ulip lic
DESCRIPTION
comparative study on ULIP vs LICTRANSCRIPT
A STUDY ON UNIT LINKED INSURANCE PLANS AND LIC INSURANCE PLANS AT
RELIANCE LIFE INSURANCE
CHAPTER 1
INTRODUCTION
Unit-linked insurance plans (ULIPs) offer the benefits of both life insurance and returns on investment.
• In traditional plans the insurance company takes a decision on the investments to be made on behalf of
the insured. However, in a ULIP the insured has a variety of funds to choose from like equity funds, debt
funds, balanced funds and money market funds etc. for their investments.
• ULIPs give the insured the option to participate in the growth of the capital markets.
• On the death of the insured the sum insured or the market value of the investment (fund value),
whichever is higher, is paid.
• On maturity of the plan the fund value is payable.
The following are some of the common types of funds available along with an indication of their risk
characteristics.
Description Nature Of Investment Risk Level ULIP variants
Equity Funds Primarily invested in company
stocks
Medium To
High
Aggressive ULIP
(100% Equity Funds)
Income, Fixed
Interest, Bond
Funds & Cash
Funds
Invested in corporate bonds, govt.
securities, cash, bank deposits &
money market instruments &
other fixed income instruments
Medium To Low Conservative ULIP
(100% debt + money
market instruments)
Balanced Funds Combining equity investment
with fixed interest instruments
Medium Balanced ULIP
(60% Equity Funds +
40% in debt market)
Having selected an option such Equity funds or Debt funds or Balanced funds, you still have the
flexibility to switch to another option ( i.e. from Equity to Debt or From Debt to Balanced). Most
insurance companies allow a number of free ‘switches’ in a year.
The investment is denoted as units and is represented by the value that it has attained called as Net Asset
Value (NAV). The policy value at any time varies according to the value of the underlying assets at the
time cost/charge involved in ULIP:
1. Premium Allocation Charge: This is a percentage of the premium appropriated towards charges such
as initial expenses, renewal expenses, and commission expenses before allocating the units under the
policy. Commission expenses consist of 5% to 40% of premium (depending on the insurance company)
in the first 1-3 years. After the initial years, it stabilizes at 1-3%
2. Mortality Charges: These are charges to provide for the cost of insurance coverage under the plan.
Mortality charges depend on number of factors such as age, amount of coverage, state of health
3. Fund Management Fees:These are fees levied for management of the fund(s) and are deducted before
arriving at the Net Asset Value (NAV).
4. Policy/ Administration Charges:These are the fees for administration of the plan and levied by
cancellation of units. This could be flat throughout the policy term or vary at a pre-determined rate.
5. Surrender Charges: surrender charge may be deducted for premature partial or full encashment of units
wherever applicable, as mentioned in the policy conditions.
6. Fund Switching Charge: Generally a limited number of fund switches may be allowed each year
without charge, with subsequent switches, subject to a charge.
Let me give you one example:
Premium: Rs. 50,000
Sum Assured: Rs. 10,00,000
No. of Years: 20
Fund Management charge (FMC): 1.75%
Mortality cost (MC): 1.16 per thousand (Means for on S.A of Rs. 10,00,000
MC will be 10,00,000/1000=1000 x 1.16= Rs. 1160 per year
Policy and Maintenance cost(PMC): Rs. 720 per year
Premium Maintenance charge (PMC):30% first year3% second year
2% for subsequent years
Expected Return: 10%
Allocatio
n
Charges
(1)
Year
(2)
Premiu
m
(3)
AC
(4)
(3)x(1
)
MC
(5)
PM
C
(6)
FMC
(7)
1.75%
x(10)
Total
Charge
s
(8)
(4)+(5)
+
(6)+(7)
Investabl
e
Premium
(9)
(3)-(8)
Fund
Value
w/o
FMC
(10)
10% x
(9)
Fund
Value
after
FMC
(11)
(10)-(7)
30% 1 50000 15000 1160 720 638 17518 33120 36432 35794
3.00% 2 50000 1500 1160 720 1586 4966 46620 90656 89069
2.00% 3 50000 1000 1160 720 2652 5532 47120 151553 148901
2% 4 50000 1000 1160 720 3824 6704 47120 218541 214716
2% 5 50000 1000 1160 720 5114 7994 47120 292227 287113
2% 6 50000 1000 1160 720 6532 9412 47120 373282 366749
2% 7 50000 1000 1160 720 8093 10973 47120 462442 454349
2% 8 50000 1000 1160 720 9809 12689 47120 560518 550709
2% 9 50000 1000 1160 720 11697 14577 47120 668402 656705
2% 10 50000 1000 1160 720 13774 16654 47120 787074 773300
2% 11 50000 1000 1160 720 16058 18938 47120 917613 901555
2% 12 50000 1000 1160 720 18571 21451 47120
106120
7 1042635
2% 13 50000 1000 1160 720 21335 24215 47120
121915
9 1197824
2% 14 50000 1000 1160 720 24376 27256 47120
139290
7 1368531
2% 15 50000 1000 1160 720 27721 30601 47120
158403
0 1556309
2% 16 50000 1000 1160 720 31400 34280 47120
179426
5 1762865
2% 17 50000 1000 1160 720 35447 38327 47120
202552
3 1990077
2% 18 50000 1000 1160 720 39898 42778 47120
227990
8 2240009
2% 19 50000 1000 1160 720 44795 47675 47120
255973
1 2514935
2% 20 50000 1000 1160 720 50182 53062 47120
286753
6 2817354
1000000 445603
Value at the end of 20th year: Rs. 28,17,354
LIC
Individuals seeking to buy a Unit-Linked Insurance Plan (Ulip) from the Life Insurance Corporation of
India (LIC) may have to wait a little longer for this product to hit the market. This is because LIC is
currently in a wait-and-watch mode towards the Ulip segment and focused on strengthening its
traditional product portfolio.
New guidelines for linked and non-linked insurance policies were implemented in life insurance from
January 1, 2014 onwards. These rules made changes in the product structure and surrender benefits,
making the product more transparent for the customer.
Under the new norms, life insurance companies had to stop selling existing products and introduce new
ones. LIC, too, withdrew its products from the market and introduced new guidelines-compliant variants
of the products including money back plans.
However, there has not been any Ulip product launch in 2014 under the new guidelines. Ulips constitute
less than 10 per cent of the total product mix of LIC and the rest comprises traditional life insurance
products.
The last time the life insurer launched a Ulip plan was in January 2013, that too after a gap of two years.
The product, 'Flexi Plus', was a unit-linked assurance plan which provided a lumpsum benefit on death
and also the maturity benefit irrespective of survival of the policyholder. However, with the new product
guidelines being implemented, this product had to be replaced.
LIC, which has planned to launch 15-20 products in the first phase of the new product regime, has filed
only traditional products with the Insurance Regulatory and Development Authority (Irda) and no Ulips.
A senior LIC executive explained there was no urgency to launch a Ulip.
In December 2013 as well, LIC’s chairman S K Roy had said the insurer’s priority is to get traditional
products in place.
Ulips, which used to be a darling of investors, took a beating following stiff norms set by the insurance
regulator in September 2010, mandating a minimum mortality cover and increase in the lock-in period
from three years to five years.
As a result, Ulip premiums, which accounted for 90 per cent of the first-year premium of life insurance
companies, saw their share fall to less than 30 per cent. Recent data shows that the share of Ulips in
LIC’s new premium is less than 10 per cent, down from over 70 per cent in the pre-2010 period.
However, LIC customers, especially the technology-savvy ones, have reason to cheer. For, the insurer
has already filed an online term plan with the insurance regulator and, once approved, customers can
purchase it online. The insurer already has an immediate annuity plan, Jeevan Akshay VI, which is fully
online.
These are unit linked insurance plans that give you the advantage of market linked returns and help you
reap the benefits of the market scenario and help you customise your plan as per your risk appetite.
Endowment Plus: Is a unit linked insurance plan which gives dual benefit of investment plus
insurance during the term. A transparent ULIP plan that provides you an opportunity to enjoy
growth while retaining protection
Comparison of LIC and ULIP plans will help you to understand ULIP policy provided by LIC
and Reliance . Also, compare all LIC plans and ulip plans provided by reliance life insurance
companies in India.
Need for the study:
In India very little work has been done to investigate fund managers forecasting abilities. Active fund managers
are expected to reward higher return. If the fund manager feels that market on the whole overvalued, then he
would get out the market. Hence the present study has the objective of finding out the performance of unit linked
equity schemes (ULIPs) of Reliance and LIC insurance in the frame work of risk and returns and comparing their
NAVs.
Objectives of the study:
1. To understand the basic concepts of ULIPs and Insurance and its benefits as an investment
avenue.
2. To understand the importance of ULIPs and LIC insurance and their differences in terms of
NAVs.
3. To analyze the performance of different ULIPs of Reliance and LIC insurance schemes on the
basis of various parameters.
4. To analyze the alternative investment options for investing money.
5. To analyze the risk, return, volatility of ULIPs Reliance and LIC insurance.
Scope of the study:
The scope of the study is restricted ULIPs of reliance and LIC insurance plan Jeevan Saathi Plus. From the LIC
plan the fund selected are Jeevan saathi plus of Bond, Secured, Growth and balanced fund schemes are selected
and the study covers the period two years only i.e. April 2012 to March 2014.
RESEARCH METHODOLOGY
Data collection
The methodology followed for the collecting information are using two sources of data namely
Primary data
Secondary data
Primary data: the data collected first hand by the researcher concerned with the research problem refers to the
primary data.
Secondary data
The information available at various sources made for some other purpose but facilitating the study undertaken is
called as secondary data.
Sample size:
6 schemes is selected for the study. Three from ULIPs of reliance and 3 from LIC jeevan saathi plus fund
The following are the fund selected for the study
RELIANCE ULIPS SCHEMES
1) Life Energy Fund 1.
2) Life Gilt Fund 2
3) Life Growth Plus Fund 1
LIC JEEVAN SAATHI PLUS FUND SCHEMES ARE
1) JEEVAN SAATHI PLUS – SECURED FUND
2) JEEVAN SAATHI PLUS – BALANCED FUND
3) JEEVAN SAATHI PLUS- GROWTH FUND
Limitations of the study:
1. Time constraint
2. Only 6 schemes is selected for the study 3 from reliance and 3 from LIC
3. The entire study is based on secondary data only.
4. The study is restricted to only one company and limited to UPLIs and LIC.
Chapter 2:
LITERATURE REVIEW:
Inderjit Singh et.al. (2009) in their Book on “Insurance and Risk Management”analyze the different
facets of the privatization of Indian Insurance Sector. The different approaches of managing risk based
capital are discussed.
Chandra Sekhar, C.P. (2009) in his article on “Learning Nothing, Forgetting Everything” observes that
the Government has been pushing ahead with privatization despite there being no evidence of the
nationalized insurance industry failing to meet its obligation to insurers or to the Government. The LIC
has not only put at the Government’s disposal large volumes of capital for investment but also addressed
the problems of insurance for the poor.
Basavanthappa, C. and RajanalkarLaxman (2009) in their article on “Performance of Life Insurance
Companies: A Comparative Study” show that the Private Insurance Companies have made their
presence felt and over the years have achieved remarkable progress. There is a big opportunity to these
companies in the Indian Life Insurance Sector. The companies have to bring out innovative products to
suit the different requirements of the public. A healthy competition in the sector would be beneficial to
both the players and also the public.
Krishna Swami, G. (2009) in his book “Principles and Practice of Life Insurance” explains clearly the
history of insurance, advantages of insurance and the role of insurance in the economy and also in
thesociety. The life insurance products, the concepts of premium, investment management and solvency
margin are also discussed at length in the book.
Murthy, T.N. et.al. (2009) in their article on “Performance Evaluation of LIC: Ways of Winning
Confidence” conclude that several changes have taken place since opening up of the insurance sector.
After liberalization, insurance industry’s outlook has been changed significantly. The number of private
players and their innovative products are also made attractive for every social segment. The healthier
competition has intensified to increase insurance density and penetration levels in order to fulfill
customer needs.
SumninderKaurBawa and SubashChander (2009) in their article on “Prospects of Bancassurance in
India” opine that the entire banking network caters to the needs of people in every economic segment
and in widely diverse geographical regions. Thus, banks can change the face of insurance distribution.
Hence, bancassurance can catalyst the growth of insurance in this huge untapped market.
Mishra, K.C. and Kumar, C.S.(2009) in their book on “Life Insurance Principles and Practice” explain
the origin of insurance and its elementary aspects, principles of life insurance, life insurance
products,policy conditions, underwriting, pricing, policy servicing and policy benefit payments in a
more clear and analytical manner so that a layman can understand the same without any ambiguity.
RESEARCH GAP
An analysis of the above mentioned literature indicates that most of the studies were understood to be
confined mainly to an opinion poll on insurance awareness and marketing strategies of insurance
products. Further, these studies assessed the performance of the insurance sector from a particular and a
very specific dimension. No comprehensive study seems to have been undertaken so far to evaluate the
performance of public and private sector insurance players in all respects.www.theinternationaljournal.org > RJCBS: Volume: 02, Number: 04, February-2013
Khurana (2009) made a comparative analysis of performance of ULIPs of private sector companies and
found that there is no significant difference between the performances of pension funds-growth of
selected insurance companies. Prasad, Babu, Chiranjeevi and Rao (2009) found that in spite of various
investment opportunities, ULIPs have gained more reputation among the investors. Hence his study
focused on assessing the significant relation between demographic features and ULIPs feature and level
of investment in ULIP. Rao (2003) done the performance evaluation of mutual funds in a bear market
and his results suggest that most of mutual funds have given excess returns over expected return. Dash,
Lalremtluangi, Atwal and Thapar (2007) the researchers tried to find out rate of return given by different
insurance policies and the effect of mortality and he found that different returns are given by different
insurance policies and the mortality does not affect return. Devasenathipathi, Saleendran and
Shanmugashunaram (2008) found that due to changes in LPG policies, preferences of people are
changing.
Therefore a wide range of ULIPs products is being offered to customers according to their preferences.
Korivi and BS (2009) examined that mutual funds offered customer-tailor products to suit investors.
requirement. So insurance companies also offered ULIPs which is an insurance product with an
investment fund wrapped around it. SMS Varanasi:Vol. VIII, No. 2; December 2012
CHAPTER 3
INDUSTRY PROFILE:
GROWTH OF UNIT LINKED BUSINESS IN INDIA:
India Has Seen A Tremendous Growth On The UnitLinked Front Over The Recent Years. The Growth Has Been
Fuelled By The Booming Stock Markets & Lower Interest Rates. Before The Introduction Of The Unit Linked Product,
The Prospects/Policyholders Who Are Interested In Investing In Stock Markets Either Had To Purchase The Stocks On
Their Own In The Primary/Secondary Or Invest In Mutual Funds. With The Introduction Of The Unit Linked Product ,
The Prospect Has An Option To Invest In The Stock Market Via Purchase Of A Unit Linked Life Insurance Policy In
Addition To The Life Insurance Cover. A Unit Linked Policy Scores Over Mutual Fund Via Tax Advantages And Life
Cover(Now Sips Can Offer Life Cover As Per Recent SEBI Guidelines). Also, As Per The Recent SEBI Guidelines
Exits Under Closed Ended Schemes Are Not Permitted.
The Graphs Below Shows Group-Wise Comparison Of Unit Linked And Non-Linked Products And Their
Contribution To The Total Premium In The Year 2008..
It Is Also Interesting To Note That Even Though Group-1 & 2 Have Almost Same Number Of Linked Products,
The Contribution Of Group 1(83.82%) Is Much Higher Than The Contribution Of Group 2(12.02%) To The Total
Linked Premium.
Group-wise comparision of products (Linked vsNonLinked)
prod
ucts
500
400
300
of
200
Num
ber
100
0Group 1 Group 2 Group 3 Industry
Linked 122 114 82 318
Non-linked 174 133 128 435
Group
Linked
Non-linked
As Per The Graph Below, Group 1 Which Has 16.2% Linked & 23.1% Non-Linked Of The Total Products Contribute 38.64% & 52.54% Respectively To The Total Premium Which Sums To 91.18% Of The Total Premium.
It Is Also Observed That Linked Business Is A Major Contributor To The Total Premium For Most(15) Of The Companies
Group-wise contribution of L/NL as a % of the total products to the Total Premium
prod
ucts 60.00%
Group 1
40.00% Group 2
% o
f L/N
L
20.00%Group 3
0.00%Linked Non-Linked
Group 1 16.20% 38.64% 23.11% 52.54%
Group 2 15.14% 5.54% 17.66% 0.97%
Group 3 10.89% 1.92% 17.00% 0.39%
Linked/Non-Linked
Growth Of Unit Linked Business In India
The Next Few Pages Discuss About The Overall Growth Including The New Business Growth Of The Unit-Linked Business In India And A Comparison Is Made With Non-Linked Business Wherever Relevant.
Overall Growth
Policy-Wise
The Unit-Linked Business, In Respect Of The Industry As A Whole, Which Was 4%(96% For Non-Linked) Of The Total Policies In The Year 2006 Grew To 21.76%(Non-Linked Fell To 78.24%) In The Year 2008. The Graph Below Shows How The Unit Linked Policies Progressed Policy Wise (Year On Year) Across Groups. As Can Be Seen From The Graph, Group 1 Is A Major Contributor To The Total Number Policies In Both Linked & Non-Linked Business. However, Group 1’s Share In The Of Total Linked Policies Increased In The Year 2006-07 But Has Decreased Marginally In The Year 2007-08 While Group’s 2 & 3 Has Shown The Reverse Trend.
It Is Important To Note That Groups 1 & 2 Have Minimum Exposure To Non-Linked Business On The Policy Count And Almost The Total Business Comes From Group 1.
It Is Also Observed That Linked Business Is A Major Contributor To The Total Policies For Most(13) Of The Companies In The Year 2008.
Contribution of the groups to the total L/NL policies
polic
ies 100.00%
80.00%
L/N
L
60.00% Group 1
Group 2
of 40.00% Group 3
Perc
enat
ge
20.00%
0.00%NL L NL L NLL
2005-06 2006-07 2007-08
Group 1 85.17% 99.01% 91.09% 98.74% 90.09% 98.53%
Group 2 12.75% 0.73% 7.05% 0.94% 7.47% 1.11%
Group 3 2.08% 0.26% 1.86% 0.32% 2.45% 0.36%
Linked/Non-Linked
Sum Assured-Wise
The Unit-Linked Business, In Respect Of The Industry As A Whole, Which Was 7.1%(92.9% For Non-Linked) Of The Total SA In The Year 2006 Grew To 28.68%(Non-Linked Fell To 71.32%) In The Year 2008. The Graph Below Shows How The Unit Linked Business Progressed SA Wise (Year On Year) Across Groups. As Can Be Seen From The Graph, Group 1 Is A Major Contributor To The Total SA In Both Linked & Non-Linked Business.
The Share Of Group 1 Which Was 60.09% Of The Total Linked SA In The Year 2006 Grew To 72.83% In The Year 2008 While The Shares Of Groups 1 & 2 Which Were 32.35% & 7.56% Fell To 19.65% & 7.53% Respectively.
It Is Also Observed That Linked Business Is A Major Contributor To The Total SA For Most(14) Of The Companies In The Year 2008.
Contribution of the groups to the total L/NL SA
100.00%
SA 80.00%
L/N
L
60.00%Group 1
of Group 2
Perc
enat
ge 40.00% Group 3
20.00%
0.00%NL L NL L NLL
2005-06 2006-07 2007-08
Group 1 60.09% 96.34% 72.87% 95.71% 72.83% 95.37%
Group 2 32.35% 2.55% 20.81% 3.08% 19.65% 3.36%
Group 3 7.56% 1.11% 6.32% 1.21% 7.53% 1.27%
Linked/Non-linked
Premium –Wise
The Unit-Linked Business, In Respect Of The Industry As A Whole, Which Was 20.36%(79.34% For Non-Linked) Of The Total Premium In The Year 2006 Grew To 46.1%(Non-Linked Fell To 53.9%) In The Year 2008. The Graph Below Shows How The Unit Linked Business Progressed Premium Wise (Year On Year) Across Groups. As Can Be Seen From The Graph, Group 1 Is A Major Contributor To The Total Premium In Both Linked & Non-Linked Business.
The Share Of Group 1 Which Was 84.91% Of The Total Linked Premium In The Year 2006 Fell Marginally To 83.82% In The Year 2008 While The Shares Of Groups 1 & 2 Which Were 11.52% & 3.57% Grew To 12.02% & 4.16% Respectively.
It Is Also Observed That Linked Business Is A Major Contributor To The Total Premium For Most(15) Of The Companies In The Year 2008.
Perc
enta
ge o
f L/N
L p
rem
ium
s
Contribution of groups to total L/NL premiums
100.00%
80.00%Group 1
60.00%Group 2
40.00%Group 3
20.00%
0.00%NL L NL L NLL
2005-06 2006-07 2007-08
Group 1 84.91% 97.87% 87.80% 97.70% 83.82% 97.47%
Group 2 11.52% 1.51% 9.09% 1.61% 12.02% 1.80%
Group 3 3.57% 0.62% 3.12% 0.69% 4.16% 0.73%
Percentage of the total premium for the Industry(Linked vs Non-Linked)
Perc
enta
ge
100.00%
80.00%
60.00%
40.00%
20.00%
0.00%2005-06 2006-07
Linked 20.36% 35.31%
Non-Linked 79.64% 64.69%
Year
Linked
Non-Linked
New-Business Growth:
The Graphs Below Shows The New Business Progression Of The Unit Linked Business Across The Groups On All The 3 Counts.
As Can Be Seen From The Graphs Below, The New Business Volumes As A Percentage Of The Total Linked & Non-Linked Business Has Substantially Increased With The Year 2007 Witnessing A Huge Increase On All The 3 Counts (Premium,SA,Policies).
Policy-Wise
Contribution of the groups to the total L/NL new policiespo
licie
s
100.00%
80.00%
new
60.00%Group 1
L/N
L
Group 240.00% Group 3of
Perc
enta
ge 20.00%
0.00%NL L NL L NLL
2005-06 2006-07 2007-08
Group 1 84.73% 97.01% 92.92% 94.98% 88.05% 94.68%
Group 2 12.30% 2.24% 5.33% 3.92% 8.79% 4.12%
Group 3 2.97% 0.75% 1.74% 1.10% 3.16% 1.19%
Linked/Non-Linked
As Per The Above Graph, The Shares Of Group 1 & 3 Which Were 84.73%& 2.97% Of The Total New Linked Policies In The Year 2006 Grew To 88.05% & 3.16% In The Year 2008 While The Share Of Groups 2 Which Were 12.3% Fell To 8.79%.
It Is Also Observed That Linked Business Is A Major Contributor To The Total New Premium For Most(16) Of The Companies In The Year 2008.
SA-Wise
Contribution of the groups to the total L/NL new SA
new
SA
100.00%
80.00%
L/N
L
60.00% Group 1
Group 2of
40.00%
Perc
enta
ge
Group 3
20.00%
0.00%NL L NL L NLL
2005-06 2006-07 2007-08
Group 1 63.66% 94.15% 77.74% 91.45% 69.08% 92.19%
Group 2 26.03% 4.32% 15.76% 6.64% 20.53% 5.93%
Group 3 10.31% 1.53% 6.50% 1.91% 10.40% 1.88%
Linked/Non-Linked
As Per The Above Graph, The Shares Of Group 1 & 3 Which Were 63.66%& 10.31% Of The Total New Linked Policies In The Year 2006 Grew To 69.08% & 10.4% In The Year 2008 While The Share Of Groups 2 Which Was 26.03% Fell To 20.53%. The Same Trend Is Observed Policy-Wise Also.
It Is Also Observed That Linked Business Is A Major Contributor To The Total New SA For Most(15) Of The Companies In The Year 2008.
Premium-Wise
Contribution of the groups to the total L/NL new premium
new
pre
miu
m 100.00%
80.00%
60.00% Group 1
L/N
L Group 240.00% Group 3
ofPe
rcen
tage 20.00%
0.00% L NL L NL L NL
2005-06 2006-07 2007-08
Group 1 86.12% 95.81% 89.22% 96.43% 85.47% 94.19%
Group 2 9.89% 2.98% 7.56% 2.61% 10.35% 4.19%
Group 3 4.00% 1.20% 3.23% 0.95% 4.18% 1.62%
Linked/Non-Linked
As Per The Above Graph, The Share Of Group 1 Which Were 86.12% Of The Total New Linked Policies In The Year 2006 Fell To 85.47% In The Year 2008 While The Shares Of Groups 2 & 3 Which Were 9.89% & 4% Grew To 10.35% & 4.18%.
It Is Also Observed That Linked Business Is A Major Contributor To The Total New SA For Most(17) Of The Companies In The Year 2008.
The Graph Below Shows The New Business Progression On The Premium Count For The Entire Industry Both For Linked & Non-Linked Business. As Can Be Seen From The Graph, The Linked Premium Income Which Was 50.41% As % Of The Total New Business Premium In The Year 2006 Grew To 86.23% By The Year 2008 Indicating The Growing Popularity Of The Unit Linked Business In The Country. At The Same Time, The % Of Non-Linked Total New Premium Declined Year On Year.
Percentage of the total new premium(Linked vs Non-linked)
100.00%
Perc
enta
ge
80.00%
60.00%
40.00%
20.00%
0.00%2005-06 2006-07 2007-08
Linked 50.41% 67.83% 86.23%
Non-Linked 49.59% 32.17% 13.77%
Year
Linked
Non-Linked
Group-Wise Of Linked And Non-Linked Portfolio On All The 3 Counts(Over All)
The Graphs Below Shows The Portfolio Of Linked & Non-Linked Business On All The 3 Counts Across The Groups And For The Industry As Well.
Portfolio( Policy-Wise)- As Per The Graph Below,Group 1 Has 80:20 (Non-Linked To Linked)Portfolio , Groups 2 & 3 Almost Have A Similar Portfolio Of 35:65 With The Industry As A Whole Having A Portfolio Of 78:22.
Amongst The Companies, If We Assume 85% As The Benchmark For Linked/Non-Linked Business On Policy Count, 4 Companies Have Exceeded The Benchmark On The Linked Count And 1 On Non-Linked Count.
Group-wise portfolio of Total Policies(Linked vs Non-Linked)
Polic
ies
100%
80%
of T
otal
60%
40%
Perc
enta
ge 20% Industry
0% Group 3
Linked Non-LinkedLinked Non-LinkedLinked Non-Linked Group 2
2005-06 2006-07 2007-08 Group 1
Industry 3.75% 96.25% 12.68% 87.32% 21.76% 78.24%
Group 3 23.62% 76.38% 45.82% 54.18% 65.30% 34.70%
Group 2 40.62% 59.38% 52.15% 47.85% 65.24% 34.76%
Group 1 3.25% 96.75% 11.81% 88.19% 20.27% 79.73%
Year
Portfolio( SA-Wise)- As Per The Graph Below , Group 1 Has 77:24 (Non-Linked To Linked)Portfolio , Groups 2 & 3 Almost Have A Similar Portfolio Of 30:70 With The Industry As A Whole Having A Portfolio Of 71:29.
Amongst The Companies, If We Assume 85% As The Benchmark For Linked/Non-Linked Business On SA Count, 4 Companies Have Exceeded The Benchmark On The Linked Count And 2 On The Non-Linked Count.
Group-wise portfolio of Total SA(Linked vs Non-Linked)
SA
100%
Tota
l 80%
60%
ofPe
rcen
tage 40%
20% Industry
0%Non-LinkedLinked Non-LinkedLinked Non-Linked
Group 3Linked Group 2
2005-06 2006-07 2007-08 Group 1
Industry 7.10% 92.90% 18.10% 81.90% 28.68% 71.32%
Group 3 34.30% 65.70% 53.57% 46.43% 70.47% 29.53%
Group 2 49.19% 50.81% 59.89% 40.11% 70.14% 29.86%
Group 1 4.55% 95.45% 14.40% 85.60% 23.49% 76.51%
Year
Portfolio( Premium-wise)- As Per The Graph Below , Group 1 Has 58:42 (Non-Linked To Linked)Portfolio , Groups 2 Has A 15:85 & Group 3 Has A Portfolio Of 17:83 With The Industry As A Whole Having A Portfolio Of 54:46.
Amongst The Companies, If We Assume 85% As The Benchmark For Linked/Non-Linked Business On SA Count, 9 Companies Have Exceeded The Benchmark On The Linked Count And 2 On The Non-Linked Count.
Group-wise portfolio of Total Premium(Linked vs Non-Pr
emiu
m
Linked)100%
80%
of T
otal 60%
40%
Perc
enta
ge 20% Industry
0% Group 3
Non-Linked Linked Non-LinkedLinked Non-Linked Group 2Linked
2005-06 2006-07 2007-08 Group 1
Industry 20.36% 79.64% 35.31% 64.69% 46.10% 53.90%
Group 3 59.59% 40.41% 71.02% 28.98% 82.98% 17.02%
Group 2 66.13% 33.87% 75.52% 24.48% 85.07% 14.93%
Group 1 18.15% 81.85% 32.91% 67.09% 42.38% 57.62%
Year
Critical Areas:
Unit Linked Single Premium Business
As Can Be Seen From The Graphs, The Unit Linked New Single Premium Shares A Decisive Portion Both In
Terms Of Number Of Policies And Premium Amount, Which Also Boosted The Unit Linked Sales In India. This
May Be Because That The Investors May Be Viewing The Unit Linked Policy As A More Of Investment Than A
Protection Product. As Much As 42% Of The Total New Linked Premium In The Year 2008 Has Come From The
Single Premium Mode. At The Same Time, We Have To Note That The Above Policies Are Particularly Sensitive
And Also Perhaps Correlated With The Movements In The Stock Markets. The Graph Below Between
Sensex/Nifty Vs ULIP Sales Which Shows A Positive Correlation Of Around 1 Supports Our Above Argument.
The Indian Stock Market Has Witnessed A Fall Of More Than 50% During The Last 3 Months. Just As The
Investors May Want To Book Profits In A Booming Stock Market , They May As Well Want To Limit Their
Losses When Markets Decline. This May Also Be The Case With The Unit Linked Single Premium Business
With Huge Exposure To Stock Markets Business As The Policyholders May Also Surrender Their Policies To
Limit The Losses Or If They Are In Urgent Financial Need, Which In Turn May Effect The New Business As
Well. This Is Clearly Evident
From The Fact That The Single Premium Unit Linked Business (On The Premium Count) Has Already
Shown A Negative Growth Of 17% As At Sep’08 When Compared With The Last Year’s Business . The
Traditional Business Scores Here As There May Not Be A Wealth Erosion As IsWith A Unit Linked
Policy(Perhaps May Effect The Bonus Under A Participating Policy) In Case Of Falling Stock Markets.
Sensex vs ULIP Premiums(New)
20000 80000
1600070000
Prem
ium
(New
) 60000
Sens
ex V
alue12000 50000 Sensex
400008000
ULIP30000
4000 2000010000
0 02005 2006 2007 2008
Year
Surrenders:
It Is Also Important To Understand The Tendency/Behaviour Of The Policyholder To Surrender A ULIP Policy In Case Of Booming Stock Markets As Well . The Graph Below Compares Across The Groups , The Percentage Of Linked/Non-Linked Surrenders As Percentage Of Total Linked/Non-Linked Surrenders. As Can Be Seen From The Graph, Group 1 Takes The Major Share In The Total Surrenders For Both Years.
Group-wise comaprison as a% of the total L/NL surrender value
of L
/NL
valu
e 100.00% 3.00%
of L
/NL
valu
e
80.00% 2.50%60.00% 2.00%
Perc
enta
ge
surr
ende
r
Perc
enta
gesu
rren
der
1.50%40.00% 1.00%20.00% 0.50%0.00%
L NL L NL0.00%
2007 2008
Group 1 94.71% 99.61% 91.45% 99.26%
Group 2 2.96% 0.28% 6.04% 0.39%
Group 3 2.33% 0.11% 2.51% 0.35%
Year
Group 1
Group 2
Group 3
The Graph Below Shows The Linked Surrenders As A % Of The Total Surrenders In A Year. The Linked Surrenders Which Were Around 45% Of The Total Surrenders In The Year Grew To 49% In The Year 2008. It Is Also Important To Note That The Linked Premium Constitutes 46.1% Of The Total Premium As At 2008.
Linked Surrenders as a % of the total surrenders for the Industrylin
ked
100.00%
80.00%
perc
enta
ge o
f the
surr
ende
rs
60.00%Linked Surrenders
40.00%
20.00%
0.00%2007 2008
Linked 45.43% 48.99%Surrenders
Year
Amongst The Companies, In Case Of 15 Companies, Linked Surrenders Takes The Major Portion Of The Total Surrenders And 3 Vice-Varsa.
The Graph Below Compares The Group-Wise Linked Surrenders As A % Of The Total Linked Premium And For The Industry As Well.
Linked surreders as a % of the Total Linked Premium
20.00%
Perc
enta
ge
15.00%
10.00%2006-07
2007-08
5.00%
0.00%Group 1 Group 2 Group 3 Industry
2006-07 15.83% 4.78% 10.96% 14.68%
2007-08 12.69% 5.84% 7.03% 11.63%Group
As can be seen from the graph, linked surrenders which was 14.68% of the total linked premium in the Year 2007 Reduced To 11.63% In The Year 2008. The Group 1 Has Exceeded The Industry Average Of 11.63% In The Year 2008. Amongst The Companies , 4 Companies Have Exceeded The Industry Average Of 11.63% In The Year 2008.
The Graph Below Shows The Group-Wise And For The Industry As Well , The Linked/Non-Linked Surrenders As % Of The Respective Linked/Non-Linked Mathematical Reserve(MR). As Can Be Seen From The Graph, The Linked/Non-Linked Surrenders For The Industry Which Was 12% & 2.13% In The Year 2006-07 Fell To 7.21% & 2.12% By The Year 2007-08.
Amongst The Groups, For Groups 1& 3 ,The Linked Surrenders Which Were 13.17% & 7.94% In The Year 2006-07 Fell To 8.31% & 1.66% By The Year 2007-08 While For Group 2 The Linked Surrenders, Which Was 3.49% In The Year 2006-07 Grew To 4.51% By The Year 2007-08.
Amongst The Companies, 3 Companies Have Exceeded The Industry Average Of 7.21% On The Linked Count And 5 Companies Have Exceeded The Industry Average Of 2.12% On The Non-Linked Count.
Linked/Non-Linked surrenders as a % of the respective Linked/Non-Linked MR
Perc
enta
ge o
f L/N
L su
rren
ders
14.00% 9.00%
12.00%
10.00%
6.00%8.00%
6.00%
3.00%4.00%
2.00%
0.00% 0.00%
Group 1 Group 2 Group 3 Industry
2006-07 Linked 13.17% 3.49% 7.94% 12.00%
2006-07 Non-linked 2.13% 1.48% 1.02% 2.13%
2007-08 Linked 8.31% 4.51% 1.66% 7.21%
2007-08 Non-linked 2.12% 1.62% 2.52% 2.12%
2006-07 Linked
2006-07 Non-linked
2007-08 Linked
2007-08 Non-linked
Group
Lapses:
The Graphs Compares The Lapse Rate By Number & Premium Between Linked And Non-Linked Business.
A Unit Linked Policyholder May Lapse His Policy, If He Believes That The Charges Are Higher Or If The Value Of The Fund Has Substantially Changed(In Either Directions) Or Because Of His Inability To Pay The Premiums.
If The Policyholder Lapses The Policy During The Early Years, The Insurer May Not Have Recovered The Acquisition/Initial Expenses Which Have Been Amortized Over The Years.
As Can Be Seen From The Graphs, The Linked Lapse Rate By Number Which Was 17.8% In The Year 2004-05 Fell To 14.34% By The Year 2006-07. However, The Linked Lapse Rate(14.34%) By Number Is Much Higher Than The Non-Linked Lapse Rate(6.59%) In The Year 2006-07.
Also, The Linked Lapse Rate By Premium Which Was 4.89% In The Year 2004-05 Grew To 11.35% By The Year 2006-07. The Linked Lapse Rate(11.35%) By Premium Is Much Higher Than The Non-Linked Lapse Rate(5.63%) In The Year 2006-07
Comparison of lapse rates by number(Linked vs Non-Linked)
30.00%
Perc
enta
ge 20.00%L
10.00%NL
0.00%2004-05 2005-06 2006-07
L 17.80% 26.09% 14.34%
NL 7.69% 7.48% 6.59%
Year
Comparison of lapse rates by Premium(Linked vs Non-Linked)
15.00%
Perc
enta
ge 10.00%L
5.00%NL
0.00%2004-05 2005-06 2006-07
L 4.89% 8.54% 11.35%
NL 6.04% 6.19% 5.63%
Year
Investment
As Stated Above, The Prospects/Policyholders May View The Unit Linked Product As An Investment Rather Than A Protection Product. When A Policyholder Takes Out A Unit Linked Policy He Pays A Premium . The Policyholder Can Either Pay The Premium Regularly Or By Way Of Single Premium. The Insurer Recovers Charges From This Premium And The Rest Is Available For Investment , Which Is Invested In The Funds As Per The Choice Made By The Policyholder At The Inception Of The Policy With A Flexibility To Switch Between The Funds As Per The Terms And Conditions Of That Particular Policy.
It Is Also Important To Note That The Insurance Sector Is The Largest Investor In The Indian Stock Market.
Most Insurers Offer A Wide Range Of Funds To Suit One’s Investment Objectives, Risk Profile And Time Horizons. Different Funds Have Different Risk Profiles. The Potential For Returns Also Varies From Fund
To Fund. The Following Are Some Of The Common Types Of Funds Available Along With An Indication Of Their Risk Characteristics.
General Description Nature Of Investments RiskCategory
Equity Funds Primarily Invested In Company Stocks With The General Medium ToAim Of Capital Appreciation High
Income, Fixed Interest Invested In Corporate Bonds, Government Securities MediumAnd Bond Funds And Other Fixed Income Instruments
Cash Funds Sometimes Known As Money Market Funds — Invested LowIn Cash, Bank Deposits And Money Market Instruments
Balanced Funds Combining Equity Investment With Fixed Interest MediumInstruments
The Graphs Below Indicate Group-Wise Year On Year Progression Of Unit And Non-Unit Linked Fund Investments As A Percentage Of The Total Investments Of That Particular Year. As Can Be Seen From The Graphs, The Unit Linked Fund(Ulf) Of Group 1 Which Was 76.51% Of The Total Ulf Investment In The Year 2006 Grew To 84.3% In The Year 2008 While The Shares Of Groups 1 & 2 Which Were 18.33% & 5.16% Fell To 11.75% & 3.95% Respectively.
At The Same Time, , The Traditional Fund(Tf) Of Group 1 Which Was 99.48% Of The Total Tf Investment In The Year 2006 Fell Marginally To 98.58%% By The Year 2008 While The Shares Of Groups 1 & 2 Which Were 0.34% & 0.18% Grew To 0.89% & 0.53% Respectively.
The Unit Linked Fund Investment For The Entire Industry As A Percentage Of The TotalInvestment Which Was Only 1.76% In 2005 Grew To 18.39% In The Year 2008, Which ClearlyIndicates The Growing Popularity Of The Unit Linked Business.
Group-wise progression of ULFPe
rcen
tage
of U
LF
100.00%
80.00%Group 1
60.00%Group 2
40.00%Group 3
20.00%
0.00%2005 2006 2007 2008
Group 1 76.51% 83.26% 86.20% 84.30%
Group 2 18.33% 12.60% 10.40% 11.75%
Group 3 5.16% 4.14% 3.39% 3.95%
Year
Perc
enta
ge o
f TF
120.00%
100.00%
80.00%
60.00%
40.00%
20.00%
0.00%
Group 1
Group 2
Group 3
Group-wise progression of TF
Group 1
Group 2
Group 3
2005 2006 2007 2008
99.48% 99.22% 98.96% 98.58%
0.34% 0.50% 0.66% 0.89%
0.18% 0.28% 0.39% 0.53%
Year
The Graph Below Shows The Comparison Of AI(Approved Investments) & OTAI(Other Than Approved Investments) For The Industry Between Traditional & ULIP Fund Investments. The AI For The Industry As A Percentage Of The Total Linked Investments Which Was 89.43% In The Year 2005 Fell To 85.89% By The Year 2007 .
At The Same Time, The AI For The Industry As A Percentage Of The Total Non-Linked Investments Which 93.73% In The Year 2005 Grew To 94.41% By The Year 2007.
As Per The Regulations, The Investments Under OTAI Shall Not Exceed 25% Of The Total Investments Of The ULIP Fund Investment.
Amongst The Companies, No Company Has Exceeded The Stipulated Limit(25%). The Highest Exposure To OTAI Of Any Company Is 19.74% With One Of The Companies Having A Least Exposure Of 5.68% To OTAI.
Am
ount
(in c
rore
s)
Apporovedvs Other than approved investments for the Industry(ULIP Fund)
100%
80%
60% OTAI
40% AI
20%
0%
2005 2006 2007
Year
11th Global Conference of Actuaries
Assets held to cover the linked liabilities for the Industry
Am
ount
(in c
rore
s)
180000
150000
120000Assets
90000Liabilities
60000
30000
02005 2006 2007 2008
Year
Equities:
As Discussed Above, A Policyholder Can Choose The Funds In Which His Premiums Are To Be Invested. Most Of The Policyholders Would Generally Wish To Have Large Proportion Of Their Premiums ( Even 100%) To Be Invested In Equity Markets, In Pursuit Of Higher Expected Returns. As A Matter Of Fact As Much As 64.01% Of The Total ULIP Funds Are Invested In The Equities In The Year 2008.
The Life Insurance Industry Is The Largest Investor In The Indian Stock Market. The Net Investment By The Life Insurance Companies In The Equity Markets During The Year 2007-08 Was Rs.55,000 Crores As Against An Investment Of Rs.53,400 Crores By The Fiis. The Investment By The Mutual Funds During The Same Period Was Estimated At Rs.16,300 Crores. The Life Insurance Companies Have Already Invested 25000 CroresUpto July’2008.
It Is Also Important To Note That In The Current Situation Where The Stock Market Has Fallen By More Than 50% , This Fall May Not Only Effect The Sales Of Ulips But Also The FMC, Which Is The Main Source Of Revenue To The Insurer. As Mentioned Above, 64.01% Of The ULIP Funds Are Invested In Equities, Which May Mean That Any Sharp Fall In The Equity Markets May Well Reduce The Income From The FMC Earned On The Underlying Assets To The Insurer. Even Though The Regulations Do Permit The Insurer To Increase The FMC, There Is A Maximum Level At Which Such Increase Can Be Capped. Thus, The Volatility Of The Stock Markets Also Leads To Considerable Volatility Of The Premium(Reduced Sales) And The FMC.
The Graph Below Makes A Comparison Of The Equity Exposure Under The Linked And Non-Linked Investments For Industry For The Year 2008. As Can Be Seen From The Graph The Equity Exposure Under Linked Side Which Was 28.85% Grew Substantially To 64.01% Of The Total Linked Investments. At The Same Time, The Equity Exposure Under Non-Linked Side Which Was 14.40% Fell To 11.26% Of The Total Non-Linked Investments.Amongst The Companies, 9 Companies Have Exceeded The Industry Average Of 64.01% On The Linked Count And 5 Companies Have Exceeded The
Industry Average Of 11.26% On The Non-Linked Count.
Equity exposure (Linked vs Non-Linked) for the Industry
100.00%
Perc
enta
ge
80.00%
60.00%
40.00%
20.00%
0.00%2005 2006 2007 2008
Linked 28.85% 55.37% 53.14% 64.01%
Non-Linked 14.40% 19.79% 17.67% 11.26%
Year
Linked
Non-Linked
The Graph Below Makes A Comparison Of The Equity Exposure Under The Non-Linked Side Across The Groups For The Year 2008. As Can Be Seen From The Graph, The Equity Exposure Of Group 1 Has Exceeded The Industry Average Of 11.26%.
Equity exposure as a % of the total non-linked investments in the Year 2008
Perc
enta
ge
80.00%
60.00%
40.00% Non-Linked
20.00%
0.00%Group 1 Group 2 Group 3 Industry
Non-Linked 11.34% 3.27% 9.17% 11.26%
Group
The Graph Below Makes A Comparison Of The Equity Exposure Under The Linked Side Across The Groups For The Year 2008. As Can Be Seen From The Graph, The Equity Exposure Of Group 1 Has Exceeded The Industry Average Of 64.01% While The Exposure Of Group 3 Is Very Close To The Industry Average.
Equity exposure as a % of the total linked investments in the year 2008
80.00%
Perc
enta
ge
60.00%
40.00% Linked
20.00%
0.00%Group 1 Group 2 Group 3 Industry
Linked 65.09% 56.34% 63.70% 64.01%
Group
Share of each group in the equity investments of the total ULF/TF of the respective group
100.00%
80.00%
60.00%
40.00%
20.00%
0.00%Group 1 Group 2 Group 3
Linked 85.73% 10.34% 3.93%
Non-Linked 99.31% 0.26% 0.43%
Linked
Non-Linked
Mathematical Reserves:
As Per The Regulations Unit Reserves Are To Be Calculated In Respect Of The Units Allocated To The Policies In Force At The Valuation Date Using The Unit Values At The Valuation Date.
The Graph Below Shows The Progression Of The Total Linked MR Across The Groups. As Can Be Seen From The Graph, Group 1 Is The Major Contributor To The Total Linked MR.
The Shares Of Group 1&2 Which Were 84.59% & 11.61% Of The Total Linked MR In The Year 2006 Fell To 79.4% & 9.66% In The Year 2008 While The Share Of Groups 3 Which Was Only 3.81% % In The Year 2006 Grew To 10.94% By The Year 2008.
Amongst The Companies, In Case Of 16 Companies ,The Linked Reserve Takes The Major Portion Of The Total MR.
Progression of linked reserve as % of total linked MR
Perc
enta
ge o
f LR
100.00%
80.00%Group 1
60.00%Group 2
40.00%Group 3
20.00%
0.00%2006 2007 2008
Group 1 84.59% 86.29% 79.40%
Group 2 11.61% 10.19% 9.66%
Group 3 3.81% 3.52% 10.94%
Year
The Graph Below Shows The Progression Of The Total Non-Linked MR Across The Groups. As Can Be Seen From The Graph, Group 1 Is The Major Contributor To The Total Non- Linked MR.
The Shares Of Group 1 Which Was 99.55% Of The Total Linked MR In The Year 2006 Fell Marginally To 99.20% By The Year 2008 While The Shares Of Groups 2 & 3 Which Were 0.28% & 0.17% % In The Year 2006 Grew Marginally To 0.51% & 0.29% By The Year 2008.
Amongst The Companies, In Case Of 2 Companies ,The Non-Linked Reserve Takes The Major Portion Of The Total MR.
Progression of Non-linked reserve as % of total Non-linked MR
Perc
enta
ge o
f NL
R
150.00%
100.00% Group 1
50.00%
Group 2
Group 3
0.00%2006 2007 2008
Group 1 99.55% 99.36% 99.20%
Group 2 0.28% 0.40% 0.51%
Group 3 0.17% 0.24% 0.29%
Year
As Can Be Seen From The Graph Below, Linked Mathematical Reserve As % Of The Total Reserve Is Increasing Year On Year. The Linked Reserve For The Industry Which Was 6.72% In The Year 2006 Grew To 21.99% By The Year 2008. At The Same Time, The Non- Linked Reserve For The Industry Which Was 93.28% In The Year 2006 Fell To 78.01% In The Year 2008
Mathematical reserve(Linked vs Non-Linked)
Perc
enta
ge
100.00%
80.00%
60.00%
40.00%
20.00%
0.00%2006 2007 2008
Linked 6.72% 12.86% 21.99%
Non-Linked 93.28% 87.14% 78.01%
Year
Linked
Non-Linked
Guarantees:The Stock Markets Which Are Witnessing A Severe Fall During The Last Few Months Also Resulted In Wealth Erosion On The ULIP Polices Particularly On The Funds Which Have Large Exposure To Equity. The ULIP Policies Have Traditionally Offered Higher Returns To A Policyholder In Booming Stock Markets . However, In The Prevailing Situation The Policyholder Is At The Receiving End As The Investment Risk Under A ULIP Is Typically Borne By Him. To Draw A Comparison, Even Mutual Funds Are Also Feeling The Heat Perhaps More Than Ulips.
The Financial Market Uncertainties May Push Investors Away From The Tailor Made ULIP Products Where The Entire Risk Is Borne By The Policyholder. This Has Shifted The Focus To ULIP Products That Offer Guarantees As The Customer Has Began To Look At Security And Guarantees Under Ulips Policies As Well. The Investors Now Intend To Have Both The Exposure To Growth Assets As Well As Downside Protections Ie, A Minimum Guarantee. In India There Are About 11 Companies Offering Guaranteed UL Products And The Sale Of These Policies Are Not As Aggressive As It Should Be. The Guaranteed UL Policies Partly Shifts The Risk To The Insurer Also. The Following Are The Guarantees That Are Typically Being Offered By The Indian Insurers:
• Investment Return Of X% Per Annum On The End Fund Payable At Maturity Or• Capital Guarantee • A Guaranteed % Of The FYP At Maturity Etc.,
The Graph Below Shows Unit Linked Guaranteed(ULG) Products As A Percentage Of The Total Linked Products In The Respective Group. The Proportion Of The ULG Products For The Industry Is
17.3%. Amongst The Companies,3 Companies Have Exceeded The Industry Average Of 17.3% AndHave A Guaranteed Linked Products Of More Than 30% .
Perc
enta
ge
Proportion of ULG prodcuts out of the total linked products in the respective group
100%
80%
60%GLP
40% TLP
20%
0%Group 1 Group 2 Group 3 Industry
Group
The Graph Below Shows The Guaranteed Linked Mathematical Reserve(GLMR) As A Proportion Of The Total Linked Mathematical Reserve(TLMR) In The Respective Group . The GLMR Constitutes 3.60% Of The TLMR For The Industry. Amongst The Companies, 2 Companies Have A GLMR Of More Than 30 % Of Their TLMR With One Of The Companies Having A GLMR Of 83.33% .
Percentage of the GLMR out of the TLMR of the respective group
80.00%
GL
MR
60.00%
40.00% GLMR
% o
f
20.00%
0.00%Group 2 Group 3Group 1
GLMR 2.18% 9.54% 51.21%
Group
As Per The Graph Below, Group 1 Assumes Maximum Share (43.76%)In The Total GLMR.
Share of each group in the total GLMRG
LMR 50.00%
40.00%
tota
l
30.00%
of 20.00%
Perc
enta
ge
10.00%
0.00%Group 1 Group 2 Group 3
GLMR 43.76% 25.62% 30.63%
Group
The Graph Below Compares The Equity Exposure( As % Of The Total Unit Linked Fund Investment Of The Respective Group) And The GLMR (As A Percentage Of TLMR Of The Respective Group). As Can Be Seen From The Graph Group 3, Which Has The Highest Proportion Of GLMR Of 51.21% , Has An Equity Exposure Of 63.70% And This May Make Group 3 Vulnerable To The Fall In Equity Market.
Equity exposure(as a % of the Unit linked fund of the respective group) vs
GLMR(as a% of the TLMR of the respective group)
80.00%
Perc
enta
ge
60.00%
40.00% Equity exposure
20.00% GLMR
0.00%Group 1 Group 2 Group 3
Equity exposure 65.09% 56.34% 63.70%
GLMR 2.18% 9.54% 51.21%
Group
We Have, To Examine Effect Of The Above, Analysed The Performance Of All The Funds Of 4 Companies Which Have An Equity Exposure Of 10% & Above For The Period Between 01/07/2008 And 25/10/2008 And Which Have Guaranteed Products In Their Portfolio. All The Funds Of Theses Companies Have Shown A Negative Growth During This Period Which Is Normally Not Expected For The Companies Which Has GLMR.
We Have However Observed That For These Companies, The Guarantees Mostly Will Only Apply At Original Maturity Date Selected By The Client Which May Significantly Reduce The Risk.
Amongst The Companies, Only 2 Companies Have GLMR(As Percentage Of The Respective TLMR) Of More Than 30% And All Other Companies Have A GLMR Of Less Than 5% Of Respective TLMR
It May Not Be Out Of Context To Produce A Graph, Which Shows The Weighted Average Solvency Ratio Of Each Group & The Industry As Well Where The Weights Are The Policyholders Funds InOrder To Understand Whether The Insurers Are Financially Sound & Capable To Meet The ExistingLiabilities Of The Policies In Their Respective Books.
Weighted Average Solvency ratio with Policyholders Funds as weights
4.00
Rat
io 3.00
Solv
ency 2.00 Solvency Ratio
1.00
0.00Group 2 Group 3 IndustryGroup 1
Solvency Ratio 1.57 2.89 2.30 1.61
Group
As Can Be Seen From The Above Graph, The Solvency Ratio Of Groups 2& 3 Have Exceeded The Industry Average Of 1.61 While Group 1 Is Slightly Below The Industry Average.
Amongst The Companies, All The Companies Have A Solvency Ratio Of More Than The Stipulated Ratio Of 1.5 As Per Regulations With 14 Companies Having A Solvency Ratio Of More Than 2.
Guarantees (International Scenario):The Guaranteed Unit Linked Products Have Been A HugeSuccess In US, UK, Japan, Korea, Italy, Ireland . Adding Guarantees Has Become Common In Developed Markets In North America, Japan & Europe. Basically, There Are Three Types Of Adding The Guarantees To The ULIP Products Which Are In Existence In The Above Markets And These Are Explained As Under:
Traditional/Conservative Funds:In This Type Of Products, The Customer Will Not Have TheInvestment Flexibility And Only Has A Limited Fund Choice And Hence Minimum Investment Risk Is Borne By The Customer. This Can Give Unsatisfactory Results In Certain Market Conditions And Also Has A Limited Upside Fund Movement.
Structured Funds:These Products Offer A Link To A Financial Instrument, Typically An Index Or ABasket Of Equity Stocks,Over A Fixed Period The Return Is Linked To The Financial Instrument, Usually Being Capped At A Certain Level, But With A Guaranteed Platform, For Example 105% Of The Original Investment The Underlying Structure Combines An Option Related To The Index And Fixed Interest Stocks To Provide The Guaranteed Return At Maturity The Products Do Offer Clients Security But Typically With Restricted Surrender Options, A Fixed End Date (Limited Entry)And No Investment Flexibility.
Variable Annuities: A Variable Type Of Annuity Stipulates A Fixed Periodic Payment To TheAnnuity Holder Beginning Immediately Or At Some Point In Future. The ‘Variable’ Portion Of The Annuity Exists Due To The Investments That Are Made As Per The Choice Of The Investor For Ex: In Stocks, Bonds Tec., These Products Provides The Customer With The Combination Of Upside Exposure In The Fund And Downside Protection. These Products Also Offer A Variety Of Additional Guarantees, Effectively As Riders To The Existing Contract, Paid For By An Additional Management Charge One Or More Guarantee May Be Offered From A Client-Selected “Menu” The Same Or Similar Funds May Be Offered In The VA Product As On Existing UL, Or It Could Be Index-Based Products Are Long Term And Offer Multiple Payment Possibilities. These Type Of Annuities Have Dominated US, Europe, Even Parts Of Asian Markets.
There Are Broadly Four Types Of Guarantees That Are Available On VA Products
• Guaranteed Minimum Death Benefit(GMDB) • Guaranteed Minimum Accumulation Benefit (GMAB) • Guaranteed Minimum Income Benefit (GMIB) • Guaranteed Minimum Withdrawal Benefit (GMWB)
The Above Guarantees Can Be Offered On A Stand-Alone Basis Or Combinations, And On A ‘Menu’ Basis For The Client. There Are About 40 Such Products In America. In UK The VA Product Has Started In The Year 2005 And Is Now Flooded With Such Products.A Brief Description Of The Above Guarantees Is As Under
GMDB:This Involves An Additional Payment To The Beneficiary Equal To The Difference Between TheGuaranteed Value Of The Fund And The Market Value Of The Fund That Is Originally Payable. This Guarantee Gives Asset Protection On Death.
GMAB:This Involves An Additional Payment In The Form Of A Top Up To The Beneficiary On ASpecific Date Or After A Specified Waiting Period If The Market Value Of The Fund Id Lower Than A Pre-Determined Guarantee Level. This Payment Is Equal To The Difference Between The Guarantee Value Of The Fund And The Market Value Of The Fund That Is Originally Payable. This Guarantee Gives Asset Protection On Market Decrease.
GMIB:This Involves A Guarantee To The Policy Holder That A Minimum Income Stream On TheVesting Of The Annuity Regardless Of How Well Their Fund As Performed And The Annuity Rates Prevailing At That Time. This Guarantee Gives Protection Against Under Performing Assets.
GMWB:This Involves A Guarantee To The Policy Holder That They Will Not Outlive Their AssetsRegardless Of Market Performance. The Policy Holder Continues To Receive The Payments Even After The Market Value Of The Fund Falls To Zero. There Is No Requirement To Annuitize Thus Surrender Option And Death Benefit To Beneficiary Remains. . This Guarantee Gives Protection Against Under Performing Assets.
Pricing Of The Guarantees:The Pricing As Well As Managing & Reserving For These GuaranteesIs Highly Complex And Intensive. The Premium Differs By The Type Of Guarantee, Type Of Fund, Level Of Guarantee Etc. It Is Helpful To Start With An Acceptable Premium Range And Then Develop The
Guarantee. However To Determine A Proper Market Price To Charge The Client There Can Be A Large Risk Exposure To The Insurer.
Risks Under Guaranteed Products:There Are Certain Risks Involved In Pricing TheGuarantees. Some Of Them Are
• Financial Risk: This Is The Risk That The Fund Value Might Be Lower Than The Investment Guarantee And The Difference To Be Met By The Insurer. This Is The Main Risk For Pricing The Guarantees.
• Mis-Pricing Risk: This Is The Risk That The Guarantee Provided Might Not Be Adequate. • Policy Holder Behaviour Risk: The Insurer Might Have Priced The Product Based On The Some
Assumptions About The Policyholders Behaviour In Different Market Scenarios. This Is The Risk That Such Assumptions Are Proved To Be Wrong/Not Conservative Enough, Thereby Exposing The Insurer To Risk.
• Actuarial Risks: These Are The Risks Relating To Mortality, Longevity, Expenses Etc Assumptions Going Wrong Or The Model Used May Not Be Appropriate.
• Captital Market Risks
Risk Mitigation Process:Some Of The Ways In Which The Above Risks Can Be Mitigated.
• Basically All The Above Risks Can Be Mitigated By Smart Product Design. • Use Of Reinsurance • Purchasing Options From Investments Banks • Setting A Side An Additional Reserve For Guarantees • Sophisticated Internal Asset Management So As To Manage The Portfolios Effectively • Trained Marketing Personnel • Dynamic Hedging
Dynamic Hedging Is An Approach Where In Addition To The Usual Funds Associated With A Unit Linked Contract, A Hedge Portfolio Is Purchased And Actively Managed In Such A Way That All Shortfalls Arising From An Investment Guarantee Can Be Financed By This Portfolio Under All Possible Financial Market Situations.
The Current Best Approach For Valuing ULG Products Is To Use Stochastic Simulation:• Produce A Sufficiently Large Set Of Market-Consistent Scenarios Describing All Relevant Market
Parameters. • Determine The Cost Of The Option For Each Scenario. • The (Potentially Weighted) Average Value Over All Scenarios Is Then An Estimation For The Value Of
The Option.Guarantees (Indian Scenario):In India, There Is A Compulsory Minimum Guaranteed DeathBenefit, Which Is Largely Taken Care By The Mortality Expenses Charged For The Death Cover. Other Guarantees Available In India Are Discussed Above. These Guarantees Are Being Usually Priced Either Implicitly By Way Loading In The Expense Charges Or Explicitly With The Cost Of Guarantee Being Modeled Stochastically.
The Calculation Of Guaranteed Reserves Either Involves An Explicit Provision To Meet The Cost Of Guarantee Or The Cost Of Guarantee Considered As X% Per Assets Per Annum. The Insurer Usually
Arrive At This Percentage After Extensive Stochastic Testing Of The Business( Surprisingly There Are Insurers Who Are Modeling The Guarantees Deterministically). For The Products Which Have Maturity Guarantees, Investment Risk Is Explicitly Modeled And A Special Reserve (Which Is Held Back To Meet The Cost Of Guarantee Till The Maturity) Is Maintained To Cover The Maturity Guarantee A Stochastic Model Based On Real World Assumptions Is Used For Asset-Liability Matching Exercise. As Stated Above, The Guaranteed ULIP Products Are Not So Aggressive In India And GLMR Constitutes Only 3.60% Of The TLMR.
Road Ahead:
Pre-Global Financial Crisis:
World Scenario:The Insurance Sector Through Out The World Registered A Good Growth And AsCan Be Seen From The Graph Almost All The Regions Exceeded The World Average Of 5%.
Growth rate in 2007 across the world
18.0%16.0%
Perc
enta
ge
14.0%12.0%10.0%
Series18.0%6.0%4.0%2.0%0.0%
North
Am
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Wes
tern
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Emer
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Latin
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Carib
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Cent
ral a
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aster
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Mid
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ast a
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entra
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Indu
strial
ised
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Sout
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Afri
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Region
At The Same Time, Indian Insurance Business Grew At 13% (Adjusted Fro Inflation)
Ulips Front:UK Which Is The Most Developed Unit Linked Market InEurope , The Demand For Unit Linked Product Remained Strong And The Growth Was Mainly Driven By Individual Pension Market And Offshore Bonds Which Attracted Growing Interest From Wealthy Customers.
French Unit Linked Business However Declined By 1% In 2007. In Italy Unit Linked Premium Registered Growth In An Overall Declining Individual Life Insurance Market. Similarly Irish International Market Also Registered A Strong Growth. Germany, Brazil, Switzerland, Hungary, Poland, Spain Have Also Registered Growth In Unit Linked Business.
Post Global Financial Crisis:
General Scenario: Now, These Are Challenging Times For All Financial Sectors, Not Least TheInsurance Market. Amid The Economic Challenges, Financial Services, And Within Them Insurance, Also Remain A Key Focus In Its Drive To Create A Better Regulated, More Integrated Single Market.
The Life Insurance New Business Across The World Is Already Effected Because Of The Drop In Unit Linked And Single Premium Business. Demand For Life Insurance Has Slowed Across The World. The Greatest Impact Will On Products Which Are Discretionary In Nature And Unit Linked Products, Due To The Poor Returns And Continuing High Volatility Of The Stock Markets.
The On-Going Financial Crisis May Also Negatively Effect The Profitability Of The Providers Of The Variable Annuity Products As The Fall In The Equity Prices May Significantly Reduce The Future, Which Is Based On The Fund Values . The Same May Be The Case For Traditional Unit Linked Products.
The Challenges Being Faced By The Life Sector From A Slowing Economy And Continuing Volatility In The Financial Markets Are Likely To Last For Some Time. Profitability, Therefore Will Continue To Be Negatively Effected Due To The Pressures From The Declining Sales, Lower Investment Returns, Lower FMC From Unit-Linked Business, Higher Hedging Cost Of Guarantees And Possible High Surrenders On Some Products.
Indian Scenario:In India, Unit Linked Business Is Well Regulated As Under
• Through Unit Linked Guidelines, Which Aim At Provision Of Fair Insurance Coverage, Disclosures To Facilitate Informed Decisions By The Policyholders As The Investment Risks Are
Borne By Them And Preserving Long Term Nature Of The Insurance Products.• Benefit Illustrations, To Be Demonstrated To The Policyholder/Prospect, Which Aims At Providing All Relevant Information Regarding The Amounts Deducted Towards Various Charges So That The Policyholder/Prospect Can Take An Informed Decision.
• Through Investments Regulations For Ex: Restricting The Investments In Other Than Approved Securities To A Maximum Of 25%, Restriction The Concentration In One Particular Sector To 10%
For A Unit Linked Product To Continue To Be Successful, Insurers Must Ensure That They Make It Easy For The Policyholder/Prospect To Access The Information Relevant To Their Investment Decisions And Which Enables Them To Make Comparisons With The Other Providers. The Sales Literature Must Disclose All The Key Elements Which Are Essential To Enable The Policyholder/Prospect To Make Effective And Informed Choices.
It Is Also Important To Note That The Level Of Information/Disclosure Should Match The Customer Needs. At The Same Time, An Overload Of Information May Prevent Consumers From Making An Appropriate Assessment Of A Product And Therefore Just Adding Additional Disclosures May Not Be The Solution. Thus, Under A Unit Linked Policy The Disclosures Should Give The Customers Confidence That Their Funds Are Managed Fairly In Line With Their Expectations So That They Can Take Effective And Informed Decisions.
