Irda plans credit rating for insurance firms

The Insurance Regulatory Authority of India (Irda) is planning credit rating for insurance companies.

The actuarial division of Irda is preparing parameters which will facilitate grading of such companies. One such parameter is the embedded value in insurance companies, which is similar to the price-earnings ratio in case of listed companies.

"It is not a regulatory issue . But the moment a company enters credit rating, it will improve reporting of financials. The important job now is to work out the parameters so that various ratios could be calculated and analyzed," said R. Kannan, whole-time member of Irda.

He said that working out parameters such as embedded values, facilitating credit rating and a risk-based capital structure for insurance companies is on top of the Irda's agenda now.

Life insurance policies are long-term contracts, where the policyholder pays a premium for many years to be covered against death.

Usually, the assets of a company are what the company "owns", such as buildings and cash, and liabilities are what they "owe" to shareholders, banks and creditors.

However, for an insurance company, the assets include the possible payment of future premiums for policies already sold, and the liabilities could include possible claims paid out in future, if and when policyholders die.

Embedded value is what allows these uncertain future cash flows to be valued, so that a more realistic picture of the company's financial position is possible, allowing for future contingencies.

Irda is also working towards standardising various norms - pricing, commission and incentive structure "� and nature of products to be floated by companies launching health insurance products . According to officials, both life and non- life companies are launching health insurance products.

Meanwhile, the Irda is reviewing the investment norms for insurance companies so that they can invest in a wide range of products. If the recommendations were accepted, the insurance companies will be able to trade and invest in derivatives, among other things.