Process to derive LIC's embedded value may take more than a quarter

The process to derive the embedded value of Life Insurance Corporation of India (LIC) may take over a quarter even as the insurer has initiated it by buying an actuarial modeling software and appointed EY India for its implementation.

Finding the embedded value of LIC is a significant preparatory step for the initial public offering (IPO) of India’s largest insurer. The government expects the exercise to be completed in a quarter, according to a senior official. However, officials involved in the process said the exercise will take more than a quarter as LIC has hundreds of insurance products.

The insurer has selected technology and services major FIS to provide Prophet — an actuarial modeling software — which is used by all life insurance companies in India. EY India has been appointed to help LIC implement the software. It would assist in making actuarial and statutory models, used for calculating embedded value of insurance companies. Use of Prophet is a groundwork for the IPO as it would help LIC in timely reporting of financials.

Until now, LIC had its own internal software that supported statutory valuation. Given the requirements for listing and timely reporting of financials, the insurer needs to report its embedded value, said the official quoted above. “ LIC has hundreds of insurance schemes and testing the software on a number of these products and deriving the embedded value is an exhaustive and time-consuming process,” said another official.

The fresh surge in Covid cases, and subsequent lockdown by states, are coming as roadblocks to the exercise, he added. Once the embedded value is computed using the new software, Milliman Advisors will independently validate the results of the software, and also through the insurer’s balance sheet, he added.

In December, the Department of Investment and Public Asset Management (DIPAM) had selected Milliman Advisors LLP India to ascertain LIC's embedded value before its listing on the exchanges. This isn’t the only bottleneck for launch of the insurer's IPO. Besides this, India’s largest insurer is also implementing systems for treasury management and compliance management. It has to undertake other pre-IPO preparatory work such as book building and road shows, among others. These would also consume significant time, the second official said.

The government intends to launch LIC’s IPO in the current financial year, through which a chunk of its Rs 1.75-trillion divestment target is expected to be achieved. Legislative amendments to the LIC Act were approved along with the Finance Bill 2021. They propose that the central government will hold at least 75 per cent in LIC for the first five years post the IPO. Subsequently, it will keep at least 51 per cent stake in the insurer after five years of listing.

The government also proposes to reserve up to 10 per cent of LIC’s issue for policyholders.

Source: Business Standard