Summer Internship

Program
2009-10
Name: Parthasarathy FINAL REVIEW
Bhaskar
Campus Name: FMS, Delhi
Project Guide: Mr. Swapnil Pathak
 The Project

3 parts

l Develop a predictive model, that links

macro economical parameters in the
economy with Life Insurance premiums( of
the industry)

l Analyze the correlation between Linked

Product Sales (Industry wide) & Stock
Market Indices

l Identify strategies used historically by the

Life Insurance Players( World wide) to
counter Stock Market crashes and the
consequent decline of Linked Product Sales
Relevance of the Project to the
Organization
l Linking targets to macro-economic factors?
l Two Components

l What is the quantitative Impact

l Of what on what?
l Why do we care?
l Is the consumer completely rational?
Project Deliverables
Does Causality exist ?
Macro Variables

l Population
l Financial Development *
l Per Capital Income/Disposable Income
l Inflation *
l Price of Insurance Products- Elasticity*
l Life Expectancy*
l Secondary Market Interest Rates
l Structural Changes post 2000, How do
you accommodate that?
l Stock Market Index
GDP, the big factor

l Interdependence of GDP,
GDS, Life Funds
l Makes better sense to
use a widely prevalent
Macro Variable which
influences all
l Especially if it can be
predicted
Methodology Used

l What needs to be forecast?

l Independent variables
l Multi Collinearity
l Year on Year Basis

l Simple Regression Vs Time Series Analysis

l ErrorCorrelation
l Auto Regressive Components
l Spurious Regression Problems
l Estimation and Tests Needed to analyze
data
Tools Used: Eviews 5.0

l Eviews
Challenges faced

l Data Mining- Finding data over 50 years

old
l Spurious Regressions
l Predicting the Sensex! ( As if that were
possible!)
l Occam’s Razor
What is the future?
Qualitative Impact of ULIPS

l Hypothesis
l People are affected by Trading Indices
l Affected by a time lag
l Average time lag found to be 2 months
l Found that the Sensex affects ULIP sales
differently in different stages
l A steady trend estimated when Sensex
was climbing upwards
l No particular trend for Sensex that was
moving down or volatile- mainly due to
lack of data points
History of Stock Market
Crashes
l Historically Stock Market Crashes have
lead to slump in Linked Products
l UK, Italy & Japan have for most part
waited for the Market to bounce back-
than do anything too drastic
l Singapore had to wait for 3 full years to
recover from the impact of a Stock Crash
l Found that a Stock Market Jump, always
leads to recovery in ULIP sales
l In the time of recession Capital
Guarantee Linked Products are offered
ULIPS and the world of option
pricing
•“For everything
you have missed, you have gained something else, and fo
.”
l Ralph Waldo Emerson
• All compromises are not the same.
• Some compromises appeal more to us than others.
More specifically , they appeal to our brain. Even more
specifically, to our utility curves.
ULIPS…..

l The savings benefit is linked directly to the value of

units in a mutual fund(or a company‘s own internal
fund)
l First incarnation: High risk, High gain products that
were equity linked.
l Then came…
l People are not all risk-seeking, nor
are they all risk-averse.
l They needed a minimum return.
l And so was born the modern day
ULIP.
What’s special?
l The buck stops with the …investor

l More transparency in the system

l Less capital intensive

l Scope of customization very high

l Tax advantages

l Cash in on a booming equity market

What’s not so special
l Pricing: The Black- Scholes way- but do the
assumptions hold?

l By nature, the underlying assets are volatile

l Sensitive to regulatory risk

l Are right up the alley of Financial Institutions

disconnected with Insurance.
ULIPS in India
l Likely to follow a similar trajectory to the ULIP
majors
Hits and Misses

l Sufficient
Industry wide data for Linked
Product sales unavailable (to make a
proper regression analysis)
l Hence,only ICICI Prudential Linked Product
Sales have been considered
l LinearModels to predict Stock Market
fluctuations?
l Earlier models linking FII Inflows and Sensex

l Scenario
building approach for Sensex(based
on Macroeconomic factors)
References

l ‘ Life Insurance and the Macro Economy- The Indian

Experience’- H. Sadhak, EPW, March 2006
l ‘Macroeconomic Variables and the Demand for Life Insurance
in Malaysia’ -Chee Chee Lim, Steven Haberman
l ‘The Price Elasticity of Demand and for Whole Life Insurance’,
Babbel, D F (1985): The Journal of Finance, Vol 40, No 1.
l ‘An International Analysis of Life Insurance’ Browne, M J and K
Kim (1993):
l ‘Modelling Life Insurance Savings: Some Pointers, Cargill T F
and T E Troxel (1979):
l ULIPS in the Indian Insurance Industry: Status, Challenges and
the way forward’ D. L.N Chakravarthy
THANK YOU