Insurance Sem 4 - Copy1

A STUDY OF INSURANCE AS AN INVESTMENT STRATEGY
A Project Submitted to
University of Mumbai for partial completion of the degree of
M.Com Part-2 Sem 4 (Accountancy)
Under the Faculty of Commerce
By
Monika Shrinivas Gummula
Under the Guidance of
Gurunathan Pillai
RAJASTHANI SAMMELAN’S
Ghanshyamdas Saraf College Of Arts & Commerce
REACCREDITED BY NAAC WITH ‘A’ GRADE
S.V. Road, Malad (west) Mumbai-400064
April 2018
A STUDY OF INSURANCE AS AN INVESTMENT STRATEGY
A Project Submitted to
University of Mumbai for partial completion of the degree of
M.Com Part-2 Sem 4 (Accountancy)
Under the Faculty of Commerce
By
Monika Shrinivas Gummula
Under the Guidance of
Gurunathan Pillai
April 2018
Certificate
This is to certify that Ms. Sneha Sudesh Burade Roll No:11 has worked and duly
completed her project for the degree of Master in Commerce under the Faculty of
Commerce in the subject of Accountancy and her project is entitled, “Investment
Strategies of Middle Income Group Individuals” under my supervision. I further
certify that the entire work has been done by the learner under my guidance and that no
part of it has been submitted previously for any Degree or Diploma of any University.
It is her own work and facts reported by her personal findings and investigations.
Project Guide : Principal :

Date :
External Examiner : College Seal :

Date :
Declaration by learner
I the undersigned Miss Monika Shrinivas Gummula here by, declare that the work
embodied in this project work titled “A Study Of Insurance As An Investment
Strategy”, forms my own contribution to the research work carried out under the
guidance of Gurunathan Pillai is a result of my own research work and has not been
previously submitted to any other University for any other Degree/ Diploma to this or
any other University.
Whether reference has been made to previous works of others, it has been clearly
indicated as such and included in the bibliography.
I, here by further declare that all information of this document has been obtained and
presented in accordance with academic rules and ethical conduct.
Name and Signature of the learner
Certified by
Name and Signature of the Guiding Teacher
Acknowledgement
To list who all have helped me is difficult because they are so numerous and the depth
is so enormous.
I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.
I take this opportunity to thank the University of Mumbai for giving me chance to do
this project.
I would like to thank my Principal, Mrs. Bhavana Vaidya for providing the necessary
facilities required for completion of this project.
I would also like to express my sincere gratitude towards my project guide
Gurunathan Pillai whose guidance and care made the project successful.
I would also like to thank my College Library, for having provided various refernce
books related to my project.
Lastly, I would like to thank each and every person who directly or indirectly helped
me in the completion of the project especially my Parents and Peers who supported
me throughout my project.
SUMMARY
The recent global financial crisis, combined with regulatory changes in financial industries, has
altered the financial landscape in terms of how financing can be achieved and the potential role of
institutional investors. Before the crisis, banks and capital markets were significant sources for project
financing. However, increases in the cost of interbank lending and the expectation of tighter
regulations have constrained the ability of banks and equity markets to provide long-term financing.
The potential role that insurers, particularly life insurers and pension funds, can play as long-term
institutional investors has become a central topic of discussion in various fora. How this role develops
will, in the long run, affect how firms obtain financing for their investments and ultimately lead to
growth of the real economy. In the current low interest rate environment, financing long-term
investment can be beneficial for inter alia life insurers (as well as pension funds) looking to match
their long term liabilities with long duration assets, and having a steady investment income stream
from these investments. On the other hand, the risks associated with such assets and their regulatory
treatment may inhibit insurance company investments.
The objective of this report is to provide an overview of the evolving investment strategies of insurers
and to identify the opportunities and constraints insurers may face with respect to long-term
investment activity. The report investigates the extent to which changes in macroeconomic conditions,
market developments and insurance regulation may affect the role of insurers in long-term investment
financing. In response to the recent financial crisis and the current macroeconomic conditions, the risk
appetites of insurers and pension funds are diversifying. In searching for higher yields, some fund
managers have opted for “re-risking” strategies by investing in alternative assets (illiquid assets) or in
emerging markets. Others have chosen “de-risking” strategies by investing in shorter-term assets so as
to cope with changing regulation. Further, since fixed income instruments are presently the
predominant asset class of life insurers, low interest rates have led to lower investment income and
earnings might be insufficient to cover investment guarantees that often constitute an important
product feature of life insurance contracts.
The asset and liability management (ALM) strategies of insurers vary depending on the company’s
lines of business. Non-life insurers primarily use stochastic models such as dynamic financial analysis
(DFA) to cope with their liquidity risks. Life insurers generally engage in immunisation strategies,
optimisation strategies, and scenario analyses, where stochastic modelling is extensively used in
economic scenario generators (ESG) for valuation and risk modelling purposes.
The profitability of insurance companies globally continues to be under serious pressure following a
sustained period of low interest rates, increased regulation and intense underwriting competition. Over
recent years insurers have battled to protect and improve profitability, but they are now finding fewer
levers left to pull on the operating side of their businesses. As a result, insurers are now taking a closer
and more calculated look at the capital efficiency and risk-return profile of their investment portfolios.
INDEX
Chapter No. Title of Chapter Page no.

1. Introduction 1
2. An overview of insurance industry 3-32

2.1 Evolution of Insurance
2.2 History of Insurance
2.3 Composition of Authority
3. Company Profile 33-40
3.1 History,Growth , Awards and recognitions
3.2 Overview
3.3 How it works
3.4 Benefits of investment strategy
4. Other investment strategies 41-55
5. Conclusion 56
 Bibliography
INTRODUCTION
Insurance industry is an important and integral component of macro-economy and has

emerged as a dominant institutional player in the financial market impacting the health of economy
through its multidimensional role in saving and capital market. It acts as a mobilizer of savings, a
financial intermediary, a promoter of investment activities, a stabilizer of financial markets and a risk
manager. Insurance companies generally function on two dimensional landscapes, which embrace
a)underwriting activity, which is mainly centered on collecting premiums and honoring claim;
b) investment activity, which is meant to dispense allowed assets into various investments to earn
additional revenues in the form of interest, dividends and realized capital gains. Due to the
complexities of insurance activities, many recent studies have attempted to use innovative techniques
for designing effective strategies for the insurance firms.
Investment management is a backbreaking area of operation in any insurance company, which
has to generate reserve for claim that might arise over a period keeping in view the different risk level,
regulations and a variety of investment objective implicit in mind of policyholders and shareholders.
Insurance companies invest their shareholder’s funds, policyholder’s fund and other temporarily
available financial resources, which have a valuable contribution to firm as well as to economy.
Insurance investments are oiling the wheels of economic and social development of the nation.
Insurance companies decrease dependence on the banking system, acting as stun absorber now and
again for budgetary trouble (“Promoting longer-term investment by institutional investors: Selected
issues and policies,”. Insurers should have in place sound, systematic and objective process of
determining investment pattern (“Insurance investment in a challenging global environment,”) to
maximize the value of shareholder as well preserve the value of policyholder.
Insurance companies can invest their funds in short term and long-term financial instruments viz.,
securities of money market and capital market. The investment portfolio is generally overwhelmed by
long-term assets, but one part of funds is invested in short-terms instruments for securitization of
liquidity. Investment portfolio must be in accordance with liquidity need, profitability, reinsurance
arrangements, leverage and stream of premium. Every portfolio should also be rebalanced from time
to time so that highest possible level of return for a given level of risk can be obtained. Insurer should
determine investment portfolio by using a robust optimization framework and
diversifying investment portfolio into higher income generating strategies with firm specific
constraints to increase overall efficiency and risk generating return. The point of convergence for
insurance investment portfolio is to ensure long-term safety, and profitability of customer's funds.
Therefore, in this view of public interest, investment pattern of insurance companies is regulated in
some countries.
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The insurance industry in India is subject to comprehensive set of rules and regulations prescribed
by IRDAI (The Insurance Regulatory and Development Authority of India) to ensure safety of
policyholder’s funds. The regulations austerely specify types of securities in which insurers may
invest and limit their share in total amount. Insurance companies are required to invest certain
minimum amounts of their investible fund in government securities; and restrictions are likewise
placed on the amount to be invested in approved investments and other investments, according to a
detailed list that includes specific equities and corporate bonds as well as bank deposits. Investments
in companies that have a strong multi-year dividend payment record fall under the category of
approved investments. Investments that do not fit these criteria are treated as other investments
(“Report of the committee on investment pattern for insurance and pension sector”). The objective
behind such across the board regulation is the preservation of the real value of funds and supports an
insurer’s ability to satisfy their commitment towards policyholders in circumstances of an unstable
investment setting.
The key indicators of insurance investment activities facilitate the design of policies that may
improve profitability of the insurance industry. Investment activities of insurance firms have important
macroeconomic consequences for allocation of funds between different sectors of the economy;
relatively few studies investigate the investing activities of insurance companies. Majority of studies
were based on theoretical aspect of investment pattern, investment regulation and financial
performance of insurance companies. Investment pattern is not given due importance or adequately
explored. Hence, the determinants of insurers’ long term investment portfolio have attracted keen
interest of investors, scientific researchers, financial markets analysts and insurance regulators. This
paper seeks to cover more scientific research and academic debate into insurers’ investment
Portfolio.
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2.An overview of Insurance industry
2.1Evolution of Insurance
Some kind of life insurance was practiced in ancient Rome, where citizens used to form burial clubs
that would meet the funeral expenses of its members. The code of ‘Manu’ that was in force during the
Reign of Cholas in South India shows that there was the practice of marine insurance carried out by
traders in India with those in Sri Lanka, Egypt and Greece. As the European civilization progressed,
welfare practices also became more refined. With the discovery of new lands, sea routes and the
consequent growth in trade, there was a need to protect the traders from loss on account of fire,
shipwrecks and the like. As a result the need for insurance came into existence.
Meaning of Insurance
Insurance is “a contract for reducing losses from accident incurred by an individual party through a
distribution of the risk of such losses among a number of parties”. The definition goes on to say: “In
return for a specified consideration, the insurer undertakes to pay the insured or his beneficiary
some specified amount in the event that the insured suffers loss by pooling both the financial
contributions and the ‘insurable risks’ of a large number of policyholders. The insured is typically able
to absorb losses incurred over any given period much more easily than would the uninsured
individual”.
2.2History of Life Insurance in India

The insurance sector in India has come back to the square one from being an open competitive market
to nationalization and back to a liberalized market once again. The business of life insurance started in
India in the year 1818, with the establishment of the Oriental Life Insurance Company
in Calcutta.
Milestones in the Life Insurance Business in India:

• 1912: The Indian Life Insurance Companies Act enacted as the first statute to regulate the life
insurance business.
• 1928: The Indian Insurance Companies Act enacted to enable the government to collect statistical
information both about life and non-life insurance businesses.
• 1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective of
protecting the interests of the insuring public.
• 1956: 245 Indian and Foreign Insurers and Provident Societies taken over by the Central
Government and nationalised. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital
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contribution of Rs. 5 crore from the Government of India.
• 1993: The Indian government constituted the “Malhotra Committee” to suggest reforms in the
Insurance Industry.
• 1994: “Malhotra Committee” submitted its report.
• 1999: the Insurance Regulatory Development Act (IRDA) was passed in the Indian Parliament and
the door was opened for private companies with foreign equity.
2.3Composition of Authority
The sec.4 of IRDA Act' 1999, (which was constituted by an act of parliament) specify the composition
of authority, who were appointed by the Government of India. The authority is a ten-member team
consisting of :-
1. A Chairman
2. Five whole-time members and
3. Four part-time members
Duties, Powers and Functions of Authorities in IRDA

Sec.14 of IRDA Act’, 1999 lays down the duties, powers and functions for the authorities in IRDA. It
is subject to the provisions of this act and any other law for the time being in force. The authority shall
have the duty to regulate, promote and ensure orderly growth of the insurance business and re-
insurance business. The powers and functions of the authority shall include:
1. Issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such
registration;
2. Protect the interests of the policy holders in matters concerned with assigning the policy,
nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of
policy and other terms and conditions of contracts of insurance;
3. Specify the requisite qualifications, code of conduct and practical training for insurance
intermediaries and agents;
4. Specify the code of conduct for surveyors and loss assessors;Life Insurance – A multi purpose
option
Most of us, especially the salaried people believe that the best time to start tax planning is always at
the beginning of a financial year. That is the time we get our increments and bonuses, and self-
employed/businessmen have a clear idea of how much they have earned during the previous year.
Invariably, we end up investing in a hurry without proper planning or evaluating various tax saving
products and features during the last quarter of the financial year (January-March period). These
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tricky times pose several challenges for us. Investing a portion of your total savings in some securities
is an ideal method of tax planning out of which Life Insurance is one of the most effective and
preferred avenues across all investments.
While the main objective of life insurance is to provide financial protection to its beneficiaries, in case
of unforeseen events, it also goes a step ahead to offer a host of tax benefits which is an icing on the
cake. How much life insurance an individual needs largely depends on factors such as regular income,
expenses, financial obligations, and future goals like education, marriage etc. Not only life insurance
but health insurance also helps you save overall on the net tax liability, with greater advantage for
senior citizens.
Let’s see the options and benefits
You need to ensure that the Sum Assured of the policy is at least 10 times that of Annual Premium in
the year of premium payment.
You can purchase life insurance in the form of a term plan, traditional savings and protection plan,
whole life plan, ULIP or as a pension plan.
You can avail a tax benefit by way of deduction towards premium paid on life insurance policies up
to Rs. 150,000 under Section 80C of the Income Tax Act, 1961. This also includes premium paid by
you for life insurance for your spouse or premium paid for your child's policy.
If your nominee claims the insurance money in case of your unfortunate demise, the claim amount is
also tax deductible under Sec 10D. The same benefit is extended to Unit Linked Insurance
Plans (ULIPs) and retirement plans under Section 80CCC.
If you have taken any pension/annuity plan, you will be allowed a deduction up to Rs. 1 lakh. On
maturity of the accumulated amount, 2/3rd of the income is taxable, while the remaining 1/3rd is tax
free.
Unlike other savings instrument, life insurance has an additional EEE (Exempt Exempt Exempt)
benefit – the amount you invest, the amount that your investment earns and the amount that you
finally receive is all exempted from income tax.
There are various riders or additional benefits that can be added to a life insurance plan, at a
minimum cost, which will also offer tax benefits.
What we need to keep in mind is that if the mode of payment is in cash, you cannot avail of any tax
benefits.
A better option than fixed deposits
A tax saving fixed deposit will offer you peace of mind but there is usually a lock-in period where the
money cannot be withdrawn before maturity. The interest that you earn on FDs is also taxable.nal
organizations connected with the insurance and re-insurance business;
7. Levy the fees and other charges for carrying out the purposes of this
act;
8. Control and regulation of the rates, advantages, terms and conditions that may be offered by
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insurers in respect of general insurance business not so controlled and regulated by the Tariff Advisory
Committee under sec.64U of the Insurance Act, 1938;
9. Specify the form and manner in which books of account shall be maintained and statement of
accounts shall be rendered by insurers and other insurance intermediaries;
10. Regulate the investment of funds by insurance companies;
11. Regulate the maintenance of margin of solvency;
12. Adjudication of disputes between insurers and intermediaries;
13. Supervise the functioning of the Tariff Advisory Committee;
14. Specify the percentage of premium income of the insurer to finance schemes for promoting and
regulating professional organizations;
15. Specify the percentage of life insurance business and general insurance business to be undertaken
by the insurer in the rural or social sector; and
16. Exercise such other powers as may be prescribed.
Growth of Life Insurance in India

Before the private players entered into the market, LIC was the only dominant player in the public
sector. LIC enjoyed over 98% of the market share in the early stage of liberalization and private
players suffered losses in the first year of their operations. But LIC’s market share has drastically
reduced and now it is nearly 78% and 22% of the market share has been gained by the private players.
It could be seen that the Indian life insurance industry is an underdeveloped one, as 80% of the Indian
population is still not under the insurance coverage. Therefore, there is ample scope for the growth of
the life insurance sector in India. Previously, customers were insured with public insurance companies
with no flexibility and transparency in the products. They have visualized the life insurance as a tax
saving device only. As the private players entered, the change has taken place in terms of offering
flexibility and transparency. Customers are looking for new and innovative products and are more
interested to take insurance from private players due to its attractive features and services.
Emergence of Private Insurance Players

The Government of India liberalized the insurance sector in March 2000, which lifted the entry
restrictions for private insurance players, allowing foreign players to enter into the Indian market and
start their operations in India. Each foreign company needs to have a 26% equity capital to enter into
the Indian insurance market. Many foreign companies have joined their hands with the Indian
companies and started their operations in early 2001. Currently there are 26 life insurance companies
that are operating in the private sector. However, the private insurance companies have three
times more products than public insurance companies. Analysts found that the private insurance
players have established their own identities in the Indian market within a short period of time. India
has the world’s top companies like AIG, New York Life, ING, Lombard, Aviva, MetLife, etc.;
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competing in the same market. The private sector players have seen 200% growth in the second year
of liberalization. The current annual growth in the average insurance premium in India has been 8.2%
compared with the global average of 3.4%.
Business Strategies
Innovative products, smart marketing, and aggressive distribution have enabled the private insurance
companies to sign up Indian customers faster than expected. To retain their positions and to stand with
the competition, the private players are looking for various methods and are also following a variety
of strategies. The private players are mainly concentrating on customer service. For this, they are
looking at delivery channels like callcenters, internet, telemarketing and direct marketing. By using
these approaches, companies are effectively marketing their products and providing better service to
their customers.
Distribution Channels
The distribution channel is one of the best ways to increase the growth of the insurance industry.
Channels like corporate agents, brokers and banc-assurance are playing a greater role in distribution.
The general way of selling insurance products is through agents and brokers. But the companies are
now looking at a new distribution channel “Work-site marketing”, which is nothing but selling of
financial products and other services to employees through workplace participation and is entirely on
a voluntary basis. In this, the employee has to pay for the products through a payroll deduction. The
private players are looking for alternative channels to market their products as they are facing
difficulty in training new agents with skill sets, which is a time-consuming and costly activity. The
private players are mainly concentrating on banc assurance model; through this, they are concentrating
on providing the service to rural and semi-urban sector. In the banc assurance model, the insurance
companies have tie-ups with the banks and sell their products to the bank customers. With the rise in
agricultural income, the potential for banc assurance has increased in smaller cities. So the companies
are moving to smaller cities and towns, which have also increased the growth opportunity for
insurance companies.
According to a Fitch report on the insurance sector, the banc assurance channel has contributed about
20% of the total insurance business in the financial year 2005, whereas all the alternative distribution
channels together have contributed 25-30% of sales in private insurance companies. These distribution
channels include corporate brokers, internet and corporate agents
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Need for Insurance Companies to become a Learning Organization
As such it could be seen that the competition before insurance companies are large. With rapid change
in one’s environment, however the risk of becoming obsolete – of no longer being relevant to one’s
customer is indeed real; clearly, rapid change leads to strong pressure to learn for both
individuals and organization (Peter Lorange, 1996)110. When it comes to insurance industry, the
markets are highly competitive and organizations need to introduce new products or develop their
current products permanently. This means that innovation is a key part of their business strategies and
the only source of competitive advantage can be found in continuous innovation of the insurance
products. This can be achieved by creating a learning environment where the employees are motivated
to learn about the changing needs and expectations of the customers, competing products in the
market and new trends in marketing, in order that they may work more effectively in this complex and
dynamic settings. All of this means more change facing the insurance industry and thus there is a need
for the insurance companies to become more effective learning organizations.
Life Insurance: How To Get the Most Out Of Your Policy

Life insurance can be a very important investment, especially if you have a growing family. You can
get hassle-free wealth distribution among your children, emergency loans at low interest, assured
benefits and in the end, a death benefit. All you need to do is to work out a sensible plan with your
insurance advisor, through which you can avail yourself of these aspects of your life insurance policy.
Beneficiaries
The most prominent feature of a life insurance policy is the beneficiary clause, which facilitates the
easy transfer of your money to your successors. Different kinds of beneficiaries in life insurance:
Multiple Beneficiaries
You can have your children as multiple beneficiaries. All you have to do is to indicate the names of
these recipients and the amount of proceeds that they are going to get.
Contingent Beneficiary
Naming a contingent beneficiary is always practical. Suppose that your first (primary) beneficiary dies
near the time of your own death. In this case, your children will qualify for your insurance money if
you nominate them as contingent (secondary) beneficiaries. A contingent beneficiary can get
life insurance proceeds if the primary beneficiary dies before he or she can receive the assets.
Minor as a Beneficiary
If you have named your minor child as a beneficiary, you will have to appoint a guardian/trustee who
will administer the insurance proceeds upon your death.
Revocable Beneficiary
Here, the recipient can be changed any time during the policy.
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Irrevocable beneficiary
In this type of beneficiary class, you cannot change your beneficiary's name unless they consent to it.
With an irrevocable beneficiary, creditors cannot touch the policy proceeds as these monies are not
considered to be a part of your assets.
Lapse
It can happen that due to certain circumstances you forget to pay your premiums, even in the specified
grace period. Unfortunately, because you have missed the deadline your policy will lapse.
Consequently, your insurance company can stop covering you or may provide you reduced insurance
coverage equivalent to the total premiums paid formerly (also called paid-up policies). Nonetheless, a
lapsed policy may be renewed in some plans, although the exact renewal procedure varies among
different insurers.
Cash Surrender Value
Permanent life insurance policies like universal life insurance, whole life insurance and variable life
insurance are more attractive thanks to the presence of built-in cash value. (Term life insurance
policies do not offer cash values). The interesting aspect of these policies is that you can surrender
your policy and get the accrued cash value in your hands provided you have a substantial amount of
cash value.
Cash Value
Here, a part of your premium is put in savings or another investment account according to the type of
policy you purchase. As a result, the ongoing interest you receive from your investment account
gradually increases your cash value.
Non-Forfeiture Options
In permanent life insurance policies, if you fail to pay the premiums in the grace period, you won't
lose your life insurance - your accumulated cash value will come to your rescue with the following
options :
1. Terminate your policy and get the cash surrender value in hard cash
2. Go for reduced coverage for the remaining term of the policy with no future premiums. (i.e. Paid
up policy)
3. Use your accumulated cash value to pay the future premiums (also referred as automatic premium
loan)
4. Buy an extended term insurance with the remaining cash surrender value. (no further premiums
required.)
The above non-forfeiture options may differ from one insurance company to another.
It is always easy to terminate (surrender) your policy and get the entire cash surrender value, which
will solve your liquidity problems. However, you need to consider many factors before surrendering
your policy, such as the increase in the cash surrender value if your policy is maintained for the full
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term.
Policy Loans
Another positive characteristic of a life insurance policy is that you can take out a policy loan against
your policy to cater to your emergency needs. The interest is relatively low and the policy loan can be
repaid in a lump sum or installments.
If you are incapable of repaying your policy loan, your insurance company will use your cash value to
settle the loan.
Participating Vs. Non-Participating Policies
You can opt for participating policies in which you participate in the profits of your insurance
company and get dividends annually. Here, the premiums are somewhat higher.
Conversely, non-participating policies do not participate in the profits of the insurance company and
therefore do not have the dividend option. Here, the premiums are relatively lower.
Unlike permanent life insurance policies, term life insurance policies are non-participating policies.
Policy Dividends
Dividends are the earnings paid out by the insurer to its shareholders and/or policyholders. You are
entitled to enjoy the fruits of your insurance company's labor, for example, dividends if you own
a participating policy.If you do receive a dividend, it is up to you to decide how to make use of it.
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I. Insurance business and insurers as institutional investors
1. Nature of insurance business and differences across insurers
Insurance companies assume risk on behalf of their policyholders in exchange for a premium. An
insurance contract is a “contract under which one party (the insurer) accepts significant insurance risk
from another party (the policyholder) by agreeing to compensate the policyholder if a specified
uncertain future event (the insured event) adversely affects the policyholder”. The insurance industry
contributes to economic efficiency and fosters economic growth in several ways. First, insurance
improves risk allocation of an economy and reduces transaction costs. Second, by protecting existing
assets, insurers provide economic agents with a more stable financial basis. Third, insurers foster
governance through their asset holdings by encouraging risk mitigation through warranties and/or risk
exclusions,and direct monitoring of risks. Fourth, insurance can be an alternative and supplemental
financial support in the event of economic losses caused by, for example, accidents,catastrophes and
bankruptcies.
Insurers are generally classified as either a primary insurance company or a reinsurance company.
Primary insurers cover individual and corporation risk and can be categorised according to the type of
event that is insured. Most insurers are either life insurers or non-life insurers, although some
companies can be composite insurers with both life and non-life businesses. Reinsurance companies
insure the risks of primary insurers, and are thus an important element of the latter’s risk management.
Life vs. non-life insurers
Life insurers offer a hedge against the risk of an interruption in individual’s and/or family’s finances,
or in the case of key personnel insurance, a business’ income stream, such interruption often being
caused by death, disability or retirement. Life insurance contracts can be for short periods (for
example, accident and death) or for longer periods (for example, a whole life). Life insurance products
often incorporate a savings element,where life insurance companies contribute to financial-sector flow
of funds. The main life insurance products are whole life insurance, term life insurance, endowment
life insurance and annuities (see Table 1)
Table 1. Main types of life insurance products

Life insurance Description
Whole life insurance The contract covers the insured throughout his or her life,
regardless of how long or short that is, with
designated beneficiaries being paid when the insured dies.
Term life insurance The contract covers only a certain number of years, meaning
that the insured’s beneficiaries receive
payment only if he or she dies within the period of coverage.
Endowment insurance Benefits are payable to a living insured on a specified future
date or to the beneficiaries of the insured if he
or she dies before the date specified in the policy.
Annuities Life insurers promise to make a series of future payments to the
insured until his or her death, in exchange
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for an immediate lump-sum payment or a series of regular
payments.
Non-life insurance companies offer policies such as property and casualty insurance that also
comprises liability insurance (see Table 2). Property and casualty (P&C) insurance protects against
fire, theft, weather perils, negligence, and other acts and events that can result in injury to persons or
property. In addition to traditional insurance lines – automobile, fire, marine, personal liability and
property coverage – many P&C insurance companies offer health and medical insurance, thus
competing with life insurance companies that offer similar services. Liability insurance protects
against claims for indemnification.
Table 2. Main types of non-life insurance contracts

Non-life insurance Description
Property insurance The contract protects businesses and owners from the impact of
risk associated with owning property.
This includes replacement and loss of earnings from income-
producing property as well as covering
financial losses suffered by owners of residential property.
Casualty insurance The insurance comprises three common forms of contracts:
automobile, flood, and liability.
There are a number of key differences between life and non-life insurance business. Life insurance
contracts are relatively longer-term compared to non-life insurance policies, which are usually for a
term of one year or less, whereas uncertainty about the timing and volume of non-life insurance claim
payments as well as the difficulty of predicting perils has led non-life business to being considered
riskier than life insurance. In contrast, life insurance mainly insures one event – death, the risk of
which for any individual is often based on a standard mortality table. Further, the potential losses from
non-life insurance are more difficult to predict than for life insurance. The different natures of their
business mean that life and non-life insurers have different operating strategies. Non-life insurers tend
to maintain substantial liquidity, since claims may arise from the day the policy is underwritten. In
contrast, claims towards life insurers are generally better estimated enabling life insurers to invest in
less liquid assets, such as long-term assets, and to follow a “buy and hold” strategy.
Reinsurers
Reinsurers insure the risk of primary insurers. Reinsurance can be defined as a financial transaction by
which the risk is (partly) transferred from an insurance company to a reinsurer in exchange for a
premium. There are several reasons for primary insurance companies to purchase reinsurance.
For example, reinsurance can increase an insurer’s underwriting capacity. Reinsurance also leads to
lower solvency capital requirements and thus allows primary insurers to take more diverse risks with
the same working capital. Furthermore, reinsurance allows insurers to more effectively protect
themselves from extreme events such as earthquakes, floods, airplane crashes, and other catastrophic
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events. In addition, purchasing reinsurance may provide insurers with access to the reinsurer’s
expertise in, for example, underwriting and claims management.
2. Pension funds
Pension funds provide individuals with a hedge against the loss of income in their retirement years.
They enable employees to invest a portion of their current income in a portfolio of bonds, stocks, real
estate, and other assets in the expectation of having more money in the future from investment returns.
Private pension funds are sponsored by employers, groups, and individuals as alternative and/or
supplemental to public pension plans. Private pension funds are increasingly becoming a standard part
of retirement planning, as concerns about the sufficiency of the public pension system increases.
Pension plans are either defined benefit plans or defined contribution plans (see Table 3). Private
pension plans may retain life insurers as asset managers, annuity providers and plan administrators.
Table 3. Types of pension plans
Pension Plans Description
Defined benefit plans They promise specific retirement payments to
employees, depending on their salary during
their working years and their length of
employment. Such programs have the
advantage of a guaranteed retirement income,
but exposes the plan provider to the risk of
having lower than expected investment return.
Defined contribution plans Such plans specify how much each employee
must contribute each year, but the amount to be
received after retirement will vary based on the
amount saved and the investment returns of
accumulated savings. The funds saved typically
belong to the employee and are portable.
Similar to life insurers, pension funds are long-term investors with relatively predictable liquidity
needs. The cash inflows of pension funds can be assessed with considerable accuracy, since each
employee/beneficiary usually pays in a fixed percentage of their salary. Similarly, the cash outflows of
pension funds can be well forecasted because the formula for benefit payments is set out in the
contract between the fund and its beneficiaries. These characteristics enable pension funds to invest in
long-term assets like bonds, equity, mortgages and real estate, and fund managers tend to hold these
assets for a relatively long term. Further, rising longevity has increased pressure on pension funds to
invest in long-term assets.
The OECD survey of 99 large pension funds (LPFs) and public pension reserve funds (PPRFs) shows
that both LPFs and PPRFs exhibit similar asset allocation trends for the period 2010 to 2015:
decreasing investments in equities, with increasing investments in fixed income, and gradually
increasing investments in alternative assets such as infrastructure and private equity. The survey
results indicate growing interest in this form of investment by pension fund managers. This suggests
the existence of considerable barriers and disincentives limiting such investment. Specifically, when
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considering total assets under management for the complete survey (i.e., 104 funds), infrastructure
investment in the form of unlisted equity and debt in 2013 represents only 1.0% of the total assets
under management by the surveyed funds.
3. Risk-taking by insurers investment decisions – factors for consideration
To better understand why insurers may make risky investments, this section reviews academic
literature on risk-taking behaviour of insurers. The studies reviewed incorporate both the empirical
and the theoretical research and cover global insurance markets for different types of insurance
undertakings.
In corporate finance theory, excessive risk taking indicates that firms are transferring wealth from
bondholders to shareholders by increasing firm risk after bonds have been issued. If shareholders
cannot commit to an appropriate risk strategy, this may lead to a detrimental situation for bondholders,
with in turn detrimental consequences for shareholders. This agency problem can also arise within the
shareholder-policyholder relationship of a stock insurance company. Specifically, there are mainly
four ways in which insurers may be taking excessive risks. First, the risk of an insurer’s liabilities can
increase if the insurer charges insufficient premiums or has a imprudent underwriting policy, both
activities having the potential to rapidly expand an insurer’s volume of business. Second, after
collecting premiums from their policyholders, insurers can change their asset allocation toward a
riskier investment portfolio. Third, insurers can reduce their equity capital endowment to the
minimum regulatory capital required, which leads to a higher probability of insolvency. Finally, an
insurer may fail to sufficiently manage risks through reinsurance arrangements. Academic studies
show that firm size has a significant and mixed impact on insurer risk. On the one hand, larger
insurers generally hold relatively more diversified insurance products and investment portfolios,
which give large insurers greater latitude to control their risk. On the other hand, size may be an
important contributing factor for large insurers to take on more risks (particularly if there is a
perception of “too big to fail”), which could potentially result in a greater impact on the market and
policyholders.
The International Association of Insurance Supervisors (IAIS) will adopt a revised methodology for
the assessment of globally systemically-important insurers (G-SIIs) from 2016. To counter the risk of
such systemically-important insurers, IAIS has developed enhanced regulatory requirements designed
to mitigate their systemic risk such as the Basic Capital Requirements (BCR) and the Higher Loss
Absorbency (HLA). Several empirical studies have focussed on identifying the internal and external
determinants of insurer risk. Specifically, the firm-specific determinants of non-life insurer solvency
risk are: firm size, investment performance, underwriting income, liquidity, operating margin,
premium growth and the growth rate of equity capital. Consistent with the findings for non-life
insurers, firm size, investment performance, and operating margin are factors that determine the risk
of life/health insurers.
Additionally, changes in asset mix, changes in product mix and insurance leverage are found to be
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important risk indicators for life/health insurers. The market/economic factors that affect non-life
insurer risk are: the number of insurers (competition), underwriting cycle, combined ratio,
unanticipated inflation, interest rate level, and interest rate change.With respect to life/ health insurers,
important external risk indicators are: accident and health underwriting cycle, interest rate levels,
investment-related products, long-term interest rates, personal income, and real estate returns.
II. Detailed assessment of insurer investment tools and decisions

1. Common investment models
The basic theoretical model for investment management is the Markowitz portfolio selection model.
The Markowitz model assumes that risk-averse investors only care about the expected return and risk
of their portfolio investment, measured by the variance of the portfolio return. They thus build mean-
variance-efficient investment portfolios to minimise the variance of portfolio return given a desired
expected return, or maximise the expected return, given a specific variance of the portfolio return. The
efficient risk-return opportunities available to the investor are, as a first step, mapped by the so-called
efficient frontier of risky assets. This frontier is a diagram of the lowest possible variance that can be
attained for a given portfolio’s expected return. In the second step, by including a risk-free security,
the investor searches for the so called capital allocation line (CAL) with the highest reward-to-
volatility ratio (i.e., the steepest slope). The market portfolio is found where the CAL is tangent to the
efficient frontier. Finally, the investor chooses the appropriate mix between the optimal risk portfolio
and risk-free securities. Sophisticated insurers may use models with risk measures such as VaR or
TailVar, which are more appropriate than the variance. In addition they do not use a
multivariate normal distribution for the movements of assets and liabilities. Therefore, the portfolio
allocation is constructed in a different way in these approaches.
Although the Markowitz model is based on a perfect capital market, which assumes no taxes and
transaction costs, perfect information and no restrictions on investment or financing, this model is the
basis for many real-world investment models. The same applies to the capital asset pricing model
(CAPM), which identifies the relationship between systematic risks and expected (required) return of
financial assets.
Specifically, the CAPM aims to answer the following two questions: what are the risk adequate
prices for financial assets if the capital market is in equilibrium?, and is an investment advantageous
or disadvantageous compared to its “fair” rate of return based on the CAPM? In the CAPM, the
expected (required) return of securities is calculated as the risk-free rate of return plus a risk premium
that is dependent on the systematic risk of securities. Thereby, the CAPM deals with two types of risk,
namely, unsystematic and systematic risk, that is, the non-diversifiable risk. The model’s central
implication is that only systematic risk determines asset prices.
There are several measures used to examine the performance of an investment, taking its risk into
account. Jensen’s Alpha measures the difference between the expected return of an investment and the
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investment’s required “fair” rate of return, as determined by the CAPM. Investments with a positive
Alpha promise an excess return to be realised. Jensen’s Alpha can be seen as a measure of how much
an investment “beats the market” and is thus often used to evaluate fund manager performance.
The Treynor Ratio measures the excess return over the risk-free rate per each unit of market risk.
Specifically, it equals the expected return of a portfolio minus the risk-free rate of return, divided by
the systematic risk measure of the CAPM. The market risk premium is defined as the expected return
of the market portfolio minus the risk-free rate of return for each additional unit of systematic risk. If
the Treynor Ratio exceeds the market risk premium, the investment should normally be undertaken.
The Sharpe Ratio can be used to compare different investment opportunities with different risk levels
(measured by the standard deviation of a portfolio’s return) because it measures expected excess
return per unit of risk. Specifically, it equals the expected return of a portfolio minus the risk-free rate
of return, divided by the total portfolio risk.
The Sharpe Ratio differs from Jensen’s Alpha and the Treynor Ratio in that it does not build on
systematic risk (i.e., non-diversifiable risk), but on the entire portfolio risk.
Description of asset allocation process (such as mean variance optimisation,scenario analysis and
factor-based model). The responses indicate that the following asset allocation methods are applied by
insurers around the world:
● Asset allocation is based mainly on the mean variance optimisation modelling with consideration
for tax and capital charge simplifications.
● Liability driven investment techniques (including efficient frontier analysis) that takes into account
the nature of the liabilities are utilised: guaranteed products primarily utilise duration targeting with
limited cash flow matching considered for shorter durations. Pass-through product strategies vary with
the level of risk sharing and the expectations set with policyholders regarding asset mix, portfolio
turnover and other factors. Stress scenario analysis is also carried out.
● The strategic asset allocation (SAA) is based on an asset-liability-management process, relying on
mean variance optimisation. It can be combined with an asset-liability management approach
depending on the maturity structure of liabilities and the optimisation of risk capital.
● Both SAA and tactical asset allocation (TAA) are applied to determine the asset allocation. The
SAA uses the multi-step Monte Carlo simulation, whereas the TAA sticks to the mean variance
optimisation with a robust optimisation method. It can be the case that the planned overall investment
return, asset-liability-management framework and constraints stem from the SAA, which is in line
with the company’s risk bearing capacity in a mid- to long-term. The short- and mid-term asset
allocation can be determined from the TAA according to market expectations.
● Following a policy of surplus management-type ALM, the asset allocation is set through the
profitability and risk analysis based on economic values and the immunisation analysis of interest rate
fluctuations on current accounting standards.
● A risk-return optimisation model simulates a variety of asset strategies, which lead to combinations
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of risk (economic capital, EC) and return (economic value, EV). The asset portfolio that generates the
highest EV-EC ratio is adopted as the most appropriate asset allocation strategy.
III. Risk management and its relation to insurer investment policies
1. Asset and liability management of insurance companies
The motivation behind asset and liability management (ALM) in insurance companies is to avoid an
isolated analysis of assets or liabilities which can have the effect of ignoring risks as well as matching
and diversification effects between the two sides of an insurer’s balance sheet. The matching and
diversification effects occur due to the interrelations between asset classes, underwriting lines, and the
time structure of investment cash flows and claim payments. Asset and liability management can take
several forms in insurance companies: immunisation strategies, optimisation strategies and scenario
analyses.
Immunisation strategies consist of cash flow, duration and currency matching.The cash flow
matching strategy matches the maturity of each position in the liability portfolio with cash flows from
assets. It aims to eliminate the effects of interest rate changes. However, there are several limitations
to the cash flow matching strategy. First, when the timing and amount of claims are uncertain, which
is particularly likely to be the case for non-life insurers, cash flow matching may not be precise.
Second, cash flow matching can be costly, since this strategy requires insurers to select certain types
of assets in which to invest for their cash flow needs, foregoing investing in alternative assets with
higher yields.
The duration matching approach balances the duration of an insurer’s assets with that of its liabilities.
Duration matching aims to immunise the firm’s value against interest rate changes. However, there are
limitations to the duration matching strategy due to the underlying assumptions. For example, it only
works accurately if cash flows are known with a high degree of certainty, only for small changes in
interest rates (otherwise second order terms cannot be neglected), and only for parallel shifts of the
entire yield curve. The portfolio will need to be re-immunised if further interest rates changes occur.
Currency matching approach is when asset cash flows are denominated in the same currency as the
(expected) liability cash flows. This reduces foreign exchange rate risks although currency risks from
unexpected cash flows will remain.
Optimisation strategies are typically based on a multi-period setup of the Markowitz approach and
the Leibowitz approach. The Markowitz approach is used to find the asset structure with the optimal
risk-return trade-off, given a fixed structure of the insurance portfolio. However, the principle of ALM
is to provide a framework for managing both assets and liabilities by allowing the structure of the
insurance portfolio to change.
Leibowitz and Henriksson (1988) developed a portfolio optimisation strategy that allows
simultaneously selecting investments and underwriting lines so as to create an efficient mean-variance
portfolio. Insurer liabilities are treated as a short position within the overall portfolio. Return and risk
are then measured in terms of changes in the surplus of the asset value over the liability value. In this
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surplus framework, the optimal asset mix may differ substantially from the mix that is optimal when
only the asset side is considered. Nevertheless, the Markowitz and Leibowitz approaches both account
for correlations between assets and liabilities.
Scenario analyses predict the development of asset and liability values by assuming diverse, possible
scenarios. Two common methods of scenario analysis are dynamic financial analysis (DFA) and stress
testing.
DFA implies modelling the entire insurance company and its environmental factors in an integrated
manner. This is typically done by linking certain key figures of the insurer (e.g. the premium income,
investment income or loss ratio) with macroeconomic developments (e.g., GDP, interest rate
environment or unemployment rate). Since these environmental factors are stochastic, it results in a
stochastic model of the insurance company. From such an approach it is possible to derive, for
example, the insolvency probability of an insurer, taking the relevant interdependencies between
assets and liabilities into account.
Stress testing includes both quantitative and qualitative analyses. Quantitative stress testing aims to
determine the ruin probability or expected shortfall in diverse, extreme scenarios, for example, a stock
price decline of a certain percentage, whereas qualitative stress testing is widely applied when
identifying emerging risks, and is particularly useful when quantifying certain risks. Insurance
companies’ asset and liability management strategies vary depending on the companies’ lines of
business. Non-life insurance companies offer short-term contracts, and their claim distributions are
typically more volatile, making the management of their liquidity risks an important goal of the ALM.
Therefore, non-life insurance companies primarily use stochastic models such as DFA. In life
insurance companies, where contracts are relatively long term with claim numbers, and size of claims
being less stochastic as long as the underlying mortality tables remain stable. Consequently, predicting
mortality rates is of great importance for assessing future cash outflows. The importance of this factor
continues to increase as life insurance companies develop products designed to insure against
longevity risk. Furthermore, life insurers usually have a long planning horizon for their asset
investment, and thus interest rate risks are of bigger concern than liquidity risks. Therefore, life
insurers generally engage in immunisation strategies, optimisation strategies and scenario analyses.
Whatever strategy is being used, the possibility of model uncertainty or failure should be borne in
mind. Models may not take into consideration the appropriate assumptions, which could lead to failure
of the model. Investment strategies should not rely solely on models but also have a comprehensive
risk management strategy that goes beyond Models.
The results show that the ALM methods mentioned above are applied in practice. However, the
specific applications of these ALM methods are heterogeneous among the sample insurance
companies due to their different business models, i.e. different liability structures. The following are a
list of (selected) responses the sample insurers:
● “Our ALM program is limited given the short-term duration of our liabilities and the liquid nature
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of our investment portfolio. Most claims are paid out of current operating cash flows. We have a
small ALM program which looks to match average duration.”
● “ALM methods depend upon the nature of liabilities in the segment. Public equity vs. fixed income
mix is managed actively to target participating and other pass-through segments. For guaranteed
segments, appropriate rebalancing toward fixed income duration targets is achieved using limited
rebalancing of derivative overlays. Asset mix targets for these segments are achieved through ongoing
sourcing of desired illiquid fixed income and alternative long duration assets. Total company risk is
primarily reviewed and reported through loss measures, including Earnings at Risk, Earnings
Sensitivity, Economic Value-at-Risk and Economic Capital-at-Risk. Risk forecasts are updated
continually and management actions developed to achieve operating targets.”
● “Firstly, portfolios are managed in defined segments/portfolios, each supporting specific blocks of
liabilities. Portfolio managers use replicating portfolio derived metrics, where appropriate, to manage
interest rate risk. Secondly, portfolio construction is informed by Strategic Asset Allocation (SAA)
and Marginal Asset Allocation (MAA) analyses. Investment portfolios are structured to have sufficient
cash and diversified marketable securities to meet their obligations. Thirdly, managers also consider
Risk Adjusted Capital (RAC) and capital constraints during portfolio construction/optimization, and
manage portfolios in a way that adheres to applicable liquidity policies of the Treasurer.”
● “For the long term, ALM pursuit immunization strategy which combined with short term scenario
analysis such as interest rate volatility, rate expectation, and primary market circumstance of long
term maturity bonds.”
● “Following a policy of surplus management-type ALM, we control the surplus derived from the
difference between the economic values of assets and liabilities through purchases of super longterm
bonds aimed at prolonging asset duration and reductions of high volatility assets such as equity.”
● “Asset Investment Policy of the firm is determined annually through scenario analysis. Investment
strategies, tactics and plans are set in the beginning of every year. Furthermore, interest and currency
stress tests are applied; asset liability maturity details are calculated.”
Derivatives as a tool of ALM
Since derivatives provide a means of managing a variety of firm-wide risk exposures, they are
valuable instruments for ALM by insurance companies and pension funds. Indeed, insurers and
pension funds use derivatives for several purposes, including investment and portfolio hedging,
replicating assets, and generating additional income. In practice, there are several common types of
derivatives used by insurance companies and pension funds:
● Swaps: Insurers and pension funds can purchase interest rate swaps to manage cash flow risks
caused by interest rate changes. Exchange rate swaps help insurers manage foreign currency
dominated investments.
● Options: Options, mostly in the form of caps, floors, and swaptions, are used frequently by life
insurers and pension funds to hedge against interest rate risk, and particularly for products embedded
19
with minimum guaranteed returns.
● Credit derivatives: Credit default swaps (CDSs) and collateralised debt obligations (CDOs) can be
utilised by insurers and pension funds as alternatives to debt security portfolios. Non-life insurers
usually use derivatives as a means of standard asset management with the objective of generating
higher investment returns. Life insurers and pension funds use derivatives extensively as a tool for
hedging risks. Life insurance contracts with guaranteed returns and pension funds with defined
benefits especially use derivatives to build up investments so as to mirror these promised guarantees.
One could argue that life insurers and pension funds sell embedded option contracts (put options) to
policyholders and beneficiaries, for example, by making investment guarantees. Hence, one ideal way
to hedge against their positions is to buy similar put options from the derivatives exchange market to
achieve ALM. However, in practice, finding such derivatives in the capital market is difficult and
swaps, in particular interest rate swaps, are used instead.
Life insurers and pension funds invest a large portion of their assets in fixed income securities. The
time value of life insurers’ and pension funds’ liabilities are calculated by the discounted, expected
future cash flows, which is also subject to interest rate risk, which swaps can be used to hedge.
Derivatives are seen as an efficient tool for asset and liability management, as it enables insurers and
pension funds to hedge large volumes of capital with fewer transaction costs. However, the liquidity
of derivative exchange markets is of concern in this regard. For example, there is no liquid market for
equity derivatives that provide insurers or pension funds with longer than five years of equity
exposures. One solution is to purchase these derivatives from investment banks, which may increase
the cost of the transaction and change the nature of counterparty risk.
2. Impact of ALM on insurer investment strategies
Appropriate asset and liability management will result in an insurer structuring its assets and liabilities
in such a way that the overall firm risk stays within its predefined risk appetite, for example, measured
by a maximum insolvency probability for a certain period of time. A necessary condition for ALM to
work is that there are risk interdependencies between the insurance risks (and other insurer liabilities)
and investment risks. These interdependencies can have a timing dimension and a size dimension.
Non-life insurance
In property and casualty insurance, it is rare to find assets that exhibit risk dependencies with
liabilities, either in the timing or claim size dimension. Common risk sources that drive both asset
prices and claims would have to be considered individually.
An example of this is a building company that prospers due to a hurricane event in a certain region.
Thus, a flood insurer might consider investing in a building company for ALM purposes. Credit
insurance claims are higher in times of economic downturns that are positively correlated with stock
price indices. Therefore, buying puts on stock price indices can help a credit insurer in its ALM.
However, for personal accidents or liability cases, it is impossible to find risk dependencies with
certain assets. As property and casualty risks are less precise compared to life and health risks, the aim
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of ALM would mainly be to ensure short-term liquidity management. Therefore, property and casualty
insurers are usually not able to invest alarge part of their portfolio in illiquid, long-term investment
projects. However, for longterm investment projects financed through investment funds, the shares of
which can be easily sold, property and casualty insurers could invest more easily.
Life insurance
In a broad portfolio of life and health insurance contracts, due to underlying mortality and morbidity
assumptions, claim sizes and the timing of cash flows can be predicted fairly well. This enables life
and health insurers to employ immunisation and optimisation strategies for ALM. The first candidate
assets for ALM purposes are bonds because they typically have a fixed term to maturity and yield
regular payments. As long as bonds do not default and the bond market has sufficient depth, it is
possible to construct a bond portfolio that matches the expected cash flows of liabilities, or their
duration through a duration matching strategy.
However, incidental deviations from mortality tables or systematic changes of mortality not covered
by the tables could lead to false predictions of life insurance liabilities. Options embedded in life
insurance contracts also lower the predictability of cash flow due to the policyholder’s discretion in
when to exercise, for example, a surrender option or a paid-up option, that is, a possible exemption
from premium payment. In this case, immunisation strategies usually try to match the expected cash
flows rather than the actual ones.
On the asset side, asset classes other than bonds can be taken into account for an ALM. Although their
cash flows are not completely certain, a regular income stream from residential real estate investments
or relatively constant dividend payments from share investments can serve as cash flows that
approximately match liabilities. Using such cash flows for ALM can overcome the problem that, for
many life insurance contracts, duration is longer than the maturity of bonds in the market. These
investments therefore can help close a “duration gap” between assets and liabilities that is crucial for
interest rate risk, although the volatility of cash flows from dividends is much higher than for bonds.
In principle, direct long-term investment is a suitable asset class for life insurers’ ALM. However,
market demand for products that offer more, not less, liquidity could be an impediment for long-term
investment by life insurers. Especially if policyholders’ surrender options are granted for consumer
protection purposes which require a degree of liquidity by the insurer. Such liquidity must then be
supported by investments in liquid assets, which reduces the capacity for investing in illiquid, long-
term assets.
This may explain some of the observations made in the OECD Large Insurer Survey that the asset
allocation of insurers has not moved towards long-term investments in the last couple of years.
Despite the low-interest rate environment, illiquidity premiums of long-term investments were not
sufficient to outweigh the disadvantages of long-term investments’ inherent illiquidity.
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IV. Macroeconomic environment and its influence on insurer investing
According to the IMF World Economic Outlook (October 2015), the global economy experiences
subdued growth in 2015, specifically, a 3.1% increase in world output, which falls 0.2 percentage
points below the growth rate of 2014.
Macroeconomic uncertainties pose risks to the global insurance industry, which can be categorised
into four major issues. The slow economic recovery from the recent financial crisis resulted in high
unemployment rates in some countries. This, together with an aging population, can negatively impact
the insurance industry and pension fund growth in these countries. Consequently, insurers, particularly
from developed countries, are inclined to seek higher yields in emerging markets. Rising individual
wealth and aging populations in emerging markets generate growth opportunities for insurers and
pension funds from advanced economies. However, these high yields are associated with potential
legal and political risks due to different regulatory standards and political uncertainties. Long-lasting
low interest rates affect both the assets and liabilities of insurers. On the one hand, low interest rates
constrain profits by generating insufficient investment returns, particularly for life insurers and
pension funds that invest many of their assets in long-term, fixed income securities. On the other
hand, the value of insurers’ liabilities increases when applying the reduced rate for discounting.
Hence, the low interest rate environment can cause a financial distress for life insurers and pension
funds.
Contagion risks from exposure to sovereigns bonds and bonds of other financial institutions continue
to be of high concern to the insurance industry in many regions, as government and corporate bonds
tend to occupy a large proportion of insurers’ asset portfolio, particularly for life insurers and pension
funds. Therefore, a deterioration of sovereign or corporate credit quality induces higher credit risks for
insurers. Emerging risks, such as cyber risk and world or regional health risk (for example, EBOLA),
are of substantial concern to the insurance industry.
The OECD Large Insurer Survey asks the participating insurance companies about the impact of the
prolonged, low interest rate environment on their profitability, return on investment, interest income,
business strategy, and asset allocation, and whether they are induced to adjust their business model to
cope with the low interest rate environment.
Among the 30 valid responses, only 4 insurance companies report no significant impact from the low
interest rate environment, and consequently did not have to adapt a new business model or investment
strategy. The remaining majority reports influences of the prolonged low interest rate environment as
well as the corresponding changes:
● “The low interest rate environment has placed pressure on accounting investment income and profit.
The business has generally reduced its offering of products with material investment guarantees
(interest rate or equity) and/or substantially reduced the nature of the guarantees that remain in the
existing product suite. The company has thus the incentive to switch its focus to unit-linked products.”
● “The steady fall in interest rates has reduced the investment income of the company and in turn
22
has meant transferring this fall to policyholders, with significant impact on pension annuities.
This has required revising the distribution of assets in search of better returns.”
● “Based on the group’s disciplined approach to ALM, the capital position of the company has not
decreased due to the lower yields, and this strong capital basis allows the group to deploy moderately
more capital to take financial market risks. The company has undertaken initiatives such as higher
asset allocation to equities and illiquid assets (i.e. private debt).”
● “Sales activities have become more difficult in terms of attaining the same margin. Products like
closed end funds become unattractive and have to be compensated by new offers on open-ended fund
and capitalisation.”
● “The low interest rate environment in the domestic market has been steadily eroding the
company’s investment return. Therefore, the company has controlled its new investment volume
in the domestic government bond market and increased foreign fixed income securities as well as
credit related financial instruments.”
● “The low interest rates induced the company to actively enlarge its exposure of loan to prime
enterprises, alternative investment, structured products and overseas investments to achieve
portfolio diversification.”
● “Apart from the negative impacts of the low interest rate environment, it has its positive effect on
the stock market, which eventually makes the company’s pension products more preferable to
customers.”
V. Insurance regulation and its impact on insurer investment strategies
1. Changes in insurance regulation
In many countries, regulation of the insurance market has undergone dramatic reform in recent years
and many other countries are expected to move towards risk-based capital regimes which have already
been implemented in some OECD markets such as: Australia, Canada, Japan, South Korea,
Switzerland, and the United States. This global trend toward (more) risk based capital regimes may
influence insurers’ abilities or willingness to make long-term investments.
These regulatory regime changes not only involve substantive changes to insurance regulation itself,
but also extend to the regulatory regime and organisation of regulation and supervision. A shift in
substantive regulations toward a more risk-based regime is often accompanied by a shift from a rule-
based to a more principle-based regime. In such a situation, insurance regulators are often granted
more leeway in closing regulatory gaps by granting many supervisory/regulatory agencies the
authority to pass non-legislative rules (such as, using U.S. terminology, interpretive releases, policy
statements, staff legal bulletins, staff no-action letters, etc.). In all countries in which a principle-based
approach is taken and decisive positions are rarely taken at the legislative level, the soft law passed
by the regulator may have a substantive effect on investment decisions. Thus, reform of regulatory
regimes has implications for insurer investment strategies.
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Changes to Substantive Insurance Regulation
Most insurance regulatory regimes have gone through or are in the process of going through dramatic
changes, especially in the areas of risk evaluation and the inclusion of new risks in solvency
assessments. Some countries have opted to follow the three-pillar approach of Solvency II others
have chosen to focus more closely on market, credit, and operational risk in their solvency
assessments.
At the international level, the International Association of Insurance Supervisors (IAIS) is developing
the Risk-based Global Insurance Capital Standard (ICS) which would be applicable to internationally
active insurance groups (IAIGs) as part of the IAIS’ common framework for the supervision of IAIGs,
or ComFrame. This will likely impact the application of risk-based capital regimes in countries with
IAIGs.
2. The effects of regulatory changes on insurer investment strategies and long-term
investments
Insurers’ investment strategies are contingent on a plethora of factors, including regulatory
requirements which could be one of the most important. Indeed, regulatory requirements can either
incentivise or dis-incentivise long-term investment. To bring to light the features of regulatory regimes
that have the most influence on long-term investment, the OECD conducted a survey designed to
collect information from regulators and the private sector about the evolving regulatory framework for
insurers (including the shift to risk-based capital regimes and increased reliance on governance and
risk management principles to guide prudent investment behaviour) and how it may influence
insurer investment strategies. Regulatory factors that have a noticeable influence on insurer
investment strategies, and thus also on long-term investment, are, for the most part, either quantitative
regulations concerning insurers’ capital endowment or risk governance requirements. Regulatory
disclosure duties were not explicitly identified as having an identifiable effect on investment
decisions. In countries in which a broad transparency regime has hitherto not existed, this could lead
to insurers shying away from long-term investments that require disclosures (for example, atomic
plants, prisons,
infrastructure projects in certain countries) that have the potential to attract the public’s disfavour and
might harm the corporate image.
Supervisory discretion to foster long-term and infrastructure investments.
There appears to be a clear trend in many jurisdictions towards encouraging insurers to make more
long-term investments and avoid creating disincentives towards them. The political motivations for
this include attracting investors for important infrastructure projects and meeting the financing needs
of state(s) and the real economy. However, possible volatility introduced by changes to a market
consistent valuation and risk-based regulatory regime could prove a barrier to achieving such goals. In
solvency margin regimes, investments can be indirectly controlled toward certain investments by
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imposing quantitative restrictions (on other investments). This is not to say that risk-based regimes are
unable to impose quantitative restrictions, but that they are less likely to do so. Instead of direct
quotas, however, risk-based regimes could include requirements that have an indirect effect on
investment, such as matching, counterparty, derivatives, or concentration requirements for regulatory
capital.
Insurers look for a balance between expected returns and risk, which will in turn be able to meet its
capital requirements. Thus, granting supervisory discretion to enable investment in certain long-term
assets on a case-by-case basis, as done under the Swiss tied asset regime, may give the flexibility for
insurers to be able to consider long-term investments. A disadvantage of such an approach – if it were
implemented at a global scale – is that it could lead to increased risk of supervisory arbitrage and as
such make the playing field less level.
On the whole, possible barriers to long-term investment resulting from risk-based capital regimes are
economically reasonable and serve the purpose of providing protection against insurers’ insolvency.
Any improvement of conditions for long-term investments (in comparison to their normal treatment
under the regime) should thus be balanced with the possible impact on the solvency of insurers’ for
policyholder protection.
The Impact of Enhanced Risk Governance
Statutory governance requirements will not only influence insurer investment decisions, but induce
them to strengthen their internal control processes, and ensure that certain key function holders
(management or board of directors) are responsible for the insurer’s risk management and investment
strategy.
These function holders (and the insurer as a legal entity) have a duty to review actual assets to ensure
compliance with regulatory requirements. A central part of enhanced risk governance is the “own risk
and solvency assessment” (ORSA), which is intended to provide amulti-year overview of insurers’
risk situations in an integrated (i.e., holistic) risk management approach that covers all relevant risks
of an insurance company.
VI. The role of insurers in long-term investment financing
1. Changes in the financial landscape
The recent global financial crisis altered the financial landscape due to the changing role of the
banking sector and the effects on equity markets from certain regulatory changes. In the banking
sector, the recent crisis has had a negative impact on the size of bank lending. Additionally, some
regulatory changes (particularly in response to corporate governance scandals) have turned equity
financing into a more costly funding approach. The scale of share buybacks also indicates that
capital is not being put into productive investment but for the financial management of corporates.
2. The evolution of insurers and pension funds as long-term investors
The three types of long-term investments: patient, engaged and productive capital, in particular in
terms of the role of institutional investors in more illiquid assets such as infrastructure investments.
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World Economic Forum and Oliver Wyman (2011) indicates that long-term investment implies the
expectation of holding an asset for an indefinite period of time (typically more than 10 years) by an
investor with the capability of doing so. Asset classes that are appropriate for longterm
financing are direct private equity and venture capital, infrastructure, and strategic stakes in public
companies. These asset classes exhibit the features of being more illiquid and longer-term, and
consequently being perceived as riskier.
Direct private equity investment, where an investment is made directly into unlisted companies, plays
an important role in financing start-up companies, typically in innovative business. The returns of
direct private equity investment are uncertain and long-term, consequently generating high risk
premiums for investors. Similarly, direct venture capital investment, where a direct equity investment
is made into early-stage companies with fast growing prospects, have similar risk-return patterns as
private equity.
Long-term infrastructure projects can be in industrial, extractive, environmental and other
projects/public services (including social, sports and entertainment). Infrastructure investments
typically face illiquidity risk, with a long economic lifetime and capital commitment of around 60
years on average and even up to 99 years. In a challenging environment of low fixed-income returns,
insurers may invest in equities for possible higher, long-term returns. Strategic stake holding in public
companies may be associated with a board position and a potential lockup period; however, this does
not occur when insurers invest through private money managers, index funds, or other managed
products (such as in ELTIFs). Apart from the advantage of generating higher yields, equities allow
insurers to hedge against inflation and are tax-efficient.
Some indications of changes in insurers asset allocation for the last three years; for instance:
● “The company has marginally increased its risk by looking at high-quality preferred shares and
alternative investments such as private infrastructure funds due to the low yields on fixed income
products.”
● “In order to seek better investment returns, the company increased the financial leasing and real
estate exposure and set the long-term target asset allocation to a time horizon of around 3 years.”
● “The company increased the share of illiquid assets such as infrastructure debt and equity in order
to earn illiquidity premia. It also increased its exposure to European peripheral sovereigns.”
● “For companies in the low interest rate environment, some of them increased the foreign fixed
income securities.”
3. Further factors affecting insurer long-term investments
This subsection discusses several other factors that possibly affect insurers’ decision on long-term
investment. An insight into the main drivers and constraints for alternative investments from insurers’
perspective is also analysed.
Appropriate financing vehicles
According to findings from the OECD survey on Pension Funds’ Long Term Investments (2014), only
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the largest institutional investors have the capacity to invest directly in infrastructure projects.
Infrastructure projects are typically illiquid, and this also applies to other long-term projects financed
by direct private equity and the direct venture capital. The illiquidity makes long-term projects
disadvantageous, particularly for smaller insurers that have fewer investment alternatives. One
possible solution, particularly for smaller insurers, is to invest in these long-term projects through
appropriate financing vehicles, such as private equity funds, venture capital funds, real estate
investment funds or long-term bonds. Since the availability of such vehicles was limited in the past,
some jurisdictions have taken measures to propagate the creation of such vehicles – such as, e.g.,
ELTIFs.
Public-Private-Partnerships
Financing Public-Private Partnerships (PPPs) can be another form of life insurers’ longterm
investments. PPPs are long term contractual arrangements between the government and a private
partner whereby the latter delivers and funds public services using a capital asset, sharing the
associated risks. Through PPPs, long-term infrastructure projects can have a well-defined income
stream which serves as the main source of the return to the financing institutions.
The private party of a PPP, typically a project company, raises funding via equity financing (e.g.
through private equity funds) or debt financing (e.g. by issuing long-term bonds).A PPP investment
model that aims to overcome investment barriers in different areas of the real economy. PPP financing
can involve fiscal commitments, e.g. guarantees to compensate the private party for low revenues.
Such guarantees make investments in PPP less risky and contribute to PPP financing by insurers
because of insurers’ interest in well-predictable long-term yields on their investments. However,
investors will have to take into account the degree of long-term commitment by the government on
long-term guarantees or subsidy provision.
Expertise
Direct investment or co-investment is the most common method to gain exposure to infrastructure.
The OECD Large Pension Survey indicates that some of the largest funds have the size and expertise
for direct investments in infrastructure, and this would be applicable to insurers too. However, the
smaller insurers and pension funds would lack the requisite expertise, particularly in comparison with
banking institutions that have been traditionally involved in infrastructure projects and have
accumulated the know-how of such projects.
High-quality data
The lack of high-quality data on long-term investment projects gives rise to diagnosis and prognosis
difficulties for insurers. Insurers cannot accurately quantify the risk of these projects or assess the
correlation between the risk of a long-term investment project and the risks of the existing assets and
liabilities. This ambiguous situation in turn causes investors to demand a risk premium as
compensation that might make long-term projects unattractive.
Demographic change
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Populations in OECD countries, where life insurance companies and pension funds are among the
largest institutional investors, are aging. These demographic changes may also influence insurers
long-term investment decisions, concerning the need to find longer term investments to better meet
the increased life expectancy of the insured. Such strategy could include investing in infrastructure
such as nursing homes or hospitals – though the anti-trust regulations of some countries may make
such investments difficult for insurers – thus enabling insurers to hedge against longevity driven pay-
out requirements.
Climate change
Climate change is expected to have a pivotal effect on insurers in the future – be it through altering the
risk exposure or by affecting the risk inherent in certain investments. Insurers have a long history of
lobbying for public policy changes aimed at slowing down climate change, and reinsurers have in
particular been one of the prime protagonists of climate change research, having established a far
reaching database allowing other researchers to analyse the phenomena linked with climate change.
To hedge against risks of investments associated with climate change, insurers could engage in green
investments. Green investments broadly refer to low carbon and climate resilient investments made in
companies, projects and financial instruments that operate primarily in the renewable energy, clean
technology, environmental technology as well as those investments that are climate change specific or
environmental, social and corporate governance (ESG) screened. It is difficult to clearly define green
or ESG investments since the criteria used by institutional investors may vary. A loose description was
provided for green or ESG investment but left it up to survey respondents to determine the
corresponding investment, and provide an open ended question as part of the survey to expound
further on what green or ESG investing means.As such, these investments are not necessarily long-
term investments in the sense of this report, but can be, depending on the asset class. Green
investments exhibit a long-term feature in that they are aimed at aiding the conservation of natural
resources – which might inter alia need to be long-term to achieve this objective. With growing
environmental awareness of policyholders and investors alike, green investments can, furthermore,
have a positive public relation impact for insurers.Despite the interest that many insurers have
expressed for green investment,insurers asset allocation to such green investments is relatively
limited.
VII. Prospects of insurer long-term investment and policy implications
1. Prospects of insurer long-term investment
Long-term financing by insurance companies (and pension funds) is critical for global economic
growth, particularly after the recent global financial crisis, which had a huge and negative impact on
the supply of long-term investment financing. Many OECD countries recognise the importance of
promoting long-term investment, with a number of countries introducing legislative changes to make
financing long-term investment projects more accessible. However, insurers continue to face several
challenges if investing long-term.
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Based on insurers’ asset and liability management (ALM), life insurers should be incentivised to
invest in long-term assets because of the illiquidity of the insurers liabilities. However, in the interest
of consumer protection, life insurance contracts usually contain certain options (for example, a
surrender option or a paid-up option) which allow policyholders to exercise the contracts before
maturity and making the insurers’ future cash outflow more difficult to predict, although this can be
mitigated by surrender penalties. This in turn requires insurers to invest in more liquid (short-term)
assets so as to be able to meet future pay-outs.
The economic downturn brought about by the recent global financial crisis has had an adverse impact
on the growth of insurance and pension markets due in part to higher unemployment rates. In a low
interest rate environment, life insurers and pension funds have an incentive to invest in longer-term
(illiquid) assets so as to obtain higher yields.
However, the possibility of rising interest rates, especially in the Americas, somewhat dampens this
incentive. Additionally, insurers and pension fund managers have been cautious of re-risking,
especially given the uncertainty of credit risk for certain sovereign bonds. Compared to previous
solvency margin regimes, where asset risks were completely ignored, risk-based capital requirements,
when combined with market-consistent valuation in the solvency balance sheet, can have a negative
impact on investment in illiquid assets. Certain asset classes, such as infrastructure and private equity,
receive particularly high capital charges, and their riskiness leads to low mark-to-model values in
the solvency balance sheet.
2. Policy issues and implications
Enhancing long-term investments is one way in which insurers and pension funds can contribute to
economic growth. However, the main objective of insurance companies (and pension funds) is to
provide policyholders with insurance protection, payments in accordance with contract terms, and
returns on equity in the case of publicly listed insurers. Any change of insurance regulation that aims
at fostering long-term investments should therefore not neglect the primary policyholder-protection
goal of insurance regulation.
Insurance regulation should continue to place priority on incentivising prudent asset and-liability
management. Investing in long-term projects can substantially contribute to a better matching of life
insurers assets and long-term liabilities, if they entail well predictable returns. Therefore, insurance
regulation should contain mechanisms that provide a “true and fair view” of the insurers’ risk
exposition, taking into account both asset and liabilities. In light of risk-based capital regulation, on
the one hand, a long-term investment asset class should be reflected in the capital requirements
according to its actual risk. This may lead to higher capital requirements for higher-risk investments,
but lower requirements if the respective cash flow exhibits low volatility and uncertainty. In short,
capital requirements should map the real risk of long-term investments but ought not be used to
promote certain asset classes.
On the other hand, regulation that has the possibility of greater discretion in capital charges for
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investments in certain asset classes that entail a higher capital requirement – when accompanied by
the appropriate risk management – could in turn facilitate and address some of the wider concerns for
long-term investment. However, this should be well scrutinised and a mechanism to implemented so
that regulatory discretion could be limited to circumstances which are well scrutinised.
In the area of public-private partnerships, fiscal guarantees, e.g. for revenues of infrastructure projects,
could increase the possibility of long-term investment, although there may be possible market
distortions and downside risk to taxpayers. To allow more insurers, particularly many small and
medium-sized insurers, to invest in long-term assets, appropriate investment vehicles are needed. The
creation of such vehicles could be induced by legislation, as with the ELTIF regulation. Life insurers
could consider obtaining illiquidity on their liability side through product innovation that should be in
accordance with the objective of consumer protection, but may not align with consumer preference for
flexible product designs. Insurers should continue to monitor illiquidity risk in their products through
appropriate risk management techniques. In turn, insurers are able to invest in less liquid assets as
long-term investments, and policyholders could receive the corresponding illiquidity premiums as
compensation for the increased inflexibility of such products.
Despite the policy discussions taking place on long-term investment, insurers – have not yet exhibited
a significant shift towards long-term investments, although target investment allocations
remain above actual allocation in alternative investments and other investments. Developments in the
regulatory treatment of long-term investment financing of insurers may require greater clarity for
insurers to be able to increase their investments towards target allocations. Greater regulatory certainty
of capital charges of long-term investments will be a prerequisite for robust long-term investment to
take place.
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Life Insurance – A multi purpose option
Most of us, especially the salaried people believe that the best time to start tax planning is always at
the beginning of a financial year. That is the time we get our increments and bonuses, and self-
employed/businessmen have a clear idea of how much they have earned during the previous year.
Invariably, we end up investing in a hurry without proper planning or evaluating various tax saving
products and features during the last quarter of the financial year (January-March period). These
tricky times pose several challenges for us. Investing a portion of your total savings in some securities
is an ideal method of tax planning out of which Life Insurance is one of the most effective and
preferred avenues across all investments.
While the main objective of life insurance is to provide financial protection to its beneficiaries, in case
of unforeseen events, it also goes a step ahead to offer a host of tax benefits which is an icing on the
cake. How much life insurance an individual needs largely depends on factors such as regular income,
expenses, financial obligations, and future goals like education, marriage etc. Not only life insurance
but health insurance also helps you save overall on the net tax liability, with greater advantage for
senior citizens.
Let’s see the options and benefits
 You need to ensure that the Sum Assured of the policy is at least 10 times that of Annual Premium
in the year of premium payment.
 You can purchase life insurance in the form of a term plan, traditional savings and protection plan,
whole life plan, ULIP or as a pension plan.
 You can avail a tax benefit by way of deduction towards premium paid on life insurance policies
up to Rs. 150,000 under Section 80C of the Income Tax Act, 1961. This also includes premium
paid by you for life insurance for your spouse or premium paid for your child's policy.
 If your nominee claims the insurance money in case of your unfortunate demise, the claim
amount is also tax deductible under Sec 10D. The same benefit is extended to Unit Linked
Insurance Plans (ULIPs) and retirement plans under Section 80CCC.
 If you have taken any pension/annuity plan, you will be allowed a deduction up to Rs. 1 lakh. On
maturity of the accumulated amount, 2/3rd of the income is taxable, while the remaining 1/3rd is
tax free.
 Unlike other savings instrument, life insurance has an additional EEE (Exempt Exempt Exempt)
benefit – the amount you invest, the amount that your investment earns and the amount that you
finally receive is all exempted from income tax.
 There are various riders or additional benefits that can be added to a life insurance plan, at a
minimum cost, which will also offer tax benefits.
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 we need to keep in mind is that if the mode of payment is in cash, you cannot avail of any tax
benefits.
A better option than fixed deposits

A tax saving fixed deposit will offer you peace of mind but there is usually a lock-in period where the
money cannot be withdrawn before maturity. The interest that you earn on FDs is also taxable.
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Company Profile
Birla Sun Life Insurance:
3.1 History
Birla Sun Life Insurance Company Limited was founded in 2000. The company is based in Mumbai,
India. It is a joint venture between Indian Aditya Birla Group and Canadian Sun Life Financial Inc. In
April 2016, Sun Life Financial increased their stake in Birla Sun Life Insurance to 49%.
The Aditya Birla Group
The Aditya Birla Group is an Indian multinational conglomerate named after Aditya Vikram Birla,
headquartered in the Aditya Birla Centre in Worli, Mumbai, India. It operates in 40 countries with
more than 120,000 employees worldwide. The group was founded by Seth Shiv Narayan Birla in
1857. The group interests in sectors such as viscose staple fibre, metals, cement (largest in India),
viscose filament yarn, branded apparel, carbon black, chemicals, fertilisers, insulators, financial
services, telecom (third largest in India), BPO and IT services. The group had a revenue of
approximately US$41 billion in year 2015.
Sun Life Financial

Sun Life Financial, Inc. is a Canada-based financial services company known primarily as a life
insurance company. It is one of the largest life insurance companiesin the world, and also one of the
oldest with the history spanning back to 1865. Sun Life Financial has a strong presence in investment
management with overCAD$734 billion in assets under management operating in a number of
countries. Sun Life had about $734 billion of assets under management as of Dec. 31 2014 including
mutual funds and insurance-unit holdings.
Growth
BSLI is the first Indian Insurance Company to introduce "Free Look Period", by which consumer can
return the policy to an insurance company within this period after receiving the policy. “Free Look
Period” was later made mandatory by Insurance Regulatory and Development Authority of India for
all other life insurance companies In 2013. Additionally, BSLI pioneered the launch of Unit Linked
Plan.BSLI has a policy of disclosing their portfolio on a monthly basis. On 5 February 2015, Birla
Sun Life Insurance signed an IT outsourcing deal with International Business Machines
Corporation (IBM) with a view to leveraging mobility and cloud solutions developed by IBM
Research and the IBM India Software Lab.
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Awards and recognition
 'Gold Trophy' for Financial Reporting by The Institute of

 Chartered Accountants of India (ICAI) in 2012.
 Media Abby Awards at Goa Fest Advertising Agencies Association of India & Advertising Club
Bombay (2011)
 Grand Midas at the Midas Awards 2013 in Public Service Category for work titles as 'Death
Track'.
 Gold Midas Awards 2013 in Direct Mail/Collateral competition for work titled as 'Karva Chauth'.
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3.2 Overview
What is the investment strategy?
The investment strategy benefits clients because it addresses a variety of tax challenges, both while
living and at death. Income earned by clients on investments outside of a registered plan- such as
interest, dividends or capital gains- may be subject to tax. Paying these annual taxes reduces the
overall net return and can substantially slow the accumulation of clients assets and estate value over
time. Having too much investment income may also result in other unintended consequences. For
corporations, it may limit the advantages that the small business deduction can provide. The
investment strategy compares the net estate value of a tax-exempt life insurance policy against a
tasxable investment.
3.3 How it Works
A tax-exempt participating or universal life insurance policy offers advantages that can help to reduce
or eliminate some of the challenges that may occur during the life and at the death of the insured
person.The following table compares how the investment strategy addresses a variety of tax
challenges, both while living and at death and the advantages of insurance over taxable investments.
Challenges that can exist with taxable How the investment strategy addresses these
investments issues
 Income earned on non-registered  A life insurance policys cash value grows
investments is subject to tax during the tax-preferred within legislative limits.
clients lifetime.  This cah value may be accessed in a
 Annual taxes paid reduce the overall net number of ways, helping to satisfy the
return and can substantially slow the clients liquidty concerns.
growth of clients assets and estate value  Transferring funds from taxable
over time. investments to an exempt life insurance
 When an individual dies, their assets are policy can help reduce overall taxable
deemed to be diposed of at a fair market income.
value. There may be rollover opportunities  The tax-free death benefit is paid directly to
available for the first death of a married or the named beneficiary, avoding probate,
common-law partner, but taxes are executor and legal fees, addressing the
trigerred upon the second death,reducing common tax challenges often faced at death
the estate value. for individual clients.
 When an asset is disposed of for more than
the adjusted cost base, a capital gain is
incurred. Currently, 50% of the capital gain
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is subject to income taxes, which can
significantly reduce the final estate value.
 Probate,executor and legal fees may also
apply,further reducing the amount
available to beneficiaries.
Corporate clients Corporate clients
 Passive investment income within the  The tax-free death benefit is paid to the
corporation, including interest, dividends corporate beneficiary.
and half of realized capital gains, is taxed  The death benefit minus the policys
at the high corporate investment income adjusted cost basis (ACB) just before death
tax rates. can be posted to the corporations capital
 Depending onthe province, taxable income dividend account (CDA). Since the ACB of
within the corporation is subject to tax rate a policy decreases as the insured person
near 50%. nears life expectancy, in some
 When the assets are liquidated and circumstances the full death benefit could
distributed from the corporation following be credited to the CDA.
the shareholders death, sny deferred capital
 The CDA can then be used to pay tax-free
gains are realized. Half of any realized
capital dividends out of the corporation.
capital gains are included in the
Any remaining portion of the death benefit
corporations taxable income.
that didnt provide a CDA credit,
 The after-tax value of these assets in the representing the ACB of the policy, can be
company need to be paid out as a taxable paid as a taxable dividend.
dividend to the estate or new shareholders,
resulting in an additional layer of taxation.
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THE INDIVIDUAL INVESTMENT STRATEGY (IIS)
Implementing the strategy for individual clients involves the following steps:
1. An individual or a couple purchases a participating or universal life insurance policy. For couples,
the effectiveness of the IIS may be improved by illustrating a joint-last-to-die policy, compared to
a single life contract.
2. Premiums for policy are paid by either :
- Using excess income not needed for other purposes; or,
- Transferring a portion of the clients assets from their non-registered investment portfolios to the
life insurance policy.
3. The cash value accumulates within the life insurance policy on a tax-preferred basis.Depending
on the policy type ,the death benefit may also grow over time. By moving excess income or
transferring funds from taxable non-registered investments to a life insurance policy. An indiviual
can reduce thier annual taxable income potentially resulting in greater assest growth.
4. If clients require access to the cash value in the policy, they may be able to take a policy loan,
make a withdrawal from the policy or collaterally assign the policy to a lending institution for a
loan.
5. When the insured person or the second spouse for a joint last-to-die plan does,the life insurance
tax-free death benefit is paid directly to the named beneficiaries.
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THE CORPORATE INVESTMENT STRATEGY (CIS)
The CIS has similar considerations to that of the IIS, but there are additional elements involved. The
main differences are how the death benefit process works and flows to the estate. Implementing this
strategy for corporate clients involves the following steps :
1. An corporation purchases a participating or universal life insurance policy on the life of a
shareholder. The corporation owns the policy, pays the premiums and names itself as the beneficiary.
2. Premiums for policy are paid by either :
- Using excess cash flow not needed for business operations; or,
- Transferring assets from the corporations investment portfolios to the life insurance policy.
3. The cash value accumulates within the life insurance policy on a tax-preferred basis.Depending
on the policy type ,the death benefit may also grow over time. By moving excess income or
transferring funds from taxable non-registered investments to a life insurance policy. An indiviual can
reduce thier annual taxable income potentially resulting in greater assest growth.
4. If clients require access to the cash value in the policy, they may be able to take a policy loan,
make a withdrawal from the policy or collaterally assign the policy to a lending institution for a loan.
5. When the insured person dies, the tax-free life insurance death benefit proceeds are paid directly
to the corporation as the beneficiary. The death benefit, minus the policys adjusted cost basis (ACB) at
the time of death can create a credit to the corporations capital dividend account (CDA).
6. Working with its tax advisors the corporation can use the CDA credit created by the life insurance
policy death benefit to pay tax-free capital dividends out of the corporation.Any additional money can
be paid out as a taxable dividend.
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Client Profiles
The Investment Strategy may be most suitable for individual or corporate clients with significant
excess income, or substantial assets in taxable non-registered investments. Their immediate and long-
term financial planning objectivews may be similar, including minimizing taxes, and ensuring future
generations are financially secure when they are gone. Unfortunately, tax on investment income can
work against clients goals and objectives. The Investment Stategy demonstrates how a permanent life
insurance policy can help reduce the overall tax bill and provide a larger estate than taxable
investments alone.
These strategies should be used with individuals or corporations that have either excess income or
assets they dont require to fund lifestyle needs or company operations. For individual clients, it should
only be used after maximizing other tax-preferred registered savings i.e. registered retirement savings
plans (RRSP) and tax-free savings accounts (TFSA). This strategy may not be suitable for clients with
variable income or fewer assets.
Examples of clients may include those who are high-income earners, have saved diligently, inherited a
large sum of money, sold their business or may accumulate significant wealth that they dont intend to
spend in their lifetime.
The investment strategy uses life insurance, so clients must be reasonably healthy and able to qualify
for coverage to take advantage of the benefits this strategy offers. The Investment Strategy is intended
to be in place for the life of the insured person. A long-term view is essential to maximizing the
benefits of this strategy.
Whether the strategy is implemented on an individual or a corporate basis, the indiviual or corporation
must have an underlying life insurance need and ultimately have adesire to maximise their value of
estate.
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3.4 Benefits of the Investment Strategy
Life insurance is the driving force behind the succes of the investment strategy. Here is a summary of
the benefits life insurance can provide individual and corporate owners:
 Tax-preferred cash accumulation - The policys cash value grows tax free, as longas it remains
within the policy.
 Tax-free death beneift - The named beneifciary receives the tax-free death benefit, avoiding
probate and estate settlement costs for individuals. For corporate clients , the CDA creidit
provides a tax-efficient way of moving the proceeds out of the corporation. This allows a larger
amount to be passed directly to beneficiaries compared to taxable investments.
 Liquidity - If the policy owner requires access to the accumulated funds with in their policy, they
may take a policy loan, withdraw cash value or collaterally assign the policy in exchange for a
loan from a third party financial institution .Many clients appreciate the comfort that comes from
knowing they can access the cash value of their life insurance policy at any time.
 Potential creditor protection - For personally owned policies, the accumulated cash value of the
policy may be protected from the claims of the policy owners creditors during the policy owners
life and after their death. Policies owned by holding companies may offer some degree of
protection against creditors of a related operating company.
 Protection of privacy - By naming a beneficiary, life insurance proceeds dont pass through the
policy owners estate but go directly to the person or organization named. The tax-free death
benefit isnt part of the probate process and doesnt beocme a matter of public record. This helps
clients keep their final wishes and the distribution of their assets private.
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Other Investment Strategies
Matching investment strategies for general insurers
What is Matching?
 Matching is the process of constructing an investment portfolio which replicates the timing and
amounts of future liability outgo.
 If such a portfolio exists, then the insurance company can be certain that their invested assets will
be sufficient to meet their obligations.
 The key areas of liability outgo uncertainty to consider are:
 timing of payments
 nature of payments (inflation linked, random nature)
 currency of payment
 We will only consider timing and uncertainty of amounts
Why Use Matching?
 Matching is a concept often associated with life or pensions.
 It works especially well when the amount and timing of payments is known in advance
 Protects the insurer’s solvency position (so is good for policyholders)
 Reduces the level of capital required to support the existing and new business
 Valuable exercise in situations where limited financial backing is available to support a liability
(e.g. pension trustees)
Assessing Benefit of Matching
“ Is there any benefit of adopting matching investment strategies for general insurers? “
What does this mean?
 Depends on the goal and targets of the insurer
 We will look at the problem from the perspective of the company’s managers. Their main goals
are:
 Maximise economic profit on insurance business
 Maintain the solvency of the insurer so that commitments to policyholders can be met in most
circumstances
 Can matching asset strategies help in these areas?
Matching Applications and Aims
We will consider whether matching can be applied in two key areas:
 New Business: Can premiums be invested in such a way that will match the liability generated
by the new policy?
 Runoff: Can a matching portfolio be found for the runoff of existing business?
Why Does Matching Work For New Business in Life Insurance?
 Payment timing and amounts of annuity type benefits are known in advance when new policies
41
are written
 Premium for life policies covers the actual payments made to the policyholder under the contract
 Above points not normally true for general insurance policies
 Claims occur with low probability
 When claims do occur, the individual premium will be significantly less than the claim size (e.g.
liability claims)
 This means that it is not possible to create a matching portfolio on an individual policy level
How Can Matching be Applied to New Business in General Insurance?
 If we cannot match on an individual policy level what alternatives are there?
1. Match on a pool of homogenous policies
 Group by policies with similar claim frequency and severity distributions and loss payment
pattern
 Calculate expected total claim amount and expected payment pattern
 Set up matching portfolio to these expected amounts
2. Match runoff of liabilities after claim inception
 Invest premiums in strategic investment fund until claim occurrence
 Set up matching portfolio
3. Combination of 1 and 2
Measuring Economic Profit
 How do we measure economic profit?
 Premiums – Losses – Cost of Capital
 Therefore assessment of matching depends on regulatory regime
 We will consider the following risk measures:
 VaR 99.5% (QIS 3)
 TVaR 99% (QIS 2)
 Expected Shortfall (EPD)
calculated over a 1 year time horizon
Capital Requirement Calculation
 Following an economic capital approach we assume that in each future year of simulation risk
capital will be held on a 1 year time horizon
 In the case studies we assume:
 1 year of new business is written and premium is earned over the first year
 Claims will run-off over a n year payment pattern
 Capital requirement is therefore:
C=nΣCj (1+i(j))-j
where: j=1
C(j) is the capital requirement in year j, calculated on a 1 year time horizon
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i(j) is the interest rate applying for a payment in j years time
Can Matching Increase Economic Profit?
 Matching may be able to reduce capital requirements
 Which should then lead to higher economic profits
 If so we have an appealing case for matching:
 higher economic profit combined with
 greater policyholder security
 Whether economic profit can be increased will depend on regulatory regime defining risk
measure
 Intuitively expect matching to be more effective under VaR / TVaR than EDP
 Need to be aware of the costs involved
How Insurers portfolio improve their profitablity?

Turning to investments to bolster profitability
Over the past five years, the industry’s efforts to defend and increase its profitability have been largely
concentrated on lifting returns from underwriting: 40% of respondents said this had made the biggest
contribution to overall profitability. A further 30% said that cutting operating costs had been the
biggest contributor to improving profitability. But the waning of those opportunities has heightened
the focus on the investment portfolio. “Our overall balance sheet is strong so we can afford to take
more risks. What we’d like to be doing is taking on more insurance risks but to the extent that there’s
only so much new business that we can write, we’re also looking at financial strategies,” said Tom
Stoddard, Chief Financial Officer of UK Insurer Aviva.
Only 28% of insurers globally reported that their primary focus over the past five years had been
on improving returns from investment activities. With investment’s contribution to profitability as a
secondary priority amid challenging market conditions, just 18% of respondents said that their
investment strategy had made an increased contribution to their company’s overall profitability over
the past five years. For three-quarters of the sample, investment’s contribution was static.
Insurers recognise the challenges of investing today in a market characterised by low rates, tight credit
spreads and higher equity valuations, as only 20% globally (rising to 36% in North America) believe
investments will make the biggest contribution to improving their profits over the next five years. In
such an environment, we expect a continuation of many trends already apparent in today’s
marketplace. These include increased attention to structures that can help mitigate and diversify away
risk in a capital-friendly way, greater use of non-traditional sourcing methods across sectors (reverse
inquiries should increase), and more thoughtful approaches to managing and specifically giving
liquidity.
Investment strategy contribution to profitability -last five years
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GG% 80% 13%
G gggggggghdfuhuh% 11%
Finding Opportunity in Fixed Income

Despite a solid outlook for growth , and improving conditions elsewhere in the world, the
overwhelming need for yield continues to be the driving force in cross-sector asset performance. As a
result, our outlook for higher rates remains subdued, even as the Fed continues on the path to
normalisation, and inflation starts to re-emerge. Accordingly in fixed income, we anticipate that
investors will continue to seek out new avenues for sourcing income, increasing risk on balance sheet,
and thinking more strategically about liquidity needs.
We also believe that we are in the back half of a credit cycle, and as idiosyncratic risks continue to
rise, we advocate sectors that may help address both concerns. Managed pool collateralised loan
obligations (CLOs), for example, may offer attractive income levels relative to the market, with a built
in ability to help mitigate both credit and interest rate risk.
Some asset classes that offer potentially attractive risk-adjusted relative value remain under-owned in
our opinion single-asset, single-borrower commercial mortgage backed securities (CMBS) and broad
swaths of the municipal market (both taxable and tax-free) would fall into this category.
Traditional core fixed income sectors, while rich, remain attractive in our minds, as the context of
pricing is reset by the global hunt for yield. Additionally, we expect that insurers will continue to seek
out opportunities in less liquid sectors such as whole loans (both commercial and residential), private
credit and the like, despite the regulatory and capital-related challenges of such investments. These
allocations will likely serve, counter-intuitively perhaps, to sustain the bid for liquid investment grade
assets, as insurers seek to counterbalance increasing risk allocations on their balance sheets.
Respondents in every region believe controlling operating costs will be the most important factor in
the future, with particularly large majorities in Asia-Pacific and EMEA taking this view.
However, demands on insurers to improve returns from their investment activities are widely felt:
two-thirds agree that “rethinking our investment portfolio will be key to improving my organisation’s
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profitability in the current business environment”. The consensus also suggests that regulation is a key
limiting factor, with 42% agreeing that the regulatory environment is preventing them from taking
action in their investment portfolio to help improve their overall profitability.
Tom Stoddard of Aviva, said: “There’s an opportunity to consider additional asset classes which
Solvency II gets in the way of to some extent. Regulators insist that we have models for everything, so
you’ve got to go through quite a bit of hoopla in order to get into a new asset class.” However, he also
pointed out that Solvency II had played an important role in encouraging the company to change its
investment strategy to include larger weightings of illiquid assets, which had also helped to improve
investment’s contribution to profitability.“Solvency II, particularly in the UK, creates benefits for
investing in illiquid assets to match illiquid liabilities such as annuities. That has enabled us to
respond and create some value,” he said. David Astor, Chief Investment Officer of the UK
insurer Hiscox, points to the rules around securitised bonds as one area of concern. “EIOPA [the
European Insurance and Occupational Pensions Authority] have deemed that people such as us should
be restricted by various measures in holding mortgage-backed and asset-backed securities that don’t
meet various rules and requirements, in particular the requirement that the originator should hold 5%
of the issue.” He said the effect was that an entity regulated in Europe could not buy US mortgage-
backed securities that could be bought by a US entity under Dodd-Frank “because the retention rule is
interpreted differently in the two jurisdictions”.
Investment
Insurers’ efforts to improve the profits they generate from investment have focused on three changes.
The most popular tactic has been to reduce investment-related fees and expenses (67%). The CFO of a
European insurer said the company had reduced its asset management costs by “having fewer external
partners but in larger scale. Rather than spreading ourselves thinly, we have stronger views and go
with bigger lots so you can typically negotiate better fee terms.”
Aside from efforts to reduce asset management fees and expenses, the two most important levers were
efforts to improve capital efficiency by narrowing the mismatch between their assets and liabilities
(64%), and various changes in asset allocation. Some 57% of insurers globally said they had increased
exposure to illiquid/alternative assets such as real estate, private equity and infrastructure. Other, less
widespread steps include increasing exposure to equities (35%) and extending the duration of fixed
income portfolios (26%). The latter measure was especially favoured among North American
respondents, 50% of whom had done so. While duration extension could continue for the short term as
an attractive trade, we would urge caution in this approach in the US. The current term structure of
interest rates in the US is relatively flat compared to historical averages. Moreover, the forwards
market is pricing in a benign rate environment despite a Fed that is in the midst of a tightening cycle
and is ready to begin reducing its balance sheet. When asked how they plan to continue to improve
their investment portfolio’s contribution to profitability over the coming 3-5 years, insurers say the
favoured approaches detailed above will remain the same. The most important lever (68%) in future
45
will be reducing the need for regulatory capital by better asset-liability matching. This reflects the
conviction among 69% of respondents that there is “significant room” for their organisation to
improve “capital efficiency management”. Some 65% of respondents expect further increases in
alternative and private market assets. It is equally clear that reducing investment-related fees and
expenses will remain an important ongoing project, with 61% identifying this as a focus over the next
five years. Insurers are also thinking more broadly about how their investment portfolios can better
support overall profitability. Some 69% see significant scope to improve portfolio risk management.
Underwriting
Improving the profitability of underwriting activities has been an important contributor to bottom lines
over the past five years, with 40% indicating this area had made the biggest contribution. Insurers
attribute their progress here chiefly to changes in pricing (71%) and success in developing new
products (66%). Several insurers noted that their revenues had been static or declining for several
years as they avoided business that no longer met their return expectations. A senior executive at a
large global insurance company pointed out that as return expectations across many asset classes have
fallen over recent years there has been a surge of alternative capital seeking exposure to insurance
risks, compressing the industry’s underwriting margins. “Standardised, brokered natural catastrophe
risk has dropped below our ROE hurdles in many cases, so we have reduced the amount of this
brokered risk that we take on,” he said. Instead, the company had shifted towards more customised,
non-standard solutions that fewer competitors could offer. David Astor of Hiscox said his company
had made strong profits on underwriting over the past five years in part by tilting its business mix
towards retail and SME markets and “cutting back on the big-ticket stuff”.
Large flows of new capital into insurance had squeezed margins, he said, but had also brought
opportunities. “Underwriting for third-party capital is an important part of our business.” The move in
Europe to Solvency II has had a material impact on decisions about product mix, said Tom Stoddard
of Aviva. “We’ve shifted away from products that are capital-intensive or where the regulations have
made existing products more capital-intensive, and towards protection products or others that are
capital efficient such as unit-linked products.” Only 24% believe that underwriting will be the most
important factor in improving their profitability over the next five years. However, a majority (56%)
expect efficiency gains to play a major role.
Operations
Working to contain costs is “a never-ending effort”, according to Gérald Harlin of AXA. “When you
have reduced top-line growth you are at risk,” he said. Among respondents, the most important
operational priority has been to control non-staff overheads: 67% said that cutting expenses such as
rents and IT budgets had made the biggest contribution to improving cost efficiency, although just
under a quarter indicated that staff cuts had been their most important operational initiative.
Gary Brader, Chief Investment Officer of Australian insurer, said his company had set up a global
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operations centre in Manila that now employs 2,000 people to service its businesses in Asia, Europe
and the Americas. “Obviously the labor arbitrage is part of the logic for that change but increasingly
there’s value being driven through identifying and leveraging single best practices for certain
processes that were done differently and less consistently across our various countries.”
A quarter of insurers said they had improved operational performance thanks to M&A or disposals of
non-core units, or both. Yoichi Moriwaki of Tokio Marine said a series of overseas acquisitions had
been the most important contributor to improving the group’s profitability over recent years,
particularly the access to “sophisticated investment expertise” that the acquisition of US insurer
Delphi had provided for other businesses in the group.
Integrating private assets
To bolster their profitability, this year’s survey shows, many insurers are seeking to improve returns
from their investment portfolios — but without adding to current risk levels. Private assets are a key
element in their optimisation plans, with insurers turning to them in search of enhanced income and
higher risk-adjusted returns than those available from their public bond holdings. This makes sense.
The illiquid nature of many insurers’ liabilities means that they are often well positioned to bear
illiquidity risk. For a given set of default and recovery characteristics, private assets may offer a
premium as compensation for bearing illiquidity risk. However, a legitimate concern is whether the
return potential of private assets has already been significantly eroded by the weight of investor
demand. An investor in private assets should not ignore this point. Current valuations are not
overwhelmingly attractive, and some assets are in short supply as evidenced by increasing amounts of
“dry powder” and rising valuations. Nevertheless, we believe that well-chosen private market assets
have better return potential, relative to similar public assets. There are two key points to make here.
First, while prospective returns from private assets may not be as high as they once were, they remain
attractive relative to the low returns we anticipate from public fixed income.Over the coming years
interest rates will rise more quickly than forward rates imply. If we are right, this will challenge the
return potential of traditional fixed income assets, and any additional pick up from an illiquidity
premium is to be welcomed.
Second, there’s evidence that the return potential for skilled managers is far greater in private assets
than in public assets. There are good reasons for this. The skilled manager can outperform the average
investor through expertise in selecting particular deals and through structural factors such as better
access to deal flow and possession of the legal skills and resources to assess non-standard covenants.
Insurers have a number of constraints when deciding how much to allocate to illiquid assets. The
impact of the nature of the insurance liability on illiquidity risk appetite is intuitive and well
understood: lines of business with short-dated, unpredictable cash-flows such as catastrophe insurance
support less illiquidity risk than liabilities with long-dated, predictable cash-flows such as annuities.
Liquidity preferences are also driven by factors such as accounting, regulation and market dynamics,
many of which are continuously evolving. For example, the introduction of central clearing for some
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interest rate derivatives creates a requirement to hold highly liquid assets such as government bonds
and cash as collateral or margin. Derivatives are often employed by insurers with long-dated, ‘illiquid’
liabilities, thus presenting a dilemma between portfolio efficiency and liquidity.
Liquidity budgeting is often difficult to implement in practice and many insurers struggle to quantify
the ‘liquidity’ of their liabilities. The more qualitative approach of liquidity tiering — which separates
asset types according to the likelihood that they can be sold without adverse price impact — is often
used instead, in conjunction with a more subjective liquidity budget.The well-chosen private asset
may offer a return potential that is currently difficult to find elsewhere. It is possible to improve
portfolio efficiency by building a meaningful allocation to private assets while taking a pragmatic
and nuanced approach to managing liquidity risk.
Risk Indicators on the rise

The proportion who now say they expect to increase their investment risk exposure over the coming 1-
2 years has tumbled to just 9% -down from almost half (47%) a year ago. The percentage expecting to
maintain their current risk profile has jumped to 79% this year, from 46% in 2016.
One CIO commented: “If I had my way I would reduce risk more because I don’t think I’m being
compensated appropriately for the risk we’re adding, but we have to maintain earnings.” His
preference would be to “dial back [investment risk] and make up for that reduction in income with
efficiency gains elsewhere in the company”.
Although most plan to maintain their current risk profile, they are tilting their exposure more firmly
towards private market assets and, to a smaller extent, equities.The proportion intending to increase
their weighting in private market assets has jumped 23 percentage points in the past year to 39% -by
far the strongest positive change in sentiment towards any of the major asset classes. Across more
traditional assets, by contrast, the proportion of insurers expecting to keep their current weighting is
above 50% in every case, well above the levels seen a year ago. At first glance, this move to private
markets may seem to conflict with insurers’ stated desire not to increase the risk of their investment
portfolios. But the riskreturn trade-offs in private markets can in fact be more attractive than those in
public markets. Given public and private credits of similar quality, with equivalent default and
recovery outlooks, the private credit may be a better addition to the portfolio by virtue of the
illiquidity premium it offers. Private assets may also be diversifying to insurers’ public allocations and
may therefore help to improve the risk/return profile of the total portfolio. Brion Johnson, President
and Chief Investment Officer of Himco, said that the company seeks to keep its risk exposure steady
as it increases allocation to illiquid assets by reducing corresponding risks in its public market
portfolios.
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Macro risks
Ranking Macro-risk
Insurers concerns about the range of macro risks facing their business have become significantly
stronger, and there is less emphasis on the dangers of weak economic growth than in previous years.
The more sanguine sentiment on growth is consistent with the view that the world is in the midst of a
synchronised and sustained period of economic expansion. Geopolitical risk, encompassing worries
over populism, protectionism and regional tensions, is seen as much more important, with 71% now
regarding it as the most serious macro risk the industry faces, against 51% a year ago. It is also now
seen as one of the top drivers of change in the industry over the next 1-2 years, at 39%, up from 29%
last time. Modelling the potential investment implications of a significant geopolitical shock is a
difficult, but valuable, exercise to conduct. Worry over regulatory risk also registers a big increase this
year, with particularly strong readings in Asia-Pacific and EMEA, while in North and Latin America
currency risk is seen as much more significant than elsewhere. Globally, some 64% of respondents
believe regulation is the most serious macro risk they face, marking an acceleration of a trend that
began in 2014, with regulatory risk growing in importance with every survey. Regulation has also
emerged as a key driver of change in the insurance industry. Two years ago, with Solvency II about to
go live in Europe, 49% of respondents cited regulation as a key driver of change in the industry,
making it the number one issue. In 2016, with the Solvency II regime now active, only 25% pointed to
this issue as a dominant factor. Now the proportion has risen to 54%. Interviewees expressed a range
of concerns over regulations, including the IFRS17 accounting changes and planned International
Capital Standards for the insurance industry. More broadly, interviewees voiced concerns about the
difficulties that international groups face in dealing with differing regulatory regimes in markets
around the world. Gary Brader, CIO insurer QBE, said his group faces challenges from fragmented
regulatory regimes because they make it more difficult to shift capital between international
subsidiaries to suit overall strategic goals. Another interviewee, representing a large global insurer,
was affected by fragmented regulation for managing assets that he felt was, in some cases, made
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worse by “regulatory developments that in consequence are outright protectionist”. He added: “In
more and more countries they impose hurdles that make it difficult to access data globally, but also
make decisions that affect local carriers globally. That fragmentation is probably the most constraining
development for us. We could live with pretty much any regulatory environment but what drives our
costs are these different regimes.” Possible changes in regulation are also a concern for Tokio Marine,
said Yoichi Moriwaki, General Manager of the Financial Planning Department: “We are trying to
change our focus towards more long-term investment and therefore, were economic value-based
regulations to be introduced, I believe they would have an impact on our financial statements.”
Other areas of macro risk, by contrast, have become less pressing since 2016, particularly concerns
relating to the pace of economic growth and “lower-for-longer” interest rates. Concern about the
persistent low interest rate environment scored 59% last year, making it the number one macro risk.
Twelve months on, its score has dropped 19 percentage points and, with rates rising in the US and
Canada and a tapering program expected from the European Central Bank, insurers’ worries are
receding. Similarly, for the past three years, around 50% of respondents have cited weak global
growth among the most serious market risks: this year only 39% feel that way. This improvement in
growth expectations might help to explain insurers’ gradually increasing appetite for investment in
equities.
Focusing on factors
Holistic use of factors within investment and risk management frameworks can help.
Investment factors are the broad, persistent drivers of return that underlie all asset classes, and we
separate them into two groupings, macro and style factors. Risk management factors are a separate,
but also important, category. Whereas macro and style factors are few, broad and persistent, risk
management factors are many, nuanced and specific, and they help explain risk at the individual
security level. Thus, macro and style factors are more relevant for top-level strategic portfolio
allocation decisions, whereas risk management factors must be highly granular to minimise
unintended security-level risks.
The six macro factors — economic growth, credit, inflation, real rates, emerging markets and
commodities — that capture the broad, systematic risks that explain returns across asset classes.
Examining a portfolio’s exposure to each of these macro factors can provide insurers with a clearer
understanding of how well diversified their investments are. A portfolio that appears diversified from
an asset class perspective may be heavily concentrated in one or more macro risk factors. By
understanding their macro exposures, insurers can take a more deliberate and balanced approach in
allocating to macro factors. This can help them fine-tune their asset allocation to better seek specific
objectives or adapt to different market conditions. While macro factors explain returns across asset
classes, style factors explain returns within asset classes. Four style factors are more focused — value,
carry, momentum, and defensive — that are backed by strong economic rationale and are supported
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by risk premiums, structural impediments or behavioural anomalies. These style factors can help
insurers maximise the efficacy of their allocations to individual asset classes. By tilting fixed income
and equity portfolios toward rewarded style factors, it may be possible to improve returns, reduce risk,
or increase diversification over the long term. Additionally, a long/short strategy that invests in style
factors across asset classes can provide a diversifying source of return. As insurers increase their
commitment to alternatives, it is critical to understand the role that investment factors play in driving
the returns of these strategies. While many alternative strategies provide idiosyncratic alpha and
diversifying sources of return, others lean heavily on macro or style factors to drive returns.
To avoid paying high fees for returns that are largely factor-based, the insurers should analyse the
results of their current alternatives and equities portfolios to determine the sources of return, and they
should evaluate any potential new strategies with a factor lens. This can be a difficult and time-
consuming task, but factor-based strategies teams can help.
Insurers would also be well-served to consider how their portfolios may perform in different market
scenarios and how they might react to stress situations. This is where risk management factors come
into play, and our Aladdin risk management system considers nearly 3,000 of them. By analysing risk
management factors such as spread, volatility and currency, we can gain a better understanding of
bottom-up individual security risk, and we may find hidden correlations within seemingly
welldiversified portfolios.
Market risks
The year’s survey results make plain the depth of insurers’ concerns about conditions in financial
markets. For the first time in the survey’s history, the three most cited market risks all scored above
70% — only once before has any market risk scored above 60%. Worries over market risk are
concentrated almost uniformly on liquidity (74%), asset price volatility (74%) and a sharp rise in
interest rates (72%), although in every case these risks register higher scores in Asia-Pacific and
EMEA than in the Americas. These concerns are closely linked: the possibility of a sharp rise in
interest rates increases concerns about likely asset price volatility that could result in liquidity
disappearing from the market. The proportion of respondents pointing to liquidity risk shows the
largest year-on-year increase, jumping 25 percentage points to 74%. It’s clear that insurance
executives are growing more worried about their ability to access liquidity in public fixed income
markets. Randy Brown, Chief Investment Officer of the Canadian insurer Sun Life Financial, argues
that regulation has led to reduced liquidity in financial markets by “disintermediating the
broker/dealers to a certain extent,” and that this had “reduced balance sheet availability for market-
makers”. Given low market yields and expectations for poor liquidity in traditional fixed income
assets, it is not surprising that insurers are increasingly comfortable with alternative strategies that can
offer compensation for the liquidity risk they present. Worries over future asset price volatility have
also intensified, reaching 74% after hovering around 60% in the past two years’ surveys. This spike in
concern follows an extended period of relatively low volatility in financial markets and therefore
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seems to signal that insurers believe this could come to an end in the near future. This
is certainly a possibility, but our research indicates that low-volatility regimes can last for a long time,
and that low market vol. is more the norm than the exception. In addition to the regulatory
requirements and mounting pressure from rating agencies, growing nervousness over the potential for
asset price volatility is having a direct impact on the levels of capital and liquidity that insurers
are holding, with 60% saying the need to manage asset price volatility is the main reason they are
holding higher levels of capital now than five years ago. The pattern of growing concern over recent
years about the possibility of a sharp rise in interest rates is reinforced in this year’s survey. Some 72%
cite it as a key market risk, up from 53% a year ago. Tokio Marine’s Yoichi Moriwaki said: “Once
rates spike we need to be prepared for dynamic surrender or lapse risks, particularly for savings
products or longer-term products, and on that basis it’s our domestic life assurance operation that we
expect to be affected the most because they are dealing with products with longer duration.”
“Because we are expecting a significant number of policies to be surrendered under this scenario, we
need to be ready with ample amounts of cash,” he added. This potential liquidity call would be met by
selling Japanese government bonds, he said.
Moving risk modelling forward

This year’s survey saw a big jump in insurers’ concerns about geopolitical risks and their potential
impact on investment portfolios. But evaluating these risks can be difficult and sometimes requires
more art than science. To consider how portfolios may be affected by the type of large geopolitical
shocks that insurers are worried about, we find two tools quite valuable: hypothetical stress testing and
scenario-weighted analysis. Stress testing has become a well-established tool to supplement standard
Value at Risk (VaR) measures to better understand exposure to event risk. Stress tests come in many
shapes and sizes. Historical stress tests for one — where factor shocks defined by some past date
range are applied to the portfolio today — can be useful, but are also inherently backward looking.
Adding the perspective of hypothetical stress tests defined from a topical point of view may provide
more insight into clear and present dangers that may have an adverse impact on the portfolio.
Take a potential geopolitical event, such as escalating tensions between the United States and North
Korea. A granular factor model can be used to translate views about that event into terms that we can
use to estimate potential portfolio return implications. We can apply shocks to a small set of risk
factors for which we have the highest level of conviction about how they would respond to such an
event — a widening of high yield credit spreads, for example. Shocks to the remaining set of portfolio
exposures can be implied based on the empirical relationships between risk factors to paint a full
macroeconomic picture. Having access to a panel of stress tests addressing hypothetical events across
different outcomes may provide useful insights into what amounts to the potential worst-case
results for a given portfolio in a specific scenario. Through the resulting risk-factor decomposition,
stress tests can also provide an indication of which portfolio exposures may react most adversely to
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certain events. In addition to this monitoring function, stress tests can be further extended to various
what-if analyses. For example, a mean variance optimisation that minimises portfolio loss under a
given stress event can provide some guidance into how the portfolio may need to be re-allocated to
better absorb tail events.
We cannot overlook the fact that there is a great deal of subjectivity in defining these scenarios. While
there are no hard and fast rules, history can provide some guidance. It is important to construct stress
tests that are plausible. In other words, the magnitude of proposed scenarios should be considered
relative to the extremeness of market crises of the past.
The second tool to help analyse potential event risk is scenario-weighted analysis. Its use is motivated
by the fact that major market crises are often characterised by spikes in both market volatility and
cross-asset-class correlations. In some sense, diversification fails us when we need it the most. If we
calculate the results of our stress tests and VaR measures without taking this into account, we may be
baking in overly optimistic assumptions about how a true geopolitical event would affect the portfolio.
Rather than computing volatilities and correlations based on some window in recent history, scenario
weighting over-emphasises historical periods that exhibited some form of market stress while down-
weighting periods where markets experienced more subdued, normal conditions. By doing so,
scenario weighting captures some of the asymmetries in how markets have historically responded to
such events. When embedded within stress testing and VaR analysis, it can provide another
perspective on worst-case portfolio outcomes.
How customer centric approach can change life insurance industry

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What are we doing for our customers?
Customer-Centricity has been positioned as a Unique Selling Proposition(USP) by almost all
companies in the services sector. The organisation invests a lot of time and money in training, defining
new processes and planning new initiatives.
What exactly is customer centricity?

Customer centricity is not just about offering great customer service, it means offering a delightful
experience from the awareness stage, to the purchase process and finally through the post-purchase
process. It is about putting your customer first, and at the core of your business. While marketing guru
Lester Wunderman has been talking about the idea of putting the customer at the centre of every
activity, it has gained significant traction in recent years as customers have become more empowered
and as a result have greater expectations.
Changing trends
Today, technology has left behind the traditional distribution channels, thereby creating the need for
every company to rethink. Advances in technology and communication, combined with the explosive
growth in data and information have given rise to an empowered customer. The customer has various
avenues to collect and filter information from – interactions with peers/friends/family, online research,
social media etc, which helps them make an informed decision.
What does the life insurance sector need to do?
Life insurance is a business in which both, the customer and the company derive financial value only
by staying invested in the relationship over a long period of time. It is therefore imperative to keep the
customer’s best interests in mind, understand their needs and analyse drivers which influence their
purchase decisions.
The most important priority in a life insurance business is to win and keep the customer’s trust and
ensure the highest levels of business delivery at every stage of their lifecycle.
To achieve that we need to do the following:
Have simpler products

Have seamless processe
Have simplicity and transparency in communication
The last and most important is to “create value for money”, which needs to be clearly demonstrated
through a balance of price, product features and service delivery. The key here is to offer services that
are tailored to suit their individual needs in a manner which is convenient and easily accessible
through various touch points.
54
A paradigm shift
To keep pace with the fast changing environment, we need to redefine our relationships with our
customers and transform our business models. The two key steps to begin with are:
Listen to your Customer:
Most businesses tend to only hear but rarely listen hence lose out on the missing links articulated by
their customers, which are usually the most common and basic issues. Listening attentively also
makes the customers believe that they are valued at every step of the business interaction, leading to
greater customer satisfaction.
Sell what they need and not what you have:
Insurers need to know their customers better and use this information and knowledge as a source of
competitive advantage. A better understanding of their needs will help in offering them the relevant
products which will lead to greater persistency and reduce chances of mis-selling and surrenders.
Creating Customer Delight
To truly dominate a market, we must focus on delivering a “wow” experience to all our customers and
business partners in all the things we do for and with them. We need to let the customer be in control
by communicating with them at various stages through different mediums and keeping him informed
at all times.
An interesting way of gauging customer satisfaction and loyalty across sectors is through the Net
Promoter Score framework which is a worldwide index to measure the likelihood of customers to
recommend the company and its products/services to others. The objective is to convert customers
who were less than happy or unimpressed into promoters who will put the word out and allow for
increased revenues and profits of the company. This will not only help in offering better customer
experience but will also help employees perform better.
For a company to truly succeed, they must embrace and embed the concept of innovation within their
work culture. We need to be agile to be able to respond quickly and effectively to changing market
conditions, new customer demands and emerging regulations.
Conclusion
life insurance is an important form of insurance and essential for every individual. Life insurance
55
penetration in india is very low as compare to developed nation where almost all the lives are covered
and stage of saturation has been reached. Customers are the real pillar of the success of life insurance
business and thus its important for insurers to keep their policyholders satisfied and retained as long as
possible and also get new business out of it by offering need based innovative products.There are
many benefits to owning a suitable life insurance policy, including fast loans at comparatively low
interest rates (with no restrictions on how to spend the loan amount), annual policy dividends and the
presence of the cash surrender value. Life insurance also comes with the assurance that the financial
worries of your loved ones will be taken care of in your presence as well as your absence!
Bibliography
56
Websites
 lifeinsurance.adityabirlacapital.com
 Shodhganga.inflibnet.ac.in
 www.investopedia.com
 www.omicsonline.org
57

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A STUDY OF INSURANCE AS AN INVESTMENT STRATEGY

University of Mumbai for partial completion of the degree of

M.Com Part-2 Sem 4 (Accountancy)

Under the Faculty of Commerce

Monika Shrinivas Gummula

Under the Guidance of

University of Mumbai for partial completion of the degree of

M.Com Part-2 Sem 4 (Accountancy)

Under the Faculty of Commerce

Monika Shrinivas Gummula

Under the Guidance of

Project Guide : Principal :

External Examiner : College Seal :

Name and Signature of the learner

Chapter No. Title of Chapter Page no.

2. An overview of insurance industry 3-32

Insurance industry is an important and integral component of macro-economy and has

2.2History of Life Insurance in India

Milestones in the Life Insurance Business in India:

• 1994: “Malhotra Committee” submitted its report.

Duties, Powers and Functions of Authorities in IRDA

Growth of Life Insurance in India

Emergence of Private Insurance Players

Life Insurance: How To Get the Most Out Of Your Policy

Table 1. Main types of life insurance products

Table 2. Main types of non-life insurance contracts

II. Detailed assessment of insurer investment tools and decisions

A better option than fixed deposits

The Aditya Birla Group

Sun Life Financial

 'Gold Trophy' for Financial Reporting by The Institute of

What is the investment strategy?

3.3 How it Works

Corporate clients Corporate clients

How Insurers portfolio improve their profitablity?

Finding Opportunity in Fixed Income

Risk Indicators on the rise

Moving risk modelling forward

How customer centric approach can change life insurance industry

What exactly is customer centricity?

What does the life insurance sector need to do?

Have simpler products

Sell what they need and not what you have:

Creating Customer Delight

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