New Delhi: The so-called fair market value of many life insurers may decline significantly when the regulator enforces market-consistent guidelines for valuing firms, experts say. Insurers now follow different methods of assessing their worth, leading to sharp differences in their valuations.
The Insurance Regulatory and Development Authority, or Irda, formed a committee last year to work on a standard valuation method for all companies to help them assess their fair value in entering deals with foreign partners. Fair market value is an estimate of the value of an asset, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a seller with similar qualities.
Parliament is expected to pass an Insurance Bill this year, increasing the foreign investment limit in insurance companies to 49% from 26%. These guidelines will also help insurance companies in raising capital through initial public offerings. R. Kannan, member-actuary, Irda, said the internationally compatible guidelines will be mandatory.
“New guidelines can bring a significant drop in valuation of companies because of a shift from new business premium methodology to market-consistent embedded value,” said Ravi Trivedy, executive director at audit and consulting firm KPMG. “There will be, however, no significant impact on the capital requirement of companies. With measurement of risks and costs involved it’s no more going to be a simple calculation for insurance companies.”
The committee formed by Irda has submitted its report to the regulator. Mint has a copy of the report that explains the concept of market-consistent embedded value. The regulator is expected to release the final draft in the coming months.
According to the report, the 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.
The embedded value method now employed is not market-consistent. A risk discount rate is used to reflect overall risk levels indirectly. The enterprise value can be defined as the value of future profits from the company’s existing business together with shareholders’ funds.
The appraisal value of an insurer would be calculated by adding estimated profits from future business to its embedded value. According to a report by HSBC Global Research, the appraisal value of ICICI Prudential Life Insurance Co. Ltd and Bajaj Allianz Life Insurance Co. Ltd is currently Rs16,700 crore and Rs11,200 crore, respectively.