Striking The Perfect Balance: Volume VI, No. 6

Volume VI, No.
May 2008
Assets
Liabilities
ALM -
Striking the Perfect Balance
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IRDA Journal (Vol 6 Iss 6) FINAL.pmd 1 13-05-2008, 12:03
Editorial Board
C.S. Rao
C.R. Muralidharan
S.V. Mony
K.N. Bhandari
Vepa Kamesam
Ashvin Parekh
Editor
U. Jawaharlal
Hindi Correspondent
Sanjeev Kumar Jain
Printed by Alapati Bapanna and
published by C.S.Rao on behalf of
Insurance Regulatory and Development Authority.
Editor: U. Jawaharlal
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Please reproduce with due permission.
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and Development Authority.

From the Publisher
A
s I prepare to demit office as a move would result in a collapse of the large to be ignored and what we witness
Chairman by the middle of May on market. The prophets of doom have been now is a second wave of licensing involving
completion of 65 years, I look back proved wrong and we have a thriving non- multinational insurers teaming up with
to these years of association with the life market with all major international Indian Corporates, specially Banks.
Authority as one of the most satisfying reinsurers actively supporting the local
The enormous increase in the market has
periods of my professional life spanning insurers. The next step of giving freedom
caused severe strain on the limited human
four decades. I could see insurance grow to insurers to determine the terms of
resources available to the Regulator.
from a sapling into a mighty tree and contract is on the anvil and would be
Efforts are on to put in place a system of
secure for itself its rightful place in the operationalised soon.
direct recruitment of staff and officers;
financial sector. It is no longer a poor
A major shift in the non-life market is the and over a period of time, it should be
cousin of Banking or Capital Markets! It is
emphasis laid on retail business as opposed possible to equip the office to meet the
a flourishing industry competing
to obsession with corporate business. challenges of this expanding market.
effectively with others and mobilizing Within the retail segment the health
savings of individuals and making them I recognize that in this long journey of the
insurance market has grown substantially
available for building much needed insurance market in India, we are at the
and for the first time we have stand alone
infrastructure. initial stages and it had been my endeavour
health insurance companies licensed to do
to guide the market as also the supervisory
Those who advocated the freeing of business only in health related activities.
mechanism to get the best out of the free
insurance from Government monopoly This is an area that has immense potential
market and avoid the pitfalls inherent in a
believed that the country had immense and I have no doubt that with the combined
market that is never perfect. If I have
potential waiting to be tapped. The efforts of the State and Central
succeeded, at least in a small measure,
enormous growth in the premiums in the Governments, the insurance companies
the credit should go to the support and
last few years, specially in the life segment and, the Regulator; the country would see
cooperation that I received from the
has proved correct these advocates of a thriving health insurance market in the
Members of the Authority, the band of
change. An interesting lesson that we have years to come.
dedicated officers and staff of the
learnt is that this growth need not be at The micro insurance regulations that the Authority, a number of insurance
the expense of the public sector. The Authority introduced have been professionals and the understanding
insurance pie has enlarged to such an appreciated not only in India but also by shown by the insurers. I am thankful to all
extent that each company can have its the community of regulators in the rest of of them.
reasonable share and there is enough space the world. The International Association
for more to participate. The drive for I would also like to place on record my
of Insurance Supervisors (IAIS) has
premium is so compelling that private deep sense of gratitude to Sri C.N.S.
constituted a working group on micro
insurers have expanded their reach to the Shastri, who in an Honorary Capacity as
insurance with India as an active member
small and medium towns and with these Advisor, provided guidance and advice in
to arrive at supervisory and regulatory
critical areas of detariffication of the
places as base they are reaching out to standards for adoption by supervisors
market and in developing sound
the rural areas. world over.
supervisory practices.
In the non-life segment, tariffs were The strides made by the Indian insurers in
removed in all segments last year and the the last few years have resulted in a revival
insurers given the freedom to determine of interest among multinational insurers.
rates. There was apprehension that such C.S. Rao
They realize that the Indian market is too

Asset-Liability Management by Insurers
FOCUS
- Ashwin Parekh 7
ALM in Indian Insurance Companies

- Sunil Kakar 11
Changing Priorities in a Dynamic World

- Arup Chatterjee 14
ISSUE
ALM in the Financial Services Industry

- Khusroo Panthaky 21
SRI and Relevance of ALM

- Rajesh Khandelwal 25
THINKING CAP 28
Statistics - Life Insurance 4
Vantage Point
Risk Management within Financial Services
U. Jawaharlal 6 - V.S. Lakshmi
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gÁ}. ™ÁzuåN˛Á NÏ˛¬»z…e 40
N˛Á™ N˛∫ı \“ÁÊ N˛“Î FOLLOW THROUGH
™ÁNz˛|ubÊT ÃÁzY “y Ã“y
∫Ááz≈ÆÁ™ ∆™Á| 42
quoúÓuo| osÁ ÃÊ∫qm §y™Á - 33 Some Thoughts on Microinsurance
N˛ÏZ ªuYúÓƒN| ˛ o·Æ - Tina Makhija
åuãtoÁ §zå\y| 44
Statistics - Non-Life Insurance 46 36 Conscious Options for Protection
- Gary R. Bennett
Round up 47

from the editor
Need for a Sound ALM

- Top Management Imperative
A
sset Liability Management (ALM) is a very vital function for the top management of an insurance company.
Managements are required to strike that delicate balance between risk and return; and in an industry
where the liabilities can arise without notice, it is not an easy task to accomplish. While the immediate
aftermath of a structured ALM planning may not be indicative of any crisis, the real effects may surface in the
long run – differently for different geographic regions. If one were to look at past experiences, history would be
witness to the fact that several insurers failed in keeping in place a good ALM initiative and had to pay a very
precious price.
The priorities for an insurer in the area of ALM would differ not only with the actual line of business but also by
the different types of products that together compile their portfolio. The sets of priorities, for example, would
be vastly different for a life and a non-life insurer. Considering the type of commitments made to their
policyholders, insurers should plan their investments accordingly. In the process, it is very essential that initial
lure for a higher return could be very enticing but insurers should ensure not to fall prey to such ephemeral
gains but should look for long term sustenance. The past experiences associated with corporate entities where
investments are proposed to be made should be looked into thoroughly.
The global financial environment is changing rapidly and this could have a far-reaching effect on the entire
economic scenario – like the sub-prime crisis that we have witnessed recently. It is very essential that insurers
take into consideration all the possible factors that could influence their business, both in the short term as
well as in the long term. A thoroughly planned, strategic ALM should be a top priority for the management of an
insurance company.
‘ALM for Insurers’ is the focus of this issue of the Journal. We open the highly intricate issue with an article by
Mr. Ashwin Parekh who discusses the dynamics of the inter-active forces associated with this very vital function.
In the next article, Mr. Sunil Kakar talks about the importance of product alignment in designing a proper ALM.
The need for insurers all over the world having in place a sustainable ALM strategy has been occupying the
minds of international supervisors, in order that insurance business as a whole lives up to its reputation of
keeping its promises. Mr. Arup Chatterjee of IAIS writes about the importance of ALM and the role of IAIS in
ensuring sound ALM practices. In an article that describes the role of ALM in the financial services industry
generally, Mr. Khusroo B. Panthaky enumerates the various risks that corporates in financial services industry
have to consider. Mr. Rajesh Khandelwal opines that insurers should look beyond mere monetary returns; and
talks about the role of ALM in socially responsible investments.
In the ‘Thinking Cap’ section that follows, we have an article by Mrs. V.S. Lakshmi who describes in detail the
importance of Economic Capital in the whole process of risk management for an insurer. We have two articles
in the ‘Follow Through’ section – one by Ms. Tina Makhija in the area of Microinsurance; and the other by Mr.
Gary Bennett that talks about the role of life insurance products in the rapidly changing environment. Health
Insurance continues to hog the limelight in the Indian domain for more reasons than one; and we thought it
proper to focus on this area again in the next issue of the Journal.
Mr. C.S. Rao will be demitting office as Chairman, IRDA during the course of this month after a very eventful and
successful stint. He has been a great source of inspiration and guidance for all of us at the Journal. I, in my
personal capacity as the Editor of the Journal; and all the others associated with the Journal, wish him a very
happy and peaceful retired life.
U. Jawaharlal

IRDA Journal (Vol 6 Iss 6) FINAL.pmd
Report Card:LIFE
statistics - life insurance

First Year Premium of Life Insurance Industry - 2007-08 (Unaudited)
Sl
Premium u/w (Rs. in Crores) No. of Policies / Schemes No. of lives covered under Group Schemes
No. Insurer
6
March, 08 2007 - 08 2006 - 07 March, 08 2007 - 08 2006 - 07 March, 08 2007 - 08 2006 - 07

1 Bajaj Allianz
Individual Single Premium 168.83 735.21 1179.12 23526 102771 173166
Individual Non-Single Premium 1057.50 5568.63 3027.55 625460 3641575 1905767
Group Single Premium 0.20 8.52 5.89 0 0 1 230 6704 3486
Group Non-Single Premium 134.61 179.36 57.22 108 396 283 780136 1992621 844480
2 ING Vysya
irda journal

3 Reliance Life
4
4 SBI Life
May 2008

5 Tata AIG
13-05-2008, 12:04

6 HDFC Standard
7 ICICI Prudential
8 Birla Sunlife
9 Aviva
Group Single Premium -0.14 1.65 3.10 0 0 1 53 1091 1790
10 Kotak Mahindra Old Mutual

d dua o S g e e u 88.03 80. 656. 0 3863 338
Group Single Premium -0.14 1.65 3.10 0 0 1 53 1091 1790
10 Kotak Mahindra Old Mutual

IRDA Journal (Vol 6 Iss 6) FINAL.pmd

statistics - life insurance

11 Max New York
12 Met Life
7
13 Sahara Life
14 Shriram Life
irda journal

15 Bharti Axa Life
16 Future Generali*
5

May 2008

17 IDBI Fortis Life**
13-05-2008, 12:04

Private Total
18 LIC
Grand Total
Note: 1.Cumulative premium upto the month is net of cancellations which may occur during the free look period.
2. Compiled on the basis of data submitted by the Insurance companies
3. * Commenced operations in November, 2007.
4. ** Commenced operations in March, 2008.
vantage point
Progress of Health Insurance

WORKING TOWARDS A HEALTHIER SOCIETY
'THE GROWTH BEING OBSERVED IN THE HEALTH INSURANCE CLASS SHOULD BE SUSTAINED. HOWEVER, WE SHOULD NOT
GET CARRIED AWAY BY THE MERE QUANTUM OF GROWTH BUT SHOULD WORK TOWARDS ATTAINING BETTER TRANSPARENCY
IN THE HEALTH INSURANCE CONTRACTS IN ORDER TO ENSURE A MORE SATISFIED HEALTH INSURANCE POLICYHOLDER'
SAYS U. JAWAHARLAL.
T
he steady progress that Health merits of a case, the over-riding factor personal portfolio and tendencies of
Insurance has been making in more should be to analyze whether there has resorting to buy health insurance ‘on the
recent times continues to be seen; been an intention to defraud the insurer. way to a hospital’ must be curbed.
and it augurs well in a country where out- Mere pre-existence of a condition that the
One area that has been hogging limelight
of-pocket spending for healthcare has been applicant never had an occasion to know
recently is providing health insurance to
very huge. It is also additionally gratifying should be treated more sympathetically so
the senior citizens at more softer terms.
to note that it is not merely by the sales that the misgivings associated with the
On the one hand, there is no denying the
driven mode that this sector is growing but health insurance industry are sought to be
fact that as age advances, proneness to
out of a voluntary participation by an removed. Very strict interpretations,
ill-health also goes up and accordingly the
increasing number of individuals. The particularly in letter, would tend to stifle
risk factor increases. But on the other,
various attempts to spread awareness the spirit of a contract.
when there is a decline in the amount of
among the common people seem to be
There is a role for all the stakeholders in earnings; there is need for availability of
bearing fruit and this is yet another
arresting moral hazard that is the bane of health insurance more easily. Insurance
significant achievement over the past few
the health insurance sector. If we are to industry must look at this paradoxical
years. As a part of the continuing progress
achieve greater participation in voluntary situation more sympathetically. At the
of this class, more and more policyholders
health insurance, all the forces have to same time, people must realize that
should clearly understand the basic
work as a team and ensure that the evils starting at an early age always gives them
concepts of insurance; and more
associated with the class are fought tooth the advantage of reaping the fruits
specifically the various clauses applicable
and nail. Practices like differential more easily.
in the health insurance contracts.
treatment of patients by hospitals based
We have done an issue on Health Insurance
Insurance works on the basic premise of on their insurance status that is very often
a few months ago and the response was so
uncertainty, for which reason insurance reported in the print or the visual media
overwhelming that we are tempted to go
contracts are said to be aleatory in nature. should be arrested sooner than later.
for an encore, with the unfinished agenda.
As a natural corollary of this factor, pre- Emphasis should be laid on educating the
The focus of the next issue of the Journal
existing diseases or conditions are to a general masses about the evils arising from
will be on ‘Health Insurance’.
great extent excluded in a health insurance reproachable practices. Health insurance
policy. However, while interpreting the must be purchased as a major part of one’s
Health Insurance
... Giant Strides of Progress

in the next issue...
irda journal 6 May 2008

issue focus
Asset-Liability Management
by Insurers
TOPMOST PRIORITY
ASHWIN PAREKH WRITES THAT ALM IS A TOP MANAGEMENT FUNCTION OF VITAL IMPORTANCE; AND FAILURE TO ASSIGN DUE
VALUE TO IT COULD LEAD TO DISASTROUS RESULTS, EVEN BANKRUPTCY OF THE INSURERS.
F
inancial institutions like insurance at large. The management of assets is
companies provide services which increasingly becoming a challenge
expose them to certain kinds of risks compared to liability as the money and
such as credit risk, interest risk and investment markets are becoming more
liquidity risk. Also, the assets and liability volatile and choppy.
items have their respective characteristic
Risks are now
An insurer that does not coordinate its
in regard to rates/price and tenure. The compounded by the
decisions on assets and liabilities is
cash flow and cash requirements arising
courting disaster. Nissan Mutual Life, a increased
out of anticipated or unusual liability in
company with 1.2 million policyholders complexity of
claims also pose additional challenge.
Asset-Liability Management (ALM) is a
sold individual annuities paying guaranteed product design,
returns of 5%-5½% without hedging these
process which helps institutions to measure
liabilities. A plunge in the government bond
more stringent
and monitor these characteristics and
yields created a large gap in its earnings scrutiny from
identify mismatches which need to
be managed.
and on April 1997, the company was regulators and a
ordered to suspend its business. Two
greater availability
The financial services industry and decades earlier, a mismatch between the
insurance in particular, is not new to the assets and liabilities of a US mutual life of various investing
concept of Asset-Liability Management. We insurance company, The Equitable, caused options for the
see signs of organized knowledge it to go under. During the early 1980s, the public, at large.
development in the subject in the US in USD yield curve was inverted, with short-
order to address interest rate risk, which term interest rates spiking into the high
became a major concern in the 1970s, teens. The Equitable sold a number of long-
when rates increased sharply and became term guaranteed interest contracts (GICs)
far more volatile than they were earlier. guaranteeing rates of around 16% for
What is new to the industry, however, is periods up to 10 years. During this period,
on the GICs. The firm was crippled.
the nature of exposure that firms have to GICs were normally for principal of USD
Eventually, it had to demutualize and was
two basic risks - those of liquidity and 100MM or more. The Equitable invested the
acquired by the Axa Group.
interest rate risk. Risks are now assets short-term to earn the high interest
compounded by the increased complexity rates guaranteed on the contracts. Short- The non-life insurance sector is
of product design, more stringent scrutiny term interest rates soon came down. When characterized with a yearly tenure
from regulators and a greater availability The Equitable had to reinvest, it couldn’t contracts. The asset-liability management
of various investing options for the public, get nearly the interest rates it was paying problem is largely limited to cash flow

issue focus
management and liquidity management so have been developed. Each of these taking care of changes in the value of
as to service the claims efficiently. The methods tends to focus on different duration due to interest rate
same is being achieved through the aspects of the risks. movements.
reserving methods applied to each line of • Cash Flow Matching Immunization comes with its own
business. The penetration of typically long Cash Flow Matching involves term wise drawbacks. The duration of many assets
tail liability insurance and long term matching of positive and negative cash and liabilities is difficult to estimate,
managed health insurance products in India flows to identify any potential points of especially in non-life insurance. Also, the
is low. These products, especially liability a liquidity crisis. The positive cash flows method is unable to deal with liquidity
products, bring in additional amount of originating from the assets at the end of risk in a sufficient manner. While the
risk for the insurers as a huge claim each term, say quarter, are calculated market value of the firm’s assets and
can arise even after many years of the and the same is done for the liabilities. liabilities might remain constant with
coverage period. In order to ensure a perfectly hedged changes in interest rates, the firm might
It is life insurance, where the importance position, the net cash flows should be get into a liquidity trap. Finally,
of the asset-liability management zero in each term. duration/convexity analysis only works
increases manifold. Life insurance The method is simple to implement, in the scenario that the yield curve
contracts are normally longer term though it comes with its drawbacks. The movements are parallel. In a non-parallel
contracts of more than 10 years. Life method is unable to factor in interest movement of yield curve, the analysis
insurers have to manage both their assets rate risk as the cash flows are assumed breaks down.
in terms of risk/return profiles of the as deterministic. Uncertainties of cash • Scenario Analysis
investments and liabilities which emerge flows due to exogenous factors such as Scenario analysis was adopted by the
from the design and pricing of the product a catastrophe are difficult to factor, National Association of Insurance
by the insurer and the business mix in terms especially for non-life insurers. And Commissioners in the US in 1993, to
of premium mode, maturity profile etc. finally, the method imposes restrictions verify that they hold sufficient reserves.
on the exposure of the firm. For
In the post liberalization era, the life
example, if a firm strongly believes in a
insurance market in India has moved
rising yield curve, for the next few years,
towards the unit linked products, although
it might want to position its portfolio in
a significant portion of the new business
order to gain from riding the yield curve.
still comes from the traditional guaranteed
returns products. At the very start of • Duration/convexity analysis or
operations many private players offered Immunization
A more simple, but effective way to
unit linked policies also with minimum
address interest rate risk is using
In the post
guaranteed interest returns. Life Insurance
Corporation of India has close to 225 mn duration and convexity matching. The liberalization era,
policyholders and a majority of the process involves structuring the the life insurance
company’s portfolio so that impact of a
policyholders are covered by interest
change in interest rates on the value of
market in India has
guarantee on the life insurance or
pension contracts. liabilities offsets the corresponding moved towards the
ALM helps avoid a situation where asset
impact on the asset values. The duration unit linked products,
of a portfolio is the weighted average of
values fall short of the liabilities arising the time periods of the portfolio’s cash
although a
out of the insurance contracts which can flows. Once the company has computed significant portion
in extreme cases lead to bankruptcy or
insolvency of the insurer. Traditionally, the
the duration of its assets and liabilities, of the new business
it should make sure that the two are
scope of ALM was mostly limited to the equal. If, for example, the durations of
still comes from the
‘asset’ side and hence ALM process is about assets and liabilities are both 10 years, traditional
choosing the investment portfolio to match
the liabilities i.e. hedging of liabilities.
a 0.1% increase in the interest rates will guaranteed returns
decrease the value of assets and
liabilities by 1%, thus providing a perfect products.
Methods of ALM Generic Methods offset. Convexity analysis, done along
of ALM with duration analysis, provides a more
Over time, three basic methods of ALM accurate method of immunization, by

issue focus
A simple analysis might consider five among different strategic alternatives.

scenarios, say reflecting assumptions The single summary statistic can be a
that over the next 2 years, interest rates utility measure or a return on capital
will rise 200 basis points, or rise 100 basis measure such as risk adjusted return on
points, or are flat, or decline 100 basis capital. The bivariate approach often
points, or decline 200 basis points. The involves creating a map called the
Simple models
next step is to project what will happen efficient frontier which depicts a set of entail lower costs
under each one in terms of the value of strategies that maximizes the financial and offer greater
assets and liabilities. An elaborate reward for a given level of risk.
analysis might project, under each
transparency. It is
• Results: Finally, the model provides a set
scenario, a bank’s cash-flow statement of results summarizing the lessons also easier to
and balance sheet at each time step. learned from the simulation. These communicate the
include distributions of key measures
While scenario analysis does address most assumptions and
of the concerns raised in the earlier two and some indication of which choice
variables most critically affect the results.
methods, it has its own drawbacks. It only
addresses risk due to the specific scenarios the results.
considered. Also, scenario analysis is
highly dependent on assumptions and
Simplicity versus Complexity
The four methods described above vary
output of the analysis is only as good as
significantly in complexity. While scenario
these assumptions. Asset and Liability classes
testing and cash flow matching are
One way in which firms tend to simplify
moderate in complexity, immunization is
Dynamic Financial Analysis (DFA) their ALM models is by the use of a single
a rather simple procedure and DFA is a
While all the methods focus on different asset and liability class instead of multiple
highly complex method. However,
aspects of asset-liability risk, no single classes, each demanding a different
practitioners disagree about whether it is
method is capable of comprehensively treatment, a different model. Thus,
preferable to use simple or complex
dealing with all the aspects of ALM. DFA is immaterial of the risk of an asset class,
methods as each has its own advantages.
one of the forms of ALM that has gained the classes are all pooled into one, the
Simple models entail lower costs and offer
acceptance in the insurance industry as it same done for the liabilities and ALM
greater transparency. It is also easier to
is more effective in dealing with a broader methods then applied. While the process
communicate the assumptions and the
range of ALM issues. The DFA consists of makes identifying asset-liability risk of the
results. However, simple models can lead
five main components:
to incorrect conclusions due to the balance sheet as a whole easier, it affects
• Initial Conditions: Initial conditions following drawbacks: the pricing decisions on policies
summarize the past performance of the undertaken. Independent of the risk
New business and future additional
company being analyzed and the inherent in a policyholder, the premiums
flexible premiums are generally
economy at large. that get charged remain same across all
not modeled
• Scenario Generator: The scenario customers. While an ideal situation would
Focus is largely on interest rate risk
generator constructs a set of plausible be to divide all assets and liabilities in all
scenarios for general economic Regulatory constraints are rarely possible risk buckets, cost considerations
conditions, the firm’s assets and its considered could limit the number of buckets to a
liabilities. The outputs of these Due to the complexity involved, asset- smaller number. Some ground rules for the
simulations are often summarized as liability interactions are generally not grouping are:
distributions. modeled
• Consider segregated funds separately
• Financial Calculator: The financial Diversification benefits are not taken (when no cross subsidy is possible)
calculator translates scenarios into into account.
• Consider each asset class separately
financial results. The level of detail Although the question of how complex a • Group bonds and derivatives by maturity
under which the calculator operates will model to use is a matter of style and
depend on the subject under discussion. • Group equities and property into a
approach, costs also figure in the decision.
single index
• Optimiser: An optimizer uses a single Nowadays complex models have become
summary statistic, or a pair of summary more affordable because of advances in More detailed ground rules can be formed
statistics in order to evaluate and select methodology and fall in computer prices. on a case basis.

issue focus
Participatory and Non-partici- The Asset Liability Interaction Dynamics

patory holders
A specific example of the need of bucketing
of liabilities is the differential treatment
that should be meted out to participatory
and non-participatory holders.
Participatory holders could be considered
as less risky as part of the claim risk is
transferred back to the holder by linking
his/her bonuses to the profit made by the
company. Even among non-participatory
holders, the risk profile of unit linked
policies will be different from the plain
vanilla type policies.
Deep Rooting ALM in Insurance

Companies
Portfolio and pooling approaches used in
the insurance companies for grooming the
efficacy of AL management event have the • Assembling reliable data: There is a need thousands of times. It is important that
following tasks. to then gather reliable data on the the results of these calculations are
• Identifying key objectives: Before company’s major risk exposures and summarized in a way that leaves the
implementing ALM, management needs asset-liability interactions. A simplified findings simple and clear.
to identify questions of greatest interest asset-liability interaction in a life • Developing additional stress testing
by asking questions such as what is the insurance firm is as shown in the requirements for the ALM model:
probability that the company will meet following figure, Risks and Value Looking back at the last 6 months stock
its earning expectations, or what parts indicators have to be identified and if market performance and the changes in
of the business pose the greatest risk to possible, quantified. Risk indicators the interest rates, it is very necessary
the company. Although a single ALM include to introduce stress testing to ascertain
analysis could address a broad range of Economic capital whether the reserves set aside by the
topics, some balance has to be struck insurance company are sufficient to
Statutory solvency margin
between the desire to answer a range cover say 10-15% drop in stock prices or
Shortfalls, given a market, regulatory
of questions and the need to keep the 50-75 bps change in interest rates.
or contractual target
model simple.
• Implementation of the model: An issue
• Selecting an appropriate methodology: Conclusion
to be decided here is whether the
The choice of methodology depends The article is aimed to impress the AL
company will implement the model
upon the main questions being answered managers in regard to the task ahead of
themselves or will they outsource the
by the ALM users. Questions could them in evolving sound ALM practices
implementation to a consultant.
feature which will support a higher order of
Designing and maintaining the model
Company’s ability to resist to stress management reporting and governance.
requires technical expertise that may be
scenarios The boards and the senior management of
scarce in the company. Rather than
Shape of earnings with actual situation the insurance companies must be provided
dedicating scarce resources to the task,
with quantified view of risks and
Cost of guarantees embedded in it may be preferable to have experienced
mismatches to support them in conducting
life products outside experts perform the task.
an effective role.
Is hedging with derivatives • Producing relevant output: Even a
appropriate? straightforward ALM exercise can involve
Need for reinsurance a large number of computations. Once a
range of variables is computed taking
Product pricing and design The author is Partner, National Leader –
into account many inter relationships, Global Financial Services, Ernst & Young Pvt.
Optimization of asset portfolio the entire exercise may be repeated Ltd.

issue focus
ALM in
Indian Insurance Companies
ESSENTIAL GUIDELINES
SUNIL KAKAR ARGUES THAT STRIKING A REASONABLE BALANCE BETWEEN ASSETS AND LIABILITIES FOR AN INSURER IS A
TRICKY JOB; AND REPLETE WITH TAKING INTO CONSIDERATION SEVERAL DYNAMIC FACTORS.
A
sset Liability Management (ALM) can management required. Non-participating non-participating endowment of 30 years.
be termed as a risk management non-linked contracts have significant For a single policy assuming no death,
technique designed to earn an investment guarantees and an insurer can there are certain cash flows like expenses,
adequate return while maintaining a have an upside/downside if the assets premiums and a benefit payout. The
comfortable surplus of assets over perform differently from the guaranteed cash flows in such a case can take the
liabilities. It takes into consideration the rates. Participating contracts, as the name following form.
nature of contracts sold, risk appetite of suggests, have an element of discretion • Duration Mismatch
an organization and its future goals and sharing of experience between the At an interest rate of 6%, the discounted
and plans. policyholders and insurer, and hence the
value of these cash flows is around INR
Another definition says that “Asset Liability investment risk is reduced but only to a
1,540. Suppose assets backing this
Management is the on-going process of limited extent. ULIPs are a class of
contract are also of the value 1,540 but
formulating, implementing, monitoring, contracts where the entire investment risk
all invested in a zero coupon bond of
and revising strategies related to assets under a standard contract is passed on to
5 years. A 1% decrease in interest rate
and liabilities in an attempt to achieve the policyholders and hence the
would make the liabilities equal to INR
financial objectives for a given set of risk investments are made in accordance with
4,675 and the assets INR 1,615. Hence,
tolerances and constraints.” the policyholder’s chosen assets. Hence,
post a decrease in interest rates of 1%;
asset liability management assumes prime
the organization is left mismatched to
Factors impacting Asset Liability importance in case of non-participating
an extent of INR 3,060. This phenomenon
Management and participating non-linked contracts.
is commonly referred to as duration
• Category of Plans Let us take an example before highlighting mismatch between assets and liabilities
There are primarily three categories of some of the important issues related to where assets are available for five years
plans currently being sold in the Indian asset liability management. Suppose an and liabilities are of significantly longer
market viz. organization sells a simple regular premium duration. It is a very real problem in
Non-participating non linked
endowment contracts
Participating non linked endowment Year 1 Year 2 Year 3 Year 30
contracts
Unit Linked Insurance Plans (“ULIPs”) Premiums +1000 +1000 +1000 +1000
Nature of contracts (or the liabilities) being Expenses -100 -100 -100 -100
sold is one of the most important defining
Benefit payout 80,000
criteria for the extent of asset liability

issue focus
insurance industry and more so in India premiums have been invested at the rate investments are usually made for
where market for long tenure debt is of 6% and then there is a sudden shock participating contracts where the
very thin. The insurers in India try and jump in interest rates to 9%. Before the downside risk is limited through sharing
employ cash flow matching or duration shock jump, assets and liabilities are of investment experience by changing
matching techniques to the extent matched at a value of INR 24,640 and the bonuses payable to policyholders.
possible, but still face a duration same duration. Now, post jump, market • Impact of Lapsation and Mortality
mismatch. rates go up to 9% but the portfolio rate There are additional complications in
• Inconsistency of Financial Measures could be in the range of around 7.5% real life operations of an insurer where
However, even if the insurers were able because of the earlier investments being rather than a single policy; there is a
to achieve a duration match, it would made at a higher rate. In such a portfolio of policies that are subject to
only be fruitful if there were a scenario, purely due to inconsistency of lapses as well as mortality. Hence, a
consistency in measures of liability and measurement, liabilities end up at sound ALM strategy for the business must
assets. Current practice in India to value INR 19,100 whereas assets fall down to consider the true nature of the
Held to Maturity (“HTM”) assets on a INR 14,700. contracts, business goals for an
book value basis and the liabilities are • Reinvestment Risk organization and ensuring solvency of
valued using a portfolio rate approach, Another implicit risk in this is a the life insurance operations. Different
which are broadly consistent. However, reinvestment risk where all future net investment strategies are tested along
any inconsistency in the relative money into the company (i.e. INR 900 in with liabilities including the new
valuation of assets and liabilities itself above example) needs to get invested business. Stochastic simulations can be
can lead to a mismatch risk. A at appropriate rates to cover the fixed carried out and highest return with
communication from the IRDA implies liabilities. Given the sensitivity of the lowest probability of insolvency can
that insurers would soon have to use outcome to even a small change in be targeted
market value of assets for demonstration interest rates, it is imperative for the
With Indian stock markets at an all time
of solvency purposes. Let us assume the insurers to find out ways to hedge this
high a few months back and the recent
organization sells the same example risk. One way is to enter into long-term
volatility, it seems there is a market from
contract and the policyholder has paid interest rate swap contracts where the
a section of the Indian consumers for
15 annual insurance premiums. These insurer can exchange its market variable
guarantees on their ULIPs. This need is
interest rate earnings with fixed interest
accentuated by the fact that in the
rate earnings. However, the market for
Indian stock markets, the options market
such long-term swaps is not developed
is limited to duration of less than a year.
in India. IRDA should further define and
Even the mutual funds are explicitly
promulgate rules that help insurers in
prohibited by the securities market
effectively countering this risk.
regulator SEBI to offer capital
One way is to enter Given the inherent investment risks in guarantees. In the wake of this, many
into long-term non-participating non-linked contracts, insurers have started offering
most insurers would avoid using equity guaranteed ULIPs to consumers and have
interest rate swap as an asset class. The commonly used effectively filled in the market gap by
contracts where the asset class for such liabilities is becoming writers of long term naked put
insurer can exchange government securities and corporate options. These guarantees are in various
bonds. Corporate bond market in India
its market variable forms like a guaranteed interest rate
presents its own challenges. Corporate credit or a return of premium and so on.
interest rate earnings bond market in India is very thin in terms Pricing for such guarantees involves
with fixed interest of both duration as well as issuers. Most significant model and assumptions risk.
rate earnings. of the issuers of good quality corporate Even then, the insurer is exposed to a
bonds are limited thus leading to significant downside tail risk where in
concentration of risks. extreme event scenarios, the economy
Additional investment return can be might slow down and stock markets may
earned through other investment classes crash. Hence, the non-availability of
like real estate and equities. But such appropriate hedges for these guarantees

issue focus
in the market exposes the insurance if assets and liabilities were closely
companies to significant downside risks matched.
because of the inability to transfer this • A long-term reinvestment risk is a real
risk. Insurer should consider limiting such
If liabilities are fixed, risk for an insurer where future
products to a percentage of portfolio to premiums need to get invested at
avoid getting into considerable risk of
then a close match
unknown market rates. Practical hedges
asset liability mismatch. should be aimed for through interest rate swaps might ease
Hence, to summarize, ALM for an insurer and if variable as in up the risk considerably.
should consist of and address the the case of • Investment guarantees are non-
following issues. diversifiable risks as compared to
participating
• ALM is of utmost significance for non- mortality risk where having a large pool
contracts, then some of people enhances diversification.
linked contracts sold by an insurer. An
insurer should try and match the nature, degree of mismatch Economic markets going bad can have a
term and currency of the liabilities while can be practiced to ripple down and concentrated effect on
all economic guarantees simultaneously
aiming for highest investment return. achieve higher and hence such guarantees should be
• Nature of the contract broadly implies
returns. carefully considered especially given
fixed vs. variable nature of the contract.
that suitable hedge instruments are
If liabilities are fixed, then a close match
currently unavailable in India.
should be aimed for and if variable as in
the case of participating contracts, then India. However, to insulate itself from
some degree of mismatch can be interest rate risk, maximum possible
practiced to achieve higher returns. duration matching should be aimed for.
• Matching by term is difficult for an • Consistency in measures of assets and
insurer given the timings of cash flows liabilities is also a key area. Any
are not certain as well as non-availability inconsistency in measure itself might The author is CFO and CIO, Max New York
of a liquid long duration bond market in require the company to recapitalize even Life Insurance Company Ltd.
We welcome consumer experiences.

Tell us about the good and the bad you
have gone through and your suggestions.
Your insights are valuable to the industry.
Help us see where we are going.
Send your articles to:

Editor, IRDA Journal, Insurance Regulatory and Development Authority,
Parisrama Bhavanam, III Floor, 5-9-58/B, Basheerbagh, Hyderabad 500 004
or e-mail us at irdajournal@irda.gov.in

issue focus
Changing Priorities
in a Dynamic World
ALM FOR INSURERS
ARUP CHATTERJEE OBSERVES THAT ASSET LIABILITY MANAGEMENT IS NOT A SIMPLE THEORY THAT CAN BE LEARNT OVERNIGHT.
IT INVOLVES A COMPREHENSIVE STUDY OF SEVERAL GLOBAL FACTORS THAT ARE EVER-CHANGING; AND HAS TO BE REVIEWED
FROM TIME TO TIME.
Introduction multiple stakeholders. Insurance

Opportunity is risk, for without risk there companies assume the common risks of
are no financial rewards. The primary role individuals, businesses, and government:
of management is to evaluate fortuitous losses resulting from ill health,
opportunities in light of their attendant disability, and catastrophic events such as Since insurance is
risks and to develop a complete risk profile, earthquakes, hurricanes, and so instrumental to
an ambitious undertaking for any conflagrations; liabilities arising from the economic
organization. Asset-liability management certain actions, retirement, or death.
(ALM) can be defined as the ongoing
fabric of our
Insurance allows people, businesses, and
process of formulating, implementing, government to take risks they cannot
society,
monitoring and revising strategies related afford to take without it—and society is regulations are
to assets and liabilities to achieve an advanced. Since insurance is so needed to make
organisation’s financial objectives, given instrumental to the economic fabric of our sure insurers are
the organisation’s risk tolerances and other society, regulations are needed to make
constraints. ALM is relevant to, and critical
effective and
sure insurers are effective and efficient.
for, the sound management of the finances Insurance is of no help to anyone if the
efficient.
of any organisation that invests to meet risks insurers assume put them out of Insurance is of no
its future cash flow needs and capital business. Globalization of insurance help to anyone if
requirements1. products and services complicates matters, the risks insurers
leading to a world of new and different
But risk is a chameleon; it can look quite assume put them
different when management limits its view risks. In addition, more stakeholders are
driving a greater emphasis on making
out of business.
to a specific internal application rather
than expanding the view to include market, credit, and operational risks more
1 Society of Actuaries, Specialty Guide on ALM, 2003, cited in IAIS Standard on asset-liability management (2006) and IAIS Issues paper on asset-liability
management (2006]

issue focus
transparent, pushing for improvements in securities (i.e. public-sector bonds may

corporate governance. These newly be tax-exempt, as are municipal bonds
awakened stakeholders include legislators in the USA). Such special treatments
and regulators, rating agencies, capital often give the investment manager the
markets, competitors, consumer groups, decision of weighing the gain from not
customers, and insurers themselves. paying taxes on interest income received
Periods of rising from tax-free securities, versus obtaining
Evolution of ALM investment returns the higher interest rate available from
Both regulatory factors and economic heighten insurer corporate or other taxable securities,
factors have given rise to different ALM management’s but paying the extra taxation on
practices. The regulatory factors are: capital gains.
awareness of the
• Rate regulation: Where tariffs exist for The economic environment factors are:
role that investment
products, the incentive for managing • Financial market depth/liquidity: A fairly
investment portfolios is often
management can
liquid market affords investors the price
diminished. This is so inasmuch as have in overall and quality signals needed for decisions
decisions affecting the pricing of profitability. on asset composition. Without active
products can take into account expected bond and equity trading investors are
returns on investments. Taking out this unable to determine what risks are
interaction by imposing mandatory associated with certain types of bonds.
tariffs may reduce the degree of Neither is it how they react to changes
coordinated planning carried out by in interest rates and other economic
the industry. indicators. A fairly broad market provides
prudent manager’s discretion. The
Highly competitive pricing environments investors with options for matching
prudent approach implies that managers
can motivate insurers to undertake liabilities with investments of different
must act with due diligence using
higher return/higher risk investment maturities, and interest rate
experience and skills that are
portfolios in order to make up for sensitivities.
comparable to other managers’ actions
technical losses from under-pricing the • Economic stability: This stability
in similar situations within the industry.
products. Investment returns have facilitates the analysis of risks and
This new rule grants flexibility to
contributed significantly to total returns in the financial markets. Volatile
Canadian life insurance companies in
operating results in the developed markets are more difficult to measure,
matching asset portfolios with their
insurance markets over the last 25 years. liabilities. The Boards of Directors of and so to manage. Stability however is
• Investment regulation: Restrictions on these companies are required to develop not necessary, and in fact instability has
type, concentration, mix, and quality of and approve written investment policies spurred countries on to realise they need
that encourage prudent behaviour. This to manage assets and liabilities more
investments all put further constraints
change provides Canadian life insurers carefully. Yet it is desirable for
on the investment strategies available
with a more modern regulatory developing the metrics to have stability
to insurers. In Canada, for example, up
environment and the ability to invest and in markets.
until 1992, the Insurance Companies Act
restricted the types of investments life operate more actively without • Economic booms: Periods of rising
insurance companies could hold by cumbersome constraints. investment returns heighten insurer
providing a detailed list of the asset • Tax regulations: The tax treatment of management’s awareness of the role
classes and investment limits. After alternative investments may restrict that investment management can have
1992, the law adopted a prudent their use. Examples are heavy taxation in overall profitability. Periods of high
portfolio investment regulation that of foreign-issued instruments, heavy interest rates and rising equity values
allows managers to pursue a broader corporate taxation on investment can drive competitiveness with regard
class of investments while employing a profits, tax-free status for certain to investment strategies. As a result of

issue focus
services market in the U.S. in the 1980s, First Executive Life Company went
in which the savings products offered by insolvent in 1991, with 60 billion dollars in
life insures were challenged by products coverage in effect, and billions in
from banks and mutual funds, drove insurer liabilities. High-risk investments in high-
management to take bold new strategies. risk bonds was largely at fault.
The methodologies which applied in the
Mutual Benefit, the 6th largest life insurer
Methods have been more settled environment were no longer
in the U.S., had assets of $13.1 billion when
developed to adequate. Riskier investment portfolios, a
it was taken over in 1991. A high
move to more interest-sensitive products,
provide insurers concentration (37% of its investment
greater guarantees on returns, all
with greater portfolio) in real estate, contributed
contributed to much greater risk for
investment returns companies. Life insurance contracts which
greatly to the demise of a company that
had been in business since 1846.
while ensuring a offered a variety of options to
degree of liquidity policyholders, such as settlements, policy A more recent lesson of inadequate ALM
can be found in Japan. Nissan Mutual life,
and cash-flow loans, and surrender or renewal privileges,
became more risky for companies when a Japanese company with 17 billion dollars
balance. of assets, sold annuities paying guaranteed
interest rates fluctuated. This is because
the value of the options rose in many interest rates of 5 percent or greater
instances with the rise of interest rates. without hedging these liabilities. A drop in
For example, policyholders guaranteed government bond yields created a large
loan options at 4 percent interest gap between the interest rates Nissan
were being offered 6 or greater percent Mutual promised and the returns it was
return on government bonds. Thus, life making on its investments. In 1997 the
the many ways the environmental factors
insures lost as there was great financial company was taken over by the Japanese
affect the options available to managers
disintermediation. As interest rates Finance Minister, with losses of 2.5 billion
for the practice of ALM, it is not
fluctuated greatly, it was only natural dollars.
surprising there are many differences in
how it is practiced around the world. In that some companies approached financial From this experience and the competitive
spite of these factors, however, there is crises. forces, methods have been developed to
also simply the issue of insufficient The leading causes of insolvencies in the provide insurers with greater investment
exchange of information, education, and U.S. during the last 15 years have been returns while ensuring a degree of liquidity
experience with ALM techniques. inappropriate investments in high-yield and cash-flow balance. The methods vary
non-investment grade bonds, commercial by line of business, as there are significant
mortgages, and real estate. However, differences in how ALM is practiced for Life
Learning from Past Failures
inadequate liquidity, poor management of and Non-life.
Besides the environmental factors
mentioned already, the growth of ALM investment function including insufficient
techniques and know-how has also much analysis and reporting of the investment Significance of ALM
to do with learning from ALM failures. In function to top management, also While ALM is a well-established discipline
the U.S. there is quite a history of insurer contributed. in the insurance industry in many
failures, which have led great changes in Baldwin United Life Insurance Company jurisdictions, ALM techniques are still
regulatory oversight as well as industry evolving. For life business, ALM initially
went bankrupt in 1983, having annual sales
self-management. These failures were focused on asset-liability matching, with
of 1.6 billion dollars the previous year. Two
accelerated by a highly competitive the primary goal of minimising interest rate
primary causes were unrealistic promises
environment which created a multitude of risk, whereas for some types of non-life
on interest rate returns on insurance and
new risks for insurers. business ALM attempted to manage volatile
annuities to customers, mismatching assets
Heightened competition in the financial and liabilities. outcomes more appropriately. Nowadays,

issue focus
for most insurers, ALM has changed to focus effective, or increased, if justified by the markets may also be a significant
also on value optimisation. ALM looks at expectation of enhanced returns and the constraint. Internal constraints, such as
all risks requiring coordination of the availability of additional capital, without asset allocation limits, reflect the insurer’s
insurer’s assets and liabilities, especially endangering the capacity of the insurer to management philosophy or professional
market risk (including interest rate and meet its commitments to policyholders. judgement (although these may also be
credit spread risk, currency risk, equity influenced by external constraints). In
ALM also helps insurers balance competing
and, sometimes, real estate risk), addition, the availability of skilled staff
and legitimate objectives for growth,
underwriting risk and liquidity risk. Credit could pose internal constraints.
profit, and risk. The key is to understand
risk may be an integral part of managing
and forecast changes in economic value ALM was developed in 1970s in response
these risks. Only those aspects of credit
using company and market data, to a sharp rise in the level of volatility of
risk which require the coordination of the
appropriate company and industry specific interesst rates. It has evolved into a set of
insurer’s assets and liabilities are
assumptions, and appropriate financial techniques that enable the fianncial
considered part of ALM.
models. An insurer should be able to instititutions to manage a host of risks , of
The objective of ALM is not to eliminate forecast changes in economic values over which interest certainity is only one. It is
risk. Rather, it is to manage risks within a a range of plausible and adverse scenarios likely to play a growing role in the
framework that includes self-imposed (using deterministic or stochastic insurance industry. Several forces are at
limits. In setting limits for particular types approaches) and to evaluate the work: Consolidation in the insurance
of risk, the insurer should consider its implications of such scenarios on its industry is creating ever-larger and more
solvency position and its risk tolerance. solvency position. complex companies in need of the risk
Limits should be set after careful management tools that ALM offers.
The ALM implications of new products
consideration of corporate objectives and Regulators and ratings agencies are
should be considered during the design
circumstances, and should take into focusing increasingly on the ALM practices
process. For example, the insurer should
account the projected outcomes of of the insurers they follow. And, dramatic
have reasonable assurance that sufficient
scenarios run using a range of plausible improvements in computer technology
assets will be available with the
future business assumptions. Within these support a trend towards more sophisticated
characteristics required for the new
limits, risks can be reduced if this is cost modeling techniques.
business. In some cases, ALM
considerations may lead an insurer to ALM standardisation is needed. Rallying
conclude that a product should not around a common ALM framework would
be offered. simplify communication, speed
development, reduce costs, and promote
The ALM process chosen will vary from
adoption. At present, however, several
entity to entity; and reflect circumstances
ALM standardisation relevant to each insurer and external and
obstacles remain. Basic ALM terms mean
different things to different practitioners.
is needed. Rallying internal constraints. External constraints
Communication between life and non-life
around a common include supervisory and legislative
ALM practitioners is almost non-existent.
requirements, rating agency concerns, and
ALM framework Their diversity of approaches limits the
the interests and expectations of
would simplify policyholders and other stakeholders. A
usefulness of model output to third parties
communication, significant constraint is the liquidity of the
such as rating agencies and regulators.
speed development, assets and liabilities which may

IAIS ‘s work on ALM
reduce costs, and compromise the ability to price, measure
The IAIS Insurance core principles (ICPs)2
and hedge exposures. In many less
promote adoption. that relate directly to ALM are:
developed countries the lack of deep,
liquid and well-functioning financial ICP 18: Risk assessment and management:
2 IAIS Insurance core principles and methodology (2003)

issue focus
The supervisory authority requires insurers diversification, asset-liability matching, management for insurers, this paper should
to recognise the range of risks that they and risk management. be considered together with any IAIS
face and to assess and manage them work thereon.
Essential Criteria i: The supervisory
effectively.
authority requires that insurers have in The IAIS Standard on asset-liability
Essential Criteria a: The supervisory place effective procedures for monitoring management (2006) paper describes best
authority requires and checks that insurers and managing their asset-liability positions practices for asset-liability management
have in place comprehensive risk to ensure that their investment activities (ALM) that a well managed insurer would
management policies and systems capable and asset positions are appropriate to their be expected to follow and identifies
of promptly identifying, measuring, liability and risk profiles. 11 minimum requirements (see Box 1).
assessing, reporting and controlling Supervisors should ensure that insurers in
The need for an appropriate application
their risks. their jurisdiction meet these requirements.
of ALM is also addressed in two other
Essential Criteria b: The risk management IAIS papers: The requirements set out in this standard
policies and risk control systems are apply to both life and non-life business.
i) Standard on asset management by
appropriate to the complexity, size and Insurers should understand the risks they
insurance companies (1999), paragraph 4:
nature of the insurer’s business. The are exposed to and develop ALM policies
A key driver of the asset strategy adopted
insurer establishes an appropriate to manage them effectively. They should
by an insurer will be its liabilities profile,
apply techniques appropriate for the
tolerance level or risk limit for material and the need to ensure that it holds
nature of their business, the risks they
sources of risk. sufficient assets of appropriate nature,
undertake and local market conditions.
ICP 21: Investments: The supervisory term and liquidity to enable it to meet
Every insurer should have an ALM policy,
authority requires insurers to comply with those liabilities as they become due. but not all ALM risks need to be assessed
standards on investment activities. These Detailed analysis and management of this using complex techniques. For example,
standards include requirements on asset-liability relationship will therefore be simple or short term business may call for
investment policy, asset mix, valuation a pre-requisite to the development and less complex ALM techniques.
review of investment policies and
The IAIS has also developed an
procedures which seek to ensure that the
accompanying Issues paper on asset-
insurer adequately manages the
liability management (2006). It provides
investment-related risks to its solvency.
additional information on asset-liability
The analysis will involve, inter alia, the
measurement, and management
testing of the resilience of the asset
techniques; and contains an appendix with
Every insurer should portfolio to a range of market scenarios
definitions of ALM related terms.
and investment conditions, and the impact
have an ALM policy,
on the insurer’s solvency position.
but not all ALM risks Enterprise Risk Management
ii) Guidance paper on investment risk
need to be assessed Enterprise Risk Management (ERM) is an
management (2004), paragraph 8: This evolutionary concept and is fast becoming
using complex paper should be considered in conjunction a part of a corporation’s risk management
techniques. For with other principles, standards or culture. It requires a company to treat all
example, simple or guidance papers developed by the IAIS, in risks as a portfolio and manage them in a
short term business particular the Principles on capital holistic manner within an integrated risk
adequacy and solvency (2002), the management framework. Some insurers
may call for less
Solvency control levels guidance paper use ERM as part of their strategic decision-
complex ALM (2003) and the Stress testing by insurers making framework to exploit opportunities
techniques. guidance paper (2003). Given the to create value and optimise their risk/
particular importance of the liability reward profile. ERM considers all sources
structure in determining the investment of risk to an insurer and ALM constitutes a
policies, and the key role of asset-liability vital element within an ERM framework.

issue focus
Minimum ALM Requirements
i. The supervisor requires that insurers have in place effective procedures for monitoring and managing their asset-liability
positions to ensure that their assets and investment activities are appropriate to their liability and risk profiles and their
solvency positions.
ii. ALM should be based on economic value and should consider the change in economic value that will arise from a range of
plausible scenarios. Accounting and regulatory values that involve non-economic considerations and conventions may also be
considered within an ALM framework, representing additional constraints on the cash flows valued.
iii. The ALM measurement tools used should be appropriate to the nature and circumstances of the insurer and the risk characteristics
of the line of business.
iv. The insurer should examine all risks requiring the coordination of its assets and liabilities. The ones that are significant in terms
of their potential impact on economic value should be covered by an ALM framework. These may include, in whole in or in part:
a ) Market Risk
• interest rate risk (including variations in market credit spreads)
• equity, real estate and other asset value risks
• currency risk
• related credit risk
b) Underwriting Risk
c) Liquidity Risk
v. The insurer should use appropriate metrics to measure exposure to market risk and related credit risk. More sophisticated
models should be used for more complex portfolios of products and investments in order to model the portfolios reliably.
vi. The insurer should take into account risks posed by options embedded in new and in-force policies. It should identify ways to
mitigate the impact of the options, while ensuring that policyholders are treated fairly. ALM should assess the possible effects
such embedded options can have throughout the life of the insurance policies.
vii. The insurer should structure its assets so that it has sufficient cash and diversified marketable securities to meet its obligations
as they fall due.
The insurer should have a plan to deal with unexpected cash outflows, by such means as holding sufficient liquid or readily
marketable assets or by having a formal credit facility.
viii. The board of directors should approve the insurer’s strategic ALM policy, taking account of asset-liability relationships, the
insurer’s overall risk tolerance, risk and return requirements, solvency position and liquidity requirements. Senior management
is responsible for implementing the ALM policy.
ix. In formulating its overall strategy, an insurer should consider the ALM strategies appropriate to the characteristics of each
distinct block of business, and should also take into account the interaction between blocks.
x. The insurer should be organised so that there is a close and continuing liaison between the different areas that need to be
involved with ALM. The organisational structure depends on the nature, size and complexity of the insurer, and should enable
the organisation to maintain effective ALM.
To the extent practicable, the monitoring of ALM risk and processes should be organisationally separate from the functions
overseeing investments, pricing and management of in-force business.
The mandate, roles and responsibilities of the ALM function should be clear, appropriate and well understood within the
insurer.
The supervisor should examine whether the interrelationship of functions is appropriate.
xi. The insurer should develop and implement controls and reporting procedures for its ALM policies that are appropriate for its
business and the risks to which it is exposed. These should be monitored closely and reviewed regularly.
Source: IAIS Standard on asset-liability management (2006 )

issue focus
The ERM is a process that starts at the top company’s in-house capital models into the homework necessary to study the available
(i.e., board of directors) and filters down ratings process. hedging instruments, and synthesizing
through the entire organization. A strong those that are not yet available. Insurance
The IAIS is also presently developing a
ERM discipline creates value and may lead firms that take asset liability management
Standard (and guidance) on enterprise risk
to improving a firm’s competitive (ALM) and broader risk management
management for capital and solvency
advantage and optimal capital structure seriously will withstand pressure on
purposes.
besides providing the management with solvency margins much better in
the ability to make better decisions and financial crises
may help to eliminate surprises. It is mainly Impact of Solvency II and IFRS
ALM is a complex process. One does not
concerned with the evaluation of risk The profound changes in the risk
simply open up the textbook and turn to
processes, risk controls and the management of insurance companies,
the back page for the model answer.
quantification of risk exposures. brought about by the increasing complexity
Literally hundreds of pages of information
and variety of risks over the last two
The leading rating agencies have been a can be churned out – an important task is
decades, have made it necessary to revise
driving force behind the development of to determine what is useful to report to
prudential regulations (Solvency II) and to
ERM practices as it has become an management. What indicators show
adapt the international accounting
important component of the financial management the performance of their
standards (IFRS). The objective of the new
strength ratings process. Insurers have investments and the asset-liability
accounting standards is to offer a better
started to adopt economic capital models position?
view of all companies, particularly with
(EC models) as part of their ERM practice.
regard to the risks they run. IFRS and More importantly, management needs to
One reason for the development of such
Solvency II should lead to a genuine be provided with qualitative and informed
models has been the fact that rating
evolution in the management of insurance judgement on the results. Therefore it is
agencies have started to incorporate a
companies, by empowering them with important to establish such measures early
respect to their risks (identification, on in the process. Of course, the template
measurement and management). for results and the process should always
be regularly reviewed for improvement and
Conclusion in consideration of the changing
The increasingly competitive and environment. Many insurers conduct such
constantly changing nature of the financial reviews annually.
Increased volatility services industry is beginning to drive many

We are all, to some degree, familiar with
insurance companies to move beyond
in the global the concepts of risk management, and even
traditional profitability measures to more
financial markets sophisticated value models based on cash
may agree with some of them. Putting
them into practice is the challenge,
has spurred flows and modern portfolio theory. At the
although not as challenging as one may
significant efforts to same time, increased volatility in the
have first thought.
improve risk global financial markets has spurred
significant efforts to improve risk
management
management practices. Even if you’re on the right track,
practices.
In today’s insurance market, many you’ll get run over if you just sit
products have become so commoditized there.
that profit margins have been squeezed W ill Rogers (1879-1935)
razor thin. It seems to me that there
remains a lot of profit to be earned in areas
that have heretofore been considered
The author is Principal Administrator, Inter-
uninsurable. But the profit will have to be national Association of Insurance Supervisors
earned by an insurer undertaking the (IAIS), Basel, Switzerland.

issue focus
ALM in
the Financial Services Industry
MONITORING THE RISKS EFFECTIVELY
KHUSHROO B. PANTHAKY NOTES THAT IN THE ALM PRACTICES THAT EVOLVED SINCE THE EARLY 1980’S, CURRENTLY COMPANIES
AND ORGANIZATIONS IN THE FINANCIAL SERVICES INDUSTRY ARE INCREASINGLY USING MARKET VALUE ACCOUNTING FOR
CERTAIN BUSINESS LINES.
T
he term, ‘Asset-Liability risks and provide suitable strategies for Earlier Phase
Management (ALM’), can be their effective management. It is therefore In the 1940s and the 1950s, there was
termed as a risk management appropriate for institutions (banks, finance abundance of funds in banks in the form
technique designed to earn an adequate companies, leasing companies, insurance of demand and savings deposits. On
return while maintaining a comfortable companies and others) to focus on asset account of low cost of deposits, banks had
surplus of assets beyond liabilities. It takes liability management when they face to develop mechanisms by which they
into consideration interest rates, earning financial risks of different types. could make efficient use of these funds.
power, and degree of willingness to take Hence, the focus then was mainly on ALM.
on debt and hence is also known as Surplus But as the availability of low cost funds
Management. ALM was initially initiated by 9 1
Control Strategic
started to decline, liability management
financial institutions and banks and is now Framework Framework became the focus of bank management
widely prevailing in industries too. The 8
Regulatory efforts.
2
Society of Actuaries Task Force on ALM Compliance Organizational
Framework Framework Liability management essentially refers to
Principles, Canada, defines ALM as: “Asset
the practice of buying money through
Liability Management is the on-going 7 ASSET/LIABILITY 3
Performance MANAGEMENT cumulative deposits, funds and commercial
process of formulating, implementing, Management
Operational
Framework paper in order to fund profitable loan
monitoring, and revising strategies related Framework
opportunities. But with an increase in
to assets and liabilities in an attempt to 6 4
Information Analytical volatility in interest rates and with a severe
achieve financial objectives for a given set Reporting Framework
5 recession damaging several economies,
of risk tolerances and constraints.” Framework Technology
Framework financial institutions started to
Asset Liability Management basically refers concentrate more on the management of
to the process by which an institution assets as well as liabilities.
manages its balance sheet in order to allow ALM is not just a formalization of this
for alternative interest rate and liquidity understanding but also a way to quantify Categories of Risks
scenarios. Insurers, banks and other and manage these risks. Further, even in Risk can be defined as the chance or the
financial institutions provide services the absence of a formal ALM program, the probability of loss or damage. Risks can
which expose them to various kinds of risks, understanding of these concepts is of value be categorized into credit risk, capital risk,
such as credit risk, interest risk, and to an institution as it provides a genuine market risk, interest rate risk, and liquidity
liquidity risk. ALM is an approach that picture of the risk/reward trade-off in risk. These categories of financial risk
provides institutions with protection that which the institution is engaged. Asset require focus, since financial institutions
makes such risk acceptable. ALM models Liability Management is a first step in the do have complexities and rapid changes in
enable institutions to measure and monitor long-term strategic planning process. their operating environments.

issue focus
Credit risk: The risk of counter party failure the banking practice is the maintenance and liabilities. First, the proportion of
in meeting the payment obligation on the of adequate capital on a continuous basis. central government securities with longer
specific date is known as credit risk. Credit There are attempts to bring in global norms maturities in the Indian bond market,
risk management is an important challenge in this field in order to bring in significantly increasing during the 1970s
for financial institutions and failure on this commonality and standardization in and 1980s, affected the banking system
front may lead to failure of the institution. international practices. Capital adequacy because longer maturity securities have
The recent failure of many Japanese banks focuses on the weighted average risk of greater volatility for a given change in
and failure of savings and loan associations lending and to that extent, the banks are interest rate structure. This problem gets
in the 1980s in the USA are important in a position to realign their portfolios accentuated in the context of change in
examples, which provide lessons to others. between more risky and less risky assets. the main liability structure of the banks,
It may be noted that the willingness to pay, namely the maturity period for term
Market risk: Market risk is related to the
which is measured by the character of the deposits. For instance in 1986, nearly 50%
financial condition, which results from
counter party, and the ability to pay, need of term deposits had a maturity period of
adverse movement in market prices. This
not necessarily go together. more than 5 years and only 20%, less than
will be more pronounced when financial
2 years for all commercial banks. But in
The other important issue is contract information has to be provided on a
1992, only 17% of term deposits were more
enforcement in countries like India. Legal marked-to-market basis, since significant
than 5 years whereas 38% were less than
reforms are very critical in order to have fluctuations in asset holdings could
2 years (Vaidyanathan, 1995).
timely contract enforcement. Delays and adversely affect the balance sheet of
loopholes in the legal system significantly banks. In the Indian context, the problem We find that newer instruments are being
affect the ability of the lender to enforce is accentuated because many financial floated with shorter maturities
the contract. The legal system and its institutions acquire bonds and hold them accompanied by roll over of earlier
processes are notorious for delays showing until maturity. When there is a significant instruments with shorter maturities. In
scant regard for time and money, which increase in the term structure of interest order to meet short-term liability
are the basis of sound functioning of the rates, or violent fluctuations in the rate payments, institutions have to maintain
market system. Over two million cases are structure, one finds substantial erosion of certain levels of cash at all points of time.
pending in 18 High Courts alone and more the value of the securities held. Thus managing cash flows becomes crucial.
than 200,000 cases are pending in the Institutions could access low cost funding
Interest rate risk: Interest risk is the
Supreme Court for admission, interim relief or could have assets that have sufficient
change in prices of bonds that could occur
or final hearing. Since thousands of cases short-term cash flows. Hence, banking
as a result of changes in interest rates. It
are pending in the lower courts, legal institutions need to strike a reasonable
also considers change in impact on interest
experts suggest that the average time trade off between being excessively liquid
income due to changes in the rate of
taken by Indian courts for deciding a civil and relatively illiquid. The failures of many
interest. In other words, price as well as
case is around 7 to 10 years. The right of non-banking financial companies can be
reinvestment risks require focus. In so far
the lessor to repossess the leased asset in ascribed to mismatch between asset-
as the terms for which interest rates were
case of default by the lessee was not very liability maturities, since many of them
fixed on deposits differed from those for
clear until the Bombay High Court ruled have invested in real estate type of assets
which they were fixed on assets, banks
(and the Supreme Court upheld) that the with short-term borrowings. Particularly in
incurred interest rate risk i.e., they stood
lessor has a right to so repossess (in the a declining real estate market, it becomes
to make gains or losses with every change
case of Twentieth Century Finance difficult for non-banking financial
in the level of interest rates. As long as
Corporation vs. SLM Maneklal Industries companies to exit and meet obligations of
changes in rates were predictable both in
Ltd.). Hence the required rate of return lenders. In such a context, liquidity
magnitude and in timing over the business
due to feeble contract enforcement becomes a much more significant variable
cycle, interest rate risk was not seen as
mechanisms becomes larger in countries even at the cost of forgoing some
too serious, but as rates of interest became
like India. Therefore a good portion of non- profitability.
more volatile, there was a felt need for
performing assets of commercial banks in explicit means of monitoring and
India is related to deficiencies in contract
Techniques for assessing Asset-
controlling interest gaps. Liability Risk
enforcement mechanisms. Credit risk is
Liquidity risk: This risk affects many Indian Techniques for assessing asset-liability risk
also linked to market risk variables. In a
institutions. It is the potential inability to came to include Gap Analysis and Duration
highly volatile interest rate environment,
generate adequate cash to cope with a Analysis. These facilitated techniques of
loan defaults could increase, thereby
decline in deposits or increase in assets. managing gaps and matching duration of
affecting credit quality.
To a large extent, it is an outcome of the assets and liabilities. Both approaches
Capital risk: One of the sound aspects of mismatch in the maturity patterns of assets worked well if assets and liabilities

issue focus
comprised fixed cash flows. But cases of funds management. Funds management As all banks are affected by changes in the
callable debts, home loans and mortgages represents the core of sound bank planning economic climate, the monitoring of
which included options of prepayment and and financial management. Although economic and money market trends is key
floating rates, posed problems that gap funding practices, techniques and norms to liquidity planning. Sound financial
analysis could not address. Duration have been revised substantially in recent management can minimize the negative
analysis could address these in theory, but years, it is not a new concept. Funds effects of these trends while accentuating
implementing sufficiently sophisticated management is the process of managing the positive ones. Management must also
duration measures was problematic. the spread between interest earned and have an effective contingency plan that
Accordingly, banks and insurance interest paid while ensuring adequate identifies minimum and maximum liquidity
companies started using Scenario Analysis. liquidity. Therefore funds management has needs and weighs alternative courses of
following three components, which have action designed to meet those needs. The
Under this technique, assumptions were
been discussed briefly. cost of maintaining liquidity is another
made on various conditions, for example:-
important prerogative. An institution that
• Several interest rate scenarios were A. Liquidity Management maintains a strong liquidity position may
specified for the next 5 or 10 years. Liquidity represents the ability to do so at the opportunity cost of generating
These specified conditions like declining accommodate decreases in liabilities and higher earnings. The amount of liquid
rates, rising rates, a gradual decrease to fund increases in assets. An organization assets a bank should hold depends on the
in rates followed by a sudden rise, etc. has adequate liquidity when it can obtain stability of its deposit structure and the
Ten or twenty scenarios could be sufficient funds, either by increasing potential for rapid expansion of its loan
specified in all. liabilities or by converting assets promptly portfolio. If deposit accounts are composed
• Assumptions were made about the and at a reasonable cost. Liquidity is primarily of small stable accounts, a
performance of assets and liabilities essential in all organizations to relatively low allowance for liquidity
under each scenario. They included compensate for expected and unexpected is necessary.
prepayment rates on mortgages or balance sheet fluctuations and to provide
surrender rates on insurance products. Additionally, management must consider
funds for growth. The price of liquidity is
the current ratings by regulatory and rating
• Assumptions were also made about the a function of market conditions and market
agencies when planning liquidity needs.
company’s performance - the rates at perception of the risks, both interest rate
Once liquidity needs have been
which new business would be acquired and credit risks, reflected in the balance
determined, management must decide
for various products, demand for the sheet and off-balance sheet activities in
how to meet them through asset
product etc. the case of a bank. If liquidity needs are
management, liability management, or a
• Market conditions and economic factors not met through liquid asset holdings, a
combination of both.
like inflation rates and industrial cycles bank may be forced to restructure or
were also included. acquire additional liabilities under adverse B. Asset Management
market conditions. Liquidity exposure can Many banks (primarily the smaller ones)
Based upon these assumptions, the
stem from both internally (institution- tend to have little influence over the size
performance of the company’s balance
specific) and externally generated factors. of their total assets. Liquid assets enable
sheet could be projected under each
Sound liquidity risk management should a bank to provide funds to satisfy increased
scenario. If projected performance was
address both types of exposure. External demand for loans. But banks, which rely
poor under specific scenarios, the ALM
liquidity risks can be geographic, systemic solely on asset management, concentrate
committee would adjust assets or liabilities
or instrument-specific. Internal liquidity on adjusting the price and availability of
to address the indicated exposure. But the
risk relates largely to the perception of an credit and the level of liquid assets.
main shortcoming of scenario analysis was
institution in its various markets: local, However, assets that are often assumed to
that, it was highly dependent on the choice
regional, national or international. be liquid are sometimes difficult to
of scenarios. It also required that many
Determination of the adequacy of a bank’s liquidate. For example, investment
assumptions were to be made about how
liquidity position depends upon an analysis securities may be pledged against public
specific assets or liabilities will perform
of the following: deposits or repurchase agreements or may
under specific scenarios. Gradually the
be heavily depreciated because of interest
firms recognized a potential for different • Historical funding requirements
rate changes. Furthermore, the holding of
type of risks, which was overlooked in • Current liquidity position
liquid assets for liquidity purposes is less
ALM analyses. • Anticipated future funding needs
attractive because of thin profit spreads.
• Sources of funds
Asset-Liability Management • Present and anticipated asset quality Asset liquidity or how “salable” the bank’s
Approach • Present and future earnings capacity assets are in terms of time and cost,
ALM in its most apparent sense is based on • Present and planned capital position are of primary importance in asset

issue focus
management. To maximize profitability, latter is that until the bank goes to the bank’s exposure to the risk of interest rate
management must carefully weigh the full market to borrow, it cannot determine with fluctuations. That is why in cases of banks
return on liquid assets (yield plus liquidity complete certainty that funds will be which particularly rely on wholesale
value) against the higher return associated available and/or at a price, which will funding sources, the management must
with less liquid assets. Income derived from maintain a positive yield spread. Changes constantly be aware of the composition,
higher yielding assets may be offset if a in money market conditions may cause a characteristics, and diversification of its
forced sale at less than book value is rapid deterioration in a bank’s capacity to funding sources.
necessary because of adverse balance borrow at a favorable rate. In this context,
sheet fluctuations. liquidity represents the ability to attract Procedure for Examination of Asset
funds in the market when needed, at a Liability Management
Seasonal, cyclical, or other factors may
reasonable cost vis-à-vis asset yield. The In order to determine the efficacy of Asset
cause aggregate outstanding loans and
access to discretionary funding sources for Liability Management, one has to follow a
deposits to move in opposite directions and
a bank is always a function of its position comprehensive procedure of reviewing
result in loan demand, which exceeds
and reputation in the money markets. different aspects of internal control, funds
available deposit funds. A bank relying
management and financial ratio analysis.
strictly on asset management would Although the acquisition of funds at a
restrict loan growth to that which could competitive cost has enabled many banks
Conclusion
be supported by available deposits. The to meet expanding customer loan demand,
ALM has evolved since the early 1980’s.
decision whether or not to use liability misuse or improper implementation of
Currently companies and organizations in
sources should be based on a complete liability management can have severe
the financial services industry are
analysis of seasonal, cyclical and other consequences. Further, liability
increasingly using market value accounting
factors, and the costs involved. In addition management is not free of risk. This is
for certain business lines. Techniques of
to supplementing asset liquidity, liability because concentrations in funding sources
ALM have also evolved. The growth of OTC
sources of liquidity may serve as an increase liquidity risk. For example, a bank
derivatives markets has facilitated a
alternative even when asset sources relying heavily on foreign inter-bank
variety of hedging strategies. A significant
are available. deposits will experience funding problems
development has been securitization,
if overseas markets perceive instability in
C. Liability Management which allows firms to directly address
U.S. banks or certain economies. Replacing
Liquidity needs can be met through the asset-liability risk by removing assets or
foreign source funds might be difficult and
discretionary acquisition of funds on the liabilities from their balance sheets. This
costly because the domestic market may
basis of interest rate competition. This not only eliminates asset-liability risks but
view the bank’s sudden need for funds
does not preclude the option of selling also frees up the balance sheet for
negatively. Again over-reliance on liability
assets to meet funding needs and new business.
management may cause a tendency to
conceptually, the availability of asset and
minimize holdings of short-term securities, ALM departments are addressing (non-
liability options should result in a lower
relax asset liquidity standards and result trading) foreign exchange risks as well as
liquidity maintenance cost. The alternative
in a large concentration of short-term other risks. Also, ALM has extended to non-
costs of available discretionary liabilities
liabilities supporting assets of longer financial organizations. Corporations have
can be compared to the opportunity cost
maturity. During times of tight money, this adopted techniques of ALM to address
of selling various assets. The ability to
could cause an earnings squeeze and an interest-rate exposures, liquidity risk and
obtain additional liabilities represents
illiquid condition. foreign exchange risk. ALM technique will
liquidity potential. The marginal cost of
go a long way in managing volume, mix,
liquidity and the cost of incremental funds Also if rate competition develops in the
maturity, rate sensitivity, quality and
acquired are of paramount importance in money market, a bank may incur high cost
liquidity of the assets and liabilities so as
evaluating liability sources of liquidity. of funds and may elect to lower credit
to earn a sufficient and acceptable return
Consideration must be given to such factors standards to book higher yielding loans and
on the portfolio.
as the frequency with which the securities. If a bank is purchasing liabilities
banks must regularly refinance maturing to support assets, which are already on its
purchased liabilities, as well as an books, the higher cost of purchased funds
evaluation of the bank’s ongoing ability may result in a negative yield spread.
to obtain funds under normal market
Preoccupation with obtaining funds at the
conditions. The author is Partner & Head of Audit,
lowest possible cost, without considering Walker, Chandiok & Co, Chartered
The obvious difficulty in estimating the maturity distribution, greatly intensifies a Accountants.

issue focus
SRI and Relevance of ALM

INSURANCE COMPANIES IN INDIA
‘INSURANCE COMPANIES SHOULD ADOPT CLEAR POLICIES OF SOCIALLY RESPONSIBLE INVESTMENT AND IMPLEMENT THEM IN
THEIR ASSET MANAGEMENT PRACTICES’ EMPHASIZES RAJESH KHANDELWAL. HE FURTHER ADDS THAT THESE COMPANIES
SHOULD JOIN THE MOVEMENT OF SOCIALLY RESPONSIBLE INVESTING, WHICH IS GAINING MOMENTUM WORLDWIDE.
T
he capital of insurance companies issues, looking at the reporting methods and other environmental threats, but also
is small relative to the firm’s assets that are implemented, and occasionally with some pressing societal issues such as
or liabilities, and so small advising changes in corporate governance the rise of social inequalities and exclusion,
percentage changes in assets or liabilities schemes. child labor in overseas factories, or human
can translate into large percentage rights violations.
For the past two decades, in western
changes in capital. Hence, insurance
industrialized world, the movement of Insurance companies in India should start
companies increasingly focus on Asset-
socially responsible investing (SRI) has kept incorporating sustainability-related issues
Liability risk. There is an apprehension
continuously increasing, in relation with into their investment decisions. They
among insurance companies in India that
the alarming visibility of global warming should take a leaf out of the views
the Socially Responsible Investment (SRI)
expressed by Nobel peace prize winners
strategy may cause a mismatch between
Mr. Albert Arnold (AL) Gore Jr. and
assets and liabilities. The problem they
Intergovernmental panel on climate
perceive is not that the value of assets
change (IPCC), on sustainability-related
might fall or that the value of liabilities
issues. They should become sustainability-
might rise. It is that the capital might be
depleted by narrowing of the difference There is an oriented and understand that businesses
which deliberately ignore the societal and
between assets and liabilities and that the apprehension
environmental dimensions do so at their
values of assets and liabilities might fail among insurance own peril: they may experience lawsuits,
to move in tandem. We shall discuss about companies in India tarnished reputations, and see their
Socially Responsible Investment (SRI) in
that the Socially possibility to operate in important markets
this article.
Responsible significantly reduced. In this regard, the
Insurance companies are big investors minds should change at a relatively fast
Investment (SRI)
focused on the long-term, and therefore pace. Insurance companies should adopt
have a preference for companies that will strategy may cause clear policies of socially responsible
deliver long-term value. Being themselves a mismatch investment and implement them in their
experts in risk analysis, they also take a between assets asset management practices. By choosing
growing interest in the way the companies and liabilities. to integrate environmental and social
they invest in manage their own risks; criteria into their decision making process,
increasingly, they play their role as these companies should join the movement
institutional investors, investigating how of socially responsible investing, which is
the boards of these companies handle risk gaining momentum worldwide. Insurance

issue focus
the promotion of social or environmental any combination of both strategies is

values on the one hand, and the search possible. Screening is thus a selection
for financial gains on the other; on the process, whereby the investor filters the
contrary, the good performance of socially shares that he prefers to buy or to avoid.
responsible indices in western
The second option open to socially
A growing number industrialized world, as well as several
responsible investors is shareholder
of financial analysts recent studies, support the idea that
activism. The ownership of company shares
across the globe, values-led investing does not compromise
provides investors with rights and
financial gains. In 2004, a study requested
although they do responsibilities, and they should use their
by the UNEP Finance Initiative bearing on
not represent the the materiality of social, environmental
rights as corporate owners to advocate
whatever cause they deem appropriate –
majority of the and corporate governance issues to equity
ranging from animal protection to access
profession yet, now pricing has provided strong support for the
for the disabled, for instance. Socially
suggest that the thesis that effective management of these
responsible investors can use three main
issues will contribute to an increase in
companies that pay approaches to express themselves, which
shareholder value (UNEP Finance
close attention to Initiative, 2004/2). A growing number of
represent three levels of engagement:
social and dialogue with company management,

financial analysts across the globe,
supporting shareholder resolutions, and
environmental risks although they do not represent the
eventually divesting from the company. By
and opportunities majority of the profession yet, now
utilizing one of these three levers,
suggest that the companies that pay close
will be more shareholders aim at raising the awareness
attention to social and environmental risks
competitive in the and opportunities will be more
of the management of the target company
long run. competitive in the long run.
as to how the way it conducts its business
affects all stakeholders, including
Three main SRI strategies are available for customers, employees, the supply chain,
responsible investors: screening, the surrounding communities, as well as
shareholder activism and community civil society and the environment.
investing. The practice of screening, the
Lastly, the third identified SRI strategy
first SRI strategy, consists in choosing
resides in community investing. For
securities based on social or
regulator in India should take lead role in instance, financial institutions choosing
environmental criteria; the choice process
creation of new sustainability indices like this path can propose low interest rate
may be negative, positive, or a
the Dow Jones Sustainability Group Indices loans to people who earn a low or moderate
combination of both. For instance,
and the FTSE4Good Indices. It can seek the income, and who would otherwise be at a
negative screening implies the exclusion
assistance from rating agencies for loss to finance affordable housing; they can
of companies that manufacture harmful
this purpose. develop such programs either in poor areas
products such as tobacco, alcohol or
Socially responsible investing (SRI) consists of the cities of rich countries, or in villages
weapons, or that have developed
in the inclusion of non-financial criteria, in developing countries. Small business
management practices considered
such as environmental, social and loans can also help finance local projects,
negatively. Alternatively, positive
governance considerations, into the screening implies buying shares of following the well-known example of the
process of investment decision-making. It companies that bring a positive Nobel peace prize winners Mohammad
thus aims at achieving non-financial contribution to society, such as developing Younus and Grameen Bank that has
results as well as a financial return. In renewable energies, sustainable buildings implemented a well-known and successful
today’s society, a number of observers – and organic agriculture, fostering diversity micro-credit system in Bangladesh.
and scientists alike – suggest that there is in the workplace and social inclusion, or Community investing provides socially
no fundamental contradiction between other beneficial practices. And of course, oriented investors with a concrete way to

issue focus
improve people’s lives, and to see tangible mean being charitable’, as quoted by health risks and will generate heavy
social results in the medium term; Dr. Manmohan Singh, Prime Minister compensations for the victims? Insurance
therefore it is a very satisfying investment of India. companies should divest their tobacco and
strategy. Although the financial return spirits investments, if any, not only on
Today, investments using at least one SRI
generated by these projects is usually moral grounds, but also for good economic
strategy represent over $ 2 trillion in assets
lower than that of “blue chips” for reasons. Insurance companies help
(to be compared with $ 40 billion in 1984),
instance, these investments have businesses to protect themselves from
and account for about 11.3% of the
nevertheless their place in a well- risks. What if the insurance companies do
estimated $ 19.2 trillion under professional
diversified portfolio; but what counts most not extend the risk cover to tobacco and
management in the US, according to the
here is that the negative return gap is alcohol firms and businesses? This simple
latest Trends Report by the Social
largely outweighed by the benefits at the reality should lead the insurance
Investment Forum (Social Investment
community level, which can themselves companies to extend the logic of divesting
Forum, 2003). In other words, more than
entail new opportunities for the activity from “bad” sectors, and instead, to invest
one out of every nine dollars under
of the financial institution involved. in sustainable or socially responsible
professional management in the United
companies.
Hence the insurance industry should not States – including pension funds, mutual
be apprehensive about negative returns funds, foundations, religious organizations Besides, the choices made by the insurance
gap from SRI strategy, thinking of increase and community development financial industry exert an influence on corporate
in liability and asset-liability mismatch. institutions – is involved in socially behavior in many other sectors, and thus
‘Being socially responsible does not responsible investing. The SRI trend is this industry can act as a lever to
gradually influencing mainstream encourage positive change in society as a
investment: the number of mutual funds whole. For all these reasons, the
using one or more social criteria has grown investment policies of the insurance sector
to nearly 200 in the United States, and have a great effect in designing the future
hundreds of financial institutions of all of our economic system, and they
Insurance kinds have used their voting rights in condition the quality of our life and that
publicly held companies to support of our children; therefore the integration
companies
shareholder resolutions or vote their of extra-financial concerns and values in
should divest proxies on corporate social responsibility the investment choices of insurance
their tobacco issues. companies is of great importance.
and spirits To a certain extent, the choice of insurance
investments, if companies to adopt SRI policies is a matter
any, not only on of consistency between risk management
moral grounds, and financial management: is it
appropriate for an insurance company to
but also for good
invest in tobacco firms with a view to reap
economic high short and long term benefits, knowing
reasons. that at the same time these firms The author is an industry expert and an
manufacture products that increase public independent market analyst.

thinking cap
Risk Management
within Financial Services
ECONOMIC CAPITAL OF INSURERS
V.S. LAKSHMI OBSERVES THAT ECONOMIC CAPITAL IS AN INSURANCE COMPANY’S OWN MEASURE OF THE AMOUNT OF CAPITAL
IT SHOULD HOLD, AS OPPOSED TO THE OPINION OF AN EXTERNAL STAKEHOLDER E.G. REGULATORY CAPITAL.
F
inancial markets have been quite When the market volatility increases, • What level of capital will provide
volatile in the past few months capital becomes constrained. It is adequate protection for the
mainly due to the US sub-prime imperative that the insurance companies policyholders?
lending crisis and its knock-on effects on understand the risks they are taking. Hence • Is the insurance company over or under
the rest of the world. the increased popularity of capital models capitalised?
amongst the financial services industry,
The recent failure of the UK Bank ‘Northern • How can the insurance company’s capital
regulators and the rating agencies.
Rock’ failure was attributed to the failure be managed efficiently within the
of its board and executive team to create stipulations imposed by regulatory
What are the different definitions
a durable funding model which could framework, investors and rating
of capital models in use?
withstand the exceptional set of market agencies?
There are many definitions of capital,
circumstances that occurred in summer
including (1) Risk Based Capital
2007 along with lapses in the regulation.
(2) Economic Capital (3) Internal Capital
The latest report from International Assessment (ICA) in the UK (4) Solvency II
Monetary Fund (IMF) warns that: in Europe. There may be many forms and
• the potential losses from the US credit

definitions but the underlying objective is When the market
the same i.e. ‘risk management’. The
crunch will reach $1 trillion and can be volatility increases,
different stakeholders of an insurance
higher; and
company, namely the policyholders,
capital becomes
• losses are spreading from sub-prime regulators, shareholders, rating agencies constrained. It is
mortgage assets to other sectors, such and the management team are trying to imperative that the
as commercial property, consumer understand the following: insurance
credit, and company debt.
• What is the nature and level of risk the companies
The IMF report also says that there was a insurance company is taking? understand the risks
’collective failure’ to appreciate the risky • What is amount of capital required to they are taking.
borrowing by financial institutions. The support the insurance company’s total
importance of risk management cannot be risk? What is the expected return on
over-emphasised. that capital?

thinking cap
series of events that might be considered • change in the mix of business, e.g.
as unexpected, yet still reasonably likely proportion of EL and Motor business
to occur in practice’. [Source: An approach • Competition and the impact on the
It is losses from to economic capital for financial services adequacy of premium.
unexpected events firms by Bruce Porteous, Louise McCulloch
Market risk: This refers to the volatility in
and Pradip Tapadar]. It should be noted
that lead to the value of assets as well as income from
that economic capital is an insurance
volatility in the assets and includes:
company’s own measure of the amount of
profits, assets and capital it should hold, as opposed to the
• Stock market volatility
liabilities, potential opinion of an external stakeholder e.g. • Change in interest rates
insolvency and regulatory capital. • Change in exchange rates
hence a capital It is losses from unexpected events that

• Defaults
requirement. lead to volatility in the profits, assets and

• Mismatch in assets & liabilities;
reinvestment risk.
liabilities, potential insolvency and hence
a capital requirement. This mainly arises Credit risk: Refers to the risk of recovering
from (1) lower than expected returns from money owed by third parties; it includes
assets (e.g. stock market volatility, default, partial impairment and any time
reduction in interest rates, etc.) and/or delays from any of the following parties:
(2) as a result of having to incur more than • Reinsurers
• What is the shareholder value creation/ expected losses (e.g. a very large • Intermediaries
deterioration from different business catastrophe weather event, court-award • Policyholders
units? increasing the size of claims, etc.). • Banks
• What are the major sources of • Issuers of investments.
concentration and diversification? Quantification of Economic Capital
Liquidity risk: This refers to the lack of
Are there any potential opportunities Economic capital is a measure of capital
liquid financial assets to meet its
to expand or diversify some parts of requirement to sustain potential
obligations when they fall due. The
business? unexpected losses up to a specified
measurement includes:
• How do we improve our portfolio confidence interval. The main drivers are:
• the extent of mismatch between assets
performance? Which exposures should insurance risk, market risk, credit risk,
and liabilities,
we grow, sell and how much? What is liquidity risk, operational risk and
group risk. • value of assets held in cash or highly
the optimum strategy for expansion
liquid forms.
or reduction? Insurance risk: Typically refers to the risk
• How do we increase/maintain the of deviation of actual experience from the Operational risk: This refers to the
insurance company’s rating? expected at the time of underwriting, occurrence of an incident which may lead
examples of factors that may cause to a difference in the business process and
What is Economic Capital? include: it includes:
Economic capital is one of those • frequency of claims, • fraud
expressions that mean different things to • average claim size, • technology – data systems, telephone
different people. A precise definition of • size of catastrophe events, lines, etc.
economic capital is difficult to find • cost of reinstating the reinsurance, • reputation
although the term has been around for • latent claims, • adequacy of resources and management
some time. One definition is ‘the amount • court awards, of employees
of capital a firm should hold to keep its • policy contract disputes • legal actions against the insurance
realistic balance sheet solvent following a • change in volume of new business company

thinking cap
Group risk: Risks of being a member of a credibility and effectiveness. The • establishing any correlation between
group like: companies need to strike a balance the risks
• the accumulation of risks from one between having a sophisticated, highly • data collection
counterparty, accurate, risk-assessment system, and
• IT system
having one that is workable. It all depends
• reputation damage of one member of the • buy-in from the senior management
on the size of business and the type of risks
group may affect all other members team
being taken. In some cases, accuracy may
within the group.
be extremely important, yielding results • definition of risk measure (99.5%
The results from the internal capital that may be counter-intuitive. In others, confidence over 1-year time horizon or
assessment models for UK General it may be better to use imperfect simple 95% confidence interval over 5-year
Insurance Market indicate that the data to begin with and refine it later, rather time horizon)
insurance and market risks are the main than delay implementing a system. • competition from other companies
drivers of the capital requirement for
• embedding the model to the daily
general insurance companies. [Source: FSA What are the challenges with the operation of the business
Insurance Sector Briefing – ICAS lessons and quantification of economic capital?
looking ahead to Solvency II, October This is a dynamic process that needs to be
The main challenges are: constantly developed, amended and re-
2007].
• identification of all the risks calibrated for changing market conditions.
Other measures of capital: are they different?

Traditional approach
Quantification of ‘economic capital’

involves creation of stochastic financial
models. These generate thousands of
simulations with different scenarios for UK Internal Capital Assessment (ICA) Approach
catastrophe events, large claims, change
in equity returns, etc.; this is often the
most technically demanding part of the
exercise. Simplistically these models
enable the insurance company to simulate
a large number of possible scenarios and
assess the financial consequences.
All the calculations may appear very

complex and difficult to calculate. Data is
the key but judgment and experience are
equally important inputs. Over engineered
complex models could undermine its

thinking cap
Solvency II Keeping too much capital in reserves

Solvency II has a three-pillar similar approach to Basel II (applicable to the Banks hinders growth; accurate calculations of
in Europe). risks and capital requirements can actually
release capital. There may be
diversification benefits from assessing
capital at a group level because some risks
may offset each other.
Economic capital models provide the full

range of risks/returns results, allowing
strategy to be formulated on where to
use the capital. Companies, and their
stakeholders, will have a better
understanding of their appetite for risk,
and where they are prepared to accept
volatility in exchange for higher returns.
Reinsurance strategy
One of the basic functions of an insurance
company is reinsurance purchase. Most
insurance companies rely on their broker
and reinsurers to come up with the best
protection, terms and price. However this
There are some differences in approach institutions such as BHW, Allianz and is normally done in isolation without
between risk-based capital models, ICA, Commerzbank. Internal risk models like considering other risks. An economic model
Solvency II and economic capital models Munich Re’s explain relationships, which will allow reinsurance strategy to be
but the main components are very similar. cannot be derived from published balanced analysed as part of a company’s entire
sheets. The benefits of broad risk corporate strategy and risk management.
What are the benefits? diversification, which are identifiable with Insurers will be able to measure the
Large companies such as Munich Re, AXA the risk model, are gaining recognition and outcomes of a large number of reinsurance
and Royal SunAlliance (RSA) have used the acceptance worldwide.” strategies e.g. varying the excess, limits,
economic capital models for the past aggregate deductibles, aggregate limits,
All the three insurers have gained a lot etc. They will be able to measure even the
few years.
from embedding their capital models into ratings and probability of default of
Munich Re stated at London Investors Day the risk management. The economic potential reinsurers.
Conference on 28/06/2005: “The models provided a large diversification
improvement in our economic capital benefit which resulted in the reduction in Investment strategy
position is the result of our long-standing their capital requirements. The resultant Most sophisticated insurers have
strategy of balancing risks worldwide and release of capital provides opportunity for considered the assets they hold in relation
across business segments. Our strength is expansion, increased dividends, etc. to their liabilities for many years. An
the way we diversify risks in both economic capital model will allow an
reinsurance and primary insurance. Risk appetite investment strategy to be formulated that
In addition, we have systematically Whilst the main use of economic capital is not only considers the trade-off of risk and
reduced the concentration of risks in our to guard against major disasters and satisfy return of the assets themselves, but also
investment portfolio by cutting back our regulatory requirements, it is also in relation to other risks and cash flows an
shareholdings in German financial important to safeguard profitability. insurance company faces.

thinking cap
Maintaining ratings limited information available and they

Rating agencies like Standard & Poor, tend to be judgement call based on general
Moody’s and AM Best use the economic strategy and market knowledge. Even so,
capital valuation process for measuring economic capital calculations underpin the
capital adequacy. The analysis, decisions of large financial institutions’
documentation and reports provide strategic decision-making and are
evidence of effective risk management of becoming very popular.
the insurance company. This helps to
maintain and improve ratings from the By working out the Summary
credit rating agencies. return on capital for Economic capital can provide a better
each policy and understanding of the trade-off between
Products, pricing and distribution adjusting it for each risk and reward by enabling insurers to
strategies quantify the risks they face, the capital
Insurance companies provide the risk
risk, underwriters needed to support them and the real risk-
transfer mechanism for transferring the
can calculate how adjusted returns that are being made or
risk of unexpected loss from commercial much they ideally to be targeted.
enterprises and private individuals to the need to charge to Risk-based capital regulation is already in
insurance market. The changes in the policyholders if they place in countries like UK and Switzerland.
market place and the risk environment
need to cover their Solvency II is soon going to be operative
suggest that pricing will get keener;
risks. for all insurance companies operating in
therefore it is essential to understand
Europe. They are very similar to the
clearly all the risks being taken in order to
economic capital models which have been
price insurance contracts competitively
recognized by the banking industry already.
and profitably.
Therefore a closer alignment of the way
Good embedded economic capital models the insurance companies manage their
of a company may allow an insurance business and how they are regulated can
company to identify potential underwriters can calculate how much they only benefit all the parties involved -
opportunities and threats ahead of ideally need to charge to policyholders insurers, policyholders and shareholders.
competition. if they need to cover their risks. If
they cannot get that minimum premium,
Risk is inherent in the insurance business.
then they can walk away unless they
Economic capital enables the company to
are using it as part of a relationship
measure performance of different business
management process with the policyholder
units, classes of business and distribution
or intermediary.
channels on the risk-adjusted return on
capital (RAROC) basis. This enables in
Business planning, Mergers and
strategic decision-making as to which parts
Acquisitions
to grow/contract. This ensures that the risk
Economic capital calculations can be used
of following different strategies is taken
to decide whether to move into a new line
into account when comparing returns.
of business or new markets or make an
By working out the return on capital for The author is General Business Actuary,
acquisition that may offer good returns.
Ecclesiastical Insurance Group,
each policy and adjusting it for each risk, This is harder to calculate because of Gloucester, UK.

follow through
Some Thoughts on Microinsurance

CHALLENGE FOR STAKEHOLDERS
TINA MAKHIJA OPINES THAT MICRO INSURANCE THAT HAS ASSUMED PARAMOUNT IMPORTANCE IN THE INDIAN DOMAIN HAS
TO BE NURTURED CAREFULLY IN ORDER TO ENSURE THAT THE BENEFITS REACH THE UNDER PRIVILEGED SECTIONS OF
THE SOCIETY.
A
t the outset, let us look at some of have generally served two major purposes: payments at the factory gates, to increased
the ways micro insurance has been (i) they have contributed to loan security; efficiency of factory management
described in order that a certain and (ii) they have served as instruments collecting premiums, or even covering
level of clarity is accomplished. of resource mobilization. The greatest their employees directly, this historical
challenge for microinsurance lies in the microinsurance moved into the
“…the protection of low-income
combination of viability and sustainability mainstream. From here, many developed
people against specific perils in
exchange for regular premium with outreach. countries were able to generate substantial
payments proportionate to the pools of investment funds that helped drive
likelihood and cost of the risk Microinsurance - A Bit of History ever-growing economies.
involved” Microinsurance is not a new invention. The
-Draft Donor Guidelines, “industrial insurance” sold at factory gates
CGAP Working Group (2003) in American cities in the early 1900s made
“…not a specific product or product the Metropolitan Life Insurance Company
line. It is also not limited to a specific the largest company – not just insurance
provider type. Microinsurance is the company – in the world at that time. Their
provision of cover to a specific market industrial insurance was the forerunner of
segment, i.e. low-income persons.” today’s commercial microinsurance. It was
- IAIS Issues Paper (2007) simply a response to a market demand Industrial insurance
Micro-insurance refers to the protection
managed in a manner that made the was a response to a
products appropriate for the market. The
of assets and lives against insurable risks market niche that
delivery channels - agents at the factory
of target populations such as micro-
gates – were specific to this market. The provided access to
entrepreneurs, small farmers and the
landless, women and low-income people
premiums reflected the particular risks of quality insurance
through formal, semiformal and informal
the factory worker market. Coverage products for low-
responded to the workers’ specific needs.
institutions. Such products are often
Premium collection – on payday as the
income workers,
bundled with micro-savings and micro-
credit, thereby allocating scarce resources
workers exited the factories – was and access to a
to micro-investments with the highest
efficient. In short, industrial insurance was huge market for the
a response to a market niche that provided
marginal rates of return. Microinsurance insurers.
access to quality insurance products for
is the most underdeveloped part of
low-income workers, and access to a huge
microfinance. Yet various schemes exist
market for the insurers.
that are viable, benefiting both the
institutions and their clients. Such schemes From industrial workers making premium

follow through
In developing countries, access to this development through enterprise, has

market has not been easy and insurance become quite popular in India recently,
products have remained focused on the with some of the big players in the Indian
high-end and corporate markets. Because insurance space making a foray into
most low-income people in developing this field.
countries are self-employed or employed
The most inspiring one among these is the
in small firms, they have had little or no
“Yeshasvini” initiative, which was Yehsasvini is a
access to insurance products that fit their
needs. The appropriate delivery channels,
pioneered by Dr. Devi Shetty, a heart pioneering
types of coverage, product simplicity,
surgeon, who is also the founder initiative in India
of “Narayana Hrudayalaya”, an
premiums, and premium collection
internationally acclaimed heart care
and Dr. Devi
methods that this market requires have not
hospital in Bangalore, India. “Yeshasvini”, Shetty’s concern
been available.
which was launched in 2003, insured for the health of
Other microinsurance mechanisms have
substituted for the lack of commercial
1.6 million in its first year, when the the rural poor is
premium was as low as Rs.60 per annum
microinsurance in these markets. Mutual (about $1.5). The number insured rose to
simply amazing.
insurance (where a group owned insurance 2.2 million in its second year, but dropped
business is professionally managed) and to 1.45 million in the third year owing to
community-based microinsurance (where an increased premium of Rs.120 per annum
local people manage an insurance fund) (about $3). Nevertheless, Yehsasvini is a
have been available for many years. Mutual pioneering initiative in India and Dr. Devi
products often cover a wide range of low- Shetty’s concern for the health of the rural
medium- and high-income individuals and Micro insurance Delivery channels
poor is simply amazing. Dr. Shetty, who
have offered often simple and limited • Partnerships between insurers and
studied medicine in India and in the UK,
insurance products directly appropriate to distribution agents like cooperatives and
was also Mother Teresa’s personal doctor.
their members. Such products and MFIs (e.g. Zurich Bolivia and BancoSol)
programs have been available for over two Yeshasvini’s success is all the more special
• Self-insuring MFIs that assume the risk
hundred years in some form. since it was not driven by any insurance
of offering insurance to their clients
company but was successful in mobilizing
(e.g. Spandana, India)
Microinsurance initiative in India co-operative societies, with help from the
• Informal mutual assistance schemes (e.g.
Microinsurance, which is based on the Karnataka State Government’s Department
burial societies, South Africa)
same principles as Microfinance and of Co-operation.
• Healthcare providers offering health
care schemes (e.g. Nkoranza Community
To what risks and economic stresses are low-income persons vulnerable? Health Insurance Plan, Ghana)
• Regulated insurance companies that
Country Priority risk
serve the low-income market directly
Uganda Illness, death, disability, property loss, risk of loan (e.g. Delta Life, Bangladesh)
Malawi Death, food insecurity, illness, education • Regulated insurance companies that
have created microinsurance agents
Philippines Death, old age, illness
(e.g. Tata-AIG, Bangladesh)
Vietnam Illness, natural disaster, accidents, livestock disease
• Insurance companies that target the low-
Indonesia Illness, children’s education, poor harvest income market through retailers (e.g.
Seguros Azteca and Electra, Mexico)
Lao P.D.R. Illness, livestock disease, death
• Community-based schemes that pool
Georgia Illness, business losses, theft, death, retirement income funds, carry risk and manage a
Ukraine Illness, disability, theft relationship with a healthcare provider
(L’Union Technique de la Mutualité
Bolivia Illness, death, property loss (including crop loss in rural areas)
Malienne, Mali)

follow through
• Insurance distributed through Today we have a variety of microfinance risks, the only viable inducement for them
cooperatives (e.g. Yeshasvini, India) institutions with national and local is an adequate margin, lest they exclude
• Mutual insurance companies created by outreach. Many of them have already small farmers, - micro-entrepreneurs and
credit union/cooperative federations become corporate agents or have entered people in remote areas. Only sound social
(e.g. TUW SKOK, Poland; La Equidad, into referral arrangements with insurers. insurance, which combines a social
Colombia) However, semiformal institutions including mandate with profit-making, has a chance
savings and credit cooperatives, NGOs and of sustainability
Most common types of self-help groups which have immense
microinsurance products potential in carrying the message of Key stakeholders in the
insurance as also solicit insurance business development of Microinsurance
• Credit life
are yet to be utilized in a manner where • Potential and current policyholders
• Term life/Personal accident their true potential can be harnessed to
• Actual and potential delivery channels
• Savings life increase the insurance penetration levels.
This is due to restrictions in the existing • Risk carriers
• Property insurance
agency regulations in terms of minimum • Industry associations, networks
• Endowment life
eligibility norms in order to become • Insurance infrastructure: training,
• Health insurance
an agent. technical assistance, research, data
• Agriculture warehousing…
Depending on the existence and vigour of
such institutions, the following alternatives • Policymakers, regulators and supervisors
have emerged, for offering strategic entry • Donors and development agencies
points for microinsurance development:
• Adapting formal insurance arrangements The challenge for all of these stakeholders
to the needs of the micro-economy. is to … create a culture of insurance among
If insurers are to • Upgrading non-formal (comprising low-income persons!!
serve customers semiformal and informal) insurance
who differ widely arrangements with insurance companies.
in terms of service • Linking formal and non formal insurance
institutions with banks and self-help
costs and risks, the
groups.
only viable • Establishing new local institutions
inducement for providing microinsurance services.
them is an The first three strategies may be inter-
adequate margin, connected:
lest they exclude • Adapting insurance companies to the
small farmers, - requirements of the micro-economy is a
first step; then
micro-
• Linking them as wholesale institutions
entrepreneurs and to self-help groups as retailers; and
people in remote finally,
areas. • Upgrading self-help groups e.g. to the
level of financial cooperatives or village
banks.
The author is working with the Corporate
If insurers are to serve customers who
Marketing Group-Bancassurance, IFFCO-
differ widely in terms of service costs and TOKIO General Insurance Co. Ltd.

follow through
Conscious Options for Protection

LIFE INSURANCE PRODUCTS
GARY R. BENNETT WRITES THAT THE CHANGING SOCIAL FABRIC OF INDIA TOGETHER WITH THE GROWING INCIDENCE OF
LIFESTYLE AND ENVIRONMENT RELATED DISEASES, AND THE INCREASING COST OF DISEASE MANAGEMENT MAKE FINANCIAL
PROTECTION IMPERATIVE.
E
volution is inevitable! Life as it used increased the uncertainties of life. In fact unconscious creation.” What is true of the
to be in the 70’s or the 80’s is in today’s time all of us love to live life in spiritual journey of life is equally real for
practically non-existent. The pace the fast lane, take risks, overcome the the material and financial existence.
or the speed at which we live our lives uncertainties and emerge victorious. This
Life insurance has a closer link to spiritual
today, maybe, was unimaginable a couple is what we call a life in the twenty first
health than would appear. It is, about
of years ago. Lives have changed so much century; a life full of adrenalin rush and
valuing one’s life and the lives of one’s
and along with these changes have uncertainties. What concerns most of us
is however the fact that though we know loved ones. No one, who values his or her
there are uncertainties on our way, we do own life and of those loved ones, would
not really make an effort to dodge them fail to protect them against uncertainties.
or opt for necessary protection to enabling Life insurance is a tool that helps provide
our families and ourselves to meet our succor and support by protecting one’s
desired goals mitigating the risk factor to goals for oneself and one’s family during
Accidents, its minimum. How we choose to handle the lifetime and beyond that.
disability, death these uncertainties of life lies in our hands. Every life is unique in its own way and so
are all pitfalls that It is in our hand how we plan to handle our
are the financial needs or requirements
protection and wealth creation needs to
could affect meet our goals at every stage of life.
that come with it. Therefore it is
important that products must provide
anyone. Protecting The purchase of life insurance is one such solutions tailored to what the individual
oneself against planned decision, and conscious choice needs. Life insurance is not just about
the ill effects of that helps us minimize the risk of either providing protection against the
living too long or dying too early. Accidents, uncertainties of life; it is also about
these financially disability, death are all pitfalls that could providing tools for financial planning for
could go a long affect anyone. Protecting oneself against events one is relatively certain about and
way in mitigating the ill effects of these financially could go would like to plan for. As an example, for
a long way in mitigating the harm - and someone the goal may be to plan for buying
the harm and only only conscious action could help do so. Life a house, for another it could be for a child’s
conscious action insurance is also a tool for long term wealth education and for yet another, retirement
could help do so. creation that enables us build a corpus to planning. Separate lives, separate goals …
meet various long term needs by
and the need for separate insurance
inculcating a disciplined savings behavior.
plans and arrangements! With lives
Spiritualist Neale Donald Walsch says transecting individual paths, insurance
“A life lived of choice is a life of conscious services provide customized and need
action. A life lived of chance is a life of based solutions.

follow through
Beyond financial protection against the internal rate of return even while providing The survey also found that 96 per cent of
uncertainties of life, life insurance permanent insurance coverage. Indian households are financially at risk,
products also help in long-term wealth as they cannot survive for more than
These products also allow for altered
creation. Life insurance allows for the most 12 months on their current savings if their
payment plans at different times for the
resourceful variations of the product current income were to stop. Yet, a
same policy. And then there are products
design, depending on individual needs. majority of the households are unaware
allowing steady premium payment over the
There are products in the Indian domain of this risk and are optimistic about their
presently that offer several adaptations of future - with 54 per cent saying they were
the protection-and-wealth creation confident of their financial future! Perhaps
formula to meet the needs at various it is this misplaced optimism that is the
life stages. bigger problem.
Planning for one’s life is a more complex It is such misplaced optimism that results
process than planning for one’s dinner in lack of financial planning to protect
needs or monthly detergent supplies … or against the uncertainties of life. The
even a holiday! All too often, the needs In a more dynamic changing social fabric of India - such as
are not felt needs - these are real, often labor market and in the break-up of the joint family system,
unforeseen, and so complex that even a and increasingly younger population -
the absence of
customer could fail to identify them fully. together with the growing incidence of
This makes buying life insurance products established state- lifestyle and environment related diseases,
a complex decision. provided and the increasing cost of disease
management make financial protection
Term policies are the least expensive and mechanisms of
imperative.
are suited to provide protection against social security,
loss of life or disability. Health insurance Financial security is thus an essential
policies provide financial protection households in India element of inclusive growth. In a more
against loss arising due to disease, increasingly need to dynamic labor market and in the absence
hospitalization and accident. There are look to financial of established state-provided mechanisms
products among health insurance plans of social security, households in India
that are the most comprehensive and cover instruments to meet increasingly need to look to financial
the largest number of diseases. Also their asset instruments to meet their asset
available in the market are comprehensive accumulation and old-age goals. Life
accumulation and
life as well as health protection insurance insurance is one of the most important
plans. old-age goals. financial instruments for financial security.
In this rapidly changing Indian economic
Endowment plans are the more traditional
and social environment, educating the
by nature and often perceived to be more
consumers appropriately about life
transparent. Unit Linked Plans are market
insurance will not only create awareness
linked products that meet one’s protection
of the changing reality but also help
needs as well as help in long term wealth
reduce their vulnerability and above all
creation to meet specific needs of life,
improve the long-term financial security
which are designed to meet the needs of long term. And, of course, there are
of the individual, the family and thereby
growing children; and also retirement numerous variations and adaptations
the nation.
planning products to ensure that you do between the designs.
not compromise on the quality of life post
Products specifications vary. But the
your retirement.
bottom-line is the need for protection.
While life insurance products In India, the recognition of this need is
conventionally fell into one of two broad relatively low - less than 25 per cent of
categories of - term and cash value - Indians own life insurance. The findings of
products, recent years have seen more a very popular survey concluded:
innovative variations, such as the universal “A financially secure country cannot be
The author is Managing Director & Chief
life plan, which allows greater flexibility built on the base of a small proportion of Executive Officer, Max New York Life
in premium payment and offers higher financially secure households.” Insurance Co. Ltd.

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ÃÏåÁ™y ßy §“Ïo uƒåÁ∆N˛Á∫y “Áz ÃN˛oz “¯@ ™ı õ¬zb úu∫Ãy™Á N˛y TuouƒuáÆÁı Ãz “y GnúëÁ ¬“∫ N˛y H\Á|, Hú∫y Ão“ Ãz ¬zN˛∫ uåY¬y
ÃÏåÁ™y obyÆ “¬ÁN˛Áı ™ı ∫“åz ƒÁ¬z ¬ÁzTÁı Nz˛ “Ázoz “¯@ Ã§Ãz Qo∫åÁN˛ ßÓN˛©ú, Ã§FM∆å Ão“ oN˛ \Áoy “{@ \{Ãz “y ÃÏåÁ™y obyÆ
u¬L LN˛ §“Ïo §‰gÁ Qo∫Á “{@ FåÃz §“Ïo N˛ub§ãá ™ı “y EÁoz “¯, u\Ã™ı LN˛ ™“ÁÃÁT∫yÆ F¬ÁN˛Áı ú∫ áÁƒÁ §Áz¬oÁ “{, ¬“∫Áı N˛y H\Á|
EuáN˛ \Áå-™Á¬ N˛y “Áuå “Ázoy “{@ “ÁÂ¬ÁuN˛ õ¬zb, tÓÃ∫y ™“Á˚yúyÆ õ¬zb Nz˛ åyYz uQÃN˛ §“Ïo ZÁzby \T“ ™ı t§ \Áoy “{ EÁ{∫ ¬“∫Áı
80% ÃÏåÁ™y, ü∆ÁÊo ™“ÁÃÁT∫ ™ı “y EÁoz “¯, \Áoy “{ ÆÁ uN˛Ãy åÆy ™“ÁÃÁT∫yÆ õ¬zb Nz˛ N˛y HÂYÁF| Nz˛ øú ™ı Gß∫oy “{@ u\ÃÃz ƒ“
¬zuN˛å FÃÃz §“Ïo Ãz tz∆Áı Nz˛ obyÆ F¬ÁN˛Áı åyYz uQÃN˛ \Áoy “{@ Ãßy ßÓN˛©ú, ÃÏåÁ™y o§Á“ N˛∫åzƒÁ¬y uƒåÁ∆N˛Á∫y ¬“∫Áı ™ı úu∫ƒuo|o
N˛Áz ßy Qo∫Á ∫“oÁ “{@ GnúëÁ å“Î N˛∫oz “{@ ÃÏåÁ™y GnúëÁ “Ázåz Nz˛ “Áz \Áoy “{@
u¬L, ß¿Ê∆ \“ÁÂ ú∫ ßÓN˛©ú EÁoÁ “{, úÁåy Nz˛
õ¬zb uƒƒo|uåN˛ Eãt∫ ÆÁ ™“ÁÃÁT∫ Nz˛ EÁÃ-úÁÃ “ÁzåÁ YÁu“L@ ÃÏåÁ™y N˛y Tuo
õ¬zb uƒƒo|uåN˛ uÃÚÁÊo Nz˛ EåÏÃÁ∫, úw·ƒy LN˛ MÆÁıuN˛ Æ“ ßÓN˛©ú “y Ã™Ï¸y ¬“∫Áı Nz˛ ÃÏåÁ™y \“ÁÂ ú∫ ™“ÁÃÁT∫ N˛y T“∫ÁF| 6000 ™y.

™“ÁuƒútÁ
“Ázoy “{, ÃÏåÁ™y N˛y ¬“∫Áı N˛y Tuo ¬TßT • ÃÏåÁ™y ZÁzbz ˚yúÁı N˛Áz YÁ∫Áı EÁz∫ Ãz jN˛ • ÃÏåÁ™y ¬“∫Áı N˛y LN˛ ¬©§y »zmy “{ \Áz “∫
800 uN˛.™y / VãbÁ “Ázoy “{@ Æz ü∆ÁÊo ™“ÁÃÁT∫ ÃN˛oz “¯ EÁ{∫ Gå obÁı ú∫ ßy Qo∫åÁN˛ “Áz 10 u™. Ãz 60 u™. Nz˛ Eãt∫ ú∫ EÁoy “{@
Nz˛ LN˛ uN˛åÁ∫z Ãz tÓÃ∫z uN˛åÁ∫z oN˛ N˛y tÓ∫y, ÃN˛oz “¯, \Áz ÃÏåÁ™y Nz˛ œÁÁzo N˛Á ÃÁ™åÁ EN˛Ã∫ ú“¬y ¬“∫ Ã§Ãz §‰gy å“Î Ázoy “{@
LN˛ utå Ãz ßy N˛™ Ã™Æ ™ı oÆ N˛∫ ¬zoy “¯@ å“Î N˛∫ ∫“z “¯@ ÃÏåÁ™y N˛Á Qo∫Á ú“¬y ¬“∫ EÁåz Nz˛ §Át
• ÃÏåÁ™y ™“ÁÃÁT∫ Ãz åutÆÁı oN˛ ú“ÏÂY
FåN˛y Foåy EuáN˛ Tuo N˛y ƒ\“ Ãz ÃÏåÁ™y N˛F| VãbÁı oN˛ §åÁ ∫“oÁ “{@ ÃÏåÁ™y ¬“∫Áı
\Áoz “¯@
N˛y ¬“∫Áı Nz˛ §Á∫z ™ı úoÁ ¬TÁÆÁ \Á ÃN˛oÁ “{@ • NÏ˛Z ÃÏåÁ™y N˛y oÁN˛o §“Ïo [ÆÁtÁ “Ázoy “{@ N˛y »zmy bÓboy ÆÁ ™Ï‰goy å“Î “{@ FÃu¬L
ƒ{rÁuåN˛ FÃ §Áo N˛Á úoÁ ¬TÁ ÃN˛oz “¯ uN˛ “\Á∫Áı uN˛¬Áz N˛y §‰gy YcÁåı, åÁƒ EÁut NÏ˛Z VãbÁı oN˛ Æ“ å“Î Ã™^åÁ YÁu“L uN˛
ÃÏåÁ™y E¬T-E¬T \T“Áı ú∫ N˛§ ú“ÏÂYzTÁ@ ÃÏåÁ™y N˛y ¬“∫Áı ˚Á∫Á, N˛F| ÃÁ{ ™yb∫ Eãt∫ ÃÏåÁ™y N˛Á Qo∫Á b¬ TÆÁ “{, EÁ{∫ å “y
obyÆ F¬ÁN˛Áı Nz˛ EÁÃ-úÁÃ Nz˛ ¬qm §oÁ oN˛ ú“ÏÊY \Áoz “¯@ ßƒåÁı osÁ \Áå-™Á¬ N˛y ÃÏåÁ™y Nz˛ g∫ Ãz Ã™Ï¸ Nz˛ uN˛åÁ∫z, Ã™Ï¸
ÃN˛oz “¯ uN˛ ÃÏåÁ™y uN˛oåÁ §‰gÁ EÁ{∫ üßÁƒN˛Á∫y ßÁ∫y “Áuå “Ázoy “{@ ¬“∫Áı N˛Á EÁåãt ¬zåÁ ZÁz‰gåÁ Yu“L@
“Áz ÃN˛oÁ “{@ Ã™Ï¸ Nz˛ úÁåy Nz˛ åyYz Nz˛ ¬qm
EÁ{∫ uN˛åÁ∫z N˛y j¬Áå, EÁut ÃÏåÁ™y Nz˛ ob
ú∫ “™¬z N˛Áz üßÁuƒo N˛∫oz “¯@ \§ ÃÏåÁ™y
N˛ÏZ Luo“ÁuÃN˛ ÃÏåÁ™y N˛y ÃÁ∫my FÃ üN˛Á∫ “{
ob ú∫ ú“ÏÂYoÁ “{ EÁ{∫ obyÆ F¬ÁN˛Áı ™ı VÏÃ åÁ™ ƒ | úu∫™Ám
\ÁoÁ “{, úÁåy N˛Á Ào∫ N˛F| ™yb∫ oN˛ HÂYÁ (Pacificwide)
“Áz \ÁoÁ “{@ Alentian Tsunami 1 Eü{¬, 1946 8.6
Kamchatka Tsunami 4 åƒ©§∫, 1952 9.0
uúZ¬z ÃÏåÁ™y Nz˛ Fuo“ÁÃ N˛Áz tzQoz “ÏL, Alentian Tsunami 9 ™ÁY|, 1957 8.3
ƒ{rÁuåN˛ Æ“ §oÁ ÃN˛oz “¯ uN˛ ÃÏåÁ™y GnúëÁ Chilean Tsunami 22 ™F|, 1960 9.5
“Ázåz N˛y Ã§Ãz [ÆÁtÁ Ã©ßÁƒåÁ N˛“ÁÂ ú∫ “{@ Alaska Tsunami 28 ™ÁY|, 1964 9.3
uúZ¬z ÃÏåÁ™y N˛y HÂYÁF| N˛Á úu∫mÁ™ Æ“ §oÁåz (Regional / Local)

Nikaragua 2 uÃo©§∫, 1992 7.6
™ı ™ttTÁ∫ “ÁzoÁ “{ uN˛ ßuƒ…Æ ™ı EÁåz ƒÁ¬Á
Flores, Indonesia 12 utÃ©§∫, 1992 7.7
ÃÏåÁ™y uN˛oåÁ üßÁƒ∆Á¬y “Áz ÃN˛oÁ “{ EÁ{∫ Japan (Okushiri) 12 \Ï¬ÁF|, 1993 7.7
uN˛oåÁ úÁåy NÏ˛Z ™ÏPÆ obyÆ F¬ÁN˛Áı ™ı ß∫ Indonesia (Java) 2 \Óå, 1994 7.8
ÃN˛oÁ “{@ Mexico - Manzarillo 9 EMbÓ§∫, 1995 8.0
Andreanov 10 \Óå, 1996 7.9
Peru Northern 21 ¢˛∫ƒ∫y, 1996 7.8
ÃÏåÁ™y ÃÊqúz ™ı
Papua, New Guinea 17 \Ï¬ÁF|, 1998 7.0
• ÃÏåÁ™y \Áz obyÆ F¬ÁN˛Áı Ãz bN˛∫Áoz “¯, Vanuatu 26 åƒ©§∫, 1999 7.4
EuáN˛o∫ ßÓN˛©ú Nz˛ N˛Á∫m EÁoz “¯@ Turkey 17 ETÀo, 1999 7.6
• NÏ˛Z ÃÏåÁ™y §‰gz “Áz ÃN˛oz “¯@ obyÆ F¬ÁN˛Áı Sea of Marmara (Indonesia)
(Sulawesi Island) 3 ™F|, 2000 7.3
™ı FåN˛y HÂYÁF|, 10 ™y. ÆÁ GÃÃz EuáN˛ Peru - Southern 23 \Óå, 2001 8.4
“Áz ÃN˛oy “{@ Vanuata 2 \åƒ∫y, 2002 7.5
• Ãßy uåY¬z obyÆ F¬ÁNz˛ ÃÏåÁ™y Ãz üßÁuƒo Rat Island 17 åƒ©§∫, 2003 7.7
“Áz ÃN˛oz “{@ Adentian Island (Japan, Honshu) 31 EMbÓ§∫, 2003 7.0
• ÃÏåÁ™y N˛y Tuo LN˛ √ÆuO˛ Nz˛ tÁ{‰gåz Ãz Tokachi-Oki Earthquake 25 uÃo©§∫, 2003 8.3
Hokkaido, Japan
[ÆÁtÁ “Ázoy “{@
Honshu, Japan 05 uÃo©§∫, 2004 7.2
• N˛ßy-N˛ßy ÃÏå™y N˛y ∆ÏøEÁo ™ı Ã™Ï¸ Nz˛ Northern Sumatra 26 utÃ©§∫, 2004 9.0
uN˛åÁ∫z N˛Á úÁåy N˛™ “Ázåz ¬ToÁ “{ EÁ{∫
Ã™Ï¸ N˛y Ão“ utQÁÆy tzåz ¬Toy “{@ GÄÁÁ∫m N˛y ÃÏuƒáÁ “zoÏ EÊT¿z\y N˛Á “y üÆÁzT uN˛ÆÁ TÆÁ “{@
• ÃÏåÁ™y uN˛Ãy ßy Ã™Æ utå ÆÁ ∫Áo ™ı “Áz
ÃN˛oÁ “{@ ¬zQN˛ uƒ≈¬z m EåÏßÁT, ßÁ∫oyÆ ∫ÃÁÆuåN˛ üÁ{˘ÁzuTN˛y ÃÊÀsÁå, “{t∫Á§Át

uƒúmå
N˛Á™ N˛∫ı \“ÁÊ N˛“Î ™ÁNz˛|ubÊT ÃÁzY “y Ã“y

∫Ááz≈ÆÁ™ ∆™Á| N˛“oz “¯,üuoÀúáÁ|n™N˛ úu∫ƒz∆ ™ı ÃÊÀsÁ Nz˛ EuÀonƒ LƒÊ EuT¿™ ∫“åz N˛Á LN˛™Áfi EÁáÁ∫
uƒúmå “y “{@
áÏuåN˛ EÁ{˘ÁzuTN˛ LƒÊ √ÆÁƒÃÁuÆN˛ üuN¿˛ÆÁ ™ı T¿Á“N˛ Ãz ¢˛yg§{N˛, FÃN˛Á uƒ≈¬z m \{ÃÁ uN˛ ú“¬z N˛“Á \Á YÏN˛Á “{ ünÆzN˛ §y™ÁN˛Á™y|
EÁ \To ™ı <<uƒúmå ÆÁ ™ÁNz˛|ubÊT>>
N˛Á¢˛y ÃÏååz ƒ ú‰jåz N˛Áz u™¬oÁ “{@ \å ÃÁ™ÁãÆ
N˛∫, GnúÁt / ÃzƒÁ N˛Á Ãw\å, T¿Á“N˛ Ã™Ó“ ƒ
qzfi N˛y ú“YÁå, Ã™Ó“ ™ı GnúÁt N˛y ÃÓYåÁ
(EußN˛oÁ| osÁ owoyÆ »zmy Nz˛ N˛™|\Á∫y ßy)
™ÁNz˛|ubÊT N˛Á EÊT “{@ \yåå§y™Á ™ı Æ“ GnúÁt
uƒúmå N˛Áz ÃzƒÁ / GnúÁt N˛Á uƒN¿˛Æ ™ÁåoÁ “{ LƒÊ uƒ∆z oÁEÁzÊ Nz˛ üuo \ÁTøN˛ §åÁåÁ, üÆÁzT Ãw\å Ãz úÓƒ,| ÃsÁ osÁ §Át Nz˛ Ãßy N˛ÁÆ|N˛¬ÁúÁı
\§uN˛ Æ“ GnúÁt / ÃzƒÁ N˛y u§N¿˛y LƒÊ / GúÆÁzT N˛y \ÁåN˛Áu∫ÆÁÊ tzåÁ, Q∫ytåz “zoÏ ™ı Ã©úÁuto uN˛ÆÁ \Á ÃN˛oÁ “{@ uN˛ÆÁ \Á ßy
uƒN¿˛ÆÁzú∫Áão N˛y Ã™Ào üuN¿˛ÆÁ “{@ √ÆÁúN˛ üzu∫o N˛∫åÁ, T¿Á“N˛ N˛y ÃÏuåáÁ LƒÊ EÁƒ≈ÆN˛oÁ ∫“Á “{@ §Ã EÁƒ≈ÆN˛oÁ FÃ §Áo N˛y “{ uN˛
Es| ™ı Æ“ ÃÁz Y LƒÊ N˛ÁÆ| ∆ { ¬ y “{ \Áz Nz˛ twu…bTo GnúÁt ™ı ÃÊ∆ÁzVå N˛∫åÁ osÁ FÃz Ãßy EúåÁÆı LƒÊ úÓm|oÆÁ EúåÁÆı@ EÁuQ∫
T¿Á“N˛Nz˛uã¸o “{@ FÃ™ı T¿Á“N˛ u“o EÁ{∫ uÃ¢|˛ uƒN¿˛ÆÁzú∫Áão ÃzƒÁ ütÁå N˛∫åÁ “{@ uƒúmå ™ÁNz˛|ubÊT ÃÁzY MÆÁ “{? FÃ ú∫ uƒYÁ∫ N˛∫ı:-
T¿ Á “N˛u“o “{ @ FÃNz ˛ tÁÆ∫z ™ı Eußƒå EƒáÁ∫mÁ N˛Á úÓmo| ÆÁ úÁ¬å N˛∫ ÃÊÀsÁÆı T¿Á“N˛ • ∆ÁQÁ ™ı EÁÆ ünÆzN˛ úÁ}u¬ÃyáÁ∫N˛ N˛Á N˛ÁÆ|
(Innovation), Ãw\å ( Creation), ú“¬ N˛y u∆N˛ÁÆoÁı N˛Áz ãÆÓåo™ otåÏÃÁ∫ ∆ÏãÆ N˛∫ ÆsÁÃÊßo uN˛ÆÁ \ÁåÁ YÁu“Æz@
(Initiation) üz∫mÁ (Motivation) tyV|N˛Áu¬N˛ ÃN˛oy “¯@ uƒúmå ÃÊÀsÁ N˛Áz ™\§Óo §åÁoÁ “{
Ã©§ãá, ÃÏ Q ÁßÁÃ ( Feel Good ) osÁ osÁ FÃz EÁn™ÃÁo N˛∫ LƒÊ üÆÁzT Ãz ÃÊÀsÁ
EúåÁúå EÁut N˛y ß∫úÓ∫oÁ “{@ ƒo|™Áå ™ı Æ“ N˛y Zuƒ, T¿Á“N˛ EÁáÁ∫ (Customer Base)
ÃÁzY Ãßy ÃÊÀsÁEÁzÊ Nz˛ u¬Æz EuåƒÁÆ| “{@ FÃ osÁ T¿Á“N˛ ÃãoÏu…b ™ı EúzqÁ Ãz ßy EuáN˛
uÃÀb™ ™ı √Æƒ“Á∫ u\Ãz >ƒ{úmuåN˛ √Æƒ“Á∫> ƒwuÚ “Áz ÃN˛oy “{@ Æ“ T¿Á“N˛Áı N˛Áz ÃÊÀsÁ Nz˛
úz∆ƒz ∫ rÁå Eúåz
N˛“oz “¯; ÃÏÀsÁuúo “Áz TÆÁ “{@ FÃ √Æƒ“Á∫ ™ı üuo EÁN˛u |o LƒÊ §åÁÆz ∫QoÁ “{@ üuoÀúáÁ|n™N˛ N˛ÁÆ| osÁ FÃz
úz∆zƒ∫ rÁå osÁ úz∆zƒ∫ √Æƒ“Á∫ ∆Áu™¬ “{@ úu∫ƒz∆ ™ı ÃÊÀsÁ Nz˛ EuÀonƒ LƒÊ EuT¿™ ∫“åz
úz∆ƒz ∫ rÁå Eúåz N˛ÁÆ| osÁ FÃz üßÁuƒo N˛∫åz N˛Á LN˛™Áfi EÁáÁ∫ uƒúmå “y “{@ Ã“y N˛“Á
üßÁuƒo N˛∫åz ƒÁ¬z
ƒÁ¬z Ã™Ào ú“¬ÏEÁzÊ N˛y EXZy \ÁåN˛Á∫y “{@ TÆÁ “{ uN˛ “Marketing is nothing but Ã™Ào ú“¬ÏEÁzÊ N˛y
úz∆zƒ∫ √Æƒ“Á∫ ÃÁ{©Æ, ÃÊÆu™o, ªuYN˛∫, winning over the opponent”.
oÁuN|˛N˛, T¿Á“N˛ N˛Áz ™“nƒ ütÁÆN˛ √Æƒ“Á∫
EXZy \ÁåN˛Á∫y “{@
\yƒå §y™Á √ÆƒÃÁÆ ™ı uƒúmå N˛Á ™“nƒ EÁ{∫
EÁut-2 ∆Áu™¬ “{@ ßy EuáN˛ “{ MÆÁıuN˛ \yƒå §y™Á GnúÁt E™Óo|,
úz∆ƒz ∫ √Æƒ“Á∫ ÃÁ{©Æ,
uƒúmå Nz˛ EãoT|o Ã™Ào N˛™y| YÁ“z ƒz EÁ}u¢˛Ã tyV| Eƒuá osÁ ƒÁÆtÁú∫N˛ “Ázoz “¯@ \yƒå ÃÊÆu™o, ªuYN˛∫,
™ı “Áz ÆÁ ¢˛y¡g ™ı uƒúmåN˛oÁ| N˛“z \Áoz “{.@ §y™Á GnúÁt N˛y EÁƒ≈ÆN˛oÁ ünÆqo: ™“ÃÓÃ
ÃÊÀsÁ ü™ÏQ Ãz Yú∫ÁÃy Ãßy uƒúmå Nz˛ EÊT å“Î N˛y \Áoy “{@ Æ“y N˛Á∫m “{ uN˛ \yƒå
oÁuN|˛N˛, T¿Á“N˛ N˛Áz
“¯@ FåNz˛ N˛ÁÆ| ™ı Eão∫ ß¬z “y “Áz uN˛ãoÏ §y™Á √ÆƒÃÁÆ ™ı T¿Á“N˛ N˛Áz ™“nƒ ut¬ÁoÁ ™“nƒ ütÁÆN˛ √Æƒ“Á∫
™ão√Æ uÃ¢|˛ √ÆƒÃÁÆ ƒwuÚ LƒÊ FÃN˛Á ÃÊ∫qm ∆Á¬yå LƒÊ uåúÏm √Æƒ“Á∫ N˛y EuåƒÁÆ|oÁ “Ázoy
osÁ T¿Á“N˛ u“o “ÁzoÁ “{@ N˛“Á ßy TÆÁ “{ - “{@ N˛“Á ßy TÆÁ “{ uN˛ >>§y™Á EÁT¿“ N˛y uƒ Æ
EÁut-2 ∆Áu™¬ “{@
“Marketing is too important to be left ƒÀoÏ “{@>> \yƒå §y™Á √ÆƒÃÁÆ Nz˛ ™ÁNz˛|ubÊT
with marketing department”. uƒúmå N˛y Æ“ ∫y‰j “{@

uƒúmå
• Æut N˛ÁÆ| Nz˛ Ã©úÁtå ™ı tz∫y “Áz oÁz • ÃÊÀsÁN˛u™|ÆÁı N˛y N˛ÁÆ|q™oÁ LƒÊ GnúÁtN˛oÁ
ÃÊoÁz \åN˛ EÁæÁÁÃå utÆÁ \ÁÆz@ N˛Áz §‰jÁåz Nz˛ √ÆÁúN˛ üÆÁÃ uN˛Æz \ÁLÊ@
• N˛ÁÆ|Á¬Æ úu∫Ã∫ (§Áÿ LƒÊ ßyo∫) ÀƒXZ • ünÆzN˛ ÃÊÀsÁN˛™y| N˛Á PÆÁ¬ ∫QÁ \ÁÆz LƒÊ
LƒÊ EÁN˛ |N˛ “ÁzåÁ YÁu“Æz@ ünÆzN˛ N˛™|YÁ∫y GÃz ú“YÁå / ™“nƒ u™¬z@ ƒÁÀoƒ ™ı uƒúmå
• N˛ÁÆÁ|¬Æ Nz˛ Eãt∫ “ƒÁ, üN˛Á∆ osÁ GuYo ¬ÁzTÁı Nz˛ \yƒå Ào∫ N˛Áz ÃÏáÁ∫åz LƒÊ §‰‰jÁåz
oÁúN¿˛™ “ÁzåÁ YÁu“Æz@
N˛Áz EÁƒÊubo N˛Á GúÁÆ “{@
• N˛ÁÆÁ|¬Æ ™ı §{eåz ƒ \¬úÁå N˛y úÆÁ|õo N˛ÁÆ| Nz˛ üuo • FÃy EƒáÁ∫m Nz˛ NÏ˛∆¬ üÆÁzT Ãz T¿Á“N˛
(EÁãou∫N˛ LƒÊ §Áÿ tÁz å Áı “y) ˚Á∫Á
√ÆƒÀsÁ “Áz@ Àú…boÆÁ LƒÊ úÁu∫»u™N˛ / GnúÁt / ÃzƒÁ üÁõo N˛∫åz “zoÏ
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• úÁ}u¬ÃyáÁ∫N˛ N˛Áz N˛ÁÆ| N˛y üNw˛uo Nz˛ EåÏÃÁ∫ üuo¢˛¬ / GnúÁt GúÆÁzuToÁ / ƒ{¡ÆÏLƒ¬
Ãz \ƒÁ§tz“ Ãuƒ|Ã u™¬z@ Ã“y “y N˛“Á TÆÁ “{ -
Ã“y Ãyb ú∫ ßz\Á \ÁÆz@
• N˛ÁÆ| N˛y uÃTÊ¬ uƒãgÁz E§áÁ∫m N˛Á uƒÀoÁ∫
§åÁÆÁ \ÁÆz@ “Marketing is the creation and
delivery of valuable services, returns
LƒÊ uN¿˛ÆÁãƒÆå ÃÏuåu≈Yo uN˛ÆÁ \ÁL@
and products” uN˛Ãy uƒÚÁå åz Ã“y N˛“Á
• N˛ÁÆÁż N˛Á EÁƒÊbå oN|˛Ã©™o LƒÊ uƒƒzN˛Ã©™o “{ uN˛ Æut √ÆuO˛ ™ı N˛ÁÆ| N˛∫åz N˛y FXZÁ
úÆÁ|úo uN˛ÆÁ \ÁÆz@ ∆uO˛ “{ oÁz N˛ÁÆ| N˛Áz Ã©úÁuto N˛∫åz “zoÏ
• N˛ÁÆ|úÚuo ƒ ÃzƒÁ / GnúÁt ™ı EußåƒoÁ, GuYo o∫yN˛Á uåN˛¬ EÁoÁ “{@ MÆÁıuN˛ LzÃy
üz∫m, Ãw\å EÁut N˛Áz ÃÏuåu≥Áo uN˛ÆÁ \ÁL@ osÁ Gã“ı FÃ “zoÏ üzu∫o ßy uN˛ÆÁ \ÁÆz@ uÀsuo ™ı uƒƒzN˛ \ÁTwo “ÁzoÁ “{@ FÃNz˛ uƒú∫yo
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• EÁáÏuåN˛o™ oN˛åyƒ LƒÊ N˛ÁÆ|úÚuo N˛Áz
“{ uN˛ N˛ÁÆ|úÚuo LƒÊ ÃÁzY ™ı N˛“Î å N˛“Î EƒÁÊqåyÆ §ÁáÁÆı EÁ \Áoy “{@
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uƒãgÁz osÁ fiwub∫u“o Ã©úëÁ “Áz ÃNz˛@
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N˛ÁÆ| úÚuo LƒÊ N˛ÁÆ| √Æƒ“Á∫ ƒÁoÁƒ∫m N˛Áz
N˛ÁÆ|Às¬ Ãz TÁÆ§ ∫“åÁ osÁ T¿Á“N˛Áı N˛Áz uN˛Æz \ÁÆı@
EuáN˛o™ üßÁƒy §åÁåz “zoÏ -
ú∫z∆Áå N˛∫åz N˛y EãÆ üƒwuÆÁı ú∫ EÊNÏ˛∆ uN˛Ãy uƒ˚Áå åz Ã“y N˛“Á “{ uN˛ “When
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üNw˛uo) N˛Áz N˛∫åz Nz˛ u¬Æz EãÆ N˛™|YÁ∫y
• ünÆzN˛ N˛™|YÁ∫y N˛Áz EÁƒÊubo N˛ÁÆ| Nz˛ üuo expect a miracle”.
u™¬-\Ï¬N˛∫ üÆÁÃ N˛∫ı@
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ƒ u∆…boÁ Àú…boÆÁ twu…bTÁzY∫ “Áz@
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twu…b “y N˛Á¢˛y “{@ §ÁN˛y ∫“Á N˛Á™N˛Á\ N˛Á \ÁÆı@
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úy ƒ EÁF| M¬§ MÆÁ “{?

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N˛∫åz Nz˛ u¬L M¬§ uåÆ™Áı N˛Áz uåÆu™o øú \“Á\∫Áåy Nz˛ ÀƒÁ™y EsƒÁ YÁb|∫ >>ÃtÀÆ>>
úy ƒ EÁF| M¬§ N˛ÁTÁż tuÆnƒ “{ - M¬§ ˚Á∫Á
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tzåÁ ∆Áu™¬ “{@ Eúåy ÃzƒÁ Nz˛ LN˛ ßÁT Nz˛ ¢Ê˛g §åÁÆz ∫Qåz Nz˛ u¬L Ã“ÆÁzT tzoÁ “{
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Nz˛ u¬L ™Á¬ jÁzåz ƒÁ¬Á u§¬ EÁ¢˛ ¬ÁzugT N˛Áz
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\“Á\∫Áåy
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statistics - non-life insurance
Report Card: General

GROSS PREMIUM UNDERWRITTEN BY NON LIFE INDUSTRY - 2007-08 (UNAUDITED)
(Rs.in Crores)
MARCH APRIL - MARCH GROWTH OVER THE
INSURER CORRESPONDING PERIOD
2007-08 2006-07 2007-08 2006-07 OF PREVIOUS YEAR
Royal Sundaram 67.42 56.63 695.16 600.58 15.75
Tata-AIG 73.12 54.61 813.39 741.56 9.69
Reliance General 136.68 108.72 1946.42 912.31 113.35
IFFCO-Tokio 207.53 80.05 1235.83 1150.32 7.43
ICICI-lombard 201.81 200.11 3344.69 3003.45 11.36
Bajaj Allianz 253.82 181.90 2404.34 1803.34 33.33
HDFC ERGO General 14.73 19.99 216.58 190.16 13.89
Cholamandalam 84.29 34.74 563.67 314.59 79.17
Future Generali* 2.25 0.00 10.64 0.00
Universal Sompo** 0.00 0.00 0.48 0.00
New India 511.99 534.06 5274.14 5017.19 5.12
National 389.81 386.21 4030.80 3814.42 5.67
United India 371.61 346.22 3738.94 3498.77 6.86
Oriental 348.87 349.00 3855.61 3928.66 -1.86
PRIVATE TOTAL 1041.65 736.74 11231.19 8716.31 28.85
PUBLIC TOTAL 1622.28 1615.49 16899.49 16259.04 3.94
GRAND TOTAL 2663.92 2352.23 28130.68 24975.35 12.63
SPECIALISED INSTITUTIONS
Credit Insurance
ECGC 78.98 72.53 669.39 618.05 8.31
Health Insurance
Star Health & Allied Insurance 10.80 5.72 173.03 22.51 668.70
Apollo DKV* 2.04 0.00 2.98 0.00
Health Total 12.84 5.72 176.02 22.51 681.94
Agriculture Insurance
AIC 52.70 61.84 828.66 564.67 46.75
Note: Compiled on the basis of data submitted by the Insurance companies
* Commenced operations in November, 2007.
** Commenced operations in February, 2008.

round up
General Insurance Council – India (GIC-I), Mumbai and the German

Insurance Association (GDV) have entered into a Memorandum of Co-
operation (MoC) with the key objectives of promoting a co-operative
relationship and mutual understanding between the two organisations;
and to exchange views and information on matters and activities of
common interest.
Mr. K.N. Bhandari, Secretary General,

GIC-I, signing the MoC. Others seen in
the picture are (L to R): Dr. Jorg
Freiherr Von Fiirstenwerth, Member of
Board & CEO, GDV; Mr. Hoenen,
Member of Board, GDV. Seen in the
background is Mr. M. Ramadoss, CMD,
Oriental Insurance Co. Ltd. and EC
member of GIC-I.
Mr. K.N. Bhandari and Dr. Jorg Freiherr

Von Fiirstenwerth displaying the signed
MoCs. Others seen in the picture are
(L to R): Mr. Yogesh Lohiya, CMD, GIC of
India; and Mr. Hoenen.

SPREAD THE WORD...
The above advertisement is issued by IRDA in the Public interest.
Those wishing to publish it for spreading consumer awareness of Insurance may use this artwork for reproduction.

events
5 - 6 May 2008 Making Health Insurance Work for the Poor

Venue: New Delhi By USAID-INDIA and GTZ
7 - 9 May 2008 2nd Asian Insurance CFO Summit

Venue: Singapore By Asia Insurance Review, Singapore
12 – 14 May 2008 International Conference on

Venue: Aqaba, Jordan Insurance and Marine Transportation
By Jordan Insurance Federation
22 - 23 May 2008 Conference on Terrorism and Political Risk in Asia

Venue: Singapore By Asia Insurance Review, Singapore
2 - 4 Jun 2008 2nd Mena CEO Insurance Summit

Venue: Dubai, UAE By Asia Insurance Review, Singapore
11 Jun 2008 Risk Summit 2008

Venue: Mumbai By Asia Insurance Post, India
12 - 13 Jun 2008 Asia Pacific Life Insurance Congress

Venue: Seoul, Korea By Asia Pacific Financial Services Association
22 - 24 Jun 2008 LOMA/LIMRA Strategic Issues Conference

Venue: Seoul, Korea By LOMA
30 Jun - 1 Jul 2008 7th Asia Conference on Catastrophe Insurance

Venue: Ho Chi Minh By Asia Insurance Review, Singapore
Vietnam

RNI No: APBIL/2002/9589
“ view point
Regulations and guidance are currently being prepared to make more transparent
the regulatory treatment across a whole range of Islamic finance products. We are
also committed to continue reviewing our regulatory framework as new structures
emerge in this highly dynamic industry.
Mr Tai Boon Leong
Executive Director, Monetary Authority of Singapore
The International Association of Insurance Supervisors (IAIS) is pleased to be working

closely with the Financial Stability Forum (FSF) in examining measures to enhance
the resilience of the financial system.
Mr Michel Flamée
Chair of the IAIS Executive Committee
The ability of the private players to cash in on the urban (Indian) markets and
innovative distribution channels drove them to higher growth. They are also able to
get more business by convincing a policy holder to go for an additional one, exploiting
the unsaturated urban markets.
Mr C S Rao
Chairman, Insurance Regulatory & Development Authority, India
An embedded risk management culture ensures staff are on the lookout for loss
events which helps contribute to the prevention and reduction of potential future
losses.
Mr Harvey Cropp
General Manager (CORS), Australian Prudential Regulation Authority
The financial services industry needs to identify the appropriate strategic direction
for human capital development. Attention needs to be given to the entry level, to
the specialists and to the senior management levels.
Dr Zeti Akhtar Aziz
Bank Negara Malaysia
State legislators and regulators want to set the record straight. We provide local,
proven consumer protection. And, by working together, we have continued to
improve, enhance and modernize the state-based system of insurance regulation.
Ms Sandy Praeger
NAIC President and Kansas Insurance Commissioner

”

Striking The Perfect Balance: Volume VI, No. 6

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Striking The Perfect Balance: Volume VI, No. 6

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Volume VI, No.

’Ë◊Ê ÁﬂÁŸÿÊ◊∑§ •ı⁄U Áﬂ∑§Ê‚ ¬˝ÊÁœ∑§⁄UáÊ

© 2007 Insurance Regulatory and Development Authority.

IRDA Journal (Vol 6 Iss 6) FINAL.pmd 2 13-05-2008, 12:03

IRDA Journal (Vol 6 Iss 6) FINAL.pmd 3 13-05-2008, 12:03

ALM in Indian Insurance Companies

Changing Priorities in a Dynamic World

ALM in the Financial Services Industry

SRI and Relevance of ALM

IRDA Journal (Vol 6 Iss 6) FINAL.pmd 4 13-05-2008, 12:04

Need for a Sound ALM

IRDA Journal (Vol 6 Iss 6) FINAL.pmd 5 13-05-2008, 12:04

statistics - life insurance

March, 08 2007 - 08 2006 - 07 March, 08 2007 - 08 2006 - 07 March, 08 2007 - 08 2006 - 07

Group Single Premium 2.84 6.69 2.31 0 1 0 513 1312 517

Individual Non-Single Premium 607.79 2531.78 1198.83 166412 754677 480065

Group Single Premium 6.00 62.96 56.32 1 5 7 28500 363664 309264

10 Kotak Mahindra Old Mutual

10 Kotak Mahindra Old Mutual

Individual Single Premium 5.59 32.03 47.03 853 4357 5901

statistics - life insurance

Group Non-Single Premium 0.00 0.00 0.00 0 2 0 0 623 0

Individual Non-Single Premium 0.28 0.41 0.00 747 800 0

Group Non-Single Premium 0.25 2.09 0.00 2 9 0 4428 71672 0

Group Non-Single Premium 0.00 0.00 0.00 0 0 0 0 0 0

Progress of Health Insurance

... Giant Strides of Progress

irda journal 6 May 2008

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VALUE TO IT COULD LEAD TO DISASTROUS RESULTS, EVEN BANKRUPTCY OF THE INSURERS.

irda journal 7 May 2008

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irda journal 8 May 2008

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A simple analysis might consider five among different strategic alternatives.

irda journal 9 May 2008

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Participatory and Non-partici- The Asset Liability Interaction Dynamics

Deep Rooting ALM in Insurance

irda journal 10 May 2008

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irda journal 11 May 2008

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irda journal 12 May 2008

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We welcome consumer experiences.

Send your articles to:

irda journal 13 May 2008

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FROM TIME TO TIME.

Introduction multiple stakeholders. Insurance

irda journal 14 May 2008

IRDA Journal (Vol 6 Iss 6) FINAL.pmd 16 13-05-2008, 12:04

transparent, pushing for improvements in securities (i.e. public-sector bonds may

irda journal 15 May 2008

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irda journal 16 May 2008

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speed development, assets and liabilities which may

2 IAIS Insurance core principles and methodology (2003)

irda journal 17 May 2008

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irda journal 18 May 2008