India’s insurance regulator is expected to release valuation guidelines for insurance companies by next month, a move expected to help them assess their fair market value in entering into deals with foreign partners.
Parliament is expected to pass an insurance Bill this year, increasing the foreign investment limit in insurance companies to 49% from 26% and removing a condition that requires Indian promoters to divest a part of their holding 10 years after commencing operations.
“We are working on economic valuation guidelines and it will take a month’s time to come out,” said Hari Narayan, chairman of the Insurance Regulatory and Development Authority, or Irda.
Passage of the insurance Bill would give Indian insurers access to additional capital they require to expand operations and increase market share.
R. Kannan, member-actuary, Irda, said the internationally compatible guidelines will be mandatory.
“The committee (formed by Irda) which was set up for economic valuation of insurance companies will give its report next week. The report will look at market-consistent embedded value.
Under embedded value, we will have detailed guidelines of how to value life insurance companies.”
Embedded value is the expected future cash flow from a company’s existing business and shareholders’ net worth.
In the absence of a standard method of valuation, most insurance companies now use the so-called appraisal value method.
Using this method, the value of an insurance company is calculated as the sum of its embedded value and the value of the ability of the company to do profitable business in the future.
The United Progressive Alliance (UPA) government introduced the Insurance Laws (Amendment) Bill, 2008, in the Rajya Sabha and the Life Insurance Corporation (Amendment) Bill, 2008, in the Lok Sabha in December.
But in the absence of a clear majority for the UPA in Parliament, both Bills didn’t get clearance.
However, the insurance Bill is likely to win passage this time because the Congress party-led coalition has returned to power with enough seats in the Lok Sabha to overcome opposition to the proposed legislation.