Financing the Embedded Value of Life Insurance Portfolios

In May 2004 the CFO Forum harmonized the various efforts of reporting the embedded valueof life insurance companies by issuing the European Embedded Value (EEV) Principles.In this working paper a methodology is proposed to derive a maximum lending amountfrom EEV figures without much additional data requirements from the originating insurer.The approach chosen is similar to that of other financing areas, e.g. real estate finance, wherefirst a prudent best estimate valuation is done and later risk deductions are performed in theform of applying loan to value ratios, e.g. 60-80 % of the prudent amount. Here, this prudentvalue is called bankable embedded value and the loan to value analysis presented leads tothe maximum lending amount. The deductions proposed to arrive at a maximum lendingamount are based on parameter adjustments and risk allowances for unexpected risks. There isan analogy with insurers for determining their own capital needs. The methodology proposedis based on the stress test approach which increasingly gains popularity with insurance supervisorsin Europe.