Embedded ValueEV
The consolidated value of a life insurer: net worth plus the present value of the in-force book — the number life insurers are actually valued on.
Why you care
A life insurer's accounting profit is nearly meaningless — new business actually depresses it, because costs hit upfront while profits trickle in for decades. Embedded value fixes that: it's the insurer's net worth plus the present value of every policy already on the books. It's the number the market actually values life insurers on.
Run the numbers
Net worth ₹200 cr + present value of the in-force book ₹300 cr = EV of ₹500 cr (illustrative). Each year this year's VNB adds to it, the existing book unwinds interest, and lapses subtract. EV growth, not reported profit, is the real scorecard.
Where this goes
Embedded value is the life-side store of value, and its growth is the life engine's contribution to overall insurer ROE. It's built up by VNB accreting each year and torn down by weak persistency when policies lapse.
Why you care
Embedded Value (EV) is the consolidated value of a life insurer: its shareholder net worth, plus the present value of the future profits locked inside the policies it has already sold (the in-force book). It is the number life insurers are actually valued and judged on, in place of ordinary accounting profit.
The reason ordinary profit fails so badly for life insurers is a timing trap that runs the wrong way. When a life insurer writes good new business, it reduces this year's reported profit. That's because the acquisition costs and commissions hit immediately while the profits from that policy arrive over the next twenty years. So a fast-growing, high-quality life insurer can look worse on accounting profit than a stagnant one — the exact opposite of the truth. Embedded value corrects this by valuing the whole store of future profit already sitting on the books. Growth in EV, broken into its causes, is how you actually judge a life insurer. Look at how much this year's new business added, how much the existing book earned as its locked-in profits drew closer, and how much was lost to policies lapsing. EV is the life-side balance sheet of value, and its movement is the real profit-and-loss.
Run the numbers
A life insurer's embedded value is built from two blocks:
| Component | Amount |
|---|---|
| Adjusted net worth (shareholder funds) | ₹200 cr |
| Present value of in-force book (future profits on existing policies) | ₹300 cr |
| Embedded value | ₹500 cr |
So EV is ₹500 crore (illustrative). Now watch a year pass and see what moves it:
- + VNB ₹25 cr — this year's new business accretes straight into EV.
- + unwind of ~8% — the in-force book's locked-in profits move one year closer, so their present value rises.
- − lapses / negative variance — where persistency came in worse than assumed, expected profits are written off.
Net those and EV might grow from ₹500 crore to, say, ₹560 crore. That ₹60 crore of EV growth — not the accounting profit line — is what a life insurer's shareholders actually earned this year (illustrative). Decompose it and you can see exactly which engine did the work: new business, the existing book, or investment markets.
Where this goes
Embedded value is the life-side store of shareholder value, and its growth is how the life engine's return shows up in overall insurer ROE. For a life insurer, ROE is essentially EV growth over opening EV. EV is fed each year by VNB accreting into it and eroded by weak persistency when assumed policies lapse. It is the number that finally makes life insurance legible: not this year's profit, but the growth in the whole book of value the insurer is sitting on.