European embedded value

The European Embedded Value (EEV) is an effort of the CFO Forum to standardize the calculation of the Embedded value. For this purpose the CFO Forum has released guidelines how Embedded Value should be calculated.

There is a lot of uncertainty around how the value of a life insurer should be calculated. The challenge is that insurance contracts are long-term contracts, so the value of the company now is dependent on how each of those contracts end up performing. Profit is made if the policyholder doesn't die, for example, and just contributes premiums over many years. Losses are possible for policies where the insured dies soon after signing the contract. And profitability is also affected by whether (and when) a policy might terminate early.

An actuary calculates an embedded value by making certain assumptions about life expectancy, persistency, investment conditions, and so on - thus making an estimate of what the company is worth now. But if each person has a different opinion on how things will turn out, you could expect a range of inconsistent estimates of the worth of the company.

The CFO Forum was formed to consider in general the issues around measuring the value of insurance companies. The EEV was the output of this forum, and allows greater consistency in the such calculations, making them more useful.

European Embedded Value Principles