This paper reviews the developments in reporting of traditional embedded value and summarises some of the reasons why this is now undergoing change. It considers the purpose of an embedded value calculation and the effect of differing attitudes to risk. It comments on the recently developed European Embedded Value Principles and sets out the main areas where scope remains to apply judgement.
The paper proposes the market-consistent embedded value framework as a way forward to help provide guidance in some of these areas, in particular on the choice of discount rate and on calibration of stochastic techniques used to value embedded options and guarantees. The paper recognises that market-consistent embedded values are in relative infancy and sets out areas for possible future development.
