Summer Internship

Project Report

Name of Organization
Reliance Life Insurance

Vaibhav Gupta (5359) (90439) Keshav Mahavidyalaya, Pitampura (University of Delhi)

Name of the Intern

Time Period of Internship

6 weeks (14th June 2010 to 26th July 2010)

INDEX
S.N Particulars o. Page No.

1 2 3 4 5

Acknowledgment Introduction About RELIANCE LIFE INSURANCE Why RELIANCE LIFE INSURANCE? Projects Undertaken Project 1 Project 2 Project 3 Project 4

3 4 5 6 7 8 10 12 14 16

Summary

ACKNOWLEDGMENT
Before going to the project report, I would like to express my sincere thanks and gratitude to our mentor for internship, for bestowing the valuable support and guidance, given by him to me wherever needed. He ensured that I was clear about all the concepts required to complete my project. He gave me the valuable guidance required from a senior in the finance industry to an undergraduate student. His counseling helped me in making this project. He helped me in researching about the topics and understanding the research used by me in the project. The data wouldnt be appropriate for the project without his constant guidance.

INTRODUCTION
Being a graduate student of Bachelor of Business Studies at Delhi University, one needs to gather as much knowledge and experience as possible for personality development and getting ready for corporate world. The students to gain this experience can undergo summer internships. For the same reasons, I decided to go for internship with the RIL Most of the projects given were of financial and research field which was required for a BBS student. Also, I got to work with other interns who were at same level on which I was. RIL provided me all the support required for a graduate student to learn about the working in a corporate setup.

ABOUT RELAINCE LIFE INSURANCE

Reliance Life Insurance Company Limited (Reliance Life Insurance) is a part of Reliance capital Ltd. of the Reliance Anil Dhirubhai Ambani Group Reliance Capital is one of Indias leading private sector financial services companies, and ranks among the top 3 private sector financial services and banking companies, in terms of net worth. Reliance Life Insurance is an associate company of Reliance Capital Ltd., a part of Reliance Group. Reliance Capital is one of Indias leading private sector financial services companies, and ranks among the top 3 private sector financial services and banking companies, in terms of net worth. Reliance Capital has interests in asset management and mutual funds, stock broking, life and general insurance, proprietary investments, private equity and other activities in financial services. Vision Empowering everyone live their dreams.

Mission Create unmatched value for everyone through dependable, effective, transparent and profitable life insurance and pension plans. Our Goal Reliance Life Insurance would strive hard to achieve the 3 goals mentioned below:

Emerge as transnational Life Insurer of global scale and standard Create best value for Customers, Shareholders and all Stake holders Achieve impeccable reputation and credentials through best business practices

WHY RELIANCE LIFE INSURANCE ?

RELIANCE LIFE INSURANCE has been a leading Company and has also been exemplary in providing insurance services via effective and varying options. RELIANCE LIFE INSURANCE provided me the base for business aspect of insurance and marketing knowledge which has always been my area of interest. Being one of the best, gaining knowledge from it was an invaluable experience for me. Also, the counseling provided by the mentors at the institute was in itself exclusive. Such counseling is

necessary for an intern and was found at RELIANCE LIFE INSURANCE. At the same time, the discipline maintained by the organization was essential for the interns to follow the guidelines and submit their work within deadlines. The work at the same time was always challenging, aspiring and kept encouraging the interns, to give their best.

PROJECTS UNDERTAKEN
During the two months of internship period, every intern was given various projects in different field. Te projects given to me were from various fields like research, analysis, marketing etc. The details of the projects are as follows:PROJECT 1 Principal & Practice Of Life Insurance

PROJECT 2 Insurance Business Environment PROJECT 3 Market Survey

PROJECT 4 Insurance Act 1938, Indian Contract Act 1872, IRDA Act 1999. PROJECT 5 Licensing of Regulation, 2002 Insurance Agents

Project 1 -Principal

& Practice Of Life Insurance

Insurance can be defined as a contract between two parties, where one promises the other to indemnify or make good any financial loss suffered by the latter (the insured) in consideration for an amount received by way of premium. In other words, the party agreeing to pay for the losses is the insurer. The party whose loss makes the insurer pay the claim is the insured. The consideration involved in the contract or what the insured pays to the insurer is called premium. The contract of insurance is referred to as the policy.

Losses cannot be determined before hand, but certainly can be reimbursed if and when they occur, by insurance. For this, people facing common risks come together and contribute a fixed amount towards a pool, out of which they are reimbursed if and when loss occurs. This point can be made clear with the help of the following example: If there are 100 houses in a locality each of the value of Rs. 2,00,000 and every year one house gets burnt down or destroyed, then the 100 owners will have to contribute an amount of Rs. 2,000 each to create a pool in order to be able to reimburse the loss amounting to Rs. 2,00,000 faced by the one unfortunate owner amongst them. An asset of any nature that is the outcome of the efforts of the owner has an economic value and any damage that occurs to the asset making it non-functional in turn leads to a loss where the owner cannot derive benefits that he was enjoying earlier. Thus, it becomes necessary to replace or repair such an asset for the continued benefit of the owner. Every individual is endowed with a potential to earn. If he is disabled he cannot enjoy the same level of earnings. In the event of his death, his family suffers loss of earnings. It is in this context insurance assumes importance. If the asset had been insured, or the individuals life and earning capabilities are insured, then any loss or damage to the asset or to him would not affect the lifestyle of the owner or his dependents to a very great extent. The owner/individual may suffer a loss, but it is made good by the insurer as the owner/individual by getting his assets or himself insured, is transferring the loss to the insurer thus making him liable to reimburse it. Insurance is therefore, from the point of view of an individual, a financial arrangement whereby the individual can substitute a relatively small definite cost (premium) for a large uncertain financial loss. The predictability of a loss forms the base of an insurance system. Pooling of losses means the spreading of losses incurred by the few over the entire group, so that in the process, average loss is substituted for actual loss. To accurately predict the future losses, exposure units in large numbers have to be grouped together to bring in the application of the law of large numbers. For this there has to be a large number of exposure units facing the same or similar kind of perils. In simple words, pooling in an insurance context implies two things: - Sharing of losses by the entire group. - Using the law of large numbers to predict future losses. Loss sharing can be well understood with the help of the example already given where the house owners of a locality create a pool to reduce the burden on the owner in case of any damage to the house. Also the future losses can be better predicted with the use of the law of large numbers. The use of the law of large numbers helps the insurer to minimise risk based on his

experience. The law of large numbers states that the greater the number of exposures, the more closely will the actual results approach the probable results that are expected from an infinite number of exposures. This can be well understood by an example. While the probability of getting heads 5 out of 10 times by tossing a coin in the air is exactly half, it is not necessary that heads will appear 5 times only, it can appear 8 times also. However, as the number of tosses increases, the probability of heads and tails appearing equal number of times increases. Insurance is a business based on the previous experience of damage and loss. Actual loss comes close to estimated loss where the number of assets/individuals exposed to similar risk is large. The law of large numbers gains importance here since the amount of premium to be charged depends upon the expected loss, which should enable the insurer to meet all the expenses and claims that arise and also allow for reasonable profit. Though insurers prefer insuring only pure risks, all pure risks cannot be insured. For risks to be insured, they should meet the essential requirements indicated below: As insurance is based on the law of large numbers, it is necessary that there are a large number of similar exposure units, which makes possible prediction of future losses? The loss that may be caused must be measurable in financial terms. The loss caused should be the result of an accident or a fortuitous event in nature. Ideally, the loss should not be catastrophic (i.e. affecting a large number of exposure units at the same time). Insurance assumes that out of a large population only a small percentage of people will incur loss at one time. This is necessary; otherwise the pooling technique will not work. In reality though, catastrophic risks are insured. It should be possible for the insurer to calculate the chance of loss with a reasonable degree of accuracy, as this is a major consideration in determining premium. The premium fixed for the risk should be affordable. If the premium is too high, the insurance will not be appealing to prospective customers. Any kind of loss due to death or disability of the earning member or the breadwinner leads to a decrease or termination of regular income besides any future income that he would have been able to earn, had normal circumstances prevailed. The main function of life insurance is to provide protection to the family, by ensuring continuity in income even after the death of the breadwinner. Economists have for long acknowledged the fact that people are an important part of a nations wealth. Although they cannot be held similar to marketable assets like property, they are nevertheless assets and their economic value, is dependant on their knowledge and skills. They represent the human capital of the country. It is the presence in abundance of the human capital, which makes certain countries of the world more advanced than others. A noteworthy feature of our present day economic system is the huge growth in human capital largely due to education, which is an investment in human capital. Human capital represents the production potential of an individual. But by human life value we mean the actual future earnings of an individual. To be precise human life value is the capitalised value of a persons net future earnings reduced by the cost of the mans own maintenance expenses. This is the value of the bread earner as far as his dependants are concerned and should ideally be the value of the insurance the bread earner should have. Thus, the Human Life Value concept propounded by S.S.

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Huebner became the economic foundation of life insurance. This concept received wide acceptance and it is quite different from the earlier held view that life insurance meant only payment of a certain amount on death arbitrarily determined at the time of insurance without regard to the need of dependants. The emergence of Human Life Value concept and other such concepts acknowledged the importance of professional counselling in the buying and selling of life insurance. Let us now determine the different economic uses life insurance offers: Life insurance makes the family financially secure after the untimely death of the breadwinner. Life insurance is also a savings instrument. Life insurance helps in meeting responsibilities of people even after death like higher education of children, their marriages, etc. Helps in repaying the mortgage loans by acting as a collateral security. Life insurance also provides old age benefits, which can be had in the form of annuities or a lump sum after retirement. Creditors can also use it in case the debtor dies without repaying the loan amount by getting the lives of the debtors insured, where the policy money or the sum assured will belong to the creditor in case of non-repayment. Partners of a partnership firm can get the lives of the partners insured in order to repay the share of the dead partner to the heirs. A firm can get the life of its key man insured as the death of the key man may cause the firm to suffer huge financial losses, and this money so got can be used to recruit a new person in place of the deceased employee and also meet the losses during the transitional period (i.e. from the time of death of the key person till the recruitment and training of a new employee). Group insurance policies can also be taken as a welfare measure on the lives of the employees as a whole, improving and boosting the morale of the employees resulting in improved productivity. As with all other products and services that are bought, sold, or traded, life and health insurance is subject to the laws of supply and demand. As with most other products and services, it is reasonable to assume that the higher the price, less will be demanded and more will be supplied, and vice versa. Some of the benefits derived by society through insurance are given below: Reduces worry and fear Makes available large funds for investment at low cost Provides employment to a large number of people Insurance enhances credit worthiness and reduces credit risk Invisible earnings Social benefits

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Project 2 Insurance Business Environment

India had the nineteenth largest insurance market in the world in 2003. Strong economic growth in the last decade combined with a population of over a billion makes it one of the potentially largest markets in the future. Insurance in India has gone through two radical transformations. Before 1956, insurance was private with minimal government intervention. In 1956, life insurance was nationalized and a monopoly was created. In 1972, general insurance was nationalized as well (endnote 1). But, unlike life insurance, a different structure was created for the industry. One holding company was formed with four subsidiaries. As a part of the general opening up of the economy after 1992, a Government appointed committee recommended that private companies should be allowed to operate. It took six years to implement the recommendation. Private sector was allowed into insurance business in 2000. However, foreign ownership was restricted. No more than 26% of any company can be foreign-owned. In what follows, we examine the insurance industry in India through different regulatory regimes. A totally regulation free regime ended in 1912 with the introduction of regulation of life insurance. A comprehensive regulatory scheme came into place in 1938. This was disabled through nationalization. But, the Insurance Act of 1938 became relevant again in 2000 with deregulation. With a strong hint of sustained growth of the economy in the recent past, the Indian market is likely to grow substantially over the next few decades. The rest of the chapter is organized as follows. First, we study the evolution of insurance business before nationalization. This is important because the denationalized structure brought back to play important legal rules from 1938. Next we analyze the

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nationalized era separately for life and property casualty business as they were not nationalized simultaneously. Much of post-independence history of insurance in India was the history of nationalized insurance. In the following section, we examine the new legal structure introduced after the industry was denationalized in 2000. In the penultimate section, we examine the current state of play and projected future of the industry. The final section sets out conclusions. Evolution of Insurance Before Nationalization Insurance in the Colonial Era. Life insurance in the modern form was first set up in India through a British company called the Oriental Life Insurance Company in 1818 followed by the Bombay Assurance Company in 1823 and the Madras Equitable Life Insurance Society in 1829. All of these companies operated in India but did not insure the lives of Indians. They were insuring the lives of Europeans living in India (endnote 2). Some of the companies that started later did provide insurance for Indians. But, they were treated as substandard. Substandard in insurance parlance refers to lives with physical disability. In this case, the common adjustment made was a rating-up of five to seven years to normal British life in India. This meant, treating q(x), the (conditional) probability of dying between x and x+1, for an x year old Indian male as if it was q(x+5) or q(x+7) of a British male. Therefore, Indian lives had to pay an ad hoc extra premium of 20% or more. This was a common practice of the European companies at the time whether they were operating in Asia or Latin America. The first company to sell policies to Indians with fair value was the Bombay Mutual Life Assurance Society starting in 1871. The first general insurance company, Triton Insurance Company Ltd., was established in 1850. It was owned and operated by the British. The first indigenous 13

general insurance company was the Indian Mercantile Insurance Company Limited set up in Bombay in 1907. Insurance business was conducted in India without any specific regulation for the insurance business. They were subject to Indian Companies Act (1866). After the start of the Be Indian Buy Indian Movement (called Swadeshi Movement) in 1905, indigenous enterprises sprang up in many industries. Not surprisingly, the Movement also touched the insurance industry leading to the formation of dozens of life insurance companies along with provident fund companies (provident fund companies are pension funds). In 1912, two sets of legislation were passed: the Indian Life Assurance Companies Act and the Provident Insurance Societies Act. There are several striking features of these legislations. First, they were the first legislations in India that particularly targeted the insurance sector. Second, they left general insurance business out of it. The government did not feel the necessity to regulate general insurance. Third, they restricted activities of the Indian insurers but not the foreign insurers even though the model used was the British Act of 1909. Comprehensive insurance legislation covering both life and non-life business did not materialize for the next twenty-six years. During the first phase of these years, Great Britain entered World War I. This event disrupted all legislative initiatives. Later, Indians demanded freedom from the British. As a concession, India was granted home rule through the Government of India Act of 1935. It provided for Legislative Assemblies for provincial governments as well as for the central government. But supreme authority of promulgated laws still stayed with the British Crown. The only significant legislative change before the Insurance Act of 1938, was Act XX of 1928. It enabled the Government of India to collect information of (1) Indian

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insurance companies operating in India, (2) Foreign insurance companies operating in India and (3) Indian insurance companies operating in foreign countries. The last two elements were missing from the 1912 Insurance Act. Information thus collected allows us to compare the average size face value of Indian insurance companies against their foreign counterparts. In 1928, the average policy value of an Indian company was 619 US dollars against 1,150 US dollars for foreign companies (Source: Indian Insurance Commissioners Report, 1929, p. 23). Foreign insurance companies were doing well during that period. In 1938, the average size of the policy sold by Indian companies has fallen to 532 US dollars (in comparison with 619 US dollars in 1928) and that of foreign companies had risen somewhat to 1, 188 US dollars (in 1928, the average size was 1,150 US dollars). The Birth of the Insurance Act, 1938. In 1937, the Government of India set up a consultative committee. Mr. Sushil C. Sen, a well known solicitor of Calcutta, was appointed the chair of the committee. He consulted a wide range of interested parties including the industry. It was debated in the Legislative Assembly. Finally, in 1938, the Insurance Act was passed. This piece of legislation was the first comprehensive one in India. It covered both life and general insurance companies. It clearly defined what would come under the life insurance business, the fire insurance business and so on (see Appendix 1). It covered deposits, supervision of insurance companies, investments, commissions of agents, directors appointed by the policyholders among others. This piece of legislation lost significance after nationalization. Life insurance was nationalized in 1956 and general insurance in 1972 respectively. With the privatization in the late Twentieth Century, it has returned as the backbone of the current legislation of insurance companies. Milestones of Insurance Regulations in the 20th Century 15

Year Significant Regulatory Event 1912 The Indian Life Insurance Company Act 1928 Indian Insurance Companies Act 1938 The Insurance Act: Comprehensive Act to regulate insurance business in India 1956 Nationalization of life insurance business in India with a monopoly awarded to the Life Insurance Corporation of India 1972 Nationalization of general insurance business in India with the formation of a holding company General Insurance Corporation 1993 Setting up of Malhotra Committee 1994 Recommendations of Malhotra Committee published 1995 Setting up of Mukherjee Committee 1996 Setting up of (interim) Insurance Regulatory Authority (IRA) Recommendations of the IRA 1997 Mukherjee Committee Report submitted but not made public 1997 The Government gives greater autonomy to Life Insurance Corporation, General Insurance Corporation and its subsidiaries with regard to the restructuring of boards and flexibility in investment norms aimed at channeling funds to the infrastructure sector 1998 The cabinet decides to allow 40% foreign equity in private insurance companies-26% to foreign companies and 14% to Non-resident Indians and Foreign Institutional Investors 1999 The Standing Committee headed by Murali Deora decides that foreign equity in private insurance should be limited to 26%. The IRA bill is renamed the Insurance Regulatory and Development Authority Bill 1999 Cabinet clears Insurance Regulatory and Development Authority Bill 2000 President gives Assent to the Insurance Regulatory and Development Authority Bill Life Insurance Business during the Nationalized Era. Indian life insurance was nationalized in 1956. All life companies were merged together to form one single

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company: the Life Insurance Corporation. By 2000, Life Insurance Corporation had 100 divisional offices in seven zones with 2048 branches. There were over 680,000 active agents across India with a total of 117,000 employees in the Life Insurance Corporation employed directly. There are two problems with this type of examination of the industry. First, the population of India has grown from 413 million in 1957 to over 1,000 million in 2000. Therefore, we would expect growth in life policies sold by the growth of the population alone. Second, if we measure growth in life insurance in nominal amount, for a country like India, where the annual inflation rate has averaged 7.8% a year between 1957 and 2002, we would expected a growth in the sale of life insurance by the sheer force of inflation. Therefore, in our discussion, we will not indulge in such descriptions. The largest segment of the life insurance market in India has been individual life insurance. The types of the policies sold were mainly whole life, endowment and money back policies. Money back policies return a fraction of the nominal value of the premium paid by the policyholder at the termination of the contract. Until recently, term life policies were not available in the Indian market. The number of new policies sold each year went from about 0.95 million a year in 1957 to around 22.49 million in 2001. The total number of policies in force went from 5.42 million in 1957 to 125.79 million in 2001. Thus, on both counts there has been a 25-fold increase in the number of policies sold. Of course, during the same period, the population has grown from 413 million in 1957 to over 1,033 million in 2001. On a per capita basis, there were 0.0023 new policies per capita in 1957 compared with 0.0218 new policies in 2001. Total policies per capita went from 0.0131 in 1957 to 0.1218 in 2001. Thus, whether we examine the new policies sold or the total number of policies in force, there has been a tenfold increase during that 17

period. Therefore, if we examine the headcount of policies as an indication of penetration, there has been a substantial rise. A part of this rise is directly attributable to a deliberate policy of rural expansion of the Life Insurance Corporation. In Table 6, we lay out the details of different components of life insurance business during the nationalized era. Between 1985 and 2001, total life business has grown from below 18 billion rupees to over 500 billion rupees. During that period, the price index has grown fourfold. Thus, if there were no change in life insurance bought in real terms, it would have accounted for 78 billon rupees worth of business. Note that even in 2001, individual life business accounts for 92% of all life insurance market. How Public Insurers Reacted During the Final Countdown. During the final years of the General Insurance Corporation as a holding company, there were a number of suggestions as to what to do with the structure of the industry. The Malhotra Committee Report strongly recommended that the General Insurance Corporation should cease to be the holding company and concentrate on reinsurance business only. The four subsidiaries should become independent companies. The report also noted that the subsidiaries were overstaffed (Malhotra, 1994, Chapter XII, p. 88-89). It was not the final word. A study conducted by the consulting company PriceWaterhouseCoopers commissioned by the General Insurance Corporation in 2000 recommended just the opposite. It argued that in the face of impending competition from the private companies, the subsidiaries should be merged to form one single company to better fight the competition. While these discussions were going on, the four subsidiaries undertook restructuring. The results of this restructuring can be seen if we monitor the efficiency level of the companies over 1997-2003. To assess the change in efficiency of these four companies, we calculated the

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technical efficiency of each company. The relative efficiency measure of Farrell (1957) has been formulated in a mathematical programming framework usually called data envelopment analysis (DEA). We took the number of employees (labor), the number of offices (physical capital) and the commission paid as three inputs. We took two alternative measures of outputs: premiums and claims (see, Cummins et al., 1997, for a discussion on this issue). The results are similar for both outputs. It shows that after some initial change, the relative efficiency level converged among the public sector general insurance companies by 2003 (see Figure 3). New India Insurance has consistently stayed as the company with the highest technical efficiency (equal to 1 for every single year). It is well known in the literature that DEA is biased upward in small samples. Thus, the absolute level of efficiency should not be taken at face value. The point here is that there has been a convergence among the public sector companies in terms of efficiency.

Project 3 Market Survey

Market survey in various segments was done in order to understand various needs of the individuals who would be potential customers and individuals who are present customers. With a huge population base and large
untapped market, insurance industry is a big opportunity area in India for national as well as foreign investors. India is the fifth largest life insurance market in the emerging insurance economies globally and is growing at 32-34% annually. This impressive growth in the market has been driven by liberalization, with new players significantly enhancing product awareness and promoting consumer education and information. The strong growth potential of the country has also made international players to look at the Indian insurance market. Moreover, saturation of insurance markets in many developed economies has made the Indian market more attractive for international insurance players, according to "Booming Insurance Market in India (2008-2011). This research report will help the client to analyze the leading-edge opportunities critical to the success of insurance industry in India. Based on this analysis, the report gives a future forecast of the market that is intended as a rough guide to the direction in which the market is likely to move. Research Findings

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- Total life insurance premium in India is projected to grow Rs 1,230,000 Crore by 2010-11. - Total non-life insurance premium is expected to increase at a CAGR of 25% for the period spanning from 2008-09 to 2010-11. - With the entry of several low-cost airlines, along with fleet expansion by existing ones and increasing corporate aircraft ownership, the Indian aviation insurance market is all set to boom in a big way in coming years. - Home insurance segment is set to achieve a 100% growth as financial institutions have made home insurance obligatory for housing loan approvals. - Health insurance is poised to become the second largest business for non-life insurers after motor insurance in next three years. - A booming life insurance market has propelled the Indian life insurance agents into the top 10 country list in terms of membership to the Million Dollar Round Table (MDRT) an exclusive club for the highest performing life insurance agents. Key Issues & Facts Analyzed in the Report - Where does India stands in context of emerging countries? - How the insurance market is likely to move in near future? - What are key factors fueling growth into the Indian insurance market? - What are the growing insurance segments in India? - What are various opportunity areas in the market? - What are the key issues that need to be addressed? - What is the status of microinsurance and rural insurance in India? - What initiatives the government is taking to promote the Indian insurance market? Key Players The major players discussed in the report include LIC, Bajaj Allianz and HDFC Standard under life insurance segments, and New India, United India and ICICI Lombard under non-life insurance segments. Research Methodology Used Information Sources Information has been sourced from books, newspapers, trade journals and white papers, industry portals, government agencies, trade associations, monitoring industry news and developments, and through access to more than 3000 paid databases. Analysis Methods The analysis methods used for judgmental analysis in the report include ratio analysis, historical trend analysis, linear regression analysis using software tools, judgmental forecasting, and cause and effect analysis.

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Project 4 Insurance Act 1938, Indian Contract

Act 1872, IRDA Act 1999.
Various contracts and its sections were read and the implication on the business of insurance was analysed.

Summary
Overall, the summer internship at RELIANCE LIFE INSURANCE was an enlightening experience where I learned not only the basics of financial markets and gained the essential financial knowledge I expected to learn in the time period of two months, but also learned the behavior observed in the corporate world. The discipline to complete the projects on time and submit them before deadlines is essential to succeed in the corporate world. The detailed knowledge of financial
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planning, the strategies of marketing and learning foreign exchange basics were some of real concepts learned, which could not have been learned otherwise as a general graduate student. Hence, at the end I would like to express my gratitude to RELIANCE LIFE INSURANCE for providing me such a wonderful opportunity.

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