An Analysis of EVA to ROE in the Japanese Insurance Industry

概要

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Non-Life insurrance business, which is part of financial industry, is now required to improve shareholders' value in the midst of deregulation. However, it won't be the proper direction for the industry to put a focus only on the earning's ratio for invested captial. In this report, analysis of EVA to ROE reveals that Japanese non-life insurance business is different from other industries due to its specific characteristics(related to products, business operation and market). We analyzed Japanese non-life insurance business based on changes in EVA during a period from FY1996 to 2004, and found that the limiting point of ROE would be 6.3%. The EVA was calculated by using "Goal by ROE(%)," of which the top management assures shareholders. The top management must improve shareholders' value as one of their most important tasks. However, excessively high target may lead to insufficient basis of liability reserves, and therefore thorough consideration is necessary for the top management in setting such a high target to secure stable management.