• Sai Srinivas D

Life Insurance M&A – What value would you place on a third party distribution channel?

Updated: Feb 2, 2019




Valuation of a life insurance company is complicated. The business is of long term. The profits are realized gradually over the term of a life insurance policy. Placing a value on the same involves many assumptions. Assumptions about expected mortality, persistency, expenses, return on investment etc.


The big assumption


One of the most important assumptions is about the expected new business in future. And these sales volumes depend a lot on the distribution channel. The main channels of distribution in life insurance are agents, corporate agents, brokers and direct sales (through employees, website etc.). While agents and direct are owned by insurer, corporate agents and brokers are not owned by insurer. They are owned by a third party.


The challenges


You have control on your own channels but not on third party channels. They can always leave you and go to another insurer. And hence valuation of those third party channels is a big challenge. The business that they can bring in is controlled by them and not by you is one challenge. For example, you can’t dictate the product mix nor push for the term as you desire. And they can leave you any time is the bigger challenge. Recently, regulation is changed to allow corporate agents to have up to three insurance partners. This is one more challenge. In other words, the corporate agent can continue with you but direct the business to another insurer, if they want.


Complications of valuing the third party channel


Given these challenges, what value would you place on a third party channel is a big question. Especially, at the time of Mergers & Acquisitions. Or at the time of purchase of any stake in the insurance company. As purchaser of stake, if you place 100% value on the channel as derived from pure mathematics, you are losing if the channel leaves the company later. But if you reduce the value, what should be the basis of reduction? And why should seller agree for the basis, whatever be that basis? If he does agree, is he not compromising on the value that he has built over years?


It is really complicated. If I am an independent actuary valuing a third party channel, I will not place 100% value on it. The value will depend on how long the channel is expected to continue and its loyalty towards the insurer without diverting the business to other insurance partner.


Word of caution


If you go ahead with the deal on the basis of today’s situation or on the basis of some assurances / commitments made, you may be in for a surprise at a later date. And that may turn out to be a very unpleasant surprise given the huge amount of money involved.

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