INTRODUCTION 1.1 Asset Allocation Asset Allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon. The three main asset classes - equities, fixed-income, and cash and equivalents - have different levels of risk and return, so each will behave differently over time. There is no simple formula that can find the right asset allocation for every fund. However, the consensus among most financial professionals is that asset allocation is one of the most important decisions that fund managers make. In other words, the selection of individual securities is secondary to the way fund managers allocate the fund assets in stocks, bonds, and cash and equivalents, which will be the principal determinants of the fund’s performance. Asset-allocation of funds, also known as life-cycle, or target-date, funds, are an attempt to provide customers with portfolio structures based on the variety of funds that address a customer’s age, risk appetite and investment objectives with an appropriate apportionment of asset 1
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INTRODUCTION
1.1 Asset Allocation
Asset Allocation is an investment strategy that aims to balance risk and reward
by apportioning a portfolio's assets according to an individual's goals, risk
tolerance and investment horizon.
The three main asset classes - equities, fixed-income, and cash and equivalents
- have different levels of risk and return, so each will behave differently over time.
There is no simple formula that can find the right asset allocation for every fund.
However, the consensus among most financial professionals is that asset
allocation is one of the most important decisions that fund managers make. In
other words, the selection of individual securities is secondary to the way fund
managers allocate the fund assets in stocks, bonds, and cash and equivalents,
which will be the principal determinants of the fund’s performance.
Asset-allocation of funds, also known as life-cycle, or target-date, funds, are an
attempt to provide customers with portfolio structures based on the variety of
funds that address a customer’s age, risk appetite and investment objectives with
an appropriate apportionment of asset classes. However, critics of this approach
point out that arriving at a standardized solution for allocating portfolio assets is
problematic because every fund managers invests differently.
1.2 Fund Management
Fund Management is the professional management of various securities and
assets (e.g., real estate) in order to meet specified investment goals for the
benefit of the investors. Investors may be institutions (insurance companies,
pension funds, corporations etc.) or private investors (both directly via investment
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contracts and more commonly via collective investment schemes e.g. mutual
funds or Insurance).
The term Fund management is often used to refer to the investment
management of collective investments, while the more generic fund management
may refer to all forms of institutional investment as well as investment
management for private investors. Investment managers who specialize in
advisory or discretionary management on behalf of private investors may often
refer to their services as wealth management or portfolio management often
within the context of so-called "private banking".
The provision of 'investment management services' includes elements of
financial statement analysis, asset selection, stock selection, plan
implementation and ongoing monitoring of investments. Investment management
is a large and important global industry in its own right responsible for caretaking
of trillions of yen, dollars, euro, pounds and yen. Coming under the ambit of
financial services many of the world's largest companies are at least in part
investment managers and employ millions of staff and create billions in revenue.
Fund manager refers to both a firm that provides investment management
services and an individual who directs fund management decisions.
1.3 Fund Manager
The person(s) responsible for implementing a fund's investing strategy and
managing its portfolio trading activities. A fund can be managed by one person,
by two people as co-managers and by a team of three or more people. Fund
managers are paid a fee for their work, which is a percentage of the fund's
average assets under management.
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1.4 Size of the global fund management industry
Conventional assets under management of the global fund management industry
increased by 14% in 2009, to $71.3 trillion. Pension assets accounted for $28.0
trillion of the total, with $22.9 trillion invested in mutual funds and $20.4 trillion in
insurance funds. Together with alternative assets (sovereign wealth funds, hedge
funds, private equity funds and exchange traded funds) and funds of wealthy
individuals, assets of the global fund management industry totaled over $105
trillion, an increase of 15% on the previous year. The increase in 2009 followed a
18% decline in the previous year and was largely a result of the recovery in
equity markets during the year. Part of the reason for the increase in dollar terms
was the depreciation in the value of the US dollar against a number of currencies
in 2009.
The US remained by far the biggest source of funds, accounting for around a half
of conventional assets under management or some $36 trillion. The UK was the
second largest centre in the world and by far the largest in Europe with around
9% of the global total.
1.5 Performance measurement
Fund performance is often thought to be the acid test of fund management, and
in the institutional context, accurate measurement is a necessity. For that
purpose, institutions measure the performance of each fund (and usually for
internal purposes components of each fund) under their management, and
performance is also measured by external firms that specialize in performance
measurement. The leading performance measurement firms compile aggregate
industry data, e.g., showing how funds in general performed against given
indices and peer groups over various time periods.
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In a typical case (let us say an equity fund), then the calculation would be made
(as far as the client is concerned) every quarter and would show a percentage
change compared with the prior quarter (e.g., +4.6% total return in US dollars).
This figure would be compared with other similar funds managed within the
institution (for purposes of monitoring internal controls), with performance data
for peer group funds, and with relevant indices (where available) or tailor-made
performance benchmarks where appropriate. The specialist performance
measurement firms calculate quartile and decile data and close attention would
be paid to the ranking of any fund.
Generally speaking, it is probably appropriate for an investment firm to persuade
its clients to assess performance over longer periods (e.g., 3 to 5 years) to
smooth out very short term fluctuations in performance and the influence of the
business cycle. This can be difficult however and, industry wide, there is a
serious preoccupation with short-term numbers and the effect on the relationship
with clients (and resultant business risks for the institutions).
An enduring problem is whether to measure before-tax or after-tax performance.
After-tax measurement represents the benefit to the investor, but investors' tax
positions may vary. Before-tax measurement can be misleading, especially in
regimens that tax realized capital gains (and not unrealized). It is thus possible
that successful active managers may produce miserable after-tax results. One
possible solution is to report the after-tax position of some standard taxpayer.
1.6 Risk-adjusted performance measurement
Performance measurement should not be reduced to the evaluation of fund
returns alone, but must also integrate other fund elements that would be of
interest to investors, such as the measure of risk taken. Several other aspects
are also part of performance measurement: evaluating if managers have
succeeded in reaching their objective, i.e. if their return was sufficiently high to
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reward the risks taken; how they compare to their peers; and finally whether the
portfolio management results were due to luck or the manager’s skill. The need
to answer all these questions has led to the development of more sophisticated
performance measures, many of which originate in modern portfolio theory.
Modern portfolio theory established the quantitative link that exists between
portfolio risk and return. The Capital Asset Pricing Model (CAPM) developed by
Sharpe (1964) highlighted the notion of rewarding risk and produced the first
performance indicators, be they risk-adjusted ratios (Sharpe ratio, information
ratio) or differential returns compared to benchmarks (alphas). The Sharpe ratio
is the simplest and best known performance measure. It measures the return of a
portfolio in excess of the risk-free rate, compared to the total risk of the portfolio.
This measure is said to be absolute, as it does not refer to any benchmark,
avoiding drawbacks related to a poor choice of benchmark. Meanwhile, it does
not allow the separation of the performance of the market in which the portfolio is
invested from that of the manager. The information ratio is a more general form
of the Sharpe ratio in which the risk-free asset is replaced by a benchmark
portfolio. This measure is relative, as it evaluates portfolio performance in
reference to a benchmark, making the result strongly dependent on this
benchmark choice.
Portfolio alpha is obtained by measuring the difference between the return of the
portfolio and that of a benchmark portfolio. This measure appears to be the only
reliable performance measure to evaluate active management. In fact, we have
to distinguish between normal returns, provided by the fair reward for portfolio
exposure to different risks, and obtained through passive management, from
abnormal performance (or outperformance) due to the manager’s skill (or luck),
whether through market timing, stock picking, or good fortune. The first
component is related to allocation and style investment choices, which may not
be under the sole control of the manager, and depends on the economic context,
while the second component is an evaluation of the success of the manager’s
decisions. Only the latter, measured by alpha, allows the evaluation of the
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manager’s true performance (but then, only if you assume that any
outperformance is due to skill and not luck).
Portfolio return may be evaluated using factor models. The first model, proposed
by Jensen (1968), relies on the CAPM and explains portfolio returns with the
market index as the only factor. It quickly becomes clear, however, that one
factor is not enough to explain the returns very well and that other factors have to
be considered. Multi-factor models were developed as an alternative to the
CAPM, allowing a better description of portfolio risks and a more accurate
evaluation of a portfolio's performance. For example, Fama and French (1993)
have highlighted two important factors that characterize a company's risk in
addition to market risk. These factors are the book-to-market ratio and the
company's size as measured by its market capitalization. Fama and French
therefore proposed three-factor model to describe portfolio normal returns
(Fama-French three-factor model). Carhart (1997) proposed to add momentum
as a fourth factor to allow the short-term persistence of returns to be taken into
account. Also of interest for performance measurement is Sharpe’s (1992) style
analysis model, in which factors are style indices. This model allows a custom
benchmark for each portfolio to be developed, using the linear combination of
style indices that best replicate portfolio style allocation, and leads to an accurate
evaluation of portfolio alpha.
In life insurance the funds collected for traditional policies go to life fund. Those
funds are managed by the insurance company based on the IRDA regulations.
The new form of investment in insurance is through ULIPs (Unit Linked Insurance
Policies). These are also regulated by IRDA but here the collected fund is
invested in various assets to generate high return compared to normal policies
which provide risk cover and a small return. Here the role of fund manager is to
make such a portfolio, which will generate a continuous return to the investors.
Fund manager has to have a close look on the portfolio growth and structure.
Because the investors invest in ULIPs only when they need both risk cover and
return. Most of them don’t have the needed knowledge to invest in equity market
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efficiently. Here the fund manager comes in to help. He will be a knowledgeable
person who should be aware of the market behavior.
1.7 Theoretical Back Ground
ULIPs
Meaning
A unit-linked insurance plan (ULIP) is a type of life insurance where the cash
value of a policy varies according to the current net asset value of the underlying
investment assets. It allows protection and flexibility in investment, which are not
present in other types of life insurance such as whole life policies. The premium
paid is used to purchase units in investment assets chosen by the policyholder
How ULIPs work
ULIPs work on the lines of mutual funds. The premium paid by the client (less
any charge) is used to buy units in various funds (aggressive, balanced or
conservative) floated by the insurance companies. Units are bought according to
the plan chosen by the policyholder. On every additional premium, more units are
allotted to his fund. The policyholder can also switch among the funds as and
when he desires. While some companies allow any number of free switches to
the policyholder, some restrict the number to just three or four. If the number is
exceeded, a certain charge is levied.
Individuals can also make additional investments (besides premium) from time to
time to increase the savings component in their plan. This facility is termed "top-
up". The money parked in a ULIP plan is returned either on the insured's death or
in the event of maturity of the policy. In case of the insured person's untimely
death, the amount that the beneficiary is paid is the higher of the sum assured
(insurance cover) or the value of the units (investments). However, some
schemes pay the sum assured plus the prevailing value of the investments.
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Types of ULIPs
ULIPs for retirement planning
ULIPs for long term wealth creation
ULIPs for child education
ULIPs for health solutions
Recent modification in ULIPs by IRDA
Initial charges: Premium paid by investors in ULIPs is partly used for insurance
and partly for making investments. However, for the first 2 -3 years of the term of
the policy, insurance companies charged heavily. Sometimes insurance
companies diverted as much as 80 percent of the premium payments towards
these charges.
Initial charges are basically used for administration charges, processing fees etc.
Therefore the charges should be extremely low.
Facility to surrender policy: Sometimes policyholders need immediate funds,
and then they opt to surrender their policy. But the problem is, the long term
consequences of surrendering the policy early had an adverse impact on the
policyholder's investments.
The surrender charges on policy were high. Some companies confiscated up to
60 per cent of the policy value in case the policyholder surrendered his policy.
ULIPs give back most when it’s invested as long term basis. Hence early
withdrawal should be discouraged.
Advantages
1. The accretion to the fund invested can be checked on daily basis unlike
the traditional policies.
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2. There is lot more flexibility like partial withdrawal, switching, redirection,
early withdrawal, Sum Assured reduction, top up contribution, etc....
3. Charges are transparent in nature, with the latest AML guidelines insisting
on common nomenclature of charges for all insurance companies.
4. The customer can time the market by exercising switch options and make
the most when markets are zooming or choose to be conservative when
markets are falling. It’s thus win-win situation
5. He gets a life cover at a nominal cost unlike mutual funds,
6. Stages in one life like education of children, marriage, and retirement
needs can be soundly planned by the help of ULIPs.
7. Tax advantages are also offered by the ULIPs.
Disadvantages
1. Investors find it difficult to understand capital market and how ulips works
2. ULIPS are attractive for risk taking people and less attractive for risk
adverse people
3. Some consider taking term insurance and a mutual fund as a combination
to beat the ULIP.
4. Some consider charges levied exorbitant and not commensurate to the
returns offered.
5. The complicated design of the policies makes them less aware of the
product features and chances of misuse by agents are very high.
The Role of a fund Manager
The Prime Goal of a Fund Manager is to monitor and manage the securities (in
the form of stocks, bonds amongst others) to meet the investment goals and
objectives of the customers (investors). The services include financial analysis on
the investments, the assets that are invested upon and the stocks selected. The
plan and strategy that is implemented is also to be closely monitored so that in
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the longer run, risks on loosing out on major dividends can be avoided. A
certified company investment advisor should conduct an assessment of each
client's individual needs and risk profile. The advisor then recommends
appropriate investments. The art of managing investments is an important aspect
in its own right and involves a lot of money at a single moment taking care of
trillions of dollars, euro, pounds and yen and other major Global economies.
The budget of an investment management firm directly depends on the Asset
Allocation that is made by the Fund Manager for the investors. Asset Allocation
involves a lot of money at stake at a go, because at one time you are investing
one more than one commodity. Moreover Asset Allocation has more predictive
power than the choice of individual holdings in determining portfolio/investment
return. The real test and skill proof of a Fund Manager truly lies in handling asset
allocations and individual investments separately so that the competition that the
investment faces from other competing funds is handled with care. Another
important factor that a Fund Manager has got to take care of is the diversification
in assets once an investment is being made. It is always advisable to investors to
invest in more then one commodities at a time. A fund does fluctuate and varies
with market conditions, so if an investor looses out on the dividend from one
investment he has the other to gain from. As it is people investing in Mutual
Funds do gain from long term returns.
There are numerous ways to invest in a Fund. It depends upon the risk you are
willing to undertake and your expected dividends from your investments. Fund
performance is the main test of fund management and for the investment
management firm as well. In order to be sure that fund they are monitoring, the
firm measures the performance of each fund they are managing. The
performance of a Fund shouldn't be decided on the returns provided alone, as
there are several other factors associated with it. Whether the return was worth
the risk taken, Performance of the fund compared to their competitors and finally
whether the portfolio management results were due to luck or the manager's skill.
A Fund Manager is hence compared to God when it comes to Fund Investments.
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ULIPs is almost similar to Mutual funds. Only difference in ULIPs is it covers the
risk also.
Major Problems For fund Management Companies
revenue is directly linked to market valuations, so a major fall in asset
prices causes a precipitous decline in revenues relative to costs;
above-average fund performance is difficult to sustain, and clients may not
be patient during times of poor performance;
successful fund managers are expensive and may be headhunted by
competitors;
above-average fund performance appears to be dependent on the unique
skills of the fund manager; however, clients are loath to stake their
investments on the ability of a few individuals- they would rather see firm-
wide success, attributable to a single philosophy and internal discipline;
Analysts who generate above-average returns often become sufficiently
wealthy that they avoid corporate employment in favor of managing their
personal portfolios.
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INDUSTRY PROFILE
THE INSURANCE INDUSTRY IN INDIA
AN OVERVIEW
With the largest number of life insurance policies in force in the world, Insurance
happens to be a mega opportunity in India. It’s a business growing at the rate of
15-20 per cent annually and presently is of the order of Rs 1560.41
billion .Together with banking services, it adds about 7% to the country’s Gross
Domestic Product (GDP). The gross premium collection is nearly 2% of GDP and
funds available with LIC for investments are 8% of the GDP.
Even so nearly 65% of the Indian population is without life insurance cover while
health insurance and non-life insurance continues to be below international
standards. A large part of our population is also subject to weak social security
and pension systems with hardly any old age income security. This in itself is an
indicator that growth potential for the insurance sector in India is immense.
A well-developed and evolved insurance sector is needed for economic
development as it provides long term funds for infrastructure development and
strengthens the risk taking ability of individuals. It is estimated that over the next
ten years India would require investments of the order of one trillion US dollars.
The Insurance sector, to some extent, can enable investments in infrastructure
development to sustain the economic growth of the country.
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HISTORICAL PERSPECTIVE
The history of life insurance in India dates back to 1818 when it was conceived
as a means to provide for English Widows. Interestingly in those days a higher
premium was charged for Indian lives than the non - Indian lives, as Indian lives
were considered more risky to cover. The Bombay Mutual Life Insurance Society
started its business in 1870. It was the first company to charge the same
premium for both Indian and non-Indian lives.
The Oriental Assurance Company was established in 1880. The General
insurance business in India, on the other hand, can trace its roots to Triton
Insurance Company Limited, the first general insurance company established in
the year 1850 in Calcutta by the British. Till the end of the nineteenth century
insurance business was almost entirely in the hands of overseas companies.
Insurance regulation formally began in India with the passing of the Life
Insurance Companies Act of 1912 and the Provident Fund Act of 1912. Several
frauds during the 1920's and 1930's sullied insurance business in India. By 1938
there were 176 insurance companies.
The first comprehensive legislation was introduced with the Insurance Act of
1938 that provided strict State Control over the insurance business. The
insurance business grew at a faster pace after independence. Indian companies
strengthened their hold on this business but despite the growth that was
witnessed, insurance remained an urban phenomenon.
The Government of India in 1956, brought together over 240 private life insurers
and provident societies under one nationalized monopoly corporation and Life
Insurance Corporation (LIC) was born. Nationalization was justified on the
grounds that it would create the much needed funds for rapid industrialization.
This was in conformity with the Government's chosen path of State led planning
and development.
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The non-life insurance business continued to thrive with the private sector till
1972. Their operations were restricted to organized trade and industry in large
cities. The general insurance industry was nationalized in 1972. With this, nearly
107 insurers were amalgamated and grouped into four companies- National
Insurance Company, New India Assurance Company, Oriental Insurance
Company and United India Insurance Company. These were subsidiaries of the
General Insurance Company (GIC).
KEY MILESTONES
a) 1912: The Indian Life Assurance Companies Act enacted as the first
statute to regulate the life insurance business.
b) 1928: The Indian Insurance Companies Act enacted to enable the
government to collect statistical information about both life and non-life
insurance businesses.
c) 1938: Earlier legislation consolidated and amended by the Insurance Act
with the objective of protecting the interests of the insuring public.
d) 1956: 245 Indian and foreign insurers along with provident societies were
taken over by the central government and nationalized. LIC was formed by
an Act of Parliament- LIC Act 1956- with a capital contribution of Rs. 5
crore from the Government of India.
INDUSTRY REFORMS
Reforms in the Insurance sector were initiated with the passage of the IRDA 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. Since being set up as an
independent statutory body the IRDA has put in a framework of globally
compatible regulations.
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The other decision taken simultaneously to provide the supporting systems to the
insurance sector and in particular the life insurance companies was the launch of
the IRDA 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.
PRESENT SCENARIO - LIFE INSURANCE INDUSTRY IN INDIA
The life insurance industry in India grew by an impressive 47.38%, with premium
income at Rs. 1560.41 billion during the fiscal year 2006-2007.
The 17 private insurers increased their market share from about 15% to about
19% in a year's time. The figures for the first two months of the fiscal year 2007-
08 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.
With the opening up of the insurance industry in India many foreign players have
entered the market. The restriction on these companies is that they are not
allowed to have more than a 26% stake in a company’s ownership. Since the
opening up of the insurance sector in 1999, foreign investments of Rs. 8.7 billion
have poured into the Indian market and 19 private life insurance 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. Some of these products include investment plans
with insurance and good returns (unit linked plans), multi – purpose insurance
plans, pension plans, child plans and money back plans.
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LIFE INSURANCE CORPORATION OF INDIA (LIC)
Life Insurance Corporation of India (LIC) was formed in September, 1956 by an
Act of Parliament, viz., Life Insurance Corporation Act, 1956, with capital
contribution from the Government of India. The then Finance Minister, Shri C.D.
Deshmukh, while piloting the bill, outlined the objectives of LIC thus: to conduct
the business with the utmost economy, in a spirit of trusteeship; to charge
premium no higher than warranted by strict actuarial considerations; to invest the
funds for obtaining maximum yield for the policy holders consistent with safety of
the capital; to render prompt and efficient service to policy holders, thereby
making insurance widely popular.
Since nationalisation, LIC has built up a vast network of 2,048 branches, 100
divisions and 7 zonal offices spread over the country. The Life Insurance
Corporation of India also transacts business abroad and has offices in
Fiji, Mauritius and United Kingdom. LIC is associated with joint ventures abroad
in the field of insurance, namely, Ken-India Assurance Company Limited, Nairobi;
United Oriental Assurance Company Limited, Kuala Lumpur and Life Insurance
Corporation (International) E.C. Bahrain. The Corporation has registered a joint
venture company in 26th December, 2000 in Kathmandu, Nepal by the name of
Life Insurance Corporation (Nepal) Limited in collaboration with Vishal Group
Limited, a local industrial Group. An off-shore company L.I.C. (Mauritius) Off-
shore Limited has also been set up in 2001 to tap the African insurance market.
SOME AREAS OF FUTURE GROWTH
Life Insurance
The traditional life insurance business for the LIC has been a little more than a
savings policy. Term life (where the insurance company pays a predetermined
amount if the policyholder dies within a given time but it pays nothing if the
policyholder does not die) has accounted for less than 2% of the insurance
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premium of the LIC (Mitra and Nayak, 2001). For the new life insurance
companies, term life policies would be the main line of business.
Health Insurance
Health insurance expenditure in India is roughly 6% of GDP, much higher than
most other countries with the same level of economic development. Of that, 4.7%
is private and the rest is public. What is even more striking is that 4.5% are out of
pocket expenditure (Berman, 1996). There has been an almost total failure of the
public health care system in India. This creates an opportunity for the new
insurance companies.
Thus, private insurance companies will be able to sell health insurance to a vast
number of families who would like to have health care cover but do not have it.
Pension
The pension system in India is in its infancy. There are generally three forms of
plans: provident funds, gratuities and pension funds. Most of the pension
schemes are confined to government employees (and some large companies).
The vast majority of workers are in the informal sector. As a result, most workers
do not have any retirement benefits to fall back on after retirement. Total assets
of all the pension plans in India amount to less than USD 40 billion.
Therefore, there is a huge scope for the development of pension funds in India.
The finance minister of India has repeatedly asserted that a Latin American style
reform of the privatized pension system in India would be welcome (Roy, 1997).
Given all the pros and cons, it is not clear whether such a wholesale privatization
would really benefit India or not (Sinha, 2000).
List of insurance companies in India
Life Insurer in Public Sector
1. SBI Life Insurance
2. Metlife India Life Insurance
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3. ICICI Prudential Life Insurance
4. Bajaj Allianz Life
5. Max New York Life Insurance
6. Sahara Life Insurance
7. Tata AIG Life
8. HDFC Standard Life
9. Birla Sun life
10.Kotak Life Insurance
11.Aviva Life Insurance
12.Reliance Life Insurance Company Limited - Formerly known as AMP Sanmar
LIC
13. ING Vysya Life Insurance
14.Shriram Life Insurance
15.Bharti AXA Life Insurance Co Ltd
16.Future Generali Life Insurance Co Ltd
17. IDBI Fortis Life Insurance
18.AEGON Religare Life Insurance
19.DLF Pramerica Life Insurance
20.CANARA HSBC Oriental Bank of Commerce LIFE INSURANCE
21. India First Life insurance company limited
22.Star Union Dia-ichi Life Insurance Co. Ltd
INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY OF INDIA
The Insurance Regulatory and Development Authority (IRDA) is a national
agency of the Government of India, based in Hyderabad. It was formed by an act
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of Indian Parliament known as IRDA Act 1999, which was amended in 2002 to
incorporate some emerging requirements. Mission of IRDA as stated in the act is
"to protect the interests of the policyholders, to regulate, promote and ensure
orderly growth of the insurance industry and for matters connected therewith or
incidental thereto."In 2010, the Government of India ruled that the Unit Linked
Insurance Plans (ULIPs) will be governed by IRDA, and not the market regulator
Securities and Exchange Board of India
DUTIES, POWERS AND FUNCTIONS OF IRDA
Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of
IRDA
1. Subject to the provisions of this Act and any other law for the time being in
force, the Authority shall have the duty to regulate, promote and ensure
orderly growth of the insurance business and re-insurance business.
2. Without prejudice to the generality of the provisions contained in sub-
section (1), the powers and functions of the Authority shall include,
1. issue to the applicant a certificate of registration, renew, modify,
withdraw, suspend or cancel such registration;
2. protection of the interests of the policy holders in matters
concerning assigning of policy, nomination by policy holders,
insurable interest, settlement of insurance claim, surrender value of
policy and other terms and conditions of contracts of insurance;
3. specifying requisite qualifications, code of conduct and practical
training for intermediary or insurance intermediaries and agents;
4. specifying the code of conduct for surveyors and loss assessors;
5. promoting efficiency in the conduct of insurance business;
6. promoting and regulating professional organizations connected with
the insurance and re-insurance business;
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7. levying fees and other charges for carrying out the purposes of this
Act;
8. calling for information from, undertaking inspection of, conducting
enquiries and investigations including audit of the insurers,
intermediaries, insurance intermediaries and other organizations
connected with the insurance business;
9. control and regulation of the rates, advantages, terms and
conditions that may be offered by insurers in respect of general
insurance business not so controlled and regulated by the Tariff
Advisory Committee under section 64U of the Insurance Act, 1938
(4 of 1938);
10.specifying the form and manner in which books of account shall be
maintained and statement of accounts shall be rendered by
insurers and other insurance intermediaries;
11. regulating investment of funds by insurance companies;
12. regulating maintenance of margin of solvency;
13.adjudication of disputes between insurers and intermediaries or
insurance intermediaries;
14.supervising the functioning of the Tariff Advisory Committee;
15.specifying the percentage of premium income of the insurer to
finance schemes for promoting and regulating professional
organizations referred to in clause (f);
16.specifying the percentage of life insurance business and general
insurance business to be undertaken by the insurer in the rural or
social sector; and
17.Exercising such other powers as may be prescribed from time to
time.
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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.
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.
The institution of Insurance Ombudsman was created by a Government of India
Notification dated 11th November, 1998 with the purpose of quick disposal of
the grievances of the insured customers and to mitigate their problems involved
in redressal of those grievances. This institution is of great importance and
relevance for the protection of interests of policy holders and also in building
their confidence in the system.The institution has helped to generate and
sustain the faith and confidence amongst the consumers and insurers.
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Insurance Ombudsman
The governing body of insurance council issues orders of appointment of the
insurance Ombudsman on the recommendations of the committee comprising of
Chairman, IRDA, Chairman, LIC, Chairman, GIC and a representative of the
Central Government. Insurance council comprises of members of the Life
Insurance council and general insurance council formed under Section 40 C of
the Insurance Act, 1938. The governing body of insurance council consists of
representatives of insurance companies.
Terms of office
An insurance Ombudsman is appointed for a term of three years or till the
incumbent attains the age of sixty five years, whichever is earlier. Re-
appointment is not permitted..
Territorial jurisdiction of Ombudsman
The governing body has appointed twelve Ombudsmen across the country
allotting them different geographical areas as their areas of jurisdiction. The
Ombudsman may hold sitting at various places within their area of jurisdiction in
order to expedite disposal of complaints. The offices of the twelve insurance
Ombudsmen are located at (1) Bhopal, (2) Bhubaneswar, (3) Cochin, (4)