Reimagining Growth with Resilience
Indian Embedded value: Methodology and Approach (2/2)
Components of Value in-force covered business (VIF)
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Present value of future profits (PVFP): PVFP is the present value of projected distributable profits to shareholders arising
from the in-force covered business determined by projecting the shareholder cash flows from the in-force covered business
and the assets backing the associated liabilities.
Time Value of Financial Options and Guarantees (TVFOG): TVFOG reflects the value of the additional cost to shareholders
that may arise from the embedded financial options and guarantees attaching to the covered business in the event of future
adverse market movements. Intrinsic value of such options and guarantees is reflected in PVFP.
Frictional costs of required capital (FC): FC represents the investment management expenses and taxation costs
associated with holding the RC. VIF includes an allowance for FC of holding RC for the covered business. VIF also includes an
allowance for FC in respect of the encumbered capital in the Company's holdings in its subsidiaries.
Cost of residual non-hedgeable risks (CRNHR): CRNHR is an allowance for risks to shareholder value to the extent that
these are not already allowed for in the TVFOG or the PVFP. In particular, the CRNHR makes allowance for:
- asymmetries in the impact of the risks on shareholder value; and
- risks that are not allowed for in the TVFOG or the PVFP.
CRNHR has been determined using a cost of capital approach. CRNHR is the present value of the cost of capital charge levied
on the projected capital in respect of the material risks identified.
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