Market Consistent Embedded Values as 'Fair Value' Measurements for Life Insurance Accounting: A Step Too Far With Finance Theory?

53 Pages Posted: 11 Jan 2007

See all articles by Joanne Horton

Joanne Horton

University of Warwick - Warwick Business School

Richard H. Macve

London School of Economics & Political Science (LSE) - Department of Accounting and Finance

George Serafeim

Harvard Business School

Date Written: January 9, 2007

Abstract

Embedded value has been widely adopted by European and Canadian life insurance companies for supplementary performance reporting and increasingly by US insurers for management purposes. It has important implications for the international debate over the appropriate use of fair values in financial reporting. But EV has still not been accepted by standard setters (e.g. IASB) for inclusion in the main financial statements. The concept of Market Consistent Embedded Value has been developed primarily by actuaries utilizing modern financial economics. This paper analyzes how both top-down and bottom-up methodologies for estimating MCEV may lead to unrealistic allowance for risk and explores the dangers of double counting of elements in the MCEV 'economic balance sheet', of a misunderstanding of the synergistic nature of overall firm value, and of a naïve belief in market efficiency. It outlines potential empirical research with wider implications for 'fair value' accounting and reporting.

Keywords: Fair Value, Life Insurance, Embedded Values, Market Efficiency, Risk

JEL Classification: G12, G22, M41, M44

Suggested Citation

Horton, Joanne and Macve, Richard H. and Serafeim, George, Market Consistent Embedded Values as 'Fair Value' Measurements for Life Insurance Accounting: A Step Too Far With Finance Theory? (January 9, 2007). Available at SSRN: https://ssrn.com/abstract=956104 or http://dx.doi.org/10.2139/ssrn.956104

Joanne Horton

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Richard H. Macve (Contact Author)

London School of Economics & Political Science (LSE) - Department of Accounting and Finance ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 6138 (Phone)
+44 20 7955 7420 (Fax)

George Serafeim

Harvard Business School ( email )

Boston, MA 02163
United States

HOME PAGE: http://www.hbs.edu/faculty/Pages/profile.aspx?facId=15705

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