MCEV

Question 1

MCEV Definitions

Answer 1

Free Surplus 3
Required Capital 3
Value of in-force Covered Business 4
Financial Options and Guarantees 4
Frictional Costs of Required Capital 5
Cost of Residual Non Hedgeable Risks

Question 2

Economic Assumptions

Answer 2

Inflation 11
Smoothing 11
Investment Returns and Discount Rates 11
Reference Rates 12
Stochastic Models 12
Participating Business

Question 3

Market Consistent Embedded Value (MCEV) is a measure of

Answer 3

the consolidated value of shareholders’ interests in the covered business.

Question 4

Group Market Consistent Embedded Value (Group MCEV) is a measure of

Answer 4

consolidated value of shareholders’ interests in covered and non-covered business.

Question 5

The MCEV Methodology (MCEVM) described here is applied to

Answer 5

the calculation and reporting of the MCEV of the covered business.

Question 6

G1.2 Adjustments must be made to ensure all covered business has been

Answer 6

included appropriately. An example of such an adjustment might be in respect of a reinsurance or loan arrangement within the group to avoid distorting the MCEV.

Question 7

Principles 1 to 17

Answer 7

relate only to covered business.

Question 8

There are similarities between the methodology and assumptions used to

Answer 8

determine the Solvency II balance sheet and the MCEVM. Alignment of methodology and assumptions between Solvency II and MCEV may be beneficial for companies reporting under both approaches. Consequently, where Solvency II is adopted for solvency reporting, certain components of the MCEVM may be aligned to Solvency II methodology and assumptions as described in Principles 3, 5, 6, 8, 10, 11, 14 and 16. Alignment of MCEV to Solvency II methodology and assumptions in other areas is permitted provided that the nature of such alignment is disclosed

Question 9

Coverage: Principle 2: The business covered by the MCEVM should be

Answer 9

clearly identified and disclosed.

Question 10

G2.1 The MCEVM should, where material, include, as a minimum, any contracts that are

Answer 10

regarded by local insurance supervisors as long-term life insurance business.

Question 11

G2.2 The MCEVM may cover

Answer 11

short-term life insurance such as group risk business and long-term accident and health insurance business. Where mutual funds and short-term healthcare are regarded as part of or ancillary to a company’s long-term life insurance business, then it may be regarded as covered business.

Question 12

G2.3 The MCEVM may be applied by group companies that are not

Answer 12

predominantly long term insurance companies. For example the MCEVM may be applied to covered business provided by non-insurance groups and operations such as banking groups and pension funds.

Question 13

Principle 3: MCEV represents:

Answer 13

present value of shareholders’ interests in the earnings distributable from assets allocated to the covered business 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.

The MCEV consists of the following components:
 Free surplus allocated to the covered business
 Required capital; and
 Value of in-force covered business (VIF).
The value of future new business is excluded from the MCEV.