Innovation in Insurance New Content

7/29/2019 Innovation in Insurance New Content

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CHAPER-1

INSURANCE- AN INTRODUCTION

A.Meaning:Insurance may be described as a social device to ensure protection of economic value of life

and other assets. Under the plan of insurance, a large number of people associate themselves by

sharing risks attached to individuals. The risks, which can be insured against, include fire, the

perils of sea, death and accidents and burglary. Any risk contingent upon these, may be insured

against at a premium commensurate with the risk involved. Thus, collective bearing of risk is

insurance.

Insurance = Collective Bearing of Risks

Insurance is a contract whereby, in return for the payment of premium by the insured, the

insurers pay the financial losses suffered by the insured as a result of the occurrence ofunforeseen events. The term "risk" is used to describe the possibility of adverse results flowing

from any occurrence or the accidental happenings, which produce a monetary loss.

Insurance is a pool in which a large number of people exposed to a similar risk make

contributions to a common fund out of which the losses suffered by the unfortunate few, due to

accidental events, are made good. The sharing of risk among large groups of people is the basis of

insurance. The losses of an individual are distributed over a group of individuals.

Insurance is nothing but a system of spreading the risk of one onto the shoulders of many.

While it becomes somewhat impossible for a man to bear by himself 100% loss to his own

property or interest arising out of an unforeseen contingency, Insurance is a method or process

which distributes the burden of the loss on a number of persons within the group formed for this

particular purpose.


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B.Definitions:I) Fundamental Definition

In the words of D.S. Hansell, Insurance accumulates contributions of all parties

participating in the scheme.

II) Contractual Definition

In the words ofJustice Tindall, Insurance is a contract in which a sum of money is paid to

the assured as consideration of insurers incurring the risk of paying a large sum upon a given

contingency.

1.1.3 Working of Insurance

C) Introduction:

According to the U.S. Life Office Management Inc. (LOMC), "Life Insurance provides a

sum of money if the person who is insured dies whilst the policy is in effect."


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Life insurance has come a long way from the earlier days when it was originally conceived

as a risk-covering medium for short periods of time, covering temporary risk situations, such as

sea voyages. As life insurance became more established, it was realized what a useful tool it was

for a number of situations that includes temporary needs/threats, savings, investment, retirement

etc.

D) Origin of Life Insurance in India:

In India, after failure of two British companies, the European and the Albert in 1870, which

attempted writing business on Indian lives, first Indian Life Assurance Society was formed in the

same year called Bombay Mutual Assurance Society Ltd. It was followed by the Oriental Life

Assurance Company Limited in 1874, Bharat in 1896 and Empire of India in 1897. The Idea of

insurance was born out of a desire of the people to share loss of an individual by many. Originally

it restricted to forms other than life assurance.

The Government began to exercise a certain measure of control on Insurance business by

passing the `Insurance Act in 1912. For controlling investment of funds, expenditure and

management, a comprehensive Act was passed known as `The Insurance Act 1938. For

controlling the affairs, the office of Controller of Insurance was established. The act was

extensively amended in 1950.

In the year 1955, approximately 170 Insurance Offices and 80 Provident Fund Societies had

been registered for transacting Life Assurance business in India. There were malpractices in

insurance business. For achieving the following purposes it was felt necessary to nationalize the

insurance business in India. The Life Insurance Corporation Act was passed by the Parliament in

June 1956 which came in force on 1st

July 1956.

E) Important Milestones in the Life insurance business in India:

1870: Bombay Mutual life assurance society is the first Indian owned life insurer.

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.


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

government are nationalized. LIC formed by an Act of Parliament- LIC Act 1956- with a capital

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

1997: Insurance regulator IRDA set up.

2000: IRDA starts giving licenses to private insurers like Kotak Life Insurance, ICICI

Prudential and HDFC Standard Life insurance first private insurers to sell a policy.

2001: Royal Sundaram Alliance first non life insurer to sell a policy.

2002: Banks were allowed to sell insurance plans. As Third Party Administrations (TPAs)

enter the scene, insurers start setting non-life claims in the cashless mode.

2004-05: The Government proposed for increasing the foreign equity stake to 49%.

2007: First Online Insurance portal, set up by an Indian Insurance Broker, Bonsai Insurance

Broking Pvt. Ltd.


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CHAPTER-2

INSURANCE SECTOR REFORMS

In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor R. N.Malhotra, was formed to evaluate the Indian insurance industry and recommend its future direction.

The Malhotra committee was set up with the objective of complementing the reforms initiated in the

financial sector. The reforms were aimed at creating a more efficient and competitive financial system

suitable for the requirements of the economy keeping in mind the structural changes currently underway

and recognizing that insurance is an important part of the overall financial system where it was necessary

to address the need for similar reforms. In 1994, the committee submitted the report and some of the key

recommendations included:

Structure of the Indian Insurance Industry. Competition. Regulatory Body. Investments. Customer Service.

The committee felt the need to provide greater autonomy to insurance companies in order to

improve their performance and enable them to act as independent companies with economic motives. For

this purpose, it had proposed setting up an independent regulatory body i.e. The Insurance Regulatory and

Development Authority.

Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament in

December 1999. Since being set up as an independent statutory body the IRDA has put in a framework of

globally compatible regulations. The other decision taken simultaneously to provide the supporting

systems to the insurance sector and in particular the life insurance companies was the launch of the IRDA

online service for issue and renewal of licenses to agents.

A) INSURANCE REGULATORY AND DEVELOPMENT

AUTHORITY (IRDA)

The Insurance Act, 1938 had provided for setting up of the Controller of Insurance to act as a strong

and powerful supervisory and regulatory authority for insurance. Post nationalization, the role of


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Controller of Insurance diminished considerably in significance since the Government owned the

insurance companies.

The Insurance Regulatory and Development Authority Act, 1999 is an act to provide for the

establishment of an Authority to protect the interests of holders of insurance policies, to regulate, promote

and ensure orderly growth of the insurance industry and for matters connected therewith or incidental

thereto amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 to end the monopoly of

the Life Insurance Corporation of India (for life insurance business).

Following are some of the powers, functions and duties of IRDA:

Issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel suchregistration.

Specifying requisite qualifications, code of conduct and practical training for intermediary or insuranceintermediaries and agents.

Specifying the code of conduct for surveyors and loss assessors. Promoting efficiency in the conduct of insurance business. Promoting efficiency in the conduct of insurance business; promoting and regulating professional

organisations connected with the insurance and re-insurance business.

Specifying the percentage of life insurance business and general insurance business to be undertaken bythe insurer in the rural or social sector.

Supervising the functioning of the Tariff Advisory Committee; Exercising such other powers as may be prescribed.

B) INSURANCE MARKET- PRESENTThe insurance sector was opened up for private participation four years ago. For years now, the

private players are active in the liberalized environment. The insurance markets have witnessed dynamic

changes because of Indian Insurers going global. Most of the private insurance companies have formed

Joint venturespartnering well recognized foreign players across the globe.

There are now 22 Life insurance companies operating in the Indian market. With many more joint

ventures in the offing, the insurance industry in India today stands at a crossroads as competition

intensifies and companies prepare survival strategies in a detariffed scenario. There is pressure from both

within the country and outside on the Government to increase the foreign direct investment (FDI) limit

from the current 26% to 49%, which would help Joint ventures partners to bring in funds for expansion.


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1. State Insurers Continue To Dominate: There may be room for many more players ina large underinsured market like India with a population of over one billion. But the reality is that

the intense competition in the last five years has made it difficult for new entrants to keep pace

with the leaders and thereby failing to make any impact in the market. Also as the private sector

controls over 26.18% of the life insurance market a public sector companies still call the shots.

The countrys largest life insurer, Life Insurance Corporation of India (LIC), had a share of 64%

in new business premium income in November 2009. ICICI Prudential Life Insurance Company

continues to lead the private sector with a 9% market share in terms of fresh premium.

2. Reaching Out To Customers: No doubt, the customer profile in the insurance industry ischanging with the introduction of large number of divergent intermediaries such as brokers,

corporate agents, and banc assurance. The industry now deals with customers who know what

they want and when, and are more demanding in terms of more demanding in terms of better

service and speedier responses.

3. Intense Competition: In a de-tariffed environment, competition will manifest itself inprices, products, underwriting criteria, innovative sales methods and creditworthiness. Insurance

companies will vie with each other to capture market share through better pricing and client

segmentation. The battle has so far been fought in the big urban cities, but in the next few years,

increased competition will drive insurers to rural and semi-urban markets .

4. Global Standards: While the world is eyeing India for growth and expansion, Indiancompanies are becoming increasingly world class. Take the case of LIC, which has set its sight on

becoming a major global player following Rs. 280-crore investment from the Indian government.

The company now operates in Mauritius, Fiji, the UK, Sri Lanka, and Nepal and will soon start

operations in Saudi Arabia. It has already ventured into the African and Asia-Pacific regions in the

year 2006.

With life insurance premiums being just 2.5% of GDP, the opportunities in the Indian market

place is immense. The next five years will be challenging but those that can build scale and market

share will survive and prosper.

C) Driving Innovation in the Insurance Industry

WRITTEN BY CIOZONE STAFF

Advances in technology, particularly centered around business intelligence and global positioningsystems, are set to radically alter the insurance industry over the next five to 10 years, predicts a

report from the Tower Group, a Needham, Mass. research firm that specializes in the financial

services industry.


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The insurance industry has managed to plod along without the major upheavals seen in manyother sectors, but that is about to end, says Tower Group Research Director David West. Several

technologies are coming together that will result in dramatic improvements to safety in vehicles as

well as enable insurance companies to offer a wide range of new pricing plans based on distancesdriven, time of day, and individual driving habits.

The direct result is that companies that seize the opportunity to innovate first will have a distinctadvantage to survive and lead as the industry goes through the predicted upheaval. "The timing is

right for it," says West. "I don't think this [the major changes forecasted] could have happened 10

years ago - the technology wasn't ready. But what we're seeing now is a convergence of several

important technologies and behind those technologies is information - information to make better

decisions on risk and price plans accordingly."

In his report, The Digital Chauffeur: Real-World Principles of Innovation for the InsuranceIndustry, West notes the evolution taking place in such areas as passenger air bags. Early air bags

required inflation forces much stronger than those of modern air bags and produced unexpected

consequences such as injuring passengers who sat too close to the air bag. To better learn how air

bags performed in crashes, vehicle manufacturers such as General Motors and Ford Motor, began

installing event data recorders in vehicles to capture information related to the seconds

immediately before and after an air bag deployment.

By combining the two technologies, vehicle manufacturers were able to reduce the number offatalities per million vehicles from about .35 per million in 1991 to practically zero from 2004

through 2007.

Now a number of insurance carriers are making use of that same event data recorder (EDR)information. The practice has raised privacy concerns, and some states, such as California, haveenacted legislation requiring manufacturers to disclose to customers whether EDRs are installed in

their vehicles. The National Highway Traffic Safety Administration issued a rule in August 2006

that will require all automakers to tell new car buyers if an EDR has been installed, beginning

with model year 2011 cars.

West says one insurance carrier he spoke with, which could not be named, used EDR informationto reconstruct an accident in which a driver claimed to have hit a deer. The change in velocity

recorded by the EDR clearly showed a collision with a fixed object, not a deer. It was laterdetermined the driver hit a concrete barrier.


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The direct result is that through this innovation insurance carriers have been able to betterreconstruct events that took place at an accident and, in the process, better determine appropriate

damages and deter fraud. As vehicle manufacturers implement further safety systems, such as

systems to detect if a vehicle is approaching another vehicle too quickly and is in danger of being

involved in a crash, more information will be at their disposal.

An equally important innovation is taking place in the area of pay as you drive (PAYD) insurance.By combining global positioning systems, along with cellular technologies, insurance companies

are beginning to offer policies where drivers are charged based on the amount they drive, as well

as the time of day and how well they drive. Progressive Insurance introduced the concept in the

U.S. about 10 years ago, but with limited success.

The Progressive system was called Autograph, and combined GPS technology with cellularsystems to record and transmit driving information. However, the technology was still relatively

new and expensive to purchase and install. They were not being installed directly by automakers,

so insurance policy holders had to pay for the installation themselves. The idea was ahead of its

time, says West, but since then more cost effective systems have been developed.

One insurer, Norwich Union, has launched what appears to be a successful version of PAYDinsurance in Britain. Powering the system is a large Teradata data warehouse and business

intelligence systems. Through an on-board GPS system that is about the size of a compact disc

player and cellular technology, the carrier can now track an individual's driving patterns, from

how many miles they drive in a day, to whether they drive on city streets, major highways or rural

roads, what time of day they drive, and how fast. In turn, the carrier is able to greatly reduce the

risk associated with pricing a policy and offer discounts to qualifying customers. In some cases,

Norwich says customers have changed their driving patterns to qualify for lower pricinga win

for both sides.

In the U.S., Progressive Insurance re launched its pay as you drive program in Minnesota in 2004under the name Trip Sense, and expanded the program in 2007 into Oregon and Michigan. Other

carriers such as Safeco are offering other innovations, such as Teen insurance, which allows

parents to track their teen's driving. According to Safeco's Web site, the GPS-based system allows

parents to set "safe driving zones", essentially a perimeter in which the teen is allowed to drive. If

a vehicle goes outside the perimeter, the parent is notified by phone or text message.

"A lot of the innovation in the years ahead will be driven by competition," says West. "If you wantto capture business from your competitor, you're going to have to be more innovative, you're

going to have to consider what your customers want, be able to implement systems to offer it, then

price it accordingly."


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CHAPTER-3

PRIVITIZATION OF INSURANCE SECTOR

Insurance Services

Insurance investors developed economies, particularly from Western Europe and the US find Indian

market as having greater growth potential than their domestic markets. Therefore, a high level of interest

exists for these companies to acquire insurance concerns. Many international players are eyeing the vast

potential of the Indian market and are already making plans to enter.

The entry of the foreign players in the sector with more financial resources/ better experience and lower

operational costs will have an advantage over the Indian companies involved in the business. The bigger

private players claim that opening up insurance will give policyholders better products and service, theopponents of privatization argue that in a poor country like India insurance needs to have social

objectives and newcomers will not have that commitment.

Better experience provides them with the wherewithal to have a better product mix and more operational

flexibility. Moreover, they will operate with a lean staff and

lower operational cost. The domestic Insurance industry will as a

result, have to face a greater competition. But the resources with

the foreign players are limited, as they can invest up to 40 per-

cent of the equity of their joint-venture with Indian firms. This is

a great hindrance for them to perform at their optimum level.

IRDA is working out to gradually dismantle the tariff structure.

Not much threat is perceived as to any price war since the new

companies will stress more on the non-actuarial product differentiation. However, the Indian Insurers due

to their extensive branch networking and long-standing association with the client still have an advantage.

Further, insurance products can become competing investment product vis--vis other saving, etc.

Already LIC has launched Equity linked Indexed Insurance Policies, which have been received quite

well. The new players are expected to bring in spate of such products.

Insurance is viewed as a tax saving instrument rather than protecting one's own kith and kin from the

vagaries of the future. The rush for insurance policies to save tax bills can be seen at the end of the

financial year. With the entry of private and global players like HDFC Standard Life, JCTCI Prudential,

Kotak Mahindra Club Insurance, Hindustan Times Commercial Union to name a few, the insurance

industry is going to provide many jobs and is going to witness phenomenal growth.


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CHAPTER-4

LIBERALISATION OF INSURANCE MARKETS

Meaning:

A liberal insurance market is one in which the market, subject only to economically justifiable

government restrictions, determines; who should be allowed to sell insurance, what product should be

sold, how product should be sold, and the prices at which the product should be sold.. In turn market

access issues encompass prudential regulation. Second and fourth items commonly deal with issues such

as product, price, and market conduct regulation. All four items subsume competition regulation. Pre-

conditions for Liberalization:

a) Sound competitive law.

b) Efficient and reliable regulation.

c) Phased-Liberalization.

d) Efficient disclose and dissemination of information to the society.

For developing countries, the regulation of insurance business in liberalization era poses following

concerns and special interest

a) Restriction on entry, especially foreign players.

b) Suppression of price and product competition; and.

c) Control of inter-industry competition from those selling similar or complementary products.

Insurance markets in countries like India inherently imperfection justifying the need for competition as

well as regulation. This is attributable for the following reason:

a) Lack of knowledge on part of insured.

b) Insurance is a complicated, technical subject.

c) Intensity of price discrimination is high when there is competition.


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CHAPTER-5

Call for Innovation

Insurers have always been aware of the importance of new product launches and their effect on sales and

profitability. Industry analysts have confirmed the importance of keeping product portfolios fresh andcurrent to meet market demands. A recent Celent study1 reaffirms that market demands like Time to

Market and Ease of Doing Business are among the top business issues for both Life/Health and P&C

insurers (Fig. 1). The report identifies Improving Time to Market as the most frequently cited market

demand. This is borne out by the fact that Improvements to Policy Administration Systems which in

turn positively influences the time-to-market issue has been identified by all respondents as one of the

top three IT initiatives for 2007.

Business drivers that accentuate the need to quickly and cost-effectively launch new or enhanced products

can be grouped under the following four major heads (Fig. 2):

Customer demand: Competition in the insurance marketplace has raised the level of customer

awareness. Today, customer expectations are very specific and customers have plenty of choices before

them. Customer demographics are also changing. The earliest of the 77 million baby boomers turned

sixty in 2006.Insurers need to cater to the diverse demands of the post-retirement life of this economically

active group and also the discerning young generation whose needs and expectations are dramatically

different. Many economic factors such as stock market performance, interest rates, inflation, etc. also

contribute to the rapidly changing customer needs.

Pressure from distributors: The demands of distributors especially the successful onesare increasing.

Distributors looking to differentiate themselves in the marketplace expect insurers to develop and market

distributor-specific products. Additionally, distributors are seeking ways to increase their clients wallet

share by offering additional products to address perceived gaps in coverage or investment needs. Pressure

from competitors: Insurance companies are being pressured by both insurance and non-insurance

financial services competitors.

As new product offerings from innovative insurance companies gain traction in the market, other

companies feel the pressure to copy. To prevent non-insurance competitors from gaining further market

share, insurance companies develop products that take full advantage of their unique tax and protection

characteristics. The mounting competitive pressure makes it imperative for insurance companies to keep a

close watch on the market and design, develop and implement new insurance products that better address

the needs of the market.

Regulationsthe moving target: Insurance is a highly regulated industry that must constantly review and

adjust its product offerings to ensure compliance. In addition, the changing regulations often offer new

opportunities to aggressive and innovative carriers. Regulations impact every aspect of the product design

and development processproduct filings, rate approvals, regulatory reporting, tax treatment, disclosure,

etc.

What Ails the Product Development Process?

The product development or enhancement process in a typical insurance company requires a high level of

collaboration and coordination among various stakeholders from product design, programming, legal,


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compliance, operations, marketing, training, etc. More than 50% resources of the total product

development lifecycle are taken by the implementation phase. The actual implementation of new products

entails substantial resource investments. The process also necessitates many handoffs between the

stakeholders.

The emerging trends in the industry in terms of product innovation

Riders and unit linked products have led some of the visible innovations in the market place. Riders can

be used to customize life insurance for varying customer requirements, provide health coverage, and

improve a product's competitive profile through improved customer value. Health oriented life insurance

covers, asset allocation products, saving products, which offer downside protection with the opportunity

to participate in upsides, worksite-marketing products, and customized group corporate retirement

products are among the emerging innovative product categories. Regulation will also play a crucial role in

the speedy emergence and efficacy of other innovative product offerings and categories. Finally, as the

pension market develops, variable annuities (VA) and equity-indexed annuities could emerge as part of

the product suite of life insurance companies. Clearly, product innovation is a major strategic imperativefor insurers. The key is to offer products based on deep insights of consumer needs. In the long term, only

such products survive and grow into a meaningful and profitable component of an insurer's product

portfolio.

The opening up of the insurance sector saw the emergence of innovations introduced by private players,

initially in terms of product offerings. The insurance industry, which till then had seen minimal product

innovations, saw the advent of unit linked insurance products (ULIPs). Moreover, liberalization of the

sector also saw the advent of over-the-counter and pre-underwritten products that are offered by banks to

its customers. These are products with no underwriting that are cross-sold with home loans and the like.

Innovations have also come about in the area of value added services as companies started providing

value additions like online purchase of insurance policies, payment of premiums by credit cards and

online tracking of net asset values (NAVs).

The rise in preference for ULIPs as compared to traditional products

Apart from protection benefits, ULIPs provide policyholders an opportunity to earn returns linked to the

underlying financial markets. Also, unlike conventional products, the charges in ULIP share transparent.

Top-ups, premium redirection options, facility to switch partially or fully from one fund to another, etc,

make these products very flexible. Lower regulatory capital requirements vis--vis endowment products

have also helped insurers drive down the costs of these products. These factors coupled with stellar

returns in the equity markets have made ULIPs, particularly, appealing. ULIPs give customers an option

to participate in equity and debt markets depending on their risk appetite. Traditional products did not

offer the facility to choose and change their pattern of investment in a particular policy. ULIPs are useful

for those who want to be insured but at the same time are interested in investing in an avenue, which

matches their risk-return profile. ULIPs are best suited for those who have a conceptual understanding of

financial markets and are genuinely looking for a flexible, long-term investment-cum-insurance. ULIPs

have gained in popularity due to the flexibility they offer to policyholders in choosing the investment

pattern along with the transparency in charges besides the ease of comparison of the final illustrated

values.


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Chapter-6

A BRIEF HISTORY OF UNIT LINKED INSURANCE PLAN

ULIP stands for Unit Linked Insurance Plan. It provides for life insurance where the policy value at any

time varies according to the value of the underlying assets at the time. ULIP is life insurance solution that

provides for the benefits of protection and flexibility in investment. The investment is denoted as units

and is represented by the value that it has attained called as Net Asset Value (NAV).ULIP came into play

in the 1960s and became very popular in Western Europe and America. The reason that is attributed to the

wide spread popularity of ULIP is because of the transparency and the flexibility which it offers.

As times progressed the plans were also successfully mapped long with life insurance need to retirement

planning. In todays times, ULIP provides solutions for insurance planning, financial needs, financial

planning for childrens future and retirement planning. These are provided by the insurance companies oreven banks. These investments can also be used for tax benefit under section 80C

5 steps to selecting the right ULIP

Here's a 5-step investment strategy that will guide investors in the selection process and enable them to

choose the right unit-linked insurance plans (ULIPs).But before we get there, let's understand what ULIPs

are all about? For the generation of insurance seekers who thrived on insurance policies with assured

returns issued by a single public sector enterprise, unit-linked insurance plans are a revelation.

Traditionally insurance products have been associated with attractive returns coupled with tax benefits.

The returns part was often so compelling that insurance products competed with investment products for a

place in the investor's portfolio. Perhaps insurance policies then were symbolic of the times when high

interest rates and the absence of a rational risk-return trade-off were the norms.

What are Unit-Linked Insurance Plans?

Unit-linked insurance plans, ULIPs, are distinct from the more familiar with profits policies sold for

decades by the Life Insurance Corporation. With profits policies are called so because investment gains

(profits) are distributed to policyholders in the form of a bonus announced every year.

ULIPs also serve the same function of providing insurance protection against death and provision of long-term savings, but they are structured differently. In with profits policies, the insurance company credits

the premium to a common pool called the life fund, after setting aside funds for the risk premium on life

insurance and management expenses.

Every year, the insurer calculates how much has to be paid to settle death and maturity claims. The

surplus in the life fund left after meeting these liabilities is credited to policyholders accounts in the form

of a bonus.

In a ULIP too, the insurer deducts charges towards life insurance (mortality charges), administration

charges and fund management charges. The rest of the premium is used to invest in a fund that investsmoney in stocks or bonds. The policyholders share in the fund is represented by the number of units.


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The value of the unit is determined by the total value of all the investments made by the fund divided by

the number of units. If the insurance company offers a range of funds, the insured can direct the company

to invest in the fund of his choice.

Insurers usually offer three choices an equity (growth) fund, balanced fund and a fund which invests

in bonds.

In both with profits policies as well as unit-linked policies, a large part of the first year premium goes

towards paying the agents commissions.

Unit-linked insurance plans, ULIPs, are distinct from the more familiar with profits policies sold for

decades by the Life Insurance Corporation. With profits policies are called so because investment gains

(profits) are distributed to policyholders in the form of a bonus announced every year.

ULIPs also serve the same function of providing insurance protection against death and provision of long-

term savings, but they are structured differently. In with profits policies, the insurance company credits

the premium to a common pool called the life fund, after setting aside funds for the risk premium on lifeinsurance and management expenses.

Every year, the insurer calculates how much has to be paid to settle death and maturity claims. The

surplus in the life fund left after meeting these liabilities is credited to policyholders accoun ts in the form

of a bonus. In a ULIP too, the insurer deducts charges towards life insurance (mortality charges),

administration charges and fund management charges. The rest of the premium is used to invest in a fund

that invests money in stocks or bonds. The policyholders share in the fund is represented by the number

of units.

The value of the unit is determined by the total value of all the investments made by the fund divided bythe number of units. If the insurance company offers a range of funds, the insured can direct the company

to invest in the fund of his choice. Insurers usually offer three choices an equity (growth) fund,

balanced fund and a fund which invests in bonds. In both with profits policies as well as unit-linked

policies, a large part of the first year premium goes towards paying the agents commissions.

A) UNIQUE FEATURES

1. Unit linked plan to give you efficient earnings in the long term.

2. Three investment fund options: protector, builder and enhancer, with the freedom to switch betweenfunds any time during the policy tenure.

3. Flexibility to make additional lump sum investments ( top ups ) to increase the savings portion of your

policy.

4. Minimum guaranteed returns of 3% pa. On your premium net of all policy fee and charges the entire

upside on the performance of the fund is passed on to you.

5. Option to make tax free withdrawal from your fund any time after three years.

6. Loan against your policy or surrender of the policy without penalty after a policy year

7. Vary the face amour during the premium paying period depending on your life insurance requirements.


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8. Convenient premium payment option singe pay, short pay or regular pay.

Which is better, unit-linked or with profits?

The two strong arguments in favour of unit-linked plans are that the investor knows exactly what is

happening to his money and two; it allows the investor to choose the assets into which he wants his funds

invested.

A traditional with profits, on the other hand, is a black box and a policyholder has little knowledge of

what is happening. An investor in a ULIP knows how much he is paying towards mortality, management

and administration charges.

He also knows where the insurance company has invested the money. The investor gets exactly the same

returns that the fund earns, but he also bears the investment risk.

B)Are ULIPs similar to mutual funds?

In structure, yes; in objective, no. Because of the high first-year charges, mutual funds area better option

if you have a five-year horizon.

But if you have a horizon of 10 years or more, then ULIPs have an edge. To explain this further a ULIP

has high first-year charges towards acquisition (including agents commissions).

As a result, they find it difficult to outperform mutual funds in the first five years. But in the long-term,

ULIP managers have several advantages over mutual fund managers.

Since policyholder premiums come at regular intervals, investments can be planned out more evenly.

Mutual fund managers cannot take a similar long-term view because they have bulk investors who can

move money in and out of schemes at short notice. The transparency makes the product more

competitive. So if you are willing to bear the investment risks in order to generate a higher return on your

retirement funds, ULIPs are for you.

Traditional with profits policies too invest in the market and generate the same returns prevailing in the

market. But here the insurance company evens out returns to ensure that policyholders do not lose money

in a bad year. In that sense they are safer.

ULIPs also offer flexibility. For instance, a policyholder can ask the insurance company to liquidate units

in his account to meet the mortality charges if he is unable to pay any premium instalment .

This eats into his savings, but ensures that the policy will continue to cover his life But in the long-term,

ULIP managers have several advantages over mutual fund managers.

Since policyholder premiums come at regular intervals, investments can be planned out more evenly.

Mutual fund managers cannot take a similar long-term view because they have bulk investors who can

move money in and out of schemes at short notice.

C) Advantages of ULIPS to insurers:


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Insurers love ULIPs for several reasons. Most important of all, insurers can sell these policies with less

capital of their own than what would be required if they sold traditional policies.

In traditional with profits policies,the insurance company bears the investment risk to the extent of the

assured amount. In ULIPs, the policyholder bears most of the investment risk.

Since ULIPs are devised to mobilize savings, they give insurance companies an opportunity to get a large

chunk of the asset management business, which has been traditionally dominated by mutual funds.

Most insurers in the year 2004 have started offering at least a few unit-linked plans. Unit-linked life

insurance products are those where the benefits are expressed in terms of number of units and unit price.

They can be viewed as a combination of insurance and mutual funds. The number of units, which the

customer would get, would depend on the unit price when he pays his premium. The daily unit price is

based on the market value of the underlying assets (equities, bonds, government securities etc.) and

computed from the net asset value.

The advantage of Unit linked plans:

Unit Linked plans are simple, clear, and easy to understand. Being transparent the policyholder gets the

entire upside on the performance of his fund. Besides all the advantages they offer to the customers, unit-

linked plans also lead to an efficient utilization of capital.

Unit-linked products are exempted from tax and they provide life insurance. Investors welcome these

products as they provide capital appreciation even as the yields on government securities have fallen

below 6 per cent, which has made the insurers slash payouts.

According to the IRDA, a company offering unit linked plans must give the investor an option to chooseamong debt, balanced and equity funds. If you opt for a unit-linked endowment policy, you can choose to

invest your premiums in debt, balanced or equity plans. If you choose a debt plan, the majority of your

premiums will get invested in debt securities like gilts and bonds. If you choose equity, then a major

portion of your premiums will be invested in the equity market. The plan you choose would depend on

your risk profile and your investment need.

The ideal time to buy a unit-linked plan is when one can expect long-term growth ahead. This is

especially so if one also believes that current market values (stock valuations) are relatively low. So if

you are opting for a plan that invests primarily in equity, the buzzing market could lead to windfall

returns. However, should the buzz die down, investors could be left stung.

If one invests in a unit-linked pension plan early on, say 25, one can afford to take the risk associated with

equities, at least in the plan's initial stages. However, as one approaches retirement the quantum of returns

should be subordinated to capital preservation. At this stage, investing in a plan that has an equity tilt may

not be a good idea.

Considering that unit-linked plans are relatively new launches, their short history does not permit an

assessment of how they will perform in different phases of the stock market. Even if one views insurance

as a long-term commitment, investments based on performance over such a short time span may not be

appropriate.


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Ever since the insurance sector was opened up, private players have been trying to entice the

Indian customer with new and innovative policies. But is the customer ready for innovations--such

as unit-linked plans?

These plans are popular in developed and other developing markets, but India has so far had only

one such product from LIC. Stuart Purdy, managing director, Aviva Life Insurance India,toldNarayan Krishnamurthy and Udayan Ray that most of Avivas offerings here are unit-linked and

he is betting on these products being successful.

Can unit-linked plans actually fetch you market linked returns?

Unit-linked insurance plans are all of a sudden much talked about, publicized and sold. While these are

not a recent phenomenon, since a number of insurance companies already had these products as a part of

their portfolio, of late these plans have seen sudden frenzy.

It is perhaps the bull phase or the lure of market-linked returns that insurance companies have been

shouting hoarse about that is responsible for these products outselling others.

Given a thought? Do these products actually provide you market linked returns? Now before we get into

the details, is that what you should be looking for from an insurance

product?

Isnt insurance in the real sense of the term meant for covering risk?

And should you be aiming at financial Returns from an insurance

product since that would mean compromising on the much more

important security cover for yourself and your family?

If returns are your aim dont you think you should be opting for

other investment avenues rather than risk your risk cover. While

this is not to dissuade you from purchasing unit linked covers it

would be in your interest to take a peek at the market linked

returns you can expect. And if you think that the entire premium

you pay is invested in avenues chosen by you to maximize returns you could be wrong.

Expenses during the first year:

A substantial amount is deducted from your premium income by the insurance company towards various

charges reducing the investible amount considerably. In the first year Allianz Bajaj through its Unit Gain

SP Plus claims to allocate 100percent of the single premium you Invest but cancels units on a monthly

basis towards various charges from your fund.

Accordingly Kotak Safe Investment Plan allocates 86% and Life time of ICICI Prudential Life allocates

80percent for amounts less than Rs50,000 and 82percent for those above Rs50,000 towards investments.

Administration expenses:

The fund expense is the highest in the first year. ICICI Pru Life charges administration expenses of

20percent of the premium for amounts below Rs50,000 and 18percent for amounts over Rs50,000 in thefirst year while it is 7percent for amounts upto Rs20,000in case of Kotak Safe Investment plan. Again

there are annual administrative charges that are as high as 1.25percent per annum of net assets on Life

Link of ICICI Pru Life and on Unit Gain SP Plus of Allianz Bajaj Life Insurance.


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Will unit linked risk products continue to rule: -

Unit linked risk plans are doing roaring business agreed but if the recent reports are any indication a

shakeup is on the cards. The mutual fund industry is all set to get aggressive to counter competition from

the insurance industrys unit linked risk products. For mutual funds the unit linked insurance products

launched by life insurance companies are an encroachment on their territory. Consider this: Around 80per cent of the premium income of life insurers has come in through unit-linked plans in 2004 thanks to

the boom in the equity markets.

This means mutual fund companies are losing out on a huge market that would have otherwise been

theirs. To put an end to such a situation they are toying with the idea of aggressively publicizing its

products through celebrity endorsements which mutual funds feel will give a never-before fillip to its unit

linked schemes.

Unit linked insurance products launched have been doing brisk business and insurers have been coming

out with several such products with slight variations to suit the changing needs of the customers. These

products are investment avenues that provide market related returns to the investor with an element of

insurance thrown in. For the customer the attraction of market related returns with insurance is an

attractive option. On the contrary though mutual fund companies also have unit-linked products what is

absent is the insurance cover.

But the grouse of mutual funds is that they have to adhere to stringent regulations that are absent for

insurance companies when the products are almost similar. While for insurance companies it is not

mandatory to disclose the various expenses related to unit linked risk products such as expense ratio and

brokerages among others, for mutual fund companies it is mandatory. The Association of Mutual Funds

will soon be setting up a committee to work out an advertising strategy after which it plans to approachSEBI to take it from there. But will SEBI be able to take up the matter with the insurance regulator?

Should I invest in unit-linked plans?

So have unit linked plans - the much talked about high-return offering product of late taken your fancy?

Wondering what it is all about and how unit linked plans are able to offer a comparatively better return on

your investment. While they are not a totally new concept considering that the Indian investor is familiar

with mutual funds that have been around for some time now, as far as insurance goes, unit linked has all

of a sudden caught the fancy of the Indian customer. If you are all set to take the plunge into buying a unit

linked product it would do well to know a few things about their working.

Combination of mutual fund and insurance cover:

Unit-linked plans are a combination of an investment fund and an insurance policy. A major part of the

premium amount received on such policies is invested in the stock market by the insurer in select funds

depending on the risk level chosen by the customer. Mind you, this is after deducting administration

charges and management expenses that may vary from one fund to the other.

Choice of Funds:

The customer has the option of choosing from debt, balance and equity funds. If the individual chooses a

debt fund, a major part of his premia is invested in debt securities like gilts and bonds. But if it is equity, a

major portion goes towards investments in the stock market. So depending on the risk profile the

individual may choose his investmentoption.20


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What do unit-linked products actually offer in terms of value-addition?

When you are looking at a long-term plan, there are always factors that will change from time to time to

meet any challenges. Also, plans change so that the company can offer some amount of customization.

Among other things, we offer to add the cover to the policy, add riders when necessary, and change the

investment structure. We also let customers choose from different fund options on the investmentwithout compromising on the basic product. While all these options do come with caps to follow the

regulatory framework, they definitely offer value-addition to the customer. And, with the NAV (net asset

value) of the fund calculated at the end of the day, the customer knows the value of his funds. I must add

that that in case of death, the beneficiary gets the sum assured or the NAV of the fund, whichever is

higher. So, there is no reduction in protection in these plans.

Is the investment risk left to the customer who buys unit-linked plans?

For any investor, the idea is to maximize returns. Wise customers know that the era of guaranteed returns

is over. The fall in interest rates in the past 18 months is indication enough of what lies ahead. What unit-linked products offer is a long-term investment option

where returns are far more real and there is no

compromise in the protection that the policy offers.

In the guaranteed returns regime, the guaranteed

component was met by paying lower interest rates to

those who did not have any guarantee on their plans.

Compared to this, unit-linked plans offer greater

value to the customer. Yes, to an extent the risk is in

the hands of the customer. However, the flexibility toopt for funds means that the customer can benefit as

well. And finally, the returns that these products offer

are bound to be relatively higher than what similar

traditional plans offer.

In order to cater to customers with very low risk

appetite we also offer a unitised, with- profit plan

across our products, where the bonus rate is declared in advance for the year. This is a conservative

approach but it has its takers.

What has been the performance of unit-linked plans in other emerging markets? In a country like Poland,

where the markets were opened a little over a decade ago, we are today the largest private insurance

company. The demand for our unit-linked products is high. Worldwide, the growth of these products is

high when compared to traditional products, an indication of where the market is headed.

There are a few people who view unit-linked plans as pure investment products that offer little cover. But

this is a myth and customers realize this when the benefit of these plans is explained to them.

With investment options regulated, one has to be prudent with the money that is contributed for the

product and has to add value for the business to be successful. I feel that both developed and developingmarkets understand the great value proposition that unit-linked insurance plans offer.


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CHAPTER-7

RIDERS

Riders are the additional benefits the company offers to the customer in addition to the life coverage. The

customer has to pay additional premium to get this benefit. However the benefit of rider is optional, the

client has full power to take or leave the riders.

There are five riders normally provided by the insurance companies and they are,5 riders-terms riders,

AD&D rider, critical-illness, critical illness pus or critical illness woman rider. I can add or delete them

(only after the 1st policy year) as my needs change

You can further customize your Birla sun life insurance plan by adding riders to base plan at a marginal

extra cost.

1. Accidental death and dismemberment benefit rider. It provides 100% of coverage in case of deathdue to accident; loss of more than one limb or sight in both the eyes or in case of loss of one limb

and loss of sight in one eye 50% coverage in23case of loss of one lib or sight in one eye.

2. Term rider: it provides additional amount of cover in the event of death of the life insured.3. Critical illness rider: it provides a cover in the event of life insured being diagnosed as suffering

from any of seventeen illnesses specified under the critical illness plus rider.

4. Critical illness woman rider: it provides a cover against several critical illness including womanspecific illnesses, pregnancy complication and congenital anomalies in a new born child.

5.

Waiver of premium: this rider waives payment of future premiums on the happening of any of theunforeseen events as covered under this rider.

For rider deletion I am required to give a written intimation along with the policy documents. For

rider addition, my certificate on insurability and the receipt of payment of rider premium will be

needed (ride addition is subject to underwriting condition.


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CHAPTER-8

MARKETING STRATERGIES

Birla sun life has adopted various marketing strategies to market its product. The company hasadapted to main strategies two main ways.

1. Corporate agent:Marketing through corporate agents is the traditional ways of marketing the insurance products.

Birla sun life also has huge number of agent spread all over the country.

2. Banc assurance:

Banc assurance is also a modern method of marketing insurance product in the market. It is done

in three ways. In banc assurance is a coming together of a bank and insurance company to market

the insurance product. The banks provide its customer data or sell the insurance product to its

customer.

1) Joint venture

2) Corporate agent

3) Customer base

Effective Banc assurance model

There are broadly three banc assurance models in

operation globally

In joint venture bank and insurance company form a

separate insurance company as in the case on ICICI

prudential life insurance? in corporate agent module a bank act as an agent of the insurance

company and sell products to its customers . The bank gets commission for its service as in the

case of LIC and Corporation bank in customer base the bank allow to sue its customer data and its

premises to insurance company to sell its products.

Birla sun life insurance Company has tied up with three bank to market its products. They act as a

corporate agent of the bank

1) CITI BANK

2) IDBI BANK

3) KARUR VYSYA BANK

Among these three banks Citi bank is the most active agent of the company .the company also

give various benefit to the customer of the Citi bank. For e.g.:- if a normal customer is above the

age of 45 or the policy amount exceed the amount of rs15lacs then he is required to submit

FMR(FULL MEDICAL REPORT) .but for the customer of city bank the limit is exceeded to

rupees 20lacs .

Recently the company has decided to target the SME sector i.e. small-scale enterprise to marketthis product. They have innovated new product. Basically for this the company has decided to use

industrial marketing strategies. The product innovated are explained below Mot of the partnership

in India fall in to the first model, were banks have offered their services as distribution channels


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for insurance products through their branch network. In terms of present regulatory frame work

banks have taken up corporate agency for marketing insurance products for an agreed referral

fee/commission.27

Banc assurance in India is very much in its infancy. There are a wide variety of banks, which are

very different; both in makeup, culture, geographic spread and working practices. There are widenumber of approaches and models that can be adopted for banc assurance, many of which are

dependent on this attributes, as well as the insurance partner views and competencies, and also the

nature of relationship between the bank and insurer-whether one of equity sharing company

structure, or of a profit share nature or purely a distribution management.

The effective banc assurance model is the one, which helps, in pushing sales as well as satisfying

customer needs and helping banks to become a One stop shop. As a Banc assurance model, if the

bank is using distribution agreement model, it should, go in for an exclusive agreement with an

insurance company of repute. The reason being, while signing up with multiple insurers you end

up looking like a broker who is not committed to brand or a product or a particular level ofservice, which is so vital for the growth of Banc assurance. By signing an exclusive agreement

with the insurer, the bank can put the stamp of its own Brand on the product without actually

taking any risk. The bank will thus be identified with the product it is selling and will be able to

convince the customer in a much better way. However, if the insurance market is not mature and

there is lack of creativity and innovation, even non-exclusive agreement is workable.

Sale of insurance products by the banks offers the following benefits:

It adds to the portfolio of retail products already offered by the banks It helps in building and packaging the existing core banking products like adding deposit

life insurance on a pure term deposit product.

Balances the less performing products. It is a risk management device, since the fee increase earned on the sale of insurance can

be used to offset the loss on account of bad loans.

It helps in increasing customer loyalty since they have more reason than just the bankingto continue their relationship with the bank.

It helps bank to become a one stop shop for all the financial needs of the customers whileit is banking insurance investments or state planning.


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CHAPTER-9

THE WORKING OF BANCASSURANCE

The distribution channel today for insurance products is widening. Increase in distribution channels

among others has also seen the concept of Banc assurance taking roots in India, which is emerging to be a

viable solution to mass selling of insurance products. A popular concept in the West, Banc assurance put

in simple terms means selling insurance products through banks.

Wide network of branches

The Insurance Regulatory Development Authority (IRDA) has permitted banks to venture into marketing

insurance products on a risk participation basis. Banks need to possess at least 500crores of net worth and

capital adequacy of a minimum of 10 per cent to make an entry. Since banks have wide number ofbranches, distribution will be smoother

Corporate clients

Banks can utilize their existing clientele, which includes

corporate as well as retail clients to market insurance products.

Depending on the relationship with its clients it would become

easier to influence tile insurance purchase decisions of its

clients. Customers too, having banked with a particular bank

for a long period repose a sense of trust and faith in the bank.

Customer database

Customer database - raw information on the customers

spending habits, investment purchase, can prove to be a goldmine. Such information channelised in the

right manner can help work out marketing strategies and arrive at result-oriented decisions targeting

prospects.

Personalized Service

Since banks have direct contacts with customers, the service area can be tackled easily. Customers, other

than their day-to-day financial requirements can also get assistance for premium payment, surrender,

transfer of policies and many more.

Rural penetration

Penetration into the rural areas is easier for banks. Having been accustomed to the customers' choices,

banks are in a better position to understand the needs of the customers and sell tailor made policies.

Cross-selling products

Banks in their normal course of functions lend finance in the form of loans for cars or for buying a house.

They can combine insurance products and sell as a package. In the current scenario banks can cross sell

their products along with the insurance products.


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Fee based service

Insurance products can be sold as a fee based service. in which some broker charge commission to

policyholder against the insurance product , such as, selling of insurance policy, different types of scheme

( ULIPS, endowment, personal accident, whole life, money back policy and joint life policy ) etc.

Joint life policy is much suitable for fee based services to the insurance agents in the insurance sectors.

And now, in ULIPS are most benefited to insured persons as well as insurers agents.

Cheaper than agents

Banc assurance may work out to be cheaper compared to companies appointing agents for selling

insurance products. This is particularly considering the banks wide network and the reach they have

compared to the agents.

"Integration of Banks and Insurance Companies is Likely to have a Longer Impact"

Insurance companies have been very slow to use the Web, for example, and their web pages are among

the poorest designed in the financial services industry in the US. France, Canada has picked up banc

assurance very fast whereas US, Japan has not. They've lagged behind in the US for a number of reasons.

Consumers don't see banks as a primary source for insurance.

Consumers do not have a lot of confidence in banks' financial expertise outside of loans and deposits.

There are well-developed distribution channels for insurance that are effective. Banks thought they could

get "easy sales" by cross-selling insurance, forgetting that:

They are not good cross-sellers,

The level of training required to sell insurance and the licensing requirements are far heavier thanwhat they're used to for selling other products, and

The banks have not, in most cases, put a strong emphasis on insurance sales. Annuities,somewhat, more than other products.

The time taken to overcome the sluggishness can also because of the reason that functioning of

banks and insurance companies are different from each other.

On the other hand, this integration of banks and insurance companies is likely to have a longer impact.

Over time, they will integrate increasingly as public perceptions change and banks put more effort behind

it. The insurance companies are trying the idea of selling banking services. Some banks and insurancecompanies fear that this will lead to higher growth and revenues but for those companies, which have not

opted for banc assurance, it will be an end.

I think it will be easier for the insurance companies to offer banking services than it will be for the banks

to offer insurance products. The insurance companies are more under threat from industry consolidation

and cost pressures within their own industries than they are from bank/insurance company combinations

at this point. The dream was that the banks' customer-bases would be "ripe for picking", but the banks'

sales and marketing teams have not figured out how to make it work.

"For Banc assurance to be successful, the savings made on the distribution may have to be passed on tothe customer. Insurance companies need to design products specifically for distributing through banks."


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On usefulness of Banc assurance: Globally, there is a trend of convergence of all personal finance

services including insurance. In this scenario, it is possible for banks to distribute some of the insurance

products to their customers. It is possible for banks to cross-sell insurance to their customers. Thus, the

existing distribution network and the existing customer-base of the banks are utilized for selling

insurance. There will be savings in distribution cost as well as customer acquisition cost. These savings

will be passed on to insurance seekers.

On new pricing issues: Marketing, especially the pricing may be the key issue. For banc assurance to

be successful, the savings made on the distribution may have to be passed on to the customer. Insurance

companies need to design products specificallyfor distributing through banks. Trying to sell traditional

insurance products may notwork.

On the success factors: The concept will succeed, as the customer is ultimately the same. However, it

may not work for traditional insurance products. It is right that the functioning of banks and insurers is

different. New products need to be designed keeping in mind the functioning of banks and the needs of

bank customers.

On the measures of strategies to be taken up by companies: Companies not opted for Banc

assurance could consider approaching or identifying the customers through other channels. For example,

a customer approaching a bank for home loan can be offered Householder insurance policy through Banc

assurance. However, other insurers through a real estate developer or a real estate broker can offer the

same customer a Householder insurance policy.

On level of success in India: In India, the level of success could be high. Many banks have entered the

insurance sector through joint ventures and others have formed alliances with Banks. These new

companies will try to exploit the branch networks of the banks. For example, Standard Chartered bankhas already started selling personal accident covers of Royal Sundaram Alliance Insurance Company to

its credit cardholders.

On the competition between LIC and SBI: It is too early to comment. The strength of LIC is their

agent network. LIC is said to have over eight lakh agents. The strength of SBI is their branch network.

Traditionally, life insurance is best sold through agents, while bank branches only supplement.

Other marketing and distribution channels

a) InternetThough India is joining the fast growing breed of net users, using net for transactions has not yet caught

up. Though a few banks provide online banking, the usage is still a small fragment. The insecurity

associated with transactions over the net is still an inhibiting factor. At present most of the insurance

companies have product information and/or illustrative tools on the web.

We do not see the web evolving into a means for direct selling of insurance in the current scenario. In the

Indian market, where insurance is sold after considerable persuasion even after face-to-face selling, the

selling over the net, which must be initiated by the client, would take some more time.

While the technology capability is there, improvements in width and infrastructure are needed. Also

needed are simpler products where auto-underwriting is feasible. Automobile insurance, one of the

segments of insurance purchased "off the shelf" in India, would be the ideal segment to start with. On the


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life side, term assurance for standard lives with simplified underwriting is a possibility. These channels

by themselves will not be able to overcome the mindset of the people, but rather can only be enablers for

the human channels.

b)Electronic Channels:

In the last decade, numbers of technological advances have taken place due to immense use of EDI

(Electronic Data Interchange)

i) LIC on Internet: They have their own site, which is very informative. They display information about

them and its subsidiaries, the product they offer. The addresses/e-mail Ids of their zonal offices, zonal

training centers, management development centers , overseas branches, Divisional offices and also all

Branch offices with a view to speed up the communication process.

ii) SMS: SMS through mobile phone is recently new technology introduced by the LIC to promote their

product.

iii) Advertising: It is a paid form of non-personal communication. It is used to create awareness and

transmit information in order to gain a response from the target market. Forms of advertising are as

follows:

c) News Papers and Magazines: LIC give ads in the newspapers and magazines round the year to

continue its brand image and also when new products are introduced. Normally its ads are published in

Times of India

d) Electronic media:

Insurance companies also advertise its services in the

i) Internet (Websites ): Companies like LIC (www.licindia.com), ICICI(www.iciciprudential.com) allhave websites from which people can get the information about their products, prices, various schemes,

and lots of other information. People can also purchase the product through this website.

ii) Television: Companies like LIC, Met Life India, advertise on television to make people awareof their products and services.

iii) Radio: ICICI Prudential advertises on 92.5 red Fm.iv) Punch lines and logos: It helps to create awareness about the brand among the target

audience. It also helps the company to convey its message to the customer.
http://www.iciciprudential.com/http://www.iciciprudential.com/


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CHAPTER-10

DISABILITY INSURANCE

Most of us insure our lives, effectively insuring that we will be able to provide income for our families in

event of our untimely death since we believe that we are doing something reasonable to prevent any

undue financial burden from affecting the lives of our loved ones. Yet, most of us never insure a part of

us that is much more important.

Not only can a disabled person not work but he or she has to undergo extensive medical regimes while

still incurring the daily costs of living. And health insurance is not enough to circumvent the perils

associated with permanent disability. A recent study conducted abroad found that although 96percent of

seriously ill people had medical insurance over a third of them lost everything that they owned and

maintained owing to their disability.

After all, a disabled person still needs to eat and drink like the rest of normal human society. Given the

fact that he or she is disabled now requires extra care from the family or paid professional help that

eventually uses up the funds much beyond what they might have earned. People may be put off by the

price of disability insurance but the only reason why the policy premiums are higher is because there is a

much greater chance of you actually needing the policy.

Most of the Indian insurance policies have an in-built disability clause. So the next time any agent tries to

sell you a life insurance policy, do inquire more about the disability clauses.

Also, check out the definition of disabled in the policy that the agent offers since you must be insured

for your chosen occupation. At times, a disability may stop you from working at your current job but still

lets you perform other activities. Do verify if there is coverage offered for partial disability since it could

be the moot point between over-taxing yourself and worsening your condition and being able to achieve

the needful by performing whatever amount of work seems prudent.

Also, look for a policy that holds a guarantee and is non -cancelable. Guaranteed policies are policies

where the payment stays fixed. Non-cancelable policies stay in effect regardless of whatever that might

happen and as long as the premium is paid from time to time.

Finally, the last option to map is to calculate how much actual cover you may be having currently or

might need in the times to come. An insurance cover of Rs.1lakh may have been adequate when you

started working and earned Rs.3000 per month. But it sure will be insufficient now that you have risen up

in the world and your salary has risen to over Rs.20000/- month.

Keep your interests in mind while choosing the insurance policy and you will never regret it. After all, in

the materialistically inclined times where we subsist, self-centredness is the only truly justifiable

prerogative in life Please go through this list. It is designed as the starting point to help you make the right

choice while purchasing a life insurance policy. Answer the questions with your policy in perspective and

eliminate any conflicting doubts that might arise.

Is your life insurance so arranged that the proceeds stand exempted from the claims of creditors, in case

you have any? Will it stand against any judgment passed by a court of law?


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If and when desired, will the cash values of the insurance policy result in the largest possible income for

yourself?

In case, you have named your children as beneficiaries, do all of them participate? In case your children

are minors, can your expenses be correctly and swiftly liquidated?

In case of an unexpected emergency, will the settlement provision prove sufficiently flexible? Or will

your benefactors interests be jeopardised?

Are all beneficiary designations correct and complete? Do your beneficiaries need to be altered due to

new family circumstances?

Is there a chance of your current life insurance policy being subject to probationary delays or

unnecessary additional expenses?

Do your grandchildren, if any obtain equal shares in your estate?

Are the beneficiary clauses formulated in a way that they perform your last wishes to their fullest, with

no violation whatsoever?

Will your spouse be guaranteed the most favourable income from the insurance proceeds?

Is the extent to which your life insurance policy providing income absolutely clear in your mind?

Can your spouse outlive the income provided?

Is your insurance policy arranged in a manner to create an income for your childs educational and

marriage expenditure?

Shouldnt you provide a cash fund for your spouses last expenses?

Have you taken full advantage of the best possible exemptions from tax?

Is the insurance policy so arranged that your spouse will be provided with similar income advantages as

yourself, if he or she outlives you?

Is there a chance of saving more if you opt to change the frequency of the payment of premium?

Is there a non-forfeiture option provided? Would a change in the non-forfeiture option be beneficial?

Would the proceeds of your life insurance policy be subject to double taxation if you predecease your

spouse?

Is the plan of distribution of your life insurance coordinated with your general property?

Do you now own a substandard policy? If so, do the conditions that caused the extra rating still exist?

Are there any "gaps" left in your "earning years"? For instance, your agent might go on selling you short-

term policies, all of them maturing between 50-55 years of age. Eventually you will be resigned to a zero-insurance status when you actually need it the most.


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There are no hard and fast rules, nor any easy formulae to help you decide how much life insurance cover

you need. However, there is a fairly straight forward approach which each of us can follow.

Since life insurance is, first and foremost, financial security for your family, you can judge how much

money your family will need increase of your premature death and build your insurance portfolio

accordingly.

For instance, if you are contributing Rs.3,000 a month for meeting your familys needs, you must have a

life insurance cover of around Rs.3 lakhs. In case of the policy holders death the family can invest this

amount in some absolutely safe investment avenue such as government bonds, which pay 12% interest.

The annual interest of Rs.36,000 . Additionally, the insurance portfolio could also include polices

specifically earmarked for the education and marriage of your children.

Income replacement is another approach to determine how much insurance one needs. There are ways to

figure it; two are discussed below:

1. Seventy-five percent solutions: Some observers believe that a family, particularly a young one, needs

about 75percent of the take-home pay the insured would have received until age sixty-five.

2. Five times solution: A second income replacement formula is to buy insurance equal to five times

your annual income less any insurance equal to five times your annual income less any insurance already

held. Suppose your annual income isRs.25, 000. Multiply this by 6 and it equals Rs.1,50,000. Now if you

haveRs.25,000 in-group life insurance, you need an additional Rs.1,25,000(Rs.1,50,000 minus Rs.25,000)

of life insurance.


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CHAPTER-11

BUSINESS INSURANCE

Business insurance is a type of insurance which is taken out by the business concerns. Every business

house, small or large requires security for their business. For the security and safety of their employee &

employers, they require certain type of insurance which will help them to preserve from the uncertainties

arising in the business. A business concerns include company, partnership or sole trading concern. Every

business concern take out insurance for their employee, key person etc. This helps them to protect the

interest of their employees.

Business Insurance comprises of:

Key Person/man Insurance

Partnership Insurance

Employer- Employee Insurance

What is Key Person Insurance?

Key man insurance is the insurance taken out by the business concern to indemnify himself from the loss

which may suffer in the event of death or loss of skill of the key person, it can also be defined as

Insurance taken by a Business Concern on the lives of the Key Employees / Directors / Working Partners.

Their Talent and Experience account for much for the success of the Business Who cannot be easilyreplaced by virtue of their long experience.

A Key Person is:

Key Executive

Key Employee

Whole Time Director

Working Partner Business Concern includes:

A business concern includes:-

Company To insure key employees / directors

Partnership firm To insure working partners/ Employees

Sole proprietor concern To insure key employees, but not the sole proprietor

The risk arising from the death of key employee is as follows:-

Reduction in value of business

Decrease in sales and production


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Impaired customer and supplier confidence

Weakened credit standing of business

Forced liquidation of business48

Delay or termination of projects or future plans

Reduced Brand Value

Reduction of profits

Provide funds to recruit, hire, and train suitable replacement

Assure customers, creditors and employees of the continuity of the business

Pay a death benefit to the Key Persons family

Reduction in profits

Hostile Takeovers

The benefits of key men insurance to particular business concern are as follows:

Replace loss of profits

Provide funds to recruit, hire, and train suitable replacement

Assure customers, creditors and employees of the continuity of the business

Pay a death benefit to the Key Persons family

Ensure Liquidity

Create policy cash value which accumulates and can be used for emergency business requirement or

opportunity

Key Employee retirement / disability income.

As explained earlier that the key man insurance is taken out by the business concern to indemnify himself

from the loss arise due to death of the key employee of the company, the benefit of the key men insuranceis enjoyed by the company himself.

Key person insurance is taken by a business concern for its own benefit and not for the benefit of its

employee / individual. The control of the key men insurance is also with the company as the following

right are with the company himself.

Premium is paid By the Business Concern

- It retains the right to the Policy

- Is eligible to receive the policys benefits

-On what basis can key person insurance be given?


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-Holdings

- Contribution to Profits & Profile

- Documents Holdings

-In case of an entity, the key person should not hold;

- More than 50% individually, and

- More than 75% jointly with his family

- (Family includes spouse and minor children

when a minor becomes a major, then he/ she is not a part of the family for this purpose)

- The above are more of a convention and not a rule or law.

- Contribution to the Profits & Profile

- Quantum of Insurance will depend on the key persons contribution to the concerns profits keeping in

mind

- His Qualifications

- Experience

- No. of key persons in the concern

- Documents - Profits & Compensation

-Thecover for all the key persons in the concern will be limited to the least of;

- 3 Times of Average PBDT ( Profit before Depreciation- and Taxes) for the last 3 years

- 5 Times of Average Profit before Taxes (PBT) - for the

- Last 3 years- Individual Key persons cover limit

- Up to 8 times of the annual compensation of key person.

-Assume that the Key mans annual compensation is Rs. 12 Lakhs and commission@ 1% of the PAT.

-3 Times of Average PBDT for the last 3 years = 280 + 250 + 200 X 3 = 7303-5 Times of Average Profit

before Taxes = 220 + 190 + 140 X 5 = 917

- For the last 3 years 3-8 times of the annual compensation = 12 + (1% of 139.5) X 8 = 107

-Of key person

-The cover for all the key persons in the concern will be limited to 730lakhs&individual Key persons

cover limit will be 107 lakhs.

-Where do you get the information on PBT & PBDT?

Balance Sheet& P & L Statement:


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-forming a part of the Companys Annual Report

-Balance Sheet:

-Presents the snapshot of the companys financial

-Position and reflects the sources and application of funds.

Documents Required:

- Copy of Memorandum and Articles of Association

- Copy of Resolution of Board authorizing such insurance

- Copy of audited accounts for the last 3 years- Key person Questionnaire

- I. T. returns of the Key person for the last 3 years

Plans & Policy Procedures:

- Flexi Save Plus, Flexi Life Line, Classic Life and Term Plan can be given

- Term and CI riders can be added

- Concern being the owner of the policy, nomination is not possible.

- Assignment can be made in favour of the key person, in case of the key person leaving, can also be

assigned in favour of

- New employer

1. Premium paid by the concern not a perquisite in the hands of the key person.

2. Policy proceeds received will not be exempt under Sec. 10(10D)s of the I.T. Act.

3. Policy proceeds received by the concern to be treated as business income and taxed under Sec. 28 of I.

T. Act.

Benefits of Key person policy:

Concern is indemnified in case of sudden death of the key person.

Corporate tax saving

A tool for retention of key person

Policy can be gifted to the key person as a recognition

Policy can be used as a collateral security

Withdrawals from the poli

Innovation in Insurance New Content

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