The Enlightenment to the Chinese Insurance Business by analysis on the U.S. Government's Takeover of American International Group

WSEAS TRANSACTIONS on
INFORMATION SCIENCE and APPLICATIONS
Junlu Wang
The Enlightenment to the Chinese Insurance Business by analysis on
the U.S. Government’s Takeover of American International Group

Junlu Wang
Institute of Economics
Jilin University
No.2699, Qianjin Street, Changchun City, Jilin Province
China


Abstract: - Since the American sub-debt crisis has erupted, has caused US's entity economy and even the whole
world capital market fluctuation, Its influence effect does not allow to look down upon. The American
International Group (AIG) takes the world insurance and the financial service leader, also has paid the huge
price. Regarding China, the immediate influence which the crisis brings is limited The insurance business as the
financial service industry's important composition department, This article thought that has the necessity to
study it to our country insurance business enlightenment.


Key-Words: Sub-debt crisis, American Group International, Chinese insurance business, CDS, CDOs,
Financial supervision

1 U.S. government seized control of
Willumstad, a former president of Citigroup who
AIG
headed AIG until the government bailed out the
company last month with an $85 billion loan,
With the deteriorating of the U.S. sub-debt crisis,
attributed the bulk of the insurer's problems to
the world’s top finance and insurance group,
forces beyond their control.
American International Group (AIG) , which has up
Both men cited the unintended consequences of
to 89 years of operating history and more than 1,000
mark-to-market accounting, a practice that forced
billion dollars of total assets, is on the verge of
AIG to book unrealized losses on its book of
bankruptcy. By the end of June this year, AIG has
mortgage-backed securities and credit default swaps
loss 25 billion dollars in the Credit Default Swaps
- a type of contract which can insure everything
(CDS) business and 15 billion dollars in other
from plain-vanilla corporate and municipal debt to
business.
esoteric products like collateralized debt obligations,
At the same time, many holders of senior bonds
or CDOs. AIG was a big player in both the default
issued by AIG, AIG shares and subordinated bonds
swap and mortgage-backed debt markets.
and other insurance companies also suffered heavy
By Sept..30, AIG has used the 61 billion dollars
losses. The Prudential plc which holds the fair value
of the transition bandwidth 85 billion promised by
of 195,000,000 U.S. dollars of bonds AIG, show
the Federal Reserve. On Oct. 8, the Fed announced
that this part of the assets of as much as 43% have
another injection of 37.8 billion dollars. On Sept. 16,
been eliminated in the files to the U.S. Securities
the Federal Reserve provide a 85 billion emergence
and Exchange Commission while the company also
loan to AIG though the NY Federal Reserve Bank,
holds a fair value of 9,000,000 U.S. dollars of bonds
and hence the U.S. government will effectively get a
AIG, is reduced by 7% only in the third quarter.
79.9% equity stake in the insurer in the form of
AIG in times of crisis loan losses to the inevitable
warrants called equity participation notes. In other
spread to other global insurance giant, the global
words, the U.S. government has seized control of
insurance industry suffered heavy losses.
AIG. Since the main victims of the sub-loan crisis
Members of the House Committee on Oversight
are investment banks, AIG is the only bust
and Government Reform. weren't buying it, not that
insurance company. Why does it happen?
lawmakers were necessarily well-versed in the rule

in question, known as mark-to-market. But they

seemed to know a half truth when they heard one.
Former chief executives Martin Sullivan, who
2 Analysis of the loss of AIG in the
resigned under pressure in June and Robert
sub-debt crisis
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2.1 Introductions to Sub- Prime Mortgage
from 2004 to 2006, has grown rapidly, CDO market
In order to stimulate economic growth in 2001 U.S.
size of the issue reached the 1, 57,000,000,000 U.S.
Federal Reserve began to use active monetary
dollars, 2, 49,000,000,000 U.S. dollars and 4,
policy so as to the achievements of the U.S. real
89,000,000,000 U.S. dollars. Due to the different
estate market in 2001 - 2005 years of prosperity.
risk preferences, commercial banks, insurance
During this period, buyers will of the people of the
companies, mutual funds, pension funds, such as
United States rose, financial institutions were driven
relatively risk-averse institutional investors tend to
by real estate interests, the provision of loans have
hold priority CDO; Middle-class level CDO equity
also become more relaxed. Those who can not apply
is held by investment banks. American Standard is
for the original mortgage groups, that is a credit
the amount of the mortgage down payment of 20%,
score in the 6, 601 points below (the United States
but in recent years has dropped to zero or even
account for about 25% of the proportion of the
negative down payment. U.S. housing loans down
population) people, but also to be included in the
payment rate decreased year by year, together with
mortgage customer resources, and can ALT-A2 and
credit loans to lower the threshold to be, resulting in
sub-loans Loan-level access to financial support.
CDO products to credit risk and continue to
The objects of Sub-Prime Mortgage, refers to a
accumulate reserves.
credit score below 620 points and do not have to
CDS is a so-called buyers and sellers of the
provide proof of income customers. The two types
agreement, in which the buyer commitments on a
of loan interest rates were higher about 2-3 percent
regular basis in accordance with a fixed price to the
than the good-quality credit. Subsequently, a
seller must pay the cost, in return for a third party
number of new mortgage products came into being,
(such as housing loans in the home), breach of
such as the principal of the loan (Interest Only
contract case to be compensated by the seller. From
Loan), 2 / (N-2) adjustable rate loans (Adjustable
the point of view of the nature of the product ,CDS
Rate Mortgage, ARM), selective adjustable rate
is similar to the credit guarantee insurance, if the
loans (Option ARM) and so on. These innovative
housing loan default rate at a level of stability, then
mortgage products have a common characteristic,
the CDS seller is really able to bring about greater
that is, in the early repayment burden, the latter part
benefits. AIGFP find the business opportunities in
of the repayment will be a sharp increase in pressure.
the market to sell a large number of super-called
In order to improve the liquidity of assets, real
credit default swaps (Super Senior Credit Default
estate and financial institutions create mortgage-
Swaps) products on the market for the CDOs to
backed securities MBS (Mortgage Backed
provide massive security. As by the end of June,
Securities), and its essence is to make a large
AIG also for 440,000,000,000 U.S. dollars worth of
number of mortgage assets to form a pool of assets,
products to provide such guarantees CDOs. AIGFP
and the pool of assets generated by cash flow ( That
from AIG has a ready source of money into a
is, buyers pay on a regular basis for the month) as
bottomless black hole.
the basis for payment of principal and interest MBS.

In order to further enhance the types of financial

products, the mobility of the MBS market, enhance
2.2 From the point of micro-analysis:
the secondary bond credit rating, financial
Participants in the market have paved the way for
institutions, real estate investment bank in the help
the crisis. The borrowers’ loan-to-super-act
of credit enhancement through a series of measures
stimulates the mortgage market supply. Concerning
to develop a new type of debt security certificate -
more profits, banks and credit companies relax the
CDO (Collateralized Debt Obligation). The core of
credit rating review on borrowers and reduce the
the product is to highlight the outstanding credit risk
amount of down payment radio. These acts result in
classification of the different concepts, that is, in
the increase credit risk of low-income borrowers. In
accordance with the distribution of cash flow or debt
the term of mortgage securitization, investment
default in the order of its evaluation of the credit
banks use lower sub bonds to support the asset
default risk, and then re-divided according to three
quality to meet demand of high-yield customers.
different levels: High-level, mid-level, the equity
Moreover, investors overestimated the quality of the
level: from the first to the third is priority class, the
assets of sub bonds and put too much of them in
middle class, the class shares. The lower the credit
their portfolio.
ratings of CDOs of their products the higher level of

income in that to attract a large number of investors,

CDO is one of the fastest-growing products in
2.3 From the point of mac ro-analysis:
recent years MBS market, In particular, in the years
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The low interest rates and relaxed lending standards
derivatives use the fair value measurement. The fair
in U.S lead a constantly increase in the sub bond
value of the so-called core meaning “mark to
issuance. However, many borrowers –especially
market”, the market price of financial assets
those low-income borrowers, made their decision
recorded in the statements on the amount. But for
recklessly. The economic bubble doesn’t show up
those involved in small, liquidity is not so strong,
when the real estate market is booming. However,
not even the market price of the transaction, the fair
since the Federal Reserve has risen the interest rates
value of the cash flow projections on the basis of
17 times in a row (from 1% to 5.25%), the costs are
relying on complex mathematical models of
too huge for the borrowers to bear. Besides, such
calculated. No one knows, the complex geometry of
situation is unexpected by the investment banks.
the product value in the end, even if AIG listen to

the views of auditors changed the method of

valuation, there are also over-estimated the existing
2.4 From the point of the management of
methods of the possibility of actual loss, In other
AIG
words, the market may be over-reacted on the

existing accounting of the number . In any case,

AIG did not start in a more cautious approach to the
2.4.1 The monitoring mechanism in AGI didn’t
valuation of derivatives transactions, leading to
play its role.
today's Board.
After the accounting crisis in 2005, AIG established

two committees (Complex Structured Finance
2.4.2 Over-involved in derivatives trading
Transaction Committee and Transaction Review
AIG has unacceptable flaws in the valuation of CDS.
Committee) to estimate its transaction. Although
Pricewaterhouse
Coopers, AIG’s external
Bernard Connolly, a global strategist who works for
accountant believed that AIG used Market-to-
AIG warned the danger of CDOs and CDS the two
Market to value the CDS business, which inflated
committees didn’t pay adequate attention.
the value of CDS. Contracts in AIG’s CDS
In 2007, at a time when increasing loan crisis,
contained various credit levels, those contracts may
AIG has exposed some signs of damage. Despite
devalue rapidly when the U.S economy drops. If
that the fourth quarter of 2007 has created the
value those assets through the opening market, the
largest quarterly loss record since 1919 at that time,
valuation could hardly catch up with the devaluation.
the market is still widely felt in the loss of control.
Indeed, AIG’s profits will be over-estimated and
However, on February 11, 2008, AIG to the U.S.
thus affect the fairness of the financial report.
Securities and Exchange Commission (SEC) filings
The loss in AIG current book, a large part of the
made in Yukui amendment to change the credit
credit default came from the CDS. Credit default
default swap products, the method of valuation,
swaps are similar to a guarantee insurance business;
according to a security meeting by the previously
the operators are not limited to insurance companies.
announced loss of 1.1 billion U.S. Yuan, the
When investors buy a credit default swap, the
amendment to 4,880,000,000 U.S. dollars. Upon
equivalent of its investment securities purchased
disclosure of the information, AIG immediately
insurance. When the securities were credit rating
drop the market value of 15,000,000,000 U.S.
agencies to lower ratings, any risk of default will be
dollars, AIG This is a turning point in the issue
clammed by the investors themselves not by the sale
began to deteriorate. Since then, due to increased
of credit default swaps of the sector. AIG provide a
impairment losses, AIG's book losses continue to
great deal of credit default swaps to CDOs, which
grow. It was therefore of the opinion that: AIG will
lead in a huge risk exposure.
incident as their business issues, it would be better
Many people accused AIG into the CDO/CDS,
under the accounting issues. Credit default swaps to
and other complex financial derivatives is the main
change the method of valuation of the products has
reason for now bogged down in a quagmire. This is
greatly increased the amount of losses AIG, AIG is
not unreasonable. AIG on a large number of CDOs
to promote the troubled accelerator. It should be
into the business, in the final crisis has been before
noted that, AIG is not the initiative to adjust the
the parties (including credit rating agencies) as a
valuation method, but by independent external
high credit rating business, risks are close to 0.For
auditors PricewaterhouseCoopers views. AIG's
the benefit of the same credit rating higher than
original valuation methods obviously over-estimated
traditional asset-backed securities, AIG to invest
the credit default swap contract value, and
heavily, as well as security can not be said to be the
underestimated the potential loss. According to the
company's rational decision-making. It also makes a
U.S. accounting standards, the valuation of
significant contribution for the growth of the
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company's performance. After all, the investment
In addition, AIGFP has also provided a lot of
policy is relatively conservative and radical, and
hidden security products which have the
there is no absolute right or wrong of points, we
characteristics of credit derivatives. For example,
can’t carry out an active advocate of innovation
2a-7 puts from AIG. These products are allowed
when the market is good and blamed "aggressive"
CDO when it has no breach of contract, but is
when the market is bad, The root of the problem is
difficult to sell, included in AIG's balance sheet. In
not that AIG is involved in this type of complex
the second quarter of this year, AIG was the name
derivatives, is only "excessive" involvement. First,
of a total value of 18,800,000,000 U.S. dollars of
because of the special nature of insurance
CDO products 2a-7puts. This greatly increased the
compensation, the second reason is that the
company's products CDO exposure.
relatively low-cost insurance funds are particularly

vulnerable to lead to impulsive investment. As a
2.4.3 Real estate related to the excessive
result, both the operating insurance agencies and
concentration of risk
insurance regulators in the treatment of insurance
To diversify the risk of spread of the use of
investment activities should uphold the special
insurance funds is the basic guiding principles.
caution. Insurance funds for the proceeds of the
However, AIG is contrary to the principles of its
factors to consider, of course, be careful risk
business into the area of real estate finance at all
assessment based on high-risk asset allocation.
levels, leading to the real estate market and the risks
However, we must first and foremost for the safety
associated with
excessive concentration.
considerations, the investment impulse control
Specifically, not only AIG insurance and financial
strictly the proportion of such assets. AIG over foots
services sector to invest in direct support of the
in high-risk assets, yield to the temptation of the
mortgage securities and CDOs (On the basis of
proceeds blindly, and forget about the potential risk,
which all or part of the collateral by the housing
it is the first reason which leaded in today’s
mortgage loans). And many of the subsidiaries AIG
situation.
Group specialize in a certain category of real estate
Despite the risks from the final attribution of
finance business. For instance, AGF purchase
view, CDS and bonds are basically the same
housing for all and to issue loans in the first level;
security, but CDS, in particular the high-level CDS,
UGC for high loan / price ratio of housing mortgage
provider of mobility requirements are more stringent.
guarantee insurance to provide mortgage services;
AIGFP its counterparty provided by the so-called
AIGFP provide credit protection through CDS for
high-level CDS, and the need for the CDO arbitrage
some ultra-high-level CDOs. It can be said, AIG
portfolio of credit derivatives to provide the
comprehensive set foot in the real estate finance in
majority of mortgage assets. The amount depends
various fields. Once the real estate prices, rising
on the mortgage assets of the credit derivatives of
mortgage default rates, a risk in the area quickly
the replacement value or market value of the bonds.
spread to another area, resulting in the loss was the
At the same time, the amount of mortgage assets
geometric growth of the base.
with AIG credit rating and credit rating relating to
Similarly, the risk of real estate can not be over-
Bonds. As a result, the CDS once the effect of price
concentrated simple reason attributed to AIG
changes or the subject of CDOs of asset price
executives in decision-making errors. In fact, AIG
changes, as well as AIG's own credit rating change,
involved in all aspects of real estate finance and not
AIG must provide more liquidity assets as collateral.
contrary to the existing regulatory framework, and
The worst scenario is inevitable emergence of the
also have measure for the risk of isolation. For
second loan crisis broke out, so that almost all of the
example, to engage in mortgage insurance
above conditions have been triggered: In the first
subsidiary has adopted a single-line mode of
half of last year and this year there are a
operation, there is no other business operators at the
considerable number of CDO's credit rating was
same time. However, there still comes a problem.
reduced, AIG is on a substantial loss in the credit
This tells us that the existing regulatory system, the
default swap business, 3 major rating agencies
existence of the gap, the current risk of isolation is
lowered their ratings, led to AIG increase tens of
not enough.
billions of dollars to the collateral. As of July 31,

2008, as a result of the deterioration of the CDO
2.4.4 Too many parts of AIG's business lines are
rating AIGFP provide a total of some 165 billion
encroached on the bond sub-products
dollars in mortgage assets for its senior credit
AIG as a Financial Group sets foot in business
derivatives.
insurance, banking, leasing and other fields.
However, a number of AIG's business lines, a
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number of subsidiaries have to set foot in sub-sub-
With the second loan from the subprime mortgage
credit and bonds, thus meeting the overall loan-to-
spread to the of Alt-A loans, from private to public
high risk of exposure drag its financial position.
securities spread to the securitization, the crisis is on
1st- security operations bonds. We can see that
further escalation, more problem financial
AIG provided a security bond of close to 30% of the
institutions were exposed. Local time, the United
credit rating under AA. This has led to AIG in the
States on September 15, AIG's stock price
security business in 2007 from a net profit of 1
plummeted 61% to 4.76 U.S. dollars, so that the
million -7800 quarter of the rapid growth in 2008 to
market value of AIG has shrunk nearly 200 million.
the mid-million -51800.
This year, the stock fell a total of 93% for the Dow
2nd- mortgage insurance. The AIG's business is
stocks performed the worst one.
provided by the UGC, in order to have a different
Since the U.S. sub-loan crisis, AIG has suffered a
order of the right to claim credit for insurance.
three-quarter net loss. Net loss of 5,290,000,000 U.S.
3rd- senior credit derivatives, mainly refers to the
dollars in 2007 fourth quarter, In the first quarter of
CDS products provided by the AIGFP. As of June
this year, a loss of 7,800,000,000 U.S. dollars and
30, 2008, AIGFP's senior credit derivatives net
5,360,000,000 U.S. dollars in the second. As of the
exposure to 441,000,000,000 U.S. dollars, involving
second quarter of AIG's CDS business had a loss of
a total of 208 transactions. CDO for which the
up to a total of 25,000,000,000 U.S. dollars. The
subject of credit derivatives totalled 57,800,000,000
night of 16th, the U.S. government agreed to
U.S. dollars, Among these 65%, or about
authorize the New York Federal Reserve Bank of
36,400,000,000 U.S. dollars of CDO has been
AIG to provide emergency loans 85,000,000,000
downgraded, there are 33,900,000,000 U.S. dollars
U.S. dollars in exchange for 79.9 percent controlling
in CDO's on the brink of relegation and therefore
stake in the way of taking over AIG. The loan
lead to the mark-to-market losses amounted to a
window will be valid for 24 months, the interest rate
total of about 24.8 billion.
for the period March London Inter-bank Offered
4th- the real estate loans provided by AGF
Rate (LIBOR) plus 850 basis points. AIG has been
(American General Finance).
took over by the U.S. government and avoided the
5th- the sub-loan assets in the insurance portfolio
immediate closure of the fate of 85,000,000,000 U.S.
held by AIG Investment. As of June 30, 2008, AIG's
dollars, but high-interest-bearing loan is actually a
insurance 261,800,000,000 portfolio, 24% RMBS,
winding-up program, ordinary shareholders are
1% of the CDO, as well as 5% of the CMBS. The
likely to lose all the last, AIG still have to through
first two sub-loans are a great association. For
the sale of assets to pay off the loan as soon as
example, AIG's investments in RMBS, there were
possible .
almost 200 million are sub-loan RMBS.
Re-examine the insurance companies in the sub-
Multi-line business is in a different way into the
loan crisis in the role, not only can help us to clarify
loan-to-time, AIG is facing not only the high risk of
the context of the financial turmoil and toward, and
exposure, but also to the entire group of risk
contribute to an in-depth assessment of the
measurement and management very difficult. In
insurance industry has a new identity and new risks.
addition, AIG's complex structure is difficult to lead

to a comprehensive risk management, reflecting the
3.1.1 Financial risk has shown a new way to the
important reasons behind.
insurance market.

Decrease in capital market investment will not only

affect the solvency of the net assets of the insurance
3 Lessons for China's insurance
companies and could also make insurance company
liquidity problems. The AIG is adequate solvency,
industry
as a result of lack of liquidity crisis.
As the capital markets and banking open late, the

influence of Sub-debt crisis on China's insurance
3.1.2 The insurance industry on financial
market is extremely limited. However, through
markets, the depth of intervention, increased its
careful analysis of the crisis on the U.S. insurance
cyclical characteristics.
industry and the government, regulators response,
Traditional thought, the insurance industry that is
China can still have a very useful inspiration:
not sensitive to economic cycles, in particular the

life insurance industry. However, nearly 20 years of

experience in the international insurance market,
3.1 AIG insurance crisis revealed the risk of
insurance influenced by the depth of financial
ne w features
markets, the characteristics of the cycle is
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increasingly clear in insurance industry. Collapse of
3.3 Improve the corporate governance
the wave of Japanese insurance companies in 1997-
structure is a fundamental and crucial work
2001, as well as global stock markets fell by
It can’t be denied that AIG is under Greenberg
insurance companies to weaken the power of capital
management and control for more than 40 years of
in 2000-2002, both of these indicate that the
have made outstanding achievements, but also
insurance industry's business cycle fluctuations of
exposed a number of obvious problems. Greenberg,
the sensitivity enhanced.
through a special structure of the company, the

company's long-term operational and management
3.1.3 In the macroeconomic, financial market
control, He took advantage of AIG executives in the
volatility conditions, smoothing the business cycle
hands of the original stock has registered a 3 - Starr
fluctuations in China's insurance industry is of
International, CV Starr, Starr Foundation, He is the
practical significance.
company's three largest shareholders, and the three
From the perspective of the balance, it is necessary
companies are major shareholders of AIG. As a
to strengthen the management, attention to product
result, his use of the three companies control not
pricing and underwriting profits. From the
only firmly in control of AIG, but AIG took control
perspective of assets, it will have to widen the
of the senior management, led to the supremacy of
investment channels through the diversification of
the individual over the authority of the established,
risk and the risk cycle.
the role of individuals is often greater than the

system, making corporate governance Failure.

Although the company's governance structure
3.2 The important role of Insurance
integrity and complete system, but in practice
Company in the sub-loan crisis trans mission
because of the large shareholders can not be
risk chain.
manipulated to play a real role. Lack of sufficient
Over the past 20 years, financial assets expanded
checks and balances of rights, is often a breeding
rapidly, Bank credit as being paid to the importance
ground for potential risks.
of continuous decline. Large international banks to
Since the resumption of business in 1980, China's
gradually buy from the traditional holders (buy-and-
insurance industry experienced two decades of rapid
hold) to launch the distribution of profits model
development, has made remarkable achievements.
(originate-to-distribute) profit model. That is,
However, the development of the long-term
through the Bank of securitization and credit
accumulation of a number of issues have gradually
derivatives will be issued credit for his re-assigned
become apparent that corporate governance is one
to the capital markets, more transactions become the
of the problems, If we do not effectively be
main type. Bank business model changes brought
addressed not only vulnerable to the insurance
about an important change is to reduce the bank's
industry's enormous potential systemic risk, but also
credit risk vulnerability; risk is widely distributed in
constraints of the insurance industry will be
addition to the banking system. In the originate-to-
sustained, rapid and sound development of the
distribute model, the credit enhancement has
bottleneck.
become the most important.
At present, China's insurance industry is still in its
From a global point of view, the credit
initial stage, insurance companies, construction
enhancement has penetrated into the bond issue,
management structure is still in its initial stage,
including the traditional financial services in many
inevitably there are some problems, Outstanding
areas of the field. The insurance companies involved
performance as follows: First, the equity structure,
in credit risk transfer is the most important non-bank
shareholder rights of asymmetry. At present,
financial companies, and through the CDS and other
although investors to diversify, there have been
products to be the second to bear the ultimate risk of
state-owned shares, legal person shares, foreign
loan-to-one. Since early 2008, including bonds and
stocks, stocks mixed private property rights
financial guarantee insurance companies, including
structure, Corporate governance structure and
insurance companies throughout the evolution of the
emerging into a new orbit, but focus on equity,
crisis at the beginning of an important fact. From the
stock and shares of the main structure of the type of
beginning of the year MBIA, AGC bond insurance
structure is irrational, the proportion of state-owned
companies such as the recent financial crises of AIG
shares is too large and the lack of personification of
have caused serious market turmoil.
the main property, and "lack of owners", resulting in

Shareholders have control, management and control

of external intervention, and other issues still exist,
principal-agent problem is more prominent, making
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it difficult corporate governance realize their full
The principle of security is the necessary condition
potential. Second, we do not fully play the role of
to achieve the full amount of insurance funds, for
the board of supervisors. Although the restructuring
returning reliable and the guarantee of payment,
of state-owned companies made considerable
which is decided by the nature of the insurance
achievements in the new "three" system set up, most
funds. The majority of countries conduct more
of the other joint-stock companies to set up a board
stringent supervision over the investment activities
of supervisors, but in actual operation, the board of
of the insurance companies, For example, to set the
supervisors has not really expected to play a
specific investment ratio of specific capital, to make
substantive role in the supervision. Third, the
higher requirements of high-risk investments, and so
independent directors can not really play a role in
on. The security of return is the prerequisite for the
the building of the Board of Directors is not
usage of Insurance funds otherwise they will affect
sufficient. Although a small number of companies
the insurance function of the realization of
set up the independent director system, the
economic compensation, thus affecting the stability
introduction of independent directors, but the effect
of insurance companies operating as well as social
was not obvious. Of course these problems not only
stability. Therefore, in the insurance investment
reflected in the insurance industry, which is our
management, to ensure the safety of the funds are
corporate governance in various sectors of common
often placed on the first of many factors.
problems. Recently, a major media of China's listed
Since we are increasing channels to expand the
companies in all industries sample survey shows
use of insurance funds in China, security is the first
that the board of directors to vote in 33.3 percent of
principle when the insurance companies develop
the independent directors have never voted against
their own investment strategy so that they can
and abstained from voting, 35% of the independent
control investment risks.
directors of listed companies and has never made a
It is the only way to guarantee sustainable and
major shareholder differences The independent
smooth development of the insurance investment
views. Fourth, China's insurance laws and
activities.
regulations and operating practice, there are still

lagging behind and do not fully match. For example,

the "Company Law", "Insurance Law" and the
3.5 To broa den the field of insurance
management of insurance companies, all of the
business
corporate governance structure of the general
To promote the insurance industry and capital
meeting of shareholders, board of directors, board of
market integration and make Insurance funds to
supervisors, managers have a clear terms of
operate efficiently is an inevitable choice for the
reference, but in practice, there are many companies
development of China's insurance industry’s
in the industry and Approved by the executive does
innovation. Learn from the experience of the
not refer explicitly to the system; Also on the
Western insurance business, combined with China's
corporate governance structure of the incentive
realities, with improvement the solvency as the core,
mechanism, there is no principle, no taxation
ensuring the efficiency of the use of insurance funds
policies, leading companies and executives for the
as the target, risk-management techniques as a
stability of the pay comparison, increased corporate
means, the operation and administration of the funds
governance costs.
which is made according to the structure and
As a result, based on China's insurance industry
characteristics of the Insurance capital and under
in corporate governance problems and their deep-
help to form a virtuous circle of operation and
seated reasons for a gradual manner, through
promote sustainable and innovative development, is
deepening reform and industry characteristics of the
a major strategic choice in the new period of
new corporate governance structure, improve
development of China's insurance industry.
internal and external governance mechanisms to
There is no bond insurance in China yet, however,
fully mobilize the enthusiasm of all sides, stimulate
there are a lot of business such as liability insurance,
and enhance internal Vitality and external
agricultural insurance, banking insurance which are
competitiveness, and gradually
establish a
all of new business areas. The regulatory bodies
standardized modern corporate governance structure
must address these new business developments of
and internal operation mechanism.
the special nature of the special regulatory rules,

track and analysis of new business market and take

the appropriate adjustment measures to solve them
3.4 Always adhere to the principle of
in time. Only in this way, small problems will not be
insurance investment security
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Junlu Wang
accumulated to form the system risk, the insurance
Now the world economy is in a financial panic,
market be able to develop healthily.
China's economy is entering a downward track, big
It is true that new financial products’ appearance
ups and downs in the stock market, real estate is full
can increase the operating efficiency of financial
of stormy uncertainties of the current rush the
markets. But financial innovation is a double-edged
introduction of a deposit insurance system, it may
sword. In the process of innovation we can not
be counter-productive. If you have to be introduced,
ignore the financial security, it is necessary to grasp
at least a few years of grace period to allow banks
the balance between safety and efficiency. If not
and depositors of the system to have a step-by-step
handled properly, the financial instruments for
process of digestion and adapt in order to give better
prevention of financial risks of are also likely to
play to the functions of a deposit insurance system
bring new financial risks. During the innovation in
to safeguard the security of the financial system.
the insurance business, we should consider not only

its own products and systems for insurance risk, but

also take into account that its real economy may be
3.7 Ins urance information disclosure system
risk factors. If we only pursuit of innovation and
should be run through the whole process of
efficiency and ignore the safety, in the event of a
insurance business
crisis, not only reduce the efficiency of financial
AIG's accounting and control the quality of
innovation, but also may have hurt the economic
information disclosure led Wall Street investment
entities and effect the efficiency of economic
analysts questioned the broad, but also seriously
operation.
affected the confidence of investors. At present,
The sub-debt crisis show that, today , financial
China's insurance information system is not sound
markets globalized increasingly, financial credit evaluation system, lack of insurance,
innovations have become increasingly popular,
policyholders asymmetric information, Insurance
financial products are increasingly complex.
market information distribution and transmission of
Traditional financial-market has been to play down
the irrational behaviour exists to a greater extent,
the boundaries between, cross-market financial
insurance companies, information disclosure,
products become increasingly common. The
whether in the form or content is still in its initial
financial institution and the number of which
stage, the motive for the disclosure of information is
innovative products related have been increased.
not very strong, which is not comprehensive enough,

in the form of a single comparison, the lack of time

Rapid way to be normative. Now, the WTO
3.6 About the establishme nt of a depos it
transition period ended, In the opening round and
insurance system in China
faces new pressure to open the new situation, the
The so-called deposit insurance system means that
insurance industry to disclose information is
for the absorption of funds from the public to
industry practice to operate and theoretical research
engage in the business of financial institutions to
should be of concern, Explore the establishment of
establish an insurance agency, the members of the
China's insurance industry to disclose information
financial institutions pay premiums to insurance
system, strengthening supervision to protect the
agencies, financial institutions, members of the
legitimate rights and interests of all sides to
payments crisis or facing bankruptcy to operate, the
maintain a fair market, systemic risk and improve
insurance institutions by protection of the deposit
internal management and rational allocation of
accounts of principal and interest payments to give
resources, insurance and so on, have an important
all or part of the security system. In the sub-debt
realistic significance and far-reaching implications.
crisis in the U.S, traditional deposit insurance

system has played a limited role.

In our country we have been operating implicit
3.8 To establish a flexible, comprehensive
deposit insurance system, it is unrealistic to
coverage of the monitoring system
introduced a deposit insurance system The fact of the U.S. loan crisis in the bond insurance
immediately.The deposit insurance system in the
market, shows that the capital market in the chain of
banking system is the last line of firewalls, from the
financial institutions have close ties, the market is
current situation of the affected financial institutions,
not omnipotent, supervision is particularly important.
our country did not hurry to introduce this system,
In the loan crisis, although many of the mature
we can learn from the experience of the crisis, to
market, insurance companies suffered more adverse
improve the system more rational.
effects, but because of its good risk management
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WSEAS TRANSACTIONS on
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system, make the loss in the maximum control. It
the United States to promote China's economics’
goes without question, these companies a good risk
sustainable development.
management system and the establishment of

regulatory agencies to implement risk-sensitive

solvency regulation great relationship. With the sub-
3.9 Learn the way of U.S. government’s
loan crisis of the in-depth reflection and assessment,
action in the crisis
is expected in the future solvency of the insurance
Most of the money that U.S. government puts into
industry in China will be more strict supervision. In
the capital market is short-term loan. The 85b
the United States, New York state has planned to
dollars which AIG received are not free lunch but
increase the bond insurance and capital adequacy
have a 12% interest rate. In other words, on surface,
requirements; In Europe, in the process of being
the U.S. government is trying to save the insurance
prepared to establish a "solvency Ⅱ system " w ill be
giant; however, AIG’s stockholders will lost their
based on recent market developments, some
benefit in order to save the taxpayers and the capital
European insurance companies to re-evaluate the
market.
risk management capability, In particular focus on
Moral hazard, which means the safe of the
insurance companies to study the balance sheet
taxpayers’ money is top priority, is the most
assets of the party to determine whether they can
concerned by U.S. government. If the lost in the
withstand the volatility of market risk in the near
crisis are committed by the government and
future. To achieve seamless monitoring is extremely
taxpayers finally, speculators will continue their
difficult. To this end, the regulator should not have
risky investments since they will lose nothing. This
been as much as possible to improve the current
also provides reasons why U.S. government saves
regulatory system should also pay attention to
Fannie Mae, Freddie Mac and AIG in a row, but let
"monitor the border" to make it more flexible and
the Lehman Brothers go break.
more comprehensive.
China’s government, however, reacts by just
Shang Fulin, chairman of the SFC pointed out
putting money into the nationalized banks and using
that the financial system; financial security can not
the state foreign exchange reserve. Indeed, citizens
be ignored forever. The financial supervision should
in China finally pay the bill of the banks’ lost.
be adjusted and optimized according to the
China should learn the way that U.S government
development of the market. Modern financial
did in the crisis.
system, the regulatory function and supervision in

advance should be strengthened. To enhance the

uniformity of international regulatory standards is
3.10 establis h a national credit rat ing s ys tem
also needed. Different regulatory standards will lead
So far, China does not have a unified credit rating
to regulatory arbitrage market emerged. China's
system. Every bank and insurance company has its
banking, insurance, securities regulatory standards
own one. However, such credit rating system is
are gradually walking to the international line.
often invalid since companies are tending to get
At present, the financial supervision and monetary
round the system for their own profits.
policy authorities and the majority of cases are
The China Construction Bank (CCB), one of
distinguished from, so our country and other
the country's four largest State-owned
countries in addition to the attention of monetary
commercial banks, is to establish its first
policy co-ordination between, we also have to pay
attention to the domestic regulatory information,
national individual credit rating system, in a bid
communication, and the central bank's cooperation.
to ward off possible bad- loa n risk in the
Through the sub-debt crisis in the U.S, it should be
booming personal loan market.
noted that in China's financial industry actively and
"The rating system, which is expected to be
steadily push forward the opening to the outside
able to provide the bank with more objective
world at the same time, the risk of the global
understanding o f its clients' credit status, will be
financial system can not be ignored. Of particular
a crucial step in enabling the ba nk to gain a
importance is that China's banking financial
larger stake in the retail banking market," Xin
institutions must be deeply reformed, improve risk
Shusen, general manager of the bank' s retail
management capacity and enhance overall
banking department..
competitiveness. China's financial regulators should
By linking all the bank's computer networks
draw lessons from similar circumstances should
have early warning capability. In short, China
together, the rating system will contain all of
should learn something from the sub-debt crisis in
CCB's credit records, for around 200 million
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WSEAS TRANSACTIONS on
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Junlu Wang
clients nationwide, and a set of rating standards
that will be used to evaluate the credit status of
individual clients who apply for loans from
CCB.
The move is believed to be another
breakthrough in safeguarding the banking sector
form possible lending risks and improving the
objectiveness of ratings following the
establishment of the country's first regional
individual credit rating s ystem in S hanghai.
The bank's retail services for individual
consumers have undergone a sharp increase in
recent years in the country's developed areas.
CCB will be able to decide whether to lend
and how much to lend to individual clients
based on historical consumer records and CCB's
rating standards.


References:
[1] Ron Shelp with Al Ehrbar, Fallen Giant: The
amazing story of hank Greenberg and the
history of AIG, John Wiley & Sons, Inc.,
Hoboken, New Jersey, 2006
[2] Huawei Zhao, the Impact of U.S. Sub-debt to
Chinese Finance Industry, Contemporary
Economics, No.9, 2008, pp. 84-85.
[3] Hui Tian, the Impact of Sub-debt to U.S.
Economy, Northern Economy, No.7, 2008, pp.
7-9.
[4] Weijun Li, the Impact of U.S. Sub-debt to
China’s Economy, Hebei Finance, No.5, 2008,
pp. 21-23.
[5] Wei Zhong, the Influence of U.S. Sub-prime
mortgage market, Reference of Theory, No.4,
2008, pp. 27-31.

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