AV, EV, MCEV, and TEV: Understanding the Differences and When to Use Each

Insurance companies use several actuarial valuation frameworks to assess business value, including Embedded Value (EV), Market Consistent Embedded Value (MCEV), Traditional Embedded Value (TEV), and Actuarial Appraisal Value (AV). While these frameworks are related, they are designed for different purposes and contexts.

Traditional Embedded Value (TEV)

TEV represents the present value of future distributable profits from in-force business and assets, using a traditional actuarial approach to discount rates and risk allowances. It is commonly used for:

• Internal performance monitoring

• Strategic planning

• Long-term value tracking

Embedded Value (EV)

In practice, “EV” often refers to either TEV or MCEV depending on the company’s framework. EV is widely used as a strategic management tool, helping management understand:

• Value creation over time

• Sensitivity to key assumptions

• Impact of management actions

EV typically includes allowance for expenses, sensitivities, and risks, but is often prepared in a non-transaction context, with assumptions primarily challenged internally.

Market Consistent Embedded Value (MCEV)

MCEV extends EV by applying market-consistent valuation principles, particularly for financial options and guarantees. It aims to improve comparability and transparency by aligning valuation assumptions more closely with observable market prices.

MCEV is often used when:

• Greater market consistency is required

• Comparability across companies is important

• External stakeholders require enhanced transparency

Actuarial Appraisal Value (AV)

Actuarial appraisal value builds on EV concepts but extends beyond in-force business to include future new business. AV is typically expressed as:

AV = Net Asset Value (NAV) + Value of In-Force (VIF) + Value of New Business (VNB)

AV is used to:

• Understand total business value, including future growth

• Identify key value drivers and sensitivities

• Provide a structured foundation for pricing and negotiation discussions

Importantly, appraisal valuation should be performed regularly, not only when a transaction is imminent. When used in a transaction or shareholder decision context, AV is typically subject to a higher level of scrutiny, often alongside due diligence.

Choosing the Right Framework

Each framework serves a purpose:

• TEV / EV → Ongoing value monitoring and strategic management

• MCEV → Market-consistent valuation and comparability

• AV → Holistic business value, including future growth and pricing discussions

Effective value management requires understanding which framework to use, when, and why.

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