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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

Fabian Suarez

BNP Paribas

Steven Vanduffel

Vrije Universiteit Brussel (VUB)

Date Written: September 1, 2008

Abstract

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

Suggested Citation

Suarez, Fabian and Vanduffel, Steven, A Critical Note on MCEV Calculations Used in the Life Insurance Industry (September 1, 2008). Belgian Actuarial Bulletin, Vol. 8, No. 1, pp. 54-59, 2008. Available at SSRN: https://ssrn.com/abstract=1404011

Fabian Suarez

BNP Paribas ( email )

Montagne Du Parc 3
Belgium

Steven Vanduffel (Contact Author)

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
Brussels, Brabant 1050
Belgium

HOME PAGE: http://www.stevenvanduffel.com

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