The embedded value concept and its application in South Africa
Date
2006-11-14T12:32:54Z
Authors
Huang, Jen-Chieh
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Abstract
The purpose of this research report is to review the embedded value concept and to
examine its practical use in South Africa. Important recent developments relating to
the embedded value concept are discussed and compared with the existing embedded
value concept. These developments include fair value accounting, market-consistent
embedded value and the European Embedded Value Principle.
In the second part of the report, the disclosure of the embedded value information of
four major South African life assurance companies is examined. It was found that the
market capitalisations of these companies were smaller than their embedded values
for most of the period under the investigation. Reasons for this phenomenon are
considered and tested against the data available.
It was found that the risk discount rates used by some life assurance companies in
calculating their embedded values may be too low. It appears that a ‘herding’
tendency exists among South African life assurance companies when selecting risk
discount rates for the embedded value calculation.
It is suggested that a more market consistent approach for the embedded value
calculation and a better disclosure for the embedded value reporting should be
considered by life assurance companies in South Africa. This should improve
investors’ understanding and confidence in the embedded value disclosed, which in
turn should help narrow or eliminate the discount of the market capitalisation to the
embedded value observed in the market.
Description
Faculty of Science
School of Statistics and Actuarial science
9802374m
nhuang@glenrandmib.co.za
Keywords
Embedded value, Market capitalisation, Market consistent, European embedded value principle