Insurance Practices

and Products
Module 4
 Mortality Tables
• Definition
– Mortality table is such data which records the past
mortality and is put in such form as can be used in
estimating the course of future data.
– It is to predict future mortality
– It is the picture of a generation of individuals passing
through time
– A large number of persons are selected and observed for
death and survival rates till all of them is dead.
 Mortality Tables
• Features
– Observation of generation
• Persons of single age are selected and observed up to
death. No new entries or withdrawals
– Start from a point
• As per the requirement of the insurer
– Yearly estimation
• Death and survival rates considered each and every
year
– Mortality and survival rates
 Mortality Tables
• Construction of mortality table
– Select large number of persons at attained age
– The number of deaths will be recorded each year till all of
them are dead.
– The number living in the beginning of next year = the
number of living in the beginning of last year – the number
of deaths in last year
Number of Number of Death Survival
Age livings deaths Rate Rate
20 10,00,000 2000 0.002 0.998
21 9,98,000 3000 0.003 0.997
22 9,95,000 4000 0.004 0.996
 Mortality Tables
• Criticism
– It is difficult to get large number of attained age
– Constant watch on them is not possible
– Longer period to construct a table
– Lot of time and money waste to record the data
– It will be quite obsolete since over the years lot of
changes might have occurred
 Mortality Tables
• Construction of death rate on yearly basis
– Separate sample is taken for each age
– Death rate is calculated every year for all the ages
– Reasons: (i) High, low and normal mortalities are averaged
over a year; (ii) Insurance premium is quoted for a year
– Death rate = Number of deaths during the year/Number of livings at the beginning of the year
Number of Number of Crude Death Graduated
Age livings deaths Rate Death Rate
20 10,000 20 0.002 0.002
21 20,000 80 0.004 0.003
22 5,000 15 0.003 0.004
23 10,000 60 0.006 0.005
24 20,000 100 0.005 0.006
 Mortality Tables
• Sources of mortality information
– Population statistics
• Criticism
– The accuracy of population is doubtful in absence of
age-proof
– Some deaths may go unrecorded
– Census is done once in 5/10 yrs
– Interpolation and extrapolation involved
– No separate statistics of insurable, standard and
sub-standard lives
 Mortality Tables
• Sources of mortality information
– Records of Insurers
• Accuracy of death rate
• Generally 10 Yrs data collected from as many insurers
as possible
• Separate mortality tables for standard, sub-standard
lives, female and males lives
• Sub-classification according to gender, marital status,
occupation, geographical area, social class etc
• Abnormal years, withdrawals and lapsation are
excluded
 Mortality Tables
• Crude and Graduated Mortality Rates
– Criticisms on Crude Death rates
• It has been observed death rate normally decreases from 1 to 10
years. It increases thereafter and fastly increases after the age of 50.
• The generation of an age is not observed
• There may not be large numbers for observation
• The data may not be cent percent correct
• There may be fluctuations in the death rate
• Absence of a certain trend
– After smoothing the fluctuations of crude rate with the help of
interpolation/graphical method, graduated mortality rates are
obtained
 Mortality Tables
• Types of Mortality tables
• Select table
– Mortality tables giving rate depending on both age and duration
elapsed since entry are called select mortality tables.
– It is used for calculating short-term and non-participating policies
• Ultimate mortality table
– A mortality table in which the rates in the select period are omitted
and only the ultimate rates are tabulated is called an ultimate
mortality tables
– It is used if the insurer wants to have a reasonable safety margin and
where the policies are participating one
 Mortality Tables
• Types of Mortality tables
• Aggregate table
– A table constructed without distinguishing the select and ultimate
lives is called an Aggregate Mortality Table.
– It is used in non-medical and group policies
Mortality Rate per 1000
Years of Insurance
6 Years & Age
Age 1 2 3 4 5 over attained
20 2.73 3.59 3.8 3.96 4.13 4.31 25
21 2.78 3.66 3.86 4.01 4.18 4.35 26
22 2.83 3.72 3.91 4.07 4.21 4.38 27
23 2.86 3.76 3.06 4.08 4.24 4.41 28
 Underwriting
• Definition:
– Underwriting is the insurance function that is responsible for assessing
and classifying the degree of risk a proposed insured or group
represents and making a decision concerning coverage of that risk
• Underwriter &Underwriting:
– The person responsible for evaluation and acceptance/rejection of
risks and computation of premium is called as the underwriter.
– Accordingly, the decisions made by the underwriter concerning risk
classification and rating is called as the underwriting decisions
 Underwriting
• Benefits of good underwriting:
– If risks are assessed properly, pricing will be effective and therefore
the company can well compete and build up reputation
– Good underwriting makes companies financially stronger and secure
competitive advantage
• The trade-off
– If the company sets high standards for risk, it may loose market. Also,
if it undertakes risk with loose assessment in a zeal to get business,
the possibility of claims may increase substantially
– If the company charges too much of premium, it will loose competitive
advantage.
– The underwriting exercise is a trade-off between the business and
survival.
 Underwriting
• The conflict
– The conflict between the underwriting and sales in insurance
companies is similar to conflicts between credit and sales in other
firms
– Neither the underwriter nor the agent will profit long by underwriting
that is too strict or too loose.
• Twin guiding principles
– Adverse selection: A healthy person is less likely to go for an insurance
cover than the one who becomes frequently ill. Accordingly, the
potential business for the insurers would represent these class.
Therefore, the underwriter should carefully appraise the inherent risk
– Persistency: The underwriter should carefully examine the paying
capacity of the proposer, to avoid large no.of policies are
surrendered/lapsed. The continuous renewal of policies is must to
business retention.
 Underwriting
• The objectives and principles of underwriting
• The primary objective of underwriting is to see that the applicant
accepted will not have a loss experience. To this end certain standards of
selection relating to physical and moral hazards are set up when rates are
calculated
– Example: A company may decide that it will not accept
• fire insurance in areas where there is no fire protection dept (or)
• life insurance who has had cancer within previous 5 Yrs
• Objectives of underwriting
– Product equitable to customer: Fair risk assessment & premium
fixation
 Underwriting
• Objectives of underwriting
– Deliverable to the customer: If the product becomes undeliverable,
onus is on the underwriter to carry introspection
– Financially feasible to the insurer: insurance is not charity. Although,
the underwriters are not involved in pricing as that of actuaries, yet
their contribution is vital
– To provide framework for underwriting decisions through
underwriting philosophy
• It specifies accepted line of business and prohibited risk exposures
• Permitted amount of coverage on various types of exposures
• Area of the country in which each line will be written etc
• It also generally describes the use of reinsurance for risk
management
 Underwriting
• Objectives of underwriting
– In life insurance, the underwriter is assisted by
• Medical reports from physicians
• Information from the agent
• An independent outside agency
• Company’s own medical advisor
Underwriting in life insurance
• Life insurance underwriting is mainly concerned with mortality. Mortality
risk for an insurer is that the insured will die prior to the stipulated life.
• The following factors are generally considered while underwriting an
individual life insurance:
– Age, sex, height &weight, health history, the purpose of the insurance,
marital status &no.of children, the no.of existing &proposed
inurances, occupation, income, smoking/tobacco chewing, alcohol
consumption, certain hobbies, foreign travels
• Similarly in case of group insurance:
– Proposed coverage, cause of existence of the relevant group, group
size, nature of industry, location, stability of the group, attributes of
group members, level of premium participation, previous insurance
history
 Underwriting in life insurance
• The potential insured's are classified by the underwriter as follows:
– Preferred class
• The inherent risk lesser than the average risk. The possibility of the
claim is least
– Standard class
• The risk exposure is at par with the average risk. Most of the
insured belong to this class
– Sub-standard class:
• The anticipated risk is higher than the average risk.
• Ex: physically challenged, presently recovering from life
threatening diseases/accidents, occupations/avocations that
significantly increase the risk
 Underwriting in life insurance
• The underwriting process
– The life insurance underwriting is different from other insurances.
Because the policy term may be 30 or even life time.
– It involves looking at medical, occupational, life style etc (Exclusive
questions to identify the risk level for AIDS/HIV)
– The U/W process involves
• Performing field U/W
• Reviewing the application in the office
• Gathering additional information if required
– Detailed questionnaire, medical report from proposer’s own
doctor &independent doctor, specific tests etc
• Taking U/W decisions
 Underwriting in life insurance
• The following steps generally followed by underwriters
– Receiving proposals/Applications
• Collected by field personnel/Agent
• General information section: Name, age, address, DOB, sex,
income, marital status, occupation, type of policy, SI, name
&relationship of the beneficiary, other insurance details etc
• Medical information section: health history, family health history,
medical examination results if required
– The medical report
– Underwriting review (bad risks are rejected)
– Policy writing (Issue of policy & computerized data)
 Underwriting in Non-life
insurance
• The commercial insurances range from small shops/factories to large
MNC’s and the degree of underwriting complexity varies with the size.
• In small cases, risk assessment can be done from reading the proposal. In
large cases, broker will do site inspection and prepare reports for insurers.
Later negotiation on the terms &conditions, cover and price etc take
place.
• Sources of information for commercial insurance
– Application containing the insurers statements (Proposal forms)
– Information from agents/Broker
– Prior experience
– Inspection
 Underwriting in Non-life
insurance
• Underwriting Practices
– Branch, divisional offices follows the rules framed by the head office
– The U/W guidelines covers
• Acceptance of normal risks irrespective of SI
– The risks in fire, marine &motor insurance have generally high
levels of limits of acceptance.
• Acceptance of normal risks up to specified SI
– All risk insurance on jewellery, baggage insurance, PA, Special
contingency policy
• Acceptance of normal classes of business with prior approval of
the controlling office
• Acceptance of risks subject to underwriting safeguards
– Restrictive conditions, clauses and warranties
• Procedural matters
 Underwriting in Non-life
insurance
• Fire Insurance
– Only standard fire &special perils policy with permitted “Add-on”
covers
– Generally, the value of (i) Building; (ii) Machinery &accessories; (iii)
Stock &stock-in-progress and (iv) Furniture &other contents should be
given separately
– STFI (Storm, Tempest, Flood and Inundation); RSMTD (Riot, Strike,
Malicious, Terrorism Damage) can be deleted at the inception with out
selection.
– Provisional rate of Rs.2.5 per mille is charged (in case if the risk is not
mentioned under TAC). For add-on covers rates as per Sec VIII
 Underwriting in Non-life
insurance
• The risks above the normal kind of risks (Ex: risks in ammunition,
explosive, fireworks, celluloid, match factories etc) are normally declined
or accepted by imposing
– Restrictive conditions
• In fire policy, special perils can be accepted subject to inspection
of risk
• In consequential loss policy, the audit of accounts is a must
• In motor insurance, acceptance of comprehensive cover is subject
to specified model
• Only TP cover for Military disposal vehicles
– Clauses
• In motor insurance, comprehensive insurance is allowed subject to
an excess clause.
– Warranties
 Fundamentals of Insurance
Pricing
• The sale price (Premium) is collected before stipulated services (claim
settlement)
• Two corollaries: (i) Insurance is rather a delicate actuarial exercise; (ii)
Technical reserves built up should represent the liabilities
• The received premiums should be sufficient to fund expected claim
&administrative costs and provide an expected profit
• Fair premium: the premium level that is just sufficient to fund insurer’s
expected cost and provide a fair ROI is known as fair premium
• Actuaries calculate the premium based on expected claims distribution
using principle of equivalence (P) such that
– P = E(S) + k + R
– E(S) – Mathematical expectation of claims
– k – ongoing running costs
– R – Risk Premium
 Fundamentals of Insurance
Pricing
• Pure premium: it includes the amount needed to cover expected losses
and loss adjustment expenses
• Operating expenses: it includes the sales commission, other marketing
costs, taxes and costs of handing claims. It varies from one line to another,
largely dependent upon the extent &variety of policyholders services
provided
• Margin and other incomes: it includes an allowance for (i) contingencies
and (ii) underwriting gain
• Rating terminology
– Insurance price: insurance prices are called as premium
– Rate: price per unit of insurance
– Exposure unit: are quantitative units used in insurance pricing
– Loading: the amount added to the pure premium
Fundamentals of Insurance
Pricing
Kind of Insurance Exposure unit
Fire, WC Rs. Per 100
Product Liability, Life Rs. Per 1000
 Pricing objectives
• Pricing of insurance products is a critical issue
Marketers Pricing Underwriters

• TAC regulated rates for fire, marine (Hull), Motor, engineering and WC.
• Adequacy (to meet claims and generate fair ROI)
• Reasonableness (justify potential buyers in free market condition)
• Fairness (different rates for hetero groups and same for homo groups)
• Simplicity, consistency and flexibility
 Types of rating
Insurance rating assesses the cost of the insurance product. Depending upon
the type of rating, the price to the buyer may vary.
• Judgement rating: it is widely used in ocean marine and some lines of
inland marine insurance. It is used when the proposed risk is so unusual
that little or no statistical information about similar risk is available.
• Class rating: it is applied in life, motor, houseowners, mediclaim and WC.
– Twin considerations: (i) how many classifications and rates?; (ii) how
many characteristics should be considered?
– It can be determined by the formula = the amount of incurred losses
no.of exposure units
– It also can be calculated based on comparing actual and expected
claim loss ratios
 Types of rating
• Merit rating: it is a modification of the class rating.
– Schedule rating: (i) identify the features that are likely to cause losses
/prevent them (ii) compare with the standard risk of its type (iii) finally
deductions/additions for desirable/undesirable features.
• For a building the major factors taken into account are –
occupancy, construction, location, protection and maintenance. It
is subjective and important to identify the different features
– Experience rating: (i) the actual loss for a period of 2/3 Yrs is compared
with the avg. risk in the same class (ii) the rate is reduced/increased
based on better/worst record . It is applicable only to larger risks good
enough to reflect a trend.
– Retrospective rating: it used widely in liability and WC policies
• Rating based on current experience
 Life insurance Vs Non-life
insurance pricing
• In life main factors used to determine premium are: mortality, expenses
and interest. In non-life factors are: claims cost, business acquisition cost,
management expenses, margin for claims fluctuations, reasonable profit.
• Basics Life Non-Life
Simple class rating system based on Complicated several rating system
insured's age &sex. Only in group are used for variety of risks. For
Simplicity
insurance experience/retrospective commercial risks experience and
rating is used. retrospective rating is used.
Do not change frequently. Avg. Wide fluctuations accountable to
operating environment, claims
Stability mortality rates scarcely change
every year. Also overhead costs do experiences.
not change substantially each year.
Exact calculations because of Rating is less precise. Losses and
Precision
mortality expenses, investment their amount are uncertain.
incomes are significantly large. Maximum amount is specified but
Claims known in advance. not the loss payment amount.
 Rate making entities
• Professional rate making organisations: are the specialist in rate making
for insurers.
• Actuaries: are experts and uses mathematical models for the rate making
process. They are experienced in reviewing &analysing insurance
operations, reserves and U/W procedures and provide actuarial technical
assistance
– Developing new forms of insurance to meet the changing needs of
consumers
– Determining the reserves needed to meet the future obligations
– Analysing the expenses and earning &providing database for
distribution of surplus
– Conducting research studies on claim experience, projecting future
claims and earnings
– Communicating with the company officials, agents, policyholders and
regulatory authorities about company policies and practices
 Rate making entities
• A person shall be eligible to be appointed as an actuary for an insurer if
he/she shall be
– Ordinary resident in India
– A fellow member of the actuarial society of India
– An employee of the life insurer, in case of life insurance business
– An employee of the insurer or a consulting actuary, in case of general
insurance business
– A person who has not committed any breach of professional
misconduct
– A person against whom no disciplinary action by the actuarial society
of India or any other actuarial body is pending
– Not an appointed actuary of another insurer
– A person who possesses a certificate of practice issued by the actuarial
society of India
– Not over the age of seventy years
 Role of reinsurer
• Comparison of insurers and reinsurers
Insurance Reinsurance
Known as Direct/Primary/Ceiding
Name Insurer Known as Reinurer
Objective Individual transfer risk to insurer Insurer transfer risk to Reinsurer
Parties involved Insured and insurer Insurer and reinsurer
Subject matter Property, life etc Insurance companies
Coverage Comparatvely less complex More complex and much broader
Conditions Subject to Principes of Insurance Subject to Principes of Insurance
Risk transfer mechanism Reinsurance Retrocession
Generally in the beginning of each Simultaneously retrocessionaries taken
Time of Risk transfer year reinsurance is taken by reinsurance
Insurer can transfer all/part of the Reinsurers can transfer the risk to one
Amount of Risk Transfer risk to one or more reinsurers or more reinsurers
Liable to settle claims to Liable to share the claims with the
Claim Liability individuals cedent as per agreement
 Role of reinsurer
• Three essential services of reinsurers
– Reinsurance company enables direct writing companies to even out
their results when major, exceptional, losses occur
– Reinsurance companies increases the insurable capacity of the direct
insurer
– Reinsurance also provides insurers with the large amounts of cash
needed in the event of a major loss (better asset management)
• Support services
– Training of technical and administrative personnel to practical
assistance in organisations, accounting and data processing, risk
inspection and co-operation in claims settlement
 Role of reinsurer
• Specialised service
– In case of Major public works’ projects, term life insurance policies
written on substandard patients, reinsurers are more familiar with the
relevant statistics and rates & capacity to cover cedents’ exposures
• Capital base
– Laws enacted on maintaining solvency margin. In life insurance, when
new type of policies are first issued reinsurers can finance and share
ROI.
 Nature of reinsurance
• There are no characteristics uniquely attributable to the risk associated
with proportionate reinsurance.
• A great deal of uncertainty associated with excess of loss reinsurance. The
level of risk is decided by line of reinsurance, overall stability of cedent
and the layer of coverage
• Excess of loss reinsurance claims – relatively low frequency &very high
severity and unstable. Due to this reinsurer may absorb disproportionate
losses
• Liability reinsurance – “long tail” lines create worst problems for reinsurers
• For loss estimation, Insurance underwrite rely on a combination of
frequency, severity and the total no. of units insured. The law of large
numbers applicable. Ex: the frequency of motor insurance claims is
relatively stable
 Nature of reinsurance
• A reinsurance underwriter rely on professional judgement &experience for
loss estimation. Since relevant &credible loss data is often unavailable and
law of large number also often not applicable.
• Nature of occurrence policy – long tail nature. Ex: environmental liability
policy
• Many claims not valued initially at ultimate cost. Generally, the reinsurer is
notified only when the ultimate claim exceeds the Retention limit.
Solutions: (i) Insurer can be asked to notify all the claims (ii) On site claim
file inspection by reinsurer
• Reinsurance is used heavily in commercial lines characterized by unstable
frequency &severity and often have long tails. All insurers and reinsurers
set aside reserves for IBNR (Incurred But Not Reported)claims
 Nature of reinsurance
• Since IBNR is such a major component of reinsurers’ reserves, companies
use variety of methods to establish. This future loss payments are
extremely sensitive to social, legal and economic environmental changes
• Based on the past experience the proportion of IBNR to total loss reserves
may vary. Ex: casualty and WC reinsurance lines will have large IBNR
proportion
• The impact of inflation results from increase in (i)cost of living, (ii)no. of
claims paid and (iii) large jury verdicts. It affects reinsurer heavily because
it develops slowly
• If claims are paid in shortly then inflation is insignificant. But, In many
instances, the ultimate loss will be known by the reinsurer after decades.
 Nature of reinsurance
Reinsurance contracts
Terms, Conditions and costs of Reinsurance
Insurer Reinsurer

Broker

• Two basic types of reinsurance: treaty and facultative. Treaty

automatically cover all risks fall with in their terms without reinsurers’
review. Facultative is written on an individual basis after review.
• Treaty demands a careful review of - U/W philosophy, practice and
historical experience of cedent; claim mgt attitude, mgt general
background, expertise and planned objectives
 Nature of reinsurance
• Facultative terms &conditions are negotiated every time when policy is
issued. But treaty is applicable to either a class or classes of business for
long periods.
• facultative presents significant potential losses, demands technical
resources to underwrite exposures accurately
• Facultatives are also used to cover risks excluded by treaties. Ex: Long haul
trucking or munitions manufacturing
• As a service to insured, insurer may agree to provide commercial
automobile coverage. Since it is too risky insurer will prefer to take
facultative but the reinsurer may not provide.
• Retrocession is used by the reinsurers to transfer the risk
• Different layers of reinsurance can be used by insurer.
 Nature of reinsurance
• Fundamental principles of reinsurance contracts
– Parties to the contract: direct insurer and reinsurer
– Reinsurer liability is the asset of the direct insurer
– Direct insurer can recover proportionate share only after claim
settlement to insured
– If the insurer is insolvent, then the insured can deal directly with the
reinsurer (if insolvency clause inserted)
 Bancassurance
Concept
• Bancassurance is a new distribution channel for marketing insurance
services
• Established banca channels can take impressive LI market share (Ex: 55%
in france; 20% to 30% in many other European countries)
• Banca is a partnership between a insurance company and a banking
institution. It aims at offering wide range of financial products to large
base of customers.
• Key attractions: trusting customer relationship; branch name recognition;
cash management relationship with corporations and cost effective
 Bancassurance
Need
• Agency commission 5% to 10% of annual premium throughout the length
of the policy. But the banca will cost just 20% for one time.
• Declining trend of agency business and market share demands Banca.
• Specially designed products to fit the huge customer base of banks
• Banca increases ROA (Return on Assets) through sale of insurance
products
• Leverage: banks can effectively cross-sell financial products can leverage
distribution &processing capabilities
• A large retail customer base enhance banks to sell personal line of
business easily. Also, face to face contact is possible
 Bancassurance
• Lower cost per lead made possible by their loyal customer base. Also,
banks enjoy significant brand awareness.
• Other strengths: marketing (Existing customers-retention &cross selling;
Non-Existing customers- Acquisition &awareness) and processing
capabilities.
• Reasons for success of European banca channel:
– Data mining
– Leveraging reputation &distribution system
– Tailored products and sales techniques
 Bancassurance
Bancassurance models
– Distribution Alliance
– Joint Venture (Banks-reputation &brand name; Insurer-Products, U/W
and service expertise)
– Leveraged life distribution
– Leveraged Bank distribution
Common features
– Enhanced customer service
– Leverage of existing assets
– More income
– Greater productivity
– Quality sales culture
– Improved staff retention
– Cross-selling opportunities
 Bancassurance
• Key issues to be addressed
– Improving effectiveness of the sales channels
– Products need to be tailored
– Communication
– Processes need to be redesigned
– Information system need to be reviewed
– Skills need to be developed
 Partnership Models

Arms Leveraged Life

Length Broker Driven
(Warm Distribution
Broker develops and
leads/ Bank provide prospects
reputa
owns proprietary
and insurer sales force
tion model
only)
sells

L Leveraged bank
Bank/insurer JV
E Distribution
A Bank &Insurer share
Bank leverages own
D their advantages and
E sales force/distribution
profit
R sells

LEADER Arms Length (product

only)
 Bancassurance
Number of banks
• Nationalized Banks: 19
• Private sector banks: 27
• Foreign Banks: 30
– Total no.of branches of Commercial Banks: 80,000 (Metro-14k; Urban-
16k; Semi-urban-18k and rural branch 32k)
– Total no.of SB A/c 310 million (200 million if multiple A/c excluded)
consist of diff. age group, occupation &income
– Complete knowledge o financial profile
– Well trained, experienced &multi-skilled bank employees are over
8,69,000
– Excess of manpower due to process reengineering can be utilized to
sell insurance
 Bancassurance
• Pressure to offer higher interest on deposits as well as competitive rates
on loans. These factors compelled banks to go for fee/commission based
income
• Role of increase in savings ratio: 35% of the GDP (on an avg recently)
consists of domestic saving rate
• Banks have second largest reach in the country after post offices. The
customer accessibility with great speed and lesser cost is possible
 Bancassurance
Strengths of banking system in India
• Credibility
• Huge network and strong network mechanism
• Fee-based incentives increases employee productivity
• Complementarity between some products (property loans)
• Reliability
• Retention of customer loyalty by offering wide range of financial products
• Lower penetration cost
• Declining NPA ratio enhances banks to enter directly in insurance business
• Tie-up with co-operative/rural banks helps insurer to access rural
communities cost effectively
 Bancassurance
• Over 40% of household savings lie with banks
• Access to multiple communication channels (E-mail, mobile banking,
direct mail, telemarketing, ATM’s etc)
• Employees’ proficiency in using technology
 Natural roles for partners in a start-up

Develop the Build Generate Sell the Process the Administer

product Distribution sales leads product policy the policy

Banks

Insurer

Broker
 Comparison of banca Vs others
Banca Agency DM Broking
IRDA License Nil Required Nil Nil
Core business Banking Insurance Motor Insurance Shares and etc
Non-motor More Less Almost Nil More
Premium Dis. Low Vary High Moderate
Premium Size Essential Vital Considerable Sizeable
Profitability High Moderate Low Vary
Renewals High Moderate Low Moderate
Issuance of risky Yes No No No
Insurance

Customization Yes No No Yes

Accuracy of High Moderate Low Moderate
customer details
Bancassurance in India - SWOT
Strengths
• Huge pool of skilled professionals
• LIC and GIC both have good range of personal line products
• LIC and GIC have good no.of branches
• Low cost per customer
• Skilled employees have faster learning curve
• Low cost for training
• Earning by the way of commission
• Compulsory sale of insurance along with disbursement of loan
• Integrated financial services under one roof
Weakness
– Lack of IT innovations (WAN,LAN etc)
– The middle class customers are burdened due to inflation and tax (LIC
policies attract tax exemption)
– Inflexibility of products (not tailor made)
 Bancassurance
• Opportunities
– Vast untapped potential
• 900 million lives waiting to be given life cover
• 200 million households waiting to be approached for a
householder's policy
• Millions of people travelling in and out of India can be tapped for
overseas mediclaim and travel insurance policies.
• Middle class market is the second largest in the world after China
– Vast database
– Good IT can do wonders
– Favorable RBI and IRDA norms
– Excess of manpower can be used to sell insurance
– Face to face contact is possible
– Can boost productivity
 Bancassurance
Threats
• Resistance to change
• Non-response from target customers
• If the unholy alliances are allowed to take place, there will be unhealthy
competition and break-even cannot be touched
 Insurance Accounting
Accounting
• The primary income of an insurer is the direct premium income and
reinsurance. The other income consists of ROI etc
• The expenses are: claims settlement, loss adjustment expenses (Surveyor
fee), commission, management expenses etc
• However the difference between income and outgo does not necessarily
indicate profit/loss (The reserves need to be taken into account)
Reserves for outstanding claims
• Claims occur during each year are paid out of current premiums. At the
end of financial year, unpaid claims have to be settled in the following year
• These unpaid claims may be in the process of investigation, survey,
arbitration or litigation. Some claims surveyed and finalised for payment
but actual payment may not have been effected
 Insurance Accounting
• An amount to be set apart from current premium to meet the outstanding
claims called Reserve for outstanding claims
• These reserves include (i) reported but not yet surveyed; (ii) reported and
surveyed but not yet paid; (iii) IBNR (Incurred but not reported)
Unexpired Risk Reserves
• Almost all general insurance policies are annual contracts. As they are
issued throughout the year, they will expire on different dates. Many
policies will extend beyond financial year end
• Reserve to meet these unexpired liabilities are called unearned premium
reserve
• If we calculate unexpired portion of the policy it would be voluminous
process
• Unearned premium reserve = 62% (Appr)
– If we deduct short policies – 60%
– If we reduce commissions and mgt expenses – 40%
• Unearned premium reserve in Fire and miscellaneous – 50%; Marine –
100%
 Insurance Accounting
Other reserves
• Special reserve for a class of business or general reserve, in the event of
catastrophe such as an earthquake, flood etc
• Investment reserve to provide losses on investments due to economic
conditions, reserves for bad debt and reserves for taxes.
 Valuations
• The valuation firstly, determines the total net liabilities of the insurer and
secondly, compares his liabilities with the available funds. Ultimately
reveals whether the insurer has sufficient funds to meet obligations
• Purpose: (i) to determine solvency; (ii) To determine divisible surplus
• Calculation of net liabilities
– Prospective value (the excess of present value of future claims over
the present value of the future premiums is called net liability)
– Retrospective method (Accumulated fund Vs Assumed reserve)
– Bases of valuation of net liabilities: mortality rate, rate of interest, rate
of expenses and bonus rates
 Valuations
• Calculation of life insurance fund
– Difference between all incomes and expenses – LI fund.
– LI fund Vs LI Reserve
• Comparison of net liabilities with LI fund
• Treatment of deficiency
• Treatment of surplus
– Sources of surplus: Excess interest, savings from mortality, savings
from loading, lapses and surrenders and bonus loading etc
– Methods of distributing surplus: uniform bonus plan (Based on policy
amount), contribution method (the contribution of a particular type of
policy to the total surplus)
 Valuations
• Calculation of bonus
– Bonus on the basis of calculation (uniform Vs contributory)
– Bonus on the basis of vesting (Immediate Vs Deferred bonus)
– Bonus on the basis of results (Final bonus Vs interim bonus)
• Types of bonus
– Cash bonus
– Reversionary bonus (Simple Vs Compound)
– Reduction in premium
– Accumulation at interest bonus
– Endowment option
 Solvency margin
• LI – An amount of 50 crore of rupees or a sum which is based on a formula
given in the Act and the regulations there under whichever is higher
• GI – 50 crore of rupees (100 crore for reinsurer)
– A sum equivalent to 20% of net premium
– A sum equivalent to 30% of net incurred claim
Whichever is higher
• Working solvency margin as per 1.5 for all insurer to be maintained all the
times
• Filing of solvency margin – June 30th, Sep 30th, Dec 31st and Mar 31st
 Performance measures
• Other performance measures includes operating expense ratio,
commission expense ratio, paid up capital etc
• Loss ratio = loss incurred/premium earned
– (or) loss incurred + loss adjustment expenses/premium earned
– (or) loss incurred + loss adjustment expenses + IBNR/premium earned
• Expense ratio = expenses incurred/premium written (used to determine
cost of acquisition)
• Combined ratio (trade ratio) = loss ratio + expense ratio
• Kenney rule: net premium < 3 * policyholders surplus
– Policyholders surplus > ½ * Total reserves
• Cover ratio: net premium written/loss reserves + policyholders surplus
– It is used to measure financial strength
 Performance measures
• Actual expected mortality:
• Interest realization ratio = interest earned / interest projected (Ideally
should be > 100%)
• Lapse ratio = policies lapsed during the year / policies in force at the
beginning
– (or) policies lapsed / policies at the beginning + policies made
• Attrition rate = insurance in force at the beginning of the year – insurance
written during the year – insurance in force at the end of the year /
Insurance written during the year