Insurance Company Valuations Remain An Enigma: Study

<p>With the government increasing the FDI limit to 49 per cent, there is a keen sense of anticipation within the Indian insurance industry that is expecting a flush of foreign investment in the sector. However, valuation of insurance companies is still a relative novelty for investment analysts in India as the industry has historically been isolated from the analysts’ radar.<br><br>A joint study by CII and Towers Watson, titled Indian Insurance Sector: In Pursuit of Value demonstrates the measurement of value from insurance business and chronicles the industry's experience to date in being able to deliver stakeholder value for both consumers and providers of insurance.<br><br>Sanjiv Bajaj, Chairman, CII National Committee on Insurance and Pensions and Managing Director, Bajaj Finserv Ltd, said “The government has done a commendable job with FDI in creating a conducive environment for the sector to realise its full potential and unlock value. It is now critical for all the stakeholders, led by the insurance companies, to make a concerted effort in building a value creating and value delivering industry, thus staking claim to its rightful position among the most promising insurance markets in the world.<br><br>The study sheds light on sources of profits for insurers and through stylized case studies, illustrates possible paradoxes in the analysis of long term life insurance business for the shrewd investor.<br><br>Despite recent challenges – including a raft of regulatory changes, growing competition, mis-selling and a prolonged economic slowdown - that have all required insurers to constantly reassess their business strategies, the study has highlights that insurers remain upbeat about the industry's prospects and have emerged anew seeking growth, momentum and value.<br><br><strong>Key challenges for the insurance sector</strong><br>Distribution appears to have posed maximum challenges for the insurance sector in the recent past, yet continues to be seen as the major driver of value in future. A majority of the bigger challenges faced by life insurers have either been related directly to distribution channels - for example, retention and productivity of agency force and managing third-party distribution tie-ups or indirectly (such as, managing policy persistency). Similarly, the balance of power being significantly in favor of the distributors was one of the major challenges faced by the non-life insurance companies as well.<br><br>The inability to balance growth with profits was cited as one of the key challenges faced by non-life companies. Inefficiency prevalent within the insurance sector is again one of the key challenges that need to be overcome for all stakeholders, including policyholders, investors and distributors, to realize the true potential of the business.<br><br><strong>Setting the right KPIs</strong><br>The study highlights historical focus on short term KPIs by focusing disproportionately on just new business growth and premium incomes that may have hampered long term value creation for the sector that would emerge with a robust back-book.&nbsp; A key requirement for implementation of business optimization strategies is ensuring alignment of the KPI of the senior management of insurance companies with shareholder objectives.</p>