Contents

S.No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Topics Contents Introduction Project Objectives Objectives of firm Capital Structure Cost of Capital Market Structure Office Location Product & Services Sales channels Assumptions Human Resources Department Administration & Finance Department Operations Department Actuaries Department Investments Department Agency Department Field Operations – Bancassurance Department Field Operations – Partner Distribution Department Information Technology Department Legal Department Marketing, Strategic Initiatives & Product Management Group Life Insurance Health Insurance Hybrid Policy Conclusion

Page No. 1 2 2 2 3 3 3 4 4 5 6 7 9 14 18 20 24 27 29 32 34 37 40 42 44 47

Page | 1

Introduction
Insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. It is the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. 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 the insured in the case of a large, possibly devastating loss. The insured receives a contract called the insurance policy which details the conditions and circumstances under which the insured will be compensated. Insurers make money in two ways: 1. Through underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks; 2. By investing the premiums they collect from insured parties.

Life Insurance
Life insurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a designated beneficiary a sum of money upon the occurrence of the insured individual's death or other event, such as terminal illness or critical illness. In return, the policy owner agrees to pay a stipulated amount called premium at regular intervals or in lump sums.

Health Insurance
Health insurance, like other forms of insurance, is a form of collectivism by means of which people collectively pool their risk, in this case the risk of incurring medical expenses. The collective is usually publicly owned or else is organized on a non-profit basis for the members of the pool. It may be purchased on a group basis or purchased by an individual and the covered groups or individuals pay a fee, premium, or tax to help protect themselves from unexpected healthcare expenses.

Project Objectives
The project entails the development of business model of a firm which provides following services:• • Life Insurance, and Health Insurance

In the project, these services have been implemented by dividing various processes in the firm into departments and then maximizing profits at each department level.

Objectives of Firm
The firm has the objective of Profit maximization. Page | 2

Capital Structure
• • The total capital required is 4000 Crores. The assumed Debt to Equity ratio is 1:3.

Cost of Capital
Risk free rate: Risk premium: Beta: Ke Kd: WACC: 8% 6% 0.8 8 + 0.6*6 = 11.6% 8% 11.6 * 0.75 + 8 * 0.25 = 10.7 %

Market Structure
• • The firm operates in oligopoly market with dominant firm (LIC). So, the firm is a price-taker. The firm has 15 competitors and this firm has 2.4% of the market share.

Company name
LIC ICICI Prudential Allianz Bajaj SBI Life HDFC Standard Birla Sunlife Reliance Life Pinnacle Insurance Ltd. Max New York OM Kotak AVIVA Tata AIG MetLife ING Vysya Shriram Life Bharti Axa Life Total

Market Share
75.00 3.30 3.10 2.90 2.70 2.60 2.50 2.40 1.80 1.30 0.70 0.50 0.40 0.30 0.30 0.20 100.00

Herfindahl's Index
5,625.00 10.89 9.61 8.41 7.29 6.76 6.25 5.76 3.24 1.69 0.49 0.25 0.16 0.09 0.09 0.04 5,686.02

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Office Location
• • • The Corporate office is located at Parel, Mumbai. The firm has four Head offices which are located at Delhi, Mumbai, Bangalore & Calcutta. Apart from head offices, the firm has 350 branches which are located at various tier-II and tier-III cities throughout the country.

Products & Services
The firm offers the following plans:• Pinnacle Life Insurance o Sampurna Jivan Policy o Sampurna Aadhaar Policy o Muskaan Policy o Sanjivani Policy o Samridhi Policy Pinnacle Life Insurance o Pinnacle Jivan Raksha

•

Sampurna Jivan Policy – In this policy the Pinnacle Insurance Company collects premium from the insured for whole life or till the time of his retirement and pays claim to the family of the insured only after his death. • • • • Insurance protection till age 85 More value for your money by way of High Sum Assured Rebate Get Sum Assured plus Bonuses in case of your unfortunate death Option to add two Riders – Critical Illness and Accidental Death Benefit and Total and Permanent Disablement Rider Policy Loan available after three full years premium payment

Sampurna Aadhaar Policy – In this policy the term of policy is defined for a specified period say
15, 20, 25 or 30 years. The Pinnacle Insurance Company pays the claim to the family of assured in an event of his death within the policy's term or in an event of the assured surviving the policy's term. • • • On maturity receive Sum Assured plus bonuses More Value for your money by way of High Sum Assured Rebate Choose to add the Benefit of three Riders-Reliance Term Life Insurance Benefit Rider, Reliance Critical Conditions Rider and Reliance Accidental Death and Total and Permanent Disablement Rider Choose to avail of Policy Loan after three years

•

Pinnacle Jivan Raksha – Pinnacle Health Insurance presents a very innovative plan for the entire family including children, dependant parents and in-laws too. Pinnacle Health Insurance cares for you and assures to stand by you during those difficult times of physical and mental stress – so that Page | 4

you are able to be hassle free during your & your family's health related emergencies by providing you with a 3 year health cover with guaranteed renewability and guaranteed renewable discount plus a guarantee of fixed premium for 3 years. We also cover Pre-existing illnesses after 4 continuous years of membership and Maternity Benefit under family floater cover. You and your family members will have guaranteed coverage up to the age of 75 years (21 years in case of children) irrespective of claim experience and change in your health condition. • • • • • • • • • • • Reimbursement of all admissible medical expenses when you are in hospital. Maternity Benefit (available under family floater cover) 150 Day Care Treatment covered Pre & Post hospitalization expenses are covered. Income Tax benefit under section 80(D) Entire family covered under a single umbrella of protection. Cashless facility at 4000 hospitals across the country. Sum Insured is increased by 5% without paying any extra premium, for every claim free year. Guaranteed fixed rate of premium for 3 years. Renewal discount of 15% on premium at the time of term renewal as a token of appreciation for your continued faith in us. Wide range of Sum Insured ranging from 2 lakhs to 10 lakhs.

Premium Schedule for various Policies Name of Policy Sampurna Jivan Policy Sampurna Aadhaar Policy Muskaan Policy Sanjivani Policy Samridhi Policy Total Premium 24,618 23,429 22,605 19,600 21,307 111,559 No. of Policies sold 100,000 135,000 245,000 230,000 290,000 1,000,000 Revenue per Policy 2,461,830,000 3,162,915,000 5,538,225,000 4,508,000,000 6,179,030,000 21,850,000,000 Sum Assured 1,350,000 1,000,000 950,000 825,000 875,000 5,000,000

Sales Channels
The firm has the following sales channels:• • • Direct selling Agents Bancassurance Partner Distribution

The sale of Insurance product will accounted as the sales for the company. The revenue will be accounted from the premium received from the policy holders. Business generated by agents is 67%. Partner distributors make 28% of the business. Bancassurance generates 6% of the business.

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Assumptions
Life Insurance The assumption for the Policies sold, Average premium, Premium collected and Commission paid through different distribution channels for Life Insurance are given below:Policies sold 600,000 50,000 350,000 1,000,000 Average Premium 24,000 23,000 18,000 21,850 Premium Collected 14,400,000,000 1,150,000,000 6,300,000,000 21,850,000,000 % of business 66 5 29 100 Commission % paid Commission 6,955,000,000 48 345,000,000 30 1,500,000,000 8,800,000,000 24 40

Agents Banks Private Tie-ups Total

Health Insurance The assumption for the Policies sold, Average premium, Premium collected and Commission paid through different distribution channels for Health Insurance are given below:Policies sold 320,000 50,000 30,000 400,000 Average Premium 2,500 2,450 2,200 2,471 Premium Collected 800,000,000 122,500,000 66,000,000 988,500,000 % of business 81 12 7 100 Commission % paid Commission 152,000,000 19 24,500,000 20 9,900,000 186,400,000 15 19

Agents Banks Private Tie-ups Total Total

Adding up the above mentioned figures, we get the Policies sold, Premium collected and Commission paid through different distribution channels for the firm (i.e. for both Life & Health Insurance). These are given below:Policies sold 920,000 100,000 380,000 1,400,000 Premium Collected 15,200,000,000 1,272,500,000 6,366,000,000 22,838,500,000 % of business 67 6 28 100 Commission % paid Commission 7,107,000,000 47 369,500,000 29 1,509,900,000 8,986,400,000 24 39

Agents Banks Private Tie-ups Total

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Human Resources
The HR Department will be looking after the Human Resource Management for the Organization. Man power is an integral part of any organization. The running of an organization of any size cannot be ever done well by one man alone. It can only be done efficiently by a team of men acting together. HR department will play an important role in progress and accomplishment of the organization's goals. Human Resources may set strategies and develop policies, standards, systems, and processes that implement these strategies in a whole range of areas. The following are typical of a wide range of organizations: • • • • • • • Recruitment, selection, and on-boarding (resourcing) Organizational design and development Business transformation and change management Performance, conduct and behavior management Industrial and employee relations Compensation, rewards, and benefits management Training and development (learning management)

Implementation of policies, processes or standards may be directly managed by the HR function itself, or the function may indirectly supervise the implementation of such activities by managers, other business functions or via third-party external partner organizations. After working out the costs of outsourcing and managing the HR department in-house, we find that it will be more profitable to manage the HR department in-house as the cost of outsourcing is more than the cost of keeping an in-house HR department. The same has been shown in the tables below: The cost drivers for the HR department (when considered In-house) are:Cost (Rs/per annum) 1,800,000 1,000,000 700,000 400,000 220,000 25,917 Total Cost (Rs/per annum) 1,800,000 5,000,000 3,500,000 4,000,000 13,200,000 2,099,277 29,599,277 2,466,606

Particulars Vice President HR HR Head Senior HR Manager HR Manager HR Executives Admin costs Total Cost (per annum) Total Cost (per month)

Number 1 5 5 10 60 81

The cost drivers for the HR department (when considered Outsourced) are:Cost (Rs/per annum) 40,000,000 Total Cost (Rs/per annum) 40,000,000 40,000,000

Particulars Outsource: Mafoi Total Cost (per annum)

Number 1

Page | 7

No. of policies sold in an year 1,400,000 Total Cost 29,599,277 Cost per policy 21.14 Total Revenue 40,000,000 Revenue per policy 28.57

The schedule for Marginal Costs is as given below:No. of policies 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700 Costs 29,588,197 29,589,777 29,591,177 29,592,467 29,593,857 29,595,397 29,597,177 29,599,277 29,601,587 29,604,137 29,606,847 29,609,737 29,612,847 29,616,137 29,619,547 Difference 1,770 1,580 1,400 1,290 1,390 1,540 1,780 2,100 2,310 2,550 2,710 2,890 3,110 3,290 Marginal Cost 17.70 15.80 14.00 12.90 13.90 15.40 17.80 21.00 23.10 25.50 27.10 28.90 31.10 32.90

The schedule for Marginal Revenue is as given below:No. of policies 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700 Revenue 39,985,300 39,987,400 39,989,500 39,991,600 39,993,700 39,995,800 39,997,900 40,000,000 40,002,100 40,004,200 40,006,300 40,008,400 40,010,500 40,012,600 40,014,700 Difference 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 Marginal Revenue 21 21 21 21 21 21 21 21 21 21 21 21 21 21

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In the Human Resource department, initially with the increase in the number of policy output, the Marginal Cost would come down till the level where MC=MR. Post this the MC would rise since the staff has been stretched to the limit, and after this level the inefficiencies would increase from the staff. To process the increase level, we need to hire new staff which is not well trained resulting in inefficiency again.
40 35 30

Revenue, Costs

25 20 15 10 5 0 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700 Marginal Cost Marginal Revenue

No. of Policies
So, we see that MR=MC=Rs.21 happens at a point where 1,400,000 policies are sold. Not only is the MR=MC, but also the second order condition of “profit maximisation” that Slope of MC > Slope of MR is being fulfilled here.

Administration & Finance
The Administration and Finance department will be looking after the day to day support system for the organization. Also this department would take care of the real estate needs, working capital management, utilities required(electricity, telephones, stationary etc) for the smooth functioning of the various departments in particular and the organization on the whole. Also the financial records of the company would be managed by this department. In short this department is detrimental to the smooth state of affairs and in short it may be called as the backbone of the organization as any shortcomings would result in the operations coming to standstill. Following functions will be undertaken by the department • • • • • • Arranging for the connectivity requirements both intra and inter organization Arrangement of the travel and stay for the company executives Arrangement for Maintenance of the Office premises Internal Communication Managing various utility services required Day to day Scheduling of the office staff Page | 9

• • • •

Managing other support systems Managing the account system of the organization Management of accounts payable and accounts receivables Cash Management

This department is concerned with the various Administration related expenses in the firm. This department takes care of the following expenses of the firm:• • • • • • • • • • • Employees salaries Rental expenses Electricity costs Maintenance costs – outsourced Stationary Costs Telephone expenses Broadband expenses Postal charges Security – outsourced Travel Power Backup – outsourced Cost (Rs/per annum) 700,000 400,000 225,000 Total Cost (Rs/per annum) 700,000 2,000,000 79,875,000 0 82,575,000 6,881,250

Particulars Facility Manager(At Corporate Head Office) Supervisors Unit Managers Admin costs Total Cost (per annum) Total Cost (per month)

Number 1 5 355

The details of the various expenses are as follows:COSTS Rental Expenses Stationary Expenses Printing Expenses Maintenance Costs Telephone Charges Broadband Charges Electricity Costs Security Expenses Travel Expenses ADMIN Staff Remuneration Postage Expenses ADMIN Costs (Rs. per person) 1344 480 3050 2700 7700 624 3312 77 5350 1,180 100 25917

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The above mentioned costs are justified as follows:(Rs. per person) Rental Expenses Space required per person (in sq. ft) Avg. Rent (per sq. ft) Cost of space per person (Rs.) Stationary Expenses Stationary Expenses (Rs.) Printing Expenses Printing Expenses (Rs.) Maintenance Costs Maintenance Cost (Rs. per month) Maintenance Cost (Rs. per year) Telephone Charges Fixed phone (Rs. per month) Mobile phone (Rs. per month) Total telephone expenses (Rs. per month) Total telephone expenses (Rs. per year) Broadband Charges Broadband Charges (Rs. per month) Broadband Charges (Rs. per year) Electricity Costs Units consumed by AC used in 150 sq.ft. in 22 days Units used up by 4 lighting fixtures in 22 days Units used up by 15 PCs in 22 days, if run for 4 hours daily Total Units in a month i.e. for 22 days Rate per unit of electricity (Rs. Per unit) Total cost of electricity No. of persons sitting in this space Net Electricity expenses (per person) Electricity Costs (per year) Security Expenses Security guards required for Branches Security guards required for Head offices Security guards required for Corporate Office No. of branches No. of Head offices Total Security persons reqd. Monthly Pay 12 112 1344

480

3050

225 2700

225 417 642 7704

52 624

415 15 260 690 6 4140 15 276 3312

2 12 22 350 4 770 7000 Page | 11

Total Security charges per month Security charges (per person) Travel Expenses Travel Expenses (per person per year) Postage Expenses Postage and courier expenses

5390000 77

5350

100

The admin expenses of all departments as per above mentioned costs is summed up as follows:Departments HR Operations Actuary Investment Agency Bancassurance Partner Distribution Information Technology Legal Marketing Costs 2,099,277 100,687,545 518,340 9,796,626 1,414,679,445 56,628,645 129,585 881,178 259160 1,658,688 Total 1,587,338,489 No. of Policies 1,400,000 Admin Cost per policy 1,134

The schedule for Marginal Cost is as given below:No. of policies 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700 Costs 1,586,693,489 1,586,780,489 1,586,855,489 1,586,926,489 1,587,011,489 1,587,108,489 1,587,218,489 1,587,338,489 1,587,470,489 1,587,615,489 1,587,776,489 1,587,950,489 1,588,145,489 1,588,355,489 1,588,583,489 Difference 100,000 87,000 75,000 71,000 85,000 97,000 110,000 120,000 132,000 145,000 161,000 174,000 195,000 210,000 Marginal Cost 1,000 870 750 710 850 970 1,100 1,200 1,320 1,450 1,610 1,740 1,950 2,100

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The schedule for Marginal Revenue is as given below:No. of policies 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700 Revenue 167,999,160,000 167,999,280,000 167,999,400,000 167,999,520,000 167,999,640,000 167,999,760,000 167,999,880,000 168,000,000,000 168,000,120,000 168,000,240,000 168,000,360,000 168,000,480,000 168,000,600,000 168,000,720,000 168,000,840,000 Difference 120,000 120,000 120,000 120,000 120,000 120,000 120,000 120,000 120,000 120,000 120,000 120,000 120,000 120,000 Marginal Revenue 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200

In Administration & Finance department, MC would fall till the optimum level is reached. Post this as the level of output rise the MC would start rising again as either the staff employed need to work extra or they would work inefficiently. Also expenses of the various utilities consumed would rise. If new staff is hired, inefficiency would result on account of not being trained properly. Also new staff would result in more space requirement resulting in cost escalation.
2500 2000

Revenue, Costs

1500 1000 500 0 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700

Marginal Cost Marginal Revenue

No. of Policies
So, we see that MR=MC=Rs.1200 happens at a point where 1,400,000 policies are sold. Not only is the MR=MC, but also the second order condition of “profit maximisation” that Slope of MC > Slope of MR is being fulfilled here. Page | 13

Operations
Operation department handle the following tasks:• • • • • • • • • Policy issuance Underwriting Renewals Claims – looks after claims made by the policy holders Training Business Recovery FINOPS - Financial Operations Customer Service POS - Policy Owner Services - change some details in policy, change address etc

Each branch office has 3-4 people of the Operations dept. These people are employed to do the basic jobs. Some of these people are on the rolls of the company and some of the tasks are outsourced as outsourcing saves costs. The firm outsources the tasks for half the price it has to pay for its own employees. Also outsourced person doesn’t have an increment each year like an employee of the firm. But, at the same time, outsourced people are not that reliable. So, there is a tradeoff between the two. Policy issuance- This is basically concerned about the actual issuance of policy to the owner which consists of documentation and sending across the actual policy statement. Renewals focus on the renewal of the policies of existing policy owners as and when it is due. Recovery Dept focuses on recovering money paid out on claim, if possible. This includes the following kind of recoveries:• • Overpayments - This is when an incorrect amount is paid on a claim. Second Injury funds - When an employer hires an employee with pre-existing disability and the employee gets hurt on job and his pre-condition makes the cost of claim substantially higher than what injury alone would have cost, then the insurance company can file with the govt.'s secondary injury fund to recover some of the money paid out as claim. Third party recovery - If work-related injury was the result of negligence of a third party, insurance company will seek to recover the money paid out as claim from the third party.

•

Underwriting Insurance underwriters evaluate the risk and exposures of potential clients. They decide how much coverage the client should receive, how much they should pay for it, or whether even to accept the risk and insure them. Underwriting involves measuring risk exposure and determining the premium that needs to be charged to insure that risk. The function of the underwriter is to acquire—or to "write"—business that will make the insurance company money, and to protect the company's book of business from risks that they feel will make a loss. In simple terms, it is the process of issuing insurance policies.

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Claims Claims as the name suggest takes care of all the claims made by the policy owners and then decide on the actual quantum that needs to be settled. An insurance claim is the actual application for benefits provided by an insurance company. Policy holders must first file an insurance claim before any money can be disbursed to the hospital or repair shop or other contracted service. The insurance company may or may not approve the claim, based on their own assessment of the circumstances. Individuals who take out home, life, health, or automobile insurance policies must maintain regular payments called premiums to the insurers. Most of the time, these premiums are used to settle another person's insurance claim or to build up the available assets of the insurance company. But occasionally an accident will happen which causes real financial damage, such as a automobile wreck or a tornado or a work-related accident. At this point the injured policy holder has the right to file an insurance claim in order to receive money from the insurance company. There are various means to file claims and the same could be carried out via agents and TPAs. A Third Party Administrator (TPA) is an organization that processes insurance claims or certain aspects of employee benefit plans for a separate entity. This can be viewed as "outsourcing" the administration of the claims processing, since the TPA is performing a task traditionally handled by the company providing the insurance or the company itself. Often, in the case of insurance claims, a TPA handles the claims processing for an employer that self-insures its employees. Thus, the employer is acting as an insurance company and underwrites the risk. The risk of loss remains with the employer, and not with the TPA. The employer may also contract with a reinsurer to pay amounts in excess of a certain threshold, in order to share the risk for potential catastrophic claims. An insurance company may also use a TPA to manage its claims processing, provider networks, utilization review, or membership functions. While some third-party administrators may operate as units of insurance companies, they are often independent. The insurance companies have hitherto been handling the claim rather than managing them. Typically this process involves – • • • • As soon as a claim is reported, the insurance company checks as to whether the cover was in force at the time of loss and whether the peril is covered under the policy. A surveyor is appointed who visits the spot, does the assessment and submits the report. Insurance company examines the report, calls for relevant supporting documents. On receipt of survey report and documents, the same are examined. The claim file is processed and settlement is offered.

The details on claims settled by the firm are given below:Particulars Policies sold No. of claims Average claim amount Total claim amount Life 1,000,000 80,000 85,000 6,800,000,000 Health 400,000 25,000 15,000 375,000,000 Total 1,400,000 105,000 100,000 7,175,000,000

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The cost drivers for the operations department (when considered In-house) are:Cost (Rs/per annum) 250,000 280,000 180,000 200,000 340,000 450,000 600,000 1,200,000 2,800,000 6,000,000 150,000,000 12,000,000 25,917 Total Cost (Rs/per annum) 175,000,000 196,000,000 126,000,000 140,000,000 102,000,000 270,000,000 90,000,000 36,000,000 11,200,000 6,000,000 150,000,000 12,000,000 100,687,545 1,414,887,545

Particulars Executives ( Policy issuance, Renewals ) Executives ( Financial Operations, Claims ) Executives ( Customer Service, POS ) Executives ( Claims ) Executives ( Underwriting ) Team Lead Managers Senior Managers Regional Head National Head - BOD Training - outsourced Business Recovery - outsourced Admin costs Total Cost (per annum)

Number 700 700 700 700 300 600 150 30 4 1 1 1 3,885

The cost drivers for the operations department (when considered Outsourced) are:Cost (Rs/per annum) 1 1 1 150,000,000 12,000,000 Total Cost (Rs/per annum) 1,900,000,000 150,000,000 12,000,000 2,062,000,000

Particulars Outsource Operational tasks Training - outsourced Business Recovery - outsourced Total Cost (per annum)

Number

Cost of in-house Training Cost of in-house Business recovery

180,000,000 15,000,000

Total costs 1,414,887,545 No. of policies sold in year 1,400,000 Total costs per year 1,011 Total revenue 2,095,000,000 Total revenue per year 1,496

The schedule for Marginal Cost is as given below:No. of policies 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 Costs 1,414,205,745 1,414,304,445 1,414,402,045 1,414,498,745 1,414,594,745 Difference 98,700 97,600 96,700 96,000 96,600 Marginal Cost 987 976 967 960 966 Page | 16

1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700

1,414,691,345 1,414,788,945 1,414,887,545 1,414,987,545 1,415,088,645 1,415,190,945 1,415,294,545 1,415,399,545 1,415,506,045 1,415,614,145

97,600 98,600 100,000 101,100 102,300 103,600 105,000 106,500 108,100

976 986 1,000 1,011 1,023 1,036 1,050 1,065 1,081

The schedule for Marginal Revenue is as given below:No. of policies 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700 Revenue 2,094,300,000 2,094,400,000 2,094,500,000 2,094,600,000 2,094,700,000 2,094,800,000 2,094,900,000 2,095,000,000 2,095,100,000 2,095,200,000 2,095,300,000 2,095,400,000 2,095,500,000 2,095,600,000 2,095,700,000 Difference 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 Marginal Revenue 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000

In Operations department, MC would fall till the optimum level (MC=MR) is reached as for the same amount of expenses the level of output is rising. Post this as the level of output rise the MC would start rising since there would be increase the claims and recovery needs to be strengthened. Also underwriting would require renewed effort. For all of this either the staff employed would be working beyond there limits as they need to work extra resulting in inefficiencies. Also expenses of the various utilities consumed would rise since existing manpower would be putting in extra hours. If new staff is hired, inefficiency would result on account of not being trained properly. Also new staff would result in more space requirement which would hike the costs again.

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1,120

Revenue,Costs

1,070 1,020 Marginal Cost 970 920 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700 Marginal Revenue

No. of Policies
So, we see that MR=MC=Rs.1000 happens at a point where 1,400,000 policies are sold. Not only is the MR=MC, but also the second order condition of “profit maximisation” that Slope of MC > Slope of MR is being fulfilled here.

Actuaries
The actuary department will be set up under Insurance operations. The Department will operate for both Life and Health Insurance The department will look after the actuarial requirement of the business. The basic function of the actuary will be: • • • Premium calculation and Policy formulation Valuation of the Policies Settlement amounts

The cost riders for the actuaries department (when considered In-house) are:Cost Total Cost (Rs/per annum) (Rs/per annum) 150,000 1,500,000 120,000 1,200,000 25,917 518,340 3,218,340 268,195

Particulars Actuaries Chartered Accountants Admin costs Total Cost (per annum) Total Cost (per month)

Number 10 10 20

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The cost riders for the actuaries department (when considered Outsourced) are:Cost Total Cost (Rs/per annum) (Rs/per annum) 5,000,000 5,000,000 5,000,000

Particulars Outsource: Inspiration Manpower Total Cost (per annum)

Number 1

No. of policies sold in an year Total Cost Cost per policy Total Revenue Revenue per policy

1,400,000 3,218,340 2.30 5,000,000 3.57

The schedule for Marginal Cost is as follows:No. of policies 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700 Costs Difference 3,217,425 160 3,217,585 135 3,217,720 110 3,217,830 100 3,217,930 110 3,218,040 135 3,218,175 165 3,218,340 200 3,218,540 230 3,218,770 260 3,219,030 290 3,219,320 320 3,219,640 350 3,219,990 380 3,220,370 Marginal Cost 1.60 1.35 1.10 1.00 1.10 1.35 1.65 2.00 2.30 2.60 2.90 3.20 3.50 3.80

The schedule for Marginal Revenue is as follows:Marginal Revenue 2 2 2 2 2 2 2 2 Page | 19

No. of policies 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000

Revenue 4,998,600 4,998,800 4,999,000 4,999,200 4,999,400 4,999,600 4,999,800 5,000,000

Difference 200 200 200 200 200 200 200 200

1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700

5,000,200 5,000,400 5,000,600 5,000,800 5,001,000 5,001,200 5,001,400

200 200 200 200 200 200

2 2 2 2 2 2

In Actuary department, MC would fall till the optimum level is reached since the manpower and every other utility remains the same. Post this as the level of output rise the MC would start rising again as firm might need to come up with new policies which would require the services of actuaries and for this either the staff employed would need to work extra resulting in inefficiencies. Also various utilities expenses would rise since existing manpower would be putting in extra hours. If new staff is hired, inefficiency would result on account of not being trained properly. Also new staff would result in cost escalation as Administration cost which is shared would increase (telephone, broadband, Maintenance, Stationary expenses etc.).
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700

Revenue, Costs

Marginal Cost Marginal Revenue

No. of Policies
So, we see that MR=MC=Rs.2 happens at a point where 1,400,000 policies are sold. Not only is the MR=MC, but also the second order condition of “profit maximisation” that Slope of MC > Slope of MR is being fulfilled here.

Investments
Investments is one of the most important, other than sales, revenue generating activity for any insurance company i.e. it is an important source of income for an insurance company apart from obligation as per IRDA. The important things that are kept in mind are: • Liquidity of the company is ensured Page | 20

• • •

We ensure that right amounts of cash resources are available in the right place, at the right time in such a way as to minimize exposure to interest/ exchange risks. We aim that returns on surplus funds are maximized We also try to minimize financial costs.

For the purpose of Investments (as it plays a crucial role in determining company’s success or otherwise), we have a separate Treasury Department, to take care of investment decisions. As per the IRDA guidelines, following investments will be taken into consideration:LIFE FUND GOVERNMENT SECURITIES GOVERNMENT SECURITIES / OTHER APPROVED SECURITIES (including (I) above) APPROVED INVESTMENT SUBJECT TO EXPOSURE NORMS (as in Schedule 1 ) a. Housing & Infrastructure b. i) Approved Investments ii) Other Investments (Not to exceed 15%)

(I) ( II ) ( III )

Not less than 25% Not less than 50%

Not less than 15% Not less than 35%

The amount of funds that have been invested amounts to 33,312,672 lakhs. Each associate manager manages about 500 Crore of the funds. The various investments made by the firm are as follows:Investments from Life Approved Investments (>=75%) Government Bonds 656,301,194 Corporate Bonds 758,443,423 Infrastructure Bonds 2,737,436,663 Equity 7,507,802,647 Money Market 2,134,946,986 Mutual funds 512,180,999 Deposit with Banks 120,776,958 Sub Total (A) 14,427,888,871 Current Assets: Accrued Interest Bank Balance Dividend Receivable Receivable for Sale of Investments Other Current Assets Appropriation Asset Less: Current Liabilities Payable for Investments from Health Total Investments

% Actual

29,691,246 68,599,344 34,312,189 79,275,677 123,842,386 286,128,323 339,655,053 784,746,915 96,585,588 223,153,583 23,171,209 53,535,299 5,463,983 12,624,113 652,721,654 1,508,063,254

4.00 4.63 16.70 45.81 13.03 3.13 0.74 88.04

108,320,589 290,781,488 14,250,087 28,699,475

4,900,453 13,155,034 644,678 1,298,372

11,322,121 30,393,697 1,489,479 2,999,789

0.66 1.77 0.09 0.18

-

-

-

-

0.75 Page | 21

Investments Other Current Liabilities Fund Mgmt Charges Payable Sub Total (B) Other Investments ( Slope of MR is being fulfilled here.

Agency
The agency department is one of the most important parts of the organization. The sheer number of employees is the testimony to it. Direct sales agents’ forms the front end of the insurance company. In Pinnacle Insurance Company limited the total number of agents is 50,000. These agents’ works totally on the commission basis and no fixed component is paid to them. They directly report to Assistant Sales Manager and Sales Manager. Their main purpose is to build relationships with customers and sell different policies to them. They are also required to leverage their network to make more and more sales. There are no compulsions on them to visit office on daily basis. In the office they are provided with shared work stations to access company MIS, internet, make sales calls etc. Each employee is given a specific target each month to meet. Commission for an agent varies from 5 to 30% depending upon the factors mentioned below: • • • • • No. of policies sold Type of plan Term of the policy First year Premium Riders – small plans which are clubbed with primary plan & give us more money on maturity

Page | 24

Each DSA is provided with a log-in ID. In the log-in ID they can access the detailed policies information, calculate premium and maturity value, and keep track of customer next premium collection date. They can also access the customer information, company mail, daily reporting and many other services. Strong MIS system helps Pinnacle Insurance Company limited in saving a lot printing and stationary cost. Each DSA is required to mail his daily sales report which is integrated to the organization wide MIS system. This ensures that the top management knows the total premium collected as and when the data is enters. To motivate the DSA, regular contest is organized. They can be branch wise, city wise, region wise, or nationwide. In total DSA contributes a total of 28% of the total premium collected. Two day training is provided to each new recruit. They are also required to pass the IRDA exam. Training is an important tool as it provide agents skills set and knowledge base to become a successful sales personnel. The detailed costing of the Agency department is given below: Cost (Rs/per annum) 90,000 875,000 1,750,000 2,250,000 3,000,000 4,000,000 11,000,000 25,917 Total Cost (Rs/per annum) 4,500,000,000 3,062,500,000 1,225,000,000 787,500,000 90,000,000 16,000,000 11,000,000 1,414,679,445 11,106,679,445 925,556,620

Particulars Direct Selling Agents Assistant Sales Manager Sales Manager Associate Partner Zonal Head Regional Head National Head - BOD Admin costs Total Cost (per annum) Total Cost (per month)

Number 50,000 3,500 700 350 30 4 1 54,585

Total business generated Total Profit

14,400,000,000 3,293,320,555

The costs for the department are divided in fixed and variable costs as follows:No. of policies sold in an year 1,400,000 Total Cost 11,106,679,445 Cost per policy 8000-11000 Fixed Cost 7,000 Variable cost 1000-4000

The Marginal Cost schedule is as follows:No. of policies 1,399,300 1,399,400 Costs 11,106,260,445 11,106,320,445 Difference 60,000 52,000 Marginal Cost 600 520 Page | 25

1,399,500 11,106,365,445 1,399,600 11,106,410,445 1,399,700 11,106,460,445 1,399,800 11,106,524,445 1,399,900 11,106,599,445 1,400,000 11,106,679,445 1,400,100 11,106,769,445 1,400,200 11,106,869,445 1,400,300 11,106,979,445 1,400,400 11,107,099,445 1,400,500 11,107,229,445 1,400,600 11,107,369,445 1,400,700 11,107,519,445

45,000 50,000 60,000 70,000 80,000 90,000 100,000 110,000 120,000 130,000 140,000 150,000

450 500 600 700 800 900 1,000 1,100 1,200 1,300 1,400 1,500

The Marginal Cost schedule is as follows:No. of policies 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700 Revenue 14,399,230,000 14,399,355,000 14,399,475,000 14,399,590,000 14,399,700,000 14,399,805,000 14,399,905,000 14,400,000,000 14,400,090,000 14,400,175,000 14,400,255,000 14,400,330,000 14,400,400,000 14,400,465,000 14,400,525,000 Difference 125,000 120,000 115,000 110,000 105,000 100,000 95,000 90,000 85,000 80,000 75,000 70,000 65,000 60,000 Marginal Revenue 1,250 1,200 1,150 1,100 1,050 1,000 950 900 850 800 750 700 650 600

In Agency department, MC would keep on falling till the optimum level is reached since the manpower and every other utility remains the same i.e. for the same level of expense the level of output would rise resulting in fall in MC. Post this as the level of output rise the MC would start rising again as either the staff employed would need to work extra resulting in inefficiencies.. If new agents are hired, inefficiency would result on account of not being trained properly. Also if new agents are hired, this would result in cost escalation as Administration cost which is shared would increase (telephone, broadband, Stationary expenses etc.).

Page | 26

1,800 1,600 1,400

Revenue,Costs

1,200 1,000 800 600 400 200 0 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700 Marginal Cost Marginal Revenue

No. of Polices
So, we see that MR=MC=Rs.900 happens at a point where 1,400,000 policies are sold. Not only is the MR=MC, but also the second order condition of “profit maximization” that is Slope of MC > Slope of MR is also being fulfilled here.

Bancassurance
Bancassurance department looks after tie ups with banks. The firm enters into a tie up with Commercial banks. The bank would sell the insurance policies of the firm to its customers & account holders. This ensures that company gets a wider reach to the target audience by tapping the banking network in India. The firm has tied up with Punjab National Bank, which has a network of 4044 branches and under this contract; the first premium of the policies sold by this channel will be divided between firm and bank in the ratio 75%: 25%. According to the terms of the contract, PNB would not be involved in selling insurance products of any other firm. When a bank customer agrees to buy an insurance product of the firm, then lead generator will directs the leads to the relationship manager of the firm who will then give details of the various plans of the customer. An employee of the firm would also be stationed in 2000 branches of the bank for the same purpose. The cost drivers for the department (when considered In-house) are:Cost (Rs/per annum) 220,000 500,000 1,200,000 2,500,000 Total Cost (Rs/per annum) 440,000,000 75,000,000 36,000,000 10,000,000 Page | 27

Particulars Relationship Managers in PNB Cluster Managers Circle Heads Zonal Head

Number 2,000 150 30 4

National Head - BOD Admin costs Total Cost (per annum)

1 2,185

10,000,000 25,917

10,000,000 56,628,645 627,628,645

Revenue Commission Costs Total costs No. of policies sold Cost per policy

1,272,500,000 369,500,000 627,628,645 997,128,645 100,000 9,971

The Marginal Cost schedule is as follows:No. of policies 99,300 99,400 99,500 99,600 99,700 99,800 99,900 100,000 100,100 100,200 100,300 100,400 100,500 100,600 100,700 Costs 990,838,245 991,737,445 992,636,145 993,534,345 994,432,345 995,330,545 996,229,245 997,128,645 998,028,645 998,929,245 999,830,445 1,000,732,345 1,001,635,045 1,002,538,545 1,003,442,845 Difference 899,200 898,700 898,200 898,000 898,200 898,700 899,400 900,000 900,600 901,200 901,900 902,700 903,500 904,300 Marginal Cost 8,992 8,987 8,982 8,980 8,982 8,987 8,994 9,000 9,006 9,012 9,019 9,027 9,035 9,043

The Marginal Revenue schedule is as follows:No. of policies 99,300 99,400 99,500 99,600 99,700 99,800 99,900 100,000 100,100 100,200 Revenue 1,266,186,000 1,267,089,500 1,267,992,500 1,268,895,000 1,269,797,000 1,270,698,500 1,271,599,500 1,272,500,000 1,273,400,000 1,274,299,500 Difference 903,500 903,000 902,500 902,000 901,500 901,000 900,500 900,000 899,500 899,000 Marginal Revenue 9,035 9,030 9,025 9,020 9,015 9,010 9,005 9,000 8,995 8,990 Page | 28

100,300 100,400 100,500 100,600 100,700

1,275,198,500 1,276,097,000 1,276,995,000 1,277,892,500 1,278,789,500

898,500 898,000 897,500 897,000

8,985 8,980 8,975 8,970

In Bancassurance department, initially with the increase in the level of output the MC would keep on falling till the optimum level is reached since the manpower and every other utility remains the same i.e. for the same level of expense the level of output would rise, resulting in fall in MC. Post this as the level of output rise the MC would start rising again as either the inefficiencies would creep in or existing manpower employed would need to work extra resulting in inefficiencies.. If new tie-ups are carried out, the cost would rise as for those new tie-ups would require hiring people or making existing staff to work extra to manage new tie-ups as well which would result in inefficiencies.
9,060 9,040

Revenue,Costs

9,020 9,000 Marginal Cost 8,980 8,960 8,940 99,300 99,400 99,500 99,600 99,700 99,800 99,900 100,000 100,100 100,200 100,300 100,400 100,500 100,600 100,700 Marginal Revenue

No. of Polices
So, we see that MR=MC=Rs.9000 happens at a point where 1,400,000 policies are sold. Not only is the MR=MC, but also the second order condition of “profit maximization” that is Slope of MC > Slope of MR is also being fulfilled here.

Partner Distribution
This is a kind of group sales initiatives by the firm. This sales channel is meant to target people with demand of similar insurance services, like in the case of an organization. This helps in bulk sales of insurance policies to the employees of that organization. These insurance plans usually have a low premium compared to that in case of an individual insurance. Page | 29

The cost involved is the amount of premium forgone in offering group sales service. The costs estimates for the department (when considered In-house) are:Cost (Rs/per annum) 2,000,000 1,000,000 25,917 Total Cost (Rs/per annum) 2,000,000 4,000,000 129,585 6,129,585

Particulars National Head Regional Head Admin Costs Total Cost (per annum)

Number 1 4 5

Revenue 6,366,000,000 Commission 1,509,900,000 Costs 6,129,585 Total costs 1,516,029,585 No. of policies sold 380,000 Cost per policy 3,990

The Marginal Cost schedule is as given below:No. of policies 379,300 379,400 379,500 379,600 379,700 379,800 379,900 380,000 380,100 380,200 380,300 380,400 380,500 380,600 380,700 Costs 1,513,589,285 1,513,938,485 1,514,287,185 1,514,635,385 1,514,983,385 1,515,331,585 1,515,680,285 1,516,029,585 1,516,379,585 1,516,730,185 1,517,081,385 1,517,433,285 1,517,785,985 1,518,139,485 1,518,493,785 Difference 349,200 348,700 348,200 348,000 348,200 348,700 349,300 350,000 350,600 351,200 351,900 352,700 353,500 354,300 Marginal Cost 3,492 3,487 3,482 3,480 3,482 3,487 3,493 3,500 3,506 3,512 3,519 3,527 3,535 3,543

The Marginal Revenue schedule is as given below:No. of policies Revenue Difference Marginal Revenue 379,300 6,363,536,000 353,500 3,535 379,400 6,363,889,500 353,000 3,530 379,500 6,364,242,500 352,500 3,525 379,600 6,364,595,000 352,000 3,520 379,700 6,364,947,000 351,500 3,515 Page | 30

379,800 6,365,298,500 379,900 6,365,649,500 380,000 6,366,000,000 380,100 6,366,350,000 380,200 6,366,699,500 380,300 6,367,048,500 380,400 6,367,397,000 380,500 6,367,745,000 380,600 6,368,092,500 380,700 6,368,439,500

351,000 350,500 350,000 349,500 349,000 348,500 348,000 347,500 347,000

3,510 3,505 3,500 3,495 3,490 3,485 3,480 3,475 3,470

In Partnership Distribution department, initially with the increase in the level of output the MC would keep on falling till the optimum level is reached since the manpower and every other utility remains the same. As we move beyond the optimum level of MC=MR, the MC would rise since we need to get new partners and to manage those either the existing personals need to put in extra effort which might result in inefficiencies or new personals are required which adversely hit the costs on account of salary for the new staff, increase in administration cost etc. resulting in the hike in Marginal Cost.
3,560

3,540

Revenue,Costs

3,520

3,500 Marginal Cost 3,480 Marginal Revenue

3,460

3,440 379,300 379,400 379,500 379,600 379,700 379,800 379,900 380,000 380,100 380,200 380,300 380,400 380,500 380,600 380,700

No. of Polices
So, we see that MR=MC=Rs.3500 happens at a point where 1,400,000 policies are sold. Not only is the MR=MC, but also the second order condition of “profit maximization” that is Slope of MC > Slope of MR is also being fulfilled here.

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Information Technology
Personalization is the need of the hour in Insurance sector. Today managing the customer intelligently is very critical for the insurer especially in the very competitive environment. Companies need to apply different set of rules and treatment strategies to different customer segments. However, to personalize interactions, insurers are required to capture customer information in an integrated system. Also insurance industry is a data-rich industry, and thus, there is a need to use the data for trend analysis and personalization. Personalization helps organizations to reach their customers with more impact and to generate new revenue through cross selling and up selling activities. To ensure that the customers are receiving personalized information, many organizations are incorporating knowledge database-repositories of content that typically include a search engine and lets the customers locate the all document and information related to their queries of request for services. Also in an era where information travels thick and fast, it is imperative for company to ensure high-speed communication links. To incorporate all of this, there is a need of a dedicated department of Information technology which would take care of the Insurance sector specific software like Omniclient and Ingenium. Also this department would maintain the mail servers and it would consist of server administrators and network analysts to ensure round the clock connectivity. Managing this department in-house turns out to be more costly than to outsourcing cost. Training the manpower, sourcing of software and hardware would be a major cost drivers as well as the salary component of dedicated manpower for this department if kept in-house. Considering all of this, outsourcing the IT needs of the company is more advisable as is clear from the in-house costs and outsourcing costs. The costs for IT department (when In-house) are:Cost (Rs/per annum) 10 4 20 34 2 500,000 700,000 350,000 25,917 500,000 Total Cost (Rs/per annum) 5,000,000 2,800,000 7,000,000 881,178 1,000,000 16,681,178 1,390,098

Particulars Network Analysts Server Administrators System Administrators Admin Costs Software Costs(Ingenium, Omniclient) Total Cost (per annum) Total Cost (per month)

Number

The costs for IT department (when Outsourced) are:Cost (Rs/per annum) 12,500,000 Total Cost (Rs/per annum) 12,500,000 12,500,000

Particulars Outsource: Indiafin Technologies Total Cost (per annum)

Number 1

Page | 32

No. of policies sold in an year 1,400,000 Total Revenue 16,681,178 Revenue per policy 11.92 Total Cost 12,500,000 Cost per policy 8.93

The Marginal Revenue schedule is as follows:No. of policies 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700 Revenue 16,672,778 16,673,978 16,675,178 16,676,378 16,677,578 16,678,778 16,679,978 16,681,178 16,682,378 16,683,578 16,684,778 16,685,978 16,687,178 16,688,378 16,689,578 Difference 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 Marginal Revenue 12 12 12 12 12 12 12 12 12 12 12 12 12 12

The Marginal Cost schedule is as follows:No. of policies 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700 Costs 12,494,390 12,495,410 12,496,230 12,496,900 12,497,450 12,498,140 12,498,970 12,500,000 12,501,200 12,502,530 12,504,000 12,505,620 12,507,390 12,509,330 12,511,420 Difference 1,020 820 670 550 690 830 1,030 1,200 1,330 1,470 1,620 1,770 1,940 2,090 Marginal Cost 10.20 8.20 6.70 5.50 6.90 8.30 10.30 12.00 13.30 14.70 16.20 17.70 19.40 20.90

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In Information Technology department, initially with the increase in the level of output the MC would keep on falling till the optimum level is reached since the manpower and every other utility remains the same. As we move beyond the optimum level of MC=MR, the MC would rise since either new staff for processing the increased output would have been recruited which would require IT personals to work extra which may cause inefficiencies or new system administrators would be needed which would result in cost escalations on account of salary hikes etc.
25 20

Revenue,Costs

15 10 5 0 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700

Marginal Revenue Marginal Cost

No. of Policies
So, we see that MR=MC=Rs.1200 happens at a point where 1,400,000 policies are sold. Not only is the MR=MC, but also the second order condition of “profit maximization” that is Slope of MC > Slope of MR is also being fulfilled here.

Legal
Our Company has an in-house Law Department. Its work ranges from the formulation and implementation of legal due diligence guidelines to legal appraisal of insurance contracts to litigation and arbitration. Having an in-house department implicitly assumes that outsourcing the work would result in higher costs. This also means that if the department sells its services in the market, it would be able to earn exactly the amount which it otherwise would have been charged had the services been outsourced i.e. the outsourcing cost becomes its notional revenue. Now since the department here is a price taker meaning that it has no control on the price whatsoever, so, its Marginal Revenue (MR) curve will be a straight line i.e. sale of each additional policy will bring about the same revenue. Also, its Marginal Cost (MC) has also been computed taking into consideration only the variable cost elements like administration expenses, litigation costs etc.

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The detailed cost and revenue breakup of the department is given below:Cost Total Cost Particulars Number (Rs/per annum) (Rs/per annum) Deputy Manager 4 800,000 3,200,000 Manger 5 1,000,000 5,000,000 Head of Legal Dept 1 2,400,000 2,400,000 Total Cost (per annum) 10,600,000

Total Cost details: Particulars Training & Induction Payroll Litigation Admin Costs Total In-house Cost 460,000 106,000,000 7,600,000 259,160 114,319,160

Total Outsourcing Cost

13,435,000

So, the Total Revenue of the department is Rs. 13,435,000 And the Total Variable Cost is: Litigation Administration Costs Training & Induction Total 7,600,000 259,160 460,000 8,319,160

The Marginal Revenue schedule is given below:No. of policies 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 Revenue 16,672,778 16,673,978 16,675,178 16,676,378 16,677,578 16,678,778 16,679,978 16,681,178 16,682,378 16,683,578 16,684,778 16,685,978 16,687,178 Difference 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 Marginal Revenue 12 12 12 12 12 12 12 12 12 12 12 12 12 Page | 35

1,400,600 1,400,700

16,688,378 16,689,578

1,200

12

The Marginal Cost schedule is given below:No. of policies 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700 Costs 12,494,390 12,495,410 12,496,230 12,496,900 12,497,450 12,498,140 12,498,970 12,500,000 12,501,200 12,502,530 12,504,000 12,505,620 12,507,390 12,509,330 12,511,420 Difference 1,020 820 670 550 690 830 1,030 1,200 1,330 1,470 1,620 1,770 1,940 2,090 Marginal Cost 10.20 8.20 6.70 5.50 6.90 8.30 10.30 12.00 13.30 14.70 16.20 17.70 19.40 20.90

In Legal department, initially with the increase in the level of output the MC would keep on falling till the optimum level is reached since the manpower and every other utility remains the same. As we move beyond the optimum level of MC=MR, the MC would rise since either new staff for processing the increased output would have been recruited which would require legal staff to work extra which may cause inefficiencies or new staff would be needed which would result in cost escalations on account of salary hikes, training and induction costs, administration costs etc.
2,000 1,800 1,600

Revenue,Costs

1,400 1,200 1,000 800 600 400 200 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 Marginal Cost Marginal Revenue

No. of Policies
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So, we see that MR=MC=Rs.800 happens at a point where 14, 00,000 policies are sold. Not only is the MR=MC, but also the second order condition of “profit maximisation” that Slope of MC > Slope of MR is being fulfilled here.

Marketing, Strategic Initiatives & Product Management Group
Marketing and strategy department will be looking after the marketing operation of the company. Strategy development for the growth of the business and business development will be undertaken by the Marketing team. The function of the marketing department will be: • • • • Looking after the marketing of the Service offered by the company Brand building initiatives Business Strategy development Preparing Marketing budgets

To have a bottom line it’s very important to have a top line. The marketing department helps the company to build up a trusted brand image in the mind of the consumer. A trusted brand image makes it much easier to sell insurance policies. Marketing efforts spread awareness about the company, its insurance policies and also the need of the same. India is a highly under-insured country and its very important for insurance companies to make people know and understand the benefits of insurance. Total marketing budget of Pinnacle Insurance Company Limited is Rs. 700 Cr. To make sure to get the best out of the huge marketing budget, the media duty has been outsourced to Group M. These ad agencies have certain market power and they can easily get the best media deals from various media vehicles. It’s their duty to interact with various media channels and get the best judicious mix. The creative duty was outsourced to Re-diffussion DY&R after multi-agency pitch. The marketing is one department where it is highly difficult to gauge the real benefit of each branding activity. So we have taken the notional profit as the revenue. The marketing team also include small team of Strategic Initiative and Product Management Group. These two are specialised teams and work in closely with the marketing team. The main aim of Strategic Initiative team is to get into fruitful partnership. All the agreements with Banks and other Distribution Partners have been brought into the fold by this team only. They are also responsible for other strategic initiatives time to time to keep the company two steps ahead of the competition. The Product Management Group works in close syndication with marketing team and Actuary team. The main aim of this team is to act as a link between the marketing and actuary team to come up with innovative insurance policy that meets ever changing need of the customer.

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The total costing of the Marketing Department including Product Management Group and Strategic Initiative (when considered In-house) are given below:Salary (Rs/per annum) 850,000 2,000,000 4,000,000 5,000,000 2,000,000 4,500,000 2,500,000 4,500,000 140,000,000 50,000,000 25,917 Total Salary (Rs/per annum) 34,000,000 16,000,000 20,000,000 5,000,000 8,000,000 4,500,000 10,000,000 4,500,000 140,000,000 50,000,000 1,658,688 293,658,688 24,471,557

Particulars
Marketing

No. of employees 40 8 5 1 4 1 4 1 2% of total budget 64

Assistant Manager - Marketing Manager - Marketing Regional Manager Marketing - Head
Product Management Group

Product Analyst Head - PMG
Strategic Initiative

Manager - Strategy Head - Strategy Media Agency Fee Creative Agency Fees Admin Costs Total Cost (per annum) Total Cost (per month)

The cost estimates of the department (when considered Outsourced) are:Particulars Marketing Product Management Group Strategic Initiative Media Agency Fee Creative Agency Fees Total Cost 90,000,000 11,000,000 31,000,000 140,000,000 50,000,000 322,000,000

Cost per policy Revenue per policy

210 230

The Marginal Cost schedule is given below:No. of policies 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 Costs 293,519,188 293,540,188 293,560,188 293,579,188 293,597,188 293,616,188 293,636,688 Difference 21,000 20,000 19,000 18,000 19,000 20,500 22,000 Marginal Cost 210 200 190 180 190 205 220 Page | 38

1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700

293,658,688 293,681,688 293,705,688 293,730,688 293,756,688 293,783,688 293,811,688 293,840,688

23,000 24,000 25,000 26,000 27,000 28,000 29,000

230 240 250 260 270 280 290

The Marginal Revenue schedule is given below:No. of policies 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700 Revenue 321,839,000 321,862,000 321,885,000 321,908,000 321,931,000 321,954,000 321,977,000 322,000,000 322,023,000 322,046,000 322,069,000 322,092,000 322,115,000 322,138,000 322,161,000 Difference 23,000 23,000 23,000 23,000 23,000 23,000 23,000 23,000 23,000 23,000 23,000 23,000 23,000 23,000 Marginal Revenue 230 230 230 230 230 230 230 230 230 230 230 230 230 230

In Marketing & Strategic Initiative department, initially with the increase in the level of output the MC would keep on falling till the optimum level is reached since the manpower and every other utility remains the same. As we move beyond the optimum level of MC=MR, the MC would rise since to sell more policies the level of promotions need to be raised, we need to approach new customer segments which require renewed promotion strategy which would result in cost escalations ultimately resulting in hike in Marginal Costs.

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350 300

Revenue,Costs

250 200 150 100 50 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700 MC MR

No. of Policies
So, we see that MR=MC=Rs.230 happens at a point where 1,400,000 policies are sold. Not only is the MR=MC, but also the second order condition of “profit maximization” that is Slope of MC > Slope of MR is also being fulfilled here.

LIFE INSURANCE
No. of policies sold: Average premium collected per policy: Total premium collected: Percentage of premium invested in securities (75%): Return on investment: Total Revenue (Premium collected + Return): Costs of various departments: Commission paid: Costs: Total claim amount: Total cost: Profit: 1,000,000 21,850 21,850,000,000 16,387,500,000 4,424,625,000 26,274,625,000 4,531,896,619 8,800,000,000 13,331,896,619 6,800,000,000 20,131,896,619 6,142,728,381

The Marginal Revenue for every new policy sold due to decrease in premium is given below:No. of policies Premium 999,300 21920 999,400 21918 999,500 21916 999,600 21914 999,700 21912 999,800 21910 Difference Marginal Revenue 193200 1932 192800 1928 192400 1924 192000 1920 191600 1916 191200 1912

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999,900 1,000,000 1,000,100 1,000,200 1,000,300 1,000,400 1,000,500 1,000,600 1,000,700

21908 21906 21904 21902 21900 21898 21896 21894 21892

190800 190400 190000 189600 189200 188800 188400 188000

1908 1904 1900 1896 1892 1888 1884 1880

The Demand Curve for Life insurance is as given below:21925 21920 21915 21910

Premium

21905 21900 21895 21890 21885 21880 21875 1,000,000.00 1,000,100.00 1,000,200.00 1,000,300.00 1,000,400.00 1,000,500.00 1,000,600.00 1,000,700.00 999,300.00 999,400.00 999,500.00 999,600.00 999,700.00 999,800.00 999,900.00 Premium

No. of Policies

The Marginal Revenue & Marginal Cost schedule is as given below:No. of policies 999,300 999,400 999,500 999,600 999,700 999,800 999,900 Marginal Marginal Revenue Costs Difference Costs 21,850 13,316,620,419 2,183,600 21,836 21,850 21,850 21,850 21,850 21,850 21,850 21,850 21,850 21,850 13,318,804,019 13,320,986,619 13,323,168,219 13,325,349,219 13,327,530,819 13,329,713,219 13,331,896,619 13,334,081,619 13,336,267,819 2,182,600 2,181,600 2,181,000 2,181,600 2,182,400 2,183,400 2,185,000 2,186,200 2,187,400 21,826 21,816 21,810 21,816 21,824 21,834 21,850 21,862 21,874 Page | 41

Revenue Difference 21,834,705,000 2,185,000 21,836,890,000 21,839,075,000 21,841,260,000 21,843,445,000 21,845,630,000 21,847,815,000 2,185,000 2,185,000 2,185,000 2,185,000 2,185,000 2,185,000 2,185,000 2,185,000 2,185,000

1,000,000 21,850,000,000 1,000,100 21,852,185,000 1,000,200 21,854,370,000

1,000,300 1,000,400 1,000,500 1,000,600 1,000,700

21,856,555,000 21,858,740,000 21,860,925,000 21,863,110,000 21,865,295,000

2,185,000 2,185,000 2,185,000 2,185,000

21,850 21,850 21,850 21,850

13,338,455,219 13,340,643,819 13,342,833,819 13,345,025,219 13,347,218,019

2,188,600 2,190,000 2,191,400 2,192,800

21,886 21,900 21,914 21,928

22,000

21,950

Revenue,Costs

21,900

21,850

Marginal Revenue Marginal Costs

21,800

21,750 999,300 999,400 999,500 999,600 999,700 999,800 999,900 1,000,000 1,000,100 1,000,200 1,000,300 1,000,400 1,000,500 1,000,600 1,000,700

No. of Policies
So, we see that MR=MC=Rs.21,850 happens at a point where 1,000,000 policies are sold. Not only is the MR=MC, but also the second order condition of “profit maximization” that is Slope of MC > Slope of MR is also being fulfilled here.

HEALTH INSURANCE
No. of policies sold: Average premium collected per policy: Total premium collected: Percentage of premium invested in securities (75%): Return on investment: Total Revenue (Premium collected + Return): Costs of various departments: Commission paid: Cost: Total claim amount: Total cost: Profit: 400,000 2,471 988,500,000 741,375,000 200,171,250 1,188,671,250 369,095,692 186,400,000 555,495,692 375,000,000 930,495,692 258,175,558

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The Marginal Revenue for every new policy sold due to decrease in premium is given below:No. of policies Premium Difference Marginal Revenue 399,300 2,541 108700 543.5 399,500 2,540 108300 541.5 399,700 2,539 107900 539.5 399,900 2,538 107500 537.5 400,100 2,537 107100 535.5 400,300 2,536 106700 533.5 400,500 2,535 106300 531.5 400,700 2,534 105900 529.5 400,900 2,533 105500 527.5 401,100 2,532 105100 525.5 401,300 2,531 104700 523.5 401,500 2,530 104300 521.5 401,700 2,529 103900 519.5 401,900 2,528 103500 517.5 402,100 2,527

The Demand Curve for Health insurance is as given below:2,545 2,540

Premium

2,535 2,530 Premium 2,525 2,520 399,300 399,500 399,700 399,900 400,100 400,300 400,500 400,700 400,900 401,100 401,300 401,500 401,700 401,900 402,100

No. of Policies
The Marginal Revenue & Marginal Cost schedule is as given below:No. of policies 399,300 399,400 399,500 Marginal Marginal Revenue Difference Revenue Costs Difference Costs 986,656,300 250,600 2,506 553,775,392 246,300 2,463 986,906,900 250,100 2,501 554,021,692 245,800 2,458 987,157,000 249,600 2,496 554,267,492 245,400 2,454 Page | 43

399,600 399,700 399,800 399,900 400,000 400,100 400,200 400,300 400,400 400,500 400,600 400,700

987,406,600 987,655,700 987,904,300 988,152,400 988,400,000 988,647,100 988,893,700 989,139,800 989,385,400 989,630,500 989,875,100 990,119,200

249,100 248,600 248,100 247,600 247,100 246,600 246,100 245,600 245,100 244,600 244,100

2,491 2,486 2,481 2,476 2,471 2,466 2,461 2,456 2,451 2,446 2,441

554,512,892 554,757,992 555,003,392 555,249,292 555,495,692 555,742,792 555,990,492 556,238,792 556,487,792 556,737,492 556,987,892 557,239,192

245,100 245,400 245,900 246,400 247,100 247,700 248,300 249,000 249,700 250,400 251,300

2,451 2,454 2,459 2,464 2,471 2,477 2,483 2,490 2,497 2,504 2,513

2,540 2,520 2,500

Revenue,Costs

2,480 2,460 2,440 2,420 2,400 2,380 399,300 399,400 399,500 399,600 399,700 399,800 399,900 400,000 400,100 400,200 400,300 400,400 400,500 400,600 400,700 Marginal Revenue Marginal Costs

No. of Policies
So, we see that MR=MC=Rs.2471 happens at a point where 400,000 policies are sold. Not only is the MR=MC, but also the second order condition of “profit maximization” that is Slope of MC > Slope of MR is also being fulfilled here.

HYBRID POLICY
Since all the departments are processing both health and life insurance policies, we assume that Pinnacle is offering a hybrid product i.e. we assume that for every 14 policies sold 10 would be of Life insurance and rest 4 would be of health insurance.

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For calculating average premium: Ratio of Life insurance: Health insurance policies sold:: 10:4 Average Premium= (10*21850 + 4*2471)/14 = 16313 Average cost = (13,331,896,619 + 555,495,692)/1400000 = 9920 The Marginal Revenue for every new policy sold due to decrease in premium is given below:No. of policies 1,398,600 1,398,800 1,399,000 1,399,200 1,399,400 1,399,600 1,399,800 1,400,000 1,400,200 1,400,400 1,400,600 1,400,800 1,401,000 1,401,200 1,401,400 Premium 16,315 16,313 16,311 16,309 16,307 16,305 16,303 16,301 16,299 16,297 16,295 16,293 16,291 16,289 16,287 Revenue 22,818,159,000 22,818,624,400 22,819,089,000 22,819,552,800 22,820,015,800 22,820,478,000 22,820,939,400 22,821,400,000 22,821,859,800 22,822,318,800 22,822,777,000 22,823,234,400 22,823,691,000 22,824,146,800 22,824,601,800 Difference 465,400 464,600 463,800 463,000 462,200 461,400 460,600 459,800 459,000 458,200 457,400 456,600 455,800 455,000 MR 2,327 2,323 2,319 2,315 2,311 2,307 2,303 2,299 2,295 2,291 2,287 2,283 2,279 2,275

The Demand Curve of Hybrid Product is given below:-

16,320 16,315 16,310 16,305 16,300 16,295 16,290 16,285 16,280 16,275 16,270 1,398,600 1,398,800 1,399,000 1,399,200 1,399,400 1,399,600 1,399,800 1,400,000 1,400,200 1,400,400 1,400,600 1,400,800 1,401,000 1,401,200 1,401,400

Premium

Premium

No. of Policies

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In insurance sector the Life insurance quanta is much more than the overall business garnered by Health Insurance. Hence, the MR-MC curve for the hybrid product is similar to that of Life insurance i.e. Hybrid product operates in oligopoly with dominant firm. The Marginal Revenue & Marginal Cost schedule is as given below:No. of policies 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 1,400,700 Marginal Revenue 16,313 16,313 16,313 16,313 16,313 16,313 16,313 16,313 16,313 16,313 16,313 16,313 16,313 16,313 Marginal Costs 16,299 16,289 16,279 16,273 16,279 16,287 16,297 16,313 16,325 16,337 16,349 16,363 16,377 16,391

Revenue 22,826,780,900 22,828,412,200 22,830,043,500 22,831,674,800 22,833,306,100 22,834,937,400 22,836,568,700 22,838,200,000 22,839,831,300 22,841,462,600 22,843,093,900 22,844,725,200 22,846,356,500 22,847,987,800 22,849,619,100

Difference 1,631,300 1,631,300 1,631,300 1,631,300 1,631,300 1,631,300 1,631,300 1,631,300 1,631,300 1,631,300 1,631,300 1,631,300 1,631,300 1,631,300

Costs 13,875,992,011 13,877,621,911 13,879,250,811 13,880,878,711 13,882,506,011 13,884,133,911 13,885,762,611 13,887,392,311 13,889,023,611 13,890,656,111 13,892,289,811 13,893,924,711 13,895,561,011 13,897,198,711 13,898,837,811

Difference 1,629,900 1,628,900 1,627,900 1,627,300 1,627,900 1,628,700 1,629,700 1,631,300 1,632,500 1,633,700 1,634,900 1,636,300 1,637,700 1,639,100

16,400 16,380 16,360

Revenue, Costs

16,340 16,320 16,300 16,280 16,260 16,240 16,220 16,200 1,399,300 1,399,400 1,399,500 1,399,600 1,399,700 1,399,800 1,399,900 1,400,000 1,400,100 1,400,200 1,400,300 1,400,400 1,400,500 1,400,600 Marginal Revenue Marginal Costs

No. of Policies

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Conclusion
The Pinnacle Insurance Company which is in the field of life and health insurance is a profit making venture as shown in the tables above. It satisfies the basic criteria of profit maximizing levels for each of the department viz. each department should work to the level where Marginal Costs should be equal to the Marginal Revenue which happens at sale of 1000,000 Life insurance policies & 400,000 Health Insurance policies in a year.

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