With the new takeover code and merger and acquisition (M&A) guidelines set to overhaul India’s corporate acquisition regime, the government and regulators will have to define valuation norms for firms in the financial sector, especially for the insurance industry.
Research and consulting firms have released widely divergent estimates of the valuation of insurance firms that analysts say are largely attributable to inadequate disclosures.
The government, Insurance Regulatory and Development Authority (IRDA) and the Competition Commission of India (CCI) need to spell out if premium earned by insurance companies can be calculated as earnings.
The IRDA, which is finalising guidelines for firms that plan to list on the stock market, is likely to make it mandatory for firms to adopt a standard methodology for calculating “embedded value (EV)” that provides an estimate of a life insurance company’s value.
Life insurance policies are long-term contracts, where the policyholder pays a premium to be covered against a possible future event such as death.Future income for the insurer consists of premiums paid by policyholders while future outgo comprises claims paid to policyholders as well as various expenses such as mortality charges and commissions to agents. The difference represents future profit.
“The standardisation in valuation would also facilitate comparison across different insurance companies,” said an official on the condition of anonymity.
These will also form a critical component in formulating guidelines for mergers and acquisitions in insurance companies, the official said.
HDFC Standard Life was the first private insurance company in India to disclose its embedded value at Rs3,380 crore as on March 31, 2010
Research and consulting firms have released widely divergent estimates of the valuation of insurance companies that analysts say are largely attributabed to inadequate disclosures by insurance firms.