Overview of Indian Life Insurance Industry;As Is and would be Perspective : Overview of Indian Life Insurance Industry;As Is and would be Perspective Presentation to SBI LIFE
Navi Mumbai
8th October 2010
CURRENT ISSUES : CURRENT ISSUES ULIPS Vs Mutual Funds
Health Insurance-Cashless-Pre existing Illness-Extension of Coverage.
Pensions-PFRDA-Annuities-Reinvention
Regulations
Economic Capital-Risk Management
Solvency
ULIPS Vs MUTUAL FUNDS : ULIPS Vs MUTUAL FUNDS Evolution of Insurance Products
Traditional –Whole Life-Endowment
With Profit Plans
Guarantees
ULIPS
ULIPs-SWOT Analysis : ULIPs-SWOT Analysis Protection Risk –Insurer
Investment Risk-Policyholder
Long term Interest Guarantee-Difficult in volatile economic scenario
Investment freedom-away from Insurance Act
IRDA restrictions
ULIPs : ULIPs Surrender charges capped
Cap on Expenses-difference between gross and net yields term<10years 3% term>10years 2.25%
Five year Lock-in period
Minimum annualised guarantee of 4.5% on pensions
Advanced form of with profit
Upside and downside with Policyholder
Insurer protected from Investment Risk
Mutual Funds : Mutual Funds Investment risk with Unit holder
Investment as per prospectus
Gilt-Balanced –Equity
Long term Advantage
No guarantees
ULIPsVs Mutual Funds : ULIPsVs Mutual Funds ULIP-Protection+Investment
IRDA restrictions-PH Protection
Long term –Upside
Mutual Funds-No load
Pros and Cons
ULIPs Vs WITH PROFIT : ULIPs Vs WITH PROFIT WITH PROFIT SYSTEMS
REVERSIONARY BONUS
COMPOUND
CONTRIBUTION
CASH ACCUMULATION
ULIPs Vs WITH PROFIT : ULIPs Vs WITH PROFIT BASIC SUM ASSURED
VESTED BONUS
UPSIDE WITH POLICYHOLDER
POSSIBLY BETTER SYSTEM
LACK OF TRANSPARENCY
VOLATILE ENVIRONMENT
LONG TERM PREDICTION INTEREST RATE DIFFICULT
ULIPs Vs WITH PROFIT : ULIPs Vs WITH PROFIT MF-NO INVESTMENT RISK
PROJECTIONS NOT ALLOWED
COMPANY-LESS RISK
WITH PROFIT –CONSERVATIVE
TERMINAL BONUS
ASSET SHARE
ULIPs Vs MUTUAL FUNDS : ULIPs Vs MUTUAL FUNDS CURRENT CRISIS
RESOLUTION
Unitised with ProfitUniversal Life : Unitised with ProfitUniversal Life Unitised with Profit
Universal Life
HEALTH INSURANCE : HEALTH INSURANCE Evolution
Critical Illness
Increase in coverage of Diseases
Hospital Treatment
Domiciliary
Group Schemes
Riders
HEALTH INSURANCE : HEALTH INSURANCE Pre-Existing Illnesses
Cashless
Morbidity Investigations
Incidence-Duration-Cost
HEALTH INSURANCE : HEALTH INSURANCE PRODUCTS
HOSPITALISATION
DOMICILLARY
EXCLUSIONS
EXISTING ILLNESSES
IRDA REGULATIONS
HEALTH INSURANCE : HEALTH INSURANCE NON LIFE &LIFE
INCREASE IN COVERS
PRODUCT DESIGN
Term 1-30 years
Premium guarantee 1-5years
Diseases covered 5- 100
SEC 80 D-Impact-No Death Benefit
Non linked-Linked
Maturity age 65-75
Entry age 50-65
Current Health Insurance Scenario: India : Source: Business World (India) – Oct 2007 Low penetration of Insurance and Low Govt. expenditure in India . . .
Has resulted in high Out-of-Pocket spend Current Health Insurance Scenario: India
Slide 18 : Healthy life expectancy of India indicates that there is higher need of health insurance from age 60.
Pension as a % of Total Business : Pension as a % of Total Business
Current IssuesDemographic Pattern : Current IssuesDemographic Pattern INDIA USA UK CHINA Data source: www.unicef.org
Population Pyramid of India : Population Pyramid of India Population Pyramid: 2001 Projected Population Pyramid: 2026
Impact on PopulationProjections 2001-2026 : Impact on PopulationProjections 2001-2026 1.2%increase per year
Decline in Crude Birth Rate 23-16
Decline in Crude Death Rate 7.5-7.2
Effect - decrease in population<16
Effect - increase in population 16-60
Effect - increase in population>60
DEMOGRAPHICS : DEMOGRAPHICS 459 million between 13-35
333 million literate young indians
62% of literate youth live in villages
66% of population<35
Average Indian in 2020-29 years old
Average USA&CHINAin 2020-37 years old
Average W Europe in 2020-45 years old
PENSIONS : PENSIONS CONCEPTS
Accumulation
Annuity
Designs
Reinvention
Investment risk
Longevity risk
MORTALITY : MORTALITY INVESTIGATIONS
FORECAST MORTALITY
ACTUARIAL MANAGEMENT : ACTUARIAL MANAGEMENT ACTUARIAL
INVESTMENT
MARKETING
ACTUARIAL : ACTUARIAL CERTAINTY IN UNCERTAINTY
PRICING ASSUMPTIONS
VALUATION ASSUMPTIONS
EXPERIENCE –ACTUALS
ACTUARIAL CONTROL CYCLE
STOCHASTIC MODELLING
RISK MANAGEMENT
VALUATION : VALUATION Background on valuation
Determination of net liabilities
Valuation of assets
Solvency
Different methods of valuation
Allocation of profits/surplus
Purpose of Valuation : Purpose of Valuation Solvency
Allocation of profits
Financial condition
Appraisal
Concepts : Concepts Pricing basis
Actual experience
Valuation basis
Pricing Basis : Pricing Basis Conservative
Competitive
Differentiation between par and non-par
Statutory restriction
Policyholders’ reasonable expectation
Actual Experience-Mortality : Actual Experience-Mortality Mortality - actual and expected deaths
Measures of mortality
Large exposure
Classification according to group/plans
Financial impact - mortality strain
Investment Experience : Investment Experience Pricing assumption
Varied rates of interest
Economic scenario
Inter valuation experience
Investment Analysis : Investment Analysis Book value, Market value
Adjusted book value
Realised gains
Unrealised gains
Expenses - Assumption : Expenses - Assumption Initial expenses
Renewal expenses
Inflation
Level premium
Slide 36 : REGULATORY ISSUES GLOBAL TRENDS
PRESCRIPTIVE
SELF REGULATORY
PRODUCT APPROVALS
MONITORING SYSTEMS
VALUATIONS-NP,GP,BRV-LOSS RESERVES
STATUTORY RETURNS
Slide 37 : CORE PRINCIPLES INTERNATIONAL ASSOCIATION OF INSURANCE SUPERVISORS
Slide 38 : IAIS SOME CORE PRINCIPLES ON SOLVENCY AND CAPITAL ADEQUACY Principle 1 : Technical provisions
Technical provisions of an insurer have to be adequate, reliable, objective and allow comparison across insurers Principle 2 : Other liabilities
Adequate provisions must be made for all other liabilities insofar as they are not included in the technical provisions. Principle 3 : Assets
Assets have to be appropriate, sufficiently realizable and objectively valued
Slide 39 : Principle 4 : Matching
Capital adequacy and solvency regimes have to address the matching of assets with liabilities. Principle 5 : Absorption of losses
Capital requirements are needed to absorb losses that can occur from technical and other risks.
Principle 6 : Sensitivity to risk
Capital adequacy and solvency regimes have to be sensitive to risk.
Principle 7 : Control level
A control level is required. Principle 8 : Minimum capital
A minimum level of capital has to be specified. Principle 9 : Definition of capital
Capital adequacy and solvency regimes have to define the suitable form of capital
Slide 40 : Principle 10 : Risk Management
Capital adequacy and solvency regimes have to be supplemental by risk management systems. Principle 11 : Allowance for reinsurance
Any allowance for reinsurance in a capital adequacy and solvency regime should consider the effectiveness of the risk transfer and make allowance for the likely security of the reinsurance counterparty. Principle 12 : Disclosure
The capital adequacy and solvency regime should be supported by appropriate disclosure. Principle 13 : Solvency assessment
Insurance supervisory authorities have to undertake solvency assessment
Principle 14 : Double gearing
Capital adequacy and solvency regimes have to address double gearing and other issues that arise as a result of membership in a group.
Margin of Solvency (Cont) : Margin of Solvency (Cont) Probability of ruin
4% reserves
0.1% and 0.2% of Sum at Risk
Margin of Solvency : Margin of Solvency Additional buffer
Statutory requirement
Rationale -customer protection
Dynamic Solvency Testing
- Stress Testing
SOLVENCY : SOLVENCY VALUATION RESERVES
VALUATION OF LIABILITIES
VALUATION OF ASSETS
BOOK VALUE- MARKET VALUE
PRUDENTIAL VALUATIONS
INTERNATIONAL ACCOUNTING STANDARDS
Slide 44 : TABLE A- Name of Life Insurance Company
Slide 45 : Table B Available Solvency Margin and Solvency Ratio
Name of Life Insurer Notes: 1.Items in Table A from latest Valuation
2. Sum at risk is Value of Sums Assured minus Mathematical Reserves.
GENERAL INSURANCESOLVENCY MARGINS : GENERAL INSURANCESOLVENCY MARGINS RSM 1-20% of Premiums (Adjusted)
RSM 2- 30% of Incurred Claims (Adjusted)
RSM-Higher of RSM 1 &RSM 2
RSM-required Solvency Margin
ASM & Solvency ratio similar table as for Life Insurance Cos
SOLVENCY ISSUES : SOLVENCY ISSUES IMPACT OF SOLVENCY MARGINS
INCREASE IN CAPITAL
REALISTIC VALUATIONS
IMPACT ON SURPLUS/BONUS
IMPACT ON PRICING
Provisions of Act and Regulationon Surplus Withdrawal : Provisions of Act and Regulationon Surplus Withdrawal Non- Par - 100% to S/H
Par - Proportion bet S/H & P/H
Transfer between non-par to par
Actual Transfer - Taxation
RISK MANAGEMENTINSURANCE RISK : RISK MANAGEMENTINSURANCE RISK MORTALITY/MORBIDITY RISK
LAPSE/SURRENDER RISK
EXPENSE/INFLATION RISK
LONGEVITY RISK
AGGREGATION OF INSURANCE RISK COMPONENTS
MARKET RISK : MARKET RISK INTEREST RATE RISK
EQUITY RISK
FOREX RISK
PROPERTY RISK
AGGREGATION OF MARKET RISK COMPONENTS
OTHER RISKS : OTHER RISKS OPERATIONAL RISK
CREDIT RISK
TOTAL : TOTAL TOTAL OF ALL RISKS
AGGREGATION/DIVERSIFICATION EFFECT
TOTAL AFTER AGGREGATION/DIVERSIFICATION EFFECT (ECONOMIC CAPITAL)
TOTAL : TOTAL TOTAL ASSETS REQUIRED (I)
TOTAL ASSETS AVAILABLE ON ECONOMIC BASIS(II)
TOTAL STATUTORY LIABILITIES AND 150% OF SOLVENCY MARGIN(III)
TOTAL ASSETS ON IRDA BASIS(IV)
A=(II)/(I)
B=(IV)/(III)
ECONOMIC CAPITAL : ECONOMIC CAPITAL EC is the amount of capital required to keep the balance sheet solvent on a going concern basis under a stress event.
EC:Sufficient surplus to cover potential losses at a given tolerance level over a specified time horizon
ECONOMIC CAPITAL : ECONOMIC CAPITAL EC is calculated as change in value of assets minus change in value of liabilities after applying a shock.
EC : (A’-A)- (L’-L)
A’/L’=asset/liability post shock
A/L=asset/liability pre shock
EC: (A’-L’)-(A-L)
EC:New capital requirement-old capital requirement.i.e.increase in capital required due to shock.
IMPACT OF DIRECT TAX CODE : IMPACT OF DIRECT TAX CODE RESTRICTIONS ON TAX RELIEF
DIVIDEND DISTRIBUTION-5%
HEALTH INSURANCE-LIMIT RS 50000
POSSIBLE RESTRUCTURING OF PRODUCTS
INTERNATIONAL ACCOUNTING STANDARDS-IFRS : INTERNATIONAL ACCOUNTING STANDARDS-IFRS BOOK VALUE
MARKET VALUE
FAIR VALUE
IFRS- INTERNATIONAL FINANCIAL REPORTING STANDARDS
ECONOMIC CAPITAL
MARKETING : MARKETING PRODUCTS
MEET POLICYHOLDERS NEED
DISTRIBUTION CHANNELS
SERVICING
IT
BPO
CLAIMS
INVESTMENT : INVESTMENT FUND MANAGEMENT
EXPERTISE
ECONOMIC ENVIRONMENT
ASSET LIABILITY MANAGEMENT
FINANCIAL SEVICES : FINANCIAL SEVICES BANKING
MUTUAL FUNDS
SECURITES
INSURANCE
FINANCIAL STABILITY
CO-ORDINATION
Slide 61 : Comparison of Risks in Financial Services Source : KPMG
FUTURE PERSPECTIVE : FUTURE PERSPECTIVE CUSTOMER AWARENESS
SELF REGULATION
DEVELOPMENTS IN ULIP’S
GUARANTEES
PENSIONS
REINVENTION OF ANNUITIES
FUTURE PERSPECTIVE : FUTURE PERSPECTIVE Increase in guarantees and options
Trend to With Profit plans
Plans oriented to DTC
Longer Terms
Universal Life
Unitised with Profit
Annuitisation –different options
Joint life plans
FUTURE PERSPECTIVE : FUTURE PERSPECTIVE HEALTH INSURANCE-GREATER COVERAGE
PORTABILITY-HEALTH &PENSIONS
GROUP INSURANCE
BANCASSURANCE
REFERRALS
FUTURE PERSPECTIVE : FUTURE PERSPECTIVE IT DEVELOPMENTS
COMMUNICATIONS
MOBILES
INTERMEDIARIES
MARKETING-Plan Presentations
Innovative Products-Niche marketing
Riders
PENETRATION
FUTURE PERSPECTIVE : FUTURE PERSPECTIVE INTEGRATION OF FINANCIAL SERVICES
COMBINATION PRODUCTS
SATEELLITE OFFICES
FUTURE PERSPECTIVE : FUTURE PERSPECTIVE International Trends
Consolidation
Group companies
Packaged products-LIFE-MF-General-Banking-Securities
Optimisation of costs
Demat-Paperless
THANK YOU : THANK YOU N M Govardhan