Brace up for LIC IPO: Decipher key terms used to assess financial performance of a life insurer

10 Feb 2022 , 12:24 PM

The mega Initial Public Offering (IPO) of country’s largest life insurer — Life Insurance Corporation (LIC) is just around the corner. Its IPO prospectus is likely to be filed soon. However, given the different nature of the business of life insurance, there are several unique parameters which are used to assess the financial health and performance of these companies.

On the eve of the LIC IPO, we help you decode some of the prominent terminologies and key performance indicators (KPIs) used in evaluating life insurers.

Financial parameter	KPIs
INCOME Primary source of income of a life insurer is the premium it earns which is usually received over a period of time.	GROSS WRITTEN PREMIUM (GWP) It refers to the total premium written by the company before deductions for reinsurance ceded.   ANNUALIZED PREMIUM EQUIVALENT (APE) It is the sum of annualized first year premium on regular premium policies, and 10% of single premiums, written by the Company during the year.   INDIVIDUAL RATED PREMIUM (IRP) It is the premium written by the Company under individual products and weighted at the rate of 10% for single premiums.   RENEWAL PREMIUM It refers to life insurance premium due after the first year of the policy.
PROFITABILITY Value of new business is the key parameter used to measure the profitability of life insurance companies. It reflects the earnings from new policies written during a given period.	VALUE OF NEW BUSINESS (VoNB) It is the present value of expected future earnings from new policies written during a specified period and reflects the additional value to shareholders expected to be generated through the activity of writing new policies during a specified period.   VALUE OF NEW BUSINESS MARGIN (VoNB MARGIN) It is the ratio of VoNB to APE for a specified period and is a measure of the expected profitability of new business.
VALUE OF A LIFE INSURANCE COMPANY It is measured using embedded value, which computes future profits from existing policies.	INDIAN EMBEDDED VALUE This refers to the consolidated value of shareholders’ interest in the covered life insurance businesses, which is all life insurance business written by the Company since inception and in-force as on the valuation date (including lapsed businesses that have the potential of getting revived).   Embedded value is determined as per the requirements and principles set forth by the Institute of Actuaries of India, in accordance with Actuarial Practice Standard 10.
QUALITY OF BUSINESS It can be determined by understanding its ability to retain customers.	PERSISTENCY RATIO This is the ratio of life insurance policies remaining in force to all policies issued in a fixed period. Persistency can be measured in terms of number of policies or in terms of premium.
CUSTOMER SERVICE The quality of customer service offered by a life insurance company is measured by the efficiency with which it settles claims. It is also assessed through the sales practices and transparency adopted by a company.	DEATH CLAIMS SETTLEMENT RATIO This refers to the ratio of death claims settled to death claims reported to the company and outstanding at the beginning of the year.   UNFAIR BUSINESS PRACTICE RATIO This refers to the number of grievances with respect to unfair business practices reported to the company divided by policies issued by the company in the same period.
SOLVENCY The solvency ratio measures how financially sound an insurer is and its ability to pay claims. In India, insurers are required to maintain a minimum ratio of 1.5.	SOLVENCY RATIO Every insurer is required to maintain an excess of the value of admissible assets over the amount of liabilities of not less than an amount prescribed by the IRDAI, which is referred to as a required solvency margin.   The actual excess of admissible assets over liabilities maintained by the insurer is termed as the available solvency margin. The ratio of the available solvency margin to the required solvency margin is the solvency ratio.

 
Now that you are aware of the basic terminologies and ratios, you may assess them individually (by comparing their progress in case of LIC for 3-5 years) or with peers (by comparing these metrics with those of other listed life insurance companies).

Such an analysis will help you understand LIC’s performance a little more and enable you to make more informed investment decision.

Author of this article is Sheetal Agarwal, AVP-Content and Communication, IIFL