Chapter No.

1)

Particulars

Page No.

Introduction
1.1 Introduction to insurance 1.2 Working of insurance 1.3 Indian Insurance sector 1.4 History of insurance sector 1.5 Structure of Indian insurance 1.6 IRDA and its functions Review or literature 3.1 Introduction to Portfolio management 3.2 Definition of portfolio management 3.3 Scope of portfolio management 3.4 Need for portfolio management 3.5 Objectives of portfolio management 3.6 Portfolio manager 3.7 Portfolio management in insurance sector

2) 3)

4)

Finding and Analysis

4.1 Benefits of Portfolio Management In Insurance Sector 4.2 Disadvantages of port folio management in insurance 4.3 Portfolio Risk Management In Insurance Sector

5) 6)

Feild Study
Case study Challenges of Portfolio Management In Insurance Sector

7)

Conclusion

Chapter Particulars No. 8) Bibliography, Webilography 9) Annexure

Page No.

1.1 INTRODUCTION & DEFINITION OF INSURANCE

Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. According to study texts of The Chartered Insurance Institute, there are the following categories of risk. 1. Financial risks which means that the risk must have financial measurement. 2. Pure risks which means that the risk must be real and not related to gambling 3. Particular risks which mean that these risks are not widespread in their effect, for example such as earthquake risk for the region prone to it. It is commonly accepted that only financial, pure and particular risks are insurable. An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount of money to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice. The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.

DEFINITIONS

The definition of insurance can be made from two points: Functional definition. Contractual definition. Functional definition Insurance is a co-operative device to spread the loss caused by a particular risk over a number of persons who are exposed to it and who agree to insure themselves against the risk. General Definition Insurance has been defined to be that in which a sum of money as a premium is paid in consideration of the insurers incurring the risk of paying a large sum upon a given contingency. In the words of John Magee, Insurance is a plan by themselves which large number of people associate and transfer to the shoulders of all, risks that attach to individuals. Contractual Definition In the words of justice Tindall, Insurance is a contract in which a sum of money is paid to the assured as consideration of insurers incurring the risk of paying a large sum upon a given contingency.

1.2 Working of Insurance

CLASSIFICATION OF INSURANCE

INSURANCE

LIFE INSURANCE

GENERAL INSURANCE

Fire insurance

Marine insurance

Mediclaim

Motor vehicle

Life insurance Life insurance is an insurance coverage that pays out a certain amount of money to the insured or their specified beneficiaries upon a certain event such as death of the individual who is insured. This protection is also offered in a Family takaful plan, a Shania-based approach to protecting you and your family. The coverage period for life insurance is usually more than a year. So this requires periodic premium payments, either monthly, quarterly or annually.

The risks that are covered by life insurance are: Premature death Income during retirement Illness

The main products of life insurance include: Whole life Endowment Term Investment-linked Life annuity plan Medical and health

General insurance General insurance is basically an insurance policy that protects you against losses and damages other than those covered by life insurance. For more comprehensive coverage, it is vital for you to know about the risks covered to ensure that you and your family are protected from unforeseen losses. The coverage period for most general insurance policies and plans is usually one year, whereby premiums are normally paid on a one-time basis.

The risks that are covered by general insurance are: Property loss, for example, stolen car or burnt house Liability arising from damage caused by yourself to a third party Accidental death or injury

The main products of general insurance includes: Motor insurance Fire/ Houseowners/ Householders insurance Personal accident insurance Medical and health insurance Travel insurance

1.3 INDIAN INSURANCE SECTOR

The Insurance sector in India governed by Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and General Insurance Business (Nationalization) Act, 1972, Insurance Regulatory and Development Authority (IRDA) Act, 1999 and other related Acts. With such a large population and the untapped market area of this population Insurance happens to be a very big opportunity in India. Today it stands as a business growing at the rate of 15-20 per cent annually. Together with banking services, it adds about 7 per cent to the countrys GDP .In spite of all this growth the statistics of the penetration of the insurance in the country is very poor. Nearly 80% of Indian populations are without Life insurance cover and the Health insurance. This is an indicator that growth potential for the insurance sector is immense in India. It was due to this immense growth that the regulations were introduced in the insurance sector and in continuation Malhotra Committee was constituted by the government in 1993 to examine the various aspects of the industry. The key element of the reform process was Participation of overseas insurance companies with 26% capital. Creating a more efficient and competitive financial system suitable for the requirements of the economy was the main idea behind this reform. Since then the insurance industry has gone through many sea changes. The competition LIC started facing from these companies were threatening to the existence of LIC .since the liberalization of the industry the insurance industry has never looked back and today stand as the one of the most competitive and exploring industry in India. The entry of the private players and the increased use of the new distribution are in the limelight today. The use of new distribution techniques and the IT tools has increased the scope of the industry in the longer run.

1.4 HISTORY OF INSURANCE SECTOR

India had the nineteenth largest insurance market in the world in 2003. Strong economic growth in the last decade combined with a population of over one billion makes it one of the potentially largest markets in the future. Insurance in India has gone through two radical transformations. Before 1956, insurance was private with minimal government intervention. In 1956, life insurance was nationalized and a monopoly was created. In 1972, general insurance was nationalized as well.255 But, unlike life insurance, a

different structure was created for the industry. One holding company was formed with four subsidiaries. As a part of the general opening up of the economy after 1992, a

government-appointed committee recommended that private companies should be allowed to operate. It took six years to implement the recommendation. The private sector was allowed into the insurance business in 2000. However, foreign ownership was restricted. No more than 26 percent of any company can be foreign-owned.

The term general insurance is used in Britain and other Commonwealth countries. Elsewhere, the equivalent term is property-casualty insurance or non-life insurance Indian Insurance Market History

Insurance has a long history in India. Life Insurance in its current form was introduced in 1818 when Oriental Life Insurance Company began its operations in India. General Insurance was however a comparatively late entrant in 1850 when Triton Insurance company set up its base in Kolkata. History of Insurance in India can be broadly bifurcated into three eras: a) Pre Nationalization b) Nationalization and c) Post Nationalization. Life Insurance was the first to be nationalized in 1956. Life Insurance Corporation of India was formed by consolidating the operations of various insurance companies. General Insurance followed suit and was nationalized in 1973. General Insurance Corporation of India was set up as the controlling body with New India, United India, National and Oriental as its subsidiaries. The process of opening up the insurance sector was initiated against the background of Economic Reform process which commenced from 1991. For this purpose Malhotra Committee was formed during this year who submitted their report in 1994 and Insurance Regulatory Development Act (IRDA) was passed in 1999. Resultantly Indian Insurance was opened for private companies and Private Insurance Company effectively started operations from 2001.

1.5 Structure of Indian Insurance

The business of life insurance in India in its existing from started in India in the year 1818 with the establishment of the Oriental Life Insurance company in Calcutta. Some of the important milestones in the life insurance business in India are: 1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business. 1912: The Indian Life Assurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance

business. 1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public. 1956: 245 Indian and foreign insurers and provident societies taken over by the central government and nationalized LIC formed by an Act of parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India. The general insurance business in India, on the other hand, can trace its roots to the Triton Insurance Company Ltd., the first general insurance company established in the year 1850 in Calcutta by the British. Some of the important milestones in the general insurance business in India are: 1957: The Indian Mercantile Insurance Ltd. Set up, the first company to transact all classes of general insurance business. 1957: General Insurance Council, a wing of the Insurance Association of India, frames a code of conduct for ensuring fair conduct and sound business practices. 1968: The Insurance Act amended to regulate investments and set minimum solvency margins and the tariff Advisory Committee set up.

1972:

The General Insurance Business (Nationalization) Act, 1972 nationalized

the general insurance business in India with effect from 1st January 1973. 107 insurers amalgamated and grouped into four companies viz. the National Insurance Company Ltd., the New India assurance Company Ltd., the Oriental Insurance Company Ltd. And the United India Insurance Company Ltd. GIC incorporated as a company. Insurance sector reforms in 1993, Malhotra Committee, headed by former Finance secretary and RBI Governor R.N. the Indian insurance industry and

Malhotra, were

formed

to evaluate

recommend its future direction. The Malhotra Committee was set up with the objective of completing 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 reforms In 1994, the co mmittee submitted the report and some of the key recommendations included: 1) Parties to contract 2) Contract terms 3) Costs, insurability and underwriting 4) Death proceeds 5) Insurance v/s assurance

Parties to contract
There is a difference between the insured and the policy owner, although the owner and the insured are often the same person. For example, if Joe buys a policy on his own life, he is both the owner and the insured. But if Jane, his wife, buys a policy on Joe's life, she is the owner and he is the insured. The policy owner is the

guarantor and he will be the person to pay for the policy. The insured is a participant in the contract, but not necessarily a party to it. Also, most companies allow the payer and owner to be different, e. g. a grandparent paying premiums for a policy on a child, owned by a grandchild.

The beneficiary receives policy proceeds upon the insured person's death. The owner designates the beneficiary, but the beneficiary is not a party to the policy. The owner can change the beneficiary unless the policy has an irrevocable beneficiary designation. If a policy has an irrevocable beneficiary, any beneficiary changes, policy assignments, or cash value borrowing would require the agreement of the original beneficiary.

In cases where the policy owner is not the insured (also referred to as the celui qui vit or CQV), insurance companies have sought to limit policy purchases to those

with an insurable interest in the CQV. For life insurance policies, close family members and business partners will usually be found to have an insurable interest. The insurable interest requirement usually demonstrates that the purchaser will actually suffer some kind of loss if the CQV dies. Such a requirement prevents people from benefiting from the purchase of purely speculative policies on people they expect to die. With no insurable interest requirement, the risk that a purchaser would murder the CQV for insurance proceeds would be great. In at least one case, an insurance company which sold a policy to a purchaser with no insurable interest (who later murdered the CQV for the proceeds), was found liable in court for contributing to the wrongful death of the victim (Liberty National Life v. Weldon, 267 Ala.171 (1957)).

Contract terms
Special exclusions may apply, such as suicide clauses, whereby the policy becomes null and void if the insured commits suicide within a specified time (usually two years after the purchase date; some states provide a statutory one-year suicide clause). Any misrepresentations by the insured on the application may also be grounds for nullification. Most US states specify a maximum contestability period, often no more than two years. Only if the insured dies within this period will the insurer have a legal right to contest the claim on the basis of misrepresentation and request additional information before deciding whether to pay or deny the claim. The face amount of the policy is the initial amount that the policy will pay at the death of the insured or when the policy matures, although the actual death benefit

can provide for greater or lesser than the face amount. The policy matures when the insured dies or reaches a specified age (such as 100 years old).

Costs, insurability and underwriting The insurer (the life insurance company) calculates the policy prices with intent to fund claims to be paid and administrative costs, and to make a profit. The cost of insurance is determined using mortality tables calculated by actuaries. Actuaries are professionals who employ actuarial science, which is based on mathematics (primarily probability and statistics). Mortality tables are statistically based tables showing expected annual mortality rates. It is possible to derive life expectancy estimates from these mortality assumptions. Such estimates can be important in taxation regulation.

The three main variables in a mortality table are commonly age, gender, and use of tobacco, but more recently in the US, preferred class-specific tables have been introduced. The mortality tables provide a baseline for the cost of insurance, but in practice these mortality tables are used in conjunction with the health and family history of the individual applying for a policy to determine premiums and insurability. Mortality tables currently in use by life insurance companies in the United States are individually modified by each company using pooled industry experience studies as a starting point. In the 1980s and 90s, the SOA 1975 80 Basic Select & Ultimate tables were the typical reference points, while the 2001 VBT and 2001 CSO tables were published more recently.. Most of the revenue received by insurance companies consists of premiums paid by policy holders, with some additional money being made through the investment of some of the cash raised from premiums. Rates charged for life insurance increase with the insurer's age because, statistically, people are more likely to die as they get older. The insurance company will investigate the health of and

applicant for a policy to assess the likelihood of incurring a claim, in the same way that a bank would investigate an applicant for a loan to assess the likelihood of a default. Group Insurance policies are an exception to this. This investigation and resulting evaluation of the risk is termed underwriting. Health and lifestyle questions are asked, with certain responses or revelations possibly meriting further investigation. Life insurance companies in the United States support the Medical Information Bureau (MIB), which is a clearing house of information on persons who have applied for life insurance with participating companies in the last seven years. As part of the application, the insurer often requires the applicant's permission to obtain information from their physicians. Underwriters will determine the purpose of insurance; the most common being to protect the owner's family or financial interests in the event of the insured's death. Other purposes include estate planning or, in the case of cash-value contracts, investment for retirement planning. Bank loans or buy-sell provisions of business agreements are another acceptable purpose. Death proceeds Upon the insured's death, the insurer requires acceptable proof of death before it pays the claim. The normal minimum proof required is a death certificate, and the insurer's claim form completed, signed (and typically notarized).If the insured's death is suspicious and the policy amount is large, the insurer may investigate the circumstances surrounding the death before deciding whether it has an obligation to pay the claim. Payment from the policy may be as a lump sum or as an annuity, which is paid in regular instalments for either a specified period or for the beneficiary's lifetime.

Insurance v/s assurance The specific uses of the terms "insurance" and "assurance" are sometimes confused. In general, in jurisdictions where both terms are used, "insurance" refers

to providing coverage for an event that might happen (fire, theft, flood, etc.), while "assurance" is the provision of coverage for an event that is certain to happen. In the United States both forms of coverage are called "insurance", for reasons of simplicity in companies selling both products.

1.6 IRDA & ITS FUNCTION

Insurance laws and regulations in India takes care of all matters related to various insurance companies in the country. Much of the development and growth of the insurance sector in India is due to the government's decision to nationalize the insurance business and to allow private and foreign insurance companies to establish their businesses here. In India, there is one regulatory authority i.e. IRDA which oversees different functioning of the life insurance companies in India and provide them with guidelines.

Insurance Regulatory and Development Authority (IRDA) Insurance Regulatory and Development Authority (IRDA) is the controlling body, overseeing important aspects and functioning of various insurance companies in India. Established by the government, it safeguards the interest of the insurance policy holders of the country. Some of IRDA's functions include: To regulate, ensure and promote the orderly growth of the insurance business To prescribe regulations on the investment of funds by insurance companies To regulate the maintenance of the margin of solvency To adjudicate the disputes between insurers and intermediaries To supervise the functioning of the Tariff Advisory Committee

Rules and regulation

The Insurance Act of 1938 was the first legislation governing all forms of insurance to provide strict state control over insurance business. Life insurance in India was completely nationalized on January 19, 1956, through the Life Insurance Corporation Act. All 245 insurance companies operating then in the country were merged into one entity, the Life Insurance Corporation of India. The General Insurance Business Act of 1972 was enacted to nationalize the about 100 general insurance companies then and subsequently merging them into four companies. All the companies were amalgamated into National Insurance. Until 1999, there were not any private insurance companies in India. The government then introduced the Insurance Regulatory and Development Authority Act in 1999, thereby de-regulating the insurance sector and allowing private companies. Furthermore, foreign investment was also allowed and capped at 26% holding in the Indian insurance companies. In 2006, the Actuaries Act was passed by parliament to give the profession statutory status on par with Chartered Accountants, Notaries, Cost & Works Accountants, Advocates, Architects and Company Secretaries. A minimum capital of US$20 million (Rs.100 Crore) is required by legislation to set up an insurance business. IRDA was formed by an act of the Indian Parliament (known as the IRDA Act, 1999) as the regulatory body to govern the Indian insurance sector. A company, to operate as an insurance company in India, must be incorporated under the Companies Act, 1956, and possess the certificate of the memorandum of association and articles of association Capital requirement paid up equity share capital At least US$ 208.3 million for life insurance or non-life insurance business At least US$ 416.7 million for reinsurance business International players can operate in India only through a joint venture with a domestic firm and are classified under private sector insurers. FDI up to 26 per cent is permitted in the insurance sector. IRDA does not allow foreign reinsurance companies to open branches in India. This proposal is currently under consideration in the Parliament

2 Review of literature

3.1 INTRODUCTION TO PORTFOLIO MANAGEMENT

Portfolio management in common parlance refers to the selection of securities and their continuous shifting in the portfolio to optimize the returns to suit the Objectives of the investor. This however requires financial expertise in selecting the right mix of securities in changing market conditions to get the best out of the stock market. In India, as well as in many western countries, portfolio management service has assumed the role of specialized service now a days and a number of professional merchant bankers compete aggressively to provide the best to high net-worth clients, who have little time to manage their investments. The idea is catching up with the boom in the capital market and an increasing number of people are inclined to make the profits out of their hard earned savings. Portfolio management service is one of the merchant banking activities recognized by securities and exchange board of India (SEBI). The portfolio management service can be rendered either by the SEBI recognized categories I and II merchant bankers or portfolio managers or discretionary portfolio manager as defined in clause (e) and (f) of rule 2 SEBI (portfolio managers) Rules 1993. According to the definitions as contained in the above clauses, a portfolio manager means any person who pursuant to contract or arrangement with a client, advises or directs of undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client, as the case may be. A merchant banker acting as a portfolio manager shall also be bound by the rules and regulations as applicable to the portfolio manager. Portfolio management or investment helps investors in effective and efficient management of their investment to achieve this goal. The rapid growth of capital markets in India has opened up new investment avenues for investors. The stock markets have become attractive investment options for the common man. But the need is to be able to effectively and efficiently manage investments in order to keep maximum returns with minimum risk.

3.2 DEFINITION OF PORTFOLIO MANAGEMENT

Portfolio means the totals holdings of the securities belonging to any person. Portfolio manager means any person who enters into a contract or arrangement with a client. Pursuant to such arrangement he advises the client or undertakes on behalf of such client management or administration of portfolio of securities or invests or manages the clients funds. A discretionary portfolio manager means a portfolio manager who exercises or may under a contract relating to portfolio management, exercise any degree of discretion in respect of the investment or management of portfolio of the portfolio securities or the funds of the client, as the case may be. He shall independently or individually manage the funds of each client in accordance with the needs of the client in a manner which does not resemble the mutual fund. A non discretionary portfolio manager shall manage the funds in accordance with the directions of the client. A portfolio manager by virtue of his knowledge, background and experience is expected to study the various avenues available for profitable investment and advise his client to enable the latter to maximize the return on his investment and at the same time safeguard the funds invested

3.3 SCOPE OF PORTFOLIO MANAGEMENT

Portfolio management is an art of putting money in fairly safe, quite profitable and reasonably in liquid form. An investors attempt to find the best combination of risk and return is the first and usually the foremost goal. In choosing among different investment opportunities the following aspects risk Management should be considered: a) The selection of a level or risk and return that reflects the investors tolerance for risk and desire for return, i.e. personal preferences. b) The management of investment alternatives to expand the set of opportunities available at the investors acceptable risk level. The very risk-averse investor might choose to invest in mutual funds. The more risk-tolerant investor might choose shares, if they offer higher returns. Portfolio management in India is still in its infancy. An investor has to choose a portfolio according to his preferences. The first preference normally goes to the necessities and comforts like purchasing a house or domestic appliances. His second preference goes to some contractual obligations such as life insurance or provident funds. The third preference goes to make a provision for savings required for making day to day payments. The next preference goes to short term investments such as UTI units and post office deposits which provide easy liquidity. The last choice goes to investment in company shares and debentures. There are number of choices and decisions to be taken on the basis of the attributes of risk, return and tax benefits from these shares and debentures. The final decision is taken on the basis of alternatives, attributes and investor preferences. For most investors it is not possible to choose between managing ones own portfolio. They can hire a professional manager to do it. The professional managers provide a variety of services including diversification, active portfolio Management, liquid securities and performance of duties associated with keeping track of investors money.

3.4 NEED FOR PORTFOLIO MANAGEMENT

Portfolio management is a process encompassing many activities of investment in assets and securities. It is a dynamic and flexible concept and involves regular and systematic analysis, judgment and action. The objective of this service is to help the unknown and investors with the expertise of professionals in investment portfolio management. It involves construction of a portfolio based upon the investors objectives, constraints, preferences for risk and returns and tax liability. The portfolio is reviewed and adjusted from time to time in tune with the market conditions. The evaluation of portfolio is to be done in terms of targets set for risk and returns. The changes in the portfolio are to be effected to meet the changing condition. Portfolio construction refers to the allocation of surplus funds in hand among a variety of financial assets open for investment. Portfolio theory concerns itself with the principles governing such allocation. The modern view of investment is oriented more go towards the assembly of proper combination of individual securities to form investment portfolio. A combination of securities held together will give a beneficial result if they grouped in a manner to secure higher returns after taking into consideration the risk elements. The modern theory is the view that by diversification risk can be reduced. Diversification can be made by the investor either by having a large number of shares of companies in different regions, in different industries or those producing different types of product lines. Modern theory believes in the perspective of combination of securities under constraints of risk and returns.

3.5 OBJECTIVES OF PORTFOLIO MANAGEMENT

1. Security/Safety of Principal: Security not only involves keeping the principal sum intact but also keeping intact its purchasing power intact. 2. Stability of Income: So as to facilitate planning more accurately and systematically the reinvestment consumption of income 3. Capital Growth: This can be attained by reinvesting in growth securities or through purchase of growth securities. 4. Marketability: It is the case with which a security can be bought or sold. This is essential for providing flexibility to investment portfolio. 5. Liquidity i.e. nearness to money: It is desirable to investor so as to take advantage of attractive opportunities upcoming in the market. 6. Diversification: The basic objective of building a portfolio is to reduce risk of loss of capital and / or income by investing in various types of securities and over a wide range of industries. 7. Favorable tax status: The effective yield an investor gets form his investment depends on tax to which it is subject. By minimizing the tax burden, yield can be effectively improved.

3.6 PORTFOLIO MANAGER

Only those who are registered and pay the required license fee are eligible to operate as portfolio managers. An applicant for this purpose should have necessary infrastructure with professionally qualified persons and with a minimum of two persons with experience in this business and a minimum net worth of Rs. 50lakhs. The certificate once granted is valid for three years. Fees payable for registration are Rs 2.5lakhs every for two years and Rs.1lakhs for the third year. From the fourth year onwards, renewal fees per annum are Rs 75000. These are subjected to change by the S.E.B.I. The S.E.B.I. has imposed a number of obligations and a code of conduct on them. The portfolio manager should have a high standard of integrity, honesty and should not have been convicted of any economic offence or moral turpitude. He should not resort to rigging up of prices, insider trading or creating false markets, etc. their books of accounts are subject to inspection to inspection and audit by S.E.B.I. The observance of the code of conduct and guidelines given by the S.E.B.I. are subject to inspection and penalties for violation are imposed. The manager has to submit periodical returns and documents as may be required by the SEBI from time-to- timePortfolio risk can be divided into two groups- diversible risk and non-divisible risk. Diversible risk arises from companys specific factors. Hence, such risk can be diversified by including stocks of other companies in the portfolio. Non-divisible risk arises from the influence of economy wide factors which affect returns of all companies; investors cannot avoid the risk arising from them. Often investors tend to buy or sell securities on casual tips, prevailing mood in the market, sudden impulse, or to follow others. An investor should investigate the following factors about the stock to be included in his portfolio.

3.7 PORTFOLIO MANAGEMENT IN INSURANCE

When economic conditions become more challenging, organizations often have fewer resources to deploy on new business or change projects and programmers, reducing the number of such initiatives they can undertake. However, at such times, the projects and programmers they do invest in are often more critical, since they may be essential to deliver efficiency savings, sustain revenue or improve aspects of performance on which the survival of the organization can depend. The current turbulent economic conditions appear to have caused increasing adoption of project portfolio management (PPM) by organizations. PPM can be defined as: managing a diverse range of projects and programmers to achieve the maximum organizational value within resource and funding constraints, where value does not imply only financial value but also includes delivering a range of benefits which are relevant to the organizations chosen strategy What is Portfolio? Portfolio refers to invest in a group of securities rather to invest in a single security. Dont Put all your eggs in one basket Portfolio help in reducing risk without sacrificing return. Portfolio Management Portfolio Management is the process of creation and maintenance of investment portfolio. Portfolio management is a complex process which tries to make investment activity more rewarding and less risky. Major tasks involved with Portfolio Management1. Taking decisions about investment mix and policy2. Matching investments to objectives3. Asset allocation for individuals and institution4. Balancing risk against performance Phases of Portfolio Management Portfolio management is a process of many activities that aimed to optimizing the investment. Five phases can be identified in the process:2. Security Analysis.3. Portfolio Analysis.4. Portfolio Selection.5. Portfolio revision.6. Portfolio evaluation.Each phase is essential and the success of each phase is depend on the efficiency in carrying out each phase. Security analysis is the initial phase of the portfolio management process. There are many types of securities available in the market including equity shares, preference shares, debentures and bonds. It forms the initial phase of the portfolio management process and involves the evaluation and analysis of risk return features of individual securities.
According to a survey of insurance companies conducted by the Insurance Asset Outsourcing Exchange, approximately two-thirds of the insurance companies that responded outsource some or all of their asset management. An effective

investment operation requires more than just a few knowledgeable people, but instead, in many cases, an extensive, specialized staff and systems. This staff needs expertise covering a broad range of investment disciplines and market sectors that could include, but is not limited to, corporate bonds, residential mortgage-backed securities (RMBS), asset-backed securities, commercial mortgage-backed securities (CMBS), equities, tax-exempt securities and derivatives. An insurer that intends to have a diversified portfolio across different asset classes needs sufficient size in invested assets to economically justify the formation of even a modest size internal investment operation. Without that size, the investment managers operation would be inherently limited in breadth and depth. The internal manager would not be able to economically offer a broad range of investment capabilities covering a wide variety of asset classes

4 Finding And Analysis

4.1 Benefits of portfolio management in insurance

There is large number of benefits of Portfolio Management in insurance that can provide high value returns in case it is performed on regular basis and implemented properly. There are many companies that aimed to utilize their management efforts on balanced project portfolio for achieving optimal performance and returns for the entire portfolio. Maximize overall returns The proper portfolio management ensures the proper mix of projects for achieving the maximum overall returns. The project portfolio comprises of projects that provide values that differ widely from each other. The projects in the portfolio vary in terms of following factors. Short- and long-term benefit Synergy with corporate goals Level of investment By considering all these factors, PPM focuses on optimization of the returns of the entire portfolio by doing the following activities. Executing the most value-producing projects Directing the funds towards worthy initiatives Eliminating the redundancies between projects Saving time and costs Balancing the Risks posed by Projects The PPM involves the balancing of the risks posed by the projects in the portfolio. The companies should evaluate and balance the projects risks in their portfolios for minimizing the risks and maximizing the returns by diversifying portfolio holdings.

A traditional portfolio may minimize the risk and protect principal; however it also limits the prospective returns. On the contrary, the hard-line project portfolio may provide greater chances of good returns however it also poses considerably higher risk of failure or loss. PPM balances the risks with potential returns by diversifying the project portfolio of the companies. Apart from these objective there are more benefits which are as follows

Develop the financial and statistical skills necessary for the management of an insurance portfolio Understand the product life cycle as applied to insurance Identify non-performing segments within a portfolio Build strategies to refocus an ailing insurance portfolio Develop a view of a portfolio as a whole, rather than a case-specific perspective Receive a CD-ROM containing notes and fully working tools

4.2 Disadvantages of port folio management in insurance

5 Field Study Case study

Portfolio Management Lets face it, Life Insurance products are confusing. Do you know what questions to ask ahead of time? Do you know what the answers mean? Which data is correct and which is just plain wrong? What is guaranteed and what is projected? Can you imagine a multi-million dollar investment portfolio which has not been reviewed for years? People strive to manage their investments carefully but, what about a multi-million dollar life insurance portfolio? Often, the policies get tossed in a drawer or file and are not reviewed for many years.

How Confident Are You? Do you know? If your life insurance is cost effective? If your life insurance is tax effective? If your life insurance policies will be in force when they are needed for a death benefit? If the amount of life insurance is appropriate for your current needs?

The Life Insurance Portfolio Management System How It Works

The process starts with a no cost, no obligation meeting. We will do an initial review of your existing policies and recent annual statements. There are two components to the Life Insurance Portfolio Management System:

 The Life Insurance Portfolio Management ReviewThe Life Insurance Portfolio Management Analysis This analysis is a combination of life insurance tax analysis and life insurance cost analysis. To begin the Life Insurance Portfolio Management Analysis, we consult with you, your legal advisor and your tax advisor to understand the goals for your life insurance portfolio as a portion of your estate or business plan. In our exclusive six-step evaluation we: Help you determine your insurance needs and objectives. Identify potential policy or tax problems with your existing life insurance in light of your current needs and objectives. Gather and evaluate all of the available data on your current policies. Compare your existing policy costs with other life insurance alternatives. Prepare a written report analyzing your current policies, listing and quantifying potential problems, identifying alternatives and recommending solutions. Assist in the implementation of selected improvements.

The Life Insurance Portfolio Management Review The Life Insurance Portfolio Management Analysis provides your baseline information. The Life Insurance Portfolio Management Review is a periodic evaluation of your policies based upon actual policy performance, not just projections. Your actual policy performance is measured against your baseline information. This step is especially important to measure the ongoing performance of cash value policies. No Savings No Fee If we cannot provide recommendations for a decrease in cost or an increase in after tax value to you or your beneficiaries, there is no charge for our Life Insurance Portfolio Management Analysis. This is our guarantee to you.

A CPA and attorney asked us to review their clients business and personal life insurance. The client was paying over $150,000/year in premiums and over $60,000/year in interest on life insurance policy loans in excess of $1,000,000.

As A Result Of Our Life Insurance Portfolio Management Analysis

Approximately half of the clients life insurance was restructured to continue without any policy loans or future premium payments.

The other half of the clients life insurance was replaced with new, lower premium life insurance structured to be more tax effective. The client more than doubled the after tax value of their total life insurance for their family and business. All other needed life insurance was restructured to continue without any policy loans or future premium payments.

All other unneeded life insurance was eliminated, erasing all other policy loans. Even with the clients increase in life insurance, the clients business saved over $150,000/year in after tax cash flow.

Chapter No. 6

CHALLENGES PORTFOLIO MANAGEMENT IN INSURANCE

Insurance companies run into several challenges as they manage their portfolios and when they seek to optimize the deployment of their capital. In establishing a risk tolerance threshold for their firms, insurance company risk managers need to measure their portfolios against established risk tolerances. To do this effectively, they need metrics based on: Pre-tax operating income, or an acceptable loss of earnings or loss of surplus threshold Probable maximum loss (PML) for a given confidence level or a maximum foreseeable loss (MFL) Changes in BCAR results or other rating agency-focused thresholds Some risks held in insurers portfolios, of course, are un -modelled, which makes it quite difficult to hedge them effectively. Nonetheless, they must be addressed to ensure the appropriate management of capital. Traditionally un-modelled risks include flood and contingent business interruption Additionally, the implications for residual markets on catastrophe loss potential must be considered. There are constraints on data completeness and accuracy, which lead to modeling deficiencies and introduce more risk into a portfolio that cannot be hedged optimally. To mitigate the effects of these factors, risk managers need to consider how much data deficiencies related to a particular risk could impact the portfolio and the methods that could be used to measure changes in data quality over time. The situation can be complicated further by the tendency of personal and commercial lines business units in large companies to operate separately but write business in the same geographical locations, which can create friction for reinsurance costs and severity drivers. On the other hand, efforts to manage catastrophe exposure thoroughly can constrict agents and underwriters located in offices in high catastrophe risk areas.

Even modeled risks have their limitations. Catastrophe models are not exact, and they do evolve. Sometimes, the fastest change to a portfolio comes not from any action taken by an insurance company: rather, its the result of a model update. This can have implications for reinsurance costs, rating agency perception of a portfolio and the firms expected profitability - not to mention its ability to retain current clients and attract new ones in the future. The other challenge regarding catastrophe models is the reason why models change, specifically the continual improvement of underlying deficiencies and inaccuracies. As shortcomings are remedied through innovation and an increase in the industrys institutional knowledge, the outcome can impact the capital allocation and risk management decisions of insurers of all sizes. However, the pace of change in recent years can present perceptions of instability in underwriting approach and philosophy. Market forces cause companies almost to live by model output. Used prudently, catastrophe models with multiple views of risk, in conjunction with adjunct business plans where models seem to be at odds with risk management knowledge and underwriting experience, can inform the capital management process and deliver actionable intelligence. That intelligence can be used in value-accretive decision-making. Further, insurers need to ensure rates remain adequate, determining (and obtaining approval for) rates that cover reinsurance costs, expenses and expected catastrophe and attritional losses -and deliver a profit. In the process of doing so, insurers need to figure out which geographic areas and lines of business offer the best (and worst) return on capital. Where returns are deficient, they need to ascertain the impact to the company and determine what steps it is willing to take either to improve financial results or accept degraded performance. Surrounding the set of alternatives open to insurers are regulatory constraints. Risk and capital management decisions as well as rates are subject to prevailing laws and rules. Rate approvals, non-renewal restrictions (e.g., in New York) and mandated premium credits for mitigation features, which may be too generous to support the cost of writing the policy otherwise (e.g., in Florida), must be factored into modeling and portfolio analysis efforts. The constraints will affect the overall risk profile and tolerance of a carrier.

7 Conclusion

I can conclude from this project that portfolio management has become an important service for the investors to identify the companies with growth potential. Portfolio managers can provide the professional advice to the investors to make an intelligent and informed investment. Portfolio management role is still not identified in the recent time but due it expansion of investors market and growing complexities of the investors the services of the portfolio managers will be in great demand in the near future. Today the individual investors do not show interest in taking professional help but surely with the growing importance and awareness regarding portfolios managers people will definitely prefer to take professional help. Insurance companies, by their very nature, accumulate substantial amounts of cash that are used to purchase invested assets. Assets accumulated by insurers include those associated with the companys policyholders surplus (or capital), as well as assets that support the insurance companys policy reserves, which are used to pay policyholder obligations as they become due. The nature and size of an insurers invested assets vary substantially depending on the specifics of the insurer. Life insurance companies typically accumulate the largest dollar amount of invested assets, because of the asset intensive nature of their products, such as life insurance and annuities. Assets of life insurers are primarily invested in medium- and longer-term taxable fixed-income investment. Property/casualty insurers typically have a relatively higher percentage of their assets associated with the companys policyholders surplus (capital) a considerably smaller dollar amount of total assets than life insurers and can

benefit from use of tax-favoured investments such as tax-exempt bonds. Still other kinds of insurance companies (such as reinsurers, title insurance companies and health insurers) have their own set of unique investment-related characteristics and needs. The investment portfolio of every insurer must be tailored to satisfy that specific insurers complex and ever-changing investment requirements.

Chapter No.8

Bibilography

Environmental Function And Management Study Financial market

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