Mumbai: India’s insurance regulator will finalize over the next two weeks disclosure norms for life insurers and guidelines for firms that evaluate them, giving potential investors greater clarity on the valuations of insurers that plan to sell shares in initial public offerings (IPOs).
“We are in discussion with the Securities and Exchange Board of India (Sebi) to frame the IPO guidelines for insurers,” said J. Hari Narayan, chairman of the Insurance Regulatory and Development Authority (Irda).
Graphics: Ahmed Raza Khan / Mint
“We are concerned about the disclosures of insurers, and should be able to come out with disclosure norms by the end of this month,” he said on Friday.
Disclosures would give investors a clearer picture of the net worth of insurance companies. Research and consulting firms have released widely divergent estimates of the valuation of insurance firms that analysts say are largely attributable to inadequate disclosures.
Life insurers such as Reliance Life Insurance Co. Ltd and ICICI Prudential Life Insurance Co. Ltd have expressed their intention to raise money through IPOs in the next few years.
A report by Edelweiss Securities Ltd values ICICI Prudential at $5.4 billion (Rs26,028 crore) based on the company’s FY11 earnings, while another by Bank of America Securities Merrill Lynch Research puts that number at at $4.4 billion, a difference of $1 billion, or Rs4,816 crore.
Hari Narayan said the industry needs to adopt a market-consistent embedded value (MCEV) method to evaluate life insurers.
In order to do this, “the Institute of Actuaries of India would bring out a guidance note, which all insurers will be mandatorily required to follow to evaluate themselves,” he said in an address at the 12th Insurance Summit arranged by the Confederation of Indian Industry (CII) in Mumbai.
Market-consistent embedded value of an insurer is the difference between the market value of its assets and the value of liabilities assessed on a market-consistent basis. In a market-consistent valuation, all projected cash flows are valued in line with the prices of similar cash flows in the open market.
Insurers’ valuations have also differed because of the application of different models for determining their worth.
In a June report, Rajeev Varma and Veekesh Gandhi, analysts at Bank of America Merrill Lynch, said they had used a multiple to the new business achieved profit (NBAP)—the present value of profits arising from the new business underwritten during the year —as a measure of insurers’ worth.
“In the absence of adequate disclosures of any actuarial data or EV (embedded value) by any of the life insurers in India, NBAP remains the only valuation tool that can be applied to Indian life insurance companies,” they wrote. “However, we hope to see enhanced disclosures (including embedded value reporting) by year-end, which should lead to some change in the overall valuation approach.”
On the other hand, a June report by Edelweiss Securities, said: “We are using the appraisal value methodology for valuing life insurance companies as it captures explicitly both the embedded value (net asset value plus value of in-force business) and the goodwill value, that is, the future new business value.”
The Edelweiss report also mentioned that the actual embedded value could not be established due to managerial discretion and inadequate disclosures. “We are giving 5-15% discount to potential valuation due to lack of adequate disclosures,” it said.
While these reports have evaluated the companies on the basis of limited information, according to Kamesh Goyal, chief executive of Bajaj Allianz Life Insurance Co. Ltd, the current valuations of insurers done by these reports do not have any significance.
“These valuations do not have any meaning, as we do not have adequate disclosures and standard parameters to evaluate insurers,” said Goyal.
Alpesh Shah, partner and director, Boston Consulting Group (BCG), a consultancy firm agreed. “Firms that evaluate a company do so on the basis of certain assumptions and data that is shared with them by the company,” he said.
At present, since it is not mandatory for the insurers to publicly disclose details of assets, liabilities, margins, profitability, retention ratio, claims ratio, and other financial health indicators, many research firms depend on limited information.
Mandatory detailed disclosures would not only help merchant bankers arrive at logical valuations, but would also help insurers themselves to focus on profitability and curb expense ratios, rather than increasing market share and revenue, as is the current practice.
So far, even the largest private sector insurers have not been able to break even in almost 10 years since the industry was opened up to competition with the dismantling of the monopoly of state-run Life Insurance Corp. of India.
“As of now the present rules for listing s company is not sufficient when it comes to insurance business,” said Sanket Kawatkar, head (life insurance consulting) at Watson Wyatt Worldwide, a firm that conducts research on financial services. “Life insurance business is based on the embedded value which will be difficult to arrive at if proper disclosure norms ...are not set”.
The Irda chairman also emphasized the need for larger control over the commission structure and training of the intermediaries, especially agents, and investment norm that are currently prescribed in the Insurance Act.
“We have proposed an amendment to the Act in a Bill which would give the regulator full power to regulate the commissions and investment which is currently followed as per the guidelines prescribed in the Act,” Hari Narayan.
Deepak M. Satwalekar, independent director and a former managing director of HDFC Standard Life, said commissions are front-loaded, concentrating the benefits to agents in the early years of a life policy. That leads to “mis-selling,” or selling of policies that may not be appropriate for a consumer.
“Ideally the insurance industry should have models which allow remuneration structure to be even across the policy tenure or back ended so as to contain mis-selling,” Satwalekar said.