Risk Management and Analysis of Insurance Companies

8/17/2019 Risk Management and Analysis of Insurance Companies

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A PROJECT REPORT ON RISK ANALYSIS AND RISK

MANAGEMENT IN INVESTING IN INSURANCE POLICES

Research Report submitted to Entrepreneurship Development Institute

of India in partial fulfilment of the requirements for the award of

Post Graduate Diploa i! "usi!ess Ma!a#ee!t

Submitted by

A"$IS$EK RAJ

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E%ECUTIVE SUMMARY

All assets in this world have some economic value and some amount of risk

carrying with them. All assets have some epected life also and if it!s get lost

or destroyed there are many chances that owner will suffer some amount of

loss which can be financial or in any other form. So to protect the owner from

suffering a huge amount of loss we can assure these assets.

Insurance is a contract between the insurer and insured in return for a

premium" the insurance company promises to pay a specified amount to the

insured on the happening of a specific event.

India economy is growing at the rate of #.$% with a significant rise in working

population and has a large potential for the development in the field of

insurance sector. A large amount of population in India is still uninsured. It is

also estimated that the sector will grow at a rate of '()% in net &) years.

*he pro+ect has been undertaken to know about different types of risk that can

covered by insurance policies and how to analyse and mange those risks as

there are various types of risk that a person can suffers in his life term.

*he pro+ect talks about what are the various things that customer should

consider before buying an insurance policy and various steps that need to

consider before buying it.

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I!trodu&tio!India is the second largest country in the world in the respect of population.

*he ,D- growth of India was #.$% in year ()&.the insurance sector is

epected to grow at a very high rate in net &)'$ years and its contribution

in ,D- is going to rise in a huge manner as a large amount of population is

still uninsured especially in urban areas.

/hat is Insurance0

Insurance is a contract between the insurance company 1insurer2 and thepolicyholder 1insured2. In return for a consideration 1the premium2" the

insurance company promises to pay a specified amount to the insured on the

happening of a specific event. /e all need insurance because it not only

transfer the risk but also have other benefits like ta saving.

*he first Indian insurance company was formed in the year &3&3 which was

oriental life insurance company and the Indian life assurance companies act

&4&( was the first statutory measure to regulate life business which was

finally amended in the year &43. In the year &444 Insurance Regulatory and

Development Authority 1IRDA2 was constituted as an autonomous body to

regulate all the insurance companies in India which came in power in the year

April ())). 5nder the current regulation a foreign companies cannot have

more than (6% of stake in +oint venture.

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7enefits of insurance

Investment option It is good investment option because insurer will not get the

insurance cover but also the in some amount of return.

*a benefits /e can also save ta up to RS &))))).

8oan on insurance 9ustomer can also take loan against insurance policies.

:abits of saving It also develops the habits of saving certain amount of money

which can be helpful in future.

Employment

generation

An increase in the penetration of insurance is going to generate

more employment as insurance policies will require more

advisors.

Social benefits It is going to help in developing the infrastructure of the counrty.

Ta'le ()(

*ypes of life insurance polices

*he different types of life insurance policies are following;

/hole life insurance plans Endowment insurance plans

*erm Insurance plans

-ension and savings plans

5nit linked insurance plans

Risk

A person carries various types of risk in his life term and it can be classified in

many ways. 7ut first we need to understand the meaning of risk. It is difficult

to give the eact definition of risk but it can be defined in the respect of

insurance sector as the possibilities of unfavourable event happing like death

or physical damage.

*he various types of the risks are following;


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=inancial risk

-ure risk

-articular risk

>ut of all these risk the insurable risk are following;

=inancial risk; *he outcome of risk which can be measured in financial

term like loss of life etc. -ure risk; -ure risks are those risks where there is no possibility of

making a profit. -articular risk;

*hese are the three risks which can be insured by having insurance policies

and the insured persons can transfer his risk to insurer.

Risk analysis and Risk management*

As there are different types of in insurance police in the market it becomes

difficult for a customer to understand the actual value of its life i.e. :uman 8ife

?alue. 7efore buying an insurance police a person should to knowing the

purpose for which he is buying the insurance and how to analyse its value.

It might be confusing for many that for what value they should buy aninsurance policies i.e. how they are worth for.

*here are two methods to calculate the human life value

Income replacement method

Simple method

I!&oe repla&ee!t et+od; *his method takes into consideration the

future income earning potential of a person during the remaining years of their

working life. It is a two'step method;

Step &; 9alculate the income of person in the future working years.

Step (; this is its :8?" now take inflation in account and calculate how much

should be enough for his family in case of his death.

Siple et+od; In this method we consider the present interest rate in a

fied deposit in a bank and then we calculate that how much amount person

should get insured.

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7ut we always need to keep in mind that :8? in not a onetime calculation and

it should get revised from time to time.

@ow as there are many insurance policies in the market it becomes difficult to

decide which will be suited best for you. So it is always best for anyone to

take the polices which is best suited for them. Anyone can easily find out

which policies best suited for them by following these three steps;

Step &; Identify your needs; you always need to understand you goals and

need after considers these factors;

marital status

future financial goals

number and age of dependants on you

employment status

income which includes salary" business income and income from

other sources and investments eisting protection" savings and retirement provision

Step (; Buantifying needs; *hen you need quantify your needs and

then calculate suitable amounts that you need to save in future the

future.

Step ; -riorities your needs; then you need to priorities you needsbased upon your requirements. It is important because you have only a

specific amount of money to invest and that money should be invested

in a best product mi.Step $; 9ompare; it is always best for you to compare the policies

which you are going to take with all the other similar polices in the

market.So this how any individual can decide on what polices is best suited for

him and whether he should consider to by that specific insurance

policies or not.

I!dustr, a!al,sis;*he insurance is established a way long before and it is growing well

since then. *he first insurance company was formed 5nited States in

the year &C3( in South 9alifornia. Since then various insurance

company are founded and today hundreds on insurance companies

are operating well.*op five companies in world in ()&

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• apan post Insurance

• AA

• AllianF

• riental 8ife Insurance 9ompany in 9alcutta but in &463" the Insurance

Act was amended to regulate investments and set minimum solvency

margins. 7ut actually grow in the insurance sector in India begun from the

year ())) with the formation on IRDA. IRDA is a regulatory body to manage

working of all the insurance company in India. =oreign companies were

allowed ownership of up to (6% and invest in insurance policies in India. *he

insurance sector is a colossal one and is growing at a speedy rate of '()%.

*ogether with banking services" insurance services add about C% to the

country!s ,D-. 8ife insurance 9ompany has acquired in India. /ith the entry

of new private players insurance sector has seen a huge growth in last five

years and it is epected to grow in future.

*he various data which is represents the market share of top five insurance

companies in India

7%7%

4%

2%

79%

Sales

ICICI Prudential

SBI Life

HDFC Standard

Bajaj Allian

Li!

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-i#ure ()(


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*oday" &)( million clients in the world trust AA and the AA name. In ())"

to provide a clearer vision of the transformation of its core business from

traditional insurance to the broader concept of financial protection" the AA

group added the words financial protection as a base line to its logo.

7harti Enterprises

7harti Enterprises is a pioneer in telecom sector and the group is widening its

horiFons by entering new business areas such as insurance and retail. 7harti

Enterprises has created a vantage position for itself in the global

telecommunications sector. 7harti Airtel 8imited occupies good status in

mobile telephony in India while its brand 7eetel is the largest manufacturer

and eporter of world class telecom terminals.

=ounder of 7harti ,roup is Sunil


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7harti AA life insurance 8td.

7harti AA 8ife Insurance is a +oint venture between 7harti" Indias leading

private telecom company and AA" world leader in financial protection and

wealth management. *heir philosophy is to build around the promise of

making people J8ife 9onfidentJ...

7harti Enterprises and AA Asia -acific :oldings 8imited 1AA2 signed an

agreement to establish a +oint venture named 7harti AA 8ife Insurance

9ompany 8imited to carry on life insurance business in India.

August (6" ())#" @ew Delhi ; 7harti Enterprises and AA Asia -acific

:oldings 8imited 1AA2 signed an agreement to establish a +oint venture

named 7harti AA 8ife Insurance 9ompany 8imited to carry on life insurance

business in India.

5nder the agreement AA has a (6% equity interest in the +oint venture" while

7harti holds the balance. AA" a global leader in insurance business" enabled

the company to have access to AA!s global life insurance and asset

management epertise. 7harti brought its strong local market knowledge"

reputation and India'wide retail presence.

K*he insurance sector in India provides a mega opportunity for private players

like 7harti Aa Despite the strong growth witnessed by the sector in the recent

years" nearly 3)% of the Indian population is without life insurance coverage.

As one of India!s leading business conglomerates having an established

brand and a significant presence in the retail space" 7harti has inherent

advantages in being a part of this growth story. In AA" 7harti has a global

leader as its partner" one that is known for its epertise and best practice

across the world.


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growth in the insurance market. 7harti is a well'established and financially

strong group whose capabilities and network will be of significant value to the

+oint venture. *he +oint venture invested in the region of Rs. #)) crores 1&


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M 7harti brought its strong local market knowledge" reputation and India.

M Associated with AA world leader in financial protection and wealth

management" ranked @o & in the =ortune #)) list of global companies and

has enabled the company to have access to AA!s global life insurance and

asset management epertise.

M Strong partner 7harti ' provides access to customer base of more than

() million

0ea1!ess

M 8ate entrant in the insurance sector

M *hin distribution network all over the nation

M ?ery less number of product offering in comparison to its competitors

M 8ack of confidence among the customers as parent company does not

have a financial background.

Opportu!ities

M Strong growth of unit linked market at the mass affluent end.

M -otentially with ()% insurance cross sale only to new telecom

customers" this network can yield $3 lakh policies per year with sum assured

of nearly Rs #3))) cores.

T+reats

M


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Resear&+ et+odolo#,

Statement of the problem;

.As the insurance sector epected to grow around '()% in net &) years it

is important for a customer to understand the basis steps to buy an insurance

policy. It is also going to help companies to understand that how can they

convince there customers to buy an insurance policies. *he pro+ect has beenundertaken with the aim to analyse insurance firm and how to calculate your

need analysis.

>b+ective of the study*

*o make people aware about the steps they should consider before

buying insurance policies. *o know about various analytical tools that can value an insurance

policy.

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*o find whether need analysis is compulsory before buying an

insurance police.

S9>-E >= *:E S*5DN

. *he scope of the study is limited to only insurance L no other financial

instruments were considered .*he study will help us to know the perception of

customers about insurance policies. *he various risks involves in buying an

insurance policy and how to tackle it. It will also help us to get a basic

knowledge about need analysis calculation and its requirement.


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*his pro+ect only talks about three risk analysis tools there are others

tools also which can be used.

*he study had done only on &)) respondents.

Data a!al,sis

Ris1 a!d Need a!al,sis

As a customer you should always know your value in the market so that you

can take a police according to your eact value. *hree various approachesare used to determine the amount of life insurance to own;

&. :uman life value approach(. @eeds approach. 9apital retention approach

$ua! li.e /alue approa&+

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$LV can be defined as the present value of the family!s share of the deceased

breadwinner!s future earnings. It can be calculated by the following steps;

&. Estimate the individual!s average annual earnings over his or her

productive lifetime.(. Deduct federal and state income taes" social security taes" life and

health insurance premiums and cost of self maintenance.. Determine the number of years from person!s present age to the

contemplated age of retirement.$. 5sing a reasonable discount rate" determine the present value of the

family!s share of earnings for the period in the previous step.

Eamples; Assume that Ra+" age (# is married and has two children. :e earns

Rs(#))) annually and plans to retire at age of 6#. >f this amount Rs&)))) is

use for federal and state taes" life and health insurance and his personal

needs. *he remaining ))) is used to support his family. /hat should be

value of insurance if discount rate is 6%0

Solutio!; 5sing the give discount rate the present value of Rs& payable

annual for $) years is Rs.)#

So Ra+ has a human life value of 1)))O.)#2 P Rs((#C#)

Needs approa&+

*he second method for estimating the amount of life insurance to own is the

needs approach. *he various family needs that must be met if the family head

will die are analysed. *he most important family needs are following;'

• Estate clearance fun

• Income during the read+ustment period

• Income during the dependency period

• 8ife income to the surviving purpose

• Special needs

• Retirement needs

7y the help of need analysis chart we can know the amount of

insurance we need in the following ways'

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Cas+ !eeds

=uneral cost &))))

5ninsured medical bills )))

Instalment debts &()))

-robate cost )))

Total estate &leara!&e

.u!d

(3)))

Income needs

Read+ustment period &$$))

Dependency period &)3)))

*otal income needs &(("$))

Spe&ial !eeds


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Capital rete!tio! approa&+

*his method preserves the capital needed to provide income to the family.

*his methods works in following step;

• -repare a personal balance sheet

• Determine the amount of income producing capital

• Determine the amount of additional capital needed

-reparing a personal balance sheet;

*he first step is to prepare a personal balance sheet that lists all assets and

liabilities .Eample

Assets

:ouse &(#)))

Automobiles )))-ersonal and household property $#)))

Securities and investment (3)))

9hecking account ()))

Individual and group life insurance ()))))

-rivate pension death plan ())))

Total 234555

8iabilities


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*he net step is to determine the amount of income producing assets that can

provide income to the family. *his step is performed as follows;

Total assets $#)))

8ess;


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-ercentage analysis

=UESTION NO) (<

7usinessman #$

-rofessional #

Students 6

:ousewife #

Ta'le !o) 2)(

2#


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5435

65

Occupation of respondentBu$ine$$an

Pr&fe$$i&nal

Student$H&u$e'ife

-i#ure 2)(

I!terpretatio!*

>ut of &)) respondents" maimum respondents belong to business class"

followed by professional" then students and the minimum respondents are

from housewife.

=UESTION NO) ><

:aving insurance already

S.@>. -articular Response

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A Nes 4(

7 @o 3

Ta'le !o) 2)>

92

"

Insurance Already

(e$

)&

-i#ure 2)>

I!terpretatio!*

=rom above chart" we can infer that 4(% respondents already have insurance

policies" whereas 3 % does not have insurance policies.

=UESTION NO) 3<

A6are!ess o. li.e i!sura!&e &opa!ies

>ption -articular Response

a -rint media ()

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b Electronic media (#

c Agents #)

d >ther #

Ta'le !o) 2)3

2#

255#

5

Awareness of life insurance companies

Print %edia

*le!tr&ni! %edia

A+ent$,t-er

-i#ure 2)3

I!terpretatio!*

=rom this chart we can say that ma+ority of respondents are aware of

insurance policies through agents" followed by electronic media" then print

media.

=UESTION NO) 2<

Mai! purpose to 'u, i!sura!&e poli&ies


A *a Saving ($

7 Savings

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9 -rotection $4

D -ension &)

E Investment (

Ta'le !o) 2)2

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1549

1# 2

Main purpose to buy insurance policies

.a/

Sa0in+

Pr&te!ti&n

Pen$i&n

In0e$t%ent

-i#ure 2)2

INTERPRETETION*

>n the basis of above analysis" we can interpret that main reason for buying

insurance policies is because of security reasons as $4% of respondent

agreed with it.

=UESTION 4<

24

Your pre.ere!&e i! 'u,i!# I!sura!&e poli&ies


a ,oodwill of the company &4

b Range of products ()c =eatures of the product #)

d Services offered by company 6

e Returns of the bonds #


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Ta'le !o) 2)4

19

2#5#

6 5

Your prefence in buying Insurance policies

&&d'ill &f t-e

!&%an3

an+e &f r&du!t$

Feature$ &f t-e

r&du!t

Ser0i!e$ &ered 3

!&%an3eturn$ &f t-e &nd$

-i#ure 2)4

INTERPRETETION*

*he graph shows that #) out of &)) respondents buy an insurance policy after

looking at the features of the product which is followed by () respondent who

looks at different range of products and &4 looks at good will of companies.

So the products with good features have more demand among customers.

=UESTION ;<

,ou pur&+ase a! i!sura!&e poli&e u!der soeo!e else i!.lue!&e


a Nes 6

b @o C

Ta'le !o) 2);

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63

37

You purchase an insurance policies under someone else infuence

(e$ )&

-i#ure 2);

INTERPRETETION*

According to graph out of &)) respondent 6% agreed that they buy

insurance due to someone else influence not according to their requirement.

=UESTION 9<

Done need analysis before buying aninsurance police


a Nes

b @o 6C

Ta'le !o) 2)9

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33

67

Done need analysis before buying an insurance policy

(e$

)&

-i#ure 2)9

INTERPRETETION*

According to the graph out of &)) respondent 6C customers do not prefer to

do need analysis before buying insurance policies. It shows that customer do

not look at their needs before buying an insurance policies

=UESTION NO) ?<

I!sura!&e pla! ,ou pre.er to

'u,s


a -rotection plan #C

b Investment plans 4

c -ension plan &)

d children plan ($

Ta'le !o) 2)?

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57

9

1#

24

Insurance plans you prefer to buy

Pr&te!ti&n lan

In0e$tent lan$

Pen$i&n lan

!-ildren lan

-i#ure 2)?

INTERPRETETION*

>n the basis of above analysis we can say that customers are more

interested in protection plan and children plan only. It shows that customers

do not think insurance as an investment opportunity.

=UESTION NO) @<

Epe&tatio!s .ro li.e i!sura!&e

&opa!ies


a Innovative -roducts #

b Attractive Riders (

c Reasonable -remium $C

d

7etter 9ustomer

Service ($

e :igh Risk 9overage ((

Ta'le !o) 2)@

2"


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5 2

4724

22

Expectations from life insurance companies

Inn&0ati0e Pr&du!t$

Attra!ti0e ider$

ea$&nale Pre%iu%

Better Cu$t&%er

Ser0i!e

Hi+- i$ C&0era+e

-i#ure 2)@

INERPRETETION*

*he graph shows out of &)) respondent $C epect reasonable premium from

insurance companies. So it shows that people prefer to buy insurance policies

when the premium is low.

=uestio! No) (52

satis.ied 6it+ pre/ious

i!sura!&e pla! ,ou 'ou#+t

Done need analysis


a yes &4

b no &(

c cant say (

Ta'le !o) 2)(58a<

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1912

Satised with pre!ious insurance plan you bought "done need analysis#

e$

n&

!an8t $a

Not did !eed a!al,sis

>ption

-articul

ar

Respon

se

a yes ()

b no $$

c

cant

say

3#


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2#

44

3

$esponse

I!terpretatio!*

According to graph () out of 6C respondents who not did need analysis are

not satisfied with their insurance plan which is (C% and &4 out of &

respondents who did need analysis are satisfied with their insurance plan

which is 6&%. It shows that more percentage of people will satisfied with their

police if they will do need analysis.

-i!di!#s

*he findings drawn during the pro+ect are as follows;

• In occupation group most of the customers were business man and

second most customers were self'employed and least was associated

with government services.

Awareness about life insurance companies were mostly done by

agents.

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>ut of &)) respondent $4% of buy an insurance policy for security

purpose and ($% to save ta.

>nly % of customers do need analysis before buying an insurance

policy.


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CONCLUSION

Insurance sector in India is growing at a very high rate and it is epected to

grow more in future. *his study had made an attempt to understand to

understand the various risk involves in investing in insurance an how to

manage those risk. I observed that most of the people buy an insurance

police under someone!s influence and not according to their requirement. Also

there is a very low awareness about need analysis calculation.


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@A


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& a2-rint mediaQ b2Electronic

media Q

c2 Agents Q d2 >thers Q

=)2< 6+at is t+e ai! purpose to 'u, i!sura!&e poli&iesB

a2 *a Q

& b2 Saving Q

( c2 -rotection Q

d2 -ension Q

$ e2 Investment Q

=)4< 6+at do ,ou loo1 i! a! i!sura!&e poli&, 'e.ore 'u,i!# itB

a2 ,oodwill of the company Q

& b2 Range of products Q

( c2 =eatures of the product Q

d2 Services offered by company Q

$ f2 Returns of the bondsQ

=);< Do ,ou pur&+ase a! i!sura!&e poli&e u!der soeo!e else

i!.lue!&eB

a< yes Q b2 @o Q

=)9< I pre.er to do !eed a!al,sis 'e.ore 'u,i!# a! i!sura!&e poli&e*

a2 Nes Q b2 @o Q

=)?< 0+i&+ I!sura!&e pla! ,ou pre.er to 'u,sB

a2 -rotection plan Q b2 Investment plans Q

c2 -ension plan Q d2 children plan Q

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=)@< 6+at do ,ou epe&t .ro li.e i!sura!&e &opa!iesB

a2 Innovative -roducts Q b2 Attractive Riders Q

c2 Reasonable -remium Q d2 7etter 9ustomer

service Q

e2 :igh Risk 9overage Q

=)(5< Are ,ou satis.ied 6it+ pre/ious i!sura!&e pla! ,ou 'ou#+t B

A2 9ustomer who do need analysis;

& a2 yes Q b2 no Q

(

c2 can!t say Q

$ 72 9ustomer who do not did need analysis;

# a2 yes Q b2 no Q

6

C c2 can!t say Q

3

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&)

3"


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Documents

Risk Management and Analysis of Insurance Companies