Market Consistent Embedded Value (MCEV) - Swiss Life - Online ...

More documents

Recommendations

Info

Market Consistent Embedded Value53individuals), such as tax on profits generated by the insurancecompany or the costs of asset management. Otherpotential frictional costs such as agency costs or financialdistress costs have not been taken into account in the frictionalcosts of required capital.4.2 NEW BUSINESSNew business is defined as covered business arising fromthe sale of new contracts and from new covers to existingcontracts during the reporting year, including cash flowsarising from the projected renewal of those new contracts.Higher premiums in Swiss group life contracts from wageincreases are not considered new business. The value ofnew business (VNB) reflects the additional value to shareholderscreated through the activity of writing new businessduring the reporting period.The value of new business of a period represents the effecton the MCEV as at end of period from writing new business,i.e., it is the difference between the actual closingMCEV and the closing MCEV which would result if nonew business had been written during the period. This isknown as the “marginal” approach to value of new business.It applies to every MCEV component: CEV, TVOG,CNHR and FC. Legal constraints – e.g. “legal quotes” – ormanagement rules often apply to books of contracts as awhole instead of individual contracts. That is why thevalue of new business can be dependent on the businessin force before the writing of new business.A “stand-alone” valuation for value of new business hasbeen performed when the business in force is not affectedby writing new business (for example for unit-linked contracts).In this case, the value of new business has been valuedindependently of the business in force.The value of new business is generally calculated with economicscenarios and assumptions as at end of period.4.3 ASSET AND LIABILITY DATAAll assets and liabilities reflect the actual positions as ofthe valuation date.ASSETS — The asset model used for the calculation of theMCEV differentiates three main asset classes:– cash and fixed income instruments– equity-type investments (including real estate)– derivativesAll bonds and bond-like securities (such as mortgages) aremodelled as fixed or floating government bonds. For allbonds, coupons and nominals have been recalibrated sothat the valuation of the bonds using the reference yieldsconverges to the observed market value.Equities, real estate, participations and alternative investments(hedge funds and private equities) are modelledseparately using appropriate indices for the correspondinggeographical regions (Switzerland, Europe and USA)and currencies.Actual initial market values of assets have been takenwhere available (“marked-to-market”), or estimated wherethere is no market (“marked-to-model”), for example bydiscounting unquoted loan and mortgage asset proceeds.Local regulatory and accounting frameworks (such as theamortisation of bonds or lower of cost or market principle)are incorporated in the model.When a substantial part of the assets is held in foreigncurrencies, these foreign assets are modelled explicitly(including the foreign currency exchange risk).INSURANCE LIABILITIES — Liabilities are calculated inline with local statutory requirements generally usingindividual policy data. For projection purposes, policiesof the same product with similar risk profiles are groupedtogether to form model points.HYBRID DEBT — The going-concern assumption stipulatesthat for MCEV the hybrid debt allocated to the coveredbusiness is valued assuming that the coupons andnominal are paid with certainty. The hybrid debt is valuedin a market consistent way by discounting the correspondingliability cash flows using the reference rates withoutany credit spreads. This leads to a difference to the fairvalue reported in the Notes to the Consolidated FinancialStatements.Swiss Life — Financial Statements 2010
54 Market Consistent Embedded Value4.4 ECONOMIC SCENARIO GENERATORThe MCEV is calculated using a risk-neutral valuation,based on market consistent and arbitrage-free stochasticeconomic scenarios. Under this approach, the key economicassumptions are:– the reference swap rates– interest rate and equity-type volatilities– correlations between the economic risk factors– inflation ratesThe stochastic economic scenarios are generated by theeconomic scenario generator developed and provided byBarrie & Hibbert, a UK based financial consulting company.For variable annuity products another economicscenario generator is used.The crediting rules for policyholders are consistent withcurrent company practices and local regulatory environments,in particular regarding the existence of a “legalquote”. They ensure that the statutory solvency rules (SolvencyI, including stress tests if legally required in thecountry) and other legal requirements are fulfilled foreach projection year.The rules for future asset allocations are consistent withgoing-concern assumptions. Asset realignment avoidsdeviating from the strategic asset allocation by more thana predefined margin and takes place after each projectedyear.Lapse rates from policyholders have been dynamicallymodelled. For traditional business, lapse rates depend onthe difference between the credited rate to the policyholdersand the anticipated policyholders’ expectations. Lapseparameters depend on the country and product line considered.Since the assets and liabilities within the Swiss Life Groupare mostly denominated in Swiss francs, euros or US dollars,the economic scenarios model these three economiesin a market consistent way. The exchange rates and dividendyields are modelled as additional risk factors, as wellas the inflation rates in each economy.For the calculation of the MCEV and the value of thenew business as at valuation date, 1000–2000 economicscenarios (also referred to as simulations) are used, ensuringa satisfactory convergence of the results for all marketunits. For the calculation of the sensitivities and somesteps in the movement analysis, some market units usefewer scenarios in connection with variance reductiontechniques.4.5 DYNAMIC MANAGEMENT ACTIONS ANDPOLICYHOLDER BEHAVIOURAnticipated dynamic management actions and policyholderbehaviour mainly concern the following areas:profit sharing for participating life businesses, asset allocationand realisation of gains and losses, and assumedpolicyholder behaviour with regards to their contractualoptions. They are dependent on the time period, economicscenario considered, local regulations and type ofbusiness.4.6 LOOK-THROUGH PRINCIPLEMCEV guidance requires that profits or losses incurred inservice companies from managing covered business aremeasured on a “look-through” basis. This principleensures that all profits and losses incurred with regard tothe covered business are passed to the correspondingentity, and consequently passed to the present value offuture profits.Look-through adjustments are applied on the asset managementservices and corporate centre costs. The futureprofits or losses taken into account for this adjustmentare those linked to the insurance business, after “legalquote” and taxes.4.7 CONSOLIDATIONThe Group MCEV for Swiss Life comprises MCEV resultsfor covered business and IFRS net asset values for noncoveredbusiness.Covered business comprises all of Swiss Life’s major life,health and pension business as well as assumed externalreinsurance. In the case of France, the remaining operationsare sub-consolidated with their IFRS net asset valueand also included in the French covered business.
Page 1 and 2: 34 Market Consistent Embedded Value
Page 5 and 6: 38Market Consistent Embedded Value2
Page 19: 52 Market Consistent Embedded Value
Page 29: 62 Market Consistent Embedded Value

Market Consistent Embedded Value (MCEV) - Swiss Life - Online ...

Create successful ePaper yourself

Delete template?

Save as template?