Dated: 6th Sep 2010Dated: 6th Sep 2010

Insurance

Insurance is pooling of risks. In a contract of insurance, the insurer undertakes, in consideration of a sum of money (premium), to make good the loss suffered by the insured against a specified risks such as fire and any other similar contingency of compensate the insured on the happening of a specified event such as accident or death.

The business of insurance is related to the protection of the economic values of assets.

Insurance is pooling of risks. In a contract of insurance, the insurer undertakes, in consideration of a sum of money (premium), to make good the loss suffered by the insured against a specified risks such as fire and any other similar contingency of compensate the insured on the happening of a specified event such as accident or death.

The business of insurance is related to the protection of the economic values of assets.

INSUREINSURE

IRDA is the regulatory authority for insurance industry in India The IRDA deals with discrepancies in the insurance sector. It has been established to protect the interest of policyholders

Regulations of IRDA: Rural/Social Sector Obligations Insurance Advertisement Licensing of Insurance Agents General Insurance: Reinsurance Life Insurance: Reinsurance Investment Norms Third Party Administrators Protection of policyholders Interest Micro-insurance

Insurance Regulatory and Development Authority (IRDA)

The insurance sector has opened up for private insurance companies with the enactment of

IRDA Act, 1999. A large number of companies are competing under

both life and general Insurance. The FDI cap/equity in this sector is 26% and the

proposals have to be cleared by Insurance Regulatory and Development Authority (IRDA.)

The insurance sector has opened up for private insurance companies with the enactment of

IRDA Act, 1999. A large number of companies are competing under

both life and general Insurance. The FDI cap/equity in this sector is 26% and the

proposals have to be cleared by Insurance Regulatory and Development Authority (IRDA.)

Insurance

Life Insurance

General Insurance

1. Fire Insurance2. Marine Insurance3. Accident/Motor Insurance4. Health Insurance5. Liability Insurance

1. Individual Insurance2. Group Insurance

Types of Insurance

1. With Profits2. Without Profits

Life Insurance PolicesDigital Commerce

Annuities Policy

Whole Life Policy

Endowment Policy

Typ

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Provides Life Insurance protection over one's lifetime. Under these policies, the payment of the assured sum is a certainty in contrast to the term insurance contracts. Only the time of payment of the assured sum is an uncertainty. These can be either participating type or non-participating type.

Term Policy

Term Policy and whole life insurance policies focus on risk-coverage

Endowment policy and annuities insurance policies focus on

investments

ULIPs focus on both risk-coverage and the investments

ULIP

Term Insurance Policy provides pure risk cover without any

element of saving for a specified period only.

The sum assured is payable only if the insured dies during the

specified period.

In case the assured does not die during the specified period,

nothing is payable.

Term Insurance Policy

Whole life policy guarantees a death benefit cover throughout

the life.

The assured sum is paid whenever death of the assured occurs.

Premiums have to be paid throughout the life of the assured or

for a shorter period.

Whole Life Insurance Policy

Where, in pure endowment plan, the benefit is payable to the insured only

on survival after the specified term.

Under the endowment policy, the assured sum is paid either on the death of the assured or after a fixed term.

Thus, claims may arise either by death or by maturity.

Endowment policies assist in providing for the payment of a lump sum amount for a specific purpose, say, provision for retirement, meeting the needs of the child etc.

Like whole life insurance policies, endowment policies can also be of participating and non-participating types.

Endowment Insurance Policy

An annuity is a series of periodic payments. An annuity contract is an insurance policy, under which the annuity provider (insurer) agrees to pay the purchaser of annuity a series of regular periodical payments for a fixed period or during

someone's life time.

There are two types of annuity plans:1. Immediate Annuity Plan Purchased with a single premium and begins at once or on the expiry of the

designed period. If the person purchasing the annuity dies during the term, his legal heirs are

entitled to the remaining installments of the annuity.

2. Deferred Annuity Plan The annuity payments start at some specified age of the annuitant. These can

be funded by single payment or a series of regular payments. The payment starts after some deferment period.

Annuities

10

Key Players in the Insurance Industry

IRDA has so far granted registration to 12 private life insurance companies and 9

general insurance companies. If the existing public sector insurance

companies are included, there are currently 13 insurance companies in the life side and 13 companies operating in

general insurance business. General Insurance Corporation has been

approved as the "Indian reinsurer" for underwriting only reinsurance business.

IRDA has so far granted registration to 12 private life insurance companies and 9

general insurance companies. If the existing public sector insurance

companies are included, there are currently 13 insurance companies in the life side and 13 companies operating in

general insurance business. General Insurance Corporation has been

approved as the "Indian reinsurer" for underwriting only reinsurance business.

What is ULIP ?

A category of financial solutions that combine the safety of insurance protection with wealth creation opportunitiesU: UnitL : LinkedI : InsuranceP : Plan

Premium for ULIP

Investment as Unit Life Coverage

Premium towards ULIP

Less Charges

Investment as Unit Life Coverage

What is NAV ?

NAV Net Asset Value is value of assets held by the insurance co after deducting various charges

and it is computed daily based on closing price of securities.

HOW IS UNIT VALUE CALCULATED? A = Market /Fair Value of the relevant Plans Investment Plus Current Assets Less Current Liabilities and Provisions. B = Number of Units outstanding under the relevant Plan

NAV = A/ B

FOR EXAMPLE: AN INVESTOR HAD INVESTED RS.10,000/- IN A UNIT LINKED PLAN AND THE NAV AT THE

TIME OF INVESTMENT WAS RS.10/- THEN THE NUMBER OF UNITS HELD BY THE INVESTOR WILL BE:

= 10,000/10=1000 UNITS

Associated Charges/Costs

• Premium Allocation Charge

ULIP Premium Break up

Mechanics of ULIPS ULIPs work on the lines of mutual funds The premium paid by the client (less any charge) is used to buy units in various

funds (aggressive, balanced or conservative) floated by the insurance companies Units are bought according to the plan chosen by the policyholder. On every

additional premium, more units are allotted to his fund The policyholder can also switch among the funds as and when he desires. While

some companies allow any number of free switches to the policyholder, some restrict the number to just three or four. If the number is exceeded, a certain charge is levied

Individuals can also make additional investments (besides premium) from time to time to increase the savings component in their plan. This facility is termed "top-up"

The money parked in a ULIP plan is returned either on the insured's death or in the event of maturity of the policy

In case of the insured person's untimely death, the amount that the beneficiary is paid is the higher of the sum assured (insurance cover) or the value of the units (investments)

How Guarantee NAV WORKS ?

Supposing a policy starts today and is guaranteed to give highest NAV in next 7 yrs.

In the beginning, let’s assume a NAV of Rs 10, and the Asset allocation is 100% in equity and 0% in debt

Suppose, the market moves up and NAV goes up to Rs 15 by the end of the first year, at this point, try to understand what Insurance company has to provide at least Rs 15 as the return after 6 yrs .

Contd….

Contd..

All they have to do is keep X amount in debt instruments which will mature in next 6 years and provide Rs 15 at the end of 6 yrs.

So assuming the debt return at 7%, they need to put around Rs 10 in Bonds , so that the maturity of the bond is Rs 15 at the end of 6 yrs .

=> 10 * (1.07)^6 = 15.007

They can now invest the rest Rs 5 in Equity as Rs 10 is allocated to Debt . So, now they’ve made sure that whatever happens to the market, they get Rs 15 for sure at the end of 6 yrs.

Contd…

Contd… Case 1: Market Goes down: If market goes down, the NAV will go

down correspondingly, but as per the strategy, the maturity value will be at least Rs 15.

Case 2: Market Goes up again: If market goes up at this point and

the NAV rises above 15, for example say to Rs. 18, now again they will pull out money from Equity and allocate such an amount to debt, that the maturity at the end of total 7 yrs would be Rs 18 and so on…

Why it is so attractive ?TAX BENEFITS Premium Paid for ULIP is eligible for tax rebates.

It works like SIP With an SIP, individuals invest their money regularly over

time intervals of a month/quarter. Basis and even the annual premium in a ULIP works on the rupee cost- averaging principle. An added benefit with ULIPs is that individuals can also invest a one-time amount in the ULIP.

Features Most ULIPs are rich in features such as allowing one to top-up

or switch between funds, increase or decrease the protection level.

Why ULIP is so attractive? TRANSPARENCY – Plan as per life stage needs through market led

investments as compared to traditional investment plan

INSURANCE COVER plus INVESTMENT

FLEXIBILITY- switching as per market movements to capitalize on investment opportunities across the equity and debt markets and benefit from the vagaries of stock/debt markets

MULTIPLE INVESTMENT OPTIONS: Aggressive ULIPs (which invest 80%-100% in equities, balance in debt) Balanced ULIPs (invest around 40%-60% in equities)Conservative ULIPs (invest up to 20% in equities)

Important points to remember before investing in a ULIP

Stay invested for long run- for say 5 to 8 years i.e. your cost will be recovered in a longer period of time

Be clear with the charges- As per new IRDA regulations no hidden charges can be charged by the companies

Invest as per your risk profile

Other features- like switching funds, fund’s past performance, fund management fee

Investment Option For Your Money Maximiser: If high growth is your priority, this is the plan for you. You can enjoy

long-term capital appreciation from a portfolio that is invested primarily in equity

and equity-related securities

Protector: If on the other hand, your priority is steady returns, you can opt for the

protector Plan. Plan, you can accumulate a steady income at a low risk across a

medium to long-term period from a portfolio, which is primarily invested in fixed

income securities.

Balancer: If you prefer a balance of growth and steady returns, choose our

balancer plan. This would ensure that your portfolio is invested in equity-linked

securities, as well as in fixed income securities.

Investment Option For Your Money

FUND TYPE

ASSET MIX POTENTIALRISK /REWARD

Maximiser

Balancer

Protector

Equity& Related securities: Max 100%Debt, Money market & Cash: Max 25%

Debt. Money market & Cash: Min 60%Equity & Related securities: Max: 40%

Debt Instruments, Money market & Cash: Max 100%

High

Moderate

Low

ULIP options related to your life stage

ULIP options related to your life stage

A.) ULIPs FOR RETIREMENT PLANNING

B.) ULIPs FOR LONG TERM WEALTH CREATION 1.) Single premium - Regular premium plan 2.) Guarantee plans – Non guarantee plans 3.) Life Stage based – Non life Stage based

C.) ULIPs FOR CHILDREN’S EDUCATION

D.) ULIPs FOR HEALTH SOLUTIONS

SWOT Analysis

FAQs Am I getting the plan of my requirements? What are the overall charges am I paying? How do I evaluate the performance of my

ULIP plan? Do I have a better option in the market? Is it important to know about the company

which is offering me ULIP? Is there any regulatory body for this?

Comparison of ULIP with other Investment Modules

INSTRUMENTRATE OF

RETURNTIME PERIOD RISK

MIN

INVESTMENT

MAX

INVESTMENT

TAX FREE

RETURN

TAX

BENEFIT

NSC 8% 6years No 100 No limit No Yes

PPF 8% 15years No 500 70000 Yes Yes

ELSSMarket

Return3years Risky 500 No limit Yes Yes

ULIPMarket

Return5years

Risky

Module500 No limit Yes Yes

FD 9.5% 5years No 10000 No limit No Yes

MUTUAL

FUND

Market

Return

Open

EndedHigh 500 No limit

Capital

gain @10% for

time less than

1year

Only in

ELSS

Funds

STOCK VariableNo time

frameVery high Variable No limit

Capital gain

@10% for time

less than 1 year

No

Microsoft Office Word 97 - 2003 Document

IRDA & SEBIIRDA & SEBI

SEBISEBI

Since its inception in 1992 SEBI has been working targeting

the securities and is attending to the fulfillment of its

objectives with commendable zeal and dexterity.

The basic objectives of the SEBI were identified as:

•to protect the interests of investors in securities

•to promote the development of Securities Market

•to regulate the securities market and for matters connected

IRDAIRDA

IRDA is Insurance Regulatory Development Authority, that has been

set up to protect the interests of the policy holders, to regulate,

promote and ensure orderly growth of the insurance industry and for

matters connected therewith or incidental thereto

THE STORY SO FAR

Bone Of ContentionBone Of ContentionULIPULIP

The whole controversy has one single point of contention i.e. who is the controlling authority. The whole controversy has one single point of contention i.e. who is the controlling authority. Since the introduction of ULIPs, which is essentially a insurance policy, in the Indian Markets Since the introduction of ULIPs, which is essentially a insurance policy, in the Indian Markets IRDA has been over looking the functioning of all the insurance companies selling this particular IRDA has been over looking the functioning of all the insurance companies selling this particular product. product. But, keeping in mind the fact that ULIP premium is being used to invest in a fund that invests But, keeping in mind the fact that ULIP premium is being used to invest in a fund that invests money in stocks or bonds, SEBI has contended that all 14 companies selling ULIP has to take its money in stocks or bonds, SEBI has contended that all 14 companies selling ULIP has to take its permission before selling the same in the markets.permission before selling the same in the markets.

Bone Of ContentionBone Of Contention

ULIPs offered by the insurance companies are a combination of investment and insurance and, therefore, the investment components are in the nature of mutual funds which can only be offered/launched after obtaining registration from Sebi under section 12(1B) of the SEBI Act. However, they have not obtained any certificate of registration from Sebi though the ULIPs launched by them had an investment component in the nature of mutual funds, as mandated by the SEBI Act

Firstly In a reaction to the SEBI order, IRDA retaliated on Saturday by invoking its power under section 34(1) of the Insurance Act, directing insurance companies to disregard the order from SEBI and proceed further with their business as usual.

IRDA ContentionIRDA ContentionSEBI ContentionSEBI Contention

Unfolding Of EventsUnfolding Of Events

99thth AprilApril

1010thth AprilApril

1313thth AprilApril

1414thth AprilApril

2121stst AprilApril

ULIP ULIP SagaSaga

SEBI issues show cause SEBI issues show cause notice to all insurance notice to all insurance companies selling ULIPs, companies selling ULIPs, asking them why they did asking them why they did not take permission before not take permission before selling the sameselling the same

SEBI bans sale of all ULIP SEBI bans sale of all ULIP products, creating a panic products, creating a panic amongst insurance playersamongst insurance playersIRDA counters by issuing an IRDA counters by issuing an order permitting all insurers order permitting all insurers to sell ULIPto sell ULIP

Regulators SEBI and IRDA Regulators SEBI and IRDA agrees to settle the issue of agrees to settle the issue of jurisdiction over ULIPs jurisdiction over ULIPs mutually at the High Level mutually at the High Level Coordination Committee Coordination Committee (HLCC)set up by (HLCC)set up by governmentgovernment

Government asks SEBI and Government asks SEBI and IRDA to move court IRDA to move court immediately on the immediately on the contentious issue of who contentious issue of who will regulate unit-linked will regulate unit-linked insurance productsinsurance products

SEBI, IRDA, Ministry Of Finance Officials meet and decide to SEBI, IRDA, Ministry Of Finance Officials meet and decide to maintain status quo and allow selling of ULIPs, in the maintain status quo and allow selling of ULIPs, in the marketmarket

The decision goes in favour of the IRDA and IRDA will The decision goes in favour of the IRDA and IRDA will continue to govern the ULIPs.continue to govern the ULIPs.

Microsoft Office Excel Worksheet

NEW GUIDELINES FOR ULIP BY IRDA

Lock in period has been increased from 3 years to 5 years thereby making it long term financial instrument

Premium has gone up to 10 times of first year premium compared to 5 times

Expected commission and expense have been reduced by evenly distributing it through-out lock in period

ULIP pension or annuity will offer minimum guarantee return of 4.5 %

Standardization of surrender charges

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Impact of fallout of cap on chargeswhich is going to be implement from Wednesday

Anyone buying a ULIP will subjected to lesser charges but will be forced to buy higher level of insurance

Due to cap, products will be more standardized. With most companies offer two or three schemes as against half a dozen plans earlier.

These new pricing norms would have adverse impact on margin profit.

Co. that had 80 % of their business coming from linked business will now focus on traditional product. Product mix will change from 70:30 to 50:50

Impact Cont… Investor return will be maximized because cost will come down.

Insurers will hear out their customers and provide them solution quickly

Decrease in surrender charges might cause an increase in churning

policy.

Companies need to bring in more capital as the working capital

requirement will increase

To avoid negative return ,they need to reduce their cost.

SNAPSHOT Investor should be satisfied because of cost reduction and better service

and products will be investor friendly.

For Insurance companies there will be tough road ahead for profit

making but has lots of potential

New ProductWhy to launch ULIPs for rural population?

IRDA has made it mandatory for insurers to write a growing proportion of its business in rural market

Only 8-10% of rural households are covered by the life insurance

Insurance penetration in urban India is 47 per cent, while it is only 27 per cent in rural areas.

Rural households accounts for 45% of total household income of the country

Savings/income % in rural is higher than in urban. Rural has the purchasing power

Product Features Localization/regionalization of the product sales delivery in

local language and customized product to suit the regional cultural sensitivities.

An annual policy would be a waste for them. Seasonal income and i.e. why regular premium payment are tough and high % of policy terminations could be possible.

The service tax of 10.2% on premiums adds to the price of insurance. Low premiums for rural poor.

Endowment products have been sold in rural. They need low premium term insurance products.

To create awareness of the brand, physical presence of the branch office.

In the United States, there are two types of ULIP products:

1. The investment of funds is made by the insurers whereunder they guarantee minimum return, ceiling on expenses and mortality charges and promise optimal returns. The product has the benefit of unbundling.

2. The second type is similar to ULIPs in our country where the investment decision rests with the insured and hence the risk of investment is born by the insured and not the insurer.

In this type of product lines, there is no guarantee of any kind except the life cover.

In the United States, there are two types of ULIP products:

1. The investment of funds is made by the insurers whereunder they guarantee minimum return, ceiling on expenses and mortality charges and promise optimal returns. The product has the benefit of unbundling.

2. The second type is similar to ULIPs in our country where the investment decision rests with the insured and hence the risk of investment is born by the insured and not the insurer.

In this type of product lines, there is no guarantee of any kind except the life cover.

ULIPs for RURAL INDIA

ULIPs for RURAL INDIA

Customer Profile

Rural India is home

to around 70% of

Indian households

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Awareness (1/2)

Television Ads Regional Newspaper Ads

Word of Mouth Very effective to build

volume

Home Visit Advertising Banners are most effective –

aesthetic value, lasts long, size big & hence catches attention

Road ShowsGood to catch attention & inform about the product.

SMS Alerts and Calling

1 2 3

654

Awareness (2/2)

Retailer/CSP introducing the

new savings product

Very effective in SEC B, C & D

segments

7

89

Advertising Channels Print & Broadcasting Ads Posters, Banners, Danglers

Necessary but not sufficient Not much message is grasped by the customer from one

glance at the theme based or symbolism based posters Posters should be more on company branding – colours,

celebrities etc. Text – vernacular on top of Company

Theme/Background Utility @ this Price

E.g. Insurance + higher returns Poster at eye level most effective

Reduces the effectiveness of danglers Posters closer to the shopkeeper are the only once

noticed >> Read by consumers

BTL

Sales & Promotion– Sampling:

» Example: Mutual funds have launched daily SIPs/ STPs with very low denominations.

– Financial Literacy:

» Rural people prefers post office schemes and bank FDs as investment instruments. Most of it has got to do with financial illiteracy than anything else. So for penetrating any financial product, banks in rural areas are the first point of entry.

– Continuity Program:

» Investment in liquid funds through mobile phones: M-commerce

Distribution Channel42% of 6,30,000 villages have population < 500

Agents NGOs and MFIs Self-Help Groups Post Offices Rural kiosks and rural knowledge centers

Micro-insurance Model

Direct Marketing ModelDirect Marketing Model

Partner-Agent ModelPartner-Agent Model

De-linked ModelDe-linked Model

Service Provider ModelService Provider Model

Challenges Confronting Sales & Marketing Executives in Rural Domain

Supply related challenges More sales happen on trust and familiarity with the agent

than on a structured administration of financial planning tools.

Using the right distribution mix to reach potential customers.

Procuring reliable & standard documentation. Non-available of income and age proof documents. Hence, difficulty in policy issuance & claim processing.

Demand related challenges Ability and willingness to pay Lack of awareness Non-standardized risk reducing practices