Derivatives: Forwards vs Futures

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  Before understanding what is derivative, let’s learn what is underlying asset. Underlying asset: Underlying asset can be real asset such as commodities, gold etc or financial assets such as index, interest rates etc. Derivatives: ·         These are financial instruments who value depend upon or is derived from some underlying asset. ·         A derivative does not have its own physical existence, it emerges out of contract between the buyer and seller of derivative instrument. ·         Its value depends upon the value of underlying asset. Hence returns from derivative instruments are linked to returns from underlying assets. ·         The most common underlying assets are stocks, bonds, commodities, market indices and currencies. ·         Derivatives are mainly used to control risks. They can be used to reduce risks (a process known as hedging) or to increase risks in order to enhance returns (speculation)   Classification of Derivatives: ·         Broadly we c

Do you know the types of risk faced by a Life Insurance company ?

 Hey Guys

If interviewer ask any case study question or any situation based question then try to role play that situation in your mind and then try to answer that question.


Risks: We can divide it into various types such as

  • Market risks
  • Credit risks
  • Liquidity risks
  • Operational risks
  • Business risks
  • External risks
It will be quite theoretical but i will focus on some main risks for you guys in a layman terms.

Mortality risk:
  • It is the risk of policyholder dying earlier than expected or more deaths occurred in a portfolio than expected.
  • It will be a risk or not depends on the product that we as an insurer are selling into the market
  • For ex, HDFC life insurance sells term assurance policy where the payout is based on the death of the policyholder within a given time.So, in this case company has a mortality risk that if policyholder dies within that period they have to pay the money

  Longevity risk:
  • It is the risk of policyholder dying later than expected
  • It will be a risk or not depends on the product that we as an insurer are selling into the market
  • For ex, HDFC life insurance sells annuity policy where the payout is based on the regular basis as long as policyholder is alive. The more he lives, the more number of series of payments has to be made by our beloved HDFC in this case.

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Now i will try to list down some other risks for you not in detail but it will be easily understood




  1. Expenses of company being higher than expected
  2. Policyholder didn't renew their policy (majorly related to General insurance company where policyholder has to renew their policy for example your motorbike)
  3. Investment return earned being less than expected (so Policyholder will pay you money then you have to invest it somewhere and you just got hit by bad stock market)
  4. Fraud, embezzlement in the company
  5. Credit default
  6. Company has a cashflow problem
  7. Sales people are not trained
and many more......... Just do the roleplay :)

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Comments

  1. Enjoy reading the article above , it really explains everything in detail, the article is very interesting and effective. Thank you and good luck for the upcoming articles. compare life insurance

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  2. Enjoy reading the article above , it really explains everything in detail,the article is very interesting and effective.Thank you and good luck for the upcoming articles. best health insurance Miami

    ReplyDelete

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