embedded value
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The Embedded Value (EV) of a life insurance company is the
present value In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...
of future profits plus adjusted
net asset value Net asset value (NAV) is the value of an entity's asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to p ...
. It is a construct from the field of
actuarial science 2003 US mortality ( life) table, Table 1, Page 1 Actuarial science is the discipline that applies mathematical Mathematics (from Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), ...
which allows insurance companies to be valued.


Background

Life insurance Life insurance (or life assurance, especially in the Commonwealth of Nations The Commonwealth of Nations, generally known simply as the Commonwealth, is a political association of 54 member states, almost all of which are former territorial ...
policies are long-term contracts, where the policyholder pays a premium to be covered against a possible future event (such as the death of the policyholder). Future income for the insurer consists of premiums paid by policyholders whilst future outgoings comprise claims paid to policyholders as well as various expenses. The difference, combined with income on and release of statutory reserves, represents future profit. Net asset value is the difference between the total assets and liabilities of an insurance company. For companies, the net asset value is usually calculated at
book value In accounting, book value is the value of an asset according to its balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances ...
. This needs to be adjusted to
market value Market value or OMV (Open Market Valuation) is the price A price is the (usually not negative) quantity Quantity is a property that can exist as a multitude or magnitude, which illustrate discontinuity and continuity. Quantities ca ...
s for EV purposes. Furthermore, this value may be discounted to reflect the "lock in" of some of the assets by their nature. (An example of such a lock-in would be assets held within the with-profits fund)


Value of the insurer

EV measures the value of the insurer by adding today's value of the existing business (i.e. future profits) to the market value of net assets (i.e. accumulated past profits). It is a conservative measure of the insurer's value in the sense that it only considers future profits from existing policies and so ignores the possibility that the insurer may sell new policies in future. It also excludes goodwill. As a result, the insurer is worth more than its EV.


Formula

Embedded Value is calculated as follows: :EV = PVFP + ANAV where :EV = Embedded Value :PVFP =
present value In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...
of future profits :ANAV = adjusted
net asset value Net asset value (NAV) is the value of an entity's asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to p ...


Improvements

European embedded value (EEV) is a variation of EV which was set up by the CFO Forum which allows for a more formalised method of choosing the parameters and doing the calculations, to enable greater transparency and comparability. Market Consistent Embedded Value is a more generalised methodology, of which EEV is one example.


References

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External links


Embedded value definition from Investopedia
Actuarial science