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Submitted in partial fulfillment of the requirement for Post Graduate Diploma in Management
Submitted by Harish Babu Mulluri Roll No: 2B2-15, BIFAAS 2011- 2013
Siva Sivani Institute of Management, Kompally, Secunderabad- 500014
Letter from Company
I hereby declare that the project work ―A Study on Investor’s Perception on Unit Linked Insurance Policies‖ submitted to Siva Sivani Institute of Management, is a record of an original work done by me under the guidance of Mr. D.Sreekanth, Asst. Professor-Finance Siva Sivani Institute of Management, Secunderabad and this project work is submitted in the partial fulfillment of the requirement for the award of Post Graduate Diploma in Management. The results embodied in this report have not been submitted to any other University or Institute for the award of any degree or diploma.
Harish Babu Mulluri 2B2-15
I certify that the dissertation titled ―A Study on Investor‘s Perception on Unit Linked Insurance Policies‖, submitted to Siva Sivani Institute of Management, Secunderabad, and is an original research work carried out by Mr. Harish Babu Mulluri under my supervision.
Mr. D.Sreekanth Asst.Professor
First and foremost, I sincerely thank to my industry guide Mr. Abhay Pratap Singh, Relationship Manager-Reliance Securities, Somajiguda, Andhra Pradesh for his guidance and encouragement in carrying out this project work. I would like to show my deep sense of gratitude to internal project guide, Mr. D.Sreekanth, Asst. Professor, Finance, Siva Sivani Institute of Management for his constant encouragement and support throughout this project, especially for the useful suggestions given during the course of the project period. He inspired and motivated me tremendously whenever I had any hesitation. Besides, I am also grateful to faculty members of Siva Sivani Institute of Management for their assistance in data collection. I take this opportunity to extend my deep appreciation to my family and friends, for all that they meant to me during the crucial times of the completion of my project. Apart from my efforts, the success of my project depends largely on the encouragement and guidelines of many others. I take this opportunity to express my gratitude to all the people who have been instrumental in the successful completion of this project.
Place: Hyderabad Date: 28/12/2012
Harish Babu Mulluri 2B2-15
Table of Contents
Chapter No 1 1.1 1.2 1.3 1.4 1.5 1.6 2 2.1 2.2 3 4 5 5.1 5.2 5.3 5.4
Description Introduction Introduction To Topic Need and Importance of Study Objectives of Study Research Methods Review of Literature Short Comings Industry and Company Profile Industry Profile Company Profile Theoretical Aspects Related To Project Data Analysis and Interpretation Suggestions, Findings and Conclusion Findings Suggestions Conclusion Appendix
Page No 9 10 19 19 19 20 21 22 23 29 38 42 57 58 59 59 60
List of Figures:
Figure No. Figure Name.
4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 4.17 4.18 4.19 4.20 4.21 4.22 Gender Age Group Annual Income Savings Per Annum Qualification Occupation Preferred Mode of Savings Investment Decision Opinion About Investment Preference of Investor Frequency of Investment How Long Investor Would Invest Opinion on Insurance Do Investor Hold An Insurance Policy Do Investor Have An Idea On ULIP‘s Do Investor Hold ULIP Rank of Life Insurance Companies Influence Of Factors Gender and Risk Factor Age and Investments Age and Risk Factor Age And Income Factor
43 43 44 44 45 45 46 46 47 47 48 48 49 49 50 50 51 52 53 54 55 56
Neelam Saini(2011),Unit Linked Insurance Plans, Journal On Banking Financial Services and Insurance Research, ISSN 2231-4288, Volume 1, Issue 3 (June, 2011). J. Shanmuganathan and Krishnaveni Muthiah, The Impact of the Tussle between IRDA and SEBI on Unit Linked Insurance Plans, European Journal of Social Sciences, ISSN 1450-2267 Vol. 33 No 3 September, 2012. S.Clifford Paul, D.Joseph Anbaras and Annette Barnabas, Study on Awareness of Indian Investors of Insurance, E-Journal of Business and Economic Issues, Fall 2010, Volume V, Issue III. Harnam Singh, An Empirical Study Of Life Insurance Product, International Journal of Multidisciplinary Research, Vol.1 Issue 8, December 2011, ISSN 2231 5780. Dr. Arnika Srivastava, Dr. Sarika Tripathi and Dr. Amit Kumar, Indian Life Insurance Industry, Journal of Arts, Science & Commerce, E-ISSN 2229-4686, ISSN 2231-4172. Mrs. Preeti Kulkarni, Why ULIP holders should stick to their strategy, Article in Economic Times (Sep 2012).
Chapter 1 Introduction
1.1 Introduction to topic
Life Insurance or life assurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a sum of money upon the occurrence of the insured‘s death. In return, the policy owner (or policy payer) agrees to pay a stipulated amount called a premium at regular intervals. Life Insurance is a contract for payment of money to the person assured (or to the person entitled to receive the same) on the occurrence of the event insured against. Usually the contract provides for: 1. Payment of an amount on the date of maturity or at specified periodic intervals or at death if it occurs earlier. 2. Periodical payment of insurance premium by the assured, to the corporation who provides the insurance. Who can take Life insurance policy? 1. Insurance can be bought at any age for an individual. You can even get insurance policies for your children. 2. Subject to certain conditions a policy can be taken on the life of a spouse or children. Now life insurance policies are available in two types: 1. Traditional policies: 2. Unit linked insurance Plans (ULIPs):
1.1.1 Introduction to ULIP’s
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. It provides for life insurance where the policy value at any time varies according to the value of the underlying assets at the time. ULIP is life insurance solution that provides for the benefits of protection and flexibility in investment. The investment is denoted as units and is represented by the value that it has attained called as Net Asset Value (NAV). “ULIPs are ideal for someone who is looking for a long term investment product, is under insured and is averse to taking a traditional life plan. ULIP should be looked at from both an investment as well as insurance point of view and not in isolation.”
Unit linked plans combines the protection of life insurance and benefits of mutual fund .The main reason for increasing interest towards unit linked plans is that they allow you to earn more return on your investment in this declining interest scenario, and at the same time offer financial protection to your family in unfortunate event of your death. They also allow you the flexibility of withdrawing or surrendering your unit wholly or partially to meet any contingency like your children‘s education marriage, etc. ULIPS also known as UNBUNBLED, VARIABLE INSURANCE PLANS has possibly been the single largest innovation in the field of life insurance in the past several decades. It wasn‘t too long back, when the good old endowment plan was the preferred way to insure oneself against an eventuality and to set aside some savings to meet one‘s financial objectives. Then insurance was thrown open to the private sector. The result was the launch of a wide variety of insurance plans, including the ULIPs.
1.1.2 History Of ULIP’s
Life insurance in India started way back in 1818 with establishment or Oriental Insurance in Kolkata. The Indian Life Assurance Companies Act came into action for regulating the life insurance business in 1912. The first Indian insurance company was the Bombay Mutual Assurance Society Ltd, formed in 1870 in Mumbai. By the year 1938 there were 176 insurance companies in India. In 1999, IRDA was established as the regulator for all the insurance business in India. Now, India has many public and private players working in insurance business like LIC, Bharti AXA, ICICI Prulife, Future Generali, UTI, SBI etc. With new developments in the insurance policy, finally the plans which provided the dual benefit of ‗sum assured‘ plus the ‗fund value‘, in the event of an unforeseen occurrence became popular. The new type of Unit Linked Insurance Plans involves risks of investors‘ money because the investments are done in capital market and the return is not guaranteed. These came into picture around 1960s and became very popular in the world. In 1971 the Unit Trust of India offered the first ULIP policy in which a small part of premium was utilized for providing life cover and balance was invested in units. Two factors were responsible for the advent of ULIPs on the domestic insurance horizon. First was the arrival of private insurance companies on the domestic scene. ULIPs were one of the most significant innovations introduced by private insurers. The other factor that saw investors take to ULIPs was the decline of assured return endowment plans. These were the two factors most instrumental in marking the arrival of ULIPs, but another factor that has helped their cause is a booming stock market. While this now appears as one of the primary reasons for their popularity, it is believed that ULIPs have some fundamental positives like enhanced flexibility and merging of investment and insurance in a single entity that have really endeared them to individuals.
As times progressed the plans were also successfully mapped along with life insurance need to retirement planning. In today‘s times, ULIP provides solutions for insurance planning, financial needs, financial planning for children‘s future and retirement planning. These are provided by the insurance companies or even banks. These investments can also be used for tax benefit under section 80C. Since, the investment risk is borne by the policyholder, stock market regulator Securities and Exchange Board of India looked into dynamics of the ULIP-Scheme business. On April 9, 2010 SEBI barred 14 life insurance companies from selling or renewing ULIPs unless they registered with it. These ULIPs had already got the approval from IRDA which led to a legal tussle between two regulators. Finally on June 18 2011, in an amendment favoring IRDA over SEBI an act was signed by then President Smt. Pratibha Patil. There are many Unit Linked Insurance Plans available now with various flexibilities including that of choosing the portfolio on a la carte basis, various other schemes like top-ups, premium holidays and other customizations. Do post a comment in case of doubt or any further queries Features of ULIPs distinguish itself through the multiple benefits that it provides to the customer which are as follows Life protection Investment and Savings Flexibility Adjustable Life Cover Investment Options Transparency Options to take additional cover against- Death due to accident- Disability- Critical Illness- Surgeries Liquidity Tax benefits
Unit linked plans come in the form of units where the premium paid by you is used to buy units and an investment fund is allotted to you. Most of the companies offer two or more options to you with regard to the fund. The choice of the fund allows you to determine as to how much premium paid by you should be invested and in which financial instrument. The performance of the fund depends upon the current value of units in the market. The return given by this policy directly depends on the performance of the portfolio chosen by the policyholder which also further depends on the performance of the capital market. There is no guaranteed return on investments in Unit Linked Insurance scheme and the value of investments varies just like any other Mutual Funds. But it also offered a stock market driven potential for high returns on investments which came at the expense of market risks.
The following points help us to get a better idea on ULIPs 1. Sum Assured: In ULIPs you are asked ―HOW MUCH PREMIUM CAN YOU PAY?‖ & accordingly the Sum Assured is estimated. 2. Investments: ULIPs invest in Equities Bonds G-securities Money market 3. Flexibility: In ULIPs the investor can choose the fund in which he wants to allocate his portfolio. He can go for pure Equity, or a combination of deb equity, depending on his requirements. The investor also has the option of switching from one fund to another. 4. Top Up Facility: A top up is a onetime additional investment in the ULIP over and above the annual premium. This feature works well when you have a surplus that you are looking to invest in a market linked avenue, rather than keeping in an FD or Savings account. 5. Transparency: ULIPs are more transparent as their NAV is declared every day. As a result you can know how your ULIP has performed. 6. Liquidity: Since ULIPs investments are NAV based it is possible to withdraw a portion of your investments before maturity (after 3yrs lock in period is over).The withdrawal is possible provided the minimum fund value is maintained.
1.1.3 How The Unit Linked Plan Works?
Unit linked plans combines the protection of life insurance and benefits of mutual fund .The main reason for increasing interest towards unit linked plans is that they allow you to earn more return on your investment in this declining interest scenario, and at the same time offer financial protection to your family in unfortunate event of your death. They also allow you the flexibility of withdrawing or surrendering your unit wholly or partially to meet any contingency like your children‘s education marriage, etc. Unit linked plans come in the form of units where the premium paid by you is used to buy units and an investment fund is allotted to you. Most of the companies offer two or more options to you with regard to the fund. The choice of the fund allows you to determine as to how much premium paid by you should be invested and in which financial instrument. The performance of the fund depends upon the current value of units in the market. For e.g. if current value of unit is Rs 10/- and you pay annual premium of Rs 10000/-, than the number of units you buy with this premium is 1000 units. If the market is bullish and the value of a unit become Rs 13 /- then you can surrender the units for a profit.
According to the IRDA, a company offering unit linked plans must give the investor an option to choose among debt, balanced and equity funds. If you opt for a unit-linked endowment policy, you can choose to invest your premiums in debt, balanced or equity funds. If you choose a debt fund, the majority of your premiums will get invested in debt securities like gilts and bonds. If you choose equity, then a major portion of your premiums will be invested in the equity market. The type of fund you choose would depend on your risk profile and your investment need. In case of death during the premium paying term or the term of the policy, the sum assured, or value of policy fund, whichever is higher, is paid to the beneficiaries. In case of survival up to maturity, the value of the fund is paid out. Therefore, the risk here is transferred to the policyholder and nothing is guaranteed. So, if the fund value falls below the amount invested, the policyholder will receive a lower amount. Taking a closer look at charges and fees one comes to knows that, there is an initial administrative charge deducted every month from units. This could be very high, around 15% per annum in the first year, around 7% p a in the second and around 2-3% p a thereafter. Suppose you buy a policy wherein the annual premium works out to Rs 10,000, in the first year, Rs 1,500 would be deducted towards administrative charges, Rs 700 in the second year and around Rs 300 from the third year. These rates vary from company to company but are more or less in this range. There is an investment management charge too, which would vary according to the fund selected; for instance, an equity fund would attract a higher investment management fee of around 1% p a compared with a debt fund that might attract a fee of 0.25%. So continuing with the same example, a sum of Rs 100 would be deducted from the annual premium if an equity fund is opted for. Next, companies charge an annual administration charge. In case of some companies this charge is a flat rate, say, Rs 20 per month. In the case of others, this charge is again a percentage of net assets for each fund. Finally, there is a deduction for risk cover. This goes towards contribution to the sum assured or the life insurance cover. It is based on mortality rates as calculated by actuaries. For comprehensively summarizing our example, we will assume the age of the male policyholder to be 30 years and sum assured Rs.1, 00,000. Of a total premium of Rs 10,000 paid in the first year, Rs 1,500 is deducted towards initial administration fees, Rs 100 towards investment management fees (assuming the fund opted for is equity) and Rs 240 towards annual administration fees. That leaves a balance of Rs 8,160 in the first year. Out of this, Rs 169 would be deducted towards risk cover. Hence, finally Rs 7,991 would be invested in the fund. In the second year, the
figure would stand at Rs 8,791 and third year onwards, around Rs 9,191 for the term of the policy. So, every time you make your premium payment, only a part of it is actually invested in the fund of your choice. Fund Value: The fund value is the value of your investment as on a given date. This is influenced by the ups and downs in the Sensex. So Fund Value = Unit Price * Number of Units How much of the premium is used to purchase units The full amount of premium paid is not allocated to purchase units. Insurers allot units on the portion of the premium remaining after providing for various charges, fees and deductions. However the quantum of premium used to purchase units varies from product to product. The total monetary value of the units allocated is invariably less than the amount of premium paid because the charges are first deducted from the premium collected and the remaining amount is used for allocating units. Can one seek refund of premiums if not satisfied with the policy, after purchasing it? The policyholder can seek refund of premiums if he disagrees with the terms and conditions of the policy, within 15 days of receipt of the policy document (Free Look period). The policyholder shall be refunded the fund value including charges levied through cancellation of units subject to deduction of expenses towards medical examination, stamp duty and proportionate risk premium for the period of cover. What happens if payment of premiums is discontinued? a. Discontinuance within three years of commencement – If all the premiums have not been paid for at least three consecutive years from inception, the insurance cover shall cease immediately. Insurers may give an opportunity for revival within the period allowed; if the policy is not revived within that period, surrender value shall be paid at the end of third policy anniversary or at the end of the period allowed for revival, whichever is later. b. Discontinuance after three years of commencement — At the end of the period allowed for revival, the contract shall be terminated by paying the surrender value. The insurer may offer to continue the insurance cover, if so opted for by the policy holder, levying appropriate charges until the fund value is not less than one full year‘s premium. When the fund value reaches an amount equivalent to one full year‘s premium, the contract shall be terminated by paying the fund value.
Are Investments Guaranteed in ULIP’s Investment returns from ULIP may not be guaranteed.‖ In unit linked products/policies, the investment risk in investment portfolio is borne by the policy holder‖. Depending upon the performance of the unit linked fund(s) chosen; the policy holder may achieve gains or losses on his/her investments. It should also be noted that the past returns of a fund are not necessarily indicative of the future performance of the fund. How ULIP’s Manage Money Growth Fund Balance Fund Debt Fund Money Market Fund 100% equity 60% equity,40% debt 100% debt 100% MM instruments for a period of one Year
1.1.4 Charges, Fees and Deductions in ULIP’s
ULIPs offered by different insurers have varying charge structures. Broadly, the different types of fees and charges are given below. However it may be noted that insurers have the right to revise fees and charges over a period of time. 1. Premium Allocation Charges: This is a percentage of the premium appropriated towards charges before allocating the units under the policy. This charge normally includes initial and renewal expenses apart from commission expenses 2. Mortality Charges: These are charges to provide for the cost of insurance coverage under the plan. Mortality charges depend on number of factors such as age, amount of coverage, state of health etc. 3. Fund Management Fees: These are fees levied for management of the fund(s) and are deducted before arriving at the Net Asset Value (NAV). 4. Policy/Administration Charges: These are the fees for administration of the plan and levied by cancellation of units. This could be flat throughout the policy term or vary at a pre-determined rate. 5. Surrender Charges: A surrender charge may be deducted for premature partial or full encashment of units wherever applicable, as mentioned in the policy conditions. 6. Fund Switching Charge: Generally a limited number of fund switches may be allowed each year without charge, with subsequent switches, subject to a charge. 7. Service Tax Deductions: Before allotment of the units the applicable service tax is deducted from the risk portion of the premium.
1.1.5 Risk Element:
On the face of it investment in unit-linked plans are not entirely safe. An element of risk is definitely in the hands of the individual. An individual choosing to park his funds in equities stands to gain or lose depending on the bull run in the stock market. When the market is buoyant he stands to gain handsomely but on the other hand he may lose heavily when it tanks out. Unit-linked insurance plans are all of a sudden much talked about, publicized and sold. While these are not a recent phenomenon, since a number of insurance companies already had these products as a part of their portfolio, of late these plans have seen sudden frenzy. It is perhaps the bull phase or the lure of market-linked returns that insurance companies have been shouting hoarse about that is responsible for these products outselling others. While this is not to dissuade from purchasing unit linked covers it would be once own interest to take a peek at the ‗market linked returns‘ you can expect. And if you think that the entire premium you pay is invested in avenues chosen by you to maximize returns you could be wrong.
1.1.6 Unit-linked vs. Traditional Insurance Products
While in a unit-linked insurance product part of the premium paid by the policyholder goes towards administrative and mortality charges (that provides life cover) and the balance into an investment account, in a traditional policy (with or without profit policy), the premiums are put in a common fund, part of which is invested and part goes into paying for the risk cover. However, the entire profit from investment is not declared as bonus in a traditional policy. Some is held back by the insurance company to build reserves to pay end bonus and other returns. Also, there is a chance of using the money to cross-subsidies other products i.e. paying more returns towards single premium products. The performance of the investible portion of premium in a unit-linked scheme is monitored in the form of mutual fund units. Unit-linked insurance products allow policyholders to define their underlying investment with choices varying from a conservative to an aggressive option. In effect, a customer can create his/her own personal investment plan backed by an insurance policy with at least a minimum guaranteed return, in some cases. On the contrary, a traditional policyholder has to rely on the investment manager. Besides, unit-linked products offer benefits like transparency, liquidity and flexibility. The insured has the flexibility of changing the investment option after completing one policy year taking advantage of market movements to plan investments and earn returns, giving him complete control of his funds. Thus, in a scenario when the equity market is not performing well, a policyholder with high exposure to equities can switch to the option, which has a high proportion of fixed income
instruments. Above all, as in the case of other insurance products, the premiums are taxing deductible and the benefits i.e. the maturity benefit, withdrawal, surrender and death benefits are all tax-free.
1.1.7 Difference Between ULIP’s and Mutual Funds
Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to mutual funds in terms of their structure arid functioning. As is the case with mutual funds, investors in ULIPs is allotted units by the insurance company and a net asset value (NAV) is declared for the same on a daily basis. Similarly ULIP investors have the option of investing across various schemes similar to the ones found in the mutual funds domain, i.e. diversified equity funds, balanced funds and debt funds to name a few. Generally speaking, ULIPS can be termed as mutual fund schemes with an insurance component. However it should not be construed that barring the insurance element there is nothing differentiating mutual funds from ULIPs. Mutual Funds have very stringent transparency requirements compared to ULIPs, but this also ensures that the investor is availed as much information as necessary, unlike with ULIPs. Things like Portfolio disclosure and Daily NAV are better followed with Mutual Funds. In terms of flexibility, a ULIP will allow you to increase your life cover while keeping your premium the same. This is achieved by reducing your investment allocation. However, if you have a term policy purchased on top of a Mutual Fund, you cannot increase your life cover. You would only have the option of purchasing a new policy, thus incurring new administration costs again. In terms of costs of insurance, typically investing in a Mutual Fund will cost you less than it will cost for a general ULIP scheme. But in a nutshell, ULIP products are better suited for long term investment bundled with insurance cover, whereas Mutual Funds are better suited for those that solely focus on investment and medium-term returns.
1.1.8 Advantages and Disadvantages of ULIP’s
Advantages Flexibility -- you can choose your term, insurance cover, pay premiums for a limited period Transparency -- you know what is the amount you are paying for the various benefits Tax free returns -- 100% tax free since they are received from insurance and it is a contract Switch between various options Tax benefits when investing under Sec 80C
Disadvantages Flexibility -- this can act a disadvantage since the person may use the withdrawal and may not end up building a huge corpus Initially heavy costs -- You pay around 15-40% for the first year and then around 5%for the next two years No control on costs One may try to time the market and may make errors
1.2 Need and Importance Of study
The project entitled ―A study on investor perception on ULIP‘s‖ is a detailed study about the consumer‘s interesting towards unit linked insurance plans. The study is confined only on investor perception on ULIPS.
1.3 Objectives Of study:
1. 2. 3. 4. To study the investor perception on ULIP‘s To understand the factors influencing investors while purchasing unit linked policy. To know which attributes people consider most important. To know in which investments options people like to invest.
1.4 Research Methods 1.4.1 Data:
The data collection is primary data. Primary data was collected through field survey by framing the questionnaire from the employees, businessman and other in the area of Hyderabad city.
1.4.2 Data Sources:
The data source is a raw data that has been collected through research, observation and survey through questionnaire.
1.4.3 Data Period:
Data period for the collection of data from the investors was between 15th July2012 to 31th August2012
Tools used for analyses of data are done by Chi-Square test. Chi-Square test: A chi-squared test is statistical hypothesis test in which the sampling distribution of the test statistic is a chi-squared distribution when the null hypothesis is true, or any in which this is asymptotically true, meaning that the sampling distribution (if the null hypothesis is true) can be made to approximate a chi-squared distribution as closely as desired by making the sample size large enough
1.5 Review of literature:
Sunayna Khurana (2008) analyzed the customer preference of life insurance industry in India. She had analyzed the customer preference regarding plans and company, their purpose of buying insurance policies, satisfaction level and their future plans for new insurance policy. Mr. K.B.S Kumar edited the book ―Insurance customer service‖ of ICFAI university press; it includes the chapters like tracking customer satisfaction by Mr. Tom Moormam U Jawaharlal and Nikhil Pareek analyzed the customer service in life insurance .In insurance chronicle (2004) he analyzed the different players of Reliance life insurance in India. Narayan Krishnamurthy in outlook money (2003) article analyzed the situational need of insurance at different situations and steps of life in his article ―At every step of life.‖ Navasiyam et al. (2006) analyzed the socio economic factors that are responsible for taking life insurance policies and examined the preferences of the policy holders towards various types of policies of LIC. From the analysis it was found that factors such as age, education level and sex of policy holders are insignificant. However income level, occupation and size of family are significant on deciding insurance policy. From the analysis it was inferred that respondents belonging to age group of 31-40 are much interested in taking life insurance policy. Mutual Funds have attracted a lot of attention and killed the interest of both academic and practitioner communities. Compared to the developed markets very few studies of MF‘s are done in India. This literature review reveals investor behavior studies. The researches on mutual funds have extremely skewed in terms of geographical coverage, most focused to developed countries like us. Mr. Madhu T made a study on ‗ULIPs hold edge over mutual funds‘. The findings shows that distributors would push unit linked insurance plans (ULIPs) to earn better commission. ULIPs
offer attractive frontend commissions to agents. However, independent financial advisors believe that though there is a possibility of some distributors favoring ULIPs in the short term, the new directive would be beneficial for both the industry and investors in the long run. (Mr. Madhu T, the Economic Times, June2009). Mr. Deepak Shenoy ,in his article ‗Comparing ULIP returns to Mutual Funds‘, he reveals that, over the last three years, their growth mutual fund has given better returns than the "MAXIMISER" option of their ULIPs.(Deepak Shenoy, The Indian Investor‘s Blog, (August 2006). Mr. Murthaza and Sony, in their article ‗An Overview on ULIP‘, This article is an initiative from Bajaj Allianz to create better understanding of ULIPs and its benefits so that investors can avail maximum returns from their investments.
1.6 Short Comings: This collection of the data sample and study of the project has been confined only to
Hyderabad city This project has not evaluated the performance of various companies under this group The study does not include any comparison with product of other companies. The study of the project has been focused only on Investor perception on ULIP‘s Some of the respondents could not give an accurate response to some of the questions
Chapter 2 Industry and Company Profile
2.1 Industry Profile 2.1.1 Insurance
Insurance may be described as to protect the economic value of asset. It can be said to be a system of spreading the losses of an individual over a group of individuals. Since it is an intangible product, Insurance Industry is a service industry. Insurance Industry doesn‘t produce any goods but sell the promise. A promise to take care of the customers or their dependents in case they suffer a loss due to some peril during the term of policy. Mankind is exposed to many serious perils such as property losses from fire and windstorm and personal losses from disability and premature death. Although it is impossible for an individual to foretell or completely prevent their occurrence but it is possible to provide against their financial effect the loss of property and earnings. From the point of view of the individual the life Insurance may be defined as a contract whereby for a Consideration amount called the premium, one party(the insurer) agrees to pay to the other (the insured) or a beneficiary a particular amount upon the occurrence of death or any other agreed event. Insurance is the method of spreading and transfer of risks Losses of few unfortunate are shared by and spread over to many exposed to the same risk. Assets created by the owner in expectation of future needs have a value Losses of assets for any reason deprive the owner of the expected benefits. It acts as a form of a safeguard against misfortunes. From the point of view of community life insurance may be defined as asocial
2.1.2 Purpose and need of insurance:
As said earlier that the making is exposed to many serious perils which risk the security of their belongings. The risk here means that there is a possibility of occurrence of loss or damage to the property, it may happen or may not happen. Insurance is relevant only in the contingency of uncertainty. If there is no uncertainly about the occurrence of the loss it can‘t be insured against: Assets are likely to be destroyed or made non-functional due to perils like firefloods, breakdowns, lightning and earthquake. Damage to assets caused by any perils is the risk that assets are exposed to. Insurance become relevant only if there is uncertainly of occurrence of event leading to loss. No uncertainty No insurance.
We can say that the human life value is an ongoing generating asset, which can be lost on early death or disability caused by accidents. Insurance doesn‘t protect the assets but only compensates the economic or financial loss. Basically insurance covers tangible assets but the concept can be extended to intangible also
2.1.3 Insurance in India
Insurance in India started without any regulation in the nineteenth century. It was a typical story of a colonial era: a few British Insurance companies dominating the market sewing mostly large urban centers. After the independence, it took a dramatic turn. Insurance was nationalized. First, the life insurance companies were nationalized in 1956, and then the general business was nationalized in 1972. Only in 1999 private insurance companies have been allowed back into the business of insurance with a maximum of 26% of foreign holding. We describe how and why of regulation and deregulation. The entry of the State Bank of India with its proposal of bank assurance brings a new dynamic in the game. We study the collective experience of other countries in Asia already deregulated their market and have allowed foreign companies to participate. If the experience of other countries is any guide, the dominance of Life Insurance Corporation is not going to disappear any time soon. The Indian insurance market, with a population of over one million, offers tremendous opportunities and can easily sustain 100 insurers. This article analyses the development of the insurance sector, which will result in higher domestic savings and investments, significant expansion of flue capital market, enhanced insurance infrastructure financing and increased foreign capital inflow and employment. The opening up of the Indian insurance sector has been hailed tie a groundbreaking move towards further liberalization of the Indian economy. The size of the existing insurance market is growing at a rate of ten percent per year. The estimated potential of the Indian insurance market in terms of premium was around Rs. 344000crores in 1999. The Indian players have tapped only tent per cent of the market share and the remaining 90 per cent of the market remain untapped. The Indian Government has enacted the insurance Regulatory Development Authority Act 1999, which amends existing Insurance laws dating from 1936. The act establishes an authority called the Insurance Regulatory Development Authority, designed to regulate the Insurance sector. This article examines the provisions of the new Act from the point of view of a company with diverse business interests wishing to establish a joint venture with an Indian company. A number of foreign insurance companies have set up representative office in India and have also tied up with various asset management companies. They have either signed Memorandum of Understanding with Indian companies or are trying to do the same. A few of them have been
around for the last four to five years. Some have carried out extensive research on the Indian insurance sector. Others have set up liaison offices. All of them are waiting with bated breath for the opening up of the sector and taking a bite of the great Indian Insurance pie. India is marching ahead to more prosperous future. The economy is on a high growth path, domestic savings are growing, exports have risen and inflation has stabilized. Infrastructure sector, which even today is woefully inadequate to meet the expected increased industrial activities, has been accorded top priority by the government. All this should reflect in a growth rate of 7 to 8% for the next 3-4 years. With this scenario of high economic growth further reforms in the financial sector are in the Common Minimum Program of the Government. India is regarded as under- insured country with insurance penetration at a very low level of 0.6% of GDP. Insurance, as a rule, has always been given very low priority by corporate India. It is always taken with reluctance, usually only when it is compulsory, and then only by big industrial houses. Without exception it is always inadequate to meet the needs of the corporate sector. In addition to the tradition exposure of fire, floods, workers compensation and the interruption, Corporate India also has to address unpredictable changes in areas such as environment; security; occupational health and safety; public liabilities; Directors and Officers Liability and product liability It therefore becomes quite obvious that purchase of insurance, in itself, will not substitute for a soundly based and property implemented Risk Management Program as insurance can only offer some financial relief by replacing the plants; it cannot replace the loss in development of a business or development of the market.
2.1.4 Milestones of Insurance Regulations in the 20th Century
Year Significant Regulatory Event
1912 The Indian Life Insurance Company Act enacted. 1928 The Indian Insurance Companies Act enhanced to enable the government to collect statistical information about both life and non-life insurance business. 1938 The Insurance Act: Comprehensive Act to regulate insurance business in India 1956 The Indian and foreign insurers and provident societies taken over by the Central government and nationalized. LIC formed by an act of parliament. VIZ. LIC Act, 1956, with a capital contribution of Rs.5 crore from the government of India. 1972 Nationalization of general insurance business in India. 1993 Setting up of Malhotra Committee. 1994 Recommendations of Malhotra Committee.
1995 Setting up of Mukherjee Committee 1996 The government gives greater autonomy to LIC, GIC and its subsidiaries with regard to the restructuring of boards and flexibility in investment norms aimed at channeling funds to the infrastructure sector. 1998 The cabinet decides to allow 40% foreign equity in private insurance companres-26% to foreign companies and 14% to NRIs and FIIs. 1999 The standing committee headed by Murali Deora decides that foreign equity in Private insurance should be limited to 26%. The IRA bill is renamed the Insurance Regulatory and Development Authority (IRDA) Bill. Also, Cabinet clears IRDA Bill 2000 President gives assent to the IRDA Bill. In India insurance is a federal subject. The primary legislation that deals with insurance business in India is:
2.1.5 Insurance Regulatory Development Authority:
On the recommendation of Malhotra committee an Insurance Regulatory Development Act (IRDA) passed by Indian Parliament in 1993. Its main aim was to activate an insurance regulatory apparatus essential for proper monitoring and control of the insurance Industry. Due to this Act Several Indian private companies have entered into the insurance market, and some companies have joined with foreign partners. In economic reform process, the insurance Companies have given boost to the socio - economic development process. The huge amount of funds that are disposal of insurance are directed as desired avenues like housing safe drinking water, electricity primary education and infrastructure. Above all the policyholders gets better pricing of products from competitive insurance companies. Liberalization: The opening up of insurance Sector was a part of the ongoing liberalization in the financial sector of India. The domain of state-run insurance companies was thrown open to private enterprise on December 7, 1999, with the introduction of the Insurance Regulatory Authority (IRDA) Bill. The opening up of the sector gave way to the world known names in the industry to enter the Indian market through tie-ups with the eminent business houses. What was once a quiet business is becoming one of the hottest businesses today.
Post Liberalization: The changing face of financial sector and the entry of several companies in the field of life insurance segment are one of the key results of these liberalization efforts. Insurance business by way of generating premium income adds significantly to the GDP. Estimates show that a meager 35-40 million, out of a population of 950 million, have come so far under the Insurance industry. The potential market is so huge that it can grow by 15 to 17 per annum. With the entry of private players the Indian insurance market may finally be able to make deeper penetration in to newer segments and expand the market size manifold. The quality of service will also improve and there will be wide range of product catering to the needs of different customers. The pace for claims settlements is also expected to improve due to increased competition. The life insurance market in India is likely to be risky in the initial stages, but this will improve in the next three to five years. Therefore it may be advantageous to be a second round entrant. In the life insurance market the need to build trust over time becomes important because the risk assessment systems and data that are a key to success in the insurance market are significantly underdeveloped in India even today. Reforms and Implications: The liberalization of the Indian insurance sector has been the subject of much heated debate for some years. The sector is finally set to open up to private competition. The Insurance Regulatory and Development Authority bill cleared the way for private entry into insurance, as the government was keen to invite private sector participation into insurance. To address those concerns, the bill requires direct insurers to have a minimum paid-up capital of Rs. 1 billion; to invest policy holder‘s funds only in India; and to restrict international companies to a minority equity holding of 26 percent in any new company. Indian promoters will also have to dilute their equity holding to 26 percent over a 10-year period. Over the past three years, around 30 companies have expressed interest in entering the sector and many foreign and Indian companies have arranged alliances. Whether the insurer is old or new, private or public, expanding the market will present challenges. A number of foreign insurance companies have set up representative offices in India and have also tied up various asset management companies. They have either signed MOU‘s with Indian companies or are trying to do the same. Some have carried out extensive research on the Indian insurance sector. Others have set up liaison offices.
2.1.6 Life Insurance:
The word ‗Life Insurance‘ itself is self-explanatory. It deals with insurance of human life. ―Life Insurance corporation of India‖- a public sector undertaking has the monopoly in this sector since its nationalization. In our wordily life, whenever there is uncertainty, there is an involvement of risk. The instinct for security against such risk is one of the basic motivating
forces determining human attitudes. As a squeal to this quest for Security, the concept of insurance must have been born. The urge to provide insurance or protection against the loss of life & property must have prompted people to make some sort of sacrifice willingly in order to achieve security through ―COLLECTIVECO-OPERATION‖, in this sense; story of insurance is probably as old as the story of mankind Why Life Insurance: Protection of the interest of the family member. Provision for education and marriage of the children. Post retirement income for self and dependents Special needs for medical expenses. Provision for health /illness. Provision for housing. Provision for income tax rebate.
Life insurance companies in India 1. Bajaj Allianz Life Insurance Company Limited 2. Birla Sun Life Insurance Co. Ltd 3. HDFC Standard Life Insurance Co. Ltd 4. ICICI Prudential Life Insurance Co. Ltd. 5. ING Vysya Life Insurance Company Ltd. 6. Life Insurance Corporation of India 7. Max New York Life Insurance Co. Ltd 8. Met Life India Insurance Company Ltd. 9. Kotak Mahindra Old Mutual Life Insurance Limited 10. SBI Life Insurance Co. Ltd 11. Tata AIG Life Insurance Company Limited 12. Reliance Life Insurance Company Limited. 13. Aviva Life Insurance Co. India Pvt. Ltd. 14. Sahara India Life Insurance Co, Ltd.
15. Shriram Life Insurance Co, Ltd. 16. Bharti AXA Life Insurance Company Ltd. 17. Future Generali Life Insurance Company Ltd. 18. IDBI Fortis Life Insurance Company Ltd. 19. Canara HSBC Oriental Bank of Commerce Life Insurance Co. Ltd 20. AEGON Religare Life Insurance Company Limited. 21. DLF Pramerica Life Insurance Co. Ltd. 22. Star Union Dai-ichi Life Insurance Comp. Ltd.
2.2 Company Profile
Reliance Securities comes from the house of Reliance Capital, one of India‘s leading & prominent financial houses. Founded in 1986, Reliance Capital has come a long way from being into steady annuity yielding businesses such as leasing, bill discounting, and inter-corporate deposits to diversifying its activities in the areas of asset management and mutual fund; life and general insurance; consumer finance and industrial finance; stock broking; depository services; private equity and proprietary investments; exchanges, asset reconstruction; distribution of financial products and other activities in financial services. Reliance Capital has a net worth of Rs. 7,887crore and total assets of Rs. 32,419crore as on June 30, 2011. RCL is registered as a depository participant with National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL) under the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996. RCL has sponsored the Reliance Mutual Fund within the framework of the Securities and Exchange Board of India (Mutual Fund) Regulations, 1996.RCL primarily focuses on funding projects in the infrastructure sector and supports the growth of its subsidiary companies, Reliance Capital Asset Management Limited, Reliance Capital Trustee Co. Limited, Reliance General Insurance Company Limited and Reliance Life Insurance Company Limited. As of March 31, 2005, the company‘s investment in infrastructure projects stood at Rs. 1071 Crores. The investment portfolio of RCL is structured in a way that realizes the highest post-tax return on its investments.
2.2.1 Mission and Vision:
Vision Reliance Capital's vision is that: By 2015, it will be a company that is known as: "The most profitable, innovative, and most trusted financial services company in India and in the emerging markets". In achieving this vision, the company will be both customer-centric and innovation-driven. Mission To create and nurture a world-class, high performance environment aimed at delighting our customers by providing endless financial products in all part of the country Reliance Securities Limited is a Reliance Capital company and part of the Reliance Group. Reliance Securities endeavors to change the way investors transact in equities markets and avails services. It provides customers with access to Equity, Derivatives, Portfolio Management Services, Investment Banking, and Mutual Funds & IPOs. It also offers secured online share trading platform and investment activities in secure, cost effective and convenient manner. To enable wider participation, it also provides the convenience of trading offline through variety of means, including Call & Trade, Branch dealing Desk and its network of affiliates. Reliance Securities has a pan India presence at more than 1,700 locations. Reliance Capital is one of India's leading and fastest growing private sector financial services companies, and ranks among the top 3 private sector financial services and banking groups, in terms of net worth.
2.2.2 Awards & Achievements
Reliance Securities has been rated no. 1 by Starcom Worldwide for online security and cost effectiveness in 2007 'Debutant Franchisor of the Year' at the 5th International Franchisee & Retail shows 2007 'Best in category Service Franchise' at the 6th International Franchise & Retail show 2008 'Best E-Brokerage Houser 2008' (runner's up) by Outlook Money NDTV Profit Awards
'Largest E-Broking House & Best Equity Broking House for the year 2009' by Dun & Bradstreet 'Largest E-Broking House 2010' by Dun & Bradstreet 'My FM Stars of the Industry 2011' for excellence in Online Demat Reliance Securities Limited is now ISO 9001:2008 certified for Online Trading Platform 'Brand Leadership Legacy Award' at the Asian Leadership Awards - Dubai, 2011
2.2.3 Organization Structure
Reliance Securities, the equity broking arm of Reliance Capital, is one of the leading retail broking houses in India, providing customers with access to equities, equity options, and wealth management services, mutual funds, IPOs and investment banking. Reliance Securities had 6.64 lakh broking accounts as on March 31, 2011. The average daily equity broking turnover stood at 1,413 crore in wealth management, the AUM stood at 169 crore as on March 31, 2011, an annual growth of 85 per cent. In investment banking, the company handled 4 issues and mobilized 620 crore and did IPO funding of 3,164 crore. Reliance Securities achieved profit before tax of 22 crore for the year ended March 31, 2011, as against 28 crore in the previous year. Reliance Life Insurance (RLI) is amongst the leading private sector life insurers with a market share of 7.7 per cent in the private sector. It ranks among the top four private sector companies in terms of new individual business premium with a market share of 8.7 per cent. RLI garnered a total premium of 6,548 crore in the year, as against 6,588 crore in the previous year.RLI received new business premium of 3,035crore for the year as compared to 3,921 crore in the previous year. The renewal premium for the year was 3,536crore as against 2,684 crore in the previous year – an increase of 32 per cent. The total funds under management increased by 31 per cent to 17,855 crore. During the year, RLI sold the highest number of individual premium policies in the private sector at 1.9 million. The Company invested a sum of 120 crore into the business by way of capital infusion during the year as against 231 crore in the previous year, a 48 per cent reduction. RLI did not require any fresh capital for the last 2 quarters of the financial year 201011.In fourth quarter of financial year 2010-11, Nippon Life, Japan‘s largest private life insurer, signed a definitive agreement to acquire a 26 per cent stake in Reliance Life Insurance, subject to necessary regulatory approvals. This is the largest FDI in Indian Financial Services sector and by far, the largest FDI in Insurance sector. The transaction pegs the valuation of Reliance Life Insurance at 11,500 crore. Nippon Life Insurance will invest 3,062 crore to acquire 26 per cent in Reliance Life Insurance. A 121 year old life insurance company, Nippon Life is the 6th largest private life insurer in the world. As a strategic partner, Nippon Life will bring vast experience, expertise and global best practices in areas of product development, underwriting, investment management, distribution, customer relationship management and risk management. The distribution business of Reliance Capital, known as Reliance Money, is a comprehensive financial services and solutions provider, providing customers with access to mutual funds, life and general insurance products, money transfer, currency exchange, loans, gold coins and premium products. It has a pan-India distribution network of 6,200 outlets. Reliance Money sold nearly 1,500 kg. Of Gold in the financial year 2010-11, an increase of 235 per cent over the previous year figure of 433 kg. Reliance Money is now the largest private sector partner for Western Union Money Transfer, and has handled over 20 lakh money transfer transactions during the year.
The business achieved profit before tax of 12 crore for the year ended March 31, 2011 as against a loss of 13 crore in the previous year. Reliance General Insurance is amongst the leading private sector general insurance companies in India with a market share of9.4 per cent. Reliance General Insurance‘s gross written premium for the year ended March 31, 2011 was 1,655 crore as against 1,980 crore in the corresponding previous period.
2.2.5 Human Resources
―In my book, we have no greater asset than the quality of our intellectual capital, and no greater priority than the growth and retention of our vast pool of talent‖ – Anil Dhirubhai Ambani At Reliance - Anil Dhirubhai Amabani Group, we recognise the critical role that our people play in the success and growth of each of our businesses. It is the skill and initiative of our workforce that sets us apart from our peers in today‘s knowledge-driven economy. It is their commitment and dedication that lends us the competitive edge, and helps us stay ahead of the curve. Our strong team of professionals is among the youngest in the country, and consists of some of the most dynamic, motivated and qualified individuals to be found anywhere in the world. Firstrate management graduates, highly trained engineers, top-notch financial analysts and razor sharp accountants—we have on our rolls some of the brightest minds in the business.
2.2.6 Products and services
Life Insurance Plans:
Reliance Life Insurance e Term Plan Key Features: Get higher insurance protection at affordable premiums Option to choose life cover from the two options available in the plan to enhance protection Buy life insurance cover through simple online application process (conditions apply) Benefit from special rates for female lives Tax benefit u/s 80C & 10(10D), subject to conditions
Reliance Life Insurance Money Multiplier Plan Key Features Double life cover – This plan offers you a life cover of twice the basic sum assured. Increasing life cover every year–Life cover which increases with time, through Guaranteed Loyalty Additions. Triple survival benefits (on Maturity): Basic sum assured. Accrued Guaranteed Loyalty Additions. Guaranteed Maturity Addition. Longer the commitment, higher the benefits – through an increasing Guaranteed Loyalty Additions every year and Guaranteed Maturity Additions with policy term. A host of optional rider benefits to enhance protection cover Reliance Cash Flow Plan Key Features Easy Liquidity - Get periodic cash flows at the end of the fourth year and thereafter at the end of every three years Wealth creation through bonus additions On maturity, receive accumulated bonuses along with final lump sum payout More value for your money by way of High Sum Assured Rebate Full Sum Assured plus bonuses in case of your unfortunate death. This is over and above the Survival Benefits already paid Option to add two Riders - Critical Illness Rider & Accidental Death Benefit and Total and Permanent Disablement Rider
Savings & Investment Plans:
Reliance Life Insurance Guaranteed Maturity Insurance Plan Key Features: Guarantees to pay you double your money on maturity You get the upside too because this is a unit linked insurance cum investment plan Single premium plan Zero premium allocation charge Liquidity after five policy years
Reliance Life Insurance Guaranteed Money Back Plan: Key Features: Guaranteed Money Back benefits are payable every year during last five policy years. Guaranteed Loyalty Additions of up to 40% of base Sum Assured Guaranteed Maturity Addition of up to 20% of base Sum Assured On death, 100% of the base Sum Assured is paid and the nominee will also receive the money back benefits and the maturity benefits as mentioned under the contract at specified times. An additional Sum Assured up to ` 50 Lacs is payable on accidental deaths. A host of optional rider benefits to enhance protection cover Reliance Life Insurance – Classic Plan – II Key Features: Dual benefit of market linked return and insurance protection. Amount equivalent to base sum assured is payable in extra on account of accidental deaths. Investment opportunity with flexibility - Choose from 8 pure investment fund options Additional flexibility with options like Systematic Transfer Plan &Premium Redirection. Option to pay Top-up Premium(s). Liquidity in the form of partial withdrawals after completion of five policy anniversaries. Exchange option to take advantage of any new plans we may offer in the future. A host of optional rider benefits to enhance protection cover
Reliance Child Plan Key Features: Risk protection for you during the term of the Policy Accumulated bonus at the end of the Policy Term 25% of Sum Assured payable every year as lump sum Benefit during the last four Policy Anniversaries All future premiums are waived in the event of unfortunate loss of life Guaranteed Fixed Benefits continue even after loss of life of the Policy holder More value for your money by way of High Sum Assured Rebate Choose to add the Benefit of two Riders - Critical Illness and Accidental Death Benefit and Total and Permanent Disablement Rider Policy participates in profit even after the loss of life of the life Assured
2.2.7 SWOT Analysis
Strengths One of India‘s leading and fastest growing private sector financial services companies, and ranks among the top 3 private sector financial services and banking companies, in terms of net worth. It is India‘s first insurance company to be awarded the ISO 9001:2000certification across all functions, processes, products and locations pan-India. The quality assurance provides an edge over other players. Company issued 36.57 Lac policies during the year as compared to 14.60Lac in the previous year thereby registering a growth of 150%. RGIC has been able to give highest ROI of 11.27% in last five years. The net worth has doubled to Rs.4.94 billion from last year‘s Rs.2.59 billion. Excellent outreach with a large distribution network. It has 200 branches across 171 cities and over 20,000 intermediaries. The setup provides the company is very strong and very effective distribution network, and consequently a strong penetration in the market. Expert‘s and research team to make strategies and products for company as well as clients base to resolve the problem. Capture the 17% of the Private Sector Share & 7% share of the General Insurance Industry Reserves and Surplus has increased five times to Rs.4.998 billion fromRs.1.04 billion previous years. The Company has earned Rs.1034 crore of New Premium Business in Financial Year 2008 which is 41% share of the Private Sector Industry &33% of the Industry as whole. Company is ranked number one in the New Premium Business in Financial Year 2008. Other than this, it maintains a good database of its existing and potential customer, has a brand image and low pricing strategy .Reliance Money unlike other brokering houses has introduced a new prepaid system of brokerage for the share trading in which it provides the lowest form of brokerage charged from an investor.
Weaknesses Dependence on fellow subsidiaries for various supplies. Extra control or interference from fellow subsidiaries. Sudden expansion in year 2007-08 by establishing more than 125 branches has increased operations and administration expenses due to which losses incurred. Due to the emphasis on recruiting young people in the company, staff is in experienced. Clientage is not so loyal as compared to the clientage of other competing companies in the same industry The phenomenon of job hopping is very common in the company. So, the problem of loyalty towards the company on behalf of the employees is a major problem
Opportunities Low retail penetration of financial services products in India Tremendous brand strength hand extensive distribution reach Opportunity to cross sell services Increasing per-capita GDP Changing demographic profile of the country in favor of the young Threats Competition from local and multinational players Execution risk Regulatory changes Attraction and retention of human, capital
Chapter 3 Theoretical Aspects Related To the Project
Theoretical Aspects Related To the Project
ULIPs or Unit Linked Insurance Plans as the name suggests, are insurance plans linked to investment units. It is a financial product that offers life insurance as well as an investment like a mutual fund. Part of the premium you pay goes towards the sum assured (amount you get in a life insurance policy) and the balance is invested in whichever investments one desire – equity, fixed-return or a mixture of both. There was battle unfolding in the financial circles, the tussle between SEBI (Securities and Exchange Board of India) and IRDA (Insurance Regulatory and Development Authority) for the right to regulate ULIPs (Unit Linked Insurance Plans). This episode has brought to fore various issues surrounding this product. The size of the market for life insurance products in India, estimated to be the fifth largest in the world, is over $40 billion and growing at a rapid pace of over 30% per annum. ULIPs account for over 80% of the business in this market. Through this article we will give an overview of ULIPs, the much publicized tussle between the two regulators over this, the recent changes brought about by IRDA and its impact on the life insurance industry and the investors. In April 2010, SEBI issued a notice asking all insurers to stop the sale of ULIPs, which according to SEBI, should come under its regulations. Insurance regulator IRDA immediately struck down on this call and asked insurance companies to ignore SEBI‘s order. What followed was a bitter public spat between the two regulators with the Finance Minister intervening and calling for a joint application before the judiciary. The genesis of this issue lies in an August 2009 verdict by SEBI which banned the entry loads on Mutual Funds. Entry load is the commission that an investor has to pay while purchasing units of a mutual fund. After this verdict, entry loads on Mutual Funds had to be cut down to as low as 0.5-1%. In contrast, ULIPs had entry loads ranging from 15-20%. One of the biggest assets of MFs is their wide distribution network which can reach out to a large number of investors. However, with the reduction in the upfront commissions, selling Mutual Fund units was no longer a very attractive proposition for the agents in this distribution network. This is where ULIPs came into the picture. As these products still continued to have large upfront commissions, most distributors shifted their attention from selling MFs to selling ULIPs. Just to give you a sense of how every distributor jumped on to the ULIP bandwagon, fathom this: during the previous financial year, over 1.6 million ULIP policies were sold, with the total premium involved in these products amounting to over $20 billion. Most of these funds are invested in the capital market. To put this figure in perspective, the net FII inflow in the previous fiscal was around $32 billion. The effect that FIIs can have on the movement in the Indian markets has been well documented. So, the burgeoning size of the ULIP products meant that SEBI essentially had no control over a major investor segment in the capital markets. This finally
culminated in SEBI‘s April 10 order banning 14 private insurers from selling any new ULIP product without registering with SEBI. The main contention by SEBI was that ULIPs ultimately are investment products. As mentioned earlier, they have a very significant investment in the capital markets. So, it does make sense to bring such products under the purview of the capital market regulator. But a couple of things regarding SEBI‘s ban order stuck out. Firstly, it quite conspicuously left out the public sector insurers (read LIC) from the ambit of the ban. Given the size of these insurers, it‘s hard to explain why they were treated differentially than the private insurers. Secondly, the manner in which it placed the ban. It should never have been a unilateral decision. The insurance regulator IRDA was not kept in the loop while taking this drastic step which ultimately gave rise to the bitter public dispute between the two regulators. The central government had to finally step in to resolve this turf war between the regulators. The verdict was finally ruled in favor of IRDA with the government promulgating an ordinance to amend existing laws to include ULIPs under the life insurance business. This highly publicized tussle brought various aspects of ULIPs into limelight. There already were a number of concerns being raised by various stakeholders regarding some of the problems this product had. First of all, it had a significant entry load – as high as 30% in some cases. This encouraged distributors to push the product to the investors and often led to misrepresentation of information related to the product in order to sell more and more of them. Secondly, the surrender charges, imposed on premature encashment of investment units, were exorbitant. In some cases, surrender charges went up to as high as 90% if the policy was surrendered in the first three years. IRDA had already started the process of instituting more stringent rules to overcome these aspects of ULIPs. However, the events over the past few months precipitated in some sweeping changes being suggested by the regulator. Let‘s analyze some of the new guidelines it has provided on the product and its possible impacts on the insurers and the investors: Increasing the Lock-in Period to five years from the current three. The premium paying term has also been increased to five years To spread out the front end expense evenly over the lock-in period. This is good news for the investors as it would insure that the insurance seller is not ‗miss-selling‘ the product to realize short term gains. Also, with rational front end cost, more investors would be able to afford these investments Capping the surrender charges to 15% of fund value as well as in absolute terms. Again, this would be beneficial for the investors as they would now incur a smaller cost while switching from one policy to another. However, this would mean a big loss in revenues for the insurers. According to estimates, around 25-30% of the policies lapse within the current lock-in period of three years with surrender charges ranging from 50%-90%. This
combined with the spreading out of the entry load would mean a significant reduction in the revenues of the insurers as well as an increase in their time to break even. The risk cover has been increased to at least 10 times the annual premium being paid. This would mean that the insurers would have to set aside larger capital which would dampen their profitability. It would also deter marginal companies from entering in this segment. As regards pension products, all ULIP pension/annuity products shall offer a minimum guaranteed return of 4.5% per annum. This will ensure that the life time savings of the pensioners are protected from any adverse fluctuations. Currently, there are some unitlinked pension plans that can invest up to 100 per cent in equities. However, with the guaranteed return clause, exposure in fixed income securities will increase
So it is quite evident that the new regulations, which the insurance companies are required to comply with by September 1st, would serve to reduce the attractiveness of ULIPs for these companies. However, looking on the positive side, it would create a level playing field for other products like Mutual Funds whose popularity had waned significantly over the past year. And most importantly, the investors will most certainly be better off with these changes. On how the insurance companies would deal with these changes, only time will tell. But I have a strong feeling that after MFs and ULIPs, it‘s time for another new kid on the block. A year from now, the dialectic may shift to yet another product.
Chapter 4 Data Analysis and Interpretation
1. Gender Figure No: 4.1
Interpretation: Out of the sample size 100, male respondents are 73 and the female respondents are 27. 2. Age group. Figure No: 4.2
Interpretation: The pie chart shows most of the age is between 18-30% which constitutes 74% of the sample size of 100. The age group between 31-40 constitutes for 11%, age group 41-50 constitutes for 10% and the age group above 50 constitutes for 5%.
3. Annual Income Figure No: 4.3
Interpretation: The above pie diagram shows the Annual Income of the respondents. Of the total 100 respondents the annual income between Rs.250000 – Rs.400000 constitute of 27% , and the annual income less than Rs.150000 constitutes for 33%, the annual income between Rs.150000Rs.250000 constitutes for 19% and the respondents whose annual income is above Rs.400000 constitute for 21%. 4. Savings Per Annum Figure No: 4.4
Interpretation: The above pie diagram shows the annual savings of the respondents. Majority of the savings of the respondents is less than 15000 which constitute for 41%, and annual savings of the respondents between Rs.15000 – Rs.40000 constitute for 20%, the annual savings of the respondents between Rs.40000 - Rs.100000 constitute for 24% and the annual savings of the respondents higher than Rs.100000 constitute for 15%.
5. Qualification Figure No: 4.5
Interpretation: The above graph shows the qualification the respondents. Of the total of 100 respondents the majority of the respondents are Graduates which constitute for 51, and the post graduates constitute for 44 and others constitute for 5. 6. Occupation Figure No: 4.6
Interpretation: The graph shows the occupation of the respondents. The majority of the respondents work for a private company which constitute for 54, and the respondents who work for Government Service constitute for 13, Self Employed constitute for 15 and the others constitute for 18.
7. Preferred Mode Of Savings Figure No: 4.7
Interpretation: The above pie diagram shows the mode of savings of the investors. While majority of the respondents prefer for Bank Deposits, percentage of respondents for investments constitute for 33% and fixed deposits constitute for 22% and other constitute for 6%. 8. What Do You Consider While Making An Investment Decision? Figure No; 4.8
Interpretation: The above diagram shows whose decision the respondents consider the most. Most of the respondents take their own decision which constitute for 40%, decision of the family respondents constitute for 33%, respondents who consider their friends decision constitute for 19% and others constitute for 8%.
9. Your Opinion About Investment? Figure No: 4.9
Interpretation: This graph shows the opinion of the respondents about investment. Out of the 100 respondents 18 respondents have the opinion on investment as Tax savings, while 33 respondents have the opinion of expecting good returns, 44 respondents expect for a better future and others constitute for 5. 10. Preferably You Would Like To Invest In? Figure No: 4.10
Interpretation: The above graph shows preference of the respondents for investment. Majority of the respondents prefer to investment in Mutual Funds which constitute for 33, while 23 respondents would like to invest in shares, 28 respondents prefer to invest in insurance products and other type of investments constitute for 10.
11. How Frequently Do You Invest Figure No: 4.11
Interpretation: The above graph shows the frequency of investment of the respondents. Majority of the respondents prefer to invest only once a year which constitute for 62, while the respondents who would like to between 2-4 times a year constitute for 30 and the respondents who like to invest more than 4 times a year constitute for 8. 12. How Long Do You Invest Figure No: 4.12
Interpretation: The above graph shows the tenure of the investment of respondents. Most of the respondents prefer for short returns. The respondents who would like to invest for lee than 2 years constitute for 40, while the respondents who would like to invest between 2- 5 years constitute for 31. The respondents who would like to invest between 5-10 years constitute for 24 and the respondents for more than 10 years constitute for 5.
13. Your Opinion On Insurance? Figure No: 4.13
Interpretation: The above graph shows the opinion of respondents towards insurance. Majority of the respondents consider Insurance as a risk coverage which constitute for 64 and the respondents who have an opinion on Insurance as investment constitute for 34. 14. Do You Have An Insurance Policy? Figure No: 4.14
Interpretation: The above graph shows the number of respondents who hold an insurance policy. Out of 100 respondents 78 respondents have Insurance while the remaining 22 respondents do not hold an insurance policy.
15. Do You Have an Idea on ULIP’s? Figure No: 4.15
Interpretation: This pie diagram shows how many respondents have an idea on ULIP‘s. Majority of respondents don‘t have an idea on ULIP‘s. Only 28 respondents have an idea on ULIP‘s and the remaining 78 respondents don‘t have an idea on ULIP‘s
16. Do You Hold An ULIP? Figure No: 4.16
Interpretation: This diagram shows the respondent who hold an ULIP. Out of the 100 respondents only 18 respondents do hold an ULIP and the remaining 82 respondents don‘t hold an ULIP.
17. Rank The Life Insurance Companies Figure No: 4.17
Interpretation: This graph shows the ranking of the life insurance companies. Out of the 100 respondents 20 respondents rank Bajaj Allianz first, 18 respondents rank ICICI as first rank, 14 respondents rank Reliance first rank, 14 respondents rank Tata Aig first Rank and 14 respondents rank ING Vysya as first rank.
18. How Do You Consider The Following Factors Influence Your Investment Decision While Taking An Insurance Policy? Figure No: 4.18
Interpretation: The above graph shows the factors that influence an investor while taking an insurance policy.
Hypothesis Using Chi-Square:
The relationship between important factors has been analyzed with the help of Chi-Square Test. The following pairs have been analyzed: a. Gender and Risk Factor: Gender and the Risk Tolerance Level of an investor are two independent attributes. The relationship between the Gender and Risk Tolerance of investors can be presented with the help of following table and diagram: Highly Important 9 3 12 Important 13 4 17 Neutral 28 3 31 Unimportant 12 12 24 Extremely Unimportant 11 5 16
73 27 100
Interpretation: Above table shows the relationship between Gender and Risk Tolerance of Respondents. Let us consider H0: Gender and Risk Factor of Respondents are independent. H1: Gender and Risk Factor of Respondents are dependent. Conducting chi square test at 5% level of significance, it is found that χ2 = 11.43 as the computed value which is very less than the table value 16.92 so we accept H0. Hence we can conclude that Gender and Risk Tolerance of an investor are two independent attributes. Generally, it is considered that women tend to be risk averse in comparison with men.
Figure No: 4.19
b. Age and Investment Avenues: Age of investor and the Investment Avenues preferred by an investor are two independent attributes. The relationship between the Age and Investment Avenues preferred by the investors can be presented with the help of following table and diagram:
Age/Investments Mutual Funds 18-30 43 31-40 2 41-50 1 >50 1 38
Shares 14 1 2 1 18
Insurance Products 21 6 4 1 32
Others 5 2 3 2 12 74 11 10 5 100
Above table shows the relationship between Age and Investment Avenues preferred by the Respondents. Let us take, H0: Age and Preferred Investment Avenues by investors are independent. H1: Age and Preferred Investment Avenues by investors are dependent. Conducting chi square test at 5% level of significance, it is found that χ2 = 15.89, but the computed value is less than the table value 26.1 so we accept H0. Hence null hypothesis rejected and we can conclude that age and preferred investment avenues by the investors are two dependent attributes of the investor.
Figure No: 4.20
c. Age and Risk Factor: Age of investor and the Risk factor of an investor are two independent attributes. The relationship between the Age and Risk Factor of an investors can be presented with the help of following table and diagram: Age/Risk Factor 18-30 31-40 41-50 >50 Highly Important 21 3 2 1 27 Important 34 5 3 3 45 Neutral 11 1 2 1 15 Unimportant Highly Unimportant 6 2 1 1 2 1 0 0 9 4
74 11 10 5 100
Above table shows the relationship between Age and Risk Factor preferred by the Respondents. Let us take, H0: Age and Risk Factor preferred by investors are independent. H1: Age and Risk Factor preferred by investors are dependent. Conducting chi square test at 5% level of significance, it is found that χ2 = 5.58, but the computed value is very less than the table value 32.9 so we accept H0. Hence null hypothesis rejected and we can conclude that age and preferred investment avenues by the investors are two dependent attributes of the investor.
Figure No: 4.21
d. Age and Income Factor: Age of investor and the Income factor of an investor are two independent attributes. The relationship between the Age and Income Factor of an investors can be presented with the help of following table and diagram: Age/Income Factor 18-30 31-40 41-50 >50 Highly Important 18 2 1 2 23 Important 39 6 5 1 51 Neutral 11 1 2 0 14 Unimportant Extremely Unimportant 2 4 1 1 1 1 1 1 5 7
74 11 10 5 100
Interpretation: Above table shows the relationship between Age and Income factor of Respondents. Let us consider H0: Age and Income Factor of Respondents are independent. H1: Age and Income Factor of Respondents are dependent. Conducting chi square test at 5% level of significance, it is found that χ2 = 9.302 as the computed value which is very less than the table value 32.9 so we accept H0. Hence we can conclude that Gender and Risk Tolerance of an investor are two independent attributes. Generally, it is considered that women tend to be risk averse in comparison with men.
Figure No: 4.22
Chapter 5 Findings, Suggestions and Conclusions
Age and risk factor are independent. Risk factor is not relevant to age while taking an
ULIP policy Age and income factor are independent. Income factor is independent of age while taking an ULIP policy. Age is not a consideration while investing. Gender is independent of risk factor. Gender has no dependency with risk factor while taking an ULIP policy. ULIPs are liquid and offer flexibility to the investor after some period. Majority of the respondents do hold a life insurance. 78% of the respondents hold a Life insurance policy and 22% of the respondents don‘t hold a life insurance. 64% of the respondents are of opinion that insurance is for risk coverage. Only 36% of the respondents look it in investment perspective. 39% of the respondents would like to invest in Mutual funds, 28% of the respondents in Insurance products and 23% off respondents in Stocks. Only 25% of the respondents have an idea on ULIP policy, and the remaining 75% don‘t have an idea on ULIP policies. And 18% of the respondents do hold an ULIP policy. Respondents rank safety, return on investment and sum assured as important factors while taking an ULIP policy. Out of 100 respondents 62 respondents would like to invest only once in a year,30 respondents would like to invest 2-4 times a year and 8 respondents would like to invest more than 4 times a year 44% of respondents rank investment is for better future, 33% of respondents are of opinion of good returns and 17% of respondents are of opinion of tax savings. 33% of respondents would like to save in investments, 39% in bank deposits and 22% of respondents in fixed deposits.
5.2 Suggestions: Awareness on ULIP has to be increased As people consider risk factor is important company should give minimum guarantee of
money so that people may consider this policy as most secured and also giving good profit. Company should come up with group unit linked plans so that people may have option to go for unit-linked policy. The unit-linked policies are suitable to those who are active investors and at the same time they want to cover their life. Life insurance is the classical example of unsought goods. The nature of that is the consumer does know about or does not normally think of buying. It requires personal selling support. So agents should be fully informative and they should be able to tell the entire information customer needed.
The above study showed that unit linked policy has attractive market. But main problem is awareness. Companies should explain the advantages they are getting out of unit-linked policy. They should come up with some salient features like different investment criteria, group investment plans etc. In India people are not willing to invest their money in market but they make idle investment. So it is the work of middlemen win the willingness of people to invest in market. Also company should concentrate on death benefit and term of policy.
5.4 Appendix: Questionnaire
(Survey on Unit Linked Insurance Policies) Name: _________________________________________________________________ Gender: Age Group: Qualification: Occupation: Male 18-30 Female 31-40 41-50 Graduation Contact No: ________________________ >50 12th <12th Self Employed 150000-250000 >400000 40000-100000 > 100000 Other________
Post-graduation Government Service
Private Company <150000 250000-400000 15000-40000
1. Your income range (Annum) :
2. Your savings per year:
3. You would prefer savings in which form? Bank Deposits Fixed Deposits Investments Others ________
4. What do you consider while making investment decision? Family Advice Friends Advice Your Own Advice Others ________
5. Your opinion about investment: Tax Saving Good Returns Better Future Other __________
6. Preferably you would like to invest in: Mutual Funds Stocks and shares Insurance products Other _________
7. How frequently do you invest? Once a year 2-4 times a year More than 4 times a year
8. Your opinion on insurance? Risk coverage Investment
9. Do you have an idea on ULIP ? Yes No
10. Do you hold ant ULIP policy Yes No If yes company name________________
11. How long do you invest? < 2 yrs 2-5 yrs 6-10 yrs > 10 yrs
12. Rank Life insurance companies that you are aware of? ICICI Reliance Tata Aig Bajaj Allianz ING Vysya
13. How do you consider the following factors inflence your investment decision? Factors Brand image Risk factor Income Sum assured Claim settlement Safety Liquidity Tax saving Performance of past schemes Return on investment Market conditions Withdrawl benefits Savings component Maturity benefits Charges levied 5 4 3 2 1
Bibliography: http://economictimes.indiatimes.com/configspace/ads/defaultinterstitial.html http://www.reliancelife.com/rlic/index.aspx http://www.rsec.co.in/home http://www.irda.gov.in/Defaulthome.aspx?page=H1 http://en.wikipedia.org/wiki/Unit-linked_insurance_plan http://www.ulipindia.co.in/
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