ALL ABOUT PRODUCT DESIGNING OF LIFE INSURANCE CORPORATION OF INDIA

“all about product designing of Life Insurance Corporation of India”

Life Insurance Corporation of India or simply known as LIC is an Indian company that deals in insurance and investments. This largest company of insurance is an Indian state owned company and has its headquarter in Mumbai, India. It is the largest insurance company in India with an estimated asset value of ₹1560482 crore (US$230 billion). As of 2013 it had total life fund of ₹1433103.14 crore with total value of policies sold of 367.82 lakhs that year. The Life Insurance Corporation of India was founded in 1956 when the Parliament of India passed the Life Insurance of India Act that nationalized the private insurance industry in India. Over 245 insurance companies and provident societies were merged to create the state owned Life Insurance Corporation.

Product in the Marketing mix of LIC

LIC- Life Insurance has designed several products in accordance with the requirements of the common people. Insurance is mainly taken out with the purpose of providing for the family members in case of death by natural causes or accident to the breadwinner of the family. Life insurance corporate of India has business operations in foreign countries also. Life Insurance offers its customers various insurance products such as the following:-

Life Insurance
Investment Management
Health Insurance
Mutual Fund
Property Insurance
Auto Insurance
Home Insurance
Casualty Insurance
Liability Insurance
Credit Insurance

Besides this, various pension plans, annuities, group schemes, special plans and unit-linked plans are also in place for the benefit of consumers. LIC- Life Insurance has also launched several products especially for children, senior citizens, women and handicapped. LIC also has schemes for people who are on the borderline of poverty. Some products of the LIC are also available through online.

Place in the Marketing mix of LIC

As LIC- Life Insurance is a service industry, the distribution of its products and facilities is done through various channels – direct and indirect. Numerous routes are taken to reach the potential customers. The most important and basic channel member until this date has been the “Insurance agent”. Taking various innovative routes in order to reach the corner that is the farthest and remotest is the objective of the LIC. Physical distribution of the service products, which in this case is funds and support at the right time and place, is an important factor of marketing policy of LIC- Life Insurance.

The organization’s channel of distribution consists of agents, brokers, development officers, retail services related to finance, branch office, alliance with banks and distributors, corporate agencies and proper and well-maintained infrastructure. Presently LIC- Life Insurance distributive channel consists of numerous development officials, agents and service branches who are active participants. Presently the number of zonal offices LIC has is eight, divisional offices are 109, satellite offices is 992, branches is 2,048 and numerous corporate offices. It also has a network of corporate agents that are 242, individual agents that are 1,337,064, referral agents that are 79, brokers that are 98 and tie-ups with 42 banks.

Price in the Marketing mix of LIC

A suitable pricing policy is a very important factor in the successful running of an insurance company as it is the pricing policy that affects the sales volume of a company. Price is actually the valuation that is offered for the product by the offer. For any LIC- Life Insurance policy, the policyholder has to pay a premium that is paid either annually, half-yearly, quarterly or in some cases monthly. The management takes the decision of fixing the premium of every policy relating to a particular period.

A complete market analysis is done and information about various facts are collected like how much money can an individual afford for a particular scheme, and what is the economic and financial condition of the market at that particular time. This data helps in making the fair and reasonable pricing policies. The management also makes pricing decisions about the premium mode, premium level, investment return, loan interest and the commissions. If you compare LIC products with other insurance products, then you will find that LIC is very much a value for money product. With its excellent brand value, and service quality, a customer can get full value as per the price paid for an LIC product. The premium of LIC is much lower than other life insurance company for same sum assured and the returns of the LIC are better than any other life insurance companies.

Price

An amount of money charged for a product or service is price. Broadly it can be defined as the sum of the values that consumers exchange for the benefits of having and using the product or service. Price is an important element in the marketing mix that produces revenue. Price is also one of the most flexible elements of the marketing mix, which can be raised or lowered quickly. Firm's internal factors — marketing objectives, marketing mix strategy, costs and organization for pricing — influence its pricing decisions. The firm's or company's target market and positioning objectives determine the pricing strategy, which is affected by product / service design, distribution, and promotion decisions.

Costs help in deciding the floor of the company's price — the price must cover all the costs of making and selling the product, plus a fair rate of return. Common pricing objectives include survival, current profit maximization, market share leadership and product quality leadership. In order to coordinate pricing goals and decisions, a management must decide who within the management possesses the ability of deciding the price or influencing the pricing decisions. External factors that influence pricing decisions are the nature of the market and demand, competitor's price and offers, economy, reseller needs, and government actions.

Ultimately, the consumer decides if the company has set the right price. The consumer weighs the price against the perceived values of using the product. Demand and consumer value perceptions set the ceiling for prices. Consumers differ in the values they assign to different product features. They also compare a product's price with the prices of competitors, products. As a result a firm must learn the price and quality of competitors' offers and use them as a starting point for its own pricing.

Pricing approaches

A company or a firm can select one or a combination of three general pricing approaches: the cost-based approach (cost-plus pricing, break-even analysis, and target profit pricing), the value based approach and the competition based approach. Cost-based pricing sets prices based on the seller's cost structure. The value-based pricing relies on consumer perceptions of value to drive pricing decisions. Competition-based pricing sets prices based on what competitors are charging. Pricing is a dynamic process and companies design a pricing structure that covers all their products. They change this structure over time and adjust it to account for different customers and situations. Pricing strategies usually change as a product passes through its life-cycle. The company can decide on one of several price-quality strategies for introducing an imitative product, including premium pricing, economy pricing, good value, or overcharging. In pricing, it can follow a skimming policy (high pricing) or a penetrating policy of pricing (low pricing). Companies use a variety of price adjustment strategies to account for differences in consumer segments and situations by way of discount and allowance pricing, segmented pricing, — psychological pricing, promotional pricing, geographical pricing — FOB pricing, uniform-delivered pricing, zone pricing, basing-point pricing, freight-absorption pricing ; and, international pricing (global pricing).

Pricing in LIC :-

LIC observes the above principles and strategies in fixing its premium rates or price for its products or plans that depend upon the amount of sum assured as well as the age of the potential policyholders to meet the needs of different target segments who may have different levels of spending power. The policies concerning with 'with profit plans' are relatively high priced as compared to 'without profit plans'. The price is the key element of the marketing mix and it must be acceptable to target customers and it must reflect the other components of the mix accurately so that the profitable relationship may be maintained in view of the rendered services and the value attached to them by the service provider in correspondence with the customer's perception of value. And, LIC, for the above purpose, appoints an Actuary who deals with pricing decisions in regard with premiums and certifies that the premium rates charged by the company are adequate and fair. The Actuary determines the value of its net liability. He also ensures that the values of its assets are sufficient not only cover the value of the net liability but also to satisfy the solvency margin requirements. And, in this process, the pricing Actuary has to satisfy the needs and requirements of different functional units: marketing, agency, claims, finance, underwriting, investment and legal. He has to keep in mind their separate priorities also and their adjustable combination. The LIC considers the following factors before fixing the premium or price:

(1) Rate of mortality.

(2) Rate of Interest.

(3) Operational Expenses

(4) Margins.

(1) RATE OF MORTALITY

In deciding the premium or price, the LIC considers the rate of mortality, as the function of LIC is to eliminate risk or substitute certainty for uncertainty. The financial loss suffered by a few on account of some eventual death is covered by the LIC by distributing that equally among all people facing the risk and by the contribution of every one (every policyholder) to the common fund. And the measure of this contribution to the common fund is called the premium or price. The method of measuring the involved risk is worked out scientifically in order to determine the amount of each individual's contribution to the common fund. This measurement of risk is done by applying the following mathematical and statistical tools:

(i) Laws of Probability.

(ii) Laws of Large Numbers.

The LIC measures the risk factor with reference to mortality. At the same time, it co-relates the relationship between the rate of mortality and premium.

(i) LAWS OF PROBABILITY

The laws of probability are considered in estimating the likelihood of future events. The forecast is done by - Deductive reasoning — Conclusion drawn from the previous experience of whole or all and (b) Inductive reasoning — conclusion drawn from the previous experience based on individuals'. The deductive method is not a safe basis because of the limitations of human mind to identify all such causes. The inductive method is a safer basis for deciding premium or price and it can be applied to life insurance. The prediction of laws of probability becomes possible when the inductive reasoning is applied on the large number of lives at birth and at death — and when the mortality statistics is applied. The accuracy of mortality statistics depends on two factors: (1) estimates and (2) the number of units taken. The mortality statistics should be carefully scrutinized in order to avoid inaccuracies in the original data; and, the second factor is the number of units or trials undertaken.

(ii) LAWS OF LARGE NUMBERS

The laws of large numbers state that "the more the number of trials undertaken, the lesser the variation". The laws of numbers apply to life insurance and the future mortality is estimated on the basis of the past mortality data. Because of the theory of probability and the law of large numbers, it has been aptly said, "There is nothing more uncertain than life and nothing more certain than life insurance".

MORTALITY STATISCTICS

The two basic sources — the law of probability and the law of large numbers — of mortality statistics are population statistics — derived from census enumerations and the returns of deaths from registration offices, statistics derived from insured lives. Thus based on above, the mortality statistics represent the actual mortality of the period and the mortality statistics of insured lives tend to be more accurate. The mortality statistics remains based on the careful recording of the date of birth, gender lives. The mortality statistics is arrived at by presenting a mortality table that represents a record of mortality observed in the past and is arranged in a form to show the probabilities of death and survival at each separate age.

MORTALITY AND PREMIUM-LINK

There is a link or relationship between the rate of mortality and premium. In deciding the rate of premium in view of the mortality statistics, the LIC introduced single premium plan, Installment payment plan and Level-premium plan — called "Level Annual Premium System" or "Uniform Level Annual Premium System". Many individuals prefer installment payment plan. Mortality affects the premium rate.

RATE OF INTEREST

Interest is the second factor that affects premium rates. LIC invests the excess premium collected from the Level premium plan and the endowment plan and so in various investments and the earned income (out of these investments) is passed on to the policyholder, as the income belongs to them. This is done by discounting the premiums at a rate of interest. The higher the rate of interest earned, the lower will be the premium rate. The premium system based on rate of mortality alone is called the Natural Premium System and the premium calculated based on the combination of mortality rates and interest factor is called the Net premium.

OPERATIONAL EXPENSES

The third important factor that goes into the computation of premium is the expense factor. The contingency factor and the profit margin factor should be included in the expense factor. When these three are loaded together, the premium so arrived at is called the Gross or Office premium. The operational expenses — during the first year and the following years for the payment of commission to the agents, medical fee to the doctors etc — which are taken into account is fixing the premium are broadly categorized into three groups such as (1) premium related expenses, (2) policy related expenses and (3) the other expenditures, which are explained below —

(i) PREMIUM RELATED EXPENSES

Premium related expenses are concerned with three items: (a) commission to agents, (b) remuneration to those who recruit, train and organize the agency force — the Development Officers in LIC of India — and (c) expenses on promotion. It has been observed that the premium related an expense, with regard to above, during the first year is higher by 40 percent over the corresponding expenses during the subsequent years.

(2) POLICY RELATED EXPENSES

Administrative expenses are to be met by policy related expenses, which are done by two methods — (a) the policy fee method and (b) the average cost method. (a) The policy fee method is applied in the developed countries, like U.S.A. etc., where a certain calculated fee of similar amount is added to every policy of varying sum assured; thus, an equity is maintained among the policyholders. (b) The average cost method is applied in the developing countries, like India, where the LIC of India follows this method and adds average cost to the premium. If one compares the policy fee method and the average cost method, in the former loading for administrative expenses is done explicitly. The loading of expenses is not explicit in the average cost method but it is incorporated in the premium rate per thousand sum assured, so, high sum assured policies will be payable more towards administrative expenses than low sum assured policies. However, LIC provides some discount relief to high sum assured policies. This system has helped LIC in bringing it within the reach of poorer sections of the society.

(C) OTHER EXPENDITURES

In addition to the premium related expenses and policy related expenses, LIC has a lot of other additional expenses. The LIC spreads the higher expenses incurred in the first year uniformly over the entire term of policy. LIC should keep in mind about the legal provisions of the country regarding the expenses to be incurred; and, the Rule 17D of Insurance Act must be observed in maintaining the fixed ceiling placed on both first year expense ratio and renewal expense ratio — 90 percent and 15 percent respectively. Insurances — like LIC — make some provisions to meet contingencies that may adversely affect their financial position. But due to the development medical science and technology, the mortality rate has gone down and the insurers are not adversely affected. They have more income which they distribute among the policyholders, who go encouraged in for more insurance and serve as an advertisement for the public regarding the prosperity and good services of the insurance companies. Besides, to satisfy the wishes of profit minded business people, regular provision is made in the premium for definite scales of profit to be declared as bonus. Such premiums with definite provision for participation in the profits of the insurer are known as 'with profit premium'. All the same, insurers started providing margins in their 'without profit premiums' to meet contingencies.

ADEQUACY AND CONSISTENCY OF PREMIUMS

The calculation of premium is a complex task. It is not easy. Premium rates are said to be adequate, if actual experience regarding mortality, interest and expenses follows reasonably close to the inferences made in their calculation. An 'Appointed Actuary' does the works of pricing — or — fixing the premium rates of policies to suit the market scenario. If the adequacy is upset or is to be upset, the insurer should revise his calculation and change the rate of premium, which, in fact, should not be unusually heavy and beyond the reach of common man. The disaster that is to fall upon the insurer due to his wrong policy in the adequate rate of premiums should be avoided. Regular revision of the rate of premium is essential. The rates of premiums for the various classes should be consistent with benefits offered. Also,
premiums for approximately similar durations should be consistent with the difference in the types of benefits offered. Besides, the pricing Actuary, while designing the insurance products must take into considerations the company's ability to take risks and the need for insurance coverage in each particular market segment. He will have to consider the prevailing market interest rate and its future trends and other factors that are peculiar to the economy where the product is designed.

CALCULATION OF INSTALMENT PREMIUM

The premium paid in installment — monthly, quarterly, half yearly or yearly — is called installment premium — which is paid at intervals. The LIC based on the mode of payment of premium and also the amount of sum assured gives rebates and concessions to policyholders. It also collects
additional charges from policyholders who make premium payments on ordinary monthly installment basic. The rebates depend upon products approved by IRDAI and may vary plan to plan. The rebates and concessions given and the additional charges collected are shown here in the following table (b):

Table (b)

Example of Rebates and Extras on Mode of Payment

Sl. No.	Particulars	Extras and Rebates
1	Ordinary monthly	5% extra
2	Quarterly	Rebate- Nil
3	Half yearly	1.55% rebate
4	Yearly	3% rebate
5	Salary Saving scheme	Rebate- Nil

Conclusion The product designing in Life Insurance business are very important task and under the senior actuary actuarial team are designing the product. Product always design based on demand of the field force of the LIC of India. The products premium depends upon many factors which is take care by expert i.e. Appointed Actuary. The LIC collects additional charges basing on health status and level of danger in the occupation pursued by people. Besides, it also collects additional charges, if sufficient proof is not given regarding age. In the above table, health and occupational extras and age proof extras are not shown as they vary from person to person. Products cost depend upon so many factors as described above but out of them the - Laws of Probability and Laws of Large Numbers are two main part of defining products pricing. LIC of India servicing country from many decades and are present in every corner of the country because of their trust and plans which are fulfilling the desires of people. Products are the back bone of any company and the same formula applicable in life insurance sector too. Method of product designing and execution process and take care of every small and big things towards products are make LIC universal in the sector of Life Insurance. The market share of the LIC are 70 percent and including all life insurance company they are restricted in 30 percent that self shows quality of products and trust amongst people in India toward LIC.

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