Master of Business Administration - MBA Semester 4 MF0018 Insurance and Risk Management Assignment Set- 1

Q.1 Explain chance of loss and degree of risk with examples Ans:- Chance of loss Loss is the injury or damage borne by the insured in consequence of the happening of one or more of the accidents or misfortunes against which the insurer, in consideration of the premium, has undertaken to assure the insured. Chance of loss is defined as the probability that an event that causes a loss will occur. The chance of loss is a result of two factors, namely peril and hazard. Hazards are further classified into the following four types: Physical hazard This is a danger likely to happen due to the physical characteristics of an object, which increases the chance of loss. For example defective wiring in a building which enhances the chance of fire. Moral hazard It is an increase in the probability of loss due to dishonesty or character defects of an insured person. For example, Burning of unsold goods that are insured in order to increase the amount of claim is a moral hazard. Morale hazard It is an attitude of carelessness or indifference to losses, because the losses were insured. For example, careless acts like leaving a door unlocked which makes it easy for a burglar to enter, or leaving car keys in an unlocked car increase the chance of loss. Legal hazard It is the severity of loss which is increased because of the regulatory framework or the legal system. For example actions by government departments restricting the ability of insurers to withdraw due to poor underwriting results or a new environment law that alters the risk liability of an organisation.

Degree of risk Degree of risk refers to the intensity of objective risk, which is the amount of uncertainty in a given situation. It can be assessed by finding the difference between expected loss and actual loss. The formula used is Degree of risk = Degree of risk is measured by the probability of adverse deviation. If the probability of the occurrence of an event is high, then greater is the likelihood of deviation from the outcome that is hoped for and greater the risk, as long as the probability of loss is less than one. In the case of exposures in large numbers, estimates are made based on the likelihood of the number of losses that will occur. With regard to aggregate exposures the degree of risk is not the probability of a

single occurrence but it is the probability of an outcome which is different from that expected or predicted. Therefore insurance companies make predictions about the losses that are expected to occur and formulate a premium based on that. Q.2 Explain in detail Malhotra Committee recommendations Ans:- Recommendations of Malhotra committee The major reforms in Indian industry started when the Malhotra committee was formed in 1993 headed by R. N. Malhotra (former Finance Secretary and RBI Governor). This was formed to analyse the Indian insurance industry and propose the future course of the industry. It modified the financial sector to design a system appropriate for the changing economical structures in India. The committee recognised the importance of insurance in financial systems and designed suitable insurance programs. The report submitted by the committee in 1994 is given below: Structure Government risk in the insurance Companies to be decreased to 50%. GIC must be taken under the government so that the GIC subsidiaries can work independently. Better freedom of operation for insurance companies.

Competition Private companies who have initial capital of Rs 1 billion must be permitted to work in the insurance industry. Companies should not use a single entity to deal with life and general Insurance. Foreign companies may be permitted to work in the Indian insurance industry only as partners of some domestic company. Postal life insurance must be permitted to work in the rural market. Every state must have only one state level life insurance company.

Regulatory body The Insurance Act must be changed. An Insurance Regulatory body must be formed. Insurance controller, which was a part of finance ministry, should be allowed to work independently.

Investments The mandatory investments given to government securities from the LIC Life Fund must be reduced from 75% to 50%.

GIC and its subsidiaries should not be allowed to hold more than 5% in any company.

Customer service LIC must pay interest if it delays any payments beyond 30 days. All insurance companies should be encouraged to create unit linked pension plans. The insurance industry should be computerised and the technologies must be updated. The insurance companies should promote and fulfil customer services. They should also extend the insurance coverage areas to various sectors.

The committee allowed only a limited competition in this sector as any failure on the part of new players could ruin the confidence of the public to associate with this industry. Every insurance company with an initial capital of Rs.100 crores can act as an independent company with economic motives. Since then there is a competition between the private and public sectors of insurance, the Insurance Regulatory and Development Authority Act, 1999 (IRDA Act) was formed to control, support and ensure a structured growth of the insurance industry. The private sector insurance companies were allowed to work along with the public sector, but had to follow the conditions given below: The company must be registered under the Companies Act, 1956. The total capital share by a foreign company held by itself or by through sub sectors of the company should not exceed 26% of the capital paid to the Indian insurance industry. The company should only provide life, general insurance or reinsurance. The company should have an initial paid capital of at least Rs.100 crores to provide life insurance. The company should have an initial paid capital of at least Rs.200 crores to provide reinsurance.

Later in 2008, further reforms were made by introducing the plan for Insurance (Laws) Amendment Bill - 2008 and The LIC (Amendment) Bill - 2009. These amendments influenced the Indian insurance industry in a huge way. The Insurance (Laws) Amendment Bill - 2008 amended three other acts namely, Insurance Act 1938, General Insurance Business (Nationalisation) Act 1972 (GIBNA) and Insurance Regulatory and Development Authority Act 1999. Q.4 Discuss the guidelines for settlement of claims by Insurance company Ans:- General guidelines for claims settlement There are some guidelines that must be followed while settling the claims. These guidelines are general in nature, and are not compiled

to be the same always. Therefore, the claim settling authority uses discretion and records reasons. Appointment of surveyor The Insurance Act states that surveyor should survey claims above Rs. 20,000. The surveyors appointment should be based on the following points: The surveyor should have a valid license. The surveyor selected should consider the type of loss and nature of the claims. Depending on the situation, if technical expertise is required, a consultant having technical expertise assists the surveyor. One surveyor can be used for various jobs, if the surveyors competence is good for both.

Appointment of investigator Depending on circumstances, it is necessary to appoint an investigator for verifying the claim version of loss. The appointing letter of the investigator o mentions all the reference terms to perform. Q.5 What is facultative reinsurance and treaty reinsurance? Ans:- The two different types of reinsurances are: Facultative reinsurance. Treaty reinsurance.

Facultative reinsurance It is a type of reinsurance that is optional; it is a case-by-case method that is used when the ceding company receives an application for insurance that exceeds its retention limit. It is based on the individual agreements that help to cover specific losses. When any primary insurer wants reinsurance for a specific coverage, it enters the market, and bargains with different reinsurance companies for the amount of coverage and premium, looking out for a better value. According to most of the contracts, the reinsurer pays a ceding commission to the insurer to pay for purchase expenses. Before issuing the insurance policy the insurer looks for reinsurance and speaks to many reinsurers. The insurance company does not have any commitments to cede insurance and also the reinsurer has no commitments to accept the insurance. However if the insurance company find a reinsurer who is willing to take the insurance policy then they can enter into a contract.

Facultative reinsurance is used when a huge amount of insurance is preferred and while considering a specific risk involved in an individual contract. Facultative reinsurance is the reinsurance of a part of a single policy or the entire policy after negotiating the terms and conditions. It reduces the risk exposure of the ceding company against a particular policy. Facultative reinsurance is not mandatory. One advantage of facultative reinsurance is it is flexible as a reinsurance contract is arranged to fit any kind of cases. It helps the insurance companies in writing large amount of insurance policies. Reinsurance moves the huge losses of the insurers to the reinsurer and thus helps the insurer. One main disadvantage of facultative reinsurance is that it is not reliable. The ceding insurer will not know in advance whether a reinsurer will agree to pay any part of the insurance. The other disadvantage of this kind of reinsurance is the delay in issuing the policy as it cannot be issued until the reinsurance is got for that policy. Treaty reinsurance Treaty reinsurance is one in which the primary insurer agrees to cede the insurance policy to the reinsurer and the reinsurer has to accept it. It includes a standing agreement with a specific reinsurer. The amount of insurance that the primary insurer sells and those policies where both the parties provide the service is specified in the contract. All the business that comes under the contract is automatically reinsured according to the conditions of the treaty. Treaty reinsurance needs the reinsurer to assume the entire responsibility of the ceding company or a part of it for some particular sections of the business with respect to the terms of the policy. The contract is a compulsory contract because according to the treaty the ceding company has to cede the business and the reinsurer is compelled to assume the business. It is a type of reinsurance that is preferred while considering the groups of homogenous risks. The treaty reinsurance provides many advantages to the primary insurance company. It is automatic, more reliable, and there is no delay in issuing the policy. It is also more cost effective as there is no need to shop around for reinsurers before writing the policy. The treaty reinsurance is not advantageous to the reinsurer. Usually the reinsure does not know about the individual applicant of the policy and has to depend on the underwriting judgment that the primary insurer gives. It may be so that the primary insurer can show bad business like more losses and get reinsured for it as the reinsurer does not know the real fact. The primary insurer may pay insufficient premium to the reinsurer. Therefore the reinsurer undergoes a loss if the risk selection of the primary insurer is not good and they charge insufficient rates. There are different types of treaty reinsurance arrangements which may differ according to the liability of the reinsurer. They are:

Quotashare treaty. Surplusshare treaty. Excessofloss treaty. Reinsurance pool.

Q.6 What is the role of information technology in promoting insurance products Ans:-The rapid developments in information technology are posing serious challenges for insurance organisations. The use of information technology in insurance industry has an impact on the efficiency of the organisation as it reduces the operational costs. After many private players entered the insurance industry, the competition in the insurance sector has become immense. Information technology has helped in enhancing the insurance business. Insurance industry uses information technology for internal administration, accounting, financial management, reports, and so on. Indian insurance organisations are rapidly growing as technology-driven organisations, by replacing billions of files with folders of information. Insurers are heading towards the technological enhancements, in order to focus on the key areas of insurance business. The role of IT in different fields of insurance like: Actuarial investigation - Insurers depend on the rates of actuarial models to decide the quantity of risks which create loss. Insurance organisations are using new technologies, to analyse the claims and policyholders data for providing connection between risk characteristics and claims. Developments in technology allow actuaries to examine risks more precisely. Policy management - Most of the insurance policies are printed and conveyed to policy owners through mail every year. The method of creating documents is accomplished by technicians and typists. In most of the cases, this task is generally completed by using new technology. Customer data is accessed by computer systems, and maintained in huge folders, in order to renew each policy. To assemble the policies, complex software packages are used, and to print the policies high speed printers are utilised. Underwriting Underwriters can use knowledge based expert systems to make underwriting decisions. By using automated systems, underwriters can compare an individuals risk profile with their data and customise policies according to the individuals risk profile. Front end operations: CRM (Customer Relationship Management) packages are used to integrate the different functional processes of the insurance company and provide information to the personnel dealing with the front end operations. CRM facilitates easy retrieval of customer data. LIC is using CRM packages to handle its front end operations.

Master of Business Administration - MBA Semester 4 MF0018 Insurance and Risk Management Assignment Set- 2
Q.1 Explain risk avoidance, risk reduction and risk retention Ans:- Risk avoidance Risk avoidance is where a certain loss exposure is never acquired or the existing one is totally removed. This is one of the strongest methods to deal with risks. The major advantage of this method is that it reduces the chance of loss to zero. The two ways by which risk can be avoided are proactive avoidance and abandonment avoidance. In the first case, the person does not assume any risk and therefore any project which brings in risk is not taken up. For example a company which has chances of nuclear radiation will not set up the company, due to the perils which it can bring up. In the case of abandonment avoidance, the existing loss exposure is abandoned. All activities with a certain degree of risk are abandoned. The case of abandonment avoidance is very few. If a firm abandons risky activities, then it faces difficulties in remaining in the market. The firm in the process of abandoning might take up new activities which exposes to another type of risk. Risk reduction This strategy aims to decrease the number of losses by reducing the occurrence of loss, which can be done in two ways namely loss prevention and loss control. Loss prevention is a desirable way of dealing with risks. It eliminates the possibility of loss and hence risk is also removed. The examples of this are safety programs like medical care, security guards, and burglar alarms. Loss control refers to measures that reduce the severity of a loss after it occurs. For example segregation of exposure units by having warehouses with inventories at different locations. Insurance companies provide guidance and incentives to the company which has taken the policy to avoid the occurrence of loss. Risk retention Retention simply means that the firm retains part or all the losses incurred from a given loss. Risks may be knowingly or unknowingly retained by the organisation. They are hence classified as active and passive based on this. Active risk retention is when the firm knows of the loss exposure and plans to retain it without making any attempt to transfer it or reduce it. Passive retention is the failure to identify the loss exposure and retaining it unknowingly.

Retention can be used only under the following circumstances: When insurers are unwilling to write coverage or if the coverage is too expensive. If the exposure cannot be insured or transferred. If the worst possible loss is not serious. When losses are highly predictable.

Based on past experience if most losses fall within the probable range of frequency, they can be budgeted out of the companys income. Q.2 What are the challenges faced by Indian Insurance Industry and what measures are taken to overcome them? Ans:- Issues and Challenges of Insurance industry in India The increased growth in the Indian middle income group has posed incremental growth in the insurance sector in India. October 2008 The Indian insurance sector is on a bull run. The average Indian now spends 5.4 times as much on life insurance as what s/he did seven years ago when the industry was yet to be opened up for private participation. With the largest number of life insurance policies in force in the world, India's insurance sector accounted for 4.1 per cent of GDP in 2006-07, up from 1.2 per cent in 1999-2000, far ahead of China where insurance accounts for just 1.7 per cent of the GDP and even the US where insurance penetration stands at 4 per cent of the GDP.

Indians are now setting aside a larger chunk of their income on life insurance when measured as a percentage of GDP. They are allocating a small amount of their take-home to buy insurance products given their rising equated monthly installment (EMI) payments for home mortgage and

other loans. The growth in insurance premium collections has spelt an opportunity for the equity market too. The industry's investment in the equity market stood at US$ 38.1 billion and the assets under management were at US$ 152.6 billion as on March 31, 2007. Indian insurance companies recorded a 19.9 per cent growth in premium in dollar terms (adjusted for inflation) in 2006-07, compared to the world market growth rate of 2.9 per cent. This rate of growth of the industry looks particularly impressive when seen against the fact that the combined penetration of both life and non-life is less than 2 per cent of the GDP compared to world average of 7.52 per cent. Clearly, the scope for growth is enormous. Nonetheless, the minimal foreign investment allowed within the country increase the need for partnerships to operate in the Indian environment. This poses challenges of governance, risk and compliance mechanisms that will allow the partnerships to act in the best interest of the policyholder. As India is in the cusp of grasping potential opportunities in the insurance industry, one needs to understand that investing for the long term is key. The sector wise growth and potential is underscored below to enhance the understanding of the Indian insurance segment. Life Insurance Led by the Life Insurance Corporation (LIC), the life insurance industry registered a growth of 110 per cent in fiscal 2006-07, taking the total business to US$ 19.2 billion from the previous year's US$ 9.1 billion. The life insurance market has grown rapidly over the past six years, with new business premiums growing at over 40 per cent per year owing to the entry of a host of new players with significant growth aspirations and capital commitments. Life insurance penetration in India - which was less than 1 per cent till 1990-91 - increased to 2.53 per cent in 2005, and to 3 per cent in 2006-07. The impetus for growth has come from both public and private insurers. Also, the number of players in this segment has also increased to 17 (16 in private sector), with Life Insurance Corporation (LIC) being the dominant player (market share of about 74 per cent). General Insurance The general insurance industry grew 12.63 per cent during 2007-08 driven a robust performances by private players. The 13 non-life insurers collected US$ 2.63 billion in premium during 2007-08, against US$ 2.04 billion in 2006-07. Consequently, total non-life premium collections totaled US$ 6.59 billion in 2007-08, against US$ 5.85 billion collected in 2006-07. While the public sector could increase its premiums by just 3.94 per cent, 13 private sector players clocked premium growth of 28.85 per cent. Private sector players' market share has grown to about 40 per cent in FY 2008 as compared to the public sector's 60 per cent. Government Initiatives The Government has taken many proactive steps to give a boost to this sector:

Foreign direct investment up to 26 per cent is permitted under the automatic route subject to obtaining a license from the IRDA.

IRDA has removed administered pricing mechanism, i.e. de-tariffing in respect of fire and engineering along with motor insurance of general insurance for premium, effective from 1 January, 2007. The control rates on fire, engineering and workmen's compensation insurance classes has been removed from 1 September, 2007. Some state governments have also taken a dynamic role in this sector. The Government of Andhra Pradesh after piloting the 'Arogya Sri' health insurance scheme in three districts plans to issue health cards to 18 million BPL (below the poverty line) families. As a result, about 60 million of the State's 80 million people will have insurance cover. The Karnataka Government has partnered with the private sector to provide coverage at a low cost in the Yeshaswini Insurance scheme. Launched in 2002, the scheme provides coverage for major surgical operations, including those pertaining to pre-existing conditions, to Indian farmers who previously had no access to insurance.

Innovative Trends Insurance in India has been spurred by product innovation, streamlining of sales and distribution channels along with targeted advertising and marketing campaigns. The kid's insurance segment in the insurance sector is witnessing increased activity. According to industry estimates, currently, 20-30 per cent of business of many companies comes from children-specific insurance policies alone. Emerging lifestyle trends amid a changing fabric of the Indian society have also modified social and financial behavior. For instance, an increase in the number of working women has led to a demand for life insurance policies, which in turn has helped women through a microentrepreneurship initiative (women have flexibility - managing home and being financially independent as distributors of insurance). The Road Ahead Market penetration tends to rise as incomes increase, particularly in life insurance. India, with its huge middle-class households and growing economy has exhibited huge potential for this sector. Current estimates say that, for every one per cent increase in the GDP, insurance premiums increase by at least 4 per cent. The domestic insurance industry in India is estimated to be around US$ 60.5 billion by 2010, of which US$ 35 billion will come from rural and semi-urban areas. While the life insurance market is expected to grow to US$ 35 billion, non-life insurance market will touch an estimated US$ 25 billion. Regulators have identified derivatives as risk management tools for insurance organisations. Hence insurance companies use these within the quantitative and qualitative limits determined by the legislation, supervisory authority and the internal procedures of the organisations. The insurance companies need to obtain prior authorisation needs for every derivatives it intends to use. Additionally, the management of the organisation should develop a system of estimation, quantitative limitation and supervision of risks.

In case of investment choices, the administrators and supervisors must improve risks like credit risk, market risk, legal and operational risk. VAR (Value at Risk) models are accepted by banking and insurance organisations as a risk management tool to control risks. VAR is defined as the maximum potential change in value of financial instruments portfolio with a provided probability for certain time period. VAR approach is useful for risk management and regulatory purpose. The main aim of VAR approach in risk management and capital regulation is to bring capital requirements close to underlying risks of assets in a portfolio. This approach is really important for insurance organisations as they operate the sufficient capital to cover the liabilities and claims in future on a long-term basis. Risk exposure is also covered through investment rules by restricting asset categories. Because of VAR tools, the quantitative objection in risk management tools is decreasing. VAR is a financial engineering tool used by insurance companies. Some other tools include credit assessments of individuals, pricing of risks and valuations of combined risks of companies that engage in multiple markets. Asset liability management and revenue management are optimised tools for financial management and risk management. Q.3 What is premium accounting and claim accounting? Ans:- Premium accounting For the businesses that have a fixed rate like that of fire insurance, motor insurance etc., the premium is charged based on the rate. Where as in businesses that do not have fixed rate, the premium is charged based on the guideline rates fixed by the respective technical departments of the insurers Head Office. According to section 64VB of the Insurance Act, 1938; the insurer cannot assume any risk unless the premium is received in advance. Apart from collection of premium by cash, cheque DD etc., the IRDA recently has permitted to collect the premium by other type of receipt like the credit card, debit card, E transfer etc. However, the same has to be collected before assumption of the risk. Service tax of 8% (presently) has to be collected on taxable premium and deposited with the respective excise authorities within prescribed time limit. If the same business is shared among more than one insurer as preferred by the policy holder, then the lead insurer has to collect the full premium along with service tax. But only one share of premium is accounted as premium and the balance is shown as the amount that is due to other co-insurers. As per the Stamp Act, a policy stamp has to be affixed and has to be accounted properly by debiting policy stamp expenses. A premium register is generated in the system on a daily basis. According to the IRDA Regulation, the premium has to be identified as the income over the contract period or the period of risk, whichever is suitable. Most of the general insurance policies are annual contracts and therefore the premium earned is worked out using 1/365 method. In the insurance policies in which the same is not practicable, it is worked out either using 1/24 or 1/12

method. According to the section 64V(1)(ii)(b) of the Insurance Act, 1938, the unearned premium is compared with the reserve for unexpired risks at the end of the financial year and if there is any shortfall it is accounted as unearned premium. Claims accounting Claims outgo is the major outgo of an insurance company. The respective technical department does the processing of claims and the competent authority approves it. The accounts department does the payment and accounting of the claims. When claim is made for a policy that has more than one insurer the lead insurer pays the full amount of claims. Only own share of claim is accounted as claims cost and the balance is shown as amount recoverable from the other insurers (co-insurers). If a claim is made but not settled by the end of the financial year, then enough provision is made for such outstanding claims. By the end of the financial year the IRDA needs the actuarial valuation of the claims liability of an insurer that the appointed actuary makes and if there is any shortfall, it is provided as Incurred But Not Reported (IBNR) losses. Q.4 What factors indicate that there is a good potential for growth of insurance services in rural markets? Ans:- Rural insurance covers areas like fisheries, horticulture, floriculture, cattle and living stock. This insurance is accepted to be a high-cost, low premium business which requires different type of skills. It involves various government organisations, agencies and departments. Need and potential of rural insurance With the increase in income of the rural community, the rural population is purchasing consumer durables, constructing houses and purchasing vehicles. These assets need insurance. Therefore the efforts by private insurance companies backed by proper business can have direct impact on the rural economic growth. In the farm sector, insurance supplements the advances in science and technology. The following factors indicate that there is a good potential for growth of insurance services in rural markets: Improving economic conditions. Low penetration level of insurance products in the rural sector. Rising rural demand for insurance products. Increasing disposable income levels.

LIC (Life Insurance Corporation) and GIC (General Insurance Corporation) have been providing insurance cover for the rural areas, but they are not sufficient. The people residing in rural areas

state that claim lodgment and settlement procedure is time consuming and burdensome. Cattle and crop insurance by the government, have not met the expected results. To set up or improve the rural insurance, the following needs to be done: Create products according to the rural requirements, and establish efficient methods of premium collection and claims settlement. Educate the rural about the need of insurance products. The government should encourage the private and foreign insurance companies to provide insurance to rural assets. The educated young people of the villages need to be trained and taught about the need for insurance.

Q.5 Critically evaluate the role of agents in insurance industry Ans: Insurance agents are people who possess specialized knowledge in the field of finance. They play an important intermediary role between the customer and the insurance company. They are also known as insurance agents. An insurance agents can be either of the following: An individual A commercial business entity

Insurance Brokers: Well Informed and Unbiased Insurance brokers or agents have a thorough knowledge and extensive experience in the insurance sector and are quite conversant with the contingent risks of life and their possible riskmanagement. They actually broker the insurance deal between the insurance company and the consumer and in lieu for this, extract a commission. Insurance brokers are basically financial planners who acquire suitable insurance schemes in accordance with the needs of the insurance clients. Insurance brokers are not tied to any specific insurance companies but to multiple ones. So, there is little chance of them favoring insurances of any specific company/companies. An insurance broker is expected to perform extensive

research while choosing the right insurance scheme/policy for the clients requirements without any prior biases. Insurance Brokers: Serving a Large Client Base The job of an insurance broker varies from firm-to-firm because in such cases, size does matter. In large business entities, they have a wide range of client base along with their wide range of requirements. However, it is impossible for a single broker to meet all these need. So, each broker in a big business house has categorical specializations according to the needs of the clients. Insurance brokers in small business entities who have comparatively less businesses and a small number of clients are required to do all the associated work themselves. Insurance Brokers: A Brief Job Description Generally, an insurance broker is involved with the following work: Acquisition of clients in need of insurance - Even if people don't have the demand for insurance in a specific field, brokers generate this demand through advertisements and other methods. This is known as business development.

Giving proper and adequate service to the client to maintain an ongoing relationship between the insurance company and the client - This is commonly known as servicing of client.

Constantly remaining in touch with the clients and catering to their problems by gathering proper information and assessing their risk profile and requirements.

Renewing the policies of the existing clients in a hassle-free manner and with appropriate judgment and guidance.

Giving proper advice to clients in a customized way by gauging their risk profile coupled with extensive research.

Keeping abreast with new policies and schemes of the insurance companies so that they can choose the right policy for their clients personal needs.

Collecting regular premiums paid by the clients. Processing the accounts of the clients

Q.6 Explain product design and development process in Insurance Industry Ans:-One main issue in the liberalised scenario of the insurance sector is in the area of developing new products. Constant activity in this area is very important for determining the overall profitability, and growth of any insurance company. The main reason for the liberalisation of the insurance sector is that it the public sector was not practical in the process of developing products that satisfied the needs of the customer. Product development process is an important process for an insurance company. Developing insurance products include the following steps:

Customer requirement analysis - In the first step, the customer requirements are analysed. In this phase, the information on the amount to be insured, total income, client biometrics such as age and family size, current purchasing habits, and so on are analysed. Business analysis - In the business analysis stage of product development, different departments of the insurance company have the following responsibilities. 1. Marketing department has to perform the market analysis to know the customer needs, and make a forecast for sales. 2. Underwriting department has to prepare the manuals. 3. Customer service department assesses the procedural requirements of the new products. 4. Actuarial department develops the specifications of the product, and the resulting impact on product portfolios. 5. Accounting department reports the financial requirements of the new product. 6. Information systems department checks whether the insurer has enough operating systems to accommodate the new product or not. 7. Investment department along with the actuarial department determines the investment needs for the new product.

Prototype development - In this step, a prototype of the product is designed and testing is carried out.

Pricing the product - The pricing of the insurance products plays an important role in the design and development of the product. The price of the product should include the risk premium that the insurance company needs for accepting the policy, and the cost for distributing and administering the product to the client. The policy price that is charged to the client includes the risk premium and the cost of the distributor. Product release - This stage is called as the technical design stage. It involves creation of drafts for policy documents, commission structure, underwriting, forms and procedures and issue specifications. Before the product is released to the market the insurance companies have to take care of the following: 1. 2. 3. 4. 5. Arrangement of training material. Designing promotional materials for the products. Releasing all the information that is needed to understand the product. Administration of the product after release. Complete policy filing, the process by which the organisation obtains all the regulatory approvals from all the applicable authorities that are needed to release the product. 6. Educating and training the staff and the sales agents on administrative procedures and forms that are needed to sell, administer and service the product.

The environment in which the insurer functions inspires its product development. This comprises of the legal framework which the insurance industry has to follow and social and economic factors. Any stage of product development has to be carried out in accordance with the customers interest. Thus, since 1973, the Indian Insurance sector has directed the product development towards meeting this goal. In the last three decades, the General Insurance Company (GIC) together with its four subsidiaries has developed 150 new products, and has met its customer requirements. To control poverty and provide employment in the rural areas, the insurance sector developed the Integrated Rural Development Program (IRDP).