Submitted by: Submitted by 12345678dj
Views: 389
Words: 1345
Pages: 6
Category: Business and Industry
Date Submitted: 07/19/2010 10:52 AM
watsonwyatt.com Watson Wyatt UK
Market consistent embedded value
principles
E-Alert
12 June 2008 – On the 4th June the CFO Forum, representing leading European insurers,
published its Market Consistent Embedded Value (MCEV) principles and guidance. The 17 new
principles replace the 12 EEV principles that have been the basis of Embedded Value
disclosure since 2004. Compliance with the new principles is mandatory for CFO members from
year-end 2009, but early adoption is encouraged.
A number of insurers are in effect already reporting MCEV under the old EEV principles, but the
new principles will provide more consistency in the approach taken, ensuring that companies
report on the same basis. Guidance has been strengthened in a number of areas, and more
extensive minimum disclosure requirements added.
In this e-alert we outline the main thrust of the principles, and comment on their likely impact.
Market consistency
The move to market consistency removes the subjective area of real-world economic
assumption and risk discount rates from embedded values. Financial risk in an MCEV should be
valued, where possible, in line with asset prices quoted in deep and liquid markets for
instruments with similar cash flows.
Most companies will be familiar with the techniques and calibrations described in the principles
to achieve market consistency. A key decision was the choice of the swap rate as the ‘risk-free’
benchmark rate, which is in line with the likely outcome of Solvency 2. The decision not to allow
(further) additions in the risk-free rate for liquidity premia or credit risk premia has significant
consequences for annuity providers (see below).
Allowance for risk
An MCEV comprises free surplus, required capital and value of in-force (VIF). The definition of
the VIF highlights how risk is allowed for under MCEV:
present value of future profits
less time value of options and guarantees (TVFOG)
less frictional costs
less cost of...