Figuring out the future and the now

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IFRS17 may not kill off EV

Will IFRS17 kill off Embedded Value (EV) reporting in Africa?

Or will it finally bring Market Consistent Embedded Value (MCEV) to life?

I gave a presentation at the Life Assurance Seminar 15 years ago on MCEV. It took off in the UK but didn’t become popular in South Africa. That might be changing.

Some insurers have already stopped EV reporting altogether. This has some pretty unattractive implications for lines of business where using solvency-based measures with short contract boundaries distorts value.

One of the simpler (and most useful) ways to report EV figures in an IFRS17 world is to adopt MCEV principles and pull most of the relevant figures out of existing IFRS17 reporting. If you are comfortable that your Risk Adjustment is appropriate, adjusting CSM for tax, non-attributable expenses, and frictional costs can get you to an acceptable MCEV.

Other changes are still required for contract boundary extensions and non-insurance business. Will insurers have appetite to value these on a directly market consistent basis, or will these non market consistent values be aggregated along with purer MCEV for life insurance lines? (There’s no fundamental problem here – value is value regardless of the method.)

Insurers have not settled on a single reporting framework. Internal measures are not even always consistent with external reporting. We absolutely need consistent, comparable, rational measures. Not least because with Value of New Business (VNB) margins under pressure almost everywhere, and analysts increasingly asking pointed questions around onerous contract (under IFRS17), an accurate and reliable measure of new business value that everyone agrees to is critical.

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