Fiance Report

8/8/2019 Fiance Report

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A

PROJECT REPORT ON

WORKING CAPITAL MANAGEMENT

AT

UNIVERSAL SOMPO GENERAL INSURANCECOMPANY LTD

SUBMITTED BY

SHWETA GUPTA

INDIRA INSTITUTE OF CAREER STUDIES

IN PARTIAL FULFULLMENT OF THE REQUIREMENTS OFP.G.P+SMU

BATCH (2009-2011)


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DECLARATION

I hereby declare that the project report titled WORKING CAPITAL MANAGEMENT

at UNIVERSAL SOMPO GENERAL INSURANCE Co. Ltd. is my own work and

has been carried out under the able guidance of MR.Bisheshwari Singh, Business

Head-North Gurgaon . All care has been taken to keep this report error free and I

sincerely regret for any unintended discrepancies that might have crept int o this

report. I shall be highly obliged if errors (if any) be brought to my attention.

Thank You

SHWETA GUPTA


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ACKNOWLEDGEMENT


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ACKNOWLEDGEMENT

I take this opportunity to express my deep sense of gratitude to all those who have

contributed significantly by sharing their knowledge and experience in the completion of this

project work.

I am greatly obliged to PROF.P.K.DIVAKARAN for providing me the right kind of

opportunity and facilities to complete this venture.

My first word of gratitude is due to MR.Bisheshwari Singh, Gurgaon, my corporate guide,

for his kind help and support and for his valuable guidance throughout the project. I am

thankful to him for providing me with necessary insights and helping me out at every single

step.

My heartfelt thanks to my respected Faculty Guide namely PROF.Vishaka, without hiscontinuous help the project would not have been materialized in the present form. Hisvaluable suggestions helped me at every step.

Finally, I would also like to thank all my dear friends for their kind cooperation, advice and

encouragement during the long and arduous task of preparing this report and carrying out the

project.

At last but not the least, who are always at the top of my heart, my dear family members

whose blessings, inspiration and encouragement have resulted in the successful completion of

this project.

SHWETA GUPTA

ISCS PUNE


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DECLARATION

I SHWETA GUPTA, student of P.G.P III Semester ofINDIRA

SCHOOL OF CAREER STUDIES, PUNE hereby declare that the Summer

Training Report on WORKING CAPITAL MANAGEMENT of

UNIVERSAL SOMPO GENERAL INSURANCE COMPANY LIMITED,

Is my original work and has not been submitted by any other person.

I also declare that I have done my work sincerely and accurately

even then if any mistake or error had kept in it, I request the readers to point out

these errors and guide me to remove these errors in future.

Internal Guide Signature of the Candidate


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TABLE OF CONTENTS

Introduction

UNIVERSAL SOMPO GENERAL INSURANCE COMPANY LTD.

An Organization overview

USP (Unique selling propost)

Evolution of company

Product and service

GENERAL INSURANCE

What is insurance

Classifation of insurance

Removal of tariffs

Impact of detariffing

How insurance work

How premium is calculated

Research Methodology

WORKINGCAPITALATAGLANCE


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THEORTICAL ASPECTS OF WORKING CAPITAL

MANAGEMANT


RECEIVABLES MANAGEMENT

INVENTROY MANAGEMENT

CASH MANAGEMENT

ANALYSIS OF WORKING CAPITAL MANAGEMENT

COMPARATIVE P&L ACCOUNT

TREND ANALYSIS

CASH FLOW ANALYSES

RATIO ANALYSIS

FINDINGS AND CONCLUSIONS

LIMITATIONS

BIBLIOGRAPHY


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COMPANY PROFILE


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Organization overview

Introduction

Success is a journey, not a destination. If we look for examples to prove this quote then wecan find many but there is none like that of USGIC. Universal Sompo General InsurancePvt Ltd received the License and Certificate of Registration from IRDA (InsuranceRegulatory and Development Authority) in November 2007. It is a first of its kind venture,

i.e. Public - Private Partnership in General (Non-Life) Insurance Industry.

Success sutras of USGIC

The success story of USGIC is driven by 8 success sutras adopted by it namely trust,integrity, dedication, commitment, enterprise, hard work and team play, leaning andinnovation, empathy and humanity. These are the values that bind success with UniversalSompo General Insurance company.

Vision of USGIC

To emerge as a market leader in our chosen domain by winning customer, Confidencethrough superior value and continually enhancing the same. To achieve &sustain marketleadership, USGIC shall aim for complete customer satisfaction, by combining its human andtechnological resources, to provide world class quality services. In the process USGIC shallstrive to meet and exceed customers satisfaction and industry standards.

Mission statement

To provide superior value for our customers. Stable returns for our shareholders. Stimulatingwork environment for our employees. Safety consciousness for the Society.


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UNIQUE SELLING PROPOST(USP)

Bancassurance a hugely successful distribution channel is the USP of our Company;capitalizing on the tremendous reach of this channel Universal Sompo, is perhaps the firstcompany to present a plethora of products, commercial and retail to suit every need and

pocket.Our Company is a pioneer, of sorts too, in introducing all our most popular products onGenisys configuration, a sturdy web based platform. All our products, as approved by IRDA,would be added to the menu available so that our clientele can conveniently choose from theselection offered.We have excellent health products, both standalone policies and co -branded exclusive

products in conjunction with our bank partners, designed exclusively for their customers. OurTPAs i.e. TTK Health Services & Paramount Health services and Family Health Plan are

providing seamless services ensure that in the unfortunate event of hospitalization ouresteemed customers make a fast recovery to good health, safe in knowledge that we wouldtake care of their medical expenses.We have many ideas to further enhance our services to ensure that our valued customers'choice of Universal Sompo as their own insurer becomes inevitable rather than a matter of

choice. Thank you for visiting our site. We look forward to assisting you in your efforts toensure protection and security for yourself, family and property at every step.

USGIC shall striveTo be compliance oriented.To ensure prompt action / feedback on Customer grievance.To monitor and enhance service levels constantly.


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Evolution of the company

Universal Sompo General Insurance Co. Ltd. (universal Sompo) a joint venture betweenAllahabad Bank, Sompo Japan Insurance Inc., Dabur Investments, Karnataka Bank andIndian Overseas Bank. Universal Sompo is a uniquely symbolic example of fruitful public-

private sector partnerships.

The joint venture has been capitalized with shareholders funds of over 230 cr. including sharepremium.

Insurance Regulatory and Development Authority granted the License and Certificate ofRegistration to the company in November 2007.

Of all the five partnering companies, Sompo Japan Insurance Inc. is a Fortune 500 companybased in Tokyo, Japan. With a 15,000 strong workforce and a capital worth 70 Billion Yen,the company earned Rs. 50,000 crores as total premium income for the year 2006-2007,which is almost twice the premium income of the General Insurance Industry in India.

Three of the Indian partners are leading banks with a combined asset base of Rs. 92,602crores and over 4000 branches and distribution centers. Plus the 4th largest FMCG Companyin India with over 15 million retail outlets. The JV partners will extend their vast distribution

reach and customer base for soliciting our bouquet of non-life insurance business. In addition,the company's distribution network will also consist of brokers, agents and focused below theline direct marketing promotions.

The company is present across almost all product lines, classified into five major classes: Property Marine General Accident Workmen Compensation Motor Health Fire and burglary


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UNIVERSAL SOMPO GENERAL INSURANCE COMPANY

PRIVATE LIMITED

COMPANY PROFILE

Public Private Partnership in Indian General Insurance Industry Firm Footing

NameUniversal Sompo General Insurance Company Ltd. (USGI)

Registered : 310-311, Trade Centre, Opp. MTNL Bldg, Bandra Kurla

Address : Complex.Bandr(East), Mumbai 400051

Capital : Rs.235 crores

DirectorsExecutive Chairman Mr O.N. SinghManaging Director Mr Koichi Hattori

Incorporated : 5th January 2007

Business General Insurance in India including Reinsurance

Shareholders :

Allahabad Bank (National)30 Indian Overseas Bank (National) 19 Karnataka Bank (Private)15 Dabur Investment 10 Sompo Japan Inc26


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Company Profile as on 31th March 2009

Capital70 billion yen (USD 698 Million)

Net Underwritten Premium 2008 09: US$ 13 billion

Employees 16,095, Agents 54,282

Network41 branch and liaison offices in 26 countries

Total Ordinary income US$ 17.9 billion for 2008-2009 (twice the total Indian GeneralInsurance Industry)

Distribution network105 Regional Offices, 516 Branch offices.

Claim handling network233 claim service centers

Companys philosophy To be a sophisticated Risk Solution Provider to

Individuals and Corporates

Unique proposition based on differentiating elements of Time, Cost and know-how


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Products and services for the individual, corporate and small

entrepreneurDrawing upon the financial strengths and distribution reach of Indian partners and backed byinsurance expertise of Sompo Japan, Universal Sompo intends to be a diversified player,

participating in healthy competition to augment insurance capacity in the country through prudent underwriting, offering innovative and customized Risk Solutions to range ofcustomer segments including Rural and Social sector, utilizing varied Distribution channels.

Our bouquet of insurance products includes Health & Critical Illness, Personal Accident &Disability, Home, Motor, and Property for individuals, Offices, Shopkeepers Package andother non-life packages for Small Entrepreneurs, besides Employee Benefit, Operational,Project Insurance, Liability and other special products for Corporates. Detailed informationon our products and services are available in our product brochures.

They aim to provide our customers with peace of mind through advice on Risk Management(pre and post loss), Portfolio analysis, Business Continuity Planning (Business - Non Stop).


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Universal Sompo

Outlets in South Asia

Universal Sompo

Sompo Tokyo Head OfficeUI CPGA Sompo JapanBerjaya Sompo InsuranceSompo Japan Insurance (Spore)Sompo Japan Australia branchYangon Rep OfficeSompo Japan ThailandSompo Japan Indonesia


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Business Performance April 2010 (Net Premium Fig in lacs)


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Bancassurance Growth Story

Existing Tie-Ups

Indian Overseas BankAllahabad BankKarnataka BankLucknow Kshetriya Grammin BankTriveni Kshetriya Grammin BankSharda KGBMP APEX BankRajasthan State Co-Operative BanksRajasthan Finance CorporationJhalawar Sahakari Land Development BankIn PipelinePandiyan KGB, Nilanchal KGB, Survodaya Co-Op Bank. Mumbai Distt Co-Op Bank, Weare in talks with other 50 SCBs and 1 Major PSU Bank for Corporate Tie -Up


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USGI's Operational Performance FY 09-10


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Our Existing Clientele

Airports Authority of IndiaAmity InternationalBellsonica Auto Component India Pvt.Ltd.Bridgestone India Pvt. Ltd.

British Oxygen Company Ltd

Bhushan Steel LimitedBush Foods Overseas

Cabcon India

Canon India Pvt Ltd

Dabur India

Department of Trade Tax, Govt. Of UP

Dharampal Satyapal Limited

DOW Chemical

Euronet Services India

Goshi India Auto Parts Pvt. Ltd

Groz EngineeringHealth Education Society

Himadri Chemicals

Hi-Lex India Pvt. Ltd.

Hitachi Group

Honda Motorcycles &Scooters India Pvt.Ltd

Honda Siel Cars India Ltd.

Jaquar & Co. Ltd

Jindal Steel & Power Ltd

JSLKFSL ( Kribhco Shyam Fertilizer)

J K Lakshmi Cement Ltd.

MCC PTAManali Petrochemicals

Maruti Suzuki India Ltd.

Mizuho Corporate Bank

Minda Corporation Ltd.

Minda Furukawa Electric Pvt. Ltd.

Monnet Ispat& Energy Ltd

NHK Spring India Ltd.

Orient Fashion Export Limited

Reliance Industries Ltd

Renault Nissan Technology

Suzuki Motor Cycle India Pvt Ltd

Telecommunications consultants India Ltd

Tilda Riceland Private Limited

Unison Hotels Ltd (Hotel Grand)

YKK India

Yutaka Auto parts India

Uflex Ltd.


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SERVICES

All Customers:

Toll free no.( 247)

Web enabled service platform customer guidance, product brochures, claim forms, process,do's and dont's, FAQs

Cashless claims settlement Motor, Health

Pan India network of service providers surveyors and TPA

Managed care partners quality screened repair workshops, hospitals, builders, plumbers,white goods dealers

Minimal documentation, easy processes

Value added services road side assistance, valet service (motor claim), self-attested

documents, and health check-upInformation over SMS surveyor deputation, claim approval, policy renewal.

Corporate Clients

Dedicated Account Managers

Direct access to senior management team at the Regional and Corporate Office

Risk Inspection, portfolio advisory services, Business Continuity Planning

MOU with pre-agreed service standards

Facility for e-Marine, e-Travel and e-Motor

Panel of surveyors and pre agreed documentation

On-account payment in case of large losses

Advice on loss prevention & minimization

Employee education and awareness programs


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Customer Service Commitment

Understanding that Claims service is at the heart of an insured-insurer relationship, ourClaims philosophy is to 'to achieve fair and timely settlement through proactive managementof each claim in a customer friendly and transparent manner. 'Our aim is to help ourcustomers quickly tide over the financial loss arising out of the incidence of a covered perilso that they can get back to normal 'Life & Business As Usual'.

Our 24 hours Helpline, SMS and web enabled service platform for customer guidance, claimforms, processes, Do's and Don'ts, FAQs, minimal documentation, cashless claim settlement,

pan India network of service providers, quality screened partners, on-account payment in caseof large loss are some other efforts to ease claimants' anxieties and to make sure that ourcustomers get the best possible service at all times

Corporate Responsibility

Corporate Responsibility (CR) is about how our core business principles translate intocommitments for each of our key stakeholders, Customers, Employees, Business Partners,Regulators, Shareholders, Community and Environment.In line with our mission statement, an important CR issue that we will work to address would

be, to develop market leading understanding of safety and risk management in the society -down to the individual property level, providing preventative advice to our customers.


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Why choose Universal Sompo ?

Strong lineage of financial giants with proven track record. Only company in the country with public/private partnership Pan India distribution and servicing capability World class services and products Competitive prices Simple worded, easy to understand policy documents, terms and conditions

Sompo Japan -New Topics

SompoJapanestablishedaJointHoldingCompanynamedNKSJHoldingswithNIPPONKOAInsuranceCo.on1stApril2010.ThisgroupsOrdinaryincomewillbeJPY2,869,500million(=US$28,638millon)andisranked10thinworldwideGeneralInsuranceMarket.

Sompo Japan was the only Japanese financial institution to be honoured as One of theGlobal 100 Most Sustainable Corporations in the World for two consecutive years.


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Products to be Filled in 2010-11

The products of the company are divided into categories: Retail Commercial Benefit product

BENIFIT PRODUCT

Aapat Suraksha Bima Policy Individual Personal Accident Policy Group Personal Accident Policy (Long Term Also) Individual Health Insurance Policy Group Health Insurance Policy IOB-Health Care Plus Policy Janata Personal Accident Policy Long Term JPA


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INSURANCE

HISTORYInsurance in India started without any regulations in the nineteenth century of British colonialera. After the independence, the Life Insurance was nationalized in 1956, and then thegeneral insurance business was nationalized in 1972, with 4 insurance companies operatingunder the supervision of General Insurance Corporation of India. It was expected that thesubsidiary companies would provide effective competition to each other. For more than twodecades, the subsidiary companies have acquired considerable experience, expertise andfinancial strength and have also established reasonable standards of conduct of business.

What is Insurance?

Insurance is a contract between two parties whereby one party called insurer undertakes in

exchange for a fixed sum called premiums, to pay the other party called insured a fixedamount of money on the happening of certain events.

Insurance is a protection against financial loss arising on the happening of an unexpected

event. Insurance companies collect premiums to provide for this protection. A loss is paid outof the premiums collected from the insuring public and the Insurance Companies act as

trustee to the amount collected.

The economic value of a human life arises out of its relations to the other lives. Whenever

continuance of a life is financially valuable to others, either to family dependents, businessassociates, or educational and philanthropic situations, the necessity for the life insurance is

present.

For example, in a life policy by paying a premium to the Insurer, the family of the insuredperson receives a fixed compensation on the death of the insured.

Similarly, in car insurance, in the event of the car meeting with an accident, the insuredreceives the compensation to the extent of damage.

It is a system by which the losses suffered by a few are spread over many, exposed to similarrisks.


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Why should you like to take Insurance?

Insurance is desired to safeguard oneself and ones family against possible losses on accountof risk and perils. It provides financial compensation for the losses suffered due to thehappening of any unforeseen events.

By taking a life Insurance a person can have peace of mind and need not worry about the

financial consequences in case of any untimely death.

Let us consider the family of four, which consist of a man, a woman and their two children.The earning member of the family works hard to get the money flowing to meet therequirements of his family. They have plans to have their own house constructed in the next

two years. Everything is going as per the plans.

What could be the various events that could upset the plans?

Burglary

Death

Accidental Permanent Disability

Sickness & Critical Illness

All these events are forfituous in nature, i.e., they are out of control of the family and more inthe hands of destiny. Moreover all of these events can actually erode the wealth of the family.

In order to reduce the element of risk to which this family is subjected and to safeguard thewealth or economic value, insurance should be carried out.

There are two different branches of insurance, which are Life and Non-Life Insurance. WhileLife Insurance insures the life of a person, Non-life insures everything else.

Insurance ensures protection of economic value of assets. Assets are insured against

the risk of being destroyed or made non-functional due to any accidental

occurrence.


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Name some areas covered under Life and Non-Life Insurance

Certain Insurance contracts are also made compulsory by legislation. For example, Motor

Vehicle Act 1988 stipulates that a person driving a vehicle in a public place should hold avalid insurance policy covering Act risks. Another example of compulsory insurance

pertain to the Environment Protection Act, Wherein a person using a carrying hazardoussubstances (as defined in the Act) must hold a valid public liability (Act) policy.

What are the other benefits of taking Insurance?

Tax Relief: Under section 88 of Income Tax Act, a portion of premium is paid for lifeinsurance policies are deducted from tax liability. Similarly, exemption is available for HealthInsurance Policy premiums.

Money paid as claim including Bonus under a life policy is exempted from payment ofIncome Tax. However annuities received under certain pension plans are taxable.

Encourage Savings: An insurance scheme encourages thrift among individuals. It inculcatesthe habits of saving compulsorily, unlike other saving instruments, wherein the saved moneycan be easily withdrawn.

In insurance parlance risk implies:Peril to be insured against e.g. Fire, theft etc.Person/ Property e.g. young people vis--vis old people.While we are on this subject, let discuss insurance and assurance, the two terms, which areused interchangeably and also understood wrongly at times.


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CLASSIFATION OF INSURANCE

LIFE INSURANCEThe insurance sector went through a full circle of phases from being unregulated tocompletely regulate and then currently being partly deregulated. It is governed by a numberof acts.

The Insurance Act of 1938 was the first legislation governing all forms of insurance toprovide strict state control over insurance business.

Life insurance in India was completely nationalized on January 19, 1956, through the LifeInsurance Corporation Act. All 245 insurance companies operating then in the country weremerged into one entity, the Life Insurance Corporation of India.

Human life is an income generating assets. This asset can be lost through unexpected deathor made non functional sickness or disability caused by accident. There is no certainty thatdeath will happen. On the other hand there is a certainty that death will happen. But itsremaining uncertain.

Life insurance protects against loss of income of individual. Life Insurancey Does not protect the asset

y Does not prevent loss

Insurance

Life

Insurance

General Insurance

Fire Marine Miscellaneous

Health

Insurance


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NON- LIE INSURANCE FIRE INSURANCE

MARINE INSURANCE MISCELLANEOUS

FIRE INSURANCE Standard Fire and Special Perils Policy Consequential Loss-Fire Insurance Policy Industrial All Risk Insurance

MARINE INSURANCE

Marine Cargo Open Policies (Inland & Import/ Export) and Annual Sales Turn overPolicies

Marine Cargo -Specific Transit Policies ( Inland & Import/ Export ) Tea Crop Insurance Policy

MISCELLANEOUS INSURANCE

Burglary Policy All Risk Insurance Policy Workmens Compensation Policy Jeweller Block Insurance Policy Public Liability (Industrial & Storage Risks) Money Insurance Public Liability (Act) Insurance Products Liability Public Liability (Non Industrial) Commercial General Liability Policy Fidelity Guarantee Bankers Indemnity Travel Insurance Credit Insurance Errors & Omission


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FIRE INSURANCE

Loss due to FIRE, LIGHTINING, EXPLOSION, IMPLOSION,, RIOTS & STRIKES,IMPACT BY RAIL, AIRCRAFT DAMAGE, EARTH QUAKE, FLOOD, STORM,TEMPEST, TORNADO, TYPHOON, CYCLONES & LAND SLIDE.Fire insurance policies may be issued on REINSTATEMENT value basis. Although theinsured gets new property which is in similar condition and of same kind, to protect the basicof idea of indemnity the property will not be of superior nature.

MARINE INSURANCE

In this branch what is provided as indemnity becomes commercial indemnity because, almostall the policies issued are agreed value policies.

To be precise the insured and the insurer agree that the sum insured is the value of theproperty insured. The agreed amount is then payable in case of total loss, with no attachments

what so ever.

Type of marine insurance

A. cargo insuranceB. hull insurance

Cargo insurance provides insurance cover in respect of loss of or damage to goods duringtransit by RAIL, ROAD, SEA, AIR OR REGISTERED POST.

TYPE OF CONTRACT RESPONSIBILITY

FREE ON BOARD SELLER IS RESPONSIBLE TILL THE(F.O.B) GOODS ARE PLACED ONBOARD.

COST & FREIGHT THE BUYERS RESPONSIBILITY STARTS

(C & F) FROM THE TIME THE GOODS AREPLACED ONBOARD

COST INSURANCE THE SELLER IS RESPONSIBLE FOR

& FREIGHT (C.I.F) ARRANGING INSURANCE WHICH ISINCLUDED IN THE COST OF THE GOODS.


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A further security in the form of insurance policy is also required by the bank to protect itsinterest in case of goods suffering loss or damage while in transit, in which case the importermay not make the payment. The terms and conditions of the insurance are specified in the

letter of CREDIT.

The RISKS covered in a marine policy falls under three categories

MARINE PERILS EXTRANEOUS PERILS WAR & STIRKES, RIOTS & CIVIL

COMMOTION RISKS (S.R.C.C

MARINE PERILS:are the perils associated with rivers, seas.

EXTRANEOUS PERILS: means not relevant. Ex: theft, pilferage non deliveries aresome of the extraneous perils. Loss due to WAR, STRIKES and CIVIL COMMOTIONS(SRCC) can also be covered under a Marine policy. The consequences of these perils mayresult in total loss.

HEALTH INSURANCE

Health insurance in a narrow sense would be an individual or group purchasing health carecoverage in advance by paying a fee called premium. In its broader sense, it would be any

arrangement that helps to defer, delay, reduce or altogether avoid payment for health careincurred by individuals and households. Given the appropriateness of this definition in theIndiancontext, this is the definition, we would adopt. The health insurance market in India isvery limited covering about 10% of the total population. The existing schemes can becategorized as:

(1) Voluntary health insurance schemes or private-for-profit schemes;(2) Employer-based schemes;(3) Insurance offered by NGOs / community based health insurance, and(4) Mandatory health insurance schemes or government run schemes

IRDA Regulations (Registration of Indian Insurance Companies) 2000 defines health

insurance as- Health Insurance business or Health cover as affecting of contracts whichprovide sickness benefit or medical or surgical or hospital expense benefits, whether inpatientor outpatient, on an indemnity basis, reimbursement , pre-paid or hospital or other plans

basis, including assured benefits and long term care.

Health Insurance is the method to finance health care. The ILO defines health care as- the

reduction or elimination of uncertain risk of loss for the individual or household bycombining a larger number of similarly exposed individuals or households who are includedin a common fund that makes good the loss caused to any one member.


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Second largest contributor to general insurance premiums after motor insurance ~20% of themarket in FY09 and is expected to be 26% of the market in FY10 fastest growing segment

5 year growth rate of 37%. Annual premiums in FY09 of $1.4 billion expected to increase to$6.2 billion by FY15

Growth drivers-Ageing populationImproving per-capita income and awarenessIncreasing healthcare costsIncreasing health insurance by employersIn the absence of any major social security support in the India, the need for health insuranceis a subject of prime importanceIt is estimated that only 3-4% of the Indian population has some form of health insurance.Private insurers are more aggressive in this segment.Loss ratio has been high at ~141% in 2006-07, and 107% in 2007-08 largely driven by thegroup health portfolio.Prior to detariffing, this coverage was commonly bundled with fire insurance and companiesmade a profit on the whole due to fire tariffs being much higher. Now after detariffing thiscross subsidization cannot continue.Life insurers can now sell health policies and recently two companies specializing in healthinsurance have set up shop (Star Health & Allied Insurance and Apollo DKV)


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Perceptions about Health Insurance in India


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Health Insurance Focus Areas Health Insurance - potential to become a Rs.25000 crores industry by 2012.

No. of Elderly People in the Developing World will TRIPLE in 25yrs. (WHO)

In India, the no. of people above 60 yrs is about 8% today, with that no. expected tohit 21% by 2025. (Asia Insurance Review)

\


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Health Insurance The Way Ahead

Creating awareness on Rights & Responsibilities

Data Pool Regulator as a repository

Standardization of CostTPAsHealth Providers

Increased Tax benefit

Removal of Service Tax

Standardization of definition a right step ahead

Standard Pre-Existing exclusion defined w.e.f. 01/06/08

Gradation of Health service providers

Pool for Senior Citizen

Renewability / Portability

Compulsory Health Benefits for organized sector

Government role on mass healthcare initiatives

GENERAL INSURANCE VS. LIFE INSURANCE

Several life insurance companies have of late plunged into health segment, which till recentlywas dominated by general insurance companies. Among others, ICICI Prudential has

launched Hospital care and Crisis Cover and Bajaj Allianz, the Care First Plan. Life insuranceCorporation, too, plans to roll out products soon. But, are these products different from those

offered by general insurance companies, popular as Medi-claim policies?Acomparison of Health Insurance offered by a Life and a General Insurer:

Nature of Contract Life Insurer General InsurerPeriod of Coverage Contracts are usually made

for a longer duration

Contracts are usually, though

not invariably, are made for ashort period of usually oneyear or less and at the end ofthat year are renewable bymutual consent of the insurerand the insured.

Obligation of the Insured Once the contract has been At each renewal there is an


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made, the insured isgenerally under no obligationto report any change of

circumstances affecting therisk insured unless a changein actual nature of contract isrequested by the Insured

onus on the insured toobserve utmost good faith ininforming the insurer of any

changes in circumstanceswhich affect assessment ofcost of risk borne by theinsurer.

Premiums The premiums for a lifeassurance contract remainsfixed over the period ofcontract.

The premiums may vary ateach renewal to reflectchanges in individualcircumstances.

Benefit Payout Pays a lump sum,irrespective of whether the

policyholder has incurredthose expenses on hishospital stay.

Pays claims according to thehospital expenses that a

person incurs depending, onthe amount of cover that a

policy holder has taken.Valuation of Liabilities A deterministic Approach

(the life and morbidity table)may be adequate for thevaluation of life assuranceliabilities.

A stochastic approach (withstatistical models morecomplicated than life andmorbidity table) has to beconsidered for generalinsurance.

Taxation Portion of premium paid inrespect of health insurancecovering the assessee as wellas any member of family is

deducted from taxableincome under section 80 D.

Premium paid in respect ofhealth insurance policies isdeducted from taxableincome under section 80 D.

Advantages of Health insurance offered by Life insurance companies: Because of thelong term nature of the plans, the policy holder can plan in advance his future medical/careexpenses. But it is not so under General insurance. Since, the general insurance policies aresubject to renewal every year, if the policy holder has been making several claims and isconsidered a risk, the general insurance company may deny renewal or renew it for a muchhigher premium.

Advantages of Health insurance offered by General insurance companies: Though alump sum amount is paid by life insurers and is of long term nature, this comes with a cost.They charge bigger premiums as compared with general insurers. In addition, most generalinsurance companies offer medical charges up to 30 days before a person is hospitalized and

pay the claims if a person has been undergoing a treatment at home- also called domiciliaryhospitalization. The life insurers seem to lack this facility at this point in time.


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Removal of Tariffs (Detariffing)

Detariffing occurred in three phases- One of the significant milestones has been the withdrawal of premium pricing

restrictions initiated from Jan 1, 2007

From Jan 1, 2007 Jan 1, 2009, insurers were permitted to structure the premium

rates, but were not allowed to vary the coverage, terms, conditions, policy wordings

etc. This period allowed to migrate towards risk based pricing.

From Jan 1, 2009 the IRDA allowed the insurers to file variation in deductibles,

coverage amounts, etc. This phase has allowed flexibility in terms of breadth of

coverage.

Detariffing of rates has led to a virtual price war in certain lines of business such as

Fire and Engineering thereby resulting in an adverse impact on profitability.

Impact of Detariffing Loss ratios have increased for FY08 compared to FY07 and are expected to continue

to worsen in FY09

Fire has seen premium correction of approx 60-70% and motor has witnessed adecrease in rates of approx 30-40%

Health insurance shows a high level of underwriting losses mainly due to the grouphealth portfolio, but has showed an improvement in FY08

Growth in gross premiums decreased significantly from 21.5% in FY03 07 to 9.9%

in FY09 Sum assured continues to grow at a healthy rate increase of approx 16% in FY09

and 23% in FY08 Increased focus on scientific risk based pricing and improving underwriting

capabilities Improvement in risk management and claim control Eliminate cross subsidization between lines of business (e.g. health and fire) Emphasis on customer service and relationship management


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IMPACT OF TARIFFS

The price of an insurance product is linked to the scope of the cover. The tariff mechanismprovides floor rates for various insurance products based on estimates of average of all lossesacross insurance companies, average administrative costs including commissions and averageexpected profit.In India, the Tariff Advisory Committee (TAC) established under the Insurance Act 1938 is

vested with the functions of administering the rates, terms, advantages and conditions in thegeneral insurance business which are under tariff. The major classes of general insurance

business under tariff regime as in 2006 before detariffing of the market were Fire,Petrochemicals, Engineering and Motor. The endeavor has been to ensure that the rates arefixed appropriately and equitably keeping in mind the interests of both insurers and

policyholders through a scientific method of rating.Upto 1972, some data was being received at TAC from the insurers. After nationalization in

1972, the data flow reduced. Further, there was no system of dissemination of data to the public. Even the four public sector insurers were not able to publish consolidated data oneach class of insurance. Thus scientific rating became a casualty. As a result pricing ofdifferent classification of risks was done in an ad-hoc manner. This resulted in crosssubsidization among different class of risks and also within a class the better risks subsidizingthe loss making risks.

Apart from this, the insurer in a regulated market did not have flexibility in pricing orinnovation of products as they had to adhere to the terms and conditions of the tariff in letterand spirit. With the standardization of covers, freezing of rates, terms and conditions, therewas little choice available to the insuring public in terms of products and prices. Thus, whilethe parameters or risk factors fixed in the tariff were adhered to for rating purposes, new and

emerging risk factors could not be dove-tailed into the tariff for want of data on those factors.On the customers side, there was a perception that the better risks were being charged asmuch premium if not more than those for the high risk ones. In short there was no distinction

between good risks and bad risks as the same rate applied to all.

Post IRDA Act 1999

IRDA Act was enacted with the objective to protect the interests of insurance policy holdersand to regulate, promote and ensure orderly growth of the insurance industry. Though the

benefits of liberalization can be seen with increase in volumes of premium, there was little

innovation in the tariff driven General Insurance business. Even after the opening up of theinsurance sector, the general insurance business was predominantly governed by the tariffs

prescribed by TAC.

Considering prevalence of such tariffs against the principles of competition, there was aconstant demand from insurers and other industry experts to abolish the tariffs. However,sudden removal of tariffs can result in unhealthy price-wars thereby affecting the solvency ofthe company itself. It means that there is need for sustainable growth on scientific lines andenhanced customer satisfaction.


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THE PROCESS OF DE-TARIFFING

Evolution of De-tariffing Concept

In a competitive market, the products need to be priced equitably based on their individualrisk experience which was not practiced due to tariff restrictions. It was alleged that tariffswere rigid based on out-dated statistical data, and that premium rates were not revised inresponse to the market dynamics. It resulted in heavy cross subsidy of premium for thoselines of business which had persistent high claims ratio, for e.g. Motor Third Party.

In other profitable portfolios, tariff rates were higher than rates for similar risks in other partsof the world. Hence, General insurance companies and other Stake holders in the insurancemarket had been voicing the demand for the removal of tariff as the existence of tariff wasconsidered contrary to free market principles and insurance products need to be priced basedon free market forces.

Reasons for transition to detariff regime

Pursuant to liberalization and the entry of private insurers, the motor underwriting scenariochanged drastically. On one hand the private players refrained from underwriting the lossmaking areas such as standalone liability policy and on the other, they clamoured fordetariffing of motor portfolio. They also had in place sophisticated IT set ups and systemscapable of statistical analysis of various risk factors over and above the ones prescribed by

the motor tariff.

The awareness among customers in the wake of liberalization also resulted in a movementtowards risk based rating rather than a rigid tariff structure. Representations have beenreceived by the IRDA that insurers were not willing to offer Mandatory Third Party Liabilitycover and that there were loading the own damage policies. The response of the insurancecompanies was that the third party liability insurance was not a viable business without crosssubsidizing with the premia from own damage portfolio.

The Authority has accordingly considered moving to a tariff free regime in a phased manner.To begin with, by notification dated 31.10.2002, it constituted a Committee under the

Chairmanship of Justice T.N.C. Rangarajan to examine the various aspects of motorunderwriting including de-tariffing and pooling arrangements.


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De-tariffing of Marine Hull InsuranceContinuing the spirit of competition, vide circular Ref No. IRDA/CIR/Mrn-Hull/086/Mar-05dated 23rd March, 2005; all general insurers who wish to write marine hull class of businesswere allowed to go out of the tariff from 1.4.2005. However, it was mandated that they shallfollow the existing policy wordings, terms and conditions including clauses such as theInstitute clauses till further orders. On the other hand the terms & conditions for the war riskinsurance policy shall be identical to the existing Government of India Scheme until furtherorders, which continues till date.

ADVANTAGES OF DE-TARIFFING Competition will improve efficiency Efficiency will lead to reduction of premia and benefit policyholders It is part of the reforms towards liberalized economy.

The fears apprehended are: De-tariffing may make insurance unavailable at reasonable premia. Companies may form cartels and jack up the premia. Free market may lead to insolvency of companies and loss of protection for

policyholder.


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CHANGING DIMENSION OF INSURANCE MARKET

On September 23, 2005, the Insurance Regulatory Development Authority of India (IRDA)announced that non life-insurance companies would be tariff-free regime with effect frombrought under a January 1, 2007.

After detariffing these companies would be allowed to fix the premiums for the insurance products they offered based on their own analysis and of the risk involved in each case,without government regulation.

In other words, detariffing would increase the role and responsibility of the underwriter, andcause a shift from rule-based underwriting to risk-based decision-making.

Commenting on the move to set up a tariff-free regime in general insurance, the Chairman of

the IRDA, C.S. Rao, said "The proposed detariffing in general insurance industry would leadto a major shift in the focus of insurance companies from corporate business to individuals,resulting in higher insurance penetration in the country."

J. Cyril, President of the Oriental Insurance Company officers' Association and formerSecretary-General of the Confederation of Insurance officers' Associations, said, "All along,the private sector in the industry had greater flexibility in quoting premiums because ofcertain practices like commissions and incentives. Detariffing will enable the public sectorcompanies to quote competitive rates."

According to analysts, the impact of detariffing would vary from segment to segment in theinsurance sector. The engineering and fire insurance premiums, which were a lucrative

business for the insurance companies, were expected to fall, whereas premiums in the loss-making motor insurance segment were expected to increase after a detariffed regime was setup.Marine hull/cargo insurance premiums were also expected to fall, because profitable risks

covered by the companies would be offered at a competitively lower price. The healthinsurance companies were expected to experience profits as cross subsidizationwould beeliminated.

Until 2006, health insurance products accounted for less than 1% of the business of lifeinsurance firms, in terms of premium value. Life insurance providers were allowed to offer alimited range of critical care products along with their life insurance policies.However, premiums from standalone health care insurance products sold by general

insurance companies contributed to almost 11-12% of the total premium value pool. At astage where the health insurance companies lacked transparency and regulation of services,the detariffing policy was expected to play a significant role in remedying this situation.Also, this sector was expected to expand its services by providing customized policies tocustomers based on their individual risk profiles.The Insurance Regulatory and Development Authority Act, 1999 is an Act to provide for theestablishment of an authority to protect the interests of holders of insurance policies, toregulate, promote and ensure orderly growth of an insurance industry and for mattersconnected therewith or incidental thereto and further to amend the Insurance Act, 1938, the


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Life Insurance Corporation Act, 1956 and the General Insurance Business (Nationalizations)Act, 1972.The Parliament ratified the Insurance Regulatory and Development Authority Bill, 1999 on

7-12-1999, thus stigmatizing the monopoly of the Life Insurance Corporation and GeneralInsurance Corporation over the insurance sector.

The Bill, adopted by the Lok Sabha on December 2, was passed in the Rajya Sabha on 7-12-1999. The Insurance Regulatory & Development Authority Act, 1999 seeks to open up theinsurance sector for private companies with a foreign equity of 26 per cent. It is also aimedat ending the monopoly of the Life Insurance Corporation (LIC) and General InsuranceCorporation (GIC) in the insurance sector of the country.Finance Minister, Mr. Yashwant Sinha, asserted that the government was not in favour ofState monopolies. Reiterating that the policy of the government was one that was forcompetition, Mr. Sinha, however, assured the House that there would be a level playing fieldfor the private and State owned insurance companies: "The Regulatory Authority will not doto the public sector what it would not do to a private company", he said as he allayed fearsthat the legislation would be detrimental to the interests of the social sector.

Stating that the government is under no pressure to bring in the Bill, the Finance Ministersaid that the Government is bringing the Bill on its own accord.Mr. Sinha, on his part, said the government had given "ample notice" of its intention to

privatise the insurance sector.

Mr. Sinha set at rest doubts about dilution of equity of the LIC and GIC. The presentgovernment, he said, has no intention to privatise these corporations: "Neither is it our casethat the LIC and GIC have not functioned. They have discharged their responsibility well but

they need to do more". He said adding that it was not possible for the LIC and GIC to cover acountry as large as India in its entirety" "That is why penetration of LIC and GIC has beeninadequate".

Drawing the attention of the House to the fact that LIC and GIC had branches in 26 countries,he sought to know from the members that when LIC and GIC could go to other countries thenwhy couldn't others countries come to India. The 26 per cent equity cap does not meansurrendering freedom, he clarified.

On the issue of loss of sovereignty, he said that similar references were expressed when thebanking sector was opened up but the experience has been quite to the contrary. The LIC andGIC, he asserted, are geared to face competition.

This comprehensive write-up comprising the Insurance Regulatory and DevelopmentAuthority Act, 1999 with short comments and Regulations relating thereto would serve the

purpose of a ready reference on the subject. A creative feedback from the learned readers,

bringing to our notice any mistake, error or omission or discrepancy that might have crept inthis book in spite of our sincere efforts to avoid those, is most welcome, for it will help us

improve the overall quality, style and presentation of the book in the forthcoming editions


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Private company

To ensure better corporate governance and transparency in the insurance sector, the InsuranceRegulatory and Development Authority (IRDA) has decided not to issue licences tocompanies registered as private limited insurance companies under the Indian Companies Act1956.

According to an IRDA official, prospective entrants in the insurance sector have been askedto register their companies as public limited companies instead."Existing private limited insurers have been asked to become public limited," he said.Accordingly Aviva Life Insurance Company India Pvt Ltd changed its incorporation status in

November 2007 and is now Aviva Life Insurance Company India Ltd.

"Becoming public limited does not mean that the company is planning any public issue. It is

mainly to comply with the regulator's directive," said an Aviva spokesperson.

When contacted the spokesperson of the Bangalore-based MetLife India Insurance Co PvtLtd said the company was awaiting the Registrar of Companies' sanction for the change in itsincorporated status.

Originally a private limited company, another Bangalore-based life insurer, ING Vysya LifeInsurance Company Ltd, became a public limited company in 2005 when the promoterschanged hands.

Is IRDA correcting a monumental blunder?

Interestingly all three private limited insurers licensed by IRDA are those in the life insurancebusiness.

"That is all the more reason for worry as life insurers deal with large quantum of publicfunds, generally parked on a long-term basis by policyholders, say 10 to 30 years," says PPrabhakar, a Chennai-based practicing chartered accountant and an insurance sector analyst.Welcoming IRDA's latest move, he says, "IRDA committed a monumental and pathological

blunder in licensing three private limited life insurers."

A blunder ? Citing the provisions of Insurance Act 1938 he says, "Section 2C of the Actclearly states that an insurance company should be "public company" Prabhakar explains.

According to him the regulator must have relied on the provision of the IRDA (Registrationof Indian Insurance Companies) Regulations, 2000 and Section 2(7A) of Insurance Act 1938inserted in the Act only in 1999.

Regulation 5 of IRDA (Registration of Indian Insurance Companies) Regulations, 2000 readsas follows: "An applicant shall be eligible to apply for requisition referred to in sub-

regulation (1) of regulation 2, if such applicant upon registration will be an Indian InsuranceCompany as defined in section 2(7A) of the Act"


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And Section 2(7A) defines an Indian insurance company as one formed and registered underCompanies Act 1956. However, it is silent on the nature of incorporation - private or publiclimited - of the company.

"Whether it is a conscious silence or an unintended omission is not clear. However, the factthat three private limited companies have been permitted by the IRDA shows that it is adeliberate omission. The legal position is delightfully vague and it appears, it has beenintended to be so," opines R Ramakrishna, a member of Malhotra Committee on InsuranceReforms and former executive director (Actuarial) Life Insurance Corporation of India.

Broadly speaking under Companies Act 1956 two kinds of companies can be formed vizprivate limited and public limited.

Add Prabhakar When the Insurance Act was extensively amended in 1999, Section 2C wasnot touched. The section is much older than Section 2(7A), which is of 1999 vintage.Logically a new legal provision cannot override its elder unless specifically mentioned."

On the face of it may seem the lacuna was unintended, but it is not so if one reads Section 6A(2) the Insurance Act that deals with voting rights of the shareholders of a public company.

As per this section the voting rights of shareholders in the case of a public company is strictlyproportionate to the paid up amount of the shares held up by him.

The section is conspicuously silent about private limited companies. They can fall back onthe Companies Act that provides for disproportionate voting rights.

Spokespersons of MetLife India and Aviva India declined to comment on the kind of votingrights the promoters - foreign and Indian- had on their respective shares.

Why not a 'Pvt Ltd' company?Arguing in favour of private limited insurers an industry official preferring anonymity says,"In the case of a private limited companies transfer of shares can be restricted by the articlesof association. This gives comfort to the foreign shareholders who by law can hold only 26

per cent stake. In a public company there is no level playing field for the foreign partner."

Responding to that Prabhakar says, "There cannot be a level playing field between majorityand minority promoters."

Nevertheless the field seems to be level in the case of a public limited company as anypromoter can exit the venture without seeking other party's permission.

Perhaps what could be considered as negligence or careless in drafting of the insurance law isthe mention of Companies Act 1913 in several places instead of Companies Act 1956 - thegoverning law the Indian incorporated companies.


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Transparency is at a premium

Allowing private limited companies to deal with huge public money actually hinders the twogood concepts viz corporate governance and transparency.Under Companies Act anybody can get a copy of a public limited company's annual reportfrom the Registrar of Companies even it is not listed on the bourses.

On the other hand the annual reports of private limited companies are not accessible to thepublic."Look at the banking sector. First of all there are not private limited banks. Secondly eachand every bank has to publish its accounts in the newspapers and each and every bank branchdisplays them in their premises. Why such a transparency is not there in the insurance sector,"Prabhakar poses.

Today transparency is at a premium in the insurance sector with very few enlightenedcompanies putting their annual reports on their corporate websites or sharing it with

journalists for further dissemination, unlike notable exceptions like Bajaj Allianz.

Counter an executive with a private life insurance company. "Policyholders do not need toknow the profit / loss account or the balance sheet of a life insurer as they are not investors ora creditor. It takes at least seven years for a life insurer to break even. If a prospect sees a lifeinsurance company making losses he may not buy a policy."

According to him all the information required by a prospect to decide on a product purchaseis available in the public domain."IRDA ensures the solvency of insurance companies. So publishing the annual reports will be

a competitive disadvantage," he argues.

Strongly disagreeing with that view S V Mony, secretary general, Life Insurance Council ofIndia says, "A policyholder and a prospective policyholder have every right to know thefinancial health of a life insurer."

According to Prabhakar, IRDA guarantees just the risk / insurance portion of the premiumpaid and not the safety of the money's invested in the stock markets under the unit linkedpolicies. The policyholder bears the entire investment risk. Hence he has every right to knowthe financials of the company."

Even an unsecured creditor has a right to repayment whereas a poor policyholder has no

recourse in the event a company loses his savings when the stock market collapses.

Prabhakar further adds, The time has come for IRDA to stipulate that domestic insurer's ofcertain age should publish their annual accounts in newspapers. Life insurers should not beallowed to keep their accounts under wraps in perpetuity. A policyholder should knowwhether the life insurer has sufficient assets to pay off its liabilities."Only when the accounts are thrown open insurers would be forced to look at their operationalefficiencies and not just the top line growth.


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Unravelling the embedded values

The other area that IRDA should look at is the calculation of embedded value-the currentvalue of future profits from the existing policies- by the life insurers.

Many life insurers are playing the top line growth game with an eye on coming out with an

initial public offering.

Some life insurers have started announcing the embedded value of their business and somehave started issuing employees stock options.

The IRDA should start looking at the actuarial assumptions under which the embedded value

is calculated so that lay people are not fooled with fancy valuations.

Perhaps to bring some sort of comparability amongst insurers IRDA could ask the insurers todeclare the basis/assumptions on which the embedded value is calculated by an insurer.

WHAT IS DETARIFFING IN INSURANCE?

Insurance premiums are fixed by a body known as the Tariff Advisory Committee whichcontrols and regulates the rates, advantages, terms and conditions that may be offered byinsurers in respect of General InsuranceBusiness relating to Fire, Marine (Hull), Motor,Engineering and Workmen Compensation.Detariffing refers to doing away with suchfixation of tariffs.

Responding to the demands from the industry, the IRDA has notified in September 2005 that

a detariffing regime in respect of non-life insurance viz. liability insurance , indemnityinsurance, personal lines like health insurance, and marine hull insurance, will come into

place with effect from January 1, 2007.

Detariffing is expected to make the prices of these premiums market driven.It is expectedthat the premiums will take a southward direction.In a detariffed regime insurancecompanies are expected to focus on personal lines of business like healthand motor insurance in a stronger way than at present.


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How Insurance Works?The mechanism of insurance is very simple. People who are exposed to the same risks cometogether and agree that, if any one of them suffers a loss, the others will share the loss andmake good to the person who lost. All people who send goods by ship are exposed to thesame risks, which are related to water damage, ship sinking, piracy, etc. Those owningfactories are not exposed to these risks, but they are exposed to different kinds of risks like,fire, hailstorms, earthquake, lightning, burglary, etc. Like this, different kinds of risks can beidentified and separate groups made, including those exposed to such risks. By this method,the heavy loss that any one of them may suffer (all of them may not suffer such losses at thesame time) is divided into bearable small losses by all. In other words, the risk is spreadamong the community and the likely big impact on one is reduced to smaller manageable

impacts on all.

If a Jumbo Jet with more than 350 passengers crashes, the loss would run into several croresof rupees. No airline would be able to bear such a loss. It is unlikely that many Jumbo Jets

will crash at same time. If 100 airline companies flying Jumbo Jets, come together into aninsurance pool, whenever one of the Jumbo Jets in the pool crashes, the loss to be borne byeach airline would come down to a few lakhs of rupees. Thus, insurance is a business ofsharing.There are certain principles, which make it possible for insurance to remain a fairarrangement. The first is that it is difficult for any one individual to bear the consequences ofthe risks that he is exposed to. It will become bearable when the community shares the

burden. The second is that the perils should occur in an accidental manner. Nobody should bein a position to make the risk happen. In other words, none in the group should set fire to hisassets and ask others to share the costs of damage. This would be taking unfair advantage ofan arrangement put into place to protect people from risks they are exposed to. Theoccurrence has to be random, accidental, and not the deliberate creation of the insured person.

The manner in which the loss is to be shared can be determined before-hand. It may beproportional to the risk that each person is exposed to. This would be indicative of the benefithe would receive if the peril befell him. The share could be collected from the members afterthe loss has occurred or the likely shares may be collected in advance, at the time ofadmission to the group. Insurance companies collect in advance and create a fund from whichthe losses are paid.

The collection to be made from each person in advance is determined on assumptions. Whileit may not be possible to tell beforehand, which person will suffer, it may be possible to tell,on the basis of past experiences, how many persons, on an average, may suffer losses. Thefollowing two examples explain the above concept of insurance:


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Example 1

In a village, there are 400 houses, each valued at Rs. 20000. Each year, on the average, 4

houses get burnt, resulting into a total loss of Rs. 80000. If all the 400 owners come togetherand contribute Rs. 200 each, the common fund would be Rs. 80000. This is enough to payRs. 20000 to each of the 4 owners whose houses got burnt. Thus, the risk of 4 owners isspread over 400 house-owners of the village.

Example 2

There are 1000 persons who are all aged 50 and are healthy. It is expected that of these, 10persons may die during the year. If the economic value of the loss suffered by the family ofeach dying person is taken to be Rs. 20000, the total loss would work out to Rs. 200000. Ifeach person in a group contributed Rs. 200 a year, the common fund would be Rs. 200000.This would be enough to par Rs. 20000 to the family of each of the ten persons who die.

Thus, the risks in the case of 10 persons are shared by 1000 persons.


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How Premiums are Calculated

Property and Business Interruption General Liability Motor Vehicle

The role of insurance in society is to increase financial certainty in the case

of catastrophic loss


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M t C iti

Property and B iness Interruption

Loadi Inferior construction C clone / eart uake zones Lackof physical protection Clai s history

Discounts Hi h asset values Strong riskmanagement protocols

Sprinklers, h

oses, etc Attractive risks

Rate appliedtodeclared Property andBusiness Interruption values. Example

0.10% x $125,000,000 = $125,000(plus GST / FSL/ Stamp Duty as applicable)


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Methods for Reducing Premiums

Retain more risk Higher deductibles / excesses First loss sums insured

Reduce coverage Fire & perils instead of physical loss Motor vehicle third party only instead of comprehensive

Retain certain classes of insurance Machinery breakdown Fidelity Guarantee


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RESEARCH METHODOLOGY


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RESEARCH METHODOLOGY

When we talk of research methodology, we not only talk of the research methods but also the

comparison of the logic behind the methods, we used in this context of our research study and

explain why we are using a particular method or technique and why using the others.

Research methodology is a way to systematically solve the research problem. It may be

understood as a science of studying how research is done systematically. In this, we study the

various steps that are generally adopted by researcher in studying his research problem along

with the logic behind them.

The present study is based upon the case study method of research to investigate procedures

at micro level.

As the study is analyzing probing in nature, thus, entirely based on the secondary data

gathered through the annual reports of the company. Therefore it provides a historical

perspective of decisions.


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RESEARCH

Research refers to search for knowledge. Research is an original contribution to the existing

stock of knowledge making for its advancement. It is the pursuit of truth with the help of

study, observation, comparison and experiment. In short, the search for knowledge through

objective and systematic method of finding solution of the problem is research. The advance

learners dictionary of current English gives the meaning of research a careful investigation

or inquiry especially through search for new facts in any branch of knowledge.

RESEARCH METHODS

Research methods may be understood as those methods/techniques that are used for

conduction of research. All those methods which are used by the researcher during the course

of studying his research problem, are termed as research methods . Keeping in view, the

research methods can be put into following three groups:

In the first group we include those methods which are concerned with the

collection of data. These methods will be used where the data already

available are sufficient to arrive at the required solution.

The second group consists of those statistical techniques which are used to

establish relationships between the data and the unknown.

The third group consists of those methods which are used to evaluate the

accuracy of the obtained results.


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COLLECTION OF DATA

There are several ways of collecting the appropriate data which differ considerably in context

of money, cost, time and other sources at the disposable of the researcher.

There are two types of data:

y Primary data

y Secondary data

Primary data

Primary data are those which are collected afresh and for the first time, and thus happen to be

original in character. In case of descriptive research, researcher performs survey whethersample survey or census survey, thus we obtain primary data either through

y Observation

y Direct communication with respondent

y Personal interview

Secondary data

Secondary data are those which have already been collected by someone else and have

already been passed through statistical process.

In this project report, both types of data have been used. Mainly, secondary data is used

such as annual reports of last two years of Universal Sompo General Insurance Company.


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WOKING CAPITAL AT A GLANCE


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WORKING CAPITAL AT A GLANCE

INTRODUCTION

TYPES

FEATURES

DETERMINANTS

COMPONENTS

WORKING CAPITAL CYCLE


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INTRODUCTION

A successful sales program is necessary for earning profits by any business enterprise. Salesdont convert into cash instantly. There is a time lag between the sale of goods and receipt ofcash.

Therefore, there is a need for working capital in the form of current assets to deal with theproblem arising out of the lack of immediate realization of cash against goods sold. Thereforesufficient working capital is necessary to sustain sales activity.

Defination of Working Capital:-

According to C.W. Gestenbergh-

Working capital is ordinarily defined as the excess of the current assets over current

liabilities.

According toLawrence. J. Gitmen

The most common defination of working capital is the difference of the

firms current assets and current liabilities.

Defination of working capital management:-

Working capital management involves the relationship between a firm's short-term assetsand its short-term liabilities. The goal of working capital management is to ensure that a firmis able to continue its operations and that it has sufficient ability to satisfy both maturingshort-term debt and upcoming operational expenses. The management of working capitalinvolves managing inventories, accounts receivable and payable, and cash.-From WWW.STUDYFINANCE.COM


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Management of working capital

Guided by the above criteria, management will use a combination of policies and techniquesfor the management of working capital. These require managing the currentassets - generallycash and cash equivalents, inventories and debtors. There are also a variety of short termfinancing options which are considered.

Cash management identify the cash balance which allows for the business to meet day today expenses, but reduces cash holding costs

Inventory management - identify the level of inventory which allows for uninterruptedproduction but reduces the investment in raw materials and hence increases cash flow; seeJust In Time (JIT) and Economic order quantity (EOQ).

Debtors management - identify the appropriate credit policy, i.e. credit terms which willattract customers, such that any impact on cash flows and the cash conversion cycle will beoffset by increased revenue and hence Return on Capital (orviceversa); see Discounts andallowances.

Short term financing - inventory is ideally financed by credit granted by the supplier;dependent on the cash conversion cycle, it may be necessary to utilize a bank loan (oroverdraft), or to "convert debtors to cash" through "factoring".


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TYPES

Working capital can be classified either on the basis of concept or on the basis of periodicityof its requirement.

1) ON THE BASIS OF CONCEPTOn the basis of concept working capital is of 2 types.

A) Gross working capital - Gross working capital is represented by the total Current assets.Gross working capital = Total current assets

B) Net working capital - Net working capital is the excess of current assets over currentliabilities.

Net working capital = Current assets Current liabilities

2) ON THE BASIS OF REQUIREMENT

On the basis of requirement working capital is also of 2 types.

A) Permanent working capital- It is that amount of investment which should always bethere in the fixes or minimum current assets like inventory, accounts receivables or cash

balance etc. to carry out business smoothly. Such an amount cant be reduced if the firm

wants to carry on business operations without interruption.

B) Variable working capital - The excess the amount of working capital over permanentworking capital is known as variable working capital. It may also be subdivided into two

parts.

Seasonal working capital - Such capital is required to meet out the seasonal demands ofbusy periods occurring at stated intervals.

Special working capital - Such capital is required to meet out the extra-ordinary needs forcontingencies. Events like strike, fire, unexpected competition, rising price tendencies, orinitiating a big advertisement campaign require such capital.


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FEATURES

Working capital is regarded as the excess of current assets over current liabilities.

Working capital indicates circular flow of funds in the day-to-day activities of business.Thats why it is also called circulating capital.

Working capital represents the minimum amount of investment in raw materials, work-inprogress, finished goods, stores and spares, accounts receivables and cash balance.

DETERMINANTS

Nature of business The effect of the general nature of the business on working capital

requirements cant be exaggerated. Rail, roads and other public utility services have largefixes investment so they have the lower requirements of current assets. Industrial andmanufacturing enterprises, on the other hand, generally require a large amount of workingcapital.

Production policies if the production is evenly spread over the entire year, working capitalrequirements are greater, because the inventories will be unnecessarily accumulated during ofseason period. But if the production schedule favours a varying production plan as per theseasonal requirements, working capital is required to a greater extent during a specifiedseason only. The production policies are affected by so many factors availability of rawmaterials, labour, stocking facility etc & therefore, whatever the productions policies are, thefirm has to arrange its working capital requirements accordingly.

Proportion of the cost of raw materials to total cost - In those industries where cost ofproportion is a large proportion of total cost of the goods produced, requirements of workingcapital will be comparatively large.

Length of period of manufacturing The time which elapses between the commencementand end of the manufacturing process has an important bearing upon the requirements ofworking capital. The manufacturing cycle may be shorter for certain concerns & longer forothers it depends on the type of the product to be manufactured, work to be done throughmachine labour & hand labour, degree of rationalization of manufacturing proceduresthrough times, motion & fatigue studies etc.

Terms of purchase - If suppliers allow continuous credit, payment can be postponed forsome time and can be made out of the sale proceeds of the goods produced. In such a case,the requirements of working capital will be reduced.

Dynamic Attitudes As a company grows, it is logical to expect the large amount ofworking capital will be required.


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Business cycles Requirement of working capital also varies with the business. When theprice level is up due to boom conditions, the inflationary conditions create demand for moreworking capital. During depression also a heavy amount of working capital is needed due to

the inventories being locked unsold and book debts uncollected.

Requirement of cash - The working capital requirements of a company are also influencedby the amount of cash required by it for various purposes. The greater the requirement ofcash, the higher will be the working capital needs of the company.

Dividend policy of concern If the management follows a conservative dividend policy theneeds of working capital can be met with the retained earnings. The relationship betweendividend policy and working capital is well established and mostly companies declaredividend after a careful study of their cash requirements

Other Factors - Other factors, which affect the requirement of working capital, are lack ofco-operation in production and distribution policies, transport and communication facilities,the fiscal and tariff policies of the government etc.

COMPONENTS

Main components of working capital are as follows:

Cash Cash is the most liquid and important component of working capital. Holding cashinvolves cash in the sense that the present worth of cash held for a year is less than the valueof cash on today. During inflationary situations as exist today the cost of holding includes the

deterioration in the value of the cash due to inflation. Cash, therefore, results in enhancedliquidity, but lower profitability. Despite in the cost involved it is pertinent to hold cash

because it facilitates the attainment of some important motives.

Marketable Securities Though marketable securities provides a such lower yield that thefirms operation assets. They serve two useful functions. Firstly, they act as a substitute forcash, and secondly, are used as temporary investment. Where these securities are held in lieuof the cash balance, they act as a substitute for transactional or precautionary balances.

Normally, these arent used as speculative balances, but only as a guard against the possibleshortage of bank credit.

Marketable securities (as temporary investment) may be held for one of the following

reasons:

Seasonal or cyclical operations - To meet known financial requirements. Construction ofan additional plant. Immediately after the sale of long-term securities.

Account Receivable - Though accounts receivable are a vital investment of any businessorganization, little analytical work as been done to determine credit policies. Maintainingaccount receivable has its cost implications in that the firms monetary resources are tied up.This is of greater significance in the inflationary economy, because of the depreciation in the


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value of money. Basically, this is a two-step account. When goods are shipped, inventoriesare reduced and accounts receivable is created. When payment is made, this account isreduced and the cash level increases. Accounts receivables are, therefore a function of the

volume of credit sales and the average length of time between sales and collections.

Inventory Inventories represent a substantial amount of a firms current assets.Management of inventories should be efficiently carried out so that this investment doesnt

become too large, as it would result in blocked capital which could put to productive useelsewhere. On the other hand, having too small an inventory could result in loss of sale orloss of customer goodwill. An optimum level of inventory should therefore be maintained.

WORKING CAPITAL CYCLE

Working capital cycle indicates the length of time between a firms paying for materialsentering into stock and receiving the cash from sale of finished goods. In a manufacturingfirm, the duration of time required to complete the sequence of events is called operatingcycle.

In case of a manufacturing company, the operating cycle is the length of time necessary tocomplete the following cycle of events: -

Conversion of cash into raw materials

Conversion of raw materials into work-in-progress

Conversion of work-in-progress into finished goods

Conversion of finished goods into accounts receivable

Conversion of accounts receivable into cash

The above operating cycle is repeated again & again over the period depending upon thenature of the business & type of product etc. the duration of the operating cycle for the

purpose of estimating working capital is equal to the sum of duration allowed by thesuppliers.


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Working capital cycle can be expressed as: R+W+F+D-C

Where R=Raw Material Storage Period =Avg. Stock of Raw Material / Avg. Cost of

Production per day

W=Work in Progress Holding Period = Avg. Work in Progress Inventory /Avg. Cost ofProduction per day

F=Finished Goods Storage Period = Avg. Stock of Finished Goods / Avg. Cost of GoodsSold per day

D=Debtors Collection Period= Avg. Book Debts / Avg. Credit Sales per day

C=Credit Period Availed = Avg. Trade Creditors/Avg. Credit Purchases per day


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AccountsReceivables

OPERATING CYCLE OF MANUFACTURING BUSINESS

Cash Finished Goods

PURCHASES PRODUCTIONPRODUCTION PROCESS

Raw Materials Work-in-ProcessPROCESS


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Composition of Level

of Current Liabilities

THEORTICAL ASPECTS OF WORKING CAPITAL

MANAGEMANT


NATURE OF WORKING CAPITAL MANAGEMENT

Working capital management is three dimensional in nature-

1) It is concerned with the formulation of policies with regard to profitability, liquidity and risk.

2) It is concerned with the decisions about the composition and level of current assets

3) It is concerned with the decisions about the composition and level of current liabilities.

Composition of Level of

Policies regarding to Profitability

Liquidity and Risk


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GOAL OF WORKING CAPITAL MANAGEMENT

Working capital management is concerned with the problems that arise in attempting tomanage the current assets, the current liabilities and the interrelationship that exists betweenthem.

The term current assets refer to those assets which is the ordinary course of business can beconverted into cash within one year. Major current assets are cash, marketable securities,accounts receivable and inventory.

Current liabilities are those liabilities, which are intended, at their inception, to be paid in theordinary course of business within a year, out of the current assets or earnings of the concern.

Current liabilities are accounts payable, bills payable, bank overdraft, and outstandingexpenses. Working capital is that portion of firms assets which is financed by long-termfunds.

Interaction between current assets and current liabilities is the main theme of the theory ofworking capital management.

Goal of working capital management is to manage the firms current assets and liabilities insuch a way so that a satisfactory level of working capital is maintained.

The second important segment of working capital management is deciding the optimum levelof investment in various current assets. There are three important current assets cash,

accounts receivables and inventory


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RECEIVABLES MANAGEMENT

INTRODUCTION

The term receivable is defined as debt owed to the firm by customers arising from sale ofgoods or services in the ordinary course of business. When a firm makes an ordinary sale ofgoods or services and doesnt receive payment, the firm grants trade credit accountsreceivable, which could be collected in the future. Receivables Management is also calledtrade credit management.

OBJECTIVE

The objective of receivables management is to promote sales and profits until that point isreached where the return on investment in further funding receivables is less than the cost offunds raised to finance that additional credit.

BENEFITS

Investments in receivables involve both benefits and costs. The extension of trade credit has amajor impact on sales, costs and profitability. Other things being equal, a relatively liberal

policy and, therefore, higher investments in receivables, will produce larger sales. However,costs will be higher with liberal policies than with more stringent measures.Therefore, accounts receivables management should aim at a trade-off between profit

(benefit) and risk (cost).

CREDIT POLICY

The credit policy of a firm provides the framework to determine:

Credit standards

Credit terms

Credit Analysis

Credit StandardThe term credit standards represent the basic criteria for the extension of credit to thosecustomers to whom goods could be sold on credit. If a firm has more slow-paying customers,its investment in accounts receivables will increase. The firm will also be exposed to higherrisk of default.


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Credit Terms

Credit terms specify duration of credit and terms of payment by customers. Investment inaccounts receivables will be high if customers are allowed extended time period for making

payments.

Credit Analysis

Credit analysis and investigation is an aspect of credit policies of a firm.

Two basic steps are involved in the credit investigation process:

y Obtaining credit information

y Analysis of credit information

It is on the basis of credit analysis that the decisions to grant credit to a customers as well asthe quantum of credit would be taken.


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INVENTORY MANAGEMENT

INTRODUCTION

Inventories constitute the principal item in the working capital of the majority of trading andindustrial companies. In inventory we include raw materials, finished goods, work-in-

progress, supplies and other accessories. To maintain the continuity in the operations ofbusiness enterprises, a minimum stock of inventory is required.

Management of inventory is designed to regulate the volume of investment in goods on handand the types of goods carried in stock to meet the needs of production and sales while at thesame time, the investment in them is to be kept at a reasonable level.

CONCEPT

The inventory management is used in two ways- Unit Control and Value Control.Production and purchase officials use this word in term of unit control whereas in accountingthis word is used in term of value control .Investment in inventory is one the largest assetitem of business enterprises particularly those engaged in manufacturing.

The proper management and control of the capital invested in the inventory should be theprime responsibility of accounting department because resources invested in inventory arentearning a return for the company. Rather, on the other hand, they are costing the firm money

both in terms of capital costs being incurred and loss of opportunity income that is beingforegone.

OBJECTIVES

The basic managerial objectives of inventory control are two-

1) The avoidance of over-investment or under-investment in inventories.

2) To provide the right quantity of standard raw material to the production department at theright time.


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TECHNIQUES OF INVENTORY CONTROL

The Selective Inventory Control or ABC System of Control

Maximum Stock Limit

Minimum Stock Limit

Re-ordering Level

Economic Order Quantity

ABC System of Control

The various inventory items are, according to this system, categorized into three classes-

1. A2. B3. C

The item included in-group involve the largest investment. Therefore, inventory controlshould be the most rigorous and intensive and the most sophisticated inventory controltechniques should be applied to these items. The C group consists of items of inventorywhich involve relatively small investments although the numbers of items is fairly large.These items deserve minimum attention. The B group stands midway. It deserves less

attention than A but more than C. It can be controlled by employing less sophisticatedtechniques.

Maximum Stock Limit

This represents the quant

Documents

Fiance Report