Key Financial Terms of Indian Life Insurance Companies

Insurance is a very risky & complex business and largely differs from the other industries. Unlike other industries, the actual profit of an Insurance business is not known at the time of the sale of the product. The Insurance company keeps on receiving premiums (price) from their customers for certain time. In return, benefit is provided to the customers (subjective to happening of a particular event and as per the terms and conditions of the policy). So an Insurance company can know their actual profit from a particular business only when the policy goes off book.

Hence valuing an Insurance Company is a very complex task and is done by highly qualified professionals.

The Embedded Value is a key indicator about the value of an Insurance Company. It is the total value of the company calculated based on its existing businesses and the excess of its assets over liabilities. It is calculated by the Actuarial department of the company.

Embedded Value = VIF + ANW

VIF = Value of in force Businesses – The VIF is the Expected Present Value of the future profits arising from the in force businesses since the inception of the company. It is calculated using various assumptions such as Mortality, Persistency rate, Expenses, Inflation, Investment Income & etc. These assumptions are the best estimates about the future of the company and may vary from company to company and are set by an Actuary.

ANW = Adjusted Net Worth – It is excess of the total assets over the total liability of the company that are available to shareholders of the company.

So, the Embedded Value is the value of the Insurance Company as at the valuation date without taking into account the future businesses that the company may write and the Goodwill of the company.

There are a total of 24 Indian Life Insurance Companies of which three are listed – ICICI Prudential Life Insurance, SBI Life Insurance & HDFC Life Insurance Company.

In this Article we will look at some of the key financials of ICICI Life Insurance Company and explain some more of the financial terminologies.

The Embedded Value of the ICICI Life Insurance Company stands at whooping INR 230.30 Billion as at 31 March 2020 which is a 6.5% increment from its Embedded Value as at 31 March 2019. Below is the financial performance of the company as at FY 2018-19 & FY 2019-20.

VNB – it is the expected present value of future profits of the new businesses written during the period.  How it differs from VIF is that VIF includes all the in force policies written since the inception of the company. However, VNB only includes the expected present value of future profits of new businesses.

For example, in above the VNB as at 31 March 2020 only includes the businesses written during the period 1 April 2019 to 31 March 2020 in it calculations & the VNB as at 31 March 2019 only includes the businesses written during the period 1 April 2018 & 31 March 2019.

New Business premium received means the total premium received by the company during the financial year.

APE – it is used to calculate the New Business Margins (NBM) which is one of the most important metric of an insurance company. APE is the same as the annual new business premium except for the policies which has Single Premium. In case of Single Premium Policies, the APE is calculated as 10% of the Single Premium. This is based on the fact that in general the average term of a policy is 10 years.  

For Regular Pay & Limited Pay policies, the APE is equal to the Annualized Premium of the policy.

NBM – it is one of the most important metric of an insurance company and is very easy to calculate and understand. It tells us about the profitability of the new businesses that the company is writing.

NBM = VNB / APE

It is the percentage of APE that the company can expect to earn from the new businesses that it has written. It helps in keeping a track of whether the company is writing profitable businesses or not and whether it is growing and going in the profitable direction.

In the above table we can see that APE in FY 2019-20 has decreased by around 5.5% from FY 2018-19 but still the NBM has increased considerably in FY 2019-20. This indicates that the company has written more businesses that are more profitable in FY 2019- 20 when compared to FY 2018-19.

A NBM of 22% in FY 2019-2020 indicates that the company is performing good and writing businesses that are profitable.

In our coming articles, we will explain more about the concepts of financials of Insurance companies such as the Appraisal Value, Persistency Ratio, Risk free rates, Ultimate Forward Rate and etc. We hope this article was helpful and understandable to all its readers. Feel free to reach out to us in case any help is required.