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
Date Written: July 6, 2015
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: Suggested Citation