A 50 per cent rise in PICC Property and Casualty's share price on its debut earlier this month whet investors' appetite for China Life Insurance's December listing. China Life's initial public offering, however, is more ambitious than PICC's. It is seeking to raise up to US$2.5 billion, which would make it the biggest offering attempted anywhere this year. The sheer size of China Life's IPO will make it hard for investors to digest. It is also predominately a life company rather than a property and accident insurer like PICC. As a result, it is going to be more important than ever to look carefully inside China Life's listing vehicle. Some of its liabilities might not be to everyone's taste. The business model of insurance companies is slightly more sophisticated than that of their banking counterparts. Rather than deposits, insurers collect monthly premiums and invest the proceeds. The trick is to generate sufficient growth to cover future liabilities and still make a profit. In China, the task is made all the more difficult by regulations that restrict insurers' investment options, mainly to low-yield bank deposits and domestic bonds. China Life, for example, managed to get its sums very wrong on a large raft of policies it wrote over a four-year period beginning in 1996. Bank deposit rates were then at 11 per cent, so China Life promised policy holders 9 per cent returns. But by 1999, deposit rates had crashed to just 2.25 per cent, leaving the insurer on the wrong end of a nasty negative spread. Understandably, investors are reluctant to buy a share in someone else's losing investment. Some 44 million loss-making life insurance policies will therefore be excluded from the new listing vehicle and quarantined in a separate vehicle owned by China Life's parent. Hopefully they will stay separated. In the small print of China Life's pre-listing circular, it states that if the parent is unable to meet obligations to its policy holders, it may seek extra dividends from China Life or sell more of its holding. The possibility of a legal challenge to the ring-fence concocted by China Life's investment bankers is also highlighted. Ultimately, China's insurance industry needs greater flexibility for it to diversify its investments. So far, regulators have made small moves in this direction and a professional fund management culture is developing slowly. There is, for example, speculation that funds may be allowed to invest in Hong Kong equities. Investors may be more sanguine if a foreign strategic investor comes along and takes a piece of China Life, as American International Assurance did with PICC and HSBC did with Ping An Securities. No doubt, this apparent deficiency will be addressed in the upcoming roadshows organised to promote China Life's IPO. After that, we will just have to wait to see the pricing - and whether the markets will bear it. What price a slice of China's No1 life company?