EMBEDDED VALUE

Question 1

What is embedded value

Answer 1

• Adjusted net worth (Free surplus + Required Capital)
• VIF less Cost of Required Capital
• The above only applies to Covered Business

Question 2

What is required capital?

Answer 2

• This is meant to cover residual risk i.e. the risk that is not already priced into liabilities
• Restricted assets = Target capital ( 2 x SCR) less Supervisory liabilities
• Required capital = Restricted assets less EV liabilities

Question 3

What is free surplus?

Answer 3

• Market value of assets
• Less EV liabilities
• Less other Liabilities