MCEV is a measure of the consolidated value of shareholders’ interest in the covered business of an insurance company.
It corresponds to the present value of future profits plus adjusted net asset value.
This standard measure allows insurance companies to be valued and compared. Indeed MCEV measures the value of the insurer by adding current value of the existing business relative to future profits to the market value of net assets relative to past profits.
It is a conservative measure of the insurer’s value in the sense that it only considers future profits from existing policies and so ignores the new business.
Life insurance contracts are long-term commitments. The future income for the insurer engaged in this commitment consists of premiums paid by policyholders. The future cash-out flows are composed by claims paid to policyholders and various expenses. The difference, combined with income on and release of statutory reserves, represents future profit.
The net asset value equals the difference between the total assets and liabilities of an insurance company. In the MCEV framework, the net asset value usually calculated at book value is adjusted to market value.