NAV Guaranteed Products

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NAV Guaranteed Products

• Current Issues in Life Insurance
• 28 August 2009

2
Contents

• Specifications
• CPPI
• Key Considerations and Risks

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Overview
4
Product Features

• NAV guarantee at maturity of the product, (akin
  guarantying Capital minus the charges)
• Dynamic exposure to Equities
• To protect investment throughout the product
  lifecycle
• To lock-in positive performance during
  Subscription Period
• Investment horizon 10 Years
• Open Entry structure guaranteed can be valid
  even if all premium are not paid or are not paid
  on time

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Funds

• Money Market Fund

• FlexiProtect Fund

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Constant Proportion Portfolio Insurance
Balance
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Constant Proportion Portfolio Insurance
Calculation of exposure to equity Equity
Component min(Portfolio Value,(Portfolio value-
Floor)Multiplier) Debt Component Portfolio
value - Equity Component Portfolio
value Portfolio value Market Value of
securities accrued interest accrued dividend
(any other income) cash accrued
expenses Floor (Guarantee Level) Floor (on reset
date) PV of max(NAV on current reset date,
Previous NAV used for determining floor), Floor
(on other days) PV of previous NAV used for
determining floor
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Key Considerations

• Selection of Multiplier
• More important to avoid rapid reallocation of
  asset classes
• Nature of safe assets
• Higher interest on safe assets the more cushion
  can be built-in
• But impact cost of reallocation in case of risky
  assets is high
• Interest rate hedging can not be done

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Key Risks

• Tracking error
• Chance that the volatility of the fund would be
  significantly different from the equity market
  (Nifty)
• Impact cost of change in asset allocation
• Impact cost of change in asset allocation higher
  than expected
• Drop in value of risky assets beyond modelled
  volatility
• Sharp Drop in interest rates
• Simultaneous drop in both

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Thank You