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Financing the embedded value of life insurance portfolios

Author

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  • Hölscher, Luise
  • Harding, Perham
  • Becker, Gernot M.

Abstract

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, where first a prudent best estimate valuation is done and later risk deductions are performed in the form of applying loan to value ratios, e.g. 60-80 % of the prudent amount. Here, this prudent value is called bankable embedded value and the loan to value analysis presented leads to the maximum lending amount. The deductions proposed to arrive at a maximum lending amount are based on parameter adjustments and risk allowances for unexpected risks. There is an analogy with insurers for determining their own capital needs. The methodology proposed is based on the stress test approach which increasingly gains popularity with insurance supervisors in Europe.

Suggested Citation

  • Hölscher, Luise & Harding, Perham & Becker, Gernot M., 2005. "Financing the embedded value of life insurance portfolios," Frankfurt School - Working Paper Series 64, Frankfurt School of Finance and Management.
    • Handle: RePEc:zbw:fsfmwp:64
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    References listed on IDEAS

    as
    1. O'Keeffe, P. J. L. & Desai, A. J. & Foroughi, K. & Hibbett, G. J. & Maxwell, A. F. & Sharp, A. C. & Taverner, N. H. & Ward, M. B. & Willis, F. J. P., 2005. "Current Developments in Embedded Value Reporting," British Actuarial Journal, Cambridge University Press, vol. 11(3), pages 407-479, August.
    2. Alex Cowley & J. David Cummins, 2005. "Securitization of Life Insurance Assets and Liabilities," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(2), pages 193-226, June.
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    Cited by:

    1. Kostka, Genia & Hobbs, William, 2010. "Energy efficiency in China: The local bundling of interests and policies," Frankfurt School - Working Paper Series 151, Frankfurt School of Finance and Management.
    2. Almer, Thomas & Heidorn, Thomas & Schmaltz, Christian, 2008. "The dynamics of short- and long-term CDS-spreads of banks," Frankfurt School - Working Paper Series 95, Frankfurt School of Finance and Management.
    3. Grau, Corinna & Moormann, Jürgen, 2013. "Exploring the interrelation between process management and organizational culture: A critical review," Frankfurt School - Working Paper Series 200, Frankfurt School of Finance and Management.
    4. Polleit, Thorsten & Gerdesmeier, Dieter, 2005. "Measures of excess liquidity," Frankfurt School - Working Paper Series 65, Frankfurt School of Finance and Management.

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    More about this item

    Keywords

    European embedded value; embedded value; life insurance policies; maximum lending amount; required capital; risk analysis; risk discount rate; value reporting and analysis; value sensitivity analysis;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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