Market-Consistent Embedded Value in Non-Life Insurance: How to Measure it and Why

The aim of this paper is to transfer the concept of market-consistent embedded value (MCEV) from life to non-life insurance. This is an important task since the differences between management techniques used in life and non-life insurance make management at group level very difficult. Our methodology might be a way out of this unfavorable situation. After explaining the idea of MCEV, we derive differences between life and non-life and develop a MCEV model for non-life business. We apply our model framework to a German non-life insurance company to illustrate its usefulness for management purposes. Furthermore, we illustrate the value implications of varying loss ratios, cancellation rates, and costs within a sensitivity analysis, and the use of MCEV as a performance metric within a value added analysis. We also embed our MCEV concept in a simplified model for an insurance group to derive group MCEV and to outline differences between local GAAP, IFRS, and