New norms likely to impact LIC's investment portfolio the most
The Insurance Regulatory and Development Authority (Irda) is likely to ask insurers to mark-to-market (MTM) their entire investment portfolio to indicate the change in prices.
The move is expected to impact the non-linked or traditional business of life insurers, since companies already mark-to-market the linked business portfolio, consisting of mainly equity shares. The equity portfolio under the traditional business is already marked-to market.
Further, all insurers will have to arrive at the market value of the real estate assets held by them. At present, there are no norms for valuation of real estate and most insurers carry it on a book-value basis.
Actuaries said that the biggest impact would be on Life Insurance Corporation of India (LIC), the country’s largest insurer, which has a large pool of traditional policies. At the end of March 2008, the latest period for which accounts have been made public, the non-linked sum assured for individual policies was of the order of Rs 12,80,000 crore.
Its government paper holdings was over Rs 3,45,000 crore at the end of March 2008. Its holding in ‘other approved securities’ was of the order of Rs 16,000 crore.
At the end of March 2008, LIC’s investment in real estate was estimated at Rs 3,664 crore.
In case of traditional policies, most of the investment has to be in government securities and, over the years, LIC has accumulated a high amount of such papers. In contrast, nearly 90 per cent of the risk underwritten by most new life insurance companies is unit-linked insurance product (Ulip) business, with most of the funds invested in stock markets. Their Ulip investments are already marked-to-market.
In addition, liabilities will also have to be marked-to-market. So the liabilities arising from the traditional plans will require more capital. Higher exposure to traditional products would result in lower valuation, said an actuary.
The new norms will be part of the valuation guidelines, which are expected to be released soon.
These guidelines will prescribe the methodology to calculate the economic capital and embedded-value of an insurance company. At present, there are various methods of arriving at embedded-value.
Going forward, an insurance company’s economic capital will be based on the risk each company writes. As a result, the solvency margin, which at present is fixed at 1.5 times of the business underwritten, will differ based on the risk underwritten.
“Normally, solvency requirement under economic capital will bring down the capital requirement by 40 per cent,” said GN Agarwal, president of the Actuarial Society of India.
The guidelines are also expected to provide that fixed liability, such as term covers due over the next few years, should be valued in line with the zero coupon bond.
At present, the embedded-value is not directly based on the risk of cash flows, but a risk discount rate is used to calculate the overall risk levels.
