Report on Public Issues by Insurance · PDF filePublic Issues by Insurance Companies ... to...
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Report on
Public Issues by
Insurance Companies
SEBI Committee on Disclosures and Accounting
Standards (SCODA)
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Table of contents
Section No Section Page
Number
1 Background 3
2 Constitution of the Sub-group 3
3 Scope of the Sub-group 4
4 Recommendations of Sub-group 4
5 Other issues raised by IRDA 10
List of Annexure
Annexure
Number
Details of Annexure Page
No.
Annexure I Industry specific risk factors for insurance sector 13
Annexure II Overview of Insurance Industry 21
Annexure III Comparison table on disclosures made in offer
documents of life insurance companies in other
jurisdictions
23
Annexure IV Glossary of terms used in Insurance Industry 29
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Public Issues by Insurance Companies
1. Background:
1.1. There have recently been media reports that insurance companies in India are planning
to raise money from the capital market through initial public offers. Till now, no
company from the insurance sector has accessed the capital markets in India. Since the
nature of business and risks involved in insurance sector are of a different kind, it was
felt that there is a need to review whether the present disclosure requirements in offer
documents as well as those on a continuous basis are suitable and sufficient for the
insurance companies.
1.2. In this context, SEBI has been in receipt of suggestions/ observations from merchant
bankers and international consultants on additional insurance sector-specific
disclosures. SEBI has also received suggestions/comments from IRDA on the
disclosures in offer documents by insurance companies. The areas of disclosures as
identified taking into account the practices followed in other jurisdictions and
suggestions/ comments of the merchant bankers and IRDA were discussed in the SEBI
Committee on Disclosures and Accounting Standards (SCODA) in its meeting held on
August 24, 2009.
1.3. SCODA during its deliberations suggested that the suitability/sufficiency of the existing
provisions of SEBI (ICDR) Regulations to insurance companies may be examined.
2. Constitution of the Sub-group:
2.1.In order to examine the extant regulatory requirements vis a vis the disclosure
requirements for insurance companies, SCODA decided to constitute a sub-group
comprising following members:
Sl Name Designation Organization
1. Ms. Dipti Neelakantan MD & Group COO JM Financials Ltd
2. Shri Prithvi Haldea CMD Prime Database Ltd
3. *Shri R K Sharma Deputy Director Insurance Regulatory and
Development Authority
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Sl Name Designation Organization
(IRDA)
4. Dr. S. Subramanian Head, IBD Enam Securities Ltd
5. Shri Shrawan Jalan Director Ernst & Young
6. *Shri Sunil Kadam General Manager Securities and Exchange
Board of India (SEBI)
* Shri R K Sharma, Deputy Director, IRDA and Shri Sunil Kadam, General Manager, SEBI
replaced Ms Mamta Suri, Joint Director, IRDA and Shri Parag Basu, General Manager, SEBI,
respectively due to internal changes in their respective organizations.
2.2 The group places on record its appreciation for the valuable contribution made by Ms
Lakha Nair, Enam securities Ltd, Shri Sanjay Purao, Deputy General Manager, SEBI
and Shri E Balasubramanian, Assistant General Manager, SEBI in preparation of this
report.
3. Scope of the Sub-group:
The following scope of work was identified by the sub-group:
i. Provisions of SEBI (ICDR) Regulations vis a vis insurance companies
ii. Disclosures by insurance companies
iii. Continuous disclosure requirements for insurance companies
4. Recommendations of Sub-group
4.1. Amendment to SEBI(ICDR) Regulations
The provisions of SEBI (ICDR) Regulations have been examined primarily with regard
to its suitability and sufficiency with respect to disclosures by insurance companies. The
provisions of SEBI (ICDR) were discussed. The sub-group agreed that the provisions of
SEBI (ICDR) Regulations shall be applicable to insurance companies. The sub-group
after deliberations gave their comments on certain provision of the SEBI (ICDR)
Regulations along with the recommendations.
The recommendations of the sub-group are as follows:
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a) Monitoring Agency: Regulation 16(1) of SEBI (ICDR) Regulations provides that if
the issue size exceeds Rs. 500 crore, the use of issue proceeds has to be monitored
by a public financial institution or a scheduled commercial bank. The Regulation
also states that the said provision is not applicable in case of issues made by a bank
or a financial institution. Sub-group noted that the said dispensation was given as
banks generally raise funds to meet the capital adequacy norms set out and
monitored by RBI, the sectoral regulator. Sub-group further noted that in case of
insurance companies too, the funds would be raised primarily to maintain/enhance
solvency requirement, as stipulated by IRDA. Further, IRDA stipulates periodic
reporting of solvency ratios and has also specified investment regulations for
investing the funds raised for meeting the solvency margin. In view of the above,
the sub-group recommends that insurance companies may be exempted from the
provision of Regulation 16 of SEBI (ICDR) Regulations in line with exemption
given to banks and financial institutions.
b) Disclaimer clause: In the case of banks, section XI (K) of part A of Schedule
VII of SEBI (ICDR) Regulations provide for disclosure of a disclaimer clause
of RBI. Similarly, a disclaimer clause of IRDA may be provided for in the offer
documents of insurance companies.
4.2.Disclosures by Insurance Companies:
4.2.1. Industry- specific Risk Factors for Insurance Companies:
The insurance industry is different from other industries and has risks which are
unique to it. In order to get an understanding of risks specific to the insurance
industry, offer documents of certain insurance companies which came out with
issue of capital in other jurisdictions were studied. Based on the risk factors
disclosed in such offer documents, following are the minimum broad industry
specific risk areas that needs to be disclosed:
i. Claims arising out of catastrophic losses (natural and man-made), which
could materially and adversely impact the profitability or cash flow of the
insurance companies.
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ii. Concentrated surrenders which may materially affect cash flows, results of
operations and financial condition.
iii. Differences in future actual claims resulting from the assumptions used in
pricing and establishing reserves for insurance and annuity products which
may materially affect earnings.
iv. Risk with reference to concentration by region/type of policies of the
insurance company.
v. The assumptions based on which the embedded value is calculated and
disclosed may vary significantly from time to time / among industry players.
vi. Deviations in mortality/morbidity rates from those predicted in determining
reserve amounts.
vii. Deviations in persistency/lapse rates from those predicted in determining
reserve amounts
viii. Inability to attract and retain productive agents in a growing competitive
business environment.
ix. Fluctuations in reserves due to guaranteed benefits
x. Inability to obtain reinsurance on a timely basis or at all, which results in
bearing increased risks or reduce the level of our underwriting
commitments.
xi. Default by one or more of our reinsurers which could materially affect the
financial condition and results of operations.
xii. Regulatory restrictions on investments by insurance companies
xiii. Exposure to recovery related risks including for foreclosure of the
mortgages
xiv. Inability to accurately predict benefits, claims and other costs or to manage
such costs through loss limitation methods, which could have a material
adverse effect on the operations and financial condition
The sub-group recommends that the aforementioned list may act as guidance for
companies while disclosing the risk factors in the offer documents. The sub-group
also compiled detailed risk factors for insurance companies which are placed at
Annexure I.
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The sub-group recommends that:
a. The detailed risk factors as identified by sub-group may be placed on the
website of IRDA which may act as guidance to insurance companies
coming out with IPO.
b. SEBI may prescribe the disclosure of aforementioned list of risk factors in
the offer documents of insurance companies through circular or standard
observations.
4.2.2. Disclosure on Overview of the Insurance Industry:
The SEBI (ICDR) Regulation does not prescribe the format or the contents of
industry overview which need to be disclosed in the offer documents for any
industry. However, considering the fact that no insurance company in India has
come out with an issue so far, it is felt necessary that the investors get a broad
overview of the insurance industry. In view of this, broad parameters under which
the disclosure on insurance industry overview may be made have been listed and
placed in Annexure II.
The sub-group recommends that this list may be placed in the website of IRDA,
which may act as guidance for insurance companies coming out with issues.
4.2.3. Disclosure of Financial Information:
It is observed that the components of financial statements of insurance companies
are significantly different from other companies. An insurance company prepares
two types of income accounts i.e. policy holder’s account (Revenue account) and
shareholder’s account (profit and loss account). IRDA has prescribed the formats
in which the financials of the insurance companies need to be submitted to them
on a periodic basis. On the other hand, provisions regarding disclosure of
financial information in SEBI (ICDR) Regulations are general and are applicable
to all companies. The subgroup noted that banking companies follow format of
financial statements prescribed under Banking Regulation Act, 1949 and similarly
insurance companies may follow formats specified by IRDA.
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Sub-group recommended that the financial disclosure for insurance companies
may be as per the format specified by IRDA.
4.2.4. Specific Disclosures which are followed in other Jurisdictions:
The sub-group carried out an analysis of the specific disclosures which are
followed in other jurisdictions. A detailed comparative chart along with the
comments of the IRDA on each disclosure item in case of life insurance
companies is attached as Annexure III. It is observed that the extant disclosure
norms prescribed by IRDA are by and large at par with the international practice
in vogue in various jurisdictions.
Sub-group recommends that following additional disclosures applicable in other
jurisdictions shall be included in the offer documents of life insurance companies
i. Gross premium- along with Geographic segmentation
ii. Cross selling
iii. Distribution network
iv. Persistency
v. Operating expense ratio
vi. Investment yield
vii. Embedded value Report comprising of:
New Business Value
Value of in force business
Embedded value
viii. Investment of above 5% of total Funds in each sector through equity &
bonds
ix. Reinsurance
x. Interest rate sensitivity
xi. Liability for future policy benefits and policy holders account balances.
xii. NBAP
xiii. Manner of arriving at unrealized gain/losses –under IFRS or Indian
equivalent
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As regards the disclosure on NBAP (New Business Achieved Profit) IRDA has
reservations on mandating the said disclosure for insurance companies due to lack
of uniformity/standardization of approach adopted for calculation, as of now.
Considering the nascent stage of the insurance industry in India and lack of
understanding of this business by investors in general, the sub-group felt that
there is a need for an expert opinion on both the Embedded Value (EV) and
New Business Value (NBV) which together reflect the fair value of the
business of an insurance company. Accordingly, sub-group recommends that
report of an independent actuary on the EV and NBV of the insurance
company should be made a part of the offer document. The contents and
format of the EV/NBV reports and criteria for actuaries who are authorized
to prepare such report may be prescribed by IRDA.
The sub-group recommends that SEBI may mandate the disclosure of
aforementioned list of disclosure items in the offer documents of insurance
companies through circular or standard observations.
4.2.5. Glossary of terms used in the Insurance Industry:
In order to familiarize the investors with terms used in insurance industry and to
standardize the definition and understanding of such terms, the sub-group felt that
a “Glossary of the terms used in Insurance industry” may be prepared. IRDA
provided a “Glossary of the terms used in Insurance industry” which is placed in
Annexure IV. This glossary of terms may act as guidance for insurance
companies coming out with issues.
The sub group recommends that the glossary may be placed on the website of
IRDA.
4.2.6. Continuous Disclosure Requirements for Insurance Companies:
The continuous disclosure requirements i.e the disclosure/reporting requirements
of companies after its shares are listed at the stock exchanges are prescribed
through the listing agreement. The provisions of the listing agreement have been
examined in light of continuous disclosure requirements of the insurance
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companies. It may be noted that clause 41 of the listing agreement prescribes the
format in which the listed companies are required to disclose the financial
information on a quarterly basis to the stock exchanges. Further, a separate
format of financial and a format of limited review report has been provided for
banks under the clause 41 of the listing agreement. On the same lines, a separate
format of financial information and a format of limited review report were
recommended for the insurance companies.
SCODA suggested the sub-group to re-work on the formats specified in Clause 41
of the Listing Agreement and retain only critical portions, as the same needs to be
published in the newspapers. Further, SCODA suggested that the sub-group
should classify those disclosures which need to be filed with the exchanges and
those which need to be published.
5. Other issues raised by IRDA:
5.1. Advertisements regarding public issues: IRDA requires that all advertisements
issued by insurance companies be filed with IRDA for vetting at least 30 days before
publishing the same.
Sub-group noted that issue advertisements are typically made post the filing of the red
herring prospectus which leaves a very short time between the date of filing of RHP and
issue opening date. Sub-group recommended that the issue advertisements made by
insurance companies being statutory advertisements, may be as per the provisions of
SEBI (ICDR) Regulations only.
5.2. Objects of issue: The IRDA representative suggested that insurance companies
should be allowed to raise money only for the following objects:
a. To augment the solvency requirement
b. For general corporate purposes
c. For any other purpose which has a specific approval of IRDA
The sub-group noted that SEBI (ICDR) Regulations does not have any specific
restriction on nature of objects for which a company can raise money from the
public. Hence, the sub-group recommends that SEBI (ICDR) Regulations need not
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be amended in this regard. However, IRDA may, if it considers necessary issue
guidelines to the insurance companies in this regard.
5.3. Issuance of partly-paid shares: The IRDA representative stated that partly-paid
shares should not be allowed as it may inflate the capital.
Sub-group noted that the Companies Act, 1956 permits issuance of partly paid up
shares by companies. Hence, placing such restriction through subordinate legislation
may not be appropriate and may not also be legally tenable. Therefore sub-group
recommended that restrictions, if considered necessary, can be put by IRDA under its
regulatory powers.
5.4. Definition of Promoters: IRDA stated that as per the existing provisions, all the
shareholders of insurance companies are treated as promoters and employees who
have been issued shares under ESOP scheme are excluded. Further, any transfer of
shares of more than one percent by the pre-IPO shareholders requires prior approval
of IRDA. Therefore, IRDA suggested that the definition of ‘Promoter’ under SEBI
(ICDR) Regulations may be amended as follows:
“Promoters mean the shareholders of the company at the date of fi ling of the
application for IPO with IRDA/ SEBI. However, employees / officers who have
been issued shares under ESOP scheme should be excluded“
The sub-group recommends that the existing definition of promoters as per the
SEBI (ICDR) Regulations should be applicable to the insurance companies as well
and that IRDA may issue separate guidelines to insurance companies in relation to
pre-IPO transfer of shares, if so considered necessary. However, disclosure
regarding any such restriction shall be made in the offer document.
5.5. Relaxation from eligibility criteria: The IRDA representative was of the view that
insurance companies may find it difficult to comply with the eligibility requirement
(i.e. profitability criteria), since gestation period of life insurance business is
comparatively longer and it takes around 6 to 7 years for a life insurer to achieve
break even. IRDA representative enquired whether such companies can still raise
capital through fixed price issue.
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The sub-group felt that there is no need to provide specific relaxation from the
eligibility conditions to insurance companies since the companies which do not
comply with the profitability criteria can still raise the capital through book
building process.
5.6. Key Management Personnel : The IRDA representative suggested the inclusion of
the following officers in an insurance company in the definition of key
management personnel : Chief Executive, Chief Marketing Officer, Appointed
Actuary, Chief Investment Officer, Chief of Internal Audit and Chief Finance
Officer.
In this context, sub-group noted that the key management personnel generally
means and includes only employees in management. The sub-group suggested that
the provisions of extant SEBI (ICDR) Regulations may apply as it is and that
IRDA, if it so considers necessary, may issue guidelines to the insurance
companies specifying the inclusion of additional persons as key management
personnel.
5.7. Disclosure with regard to uniform financial denomination: The IRDA Accounting
Regulations require that figures in all financial statements should be in
“thousands”. It was brought to the notice of IRDA representative that SEBI
(ICDR) Regulations do not specify any particular denomination in which the
financial information shall be disclosed. The clause VIII (G) of Part A of Schedule
VIII of SEBI (ICDR) Regulations requires the issuer to use one standard financial
unit in the offer document.
The sub-group noted that insurance companies can easily comply with the
requirement of IRDA on denomination without any conflict with the provisions of
SEBI (ICDR) Regulations and hence suggested no change.
*****
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Annexure I: INDUSTRY SPECIFIC RISK FACTORS FOR INSURANCE SECTOR (LIFE and NON-
LIFE)
General
No insurance company is yet listed in the Indian capital market. Insurance sector has a unique operation and
it presents various types of unique risks. Investors should read the section on “Insurance Industry” to
acquaint themselves with the key features of this sector. In addition, investors should consider the risks
associated with the industry in which the Company operates as well as those relating specifically to it.
Interest Rate Risk
Changes in interest rates may materially and adversely affect our profitability. The profitability of some of the
products and investment returns of insurance companies are highly sensitive to interest rate fluctuations, and
changes in interest rates could adversely affect our investment returns and results of operations. In periods of rising
interest rates, while the increased investment yield will increase the returns on newly added assets in our investment
portfolios, surrenders and withdrawals of existing insurance policies may also increase as policyholders seek to buy
products with perceived higher returns. These surrenders and withdrawals may result in cash payments requiring the
sale of invested assets at a time when the prices of those assets are adversely affected by the increase in market
interest rates, potentially resulting in realized investment losses. These cash payments to policyholders would result
in a decrease in total invested assets and a potential decrease in net income. Moreover, a rise in interest rates would
adversely affect our shareholders’ equity in the immediate fiscal year due to a decrease in the fair value of our fixed
income investments. Conversely, a decline in interest rates could result in reduced investment returns on our newly
added assets and have an adverse impact on our profitability. During periods of declining interest rates, our average
investment yield will decline as our maturing investments, as well as bonds that are redeemed or prepaid to take
advantage of the lower interest rate environment, are replaced with new investments carrying lower yields, which
would adversely affect our profitability. In addition, the liabilities associated with our life insurance policies tend to
have a longer duration than our investment assets, which may result in the re-investment returns of our maturing
investments being lower than the average guaranteed pricing rate for our insurance policies in a declining interest
rate environment.
Maturity Risk
Due to the limited availability of long-term fixed income securities in the Indian capital market and the legal
and regulatory restrictions on the types of investments we may make, we are unable to match closely the
duration of our assets and liabilities, which increases our exposure to interest rate risk. Restrictions under the
IRDA regulations on the asset classes in which we may invest, as well as the limited availability in the Indian
market of long duration investment assets capable of matching the duration of our liabilities, can result in the
duration of our assets being shorter than that of our liabilities, in particular, our liabilities in life insurance
operations. If we are unable to match closely the duration of our assets and liabilities, we will continue to be
exposed to risks related to interest rate changes, which would materially and adversely affect our results of
operations and financial condition.
Liquidity Risk
Differences in future actual claims results from the assumptions used in pricing and establishing reserves for
our insurance and annuity products may materially and adversely affect our earnings. Our earnings depend
significantly upon the extent to which our actual claims results are consistent with the assumptions used in setting
the prices for our products and establishing the liabilities in our financial statements for our obligations for future
policy benefits and claims. Our assumptions include those for investment returns, mortality, morbidity, expenses and
persistency, as well as macro-economic factors such as inflation. To the extent that trends in actual claims results are
less favorable than our underlying assumptions used in establishing these liabilities, and these trends are expected to
continue in the future, we could be required to increase our liabilities. Any such increase could have a material
adverse effect on our profitability and, if significant, our financial condition. Any material impairment in our
solvency level could change our customers' or our business associates' perception of our financial health, which in
turn could adversely affect our sales, earnings and operations.
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Concentrated surrenders may materially and adversely affect our cash flows, results of operations and
financial condition. Under normal circumstances, it is generally possible for insurance companies to estimate the
overall amount of surrenders in a given period. However, the occurrence of emergency events that have significant
impact, such as sharp declines in customer income due to a severe deterioration in economic conditions, radical
changes in relevant government policies, loss of customer confidence in the insurance industry due to the weakening
of the financial strength of one or more insurance companies, or the severe weakening of our financial strength, may
trigger massive surrenders of insurance policies. If this were to occur, we would have to dispose of our investment
assets, possibly at unfavorable prices, in order to make the significant amount of surrender payments. This could
materially and adversely affect our cash flows, results of operations and financial condition.
Investments Risk
We may incur significant losses on our investments, which may cause our investment income to decrease, and
could have a material adverse effect on our financial condition and results of operations. We primarily invest
in fixed income products such as term deposits, government bonds, subordinated bonds issued by financial
institutions, corporate bonds and equity. Our investment returns, and thus our profitability, may be adversely
affected from time to time by conditions affecting our specific investments and, more generally, by market
fluctuations as well as general economic, market and political conditions. In particular, our ability to make a profit
on our insurance products depends in part on the returns on investments supporting our obligations under these
products, and the value of specific investments may fluctuate substantially. Future movements in market interest
rates, unfavorable conditions in the Indian capital market or other factors may cause our investment income to
decrease significantly, and could have a material adverse effect on our financial condition and results of operations.
Catastrophic Losses Risk
Catastrophic losses could materially reduce our profitability or cash flow. Our insurance operations expose us
to claims arising out of catastrophes. Earthquakes, typhoons, floods, wind, fires, explosions, industrial accidents,
epidemics, terrorist attacks, and other events may cause catastrophes, and the occurrence and severity of
catastrophes are inherently unpredictable. It is possible that both the frequency and severity of natural disasters may
increase in the future. We establish reserves only after an assessment of potential losses relating to catastrophes that
have taken place. However, we cannot assure you that such reserves will be sufficient to pay for all related claims.
Although we carry some reinsurance to reduce our catastrophe loss exposures, due to limitations in the underwriting
capacity and terms and conditions of the reinsurance market as well as difficulties in assessing our exposures to
catastrophes, this reinsurance may not be sufficient to protect us adequately against losses. As a result, one or more
catastrophic events could materially reduce our profits and cash flows and harm our financial condition.
Reinsurance Risk
If we are not able to obtain reinsurance on a timely basis or at all, we may be required to bear increased risks
or reduce the level of our underwriting commitments. Our ability to obtain reinsurance on a timely basis and at a
reasonable cost is subject to a number of factors, including prevailing market conditions that are beyond our control.
The availability and cost of reinsurance may affect the volume of our business as well as our profitability. In
particular, we may be unable to maintain our current reinsurance coverage or to obtain other reinsurance coverage in
adequate amounts and at favorable rates. If we are unable to renew our expiring coverage or to obtain new
reinsurance coverage, either our net risk exposure would increase or, if we are unwilling to bear an increase in net
risk exposures, our overall underwriting capacity and the amount of risk we are able to underwrite would decrease.
To the extent we are not able to obtain reinsurance on a timely basis and at a reasonable cost, or at all, our business,
financial condition and results of operations would be materially and adversely affected.
A default by one or more of our reinsurers could materially and adversely affect our financial condition and
results of operations. Like other major insurance companies in the world, we transfer some of the risk we assume
under the insurance policies we underwrite to reinsurance companies in exchange for a portion of the premiums we
receive in connection with the underwriting of these policies. Although reinsurance makes the reinsurer liable to us
for the risk transferred, it does not discharge our liability to our policyholders. As a result, we are exposed to credit
risk with respect to reinsurers in all lines of our insurance business. In particular, a default by one or more of our
reinsurers under our existing reinsurance arrangements would increase our financial losses arising out of a risk we
have insured, which would reduce our profitability and may adversely affect our liquidity position. In the event of a
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catastrophic loss that affects a significant number of Indian insurers, the reinsurers may not b able to pay us on a
timely basis, or at all.
Embedded Value Risk
The embedded value information we present in this prospectus is based on several assumptions and may vary
significantly as those assumptions are changed. In order to provide investors with an additional tool to understand
our economic value and business results, we have disclosed information regarding our embedded value, as discussed
in the section entitled, "Embedded Value". These measures are based on a discounted cash flow valuation
determined using commonly applied actuarial methodologies. Standards with respect to the calculation of embedded
value are still evolving, however, and there is no single adopted standard for the form, determination or presentation
of the embedded value of an insurance company. Moreover, because of the technical complexity involved in
embedded value calculations and the fact that embedded value estimates vary materially as key assumptions are
changed, you should read the discussion under the section entitled "Embedded Value". You should use special care
when interpreting embedded value results and should not place undue reliance on them.
Regulatory Risks
Regulations may restrict our ability to operate. The insurance industry is subject to extensive regulation by
IRDA. IRDA has broad administrative powers to regulate many aspects of the insurance business, which include
premium rates, marketing practices, advertising, policy forms and capital adequacy. IRDA is concerned primarily
with the protection of policyholders rather than shareholders. Insurance laws and regulations impose restrictions on
the amount and type of investments, prescribe solvency standards that must be met and maintained and require the
maintenance of reserves. Premium rate regulation is common across all of our lines of business and may make it
difficult for us to increase premiums to adequately reflect the cost of providing insurance coverage to our
policyholders. In our underwriting, we rely heavily upon information gathered from third parties such as credit
report agencies and other data aggregators. The use of this information is also highly regulated and any changes to
the current regulatory structure could materially affect how we underwrite and price premiums.
Our business is highly regulated and we may be materially and adversely affected by future regulatory
changes. Our life insurance and general insurance businesses are regulated primarily by IRDA and we are subject
to laws regulating all aspects of our insurance business. In addition, our securities business is regulated by SEBI.
Compliance with applicable laws, rules and regulations may restrict our business activities. Furthermore, these laws,
rules and regulations may change from time to time and we cannot assure you that future legislative or regulatory
changes, including deregulation, would not have a material adverse effect on our business, financial condition and
results of operations. We cannot predict at this time the effect of potential regulatory changes on our business and
profitability. Moreover, failure to comply with any of the numerous laws, rules and regulations to which we are
subject could result in fines, suspension or, in extreme cases, business license revocation, which could materially
and adversely affect us. In particular, future laws, rules and regulations, or the interpretation of existing or future
laws, rules and regulations, may have a material adverse affect on our business, financial condition and results of
operations.
The Indian insurance regulatory regime is undergoing significant change as it moves toward a more transparent
regulatory process. Some of these changes may result in additional costs or restrictions on our activities. In
particular, some of the changes may require us to take additional steps to comply with new rules and regulations on
a timely basis. We cannot assure you that we will be able to achieve full compliance with any such new rules and
regulations within any prescribed timeframe, and any such compliance may result in our incurring increased
compliance and other costs. Moreover, because the terms of our products are subject to regulations, changes in
regulations may affect our profitability on the policies and contracts we issue.
Regulatory investigations and the resulting sanctions or penalties may adversely affect our reputation,
business, results of operations and financial condition. We may also be subject to regulatory actions from time to
time. A substantial legal liability or a significant regulatory action could have an adverse effect on us or cause us
reputational harm, which in turn could harm our business prospects. We are subject to periodic examinations by
IRDA, which may impose sanctions, fines and other penalties on us. If IRDA, in connection with their future audits
or examinations, requires us to take corrective measures or impose administrative penalties on us or if as a result we
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become the target of negative publicity, our corporate image and reputation and the credibility of our management
may be materially and adversely affected.
New accounting pronouncements may significantly affect our financial statements for the current and future
years, and may materially and adversely affect our reported net profits and shareholders’ equity, among
other things.
Solvency Risks
Our ability to comply with minimum solvency requirements stipulated by IRDA is affected by a number of
factors, and our compliance may force us to raise additional capital, which could be dilutive to you, or could
reduce our growth. We are required by IRDA regulations to maintain our solvency at a level in excess of minimum
solvency levels. Our minimum solvency is affected primarily by the policy reserves we are required to maintain
which, in turn, are affected by the volume of insurance policies we sell and by regulations on the determination of
statutory reserves. Our solvency is also affected by a number of other factors, including the profit margin of our
products, returns on our investments, underwriting and acquisition costs, and policyholder and shareholder
dividends. If we continue to grow rapidly in the future, or if the required solvency level is increased in the future, we
may need to raise additional capital to meet our solvency requirement, which would be dilutive to you. If we are not
able to raise additional capital, we may be forced to reduce the growth of our business.
Insurance Risk
Impact of Lapse Rates, Expense Level, mortality / Morbidity Rates
Legal Risk
We may suffer losses from unfavorable outcomes from litigation and other legal proceedings. Legal actions are
inherent in our businesses and operations. We are subject to litigation and other legal proceedings as part of the
claims process, the outcomes of which are uncertain. We maintain reserves for these legal proceedings as part of our
reserves. We also maintain separate reserves for legal proceedings that are not related to the claims process. In the
event of an unfavorable outcome in one or more legal matters, our ultimate liability may be in excess of amounts we
have currently reserved for and such additional amounts may be material to our results of operations and financial
condition.
As industry practices and legal, judicial, social and other conditions change, unexpected and unintended issues
related to claims and coverage may emerge. These issues may adversely affect our financial condition and results of
operations by either extending coverage beyond our underwriting intent or by increasing the number and size of
claims. In some instances, these changes may not become apparent until some time after we have issued insurance
contracts that are affected by the changes.
Risk Management Risk
Our risk management and internal reporting systems, policies and procedures may leave us exposed to
unidentified or unanticipated risks, which could materially and adversely affect our businesses or result in
losses. Our policies and procedures to identify, monitor and manage risks may not be fully effective. Many of our
methods of managing risk and exposures are based upon our use of observed historical market behavior or statistics
based on historical models. As a result, these methods may not predict future exposures, which could be
significantly greater than what the historical measures indicate. Other risk management methods depend upon the
evaluation of information regarding markets, customers or other matters that is publicly available or otherwise
accessible to us, which may not always be accurate, complete, up-to-date or properly evaluated. In addition, a
significant portion of business information needs to be centralized from our many branch offices. Management of
operational, legal and regulatory risks requires, among other things, policies and procedures to record properly and
verify a large number of transactions and events, and these policies and procedures may not be fully effective.
Failure or the ineffectiveness of these systems could materially and adversely affect our business or result in losses.
Page | 17
We are likely to offer a broader and more diverse range of insurance and investment products in the future as the
insurance market in India continues to develop. At the same time, we anticipate that the relaxing of regulatory
restraints will result in our being able to invest in a significantly broader range of asset classes. The combination of
these factors will require us to continue to enhance our risk management capabilities and is likely to increase the
importance of our risk management policies and procedures to our results of operations and financial condition. If
we fail to adapt our risk management policies and procedures to our changing business, our business, results of
operations and financial condition could be materially and adversely affected. Catastrophes could materially reduce
our earnings and cash flow.
We may experience failures in our information technology system, which could materially and adversely
affect our business, results of operations and financial condition. We depend heavily on our information
technology system to record and process our operational and financial data and to provide reliable services. We may
be subject to severe failures in our information technology system arising from natural disasters or failures of public
infrastructure, our information technology infrastructure or our applications software systems that are wholly or
partially beyond our control. Although we back up our business data daily and have an emergency disaster recovery
center located at a site different from our production data center, any material disruption to the operation of our
information technology system could have a material adverse effect on our business. Our failure to address these
problems could result in our inability to perform, or prolonged delays in performing, critical business operational
functions, the loss of key business data, or our failure to comply with regulatory requirements, which could
materially and adversely affect our business operations, customer service and risk management, among others. This
could in turn materially and adversely affect our business, results of operations and financial condition
Competition Risk
Competition in the Indian insurance industry is increasing and our business and prospects will be harmed if
we are not able to compete effectively as well as have a material adverse effect on our financial condition and
results of operations by, among other things: reducing our market share in our principal lines of business;
decreasing our margins and spreads; reducing the growth of our customer base; increasing our policy
acquisition costs; increasing our operating expenses, such as sales and marketing expenses; and increased
turnover of management and sales personnel. Some of our competitors may have advantages over us in one or
more areas, such as financial strength, management capabilities, resources, operating experience, market share,
distribution channels and capabilities in pricing, underwriting and claims settlement. In addition, we face potential
competition from commercial banks, some of which invest in, or form alliances with, existing insurance companies
to offer insurance products and services that compete against those offered by us. These commercial banks may also
establish subsidiaries of their own to engage in insurance business directly. Such potential competitors may further
increase the competitive pressures we experience.
Competition from foreign-invested life insurance companies is likely to increase in the future, as restrictions
on their operations in India are relaxed. Moreover, foreign-invested life insurance companies may have
access to greater financial, technological or other resources than we do.
We are likely to face increasing competition from companies offering products that compete with our own. In
addition to competition from insurance companies, we face competition from other companies that may offer
products that compete with our own, including real estate companies, mutual fund companies and other financial
services providers.
Market Growth Risk
The rate of growth of the Indian insurance market may not be as high or as sustainable as we anticipate.
The rate of growth of the Indian insurance market may not be as high or as sustainable as we anticipate. This may be
the case even though we expect the insurance market in India to expand and the penetration rate to rise with the
growth of the Indian economy and household wealth, continued social welfare reform, demographic changes and the
opening of the Indian insurance market to foreign participants. The impact on the Indian insurance industry of
certain trends and events, such as the pace of economic growth in India and the ongoing reform of the social welfare
system is unpredictable and consequently, the growth and development of the Indian insurance market is subject to a
number of uncertainties that are beyond our control.
Page | 18
An economic slowdown in the country, such as the one experienced following the recent global financial crisis,
may reduce the demand for our products and services and have a material adverse effect on our results of
operations, financial condition and profitability. In an economic downturn characterized by higher
unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer
spending, the demand for our insurance products and services could be adversely affected. In addition, we may
experience an elevated incidence of claims and lapses or surrenders of policies. Our policyholders may also choose
to defer paying insurance premiums or stop paying insurance premiums altogether.If the Indian economy continues
to experience a slower growth or a significant downturn, our results of operations and financial condition would be
materially and adversely affected.
Agents’ Risk
All of our insurance agents are required to obtain a qualification certificate from IRDA; any changes in the
regulatory policies with regard to the agents may materially and adversely affect our business. Moreover, our
growth is dependent on our ability to attract and retain productive agents. A substantial portion of our business
is conducted through agents. Competition for agents from insurance companies and other business institutions may
force us to increase the compensation of our agents and sales representatives, which would increase operating costs
and reduce our profitability.
If we are unable to develop other distribution channels for our products, our growth may be materially and
adversely affected. Banks and post offices are rapidly emerging as some of the fastest growing distribution
channels in India. We do not have exclusive arrangements with any of the banks and post offices through which we
sell insurance and annuity products, and thus our sales may be materially and adversely affected if one or more
banks or post offices choose to favor our competitors' products over our own.
Agent misconduct is difficult to detect and deter and could harm our reputation or lead to regulatory sanctions or
litigation costs. Agent misconduct could result in violations of law by us, regulatory sanctions, litigation or serious
reputational or financial harm. Misconduct could include engaging in misrepresentation or fraudulent activities
when marketing or selling insurance policies or annuity contracts to customers; hiding unauthorized or unsuccessful
activities, resulting in unknown and unmanaged risks or losses; or otherwise not complying with laws or our control
policies or procedures. We cannot always deter agent misconduct, and the precautions we take to prevent and detect
these activities may not be effective in all cases. We cannot assure you that agent misconduct will not lead to a
material adverse effect on our business, results of operations or financial condition.
Other Risks
– We depend on select actuarial personnel and could be materially and adversely affected by the loss of their
services.
– A perceived reduction in our financial strength could increase policy surrenders and withdrawals and
damage our relationship with our creditors, our counterparties and the distributors of our products.
– Prospective investors should acquaint themselves with the Financial Statements, drawn specifically for the
insurance companies.
– Contingent liabilities could adversely affect the financial condition and results of operations of the
insurance company.
– Investment in the relatives/associates of the Promoters/ Directors of the Insurance Company can be
detrimental to the interests of our company.
– Risk with reference to concentration by region/type of policies of the Insurance Company
– Insurance Companies are subject to restrictions on payments of dividends
– We will incur increased costs as a result of being a listed company.
The insurance industry is cyclical, which may impact our results. The insurance industry is cyclical. Although
no two cycles are the same, insurance industry cycles have typically lasted for periods ranging from two to six years.
The segments of the insurance markets in which we operate tend not to be correlated to each other, with each
segment having its own cyclicality. Periods of intense price competition due to excessive underwriting capacity,
periods when shortages of underwriting capacity permit more favorable rate levels, consequent fluctuations in
underwriting results and the occurrence of other losses characterize the conditions in these markets. Historically,
Page | 19
insurers have experienced significant fluctuations in operating results due to volatile and sometimes unpredictable
developments, many of which are beyond the direct control of the insurer, including competition, frequency of
occurrence or severity of catastrophic events, levels of capacity, general economic conditions and other factors. This
may cause a decline in revenue at times in the cycle if we choose not to reduce our product prices in order to
maintain our market position, because of the adverse effect on profitability of such a price reduction. We can be
expected therefore to experience the effects of such cyclicality and changes in customer expectations of appropriate
premium levels, the frequency or severity of claims or other loss events or other factors affecting the insurance
industry that generally could have a material adverse effect on our results of operations and financial condition.
The insurance and related businesses in which we operate may be subject to periodic negative publicity,
which may negatively impact our financial results. The nature of the market for the insurance and related
products and services we provide is that we interface with and distribute our products and services ultimately to
individual consumers. There may be a perception that these purchasers may be unsophisticated and in need of
consumer protection. Accordingly, from time to time, consumer advocate groups or the media may focus attention
on our products and services, thereby subjecting our industries to periodic negative publicity. We may also be
negatively impacted if another company in one of our industries engages in practices resulting in increased public
attention to our businesses. Negative publicity may result in increased regulation and legislative scrutiny of industry
practices as well as increased litigation, which may further increase our costs of doing business and adversely affect
our profitability by impeding our ability to market our products and services, requiring us to change our products or
services or increasing the regulatory burdens under which we operate.
The impact of investigations of possible anti-competitive practices by the company cannot be predicted and
may have a material adverse impact on our results of operations, financial condition and financial strength
ratings.
We may be exposed to environmental liability from our commercial mortgage loan and real estate
investments. As a commercial mortgage lender, we customarily conduct environmental assessments prior to making
commercial mortgage loans secured by real estate and before taking title through foreclosure to real estate
collateralizing delinquent commercial mortgage loans held by us. Based on our environmental assessments, we
believe that any compliance costs associated with environmental laws and regulations or any remediation of affected
properties would not have a material adverse effect on our results of operations or financial condition. However, we
cannot provide assurance that material compliance costs will not be incurred by us.
The effects of emerging claims and coverage issues on our business are uncertain. As industry practices and
legal, judicial, social and other conditions change, unexpected and unintended issues related to claims and coverage
may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting
intent or by increasing the number or size of claims. In some instances, these changes may not become apparent
until some time after we have issued insurance or reinsurance contracts that are affected by the changes. As a result,
the full extent of liability under our insurance and reinsurance contracts may not be known for many years after a
contract is issued. Recent example of emerging claims and coverage issues include:
larger settlements and jury awards in cases involving professionals and corporate directors and officers
covered by professional liability and directors and officers liability insurance and
a growing trend of plaintiffs targeting property and casualty insurers in class action litigation related to
claims handling, insurance sales practices and other practices related to the conduct of our business.
We may be unable to accurately predict benefits, claims and other costs or to manage such costs through our
loss limitation methods, which could have a material adverse effect on our results of operations and financial
condition. Our profitability depends in large part on accurately predicting benefits, claims and other costs, including
medical and dental costs, and predictions regarding the frequency and magnitude of claims on our disability and
property coverage. It also depends on our ability to manage future benefit and other costs through product design,
underwriting criteria, utilization review or claims management and, in health and dental insurance, negotiation of
favorable provider contracts. Utilization review is a review process designed to control and limit medical expenses,
which includes, among other things, requiring certification for admission to a health care facility and cost-effective
ways of handling patients with catastrophic illnesses. Claims management entails the use of a variety of means to
mitigate the extent of losses incurred by insureds and the corresponding benefit cost, which includes efforts to
improve the quality of medical care provided to insureds and to assist them with vocational services. The aging of
Page | 20
the population and other demographic characteristics and advances in medical technology continue to contribute to
rising health care costs. Our ability to predict and manage costs and claims, as well as our business, results of
operations and financial condition may be adversely affected by:
changes in health and dental care practices;
inflation;
new technologies;
the cost of prescription drugs;
clusters of high cost cases;
changes in the regulatory environment;
economic factors;
the occurrence of catastrophes; and
numerous other factors affecting the cost of health and dental care and the frequency and severity of
claims in all our business segments.
The judicial and regulatory environments, changes in the composition of the kinds of work available in the
economy, market conditions and numerous other factors may also materially adversely affect our ability to manage
claim costs. As a result of one or more of these factors or other factors, claims could substantially exceed our
expectations, which could have a material adverse effect on our results of operations and financial condition.
As industry practices and legal, judicial, social and other environmental conditions change, unexpected and
unintended issues relating to claims and coverage may emerge. These issues could materially adversely affect our
results of operations and financial condition by either extending coverage beyond our underwriting intent or by
increasing the number or size of claims or both. We may be limited in our ability to respond to such changes, by
insurance regulations, existing contract terms, contract filing requirements, market conditions or other factors.
Page | 21
Annexure II: Overview of Insurance Industry
1. Introduction
2. Background- A brief history about Insurance Industry
2.1. Pre-Nationalization
2.2. Nationalization of the Sector
2.3. Insurance Reforms
2.4. Interim Insurance Regulatory Authority
2.5. Insurance Regulatory and Development Authority
2.6. Approach to Reforms
3. Global Insurance Environment- A brief on global and domestic scenario covering Insurance Penetration,
Density, growth of Industry etc
3.1. Global Insurance Environment
3.2. Domestic Market Overview
4. Industry Outlook
4.1. Life Insurance -Total Premium Underwritten
4.1.1. Market Share (% share)
4.1.2. Growth of Business
4.2. Non Life insurer Market Share (% share)
4.2.1. Market Share (% share)
4.2.2. Growth of Business
5. Analysis of Trends
5.1. Life Insurance
5.1.1. Enlarged Coverage
5.1.2. Introduction of New Products
5.2. General Insurance
5.2.1. Tariff and non-tariff Products
5.2.2. Enlarged Coverage
5.2.3. Introduction of New Products
5.2.4. Reinsurance Supported Products
5.3. Health Insurance
5.3.1. Enlarged Coverage
5.3.2. Introduction of New Products
Page | 22
5.4. Reinsurance Business
6. Investment of Funds by the Insurance Industry
6.1. Investment Pattern
7. FDI in Insurance Sector
8. Intermediaries
8.1. Commission Structure
8.1.1. Life Insurance Industry
8.1.2. Non Life Insurers
9. Changes in Insurance Legislation
9.1. Changes in Insurance Legislation
9.2. Regulatory Issues and Changes
9.3. Consumer Related Changes
9.4. Removal of Redundant Clauses
9.5. Enhancement of Enforcement Powers and Levy of Penalties
10. Corporate Governance Guidelines for Insurance Companies
11. Conclusion
Page | 23
Annexure III: Comparison table on disclosures made in offer documents of life insurance companies in other jurisdictions
Particular Cathy FHC,
Taiwan
China Life Ping AN Sony Financial Delta Lloyd Groep IRDA's Observations
1 Business Description
1.a Gross Premium By business line
(life V/s Non-life)
and by product line
By product
profitability (group
life vs. individual life/ Participating
vs. traditional non-
participating/ Singe premium vs regular
premium)
By business life (life
vs non-life), By
region (Coastal vs. others), by product
(Life % of regular
premium/ % of renewal premium /
Bancassurnace vs.
group life vs. individual life, non-
life, auto vs. non-
auto
By business line
(life, non-life &
banking) By product (individual life vs.
individual annuity
vs. group life, group annuity)
By business line (life vs.
non-life) By region
(Netherlands, Belgium) By product (Individual/ group,
savings/ pension, traditional
/ linked)
Covering various business lines
(including the renewal premiums in
case of life companies). Also
disclosre on buisness underwritten on
geography wise basis
1.b Cross selling Between Insurance and banking
Not Available Between life and non-life
Between life, non-life and bank
Between life, non-life and bank and fund management
Between insurance & banking (details
of referrals and bancassurance to be
provided)
1.c Distribution network Agents Branch/ Agents/
Bancassurance
Branch/agents/.
Bancassurance
Life planner sales
employees and
independent agents
Different channels utilized Agents, corporate agents,
bancassurance, brokers and Referrals.
The same will be specified by IRDA as
an additional disclosure.
1.d Persistency 13-month
persistency
Not Available 13-month and 25-
month persistency
12-months
persistency
Not available Applicable only for life insurance
business. Already covered in the re-
statement of the financial statement.
However, if require, the same may be
repeated here giving 13months, 25th
month, 37months, 49th months and
61th months persistency ratio
2 Income Statement
Page | 24
Particular Cathy FHC,
Taiwan
China Life Ping AN Sony Financial Delta Lloyd Groep IRDA's Observations
2.a Renewals Not available Not available Mentioned Mentioned Mentioned (in MCEV) Would be covered under the Revenue
Statement - specific for life companies.
2.b Agent productivity Not available Briefly discussed Annualized FYP per agent, new life
policies per agent
per month
Mentions only the number of sales
employees and
agents
Mentions number of agents Annualized FYP per agent; new life
policies per agent per month. - case of
life companies
2.c Margin per product
line
By different
business line
Not available By different product
(bancassurance vs
group life vs individual)
By different product
lines and different
business divisions
By different business
divisions Not in vogue in India at present.
However, segment wise disclosure have
already been specified for revenue a/c.
In case of non-life companies,
disclosure would be underwriting
experience segment wise.
2.d Operating expense
ratio
ratio given for life
insurance
Only expenses
disclosed in P&L
Expenses disclosed
in detail
Only expenses
disclosed in P&L
Mentioned only for general
insurance divisions, for life
insurance expenses in P&L
Already covered in management
expense ratio
3 Balance Sheet
3.a Investment Yield for overall investment
Yield for each class of investment
Yield for each class of investment
Yield for each class of investments
Yield for each class of investments
Already covered in the financial
statement and the continuous
disclosures- – to be disclosed for the
shareholders’ funds; traditional
portfolio and on the ULIPs in case of
life com.
3.b Investment portfolio Loans/ overseas
investment/ short
term security/ bonds etc.
Deposit/fixed
maturity/ equity/
loan
Deposit/fixed
income/ equity/loan
Deposit /fixed
income/equity/loan
Deposit/fixed
income/equity/loan/bonds Already covered in the financial
statements to be restated
3.c cost of liability Not available Not available Provides interest
rates directly to
illustrate negative spreads
Provides interest
rates directly to
illustrate negative spreads
Interest amount by type of
liability provided In the Indian context, the only form of
capital presently permitted is Equity. As
such, there is presently only the
notional cost of capital involved. For
the present, disclosures in this context
may not be required.
4 Capital and EV (including assumptions)
Page | 25
Particular Cathy FHC,
Taiwan
China Life Ping AN Sony Financial Delta Lloyd Groep IRDA's Observations
4.a Value of new Business
Not available with sensitivity analysis
With sensitivity analysis
with sensitivity analysis
with sensitivity analysis not required to be disclosed as there is
no uniformity in the approach to be
followed for computation of Value of
New Business.
4.b NBAP Not available Not available New business value
/ first year premium
(No assumptions
mentioned)
disclosure of NBAP
and NBAP %
(Assumptions
mentioned)
disclosure of NBAP and
NBAP % (Assumptions
mentioned)
-do-
4.c Embedded Value Assumptions are
mentioned very
briefly
Assumptions are
mentioned very
briefly
Assumptions are
mentioned very
briefly
Assumptions are
mentioned in detail
Assumptions are mentioned
in detail The same needs to be disclosed.
Institute of Actuaries of India is already
in process of finalisation of the
guidelines on Embedded Value.
4.d Capitalization Mentioned Mentioned Mentioned Mentioned Mentioned Already covered as a part of financial
statement.
4.e Solvency margin statutory disclosure statutory disclosure statutory disclosure statutory disclosure Regulatory and IFRS basis Covered in the ratios prescribed by the
Authority.
5 Risk Management
5.a Market risk Described the risk
and explained the
way it is managed
Described the risk
and explained the
way it is managed
Described the risk
and explained the
way it is managed
Described the risk
and explained the
way it is managed
Described the risk and
explained the way it is
managed
Covered
5.b Operational risk Not available Not available Explained the risk
and the measures
taken to manage it
Described the risk
and explained the
way it is managed
Described the risk and
explained the way it is
managed
Covered
5.c Credit risk Described the risk and explained the
way it is managed
Described the risk and explained the
way it is managed
Described the risk and explained the
way it is managed
Described the risk and explained the
way it is managed
Described the risk and explained the way it is
managed
Covered
5.d Liquidity risk Described the risk and explained the
way it is managed
Described the risk and explained the
way it is managed
Described the risk and explained the
way it is managed
Described the risk and explained the
way it is managed
Described the risk and explained the way it is
managed
Covered
5.e Assets Liability
Management
Described the risk
and explained the way it is managed
Described the risk
and explained the way it is managed
Described the risk
and explained the way it is managed
Described the risk
and explained the way it is managed
Described the risk and
explained the way it is managed
Covered
6 Investment
6.a Equity Types of investment and the quality of
the portfolio
Mentions the investments in brief
and the yield
Mentions the investments in brief
and the yield
Mentions the investments, yield
and the industry
wise bifurcation n brief and the yield
Types of investment and the quality of the portfolio
At present covered only in the financial
statement. It is suggested that the
investments, yield and the industry wise
bifurcation in brief may also be
captured.
Page | 26
Particular Cathy FHC,
Taiwan
China Life Ping AN Sony Financial Delta Lloyd Groep IRDA's Observations
6.b Bonds Types of investment and the quality of
the portfolio
Mentions the investments in brief
and the yield on it
Mentions the investments in brief
and the yield
Mentions the investments in brief
Types of investment and the quality of the portfolio
Already covered in the periodical
disclosures to be made by the insurers.
However, the same may also be covered
in the IPO disclosures.
7 Reinsurance
7.a No. of reinsurers Main reinsurers
mentioned
Main reinsurers
mentioned
Not available Not available Main reinsurers mentioned Along with disclosure of the
information as indicated, the overall
strategy and reinsurance policy of the
insurer and the types of reinsurance
treaties entered into would also need to
be indicated.
7.b Rating of reinsurers Mentioned Not available Not available Not available Not available
7.c Exposure of
reinsurers
Not available Mentioned Not available Not available Briefly mentioned
8 Interest rate
sensitivity
Briefly mentioned Mentioned in detail Mentioned along with the impact of
the risk
Not availabe Mentioned along with the impact of the risk
Would form part of various risk factors.
8.a Equity price sensitivity
Not available Mentioned along with the impact of
the risk
Mentioned along with the impact of
the risk
Not availabe Mentioned along with the impact of the risk
9 Management Report on internal control over financial reporting
Internal control
reporting
Not available Not available Not available Not available Currently not available.
However to be submitted by 2012.
As part of MD&A.
10 Investment
10.a Classification Classified in to Trading securities,
Held to Maturity &
Available for sale
Classified in to Held to Maturity,
Trading securities
and Non-trading securities
Classified in to Held for trading
securities, Held to
Maturity & Available for sale
and Loans &
receivables originated by
enterprise
Classified in to Held to maturity,
Financial assets
carried at cost & Available for Sale
Classified financial assets at fair value through profit or
loss (FV) (further classified
into "held for trading" and "other than trading"),
available-for-sale financial
assets (AFS), or loans and receivables
Presently, the portfolio is not required
to be segregated into HTM/HFT/AFS.
However, once the stipulation is in
place, insurers would need to disclose
the segregation.
Page | 27
Particular Cathy FHC,
Taiwan
China Life Ping AN Sony Financial Delta Lloyd Groep IRDA's Observations
10.b Valuation Trading securities and Available for
sale are marked to
market and Held to Maturity are stated
at amortized cost
Held to maturity securities are
reported at
amortized cost and Trading and Non-
trading securities
are reported at fair
value
Held to maturity and Available for
sale reported at fair
value and Trading securities and Loans
& receivables at
cost
Held to maturity are reported at
amortized cost, Held
for trading securities and available for
sale are stated at
fair value with
unrealized gains or
losses charged to
income
FV and AFS are carried at fair value. Changes in the
fair value of "held for
trading" and "other than trading" investments are
charged to income.
Changes in the fair value of
AFS (except for impairment
losses and relevant foreign
exchanges gains and losses) are recorded in a specific
investment valuation reserve
within equity, mortgages and loan assets are reported
at amortized cost.
As per the present dispensation, listed
equity is valued at market price. Debt
instruments are valued at amortized
cost. The same is already being covered
in Significant accounting policies.
10.c Unrealized gains/ losses
Unrealised gains/ losses on Trading
securities are taken
to current earnings, on Available for
sale are taken to a
separate component of
shareholder's
equity and premiums &
discounts on Held
to Maturity are amortized over the
period of
investment
Unrealised gains/ losses on Held to
Maturity and
Trading securities are reported in
profit and loss
account whereas as that on Non trading
are routed through
investment revaluation reserve
Unrealised gains/ losses on Held for
trading are included
in consolidated results, for
Available for Sale,
they are recognised as a separate
component of equity
Unrealised gains or losses on securities
held for trading
charged to income
Fair Value movement on Held for trading and other
than held for trading are
included in the results, gross fair value gains/ losses
shown in Equity account
Manner of arriving at the unrealized
gains to be indicated.
11 Others
11.a Deferred acquisition
cost
Amortized Amortized Amortized Not available Amortized In the Indian context, the acquisition
costs are not permitted to be deferred.
Thus, no disclosures required.
Page | 28
Particular Cathy FHC,
Taiwan
China Life Ping AN Sony Financial Delta Lloyd Groep IRDA's Observations
11.b Liability for Future policy benefits and
Policyholder
Account Balances
Not available Calculated through the use of
assumptions for
investment returns, mortality,
morbidity, expenses
and persistency, as
well as certain
macro-economic
factors such as inflation
Briefly mentioned Briefly mentioned Briefly mentioned Calculated based on various actuarial
assumptions – in case of life insurers.
In case of non life insurance
companies, disclosure with respect to
reserving -loss triangles/claims
development would also be required to
be made.
11.c Risk Based Capital Calculated as per
the regulatory guidelines
prescribed by ROC
Calculated as per
the regulatory guidelines
prescribed by CIRC
Calculated as per
the regulatory guidelines
prescribed by CIRC
Solvency margin
ratio is mentioned along with the
calculations
Solvency margin ratio is
mentioned for all divisions These prescriptions are presently not
applicable to insurance companies in
India.
11.d Monitoring
Mechanism
CIRC CIRC CIRC FSA Not mentioned Already decided that no monitoring
agency is required.
29
Annexure IV: Glossary of terms used in Insurance Industry
(A) LIFE INSURANCE
Glossary- Life
Annuity
A periodic payment made for an agreed period of time (usually up to the death of the
recipient) in return for a cash sum. The cash sum can be paid as one amount or as a
series of premiums. If the annuity commences immediately after the payment of the
sum it is termed an immediate annuity. If it commences at some future date it is termed
a deferred annuity.
Annual premium equivalent
(APE)
An industry measure of new business. The total of new annualised regular premiums
plus 10% of single premiums written during the applicable period.
Assumptions Variables applied to data used to project expected outcomes.
Acquisition costs
Expenses related to the procurement and processing of new business written including
a share of overheads.
Board The board of Directors of the Company.
Bonus Surplus funds that a life insurance company allocates to its policyholders
Certainty Equivalent The approach adopted in calculating the value of in-force under the MCEV basis,
where all cash flows are projected and discounted at risk-free rates
Conventional with-profit or
CWP
Traditional policies which participate in the profits of the company-participating
policies
Cost income ratio
The ratio of total costs to total income for the year expressed as a percentage. These
are measures by reference to which the development, performance or position of the
business can be measured effectively. It indicates how much of total income is being
employed to meet the cost base and measures the strategic driver of cost effectiveness.
Deferred acquisition costs
(DAC)
The method of accounting whereby acquisition costs on long-term business are
deferred in the balance sheet as an asset and amortised over the life of those contracts.
This leads to a smoothed recognition of up front expenses instead of the full cost in the
year of sale.
Deferred Annuity Annuities which commence after a specified number of years or at a specified age
(usually on retirement), usually continuing through the policyholder’s life.
Director A director of the Company
Discounting
The reduction to present value at a given date of a future cash transaction at an
assumed rate, using a discount factor reflecting the time value of money. The choice of
a discount rate will usually greatly influence the value of insurance provisions, and
may give indications on the conservatism of provisioning methods.
Dividend cover
This is a measure of how easily a company can pay its dividend from profit. It is
calculated as IFRS operating profit after tax and minority interest divided by the total
dividend for that financial year. The dividend for the financial year is the current year
interim dividend plus the proposed final dividend.
Earnings before interest
and tax (EBIT)
EBIT is defined as earnings before interest, taxation, foreign exchange gains and
losses, profit on partial disposal of investment in associate, divergence on financial
guarantee costs, movement on contract for differences and restructuring costs. This
KPI measures directly the underlying operating profitability. is defined as earnings
before interest, taxation, foreign exchange gains and losses, profit on partial disposal
of investment in associate, divergence on financial guarantee costs, movement on
contract for differences and restructuring costs. This measures directly the underlying
operating profitability.
EBIT margin
This is an industry measure of performance for investment management companies. It
is calculated as EBIT is defined as earnings before interest, taxation, foreign exchange
gains and losses, profit on partial disposal of investment in associate, divergence on
financial guarantee costs, movement on contract for differences and restructuring
costs. This KPI measures directly the underlying operating profitability. divided by total
revenue
Economic assumptions Assumptions in relation to future interest rates, investment returns, inflation and tax.
30
These assumptions and variances in relation to these assumptions are treated as non-
operating profits/(losses) under EEV.
Embedded Value or EV The Embedded Value of a life insurance business is the sum of its shareholder net
assets (including any surplus held in the long term business fund which is attributable
to shareholders) and the value of its in-force business. The latter is calculated by
projecting the after tax surpluses distributable to shareholders expected in respect of
the in-force business and discounting them back to the present time at a risk rate of
return
Experience variances
Current period differences between the actual experience incurred over the period and
the assumptions used in the calculation of the embedded value excluding new business
non-economic experience variances which are captured in new business contribution.
Financial options and
guarantees
Terms relating to covered business conferring potentially valuable guarantees
underlying, or options to change, the level and nature of policyholder benefits and
exercisable at the discretion of the policyholder, whose potential value is impacted by
the behaviour of financial variables.
Free surplus
The amount of capital and any surplus allocated to, but not required to support, the in-
force business covered by the EEV
IFRS International Financial Reporting Standards
Income Protection A long-term business policy which provides cover against loss of income consequential
upon certain insured events such as accident, sickness or permanent ill health.
In-force
Long-term business which has been written before the period end and which has not
terminated before the period end.
Interest margin
Net interest income for the year as a percentage of average total assets during the year
disclosed in basis points (1/100th of 1%). This is a measure of how much margin the
Group is making on its banking assets and measures the driver of income generation
for this business.
Internal rate of return
(IRR)
A measure of rate of returns on an investment and so an indicator of capital efficiency.
The IRR is equivalent to the discount rate at which the present value of the after tax
cash flows expected to be earned over the lifetime of new business written is equal to
the capital invested to support the writing of the business.
ISA An individual savings account.
Key Performance Indicator
(KPI)
These are measures by reference to which the development, performance or position of
the business can be measured effectively.
Lapsing or Lapse The cancellation or non renewal of a policy other than by the reason of surrender
Life insurance fund A pool of assets which are maintained by an insurance company and which are
attributable to its life and pensions business
Long-term business
Insurance business which comprises life assurance business (life and pensions
business) and long-term disability insurance (also known as permanent health
insurance)
Maintenance expenses
Expenses related to the servicing of the in-force book of business (including investment
and termination expenses and a share of overheads).
maturing or maturity The point at which the sum assured under a life insurance or pension policy becomes
due to be paid
Market Consistent
Embedded Value (MCEV)
Market-consistent embedded value which is the methodology Resolution adopts for the
purpose of its EEV disclosure. Within a Market-Consistent Embedded Value
(‘‘MCEV’’) framework, assets and liabilities are valued in line with its market prices
and consistently with each other. In principle, each cash flow is valued using the
discount rate consistent with that applied to such a cash flow in the capital markets.
Morbidity Rate The incidence of serious illness or disease across a defined group or number of people
Mortality The incidence of deaths at a specified age across a defined group or number of people
Net flows
Life and pensions net flows representing gross inflows less redemptions. Gross inflows
are premiums recognised in the period on a regulatory basis (excluding any switches
between funds). Redemptions are claims and annuity payments (excluding any
reinsurance transactions and switches between funds).
Net worth The market value of equity holders’ funds and the shareholders’ interest in the surplus
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held in the non profit component of the long-term business funds, determined on a
statutory solvency basis and adjusted to add back any non-admissible assets per
regulatory returns.
New Business Achieved
Profit (NBAP)
NBAP is a metric for the economic value of the new business written during a defined
period. It is measured as the present value of the future profits for the shareholders on
account of new business sales, based on a given set of assumptions. NBAP
incorporates best estimate assumptions of future rates of investment returns, policy
discontinuances, mortality, expenses, inflation, taxation, bonus rates and statutory
valuation bases.
New business contribution
(NBC)
The expected present value of all future cash flows attributable to the equity holder
from new business
New business strain (NBS) Costs involved in acquiring new business (such as commission payments to
intermediaries, expenses, reserves) affecting the insurance company’s financial
position at that point and where all of the income from that new business (including
premiums and investment income) has not yet been received and will not be received
until a point in the future. To begin with, therefore, a strain may be created where cash
outflows exceed inflows.
NBS margin
New business strain costs involved in acquiring new business (such as commission
payments to intermediaries, expenses, reserves) affecting the insurance company’s
financial position at that point and where all of the income from that new business
(including premiums and investment income) has not yet been received and will not be
received until a point in the future. To begin with, therefore, a strain may be created
where cash outflows exceed inflows. As a percentage of PVNBP The industry measure
of insurance new business sales under the EEV methodology. It is calculated as 100%
of single premiums plus the expected present value of new regular premiums.
Non-Market risks Risks relating to insurance (such as mortality, longevity and persistency), business,
operations and liquidity
Non profit policy A policy, including a unit linked policy, which is not a with profits policy.
Present value of in-force
business (PVIF)
The present value of the projected future distributable profits after tax attributable to
equity holders from the covered business in force at the valuation date, adjusted where
appropriate, to take account of TVOG.
Present value of new
business premiums
(PVNBP)
The industry measure of insurance new business sales under the EEV. The value to
equity shareholders of the net assets plus the expected future profits on in-force
business from a life assurance and pensions business. Prepared in accordance with the
EEV Principles and Guidance issued in May 2004 by the CFO Forum and the
Additional Guidance issued in October 2005. EEV reports the value of business in-
force based on a set of best estimate assumptions, allowing for the impact of
uncertainty inherent in future assumptions, the costs of holding required capital, the
value of free surplus and TVOG methodology. It is calculated as 100% of single
premiums plus the expected present value of new regular premiums.
PVNBP margin PVNBP margin is NBC expressed as a percentage of PVNBP. This measures whether
new business written is adding value or eroding value.
Regular premium
A regular premium contract (as opposed to a single premium contract), is one where
the policyholder agrees at inception to make regular payments throughout the term of
the contract
Reinsurance Insurance taken out by an insurer of the whole or part of the risks that it has already
insured
RFP Request for proposals
Return on EEV (RoEV)
The annualized post-tax operating profit on an EEV. The value to equity shareholders
of the net assets plus the expected future profits on in-force business from a life
assurance and pensions business.
Return on equity (RoE) Calculated as IFRS underlying profit after tax divided by opening net assets.
Run-off The operation of portfolios of insurance that have been closed to new business
Single premium
A single premium contract (as opposed to a regular premium contract (see above)),
involves the payment of one premium at inception with no obligation for the
32
policyholder to make subsequent additional payments.
SIPP
A self invested personal pension which provides the policyholder with greater choice
and flexibility as to the range of investments made, how those investments are
managed, the administration of those assets and how retirement benefits are taken.
Surrender The cancellation of a long term policy before it reaches maturity
Surplus The part of a long term business fund over and above the sum of its liabilities. In the
case of a with-profits fund, holders of ‘with-profits’ policies are entitled to a share in
the surplus, usually in the form of a reversionary bonus added periodically to a payable
with the sum assured and terminal bonuses added at maturity
Total shareholder return
This is a measure of the overall return to shareholders and includes the movement in
the share price and any dividends paid and reinvested.
TEV Traditional Embedded Value, a methodology of calculating embedded value using
deterministic assumptions.
Underlying profit
An IFRS profit measure the Group uses to provide a more meaningful analysis of the
underlying business performance. Underlying profit is calculated by adjusting profit
attributable to equity holders before tax for items such as volatility arising from
accounting mismatches, impairment of intangibles and certain restructuring expenses.
Underwriting The insurer’s process of reviewing applications for insurance cover and the decision
whether to accept all or part of the risk and determination of the applicable premiums
and also refers to the acceptance of such risk
Unit linked policy
A policy where the benefits are determined by reference to the investment performance
of a specified pool of assets referred to as the unit linked fund.
Unit Trust A trust where investors (unit holders) obtain a fractional interest in a fund by
purchasing units from the managers of the trust on the understanding that they can
resell their units to the managers at a price closely reflecting the stock market value of
the trust’s investments
Unitised with-profits or
UWP
Any policy under which the value of the benefits is measured in whole or in part by
reference to the with-profits units allocated to that policy
With-profit business Business represented by with-profits policies and the assets and liabilities associated
with them.
With-profit fund The part of a long term business fund in which holders of with-profits policies are
entitled to participate in surplus
With profits policy or
With-profit policies
A policy where, in addition to guaranteed benefits specified in the policy, additional
bonuses may be payable from relevant surplus. The declaration of such bonuses
(usually annually) reflects, amongst other things, the overall investment performance
of the fund of which the policy forms part. Also known as a ‘participating policy’.
With-profit units Notional units whose value or number vary by reference to premiums paid, bonuses
declared or surpluses otherwise distributed for the purposes of calculating benefits
payable under policies
VIF Value of in-force business
33
B) NON-LIFE INSURANCE
Glossary- Non-Life
“1/24th method and
1/365th method”
Under the annual basis of accounting, the provision for unearned premiums is recognized
to cover the proportion of retained premiums written in a year which relate to the period of
risk from the first date in the following financial year to the subsequent date of expiry of
policies. Unearned premiums can be calculated on a time apportionment basis, principally
on either a daily or monthly pro rata basis. The 1/365th method and 1/24th method are the
main time apportionment methods to calculate unearned premiums under the 1/365th
method, the unearned premium reserve is the aggregate of the unearned premiums,
calculated on a daily pro rata basis, in respect of the premiums relating to the unexpired
periods of the respective insurance policies at the end of the financial period the 1/24th
method is based on the general assumptions that the premiums are spread uniformly over
the month and the average date of issue of all policies is the middle of that month.
“accident year” The 12-month period in which loss events occurred, regardless of when the losses are
actually reported, booked or paid.
“actuaries” Specialists trained in mathematics, statistics and accounting who are responsible for rate,
reserve and dividend calculations and other statistical studies
“agent” An individual who is appointed by an insurance company to sell insurance policies on
behalf of, and within the scope authorised by, the insurance company, and who receives a
commission from the insurance company.
“broker” A brokerage firm which represents and negotiates insurance contracts on behalf of the
insured party, and who receives a commission from the insurance company.
“capital insurance” Insurance coverage provided by a company insuring the risks of its parent entity and/ or its
associated corporations.
“captive insurer” An insurance company which carries on general insurance business only and such
business (1) does not relate to any liabilities or risks in respect of Which persons are
required by law to be insured and (2) is restricted to the insurance and reinsurance of risks
of the companies within the same grouping of companies to which that company belongs.
“case reserves” Reserves for claims and claims handling costs established with
respect to specific, individual reported claims.
“catastrophe “ A severe loss, usually involving risks such as earthquake, flood, windstorm and other
similar natural disasters.
“catastrophe loss” Loss and directly identified LAE resulting from catastrophes.
“catastrophe excess of
–loss reinsurance”
A form of excess-of-loss reinsurance which, subject to a specified limit, indemnified the
ceding company for the amount of loss in excess of a specified retention with respect to an
accumulation of losses resulting from an insured catastrophe. The actual reinsurance
document is called a “catastrophe cover”.
“cede” or ”ceding
company”
When an insurer reinsures its risk with another insurer or reinsurer, it “cedes” business.
“claim” A demand made by an insured person or the beneficiary of an insurance policy in respect
of a loss which may come within the cover provided on the sum insured by the policy.
“claims handling
costs”
The expenses of settling general claims, including legal and other fees and general
expenses.
“claims incurred” The total amount of loss and claims handling costs incurred by an insurance company
under a policy or policies, whether paid or unpaid.
“claims reserves” case reserves plus IBNR reserves
“combined loss
amount”
For the purpose of calculating the minimum solvency margin required by the CIRC, the
sum of the loss paid, change in loss and LAE reserves and loss paid for assumed
reinsurance, less losses recovered from reinsurance companies, salvage and other
recoverable amounts.
“combined ratio” The sum of the loss ratio and the expense ratio for a general insurance company or a
reinsurance company. A combined ratio below 100 generally indicates profitable
underwriting. A combined ratio over 100 generally indicates unprofitable underwriting. An
insurance company with a combined ratio over 100 may be profitable to the extent net
34
Glossary- Non-Life
investment results exceed underwriting losses.
“commission” A payment to an agent or broker by an insurance company for service in respect of a sale
of an insurance product.
“compulsory
insurance”
Insurance which the State, by law or regulation, requires to be taken up
“credit and guarantee
insurance”
Insurance that covers credit risk or exposure. Such insurance can be divided into credit
insurance and guarantee insurance. Credit insurance is provided by an insurer to an
obligee to cover the credit of an obligor such that the insurer indemnifies the obligee
against losses caused by the obligor failing to perform its obligations under its contract
with the obligee. Guarantee insurance involves the provision by an insurer, at the request
of an obligor, of a guarantee in favour of an obligee such that if the obligor does not
perform its contractual obligations and causes economic losses to the obligee, the insurer
indemnifies the obligee against the losses.
“deductible” The amount of loss that an insured retains.
“deferred acquisition
costs”
Primarily commissions and underwriting and personnel expenses net of reinsurance
commissions recovered, which vary with and are primarily related to the production of new
and renewal business, and which are deferred and amortized rateably over the terms of the
insurance policies.
“direct premium
written” or “direct
premiums written”
The amounts before government levies and surcharges charged by an insurer from insured
in exchange for coverage provided in accordance with the terms of an insurance contract.
It excludes all reinsurance premiums, either assumed or ceded.
“excess of loss
reinsurance treaty”
A form of non-proportional reinsurance under which the reinsurer agrees to reimburse the
ceding company for all losses in excess of a predetermined amount, subject to a
predetermined maximum limit. Premiums paid by the ceding company to the reinsurer for
excess of loss reinsurance are generally not in the same proportion to the claims recovered
by the ceding company from the reinsurer
“expense ratio” The ratio of business operating expenses to net earned premiums
“facultative
reinsurance”
The reinsurance of all or a portion of specific, individual risks to a reinsurer on a case-by-
case basis.
“general insurance” Also called “non-life insurance” or “property and casualty insurance” and including
insurance such as motor, personal accident, goods in transit, employees’ compensation,
other liabilities and property insurance and medical insurance.
“gross premiums
written”
Direct premiums written plus any reinsurance premiums assumed by the insurer
“group insurance” Life, personal accident and medical insurance taken out for groups of individuals (typically
employees of a common employer).
“IBNR reserves” Reserves for estimated losses and loss adjustment expenses which have been incurred but
not yet reported to the insurer or reinsurer, including future development of claims which
have been reported to the insurer or reinsurer but where the established reserves may
ultimately prove to be inadequate.
“insurance protection
fund”
Fund set aside by insurance companies to deal with serious insufficiency of solvency or
paid-in capital. An insurance company may, subject to the approval of the Ministry of
Finance and CIRC, use the insurance protection fund if it encounters serious problems in
paying its obligations or it is on the verge of becoming insolvent. According to the relevant
regulations, insurance companies are required to set aside and maintain 1% of their
annual retained premiums to the insurance protection fund until the total amount of the
fund reaches 6% of their total asset value.
“long-tail” Insurance business with a relatively longer period of exposure to potential claims and/or
with a relatively longer period of settlement, generally more than three years.
“long term business” Means any of the classes of insurance business specified in Part 2 of First Schedule of the
ICO which include, among others, life and annuity, marriage and birth, permanent health,
capital redemption and retirement scheme management.
“long term life
insurance”
Life insurance policies which are intended to be greater than twelve months in duration,
are not subject to unilateral changes in the contract terms and require the performance of
35
Glossary- Non-Life
various functions and services (including but not limited to insurance protection) for an
extended period of time
“loss” An occurrence that is the basis for submission and/or payment of claim. Losses may be
covered, limited or excluded from coverage, depending on the terms of the policy.
“loss and LAE
reserves”
Liabilities established by insurers to reflect the estimated cost of claims incurred that the
insurer will ultimately be required to pay in respect of insurance it has written. Reserves
“loss adjustment
expenses or LAE”
The expenses of settling claims, including legal and other fees and the portion of general
expenses allocated to claim settlement costs. For the purpose of calculating reserves, we
only include external claims related expenses, such as fees for external legal advisors and
external claims adjustors.
“loss and LAE ratio” The ratio of loss incurred net of reinsurance recovered to net premiums earned.
“loss ratio” The ratio of a general insurance or reinsurance company’s incurred claims and claims
expenses to net earned premiums.
‘loss incurred” The total amount of loss and LAE incurred by an insurance company under a policy or
policies, whether paid or unpaid
“loss paid” The total amount of loss incurred and paid by insurance company under a policy or
policies.
“net premiums written” Turnover less reinsurance premiums ceded
“net written premiums” Gross written premiums for a given period less premiums ceded to reinsurers during such
period.
“net earned premiums” Net written premiums less the change in net unearned premium reserves.
“net premiums earned” Net premiums written less the change in net unearned premiums reserves.
non-proportional
reinsurance treaty”
A reinsurance contract under which the reinsurance coverage of loss is not directly
proportional to the loss of the ceding company. Generally, non-proportional reinsurance is
also known as “excess of loss reinsurance”.
“penetration rate” Direct written premiums as a percentage of GDP
“pool” An organization of insurers or reinsurers through which particular types of risks are
underwritten with premiums, losses and expenses being shared in agreed-upon
percentages.
“P&C insurance” Property and casualty insurance, which includes property loss and damage insurance,
liability insurance and credit and guarantee insurance.
“premium” The amount charged on policies and contracts issued, renewed or reinsured by an
insurance company.
“premiums earned” That portion of gross written premium in current and past periods which applies to the
expired portion of the policy period, calculated by subtracting changes in net unearned
premium reserves from gross written premiums.
“property insurance” Insurance that provides coverage to a person with an insurable interest in tangible property
for that person’s property loss, damage or loss of use.
“proportional
reinsurance treaty”
A reinsurance contract under which the ceding company and the reinsurer share premiums
and claims in agreed proportions.
Policy Period The period of time in which a policy is in effect.
Probable Maximum
Loss (PML):
The largest loss thought probable under an insurance policy; normally applied to material
damage risks where the total sum insured is not considered to be at risk from one loss
event.
“quota share” or
“quota share
reinsurance”
Reinsurance where the insurer cedes an agreed-upon percentage of liabilities, premiums
and loss for each policy covered on a pro rata basis.
“rate” or “premium
rate”
Consideration paid per unit of insurance as a percentage of insured value.
“reinsurance” The sharing or spreading of a risk by an insurer ceding part of an insured risk to a
reinsurer.
“reinsurance
commission”
A commission paid to an insurance company by a reinsurer.
“retained premiums” Gross premiums written less reinsurance premiums ceded.
36
Glossary- Non-Life
“retention” The risks kept and assumed by an insurer or reinsurer after ceding a part of such risks to
another reinsurance company. Losses in excess of the retention level up to the outer limit
of a reinsurance program, are paid by the reinsurer. In proportional treaties, the retention
may be a percentage of the original policy’s limit. In excess-of-loss reinsurance, the
retention is a dollar amount of loss, a loss ratio or a percentage.
“risk unit” The maximum amount of loss that can arise from a single risk under a single policy.
“salvage” The property or amount or money an insurer recovers through the sale of property
transferred to the insurer as a result of a loss payment.
“security fund” The fund established in accordance with the Insurance Law by an insurance company at
the time of its incorporation. Such fund is owned by the insurance company but must be
deposited into a bank designated by the CIRC and may not be used for any purpose other
than to pay off debts of the insurance company upon liquidation.
“segment expense
ratio”
The ratio of the sum of amortization of deferred acquisition costs and insurance protection
expense to net premiums earned for a particular segment.
“share premium” Paid-in capital in addition to issued and paid-up nominal share capital.
“short-tail” Insurance business with a relatively shorter period of exposure to potential claims and/or
with a relatively shorter period of settlement, generally less than three years.
“short-term life
insurance”
As used in connection with insurance businesses, life insurance policies for a fixed period
of no more than twelve months.
“statutory reserves” Amounts required to be reserved under the PRC Insurance Law as well as PRC accounting
standards in order for an insurance company to provide for future obligations with respect
to all policies. Statutory reserves are liabilities on the balance sheet of financial statements
prepared in conformity with PRC accounting standards.
“surplus treaty” A form of proportional reinsurance treaty whereby the reinsured cedes and the reinsurer
accepts that share of the risk which exceeds the reinsured’s retention.
“term life insurance” Life insurance written for a specified period and under which no cash value is generally
available on surrender.
“third-party liability” A liability owed to a claimant by the insured party.
“treaty reinsurance” Reinsurance of blocks of risks, whereby all risks within a certain class or classes, and
within the scope defined in the relevant reinsurance agreement known as a treaty, are
accepted by the reinsurer. Typically, in treaty reinsurance, the direct insurer (that is,
reinsured) has the obligation to offer, and the reinsurer is obligated to accept, a specified
portion of all that type or category of risks originally written by the insurer.
“turnover” Gross written premiums net of government levies and surcharges
and discounts and returns
“underwriting” The insurance function that is responsible for (1) assessing and classifying the degree of
risk a proposed insured party represents and (2) making a decision concerning coverage of
that risk. Also called risk selection or selection of risks.
“underwriting
capacity” Or
“underwriting limit”
The amount of exposure that an insurer or reinsurer is willing or able to place at risk.
Underwriting capacity may apply to a single risk, a line of business or an entire book of
business. Underwriting capacity may be constrained by legal restrictions, corporate
restrictions or indirect restrictions.
“underwriting profit”
or “underwriting loss”
The pre-tax profit-or loss experienced by an insurance company after deducting net loss
incurred, amortization of deferred acquisition costs, insurance protection expense and
general and Administrative expenses from net premiums earned. This pre-tax profit or loss
includes reinsurance assumed and ceded but excludes Investment income.
“unearned premiums” The portion of premiums that is allocable to the unexpired portion of the policy term or
paid in advance for insurance or reinsurance that has not yet been provided.
“unearned premiums
reserves”
Liabilities established by insurers to reflect the amount of unearned premiums.