Embedded value

What is embedded value?

Embedded value (EV) estimates the value of a life insurance company to its shareholders, based on the business it has already written. It has two parts: the adjusted net worth, which is the shareholders' capital and free surplus held today, and the value of in-force business (VIF), which is the present value of the profits expected to emerge in future from policies already on the books, less the cost of the capital tied up in supporting them.

EV ignores the value of business the insurer has not yet sold. That future potential is what share prices add on top, often expressed as a multiple of EV or of value of new business.

How embedded value is calculated in India

Indian life insurers calculate Indian Embedded Value (IEV) under Actuarial Practice Standard 10 (APS 10) of the Institute of Actuaries of India. In outline:

IEV = adjusted net worth + value of in-force business

Value of in-force = present value of future profits minus time value of financial options and guarantees minus frictional cost of required capital minus cost of residual non-hedgeable risks

The projections use best estimate assumptions for mortality, morbidity, lapses, expenses and investment returns, and a risk-free rate for discounting. Listed insurers have their IEV reviewed by an independent actuarial firm. SBI Life describes its IEV as covering all business written since inception and in force at the valuation date, including lapsed policies that may still be revived.

How EV moves over a year (illustrative numbers)

Operating return on EV here is (900 + 700 + 100) ÷ 10,000 = 17%. Insurers publish a similar EV walk each year.

How embedded value is reported

Listed Indian life insurers disclose IEV at least half yearly. SBI Life reported IEV of ₹801.3 billion at 31 December 2025, up 18% from a year earlier. EV is a supplementary measure: it does not appear in the statutory financial statements prepared under IRDAI's formats, and it is not the basis for solvency.

The move to Ind AS for insurers from April 2026 introduces the contractual service margin (CSM) under Ind AS 117, which also represents unearned future profit on in-force contracts. CSM and VIF are related ideas but are calculated differently, so they will not match.

What embedded value means for distribution

• Persistency feeds EV directly. When policies stay in force longer than assumed, the insurer reports positive operating variances. When they lapse faster, EV falls and assumptions may be weakened for future business too. The quality of past selling is visible in every EV walk.
• New business is the main growth engine. Value of new business is usually the largest single addition to EV each year, which is why investors and boards press distribution for VNB growth rather than premium growth.
• Channel quality has a long tail. A partner whose business lapses early reduces VIF for years. A channel known for long-lasting policies supports EV well beyond the year of sale.
• Expense discipline matters. Assumed future maintenance expenses are built into VIF. Channels that need costly servicing reduce value even after the sale.
• Use EV in partner conversations carefully. EV is a company-level figure. For a distributor, the useful link is that persistency and product mix, which the distributor influences, are what move it.