Consider These 5 Metrics To Evaluate Life Insurance Companies

Jul 13, 2018 | 4 months ago | Read Time: 3 minutes | By iKnowledge Team

Life Insurance

If you are planning to purchase an insurance plan, you can buy it from over two dozen life insurance companies in India. However, the first question that comes to your mind is which plan to buy, followed by the second challenge of choosing the right insurance company. Also, too many jargons and complexities about the company confuse you even more. Therefore to avoid any error, understanding the matrices for a life insurance company is very crucial. With basic valuation techniques, you can understand the insurance business better.

Learn about these five metrics which can help you to understand the insurance business:

  1. Embedded Value: “Embedded Value (EV) represents the sum of present value plus the future profits from the existing business and shareholders’ net worth.” In simple words, it denotes the value generated from the business sold by the company before it stopped writing any more EV is directly proportional to the business generated assuming that all the other factors such as persistency ratio and cost remain constant.

           Why does it matter?

Consistent performance in EV growth indicates stability. Companies which experience huge dips or spikes are required to be tracked closely. EV signifies expense performance, product strategy, and distribution model.

  1. Value of New Business: While EV suggests a company’s value based on history, the value of business tells you the value of an insurer based upon the business written in the previous year. Thus, VNB is nothing but an embedded value of the new business, which is measured at the point of sale.

          Why does it matter?

VNB is crucial in understanding fair valuations. VNB indicates the number of future years that an insurer is required to underwrite with the same amount of business as the previous year and with the same level of profitability to justify the fair valuation.

  1. Value of New Business Margin: VNB indicates the product mix of a company. It is amongst the most important metric that a shareholder must track. VNB Margin indicates the profit margin of a company and is calculated by dividing the value of new business by one year’s annualised premium.

           Why does it matter?

VNB helps to understand the product mix of a particular company, which includes the likes of protection plans and Unit-Linked Insurance Plans.

  1. Expense Ratio: Expense Ratio of an insurance company is the expense of management divided by the gross premium. As per the experts, a higher expense ratio can hurt the policyholders in terms of traditional products.

          Why does it matter?

Expense ratio of life insurance companies is in the range of 35-50%. However, it can seriously impact the returns. Expense ratio depends upon the type of business conducted by the company. For instance, in case of a single-premium business, the expense ratio will be much lower.

  1. Persistency Ratio: Persistency Ratio is an important metric as it determines the profitability for an insurer. It refers to how long customers persist with their policies. ‘’ A regulatory body reports persistency ratio of all the companies so that you can benchmark the ratio against the global average.

          Why does it matter?

Being one of the most crucial metrics, Persistency Ratio plays a vital role in evaluating stocks of a life insurance company.

These metrics are not the only measure that you should refer to evaluate a life insurance company. However, considering a comprehensive view, these metrics should do the trick for you when it comes to evaluating the position of a company. Aegon Life is spreading awareness and educating customers on adequate protection by meaningfully offering them the right consultation. The company is dedicated towards helping its customers secure their long-term financial future with its popular schemes like iTerm Plus plan and iMaximize plan.

Advt. No.: IA/Jun 2018/4157


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