A critical note on MCEV calculations used in the life insurance industry

Since the beginning of the development of the so-called embedded value methodology, actuaries have been using the present value of future profits as yardstick when valuing life insurance activities. However, using profits as a fundamental input is subject to criticism because profits are no actual cash flows. In an attempt to create more transparency and robustness the CFO forum (2008) has set a definition for market consistent embedded value (MCEV). Nevertheless, this definition refers again to the present value of future profits. In this note we show that such a definition is misleading and, instead of creating more transparency, it could end up in creating more confusion.