Research in Risk Management

FINAL REPORT IDBI FEDERAL LIFE INSURANCE

COMPANY GUIDE: Mrs. ShanthiYagyanath

SUBMITTED BY: MANEET SINGH RAI 2012154

FACULTY GUIDE:
Dr. V.Pailwar

IMT NAGPUR
PGDM (FINANCE) 2012-14

DECLARATION

I, MANEET SINGH RAI, hereby declare that this project entitled Research in Risk Management Is written by me and is my own effort and that no part has been plagiarised without any citations.

ACKNOWLEDGMENT
I would like to thank IDBI Federal Life Insurance Co. Ltd for giving me an opportunity to work with them as a summer intern. It was a privilege for me to work with such an esteemed organization. I would like to thank my project guide,Mrs.Shanthi Yagyanath and Mrs Jayakrithika, for assigning a meaningful project to me which is not only relevant but was also a great learning experience and also for her support and guidance throughout the course of this project. They always gave me continuous encouragement and support, and shared with me their knowledge and experience. I really appreciate the effort she put in the development of me and my work and helped to improve the quality of my Project. I would like to express my eternal gratitude and thanks to faculty members at IMT NAGPUR for their guidance throughout the project. Lastly, I would like to acknowledge each and everyone who contributed for my work either by directly or indirectly.

TABLE OF CONTENTS COMPANY PROFILE IDBI BANK FEDERAL BANK AGEAS INDUSTRY PROFILE

ORIGIN OF INSURANCE SECTOR GLOBAL TREND IN INSURANCE SECTOR INDUSTRY HIGHLIGHTS GLOBAL PLAYERS IN INSURANCE OVERVIEW OF INDIAN INSURANCE SECTOR FUTURE OUTLOOK OF INDIAN INSURANCE SECTOR MISSION OF IDBI FEDERAL LIFE INSURANCE VISSION OF IDBI FEDERAL LIFE INSURANCE PRODUCTS OFFERED INTRODUCTION TO RISK MANAGEMENT OBJECTIVES OF THE STUDY TYPES OF RISK FACED BY FINANCIAL INSTITUTIONS MAIN RISK FACED BY IDBI FEDERAL LIFE INSURANCE GOVERNMENT SECURITIES BONDS EQUITY SHARES INFRASTRUCTURE RISK MANAGEMENT STRUCTURE IN IDBI FEDERAL LIFE INSURANCE TECHNIQUES USED IN RISK MANAGEMENT IN IDBI FEDERAL LIFE INSURANCE OBSTACLES IN RISK MANAGEMENT LIMITATIONS CONCLUSIONS

Company Profile

IDBI Federal Life Insurance Co Ltd is a joint venture of IDBI Bank - Indias premier development and commercial bank, Federal Bank - one of Indias leading private sector banks and Ageas Insurance International - a multinational insurance giant, based out of Europe. In this venture, IDBI owns 48% equity while Federal Bank and Ageas own 26% equity each. IDBI Federal launched its first set of products across India in March 2008, after receiving the requisite approvals from the Insurance Regulatory Development Authority (IRDA). In just five months of inception, IDBI Federal became one of the fastest growing new insurance companies to garner Rs 100 crores in premiums. As on March 31st, 2009, the Company had collected more than 328 crores in premiums, through over 87,000 policies and over Rs 2825 crores in Sum Assured.The Company offers its services through a vast nationwide network across the branches of IDBI Bank and Federal Bank, in addition to a sizeable network of advisors and partners. IDBI BANK IDBI Bank Ltd continues to be, since its inception, Indias premier industrial development bank. Created in 1956 to support Indias industrial backbone, IDBI Bank has since evolved into a powerhouse of industrial and retail finance. Today, it is amongst Indias foremost commercial banks, with a wide range of innovative products and services, serving retail and corporate customers in all corners of the country from 689 Branches 1140 ATMs.

The Bank offers its customers an extensive range of diversified services including project financing, term lending, working capital facilities, lease finance, venture capital, loan syndication, corporate advisory services and legal & technical advisory services to its corporate clients as well as mortgages and personal loans to its retail clients. As part of its development activities, IDBI Bank has been instrumental in sponsoring the development of key institutions involved in Indias financial sector such as the Securities and Exchange Board of India (SEBI), National Stock Exchange of India Limited (NSE) and National Securities Depository Ltd.

FEDERAL BANK Federal Bank Limited is a major Indian commercial bank in the private sector, headquartered at Aluva, Kochi, Kerala. It is the fourth largest bank in India in terms of capital base. As of 18 April 2013, Federal Bank has 1103 branches spread across 24 states in India and 1171 ATMs around the country(across 108 metro centres, 224 urban centres, 384 semi-urban locations and 87 rural areas). Federal Bank opened its 1000th branch at Muthoor, Thiruvalla in Kerala on 17 August 2012, and is planning to hire 2000 professionals by September 2012. The Bank would be the first Bank from Kerala to cross the milestone of 1000 branch network. Federal Bank is a scheduled commercial bank founded in 1931.Federal Bank is one of Indias leading private sector banks, with a dominant presence in the state of Kerala. It has a strong network of over 612 Branches, 617 ATMs spread across India. The Bank provides over four million retail customers with a wide variety of financial products. Federal Bank is one of the first large Indian banks to have an entirely automated and interconnected branch network.

The Bank has a wide range of services like Internet Banking, Mobile Banking, Tele Banking, Any Where Banking, debit cards, online bill payment and call centre facilities to offer round-the-clock banking convenience to its customers. The Bank has been a pioneer in providing innovative technological solutions to its customers, having won several awards like the award for Best Use of IT in Retail Banking by IBA, TFCI and Infosys.

AGEAS

Ageas N.V./S.A. is a Belgium-Dutch multinational insurance company coheadquartered in Brussels, Belgium and Utrecht, Netherlands. Ageas is Belgium's largest insurer and operates in 14 countries worldwide. The company was renamed from Fortis Holding in April 2010 and consists of those insurance activities remaining after the breakup and sale of the financial services group Fortis during the financial crisis of 2007-2010. It is listed on the Euronext Brussels, Euronext Amsterdam, and Luxembourg stock exchanges and forms part of the blue-chip BEL20 stock market index. Ageas ranks among Europes top 20 financial institutions and is a reputed international brand in financial services. European financial services provider engaged in banking and insurance with a presence in over 50 countries. Ageas has subsidiaries in France, Germany and Hong Kong. Ageas has a track record in developing partnerships with strong financial institutions and key distributors in different markets around the world and successfully operates Italy, Portugal, China, Malaysia, India and Thailand. Ageas employs more than 13,000 people and has annual inflows of almost EUR 18 billion. The company is the largest provider of insurance in Belgium, owning 75% of AG Insurance (the remainder is held by Fortis Bank N.V./S.A., which was sold to BNP Paribas in 2009). Products are sold through independent agents, brokers and financial planners, and through branches of BNP Paribas Fortis and its subsidiary Banque de La Poste/Bank van De Post.

Ageas also wholly owns the subsidiary Ageas Insurance International (formerly Fortis Insurance International), through which it is the United Kingdom's thirdlargest provider of private vehicle cover and fourth-largest provider of travel insurance through subsidiaries such as Kwik Fit Insurance. Fortis Insurance International also operates in France, Germany, Turkey, Ukraine and Hong Kong and holds partnerships or joint ventures in Luxembourg, Italy, Portugal, China, Malaysia, India and Thailand. In addition, Ageas holds 45% of Royal Park Investments, a special purpose vehicle which manages a portfolio of "toxic" structured credit assets previously held by Fortis Bank. In September 2012, Ageas acquired Groupamas UK insurance operations, boosting its presence in the automobile and home sectors. The deal will see Ageas add another million policyholders in the UK.

INDUSTRY PROFILE
INTRODUCTION Wherever there is uncertainty there is risk. We do not have any control over uncertainties which involves financial losses. The risks may be certain events like death, pension, retirement or uncertain events like theft, fire, accident, etc. Insurance is a financial service for collecting the savings of the public and providing them with risk coverage. The main function of Insurance is to provide protection against the possible chances of generating losses. It eliminates worries and miseries of losses by destruction of property and death. It also provides capital to the society as the funds accumulated are invested in productive heads.

ORIGIN OF INSURANCE SECTOR Insurance in its current form has its history dating back until 1818, when Oriental Life Insurance Company was started by Anita Bhavsarin Kolkata to cater to the needs of European community. The pre-independence era in India saw discrimination between the lives of foreigners (English) and Indians with higher premiums being charged for the latter. In 1870, Bombay Mutual Life Assurance Society became the first Indian insurer.

At the dawn of the twentieth century, many insurance companies were founded. In the year 1912, the Life Insurance Companies Act and the Provident Fund Act were passed to regulate the insurance business. The Life Insurance Companies Act, 1912 made it necessary that the premium-rate tables and periodical valuations of companies should be certified by an actuary. However, the disparity still existed as discrimination between Indian and foreign companies. The oldest existing insurance company in India is the National Insurance Company Ltd., which was founded in 1906. It is in business. The Government of India issued an Ordinance on 19 January 1956 nationalising the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The Life Insurance Corporation (LIC) absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies245 Indian and foreign insurers in all. In 1972 with the General Insurance Business (Nationalisation) Act was passed by the Indian Parliament, and consequently, General Insurance business was nationalized with effect from 1 January 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on January 1, 1973. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector. Before that, the industry consisted of only two state insurers: Life Insurers (Life Insurance Corporation of India, LIC) and General Insurers (General Insurance Corporation of India, GIC). GIC had four subsidiary companies. Global trends in Insurance Sector Across the world, insurance markets are adapting to the aftermath of the economic crisis. Many multinational insurance companies that hunkered down to conserve capital and trim expenses are now ready to invest in global markets that are poised for significant growth. Insurers enter new domains

Expectations are pointing to insurers entering new domains, as well as expand their presence in current markets. While there are signs of stabilization, consumers and businesses continue to tighten their purse strings. For much of the European and US insurance markets, these conditions continue, with only slight improvement. In Europe, for example, 2011 will likely be another year of low GDP growth, low interest rates and moderate equity market performance. On the life insurance side in Europe, low interest rates reduce the probability of people saving or putting capital into investment products like life insurance and annuities. Insurers that seek greater flexibility in their distribution relationships may be able to counter the stagnant sales environment. Consumers and businesses tighten their purse strings

Sluggish consumer and business spending similarly strains the US property/casualty and life insurance segments, causing revenues and earnings to fall in 2010. The decline in net premiums occurred at the same time that investment yields were torpid. Insurers are further pressured by a competitive insurance market, with pricing barely budging in 2010 and no expectations for significant movement in 2011. Insurer surplus in the US is at an all-time high, and this, too, is driving enhanced competition for business. As in Europe, US insurers that invest in more efficient distribution methodologies and more cost-effective operations can drive stronger performance at home and abroad.

Industry highlights

More people and businesses are equipped to buy insurance and the regulatory systems in many locales have become more sophisticated. While insurance penetration in more mature markets is hindered by relatively high saturation, fast-growing developing and emerging markets offer important growth prospects over the longterm. Insurers seeking opportunities will need to consider strategies that address the fast pace of local and global regulatory and accounting developments. Access to reliable capital sources to support investments in specific regions and developing distribution strategies that take into account consumer buying patterns and demographic trends are other avenues for growth.

Growth drivers vary on market-by-market basis Some challenges, of course, remain. Since Asia-Pacific is a highly diverse super-region with respect to different countries' economic development and insurance penetration, the rate and drivers of growth vary on a market-by-market basis. Mature markets, for example, are more saturated. Developing and emerging markets, on the other hand, offer greater growth opportunities for companies prepared to invest for the long haul. We anticipate further regional evolution, but not revolution, in Asia-Pacific markets in 2011. Each insurer's strategic prioritization and response to the opportunities presented may reap significant rewards. Early movers may especially benefit by their immediate actions, while the insurers who wait to discern the short-term mistakes of others may similarly attain valuable traction.

Poised for opportunity Indefinitely postponing a response to the current market opportunities seems ill-advised, given the chief attraction of the Asia-Pacific market and its remarkable growth rate. This alone helps explain why many multinational insurers are either preparing plans for further investment in the region, or are in the thick of implementing them.

By 2015, approximately 39% of the world's economy is predicted to be in Asia-Pacific

Global Players in Insurance Rank 1 2 3 4 5 6 7 8 9 10 11 Company China Life Insurance Ping An Insurance Group Allianz AXA Group ING Group Generali Group Zurich Financial Services Manulife Financial China Pacific Insurance Munich Re MetLife Market Value (Billions) 118.74 52.80 52.74 46.02 35.46 35.19 34.71 32.56 32.21 30.12 29.93

12 13 14 15 16 17 18 19 20 21 22 23 24 25

The Travelers Companies Prudential Financial Aflac Tokio Marine Holdings Prudential QBE Insurance Group ACE Allstate Chubb Swiss Re Sun Life Financial Cathay Financial CNA Financial AVIVA

27.26 24.86 23.47 22.29 20.05 19.74 16.97 16.94 16.77 16.44 16.24 15.86 15.64 15.51

Overview of Indian Insurance Sector Insurance business was subjected to Indian company act1866, without any specific regulation. In 1905, the slogan Be Indian-Buy Indian declared by Swadwshi Movement gave birth to dozens of indigenous life insurance and provident fund companies. In 1937, the Government of India setup a consultative committee and finally first comprehensive insurance act was passed in 1938.

In oct.2000, IRDA (Insurance Regulatory and Development Authority) issued license paper to three companies, which are HDFC Life Standard, Sundaram Royal Alliance Insurance Company and Reliance General Insurance. At the same time Principal approval was given to Max New York Life, IC ICI Prudential Life Insurance Company and IFFCO Tokio General Insurance Company. Today total 22 life insurance companies including one public sector are successfully operating in India. The growth of the sector can easily be judged through figure-1. According to a study by McKinsey total life insurance market premiums in India is likely to more than double from the current US$ 40 billion to US$ 80-US$100 billion by 2012.

CHANGING COMPETITIVE ENVIRONMENT: With the opening of insurance sector in India, the share of private insurer was very less. As shown in table-1, total share of private insurer was just 2% in 2001-02. It was because of any reason which includes credibility on private players.

But soon because of innovative & customized products, novel distribution channels, aggressive marketing etc. private players gave a tough competition to public sector company (LIC). Gradually, the market share of private insurer went up and till financial year 2007-08, total share of private insurer reached as high as 40.35%. The market share of LIC decreases after the entry of private insurer but it doesnt mean that the growth of LIC got down. LIC continue its growth even after a cut throat completion from the private players.

As shown in table-2, total revenue generated in 2007-08 by LIC is 149783.99 crore against just Rs.51561.42 crore, generated by all 21 private players. It shows that even after opening of insurance industry and heavy competition from the new entrant, LIC observed a continuous growth in its revenue generation. Future Outlook Of Indian Insurance Sector India's growing economy, coupled with a significant rise in the young working population, has potential for development of the life insurance sector. This is in addition to the large population that remains uninsured. Moreover, of the insured population, a significant percentage remains under-insured. So, while premium as percentage of GDP is 4.47 per cent, sum assured as a multiple of GDP is just 0.3. It is estimated that the sector will grow at a compounded average growth rate of 15-20 per cent over the next 15-20 years. Sector Outlook Since the life insurance sector was opened up in 2000, it has now gone through two clear cycles - the first of very high growth (CAGR of over 12 per cent in number of new policies between 2000-10) and then one of substantive moderation (CAGR of over 9 per cent between 2010-12). Despite this, long-term growth prospects for the industry remain intact. The new Bancassurance regulations are also expected next year. These should allow for a bank to collaborate with more than one insurer. While this will allow for more choices for a customer of the bank, choices will remain limited if the number of insurers are restricted to one per state or zone as proposed in the draft regulation. Finance budgets have always had a significant impact on the shape of the Indian industry. This time around, there is a clear need to announce measures that will help sustain momentum of growth and confidence in the economy. There is also a need for decisive legislature and clarity on reforms. At the same time, the government will need to contain the fiscal deficit and inflation. Government spending will have to be efficient and sectors that will have a longterm impact on the economy, such as education, infrastructure and health, will have to be monitored. Challenges facing Insurance Industry

Threat of New Entrants: The insurance industry has been budding with new entrants every other day. Therefore the companies should carve out niche areas such that the threat of new entrants might not be a hindrance. There is also a chance that the big players might squeeze the small new entrants. Power of Suppliers: Those who are supplying the capital are not that big a threat. For instance, if someone as a very talented insurance underwriter is presently working for a small insurance company, there exists a chance that any big player willing to enter the insurance industry might entice that person off. Power of Buyers: No individual is a big threat to the insurance industry and big corporate houses have a lot more negotiating capability with the insurance companies. Big corporate clients like airlines and pharmaceutical companies pay millions of dollars every year in premiums. Availability of Substitutes: There exist a lot of substitutes in the insurance industry. Majorly, the large insurance companies provide similar kinds of services be it auto, home, commercial, health or life insurance.

With the size of world's population reaching gigantic proportions, global insuranceis also gaining in stature. Privateas well government insurance agenciesaround the world are running for insuring lives of millions (and in the process insuring their own businesses more). In fact, the insurance industryis a key component of the world economy today owing to its premiums, its investment and, above all, the social and economic role it plays in covering personal and business risks. Financial viability of insurance companies However, although the insurance industry is a flourishing in world economy today, one need to keep in mind that financial viability/stability of the insurance company is a major consideration at the time of purchasing insurance contract. The viability factor is important because many a times, an insurance premium paid currently provides coverage for losses in distant future and there are instances where a number of insurance companies have gone insolvent, thus leaving their policyholders with little helpful or no coverage. Therefore, even if the global industry is strengthening more and more, the weak links are also co-existent and blind faith can lead to a severe downfall. There are also independent rating agenciesfor insurance companies which could be helpful in providing sound information on financial viability of various insurance companies.

Milestones

2006: IDBI Bank, Federal Bank and Belgian-Dutch insurance major Fortis Insurance International NV signed a MoU to start a life insurance company 2008: IDBI Fortis Life Insurance Co. Ltd., which started its operations in March 2008 2008: IDBI Fortis opens its second branch in Andhra Pradesh in Vijayawada 2008: IDBI Fortis Life positive on assured return products 2008: IDBI Fortis launches the Bondsurance Plan 2009: IDBI Fortis announces Rs 250cr capital infusion 2009: Nimbus ropes in IDBI Fortis as title sponsor of IndiaSri Lanka series 2009: 'IDBI Fortis' Boss-Ka-Boss receives PRCI Award 2009: IDBI Fortis launches Retiresurance Pension Plan 2009: IDBI Fortis scores with Goalsurance 2009: IDBI Fortis reaches the banks of Hoogly 2009: IDBI Fortis launches Incomesurance Immediate Annuity 2009: IDBI Fortis Life Insurance uses an interactive application to help users easily calculate their taxes 2009: IDBI Fortis reaches the City of Eastern Light 2009: IDBI Fortis receives bronze Dragon at 'PMAA 2009' 2009: IDBI Fortis Life Insurance introduces financial inclusion plan in rural Orissa 2009: IDBI Fortis launches Termsurance Protection Plan 2009: IDBI Fortis redefines endowment & money back with Incomesurance 2009: IDBI Fortis to open 65 more branches; raise headcount by 1,000 2010: IDBI Fortis now renamed as IDBI Federal Life Insurance Company

The Mission
We aim to be recognized as a leading provider of wealth management, protection and retirement propositions that satisfy the needs of and add value to our key customer segments. We shall continually strive to enhance the customer experience, in relationship management and service delivery, and interact with our customers in the most convenient and cost effective manner. We shall be transparent in our dealings and act with integrity. We shall invest in and build quality human capital in order to achieve our mission.

Vision
To be a customer centric channel, while setting benchmarks in the life insurance industry, in terms of presence, productivity and profitability.

The customer is aware of the charge structure and demands transparency.

The charge structure of our products are designed for investment and we are proud to share it.

Market is volatile and the customer is cautious while investing in market linked product.

In the volatile market we have an option that Guarantees good returns on maturity.

There is a clutter of investment products available to confuse the customer

We have a Product suite to cover the whole spectrum of wealth management, savings, protection and health. Added to this is the very high flexibility.

PRODUCTS OFFERED

Childsurance IDBI Federal Childsurance Dreambuilder Insurance Plan Whether your child wants to be a doctor, an engineer, an MBA, a sportsman, a performing artist, or dreams of being an entrepreneur, the IDBI Federal Childsurance Dreambuilder Insurance Plan will keep you future-ready against both, changing dreams and lifes twists. It allows you to create build and manage wealth by providing several choices and great flexibility so that your plan meets your specific needs. However, what makes Childsurance a must-have for any parent who is looking to make their childs fut ure shock-proof is its powerful insurance benefits. Childsurance allows you to protect your child plan with triple insurance benefits so that your wealth-building efforts remain unaffected by unforeseen events and your childs future goals can be achieved without any hindrance. Lifesurance IDBI Federal Lifesurance Savings Insurance Plan IDBI Federal Lifesurance Savings Insurance Plan is a fixed term participating endowment policy that provides you with the twin benefits of long-term savings and life cover. It is a guaranteed plan that allows you to accumulate considerable savings to meet your responsibilities in life. The IDBI Federal Lifesurance Savings Insurance Plan (hereinafter referred to as Lifesurance) also offers you the benefit of a death cover that provides financial security to your family in your absence. Lifesurance IDBI Federal Lifesurance Suvidha Savings Insurance Plan The IDBI Federal LifesuranceSuvidha Savings Insurance Plan is a non-medical participating endowment policy that allows you to save for long term goals in 3 simple steps. Simply Select the appropriate plan option, Sign a simplified proposal form after filling the details and Submit your documents with your premium

Bondsurance IDBI Federal Bondsurance Plan Given the ever-changing market conditions, a certain segment of customers prefer to invest their money in guaranteed return products. Bondsurance is designed for customers looking for guaranteed returns which will not get affected by financial market conditions. It offers guaranteed return on investment along with life insurance cover. Investment in the Plan is eligible for deduction under Sec 80C of the Income Tax Act and the maturity amount is taxfree under Sec 10(10D) of the Income Tax Act.

IDBI Federal Bondsurance Advantage Plan

The IDBI Federal Bondsurance Advantage Plan is a single premium plan where you need to make just a one-time investment. You can choose a Maturity Period of 5, 7, 10, 15 or 20 years. At the end of the chosen period, you will receive a guaranteed maturity amount. In case of death of the insured person before the Maturity Date, a guaranteed* Death Benefit will be paid. Healthsurance IDBI Federal Healthsurance Hospitalisation and Surgical Plan Every year, millions of adults in India are admitted to hospitals due to illness or injury. With the sharp rise in lifestyle diseases in the country, hospitalization has now become a real chance for most of us. Yet, when you bring up hospitalization, "It wont happen to me!" is the typical response from people at large. It is this insight that helped us create IDBI Federal Healthsurance Hospitalisation and Surgical Plan. This new insurance plan offers a host of features and benefits that are designed to help you manage the extra financial burden that comes with hospitalisation. Homesurance IDBI Federal Homesurance Protection Plan

Homesurance Protection Plan is a mortgage reducing term insurance plan that secures the policyholder, irrespective of interest fluctuations at a nominal cost with high benefits. IDBI Federal Homesurance Protection Plan provides full insurance cover for properties even under construction, thus ensuring that the beneficiary gets the full sanctioned amount in case of any unfortunate event. It also has an innovative fixed period cover for those who would aim to prepay their loans early and would find a cover for the full term a waste.

Incomesurance IDBI Federal Incomesurance Endowment & Money Back Plan IDBI Federal Incomesurance Endowment &MoneyBack Plan is a unique combination of the oldest type of insurance policies. On purchasing a typical endowment plan, it is difficult to know the final maturity amount at the time of investing. Also, the maturity date is usually fixed and therefore, if your goals shifted, like getting your daughter married earlier, your plan would not provide the required flexibility. Knowing the customer helped us to combine the Endowment & Money Back plans into a single plan that would allow you to withdraw at maturity but also take your money back at intervals. This way, you can now have the flexibility to tailor your investment to your lifes goals. To add, we linked the returns to the G-Sec rates, transparently declared by the government. This way, you would know the exact amount on maturity at the time of investing. So you could invest according to the desired corpus you intended to build. The Premium is eligible for tax deduction under Sec 80C. Also, the Guaranteed Annual Payout and other benefits upon death are tax-free under Sec 10(10D).

Loansurance IDBI Federal Loansurance Group Life Plan With the growing number of loans taken in the country, it is important to provide the borrowers family with security. This insight has led to the product, IDBI Federal Loansurance Group Life Plan, a cost-effective way to ensure that the outstanding debt is settled in the unfortunate event of death of the borrower. This term assurance plan provides cover to a person directly liable for loan repayment (and the partners, in case of a partnership).

Microsurance IDBI Federal Group Microsurance Plan Microfinance is recognised globally as the foremost tool in pulling large numbers of poor households from the grip of poverty. Micro-insurance in particular is an explicit need and desire of poor households as it offers some protection from their intense vulnerability to external shocks. IDBI Federal Microsurance Plan is a one of its kind insurance plan which can be very useful for various Micro Financial Institutions and NGOs, wherein not only the members but even the members family gets an insurance cover.

Termsurance IDBI Federal Termsurance GrameenBachatYojana IDBI Federal Termsurance GrameenBachatYojana is a low-cost risk protection plan targeted at the rural population. It is an ideal plan to protect family members in the event of unfortunate demise of the major income earner and also to save for specific events like repayment of loan, daughter's marriage or child's education. The plan offers life cover at a nominal cost along with the option of refund of premiums paid by you at maturity. This product has got a very unique mix of options that allow the customers to receive either of 0%, 50%, 90% or 100% return of premium. The coverage terms offered are 3 years, 5 years & 10 years. The customer has the flexibility of get the sum assured ranging from Rs. 5,000 to Rs. 1,00,000 in the multiples of Rs. 1,000. Termsurance IDBI Federal Termsurance GrameenSuraksha Plan IDBI Federal Termsurance GrameenSuraksha is a low-cost, simple term individual insurance plan targeted at the rural population. It is an ideal plan to protect the policyholders family members in the event of unfortunate demise of the major income earner.

Termsurance IDBI Federal Termsurance Group Life Plan The IDBI Federal Termsurance Group Life Plan is a pure term plan designed to cater to a wide variety of formal and informal groups such as the Employer-Employee groups, bank depositor/customers groups, customer-supplier groups, professional and affinity groups. It is

a group term insurance plan that provides basic life insurance protection to the members of the plan. Termsurance IDBI Federal Termsurance Group Premium Return Insurance Plan IDBI Federal Termsurance Group Premium Return Insurance Plan is a term plan designed to provide life cover to employer-employee groups and other affiliate groups where insurance is offered as an add on benefit. It provides life insurance protection to the members of the plan along with a return of basic premiums at the cover expiry date. Life insurance benefit for all the members of the plan is provided by one policy document that is issued to the master policyholder.

Termsurance IDBI Federal Termsurance Premier Insurance Plan IDBI Federal Termsurance Premier Insurance Plan is a term insurance plan that gives you the power and flexibility to take complete charge of the financial future of your loved ones. It is designed with a host of benefits and options aimed at satisfying your needs. It has choice of policy term, flexible premium payment options and lots more. It also allows you to create a plan as per your individual and your familys needs and objectives, thus offering you a truly flexible protection plan. Termsurance IDBI Federal Termsurance Protection Plan A term plan is a term plan, thats how this product has been seen.We realized, different people have different needs for insurance. Some look for a large cover option at a low cost, while others seek return of premium on maturity of the policy. There are some who may want their plan to keep in touch with inflation, while others may seek flexible premium payment options. IDBI Federal Termsurance Protection Plan is not a typical term insurance plan, that gives you a cover for the premium, it is innovatively designed to deliver more value to the customers who are looking for a flexible protection plan and a large insurance cover at an affordable cost. The plan offers a Level Paying Term, like a usual term plan. In addition it also offers a Return of Premium so you can get the premiums paid, back on maturity. Thats not all, we understood that by the time an insurance policy matures, inflation and rising costs can make the cover inadequate. IDBI Federal Termsurance Protection Plan offers the unique Increasing Cover option that automatically increases the cover every year without increasing the premium. This way, your sum assured keeps increasing just like rising costs and inflation,

keeping you adequately covered till maturity. The Premium is eligible for tax deduction under Sec 80C. Termsurance IDBI Federal Termsurance Seniors Insurance Plan A 'no questions asked' whole life protection plan that protects your loved ones after you. This plan is designed to offer people over the age of 50, a whole life cover with guaranteed acceptance. In other words, we will never say no, no matter what your health condition. One can enroll up to the age of 85 years. The plan offers you life cover without the hassles of going through medical tests and disclosures of medical reports. Also, the premiums will never increase and you can also enjoy tax benefits u/s 80C and 10(10D).

Wealthsurance IDBI Federal Wealthsurance Milestone Plan The combined knowledge of our partners customer base of over 9 million, and the combined expertise in the insurance business allowed us to look at the category in a different way. Customers are often left perplexed by the various insurance options, insurance plus investment options, insurance riders and the multitude of other complicated terminologies that hit them every day. This is apparent in the way customers buy insurance - as an investment. So we decided to design one product that can have the flexibility to incorporate within itself, all the possible investments and insurance combinations. We realised that, to reach long-term financial goals, one needs to have a balanced investment plan. If this plan continues to work, the power of compounding can ensure that one would logically reach their goals. Simple, isnt it? Unfortunately, life is uncertain and any plan is incomplete without being prepared for uncertainties. Be it your changing risk appetite or a major illness or accident that poses a sudden financial demand that could force one to break this plan. One break in a continuous investment plan can heavily dent your investment objectives. This very insight forms the basis of our product. Presenting an insured wealth plan. A plan that not only allows the policyholder to invest according to their changing risk appetite; it also provides a host of insurance benefits to protect them against uncertainties, so that they dont have to break their investment to meet sudden financial demands and their money can keep compounding. The Wealthsurance Milestone Plan enables the policyholder to save and build wealth to meet their financial goals. This Plan comes with a wide range of 13 investment options and 7 insurance benefits - all packaged with a low charge structure and unmatched flexibility. Moreover, get tax benefits on investment and returns under Sec 80C and Sec 10(10D).

Wealthsurance IDBI Federal Wealthsurance Maxigain Insurance Plan IDBI Federal Wealthsurance Maxigain Insurance Plan is a plan that ensures that you maximise your gains and at the same time are shielded from potential losses. The plan provides a unique investment fund called the MaxiNAV Guaranteed Fund which offers the guarantee of the highest NAV achieved on the reset dates during the 7 years tracking period from the date of launch of the fund on the policy maturity date. This special feature can help you benefit from market increases and also help protect you from market declines. Wealthsurance IDBI Federal Wealthsurance Dreambuilder Insurance Plan Wealthsurance Dreambuilder Insurance Plan combines the protection of insurance with wealth creation into one powerful financial solution fully capable of delivering the financial backing to fulfill your dreams. With a minimum premium amount per year of Rs. 25,000 and maximum premium amount of Rs. 1, 00, 000 respectively, payable in annual installments, Wealthsurance Dreambuilder Insurance Plan offers you insured wealth plans. IDBI Federal Wealthsurance Premier Insurance Plan IDBI Federal Wealthsurance Premier Insurance Plan is a single premium ULIP plan, which is designed keeping in mind specific requirements of high net-worth individuals. The objective of the plan is to facilitate growth of your wealth under the protective cover of insurance. The plan has low and level charges and for premiums above Rs 25 lacs there is no policy administration charge and no premium allocation charge. HNI's can choose the policy term as per their need. The minimum policy term is 5 years and maximum policy term is 75 years (less age at entry). What is risk management? Managing risks means to understand, evaluate and take the necessary steps to increase the probability of success and reduce the likelihood of failure. 1 Risk management specifically deals with the uncertainties inherent in any development intervention. By identifying and evaluating these uncertainties development organisations are better placed to be able to make informed decisions and this will lead to fewer losses and more gains. For example, changing local tax requirements, climate change and climate induced disasters, change in the local political landscape, social and political turbulence and dynamics in the demographic structure of the

population, and many more things can influence the performance of any development organisation. Seemingly simple steps like being alert to risks, avoiding threats and maximizing opportunities, and feeding the learning back into the implementation requires a fundamental change in the way we think and work in the development sector. The strategies to manage risk typically include transferring the risk to another party, avoiding the risk, reducing the negative effect or probability of the risk, or even accepting some or all of the potential or actual consequences of a particular risk. Certain aspects of many of the risk management standards have come under criticism for having no measurable improvement on risk, whether the confidence in estimates and decisions seem to increase. The outcomes of development interventions are not pre-determined, they are uncertain. A highly dynamic development context is also uncertain because what we know about it is very much limited and fragmented. Understandably, it has become increasingly difficult for development organisations to define the optimum pathway towards the desired development results. The truth is that we simply dont fully know what works and what doesnt, how the context will respond to interventions and what changes in the context could hinder or facilitate achieving certain objectives. So how can we address uncertainties and increase the effectiveness of development interventions? Of course, from the perspective of a development organisation not all uncertainties matter but only those, which might have an impact, either positive or negative, on achieving the development objectives. By analyzing uncertainty from the perspective of its likelihood of happening and the range of possible impacts, random uncertainties can be turned into probable events or risks. We cannot manage uncertainties but we can manage risks by tackling either the likelihood of their happening or the impact of such on the organisation. For instance, if the security situation in a fragile state deteriorates, the development organisation promoting polio vaccination might suspend its operations in that country. Conversely, if the government manages to secure the project area from rebels, the development organisation could consider expanding its polio vaccination campaign. It would be unjustifiable to endanger the lives of development workers in the first example and miss opportunities in the second should project staff turn a blind eye to changes in the project context. Therefore, the question should be: how can the risks facing development interventions be managed and thus improve the effectiveness of the interventions? The answer lies in two

mutually dependent dimensions: the proactive and systematic consideration of risks and greater responsiveness in development interventions, accordingly.

OBJECTIVES THE STUDY

The following are the objectives of the study:

To identify the risks faced by the IDBI Federal life insurance co ltd. To trace out the process and system of risk management. To examine the techniques adopted by IDBI Federal life insurance co ltd for risk management.

TYPES OF RISK FACED BY FINANCIAL INSTITUTION

Credit risk

Credit risk refers to the risk that a borrower will default on any type of debt by failing to make payments which it is obligated to do. The risk is primarily that of the lender and include lost principal and interest, disruption to cash flows, and increased collection costs. The loss may be complete or partial and can arise in a number of circumstances. For example:

A consumer may fail to make a payment due on a mortgage loan, credit card, line of credit, or other loan A company is unable to repay amounts secured by a fixed or floating charge over the assets of the company A business or consumer does not pay a trade invoice when due A business does not pay an employee's earned wages when due A business or government bond issuer does not make a payment on a coupon or principal payment when due An insolvent insurance company does not pay a policy obligation An insolvent bank won't return funds to a depositor A government grants bankruptcy protection to an insolvent consumer or business

To reduce the lender's credit risk, the lender may perform a credit check on the prospective borrower, may require the borrower to take out appropriate insurance, such as mortgage insurance or seek security or guarantees of third parties, besides other possible strategies. In general, the higher the risk, the higher will be the interest rate that the debtor will be asked to pay on the debt.

Credit risk can be classified in the following way: Credit default risk - The risk of loss arising from a debtor being unlikely to pay its loan obligations in full or the debtor is more than 90 days past due on any material credit obligation; default risk may impact all credit-sensitive transactions, including loans, securities and derivatives. Concentration risk - The risk associated with any single exposure or group of exposures with the potential to produce large enough losses to threaten a bank's core operations. It may arise in the form of single name concentration or industry concentration. Country risk - The risk of loss arising from a sovereign state freezing foreign currency payments (transfer/conversion risk) or when it defaults on its obligations (sovereign risk). Mitigating credit risk Lenders mitigate credit risk using several methods:

Risk-based pricing: Lenders generally charge a higher interest rate to borrowers who are more likely to default, a practice called risk-based pricing. Lenders consider factors relating to the loan such as loan purpose, credit rating, and loan-to-value ratio and estimates the effect on yield (credit spread). Covenants: Lenders may write stipulations on the borrower, called covenants, into loan agreements:

Periodically report its financial condition Refrain from paying dividends, repurchasing shares, borrowing further, or other specific, voluntary actions that negatively affect the company's financial position

Repay the loan in full, at the lender's request, in certain events such as changes in the borrower's debt-to-equity ratio or interest coverage ratio Credit insurance and credit derivatives: Lenders and bond holders may hedge their credit risk by purchasing credit insurance or credit derivatives. These contracts transfer the risk from the lender to the seller (insurer) in exchange for payment. The most common credit derivative is the credit default swap. Tightening: Lenders can reduce credit risk by reducing the amount of credit extended, either in total or to certain borrowers. For example, a distributor selling its products to a troubled retailer may attempt to lessen credit risk by reducing payment terms from net 30 to net 15.

Diversification: Lenders to a small number of borrowers (or kinds of borrower) face a high degree of unsystematic credit risk, called concentration risk. Lenders reduce this risk by diversifying the borrower pool. Deposit insurance: Many governments establish deposit insurance to guarantee bank deposits of insolvent banks. Such protection discourages consumers from withdrawing money when a bank is becoming insolvent, to avoid a bank run, and encourages consumers to hold their savings in the banking system instead of in cash.

The possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets. Market risk, also called "systematic risk," cannot be eliminated through diversification, though it can be hedged against. The risk that a major natural disaster will cause a decline in the market as a whole is an example of market risk. Other sources of market risk include recessions, political turmoil, changes in interest rates and terrorist attacks.

Market risk is the risk of losses in positions arising from movements in market
prices. Some market risks include:

Equity risk, the risk that stock or stock indexes (e.g. Euro Stoxx 50, etc. ) prices and/or their implied volatility will change.

Equity risk is the risk that one's investments will depreciate because of stock market dynamics causing one to lose money. The measure of risk used in the equity markets is typically the standard deviation of a security's price over a number of periods. The standard deviation will delineate the normal fluctuations one can expect in that particular security above and below the mean, or average. However, since most investors would not consider fluctuations above the average return as "risk", some economists prefer other means of measuring it.

Interest rate risk, the risk that interest rates (e.g. Libor, Euribor, etc.) and/or their implied volatility will change.

Interest rate risk is the risk that arises for bond owners from fluctuating interest rates. How
much interest rate risk a bond has depends on how sensitive its price is to interest rate changes in the market. The sensitivity depends on two things, the bond's time to maturity, and the coupon rate of the bond.

Currency risk, the risk that foreign exchange rates (e.g. EUR/USD, EUR/GBP, etc.) and/or their implied volatility will change.

Foreign exchange risk (also known as exchange rate risk or currency risk) is a financial risk posed by an exposure to unanticipated changes in the exchange rate between two currencies. Investors and multinational businesses exporting or importing goods and services or making foreign investments throughout the global economy are faced with an exchange rate risk which can have severe financial consequences if not managed appropriately.

Commodity risk, the risk that commodity prices (e.g. corn, copper, crude oil, etc.) and/or their implied volatility will change.

Commodity risk refers to the uncertainties of future market values and of the size of the future income, caused by the fluctuation in the prices of commodities. These commodities may be grains, metals, gas, electricity etc. A commodity enterprise needs to deal with the following kinds of risks:

Price risk (Risk arising out of adverse movements in the world prices, exchange rates, basis between local and world prices) Quantity risk Cost risk (Input price risk) Political risk

Liquidity risk liquidity risk is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit). Types of liquidity risk Market liquidity An asset cannot be sold due to lack of liquidity in the market essentially a sub-set of market risk. This can be accounted for by:

Widening bid/offer spread Making explicit liquidity reserves Lengthening holding period for VaR calculations

Funding liquidity Risk that liabilities:

Cannot be met when they fall due

Can only be met at an uneconomic price Can be name-specific or systemic

In banking and finance, refinancing risk is the possibility that a borrower cannot refinance by borrowing to repay existing debt. Many types of commercial lending incorporate balloon payments at the point of final maturity; often, the intention or assumption is that the borrower will take out a new loan to pay the existing lenders. A borrower that cannot refinance their existing debt and does not have sufficient funds on hand to pay their lenders may have a liquidity problem. The borrower may be considered technically insolvent: even though their assets are greater than their liabilities, they cannot raise the liquid funds to pay their creditors. Insolvency may lead to bankruptcy, even when the borrower has a positive net worth.

Operational risk

An operational risk is defined as a risk incurred by an organisation's internal activities. Operational risk is the broad discipline focusing on the risks arising from the people, systems and processes through which a company operates. It can also include other classes of risk, such as fraud, legal risks, physical or environmental risks. A widely used definition of operational risk is the one contained in the Basel II regulations. This definition states that operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Operational risk management differs from other types of risk, because it is not used to generate profit (e.g. credit risk is exploited by lending institutions to create profit, market risk is exploited by traders and fund managers, and insurance risk is exploited by insurers). They all however manage operational risk to keep losses within their risk appetite - the amount of risk they are prepared to accept in pursuit of their objectives. What this means in practical terms is that organisations accept that their people, processes and systems are imperfect, and that losses will arise from errors and ineffective operations. The size of the loss they are prepared to accept, because the cost of correcting the errors or improving the systems is disproportionate to the benefit they will receive, determines their appetite for operational risk. Political risk Political risk is a type of risk faced by investors, corporations, and governments. It is a risk that can be understood and managed with reasoned foresight and investment.

Broadly, political risk refers to the complications businesses and governments may face as a result of what are commonly referred to as political decisionsor any political change that alters the expected outcome and value of a given economic action by changing the probability of achieving business objectives. Political risk faced by firms can be defined as the risk of a strategic, financial, or personnel loss for a firm because of such nonmarket factors as macroeconomic and social policies (fiscal, monetary, trade, investment, industrial, income, labour, and developmental), or events related to political instability (terrorism, riots, coups, civil war, and insurrection). Portfolio investors may face similar financial losses. Moreover, governments may face complications in their ability to execute diplomatic, military or other initiatives as a result of political risk. Legal risk Legal risk is a type of risks that means that a counterparty is not legally able to enter into a contract. Another legal risk relates to regulatory risk, i.e., that a transaction could conflict with a regulator's policy or, more generally, that legislation might change during the life of a financial contract.

Valuation risk Valuation Risk is the financial risk that an asset is overvalued and is worth less than expected when it matures or is sold. Factors contributing to valuation risk can include incomplete data, market instability, financial modeling uncertainties and poor data analysis by the people responsible for determining the value of the asset. This risk can be a concern for investors, lenders, financial regulators and other people involved in the financial markets. Overvalued assets can create losses for their owners and lead to reputational risks; potentially impacting credit ratings, funding costs and the management structures of financial institutions. Valuation risks concern each stage of the transaction processing and investment management chain. From front office, to back office, distribution, asset management, private wealth and advisory services. This is particularly true for assets that have low liquidity and are not easily tradable in public exchanges. Moreover, issues associated with valuation risks go beyond the firm itself. With straight through processing and algorithmic trading, data and valuations must remain synchronized among the participants of the trade processing chain. The executing venue, prime brokers, custodian banks, fund administrators, transfer agents and audit share files electronically and try to automate such processes, raising potential risks related to data management and valuations.

Main Risk Faced By IDBI Federal Life Insurance

1 . Bonds are often classified as low risk or high risk, but this is only half of the story. There are actually two kinds of risk: interest rate risk and credit risk. These are two distinct types of risk that can have a very different impact on various asset classes within the bond market. Interest rate risk is the vulnerability of a bond or fixed income asset class to movements in prevailing interest rates. Bonds with elevated interest rate risk tend to perform well when rates are falling, but they will underperform when interest rates are rising. (Keep in mind, bond prices and yields move in opposite directions). As a result, rate-sensitive securities tend to perform best when the economy is slowing, since slower growth is likely to lead to falling rates. Credit risk, on the other hand, is a bonds sensitivity to default, or the chance that a portion of the principal and interest will not be paid to investors. Individual bonds with high credit risk will do well when their underlying financial strength is improving, but they will weaken when their finances deteriorate. Entire asset classes can also have high credit risk; these tend to do well when the economy is strengthening and underperform when it is slowing.

In case of investments, majority of the investments of IFLI is into Govt. Bonds. If you see Form L-13 Investments Policyholders Schedule as at Mar 31, 2012, out of total investments of Rs.4.96 billion, Rs.3.33 Billion is into Govt. bonds. As such we understand that Govt. bonds are risk free securities. However, that is not completely true. These bonds, like other bonds, carry number of risks. One of the major risks is the Interest rate risk. In brief, as the interest rates increases in market, the value of the bonds (including Govt. Bonds) decreases Typically this involves deciding on the maturity and coupon. Maturity is important because this determines the extent of risk an investor like an UCB is exposed to higher the maturity, higher the interest rate risk or market risk. If the investment is largely to meet statutory requirements, it may be advisable to avoid taking undue market risk and buy securities with shorter maturity. Within the shorter maturity range (say 5-10 years) it would be safer to buy securities which are liquid, that is, securities which trade in relatively larger volumes in the market. The information about such securities can be obtained from the website of the CCIL), which gives real-time secondary market trade data on NDS-OM. Since pricing is more transparent in liquid securities, prices for these securities are easily obtainable thereby reducing the chances of being misled/misinformed on the price in these cases. The coupon rate of the security is equally important for the investor as it affects the total return from the security. In order to determine which security to buy, the investor must look at the Yield to Maturity (YTM) of a security . Thus, once the maturity and yield (YTM) is decided, the UCB may

select a security by looking at the price/yield information of securities traded on NDS-OM or by negotiating with bank or PD or broker. Securities are highly sensitive to rising interest rates. When the RBI is expected to raise rates, or when inflation is a concern for investors, yields on Treasuries and TIPS will likely rise (as their prices fall). In this scenario, longer-term bonds will perform much worse than their short-term counterparts. On the other hand, signs of slowing growth, falling inflation, or the RBIs intention to raise rates are all a positive for rate-sensitive government bonds in general, and longer-term bonds in particular.

To mitigate interest rate risk interest rate swaps are issued

An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps often exchange a fixed payment for a floating payment that is linked to an interest rate (most often the LIBOR). A company will typically use interest rate swaps to limit or manage exposure to fluctuations in interest rates, or to obtain a marginally lower interest rate than it would have been able to get without the swap. In an interest rate swap, each counterparty agrees to pay either a fixed or floating rate denominated in a particular currency to the other counterparty. The fixed or floating rate is multiplied by a notional principal amount (say, USD 1 million) and an accrual factor given by the appropriate day count convention. When both legs are in the same currency, this notional amount is typically not exchanged between counterparties, but is used only for calculating the size of cash flows to be exchanged. When the legs are in different currencies, the respective notional amount are typically exchanged at the start and the end of the swap. The most common interest rate swap is one where one counterparty A pays a fixed rate (the swap rate) to counterparty B, while receiving a floating rate indexed to a reference rate (such as LIBOR orEURIBOR). By market convention, the counterparty paying the fixed rate is called the "payer" (while receiving the floating rate), and the counterparty receiving the fixed rate is called the "receiver" (while paying the floating rate). A pays fixed rate to B (A receives floating rate) B pays floating rate to A (B receives fixed rate) Currently, A borrows from Market @ LIBOR +1.5%. B borrows from Market @ 8.5%. Consider the following swap in which Party A agrees to pay Party B periodic fixed interest rate payments of 8.65%, in exchange for periodic variable interest rate payments of LIBOR + 70 bps (0.70%) in the same currency. Note that there is no exchange of the principal amounts and that the interest rates are on a "notional" (i.e. imaginary) principal amount. Also note that the interest payments are settled in net (e.g. Party A pays (LIBOR + 1.50%)+8.65% -

(LIBOR+0.70%) = 9.45% net). The fixed rate (8.65% in this example) is referred to as the swap rate. At the point of initiation of the swap, the swap is priced so that it has a net present value of zero. If one party wants to pay 50 bps above the par swap rate, the other party has to pay approximately 50bps over LIBOR to compensate for this.

Risk in investing in bonds IN CASE OF INVESTMENTS 10 PERCENT ARE MADE IN BONDS

Interest rate risk When interest rates rise, bond prices fall; conversely, when rates decline, bond prices rise. The longer the time to a bonds maturity, the greater its interest rate risk. Reinvestment risk When interest rates are declining, investors have to reinvest their interest income and any return of principal, whether scheduled or unscheduled, at lower prevailing rates. Inflation risk Inflation causes tomorrows dollar to be worth less than todays; in other words, it reduces the purchasing power of a bond investors future interest payments and principal, collectively known as cash flows. Inflation also leads to higher interest rates, which in turn leads to lower bond prices. Inflation-indexed securities such as Treasury Inflation Protection Securities (TIPS) are structured to remove inflation risk. Market risk The risk that the bond market as a whole would decline, bringing the value of individual securities down with it regardless of their fundamental characteristics. Selection risk The risk that an investor chooses a security that underperforms the market for reasons that cannot be anticipated. Timing risk The risk that an investment performs poorly after its purchase or better after its sale. Risk that you paid too much for the transaction The risk that the costs and fees associated with an investment are excessive and detract too much from an investors return. Duration risk The modified duration of a bond is a measure of its price sensitivity to interest rates movements, based on the average time to maturity of its interest and principal cash flows. Duration enables investor to more easily compare bonds with different maturities and coupon

rates by creating a simple rule: with every percentage change in interest rates, the bonds value will decline by its modified duration, stated as a percentage. For example, an investment with a modified duration of 5 years will rise 5% in value for every 1% decline in interest rates and fall 5% in value for every 1% increase in interest rates. Bond portfolio managers increase average duration when they expect rates to decline, to get the most benefit, and decrease average duration when they expect rates to rise, so minimize the negative impact. If rates move in a direction contrary to their expectations, they lose. Risk involved in investing In equity shares IN CASE OF INVESTMENTS 18 PERCENT ARE MADE IN EQUITY SHARES

One should find answers to the above questions, before placing a buy order with his/her broker. Let us go through the various risks associated with stock market investing. Financial Risk The investor can lose his/her money when the financials of the company in which he has invested is not performing well. If an investor invests in a company and if the company's profit keep declining yoy, then investor is holding the risk of losing her money because the company's share price will keep moving downwards. So before choosing a company to invest, do a thorough analysis of the financials of the company. Interest Rate Risk Lets assume an investors goes for fixed deposit at the rate of 8%. When the interest rate scenario changes, the interest rate in the market can move to say 10%, then you stand to lose the extra 2% gained in new fresh deposits. Interest rate also affects equity investment, how? Companies borrow funds from banks, financial institutions for capital expansion. When the lending rate increases, company bottom line (profit) is hit and hence it affects the share price of the company. Market Risk

The investment can be influenced by market volatility in the short to medium term. The markets sentiment is driven by lots of factors - like global cues, economic data etc. When the entire market is moving down, your stock will also most likely move down and affect your return on investment. Inflation Risk In terms of investment, one should always look for inflation adjusted return for true evaluation. If your investment fetches you 10% per annum and the inflation is 12% per annum, then you are losing your money and your investment is giving negative returns. So inflation has a bigger impact in investments. Political Risk The market mood is influenced by the political climate in the country. When a govt changes,the market will be in a jittery mood to know if the new govt will be industry friendly or not.The major economic policy of a country is framed by the ruling government and hence it has a bigger say in market and hence your investments. Emotional Risk Investors usually get into the trap of three emotions while investing. Greed, Fear, Love. They have an greed to make most of the money in a short period of time. They fear to enter markets when market is in a deep bear run. They keep investing in a stock though it is moving down just because they have a mad love for that stock. In investment, emotions should not rule over intelligence. So, take into account all these risks before investing in stock markets. Risk in Infrastructure Investing IN CASE OF INVESTMENTS 9 PERCENT ARE MADE IN INFRASTRUCTURE

Sub-sector: Each infrastructure sub-sector has different risk factors, return drivers, and economic sensitivities. Due to low correlation among sub-sectors, these risks can be reduced by constructing a well diversified infrastructure portfolio.

Political and regulatory: Different countries/regions have different political, regulatory and legal frameworks. Especially in jurisdictions with relatively shorter regulatory histories, regulatory decisions may be inconsistent, increasing uncertainty for investors. Investing in politically stable regions with established legal and regulatory frameworks can reduce these risks. Stage of development: Development projects face higher construction risks and demand uncertainty compared to mature assets. Investors can choose to avoid these risks by investing only in existing infrastructure. Those willing to take these added risks may be compensated with higher returns. Liquidity: Due to the size of some assets, the limited number of potential buyers and regulatory approval requirements, divestments of infrastructure assets can take a significant amount of time and effort. An open-ended fund provides a long-term investment approach that will not force asset sales and may provide added liquidity relative to closed end funds. Emerging asset class: As a relatively new asset class, infrastructure does not have reliable return data comparable to other asset classes which makes it difficult to model in an asset allocation. Using historical cash flows to model returns is one method we will discuss that allows investors to make a more informed allocation decision Credit market risk: Infrastructure assets providing stable cash flows present opportunities to boost return on equity via leverage at the operating company level. Credit market conditions impact the amount, cost and terms of credit available to infrastructure assets. Managers can mitigate this risk by making conservative refinancing assumptions when underwriting and employing leverage prudently, in quantity, structure and tenor. Currency volatility: A global infrastructure investment strategy provides diversification benefits to moderate several risks (e.g., political, regulatory, demographic) but does expose an investor to the currency volatility of the underlying portfolio companies. Investors can hedge this with a currency overlay strategy

When (in which year) it was implemented? It was implemented in the year 2007

How many members comprises of Risk Management Team? 6-7 members in risk management team.

Explain The Structuring Of This Risk Management Team? Risk Management Framework 1. Strategic Aims & Objectives The Trust recognizes that risk management forms an integral part of its philosophy, practices and business plans. In meeting its key objectives and targets it is committed to taking all reasonable steps in the management of risk with the overall aim of delivering safety, quality and efficiency as outlined in the Trusts Integrated Business Plan and Assurance Framework. In developing this framework and adopting this philosophy the Trust will protect its patients, staff, contractors, visitors, business interests, reputation and partner organizations .

2. Risk Management Framework: The Risk Management Framework lays out the key elements that enable the Trust to effectively deliver the strategic aims in relation to risk management are set out in this framework document as follows: Trusts risk tolerance Key accountability and responsibilities clearly defined throughout the organization. Key structures and processes for managing risk. Including: Committee structures

Risk identification, recording and escalation

3. Key Accountability & Responsibilities: Risk Management 3.1 Chief Executive & Delegated Executive Director/s The Trust Board through the Chief Executive is ultimately accountable for ensuring that there is a comprehensive risk management system in place this responsibility is delegated to the Medical Director (Professional Practice). The Executive Director of Finance is responsible for the provision of assurance to the Board through Audit Committee that processes are in place and operating as designed, that all risks are controlled and this is reflected in the Statement on Internal Control. 3.2 Designated Non-Executive Director for Risk Management: The designated Non-Executive Director is responsible for monitoring the delivery of the risk management framework and alerting the Trust Board via the Audit Committee of any concerns regarding the Trusts management of risk. 3.3 Executive, Clinical and Service Directors All Executive Directors, supported by Directors of Operations and Service Directors, are responsible for ensuring that effective risk management processes are in place and supported within their designated area(s) and scope of responsibility. They are also responsible for ensuring the senior managers who report to them are trained so that they can lead and report on risk within their designated area of responsibility and that staff are supported by trained risk assessors. The Executive Directors are also responsible for managing and reporting in line with theaccountability matrix the nature of the risk and how they are being managed to the Trust Board. Risk Control The Risk Management Team The Risk Management Team is part of the Department of Clinical Management and consists of the Risk Manager supported by a Risk Management Coordinator and the DATIX System

Manager. The main function of the Risk Management Team is to: Support the Trust in the implementation of the risk management framework. Monitor and report on Risk Management Activity to the appropriate Trust committees. Support and advice managers in discharging their Risk Management responsibilities. The Risk Management Process The Trust has a detailed procedure (See Risk Assessment Procedure and Tools), that covers the key components in relation to the following; an outline process map of this procedure. Risk Assessments: The Trust has developed a series of generic risk assessment tools for all types of risk. These tools provide a means of enabling staff to identify and quantify risks in their respective areas and decide what action, if any, needs to be taken with a view to reducing or eliminating those risks.

Risk Scoring: A common risk-scoring matrix is used by the Trust to quantify and prioritize risks that have been identified through the risk assessment procedure. It is based on the frequency or likelihood of the harm by the possible severity of that harm. It helps to determine at what level in the organization those risks should be managed.

Risk Registers Following comprehensive risk assessment of all processes and business activity, significant risks must be submitted to the Trust-wide Risk Register and owned by the line manager responsible for that area/service. All registered risks are required to have action plans and where controls are inadequate the register must be used to escalate risks to the level at which they can be controlled. Following the implementation of action plans the level of residual risk must be reassessed and further actions taken or the risk accepted/tolerated. It is important to note that the Risk Registers are dynamic living documents and will constantly change to reflect the level of risk in all areas of the Trust. The register is an integral part of the business of the Trust and

must be used to inform departments, directorates, risk /governance groups/committees and the Trust Board of the risk status of the Trust. Risk Tolerance/Acceptability and Escalation: The level of decisions on tolerance/acceptability and actions required are based around the quantification of the risk and are also linked to the risk tolerance matrix. A risk is deemed to be acceptable when there are adequate control mechanisms in place and a decision has been made that the risk has been managed as far as is considered to be reasonably practicable.

5. The Strategic Planning, capacity expansion, vertical integration, or diversification In theIDBI Federal? Strategic Planning and Gap Analysis: Executives periodically develop and review their organization's strategic plan to ensure clear understanding of the company's direction relative to its current standing. They need to delineate a clear trail for the rest of the firm to follow. As executives outline the end goal and map out the approach to reach that goal, they need to take in important gaps between where theyare now and where they want to be andascertain which steps can bridge these breaks. Vertical integration: Ownership of its inputs, production, and outputs in the value chain Horizontal value chainInternal, firm-level value chains Types of Vertical Integration: Full vertical integration Ex: Weyerhaeuser Owns forests, mills, and distribution to retailers Backward vertical integration Ex: HTCs backward integration into design of phones Forward vertical integration Ex: HTCs forward integration into sales & branding Benefits of Vertical Integration

Market power

Entry barriers Down-stream price maintenance Up-stream power over prices Securing critical supplies Lowering costs (efficiency) Improving quality Facilitating scheduling and planning Facilitating investments in specialized assets Ex: HTC started as OEM & expanded to fully integrated

Risks of Vertical Integration: Increasing costs Internal suppliers lose incentives to compete Reducing quality Single captured customer can slow experience effects Reducing flexibility Slow to respond to changes in technology or demand Increasing the potential for legal repercussions FTC carefully reviewed Pepsi plans to buy bottlers

1.

Technique used for Risk Management in IDBI Federal like Value at Risk or GAP Analysis:

Risk Identification There are many tools and techniques for Risk identification. Documentation Reviews Information gathering techniques Brainstorming Delphi technique here a facilitator distributes a questionnaire to experts, responses are summarized (anonymously) & re-circulated among the experts for comments. This technique is used to achieve a consensus of experts and helps to receive unbiased data, ensuring that no one person will have undue influence on the outcome Interviewing Root cause analysis for identifying a problem, discovering the causes that led to it and developing preventive action Checklist analysis Assumption analysis -this technique may reveal an inconsistency of assumptions, or uncover problematic assumptions. Diagramming techniques Cause and effect diagrams System or process flow charts Influence diagrams graphical representation of situations, showing the casual influences or relationships among variables and outcomes SWOT analysis Expert judgment individuals who have experience with similar project in the not too distant past may use their judgment through interviews or risk facilitation workshops.

Risk Analysis Tools and Techniques for Qualitative Risk Analysis Risk probability and impact assessment investigating the likelihood that each specific risk will occur and the potential effect on a project objective such as schedule, cost,

quality or performance (negative effects for threats and positive effects for opportunities), defining it in levels, through interview or meeting with relevant stakeholders and documenting the results. Probability and impact matrix rating risks for further quantitative analysis using a probability and impact matrix, rating rules should be specified by the organization in advance. See example in appendix B. Risk categorization in order to determine the areas of the project most exposed to the effects of uncertainty. Grouping risks by common root causes can help us to develop effective risk responses. Risk urgency assessment - In some qualitative analyses the assessment of risk urgency can be combined with the risk ranking determined from the probability and impact matrix to give a final risk sensitivity rating. Example- a risk requiring a near-term responses may be considered more urgent to address. Expert judgment individuals who have experience with similar project in the not too distant past may use their judgment through interviews or risk facilitation workshops. Tools and Techniques for Quantities Risk Analysis Data gathering & representation techniques InterviewingYou can carry out interviews in order to gather an optimistic (low), pessimistic (high), and most likely scenarios. Probability distributions Continuous probability distributions are used extensively in modeling and simulations and represent the uncertainty in values such as tasks durations or cost of project components\ work packages. These distributions may help us perform quantitative analysis. Discrete distributions can be used to represent uncertain events (an outcome of a test or possible scenario in a decision tree) Quantitative risk analysis & modeling techniques- commonly used for event-oriented as well as project-oriented analysis: Sensitivity analysis For determining which risks may have the most potential impact on the project. In sensitivity analysis one looks at the effect of varying the inputs of a mathematical model on the output of the model itself. Examining the effect of the uncertainty of each project element to a specific project objective, when all other uncertain elements are held at their baseline values. There may be presented through a tornado diagram. Expected Monetary Value analysis (EMV) A statistical concept that calculates the average outcome when the future includes scenarios that may or may not happen (generally: opportunities are positive values, risks are negative values). These are commonly used in a decision tree analysis.

Modeling & simulation A project simulation, which uses a model that translates the specific detailed uncertainties of the project into their potential impact on project objectives, usually iterative. Monte Carlo is an example for a iterative simulation. Cost risk analysis - cost estimates are used as input values, chosen randomly for each iteration (according to probability distributions of these values), total cost will be calculated. Schedule risk analysis - duration estimates & network diagrams are used as input values, chosen at random for each iteration (according to probability distributions of these values), completion date will be calculated. One can check the probability of completing the project by a certain date or within a certain cost constraint. Expert judgment used for identifying potential cost & schedule impacts, evaluate probabilities, interpretation of data, identify weaknesses of the tools, as well as their strengths, defining when is a specific tool more appropriate, considering organizat ions capabilities & structure, and more. Risk Response Planning Risk reassessment project risk reassessments should be regularly scheduled for reassessment of current risks and closing of risks. Monitoring and controlling Risks may also result in identification of new risks. Risk audits examining and documenting the effectiveness of risk responses in dealing with identified risks and their root causes, as well as the effectiveness of the risk management process. Project Managers responsibility is to ensure the risk audits are performed at an appropriate frequency, as defined in the risk management plan. The format for the audit and its objectives should be clearly defined before the audit is conducted. Variance and trend analysis using performance information for comparing planned results to the actual results, in order to control and monitor risk events and to identify trends in the projects execution. Outcomes from this analysis may forecast potential deviation (at completion) from cost and schedule targets. Technical performance measurement Comparing technical accomplishments during project execution to the project management plans schedule. It is required that objectives will be defined through quantifiable measures of technical performance, in order to compare actual results against targets. Reserve analysis compares the amount of remaining contingency reserves (time and cost) to the amount of remaining risks in order to determine if the amount of remaining reserves is enough.

Status meetings Project risk management should be an agenda item at periodic status meetings, as frequent discussion about risk makes it more likely that people will identify risks and opportunities or advice regarding responses.

Main obstacles during implementation of Enterprise Risk Management in IDBI Federal Life Insurance Co. Ltd.?
Failure to completely identify and effectively mitigate risk management implementation challenges contributed significantly to the latest global economic disaster and continues to contribute to corporate losses and failures resulting in some doubts being raised regarding effectiveness/value of risk management. Those organizations that have been properly managing risk as part of the day job have frequently managed to overcome these barriers emerging with success stories to tell. One of the more frequently encountered barriers to effective implementation of risk management is inertia which manifests through personnel not wanting to adopt new procedures. This is characterized by difficulty in changing mind-sets and obstinacy. Resistance to process change initiatives or culture may result from various reasons including job security fears (self-concern, individual objectives or goals driven by greed (self-interest), arrogance and pride, insufficient regulation in the industry or economy and inadequate will and initiative at executive level (national and organizational). Inertia which can also promote corruption also results where risk management is viewed simply as a hindrance getting in the way of progress/individual goals, stopping deals and preventing bonuses from being earned. During difficult periods in a business cycle or periods of boom, risk management is often relegated to the background. Combating inertia begins with culture change and the message that comes down from the top/board is crucial in establishing the attitude that will filter to the other organizational levels. Risk management should rather be viewed as informed decision making (and informed risk taking) rather than a negative exercise feeding problems at the expense of opportunities. Clear communication of top management buy in and support is critical if the process is to hurdle this obstacle. Legislation (including threat of litigation), corporate governance responsibilities and a culture of accountability are also factors that can combat inertia. Individuals aware that their jobs are at risk and those whose investment or financial interest is at risk will have an interest in managing risk appropriately. FAIS legislation, SAM and King Code for example compel responsible individuals to ensure steps are taken to manage risk. Managing the risk of talking about risk is another culture related obstacle to an effective risk management process. This happens in the private sector public sector and indeed government/national level. In some organizations there exists this often misplaced belief that

senior management do not want to hear any bad news with any attempts to identify risk being treated as being overly pessimist. This is normally a challenge with the middle level that does not want to be bearers of bad news. Individuals will highlight only the benefits and downplay the downside risk to secure a seat on a project team by sounding more enthusiastic and positive. Whilst this helps focus on the positive side of risk (opportunity) it defeats the purpose of risk management i.e. informed decision making. Often in meetings about key business decisions, some individuals tend to nod along as the CEO or senior executive speaks and when invited to contribute merely echo the executives positive sentiments even though be aware of certain downside risks to the project or transaction. Highlighting risk in such instances may be viewed as a career limiting move. The CEO or senior executive quite often is looking for genuine and honest input possibly in the form of highlighting the risks and opportunities and suggesting ways to handle the risks whilst fully exploiting the opportunities. One however must have the skills, expertise and business knowledge to present the right information which must be accurate, timely and persuasive. Where there are various projects competing for limited funding one may seek to conceal the negative risks to ones project for fear of losing out o n the funding. This approach is however one thats genuinely career limiting in that significant risks will begin to surface well in the middle of the project. It should again be emphasized that risk management is NOT there to stop or delay projects but to ensure that we go into the project or investment fully informed. Total disregard for risk reduces business decisions to gambling or speculation and the significance of the goal or project does not diminish the need for proper risk analysis. Would one drive the Gautrain (high speed passenger train in South Africa) at 160km per hour without knowing whether the brakes work or the line is clear? The answer for big business with big goals is structured and formalized risk management with comprehensive risk assessment and mitigation strategies.

Effective communication skills and ability to provide/ suggest effective mitigation solutions and should that fail then right old integrity and putting organizational and national interests first should suffice. In the words of Brian Tracy The glue that holds all relationships together -including the relationship between the leader and the led is trust, and trust is based on integrity. Integrity, commitment to cause and good faith in organizational/national discussion s are more likely to secure a job than being driven by fear and self-concern. The leader is likely to appreciate the led more if they are of real value. Prohibitively High Cost of risk management or huge funding/resource requirements is also a regularly encountered obstacle when it comes to risk management. Some companies do not regard spending on risk management as something positive, although they do recognize that its something they need to invest in. A big challenge for the ERM process is to ensure the appropriate balance and focus on those risks that are rated within a band where the risk mitigation procedures are necessary. Some residual risks outside this band (e.g. low risk but

high cost to control/mitigate) can be carried by the organization. Hence a risk vs value of action matrix should be a tool. ERM programs naturally entail enhanced risk assessment processes, risk and business integration, and governance concerns. These activities may necessitate investment in new resources, technologies, policies and process enhancements. Risk Managers or risk advocate often struggle to demonstrate sufficient Enterprise Risk Management value to justify implementation costs when it comes to appraising investment decisions and on occasion that helps management shoot down investment requests on account of high cost. Traditional investment decision tools including can be employed in establishing Enterprise Risk Management value, risks and costs and these may also be augmented by other less tangible qualitative factors such as improved risk transparency and awareness, improved safety, improved health, improved risk management coordination and accountability, and the elimination of siloed risk management activities. Clear monetary values can be attached to savings such as risk infrastructure and process consolidation, reduction in compliance fines and penalties, reduced risk transfer costs and reduced regulatory capital requirements. Likely equity premium driven by positive public perception, an improved credit rating or risk score, and the integration of risk results with operations may be used in arguing the case for shareholder value added. Alternative options can also be assessed and combinations of risk mitigation solutions can be used. A combination of organizational consensus, strong executive management and an appreciation for various program sensitivities is required to overcome barriers to EWRM implementation. The implementation should follow a concise path to transform the process and organization past traditional risk management (defensive risks avoided approach) through business risk management (focusing on managing risks with an organizational risk governance structure) and ultimately to ENTERPRISE RISK MANAGEMENT (risk exploited). The general challenge for organizations is the necessary commitment, initiative and motivation to take the next step towards ERM maturity after the initial process.

Limitations Prioritizing the risk management processes too highly could keep an organization from ever completing a project or even getting started. This is especially true if other work is suspended until the risk management process is considered complete. It is also important to keep in mind the distinction between risk and uncertainty. Risk can be measured by impacts x probability. If risks are improperly assessed and prioritized, time can be wasted in dealing with risk of losses that are not likely to occur. Spending too much time assessing and managing unlikely risks can divert resources that could be used more profitably. Unlikely events do occur but if the risk is unlikely enough to occur it may be better to simply retain the risk and deal with the result if the loss does in fact occur. Qualitative risk assessment is subjective and lacks consistency. The primary justification for a formal risk assessment process is legal and bureaucratic.

The following are the conclusions of the study from IDBI FEDERAL LIFE INSURANCE CO LTD:

Risk management underscores the fact that the survival of an organization depends heavily on its capabilities to anticipate and prepare for the change rather than just waiting for the change and react to it.

The objective of risk management is not to prohibit or prevent risk taking activity, but to ensure that the risks are consciously taken with full knowledge, clear purpose and understanding so that it can be measured and mitigated.

Since main investment is done in government securities so main risk faced is interest rate risk

Risk Management Committee, Credit Policy Committee, Asset Liability Committee, etc are such committees that handle the risk management aspects.

The insurance company can take risk more consciously, anticipates adverse changes and hedges accordingly; it becomes a source of competitive advantage, as it can offer its products at a better price than its competitors.

Regarding use of risk management techniques, it is found that internal rating system and risk adjusted rate of return on capital are important.