In May 2004 the CFO Forum harmonized the various efforts of reporting the embedded valueof life insurance companies by issuing the European Embedded Value (EEV) Principles.In this working paper a methodology is proposed to derive a maximum lending amountfrom EEV figures without much additional data requirements from the originating insurer. The approach chosen is similar to that of other financing areas, e.g. real estate finance, where first a prudent best estimate valuation is done and later risk deductions are performed in the form of applying loan to value ratios, e.g. 60-80 % of the prudent amount. Here, this prudent value is called bankable embedded value and the loan to value analysis presented leads to the maximum lending amount. The deductions proposed to arrive at a maximum lending amount are based on parameter adjustments and risk allowances for unexpected risks. There is an analogy with insurers for determining their own capital needs. The methodology proposed is based on the stress test approach which increasingly gains popularity with insurance supervisors in Europe.

https://www.econstor.eu/bitstream/10419/27823/1/498526631.PDF

Financing the embedded value of life insurance portfolios

The cost of capital is a key element of the embedded value methodology for the valuation of a life business. Further, under some solvency approaches (in particular, the Swiss Solvency Test and the developing Solvency 2 project) assessing the cost of capital constitutes a step in determining the required capital allocation. Whilst the cost of capital is usually meant as a reward for the risks encumbering a given life portfolio, in actuarial practice the relevant parameter has been traditionally chosen, at least to some extent, inconsistently with such risks. The adoption of market-consistent valuations has then been advocated to reach a common standard. A market-consistent value usually acknowledges a reward to shareholders’ capital as long as the market does, namely if the risk is systematic or undiversifiable. When dealing with a life annuity portfolio (or a pension plan), an important example of systematic risk is provided by the longevity risk, i.e. the risk of systematic deviations from the forecasted mortality trend. Hence, a market-consistent approach should provide appropriate valuation tools. In this paper we refer to a portfolio of immediate life annuities and we focus on longevity risk. Our purpose is to design a framework for a valuation of the portfolio which is market-consistent, and therefore based on a risk-neutral argument, while involving some of the basic items of a traditional valuation, viz best estimate future flows and allocated capital. This way, we try to reconcile the traditional with a market-consistent (or risk-neutral) approach. This allows us, in particular, to translate the results obtained under the risk-neutral approach in terms of a properly redefined embedded value.

http://www.actuaries.org/LIFE/Events/Stockholm/Olivieri_Pitacco.pdf

Assessing the cost of capital for longevity risk

Purpose – The purpose of this paper is to transfer the concept of market‐consistent embedded value (MCEV) from life to non‐life insurance. This is an important undertaking since differences in management techniques between life and non‐life insurance make management at the group level very difficult. The purpose of this paper is to offer a solution to this problem.Design/methodology/approach – After explaining MCEV, the authors derive differences between life and non‐life insurance and develop a MCEV model for non‐life business. The model framework is applied to a German non‐life insurance company to illustrate its usefulness in different applications.Findings – The authors show an MCEV calculation based on empirical data and set up an economic balance sheet. The value implications of varying loss ratios, cancellation rates, and costs within a sensitivity analysis are analyzed. The usefulness of the model is illustrated within a value‐added analysis. The authors also embed the MCEV concept in a simplified...

/pdf/market-consistent-embedded-value-in-non-life-insurance-how-29wxfjhum7.pdf

Market‐consistent embedded value in non‐life insurance: how to measure it and why

prepared for the Centre for Business Performance, ICAEW Financial support from the P.D. Leake trust (a trust associated with the Institute of Chartered Accountants in England and Wales (‘ICAEW’)) is gratefully acknowledged. The Centre for Business Performance (‘CBP’) manages all grant applications. We thank Margaret Lee for research assistance at LSE. We are also grateful for financial support and technical advice from Deloitte and KPMG for the

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1016817_code573672.pdf?abstractid=1016817

An experiment in 'fair value' accounting? the state of the art in research and thought leadership on accounting for life assurance in the uk and continental europe

This thesis reviews the UK life insurance industry comprehensively in terms of performance and business behaviour. One major contribution of the thesis is to challenge the conventional view on evaluation of investment funds from a shareholders’ perspective. The accounting valuation techniques to evaluate investment from the policyholder’s perspective have not been advanced to the same extent as methods designed to evaluate investment from the shareholder’s perspective, due partly to the accounting complexity of the investment management. Against this context, the thesis develops a valuation method on the basis that policyholders’ basic expectation that their saved funds shall be invested with value growth higher than inflation in the real goods market, and the thesis takes this as the benchmark to assess the reported value of policyholders’ assets. The thesis employs this valuation to assess the performance of different life assurance products (conventional vs. modern) and examine whether the transformation (from conventional to modern) has any impact on insurer performance and behaviour. The thesis also examines whether product diversification impacts realised and unrealised investment income homogenously; the result suggests that the effect of product diversification on performance varies across different measurements of realised and unrealised gain. The second major contribution of the thesis is to test the validity of different output proxies and compare efficiency scores based ranking for competitive firms to the value creation based ranking. Overall, the thesis suggests that different output proxies give consistently similar ranking for competitive firms, and cost efficiency based on different proxies are closely related to conventional measurers of firm performance and value creation in terms of value and ranking.

/pdf/how-does-the-life-insurance-business-perform-and-behave-the-rknavh3hns.pdf

How does the life insurance business perform and behave: the case of the UK industry

This paper reviews the developments in reporting of traditional embedded value and summarises some of the reasons why this is now undergoing change. It considers the purpose of an embedded value calculation and the effect of differing attitudes to risk. It comments on the recently developed European Embedded Value Principles and sets out the main areas where scope remains to apply judgement.The paper proposes the market-consistent embedded value framework as a way forward to help provide guidance in some of these areas, in particular on the choice of discount rate and on calibration of stochastic techniques used to value embedded options and guarantees. The paper recognises that market-consistent embedded values are in relative infancy and sets out areas for possible future development.

Current Developments in Embedded Value Reporting

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Current Developments in Embedded Value Reporting