The insurance regulator will allow mergers in the sector only if they protect the interests of policyholders and create a stronger insurer.

Any M&A should enhance the value of the merged entity. There is no point in a merger if one plus one equals two. It should be more than two, Irda Chairman J Hari Narayan told ET in an interview.

A proposal on the merger of Reliance General Insurancea fully-owned subsidiary of Anil Ambani-controlled Reliance Capitaland Royal Sundaram Alliance is pending before the regulator. But no decision has been taken because the existing Insurance Act empowers the regulator to approve only mergers of life companies. We are legally examining how we can permit M&As in non-life companies within the extant law, Hari Narayan said.

Valuing an insurance company is much more complex than a listed manufacturing company. The value of a manufacturing company is generally based on the price-earning multiplea measure of the price paid for a share relative to the profit earned per share. A high PE multiple suggests that investors expect higher earnings growth in the future.

In contrast, the profit of an insurer can fluctuate because claims and yield on investments could spike in a year.

So, a commonly accepted benchmark will be crucial when Indian partners dilute their shareholdings in insurance joint ventures through an initial public offering (IPO) at the end of the tenth year of operations. HDFC Standard Life and ICICI Prudential featurethe insurance arms of mortgage lender HDFC and ICICI Banktop the list of life companies that qualify to tap the market.

The accounts presented by the company should be a fair statement of its assets and liabilities, he said.

Hari Narayan also said there could be a review of a recent regulation that asked insurers to guarantee a 4.5% return on pension plans. It is also examining the feasibility of structuring annuity products better to give investors a clear idea of a minimum they would get as monthly income after retirement.

Annuity products promise a regular income after payment of premium for a certain number of years. Investors are also set to get more time to renew their Ulips even if they miss the last date to pay the premium, he said. The assets of life insurers in India are estimated at over Rs 10 trillion.