April 14, 2015
Regulations covering corporate agents proposed by the insurance regulator that would require a bank to sell the insurance policies of up to three life insurers, three non-life insurers and three health insurers, will have far reaching implications on the valuations of domestic insurance companies at a time when foreign investors are looking at increasing their stake in them
In valuing an insurance company, a key part of the value of future new business premium relates to the value of business that can be sold through banks and other corporate agents driven by future volumes and margins, both of which could be impacted by the proposed changes, reported the Financial Chronicle. The Insurance Regulatory and Development Authority of India (IRDAI) has issued draft regulations covering corporate agents including banks. Most banks such as State Bank of India, ICICI Bank, Bank of Baroda, Bank of India, Union Bank, Andhra Bank, Allahabad Bank, Canara Bank, and HSBC Bank have established their own life or general insurance company, or both. They exclusively sell policies of their insurance subsidiaries.
The draft regulations for corporate agents state that a corporate agent “shall have arrangements with a maximum of three life/general/health insurers as the case may be to distribute their products. The corporate agent is not allowed to place more than 90% of the business it procures with any one insurer (in each of the categories-life/general/health as applicable in the first year. This limit is lowered to 75%, 60% and 50% in the second, third and fourth year onwards respectively”. Mr Karni Singh Arha, Chief Financial Officer of India First Life Insurance, told Financial Chronicle: “An open architecture model impacts the future business of an insurance company.
At present, health and motor insurance are driving the non-life market, said the executive.
“Valuation is dependant on future business which is dependant on the distribution point of sale. So if the distribution point of sale decreases or increases, it will impact valuations accordingly,” explained Mr Singh. Mr Sanket Kawatkar, principal and consulting actuary at the actuarial and consulting firm, Milliman, said: “Valuations will depend on whether an insurance company ends up gaining additional business through banks or losing business through banks.” Currently, all bancassurance arrangements are exclusive, that is, the bank as corporate agent is allowed to distribute the products of one life insurer, one non-life insurer and one standalone health insurance company.