A Critical Note on MCEV Calculations Used in the Life Insurance Industry
Belgian Actuarial Bulletin, Vol. 8, No. 1, pp. 54-59, 2008
6 Pages Posted: 17 May 2009 Last revised: 24 Nov 2013
Date Written: September 1, 2008
Since the beginning of the development of the so-called embedded value methodology, actuaries have been using the present value of future profits as yardstick when valuing life insurance activities.
However, using profits as a fundamental input is subject to criticism because profits are no actual cash flows. In an attempt to create more transparency and robustness the CFO forum (2008) has set a definition for market consistent embedded value (MCEV).
Nevertheless, this definition refers again to the present value of future profits. In this note we show that such a definition is misleading and, instead of creating more transparency, it could end up in creating more confusion.
Keywords: Embedded Value, MCEV, Fair Value, Cash Flow Projections, Business Valuation, Profits, Cash Flows
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