CENTRAL INDIA INSTITUTE OF TECHNOLOGY INDORE

MAJOR RESEARCH PROJECT

Synopsis On

Product Innovation in Life Insurance Sector

within five years

Submitted to: Rashmi Dubey

Submitted by: Ravi Ranjan MBA IV SEM

Introduction:Insurance is a cover used for protecting oneself from the risk of a financial loss. It is important to understand that risk is a part of any persons life and that it increases as a person increases in age, responsibility and wealth. Insurance is risk coverage against financial losses and should not be taken as an investment instrument. There are mainly two parties involved in this the insurer and the insured. The insurer is the insurance company who will provide the cover to the insured against any financial losses. The insured may be an individual person or a group of people like an employer, members of a society, etc. A policy is the contract between the insurer and the insured, which states the risks covered, the exclusions, if any, and the benefits reimbursed on the happening of an event like death, illness etc. The policy is paid through what is called a premium, which is a set amount that must be paid by the insured on a monthly, semi-annual or annual basis. On the happening of an event like death, disability, fire, etc, for which the insured is covered, the benefit amount stated in the policy contract can be claimed by the insured. Classification of Insurance There are mainly two broad classes of Insurance Life and Non Life. Life insurance products include Term Life policies, which give a pure risk coverage of only the death benefit, whereas endowment or money back policies have a risk as well as savings component i.e. death as well as maturity benefit. Also coming under the life insurance umbrella are the Unit Linked Policies in which there is a risk component and a savings component, which is invested in equity, debt or gilt funds, depending on the insurance company. Non Life insurance products include property or casualty, health insurance or house, fire, marine insurance etc. This insurance class deals with all the non-life aspects of an insured like his/her house, health, land, office, cargo, etc which might bring financial loss. What is Innovation? Innovation includes the acts of invention (the ongoing research and development function) and Diffusion of new products, services or idea. Financial innovation is an ongoing process Whereby private parties experiment to try to differentiate their products and services, Responding to both sudden and gradual Changes in the economy. Financial innovation creates new financial technologies, institutions, markets and Instruments and is defined as either product or process innovation Why is innovation so important to the financial services? Innovation exists to complete inherently incomplete markets. It persists to address inherent agency concerns and information asymmetries. Innovation exists so parties can minimize transaction, search or marketing costs. Increasing globalization and risk motivate innovation and technological shocks stimulate innovation.

Literature Review:1. Embedded Options and Integrated Asset-Liability Management for Life Insurance, Gabriele Susinno, Unigestion SA, Seminario de Matematica Financiera, Vol. 3, 2003 In this paper we describe life insurance contracts as a portfolio of financial options. This type of policy constitutes the bulk of mathematical reserves of continental European insurance companies. A close examination of a typical contract reveals an exchange of options between policy holders and the Insurance company whereby the former is long a floor option (the minimum guaranteed return) on the fund and short a call on the fund excess return relative to the floor. From an insurance company's point of view, this amounts to holding a portfolio of financial options vis-a-vis the client (the most common types of options included in Insurance contracts are the standard European and cliquet with European exercise options). This framework can be successfully used to support strategic decisions at a firm-wide level: return on risk capital, product design and innovation, risk management, asset benchmark selection and hedging strategies. 2. Uncertain Lifetime, Life Protection, and the Value of Life Saving, Isaac Ehrlich, State University of New York at Buffalo - Department of Economics; National Bureau of Economic Research (NBER), Journal of Health Economics, Vol. 20, No. 3, May 2000 The analytic innovation is treating life's end as uncertain, and life expectancy as partly the product of individuals' efforts to self-protect against mortality and morbidity risks. The demand for self-protection is modelled in a stochastic, life-cycle framework under alternative insurance options. The model helps explain the trend and systematic diversity in life expectancies across different population groups, as well as the wide variability in reported "value of life saving" estimates. The analysis yields a closed-form solution for individuals' value of life saving that is estimable empirically. It reflects the impacts of specific personal characteristics and alternative insurance options on both life expectancy and its valuation. 3. Productivity and Efficiency in Insurance: An Overview of the Issues, Douglas O. Cook University of Alabama - Culverhouse College of Commerce & Business Administration, John David Cummins, Temple University, October 1994, 96-57 In this paper we have identified the major developments and issues that affect productivity and efficiency in insurance. We have used the designation "Life" to refer to developments and issues affecting life insurers and "P/C" for those affecting property/casualty insurers. The following is a listing of these issues: 1. Marketing, Relationship marketing, Distribution, Electronic data interchange, Market segmentation, Service centres, Point of sale policy illustrations, Unbundling of services, Innovative policies and products 2. Underwriting and expert systems 3. Data processing, General issues, Outsourcing vs. in-house, Centralization vs. decentralization, Mainframe vs. mini vs. workstations, Image systems, Technology, systems, and software, Links between

mainframes and pc networks 4. Claims settlement 5. Miscellaneous, Total quality management, Reengineering, Downsizing Mergers and acquisitions, Management reporting 6. Financial risk management, Overview of risk, Balanced view of risk, Perspective on risk, Catastrophic risk, Asset-liability management, Capital budgeting, Derivatives, Regulation.

Rationale of the study:The purpose of the research is to help students, economists, academicians, leaders and other members of the governments to understand the importance of Insurance sectors.. The findings of the study will be beneficial to the national system since the research will be able to support existing evidences about the effect of insurance sector to a developing country like India. In the present study few macroeconomic factors will also be considered being GDP, Export, BOP, Inflation, Bank Rate and Exchange Rate while other factors can also be considered for further research. Over a period of time many developments have been seen in the Indian Insurance sector, now private players are actively participating and their market shares are also growing. Globally India is regarded as the fifth largest life insurance market. There are approximately 22 life insurance companies. People perceptions towards insurance products have been changing from only a tax saving instrument to a strong investment tool. In my project the scope is limited to some prominent insurance in the life insurance industry. It will help the investors to know about life insurances and whether they invest or not in life insurances. The main purpose of doing this project is to know about life insurance and its functioning. This helps to know in details about life insurance industry right from its inception stage, growth and future prospects.

Objectives:1. To study the impact of product innovation in Life Insurance during five years. 2. To evaluate the product of Life Insurance in economy. 3. To study the impact of variety in Life Insurance product on investor.

Research Methodology:The Study

The present study is exploratory and analytical in nature.

The Sample:Sample Type:. Random Sampling Sample Size: In the city of Indore with sample size of 100 respondents.

Sources & Collection of Data

Data Collection:Primary data: Data will be collected through structured questionnaire. Secondary data: Data will be collected through various journals, research papers, articles and Internet.

Tools Used For Analysis

Statistical: Correlation, regression and other tools as per the need of the study. Statistical tools:Regression Analysis: This analysis tool performs linear regression analysis by using the "least squares" method to fit a line through a set of observations. We can analyze how a single dependent variable is affected by the values of one or more independent variables. . Correlation Analysis: Correlation is a statistical measurement of the relation between 2 variables. Possible correlations range from + 1 to -1.A zero correlation indicates that there is no correlation between 2 variables.

References:Bibliography:
1. Embedded Options and Integrated Asset-Liability Management for Life Insurance, Gabriele Susinno, Unigestion SA, Seminario de Matematica Financiera, Vol. 3, 2003 2. Uncertain Lifetime, Life Protection, and the Value of Life Saving, Isaac Ehrlich, State University of New York at Buffalo - Department of Economics; National Bureau of Economic Research (NBER), Journal of Health Economics, Vol. 20, No. 3, May 2000 3. Productivity and Efficiency in Insurance: An Overview of the Issues, Douglas O. Cook University of Alabama - Culverhouse College of Commerce & Business Administration, John David Cummins, Temple University, October 1994, 96-57

Webliography:
www.moneycontrol.com www.rbi.org www.irda.gov.in http://www.chillibreeze.com/articles_various/insurance-policies.asp http://www.licindia.in