VALUATION OF INSURANCE COs

Insurance Regulatory & Development Authority, 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. In the absence of a standard valuation method, the industry feels that some of the valuations 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.