Pension Fund,

Insurance,
Private Equity,
Hedge Fund,
Asset Reconstruction Company
Pension funds

 Definition: A pension plan is an asset pool that accumulates

over an individual’s working years and is paid out during
the nonworking years.
 Developed as Americans began relying less on children for
care during their later years.
 Also became popular as life expectancy increased.
 These are investment pools that pay for employee
retirement commitments. Funds are paid for by either
employees, employers, or both. Corporations and all levels
of government provide pensions. The fund managers invest
these contributions conservatively. They must avoid
losing the principal but still beat inflation.
Types of Pensions

 The pension fund industry comprises two distinct sectors.

 1. Private pension funds: are those funds administered by a
private corporation ( e.g. (insurance company, mutual fund).
 Any pension plan set up by employers, groups, or
individuals
 2. Public pension funds: are those funds administered by a
federal, state, or local government (e.g., Social Security).
 Any pension plan set up by a government body for the
general public.
1. Defined Benefit Pension Funds
 Pensions funds can also be distinguished by the way contributions are made and
benefits are paid.
 Defined Benefit Pension fund : A plan where the employer promises the
employee a specific benefit when they retire.
 i. Flat benefit formula ii. Career average formula iii. Final pay formula
2.Defined contribution Pension :Pension fund in which the employer agrees to make
a specified contribution to the pension fund during the employee’s working years.
 So the final retirement benefit is based on
 1. Employer contribution
 2. Any additional employee contribution
 3. Gain or losses on the investments purchased by the fund with these
contributions
3. Participating pension plans: investments are regulated by IRDA..min. 20% in
Govt. Securities…another 20 % in Govt. backed secruities….balance 60 % in
approved bonds( mostly AAA).
Features & Benefits of Pension Plans

 Guaranteed Pension/Income
 Tax-Efficiency ( under section 80 C)
 Surrender value
 Payment Period
 Liquidity
INTRODUCTION TO
INSURANCE
 Economic Institution.
 Three parties contract.
 Written Agreement.
 Distributes the risks.
 Legal Agreement.
 Assumes the Risk.
Element of insurance contract

 The insured must have insurable interest in the subject of

insurance.
 The insurer’s obligation to indemnify.
 The insurer assumes the risk of loss.
 As a consideration insured or policy holder have to pay a
premium to the insurance company.
TYPES OF INSURANCE

 Insurance Cover Various Types of Risk Under the Four

Heading. They are:
 Life Insurance
 Marine Insurance
 Fire Insurance
 Miscellaneous Insurance
Miscellaneous Insurance

This insurance includes various types of insurance policies except life,

fire and marine. This policy is developed to meet the demand of time
and situation.
Aviation Insurance
Motor Insurance
Employees Insurance
Cash in Transit Insurance
Engineering Insurance
Cattle Insurance
Medical Insurance
Crop Insurance
House Hold Insurance
Bancassurance

 The Bancassurance is a phenomenon where in insurance

products are offered through the distribution channels of the
banking services along with a complete range of banking &
investment products & services.
 In simple term, we can say It is a relationship/tie-up
between a Bank and an Insurance company.
 Bank sells the products of the Insurance company to their
own customers and earn some amount of commission on
sales.
Bancassurance in India

 Bancassurance in India is a new concept.

 In our country the banking & insurance sectors are
regulated by two different entries. They are: - * Banking is
fully governed by RBI & * Insurance sector is by IRDA
 Example: SBI Life Insurance Company Ltd has tie up with
SBI.
 Advantages of Bancassurance –
 Bancassurance is a tool, which is beneficial to • bank, •
customer & • Insurer
REINSURANCE
 When an insurer transfers a part of his risk on a particular insurance by
insuring it with another insurer or other insurers, it is called “Re-
insurance”.
 It means insuring again by the insurer of a risk already insured. Every
insurer has a limit to the risk that he can bear. If at anytime a profitable
venture comes his way, he may insure it even if the risk involved is beyond
his capacity which is his retention limit. In such cases, in order to
safeguard his interest, he may reinsure the same risk for an amount in
excess of his retention limit with other insurers, so that the loss due to risk
is spread over many insurers.
 Reinsurance is, therefore, a contract between two insurers and the original
contract or the insured is not at all affected by it. Now there are two
contracts on the subject matter.
 CHARACTERISTICS OF REINSURANCE

 Reinsurance is a contract between the two insurance companies.

 The original insurer agrees to transfer part of his risk to other insurance
company on the same terms and conditions.
 The fundamental principles of insurance such as insurable interest utmost
good faith, indemnity, subrogation and proximate cause also apply to
reinsurance.
 In the event of fire, the insured is entitled to get the amount of claim only
from the original insurer and not from reinsurer.
 Original insurer cannot insure the risk with a re-insurer, more than the sum
assured, originally by the insured.
 The original insurer should intimate to the reinsurer about the alteration, if
any, made in terms and conditions with the insured.

Types of Reinsurance
Facultative coverage protects an insurer for an individual or a specified risk or
contract. If several risks or contracts need reinsurance, they a renegotiated
separately. The reinsurer holds all rights for accepting or denying a facultative
reinsurance proposal.
 A reinsurance treaty is for a set period rather than on a per-risk or contract basis.
The reinsurer covers all or a portion of the risks that the insurer may incur.
 Under proportional reinsurance, the reinsurer receives a prorated share of all policy
premiums sold by the insurer. For a claim, the reinsurer bears a portion of the losses
based on a pre-negotiated percentage. The reinsurer also reimburses the insurer for
processing, business acquisition, and writing costs.
 With non-proportional reinsurance, the reinsurer is liable if the insurer's losses
exceed a specified amount, known as the priority or retention limit. As a result, the
reinsurer does not have a proportional share in the insurer's premiums and losses.
The priority or retention limit is based on one type of risk or an entire risk category.
 Excess of loss reinsurance is a type of non-proportional coverage in which the
reinsurer covers the losses exceeding the insurer's retained limit. This contract is
typically applied to catastrophic events and covers the insurer either on a per-
occurrence basis or for the cumulative losses within a set period.
Private Equity

 Private equity is an alternative investment class and consists

of capital that is not listed on a public exchange. Private
equity is composed of funds and investors that directly
invest in private companies.
 A private equity fund has limited partners (LP), who
typically own 99 percent of shares in a fund and have
limited liability, and general partners (GP), who own 1
percent of shares and have full liability. The latter are also
responsible for executing and operating the investment.
Process of Private Equity
Financing
4 stages
 1. Fund Formation Stage
 2. Investment Stage
 3.Management Stage
 4.Exit Stage
 Hedge Fund
 Hedge funds are alternative investments using pooled funds that employ
different strategies to earn active return, or alpha, for their investors. Hedge
funds may be aggressively managed or make use of
derivatives and leverage in both domestic and international markets with the
goal of generating high returns (either in an absolute sense or over a specified
market benchmark).
 One aspect that has set the hedge fund industry apart is the fact that hedge
funds face less regulation than mutual funds and other investment vehicles.
 Key Characteristics
 They're only open to "accredited" or qualified investors: Hedge funds
are only allowed to take money from "qualified" investors—individuals
with an annual income that exceeds $200,000 for the past two years or a
net worth exceeding $1 million, excluding their primary residence.
 They offer wider investment latitude than other funds: A hedge fund's
investment universe is only limited by its mandate. A hedge fund can
basically invest in anything—land, real estate, stocks, derivatives, and
currencies
 They often employ leverage: Hedge funds will often use borrowed money
to amplify their returns.
Asset Reconstruction
Company
 An Asset Reconstruction Company is a specialized financial
institution that buys the NPAs or bad assets from banks and financial
institutions so that the latter can clean up their balance sheets. Or in
other words, ARCs are in the business of buying bad loans from
banks.
 ARCs clean up the balance sheets of banks when the latter sells these
to the ARCs. This helps banks to concentrate in normal banking
activities. Banks rather than going after the defaulters by wasting
their time and effort, can sell the bad assets to the ARCs at a mutually
agreed value.
 SARFAESI Act 2002– origin of ARCs
 The Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest (SARFAESI) Act, 2002; enacted in
December 2002 provides the legal basis for the setting up ARCs in India.
 The SARFAESI Act helps reconstruction of bad assets without the
intervention of courts. Since then, large number of ARCs were formed and
were registered with the RBI which has got the power to regulate the
ARCs.
 Capital needs for ARCs
 As per amendment made on the SARFAESI Act in 2016, an ARC should
have a minimum net owned fund of Rs 2 crore. The RBI plans to raise this
amount to Rs 100 crore by end March 2019. Similarly, the ARCs have to
maintain a capital adequacy ratio of 15% of its risk weighted assets.