Introduction to Embedded Value
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Rishabh Surana
Introduction: Embedded Value is a construct from the field of actuarial science which allows insurance companies to be valued. Meaning : The Embedded Value (EV) of a life insurance company is the present value of future profits plus adjusted net asset value.
EV = PVFP + ANAV
Explaination:
Life insurance policies are long-term contracts, where the policyholder pays a premium to be covered against a possible future event (such as the death of the policyholder).
Future income for the insurer consists of premiums paid by policyholders whilst future outgoings comprise claims paid to policyholders as well as various expenses. The difference, combined with income on and release of statutory reserves, represents future profit.
Net asset value is the difference between the total assets and liabilities of an insurance company. For companies, the net asset value is usually calculated at book value. This needs to be adjusted to market values for EV purposes.
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