Sales target in year 1

y-o-y growth in sales target

Employee cost in an an year

Fixed - employees
Salary inflation
Variable staff salary cost
Year 1-3
Year 4-6
Year 7-10

Initail set-up cost

The insurer wants to run it off over a period of 5 years in straight line method

Commsion rate payable

Product A
Product B
Product C

Other costs
Marketing - Variable cost

Average premium
A
B
C

Discount rate
 40,000 INR lacs Product mix - % of total sales amount
12% Year A B
1 60% 25%
2 60% 25%
1000 INR lacs 3 60% 25%
5% p.a. 4 62% 23%
% of the sales 5 62% 23%
14% 6 62% 23%
12% 7 62% 23%
10% 8 65% 23%
9 65% 23%
1500 INR lacs 10 65% 23%

3%
8%
10%

5% of the total annual premium

30000
25000
15000

9%
total sales amount Other insurance cost (% of the total sales amount)
C A B C Check
15% 74.00% 72.00% 67.00% 100.00%
15% 73.75% 71.75% 66.75% 100.00%
15% 73.50% 71.50% 66.50% 100.00%
15% 73.25% 71.25% 66.25% 100.00%
15% 73.00% 71.00% 66.00% 100.00%
15% 72.75% 70.75% 65.75% 100.00%
15% 72.50% 70.50% 65.50% 100.00%
12% 72.25% 70.25% 65.25% 100.00%
12% 72.00% 70.00% 65.00% 100.00%
12% 71.75% 69.75% 64.75% 100.00%
 Sales (in INR lacs) Commission (in INR lacs
Year Total A B C Total
1 40,000 24,000 10,000 6,000 2,120
2 44,800 26,880 11,200 6,720 2,374
3 50,176 30,106 12,544 7,526 2,659
4 56,197 34,842 12,925 8,430 2,922
5 62,941 39,023 14,476 9,441 3,273
6 70,494 43,706 16,214 10,574 3,666
7 78,953 48,951 18,159 11,843 4,106
8 88,427 57,478 20,338 10,611 4,413
9 99,039 64,375 22,779 11,885 4,942
10 110,923 72,100 25,512 13,311 5,535

Total A B C
NPV profit (INR lacs) 19,302 21,825 2,030 -4,553
NPV premium (INR lacs) 415,925 259,716 97,926 58,284
Profit Margin % 5% 8% 2% -8%

Total A B C
NPV profit (INR lacs) 23966.50471 25914.213 2768.2144 -4715.9223
NPV premium (INR lacs) 472591.5383 295756.8 111021.31 65813.424
Profit Margin % 0.050712937 0.08762 0.0249341 -0.0716559
Commission (in INR lacs) Expense calculation (amounts in INR lacs)
A B C Fixed salary cost Variable cost % - Variable cost % -
720 800 600 1,000 14% 5%
806 896 672 1,050 14% 5%
903 1,004 753 1,103 14% 5%
1,045 1,034 843 1,158 12% 5%
1,171 1,158 944 1,216 12% 5%
1,311 1,297 1,057 1,276 12% 5%
1,469 1,453 1,184 1,340 10% 5%
1,724 1,627 1,061 1,407 10% 5%
1,931 1,822 1,188 1,477 10% 5%
2,163 2,041 1,331 1,551 10% 5%

Yearly profit projection under Base

1,145
951
862
Profit (INR lacs)

385 8
6,989
221 6,047
141 5,159
3,725
2,567 3,033
1,070 1,319 1,607
-225 -198 -162 -405 -394 -391 -
-760 -798 -762
1-845 2-903 3-965 4 5 6 7 8 9 10

Projection year

A B C
xpense calculation (amounts in INR lacs) Number of policies sold
Variable cost amount Initial set up cost Set up cost allocation Total A B
7,600 1,500 300 160,000 80,000 40,000
8,512 - 300 179,200 89,600 44,800
9,533 - 300 200,704 100,352 50,176
9,554 - 300 224,039 116,141 51,701
10,700 - 300 250,924 130,078 57,906
11,984 - - 281,035 145,687 64,854
11,843 - - 314,759 163,169 72,637
13,264 - - 343,687 191,592 81,353
14,856 - - 384,930 214,583 91,115
16,638 - - 431,121 240,333 102,049
Check ---> TRUE

Total cost (in INR lacs)

Total A B
n under Base 40000 22930 10225
45740 26228 11693.75
52318.75 30007.85 13377.25
1,371 58606.024 34876.583 13811.678
1,145 67061.264 39916.293 15806.104
951 76452.768 45537.176 18023.093
862 85711.3 51198.918 20216.877
98167.984 61724.844 23260.42
385 8,065 112446.57 70706.293 26645.819
6,989
6,047 128814.02 81001.213 30526.808
5,159
3,725

-762 -405 -394 -391 -383

6 7 8 9 10

year
olicies sold Expense (in INR lacs) Insurance cost (in INR lacs)
C Total A B C Total A B C
40,000 8,900 4,450 2,225 2,225 28,980 17,760 7,200 4,020
44,800 9,862 4,931 2,466 2,466 32,346 19,824 8,036 4,486
50,176 10,936 5,468 2,734 2,734 36,102 22,128 8,969 5,005
56,197 11,011 5,708 2,541 2,762 40,316 25,522 9,209 5,585
62,941 12,215 6,332 2,819 3,064 44,996 28,487 10,278 6,231
70,494 13,260 6,874 3,060 3,326 50,220 31,796 11,471 6,952
78,953 13,183 6,834 3,042 3,307 56,049 35,489 12,802 7,757
70,742 14,671 8,179 3,473 3,020 62,739 41,528 14,288 6,924
79,231 16,333 9,105 3,866 3,362 70,020 46,350 15,945 7,725
88,739 18,190 10,140 4,306 3,744 78,145 51,732 17,795 8,619

Profit (in INR lacs)

C Total A B C
6845 0 1070 -225 -845
7818.25 260 1372 -193.75 -918.25
8933.65 581.25 1732.15 -152.25 -998.65
9917.763 2228.976 2841.117 180.3715 -792.5127
11338.87 2898.986 3459.062 284.7534 -844.8295
12892.5 4001.52 4344.482 481.3932 -824.3558
14295.5 6811.13 6164.989 1063.282 -417.1402
13182.72 8232.812 7435.673 1211.763 -414.6243
15094.46 9914.346 8828.301 1497.192 -411.147
17286 11901.03 10463.57 1837.654 -400.1938
 Total cost (in INR lacs) Profit (in INR lacs)
Total A B C Total A B C
40,000 22,930 10,225 6,845 - 1,070 -225 -845
44,582 25,561 11,398 7,623 218 1,319 -198 -903
49,697 28,499 12,706 8,492 479 1,607 -162 -965
54,249 32,275 12,784 9,190 1,948 2,567 141 -760
60,485 35,990 14,255 10,239 2,456 3,033 221 -798
67,146 39,981 15,828 11,336 3,348 3,725 385 -762
73,337 43,792 17,297 12,248 5,616 5,159 862 -405
81,823 51,431 19,387 11,005 6,604 6,047 951 -394
91,295 57,386 21,634 12,275 7,743 6,989 1,145 -391
101,870 64,035 24,141 13,694 9,053 8,065 1,371 -383
 Sales (in INR lacs) Commission (in INR lacs
Year Total A B C Total
1 40,000 24,000 10,000 6,000 2,120
2 44,800 26,880 11,200 6,720 2,374
3 50,176 30,106 12,544 7,526 2,659
4 56,197 34,842 12,925 8,430 2,922
5 62,941 39,023 14,476 9,441 3,273
6 70,494 43,706 16,214 10,574 3,666
7 78,953 48,951 18,159 11,843 4,106
8 88,427 57,478 20,338 10,611 4,413
9 99,039 64,375 22,779 11,885 4,942
10 110,923 72,100 25,512 13,311 5,535

Total A B C
NPV profit (INR lacs) 19,302 21,825 2,030 -4,553
NPV premium (INR lacs) 415,925 259,716 97,926 58,284
Profit Margin % 5% 8% 2% -8%
Commission (in INR lacs) Expense calculation (amounts in INR lacs)
A B C Fixed salary cost Variable cost % - Variable cost % -
720 800 600 1,000 14% 5%
806 896 672 1,050 14% 5%
903 1,004 753 1,103 14% 5%
1,045 1,034 843 1,158 12% 5%
1,171 1,158 944 1,216 12% 5%
1,311 1,297 1,057 1,276 12% 5%
1,469 1,453 1,184 1,340 10% 5%
1,724 1,627 1,061 1,407 10% 5%
1,931 1,822 1,188 1,477 10% 5%
2,163 2,041 1,331 1,551 10% 5%

Yearly profit projection under Base

1,145
951
862
Profit (INR lacs)

385 8
6,989
221 6,047
141 5,159
3,725
2,567 3,033
1,070 1,319 1,607
-225 -198 -162 -405 -394 -391 -
-760 -798 -762
1-845 2-903 3-965 4 5 6 7 8 9 10

Projection year

A B C
xpense calculation (amounts in INR lacs) Number of policies sold
Variable cost amount Initial set up cost Set up cost allocation Total A B
7,600 1,500 300 160,000 80,000 40,000
8,512 - 300 179,200 89,600 44,800
9,533 - 300 200,704 100,352 50,176
9,554 - 300 224,039 116,141 51,701
10,700 - 300 250,924 130,078 57,906
11,984 - - 281,035 145,687 64,854
11,843 - - 314,759 163,169 72,637
13,264 - - 343,687 191,592 81,353
14,856 - - 384,930 214,583 91,115
16,638 - - 431,121 240,333 102,049
Check ---> TRUE

n under Base

1,371

1,145
951
862

385 8,065
6,989
6,047
5,159
3,725

-762 -405 -394 -391 -383

6 7 8 9 10

year
olicies sold Expense (in INR lacs) Insurance cost (in INR lacs)
C Total A B C Total A B C
40,000 8,900 4,450 2,225 2,225 28,980 17,760 7,200 4,020
44,800 9,862 4,931 2,466 2,466 32,346 19,824 8,036 4,486
50,176 10,936 5,468 2,734 2,734 36,102 22,128 8,969 5,005
56,197 11,011 5,708 2,541 2,762 40,316 25,522 9,209 5,585
62,941 12,215 6,332 2,819 3,064 44,996 28,487 10,278 6,231
70,494 13,260 6,874 3,060 3,326 50,220 31,796 11,471 6,952
78,953 13,183 6,834 3,042 3,307 56,049 35,489 12,802 7,757
70,742 14,671 8,179 3,473 3,020 62,739 41,528 14,288 6,924
79,231 16,333 9,105 3,866 3,362 70,020 46,350 15,945 7,725
88,739 18,190 10,140 4,306 3,744 78,145 51,732 17,795 8,619
 Total cost (in INR lacs) Profit (in INR lacs)
Total A B C Total A B C
40,000 22,930 10,225 6,845 - 1,070 -225 -845
44,582 25,561 11,398 7,623 218 1,319 -198 -903
49,697 28,499 12,706 8,492 479 1,607 -162 -965
54,249 32,275 12,784 9,190 1,948 2,567 141 -760
60,485 35,990 14,255 10,239 2,456 3,033 221 -798
67,146 39,981 15,828 11,336 3,348 3,725 385 -762
73,337 43,792 17,297 12,248 5,616 5,159 862 -405
81,823 51,431 19,387 11,005 6,604 6,047 951 -394
91,295 57,386 21,634 12,275 7,743 6,989 1,145 -391
101,870 64,035 24,141 13,694 9,053 8,065 1,371 -383
Scenario 1 Scenario 2

Premium growth rate 15% Fixed marketing cost

Year Cost (INR lacs)
1 1500
2 1500
3 1500
4 1500
5 1500
6 1800
7 1800
8 1800
9 1800
10 1800

Variable marketi 0%
Scenario 3 Scenario 4

% of total sales amount Year Applicable discount rate (forward rate)

Year A B C 1 7.67%
1 70% 20% 10% 2 7.91%
2 70% 20% 10% 3 8.02%
3 70% 20% 10% 4 8.59%
4 75% 18% 7% 5 9.01%
5 75% 18% 7% 6 8.72%
6 75% 18% 7% 7 8.80%
7 75% 18% 7% 8 9.23%
8 80% 18% 2% 9 9.10%
9 80% 18% 2% 10 9.10%
10 80% 18% 2%
 Sales (in INR lacs) Commission (in INR lacs
Year Total A B C Total
1 40,000 24,000 10,000 6,000 2,120
2 46,000 27,600 11,500 6,900 2,438
3 52,900 31,740 13,225 7,935 2,804
4 60,835 37,718 13,992 9,125 3,163
5 69,960 43,375 16,091 10,494 3,638
6 80,454 49,882 18,504 12,068 4,184
7 92,522 57,364 21,280 13,878 4,811
8 106,401 69,161 24,472 12,768 5,309
9 122,361 79,535 28,143 14,683 6,106
10 140,715 91,465 32,364 16,886 7,022

Total A B C
NPV profit (INR lacs) 23,967 25,914 2,768 -4,716
NPV premium (INR lacs) 472,592 295,757 111,021 65,813
Profit Margin % 5% 9% 2% -7%
Commission (in INR lacs) Expense calculation (amounts in INR lacs)
A B C Fixed salary cost Variable cost % - Variable cost % -
720 800 600 1,000 14% 5%
828 920 690 1,050 14% 5%
952 1,058 793 1,103 14% 5%
1,132 1,119 913 1,158 12% 5%
1,301 1,287 1,049 1,216 12% 5%
1,496 1,480 1,207 1,276 12% 5%
1,721 1,702 1,388 1,340 10% 5%
2,075 1,958 1,277 1,407 10% 5%
2,386 2,251 1,468 1,477 10% 5%
2,744 2,589 1,689 1,551 10% 5%
xpense calculation (amounts in INR lacs) Number of policies sold
Variable cost amount Initial set up cost Set up cost allocation Total A B
7,600 1,500 300 160,000 80,000 40,000
8,740 - 300 184,000 92,000 46,000
10,051 - 300 211,600 105,800 52,900
10,342 - 300 242,529 125,726 55,968
11,893 - 300 278,908 144,585 64,363
13,677 - - 320,744 166,272 74,018
13,878 - - 368,856 191,213 85,121
15,960 - - 413,544 230,535 97,889
18,354 - - 475,576 265,115 112,572
21,107 - - 546,913 304,883 129,458
Check ---> TRUE
policies sold Expense (in INR lacs) Insurance cost (in INR lacs)
C Total A B C Total A B C
40,000 8,900 4,450 2,225 2,225 28,980 17,760 7,200 4,020
46,000 10,090 5,045 2,523 2,523 33,212 20,355 8,251 4,606
52,900 11,453 5,727 2,863 2,863 38,062 23,329 9,456 5,277
60,835 11,800 6,117 2,723 2,960 43,643 27,628 9,969 6,045
69,960 13,409 6,951 3,094 3,363 50,015 31,664 11,425 6,926
80,454 14,954 7,752 3,451 3,751 57,316 36,289 13,092 7,935
92,522 15,218 7,889 3,512 3,817 65,682 41,589 15,003 9,090
85,121 17,367 9,682 4,111 3,575 75,491 49,968 17,192 8,331
97,889 19,832 11,055 4,694 4,082 86,509 57,265 19,700 9,544
112,572 22,659 12,631 5,363 4,664 99,134 65,626 22,574 10,934
 Total cost (in INR lacs) Profit (in INR lacs)
Total A B C Total A B C
40,000 22,930 10,225 6,845 - 1,070 -225 -845
45,740 26,228 11,694 7,818 260 1,372 -194 -918
52,319 30,008 13,377 8,934 581 1,732 -152 -999
58,606 34,877 13,812 9,918 2,229 2,841 180 -793
67,061 39,916 15,806 11,339 2,899 3,459 285 -845
76,453 45,537 18,023 12,892 4,002 4,344 481 -824
85,711 51,199 20,217 14,296 6,811 6,165 1,063 -417
98,168 61,725 23,260 13,183 8,233 7,436 1,212 -415
112,447 70,706 26,646 15,094 9,914 8,828 1,497 -411
128,814 81,001 30,527 17,286 11,901 10,464 1,838 -400
 Sales (in INR lacs) Commission (in INR lacs
Year Total A B C Total
1 40,000 24,000 10,000 6,000 2,120
2 44,800 26,880 11,200 6,720 2,374
3 50,176 30,106 12,544 7,526 2,659
4 56,197 34,842 12,925 8,430 2,922
5 62,941 39,023 14,476 9,441 3,273
6 70,494 43,706 16,214 10,574 3,666
7 78,953 48,951 18,159 11,843 4,106
8 88,427 57,478 20,338 10,611 4,413
9 99,039 64,375 22,779 11,885 4,942
10 110,923 72,100 25,512 13,311 5,535

Total A B C
NPV profit (INR lacs) 29,713 27,357 4,494 -2,139
NPV premium (INR lacs) 415,925 259,716 97,926 58,284
Profit Margin % 7% 11% 5% -4%
Commission (in INR lacs) Expense calculation (amounts in INR lac
A B C Fixed salary cost Fixed marketing coVariable cost % - Variable cost % -
720 800 600 1,000 1,500 14% 0%
806 896 672 1,050 1,500 14% 0%
903 1,004 753 1,103 1,500 14% 0%
1,045 1,034 843 1,158 1,500 12% 0%
1,171 1,158 944 1,216 1,500 12% 0%
1,311 1,297 1,057 1,276 1,800 12% 0%
1,469 1,453 1,184 1,340 1,800 10% 0%
1,724 1,627 1,061 1,407 1,800 10% 0%
1,931 1,822 1,188 1,477 1,800 10% 0%
2,163 2,041 1,331 1,551 1,800 10% 0%
lculation (amounts in INR lacs) Number of policies sold
Variable cost amount Initial set up cost Set up cost allocation Total A B
5,600 1,500 300 160,000 80,000 40,000
6,272 - 300 179,200 89,600 44,800
7,025 - 300 200,704 100,352 50,176
6,744 - 300 224,039 116,141 51,701
7,553 - 300 250,924 130,078 57,906
8,459 - - 281,035 145,687 64,854
7,895 - - 314,759 163,169 72,637
8,843 - - 343,687 191,592 81,353
9,904 - - 384,930 214,583 91,115
11,092 - - 431,121 240,333 102,049
Check ---> TRUE
policies sold Expense (in INR lacs) Insurance cost (in INR lacs)
C Total A B C Total A B C
40,000 8,400 4,200 2,100 2,100 28,980 17,760 7,200 4,020
44,800 9,122 4,561 2,281 2,281 32,346 19,824 8,036 4,486
50,176 9,927 4,964 2,482 2,482 36,102 22,128 8,969 5,005
56,197 9,701 5,029 2,239 2,433 40,316 25,522 9,209 5,585
62,941 10,568 5,479 2,439 2,651 44,996 28,487 10,278 6,231
70,494 11,536 5,980 2,662 2,894 50,220 31,796 11,471 6,952
78,953 11,035 5,721 2,547 2,768 56,049 35,489 12,802 7,757
70,742 12,050 6,717 2,852 2,480 62,739 41,528 14,288 6,924
79,231 13,181 7,348 3,120 2,713 70,020 46,350 15,945 7,725
88,739 14,444 8,052 3,419 2,973 78,145 51,732 17,795 8,619
 Total cost (in INR lacs) Profit (in INR lacs)
Total A B C Total A B C
39,500 22,680 10,100 6,720 500 1,320 -100 -720
43,842 25,191 11,213 7,438 958 1,689 -13 -718
48,688 27,994 12,454 8,239 1,488 2,111 90 -713
52,939 31,596 12,482 8,861 3,258 3,246 443 -431
58,838 35,136 13,875 9,826 4,103 3,887 601 -385
65,421 39,087 15,430 10,903 5,073 4,619 783 -329
71,190 42,679 16,802 11,709 7,763 6,272 1,358 133
79,201 49,969 18,767 10,465 9,226 7,508 1,571 146
88,144 55,629 20,888 11,627 10,895 8,746 1,891 258
98,124 61,947 23,255 12,923 12,799 10,153 2,258 388
 Sales (in INR lacs) Commission (in INR lacs
Year Total A B C Total
1 40,000 28,000 8,000 4,000 1,880
2 44,800 31,360 8,960 4,480 2,106
3 50,176 35,123 10,035 5,018 2,358
4 56,197 42,148 10,115 3,934 2,467
5 62,941 47,206 11,329 4,406 2,763
6 70,494 52,870 12,689 4,935 3,095
7 78,953 59,215 14,212 5,527 3,466
8 88,427 70,742 15,917 1,769 3,572
9 99,039 79,231 17,827 1,981 4,001
10 110,923 88,739 19,966 2,218 4,481

Total A B C
NPV profit (INR lacs) 19,926 22,509 429 -3,012
NPV premium (INR lacs) 415,925 313,128 77,130 25,668
Profit Margin % 5% 7% 1% -12%
Commission (in INR lacs) Expense calculation (amounts in INR lacs)
A B C Fixed salary cost Variable cost % - Variable cost % -
840 640 400 1,000 14% 5%
941 717 448 1,050 14% 5%
1,054 803 502 1,103 14% 5%
1,264 809 393 1,158 12% 5%
1,416 906 441 1,216 12% 5%
1,586 1,015 493 1,276 12% 5%
1,776 1,137 553 1,340 10% 5%
2,122 1,273 177 1,407 10% 5%
2,377 1,426 198 1,477 10% 5%
2,662 1,597 222 1,551 10% 5%
xpense calculation (amounts in INR lacs) Number of policies sold
Variable cost amount Initial set up cost Set up cost allocation Total A B
7,600 1,500 300 152,000 93,333 32,000
8,512 - 300 170,240 104,533 35,840
9,533 - 300 190,669 117,077 40,141
9,554 - 300 207,180 140,493 40,462
10,700 - 300 232,042 157,352 45,317
11,984 - - 259,887 176,234 50,755
11,843 - - 291,073 197,382 56,846
13,264 - - 311,264 235,806 63,668
14,856 - - 348,616 264,103 71,308
16,638 - - 390,449 295,795 79,865
Check ---> TRUE
policies sold Expense (in INR lacs) Insurance cost (in INR lacs)
C Total A B C Total A B C
26,667 8,900 5,465 1,874 1,561 29,160 20,720 5,760 2,680
29,867 9,862 6,056 2,076 1,730 32,547 23,128 6,429 2,990
33,451 10,936 6,715 2,302 1,919 36,327 25,816 7,175 3,337
26,225 11,011 7,467 2,150 1,394 40,687 30,873 7,207 2,606
29,372 12,215 8,284 2,386 1,546 45,412 34,460 8,044 2,908
32,897 13,260 8,992 2,590 1,679 50,685 38,463 8,977 3,244
36,845 13,183 8,940 2,575 1,669 56,570 42,931 10,019 3,620
11,790 14,671 11,115 3,001 556 63,447 51,111 11,182 1,154
13,205 16,333 12,374 3,341 619 70,813 57,046 12,479 1,288
14,790 18,190 13,780 3,721 689 79,033 63,670 13,926 1,436
 Total cost (in INR lacs) Profit (in INR lacs)
Total A B C Total A B C
39,940 27,025 8,274 4,641 60 975 -274 -641
44,515 30,124 9,222 5,169 285 1,236 -262 -689
49,622 33,584 10,280 5,757 554 1,539 -245 -739
54,165 39,605 10,167 4,393 2,032 2,543 -51 -460
60,390 44,160 11,336 4,895 2,550 3,046 -6 -489
67,040 49,041 12,582 5,416 3,454 3,829 107 -482
73,219 53,647 13,731 5,841 5,734 5,568 481 -315
81,690 64,348 15,456 1,887 6,737 6,394 461 -118
91,147 71,797 17,246 2,104 7,892 7,434 581 -123
101,704 80,112 19,244 2,347 9,219 8,626 722 -129
 Sales (in INR lacs) Commission (in INR lacs
Year Total A B C Total
1 40,000 24,000 10,000 6,000 2,120
2 44,800 26,880 11,200 6,720 2,374
3 50,176 30,106 12,544 7,526 2,659
4 56,197 34,842 12,925 8,430 2,922
5 62,941 39,023 14,476 9,441 3,273
6 70,494 43,706 16,214 10,574 3,666
7 78,953 48,951 18,159 11,843 4,106
8 88,427 57,478 20,338 10,611 4,413
9 99,039 64,375 22,779 11,885 4,942
10 110,923 72,100 25,512 13,311 5,535

Total A B C
NPV profit (INR lacs) 20,020 22,593 2,115 -4,688
NPV premium (INR lacs) 429,767 268,399 101,160 60,208
Profit Margin % 5% 8% 2% -8%
Commission (in INR lacs) Expense calculation (amounts in INR lacs)
A B C Fixed salary cost Variable cost % - Variable cost % -
720 800 600 1,000 14% 5%
806 896 672 1,050 14% 5%
903 1,004 753 1,103 14% 5%
1,045 1,034 843 1,158 12% 5%
1,171 1,158 944 1,216 12% 5%
1,311 1,297 1,057 1,276 12% 5%
1,469 1,453 1,184 1,340 10% 5%
1,724 1,627 1,061 1,407 10% 5%
1,931 1,822 1,188 1,477 10% 5%
2,163 2,041 1,331 1,551 10% 5%
xpense calculation (amounts in INR lacs) Number of policies sold
Variable cost amount Initial set up cost Set up cost allocation Total A B
7,600 1,500 300 160,000 80,000 40,000
8,512 - 300 179,200 89,600 44,800
9,533 - 300 200,704 100,352 50,176
9,554 - 300 224,039 116,141 51,701
10,700 - 300 250,924 130,078 57,906
11,984 - - 281,035 145,687 64,854
11,843 - - 314,759 163,169 72,637
13,264 - - 343,687 191,592 81,353
14,856 - - 384,930 214,583 91,115
16,638 - - 431,121 240,333 102,049
Check ---> TRUE
policies sold Expense (in INR lacs) Insurance cost (in INR lacs)
C Total A B C Total A B C
40,000 8,900 4,450 2,225 2,225 28,980 17,760 7,200 4,020
44,800 9,862 4,931 2,466 2,466 32,346 19,824 8,036 4,486
50,176 10,936 5,468 2,734 2,734 36,102 22,128 8,969 5,005
56,197 11,011 5,708 2,541 2,762 40,316 25,522 9,209 5,585
62,941 12,215 6,332 2,819 3,064 44,996 28,487 10,278 6,231
70,494 13,260 6,874 3,060 3,326 50,220 31,796 11,471 6,952
78,953 13,183 6,834 3,042 3,307 56,049 35,489 12,802 7,757
70,742 14,671 8,179 3,473 3,020 62,739 41,528 14,288 6,924
79,231 16,333 9,105 3,866 3,362 70,020 46,350 15,945 7,725
88,739 18,190 10,140 4,306 3,744 78,145 51,732 17,795 8,619
 Total cost (in INR lacs) Profit (in INR lacs)
Total A B C Total A B C Forward ra
40,000 22,930 10,225 6,845 - 1,070 -225 -845 7.67%
44,582 25,561 11,398 7,623 218 1,319 -198 -903 7.91%
49,697 28,499 12,706 8,492 479 1,607 -162 -965 8.02%
54,249 32,275 12,784 9,190 1,948 2,567 141 -760 8.59%
60,485 35,990 14,255 10,239 2,456 3,033 221 -798 9.01%
67,146 39,981 15,828 11,336 3,348 3,725 385 -762 8.72%
73,337 43,792 17,297 12,248 5,616 5,159 862 -405 8.80%
81,823 51,431 19,387 11,005 6,604 6,047 951 -394 9.23%
91,295 57,386 21,634 12,275 7,743 6,989 1,145 -391 9.10%
101,870 64,035 24,141 13,694 9,053 8,065 1,371 -383 9.10%
Discont factor
0.928764
0.860684
0.796782
0.733752
0.673106
0.619119
0.569043
0.520958
0.477505
0.437677
 NPV profit
Scenario number Description Total
Base Base 19,302
Scenario 1 Increase in sales 23,967
Scenario 2 Making marketing activity fixed cost instead of variable 29,713
Scenario 3 Changing product mix 19,926
Scenario 4 Using dicount curve 20,020

Profit Margin % - Aggregate

Scenario 4 4.66%

Scenario 3 4.79%

Scenario 2 7.14%

Scenario 1 5.07%

Base 4.64%
 NPV profit NPV premium Profit margin %
A B C Total A B C Total A
21,825 2,030 -4,553 415,925 259,716 97,926 58,284 4.64% 8.40%
25,914 2,768 -4,716 472,592 295,757 111,021 65,813 5.07% 8.76%
27,357 4,494 -2,139 415,925 259,716 97,926 58,284 7.14% 10.53%
22,509 429 -3,012 415,925 313,128 77,130 25,668 4.79% 7.19%
22,593 2,115 -4,688 429,767 268,399 101,160 60,208 4.66% 8.42%

Profit Margin % - split by products N

15.00%

10.00%
23
5.00%
19,302
0.00%
7.14% Base Scenario 1 Scenario 2 Scenario 3 Scenario 4
-5.00%

-10.00%

-15.00%
Base Sce
A B C
Profit margin %
B C
2.07% -7.81%
2.49% -7.17%
4.59% -3.67%
0.56% -11.74%
2.09% -7.79%

NPV prfit (amount in INR lacs)

29,713

23,967

19,302 19,926 20,020

Base Scenario 1 Scenario 2 Scenario 3 Scenario 4

 NPV profit
Scenario number Description Total
Base Base 19,302
Scenario 1 Increase in sales 23,967
Scenario 2 Making marketing activity fixed cost instead of variable 29,713
Scenario 3 Changing product mix 19,926
Scenario 4 Using dicount curve 20,020

Profit Margin % - Aggregate

Scenario 4 4.66%

Scenario 3 4.79%

Scenario 2 7.14%

Scenario 1 5.07%

Base 4.64%
 NPV profit NPV premium Profit margin %
A B C Total A B C Total A
21,825 2,030 -4,553 415,925 259,716 97,926 58,284 4.64% 8.40%
25,914 2,768 -4,716 472,592 295,757 111,021 65,813 5.07% 8.76%
27,357 4,494 -2,139 415,925 259,716 97,926 58,284 7.14% 10.53%
22,509 429 -3,012 415,925 313,128 77,130 25,668 4.79% 7.19%
22,593 2,115 -4,688 429,767 268,399 101,160 60,208 4.66% 8.42%

Profit Margin % - split by products N

15.00%

10.00%
23
5.00%
19,302
0.00%
7.14% Base Scenario 1 Scenario 2 Scenario 3 Scenario 4
-5.00%

-10.00%

-15.00%
Base Sce
A B C
Profit margin %
B C
2.07% -7.81%
2.49% -7.17%
4.59% -3.67%
0.56% -11.74%
2.09% -7.79%

NPV prfit (amount in INR lacs)

29,713

23,967

19,302 19,926 20,020

Base Scenario 1 Scenario 2 Scenario 3 Scenario 4

 NPV profit
Scenario number Description Total
Base Base 19,302
Scenario 1 Increase in sales 23,967
Scenario 2 Making marketing activity fixed cost instead of variable 29,713
Scenario 3 Changing product mix 19,926
Scenario 4 Using dicount curve 20,020

Profit Margin % - Aggregate

Scenario 4 4.66%

Scenario 3 4.79%

Scenario 2 7.14%

Scenario 1 5.07%

Base 4.64%
 NPV profit NPV premium Profit margin %
A B C Total A B C Total A
21,825 2,030 -4,553 415,925 259,716 97,926 58,284 4.64% 8.40%
25,914 2,768 -4,716 472,592 295,757 111,021 65,813 5.07% 8.76%
27,357 4,494 -2,139 415,925 259,716 97,926 58,284 7.14% 10.53%
22,509 429 -3,012 415,925 313,128 77,130 25,668 4.79% 7.19%
22,593 2,115 -4,688 429,767 268,399 101,160 60,208 4.66% 8.42%

Profit Margin % - split by products N

15.00%

10.00%
23
5.00%
19,302
0.00%
7.14% Base Scenario 1 Scenario 2 Scenario 3 Scenario 4
-5.00%

-10.00%

-15.00%
Base Sce
A B C
Profit margin %
B C
2.07% -7.81%
2.49% -7.17%
4.59% -3.67%
0.56% -11.74%
2.09% -7.79%

NPV prfit (amount in INR lacs)

29,713

23,967

19,302 19,926 20,020

Base Scenario 1 Scenario 2 Scenario 3 Scenario 4

 NPV profit
Scenario number Description Total
Base Base 19,302
Scenario 1 Increase in sales 23,967
Scenario 2 Making marketing activity fixed cost instead of variable 29,713
Scenario 3 Changing product mix 19,926
Scenario 4 Using dicount curve 20,020

Profit Margin % - Aggregate

Scenario 4 4.66%

Scenario 3 4.79%

Scenario 2 7.14%

Scenario 1 5.07%

Base 4.64%
 NPV profit NPV premium Profit margin %
A B C Total A B C Total A
21,825 2,030 -4,553 415,925 259,716 97,926 58,284 4.64% 8.40%
25,914 2,768 -4,716 472,592 295,757 111,021 65,813 5.07% 8.76%
27,357 4,494 -2,139 415,925 259,716 97,926 58,284 7.14% 10.53%
22,509 429 -3,012 415,925 313,128 77,130 25,668 4.79% 7.19%
22,593 2,115 -4,688 429,767 268,399 101,160 60,208 4.66% 8.42%

Profit Margin % - split by products N

15.00%

10.00%
23
5.00%
19,302
0.00%
7.14% Base Scenario 1 Scenario 2 Scenario 3 Scenario 4
-5.00%

-10.00%

-15.00%
Base Sce
A B C
Profit margin %
B C
2.07% -7.81%
2.49% -7.17%
4.59% -3.67%
0.56% -11.74%
2.09% -7.79%

NPV prfit (amount in INR lacs)

29,713

23,967

19,302 19,926 20,020

Base Scenario 1 Scenario 2 Scenario 3 Scenario 4

 NPV profit
Scenario number Description Total
Base Base 19,302
Scenario 1 Increase in sales 23,967
Scenario 2 Making marketing activity fixed cost instead of variable 29,713
Scenario 3 Changing product mix 19,926
Scenario 4 Using dicount curve 20,020

Profit Margin % - Aggregate

Scenario 4 4.66%

Scenario 3 4.79%

Scenario 2 7.14%

Scenario 1 5.07%

Base 4.64%
 NPV profit NPV premium Profit margin %
A B C Total A B C Total A
21,825 2,030 -4,553 415,925 259,716 97,926 58,284 4.64% 8.40%
25,914 2,768 -4,716 472,592 295,757 111,021 65,813 5.07% 8.76%
27,357 4,494 -2,139 415,925 259,716 97,926 58,284 7.14% 10.53%
22,509 429 -3,012 415,925 313,128 77,130 25,668 4.79% 7.19%
22,593 2,115 -4,688 429,767 268,399 101,160 60,208 4.66% 8.42%

Profit Margin % - split by products N

15.00%

10.00%
23
5.00%
19,302
0.00%
7.14% Base Scenario 1 Scenario 2 Scenario 3 Scenario 4
-5.00%

-10.00%

-15.00%
Base Sce
A B C
Profit margin %
B C
2.07% -7.81%
2.49% -7.17%
4.59% -3.67%
0.56% -11.74%
2.09% -7.79%

NPV prfit (amount in INR lacs)

29,713

23,967

19,302 19,926 20,020

Base Scenario 1 Scenario 2 Scenario 3 Scenario 4

 Profit Margin % - Aggregate

Scenario 4 4.66%

Scenario 3 4.79%

Scenario 2 7.14%

Scenario 1 5.07%

Base 4.64%
Summary

Purpose

The government organisation is planning to launch certain insurance products to the public. For the same it has designed t
profitability from the business based on certain inputs and assumptions.

The exercise includes the following objectives :

• Calculating the expense cost and commission (total as well as product wise split) over the 10 year protection period b
• Combining the above with the insurance cost for these products to calculate total expected outflows from the busines
• Calculating profit cashflows over the projection period using the premium income and the expected cashflows.
• Calculating PV profits, PV premium and % profit margin for the business is being done to determine the net profitabili
• Show the impact of changing a few parameters and approach and understanding how would profitability move to hel

Inputs and assumptions

The following information has been obtained from the Finance team - and used in the base scenario
• Sales target :
- Sales target in the first year is assumed to be INR 40,000 lacs in the first year of sales and thereafter assumed to grow at a
- % share in the premium collected for the three products (A, B and C) year wise
A check was done to ensure the total product share of A+B+C equals to 100%

• Expenses
- Fixed cost (in year 1 and inflation rate for future years )
- Initial set-up cost - INR 1500 lacs, assumed to be spread over first 5 years.
- Variable salary cost (% of the premium amount to be collected)
- Commissions rate payable – product wise
- Other marketing cost (5% of the premium to be collected is assumed to be spent on marketing activities every year)

• Insurance cost - % of premium which will be used to meet the claims cost under the policy (product wise)

• Average expected premium amount per policy for each product

• Discount rate (single rate) used to calculate the Present value of profits and of premium.

Other inputs and assumptions

The following additional information/assumption was used

(1) There are no other costs or expenses besides the ones provided
(2) Taxes have been ignored
(3) All cashflows for a year - premium, expenses, commissions and insurance cost represent the value at the start of the ye

Scenarios tested
The following scenarios have also been tested - along with relevant inputs
• Increasing the size of the business by increasing the yearly premium growth rate from 12% in base to 15%
• Consider outsourcing the marketing activity, moving it from variable to fixed cost. The external vendor will charge INR
• Increasing the sales % of the product with a higher profit margin %
• Using a curve (time dependent discount rate) to discount the Premium and profit cashflows, instead of a single rate.

These scenarios have been independently tested over the base. No scenarios have been combined.

Methodology

The calculations are done in the following order

1. Premium target or the sales amount - This is calculated using the first year premium, growing at the growth rate provide
products based on the mix provided. Under Scenario 3, the mix ratio is changed.

2. Commission rate - the product wise premium amounts are multiplied by their corresponding commissions rate

3. Expenses -
- Fixed cost - Starting with the year 1 cost and then inflating at the given inflation rate.
-Variable salary cost - Multiplying the % of variable cost to the total premium for each year. Under scenario 2, this is chang
-Marketing cost - Multiplying the % of marketing cost to the total premium for each year
- Apportioned value for initial set-up cost - Dividing the initial set up cost by the number of years to spread

4. Average number of policies to be sold : used to apportion the cost in all except scenario 2 - For this the total premium to
product, provided in the input

5. Insurance cost - Product wise premium is multiplied with its given Insurance cost ratio each year.

6. Total cost = Insurance cost + expenses + commissions

7. Profit = Sales amount - Total cost

8. Discounted value of profits and premium - present value is calculated by discounting the year wise cashflows by the give
formula. Under Scenario 4 - instead of a flat rate, a curve is used for discounting. From the curve, the discount factor is cal

9. Profit Margin = Present value of the profits/ Present value of the premium;

Check : A check was done to ensure the total initial set up cost is currently run off over the first 5 years.
Check : A reasonableness check was done to ensure all values (except fixed cost) should increase y-o-y as the total sales vo

Results
The following results were obtained in the base case
cs)
 Profit (INR lacs)
1,070
-225
1-845

The following table and graphs show how the results change under the scenarios tested

Profit Margin % - Aggregate

15
Scenario 4 4.66%
10

Scenario 3 4.79% 5

0
Scenario 2 7.14%

and -5
Scenario 1 5.07%
-10

Base 4.64% -15

Observation

Scenario wise observation

Base - ~ 70% of the premium is used top cover the insurance cost, ~5% in commissions and ~ 20-10% goes to meet the exp
Because of fixed expenses not changing with increase in sales volume and some improvement in the insurance cost over t
profit % is obtained on product A. This is mainly happening because the average premium size for C is lowest and hence, it
the lowest insurance cost .

Scenario 1 - By increasing the growth rate, the is some improvement in % profits margin mainly because fixed expenses do
which is split over the 3 products similarly. The amount of profits is maximum in this scenario because the total sales volum

Scenario 2 - This scenario shows the maximum % profit margin. The market cost the external vendor would charge is cons
the quality of marketing is good and there are no other risks.

Scenario 3 - By changing product mix, there is a marginal increase in the profits because the commissions are highest for p
Hence, not much impact at aggregate level.

Scenario 4 - There is not much change by using a discount curve instead of a flat rate as the flat rate is nearly the average o

Conclusion
Product C is yielding loss in every scenario. Other factors must be considered before deciding whether to sell or not sell th

In terms of profits - The organisation should explore a mix of Scenario 1 and Scenario 2 - to increase profits both in amoun

Next steps

1. Discuss with the Finance on the possibility of expense reduction

2. Calculate the profit post taxation
3. Get the insurance cost numbers peer reviewed
4. Get the model peer reviewed
5. Collect industry benchmarking data around the profitability numbers for similar products
6. Collect industry benchmarking numbers on the commissions rates
7. Understand form the finance team the possible investments backing this business and if the interest rate can be increas
8. Analyse if there are any additional capital requirements to start the business
9. Evaluate if the organisation can increase the premium rate to increase the margins
10. Obtain reinsurance to support and estimate the impact
11. Renegotiate the commissions rate
12. Discuss change of product structure to reduce to the cost of insurance
13. Estimate the projection for a longer period - say 15 years
14. Understand if the organisation will be subject to any regulatory controls and accordingly ensure that they are allowed
15. Allow for any premium rate revision in the product in future years
16. Analyse the effect of selling or not selling Product C given it is loss making
17. Understand the market reputation of the vendor to outsource marketing activities under scenario 2, before going ahea
18. Evaluate whether the organisation has the capacity to sell at an increased premium growth rate under Scenario 1 and
19. Verify the expenses inputs received
ofit (amount in INR lacs)

29,713

19,926 20,020

Scenario 2 Scenario 3 Scenario 4