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    A Comparative Analysis of Embedded Value of Life Insurance ... A Comparative Analysis of Embedded Value of Life Insurance ... Document Transcript

    • A Comparative Analysis of Embedded Value of Life Insurance Companies and Banks of China Cao Xiaojing1 Hao Yansu1 Abstract Embedded 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 Purpose It 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: 1 Postgraduate Student of Insurance School, Central University of Finance and Economics, Email: roweanammmm@sina.com r Professor of Insurance School, Central University of Finance and Economics, Email: haoys@cufe-ins.sina.net 1
    • 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 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 2
    • embedded value than banks? Share Price of Financial Instituitions (closing price of 04/30/07 from SSE) Pingan Insurance 65.85 41.65 China Life 31.58 Industrial Bank 19.48 Merchants Bank 13.31 13.01 Huaxia Bank 10.34 Mingsheng Bank 5.62 CITIC Bank 5.42 China Bank ICBC 0 20 40 60 80 Chart 1 Data from: www.sse.com i. Research Frame 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 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.  scale   scale   asset ‡ ˆmatchingˆˆ liability  ˆ ˆ ˆ ˆ ˆ† ˆˆ leverage    structure   structure  invest income discount embedded value Chart 2 ii. Capital Structure of Life Insurance Companies and Banks in China In 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 3
    • 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. 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 f x1 f, long-term liability is f ( x2 ) and equity of ICBC is g ( x1 ) , long- term deposit is g ( x2 ) . When leverage is defied as long-term liability/equity, then the leverage of ( ) China Life is marked as A= f ( x2 ) / f x1 fand the leverage of ICBC is marked as B= g ( x2 ) / g ( x1 ) . 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
    • Changing of Long-term Liability and Shareholding Equity of China Life 700000 600000 500000 Million(RMB) Long-term 400000 Liability 300000 Shareholding Equity 200000 100000 0 2001 2002 2003 2004 2005 Chart 3 Data from: Insurance Year Book of China Changing of Long-term Deposit and Shareholding Equity of ICBC 25000 Hundred Million(RMB) 20000 Long-term 15000 Deposit 10000 Shareholding Equity 5000 0 1998 1999 2000 2001 2002 2003 2004 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
    • Individual and Party Operation of China Life 200000 150000 Million(RMB) Party Operation 100000 Individual Operation 50000 0 99 00 02 03 05 06 98 01 04 19 20 20 19 20 20 20 20 20 Chart 5 Data from: Insurance Year Book of China Saving Deposit and Public Deposit of ICBC Hundred Million(RMB) 60000 40000 Public Deposit 20000 Saving Deposit 0 98 99 00 01 02 03 04 05 19 19 20 20 20 20 20 20 Chart 6 Data from: Finance Year Book of China 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 Operation of China Life 200000 Million(RMB) 150000 Long-term Operation 100000 Short-term Operation 50000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 Chart 7 Data from: Insurance Year Book of China Short-term and Long-term Deposit of ICBC Hundred Million(RMB) 60000 50000 40000 Long-term Deposit 30000 Short-term 20000 Deposit 10000 0 98 01 02 03 04 99 00 19 19 20 20 20 20 20 Chart 8 Data from: Finance Year Book of China 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 Distribution of China Life 800000 Million(RMB) 700000 600000 500000 Long-term Asset 400000 Floating Asset 300000 200000 100000 0 2001 2002 2003 2004 2005 Chart 9 Data from: Insurance Year Book of China Asset Distribution of ICBC Hundred Million(RMB) 50000 40000 Investment 30000 Mid/Long-term loan 20000 Short-term loan 10000 0 98 99 00 01 02 03 04 19 19 20 20 20 20 20 Chart 10 Data from: Finance Year Book of China 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
    • Special Special asset liability structure structure Higher embedded value Chart 11 Duration distribution 2006 2005 2004 of China Life(%) 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 2006 2005 2004 of ICBC(%) 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 Duration of China Life's Contracts (2004-2006) less than 1 more than year years 10 0.67% years 1-5 31.33% 30.43% years 5-10 37.57% Chart 12 Data from: Annual Report of China Life 9
    • Duration of ICBC's Contracts (2004-2006) more than 5 years 1-5 years 7.50% 0.10% months 3-12 current 23.53% deposit 50.27% less than 3 months 18.60% Chart 13 Data from: Annual Report of ICBC 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. 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. 10
    • China Life’s Return on 2006 2005 2004 Investment(million) 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 Data from: Annual Report of China Life ICBC’s Return on 2006 2005 2004 Fund(million) 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 3.99% 4.03% 3.43% Total Return Table 4 Data from: Annual Report of ICBC 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. 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 11
    • Asset Distribution of America's Life Insurance 1996 Bond 1995 Stock 1994 Mortgage Lending 1993 Policy Mortgage 1992 real estate Other Asset 1991 0% 50% 100% 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 Distribution of England's Life Insurance 1996 Bond Stock 1995 Mutual Fund Other Investment 1994 Cash Other Asset 1993 0% 20% 40% 60% 80% 100% Chart 15 Data from: “modeling analysis of asset-liability of insurance in China” 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 12
    • Asset Distribution of Japan's Life Insurance 1996 Deposit 1995 Negotiable Note 1990 Loan 1989 Real Estate 1988 Other 1986 0% 20% 40% 60% 80% 100% Chart 16 Data from: “modeling analysis of asset-liability of insurance in China” 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 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 Deposit Government Fund Energy Road and Public Income(%) bond source traffic 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 13
    • 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 Deposit Government Bond Investment Financial Others Insurance in China Bond Fund Bond 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 Data from: Insurance Year Book of China 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. 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. 14
    • the Comparison of Insurance and Bank Assets in Matured Market 60 50 48.7 50.5 48.1 47.3 Insurance 43.5 40 39.6 41.2 Asset / GDP 36.3 37.9 Bank Asset / % 30 24.7 27.2 23.5 24 24.7 26.2 GDP 23.2 23.2 24 20 10 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 Chart 17 Data from: Global Report of Financial Stability in 2004 the Comparison of Insurance and Bank Assets in China 250.00 231.47 210.29 218.02 205.54 200.00 150.00 153.57 154.09 % Insurance 100.00 Asset / GDP Bank Asset 50.00 / GDP 0.00 3.73 4.81 6.17 7.79 8.76 8.39 2000 2001 2002 2003 2004 2005 Chart 18 Data from: Finance Year Book of China 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 Insurance in China 18000 16000 15296.3 14000 100 million 12000 11953.68 10000 9088.21 8000 6000 4611.83 6319.68 4000 2724.2 2000 3291.32 2038.2 0 1998 1999 2000 2001 2002 2003 2004 2005 Chart 19 Data from: Insurance Year Book of China Assets of Banks in China 400000 355282.38 350000 300000 300488.98 100 million 254413.13 250000 215329.37 200000 147826.8 150000 119872 100000 135434 106411.9 50000 0 1998 1999 2000 2001 2002 2003 2004 2005 Chart 20 Data from: Finance Year Book of China 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, 16
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