What Is the Value of In-Force?

Embedded value is a concept unique to the insurance industry, and its role is similar to that of Economic Value Added used by many large enterprises. The present value of the shareholder cash flow generated.

Embedded value

In layman's terms, embedded value is a consideration without considering the company's future new business

Defined from four aspects: effective business value , adjusted net assets , new business value, and other test scenarios .

With the gradual adoption of embedded value law abroad and domestically, people have gradually realized its advantages and limitations.

Key advantages:

1. For different types of insurance products, unified financial regulations are given to make comparisons between different products a reality.

2. Link management decisions with the company's embedded value and provide management decision support.

3. Through analysis of variance between embedded values in different periods, you can compare the difference between actual business and expectations, and confirm the rationality of some assumptions in pricing and business plans.

4. More emphasis was placed on the efficiency of capital utilization to meet the company's goal of maximizing the value of the company.

5. The hypotheses proposed are more rigorous and better reflect the company's actual operating conditions.

Major limitations:

1. The calculation is too esoteric and complicated, so it requires too much personnel, and the initial investment is large.

2. It is difficult to make assumptions, and it is easy to be manipulated by management decision-making layers.

3. Most of the assumptions used are static assumptions, and less consideration is given to the risk situation. It is difficult to guarantee the accuracy of the risk discount rate assumptions.

4. Too sensitive to changes in actuarial assumptions, especially during periods of economic fluctuations.

5. The embedded value is hardly consistent with the company's stock market value.

6. The implicit valuation method does not take into account the value of options embedded in life insurance policies.

The popularity of a value assessment method depends first and foremost on analysts' acceptance of it, and secondly depends on how well investors understand it. At present, Chinese investors have far less understanding of the insurance industry than developed countries such as Europe and the United States, and even less understanding and research on embedded value. Therefore, it will take some time for the embedded value assessment method to become popular in China. ^[1]