Sudershan PDF

8/12/2019 Sudershan PDF

1/41

Chapter

No.

Particulars Page No.

1) Introduction1.1 Introduction to insurance1.2 Working of insurance

1.3 Indian Insurance sector1.4 History of insurance sector1.5 Structure of Indian insurance1.6 IRDA and its functions

2) Review or literature

3) 3.1 Introduction to Portfolio management

3.2 Definition of portfolio management

3.3 Scope of portfolio management

3.4 Need for portfolio management

3.5 Objectives of portfolio management

3.6 Portfolio manager

3.7 Portfolio management in insurance sector

4) Finding and Analysis4.1 Benefits of Portfolio Management InInsurance Sector

4.2 Disadvantages of port folio managementin insurance4.3 Portfolio Risk Management In Insurance

Sector

5) Feild StudyCase study

6) Challenges of Portfolio Management In

Insurance Sector

7) Conclusion


2/41

Chapter

No.

Particulars Page No.

8) Bibliography, Webilography

9) Annexure


3/41

1.1 INTRODUCTION & DEFINITION OF INSURANCE

Insuranceis the equitable transfer of the risk of a loss, from one entity to another

in exchange for payment. It is a form of risk management primarily used to hedgeagainst the risk of a contingent, uncertain loss.

According to study texts of The Chartered Insurance Institute, there are thefollowing categories of risk.

1. Financial risks which means that the risk must have financial measurement.2. Pure risks which means that the risk must be real and not related to gambling3. Particular risks which mean that these risks are not widespread in their

effect, for example such as earthquake risk for the region prone to it.

It is commonly accepted thatonly financial, pure and

particular risks are insurable.

An insurer, or insurance carrier,is a company selling theinsurance; the insured, or

policyholder, is the person orentity buying the insurance

policy. The amount of moneyto be charged for a certainamount of insurance coverageis called the premium. Riskmanagement, the practice ofappraising and controlling risk, has evolved as a discrete field of study and

practice.

The transaction involves the insured assuming a guaranteed and known relatively

small loss in the form of payment to the insurer in exchange for the insurer'spromise to compensate (indemnify) the insured in the case of a financial (personal)loss. The insured receives a contract, called the insurance policy, which details theconditions and circumstances under which the insured will be financiallycompensated.


4/41

DEFINITIONS

The definition of insurance can be made from two points:

Functional definition.

Contractual definition.

Functional definition

Insurance is a co-operative device to spread the loss caused by a particular risk

over a number of persons who are exposed to it and who agree to insure

themselves against the risk.

General Definition

Insurance has been defined to be that in which a sum of money as a premium is

paid in consideration of the insurers incurring the risk of paying a large sum upon

a given contingency.

In the words of John Magee, Insurance is a plan by themselves

which large number of people associate and transfer to the shoulders of all, risks

that attach to individuals.

Contractual Definition

In the words of justice 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.


5/41

1.2 Working of Insurance


6/41

CLASSIFICATION OF INSURANCE

LIFE

INSURANCE

GENERAL

INSURANCE

Fire

insurance

Marine

insurance

Mediclaim Motor vehicle

INSURANCE


7/41

Life insurance

Life insurance is an insurance coverage that pays out a certain amount of money tothe insured or their specified beneficiaries upon a certain event such as death of theindividual who is insured. This protection is also offered in a Family takaful plan, aShania-based approach to protecting you and your family.

The coverage period for life insurance is usually more than a year. So this requiresperiodic premium payments, either monthly, quarterly or annually.

The risks that are covered by life insurance are:

Premature deathIncome during retirementIllness

The main products of life insuranceinclude:

Whole lifeEndowmentTermInvestment-linked

Life annuity planMedical and health
http://www.insuranceinfo.com.my/choose_your_cover/secure_your_future/life_insurance.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/secure_your_future/life_insurance.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/insure_your_health/medical_health_insurance.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/insure_your_health/medical_health_insurance.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/insure_your_health/medical_health_insurance.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/secure_your_future/life_insurance.php?intPrefLangID=1&


8/41

General insurance

General insurance is basically an insurance policy that protects you against lossesand damages other than those covered bylife insurance.For more comprehensivecoverage, it is vital for you to know about the risks covered to ensure that you andour family are protected from unforeseen losses.

The coverage period for most general insurance policies and plans is usually oneear, whereby premiums are normally paid on a one-time basis.

The risks that are covered by general insurance are:

Property loss,for example,stolen car or burnt house

Liability arising from damage

caused by yourself to a thirdparty

Accidental death or injury

The main products of general insuranceincludes:

Motor insurance Fire/ Houseowners/

Householders insurance Personal accident insurance Medical and health insurance Travel insurance
http://www.insuranceinfo.com.my/choose_your_cover/secure_your_future/life_insurance.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/protect_your_possessions/home_insurance.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/protect_your_possessions/motor_insurance.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/protect_your_possessions/home_insurance.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/protect_your_possessions/home_insurance.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/protect_your_possessions/home_insurance.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/protect_your_possessions/home_insurance.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/cover_personal_needs/personal_accident.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/insure_your_health/medical_health_insurance.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/cover_personal_needs/travel_insurance.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/cover_personal_needs/travel_insurance.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/insure_your_health/medical_health_insurance.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/cover_personal_needs/personal_accident.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/protect_your_possessions/home_insurance.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/protect_your_possessions/home_insurance.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/protect_your_possessions/motor_insurance.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/protect_your_possessions/home_insurance.php?intPrefLangID=1&http://www.insuranceinfo.com.my/choose_your_cover/secure_your_future/life_insurance.php?intPrefLangID=1&


9/41

1.3 INDIAN INSURANCE SECTOR

The Insurance sector in India governed by Insurance Act, 1938, the Life Insurance

Corporation Act, 1956 and General Insurance Business (Nationalization) Act,

1972, Insurance Regulatory and Development Authority (IRDA) Act, 1999 and

other related Acts. With such a large population and the untapped market area of

this population Insurance happens to be a very big opportunity in India. Today it

stands as a business growing at the rate of 15-20 per cent annually. Together with

banking services, it adds about 7 per cent to the countrys GDP .In spite of all this

growth the statistics of the penetration of the insurance in the country is very poor.

Nearly 80% of Indian populations are without Life insurance cover and the Health

insurance. This is an indicator that growth potential for the insurance sector is

immense in India. It was due to this immense growth that the regulations were

introduced in the insurance sector and in continuation Malhotra Committee was

constituted by the government in 1993 to examine the various aspects of the

industry. The key element of the reform process was Participation of overseas

insurance companies with 26% capital. Creating a more efficient and competitive

financial system suitable for the requirements of the economy was the main idea

behind this reform. Since then the insurance industry has gone through many sea

changes. The competition LIC started facing from these companies were

threatening to the existence of LIC .since the liberalization of the industry the

insurance industry has never looked back and today stand as the one of the most

competitive and exploring industry in India. The entry of the private players and

the increased use of the new distribution are in the limelight today. The use of new

distribution techniques and the IT tools has increased the scope of the industry in

the longer run.


10/41

1.4 HISTORY OF INSURANCE SECTOR

India had the nineteenth largest insurance market in the world in 2003. Strong

economic growth in the last decade combined with a population of over one billion

makes it one of the potentially largest markets in the future. Insurance in India has

gone through two radical transformations. Before 1956, insurance was private with

minimal government intervention. In 1956, life insurance was nationalized and a

monopoly was created. In 1972,generalinsurance was nationalized as well.255But,

unlike life insurance, a

different structure was created

for the industry. One holdingcompany was formed with

four subsidiaries. As a part of

the general opening up of the

economy after 1992, a

government-appointed

committee recommended that

private companies should be

allowed to operate. It took six

years to implement the recommendation. The private sector was allowed into the

insurance business in 2000. However, foreign ownership was restricted. No more

than 26 percent of any company can be foreign-owned.

The term general insurance is used in Britain and other Commonwealth countries.

Elsewhere, the equivalent term is property-casualty insurance or non-life insurance

Indian Insurance MarketHistory


11/41

Insurance has a long history in India. Life Insurance in its current form was

introduced in 1818 when Oriental Life Insurance Company began its operations in

India. General Insurance was however a comparatively late entrant in 1850 when

Triton Insurance company set up its base in Kolkata. History of Insurance in India

can be broadly bifurcated into three eras: a) Pre Nationalization b) Nationalization

and c) Post Nationalization. Life Insurance was the first to be nationalized in 1956.

Life Insurance Corporation of India was formed by consolidating the operations of

various insurance companies. General Insurance followed suit and was

nationalized in 1973. General Insurance Corporation of India was set up as the

controlling body with New India, United India, National and Oriental as its

subsidiaries. The process of opening up the insurance sector was initiated against

the background of Economic Reform process which commenced from 1991. For

this purpose Malhotra Committee was formed during this year who submitted their

report in 1994 and Insurance Regulatory Development Act (IRDA) was passed in

1999. Resultantly Indian Insurance was opened for private companies and Private

Insurance Company effectively started operations from 2001.


12/41

1.5 Structure of Indian Insurance

The business of life insurance in India in its existing from started in India in the

year 1818 with the establishment of the Oriental Life Insurance company in

Calcutta. Some of the important milestones in the life insurance business in India

are:

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

regulate the life insurance business.

1912: The Indian Life Assurance Companies Act enacted to enable the government

to collect statistical information about both life and non-life insurance

business.

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 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.

The general insurance business in India, on the other hand, can trace its roots to the

Triton Insurance Company Ltd., the first general insurance company established in

the year 1850 in Calcutta by the British. Some of the important milestones in the

general insurance business in India are:

1957: The Indian Mercantile Insurance Ltd. Set up, the first company to transact

all classes of general insurance business.

1957: General Insurance Council, a wing of the Insurance Association of India,

frames a code of conduct for ensuring fair conduct and sound business practices.

1968: The Insurance Act amended to regulate investments and set minimum

solvency margins and the tariff Advisory Committee set up.


13/41

1972: The General Insurance Business (Nationalization) Act, 1972 nationalized

the general insurance business in India with effect from 1st January 1973. 107

insurers amalgamated and grouped into four companies viz. the National

Insurance Company Ltd., the New India assurance Company Ltd., the Oriental

Insurance Company Ltd. And the United India Insurance Company Ltd. GIC

incorporated as a company. Insurance sector reforms in 1993, Malhotra

Committee, headed by former Finance secretary and RBI Governor R.N.

Malhotra, were formed to evaluate the Indian insurance industry and

recommend its future direction. The Malhotra Committee was set up with the

objective of completing 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:

1) Parties to contract

2) Contract terms

3) Costs, insurability and underwriting

4) Death proceeds

5) Insurance v/s assurance

Parties to contract

There is a difference between the insured and the policy owner, although the owner

and the insured are often the same person. For example, if Joe buys a policy on his

own life, he is both the owner and the insured. But if Jane, his wife, buys a policy

on Joe's life, she is the owner and he is the insured. The policy owner is the


14/41

guarantor and he will be the person to pay for the policy. The insured is a

participant in the contract, but not necessarily a party to it. Also, most companies

allow the payer and owner to be different, e. g. a grandparent paying premiums for

a policy on a child, owned by a grandchild.

The beneficiary receives policy proceeds upon the insured person's death. The

owner designates the beneficiary, but the beneficiary is not a party to the policy.

The owner can change the beneficiary unless the policy has an irrevocable

beneficiary designation. If a policy has an irrevocable beneficiary, any beneficiarychanges, policy assignments, or cash value borrowing would require the agreement

of the original beneficiary.

In cases where the policy owner is not the insured (also referred to as the celui qui

vitor CQV), insurance companies have sought to limit policy purchases to those


15/41

with an insurable interest in the CQV. For life insurance policies, close family

members and business partners will usually be found to have an insurable interest.

The insurable interest requirement usually demonstrates that the purchaser will

actually suffer some kind of loss if the CQV dies. Such a requirement prevents

people from benefiting from the purchase of purely speculative policies on people

they expect to die. With no insurable interest requirement, the risk that a purchaser

would murder the CQV for insurance proceeds would be great. In at least one case,

an insurance company which sold a policy to a purchaser with no insurable interest

(who later murdered the CQV for the proceeds), was found liable in court for

contributing to the wrongful death of the victim (Liberty National Life v. Weldon,

267 Ala.171 (1957)).

Contract terms

Special exclusions may apply, such as suicide clauses, whereby the policy becomes

null and void if the insured commitssuicidewithin a specified time (usually two

years after the purchase date; some states provide a statutory one-year suicide

clause). Any misrepresentations by the insured on the application may also be

grounds for nullification. Most US states specify a maximum contestability period,

often no more than two years. Only if the insured dies within this period will theinsurer have a legal right to contest the claim on the basis of misrepresentation and

request additional information before deciding whether to pay or deny the claim.

The face amount of the policy is the initial amount that the policy will pay at the

death of the insured or when the policymatures,although the actual death benefit
http://en.wikipedia.org/wiki/Suicidehttp://en.wikipedia.org/wiki/Suicidehttp://en.wikipedia.org/wiki/Suicidehttp://en.wikipedia.org/wiki/Maturity_(finance)http://en.wikipedia.org/wiki/Maturity_(finance)http://en.wikipedia.org/wiki/Maturity_(finance)http://en.wikipedia.org/wiki/Maturity_(finance)http://en.wikipedia.org/wiki/Suicide


16/41

can provide for greater or lesser than the face amount. The policy matures when

the insured dies or reaches a specified age (such as 100 years old).

Costs, insurability and underwriting

The insurer (the life insurance company) calculates the policy prices with intent to

fund claims to be paid and administrative costs, and to make a profit. The cost of

insurance is determined using mortality tables calculated by actuaries. Actuaries

are professionals who employ actuarial science, which is based on mathematics

(primarily probability and statistics). Mortality tables are statistically based tables

showing expected annual mortality rates. It is possible to derive life expectancy

estimates from these mortality assumptions. Such estimates can be important intaxation regulation.

The three main variables in a mortality table are commonly age, gender, and use

of tobacco, but more recently in the US, preferred class-specific tables have been

introduced. The mortality tables provide a baseline for the cost of insurance, but in

practice these mortality tables are used in conjunction with the health and family

history of the individual applying for a policy to determine premiums and

insurability. Mortality tables currently in use by life insurance companies in the

United States are individually modified by each company using pooled industry

experience studies as a starting point. In the 1980s and 90s, the SOA 197580

Basic Select & Ultimate tables were the typical reference points, while the 2001

VBT and 2001 CSO tables were published more recently..

Most of the revenue received by insurance companies consists of premiums paid

by policy holders, with some additional money being made through the investment

of some of the cash raised from premiums. Rates charged for life insurance

increase with the insurer's age because, statistically, people are more likely to die

as they get older. The insurance company will investigate the health of and


17/41

applicant for a policy to assess the likelihood of incurring a claim, in the same way

that a bank would investigate an applicant for a loan to assess the likelihood of a

default. Group Insurance policies are an exception to this. This investigation and

resulting evaluation of the risk is termed underwriting. Health and lifestyle

questions are asked, with certain responses or revelations possibly meriting further

investigation. Life insurance companies in the United States support the Medical

Information Bureau (MIB), which is a clearing house of information on persons

who have applied for life insurance with participating companies in the last seven

years. As part of the application, the insurer often requires the applicant's

permission to obtain information from their physicians.

Underwriters will determine the purpose of insurance; the most common being to

protect the owner's family or financial interests in the event of the insured's death.

Other purposes include estate planning or, in the case of cash-value contracts,

investment for retirement planning. Bank loans or buy-sell provisions of business

agreements are another acceptable purpose.

Death proceeds

Upon the insured's death, the insurer requires acceptable proof of death before it

pays the claim. The normal minimum proof required is a death certificate, and the

insurer's claim form completed, signed (and typically notarized).If the insured's

death is suspicious and the policy amount is large, the insurer may investigate the

circumstances surrounding the death before deciding whether it has an obligation

to pay the claim.

Payment from the policy may be as a lump sum or as an annuity, which is paid in

regular instalments for either a specified period or for the beneficiary's lifetime.

Insurance v/s assurance

The specific uses of the terms "insurance" and "assurance" are sometimes

confused. In general, in jurisdictions where both terms are used, "insurance" refers


18/41

to providing coverage for an event that might happen (fire, theft, flood, etc.), while

"assurance" is the provision of coverage for an event that is certain to happen. In

the United States both forms of coverage are called "insurance", for reasons of

simplicity in companies selling both products.


19/41

1.6 IRDA & ITS FUNCTION

Insurance laws and regulations in India takes care of all matters related to various

insurance companies in the country. Much of the development and growth of the

insurance sector in India is due to the government's decision to nationalize the

insurance business and to allow private and foreign insurance companies to

establish their businesses here. In India, there is one regulatory authority i.e. IRDAwhich oversees different functioning of the life insurance companies in India and

provide them with guidelines.

Insurance Regulatory and Development Authority (IRDA)

Insurance Regulatory and Development Authority (IRDA) is the controlling body,

overseeing important aspects and functioning of various insurance companies in

India. Established by the government, it safeguards the interest of the insurance

policy holders of the country.

Some of IRDA's functions include:

To regulate, ensure and promote the orderly growth of the insurance business

To prescribe regulations on the investment of funds by insurance companies

To regulate the maintenance of the margin of solvency

To adjudicate the disputes between insurers and intermediaries

To supervise the functioning of the Tariff Advisory Committee


20/41

Rules and regulation

The Insurance Act of 1938 was the first legislation governing all forms of

insurance to provide strict state control over insurance business.

Life insurance in India was completely nationalized on January 19, 1956,

through the Life Insurance Corporation Act. All 245 insurance companies

operating then in the country were merged into one entity, the Life InsuranceCorporation of India.

The General Insurance Business Act of 1972 was enacted to nationalize the

about 100 general insurance companies then and subsequently merging them

into four companies. All the companies were amalgamated into National

Insurance.

Until 1999, there were not any private insurance companies in India. The

government then introduced the Insurance Regulatory and Development

Authority Act in 1999, thereby de-regulating the insurance sector and

allowing private companies. Furthermore, foreign investment was also

allowed and capped at 26% holding in the Indian insurance companies.

In 2006, the Actuaries Act was passed by parliament to give the profession

statutory status on par with Chartered Accountants, Notaries, Cost & Works

Accountants, Advocates, Architects and Company Secretaries.

A minimum capital of US$20 million (Rs.100 Crore) is required by

legislation to set up an insurance business.

IRDA was formed by an act of the Indian Parliament (known as the IRDA

Act, 1999) as the regulatory body to govern the Indian insurance sector.

A company, to operate as an insurance company in India, must be

incorporated under the Companies Act, 1956, and possess the certificate of

the memorandum of association and articles of association

Capital requirementpaid up equity share capital

At least US$ 208.3 million for life insurance or non-life insurance business

At least US$ 416.7 million for reinsurance business

International players can operate in India only through a joint venture with a

domestic firm and are classified under private sector insurers. FDI up to 26 per cent is permitted in the insurance sector.

IRDA does not allow foreign reinsurance companies to open branches in

India. This proposal is currently under consideration in the Parliament


21/41

2 Review of literature


22/41

3.1 INTRODUCTION TO PORTFOLIO MANAGEMENT

Portfolio management in common parlance refers to the selection of securities

and their continuous shifting in the portfolio to optimize the returns to suit the

Objectives of the investor. This however requires financial expertise in

selecting the right mix of securities in changing market conditions to get the

best out of the stock market. In India, as well as in many western countries,

portfolio management service has assumed the role of specialized service now a

days and a number of professional merchant bankers compete aggressively to

provide the best to high net-worth clients, who have little time to manage their

investments. The idea is catching up with the boom in the capital market and an

increasing number of people are inclined to make the profits out of their hard

earned savings.

Portfolio management service is one of the merchant banking activities

recognized by securities and exchange board of India (SEBI). The portfolio

management service can be rendered either by the SEBI recognized categories I

and II merchant bankers or portfolio managers or discretionary portfolio

manager as defined in clause (e) and (f) of rule 2 SEBI (portfolio managers)

Rules 1993.

According to the definitions as contained in the above clauses, a portfolio

manager means any person who pursuant to contract or arrangement with aclient, advises or directs of undertakes on behalf of the client (whether as a

discretionary portfolio manager or otherwise) the management or

administration of a portfolio of securities or the funds of the client, as the case

may be. A merchant banker acting as a portfolio manager shall also be bound

by the rules and regulations as applicable to the portfolio manager.

Portfolio management or investment helps investors in effective and efficient

management of their investment to achieve this goal. The rapid growth of

capital markets in India has opened up new investment avenues for investors.

The stock markets have become attractive investment options for the common

man. But the need is to be able to effectively and efficiently manage

investments in order to keep maximum returns with minimum risk.


23/41

3.2 DEFINITION OF PORTFOLIO MANAGEMENT

Portfolio means the totals holdings of the securities belonging to any person.

Portfolio manager means any person who enters into a contract or arrangement

with a client. Pursuant to such arrangement he advises the client or undertakes on

behalf of such client management or administration of portfolio of securities or

invests or manages the clients funds.A discretionary portfolio manager means a

portfolio manager who exercises or may under a contract relating to portfolio

management, exercise any degree of discretion in respect of the investment or

management of portfolio of the portfolio

securities or the funds of the client, as the

case may be. He shall independently or

individually manage the funds of each

client in accordance with the needs of theclient in a manner which does not

resemble the mutual fund. A non

discretionary portfolio manager shall

manage the funds in accordance with the

directions of the client. A portfolio

manager by virtue of his knowledge,

background and experience is expected to

study the various avenues available forprofitable investment and advise his client

to enable the latter to maximize the return on his investment and at the same time

safeguard the funds invested


24/41

3.3 SCOPE OF PORTFOLIO MANAGEMENT

Portfolio management is an art of putting money in fairly safe, quite profitable and

reasonably in liquid form. An investors attempt to find the best combination of

risk and return is the first and usually the foremost goal. In choosing among

different investment opportunities the following aspects risk

Management should be considered:

a) The selection of a level or risk and return that reflects the investors tolerance

for risk and desire for return, i.e. personal preferences.

b) The management of investment alternatives to expand the set of opportunities

available at the investors acceptable risk level.

The very risk-averse investor might choose to invest in mutual funds. The more

risk-tolerant investor might choose shares, if they offer higher returns. Portfolio

management in India is still in its infancy. An investor has to choose a portfolio

according to his preferences. The first preference normally goes to the necessities

and comforts like purchasing a house or domestic appliances. His second

preference goes to some contractual obligations such as life insurance or provident

funds. The third preference goes to make a provision for savings required for

making day to day payments. The next preference goes to short term investments

such as UTI units and post office deposits which provide easy liquidity.

The last choice goes to investment in company shares and debentures. There are

number of choices and decisions to be taken on the basis of the attributes of risk,

return and tax benefits from these shares and debentures. The final decision is

taken on the basis of alternatives, attributes and investor preferences.

For most investors it is not possible to choose between managing ones own

portfolio. They can hire a professional manager to do it. The professional managers

provide a variety of services including diversification, active portfolioManagement, liquid securities and performance of duties associated with keeping

track of investors money.


25/41

3.4 NEED FOR PORTFOLIO MANAGEMENT

Portfolio management is a process encompassing many activities of investment in

assets and securities. It is a dynamic and flexible concept and involves regular and

systematic analysis, judgment and action. The objective of this service is to help

the unknown and investors with the expertise of professionals in investment

portfolio management. It involves construction of a portfolio based upon the

investors objectives, constraints, preferences for risk and returns and tax liability.

The portfolio is reviewed and adjusted from time to time in tune with the market

conditions. The evaluation of portfolio is to be done in terms of targets set for risk

and returns. The changes in the portfolio

are to be effected to meet the changing

condition. Portfolio construction refers to

the allocation of surplus funds in hand

among a variety of financial assets open

for investment. Portfolio theory concerns

itself with the principles governing such

allocation. The modern view of

investment is oriented more go towards

the assembly of proper combination of

individual securities to form investment

portfolio. A combination of securities heldtogether will give a beneficial result if they grouped in a manner to secure higher

returns after taking into consideration the risk elements.

The modern theory is the view that by diversification risk can be reduced.

Diversification can be made by the investor either by having a large number of

shares of companies in different regions, in different industries or those producing

different types of product lines. Modern theory believes in the perspective of

combination of securities under constraints of risk and returns.


26/41

3.5 OBJECTIVES OF PORTFOLIO MANAGEMENT

1.Security/Safety of Principal:

Security not only involves keeping the principal sum intact but also keeping intact

its purchasing power intact.

2. Stability of Income:

So as to facilitate planning more accurately and systematically the reinvestment

consumption of income

3. Capital Growth:

This can be attained by reinvesting in growth securities or through purchase of

growth securities.

4. Marketability:

It is the case with which a security can be bought or sold. This is essential for

providing flexibility to investment portfolio.

5. Liquidity i.e. nearness to money:

It is desirable to investor so as to take advantage of attractive opportunities

upcoming in the market.

6. Diversification:

The basic objective of building a portfolio is to reduce risk of loss of capital and /

or income by investing in various types of securities and over a wide range of

industries.

7. Favorable tax status:

The effective yield an investor gets form his investment depends on tax to which itis subject. By minimizing the tax burden, yield can be effectively improved.


27/41


28/41

3.7 PORTFOLIO MANAGEMENT IN INSURANCE

When economic conditions become more challenging, organizations often have

fewer resources to deploy on new business or change projects and programmers,

reducing the number of such initiatives they can undertake. However, at such

times, the projects and programmers they do invest in are often more critical, sincethey may be essential to deliver efficiency savings, sustain revenue or improve

aspects of performance on which the survival of the organization can depend. The

current turbulent economic conditions appear to have caused increasing adoption

of project portfolio management (PPM) by organizations. PPM can be defined as:

managing a diverse range of projects and programmers to achieve the maximum

organizational value within resource and funding constraints, where value does

not imply only financial value but also includes delivering a range of benefits

which are relevant to the organizations chosen strategy

What is Portfolio? Portfolio refers to invest in a group of securities rather to investin a single security. Dont Put all your eggs in one basket Portfolio help in

reducing risk without sacrificing return. Portfolio Management PortfolioManagement is the process of creation and maintenance of investment portfolio.

Portfolio management is a complex process which tries to make investmentactivity more rewarding and less risky.

Major tasks involved with Portfolio Management1. Taking decisions about

investment mix and policy2. Matching investments to objectives3. Assetallocation for individuals and institution4. Balancing risk against performance

Phases of Portfolio Management Portfolio management is a process of manyactivities that aimed to optimizing the investment. Five phases can be identified inthe process:2. Security Analysis.3. Portfolio Analysis.4. Portfolio Selection.5.Portfolio revision.6. Portfolio evaluation.Each phase is essential and the success ofeach phase is depend on the efficiency in carrying out each phase.

Security analysis is the initial phase of the portfolio management process. Thereare many types of securities available in the market including equity shares,

preference shares, debentures and bonds. It forms the initial phase of the portfoliomanagement process and involves the evaluation and analysis of risk returnfeatures of individual securities.

According to a survey of insurance companies conducted by the Insurance Asset

Outsourcing Exchange, approximately two-thirds of the insurance companies that

responded outsource some or all of their asset management. An effective


29/41

investment operation requires more than just a few knowledgeable people, but

instead, in many cases, an extensive, specialized staff and systems. This staff

needs expertise covering a broad range of investment disciplines and market

sectors that could include, but is not limited to, corporate bonds, residential

mortgage-backed securities (RMBS), asset-backed securities, commercial

mortgage-backed securities (CMBS), equities, tax-exempt securities and

derivatives. An insurer that intends to have a diversified portfolio across differentasset classes needs sufficient size in invested assets to economically justify the

formation of even a modest size internal investment operation. Without that size,

the investment managers operation would be inherently limited in breadth and

depth. The internal manager would not be able to economically offer a broad

range of investment capabilities covering a wide variety of asset classes


30/41

4 Finding And Analysis

4.1 Benefits of portfolio management in insurance

There is large number of benefits of Portfolio Management in insurance that can

provide high value returns in case it is performed on regular basis and implemented

properly. There are many companies that aimed to utilize their management efforts on

balanced project portfolio for achieving optimal performance and returns for the entire

portfolio.

Maximize overall returns

The proper portfolio management

ensures the proper mix of projects

for achieving the maximum overall

returns. The project portfolio

comprises of projects that provide

values that differ widely from each

other. The projects in the portfolio

vary in terms of following factors.

Short- and long-term benefit

Synergy with corporate goals

Level of investment

By considering all these factors, PPM focuses on optimization of the returns of the

entire portfolio by doing the following activities.

Executing the most value-producing projects

Directing the funds towards worthy initiatives

Eliminating the redundancies between projects

Saving time and costs

Balancing the Risks posed by Projects

The PPM involves the balancing of the risks posed by the projects in the portfolio. The

companies should evaluate and balance the projects risks in their portfolios for

minimizing the risks and maximizing the returns by diversifying portfolio holdings.
http://www.portfoliomanagement.in/wp-content/uploads/2011/09/image3.pnghttp://www.portfoliomanagement.in/wp-content/uploads/2011/09/image3.pnghttp://www.portfoliomanagement.in/wp-content/uploads/2011/09/image3.pnghttp://www.portfoliomanagement.in/wp-content/uploads/2011/09/image3.pnghttp://www.portfoliomanagement.in/wp-content/uploads/2011/09/image3.pnghttp://www.portfoliomanagement.in/wp-content/uploads/2011/09/image3.pnghttp://www.portfoliomanagement.in/wp-content/uploads/2011/09/image3.pnghttp://www.portfoliomanagement.in/wp-content/uploads/2011/09/image3.png


31/41

A traditional portfolio may minimize the risk and protect principal; however it also

limits the prospective returns. On the contrary, the hard-line project portfolio may

provide greater chances of good returns however it also poses considerably higher risk

of failure or loss. PPM balances the risks with potential returns by diversifying the

project portfolio of the companies.

Apart from these objective there are more benefits which are as follows

Develop the financial and statistical skills necessary for the management of

an insurance portfolio

Understand the product life cycle as applied to insurance

Identify non-performing segments within a portfolio

Build strategies to refocus an ailing insurance portfolio

Develop a view of a portfolio as a whole, rather than a case-specific

perspective

Receive a CD-ROM containing notes and fully working tools


32/41

4.2 Disadvantages of port folio management in insurance


33/41


34/41

5 Field Study

Case study

Portfolio Management

Lets face it,Life Insurance products are confusing. Do you know whatquestions to ask ahead of time? Do you know what the answers mean? Which datais correct and which is just plain wrong? What is guaranteed and what isprojected?Can you imagine a multi-million dollar investment portfolio which has not beenreviewed for years? People strive to manage their investments carefully but, whatabout a multi-million dollar life insurance portfolio? Often, the policies get tossedin a drawer or file and are not reviewed for many years.

How Confident Are You? Do you know?

If your life insurance is cost effective?

If your life insurance is tax effective?

If your life insurance policies will be in force when they are needed for a death

benefit?

If the amount of life insurance is appropriate for your current needs?

The Life Insurance Portfolio Management SystemHow It

Works

The process starts with a no cost, no obligation meeting. We will do an initialreview of your existing policies and recent annual statements. There are twocomponents to the Life Insurance Portfolio Management System:


35/41

The Life Insurance Portfolio Management ReviewThe Life Insurance PortfolioManagement Analysis

This analysis is a combination of life insurance tax analysis and life insurancecost analysis. To begin the Life Insurance Portfolio Management Analysis, weconsult with you, your legal advisor and your tax advisor to understand the goalsfor your life insurance portfolio as a portion of your estate or business plan. In our

exclusive six-step evaluation we:

Help you determine your insurance needs and objectives.

Identify potential policy ortax problems with your existing life insurance inlight of your current needs and objectives.

Gather and evaluate all of the available data on your current policies.

Compare your existing policy costs with other life insurance alternatives.

Prepare a written report analyzing your current policies, listing and quantifyingpotential problems, identifying alternatives and recommending solutions.

Assist in the implementation of selected improvements.

The Life Insurance Portfolio Management Review

The Life Insurance Portfolio Management Analysis provides your baselineinformation. The Life Insurance Portfolio Management Review is a periodic

evaluation of your policies based upon actual policy performance, not justprojections. Your actual policy performance is measured against your baseline

information. This step is especially important to measure the ongoing performanceof cash value policies.

No Savings No Fee

If we cannot provide recommendations for a decrease in cost or an increase in aftertax value to you or your beneficiaries, there is no charge for our Life InsurancePortfolio Management Analysis. This is our guarantee to you.


36/41

A CPA and attorney asked us to review their clients business andpersonal lifeinsurance. The client was paying over $150,000/year in premiums and over$60,000/year in interest on life insurance policy loans in excess of $1,000,000.

As A Result Of Our Life Insurance Portfolio Management Analysis

Approximately half of the clients life insurance was restructured to continue

without any policy loans or future premium payments.

The other half of the clients life insurance was replaced with new,

lower premium life insurance structured to be more tax effective. The client morethan doubled the after tax value of their total life insurance for their family and

business.

All other needed life insurance was restructured to continue without any policy

loans or future premium payments.

All other unneeded life insurance was eliminated, erasing all other policy loans.Even with the clients increase in life insurance, the clients business saved over

$150,000/year in after tax cash flow.


37/41

Chapter No. 6

CHALLENGES PORTFOLIO MANAGEMENT IN INSURANCE

Insurance companies run into several challenges as they manage their portfoliosand when they seek to optimize the deployment of their capital. In establishing arisk tolerance threshold for their firms, insurance company risk managers need tomeasure their portfolios against established risk tolerances. To do this effectively,they need metrics based on:

Pre-tax operating income, or an acceptable loss of earnings or loss of surplusthreshold

Probable maximum loss (PML) for a given confidence level or a maximumforeseeable loss (MFL)

Changes in BCAR results or other rating agency-focused thresholds

Some risks held in insurers portfolios, of course, are un-modelled, which makes itquite difficult to hedge them effectively. Nonetheless, they must be addressed toensure the appropriate management of capital. Traditionally un-modelled risksinclude flood and contingent business interruption

Additionally, the implications for residual markets on catastrophe loss potentialmust be considered. There are constraints on data completeness and accuracy,which lead to modeling deficiencies and introduce more risk into a portfolio thatcannot be hedged optimally. To mitigate the effects of these factors, risk managersneed to consider how much data deficiencies related to a particular risk couldimpact the portfolio and the methods that could be used to measure changes in dataquality over time.

The situation can be complicated further by the tendency of personal and

commercial lines business units in large companies to operate separately but writebusiness in the same geographical locations, which can create friction forreinsurance costs and severity drivers. On the other hand, efforts to managecatastrophe exposure thoroughly can constrict agents and underwriters located inoffices in high catastrophe risk areas.


38/41

Even modeled risks have their limitations. Catastrophe models are not exact, andthey do evolve. Sometimes, the fastest change to a portfolio comes not from anyaction taken by an insurance company: rather, its the result of a model update.

This can have implications for reinsurance costs, rating agency perception of aportfolio and the firms expected profitability - not to mention its ability to retaincurrent clients and attract new ones in the future.

The other challenge regarding catastrophe models is the reason why modelschange, specifically the continual improvement of underlying deficiencies andinaccuracies. As shortcomings are remedied through innovation and an increase inthe industrys institutional knowledge, the outcome can impact the capitalallocation and risk management decisions of insurers of all sizes.

However, the pace of change in recent years can present perceptions of instabilityin underwriting approach and philosophy. Market forces cause companies almostto live by model output. Used prudently, catastrophe models with multiple viewsof risk, in conjunction with adjunct business plans where models seem to be atodds with risk management knowledge and underwriting experience, can informthe capital management process and deliver actionable intelligence. Thatintelligence can be used in value-accretive decision-making.

Further, insurers need to ensure rates remain adequate, determining (and obtainingapproval for) rates that cover reinsurance costs, expenses and expected catastropheand attritional losses -and deliver a profit. In the process of doing so, insurers needto figure out which geographic areas and lines of business offer the best (andworst) return on capital. Where returns are deficient, they need to ascertain the

impact to the company and determine what steps it is willing to take either toimprove financial results or accept degraded performance.

Surrounding the set of alternatives open to insurers are regulatory constraints. Riskand capital management decisions as well as rates are subject to prevailing lawsand rules. Rate approvals, non-renewal restrictions (e.g., in New York) andmandated premium credits for mitigation features, which may be too generous tosupport the cost of writing the policy otherwise (e.g., in Florida), must be factoredinto modeling and portfolio analysis efforts. The constraints will affect the overallrisk profile and tolerance of a carrier.


39/41

7 Conclusion

I can conclude from this project that portfolio management has become an

important service for the investors to identify the companies with growth potential.Portfolio managers can provide the professional advice to the investors to make an

intelligent and informed investment. Portfolio management role is still not

identified in the recent time but due it expansion of investors market and growing

complexities of the investors the services of the portfolio managers will be in great

demand in the near future.

Today the individual investors do not show interest in taking professional help but

surely with the growing importance and awareness regarding portfolios managers

people will definitely prefer to take professional help.

Insurancecompanies, by their very nature, accumulate substantial amounts

of cash that are used to purchase invested assets. Assets accumulated by insurers

include those associated with the companys policyholders surplus (or capital), as

well as assets that support the insurance companys policy reserves, which are used

to pay policyholder obligations as they become due.

The nature and size of an insurers invested assets vary substantially depending onthe specifics of the insurer. Life insurance companies typically accumulate thelargest dollar amount of invested assets, because of the asset intensive nature of

their products, such as life insurance and annuities. Assets of life insurers areprimarily invested in medium- and longer-term taxable fixed-income investment.Property/casualty insurers typically have a relatively higher percentage of theirassets associated with the companys policyholders surplus (capital) aconsiderably smaller dollar amount of total assets than life insurers and can


40/41

benefit from use of tax-favoured investments such as tax-exempt bonds. Still otherkinds of insurance companies (such as reinsurers, title insurance companies andhealth insurers) have their own set of unique investment-related characteristics andneeds. The investment portfolio of every insurer must be tailored to satisfy thatspecific insurers complex and ever-changing investment requirements.


41/41

Chapter No.8

Bibilography

Environmental Function And

Management Study

Financial market

Webilographyhttps://www.google.co.in/search?
https://www.google.co.in/searchhttps://www.google.co.in/search

Sudershan PDF

Documents

Transcript of Sudershan PDF