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Study of Life Insurance Company Valuation

During the trend of globalization and the growing of financial instrument, companyvaluation research is now facing two key questions: How to reveal the real value ofcompany towards financial report, and how to maintain
Submitted On: 04-01-2010 | Views:	Article Tools:

During the trend of globalization and the growing of financial instrument, companyvaluation research is now facing two key questions: How to reveal the real value ofcompany towards financial report, and how to maintain "Market consistency" offinancial report. To life insurance company valuation, it is facing more challenges anddifficulties than others for its distinctiveness in operation and the inefficiency towardscurrent insurance accounting report.This paper tried to explore the valuation of life insurance company in two lines:The one is Fair value accounting standard which is in drawing-up and testing sectionby International Accounting Standard Board (IASB). As a component of Fair valueaccounting standard, the fair valuation of life insurance company uses modernfinancial technical to measure the fair value of asset and debt respectively based onbalance sheet, in order to realize the goal of "Market consistent".The other is Market-consistent embedded value (MCEV), developed by insurers fromactuarial basis. Insurers has been trying hard in developing new valuation method forlife insurance companies for years, because of the inefficiency of current accountingrules in revealing the real and "Market consistent" value for life insurance companies,as well as the delay of Fair value accounting implementation. Derived from traditionalEmbedded Value (EV), MCEV measures the "Market consistent" value of each itemsbased on Economic Balance Sheet, by a "bottom-up" method (EV uses a "top-down"),and then the total value of company. What's more, synergy effect and companystructure is also included in the total valuation of company.To summarize, this paper surrendered a suggestion to the future development of lifeinsurance company valuation that the integration and convergence with Fair valueaccounting, which is the development objective of international financial report for itsauthority and wide appliability, would be a trend for MCEV.As respect to the valuation of life insurance company in China, it is impractical to bring national standard in line with international level regardless of domestic economic condition, although insurance accounting rules international convergence would be an inevitable transition we would face under the trend of globalization and financial conglomerate. In a word, apply the international standard into the national rules of life insurance company valuation with a proper sequence, based on domestic situation, would be an optimum route.

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