HOW AN INSURANCE

ORNGANISATION WORKS
 OWNNERSHIP
GOVERNMENT PRIVATE INSURERS

LIC Capital Requirement

GIC Reserves
REGULATOR(IRDA)
INVESTMENT NORMS
SOLVENCY MARGIN
 Ownership

INCOME

Fund, Investment, Yield,

Insuring &
Selection (underwriting) Claims, Surrenders
Insured Public
Actuary (Pricing fund Management
premiums
valuation) Distribution, Expenses
Servicing Company
Administration
Fund Valuation  Present Value of FUTURE Claims –
Present Value of FUTURE Incomes =
Surplus

SURPLUS  Given to Policy Holders as BONUS

Dividends to Stake Holders

ECONOMIC CAPITAL  Defined as the difference

between the market value of Assets and the
market value of Liabilities
i. Few Insurers have the right to access Policy
holders for losses during coverage period

ii. They must hold capital to serve as a cushion

in the event of adverse experience
iii. Benefits of Increasing Capital

 To achieve higher Premium Revenues

 To protect Firms Franchise Value (Loss of Insurers

Specific Assets)

 When assets have greater value to one firm than

the other, the assets are said to be “SPECIFIC
ASSETS”

 In Financial Distress due to unexpected high

claims, holding more capital reduces the likelihood
of Loosing Franchise Value.
iii. Costs of Increasing Capital

 Double Taxation of Investment returns on Capital

 Agency costs (Reduction in Firm value due to

managers not acting in the stake holders Interest)

 Cost of Insurance of new capital and under pricing

 HOW DO INSURERS ENSURE SAFETY OF POLICY
HOLDERS MONEY?
1. IRDA Regulations:
• The reserves that Insurers have to create to meet future
Liabilities
• Investment norms to ensure Prudent Investment
• Solvency Margin and Capital brought in by share holders

2. Reserves:
• A part of Premium received is invested, so that future
liabilities are paid
• The amount of money that is kept aside is called Reserve
• The calculation of this reserve is regulated by IRDA
 Contd…

3. Investment norms:
• Ensures that the funds invested are not put to undue
risks and are invested Prudently.
• Mandates for life fund – at least 50% are in
Government securities.
• 15% to be invested in Infra structure
• Remaining 35% in Equity & Debt
• For Pension Funds at least 40% should be invested
in Government Securities.
 Contd…

4. Solvency Margin Calculation

4 % of reserves + 1% of all linked funs which
do not have guarantees + 2% of linked funds which
have sure guarantee+ 0.3% of S.A – Reserves

• First 2 factors ensure protection against movement

in interest rates &investment income
• Ensures against adverse claim experience
• Added measure 150% of solvency margin or a
minimum of 50 crores