“ Management of Life Insurance Companies”
Discussion Points ALM in Life Insurance Companies Insurance Sector in India  Introduction IRDA Management of Life Insuranc...
Group Speakers
Introduction
Why Life Insurance <ul><li>Insurance guarantees a specific sum of money  </li></ul><ul><ul><li>upon the death of the insur...
Legal contract between two parties Pay  the beneficiary a sum of money upon the occurrence of the insured individual's/ind...
Mechanism <ul><li>Key factors </li></ul><ul><ul><li>Face amount (protection or death benefit) </li></ul></ul><ul><ul><li>P...
Types Of Life Insurance <ul><li>Term Life Insurance  (non participatory) </li></ul><ul><li>Coverage for a specified term. ...
Insurance Sector in India  Evolution & Current Standing
History of Life Insurance in India 1818 : Oriental Life Insurance Company at Kolkata  1870 : British Insurance Act  <ul><l...
History of Life Insurance in India <ul><li>1999 : Insurance Regulatory and Development Authority (IRDA) Act  </li></ul><ul...
India vs World   2009 Life Premium (b $) Insurance density  ($) Insurance Penetration (%) World 2332 595 7.0 USA 492 3710 ...
Present State <ul><li>23 Public and Private Life Insurers </li></ul><ul><li>World's fifth largest life insurance market </...
Present State <ul><li>23 Public and Private Life Insurers </li></ul><ul><li>World's fifth largest life insurance market </...
Comparison of Public & Private Sector 2009 LIC Private Sector Life Insurance offices 3030 8785 Metro cities x 3x New Polic...
Advantage India Median age: 25 yrs as compared to 43 in Japan Diverse requirement  3.3% in 2002-03 to 7.6% in 2008-09 Stri...
Insurance Regulatory and Development Authority
Why Regulation ? Yes No No Yes Yes No No Yes Are SOE potentially competitive  Is divestiture possible  Implement other ref...
IRDA <ul><li>Formed by act of the Parliament in 1999 </li></ul><ul><li>Purpose : To regulate Indian insurance sector </li>...
<ul><li>Encourage Competition and improve insurance penetration </li></ul><ul><li>Innovate through products which suit cus...
IRDA : Powers and Functions Jun 2010 – ULIPs to be regulated by IRDA and not SEBI Specifies obligatory credentials, code o...
IRDA : Powers and Functions Entitled to ask information, undertaking inspection and investigate the audit of the insurers....
Supersession Govt may supercede the IRDA for a period not exceeding six months for the following:- <ul><ul><li>In public i...
Statutory Requirement & Prudential Norms
<ul><li>Life Insurance/Reinsurance Company </li></ul><ul><ul><li>must be incorporated under the Companies Act, 1956 </li><...
Statutory Regulations for Investment Life Insurance Companies Unit Linked Insurance Plan
<ul><li>Condition of Investment  </li></ul><ul><ul><li>All investments to be approved by Investment committee. </li></ul><...
Exposure Norms <ul><li>Investment in (a) < 50% of (a)+(b)  </li></ul><ul><li>Investment in immovable assets < 5% of Invest...
Rural and Social Sector Commitment <ul><li>Rural Sector </li></ul><ul><ul><li>Population of less than 5000 </li></ul></ul>...
Rural & Social Sector Obligations Year Rural Sector  (% of policies) Social Sector  (No. of policies) 1 7 5000 2 9 7000 3 ...
Management of Life Insurance Companies
Functions  <ul><li>Determination of Premium </li></ul><ul><ul><li>Payout + operating expenses </li></ul></ul><ul><li>Analy...
Pricing of Premium  <ul><li>Determinants </li></ul><ul><ul><li>Mortality Group/Rate </li></ul></ul><ul><ul><ul><li>Age bas...
Example : Premium Calculation Description Amount Expected Capital Required as Settlement 2000 If Premium Rs 2/1000, Premiu...
Types of Risk <ul><li>Insurance risk </li></ul><ul><ul><li>Mortality </li></ul></ul><ul><ul><li>Morbidity </li></ul></ul><...
Role of Actuaries <ul><li>An actuary is a business professional who analyzes the financial consequences of risk.  </li></u...
Actuarial categorization of risks C1—Asset depreciation risk Losses due to decline in market value, which has inverse rela...
Reinsurance <ul><li>Contract between an insurer and a third party to protect the insurer from losses. </li></ul><ul><ul><l...
Types of Reinsurance <ul><li>Facultative  : Policy to policy basis </li></ul><ul><li>Treaty reinsurance  : to cover a part...
Asset Liabilities Management  in  Life Insurance Companies Assets Liabilities
Disasters <ul><li>Nissan Mutual Life, a company with 1.2 million policy holders sold individual annuities paying guarantee...
Disasters <ul><li>A mismatch between assets and liabilities of “The Equitable” an US based mutual life insurance company. ...
Asset-Liability Management <ul><li>ALM has greater significance for Life Insurers </li></ul><ul><ul><li>Balancing of Long ...
ALM Requirements <ul><li>Insurers have in place effective procedures for monitoring and managing their asset-liability  po...
<ul><li>Structuring of Assets to meet obligations falling due </li></ul><ul><li>Plan to deal with unexpected cash outflow ...
Generic Methods of ALM <ul><li>Cash flow Matching.  </li></ul><ul><ul><li>Involves term wise matching of positive and nega...
Duration Mismatch <ul><li>At interest rate of 6% - PV of Cash Flow = (-) Rs. 1540 </li></ul><ul><li>Assets backing the con...
Generic Methods of ALM <ul><li>Duration/ Convexity Analysis or Immunization.  </li></ul><ul><ul><li>Effective way to addre...
<ul><li>Scenario Analysis.  </li></ul><ul><ul><li>Consider various scenarios </li></ul></ul><ul><ul><li>Project the end re...
Dynamic Financial Analysis <ul><li>Consists of five components </li></ul><ul><ul><li>Initial Conditions- summarizes the pa...
Conclusion
Insurance Industry – Way Ahead <ul><li>Insurance density and penetration improving  </li></ul><ul><li>Development of produ...
Issues with Life Insurance <ul><li>Fraud Claims </li></ul><ul><ul><li>Reporting fake deaths, death not covered, suicides a...
 
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Life insurance in india final raja

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  • Ref: http://business.mapsofindia.com/insurance/
  • Whole life coverage Whole life insurance  provides for a level premium, and a cash value table included in the policy guaranteed by the company. The primary advantages of whole life are guaranteed death benefits, guaranteed cash values, fixed and known annual premiums, and mortality and expense charges will not reduce the cash value shown in the policy. The primary disadvantages of whole life are premium inflexibility, and the internal rate of return in the policy may not be competitive with other savings alternatives. Also, the cash values are generally kept by the insurance company at the time of death, the death benefit only to the beneficiaries. Riders are available that can allow one to increase the death benefit by paying additional premium. The death benefit can also be increased through the use of policy dividends. Dividends cannot be guaranteed and may be higher or lower than historical rates over time. Premiums are much higher than term insurance in the short term, but cumulative premiums are roughly equal if policies are kept in force until average life expectancy. Cash value can be accessed at any time through policy &amp;quot;loans&amp;quot; and are received &amp;quot;income-tax free&amp;quot;. Since these loans decrease the death benefit if not paid back, payback is optional. Cash values support the death benefit so only the death benefit is paid out. Dividends can be utilized in many ways. First, if Paid up additions is elected, dividend cash values will purchase additional death benefit which will increase the death benefit of the policy to the named beneficiary. Another alternative is to opt in for &apos;reduced premiums&apos; on some policies. This reduces the owed premiums by the unguaranteed dividends amount. A third option allows the owner to take the dividends as they are paid out. (Although some policies provide other/different/less options than these - it depends on the company for some cases) Universal life insurance (UL) is a relatively new insurance product intended to provide permanent insurance coverage with greater flexibility in premium payment and the potential for greater growth of cash values. There are several types of universal life insurance policies which include &amp;quot;interest sensitive&amp;quot; (also known as &amp;quot;traditional fixed universal life insurance&amp;quot;), variable universal life (VUL), guaranteed death benefit, and equity indexed universal life insurance. A universal life insurance policy includes a cash value. Premiums increase the cash values, but the cost of insurance (along with any other charges assessed by the insurance company) reduces cash values. However, with the exception of VUL, interest is credited on cash values at a rate specified by the company and may also increase cash values. With VUL, cash values will ebb and flow relative to the performance of the investment subaccounts the policy owner has chosen. The surrender value of the policy is the amount payable to the policyowner after applicable surrender charges, if any. Universal life insurance addresses the perceived disadvantages of whole life – namely that premiums and death benefit are fixed. With universal life, both the premiums and death benefit are flexible. Except with regards to guaranteed death benefit universal life, this flexibility comes at a price: reduced guarantees. Depending on how interest is credited, the internal rate of return can be higher because it moves with prevailing interest rates (interest-sensitive) or the financial markets (Equity Indexed Universal Life and Variable Universal Life). Mortality costs and administrative charges are known. And cash value may be considered more easily attainable because the owner can discontinue premiums if the cash value allows it. Flexible death benefit means the policy owner can choose to decrease the death benefit. The death benefit could also be increased by the policy owner but that would (typically) require that the insured go through new underwriting. Another example of flexible death benefit is the ability to choose option A or option B death benefits - and to be able to change those options during the life of the insured. Option A is often referred to as a level death benefit. Generally speaking, the death benefit will remain level for the life of the insured and premiums are expected to be lower than policies with an Option B death benefit. Option B pays the face amount plus the cash value. If cash values grow over time, so would the death benefit which is payable to the insured&apos;s beneficiaries. If cash values decline, the death benefit would also decline. Presumably option B death benefit policies require greater premium than option A policies. Limited-pay Another type of permanent insurance is Limited-pay life insurance, in which all the premiums are paid over a specified period after which no additional premiums are due to keep the policy in force. Common limited pay periods include 10-year, 20-year, and paid-up at age 65. Endowments Endowments are policies in which the cash value built up inside the policy, equals the death benefit (face amount) at a certain age. The age this commences is known as the endowment age. Endowments are considerably more expensive (in terms of annual premiums) than either whole life or universal life because the premium paying period is shortened and the endowment date is earlier. In the United States, the Technical Corrections Act of 1988 tightened the rules on tax shelters (creating modified endowments). These follow tax rules as annuities and IRAs do. Endowment Insurance is paid out whether the insured lives or dies, after a specific period (e.g. 15 years) or a specific age (e.g. 65). Accidental Death Accidental death is a limited life insurance that is designed to cover the insured when they pass away due to an accident. Accidents include anything from an injury, but do not typically cover any deaths resulting from health problems or suicide. Because they only cover accidents, these policies are much less expensive than other life insurances. It is also very commonly offered as &amp;quot;accidental death and dismemberment insurance&amp;quot;, also known as an  AD&amp;D policy. In an  AD&amp;D  policy, benefits are available not only for accidental death, but also for loss of limbs or bodily functions such as sight and hearing, etc. Accidental death and  AD&amp;D  policies  very rarely pay  a benefit; either the cause of death is not covered, or the coverage is not maintained after the accident until death occurs. To be aware of what coverage they have, an insured should always review their policy for what it covers and what it excludes. Often, it does not cover an insured who puts themselves at risk in activities such as: parachuting, flying an airplane, professional sports, or involvement in a war (military or not). Also, some insurers will exclude death and injury caused by proximate causes due to (but not limited to) racing on wheels and mountaineering. Accidental death benefits can also be added to a standard life insurance policy as a rider. If this rider is purchased, the policy will generally pay double the face amount if the insured dies due to an accident. This used to be commonly referred to as a double indemnity coverage. In some cases, some companies may even offer a triple indemnity cover.
  • Ref: IBEF Website ( http://www.ibef.org/download/Insurance_060710.pdf )
  • Ref: IBEF Website ( http://www.ibef.org/download/Insurance_060710.pdf )
  • Life insurance in india final raja

    1. 1. “ Management of Life Insurance Companies”
    2. 2. Discussion Points ALM in Life Insurance Companies Insurance Sector in India Introduction IRDA Management of Life Insurance Companies Conclusion
    3. 3. Group Speakers
    4. 4. Introduction
    5. 5. Why Life Insurance <ul><li>Insurance guarantees a specific sum of money </li></ul><ul><ul><li>upon the death of the insured. </li></ul></ul><ul><ul><li>if insured lives beyond a certain age. </li></ul></ul><ul><li>Utility of Life insurance derived from psychological security and not from an actual claim event. </li></ul><ul><li>Insured may not be the Beneficiary (celui qui vit or CQV) </li></ul>Insurance is subject matter of solicitation The insurable interest is to be established between policy holder and the insured.
    6. 6. Legal contract between two parties Pay the beneficiary a sum of money upon the occurrence of the insured individual's/individuals' death. Pay a stipulated amount (at regular intervals or in lump sum). Insured Insurer Beneficiary Insurance = Managing Risk
    7. 7. Mechanism <ul><li>Key factors </li></ul><ul><ul><li>Face amount (protection or death benefit) </li></ul></ul><ul><ul><li>Premium to be paid (cost to the insured) </li></ul></ul><ul><ul><li>Length of coverage (term). </li></ul></ul><ul><li>Concerns </li></ul><ul><ul><li>Cost of policy : Admin cost + profit </li></ul></ul><ul><ul><li>Insurability </li></ul></ul><ul><ul><li>Underwriting </li></ul></ul>Concern of Insurer Concern of Beneficiary Mortality Age Gender Use of Tobacco Face amount (death benefit) Exclusions Suicide Terrorist Attacks Premium to be paid Assured Premiums Length of coverage
    8. 8. Types Of Life Insurance <ul><li>Term Life Insurance (non participatory) </li></ul><ul><li>Coverage for a specified term. </li></ul><ul><li>No accumulated cash value. </li></ul><ul><li>“ Pure&quot; insurance, with protection in the event of death. </li></ul><ul><li>Permanent Insurance/Cash Value (participatory) </li></ul><ul><li>Insurance remains in force (in-line) till maturity </li></ul><ul><li>Policy lapses if owner fails to pay the premium when due </li></ul><ul><ul><ul><li>Types of Policies </li></ul></ul></ul><ul><ul><ul><li>Whole Life </li></ul></ul></ul><ul><ul><ul><li>Universal Life </li></ul></ul></ul><ul><ul><ul><li>Limited Pay  </li></ul></ul></ul><ul><ul><ul><li>Endowment </li></ul></ul></ul>
    9. 9. Insurance Sector in India Evolution & Current Standing
    10. 10. History of Life Insurance in India 1818 : Oriental Life Insurance Company at Kolkata 1870 : British Insurance Act <ul><li>1956 : Nationalization of Life Insurance sector </li></ul><ul><ul><li>Formation of LIC : Merger of 245 Indian and foreign insurers </li></ul></ul><ul><ul><li>LIC monopoly continued till the late 90s   </li></ul></ul><ul><li>1938 : Insurance Act </li></ul><ul><ul><li>comprehensive provisions for effective control over the activities of insurers </li></ul></ul><ul><li>1912 : Indian Life Assurance Companies Act </li></ul><ul><ul><li>enacted as the first statute to regulate the life insurance business. </li></ul></ul>
    11. 11. History of Life Insurance in India <ul><li>1999 : Insurance Regulatory and Development Authority (IRDA) Act </li></ul><ul><ul><li>Formulation of IRDA </li></ul></ul><ul><ul><li>crucial policy changes in the insurance sector of India </li></ul></ul><ul><ul><li>Safeguard interests of insurance policyholders, </li></ul></ul><ul><ul><li>Initiate different policy measures to help sustain growth in insurance sector. </li></ul></ul><ul><li>1993: Malhotra Committee- Initiation of reforms </li></ul><ul><ul><li>Assessment of functionality of Indian insurance sector </li></ul></ul><ul><ul><li>Private sector be permitted to enter the Indian insurance sector </li></ul></ul><ul><ul><li>Offer operational autonomy to the insurance service providers </li></ul></ul><ul><ul><li>Form an independent regulatory body. </li></ul></ul>Insurance is a federal subject in India
    12. 12. India vs World   2009 Life Premium (b $) Insurance density ($) Insurance Penetration (%) World 2332 595 7.0 USA 492 3710 8.0 Japan 399 3979 10.0 UK 218 4579 13.0 France 194 4269 10.0 China 109 121 3.4 India 57 54 5.2 Brazil 25 252 3.1
    13. 13. Present State <ul><li>23 Public and Private Life Insurers </li></ul><ul><li>World's fifth largest life insurance market </li></ul><ul><li>  </li></ul><ul><li>Growing at 36% YoY (2010) </li></ul><ul><li>Premium : 7% to the country’s GDP </li></ul><ul><li>89% of total Insurance business </li></ul>  2007-08 2008-09   Regular Premium LIC 48 39 Private Sector 52 61   Single Premium LIC 87 90 Private Sector 13 10   First Year Premium LIC 64 61 Private Sector 36 39   Renewal Premium LIC 83 77 Private Sector 17 23   Total Premium LIC 74 71 Private Sector 26 29
    14. 14. Present State <ul><li>23 Public and Private Life Insurers </li></ul><ul><li>World's fifth largest life insurance market </li></ul><ul><li>  </li></ul><ul><li>Growing at 36% YoY (2010) </li></ul><ul><li>7% to the country’s GDP </li></ul><ul><li>89% of total Insurance business </li></ul>80% of Indians do not have Life Insurance
    15. 15. Comparison of Public & Private Sector 2009 LIC Private Sector Life Insurance offices 3030 8785 Metro cities x 3x New Policies issues 3.6 Cr (-4.5% YoY) 1.5 Cr (13.2% YoY) Paid up capital 5 Cr 18248 Cr Premium underwritten 157288 Cr 64503 Cr Market Share 71% 29% Commission Expense Ratio 6.40% 8.50% Operating Expense Ratio 5.80% 25.80%
    16. 16. Advantage India Median age: 25 yrs as compared to 43 in Japan Diverse requirement 3.3% in 2002-03 to 7.6% in 2008-09 Strict Regulatory norms 2.9 million people employed Leading contributor to Infrastructure projects (15.7 b$ in 2008
    17. 17. Insurance Regulatory and Development Authority
    18. 18. Why Regulation ? Yes No No Yes Yes No No Yes Are SOE potentially competitive Is divestiture possible Implement other reforms to enhance readiness Is country ready for reforms Use MoU selectively but effectively Unbundle Large firms Increase competition Decrease self credit Reduce transfers & subsidies Divest Ensure Transparency Competitive Bidding Are natural monopolies to be divested Ensure Regulatory Mechanism Unbundle Large firms
    19. 19. IRDA <ul><li>Formed by act of the Parliament in 1999 </li></ul><ul><li>Purpose : To regulate Indian insurance sector </li></ul><ul><li>Composition </li></ul><ul><ul><li>Ten members' team comprising of </li></ul></ul><ul><ul><ul><li>A Chairman, (J Hari Narayan ) </li></ul></ul></ul><ul><ul><ul><li>Five full time members – one actuary ( Dr.R.Kannan) </li></ul></ul></ul><ul><ul><ul><li>Four part-time members </li></ul></ul></ul><ul><ul><li>A ll appointed by Government of India </li></ul></ul><ul><ul><li>One out of Chairperson and whole-time members must have knowledge or experience in insurance sector </li></ul></ul>
    20. 20. <ul><li>Encourage Competition and improve insurance penetration </li></ul><ul><li>Innovate through products which suit customer better </li></ul><ul><li>Improving servicing standards in the industry </li></ul><ul><li>Efficient allocation of resources by dynamic management of portfolio </li></ul><ul><li>To bring about a change in consumer outlook </li></ul>IRDA
    21. 21. IRDA : Powers and Functions Jun 2010 – ULIPs to be regulated by IRDA and not SEBI Specifies obligatory credentials, code of conduct for insurers Regulating and maintaining margins of solvency Ensuring requisite qualification of intermediaries and agents Powers to issue Registration/cancellation of insurers Regulating investment of funds- Prudential Exposure
    22. 22. IRDA : Powers and Functions Entitled to ask information, undertaking inspection and investigate the audit of the insurers. Protect interests of the policy holders Exercising other powers as may be prescribed Regulate insurance and re-insurance business Regulate rates, profits, provisions and conditions offered by insurers
    23. 23. Supersession Govt may supercede the IRDA for a period not exceeding six months for the following:- <ul><ul><li>In public interest </li></ul></ul><ul><ul><li>IRDA is unable to discharge its functions </li></ul></ul><ul><ul><li>Persistent defaults in complying the directions of Govt </li></ul></ul>
    24. 24. Statutory Requirement & Prudential Norms
    25. 25. <ul><li>Life Insurance/Reinsurance Company </li></ul><ul><ul><li>must be incorporated under the Companies Act, 1956 </li></ul></ul><ul><ul><li>Registered with IRDA </li></ul></ul><ul><ul><li>Paid up capital </li></ul></ul><ul><ul><ul><li>> Rs. 100 Cr for insurance </li></ul></ul></ul><ul><ul><ul><li>> Rs. 200 Cr for Reinsurance </li></ul></ul></ul><ul><ul><li>Deposit with RBI </li></ul></ul><ul><ul><ul><li>1% of gross premium not exceeding Rs. 10 Cr for insurance </li></ul></ul></ul><ul><ul><ul><li>1% of gross premium not exceeding Rs. 20 Cr for Reinsurance </li></ul></ul></ul><ul><li>International players : only through a joint venture. </li></ul><ul><li>FDI up to 49% is permitted in the insurance sector. </li></ul><ul><li>Foreign Reinsurance companies not permitted to open branches in India. </li></ul>Statutory Requirements
    26. 26. Statutory Regulations for Investment Life Insurance Companies Unit Linked Insurance Plan
    27. 27. <ul><li>Condition of Investment </li></ul><ul><ul><li>All investments to be approved by Investment committee. </li></ul></ul><ul><ul><li>Asset instruments : Minimum AA (if N/A then A+) </li></ul></ul><ul><ul><ul><li>Credit Rating should be given by SEBI approved Credit Rating Agency </li></ul></ul></ul><ul><ul><li>Debt Instruments : Minimum AAA (if N/A then AA) </li></ul></ul><ul><ul><ul><li>Credit Rating should be given by SEBI approved Credit Rating Agency </li></ul></ul></ul><ul><li>Submit a return within 31 days, investment as on 31 Dec every year and within 15 days every other quarter. </li></ul>Statutory Regulations for Investment
    28. 28. Exposure Norms <ul><li>Investment in (a) < 50% of (a)+(b) </li></ul><ul><li>Investment in immovable assets < 5% of Investments </li></ul><ul><li>Investment in Promoter’s group < 5% of Investments (12.5% in case of ULIP) </li></ul><ul><li>Investment in financial & Banking sector < 25% of Investments (excluding term deposits) </li></ul><ul><ul><li>Funds of policy holders are prohibited for direct/indirect investment abroad. </li></ul></ul>Sl. No. Type of Instrument Individual firm Group Exposure Industry/ Sector exposure (a) Equity, preference shares, convertible debentures 10% 10% (25% for ULIP) 10% (25% for ULIP) (b) Debt/Loan 10% 10% (25% for ULIP) 10% (25% for ULIP)
    29. 29. Rural and Social Sector Commitment <ul><li>Rural Sector </li></ul><ul><ul><li>Population of less than 5000 </li></ul></ul><ul><ul><li>Population density of less than 400 per sq Km </li></ul></ul><ul><ul><li>At least 25% of male population engaged in agriculture </li></ul></ul><ul><li>Social Sector </li></ul><ul><ul><li>Unorganized sector-agri labourers, bidi labourers, carpenters, cobblers, fisherman, hamals etc. </li></ul></ul><ul><ul><li>Informal sector-retail traders, domestic servants etc. </li></ul></ul><ul><ul><li>Economically vulnerable, backward class both in urban and rural areas – below poverty line </li></ul></ul>
    30. 30. Rural & Social Sector Obligations Year Rural Sector (% of policies) Social Sector (No. of policies) 1 7 5000 2 9 7000 3 12 10000 4 14 15000 5 16 20000 10 20 55000
    31. 31. Management of Life Insurance Companies
    32. 32. Functions <ul><li>Determination of Premium </li></ul><ul><ul><li>Payout + operating expenses </li></ul></ul><ul><li>Analysis of Risk </li></ul><ul><ul><li>Types of Risk </li></ul></ul><ul><ul><li>Transfer of risk : Re-insurance </li></ul></ul><ul><li>Asset and Liabilities Management </li></ul>
    33. 33. Pricing of Premium <ul><li>Determinants </li></ul><ul><ul><li>Mortality Group/Rate </li></ul></ul><ul><ul><ul><li>Age based </li></ul></ul></ul><ul><ul><ul><li>For Individual Product India treated as a single group </li></ul></ul></ul><ul><ul><ul><li>Base Year 2001-02 </li></ul></ul></ul><ul><ul><li>Expense Ratio </li></ul></ul><ul><ul><ul><li>Overall Expenses (Commission, Salary, Administrative cost) </li></ul></ul></ul>
    34. 34. Example : Premium Calculation Description Amount Expected Capital Required as Settlement 2000 If Premium Rs 2/1000, Premium collected 2000 Expenses @ 6% -120 Balance left for Investment 1880 Interest Earned in Inv @ 10% 188 Total Balance 2068 Balance after Payment of Insured Amount 2000 Surplus/Profit 68 Age Group 30 Years Number of insurees 1000 Mortality Rate 2/1000 Insured Amount Rs 1000 Period of Insurance 1 Year
    35. 35. Types of Risk <ul><li>Insurance risk </li></ul><ul><ul><li>Mortality </li></ul></ul><ul><ul><li>Morbidity </li></ul></ul><ul><ul><li>Persistency </li></ul></ul><ul><ul><li>Expense </li></ul></ul><ul><li>Credit risk </li></ul><ul><ul><li>Corporate bond </li></ul></ul><ul><ul><li>Counterparty Default </li></ul></ul><ul><li>Market risk </li></ul><ul><ul><ul><li>Interest rate </li></ul></ul></ul><ul><ul><ul><li>Equities </li></ul></ul></ul><ul><ul><ul><li>Forex </li></ul></ul></ul><ul><ul><ul><li>Property </li></ul></ul></ul>Liquidity risk
    36. 36. Role of Actuaries <ul><li>An actuary is a business professional who analyzes the financial consequences of risk. </li></ul><ul><ul><li>Analyzing the past </li></ul></ul><ul><ul><li>Modelling the future </li></ul></ul><ul><ul><li>Assessing the risks involved </li></ul></ul><ul><li>Uses Mathematics and Statistics to assess risk and determine premiums </li></ul><ul><li>An actuary is a Statutory Requirement </li></ul>
    37. 37. Actuarial categorization of risks C1—Asset depreciation risk Losses due to decline in market value, which has inverse relationship with interest rates C2—pricing risk Mortality, morbidity and expenses higher than expected C3—interest rate change Impact of fluctuating interest rates, which is different for asset and liabilities C4—business risk Legal risk, regulatory changes and tax changes, venturing new business etc.,
    38. 38. Reinsurance <ul><li>Contract between an insurer and a third party to protect the insurer from losses. </li></ul><ul><ul><li>for the loss sustained by the insurer while making a payment on the original contract </li></ul></ul><ul><li>Reinsurance is a contract of indemnity </li></ul><ul><ul><li>It becomes effective only when the insurer has made a payment to the original policyholder. </li></ul></ul><ul><ul><li>the original policyholder has no rights against the reinsurer </li></ul></ul><ul><li>Reinsured can show more assets by reducing its reserve requirements </li></ul>
    39. 39. Types of Reinsurance <ul><li>Facultative : Policy to policy basis </li></ul><ul><li>Treaty reinsurance : to cover a particular class of policies </li></ul><ul><ul><li>Example : all accident insurance policies </li></ul></ul><ul><li>Ways of Reinsurance coverage </li></ul><ul><ul><li>Proportional : only a portion or percentage of the loss or risk from the reinsurer </li></ul></ul><ul><ul><li>Non-proportional : covers a set amount of loss. Exceeding that amount is paid by the reinsurer. </li></ul></ul><ul><li>In India every insurer has to reinsure 20% policies with GIC who in turn reinsures with international companies such as Swissre (Switzerland), Munichre (Germany) and Royale (UK) </li></ul>
    40. 40. Asset Liabilities Management in Life Insurance Companies Assets Liabilities
    41. 41. Disasters <ul><li>Nissan Mutual Life, a company with 1.2 million policy holders sold individual annuities paying guaranteed returns of 5% -5½% without hedging these liabilities. A plunge in the government bond yields created a large gap in its earnings and on April 1997, the company was ordered to suspend its business. </li></ul>
    42. 42. Disasters <ul><li>A mismatch between assets and liabilities of “The Equitable” an US based mutual life insurance company. The company sold large number of long term GICs by investing in short term assets yielding high interest. Company crippled when the short term interest rates came down. </li></ul>
    43. 43. Asset-Liability Management <ul><li>ALM has greater significance for Life Insurers </li></ul><ul><ul><li>Balancing of Long term liabilities & Short term assets </li></ul></ul><ul><ul><li>Fixed rate contracts but market exposed investments </li></ul></ul><ul><ul><li>rate/ price and tenure conflicts on a larger scale </li></ul></ul><ul><li>ALM has to be an ongoing process of formulating, implementing, monitoring and revising strategies related to assets and liabilities </li></ul>
    44. 44. ALM Requirements <ul><li>Insurers have in place effective procedures for monitoring and managing their asset-liability positions </li></ul><ul><li>ALM should be based on economic value </li></ul><ul><li>Appropriate ALM measuring tool </li></ul><ul><li>Insurer should examine all risks </li></ul><ul><ul><li>Market risk </li></ul></ul><ul><ul><li>Underwriting risk </li></ul></ul><ul><ul><li>Liquidity risk </li></ul></ul>
    45. 45. <ul><li>Structuring of Assets to meet obligations falling due </li></ul><ul><li>Plan to deal with unexpected cash outflow </li></ul><ul><li>Strategies appropriate to characteristics of distinct blocks of business </li></ul><ul><li>Interaction between blocks in formulating overall strategy </li></ul>ALM Requirements
    46. 46. Generic Methods of ALM <ul><li>Cash flow Matching. </li></ul><ul><ul><li>Involves term wise matching of positive and negative cash flows to identify any potential points of a liquidity crisis. </li></ul></ul><ul><ul><li>The net cash flows should be zero in each term – Perfectly hedged position. </li></ul></ul><ul><ul><li>Method is unable to factor in interest rate risk as the CFs assumed are deterministic. </li></ul></ul><ul><ul><li>Uncertainties of CFs due to exogenous factors such as a catastrophe are difficult to factor. </li></ul></ul><ul><ul><li>Method imposes restrictions on the exposure of the firm. </li></ul></ul>
    47. 47. Duration Mismatch <ul><li>At interest rate of 6% - PV of Cash Flow = (-) Rs. 1540 </li></ul><ul><li>Assets backing the contract invested in zero coupon bonds of 5 years. </li></ul><ul><li>A 1% decrease in interest rate </li></ul><ul><ul><li>Liability = Rs.4675 </li></ul></ul><ul><ul><li>Assets= Rs.1615. </li></ul></ul><ul><li>Mismatch to an extent of Rs.3060 post decrease of 1% interest rate. </li></ul>1 2 3 30 Premiums 1000 1000 1000 1000 Expenses -100 -100 -100 -100 Benefit Payout 80000
    48. 48. Generic Methods of ALM <ul><li>Duration/ Convexity Analysis or Immunization. </li></ul><ul><ul><li>Effective way to address interest rate risk. </li></ul></ul><ul><ul><li>Portfolio is structured such that impact of a change in interest rates on the value of liabilities offsets the corresponding impact on asset values. </li></ul></ul><ul><ul><li>The duration of a portfolio is weighted average of the time periods of the portfolio’s CFs. </li></ul></ul><ul><ul><li>The duration of Assets and Liabilities are made equal. </li></ul></ul><ul><ul><li>Difficulty in estimation of duration </li></ul></ul><ul><ul><li>Unable to deal with liquidity risks sufficiently </li></ul></ul>
    49. 49. <ul><li>Scenario Analysis. </li></ul><ul><ul><li>Consider various scenarios </li></ul></ul><ul><ul><li>Project the end result of each scenario in terms of values of assets and liabilities. </li></ul></ul><ul><ul><li>Elaborate analysis might project under each scenario CF Statement and Balance Sheet. </li></ul></ul><ul><ul><li>Drawbacks </li></ul></ul><ul><ul><ul><li>Addresses risk due to specific scenarios </li></ul></ul></ul><ul><ul><ul><li>Highly dependent on assumptions </li></ul></ul></ul>Generic Methods of ALM
    50. 50. Dynamic Financial Analysis <ul><li>Consists of five components </li></ul><ul><ul><li>Initial Conditions- summarizes the past performance the company and economy at large. </li></ul></ul><ul><ul><li>Scenario Generator – Constructs plausible scenarios for general economic conditions, the firms assets and its liabilities. </li></ul></ul><ul><ul><li>Financial Calculator – translates scenarios into financial results. </li></ul></ul><ul><ul><li>Optimiser – Uses a single summary statistic or a pair of statistics in order to evaluate and select strategy alternatives. </li></ul></ul><ul><ul><li>Results –Include distributions of key measures and critical variables. </li></ul></ul>
    51. 51. Conclusion
    52. 52. Insurance Industry – Way Ahead <ul><li>Insurance density and penetration improving </li></ul><ul><li>Development of products </li></ul><ul><ul><li>to cater to different categories especially in rural areas </li></ul></ul><ul><li>Consumer awareness campaigns to be encouraged </li></ul><ul><ul><li>improve insurance literacy levels by conducting workshops, distributing literature etc. in both urban and rural areas. </li></ul></ul><ul><li>Insurers conduct extensive market research before introducing insurance products </li></ul><ul><ul><li>to make insurance more meaningful and affordable. </li></ul></ul><ul><li>Institutions like universities should be encouraged </li></ul><ul><ul><li>to spread insurance awareness and educating the students/ customers on their rights and obligations. </li></ul></ul>
    53. 53. Issues with Life Insurance <ul><li>Fraud Claims </li></ul><ul><ul><li>Reporting fake deaths, death not covered, suicides and murders </li></ul></ul><ul><ul><li>Employees involved in fraud </li></ul></ul><ul><ul><li>No Law to prosecute wrong claimers. </li></ul></ul><ul><li>Solvency Issues </li></ul><ul><ul><li>Low paid up capital </li></ul></ul><ul><ul><li>High operational expenses </li></ul></ul><ul><ul><li>Inefficient Claim settlement ratio </li></ul></ul><ul><ul><li>Mix up of Policy holder and Shareholder’s capital </li></ul></ul>
    54. 55. Questions…
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