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📊 '''Market value margin (MVM)''' is a component of [[Definition:Technical provisions | technical provisions]] under certain [[Definition:Solvency | solvency]] frameworks that represents the additional cost a third party would demand, above the [[Definition:Best estimate liability (BEL) | best estimate liability]], to assume an insurer's insurance obligations. The concept reflects the idea that a willing buyer of a portfolio of insurance liabilities would require compensation for the uncertainty and [[Definition:Non-hedgeable risk | non-hedgeable risks]] embedded in those obligations — risks that cannot be fully eliminated through [[Definition:Reinsurance | reinsurance]] or financial instruments. Under [[Definition:Solvency II | Solvency II]] in the European Union, this margin is formally termed the [[Definition:Risk margin | risk margin]] and is calculated using a [[Definition:Cost of capital method | cost-of-capital approach]], while the Swiss Solvency Test (SST) employs a conceptually similar market value margin. The terminology and precise methodology differ across jurisdictions, but the underlying principle — that [[Definition:Technical provisions | technical provisions]] should approximate a transfer value rather than just an actuarial best estimate — is shared across modern risk-based regimes.

⚙️ The standard calculation projects the future [[Definition:Solvency capital requirement (SCR) | solvency capital requirement]] for non-hedgeable risks over the full run-off period of the liabilities, then applies a prescribed cost-of-capital rate to each year's projected capital charge and discounts the resulting stream back to the valuation date. Under Solvency II, the cost-of-capital rate is set at six percent, a parameter that has attracted sustained debate about whether it overstates the true market price of bearing insurance risk. Because projecting future [[Definition:SCR | SCR]] figures year by year is computationally intensive — particularly for long-duration [[Definition:Life insurance | life insurance]] and [[Definition:Annuity | annuity]] portfolios — regulators permit simplified methods, including proportional approximations that scale the margin from a single valuation-date SCR. The resulting MVM is added to the [[Definition:Best estimate liability (BEL) | best estimate liability]] to form the total technical provisions on the [[Definition:Balance sheet | balance sheet]], directly influencing an insurer's [[Definition:Own funds | own funds]] and solvency ratio.

💡 For long-tail lines such as [[Definition:Pension | pension]] annuities or [[Definition:Disability insurance | disability]] covers, the MVM can be material — sometimes rivaling or exceeding the present value of future profits on a book of business. This has tangible strategic consequences: it can discourage insurers from writing very long-duration products, since the solvency cost of holding the margin erodes returns on capital. The 2019 Solvency II review and the UK's subsequent post-Brexit reforms under the [[Definition:Solvency UK | Solvency UK]] initiative specifically targeted the risk margin calibration, with the UK ultimately adopting a modified methodology that tapers the margin for long-dated liabilities. Across markets, the treatment of this margin remains one of the most consequential technical choices in insurance regulation, shaping [[Definition:Product pricing | product pricing]], [[Definition:Capital management | capital management]], and the competitive dynamics between jurisdictions.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Risk margin]]
* [[Definition:Best estimate liability (BEL)]]
* [[Definition:Solvency capital requirement (SCR)]]
* [[Definition:Technical provisions]]
* [[Definition:Cost of capital method]]
* [[Definition:Solvency II]]
{{Div col end}}

Definition:Market value margin (MVM) - Revision history

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