Hello I was trying to understand the differences between the MCEV and EEV. Let me know whether my understanding is correct. Also please let me know if I have missed out on any other differences. 1) The first difference I found was that in EEV our embedded value is: Free Surplus + (required capital - cost of required capital) + PVFP MCEV: FS + RC + VIF ( PVFP - FOGS - CORNHR - FCORC) So the difference is in the calculation for the cost of capital. 2) Under EEV we would allow for some risks in the discount rate. Under MCEV any remaining risks that are not taken into account are allowed through CORNHR? Is this correct to say. 3) Before 2009, under the MCEV no allowance could be taken into account for liquidity premium which resulted in most companies having to publish negative MCEV for long term contracts as investment return was a key element for most contracts profitability. Under EEV there was no such restriction. However, now liquidity premium is allowed under MCEV where the underlying assets are illiquid. Is this correct? Are there any other differences? A few other questions that I have regarding MCEV: a) FCORC is the taxation and investment costs of the assets underlying the required capital. Is there any such allowance to take into account for FS as there must be some tax and investment costs that result due to investing the assets underlying FS. Also when calculating the PVFP we allow for tax on surplus before discounting the surpluses. Is there any allowance taken for investment costs on the return on assets underlying the statutory liabilities? If so, is that adjusted within the investment return assumption? b) FCORC requires to run off the required capital. How is that done? Does it mean we have to split the required capital between different products and then to run it off in line with reserves or pvfp or premium depending on the product? Also for CORNHR the guidance suggests using the economic capital and then running it off in line with some appropriate measure. Is that again done by splitting it between the different products or in some other way? c) Some companies use the swap curve for discounting the future surpluses to calculate the PVFP. What does the swap curve represent? Does it represent risk free term structure of interest rates or does it allow for some risk premium above the risk free rates? For SA2 is it worth reading the EEV principles and guidance that appear on the CFO Forum website or is it sufficient to just read the notes? Thanks in advance.
