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Project on Financial Analysis of

Venkata Ramanan A

19th Dec 2010


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IGTC, 2009-11

TABLE OF CONTENTS

1. Introduction...........................................................................................3

2. Objective.................................................................................................3

3. Methodology............................................................................................3

4. Company overview......................................................................................3-5

5. Product profile...........................................................................................5-9

6. Financial Analysis..........................................................................................10

Assets under Management............................................................10

Solvency Analysis...........................................................................11

Operating Expense ratio...............................................................11

Equity Share Capital.......................................................................13

Financial Highlights of 2007-08.......................................................14-15

Financial Highlights of 2008-09.......................................................16

Financial Highlights of 2009-10.......................................................17-41

Glossary of terms...............................................................................42

Insurance industry overview.............................................................43-76

7. Conclusion................................................................................................. 76

8. Bibliography............................................................................................... 77

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Objective:

This study attempts to analyse the financials of private sector insurance firm, HDFC Standard Life

Insurance..

Methodology:

Secondary research is adopted from sources such as the website of HDFC SLIC and publications of

IRDA.

Company Overview:

HDFC Standard Life, one of Indias leading private life insurance companies, offers a range of

individual and group insurance solutions. It is a joint venture between Housing Development Finance

Corporation Limited (HDFC), Indias leading housing finance institution and Standard Life plc, the

leading provider of financial services in the United Kingdom.

HDFC Ltd. holds 72.43% and Standard Life (Mauritius Holding) Ltd. holds 26.00% of equity in the

joint venture, while the rest is held by others. HDFC Standard Lifes product portfolio comprises

solutions, which meet various customer needs such as Protection, Pension, Savings, Investment and

Health. Customers have the added advantage of customizing the plans, by adding optional benefits

called riders, at a nominal price. The company currently has 32 retail and 4 group products in its

portfolio, along with five optional rider benefits catering to the savings, investment, protection and

retirement needs of customers.

HDFC Standard Life continues to have one of the widest reaches among new insurance companies

with 568 branches servicing customer needs in over 700 cities and towns. The company has a strong

presence in its existing markets with a base of 2,00,000 Financial Consultants.

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Vision:

The most successful and admired life insurance company, which mean that we are the 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'

Values:

Integrity

Innovation

Customer centric

People Care One for all and all for one

Team work

Joy and Simplicity

Strengths:

Financial Expertise

HDFC Standard Life Insurance has the financial expertise required to manage long- term

investments safely and efficiently.

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Range of Solutions

HDFC Standard Life Insurance has a range of individual and group solutions, which can

be easily customized to specific needs. HDFC Standard Life Insurances group solutions have

been designed to offer a complete flexibility combined with a low charging structure to people.

Track Record:

HDFC Standard Life Insurances cumulative premium income, including the first

year premiums and renewal premiums is Rs. 1532.21 Crores Apr-Mar 2005 - 06.

It has covered over 1.6 million individuals out of which over 5, 00,000 lives have been

covered through our group business tie-ups.

PRODUCT PROFILE OF HDFC STANDARD LIFE

HDFC Standard Life Insurance offers various insurance solutions to meet every ones need.

HDFC Standard Life Insurance offers various insurance solutions to individuals as well as to

companies looking to provide benefits to their employees.

The products that are offered by are mainly classified as follows,

Individual Products.

Group Products.

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INDIVIDUAL PRODUCTS

1. Production plan

(a)Term assurance plan

A pure risk cover plan, which gives you protection against the uncertainties of life. The Term

Assurance Plan is an insurance policy that is designed to help secure your family's financial needs.

(b) Loan cover term assurance plan

An ideal way to cover your home loan or other loan liabilities. This Plan provides a lump sum

on the unfortunate death of the life assured within the policy term.

2. Investment plan

(a)Single premium whole of life plan

OurSingle Premium Whole of Life plan is well suited to meet your long term investment

needs. We provide you with attractive long term returns through regular bonuses.

3. Pension plans

(a)Personal pension plan

It provides a post retirement income in your golden years and gives you the flexibility to plan

your retirement date and Gives you tax benefits on your premiums. The plan receives simple

Reversionary Bonuses, which are usually added annually. At the end of the term an additional

Terminal Bonus may be paid depending on the performance of the underlying investment.

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(b) Unit linked pension

It's an outstanding investment opportunity by providing a choice of thoroughly researched and

selected investments and post retirement income for life and also Flexibility to plan your retirement

date.

(c)Unit linked pension plus


selected investments. Regular Loyalty Units to boost your fund value every year and post retirement

income for life and also Flexibility to plan your retirement date.

4. Savings plan

(a)Endowment assurance plan

It's an ideal way to secure your long-term financial goals. Valuable protection to your family

by way of lump sum payment in case of your unfortunate demise within policy term and Lump sum

payment on survival up to maturity date

(b) Unit linked Endowment


selected investments. Valuable protection to your family in case you are not around and Flexible

benefit combinations and payment options and also flexible additional benefit options such as critical

illness cover.

(c) Unit linked Endowment plus


selected investments. Regular Loyalty Units to boost your fund value every year. Valuable protection

to your family in case you are not around and Flexible benefit combinations and payment options and

also flexible additional benefit options such as critical illness cover.

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(d) Money back plan

A proportion of the basic sum Assured as Cash lump sums at regular 5-year intervals within

the policy term an ideal way to secure your long- term as well as short-term financial goals and a

lump sum payment on survival up to maturity date. Valuable protection to your family by way of

lump sum payment in case of your unfortunate death within the policy term.

(e) Children's plan

The Children's Plan is designed to secure your child's future by giving your child a guaranteed

lump sum, on maturity or in case of your unfortunate demise, early in the policy term. The premiums,

paid by you, are invested by the company to give you good long-term returns.

(f) Unit linked young star


selected investments. Valuable protection to your child in case you are not around. Flexible benefit

combinations and payment options and also flexible additional benefit options such as critical illness.

(g)Unit linked young star plus


selected investments. Regular Loyalty Units to boost your fund value every year and Valuable

protection to your child in case you are not around and Flexible benefit combinations and payment

options and also flexible additional benefit options such as critical illness cover.

GROUP PRODUCTS

(1)GROUP TERM INSURANCE PLAN

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The Group Term Insurance (GTI) plan meets this need and serves as an ideal way for

companies to reinforce their bond with their employees. The sort of needs, you, as an employer need

to cater to could be in form of:

Employee benefits

Cover for housing or vehicle loans given by you to your employees

A GTI cover for future service gratuity liability to be taken along with the Group Unit Linked

Plan

One year renewable term insurance plan.

One master policy issued covering all members of the group.

(2) GROUP VARIABLE TERM INSURANCE

The Group Variable Term Insurance is a tailor made insurance policy for third party

institutions. HDFC Standard Life Insurance Company will offer life insurance to customers of one or

more of the third partys specific products in order that in the event of their death, there will be a lump

sum available.

The Group Variable Term Insurance:

On death, will pay a lump sum known as a sum assured. The sum assured varies over time in

order that the customer receives the cover that they need.

Is a group policy.

Has no lengthy underwriting procedure.

Is simple to administer.

Financial Analysis:

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The analysis will be conducted on the following dimensions for the years 2007-08 and 2008-09 and

2009-10..

The following would be analysed:

Assets under management, solvency analysis, operating expenses and Equity Share Capital.

Assets under management:

The assets under management (in Crores) as of 2008-09 and 2007-08 are calculated from the data as

presented below:

C Govt

securitiesState govt and

Other Approved

Securities

Infrastructure

Investments

Approved

Investments

Other

Investments Total

2008-09 1248 75.54 497 681 35

2537

2007-08

1095.10 84.22 364.77 625.79 50.28 2220.16

The assets under management have increased by 14.3 % which is a positive indicator.

Solvency Analysis:

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Put simply, it indicates how solvent a company is, or how prepared it is to meet unforeseen

exigencies. It is the extra capital that an insurance company is required to hold. As per the Irda

(Assets, Liabilities, and Solvency Margin of Insurers) Rules 2000, both life and general insurance

companies need to maintain solvency margins.

While all non-life insurers are required to follow the regulations, life insurance companies are

expected to maintain a 150% solvency margin.It is the ratio of the amount of Available Solvency

Margin to the amount of Required Solvency Margin. It is the key indicator of financial health of the

insurance company. The solvency margin is designed to take care of problems that are usually not

anticipated. It also provides elbow room to the managers of insurers to rectify problems and take

precautionary measures.

The table below shows the calculation of solvency margin as per IRDA guidelines.

TABLE II- AVAILABLE SOLVENCY MARGIN AND SOLVENCY RATIO

Item Description Notes

No...

Amount

(1) (2) (3) (4)

01

02

03

04

Available Assets in Policyholders' Funds:

Deduct:

Liabilities

Other Liabilities

Excess in Policyholders' funds (01 - 02 - 03)

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05

06

07

Available Assets in Shareholders Funds:

Deduct:

Other Liabilities

Excess in Shareholders' funds: (05 -06)

08 Total ASM (04)+(07)

09 Total RSM

10 Solvency Ratio (Total ASM/ Total RSM)

Solvency ratio for the company in 2007-08 was 2.38 while in 2008-09 it was 2.58.There is an increase

of 8%. This indicates that the company is financially healthy.

Operating Expenses ratio:

Operating expenses as a percentage of the premium is analysed.

Item 2008-09 2007-08

Premiums 55,646,937 48,585,616

Operating expenses 17,600,683 10,129,791

Operating expenses as a % of 32 % 20 %

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premium

The operating expenses ratio has increased in 2008-09 indicating more operating expenses as well as

an increase in the premiums.

Total premium grew by 14% in 2008-09.

Equity Share Capital:

HDFC Standard Life

Insurance Co. Ltd.

As on 31st

March

2008

Infusion

during

2008-09

As on

31st

March

2009

Foreign

Promoter

Indian

Promoter

FDI

(%)

1271.00 525.00 1796.00 466.96 1329.04 26.00

There was a substantial infusion during 2008-09.

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Financial Highlights (2007-08):

New Business

The first year premium income increased by over 1,055.37 from Rs. 1,624.24 crores in the previous

year to Rs. 2,679.61 crores in the current year, recording a growth of 65%. The renewal premia

continued to reflect the quality of the book and grew from Rs 1207 crores in the previous year to

Rs. 2173.19 crores in the current year. The cumulative Sum Assured in respect of policies

issued increased from Rs. 67,192.97 crores as at 31st March, 2007 to Rs. 87,439.41 crores as at 31st

March, 2008.During the year, the company introduced new and improved versions of products

Replacing some of the existing versions. The company now has a portfolio of 19 retail and 6 group

products, along with five optional rider benefits catering to the savings, investment, protection and

retirement needs of the customer. Most retail products are offered on both, the conventional

and unit linked platforms.

The companys focus on the retirement planning business continues to pay rich dividends. The first

year premium collected grew to Rs 1,327.13 crores During the year, the company issued over

9,40,000 policies and has covered more than 9,59,000 lives.

Investments

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Investments of insurance companies are regulated under the IRDA (Investment) Regulations, 2000 as

amended from time to time.The company has complied with all the requirements under the said

Regulations. The total assets under management as on March 31,2008 is Rs. 8,916 crores as against

Rs. 4,976 crores in the previous year. Under the unit linked products, the company offers a choice of 7

funds ranging from growth to liquid funds to the retail policyholder and an additional fund for the

corporate customers.

Risk Management Policy:

The company has a Risk Management Policy which details the mitigation measures in place to reduce

the risk levels in the functioning of the various parts and processes of the company.During the year,

the risk heat map was reviewed and recast with a view to rationalizing risks across the organization.

This process involved risk identification, impact evaluation and mitigant identification exercise.

Financial Highlights (2008-09):

New Business

The year 08-09 has been a difficult year for the financial sector and the impacts have been felt in the

Indian life insurance industry. Growth rate in the private sector have declined over the year on the

back of a much more cautious attitude adopted by individual customers. There have been changes in

asset allocation and preferences during the year. The company issued over 9.70 lakh policies

(including policies sold in rural areas) during the financial year. During the current year the first year

premium income amounted to Rs. 2,651.11 crores and renewal premium amounted to Rs. 2,913.58

crores in the current year. Total Premium collected during the year has increased from Rs. 4,858.56

crores in the previous year to Rs. 5,564.69 crores during the current year registering a positive growth

of 14.53%.The sum assured in force for the current year was Rs. 57,158 crores as compared to Rs.

45,743 crores for the previous year.

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During the year, the company introduced new and improved versions of retail products replacing

some of the existing versions. The company now has a portfolio of 25 retail and 4 group products,

along with five optional rider benefits catering to the savings, investment protection and retirement

needs of the customer. Most retail products of HDFC Standard Life Insurance Company Limited are

offered on both, the conventional and unit linked platforms.The company launched its first products in

the health insurance market during the year HDFC Critical Care Plan (to cover critical illnesses) and

HDFC Surgicare Plan (to cover surgical benefit and hospitalization cash). The company also reduced

premium rates on its term insurance plans and passed on a substantial benefit to customers.

The company continued to grow its business in the group pensions market. The company continues to

acquire new corporate customers who are interested in entrusting the company with management of

its gratuity and superannuation funds. The company maintained its brand presence through innovative

marketing campaigns. The launch of the company Brand Video & Album was well received in the

market.

Investments:

Investments of insurance companies are regulated under the IRDA (Investment) Regulations, 2000 as

amended from time to time. The total assets under management as on March 31, 2009 are Rs. 10,595

crores as against Rs. 8,916 crores in the previous year. Under the unit linked products, the company

offers a choice of 7 funds ranging from growth to liquid funds for the retail policyholder and an

additional fund for the corporate customers.In compliance with the regulations issued by the IRDA,

the company has terminated its understanding /arrangement with the HDFC Asset Management

Company for investment advice and research services with effect from January 1,2009. The entire

investment function is now independently handled by the company.

Dividend

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As the company has not earned profits, the directors do not recommend any dividend.

Financial highlights 2009-10:

Strong growth in premium income and assets under management

Total premium grew by 25.9 percent to Rs. 70.1 bn. (2008-09: Rs. 55.6 bn.)

New business received premium including first year and single premiums grew by 20.5

percent to Rs. 32.6 bn. (2008-09: Rs. 27.0 bn.)

First year regular premiums increased by 17.5 percent to Rs. 29.8 bn. (2008-09: Rs.25.4 bn.)

Single premiums, including single premium top-ups, increased by 65.6 percent to Rs.

2.7 bn. (2008-09: Rs. 1.6 bn.)

Renewal premium constituted 53.5 percent of total premiums (2008-09: 51.4 percent) and

grew by 31.0 percent to Rs. 37.5 bn. (2008-09: Rs. 28.6 bn.)

Our weighted received premium (10 percent weightage for single premium) growth during

the year at 27.5 percent was higher than the growth for the private sector (13.0 percent)

and the overall industry (20.5 percent)

Assets under management of Rs. 207.7 bn. as on March 31, 2010 nearly doubled from Rs.

106.0 bn. as on March 31, 2009.

Consolidation of the distribution network and the increasing share of Banc assurance

The number of branches / spokes stood at 568

The total number of licensed agents stood at 197,688

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The share of new business effective premium income (EPI) of the alternate channels of

distribution viz. banks, brokers and other corporate agents increased to 54.7 percent (2008-

09: 46.7 percent)

For our bank partners, brokers and other corporate agents EPI grew by 17.6 percent to Rs.

14.0 bn. (2008-09: Rs. 11.9 bn.)

For the tied agency channel EPI de-grew by 15.9 percent to Rs. 11.1 bn. (2008-09: 13.2 bn.)

Move towards creating a strong platform for profitable growth

Commission ratio was stable at 7.5 percent (2008-09: 7.6 percent)

Operating expense ratio down to 19.7 percent (2008-09: 29.2 percent)

Operating expenses were lower by 15.0 percent at Rs. 13.8 bn. (2008-09: Rs. 16.2 bn.)

Considerable improvement in conservation ratio on individual business of 71.6 percent (2008-

09: 65.0 percent)

Indian GAAP loss down to Rs. 2.8 bn. (2008-09: Rs. 5.0 bn.)

Post tax new business profits individual business

The new business post tax profit based on loaded acquisition expenses was Rs. 6.6 bn.

The new business profit translates to a new business margin of 25.8 percent pre acquisition

expense overrun calculated on an MCEV basis.

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Market consistent embedded value (MCEV) and analysis of change in MCEV

The market consistent embedded value (MCEV) as at March 31, 2010 was Rs. 33.8 bn. (March

31, 2009: 22.3 bn.); and comprised shareholders adjusted net worth of Rs. 6.7 bn. and value

of in force business of Rs. 27.1 bn.

Capital infusion and solvency ratio

The paid up capital as on March 31, 2010 stood at Rs. 19.7 bn. with an infusion of Rs. 1.7 bn.

during the year (March 31, 2009: Rs. 18.0 bn., with an infusion of Rs. 5.3 bn.)

With the objective of achieving higher capital efficiency our solvency ratio as on March 31,

2010 stood at 180 percent (March 31, 2009: 258 percent), which was above the minimum

regulatory requirement of 150 percent

HDFC Standard Lifes focus in 2009-10

In what was expected to be a challenging year for new business our three-fold strategic focus

was on:

i) new business growth

ii) operational efficiencies to bring down our operating expenses; and

iii) customer retention to improve the persistency of the in force policies.

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The year also witnessed regulatory changes that imposed a cap on the charges levied by unit

linked products. We responded to this requirement by re-launching our entire range of products

ensuring compliance with the changes from January 2010 onwards. The numbers reported are

after giving effect to this regulatory change.

1. New business growth

The slowdown in new business growth that was experienced by the life insurance sector in the

aftermath of the global financial crisis in 2008-09 continued well into 2009-10. While customers

continued to be wary of investing in the stock markets, they were also reluctant to commit

funds for the long term. There was also a marked preference for government backed

institutions. The private sector turned the corner into positive growth territory only in December

2009 as did HDFC Standard Life.

In a year marked by consolidation and a consequent loss of market share for the private sector,

we ended the year with a strong growth of new business received premium, including individual

and group, of 20.5 percent i.e. from Rs. 27.0 bn. to Rs. 32.6 bn.

1a. New business market share

During the year we were successful in striking a balance between building operational efficiencies

and pursuing growth to retain our market share. We had a private sector received premium market

share of 8.5 percent in 2009-10. In terms of weighted received premium, our market share was 8.6

percent in the private sector in 2009-10 compared to 7.6 percent in 2008-09. onsequently, our WRP

ranking in the private sector improved to 5th in 2009-10 from 6th in 2008-09.

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2. Product trends

Our product mix covers all the life stage needs of our customers. At a broad level our major

lines of business catering to unique customer needs are life and pensions. We have since last

year introduced standalone health insurance products to add to our range of product offerings in

the life insurance space. We also re-launched 16 products in compliance with the unit linked cap

on the charges imposed by the IRDA.

Amongst the key product trends during the year was the balance in our product mix between life

and pension products on one hand and unit linked and conventional products on the other. We

believe that this balance lends us an advantage in the private life insurance space which is

skewed towards unit linked life products.

2a. Life and pensions - EPI contribution

The life segment, which comprises products that cover the savings and protection needs of our

customers, constituted 78 percent of individual business notching up a 10 percent increase over

2008-09. Within this segment, the products that have been designed to cater to our customers

need to save for their childrens future have retained their immense popularity.

Over the counter savings product, the Savings Assurance Plan (SAP) and the Suvidha range, also

contributed significantly to the life segment during the year.

The pensions segment, on the other hand, is largely deferred annuity with a small immediate

annuity component. We continue to be a significant player in the pension segment in the Indian

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IGTC, 2009-11

market. In fact, we were the second largest private insurer in the pensions segment in 2008-09.

2b. Life and pensions Unit Linked vs. conventional split

On an overall basis unit linked products contributed to 79 percent of effective premium income

and conventional products contributed 21 percent during the year.

2c. Protection

An important part of our product offering is our range of protection products within the life

segment which provide income protection for the family in the unfortunate event of death or

critical illness. These include our term assurance plans, home loan protection plans and health

plans besides the riders available with our savings products. The sum assured chart below shows

an increasing trend in the coverage offered by such plans over the years.

2d. Group business

The total group business received premium (new business and renewals) during the year was Rs.

6.2 bn. During the year we received new business premium income from our corporate

customers of Rs. 5.0 bn. which constituted 15.5 percent of our total first year premiums during

the year. We offer different products for the varying needs of employers ranging from term

insurance plans for pure protection to voluntary plans such as superannuation and leave encashment.

Our corporate customers chose our group unit linked plan as investment solutions that provided them

a funding vehicle to manage corpuses with gratuity, defined benefit and defined contribution

superannuation and leave encashment schemes. These plans contributed Rs. 4.9 bn.

of received premium income during the year.

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3. Increasing insurance coverage in an underinsured market

Our primary responsibility towards our customers in the Indian life insurance market is to ensure that

they have adequate life cover in the event of unforeseen circumstances. While our pure protection

products do that exclusively, our savings products also have a life cover built in.

The table below shows the in force sum assured and death benefit as on March, 31 2010 across

all individual and group unit linked products.

Rs(Bn) Sum Assured Death Benefit

Individual Unit Linked

Life 348.7 568.2

Pension

Total

0.1 52.3

348.8

610.5

Group Unit Linked

Life

0.8

14.1

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Pension 0.8 18.6

Total349.6 639.1

*Death benefit includes accidental death benefit sum assured and waiver of

future premium benefit on the Young star policies and the fund value for

pension

4. Consolidation of the distribution networkand the increasing share of Bancassurance.

We ended the year with 568 distribution points across the country and through the network of

these offices our Financial Consultants, Corporate Agents and Brokers were able to service

customers in over approximately 700 cities and towns across the country.

Our distribution mix witnessed a change in the share of new business EPI. The share of alternate

channels of distribution viz. banks, brokers and other corporate agents increased to 54.7 percent

from 46.7 percent in 2008-09. The alternate channels EPI grew by 17.6 percent to Rs. 14.0 bn.

from Rs. 11.9 bn. in 2008-09. The retail (tied agency) channel de-grew by 15.9 percent to Rs.

11.1 bn. from 13.2 bn. in 2008-09.

5. Assets under management

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Assets under management of Rs. 207.7 bn. as on Mar 31, 2010 increased by 97.3 percent from

Rs. 105.3 bn. from the previous year and contributed to covering our maintenance expenses.

Over the last five years, our assets under management have grown at a compounded annual

growth rate of 91.8 percent.

6. Operational efficiency

6a. Operating expense ratio

The operating expense ratio* was brought back on track to 19.7 percent during the year from

29.2 percent in the previous year. This decline was achieved by both a strong drive to improve

efficiencies during the year as well as an increase in total premiums. Operating expenses* were

brought down by 15.0 percent from Rs. 16.2 bn. in 2008-09 to Rs. 13.8bn. in 2009-10.

The following table highlights some of the key expense heads and change over

the previous year.

Percentage of total

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operating

expenses*

Percentage change

over 2008-09#

Employees' remuneration & welfare

benefits

44.3 8.1

Advertisement and publicity 20.1 29.7

Business Development Expenses 4.7

24.2

Legal & professional charges

4.9 21.5

Rent, rates & taxes

7.5 -10.0

Others

18.5 16.0

Total

100.0 15.3

10.Some of the measures initiated in 2008-09 and continued during the current year that brought

about greater operational efficiencies were:

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Renegotiations of all major lease agreements related to office space to avail of better rates

Active negotiation of all significant contracts with vendors and focus on bulk purchases to

ensure cost-effective rates

Savings of 20 to 40 percent realized across different commodities by:

Category Management (through Value Analysis / Value Engineering) to identify better /

alternate ways of spend

Using best in class sourcing techniques including reverse auctions so as to source

commodities at the most competitive rates

Minimizing scope for non-compliant / wasteful spends by incorporating a workflow

process

Significant savings in terms of delivered costs through well negotiated contracts.

6b. Commission ratio

The trend of a stabilized commission ratio (total commissions to total premiums) to a level

below 8 percent also continued during the year.

A break up of the commissions into first year, single and renewal commissions shows that:

Our first year commission ratio (first year commissions to first year premium income) was at

15.1 percent in 2009-10 compared to 14.1 percent in the previous year.

Single premium commission to single premium income ratio was 0.4 percent in 2009-10

compared to 0.7 percent in the previous year.

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Renewal commission to renewal premium income ratio was 2.0 percent in 2009-10 compared

to 2.3 percent in the previous year.

7. Focus on customer retention / persistency

With a share of 53.5 percent of total premiums for the year renewal premiums grew by 31.0

percent to Rs. 37.5 bn. from Rs. 28.6 bn. in 2008-09. Our individual business conservation ratio,

which had taken a hit in 2008-09, improved considerably to 71.6 percent.

The dip in the conservation ratio in 2008-09 was due to the impact of the premium reduction

feature, which was built into our version 4 unit linked products and saw most customers opting

for it in the backdrop of turmoil in the stock markets during the period. While we discontinued

the product in 2008, its impact ran its course till the end of 2009 and as its effect wore off in

the last two quarters of 2009-10 our conservation ratio for the year improved. Excluding the

products with the premium reduction option, our individual business conservation ratio was 73.0

percent in 2008-09 and 74.7 percent in 2009-10.

The other key decrements to our conservation ratio are lapses, surrenders and paid-ups. Lapses

occur within a 24 month period of policy conversion and we identify a policy as lapsed

immediately after the grace period for renewal premiums due is over. We have processes for

preventive measures as well as revival measures to minimize the impact of lapsations.

To prevent lapsation we make welcome calls to the customers to ensure that the customer

understands the product features and it suits his/her needs. We also run campaigns to revive

lapsed policies.

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The company undertook several measures to improve the management of our back book during the

year:

Persistency vertical set up to improve customer retention proactive, direct contact with

customers to urge them to continue paying premiums

Lapse prediction model developed to predict lapse propensity which is being used to run

customer retention campaigns

Products with a premium reduction option which impacted persistency were discontinued in

2008-09.

Incentivized sales of lower frequency modes of premium payment primarily annual mode

Strong emphasis on needs based selling

First life insurer to introduce and continue with commission claw backs in the event of

lapsation

Customer welcome calls to ensure understanding of the product bought

8. Indian GAAP results

With the focus on operational efficiencies to reduce our acquisition cost, Indian GAAP loss was

brought down to Rs. 2.8 bn. during the year from a loss of Rs. 5.0 bn. in 2008-09.

9. Capital infusion and solvency ratio

The paid up capital as on March 31, 2010 was at Rs. 19.7 bn. with a lower infusion of Rs. 1.7 bn.

during the year compared to an infusion of Rs. 5.3 bn. in 2008-09.

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With an available solvency margin of Rs. 6.0 bn. and a required solvency margin of Rs. 3.3 bn.,

our solvency ratio as on March 31, 2010 stood at 180 percent, which was well above the

minimum regulatory requirement of 150 percent.

10. MCEV, new business profitability and the analysis of movements in MCEV

10a. Market consistent embedded value (MCEV)

The unaudited market consistent embedded value (MCEV) as at March 31, 2010 was Rs. 33.8 bn.

and comprised of shareholder adjusted net worth of Rs. 6.7 bn. and value of in force business of

Rs. 27.1 bn.

MCEV - Methodology and approach

The calculations of embedded value and new business profits have been done using a

market consistent embedded value (MCEV) approach. This approach differs from a

traditional EV approach primarily in respect of the way in which allowance for risk is

made. Within the traditional EV approach, allowance is made for risk through an

increase in the risk discount rate used to value future shareholder cash flows, whilst

within the MCEV calculation explicit separate allowances are made for risk.

There are two components to the MCEV:

i. Shareholder adjusted net worth - this component represents the market value of

assets attributable to shareholders. This amount is derived from the Indian GAAP

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balance sheet adjusted to allow for assets on a market value basis, elimination of

intangible assets and to allow for shareholder attributable assets residing within

the unit-linked and non par policyholder funds.

ii. Value of inforce - this component represents the discounted value of after tax

shareholder attributable cashflows expected on the business as at the valuation

date. No allowance is made for future new business. This amount has been

adjusted to deduct allowances for non hedgeable risk, frictional costs of required

capital and the time value associated with financial options and guarantees.

MCEV - Components of Value of in force (VIF)

Present value of future profits (PVFP)

This component has been calculated by discounting the projected future after tax

shareholder attributable cashflows expected to arise on in-force business at the

valuation date.

The cashflows have been projected on a deterministic basis using the companys best

estimate view of future persistency, mortality and expenses. Future investment

returns and the risk discount rate have been set equal to the returns from the risk

free yield curve at the closing balance sheet date.

Cost of non-hedgeable risk (CNHR)

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A deduction from the PVFP is required in order to make appropriate allowance for

non hedgeable and non economic risks. Within a traditional EV calculation this would

be allowed for by an increase to the risk discount rate, but within MCEV an explicit

separate deduction is made.

The CNHR has been derived using a cost of capital approach whereby an annual

charge is applied to projected risk bearing capital associated with 99.5th percentile

stress events for non economic assumptions over a 1 year time horizon.

99.5th percentile stress events have been taken from the EU Solvency II, QIS 4

framework. In order to allow for the greater risks associated with emerging markets,

the risk bearing capital has been uplifted by 50 percent.

The CNHR has been calculated as the discounted value of a 4%p.a. charge applied to

the projected risk bearing capital.

The stress events, uplifts to NHR and annual charge are reviewed and modified if

necessary on an annual basis.

Time value of financial options and guarantees (TVFOG)

The MCEV incorporates an allowance for risks associated with asymmetric shareholder

returns associated with the Participating (Par) Funds by deducting a cost for the

TVFOG. This asymmetry primarily arises due to the fact that if in deficit the Par

Funds have to be funded 100% by the Shareholder Fund whereas if the funds have

surpluses only 10% of these are attributable to the Shareholder Fund. The PVFP is

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calculated using a deterministic basis and therefore does not capture the risk that in

certain possible circumstances the Par Funds may have deficits.

The TVFOG has been calculated by assessment of the shareholder attributable cash

flows (both transfers out of the funds and injections into the funds) on a large

number of stochastic simulations derived on a risk neutral basis.

In each simulation the value of the shareholder attributable cash flows have been

discounted back to the balance sheet date with the TVFOG then being set equal to

the difference between the average of the discounted value of these cash flows and

the equivalent figure calculated on a deterministic basis.

The calculation of the TVFOG incorporates a number of approximations and is being

progressively developed and refined. The key areas of approximation include the

selection of implied equity and swaption volatilities, the treatment of future

management actions and the apportionment of TVFOG associated with new as

opposed to in-force business.

Frictional cost of required capital (FCRC)

An allowance has been made within the MCEV for the frictional costs of holding

required capital (FCRC). Required capital has been set equal to the amount of

shareholder attributable assets required to back local regulatory solvency

requirements. The FCRC has been calculated as the discounted value of investment

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costs and taxes on shareholder attributable assets backing the required capital over

the lifetime of the in-force business.

MCEV - Key assumptions

Economic: An MCEV approach is used projected earned and discount rates are

equivalent and are based on the risk free (government bond) yield curve at the

relevant balance sheet date. No allowance for any illiquidity premia is made within

the earned rates.

Expenses: Maintenance expenses have been based on actual expense levels currently

being incurred and make no allowance for future productivity improvements. The

maintenance expenses are assumed to increase each year at an expense inflation rate

of 7.5%.

Acquisition expenses, for the purposes of new business profitability reporting have

been based on levels the company expects to achieve by FY2012-2013 based on its

business plan. Actual acquisition expenses are currently higher than these

assumptions and therefore any excess acquisition expense over the assumption is

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recognised in the period and the shareholder attributable component, net of tax,

deducted from the value of new business for that period.

Persistency assumptions are set by product line, payment mode and duration inforce,

based on past experience and expectations of future experience. Separate

decrements are modeled for lapses, surrenders and paid-ups.

Due to the age of the industry, minimal experience exists on long-term persistency

assumptions and therefore these assumptions are reviewed on an active basis and

updated when experience suggests a significant difference from the assumptions

used.

Tax assumptions are based on interpretation of existing tax legislation, where

appropriate supported by legal opinion.No allowance is made for future changes to taxation such as

the Direct Tax Code.These changes will be incorporated only once materially enacted.

Mortality and morbidity assumptions are set by product line and are based on past

experience.

10b. Analysis of change in MCEV and post tax new business profits

The analysis of change in MCEV identifies the main drivers that have caused the MCEV to move

over the financial year. The value of new business written in the year is normally the most

significant driver for increases in value shown in the analysis of change.

Rs( Bn)

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New business profits (based on loaded acquisition expenses) 6.6

Impact of acquisition expense overrun -2.5

New business EPI for the FY* 25.6

New business margin (based on loaded acquisition expenses)* 25.8%

* Margins and EPI are shown for individual business only

The new business margin after expense overruns was 16.2 percent. This included the impact of

acquisition expense overrun of Rs. 2.5 bn. incurred during FY ending Mar 31, 2010. The

acquisition expense overrun is expected to reduce significantly in the current financial year and

be eliminated by 2012-13. The reduction will be driven through cost containment and continued

focus on sales efficiency and growth.

In presenting the analysis of change, the following approach has been adopted:

i) Impact of changes in assumptions and methodology

The impacts from updates to assumptions and methodology are allowed for as follows:

Updates to non economic assumptions and methodology are made at the start of the

period, and the subsequent analysis of change calculated using these revisions

Updates to economic assumptions including revisions to the economic scenarios used

for the TVFOG calculation are made at the end of period and incorporated as a

closing adjustment.

ii) Experience variances

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The impact on the MCEV from variations between the assumptions and actual

experience are determined and recognised in the period for non economic

assumptions and at the end of the period for economic assumptions.

The impact on the variations for non economic assumptions are separately attributed

to new and in-force business.

iii) Value of new business

New business profits are calculated as at end of period, using the opening (i.e. 31st

March 2009) yield curve and incorporate allowance for variations on non economic

assumptions during the period.

The TVFOG associated with new business written during the year has been

approximated by apportioning the overall closing TVFOG (before changes to the end

period economic assumptions) on the basis of guaranteed benefits associated with the

new and inforce business. This TVFOG is incorporated as a deduction from the new

business profits.

The new business profits are calculated before and after acquisition expense

overruns.

iv) EV profits

EV profits are calculated as the movement in EV during the period less capital

injections.

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v) EV Operating profit (EVOP)

EV operating profit (EVOP) is calculated as the movement in EV during the period

less capital injections and the impact of economic variances and economic

assumption changes.

The EVOP represents the impact on the MCEV from performance that is considered

within management control.

11. Best practices

11a. Underwriting standards

We continued to set the standards in the industry on underwriting best practices. Our claims

repudiation ratio was the lowest in the industry in 2008-09 at 4.8 percent of total number of

claims and 6.6 percent of benefit amount.

Financial year 2008-09 was the second consecutive year that our ratios were the lowest in the

industry. We continued with our profitability with values approach to growth during the year.

Total claims benefit amount (Rs. Bn.) Source: IRDA Annual Report.

11b. Accolades and awards

The year also witnessed recognition from consumers of our ability to innovate and create

insurance solutions that suit their needs.

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Our childrens plan YoungStar Super was voted Product of the Year 2010 in the 'Insurance'

category by more than 30,000 consumers nationwide across 36 markets. The consumer study on

product innovation in India was conducted by A C Nielsen. Product of the Year is an

internationally recognized standard that celebrates and rewards the best innovations in

consumer products and services.

11c. Technology and processes

A key initiative during the year was the implementation of SAP ERP for the Financial Accounting

& Controls (FICO) and Human Resources (HR) modules to adopt global best practices in

technology driven processes within our operations.

Some of the awards that we received during the year relating to our technology initiatives were:

CIO Ingenious 100 - 2009 Award, for our workflow system ATLAS (Agency Training Licensing

and Servicing System)

CIO 100 Security Award 2009 for pioneering LANDesk Management and Security Suite

security implementation and taking its security to a higher level of technological excellence.

We received the CIO 100 Award for the third consecutive year

Diamond EDGE Award 2009 for our mobile workforce portal - Consultant Corner

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Glossary of terms

1. Total premiums Total received premiums during the year including first year, single and

renewal premiums for individual and group business.

2.First year premiums Regular premiums received during the year for all modes of payments

chosen by the customer which are still in the first year. For e.g. for a monthly mode policy sold

in March 2009 the first installment would fall into first year premiums for 2008-09 and the

remaining 11 installments in the first year would be first year premiums in 2009-10.

3.New business received premium The sum of first year premium and single premium.

4. Weighted received premium The sum of first year premium and 10 percent weighted single

premiums and single premium top-ups.

5.Renewal premiums Regular recurring premiums received after the first year.

6.Effective premium income (EPI) - 10 percent weight-age for single premiums and annualized

for regular premiums e.g. monthly installment premium x 12

7. Commission ratio Ratio of total commissions paid out on first year, single and renewal

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premiums to total premiums

8. Operating expense ratio Ratio of operating expenses excluding service tax to total premiums.

9. Conservation ratio Ratio of current year renewal premiums to previous years renewal

premium and first year premium.

10. Claims repudiation ratio Ratio of claims paid to total claims received during the period

.

Insurance industry overview:

Introduction

The business of insurance started with marine business. Traders, who used to gather in the Lloyds

coffee house in London, agreed to share the losses to their goods while being carried by ships. The

losses used to occur because of pirates who robbed on the high seas or because of bad weather

spoiling the goods or sinking the ship. The first insurance policy was issued in 1583 in England. In

India, insurance began in 1870 with life insurance being transacted by an English company, the

European and the Albert. The first Indian insurance company was the Bombay Mutual Assurance

Society Ltd, formed in 1870. This was followed by the Oriental Life Assurance Co. in 1874, the

Bharat in 1896 and the Empire of India in 1897.

Later, the Hindustan Cooperative was formed in Calcutta, the United India in Madras, the

Bombay life in Bombay, the National in Calcutta, the New India in Bombay, the Jupiter in Bombay

and the Lakshmi in New Delhi. These were all Indian companies, started as a result of the swadeshi

movement in the early 1900s. By the year 1956, when the life insurance was nationalized and the

Life Insurance Corporation of India (LIC) was formed on 1st September 1956, there were 170

companies and 75 provident fund societies transacting life insurance business in India. After the

amendments to the relevant laws in 1999, the L.I.C. did not have the exclusive privilege of doing life

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insurance business in India. By 31.3.2002, eleven new insurers had been registered and has begun to

transact life insurance business in India.

Need of Insurance

Assets are insured, because they are likely to be destroyed, through accidental occurrences.

Such possible occurrences are called perils. Fire, floods, breakdowns, lightning, earthquakes, etc, are

perils. If such perils can cause damage to the asset, we say that the asset is exposed to that risk.

Perils are the events. Risks are the consequential losses or damages. The risk to an owner of a

building, because of the peril of an earthquake, may be a few lakhs or a few crores of rupees,

depending on the cost of the building and the contents in it.

The risk only means that there is a possibility of loss or damage. The damage may or may not

happen. Insurance is done against the contingency that it may happen. There has to be an uncertainty

about the risk. Insurance is relevant only if there are uncertainties. If there is no uncertainty about the

occurrence of an event, it cannot be insured against. In the case of a human being, death is certain,

but the time of death is uncertain. In the case of a person who is terminally ill, the time of death is not

certain, though not exactly known. He cannot be insured.

Insurance does not protect the asset. It does not prevent its loss due to the peril. The peril

cannot be avoided through insurance. The peril can sometimes be avoided, through better safety and

damage control management. Insurance only tries to reduce the impact of the risk on the owner of the

asset and those who depend on that asset. It only compensates the losses and that too, not fully.

Only economic consequences can be insured. If the loss is not financial, insurance may not

be possible. Examples of non-economic losses are love and affection of parents, leadership of

managers, sentimental attachments to family heirlooms, innovate and creative abilities, etc.

Types of insurance

Automobile insurance

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Aviation insurance

Boiler insurance

Builders risk insurance

Casualty insurance

Disability insurance

Liability insurance

Marine cargo insurance

Purchase insurance

Credit insurance

Crime insurance

Crop insurance

Directors and officers liability insurance

Property insurance

Terrorism insurance

Title insurance

Travel insurance

Workers compensation

Life insurance

Total permanent disability insurance

Locked funds insurance

Marine insurance

Financial loss insurance

Health insurance

Professional indemnity insurance

Environmental liability insurance

Pet insurance

Political risk insurance

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Indian insurance is a flourishing industry with several national and international players competing

and growing at a rapid rate. Thanks to reforms and the easing of policy regulations, the Indian

insurance sector been allowed to flourish and as Indians become more familiar with different

insurance products, this growth can only increase, with the period from 2010 - 2015 projected to be

the 'Golden Age' for the industry. However, with this projected growth, the industry is also facing a

number of challenges like high operating costs, need for new distribution channels, product

development, high claim ratio etc.Seeing the growth combined with the multiple challenges of the

insurance sector in India, the theme of the conference was decided and this theme paper deals with the

present scenario of insurance industry in the country and the way forward.

Over the past two years, most sectors have been working toward only one objectivesurvival. In fact,

the financial services sector, the world over, has been one of the hardest-hit due to the economic

upheaval.At the beginning of the downturn, there were many differences among the insurers but the

disparity has increased today. Those who had the right mechanism in place to protect their assets have

emerged much stronger than others.

Market opportunities have made it possible for the insurance companies to emerge stronger from the

downturn and now they can extend their market reach, increase the products range and take the

market share from the competitors.

Insurance industry seems to surpass the tough times in U.S with the help of support provided by

government. The insurance sector in the US seems to be emerging through difficult times, with

significant support from the government .The policymakers and regulators of US have started

strengthing the regulations on the basis of the learning from the financial crisis. The European market

is facing new threats although its fight with the old ones still continues. At the same time, emerging

economies has taken new initiatives to safeguard their financial services sector learning from the

economic crisis in the developed economies.

The insurance industry in India seems to have come out of the de growth during the economic crisis

Life Insurance companies have witnessed a 70 percent jump in new premium collection during the

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first five months of the financial year. The increase comes in a period that saw the insurers trying to

push sales ahead of the change in the norms of unit-linked insurance plans (ULIPs). (Business

Standard, 29th September, 2010).

According to the data released by Insurance Regulatory Development Authority (IRDA), insurance

companies garnered Rs 52,749 crore in new business premium in the April-August 2010 period as

against Rs 31,040 crore in the corresponding period last year.

As per the LIC Chairman, Mr. TS Vijayan quoted in the newspaper Business Standard The industry

will record a 20 percent increase in new business premium. There will be a knee-jerk reaction to the

revised norms, but we expect sales to pick up after a couple of months

During the initial phase of privatization of Insurance sector in India, the penetration was very low.

Indian as well as foreign companies reaped the benefits of a low base and have reported high rate of

growths in the last decade. But times have changed now and the way forward is going to be tough.

They have to start focusing on the different strategies like customer retention strategy, operational

discipline, regulatory developments and opportunities for innovation to drive sustainable growth and

profitability.

INSURANCE IN INDIA

About 154 Indian insurance companies, 16 non-Indian companies and 75 provident were

operating in India at the time of nationalization. Nationalization was accomplished in two stages;

initially the management of the companies was taken over by means of an Ordinance, and later, the

ownership too by means of a comprehensive bill. The Parliament of India passed the Life Insurance

Corporation Act on the 19th of June 1956, and the Life Insurance Corporation of India was created on

1st September, 1956, with the objective of spreading life insurance much more widely and in

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particular to the rural areas with a view to reach all insurable persons in the country, providing them

adequate financial cover at a reasonable cost.

LIC had 5 zonal offices, 33 divisional offices and 212 branch offices, apart from its corporate

office in the year 1956. Since life insurance contracts are long term contracts and during the currency

of the policy it requires a variety of services need was felt in the later years to expand the operations

and place a branch office at each district headquarter. re-organization of LIC took place and large

numbers of new branch offices were opened. As a result of re-organization servicing functions were

transferred to the branches, and branches were made accounting units. It worked wonders with the

performance of the corporation. It may be seen that from about 200.00 crores of New Business in

1957 the corporation crossed 1000.00 crores only in the year 1969-70, and it took another 10 years for

LIC to cross 2000.00 crore mark of new business. But with re-organization happening in the early

eighties, by 1985-86 LIC had already crossed 7000.00 crore Sum Assured on new policies

Today LIC functions with 2048 fully computerized branch offices, 100 divisional offices, 7

zonal offices and the Corporate office. LICs Wide Area Network covers 100 divisional offices and

connects all the branches through a Metro Area Network. LIC has tied up with some Banks and

Service providers to offer on-line premium collection facility in selected cities. LICs ECS and ATM

premium payment facility is an addition to customer convenience. Apart from on-line Kiosks and

IVRS, Info Centres have been commissioned at Mumbai, Ahmedabad, Bangalore, Chennai,

Hyderabad, Kolkata, New Delhi, Pune and many other cities.

With a vision of providing easy access to its policyholders, LIC has launched its

SATELLITE SAMPARK offices. The satellite offices are smaller, leaner and closer to the customer.

The digitalized records of the satellite offices will facilitate anywhere servicing and many other

conveniences in the future.

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LIC continues to be the dominant life insurer even in the liberalized scenario of Indian

insurance and is moving fast on a new growth trajectory surpassing its own past records. LIC has

issued over one crore policies during the current year. It has crossed the milestone of issuing

1,01,32,955 new policies by 15th Oct, 2005, posting a healthy growth rate of 16.67% over the

corresponding period of the previous year.

Insurance business in India are

1818: Oriental Life Insurance Company, the first life insurance company on Indian soil started

functioning.

1870: Bombay Mutual Life Assurance Society, the first Indian life insurance company started its

business.

1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the life

insurance business.

1928:The Indian Insurance Companies Act enacted to enable the government to collect statistical

information about both life and non-life insurance businesses.

1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective of

protecting the interests of the insuring public.

1956: 245 Indian and foreign insurers and provident societies are taken over by the central

government and nationalized. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital

contribution of Rs. 5 crore from the Government of India.

How Insurance Works

The mechanism of insurance is very simple. People who are exposed to the same risks come

together and agree that, if any one of them suffers loss, the others will share the loss and make good to

the person who lost. All people who send goods by ship are exposed to same risks, which are related

to water damage, ship sinking, piracy, etc. Those owning factories are not exposed to these risks, but

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they are exposed to different kinds of risks like, firer, hailstorms, earthquakes, lightning, burglary, etc.

Like this, different kinds of risks can be identified and separate groups made, including those exposed

to such risks. By this method, the heavy loss that any one of them may suffer is divided into bearable

small losses by all. In other words, the risk is spread among the community and the likely big impact

on one is reduced smaller manageable impacts on all.

Insurance as a Security Tool

The United Nations Declaration of Human Rights 1948 provides that Everyone has a right to

standard of living adequate for the health and well being of himself and his family, including food,

clothing, and housing and medical care and necessary social service and the right to security in the

event of unemployment, sickness, disability. Life insurance provides such an alternate arrangement.

If this did not happen, another family will be pushed into the lower strata of society. The lower strata

create a cost on society. Life insurance tends to reduce such a cost. In this sense, the life insurance

business is complimentary to the states efforts in the social management.

In a capitalist society provision of security is largely left to the individual. Insurance is one of

them to provide social security by state under some schemes.

Role of Insurance in Economic Development

For economic development investments are necessary. Investments are made out of savings.

A life insurance is a major instrument for the mobilization of savings, particularly from the middle

and lower income groups. This savings are channeled into investments for economic growth.

Major Market Playersin India

Presently there are 15 Life insurance companies in the country. There is only one public

sector company LIC and the rest 14 are private sector. Although LIC has been dominating the Life

Insurance business since past few years the private players have now started to build up momentum.

HDFC Standard Life

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HDFC Standard is a 74:26 joint venture between HDFC and Standard Life. It is a private

sector company. The market share for FY 2005-06 was 2.87%.

Birla Sun Life Insurance Company

Birla Sun Life Insurance Company is a 74:26 joint venture between Birla group and Sun Life

Financial. It is a private sector company. The market share for FY 2005-06 was 1.89%.

ICICI Prudential Life Insurance

ICICI Prudential Life is a 74:26 joint venture between ICICI and Prudential. It is a private

sector company. The market share for FY 2005-06 was 7.35%.

Life Insurance Corporation of India (LIC)

Life Insurance Corporation of India is a 100% government held Public Sector Company.

Being the first to be established LIC is the forerunner in the Life Insurance sector. The market share

for FY 2005-06 was 71.44%.

Kotak Mahindra OLD Mutual

Kotak Mahindra OLD Mutual is a 74:26 joint venture between Kotak Mahindra bank and Old

Mutual. It is a private sector company. The market share for FY 2005-06 was 1.11%.

Max New York Life

Max New York Life is a 74:26 joint venture between J & Bank, Pallonji & Co and MetLife. It

is a private sector company. The market share for FY 2005-06 was 1.23%.

Aviva Life Insurance India

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Aviva Life insurance is a 74:26 joint venture between Aviva and Dabur. It is a private sector

company. The market share for FY 2005-06 was 1.14%.

ING Vysya Life insurance

ING Vysya Life Insurance is joint venture between Exide (50%), Gujarat Cements (14.87%),

Enam (9.13%) and ING (26 %). It is a private sector company. The market share for FY 2005-06 is

0.79%.

MetLife India

MetLife India is a 74:26 joint venture between J & K Bank, Pallonji & Co and MetLife. It is a

private sector company. The market share for FY 2005-06 was 0.40%.

Bajaj Allianz Life Insurance Co

Bajaj Allianz Life Insurance Company is a 74:26 joint venture between Bajaj Auto limited

and Allianz AIG. The market share for FY 2005-06 was 7.56%.

SBI Life Insurance Company Ltd

SBI Life Insurance Company is a 74:26 joint venture between SBI and Cardiff S.A. It is a

private sector company. The market share for FY 2005-06 was 2.31%.

TATA AIG Group

TATA AIG group is a 74:26 joint venture between Tata Group and AIG. It belongs to the

private sector. The market share for FY 2005-06 was 1.29%.

Sahara India Life Insurance Company Ltd

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First Wholly Indian Owned Private Life Insurance Company. The market share for FY 2005-

06 was 0.06 %.

Shriram Life Insurance Company Ltd

Shriram Life is a recent entrant into the life insurance sector It is a 74:26 joint venture

between the Shriram group through its Shriram Financial Holdings and Sanlam Life Insurance

Limited, South Africa.

(IRDA)INSURANCE REGULATORY DEVELOPMENT AUTHORITY

On the recommendation of Malhotra Committee, an Insurance Regulatory Development Act (IRDA)

passed by Indian Parliament in 1993. Its main aim was to activate an insurance regulatory apparatus

essential for proper monitoring and control of the Insurance industry. Due to this Act several Indian

private companies have entered into the insurance market, and some companies have joined with

foreign partners. In economic reform process, the Insurance Companies has given boost to the socio-

economic development process. The huge amount of funds that are at the disposal of Insurance

Companies are directed as desired avenues like housing, safe drinking water, electricity, primary

education and infrastructure. Above all the policyholders gets better pricing of products from

competitive insurance companies.

Liberalization

The opening up of Insurance sector was a part of the ongoing liberalization in the financial sector of

India. The domain of State-run insurance companies was thrown open to private enterprise on

December 7, 1999, with the introduction of the Insurance Regulatory and Development Authority

(IRDA) Bill. The opening up of the sector gave way to the world known names in the industry to

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of IPOs (initial public offers) and M&As (mergers and acquisitions), the establishment of a more

robust system to collect and disseminate appropriate insurance related data and several other

initiatives.

As per the chairman of IRDA, A decade has passed since IRDA was formed and the insurance

industry has moved from its infancy towards the beginning of maturity and the regulatory architecture

will respond to these changes. In the new decade, I expect the insurance industry to grow at a slower

though a healthy rate. I would expect a greater building of trust between purchasers of insurance

products and the industry and on the whole I would expect the decade to see the building of a truly

robust and dynamic insurance industry.

Other than this, many companies are also facing pressures because of claim inflation. There is

therefore a promising opportunity for a well-prepared claims function to play a pivotal role in creating

competitive advantage and delivering value to the bottom line of organizations.

The economic crisis has taught many new lessons to the insurance industry and now it is entering a

new and changing world. Executives, who show ingenuity, have the courage to take tough decisions

and demonstrate their foresight to apply lessons from change will guide their companies to success in

the insurance sector. They will be the leaders, who establish the foundation upon which the new

global economy will rise.

Insurance Sector: Status and Growth

After privatization, insurance industry has seen significant growth. Due to low penetration and huge

potential, many foreign and domestic players have entered the sector. Moreover, several reforms and

policy measures have provided a favorable environment for insurance companies to flourish in the

country.

The insurance sector in India is primarily divided into life and non-life, apart from a very small

segment comprising re-insurance. Both the life and non-life insurance segments, which were

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nationalized in the 1950s and 1960s, respectively, witnessed an across-the-board liberalization

process in 2000. After the reforms, the number of players has increased from one in life insurance and

four in non-life insurance in 2000 to 23 players in each segment till May 2010 (including one re-

insurer in the non-life segment) (as per the IRDA website).

The reasons for the strong foundation for insurance services in India are: growing middle class

segment, rising incomes, increasing awareness of insurance, as well as investments and infrastructure

spending. The total premium earned by the insurance industry has grown at a CAGR of 24.6%

between FY03 and FY09 to touch INR2, 523.9 billion in FY09.

Growth in Total Insurance Premiums

Strong economic growth of India has led to increased penetration of insurance in the country.

Premium income as a percentage of GDP has increased from 3.3% in FY03 to 7.6% in FY09.

However, the penetration level is still low as compared to other developed and developing economies.

Many foreign companies have shown an interest in investing in Indian insurance companies, in spite

of the FDI limit, which is fixed at 26% for the life and non-life sectors.

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The Life Insurance Council has projected 18% growth in total premium income for the life insurance

industry in the financial year 2009-10.

Although final figures, released by the Insurance Regulatory Development Authority, are being

compiled, Life Insurance Council secretary general SB Mathur told The Economic Times in April

2010 in an interview: During 2008-09, the life insurance segment had mopped up a first premium

income of Rs 88,000 crore while in 2009-10, there was an approximately 10-12% growth, which

means that first premium income in the year just gone by is expected to be around Rs 1 lakh crore.

Mr Mathur also said that the industry is estimated to have garnered a total premium income of Rs 2.6

lakh crore at the end of 2009-10, against Rs 2.2 lakh crore in the previous fiscal, which means an 18%

growth. The Life Insurance Corporation (LIC) is expected to have earned a total premium income of

Rs 1.76 lakh crore in this FY10 under review, against Rs 1.53 lakh crore in the previous financial

year.

On the entire sector turning profitable, Mr Mathur said it is expected to take another 2-3 years before

almost all companies turn profitable. As of now, almost all private sector companies, barring a few,

showed loss on their profit and loss account.

According to data released by the Insurance Regulatory Development Authority for 2008-09, total

accumulated losses stood at Rs 14,421 crore while the total equity infused by all companies put

together was Rs 18,253 till March 2009.

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Life Insurance Sector

Growth of life insurance in terms of CAGR is 25.8% between FY03 and FY09. Premium of life

insurance as a percentage of Indias GDP increased from 2.7% to 6.7% and life insurance premium

per capita grew from INR528.4 to INR1, 921.9 during the period. The number of policies issued

increased at a CAGR of 12.3% during this period.

As of May 2010, there were 23 players in the sector (1 public and 22 private). Life Insurance

Corporation of India (LIC) is the only public sector player, and held almost 65% of the market share

in FY10.

Many private sector players have entered the market to provide the highly customized products and

the prompt service to the customers. A larger number of Indian customers have started purchasing

insurance because of the aggressive marketing, innovative and customized products as well as

effective distribution channel strategies of the new private players. Insurance industrys growth is

expected to be boosted by the role of private sector players in the country.

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However, in a fragmented industry, new players are giving high competition to the private players.

Existing small players are planning aggressively for the network expansion as their foreign partners

are seeing huge potential in the Indian Life Insurance market.

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ICICI Prudential, Bajaj Allianz and SBI Life hold almost 50% of the market in the private life

insurance segment. Seeing the potential of the industry, many banks have also entered in the sector.

In order to keep the track of the solvency of life insurance companies, the regulator mandates that all

insurance companies file their solvency position on a quarterly basis. This stipulation helps insurance

companies to lay down their business plans and be in a position to meet their capital requirements in a

timely manner. The life insurance market strongly emphasizes the move from the current solvency

regime of keeping aside a 150% margin over insured liabilities to risk-based capital.

Individual Life Insurance constitutes almost 80 % of the business whereas group life insurance

products form a very small segment. Unit-linked Insurance Products (ULIPs) are preferred the most

by the customers but the new regulation as well as the economic slowdown has shifted the focus from

ULIPs to traditional products.

Non-life Insurance Sector

The non-life insurance sector grew at a CAGR of 17.6% between FY03 and FY09. Non-life insurance

premium, as a percentage of the segments GDP, has increased from 0.6% to 0.9% and per capita

premium income has risen from INR109.4 to INR265.2 during this period. The intense competition

following de-tariffication and pricing deregulation (initiated in FY07) resulted in the growth

momentum slowing down in the sector.

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Auto and health insurance have been observed as the main focus of the insurers. Out of the total non-

life insurance premiums during AprilFebruary 2010, auto insurance accounted for 39.4% of the

market. The highest growth has been shown by the health insurance segment, with its share in the

total non-life insurance portfolio increasing from 12.8% in FY07 to 21.7% for the period April

February 2010. The share of these two sectors is expected to increase many fold in the coming years.

Seeing the growth prospectus of these two sectors, many more players are expected to enter the

sector. Standalone companies for health insurance like Star Union Alliance and Apollo Munich and

Max Bupa have already entered.

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In the last decade (2000-10), it was observed that aggressive growth strategies and capitalizing on

their distribution networks have helped the insurance companies to achieve the growth in the retail

segment. It has also been clearly demonstrated that although the products provided by the private and

public sector players are similar, the service provided by the private sector players is what

differentiates them from their counterparts in the public sector.

Underlying Growth Drivers

Growing economy and purchasing power

Exponential growth of household savings, purchasing power, the middle class and the countrys

working population are the factors which will influence the demand of insurance products. The

working population (2560 years) is expected to increase from 675.8 million in 2006 to 795.5 million

in 2026.Financial services sector, specifically insurance sector can tap this increased disposable

income group people.

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Favorable government and regulatory initiatives

The Insurance Regulatory and Development Authority (IRDA) has taken the following initiatives to

further regulate and develop the sector:

De-tariffication except for auto third party liability has been introduced and now the insurers can

underwrite the type of risks which they want to underwrite at their own desirable rates.

Number of years after which companies can raise capital via an Initial Public Offering (IPO) has

been reduced from 10 years to 5 years.

Furthermore, the IRDA and the Government are in the process of making the following regulatory

reforms:

With private players completing nearly a decade in Indian insurance sector, the industry is looking at

new ways to meet its capital needs. Many a times, proposals have come to increase the share of FDI

from 26% at present to 49%.

Detailed guidelines are being formulated on IPOs and M&A.

Disclosure Norms and Other Recent Changes

The IRDA is in the process of drafting mandatory disclosure of insurers financial statements and

investment portfolios at regular intervals, as well as their financial and operating ratios, actual

solvency margins, policy lapse ratio, current financial position, risk management architecture, etc.

To monitor the insurance claims, data warehouse is being set up.

Policy and draft documents are being published in regional languages for people to understand them

better and to extend their reach.

In the 201011 budget, the Finance Minister, Mr. Pranab Mukherjee, decided to roll back the

Governments decision to tax the unrealized gains of non-life insurance companies.

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Demand for health insurance has been increased due to the increase in the demand for better health

care services and the new medical technology. The following regulatory initiatives have been initiated

to promote the health insurance segment:

IRDA has given the recommendation to the Government to change the capital requirements from

INR1, 000 million to INR500 million for standalone health insurance companies.

The Government has raised budgetary support for the health sector during the Eleventh Five Year

Plan (2007 2012) to INR 1,360 billion.

The Insurance regulator IRDA has made many changes in the ULIP plans like capping of the

charges, increased lock-in period and a minimum guarantee for such plans, which are hybrid products

that combine the features of insurance and investment in equities.

Effect of ULIP Changes: The minimum ticket size of new ULIPs could be slightly higher than the

old ones, but a larger portion of the premium payment would go towards investment under the new

rules, benefiting customers. Policyholders will get most of their money back even if they exit

prematurely, unlike in the old ULIPs regime when charges for the early surrender of a policy could be

as high as 100% of premium paid.

Customers will no longer be required to pay agent commissions of up to 40% in the first year of the

policy. Such commissions may drop to around 18%.

Though the new rules will benefit policyholders, reduce the first-year agent commission and help in

curbing rampant mis-selling, insurance firms will be required to underwrite more losses, infuse more

capital and cut costs to sustain ULIPs sales.1

The industry is grappling with the task of motivating agents to sell ULIPs with relatively lower

commissions, compared with the pre-September 2010 period. Generally, the agents' commission has

1 See New Ulips to change industry, Irda image published in the Mint dt 31 August 2010

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come down by over 2 per cent on an average, on sale of new ULIPs (from 7-8 per cent to 5-6 per cent)

in September, Mr Mallik (Chief Marketing Offi

Documents

Project Nov,Dec 2