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 how value components can be allocated to different stakeholders, the value implications of varying loss ratios and costs within a sensitivity analysis, and the use MCEV as a performance metric within a value added analysis.