life insurance in india final raja
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TRANSCRIPT
“Management of Life Insurance Companies”
Discussion Points
ALM in Life Insurance Companies
Insurance Sector in India
Introduction
IRDA
Management of Life Insurance Companies
Conclusion
Group Speakers
Introducti
on
Why Life Insurance
Insurance guarantees a specific sum of money upon the death of the insured. if insured lives beyond a certain
age. Utility of Life insurance derived from
psychological security and not from an actual claim event.
Insured may not be the Beneficiary (celui qui vit or CQV)
The insurable interest is to be established between policy holder and the insured.
Insurance is subject matter of solicitation
Insurer
Legal contract between two parties
Beneficiary
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
Insurance = Managing Risk
Mechanism
Key factors Face amount (protection or
death benefit) Premium to be paid (cost to the
insured) Length of coverage (term).
Concerns Cost of policy : Admin cost +
profit Insurability Underwriting
Concern of Insurer
Concern of Beneficiary
Mortality Age
Gender Use of Tobacco
Face amount (death benefit)
ExclusionsSuicide
Terrorist Attacks
Premium to be paid
Assured Premiums Length of coverage
Types Of Life Insurance
Term Life Insurance (non participatory)
•Coverage for a specified term. •No accumulated cash value. •“Pure" insurance, with protection in the event of death.
Permanent Insurance/Cash Value (participatory)
•Insurance remains in force (in-line) till maturity•Policy lapses if owner fails to pay the premium when due
Types of Policies• Whole Life• Universal Life• Limited Pay • Endowment
Insurance Sector in India Evolution & Current Standing
History of Life Insurance in India
1818 : Oriental Life Insurance
Company at Kolkata
1870 : British Insurance
Act
1956 : Nationalization of Life Insurance sector Formation of LIC : Merger of 245 Indian and foreign
insurersLIC monopoly continued till the late 90s
1938 : Insurance Actcomprehensive provisions for
effective control over the activities of insurers
1912 : Indian Life Assurance Companies Act
enacted as the first statute to regulate the life insurance business.
History of Life Insurance in India
1999 : Insurance Regulatory and Development Authority (IRDA) Act Formulation of IRDA
crucial policy changes in the insurance sector of IndiaSafeguard interests of insurance policyholders,
Initiate different policy measures to help sustain growth in insurance sector.
1993: Malhotra Committee- Initiation of reformsAssessment of functionality of Indian insurance
sectorPrivate sector be permitted to enter the
Indian insurance sectorOffer operational autonomy to the insurance
service providersForm an independent regulatory body.
Insurance is a federal subject in India
India vs World
2009Life
Premium (b $)
Insurance density
($)
Insurance Penetratio
n (%)
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
Present State23 Public and Private Life Insurers
World's fifth largest life insurance market
Growing at 36% YoY (2010)
Premium : 7% to the country’s GDP
89% of total Insurance business
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
23 Public and Private Life Insurers
World's fifth largest life insurance market
Growing at 36% YoY (2010)
7% to the country’s GDP
89% of total Insurance business
80% of Indians do not have Life
Insurance
Present State
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%
Advantage IndiaMedian 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
Insurance Regulatory and Development
Authority
Why Regulation ?
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
Yes
No
No
Yes
Yes
No
No
Yes
IRDAFormed by act of the Parliament in 1999Purpose : To regulate Indian insurance
sectorComposition
Ten members' team comprising of A Chairman, (J Hari Narayan ) Five full time members – one actuary
(Dr.R.Kannan) Four part-time members
All appointed by Government of India One out of Chairperson and whole-time
members must have knowledge or experience in insurance sector
Encourage Competition and improve insurance penetration
Innovate through products which suit customer better
Improving servicing standards in the industry
Efficient allocation of resources by dynamic management of portfolio
To bring about a change in consumer outlook
IRDA
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 insurersRegulating
investment of funds- Prudential Exposure
IRDA : Powers and Functions
Entitled to ask information, undertaking inspection and investigate the audit of the insurers.
Protect interests
of the policy
holdersExercising other
powers as m
ay
be prescribed
Regulate
insurance and
re-insurance
business
Regulate rates,
profits, provisions and
conditions offered by
insurers
Supersession
Govt may supercede the IRDA for a period not exceeding six months for the following:-
In public interest
IRDA is unable to discharge its functions
Persistent defaults in complying the directions of Govt
Statutory Requirement & Prudential Norms
Life Insurance/Reinsurance Company must be incorporated under the Companies Act, 1956 Registered with IRDA Paid up capital
> Rs. 100 Cr for insurance > Rs. 200 Cr for Reinsurance
Deposit with RBI 1% of gross premium not exceeding Rs. 10 Cr for insurance 1% of gross premium not exceeding Rs. 20 Cr for Reinsurance
International players : only through a joint venture.
FDI up to 49% is permitted in the insurance sector.
Foreign Reinsurance companies not permitted to open branches in India.
Statutory Requirements
Statutory Regulations for Investment
Life Insurance Companies
Unit Linked Insurance Plan
Condition of Investment All investments to be approved by Investment committee.
Asset instruments : Minimum AA (if N/A then A+) Credit Rating should be given by SEBI approved Credit
Rating Agency
Debt Instruments : Minimum AAA (if N/A then AA) Credit Rating should be given by SEBI approved Credit
Rating Agency
Submit a return within 31 days, investment as on 31 Dec every year and within 15 days every other quarter.
Statutory Regulations for Investment
Exposure NormsSl. 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)
Investment in (a) < 50% of (a)+(b)
Investment in immovable assets < 5% of Investments
Investment in Promoter’s group < 5% of Investments (12.5% in case of ULIP)
Investment in financial & Banking sector < 25% of Investments (excluding term deposits)Funds of policy holders are prohibited for direct/indirect investment abroad.
Rural and Social Sector CommitmentRural Sector
Population of less than 5000 Population density of less than 400 per
sq Km At least 25% of male population
engaged in agriculture
Social Sector Unorganized sector-agri labourers, bidi
labourers, carpenters, cobblers, fisherman, hamals etc.
Informal sector-retail traders, domestic servants etc.
Economically vulnerable, backward class both in urban and rural areas – below poverty line
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
Management of Life Insurance Companies
Functions Determination of Premium
Payout + operating expenses
Analysis of RiskTypes of RiskTransfer of risk : Re-insurance
Asset and Liabilities Management
Pricing of Premium
Determinants Mortality Group/Rate
Age based For Individual Product India treated
as a single group Base Year 2001-02
Expense Ratio Overall Expenses (Commission,
Salary, Administrative cost)
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
Types of Risk
Insurance risk
Mortality Morbidity Persistency Expense
Credit risk Corporate bond Counterparty Default
Market risk Interest rate Equities Forex Property
Liquidity risk
Role of Actuaries
An actuary is a business professional who analyzes the financial consequences of risk. Analyzing the past Modelling the future Assessing the risks involved
Uses Mathematics and Statistics to assess risk and determine premiums
An actuary is a Statutory Requirement
Actuarial categorization of risks
C1—Asset depreciation riskC1—Asset depreciation risk Losses due to decline in market Losses due to decline in market value, which has inverse value, which has inverse relationship with interest ratesrelationship with interest rates
C2—pricing riskC2—pricing risk Mortality, morbidity and Mortality, morbidity and expenses higher than expectedexpenses higher than expected
C3—interest rate changeC3—interest rate change Impact of fluctuating interest Impact of fluctuating interest rates, which is different for asset rates, which is different for asset and liabilitiesand liabilities
C4—business riskC4—business risk Legal risk, regulatory changes Legal risk, regulatory changes and tax changes, venturing new and tax changes, venturing new business etc.,business etc.,
ReinsuranceContract between an insurer and a third party to
protect the insurer from losses. for the loss sustained by the insurer while making a
payment on the original contract
Reinsurance is a contract of indemnity It becomes effective only when the insurer has made a
payment to the original policyholder. the original policyholder has no rights against the
reinsurer
Reinsured can show more assets by reducing its
reserve requirements
Types of ReinsuranceFacultative : Policy to policy basis
Treaty reinsurance : to cover a particular class of policies Example : all accident insurance policies
Ways of Reinsurance coverage Proportional : only a portion or percentage of the loss or
risk from the reinsurer Non-proportional : covers a set amount of loss.
Exceeding that amount is paid by the reinsurer.
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)
Asset Liabilities Management in
Life Insurance Companies
Assets
Liabilities
Disasters
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.
Disasters
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.
Asset-Liability Management
ALM has greater significance for Life Insurers
Balancing of Long term liabilities & Short term assets
Fixed rate contracts but market exposed investments
rate/ price and tenure conflicts on a larger scale
ALM has to be an ongoing process of formulating, implementing, monitoring and revising strategies related to assets and liabilities
ALM Requirements Insurers have in place effective procedures for monitoring and managing
their asset-liability positions
ALM should be based on economic value
Appropriate ALM measuring tool
Insurer should examine all risks
Market risk
Underwriting risk
Liquidity risk
Structuring of Assets to meet obligations falling due
Plan to deal with unexpected cash outflow
Strategies appropriate to characteristics of distinct blocks of business
Interaction between blocks in formulating overall strategy
ALM Requirements
Generic Methods of ALMCash flow Matching.
Involves term wise matching of positive and negative cash flows to identify any potential points of a liquidity crisis.
The net cash flows should be zero in each term – Perfectly hedged position.
Method is unable to factor in interest rate risk as the CFs assumed are deterministic.
Uncertainties of CFs due to exogenous factors such as a catastrophe are difficult to factor.
Method imposes restrictions on the exposure of the firm.
Duration Mismatch1 2 3 30
Premiums 1000 1000 1000 1000
Expenses -100 -100 -100 -100
Benefit Payout
80000
•At interest rate of 6% - PV of Cash Flow = (-) Rs. 1540
•Assets backing the contract invested in zero coupon bonds of 5 years.
•A 1% decrease in interest rate
•Liability = Rs.4675
•Assets= Rs.1615.
•Mismatch to an extent of Rs.3060 post decrease of 1% interest rate.
Generic Methods of ALM
Duration/ Convexity Analysis or Immunization. Effective way to address interest rate risk. Portfolio is structured such that impact of a change in interest rates on the
value of liabilities offsets the corresponding impact on asset values. The duration of a portfolio is weighted average of the time periods of the
portfolio’s CFs. The duration of Assets and Liabilities are made equal. Difficulty in estimation of duration Unable to deal with liquidity risks sufficiently
Scenario Analysis.
Consider various scenarios
Project the end result of each scenario in terms of values of assets and liabilities.
Elaborate analysis might project under each scenario CF Statement and Balance Sheet.
Drawbacks
Addresses risk due to specific scenarios
Highly dependent on assumptions
Generic Methods of ALM
Dynamic Financial Analysis Consists of five components
Initial Conditions- summarizes the past performance the company and economy at large.
Scenario Generator – Constructs plausible scenarios for general economic conditions, the firms assets and its liabilities.
Financial Calculator – translates scenarios into financial results.
Optimiser – Uses a single summary statistic or a pair of statistics in order to evaluate and select strategy alternatives.
Results –Include distributions of key measures and critical variables.
Con
clus
ion
Insurance Industry – Way Ahead
Insurance density and penetration improving Development of products
to cater to different categories especially in rural areas
Consumer awareness campaigns to be encouraged improve insurance literacy levels by conducting
workshops, distributing literature etc. in both urban and rural areas.
Insurers conduct extensive market research before introducing insurance products to make insurance more meaningful and affordable.
Institutions like universities should be encouraged to spread insurance awareness and educating the
students/ customers on their rights and obligations.
Issues with Life InsuranceFraud Claims
Reporting fake deaths, death not covered, suicides and murders Employees involved in fraud No Law to prosecute wrong claimers.
Solvency Issues Low paid up capital High operational expenses Inefficient Claim settlement ratio Mix up of Policy holder and Shareholder’s capital
Questions
…