About Insuarance

       Life Insurance is the key to good financial planning. On one hand, it safeguards your money and on the other, ensures its growth, thus providing you with complete financial well being. Life Insurance can be termed as an agreement between the policy owner and the insurer, where the insurer for a consideration agrees to pay a sum of money upon the occurrence of the insured individual’s or individual’s death or other event, such as terminal illness, critical illness or maturity of the policy.

       Life insurance plans, unlike mutual funds, are beneficial when you look at them as a long term avenue of investment which also offers protection through life cover. Life insurance policies are broadly categorized into 2 types, Traditional plans and Unit Linked insurance plans.

      Traditional policies offer in-built guarantees and define maturity value. The investments risk in traditional life insurance policies is borne by life extent by IRDA rules and regulations, ensuring stable returns with minimal risk Investment income is distributed amongst the policy holders through annual bonus. These policies are ideal for policy holders who are not market savvy and do not wish to take investment risks.

     ULIPs, on the other hand provide a combination of risk cover and investment. More importantly they offer a flexibility to decide your risk taking profile.

Insurance Liabilities

            In this it is not possible to describe & value all possible insurance liabilities & hence we should to focus on the most important life insurance liabilities. We can distinguish between insurance liabilities where the policyholder assumes all risk & consequently invest in funds. Here the value is normally quite clear & so we can focus on life insurance forms with investment guarantees. In this case the majority of the investment risk is born by the insurance company. From a conceptual point of view life insurance cover behaves very similar to a bond. In principle one agrees some payments, which have to be weighted with the corresponding probabilities. In the following we want to introduce the corresponding concepts.

            Insurance liabilities can be valued according to a book value or a market value principle. In the first case future cash flows are discounted using discount rates based on the technical interest rate i. in Europe this rate is determined in as prudent way & should according to the 3^rd life insurance directive normally not exceeding 60% of the yield of governance bonds. So if we assume that governance bonds in EUR yields 4%, the maximal technical interest rate would be 2.4%. In reality the rule is interpreted in a somewhat more ingenious way & one looks for example at rolling averages of yield of government bonds. Based on the technical interest rate a payment of 1 due in one year is discounted with v = 1/1+i. So here the value approach yields to higher liabilities representing a prudent valuation approach.

            In this section we will also focus on the market valuation on a best estimate basis. This is the first step to determine the market value of an insurance liability. We assume however that the insurance cash flows are certain. Since there is in reality a risk involved, it will be necessary to revisit the concept of market values for liabilities later. We will see their how risk enters in the valuation & how we can use this knowledge for risk adjusted performance metrics.