Valuations of life insurance companies take a knock

Following the new ULIP norms and other changes mandated by the insurance regulator IRDA, insurance companies will be hard put to do IPOs even as the market starts valuing them lower

Valuations of insurance companies are being redone by analysts, following the fracas between the Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA). Under the latest diktat of IRDA, Unit-linked Insurance Plans (ULIPs), the top-selling product of the insurance companies, have become much less attractive, impacting the very business model of insurance companies. They will now have to cap surrender charges on ULIPs and also equalise the upfront commission they pay their agents over five years. IRDA has also put a cap on commissions payable between 5-10 years and 10-15 years. (See new norms here: Struck by the new stricter norms, the insurance companies have been groaning about how their business model has been ruined.

"In the medium to long run, these changes could seriously impact choice of investment options to customers, restrict product design and innovation, increase new business strain and call for increased capital requirements for insurers-thus impacting the profitability of insurers," said Deepak Sood, managing director and chief executive officer, Future Generali India Life Insurance Co Ltd.

"Under these regulations, the insurer will not be able to recover the incurred expenses (particularly under large-value policies) fully as the regulator has prescribed the limits of discontinuance charges not only by percentage of annualised premium, but also in absolute value," Mr Sood added.

According to some sources, the business of insurance companies would drop by at least 20% and the drop in profit would be 40%-60% still since insurance companies used to benefit hugely from surrender charges thanks to high rates of lapsation.

Under the new IRDA rules, for policies surrendered before the end of the term, insurance companies can deduct only a discontinuance charge from a customer and have to return the remaining amount of premiums paid. Until now, insurers have been forfeiting as much as 100% of the premium paid by customers as surrender charges. IRDA's new rules say that for exits in the first year, insurers cannot charge more than Rs3,000 or 20% of the annual premium or fund value, whichever is lower, for discontinuance of policies carrying a premium payment of Rs25,000 a year. For policies with annual premiums more then Rs25,000, an insurer cannot charge more than Rs6,000 or 6% of the annual premium. These charges decline in the subsequent years and insurers cannot deduct more than Rs2,000 for policies surrendered in the fourth year. IRDA's new rules on how distributors would be compensated are also feared to lead to lower sales.

If the new ULIP rules have made this product unattractive, it would have a chain of effects-delay the break-even of insurance companies, force their investors to inject more capital-leading analysts and institutional investors to lower their valuation. While brokerages have not yet come out with their new valuations, they are busily reworking the embedded value of insurance businesses that appear as investments of listed companies. For instance, Max India has a stake in Max New York Life, ICICI Bank has a stake in ICICI Prudential Life, Aditya Birla Nuvo has a stake in Birla Sun Life Insurance, etc. Max India's stock price fell sharply for two days after the new IRDA norms came out.

Frankly, the analysts would have their work cut out to value the life business following the new IRDA norms. These companies themselves have to substantially rework their business model that would include revamping product portfolio, distribution channel and costs and also managing overheads. Many of them have to revisit their very ambitious expansion plans. For example, in 2008, Max India and New York Life forged an ambitious growth plan which targets annualised First Year Premium (new sales) of Rs12,000 crore by FY11-12 backed by an increase in sales force from 47,000 agents to 300,000 agents and adding at least 250 offices every year. This was planned to expand Max New York Life's distribution footprint from 311 offices as at June 2008 end to around 900 agency offices and 700 rural offices by FY11-12. The tab for this? A peak capital commitment of Rs3,600 crore. This tab would have to go up substantially now-a fact that is reflected in the declining stock price.

Against this background, life companies would have to indefinitely postpone their plans for Initial Public Offerings, which they have been planning for some time now. Also, a lot of smart investors who were hoping to reap big profits from their investments in life insurance companies would also see their investment value dented temporarily as a result of the change in how insurance companies are valued. Hemendra Kothari, a top financier, had bought a 12% stake in ING Vysya from Ambuja Cements for Rs200 crore valuing the business at Rs1,800 crore early this year, possibly hoping to exit on IPO.

India has 23 life insurers whose total premium income went up by 18% in 2009-10, according to data from the Life Insurance Council, the industry mouthpiece. New business premium income was up by 25% in the same period of which 85% came from ULIPs.



K Sudhakaran

7 years ago

The new rule of IRDA is good for the costemers. Even now LIC is not taking any surrender charge after 3 years.Private companies are looting the public money. Let me humbly suggest few things to IRDA.
1. Presently units alloted are being reduced. This creates problems for costomers to calculate fund value at their own with present NAV. Insurers say this is because the proportionate units are reduced for adjusting the charges. In mutual funds units allotted are kept constant.The NAV is declared after adjusting the charges,thanks to transparancy in SEBI norms.(no: of unitsxNAV=fund value).If the IRDA adopts the same system the original faces of private companies will come out.


7 years ago

These changes in surrender charge norms, etc will definitely bring more business to insurance companies. Also there will be difnitely a fairplay from the part of the insurer automatically.


7 years ago

I dont find the changes by IRDA too harsh on the insurers...They have bben pampered for too long @ the cost of investors' ignorance. The changes will ensure fair returns on money invested.


Sunil Date

In Reply to Ajay 7 years ago

It is wrong to assume that Life insurance companies are pampered; pampered by whom ?
For your information it takes about 8 to 10 years for the promotors to break even in Insurance business; with the current regulations it may take longer. Will you be ready to invest in a business which starts generating return on your investment after such a long period ?
Why are you not skeptical about the consumer item companies which make huge profits ? Why are you not skeptical of the products, which select sportmen and stars and pay huge amounts to be their brand ambassadors ?
No body is in business to make a loss, niether are insurance companies charitable institutions. If you feel so strongly then persue with the govt to ban all private players and let govt give social security to the 100cr population and pay taxes to run the scheme ( with all the leakages)

K Sudhakaran

In Reply to Sunil Date 7 years ago

Please understand the difference between looting and taking profits. Regards

Deepak K Rao

7 years ago


No insurance in the world is more wrongly sold than life insurance. We will discuss about whether you require it or not, later. First, let us have some ideas on insurance which are based upon the advice of some of the world's best writers on financial planning, insurance and investment.
Life insurance should be purchased only if required and to the extent required. A. N. Shanbhag is perhaps the best Indian writer on investment and financial planning. This is what he has to say about life insurance:
"There is no substitute for life insurance.
Life insurance is not an investment.
It is a social and commercial instrument to provide financial security in the event of death of the insured.
If dependents can look after themselves comfortably without the amount insured, life insurance is not needed.
Life insurance is like a life saving drug. If you need it, you must have it irrespective of the cost. If you do not need it and you take it, it can have very bad side effects on your financial health."
So the first question to be asked is: Do you need life insurance?
The answer is simple. You need life insurance only if you have financial dependants. If no one is going to be financially affected by your absence, you do not need life insurance.
The next question is: How much life insurance do you need?
The answer is, enough to keep your financial dependants in the lifestyle they are used to, ensure that they are debt-free, and provide for their reasonably foreseeable future needs. In other words, enough to compensate your dependents for the adverse financial situation caused by your absence.
Let us take a simple example for attempting to calculate how much life insurance a person needs. Suppose there is a family consisting of husband, wife and two very young children. Let us assume that the monthly normal expenditure of this family is Rs 25,000/-. That means a cash requirement of Rs 3 lakhs per annum, to ensure that the family lives in the lifestyle it is accustomed to.
Now supposing the husband is the sole bread winner of this family. His first concern will be that the family will not have the cash flow of Rs 3 lakhs per annum, in case he should suddenly be removed from the scene. Therefore, he must calculate what size of corpus must be invested in a safe avenue of investment like a bank fixed deposit, to ensure that the family gets Rs 3 lakhs per annum. If a corpus of Rs 43 lakhs is invested in a safe avenue like a bank fixed deposit at an average rate of interest of say 7% p.a., it will provide the family with the required income stream.
However, this does not mean that the husband must rush out and straightaway purchase Rs 43 lakhs worth of insurance. There are some deductions to be made from this corpus. For example, he may already be having financial savings of say Rs 10 lakhs. His wife may have financial resources of her own of another Rs 15 lakhs. Let us say that the value of his retirement benefits, existing insurance policies and other cash flows that will accrue in case of his death amount to another Rs 5 lakhs. This total of Rs 30 lakhs must be deducted from the Rs 43 lakhs corpus envisaged earlier, since it will be available to provide the necessary income stream.
Therefore, there is an uninsured gap of Rs 13 lakhs, that is 43 lakhs minus Rs 30 lakhs. This is the amount for which life insurance must be taken. We have of course given a very simple example, assuming that this family has already taken care of its housing requirements. You can discuss with your close family members and calculate your own insurance requirements.
Going back to the example under consideration, if when doing your calculations, you find that your total liquid assets are say Rs 45 lakhs, that is more than the corpus of Rs 43 lakhs that would be required to provide income to take care of normal expenditure, then you do not have an uninsured gap and you certainly do not require life insurance.
One final point. Do not be fooled by advisors who do complicated calculations to arrive at how much life insurance you need. They will add things like child education, marriage expenses, etc., to inflate the quantum of insurance to be taken. No one can predict the future, especially the distant future. The period of vulnerability is one, two, three or a maximum of five years after a death occurs in a family, especially of a breadwinner or important earning member. Human beings are very resilient by nature and are capable of adjusting to, and dealing with, new, adverse situations, in the medium to long term. It is in the short-term that they are vulnerable and need the protection of life insurance.
When we talk about expenses based on which to calculate life insurance needs, we generally talk about normal current monthly expenses. There is however definitely no harm in a slight increase in the estimate of these normal expenses. For example, if we are talking about Rs 25,000/-worth of normal monthly expenses, you certainly can provide for Rs 30,000/- normal expenses for the purpose of life insurance requirement calculations.
However, there is no need to substantially inflate these figures or worry about providing for 10 or 20 years hence. No one can predict the future including what shape general circumstances or economic circumstances including inflation is going to take. The two simple examples are; Twelve years ago, the cost of a telephone call from Mangalore to Bombay was more than 26 rupees per minute. If anyone had predicted that the cost of this call would come down to less than Rs 2.40 per minute, he would have been laughed at and dismissed as a madman. Similarly, if someone had predicted that one day, you would have air tickets of Re 1/- (subject of course to conditions) available in India, no one would have believed the prediction.
There is already a built-in safeguard in taking only normal monthly expenses for insurance calculations. In practical terms, we have observed that the expenses of a family tend to go down immediately after the death of one of its members. This is because expenses that used to be incurred on that particular person are no longer incurred.
Further, as mentioned earlier, it is impossible to predict future inflation rates and future fund requirements. So long as the rest of the family is adequately insured for health, and to the extent required for life, the best you can do in life insurance is enable a corpus to take care of normal expenses for the next few years, say a maximum of 5 or 6 years.
It is important and most people do not realise it when they buy insurance: Human beings are extremely resilient. They tend to adjust sooner rather than later to new situations, including existing, adverse situations. The greatest period of vulnerability is generally not more than, one, two or at the most three years from the date of death of the breadwinner.
The final point for consideration is, what kind of life insurance to take?
There is only one type of life insurance that is truly beneficial for the person buying it, and that is pure term insurance. This type of insurance is sometimes also called pure insurance or term insurance. Term insurance provides compensation in case the risk, against which protection is sought, actually occurs. There is no mixing up with investment. Term insurance is extremely economical.
Going back to our example, in case there is an uninsured gap of Rs 13 lakhs and you go to an adviosor, he will actively discourage you from taking term insurance saying that you get nothing back for all the premiums you pay. He will not mention of course, that you will get protection from the perceived risk, which is the sole objective of term insurance.
If you take a 10-year term policy for Rs 13 lakhs, and if you are aged about 35 years, the term insurance premium may not be be more than Rs 5,000/- per year. If you survive the term of the policy, you get nothing back. No problem. Be happy you survived! If something unfortunate happens, your nominees get Rs 13 lakhs. Term insurance is that simple.
If having taken a term policy, at sometime in the future, you decide that you no longer need insurance; all you have to do is stop paying the next premium. This brings another important point. Life insurance should be taken when there is a need for it and should be discontinued when the need for it disappears. So, life insurance requirements should be reviewed once in a while, at least once in five years.
If you have taken a housing loan, then you must take adequate mortgage insurance, which is nothing but term life insurance, which will result in the insurance company paying off the entire housing loan in case of your untimely demise. Life insurance is too important a subject to deal with lightly.


Sunil Date

In Reply to Deepak K Rao 7 years ago

You are advising to ignore inflation, in the cover calculations, with the logic that future cannot be predicted. Can you just wish it away ?
A combination of Term + Whole life + ULIP based on the cover required & the affordability ( current surplus) provides and optimum solution, with adequate cover, cost effectiveness, and felxibility.

TP Viswanathan

7 years ago

I am worried about my Life Stage Pension Plan with ICICI Prudential. While NAV has grown insignificantly, my annual charges are a whopping 7000+ (on an annual premium of Rs.50000). They have promised an ASSURED RETURN, but I am skeptical about it. Hope I do not end up lending my money free!!


7 years ago

The changes are good for the investor community. I myself feel that the changes should be retrospective. For example, I was not explained a policy properly, I invested Rs. 60000, The first year Kotak Life deducted 50 percent of premium for various charges. I did not have any option but not pay the second premium. I want the balance money back. But they are unwilling to give back. The life insurance and ulip companies are only surviving on the single premium policies which get lapsed. I dont think any such company is able to make any profit out of its operation. ULIPs should be totally avoided for investment.


Sunil Date

In Reply to Narayanan 7 years ago

Pl note that single premium policies cannot lapse, because lapsation occurs when premium is not paid.
The acturial calculations are very complicated The premiums are arrived at considering that the polices will run their full course. Please ask any actuary and he will convince you that it is not in the intrest of the insurance company that the policy lapses.
If the insurance companies would have profited by lapsed policies, they would have made all subtle efforts to ensure that. They would not have made huge expenses in having a renewals department to followup with the customers / agent to avoid lapsation.

Venkat Aiyer

7 years ago

A good in-depth analysis of recent changes made by IRDA which are undoubtedly in favour of policy holders.


7 years ago

I am impressed by the facts written by the author.&makes people wait for the companies action. I wish agent community does not affect much because they are the main force in keeping insurance sector on

A K Rao

7 years ago

Let promoters of insurance companies lose money rather than ULIP investor.

New electronic toll collection system by May 2012: Minister

A committee on electronic toll collection headed by UIDAI chairman Nandan Nilekani, which is developing the equipment, has recommended using Radio Frequency Identification technology for the system

The government today said that a new electronic toll collection system that will do away with the need for human tax collectors, and help plug revenue leakages will be put in place by May 2012, reports PTI.

A committee on electronic toll collection headed by Unique Identification Authority of India (UIDAI) chairman Nandan Nilekani, which is developing the equipment, has recommended using Radio Frequency Identification (RFID) technology for the system, road transport and highways minister Kamal Nath told reporters.

Radio Frequency transmits the identity (in the form of a unique serial number) of an object or person wirelessly, using radio waves.

The committee's report has been accepted by the government, Mr Nath said, adding, "It would be implemented in the next 18-20 months and with the new systems the government would be able to check revenue leakages in toll collection."

"The revenue leakage at present is 15% of the toll collection, which comes to about Rs300 crore," he said.

Out of the 71,000 km of National Highways in the country, only 8,500 km is under toll and the government is planning to increase it to 30,000 km in the next five years.

"We should be able to toll 30,000 km of National Highways in five years," Mr Nath said.

Electronic collection system (ETC) would allow cashless payment of highway tolls of vehicles passing through a toll plaza. Under the new system every vehicle will be fitted with an RFID (radio frequency identification) tag, which will cost Rs100 per unit.

Mr Nath said the government will hold talks with the Society of Indian Automobile Manufacturers (SIAM) to have inbuilt chips in vehicles.

"We will consult SIAM to have this chip on every vehicle produced," he said.

As per the current SIAM data over 1.2 crore vehicles were produced in the country on March 31, 2010.  Based on this estimate, the tags for ETC would cost about Rs120 crore.

UIDAI chairman Mr Nilekani said that the chip, which would be installed on the windscreens of the vehicles is rechargeable.

At present toll is collected manually at the toll plazas which results in increase in travel time for users.


Hindustan Media IPO pricing appears competitive

Its bigger competitors Jagran Prakashan and DB Corp are trading at higher prices

Hindustan Media Ventures Ltd (HMVL), the publisher of Hindi daily ‘Hindustan’, is coming out with an initial public offer (IPO) on 5 July 2010. The company has fixed the price band at Rs162-Rs175 per share and plans to raise Rs270 crore through this IPO. Rating agency CRISIL has assigned ‘IPO Grade 4’ to the issue. The issue closes on 10 July 2010. HT Media Ltd will dilute up to 23% in its subsidiary HMVL post the IPO. HMVL’s businesses include Hindi daily ‘Hindustan’ and magazines ‘Nandan’ and ‘Kadambini’. It also has printing facilities and personnel transferred from HT Media on 1 December 2009.

Hindustan’ is the third-largest daily in India with a readership of 11,89,000 in the first quarter of 2010, according to the Indian Readership Survey (IRS). It has the largest readership in key Hindi-speaking markets of Bihar and Jharkhand, although these markets have lower purchasing power. The company expects that with 69% of the Indian population being rural, readership will increase further with increase in literacy levels.

HMVL’s price earning ratio (P/E) at the lower band of Rs162 stands at around 15.5 times its March 2011 expected EPS. Some of the listed newspaper businesses including its much bigger competitors Jagran Prakashan and DB Corp are trading at a slightly higher forward PE of 18-21.

HMVL’s five group companies—HT Digital Media Holdings Ltd, HT Burda Media Ltd, Firefly e-Ventures Ltd, HT Mobile Solutions Ltd and Metropolitan Media Company Private Ltd—have incurred a combined loss of Rs29.9 crore in FY2010.  With the IPO money, the company will purchase second-hand plant and machinery of Rs3.1 crore, will set up new publishing units costing Rs66 crore and will upgrade existing plant and machinery for Rs55 crore. HMVL’s advertising revenue was Rs104.2 crore in FY10 while its total income stood at Rs166.90 crore. It has a debt of Rs135 crore which was taken to take over the businesses from HT Media. The IPO money will be used to retire this debt. HMVL reported a net profit of Rs13.9 crore for the year ended March 2010.

There are 41 criminal proceedings pending against the company’s promoter HT Media and the employees and ex-employees, relating to defamation and obscenity charges under the Indian Penal Code and 109 outstanding litigations pertaining to income-tax, civil, and other categories. Edelweiss Capital Ltd and Kotak Mahindra Capital Company Ltd are the lead book running managers to the issue.


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