MANAGEMENT DISCUSSION

AND ANALYSIS

Mr. Rajesh Sud

Executive Vice Chairman and Managing Director

Mr. Aalok Bhan

Director & Chief Distribution Officer

Mr. Amitabh Lal Das

Director & Head - Legal, Compliance & Regulatory Affairs

Mr. Jose C. John

Director & Appointed Actuary

Mr. Manik Nangia

Director- Marketing & Chief Digital Officer

Mr. Mihir Vora

Director & Chief Investment Officer

Mr. Prashant Tripathy

Senior Director & Chief Financial Officer

Mr. Shailesh Singh

Director and Chief People Officer

Mr. V. Viswanand

Senior Director & Chief Operations Officer

LIFE INSURANCE INDUSTRY – GROWTH IS BACK

FY 2017 was a year of high growth for the Indian Life Insurance industry after almost half a decade. New Business (Adjusted Individual First Year Premium) recorded 21% growth in FY 2017. During the year, 17 life insurers, including LIC, recorded double digit growth and only three life insurers recorded a decline in new business. LIC recorded 15% growth, while private life insurers recorded a growth of 26% resulting in an increase in market share of private life insurers to 54%.

The impact of open architecture regulations started to take shape in FY 2017 with a few banks opting for a second life insurance partner. However, the impact is still minimal. During the year the Insurance Regulatory and Development Authority of India (IRDAI) issued new guidelines for Corporate Governance and Public Disclosures with an aim to bring greater transparency in the industry. Indian Insurance industry witnessed some noteworthy corporate developments as well. With the IPO of ICICI Prudential Life Insurance, investors now have another opportunity, besides Max Financial Services, to invest in a pure play life insurance business. IRDAI also granted certificate of registration to five global reinsurers to open offices in India. This is a major step towards building a robust reinsurance market in India.

Regulatory update

Guidelines on Insurance E-commerce

As the e-commerce channel is gaining traction in Indian insurance industry, the need was felt to change regulation to be aligned with the fast-changing digital world and expectations of digital natives. The new guidelines specify several new requirements such as the creation of an e-insurance account within 15 days post sales and immediate issuance of e-premium receipts. In addition, e-KYC and e-PAN have been allowed now and disclosure requirements have been prescribed for the entity and products.

Guidelines on Information & Cybersecurity for Insurers

Cybersecurity assumes significant importance as more and more transactions and customer information is managed digitally. IRDAI through these guidelines has issued a detailed check list for effective implementation of cybersecurity. The insurer is required to appoint a Chief Information Security Officer who will be responsible for articulating and implementing policies to protect the information assets. The insurer shall also form an Information Security Committee. Members of this Committee shall include the head of Operations, Information Technology, Legal, Compliance, Finance, HR, and Risk.

Payment of Commission or Remuneration or Reward to Insurance Agents and Insurance Intermediaries

This regulation related to Commission / Remuneration and Rewards became applicable from 1st April, 2017. This requires a Board-approved policy on payment of commission or remuneration to insurance agents and intermediaries. As per the regulation, a limit of 20% of the first year commission or remuneration paid to them has been set on rewards that can be paid to insurance agents or intermediaries. In addition, no. rewards shall be paid to insurance intermediaries whose revenue from other than insurance intermediation exceeds 50% of the total revenue from all activities.

Operationalisation of Central KYC

The Central Registry of Securitisation and Asset Reconstruction and Security Interest of India (CERSAI) has been authorised to act as and perform the functions of the Central KYC Records Registry. Life insurers are now required to upload KYC records in respect of individual policyholders wherein policies mature on or after 15th July, 2016. This will help in creating a centralised KYC repository which can be used in all components of the BFSI industry.

Guidelines for Corporate Governance for Insurers in India

IRDAI continued to work on improving corporate governance standards in the Indian insurance industry. The new guidelines on corporate governance issued in FY 2016 require some changes in the Board and Committee structures and introduced new sections on critical issues like merging of committees, conflict of interest of Board and disclosure of financial statements. The new guidelines have also changed the definition of Key Management Personnel (KMP) and all outsourcing agreements have now to be approved by the Committee of KMP. As per these guidelines, the Company needs to formulate a Consumer Education Policy.

Strategising for sustainable and profitable growth

Over the years, Max Life Insurance has maintained its position amongst the top 4 private life insurers and as the largest non-bank owned private life insurer. This has been made possible by remaining ahead of the curve and developing the Company’s strategies based on a thorough understanding of the environment and life insurance consumers. The Company strengthened its long-term growth strategy with clearly identified focus areas for FY 2017. The Company decided to focus on the following themes:

  • Capitalise on underserved opportunity – Around 35% of the Indian households, which form the mass market of India, are underpenetrated in terms of life insurance. The Company improved its distribution efficiency using digital tools and enhanced its focus on direct channels to reach out to a larger set of consumers.
  • Create digital ecosystem – Indian consumers are adopting digital technology at a fast pace and by FY 2020, 600 million Indians are expected to be internet users. This opens up new opportunities for the life insurance industry as well. Max Life Insurance decided to focus on acquiring context to enable superior conversations with our consumers and digitally enable our sellers to leverage the new ecosystem

Over the years, Max Life Insurance has maintained its position amongst the top 4 private life insurers and as the largest non-bank owned private life insurer.

  • Build health and retirement ecosystem – India is a young country but the other reality is that the greying population of India is also growing at a fast pace. By FY 2020, 60+ population of India is expected to double, increasing the requirement for both retirement planning and healthcare services. During the year, Max Life Insurance augmented its health and well-being proposition by launching Max Life Cancer Insurance Plan.
  • Protection focus – Protection is core to a life insurance business. Max Life Insurance strengthened its protection portfolio by launching enhanced online term plan, cancer insurance plan and a plan for children education that offers triple protection benefit. The Protection business contributed almost 15% of all the individual policies sold by Max Life Insurance during FY 2017.

Snapshot of the Company’s performance through key financial parameters:

Highlights for the Financial Year (FY) ended 31st March, 2017, are as under:

Particulars Financial Year 2017 (April 16 - March 17) Financial Year 2016 (April 15 - March 16) (in Cr.) Growth %
Financial Performance
New Business Premium (First Year Premium and Single Premium) 3,666 2,882 27
Adjusted Individual First Year Premium* 2,639 2,103 25
Renewal Premium 7,114 6,334 12
Commission Expenses 936 821 14
Operating Expenses (Policyholders) 1,591 1,250 27
Shareholders’ Profit / (Loss) After Tax 660 439 50
Key Business Parameters
Solvency Ratio 309% 343% -3,400 bps
Share Capital including Reserves and Surplus 2,506 2,014 24
Assets Under Management 44,370 35,824 24
Sum Assured In-Force 3,77,572 2,71,633 39
Market Consistent Embedded Value 6,590 5,617 20
Return on Embedded Value 20% 17% 290 bps
Customer Parameters
Conservation Ratio (%) 88.6 85.9 270 bps
13th Month Persistency (%) 80 79 160 bps
61st Month Persistency (%) 53 43 1,000 bps
Claims Paid Ratio (%) 97.1 96.95 20 bps

*Adjusted First Year Premium = Individual Regular First Year Premium plus 10% of Single Premium

A discussion with Max Life leaders at the Distribution Managers Meet, 2017

A discussion with Max Life leaders at the Distribution Managers Meet, 2017

Digitally-enabled multi-channel distribution architecture for enhanced reach and efficiency

While Max Life Insurance has always believed in multi-channel distribution architecture to reach out to a diverse set of Indian consumers, it is the digital enablement of all the channels that have been taken to newer proportion over the last few years. Digital enablement of sellers not only help them conduct need analysis with ease but also helps the Company in faster policy issuance.

Owned Distribution Channels

  • Agency Distribution – Agency Distribution is core to multichannel distribution architecture of Max Life Insurance and the Company takes pride in having one of the highest office and agent productivity in Indian Life Insurance industry. The agency distribution recorded a healthy growth in the new business. It was the quality of business that made the performance remarkable this year. 13th-month persistency witnessed almost 5% points improvement during the year. The channel also witnessed more than 20% increase in the share of protection in product mix. During the year, the agency distribution enhanced its focus on long-term participating plan keeping in view the consumer profile and its targets. The channel also created new benchmarks in terms of premium per policy, Opex-to-sales ratio and ADM productivity.
  • Customer Advisory Team – This in-house team at Max Life Insurance provides service and sales support to its existing customers. This direct-to-consumers channel is dependent on recruitment and retention of talent to help build a long-term relationship with our customers. This year, the channel achieved stupendous success in recruiting talent in line with plan for the year. Another important vector in channel success is the number of meetings with customers which also witnessed 20% increase as compared to last year. As an outcome, the channel was able to achieve high growth performance consistently and recorded 13th-month persistency in line with the global standards.
  • E-Commerce – During the year, the e-commerce channel almost doubled its sales and provided protection cover to more than 38,000 families. The channel achieved leadership in online term space across web aggregators. With an aim to further simplify the sales journey on both the web and mobile platforms, NEO, a new web purchase journey was launched.

Third-Party Distribution

  • Axis Bank – Since the inception of this bancassurance relationship in FY 2007, both Axis Bank and Max Life are working towards creating the most admired bancassurance relationship in India. The channel recorded a strong growth in the new business premium and continued to witness consistent growth in persistency. For Maxis 2020, our joint effort towards digitally-enabled sales to bring in the superior quality of sales and greater efficiency in policy issuance, this was a landmark year with almost 100% e-sales.
  • YES Bank - recorded almost 100% growth in new business. The enhanced retail focus of YES Bank helped Max Life Insurance reach out to the bank customers with long-term savings and protection solutions for their life-stage needs.
  • Other bancassurance relationships – Lakshmi Vilas Bank, our 2-year-old relationship witnessed significant growth in new business and Max Life continued to be the dominant life insurance partner for the bank though it opted for another life insurer under the open architecture. Our UCB partnerships also recorded a healthy growth.

Group Business

Despite the headwinds of demonetisation because of which credit offtake reduced in banks, Group business continued its smart progress with strong growth in the core business of Group Credit Life.

Substantial improvement in quality of business through enhanced operational efficiency

The Fulfilment team at Max Life Insurance worked in tandem with frontline distribution team to help the Company achieve a record performance year.

Customer retention is key to long-term success of life insurance business. Max Life Insurance achieved a record high conservation ratio of 88% in FY 2017 as compared to 86% in FY 2016 and the renewal income touched ₹ 7,114 crore during the year recording 12% growth. 13th month persistency touched 80.4%, a 160 bps increase. The most remarkable statistics in customer retention was a 10% points increase in the 61st-month persistency to 53%.

During the year, customer complaints witnessed a remarkable 38% decline. At the end of the year, there was not even a single pending customer complaint. To further improve the speed and quality of response to customer queries and complaints, a new technology-enabled system was introduced, which ensured that all customer-related information was available to our customer service executives on a single screen. In addition, the year witnessed enhancements like integration with UIDAI, credit agencies, banking partners, PAN validation, automation and process changes like welcome call auto dialer and enablement of the single mandate for ECS enabled us to move towards paperless and frictionless onboarding process for both our customers and distributors.

During FY 2017, Max Life Insurance witnessed further improvement in claims paid ratio to 97.6%. The Company paid 8,678 death claims worth ₹ 283 crore during the year. InstaClaim, a first-of-its-kind initiative in the industry that ensures approval of death claim within 24 hours of receipt of all requisite documents, was also introduced.

Customer Experience Index, a cumulative index of customer experience across 7 key policyholder transactions, witnessed an improvement in Top 2 box score to 77% which is in line with the global best standards. This was made possible through an all-time high score in customer touchpoints like Branch Office, Medicals, Policy Issuance, Purchase Experience, Renewals, Helpline, and Claims. In addition, as per the syndicated annual customer loyalty survey, Max Life Insurance was placed number one in the experience factors that drive customer loyalty.

Simplification of customer communication and greater use of regional languages result in better customer engagement. During the year, Key Feature Documents for individual products and top 25 transactional communication, which form more than 60% of customer communication, were made available in 10 regional Indian languages.

Policyholder Bonus – Sharing the growth outcome with our key stakeholders

In FY 2017, the regular bonus that would be distributed by Max Life Insurance in FY 2017-18 would be circa ₹ 854 crore, an increase of ₹ 126 crore from ₹ 728 crore distributed last year. In addition, the payment of terminal bonus on deaths and maturities has been approved which would cost circa ₹ 23 crore in FY 2018.

Product Mix – Increased focus on protection-oriented sales

Max Life Insurance has a balanced product portfolio having an optimal mix of traditional and ULIPs as well as protection focussed and long-term savings-oriented products.

During the year, Max Life Insurance added non-linked participating child plan, Max Life Future Genius Education Plan. The plan provides a host of benefits, which are highly customisable and flexible to suit the requirements of your child’s education even during your absence. The plan offers four guaranteed money back options each equal to 25% of the sum assured in the last four policy years. The timing of receiving the money back can either be postponed or brought forward as per the child’s educational needs. The product also offers two flexible settlement options on death benefit payouts – Lump sum or Monthly Income for 135 months. In addition, to enhance the risk cover, three riders – Term Plus, Accidental Death & Dismemberment and Waiver of Premium – can also be attached to the base product.

Max Life Insurance also strengthened its protection portfolio with the launch of Max Life Cancer Insurance Plan that is designed to provide financial assistance across all stages of cancer. In addition, the plan also provides the guaranteed income benefit of up to 50% of sum assured in case the policyholder is diagnosed with major stage cancer. In addition, the product offers indexation benefit of 10% for every claim-free year for a maximum of 5 years and policy continuance benefit through which future premiums are waived off in case the insured is diagnosed with cancer. The Company launched a new feature-rich Max Life Online Term Plan Plus which offers three death benefit options – lump sum death benefit, lump sum with monthly income and lump sum with increasing monthly income.

Max Life Insurance Company Limited is a joint venture between Max Financial Services Ltd. and Mitsui Sumitomo Insurance Co. Ltd. Max Life Insurance Co. Ltd., 11th Floor, DLF Square Building, Jacaranda Marg, DLF City Phase II, Gurugram (Haryana) – 122002. For more details on the risk factors, Terms and Conditions, please read the sales brochure, available on www.maxlifeinsurance.com, carefully before concluding a sale. Insurance is the subject matter of solicitation. Trade logos displayed belong to Max Financial Services Ltd. and Mitsui Sumitomo Insurance Co. Ltd. respectively and are used by Max Life Insurance Co. Ltd. under a license. Contact us on our nation-wide toll free no. 1800-200-5577.

ARN - Max Life/Ads/Ogilvy/MLI CIP Poster/August 2017 IRDAI Regn. No - 104.

Beware of spurious phone calls and fictitious / fraudulent offers

IRDAI clarifies to public that

  • IRDAI or its officials do not involve in activities like sale of any kind of insurance or financial products nor invest premiums.
  • IRDAI does not announce any bonus.
  • Public receiving such phone calls are requested to lodge a police complaint along with details of phone call, number.

Information Technology – Facilitating Improvement in Business Efficiency

During FY 2017, Information Technology focussed on creating a solid technology backbone to simplify the life of our employees, distributors, and customers.

Max Life Insurance moved to Office 365 to provide its employees with efficiency tools like Skype for Business which has simplified remote video conferencing, chats and document sharing. Interactive employee portal, eCube was also launched which provides knowledge management features and multiple engagements and two-way communication opportunities.

To enhance distribution efficiency, mApp and CSG were introduced in select markets and will be rolled out across the country in the first half of FY 2018. Through these applications, our agent advisors can offer multiple life insurance solutions based on need analysis and can directly load customer documents for speedy policy issuance.

Focus on Engaging and Retaining Talent

Our efforts towards improving employee experience and making people practices more contemporary at Max Life Insurance received strong validation as the Company was ranked 46th amongst the top 100 Indian companies and first amongst the insurance industry by Great Place to Work Institute and & Economic Times study.

During the year, the Human Resources (HR) function gave significant attention to effective employee communication and engagement. All employee surveys and regular pulse surveys were conducted with the help of an external agency to monitor engagement levels. Communication platforms such as dedicated intranet site, leadership webcasts and employee town halls were deployed to proactively disseminate information and build two-way communication.

Through the year, there was continued focus towards enabling employees and building a high-performance workplace. Digitisation of key people processes via robust implementation of HR Management System and launch of Mobile Apps, Distribution capability-building, especially at supervisory levels and talent retention / deployment, were some of the areas of focus.

Pehal, an employee volunteering programme, was launched during the year. Around 2,000 employees participated in various social causes such as financial literacy for under-privileged students via school tie-ups, green plantation drive and sanitation drives.

Marketing Support to Drive Business

After the announcement of proposed merger of Max Life Insurance and HDFC Life in the first quarter of the year, the focus of marketing efforts was primarily on enabling sales. The marketing team created a comprehensive strategy for new Online Term Plan launched during the year and promoted Max Life Cancer Insurance Plan.

The key highlights of the year were innovative and industry first digital marketing efforts. The Company directly engaged with Google to deploy industry first insight-led prospecting and chase campaign to strengthen the direct business. An integrated digital marketing campaign was launched in the last quarter of the year and the video was the 5th most watched advertisement on YouTube in January 2017.

Customer communication and media relations efforts focussed on educating customers on various aspects of life insurance to enable them to take informed decisions. Simplification to improve ease of understanding was the other area of attention. During the year, Key Features Documents in 10 regional languages were also implemented and top 25 documents, covering almost 80% of customer communication, were simplified.

Superior Investment Performance

The Company’s Assets under Management (AUM) of ₹ 44,370 crore recorded a growth of 24% over the last year. The performance of both the traditional and unit-linked funds has been commensurate with the risks assumed in respective funds. Overall, the funds outperformed the benchmarks during the year.

The traditional funds are invested safely, with over 99% of the debt investments in AAA or equivalent instruments and a minimum of 70% of equity exposure to quality large cap equities which are expected to provide superior returns over the long term.

Generating Insurance Awareness amongst our Customers and Public-at-large

Max Life Insurance continued to work towards increasing awareness about life insurance and financial concepts amongst its existing customers and prospective life insurance customers. In line with the IRDAI focus, the Company worked on four specific themes:

  • Campaign on the benefits of life insurance
    During the year, Max Life Insurance’ major focus was on promoting protection as an important concept related to life insurance. In the last quarter of the year, the Company carried a television campaign to educate consumers about the need for protection against unforeseen events of life. Throughout the year, the Company worked towards imparting knowledge to policyholders and prospects through authored articles in national and regional dailies, knowledge articles through the own website, social media assets and direct electronic mailers. As a special initiative, during the last quarter of the year, the Company distributed leaflets about basic concepts of life insurance to policyholders who walked into our offices.
  • Campaign focussing on protection to consumers
    Fraudulent activities and spurious calling to fleece genuine life insurance consumers of their hard-earned money are spoiling the reputation of life insurance industry. There is a need to make concerted efforts to overcome this menace. Max Life Insurance made its contribution by educating consumers about such activities through authored articles in print media, direct mailers to existing consumers and social media campaigns. In addition, Max Life Insurance also took legal measures to take action against unscrupulous elements who are engaged in such activities.
  • Campaign for children and youth
    Max Life Insurance launched a special campaign of teaching the youth of India about the basic financial concepts. We believe that if they are introduced to financial planning early in their life, these people will be in a better position to implement these concepts in real life to their benefit. Max Life Insurance employees educated more than 3,000 students of 22 schools in Gurugram, Jammu and Srinagar. This campaign was extremely successful as students actively participated in these financial literacy class. They were also provided the information about Government-promoted financial schemes so that the students could share those with their parents which could benefit the household.
  • Campaign for the under-privileged and rural and socially backward
    Max Life Insurance adopted Dhakrani village in Uttarakhand in FY 2015. Our employees and agent advisors have been carrying out door-to-door financial literacy campaign in the village. During the year, our employees reached out to 450 households – conducted need analysis and educated them about the financial products suitable for their identified needs.

Corporate Social Responsibility

The Company continued to work with Max India Foundation to implement its CSR programme which has a focus on healthcare, sanitation, safe drinking water, environment protection, financial literacy & insurance awareness and village adoption. The work on the first three phases of the sewerage system, which covers almost 50% of the village households, has almost been completed in the Company-adopted Dhakrani village in Uttarakhand and is expected to be fully operational by the second quarter of FY 2018. The Company increased its activities in the areas of immunisation, health camps, and health awareness and continued providing surgeries & treatment and artificial limbs to the under-privileged people. During the year, the Board Committee for Corporate Social Responsibility met twice in the year to approve the CSR Strategy and Policy for FY 2017 and review the progress made on the agenda. More details about the Company’s CSR initiatives are mentioned under the Business Responsibility Report in the Annual Report and as part of the Annexure to Directors’ Report.

A Robust Risk Management Framework to Address Enterprise-wide Risks

The Company’s overall approach to managing risks is based on the ‘three lines of defence’ model with clear segregation of roles and responsibilities for all the lines.

Risk management is integral to all aspects of the Company’s activities and is the responsibility of all staff. Managers have a particular responsibility to evaluate their risk environment and put in place appropriate controls. The risk management culture emphasises due analysis and management of risk in all business processes. This constitutes the first line of defence.

The Company has an operationally independent Risk Management Function in place, headed by a Chief Risk Officer (CRO). The Risk Management Function together with the Compliance Function form the second line of defence, under the aegis of the Board and the Statutory Risk Management Committee. The Risk Management Function is responsible for monitoring and reporting the firm’s risk exposures and the extent to which the risks inherent in any proposed business strategy and plans are consistent with the Company’s risk appetite and tolerance. The Compliance Function is responsible for monitoring the compliance levels across the Company and for highlighting any potential compliance risks to the risk function as well as to the management teams. Compliance includes compliance with both external obligations and internal standards and the latter includes standards on ethical behaviour.

The Internal Audit Function guided by the Audit Committee is the third line of defence and provides an independent assurance to the Board. The majority of the members of the Audit Committee are independent directors, one of whom chairs the Committee. The Audit Committee has a particular responsibility in relation to financial statement risks and would also provide assurance that the Risk Management Framework has been implemented. The Statutory Auditors, as well as regulatory oversight aided by the Appointed Actuary in his fiduciary capacity, is also construed to provide an additional third line of defence.

Risk Management Framework

The Company has developed a risk management framework which defines the Company’s approach to enterprise-wide risk management. The implementation of the framework is a continuous cycle of improvement over the Company’s existing risk management elements which are progressively integrated into the framework. The Company has the vision of a matured state of risk culture where every individual takes responsibility for risks and has a thorough understanding of all the risk tolerances. The key elements of risk management framework include:

Risk Identification and Appetite

The Company has identified the material risks to which it is exposed, categorised them under the headings of Strategic, Insurance, Investment and Operational Risks and the degree of risk the Company is willing to accept for each in pursuit of its strategic objectives, business plans and the interests of the policyholders.

Risk Management Strategy

A Risk Management Strategy has been developed which defines the Company’s approach to managing each material risk through acceptance, avoidance, transfer and/or mitigation. The degree and intensity of the management action are guided by comparing the risk appetite with the potential impact of the risk, the likelihood of its occurrence and the cost of implementing the controls. The strategy also defines the governance structure for risk management practices at various levels including the roles and responsibilities of the risk management function.

Policies and Procedures

The functional owners with assistance from the risk management function develop policies and procedures consistent with the risk appetite and risk management strategy as well as ensure implementation thereof to manage the risks. The policies cover processes for identification, monitoring, measurement, reporting of risks in respective functions.

Risk-based Business Planning

The Company has a robust business planning process which includes forward-looking scenario analysis based on severe but plausible scenarios including economic stress. The analysis assesses the impact on key financial outcomes including solvency. The Chief Risk Officer reviews the plan independently to ensure that it is within the Company’s risk appetite and also comments upon the risks and opportunities embedded therein.

Risk-based Capital Assessment

A detailed annual assessment of the Company’s capital position and requirements is carried out which takes into account the Company’s risk exposures and appetite for risks. The outcomes from this assessment are presented to the Risk, Ethics and Asset Liability Management (REALM) Committee by the Appointed Actuary through the Financial Condition Report as well as the Economic Capital Assessment.

Risk Monitoring and Reporting

Risk-oriented management information is monitored by the risk function and an independent assessment of top risks as well as emerging risks is monitored and reported to the statutory Risk Committee on a quarterly basis along with identified critical risk measures.

Review of Framework

The implementation of risk management framework is subject to both internal and external assurance reviews periodically and is also tested for effectiveness during the review of entity level controls under the Company’s Internal Control Framework.

Risk Governance Structure

The Company follows a multi-layered governance approach for execution and monitoring the risk management activities performed across all of its three lines of defence. The Board of Directors, Risk, Ethics and ALM Committee, Management Risk Committee, Risk Management Function and Functional Managers have distinct roles and responsibilities.

Key Risk Exposures and Risk Mitigation Strategy

As an insurer, the Company is in the business of accepting the risk. The risk management framework ensures that the level of risk accepted is within the Company’s risk management capacity and the level of capital adequacy is in excess of the level prescribed in the public interest via legislation. The key risk exposures have been summarised below along with a brief approach adopted by the Company to manage those risks.

1. Strategic Risks

The Company accepts these risks inherent with the key business decisions and plans in areas of product strategies, distribution models, regulatory and legislative changes. The Company’s planning process includes forward-looking scenario analysis and stress-testing to assess the potential impact of the strategic choices being made.

2. Insurance Risks

The Company accepts various insurance risks as a core reason for its existence, including mortality and discontinuity. The Company manages mortality risks by use of sound underwriting norms defined in the Underwriting Policy & Manuals and leverages technology to deploy business intelligence in decision-making. The Company transfers mortality risks above certain threshold to reinsurers based on its annual Reinsurance Programme. The Company has put in place appropriate controls in the sales process and practices and products are also assessed for fairness against predetermined benchmarks. The Policyholder Protection Committee reviews borderline cases.

The Company also accepts risks inherent in the pricing of insurance products with long-term financial obligations. A Product Steering Committee governs a defined process and structure for the development of products covering all stages of product development including pricing as well as approvals. The Company follows a ‘Treat Customer Fairly’ policy, principles and considerations of which are tested at the time of pricing of products.

3. Investment Risks

The Company manages a substantial level of assets in support of its obligations to policyholders and shareholders and is exposed to investment risks of Credit, Market, Liquidity and increasing complexities like derivatives and alternate investment funds. In addition, the make-up of investment portfolios may not conform with the characteristics of the liabilities such investments are intended to support, leading to ALM risks. For effective management of such risks, a structured approach is in place comprising active oversight by Investment Committee and Risk, Ethics and Asset Liability Committee with detailed management through a Working Investment Committee and an ALM Group, besides regular checks by the concurrent auditor under the regulatory framework. This is complemented by external reviews as needed to ensure that the Company’s processes are aligned to contemporary best practices. The ALM policy defines the constraints on Investment Policy arising from the nature of the liabilities that invested assets support. The Investment Policy defines in appropriate detail the specific limits on various forms of investment arising from Regulations, the ALM Policy and the Company’s specific investment-related risk appetites on various forms of investment. The Company has a well-defined disclosure policy in accordance with which it discloses details of portfolios of both non-linked and linked business on its website at monthly and quarterly intervals.

4. Operational Risks

The Company is exposed to various areas of operational risks, including mis-selling, technology, business continuance, information security, fraud, business processes, outsourcing, and compliance. These are mitigated by regular review and monitoring of operating, reporting processes and procedures. A range of policies and procedures to manage these risks is in place including Business Continuity Management, Information Security, Outsourcing, Anti- Fraud, Anti-Corruption and Anti-Bribery, and Anti-Money Laundering Policies together with a Business Code of Conduct. The first line of defence, through the departmental self-assessments, identifies all potential areas of inherent as well as residual risks along with the mitigation actions. The progress against these is monitored closely by respective functions and is followed up by monitoring and reviews by the second and the third line of defence.

5. Other Emerging Risks

Operating models continue to evolve based on contemporary technologies, changing stakeholder preferences as well as regulatory requirements. The pace of these changes, together with the impact of innovative business models and emerging technologies, create additional risk exposures for the Company. The Company is also conscious of potential risks driven by changes in the geopolitical environment. The Company scans its operating environment continuously and its risk capabilities and controls are augmented accordingly. The emerging risks are monitored and reported to the Risk, Ethics and ALM Committee on a quarterly basis along with the potential implication and management’s identified action plan to manage these risks early.

Report on Market Consistent Embedded Value

Keeping in view the requirements of long-term investors, the Company has been reporting the Embedded Value (EV) for the past several years and has graduated to a market-consistent methodology from FY 2015. The EV of the Company, as at 31st March, 2017, stood at ₹ 6,739 crore. Post payment of final shareholder dividend of ₹ 149 crore, which will be accounted post 31st March, 2017, the closing EV will be ₹ 6,590 crore. The Operating Return on EV (RoEV) over FY 2017 is 19.9%, including non-operating variances, the RoEV is 23.0%. The Value of New Business (VNB) written during FY 2017 is ₹ 499 crore (y-o-y growth of 29%) and the portfolio new business margin is 18.8%, calculated on actual costs.

The EV is a measure of the shareholder value arising from the in-force policies and the net worth of the Company as at the valuation date. The Company uses a market-consistent methodology approach as this approach better reflects the value of an insurance company by explicitly allowing for insurance and economic risks rather than using implicit overall allowance for risks through Risk Discount Rate in the traditional approach.

The following chart provides an overview of the components of the EV as at 31st March, 2017:

Market Consistent Embedded Value (MCEV) Method

The EV of the Company is calculated keeping in view the MCEV principles issued by the Stitching CFO Forum Foundation and the Actuarial Practice Standard 10 as issued by the Institute of Actuaries of India. However, the methodology and results are not intended to be compliant with these standards.

In MCEV, an explicit allowance for the risks is made through the estimation of the Time Value of Financial Options and Guarantees (TVFOG), Cost of Residual Non-Hedgeable Risks (CRNHR) and Frictional Cost (FC).

The deductions for risk to arrive at the VIF, represent a reduction of 14% in the PVFP. The largest deduction is in respect of CRNHR. Within CRNHR, persistency risk constitutes the largest risk component.


  • Operating return on EV of 19.9% is mainly driven by new business growth and unwind of discounting.
  • Operating variance mainly constitutes the positive impact of mortality and persistency experience variance and modelling enhancements.
  • Non-operating variances are mainly driven by equity and interest rate movements since March 2016.
  • The interim shareholder dividend of ₹ 169 crore has been paid during the year and a final dividend of ₹ 149 crore will be accounted post 31st March, 2017. Post the payment of the final dividend, the closing EV will be ₹ 6,590 crore.

Value of New Business (VNB)

The VNB represents the value added to the EV due to the new business written by the Company during the year. For FY 2017, the VNB was ₹ 499 crore resulting into the new business margin of 18.8%. There was no cost overrun during the year.

Future Outlook

Opportunities

  • Demonetisation is expected to check black money and transactions supported by the same. This may help in gradually shifting savings from physical assets to financial instruments resulting in growth fillip to life insurance industry too.
  • Digital reach triggered by low-cost data and mobile instruments will provide an opportunity to reach out to a new set of customers. Right now, only 2% of Indians are engaged in mobile payments, whereas in another developing economy, Nigeria, 11% are using mobile payment which clearly indicates the potential of growth in digital payment.
    The push to increase the usage of mobile transactions has come at the right time. With over 220 million smartphone users, India is already the world’s second biggest smartphone market. The mobile internet users in India which already stand at around 350 million are expected to grow 50 million yearly till FY 2020 which can make the projected number to swell over 600 million. The magnitude of these numbers is enough to substantiate the enormous possibilities that lie in going digital.
  • Digital developments also open up transformative opportunities in areas of customer reach, engagement, and service.

Challenges

  • While in terms of revenue, the new business has witnessed a healthy growth in FY 2017, the number of policies sold by the industry has declined marginally by 1%. The industry is facing a challenge to reach out to a larger number of customers and especially to those in need of insurance cover to protect the future of their families. The lack of growth in a number of new customers is a challenge but at the same time, it offers an opportunity in the form of under penetrated market.
  • India is a savings-oriented market and the pull of protection products is still limited to a small and niche segment of consumers. Another major challenge is that more than 50% of policyholders drop out of life insurance products by the fifth policy year. This clearly indicates a lack of understanding of the concept of long-term savings. There is a need to promote long-term savings and protection to help households protect their life-stage needs and need-based selling can go a long way in building this understanding.

The Max Life contingent winning a Bronze Award at ASQ’s World Conference 2017 in Charlotte, USA

The Max Life contingent winning a Bronze Award at ASQ’s World Conference 2017 in Charlotte, USA

  • While the bancassurance channel is providing a greater reach to life insurance products, this increasing dependence of life insurance companies on bancassurance may lead to an imbalance in relationships of banks and life insurers. There is a need for both owned channels such as Agency Distribution and third-party channels such as bancassurance to be equally placed to reach out to a larger audience and sell a variety of life insurance solutions.
  • The success of agency distribution is of critical importance especially if life insurance industry has to strengthen its differentiation from other financial products. Agency distribution is better equipped to offer a balanced set of solutions based on need-based sales. However, the high cost of distribution caused primarily by low productivity and high attrition of agent advisors comes as a major roadblock in the growth of agency distribution. Life insurance companies need to work on improving agent productivity through the focus on career agency and knowledgeable agents.
  • Low-interest rate regime would impact industry ability to offer good returns on traditional life insurance products. This may get extenuated if the stock market continues to offer good returns. Most of the Indian consumers are not prepared for investment losses while they may tend to move to market-linked financial products as those may offer better returns in the short-term.