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Investment-linked insurance policies (ILPs) have both life insurance and investment components. Your premiums are used to
pay for units in investmentlinked sub-fund(s) of your choice. Some of the units you buy are then sold to pay for insurance
and other charges, while the rest remain invested.
ILPs provide insurance protection in the event of death or total and permanent disability (TPD), if included. Depending on the
policy, the death or TPD benefit may comprise the higher of the sum assured or value of ILP units or some combination of the
sum assured and the value of ILP units. How much is paid depends on the value of the units of the sub-fund at the time.
Some consumers prefer ILPs because they want more exposure to investments than other life insurance products may
provide. But if you are more concerned about getting insurance coverage, make sure the product you buy meets this need.
You may need to consider other life insurance products.
ILPs can be classified into two categories:
Single premium
ILPs
You pay a lump sum premium to buy units in a sub-fund. Most single premium ILPs provide lower
insurance protection than regular premiums ILPs.
Regular premium
ILPs
You pay premiums on an on-going basis. Regular premium ILPs may allow you to vary the level of
insurance coverage you need.
Unlike whole life or endowment participating policies, ILPs usually do not have guaranteed cash values. The value of the ILP
depends on the price of the units in the sub-fund which in turn depends on the sub-funds performance.
Some investment products have been categorised as Specified Investment Products (SIPs). Do check with your financial
institution whether the product you are considering is an SIP. For information on the requirements in place when
transacting SIPs, please refer to the Consumer Guide on SIPs requirements.
While the premiums of an ILP remain constant throughout the life of the policy, the cost of insurance coverage increases year
by year as you get older. This means more units may be sold to pay for the insurance charges, leaving fewer units invested
to accumulate cash values under your policy.
Investment-linked sub-funds
ILP sub-funds have different features and risks, catering to different consumer preferences. The sub-funds invest in portfolios
of assets according to the stated investment objective for the fund. The sub-fund may be managed by the insurer or the
insurers appointed third party fund manager(s).
What are the benefits?
Some consumers prefer ILPs because they want more exposure to investments than other life insurance products may
provide. There is a range of sub-funds to choose from and most regular premium ILPs give you the flexibility to vary the
insurance coverage and investment mix according to your changing financial needs.
What is the difference between an ILP and other life insurance policies?
The key differences between ILPs and other life insurance policies, such as participating whole life and endowment policies
and term insurance policies, are summarised in the following table:
ILPs
Investment Mandate
Bonuses
Assets of
policyholders
identifiable?
Cash Value
Investment Risk
Premium Breakdown
2 ARM Life Plc is licensed and regulated by the IRDA to underwrite Life,
Annuity and Health insurance. Embedded Value could be calculated using
either the Profits to Shareholders Method or Cost of Capital Method Where as
the former calculates the distributable profits to the shareholders within a
calendar period and then takes the present value of those profits, the latter
quantifies the cost of capital at the end of a period. Embedded Value is also a
useful tool in setting the compensation of the senior management of a
company. Being the decision makers, it could be useful to align their
management decisions and career horizon to the long term goals and
objectives of the company. This can be achieved by tying the impact of those
decisions to the impact on the embedded value of the Life insurance
company. There should also be a correlation between the stock market
valuation of a Life Insurance company and its embedded value. This tool is
highly useful in identifying potential bargains in the stock market
valuation/pricing of insurance company stocks. Furthermore, the embedded
value tool is also applicable and highly effective in actuarial appraisal. This is
the inclusion of potential future new sales in the valuation of a life insurance
company for the purpose of determining a fair and accurate acquisition value
of a life insurance business. The embedded value is another tool that can be
used by investment managers and financial advisors in the valuation of a life
insurance asset in addition to other tools such as price-to-earnings ratio,
return on equity and net asset value. Before you make that decision to
acquire a life insurance company or indeed advise a client to invest in one,
you must amongst other factors take cognisance of this tool and its outcome
by leveraging the services of actuaries and skilled investment
managers/financial advisors.
non-life insurance business grew by 1.9 per cent with Latin America reporting
a high growth in 2011. The public sector insurers exhibited growth of 21.50
per cent and the private sector general insurers registered a growth of 28.06
per cent in 2011-12. Insurance penetration of the non-life insurance sector in
the country has remained near constant in the range of 0.55-0.75 per cent
over the last 10 years. However, the insurance density of non-life sector
reached the peak of USD 10.0 in 2011 from its level of USD 2.4 in 2001.2
3. SOLVENCY MARGIN & REGULATIONS IN INDIA
Solvency Assessment
'Solvency' is defined differently by different users. Broadly, it is the ability of
an insurer to meet all its liabilities whenever they fall due. Simplistically, it is
represented by the excess of an insurer's assets over its liabilities.
One of the many uses of the risk management process is to determine the
solvency requirements or standards. These standards can be set from internal
management perspective or from regulatory perspective.
Internal From the management's point of view, having identified the total
capital requirements from the risk management process, the capital
representing the 'tail' events (i.e. the risk of the high impact, low frequency
events) would essentially be the capital required to ensure that the company
remains solvent even under adverse circumstances. This assumes that low
impact, high frequency events are covered by the prudent margins in the
reserves. If we move towards a realistic valuation of liabilities (as under the
IAS), capital requirements would need to cover all types of deviations from
best estimate assumptions. In any case, given that there may be various
approximations used in the estimation of the total capital and that the model
& the parameters used may always have an element of error, in practice, the
desired level of solvency may be higher than that represented by the 'tail'
events.
In the absence of any regulatory requirement, the capital actually held by the
company to support these 'tail' events may then depend upon the risk taking
appetite of the shareholders and the cost of capital.
Regulatory
The regulators' primary role is to protect policyholders' interests. They have to
ensure that insurers always have sufficient funds to meet the policyholders'
dues under any circumstances (i.e. even under most of the extreme
circumstances).
It is important to consider the circumstances under which regulators may
want to ensure solvency of a life insurer. They may be either on a break-up
basis/close-down (i.e. to ensure that the insurer will be able to meet the
liabilities of the in-force business) or on a going concern basis (i.e. to ensure
that the insurer will be able to meet the liabilities of the in-force business as
well as the new business that may be written in future). The level of 'solvency
capital' required under these two circumstances may be very different.
From the regulatory point of view, the 'solvency capital' is required
for various reasons
To reduce the likelihood of the insurer not meeting liabilities when they
fall due
To provide a cushion to limit the losses, in the event of insolvency
To provide an early warning system for regulatory intervention and early
corrective action
To promote the confidence of the general public
The solvency of an insurance firm refers to its ability to pay claims. An insurer
is insolvent if its assets are inadequate or illiquid to pay the claims arising.
The solvency of insurance company or its financial strength depends chiefly
on whether sufficient technical reserves have been set up for the obligations
entered into and whether the company has adequate capital as security
(Kansal 2004)3. Solvency margin is the excess of assets over liabilities that
the insurance company has to maintain in the form of a safety margin. The
minimum solvency margin and the methods of valuations of assets and
liabilities of an insurer are prescribed in the insurance regulations. Pentikainen
Helsinki (1967)4 highlighted the importance of evaluating the assets and
liabilities in a reliable way.
Solvency ratio is an important indicator of the financial health of an insurance
company and indicates the ability of the firm to survive in the long run.
Insurance Regulatory and Development Authority (IRDA), the apex body in
India, has prescribed methods of valuation of assets and Liabilities of general
insurance as: a) Available Solvency Margin means the excess of value of
assets (furnished in IRDA-Form-AA in accordance with Schedule I) over the
value of general insurance liabilities (furnished in Form HG as specified in
Regulation 4 of Insurance Regulatoryand Development Authority (Assets,
Liabilities, and Solvency Margin of Insurers) Regulations, 2000)5.b) Solvency
Ratio (SR) means the ratio of the amount of Available Solvency Margin (ASM)
to the amount of Required Solvency Margin (RSM). Every general insurer shall
determine the RSM, the ASM and the SR in Form KG. Table 1 portrays the
solvency ratio maintained by the Indian general insurers (Refer Appendix for
the list of general insurers in India) during 2005-06 to 2011-12. It is clear from
the table that the SR maintained by SBI was the highest (12) in 2010-11 and
Shriram was the lowest (0.92) in 2011-12.
This is an important step and involves the collection of data from various
sources and extensive
discussions within the team. Frequently, the risks faced by a life insurer are
not isolated and one
risk may trigger another risk event. Each department has to carefully consider
the risk areas they are subject to and also whether the areas identified by
other departments would affect the smooth functioning of their own
department. Care will be required to ensure that risks are neither missed nor
double counted.
It is often convenient to adopt a questionnaire-based approach to gather
information from various levels within a department. The key personnel
should then decide whether the issues identified in the questionnaire would
really form a risk and this process is often facilitated through a workshop.
Consolidated risk summaries from each department would then be discussed
with the risk management function. At this stage, duplicate or similar risks
could be grouped and some additional risks may be identified as a result of
these discussions.
Alternative approaches to identify risks may include using standard templates
currently available in some insurance markets or for some other financial
industries (e.g. banking) and identify risks
fitting into these templates. Care will be required not to exclude the risk areas
that may be unique to the individual company or market (if templates from
other markets are used) or the life insurance industry (if templates from other
industries are used).
c. Classify risks and assign responsibilities
(for the banking industry) In its October 1999 "Guidelines for Risk
Management Systems in banks in India", the Reserve Bank of India suggested
the following broad categories for risk classification
Credit Risk
Market Risk (which include Liquidity Risk, Interest Rate Risk, Foreign
Exchange Rate Risk, Commodity Price Risk, Equity Price Risk)
Operational Risk
The nature of some of these risks may differ in life insurance companies from
those in
banks. Also, the period over which a life insurer is considered to have
exposure to a risk may
also typically be longer than in banks. Some of the unique risks in life
insurance companies
(e.g. underwriting risk) will not be present in banks. Nevertheless, the above
risk
classification system can be used as a starting point to develop a
classification system that is
suitable for life insurance companies.
B] Canada (Office of the Superintendent of Financial Institutions)
The
In its November 2002 report, the IAA Working Party on Solvency suggested
the following