Research On Market-Consistent Embedded Value Of Life Insurance Enterprises

With the rapid development of Chinese Economy, domestic life insurance industry also enters high-speed development phase, with more diversified products and wider distribution channels. Currently, since less developed than international level, it is necessary to adopt a administration model based on valuation assessment, in order to achieve its operation goals and create more value for shareholders and customers. Through valuation assessment, operating conditions of life insurance enterprises could be inspected, and the future development directions could be determined.The key to valuation assessment of life insurance enterprises is to accurately assess their embedded value. Proposed in20th century, the concept "embedded value" emerged when enterprises of the time adopted a legal evaluation method. However, since that life insurance business was on an ongoing basis, legal evaluation based on the cash basis tremendously devaluated the enterprise value in Europe, as well as causing lots of hostile takeovers. Embedded Value enabled the problem be partly relieved. By following the idea of Economic Value, and introducing a series of assumptions, EV method is considered a milestone in valuation of life insurance enterprises.Yet, EV method is not able to thoroughly solve the problems existing. Enterprises which adopted and researched on EV method found that it was hard to find a exercisable and comparable way to evaluate the risks in calculations, even under the guidance of European EV principles. In addition, EV method ignores the valuation of those insurance policies embedding options and guarantees, which is being criticized by more and more insurance companies and actuarial institutions. In the light of more and more complex financial environment, the defects of Embedded Value are highlighted.To solve the problem, famous international actuarial institution Tillinghast proposed the Market Consistent Embedded Value (MCEV) method. MCEV method mends and develops EV method. By respectively evaluating the assets, liabilities and corporate structures of life insurance enterprises, MCEV resolves the defects of EV method, such as the selection of risk discount rate and valuation of policies embedding options and guarantees. Therefore, MCEV method could accurately assess the embedded value of life insurance companies. With the complexion of financial markets, MCEV is apparently more adaptable to changeable environment, and has been accepted by professional actuarial institutes. In the future, Market Consistent Embedded Value will be widely used in evaluation of life insurance enterprises.This thesis compromises six parts.The first part introduces the thesis’s background, significance and literature review, as well as its basic content and structure.Chapter2lays theoretical foundation for MCEV method, including traditional EV principles and option pricing techniques.In chapter3, detailed elaboration on MCEV is given, such as its constitutions and calculation. Also, valuations of assets, liabilities and corporate structure are briefly introduced.In order to better assess insurances policies with and without options and guarantees, the next part respectively discusses how to choose the appropriate risk discount rates, and analyses the key technique used in evaluating policies. For better understanding to the paper, a case study of a real insurance product is used to compare the pros and cons in risk discount rate selection between EV and MCEV.Chapter5introduces how MCEV evaluate policies embedding options and guarantees. Option pricing model could be used in simple option evaluation, while modeling method based on Monte Carlo theory is more practical when assessing complex options.At last, the paper analyses obstacles faced by domestic life insurance enterprises adopting MCEV method, and puts forward several suggestions.Currently, Embedded Value method is gradually being employed in Chinese life insurance companies. However, both literatures and living examples of MCEV are still scarce. In order to be in line with international norms, domestic life insurance industry need to learn advanced techniques of international ones, and gradually move from traditional ways to MCEV method.