IRDA benchmark for realistic valuation of insurance cos soon

NEW DELHI: Insurance regulator, Insurance Regulatory & Development Authority (IRDA), plans to introduce a new benchmark for insurance companies’ valuations. The new measures will help in arriving at more realistic estimates based on disclosures. Realistic valuations are crucial to the industry which could become a hot-bed for mergers and acquisitions (M&As) if and when there is an increase in the foreign direct investment limit. A sub-committee has been set up by IRDA to suggest ways to value these companies. The Embedded Value (EV) method, which is an indicator of the value of the existing business in the books of a company, is one of the measures suggested by the committee. At present, the New Business Achieved Profit (NBAP) is used for valuation purposes. “Though it is still early for the insurance industry in India, EV, as a concept, will have to be eventually adopted by companies,” IRDA chairman CS Rao said. In the absence of a standard valuation method, the industry feels that some of the valuations being bandied about may not be justified. While EV is an indicator of the value of the business in terms of policies already written, the NBAP multiplier is the value of the business that will be written in the future. NBAP is arrived at after various assumptions about the future, but it may not give pointers to the quality of the portfolio of the company. “The sub-committee appointed under IRDA has recommended embedded value as one of the measures for the valuation of insurance companies. The committee first studied the European Embedded Value (EEV). Changes have to made in the way we disclose our numbers. It is true that at present, the valuation figures doing the rounds may have used bold multiples as far as NBAP is concerned. EV together with NBAP will be a more balanced way to evaluate a company,” said Bert Paterson, managing director, Aviva Life Insurance. Most foreign promoters of insurance JVs have already insisted on moving towards the EV concept. These are norms prevalent in their parent companies worldwide. “When the FDI is hiked to 49% — valuations will gain importance. The remaining 23% needs to be valued on a fair basis,” Mr Paterson added. Sanket Kawatkar, senior analyst, Watson Wyatt, a global consulting firm, said, “ For a new start-up, if the past record of business growth is impressive, one would expect the value of the company to be driven more by its future growth potential — the `structural value’ rather than the value of the business already on the books which is EV.” But the estimation of future business may not capture the true risks undertaken by the company, and therefore, provide a true indication of the underlying value that can be expected by the business to be sold in the future, he added.
Source:Economic Times