Embedded Value
Embedded value is an actuarial metric that derives the present value of an insurer's existing life insurance portfolio from expected future profits.
Concept
Embedded value is an actuarial metric for valuing a life insurance company, made up of existing net asset value and the present value of the profits expected in the future from the existing in-force book of business (value of in-force business).
Purpose of the Metric
Because a life insurer’s statutory equity often reflects the actual economic value of the in-force book only inadequately, due to the conservative valuation principles applied to long-term contracts, embedded value was developed as an additional, more economically oriented metric to give investors and analysts a more realistic view of the company’s actual value.
European Embedded Value and Market Consistent Embedded Value
To improve comparability between companies, standardized calculation methods were developed with the European Embedded Value (EEV) and, building on it, the Market Consistent Embedded Value (MCEV), based on market-consistent assumptions for capital market parameters; with the introduction of Solvency II and its associated economic balance sheet, the standalone significance of embedded value in the external reporting of European life insurers has partly declined.