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1.
Objective of this paper
The market-consistent valuation (MCV) approach has become one of the standard measures for the valuation of life insurance business during the last ten years.
The recent financial crisis (in particular the period since September 2008) has led to some interesting MCV results. Some companies have published MCV results showing negative investment variances or negative new business profits, greater than they would have been under non-MCV measures. Other companies have delayed the external reporting of MCV information, highlighting as a reason the sudden wide diversion in methodologies employed under the MCV reporting banner.
Meanwhile, insurance accounting and regulatory standard setters have continued to move towards MCV approaches, and will be making decisions during 2010 and 2011 on main technical aspects.
Given this background, I believe that this is a good time to review:
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the development of MCV in recent years.
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what business issues MCV can and can not address.
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which additional metrics can help in addressing companies' business issues.
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what technical aspects of MCV require revisiting in light of the financial crisis.
The main objective of this paper is to contribute ideas for the future development of MCVs that are aimed at meeting the insurance industry's needs in all economic conditions.
The paper is written from a life insurance perspective, although many of the recommendations are also relevant to non-life insurance.
2.
Summary of conclusions
This Section provides a summary of the conclusions of this paper.
2.1 The recent dislocation of the financial markets has raised challenges to market-consistent valuation, both in its implementation and application. These include both commercial and technical challenges. The whole concept of mark-to-market accounting has been questioned in some quarters.
2.2 However, market-consistent valuation techniques have been at the forefront of insurer accounting and regulatory developments during the 21st Century. Their use is likely to grow going forward as Solvency II and IASB/FASB Phase II take effect.
2.3 Designing and applying a fuller financial reporting information pack can help address any limitations in focusing solely on the MCV result.
2.4 Components of an MCV information pack include the balance sheet (including segmented results and breakdown into components of value), the analysis of movement (including...