As one of the world’s largest insurance companies Life Insurance corporation, (LIC India) recently listed on the Indian bourse, I remembered my old days when I was understanding Insurance as a sector.
Insurance in simple words means sharing risk. In day-to-day life, We came face to face with many different types of risks. It’s impossible to Manage All sorts of them. Illness, accident, and theft, are small. But when it comes to business, earthquakes Fire, etc are big.
Insurance in today’s world is an important service as the Risk of terrorist attacks, Global pandemics, and Health insurance is highlighted Needs of the Insurance business.
Insurance companies manage a business by sharing Risk between a Similar Risk profile client and another is With the help of shareholders. So all Insurance companies made 2 income Statements. One is for policyholders and another is for shareholders.
In the early days, the risk was shared by raising funds among all Ship Owners every year and Paid to the one who received losses like Fire or damages to the ship. This type of insurance is still alive.
While studying Insurance Sector when ICICI Prudential Life Insurance was listed, I realized that the share of Insurance companies is not for the one whose Holding period is Less than 1 year. They can be good dividend players. But Insurance companies Will be good for people who can hold for the long term.
After that many companies were listed. I saw many Listing of Insurance companies. Saw their trade. What all experience teaches me is that Indian markets are not mature as other markets. They are very much Depending on LIC. But still, Indian investors Ignore many things while valuing Insurance companies. Even further, Many Indian insurance companies are not mature. I can’t find Brokerage Firms talking about Combined ratios. I also found that many insurance companies didn’t even mention free flow. I found it on the Cashflow statement of ICICI Lombard general insurance.
Another reason is many Indian insurance companies sell ULIP. Unit linked Insurance Plan. I classify them as Mutual funds. They are the biggest part of SBI Life insurance. Then how can I say that SBI LIFE Full-fledged Insurance Company?
Many insurance companies try to take Reinsurance. There is nothing wrong. But it took me time to understand Joint insurance Policies. It happened when 2 or more companies come together and share the risk. Again, nothing wrong but still how can normal shareholders understand it? Shareholders didn’t understand what type of risk is managed by which company and in what percentage?
A big factor in my view that affects the success of insurance companies is Bond Market.
Insurance companies take risks. They need something to cover the risk. Equity is good but when it comes to the short term, it can’t be Equity. In India, bond markets are not much developed. If you remove Sovereign Entity (Public sector Companies, State and Federal government) Debt market is not at all active. Whenever they will be developed, Insurance companies will start making money. For that, India needs to be added to the Global Debt indices. That will start the cycle. It will also start developing the market of Mortgage-Backed security and securitization.
One very important point here is the Valuation of Insurance companies. In India, we largely use the embedded value method. It is a good Method but Not only one method. But India is already in love with Ratios and multiples. We can’t go outside of it. so Value of New Business, Margins on Value of the new business, persistency ratio, and solvency ratio are largely ignored.
In between all this ROE, Combined Ratio is nowhere to see.
Embedded value (EV) is a common valuation measure used mainly by life insurance companies outside of North America to estimate the consolidated value of shareholders’ interest in an insurance company. The embedded value is calculated It is calculated by adding the present value of future profits of a firm to the net asset value (NAV) of the firm’s capital and surplus. It is sometimes known as market consistent embedded value (MCEV).
