Management of Insurance Companies_1

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MANAGEMENT OF INSURANCE COMPANIES

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Insurances : Definition:

1. It is a co-operative device to spread the loss caused by a particular risk over a number of persons who are exposed to it and who agree to ensure themselves against that risk.

Risk is uncertainty of a financial loss. A financial loss, here, is an unintentional decline in or disappearances of value arising from contingencies.

2. It is a social device to accumulate funds to meet the uncertain losses arising through a certain risk to a person insured against that risk.

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FUNCTIONS OF INSURANCE

PRIMARY FUNCTIONS SECONDARY FUNCTIONS

PREVENTION OF LOSS

PROVIDES CAPITAL

IMPROVES EFFICIENCY

ENGINE FOR ECONOMIC GROWTH

INSURANCE PROVIDES CERTAINTY

INSURANCE PROVIDES PROTECTION

RISK SHARING

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PRIMARY FUNCTIONS

INSURANCE PROVIDES

CERTAINTY

INSURANCE PROVIDES

PROTECTION

RISK SHARING

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SECONDARY FUNCTIONS

PREVENTION OF LOSS

PROVIDES CAPITAL

IMPROVES EFFICIENCY

ENGINE FOR ECONOMIC GROWTH

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DEFINITION ANALYSIS

FUNCTIONAL DEFINITION

CONTRACTUAL DEFINITION

a b c d a b c da b c d

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Definition Analysis: Functional:

a. Co-operative device to spread risk

b. The system to spread risk over a number of persons who are insured against the risk.

c. The principle is to share the loss of each member of the society on the basis of probability of loss to their risks.

d. The method to provide security against losses to the insured.

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Contractual:

Insurance is a contract whereby:

a. Certain sum called premium is charged in consideration.

b. Against the said consideration, a large sum is guaranteed to be paid by the insurer who received the premium.

c. The payment will be made in a certain definite sum i.e., the loss on the policy amount whichever may be less, and

d. The payment is made only upon a contingency.

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NATURE OF INSURANCE

SHARING OF RISKS

CO-OPERATIVE DEVICE

VALUE OF RISK TO COMPUTE PRMIUM

PAYMENT AT CERTAINTY OR CONTINGENCY

AMOUNT OF PAYMENT

LARGE NO. OF INSURED PERSONS

INSURANCE IS NOT A GAMBLING *

INSURANCE IS NOT A CHARITY

* Explain : Insurance is the anti-thesis of gambling

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TWIN PRINCIPLES OF INSURANCE

PRINCIPLES OF CO - OPERATION PRINCIPLES OF PROBABILITY

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RISK DISTINGUISHED FROM PERIL AND HAZARDS

RISK / VALUE PERILS HAZARDS

PHYSICAL MORAL MORALE

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VALUE @ RISK:

i. PROBABILITY OF LOSS x VALUE / QUANTUM OF LOSS

ii. PERILS ARE CAUSES OR SOURCES OF LOSS

iii. HAZARDS: CONDITIONS CONTRIBUTING TO BOTH PROBABILITY AND VALUE / QUANTUM OF LOSS

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KINDS OF INSURANCE

BUSINESS POINT OF VIEW

RISK POINT OF VIEW

LIFE INSURANCE

GENERAL INSURANCE

SOCIAL INSURANCE

PERSONAL INSURANCE

PROPERTY INSURANCE

LIABILITY INSURANCE

FIDELITYINSURANCE

LIFE PERSONAL ACCIDENT

HEALTH

MARINE FIRE MOTOR CATTLE CROP MACHINERY

THEFT / BURGLARY

THIRD PARTY

EMPLOYEES MOTOR PROFESSIONAL

FIDUCIARY CREDIT INSURANCE

PRIVILAGE

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KINDS OF INSURANCE

BUSINESS POINT OF VIEW RISK POINT OF VIEW

LIFE INSURANCE

GENERAL INSURANCE

SOCIAL INSURANCE

PERSONAL INSURANCE

PROPERTY INSURANCE

LIABILITY INSURANCE

FIDELITYINSURANCE

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PERSONAL INSURANCE

LIABILITY INSURANCE

LIFE PERSONAL ACCIDENT

HEALTH

THIRD PARTY

EMPLOYEES MOTOR PROFESSIONAL

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PROPERTY INSURANCE FIDELITY INSURANCE

MARINE FIRE MOTOR CATTLE

CROP MACHINERY THEFT / BURGLARY

FIDUCIARY CREDIT INSURANCE

PRIVILAGE

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TYPES OF INSURANCE ORGANISATIONS

SELFINSURANCE

INDIVIDUALINSURER

PARTNERSHIP FIRMS

JOINT STOCK COMPANIES

MUTUALCOMPANIES

CO-OPERATIVEINSURANCEORGANISATIONS

LLOYD’S ASSOCIATION

STATEINSURANCE

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MUTUAL COMPANIES:

Mutual companies were co-operative association formed for the purpose of effecting insurance on the property of its members. The policy holders themselves were the shareholders of the company. Each member was the insurer as well as the insured. When profit was made subsequent premium used to be reduced and vice-versa. Mutual companies are non-profit companies.

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CO-OPERATIVE INSURANCE ORGANISATIONS:

These insurance concerns which are incorporated and registered under the Indian Co-operative Society’s Act. These concerns are also called “Co-operative Insurance Societies”. These societies like mutual companies are non-profit organizations. The aim is to provide insurance protection to its members at the lowest possible reasonable net cost.

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PURPOSE AND NEED SUMMARY OF INSURANCE

USES TO AN INDIVIDUAL USES TO BUSINESS USES TO SOCIETY

INSURANCE PROVIDES SECURITY AND SAFETY

INSURANCE OFFERS PEACE OF MIND

PROTECTS MORTGAGED PROPERTY

LIFE INSURANCE ENCOURAGES SAVINGS

LIFE INSURANCE PROVIDES PROFITABLE INVESTMENTS

LIFE INSURANCE FULFILLS NEEDS OF A PERSON

UNCERTAINTY OF BUSINESS LOSSES IS REDUCEDED

INSURANCE AUGUMENTS BUSINESS EFFICIENCY

KEY MAN IDENTIFICATION

ENHANCEMENT OF CREDIT

BUSINESS CONTINUATION

WELFARE OF EMPLOYEES

PROTECTS WEALTH OF THE SOCIETY

FOSTER ECONOMIC GROWTH

REDUCES INFLATION

ELIMINATEDS ECONOMIC DEPENDENCY

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USES TO AN INDIVIDUAL

INSURANCE PROVIDES SECURITY AND SAFETY

INSURANCE OFFERS PEACE OF MIND

PROTECTS MORTGAGED PROPERTY

LIFE INSURANCE ENCOURAGES SAVINGS

LIFE INSURANCE PROVIDES PROFITABLE INVESTMENTS


ELIMINATEDS ECONOMIC DEPENDENCY

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USES TO BUSINESS

UNCERTAINTY OF BUSINESS LOSSES IS REDUCED

INSURANCE AUGUMENTS BUSINESS EFFICIENCY

KEY MAN IDENTIFICATION

ENHANCEMENT OF CREDIT

BUSINESS CONTINUATION

WELFARE OF EMPLOYEES

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USES TO SOCIETY

PROTECTS WEALTH OF THE SOCIETY

FOSTER ECONOMIC GROWTH

REDUCES INFLATION

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FAMILY NEEDS

OLD AGE NEEDS

READJUSTMENT NEEDS

SPECIAL NEEDS

CLEAN – UP FUNDS *

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* After death, ritual ceremonies, payment of wealth taxes & income taxes are some requirement which decreases the amount of funds of the family members. Multi – purpose policies, education & marriage policies, Capital redemption policies are better policies for special needs.

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ANALYSING INSURANCE CONTRACTS

ELEMENTS OF GENERAL CONTRACTS

ELEMENTS OF SPECIAL CONTRACT RELATING TO INSURANCE

AGREEMENT i.e., OFFER & ACCEPTANCE

LEGAL CONSIDERATION

COMPETENT TO MAKE CONTRACT

FREE CONSENTOF PARTICIPATNTS

LEGALITY OF OBJECT

INSURABLE INTEREST

UTMOST GOOD FAITH

INDEMNITY SUBROGATION

WARRANTIES PROXIMATE CAUSE

ASSINGMENT & NOMINATION

RETURN OF PREMIUM

CONTRIBUTION

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ELEMENTS OF GENERAL CONTRACTS

AGREEMENT i.e., OFFER & ACCEPTANCE

LEGAL CONSIDERATION

COMPETENT TO MAKE CONTRACT

FREE CONSENTOF PARTICIPATNTS

LEGALITY OF OBJECT

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ELEMENTS OF SPECIAL CONTRACT RELATING TO INSURANCE

INSURABLE INTEREST

UTMOST GOOD FAITH

INDEMNITY SUBROGATION

WARRANTIES PROXIMATE CAUSE

ASSINGMENT & NOMINATION

RETURN OF PREMIUM CONTRIBUTION

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BRIEF NOTES ON THE POINTS MENTIONED OVERLEAF:

OFFER AND ACCEPTANCES:

i. In insurance, offer is made mostly by the insured in the submission of application form duly filled in. Publication of prospectus, advertisements or agents canvassing are all invitation to offer. When the filled in application form is accepted by the insurance company and the first premium paid, the insurance contract also called the policy is binding on both the insurer and the insured.

ii. Payment of premium along with the filled up form is the legal consideration and without the premium being paid, the insurance contract can’t start.

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iii. Competent to make a Contract: Every person is competent to make a contract provided :

a. who is of the age of majority according to the lawb. Who is of sound mind c. Who is not disqualified from contracting by any law to which he is

subject.

iv. Free Consent: a. Co-ercion b. Undue influencec. Fraudd. Mis - representation e. Mistake

Except under fraud, the contract becomes voidable at the option of the party whose consent was so obtained. In case of fraud the contract is void ab-initio. The insurance proposal has a provision for declaring free consent.

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v. Legal Object:

In order to make a valid contract, the object of the agreement should be lawful. An object that is a.

a. Not forbidden by lawb. Not immoralc. Not opposed to public policy and d. Does not defeat the provision of any law, is lawful.

In the insurance proposal form the object of insurance is asked, which should be legal and should not be concealed. If the object is found to be unlawful, the policy is void.

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vi. Insurable Interest:

For an insurance contract to be valid, the insured must possess an insurable interest in the subject matter of insurance. Insurable interest is the financial interest whereby the policy holder is benefited by the existence of the subject matter and would be a loser or prejudiced by the loss or death of the subject matter.

The essentials of a valid insurable interest are the following:

i. There must be a subject matter to be insuredii. The policy holder should have a monitory interest in the subject

matteriii. The relationship between the policy holder and the subject matter

must be recognized by law

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iv. The financial relationship between the policy holder and the subject matter should be such that the policy holder is economically benefited by the survival or existence of the subject matter, and / or will suffer economic loss at the death or non-existence of the subject matter.

v. This insurable interest must exist at the time of the proposal and also at the time or loss / claim.

Insurable interest arises out of obligation or option:Obligation arises out of statute, contract or custom and option arises in cases of owners, mortgagers, lesser, trustees or tenants

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THEORY OF INSURANCE PRICING

A fundamental principle of insurance pricing is that if insurer are to sell coverage willingly, they must receive premiums that:

i. are sufficient to fund their expected claim costs and administrative cost and

ii. provide an expected profit to compensate for the cost of obtaining the capital necessary to support the sale of coverage.

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Fair Premium:

The premium level that is just sufficient to fund the insurer’s expected cost and provide insurance company owner with a fair return on their invested capital is known as fair premium.Actuaries generally calculate the base premium on the basis of expected claim distribution using “Principle of Equivalence” (p’ps) such that

P = E(S) + K + R

Where E(S) represents the mathematical expectation of claims, & K denotes ongoing company running costs, while ‘R’ is the risk premium which allows for coverage of unforeseen deviations in the claim amount to be paid, but still provides the company with ‘normal’ profits i.e the standard pricing mechanism relies upon the so called ‘loss of large numbers’ and within a large diversified and homogenous portfolio of underwriting, the claim burden should converge towards its expected value.

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INSURANCE PREMIUM

PURE PREMIUM (EXPECTED LOSSES)

OTHER INCOME i.e., FROM INVESTMENT

OPERATING EXPENSES

PROFIT MARGIN

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Pure Premium:

It is the most important component of the insurance premiums. Based on actuarial calculations, it includes the amount needed to cover expected losses and loss adjustment expenses.

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Operating Expenses:

Includes sales commission and other marketing costs, taxes and the cost of handling claims. The size of the component of premium varies from one tine to another, largely dependent upon the extent and variety of policy holder services that the insurer provides.

Margin and other Incomes:

It includes an allowances for:

a. Contingenciesb. Underwriting Gain or Profits

Contingency funds are needed to meet unexpected increase in the number of a size of benefit payment and underwriting gains are needed to provide fund for financing growth and expansion.

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Rating Terminology:

Insurance prices are called ‘Premium’. Premiums are based on rates and rates are based on per unit of exposure.The term ‘rate’ is used synonymously with premium in the insurance business. It is the price per unit of insurance.Exposure unit are quantitative units used in insurance pricingLoading refers to the amount that must be added to the pure premium for other expenses, profit and margin for contingencies

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KIND OF INSURANCES EXPOSURE UNIT

i) Automobile IDV

ii) Fire Rs./ 100

iii) Product Liability Rs./ 1000

iv) Workers Compensation Rs./ 100

v) Life Rs./ 1000

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Note: Pricing in insurance is a very critical issue, as a compromise between marketability and actuarial considerations. The non-life business in India is considerably regulated. Tariff Advisory Committee (TAC) constituted under the Insurance act 1938, controls the rates, advantages, terms & conditions that may be offered by insurers in respect of General insurance, i.e., business related to Fire, Marine (Hull), Motor, Engineering and Workmen Compensation. All other products are non-tariff. These rate are also called ‘Statutory Standards’.

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General Objectives of Pricing:

a. Adequacy: Payment of losses and meeting own expenses and profit.

b. Reasonableness: No abnormal profit in a free market conditions.

c. Fairness: The rates must not be unfairly discriminatory, i.e., the rates must not be the same for hetero groups and must not be different for homo-groups.

d. Simplicity, Consistency & flexibility: Simple to understand, must not change frequently without loosing responsiveness to changing circumstances.

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Types of Rating:

Insurance rating assesses the costs of the insurance product depending upon the types of rating – the price to the buyer may be:

a. Entirely different from the one paid by anotherb. Same as that paid by the other customer andc. Similar to that paid by others, but different for one reason or the

other.

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There are basically three recognized rate making methods:

i. Judgment ratingii. Class ratingiii. Merit rating

Under Merit rating we have

a. Schedule ratingb. Experience ratingc. Retrospective rating

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Judgment Rating: Used when the risk proposed to be brought is so unusual that little or no statistical information about similar risk is available. Each exposure has to be individually evaluated and the rate is determined largely by the underwriter’s judgment. Each premium is unique and is most widely used in ocean marine insurance and some lines of inland marine insurances. Class Rating: The most common rate in insurance business. Insured risks are classified on the basis of one or several important features and all that belong to the same class are subject to the same rate per unit of exposures. The rate charged reflects the claims experience for the class as a whole. Life Insurance is one of the lines where such class rates are used i.e, rates based on age, gender, healthiness, smoking & drinking habits etc. class rates are also used for home-owners, automobile, workers compensations and health insurance.

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Merit Rating: It is a modification of the class rating. It modifies the class rate of a particular class insured based on individual loss experience. It is based on the assumption that the loss experience of a particular insured will differ substantially from the loss experience of the other insured. In doing so, it reflects the extent to which a specific risk differs from the other in the same class.

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The various types of merits – rating plans are:

Schedule Rating:

Under this plan, each exposure is individually rated. The first step is to examine the risk (i.e., the person or the object insured) in order to identify the features that are likely to cause losses or to prevent them. Then the risk is compared with the average or standard risk of its type.Finally, deductions are made, from it standard rate for the risk’s desirable features and additions are made for its undesirable features, the resultant rate is the rate that is tailored made to reflect the characteristics of risk for which it is used. Schedule rating is mostly used for buildings where we consider the following factors.

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i. Occupancy

ii. Construction

iii. Location

iv. Protection

v. Maintenance

The various additions and subtractions from the basic rate are based upon the judgment of the person who develops the overall schedule rating system.

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Experience Rating:

This type of ratings modifies the class rate on the basis of claim experience of a particular exposure. The actual losses for a period generally of two or three years is compared with the average risks of the same class. The rate is adjusted according to better or worst experiences. Experience rating is used only for very large firms that generate sufficiently high volumes of premium and more credible experience.

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Retrospective Rating:

Contrary to experience rating, retrospective rating modifies the insurance costs on the basis of current experience. This is generally done by making a provision in the policy contract that final rates would be determined retrospectively.

Generally, a range indication, i.e., maximum and minimum is specified and the final premium is determined after the policy expires and depends upon the amount of losses incurred during the year.

Retrospective rating increases the insured’s incentive to control losses in substantial savings in premium. It is generally applied to large liability and workers compensation policies.

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LIFE INSURANCE CONTRACTS

ASSURANCES ANNUITIES

PURE DEATH BENEFIT ENDOWMENT BENEFIT

TERM ASSURANCE WHOLE LIFE ASSURANCE

PURE ENDOWMENT

INCREASING TERM ASSURANCE

DECREASING TERM ASSURANCE

PURE ENDOWMENT ASSURANCE

DOUBLE COVER ASSURANCE

MONEY BACK ASSURANCE INCREASING / DECREASING ASSURANCE

DOUBLE ENDOWMENT ASSURANCE

DEFFERED ANNUITY IMMEDIATE ANNUITY

JOINT LIFE ANNUITY

REVERSE ANNUITY

LAST SURVIVOR ANNUITY

ORDINARY DERRERED ANNUITY

DERRERED ANNUITY WITH LIFE COVER

DERRERED ANNUITY WITH OPTIONS OF THE DATE

ORDINARY IMMIDIATE ANNUITY

IMMIDIATE ANNUITY WITH

IMMIDIATE ANNUITY WITH SURVIVAL BENEFITS

INCREASING IMMIDIATE ANNUITY

ANNUITY FOR N YEARS AND FOR LIFE TIME


JOINT LIFE ANNUITY

OTHERS / MISCELLANEOUS

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LIFE INSURANCE CONTRACTS

ASSURANCES ANNUITIES

PURE DEATH BENEFIT ENDOWMENT BENEFIT

DEFFERED ANNUITY IMMEDIATE ANNUITY

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PURE DEATH BENEFIT

TERM ASSURANCE

WHOLE LIFE ASSURANCE

INCREASING TERM ASSURANCE

DECREASING TERM ASSURANCE

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ENDOWMENT BENEFIT

PURE ENDOWMENT PURE ENDOWMENT ASSURANCE

DOUBLE COVER ENDOWMENT

MONEY BACK ASSURANCE

INCREASING / DECREASING ASSURANCE

DOUBLE ENDOWMENT ASSURANCE

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DEFFERED ANNUITY

IMMEDIATE ANNUITY

JOINT LIFE ANNUITY

REVERSIONARY ANNUITY


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DEFFERED ANNUITY

ORDINARY DERRERED ANNUITY

DERRERED ANNUITY WITH LIFE COVER

DERRERED ANNUITY WITH OPTIONS AT THE VESTING DATE

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IMMEDIATE ANNUITY

ORDINARY IMMIDIATE ANNUITY

IMMIDIATE ANNUITY WITH RETURN OF CORPUS

IMMIDIATE ANNUITY WITH SURVIVAL BENEFITS

INCREASING IMMIDIATE ANNUITY

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IMMEDIATE ANNUITY

ANNUITY CERTAIN FOR ‘N’ YEARS AND FOR LIFE TIME THEREAFTER


JOINT LIFE ANNUITY

OTHERS / MISCELLANEOUS

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TYPES OF INSURANCE PRODUCTS – INDIVIDUAL

VARIETY IS THE SPICE OF LIFE

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In this chapter we aim to be familiar with

1. Insurance products offered for sale by insurers;

2. Riders / add ons;

3. Options, alternations, etc;

4. With – profit contracts

5. Investment linked contracts;

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INTRODUCTION:

In every country insurance legislation defines what is “life insurance business” (also called long term business)? In some countries, it does not include ‘accident insurance’, ‘sickness or disability insurance’, ‘health insurance’, ‘annuity – certain’ and ‘ capital redemption’. It normally includes ‘assurance’ and ‘annuities’. It also could mean ‘linked business’ which means some benefits either wholly or partly linked to the performance of specified investments, Insurers, therefore, should know ‘what is life insurance business’ as per insurance legislation. In India, Insurance Act 1938, defines life insurance business as

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“life insurance business” means the business of effecting contracts of insurance upon human life, including any contract whereby the payment of money is assured on death (except death by accident only) or the happening of any contingency dependent on human life, and any contract which is subject to payment of premiums for a term dependent on human life and shall be deemed to include –

1. The granting of disability and double or triple indemnity accident benefits, if so provided in the contract of insurance.

2. The granting of annuities upon human life and

3. The granting of superannuaition allowances and annuities payable out of any fund applicable solely to the relief and maintenance of persons engaged in any particular profession, trade or employment or of the dependents of such persons.”

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LONG TERM BUSINESS IS DEFINED IN SOME COUNTRY LIKE THIS

“Long term insurance business, that is to say, the business of entering into or maintaining contracts of assurance on human lives, such contracts including contracts whereby the payment of money is assured on death or on the happening of any contingency dependent on human life, and contracts which are subject to payment of premia for a term dependent on human life, and such contracts being deemed to comprise and include the following sub classes:-

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i. life insurance – contracts of insurance dependent on human life;

ii. linked long term – where benefits are wholly or partially determined by reference to an index or to the value of or to the income from assets of any description;

iii. annuities – contracts for the grant of annuities dependent on human life;

iv. contracts for granting of disability and multiple indemnity, accident and sickness benefits if so specified in such contracts, but excluding insurance business which is principally or wholly of any kind included in sub paragraph (i), (ii), (iii), (v) and (vi);

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v. permanent health – contracts of insurance providing specified benefits on incapacity from accident or sickness which are both in effect for a period of more than five years and cannot be cancelled by the insurer;

vi. capital redemption contracts; and

vii. pension policies – insurance contracts to provide pre and post retirement benefits for individuals;

Therefore, insurer transacting in a country has to comply with local laws in designing products.

a. Insurance products offered for sale by insurers

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LIFE INSURANCE BUSINESS IS USUALLY DIVIDED INTO TWO BROAD CATEGORIES

• Assurances and

• Annuities Life insurance business can include some indemnity type contracts too, such as health insurance, accident, sickness and investment linked contracts. In this chapter, we deal with Assurance and Annuities.

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ASSURANCES Assurances: An assurance product is that provides benefit in the event of

death besides other benefits, if any, it can be classified into two sub-groups:-

a. Pure Death benefit contracts: Death benefit only, if death takes place, otherwise the product does not offer any benefit at all. (called ‘Term Assurances’)

b. Endowment benefit contracts: Death benefit, if death takes place, and if it does not take place during the period of contract, a survival benefit is provided on the date of maturity (expiry of contract) or on specified periods too provided the life assured survives. (called usually ‘Endowment Assurance’; if more than one survival benefit is paid during the contract period, it is called ‘Money Back Assurance’)

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PURE DEATH BENEFIT CONTRACTS

These are of two types:-

a. Term Assurance contracts: Where death benefit is payable only on death provided that it takes place during a specified period of 5 years, say it is not unusual to issue contracts for 3 months, 6 months, or 12 months. Where period of contract is not more than 2 years, such contracts are usually referred as Temporary Assurance contract.

b. Whole Life Assurance contracts: Death benefit is payable only on death – which would definitely take place at any point of time after the commencement of the contract.

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Under Term Assurance contracts, a return of premium with or without interest is also offered to policy holders; and nothing is payable if contract is terminated during the period of contract on any ground (e.g. lapse, withdrawal) other than death, such contracts are preferred by certain individuals who would be working for a project for a limited period. Intention of the contract is to provide either benefit to family members or to meet the funeral expenses. Return of premium, as a benefit, is offered to policyholders so that they would get some money (which may not be of insurance use) – this is only side attraction of the contract.

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For Whole Life Assurance contracts, something (called cash / surrender value) is payable if the policy holder terminates his contract due to any reason, before his death. Intention of this contract is to provide a lump sum payment to family members to meet funeral expenses and other expenses with death ceremonies in the event of death of the life assured.

These contracts are only for providing security to the family and funeral and other expenses..

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These contracts are cheap and provide high value to family members.Nowadays, these contracts are modified in this fashion:a. Increasing Term Assurance: Insurance cover could be increased

periodically to meet the insurance needs of policyholder.

Death taking place in policy year

Death benefit (Rs)

1 100,000

2 110,000

3 120,000

4 130,000

5 140,000

6 and later 150,000

4.3.1

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b. Decreasing Term Assurance: Insurance could be reduced periodically to meet the mortgages (exactly matching with outstand loan amounts)

Death taking place in policy year Death benefit (Rs)

1 100,000

2 70,000

3 50,000

4 30,000

5 10,000

6 and later 0

Example 4.3.2

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4.3.2 Endowment Assurance Contracts:

General principle of these is to provide a death benefit if death takes place during the period of contract, which is fixed in advance, and if death does not take place, a lump sum amount is provided on the date of maturity (date of expiry of contract). These contracts also provide something (called cash / surrender value) which is payable if policyholder terminates his contract due to any reason, before expiry of contract. These provide not only security but also savings component. Policyholder is not in a disadvantage position, as he gets cash in any case, unlike in Term Assurance contracts. These contracts could be broadly grouped into six categories:

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a. Pure Endowments: There is no death benefit during the period of contract, but there would be a survival benefit at the date of maturity.

Example 4.3.1: Mr.B buys a pure endowment contract for a sum assured of Rs. 100,000/- with a single premium of Rs. 90,000/- for 10 years. If B dies at any time during the period of contact no benefit is payable and Rs. 90,000/- would be foregone, and if he survives the period of contract, he would be entitled to receive Rs.100,000/-

b. Pure Endowment Assurances: There is death benefit during period of contract as well as a survival benefit at the date of maturity.

Example 4.3.2: Mr.B buys a pure endowment assurance contract for a sum assured of Rs.100,000/- with a single premium of Rs.95,000/- for 10 years. If B dies at any time during the period of contact, Rs. 100,000/- would be payable to his nominee, and if he survives the period of contract, he would be entitled to receive Rs.100,000/-.

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c. Money Back assurances: There is a death benefit (full sum assured) during the period of contract, and survival benefits at fixed dated during the period of contract.

Example 4.3.3: Mr B buys a money back assurance contract for a sum assured of Rs. 100,000/- with a single premium of Rs. 101,000/- for 15 years. If B dies at any time during the period of contract Rs.100,000/- would be payable to his nominee, and if he survives at the end of 5 years he would be entitled to receive Rs.30,000/-, and if survives at end of 10 years he would be entitled to receive another Rs.30,000/- , and if he survives at the end of 15 years he would be entitled to receive the balance Rs.40,000/-. Suppose he dies in the 12th policy years, total benefit payment would be Rs. 30,000+30,000+100,000 = 160,000/-

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d. Increasing (Decreasing) Assurance in type (B): In pure endowment assurance death benefit can increase (decrease) during the period of contract instead a fixed death benefit (this is similar to eg. 4.3.1 & 4.3.2)

e. Double endowment Assurance: There is death benefit during period of contract and a survival benefit (which is equal to twice the amount of death benefit) at the date of maturity.

Example 4.3.4: Mr B buys a double endowment assurance contract for sum of assured of Rs. 100,000/- with a single premium of Rs. 150,000/- for 10 yrs. If B dies at any time during the period of contract Rs.100,000/- would be payable his nominee; and if he survives the period of contract he would be entitled to receive Rs.200,000/-

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(1) Double Cover Endowment: There is death benefit{which is equal to twice the amount of survival benefit} during period of contract, and a survival benefit at the date of maturity.

Example 4.3.5 : Mr B buys a. double cover endowment assurance contract for a sum assured of Rs. 100,000/- with a sing/e premium of Rs. 9_,000/- for 10 years. If B dies at any time during the period of contract, Rs. 200, 000/- would be payable , to his nominee; and if he survives the period 0[ contract, he would be entitled to receive Rs. 1 00, 000/- . In fact. and în practice, there would be many combinations of death benefit and survival benefit. As a bait to policyholders, insurers would also offer 'bonuses along with benefits, which are payable on the happening of specified events. Such contracts are referred to as 'with-profit contracts', which we wi1l discuss later.

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4.3.3 In summary, Assurances could. be:- [In all the example, Life Assured is Mr A, 'Beneficiary Ms. B; Sum Assured is Rs, 100,000/-. All contracts terminate on death, if earlier, or on date of expiry of policy term, if any.}

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TYPE 0F ASSURANCE MAIN FEATURE

TERM ASSURANCE

Pure Term Assurances

Benefit payment on death only during a specified policy Term Example: - on death of Mr A; during the policy term Of 10 years, Ms B.is entitJed for Rs. 100,00/-. If Mr A dies on or after policy term, insurer is not required to pay at all to Ms. B.

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TERM ASSURANCE

Temporary Term Assurance

Benefit payment on death only during a specified policy term which is 24 months or Iess, .Example: on death of Mr A, during the policy term of 12 months, Ms B is entitled for Rs. 100,000/- If Mr A dies on or after policy term. Insurer is not required to pay at all to Ms. B.

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TERM ASSURANCE

Term Assurance with return of premium

Benefit payment on death onJy during a specified policy. term, and return of premiums paid (with or without interest).on the date of maturity Example: on death of Mr A, during the policy term of 1 0 years, Ms B is entitled for Rs. 100,000/-.lf Mr A dies on or after po1icy term, insurer is not required to pay at all to Ms B. If Mr A survives the policy term, then he is entitled to receive the premium paid by bim (say, Rs.l000/-)

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TERM ASSURANCE

Decreasing Term Assurance

Benefit payment on death only, and the amount of death benefit gets reduced in a specified order according to year of death, Example: Policy term is 5 years; Sum Assured reduces every year by Rs.20000/- If Mr A dies in the first policy year, the death benefit would be Rs. 1 00,000/-. Lf he dies in the second policy year, the death benefit would be Rs.80,000. Etc. lf he dies in the . 511> policy year, the death benefit would be Rs.20000/- . lf Mr A dies on or after policy term insurer is not required to pay at all to Ms. B.

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TERM ASSURANCE

Increasing Term Assurance

Benefit payment on death only, and the amount of death benefit gets increased in a specified order according to year of death. Example: Policy term is 5 years; Sum Assured increases every year by Rs.20000/-. If Mr A dies in the first policy year, the death benefit would be Rs. 100,000/-. If he dies in the second policy year, the death benefit would be Rs. 120,000. Etc. If he dies in the 5th policy year, the death benefit would be Rs: 180,000/-. If Mr A dies on or after po1icy term, insurer is not required to pay at all to Ms. B.

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WHOLE LIFE ASSURANCE

Whole Life Assurance

Benefit payment on death only. Example: On death of Mr A, Ms B is entitled for Rs.100,000/-.

Anticipated Whole Life Assurance

Benefit payment on death only, and survival benefits on stipulated dates Example: On death of Mr A, Ms B is entitled for Rs. 100,000/-. lf A survives at the of 5 policy years, he is entitled for Rs. 10,000/- at that point of time. If A survives at the end of 10 policy years, he is entitled for Rs. 20,000/- at that point of time. If he dies at any time during the first 5 policy years, then survival benefits would become void, Ms B would get the death benefit of Rs.100,0000/-

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PURE ENDOWMENT

Benefit payment on survival only on the date of Maturity On death of Mr A, during the policy term of 1 0 years, no benefit is payable. If Mr A survives the policy term of 10 years, A is entitled- for Rs. 100,000/- Suppose he pays a single premium of Rs.80000/-, and dies during. the policy term, then no benefit is payable; unlike in a fixed deposit scheme in a bank. As such these contracts are no longer popular. However these, still exist in some countries since banks do not offer long term (over 5 years) fixed deposits)

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PURE ENDOWMENT ASSURANCE Benefit payment on death, if any, during specified policy term, and on survival on the date of maturity. On death of Mr A, during the policy term of 10 years, Ms B is entitled for Rs. 100,000/-. If Mr A survives policy term, A is entitled for Rs. l00,000/-. [In this contract, any how, Rs. 100,000/ was assured by insurer, so that. the policyholder would get something substantial. These contracts are most popular throughout the world.]

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DOUBLE ENDOWMENT

Benefit payment of X on death, if any, during specified policy term, and2X on survival on the date of maturity.

DØNBLE COVER ENDOWMENT

Benefit payment of 2X on death, if any, during specified policy term, and X on survival on the date of maturity

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OTHER Benefit X on death, if any, during specified policy term and Benefit Y on date of maturity, and also survival benefits of Z during policy term- where X can be increasing or decreasing at stipulated times, and Y can be fixed or related to X, Z can vary from time to time during. the period of policy term. There could be Deferred Assurances-usually policies on children. There is a deferment period and also a vesting date. During deferment period, no insurance cover is provided (except in some cases, return of premiums with or without interest), from vesting date 'Assurance' starts on the life of child. These are Deferred Endowment Assurance Policy, Deferred Whole Life Assurance Policy.

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4.3.6 In Assurances, we observe that insurers cover fundamentally two events, namely, death and survival at a point of time. Insurers provide benefits on the happening of these events in the contracts. Suitable names are given for the contracts, such as, 'Term Assurance, Whole Life Assurance, Endowment Assurance, etc. 4.3.7 In Assurances, Amount of benefit is always fixed in advance, and known at . the time of issue of contract. This is referred to as 'Sum Assured', 'Insurance Cover', 'Basic SA', 'Face Value of the contract'. etc. In some cases, the benefit amount is varied with time scale. Amount of benefit_ depends upon the time when event happens. For instance, if event happens in the second year, the amount of benefit would be like this. In any case, the benefit amount is known before.

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4.3.8 In Assurances, 'Events are defined before the issue of contract. Definitions would last long and are stable. Event 'Death' means death of life assured-no longer living. Proof of death is a certificate of death issued by governmental agency-Registrar of births and deaths-a valid document for insurer. Event 'Maturity' means survival"of 1ife assured on the exact date of maturity – date of expiry of contract. Discharge voucher duly signed by the life assured Would be enough for insurer to verify the event. There are also other events, such as 'death due to accident', 'disability', 'sickness', etc., which would be defined by insurer for application of the event. These we will discuss later.

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ANNUITIES 4.4 An annuity product is that provides benefit on event of survival at stipulate time intervals, besides other benefits, if any. It can be. classified into two sub-groups, • deferred annuity and

• immediate annuity. 4.4.1 A deferred annuity is that provides an immediate annuity after a specified period, called 'deferment period'.

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4.4.2 An immediate annuity is that provides a series of payments each at a stipulated. interval, on surviva1. For instance, if Mr A buys an immediate annuity, he would be entitled to. receive every month (stipulated interval) an amount of' Rs. X (series of payments); provided that he survives. at the end of every month. Here the event is 'survival', and 'benefit amount' is Rs. X. The contract ceases on death. Numerical Example: Mr A purchased an immediate annuity on 15th Jan, 2007, at age 60 to receive monthly pension at the rate of Rs. 1000 p.m. The first payment of Rs. 1000 would be on 1st Feb 2007, provided Mr A survives (is alive on that date). the next payment would fall due on 1st March 2007, provided he survives, and so on. Suppose he died on 15th June 2008, then the contract ceases on 5th June 2008 with no further payments from that date.

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4.4.3 Similar to Assurances, Annuity polices are of many types and varieties. Annuity policy could be with insurance cover-death benefit- on the death of annuitant a lump sum is paid (usually the purchase price in case of immediate annuity policies, a fixed sum in case of deferred annuity policies (the fixed sum could be an absolute amount or return of premium(s) with or without interest). Immediate annuities could also be increasing type-where annuity instilment increases at, a specified rate from a: specified point of time – called increasing annuity.

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Annuity policy can be for life or for a fixed number of years, whichever is longer-called 'annuity-certain and for life thereafter'. Annuity policy can be on two lives (a couple):

a) 'Joint Life annuity' -where annuity is payable as Long as both are

alive, and ceases on death of any of the two lives.b) 'Reversionary annuity' policy-where on the first death, the annuity

payment would start to second life and payable from the death of the first life to the death of the second Life.

c) 'Last survivor annuity'- annuity payments are made till death of second' life-the annuity payment to the second life could be x% of the annuity , payment to the first life (x% can be 1 00%, 75%, or S0%}-such policies are used to provide widow's pension in a pension scheme.

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4.4.4 TYPES OF DEFERRED ANNUITY ARE

Type of deferred annuity Features

1. Ordinary deferred annuity

Immediate annuity would start from date of expiry of deferment period (called vesting date}.If life assured dies during deferment period, usually premiums are retimed with or without interest.

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2. Deferred annuity with Life cover

Same as in #1, but there would be death benefit during deferment period-which could be substantial amount. -the death benefit could further be used' to purchase an immediate annuity for the nominee-who is usually spouse.

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3. Deferred annuity with options at the vesting date

At vesting, the policyholder can choose to receive a Lump sum payment (called notional cash option) or receive an immediate annuity. Usually in these contacts, po1icyholder can have option to buy an immediate annuity from any other Life insurer-which would be arranged by the first insurer.

Deferred annuity could be purchased either with a single premium or with a regular premium for a fixed number of years (where the fixed number could be equal to or less than the deferment period).

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4.4.5 TYPES OF IMMEDIATE ANNUITY ARE

Type of Immediate Annuity

1. Ordinary immediate annuity (due or in arrear)

Features

Immediate annuity is of two categories-, immediate annuity due, and immediate annuity in arrear. In case of immediate annuity due_ the first payment would be on the date of purchase; In case of immediate, annuity in arrears, the first payment would be x months from the date of purchase; where x is chosen before, such as '1', '3', ‘6', 12' month(s).

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2. Immediate annuity with ROC [ROC :Return of Corpus or Purchase Price ]

Same as in #1 above, except that there would be death benefit which is payable on death of annuitant.

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3.Immediate annuity with Survival Benefits

Same as in #1 above, but there could be survival benefits which are payable on survival at dates fixed in advance. For instance, the annuity policy could provide survival benefits (which are fixed and known in advance) at the end of 5 years and 10 years.

4. Increasing immediate annuity

Same as in #1 above, but the annuity amount could increase every year by 1 % (simple interest}, say. For instance, if annuity installment is 1 which is payable at the end of each year, then it becomes -1.0 1 at the end of 2nd Year 1.02 at the end of 3rd year and-so on.

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5. Annuity certain for n years and for life thereafter

Same as in #1 above, except that annuity, installments is guaranteed for n years. This means, the annuity policy assures payments for n years whether annuitant (life assured) is alive or not, and if the annuitant survives n years, then he would receive for life. The contract ceases on death if it takes place after n years, and if death takes place during the first n years, the contract ceases at, the end of n years. For instance Mr A purchased 'annuity certain for 5 years and for life thereafter' which provides him an annuity of Rs.100 at the end of each year. If he dies in the first 5 years, the contract provides payments for 5 years; if he dies after 5 years from the date of commencement of policy contract ceases on death.

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6. Last survivor annuity

It can be viewed as combination of two immediate annuity policies, the first annuity policy would start immediately to the first life, and the second annuity policy would start from the death of first life to the second life. For instance, A and B are two lives, annuity installment is Rs.100 payable at the end of each year, Rs. 100 would be paid to the first life, A, as long as A is alive, and B would receive Rs. 100/- only from date of death of first life, and is payable as long as B is alive.

7. Joint Life annuity

In this case, it is same as in #1 above, except that annuity is payable only, if both lives are alive, and contract ceases on first death.

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8. Other

There can be combinations. of annuity payment, survival benefits, and death benefit. In. USA and Canada, variable annuities are sold, under which there is a minimum floor of annuity payment and extra amount which depends upon performance of investments. This means some portion of annuity payment risk is borne by the policy holder. There are also annuities for impaired lives in some Asian countries, under which higher annuity (more than that in ordinary annuity, as the Longevity would be shorter) payments are made; and such contracts are issued subject to underwriting.

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Example In a pension scheme, pension is payable to member at the rate of Rs.1000 / p.m., as Long as he is alive, and on his death, his spouse is entitled to a pension of Rs.500/- p.m., which is payable as long as spouse is alive. What annuities are suitable for this member?

Two annuity policies could be purchased, 1) Last survivor annuity (LSA) for both member and his spouse for

Rs.500/ p.m. 2) Single life annuity (SLA) for member for Rs.500/- p.m.

As long as member is alive, Rs.10001- p.m. is received (Rs.500 from LSA and Rs.500 from SLA). On member's death, SLA would cease, Rs.500 would be payable to spouse from LSA as Long as spouse is alive. If spouse dies ,before member's death, member would receive Rs.1000/- from LSA and SLA as Long as he is alive, and both contracts get terminated on his death.

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(B) RIDERS / ADD-ONS

4.5 Riders or add-ons are 'additional benefits' which are optional to the policyholder, and could be attached to the main contract. For instance, if Mr A purchased an Endowment Assurance contract, he can opt for 'Accident, Benefit' rider which provides an additional benefit in the event of death due to accident. [Accident should be defined in the contract death takes place on account of accident which the Life assured has to face al1 of sudden such as snake-bite, road accident, train accident, fall from a tree, and etc., but not self inflicted- suicide). For Additional benefits, additional premiums have to be paid.

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4.5.1 CHARACTERISTICS OF RIDERS

• Offered as an option, along with main contract; • Option is valid only if main contract is valid;• It provides additional benefit due to happening of specified event. • Option can be cancelled at any time while main contract is in force;• Grant of option could be subject to underwriting requirements;

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2 Following is the list of riders, usually, offered along with main contract

Name of rider Main feature

Accident Benefit Rider

Event: Death due to Accident Benefit: usually 2 to 3 times the Sum Assured payable on normal death. For instance, if Sum Assured is Rs.100,000 which is death benefit, .the Accident benefit could be Rs. 100,000 or Rs. 200,000/- so that total death benefit could be Rs. 200,000 or Rs.300,000, on death due to accident.

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Permanent Disabi1ity Rider

Event: Permanent Disability on account of an accident or disease. Benefit: Related to Death Benefit (e.g. 10% of Sum Assured, and waiver Of future premiums)

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Term Rider Event: any type of death Benefit: Additional Death benefit.

Critical illness Rider

Event: Aff1iction with specified critical il1nessBenefit: Amount fixed in advance(usually related to death benefit)

Waiver of Premium Rider

Event: On death of proposer in case of insurance plans on children and also joint life plans; on permanent disability in any insurance Plan Benefit: Future premiums are waived from date of event.

There could be 50 many other riders attached to main contract to provide additional benefits.

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(C) OPTIONS, ALTERATIONS, ETC 4.6 Some contracts could give facility of options to covert into a different type of' policy; to alter terms and conditions of the policy. Such, options would have a limited period of offer during which option has to be exercised. Options offered by insurers are of the following:

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i. Convertible Term insurance plan offers insurance cover in the first five policy: , years, and at the end of 5 years, the po1icy can be either converted into an, Endowment contract for a period of 15/20/25 years (age at expiry of contract shall not be over 65) or into a Whole Life Assurance Plan;

ii. Increase in insurance cover (for instance from Rs. 50000 to Rs: 75000) without medical examination during the period of contract;

iii. Maturity proceeds could be made use of to buy any other plan without medical examination or to receive in 1 0 half-yearly installments;

iv. Facility to purchase another insurance plan with or without medical examination;

v. Paid-up option with participation in profits; (This means policy would be made in force for reduced sum assured with no further future premiums)

vi. To change the owner of the policy (not the Life assured) 1 nominee

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vii. To register assignment (with a prescribed notice from the policyholder) which means certain rights are made available to assignee(s)

viii.To partially surrender the policy (splitting the policy)ix. In case of a group policy, an individual member, if he Leaves the

group, can be offered an individual policy with the same terms and conditions.

x. Backdating of policy (at inception, of the contract)[ usually in the same financial year]

xi. Discounting of policy in the last year [usually with no penalties]xii. Grace period [allowing policyholder to pay premiums Late-this is

usually policy condition-some insurers accept premiums beyond grace period with no or minimal charges]

And so on.Options can either enhance value of the policy in monetary terms or provide some non monetary facilities (e.g. change in nominee, change in ownership),

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4.7 ALTERATIONS Insurers permit certain alterations, which would not impact the financial

features of the product, and certain which cou1d change the main structure of the product too. These are:

i. From one mode of premium payment to another [e.g., from monthly

mode to yearly mode};ii. Reduction in policy term (increase in policy term is general1y not

allowed, it could cause reduced premiums and the insured might select against the company)

iii. Increase in sum assured (say, from Rs.50,000 to Rs.75,000), usually, with medical examination;

iv. Change from whole life plan to endowment plan (these are rare, 'but insurers, , do permit)

v. From without profit contract to with profit contract [allotment of bonuses would be prospective, 'not retrospective]- (not vice versa)

Alterations are not free; insurer would collect charges for alterations from the policyholder.

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GUARANTEES 4.8 lnsurers would offer certain guarantees on payment of benefits and premiums. Inlife insurance contracts, death benefit is an assured amount which is known in advanceand it would be not altered; similarly the installment premiums which are Level throughoutthe premium paying period are fixed in advance and would be not altered. The following are offered as guarantees as explicitly or implicitly:

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1. Death Benefit

Usually a fixed sum assured which is known in advance in absolute terms, e.g., Rs.100,000/-

2. Premiums

Premiums payable would be level and are fixed in advance in absolute terms, and generally cease on death.

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3. Guaranteed Surrender Value

Usually a fixed amount related to premiums – for instance – 30% of premiums paid excluding premiums paid in the first policy year. This is a minimum guarantee stated in the policy contract, if policyholder terminates the contract. Sometimes referred to as ‘statutory surrender value’. Insurers offer higher surrender values, generally, and which are called special surrender or cash values – terms and conditions would be stated before.

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4. Guaranteed Additions

These are usually related to sum assured, and are payable in the event of death or maturity. For instance, 2% of SA (Sum Assured) p.a is guaranteed addition; if life assured dies in the 7th policy year, 14% of SA is payable in addition to basic SA, as an additional guaranteed benefit.

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5. Guaranteed Interest Rates

In some contracts, the benefit is related in premiums-Return of premiums with an effective interest @ 6% p.a say. This means, for instance, if life assured dies in 7th policy year, the amount of death benefit (Where P is annual premium) is accumulated value of P’s – P x [(1.06^7)+(1.06)^6+…..+(1.06)]

6. Guaranteed Maturity BenefitAmount of benefit on date of maturity is made known before and fixed (usually) and guaranteed.

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7. Paid-up Benefits

In case, if the policyholder stops paying premiums from some point of time during the contract premium paying period, the policy would be allowed to continue for reduced benefits, which are predetermined, for instance, t/n of the sum Assured, where t is the number of premiums paid and n is the number of premiums payable; if sum assured is Rs.100,000; t=5; n=10, then the reduced sum assured is Rs.50,000.

There could be some other guarantees too, which could be according to policy terms, for instance, increasing death benefit by a fixed amount after some specified period

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D) WITH - PROFIT CONTRACTS .

4.9 Insurance contracts offer profits, bonuses, or dividends for some extra premium. This is a bite to induce policyholder to buy insurance products so that some extra benefit is provided with certain amount of risk. For instance, if Mr X buys an Endowment' Assurance contract with profits on death or maturity, the contract would be entit1ed to bonuses. . . Example: Mr X buys an Endowment Assurance contract with profit for a sum assured. of Rs. 100,000/- from. an insurer, with a policy term of10 years; and he died in 6th policy year (after payment of 6 annual premiums); insurers bonus declarations were (for this contract) per 1000 -Sum Assured:-]" policy year: 40; 2nd ...: 45; 3rd : 40; 4th : 50; 5th...:55, 6th:60; Total vested bonuses would be: 4000+4500+4000+5000+5500+6000 = 29,OOO. Benefit payable on death = Sum Assured + Vested bonuses for 6 years= 100.000 +. 29,000 = Rs 129,000/=.

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4.9.2 .THERE ARE VARIOUS METHODS OF BONUSPAYMENTS

i. Simple Reversionary Bonus;

ii. Compound Reversionary Bonus; Cash Bonus;

iii. Paid-up Additions;

iv. Discount in Premium, Etc.

v. Others ; combinations

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SIMPLE REVERSIONARY BONUS (SRB):

Under this method, bonus is declared as x% _sum Assured (face Value of basic contract) (or x% of Premiums). For instance, SRB is 4% of SA; this means Rs. 40 per 1000 SA.

COMPOUND REVERSIONARY BONUS (CRB) Under this method, bonus is declared as x% of Bonus declared. in the preceding policy year. Suppose; Last year (the first bonus) bonus was 4% of SA; in the current year it could be 10% of the amount of bonus declared in last year: For instance, if Rs. 40 per 1000 was declared as the vested bonus for a policy year, then the vested bonus (CRB) for thecurrent year is Rs. 44 per 1000/- (40 x (1.10) = 44) (which is the succeeding year). .

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CASH BONUS (CB) Under this method, the policyholder is entitled to receive cash as bonus for a policy year. (This is just like a cash dividend in a manufacturing company).

PAID-UP ADDITIONS (PA) Under this method,. the policyholder is entitled to receive an additional sum assured (in addition to the existing basic sum assured) as bonus for a policy year. (This is just like a single premium contract. For.instance,Rs.100is PA; and this is additional sum assured which is payable on events specified in the contract (death or maturity).

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DISCOUNT IN PREMIUM

This is same as cash bonus method except that the policyholder would not receive cash but a premium notice which stipulates premium for the current year. If P is the due premium as per contract, the policyholder can pay P-A, (where A is the discount allowed by insurer). Suppose the premium P is Rs. 1000/- Discount declared in the year 10, then policyholder can pay Rs. 990/- instead Rs.1000/- as premium for that year.

OTHER

There could be other way of doing , for instance, a combination and simple and compound reversionary bonus. Bonus could be related to premiums; and a paid up policy is also allowed to participate in profits.

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FUTURE BONUSES

Future bonuses are never guaranteed in advance, as they will not be known. But a policyholder could expect that the future bonus would be not less than current year’s bonus. Though this is an expectation, but there is no guarantee. Premiums for participating contracts would be higher than that for non-participating contracts; the difference is for bonus element. 4.9.3 Purpose of participating contracts is to provide a good return on these contract, as the insurer could invest the bonus loadings (premium) in a propitious way by putting these monies in financing business of non-participating contracts and other contracts (a gearing benefit)

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4.9.4TERMS AND CONDITIONS FOR PAYMENT OF

BONUS COULD BE i. Policy must be in-force for with profits;ii. Bonus vests only if policy has been kept in force for 5 years, say;

(this condition would not apply in case of claims by death);iii. Vested bonuses are attached to and payable along the Sum Assured;iv. Bonus would be declared only if there are profits (surplus) available

for distribution, after payment of taxes;v. There is no guarantee that future bonuses would be maintained at the

current bonus declared rates;

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vi. Vested bonuses are payable on death or on maturity only if the policy is kept in force on such event; and are not payable on surrender of policy (this condition may also be varied to the advantage of policy holder);

vii. In case of paid-up po1icies, bonuses vested may be payable on death or on maturity, along with reduced sum assured. (Here also the condition could be varied (or not varied) to the benefit of po1icyholder}

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4.9.5 Nowadays, participating contracts are waning. Main reasons are non-transparency in respect of the amount of surplus and distribution of surplus, and also how surplus is arrived at. Investment risk is borne by policyholders who cannot choose investments. In view of this, unit linked contracts are becoming popular, which are more transparent in respect of net asset value of investments which the policyholders choose and also bear the investment risk, and also know how the net asset value is determined.

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INVESTMENT LINKED CONTRACTS

4.10 Traditionally insurance contracts bear various risks which are borne by the insurer, particularly, fluctuating interest rates, clairi1 experience, etc., promised benefits are fixed in advance (at the time of purchase of contract) and are paid on specified events (death or survival). Investment (unit) linked contracts are now offered by insurers with savings element for which investment risk is borne by purchasers of contracts. These are also called 'linked contracts', 'unit linked insurance plans'. Such contracts provide insurance benefits as well as savings benefits. The savings benefit is linked with an index (SENSEX-, share prices) or with the underlying value of assets--- this is not an assured benefit. Some insurers offer some assured benefits in respect of savings portion too--by offering some growth rate (say 5%) of the policy holders savings.

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4.10.1 A unit1inkedcontracthas two accounts, namely, unit account, and non unit account. In unit account, units are allocated at a specified price (caned NÀV-Net Asset Value) [also called 'offer' price in certain contracts: Portion of the premium that is alIocate4 to unit account is referred to' as 'allocated amount', and the rate is 'allocation rate'. For instance, out of Rs.100, 000 premium p.a., in the first policy year, the allocation rate could be 85% (that is 85,000 is put into unit account), and in the second and subsequent policy years, the 'allocation rate could be 95% or 91.5% or 98% ( in some cases..it could be 100%. The allocated amount is used to buy x units at the prevailing unit price (NAV). so the unit account has x units. Rest of the money is paid into non-unit accounts and is used to meet charges and commission. The charges are to meet expenses of administration, morta1ity and rider benefits, and other contingencies.

4.1 0.2 Unit linked contracts provide flexibility in payment of premiums, insurance cover, additional benefits, etc. In view of this, these have become popular.

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BOARD OF DIRECTORS

LOCAL BOARD OF DIRECTORS (NON – EXECUTIVE)

COMPANY SECRETARY

CHIEF GENERAL MANAGER

ASSISTANT GENERAL MANAGERS

LIFE GENERAL OVERSEAS MANAGEMENT SERVICES

PERSONNEL ACCOUNTS INVESTMENTS

1. PERSONNEL FORM

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CHAIRMAN

ZONAL OFFICES

DIVISIONAL OFFICES

BRANCH OFFICES

SUB - BRANCH OFFICES

DEVELOPMENT CENTRES

FOREIGN DEPT

FOREIGN OFFICES

CENTRAL OFFICE

2. GEOGRAPHICAL FORM

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BOARD MEMBERS

EXECUTIVE COMMITTEE

INVESTMENT COMMITTEE

BUILDING COMMITTEE

SERVICES & BUDGET COMMITTEE

PUBLIC RELATION COMMITTEE

3. COMMITTEES

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HEAD OFFICE

HEAD OFFICE ADMINISTRATION

REGIONAL OFFICE REGIONAL OFFICE REGIONAL OFFICE

MAIN BRANCH

MAIN BRANCH

MAIN BRANCH

MAIN BRANCH

MAIN BRANCH

MAIN BRANCH

SALES OFFICE

SALES OFFICE

SALES OFFICE

SALES OFFICE

SALES OFFICE

SALES OFFICE

SALES OFFICE

SALES OFFICE

SALES OFFICE

SALES OFFICE

SALES OFFICE

SALES OFFICE

4. GEOGRAPHICAL FORM BREAK - UP

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STOCK HOLDERS

BOARD OF DIRECTORS

PRESIDENT

EXECUTIVE COMMITTE

EXECUTIVE VICE - PRESIDENT

FINANCE COMMITTE

AUDITING COMMITTE

ACTUARIAL(VP) LA & G, CF & MAGENCY(VP) LA & G, CF & M SALES PROMOTION, TRAINING, AGENCY SRVICE, CF & M ADVERTISINGGROUP (VP) FIELD, PENSION, UDERWRITINGLEGAL DEPT

MEDICAL DEPT EMPLOYEES HEALT, INDUSTRIAL MEDICAL & SURGICAL LA&G MEDIC

FINANCE (VP) SECURITIES, INVESTMENTSCLAIMS (VP) LA&G, CAUALTY, FIRE & MARINEUNDERWRITING (VP), LIFE & ACCIDENT, COMPREHENSIVE LIABILITY, FIDELITY & SURETY, CASUALITY, ENGINEERING & LOSS CONTROLFIRE & MARINE EASTERN, PACIFIC, SOUTHERN, WESTERN BROKERAGE AND RE-INSURANCE PLANNING & RESEARCH

ACCOUNTING (VP) CONTROLLER & AUDITOR, PREMIUM ACCOUNTING, CASUALTY, FIRE, GROUP, LIFE & ACCIDENTSERVICES (VP) HOME, OFFICE, LIBRARY, PURCHASING , STENOGRAHPY SUPPLY & GENERALBRANCH OFFICE ADMINISTRATION

PRSONNEL

LA&G: LIFE ACCIDENT & GROUP, LA&H: LIFE ACCIDENT & HEALTH,CF&M: CASUALTY, FIRE & MARINE

5. ORGANISATION CHART OF AN ALL - LINES INSURANCE COMPANY

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STOCK HOLDERS

BOARD OF DIRECTORS

PRESIDENT

EXECUTIVE COMMITTE

EXECUTIVE VICE - PRESIDENT

FINANCE COMMITTE

AUDITING COMMITTE

137

FINANCE COMMITTE

ACTUARIAL(VP) LA & G, CF & M

AGENCY(VP) LA & G, CF & M SALES PROMOTION, TRAINING, AGENCY SRVICE, CF & M ADVERTISING

GROUP (VP) FIELD, PENSION, UDERWRITING

LEGAL DEPT

MEDICAL DEPT EMPLOYEES HEALT, INDUSTRIAL MEDICAL & SURGICAL LA&G MEDICAL

LA&G: LIFE ACCIDENT & GROUP, LA&H: LIFE ACCIDENT & HEALTH, CF&M: CASUALTY, FIRE & MARINE

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FINANCE COMMITTE

FINANCE (VP) SECURITIES, INVESTMENTS

CLAIMS (VP) LA&G, CAUALTY, FIRE & MARINE

UNDERWRITING (VP), LIFE & ACCIDENT, COMPREHENSIVE LIABILITY, FIDELITY & SURETY, CASUALITY, ENGINEERING & LOSS CONTROL

FIRE & MARINE EASTERN, PACIFIC, SOUTHERN, WESTERN BROKERAGE AND RE-INSURANCE

PLANNING & RESEARCH


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AUDITING COMMITTE

ACCOUNTING (VP) CONTROLLER & AUDITOR, PREMIUM ACCOUNTING, CASUALTY, FIRE, GROUP, LIFE & ACCIDENT

SERVICES (VP) HOME, OFFICE, LIBRARY, PURCHASING , STENOGRAHPY, SUPPLY &GENERAL

BRANCH OFFICE ADMINISTRATION

PERSONNEL


140

CORPORATE OFFICE (MUMBAI)

ZONAL OFFICE INTERNATIONAL

ZONAL OFFICE

ZONAL OFFICE

ZONAL OFFICE

ZONAL OFFICE

ZONAL OFFICE

UK USA AFRICA RUSSIA

6. ORGANISATION STRUCTURE OF LIC

141

ZONAL OFFICE

REGIONAL REGIONAL REGIONAL REGIONAL REGIONAL

BRANCHES BRANCHES BRANCHES BRANCHES

142

VPHR

HEAD CORPORATE

CEO

MD

VPOPERATIONS

VPMARKETING

VPSALES &

DISTRIBUTION

VPIT

HEAD CUSTOMER SERVICDS

HEAD ADVISOR SERVICING

HEAD A / C

HEAD BANK ASSURANCE

HEAD BUSINESS DEVELOPMENTS

HEAD PC – AMC

HEAD RETAIL

MANAGER

ASST MANAGER

EXECUTIVE

MANAGER

ASST MANAGER

EXECUTIVE

7. ICICI PRUDENTIAL LIFE INSURANCE

143VPHR

CEO

MD

VPOPERATIONS

VPMARKETING

VPSALES &

DISTRIBUTION

VPIT

144

VPOPERATIONS

HEAD CUSTOMER SERVICES

HEAD ADVISOR SERVICING

HEAD A / C

HEAD BANK ASSURANCE

HEAD BUSINESS DEVELOPMENTS

145

HEAD CORPORATE

VPIT

HEAD PC – AMC HEAD RETAIL

146

HEAD CUSTOMER SERVICES

MANAGER

ASST MANAGER

EXECUTIVE

MANAGER

ASST MANAGER

EXECUTIVE

147

INSURANCE PROMOTION STRATEGIES: SPECIAL

CHALLENGES:

Planned Prospecting: A prospect is a potential client who has to be identified. The organized step by step approach to prospecting

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STEPS IN PLANNED PROSPECTING

GETTING NAMES OF PROSPECTS

OBTAINING INFORMATION ABOUT THE PROSPECTS

RECORDING INFORMATION OF EACH PROSPECTS

GETTING INTRODUCTION TO THE PROSPECTS

SELECTING THE BETTER PROSPECTS

AGE GROUP

DEGREE OF INTIMACY

APPROACHABILITY NUMBER OF DEPENDENTS

INSURANCE NEEDS

CAPACITY TO PAY PREMIUM

PERSONAL CONTACT

WIFE’S CONTACT

CHILDREN’S CONTACT

BUSINESS AND PROFESSIONAL CONTACT

PERSONS OF ORGANISED BODIES

CLASSIFYING AND QUALIFYING THE PROSPECTS

1. PLANNED PROSPECTING

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STEPS IN PLANNED PROSPECTING


OBTAINING INFORMATION ABOUT THE PROSPECTS


GETTING INTRODUCTION TO THE PROSPECTS

SELECTING THE BETTER PROSPECTS

150


AGE GROUP

DEGREE OF INTIMACY

APPROACHABILITY NUMBER OF DEPENDENTS

INSURANCE NEEDS

CAPACITY TO PAY PREMIUM

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PERSONAL CONTACT

WIFE’S CONTACT

CHILDREN’S CONTACT

BUSINESS AND PROFESSIONAL CONTACT

PERSONS OF ORGANISED BODIES

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METHODS OF PROSPECTING

CHAIN METHOD

GROUP METHOD

COLD CANVAS METHOD

MISCELLANEOUS PROSPECTING METHOD

CENTRES OF INFLUENCE

REFERENCE GROUPS

OPINION LEADERS

QUALIFIED UNQUALIFIED

INCREASING NATURAL CONTACTS

ENDLESS CHAIN

PERSONAL OBSERVATION

NEW PAPER LEADS

POLICY HOLDERS

FRIENDS REPORTS

FAMILY HISTORY

2. METHODS OF PROSPECTING

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METHODS OF PROSPECTING

CHAIN METHOD

GROUP METHOD

COLD CANVAS METHOD

MISCELLANEOUS PROSPECTING METHOD

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GROUP METHOD

COLD CANVAS METHOD

CENTRES OF INFLUENCE

REFERENCE GROUPS

OPINION LEADERS

QUALIFIED UNQUALIFIED

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CHAIN METHOD

INCREASING NATURAL CONTACTS

ENDLESS CHAIN

PERSONAL OBSERVATION

NEWSPAPER LEADS

POLICY HOLDERS

FRIENDS REPORTS

FAMILY HISTORY

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PROSPECT – WISE APPROACHES:

A SUMMARY: i. Prospect thinking about taking an insurance – needs an agent – target

first.ii. Vague feeling of need recognition – need a bit of convincing -

second targetiii. Critical, aware, argumentative but amenable to reasons and figures

can be easily convinced with cool and unemotional arguments.iv. Neither listening nor amenable to arguments and deem themselves

self sufficient and all-knowing-need tactful handling.v. Don’t know anything of insurance but willing to listen – handle

patiently.

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vi. Willing to take insurance – prefer a particular type of policy only – need enlightment – behave like a knowledgeable person tactfully.

vii. Silent listener but conceals real attitude towards insurance, attitudinal analysis & counseling required followed by inspiration.

viii.Violent and rude, non – listener due to some pre – determined mind set or prejudice or may be due to ignorance, obstinacy spirit of all – knowing self – sufficiency or simple bravado – need very careful and delicate handling. Politeness is a must otherwise they will spoil others

ix. Uncommitted Sadist, wishes to see the agent humiliated and frustrated; ill – bred and ill – informed, the agent should be prepared not to take to heart any re – buff received. Display infinite patience and tolerance.

x. Recent earners and eager information seekers constitute good prospects. Early bird approach is called for.

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xi. Current Earner, but continuity in future earnings doubtful, like people in merchant navy – good prospect – timely identification and approach.

xii. Parents – eager to provide good education to child – good prospect – early bird approach.

xiii.Recently married couples – moderately affluent – good prospectxiv.Comparatively young – recently recovered from illness – not insured

– calls for careful identification and cautious approach xv. Sole bread winner in the family – needs insurance – identification

and early bird approachxvi.Recently promoted, sudden spurt in income and higher status –

timely identification and early bird approach.

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PRE – APPROACH & APPROACH – TYPES OF APPROACHES:

Approach : After planning the prospecting, evaluating the needs of each prospect and classifying each according to requirements of insurance, the next step is to approach the prospect. The approach is a technical job, therefore, it is divided into two steps:

i. Pre – Approachii. ApproachPre – Approach: The agent has to approach the prospect after being

prepared for that he should know much about the prospect and also the various policies. He must be aware of the strengths and weaknesses of the prospect and also the interest and hobbies.

The logical steps in Pre – Approach are:i. Proper Preparationii. Prepare Sales Talk with rehearsaliii. Getting well – set for action, i.e., fixing appointments, to make

presentation etc.

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APPROACH

THE TIME THE PLACE METHOD OF APPROACH

CURIOSITY AROUSAL

APPOINTMENT INTERVIEW

FACT FINDING INTERVIEW

PREFFERED LEAD

CHAIN & COLD CANVAS

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Explanatory Notes:

1. Approach is a technique on which the success of an insurance agent depend. It is always governed by definite principles. The objective of approach is to arouse the curiosity and interest of the prospect so that the prospect may be willing to hear him.

2. Time and Place: Should be such that undivided attention, both the prospect and the agent can give each other. Prospects residence or closed chamber in office can be a good place. Time should be selected when the prospect is physically comfortable.

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3. Preferred Lead : The name of a common friend / acquaintances, or a person of some standing should be mentioned / used whenever available / possible.

4. In fact finding interviews: The agent should not give undue break / pause, in the middle of a discussion otherwise the continuity and the seriousness would be hampered.

5. In chain & cold canvass method, the agent should respect the time and business / professional engagement of the prospect.

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METHODS OF HANDLING RISK

AVOIDANCE

RETENTION: SELF INSURANCE

TRANSFER

SHARING

REDUCTION

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RISK MANAGEMENT: THE IDENTIFICATION, ANALYSIS & ECONOMIC CONTROL OF THOSE RISKS WHICH CAN THREATEN THE ASSET OR EARNING CAPACITY OF THE ENTERPRISE.

DETERMINING OBJECTIVES

IDENTIFICATION

ANALYSIS

ASSESSMENT

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1. FINANCIAL: WITH FIANANCIAL CONSEQUENCES

2. NON-FINANCIAL: WITHOUT FINANCIAL CONSEQUENCES

3. STATIC: WITHOUT CHANGES IN THE ECONOMY, WITHOUT GAIN TO THE SOCIETY, MOSTLY REGULAR & FAIRLY PREDICTABLE

4. DYNAMIC: ARISES FROM CHANGES IN THE ECONOMY & GAINFUL TO THE SOCIETY

5. FUNDAMENTAL: IMPERSONAL IN ORIGIN & CONSEQUENCES & AFFECTS LARGE SEGMENTS IN SOCIETY

6. PARTICULAR: ARISES OUT OF INDIVIDUALS & AFFECT THE INDIVIDUALS

7. SPECULATIVE: CAN CAUSE BOTH LOSS & GAIN

8. LOSS / NO LOSSPURE

PERSONAL

PROPERTY: DIRECT / CONSEQUENTIAL

LIABILITY: OWN FAILURE

OTHERS’ FAILURESUMMARY: INSURABLE RISKS ARE PURE RIKS WHETHER FUNDAMENTAL OR PARTICULAR AND WHETHER STATIC OR DYNAMIC. FUNDAMENTAL RISKS ARE COVERED BY SOCIAL INSURANCE, WHERE-AS PARTICULAR RISKS ARE COVERED BY PERSONAL INSURANCE

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1. FINANCIAL: WITH FIANANCIAL CONSEQUENCES

2. NON-FINANCIAL: WITHOUT FINANCIAL CONSEQUENCES

3. STATIC: WITHOUT CHANGES IN THE ECONOMY, WITHOUT GAIN TO THE SOCIETY, MOSTLY REGULAR & FAIRLY PREDICTABLE

4. DYNAMIC: ARISES FROM CHANGES IN THE ECONOMY & GAINFUL TO THE SOCIETY

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5. FUNDAMENTAL: IMPERSONAL IN ORIGIN & CONSEQUENCES & AFFECTS LARGE SEGMENTS IN SOCIETY

6. PARTICULAR: ARISES OUT OF INDIVIDUALS & AFFECT THE INDIVIDUALS

7. SPECULATIVE: CAN CAUSE BOTH LOSS & GAIN

8. LOSS / NO LOSSPURE

PERSONAL

PROPERTY: DIRECT / CONSEQUENTIAL

LIABILITY: OWN FAILURE

OTHERS’ FAILURE

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SUMMARY: INSURABLE RISKS ARE PURE RIKS WHETHER FUNDAMENTAL OR PARTICULAR AND WHETHER STATIC OR DYNAMIC. FUNDAMENTAL RISKS ARE COVERED BY SOCIAL INSURANCE, WHERE-AS PARTICULAR RISKS ARE COVERED BY PERSONAL INSURANCE

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CONCEPTS OF SERVICE MARKETING & NATURE OF INSURANCE MARKET:

i. Service Characteristics: Intangibility, Inseparability, Heterogeneity, Perishability & Ownership.

ii. Eight P’s of service marketing: Products, price, promotion, place, packaging, people, process and physical evidence / proof of delivery.

iii. Marketing of Insurance Products: Challenges: a. Insurance is unpatented, subjective, requires prior experience &

physical evidence is difficult to establish b. There is an involvement of customers in production of services,

mass production is impossible. c. The services can’t be inventoried & standarised.

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SATISFACTION OF CUSTOMER WANTS AND DESIRES

CUSTOMERS

KNOWLEDGE OF WANTS AND DESIRES

OPERATING RESULTS

COMPANY GOALS

RECOGNITION OF RESULTS DESIRED

MARKETING PROCESS

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i. Business decisions should be market / customer oriented rather than product oriented i.e., gearing operation primarily to the effective satisfaction of customer wants and needs.

ii. Marketing is a dynamic business process – a total integrated process (of matching the products in the market) rather than a fragmented assortment of institutions and functions.

iii. Marketing program starts with germination of the product idea and continues till customer wants are completely satisfied which may be after the sale is made.

iv. Marketing program has to be done with a maximum effectiveness and minimum cost.

v. Marketing must increase profitable sales in the long run.

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CSF of insurance marketing:

i. changing attitude of the population

ii. Open and transparent environment created by IRDA

iii. Well established distribution network

iv. Train professionals to build and sell products

v. Rational approach to investment criteria dictated by IRDA

vi. Stringent accounting practices to prevent failures amongst the insurer

vii. Level playing field for all the players.

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BUYERS CARRIERSDISTRIBUTORS & INTERMEDIARIES

AGENTS: BELONGING TO INSURANCE COMPANIES

BROKERS: INDEPENDENT CONSULTANTS

1CONSUMERS2EMPLOYEES3EMPLOYERS

LIFE & ANNUITIESPROPERTY & CASUALTIESHEALTH & ANCILLARY

1. INSURANCE DISTRIBUTION CHANNELS

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2. BENEFITS OF BROKERAGE: i. Improvement in customer servicesii. Transfer of Technology & Managerial Know – howiii. Benefits to Insurance companiesiv. Foreign Exchange consideration (Re-insurance brokerage)

3. New Distribution Channels:

The new channels of distribution for the Indian Insurance industry are:i. Direct marketing: Company owned sales team concept is now

employed by a majority of the new players and has proved effective in customer creation & retention.

ii. Brokers / Corporate agent: Authorised by IRDA to sell and Customise products on behalf of insurance companies

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iii. Independent financial advisors: Authorised agents of insurance companies with tie-ups with many companies.

iv. Tele – marketing: Marketing thru’ telephonic device, generating leads thru’ phone calls & forwarding these leads to the main sales team of the company.

v. Work – site marketing: The seller sends teams to the target groups and explain the product and services suitable to them. HDFC, ICICI & Kotak Mahendra are using this distribution strategy effectively.

vi. vi.Retail Chain: Cross selling of product thru’ retail outlets

vii. .Internet Marketing: Internet based product offering.

viii.Bankassurance: Distribution of insurance products by banks.

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4) BANKASSURANCE: A partnership between a life insurance co & a commercial bank, to exploit the large customer base of commercial banks, 60,000 branches & customers served are15,000 / branch. Key success areas for bankassurance are:•Both bank and insurance co need to improve effectiveness of the sales channel by identifying and gaining assess to target customers.

•Products need to be tailored to meet the need of the customer base and for new distribution channel.

•Communication need to be streamlined to address any cultural issue between bank and insurance employees.

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•Traditional banking process need to be re-designed.

•Information system needs to be reviewed.

•Fresh skills have to be developed and re-allocation of financial and human resources.

•Bank assurance styles: Using bank premises as marketing offices very effective collaboration will be the key to make this new channels work. In fact, in India three different models of Bankassurance are already taking shape.

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i) Leveraged Life Distribution: Life insurance Co. takes the lead while several bank acts as corporate agents to provide access to middle market leads.

ii) Leveraged Bank Distribution: Bank takes the lead while insurance companies supply products. This model calls for large bank with a range of effective distribution channels (i.e., branches, ATMs, mails, phones etc.)

iii) Bank / Life Joint venture: Based on equal partnership a bank with a well developed customer data base together with a large life insurer with strong product & channel experience & develop a powerful new distribution model. The bank provides the lead, reputation & brand name, insurer brings products, underwriting & servicing experience.

Example: SBI Life: 12 crore term deposit holders thru’ 14000 branches.

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MARKETING STRATEGY FOR INSURANCE PLAYERS IN INDIA

LIC of INDIA: ‘ Life is Beautiful’, ‘Jindagi Ke Saath Bhi Jindagi ke Baad Bhi’Birla Sun Life: ‘Your Dreams, Our Commitment’ICICI Prudential: ‘We Cover You at Every Step in Life’ / ‘SAR UTHAKE JIYO’ HDFC Standard Life: Making Life Easier for You Om Kothak Mahendra: ‘Jeene ki Azadi’ING Vysya: ‘Adding Life to Insurance’TATA AIG: ‘With You, Always’MAX New York Life: ‘Your partner for Life’ / ‘Karo Jyada Ka Irada’Bajaj Alliance: ’We cover almost everything’AMP SANMAR: ‘Creating Better Futures’

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JOB DESIGN AND BPR:

Introduction: While employee productivity is important for any organization, managers would ensure that the workers are satisfied with their jobs. The degree to which the employees are motivated while performing their work, is dependent to a large extent on the activities and responsibilities entrusted to them in their jobs. Organizations should strive to incorporate new approaches and methodologies to improve efficiency and productivity while designing job. Job Design: Definition: Job design is the process of determining the specific tasks and responsibilities to be carried-out by each worker in the organization. It encompasses the specifications and expectations of a employee’s work related activities, including their structural and inter-personnel aspects of the job.

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JOB CHARACTERISTICS

1. SKILL VARIETY

2. TASK IDENTITY

3. AUTONOMY

4. FEED BACK

2. TASK SIGINFICANCE

RICHARD HACKMAN’S AND GRAG ORDHAM’S JOB CHARACTERISTICS

MODEL:

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RICHARD HACKMAN’S AND GRAG ORDHAM’S JOB

CHARACTERISTICS MODEL:

Notes: an effective job design ensures that jobs are consistent with the organisation’s goals. The objective is to boost employee motivation and morale to achieve performance standards and to match the skills and abilities of each worker with the job requirements. Skill variety indicates the level and range of skills, ability and talents needed to perform a job.Task identity defines clearly the identifiable tasks needed to complete the main task..

183

Task identity defines clearly the identifiable tasks needed to complete the main task.Task significance indicates the influence of the job on individuals inside and outside the organization.Autonomy of a job indicates the flexibility, independence and discretion that is available to the employee in performing the job.Feedback indicates the level of information given to the employee regarding his / her performance.

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WHO WHAT WHERE WHY HOW

MENTAL & PHYSICAL CHARACTERISTICS OF THE WORKFORCE

TASKS TO BE PERFORMED

GEOGRAPHIC LOCALE OF THE ORGANISATION, LOCATION OF WORK AREAS

ORGANISATIONAL RATIONAL OF THE JOBS, OBJECTIVES & MOTIVAION OF THE WORKERS

METHODS OF PERFORMANCES

ULTIMATE JOB

STRUCTURE

FACTORS IN JOB DESIGN

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OBJECTIVES OF JOB DESIGN

ECONOMICALLY FEASIBLE TASKS

BEHAVIOURALLY FEASIBLE TASKS

TECHNICALLY FEASIBLE TASKS

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CONSIDERATIONS IN JOB DESIGN

JOB CONTENT SPECIALISATION

CONSIDERATION IN JOB DESIGN

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JOB DESIGN JOB ANALYSIS JOB DESCRIPTION & SPECIFICATIONS

RECRUITING, INTERVIEWING & SELECTING

ORIENTATION & TRAINING

PERFORMANCE STANDARDS & GOAL STATEMENTS

PERFORMANCE APPRAISAL FORMS

JOB EVALUATION

CLASIFICATION & RE-NEGOTIATION OF ROLES

CAREER PROGRESSION LADDERS

APPLICATION OF JOB ANALYSIS & JOB DESCRIPTION

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JOB DESIGN

JOB ANALYSIS

JOB DESCRIPTION & SPECIFICATIONS

RECRUITING, INTERVIEWING & SELECTING

ORIENTATION & TRAINING

PERFORMANCE STANDARDS & GOAL STATEMENTS

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PERFORMANCE APPRAISAL FORMS

JOB EVALUATION

CLASIFICATION & RE-NEGOTIATION OF ROLES

CAREER PROGRESSION LADDERS

JOB DESIGN

JOB ANALYSIS

JOB DESCRIPTION & SPECIFICATIONS

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BUSINESS PROCESS RE-ENGINEERING:

Definitions: According to Michael Hammer, who introduced the concept of BPR, Business Re-Engineering is the fundamental re-thinking and radical changes / redesign of business process to achieve dramatic improvement in critical contemporary measures of performances such as “Cost, Quality, Services and Speed”.

191

What is a ‘Business Process’?

According to Davenpore and Short a business process is a set of “Logically related tasks performed to achieve a defined business outcome”. It is a structured and measured set of activities designed to produce a specified output for a particular customer or market. It implies a strong emphasis on how work is done within an organization process often transcends department and functional boundaries. Some processes turn out to be extremely critical for the success and survival of the enterprise.

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1. Developing a process vision & determining process objectives.

2. Defining the process to be re-engineered

3. Understanding & measuring the existing process

4. Identifying the I.T levers

5. Designing the new process prototype and implementing

FIVE STEP METHODOLOGY TO IMPLEMENT ‘BPR’

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SUPPLY – CHAIN MANAGEMENT

Definition:

The supply – chain management can be described as the network covering the various stages in the provisions of products or services to customer. It includes not only, manufacturers and suppliers, but also transporters, warehouses, distributors, retailers etc. The number of stages in the supply chain depends on the customers needs and the role each stage plays in fulfillment of that need. SCM integrates procurements, operations and logistics to provide value added products or services to customers.

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COMPETITIVE STRATEGY

SUPPLY CHAIN STRATEGY

SUPPLY CHAIN STRUCTURE

INVENTORY TRANSPORTATION FACILITIES

INFORMATION

SUPPLY CHAIN DECISION MAKING PROCESS

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PRINCIPLES OF SUPPLY CHAIN MANAGEMENT

1. SEGMENT CUSTOMERS BASED ON SERVICE NEEDS

2. CUSTOMISE THE LOGISTICS NETWORK

3. PLAN BASED ON MARKET DEMANDS

4. IMPROVE RELATIONSHIP WITH SUPPLIERS

196

PRINCIPLES OF SUPPLY CHAIN MANAGEMENT

5. HAVE A SUPPLY CHAIN – WIDE TECHNOLOGY STRAGEGY

6. ENHANCE ABILITLY TO MEET CUSTOMER REQUIREMENTS

7. DEVISE A COMPLETE SUPPLY CHAIN PERFORMANCE MEASURE

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FORCES SHAPING SCM

1. CONSUMER DEMAND

2. GLOBALISATION

4. INFORMATION & COMMUCATION

5. GOVERNMENT REGULATION

6. ENVIRONMENT

3. COMPETITION

198

THE SEVEN ‘SCM’ COMPONENTS:

The SCM component represent business process and practices. They incorporate all the activities necessary for maintaining and developing relationships with suppliers keeping the organization’s marketing and financial objectives in focus. The seven SCM components are:

199

SCM COMPONENTS

SCM LEADERSHIP

SCM STRATEGY

OPERATIONAL PLANNING

BUSINESS RELATIONSHIP MANAGEMENT

ORDER TO DELIVERY PROCESS

QUALITY AND PERFORMANCE MANAGEMENT

HUMAN RESOURCES MANAGEMENT

200

Brief Notes:

a. SCM leadership: Leadership component provides direction, design and assists in deployment and improvements in the SCM systems. Managers from different functional domains that interact with the supply chain constitute this leadership component.

b. A firm’s SCM strategy component focuses on how different entities of of the supply chain perform as a group. The firm’s resources are allocated to different supply chain operations and these resources are aligned with the firm’s strategies.

c. The operational planning component defines the operational needs for maintaining a supply chain. These requirements are specified in terms of tasks, resource requirements and measurements. The function listed include commodity planning, supplier capacity planning, supplier evaluation and certification planning etc.

201

d. Organisations are dependent on the supply chain partners as much as their partners are dependent on them. Thus, it is important to have an environment conducive to communication and negotiation between the organization and its supply chain partners.

e. Order to delivery process defines how effectively an organization can direct the flow of products from supplier to the company. It includes certain process like order release, receiving, inspection of incoming materials, accounts payable and materials handling. By automating and simplifying the order to delivery process, organizations can reduce order times significantly.

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f. Quality and performance component is concerned with the initiatives that organizations and suppliers take towards improving and maintaining quality standards and this component helps identify quality defects in suppliers products and facilities.

g. HR component deals with training of personnel in order to improve their skills, knowledge and attitudes that help enhance the performance of the supply chain.

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SIX ‘SCM’ ENABLERS

1. ALIGNMENT

2. CUSTOMER / SUPPLIER FOCUS

3. DESIGN

4. MEASUREMENT

5. PARTICIPATION / INVOLVEMENT

6. PERIODIC REVIEW

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Enablers are responsible for the overall performance of the SCM. The SCM enablers are a group of carefully conceived and defined behaviours and approaches that allows, encourages and reinforce a firm’s commitance to a high performance SCM practices. The six ’SCM’ enablers are:

i. Alignment: Refers to matching of corporate and business unit goals.

It also includes consistency in processes actions and decisions across the business units to support the supply chain management process.

ii. Customer - Supplier Focus: The basic objective is to prepare an organisation’s processes in such a way that they are able to understand and react to customer’s requirements fast.

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iii. Design: It is the aspect of products, processes, systems and services that ensures their successful applications. It is the comprehensive process that after considering feedback from customers and suppliers, defines the overall requirements, both external and internal to the organization.

iv. Measurement: Refers to quantification of information, about inputs, outputs and performances dimensions of products, processes and services. It is the tool used by organizations to evaluate the performances of different business process and supplier activities.

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v. Participation and Involvements: The stake holders must be involved in the decision making process in order to ensure the success of products, processes, systems and services.

vi. Evaluation of the Performance of the processes, programs and systems on a periodic basis, supports continuous improvements.

Documents

Management of Insurance Companies_1