A Comparison of Traditional Embedded Value and Market Consistent Embedded Value
Document ID: 2007-747 (previously 2007/004)
Published on: 30th September 2007
Author: Delme Pritchard
Market Consistent Embedded Value (MCEV) is increasingly becoming the standard for insurance companies to report the value of their business though it is still in its relative infancy. This is in contrast to the more established Traditional Embedded Value (TEV) methods.
The aim of this report is not to add to the high level discussion of the pros and cons of the different embedded value approaches, but rather to look at the impact in a case study of the reported profits under the different frameworks. The case study we look at is a simple in-force annuity book, which in some respects keeps the analysis relatively straightforward, but not in others. Amongst the questions that may be asked regarding the impact of using these different measures are::
- How does the initial embedded value differ under different EV frameworks and how can these differences be reconciled?
- How will the EVs change over time (mean and volatility) under the different frameworks and what are the drivers of this change?
This notebook looks at the first of these two questions.
