Una misura comune di valutazione per le imprese di assicurazione: Embedded value

This work wants to show the topic of 'Embedded value' highlighting logic and methods used to compute this measure. The Embedded value is a measure of the consolidated value of shareholders' interests in the covered business after carefully considering the risk factors, it is composed by inforce business value and Net Adjusted Value. The international insurance industry has long used this kind of method into every aspects of corporation management and decision making. Thus, the Embedded value fills the empty space left by traditional accounting, that cannot capture the features of life insurance activity. Indeed traditionally, when assessing the financial performance of a company one usually considers accounting indicators such as operating profit, earnings per share and return on equity. Despite their wide usage, many researchers have criticised the use of accounting numbers, for example, Rappaport (1986) in his book 'Creating Shareholder Value' demonstrates some shortcomings of accounting numbers and argues that accounting earnings fail to measure changes in the economic value of a company. Life assurance business by its nature can be very long term and profits may emerge only many years after a policy has been sold. This would make accounting indicators less suitable for measuring the financial performance of a life assurance company. Therefore assessing the value or the financial performance of a life assurance company can be more complicated than assessing the value or the financial performance of other types of companies. One of the solutions to providing a better indication of the value and the financial performance of a life assurance company is the embedded value concept. The embedded value concept was developed in the 1970s in the United Kingdom, when the financial reporting basis for insurance companies 4 was based on a solvency statement and the statutory valuation consequently tended to undervalue insurance companies. As a result insurance companies started producing embedded value type results in an attempt to give shareholders a better indication of the company's worth. The embedded value concept is not only well established in Europe but it is also accepted and widely used in Australia and Canada. The purpose of this work is to review the embedded value concept and to examine the logic of profit testing when it is required to assess the profit of a given portfolio. The thesis is divided into 3 chapters. The first chapter is about the main components of embedded value, it is focused on definitions of its components, Net adjusted value and value of in-force business. In the second part we highlight the different valuation methods of embedded value passing from Traditional embedded value to the European embedded value and the transition of this latter one to market consistent embedded value.The final part deals with the process of assessing the profitability of an insurance contract by means of 'Profit testing'.