KLPs Embedded Value

17.10.2008

In common with many proprietary life insurance companies, KLP has calculated an embedded value representing the economic value of KLP's life business.

As KLP is a mutual, this represents the value of KLP to its members, rather than shareholders, which is the case in a proprietary entity.

The embedded value consists of two components: 

• The adjusted net worth
• The value of in-force business

The adjusted net worth represents the value of members' equity together with a share of the kursreguleringsfond and sikkerhetsfond.
The value of in-force business is calculated by projecting the expected future equity contributions (profits) which are expected to arise under KLP's operating model and valuing these at a discount rate appropriate for the risks in KLP's portfolio.

In addition, KLP also calculates the value added by new business arising in the year.

In making these projections, KLP makes allowance for:

• The expected demographic experience of individual members (such as mortality, morbidity, retirement and change in employment);
• The ability of client members to attract new individual members to maintain a steady working population;
• The ability of client members to transfer their funds to other providers (through an explicit assumption in respect of client member termination rates).

The value of in-force business also includes an allowance for the value of marginal profits expected to emerge through KLP's asset management company in respect of the management of KLP's insurance assets.

In addition, the value of in-force includes an explicit allowance for the cost of KLP holding the required level of solvency over the period of the projection.

The embedded value is based on a number of assumptions about future experience. These have been set based on KLP's best estimate of what that experience will be - actual experience will inevitably vary from what has been assumed.

The embedded value of KLP was NOK 16,57 bn at 31 December 2005, NOK 17,16 bn at 31 December 2006 and NOK 19,23 bn at 31 December 2007. Although there are a number of offsetting items which have contributed to the net growth of the embedded value over this period the key contributors to the change have been: 

• The overall expected return on the embedded value
• A reduction in the embedded value resulting from changing economic assumptions which has resulted in an increase in the discount rate
• A one-off increase in the embedded value arising from the change in the legislative regime from 1 January 2008