Embedded value
As embedded value ( German embedded value ) is referred to as determined by a special method value of a personal insurance portfolio . It is made up of the present value of the expected future net income from the insurance portfolio including investment income, equity and valuation reserves (hidden reserves) minus the cost of capital . Discounting is carried out using an interest rate that takes into account the risk of deviation in the expected income.
As the calculation is dependent on many assumptions and there are no general standards for the calculation methods used, published values are difficult to compare. Two related quantities have recently become more important, the European Embedded Value (EEV) and the Market Consistent Embedded Value (MCEV) . These take into account other relevant variables or place certain requirements on the calculation methods, in particular require assumptions that are based on the current conditions on the financial markets.
All variants of the embedded value can be used for corporate management and are closely related to shareholder value . However, future new business is not taken into account in the various variants, so that the value of the company must be assessed higher.
The long-term nature and the implicit risk of the personal insurance business, the orientation towards the capital market and the specific capital requirements imposed by supervisory law make it difficult to calculate the current portfolio value. This requires assumptions about future developments in the various markets, interest rates and income and is usually carried out either on the basis of mean values or via stochastic modeling.
The embedded value was developed in order to take into account the special features of the insurance business, but in particular to achieve a realistic valuation, which was not sufficiently taken into account in conventional accounting , which is mostly based on caution in valuation . In the United Kingdom in particular, the accounting methods used in the past for internal corporate management were inadequate and were therefore supplemented by in-house developments by the individual insurers that were originally intended only for internal purposes. This explains why the methods for determining the embedded value have never been standardized. However, more modern accounting methods, in particular market-oriented prospective valuations (e.g. fair values ) are now in competition with embedded value, which is not suitable for accounting purposes due to its design, not least because of its lack of codification.
literature
- Heep-Altiner, Gallinger, Pommer, Wang, Wegmann (eds.): The embedded value in property insurance, Vlg. Versicherungswirtschaft, Karlsruhe 2012, ISBN 978-3-89952-694-3 .