a comparative analysis of embedded value of life insurance

A Comparative Analysis of Embedded Value of Life

Insurance Companies and Banks of China

Cao XiaojingError: Reference source not found Hao Yansu*

AbstractEmbedded value of life insurance companies depends on the operation and corresponding asset.

When net asset of a bank is considered as its embedded value, it also depends on the operation and

corresponding asset. The difference of life insurance companies and banks of China in capital

structure, asset structure and asset-liability management leads to different embedded value of

them.

Key words: embedded value, capital structure, asset structure, asset-liability management

Embedded value is an exclusive instrument of life insurance companies in financial reporting

and value estimating. It has been widely used in all aspects of management-decision of life

insurance companies abroad while in China it is mainly applied to estimate the value during

capital increase and share expansion or when the life insurance company gets listed. “Direction of

embedded value’s report of life insurance”, which was published by CIRC in 2005, said,

“Embedded value is current benefit which generates from the future profit of corresponding asset

to applicable operation and can be distributed to shareholders.” The definition shows that

embedded value, which is an influencing factor of life insurance companies’ value, depends on the

operation and corresponding asset. Net asset of a bank is considered as its embedded value, which

also depends on the operation and corresponding asset.

I. Research Background and Its PurposeIt is a new topic in China whether for insurance companies to evaluate embedded value or for

banks to evaluate market value. Moreover, present study is limited to separate research. However,

new phenomena have emerged in China. Firstly, in 2006 life insurance companies performed more

actively than banks in investment as the application of insurance fund is broadened. The paper

establishes relation of two industries by embedded value and gives a new illustration of different

investment inclination through the analysis of operating income structure. Secondly, when

insurance companies and banks start floating, the paper will offer the deeper reason why life

insurance companies have higher price than banks through the comparison. Thirdly, capital

movement is frequent between insurance companies and banks as the corporation of two

industries upgrades. However insurance companies’ purchase of banks is more often to see. The

paper gives the reason why insurance companies, whose assets only occupy 4% of financial

institutions, will have a deeper influence in future financial market through the contrast.

II. Literature Review“Valuation methods of a life insurance company” and “embedded value definition” and

“introduction to embedded value” give formula of embedded value of life insurance companies:

EV=NA+VBIF (EV=embedded value, NA=the adjusted net worth, VBIF=value of business in

forth). Li Bingqing and Yang xue pointed out in “the mistake of embedded value’s application in

* Postgraduate Student of Insurance School, Central University of Finance and Economics, Email: [email protected]? Professor of Insurance School, Central University of Finance and Economics, Email: [email protected]

1

life insurance companies and its modification” that embedded value of life insurance companies is

equal to net asset of other enterprises. So net assets of banks (total assets - total liabilities) can be

viewed as its embedded value.

In “management of insurance companies” Dieter Farny (Gernany) believes that acquiring

promotion of shareholder’s value is the final goal of operating a company. It can be achieved by

proper financial policies including fund source policy, fund utilization policy and the coordination

of them. The classification fits for both insurance and banks and provides main influencing factors

of embedded value. So based on the frame, this paper makes more specific research of the

influencing factors of embedded value.

Modigliani and Mille’s research of the relation of capital structure and market value since

1958 is acknowledged as foundation of modern financing theory. Based on five classical

hypotheses, they proved that market value is irrelevant to capital structure. But as two scholars

and others broadened the hypotheses step by step, they found that capital structure had been

influencing market value through a few accesses, including financial leverage, revenue,

bankruptcy cost, signal and governance structure. The research of capital structure in China

focuses on explaining the problem of capital structure with foreign theories, while adjusting the

capital structure positively to achieve the goal of enhancing market value is hardly seen.

“Theory and practice of life insurance’s embedded value” (Wei Yingning,2005) introduces

the definition, report, calculation and application of embedded value of life insurance companies

systematically. It solves the problem of calculating EV with report forms and fixed hypothesis, but

detailed methods of advancing EV through modification of operating income structure and asset

structure have not been referred. “Fiscal measure of bank’s market value” (Wang Lin, Wang

Jianping,2005) is one of few literatures in China which introduce banks’ market value specially. It

classifies assets and liabilities of banks and gives the formula of all items’ market value. The

influence of the structure of asset and liability to market value has been involved.

“Mutual development of life insurance and capital market of china” of Fu Anping makes a

comparison of the application of life insurance fund in China and in developed countries and

points out that the broadening application of the investment and the modification of capital market

promise a higher return of insurance fund.

III. Comparative Analysis of Embedded Value of Life Insurance Companies and Banks in China

Embedded value of a life insurance company is discount of future profit generated from

present operation. According to this definition, net assets of a bank can be used to measure its

embedded value, which are total assets minus total liabilities.

We know that the total assets of China Life hadn’t even reach 8.09% of ICBC until the end of

2005. What surprised us is that the offering price of the former in Shanghai Stock Exchange was

18.88￥ , which was higher than the latter’s when both of them were listed in 2006 in SSE.

Meanwhile between listing financial institutions it is common that life insurance companies have

evident higher stock price than banks, which can be seen from Chart 1. The drive of stock price is

high embedded value. But why life insurance companies in China have higher inflation in

embedded value than banks?

2

Share Pri ce of Fi nanci al I nsti tui t i onscl osi ng pri ce of 04/ 30/ 07 f rom SSE（）

5. 425. 62

10. 3413. 0113. 31

19. 4831. 58

41. 6565. 85

0 20 40 60 80

Pi ngan I nsurance

Chi na Li f e

I ndust r i al Bank

Merchants Bank

Huaxi a Bank

Mi ngsheng Bank

CI TI C Bank

Chi na Bank

I CBC

Chart 1

Data from: www.sse.com

i. Research FrameIn “management of insurance companies” Dieter Farny (Gernany) believes that acquiring

promotion of shareholder’s value is the final goal of operating a company. It can be achieved by

proper financial policies including fund source policy, fund utilization policy and the coordination

of them. The classification fits for both insurance and banks and provides different influencing

factors of embedded value. So based on the frame, this paper makes more specific research of the

influencing factors of embedded value. Firstly, we’ll research the influence of fund source policy

to embedded value by capital structure theory, which consists of the relation of long-term liability

to equity and the liability structure. Secondly, we’ll research the influence of fund utility policy to

embedded value by asset structure, which consists of diversified combination of assets. Thirdly,

we’ll research the coordination of fund source policy and fund utilization policy by the decisive

influence of liability structure to asset structure. Finally, considering that investment is of great

importance, this paper will illustrate material promotion of investment to embedded value in

China nowadays. The definite frame is shown as follows.

invest

income

discount

embedded value

Chart 2

ii. Capital Structure of Life Insurance Companies and Banks in ChinaIn a long period we are seeking for the optimized financial mode to enhance market value of

a company, which is frequently referred in finance theory and practice. Modigliani and Mille’s

research of the relation of capital structure and market value since 1958 is acknowledged as

foundation of modern financing theory. Based on five classical hypotheses, they proved that

3

market value is irrelevant to capital structure. But as two scholars and others broadened the

hypotheses step by step, they found that capital structure had been influencing market value

through a few accesses, including financial leverage, revenue, bankruptcy cost, signal and

governance structure. Since the final ambition of financing is enhancing market value and capital

structure theory is the core of financing, the adjustment of capital structure is firstly and naturally

introduced if we want to enhance market value.

The definition of capital structure in “Capital Structure, Governance Structure and Agent

Cost” includes three meanings: a. the proportion of liability to shareholding equity, which is

recognized as financing structure or financing leverage. b. the proportion of all parts of liability,

which is recognized as liability structure. c. the proportion of all parts of shareholding equity,

which is recognized as equity structure or ownership structure. But in the capital structure theory,

the proportion of long-term liability to shareholding equity is emphasized more. So if we measure

capital structure with this proportion, as it moves up, financial leverage increases. Meanwhile

embedded value and market value increase since assets correspondent to long-term liability brings

more profit in future according to the definition of embedded value. Therefore we will analyze the

dynamic influence of capital structure of China Life and ICBC to embedded value.

1. Sample: China Life and ICBC

There are three reasons for choosing China Life and ICBC when analyzing the influence of

capital structure to embedded value. a. China Life is the biggest life insurance company while

ICBC is the biggest commercial bank in China. As countrywide financial institutions, both of

them have long history, representative management and steady status. b. as listed companies, the

operation data of them can been acquired from annual report while the data of unlisted companies

are not comprehensive and authoritative. c. as financial magnates listed in SSE in 2006, they are

easily contacted with each other . Thus we can not only reveal different performance of them, but

also explain universal problem facing life insurance and banks.

2．the Analysis of Long-term Liability and Shareholding Equity

With long-term liability and shareholding equity of China Life from 2001 to 2005, we can

compare the inflation speed of them shown as Chart 3. Because ICBC reconstructed share in 2005

and its capital structure endured great change, we only choose long-term liability and shareholding

equity from 1998 to 2004. Chart 4 conceals the different inflation speed of them. Suppose that

equity of China Life is , long-term liability is and equity of ICBC is , long-

term deposit is . When leverage is defied as long-term liability/equity, then the leverage of

China Life is marked as A= / and the leverage of ICBC is marked as B= /

. By the comparison of Chart 3 and Chart 4, we can find that A>B. So China Life has a

larger financial leverage. Thus a faster development of embedded value of China Life is easy to

understand.

4

Changi ng of Long- term Li abi l i t y andSharehol di ng Equi ty of Chi na Li f e

0

100000

200000

300000

400000

500000

600000

700000

2001 2002 2003 2004 2005

Million(RMB)

Long- termLi abi l i t y

Sharehol di ngEqui t y

Chart 3

Data from: Insurance Year Book of China

Changi ng of Long- term Deposi t and Sharehol di ngEqui ty of I CBC

0

5000

10000

15000

20000

25000

1998 1999 2000 2001 2002 2003 2004

Hund

red

Mill

ion(

RMB)

Long- termDeposi t

Sharehol di ngEqui t y

Chart 4

Data from: Finance Year Book of China

3. the Analysis of Liability Structure

For a life insurance company, EV=NA+VBIF. From the aspect of liability, VBIF is

influenced by the structure of operation (including individual and party operation classified by

customers, also short-term and long-term operation classified by contracts). Meanwhile all these

are influencing factors of NA. So the influence of liability structure of a life insurance company to

its embedded value can be revealed with the data of these factors.

For a bank, EV=NA. From the aspect of liability, net asset is influenced by the structure of

deposit (including saving deposit and public deposit classified by customers, also demand deposit

and term deposit classified by contracts) and inter-bank bid. So the influence of liability structure

of a bank to its embedded value can be revealed with the data of these factors.

5

I ndi vi dual and Party Operat i on of Chi na Li f e

0

50000

100000

150000

200000

Mill

ion(

RMB)

Par ty Operat i onI ndi vi dual Operat i on

Chart 5


Savi ng Deposi t and Publ i c Deposi t ofI CBC

0

20000

40000

60000

Hundred Million(RMB)

Publ i c Deposi tSavi ng Deposi t

Chart 6


Firstly since party operation of life insurance has high surrender rate, low renew rate and

short insurance period, its function on the increase of VBIF and embedded value is limited.

Similarly, since public deposit of bank has short term, its function on the increase of embedded

value is less than saving deposit. Then from the comparison of Chart 5 and Chart 6, we find that

the share of individual operation of China Life is larger than the share of saving deposit of ICBC

and the share of party operation of China Life is less than the share of public deposit of ICBC.

Meanwhile, the occupation of China Life’s individual operation rose from 44.53% in 1998 to

87.13% in 2006 while the occupation of ICBC’s saving deposit fluctuated around 53%. In short,

classified by customers, China Life has higher proportion and faster speed of operation which can

increase embedded value than ICBC has. Thus China Life’s liability structure contributes to the

promotion of embedded value.

6

Short - term and Long- term Operat i on ofChi na Li f e

0

50000

100000

150000

200000

1998

1999

2000

2001

2002

2003

2004

2005

2006

Million(RMB)

Long- term Operat i on

Short - t erm Operat i on

Chart 7


Short - term and Long- term Deposi t ofI CBC

0

1000020000

30000

4000050000

60000

Hundred Million(RMB)

Long- termDeposi t

Shor t - t ermDeposi t

Chart 8


Secondly, since liability with long duration can match with long-term asset, it always earns

larger discount of profits and contributes more to embedded value. From the comparison of Chart

7 and Chart 8, we find that the share of short-term insurance of China Life is less than the share of

short-term deposit of ICBC and the share of long-term insurance of China Life is larger than long-

term deposit of ICBC. Meanwhile, the occupation of China Life’s long-term operation rose from

61.31% in 1998 to 93.92% in 2006, while the occupation of ICBC’s long-term deposit decreased

from 55.45% in 1998 to 39.72% in 2004. In short, classified by contracts, China Life has higher

proportion and faster speed of operation which can increase embedded value than ICBC has. Thus

China Life’s liability structure contributes to promotion of embedded value.

iii．Asset Structure of Life Insurance and Banks in China

China Life’s asset includes floating asset and long-term investment. ICBC’s asset includes

short-term loan, mid&long-term loan and investment (reserve and inter-bank offer omitted). In

this paper, only floating asset and long-term investment of China Life and short-term loan,

mid&long-term loan and investment of ICBC will be discussed. In addition, most investment of

ICBC is long-term. So we compare China Life’s floating asset with ICBC’s short-term loan and

compare China Life’s long-term investment with ICBC’s mid&long-term loan and investment.

7

Asset Di st r i but i on of Chi na Li f e

0100000200000300000400000500000600000700000800000

2001 2002 2003 2004 2005

Million(RMB)

Long- term Asset

Fl oat i ng Asset

Chart 9


Asset Di st r i but i on of I CBC

0

10000

20000

30000

40000

50000

1998

1999

2000

2001

2002

2003

2004

Hund

red

Mill

ion(

RMB)

I nvestment

Mi d/ Long- term l oan

Short - t erm l oan

Chart 10


From Chart 9 and 10, we find that long-term asset has relatively higher inflation than short-

term asset whether of China Life or of ICBC. Generally, both of their assets’ duration structure is

getting reasonable. Separately, the proportion of China Life’s long-term investment to total asset

increased from 23.07% in 2001 to 48.76% in 2005 with a yearly multiple increase rate of 20.57%.

The proportion of ICBC’s long-term asset to total asset increased from 29.47% in 1998 to 62.18%

in 2004 with a yearly multiple increase rate of 13.25%. By comparison it is obvious that the

relative inflation rate of China Life’s long-term asset (long-term investment/floating asset + long-

term investment) is larger than the relative inflation rate of ICBC’s long-term asset (mid&long-

term loan + investment/short-term loan + mid&long-term loan + investment). The developing

trend of asset structure promotes China Life’s embedded value.

iv．the Influence of Liability Structure to Asset Structure

It is referred that special liability structure of China Life promotes its embedded value. In

fact, the function is not delivered directly but through special correspondent asset structure which

can be seen from Chart 11.

8

Chart 11

Duration distribution

of China Life(%)

2006 2005 2004

Less than 1 year 1.60 0.40 0.10

1-5 years 28.90 23.60 38.70

5-10 years 21.40 37.30 54.00

More than 10 years 48.10 38.70 7.20

Total 100 100 100

Table 1

Data from: Annual Report of China Life

Duration distribution

of ICBC(%)2006 2005 2004

Current deposit 50.20 50.20 50.40

Less than 3 months 17.50 19.10 19.20

3-12 months 23.10 23.60 23.90

1-5 years 9.10 7.00 6.40

More than 5 years 0.10 0.10 0.10

Total 100 100 100

Table 2

Data from: Annual Report of ICBC

9

Special asset

structure

Special liability structure

Higher embedded

value

Duration of China Life's Contracts (2004-2006)

less than 1year

0.67% years 1-530.43%

years 5-1037.57%

more thanyears 1031.33%

Chart 12


Duration of ICBC's Contracts (2004-2006)

currentdeposit50.27%

years 1-57.50%

months 3-1223.53%

less than 3months18.60%

more than 5years0.10%

Chart 13


By averaging the data in table 1 and table 2, we get average duration distribution in Chart 12

and 13. We can find that China Life’s contracts with duration less than one year occupied 0.67%,

less than 5 years occupied 31%, less than ten years occupied 68.67%, more than ten years

occupied 31.33%. But ICBC’s contracts with duration less than one year occupied 92.4%, less

than five years occupied 99.9%, more than five years occupied 0.1%. If we assume that (a) make

the half of the period as average duration, for example 1-5years contracts have average duration of

3 years (b) make lower limit as the duration of those contracts without upper limit, for example

more than ten years’ contracts have duration of ten years. Regarding the proportion as weight,

then average duration of China Life’s contracts is 6.9 and ICBC’s is 0.4. The distance is 6 years

and a half. Of course, the measurement is not accurate since (a) duration of liability is not

distributed equably (b) it is too conservative to simplify China Life’s contracts with duration of

more than ten years as ten years uniformly. These contracts will greatly influence real average

duration since they take up a big portion (c) China Life’s contracts with duration of more than ten

years increased from 7.2% in 2004 to 38.7% in 2005, which rose to 48.1% in 2006. But the

dynamic influence of these contracts to embedded value is excluded (d) it is not reasonable to

assume duration of current deposit as 0 since it takes up more than half of the total. But

considering all these factors, we’ll find China Life’s average duration is still longer than ICBC’s

and the distance is even larger, instead of smaller.

10

Special liability structure acquires special asset structure. Assets with different duration earns

different income, thus wins different embedded value. Adjusting asset structure by increasing asset

with high return and reducing those with low return according to liability structure, China Life

earns higher total return. From table 3, we know that the occupation of deposit’s income decreased

from 63.07% in 2004 to 26.19% in 2006, while the occupation of credit and equity’s income rose

from 34.32% in 2004 to 73.52% in 2006. Since long-term assets brings more discount of future

profits, the adjustment enhanced embedded value of China Life. Meanwhile, there’s slight

increase of credit investment of ICBC while others without any evident change and total return

kept stable shown as table 4.

China Life’s Return on

Investment(million)

2006 2005 2004

amount percent amount percent amount percent

Deposit 8269 26.19 7964 46.38 6742 63.07

Credit Investment 12506 39.61 8615 50.17 3475 32.51

Equity Investment 10708 33.91 568 3.30 194 1.81

Resell Securities 80 0.25 3 0.02 268 2.51

Policy Mortgage 13 0.04 22 0.13 11 0.10

Total 31576 100 17172 100 10690 100

Total Return 5.50% 3.93% 3.26%

Table 3


ICBC’s Return on

Fund(million)

2006 2005 2004

amount percent amount percent amount percent

Reserve 10080 3.71 8967 3.82 8286 4.39

Loan 176488 64.91 166240 70.89 138909 73.58

Inter-bank Bid 18435 6.78 13437 5.73 14698 7.78

Credit Investment 66883 24.60 45870 19.56 26899 14.25

Total 261806 100 225547 100 180506 100

Interest-bearing Asset’s

Total Return 3.99% 4.03% 3.43%

Table 4


We should pay attention that the increase of equity investment can not only add up to the

return of insurance fund but have impact on structures and stratagems of insurance companies. It

is essential to those insurance companies who plan to engage in integrated operation. Banks is in

the leading position in China and its determination to engage in integrated operation never stops.

Then who has more advantage in this competition? Basing on the previous analysis I believe that

insurance fund has more advantage than banks fund resulting from larger impetus in equity

investment of insurance fund. Although banks have absolute advantage in its assets, the duration

of its liabilities requires high liquidity while the duration of insurance liabilities lays more

importance to safety and profitability.

11

v. Investment of Life Insurance Companies and Banks From the illustration, we know that investment is vital to embedded value. Although the

access of insurance fund to investment is broadened in China, present situation still needs more

modification. By the comparison of insurance fund’s investment restriction and asset distribution

of America, England, Japan and China, we can forecast the developing trend of life insurance fund

in China with the improvement of financial market.

1. Application of Insurance Fund in Developed Countries

A. America

Asset Di st r i but i on of Amer i ca' s Li f e I nsurance

0% 50% 100%

1991

1992

1993

1994

1995

1996Bond

Stock

Mortgage Lendi ng

Pol i cy Mortgage

real estate

Other Asset

Chart 14

Data from: “modeling analysis of asset-liability of insurance in China”

Investment Items in America Limited Investment Proportion

Listed Share 15

Unlisted Share 5

Foreign Company’s Share 5

Foreign Bond 5

Real Estate 10

Mortgage Loan 69

Table 5

Materials from: www.edu.drcnet.com.cn

B. England

Asset Di st r i but i on of Engl and' s Li f e I nsurance

0% 20% 40% 60% 80% 100%

1993

1994

1995

1996Bond

Stock

Mutual Fund

Other I nvestment

Cash

Other Asset

Chart 15

12


Investment Items in England Limited Investment Proportion

Government Bond 18

Foreign and Local Government Bond 3

Government Loan 7

Share 48

Mortgage Loan 22

Others 2

Table 6

Materials from: edu.drcnet.com.cn

C. Japan

Asset Di st r i but i on of J apan' s Li f e I nsurance

0% 20% 40% 60% 80% 100%

1986

1988

1989

1990

1995

1996Deposi tNegot i abl e NoteLoanReal EstateOther

Chart 16


Investment Items in Japan Limited Investment Proportion

Listed Share 30

Unlisted Share 30

Foreign Company’s Share 30

Real Estate 20

Mortgage Loan 50

Non-gage loan 30

Table 7

Materials from: www.edu.drcnet.com.cn

D. Revelation

We can get three revelations from asset distribution and limited investment proportion of

America, England and Japan. Firstly, flexible investment is common in developed countries. They

determine investment items on the characteristics of their companies and combine assets

effectively with those of large profit, high liquidity and good safety. Secondly, investment

proportion is limited to control the risk. Thirdly, securities account for majority of insurance fund.

2. Application of Insurance Fund in China

New phenomena have emerged recently in investment policy and practice.

Firstly, new investment items emerge. It started when stock market was open to insurance

fund in February 2005. Then the investment restriction of estate was cancelled by “experimental

13

management of insurance fund investing on basic facilities indirectly” in March 2006. The

“several suggestions of reform and development to insurance by State Council” encouraged

insurance fund to play more important role in the stock market in June. Later in October equity

investment on commercial banks became another feasible investment item after the print of

“notice about insurance companies investing on equity of commercial banks”. From the

comparison of the different return of deposit, government bond, fund, energy source, road and

traffic and public facilities, we conclude that as the new investment items are adopted, insurance

fund will have higher return.

Average

Income(%)Deposit

Government

bondFund

Energy

source

Road and

traffic

Public

facilities

1999 5 2.5-3.5 — 13.88 13.59 15.90

2000 3.4 2.5-3.6 38.42 10.88 8.44 10.49

2001 3.4 3.0-4.0 -16.37 9.30 8.09 10.66

Table 8

Data from: “Mutual development of life insurance and capital market of china”

Secondly, investment proportion is regulated by “provisional rules of insurance institutions

investing on bond” and “provisional rules of insurance institutions investing on stock” shown as

table 9. Liquidity and safety are coordinated to pursuit high profit.

Investment Items in China Limited investment proportion

Deposit No Upper Limitation

Government Bond & Financial Bond No Upper Limitation

Enterprise bond over AA, subordinated term debt 30%

Fund 15%

Share 5%

Table 9

Materials from: http://www.circ.gov.cn

Finally, negotiable securities take up a larger part of insurance fund. Especially in 2004,

deposit decreased to lower than 50% for the first time. But negotiable securities increased steadily

and passed 50% in 2005 for the first time shown as table 10.

Asset Distribution of

Insurance in China

Deposit Government

Bond

Bond Investment

Fund

Financial

Bond

Others

2001 52.4 21.67 5.5 4.38 16.05

2002 52.07 18.64 5.4 6.96 16.93

2003 52 16.1 5.23 9.5 17.17

2004 46 25 6 11 12

2005 37.13 25.38 7.85 12.81 16.83

Table 10


IV.the Status of Insurance in Financial Market in Different Countries

Based on previous analysis, we know that life insurance companies have larger inflation

speed of embedded value than banks in China. Therefore if we evaluate assets with embedded

value, assets of life insurance will grow with a rate higher than banks. So it is scientific to foresee

that there will be continuous promotion of insurance’s status in financial market.

14

http://www.circ.gov.cn/

From Chart 17, we can see that in matured market (a) the share of insurance in financial

market is larger than bank’s (b) the proportions of insurance asset to GDP, banks asset to GDP and

insurance asset to banks asset are stable. From Chart 18, we can see that in China (a) the share of

insurance in financial market is far smaller than banks (b) insurance asset is growing quicker than

bank asset as GDP increases, which lessened the asset gap of insurance and banks.

the Compari son of I nsurance and Bank Assetsi n Matured Market

39. 6 41. 2 43. 548. 7 50. 5 48. 1

23. 2 24 24. 7 27. 223. 5 24 24. 7 26. 2

47. 337. 936. 3

23. 2

0

10

20

30

40

50

60

1993 1994 1995 1996 1997 1998 1999 2000 2001

%

I nsuranceAsset / GDPBank Asset /GDP

Chart 17

Data from: Global Report of Financial Stability in 2004

the Compar i son of I nsurance and Bank Asset s i n Chi na

3. 73 4. 81 6. 17 7. 79 8. 76 8. 39

153. 57 154. 09

210. 29 218. 02231. 47

205. 54

0. 00

50. 00

100. 00

150. 00

200. 00

250. 00

2000 2001 2002 2003 2004 2005

% I nsuranceAsset / GDP

Bank Asset/ GDP

Chart 18


Although total assets of life insurance companies in China is far less than banks, the former

have advantage in the development of operation and assets since it is in the stage of growing. By

calculating the data given in chart 19 and 20, we know that multiple inflation of life insurance in

China is 33.37%, while banks’ is 18.79%. Although banks in China is dominant in financing and

insurance will not surpass banks as that in developed countries, insurance’s status and influence in

financial market will be advanced steadily.

15

Assets of I nsurance i n Chi na

6319. 68

11953. 68

15296. 3

9088. 21

4611. 83

3291. 32

2724. 2

2038. 20

2000400060008000

1000012000140001600018000

1998 1999 2000 2001 2002 2003 2004 2005

100

mill

ion

Chart 19


Assets of Banks i n Chi na

215329. 37

300488. 98

355282. 38

254413. 13

135434106411. 9

147826. 8119872

0

50000

100000

150000

200000

250000

300000

350000

400000

1998 1999 2000 2001 2002 2003 2004 2005

100

mill

ion

Chart 20


V．Conclusions

Different fund source and fund inflation speed promise life insurance companies a rapider

increase in embedded value than banks in China. Confronting with different discount of future

profit, life insurance and banks behave distinctly in investment inclination and also the former has

higher share price than the latter. These conclusions are based on the following facts: a. capital

structure is special with life insurance companies and leads to special asset structure b. the

efficiency of insurance fund is improving as investment gets normative and reasonable.

Although insurance is weak in financial market in China, its status will be boosted with

further development. The conclusion is based on the following facts: a. insurance in China has

advantage in expanding during its growing stage b. when evaluated by embedded value, the assets

of life insurance will increase with a high speed since high inflation of embedded value is

obtained.

References[1]Dieter Farney. Management of Insurance Companies [M]. Economic Science Press, 2002:567-

574

16

[2]David H.Friedman. Deposit Management [M]. China Planning Press, 2001:266-291

[3]Peter.S.Rose. Commercial Bank Management [M]. Mechanism Industry Publishing House,

2004:208-227

[4]Steven Lee. Estimate Embedded Value of Life Insurance Company [M]. People University

Publishing Company, 2003:7-10

[5]Dai Wensheng. Modeling Analysis of Asset-Liability of Insurance in China[M]. Economic

Science Press, 2004:107-113

[6]Deng Shimin. Fund Utilization and Management of Commercial Bank [M]. China Finance

Press, 2000:203-214

[7]Ding Jie. Embeded Value and its Application in Life Insurance Company [J]. Fujian Financial,

2006(11):32-35

[8]Fu Anping. Mutual Development of Life Insurance and Capital Market in China [M].

Economic Science Press, 2004:140-146

[9]Gao Yanfang. The Management and Control of Liquidity Risk of the Commercial Bank [D].

Master Paper of Administer, Wuhan University of Technology, 2003

[10]Guo Jinlong. Empirical Analysis of Insurance in China and International Experiences [M].

Economics Management Press, 2006: 26-28

[11]Hu Yanling, Li Lihong. The Analysis of Optimizing Liability Structure of Commercial Banks

in China [J]. The Border Economy and Culture, 2005(6):52-53

[12]Li Binqing, Yang Xue. the Mistake of Embedded Value’s Application in Life Insurance

Companies and Its Modification [J]. Insurance Study, 2005(12):9-12

[13]Li Xiufang. The Study of Asset-Liability Management of Life Insurance in China [M]. China

social science press, 2002:153-161

[14]Meng Zhaoyi. International Comparison of Managing Insurance Fund [M]. China Finance

Press, 2005:9-46

[15]Sun Jie. Capital Structure, Governance Structure and Agent Cost [M]. Social and Science

Literature press, 2006:395-403

[16]Wang Haiyan. Asset-Liability Management of Insurance Company [M]. Economic Science

Press, 2004:20-25

[17]Wang Lin, Wang Jianping. Fiscal Measure of Bank’s Market Value [M]. Economic Science

Press, 2005:36-42, 56-64

[18]Wang Yong. Collocate Financial Instrument of Commercial Bank of China [M]. Wuhan

University Publishing House, 2002:246-253

[19]Wei Yingning. Theory and Practice of Life Insurance’s Embedded Value [M]. Economy and

Management Publishing House,2005:3-9

[20]Wu Yueping. Hazard of Life Insurance Fund in China [M]. China Finance Press, 2006:22-44

[21]Xue Lan, Wu Zhiliang, Li Guorong, Jiang Xiangling. Fund Management of Commercial Bank

[M]. Tsinghua University press, 2006:60-74

[22]Zhang Ting. The Analysis and Suggestions on the Influence of Deposit Structure on

Commercial Banks [D]. Master Paper of Finance, University of International Business and

Economics, 2006

[23]Zhong Jin. The Analysis of Evaluation of Commercial Bank [D]. Doctorial Paper of Finance,

South Western University of Finance and Economics, 2006

[24] Finance Year Book of China [S]

17

[25] Insurance Year Book of China [S]

[26]http://www.osiris.bvdep.com/ip

[27]保监会[28]国研网

18

http://www.osiris.bvdep.com/ip

a comparative analysis of embedded value of life insurance

Economy & Finance