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7/27/2019 Case Study- Primus 97 Insurance Restructuring
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DELOITTE CASE STUDY
Insurance Business Restructuring
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Team Details
Gaurav Gupta B.com (H) IInd Yr.
Jai Johar B.com (H) IInd Yr.Saurabh Goenka B.com (H) IIIrd Yr.
Smriti Khurana B.com (H) IIIrd Yr.
Surabhi Bajpai B.com (H) IIIrd Yr
Team Name:- Primus
Hans Raj College, Delhi University, DelhiOctober 13INSURANCE BUSINESS
RESTRUCTURING
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IndexS.No. Contents Slide No.
1 CASE SUMMARY 5
2. PROBLEM(s) 6
3, DEFINING THE SCOPE OF STUDY 7
4. SOLUTION(s) 8
5. SOLUTION ADOPTED 9
6. REASONS FOR SOLUTION ADOPTED
6.1 SUMMARY 12-13
6.2 DATA ANALYSIS 14-26
6.3 OTHER KEY FACTORS 27-33
7. CONSIDERATIONS FOR OPERATIONAL SEPERATION PLAN 34-388. CORE GENERAL INSURANCE BUSINESS 39-41
9. APPENDIX 42-46
10. REFERENCES 47
11. APPROACH ADOPTED 48
12. LEARNING 49
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Case Summary
Client : Insure Co , MNC insurance provider
Drop in profitability due to tightening of credit markets and
economic downturn
Refocus towards Core General Insurance Business
Divest business units in order to raise $3 billion
Potential business units : Life Line Asia & All World Life
Identification of suitable business unit for divestureOctober 13INSURANCE BUSINESS
RESTRUCTURING
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Problem(s)
Insure Co has approached Deloitte to assess candidates for
divestiture and to develop a game plan for executing the
divestiture of selected business units.
Which company would you advise Insure Co to divest ? Pleaseuse available data to support your argument.
What are some of the other key factors that Insure Co should
consider when assessing which units to divest ?
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Defining the scope of study
Evaluation based on the basis of the given data. Ratio Analysis,
Net Profit Margin, Customer Analysis and other methods usedto come to the solutions possible.
Since, there is no precision in deciding which business unit todivest, as is recommended we have taken into accountEconomic factors and also did 4C’s and SWOT analysis for our
client InsureCo. Solution takes into perspective the long term scenario.
Solution also takes into account the factor considerationsapplicable post divesture of the suitable business unit
Insurance Penetration, Density, Age Analysis, GDP per CapitaGrowth rate in Asia and America done to come to the decisionof divestiture.
Guidelines for operational separation of the business units’operations from InsureCo provided with.
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Solution(s)
1. Divestiture of All-World Life Insurance Business.
2. Assisting the client in Operational separation of the business
units’ operations from InsureCo.
3. Refocus on Core General Insurance Business
4. Raising $3B in Capital through sale of All-World Life and
several other business units.
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Solution Adopted
DIVEST ALL-
WORLD LIFEINSURANCE
BUSINESS
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REASONS FOR
SELECTING THIS
SOLUTION
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SUMMARYOctober 13INSURANCE BUSINESS
RESTRUCTURING
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Data Analysis
I. Growth Rate of Revenue, Net Income and Customer is stable in case of LifeLine Asia as compared to in case All-World Life where Growth Rate of
Net Income witnesses drastic reduction of 35%. The same pattern is seen
in Net Income/Customer Analysis of both the Companies.
II. The proportion of Net Income of LifeLine Asia to that of InsureCo is
more when compared to Proportion of Net Income of All-World Life.Similarly, the proportion of customers is also more in LifeLine Asia than
in All-World Life. It gives an hint that divestiture of All-World Life would
not impact operations of InsureCo as the divestiture of LifeLine would
do.
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III. Revenue earned by LifeLine is far more than that earned by All-
World Life. While in Economic downturn, revenue is difficult to realize,
LifeLine Asia has done better in this aspect.
IV. LifeLine Asia’s positioning in Asia has improved the Net Profit
Margin of InsureCo’s business operations in Asia. It is more than
double that of North American counterparts. The fact that LifeLine Asiaaccounts for 1.76% of InsureCo’s Net Income while InsureCo earned
only 10% of its Net Income from Asia explains the importance of
LifeLine Asia in the Asian region. On the other hand All-World life
contributes mere 0.8% of InsureCo’s Net Income while InsureCo
realized 70% of its Net Income from North America.
V. We have analyzed Expenditure/Revenue of InsureCo on regional
basis and concluded that in North America, Expenditure is 96% of
Revenue while in Asia it is 90%
Data Analysis
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Other Key Factors
October 13INSURANCE BUSINESSRESTRUCTURING
I. Taking into consideration the Economic factors such as GDP per Capita
growth Rate, Demographic factors such as Ageing Population, TotalPopulation Growth rate etc and doing comparison among Asian and
American Economies, we have highlighted the importance of other key
factors in divestiture of All World Life.
II. By doing comparison on the basis of Insurance Penetration and Insurance
Density, assessment as to the maturity of Insurance Sectors in Markets canbe ascertained. Further, on that basis, growth of Insurance Industry in these
economies can be understood.
III. Asian Economy has done far better in comparison to US economy.
Growth Rate of Total Insurance Premium in Asia is 16.98% while in case of US
it is 2.32% highlighting the potential of Insurance Industry in Asia. While
Growth of GDP per Capita in Asia is around 7%, American Economy can be
thought of as slow growing economy with growth rate of around 2%.
IV. Interest Rate Fluctuations also play an important role in our analysis.
While Interest Rates in USA is very low signifying less return of Investment
for Insurance Companies, in case of Asia, Interest Rates are significantly
higher.
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DATA
ANALYSIS
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InsureCo
2009 2008 2007
Revenue($B) 25 30 28
Net
Income($B)
1.25 3 2.4
Customers
(thousands)(k)
750 800 700
GROWTH PATTERN
2008-09 2007-08
Revenue -17% 7%
NetIncome
-58% 25%
Customers -6% 14%
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All-World Life
2009 2008 2007
Revenue($MM) 100 95 90
Net
Income($MM)
10 8 5
Customers
(thousands)
250 225 200
Growth Pattern
2008-09 2007-08
Revenue 5% 6%
Net Income 25% 60%
Customers 11% 13%
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LifeLine Asia 2009 2008 2007
Revenue
($MM)
250 225 200
Net Income
($MM)
22 21 20
Customers
(thousands)
1100 1000 900
Growth Pattern
2008-09 2008-07
Revenue 11% 13%
Net Income 5% 5%
Customers 10% 11%
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Qualitative DescriptionINSURE CO
Growth Rate in Revenue saw drastic reduction from 7% to -17% causingNet Income to decline from $2.4B in 2008 to $1.25B in 2009.
ALL WORLD LIFE
From 2007 to 2008 revenue increased at 6% , net income at 60% ,
customer base at 13% ,whereas from 2008 to 2009 revenue increased at arate of 5% , net income at 25% and customer base at 11% respectively. NetIncome witnessed a drastic reduction of 35% in growth rate from 2007-08to 2008-09.
LIFE LINE ASIA
Growth Rate of Revenue declined from 13% to 11%, while Growth Rate of Net Income remained constant at 5% implying reduction in expenditure.Growth rate of customer declined from 11% to 10% which is not significantwhen Growth rate of customer in All-World Life declined from 13% to 11%.
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Net Income/Customer Analysis
Net Income/Customer($)
2009 2008 2007
ALL-World Life 40 35.5 25
Growth Rate 12.68% 42%
LifeLine Asia 20 21 22.22
Growth Rate -4.76% -5.49%
It can be clearly inferred from the analysis of above that the income per customer is
explicitly more in case of ALL-World Life but following are the implicit supporting points
for Life Line Asia:
•The proportion of customer is more in Life Line Asia which is in turn a very strong
positive point for long term perspective.
•On the basis of previous data, there is very strong declining rate in All World Life which
again overwhelms the mere point of better net income(which implicitly is not) per
customer.
•If we look at the declining growth rate of All-world Life, we can infer that owing to the
instability in the concerned unit the investor sentiments would be harmed.
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Region Based Analysis
Revenue Net Income CustomersNorth America 80% 70% 60%
Europe 15% 20% 30%
Asia 5% 10% 10%
80%
15%
5%
Revenue
North America
Europe
Asia 70%
20%
10%
Net Income
North America
Europe
Asia60%
30%
10%
Customers
North America80% 70%
Europe 15%20%
Asia 5%10%
InferenceNet Income at 70% in North America , with 60% customer base , whereas incase of
Asia net income at 10% with 10% customer base. All-World Life contributes 0.8% of
Net Income to InsureCo, North America accounts for hefty 80% of Net Income of
InsureCo. LifeLine contributes 1.76% of Net Income to InsureCo’s Net Income and
Asia accounts for just 10% of Net Income of InsureCo
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Net Profit Margin of InsureCo(Life Ins.)
The Net profit margin of Life Insurance Business’ in Asia is more than double that of in
North America. This number is an indication of how effective a company is at cost
control. The higher the net profit margin is, the more effective the company is at
converting revenue into actual profit. The net profit margin is a good way of comparingcompanies in the same industry.
2009
North America =437.5/10000*100
=4.375%1
Asia =62.5/625*100
=10%
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Expenditure per Revenue Analysis
North America Europe Asia
Revenue(MM$) 10000* 1875 625
Expenditure(MM$) 9562.5 1750 562.5
Expenditure/Revenue*100 95.63% 93.33% 90.03
96%
4%
North America
Expenditure
Net Income
90%
10%Asia
Expenditure
Net Income
Inference
In North America 96% of Revenue is Expenditure whereas in Asia it is only 90%,
representing a lower pressure on Revenue from life insurance business.
*{(25000X80%)50%}
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Qualitative Description
Life Insurance Operations of InsureCo in Asian region accounts
for 10% of Net Income of InsureCo. Net Income from LifeLineAsia contributes 1.76% of InsureCo’s Net Income. Role of LifeLine Asia in the Asian Region is significantly important.Consequentially. Proportion of Net Income realized from NorthAmerican operations is 70% of Net Income of InsureCo while
All-World Life contributes mere 0.8% to Net Income of InsureCo. Any positive development in Asian region also is alsoimportant on reciprocal basis. While Net Profit Margin fromAsian Life Insurance segment of InsureCo is 10%, in case of North American operations it is mere 4.375%.
In Asia, Expenditure per Revenue from Life Insurance business’ of InsureCo is 90% while it is 96% in case of North AmericanOperations of InsureCo
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CONCLUSION
Profile : A U.S. – based life insurancebusiness , with $100M in annual revenues
Growth Pattern : From 2007 to 2008 revenueincreased at 6% , net income at 30% , customerbase at 13% ,whereas from 2008 to 2009revenue decreased at a rate of 5% , net income
at 25% and customer base at 11% respectively
Current year analysis : Net income percentagehighest in Asia at 23%
Region Based Analysis : Asian net income at 10%
with 10% customer base
Customer based analysis : The net incomeper consumer is $1.94 in case of Americaand $1.67 in case of Asia , which is roughlyon the same lines
1.94
1.11
1.67
North America
Europe Asia
Net income/customer
70%
20%
10%
Net IncomeNorth America
Europe
Asia
90%
10%
Asia
Expenditure
Net Income
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OTHER KEY
FACTORS
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Economic Outlook
USA ASIA
ECONOMIC GROWTH(GDP per Capita)
Slow growing economy(2%in 2011-10) making it
difficult to attract new
customers and retain
existing one
Emerging market , greatergrowth opportunity (7%)
REGULATION/LEGAL
COMPLIANCE
Looming Regulatory changes
pose challenges to Life
Insurers
Improved Regulatory
Systems. Regulations and
Legal Compliance still at pre-
mature level as compared to
USA
AGEING POPULATION (25-55
years)
Very Low Growth Rate.
Limited Opportunity
High Growth Rate. High
Potential for Insurers
PRODUCT INNOVATION Limited product innovation
and distribution system
Improved product
innovation and distribution
system
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Insurance Outlook NORTH AMERICA ASIA
SUPERIOR UNDERWRITING
OF INSURANCE POLICIES
Austerity Measures limit
scope of writing new
insurance policies in coming
years
There will undoubtedly be a
dash by insurers to position
themselves to achieve
maximum penetration of the
growth in the Asian
insurance marketsTOTAL INSURANCE
PREMIUM
Growth of Insurance
Premiums was mere 2.32%
from 2009
Insurance Premium grew
16.98% in 2010 as economic
rebound in emerging
markets helped increase
Premium.
EARNING CAPACITY Persistent low interest rates ,
increased capital pressure
Limited capital pressure
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Demographics
NORTH
AMERICA
ASIA
GDP RATE 2% 7%
POPULATION
GROWTH RATE
0.96% 1.8% - 2.2%
POPULATION(MM) 310 3002
INSURANCE PREMIUM
GROWTH RATE
2% 16%
LIFE INSURANCE
PREMIUM($MM)
506228 761970
AGE (25-55) for Year2010-15 0.15 6.28
THE DEMOGRAPHICS INDICATING A STRONGER GROWTH POTENTIAL IN THE ASIAN
REGION COMPARED TO UNITED STATES OF AMERICA , CLARIFY THE REASON TO
DIVEST ALL WORLD LIFE AND RETAIN LIFE LINE ASIA
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Insurance Penetration
*Insurance penetration is calculated as the ratio of the percentage of total insurance premiums (in US dollars) to grossdomestic product.
There is a positive correlation between a country’s level of development and
insurance coverage. This is reflected both in the premium volume generated as a
percentage of GDP (insurance penetration) and in the premium per capita(insurance density.) Insurance penetration for USA stood at 8 per cent, whereas for
Asian markets the figure was 6.66 per cent. Indicating that more mature markets in
the region are saturated from an insurance penetration standpoint,
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Insurance Density
*Insurance density is calculated as the ratio of total insurance premiums (in US dollars) to totalpopulation
This huge difference in densities gives some idea of the potential which different marketshave for growth. Asia’s below par Life Insurance Density of 246.30 is reached because of
extreme items-in case of Indonesia while it is 30.73, in Japan it is 3458.89. If we compare
emerging markets of Asia with USA, we can see that Emerging Markets of Asia have large
potential of growing whereas US Insurance Industry is near to saturation point
Comparison of insurance density (per capita insurance premium, US$)
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Comparison
The slow-to-heal US economy has resulted in reducing net premiums for
property-casualty insurers, fostering declines in industry revenues and earnings.
Another major item that goes in favour of divesting US based Life Insurance
Business is interest rate fluctuations. Insurance companies invest much of the
collected premiums, so the income generated through investing activities is highly
dependent on interest rates. Declining interest rates usually equate to slower
investment income growth
In USA, interest rates are very low as compared to in Asia. Low interest rates
reduce the probability of people saving or putting capital into investment products
like life insurance and annuities
Looming regulatory changes pose strategic and competitive challenges to life andannuity insurers.
By 2015, approximately 39% of the world's economy is predicted to be in Asia-
Pacific
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Implication of the Comparison The above comparison between Asia’s insurance industry and American Insurance
Industry has illustrated the following three points
I. The relative position of Asia’s insurance industry in the world market has ascendedto some extent, and the insurance industry in Asia is developing very fast.
II. The insurance premium per capita in Asia is still very low.
III. There is a large potential for insurance penetration into Asia’s economy.
In sum, we can conclude that the current Asia’s insurance industry is at a stagewhere it can be described as “fast growing, low level, large potential”. Demographicchanges in Asia, including an increase in aging and ailing populations, will help to
drive up the demand for Life Insurance products.
Going forward, the US Life Insurance industry confronts a climate of broadregulatory and economic uncertainty in the coming year and beyond.
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CONSIDERATIONFOR
OPERATIONAL
SEPARATION
PLANOctober 13INSURANCE BUSINESS
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4C’s Analysis of All-World Life
I. Community- PEST(Political, Economic, Social and Technological )Analysis
Economic Impact on Life Insurance Industry of InsureCo need to be taken care of.
Adherence to Regulatory Framework and Legal Compliance.
Fulfil obligations related to Corporate Social Responsibility
II. Competitor Foresee competitors reaction and likewise strengthen base of other Life Insurance
Business of InsureCo in North America.
III. Customer Meet expectations of customers of All-World Life. Maintain Customer faith in
InsureCoIV. Company Taxation Matters
Create a Divestiture Team
Proper utilization of resources retained and generated fundsOctober 13INSURANCE BUSINESS
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4C’s Analysis of InsureCo
I. Community-
Protect Investor’s Interests.
Make best use of opportunity offered in terms of Demographics by Emerging
Economies.
Refocus on core general Insurance Business
II. Competitor Focus on delivering good quality Life Insurance products at competitive pricing.
III. Customer Maintain customer faith post All-World Life Divestiture
IV. Company Proper allocation of resource based on different economies.
Manage Investment portfolio prudentially.
Diversify into various Life Insurance Products and achieve high penetration rate.
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SWOT Analysis of LifeLine Asia
Strength –Better market share
Weakness- Slow capitalization of potential in Asian markets.
Opportunity-Potential in Asian Market
Threat- Negative Impact of Economic downturn and
credit crisis in foreign markets.
It is suggested that with the inherent strength of the
concerned unit it can neutralize the threat.
Weakness on the other hand can be converted into itsstrength by formulating policies based on demographic
pattern of individual Asian economies.
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Comprehensive Considerations
The transaction team is charged with meeting the expectations of all
constituents--employees, customers, stockholders, regulators, vendors and themedia--and should prepare a plan clearly delineating communication
benchmarks throughout the sale.
Corporate leaders must weigh an array of factors before they can make the
decision to divest. Chief among these is identifying business aims and weighingthe transaction's basic issues related to risk, legal, accounting, tax and
regulatory considerations.
The seller cannot reach its business goals for the deal unless a formal
transaction plan--a board- and management-supported blueprint that definesclear roles and responsibilities--is in place. The plan should be reviewed
throughout the transaction to measure progress against defined goals.
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CORE GENERAL
INSURANCEBUSINESS
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Quantitative factors
2009
3-yr Projected
Growth (CAGR)
Life 15% -3%
Property and
casualty 70% 6%
Long-term disability 15% 2%
2009
Life 50%
Property and casualty 10%
Long-term disability 40%
Industry Segment Overview Insurance Co Segment
Inference• CAGR highest in case Property and Casualty segment i.e. at 6 %
•Insurance Co segment lowest in case of Property and Casualty at 10%
•CAGR negative in case of Life at (3%)
•InsureCo segment in case of Life highest at 50%•InsureCo operated in 50% of LIFE Insurance Industry where 3-yr projected
growth is -3%. It should allocate its resources towards Property and Casualty
Insurance Segment where 6% growth is predicted on Compound three-year
basis.
The Insurance Co segment should focus into Property and Casualty andreduce its share in the Life insurance segment
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Focus On General Insurance Business
The non-life insurance market in Asia is benefiting from an
increase in demand for property insurance.
Sluggish consumer and business spending similarly strains the
US property/casualty and life insurance segments, causing
revenues and earnings to fall in 2010. The decline in net
premiums occurred at the same time that investment yields
were torpid. Insurers are further pressured by a competitive
insurance market, with pricing barely budging in 2010 and no
expectations for significant movement in 2011.
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APPENDIXOctober 13INSURANCE BUSINESS
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Appendix http://www.census.gov/population/www/pop-profile/natproj.html
http://data.worldbank.org/indicator/NY.GNP.PCAP.CD http://www.economist.com/node/14515410
en.wikipedia.org
http://www.genevaassociation.org/pdf/News/2010GlobalInsuranceIndustryFactsheet-final.pdf
http://www.imf.org/external/pubs/ft/weo/2009/update/01
http://www.irdaindia.org/annual_handbook/Table%2026.%20Insurance%20Penetration%20and%20Density.xls
http://www.unctad.org/en/docs/ditctncd20074_en.pdf
http://data.worldbank.org/topic/financial-sector
http://articles.economictimes.indiatimes.com/2010-03-31/news/28382155_1_insurance-products-aviva-life-insurance-policies
http://elibrary-data.imf.org/DataReport.aspx?c=1449311&d=33061&e=169393
http://www.hsph.harvard.edu/pgda/WorkingPapers/2011/PGDA_WP_71.pdf http://www.alvarezandmarsal.com/en/industries/insurance/services/turnaround.aspx
http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/us_consulting_breakingupwithoutbreakingdown_082610.pdf
http://www.nytimes.com/1982/08/17/business/csx-divestiture.html
Joseph Stiglitz, Economics of the Public Sector.
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Computation
Computation of Net Profit Margin of North
America in 2009
1250 (InsureCo’ Net Income $MM) X 50%(Life Ins.Segment) X 70%(North America)
=[437.5(Net Income from North America$MM)/10000(Revenue from North America $MM)] X100
Derivation of $10000MM
=>25000(InsureCo’ Revenue $MM) X 50%(Life Ins.Segment) X 80%(North America)
=10000
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Growth of Insurance Premium
Source: Swiss Re, sigma, No. 2/2011.
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Population Growth Rate- Age Group(25-55)
United Nations Population :World Population Prospects
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References
1. Dr. Krishna Sachdev , Professor
Department Of Commerce , Hans Raj College
II. Rajesh Kumar Gupta, FCA
Partner, RAA & Co.
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Approach Adopted
INFERENCE BASED SOLUTION
QUALITATIVE ANALYSIS + OTHER CONSIDERATIONS
EXPERTS , REFERENCES , INTERNET , RESEARCH PAPERS
IDENTIFICATION OF POSSIBLE AVENUES
DATA ANALYSIS (QUANTITATIVE ANALYSIS)
CASE STUDY GUIDELINE
UNDERSTANDING
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Learning Brief introduction to the insurance industry
Data analysis
Qualitative analysis
Inference based solution
Client wants clear-cut solution.
Solution to a problem can be obtained only through brainstorming
discussions.
Proper Analysis and Interpretation is required.
No information is too much. Collect as many information as is
possible but do not let confusion creep in. Consolidation of information is essential.
Exposure to real business situations. Experience how
Tax/Management Consultants work. Understand experts role in
significant business events.October 13INSURANCE BUSINESS
RESTRUCTURING
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THANK YOU