A PROJECT REPORT ON RISK ANALYSIS AND RISK MANAGEMENT IN
INVESTING ININSURANCE POLICES
EXECUTIVE SUMMARYAll assets in this world have some economic
value and some amount of risk carrying with them. All assets have
some expected life also and if its get lost or destroyed there are
many chances that owner will suffer some amount of loss which can
be financial or in any other form. So to protect the owner from
suffering a huge amount of loss we can assure these
assets.Insurance is a contract between the insurer and insured in
return for a premium, the insurance company promises to pay a
specified amount to the insured on the happening of a specific
event.India economy is growing at the rate of 5.4% with a
significant rise in working population and has a large potential
for the development in the field of insurance sector. A large
amount of population in India is still uninsured. It is also
estimated that the sector will grow at a rate of 15-20% in next 10
years.The project has been undertaken to know about different types
of risk that can covered by insurance policies and how to analyse
and mange those risks as there are various types of risk that a
person can suffers in his life term.The project talks about what
are the various things that customer should consider before buying
an insurance policy and various steps that need to consider before
buying it.
IntroductionIndia is the second largest country in the world in
the respect of population. The GDP growth of India was 5.4% in year
2013.the insurance sector is expected to grow at a very high rate
in next 10-154 years and its contribution in GDP is going to rise
in ahuge manner as a large amount of population is still uninsured
especially in urban areas.What is Insurance?Insurance is a contract
between the insurance company (insurer) and the policyholder
(insured). In return for a consideration (the premium), the
insurance company promises to pay a specified amount to the insured
on the happening of a specific event. We all need insurance because
it not only transfer the risk but also have other benefits like tax
saving.The first Indian insurance company was formed in the year
1818 which was oriental life insurance company and the Indian life
assurance companies act 1912 was the first statutory measure to
regulate life business which was finally amended in the year 1938.
In the year 1999 Insurance Regulatory and Development Authority
(IRDA) was constituted as an autonomous body to regulate all the
insurance companies in India which came in power in the year April
2000. Under the current regulation a foreign companies cannot have
more than 26% of stake in joint venture.
Benefits of insurance
Investment option
It is good investment option because insurer will not get the
insurance cover but also the in some amount of return.
Tax benefits We can also save tax up to RS 100000.
Loan on insuranceCustomer can also take loan against insurance
policies.
Habits of saving It also develops the habits of saving certain
amount of money which can be helpful in future.
Employment generationAn increase in the penetration of insurance
is going to generate more employment as insurance policies will
require more advisors.
Social benefits It is going to help in developing the
infrastructure of the counrty.
Table 1.1Types of life insurance policesThe different types of
life insurance policies are following: Whole life insurance plans
Endowment insurance plans Term Insurance plans Pension and savings
plans Unit linked insurance plansRiskA person carries various types
of risk in his life term and it can be classified in many ways. But
first we need to understand the meaning of risk. It is difficult to
give the exact definition of risk but it can be defined in the
respect of insurance sector as the possibilities of unfavourable
event happing like death or physical damage.The various types of
the risks are following:
Market risk Interest rate risk Inflation risk Political risk
Financial risk Pure risk Particular risk Out of all these risk the
insurable risk are following: Financial risk: The outcome of risk
which can be measured in financial term like loss of life etc. Pure
risk: Pure risks are those risks where there is no possibility of
making a profit. Particular risk: These are the three risks which
can be insured by having insurance policies and the insured persons
can transfer his risk to insurer.Risk analysis and Risk
management:As there are different types of in insurance police in
the market it becomes difficult for a customer to understand the
actual value of its life i.e. Human Life Value. Before buying an
insurance police a person should to knowing the purpose for which
he is buying the insurance and how to analyse its value.It might be
confusing for many that for what value they should buy an insurance
policies i.e. how they are worth for.There are two methods to
calculate the human life value Income replacement method Simple
methodIncome replacement method:This method takes into
consideration the future income earning potential of a person
during the remaining years of their working life. It is a two-step
method:Step 1: Calculate the income of person in the future working
years.Step 2: this is its HLV, now take inflation in account and
calculate how much should be enough for his family in case of his
death.Simple method:In this method we consider the present interest
rate in a fixed deposit in a bank and then we calculate that how
much amount person should get insured.But we always need to keep in
mind that HLV in not a onetime calculation and it should get
revised from time to time.Now as there are many insurance policies
in the market it becomes difficult to decide which will be suited
best for you. So it is always best for anyone to take the polices
which is best suited for them. Anyone can easily find out which
policies best suited for them by following these three steps:Step
1: Identify your needs: you always need to understand you goals and
need after considers these factors: marital status future financial
goals number and age of dependants on you employment status income
which includes salary, business income and income from other
sources and investments existing protection, savings and retirement
provisionStep 2: Quantifying needs: Then you need quantify your
needs and then calculate suitable amounts that you need to save in
future the future.Step 3: Priorities your needs: then you need to
priorities you needs based upon your requirements. It is important
because you have only a specific amount of money to invest and that
money should be invested in a best product mix.Step 4: Compare: it
is always best for you to compare the policies which you are going
to take with all the other similar polices in the market.So this
how any individual can decide on what polices is best suited for
him and whether he should consider to by that specific insurance
policies or not.
Industry analysis:The insurance is established a way long before
and it is growing well since then. The first insurance company was
formed United States in the year 1782 in South California. Since
then various insurance company are founded and today hundreds on
insurance companies are operating well. Top five companies in world
in 2013 Japan post Insurance AXA Allianz Met life Prudential
FinancialInsurance sector in India 1818 saw the advent of life
insurance business in India with the establishment of the Oriental
Life Insurance Company in Calcutta but in 1968, the Insurance Act
was amended to regulate investments and set minimum solvency
margins. But actually grow in the insurance sector in India begun
from the year 2000 with the formation on IRDA. IRDA is a regulatory
body to manage working of all the insurance company in
India.Foreign companies were allowed ownership of up to 26% and
invest in insurance policies in India. The insurance sector is a
colossal one and is growing at a speedy rate of 15-20%. Together
with banking services, insurance services add about 7% to the
countrys GDP. Life insurance Company has acquired in India.With the
entry of new private players insurance sector has seen a huge
growth in last five years and it is expected to grow in future.The
various data which is represents the market share of top five
insurance companies in India
Figure 1.1Most of the Indian population are without life
insurance cover and still a huge amount of growth is possible in
Indian environment. At presentpeople do not prefer to invest their
saving in insurance policies but it is expected to change in
future.
Company profileThe AXA GroupAXA is a world leader in financial
protection and wealth management, with major operations in Western
Europe, North America and the Asia/ Pacific area. AXA services 102
million customers throughout the world. In total the AXA group has
approximately 160,000 employees and distributors, working in around
50 countries.The AXA group reported total revenue for the first
half of 2013 of 37.8 billion. AXA group has a strong, long standing
history. The group can trace its roots right back to the 18th
century. After a successions of mergers, acquisitions and name
changes involving some of the leading insurance companies in the UK
and around the world, the name AXA was first introduced in
1985.Today, 102 million clients in the world trust AXA and the AXA
name. In 2003, to provide a clearer vision of the transformation of
its core business from traditional insurance to the broader concept
of financial protection, the AXA group added the words financial
protection as a base line to its logo.BhartiEnterprisesBharti
Enterprises is a pioneer in telecom sector and the group is
widening its horizons by entering new business areas such as
insurance and retail. Bharti Enterprises has created a vantage
position for itself in the global telecommunications sector.
BhartiAirtel Limited occupies good status in mobile telephony in
India while its brand 'Beetel' is the largest manufacturer and
exporter of world class telecom terminals.Founder of Bharti Group
is Sunil Mittal. In 1983, Sunil Mittal entered into an agreement
with Germany's Siemens to manufacture the company's push-button
telephone models for the Indian market. In 1986, Sunil Bharti
Mittal incorporated Bharti Telecom Limited (BTL) and his company
became the first in India to offer push-button telephones,
establishing the basis of Bharti Enterprises. This first-mover
advantage allowed Sunil Mittal to expand his manufacturing capacity
elsewhere in the telecommunications market. By the early 1990s,
Sunil Mittal had also launched the country's first fax machines and
its first cordless telephones. In 1992, Sunil Mittal won a bid to
build a cellular phone network in Delhi. In 1995, Sunil Mittal
incorporated the cellular operations as Bharti Tele-Ventures and
launched service in Delhi. In 1996, cellular service was extended
to Himachal Pradesh. In 1999, Bharti Enterprises acquired control
of JT Holdings, and extended cellular operations to Karnataka and
Andhra Pradesh. In 2000, Bharti acquired control of Skycell
Communications, in Chennai. In 2001, the company acquired control
of Spice Cell in Calcutta. Bharti Enterprises went public in 2002,
and the company was listed on Mumbai Stock Exchange and National
Stock Exchange of India. In 2003, the cellular phone operations
were rebranded under the single Airtel brand.
Bharti AXA life insurance Ltd.Bharti AXA Life Insurance is a
joint venture between Bharti, India's leading private telecom
company and AXA, world leader in financial protection and wealth
management. Their philosophy is to build around the promise of
making people "Life Confident"...Bharti Enterprises and AXA Asia
Pacific Holdings Limited (AXA) signed an agreement to establish a
joint venture named Bharti AXA Life Insurance Company Limited to
carry on life insurance business in India.August 26, 2005, New
Delhi : Bharti Enterprises and AXA Asia Pacific Holdings Limited
(AXA) signed an agreement to establish a joint venture named Bharti
AXA Life Insurance Company Limited to carry on life insurance
business in India. Under the agreement AXA has a 26% equity
interest in the joint venture, while Bharti holds the balance. AXA,
a global leader in insurance business, enabled the company to have
access to AXAs global life insurance and asset management
expertise. Bharti brought its strong local market knowledge,
reputation and India-wide retail presence. The insurance sector in
India provides a mega opportunity for private players like
BhartiAxa Despite the strong growth witnessed by the sector in the
recent years, nearly 80% of the Indian population is without life
insurance coverage. As one of Indias leading business conglomerates
having an established brand and a significant presence in the
retail space, Bharti has inherent advantages in being a part of
this growth story. In AXA, Bharti has a global leader as its
partner, one that is known for its expertise and best practice
across the world. More importantly, this new venture also fits into
our strategy of taking on projects that make a difference to the
society at large. This joint venture is an opportunity for AXA to
enter the Indian life insurance market, one of the most attractive
emerging insurance markets. India is a fast growing economy and a
huge market with more than 1.1 billion people. This coupled with a
large middle class and increasing income levels will drive growth
in the insurance market. Bharti is a well-established and
financially strong group whose capabilities and network will be of
significant value to the joint venture. The joint venture invested
in the region of Rs. 500 crores (115 Million USD) over the first
three to four years of operations, reflecting both partners
commitment to quickly establish a strong foothold in the Indian
market. The joint venture commenced business in the first half of
2006, subject to IRDA, FIPB and other statutory approvals.Company
ProductsBHARTI AXA offers a range of innovative, customer-centric
products that meet the needs of customers at every life stage. Its
20 products can be enhanced with up to 6 riders, to create a
customized solution for each policyholder. Their products are of
different categories like child plan, term plans, savings &
investment plan and health plan.Child Plan: Child Plan is a plan
specifically designed to take care of financial needs of your
child. Child plan provides with necessary funds that will take care
of childs education, marriage etc. Term Plan: A risk plan which
provides comprehensive cover for your family in the unfortunate
event of untimely demise. A term life insurance plan provides good
cover at relatively nominal cost and has no survival benefits.
Investment Plan: Popularly known as ULIP, an investment plan
invests part of your savings in equity or debt market as per your
preference..Group plans: With Bharti AXA Life insurance products
provide financial security and protection to your loved ones. two
group plans which are Bharti AXA Life Shield and Bharti AXA Life
Sanjeevani.Health Plan: Slightly different from health insurance,
health plan provides cover for surgery costs, critical illness. A
lump sum is paid irrespective of actual hospital bill. Easy Health
is Bharti AXAs health plan.SWOT analysis of Bharti AXAStrengthsUse
of brand affinity of Airtel to promote insurance sales.Bharti
brought its strong local market knowledge, reputation and
India.Associated with AXA world leader in financial protection and
wealth management, ranked No 13 in the Fortune 500 list of global
companies and has enabled the company to have access to AXAs global
life insurance and asset management expertise.Strong partner Bharti
- provides access to customer base of more than 20 million
WeaknessLate entrant in the insurance sectorThin distribution
network all over the nation Very less number of product offering in
comparison to its competitorsLack of confidence among the customers
as parent company does not have a financial background.
Opportunities Strong growth of unit linked market at the mass
affluent end.Potentially with 20% insurance cross sale only to new
telecom customers, this network can yield 48 lakh policies per year
with sum assured of nearly Rs 58000 cores.
ThreatsMany more companies are lining up to enter into Indian
Insurance Industry.Consumers preference is still more towards
public sector insurance companies.
Research methodologyStatement of the problem:.As the insurance
sector expected to grow around 15-20% in next 10 years it is
important for a customer to understand the basis steps to buy an
insurance policy. It is also going to help companies to understand
that how can they convince there customers to buy an insurance
policies.The project has been undertaken with the aim to analyse
insurance firm and how to calculate your need analysis.Objective of
the study: To make people aware about thesteps they should consider
before buying insurance policies. To know about various analytical
tools that can value an insurance policy. To find whether need
analysis is compulsory before buying an insurance police.SCOPE OF
THE STUDY. The scope of the study is limited to only insurance
& no other financial instruments were considered .The study
will help us to know the perception of customers about insurance
policies. The various risks involves in buying an insurance policy
and how to tackle it. It will also help us to get a basic knowledge
about need analysis calculation and its
requirement.Methodology:Primary data: Primary datais theone which
iscollected specifically forthe purpose of the project, and can be
obtained from various people working in the organization. For this
study the primary data was collected from following sources.
Questionnaires Discussion with manager.
Secondary data: It refers to the statistical material which is
not originated by the investigator himself but obtained from
someone else's records, or when Primary data is utilized for any
other purpose at some subsequent enquiry it is termed as Secondary
data. However, it plays a significant role in the project. For this
study the secondary data was collected from the following sources.
Books related to risk management and insurance Websites related to
risk management and insurance.Limitations The study is limited due
to constraint of time and information available Possibility of
error in data collection because many of respondent may have not
given actual answers of questionnaire. This project only talks
about three risk analysis tools there are others tools also which
can be used. The study had done only on 100 respondents.
Data analysisRisk and Need analysis As a customer you should
always know your value in the market so that you can take a police
according to your exact value. Three various approaches are used to
determine the amount of life insurance to own:1. Human life value
approach2. Needs approach3. Capital retention approach
Human life value approachHLV can be defined as the present value
of the familys share of the deceased breadwinners future earnings.
It can be calculated by the following steps:1. Estimate the
individuals average annual earnings over his or her productive
lifetime.2. Deduct federal and state income taxes, social security
taxes, life and health insurance premiums and cost of self
maintenance.3. Determine the number of years from persons present
age to the contemplated age of retirement.4. Using a reasonable
discount rate, determine the present value of the familys share of
earnings for the period in the previous step.Examples: Assume that
Raj, age 25 is married and has two children. He earns Rs25000
annually and plans to retire at age of 65. Of this amount Rs10000
is use for federal and state taxes, life and health insurance and
his personal needs. The remaining 15000 is used to support his
family. What should be value of insurance if discount rate is
6%?
Solution: Using the give discount rate the present value of Rs1
payable annual for 40 years is Rs15.05 So Raj has a human life
value of (15000*15.05)= Rs225750 Needs approach The second method
for estimating the amount of life insurance to own is the needs
approach. The various family needs that must be met if the family
head will die are analysed. The most important family needs are
following:- Estate clearance fun Income during the readjustment
period Income during the dependency period Life income to the
surviving purpose Special needs Retirement needs
By the help of need analysis chart we can know the amount of
insurance we need in the following ways-Cash needs
Funeral cost10000
Uninsured medical bills3000
Instalment debts12000
Probate cost3000
Total estate clearance fund28000
Income needs
Readjustment period14400
Dependency period108000
Total income needs122,400
Special needs
Mortgage redemption fund
Emergency Fund
College education fund
Total special need 235000
Total need385400
Checking account and savings10000
Mutual fund and Securities25,000
IRAS PLAN4200
Employer saving plan4500
Private pension death plan10000
Current life insurance50000
Total assets103400
Additional life insurance needed
Total needs 385400
Less total assets103700
Additional life insurance needed281700
The first part of worksheet shows the amount needed to meet
various cash needs, income needs and special needs. The second part
analyse your present financial assets for meeting these needs and
the final part determine the amount of life insurance needed.
Capital retention approachThis method preserves the capital
needed to provide income to the family. This methods works in
following step: Prepare a personal balance sheet Determine the
amount of income producing capital Determine the amount of
additional capital needed
Preparing a personal balance sheet: The first step is to prepare
a personal balance sheet that lists all assets and liabilities
.Example AssetsHouse125000
Automobiles15000
Personal and household property45000
Securities and investment28000
Checking account 2000
Individual and group life insurance200000
Private pension death plan20000
Total435000
LiabilitiesMortgage100000
Auto loan10000
Charge a/c and other bills5000
Total115000
Determining the Amount of income-Producing Capital The next step
is to determine the amount of income producing assets that can
provide income to the family. This step is performed as
follows:
Total assets435000
Less:
Mortgage payoff100000
Auto loan and credit
Credit card15000
Final expenses 10000
Emergency fund10000
Educational fund60000
Non income producing capital185000
Total deduction380000
Capital income now available550000
Determining the amount of capital needed The final step involves
a comparison of the income objective with other sources of income
such as Social security survivor benefits.ExampleIncome objective
for family30000
Less:
Capital now available for income (55000*6%)-33000
Social security survivor benefits-12000
Income shortage147000
Total new capital Required(14700/00.6)245000
So these three analysis tools can be used by the customer to
determine the exact value of a life insurance required customer to
support their family. It will also help them to decide on which
type of polices they should invest according to their
requirements.It will also help in determining amount of risk in
that policy.
Percentage analysisQUESTION NO. 1)Businessman54
Professional35
Students6
Housewife5
Table no. 4.1
Figure 4.1Interpretation:Out of 100 respondents, maximum
respondents belong to business class,followed by professional,then
studentsand the minimum respondents are from housewife.
QUESTION NO. 2)Having insurance already
S.NO.ParticularResponse
AYes92
BNo8
Table no. 4.2
Figure 4.2Interpretation:From above chart,we can infer that 92%
respondents already have insurance policies, whereas 8 % does not
have insurance policies.
QUESTION NO. 3)Awareness of life insurance companies
OptionParticularResponse
aPrint media20
bElectronic media25
cAgents50
dOther5
Table no. 4.3
Figure 4.3
Interpretation:From this chart we can say that majority of
respondents are aware of insurance policies through agents,
followed by electronic media, then print media.
QUESTION NO. 4)Main purpose to buy insurance policies
OptionParticularResponse
ATax Saving24
BSavings15
CProtection49
DPension10
EInvestment2
Table no. 4.4
Figure 4.4INTERPRETETION:On the basis of above analysis,we can
interpret that main reason for buying insurance policies is because
of security reasons as 49% of respondent agreed with it.
QUESTION 5)Your preference in buying Insurance policies
OptionParticularResponse
aGoodwill of the company 19
bRange of products 20
cFeatures of the product 50
dServices offered by company 6
eReturns of the bonds5
Table no. 4.5
Figure 4.5INTERPRETETION:The graph shows that 50 out of 100
respondents buy an insurance policy after looking at the features
of the product which is followed by 20 respondent who looks at
different range of products and 19 looks at good will of companies.
So the products with good features have more demand among
customers.QUESTION 6)you purchase an insurance police under someone
else influence
OptionParticularResponse
aYes63
bNo37
Table no. 4.6
Figure 4.6INTERPRETETION:According to graph out of 100
respondent 63% agreed that they buy insurance due to someone else
influence not according to their requirement.
QUESTION 7) Done need analysis before buying an insurance
police
OptionParticularResponse
aYes33
bNo67
Table no. 4.7
Figure 4.7INTERPRETETION:According to the graph out of 100
respondent 67 customers do not prefer to do need analysis before
buying insurance policies. It shows that customer do not look at
their needs before buying an insurance policies
QUESTION NO. 8)Insurance plan you prefer to buys
OptionParticularResponse
aProtection plan 57
bInvestment plans9
cPension plan 10
dchildren plan 24
Table no. 4.8
Figure 4.8INTERPRETETION:On the basis of above analysis we can
say that customers are more interested in protection plan and
children plan only. It shows that customers do not think insurance
as an investment opportunity.
QUESTION NO. 9)Expectations from life insurance companies
OptionParticularResponse
aInnovative Products 5
bAttractive Riders 2
cReasonable Premium 47
dBetter Customer Service 24
eHigh Risk Coverage 22
Table no. 4.9
Figure 4.9INERPRETETION:The graph shows out of 100 respondent 47
expect reasonable premium from insurance companies. So it shows
that people prefer to buy insurance policies when the premium is
low.
Question No. 10)satisfied with previous insurance plan you
bought
Done need analysis
OptionParticularResponse
ayes19
bno12
ccan't say2
Table no. 4.10(a)
Not did need analysis
OptionParticularResponse
ayes20
bno44
ccan't say3
Interpretation:According to graph 20 out of 67 respondents who
not did need analysis are not satisfied with their insurance plan
which is 27% and 19 out of 31 respondents who did need analysis are
satisfied with their insurance plan which is 61%. It shows that
more percentage of people will satisfied with their police if they
will do need analysis.
FindingsThe findings drawn during the project are as follows: In
occupation group most of the customers werebusiness man and second
most customers were self-employed and least was associated with
government services. Awareness about life insurance companies were
mostly done by agents. Out of 100 respondent 49% of buy an
insurance policy for security purpose and 24% to save tax. Only 33%
of customers do need analysis before buying an insurance policy.
Most of the customers looked for a reasonable premium before buying
an insurance policy. Most of the customers purchase insurance
policy under the influence of someone else. Customers who do need
analysis before buying an insurance policy were most satisfied with
their products. Most of the respondent like to buy a protection
plan polices which was followed by child plan. Knowledge about
different tools that can be used to calculate need analysis.
SUGGESTIONS Customers should be made more aware of need analysis
as there is low awareness level among them. Insurance companies
should take more effort in spreading awareness about need analysis
calculation. Insurance companies should also give training to their
advisors to explain about need analysis calculation to customer
properly as customer how do need analysis are more satisfied with
their policies. Insurance companies should have a reasonable
premium rate as most of the customers prefer so.
CONCLUSION
Insurance sector in India is growing at a very high rate and it
is expected to grow more in future. This study had made an attempt
to understand to understand the various risk involves in investing
in insurance an how to manage those risk. I observed that most of
the people buy an insurance police under someones influence and not
according to their requirement. Also there is a very low awareness
about need analysis calculation. Many people do not pay their
premium as they did not purchase their policies according to their
requirement. Customer satisfaction plays a very important role in
increasing the market share of the company and it is very hard to
get. So insurance companies should sell their insurance policies
according to needs of customers in this way they can easily acquire
customers loyalty.
NAME
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AGE ----------- Nationality ----------------------- Income
--------------- Contact number
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Q1) Occupation a) Businessman [ ] b) Professional [ ] c) Students [
] d) House wife [ ] Q.2) Do u have Insurance? a)Yes[ ] b) No[ ]Q.3)
Awareness of Life Insurance Companies:- a)Print media[ ]
b)Electronic media [ ]
c) Agents [ ] d) Others [ ]Q.4) what is the main purpose to buy
insurance policies? a) Tax [ ] b) Saving [ ] c) Protection [ ] d)
Pension [ ] e) Investment [ ]
Q.5)whatdo you look in an insurance policy before buying it?a)
Goodwill of the company [ ] b) Range of products [ ] c) Features of
the product [ ] d) Services offered by company [ ] f) Returns of
the bonds[ ]
Q.6) Do you purchase an insurance police under someone else
influence?
a) yes [ ]b) No[ ]
Q.7) I prefer to do need analysis before buying an insurance
police:-a) Yes[ ]b) No [ ]Q.8)WhichInsurance plan you prefer to
buys?a) Protection plan [ ]b) Investment plans [ ] c) Pension plan
[ ] d) children plan [ ]
Q.9) what do you expect from life insurance companies?a)
Innovative Products [ ] b) Attractive Riders [ ] c) Reasonable
Premium [ ]d) Better Customer service [ ] e) High Risk Coverage [ ]
Q.10) Are you satisfied with previous insurance plan you bought ?
A) Customer who do need analysis:_a) yes [ ] b) no [ ]
c) cant say [ ]
B) Customer who do not did need analysis:
a) yes [ ] b) no [ ]
c) cant say [ ]
1