Natural catastrophe is nothing new to India. Be it floods, landslides, extreme cold or heat, they all have their seasons in India. Many lives are lost every year due to these calamities. Earthquakes and tsunami are rare but equally devastating. Its been nearly 6 years since tsunami struck us and still individual natural catastrophe covers have not yet evolved in India.
There is a strong need to insure individual property and its contents. India is yet to see a standalone insurance product for natural disasters. IRDA is now studying CAT insurance solutions to insure an individual against such natural acts of destruction. In response to this, Mr. Narayan, chairman, IRDA, mentioned that the government at present provides the bulk of financial aid through budgeted funds, which are largely given for restoration of public buildings, humanitarian relief and writing off of crop loans. Loss of individual family assets is not taken care of.
He suggested that mandating lenders to take out catastrophe insurance, irrespective of the location of the properties on which they have loaned money, was one way of increasing cover against disasters.
Tuesday, August 17, 2010
Tuesday, June 29, 2010
Classroom 3: Reverse Mortgage
Reverse mortgage is a financial product that enables senior citizens (60 plus) to mortgage their real assets with a lender and convert part of the equity into tax-free regular income. This saves them from selling assets in their life-time.
Reverse Mortgage and Insurance in India
Reverse Mortgage is not yet a big thing in India. And insurance companies role in this has been limited. India's largest life insurance company, LIC (Life Insurance Corporation) is now planning to enter the reverse mortgage space.
Wednesday, June 9, 2010
Embedded Value for Indian Insurers
Indian insurance regulatory body, IRDA has signalled mandatory valuation of insurance companies on Embedded Value (EV). This could be applicable from the current financial year, i.e., 2010-11.
This new method of valuation is calculated as explained in my Classroom Series (refer Classroom 2 - EV).
Need for change:
This new method of valuation is calculated as explained in my Classroom Series (refer Classroom 2 - EV).
Need for change:
- Broadbased and transparent disclosures
- Facilitate inter-firm comparisons
- Assist capital market accession for insurance companies
Classroom 2: Embedded Value (EV)
Embedded Value (EV)
The Embedded Value (EV) of a life insurance company is the present value of future profits plus adjusted net asset value. It is a construct from the field of actuarial science which allows insurance companies to be valued.
Formula:
Embedded Value is calculated as follows: EV = PVFP + ANAV
where,
EV = Embedded Value
PVFP = present value of future profits
ANAV = adjusted net asset value
It is a common valuation measure used outside North America, particularly in the insurance industry.
The present value of future profits considers the potential profits that shareholders will receive in the future, while adjusted net asset value considers the funds belonging to shareholders that have been accumulated in the past.
Drawbacks of EV:
As per Investopedia, Embedded value is a conservative valuation method, as it excludes certain aspects of goodwill from its calculation of a company's worth. Goodwill includes intangible assets that increase the value of a company beyond its assets minus liabilities, such as strong management, good location and a happy workforce. Furthermore, to add to its conservatism, the EV calculation of a firm does not allow for any increase in future business.
EV in insurance:
Life insurance policies are long-term contracts, where the policyholder pays a premium to be covered against a possible future event (such as the death of the policyholder).
Future income for the insurer consists of premiums paid by policyholders whilst future outgo comprises claims paid to policyholders as well as various expenses. The difference represents future profit.
For companies, the net asset value is usually calculated at book value. This needs to be adjusted to market values for EV purposes.
EV measures the value of the insurer by adding today's value of the existing business (i.e. future profits) to the market value of net assets (i.e. accumulated past profits).
It is a conservative measure of the insurer's value in the sense that it only considers future profits from existing policies and so ignores the possibility that the insurer may sell new policies in future. It also excludes goodwill. As a result the insurer is worth more than its EV.
European Embedded Value (EEV) and Embedded Value (EV):
European Embedded Value (EEV) is a variation of EV which was set up by the CFO Forum which allows for a more formalised method of choosing the parameters and doing the calculations, to enable greater transparency and comparability.
Market Consistent Embedded Value is a more generalised methodology, of which EEV is one example
The Embedded Value (EV) of a life insurance company is the present value of future profits plus adjusted net asset value. It is a construct from the field of actuarial science which allows insurance companies to be valued.
Formula:
Embedded Value is calculated as follows: EV = PVFP + ANAV
where,
EV = Embedded Value
PVFP = present value of future profits
ANAV = adjusted net asset value
It is a common valuation measure used outside North America, particularly in the insurance industry.
The present value of future profits considers the potential profits that shareholders will receive in the future, while adjusted net asset value considers the funds belonging to shareholders that have been accumulated in the past.
Drawbacks of EV:
As per Investopedia, Embedded value is a conservative valuation method, as it excludes certain aspects of goodwill from its calculation of a company's worth. Goodwill includes intangible assets that increase the value of a company beyond its assets minus liabilities, such as strong management, good location and a happy workforce. Furthermore, to add to its conservatism, the EV calculation of a firm does not allow for any increase in future business.
EV in insurance:
Life insurance policies are long-term contracts, where the policyholder pays a premium to be covered against a possible future event (such as the death of the policyholder).
Future income for the insurer consists of premiums paid by policyholders whilst future outgo comprises claims paid to policyholders as well as various expenses. The difference represents future profit.
For companies, the net asset value is usually calculated at book value. This needs to be adjusted to market values for EV purposes.
EV measures the value of the insurer by adding today's value of the existing business (i.e. future profits) to the market value of net assets (i.e. accumulated past profits).
It is a conservative measure of the insurer's value in the sense that it only considers future profits from existing policies and so ignores the possibility that the insurer may sell new policies in future. It also excludes goodwill. As a result the insurer is worth more than its EV.
European Embedded Value (EEV) and Embedded Value (EV):
European Embedded Value (EEV) is a variation of EV which was set up by the CFO Forum which allows for a more formalised method of choosing the parameters and doing the calculations, to enable greater transparency and comparability.
Market Consistent Embedded Value is a more generalised methodology, of which EEV is one example
Tuesday, June 8, 2010
Classroom 1: Combined Ratio
Combined Ratio:
This ratio is one of the important profitability ratios used by insurance companies. It is used to relate premium income to claims, administration and dividend expenses.
Formula: Loss ratio + Expense ratio + Dividend ratio
-----------------------------------------------
Earned Premiums
A combined ratio of below 100% would denote a profitable insurance company while anything greater than 100% would indicate loss.
For example, a ratio of 98% would mean 2% of underwriting profit, while a ratio of 103% would mean an underwriting loss of 3% for each premium rupees
This ratio is one of the important profitability ratios used by insurance companies. It is used to relate premium income to claims, administration and dividend expenses.
Formula: Loss ratio + Expense ratio + Dividend ratio
-----------------------------------------------
Earned Premiums
A combined ratio of below 100% would denote a profitable insurance company while anything greater than 100% would indicate loss.
For example, a ratio of 98% would mean 2% of underwriting profit, while a ratio of 103% would mean an underwriting loss of 3% for each premium rupees
Monday, June 7, 2010
Private life insurers to launch universal life policies
Faced with the challenge of falling demand for Unit-Linked Insurance Products (ULIPs) and the ongoing jurisdiction between SEBI and IRDA, private life insurers in India are looking to diversify into traditional products by launching whole life and universal life policies.
ULIPs have been the main breadwinner for life insurance companies ever since their launch at the start of this decade. However their share of new business premium has come down in the last 3 years (from 2007-08 to 2009-10). Moreover the sum assured depends on the performance of the fund and market conditions.
This seems to have prompted life insurers to be more innovative and focus on traditional products suitable to Indian conditions and market.
ULIPs have been the main breadwinner for life insurance companies ever since their launch at the start of this decade. However their share of new business premium has come down in the last 3 years (from 2007-08 to 2009-10). Moreover the sum assured depends on the performance of the fund and market conditions.
This seems to have prompted life insurers to be more innovative and focus on traditional products suitable to Indian conditions and market.
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