CFO Forum

Embedded Value is a way of reporting the value of the life insurance business companies have with their customers. For some time, this supplementary information varied by country and, in some cases, by company within a country making it difficult for investors to compare relative performance.

Amended Market Consistent Embedded Value and European Embedded Value Principles

May 2016

Solvency II, an EU-wide insurance regulatory regime, was introduced on 1 January 2016. There are similarities between the methodology and assumptions used to determine the Solvency II balance sheet and those employed under Embedded Value reporting. Alignment of methodology and assumptions between Solvency II and MCEV and EEV may be beneficial for companies that embedded value report under one of these approaches. As a consequence, the European Insurance CFO Forum ('CFO Forum') has amended both the MCEV and EEV Principles and Guidance to permit, but not require the use of projection methods and assumptions applied for market consistent solvency regimes. The CFO Forum has also amended the MCEV and EEV disclosure requirements, allowing flexibility while ensuring that the scope of a company’s disclosures are commensurate with the results shown and the level of disclosures are sufficient to enable users to understand the methodology and assumptions, key judgements and sensitivities of results to changes in key assumptions.

Original Market Consistent Embedded Value Principles

October 2015

In October 2015, the European Insurance CFO Forum (‘CFO Forum’) announced additional guidance for embedded value reporting in advance of the effective date of Solvency II. The additional guidance replaces the previous interim guidance announced in September 2012.

The additional guidance states:

• The Solvency II regulatory regime is effective from 1 January 2016. The Solvency II requirements will not be finalised until late in 2015 for a number of insurers, consequently, the CFO Forum do not view an allowance for Solvency II and its associated consequences to be required when complying with the European Insurance CFO Forum Market Consistent Embedded Value Principles (MCEV Principles)© or the European Embedded Value (EEV) Principles for reporting periods ending before 30 June 2016.
• It is recognised that some members of the CFO Forum are expected to move towards Solvency II methods in embedded value reporting for example, in relation to the reference rate. The CFO Forum will revisit the MCEV and EEV Principles for reporting periods ending in 2016 and subsequently.

September 2012

In September 2012, the CFO Forum released revised interim transitional guidance for embedded value reporting in advance of the effective date of Solvency II:

• The revised interim transitional guidance is effective for all reporting dates until such time that there is full clarity on Solvency II, including the effective date and the publication of all relevant standards and guidance.
• Until the conditions set out above are met, there is no requirement to make allowance for the developing European regulatory regime (Solvency II) and associated consequences when complying with the European Insurance Market Consistent Embedded Value (MCEV) Principles© or the European Embedded Value Principles (EEV).

This guidance reflects that the full implications of Solvency II are not known with sufficient certainty at this time.

September 2011

In September 2011, the CFO Forum released interim transitional guidance for embedded value reporting in advance of the effective date of Solvency II:

• For reporting dates on or before 30 June 2012, there is no requirement to make allowance for the developing European regulatory regime (Solvency II) and associated consequences when complying with the European Insurance Market Consistent Embedded Value (MCEV) Principles© or the European Embedded Value Principles (EEV).
• This interim transitional guidance reflects that the full implications of Solvency II will not be known with sufficient certainty before the second quarter of 2012 at the earliest.

April 2011

In April 2011, the CFO Forum withdrew the intention that the Market Consistent Embedded Value ('MCEV') Principles© are the only recognised format of embedded value reporting from 31 December 2011. The withdrawal reflects the ongoing development of insurance reporting under Solvency II and IFRS. The CFO Forum remains committed to the value in supplementary information, including embedded value.

October 2009

In October 2009, the CFO Forum published an amendment to the Market Consistent Embedded Value ('MCEV') Principles© to reflect the inclusion of a liquidity premium. The CFO Forum recognises that the existence of a liquidity premium is clear, as evidenced by a wide range of academic papers and institutions. It also recognises that its inclusion and quantification are equally important for Solvency II. The changes affirm that the reference rate to be applied under MCEV should include both the swap yield curve appropriate to the currency of the cash flows, and on top of it, a liquidity premium, where appropriate. The CFO Forum is performing further work to develop more detailed application guidance to increase consistency going forward.

June 2008

The CFO Forum originally published Market Consistent Embedded Value ('MCEV') Principles© in June 2008, in order to bring greater consistency and improved disclosure to the European insurance industry's Embedded Value disclosures. Specifically, the MCEV Principles were designed to bring:

• A shareholder's perspective on value, being the present value of future cash flows available to the shareholder, adjusted for the risks of those cash flows.
• A market consistent approach to financial risk.
• A greater focus on disclosing cash emerging from covered business.
• Disclosure of combined Group MCEV information.

Use of the Market Consistent Embedded Value Principles

The European Insurance CFO Forum reserves its right to be identified as the author of the Market Consistent Embedded Value (MCEV) Principles. The copyright and other rights in and to the Principles are the property of the CFO Forum and the Principles may not be amended or modified without the written consent of the Chairman of the CFO Forum. Save as set out here, all such rights are reserved.

Acceptable use of the Principles

The Principles may be applied by insurers wishing to use them, in their entirety, for financial reporting purposes. They may be faithfully reproduced, in whole or in part, without amendment provided that the CFO Forum's copyright notice is included each time.

Referring to the Market Consistent Embedded Value (MCEV) Principles

Where the Principles are used in a publication or reproduced, in whole or in part:

1. The following copyright acknowledgement should be included at the first usage, in the text or a footnote : Copyright© Stichting CFO Forum Foundation 2008; and

2. The Principles should be referred to as follows: the European Insurance CFO Forum Market Consistent Embedded Value Principles. Further references to the Principles should use either their full title, 'the Principles' or the 'MCEV Principles'

The CFO Forum reserves all its rights in respect of any unauthorised use, adaptation or modification of the Principles or where they are inconsistently applied.

Original European Embedded Value Principles

In May 2004, the CFO Forum published its European Embedded Value ('EEV') Principles, which provided a consistent basis for European insurers to prepare their Embedded Value reports. Along with additional guidance, published by the CFO Forum in October 2005, the principles described how companies should prepare their supplementary embedded value reporting on the performance of their life insurance operations. These principles were adopted by all member companies by 31 December 2005 and were widely used throughout the industry.