EV vs. EV

[RichieGB]

I defer to those of you who are much more likely to pass this exam than I:

I see the terms "Economic Value" and "Embedded Value" thrown around a lot, and they seem to have similar definitions (as far as I can tell, at least). Are they being used interchangably here, i.e., are they the same thing?

[CalmSea]

I am not sure if this is correct,
I think for the Embedded value, the capital is usually reg required capital.
and for economic value, that capital should be the capital 'actual' needed to cover an insurer's risk at a defined level of tolerance.

[mai97]

I think you're right...

[SP's daddy]

I am not sure if this is correct,
I think for the Embedded value, the capital is usually reg required capital.
and for economic value, that capital should be the capital 'actual' needed to cover an insurer's risk at a defined level of tolerance.

I think of Embedded Value as the present value of future distributable earnings (i.e. outside of required capital/surplus and liabilities) from a product, usually computed at the after tax hurdle rate.

Economic value would also be a present value of future cashflows. There may be more to it, though. I can't recall specifically where this is mentioned in the readings.

[RichieGB]

Thanks, all!

[wat?]

I think of Embedded Value as the present value of future distributable earnings (i.e. outside of required capital/surplus and liabilities) from a product, usually computed at the after tax hurdle rate.

Economic value would also be a present value of future cashflows. There may be more to it, though. I can't recall specifically where this is mentioned in the readings.

I like SPd's explanation of embedded value. Reinforcement of his concept is in the LIPF text:

Embedded Value - This is the value of a company or block of business. Embedded value is calculated by discounting future profits using a hurdle rate. The hurdle rate is the rate of return demanded by the company's owners or prospective owners. Distributable earnings are often used as the future profits to be discounted.

As far as Economic value goes, my impression is that it had to do with opportunity costs, where economic value takes into account not only the NPV (or whatever method is used for valuation) of a block of business or venture, but also the missed opportunities for investment or activity that were forgone.

Of course, I could be imagining the whole thing about economic value.

[wat?]

As far as Economic value goes, my impression is that it had to do with opportunity costs, where economic value takes into account not only the NPV (or whatever method is used for valuation) of a block of business or venture, but also the missed opportunities for investment or activity that were forgone.

Of course, I could be imagining the whole thing about economic value.

I think I must've been imagining it.

Economic value is mentioned in the "Specialty Guide on Economic Capital,", and here's what the guide has to say about "Performance Measurement":

Some companies, particularly multinationals, have gone beyond traditional embedded value approaches and incorporate more enhanced stochastic anaylsis to better measure the cost of options and guarantees provided in the company's products. Actuarial literature has referenced this type of enhanced EV as "Economic Value".

[RichieGB]

I appreciate the help. I have something else that possibly someone can reconcile for me:

In Products and Finance, pg 516, I see embedded value defined as PV(distributable earnings).

In the M&A reading, I see emedded value defined as statutory net worth + value of in-force business.

I would have thought that the value of inforce business is the PV(dist. earnings), so it seems the latter definition has an extra piece (stat. net worth) over the former. Am I missing something here?

[UWWF]

I think I must've been imagining it.

Economic value is mentioned in the "Specialty Guide on Economic Capital,", and here's what the guide has to say about "Performance Measurement":
Does the Value Based measurement note not use required capital in it's definition of economic value?

[wat?]

I appreciate the help. I have something else that possibly someone can reconcile for me:

In Products and Finance, pg 516, I see embedded value defined as PV(distributable earnings).

In the M&A reading, I see emedded value defined as statutory net worth + value of in-force business.

I would have thought that the value of inforce business is the PV(dist. earnings), so it seems the latter definition has an extra piece (stat. net worth) over the former. Am I missing something here?

I can definitely see the confusion, and I'm inclined to agree with you, but I'll offer my attempt at an explanation of it.

The main idea behind an "embedded value" is to calculate the value of a block of business or a company. You're right in that the apparent statutory net worth (Stat(assets) - Stat(liabilities)) isn't represented in distributable earnings (which appears consistent between the M&A note and LIPF), but maybe embedded value is calculated differently for different purposes.

Recall that the M&A note is focusing on valuing an entire company for acquisition or a merger - this includes all value, not just profits, from the viewpoint of the shareholder. With the valuation of embedded value of a company with respect to continuing business, however, it's possible the "value" of the business only accounts for the present value of profits and not the statutory net worth.

... that's all I could come up with.

[RichieGB]

Recall that the M&A note is focusing on valuing an entire company for acquisition or a merger - this includes all value, not just profits, from the viewpoint of the shareholder.

THANK YOU. I never even considered trying to distinguish the different definitions by their intended use. This could certainly help clear up some perceived ambiguities on an exam.

[wat?]

THANK YOU. I never even considered trying to distinguish the different definitions by their intended use. This could certainly help clear up some perceived ambiguities on an exam.

No problem. Hopefully I haven't led you astray, though. :tfh:

[azn_to]

say the product was issued on 1/1/2007 so on 1/1/2007 Embedded value = 0?

[Toluca]

The embedded value for the product issued in 2007 would be the present value of expected future stat profits at the company best assumptions (No PAD) discounted at the after-tax Hurdle rate. Which in theory, should be greater than zero. Otherwise the company would have not roll the product out. If it is zero, then the company would expect to earn the Hurdle rate on the product and it might not be worth it to produce.