Project

HINDUSTAN UNILEVER LIMITED
Summer Internship Project Report On Developing roadmap to increase contribution of CoC (Channels of Choice) sales in OoH(Out Of Home) Business through marketing initiatives
Submitted By: Vallari Gupta 11BSPHH011009 Under the guidance of Prof. Sindhuja P N Department of Operations & It IBS Hyderabad IFHE University Mr .Omkar Kore Marketing Manager Out Of Home(F & B) HUL-Mumbai
A report submitted in partial fulfillment of the requirements of PGPM Program of IBS, Hyderabad
Date Of Submission:
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INTERNSHIP CERTIFICATE
TO WHOMSOEVER IT MAY CONCERN This is to certify that Ms. Vallari Gupta Enroll. No.11BSPHH0110009, student of IBS Hyderabad, has undergone 12 weeks of Summer Internship in our company from 12th March to 2nd June under the guidance of Mr. Omkar Kore (DesignationMarketing Manager,Out Of Home(F& B)). During the period of internship with us,she was (A comment on the quality of work should be included) A copy of the report is submitted to the company.
Signature : Name & Designation: Date:
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ACKNOWLEDGEMENT
No work is a work of an individual.This project is not an exception to it.I owe a sense of gratitude to the co-operation and support of all those people who have let me understand what is needed from time to time for the completion of this project.It is very difficult to prepare a project especially when someone is new for this experience.Without any help or guidance,it is not easy to achieve this given task.So I would sincerely like to thank all the patrons of this project. I am thankful to Hindustan Unilever Limited for having given me an opportunity to work with them and make the best out of this internship.
I thank my company guide Mr. Omkar Kore(Marketing Manager,Out of Home,F &B Division),Mr Deepak Gupta(Area Business Executive,Out Of Home Division) and Ajita Goswami (Territory Sales Officer), for having constantly guided and supported me throughout the training period.
I thank my college IBS Hyderabad for having given me this opportunity to put to practice,the theoretical knowledge that I imparted from the program.I express a deep sense of gratitude to my faculty guide Dr. Sindhuja P N for having cooperated me through the two and half months of internship period.
I take this opportunity to thank my parents and friends who have always stood by me and offered emotional strength,moral support and encouragement.
Last but not the least I would thank all my customers,who gave their precious time and insights,without which the completion of this project would not have been envisaged.
Vallari Gupta MBA 2011-13 IBS Hyderabad
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EXECUTIVE SUMMARY
Hindustan Unilever Limited has been a major player in the beverage market,with its strong brands of tea like,Taj Mahal,Lipton,etc. and in coffe with its brand Bru.With Lipton,HUL marked its entry into the vending solutions market a decade earlier. Out Of Home as this market is termed was at that time had Nestle as the only major player.HUL in the past decade has immensely grown and is now the 2nd largest player in this market. The project was an endeavor to study the existing Vending Business and the Liptons presence in it. More & more consumers are spending more & more time out of home, at Work (offices, colleges) Wait (at airports, railways) & Play (Malls, Multiplex, Leisure). This creates a large consumption and Brand experience opportunity. HUL has built a robust Beverages Out-of-Home business in the B2B space with their Lipton & Bru Tea/Coffee vending services, since 2002 & are look to continuing to scale that up rapidly. In addition they have entered the consumer OOH space with the Bru caf and Swirls ice cream parlours. Modern Foods is a very large player in the Bakery Category which is very large.I was specifically allowed to work on hospitals. Basically an installation of a kiosk/vending machine in a Hospital has been executed in following three stages: 1. Cold calling 2. Meeting respective administration/human resource heads & Negotiations 3. Installation of Lipton vending machine as in a kiosk or individually. The task of installing a vending machine gets accomplice after several rounds of negotiations the respective company representative is made acquainted with the benefit his organization will get with Lipton. For this, a comprehensive cost-benefit has to be presented to him to convert the prospect into key account of HUL.
Once an order is placed, the Lipton crew along with the distributor installs the Lipton Vending Machine. Proper and regular technical support is provided for machine management. The Lipton team also trains for a smooth operation of the Lipton Vending Machine, which will help to maximize cuppage. The installation process is divided into 5 stages: 1) Pre-delivery inspection at the establishment by the manufacturers technician. 2) Pre-installation Survey at the establishment by the installation crew. The crew shall check the location for Water Source, Electrical Wiring and Fittings, Earthing, Tank and machine placement- accordingly an estimation of cost shall be provided. 3) All electrical, plumbing and water requirement are addressed before actual installation. 4) After all the necessary checks are made, qualified technicians install the Lipton Vending Machine. 5) Training of the machine handling personnel to ensure smooth functioning and easy daily maintenance of the Lipton Vending Machine.
Through the vending machines Hindustan Unilever Ltd. promotes the following three products: IBS Hyderabad Page iv
Tea :
The packet tea market continued to be extremely competitive with national, regional and local players vying for increased share and volumes Prices of garden tea remained stable during the year, but have begun to firm up towards the later part of the year. The strategy of investing in building Brooke Bond as a mega brand to consolidate and strengthen the Company's leadership in the packet tea market helped Brooke Bond maintain its leadership during the year. In 2009, Taj Mahal and Lipton were successfully relaunched. Aggressive Brand building support behind Lipton Natural Care has established Natural Care as a significant variant within the portfolio. The focus on brand building, and innovation has helped the Company to sustain its leadership position in the overall category and exit the year with a growth momentum. Lipton continued to grow strongly in the Out-of-Home, Vending Channel through acquisition of some major regional and national clients, and by strong activation at key consumer points. The business continued to record sustained profitability through its focused brand portfolio and highly streamlined supply chain and cost management. Coffee:
The Coffee business had another excellent year, led by strong growth in Instant Coffee. The strategy to strengthen the brand equity of Bru through clutter breaking and highly visible communication, coupled with world class activation led to significant share gain further consolidating its leadership position within the branded coffee market. Bru Cappuccino continues to help Bru recruit new consumers into its franchise and consolidate Bru's channel leadership particularly in Modern Trade. The Re. 1 and Rs. 3 low unit price packs continue to contribute significantly to the brand's growth and drive category expansion. The coffee category, particularly Instant Coffee, continued to be extremely competitive with national players securing growth in volumes and market share. Ground and Roasted coffee; predominantly confined to South India, faced competition from local and regional players. There is a perceptible trend of increasing number, of consumers migrating to instant coffee from roasted and ground coffee due to its inherent convenience.
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Soups:
Knorr Soups enjoy a large share in the nascent and small soup market and held that position during 2008. A new range of international quality soups were introduced during the Foods business delivered a robust performance during 2008. This was on the back of a good 2007, reflecting sustained momentum in the Kissan, Knorr and Annapurna brands Kissan was relaunched with a new strategic positioning, improved packaging and a superior formulation, which significantly enhanced the quality of the product. Simultaneously, the Company focused on improving delivered freshness of processed foods to consumers with an improved supply year. Simultaneously, a new campaign to encourage soup consumption at various moments in the day has been well received by consumers and customers. This will help the business to build volumes through higher consumption.
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TABLE OF CONTENTS
INTERNSHIP CERTIFICATE..iii ACKNOWLEDGEMENT.iv EXECUTIVE SUMMARY....v
LIST OF TABLES ....................................................................................................................................... ix
LIST OF FIGURESix
1 INTRODUCTION ................................................................................... Error! Bookmark not defined. 1.1 BACKGROUNG OF OUT OF HOME INDUSTRY ......................................................................... 2 1.2 OBJECTIVE ..................................................................................................................................... 10 1.3 METHODOLOGY ........................................................................................................................... 10 1.4 LIMITATIONS ................................................................................................................................. 10 2 ECONOMY INDUSTRY ANALYSIS ................................................................................................... 11 2.1 GLOBAL ECONOMIC ENVIRONMENT ...................................................................................... 11 2.2 DOMESTIC ECONOMIC CONDITIONS ...................................................................................... 12 2.3 FISCAL AND MONETARY POLICY ............................................................................................ 13 2.4 INDUSTRY STRUCTURE .............................................................................................................. 16 2.5 MAJOR PLAYERS .......................................................................................................................... 17 2.6 REGULATORY AUTHORITY ....................................................................................................... 19 2.7 DEMAND DRIVERS ....................................................................................................................... 20 2.8 CRITICAL SUCCESS FACTORS ................................................................................................... 20 3 COMPANY ANALYSIS ......................................................................................................................... 22 3.1 BUSINESS LIFE CYCLE ................................................................................................................ 22 3.2 BRANDING PRACTICE ................................................................................................................. 28 3.3 PROMOTIONAL PRACTICES ....................................................................................................... 31 3.4 CUSTOMER RELATIONSHIP ....................................................................................................... 32 3.5 COMPETITOR RELATIONSHIP ................................................................................................... 32 3.6 MARKET DYNAMICS ................................................................................................................... 33 3.7 BUSINESS SEGMENTATIONS ..................................................................................................... 34 3.8 PRODUCT & SERVICES ................................................................................................................ 34 4 PROJECT SPECIFIC ANALYSIS .......................................................................................................... 36 4.1 PRINCIPLES OF INSURANCE ...................................................................................................... 36 4.2 TYPES OF INSURANCE ................................................................................................................ 37 4.3 REGULATORY AUTHORITY ....................................................................................................... 39 IBS Hyderabad Page vii
4.4 REGISTRATION OF A INSURANCE COMPANY ....................................................................... 42 4.5 SOLVENCY II AND ITS AFFECT .............................................................................................. 44 5 THEORITICAL FRAMEWORK/ CONCEPTUALIZATION ................................................................ 46 5.1 INSURANCE PRICING MODEL.................................................................................................... 46 5.2 DIVERSIFICATION OF RISK BY INSURANCE COMPANIES .................................................. 57 5.3 FACTORS AFFECTING PREMIUM OF A INSURANCE POLICY ............................................. 65 6 DATA ANALYSIS AND DISCUSSION................................................................................................ 67 6.1 COMPANY INFORMATION .......................................................................................................... 67 6.2 GROSS PREMIUM GROWTH RATE ............................................................................................ 75 6.3 COMBINED RATIO ........................................................................................................................ 76 6.4 AVAILABLE SOLVENCY MARGIN TO REQUIRED SOLVENCY MARGIN ......................... 77 6.5 ANALYSIS OF ESTIMATED PREMIUM ..................................................................................... 78 6.6 CONCLUSION ................................................................................................................................. 84 6.7 RECOMMENDATION .................................................................................................................... 85 7 REFERENCES ........................................................................................................................................ 85 7.1 WEBSITES ....................................................................................................................................... 86 7.2 RESEARCH PAPERS ...................................................................................................................... 88
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LIST OF TABLES
Table 3-1 PROFITABILITY RATIO ......................................................................................................... 23 Table 3-2 LIQUIDITY RATIO................................................................................................................... 25 Table 3-3 TURNOVER RATIO ................................................................................................................. 27 Table 3-4 DEBT EQUITY RATIO ............................................................................................................. 28 Table 3-5 WORKING CAPITAL MANAGEMENT ................................................................................. 28 Table 3-6 BETA.......................................................................................................................................... 31 Table 3-7 COST REVENUE STRUCTURE .............................................................................................. 33 Table 3-8 DEBT EQUITY RATIO ............................................................................................................. 33 Table 6-1 ESTIMATED PREMIUM PER POLICY FOR YEAR 2011-12 ............................................... 78 TABLE 6-2 POLICYS CORRELATION WITH MARKET .................................................................... 79 Table 6-3 COMPARISON OF ESTIMTED AND ACTUAL PREMIUM FOR FIRE AND MARINE INSURANCE .............................................................................................................................................. 79 Table 6-4 COMPARISON OF ESTIMATED AND ACTUAL PREMIUM FOR ENFINEERING AND PERSONAL ACCIDENT INSURANCE ................................................................................................... 80 Table 6-5 COMPARISON OF ESTIMATED AND ACTUAL PREMIUM FOR MOTOR AND AVIATION INSURANCE ......................................................................................................................... 80 Table 6-6 COMPARISON OF ESTIMATED AND ACTUAL PREMIUM FOR HEALTH INSURANCE .................................................................................................................................................................... 80 Table 6-7 FIRE POLICY - PREMIUM PER POLICY .............................................................................. 80 Table 6-8 MARINE POLICY - PREMIUM PER POLICY ....................................................................... 81 Table 6-9 MOTOR POLICY - PREMIUM PER POLICY ......................................................................... 82 Table 6-10 AVIATION POLICY - PREMIUM PER POLICY.................................................................. 83
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LIST OF FIGURES
Figure 3-1 SHARE PERFORMANCE ....................................................................................................... 31 Figure 6-1 GROSS PREMIUM GROWTH RATE .................................................................................... 76 Figure 6-2 COMBINED RATIO ................................................................................................................ 77 Figure 6-3 AVAILABLE SOLVENCY MARGIN TO REQUIRED SOLVENCY MARGIN RATIO .... 78 Figure 6-4 FIRE POLICY - PREMIUM PER POLICY ............................................................................. 81 Figure 6-5 MARINE POLICY - PREMIUM PER POLICY ...................................................................... 82 Figure 6-6 MOTOR POLICY - PREMIUM PER POLICY ....................................................................... 83 Figure 6-7 AVIATION POLICY - PREMIUM PER POLICY ................................................................. 84
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1.INTRODUCTION
1.1 BACKGROUND OF OUT OF HOME(OoH) INDUSTRY

Out of Home is essentially all type of products and services that reaches the consumer while he or she is outside the home.
Have you caught the tail of a new trend in town? Have you as yet spotted the best of brands running into the terrain of out-of-home consumption? Running for cover from the meltdown in the in-home segment of consumption! Out-of-home branding is the new buzzword sweeping Indian shores. Brands that stubbornly remain indoors through their positioning and segmentation strategies are in for a jolt! Consider the facts. The Indian population is a young population. Life expectation is longer than before. Income standards are up. Except for a year of aberration, the Indian monsoon has largely behaved! Good monsoons mean a good crop. Large parts of the rural economy are a non taxpaying economy. Good rains spell good crops and good crops in turn spell a good amount of disposable income! The metro is a happening place. We have five big ones and a whole host of 29 one million plus population towns that are buzzing with activity. The man works. The woman works as well. The average Indian is spending a lot more time out of home than before. Eight hours at work, two hours on travel and two hours of outdoor entertainment and eating out, gobbles up half his day. And that's a lot of time spent out of home! The brand in his life has to appeal to his senses more out-of-home than when in home. Tea and coffee have always been very popular beverages among people. It is beyond the class boundaries. People of all age groups relish them. With globalization and expansion of retail business, markets etc the ready to serve food items and beverages have gained lot of demand. One can spot the coffee tea vending machines almost everywhere- be it Hospitals, Airports, Commercial complexes, offices, big markets and even local colony markets. Its popularity can be judged from the fact that in places like Pragati Maidan,New Delhi one can find ready to serve tea, coffee almost everywhere. It has become a style statement to be drinking these instead of the handmade tea/coffee. They sell like hot cakes especially in markets and shopping places. Nowadays people are conscious about hygiene. Many people go in for these ready to serve tea/coffee and of course their good taste is a major drawing factor. Lipton Yellow Label has painted many a town and cities yellow! Many a restaurant, many a bus stop, and many a signage potential is today all yellow Lipton seems to run out of home and focus
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on consumption that is outdoor while Sister Brooke Bond seems to focus on what is happening inside the home! Happy people are productive people. This is the basic rule of any company. Big or small, every employer tries at keeping his employees, customers and clients happy. Imagine if an organization has a wide range of refreshments to grab, at fingertips; if they could enjoy getting a whole load of refreshments as and when they wished for it. Lever foods service gives them this freedom in form of vending machines. Available in hot and cold formats, they are the complete vending solutions for an organization. So, everyone is happy at the push of a button. Geographically, tea is widely consumed in the North, East and West of India, and is popular with a wide variety of social classes and consumer age groups. Black standard tea constitutes nearly 80% of value sales. In the south, coffee is bigger as a proportion of total hot drinks than in the rest of the country though green tea has seen its popularity rise.
It accounts for 90% of the total beverage consumption in the country. In 2007, tea constituted 70% of
retail volume sales, compared to coffee and other hot drinks with 4.4% and 26% shares respectively.
26% 70% 4%
Tea Coffee Others
Retail sales volume in year 2009 (Source: www.answers.com)
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India accounts for 26% of the total production of worlds tea and 4.6% of that of worlds coffee.
Brazil 29.42 33.16 Vietnam Columbia Indonesia Mexico 4.6 4.59 5.97 11.65 World Coffee Production in year 2009 - (source:www.financialexpress.com) 10.61 India Others
18 10 10 6 5
26 25
India China Sri Lanka Indonesia Turkey Kenya Others
World Tea Production in year 2009 (source : www.answers.com)
Unilever (Brooke Bond and Lipton) is the clear leader, holding over 30% of the market share, while Tata Tea (Tata) trails it with almost 20%. The remainder of the market is far more fragmented and shared between numerous small players. Loose tea comprises a 45-per cent market and is a formidable challenge to the Indian packaged tea segment, because of its lower prices.
The brand war

HUL Premium leaf tea market (Rs 220-240/ kg) Premium dust category (Rs 180-200 per kg) Medium leaf sector (Rs 140-180 per kg Tata Tea
Taj Mahal, Yellow Label and Green Label Tetley Temptations Three Roses and Top Star Red Label and Taaza Chakra Gold Tata Tea Premium
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Medium dust category (Rs 130-180 per kg)
Taaza, Super
Tata Tea Premium, Kanan Devan and Gemini Agni Sholay Agni and Leo
Popular or economy category (Rs 120-140 per kg) A-1 and Tiger Economy dust teas (Rs 120-130 per kg) Packet Tea Segment in India A-1 and Ruby
Consumers in different parts of the country have heterogeneous taste. Dust tea is very popular in the south. In the western states, good quality loose tea is preferred in Gujarat, whereas in Maharashtra, consumers provide a large market to packet as well as unbranded tea.. The eastern states of West Bengal and Orissa consume CTC broken. Among the northern states, CTC fanning is liked in Rajasthan and CTC broken in others states of the North. The Central India is predominantly a dust market CTC = Cut, Tear, Curl. CTC production is a shortened, machine automated production process. Importance is put on a uniform leaf and a quickly colored infusion. Hindustan Unilever Limiteds (HUL) packet tea business has strengthened its position in the market in 2004, led by its two mega brands, Brooke Bond and Lipton. Simultaneously HUL continues to post strong growth in coffee. HUL has further consolidated on the successful relaunched of Brooke Bond in the second half of 2003. The three Brooke Bond sub-brands, Taj Mahal, Red Label and Taaza, with their distinct positioning, have expanded their presence to cover new geographies. This has helped strengthen marketplace position. Appropriately priced packs have been introduced to make the Brooke Bond offerings more accessible. Coupled with high-impact market activation, these packs have increased Brooke Bonds market share and sustained its strong growth. The Lipton brand, targeted at young consumers, has been appropriately expanded in the Out-of-Home segment. Lipton Ice Tea has been successfully test-marketed in Bangalore and Chennai. The consumer test proven mix will now be taken national, leveraging the alliance between HUL and Pepsi. HUL has already identified Out-of-Home as a growth driver. The channel, which has posted strong growth in the last two years, will be used for the entire HUL Beverages and Foods categories. In the Instant Coffee segment, HUL continues to post strong growth. Bru Instant Coffee has been relaunched, with a new identity, communication and modern pack formats. Superior activation, penetration building activities and investment in strategic channels, like Out-of-Home, is contributing to the growth. Bru, as a franchise, has been strengthened with the filter coffee brand, Deluxe Green Label, re-launched as Bru Roast & Ground.
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Consumption in leading producing countries- (source: ICO)

6% 21% 23% Indonesia Ethiopia Mexico Columbia India Vietnam
14% 17%
19%
Coffee consumption in India, by and large is an urban phenomenon with an urban and rural divide of 71% and 29% respectively. Among the type of coffee consumed it was almost equally divided between instant (soluble) and filter (Roast and ground) coffees though the proportion of instant coffee is very high in non-south.
0.005 0.143 0.077 0.493 Tamil Nadu Karnataka Kerala 0.35 Andhra Pradesh Non-South
Per capita Consumption of Coffee in India
(source:www.indiacoffee.org)
Attitude of Indian Coffee Consumers (www.indiacoffee.org) Penetration (Beverage consumed in the past 12 months) of coffee at 59% is low compared to that of tea. Penetration of filter coffee is highest in South India In the Rural areas (South India) instant coffee has a higher level of penetration than filter coffee. IBS Hyderabad Page 6
Consumption of coffee is relatively lower with 19% consuming it when compared to 85% for tea. Consumption was the highest in the South at 31 % while it ranges between just 35% in the weak coffee zones of North, East and South. Yesterday's consumption is the highest among the 15-24 and 35-44 age group. When compared to consumption of other beverages yesterday, coffee comes in third, after tea and plain milk. Among other beverages, buttermilk, natural beverages and Carbonated Soft Drink are more popular with more than 10% of respondents consuming these beverages yesterday. Coffee is consumed as a first cup only by 23% of coffee drinkers even in the traditional market of the South. Per capita consumption of coffee (among all respondents - both drinkers and non drinkers) is 0.33 cups against 1.77 cups for tea. However, coffee consumption among drinkers at 1.76 cups compares favorably with that of tea at 2.1 cups.. The proportion of non-drinkers is the highest in the oldest age group of 55+ years. Amongst coffee consumers in the rural areas, a majority (43% of all adults) is light drinkers, consuming 1-2 cups everyday. About a fifth of rural consumers consume coffee occasionally.
1.1.1 HISTORY OF VENDING MACHINES

Automated retailing through vending machines is a concept that has been exploited by entrepreneurs around the world for over four decades. India, however, is relatively virgin market though with huge potential. Vending may be considered as a new concept in India, but it has been in existence for thousands of years. Vending Timeline 215 B.C. 1076 A.D 1700s 1886 1888 1902 1905 1920s IBS Hyderabad Details Device to dispense holy water used in temples of Egypt, described by Mathematician Hero, who lived in Alexandria. The Chinese produce a coin operated pencil vendor. Coin operated boxes appear in English taverns. U.S grants several patents for coin operated dispensers. Thomas Adams company installs Tutti Frutti gum machines on New York elevated train platforms. Horn and Hardart Baking Company opens automatic restaurant in Philadelphia. U.S post office begins to use stamp vendors. First commercial cigarette vending machine enters the market. Page 7
1930s 1936 1946 1950 1957 1960 1980 1985 1986 1991 1993 1998 1999
Bottled soft drink machines, cooled with ice, appear on market. National Automatic Merchandising Association is founded. Invention of first coffee vendors leads to use of vending machines for coffee breaks. First refrigerated sandwich vendors expand lunch venue. U.S Public Health Service approves Model Vending Sanitation Code, and NAMA establishes industrys first evaluation programmed certify vending equipment. Dollar bill changers are added to vending banks. Electronic components applied to vending machines. Credit card/debit card services for vending machines introduced. 100th anniversary of vending machines in U.S. Flavored coffee, espresso and cappuccino introduced in machines. First remote wireless transmission of data from machines to warehouse. Vending business started but making losses year on year with negligible top line New dollar coin introduced by U.S mint
1.1.2 A GLIMPSE OVER THE A CHIEVEMENT OF HUL VE NDING DIVISION
More than 25000 i nstallations across 100 towns serving over a billion cups of beverages per annum and growing. Customized solutions for a wide array of needs from mal l to offices to factories and hotels. Support for 24/7 operations, i ncluding some of the bi ggest bpos, companies and banks . Solutions for all offic es ranging from 10 to 10000 people and at remote locations.
1.1.3 GLOBAL SCENARIO OF Out Of Home INDUSTRY
Insurance industry premium expanded by 11% in emerging markets and by 1.3% in industrialized economies in 2011. The absolute number is yet higher for the industrialized economies due to their size of the economy but the emerging markets are catching up. Emerging
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markets have huge potential for the expansion due to low penetration when compared with the developed countries.
The world has seen the most expensive year for the insurance industry in 2011 with the losses accumulating to the unprecedented value of USD 370 bn due to natural and manmade disasters. Today insurance industry is facing three main challenges from the economic and political environment. The economic slowdown, a repercussion of recession and tightening of monetary policy along with low interest rate are posing as challenges to the profitability of insurance industry. Also insurance companies are exposed to the sovereign debt of Greece, Spain, Portugal and Italy. Statistics produced from the sample of 174 companies from emerging Asia and Latin America show that in non life sector 47% of the companies have negative underwriting margin and 36% have underwriting margin between 0-10%. In the life sector 46% of the companies have inconsistent profit, 20% have greater than 10% profit margin and the rest are in loss for the period of 2005-09. But the forecast for the future 2010-2021 shows that non life insurance of the emerging market to grow twice the industrialized economy. Also emerging market will account for the 50% of the world GDP between 2011-2021.
U.S. accounts for the largest premium amount when compared with the other countries of the world at 27%. The net premium in insurance industry in U.S. was USD1trillion out of which 58% belonged to life/ health insurance and 42% belonged to property casualty insurance. The second largest country for the amount of premium is Japan at 13% followed by UK at 7%. UK is the largest country for the amount of premium collected in Europe.
The penetration ratio i.e. the ratio of premium written to GDP is low in emerging markets as compared to industrialized countries. The penetration in industrialized countries is 5% - 10% while the ratio is less than 1% - 3% in the emerging markets. Traditionally and globally the insurers are serving wealthy, upper middle class, educated and those who are banked or it can be said that the insured population is less than 40% and the insured business is less than 10%.
The changes in solvency directives of Europe will be implemented from January 2014. It is expected to unify a single European insurance market and to enhance consumer protection. Also
it is projected that these changes will pave way for the changes in regulation in many other countries. Some of the objectives of the solvency are to regulate risk, better models to predict premiums, liquidity and capital adequacy. The cost of harmonization of regulation is huge but the cost of not doing so is even higher.
U.S is also on the path of enhancing its regulation. The Solvency II, NAIC's Solvency modernization and Dodd Frank Act will pave the way for the development of insurance regulation in U.S.
1.2 OBJECTIVE The purpose of Internship is to connect theory and practice, obtain knowledge & awareness of the functioning of various departments of the corporate and its environment which is utmost necessary for the success as budding managers. The basic objectives of the summer internship programme were: To understand the business and competitive environment in which the organization is operating. To analyze and understand the financial position of the organization viz a viz competitors. To study Sales and Marketing process of an Out Of Home Industry in various channels of choice. To get a feel of corporate life and its functioning & understand various interaction styles. 1.3 METHODOLOGY The methodology includes reviewing all the hospitals in Mumbai region where a kiosk or a vending machine can be setup for the OoH customers.This is done by understanding OoH business in vending solutions.Also analyzing is done for the products-Bru,Lipton,Knorr in the private and public hospitals.Accordingly each hospital is visited area-wise and their repective administrative or related authority is approached for the proposal of setting up the kiosk. 1.4 LIMITATION
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Since too many public and private hospitals are present,so scalability issues in national versus local areas. Model setups requires too much non-working dollars which are an asset to the organisation. Product message can turn fatal at times that includes product benefits and trial without proper maintenance.
2 ECONOMY INDUSTRY ANALYSIS

2.1 GLOBAL ECONOMIC ENVIRONMENT
The economies of the world are recovering from the 2008 crisis. The pace of growth in the developed countries has slowed down. One of the major concerns is unemployment which is around 9% in developed countries. High unemployment and stagnant income are the reason of low aggregate demand. Also the sovereign debt crisis of Euro area worsened in the second half of 2011 which will also have effect on the balance sheet of the banks that are related to this area. The two major economies of the world US and Eurozone are intertwined. The US is largely dependent on Eurozone for imports. Also the worsening of these economies will have contagion effect on majority of the countries of the world. The world gross product is expected to grow at the rate of 2.6% in the year 2012 and 3.2% in the year 2013.The growth of the developed countries have declined to 1.3% in 2011 from 2.7% in 2010 and the expected growth for the year 2012 and 2013 are 1.3% and 1.9% respectively. Budget deficit and public debt of the countries have increased in the process of recovering from 2008 crisis.
The developing countries are expected to grow at 5.6% in year 2012 and 5.9% in year 2013 which is well below the growth of 7.5% in year 2010. The growth of economies of the developed countries has slowed to around 5.9% for 2011. The reasons of downturn in 2011 can be divided into two phases the first phase consist of first half of 2011 and second phase consists of second half of year 2011. During the first phase, the developing nations tightened monetary policy to control inflation. The causes of inflation were mainly huge amount of capital inflow and rising commodity prices. In the second phase growth moderated further because of reversal of capital
flow and decreasing demand from developed countries. The growth in the developing economies will remain robust as compared with developed economies in 2012-2013. The pace of growth in Least Developed Countries (LDC) has decreased but the percentage is very less as compared with developed and developing nations of the world. The growth in 2011 was 4.9% slowed from 5.6% in 2010. The economies of LDCs are highly volatile with respect to commodity prices and less volatile with respect to financial shocks. The conditions of different economies in LCD area are different. The adverse weather condition and fragile political and security system are effecting growth of countries in Horn of Africa and in some parts of south and western Asia while countries like Bangladesh and East Africa have shown strong growth.
In the developed countries the unemployment rate has averaged 8.6% which is above crisis level 5.8% whereas in the developing economies the employment recovery has been faster. But in the developing economies, the employment related problems like social security, poor salary and workplace conditions exist.
The world wide IT spending is expected to increase 2.5% for the fiscal year 2012 in comparison to fiscal year 2011. It is the revised figure from a researcher firm which decreased growth from 3.7% to 2.5% because of strong dollar. The growth in IT industry along with increase in employment worldwide and recovery of US economy may foster the growth of IT industry. The election in US might affect the IT industry because of concern over exporting jobs. 2.2 DOMESTIC ECONOMIC CONDITIONS Fall of rupee against major currencies, new norms of standard-size packaging, increase in raw material costs due to upward spiraling interest rates and inflation together might dent the performance of the fast moving consumer goods(FMCG) sector which ruled the bourses in the FY 2011, apex industry body of The Associated Chambers of Commerce and Industry of India (Assocham) has said. According to a sector specific analysis by Assocham, a sharp depreciation in the value of rupee and new packaging norms from July 1 are going to have a drastic effect on the FMCG industry which is likely to increase cost of regular products like biscuits, coffee, tea, toiletries and personal care items by about 10 per cent and more by first quarter of
the
next
financial
year.
Input cost inflation, persistent rise in raw material price, rising fuel costs, fluctuation in the currency, dipping industrial growth, slowing global economy together with an overall moderating consumer sentiment might lead to a slow volume growth of FMCG segment in 2012, said Mr D.S. Rawat, secretary general of Assocham, while releasing the chambers analysis titled `FMCG Sector: An Outlook for 2012. All of these factors might pinch the FMCG industry which will go for a fresh round of price hikes as we usher in the New Year, said Mr Rawat. The sector might take a hit of about 10 to 15 per cent in sales including the semi-urban and rural market as the burden might be shifted to the price-conscious end-consumers or else companies will have to opt for down trading. Based on emerging market scenario and overall macro-economic expectations the Reserve Bank of India (RBI) may go in for a reduction in interest rates to boost the sagging economy, improve demand momentum and investment climate, said Mr Rawat. With interest rates peaking off we expect RBI to reduce the cash reserve ratio (CRR) and the repo rate nearly by 25 basis points each in the forthcoming monetary policy review in January, 2012 and FMCG will turn out to be the biggest beneficiary of the same.
Overall increasing affluence and aspirations in the customers have fueled FMCG sector in India which is likely to grow in rapid pace over the years. A rapid urbanization, increase in demands, double digits increase in sales, profits galloping and well under check on costs in the FMCG sector has presented a picture of growth in the recent days. As per the emerging market scenario and overall macro-economic expectations the Reserve Bank of India (RBI) is expected to go for a reduction in interest rates to boost the sagging economy, improve demand momentum and investment climate. Market also expects RBI to reduce the cash reserve ratio (CRR) and the repo in the forthcoming monetary policy review and FMCG will turn out to be the biggest beneficiary of the same. There is ample scope for all the FMCG companies as the per capita consumption of almost all products in the country is amongst the lowest in the world and the demand or prospect could be increased further if these companies can change the consumer's mindset, and offer new generation products. Traditionally, Indian consumers were using nonbranded apparel, but today, clothes of different brands are available and the same consumers are willing to pay more for branded quality clothes. It's the quality, promotion and innovation of products, which can drive FMCG sectors. The sector has sustained a double digit volume growth in the second quarter despite the slowing global and domestic economy, the rise in demand has helped the companies to recover the margin drop and the trend is likely to continue. Product innovation in FMCG sector has picked up pace in the last few years and will act as a catalyst of growth for the sector in coming days. Also the implementation of the long delayed GST is likely to benefit the sector as they are considered as the progressive measures aimed at removing bottlenecks, though the unabated inflation will continue posing hindrance.
2.3 FISCAL AND MONETARY POLICY

FMCG industry facilitates extensive series of consumables and it circulates high amount of money in the economy. The intense competition in the FMCG manufacturers is resulting in increase in investment in FMCG industry. Nielsen's study shows that out of the total $ 28 billion in FMCG sales last year, products worth about $ 6 Billion were consumed in these smaller towns. This number makes up more than 20% of overall FMCG sales, and 30% of the
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urban FMCG sales. Since 2002, the FMCG sector grew 3.5 times in these smaller towns of 1-10 lakh population, compared to 3.2 times at the all-India level. At present high burden of local taxes is likely to have an adverse impact on disposable income and purchasing power as a whole. The growth of imports constitutes another problem area and while so far imports in this sector have been confined to the premium segment. FMCG companies estimate they have already cornered a four to six per cent market share. However, most of the companies are concentrating on cost reduction and supply chain management. This should yield positive results for them.
FMCG firms post robust Q3 numbers FMCG sector has reported better than expected numbers as majority of FMCG companies for the quarter ended December 31, 2011, have reported a healthy top line growth of 20-25%. On an average, companies saw volume growth of nine to 15% and price-led growth in the region of five to 10% during the quarter. Increase in the demand was not uniform across categories as hair oils delivered 20% plus growth while shampoos posted a small single digit growth after shrinking for many quarters. The demand for soaps and detergents rose in the single digits but was balanced by price increases. Food products delivered 15-20% for most players but grew slower than the last quarter. In the October- December quarter rural demand persisted to be strong because of good monsoon and agricultural output. Companies such as Dabur, Marico and Godrej Consumer, that have an overseas leg to their operations in Nepal, South Africa and Europe, saw their international operations deliver higher sales growth than the local legs, adding to the top line. These numbers represents that the growth in profits came from two important sources - price hike and reduction in the advertising and promotional spends. Soaps, detergents and toothpastes category players witnessed the highest escalation in input costs, economized on ad spend. Those in hair oils and foods, however, saw high ad spend continue, with their profits driven by price increases. As a result FMCG was one of the few sectors that managed to increase its profit margins in the December quarter. Through raw material prices recently have started cooling off and the rupee too looking to bottom out, cost pressures for the sector seems to be moderating.
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Budget Expectations Last years budget brought cheers to fast moving consumer goods industry in the way of an upward revision in the income tax exemption limit and a 250 basis point reduction in corporate tax surcharge, this year too it expects more disposable income in the hands of consumers and defining rural infrastructure for the further growth of the sector. Lower CENVAT on food processing sector The Federation of Indian Chambers of Commerce and Industry (FICCI) has demanded that the current rate of central value-added tax (CENVAT) on a number of categories of items produced by the food processing sector be lowered from the current 10%. It has recommended that packaged drinking water, biscuits and soy products be exempt from taxes. FICCI has recommended that packaged drinking water, being a common mans product, should be put in the NIL categories. It has further suggested that VAT on biscuits be done away with or at least reduced. As per FICCI, biscuits are a product of mass consumption across India and cut across all economic groups and geographical boundaries. In fact they are eaten in larger quantities in the rural areas of the country as compared to the urban. Another area that FICCI has batted for is the soy processed food products sector. Soy products, which are high in nutritional value, currently attract an excise duty between 8-12%. FICCI is of the opinion that these be done away with as this is severely affecting the domestic consumption of these high-protein products. Maintain tax stability in excise rates for cigarette/tobacco industry FICCI has recommended that excise duty rates should be kept unchanged to leverage the tax efficiency of cigarettes by encouraging shifts from non-cigarette forms of consumption, which will maximize contribution to the exchequer, even in a shrinking basket of overall tobacco consumption. While GST on cigarettes should be levied at the uniform standard rate applicable to the general category of goods, with availability of input tax credit and central excise duty would continue to be levied, it is critical that the combined incidence of excise duty and GST on cigarettes remain revenue neutral. Further it has demanded that, excise duty evasion by small manufacturing units should be controlled through compulsory licensing [as required under the I (D&R) Act, 1951], stricter surveillance and harsher penalties to prevent revenue losses. Increase availability of vegetable oils from domestic resources To balance the demand and supply, country is compelled to import a large quantity of edible oils. India has become the largest importer of vegetable oils in the world, as during November, 2010 to October, 2011 (2010-11) country import were around 88/90 lakh tonnes of edible oil. Hence, FICCI in its pre-budget memorandum has demanded to increase the accessibility of vegetable oils from domestic resources by encouraging diversification of land from food grains to oilseeds, increasing productivity of oilseeds and fullest exploitation of non traditional domestic sources.
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Standard excise duty to be kept same FMCG industry insiders aim phasing out of the corporate service tax, which boosted the cost of products, thereby intimidating sale and margins, and an ushering in of the goods and services tax. It expects to maintain the standard excise duty at 10% in the budget. Industry also expects consistency in fiscal policy, which will permit companies to plan for medium term and thereby aid new investments; and measures to manage fiscal deficit by judicious spending. Control in prices of the commodities is also on the agenda. Recently prices of most of the raw inputs have gone up significantly. The companies want the government to take measures to control the prices and give higher focus on increased production. Revision under section 80-IA The sector members are also eying reconsideration under section 80-IA, whereby the definition of infrastructure can be amended to include rural infrastructure. Defining rural infrastructure will provide incentives to people to make investments in rural projects and will provide them some exemption and tax relief. At present, there is no exemption for such projects. FMCG companies have asked government to continue its focus on the rural sector in the forthcoming budget as employment generation and infrastructure spending is needed to improve the rural income. Enforcement of the Trade Mark and Copyright Laws Enforcement of the trade mark and copyright laws will reduce counterfeits, and protect the rights of consumers and FMCG companies. Counterfeit products account for almost 5% of the industry and pose serious challenges in its growth. More disposable income for consumers FMCG industry expects more cash for the consumers from coming budget in the form of an upward revision in the income tax exemption limit and a 250 basis point reduction in corporate tax surcharge. Sector also aims more disposable income in the hands of consumers with a restructuring of income tax slabs in line with the Direct Taxes Code (DTC) Bill. DTC is expected to come into force in the next financial year and is aimed at simplifying tax laws and lowering tax rates. Other Introduction of GST should be given high priority in order to make Indian industry competitive. Levying of safeguard duty and anti-dumping duty in appropriate cases especially in the case of import from China.
2.3 INDUSTRY STRUCTURE
The Indian FMCG sector is the fourth largest in the Indian economy and has a market size of $13.1 billion. This industry primarily includes the production, distribution and marketing of consumer packaged goods, that is those categories of products which are consumed at regular intervals. The sector is growing at rapid pace with wellestablished distribution networks and intense competition between the organized and unorganized segments. It has a strong and competitive MNC presence across the entire value chain. The FMCGs promising market includes middle class and the rural segments of the Indian population, and give brand makers the opportunity to convert them to branded products. It includes food and beverage, personal care, pharmaceuticals, plastic goods, paper and stationery and household products etc.
FMCG industry, alternatively called as CPG (Consumer packaged goods) industry primarily deals with the production, distribution and marketing of consumer packaged goods. The Fast Moving Consumer Goods (FMCG) are those consumables which are normally consumed by the consumers at a regular interval. Some of the prime activities of FMCG industry are selling,
marketing, financing, purchasing, etc. The industry also engaged in operations, supply chain, production and general management. FMCG industry economy FMCG industry provides a wide range of consumables and accordingly the amount of money circulated against FMCG products is also very high. The competition among FMCG manufacturers is also growing and as a result of this, investment in FMCG industry is also increasing, specifically in India, where FMCG industry is regarded as the fourth largest sector with total market size of US$13.1 billion. FMCG Sector in India is estimated to grow 60% by 2010. FMCG industry is regarded as the largest sector in New Zealand which accounts for 5% of Gross Domestic Product (GDP). Common FMCG products Some common FMCG product categories include food and dairy products, glassware, paper products, pharmaceuticals, consumer electronics, packaged food products, plastic goods, printing and stationery, household products, photography, drinks etc. and some of the examples of FMCG products are coffee, tea, dry cells, greeting cards, gifts, detergents, tobacco and cigarettes, watches, soaps etc.
Some of the merits of FMCG industry, which made this industry as a potential one are low operational cost, strong distribution networks, presence of renowned FMCG companies. Population growth is another factor which is responsible behind the success of this industry.
2.4 MAJOR PLAYERS The major players of IT software companies by market capitalization are mentioned according to their rank as follows: TCS with market capitalization Rs 233,300.74cr traded at Rs 1192 per share Infosys with market capitalization Rs 135414.92cr traded at Rs 2358.20 per share Wipro with market capitalization Rs99273.74cr traded at Rs 403.75 per share HCL Tech with market capitalization Rs 34714.94cr traded at Rs 501.20 per share Oracle with market capitalization Rs 21293.3cr traded at 2535.70 per share
The data presented above are of date 26th April 2012.
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The top 20 companies contribute over 64% of the revenue of IT- Software industry. The top companies according to the revenue are mentioned as per their rank as follows: TCS - revenue for fiscal year 2011 is Rs33112cr compared with revenue of fiscal year 2010 Rs 26576cr showing a growth of 25% Infosys Technologies- revenue for fiscal year 2011 is Rs25997cr compared with revenue of fiscal year 2010 Rs 21355cr showing a growth of 22% Wipro - revenue for fiscal year 2011 is Rs24899cr compared with revenue of fiscal year 2010 Rs 21949cr showing a growth of 13% Hewlett-Packard India - revenue for fiscal year 2011 is Rs23227cr compared with revenue of fiscal year 2010 Rs 17831cr showing a growth of 30% Cognizant Technology Solution - revenue for fiscal year 2011 is Rs21393cr compared with revenue of fiscal year 2010 Rs 15646cr showing a growth of 37%
The top position is occupied by TCS when ranked on the basis of both market share and revenue.TCS is the largest provider of IT services in Asia and second largest provider of BPO services in India. It has around 2lakh employees. The second and third position is occupied by Infosys and Wipro on the basis of both market share and revenue. Infosys is also ranked 28th globally in the area of IT services. It has offices across 33 countries. The number of employees in Infosys is 133560. Wipro is ranked 31st globally in the area of IT services. The number of employees in Wipro is 122,385.
The major players in the hardware market by market capitalization are mentioned as per their rank as follows: Redington with market capitalization Rs 3527.42cr traded at Rs 88.45 per share. CMC with market capitalization Rs 2710.34cr traded at Rs 894.50 per share. S Mobility with market capitalization Rs 1567.80cr traded at Rs 65.85 per share. HCL Info with market capitalization Rs 979.56cr traded at Rs 43.95 per share. Moserbaer with market capitalization Rs 246.57cr traded at Rs 14.65 per share.
The data provided for market capitalization are of date 26th April 2012 where the price of share is closing price.
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2.5 REGULATORY AUTHORITY The IT industry and e-commerce are expanding. It lead to the development of the Information Technology Act 2000 on 17th January, 2000. This day is also known as Digital Society Day. The IT Act includes legal recognization of digital signature and digital documents and deals with the offences and contravenes. It also acts as judicial system for cyber crime. In 2008, amendment of IT Act 2000 lead to inclusion of additional focus on information security. It also deals with cyber terrorism and data protection. The grievances regarding cyber crime is dealt with by a special court - Cyber Appellate Tribunal.
Computer Emergency Response Team (CERT) in India was established in January 2004 constituted under Indian Cyber Community. Its main function is to handle computer security incidents as and when they occur. After the amendment in 2008, CERTs functions are as follows: Collection, analysis and dissemination of cyber incident information. To take emergency action in the handling of cyber incidents if situation demands. Coordination of cyber incident response activities Issue guidelines and advise on information security practices, procedures, prevention, response and reporting of cyber incidents. To alert about cyber incidents
One of the important laws concerning the IT industry is Intellectual Property Right (IPR). It protects the creations of mind. There are various laws under this - copyright, trademark, industrial design, patents, geographical indicator and IT Act 2000. The main laws concerning IT industry are IT Act 2000, Copyright Act 1957 and Patents Act 1957. Among these IT Act 2000 is already discussed.
Copyright Act 1957 is a law to protect literary, artistic, musical, cinematography producers and sound recordings. The protection of computer program, tables and compilation including database comes under literary work. In relation to computer rights under copyright act, the holder of the right has the power to reproduce, use copies of it, communicate it to public, to make any
translation, to make adaption and to sell or to give for commercial purposes on rent. Commercial renting should be done only when the computer program is the subject matter of the rental. Making copies of computer program or tampering with it or selling it in the market without the permission of the owner of the work is considered to be infringement. The term of the copyright is generally 60 years but when the work is original the term is considered 60 years from the death of the author Patent Act 1970 does not consider software alone as patentable. It can be patented only when combined with hardware. The term of a patent is 20 years from the date of filing. 2.6 DEMAND DRIVERS
The demand drivers of the IT industry are as follows: The increasing need of technology for day to day operations and adoption of the technology by the different verticals of the industry and government. In this globalized world, to remain competitive adoption of technology is important The availability of the new and cheaper technology The IT industry is able to provide customized version of the technology as per the demand of the clients. It has encouraged the users to implement technology in their firm. The demand for the voice based services across borders in different languages is increasing which has lead to the growth of BPO sector. Due to globalization, the database of the companies has increased significantly. This has lead to the requirement of technology to maintain them. The factors which have contributed to the growth of IT sector in India are as follows: Availability of skilled labor Cost advantage Reduced import duties on hardware and software products No excise duty on the export income
2.7 CRITICAL SUCCESS FACTORS
The factors which have contributed to the success of the industry are as follows:
Integration: the product to be implemented should be either able to integrate with the existing technologies or convert the data without losing them to the new format. Scalability: the implemented product should be scalable without sacrificing the efficiency. It should enhance the performance of the firm. Cost effectiveness: the product should have a good return on investment. For example the application will reduce the cost of data collection for the market research firm and will help in faster conversion of data into information.
Security: the security here refers to the protection of data in its required form and can only be used by the company defined user. Simplicity: the product should have a simple interface for the user. It should be easy to use and simple to understand.
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3 COMPANY ANALYSIS
Tata Consultancy Services Limited is an IT firm which provides IT services along with business solution and outsourcing. It is a subsidiary of the Tata Group. It has 142 offices and employees 2.38 lakh people. It is known for its Global Network Delivery Model. The services that are provided by TCS includes assurance services, BI and performance management, BPO, cloud services, consulting, engineering and industrial services, iON for small and medium business, IT infrastructure services, IT services, mobility solutions and services and platform BPO solution. The software products include TCS BaNCS and TCS technology products. TCS provides services and its products to almost all the industry verticals. TCS deals with the verticals like banking and financial services, energy resource and utilities, government, healthcare, insurance, life science, manufacturing, media and information services, retail and consumer products, telecom, travel transportation and hospitability 3.1 FINANCIAL PERFORMANCE TCS has crossed the $10bn mark for the year ending 2011-12. The revenue reported for the fiscal year 2011-12 is $10.17 bn. It has become the first Indian company to cross $10bn. The volume has grown by 23.05%. The three units of TCS that have crossed $1bn are infrastructure services, enterprise solutions and BPO. The EPS is Rs 54.4 for the year 2011-12. The financial performance of a company can be analyzed by various ratios. The ratios are calculated for the period from April 2006 to march 2011 as per the data availability.
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3.1.1 PROFITABILITY RATIO
The Profitability Ratios are calculated to measure the operating efficiency of the company. Beside management of the company, creditors and owner are also interested in the profitability of a firm. Creditors want to get interest and repayment of principal regularly. Owner wants to get a required rate of return on their investment. The various profitability ratios are presented in the table below over the period considered:
Table 3-1 PROFITABILITY RATIO RATIO/ YEAR GROSS PROFIT MARGIN NET PROFIT MARGIN OPERATING EXPENSE RATIO RETURN ON TOTAL ASSET RETURN ON ASSET RETURN ON EQUITY EPS P/E 0.39 36.32 32.56 0.37 25.26 30.91 0.35 45.53 11.86 0.41 43.69 18.56 36.66 33.58 NET 0.61 0.89 0.67 0.79 0.91 0.47 0.40 0.41 0.40 0.49 0.56 0.13 0.11 0.12 0.12 0.13 0.26 0.24 0.21 0.25 0.25 0.32 0.30 0.25 0.30 0.30 2010-11 2009-10 2008-09 2007-08 2006-07
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GROSS PROFIT MARGIN
The Gross Profit Margin (GPM) reflects the efficiency with which management produces each unit of product. This ratio indicates the average spread between the cost of goods sold and the sales revenue. The value of this ratio is almost constant for the last five years with a slight variation.
NET PROFIT MARGIN
Net Profit Margin (NPM) ratio establishes a relationship between net profit and sales. It indicates managements efficiency in manufacturing, administering and selling the products. This ratio is overall measure of the firms ability to turn each rupee sales into net profit. This ratio also indicates the firms ability to withstand adverse economic conditions. The variation in this ratio over the years considered is negligible. TCS is able to maintain the same ratio in different circumstances of the economy which is a good sign of the management of the company.
OPERATING EXPENSE RATIO
Operating Expense Ratio explains the changes in the profit margin (EBIT to sales) ratio. This ratio is computed by dividing operating expenses, viz., cost of goods sold plus selling expenses and general and administrative expenses (excluding interest) by sales. A higher operating expenses ratio is unfavorable since it will leave a small amount of operating income to meet interest, dividends, etc. The value of this ratio is around .12 over the years.
RETURN ON INVESTMENT
ROTA and RONA are both Return on Investment ratios. The term investment refers to either total assets or net assets. The conventional approach to calculate ROI is to divide PAT by investment. Investment is defined as the pool of funds supplied by the shareholders and lenders. The value of this ratio is almost constant over the years considered after the crisis period. The value of ROTA is around .4 which has decreased from 2006-07 before the crisis period but remained constant thereafter.
RETURN ON EQUITY
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ROE calculates the profitability on the owner's investment. ROE is an indication of how well the firm has used the resources of its owners. It also presents great interest to the prospective shareholders. The return on equity have decreased over the period of time but started to recover from 2010-11.
EARNING PER SHARE
The profitability of shareholders can also be measured through other ratios called the EPS. EPS simply shows the profitability of a firm on a per share basis. It does not reflect how much of the profit is distributed as a dividend to the shareholders. This ratio has increased till 2009 but decreased significantly in 2009-10. One of the reasons that can be attributed to it is the change in the capital structure of the firm which would reflect in the earnings of the firm. In 2010-11 it has increased to 36.32 from 25.26 in 2009-10.
P/E RATIO
P/E ratio indicates the investors expectations about the growth in the firms' earnings. This ratio acts as a market appraisal for all the firms performance. It is generally used by investors. The value of this ratio decreased significantly in 2007-08 because of the subprime crisis and then started to increase in 2009-10. The reason that can be attributed to the increase is global economic and financial markets recovery.
3.1.2 LIQUIDITY RATIO
It measures the ability of the firm to meet its obligation. The different ratios used for analysis of liquidity of a firm are discussed below: Table 3-2 LIQUIDITY RATIO RATIO/ YEAR CURRENT 2.43 1.49 1.89 2.04 2.05 2010-11 2009-10 2008-09 2007-08 2006-07
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RATIO QUICK RATIO NET WORKING CAPITAL 0.73 0.56 0.62 0.66 0.65 2.43 1.49 1.88 2.04 2.04
CURRENT RATIO
Current ratio shows the liquidity position of any company i.e. how much current assets the company has for every rupee of current liability. The value has decreased and then again increased in 2010-11. As the economy is recovering from recession, the financials are also improving for the company.
QUICK RATIO
Quick ratio also shows the liquidity ratio of the firm. But the difference between the current and quick ratio is that the inventory is not considered in the calculation of current assets. The comparison of figure of current and quick ratio will show the effect of inventory on the liquidity of the firm. The difference between the current ratio and quick ratio is negligible because of very less inventory in it firms. The IT firms main resource is human capital.
NET WORKING CAPITAL RATIO
It reflects the ability of the firm to meet its current obligation. This ratio also decreased in the period after the recession but has increased for the year 2010-11. 3.1.3 TURNOVER RATIO The turnover ratio indicates the efficiency of the firms in utilizing its assets. This ratio is also known as activity ratio. The various ratios used to analyze this are as follows:
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Table 3-3 TURNOVER RATIO RATIO/YEAR 2010-11 DEBTORS TURNOVER RATIO ASSET TURNOVER RATIO INVENTORY TURNOVER RATIO 2.92 2.00 3.09 3.09 3.57 2.34 3.65 3.22 3.22 3.62 7.19 6.52 5.99 5.59 20.91 2009-10 2008-09 2007-08 2006-07
DEBTOR TURNOVER RATIO
The debtor turnover ratio measures the efficiency of firm in conversion of debtors into cash. The higher the value, the better it is because it reflects the times of conversion of debtors into cash. The value of debtor turnover ratio was highest in 2006-07 in the pre crisis period but then it decreased because of global slowdown and then it again started to increase slowly as the global recovery started.
ASSET TURNOVER RATIO
Asset turnover ratio signifies the use of asset to generate the sales. Higher the value of this ratio, greater is the use of assets. The value has decreased over the period of time but the decrease is
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negligible except from FY 2010 to FY 2011. This significant decrease may be due to changes in the capital structure of the firm in 2009-10.
INVENTORY TURNOVER RATIO
It specifies number of times of the conversion of inventory into sales. this ratio has also decreased over the period of time considered but it will not affect the IT industry as such because the inventory is very less as the main resource is the human capital 3.1.4 DEBT EQUITY RATIO This ratio reflects on the proportion of asset and debt of the firm. This is useful for the lenders and investors. Generally the short term lenders are more concerned with this ratio. The value of this ratio for TCS is almost nearer to zero which signifies from that the proportion of debt of the company is negligible in comparison to net worth of the firm. Table 3-4 DEBT EQUITY RATIO RATIO/YEAR 2010-11 DEBT EQUITY RATIO 0.0021 0.0024 0.0031 0.0017 0.0063 2009-10 2008-09 2007-08 2006-07
3.2 WORKING CAPITAL MANAGEMENT
The working capital of a firm can be analyzed using different variables. These variables are discussed below: Table 3-5 WORKING CAPITAL MANAGEMENT 2010-11 RMSP WIPCP FGCP 45.67 0.01 0.02 2009-10 51.13 0.01 0.05 2008-09 46.55 0.02 0.04 2007-08 49.93 0.02 0.02 2006-07 84.73 0.04 0.08
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ACP APP NOC GOC
50.04 45534.31 95.73972 -45438.6
55.19 26749.38 106.3759 -26643
60.09 9355.626 106.6958 -9248.93
64.43 8206.293 114.4015 -8091.89
67.47 13698.92 152.3107 -13546.6
RAW MATERIAL STORAGE PERIOD (RMSP)
It is the average time period taken to convert raw material into work in process. FORMULA = average raw material inventory/ average daily raw material consumption RMSP = f(raw material consumption per day, raw material inventory)
WORK IN PROGRESS CONVERSION PERIOD (WIPCP)
WIPCP is the average time taken to complete the semi finished work or work in process. Lower the value of WIPCP, better it is i.e. the ability of the firm to complete the work in less number of days. Also it shows the efficiency of the firm. FORMULA = average work in process inventory/ average daily cost of production
FINISHED GOODS CONVERSION PERIOD (FGCP)
FGCP is the average time taken to sell the finished goods. Lower the value of FGCP, better it is i.e. the ability of the firm to convert finished goods into sales is fast and it would also enhance efficiency and lower inventory. FORMULA = average finished goods inventory/ average daily cost of sales
ACCOUNTS COLLECTION PERIOD (ACP)
ACP is the average time taken to convert debtors into cash. Lower the value of ACP, better it is i.e. the company is able to convert the debtors into cash at a faster rate, so the cash received can be utilized for the faster operating cycle and hence its efficiency is good. It also indicates the efficiency of the management. An effective control of receivables helps a great deal in properly
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managing it. FORMULA = average debtors/ average daily credit sales
AVERAGE PAYING PERIOD (APP)
APP is the average time taken by a firm to pay its suppliers or creditors. Higher the value of APP, better it is i.e. the firm has more number of days to pay its creditors back. average creditors/ average daily credit purchases FORMULA =
GROSS OPERATING CYCLE (GOC) AND NET OPERATING CYCLE (NOC)
GOC is the time taken to convert cash into cash. FORMULA : GOC = RMSP + WIPCP + FGSP + ACP NOC is the equal to difference between GOC and APP. Lowe the value of NOC , better it is i.e. if the NOC is negative then it indicates that the firm had those number of extra days to pay to its creditors or suppliers. FORMULA: NOC = GOC APP The process of this conversion is as follows : CASH SUPPLIERS RAW MATERIAL WORK IN PROCESS FINISHED GOODS DEBTORS CASH
The value of FGSP and WIPCP is almost negligible because the main business of TCS is consultancy while the product development forms a small percentage of it. The average collection period is very small in comparison with accounts payable period. The accounts collection period signifies the average number of days of converting the receivables into cash so smaller it is better it is while the accounts payable period signifies number of days of making the payment to its creditors so higher the APP, better it is. For TCS accounts payable period is huge which is better for TCS. The values of NOC for TCS is negative which signifies the extra
number of days available for the firm to pay to its creditors. But a very high negative value can also signify the inability of the firm to pay to creditors which can increase the cost of borrowing for the firm.
3.3 SHARE PERFORMANCE
Figure 3-1 SHARE PERFORMANCE

0.4 0.3 0.2 0.1 0 % growth in SENSEX
Mar-08
Mar-11
Dec-08
Mar-07
Mar-09
Mar-10
Dec-11
Dec-07
Dec-09
Jun-10
Dec-10
-0.1 -0.2 -0.3 -0.4 -0.5
Mar-12
Jun-07
Jun-08
Jun-09
Sep-09
Sep-07
Sep-08
Sep-10
Jun-11
Sep-11
% growth in TCS
The above figure shows the performance of TCS with the SENSEX. The change in the performance is in tandem with the performance of the market. The sensitivity of the security with the market is given by beta, the value of beta for different years are as follows: Table 3-6 BETA Year 2007-08 2008-09 2009-10 2010-11 2011-12
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Beta 0.54 0.72 0.84 0.51 0.34

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The sensitivity of the security with the SENSEX has decreased over the period i.e. the effect of the movement of the SENSEX have decreases.
3.4 DIVIDEND POLICY
The company dividend policy is to declare dividend based on the performance of the company. TCS has been declaring dividend every year in the period considered for analysis. For the year 2010-11 the company has declared of Rs 8 for equity shares. For preference shares the dividend amounts to 11paise. The calculation of dividend of redeemable preference shares consist of two parts fixed and variable. The fixed dividend is 1 percent and the variable part of the dividend is 1 percent of the difference between the dividend declared for equity shares this year and the average of the dividend declared in the preceding three years. The fixed component is cumulative while the variable component is non cumulative. The final dividend will involve a cash flow of Rs 3189.14 equivalent to a payout of 42.13 percent of the unconsolidated profits of the company. For the year 2009-10 the company declared the dividend of Rs4 on equity shares and a special dividend of Rs 10 for the enhanced capital. For the preference share the dividend was 17 paise. For the year 2008-09 dividend of Rs 5 on the equity shares and 7 paise on the preference shares. For the year 2007-08 the company announced dividend of Rs 5 on equity shares and 7 paise on redeemable preference shares. The face value of both the equity shares and redeemable preference shares is Rs 1. The dividend payout decision should be such that if the company has started to give dividend it should continue otherwise it affects the market sentiments. It also affects the equity prices of the company and at times investors may think that the financial health of the company has deteriorated.
3.5 COST REVENUE STRUCTURE The major cost of the company is described as a percentage of revenue in the following table:
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Table 3-7 COST REVENUE STRUCTURE As % of revenue EMPLOYEE OPERATING EXPENSES SELLING AND 6.244609 7.158877 7.295348 7.253325 12.3564 11.07513 11.4008 11.97584 12.79328 2010-11 49.39812 2009-10 50.67881 2008-09 51.39119 2007-08 49.53716 2006-07 48.26564
ADMINISTRATION 5.700543
The major cost of the company is employee cost. The IT Companys main resource is the human capital and so the main expenditure is in same area. The second cost that is followed is operating expenses which majorly comprises of overseas expenses, travel, and other allowances. Then the next contributing factor is the marketing and selling expenses. The major revenue for TCS comes from Information Technology and consultancy services. The software products and license contributes 3.43% as per the annual report of 2010-11. The industry segment which contributes the most to revenue is banking financial services and insurance i.e. 44.28% in 2010-11 followed by telecom contributing 14.18%. 3.6 CAPITAL STRUCTURE AND FINANCING The capital structure of a company is defined by its debt to equity ratio. The value of this ratio is nearer to zero over the period considered which signifies that the companys debt is very less in comparison to the equity. The value of debt to equity ratio is given in the following table for the period considered. Table 3-8 DEBT EQUITY RATIO RATIO/YEAR 2010-11 DEBT EQUITY RATIO 0.0021 0.0024 0.0031 0.0017 0.0063 2009-10 2008-09 2007-08 2006-07
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The company finances its requirements through retained capital, secured and unsecured loans. Also share capital contributes to the liquidity of the firm. The major finances in case of secured loans are from entities other than banks and financial institution. The overdrafts from banks form a small percentage of the total secured loans. The unsecured loans are from banks and entities other than banks. In case of unsecured loans, the banks form a major percentage of loans.
3.7 CHALLENGES The Indian IT sector has been phenomenal in driving the nations economy onto a significant growth. Services contribute more than 50% to Indian GDP. The Indian IT services market is also estimated to remain the fastest growing in the Asia Pacific region with a CAGR of 18.6 per cent. Indias IT growth in the world is primarily dominated by IT software and services such as Custom Application Development and Maintenance (CADM), System Integration, IT Consulting, Application Management, Infrastructure Management Services, Software testing, Service-oriented architecture and Web services. There is an absence of the required training programs necessary in colleges that is a must to train the talent pool of students not only technically but also on soft skills. These also need to be opted for by offices. Majority of the IT companies in India have an export driven business model and majority of it is to the US, therefore the companies face a lot of troubles due to recession and subprime crisis occurrence in the US. The government needs to take steps to develop IT SEZs. This will lead to a reduction in the excess tax burden on these IT companies. Moreover the govt. should also relax norms for DTA (domestic Tariff Areas) to promote IT spending in the country itself at a lesser cost leading to development of the country. 3.8 GROWTH PLANS Some of the growth plans of TCS are as follows:
Tata Consultancy Services is planning to hire 50,000 people in FY 13. TCS will also go ahead with a wage hike of 8 percent on an average depending on their grades. Tata Consultancy Services, Indias top software services exporter, expects discretionary spending by overseas clients to rise from April. Discretionary spending refers to technology programs and applications that are desirable for global companies but not critical for businesses to carry on. This is considered as a healthy sign & viewed in positive form.
The Company chairman Ratan Tata announced a planned expenditure of Rs 2300 crores as capital expenditure for the expansion of TCS in the FY12. Tata Consultancy Services has moved an application to extend its LoP ( Letter of Permit) to avail SEZ tax benefits. This is mainly concerned with the operations which are to commence in Mihan-SEZ & in concern of current LoP which expires next month.
Although, the Bengal project of TCS has been closed down for a while now, TCSs subsidiary CMC Ltd is to extend another facility in the existing city of Rajarhat.
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4 PROJECT SPECIFIC ANALYSIS

4.1 PRINCIPLES OF INSURANCE There are certain principles of insurance which are common to all forms of the insurance. They are as follows: UTMOST GOOD FAITH
The principle of utmost good faith is also known as Uberrimae fidei in Latin. According to this principle the insurer must provide the complete information of the subject matter to the insured and the insured must disclose all the material facts regarding the subject matter of insurance. The liability of the insurer to pay for the losses if contingencies happen will become void if insured hides, misrepresents or omits any information which is required to be known to the insurer.
INSURABLE INTEREST
The insured must have insurable interest in the subject matter of the insurance. In all the insurance except marine insurance the insurable interest must be present both at the time of entering into contract and at the date of occurrence of loss and claim payment. Without the presence of insurable interest the contract is considered to be void.
INDEMNITY
This principle of insurance specifies that the insured should be placed in the same financial position which he/she has been in before the occurrence of loss. The amount of money paid to insured due to occurrence of the contingencies can be the assured or the actual loss, whichever is
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less. The compensation which is paid by insurer cannot exceed actual loss. The insured will be indemnified if the contingencies occurred in the period specified in the contract.
CONTRIBUTION
This principle applies when the insured enters into more than one insurance contract for the same subject matter. If the loss occurs then the claim payment will be proportionately divided among all the insurers.
SUBROGATION
This principle is corollary to the principle of indemnity. It applies to all contracts of indemnity. According to this principle the insurer get all the rights of the subject matter after insured is compensated for the losses. The insured can sell the damaged subject matter but can retain upto the value the insured has been compensated plus other expenses such as court fees which the insurer had paid in the proceeding and give the extra amount if any to the insured.
PROXIMATE CAUSE
The insurer will compensate the insured only if the reason of the occurrence of losses is proximate to the insured. If there are more than one reason for the occurrence of loss then the cause nearest to the insured peril will be considered and accordingly the insurer will compensate the insured.
4.2 TYPES OF INSURANCE
The insurance can be broadly divided into life and non life insurance. Non life insurance is also known as property casualty insurance or general insurance. Life insurance is a contract between the insurer and insured. The insurer will pay the amount of money, specified in the contract after the occurrence of the event mentioned. 4.2.1 LIFE INSURANCE
There are varied numbers of life insurance policies. Some of them are described below:
Whole life assurance: The insured pays premium till retirement or death to the insurer and insurer pays claim after the death of the insured. Endowment Policy: The insured pays premium for the term specified and insurer pays the claim if the event assured occurs during the term of the policy. The term is generally 15, 20, 25 or 30 years.
Childs Deferred Assurance: The insured will pay the premium up to the term specified and the claim will be paid at the option date which generally coincides with the 18th or 21st birthday of the child. If the insured survives till the option date, the policy can be continued after the option date or may be claimed on the option date.
Term Assurance: The premium is paid by the insured for the term specified and the claim is paid by the insurer if the insured dies before the expiry of the term. Annuity: The insured pays a specified amount of the money at the beginning of the policy and insurer will pay an amount of money till the death of the insured. It is of two types immediate annuity and deferred annuity.
Money back policy: The insured receives a series of payment till the expiry of the term. If the insured dies before the term expires, then the assured amount as per the policy is paid to the deceased. 4.2.2 GENERAL INSURANCE
The general insurance can be broadly classified as follows: Fire Insurance: It provides assurance against losses due to fire, lightening, or explosion. The fire insurance also covers damages against earthquake, riot, burst pipes, etc. It does not cover explosion due to boilers in the industry. Marine Insurance: It provides assurance against damages due to hull, cargo and freight. The perils can also include theft, fire, collision etc. Miscellaneous: It includes all the other types of insurance other than fire and marine insurance. Some of these insurance are motor insurance, health insurance, personal accident insurance, engineering insurance, liability insurance, error and omission insurance etc. Health insurance includes generally hospitalization expense for the
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diseases mentioned in the policy. Health and accident policies can be made for an individual or a group of people. 4.3 REGULATORY AUTHORITY There are various regulatory bodies in India. They are: Insurance Regulatory and Development Authority Tariff Advisory Committee Insurance Association Of India, Council And Committees Ombudsmen 4.3.1 INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY
IRDA (Insurance Regulatory and Development Authority) is the national regulatory body for the insurance industry in India. It was formed in 1999 by an act of Indian Parliament and is known as IRDA Act, 1999. This act was amended in the year 2002 to incorporate the emerging requirements of the country. In 2010, ULIPs (Unit Linked Insurance Plans) has been brought under the governance of IRDA by Government Of India (GOI). This authority comprises of ten members a chairman, five whole time members and four part time members. All are appointed by GOI. The expectations from IRDA are as follows: To protect the interest of policyholders To provide proper information to the common policy To work for the growth of insurance industry To ensure fair working of firms To provide speedy trail of the grievance of the customers Self regulation of day to day working of companies in the insurance industry with respect to requirements of regulation.
The duties, powers and functions of IRDA are provided in Section 14 0f IRDA Act,1999. The duty constitutes regulation, promotion and growth of the insurance and reinsurance business. The powers and functions of the Authority are as follows:
Registration, renewal, modification, suspension, or cancellation of certificate of registration To protect the interest of policy holders with respect to insurable interest, nomination by policy holders, terms and condition mentioned in the contract. To provide training and specify code of conduct for intermediaries. To promote and regulate the different firms of the industry To levy fees and other charges for the purpose of working of this act To inspect, audit, and investigate the insurers if required. To regulate the rate, advantages, terms and condition of the policies offered by insurance companies if not controlled and regulated by Tariff Advisory Committee. To define the form and manner in which the statement of accounts should be maintained To regulate pattern of investment and solvency margin of insurers. To settle the disputes between insurers and intermediaries To supervise Tariff Advisory Committee. To specify the percentage of premium to be used by insurer for promotion and regulation of business. It also specifies the proportion of business to be carried in rural and social sector 4.3.2 TARIFF ADIVSORY COMMITTEE
Tariff Advisory Committee is a regulatory body which regulates the rates, terms and conditions of the products offered by insurer. It specifically deals with the business of the general insurance. It can ask the companies for the disclosure of information with respect to rate, term and conditions of the contract. The failure of the insurance company to comply with this is regarded as breach of duty by the insurance company. The insurance companies have to pay fees to this committee which is 1 percent of the gross premium for the insurance companies, not exceeding 1 percent of premium for reinsurance companies and 1 percent of total premium for the facultative reinsurance companies. 4.3.3 INSURANCE ASSOCIATION OF INDIA
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Insurance association of India was established according to the provision of the Insurance Act, 1983. All the insurance companies are members of this association. The council has been divided into two parts life insurance council and non life insurance council. Both of this council has respective executive members. The executive members meet once in a year to advise the authority in setting the limits. The main functions of this body are as follows: Assisting the insurance companies in working efficiently with respect to providing service to policy holders. It also establishes the code of conduct and practices in carrying the business of life/non life insurance. To review and refer the matter to the authority if any insurer act in a prejudicial manner with the insured. To regulate the expenses of the insurance companies as per the Insurance Act and advice the authority on the ways to manage the expenses. To spread the awareness 4.3.4 OMBUDSMEN Ombudsmen was established in 1998 in accordance with the Redressal of Public Grievances Rules, 1998. The main functions of this body are the speedy trial of grievances of insured customers and settlement of claims. The aggrieved party can file a complaint with the Ombudsmen only if the trial regarding the same is not pending in any other court or through arbitration or any other judicial proceeding. Before filing a complaint, the person should make a representation of the problem to the insurer and if the insurer rejects or does not reply in the specified time then within a year the complaint should be registered. This forum is also empowered to deal with the matters regarding claim payment, amount of claim settlement and formation of terms and conditions of policies.
Ombudsmen at first tries to settle the grievance by interacting with both the parties but if the matter is not settled then it can award compensation which should not exceed the actual value of loss or rupees two million whichever is lower within three months. This body acts as a mediator and counselor.
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4.4 REGISTRATION OF A INSURANCE COMPANY For the formation of any insurance company, registration is necessary. The applicant should be a company registered under Companies Act, 1956. The name of the applicant should have the words insurance company or Assurance Company. The foreign direct investment cannot exceed 26%. The applicant should apply for requisition to IRDA in the required format. For different class of business, the applicant will have to file different requisition. After the acceptance of requisition, the applicant can apply for registration with the necessary documents deposit, capital structure and others which are specified for the grant of certificate of requisition. If the requisition is not accepted then the applicant can apply for fresh registration only after two years from the date of rejection of requisition. During the process of applicants registration if the authority finds that the rate, terms and conditions of the policy are not appropriate then it might ask the actuary to modify it. After the authority is satisfied with the performance of the promoters and directors and the planned infrastructure of the company, it will grant the certificate of registration. If the authority rejects the registration, then the applicant can approach central government for the reconsideration of application and the decision of the Central Government will be final. The reconsideration of application should be filed within thirty days from the date of rejection.
The registration can be renewed according to the specified procedure as mentioned by IRDA. The certificate of registration can be suspended or cancelled if it is found that the company has breached any of the rules and regulation specified by IRDA.
MINIMUM CAPITAL REQUIREMENTS
The minimum capital requirements of insurance and reinsurance companies are as follows: For life insurance companies Rs 100 crores For non life insurance companies Rs 100 crores For reinsurance companies Rs 200 crores
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The minimum paid up capital will be calculated excluding the deposit to be made under section7 and preliminary expenses which are incurred in the formation and registration of the company. There are certain restrictions on the equity holding which are discussed below: The foreign company cannot hold more than twenty six percent of paid up capital of any Indian insurance company. The aggregate holding will include holding by itself, by subsidiary company or by its nominees. The promoter of a company whether Indian or Foreigner will not be allowed to hold more than twenty six percent of the equity of a insurance company. The Indian promoters if holding more than 26% of share capital should divest the money in a phased manner as prescribed by central government If shares of nominal value exceeding 1% of the paid up capital is to be transferred under same management then prior approval of the regulator is mandatory. Also if more than 5% of paid up capital is transferred or if the transferee is banking or investment company and more than 2.5% of paid up capital is transferred then also approval of the regulator is necessary.
The insurance companies have to maintain a deposit with Reserve Bank of India which are discussed below. The deposit can be in the form of cash or approved securities. For life insurance - 1% of total gross premium written in India, in any financial year commencing 31st march 2000 and not exceeding Rs 10 crores For non - life insurance 3% of total gross premium written in India, in any financial year commencing 31st march 2000 and not exceeding Rs 10 crores For reinsurance Rs 20 crores If the risk has not expired, then the general insurance has to maintain reserves 50% for fire and miscellaneous, 50% for marine cargo, 100% for marine hull business for premium net of reinsurance during the preceding 12 months.
The solvency requirements for different insurance are as follows: Life insurance the minimum margin is Rs 50 crores. Depending on the risk and reserves, the percentage is specified by IRDA
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Non life insurance companies the solvency margin is max(20% of net premium income, 30% of net incurred claims, Rs 50 crores) 4.5 SOLVENCY II AND ITS AFFECT
SOLVENCY - II is the new regulation for the European Economic Area. It will replace the earlier regulation Solvency I which was introduced in 1973 and mainly focused on the capital margin based on a standard formula. But it was found that it did not reflect the true risk of the companies, focused on the liability side of balance sheet, minimal disclosure requirements and the reason for majority of the insolvencies was the lack of internal governance. These factors lead to formulation of Solvency II which has three pillars Quantitative Requirements Qualitative Requirements and supervision Supervisory reporting and public disclosure.
The first pillar concentrates on the calculation of technical provisions, investment management and solvency capital requirements. A company will not be allowed to operate if the solvency requirement falls below minimum capital requirement (MCR). It will allow the companies to use internal models which should result in better management of risk and capital requirements. The solvency capital requirement will be assessed differently for different types of risk. The second pillar of Solvency II deals with the governance of a company to ensure policyholder protection. The companies should do an analysis of their own risk and solvency and then inform the regulators about the results. The regulatory body will do a review to know compliance with the directive of Solvency II. The supervisor will ensure that the effective system is in place along with the analysis of policies, strategies and procedures followed by the companies.
The third pillar of the new legislation focuses on the transparency factor. The companies will be required to disclose the information to the public and regulatory body as per the requirements of the regulation. It will increase the insurers risk and capital transparency.
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Solvency II is considered to point a way for the other regulatory bodies of the world because it provides: Better solvency management on the basis of total balance sheet Quantitative risk management Increased market discipline
The implementation of this legislation is the most important concern to reap the benefit of such a development. One of the concerns in implementation includes the requirement of actuarial skilled employees. The other is the difference in preparedness of countries across European Economic Area. Also IT and infrastructure requirement may be challenging for the implementation. There will be requirement for some of the firms to undergo organizational and operational change for the effective implementation of the regulation. Solvency II will lead to better consumer information and transparency. It will increase the capital requirement which will reduce the risk of insolvency and improve consumer protection. It will also reflect in the better risk management by the companies and the innovation of internal models will help individual companies to better manage the risk specific to a company and also overall risk management. The official date of implementation is on 1st January 2014. The vote of European Parliament on the final version of Omnibus II directive is to take place on 10th September 2012.
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5 THEORITICAL FRAMEWORK/ CONCEPTUALIZATION
5.1 INSURANCE PRICING MODEL
The insurance pricing model explains and calculates the premium which is charged by the insurers from the insured. These models can be broadly classified into financial and actuarial models. The basic differences between these two are that the financial models give more emphasis to behavior of owners of insurance companies and the role that the financial markets play in determining the behavior of the investment made by these companies. The actuarial models do not give much emphasis to the behavior of the company owners beyond the assumption that these companies are risk averse. Some of the financial models are Capital Asset Pricing Model, Option Pricing Model. The actuarial models can be classified as ad hoc method, characteristic method and economic method. Some of the models under ad hoc method are expected value premium method, net premium principle, standard deviation premium principle, variance premium principle; some of the models under characteristic method are Wangs Principle, Proportional Hazards Principle; and some of the models under economic method are Escher Premium Principle, Wangs Principle, and Principle of Equivalent Utility. 5.1.1 CAPITAL ASSET PRICING MODEL
Capital Asset Pricing Model is basically a method for the calculation of expected rate of return. It is developed by Sharpe [1964], Litner [1965] and Mossin [1966]. But here it is used for the
calculation of premium. This model is studied with the help of a research paper Capital Asset Pricing Models with Default Risk: Theory and Application in Insurance by Yueyun Chen, Iskandar S. Hamwi and Tim Hudson. It is one of the competitive models used in the industry but this model does not take into consideration the insolvency risk of the insurance firms while calculating the premium. In the last two three decades the number of firms registering for the insolvency has increased so it is very important to consider such a risk factor while calculating the premium. The factors affecting insolvency of a firm are interest rate, economy of a country and world, inflation, amount of reinsurer ceded and size of the organization.
ASSUMPTIONS There are certain assumptions which are made before deriving the formula. They are as follows: The decisions of the investors in insurance industry are made solely on the basis of expected return and the variance of the investment. The insurer has a limited liability. Companies are exposed to insolvency risk The insurer will invest all its money in the financial market. Capital Asset Pricing Models holds true.
NOTATIONS USED There are various notations used while deriving the formula. They are described below: K Capital with the insurance firm P Total premium with which the policies are written X This is a random variable with a mean representing claims paid at the end of the period ri Rate of return on investment in the financial market ru Rate of underwriting V Denomination used for the net asset value of the insurance company Actual profit
Profit rate DERIVATION As V represent the net asset value of the company so logically it should be equivalent to the difference between the total investment (it also includes the return on the investment) and the claims which are paid. Hence it can be represented mathematically as follows: V = (K+P)*(1+ ri) X (1) A company can/ will register for the insolvency when there is going concern or when by the law of the country the company is declared to be insolvent. For the calculation of the premium using CAPM it is assumed that a company will be considered insolvent when the value of the net asset i.e. V is negative. Since the insurer has a limited liability so the actual profit of the company will be equivalent to difference of the net asset value and capital if the company is solvent while the actual profit will be equivalent to negative of capital if the company is insolvent. The same can be represented mathematically as follows: = -K if the company is declared to be insolvent (2) = V K if the company is not declared to be insolvent. (3) The value of net asset i.e. V can also be represented by max (0,-V); then the generalized formula for the actual profit can be represented as follows: = V- K + max (0, -V). (4) For later reference in this report max (0, -V) is represented by OV. OV is the option value of the insolvency of the firm. Hence, = V- K + OV (5) = /K. (6) So by dividing the equation (4) with K, the equation becomes:
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/K = V/K K/K +OV/K /K = V/K 1 + OV/K = V/K 1 + OV/K.. (7) Substituting the value of V from equation (1), the equation (7) becomes as follows: = [(K+P)*(1+ ri) X]/K 1 + OV/K = (K/K + P/K)*(1+ ri) X/K -1 + OV/K = (1+P/K)*(1+ ri) X/K -1 + OV/K = 1+ri+ P*(1+ri) /K X/K 1 + OV/K = ri+ P*(1+ri) /K X/K + OV/K = ri+ P/K + P* ri/K X/K + OV/K Rearranging the above equation = ri*(1 + P/K) + P/K X/K + OV/K = ri*(1 + P/K) + P/K (X/K)*(P/P) + OV/K = ri *(1 + P/K) + P/K (X/P)*(P/K) + OV/K = ri*(1 + P/K) + (P/K)*(1 X/P) + OV/K. (8) Substituting ru = 1- X/P in equation (8) = ri*(1 + P/K) + P*ru/K + OV/K = ri (1 + P/K) + P*ru/K + (OV*P)/ (K*P) = ri*(1 + P/K) + P*E (ru)/K + (P/K)*E (OV)/P.. (9) From the generalized financial model of Capital Asset Pricing Model, the value of expected rate of return can be written as follows:
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E () = rf+ [E (rm) - rf].. (10) Similarly, the equation for expected rate of return can be written as follows: E(i) = rf + i*[ E (rm) - rf ]..(11) Where = covariance of market and security/variance of market The combined form of beta can be written as: = (1 + P/K)* i + (P/K)*u + (P/K)*OV/P. (12) Substituting the value of beta from equation (12) to equation (11) E () = rf + [(1 + P/K)* i + (P/K)* u + (P/K)* OV/P]* [E (rm) - rf ]..(13) Equating (9) to equation (13) rf+ [(1 + P/K)* i + (P/K)* u + (P/K)* OV/P]* [E (rm) - rf ] = ri (1 + P/K) + P*E (ru)/K + (P/K)*E(OV)/P. (14) Now replacing ri in equation (14), rf + [(1 + P/K)* i + (P/K)* u + (P/K)* OV/P]* [ E (rm) - rf ] = [rf + i { E(rm) - rf }]*(1 + P/K ) + P*E(ru)/K + (P/K)*E(OV)/P u*[ E(rm) - rf ] + (OV/P)* [ E(rm) - rf ] = rf + E(ru) + E(OV)/P E(ru) = u*[ E(rm) - rf ] + (OV/P)* [ E(rm) - rf ] - rf - E(OV)/P.(15) It is also known that: E (ru) = 1 X/P. (16) Substituting equation (16) into equation (15) 1 X/P = u*[ E(rm) - rf ] + (OV/P)* [ E(rm) - rf ] - rf - E(OV)/P..(17) The value of u = -covariance(X, rm)/(P*var rm)
After substituting and rearranging the value of u in equation (17), the premium value is found to be: P = [ X {( E(rm) - rf)/var rm }*{-covariance (X, rm)} E(OV) + (OV)* {E(rm) - rf } ] /(1+rf) P = [X * covariance (X, rm) TVP] /(1+rf)(18) Where = {E (rm) - rf}/var rm TVp = E (OV) - (OV)* {E (rm) - rf} When there is no default risk: E (OV) = 0 OV = 0 Then the value of premium will be equivalent as follows: P = [X * covariance (X, rm)]/(1+rf) This model can be extended to determine the premium including the underwriting expense. This will lead to a better determination of fair premium. There are new notations which will be used for the derivation of extended model. These are described below: C Underwriting expense Proportion of surplus invested in the financial market The net asset value can be represented with underwriting expense mathematically as follows: V = {K + *(P C)}*(1 + ri) + (1 - )*(P C) X(19) The actual profit can be represented as follows: = V K + max (0, - V). (20) = /K.. (21) By dividing equation (20) with K, the following equation is obtained:
= V/K 1 + OV/K (22) Substituting V in equation (19) with equation (22) = [{K + *(P C)}(1 + ri) + (1 - )*(P C) X]/K 1 + OV/K = 1 + ri + {*(P C)*(1 + ri)}/K + {(1 - )*(P C)}/K X/K -1 + OV/K = ri
+
*(P C)/K + *(P C)* ri/ K + (P C)/K - *(P C)/K (X/P)*(P/K) +
(OV/P)*(P/K) = ri *{1 + *(P C)/K} + P/K C/K X/K + OV/K = ri *{1 + *(P C)/K} + P/K (C/P)*(P/K) (X/P)*(P/K) + (OV/P)*(P/K) = ri *{1 + *(P C)/K} + (P/K)*(1 C/P X/P) + (OV/P)*(P/K) (23) It is known that the rate of underwriting i.e. ru can be expressed mathematically as follows: ru = 1 C/P X/P..(24) Substituting equation (24) in equation (23), the equation becomes as follows: = ri *{1 + *(P C)/K} + (P/K)* ru + (OV/P)*(P/K) E () = E (ri) *{1 + *(P C)/K} + (P/K)* E(ru) + {E(OV)/P}*(P/K) (25) From the generalized financial model of Capital Asset Pricing Model, the value of expected rate of return can be written as follows: E () = rf + [E(rm) - rf ](26) Similarly, the equation for expected rate of return can be written as follows: E (i) = rf + i [E(rm) - rf ](27) Where = covariance of market and security/variance of market The combined form of beta can be written as: = i*{1 + *(P C)/K} + (P/K)* u + (OV/P)*(P/K). (28)
Therefore substituting equation (28) into equation (27) E() = rf + [i*{1 + *(P C)/K} + (P/K)* u + (OV/P)*(P/K)]*[ E(rm) - rf ]..(29) Substituting equation (27) in equation (25) E () = [rf + i*{E(rm) - rf}] *{1 + *(P C)/K} + (P/K)* E(ru) + {E(OV)/P}*(P/K)......(30) Equating the two equation (29) and (30) [rf+ i*{E(rm) - rf}]*{1 + *(P C)/K} + (P/K)* E (ru) + {E (OV)/P}*(P/K) = rf+ [i*{1 + *(P C)/K} + (P/K)* u + (OV/P)*(P/K)]*[E (rm) - rf] rf + i*{E(rm) - rf} + rf**(P C)/K +{ *(P C)/K}* i*{E(rm) - rf} + (P/K)* E(ru) + {E(OV)/P}*(P/K) = rf + i*{E(rm) - rf} +{ *(P C)/K}* i*{E(rm) - rf}+ (P/K)* u* {E(rm) - rf } + (OV/P)*(P/K)*{E(rm) - rf } rf**(P C)/K + (P/K)* E(ru) + {E(OV)/P}*(P/K) = (P/K)* u* {E (rm) - rf } + (OV/P)*(P/K)]*{E(rm) - rf } rf**(P C)/P + E(ru) + E(OV)/P = u* {E(rm) - rf } + (OV/P)*{E(rm) - rf } E(ru) = - rf**(P C)/P + u* {E(rm) - rf } - E(OV)/P + (OV/P)*{E(rm) - rf } E(ru) = - rf**(1 C/P) + u* {E(rm) - rf } - E(OV)/P + (OV/P)*{E(rm) - rf }..31 If c =C/P, the equation (31) becomes: E(ru) = - rf**(1 c) + u* {E(rm) - rf } - E(OV)/P + (OV/P)*{E(rm) - rf }..(32) It is also known that: E (ru) = 1 C/P - X/P.(33) Equating equation (32) with equation (33) 1 C/P X/P = - rf**(1 c) + u* {E(rm) - rf } - E(OV)/P + (OV/P)*{E(rm) - rf }.(34)
Substituting c = C/P in equation (34) 1 C/P X/P = - rf**(1 C/P) + u* {E(rm) - rf } - E(OV)/P + (OV/P)*{E(rm) - rf } 1 C/P X/P = - rf* + rf** C/P + u* {E(rm) - rf } - E(OV)/P + (OV/P)*{E(rm) - rf }(35) The value of u = -covariance(X, rm)/ (P*var rm) Substituting the value of u in equation (35) 1 C/P X/P = - rf* + rf** C/P + {-covariance(X, rm)/ (P*var rm)}* {E (rm) - rf} - E (OV)/P + (OV/P)*{E(rm) - rf } 1 + rf* = C/P + X/P + rf** C/P + {-covariance(X, rm)/ (P*var rm)}* {E (rm) - rf} - E (OV)/P + (OV/P)*{E(rm) - rf } P = [C + X +rf** C + {-covariance(X, rm)/var rm}* {E (rm) - rf} - E (OV) + OV*{E (rm) - rf}]/(1 + rf*) P = [C *(1 + rf*) + X * covariance(X, rm) TVp]/ (1 + rf*).. (36) Where = {E (rm) - rf}/ var rm TVP = E (OV)/P - (OV/P)*{E(rm) - rf } 5.1.2 OPTION PRICING MODEL Financial markets are ways to transfer risk. For the risk transfer, the price of the risk needs to be paid. The buyers of risk can be of two types Equity or fixed income investor Insurer
The first type of investor i.e. equity or fixed income investor will pay first then receive uncertain cash flow in future. The second type of investor i.e. insurer will get money first and then pay the uncertain cash flow in future.
The mechanism or flow of transaction of these two types of buyer of risk is significantly different. Also the behaviors of investors are different in response to exposure to risk. If the risk in reference to the cash flow increases keeping the price of risk constant then the price of the equity/ fixed income investors will decrease whereas in case of insurer the price will increase. In another case of change in risk with reference to price also both type of investor behave in an opposite manner. If the price of risk increases then the price of equity will decrease whereas the price of insurance will increase. This is the general behavior of the fixed income/equity investor and insurer.
The buying of insurance is similar to buying of call option on losses whereas the seller of insurance is similar to seller of call option on losses. The buyer of the call option has the right to exercise the contract whereas the seller is obliged to exercise the contract if the buyer chooses to do so and the buyer have to pay to seller a premium amount whether the buyer exercises the option or not. In similarity to insurance the buyer can ask for claim or losses if the contingencies mentioned in the contract occurs and the seller is obliged to pay for the losses in exchange of the premium received from the buyer of the insurance.
There are various models used for the option pricing. In this report Black Scholes model will be used for the pricing of insurance premium with the help of a research paper An Examination of Insurance Pricing and Underwriting Cycles by Madsen, Chris K., ME, ASA, CFA, MAAA Pricing Leader, GE Frankona Re. According to the Black Scholes Option Pricing Model, value of the exercise of the option is as follows: C = S*N (d1) K*e(-t)* N(d2)(37) Where C Price of the call option K Strike price of the option S Current price of the underlying asset t Time to expiration d1 = {ln(S/K) + (r + s2/2)* t}/s*t d2 = d1 s*(t) 0.5
r Risk free rate s Standard deviation of equity price returns over a period of time t = 1 The same model can also be used for the pricing of the premium of the insurance and accordingly the explanation of the notation will change. In the calculation of premium of the insurance the changes are as follows: C Price of the insurance K Losses S Current expected discount value t Time to expiration d1 = {ln(S/K) + (r + s2/2)* t}/sloss*t d2 = d1 sloss*( t) 0.5 r Risk free rate s Standard deviation of loss
The calculation of standard deviation is described as follows: Sloss = loss* is the coefficient of variation and it is described as standard deviation divided by mean. It can be represented as follows: = standard deviation/ mean The higher risk of cash flow will result in higher value of coefficient of variation. is the standardized market price of the risk
For the calculation of standardized market price of risk is as follows: st = t * t = st/ st is calculated from the returns of the index like S&P depending where the firm is situated and if it is listed in which exchange it is traded. It is calculated at the time t. is calculated over a period. It is ratio of the standard deviation of index and mean of the same index over a time period. The selection of index depend on the firm which is selected for the premium calculation, where this firms operation are situated and if listed in which exchange it is traded.
Mathematically it can be represented as follows: = index/index t = stindex/( index/index) For the determination of loss the equation is as follows: loss = (expected loss at time t* expected loss at time 0)/standard deviation of loss 5.2 DIVERSIFICATION OF RISK BY INSURANCE COMPANIES Insurance business has become more risky over the last decade. There has been reporting of two most expensive years of the insurance industry in 2011 and 2005. There has been a huge percentage of catastrophic losses in 2011 due to natural calamity and manmade causes. The losses almost amount to USD 350bn. The increasing risk due to catastrophic losses is more in case of property and casualty insurance than in life and health insurance. The inability of the company to meet huge claims may result in increase of frequency of insolvency registered by the insurance firms. To mitigate such risk, insurance companies use different instruments to diversify the risk. Also increasing competition and volatility of the value of assets contributes to reason for diversifying risk.
The instruments which are used for the reducing risk are hedging and reinsurance. Through these instruments the insurance companies diversify a portion of risk and the rest of the risk the companies retain with themselves. The percentage of diversification in different instruments will depend on the risk exposure of the firm, the size of the firm, the probability of occurrence of contingency and the amount of claim payment if the contingencies occur. 5.2.1 REINSURANCE Reinsurance is also type of insurance but the difference is that the policy holders of the reinsurance contract are the insurance companies. The main purpose of the reinsurance companies is to pool the risk of the insurer companies. Reinsurer indemnifies the insurer as per the terms of the contract. The contract specifies the type of insurance policy or a combination of insurance policy which reinsurer will indemnify. It also includes the amount reinsurer will pay as
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a claim if the contingencies occur. It can be on the proportional basis or excess basis. The proportional basis includes the claim payment by the reinsurer as a percentage of claim payment made by the insurer whereas the excess basis includes the claim payment by the reinsurer if the claim payment by insurer exceeds a certain specified mentioned as agreed by the two parties and mentioned in the contract. The reinsurer can enter into a reinsurance contract with another reinsurance company. This process is known as retrocession. Reinsurance companies are basically of two types: Direct writer Brokers
Direct writers are executives who their own employed account and produce business whereas brokers receive business through reinsurance intermediaries.
FUNCTIONS OF REINSURANCE
There are varied functions performed by reinsurance companies. They are described below: CAPACITY
The insurance companies cover a part of risk through reinsurer. This enables insurance companies to write more number of policies of both low risk and high risk. The policy written on higher risk will expose the insurance with manageable risk because of the facilitation of reinsurance. This will help the small insurance companies to compete with the larger insurers. Also it enables an insurance company to write the policies which are beyond the limit of a single insurer.
STABILIZATION
Reinsurance and insurance both help in the stabilization of economy against losses. Insurance directly helps the common people who are insured while reinsurance companies help the insurer to protect themselves against the financial losses and to manage the risk. For example in case of natural calamities like hurricane, tsunami or manmade calamities like war, terrorism the amount of losses can be huge and calamities can be forecasted with some probability so there are always chances of uncertainty. To meet these losses, funds required are also huge which a single firm may not be able to provide. So if the insurance firms have spread the risk to other companies via
reinsurance then a portion of financial loss will be met with the help of reinsurer. This enables the economy to be in a comparatively better stabilized state. The huge claim payments can be spread across a number of years which will reduce the liability of any reinsurance or insurance company in a year and hence will also increase the probability of financial stabilization.
TYPES OF REINSURANCE
There are various forms of reinsurance. Every form has some differences in the way they are written, the contingencies covered etc. Some of these forms are discussed in this section:
FACULTATIVE CERTIFICATES
It provides coverage to a one primary policy. The main function of this type of reinsurer is to provide additional capacity to the insurance. It mainly covers a part of specified policy which is written on the hazardous risk or unusual exposure limit.
FACULTATIVE AUTOMATIC AGREEMENT OR PROGRAM
This type of reinsurance provides coverage to many primary policies whose exposure to risk is homogeneous. It mainly provides additional capacity but it also performs one more important function of stabilization. It generally covers new or special programs. For example a reinsurance firm may provide some percentage of coverage on automobile umbrella business.
TREATY
It covers a specified part of the loss exposure of the insurance company. The set of insurance policies for which the insurance is written is specified in the contract and the coverage period is also specified.
TREATY PROPORTIONAL COVER
It covers a fixed proportion of the coverage provided by the insurance company to the policy holder. The main function of this form of reinsurance is financial risk management and provides capacity to the insurance companies.
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CATASTROPHIC COVER
It is used to cover the risk exposure of the property. The coverage can be on the basis of proportion or excess. It is used to cover the proportional or excess of the net claim position of the firm. These are some of the general forms of reinsurance. There can be many others forms with different variations in the instruments like funded reinsurance and non funded reinsurance. The funded reinsurance keeps a reserve with them to meet the claims payment and the non funded reinsurance does not keep the reserve funds. The premium which is applicable to the insurance companies in case of funded reinsurance is higher than in case of non funded reinsurance.
PREMIUM CALCULATION FOR REINSURANCE The reinsurance pricing are more customized than the primary insurance premium. The uncertainty is more in case of reinsurance pricing. The data mining is also difficult for the reinsurance. The availability of credible data for the cover being evaluated is difficult to obtain. Because of unavailability of information regarding the loss and exposure statistic, the premium volume is exposed to more degree of risk in reinsurance than primary insurance.
There are various pricing models used in the calculation of fair premium. Different companies may use different models. In this section one of these generalized models is discussed. The pricing model can be described in simpler terms but as it progresses various factors come into picture and then the simple equation can become complex. For the best possible precise calculation of premium, it should be measured with the help of different models and then choose the model which better represents the circumstances of policy written.
In this section of the report, Flat Rate Reinsurance Pricing Model will be discussed. PV will be used to denote present value, PC will be used to denote primary company and R will be used to denote reinsurer or reinsurance. The formula presented by this model is as follows: RP = (PVRELC)/ {(1 RCR RBF)*(1 RIXL)*(1 RTER)} Where RP Reinsurance premium PVRELC = PV of RELC = RDF * RELC
RDF reinsurance loss payment discount factor RELC reinsurance estimate of expected loss cost RL reinsurance loss E [RL] reinsurance aggregate expected loss RCR reinsurance ceding commission rate It is expressed as a percentage of RP RBF reinsurance brokerage fee It is expressed as a percentage of RP RIXL reinsurance internal expense loading factor It is expressed as a percentage of RP net of RCR and RBF RTER reinsurers target economic return It is expressed as a percentage of RP net of RCR, RBF and RIXL
This formula can be obtained using the following steps: STEP 1: The pure premium calculation on the basis of reinsurance estimate of expected loss cost and economic rate of return. The formula for this can be written as RPP = PVRELC/ (1 RTER). (38) Where RPP reinsurance pure premium Profit = RPP*RTER.. (39) Substituting equation (38) into equation (39) Profit = RTER * PVRELC/ (1- RTER) RTER is generally calculated on the basis of rate of return on equity depending upon the risk attached with the underwriting policy. RELC is calculated with the help of actuarial analysis of the losses in the past. For different forms of reinsurance RELC calculation will be different.
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STEP 2: Next is the consideration of internal expenses into the calculation of reinsurance pure premium. It includes underwriting and claims factor which are considered to be constant for a particular type of risk. The internal expenses are independent of commission and brokerage fee. RPP =PVRELC/ {(1- RTER)*(1- RIXL)} STEP 3: The brokerage fee and commission are generally expresses as a percentage of total reinsurance premium. (1 RCR RBF)*RP = PVRELC/ {(1- RTER)*(1- RIXL)} RP = PVRELC/ {(1- RTER)*(1- RIXL)*(1-RCR-RBF)} (40) 5.2.2 HEDGING
Hedging can be to use to protect insurance companies from interest rate risk, foreign exchange rate risk, credit and underwriting risk. These risks immediately affect the operations of a firm. The insurance companies can suffer from capital shocks by the fluctuation in asset value due to investment in risky asset and volatility of loss claims. The property and casualty insurer are exposed to volatile and vulnerable losses which if occurs affects the capital of the company. It can at times result in solvency of the entire company if the company has not effectively hedged its risk. Also during occurrence of catastrophic events, the stock market shows a downward trend which results in adverse situation for the property and casualty insurance companies. In such a situation if an insurance company tries to raise capital through market i.e. issuing equity or bond, the investors will invest money in this at a higher risk premium because of the outlook of the company and asymmetric information between managers of the company and investors. The cost of raising capital externally is expensive as per the pecking theory. Therefore it is important to use various sources of diversification.
The insurer uses derivatives for hedging. There are derivatives like Cat bonds derived from the subject matter of insurance. After the occurrence of natural disaster Hurricane Andrew and Northbridge earthquake, Catastrophe bonds were created and first traded in the mid 1990s. This bond is also known as Cat bonds. It developed because of the need of the insurers. When the net
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premium and the investment income on net premium was not enough to pay the claims, these bonds will mitigate the problem by providing capital to the firm. The cat bonds are issued by an insurance company through an investment bank and then sold to the investors via investment bank. These bonds are generally risky in nature and are long term instruments. If a catastrophic event mentioned in the contract occurs, the investor will have to pay principal to the sponsor/insurance company whereas if any catastrophic loss does not occur then the insurance company/sponsor pay a coupon to the investor. Hedge funds, asset managers and catastrophic oriented funds are the investor in these types of bonds. These bonds are generally high yield bonds.
The insurance company usually invests its money in a number of different instruments. Suppose an insurer invest in reinsurance and derivatives. The initial wealth of the company is w. The loss coverage underwritten is L with variance L2*L2. The premium loading charged is 1. Hence premium = (1+ 1)*L The insurance company manages a part of its risk through reinsurance at premium loading factor of 2. The fraction of loss reinsured is represented by . Premium of reinsurance = *(1+ 2)*L So the risk retained with insurer = L *L = (1-)*L Amount of asset available with the firm is represented by V0 V0 = w + (1 + 1)*L - *(1+ 2)*L The amount available is invested in capital market. Out of which a fraction is hedged which is represented by h. Hedged amount = h*V0 Also it is assumed that the rate of return from capital market is normally distributed with mean I and standard deviation I and the derivate instrument used for hedging gives a constant rate of return h. Since the risk is more in return from capital market than hedged derivative instrument, the rate of return should be more in case of capital market i.e. I > h.
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Consider that the hedging is costless, so the expected rate of return from investment can be expressed as: E [rate of return from investment] = h*V0* h + (1-h)*V0* I Standard deviation = {(1-h)*V0* I} 2 And, the expected rate of return from underwriting loss can be expressed as: E [rate of return from underwriting loss] = (1 + 1)*L - *(1+ 2)*L (1-)*L = 1*L - *2*L Standard deviation = {(1- )*L*} 2 Optimized problem can be expressed as follows: E [U (.)] = h*V0* h + (1-h)*V0* I + 1*L - *2*L (b/2)*[{(1-h)*V0* I} 2 + {(1- )*L*} 2]. (41) Differentiating equation (41) with respect to h: h = 1 - (I - h)/ (b*V0*I2).. (42) Differentiation of equation (41) with respect to : = 1 [{(1 + 2)* h} + 2]/ (b*L*L2) (43) Substituting equation (43) into equation (42): h = 1 {(I - h)* L2}/[b*I2*L2*{w + (1 2)*L} + I2*{(1 + 1)2* h + (1 + 2)* 2] (44) Differentiate equation (44) with respect to : h/ = - {(I - h)* (1 + 2)*L}/ (b*V0* I2) This differentiation will be negative since by definition I > h. it suggests that the reinsurance and hedging have a substitution affect. With the help of this model, the optimal fraction of reinsurance and hedge can be found but there will be error in the result because of some of the assumptions which are not practical. 5.2.3 SIDECARS The sidecars are financial structures similar to quota share agreement. This instrument was developed in response to hurricane and other catastrophes. These are limited purpose reinsurance companies. The insurer or reinsurer pay premium to investor in this financial structure who provides sufficient fund which is a fraction of the underwriting risk (loss and expense inclusive).
The capital of the sidecars is generally raised through equity and debt. The investors are generally hedge funds. The sidecars differ from reinsurance in terms of time period and lifetime, risk undertaken, number of cedants, contract terms and management group. In case of sidecar lifetime is generally 2 years or less, the risk undertaken is limited, number of cedants is one, the contract is agreed upon mutually so the capital is determined after calculating the risk and they do not have active management group. 5.3 FACTORS AFFECTING PREMIUM OF A INSURANCE POLICY The premium calculation is one of the important feature of insurance companies. Some of the factors affecting insurance premium are discussed below:
Information of Subject Matter:
The information about the subject matter will affect the policy. For example in case of car insurance model, value, year of purchase, number of kilometers travelled, frequency of driving and by whom, geographic location of driving are some of the factors to be considered while calculating premium. Whereas in case of life insurance some of the factors considered are age, type of illness if exist, severity of disease, gender, etc.
Analysis of historical data:
The pattern of occurrence of losses in the previous years forms a basis for the calculation of premium. It also helps in finding the probability of occurrence of an event. But in some cases like earthquake, storm, hurricane, etc the forecast of occurrence of event needs to be considered.
Rate of return on investment:
The insurance companies invest a proportion of earned premium in the financial market. If the investment return is positive, then a portion of huge claim if occurs can be contributed by this investment whereas if the investment return is negative then it will add to the losses increasing the cost for the company. In case of negative return if increase in cost is more than the capacity of firm then it may have to raise the premium.
Reinsurance premium:
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Insurance companies transfer a portion of risk to reinsurance in exchange of payment of premium so the reinsurance premium will affect the premium of primary policy holders.
Economic condition:
The economic condition of a country or world will affect each and every industry with different degrees. The economic slowdown will decrease income of an individual. So number of people who can afford insurance may decrease and as the volume will decrease the profitability of firm will be affected. This may result in the premium charged by insurance companies.
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6 DATA ANALYSIS AND DISCUSSION

The data is collected for the three companies ICICI LOMBARD GIC Ltd, New India Assurance Company Limited and National Insurance Company Limited. The background of the industry is discussed and the various excel sheet containing the data used for the estimation of premium are provided in the annexure. The data used for the calculation are as follows: Premium written Direct claims Initial capital Number of policies SENSEX closing price Risk free rate Yield on investment of the company
6.1 COMPANY INFORMATION 6.1.1 ICICI LOMBARD GIC Ltd. ICICI LOMBARD GIC Ltd is a joint venture of ICICI Bank Limited and Fairfax Financial Holding Ltd. The ratio of holding of the two companies - ICICI Bank Limited with 74% and Fairfax Financial Holding Ltd with 26%. The rating of the company is iAAA by ICRA. It offers various policies under general insurance in different sectors. The policies include fire, marine and miscellaneous while the policies analyzed are fire, marine and motor.
FIRE POLICY
The fire policy is of the following types:

Fire and Special perils policy
It covers the damages against fire, lightening, explosion and implosion, storm, tempest, flood, aircraft damage, riot, strike, malicious damage, terrorism, landslide/rockslide, overflow or bursting of pipes, apparatus and water tanks, missile testing, and bush fire. The property to be insured may be valued at market price or replacement value. This policy does not cover the first 10,000 or as applicable of the claims. It does not include the loss due to war and allied peril, theft, willful act, negligence, bullion, documents, currency, etc.
Consequential loss fire insurance policy:
It covers the loss of revenues due to occurrence of an event. The fire and special policy provides protection to material damage only. The fixed charges apply to a company whether it is operating or not. So it is important to protect the profitability of the firm through this type of insurance. It covers loss on account of net profit due to fire or any other peril specified. The premium is calculated on the basis of mainly indemnity period and estimated profit. It does not include the loss due to difference in the value of stock at the time of fire and after the fire and also third party claims and loss of goodwill.
Industrial all risk:
The insured should have a sum assured of Rs100 crores in one or more than one location of India. The industrial unit does not include petrochemical risk. It provides protection against fire and special perils, burglary, machinery breakdown, boiler explosion, electronic equipment breakdown along with the business interruption due to these factors. The sum assures is according to the restatement cost of the property and in case of business interruption according to the annual gross profit. The premium depends on the time period of the policy, risk management practices of the industrial unit, and history of claim on the peril insured.
MARINE POLICY:
The marine policies provided by ICICI Lombard are of different types covering varied perils. Some of these are discussed below: Marine Inland Transit Insurance Policy:
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It provides protection against loss (physical or damage) of the goods specified in the contract during transit. It is of two types- BASIC Risk Policy and ALL Risk policy. The basic risk policy covers losses due to fire, lightning, breakage of bridges, overturning of vehicles, collision with or by carrying vehicle except the exclusions. It does not cover loss due to willful misconduct, ordinary leakage, improper packing, delay, inherent vice, war, strike, riot and civil commotion. The all risk policy covers the losses of the insured property due to riot, fire, strike, terrorist activity, theft and accident within the geographical area specified in the contract. all risk policy excludes first Rs 5000 of the claim, loss due to war, civil commotion, wear and tear, electrical breakdown, theft from attended vehicles, detention or confiscation by customs or other
authorities and consequential loss. The premium depends on insured property, cargo, time period, distance, and analysis of the past claims.
MOTOR INSURANCE POLICY The motor insurance can be broadly divided into two types of insurance two wheeler and four wheeler. These are discussed below: Four wheeler insurance:
The policy covers losses due to natural calamities, fire, explosion, storm, hurricane, flood, earthquake, tempest, cyclone, hailstorm, frost, landslide, rockslide, etc. The loss due to manmade reasons may be included like theft, riot, strike, accident by external means, damage in transit by rail, road, inland, lift, elevator or air transport. The personal accident covers the loss to an individual driver up to Rs 2 lakhs while travelling or mounting and dismounting from the car. It also covers the loss for the third party liability due to accidental damage to an individual which includes permanent injury or death or loss to the nearby property. This policy does not include wear and tear, electrical breakdown and depreciation loss.
Two wheeler insurance:
The scope of cover and exclusion are same as four wheeler. The sum here includes the selling price minus the yearly depreciation and if any part is included in the list then its market value will be added to the insured declared value.
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Besides the policies mentioned above there are some policies which are mentioned in brief.
HEALTH POLICY
The health policy covers the medical expenses incurred in hospital in excess of Rs 4000 and if admitted for more than 24 hours for the named reasons. It also covers medical expenses incurred on advanced technological surgery specified in the contract. Medical expenses include room charges, doctors/surgeons fee, medicines bill, etc. The pre existing disease can be covered after four continuous year of coverage with the company. The policy does not cover the illness during the first 30 days except because of accident. The exclusion can be divided into permanent and temporary for the first two years. There are various health cover policies like family protect premier, heath advantage, critical care, personal protect and health care plus.
PERSONAL ACCIDENT POLICY
The personal accident insurance policy covers the losses against death or permanent injury because of an accident. There is optional coverage for accident hospitalization expense and daily allowance. Also there is customized cover in the range of Rs 3 lakhs, Rs 10 lakhs, Rs 15 lakhs, Rs 20 lakhs, Rs 25 lakhs. The policy offers coverage for different types of accidents like road, rail accidents, natural calamities, and terrorism. Health check up is not required for this policy. This policy will not cover losses against death or permanent injury due to suicide, intoxicating drug or liquor, ventral disease or insanity, arising from the breach of law, childbirth, nuclear weapon induced treatment, war, invasion, riot, seizure, capture or arrest.
ENGINEERING INSURANCE POLICY
Engineering insurance policy covers risk due to machinery breakdown, engineering transit, dismantling, erection and accident due to electronic equipment, mobile work or construction work. The various policies offered by ICICI under this line of business are boiler and pressure
plant insurance policy, electronic equipment insurance policy, machinery breakdown insurance policy, erection all risks, machinery loss of profits insurance policy, contractors all risk policy, contractors plant & machinery.
AVIATION INSURANCE
Aviation insurance covers losses due to operation of the aircraft. The different types of policies provided under this are property liability insurance, combines single insurance, passenger liability insurance, ground risk hull insurance in motion and not in motion, and inflight insurance. 6.1.2 NEW INDIA ASSURANCE New India Assurance is the largest company in the general insurance sector in terms of gross premium collection inclusive of foreign operation. It is one of the leading public sector companies. After GIC was declared to be an independent reinsurer, the four subsidiaries of the GIC were converted into independent public sector companies. The policies offered by this company in different lines of business are fire, marine and miscellaneous. The miscellaneous policies include motor, workmens compensation, aviation, employers liability, personal, health and others. Some of them are analyzed and discussed as follows:
MOTOR POLICY
This policy covers all vehicles which run on public roads like car, scooter, motor trade, scooters and motorcycles. The insurance is compulsory for the vehicles running on public roads as per Motor Vehicles Act, 1988. There are two types of cover under this policy Liability only policy
It covers the damage to third party in case of permanent injury or death and damage to property. For the third party injury the policy cover is unlimited while for the third party property cover is up to Rs 7.5 lakhs except for scooters/motorcycles the cover is Rs 1 lakh.
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Package Policy
It covers the damage to the insured vehicle along with liability only policy covers. The package policy covers the damage to the insured vehicle due to natural calamities, fire, explosion, storm, hurricane, flood, earthquake, tempest, cyclone, hailstorm, frost, landslide, rockslide, etc. The loss due to manmade reasons may be included like theft, riot, strike, accident by external means, damage in transit by rail, road, inland, lift, elevator or air transport. This policy does not include losses due to wear and tear, consequential loss, driving with invalid license, war, use of vehicle otherwise than in accordance with `limitations as to use '.
The premium is calculated on the basis of the rating of the vehicle, geographical area, age of the vehicle, analysis of past data and type of vehicle.
MARINE POLICY
This policy can be broadly classified as marine cargo and marine hull. These are discussed below: MARINE CARGO
It provides protection to goods, freight and other interest while being transported by water. The transportation can be inland, import and export. There are various types of policies under this: FOR INLAND TRANSPORTATION a) Specific policy it covers the loss for a specific transit. b) Open policy it covers the losses for the regular transits over the same route and over time period specified. c) Special declaration policy - this policy is to be taken if the insured value exceeds Rs 2 crores. d) Multi transit policy it covers various transits including storage and processing during time period specified. FOR IMPORT/EXPORT a) Specific policy it covers the losses for a specific import/export consignment. b) Open cover it covers the losses of the regular consignments made over the time period specified. The insurance company is to be informed every time a consignment is made.
c) Custom duty cover it covers the loss of custom duty if the goods arrive in a damaged form.
MARINE HULL
It covers the damage to ships, tankers, bulk carriers, smaller vessels, fishing boats and sailing vessels. It also covers risk related to vessels, floating dry lock, jetties and ship owners including hull and machinery freight, disbursements, protection and indemnity liabilities, charters hire and disbursements, ship repairers liabilities, ship breaking risk, etc. This policy provides coverage in case of the following types of risk: a) Peril of water to property: The coverage of losses to the property due to fire, explosion, stranding, sinking, overturning, derailment, theft, collision, jettisons, piracy, breakdown of nuclear installations and earthquake. It does not include losses due to malicious act, radioactive contamination, war, strike, civil commotion, insolvency or financial default. b) Comprehensive port package: It covers losses due to physical damage, third party liability, terrorism, business interruption, H&M cover for vessels. It does not include wear and tear, error in design, mechanical or electrical breakdown. c) Oil and energy risk: It covers damages due to offshore/onshore construction, operation, exploratory drilling, seismic survey, under water pipeline, etc.
FIRE POLICY
This policy covers damages due to against fire, lightening, explosion and implosion, storm, tempest, flood, aircraft damage, riot, strike, malicious damage, terrorism, landslide/rockslide, overflow or bursting of pipes, apparatus and water tanks, missile testing, bush fire. The perils which are not covered under this policy are War and allied peril, ionizing radiations and contamination by radioactivity and pollution or contamination.
AVIATION INSURANCE POLICY
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The various policies offered by New India for the losses related to aviation industry are Hull all risk policy, Spares all risk policy, hull spare war risk, hull deductible, aviation personal accident policy, loss of license insurance. Hull all risk policy is suitable for small aircrafts. Spares all risk policy provides protection against losses to spares, tools, equipment and supplies owned by insured or for which the insured is responsible. Hull / spares war risk insurance covers losses due to war, invasion, civil war, rebellion, revolution, strike, riots and civil commotion. Aviation personal accident insurance includes coverage for the insured person in case of injury, death or disablement due to accident while mounting, dismounting or travelling in aircraft in the specified geographical area. Loss of license insurance covers the financial loss due to cancellation or suspension of license on medical grounds. 6.1.3 NATIONAL INSURANCE COMPANY LIMITED National Insurance Company Limited was established in 1906 and offers its services in South Asia. It was a subsidiary of GIC but after the GIC being converted to reinsurance company, it has been announced that the four subsidiaries of GIC will act as an independent organization. It is rated as AAA by CRISIL. It offers services in fire, marine and miscellaneous insurance. Some of the policies which are analyzed are discussed below:
MARINE POLICY There are mainly two types of marine policy marine cargo and marine hull. These are described below: MARINE CARGO
It covers the losses or damages due to peril of water. The coverage starts from the moment, the goods leave the warehouse or the name of the place mentioned in the policy. The policy continues until it reached the consignee. If the goods are stored in between other than the purpose of redistribution or reallocation then the policy is considered to be invalid. The cover for the marine insurance are provided under three clauses- institute clause A, institute clause B, and institute clause C.
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Institute clause C covers the losses due to fire, explosion, standing, grounding, capsizing, overturning, derailment, collision, jettison and discharge of cargo at the point of distress. Institute clause B covers the losses due to earthquake, volcanic eruption, lightening, water damage, total loss of package lost or dropped during loading or unloading. There is no coverage for theft, shortage or non delivery in clause B. Institute clause A includes coverage mentioned in ICC B and ICC C along with breakage, scratching, chipping, denting, brushing, theft, malicious damage, non delivery, all water damage including rain damage. There are some peril which are not included like willful misconduct, wear and tear, ordinary leakage, ordinary loss in weight or volume, problem with packaging and preparation of packaging, inherent nature of subject matter, any loss caused due to delay, insolvency or financial default, strike, civil commotion and war.
MARINE HULL
This policy covers the losses for all types of ship, bargers, dregers, fishing trawlers, yatch, pleasure boats, speed boats, etc. There are various types of hull insurance Hull insurance, Ship Owners liability, Repairers legal liability, Ship building policy. Ship owners liability covers the liability to cargo by reason of general average, salvage and expenses incurred for preserving and safe guarding the property not recoverable from cargo insurers. Repairers legal liability includes the covers for the liability of repairers in case of ships of third parties taken for repairs. Ship building policy includes the cover for risk involved in construction of ship.
FIRE INSURANCE The fire insurance basically includes two types Fire and allied peril insurance and Consequential loss due to fire. Fire and peril insurance covers the losses to property against fire, lightening, riot, strike damage, atmospheric disturbance, earthquake fire and shock explosion, impact damage, aircraft damage and malicious damage. Consequential loss insurance covers for loss due to gross profit, increased cost of working, standing charges as a result of business interruption.
6.2 GROSS PREMIUM GROWTH RATE
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The rate of growth of premium have decreased for ICICI Lombard GIC Ltd and National Insurance Company Ltd from 2006-07 to 2007-08. The economy of the countries has also not performed well during this period. One of the reasons that can be attributed for the slowdown is the economic slowdown due to the subprime crisis. The rate of growth for National Insurance Company Limited has recovered but for ICICI Lombard has decreased till 2009-10 and then started recovery. The rate of growth for New India Assurance has been steady over the years.
Figure 6-1 GROSS PREMIUM GROWTH RATE

100 80 60 ICICI 40 20 0 2006-07 -20 2007-08 2008-09 2009-10 2010-11 GROSS PREMIUM GROWTH RATE NATIONAL NEW INDIA
6.3 COMBINED RATIO It is a measure of profitability of an insurance company. It is an addition of claims and expense ratio. The claims ratio is a proportion of claims to revenue earned from premiums and the expense ratio is a proportion of operating cost to revenue from earned premium. The value of combined ratio above 100 percent signifies that money outflow is more than inflow while below 100 percent signifies the company is making underwriting profit.
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Figure 6-2 COMBINED RATIO

140 120 100 80 60 40 20 0 2006-07 2007-08 2008-09 2009-10 2010-11 COMBINED RATIO ICICI NATIONAL NEW INDIA
The performance of the companies considered have been decreasing since 2006-07 but started to recover from 2009-10 for ICICI Lombard. For National Insurance Company Limited the performance recovered in 2008-09 but again decreased in 2008-09 and again alternatively recovered and decreased for the time period considered. While for New India Assurance the recovery started in 2009-10 and continued in 2010-11.
6.4 AVAILABLE SOLVENCY MARGIN TO REQUIRED SOLVENCY MARGIN
The available solvency margin to the required margin is more than 1 signifies that the extra liquidity available with the company to meet the requirements of the firm while less than 1 signifies that the company is not able to meet the solvency requirements. The values of all the companies is more than 1 but have decreased in the post crisis period.
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Figure 6-3 AVAILABLE SOLVENCY MARGIN TO REQUIRED SOLVENCY MARGIN RATIO

4 3.5 3 2.5 2 1.5 1 0.5 0 2006-07 2007-08 2008-09 2009-10 2010-11 Available Solvency Margin Ratio to Required Solvency Margin Ratio ICICI NATIONAL NEW INDIA
6.5 ANALYSIS OF ESTIMATED PREMIUM The premium per policy is estimated on the basis of past years data. The model used for calculation is capital asset pricing model with the help of option value pricing. The premium is estimated for different policies.
Table 6-1 ESTIMATED PREMIUM PER POLICY FOR YEAR 2011-12

ESTIMARED PREMIUM PER POLICY FOR YEAR 2011-12 PERSON AL MARI MOT AVIATIO ENGINEERI ACCIDE HEALT FIRE NE OR N NG NT H 67.84 83.43 2.13 1046.89 318.70 7.71 7.63
ICICI NEW INDI A NATI ONA L
6.27
6.96
1.12
671.26
9.18
1.27
8.24
2.30
5.08
The premium estimated with this model has certain limitations. These limitation are as follows:
The assumptions of the model are not practical The premium is calculated with the help of previous years data and financial market changes but the correlation between the policy and market for different policies considered is not significant which is presented in the table below: TABLE 6-2 POLICYS CORRELATION WITH MARKET
POLICY'S CORRELATION WITH MARKET PERSON AL MARIN MOTO AVIATIO ENGINE ACCIDEN HEALT FIRE E R N ERING T H 0.0018 0.0010 0.0007 0.0013 0.0009 0.0015 0.0006 0.0002 0.0002 0.0000 -0.0003 0.0000 -0.0002 0.0030 -0.0026 0.0025
ICICI NEW INDIA NATIO NAL
Since the correlation value is not significant so the value estimated may have an error. The availability of data as public disclosure is limited. 6.5.1 COMPARISON OF ESTIMATED PREMIUM AND ACTUAL FOR YEAR 201011 There is a significant variation in almost all the policies between the calculated values and actual values. The following table presents the estimated and actual value for different policies.
Table 6-3 COMPARISON OF ESTIMTED AND ACTUAL PREMIUM FOR FIRE AND MARINE INSURANCE
ICICI NATION AL NEW INDIA IBS Hyderabad
FIRE POLICY FOR MARINE POLICY FOR YEAR 2010-11 YEAR 2010-11 ESTIMATE ESTIMATE D ACTUAL D ACTUAL 68.16 113.69 83.27 144.43 2.33 5.95 9.76 13.00 5.03 6.74 19.31 20.64 Page 79
Table 6-4 COMPARISON OF ESTIMATED AND ACTUAL PREMIUM FOR ENFINEERING AND PERSONAL ACCIDENT INSURANCE
PERSONAL ENGINEERING POLICY ACCIDENT POLICY FOR YEAR 2010-11 FOR YEAR 2010-11 ACTUA ESTIMATE ACTU ESTIMATED L D AL 311.64 217.33 8.18 2.58 10.27 45.19 1.20 2.38
ICICI NEW INDIA
Table 6-5 COMPARISON OF ESTIMATED AND ACTUAL PREMIUM FOR MOTOR AND AVIATION INSURANCE
ICICI NEW INDIA
AVIATION POLICY FOR YEAR 2010-11 ESTIMATE ACTU ESTIMATED ACTUAL D AL 1.86 3.58 502.56 6090.53 1.14 2.51 769.74 469.12
MOTOR POLICY FOR YEAR 2010-11
Table 6-6 COMPARISON OF ESTIMATED AND ACTUAL PREMIUM FOR HEALTH INSURANCE
HEALTH POLICY FOR YEAR 2010-11 ESTIMATED ACTUAL 6.381794 7.32
ICICI NEW INDIA
16.20 12.51
6.5.2 FIRE POLICY Table 6-7 FIRE POLICY - PREMIUM PER POLICY FIRE POLICY - PREMIUM PER POLICY (Rs in 000s) EST 12 ICICI 67.84 112010-11 2009-10 2008-09 2007-08 2006-07 2005-06 113.69 107.36 95.86 114.15 113.59 117.98
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NATIONAL NEW INDIA
2.30 6.27
9.76 13.00
7.46 12.05
6.48 10.17
3.22 10.75
7.59 11.56
6.72 11.34
Figure 6-4 FIRE POLICY - PREMIUM PER POLICY

140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 EST 11- 2010-112009-102008-092007-082006-072005-06 12 FIRE POLICY - PREMIUM PER POLICY ICICI NATIONAL NEW INDIA
The premium per policy for New India and National Insurance is almost constant while for ICICI Lombard there is variation. The premium per policy shown here is cumulative value for each type under fire insurance. The higher value of ICICI may be because of more number of policies corresponding to higher risk so their premium will be high.
6.5.3 MARINE POLICY Table 6-8 MARINE POLICY - PREMIUM PER POLICY MARINE POLICY PREMIUM PER POLICy 2010EST 11-12 ICICI
IBS Hyderabad
200910 155.71
200809 216.71
200708 199.39
200607 115.44
200506 78.01
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11 144.43
83.43
NATIONAL NEW INDIA
5.08 6.96
19.31 20.64
16.06 17.49
38.30 14.42
15.66 13.26
17.72 9.32
14.32 9.23
Figure 6-5 MARINE POLICY - PREMIUM PER POLICY

250.00 200.00 150.00 100.00 50.00 0.00 2010-11 2009-10 2008-09 2007-08 2006-07 EST 11-12 2005-06 ICICI NATIONAL NEW INDIA
MARINE POLICY - PREMIUM PER POLICY
The marine policy value of premium per policy for New India and National Insurance is much lower than the value of premium per policy for ICICI Lombard. One of the reasons of this could be because of the difference of the risk coverage proportion of different policies under marine insurance policy. 6.5.4 MOTOR POLICY Table 6-9 MOTOR POLICY - PREMIUM PER POLICY MOTOR POLICY PREMIUM PER POLICY (Rs in 000s) 201020092008200720062005EST 11-12 11 10 09 08 07 06 2.13 3.58 3.97 4.61 5.21 4.89 5.06 1.12 2.51 2.69 27.16 0.74 3.14 3.00
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ICICI NEW INDIA

IBS Hyderabad
Figure 6-6 MOTOR POLICY - PREMIUM PER POLICY

30.00 25.00 20.00 15.00 10.00 5.00 0.00 2010-11 2009-10 2008-09 2007-08 2006-07 EST 11-12 2005-06 ICICI NEW INDIA
MOTOR POLICY - PREMIUM PER POLICY
In 2008-09 the premium per policy for New India have shown a peak while in rest of the period considered the value is much lower. There is a wide variation in the value for New India while for ICICI Lombard the increase in the value of premium per policy is steady over the period considered. Compared to the other policies of ICICI Lombard considered for analysis, the value for motor insurance is much lower than fire and marine insurance.
6.5.5 AVIATION INSURANCE POLICY
Table 6-10 AVIATION POLICY - PREMIUM PER POLICY

AVIATION POLICY - PREMIUM PER POLICY EST 1112 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 1046.89 6090.53 3391.79 2646.85 2518.66 3959.14 2337.79 671.26 469.12 1355.69 1290.44 1673.14 1800.05 3019.31 3.90 38.55 -23.26 -15.28 6.84 105.77 46.61
ICICI NEW INDIA RATE OF GROWTH OF SENSEX
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Figure 6-7 AVIATION POLICY - PREMIUM PER POLICY

7000.00 6000.00 5000.00 4000.00 3000.00 ICICI 2000.00 1000.00 0.00 2010-11 2009-10 2008-09 2007-08 2006-07 EST 11-12 2005-06 NEW INDIA
AVIATION POLICY - PREMIUM PER POLICY
The value of ICICI Lombard is higher than New India in the aviation insurance policy. The values have decreased over the years. The estimated value for ICIC has decreased significantly while for New India the value has increased. The reason for decrease is the limitation of the model or the premium may not be sensitive to the movement of index. 6.6 CONCLUSION The premium estimated with the help of CAPM based Premium calculator has shown a significant variation with the actual value for the year 2010-11. The correlation of premium with the financial market is also not significant which may be one of the reasons for the distorted estimated value. It can be said that the premium is not correlated with the financial market. None of the insurance companies have been listed in the financial market till 2012 because of which the value of correlation may be insignificant. The value of premium per policy is estimated for the year 2011-12. The model used by different companies for premium calculation is different so the degree of variation of estimated value with actual value is different for different companies.
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The combined ratio have improved, the growth rate of premium have started to recover and the available solvency margin to required margin have decreased for the three companies considered for analysis ICICI Lombard GIC Ltd. , New India Assurance Company Ltd and National Insurance Company Limited. The premium per policy is estimated for these companies. 6.7 RECOMMENDATION
The estimated premium is calculated with the help of analysis of past years loss and premium data along with the variation in financial market. But none of the insurance companies are listed in India in the financial market, so after the listing of the companies the estimated premium should be calculated and compared with the actual for better results. The index considered does not have any insurance companies and the industries with which the index have been formed may not have significant effect on the insurance industry, so a new index of the industries which effect the insurers may be used for the estimation purpose.
7 REFERENCES
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7.1 WEBSITES
http://rbi.org.in/scripts/NotificationUser.aspx?Id=7136&Mode=0 http://rbi.org.in/scripts/NotificationUser.aspx?Id=7136&Mode=0 http://www.slideshare.net/sgisave/copyright-act-1957-3648438 http://profit.ndtv.com/News/Article/india-to-grow-at-6-9-in-2012-13-says-imf-world-economicoutlook-302176 http://legalonline.blogspot.in/2011/03/copyright-protection-for-computer.html http://www.economywatch.com/india-it-industry/structure.html http://www.nielit.in/jsp/it_services.htm http://blog.nasscom.in/nasscomnewsline/2008/09/the-indian-software-products-industrypackaging-a-success-story/ http://en.wikipedia.org/wiki/Software_industry http://en.wikipedia.org/wiki/Information_technology_in_India http://resources.ipott.com/softtrend/2009/12/it-services-will-now-be-on-demand/ http://www.cert-in.org.in/s2cMainServlet?pageid=GUIDLNVIEW02&refcode=GuidelineCISG2004-04 http://en.wikipedia.org/wiki/Digital_Society_Day http://iacits2006.iitm.ernet.in/presentations/mitra.pdf http://www.moneycontrol.com/stocks/top-companies-in-india/market-capitalisationbse/computers-software.html http://www.rediff.com/business/slide-show/slide-show-1-top-20-it-companies-inindia/20110803.htm http://www.moneycontrol.com/stocks/top-companies-in-india/market-capitalisationbse/computers-hardware.html http://zeenews.india.com/business/news/economy/retrospective-taxation-not-desirableicrier_45993.html http://en.wikipedia.org/wiki/Intellectual_property http://www.icra.in/Files/ticker/ICRA%20Macro%20and%20Policy.pdf http://online.wsj.com/article/BT-CO-20120208-705911.html http://itbizcharts.blogspot.in/2012/02/india-it-bpo-industry-2012-slow-growth.html http://www.nicl.com.pk/marine_hull.aspx http://www.nicl.com.pk/fire-overview.aspx http://www.investopedia.com/terms/c/combinedratio.asp http://www.nationalinsuranceindia.com/nicWeb/nic/PolicyServlet?id=9999&name=2101.htm http://en.wikipedia.org/wiki/National_Insurance_Company_Limited http://www.newindia.co.in/Content.aspx?pageid=12 http://www.newindia.co.in/Content.aspx?pageid=8 http://www.newindia.co.in/Content.aspx?pageid=59
https://www.icicilombard.com/about-us/why-icici.html https://www.icicilombard.com/motor-insurance/two-wheeler.cms https://www.icicilombard.com/motor-insurance/car.cms https://www.icicilombard.com/business-insurance/fire-special-perils.html https://www.icicilombard.com/business-insurance/fire-consequential-loss.html https://www.icicilombard.com/business-insurance/industrial-all-risks.html https://www.icicilombard.com/business-insurance/Marine-insurance.html https://www.icicilombard.com/business-insurance/marine-export-cargo.html https://www.icicilombard.com/business-insurance/marine-inland-transit.html http://en.wikipedia.org/wiki/Insurance http://en.wikipedia.org/wiki/History_of_insurance http://en.wikipedia.org/wiki/Optional_federal_charter http://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo4&mid=2 http://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/insurancebriefing/Documents/KPMG_Insurance%20Briefing_Evolving%20insurance%20regulation.pdf www.forc.org/public/articles/521.pdf http://siteresources.worldbank.org/FINANCIALSECTOR/Resources/KeynoteAddress_June2_Ro lfHuppi.pdf http://www.authorstream.com/Presentation/niti.nandu-169311-principles-insurance-educationppt-powerpoint/ http://kalyan-city.blogspot.in/2011/03/principles-of-insurance-7-basic-general.html http://www.iba.ie/development2009/index.php?option=com_content&view=article&id=76&Item id=167 http://en.wikipedia.org/wiki/Insurance_Regulatory_and_Development_Authority http://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo1332&mid=1 .9 http://www.nishithdesai.com/Research-Papers/Insurance.pdf http://www.lexuniverse.com/insurance/india/Insurance-Association-of-India.html http://www.lifeinscouncil.org/industry-information/regulations http://media.swissre.com/documents/AIR_April2012_Solvency.pdf http://www.swissre.com/rethinking/solvency/International_perspectives_on_solvency_modernisa tion_Europe.html http://www.swissre.com/rethinking/solvency/solvency_ii_the_clients_perspective.html http://www.swissre.com/rethinking/solvency/ http://www.swissre.com/clients/insurers/solvency/ http://atos.net/NR/rdonlyres/64FD9144-6EF1-4E0F-A1E9BB7F937EF937/0/WhitePaperfinalv2.pdf
http://www.finsight-media.com/Brochure/Alok%20Tiwari-Aptivaa.pdf http://www.google.co.in/url?sa=t&rct=j&q=what+is+solvency+ii+ppt&source=web&cd=1&ved =0CDwQFjAA&url=http%3A%2F%2Fwww.phillyactuaries.org%2FPresentation%2520Archive %2F201005%2FAn%2520Introduction%2520to%2520Solvency%2520II.ppt&ei=EZWT4KFLsrZrQeX35zVDQ&usg=AFQjCNEwyQvZoSjDhkR_iXTDfeGFLCDPag http://www.fsa.gov.uk/solvency2 http://en.wikipedia.org/wiki/Catastrophe_bond http://en.wikipedia.org/wiki/Reinsurance_sidecar#Sidecar_investments http://www.appuonline.com/insurance/insurance-types.html http://www.irdaindia.org/iac/whatisgeneralinsurance.htm http://www.lloyds.com/The-Market/Communications/Regulatory-CommunicationsHomepage/Regulatory-Communications/Regulatory-news-articles/2012/03/India-Cross-BorderReinsurer-Requirements http://www.tuli.biz/articles/2012/Tuli%20Co_Changing_times_for_overseas_reinsurers_in_India _13%20Mar_2012.pdf http://www.zenithresearch.org.in/images/stories/pdf/2012/Jan/ZIJBEMR/5_ZIB_VOL2_ISSUE_ 1.pdf
7.2 RESEARCH PAPERS Capital Asset Pricing Models with DefaultRisk: Theory and Application in Insurance YUEYUN CHEN, ISKANDAR S. HAMWI, AND TIM HUDSON Hedge the Hedgers: Usage of Reinsurance and Derivatives by PC Insurance Companies J. DAVID CUMMINS and QINGYI (FREDA) SONG, First Draft: December 2, 2007 This Draft: February 29, 2008 A COMPARISON OF PROPERTY/CASUALTY INSURANCE FINANCIAL PRICING MODELS - STEPHEN P. DARCY AND RICHARD W. GORVETT AN EXAMINATION OF INSURANCE PRICING AND UNDERWRITING CYCLES Madsen, Chris K., ME, ASA, CFA, MAAA, Pricing Leader, GE Frankona Re
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HINDUSTAN UNILEVER LIMITED

Signature : Name & Designation: Date:

Vallari Gupta MBA 2011-13 IBS Hyderabad

1.1 BACKGROUND OF OUT OF HOME(OoH) INDUSTRY

Tea Coffee Others

Retail sales volume in year 2009 (Source: www.answers.com)

India China Sri Lanka Indonesia Turkey Kenya Others

World Tea Production in year 2009 (source : www.answers.com)

The brand war

Medium dust category (Rs 130-180 per kg)

Consumption in leading producing countries- (source: ICO)

Per capita Consumption of Coffee in India

1.1.1 HISTORY OF VENDING MACHINES

1.1.2 A GLIMPSE OVER THE A CHIEVEMENT OF HUL VE NDING DIVISION

1.1.3 GLOBAL SCENARIO OF Out Of Home INDUSTRY

2 ECONOMY INDUSTRY ANALYSIS

2.3 FISCAL AND MONETARY POLICY

2.3 INDUSTRY STRUCTURE

The data presented above are of date 26th April 2012.

2.7 CRITICAL SUCCESS FACTORS

3.1.1 PROFITABILITY RATIO

GROSS PROFIT MARGIN

NET PROFIT MARGIN

OPERATING EXPENSE RATIO

EARNING PER SHARE

3.1.2 LIQUIDITY RATIO

NET WORKING CAPITAL RATIO

DEBTOR TURNOVER RATIO

ASSET TURNOVER RATIO

INVENTORY TURNOVER RATIO

3.2 WORKING CAPITAL MANAGEMENT

ACP APP NOC GOC

50.04 45534.31 95.73972 -45438.6

55.19 26749.38 106.3759 -26643

60.09 9355.626 106.6958 -9248.93

64.43 8206.293 114.4015 -8091.89

67.47 13698.92 152.3107 -13546.6

RAW MATERIAL STORAGE PERIOD (RMSP)

WORK IN PROGRESS CONVERSION PERIOD (WIPCP)

FINISHED GOODS CONVERSION PERIOD (FGCP)

ACCOUNTS COLLECTION PERIOD (ACP)

managing it. FORMULA = average debtors/ average daily credit sales

AVERAGE PAYING PERIOD (APP)

GROSS OPERATING CYCLE (GOC) AND NET OPERATING CYCLE (NOC)

3.3 SHARE PERFORMANCE

Figure 3-1 SHARE PERFORMANCE

-0.1 -0.2 -0.3 -0.4 -0.5

Beta 0.54 0.72 0.84 0.51 0.34

3.4 DIVIDEND POLICY

4 PROJECT SPECIFIC ANALYSIS

4.2 TYPES OF INSURANCE

MINIMUM CAPITAL REQUIREMENTS

5 THEORITICAL FRAMEWORK/ CONCEPTUALIZATION

5.1 INSURANCE PRICING MODEL

*(P C)/K + *(P C)* ri/ K + (P C)/K - *(P C)/K (X/P)*(P/K) +

FACULTATIVE AUTOMATIC AGREEMENT OR PROGRAM

TREATY PROPORTIONAL COVER

Information of Subject Matter:

Analysis of historical data:

Rate of return on investment:

6 DATA ANALYSIS AND DISCUSSION

The fire policy is of the following types:

Fire and Special perils policy

(P C)/K + (P C)* ri/ K + (P C)/K - (P C)/K (X/P)(P/K) +