Value Relevance of Life Insurers' Embedded Value Disclosure and Implications for IFRS 4 Phase II

Munich Risk and Insurance Center Working Paper No. 27

50 Pages Posted: 7 Jul 2015 Last revised: 9 Jul 2015

See all articles by Tobias Gerstner

Tobias Gerstner

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Dominik Lohmaier

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Andreas Richter

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Date Written: July 6, 2015

Abstract

Many insurers disclose Embedded Value reports, a 'capital market-consistent' valuation framework for their life insurance business, to provide investors with additional information. We examine the incremental and relative information content of Embedded Value components in comparison to the existing mandatory accounting standards. Our findings can help to predict the capital market effects of the new insurance accounting standard IFRS 4 Phase II, which will be introduced in 2018 and is based on similar principles as the EV framework. Our results show that the incremental information content of the EV framework is limited and even decreasing since 2009. The current IFRS framework seem to have more explanatory power for insurers' stock prices and returns in the current economic environment which casts doubt about benefits of IFRS 4 Phase II. Our comprehensive analysis of the incremental value relevance of EV and EV earnings subcomponents shows that investors would profit from an explicit valuation of options and guarantees and a presentation scheme of earnings which differentiates between inforce and new business.

Keywords: Life Insurance, Embededded Value, Value Relevance

JEL Classification: G22, M41, M48

Suggested Citation

Gerstner, Tobias and Lohmaier, Dominik and Richter, Andreas, Value Relevance of Life Insurers' Embedded Value Disclosure and Implications for IFRS 4 Phase II (July 6, 2015). Munich Risk and Insurance Center Working Paper No. 27. Available at SSRN: https://ssrn.com/abstract=2627240

Tobias Gerstner (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

Dominik Lohmaier

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

Andreas Richter

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Schackstraße 4
Munich, 80539
Germany

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