Norms soon for calculating embedded value of insurers

June 26th, 2011 - 10:47 pm ICT by IANS  

Chennai, June 26 (IANS) India’s insurance regulator, the Insurance Regulatory and Development Authority (IRDA), will shortly come out with the norms for calculating the embedded value - the current discounted value of future profits that would accrue from the policies sold - of life insurance companies.

“The norms for calculation of embedded value is under formulation and will be issued soon,” an IRDA official told IANS.

The embedded value is calculated on the basis of various assumptions like the persistency/continuity of the policy, interest rate scenario, expenses and other variables.

With the life insurance business taking a long time to break even, embedded value is what is taken into account by investors.

IRDA has to come out with the norms for the calculation of embedded value early so as to complete its regulations governing the initial public offering (IPO) by life insurers.

The sectoral regulator issued June 21 its exposure draft on IRDA (Issue of Capital and Disclosure Requirements for Life Insurance Companies) Regulations, 2011, specifying the terms and conditions on which a life insurer can come out with an IPO.

One of the stipulations is that the life insurer planning to disinvest should have embedded value of at least twice the paid-up equity capital.

According to the draft regulations, the calculation of embedded value is to be done in the manner prescribed by IRDA, which in turn has baffled the actuaries who calculate the value.

Actuaries are experts in assessing the financial impact of future events, which is of prime importance in the insurance business. They analyse the past and forecast the future and place the results in financial terms to help in decision-making.

“Embedded value is calculated based on various assumptions. The assumptions would vary from company to company based on the kind of business they underwrite. Hence assumptions cannot be standardised,” Liyaquat Khan, president of the Institute of Actuaries of India (IAI), told IANS.

However, sources in the know told IANS that the proposed circular will only specify the norms for calculation of embedded value and not the value for each parameter.

On the stipulation that embedded value should be twice that of the paid-up capital of a life insurer proposing an IPO or disinvestment, R. Ramakrishnan, a member of the Malhotra Committee on Insurance Reforms, told IANS: “This is to avoid inefficient companies from hitting the market to write off their expenses.”

Formed in the mid-1990s, the Malhotra Committee charted the way for opening up India’s insurance business to private players.

Industry experts told IANS that the embedded value for insurers who have been selling traditional policies - endowment, term insurance and others - will be higher compared to those focussed on selling unit-linked insurance policies (ULIP) where the expenses are front-loaded.

However, if the traditional policies are participating in nature - profits under the portfolio to be shared with the policyholders as bonus - then too the embedded value will be lower.

The regulator has sought comments on the draft IPO regulations by June 30.

Actuaries in India, meanwhile, are a horrified lot after reading the IRDA draft regulations for they seek to permit auditors to do what is considered till now as the actuarial preserve - calculation of the embedded value of life insurers.

“Calculation of embedded value for a life insurer requires actuarial expertise. Only a qualified and experienced actuary regulated by a professional body can do the same and not by anybody else,” Liyaquat Khan pointed out.

(Venkatachari Jagannathan can be contacted at

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