Milliman has announced the availability of a new report detailing embedded value results for 32 major insurance companies in Europe.
The report examines trends among European companies reporting embedded values as of year end 2013 within the context of a global economy in the early stages of recovery. The report compares practices followed by major European companies and discusses embedded value reporting issues in the broader environment of Solvency II and International Financial Reporting Standards.
Against a backdrop of continued recovery in equity and debt markets, the narrowing of credit spreads and rising interest rates, embedded value reporting remained a key area of insurance company disclosures. Key insights include:
-The overwhelming majority of the companies included in this study, over 95%, now apply some form of market consistent valuation in the calculation of their embedded value.
-The ratio of market capitalisation to embedded value recovered significantly, with average market capitalisation, as a percentage of total embedded value, rising from 90% at the end of 2012 to 110% at the end of 2013.
-CFO Forum members experienced a robust and solid performance– with the combined embedded value increasing to £250bn at the end of 2013 compared with £222bn at the end of 2012.
-In addition to an improved economic environment, recent management actions in the wake of the Global Financial Crisis, such as product repricing and redesign, have led to improved values of new business. The total value of new business for CFO Forum members increased from £9.8bn at the end of 2012 to £11.9bn at the end of 2013.
-Some companies reflected elements of the latest Solvency II developments, mainly those relating to extrapolation methodology for establishing the long-term risk-free interest rate. However, despite the significant developments in Solvency II, all companies have generally used the same methodology to derive liquidity premiums as that used at the end of 2012. In particular, no companies included in the study used the Matching Adjustment or Volatility Balancer approaches detailed in the Technical Findings on the Long-Term Guarantees Assessment.
-The average equivalent cost-of-capital charge, where disclosed, decreased slightly from 3.4% at the end of 2012 to 3.3% at the end of 2013. The size of the liquidity premium applied by companies fell significantly over 2013, which was in line with the narrowing of credit spreads.
Overall, there are some signs of continued convergence in approach and in the information reported. The coming years will be a testing period for the industry as companies navigate the challenges of implementing new solvency and reporting requirements, while maintaining a high standard of supplementary reporting to satisfy the numerous stakeholders involved.
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