ICICI Prudential Life Insurance hosted a conference call to clarify the new business margin calculations on its life insurance business – This was prompted by Prudential plc’s disclosure that its Indian life insurance business (which is a JV with ICICI Bank) had a new business margin of 12%, compared to ICICI Bank’s disclosure that the margin is 19%. We depend on the insurance company to disclose margins – it’s impossible to calculate it ourselves – and if Prudential was correct, this would have reduced life insurance values by 35%.
However, the difference is due to accounting; the underlying margin is closer to 19%. The key reason for the difference in margins is expense ratio assumptions. New business margins reflect the present value of all profits on a particular policy; its calculation requires various assumptions like discount rate, return, expense ratio. For the expense ratio, the correct assumption is to take expenses over the life of the policy – which will imply a meaningfully lower expense ratio compared to the current ratio.