Risk Management in Hdfc. Madhukar

8/6/2019 Risk Management in Hdfc. Madhukar

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1. Introduction

1.1 Concept of Insurance

Insurance is a contract between two parties whereby one party agrees to undertake the risk of

another in exchange for consideration known as premium and promises to pay a fixed sum of

money to the other party on happening of an uncertain event (death) or after the expiry of a

certain period in case of life insurance or to indemnify the other party on happening of an

uncertain event in case of general insurance. Insurance works on the basic principle of risk-

sharing. A great advantage of insurance is that it spreads the risk of a few people over a large

group of people exposed to risk of similar type. Insurance is a means of providing protectionagainst financial loss in a great variety of situations. For example, life insurance helps

replace income lost to a family if a wage-earning parent dies. Health insurance helps pay

medical bills. Auto insurance helps cover the costs of damages resulting from

automobile accidents. People also can buy insurance to cover unusual types of financial

losses. For example, dancers have insured their legs against injury.

Insurance works on the principle of sharing risks. People who wish to be insured againstparticular types of losses agree to make regular payments, called premiums, to an

insurance company. In return these people receive a contract, called a policy, from the

company. The company promises to pay them a certain sum of money for the types of

losses stated in the policy. The individuals paying the premiums are called policy

holders. The insurance company uses the premiums to invest in stocks, bonds,

mortgages, government securities, and other income-producing enterprises. The

company pays benefits to the policy holder, from the premium it collects and from the

investment income the premiums earn. Insurance works because policyholders arewilling to trade a small, certain loss- the premiums-for the guarantee that they will be

indemnified (paid) in case of a larger loss.


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Insurance works well only when the possible losses to the insured person can be

estimated. Insurance companies take advantage of the laws of probability. These laws

enable an insurance mathematician called an actuary to determine the likelihood that an

event will occur. Laws of probability are based on the law of large numbers. As the

number of life insurance policyholders increases, for example, an insurance company

can use this law to predict with ever greater accuracy the number of policyholders who

will die.

Insurance generally covers only situations involving pure risk-that is, situations in which

only losses can occur. Such situations include fire, flood, and accidents. Insurance does

not cover gambling and other speculative risks, in which either losses or gains may

result.

Although a policyholder may never receive benefits from an insurance company, the

premiums have not been wasted. Insurance gives policyholders a feeling of security.

Policyholders know they will be indemnified if a loss should occur.

1.2 Insurance Business In India

The insurance sector in India has come a full circle from being an open competitive

market to nationalisation and back to a liberalised market again. Tracing the

developments in the Indian insurance sector reveals the 360 degree turn witnessed over

a period of almost two centuries. In India, insurance has a deep-rooted history. It finds

mention in the writings of Manu ( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and

Kautilya ( Arthasastra ). The writings talk in terms of pooling of resources that could be

re-distributed in times of calamities such as fire, floods, epidemics and famine. This was

probably a pre-cursor to modern day insurance. Ancient Indian history has preservedthe earliest traces of insurance in the form of marine trade loans and carriers contracts.

Insurance in India has evolved over time heavily drawing from other countries, England

in particular.


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1818 saw the advent of life insurance business in India with the establishment of the

Oriental Life Insurance Company in Calcutta. This Company however failed in 1834. In

1829, the Madras Equitable had begun transacting life insurance business in the Madras

Presidency. 1870 saw the enactment of the British Insurance Act and in the last three

decades of the nineteenth century, the Bombay Mutual (1871), Oriental (1874) and

Empire of India (1897) were started in the Bombay Residency. This era, however, wasdominated by foreign insurance offices which did good business in India, namely Albert

Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian

offices were up for hard competition from the foreign companies.

In 1914, the Government of India started publishing returns of Insurance Companies

in India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure

to regulate life business. In 1928, the Indian Insurance Companies Act was enacted to

enable the Government to collect statistical information about both life and non-life

business transacted in India by Indian and foreign insurers including provident insurance

societies. In 1938, with a view to protecting the interest of the Insurance public, the

earlier legislation was consolidated and amended by the Insurance Act, 1938 with

comprehensive provisions for effective control over the activities of insurers.

The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there

were a large number of insurance companies and the level of competition was high.

There were also allegations of unfair trade practices. The Government of India,

therefore, decided to nationalize insurance business. An Ordinance was issued on 19th

January, 1956 nationalising the Life Insurance sector and Life Insurance Corporation came into

existence in the same year. The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75

provident societies245 Indian and foreign insurers in all. The LIC had monopoly till the late 90swhen the Insurance sector was reopened to the private sector.The history of general

insurance dates back to the Industrial Revolution in the west and the consequent growth

of sea-faring trade and commerce in the 17th century. It came to India as a legacy of

British occupation. General Insurance in India has its roots in the establishment of Triton

Insurance Company Ltd., in the year 1850 in Calcutta by the British. In 1907, the Indian

Mercantile Insurance Ltd, was set up. This was the first company to transact all classes of

general insurance business.

1957 saw the formation of the General Insurance Council, a wing of the Insurance

Associaton of India. The General Insurance Council framed a code of conduct forensuring fair conduct and sound business practices.

In 1968, the Insurance Act was amended to regulate investments and set minimum

solvency margins. The Tariff Advisory Committee was also set up then.

In 1972 with the passing of the General Insurance Business (Nationalisation) Act,general insurance business was nationalized with effect from 1

stJanuary, 1973. 107


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insurers were amalgamated and grouped into four companies, namely National InsuranceCompany Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company

Ltd and the United India Insurance Company Ltd. The General Insurance Corporation ofIndia was incorporated as a company in 1971 and it commence business on January 1sst

1973.

This millennium has seen insurance come a full circle in a journey extending to nearly200 years. The process ofre-opening of the sector had begun in the early 1990s and the

last decade and more has seen it been opened up substantially. In 1993, the Governmentset up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to

propose recommendations for reforms in the insurance sector.The objective was tocomplement the reforms initiated in the financial sector. The committee submitted its

report in 1994 wherein , among other things, it recommended that the private sector bepermitted to enter the insurance industry. They stated that foreign companies be allowed

to enter by floating Indian companies, preferably a joint venture with Indian partners.

Following the recommendations of the Malhotra Committee report, in 1999, theInsurance Regulatory and Development Authority (IRDA) was constituted as an

autonomous body to regulate and develop the insurance industry. The IRDA wasincorporated as a statutory body in April, 2000. The key objectives of the IRDA include

promotion of competition so as to enhance customer satisfaction through increasedconsumer choice and lower premiums, while ensuring the financial security of the

insurance market.

The IRDA opened up the market in August 2000 with the invitation for application forregistrations. Foreign companies were allowed ownership of up to 26%. The Authority

has the power to frame regulations under Section 114A of the Insurance Act, 1938 andhas from 2000 onwards framed various regulations ranging from registration of

companies for carrying on insurance business to protection of policyholders interests.

The Insurance Regulatory and Development Authority

Reforms in the Insurance sector were initiated with the passage of the IRD A Bill in

Parliament in December 1999. The IRDA since its incorporation as a statutory body in

April 2000 has fastidiously stuck to its schedule of framing regulations and registering

the private sector insurance companies.


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The other decisions taken simultaneously to provide the supporting systems to the

insurance sector and in particular the life insurance companies were the launch of the

IRDAs online service for issue and renewal of licenses to agents.

The approval of institutions for imparting training to agents has also ensured that the

insurance companies would have a trained workforce of insurance agents in place to sell

their products, which are expected to be introduced by early next year.

Since being set up as an independent statutory body the IRDA has put in a framework of

globally compatible regulations. In the private sector 12 life insurance and 9 general

insurance companies have been registered.

Protection of the interest of policy holders:

IRDA has the responsibility of protecting the interest of insurance policyholders.

Towards achieving this objective, the Authority has taken the following steps:

IRDA has notified Protection of Policyholders Interest Regulations 2001 to

provide for: policy proposal documents in easily understandable language;

claims procedure in both life and non-life; setting up of grievance redressal

machinery; speedy settlement of claims; and policyholders' servicing. The

Regulation also provides for payment of interest by insurers for the delay

in settlement of claim.

The insurers are required to maintain solvency margins so that they are in

a position to meet their obligations towards policyholders with regard to

payment of claims.

It is obligatory on the part of the insurance companies to disclose clearly

the benefits, terms and conditions under the policy. The advertisements

issued by the insurers should not mislead the insuring public.


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All insurers are required to set up proper grievance redress machinery in

their head office and at their other offices.

The Authority takes up with the insurers any complaint received from the

policyholders in connection with services provided by them under the insurance

contract.

Insurance business is divided into two groups:

1.3 General Insurance

As is the case with the life insurance business, new general insurers also got registered

towards the end of 2000 and were unable to commence full scale business before the

end of March 2001.As in the past the motor and fire portfolios continue to hold pre-

INSURANCE SECTOR

LIFE INSUR ANCE GENERAL INSURANCE


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dominant share of the insurance market. The personal lines of business, which are

outside the fold of tariff administration, have vast potential for growth and companies

both in public and the private sector have devised strategies to penetrate this segment.

The Authority has encouraged, as it has done with the life insurers, to add riders to the

existing general insurance policies so that certain areas where development is

necessary, like health care etc., are not neglected.

In December 2000, the GIC subsidiaries were restructured as independent insurance

companies. At the same time, GIC was converted into a national re-insurer. In July 2002,

Parliament passed a bill, de-linking the four subsidiaries from GIC.

Presently there are 24 general insurance companies with 4 public sector companies and

9 private insurers. Although the public sector companies still dominate the general

insurance business, the private players are slowly gaining a foothold.

1.4 Life Insurance

Life Insurance is a contract providing for payment of a sum of money to the person

assured or, to the person entitled to receive the same, on the happening of a certain

event.

A family is dependent for its food, clothing and shelter on the income brought by the

family's breadwinner. The family is secure so long as this breadwinner is alive and is

capable of earning. A sudden death (or disability) may leave the family in a financially

difficult situation. Uncertainty of death is inherent in human life and this uncertainty

makes it necessary to have some protection against the financial loss arising from

untimely death. Life insurance offers this protection.

Benefits of Life Insurance:

Life Insurance has come a long way from the earlier days when it was originally

conceived as a risk covering medium for short periods of time, covering


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temporary risk situations, such as sea voyages. As life insurance became more

established, it was realized what a useful tool it was for a number of situations,

including -

a) Temporary needs / threats:

The original purpose of life insurance remains an important element, namely

providing for replacement of income on death etc.

b) Regular Savings:

Providing for one's family and oneself, as a medium to long term exercise

(through a series of regular payment of premiums). This has become morerelevant in recent times as people seek financial independence for their family.

c) Investment:

Put simply, the building up of savings while safeguarding it from the ravages of

inflation. Unlike regular saving products, investment products are traditionally

lump sum investments, where the individual makes a one off payment.

d) Retirement:

Provision for later years becomes increasingly necessary, especially in a

changing cultural and social environment. One can buy a suitable insurance

policy, which will provide periodical payments in one's old age.

e) Escaping the Tax Net:

One cannot undermine the importance of tax saving in promoting insurance.

After all, a disproportionately large chunk of LICs new business comes in the last

quarter of the financial year. Section 88 of the Income Tax Act provides a rebate

up to 20% (depending on the level of gross total income) on the sum paid as life

insurance premium up to a maximum investment ofRs 1,00,000 per annum.


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Many investors, especially those in higher tax brackets, buy life insurance mainly

to take advantage of these tax benefits. Additional tax benefits are also available

under Section 80DD and Section 80CCC applicable to specific schemes.

In simple words, insurance protects against untimely losses. Insurance has been found

useful in the lives of persons both in the short term and long term. Short term needs like

sudden medical costs and long term needs like marriage expenses etc can be met with

using life insurance.

Life Insurance as an Investment Instrument

With the fall in bank deposits rates and government investment products like PPF, NSC,

etc., poor performance of mutual funds and volatility in stock markets, a good amount of

money is coming to the insurance sector. Another point, which has attracted people to

insurance companies, is the realization that they are underinsured. With the scientific

calculation of ones need for insurance yet to start there are many loopholes like black

money, existing savings, true net worth etc. hence, insurance is also sold as an

investment product by insurance companies.

However, it is important that insurance is bought for the sake of insurance alone. It is not

a good saving toll either, at least not under Section 88. However, when buying an

insurance policy, one should remember that a part of the premium that you pay goes

towards risk coverage. In addition, the marketing costs of insurance are much higher

than those of some other investment instruments like mutual funds, fixed deposits, etc.

Hence, the return from insurance can never be more than that one can gets from some

of these other options. At the same time, however, these other instruments do not offer

insurance. They are purely investment options. So when you want insurance, buy an

insurance policy but when you want to invest, look at pure investment instruments. As

far as tax benefits go, let that not be the deciding factor for purchasing insurance policy.


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1.5 Different Kinds ofPolicies

Policies can essentially be categorized into a few types and others are just permutations

and combinations of these basic types.

Endowment: This plan is appropriate for people of all ages and social groups who wish

to protect their families from a financial setback that may occur owing to their demise. It

covers risk for a specified period, at the end of which the assured sum is paid back to

the policyholder, along with the bonus accumulated during the term of the policy. Many

investors use endowment policy to fund anticipated financial needs, such as college

education for their children or retirement. Premium for an endowment life policy is much

higher than that of a whole life policy. In an endowment policy, a 20-year term for a 30-

year-old costs around Rs 50,000 a year, whereas in a whole life plan it costs around Rs

40,000.

Money Back:Unlike other policies, this policy gives you a return after a certain period of

time. It provides periodic payments of partial survival benefits during the term of the

policy. The rest of the amount is paid at the end the term with a bonus. The risk cover on

the life continues for the full sum assured even after payment of survival benefits and the

bonus is also calculated on the full sum assured. This is suitable to the Indian psyche of

the life insurance policyholder who wants returns at frequent intervals.

Whole Life:This is also called as permanent insurance. It does not expire if you continue

to pay the premiums regularly. It provides coverage similar to term life insurance, but it

also provides an investment vehicle. A portion of the premium goes for life insurance,

while the rest goes into an investment account.

This account can be either an interest bearing account or a variable (stocks and bonds)

investment account. You pay the same premium till the termination payment period.


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Whole life insurance policies are valuable because they provide permanent protection

and accumulate cash values that can be used for emergencies or to meet specific

objectives. Another important aspect of this policy is that it also protects you after the

period of policy termination.

Term Policies:It covers a person against death for a limited term. You pay for the policy

period and at the end of the term, the contract or policy expires. If no claims are made

against the policy during the term, you don't receive any benefits after the policy expires,

just like an auto or general insurance.

But the biggest benefit of this is you have to pay a marginal premium as compared to

other policies. This is also called as a pure life insurance policy. If you are 30 years old

and take a 20-year policy, you have to shell out almost Rs 50,000 every year for any

other policy.

But in case of a term policy you have to pay a meagerRs 10,000 annually. Young

people with large financial obligations are usually better off with term insurance policies.

The substantially lower premiums enable them to purchase sufficient coverage to protect

against loss of income.


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2.0 Literature Review

2.1 Traditional Products

In traditional policies, the insurance company would collect regular premiums and invest

them in a common pool of funds. At the end of each year, the company would declare a

bonus. This bonus is actually a share in the profits of the fund. At the end of the term,

the policyholder will receive the sum assured plus bonuses. If he dies during the term,

his nominees will get the sum assured plus bonuses accrued till the date of death. So in

a way, the policyholder is assured of receiving at least the sum much of premium is

invested and what are the expenses incurred by the insurance company on the

management of the fund.

As against this, a unit-linked policy offers much more transparency. The policyholder will

know how much of his premiums are deducted as expenses and how much is invested.

The policyholder will also have an option to choose the type of fund-debt, equity or

balanced, unlike the common pool that exists in a traditional policy. The difference,however, is in the maturity benefits. On maturity, a unit-linked policy will give only the

fund value unlike a minimum sum assured, as is the case with traditional policies. So if

your fund value falls below premiums invested, you will receive only the fund value. But

look at it from the upside point of view if the fund performs really will, the policyholder

will get a higher fund value. Compare this with a traditional policy. If the fund performs

badly, you are assured of a minimum sum assured. But if the fund performs well, the

insurance company may or may not pass on the larger benefits.

What category a person selects really depends on the risk appetite, the persons age

and the profile in terms of income, number of dependents and so on. Nevertheless,

once the person has jumped into one option, theres another ocean to be crossed. Thats


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because each of these two categories give the person several options within

themselves.

All companies offer the four basic policies whole life, term, money-back, and

endowment. However, each company has a set of riders that can be incorporated into

the basic policies to suit the customers individual needs. Further, criteria like entry age,

minimum and maximum sum assured, minimum and maximum term etc. may vary from

company to company.

We take a quick look at these categories. Pure risk term plans, as the name suggests,

provide benefits only on death of the policyholder. It is usually taken to cover risks for a

specific period of time. It covers risk for a fixed period of time. For example, if you want

to cover risks for a period of twenty years, you will buy a term policy for twenty years and

pay premiums for that term. In case of your unfortunate death during this term, your

beneficiaries would receive the sum assured by the policy. The downside is that, in most

cases, there is no maturity benefit, that is, if you survive until the end of the term, the

policy closes and you do not receive anything. But the cost of taking the policy as

compared with the consequences of not taking it is so less that it becomes worthwhile to

go for a risk cover even if it means shelling out a little cash.

However, some people are still not comfortable with the idea of paying premiums for a

specific term without receiving any benefits at the end of the term. In view of this, a few

insurance companies have started to offer a variant of the plain vanilla tem insurance

policy called premium-back term insurance policy. As the name suggests, in case of this

policy, at the end of the term, you will get back, in full, whatever premiums you have

paid. However, all good things come for a price. Likewise, the premiums you will pay in

case of the latter will be much higher than that paid in case a simple term plans.

The additional amount charges are the amount that will be invested by the insurance

company so as to be able to repay the premiums at the end of 20 years while making a

profit at the same time. However, you must not confuse this policy with an investment


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policy, as there are not returns. The only thing you get back after the term is the

premium. There is no interest or bonus element nor is there any adjustment for inflation

or the time value of money.

The next category of policies comprises two elements protection as well as savings.

So naturally these policies are a little more expensive than term policies. Whole life,

endowment and money-back policies belong to this category.

Whole life policies give you protection for life. You pay premiums throughout your life

and in case of any unfortunate event happening, your beneficiaries will get the sum

assured and accumulated bonuses. Of the premiums that you pay, some part will go

toward risk cover and the balance will be invested to earn returns. Accumulated bonuses

are a part of these returns.

In the case of endowment policies, you pay premiums for a specific term. On death

during the term, the beneficiaries would get the sum assured plus bonuses accrued till

date of death. On maturity or completion of the term, you will get the sum assured plus

all accrued bonuses.

Money-back policies are a slight variant of endowment policies. You will choose a policy

term and sum assured. Accordingly, you will pay premiums. During this term, you will get

a certain percentage of the sum assured at specific intervals. On maturity, you will get

the balance sum assured along with bonuses, if any. These policies are designed to help

you receive the proceeds over a period of time rather than a lump sum at the term. On

death during the term, the beneficiaries will get the sum assured plus bonuses.


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2.2 Unit Link Products

Till some time ago, only a few insure offered unit-linked policies. They met with good

success, thus encouraging other to enter the race. Today, almost all insurance

companies offer unit-linked products. In fact, LIC, which has just one such policy today,

is looking at beefing up this segment in the coming days.

Unit-linked policies are known to be much more transparent in their offerings than their

traditional counterparts. In traditional policies, no details are given about the charges

deducted towards expenses, mortality charges and the amounts invested. There is a

common pool of funds and contributions of all policyholders are invested in this common

pool. At the end of the year, the policyholder will not know how many returns the

common pool has earned. The insurance company will share a part of the returns by

way of bonuses. The investments of this common pool are, however, regulated by the

insurance regulatory and development authority (IRDA).

In comparison, unit-linked policies offer much more transparency and many more

options. The IRDA prescribes investment norms for participatory products. Accordingly,

most of the funds must be invested in the debt market with just a maximum leeway of

35% in approved equities.

In case of unit-linked policies, the game is altogether different. Firstly, as per IRDA, if a

company offers unit-linked plans, it must give an option to the investor to choose

between three-fund options-debt, balance and equity. That means, if you opt for a unit-

linked endowment policy, you can choose a debt fund, a majority of your premiums will

get invested in a debt, securities like gilts and bonds. In case of an equity fund, a major

portion of your premiums will be invested in the equity market. Unlike in traditional

policies, you have an opportunity to invest in equities here. The type of und you choose

would depend upon your risk profile and also the need for your investment. Further,

there is transparently in terms of charges deducted to meet administration and fund

management expenses as well as mortality charges. So as a policyholder, you would

know exactly how much of your premiums are being invested. You will also know how


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your fund is performing from the NAV (Net Asset Value). All funds declare their Naves

on a daily basis. Another peculiar option that unit-linked plans offer is that of liquidity.

Most of these plans allow you to withdraw, without any surrender penalty, part or whole

of the fund value after the expiry of three or four years.

However, when it comes to maturity benefits, traditional policies at least guarantee you

the sum assured. This is quite unlike unit-linked policies where only the fund value is

paid on maturity. So if your fund performs badly and has a value, which is less than your

investments on maturity, you will get a lower fund value. One the other hand, if your

fund performs really well, you will get all the benefits with only some of the benefits.

While unit-linked policies certainly appear attractive, one must tread carefully. Agents of

new private insurers are selling unit-linked insurance plans (ULIPs) by offering the

incentive of liquidity. The policy is sold as a more liquid form of insurance where a

policyholder can exist early. However, high initial commission charges for unit-linked

plans make an early exit a non-viable move for its policyholders as it takes three-five

years to merely break even on the investments. Most often, one hears agents

evangelizing about a 100% surrender value after three years, which is nothing but an

exit option at NAV values without deduction of any other charges. However, some basic

calculations show that it is unviable for an insured person to make such early exits even

for the initial five to seven years. The reason: cost structures of unit-linked plans are so

heavily tweaked towards the initial years that mere break-even takes three-five years.

Earlier (before July 2010) IRDA allowed companies to pay a maximum commission of

40% of the first years premium and most insures recover these commissions from the

first years premium itself. If one were to look at the charge structures, one of the highest

among the list is that of Birla Sun Life Insurance. For its 15-year endowment (Unit-

linked) policy, its charges (including agency commission) are 65% of the first years

premium 7.5% for the second and third years, and 5 % thereafter. Industry sources say

in some total charges throughout the life of the policy. Other unit-linked plans like that of

HDFC Standard Life and ICICI Prudential have marginally lesser charges. In case of

Aviva, the company claims that the charges. In case of Aviva, the company claims that


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the charges are deferred over the little of the policy and there is no front-loading. Aviva

charges 5% of the first years no subsequent deductions thereafter.

However, since the charges are evened out over the period of the policy, the penalty onsurrender would be higher.

One of the concerns that arise from higher front-loading is that with higher initial

charges, the fund will take longer to break even. A little number tweaking shows that in

the case of the 15-year unit-linked plan of Birla Sun Life, it takes more than five years to

break even on investments, assuming a 10% annual growth rate in the portfolio. Against

this backdrop, a 100% surrender value after the initial three-five years may not be what itappears. Break-even is comparatively earlier at around three years for both HDFC

Standard Life and ICICI Prudential Life. Insurance agents often misguide prospective

insurance buyers about the easy exit option at NAV values in case of unit-linked policies.

But little do they know that it actually takes more years, perhaps 10 years, to earn a

decent return on the overall portfolio. Compare that to insurance giant LIC. The company

evens out its costs over the tenure of the policy. This means the charge towards agents

commission and administration is equal throughout the policy term and there is no front-

loading. For an annual premium of Rs.10,000 and a term of 10 years, the chargetowards agents commission is Rs.323 and that towards administrations charges is Rs.

247. Together, they form 5.7% of premiums each year. The break-even in this case is

achieved in the first year itself.

So the idea is not to be tempted by the liquidity option but to understand that insurance

is a long-term contract and the benefits will come in the longer run. In fact, the time

period of the policy plays a very crucial role in the effective charges. In a longer period,the initial charges get evened out because of which the effective expense ratios are

lower. Further, the impact of compounded return is higher as result of which the charges

are recovered over a longer period than a shorter period.


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What is found reiterated that it is better to make investments in these instruments for a

longer period of time? Across all companies, the expense ratios worked out much lesser

for a 30-year term than for a 10-year term. The difference is wider in cases where the

initial charges are higher in the first few years; say the first two o three years.

Another important point is that these policies offer a host of tax benefit. If one considers

the tax benefits, these expense ratios are likely to come down even further. Tax benefits

in the form of deduction from taxable income under section 80CC can be availed of if an

investment up to Rs.10,000 is made each year in this type of policy. Thus if you are in a

tax bracket of 30% then you can easily save Rs.3,000 per annum in the form of tax. That

brings down your expense ratios so drastically that in most cases, the ratio is in the

negative.

Unit-linked policies come in all categories-endowment, whole-life, money-back,

childrens policies as well as pensions. All of them operate in exactly the same manner

with a little operate in and there. The differences are usually in areas such as premium

holiday, surrender and maturities.

Why do insurers prefer ULIPs?

Insurers love ULIPs for several reasons. Most important of all, insurers can sell these

policies with less capital of their own than what would be required if they sold traditional

policies.

In traditional with profits policies, the insurance company bears the investment risk to

the extent of the assured amount. In ULIPs, the policyholder bears most of the

investment risk.


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Since ULIPs are devised to mobilize savings, they give insurance companies an

opportunity to get a large chunk of the asset management business, which has been

traditionally dominated by mutual

Benefits of our Unit - Linked Plan

Look at any advertisement for a life insurance product and chances are that it will

be for a unit linked insurance plan (ULIP). Such has been the popularity of ULIPs

in the recent past that they have outpaced the growth of regular endowment

plans.

We take a look at the most important reasons why ULIPs score over endowment

plans.

1. The power of equity

Simply put, ULIPs are life insurance plans, which have a mandate to invest upto

100% of their corpus in equities. While individuals have the choice to shift

between equity and debt (explained later in this article), several studies have

shown that equities are best equipped to deliver better returns compared to their

fixed-return counterparts like bonds and gsecs. And given the fact that life

insurance is a long-term contract, equity-oriented ULIPs augur well for the

policyholder.

2. Flexibility

While ULIPs offer the opportunity to invest upto 100% in equity, it is also true that

ULIPs provide individuals the flexibility to shift to upto 100% debt. It is entirely

upon the individual how he wishes to allocate his premiums between equity and

debt.


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This is not the case with endowment type plans- individuals can't choose their

investment avenues and have to be content with the insurance company's

investment decisions which revolve largely around debt.

ULIPs are available in 3 broad variants: 'Aggressive' ULIPs, which invest up to

100% of their corpus in equities, 'Balanced' ULIPs which invest up to 60% of their

corpus in equities and 'Conservative' ULIPs which invest upto 100% of their

corpus in debt instruments and the money market instruments*.

Individuals are free to decide where they want to invest their money. For

example, individuals with an appetite f equities while conservative individuals

have the option to park their money in balanced or conservative ULIPs.

That apart, ULIPs also provide individuals with the flexibility of

terminating/resuming premiums, increasing/decreasing premiums and paying

top-ups (i.e. a one-time sum over and above the regular premium) whenever

possible. These options are not available in regular endowment plans.

3. Transparency

For the first time, ULIPs introduced transparency into the manner in which life

insurance products were being managed. This is something that was missing in

conventional savings-based insurance products (like endowment/ money-back/

pension plans).

To understand why we are saying this, one has to first understand the structure

of traditional endowment plans. Traditional endowment plans have been opaque

in more ways than one.

To begin with, traditional endowment plans have invested a sizable portion of

their corpus in debt instruments like G-secs and bonds. The quantum of money

invested is not known. Individuals do not have access to portfolios of endowment

plans so they never find out how much money is in debt/equities.


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Add to this the fact that the expenses, which form a sizable percentage of the

premium in the first few years, are also not clear and you have a situation where

the individual is 'investing' in life insurance purely on the basis of faith and little

else!

Unit linked plans brought transparency into the scheme of things. Today, if an

individual wants to invest in a ULIP, he knows upfront what percentage of the

premium is being invested, what are the charges being levied and where his

monies are being invested. This is a welcome change for the policyholder.

Another advantage ULIPs offer is that they enable insurance seekers to compare

plans across companies and help him buy a plan that fits well into his portfolio.

Also ULIPs disclose their portfolios at regular intervals, so you know exactly

where your money is being invested.

4. Liquidity

ULIPs offer liquidity to the individual. He can withdraw money anytime he wishes

to once the initial years' premiums are paid. He will not be levied with any

surrender charges i.e. he stands to get the full market value of his investments,

net of charges, till date. This is unlike conventional endowment plans where

individuals tend to lose out on surrender charges on surrendering their policies.

Besides, part surrender is also allowed in ULIPs. Simply put, part surrender

allows individuals to withdraw a part of their corpus and thus keep the policy

alive, albeit with some adjustments. This helps individuals tide over a situation

where they need cash but have few 'liquid' investments at their disposal.

So does this mean that it is the end of the road for endowment plans? Not quite!

Individuals need to understand the de-merits of investing in market-linked

products like ULIPs. The latter are susceptible to the vagaries of markets and

can burn a hole in your portfolio over the short term. So if you can't withstand that

kind of volatility, equity-oriented ULIPs are not the right investment option for you.

Insurance seekers would do well to take into consideration their risk appetite as

well as their overall financial portfolio before taking a final call on ULIP


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investments. The ideal option is to have a prudent mix of endowment and ULIPs

depending on your preference for either long-term growth or stability.

2.3 InvestingT

ips to Maximize Returns

A single cornerstone advantage ULIPs offer is that they leave the asset allocation

decision in the hands of investors themselves. Investors are in control of how

they want to distribute their money across the broad asset classes and how and

when they want to reallocate. They can withdraw from these plans (after the

initial lock in period) without any tax implication as withdrawals and death claim

proceeds under ULIPs qualify for (capital gains) tax exemption under Section 10

(10D) of the Income Tax Act.

But such flexibility can be a big disadvantage if the investors are not `an expert'.

They could choose to be more in equities, when the time is probably right to go

into low risk debt. Or vice versa. The impact of such incorrect decisions could be

significant.

Ever since unit-linked insurance plans (ULIPs) made their debut, they have

become a subject of much discussion and debate. On the one hand, they were a

trifle too complicated for individuals not yet exposed to the stock markets; on the

other hand, they were much-maligned because of the 'unusually high' costs.

As ULIPs made their presence felt, insurers were more open to discussing the

costs and how they evened out over the long term. This and the flexibility that

ULIPs offer became important points that made individuals consider adding them

to their portfolios.

y 5 steps to selecting the right ULIP

Today, more individuals are open to using the ULIP-way to create wealth over

the long term. Here we outline exactly how ULIPs can help you fulfill that

responsibility.


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If the investor are between 25 and 35 years of age

Investor are young, probably married and even have kids. If they are the sole

breadwinner in the family, then they have quite a few responsibilities to fulfill right

from planning for their child's education/marriage to planning for their own

retirement to providing for the family in their absence.

The last responsibility is the most critical and ironically it is the easiest and

cheapest one of the lot to fulfill. At Personal front, term insurance are the

cheapest way to get a life cover.

Term insurance is also insurance in its 'purest' form, in other words there is no

savings element in it, which ensures the premiums are better product to provide

for the investors family in case of an eventuality and all individuals must consider

taking a term plan.

Term insurance of course takes a huge burden off, but it still leaves with a

problem. If term insurance is only going to take care of the 'risk' element, who is

going to take care of the 'savings' part.

This is where ULIPs come in. Of course, that is not to say that ULIPs do not have

an insurance element, they do, but it is limited largely to the earlier years and

after a point they don the mantle of an investment product.

So how ULIPs can helps to save for child's education/marriage, planning for

retirement and other investment-related objectives? ULIPs can do all this and

more because they come with a lot of variety.

If investor are looking to set aside some money for child's education, the 5%-6%

return on an endowment plan may not even take care of inflation, let alone

provide for a medical or MBA degree. The return they earn on a child plan should

not just counter inflation; it should be enough to cover the cost of education.


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And the way cost of education is spiralling, insurance plan must work very hard.

Given their equity component, ULIPs are ideally placed to fulfill this role.

As mentioned before, ULIPs are flexible; there are various options within a ULIP

with the equity component varying right from 0% to 100%. This ensures that they

are able to select an option that best suits investors risk profile. Let us

understand how ULIPs can be tailor-made to serve a persons financial planning

needs.

When investors are in the 25-35 years age bracket. They most pressing financial

objectives are providing for their child's future and their own retirement. ULIPs

can help them achieve both. Although they can take a single endowment ULIP to

achieve both objectives, we think it is more prudent to make a demarcation

between the needs and take separate ULIPs dedicated to each objective.

Opt for a ULIP child plan to provide for child's higher education, marriage and

seed capital for business to name a few needs. One way to handle this multi-

faceted objective is to take a ULIP money-back plan. This way they get moneys

at regular intervals to address multiple needs.

The other important plan that individuals must consider taking earlier on their

lives is a pension plan. Building a corpus to face the rigours of retirement should

be given the priority it deserves.

Again, a long-term investment objective like retirement planning could do with an

equity 'push'. Here is where a ULIP pension plan can add value to their

retirement portfolio. Likewise a ULIP endowment plan can help them meet

investment objectives like buying property or setting up a business for instance.

If the investors are between 35 and 45 years of age

By the time they reach the 35-45 age brackets, some of their existing ULIPs are

probably nearing maturity. For instance, if they had taken a ULIP child plan


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earlier on, it is likely to mature in this age bracket to coincide with the need

(higher education/marriage) they had in mind at the time of taking the ULIP.

However, if they are married late or did not begin planning their finances at an

early stage in your life, now is the time. If they haven't insured as yet, they can go

for a term insurance plan.

The advantage of taking a term plan at a slightly advanced age is that they have

a better idea of how their lifestyle is likely to pan out going forward. In terms of

costs, term plans remain their cheapest option no matter when they take one.

They can opt for some of the ULIPs mentioned for individuals in the 25-35 years

age bracket depending on their needs. Remember, unlike endowment, which

gets really expensive at an advanced age, ULIPs because of the way they are

structured, do not turn out that expensive.

If the investors are over 45 years of age

In this age bracket, it is likely that they are insured. However, they still need to

review their insurance cover taking into consideration the changes in their

lifestyle, income, needs and financial commitments. Beef up their insurance

cover through a term plan.

By this time, their ULIP pension plan will have matured. They can then opt for an

annuity, immediate or deferred, depending on their requirements.

6 points to note

Since ULIPs offer a lot of flexibility, they need to keep some points in mind tooptimise the benefits associated with them.

y Notice they have recommended ULIP child plans/pension plans and even term

insurance for most individuals. When they opt for these plans it is important to do this

after taking insurance consultant into confidence. He is the one who is going to help you


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with the numbers, so you need to tell him exactly what you are looking for in an

insurance plan.

y Remember there is an insurance cover associated with ULIPs. Since it is also

likely that they have other insurance plans like term and/or endowment, it is important

that investor have a clear idea of exactly how much of their insurance cover is worth

after considering all their insurance plans. This number will prove helpful when they

review their insurance cover at regular intervals.

y Likewise, ULIPs also have an investment element. Investors are likely to have

investments in mutual funds, stocks, bonds and fixed deposits as well. They need to add

up the market value of all these investments while calculating their investment worth.

This number will prove useful when they wish to beef up their investments in a particular

asset.

ULIPs derive their 'power to perform' from equities. When they have a lot of aggressive

ULIPs in their portfolio it means that they are overweight on equities. Add to this their

investments in stocks and equity funds, and their exposure to equities increases even

further. To temper their equity exposure,

y it is generally advisable to opt for conservative/balanced ULIPs (maximum 50%

equity exposure).

y Even if a person is a high-risk investor, they must gradually shift their assets to a

conservative ULIP option as their age advances. Financial prudence dictates that risk

reduces as age increases; this needs to reflect in all investments including ULIPs.

y Like with all investments, it is prudent to diversify ULIP investments. This is

necessary due to several reasons with financial prudence being the most important

reason. Varying flexibility levels in ULIPs across insurance companies is another factor

that should make an investor opts for a ULIP from more than one insurance company.

Varying level of expenses in ULIPs is another reason to opt for ULIPs across insurance

companies to keep expenses on the lower side.

2.4 Pricing of the policies

The pricing of insurance and pension products is a highly specialized function

and is actually carried out by the actuaries of insurance companies .As they create

obligations for the insurance companies over a long period and involve savings of the


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population, the pricing has to not only factor in the normal business issues but also has

to maintain the confidence of the saving community. Apart from market dynamics, the

normal business issues, which influence the premium calculation, would be future

interest rates, expected mortality rates and the companys cost structure.

Interest rates

The likely future earnings of the insurance company influence the premium rates. The

investment profile of the insurance or pension fund is tightly controlled by regulations

with strong bias in favour of debt instruments as against equity or other investments, and

hence the earnings are strongly influenced by the interest rates. Additionally, as

investments have to be valued at market rates, any change in the interest ratessubstantially affects the valuation of the debt portfolio. The premiums on the policies

would have to consider both the rise and fall in interest incomes.

Mortality rates

The life insurance companies maintain the death and birth records of the population.

These records, which also consist of the cause of the death, compiled over along timeand enable the actuaries to understand mortality rates of people in different age groups.

The statistical data arrived at is subjected to mathematical and scientific analysis which

enables the actuaries to predict the mortality rates of the population in the future and this

forms the basis of pricing the insurance or pension policies. The mortality table

establishes the probability of the number of deaths in the given age group. The higher

the age of the person seeking insurance cover, higher is the risk of death and hence

higher is the cost of insurance. However, as the insurer does not revise the premium on

the existing policies on a year to year basis, but instead charges a uniform premium

during the entire duration of the policy, it collects a surplus in the initial years where

death claims are lesser and utilises this to set off higher claims in later years due to the

greater number of deaths.


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Pension products are also long term in nature, though at times they operate conversely

when compared to insurance policies. This is especially true of annuity policies, which

commence immediately on the payment of premium. In this case, mortality assumes

importance because the longer the annuitant lives, the more the insurance company has

to pay, as obligations in most annuity contracts cease on death. In the case of differed

annuities too, mortality analysis assumes importance as the policy operates as an

insurance policy during the period of deferment and as a pension product once he

annuity commences. Although the mortality of the general population has improved,

there has been no appreciable change in the mortality levels of the set of lives insured

and hence the impact of mortality on premiums has remained constant.

Operating expenses

The main expenditure apart from claims would be the commissions paid to acquire the

business and employee costs. New business expenses are

usually higher than the renewal expenses and any increase in the new business leads to

an increase in the overall expense. If an insurance company is able to achieve a high

level of operation with a lower growth in their employee base by increasing their

productivity, then the ratio of employee cost to premium income would reduce.

Pricing issues

In the initial phases, prices of the new products could be benchmarked against the

existing products in the market. But as the competitive pressures build up in the market,

more price differentiation could be seen. In the event that interest rates move

downwards with greater global influence, mortality rates improve further with economic

development and expenditure increases due to inflation, then the actuaries task would

become extremely onerous and market competition would compound the problem. It

being a new product in India the annuitant may not understand the dynamics that go into

its pricing. The role of regulator in approving new products and their pricing will,

therefore, become extremely critical. Changes in pricing could become more frequent in

future, as companies may be compelled to offer different pricing structures to annuitants


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depending upon the time to tide over interest volatility. This would enable the company

to create differing portfolios for different annuitants depending upon time at which they

enter the scheme.

Common terms used in insurance parlance

With profit and without profit plans:

The insurers distribute their profits among the policy holders every year in the

form of a bonus/profit share. An insurance policy can be with or without profit. In

the former, any bonus declared is allotted to the policy and is paid at the time of

maturity/death (with the contracted amount) in a without profit plan, the contracted

amount is paid without any profit share. The premium rate charged for a with profit

policy is therefore, higher than that for a without profit policy.

Unit linked insurance policy:

Itis an insurance policy that is designed like a mutual fund scheme. The savings

after the deduction of the required charges are invested in a fund similar to a mutual

fund and the returns would depend on the performance of the fund.

Bonus:

Insurers usually distribute profits among the policy holders every year in the form

of a bonus. Bonuses are credited to the account of the policy holder and paid at the

time of maturity. Bonus is declared, as a certain amount is thousand of sum assured.

The term bonus is used interchangeably with with profit.

Guaranteed additions:

In some policies, insurers guarantee the bonus/profit declared as a certain

amount per thousand of sum assured. This assured bonus will be credited to the

policy holder irrespective of the performance of the insurer and is known as

guaranteed addition. Guaranteed additions will be payable at the end of the term of

the policy or early death of the policyholders.


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Loyalty additions:

In some policies over and above the guaranteed additions, insurers, especially

LIC, declare and offer to the policyholder, an additional amount per thousand of the

sum assured every five years, depending on its performance. This additional amount

is known as loyalty addition.

Survival benefits:

In some policies a part of the sum assured is paid to the policyholder in the form

of survival benefits at fixed intervals before the maturity date. The risk cover for life

continues for the full sum assured even after the payment of survival benefits and

bonus is also calculated on the full sum assured. If the policy holder survives till the

end of the term, the survival benefits will be deducted from maturity value.

Lapsed policies:

When the premium is not paid within the days of grace provided after the due

date, the policy lapses. The grace period in case of yearly, half-yearly and quarterly

models of payment is one month and in case of the monthly mode of payment, it is

fifteen days. A lapsed policy may be revived during the lifetime of the assured, but

within the period of five years from the due date of the first unpaid premium and

before the date of maturity. Revival of a lapsed policy is considered either on the non

medical or medical basis depending upon the age of the life assured at the time of

revival and the sum to be revived. If the revival of the policy is completed by payment

of overdue premium within 14 days from the expiry of the grace period, only the late

fee for one month has to be paid.


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3.0Research Design

3.1 STATEMENT OF PROBLEM

Life insurance in India, in the years gone by, has mostly been sold by way of harping onthe tax benefits. And traditional plans have been the eternal favorites of life insurance

agents. But have individuals ever spared a thought on unit link products, which could

actually give them better returns than a traditional plan? This report explores the returns

from life insurance products.

TITLE OF THE STUDYRisk management in Insurance sector (with Special reference toHDFC std life)

3.2 OBJECTIVES OF THE STUDY

TO provide risk return and stability details of all ulip products which may helps

the customer to reduce their risk in insurance.

Proper understanding and analysis the ULIP plans of HDFC std life.

To know the qualitative and quantitative benefits of different ULIP plans.

TO provide knowledge for risk, return and stability of different ulip product,

and how it is beneficial to customer.

3.3 SCOPE OF THE STUDY

Risk management in Insurance sector (with Special reference toHDFC std life)is

to know the returns available between different Unit Link Product Plans. AND to help

customers in order to maximize their profit.


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3.4 RESEARCH METHODOLOGY

TYPE OF RESEARCH

This research adopts a descriptive research design.

SOURCES OF DATA:

DATA: data available from certain publications or reports are called secondary data.

Such data are already collected by some other agencies in the past for some other

purpose but used for the investigation of current problem. The sources of secondary

data are magazines, research papers, newspapers, government publication, Internet etc.

For the current study it was collected from the respective company brochures and

company website.

3.5 LIMITATIONS OF THE STUDY

Collecting the information regarding ULIP plans is difficult.

The numbers of ULIPPlans providing by all the companies is more So the study

does not give details about all the plans.

It is difficult to compare one ULIP plan with another ULIP plan.

The given time for doing project is limited.

The data collected for the study is inadequate.


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4.0 SectorProfile

4.1 Size of the Industry

With largest number of life insurance policies in force in the world, Insurance

happens to be a mega opportunity in India. Its a business growing at the rate of

15-20 per cent annually and presently is of the order ofRs 450 billion. Together

with banking services, it adds about 7 per cent to the countrys GDP. Gross

premium collection is nearly 2 per cent of GDP and funds available with LIC for

investments are 8 per cent of GDP. An annual growth rate of 15-20% and the

largest number of life insurance policies in force, the potential of the Indianinsurance industry is huge. Total value of the Indian insurance market (2004-05)

is estimated at Rs. 450 billion (US$10 billion). According to government sources,

the insurance and banking services contribution to the country's gross domestic

product (GDP) is 7% out of which the gross premium collection forms a

significant part. The funds available with the state-owned Life Insurance

Corporation (LIC) for investments are 8% of GDP.

Till date, only 20% of the total insurable population of India is covered under various lifeinsurance schemes, the penetration rates of health and other non-life insurances in India

is also well below the international level. These facts indicate the of immense growth

potential of the insurance sector.

The year 1999 saw a revolution in the Indian insurance sector, as major structural

changes took place with the ending of government monopoly and the passage of the

Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictionsfor private players and allowing foreign players to enter the market with some limits on

direct foreign ownership.


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Though, the existing rule says that a foreign partner can hold 26% equity in an insurance

company, a proposal to increase this limit to 49% is pending with the government. Since

opening up of the insurance sector in 1999, foreign investments ofRs. 8.7 billion have

poured into the Indian market and 21 private companies have been granted licenses.

Innovative products, smart marketing, and aggressive distribution have enabled fledgling

private insurance companies to sign up Indian customers faster than anyone expected.

Indians, who had always seen life insurance as a tax saving device, are now suddenly

turning to the private sector and snapping up the new innovative products on offer.

The life insurance industry in India grew by an impressive 36%, with premium incomefrom new business at Rs. 253.43 billion during the fiscal year 2004-2005, braving stiff

competition from private insurers. RNCOSs report, Indian Insurance Industry: New

Avenues for Growth 2012, finds that the market share of the state behemoth, LIC, has

clocked 21.87% growth in business at Rs.197.86 billion by selling 2.4 billion new policies

in 2004-05. But this was still not enough to arrest the fall in its market share, as private

players grew by 129% to mop up Rs 55.57 billion in 2004-05 from Rs. 24.29 billion in

2003-04.

Though the total volume of LIC's business increased in the last fiscal year (2004-2005)

compared to the previous one, its market share came down from 87.04 to 78.07%. The

14 private insurers increased their market share from about 13% to about 22% in a

year's time. The figures for the first two months of the fiscal year 2005-06 also speak of

the growing share of the private insurers. The share of LIC for this period has further

come down to 75 percent, while the private players have grabbed over 24 percent.

The Life Insurance market in India is an underdeveloped market that was only tapped by

the state owned LIC till the entry of private insurers. The penetration of life insurance

products was 19 percent of the total 400 million of the insurable population. The state

owned LIC sold insurance as a tax instrument, not as a product giving protection. Most


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customers were underinsured with no flexibility or transparency in the products. With

the entry of the private insurers the rules of the game have changed.


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4.2 COMPANY PROFILE

HDFC STANDARD LIFE INSURANCE

THE PARTNERSHIP

HDFC and Standard Life first came together for a possible joint venture, to enter the Life

Insurance market, in January 1995. It was clear from the outset that both companies

shared similar values and beliefs and a strong relationship quickly formed. In October

1995 the companies signed a 3 year joint venture agreement.

Around this time Standard Life purchased a 5% stake in HDFC, further strengthening

the relationship.

The next three years were filled with uncertainty, due to changes in government and

ongoing delays in getting the IRDA (Insurance Regulatory and Development authority)

Act passed in parliament. Despite this both companies remained firmly committed to

the venture.

In October 1998, the joint venture agreement was renewed and additional resource made

available. Around this time Standard Life purchased 2% of Infrastructure Development

Finance Company Ltd. (IDFC). Standard Life also started to use the services of the

HDFC Treasury department to advise them upon their investments in India.

Towards the end of 1999, the opening of the market looked very promising and both

companies agreed the time was right to move the operation to the next level. Therefore,

in January 2000 an expert team from the UK joined a hand picked team from HDFC to

form the core project team, based in Mumbai.

Around this time Standard Life purchased a further 5% stake in HDFC and a 5% stake in

HDFC Bank.

In a further development Standard Life agreed to participate in the Asset Management

Company promoted by HDFC to enter the mutual fund market. The Mutual Fund waslaunched on 20th July 2000.


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INCORPORATION OF HDFC STANDARD LIFE INSURANCE COMPANY

LIMITED:

The company was incorporated on 14th August 2000 under the name of HDFC Standard

Life Insurance Company Limited.

Our ambition from as far back as October 1995, was to be the first private company to re-

enter the life insurance market in India. On the 23rd of October 2000, this ambition was

realised when HDFC Standard Life was the only life company to be granted a certificate

of registration.

HDFC are the main shareholders in HDFC Standard Life, with 81.4%, while Standard

Life owns 18.6%. Given Standard Life's existing investment in the HDFC Group, this is

the maximum investment allowed under current regulations.

HDFC and Standard Life have a long and close relationship built upon shared values

and trust. The ambition of HDFC Standard Life is to mirror the success of the parent

companies and be the yardstick by which all other insurance company's in India are

measured.

MISSION:

We aim to be the top new life insurance company in the market.

This does not just mean being the largest or the most productive company in the market,

rather it is a combination of several things like-

y Customer service of the highest ordery Value for money for customersy Professionalism in carrying out businessy Innovative products to cater to different needs of different customersy Use of technology to improve service standardsy Increasing market share


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STANDARD LIFE

Standard Life is Europes largest mutual life assurance company. Standard Life, which

has been in the life insurance business for the past 175 years is a modern company

surviving quite a few changes since selling its first policy in 1825. The company

expanded in the 19th century from kits original Edinburgh premises, opening offices in

other towns and acquitting other similar businesses.

Standard Life Currently has assets exceeding over 70 billion under its management

and has the distinction of being accorded AAA rating consequently for the six years by

Standard and Poor.

SNAPSHOT

y Founded in 1875, company supporting generation for last 179 years.

y Currently over 5 m. Policy holders benefiting from the services offered.

y Europes largest mutual life insurer.


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HDFC Standard Life Insurance Company Limited was one of the first companies to be

granted license by the IRDA to operate in life insurance sector. Reach of the JV player ishighly rated and been conferred with many awards. HDFC is rated AAA by both

CRISIL and ICRA. Similarly, Standard Life is rated AAA both by Moodys and Standard

and Poors. These reflect the efficiency with which HDFC and Standard Life manage

their asset base ofRs. 15,000 Cr and Rs. 600,000 Cr. Respectively.

HDFC Standard Life Insurance Company Ltd was incorporated on 14th August 2000.

HDFC is the majority stakeholder in the insurance JV with 81.4 %stale and Standard :ofas a staple pf 18.6% Mr. Deepak Satwalekar is the MD and CEO of the venture.

HDFC Standard Life Insurance Company Ltd. Is one of Indias leading Private Life

Insurance Companies., which offers a range of individual and group insurance

solutions. It is a joint venture between Housing Development Finance Corporation

Limited (HDFC Ltd.) Indias leading housing finance institution and the Standard Life

Assurance Company, a leading provider of financial services from the United Kingdom.

Both the promoters are will known for their ethical

dealings and financial strength and are thus committed to being a long-term player in the

life insurance industry- all important factors to consider when choosing your insurer.


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KEY STRENGTH

FinancialExpertise:As a joint venture of leading financial services groups. HDFC

standard Life has the financial expertise required to manage your long-term investments

safely and efficiently.

Range of Solutions

We have a range of individual and group solutions, which can be easily customized to

specific needs. Our group solutions have been designed to offer you complete flexibility

combined with a low charging structure.

Strong Ethical Values:

HDFC is an ethical and Cultural Organization. False selling or false commitment withthe customers is not allowed.

Most respected Private Insurance Company :

HDFC was awarded No-1 Private Insurance Company In 2004 by the World Class

Magazine Business World. Integrity, Innovation and Customer Care.

HDFC Standard Life Insurance Company Ltd

Following are the Life insurance plans offered by HDFC Standard Life InsuranceCompany Ltd.


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1. Protection Plan : Protection Plans ensures your familys financial independence inthe event of your unfortunate demise or critical illness.

Following are the Protection Plans offered by HDFC Standard Life Insurancea. HDFC Term Assurance Plan : The Plan is designed to secure your family from any

kind of financial uncertainties. It provides you high cover at nominal cost, flexibility tochoose the sum assured, an additional benefit options can be availed at marginal costand gives you the option of paying single premium or regular premium

b. HDFC Loan CoverTerm Assurance Plan : It protects your family form your loanliabilities in case of your demise within the policy term, a lump sum amount is providedwhich is a decreasing percentage of the initial Sum Assured.

c. HDFC Home Loan Protection Plan : The plan protects your family from your loanliabilities in case of your unfortunate demise within the policy term. In case if you are notthere to repay the monthly installment on your housing loan, then a sum of money isavailable towards repaying your housing loan.

2. Children Plan :The children plan helps you to fulfill your childs dreams. The plansecures your childs future financially even though you are not around them.

a. HDFC Children's Plan- The plan ensures that you can start building your savingstoday to give a bright future to your child. A the time of maturity a guaranteed lump sumis given to the beneficiary or in case of your unfortunate demise, early into the policyterm.

b. HDFC Unit Linked Young Star II- The plan provides a valuable protection to yourchild in case you are not there to support them. The unit linked plan also gives you anoutstanding investment opportunity to maximize your savings by providing you a choice

of thoroughly researched & selected investments.

c. HDFC Unit Linked Young StarPlus II- The plan provides a valuable protection toyour child in case you are not there to support them. The unit linked plan also gives youan outstanding investment opportunity to maximize your savings by providing you achoice of thoroughly researched & selected investments. Along with that a regularLoyalty Units are also provided to improve your fund value every year.

d. HDFC Unit Linked Young Star Champion- The plan provides a valuable protectionto your child in case you are not there to support them. The unit linked plan also givesyou an outstanding investment opportunity to maximize your savings by providing you achoice of thoroughly researched & selected investments. Along with that the plan also

provides Bumper Addition to the funds at the time of maturity.

3. Retirement Plans- The Retirement Plans of HDFC Standard Life Insurance ensureyou to provide a secure life after your retirement. It provides you with financial security inlife & you dont need to comprise with your life. The plan gives you a lump sum onretirement, which helps you to get a regular income through an annuity plan.

a. HDFC Personal Pension Plan- A plan that gives you a post retirement income forlife. You can choose the premium, sum assured and your retirement date too.


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b. HDFC Unit Linked Pension II- A unit linked insurance plan that gives you anoutstanding investment opportunity to maximize your saving. It also gives you Bumper

Addition.

c. HDFC Unit Linked Pension Maximiser II- Its a unique single premium unit linked

plan, designed to provide a post retirement income with maximum investment returns.The plan also gives Bumper Addition of 10% of initial single premium at vesting & ondeath.

d.HDFC Immediate Annuity- It is a contract that uses your capital to provide you with aguaranteed gross income through out your life. The income is guaranteed & isunaffected by rise or fall of interest rates.

4. Saving & Investment Plans : The saving & investment plan gives you dual benefit ofprotection & long term savings. Along with that an assured sum for your future need.

a. HDFC Unit Linked Endowment Plus II- With this plan you start saving today so that

your family remains financially independent, even when you are not around. The plangives you Loyalty Units to boost your fund value.

b. HDFC SimpliLife- The HDFC SimpliLife Plan gives you the opportunity to maximizeyour savings & secure your familys future.

c. HDFC Unit Linked Endowment II- The plans comes with additional benefits like Lifeoption, extra life option, life & health option & extra life & health option

d. HDFC Unit Linked Enhanced Life Protection II- Under this plan the sum assuredchosen by you will automatically increased by 5% each year.

e. HDFC Unit Linked Wealth MaximiserPlus - Its a unique single premium investmentcum protection plan, which gives you Loyalty Units to enhance your fund value everyyear.

f. HDFC Unit Linked Endowment Winner- The plan gives you the choice of thoroughlyresearched & select the investments. It comes with Bumper Addition to the fund value atmaturity.

g. HDFC Endowment Assurance Plan- The plan will give your family a guaranteedlump sum on maturity or in case of your unfortunate demise.

h. HDFC Money Back Plan- The plan gives you proportion of the basis Sum Assured as

cash lump sums after every 5 years.

i. HDFC Single Premium Whole of Life Insurance Plan-A single premium

investment plan which provides long-term real growth of your money.

j. HDFC Assurance Plan- A long term saving plan that will secure the life of your

family too.


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k. HDFC Savings Assurance Plan-A plan which comes With Profits savings planwhich helps you easily build your long-term savings and ensure that your family isprotected even if you are not around.


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5.0 Analysis and Interpretation

HDFC STD LIFE, ULIP CHILDREN PLANS

HDFC Young Star Supreme

Key Features:

Bumper additions - 100%. 100% allocation rate from 4

thyear onwards.

Extra Allocation rate of 5% from 6th

year onwards Nominee concept.(Beneficiary is now nominee as per Sec 39 A 0f IT Act) STO availableOptions: Only Life option.

Maturity Benefit: Fund value + Bumper addition*.

Bumper Addition*: 50% of average annualized premium for policy term of 10yrs.

100% of average annualized premium for policy term of 11+yrs

(* Bumper addition is available for Lapsed & Revived policies but not given for Paid up policies)

Death Benefit

Double benefit Triple benefit

Sum Assured is immediately paid to

NOMINEE

Sum Assured is immediately paid to

NOMINEE

Waiver of premium Waiver of premium

100% annualized premium invested by HDFCSL into the

policy

50% annualized premium invested by HDFCSL into the

policy

Fund value on Maturity 50% of the annualized premium paid to nominee every yea


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Fund Value

Partial Withdrawal:

Allowed after 5yrs. Min 10K, Max: 300% of original annualized premium for the term of the policy.

Sum assured: 5 40 times of annualized regular premium. Term: 10yrs-25yrs.

Age @ entry: 18yrs-65yrs Age @ maturity: 75yrs

Premium allocation rate:

Choice of 7 funds, 24 switches free in one policy year, 6 partial withdrawals free.

Policy admin chrgs: 0.4% on the regular premium installment on monthly basis.

FMC: 1.25 p a across all funds. Surrender charges not applicable after 5+ yrs.

Available for Indian residents & NRIs.

Mode Min Max

Annual Rs 15,000

No LimitRs 8,000

Monthly Rs.2000

Halfyrly

Year HalfYearly MonthlyPremium and Year 1 Year 2 Year 3 Year 4 5 Year 6 + Year 1 Yr 2,3,4,5 6+

15 -1 99 L 70 00%

85 00% 90 00%100 00% 105 00%

65 00%

same as yearly & Halfyrly2L-4 99L 75 00% 70 00%

5L-19 99L 80 00% 75 00%

20L+ 87 50% 90 00% 92 50% 82 50%


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HDFC Young Star Super

Key Features: High allocation rates & Bumper additions.

Two Benefit Options Available:

Life: Death Benefit Life and Health: Death / Critical Illness Benefit

Benefit on Death / CI:

Option 1: Double Benefit SA immediately + 100% of Future premiums paid by

HDFCSLIC + Fund Value on Maturity.

Option 2: Triple Benefit SA immediately + 50% Future premiums paid by HDFCSLIC +

50% of original annual premium paid to beneficiary on annual basis(every year) + Fund

Value on Maturity.

Benefit on Maturity:

Fund Value + Bumper additions (settlement option available).

Bumper addition: Additional % of Original annualized regular premium available on maturity,

Providedall premiums paid & No partial withdrawals, lapsed, paid-up or

revived.

(T

erm of 10 yrs -50% of original annualized regular premium,

Term of 11+yrs 100% of original annualized regular premium)

Partial Withdrawal:

Allowed after 5yrs.Min. Withdrawal Amt. Rs.10, 000.

After withdrawal Fund Value should be higher of more than sum of all top-ups made in last

3yrs or 150% of the Annual Regular Premium.

7 funds to choose from FMC (1.25% p.a.) one of the lowest amongst 100% equity

funds.

24 free switches*in a policy year. 12 free premium redirections in a policy year.

Smart Transfer Option no need to monitor market. 6 Free Partial Withdrawals in a policy

year.


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Min Premium: Annual Rs.15, 000/-, Hyrly Rs.8, 000/- & Monthly Rs.2, 000/-

Sum Assured: Min: 5*Annualized Premium, Max: 40*Annualized Premium.

Term: 10-25yrs. Age at Entry: 18-65yrs (Life option), 18-55yrs (Life & Health

option).

Premium Allocation Rates:

Yr 1 Yr 2 Yr 3

Yr 4+

15000 to


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2 unpaid premiums 30% of the FV

1 unpaid premium 15% of the FV

Cashing in on parents desire of providing for their childrens education, life insurer shave been

dynamically promoting child ULIPs. Recently, HDFC Standard Life launched its new child ULIP

Youngstar Super.

The minimum premium for this policy is Rs 15,000. The policyholder can choose the sum

assured (5-40 times of the annual premium) and seven fund options. You can also choose

between double benefit and triple benefit options. Under the double benefit option, if the

insured (parent) dies, the sum assured is paid to the nominee while the company directs 100(%)

percent of the premiums payable to the policy.

In case of the latter, 50% of the future premiums is paid to the nominee every year to ensure

the regular flow of income while the balance goes into the policyholders account. You can also

avail of the critical illness benefit rider in this policy. A 30-year-old male, who has chosen the

double benefit plan with an annual premium of Rs 25,000 and a sum assured of Rs 2.5 lakh, can

expect the fund value to grow to Rs 2.83 lakh or Rs 3.53 lakh at the end of the 10-year term

(rate of return of 6% and 10%, respectively).

He will also get Rs 12,500 as buffer addition, if he has not made partial withdrawals. buffer

addition is being presented as one of the key features of the policy a reward for completing

the policy term. Those with 10-year term policies will get 50% of the first-year premium at

maturity, and 100% of this amount for staying invested in longer tenure policies. The first year

premium allocation is relatively high at 85-92% (for premiums ranging from Rs 15,000-

20,00,000+). Currently, most ULIPs levy charges as high as 30-40% (premium allocation of 60-

70%) in the first year.

Post IRDA guidelines on cap charges, other child plans too could reduce their charges toa comparable level before January 1. While it doesnt seem to have any important

weakness compared to other child ULIPs, remember that child plan is not automaticallythe best tool for achieving the goal. Those with time and inclination could also look at

structuring a long-term plan through MF investments.


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HDFC YoungStar Supreme Suvidha

There is no bigger joy than being able to fulfill your child's dream. With HDFCYoungStar Supreme Suvidha you can fulfill your childs immediate and futureneeds. So tomorrow when you child needs your support you dont have todepend on anyone else. This Plan provides valuable protection to your child incase you are not around and gives you an outstanding investment opportunity tomaximise your savings by providing you a choice of thorough

Documents

Risk Management in Hdfc. Madhukar