IC-26 Formula Sheet
Ten formulas, what each one is for, and a worked example.
IC-26 is mostly about rules and statements, but several chapters rest on a calculation: the accounting equation, the ratios analysts use to judge a life insurer, budget variances and the cost of capital. These ten formulas cover them.
Where rating agencies define a ratio differently, the table says which version it uses. A worked example on new-business margin follows the table.
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The 10 Formulas
1
Formula
Accounting equation
Expression
Assets = Liabilities + Capital
Use it for
The basis of double entry: every transaction keeps both sides equal.
2
Formula
Solvency ratio
Expression
Solvency ratio = ASM ÷ RSM
Use it for
How many times the insurer's available margin covers the margin the regulator requires.
3
Formula
Expense ratio
Expression
(Operating expenses + Commission) ÷ Net premium written × 100
Use it for
Operating efficiency (Crisil's form; CARE divides by net premium earned instead).
4
Formula
Conservation ratio
Expression
Renewal premium this year ÷ Total premium last year × 100
Use it for
How much of last year's business the insurer kept on its books (Crisil's definition).
5
Formula
VNB margin
Expression
VNB margin = VNB ÷ APE × 100
Use it for
Expected lifetime profit on the year's new business, per ₹100 of APE.
6
Formula
Return on equity
Expression
Profit after tax ÷ Net worth × 100
Use it for
Return earned for shareholders (Crisil's form; CARE uses average net worth).
7
Formula
Price variance
Expression
Actual quantity × (Actual price − Standard price)
Use it for
The part of a budget variance caused by price or rate; quantity held at actual.
8
Formula
Quantity variance
Expression
Standard price × (Actual quantity − Standard quantity)
Use it for
The part of a budget variance caused by volume; price held at standard.
9
Formula
Cost of equity (CAPM)
Expression
Ke = Rf + β × (Rm − Rf)
Use it for
Shareholders' required return, a starting point for the risk discount rate.
10
Formula
Net present value
Expression
NPV = Σ [CFₜ ÷ (1 + r)ᵗ] − Initial outlay
Use it for
Whether a project or investment adds value at discount rate r (accept if NPV > 0).
| # | Formula | Expression | Use it for |
|---|---|---|---|
| 1 | Accounting equation | Assets = Liabilities + Capital | The basis of double entry: every transaction keeps both sides equal. |
| 2 | Solvency ratio | Solvency ratio = ASM ÷ RSM | How many times the insurer's available margin covers the margin the regulator requires. |
| 3 | Expense ratio | (Operating expenses + Commission) ÷ Net premium written × 100 | Operating efficiency (Crisil's form; CARE divides by net premium earned instead). |
| 4 | Conservation ratio | Renewal premium this year ÷ Total premium last year × 100 | How much of last year's business the insurer kept on its books (Crisil's definition). |
| 5 | VNB margin | VNB margin = VNB ÷ APE × 100 | Expected lifetime profit on the year's new business, per ₹100 of APE. |
| 6 | Return on equity | Profit after tax ÷ Net worth × 100 | Return earned for shareholders (Crisil's form; CARE uses average net worth). |
| 7 | Price variance | Actual quantity × (Actual price − Standard price) | The part of a budget variance caused by price or rate; quantity held at actual. |
| 8 | Quantity variance | Standard price × (Actual quantity − Standard quantity) | The part of a budget variance caused by volume; price held at standard. |
| 9 | Cost of equity (CAPM) | Ke = Rf + β × (Rm − Rf) | Shareholders' required return, a starting point for the risk discount rate. |
| 10 | Net present value | NPV = Σ [CFₜ ÷ (1 + r)ᵗ] − Initial outlay | Whether a project or investment adds value at discount rate r (accept if NPV > 0). |
What the Symbols Mean
- ASM / RSM
- Available solvency margin (broadly, assets minus liabilities) and required solvency margin (the minimum set by the regulator's method).
- APE
- Annualised premium equivalent: regular annualised premium on new policies plus 10% of single (lump-sum) premium.
- VNB
- Value of new business: the present value of expected future profits on policies written in the year.
- Rf, Rm, β
- Risk-free rate (often the ten-year government bond yield), expected market return, and the company's beta (systematic risk).
- CFₜ, r
- Cash flow in year t, and the discount rate.
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Worked Example: VNB Margin
In a year, a life insurer writes new regular-premium policies with annualised premium of ₹600 crore and single-premium policies of ₹1,500 crore. The value of new business is ₹180 crore.
- 1
Work out APE
APE = 600 + 10% × 1,500 = 600 + 150 = ₹750 crore.
- 2
Divide VNB by APE
VNB margin = 180 ÷ 750 × 100 = 24%.
- 3
Spot the trap
Counting the single premium in full gives 180 ÷ 2,100 = 8.57%. APE takes only 10% of single premium, so that answer is wrong.
Check the Denominator First
Most IC-26 ratio errors are a wrong denominator: net premium written versus earned, closing versus average net worth, APE versus total premium. The solvency ratio is ASM over RSM, never the other way round. For variances, a positive price variance on premium is favourable, but on a cost it is unfavourable.
FAQs
What solvency ratio must a life insurer maintain?expand_more
CARE Ratings and Max Life both cite IRDAI's minimum solvency ratio of 1.5, that is 150% of the required margin.
Why does APE count only 10% of single premium?expand_more
A single premium is paid once, while a regular premium recurs each year. Taking a tenth of single premium puts the two on a comparable annual footing.
What is the difference between the price and quantity variance?expand_more
The price variance measures the effect of a different rate at the actual volume; the quantity variance measures the effect of a different volume at the standard rate. Together they make the flexible budget variance.
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