Embedded Value

The aim of this chapter is to explain the Embedded Value (EV) method. The related components: Appraisal Value (AV) and Net Asset Value (NAV) are described. The transition versus a new method, European Embedded Value (EEV), is illustrated. The essential difference as compared to the traditional calculation of Embedded Value lies in the calculation of the VIF, which is adjusted through the value of the options and guarantees that are implicit in the portfolio. Then, the more sophisticated method, Market Consistent Embedded Value (MCEV) is represented. In the paragraphs following, to make easier the comprehension, a numerical example is provided. Starting from three hypothetical insurance undertakings, A comparison between TEV, EV and MCEV is performed. The example shows three different impacts on the capital requirement. In the following paragraphs, the chapter introduces the concept of New Business Value (NBV) and of Annual Premium Equivalents (APE). An indicator for Embedded Value (ROEV) is illustrated. At the end of the chapter, the model for determining Goodwill is explained.