A Report on Hdfcslic Ltd

8/7/2019 A Report on Hdfcslic Ltd.

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A REPORT

ON

LADDER TO CHANNEL DEVELOPMENT IN HDFC SLIC

SUBMITTED BY:

PRERNA GOYAL

0711233909

DELHI INSTITUTE OF ADVANCE STUDIES

(HDFC STANDARD LIFE INSURANCE COMPANY Ltd.)


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A REPORT

ON

LADDER TO CHANNEL DEVELOPMENT IN HDFC SLIC

SUBMITTED BY:

PRERNA GOYAL

071

A report submitted in partial fulfillment of

the requirements of

MBA program of

The Guru Gobind Singh Indraprastha University

28th

August, 2010


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AUTHORIZATION

This report titled LADDER TO CHANNEL DEVELOPMENT IN HDFC SLIC waswritten and submitted as partial fulfillment of the requirement of MBA Program of GGSIPU,

Delhi. The report was submitted by Prerna Goyal, to the company guide Mr. Gaurav Gupta,

Channel Development Manager, HDFC Standard Life Insurance Company Ltd. and to thefaculty guide, Ms. Taru Baswan, Faculty Dias.

MS. TARU SINGH

(Faculty Guide Signature)


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ACKNOWLEDGEMENT

My endeavour at HDFC Standard Life Insurance Company Ltd. has had the benefit of

several benefactors. I would therefore like to take this opportunity to acknowledge the

contributions of the following people, without whose support this project would not have been

completed successfully.

Any activity in the tradition of India begins with Guru Vandana. I first seek the blessings of my

Honorable MS. TARU BASWANwho taught me jargons of my project during the discussion to

face the ground realities of Human resource a fraction of whose wisdom I strove to absorb.

I am indebted to Mr. Gaurav Gupta, Channel Development Manager, Rohini Branch, my

company guide, for his help in learning actual corporate environment.

I am extremely thankful to Mr. Pradeep Kapai (Branch Manager), Mr. Sunil Bajaj (Training

guide), Mr. Harpreet Chhatwal (Sales and Distribution Manager), for rendering all possible

help facilitating my work in completion of my training.

I would also like to thank to various respondents, who took time out of their busy schedules and

provided me with their advice, information and expertise.

Finally I would like to thank my family and friends who have been constant sources of

encouragement and support.

Regards,

Prerna Goyal


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TABLE OF CONTENTS

Page No.

Authorization... 3

Acknowledgment.

4Abstract 7

1. Introduction 8

1.1 Objectives.. 8

1.2 Methodology. 8

1.3 Limitations of the Study 9

2. Industry Profile

2.1 Principle of insurance.. 10

2.2 The concept of indemnification... 12

2.3 Business model 12

2.4 Conceptual framework 13

3. About the Company

3.1 Fact sheet 17

3.2 The management... 17

3.3 Corporate office... 18

3.4 Company profile

4. The study of the products

4.1Traditional plan.

4.2ULIP plan

4.3Comparison between ULIP and Traditional.

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5. Communication mix 24

6. Channel development

6.1Recruitment process..

6.2Selection and placement procedure

7. Development of financial consultant

7.1Discriminant analysis.

7.2Correlation analysis

7.3Regression analysis.

7.4Understand about the fund management

7.5To know risk and about average return portfolio..

8. Swot analysis

9. Questionnaires analysis

10.Findings

11.Recommendations

12.Conclusion

13.Reference

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ABSTRACT

The service industry is one of the fastest growing sectors in India today. The upcoming sectors

which are really showing the graph towards upwards are Telecom, Banking and Insurance.

These sectors really have a lot of responsibility towards the economy.

Amongst the above mentioned areas Insurance is one sector, which took a lot of time in

positioning itself. The insurance business of non- life companies was not much in problems but

the major problem was with life insurance. Life insurance Corporation of India had monopoly

for more than 45 years, but the picture then was completely different. Previously people felt that

Insurance is only for classes not for masses but now the picture has changed

With the coming of insurance reforms in 1999, IRDA was set up to regulate insurance sector.

This led to the entry of 16 new private insurance companies in 2000.

HDFC standard Life insurance company started its operations in the year 2000. It recruits

Financial Consultants for the purpose of retail sales of insurance policies to its customers. These

financial consultants act as a direct link between customer and company. There is a separate

department named Channel Development in the company which recruits these FCs for it. The

existing processes of recruitment are ineffective and inadequate to recruit the right mix of

people. Every year company incurs huge cost in recruiting training and servicing FCs but many

of them turns out to be inefficient and do not generate any business for the company. Through

this research project the researcher wants to develop an effective way of recruiting and

development of fcs. The main purpose of this study is to do a detailed study on the existing

recruitment and retention strategies of FCs at HDFC SLIC.

The project aims to help understand the consumer behavior towards various financial services

like insurance and what are the factors should be taken in to consideration before investing in

Unit Linked Insurance Plans. The report enhances the knowledge on how various financial

concepts learnt in the classroom are implemented in a real life environment.


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1. INTRODUCTION

1.1 Objective of the project:

Create and Enact strategies for recruitment and retention of financial consultants to

assist HDFCSLIC to development their sales distribution channel and extend theirmarket.

To identify the challenge faced during the process of channel development.

To do a detailed studies about HDFCSLIC and its offerings traditional as well as

ULIP.

To study consumer perception towards Life Insurance.

To determine the need and purpose of Financial Consultants.

To collect and analysis the information of prospect candidate in order to make them

in front of management.

1.2 Methodology: Many financial consultants at HDFC standard Life Insurance Company are

under performers, inactive and ineffective. They are just a liability on the company. Moreover

the company is facing high attrition among its financial consultants. This is due to lack of an

appropriate recruitment and selection strategy for financial consultants. The existing processes

are inadequate and ineffective.

The following is a problem solving researchits main objective is how to retain the financial

advisorsthe major problem not only in HDFC Standard Life Insurance but in all insurancecompanies is retaining the financial advisors and making them perform according to the

companys norms and regulations. The tasks involved in developing an approach to the problem

are:

Theoretical Framework: A theoretical framework has been designed to see what normally the

financial advisors seek in a company the above is being represented by the help of a graphical

model. The following is being used by HDFC Standard Life I insurance.

Reward

Financial Advisors Expect

Recognition

The above takes into account that most of the financial advisors seek Rewards and Recognition

as a platform to measure their success.


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There are basically two techniques adopted for obtaining information: Primary Data and

secondary Data.

Primary Source: Data observed or collected directly from first-hand experience by the

researcher for the purpose of research is called primary data and the source of that data is

primary source.

Survey Method: The method oSf collection of primary data will be direct personal interview

with the help of a structured questionnaire.

Secondary Source: It was collected from internal sources. The secondary data was collected on

the basis of organizational file, official records, news papers, magazines, and management

books, preserved information in the companys database, employee handbook and website of the

company.

1.3 Limitations of the Study:The main limitations of this project are as follow:

Due to lack of time researcher had to restrict the research to a particular area i.e. Delhi

and NCR.

Many people are not interested to fill up the questionnaire.

It is difficult to find the right respondent according to requirement of research.

HR department of the company is unwilling to support as recruitment of financial

consultants is not considered as an HR function. It is considered as a marketing

function.

Regarding the making of questionnaire we were bound to make on the basis of the

companys selection criteria only. So we are not able to get more information.

Consumer perception towards selling insurance was a major bottleneck as this sector is

not considered respectable


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2. INDUSTRY PROFILE

Insurance- an Overview:Insurance, in law and economics, is a form of risk management

primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitabletransfer of the company selling the insurance. The insurance rate is a factor used to determine the

amount, called the premium, to be charged for a certain amount of insurance coverage Risk

management the practice of appraising and controlling risk has evolved as a discrete field of

study and practice.

2.1 Principle of insurance:Commercially insurable risks typically share seven common

characteristics.

1. A large number of homogeneous exposure units. The vast majority of insurance

policies are provided for individual members of very large classes. Automobileinsurance, for example, covered about 175 million automobiles in the united state in

2004. The existence of a large number of a large number of homogeneous exposure

units allows insurers to benefit from the so-called low of large number, which in

effect states that as the number of exposure units increase, the actual results to this

criterion. Lloyds of London is famous for insuring the life of actors, actresses and

sports figures. Satellites launch insurance cover events that are infrequent. Large

commercial property policies may insure exceptional properties for which there are

no homogeneous exposure units. Despite failing on this criterion, many exposures

like these are generally considered to be insurable.

2. Define Loss. The event that gives rise to the loss that gives rise to the loss that is

subject to insurance should at least in principle, take place at a known time, in a

known place, and from a known cause. The classic example is death of an insured on

a life insurance policy. Fire, automobile accidents, and worker injuries may all easily

meet this criterion .other types of losses may only be definite in theory. Occupational

disease, for instance, may involve prolonged exposure to injurious conditions where

no specific time, place or cause is identifiable. Ideally, the time place and cause of a

loss should be clear enough that a reasonable person. With sufficient information,

could objectively verify all three elements.

3. Accidental Loss. The event that constitutes the trigger of a claim should be

fortuitous, or at least outside the control of the beneficiary of the insurance. The loss

should be pure in the sense that it results from an event for which there is only the

opportunity for cast. Events that speculative elements, such as ordinary business risks,

are generally not considered insurable.


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4. Large Loss. The size of the loss must be meaningful from the perspective of the

insured. Insurance premiums need to cover both the expected cost of losses, plus the

cost of issuing and administering the policy, adjusting losses, and supplying the

capital needed to reasonably assure that the insurer will be able to pay claims. For

small losses these latter costs may be several time the size of the protection offered

has real value to a buyer.

5. Affordable premium. If the likelihood of an insured event is so high, or the cost of

event so large, that the resulting premium is large relative to the amount of protection

offered, it is not likely that anyone will buy insurance, even if on offer. Further, as the

accounting profession formally recognize in financial accounting standard, the

premium cannot be so large that there is not a reasonable chance of a significant loss

to the insurer. If there is no such chance, the transaction may have the form of

insurance, but not the substance.

6. Calculable Loss. There two elements that must be at estimable, if not formally

calculable: The probability of loss, and the attendant cost. Probability of loss is

generally an empirical exercise, while cost has more to do with the ability of a

reasonable person in possession of a copy of the insurance policy and a proof of loss

associated with a claim presented under that policy to make a reasonably definite and

objective evaluation of the amount of the loss recoverable as a result of the claim.

7. Limited risk of catastrophically large losses. The essential risk is often aggregation.

If the same event can cause losses to numerous policyholders of the same insurer, the

ability of that insurer to issue policy becomes constrained, not by the factorssurrounding the individual characteristics of a given policyholder, but by the factors

surrounding the sum of all policyholder so exposed. Typically, insurers prefer to limit

their exposure to a loss from a single event to some small portion of their capital base,

on the order of 5 percent. Where the loss can be aggregated, or an individual policy

could produce exceptionally large claim, the capital constraint will restrict an

insurers appetite for additional policyholders. The classic example is earthquake

insurance, where the ability of an underwriter to assure a new policy depends on the

number and size of the policies that it has already underwriter. Wind insurance in

hurricane zones, particularly along coast lines, is another example of this

phenomenon. In extreme cases, the aggregation can affect the entire industry, since

the combined capital of insurers and reinsurers can be small compared to the needs of

potential policyholder in areas exposed to aggregation risk. In commercial fire

insurance it is possible to find single properties whose total exposed value is well in

excess of any individual insurers capital constraint. Such properties are generally


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shared among several insurers, or are insured by a single insurer who syndicates the

risk into the reinsurance market.

2.2 The concept of Indemnification: The technical definition of indemnity means to make

whole again. There are two types of insurance contracts: 1) an indemnity policy and 2) a payon behalf or on behalf of policy. The difference is significant on paper, but rarely material

practice.

Under the same situation, a pay on behalf policy, the insurance carrier would pay the claim and

the insured (the homeowner) would not be out of pocket for anything. Most modern liability

insurance is written on the basis of pay on behalf language.

An entity seeking to transfer risk (an individual, corporation, or association of any type, etc.)

becomes the insured party once risk is assumed by an insurer the insuring party, by means of

a contract, called an insurance policy. Generally, an insurance contract includes, at a minimum,the following elements: the parties(the insurer, the insured, the beneficiaries), the premium, the

period of coverage, the particular loss events covered, the amount of coverage(the amount to be

paid to the insured or beneficiary in the event of a loss), and exclusions (events no covered). An

insured is thus said to be indemnified against the loss events covered in the policy.

When insured parties experience a loss for a specified peril, the coverage entitles the

policyholder to make a claim against the insurance for covered amount of loss as specified by

the policy. The free paid by the insured to the insurer for assuming the risk is called the

premium. Insurance premiums from many insureds are used to fund accounts reserved for later

payment of claims-in theory for a relatively few claimants-and for overhead costs. So long as aninsurer maintains adequate funds set aside for anticipated losses (i.e., reserves), the remaining

margin is an insurers profit.

2.3 The Business Model:

Profit=earned premium + investment income incurred loss - underwriting expenses.

Insurers make money in two ways(1)through underwriting process by which insurers select the

risk to insure and decide how much in premiums to charge for accepting those risk and (2) by

investing the premiums they collect from insureds.

The most complicated aspect of the insurance business is the underwriting of policies. Using a

wide assortment of data, insurers predict the likelihood that a claim will be made against their

policies and price products accordingly. To this end, insurers use actuarial science to quantify the

risk they are willing to assume and the premium they will charge to assume them. Data is

analyzed to accurately project the rate of future claims based on a given risk. Actuarial science

uses statistics and probability to analyze the risks associated with the range of fairly covered. Up


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on termination of a given policy, the amount of premium collected and the investment gain there

on minus the amount paid out in claims is the insurers underwriting profit on that policy. Of

course, from the insurers perspective, some policies are winners (i.e., the insurance pays out less

in claims and expenses than it receives in premiums and investment income) and some are losers

(i.e., the insurer pays out more in claims and expenses than it premiums and investment income).

An insurance underwriting performance is measured in its combined ratio. The loss ratio

(incurred losses and loss-adjustment expenses divided by net earned premium)is added to the

expense ratio(underwriting expenses divided by net premium written) to determine the

companys combined ratio. The combined ratio is a reflection of the companys overall

underwriting profitability. A combined ratio of less than 100 percent indicates underwriting

profitability, while anything over 100 indicates an underwriting loss.

Insurance companies also earn investment profits on float. Float or available reserve is the

amount of money, at hand at any given moment, that an insurer has collect in insurance

premiums but has not been paid out in claims. Insurers stare investing insurance premiums assoon as they are collected and continue to earn interest on them until claims are paid out.

Property and casualty insurers currently make the most money from their auto insurance line of

business. Generally better statistics are available on losses and underwriting on this line of

business has benefited greatly from advance in computing.

Finally claims and loss handling is the materialized utility of insurance. In managing the claims-

handling function, insurers seek to balance the elements of customer satisfaction, administrative

handling expenses and claims overpayment leakages.

2.4 Conceptual Framework:

What is life insurance? Life insurance is a contract providing for the payment of a sum of

money to the person assured or failing him to the person entitled to receive the same on the

happening of certain event.

Uncertainty of death is inherited in human life. It is this rise to the necessity for some form of

protection against the financial loss arise the death. The object of insurance is normally to

provide-

Family protection

Provision for old age

Why Life Insurance? We have required thinking twice before taking the plunge into buying life

insurance. Is buying insurance is necessity now? Spending an extra amount as premium at


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regular intervals where do you not see immediate benefits does not see a necessity at the

moment. May be later

Well we could be wrong. Buying insurance cannot be compared with any other form of

investment. Insurance gives us a life long benefits and the returns will definitely come but only

when we need it the most i.e. at the right time. Besides buying insurance early in life is one ofthe wise decision you could take.

Insurance is not about how much more it can offer you when the stock market is at the peak. It

may not be an attractive investment option. But weight pros and cons consider how much more it

can offers at a small price.

Most important of all it provides you with the unique sense of security that no other form of

investment provides. It gives us a sense of financial support. Especially during that time of crises

irrespective of the fluctuation in the stock market. Insurance provides for our career goals right

from the childhood years.

If the earning member of the family is no more our childs education need will not suffer. In fact

his higher education too will be provided for. We need to spend sleepless night thinking about

how to save for childs marriage. Life insurance will take care of that typical once in a life time

spending on marriage.

An accident or a disability may be devastating but a life insurance policy can be of utmost

support for the family during such times too. Beside it provide for addition benefits such as

bonuses. We need not worry about retirement years. The rising prices, taxes and your lifestyle

will be taken care of easily. And we can relax and spend our old age in comfort and peace.

Life insurance todays play a major role in once life at various stages. Considering the benefits it

offers one cannot give a thought to buying an insurance policy the earliest.

Need of Insurance:The need for life insurance comes from the need to safeguard our family. If

we care of our familys need you will definitely consider insurance.

Today insurance has become from even more important due to the disintegration of the prevalent

joint family system, a system in which a number of generations co-existed in harmony, a system

in which a sense of financial security was there as were more earning member.

Times have changed and nuclear family has emerged. Apart from other pitfalls of a nuclear

family, a high sense of insecurity is observed in it today besides, the family has shrunk. Need are

increasing with time and fulfillment of these needs is big question mark.


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How will we be able to satisfy all those needs? Better lifestyle, good education, and your long

desired house. But again- we just cannot fritter away earnings. We need to save a part of it for

the future too-a wise decision. This is where insurance helps us.

Factors such as fewer numbers of earning members, stress, increasing competition, higher

ambitious etc are some of the reasons why insurance has gained importance and where insuranceplays a successful role.

Insurance provides a sense of security to the income earner as also to the family. Buying

insurance frees the individual from unnecessary financial burden that can otherwise make him

spend sleepless night. The individual has a sense of consolidation that he has sometime to fall

back on.

From the very beginning of your life, to your retirement age insurance can take care of all your

needs. Your child needs good education to mould him into citizen. After his schooling he need to

go for higher education, to gain a professional edge over the others- a necessity in this age wherecut throat competition is the rule. His career needs have to be fulfilled.

Insurance is must also because of the uncertain future advertise of life. Accidents, illness,

disability etc are the facts of life, which can be extremely devastating. OTHER than the

hospitalization, medication bills these may run up its the aftermath of the accident, the physical

well being of the individual that has to taken into consideration. Will the individual be in a

position to earn as before? A pertinent question, but if he is not? Disability can be taken care of

by insurance. Your family will not have to go through the grind due to your present inability.

Moreover, retirement, an age when every individual has almost fulfilled his responsibilities and

looks forward to relaxing can be painful if not planned properly, Have we consider the increasing

inflation and taxes? Will our investment offer you attractive return under such circumstances?

Will it take of your family after us? An insurance policy will definitely take care of these things.

Insurance today has opened up new vistas a lot of potential. Considering how dependent our

agriculture system is on the monsoon, he farmer sees a dim future. The uncertainty of the

monsoon too can be taken care of by insurance. Looking at the advantage of the insurance policy

a number of farmers have gone into insurance. Insurance has become necessity today.

When is the right time to buy a insurance? Buying life insurance cannot ever be compared

with other investment decision since it is very much contrast with those stock market investment

where you wait for the right time to buy and sell. Neither is this like receiving tips on particular

scrip doing the market and holding great future prospects.

Buy life insurance at the earliest. Do we know when you will fall ill? Are we sure about future

income earning potential? Are we sure we will never meet an accident? If not, buy insurance

now.


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This is because the future is always uncertain. Just as buying insurance is a necessary so also

buying insurance early in life is important too. With proper financial planning one can work out

as to how much money an individual is entitled to after the end of a particular term. A policy that

fulfills your childs future education needs would have to be timed appropriately so that he

receives the policy amount at the time when he needs it the most.

What does the Life Insurance provide?

The proceeds accruing from life insurance policy can be utilized for.

Final expenses resulting from death.

Guaranteed maintenance of lifestyle.

Replacement of income.

Mortgage or Liquidation payment.

Cost of education.

Estate and other taxes.

Continuity and security of interest.

Why is insurance Superior to other form of saving?

An immediate estate is created in favor of policyholder.

Protection in cause of death and accidents.

Liquidity in case of need- easy loans is available.

Tax relief- income tax, wealth tax etc.

Policies can be taken under M.P.W Act 1874, to protect against creditors.


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3. ABOUT THE COMPANY:

3.1 Fact Sheet:

HDFC Standard Life Insurance

Fact sheet As of March 31th, 2010

Founded 2000

Started Operations 14th

August, 2000

Headquarters Mumbai, India

World Wide Web Address http://www.hdfcinsurance.com

Chairman Mr. Deepak S. Parekh

Managing Director & CEOMr. Deepak M Satwalekar

Paid-Up CapitalRs. 1796 crore

Employees14,506

Number of Offices595

Number of Cities720


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3.2 The Management:

Board of Directors:

Mr. Deepak S Parekh-Chairman, HDFC Standard Life Insurance

Mr. Deepak M Satwalekhar-Managing director and chief executive officer

Mr. Paresh Parashis-Executive Director and chief operating officer

Ms. Sharad Sangal- General Manager, Human Resources and Administration

Mr. Vikram Mehta- General Manager, Sales and Marketing

Mr. Prasum Gajri-Chief Investment Officer

3.3 Corporate Office:

HDFC Standard Life Insurance Company Ltd.

Trade Star 2nd floor, A Wing

Junction of Kandivita and M. R. Road

Andheri- Kurla Road,

Andheri (East), Mumbai-400059

Tel No-022-67516666

Fax No-022-28222414

[email protected]

Website-www.hdfcinsurance.com


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3.4 Company profile:

HDFC Standard Life Insurance Company Limited was one of the first companies to be granted

license by the IRDA to operate in life insurance sector. Reach of the JV player is highly rated

and been conferred with many awards. HDFC is rated AAA by both CRISIL and ICRA.Similarly, Standard Life is rated AAA both by Moodys and Standard and Poors. These reflect

the efficiency with which HDFC and Standard Life manage their asset base of Rs. 15,000 Cr and

Rs. 600,000 Cr. Respectively.

HDFC Standard Life Insurance Company Ltd was incorporated on 14th

August 2000. HDFC is the majority stakeholder in the insurance JV with

74% stake holding. Mr. Amitabh Choudhary is the MD and CEO of the

venture.

HDFC Standard Life Insurance Company Ltd. is one of Indias leading

Private Life Insurance Companies. It offers a range of individual and group insurance solutions.

It is a joint venture between Housing Development Finance Corporation Limited (HDFC Ltd.)

Indias leading housing finance institution and the Standard Life Assurance Company, a leading

provider of financial services from the United Kingdom. Both the promoters are known for their


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ethical dealings and financial strength and are thus committed to being a long-term player in the

life insurance industry- all important factors to consider when choosing your insurer.

HDFC Standard Life Insurance Company Limited. is one of India's leading private insurance

companies, which offers a range of individual and group insurance solutions. It is a joint venture

between Housing Development Finance Corporation Limited (HDFC Limited), India's leading

housing finance institution and a Group Company of the Standard Life Plc, UK. As on February

28, 2009 HDFC Ltd. holds 72.43% and Standard Life (Mauritius Holding) 2006, Ltd. holds

26.00% of equity in the joint venture, while the rest is held by others.

Mission statement:We aim to be the top insurance company in the market. This does not just

mean to be the largest or the most productive company in the market; rather it is a combination

of several things like-

Customer service of the highest order

Value for money for customers

Professionalism in carrying out businessOur Vision: The most successful and admired life insurance company, which means that we arethe most trusted company, the easiest to deal with, offer the best value for money, and set the

standards in the industry.The most obvious choice for all.

Logo:

Slogan: SAR UTHA KE JIYO


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4. THE STUDY OF THE PRODUCTS AVAILABLE IN COMPANY:

4.1 Traditional /Conventional plan: The conventional Insurance policies have a fixed

relationship between the premium and the sum assured.

Term assurance planEndowment assurance plan

Money back plan

Children plan

4.2 UNIT-linked insurance plan: UNIT-linked insurance plan which is popularly known as

'ULIP' is the flavor of the season. ULIP allows the policyholder to choose his own sum assured

within certain limits, for any given premium. The policyholder may then have the right to adjust

his sum assured up or down, again within certain limits according to his circumstances.

a .Young star super

b .Endowment super

c. Pension super

Unit Linked Insurance Polices (ULIPS)

Unit linked guidelines were notified by IRDA on 21st December 2005. The main intent of the

guidelines was to ensure that they lead to greater transparency and understanding of these

products among the insured, especially since the investment risk is borne by the policyholder. Itis the endeavor of IRDA to enable the buyer to make the most informed decision possible whenplanning for financial security. We hope the following FAQs will enable a better insight to all

buyers about the character and features of Unit linked Products.

1. What is a ULIP?ULIP is an abbreviation for Unit Linked Insurance Policy. A ULIP is a life insurance policywhich provides a combination of risk cover and investment. The dynamics of the capital market

have a direct bearing on the performance of the ULIPs. Remember that in a ULIP, theInvestment risk is generally borne by the investor.

2. What is a Unit Fund?The allocated (invested) portions of the premiums after deducting for all the charges andpremium for risk cover under all policies in a particular fund as chosen by the policy holders are

pooled together to form a Unit fund.

3. What is a Unit?It is a component of the Fund in a Unit Linked Policy.


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4. What Types of Funds do ULIP Offer?Most insurers offer a wide range of funds to suit ones investment objectives, risk profile andtime horizons. Different funds have different risk profiles. The potential for returns also varies

from fund to fund. The following are some of the common types of funds available along with

an indication of their risk characteristics.

5. Are Investment Returns Guaranteed in a ULIP?Investment returns from ULIP may not be guaranteed. In unit linked products/policies, theinvestment risk in investment portfolio is borne by the policy holder. Depending upon the

performance of the unit linked fund(s) chosen; the policy holder may achieve gains or losses onhis/her investments. It should also be noted that the past returns of a fund are not necessarily

indicative of the future performance of the fund.

6. What are the Charges, fees and deductions in a ULIP?ULIPs offered by different insurers have varying charge structures. Broadly, the different typesof fees and charges are given below. However it may be noted that insurers have the right to

revise fees and charges over a period of time.

Premium Allocation Charge:This is a percentage of the premium appropriated towardscharges before allocating the units under the policy. This charge normally includes initial

and renewal expenses apart from commission expenses.

Mortality Charges: These are charges to provide for the cost of insurance coverageunder the plan. Mortality charges depend on number of factors such as age, amount

of coverage, state of health etc.

Fund Management Fees:These are fees levied for management of the fund(s) and arededucted before arriving at the Net Asset Value (NAV).

Policy/ Administration Charges:These are the fees for administration of the plan andlevied by cancellation of units. This could be flat throughout the policy term or vary at apredetermined rate.

Surrender Charges:A surrender charge may be deducted for premature partial or fullencashment of units wherever applicable, as mentioned in the policy conditions.

Fund Switching Charge: Generally a limited number of fund switches may be allowedeach year without charge, with subsequent switches, subject to a charge.

Service Tax Deductions: Before allotment of the units the applicable service tax isdeducted from the risk portion of the premium. Investors may note that the portion of the premium after deducting for all charges and premium for risk cover is utilized for

purchasing units.


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7. What should one verify before signing the proposal?

One has to verify the approved sales brochure for all the charges deductible under the policy payment on premature surrender features and benefits limitations and exclusions lapsation and its consequences other disclosures Illustration projecting benefits payable in two scenarios of 6% and 10% returns as

prescribed by the life insurance council

8. How much of the premium is used to purchase units?

The full amount of premium paid is not allocated to purchase units. Insurers allot units on the portion of the premium remaining after providing for various charges, fees and deductions.

However the quantum of premium used to purchase units varies from product to product. Thetotal monetary value of the units allocated is invariably less than the amount of premium paid

because the charges are first deducted from the premium collected and the remaining amount isused for allocating units.

9. Can one seek refund of premiums if not satisfied with the policy, after purchasingit?

The policyholder can seek refund of premiums if he disagrees with the terms and conditions of

the policy, within 15 days of receipt of the policy document (Free Look period). Thepolicyholder shall be refunded the fund value including charges levied through cancellation of

units subject to deduction of expenses towards medical examination, stamp duty andproportionate risk premium for the period of cover.

10.What is Net Asset Value (NAV)?NAV is the value of each unit of the fund on a given day. The NAV of each fund is displayed onthe website of the respective insurers.

11.What is the benefit payable in the event of risk occurring during the term of thepolicy?

The Sum Assured and/or value of the fund units is normally payable to the beneficiaries in the

event of risk to the life assured during the term as per the policy conditions.

12.What is the benefit payable on the maturity of the policy?The value of the fund units with bonuses, if any is payable on maturity of the policy.

13.Is it possible to invest additional contribution above the regular premium?


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Yes, one can invest additional contribution over and above the regular premiums as per theirchoice subject to the feature being available in the product. This facility is known as TOP UP

facility.

14.Whether one can switch the investment fund after taking a ULIP

policy?Yes. SWITCH option provides for shifting the investments in a policy from one fund toanother provided the feature is available in the product. While a specified number of switches are

generally effected free of cost, a fee is charged for switches made beyond the specified number.

15.Can a partial encashment/withdrawal be made?Yes, Products may have the Partial Withdrawal option which facilitates withdrawal of a

portion of the investment in the policy. This is done through cancellation of a part of units.

16.What happens if payment of premiums is discontinued?

a) Discontinuance within three years of commencement If all the premiums have not been

paid for at least three consecutive years from inception, the insurance cover shall ceaseimmediately.

Insurers may give an opportunity for revival within the period allowed; if the policy is notrevived within that period, surrender value shall be paid at the end of third policy anniversary or

at the end of the period allowed for revival, whichever is later.

b) Discontinuance after three years of commencement -- At the end of the period allowed forrevival, the contract shall be terminated by paying the surrender value. The insurer may offer to

continue the insurance cover, if so opted for by the policy holder, levying appropriate chargesuntil the fund value is not less than one full years premium. When the fund value reaches an

amount equivalent to one full years premium, the contract shall be terminated by paying thefund value.

17. What information related to investments is provided by the Insurer to the policyholder?The Insurers are obliged to send an annual report, covering the fund performance during

previous financial year in relation to the economic scenario, market developments etc. whichshould include fund performance analysis, investment portfolio of the fund, investment strategies

and risk control measures adopted.


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4.3 Comparison between Unit Linked Plans and Traditional Plans:

1. Description: Unit Linked Insurance Plans offered by insurance companies allow policyholders to direct part of their premiums into different types of funds (equity, debt, money market,

hybrid etc.) Here the risk of investment is borne by the policyholder.

Traditional insurance plan Conventional Plans. They usually invest in low risk return options

and offer guaranteed maturity proceeds along with declared bonuses.

2. Flexibility of investment: Unit Linked Plans give the investor flexibility to invest as per his

risk profile, financial commitments and convenience. The investor can choose to invest either inequity, or in debt or in hybrid fund and even change his investment strategy.

But the conventional plans do not allow him to choose investment avenues. The funds areinvested as per the strategy and discretion of the company.

3. Transparency: Most Unit Linked Plans allow the investor to track his portfolio. They also

regularly intimate regarding the percentage of the premium that is invested along with thecharges levied. The investors are also kept informed about the value and number of fund units

that the investor holds.In conventional plans, the premiums are invested in a common 'with profits' fund and therefore

the investor cannot track his individual portfolio.

4. Maturity benefits payout: At the time of maturity the investor redeems the units collected atthe prevailing unit prices. Some plans also offer loyalty or additional units annually or at the time

of maturity.At the time of maturity the conventional investor gets the sum assured plus bonuses, if applicable

in the plan.

5. Partial withdrawal: Unit Linked Plans allow the investor to make withdrawals from his fund,provided the fund does not fall below the minimum fund value and subject to other conditions.

Conventional plans do not allow the investor to withdraw part of your fund. Instead, somepolicies offer the investor the facility to take a loan against his investment.

6. Switching options: The investor can change his investment fund decision by switching

between the funds as being offered by the policy.Not available since the investment decision is taken by the insurance company.

7. Charges structure: Unit Linked Plans specify the charges under various heads.Conventional plans do not specify the charges involved.


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5. COMMUNICATION MIX:

With the advent of private players in the insurance, companies resort to rampant

promotion. Promotion mix for this sector is as follows:

Advertisement: Advertisement can be done through the telecast media, broadcast media

and print media. Insurance companies have been making optimal use of all the three

kinds. Use of World Wide Web, as media is almost negligible and will not be very

frequent in the near future considering the fact that the majority of customer base of these

companies is not yet exposed to the Internet. The telecast media has been the most

effective of all in case of the insurance sector. Most of the companies have their separate

advertising section to take care of this aspect. An important consideration while making

the decision as to the selection of the media is budgetary constraint. Since the insurance

companies work on a large scale, usually this constraint does not stand as an obstacle.

Publicity: It is a device to promote business without making any payment and therefore

it could be also called as unpaid form of persuasive communication bearing a high rate of

sensitivity. Developing support with the media is an important aspect of publicity. This

makes it essential that the PR officers working in the insurance organizations maintain

contacts with the media personnel, organize press conference, and offer small gifts and

memento to them. These days LGD marketing is gaining popularity the world over. It

also can be applicable here. At the apex and regional levels, the PROs bear the

responsibility of projecting positive image of the organization. Thus it is necessary to

select suitable personnel for this. They should be in particular taught to deal with people,

simple things like talking, greeting etc.

Sales Promotion: Incentives to the end users for taking the policy play an important role

in promoting the insurance business. Since the insurance business is also related to

achieving of a particular target, it is pertinent that the policymakers assign due weight age

to the same. The offering of small gifts during a particular period, the rebate, discount,

bonus can increase business of organization by leaps and bounds. Besides, there can be

gifts for the insurance agents also.

Personal Selling: Personal selling in case of the insurance organizations is quite

important considering the existence of the insurance agents spread at all levels. Selection

of these agents, their training is responsibility of the organization. There is difference in

urban and rural market. Rural customers might be uneducated / uninformed etc.

compared to the urban customer. Hence the organizations will have to make selections of

the rural and urban agents accordingly.


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Word of Mouth: Word of mouth communications result into wider publicity, which

substantially sensitize the process of influencing the impulse of users/prospects of the

insurance services. They satisfied group of customers, opinion leaders, the social

reformists, the popular personalitys acts as word of mouth communicators. The

advertisement slogans may be insensitive, the publicity measures may be ineffective but

the positive feelings of friends and relations communicated cannot be ineffective. This

makes it clear that the most important thing in the promotion of any business is the

quality of services.

Telemarketing: With the development of satellite communication facilities and with the

expansion of the television network, we find telemarketing gaining popularity the world

over. The insurance organizations in general need to promote telemarketing. The foreign

insurance companies have been assigning due weight age to this and in India this is

beginning to gain importance with the advent of competition in this sector. The

telemarketer is supposed to be well aware of the telephonic code so that the task ofsatisfying the customers/their queries will not consume much of time.

World Wide Web: In banking as well as insurance, more and more importance is being

given to online contact facilities whereby complaints/comments could be sent through an

email. Email is fastest written mode of communication and since it has been recognized

legally, its use to clear doubts has been in full swing.


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6. CHANNAL DEVELOPMENT:

Channel development is basically to convince the potential customer to become advisors. Now

these advisors will convince some other people and that how channel is made. Now the channel

development involves a recruitment & selection process, which a person has to undergo in order

to become an advisor.

HDFC Standard Life Insurance has identified individual agents as its primary channel of

distribution. The Company places a lot of emphasis on its selection process. The agent advisors

are trained in-house to ensure optimal control on quality of training.

HDFC Standard Life Insurance invests significantly in its training programme and each agent is

trained for 50 hours stipulated by the IRDA before beginning to sell in the marketplace. Training

is a continuous process for agents at HDFCSLI and ensures development of skills and knowledge

through a structured programmes spread over 500 hours in two years. This focus on continuous

quality training has resulted in the company having amongst the highest agent pass rate in IRDA

examinations and the agents have the highest productivity among private life insurers.

Having set a best in class agency distribution model in place, the company is spearheading a

major thrust into additional distribution channels to further grow its business. The company is

using a five-pronged strategy to pursue alternative channels of distribution. These include the

franchisee model, rural business, direct sales force involving group insurance and telemarketing

opportunities, bank assurance and corporate alliances.

6.1 Recruitment Process in HDFC Standard Life: Before an organization begins recruiting

applicants, it should form a checklist of question, which outlines a chronological sequence for

the recruitment and selection process. Same is to be done with the HDFCSLI recruitment and

selection procedure, it also forms a checklist of questions, which are termed as the initial starter

for the recruitment procedure. The questions are given below with the specifications along with

them:

1. What kind of the job is to be filled?

This question has a wide spectrum of answers. Hence, to answer this question in to tally

following sub-questions are to be answered.

Name of the job: Life Insurance Consultant Who is the boss:No boss Job objective: To sell life insurance policies or product and achieve sales targets. How far the job is personally responsible for achieving results: Job holder will not be

responsible for achieving the sales targets because in this kind of the job there is no salary

paid, no boss over them and it is totally commission based job, so it is on the consultantwhether he think himself responsible or not.


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This job is principally dealing with the end users who are interested to be insured.

HDFCSLI looking for the persons who fulfill this job for life long because life

insurance business is a life long business and will not end till the human being is there

on the earth.

Salary and remuneration: It is totally commission based job and HDFCSLI do not provide any fixed salary for this. There is much scope of getting a huge collection of

incentives in the form of gifts, trips and other service. After getting the answer of these

questions, we will move towards next question.

2. What sort of person would do the job successfully?

It is very important to know that what sort of person would do this job of Life insurance

consultant successfully. HDFCSLI specifies some qualities, which must be there in a life

insurance consultant. These qualities suggest some skills that are listed below:

Confidence: This is the main skill, which a consultant must contain because till he willnot confident, he would not be able to convince the different kind of people.

Self-motivation: Self motivation is an essential quality, which must be, possess by aninsurance a consultant because in this job, rejection is must more than acceptance, so an

consultant has to be very strong from the heart and should not depressed soon. Persuasion: It is one of the very effective qualities, which must be there in an insurance

consultant. It shows the perceiving ability of an consultant for his job. Urge to be financially independent: For a job which is commission based, an urge

should be their in an consultant to become financially independent, then only he would beable to generate more money for himself and for the company.

Relationship skills: This very necessary element of quality shown in a consultant by theHDFCSLI because these skills help the consultant to make good relation from his

customers, which is very necessary for the future of the company

3. Where will this person be found?

Now, we know what the job is and what kind of person is required for the job-only we

need to find this person. The persons for this kind of job of a life insurance consultant can

be found at many places through many resources but most of the insurance consultant

chosen from the relations and with direct contacts. The following are the sources fromwhere we can find out the persons who can become good life insurance consultant:

Employment agencies: Employment agencies can be used as a wide source for thepersons to this job.

Advertising: It also plays a very effective role in finding of the persons for becoming aninsurance consultant. HDFCSLI also use this source.


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Educational institutes: They are also one of the main sources for the company to findout the person as a consultant.

Direct contact with people: HDFCSLI also uses direct contacts with people and offers business opportunity to them, company representatives contact to the persons and

explains business opportunity presentation to them.

4. Which person is to be recruited?The simple answer to this is that the one who fits the specification and who has the

essential characteristics as defined should be recruited. This implies a structured approach

of three steps. These are:

First, compare companys specification for a consultant with that of the prospects

specifications and remove all these who do not meet the essential criteria.

Secondly, move on to those areas where the Measuring Instruments and an assessment

at interview are needed. For instance,

Education, which should be at least 12TH pass. Age, above 18 years. Married people are given more importance. Doesnt matter male or female. He / She should possess high ambitious and zeal to become financially independent.

Thirdly, involves the identification pattern of behavior, which will helping in forming

judgments. After all three steps have been followed and care has been taken to see thatthe candidate fits into the specific job requirements one can be sure of choosing the right

candidate for the right job.

6.2 Selection and Placement Procedure of Financial Consultant: As we know that

Recruitment involves seeking and attracting a pool of people, from which qualified candidates

for the job vacancies can be chosen. Recruitment sets out the necessary stages to clarify what

kind of person is required, where he/she might found and how to make right choice.

Recruitment of life insurance consultant is also a very impressive criterion because in this

process we need to recruit and select those persons who bear some special characteristics, which

are very necessary to sell insurance. Life insurance is an intangible product and it needs

insurance advisors who are having tremendous skills to sell an intangible product.

The key to good selection is preparation. So many people are found of their ability to pick a good

sales person and so often, that person is good but not at the particular job which needs to be

done. It is vital to be clear about what job needs doing and what kind of person would do it best;


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and then to find that person. Once the plan has been decided, the choice of candidate should be

made carefully.

The effectiveness of the unit manager is dependent to great extent on the effectiveness of the

team of advisors supporting him, because an advisors works under a unit manager. So it is very

important to recruit a very good team of life insurance advisors who can give their best toincrease the effectiveness and the profit of the company. HDFCSLI give very much stress on it

and to recruit only those people as a life insurance advisor who is having some key skills

specifies by the company. Further we will show the recruitment and selection procedure of life

insurance consultants in HDFCSL insurance company ltd, and try to analyze whether it is the

best process of recruitment or company can do certain new modifications to enhance their

recruitment processor for the increment of companys effectiveness. From the next page, we will

see the recruitment and selection procedure of life insurance consultants.

A selection system is a set of successive screens at any of which an applicant may be dropped

from further consideration. The process of selection of insurance consultant differs fromcompanies to companies depending upon the requirement. In HDFCSLI the applicant goes

through various stages, the chances of selection get better as more and more stages are cleared.

Selection procedure: The following selection procedure is used by for the selection of life

insurance consultant in HDFC Standard Life insurance company-

Preliminary interview:In this interview the applicant have face-to-face interaction with

the respective Unit Manager and clear out all queries and doubts about job. After this

interview session, the prospects give his conformation whether he is interesting to join

the organization or not. Formal application: After the confirmation of the prospects the next step is to filling up

of application form with the submission of all necessary documents that are listed below:

y Birthcertificate (10th class passing certificate, driving license, etc).

y Address proof (ration card, voter card, telephone bill, etc).

y 10 passport size color photographs.

y Highest qualification certificates (mark sheet).

y A payment of Rs. 825 towards examination fees.

y After checking the form and all documents the operations department give its confirmation that

the prospects is genuine and is subject for further process.

Declaration of date of training and venue:After the previous step, operation department give

the details about the training date and about the venue of the training. The training is a necessary

part of the selection procedure. This training is under the curriculum of Insurance Regulatory

And Development Authority (IRDA). The duration is 100 hours.

Full time training (10:00 AM to 05:00 PM)


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Testing: After completing the training conducted by IRDA, a test is conducted on the samevenue. This test is taken based on the training and contains the syllabus, which is prescribed by

the IRDA. The test and previous training is necessary for every body that wants to become aninsurance advisor.

Issue of license: After passing out the test conducted by IRDA, a license is issued from

the IRDA. This license is the proof for the insurance advisor and an advisor can start hiswork just after getting this license. Getting the license is the last step in selectionprocess.

Assignment to the SDM/CDM :The following advisor is assigned to a unit manager towhom he has to report about his work and about any query concerning about insurance

and about the company.The above are the following steps which are use to select an insurance advisors/agents. The

license issued by the IRDA is the only authorized power. This gives the person a right to do

insurance. This license is supported to renew after every three years.


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Recruitment Process of FCs at HDFC SLIC:

Check eligibility criteria

Fill up of Agency form alog with Documents

IRDA Training (50 hrs)

IRDA Exam

Fail Pass

Exit Product Training

Traditional Pr. ULIP Product

Internal Assessment

Fail Pass

Exit Certification


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7. DEVELOPMENT OF FINANCIAL CONSULTANT:

Prosperity of an insurance company mainly depends upon how they maintain their financial

consultants and how they get back full amount of efforts from the financial consultants so that

the financial consultants can lead an insurance company to enjoy a competitive advantage over

other insurance companies. For this purpose the insurance company should do some additional

training program to their financial consultants so that they can read the customers perception and

accordingly they can allot different financial plans to different customers. For making the

financial consultants fitted for this objective, the company should undertake the following

methodologies---

The financial consultants should understand that how to set up discriminant

analysis to screen potential good customer (low risk) from bad customer (highrisk) and turn up the new customer in low risk and high risk. So that he can able

to provide the Company product according their risk.

Financial Consultant should understand the correlation analysis so that he can

understand that which factor more affecting sales of the Company.

Financial consultant should understand that how to make a regression analysis to

calculate the risk of a customer.

. The financial consultants should understand about the fund management.

The financial consultants should understand about the measurement of risk andreturn of each fund available in HDFC Standard Life Insurance Company.


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7.1 Discriminant analysis: A Financial consultant can explain his/her customers only if he ableto classify customer under which category i.e. whether he/she belongs to high risk or low risk

group. If he is able to classify customer as under high risk group, then he should go to ULIP because the return of the ULIP is subject to the market risk, otherwise he should go for

traditional plans. There are many factors influenced while a customer get the insurance policy

divide him/her in to either high risk or low risk such as income, no of dependent members, ageetc.

For this purpose, I use discriminate analysis technique among 58 sample size through which afinancial consultant may identify his customers whether he belongs to high risk or low risk and

accordingly he may go for ULIP if he belongs to high risk group or he may go traditional plans ifhe belongs to low risk group.

Q. HDFC Standard Life Insurance Company wanted to give the insurance policy to 58 customers

of alwar rajasthan. The company wanted to turn out to be low risk and high risk customer.These data of 58 customers are given a table. I will perform a discriminant analysis and advise

HDFC Standard Life Insurance Company on how to set up its system to screen potential goodcustomer (low risk) from bad customer( high risk). In particular, we will build a discriminant

function and find out:1.The percentage of customer that it is able to classify correctly.

2. Statistical significance of the discriminant function.3. Which variable (age, income, no. of family member) are relatively better in discriminanting

between low risk and high risk applicants.4. How to classify a new customer into of two groups- low risk or high risk by building a

decision rule and a cut off score.The code for low risk customer is 1 and the code for high rish customer is 2 in the Risk in the

table.

S.NO. RISK INCOME AGE NOFMEM

1 2 33661 53 5

2 2 20000 47 5

3 2 17000 39 7

4 2 26000 54 9

5 2 23000 46 4

6 1 20000 41 47 2 26000 56 7

8 1 17000 33 5

9 2 24000 47 8

10 1 23000 57 7

11 2 12000 24 5

12 2 19000 51 6


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13 1 22000 40 2

14 2 26000 54 4

15 2 24000 52 3

16 2 22000 52 6

17 2 32264 52 1

18 1 27782 35 519 2 32000 60 14

20 2 25000 50 6

21 1 25000 30 5

22 1 22000 38 7

23 1 18000 30 1

24 1 22000 42 5

25 2 35743 58 6

26 1 28000 33 3

27 2 25000 58 2

28 2 23766 52 6

29 1 10000 43 4

30 1 12000 25 3

31 1 17000 30 4

32 2 17600 50 6

33 2 3000 25 2

34 2 5000 48 4

35 2 5000 33 2

36 2 3000 28 2

37 2 5000 30 5

38 2 3500 31 5

39 2 10000 26 840 2 5000 26 4

41 1 27000 23 3

42 1 10000 27 3

43 1 14000 26 2

44 2 20000 25 21

45 1 15000 25 3

46 1 30000 50 3

47 1 15000 32 3

48 1 20000 28 4

49 1 10000 22 5

50 1 20000 22 6

51 1 15000 20 3

52 1 25000 22 4

53 1 180000 22 3

54 1 15000 21 1

55 1 15000 21 3


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56 1 20000 22 3

57 1 20000 22 5

58 1 20000 28 3

y AnalyzeClassifyDiscriminantGrouping Variable (Risk)Define Range (High RISK(2),LowRisk (2) )Independents (income, age and no. of family member)Statistics Classify

Save (check all boxes)Method (Enter independents together)OK

Discriminant:Groups= Risk (1, 2)

Variables= Income, Age and No. of family membersAnalysis all

Priors equalStatics=Raw table

Classify=No missing Pooled.

Discriminant:

[DataSet1]

Group Statistics

risk Mean Std. Deviation

Valid N (listwise)

Unweighted Weighted

1 income 23923.52 30472.548 29 29.000

age 28.52 7.059 29 29.000

nofmem 3.69 1.391 29 29.000

2 income 19466.69 10199.466 29 29.000

age 45.17 11.635 29 29.000

nofmem 5.79 3.940 29 29.000

Total income 21695.10 22633.994 58 58.000

age 36.84 12.710 58 58.000

nofmem 4.74 3.115 58 58.000

The above table shows the means that asked for- it gives means on each variable for people in

each sub-group, and also the overall means on each variable.


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Tests of Equality of Group Means

Wilks' Lambda F df1 df2 Sig.

income .990 .558 1 56 .458

age .563 43.438 1 56 .000

nofmem .884 7.348 1 56 .009

In this table Test of Equity of group Means the results of univariate ANOVA;s carried out for

each independent variable, are presented. Here, only age differ (sig. =.000) for the two group

(income and no. of family member).

Group Statistics

risk

Valid N (listwise)

Unweighted Weighted

1 income 29 29.000

age 29 29.000

nofmem 29 29.000

2 income 29 29.000

age 29 29.000

nofmem 29 29.000

Total income 58 58.000

age 58 58.000

nofmem 58 58.000

Analysis 1

Box's Test of Equality of Covariance Matrices


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Log Determinants

risk Rank Log Determinant

1 3 25.150

2 3 24.808

Pooled within-groups 3 26.732

The ranks and natural logarithms of determinants

printed are those of the group covariance matrices.

Test Results

Box's M 98.160

F Approx. 15.406

df1 6

df2 22721.208

Sig. .000

Tests null hypothesis of equal

population covariance matrices.

Boxs M Test of Equality of Covariance Matrices:Sig. =0.000


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An Eigenvalue indicate the proportion of variance explained. (Between-group sums of squares

divided by with-group sums of squares). A large eigenvalues (0.973) is associated with a strong

function.

The canonical relation is correlation between the discriminate score and the levels of the

dependent variable. A high correlation indicate a function that discriminant well. The present

correlation of 0.702 is not extremely high (1.00 is perfect).

Canonical Correlation=0.702---(0.702)*(0.702)=49.28% of the variance in the dependent

variable can be accounted for by the model(all three independents variable)

Pooled within-groups correlation matrix: low correlations lack of multicollinearity among the

independent variables

(Rule of thumb: if a correlation coefficient is < 0.30)

Wilks' Lambda

Test of

Functio

n(s) Wilks' Lambda Chi-square df Sig.

1 .507 37.044 3 .000

Wilks lambda is the ratio of within-groups sums of squares to the total sums of squares. This is

the proportion of the total variance in the discriminant score not explaind by difference amonggroups. A lambda of 1.00 occurs when observed group means are equal( all variance is explained

by factors other than difference between those means), while a small lambda occurs whenwithin-group variability is small compared to the total variability. A small lambda indicates that

group means apper to differ. The associate significance value indicates whether the difference issignificance. Here, lambda of 0.507 has a significant value (sig. =0.000), thus the group means

appear to differ.

The Wilks Lambda=0.507(which is equivalent to chi-square=37.044with 3 df) is significant at

the 0.000 level. This means that the discriminan function computed in this procedure is

statistically significant at the 0.000 level. Only then, one can proceed to interpret the result.

Standardized Canonical

Discriminant Function

Coefficients

Function

1

income -.260


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age .934

nofmem .382

Note: The signs (+ or -) indicate a positive or a negative relation with the dependent variable.

These discriminant function coefficients work just like the beta-weights in regression.

The discriminate function (based on standarised discriminate coefficients)

Z=0.382*Nofmem + 0.934*Age -0 .260* Income

Using this equation, given someone value on age, income and no. of family member, we can

calculate their score on the discriminant function. To figure out what the DF score means, look at

the group centroids.

Structure Matrix

Function

1

age .893

nofmem .367

income -.101

Pooled within-groups

correlations between

discriminating variables and

standardized canonical

discriminant functions

Variables ordered by

absolute size of correlation

within function.

Structure Matrix( Discriminant Loading)-Order from highest to lowest by the absolute size of the

loading, the sign + or indicate onle by a positive or negative relationship with the dependant

variable.

The discriminant function (based on discriminant loading):


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Z=0.893Age + 0.376Nofmem 0.101Income

Canonical Discriminant

Function Coefficients

Function

1

income .000

age .097

nofmem .129

(Constant) -3.939

Unstandardized coefficients

The Canonical Discriminant Function Coefficients indicate the unstandardized scores

concerning the independent variables. It is the list of coefficients of the nstandardizeddiscriminant equation. Each subjects discriminant score would be computed by entering his or

her variable values (raw data) for each of the variables in the equation.The discriminant function ( based on unstandarized discriminant coefficients):

Z= -3.939 + 0.000 Income + 0.097Age + 0.129Nofmem

Which Discriminant function to use and when?

For interpretation purpose, use discriminant loading. The standardized discriminantcoefficients can also be used.

Any variable exhibiting a loading of more than +0.30 or less than -0.30 is consider asubstantive discriminant(i.e.,age)

To calculation the discriminant Z score for the classification purposes, use theunstandarized discriminant coefficient.

Functions at Group

Centroids

risk Function


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1

1 -.969

2 .969

Unstandardized

canonical discriminant

functions evaluated at

group means

Functions at Group Centroide indicates the average discriminant score for subjects in the two

groups. More specifically, the discriminant score for each group when theVariable means (rather than individual values for each subject) are entered into the discriminant

equation. Note that the two scores are equal in absolute value but have opposite signs.

Classification Statistics

Classification Processing Summary

Processed 58

Excluded Missing or out-of-range group

codes

0

At least one missing

discriminating variable

0

Used in Output 58

Prior Probabilities for Groups

risk Prior

Cases Used in Analysis

Unweighted Weighted

1 .500 29 29.000

2 .500 29 29.000


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risk Prior


Unweighted Weighted

1 .500 29 29.000

2 .500 29 29.000

Total 1.000 58 58.000

Classification Resultsa

risk

Predicted Group Membership

Total1 2

Original Count 1 25 4 29

2 7 22 29

% 1 86.2 13.8 100.0

2 24.1 75.9 100.0

a. 81.0% of original grouped cases correctly classified.

Classification Results is a simple summary of number and percent of subjects classifiedcorrectly and incorrectly. This table gives information about actual group membership vs.predicted group membership.

Overall % correctly classified= 81.0% Sensitivity= 25/29 = 86.2% Specificity= 22/29 = 75.9%


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Stepwise discriminant function analysis:

y AnalyzeClassifyDiscriminantGrouping Variable (Risk)Define Range (HighRISK(2),Low Risk (2) )Independents (income, age and no. of family member)StatisticsClassify Save (check all boxes)Method (Stepwise method)OK

Discriminant

[DataSet1]

Analysis Case Processing Summary

Unweighted Cases N Percent

Valid 58 100.0


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codes

0 .0



0 .0

Both missing or out-of-range

group codes and at least one

missing discriminating

variable

0 .0

Total 0 .0

Total 58 100.0

Group Statistics

risk

Valid N (listwise)

Unweighted Weighted

1 income 29 29.000

age 29 29.000

nofmem 29 29.000

2 income 29 29.000

age 29 29.000

nofmem 29 29.000

Total income 58 58.000

age 58 58.000

nofmem 58 58.000

Analysis 1

Stepwise Statistics

Variables Entered/Removeda,b,c,d


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Step

Wilks' Lambda

Exact F

Entered Statistic df1 df2 df3 Statistic df1 df2 Sig.

1 age .563 1 1 56.000 43.438 1 56.000 .000

2 nofmem .524 2 1 56.000 24.998 2 55.000 .000

At each step, the variable that minimizes the overall Wilks' Lambda is entered.

a. Maximum number of steps is 6.

b. Minimum partial F to enter is 3.84.

c. Maximum partial F to remove is 2.71.

d. F level, tolerance, or VIN insufficient for further computation.

Heres the table that show you the steps SPSS went through. Based on this table, Age is the

best single predictor, and no. of family member is the next one. If we were asked how manyvariable would we include in a model to get the best possible prediction? the answer would be

two of them: age and nofmem.

Variables in theAnalysis

Step Tolerance F to Remove Wilks' Lambda

1 age 1.000 43.438

2 age 1.000 37.818 .884

nofmem 1.000 4.130 .563

Variables Not in theAnalysis

Step Tolerance Min. Tolerance F to Enter Wilks' Lambda

0 income 1.000 1.000 .558 .990

age 1.000 1.000 43.438 .563

nofmem 1.000 1.000 7.348 .884


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1 income .977 .977 1.738 .546

nofmem 1.000 1.000 4.130 .524

2 income .975 .975 1.818 .507

Above two able just show us which predictors were used in each step.

Wilks' Lambda

Step

Number of

Variables Lambda df1 df2 df3

Exact F

Statistic df1 df2 Sig.

1 1 .563 1 1 56 43.438 1 56.000 .00

2 2 .524 2 1 56 24.998 2 55.000 .00

In the above table are the Wilks lambdas for each step. As we can see, the model is good fit for

the data just one predictor( age) or with two predictors( age and nofmem).

Summary of Canonical Discriminant Functions

Eigenvalues

Functio

n Eigenvalue % of Variance Cumulative %

Canonical

Correlation

1 .909

a

100.0 100.0 .690

a. First 1 canonical discriminant functions were used in the analysis.

Wilks' Lambda


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Test of

Functio


1 .524 35.563 2 .000



Coeffici

ents

Function

1

age .925

nofmem .383

If we wanted to construct a predictive equation using just the two best predictors, it would be:

Discriminant function = 0.925*age + 0.383*nofmem

Structure Matrix

Function

1

age .924

nofmem .380

incomea

.158


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Pooled within-groups

correlations between

discriminating variables and

standardized canonical

discriminant functionsVariables ordered by

absolute size of correlation

within function.

a. This variable not used in

the analysis.



Function

1

age .096

nofmem .130

(Constant) -4.156


Functions at Group

Centroids

risk

Function

1

1 -.937

2 .937


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Functions at Group

Centroids

risk

Function

1

1 -.937

2 .937

Unstandardized



group means

If we wanted to know whether someones score on this new, simpler Discriminant function

suggested that they were the high risk or low risk. we compare their score on the DF to these

centroids. If their score are closer to _ 0.937, they were probably the low risk, if their score were

closer to + 0.937, they were probably the high risk.

Classification Statistics

Classification Processing Summary

Processed 58


codes

0



0

Used in Output 58


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risk Prior


Unweighted Weighted

1 .500 29 29.000

2 .500 29 29.000

Total 1.000 58 58.000

Classification Resultsa

risk

Predicted Group Membership

Total1 2

Original Count 1 25 4 29

2 7 22 29

% 1 86.2 13.8 100.0

2 24.1 75.9 100.0

a. 81.0% of original grouped cases correctly classified.


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One last step-lets get a graph of people of the different groups, based on the two best predictors ( age

and no. of family member). This give us a visual representation that show how the two group separate

out from one another using these two predictors.

Graph

[DataSet1]

We can see on this graph how the two groups are visually separated from one another, based on

peoples answers to age and no. of family member. Not all discriminant function will separate groups

this perfectly. Sometime we can find predictors that statically differentiate between the groups, while

the graphical representation still show the groups as pretty jumbled together.


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Ans.1: How good is this model? How many of the 58 data points does it classify correctly?

To answer this question, we look at the computer output labeled Table classification result. Thisis a part of the discriminantion analysis output from any computer pacage as spss, statistica, sas

and so on. For example if a priori probabilities chosen for the classification into the two groups

are equal, as we have assumed while generating this output, then we will very likely see similarnumber in our output.This classification result table also called the classification matrix( also known as the confusion

matrix), and it indicate that the discriminant function we have obtained is able to classify 81.0%of the 58 object correctly.

More specifically, it also says that out of 32 cases predicted o be in group1, 25 were observed tobe in group1 and 7 in group 2.

Similarly, 26 cases predict in group 2, we understand that 22 were observed to be in group in2and 4 in group 1.

Thus, on the whole, only 11(7+4) cases out of 58 were misclassified by discriminant model, thusgiving us a classification accuracy level of (58-11)/58 or 81%.

Ans.2. Statistical significance-How significant, statistically speaking, is the discriminant

function?

This question is answered by looking at Wilks Lambda and the probability value for he f-test

given in Wilks Lambda table.

Wilks' Lambda

Test of

Functio


1 .507 37.044 3 .000

The value of wilks lambda is 0.507. This the value is between 0 and 1, and a low value indicatebetter discriminant power of model. Thus, 0.507 is an indicater of the model being good.

The value of the f- test indicate that the discriminant between the two group is highly significant.Which indicate that f- test would be significant at confidence level of up to

(1-.000)*100=100%


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Ans.3. We have 3 independent variable- age, income, no of dependent family member for.

Which of these is better predictor of a person being a low risk and high risk?



Coefficients

Function

1

income -.260

age .934

nofmem .382

To answer this question, we look at the standardized coefficient in out put. These are given in

table. This output show that age is the best predictor, with the coefficient of 0.934, followedby no. of family member, with a coefficient of 0.382, income is the last, with a coefficient of:-

0.260. please recall that the absolute value of the standardized coefficient of each variableindicates its relative importance.

Ans.4. How do we classify a new policy customer into high and low risk category, and

make a decision on accepting or refusing him a policy.

This is the most important question to be answered. Please remember why we started out withthe discriminant analysis in this problem. HDFC Standard Life Insurance Company wished to

have a decision model for screening policy applicants.

The way to do this is to use the output in table unstandardised coefficients in the discriminantfunction and table means of canonical variable( function at group cenroids)

Functions at Group

Centroids

risk

Function

1

1 -.969

2 .969

Unstandardized



group means


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The function of group centroids, gives us the new means for the transformed group centroids.

Thus, the new mean for group 1(low risk)is -0.969, and the mean for group 2(high risk) is

+0.969. this means that the midpoint of these two is 0. This is clear when we plot the two means

on a straight line, and locate their midpoint, as shown below

0

- 0.969 + 0.969

Mean of Group 1(high risk) Mean of Group 2(high risk)

This also gives us a decision rule for classifying any new case. If the discriminant score of anapplicant falls to the right of the midpoint, we classify him as high risk, and if the discriminant

score of an applicant falls to the left of the midpoint, we classify him as low risk. In this case,the midpoint is 0. Therefore, any positive(greater than 0) value of discriminant score will lead to

classification ashigh risk any negative( less than 0) value of the discriminant score will lead toclassification as low risk. But how do we compare the discriminant of an applicant?

We use the applicants age, income and no. of family member and plug these into theunstandardised discriminant function. This gives us his discriminant score.



Function

1

income .000

age .097

nofmem .129

(Constant) -3.939



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Y= -3.939 + income (0.000) + age(0.097) + nofmem(0.129)

Where Y would give us the discriminant scores of any person whose Age, Income, and No. Offamily member were known.

Let us take an example of a policy applicant to HDFC Standard Life Insurance Company of aperson who aged is 45, has an income of Rs. 30,000 per month,and no. of family memberare 6. Plugging these values into