Problems never come knocking the doors. To cover these unfortunate events and provide a financial security there are various Insurance products available in the market. However to what extent is a person insured becomes a major question. Despite of being insured with multiple policies your family should not fall short of meeting their requirements in case of any eventuality. Hence it becomes very critical to calculate the Insurance coverage before opting for Insurance Plans…….
Insurance still remains a push product in the Indian market. Although it is a very common saying that Insurance need not be coupled with Investments still many buyers look at it from an investment point of view. The other aspect of buying Insurance remains affordability of premium. Very few buyers look at the finer aspects of the plan and the total coverage.
Going by the concept of Insurance, the fundamental aspect to look for while planning the Insurance needs remains the risk coverage. Human Life Value or HLV helps plan the Insurance coverage of an individual. In terms of Insurance HLV is the value of the cover a person should have to cover his family from the financial risks in case of his unfortunate death. Although Human life value is precious and can never be estimated accurately however from an Insurance perspective HLV can be calculated using two popular methods: The Income replacement method and Expense calculation method:
Income Replacement Method. This method takes into account the total income a person is expected to earn during his lifetime. From this total Income the expenses made on self are deducted and the remaining income used for expenses on family is taken into account for calculation. The total income which is expected to be used on the family’s expenses till the end his working tenure shall be discounted by the risk free rate of return.
Lets take the example of Mr X:
Current Monthly Income of Mr X (a): Rs. 50,000
Expenditure on Self (b): Rs. 10,000
Expenses on Family (a - b): Rs. 40,000
Yearly Expenses: Rs. 480,000
Current Age of Mr X: 40
Retirement Age of Mr X: 60
Inflation: 5%
Total requirement for family till retirement* Rs. 15,871,658
Present value of earned money** Rs. 3,405,236
*Rate of increase in Expenses and Salary is assumed to be equal to inflation
**Discounting done assuming 8% risk free rate
Hence we see that going by income replacement method Mr X needs an Insurance coverage of approx Rs. 3,400,000 to fulfill the requirements of his family in case of his unfortunate death. The idea is that in case of sudden death of the bread earner the family shall get the requisite sum insured and invest the same in an instrument earning returns equal to risk free rate and sustain with the same living standards.
Expense Calculation Method or Needs approach: In this method the present value of all the expenses that a persons family will incur on account of his unfortunate death needs to be added up to arrive at the sum insured. Expenses shall be taken into account based on the goals e.g. living expenses, uninsured debt and mortgages, children’s education and marriage whose provision is not in place, any other emergency expenses etc.
Lets demonstrate this with a simple example:
Monthly Expenses of Mr X's family: 40,000
Yearly Expenses: 480,000
Current Age of Mr X: 40
Retirement Age of Mr X: 60
Inflation 5%
Total requirement for family till retirement* Rs. 15,871,658
Present value of family's total requirement (1)** Rs. 3,405,236
Childrens higher education 5 yrs from now Rs. 1,500,000
Value of Childrens education as on today (2)** Rs. 1,020,875
Childrens marriage expenses 10 yrs from now Rs. 1,000,000
Value of Childrens marriage expenses as on today (3)** Rs.463,193
Total Insurance requirement (1 + 2 + 3) Rs. 4,889,304
*Rate of increase in Expenses and Salary is assumed to be equal to inflation
**Discounting done assuming 8% risk free rate
Hence going by the needs approach method Mr X needs an approximate Insurance coverage of Rs. 4,900,000 which the family can invest in an instrument earning risk free rate of return and fulfill the goals accordingly. In case the insured already possess certain assets the total value of these assets shall be deducted from the total Insurance requirement to arrive at the final coverage amount. This method is more complex and takes into account every minute detail which forms a part of the financial goals of the life thus giving a better picture in planning the Insurance requirements.
Having discussed both these methods it becomes important to consider which one shall be used while advising a client on his Insurance requirements. As mentioned above Insurance is still a push product and very rarely do we find an advisor asking for these minute details from clients. To a major extent even clients are also skeptical revealing these details to an advisor. From an advisors perspective commission and premium becomes important and from a client’s perspective premium, sum insured and returns assume prime importance. Hence planning rarely comes into picture while planning or selling Insurance.
Statistics also reveal that the Indian Life Insurance market stands skewed towards ULIPS. Out of the Rs 261,025 crore*** Indian life Insurance market ULIP’s constitute 50%**** of the total premium. ULIP’s by nature are market linked products with a low Insurance coverage. Also Insurance cos offer higher commissions to advisors on sale of ULIP products. I personally believe that if Insurance had been sold and purchased with some planning the market wouldn’t be so much skewed towards ULIP’s.
It becomes significant for investors to do a judicious planning of their Insurance requirements to financially secure their families from unfortunate events and opt for the plans accordingly. Buying Insurance without planning the coverage is just like living in a utopian world with a false sense of security.
I personally believe Income replacement method can find higher acceptability among investors as it doesn’t ask for minute details like the latter. Spreading awareness on this hold the key. To spread the awareness insurers also have launched Human life value calculators on their sites to facilitate the clients in planning their Insurance requirements. Investors might not reveal actual financial numbers to their advisors but certain averages can always be shared with him to get the right kind of plans. The same awareness needs to be percolated by the insurers among the advisors and channel partners who in turn can educate their clients for a better Insurance planning. Before concluding I would like to mention that HLV is not constant and keeps on changing as with time hence it needs to be reviewed and the Insurance coverage also needs to be taken accordingly.
***http://www.dnaindia.com/money/report_life-Insurance-industry-grew-by-18pct-in-financial-year-2010_1397271
****http://economictimes.indiatimes.com/Features/Financial-Times/Ulips-drive-life-Insurance-cos-growth-engine/articleshow/6042525.cms?curpg=1
Monday, July 5, 2010
Saturday, March 20, 2010
Debt investment and Rate hike by RBI
Bond yields are currently hovering at 7.8% mark and the expectations of yields touching the 8% mark are very high. Some reasons supporting this upward movement are:
1.) Government is soon expected to announce its borrowing plans for the year.
2.) Inflation has touched the 9% mark and is zooming towards the double digit figures. Fuel prices have increased after this budget adding to inflation.
3.) Recently (19/03/2010) the Reserve Bank has hiked the Repo and Reverse repo rates by 25 bps to 3.5% and 5% citing inflationary concerns. Economists are expecting a further hike by the Central Bank to contain Inlfation .
This brings good options for investors to shore up their Debt portfolio. Foreign investors have already doubled their holdings in Indian debt market on account of the increasing yields .
Some advisers feel that the hike is not a long term phenomenon. Inflation is expected to move downwards within a range of 6 – 7% within the next 1 year . Lowering of Inflation is expected if the monsoon remains good and government is able to address the supply side concerns. This shall set the stage for rates to come down thus lowering the yields. Hence the advisors are suggesting the investors to shift some part of their portfolio to Debt funds with maturity ranging between 1 to 2 years. This is with the expectation of rates to go down thus raising the prices and hence the NAV. Investors thus may benefit by redeeming a higher amount on their investments.
However looking at the spiraling inflation addressing it is one of the prime concerns of RBI and therefore the market is expecting another rate hike by RBI in April to tackle inflationary pressure. Thus any downward movement in interest rates seems less likely within the next one year if the inflation doesn’t come down. Rate hike might also lead to Banks raising their interest rates for lending. This however may not be an immediate step as Banks also would like to wait and watch before taking a call . And with sufficient liquidity in the market the hike is not expected to have a significant impact on the growth scenario. Stock Market is expected to react on this rate hike with a downward movement thus driving investors towards shifting some of their portfolio into debt. But analysts predict that this should not impact the markets in the long term .
Hence investors can structure their debt portfolio by Investment in Short term debt funds as it clearly seems to be a better bet till the time a clear picture emerges on inflation and interest rates. Longer term debt funds will be suitable once the interest rate reach its peak and is expected to come down in the near future.
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Tuesday, October 13, 2009
Qualified Institutional Placement
Qualified Institutional Placement (QIP's) the buzz word heard commonly these days among India Inc. Corporates raising money through QIP's has become a frequent phenomenon. As per a report published in Bloomberg* on Oct 08, 2009, Indian companies have raised $7bn through QIP's this FY and plan to double this no by the end of this FY. Some prominent QIP offerings are Unitech raising 1620 Cr and Indiabulls going a step ahead by raising 2600 cr.
But what is actually a QIP?
QIP is a mode of raising money for the Corporates. A tool for private placement introduced by SEBI in May 2006. In a QIP a listed company raises Equity shares, fully or partly convertible debentures or any other securities apart from warrants to a Qualified Institutional Buyer (QIB's: which includes Public Financial Institutuions, Mutual funds, FII and Venture capital firms registered with SEBI).
This was introduced by SEBI to avoid Indian companies raising money through overseas markets and avoid dependency on foreign capital which was raised through Foreign Currency Convertible Bonds (FCCB's) and Global Depository Receipts (GDR's).
QIP is a mode of raising money for the Corporates. A tool for private placement introduced by SEBI in May 2006. In a QIP a listed company raises Equity shares, fully or partly convertible debentures or any other securities apart from warrants to a Qualified Institutional Buyer (QIB's: which includes Public Financial Institutuions, Mutual funds, FII and Venture capital firms registered with SEBI).
This was introduced by SEBI to avoid Indian companies raising money through overseas markets and avoid dependency on foreign capital which was raised through Foreign Currency Convertible Bonds (FCCB's) and Global Depository Receipts (GDR's).
QIP's have become a cushion for Corporates for easy and speedy capital raising from the market unlike Public offerings. A Public Offering needs filing with SEBI and also a considerable time in hitting the markets whereas a QIP doesnt require any filing formalities. Also the complications which the companies face while tapping the overseas markets are not present with QIP's thus giving the corporates a comfort in raising money. Corporates through QIP can directly approach the QIB's thus asking them to let loose their pockets. However the QIP offer needs to be managed by a SEBI registered Merchant Banker. The offer documents need to placed on the website of Stock exchanges and the company raising money.
Exit options in case of a QIP also are easy as Investors donot have any lock in period for thier investments. They can exit if they find vauations of their securities attractive enough at any point of time.
Exit options in case of a QIP also are easy as Investors donot have any lock in period for thier investments. They can exit if they find vauations of their securities attractive enough at any point of time.
The economy is ripe with improving positive sentiments after an unforgettable recessionary downturn. Corporates also would like to take advantage of this situation by raising money to service thier debts and fulfill thier cash requirements#. The rising markets and profits announced by India Inc are giving confidence to the Investors. The Investors although are not going frenzy compared to some previous years but after a downturn are gradually gearing up to cautiously invest their money and get some value out of their investments in the improving economic scenario. This leaves a good scope for more QIP's to be rolled out by Corporates looking forward for investors who seek to get value for their investments by participating in the Indian growth story.
Some good Sites for more info on QIP's:
http://indianblogger.com/2009/06/05/what-is-a-qip-why-is-it-hot-now/
http://indianblogger.com/2009/06/05/what-is-a-qip-why-is-it-hot-now/
Monday, November 17, 2008
Economic Mayhem!! When will the turmoil end?
The Market Mayhem. The much mooted topic these days with everyone. It started with the subprime crisis in US. Went on to the debacle of Wall Street biggies like Lehman Brothers, Bear Sterns .... not to name the smaller ones. Honchos of Banking Industry like Citigroup, Wells Fargo Wachovia etc. were also not spared and had to bear huge losses. Markets collapsed, cos started filing for bankruptcy, real estate prices fell to rock bottom and illness of the worlds largest economy US spread across the world impacting all major economies across the globe. Indian economy few months back was expected to grow above 8% for FY 2008-09. Markets were at an all time high touching 20k mark. Investor wealth rose to all time highs leaving big smiles on the face of incredilbe Indian investors. Money poured in from foreign investors into the Indian markets to reap the benefits of the ongoing growth scenario thus leveraging it too much with foreign money. Just when the analysts started coming out with predictions of the markets touching the 25k dream mark the mayhem hit us hard catching us unawares. The sub prime impact was so hard that foreign investors had to take withdraw their money thus causing the drastic downfall. Rupee from levels of 42 a dollar reached 49 per dollar levels impacting the imports especially oil. Thanks to the Oil slide from $130 per barrel to $60 levels else it is worth envisaging where our balance of payments would have ended up. Indian banks ICICI and SBI which had little exposure to sub prime asset backed securities were also not spared of the hit. This even added to the failure hype of ICICI bank eventually ending up after loads of assurances from the management and even the govt. Current recession is said to be the biggest after the great depression. The much feared job cuts were on a roll and are still sending shivers down the spine of employees of Banks, IBanks and other organizations some of which are struggling to survive and other cutting costs to keep up their profitability levels. If's, but's and what's are the buzzwords in economic conversations these days.
I would hereby like to cite some concerns on certain areas (with focus on the Indian Economy) which are badly hit by the sub prime effect.
1.) The Indian Economic scenario couldnt be left untouched with the ongoing "Great Recession". Analysts predict a decline in growth rates to 7% levels for the year which is still respectable compared to the other big economies of the world. However compared to the envisaged 8.5% level effect of downturn can be very well estimated. Analysts predict the worst is still not over. Amidst a scenario where economies of super powers like Germany, Singapore, Japan along with our very own USA are finding difficult to come out of the crisis growth rate of 7% is a respectable number thanks to the good internal consumption demand facilitating its sustainability in tough times. Governments plan to spend Rs50000 Crore on Infrastructure development is a 'must required' move to enhance growth rate as infrastructure is one area where India lags behind a lot compared to many other developing nations.
2.) With markets touching the 9k mark what should be the advise of Wealth Managers for their clients. Should this be seen as a good buying opportunity for the retail investors as stock prices are on an all time low. Or are the market lows yet to come. Well there are mixed reactions to this question. Of course a long term investment at this time could be advisable short term profit game could be played as markets keep see sawing between 8.5k to 10k levels. However this requires a very very cautious approach on the front of wealth managers and even the investors as risk levels are on an all time high. Wealth Managers who were clever enough to facilitate their clients make profits well on time could cache in this opportunity as a good brand building move for themselves as well as their organization. However extra aggressivenes could have a strong negative impact of loss of wealth.
3.) What would be the Employment scenario across the Indian markets. Good hiring was predicted before the crisis however to what extent will things change is yet to be seen. Fat packages might be a thing of past for B-School grads however we can always hope for the hiring momentum to continue although not at the past pace. Although job cuts are not as massive as in US still the situation is tense enough to create panic situation where employees are just keeping their fingers crossed just waiting for this recession ghost to disappear. This might just add to the pressure of the employees thus impacting the work life balance.
4.) What will be the situation of Real Estate market!!! It started from the US Real Estate and banged the entire world. Real Estate has been attractive option of investment. However it now seems to be in a gone with the wind situation after the sub prime effect. Shares of listed real estate players are on an all time low. Tanking of DLF share price a perfect example of lowering confidence. Tighter liquidity conditions, high inflation levels have added fuel to the fire. Demand has shrunk badly forcing the highly optimistic real estate players to come out with sales promotion schemes which practically were non existent a few months back.
5.) What would be RBI's stand in these tough times. Few months back when Infaltion and Oil prices were on a roll, RBI took a tough stance by raising the CRR to control the inflation which touched 12% levels leaving no option with the consumers to save some extra bugs. Liquidity was tightened to control the credit growth with banks being forced to raise their PLR's and lending rates. With the sub prime wind banging the Indian economy hard the central bank had to change its stance from controlling credit grwoth to facilitating it. Although the CRR was cut by 3.5% liquidity still remained tight on account of the cautious approach adopted by the Banks. Banks had a strong focus few months back on investment products thereby generating huge third party product incomes. The scenario has drastically changed with Banks giving thrust on increasing their liability base so as to enhance liquidity in the system. Interest rates on savings account touched to levels of 11% with some banks thereby offering the customers a safer investment avenue to park their funds in a scenario when market linked investment returns are drastically down.
These were some areas of the jolted world economy which have faced a severe brunt.
It is still not clear to what extent will this mayhem continue. Analysts have a mixed opinion on time span of improvement. Some say worst is yet to come while some predict situation is expected to improve within a few quarters. Just to add guestimates only lead to a brainstorming decision. Govts have geared up and bailout packages worth $800bn is being offered by USA to rescue its top notch financial institutions. US Govt is buying Mortgage backed assets from Financial Institutions to relieve them from the burden of bad debts and make housing credit accessible to public so as to stimulate demand. AIG has got this privelege and Citi has got a $20bn respite. Europeian Union has infused $200bn for the bailouts.
Although these moves have certainly raised the confidence levels of the public and the corporates the current crisis worst after the 1949 economic depression has given a lesson of importance of regulatory norms. Think tanks consider the relaxed regulatory norms one of the primary reasons for making this crisis a massive one.
Despite all this fuss everybody is eagerly waiting for "return of the normal" situation. Positive hopes and rectifications efforts of everybody affected will certainly bring good times and big smiles back across the geographies.
(The endeavour of this article is to highlight and discuss a few facts about the ongoing recession. Views are entirely personal. Comments regarding corrections / additions / deletions are most welcome)
Monday, October 22, 2007
What after Jan 01, 2008
Jan 1, 2008 the day when total detariffing will take place in the Indian Insurance market. Lots of questions arise among the industry professionals when we think of this. Which way will the market move? What will be the pricing structure like. To what extent will the prices drop? Who will lead the show? Will any M&A game take place? Will any player be wiped out? What are the beneficial factors for the consumer along with the pricing. And the list of questions goes on.
The first thing and rather the most important factor. How will the pricess move. Looking at the first phase of detariffing for Marine and thereafter the second phase beginning Jan 1, 2007 for other tariffed products. The prices are very much expected to go down. But considering the fall in prices during the first phase of detariffing a further fall pops up many questions for the insurers like:
1.) Maintaining the profitability. (Profitability here stands for underwriting profit which is a ratio of claims paid, claims outstanding, management expenses, IBNR added together divided by the total earned premium) .
2.) Maintaining solvency Margins: This area will really make the industry honcos in the companies rub their brain. Detariffing although will make the co.s cautions in terms of risk selection but in no ways will this affect the frequency of claims thus making it a bit tougher for the employyes of new co.s .
3.) Impact on the commissions for the channel partners: A very important question as insurers depend heavily on these channel partners to get their business. They are the face of the insurers in the market and the first point of contact for the customers. Their job doesnot restrict upto selling rather extends to servicing of customers. Reduced premium might lead to a sharp downfall in commissions thereby increasing the costs of these channel partners and hence effecting the service levels.
4.) Maintaining the service levels: Reduced commissions might impact the service levels extended to their customers by the channel partners.
5.) Overall growth of Industry: Still a question in everyones mind. Yet with the existing players becoming more agressive and entry of new players good growth is expected this year.
6.) Reinsurers outlook towards accepting risks: This will be very important as every insurer needs a reinsurer support especially for insuring large risks. Premium reduction will eventually make the reinsurer cautious in terms of accepting risks. Insurers having sound risk management practice will benefit in the scenario by getting resinsurance support with much ease.
7.) What will be the impact on the product portfolio mix of the insurers: Motor insurance till date occupies the major portion of the insurers portfolio in India followed by Fire. Other major line of business Health which still is low profile is expected to pick up post complete detariffing. This is because with motor and Fire prices going down further insurers would come aggressively in marketing Health products so as to make up for their reduced premiums. Again marine rates might move northwards to compensate for the premium downfall. This will reshuffle the overall product portfolio pie of the insurers. Retail business will be the focus for the insurers to enhance the penetration. Insurers have already taken measures for this by enhancing their presence in Tier II, III cities.
8.) Talent Management: Another important aspect of this phase will be talent management. What remains the growth scenario is yet to be seen. Speculation about dip in overall premiums is strong. Insurance is one of the industries where job opportunities are increasing with the industry growth. A premium dip might affect the hikes and perks offered to the employees making the sector less lucrative to work for and hence lack of good talent. Also entry of new players in the market will make the HR departments run for employee retention.
The saying of Customer is the King will come true as he will be the actual beneficiary. The hunger to grow and clinch more business not only passes on the benefit to the customer but also educates him about the product its benefits, hidden facts and figures, competitor products etc. which otherwise wouldnt be known to him in a tariffed regime.
The other benefit which the customer will get is product differentiation. Not every insurer will be able to offer rock bottom prices. Some might be winners in terms of prices but some others in terms of differentiation and services. Though price is important but not in every case when the customer has the benefit of getting a customized product as per his choice.
Amidst so much speculation and excitement regarding detariffing the fingers of every stakeholder of this industry are crossed with just one sentence to speak "What will happen next".
Friday, April 13, 2007
Where is the Indian General Insurance market heading.
The Indian Insurance market after opening up in 2001 has come up a long way. If we talk about the General Insurance sector specifically the private players have proved to be very strong competition for the PSU players. The market which was supposed to be much cleaner in the tariffed scenario has become more of a mess after detariffing coming into existence from Jan 1,2007. Although this means flexibility to the Insurers in pricing their products upto a certain extent but has initiated a price war among the players. Customer has been the major beneficiary in this whole number game. Be it a retail or a corporate customer both have their own share of perks in terms of getting the best deal in getting the requisite insurance. But what the insurers need to be wary about in this detariffed scenario is to follow the best underwriting practice. A large drop in pricing can prove to be a big dent on the bottomline of the insurers. The scenario is that not dropping the prices means loss of business and large drop in prices could impact the profitability. Although IRDA has capped the discounts on rates still not every player is in a position to drop the rates to the maximum extent. This makes it easy for some players to increase their topline with lesser efforts. What I personally feel is that this has not left a uniformity in the competition.
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