VNB Margin: Value of New Business Explained

A life policy earns its profit over many years, but the accounts do not show it that way. Statutory earnings can be distorted by new business strain, and statutory reserving is prudent and defers profit. The difference between statutory profit and an embedded-value view is mainly one of timing, not of the final amount. VNB brings that future profit forward into the year the business was sold.

That is why Crisil says life insurers take time to break even, and looks at VNB margin and return on embedded value alongside return on equity.

Embedded value (EV) measures the shareholders' interest in the business already on the books: net assets plus the value of in-force policies. Under the European Embedded Value principles, future new business is left out of EV.

VNB is the bridge. Each year's new business adds its VNB to the in-force value, so VNB is one of the drivers of the movement in EV from one year to the next. Appraisal value, used when an insurer is sold or listed, goes one step further: EV plus the value of future new business (goodwill), and that goodwill is usually worked out as a multiple of one year's new business value.

VNB depends on the same assumptions as EV, including expenses. Where an insurer's actual expenses run above its long-term targets (an expense overrun), Milliman notes that insurers reporting on a traditional EV basis typically show both EV and VNB before and after the overrun.