techniques consistent with the methodology and assumptions used in the underlying EV
New business is defined as that arising from the sale of new contracts during the reporting period. The value of new business includes the value of expected renewals on those new contracts and expected future contractual alterations to those new contracts. The EV should only reflect in-force business, which excludes future new business
The assessment of appropriate assumptions for future experience should have regard to past, current and expected future experience and to any other relevant data. Changes in future experience should be allowed for in the value in-force when sufficient evidence exists and the changes are reasonably certain. The assumptions should be actively reviewed.
Economic assumptions must be internally consistent and should be consistent with observable, reliable market data. No smoothing of market or account balance values, unrealised gains or investment return is permitted.
For participating business the method should make assumptions about future bonus rates and the determination of profit allocation between policyholders and shareholders. These assumptions should be made on a basis consistent with the projection assumptions, established company practice and local market practice.
EV results should be disclosed at consolidated group level using a business classification consistent with primary statements.
Our overall review comment The EEV is similar in many respect to the guidance on achieved profits e.g. in terms of terminology and continued focus on the present value of profit distributable to shareholders. Given its support by leading European insurers, many believe it is a significant step forward in developing financial reporting for life insurance business.
“Prudential plc believes that the EEV methodology represent an improvement over existing embedded value reporting methods across Europe and supports its introduction. Prudential re-iterates its belief that embedded value reporting provides investors with a truer measure of the underlying profitability of the Group’s long- term business and is a valuable supplement to statutory accounts’ (Press Release, June 2, 2005)
It has been noted that this is the first time that there has been agreement on a common framework for European insurers and it could result in greater consistency in EV reporting. However there are still many areas within the Principles that leave companies with considerable freedom of choice.
For example the setting of the risk discount rate (RDR). The CFO Principles and Guidance do give a framework for how companies should derive the RDR specifically “the RDR should be set equal to risk free rates plus a risk margin” (G10.7), “..the risk margin should reflect any risk associated with the emergence of distributable earnings that is not allowed for elsewhere in the valuation” (G10.7) and the RDRs “may vary between product groups and territories” (G10.9). However, the principles and guidance are silent on the actual approach to be taken in attempting to