With the top life insurance companies planning to list next year, the Insurance Regulatory Development Authority is setting up a committee for working out a mechanism to decide the valuation and the likely initial public offer price.

The committee will look at four key aspects, a top Irda source said. One, the committee will suggest the mechanism to value the surplus that will be generated over time. Two, the acquisition costs that consists of the commission expenses and the initial expenses for a product.

Three, the IPO will take into account the initial expenses, the investment income, the future mortality risk, claims ratio, lapsation experience of the insurance company and, accordingly, work out the surplus or the deficit and the discount it to the present value of the business, the official said.

"The valuation of the surplus will help an investor to know the premium he should pay on an earnings per share," Irda member actuary R Kannan said. The committee will be formed in 15-20 days and will consist of members of the Actuarial Society of India, chartered accountants, Irda members and insurance company executives.

According to the regulations, an insurance company has to list within 10 years of operations. SBI [Get Quote] Life and HDFC [Get Quote] Standard Life have announced their intention to list next year, while ICICI [Get Quote] Prudential, the largest private player, may list in 2010-11.

Life insurance business involves contracts spanning many years. Hence, it is unique in the sense that the costs are not certain at the point of sale and can only be estimated. The business takes more than seven years to break even.

Of the dozen new players, only SBI Life Insurance has been able to break even and even register profits. The business requires high capital as the higher the growth rate of the insurer, higher the amount of money that will be required to invest.

But with the government planning to amend the insurance laws, including extending the timeframe for the mandatory listing requirement, many companies may defer their plans to list.