EVA/RAROC versus MCEV Earnings: A Unification Approach

This paper compares different performance metrics used for value-based management in life and non-life insurance business. The goal is to find a consistent basis for performance measurement at the insurance group level. This is an important task since management techniques used in non-life insurance, such as economic value added (EVA) and risk-adjusted return on capital (RAROC), are at first sight very different from those used in life insurance, i.e., an analysis of market-consistent embedded value (MCEV) earnings, thus making management difficult at the group level. The contribution of this paper is to compare and contrast these concepts and to show that all approaches can be unified under a single consistent framework. All present residual cash flow concepts and can be linked under the residual income valuation theory.