CFO Forum MCEV Principles - Institute of Actuaries of India Saunders _1.pdfModel implementation...

Mark Saunders, FIA, FIAI, FSAPrincipal & Managing Director, Asia

James Creedon, FIASenior Consultant

Wendy Fu, FIAAConsultant

© 2008 Towers Perrin

Market-Consistent Embedded Values and the CFO Forum MCEV PrinciplesCurrent Issues in Life AssuranceSea Princess Hotel, Mumbai, India - 29-30 August 2008

© 2008 Towers Perrin 2

Mark V.T. Saunders, FIA, FIAI, FSAMark Saunders is a Principal of Towers Perrin and Managing Director of Tillinghast’s insurance consulting business in Asia-Pacific. He is a member of the Global Leadership Council of Tillinghast.

He has been working in the insurance industry since the 1980’s and in Asia since 1989. He moved to Hong Kong in 1994. Before joining Tillinghast he was Asian Regional CEO and Executive Board Member of international life insurance operations of a UK-parented insurer including their joint venture in Korea.

He has been involved in more than 150 actuarial appraisal value assessments of Asian insurers and is widely regarded as a leading practitioner in value determination and Mergers & Acquisitions of insurers in Asia.

High profile deals in the public domain include: He provided the Actuarial Expert Opinion in the Prospectuses for the ground-breaking IPO of China Life (dual listing in New York and Hong Kong as well as the subsequent A-share listing in Shanghai) and was also the lead actuarial consultant in the capital raising exercise for another leading state-owned insurer, Korea Life. He was also the Expert Actuary for the Actuarial Consulting Report in Great Eastern’s Circular to Shareholders in relation to OCBC’s voluntary unconditional offer. Most recently he provided the Actuarial Expert Opinion in the Prospectus for the IPO of China Pacific in Shanghai.

Mr Saunders has extensive experience in the operations of life insurance companies around the world. With his in-depth knowledge of Asian insurers and markets he has helped a number of domestic and international insurers in critical areas of acquisition, restructuring, capital raising, market entry, strategy, business operations, partnerships, product development, sales, distribution, bancassurance, financial and risk and capital management (including ALM), financial and regulatory reporting, actuarial development, training and improving business performance.

Mr Saunders has been the Appointed Actuary for ten insurers in Hong Kong, Singapore and Vietnam. He was the inaugural Appointed Actuary for the state-owned insurer, Vietnam Life (“BaoViet Life”). He also carries out Peer Review of Appointed Actuaries’ duties for six insurers in India. He also has provided Independent Actuary opinions for High Court sanctioned insurance business transfers and successful Expert Witness testimonials in the Court of First Instance.


Mark V.T. Saunders, FIA, FIAI, FSA (cont’d)

Member of the Insurance Advisory Committee of the Hong Kong SAR, a statutory body overseeing the insurance industry and established under the Insurance Companies Ordinance

Member of the Hong Kong SAR Securities and Futures Commission Committee on Investment-Linked Assurance and Pooled Retirement Funds

Founder Member of the China Insurance Regulatory Commission (“CIRC”) Task Force for Embedded Value Reporting

Member of the Life Committee of the Actuarial Society of Hong Kong

Faculty & Institute of Actuaries representative for the professional educational Regional Seminars held throughout Asia.

Society of Actuaries Marketplace Relevance Strategic Action Team

He is a regular facilitator of training sessions and speaker and chair at conferences and seminars as well as author of numerous articles and papers relating to the Asian insurance industry and has also made the occasional TV appearance!

Mr Saunders is a Fellow of the Institute of Actuaries (UK), a Fellow of the Institute of Actuaries of India, a Fellow of the Society of Actuaries (US), a Fellow of the Actuarial Society of Hong Kong and a Fellow of the Singapore Actuarial Society. He has both a BSc (Honours) degree and Post Graduate Certificate of Education in Mathematics from Manchester University, UK.

Mr Saunders has undertaken memberships of various insurance-related, actuarial, regulatory and professional Committees such as:


James Creedon, FIA

James Creedon, FIA is a senior consultant with the Tillinghast insurance consulting practice of Towers Perrin, based in Hong Kong. He also has extensive experience of life insurance in Europe after spending seven years with Tillinghast in London.James has played a key role in developing Tillinghast’s intellectual capital in the area of Market-Consistent and European Embedded Values. James has spoken at a large number of professional and client events and written a number of articles on European and Market-Consistent Embedded Values.James leads our Risk-Capital-Value initiatives in Asia. James has worked with a number of European and Asian insurers on the implementation and application of embedded value techniques for financial reporting, performance measurement and capital management. This has included using market-consistent embedded value and economic capital metrics to quantify and manage risks and as the basis for business decisions.James’s other areas of expertise include:

Asset-liability management and modelling;Product development, pricing and risk management of investment-linked products with guarantees;Determination of economic capital requirements and capital management;Merger and acquisition and due diligence;

James holds a Bachelor in Actuarial and Financial Studies (BAFS) from University College, Dublin. He is a Fellow of the Institute of Actuaries.


Wendy Fu is a consultant with the Tillinghast insurance consulting practice of Towers Perrin in Hong Kong. She joined the company at the beginning of 2004. Wendy has been involved in a wide variety of assignments for many clients since she joined Tillinghast. Work performed covers the following countries: China, Taiwan, Hong Kong, Japan, Australia, Singapore, Malaysia, Thailand and most recently, India and Indonesia. Some of these assignments include:

Wendy is a Fellow of the Institute of Actuaries of Australia. She holds a Bachelor of Commerce with Bachelor of Applied Finance double degree from Macquarie University, Australia. She is fluent in English, Cantonese and Mandarin.

Wendy Fu, FIAA

Traditional embedded value assessments and reviews for regular reporting, capital raising exercises, and M&A dealsMarket consistent embedded value (MCEV) review and analysisRisk based / economic capital assignments US GAAP and HKFRS financial reportingFinancial projection and business planning assignments Asset and liability management Product pricing review Model implementation exercises and model reviews, upgrades and enhancements using a range of actuarial software including MoSes and Prophet External model review and validation – pricing models for institutional banking products including vanilla as well as exotic derivatives


Economic Value Credentials — The Market LeadersWe are the leaders in appraisal value determination in Asia, having been involved in nearly every major insurance company restructuring and merger & acquisition related deal since 1989. A sample of the landmark high profile completed deals we have been involved in as actuarial advisors in Asia in each of the last 10 years which included determination of actuarial appraisal values include:

Selected Landmark Deals – Tillinghast were the Actuarial Consultants

Year Completed Companies Country Comment

1998

1999

BPI – Ayala Group

Allianz – Jeil

Philippines

Korea

Restructuring of the group of Ayala insurance companies within BPI

Acquisition of one of the original “Big 6” insurers in Korea. The largest acquisition by a foreigner

2000/01 DBS: Aviva – ICS Singapore The first major acquisition of an insurer related to bancassurance in Asia

2001 MassMutual-Mercuries Taiwan The largest investment into a domestic Taiwanese insurer by a foreigner

2002 Hanwha Consortium – Korea Life Korea Engaged by KDIC to assist in the restructuring and sale of the State-owned Korea Life

2003

2004

2005

2006

2007

China Life

Great Eastern

China Pacific

AXA’s acquisitions of Winterthur’s andof MLC’s insurance businesses

China Life

China Pacific

Vietnam Life / Bao Viet

China

Singapore/Malaysia

China

Asia

China

China

Vietnam

The ground-breaking dual-listing world’s largest IPO in 2003

OCBC’s voluntary unconditional offer to acquire all Great Eastern shares

Largest private equity deal in China

Acquisitions of Asian businesses of two multi-national insurers

The ground-breaking ‘A’ share listing in Shanghai

The inaugral domestic ‘A’ share listing in Shanghai

The first strategic investment from a foreigner into the State-owned insurer/holding companies


We are the leading advisors on EV/EEV/MCEV reporting

Which clients?CFO Forum Non-CFO Forum

Aegon

Allianz

Aviva

AXA

Fortis

Generali

Legal & General

Munich Re

Old Mutual

Scottish Widows

Zurich

AIG

Alleanza

AMP

Chesnara

China Life

China Pacific

Delta Lloyd

Friends Provident

Great Eastern

HHG

Just Retirement

R&SA

RAS

Resolution

Revios

SJP

Skandia

Storebrand

T&D Holdings

Plus another fifteen or so clientswhere our involvement has not yet been disclosed


Agenda

Economic value of insurers – Some food for thought

EV Developments

What is MCEV?

The CFO Forum MCEV Principles

Implementing MCEV in India

EV Disclosures – Building confidence in your results

Implications of market-consistent valuation on your business

AXA - A MCEV case study

Panel and Q&A Session – Experiences and Views on EV/MCEV


Agenda – Some Food for Thought

1.Economic Value – some thoughts

2.Are you creating value?

3.What value should you be creating?

4.How to measure value?

5.How to measure performance?


Components of a traditional assessment of Economic Value

A traditional actuarial appraisal approach valuation typically develops the economic value of an insurance company in the following components:

Value of In Force

Business

Adjusted Net Worth

Value of Existing

Structure

Embedded Value(EV)

Other Sources of

Value

Appraisal Value (AV)

Economic Value

Profitability Analysis•Value of One Year’s Sales•Value of In Force Business•Embedded Value

In particular the CHANGE and MOVEMENT of these values give greatinsights


The Control Cycle

PROFIT TEST

VALUE OF BUSINESS

MODEL

ANALYSIS OF VARIANCE

MONITORING

UPDATING OF ASSUMPTIONS

INITIAL ASSUMPTIONS

The ActuarialControl Cycle


Revenue, yes, but is your business creating the right amount of value?

RevenueNew Business v Renewals

What is “Profit” ?!?

Sources of profit / Drivers of value …I…E…M…W……

How much profit?

“Sustainable profitable growth”Grow your in-force block of business…

Top line looks sexy, Bottom line is sexy !!


Do you really understand your business? Some Food For Thought

How good are your Financial Management (Reporting) Systems (Processes)?Do you (and your stakeholders):

1. Know how much your business is worth?2. Know what makes you money and what loses you money?3. Truly understand your sources of profit (loss)?4. Know how well you are managing your in-force business?5. Know how profitable your new business is?6. Know how efficiently you are managing your capital?7. Understand your largest risk exposures (and so how they are changing)?8. Evaluate options for managing your business and risk responsibly?9. Know whether you are optimising returns for your risk appetite/profile?10. Know how close you are to best practices?11. Know whether your value assessment/reporting methods:

— help you properly price your new products?— provide reasonable comparisons between different lines of business?— adequately allow for costs of options and guarantees?— adequately allow for risk and cost of capital?

12. Know how your competition is pricing their business? What are their profit criteria?


What Value are you creating?

EEV

MCEV

EV

Accounting Profit

US GAAP

ROC

IAS

ROECRARORAC

RAROC

ROEV

EVA

Basel II

Solvency II

Rating AgenciesLocal Regulation

Value Return

Capital Accounting

Maximising Maximising Shareholder Shareholder

ValueValue

IRR

IFRS

Local RegulationInternal Standards

Question: How to measure value?


What Value should you be generating?

Hurdle rate of return of x% ???

Reasonable “profit margin”

Sustainable profitable growth …

Risk?

Capital?

Value?

Risk – Capital – Value frameworkPortfolio of Enterprise

Risks

Economic Capital

What type of capital do I

need?

Capital Structure

How much capital do I

need?

Risk Structure

Risk and Capital

Management

Value Management

CapitalCosts

Returnon Risk

Capital AdequacyPortfolio of

Capital Resources

Value Creation

Portfolio of Enterprise

Risks

Economic Capital


need?

Capital Structure


need?

Risk Structure

Risk and Capital

Management

Value Management

CapitalCosts

Returnon Risk


Capital Resources

Value Creation


need?

Capital Structure


need?

Capital Structure


need?

Risk Structure


need?

Risk Structure

Risk and Capital

Management

Value Management

CapitalCostsCapitalCosts

Returnon RiskReturnon Risk


Capital Resources

Value Creation

Maximise value by relating a firm’s decisions on the risks it takes to the decisions on the capital it uses to finance its business


Minimum set of risks to model

Typical set of risks to model

A sample of typical risks considered….

Total Risk

Yield Curve

Equity

Property

Concentration

Basis

FX

Volatility

Liquidity

Financial Risks

Credit Risks

Insurance Risks

Operational Risks

Market Risks

Life Non Life Health

Basis

Concentration

Reinsurers

Loans

Spreads

Disability

Expense

Lapse

Revision

Catastrophe

Longevity

Mortality

Concentration

Catastrophe

Premium and reserve

Workers’Compensation

Short term

Long term

External Events

Systems

Processes

People


Simple Illustrative Example

What Value is this Financial Arrangement?What Value is this Financial Arrangement?

Initial Investment $10,000

Guaranteed Return 4% per annum

Guaranteed Maturity Benefit $12,167 after 5 years

Risk Free Rate 5% per annum

Equity Return (best estimate) 7% per annum

Value = i) $442

ii) $1,325

iii) Other

iv) $467

?????Expenses and CommissionCost of Capital…


Agenda


EV DevelopmentsWhat is MCEV?








Why do we use embedded values for life insurance?

Insurance is a long-term business

Accounting earnings do not reflect true profitability of the business

Impact of writing new business or lapsesReflect combination of historic and current performanceCan be distorted by strength of reserving bases

Focus on accounting earnings can lead to uneconomicdecision making


Background Historical development of embedded value

AndersonSoA paper

Defence document

Internal management

Supplementary information

ABI guidance

Fair Value / MCEV

CFO Forum EEV

1960 1970 1980 1990 2000


Appraisal of Pearl Group plc - 1989


Embedded Value - a success story!

Statutory GAAP Embedded Value

Widely used, well understood, robust

Clear view of new business value and development of in-force value

Attributes business performance to correct time period

Links pricing, performance and return on capital

Why have embedded values come under criticism?


Traditional Embedded Value techniques have been questioned

The time value of option and guarantee costs are ignored

Asset risk premia are capitalisedEquity market riskCorporate bond credit risk

Discount rates reflect average risk levels

Discounted target surplus is at best a crude allowance for the above


Investment market “shocks” highlighted the disadvantages of traditional EV reporting

0

2

4

6

8

10

12

14

16

Year 1979 1989 1999

Bon

d yi

elds

(%)

0

500

1000

1500

2000

2500

3000

3500

Inde

x le

vels

Gilt yieldsEquity price index

Sources: long gilt yields, IMF (2004,2005); Equity price index, FTSE all-share index

1970 1980 1990 2000 2005


CFO Forum

Concerns over Fair Value framework

Response to criticism of traditional EV methods

Issued EEV Principles in 2004

CFO ForumAegon Generali Old MutualAllianz Hannover Re PrudentialAviva IF P&C Scottish WidowsAXA ING Standard LifeBNP Paribas Legal & General Swiss ReCNP Mapfre Zurich FSFortis Munich Re


European Embedded Value (EEV) Principles

Published May 200412 key Principles65 areas of GuidanceCommentary on Principles & Guidance (Basis for Conclusions)Available from www.cfoforum.nl

Documents and quotations are copyright CFO Forum 2004


EEV Principles – address key areas of methodology

1. What is EEV

4. Free surplus

2. Business coverage

3. Allowance for risk

5. Required capital and cost of capital

6. Value of in-force covered business 12. Disclosures

11. Participating business

10. Economic assumptions

9. Assumptions

8. New business and renewals

7. Financial options and guarantees


In 2004, analysts gave the EEV Principles a cautious welcome

Source A step forward … … but some concerns

Lehman Brothers

“represent a step forward in improving the consistency, transparency and disclosure of EV calculations

“it fell short of moving to a fully ‘market consistent’ basis”

“continue to allow insurers some discretion over their allowance for market risk and ‘asset/liability mismatching’

Goldman Sachs

“a welcome development in terms of providing more consistent and comparable disclosure”

“the level of improvement may prove marginal”

“the flexibility still afforded to companies in EV calculations remains high”

“proposals do not go far enough, in our view”

Citigroup “one massive leap forward compared to the current situation”

“it falls short of a market-consistent approach in two material respects. Firstly in the way it prices options and guarantees and secondly in the fact that it books investments margins in risky assets before they have been earned – thereby abrogating simple financial theory of no arbitrage.”


EEV allowed a number of approaches which have been used to allow for risk

EEV allowance for risk

Top-down Bottom-up

Unadjusted WACC

Adjusted WACC

Product- specific

beta

Stochastic ‘real world’

Indirect MCEV

Direct MCEV


EEV Cost of Guarantees: Two choices

Real world

Market-consistent

x xx

Market price

Real world price

Market- consistent

price

… but a range of possible answers


Analysts now feel their initial caution was justified

Citigroup Smith BarneyOverall progress is being made, if not at the pace that some would have hopedTrust with the general investor will not be re-established until all companies adopt a market-consistent approach – we suspect there will be a real benefit for companies which go this way early

Bear Stearns

Critically, EEV has not resulted in a consistent and rigorous way of determining discount rates that clearly and explicitly takes into account the degree of risk inherent in each business

Morgan StanleyThe comparability of different disclosures under EEV is going to be significantly more limited than we would have hoped.

HSBCDoes not address the issue of consistent and comparable valuations

Merrill LynchWe believe that the introduction of EEVs has damaged rather than improved the credibility of embedded value based valuationsIn the light of this and also because of the poor cash flow of certain UK companies, we have used a dividend discount model to cross-check the reasonableness of the sum-of-the-part estimates


Within EEV publications, there is a clear trend towards MCEV

Source: Company publications, Towers Perrin EEV Update May 2008

0%

20%

40%

60%

80%

100%

2004 2005 2006 2007

Indirect MCEV Direct MCEV

(5) (21) (35) (34)


The Allianz restatement sets out the key advantages of MCEV over top-down

“The market-consistent approach is more granular than the previous top-down methodology … [and] it allows for differences in the economic risk profile of individual portfolios. The valuation also more clearly distinguishes the value created by adding new business written during the reporting period from that embedded in previously written business.”Source: Allianz 2006 EEV report


There were still differences between the MCEV publications causing confusion amongst analysts

Risk-free ratesSwaps, gilts or something in between?

Allowance for non-market riskApproach and disclosure of rationale

Definition of value of new businessMarginal or stand-alone?Assumptions?Pre- or post-tax?

DisclosureAnalysis of movementGroup MCEVSensitivities


The trend towards a market-consistent approach is continuing

Primary accountsIASB Phase IIUSGAAP SFAS 157 and 159

Statutory solvency reportingSolvency IIUK Realistic Balance SheetsSwiss Solvency Test

Supplementary shareholder reportingCFO Forum MCEV Principles

Internal management

Rating agencies


Agenda


EV Developments

What is MCEV?The CFO Forum MCEV Principles







What is MCEV?

MCEV attempts to give a robust answer to the allowance for market risk within the EV framework. The approach …

Provides an objective method for setting the risk discount rate at both the product line and

company levelEnsures that options and guarantees are priced in

a way which is consistent with the financial marketsReflecting the frictional costs of holding assets in

an insurance company structure… and therefore gives new insights to management of the risks in the business and how they can be managed to maximise the value of the entity


Market-consistent valuation is the application of financial theory to value liabilities

Diversification Risks that can be fully diversified awaydo not command any risk premium

Replication Systematic risks can be replicatedthrough (dynamic) investment in aportfolio of traded assets

No-arbitrage If two portfolios have exactly the samepayouts in all possible circumstancesthen they have the same value

Capitalstructure theory

The value of a company is impacted byits risk and capital structure


Why use these concepts?

By using the techniques which build on these concepts, we can go a long way towards solving some of the well-known problems with traditional valuation approaches:

What discount rate should be used?How do we allow for options and guarantees?What is the equity risk premium?How does risk impact on value?


Simple Illustrative Example 1

Sell a Bond(LIABILITY)

Buy lower ratedBond (ASSET)

Net Impact

100 1055%

100 1066%

0 1???

What is the Appropriate Risk Discount Rate?What is the Appropriate Risk Discount Rate?

No arbitrage is a key principle of financial economics


Valuing simple securities

107

8480

100

5%

7%

Sell a bond

Buy equity


What discount rate should we use?

107

8480

100

5%

7%

-23-20

Sell a bond

Buy equity

Net impact


The discount rate reflects the market price for risk in the net cash flows

107

8480

100

5%

7%

-23-20

Sell a bond

Buy equity

Net impact

15%


The risk discount rate needs to reflect each product’s or product line’s risks

Risk free rate

Risk free rate

Additional risk premium

Cash flow known with certainty

Cash flow is uncertain, but that

uncertainty is not systematic

Where uncertainty is systematic


We can also risk-adjust the cash flows

105

8480

100

5%

5%

-21-20

5%

Sell a bond

Buy equity

Net impact


An example: valuing a non-par annuity

Expected payments

Change in reserve

Interest (5% on corporate bonds)

Net cash flow

Reserve

(100)

110

16.5

26.5

330

(80)

88

11.0

19.0

220

(60)

66

6.6

12.6

132

(20)

22

1.1

3.1

22

(40)

44

3.3

7.3

66

If risk free rate = 3.5%, what is the value?

If RDR=8%, then value is 58.30, but is that right?


Valuing individual cash flows

Payments are certain so discount at 3.5%

Discount interest and asset proceeds at 5.0%

Net value

IRR

-277.11

330.00

52.89

13.4%

Value


Certainty equivalent approach

Expected payments

Change in reserve

Interest (3½%)

Net cash flow

Reserve

(100)

110

11.5

21.5

330

(80)

88

7.7

15.7

220

(60)

66

4.6

10.6

132

(20)

22

0.8

2.8

22

(40)

44

2.3

6.3

66

Discounted value at 3.5% = 52.89


Limitations of deterministic valuations

Products which can be valued deterministically

Product features which cannot be valued

Non-participating endowments

Term insurance

Unit-linked products without guarantees

Interest rate/asset guarantees

Interest rate/asset based profit sharing

Interest rate/asset sensitive lapses

The common problem: non-linear relationship with risky assets


Impact of options on value

Payout Based on Asset Value With No Guarantee

Payout of 5% Per Annum Guaranteed

Reduction in Company Value Due to Minimum Interest Rate Guarantee

Payo

ut

Asset Value

Value of option to policyholder


Approaches for valuing Options and Guarantees

Closed form solutionsCan be used for simple guarantees with no dynamic interactions

Simulation modellingGenerally required for more complex guarantees that need to reflect management and policyholder behaviourRisk neutralDeflators

Economic scenario generator calibrated to market prices such as yield curves, equity options and swaptions (where available)


Risk neutral pricing is independent of our actual expectations

100

102

110

112

121

104

10%

10%

10%

2%

2%

2%

Risk-free rate = 4%


Payoff is dependent on the strike price

100

102

110

112

121

104

10%

10%

10%

2%

2%

2%

Risk-free rate = 4%

Option strike = 108

13

4

0


Option price can be derived through replication...

110

112

12110%

2%

13

4

Pay off

Stock: 112.5

Cash:-106.49

Risk-free rate = 4%

Option strike = 108

Option price = 6.01

6.01

h * So * u – B * (1 + Rf) = Cu

h * So * d – B * (1 + Rf) = Cd


Option price can be derived through replication...

100

102

110

112

121

104

10%

10%

10%

2%

2%

2%

Risk-free rate = 4%

Option strike = 108

Option price = 2.14

13

4

0

Stock: 63.12

Cash: -60.99

Stock: 112.5

Cash: -106.49

Stock: 50

Cash: -49.04

6.01

0.96

2.14

h * So * u – B * (1 + Rf) = Cu

h * So * d – B * (1 + Rf) = Cd


…or through risk neutral probabilities

100

102

110

112

121

104

10%

10%

10%

2%

2%

2%

Risk-free rate = 4%

Option strike = 108

Option price = 2.14

13

4

0

25%

75%

25%

75%

25%

75%

Discounted expected value using risk neutral probabilities = 2.14

6.01

0.96

2.14

qu * u + qd * d = Rf

Co = ( Cu * qu + Cd * qd ) / (1 + Rf)


Expected payoff using “real-world” probabilities requires a real-world discount function

100

102

110

112

121

104

10%

10%

10%

2%

2%

2%

Risk discount rate = 80%

Option strike = 108

Option price = 2.14

13

4

0

Stock: 62.8

Cash: -60.7

62.5%

37.5%

62.5%

37.5%

62.5%

37.5%

Discounted expected value using real world probabilities = 2.14

Co = ( Cu * qu + Cd * qd ) / (1 + Rd)

5.35

1.392.14


MCEV can be presented using balance sheet or earnings approach

Market Value of Assets

Market-Consistent Value of Liabilities

MCVIF

MCEV

Frictional Cost of capital

The balance sheet presentation is the normal starting point for market consistent solvency reporting and economic capital

calculations

StatutoryLiabilities

NetWorth

NetWorth Market-

ConsistentCapital


Overview of MCEV calculation

Market value of assets

Market-consistent value of in-force business (or directly calculate market-consistent value of liabilities

Market-consistent economic assumptionsIncludes time value of options and guaranteesBest estimate non-economic assumptions

Cost of capitalFrictional costs - Tax and investment expenses on required capitalCost of non-market risks?Other costs?


Agenda


EV Developments

What is MCEV?

The CFO Forum MCEV PrinciplesImplementing MCEV in India






Existing MCEV publications: key areas of inconsistency

Key areas of inconsistency:

Allowance for market risk

Allowance for non-market risk

Value of new business

Analysis of movement

Disclosure

Future practice?


Market Consistent Embedded Value (MCEV) Principles

Published 4 June 200817 key Principles145 areas of GuidanceCommentary on Principles & Guidance (Basis for Conclusions)Available from www.cfoforum.nl

Documents and quotations are copyright CFO Forum 2008


The 17 MCEV Principles: main changes from EEV

1. What is MCEV

4. Free surplus

2. Coverage

3. Allowance for risk

5. Required capital

6. Value of in-force

12. Economic assumptions

11. Non-economic assumptions

10. New business and renewals

9. Residual non-hedgeable risks

8. Frictional costs

7. Financial options and guarantees

Key

Little change Some changes New / significant changes

ILLUSTRATIVE

13. Market-consistent discounting

14. Reference rates

15. Stochastic models

16. Participating business

17. Disclosure


Focus on market-consistency and improvements of disclosure

Source: CFO Forum MCEV Principles launch presentation, 4 June 2008


More detailed presentation and components of MCEV

Source: CFO Forum MCEV Principles launch presentation, 4 June 2008


MCEV represents the present value of shareholders’ interests … after sufficient allowance for the aggregate risks in the covered business. The allowance for risk should be calibrated to match the market price for risk where reliably observable.

MCEV Principle 3 Allowance for risk

G3.3 […] most insurance liabilities are illiquid and not traded. As assets are generally traded with an observable market price, asset cash flows that most closely resemble the insurance cash flows (from the shareholders’ perspective) are used.


The reference rates used should, wherever possible, be the swap yield curve appropriate to the currency of the cash flows.

Principle 14 Investment Returns And Discount Rates

G14.4 No adjustments should be made to the swap yield curve to allow for liquidity premiums or credit risk premiums.


[…] Volatility assumptions should, wherever possible, be based on those implied from derivative prices rather than the historical observed volatilities of the underlying instruments.

Principle 15 Stochastic Models

G15.2 The calibration of the model should be based on market values such as equity option implied volatilities, swaption implied volatilities and the initial swap rate curve for market traded contracts that are as similar as possible in nature to the option and guarantees contained within the liabilities.


Components of MCEV

Free Surplus (Principle 4)[…] market value of assets allocated to, but not required to support, the in-force covered business at the valuation date.

Required Capital (Principle 5)[...] market value of assets, attributed to the covered businessover and above that required to back liabilities for covered business, whose distribution to shareholders is restricted.G5.3: The required capital should include amounts required to meet internal objectives.

Value of in-force business (Principle 6)Present value of future profits (i.e. certainty equivalent value)Time value of options and guaranteesFrictional costs of required capitalCost of residual non hedgeable risks


[...] Allowance must be made in the MCEV for the potential impact on future shareholder cash flows of all financial options and guarantees within the in- force covered business. The allowance for the time value of financial options and guarantees must be based on stochastic techniques using methods and assumptions consistent with the underlying embedded value.

MCEV Principle 7 Financial Options and Guarantees

G7.2 Where management discretion exists, has passed through an appropriate approval process and would be applied in ways that impact the time value of financial options and guarantees, the impact of such management discretion may be anticipated in the allowance for financial options and guarantees but should allow for market and policyholders’reaction to such action.

[…] The application of such discretion must consider the environment arising in the future projection which will likely be different from the current environment, but any changes from current decision rules (for example regarding flexible crediting rates or policyholder bonuses) must be supported by appropriate approvals.


An allowance should be made for the frictional costs of required capital for covered business. The allowance is independent of the allowance for non hedgeable risks.

MCEV Principle 8 Frictional costs of required capital

G8.2 Frictional costs should reflect the taxation and investment costs on the assets backing required capital. The allowance for taxation should be based on the taxation rate(s) applicable to investment earnings on assets backing the required capital.

G8.3 The required capital should be projected appropriately over the lifetime of the underlying risks. Approximate projection methods such as the use of key capital drivers to determine the run off pattern of the required capital may be used.


An allowance should be made for the cost of non hedgeable risks not already allowed for in the time value of options and guarantees or the PVFP. This allowance should include the impact of non hedgeable non financial risks and non hedgeable financial risks.

MCEV Principle 9 Cost of residual non hedgeable risks

G9.1 The best estimate assumptions for non hedgeable risks used in the calculation of the time value of options and guarantees and the PVFP should reflect at least the mean expectation of outcomes of that risk variable. The total MCEV should allow for the mean impact of all non hedgeable risks on shareholder value.

G9.2 An allowance for uncertainty in the best estimate of shareholder cash flows as a result of the non hedgeable risks (both symmetric and asymmetric risks) should be considered.

G9.4 Regardless of the methodology used to determine the allowance for the cost of residual non hedgeable risks, it should be presented as an equivalent average cost of capital charge.


[...] The value of new business should reflect the additional value to shareholders through the activity of writing new business.

MCEV Principle 10 New business and renewals

G10.5: The projection assumptions used to value new business should be consistent with those used to value in force business.

G10.6: The contribution from new business ideally would be valued using point of sale assumptions. However, this is not practical in all cases ... Therefore assumptions can be chosen of different dates with clear disclosure of the timing required.


MCEV Principles: New business values and margin

Value added from writingNew business

New business margin =VNB

PVNBP

End period or start periodeconomic/non-economic

assumptions?

Discounted at RFRto point of sale


MCEV Principle 17 Disclosure

MCEV results should be disclosed at consolidated group level using a business classification consistent with the primary statements, with clear description of what is covered by MCEVM and what is not. Except where they are not considered material, compliance with the MCEV Principles is compulsory and should be explicitly disclosed.

G1.5: A statement should be included to confirm that the methodology, assumptions and results have been subject to external review, stating the basis of the external review and bywhom it has been performed.


Initial reaction has been positive…..

“The CFO Forum’s new MCEV Principles are to be commended – a market-consistent approach and a common template should improve reliability and comparability of the figures…”

“The CFO Forum is to be congratulated for a robust adoption of what might be described as ‘Text book MCEV’ as laid out by Towers Perrin.”Citi, 5 June 2008

“MCEV certainly represents progress,….. “The Economist, 26 July 2008

“MCEV, a step in the right direction “Keefe, Bruyette & Woods Ltd., 5 June 2008


..but will depend on the implementation and disclosure

“The market will likely reserve judgement until it sees the implementation of the principles in practice and this for some companies is over 18 months away …”

“Investment conclusion – It is too early to call for a re-rating based on a clearing of the accounting fog, albeit that we are now on the right road.”

Citi, 5 June 2008


Summary of CFO Forum MCEV Principles

Key areas of consistency:

Allowance for market risk

Allowance for NHR process

RN value of new business


Prescribed sensitivities

Other EEV areas that have been tightened

Areas of potential divergence:

Approach where no market

NHR methodology/disclosures

VNB assumptions

AoM: expected return

Credit spread sensitivity

Other EEV areas continuing to allow discretion


Agenda


EV Developments

What is MCEV?


Implementing MCEV in IndiaEV Disclosures – Building confidence in your results





Selected key issues in implementing MCEV

Economic assumptions

Valuation of options and guarantees

Non-economic assumptions

Allowance for non-hedgeable risks

Analysis of movement / expected returns


Main assumptions for MCEV (largely the same as for EV!)

Economic assumptionsInvestment returnsVolatilities, correlationsRDR risk marginsAsset values / RFR

Demographic assumptionsMortality and morbidityLapse and surrenders

Expense assumptionsAcquisition expensesMaintenance expensesOther expenses

Capital allocated to the business


Economic Assumptions: What to do if there is a lack of market data?

G14.1 Where the available swap yield curve is shorter than the projected liability cash flows, the swap curve should be extended using an appropriate methodology […]

G14.5 Where companies have businesses in territories where swap curves do not exist or do not provide a robust basis for producing reference rates then a more appropriate alternative, such as the government bond yield curve, may be used.

G15.3 Volatility assumptions should be based on the most recently available information as at the valuation date. Where there are concerns over the depth or liquidity of the market …then less recently observed measures and expert opinion should be considered.

G15.4 The duration to maturity and the “moneyness” effect on the market implied volatilities should be taken into account where material and practical.



Comparison of Indian swap and government bond rates show relationship is not stable

Comparison of Swap and Govt bond yields (1yr duration) for India

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

1/7/

2005

3/7/

2005

5/7/

2005

7/7/

2005

9/7/

2005

11/7

/200

5

1/7/

2006

3/7/

2006

5/7/

2006

7/7/

2006

9/7/

2006

11/7

/200

6

1/7/

2007

3/7/

2007

5/7/

2007

7/7/

2007

9/7/

2007

11/7

/200

7

1/7/

2008

3/7/

2008

5/7/

2008

7/7/

2008

Date

Yiel

d (%

)

1yr SwapsBond Yields



Given uncertainty, key will be disclosure of assumptions and sensitivity tests

Setting volatility assumptions in IndiaVery limited (if any!) market option dataConstantly changing market conditions

Are the assumptions reasonable?Comparison to other markets

Are the assumptions important?Sensitivity tests and disclosure



Stochastic modelling for valuation of options and guarantees

Liability Cash Flows

AssetsCash Flows

InvestmentReturns

ShareholderValue

Fund

Taxes

Economic Scenarios

PolicyholderBehaviour

CapitalDecisionRisk Appetite

Crediting or Bonus Strategy

Investment Strategy

Valuation of O&Gs


Actual business

Model of the

Companies are paying too little attention to accuracy

actualbusiness

Simulation of the

model of the

actual business

Model Error:Running more scenarios will not

eliminate this – build a better model

Simulation Error:Decreases as the number of

scenarios increases

Valuation of O&Gs


Modelling technology can now support the needs of the business

The calculation of typical models is slow, and suffers from simulation error

Variance reduction improves accuracy

Sensitivities require re-running of the model and hence are time consuming and exposed to simulation error

Economic sensitivities can be calculated ‘for free’ in some circumstances

The need to run ‘nested stochastic’ simulations for a proper risk based capital has made it a major project rather than a risk management tool

But techniques now exist to make this possible

Valuation of O&Gs


Advanced Modelling Technique – Tillinghast Smart Modelling – What is it?

Replicating portfolio techniques aimed at transforming complex insurance liabilities into portfolio of financial market instruments

Based on well-established statistical theory and methods which are well documented in financial literature and tried and tested in the banking industry

Still need the base run from the complex model as a starting point to find the replicating portfolio, but savings in sensitivities and nested stochastic valuations

Valuation of O&Gs


Principle 11 Non-economic assumptions

The assessment of appropriate assumptions for future experience should have relevant regard to past, current and expected future experience and to any other relevant data. The assumptions should be best estimate and entity specific rather than being based on the assumptions a market participant would use.

G11.3: The assumptions should be actively reviewed, and updated as appropriate, at least annually.

Glossary: A best estimate assumption should be equal to the mean estimate (probability weighted average) of outcomes of thatrisk variable.



Non-market risk: What does “best estimate” actually mean?

Distributionof financialimpact

Frequency

Mean (MCEVweighted)

Mean (risk weighted)

Median

Shareholder Optionality



How do we set non-economic assumptions?

Non-economic assumptions should be set on a ‘best estimate’ basis

‘Best estimate’ is the mean financial outcome for the shareholders

Will normally be same as traditional EV assumptionsShould allow for ‘extreme events’ in setting mean assumptionShould allow for interactions between assumptions – May require dynamic/stochastic assumptions



Expenses for value of new business

Principle 10 indicates that value of new business is additional value created through writing new business during period

A retrospective (or accounting) view of value

G11.9: The nature and impact on shareholder value of any exceptional development and one-off costs excluded from the unit cost base should be separately disclosed

Include all acquisition expenses in VNB or separately identify acquisition overruns?



Some key questions for setting expense assumptions

1) What are your historic unit cost levels?MaintenanceAcquisitionDevelopment – What are development expenses?

2) How do you expect them to develop over time?Are we still in the start-up development phase?Why are unit costs expected to decrease?Have previous projections been reasonable?

3) How should we disclose the results?Acquisition overruns?Development costs?Value of future maintenance overrun?Additional disclosure to explain/justify expense assumptions?



MCEV Principles Allowance for non-hedgeable risk

Allowance for NHR

Principle 9G9.1

G9.2

G 11.1

Principle 11Glossary:

Best estimateGlossary:Non hedgeable

financial risk

G9.3

Non-hedgeable risk


Theory says that the market does not directly price diversifiable risk in the required return

Risk free investment 5% 0% 100.0 5.0%

Coupon Volatility Price today Return

Single risky investment 5% 20% 84.8 23.9%

Portfolio of two risky investments 5% 14% 92.4 13.7%

Portfolio of ten risky investments 5% 6% 98.5 6.6%

Portfolio of 1000 risky investments 5% 0.6% 99.8 5.02%

Non-hedgeable risk


Non-market risk can lead to greater burn-through cost

Yield curve movements

Equity prices

?

Insurance risks

?

Additional volatility leads to increased burn-through cost

Fund assets

Shar

ehol

der V

alue

0

PV of guarantee benefits

WP fund with negative working capital

Strong WPFund position

Weak WP Fund position

Non-hedgeable risk


Where do we allow for non-hedgeable risks in the MCEV?

Allowance for non-hedgeable risks in MCEVBest estimate non-economic assumptionsDynamic assumptions in time value of options and guaranteesFrictional costs of capitalCost of residual non-hedgeable risks

Non-hedgeable risk


What are some of the key questions around non-hedgeable risk?

What allowance are you making for non-hedgeable risk and why?

Have you allowed for rare events that are not in your own experience in setting demographic assumptions?

Have you allowed for the effect of your demographic experience being random on embedded options?

What market risks are non-hedgeable?

What allowance have you made for correlation between demographic losses and economic assumptions?

How do you explain your approach to allowing for non-market risk in the disclosure?

Non-hedgeable risk


Granular risk allowance

Additional cost of capital

Addition to risk discount rate 6

10

7

Methodology

Source: Company publications, Towers Perrin EEV Update May 2008

Existing MCEV publications: Allowance for non-market risk

Additional allowance and little or no rationale provided

Allowance via best estimates and frictional costs (i.e. no addition)

Additional allowance and rationale provided

Published rationale

1

10

13


Non-hedgeable risk


Compliance with MCEV Principles for non-hedgeable risk – a six step process

Best estimates vs.

Glossary definition

Asymmetric impact on

MCEV

Non- hedgeable

financial risk

Risks not included?

Consider allowance for

NHR uncertainty

Correlations

Non-hedgeable risk

M.A.D.?

Probability- weighted mean of outcome

Extreme outliers?

Aggregation of Risks?

Incomplete Market Data?

Operational? Liquidity? Others?


Economic capital modelling will increase in importance

Use of EC in MCEVRequired Capital; split of components of valueDistribution of risk factorsCharge for NHR uncertaintyAdditional residual cost of NHR capital?Back-solving to equivalent % cost of NHR capitalInternal value management

Issues to considerHow to calculate NHR EC (NHFR and NHNFR)How to allocate to productsDiversificationRun off

Non-hedgeable risk


Analysis of movement: Presentation of MCEV analysis of earnings

Earnings on MCEV analysis

Free Surplus

Required Capital VIF MCEV

Opening MCEVOpening adjustmentsAdjusted opening MCEV

New business contributionExisting business contribution (reference rate)Existing business contribution (in excess of reference rate)Transfers from VIF and required capital to free surplusExperience variancesAssumptions changesOther operating variance

Operating MCEV earnings

Economic variancesOther non operating variance

Total MCEV earningsClosing AdjustmentsClosing MCEV

Source: Appendix A, CFO Forum MCEV Principles



An example of expected return calculation

Bonds for You (“B4U”) Ltd

Product Charge

Bond A - Average Mixed Charge Admin Fee (RMB575 pa) and AMC (0.5% Unit Reserve)

Bond B - Boring Fixed Fee Admin Fee (RMB1,150 pa)

Bond C - Crazy Market Charge AMC (1% Unit Reserve)

Single Premium Bonds (RMB10,000 premium)

Three year term

Bonds were all sold on 31 December 2007

Investment 100% Equity Fund



This showed how expected return on MCEV can vary by product type and design

Analysis of Movement for Bonds for You Ltd

Bond A Bond B Bond C Company

Risk-free rate 4.0% 4.0% 4.0% 4.0%

Expected equity return (Risk-free + 3.0%)

7.0% 7.0% 7.0% 7.0%

Expected return on MCEV (year 1)

6.0% 4.0% 9.7% 6.0%



MCEV publications: Differences arise in “expected returns” item

Criteria Expected movement in balance sheet

Implied RDR Risk-free rate

Source: Company publications, Tillinghast EEV Update May 2007

Note 1: If implied RDRs are calculated by product

Ease of implementation New process Existing process Existing process,(compared with TEV) required redefining unwind

to equal RFRRecognises additional Yes Yes Noexpected return foradditional risk

Differentiates by product Yes Yes1 Noline

Split investment/insurance Yes No Yesearnings correctly



Agenda


EV Developments

What is MCEV?



EV Disclosures–Building confidence in your resultsImplications of market-consistent valuation on your business




What is the issue?

“Black box blues”“Investors still struggle to understand Europe’s insurers”

Headline from article in The Economist, 26 July 2008

Investors can be sceptical of resultsIssues that emerged in last downturnDisconnect between reported earnings and shareholder dividendsUncertainty in EV assumptionsLack of comparability of results


The CFO Forum is looking to address this issue

(Para 161)Disclosures should enable users to:Understand the impact of different events, experiences and decisions … on the expected value of the business.Understand the main risks to and drivers of the realisation of that value, including its main sensitivitiesUnderstand management’s view of the business and its interpretation of the Principles […] to enable the credibility of the valuation to be judged.Make valid comparisons with other companies.Reconcile the covered business to values in primary financial statements […]

Basis for Conclusions (P159): Principle 1 to 16 set out the approach to be used in calculating an MCEV. The calculation exercise would be of little worth without disclosure and communication of the valuation results, the factors affecting them and how they interact with changes in the business and its management.


Disclosure requirements of MCEV Principles

AssumptionsMethodology used to derive economic and non-economic assumptionsReference rates

MethodologyDefinition of required capitalAssumed management actionsTreatment of residual assets in par fundNon-hedgeable risksValue of new business and premium mixProductivity gains and exceptional expensesTaxationValuation of options and guarantees


Disclosure requirements of MCEV Principles – part 2

SensitivitiesEconomic assumptions— Interest rates— Equity values — VolatilitiesNon-economic assumptions— Expenses— Lapse rates— Mortality/MorbidityLevel of required capital


Disclosure requirements of MCEV Principles - part 3

Analysis of earningsStandardised formatNet of taxation

New business margins on PVNBP basis

Group MCEV and Reconciliation to primary accounts

Optional disclosuresImplied discount ratesInternal rate of return on new business


The analysis of movement is becoming standardised and shows cash usage of the business

Earnings on MCEV analysis

Free Surplus

Required Capital VIF MCEV

Opening MCEVOpening adjustmentsAdjusted opening MCEV

New business contributionExisting business contribution (reference rate)Existing business contribution (in excess of reference rate)Transfers from VIF and required capital to free surplusExperience variancesAssumptions changesOther operating variance

Operating MCEV earnings

Economic variancesOther non operating variance

Total MCEV earningsClosing AdjustmentsClosing MCEV

Source: Appendix A, CFO Forum MCEV Principles


Companies are tailoring additional information to key risks in their businesses


We recommend a breakdown of non-economic experience variances / changes in assumptions

Source: L&G plc, preliminary results 2007, 18 March 2008


Companies are linking the EV profits to other profitability measures and showing the profit profile

Source: Prudential Analyst Day, 22 April 2008


For new business, what additional metrics can help?

ProductPVNBP gross

margin %IRR %

New business IDR %

Payback period (y)

A 5 16 14 5

B 5 12 6 5

C 5 12 6 15


It is helpful to provide a breakdown of the larger investment-related earnings items

Investment-related components of MCEV analysis of earnings

Impact on MCEV

Existing business contribution- reference rate- equity/property risk- interest rate risk- credit risk- volatility risk

XXXxxxxxxxxxxxxxxx

Economic variances- equity/property risk- interest rate risk- credit risk- volatility risk- impact of own debt

XXXxxxxxxxxxxxxxxx

Total investment-related earnings XXX


Companies are providing a Group EV balance sheet


The aim is to build confidence in the MCEV results

With current market conditions we see that investors are requesting more information from all insurers (not just the Europeans)

Fulfilling the disclosure requirements is a significant amount of work…

..but may be needed to build confidence in results

And there is a long-term prize…….

“And if more light can be let into these black boxes, they (insurance companies) may be viewed a bit more generously.”

The Economist, 26 July 2008


Agenda


EV Developments

What is MCEV?




Implications of market-consistent valuation on your businessAXA - A MCEV case study



Integrated market- consistent financial management framework

How do we want to use MCEV in managing the business?

Internal Performance Management

EV results More granular MCEV results

Analysis of Movement

What if analysis

ICA / EC analysis

Integrated framework produces MI that is:

AccurateGranularTimelyComprehensive

Investors understand the business:

Volatility issuesCapital usageIn-force v. new business profitability

Management have a better understanding of the business:

Strategic decisions (hedging, product strategy)

Management can optimise the relationship between risk, capital and value:

Risk strategy / risk appetiteReportingApplications

MCEV Information Pack


There is a compelling framework behind MCEV

The market price of risk is a key driver of value creation

Price depends on overall characteristics of the risk distribution

Value

Taking on risk creates value and ties up capital

Capital utilisation has a frictional cost and hence reduces value creation

Failing to hold sufficient capital may constrain ability to attract new business

Risk exposure determines capital needs

Required capital is a function of the tail of the risk distribution

Capital

Risk


And this framework can be applied to much more than just financial reporting

Risk managementRisk appetiteEconomic capitalAsset-liability management

Product pricing and managementRisk-based pricingProfitability by sourceCapital allocation and budgeting

Performance measurementAnalysis of movement


EV information pack is central to insurance company financial management

The EV balance sheet

The analysis of movement

The value of new business

The EV and VNB sensitivities

Financial reporting

Risk management

Capital management

Pricing

Performance measurement

Information pack Applications


EV analysis of movement is the key to effective performance monitoring

Experiencevariances

MCEVBoY

Opening adjustments

Assumption changes

Expectedinvestment

profit

Unexpectedinvestment profit

NewBusiness

Unexplained

MCEVEoY

Dividends toshareholders

Investment results

Insurance results

Analysis of Movement in MCEV


To measure performance, insurers need to understand insurance and investment results


Market value of liabilities

Economic balance sheet

Insurance results

Replicating portfolio

Market value of liabilities

Insurance balance sheet

Investment results


Strategic asset allocation

Investment balance sheet

Strategic asset result

Strategic asset allocation

Replicating portfolio

Strategic Asset Allocation

Stock picking variances

Cost savings

Identification of niche opportunities

Actual mis-match variances relative to expectations

Experience variances

Changes in assumptions


The starting point is a sensible expected return

Traditional approach

Net worth0

VIF0

Net worth1

VIF1

Market-consistent approaches

MVA1

MVL1

MCEV0 MCEV1

Expected return

Unwind at single RDR

Expected return

Expected change given best estimate returns over time 0 to 1

MVA0

MVL0

Note: under the market-consistent approach above, the overall expected return on MCEV can still be split into expected return on net worth and VIF.


Different investment strategies will create different risk / return profiles –but they may not add value on day 1

What is the right amount of capital? What type of company do you want to be?

Returnon MCEV

0

Matched

Volatility

-100%Mismatched

Expected return


The ultimate prize is an integrated market- consistent financial management framework …

Market-Consistent Model

Expected Value Sensitivities

Value Management / Reporting

Risk Management / Reporting

MCEV IFRS EC SII

PricingHedging Reward Capital Management Etc …

… the business applications and implications are significant


An integrated process provides a platform to support risk transfer, mitigation and other business decisions

Absolute risk tolerance

Risk capital usage

Risk v. reward

Risk capital availability

Capital structure

Capital allocation

Risk transfer

Risk mitigation

Acceptance of risks and pricing

Optimisation

Impact on balance sheet

e.g. reinsurance or securitisation E.g. hedging or

limit structure

e.g. internal reinsuranceto manage

pillar I capital


The MCFM framework is designed to produce value focused behaviour

Processes

Tools

Methodology MCFM

Valuationmodel

Capitalmodel

ALM Risk transfer

Pricing Planning / Targeting

Product design

A clear and consistent methodology links risk, capital and value. This ensures that the framework is consistent.

Economic value and capital models are tools - they should not dictate the structure of the framework.

The framework should direct managers to take actions that will create value without further group intervention.

The framework is relevant for and has implications at every level of an insurance company


Agenda


EV Developments

What is MCEV?





AXA - A MCEV case studyPanel and Q&A Session – Experiences and Views on EV/MCEV


Agenda


EV Developments

What is MCEV?








And finally….

1. Do you really understand your business?What risks are there and how much do they “weigh”?Are you pricing your products “correctly”? (What about your competitors?!?)How efficiently are you managing your capital?

2. What is the economic value of your business? (How are you and your stakeholders measuring it?)

3. How much value are you creating?

4. Are you creating the “right” amount of value?

5. Are all your stakeholders on the same page?


Mark Saunders, FIA, FIAI FSAPrincipal & Managing Director, AsiaTillinghast Financial Services Business Leader, Asia-Pacific

Telephone: +852 2593 4535E-mail: [email protected] Creedon, FIASenior Consultant

Telephone: +852 2593 4519E-mail: [email protected]

Wendy Fu, FIAAConsultant

Telephone: +852 2593 4576E-mail: [email protected]

www.towersperrin.com/tillinghast

And finally, rather than “Good Luck”, we wish you Success and Fortune

CFO Forum MCEV Principles - Institute of Actuaries of India Saunders _1.pdfModel implementation...

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