A traditional way of measuring life insurers' performance has been discarded following the advent of Solvency II. European embedded value (EEV) has been replaced with a variety of different metrics by UK life insurers reporting the value of their life businesses to shareholders. Only Prudential (PRU) continues to use what was once the industry standard metric.
EEV is calculated as the adjusted value of shareholders' net assets, plus future profits that are expected from business already written. UK life insurers are now calculating the value of life business based upon the amount of available capital held, or 'own funds', under the Solvency II regime. However, the exact models used to calculate shareholder net assets differ, making a direct comparison between life insurers' profitability more difficult.
Chesnara (CSN) replaced EEV with 'economic value', basing profitability on its 'own funds'. However, management has adjusted the figure for certain measures which under Solvency II it says would "undervalue" the value of its assets. These include contract boundaries - the first point in a contract it can review the premiums it charges on a policy - as well as risk margins and certain ring-fenced funds. Under Solvency II, if a contract boundary on an insurance contract is less than the full term of the contract, companies cannot include in the calculation any future upward revision in the premium; whereas Chesnara's model would allow for it.
Aviva (AV.) now uses an adjusted Solvency II basis to calculate the value of its new business. It also has removed the impact of Solvency II contract boundaries and included business written by its UK and Asia healthcare and UK equity release operations. Meanwhile, Legal & General (LGEN) introduced the 'Solvency II value metric', which essentially follows the principles of EEV but "assumes profit emergence based upon a Solvency II basis" rather than the previous Solvency I pillar regime.
