Page 77 - Risk Management in current scenario

X How much money you will be kept in the short term assets to
maintain liquidity?

In the process of purchasing the asset, there are certain investment
practices followed to answer the above question and do the assets and
liability management.
X Nature of liability: There are three types of liabilities Guarantees,
Discretionary and Linked; the first question to answer is, in which assets
classes, the investment will take place. It depends on the nature of
liabilities, that is, what is promised to the customers. There are
basically three types of liabilities/products within the insurance
companies. One of traditional non-par products where maturity
guarantees are given. For example if a product has promised to pay
Rs.500,000 after the end of the term of the product say 20 years, the
insurance company is to pay Rs.500,000 after the end of 20 years
whatever may happen to interest rate. These are maturity guarantees.
For such guaranteed nature of the products, the investment is made
in Government bonds/Corporate bonds given due consideration to
regulatory guidelines on the mix between Government bonds and
corporate bonds.

X The second nature of liabilities or products, is a par product which
participates in the bonus distribution on annual basis. In these
products, if company is to pay Rs.500, 000 at the end of the 20 years,
the initial benefit will be of say Rs.300, 000 and rest Rs.200,000 will
be paid in a form of bonus which will be given over the period of 20
years on annual basis. Such bonuses are called discretionary benefits
as originally there is not part of guarantees. To maximize the bonuses
to the customers, insurance company may invest this part of premium
in more risky assets such as equities, while for the guaranteed part of
liability; they will invest in Government or in corporate bonds.

X The third part of nature of liabilities or products prevalent in the
market are linked business or unit linked business where customer
chooses the fund where he is to invest, in this case, the investment

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