C1,2 - Life Insurance Products and Markets (India and Zimbabwe)

Life Insurance Products and Markets (A Review of India and Zimbabwe)
Leaked
Life Insurance Products and Markets
(A Review of India and Zimbabwe)
By
Dr Taonaziso Chowa (2018)
ACKNOWLEDGEMENTS
I acknowledge the work of Heather N Tshuma done under my Supervision contained in this
module.
1| Contingencies 2018 [IFM]

Table of Contents
ACKNOWLEDGEMENTS ....................................................................................................... 1
TABLE OF FIGURES AND TABLES ..................................................................................... 3
ACRONYMS ............................................................................................................................. 4
1.1 Background ................................................................................................................. 5
1.2 Introduction ................................................................................................................. 7
1.3 Defining Life Insurance .............................................................................................. 7
1.3.1 Features of Life insurance .................................................................................... 8
1.3.2 Advantages of Life Insurance .............................................................................. 9
1.3.3 Life Insurance versus Savings ........................................................................... 10
1.4 The Fascinating Origins Life Insurance .................................................................... 11
1.5 The product landscape of Life Insurance .................................................................. 14
1.6 Product Design and Pricing ....................................................................................... 17
1.6.1 Evolution in product pricing .............................................................................. 17
1.6.2 Non risk factors to consider in product pricing ................................................. 18
1.6.3 Risk Characteristics to consider in product pricing ........................................... 22
1.7 Competition and Regulation Issues in Life Insurance .............................................. 25
1.8 Life Insurance in India .............................................................................................. 28
1.8.1 A Historical Review of Indian Insurance Industry ............................................ 29
1.8.2 Changing Competitive Environment ................................................................. 30
1.8.3 Product Innovations ........................................................................................... 30
1.8.4 Changing Trends in Life Insurance Policy ........................................................ 32
1.9 Re-insurance in Life insurance .................................................................................. 34
1.10 Life insurance in Zimbabwe .................................................................................. 37
1.10.1 Zimbabwe’s Life Insurance Regulation ............................................................. 37
1.10.2 Industry Overview ............................................................................................. 38

TABLE OF FIGURES AND TABLES

Fig 2.1 Indian Insurance Market 2000-2011 …………………………………………………….……………………….……
Fig 2.2 Graph showing growth of unit linked business and non-unit linked business ………….….………..
Fig 2.3 Market share by company in Zimbabwe ………………………………………………………………………….....
Fig 2.4 Gross Written Premium by Product Class by for the half year ended 30 June 2015 …………..….
Table 2.1 Market share of Public and Private Insurance Companies ………………………………..……….....…
Table 2.2 Product Innovations in Indian insurance …………………………………………………………………..……..
Table2.3 Comparison of Unit Linked and Non-linked Insurance Plans …………………………………….…....…

ACRONYMS
BC Before Christ
ELT English Life Tables
FDI Foreign Direct Investment
GLA Group Life Assurance
HIV/AIDS Human Immunodeficiency Virus/ Acquired Immune Deficiency
Syndrome
IMV Illustrative Maturity Values
IRDA Insurance Regulatory and Development Authority
LIC Life Insurance Scheme
SA South Africa
SSS Salary Saving Scheme
UK The United Kingdom
ULIP Unit LinkedIinsurance Policy

1.1 Background
A life insurance product must fill a need or solve a problem, be consistent with company
goals and strategies and be legal not to make the regulator unhappy or uncomfortable as it is
assumed that adequate research would have been done forehand pertaining to competitor
product analysis, consumerism and product risks and constraints (Frylinck 2012). All other
things being equal, simplicity in product design is preferable to complexity. Hence insurance
players’ ultimate desire is to develop marketable, competitive and profitable products.
As explained on the DFS website (2016) product pricing involves finding a fair price for a
life insurance policy, the premium rate based on two underlying concepts namely mortality
and interest. A third variable is the expense factor which is the amount the company adds to
the cost of the policy to cover operating costs of selling insurance, investing the premiums,
and paying claims.
“Mortality assumptions are used in the calculations performed to determine how much capital
life insurance companies should hold, the prices they charge for their products, and surrender
values. Life insurance products include protection policies such as term insurance, the
protection element of some options (such as guaranteed annuity options) attached to policies
that primarily serve as investments, annuities and deferred annuities, and lifetime mortgages.
Mortality assumptions are also used in calculating the embedded values that appear in annual
reports and accounts, and in calculations for mergers and acquisitions and transfers of
business. For policies that pay benefits on death, such as term insurance, improving mortality
rates result in lower premiums and lower capital requirements. For policies that pay benefits
on survival, such as annuities, guaranteed annuity options and lifetime mortgages, they result
in higher premiums and higher capital requirements” (Board of Actuarial Standards-2008).
It is the mortality tables that give the company a basic estimate of how much money it will
need to pay for death claims each year as the life insurer can determine the average life
expectancy for each age group (DFS website-2016). Life assurance in Zimbabwe remains a
thump-sucking venture without a national best practice or benchmark as there are no specific
mortality tables for Zimbabwe that are based on Zimbabwean data. This has seen actuaries in
Zimbabwean life offices, pensions, medical aid schemes and funeral assurance schemes
basing their mortality assumptions on blended mortality tables with a bias towards South
Africa (SA) the SA 1985-90 and the SA1956-62 or United Kingdom e.g. A1924/29,which

brings uncertainty as to whether such modifications lead to an accurate depiction of the

Zimbabwean mortality.
Didonna (1997) and Bakos (1997) highlight that both over- and underestimation of future
mortality rates may have adverse consequences for consumers, through protection products
and annuities and deferred annuities respectively. Lower annuity rates hit members of defined
contribution pension schemes particularly hard, as the amount of pension they receive in
retirement depends on annuity prices at the time they retire (Doll - 1997). Mortality risk is of
paramount importance in product design. Institute and Faculty of Actuaries (2016a) explicitly
highlight that in most of the investigations carried out by an actuary, assumptions will need to
be made regarding future mortality. There are three risks associated with these assumptions:
1. A “model” risk that the model, typically a probability distribution, chosen to represent
future mortality, e.t.c, may not be appropriate or may contain errors;
2. A “parameter” risk that the parameters used with the model may not adequately
reflect the future experience of the class of lives insured or to be insured, even though
the underlying model may be appropriate;
3. A “random fluctuations” risk that the actual future experience may not correspond
with the model and parameters adopted, even though these adequately reflect the class
of lives insured or to be insured. The first two risks always exist, as actuaries cannot
predict the future with complete certainty. All these three risks tantamount an under
estimation or over-estimation of mortality which is what Zimbabwean life insurance
product designers are exposed to due to use of foreign life tables.
“If the assumptions that are used overestimate future mortality rates (ie, people live longer
than assumed), and other assumptions are held constant, in relation to protection products
such as term insurance, customers will pay more than they need have done, and insurance
companies will make higher than expected profits on these products. The effect on insurance
company profits will be slightly counterbalanced by the effect of the extra capital they will
have had to hold in respect of these policies. In relation to annuities and deferred annuities,
customers will pay less than the benefits are worth (annuity rates will be higher), and
insurance companies will make lower than expected profits on these products. Insurance
companies will hold less capital in respect of annuities than they should, and there will be a
greater risk of insolvency. If the assumptions underestimate future mortality rates (i.e., people
die sooner than assumed), the effects on insurance companies and their customers will be

reversed. Term insurance business will be less profitable than anticipated, with a greater risk
of insolvency for insurance companies, and annuity business will be more profitable.
Customers will pay less than the benefits are worth for term insurance, and more than they
need have done for annuities and deferred annuities” (Board of Actuarial Standards website-
2008).
1.2 Introduction
This module explores the theoretical and empirical findings made by prior academics and
researchers before in life insurance. While considerable attention is given to India and
Zimbabwe, literature and best practices from across the globe are also cited. This module
expounds the life insurance product landscape, regulation, mortality and how competition
consumers come into play.
1.3 Defining Life Insurance

Why have life insurance? Baldwin (1996) gets to the heart of this question and further goes
on to propose that to answer the question one needs to ask himself/herself two more
questions. The first is, “In the event of my death, will anyone experience an economic loss?”
If the answer is yes, then the second question is, “Do I care?” If the person does not have
anyone who will experience a financial loss at his or her death, or if he or she does not care
that those people will experience an economic loss, then that person is not a prospect for life
insurance. As suggested by Mr. Baldwin’s approach, an old axiom in the life insurance
business says that life insurance is only sold when somebody loves somebody.
As the Life and Health Insurance Foundation for Education website (2009) advises, “Life
insurance isn’t for the people who die. It’s for the people who live.” This is a major shift of
perspective for many prospects. (It’s about them, not you.) The following discussion
addresses the needs that may result from the death of a breadwinner and should be your
foundation for educating a prospect regarding the needs for life insurance. So if death is the
only truth, then why do we ignore the implications of the event? Because of the nature of its
permanence, and all pervasive; death requires understanding the financial implications on the
dependents. Life insurance is therefore the most important of all forms of insurance.
The theory of insurance, in general terms, may be expressed to mean that the good fortune of
the many compensates for the misfortune of the few. As defined by Bunyon (2006), “A
Contract of Life Insurance is one in which one party agrees to pay a given sum upon the
happening of a particular event contingent upon the duration of human life, in consideration

of the immediate payment of a smaller sum or certain equivalent periodical payments by

another.”
Verghese & Dash (2011) prefer explaining life insurance as, “ a contract that pledges
payment of an amount to the person assured (or his nominee) on the happening of the event
insured against. The contract is valid for payment of the insured amount during: the date of
maturity, or specified dates at periodic intervals, or unfortunate death, if it occurs earlier.
Among other things, the contract also provides for the payment of premium periodically to
the insurance provider by the policyholder. Life insurance is universally acknowledged to be
an institution which eliminates ‘risk,’ substituting certainty for uncertainty, and comes to the
timely aid of the family in the unfortunate event of death of the breadwinner. By and large,
life insurance is society’s partial solution to the problems caused by death. Life insurance, in
short, is concerned with two hazards that stand across the life-path of every person: that of
dying prematurely leaving a dependent family to fend for itself, and that of living till old age
without visible means of support.”
The above definition is not a deviation from the definition of life assurance according to the
Insurance Regulatory and Development Authority (IRDA)’s website (2016) where they
define it as a,” financial cover for a contingency linked with human life, like death, disability,
accident, retirement etc. As human life is subject to risks of death and disability due to
natural and accidental causes and when it is lost or disabled permanently or temporarily, there
is loss of income to the household. Though human life cannot be valued, a monetary sum
could be determined based on the loss of income in future years. Hence, in life insurance, the
Sum Assured (or the amount guaranteed to be paid in the event of a loss) is by way of a
‘benefit’. Life Insurance products provide a definite amount of money in case the life insured
dies during the term of the policy or becomes disabled on account of an accident.”
1.3.1 Features of Life insurance

Verghese & Dash (2011) briefly highlight the key features of life insurance as follows;
Nomination: When one makes a nomination, as the policyholder you continue to be the
owner of the policy and the nominee does not have any right under the policy so long as you
are alive. The nominee has only the right to receive the policy monies in case of your death
within the term of the policy.

Assignment: If your intention is that your policy monies should go only to a particular
person, you need to assign the policy in favour of that person
Death Benefit: The primary feature of a life insurance policy is the death benefit it provides.
Permanent policies provide a death benefit that is guaranteed for the life of the insured,
provided the premiums have been paid and the policy has not been surrendered.
Cash Value: The cash value of a permanent life insurance policy is accumulated throughout
the life of the policy. It equals the amount a policy owner would receive, after any applicable
surrender charges, if the policy were surrendered before the insured's death.
Dividends: Many life insurance companies issue life insurance policies that entitle the policy
owner to share in the company's divisible surplus.
Paid-Up Additions: Dividends paid to a policy owner of a participating policy can be used
in numerous ways, one of which is toward the purchase of additional coverage, called paid-up
additions.
Policy Loans: Some life insurance policies allow a policy owner to apply for a loan against
the value of their policy. Either a fixed or variable rate of interest is charged. This feature
allows the policy owner an easily accessible loan in times of need or opportunity.
Conversion from Term to Permanent: When in need of temporary protection, individuals
often purchase term life insurance. If one owns a term policy, sometimes a provision is
available that will allow her to convert her policy to a permanent one without providing
additional proof of insurability.
Disability Waiver of Premium: Waiver of Premium is an option or benefit that can be
attached to a life insurance policy at an additional cost. It guarantees that coverage will stay
in force and continue to grow.
1.3.2 Advantages of Life Insurance
What remains now is to summarise the need and advantages of life insurance i.e. how it
makes life less complicated as highlighted by Verghese & Dash (2011) which are;
 Risk cover: Life Insurance contracts allow an individual to have a risk cover against any
unfortunate event of the future. Income is replaced with non-taxable death benefits and
the burden of your family having to continue without you is reduced
 Tax Deduction: Under section 80C of the Income Tax Act of 1961 India one can get tax
deduction on premiums up to one lakh Rupees. Life Insurance policies thus decrease the
total taxable income of an individual.

 Loans: An individual can easily access loans from different financial institutions by
pledging his insurance policies
 Help pay for your children's college tuition
 Pay the mortgage, car note, and other debts you leave behind
 Pay your funeral expenses and estate taxes
1.3.3 Life Insurance versus Savings

The comparison of life insurance and savings is qualitatively highlighted below as observed
by Verghese & Dash (2011);
Contract of Insurance: A contract of insurance is a contract of utmost good faith technically

known as uberrima fides. The doctrine of disclosing all material facts is embodied in this
important principle, which applies to all forms of insurance. At the time of taking a policy,
policyholder should ensure that all questions in the proposal form are correctly answered.
Any misrepresentation, non-disclosure or fraud in any document leading to the acceptance of
the risk would render the insurance contract null and void.
Protection: Savings through life insurance guarantee full protection against risk of death of
the saver. Also, in case of demise, life insurance assures payment of the entire amount
assured (with bonuses wherever applicable) whereas in other savings schemes, only the
amount saved (with interest) is payable.
Aid To Thrift: “Life insurance encourages 'thrift'. It allows long-term savings since
payments can be made effortlessly because of the 'easy instalment' facility built into the
scheme. (Premium payment for insurance is either monthly, quarterly, half yearly or yearly).
For example, the Salary Saving Scheme (popularly known as SSS) provides a convenient
method of paying premium each month by deduction from one's salary. In this case the
employer directly pays the deducted premium to LIC. The Salary Saving Scheme is ideal for
any institution or establishment subject to specified terms and conditions” (Verghese & Dash
-2011).
Liquidity: In case of insurance, it is easy to acquire loans on the sole security of any policy
that has acquired loan value. Besides, a life insurance policy is also generally accepted as
security, even for a commercial loan.
Tax Relief: Life Insurance is the best way to enjoy tax deductions on income tax and wealth
tax. This is available for amounts paid by way of premium for life insurance subject to
10 | Contingencies 2018 [IFM]

income tax rates in force. Assess can also avail of provisions in the law for tax relief. In such
cases the assured in effect pays a lower premium for insurance than otherwise.
Money When You Need It: A policy that has a suitable insurance plan or a combination of
different plans can be effectively used to meet certain monetary needs that may arise from
time-to-time. Children's education, start-in-life or marriage provision or even periodical
needs for cash over a stretch of time can be less stressful with the help of these policies.
Alternatively, policy money can be made available at the time of one's retirement from
service and used for any specific purpose, such as, purchase of a house or for other
investments. Also, loans are granted to policyholders for house building or for purchase of
flats (subject to certain conditions).
1.4 The Fascinating Origins Life Insurance

The history of life insurance as qualitatively explained on the Insurance Regulatory and
Development Authority‘s website (2007) dates back to 3000 BC. Learned scholars are of the
view that the expression ‘Yogakshemam’ found in the Rig Veda refers to a sort of social
welfare insurance; the ancient Aryans seem to have developed such a concept. Edwin W
Kopf in his treatise – ‘Origin, Development and Practices of Livestock Insurance’ credits
India with being the mother of insurance practices, and opines that the development started in
India and after that spread to ancient Babylon. He refers to the Bridari system of India as the
most ancient institution formed for the mutual help of the members during the contingencies
of daily life. Insurance began as a way of reducing the risk of traders, as early as 5000 BC in
China and 4500 BC in Babylon. Life insurance dates only to ancient Rome; "burial clubs"
covered the cost of members' funeral expenses and helped survivors monetarily. Modern life
insurance started in late 17th century England, originally as insurance for traders: merchants,
ship owners and underwriters met to discuss deals at Lloyd's Coffee House, predecessor to
the famous Lloyd's of London.
The growth of life insurance as a tool of family security, synchronized with the growth of
affluent families in England during the industrial revolution. As a result of the economic
boom brought in by the industrial revolution, the merchants and manufacturers of England
became a wealthy, important and influenced section of the community. They enjoyed a
standard of living which their families would have found difficult to maintain at the event of
their death, unless special provisions were made. To such people, life assurance offered a

special attraction as a provider and protector of family financial security (Insurance

Regulatory and Development Authority‘s website-2007).
The first life insurance company, The Society for the Assurance of Widows and Orphans,
was founded in London in 1699. After the repel of the Royal Charter oft 1720 providing
monopoly to the London Assurance and the Royal Exchange Assurance in 1824 in the UK,
the growth of life insurance companies was phenomenal. Competing companies started
launching many new and attractive life insurance plans.
The Insurance Regulatory and Development Authority ‘s website (2007) further goes on to
note that first life insurance company of the United States of America was the ‘Corporation
for the Relief of the Poor and Distressed Presbyterian Ministers and for the Poor and
Distressed Widows and children of Presbyterian Ministers’; it was started in 1775 by
Benjamin Franklin. This is the oldest life insurance company in the world today, and is now
known as the Convent Life Insurance Company. Benjamin Franklin played a significant in
forming many life insurance companies in the US. The oldest surviving mutual insurance
company is the equitable Life Assurance Society of the UK that was founded in 1756.
Equitable was the first life insurance company to issue the insurance cover for varying terms
subject to certain age restrictions of the assured.
Insurance as an organizational effort came to India in its present form in 1818, and the first
insurance company in India was the Oriental Life Insurance Company, which was started in
Calcutta by the Europeans mainly for the benefit of the European Community in India. In the
initial years, the Company did not consider Indian lives worthy of underwriting. However,
due to the persistent effort of Babu Muttyal Seal, the newly formed Oriental Insurance
Company consented to consider lives for underwriting and insurance cover (Researchers
World website-2012).
This was followed by the incorporation of many more companies like the Bombay Life
Assurance in 1823 and Madras Equitable in 1823. These two and the few other companies
were taken over by Albert Life Assurance Company in 1860; Albert Life Assurance itself
went into liquidation in 1869.
The first fully Indian –owned insurance company, Bombay Mutual Life Assurance Society,
was started on December 3, 1870 in Mumbai. This landmark in the history of Indian
insurance was commemorated in 1970 as the centenary of India’s life insurance. A mutual
insurance company is one that has no equity capital by the stockholders. The capital is owned

by the policyholders. An insurance company, which is owned and controlled by stockholders

or investors, is called a Capital Stock Insurance Company. Another important Indian
insurance venture, the Oriental Government Security Life Assurance Company was
established on May 5, 1874 with Sir Pherozshah Mehta as its founder.
The first two decades of the twentieth century saw lot of growth in insurance business. From
44 companies with total business-in-force as Rs.22.44 crore, it rose to 176 companies with
total business in-force as Rs.298 crore in 1938. During the mushrooming of insurance
companies many financially unsound concerns were also floated which failed miserably. The
Insurance Act 1938 was the first legislation governing not only life insurance but also non-
life insurance to provide strict state control over insurance business. The demand for
nationalization of life insurance industry was made repeatedly in the past but it gathered
momentum in 1944 when a bill to amend the Life Insurance Act 1938 was introduced in the
Legislative Assembly. However, it was much later on the 19th of January, 1956, that life
insurance in India was nationalized. About 154 Indian insurance companies, 16 non- Indian
companies and 75 provident were operating in India at the time of nationalization.
Nationalization was accomplished in two stages; initially the management of the companies
was taken over by means of an Ordinance, and later, the ownership too by means of a
comprehensive bill. The Parliament of India passed the Life Insurance Corporation Act on the
19th of June 1956, and the Life Insurance Corporation of India was created on 1st September,
1956, with the objective of spreading life insurance much more widely and in particular to the
rural areas with a view to reach all insurable persons in the country, providing them adequate
financial cover at a reasonable cost.
In creating awareness about the life insurance in the mind of the Indian public as noted on the
Researchers World website (2012), both in the urban and rural areas, the Postal Department,
through its life insurance wing, played a significant role before the formation of the LIC. It
should be noted that neither in 1956 or thereafter were the Postal Life Insurance (PLI) and the
insurance wings of some of the state governments brought into the fold of LIC.
LIC had a monopoly status from inception in 1956 to the end of December 1999. In 1993 the
Government of Republic of India appointed RN Malhotra Committee to lay down a road map
for privatisation of the life insurance sector.
While the committee submitted its report in 1994, it took another six years before the
enabling legislation was passed in the year 1999, legislation amending the Insurance Act of

1938 and legislating the Insurance Regulatory and Development Authority Act of 1999. The
same year the newly appointed insurance regulator - Insurance Regulatory and Development
Authority (IRDA) started issuing licenses to private life insurers. The Foreign Direct
Investment (FDI) share in joint ventures with Indian partners is capped at 26%. i.e the Indian
partner(s) shall possess maximum stake at 74%. At present, 22 private life insurance
companies operate in India as on 1st April 2009.
1.5 The product landscape of Life Insurance

The most known generic life insurance products are whole life, term life, pure endowment,
endowment and annuities. Modifications have been made around these to yield non-
conventional life products such as unit linked policies, children policies etc. Hence the
industry now has broader product lines which will be qualitatively outlined below.
Term Life Assurance
Such policies cover only the risk during the selected term period. If the policyholder survives
the term, the risk cover comes to an end. According to the Institute and faculty of Actuaries
(2016b) a term plan is a pure risk cover plan, meeting the needs of people who are initially
unable to pay the larger premium required for a whole life or an endowment assurance policy,
but they hope to be able to pay for such a policy in the near future. (Smith & Ray, 2005)
indeed agree that it provides a death benefit for a certain period of time and add on to say
that “If the insured dies within the stated term, the insurance company pays the death benefit
to the beneficiary. When the term ends, the insurance ends. The premiums for term insurance
are usually the lowest among the different types of life insurance, but will increase with the
age of the insured. There is no cash value in a term life policy. This means there is no money
for loans or to pay for the insurance if you can’t pay the premiums.
Endowment Insurance Policy
Endowment insurance as explained by the Institute and Faculty of Actuaries (2016b)are

policies that cover the risk for a specified period and at the end the sum assured is paid back
to the policyholder along with all the bonus accumulated during the term of the policy. The
Endowment insurance policies work in two ways, one they provide life insurance cover and
on the other hand as a vehicle for saving. They are more expensive than Term policies and
Whole life policies. Normally as also noted on Insurance Regulatory and Development
Authority ‘s website (2009) the bonus in calculated on the sum insured but the only draw-
back is that the bonuses are not compounded. Endowment insurance plans are best for people

who do not have a saving and an investing habit on a regular basis. Endowment Insurance
Plans can be bought for a shorter duration period.
Whole Life Insurance Policy
(Smith & Ray, 2005) clearly define whole life insurance as a risk product which provides a
death benefit whenever the insured dies. In most cases, the policy will guarantee the death
benefit. The premiums are usually much higher than a term policy and the full premium must
be paid each year. Whole-life policies have cash value. The difference between the premium
and the actual cost of the insurance is put into a special account, known as the cash-value
account. This cash-value account may be used to help the insured pay the “fixed” premium
payments in later years. The policy owner may borrow against the cash value or receive the
cash value if the policy is cancelled. There may be charges associated with borrowing against
the cash value or cancelling the policy before the death of the insured. The insurance
company may charge interest if the money is borrowed and fees to close out the account if
the policy is cancelled. At death, the beneficiary only receives the death benefit, not the death
benefit and the cash value.
Universal-Life
A universal-life policy is similar to a whole-life policy. However, a universal-life policy

gives the policy owner the choice of changing the premium and even the death benefit. For
example, the owner may decide to double the premium paid one year. The extra money will
go in the cash-value account. Most universal life policies as explained on the American
Council of Life Insurers website (2009) have cash-value accounts that pay at least 3 percent or 4
percent interest. Another year, the owner may decide not to pay any premium, and use money
in the cash-value account to pay the costs for that year. Policy owners may have a higher
death benefit while their children are young, and a lower the death benefit once their children
are grown. There are some limits to the changes that can be made. The policy owner needs to
be careful not to pay too little, and end up with no cash value. If this happens, and the owner
still wants the insurance, he or she will need to buy a new policy. Some policies allow the
beneficiary to receive both the death benefit and the cash-value account at the death of the
insured. Universal-life works well for people who want lifetime coverage with added
flexibility (Insurance Regulatory and Development Authority ‘s website -2007)
Unit Linked Insurance Policy: Unit-linked insurance plans (ULIPs) are a special kind of
insurance policies which have a benefit of life insurance and which also serve as an

investment tool. In a unit linked insurance plan there are two parts in the premium a client
pays, the first part of the premium goes into covering the life of the policy holder and the
second part goes into investments. Almost all insurance companies give their customers a
choice to select the investment mix. They can go for 100% equity funds or 100% debt funds
or a mixture of both. In a unlit linked insurance plan the customers are also given choice to
switch from one fund to another. The returns from the insurance policy are directly related to
the performance of the funds. The only drawback of unit linked insurance plans is its charges
for first few years, which varies from 5% to 70% of the premium (American Council of Life
Insurers-2009).
Variable Universal-Life
A variable universal-life policy is a special type of universal policy. It allows the cash-value
account to be invested in stock funds, bond funds, and other assets (much like mutual funds).
These funds may allow the cash value to grow at higher rates than fixed-rate whole-life or
universal-life policies. The down side as explained on the Life and Health Insurance
Foundation for Education’s website (2008) is that these funds may also have losses. Many
variable policies also offer a fixed account with a low guaranteed interest rate as one of the
options. If the returns are low (or negative) then the owner may need to pay more premiums
to keep the policy. A variable universal-life policy is for people who want lifetime coverage,
and who can tolerate risk. The buyer of a variable universal-life policy would prefer to invest
money in stocks and bonds to safer assets.
Children's policies
The nominee receives a guaranteed amount of money at a pre-determined time and not
immediately on death of the insured. On survival the insured receives money at the same pre-
determined time. These policies are best suited for planning children's future education and
marriage costs.
Annuities/Pension schemes
When an employee retires he no longer gets his salary while his need for a regular income
continues. Retirement benefits like Provident Fund and gratuity are paid in lump sum which
are often spent too quickly or not invested prudently as explained on the Insurance
Regulation and Development Authority’s website (2011) with the result that the employee
finds himself without regular income in his post - retirement days. Pension is therefore an

ideal method of retirement provision because the benefit is in the form of regular income. It is
wise to provide for old age, when there is regular income during the earning period to take
care of rainy days. Financial independence during old age is a must for everybody. There are
two types of annuities (pension plans). These are;
Immediate Annuity
In case of immediate Annuity, the Annuity payment from the Insurance Company starts
immediately. Purchase price (premium) for immediate Annuity is to be paid in - in one
instalment only.
Deferred Annuity
Under deferred Annuity policy, the person pays regular contributions to the Insurance
Company, till the vesting age/vesting date (Institute and Faculty of Actuaries 2016b). He has
the option to pay as single premium also. The fund will accumulate with interest and fund
will be available on the vesting date. The insurance company will take care of the investment
of funds and the policyholder has the option to encash a percentage usually 1/3rd of this
corpus fund on the vesting age / vesting date tax free. The balance amount of 2/3rd of the
fund will be utilized for purchase of Annuity (pension) to the Annuitant.
1.6 Product Design and Pricing

Institute and Faculty of Actuaries(2016b) simply explain product pricing as involving
finding a fair price(premium) for a product using the Principle of equivalence which states
that Expected present value of Premiums =Expected present value of benefits and outgo after
accounting for the age at policy inception and term of contract.
1.6.1 Evolution in product pricing

Early life insurance pricing models generally followed one of two paths namely a focus on
life risks with little attention to other aspects (e.g., investment risks), or a focus on financial
valuation principles with little attention to the insurance liabilities side. Over time, pricing
models have evolved to include both underwriting and investment risks. For example,
Spellmam, Witt, and Rentz (1975) developed an insurance pricing method based on
microeconomic theory in which investment income and the effect of the elasticity of demand
are considered, and price is determined by maximizing profit. McCabe and Witt (1980)
discussed insurance prices and regulation under uncertainty. They considered underwriting
and investment risks, as well as the cost of regulation imposed on the insurer. In addition,

demand for the insurer’s product was assumed to be a function of the insurance rate and the
average time the insurer takes to settle claims. More recently, Persson and Aase (1997)
developed a model for pricing life insurance that includes a guaranteed minimum return
under stochastic interest rates. In their pricing model, investment and mortality risks are
considered simultaneously.
Cummins and Danzon (1997) developed a two-period pricing model subject to default risk.
Demand for insurance is inversely related to insurance default risk and is imperfectly price
elastic. Kliger and Levikson (1998) discuss pricing of short-term insurance contracts based
on economic and probabilistic arguments. Their objective function in the maximization
problem is defined as expected net profit, the loss resulting from insolvency, and the demand
for insurance embedded in the objective function. Price and the number of insurance policies
are determined by optimizing an objective function. Wang (2000) introduces a class of
distortion operators for pricing financial and insurance risks. Schweizer (2001) combines
insurance and financial research by embedding an actuarial valuation principle in a financial
environment. Still other research addresses insurance pricing in competitive markets for
property and liability insurance with one or two period cash flows. Related articles include
Joskow (1973), D’Arcy and Garven (1990), Brockett and Witt (1991), Greg (1995), Sommer
(1996), De Vylder (1997), Wang, Young, and Panjer (1997), Lai, Witt, Fung, MacMinn, and
Brockett (2000), Gajek and Ostaszewski (2001), and Oh and Kang (2004).
The typical approach in life insurance is to model interest rates by a stochastic process (see
Persson, 1998; Bacinello and Persson, 2002) and to derive price (premium) according to the
equivalence principle (Bowers et al., chapter 6, 1997). The risks associated with interest rates
and mortality typically are salient factors considered in establishing pricing models. Pricing
methods based on a security loading factor that aims to achieve a desired low probability of
insolvency assume that premiums are independent of the number of insureds. However,
assuming at least some price elasticity of demand (Pindyck and Rubinfeld, 1998), such an
assumption is inconsistent with the laws of supply and demand.
1.6.2 Non risk factors to consider in product pricing

Falconer (2003) gives an overview of the non-actuarial factors to consider when designing
life insurance products namely marketability, underwriting, the distribution channel,

competitiveness, profitability, extent of cross subsidies, administration, public interest and

financing requirements. These are explained in detail below;
Marketability
Kotler (2012) is of the notion that a new product must be marketable so that the distribution
force can sell it. Normally a product can be sold if it meets a particular need of the buyer.
What makes a product marketable depends on the product features, who it is going to be
marketed to and how it is going to be marketed. Features that can make a product marketable
as noted by Falconer (2003) include having lots of ‘bells and whistles’, good illustrative
maturity values (IMV’s), competitive rates, high levels of guarantees, low levels of
underwriting etc. However these features would not necessarily be attractive to all markets.
For example policyholders requiring life cover to back a bond would not be interested in the
product having good illustrative maturity values as the main reason for the cover is
protection. In addition, not all selling methods would be appropriate. For example, direct
marketing normally implies the need for a simple product with little underwriting
requirements. So one needs to therefore consider the target market and ensure the product
meets the specific needs of that market. Since there may be a number of products out there
that do this one would try to add some innovation such as ‘bells and whistles’, additional
guarantees, attractive IMV’s in order to differentiate from the other offerings. In certain
markets this may be less important e.g. if the market is not well developed.
Distribution Channel
Kotler (2012) explains a distribution channel as the sales force or method used to sell /
market the product. There are various types namely tied agents employed by the insurer,
independent brokers, other agents e.g. banks where insurance is incidental. There’s also direct
marketing which includes mailshots, internet and television.
The distribution channel as further explained by Falconer (2003) is possibly one of the most
important factors to consider. Without an effective distribution network the likelihood of a
product being successful is severely limited. Developing the distribution channel is therefore
critical. It must be suited to the target market. For example, if the upper income market is
being targeted independent brokers may be more effective than mailshots. It would therefore
be important to secure the support of these brokers.

Kotler (2012) notes that the distribution channel affects the demographic profile of the
market. For example, using direct marketing normally implies minimal underwriting which
will result in the mortality experience on that book reflecting non-underwritten lives. This
would need to be reflected in the rates charged. The distribution channel also affects the
complexity of the product, level of underwriting and required competitiveness. For products
sold through independent brokers, competitiveness may be critical. Generally different
distribution networks are required for the upper vs lower income markets.
Competitiveness
Kotler (2012) goes on to highlight the importance of competition as dependent on the price
sensitivity of the relevant target market. Certain products as further explained by
Falconer(2003) are also easier to compare on price e.g. term assurance. Other products such
as with-profits endowments are not as easy to compare, as the competitiveness will also
depend on bonus declarations. New types of products are generally less price sensitive.
Certain investment products may be compared to banks saving products and so must compete
with these institutions. Tax treatments may be an important factor here. The commission
structure should also be competitive. Often this is the most important factor! In a very
competitive market, product differentiation and service becomes an increasingly decisive
factor. Service includes service to the client and to the sales force.
Profitability
The product must have sufficient margins to meet expected obligations under the policy
including claims and expenses. In addition, there should be a loading for profit. The degree of
profit that should be allowed for will depend on other factors such as the price sensitiveness
of the product, shareholder requirements and the perceived risk associated with the product.
Profit loadings can be allowed for explicitly or implicitly in the assumptions. An example of
an explicit loading would be to specify the required internal rate of return. One could price a
product to be profitable overall with inherent cross subsidiaries e.g. mortality profits could
subsidise expense losses; or each item of the basis could be priced to be profitable
individually. One should be aware of the timing of the expense of profits. Often losses may
occur followed by profits which more than make up for the earlier losses. The product should
be priced (if possible) so that it remains profitable under changing conditions e.g. higher
interest rate environment. This can be achieved by including margins or by making product
terms reviewable for example (Falconer -2003).

Financing Requirements
As touched on above, insurance products often show an initial loss followed by profits. This
phenomenon is known as new business strain. As a result up front capital is required. The
product can be designed to minimise the financing requirements where possible. For example
with unit-linked products, charges can be structured to coincide with new business expenses.
This is known as front end loading. A further option that Falconer (2003) explains is to set
reserves to minimise new business strain e.g. by setting up negative reserves. However, in
many countries negative reserves are not permitted in terms of local legislature requirements.
Underwriting
When setting underwriting requirements, the reinsurers should be consulted as they may
provide technical expertise and may have underwriting conditions in the treaty (Institute and
Faculty of Actuaries -2016a). When designing a new product, Bakos (1997) highlights that
the degree of underwriting to be undertaken needs to be considered as it will have an impact
on the underlying mortality experience and hence mortality assumptions are used in deriving
the rates. The costs of underwriting also need to be loaded in the rates. The degree of
underwriting required will depend on the amount of risk benefits incorporated in the product
concerned and on the levels of cover being provided. Generally if there are high levels of
cover then more underwriting can be justified because the mortality savings as a result of the
underwriting will outweigh the costs thereof e.g. cost of medical examinations (Macedo -
2009). Note that underwriting can take place at inception in the form of medical questions on
the proposal form, reports from medical practitioners, medical examinations etc. The degree
of underwriting will depend on the perceived risks. Alternatively, underwriting can take place
at claims stage e.g. checking for pre-existing conditions and other exclusions, enforcing
waiting periods. Which approach to use will depend on the target market.
Extent of Cross – Subsidies
Cross subsidiaries are often incorporated for various reasons but often to simplify the product
and/or for marketing reasons. For example, credit life products may have a uniform rate for
all ages. Other examples of cross–subsidies include large policies subsidising small policies
(this one is common), the risk component subsidising the investment component of a unit–
linked product so that favourable illustrative maturity values are produced (Society Of
Actuaries’ website -1998).

Administration
As cited from the Society Of Actuaries website (1998) when designing a product one needs
to ensure that the relevant staff and systems will be in place. It should be noted that there are
many ways to price a product and it may therefore be relatively easy to incorporate current
administrative capabilities with the design. In addition, products could be designed to be
similar to existing products to minimise customisation and training costs. The costs of
systems and training should be amortised and allowed for in the product rates. Administration
is a key area to ensure service levels are competitive. Otherwise business will often suffer in
the long term. Life office software is normally a significant expense but money well spent in
the long run provided the system is a good one.
Public Interest
As cited from the Society of Actuaries website (1998),” One should not forget that insurance
products are provided to meet people’s needs and as such serve the public interest. Not only
is the public interest served by meeting policyholder claims, but insurance companies
normally invest significant amounts of monies in government securities and other asset
classes which stimulates the economy. It is important that insurance companies are perceived
as trustworthy institutions by the general public in order to attract business. In the area of
product design one must consider the long term relationships between the insurer and the
public. It is important that products generate profits to ensure the insurance company remains
in existence with the support of shareholders and/or participating policyholders. However,
profits should not be excessive as this would not be a sustainable model and could result in
the insurance company receiving poor publicity and a bad name for the industry. Products
must be fair and provide good value. In Africa there is the problem of inflation which results
in erosion of the value of benefits which should be taken into account in terms of providing
meaningful benefits. Policy wording must not be misleading and policyholder reasonable
benefits expectations (RBE) must be taken into account. Where the contrary takes place,
short-term profits may result but the long term effect could be devastating to the insurer and
insurance industry”.
1.6.3 Risk Characteristics to consider in product pricing

Depending on the product there will be varying levels of risk associated with it. Some risks
may be passed back to the policyholder e.g. investment risk where the product is unit-linked.
Other products have high levels of guarantees, which may span the life of the policyholder

e.g. 20 years. Areas of risk that may be guaranteed by the insurer as classified by
Falconer(2003) include mortality and morbidity risk, expense risks , investment risks , tax
risk , inflation risk ,lapse / surrender risk Generally the more onerous the guarantees
provided, the larger the required margins in the pricing assumptions. Reinsurance can be used
to reduce some of the risks. However the three main risks which will be explained in detail
are expense risk, interest risk and mortality risk.
Mortality
Assumptions about future mortality rates play a major part in many actuarial calculations in
the fields of life insurance and pensions, and are also used in general insurance, long term
care, and other calculations as explained by the Society of Actuaries website (1997).
Mortality assumptions which are the most vital in actuarial calculations play a significant role
too in a wide range of public sector and government matters, such as unfunded public sector
pension plans and social security arrangements. In addition there are a number of matters that
depend on future demographics, such as the long term costs of health care.
Mortality assumptions are used in the calculations performed to determine how much capital
life insurance companies should hold, the prices they charge for their products, and surrender
values. Life insurance products as explained by Reynolds (1997) include protection policies
such as term insurance, the protection element of some options (such as guaranteed annuity
options) attached to policies that primarily serve as investments, annuities and deferred
annuities, and lifetime mortgages. Mortality assumptions as also observed by Doll and
Didonna (1997) are also used in calculating the embedded values that appear in annual
reports and accounts, and in calculations for mergers and acquisitions and transfers of
business. For policies that pay benefits on death, such as term insurance, improving mortality
rates result in lower premiums and lower capital requirements. For policies that pay benefits
on survival, such as annuities, guaranteed annuity options and lifetime mortgages, they result
in higher premiums and higher capital requirements.
Actuaries study the incidence of deaths in the recent past, and develop expectations about
how these events will change over time, allowing them to develop an expectation of the
timing and number of such events in the future. A safety margin is built in that increases the
mortality rates above what is expected. In participating policies, savings created by these
conservative assumptions can be returned as dividends. In nonparticipating policies, the

safety margins must be smaller in order for the premium rates to be competitive (Didonna -
1997).
If the assumptions that are used overestimate future mortality rates (ie, people live longer
than assumed), and other assumptions are held constant:
 In relation to protection products such as term insurance, customers will pay more than
they need have done, and insurance companies will make higher than expected profits on
these products. The effect on insurance company profits will be slightly counterbalanced
by the effect of the extra capital they will have had to hold in respect of these policies.
 In relation to annuities and deferred annuities, customers will pay less than the benefits
are worth (annuity rates will be higher), and insurance companies will make lower than
expected profits on these products. Insurance companies will hold less capital in respect
of annuities than they should, and there will be a greater risk of insolvency.
If the assumptions underestimate future mortality rates (ie, people die sooner than assumed),
the effects on insurance companies and their customers will be reversed (Reynolds-1997).
Term insurance business will be less profitable than anticipated, with a greater risk of
insolvency for insurance companies, and annuity business will be more profitable. Customers
will pay less than the benefits are worth for term insurance, and more than they need have
done for annuities and deferred annuities.
Richards and Jones (2008) discuss the effects of mortality improvements on various types of
insurance contracts and in pensions. They conclude that longevity risk, i.e. the risk that
people will live for longer than expected, is highly significant for immediate and deferred
annuities, and defined benefit pension schemes. However, other risks, such as long term
interest rate risk, inflation risk, and default risk on bonds, may have comparable impacts. The
effects of assumptions about changes in mortality rates expected to occur many years in the
future are to some extent mitigated by the effects of the discounting that occurs in most
actuarial calculations.
Differences between the future mortality rates that are assumed in various actuarial
calculations and those that actually occur can have adverse effects on pension scheme
members, scheme sponsors, life insurance policyholders and annuitants, and life insurance
companies whether the assumptions are over- or underestimates.
Interest

Insurers invest the premiums they receive and accumulate them for future claims and other
obligations, such as policy loans and surrenders. Life insurance company portfolios are
traditionally long-term and emphasize safety of principal and predictable rates of return, to
accommodate their long-term obligations. Typically, two-thirds or more of this capital is
invested in bonds and mortgages, which meet the above criteria. A smaller percentage is
invested in common stocks, due to their volatility. Today, common stocks represent less than
10 percent of the average life insurer’s general account portfolio. If issued policies have low
claims there is an adjustment in the calculation of the premium for the time value of money
(compound interest). If the investment results exceed the guaranteed minimum, policy
owners benefit from either participating dividends or excess interest crediting to the policy’s
cash value (Society of Actuaries website 2004).
Expense
Life insurance companies incur acquisition and administrative expenses in the course of
doing business as explained by the Institute and Faculty of Actuaries (2016b). The Society of
Actuaries’ website (2004) further explains acquisition expenses to include the costs incurred
in obtaining business and placing it in force, such as advertising and promotion fees;
commissions; underwriting expenses; costs associated with medical exams and attending
physicians’ statements, inspection report and credit history fees; home office processing
costs; and an addition to the insurer’s reserve, surplus, and profits. Administrative expenses
include the costs associated with collecting premiums and distributing dividends, continuing
producer compensation, investment expenses, and home office overhead. Any costs the
insurer incurs must be recovered through mortality savings, expense charges, and (or)
reduced interest crediting.
1.7 Competition and Regulation Issues in Life Insurance

“Competition has long played an uneasy role in the insurance industry. If consumers cannot
easily observe the financial health of their insurers, competition between insurers may drive
premiums down to the point where the risk of failure is high. For several decades the
regulatory response was to limit entry and constrain premiums. In addition, special
exemptions were granted to this sector under the competition laws. More recently, however,
regulatory reform has led to a substantially greater reliance on competition and a greater
regulatory focus on prudential regulation” (Organisation for Economic Co-operation and
Development’s website -1998).

As further noted from the Organisation for Economic Co-operation and Development’s
website (1998),” public policy in the insurance sector primarily seeks to overcome
consumers’ difficulties in observing and monitoring the financial health of their insurer, both
before and during the lifetime of the insurance contract. Even if consumers were willing to do
so, there is a concern that a competitive market does not make the information available in a
form which consumers could understand. Furthermore, where insurance that they otherwise
would not have purchased, consumers face little incentive to observe and monitor the
financial health of their insurer. As a result, there is a concern that competition between
insurers would lead to deterioration in the financial health of insurers, bankruptcies and a lack
of coverage for consumers.”
A second, lesser, regulatory concern relates to concerns over the ability of consumers to
understand and compare the various terms and conditions in insurance contracts. Competition
between insurers, it is argued, will therefore be ineffective and will lead to adverse surprises
for consumers.
As a result of these concerns, regulation has traditionally taken the form of limiting the extent
of competition between insurers, through controls on entry, on prices (particularly price
floors), on the methods for calculating premiums, on terms and conditions and, in some cases,
through the explicit promotion of cartels. These regulations may not be effective at
preserving the financial health of insurers, however, if they merely divert competition away
from, say, prices and into other dimensions of service quality. If the regulations are effective
at restricting competition, they may have the usual undesirable effects of limiting incentives
for efficiency and innovation (Organisation for Economic Co-operation and Development’s
website -1998)
The extent of competition in the insurance market seems to vary significantly from product to
product and from country to country. Although several countries as cited from the website of
Organisation for Economic Co-operation and Development (1998) reported having a highly
competitive insurance industry (particularly the UK, Netherlands and the USA), concerns
over the level of competition were also raised in many countries. For example, Germany
notes: “The insurance industry continues to be very highly cartelised”. In Italy: “In the
experience of the Antitrust Authority, price competition seems to be extremely weak”.
Similarly, in Korea: “given the short history of insurance premium liberalization in Korea, a
complete form of competition on insurance premium is yet to be developed”. Given the

strong historic tradition surrounding various forms of industry cooperation throughout many
countries, sustained vigorous competition law enforcement is necessary to establish sound
patterns of compliance with competition rules (Organisation for Economic Co-operation and
Development’s website -1998). Australia will be a case study and hence its competition
policies will be explained briefly.
The Life Insurance Act 1995 of Australia makes no provision for foreign branches to operate
life insurance business in Australia. Consequently, foreign life insurance companies must
establish an Australian subsidiary to operate in the Australian market. The rationale for this is
to secure protection for Australian policyholders through the solvency and capital adequacy
provisions that are applied to the statutory funds of a life insurance company. Australian
consumers are free to purchase policies from a foreign life insurer, but the transaction will be
subject to the regulatory and disclosure provisions of the other jurisdiction, rather than those
applying to Australian life insurers. In deciding whether to de-register a life insurance
company, the regulator must be satisfied that the company has no outstanding policy
liabilities. Therefore, in practice, a company may have to transfer its existing business to
another life insurance company before being able to exit the industry. The same process
would be followed if a life insurance company wanted to exit from a particular line of
business, although it would also have the option of closing its books to new policies and
running down the existing policies over their life. The Life Insurance Act 1995 establishes a
process for the transfer or amalgamation of the life insurance business of one life insurance
company to another which generally includes a requirement that the terms of the agreement
for the transfer be confirmed by the Court.
Life insurance companies are required to undertake life insurance business, as defined in
broad terms in the Australian Life Insurance Act 1995. For instance, life insurance business
includes a range of risk policies contingent on life, annuities, continuous disability policies
and investment products. There are no impediments to the introduction of new and innovative
products that fall into the general description of life insurance business, and the regulator has
authority under the Act to declare business to be life insurance business. The meaning of
insurance business for the purposes of the Australian Insurance Act 1973 is very broad and
allows scope for general insurers to be innovative in the products offered. There are
restrictions, by way of monopolies by some State and Territory Governments, in relation to
compulsory third party motor vehicle accident insurance and workers compensation. These
monopoly arrangements are due to be reviewed under the provisions of the Competition

Principles Agreement22 that will be guided by the principle that legislation not restrict
competition unless it can be demonstrated that the benefits of doing so outweigh the costs.
Competition for life insurance savings products occurs within the larger savings and
investment market, including the provision of superannuation products, unit trust products
and deposits. Although there is substitution between product types, the largest life insurers
are part of financial conglomerates which offer a spectrum of savings and investment
products through the subsidiaries of the group, including retail superannuation funds and unit
trusts. Life insurance and savings products are also offered by friendly societies. Competition
for risk products occurs within the broader risk market, although the direct substitutability of
the products depends on the similarity of their characteristics and terms. By definition, most
life and general insurance products provide risk cover in different circumstances. An overlap
exists in the supply of accident and disability policies, though these contracts may apply for
different durations, i.e. contracts that have a duration of less than one year are not life
insurance policies. The taxation base for life insurers is narrower than for general insurers,
financial intermediaries and other funds managers. In particular, it excludes some
underwriting and management fee income (Australian Life Insurance Act -1995).
The regulatory regimes for life and general insurance do not directly impose any conditions
on the pricing of insurance policies. However, there are some indirect influences including
the possibility that pricing will seek to recover the cost of regulation and the requirement that
fees be identified in life insurance policy disclosure documents.
The Australian Insurance Contracts Act 1984 provides for appropriate disclosure of
information from life and general insurers to policyholders and provides a uniform set of
rules to govern the relationship between insurers and policyholders. To ensure that the
objectives of the Act are achieved the general insurance industry has developed a self-
regulatory Code of Practice which promotes industry awareness of the legislative rights and
obligations. The Life Insurance Code of Practice25, applies to life companies and life brokers
and includes a requirement for a needs analysis to be prepared before a consumer is sold a
life insurance policy. It also sets out standards of advice, status disclosure, competencies and
dispute resolution mechanisms.
1.8 Life Insurance in India

From the Researchers World’s website (2012) Narayan describes the Indian insurance
industry as set for some serious changes. Narayan (2012) said the Indian insurance industry

had matured from its state of childhood to early adulthood. He notes that in countries like
UK, the agents have adopted themselves to latest form of marketing and very soon such
changes will also be introduced in India. With an annual growth rate of 15-20% and the
largest number of life insurance policies in force, the potential of the Indian insurance
industry is huge. Total value of the Indian insurance market (2004-05) is estimated at Rs. 450
billion (US$10 billion). According to government sources, the insurance and banking
services’ contribution to the country's gross domestic product (GDP) is 7% out of which the
gross premium collection forms a significant part. The funds available with the state-owned
Life Insurance Corporation (LIC) for investments are 8% of GDP.
1.8.1 A Historical Review of Indian Insurance Industry

As cited from the Insurance Regulatory and Development Authority (IRDA)’s website
(2012),”in 1818, a British company called Oriental Life Insurance setup the first insurance
firm in India followed by the Bombay Assurance Company in 1823 and the Madras Equitable
Life Insurance Society in 1829. Though all this companies were operating in India but
insuring the life of European living in India only. Later some of the companies started
providing insurance to Indians with approximately 20% higher premium than Europeans as
Indians were treated as “substandard”. Substandard in insurance parlance refers to lives with
physical disability. Bombay Mutual Life Assurance Society was the first company
established in 1871 which started selling policies to Indians with “fair value”. Insurance
business was subjected to Indian company act1866, without any specific regulation. In 1905,
the slogan “Be Indian-Buy Indian” declared by Swadwshi Movement gave birth to dozens of
indigenous life insurance and provident fund companies. In 1937, the Government of India
setup a consultative committee and finally first comprehensive ‘insurance act’ was passed in
1938.”
In oct.2000, IRDA (Insurance Regulatory and Development Authority) issued license paper
to three companies, which are HDFC Life Standard, Sundaram Royal Alliance Insurance
Company and Reliance General Insurance. At the same time “Principal approval” was given
to Max New York Life, ICICI Prudential Life Insurance Company and IFFCO Tokio General
Insurance Company. Today total 22 life insurance companies including one public sector are
successfully operating in India. The growth of the sector can easily be judged from the above
graph. According to a study by McKinsey total life insurance market premiums in India is
likely to more than double from the current US$ 40 billion to US$ 80-US$100 billion by
2012 (Researchers World Website-2012).

Fig 1.1 Indian Insurance Market 2000-2011
1.8.2 Changing Competitive Environment

With the opening of insurance sector in India, the share of private insurer was very less. As
shown in table 2.1 below total share of private insurer was just 2% in 2001-02. It was because
of any reason which includes credibility on private players.
Table 1.1 Market share of Public and Private Insurance Companies
Insurance 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

sector
Public(LIC) 98 94 87 78 73.66 65.28 59.65
Private 2 6 13 22 26.34 34.72 40.35
Source: Compiled from Insurance annual reports of IRDA
But soon because of innovative & customized products, novel distribution channels,
aggressive marketing etc. Private players gave a tough competition to public sector company
(LIC). Gradually, the market share of private insurer went up and till financial year 2007-08,
total share of private insurer reached as high as 40.35%. The market share of LIC decreases
after the entry of private insurer but it doesn’t mean that the growth of LIC got down. LIC
continue its growth even after a cut throat completion from the private players (Insurance
Regulatory and Development Authority’s website-2012).
1.8.3 Product Innovations

The Researchers World website (2012) highlights that in the fifties and sixties, the life
insurance business was concentrated in urban areas and was confined only to the higher class
of the society. Through the LIC act 1956, the LIC was formed with the capital of 50 million.

One of the basic objectives of setting up the LIC was to extend the reach of insurance cover
and make it available to the lower segment of the society. LIC observed minimum growth in
1960s and 1970s. This slow growth were caused by the factors like poor infrastructure, low
saving, low investment, high illiteracy etc. however the positive change in industrialization,
infrastructure, capital formation, saving rate resulted in tremendous growth of LIC. Still the
penetration of insurance sector was very low. A key catalyst in the Indian insurance market
growth has been the entry of private players in 2000-01. With the entrance of private players
and foreign collaborations, penetration of insurance sector in India has gone up from 1.02%
in 1999-00 to 4 % of GDP in 2007-08. Life insurance business in India grew by 14.2 per cent
in US Dollar terms in 2007-08.
Before entrance of private players, it was observed that only endowment and money back
policies were popular among consumers. But the new, private insurers focused on providing
customized products, products that contain innovative features to the customers created
favourable demands for other type of policies like term insurance, child plan, pension plans
and unit linked insurance policies (ULIPs).
Table 2.2 below explicitly highlights the tough competition brought by the entry of private
players among insurers and forced all of them to search for customized insurance products
based on the needs of the customers. Within just 10 years of liberalization of the sector, the
insurer like LIC also introduced 64 new policies in the market. Today a variety of products
are available ranging from traditional to Unit linked providing protection towards child,
endowment, capital guarantee, pension and group solutions.
Table 1.2 Product Innovations in Indian insurance
Company Total new Products launched from 2000-to

2009-10
Life Insurance Corporation of India 64
HDFC Standard Life Insurance Co. Ltd 57
Max New York Life Insurance Co. Ltd 55
Birla Sun Life Insurance Co. Ltd 58
Source: compiled from annual reports of IRDA

1.8.4 Changing Trends in Life Insurance Policy

Along with the other objectives of insurance like financial security, tax benefits etc. one of
the major objectives is saving and investment. Traditional life insurance policies like
endowment were becoming unattractive and not meeting the aspirations of the policyholders
as the policyholder found that the sum assured guaranteed on maturity had really depreciated
in real value because of the depreciation in the value of money. The investor was no longer
content with the so called security of capital provided under a policy of life insurance and
started showing a preference for higher rate of return on his investments as also for capital
appreciation. It was, therefore found necessary for the insurance companies to think of a
method whereby the expectation of the policyholders could be satisfied. The objective of
providing a hedge against the inflation through a contract of insurance pushed insurer to link
the insurance policy with market and thus the industry observed the beginning of Unit linked
insurance policy (ULIP) (Researchers World Website-2012).
1.8.4.1 Unit Linked Vs Non Linked Insurance Plans

There are so many advantages that ULIPs have over traditional policies. Some of them have
been described in table2.3 below. The flexibility, transparency, liquidity and fund options
available with ULIPs made it the preferred choice of customers and gradually it changed the
trend of insurance policy.
Fig 1.2 Graph showing growth of unit linked business and non-unit linked business
Figure 2.2 above show the share of ULIPs increased from 82.3 % in 2005-06 to 90.33% in
2007-08 as far as private insurer are concern. LIC too showed a tactical shift towards
promoting linked products and soon the share of ULIPs rose from just 29.76% in 2005-06 to

62.37% in 2007-08. In order to encash the favourable environment for ULIPs, All the players
in the industry are offering innovative and customized ULIPs with respect to entry age of the
customer, term of the policy, maturity age etc. to get edge over others.
Where almost all the industries in the world trying hard for survival due to the major
economic meltdown, Indian life insurance industry as explained on Researchers World
website (2012) is one of the sectors that is still observing good growth. It is the changing
trends of Indian insurance industry only that has made it to cope with the changing economic
environment. Indian insurance industry has modified itself with the passage of time by
introducing customized products based on customers’ need, through innovative distribution
channels, Indian life insurance industry searched its path to grow. Changing government
policy and guideline of the regulatory authority, IRDA have also played a very vital role in
the growth of the sector. Move from non-linked to unit liked insurance policies is one of the
major positive changes in Indian life insurance sector. Similarly, opening on the sector for
private insurer broke the monopoly of LIC and bring in a tough competition among the
players. This completion resulted into innovations in products, pricing, distribution channels,
and marketing in the industry. Though the sector is growing fast, the industry has not yet
insured even 50% of insurable population of India. Thus the sector has a great potential to
grow. To achieve this objective, this sector requires more improvement in the insurance
density and insurance penetration. Development of products including special group policies
to cater to different categories should be a priority, especially in rural areas. The life insurers
should conduct more extensive market research before introducing insurance products
targeted at specific segments of the population so that insurance can become more
meaningful and affordable. By adopting appropriate strategy along with proper government
support and able guidance of IRDA, India will certainly become the new insurance giant in
near future.
Table2.3 Comparison of Unit Linked and Non-linked Insurance Plans
Features ULIPs Traditional Policies

Description Insurer allows policy holder to Insurer takes decision and
direct part of their premiums usually invests into low risk
into different type of funds like return option. insurer also
equity, debt, money market, offers
hybrid etc. and risk of guaranteed maturity proceeds
investment is along with declared bonuses

borne by policy holder

Flexibility of investment Policy allowed choosing their Policy holders are not allowed
investment avenues as per their to choose their investment
risk profile. avenues.
Transparency Policy holder can track their Individual cannot track their
portfolio. They are also portfolio.
informed about the value and
number of fund units they hold
Maturity benefit pay outs At the time of maturity, policy At the time of maturity policy
holder redeems the unit holder get the sum assured plus
collected at the then prevailing bonuses(if applicable)
unit prices. Some plan also
offers royalty or additional
units annually or at the time of
maturity.
Partial withdrawal Subjected to some condition, Policy holders are not allowed
policy holders are allowed to to withdraw part of their funds.
withdraw from their fund. Instead, some policy provides
facility of loan against the
investment.
Switching options Available(with some charges) Not available
Charges structures Charges are specified under Charges are not specified
various heads
Single premium top up Allowed Not allowed
Source: Compiled from Various Sources
1.9 Re-insurance in Life insurance

DiDonna (1997) discusses the impact of reinsurance on individual pricing. He observed that
there's been very little explicit reflection of reinsurance cost in pricing. Typically there's some
sort of factor, but it is buried deep within the asset shares which has not been given much
focus. This is perhaps appropriate for large companies with a large retention. Smaller
companies historically have spent more time understanding the cost and benefits of
reinsurance programs because it may have more significant an impact on these companies.
Due to the dynamics in the life insurance industry, reinsurers are bringing more to the table
than in the past, when their primary service was capacity. Many reinsurers are having
substantial impact, not only on smaller companies but on larger companies as well. The four

major impacts generated on the market by reinsurers as also observed by Bakos (1997)
pertain to retail price, the price that actually gets to the consumer; product design and
development; new products and markets; and expenses and efficiency of operation.
The current reinsurance and pricing environment over the past few years, has been
bombarded by severe price competition which has allowed direct companies to view or, at
least, look at reinsurance as a source of profit rather than a cost of prudent risk taking
(DiDonna -1997). A very popular reinsurance arrangement being utilized today is the first
dollar quota share arrangement. A first dollar quota share arrangement is defined by the
complete sharing of risk between the reinsurers and the direct writer on all policies rather
than the direct writer just reinsuring above the excess of their retention.
In a typical retention arrangement, the life policy comes in the door of the direct company.
There is a full assumption of risk by the direct company up to their stated retention limit. On
excess risk above their retention, the business goes into the reinsurance pool needs to be split
by those carriers on some basis.
Didonna (1997) furthermore highlights the several advantages to direct writers for entering
into these sorts of arrangements. First, stability of mortality costs. If the direct writers are
ceding a significant share of the risk to the reinsurers at a fixed cost, what they've done is
eliminate the volatility of much of their claim costs. That translates into a better predictability
of profits, which is so important to companies these days. Second, less capital is required.
Again, if you're ceding a significant share of the risk to the reinsurers, the direct writer need
not hold required capital on that share of the risk. Finally, there are more competitive
reinsurance rates. We're seeing very competitive reinsurance rates in the marketplace being
offered to direct writers to enter into first dollar quota share arrangements.
Very competitive reinsurance rates are making it possible for direct companies to leverage
their profits. Doll (1997 ) states that the consequence of this is more and more competitive
retail pricing for the consumer .Reinsurers in many cases are offering prices that are actually
below direct companies’ mortality assumptions. This creates for the substantial portion of the
business that's ceded to the reinsurance pool a profit for the direct company by a mortality
margin. Finally, for the direct writer no capital is required for that share of the business.
The impact of reinsurance is also seen in product design and development. Historically,
smaller companies have relied on reinsurers to provide product development type consulting
services, along with capacity. Reinsurers, again because their global view of the industry, are

thought to be on the forefront, in terms of marketplace knowledge, relating to mortality

assumptions and preferred classes as clearly noted by Reynolds (1997). Smaller companies,
particularly those with less resources, have relied on reinsurers for this kind of support.
Didonna (1997) further witnesses that new products and new markets have also been driven
by re-insurance. The life insurance environment is one which has had flat sales during the
past few years. In fact, there have been declining sales in some product lines. Profit margins
continue to thin because of the competitiveness of pricing as companies fight for market
share. Thus companies tend to look around for new profitable markets to enter which they
will be unfamiliar with and may be uncomfortable holding high amounts of risk. Reinsurers
will thus be a source of hope in providing knowledge, expertise, and resources for direct
writers.
Expenses and efficiency of operation have also been enhanced by reinsurance. I'm going to
break this topic down into three distinct subtopics. They include distribution costs, risk based
capital (RBC), and administrative costs.
Distribution Costs
Reynolds (1997) notes the costly maintenance of traditional systems for distributing life
products agency systems, general agencies, and broker operations causing companies to
seriously consider and look for new ways of selling at a lower cost as suggests Bank
distribution and electronic commerce on the internet as good examples of this. Direct writers
are focusing their attention toward their distribution capabilities. At the same time they're
moving away from risk taking. In the extreme, we're seeing some direct companies becoming
almost like distribution outlets. At the same time reinsurers have been very willing to step in
and take much of the risk on sales through these new distribution channels, even more so than
direct writers themselves. Reinsurers are supporting the direct writers’ efforts to lower
distribution costs in the form of providing capacity.
Administrative costs
When companies launch new products in new marketplaces, they will lack expertise both on
the product side and the administrative side. A great example of this is variable products
variable life and variable annuity. Many companies have attempted to get into that
marketplace only to be stymied by the administrative burden. Many companies have current
and new products that are still supported by old legacy systems. With this, administration is
inefficient because systems constraints and costs are too high. Some reinsurers are able to

provide administrative services as suggested by DiDonna (1997). They can provide state-of-
the-art systems, and they can secure for the direct writer a fixed known cost to administer the
business. In many cases, this can even lead to a reduction in the fixed-cost expense
assumption of pricing, and perhaps have a positive impact on prices as well.
1.10 Life insurance in Zimbabwe

Old Mutual opened its first office in Zimbabwe (then Rhodesia) in 1927 and operated as a
mutual company until its demutualisation in 1999. Prior to the financial sector liberalisation
of 1993/94, the Zimbabwe Life assurance sector had a few life companies, namely Old
Mutual, First Mutual, Fidelity, Southampton and Zimnat (now Sanlam) and has grown only
has grown significantly since the opening up of the market.
1.10.1 Zimbabwe’s Life Insurance Regulation

Life insurance operations are governed by the Insurance Act 24:07 with Acts 27/1987,
19/1998 (s. 14), 22/2001 which oversees registration of life companies, minimum solvency
levels, investments amongst other things. In terms of the Companies Act [Chapter 24:03] a
mutual insurance society means an association of persons formed in pursuance of any law
and by whatever name it may be called that is established solely or principally for the purpose
of carrying on any class of insurance business in which all members of the society qualify as
such by virtue of their being owners of policies issued by the society as an insurer, and are
entitled to participate at general meetings for the control of the society and in the election or
appointment of the directors of the society; and the profits of the business of the society are
distributed to owners of policies issued by the society as an insurer.
An insurer who carries on life insurance business for funeral policies in line with Insurance
Act 24:07 only shall be treated as having a margin of solvency sufficient for the purposes of
carrying on such life insurance business if the total value of his assets in respect of such life
insurance business exceeds the amount of his liabilities under un-matured funeral policies by
at least ten thousand dollars: Provided that, if the total value of the assets of the insurer in
respect of such life insurance business does not exceed the amount of his liabilities under un-
matured funeral policies by ten thousand dollars. The Commissioner may impose such
conditions upon the insurer as he considers fit and the insurer shall comply with all such
conditions so imposed within such period as may be specified by the Commissioner.
Every registered insurer who carries on life insurance as highlighted in Insurance Act 24:07
business shall, in respect of life policies, maintain in Zimbabwe in the life insurance fund

unimpaired assets of an aggregate value of not less than the sum of the liabilities of the
insurer in Zimbabwe as determined by an actuary. A registered insurer who carries on both
life insurance business and other insurance business shall maintain in Zimbabwe unimpaired
assets of not less than the sum of the amounts as determined, subject to the provisos thereto.
Insurance Act 24:07 further states that a life insurer shall, at least once in every three years,
cause an investigation to, be made by an actuary into the financial position of his life
insurance business, which investigation shall include a valuation of the liabilities in respect of
such life insurance business and there after prepare and furnish to the Commissioner in the
appropriate forms prescribed, within six months of the date on which his accounts are made
up for the purposes of the investigation, an abstract of the report of the actuary by whom the
investigation was made and a statement of his insurance business at that date.
The Commissioner according to the Insurance Act 24:07 may require a life insurer whom he
suspects is not conducting his life insurance business in accordance with sound insurance
principles to prepare and furnish, within six months commencing on the date the
Commissioner calls upon him in writing to do so, a valuation of the liabilities in respect of
the whole life insurance business and an abstract.
In terms of re-insurance as stated in the Insurance Act 24:07 no life insurer shall enter into a
contract of reinsurance against any liability in respect of his life insurance business otherwise
than with a life insurer; or with an insurer other than a life insurer, subject to the approval of
the Commissioner; or with the Zimbabwe Reinsurance Corporation established by the
Zimbabwe Reinsurance Corporation Act [Chapter 24:17].
1.10.2 Industry Overview

The IPEC report (30June2015) identifies 11 life assurance companies and 2 reinsurance
companies. The industry reportedly wrote $159 million in net premiums (June
2014:$130million), resulting in a 22% annual growth rate. Total costs negligibly grew to
$110million from $109million, reflecting tight cost management by players. Consequently
the industry’s combined ratio fell from the previous 84% to the current 69% and a technical
profit of $49million (June2015: 21million). As at that current review period, total industry
assets grew by 1% from $1.59billion reported previously to $1.61billionwhich is reflective of
a challenging investment climate in the economy. Total liabilities remained stagnant at
$1.3billionrealizing $275 million as free assets (June 2014:$250million). Two players did not
meet the minimum capital requirements and enhanced remedial action is on-going.

Fig 2.3 shows market share by company for the half year ended 30June2015. It can be clearly
seen that Old Mutual is the giant in life insurance followed by Nyaradzo and First Mutual
Life and these are affectionately called the “Big Three”.
Fig 1.3 Market share by company in Zimbabwe
Source: IPEC report 30 June 2015
In reassurance ,for the half year ended 30 June 2015, Baobab Life and Health controlled 56%
or $2,4million worth of Net Premium Written (June 2015; 68% or $2.3million) whilst the
balance was underwritten by FM Re.
In terms of product class fund business, funeral, group life assurance and other policies
constituted 89% of gross written business (June 2015:80%) as highlighted in the following
figures. The rate of new business volume recorded of 22% (highlighted in the last figure)
advises that the public is not aware of the importance life insurance and that companies are
not marketing the product well. It also suggests the weak financial capacity and awareness of
other product lines. Hence there is still scope for players to promote uptake of other policy
types via micro-insurance assisted by the emergency of Mobile Network Operators as both
agents and a viable mode of payment (“Mobile assurance”).The product composition is
diagrammatically presented below.

Fig 1.4 Gross Written Premium by Product Class by for the half year ended 30 June
2015
*************THE END***************

C1,2 - Life Insurance Products and Markets (India and Zimbabwe)

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Life Insurance Products and Markets (A Review of India and Zimbabwe)

Dr Taonaziso Chowa (2018)

1| Contingencies 2018 [IFM]

2| Contingencies 2018 [IFM]

TABLE OF FIGURES AND TABLES

Fig 2.3 Market share by company in Zimbabwe ………………………………………………………………………….....

Table 2.2 Product Innovations in Indian insurance …………………………………………………………………..……..

Table2.3 Comparison of Unit Linked and Non-linked Insurance Plans …………………………………….…....…

3| Contingencies 2018 [IFM]

4| Contingencies 2018 [IFM]

5| Contingencies 2018 [IFM]

brings uncertainty as to whether such modifications lead to an accurate depiction of the

6| Contingencies 2018 [IFM]

1.3 Defining Life Insurance

7| Contingencies 2018 [IFM]

of the immediate payment of a smaller sum or certain equivalent periodical payments by

1.3.1 Features of Life insurance

8| Contingencies 2018 [IFM]

9| Contingencies 2018 [IFM]

1.3.3 Life Insurance versus Savings

Contract of Insurance: A contract of insurance is a contract of utmost good faith technically

10 | Contingencies 2018 [IFM]

1.4 The Fascinating Origins Life Insurance

11 | Contingencies 2018 [IFM]

special attraction as a provider and protector of family financial security (Insurance

12 | Contingencies 2018 [IFM]

by the policyholders. An insurance company, which is owned and controlled by stockholders

13 | Contingencies 2018 [IFM]

1.5 The product landscape of Life Insurance

Term Life Assurance

Endowment Insurance Policy

Endowment insurance as explained by the Institute and Faculty of Actuaries (2016b)are

14 | Contingencies 2018 [IFM]

Whole Life Insurance Policy

A universal-life policy is similar to a whole-life policy. However, a universal-life policy

15 | Contingencies 2018 [IFM]

16 | Contingencies 2018 [IFM]

1.6 Product Design and Pricing

1.6.1 Evolution in product pricing

17 | Contingencies 2018 [IFM]

1.6.2 Non risk factors to consider in product pricing

18 | Contingencies 2018 [IFM]

competitiveness, profitability, extent of cross subsidies, administration, public interest and

19 | Contingencies 2018 [IFM]

20 | Contingencies 2018 [IFM]

Extent of Cross – Subsidies

21 | Contingencies 2018 [IFM]

1.6.3 Risk Characteristics to consider in product pricing

22 | Contingencies 2018 [IFM]

23 | Contingencies 2018 [IFM]

24 | Contingencies 2018 [IFM]

1.7 Competition and Regulation Issues in Life Insurance

25 | Contingencies 2018 [IFM]

26 | Contingencies 2018 [IFM]

27 | Contingencies 2018 [IFM]

1.8 Life Insurance in India

28 | Contingencies 2018 [IFM]

1.8.1 A Historical Review of Indian Insurance Industry

29 | Contingencies 2018 [IFM]

Fig 1.1 Indian Insurance Market 2000-2011

1.8.2 Changing Competitive Environment

Table 1.1 Market share of Public and Private Insurance Companies

Insurance 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08