A Report

On
RISK MANAGEMENT IN INSURANCE SECTOR
By
Tej Vardhan
17BSPHH01C1177
IDBI Federal Life Insurance Co Ltd.

A report submitted in fulfillment of the requirements of MBA

Program at IBS Hyderabad.

Distribution list:
Faculty Guide: Company Guide:
Mr.Bharath Supra Mr. Anji Reddy
Asst. Professor Sr. Agency Head
IBS, Hyderabad IDBI Federal LIC
ltd.

Date of Submission: May 9, 2018

Authorization

Mr. Bharath Supra

Asst. Professor
IBS Hyderabad

To whomsoever it may concern

I, Mr. Bharath Supra, hereby authorize the submission of the project work titled ‘Risk
Management in Insurance Sector’ undertaken by Tej Vardhan (Enrolment
no.17BSPHH01C1177) as partial fulfillment of MBA Program at IBS Hyderabad. This Project
work was executed by the student under my guidance and no part of this report has been
submitted for any other degree or recognition before.

Sincerely

Mr. Bharath Supra

Acknowledgement

I would like to take this opportunity for extending my gratitude towards IDBI Federal Life Co
Ltd. for allowing me to do my Summer Internship Program with their esteemed organization.

Firstly, I would like to express my deepest regards for my Company Mentor, Mr. Anji Reddy.
His constant encouragement, monitoring and guidance helped in completion of this project
successfully. Also, his down to earth nature and expertise helped me in enhancing my
knowledge and outlook towards the insurance sector.

Next, I would like to thank Mr. Chakradhar (Senior DM) of IDBIFLIC for providing us with
ample opportunities for our learning and growth.

I would also like to thank my Faculty Guide, Mr. Bharath Supra for his constant support and
guidance. His ever-helping nature and leadership helped me to navigate my way in various
situations through this program.

Last but not the least, I would like to thank all the staff of IDBI Life Insurance Co Ltd. for
accepting us in their small family.
Executive Summary

Risk is the possibility of deviation of the actual output from the expected output. This possibility
of deviation or uncertainty is something that every business organization on the earth has to deal
with. Insurance has evolved as a process of safeguarding the interest of people from loss and
uncertainty. It may be described as a social device to reduce or eliminate risk of loss to life and
property. Insurance contributes a lot to the general economic growth of the society by provides
stability to the functioning of process. The insurance industries develop financial institutions and
reduce uncertainties by improving financial resources.

This report features all the major risks that can be faced by the Insurance sector in India. The
Market risk, Credit Risk and Operational risks have been kept in prime focus and their
mitigation measures have been covered extensively in this report as these three risks have
caused substantial harm to the insurance industry in the past.

This report also covers the generalized principles of risk management for insurance sector, and a
step-wise guide on how an organization should start with for formulating its own Risk
Management policy. Since this report is an academic exercise, hence some limitations were
encountered. Limited access to information and technique were the two main limitations that
were encountered. A lot of techniques involve subjectivity as they involve some assumptions on
which the risk is calculated and the mitigation measures adopted.

Apart from covering the three risks in detail, the report also features the questionnaires that were
made as a part of the Risk Control Self-Assessment Survey for the Risk Management policy of
the company, IDBI Federal Life Insurance Company Limited.

Table of Contents
TOPICS PAGE NO.
Authorization I
Acknowledgement Ii
Executive Summary Iii

1. Introduction 9
1.1 Purpose, Scope and Limitations 9

1.2 Sources and Methods 10

1.3 Literature Survey 11

2. Industry Analysis 12
2.1 Global history of Insurance Industry 12
2.2 Indian Insurance Market 15
3. IRDAI 17
4. Company Analysis 19
4.1 About IDBI Federal Life Insurance Co. Ltd. 20
4.2 About the sponsors 20
4.3 Vision, Mission and Values of the Company 21
4.4 SWOT Analysis 22
4.5 Products of IDBIFLIC 23
4.6 Organization Structure 24
5. Risk Management 26
5.1 Broad principles of risk management 26
5.2 Risk management- the process 27
5.3 Types of Risk Insurance Sector 30
6. Risk management in Life Insurance 32
7. Risk management in General Insurance 33
8. Alternate Risk Managements 33
9. Managing the market risk 35
9.1 Swaps 35
9.2 Value at Risk (VaR) 36
10. Managing the Credit Risk 39
10.1 Credit Rating 40
10.2 Expert Systems 41
10.3 Internal Ratings Based (IRB) Approach 43
11. Managing the Operational Risk 44
11.1 Basic Indicator Approach 44
11.2 Advanced Measurement Approach 45
12. Analysis of Survey 55
13. Findings and Conclusions 65
14. Recommendations 66
15. References 67
16. Glossary 68

List of Illustrations
TOPICS PAGE NO.
Insurance Risks 16
The ERM Model 17
Key Risk control programs 18

Equity share of IDBI, Federal and Ageas 20

SWOT Analysis 22
Organizational Structure 25
Process of risk management 29
Factors of expert system 42
Objectives of KRI 47

1. Introduction

The insurance sector has been immersed in a permanent updating process, fostering the changes
needed to adapt both to the new economic environments and to the growing levels of safety,
transparency and effectiveness which are increasingly being demanded by financial markets and
citizens.
Their growingly frequent uncertainty necessarily leads supervisors and companies to look for
higher levels of safety through new approaches to solvency, supervision and risk management
procedures.

Insurance companies are in the business of taking risks. Worldwide these companies write
policies that deal with specific risks, and in many cases, even underwrite exotic risks. As a direct
corollary, therefore, insurance companies should be good at managing their own risks. However
the truth is a little far from that! Most insurance companies are very good at assessing insurance
risks but are not very good at setting up structures in their own home to manage their own
operating and business risks. As an emerging need from the credit crisis, IRDA issued a set of
guidelines on corporate governance in 2010, which contained a reference to the setting up of a
mandatory risk management committee (RMC). The RMC has to lay down a risk management
strategy across various lines of business, and the operating head must have direct access to the
Board. However, IRDA left it to the companies to work out the details of how risk management
functions were to be suitably organized by them given the size, nature, and complexity of their
business. But that should in no way undermine the operative independence of the risk
management head. Because of this leeway, most of the Indian insurance companies have given
risk management responsibilities to one of the actuaries, which is not a very strong move toward
independence. Today it is well recognized that sound management of an insurer, as for other
financial sector entities, is dependent on how well the various risks are managed across the
organization.

1.1 Purpose, Scope and Limitations

Insurance is the science of spreading of the risk. It is the system of spreading the losses of an
individual over a group of Individuals. Insurance is a method of sharing of financial losses. A
few from a common fund formed out of contribution of the many who are equally exposed to
the same kind of loss What is uncertainty for an Individual becomes a certainty for a Group.

Objective
The report seeks to achieve the following objectives:
a. Understanding risks: Risks are the uncertainties that hamper the normal day to day
working of the businesses. It is very important to understand these risks as they are
different in nature from one another and a response for one cannot be used to protect the
organization from the other.

b. Assessment of Risks: All the methods to reduce risks by preempting the procedures are
worthless if one fails to assess the magnitude of the type of risk involved. Hence it is
equally important to assess the magnitude of risk involved.

c. Understanding the impacts: Risks being nothing but uncertainties, function as catalysts
in an unlikely situation and their impact on the organization also differs from situation to
situation. There will never be a condition when the risks will have an equal impact over a
business concern.

d. Mitigation of Risks: Mitigation refers to the practice using which the business concerns
reduce their exposure to the uncertainties. After learning about the risks and their
impacts, the next step is how to reduce their impact on the business concern.

e. Policy Formulation: Every organization forms a policy for the mitigation of risks which
is commonly referred to as the Risk Management Policy. This policy serves as guidance
note as in this document, the organization lays down what procedures are to be followed
while assessing the risks and what all steps are to be followed in event of an unlikely
situation.

Limitations of the Project-

Following points elucidate the limitations of the project:
a. Limited Access to information
One part of the project includes assisting the company, PNB Investment Services Ltd. in
formulating their own Risk Management Policy. Due to access to only a limited piece of
information, it is very difficult to gather an exhaustive idea about the financial and
 operational performance of the organization which in turn creates difficulties in
identifying and assessing the risks associated with the organization.

b. Subjectivity in the technique

The technique used in Operational Risk Management using the Advanced Measurement
Approach (AMA) and its technique of Risk Control and Self-Assessment (RCSA) is
totally opined and has a lot of subjectivity in regard of identification and assessment of
risk.

c. Possibility of Errors in Data Collection

The methodology used for data collection is survey questionnaire. Hence, it has a
probability of suffering with the errors related to data collection and those related to
survey methodology.

d. No standard procedure
The only preferred way for mitigating the market risk is diversifying the portfolio and
there is no standardized way of mitigating the risks associated with a standard procedure.

1.2 Sources and Methods

To manage market risk, insurance sector deploy a number of highly sophisticated mathematical
and statistical techniques. In this project the method that will be followed are solvency margin
formula, risk based capital and value-at-risk (VaR) analysis. VaR is the loss level that will not be
exceeded with a specified probability. For investors, risk is about the odds of losing money, and
VaR is based on that common-sense fact. By assuming investors care about the odds of a really
big loss, VaR answers the question, "What is my worst-case scenario?" or "How much could I
lose in a really bad month?”. Stress-Testing is a useful tool for financial risk managers because it
gives us a clear idea of the vulnerability of a defined portfolio. Stress-testing techniques measure
the potential loss we could suffer in a hypothetical scenario of crisis. One of the most important
functions of Stress-testing is to identify hidden vulnerabilities, often the result of hidden
assumptions, and make clear to trading managers and senior management the consequences of
being wrong in their assumptions.

1.3 Literature Survey

Jose Manuel Feria Domínguez1 (2004) in his study on “Applying Stress-Testing on Value at
Risk (VaR) Methodologies”. In this paper, Jose develop an empirical Stress-Testing exercise by
using two historical scenarios of crisis. In particular, they analyze the impact of the 11-S attacks
(2001) and the Latin America crisis (2002) on the level of risk, previously calculated by
different statistical methods. Consequently, they have selected a Spanish stock portfolio in order
to focus on market risk. From the research they conclude that the impact of Brazilian crisis
(scenario II) in portfolio is greater than that of the 11-S terrorist attacks.
Humberto Banda-Ortiz (2014) conducted study on “Value at Risk (VaR) in uncertainty”. VaR
methodology has important limitations which make it unreliable in contexts of crisis or high
uncertainty. For this reason, they test the VaR accuracy when is employed in contexts of
volatility, for which they compare the VaR outcomes in scenarios of both stability and
uncertainty, using the parametric method and a historical simulation based on data generated
with the Black & Scholes model. In addition, they found that the Black & Scholes simulations
lead to underestimate the expected losses, in comparison with the parametric method and also
found that those disparities increase substantially in times of crisis.

2. Industry Analysis

The insurance industry of India consists of 53 insurance companies of which 24 are in life
insurance business and 29 are non-life insurers. Among the life insurers, Life Insurance
Corporation (LIC) is the sole public sector company. Apart from that, among the non-life
Insurers, there are six public sector insurers. In addition to these, there is sole national reinsurer,
namely, General Insurance Corporation of India. Other stakeholders in Indian Insurance market
include Agents (Individual and Corporate), Brokers, Surveyors and Third Party Administrators
servicing Health Insurance claims. Out of 29 non-life insurance companies, 4 private sector
insurers are registered to underwrite policies exclusively in Health, Personal Accident and
Travel insurance segments. They are Star Health and Allied Insurance Company Ltd, Apollo
Munich Health Insurance Company Ltd, Max Bupa Health Insurance Company Ltd and
Religare Health Insurance Company Ltd and Cigna TTK Health Insurance Company Ltd. There
are two more specialized insurers belonging to public sector, namely, Export Credit Guarantee
Corporation of India for Credit Insurance and Agriculture Insurance Company Ltd for Crop
Insurance. Insurance penetration of India i.e. Premium collected by Indian insurers is3.30% of
GDP in FY 2014-15. Per capita premium underwritten i.e. insurance density in India during FY
2014-15 is US$ 55.0. The insurance sector in India has come to a full circle from being an open
competitive market to nationalization and back to a liberalized market again. Tracing the
developments in the Indian insurance sector reviles the 360-degre turn witnessed over a period
of almost two centuries.

2.1 Global history of Insurance Industry:

The roots of insurance started at Babylonia, where traders were encouraged to assume the risks
of the caravan trade through loans that were repaid only after the goods had arrived safely given
legal force in the Code of Hammurabi in 2100 B.C. The Phoenicians and the Greeks applied a
similar system to their seaborne commerce. The Romans used burial clubs as a form of life
insurance, providing funeral expenses for members and later payments to the survivors.
With the growth of towns and trade in Europe, the medieval guilds undertook to protect their
members from loss by fire and shipwreck, to ransom them from captivity by pirates, and to
provide decent burial and support in sickness and poverty. By the middle of the 14th cent., as
evidenced by the earliest known insurance contract , marine insurance was practically universal
among the maritime nations of Europe. In London, Lloyd's Coffee House was a place where
merchants, ship owners, and underwriters met to transact business. By the end of the 18th
century. Lloyd's had progressed into one of the first modern insurance companies. In 1693 the
astronomer Edmond Halley constructed the first mortality table, based on the statistical laws of
mortality and compound interest. The table, corrected by Joseph Dodson, made it possible to
scale the premium rate to age; previously the rate had been the same for all ages.

In India, insurance has a deep-rooted history. Insurance in various forms has been mentioned the
writings of Manu (Manusmrithi)
,Yagnavalkya (Dharmashastra) and Kautilya (Arthashastra). The fundamental basis of the
historical reference to insurance in these ancient Indian texts is the same i.e. pooling of
resources that could be re-distributed in times of calamities such as fire, floods, epidemics and
famine.
Insurance in its current form has its history dating back until 1818, when Oriental Life Insurance
Company was started by Anita Bhavsar in 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, which was
founded in 1906, and is still in business.
The Government of India issued an Ordinance on 19 January 1956 nationalizing 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
societies—245 Indian and foreign insurers in all. In 1972 with the General Insurance Business
(Nationalization) 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 1 January 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).
In 1993, Malhotra Committee headed by former Finance Secretary and RBI Governor R.N.
Malhotra was formed to evaluate the Indian insurance industry and recommend its future
direction. The aim of the Malhotra Committee was to assess the functionality of the Indian
insurance sector. This committee was also in charge of recommending the future path of
insurance in India.
The Malhotra committee was set up with the objective of complementing the reforms initiated in
the financial sector. The reforms were aimed at "creating a more efficient and competitive
financial system suitable for the requirements of the economy keeping in mind the structural
changes currently underway and recognizing that insurance is an important part of the overall
financial system where it was necessary to address the need for similar reform. In 1994, the
committee submitted the report and some of the key recommendations included-
1) Structure
 Government stake in the insurance Companies to be brought down to 50%.
 Government should take over the holdings of GIC and its subsidiaries so that the
 Subsidiaries can act as independent corporations.
 All the insurance companies should be given greater freedom to operate.
2) Competition
 Private Companies with a minimum paid up capital of Rs.1bn should be allowed to
enter the industry.
 No Company should deal in both Life and General Insurance through a single entity.
 Foreign companies may be allowed to enter the industry in collaboration with the
Domestic companies.
 Postal Life Insurance should be allowed to operate in the rural market.
 Only One State Level Life Insurance Company should be allowed to operate in each
state.
3) Regulatory Body
 The Insurance Act should be changed.
 An Insurance Regulatory body should be set up.
 Controller of Insurance (Currently a part from the Finance Ministry) should be made
Independent
4) Investments
 Mandatory Investments of LIC Life Fund in government securities to be reduced from
75% to 50%.
 GIC and its subsidiaries are not to hold more than 5% in any company (There current
Holdings to be brought down to this level over a period of time).
5) Customer Service
 LIC should pay interest on delays in payments beyond 30 days.
Computerization of operations and updating of technology to be carried out in the insurance
industry. The committee emphasized that in order to improve the customer services and increase
the coverage of the insurance industry should be opened up to competition.

2.2 Indian Insurance Market

The insurance sector which stood at a strong US$ 72 billion in 2012 has the potential to grow to
US$ 280 billion by 2020. This growth is driven by India’s favorable regulatory environment
which guarantees stability and fair play. This environment has given rise to an insurance market
which encourages foreign investors to tap into the sector’s massive potential. Ever since the
Indian government liberalized the insurance sector in 2000 and opened the doors for private
participation, the sector has gone from strength to strength. The resultant competition has
provided the consumer with a never-before-seen range of products and providers, and also
enhanced service levels markedly. The health of the insurance sector reflects a country’s
economy. This sector not only generates long-term funds for infrastructure development, but
also increases a country’s risk-taking capacity. India’s economic growth since the turn of the
century is viewed as a significant development in the global economy. This view is helped in no
small part by a booming insurance industry.
Industry Dynamics
Factors that influence consistent growth in insurance sector are:
•Effective distribution channels – The efficiency and cost of the various distribution strategies
used by companies are significant to their success in the insurance business. This
particularly holds true for the retail business.
•Focus on overall financial inclusion – As time evolves, so must the approach of the insurance
sector in India. The objective of the insurance sector should ideally be to offer a
broader range of activities to a wider population.
•Consumer needs and preferences – The growth of India’s insurance industry can be attributed
to product innovation, dynamic distribution channels, and vibrant publicity and
promotional campaigns run by insurance companies. Benefits attached to the products
and the manner in which they are delivered (through various marketing tie-ups) have
helped bring customers and insurance companies closer to each other and made the
latter more relevant.

Types of Insurances:
Insurance business is divided into four classes:
1. Life Insurance
2. General Insurance.
Life insurers undertake the Life Insurance business; general insurers handle the rest. The
Business of insurance essentially means defraying risks attached to an activity
(including life) and sharing the risks between various entities, both persons and
organizations. Insurance companies are important players in financial markets as they
collect and invest large amounts of premium in various investment instruments.
3. IRDAI
The Insurance Regulatory and Development Authority of India (IRDAI) is an autonomous,
statutory agency tasked with regulating and promoting the insurance and re-insurance industries
in India. It was constituted by the Insurance Regulatory and Development Authority Act,
1999, an act of Parliament passed by the government of India.The agency's headquarters are
in Hyderabad, Telangana, where it moved from Delhi in 2001.
The U.S. Enterprise Risk Management (ERM) uses culture, currency, regulation, economic
factors, geographical differences Time Zone Language, distance from home office, credentials,
loss of control etc. are used for identification of a risk and operational expenses of business,
revenue loss, and normal levels of production, pre-loss situation and post-loss Situation are
studied to identify the risk.
Figure no. 1- The ERM Model

Based on the ERM Model as depicted above and emerging from the Global financial crisis of
2008, Insurance Regulatory & Development Authority (IRDA) issued a set of Guidelines of
Corporate Governance in 2010, which contained a reference to the setting up a mandatory Risk
Management Committee (RMC). The RMC has to lay down a risk management strategy across
various lines of business and the Operating Head must have direct access to the Board. However
IRDA left it to the companies in the Insurance sector to work out the details of how risk
management functions were to be suitably organized by the respective companies, given their
size, nature and complexity of the business. But that should in no way undermine the operative
independence of the risk management head. Because of this leeway, most of the Indian
insurance companies have given the risk management responsibilities to their actuaries, which is
not a very strongly recommended path.
Figure no.2- Key risk control programs
4. Company Analysis

IDBI Federal Life Insurance Co Ltd. is a joint-venture of IDBI Bank, India's premier
development and commercial bank, Federal Bank, one of India's leading private sector banks
and Ageas, a multinational insurance giant based out of Europe. In this venture, IDBI Bank
owns 48% equity while Federal Bank and Ageas own 26% equity each. Having started in
March 2008, in just five months of inception, IDBI Federal became one of the fastest
growing new insurance companies by garnering Rs.100 Cr in premiums. Through a
continuous process of innovation in product and service delivery IDBI Federal aims to
deliver world-class wealth management, protection and retirement solutions that provide
value and convenience to the Indian customer. The company offers its services through a
vast nationwide network 2,308 partner bank branches of IDBI Bank and Federal Bank in
addition to a sizeable network of advisors and partners. As on March’31’2016 company has
issued 8.23 lakh policies with sum assured of 51,918 crores during the same period last year
the company has issued 7.88 lakh policies with a sum assured of 41,856 crores. They have
achieved 40% growth on industry growth of 12%. Further IDBI Federal Life Insurance on
Wednesday (april 25th,2018) reported a jump of 94% in its net profit at Rs101 crore for the
fiscal ended March 2017-18.
The company had clocked a net profit of Rs52 crore in 2016-17. This is the 6th consecutive
year of profits since it first declared profits in 2012-13, the company said in a statement. The
total premium during the year grew by 14% to Rs1,783 crore as against Rs1,565 crore in the
preceding financial year.
The individual new business premium increased by 15% to Rs732 crore in 2017-18 from
Rs634 crore in 2016-17. The persistency ratio on overall premium for 13 months as on
February 2018 improved to 81% from 79% in the prior period, IDBI Federal Life said.

4.1 About IDBI Federal Life Insurance Company Limited (IDBIFLIC)

IDBI Federal Life Insurance is one of India’s growing life insurance companies and offers a
diverse range of wealth management, protection and retirement solutions to individual and
corporate customers.

IDBI Federal Life Insurance Co Ltd is a joint-venture of IDBI Bank, India’s premier
development and commercial bank, Federal Bank, one of India’s leading private sector banks
and Ageas, a multinational insurance giant based out of Europe.

Having commenced operations in 2008, IDBI Federal was able to achieve breakeven within just
5 years; the Company’s passion for innovation and growth helped it achieve this feat.
Through a nationwide network of 3, 014 branches of IDBI Bank and Federal Bank, and a
sizeable network of advisors and partners, IDBI Federal Life Insurance has achieved presence
across the length and breadth of the country. As on March 31, 2015, the company has issued
nearly 8.23 lakh policies with a sum assured of over 800crores.
Figure No.3. Equity Share of IDBI, FEDERAL AND AGEAS

4.2 About the sponsors

IDBI Bank
IDBI Bank Ltd., since its inception, India’s premier industrial development bank. It came into
being as on July 01, 1964 (under the Companies Act, 1956) to support India’s industrial
backbone. Today, it is amongst India’s foremost commercial banks, with a wide range of
innovative products and services, serving retail and corporate customers in all corners of the
country from 1082 branches and 1715 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 and 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 India’s financial sector –National Stock Exchange
of India Limited (NSE) and National Securities Depository Ltd, Stock Holding Corporation of
India Ltd (SHCIL), Credit Analysis and Research Ltd (CARL).

Federal Bank
Federal Bank is one of India’s leading private sector banks, with a dominant presence in the
state of Kerala. It has a strong network of over 1104 branches and 1195 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. In addition to interconnected branches and ATMs, 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 and the Bank has won several awards and
recommendations.
Ageas
Ageas is an international insurance group with a heritage spanning more than 180 years. Ranked
among the top 20 insurance companies in Europe, Ageas has chosen to concentrate its business
activities in Europe and Asia, which together make up the largest share of the global insurance
market. These are grouped around four segments: Belgium, United Kingdom, Continental
Europe and Asia and served through a combination of wholly owned subsidiaries and
partnerships with strong financial institutions and key distributors around the world. Ageas
operates successful partnerships in Belgium, UK, Luxembourg, Italy, Portugal, Turkey, China,
Malaysia, India and Thailand and has subsidiaries in France, Hong Kong and UK. Ageas is the
market leader in Belgium for individual life and employee benefits, as well as a leading non-life
player through AG Insurance. In the UK, Ageas has a strong presence as the fourth largest player
in private car insurance and the over 50‟s market. Ageas employs more than 13,000 people and
has annual inflows of more than EUR 21 billion.

4.3 Vision, Mission and Values of the Company-

Vision
To be the leading provider of wealth management, protection and retirement solutions that meets
the needs of our customers and adds value to their lives.

Mission
Continually strive to enhance customer experience through innovative product offerings,
dedicated relationship management and superior service delivery while striving to interact with
our customers in the most convenient and cost effective manner.
To be transparent in the way we deal with our customers and to act with integrity.
To invest in and build quality human capital in order to achieve our mission.
Values
 Transparency: Crystal Clear communication to our partners and stakeholders
 Value to Customers: A product and service offering in which customers perceive value
 Rock Solid and Delivery on Promise: This translates into being financially strong,
operationally robust and having clarity in claims
 Customer-friendly: Advice and support in working with customers and partners
 Profit to Stakeholders: Balance the interests of customers, partners, employees,
shareholders and the community at large

4.4 SWOT Analysis

4.5 Products of IDBI Federal Life Insurance Co Ltd.

IDBI Federal is providing various insurance policies for the commonwealth of the people and its
customer in particular. The various insurance policies provided by the company are:

a) Incomesurance
IDBI Federal Incomesurance Endowment and Money Back Plan is loaded with lots of benefits
which ensure that policyholder get Guaranteed Annual Payout along with insurance protection
which will help policyholder to reach their goals with full confidence. Incomesurance Plan is
very flexible and allows policyholder to customize their Plan as per your individual and family’s
future requirements. Moreover it also allows policyholder to choose Premium Payment Period,
Payout Period, Payout Options and more.

b) Wealthsurance
The Wealthsurance Milestone Plan is a unique Insured Wealth Plan designed to help cross
different milestones in one’s life. It enables customers to save and build wealth under the
protection of insurance to meet their financial goals. The Wealthsurance Milestone Plan offers a
wide range of Investment options, Insurance options and unmatched flexibility that allows
customers to customize a plan suited to their needs. 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.

c) Termsurance
IDBI Federal Termsurance Protection Plan (Termsurance) comes with three cover options which
policyholder can select on the basis their requirement. Termsurance is designed with a host of
benefits and options aimed at satisfying their every need. It not only allows policyholder to
customize their plan as per their individual and family’s needs, it also comes with a host of
benefits like convenient insurance cover options, flexible premium payment terms, choice of
policy term and lots more flexible options.

d) Homesurance
IDBI Federal Homesurance Plan is a mortgage reducing term assurance plan – MRTA, which
offers protection to their home from their home loan. The Plan provides a cover equal to the
outstanding balance of their home loan against any unfortunate events that may occur to
policyholder. This plan gives people the option of a Single Premium.

e) Childsurance
Whether policyholder’s 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 Dream
builder Insurance Plan will keep you future-ready against both, changing dreams and life’s
twists. It allows policyholder to create build and manage wealth by providing several choices
and great flexibility so that policyholder’s plan meets their specific needs. Childsurance allows
policyholder to protect their child plan with triple insurance benefits so that their wealth-
building efforts remain unaffected by unforeseen events and their child’s future goals can be
achieved without any hindrance.

f) Bondsurance
The IDBI Federal Bondsurance Advantage Plan is a single premium plan where policyholder
needs to make just a one-time investment. At the end of the chosen period, policyholder 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.

g) Group Microsurance
IDBI Federal Group Microsurance Plan provides affordable life insurance cover to groups. This
plan is extremely useful to Micro Finance Institutions, Self Help Groups and NGOs to insure the
lives of their group members and thus provide security to the group members’ families. The plan
can also be used for providing loan protection to the group members’ families.

h) Retiresurance
A retirement plan designed to accumulate money to aid a comfortable retirement. The plan
provides a guaranteed return on investment and grows steadily over the years to ensure that
policyholder have a corpus on their retirement date, guaranteed.
i) Loansurance
Loansurance is a cost-effective way to ensure that the outstanding debt is settled in the
unfortunate event of death of the insured member. This term assurance plan provides cover to a
policyholder directly liable for loan repayment (and the partners, in case of a partnership), as per
the benefit schedule.

j) iSurance Online Term Insurance Plan

IDBI Federal iSurance Online Term Insurance Plan (hereafter, referred to as iSurance Online
Term Plan). This simple, comprehensive and affordable life insurance plan.
4.6 Organization Structure

IDBI Federal has line structure as its Organizational structure. Authority flows from the top
level to lower levels through various managerial positions. There is vertical flow of authority
and responsibility. Every person is accountable to his immediate boss. There is limit on
subordinates under one manager. A manager has control only over the subordinates of his
department. Figure 2 shows the organizational structure of IDBIFLIC.

Figure no. 4- Organizational structure of IDBIFLIC

5. Risk Management
In ideal risk management, a prioritization process is followed whereby the risks with the greatest
loss (or impact) and the greatest probability of occurring are handled first, and risks with lower
probability of occurrence and lower loss are handled in descending order. In practice the process
of assessing overall risk can be difficult, and balancing resources used to mitigate between risks
with a high probability of occurrence but lower loss versus a risk with high loss but lower
probability of occurrence can often be mishandled.
Intangible risk management identifies a new type of a risk that has a 100% probability of
occurring but is ignored by the organization due to a lack of identification ability. For example,
when deficient knowledge is applied to a situation, a knowledge risk materializes. Relationship
risk appears when ineffective collaboration occurs. Process-engagement risk may be an issue
when ineffective operational procedures are applied. These risks directly reduce the productivity
of knowledge workers, decrease cost-effectiveness, profitability, service, quality, reputation,
brand value, and earnings quality. Intangible risk management allows risk management to create
immediate value from the identification and reduction of risks that reduce productivity.
Risk management also faces difficulties in allocating resources. This is the idea of opportunity
cost. Resources spent on risk management could have been spent on more profitable activities.
Again, ideal risk management minimizes spending (or manpower or other resources) and also
minimizes the negative effects of risks.
According to the definition to the risk, the risk is the possibility that an event will occur and
adversely affect the achievement of an objective. Therefore, risk itself has the uncertainty. Risk
management such as COSO ERM, can help managers have a good control for their risk. Each
company may have different internal control components, which leads to different outcomes.
For example, the framework for ERM components includes Internal Environment, Objective
Setting, Event Identification, Risk Assessment, Risk Response, Control Activities, Information
and Communication, and Monitoring.

5.1 Broad Principles of Risk Management

Following are the broad principles as to how a firm should manage its risks:
a. It should create and protect value: Risk management contribute to the demonstrable
achievement of objectives and improvement of performance in, for example human
health, safety, legal and regulatory compliance.

b. It should be an integrated part of all organizational processes: Risk management is

not a standalone activity that is separate from the main activity of the organization. Risk
management is part of responsibilities of management and an integral part of
responsibilities of the management.

c. It should be a part of decision making: Risk management helps decision makers make
informed decisions, prioritize actions and distinguish among different courses of action.

d. It should be systematic, structured and timely: A systematic, timely and structured

approach to risk management contributes to efficiency and to consistent, comparable and
reliable results.

e. It should be tailored: Risk management policy should be aligned with the

organization’s external and internal risk profile and context.

f. It should expressly address uncertainty: Risk management explicitly takes account of

uncertainty, the nature of uncertainty and how it can be addressed.

g. It should be transparent and inclusive: Appropriate and timely involvement of

stakeholders and in particular, decision makers at all levels of the organization, ensures
that the risk management process remains up to date. Involvement also allows
stakeholders to be properly represented and to have their views taken under
consideration in determining risk criteria.

5.2 Risk Management: The Process

The Risk Management Process primarily includes seven phases which have been detailed
below:

1. Establishing a context for risk management - This includes:

 a. Clarifying the vision, mission and goals of your organization
b. Identifying the wider environment within which your organization operates
c. Setting the scope and objectives for the risk management process
d. Identifying how risks will be measured
e. Identifying what will be involved in the risk assessment process

2. Communicating the risk management to various organizational layers - Good

communication and consultation is essential for risk management and attempts to:

a. Improve people's understanding of risks and the risk management processes

b. Ensure all relevant stakeholders are heard
c. Ensure that everyone is clear on their roles and responsibilities

3. Identifying the risks - The aim is to develop a comprehensive list of the sources of risks and
their consequences. There is no one right way to do this. Some strategies are:

a. Brainstorming at a staff meeting

b. Brainstorming with stakeholders with relevant knowledge and experience
c. Systematic analysis, for example, flow charting systems and processes
d. Development of 'what if' scenarios
e. Researching relevant data, such as attrition rate, instances of operational delays, etc.

4. Analyzing the risks - Some of the key questions in analyzing the risks are:

a. What is the likelihood of the risk?

b. What is the consequence?
c. What is the level of risk (combination of likelihood and consequence)?
d. What factors affect the likelihood or consequences?
e. What is the level of uncertainty?
f. What are the limitations to the analysis?

Similar questions can be asked in relation to opportunities (i.e. the risks with positive
consequences):

a. What is the likelihood of the opportunity?

b. What is the consequence?
c. What is the level of opportunity/risk (combination of likelihood and consequence)?

5. Evaluating the risks - Some of the key questions in risk evaluation are:

a. What are acceptable levels of risk?

b. What are intolerable levels of risk?
c. Does the risk need treatment?
d. What are the priorities for treatment of risks?
6. Treating the risks - To effectively treat the risks, one needs to understand how risks arise.
Some of the ways in which risks are treated are:

a. Contingency planning (i.e. planning in advance for an event that may happen, so as to
minimize any negative effects should it happen)
b. Sharing the risk, for example, mentioning the risk sharing clause when entering into
contracts with other service providers, use of waivers
c. Transferring the risk, for example, through insurance
d. Avoiding the risk, for example, no longer undertake the activity
e. Financing the risk, for example, setting funds aside to pay for the consequences
f. Reducing the risk, for example, by changing the practices followed at work

In treating risks there will be trade-offs between costs and benefits. One will have to make a
judgment to assess if the cost of reducing the risk is worth the benefit of the reduced risk.

7. Monitoring and reviewing the risks - Risk management is an ongoing process:

a. The risk management process needs monitoring

b. to evaluate whether the previously selected security controls are still applicable and
effective

The effects of risk treatments need to be monitored and reviewed to ensure they are adequate
and effective.

Figure No. 5- The process of risk management

5.3Types of Risk in Insurance Sector

The insurance industry has had to struggle with drastic, sometimes sudden changes to
regulations, government policies, and risks associated with natural disasters and environmental
trends. Predictive models, which are often called generalized linear models (GLMs), have
become the standard for insurance companies around the world. GLMs are used to foresee the
possible risks a particular sector may face by accounting for the various problems that may arise
in the particular area of the insurance industry. Once equipped with this knowledge, insurance
companies can price policies in a way that will ensure their continued solvency and service to
consumers, as well as their own profits .Risk is the possibility of losing economic security. Most
economic risk derives from variation from the expected outcome. Insurer uses rigorously
technique to identify, monitor and manage the risks. Some of the techniques are stochastic
modeling, value at risk, tail risk, economic capital calculations, stress tests and more and
identify negative impact. Identification of risk is determination of risk where does it lie. The risk
may be relating to property, Life, Liability and Nature. Fire, theft, damage, natural calamities are
the various hazard. Various kinds of hazards are briefly explained here:

Property Loss: The factors responsible for loss are identified and evaluated for the purpose.
The insured and uninsured perils are identified. Replacement possibilities are calculated on the
basis of valuation.The book value is the minimum loss value of the property because it denotes
the purchase price and depreciation of the property. But it is not economic value which is the
real loss of the property. Market value is very near to economic value. If the firm does not get
value of the property any benefits of use of value; it will be equal to market value. Replacement
cost is considered for insurance as it is the cost of replacement of damaged property but it
exceeds the market value as the new property value increases due to inflation, Fire insurance,
marine insurance, motor insurance, machine insurance, profit insurance etc. are the
methodologies of loss deduction due to risk.

Large loss: The size of the loss must be meaningful from the perspective of the insured.
Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and
administering the policy, adjusting losses, and supplying the capital needed to reasonably assure
that the insurer will be able to pay claims

Life Risk: Human life is exposed of several risks e.g., old, age, death, health, accident and so
on. Some responsibilities such as education and marriage of children, starting of their career,
business responsibilities, key men employees, etc. are also attached with human life, Life
insurance policies, health insurance, key man insurance etc. are prevailing to minimize the loss
of human life.

Liability: Liability mainly legal liabilities arise because of contractual relationship. Third party
insurance of motor insurance, product liability and professional liability and many new
liabilities are added in recent years.
Other Risks: There are several other risks which influence the cost and production. Profit
insurance is taken for the purpose. Machine breakdown and crop insurance etc. are the recent
examples of other risks which are separately insured to reduce the loss can used by such risks.
Risks are measured using probability methods. Last experiences and variance analysis with
standard deviation are used for measuring risks. The probability is modified with the present
situation and future expectation.

Control of Risk: The risks are controlled through insurance with the principle of pooling;
cooperation and transfer of risks, Insurance of risks are becoming a gradual and continuous
process. The Indian experience is very positive wherein insurance is expanding with more than
15 percent per annum.

6. Risk Management in Life Insurance

The life insurance industry has long been keen to make note of the changes that could affect its
exposure to risk and financial loss. Over the many decades of its existence, the insurance
industry has become quite proficient at predicting the future and adapting according to the
dangers it foresees. This is largely due to the advent of predictive models, a tool used throughout
the industry to calculate risk and price coverage accordingly.
Solvency Margin: The insurer makes assumptions into future for parameters such as mortality,
morbidity, expenses, interest etc. Sub regulation (b) of Regulation 5 of IRDA Regulations
(Assets, Liabilities and Solvency Margin of Insurers) 2000; specifies that the best estimate
assumption shall be adjusted by an appropriate Margin for Adverse Deviation (MAD) which is
dependent upon the degree confidence. The purpose of MAD is to build a buffer for miss-
estimations of the best estimate or adverse fluctuations. But it does not cover for volatility and
catastrophe risks for which separate excess assets known as Solvency Margin should be
provided by the insurer.
Risk Based Capital: Risks based capital includes asset default risk, mortality morbidity risk,
volatility risk, catastrophe risk, margin risk and fund risk. Each company needs to develop
implement and maintain appropriate and effective procedures to manage its capital position, i.e.
ongoing minimum capital requirements, and future capital requirements. The capital
management planning identifies the quantity, quality and sources of additional capital required,
availability of any external sources, estimating the financial impact of raising additional capital,
taking into account the plans and requirements of various business units of the company, Risk
Based Capital is an amount of capital based on an assessment of risk that a company should hold
to protect policy holders against adverse developments. Risk based capital involves identifying
the key risks and quantifying them. The kinds of risks faced by insurance companies are listed
with a brief description:
(i) Insurance Risk: It is underwriting, risk associated with the uncertainty of business
written in the future
(ii) Market Risk: It is the risk associated with movements in interest rates, forcing
exchange rates or asset prices lead to an adverse movement in asset values
(iii) Credit Risk: If another party fails to perform them in time i.e. If the party fails to pay
the credit. So, allowance should be made for the financial effect of non-payment of
reinsurance and of the nonpayment of premium debtors.
(iv) Liquidity Risk: It is the risk that a firm has insufficient financial resources to meet its
obligation as they fall due or can only secure the resources at excessive cost.
(v) Operational Risk: It in the risk of direct or indirect loss resulting from inadequate or
failed internal processes, people and system or from External events.
It is common knowledge that life insurance companies are subject to 3 major risks while
entering into contracts with their policy holders: first, the mortality rate of the insured lives
may turn out to be higher than anticipated second, the management expenses of the
companies may be higher than those forecast and third, circumstances may lead to a
portfolio yield which is lower than that assured while calculating the premiums.

7. Risk Management in General Insurance

Solvency Margin Formula: IRDA's relevant regulations prescribe required solvency margin
(RSM) at 20% of the net premiums or 30% of net increased claims whichever in higher.
Risk Based Capital: Risk Based Capital (RBC) formula comprises asset risk, credit risk,
underwriting loss, underwriting premium risk and off balance sheet risk.
Reserving:The importance of proper reserving cannot be over-emphasized. The failure to
provide adequately for future claims is attributed to 'under reserving' or 'under provisioning'.
Reserves can be classified as unearned premium reserves (UPR), Unexpired Risk Reserve
(URR) outstanding Claims Reserve (OCR), Chain Ladder Method (CI), Average Cost per Claim
Method (ACPC) and Incurred but not reported Reserve (IBNR).

8. Alternate Risk Managements

These are several alternate risk management strategies such as risk transfer (reinsurance), risk
hedging through interest ratio etc. longevity bonds and managing financial market risks.

Solvency I
Solvency I is based on minimum solvency standards. The solvency I directive adopted in 2002
left the solvency calculation unchanged but only adjusted some other components. Solvency
requirements should be fulfilled at all times rather than only at the time the financial statements
are drawn up. All life insurers are required to Gold capital of at least the Solvency I minimum
guarantee fund, or the Solvency I required solvency margin plus the resilience capital
requirement. Solvency capital requirement will be calculation by applying either the standard
approach or the insurer's won internal risk model.

Solvency II
Solvency II requires adequate capital backing for the volatility of claims. It assesses the capital
requirements in which lives of business may exhibit above-average volatility the loss rations of
five non-life lives of business. European Union (EU) adopted solvency I 2002 which was
converted to solvency II in early 2003. EU commission is expected to adopt the solvency II
directive in mid 2007. After its adoption by EU Parliament and the council of Ministers, the
implementation is scheduled to be complete by 2010.One of the objectives of Solvency II is to
establish a solvency capital requirement which is better matched to the risks of an insurance
company. The characteristic of solvency II are based on principles and not rules. These are two
levels of capital requirements under solvency II, i.e., The Minimum Capital Requirement (MCR)
and Solvency Capital Requirement (SCR). MCR is the minimum level below which ultimate
supervisory action will be triggered. SCR should deliver a level of capital that enables an
insurance undertaking to absolute significant unforeseen losses and gives reasonable assurance
to policy holders that payment will be made as they fall due. Solvency II deals with quantitative
requirements, supervisory review powers and for insurer's internal control and risk management
and disclosure and transparency to reinforce market mechanism and risk based supervisors. It
reinforces on risk/return fundamentals.
9. Managing the Market Risk
The Insurance sector use the following instruments to control and mitigate the risk caused due to
the market fluctuations:
9.1Swaps
A swap is a derivative contract through which two parties exchange financial
instruments. These instruments can almost be anything, but most swaps involve cash
flow based on a notional principal amount that both parties agree to. Usually the
principal does not change hands. One cash flow is generally fixed and the other is
variable. Usually, at the time when the contract is initiated, at least one of these series of
cash flows is determined by a random or uncertain variable such as interest rate, foreign
exchange rate, price of equity or certain commodities.

Following are the different types of swaps that are used for mitigating market risk:
a. Interest Rate Swap
An interest rate swap is an agreement between two parties to exchange one
stream of interest payments for another, over a set period of time. This kind
of swap agreement is generally traded over the counter (OTC). The most
commonly traded and most liquid interest rate swaps are known as ‘Vanilla’
Swaps which exchange fixed rate payments for floating rate payments based
on LIBOR (London Inter-Bank Offered Rate), which is also the interest rate
high credit quality banks charge to each other.
Following are the benefits of an interest swap agreement:
i) Matched duration of long term liabilities and short term
assets
ii) Protection against interest rate movements
iii) Matching Guaranteed Benefits for With Profits

Fixed interest rate at a notional amount for the term of the swap
Floating interest rate on a notional amount for the term of the swap

b. Currency Swap
A currency swap is an agreement between two parties wherein one party
promises to make payments in one currency and the other party agrees to
make payment in the currency that the first party wants. Currency swaps help
in eliminating differences between international capital markets
Following are the advantages of Currency Swaps:
i) Any domestic company would find it easier to borrow as
compared to a company who is setting shop in a new
country.
 ii) Entering into an interest rate swap saves the losses that the
company might incur due to the fluctuation in the value of
currencies in the global markets.

c. Commodity Swaps
Just as the case with both interest rate swaps and currency swaps, in
commodity swaps, the cash flows to be exchanged are linked to commodity
prices. Commodities are physical assets such as metals, energy stores and
food including cattle. For example, in a commodity swap, a party may agree
to exchange cash flows linked to the price of oil for a fixed cash flow.

Following are the benefits of Commodity Swaps:

i) Both parties can protect themselves from losses arising due
to unlikely conditions.
ii) Commodity swaps serve as a tool for risk hedging as one
party may be susceptible to huge losses if the prices of the
commodity drops significantly.

9.2 Value at Risk (VaR)

Just as the name signifies, Value at Risk refers to amount of loss that an insurance sector
can incur at a particular point in time due to the change in market dynamics. Value at
Risk is a statistical technique which helps in measuring how much a insurance sector’s
portfolio stands to decline given the probability of decline. The Value at Loss (VaR) has
three most important elements, and they are as follows:

-Amount of Potential loss

-Probability of Loss
-Time Frame

Basically, VaR asks the most important question of ‘how much do I stand to lose in the
worst case scenario?’

Value at Risk is calculated using the following methods:

a. Historical Method
The historical method for calculating the Value at Risk (VaR) uses the returns
in an investor’s portfolio across a time horizon. This technique involves the
plotting of returns on a Histogram and then looking at what are the lowest
and the highest returns across the time frame.
 If we carefully observe the histogram, we can see that there is a time when
the returns were as low as -9% and also as high as 13-14%. If we treat this
Histogram as a normally distributed frequency curve, we can see that the
worst 5% of daily returns are between -4% to -8%. Since these are the worst
5% of daily returns, we can say with 95% confidence that any worse day our
loss will not will exceed 4%. Similarly, if we go towards the left side of the
Histogram where the all-time lowest returns are mentioned, which are 7 and
8% respectively. In such a situation, we can say with 99% confidence that any
given day, our return cannot go worse than -7% or -8%.

b. Variance-Covariance Method
This method assumes that the stock returns are normally distributed. Using
the data from the historic method as a base, this methods involves the
calculation of standard deviation of all stocks and then transposing the normal
curve on the Histogram which appears to be like:
 The advantage of the normal curve is that we automatically get to know about
the worst 5% and 1% that lie on the curve. For that, we simply need to
multiply the standard deviation of the daily returns with the confidence
interval. The standard deviation of the daily returns in the given figure is
2.64. The calculation of the Value at Risk is as follows:

Confidence Value ∂ Value at Risk

95% -1.65 2.64 -4.36% (-1.65x2.64)
99% -2.33 2.64 -6.15% (-2.33x2.65)

So with 95% confidence, we can say that on any given day, the return will not
be lesser than -4.36%.

10. Managing the Credit Risk

The possibility that either one of the parties to a contract will not be able to satisfy its financial
obligation under that contract. The classic example is that of one commercial enterprise
extending credit to another enterprise or individual. Many insurance arrangements, especially
finite risk programs, also involve varying degrees of credit risk—on both sides of the transaction
—depending on the financial stability of the parties. Since insurance and reinsurance companies
are leveraged (i.e., their capital supports many times its value in outstanding policy limits), an
unforeseen number of severe losses could impair such capital. While it is generally assumed that
credit risk is borne by the insured or ceding insurer (under a reinsurance contract), insurance and
reinsurance companies also bear credit risk.
The five ‘C’ approach is used as a broad tool to mitigate the credit risk in the Insurance Sector:
 Capacity to Pay
It is the most critical of the five factors. The prospective lender will always be keen to
know whether the potential borrower has all the resources that are required to service the
debt obligation or not. The lender will consider cash flow from the business, timing of
the repayment and the probability of successful repayment of the loan.

 Capital
Capital is the money invested in the borrower’s business concern. Generally business
houses raise finance to fund their capital. In such a cash, the lender will look on the total
capital that the borrower plans to invest in the business, and what proportion of that
capital comes from the borrower (owner) and what proportion is borrowed. Whether the
owner is bringing in some competent assets into the business or not.

 Collateral
It is the additional form of security that can be provided to the lender. Giving the lender
collateral means that the borrower can pledge the asset. Such pledging is useful if the
borrower is unable to service the debt and the lender can liquidate the pledged asset to
recover his dues.

 Conditions
Conditions describe the intended purpose of the loan. Will the money be used in working
capital, additional equipment or inventory? The lender will also consider local economic
conditions and overall climate, both within your industry and in all the industries that
affect the business activity of the borrower.

 Character
It is the general impression that the lender makes about the prospective borrower. The
lender’s opinion is subjective as a lot of things matter about this opinion. The borrower’s
level of knowledge, technical education about his business contributes hugely in
formulating an opinion.

10.1 Credit Rating

Credit Rating is a process wherein the Rating Company, which is an entity external to the
company being rated, conducts various tests so as to determine the fitness of the organization
being rated. The Credit Rating companies, usually referred to as the Credit Rating agencies, use
various symbols as a representation of the grade that the organization falls in. At present, there
are a few companies who are engaged in the Credit Rating business extensively. These
companies are: CRISIL, ICRA, CARE Ratings and Fitch India Ratings. Following are some of
the symbols used by CRISIL:
 Rating Scale for Long term Instruments
o AAA: Such instruments are considered to have the highest degree of security
regarding timely servicing of obligations. Such instruments are assumed to have
the lowest credit risk
o AA: Instruments with this rating are considered to have a high degree of security
regarding timely servicing of obligations. Such instruments carry a very low
degree of credit risk.
o A: Instruments with this rating are considered to have adequate degree of safety
regarding timely servicing of obligations. Such instruments carry low credit risk
o BBB: Instruments with this rating are considered to have moderate degree of
safety regarding timely servicing of obligations.
o BB: Instruments with this rating are considered to have moderate degree of risk
regarding timely servicing of obligations.
o B: Instruments with this rating are considered to have high risk of default
regarding timely servicing of obligations.
o C: Instruments with this rating are considered to have a very high risk of default
regarding timely servicing of obligations.
o D: Instruments with this rating are considered to default when it comes to
servicing their obligations.

 Rating for Corporate Credit scale

o CCR AAA: This rating indicates highest degree of strength with regard to
honoring debt obligations.
o CCR AA: This rating indicates high degree of strength with regard to honoring
debt obligations.
o CCR A: This rating indicates adequate degree of strength with regard to
honoring debt obligations.
o CCR BBB: This rating indicates moderate degree of strength with regard to
honoring debt obligations.
o CCR BB: This rating indicates inadequate degree of strength with regard to
honoring debt obligations.
o CCR B: This rating indicates high degree of risk and greater susceptibility with
regard to honoring debt obligations.
o CCR C: This rating indicates substantial risk with regard to honoring debt
obligations.
o CCR D: This rating indicates that the entity is in default of some or all of its
debt obligations.
 o CCR SD: This rating indicates that the entity has selectively defaulted on
specific issue or a class of instruments, but will continue to meet its debt
obligations for other classes of obligations

The credit rating methodology involves an analysis of industry risk, issuer’s business and
financial risk. A rating is assigned after assessing all the factors that could affect the credit
worthiness of the entity. The industry analysis is done first followed by the company analysis

10.2 Expert Systems

The credit scoring process focuses on allotting scores to the borrowers based on certain pre-set
standards by the banks for the decision as to whether credit should be advanced to a particular
borrower or not. There are numerous reasons as to why the task of generating credit scores has
now been given to computer systems. The first reason being subjectivity. The human judgment
can contain subjectivity and prejudice. There is always a possibility that a judgment may contain
subjectivity to an extent. Another reason is that the human mind is impacted by monotonous
work. He may commit some mistake due to stress, fatigue and some other negative factor. A
solution to such problems was the development of expert systems for credit evaluation who
could deliver a judgment without any prejudice and not get affected by the repetitive work.

The expert system use algorithms that specify what would be the result if certain criteria are not
fulfilled. It also specifies what factors would carry how much weight-age in the score generation
process. For example, let us look at how CIBIL (Credit Information Bureau of India Limited)
uses various factors as weights while calculating the credit score for lending decision
 The repayment history
35% weight-age is given to repayment history while calculating the credit score.
Repayment history refers to the record of how efficiently and promptly the outstanding
payments have been made by the borrower in the past.

 The credit Balance

The amount that a borrower owes to the lender constitutes 30% of the score. There are
two considerations in regard to this, the first being the total credit limited sanctioned to
the borrower and the second is the amount of credit utilized by the borrower out of that
sanctioned limit. If the borrower has utilized more percentage out of the sanctioned limit,
his profile will be considered as ‘risky’.

 Duration of Credit use

This factor has a 15% importance on the credit score. If the borrower has been servicing
the loan for a longer period, handled it properly and made timely payments, then this
factor would affect the borrower’s credit score.

 New Credit applied or taken

 This factor accounts for 10% of the credit score. If the borrower has applied for more
money from various institutions, and a lot of enquiries are going on him, this will also
affect the credit score of the borrower.

 Credit Mix
This accounts for another 10% of the CIBIL score. This focuses on the sources that the
borrower has used. This portion will be impacted on what are the different types of credit
that the borrower has used, whether he is using only one line of credit or is using
multiple lines and different mix of credit.

The credit decision in the expert system is based on 3 factors: borrower’s profile, financial
situation and credit guarantees. These main factors have been sub divided in the small micro
factors given below:
Figure no. 6- Factors of expert system

The system uses

4 knowledge
sources for
credit decision.
They are
namely,
decision,
guarantee,
finance and profile.
The decision assess the credit application based on the outputs of the three other sources: Bank
guarantees, finances and profile of the borrower. Decision could be one of the three outcomes: to
grant credit, to reject or consult with a superior.
As mentioned earlier, the credit decision depends upon 3 major factors, credit guarantee, finance
and profile of the borrower. The basic condition for receiving credit is to provide guarantees.
Most banks would like to receive guarantees, which cover the amount of credit at least twice.
According to the system, the guarantees could be ‘bad’, ‘good’ or ‘very good’. These good,
very good and bad would again depend on credit amount, guarantee type, level of coverage of
the credit amount by the guarantees and credit insurance. All these values will be evaluated
subject to the algorithm set by the banks in regard of each of these values.
The next condition for receiving credit is stable financial condition of the borrower. This factor
is defined in the ‘finance’ knowledge source. The borrower’s financial condition can be assessed
as ‘bad’, ‘sufficient’, ‘good’ or ‘very good’. This classification would again depend on the
minimum requirement defined in the algorithm regarding certain values, namely: Yearly income,
payment schedule and frequency of previous liabilities, levels of liability coverage and the
details that the bank has about the borrower.
The last condition, which influences credit decision, is the borrower’s profile. It is defined in the
‘profile’ knowledge source. Borrower’s profile would be assessed as one of the three values
‘Bad’, ‘Good’ or ‘Very Good’. The assessment is based on the borrower’s education, the assets
that are owned by the borrower and other factors such as the technical education related to the
business.
At the last step of the process, the system verifies whether all the three factors: financial
conditions, guarantees and the borrower profile is up to the mark or not on the basis of
instructions fed into the system. It then gives the output as ‘Grant Credit’, ‘Reject application’ or
‘Consult superior’.

10.3 Internal Ratings Based (IRB) Approach

The Internal Ratings Based (IRB) approach is given as a part of Basel II guidelines to
mitigate the credit risks in insurance sector using Capital Adequacy as a primary tool.
This approach relies on bank’s own assessment of regulatory capital to be set aside to
mitigate the credit risk.

In order to use the Internal Ratings Based Approach (IRB), the bank has to carry out two
major steps:

a. Categorizing exposures under different asset classes as specified in the Basel

II framework.
b. Estimate the risk parameters – Probability of Default (PD), Loss given
Default (LGD) and Exposure at Default (EaD), which are inputs to risk
weight functions designed for each class of assets to arrive at the total Risk
Weighted Assets (RWA).

11. Managing the Operational Risk

11.1 Basic Indicator Approach

The Basic Approach or the Basic Indicator Approach is an approach to measure and mitigate
risk using the Basel II norm. The Basel II norm mandates that banks have to set aside some
amount of capital so that they don’t run out of resources in any unlikely situation.
This approach allocates operational risk capital using a single indicator as a proxy for an
institution’s overall risk exposure. This approach has three major components, namely:
Capital Requirement, Relevant Indicator and the Basis of Calculation of the Relevant
Indicator. The capital requirement for operational risk is set at 20% according to the circular
of the Bank of International Settlement (BIS). The operational Risk capital requirement is
also denoted by α.

The relevant indicator is taken as the average of the last three years sum of interest and non-
interest income, which is also commonly referred to as Gross Income. In case a previous
year’s audited figures are not given in the books, accounting estimates to be used for
calculation.

The indicator (Gross Income) shall be calculated before the deduction of any provisions and
operating expenses. Operating expenses shall include fees paid for outstanding services
rendered by third parties which are not a parent or subsidiary of a bank. Expenditures on
outsourcing of services rendered by third parties may reduce the magnitude of the relevant
indicator if the expenditure incurred has been done under any kind of a directive issued.
Following elements should not be used in the calculation of the relevant indicator (Gross
Income):
a. Realized profits/losses from the sale of non-trading book items.
b. Income from extraordinary or irregular items.
c. Income derived from insurance. Commissions received from agency services for
insurance operations are included in the indicator.
When there is a revaluation of trading items is a part of profit and loss statement, it should
be included in the profit and loss account.

Banks using the Basic Indicator Approach must hold capital for operational risk equal to
the average over the previous three years of a fixed percentage (denoted alpha) of positive
annual gross income. Figures for any year in which annual gross income is negative or zero
should be excluded from both the numerator and denominator when calculating the
expressed as follows:
KBIA = [∑(GI1...n × α)]/n
Where
KBIA
= the capital charge under the Basic Indicator Approach
GI
= annual gross income, where positive, over the previous three years
n
= number of the previous three years for which gross income is positive
 α
= 15%, which is set by the Committee, relating the industry wide level of required capital
to the industry wide level of the indicator.

11.2 Advanced Measurement Approach

Considering the risk mitigation techniques issued under the scope of Basel II
framework, the advanced management approach is the most sophisticated approach
for measuring and managing the operational risk of the business. This technique of
risk management allows the insurance companies to formulate their own models for
measuring the operational risk, as compared to the Basic Indicator approach and the
Standardized approach wherein the models for calculating operational risk are fixed
and the capital charge is calculating

 Key Risk Indicator (KRI)

As the name suggests, this approach is aimed towards identifying those indicators/
factors which are susceptible to risk in the future and then making plans in advance to
mitigate the bank’s losses in unlikely situations. In a system where thresholds have been
set for all kinds of activity, KRI’s would be most productive as whenever a risk indicator
goes beyond a certain limit, it triggers an alarm or sends a reminder to the management
so that appropriate action can be taken upon it.

The key risk indicators can benefit the bank in the following ways:

a. Risk appetite
The Key Risk Indicator approach involves setting up of thresholds for
business activities across the organization. By mapping the KRIs to the
requisite thresholds and risk tolerance level, the bank can assess its risk
appetite in a better way.

b. Risk identification
This is the fundamental advantage of the systems as when proper set of KRIs
are developed by the organization, they help in identifying the risky elements
in advance and also help in setting the limit of risk tolerance for those risk
elements.

c. Ease in Compliance efforts

KRIs may be useful in demonstrating compliance of operational risk related
guidelines to the regulatory authorities since they are documented and fed
 into the organization’s system to set off an alert whenever an activity’s
susceptibility to risk increases which serve as a proof to the regulatory
authorities that proper system for risk identification and mitigation is in place.

d. Improved Performance
The use of KRI to anticipate emerging risks and shifts in risks over time can
reduce losses, identify opportunities for strategic expansion, and potentially
reduce the cost of capital by mitigating perceptions of risk borne by capital
providers.
The goal of Key Risk Indicators is to provide useful insights into the probable risk elements that
could prove as obstacles in achieving the organizational objectives. Hence, the design and
selection of KRI begins with the review of organizational activities and identification of risk-
related elements that could hinder the achievement of those objectives.
The main objectives of KRI approach are segregated in two major segments.
Figure no.7- Objectives of KRI

a. Monitoring and Control of operational risk areas

i) To optimize business across business lines.
ii) To initiate risk mitigation efforts to prevent or minimize the losses.
iii) Identifying the gaps in the control functions.
iv) Providing the bank with a database management system.
v) Keeping the top management informed with of potential risks using the
risk indicators and seeking directions for controlling/mitigating those risk
areas.

b. For capital adjustment under the Advanced Measurement Approach

i) KRIs reflects the elements of the bank’s business environment and hence
is an important part of bank’s risk capital computation process. Results
drawn using KRIs is used for calculating the minimum capital
requirements.
ii) The Basel II guideline have also prescribed that ‘the internal
measurement system of the bank must reasonably estimate unexpected
losses based on the combined data from external and internal loss events,
scenario analysis and bank specific internal factors.

A good Key Risk Indicator has the following characteristics:

a. Relevance
The indicators should be relevant to the activity of the bank which is being
monitored. They should measure risk levels, determine control and performance
indicators. While selecting the indicators, following questions should be considered:
i) Does it help identifying the existing risks?
ii) Is it capable of quantifying or measuring risk?
iii) Does it monitor the exposure faced by the bank?
iv) Is it capable of managing and the exposure and its consequences?
b. Measurable
The indicators that have been selected should be measurable with absolute certainty
and also on a repetitive basis. This implies that the indicators can be in number of
days, percentage of something, time duration or any value of a pre-determined set.
The indicators those are only described using texts have a possibility of being
misinterpreted and are subject to manipulation since there is a use of text. For an
indicator to be measureable, following questions should be addressed:
i) They should be capable of being quantified in the form of a
percentage, a ratio or a number/count
ii) The bank should be able to compare the indicator values over
various time periods.
iii) The indicators should have values which are reasonably precise
and are a definite quantity.

c. Predictive
The whole Key Risk Indicator exercise deals with pre-empting the attempts so that
impact of risks can be reduced to minimum extend. A good indicator should always
be predictable because it will lose its purpose if at any time the indicator is unable to
predict the possible the risk associated with the activity that the indicator is expected
to monitor. In terms of predictability, there are three types of Risk Indicators which
are explained ahead.

d. Ease of Monitoring
In order to be an effective monitoring tool and for the ease of monitoring, all risk
indicators need to comply with two characteristics:
i) The data used in the indicator should be simple and relatively cost
effective to collect, assure quality and distribute
ii) The data should be relatively easy to interpret, understand and
monitor.
In terms of interpretation and understanding, good indicators are those which
quickly convey the required message, without the need for comparison or
reference to other information. In this regard, percentages and ratios are far more
useful than any other method.

e. Auditable
When an indicator should be easy to use and monitor, it should also be easy to
review. Every bank’s ORMC (Operational Risk Management Committee) plays a
very important role in designing and selecting auditable KRIs. It is very important
that all the risk indicators be reviewed from time for time for the check of
consistency and performance

f. Comparability
In many cases, even the indicators measured as percentages and ratios by themselves
do not provide sufficient information to really understand the exposure levels that the
indicators relate to. A particular percentage or ratio may mean nothing if it cannot be
 compared to some benchmark. To help determine acceptability it may be necessary
to compare or benchmark the data against peer banks.

Broadly, there are two types of indicators. They are as follows:

a. Leading KRIs
Leading indicators are forward looking and are usually related to the drivers
within which the bank operates. They tend to be the measures of state of
people, process technology and the market that affects the risk level in the
banks. These indicators pave the way for the bank way in advance because
these indicators change before the actual situation hits the shores. In case of
leading KRIs, the bank can take proactive action even in those areas which
have not been identified as ‘threat’ areas in the past but may pose
considerable threat in the future. Examples of leading or preventive indicators
would be: the number of limit breaches on the market, or credit risk exposure
or cash movements or the average length of delays in an activity.

b. Lagging KRIs
Current of lagging indicators are the once who provide information after the
happening of an event. These indicators are more of backward looking and
also focus more on the consequences. Such indicators are usually called as
‘detective’ in nature because of their ability to provide information and
insight into the historical causes of loss and exposure. They are especially
useful when the historical trends reflect change in certain circumstances on
occurrence of events. Since the bank has a database of what has happened in
the past with such event, it becomes easy to predict and preempt the outcome
next time. The average historical loss is used as a basis to estimate the
expected loss. Examples of such indicators would be: number of fraudulent
cash withdrawal through teller operations per month, experienced in the past.
Following steps are involved in identification and formulation of Risk Indicators (RI):
i) Risk Identification
Development of risk indicator starts with an assessment of risk. Risk events of a
business are identified, addressed and are catalogued along with their associated
control and their root causes. While listing operational risk event experienced, causal
analysis of historical operational risk loss data, internal audit reports etc. can be used
for identifying key risks associated with the risk indicators.

While collecting data and identifying risk, all the activities that are done by various
branches and circle offices of a bank are listed and risk weights are assigned to them
and the deviations from the prescribed procedures are measured as scores arrived on
the basis of frequency and the volume of deviations.

ii) Risk Driver Identification

Risk drivers are the factors that increase the probability of occurrence of a risk. For
example. Employee dissatisfaction is a risk driver for attrition rate, work load and
 un-trained employees are a driver for KYC non-compliance. In this step, the banks
identify what are the drivers that give rise to the risk. KRIs would only be an
effective tool for risk mitigation if the risk drivers are identified properly.

iii) Risk Indicator Quantification

After the risk indicators have been successfully identified, the next step is to quantify
those risk indicators into appropriate metrics for precise measurement. Such
quantifying figures are referred to as ‘RI values’. For example: the attrition risk can
be estimated as a percentage of employees leaving the organization out of the total
strength. Following are the most commonly used measures:

S.no. Unit of Measure

1 Percentage
2 Currency Amount (INR)
3 Numbers (1,2,3 and so on)
4 Days/Weeks/Months/Years
5 Hours/Minutes
iv) Frequency decision
This step deals with the frequency with which the data regarding risk indicators is
collected. This frequency is subject to change and review on the discretion of the
bank. The data for the risk indicators can be collected on weekly, monthly, half
yearly and yearly basis.

v) Fixing thresholds
The last step is concerned with fixing the thresholds. The upper and the lower
thresholds are set in accordance with RI values estimated in the earlier steps. The
thresholds are to be fixed keeping in mind the bank’s risk appetite, historical
performance, industry standards and the management estimation of risks. These
thresholds are fixed with the primary objective to sound an alert in case any of the
risk indicators crosses the threshold amount. If a certain indicator crosses its upper
thresholds, the senior management of the particular function needs to be informed at
the soonest so that proper action can be taken and unlikely situations can be avoided.

After the Risk Indicators have been properly identified and fixed in place, the next task it to
formulate the Key Risk Indicators (KRI) out of those identified indicators. The process involves
the following steps:
a. Mapping of events
After the Risk indicators have been identified in the process above, the Operational
Risk Management Committee (ORMC) segregates them according to the 8 business
lines as laid down by the Basel II framework. Following are the business lines as
given by the Basel Framework:
i) Corporate Finance (BL 1)
ii) Trading and Sales (BL 2)
iii) Retail Banking (BL 3)
iv) Commercial Banking (BL 4)
 v) Payment and Settlement (BL 5)
vi) Agency Services (BL 6)
vii) Asset Management (BL 7)
viii) Retail Brokerage (BL 8)

b. Categorization into loss event type

The next step deals with categorizing the loss events into the various categories laid
down by the Basel II framework. Following are the various loss event categories:
i) Internal Fraud
ii) External Fraud
iii) Employment practice and work place safety
iv) Client process and business practice
v) Damage to physical assets
vi) Business disruption and system failure
vii) Executive delivery and process management

c. Celebrating RI’s against loss history

One of the approaches to identify the key risk indicators is also regression analysis,
wherein the risk indicators are regressed against potential loss events or actual loss
events to find which of these can be empirically linked to the potential or actual
losses of the bank.

 Risk Control and Self-Assessment (RCSA)

As the name suggests, Risk control and Self-Assessment is a technique wherein the bank
assess the risk all by itself. It is a process of identifying, recording and assessing
potential risk and controls to mitigate operational risk. It is considered as a forward
looking tool to assess the quality of controls and expected severity of operational risk.
Under Risk Control Self-Assessment (RCSA), officials with considerable experience in
particular banking activity give their feedback in particular banking activity give their
feedback and estimates in various issues in operational risk areas.

Since, the Risk Control and Self-Assessment is a highly subjective technique, it uses the
survey method for data collection. The survey questionnaires are sent to experts
specializing in different activities carried on by the bank. The RCSA surveys seek to
achieve the following objectives:

a. Identify and assess major operational risks and exposure across various
activities of the bank.

b. Assist the bank in assessing the effectiveness of existing controls for risk
mitigation.

c. Addressing the weaknesses by bringing in additional controls or optimizing

the existing control processes.
 d. Ensuring that the best practices are followed and highest standards set for
management of operational risk.

e. Facilitation of drawing a plan to reduce the operational risk to an acceptable

level.

Following steps are followed for executing the process of Risk Control and Self-Assessment:

a. Preparation of Risk Description Chart

Preparation of Risk description chart involves the following steps:
i) The first step is to identify all the activities that are carried out by
the bank. All the activities are listed and then detailed according to
the processes that are carried out to perform the listed activities.

ii) The next step is to identify the operational risk areas concerned
with the processes and activities carried out by the bank and
listing the possible operational risk elements.

iii) All the operational risk events to be mapped according to the 7

loss events as specified by the Bank of International Settlements
Circular as follows:

a.i.1. Internal Fraud

a.i.2. External Fraud
a.i.3. Employment practices and workplace safety
a.i.4. Clients process and business practice
a.i.5. Damage to physical assets
a.i.6. Business disruption and system failures
a.i.7. Execution, process and delivery
management

iv) All existing/proposed controls in the respective processes and

activities should be identified and scrutinized.

v) The processes, sub-processes, operational risk events, risk event,

loss description and factors responsible for deviations should be
finalized

b. Conduct of RCSA Survey

This step involves building questionnaires that have to be sent to various process
experts in insurance companies for recording their opinion and recommendations for
the RCSA process. The Questionnaires should be able to capture the following
parameters:
 i) Inherent Risk: It should be able to capture that, according to the
experts, what is the inherent risk in the system and it should also
be able to capture the frequency of likelihood and the severity of
impact on the company.
ii) Controls: It should be able to take their opinion on the extent of
existing controls to mitigate the risk and the level of compliance
that is maintained by the company.
iii) Residual Risk: Residual Risk means the risk which remains in the
system even after sufficient controls have been put in place.

Following are the samples regarding how frequency, severity and control measures are
defined in RCSA:
Scale for Frequency
Probability in Percentage
(%)
Scale Scale Description Minimum
1 Negligible 0
2 Very Low >1
3 Low >3
4 Medium >5
5 High >10
6 Very High >20
7 Extremely High >50

Scale for Severity

Severity Scale (Amount in
₹)
Scale Scale Description Minimum
1 Negligible >0
2 Very Low >10000
3 Low >100000
4 Medium >1000000
5 High >5000000
6 Very High >20000000
7 Extremely High >50000000

Control Measures
Scale Guideline Implementation
1 Efficient Highly Effective
2 Acceptable Reasonably Effective
 3 To Improve Require Improvement
4 Defective Ineffective

c. Analyzing the RCSA survey

The RCSA survey is then analyzed by the company according to the parameters that
they want to use and then the suggestions by the experts are incorporated in the Risk
Management policy.

12. Analysis of Survey

The survey was conducted on Hyderabad area and parts of Uttar Pradesh. The respondents
comprises of 50 people.
Qualification:
o SSC
o HSC
o Graduate
o Post Graduate
o Ph.D.

Findings- Most of the respondent are graduates.

Occupation:
o Student
o Business
o Salaried

Findings- Most of the respondent’s occupation is business.

Q. 1. Your annual income is (Tick any 1)

o 0 to 50,000
o 50,001 to 1,00,000
o 1,00,001 to 2,00,000
o 2,00,001 to 3,00,000
o 3,00,001 to 4,00,000
 o 4,00,001 to 5,00,000
o Above 5,00,000

Findings- Most of the respondents annual income is above 500,000/-

Q. 2. For which item below you have taken Insurance Cover?

o Life
o General

Findings- Life Insurance is sold more as compared to general insurance.

Q.3. Have you taken the Med claim policy for you?
o Yes
o No

Findings- 35% people take mediclaim policy.

Q.4. Have you taken Med claim policy for children and wife?
o For children
o For wife
o For both
o Not for both

Findings- Mostly respondents take mediclaim policy for both wife and children.

Q.5. One must take General Insurance cover every year for the assets as long as they last.
o Strongly agree
o Agree
o Neither agree or disagree
o Disagree
o Strongly disagree

Findings- Most respondents neither agree nor disagree upon the importance of general
insurance.

Q.6. Do you go for Life Insurance because it is Compulsory?

o Yes
o No

Findings- Most respondents think that life insurance is compulsory.

Q.7. Do you go for Insurance to cover risk?

o Yes
 o No

Findings- Respondents not only go for insurance for risk coverage; tax benefit is another factor.

Q.8. Are you aware of the terms and conditions of the policy which you have taken?
o Aware
o Not aware
o Partially aware

Findings- Most respondents are partially aware of the policies.

Q.9. How aware are you about the various schemes of the insurance companies?
o Aware
o Not aware
o Partially aware

Findings- Most respondents are aware of the scheme the insurance company launches.

Q.10.The companies have clearly defined its risk appetite. How much you agree?
o Strongly agree
o Agree
o Neither agree or disagree
o Disagree
o Strongly disagree

Findings- Most respondents agree that the companies clearly define their risk appetite.

13. Findings and conclusions

Findings-

•Regarding use of risk management techniques, it is found that internal rating system and risk
adjusted rate of return on capital are important.
•The effectiveness of risk measurement in insurance companies depends on efficient
Management Information System, computerization and net-working of the branch activities.
•Functions of risk management should actually be bank specific dictated by the size and quality
of balance sheet, complexity of functions, technical/ professional manpower and the status of
MIS in place in that bank.
•From analysis of survey form I found that life insurance is sold the most.
•People invest in insurance plans just to get tax benefits and risk coverage.
•Also, during selling I found that IDBI FEDERAL lacks the communication to its target
customers.

Conclusion-
 Risk is inherent in any walk of life in general and in financial sectors in particular. Due
to regulated environment, banks could not afford to take risks. Insurance companies are
exposed to severe competition and hence are compelled to encounter various types of
financial and non-financial risks. Risks and uncertainties form an integral part of
insurance companies which by nature entails taking risks which are explained above.
 It is vital to deepen the collaborative dialogue between industry and regulators, to deepen
shared understanding of the challenges and opportunities for strengthening risk
management capability.
 There is a need to make sure that bureaucracy and costs are minimized, &business
benefits maximized. The main goal is improved risk management, not regulatory
compliance. IRDA has issued a rich variety of guidelines to be pursued by the insurance
companies rigorously within the risk management framework
 The insurance companies need to upgrade their credit assessment and risk management
skills and retrain staff, develop a cadre of specialists and introduce technology driven
management information systems.
 Finally, the role and responsibilities of CRO discussed above indicate the strategies to be
pursued by the companies regularly mitigate the impact of risks during the crises and
protect the stakeholders.

14. Recommendations

Some recommendations for IDBIFLIC are as follows:-

1. Currency Forward Exchange
Eliminates risk by fixing the exchange rate at which future trade will take place. A future
contract states the exchange rate for future payments at a current rate.
2. Currency Swaps
Manager borrows in a hard (strong) currency and finances the project in the local currency.
Thus, hard currency is swapped for the local currency, allowing hard currency to financing.
3. Use Local Currency
The use of local currency in developing countries to finance the projects can be an advantage
because it reduces reliance on foreign currency.
4. Interest Rate Forward Agreement (FRA)
These agreements are similar to future contracts. E. g. Manager borrows 5 Mn. for six months,
when the current loan has been paid, but manager expects the interest rate to rise. This expected
rise in interest rate can be compensated by FRA.
5. Interest Rate Swap
This is an agreement between two parties to pay each other a series of cash flows, based on
fixed or floating interest rate, in the same currency, over a given period of time.
6. RPI Swaps (Retail Price Index-linked)
Manager is in receipt of fixed cash flows. And the inflation is expected. Thus, manager makes
this swap agreement and pays to other party cash flows and receives cash flow that will have the
same purchasing power through time.

15. References

Following Sources have been used:

A. Websites
www.investopedia.com
www.rbi.gov.in
www.bis.org
www.bis.org/bcbs
www.caclubindia.com
www.ibef.org
www.wikipedia.org
www.idbifederal.com
www.irdai.org

B. Journals and Research Papers

  PROF. DEBAJYOTI GHOSH ROY, DR. BINDYA KOHLI, PROF SWATI
KHATKALE, 2013. Basel I to Basel II to Basel III: A Risk Management Journey of
Indian Banks. [Online]. AIMA Journal of Management and Research.

Available at: https://apps.aima.in/ejournal_new/articlesPDF/Dr.BindyaKohli.pdf

[Accessed Mar 6, 2016]

 Guidance note for Operational Risk Management. [Online]. Reserve Bank of India

Available at:
http://www.bis.org/bcbs/publ/d352.pdf

 G GOPALAKRISHNA, 2013. Market Risk Analysis. [Online]. Reserve Bank of India.

Available at:
https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=13988 [Accessed on Apr 5, 2016]

 G.P. SAMANTA, PRITHWIS JANA, VIVEK KUMAR, 2010. Measuring Market Risk –
An application of Value at Risk (VaR) to select Government bonds in India.

Available at:
https://rbi.org.in/scripts/bs_viewcontent.aspx?Id=2246 [Accessed on 21 Apr, 2016]
 Life insurance by B.P Agarwal, (www.idbifederal.com) (www.irda.com)
 http://people.stern.nyu.edu/adamodar/New_Home_Page/background/cfin.htm
 http://www.quickmba.com/finance/cf/
 Indian life and non-life insurance industry
(http://www.towerswatson.com/india/newsletters/india-market-non-life-insurance)
 Elements of Insurance-Bal Chandra Srivastava.

16. GLOSSARY
IDBI – Industrial Development Bank of India.
IRDA- Insurance regulatory development Authority.
ACD- Accidental Death benefits.
COB- Coordination of Benefits.
COC- Certification of Coverage.
SPD- Summary Plan Description
17. Annexures
Annexure 1: Questionnaire for Insurance holders
Questionnaire
Name: - ______________________________________________________________
Phone No.__________________________
Sex:
o Male
o Female
Qualification:
o SSC
o HSC
o Graduate
o Post Graduate
o Ph.D.
Occupation:
o Student
o Business
o Salaried
Q. 1. Your annual income is (Tick any 1)
o 0 to 50,000
o 50,001 to 1,00,000
o 1,00,001 to 2,00,000
o 2,00,001 to 3,00,000
o 3,00,001 to 4,00,000
o 4,00,001 to 5,00,000
o Above 5,00,000
Q. 2. For which item below you have taken Insurance Cover?
o General
o Life
Q.3. Have you taken the Mediclaim policy for you?
o Yes
o No
Q.4. Have you taken Mediclaim policy for children and wife?
o For children
o For wife
o For both
o Not for both
Q.5. One must take General Insurance cover every year for the assets as long as they last.
 o Strongly agree
o Agree
o Neither agree or disagree
o Disagree
o Strongly disagree
Q.6. Do you go for LifeInsurance because it is Compulsory?
o Yes
o No
Q.7. Do you go for Insurance to cover risk?
o Yes
o No
Q.8. Are you aware of the terms and conditions of the policy which you have taken?
o Aware
o Not aware
o Partially aware
Q.9. Are you aware about the various schemes of the insurance companies. Strongly agree
o Aware
o Not aware
o Partially aware
Q.10.The companies has clearly defined its risk appetite. How much you agree?
o Strongly agree
o Agree
o Neither agree or disagree
o Disagree
o Strongly disagree