1

FINANCIAL PERFORMANCE OF INSURANCE INDUSTRY

IN POST LIBERALIZATION ERA IN INDIA

Thesis Submitted to the University of Kashmir

for the Award of the Degree of

Doctor of Philosophy

(Ph.D)

In

Department of Business & Financial Studies

By

Tanveer Ahmad Darzi

Under the Supervision of

Dr. Bashir Ahmad Joo (Associate Professor, The Business School)

Faculty of Commerce and Management Studies University of Kashmir

(NAAC ACCREDITED GRADE “A”) Hazratbal, Srinagar – 190006

2

THE DEPARTMENT OF BUSINESS & FINANCIAL STUDIES

UNIVERSITY OF KASHMIR (NAAC ACCREDITED GRADE ‘A’)

SRINAGAR – 190006 Dr. Bashir Ahmad Joo No: _______________ Associate Professor The Business School Date: _____________

CERTIFICATE

This is to certify that the Ph.D thesis entitled FINANCIAL PERFORMANCE OF

INSURANCE INDUSTRY IN POST LIBERALIZATION ERA IN INDIA is the report of

the original work carried out by Tanveer Ahmad Darzi under my guidance and

supervision for the award of the degree of Doctor of Philosophy in the Faculty of

Commerce and Management Studies. He has fulfilled all the statutory requirements

for the submission of the thesis. The work is being submitted for the first time to the University of Kashmir for

evaluation and that it has not previously been submitted for the award of any degree,

diploma, fellowship or associateship.

Dr. Bashir Ahmad Joo

Supervisor

Prof. Nazir Ahmad Nazir

Head,

Department of Business & Financial Studies

3

ACKNOWLEDGEMENT

It gives me great pleasure to express my sincere and heartfelt thanks to all those who

helped me during the period of my research. First and foremost, I feel great pride and

pleasure in putting on record a deep sense of gratitude to Dr. Bashir Ahmad Joo,

Associate Professor, The Business School, University of Kashmir, under whose

supervision, I completed this research work. He gave me the liberty to encroach in his

precious time as and when I approached him for discussing the matters pertaining to

this research work. During my research, I received enlightenment, inspiration and

encouragement through his guidance. It gives me pleasure to express my gratitude to

Prof. Nazir Ahmad Nazir, Head, Department of Business & Financial studies for his

constant encouragement and the scholarly suggestions which I received from him

during this programme. My thanks are due to the entire teaching faculty and the non-

teaching staff for their co-operation and the academic environment they used to create

in the department.

I am thankful to all my friends who always kept me nudging to complete this

programme successfully.

I owe everything to my parents. This is beyond the scope of words to express their

care, support, affection and right guidance provided by them. I am highly thankful to

ALLAH who has gifted me such a caring and loving parents, without whom it was not

possible for me to complete this programme. My sisters and brother are definitely to

be thanked for their support from time to time. Asra and Maliha, my nieces, all love to

them. Apart from home and my family members I am bound to thank the staff of

GKRS INN. The days I spent there are definitely unforgettable and the experience I

got in the company of different scholars from different areas of research is priceless. I

express my best wishes and thank them for their contribution in completing this

programme.

This doctorial dissertation is a beginning to this fascinating area of research in finance

and more particularly insurance area, which I think I have been able to comprehend to

4

some extent, in which I am contemplating to contribute my own bit during my

academic career.

Tanveer Ahmad Darzi

5

CONTENTS Page No.

CHAPTER I Introduction 10 – 24

CHAPTER II Review of Literature 26 – 50

CHAPTER III Evaluation of Financial Performance

of Public Sector Non Life Insurers 52 – 78

CHAPTER IV Evaluation of Financial Performance

of Private Sector Insurers 80 – 102

CHAPTER V Comparative Statistical Analysis of

Public and Private Non Life Insurers. 104 –136

CHAPTER VI Findings, Conclusions and Suggestions 140 – 164

REFRENCES 166 –178

6

LIST OF TABLES Page No.

(1) Registered Insurance Companies 2

(2) Insurance Penetration 5

(3) Insurance Density 6

(4) Market Share of Public Sector Insurers 6

(5) Financial Soundness Indicators 51

(6) Capital Adequacy of Public Sector Insurers 53

(7) Asset Quality of Public Sector Insurers 56

(8) Reinsurance & Actuarial Issues of Public Sector Insurers 58

(9) Management Efficiency of Public Sector Insurers 61

(10) Earnings and Profitability of Public Sector Insurers 70

(11) Liquidity of Public Sector Insurers 71

(12) Market Share of Private Sector Insurers 76

(13) Capital Adequacy of Private Sector Insurers 79

(14) Asset Quality of Private Sector Insurers 82

(15) Reinsurance & Actuarial Issues of Private Insurers 85

(16) Management Efficiency of Private Sector Insurers 87

(17) Earnings and Profitability of Private Sector Insurers 95

(18) Liquidity of Private Sector Insurers 96

(19) Capital Adequacy of Selected Insurers 101

(20) Capital Adequacy of Selected Insurers 102

(21) Asset Quality of Selected Insurers 104

(22) Asset Quality of Selected Insurers 106

(23) Reinsurance & Actuarial Issues of Selected Insurers 108

(24) Reinsurance & Actuarial Issues of Selected Insurers 109

(25) Management Soundness of Selected Insurers 111

(26) Claims Analysis of Selected Insurers 113

7

(27) Expense Analysis of Selected Insurers 115

(28) Combined Ratio Analysis of Selected Insurers 117

(29) Return on Equity Analysis of Selected Insurers 119

(30) Investment Income Analysis of Selected Insurers 121

(31) Liquidity analysis of Selected Insurers 123

(32) ISI Standard of Public Insurers 125

(33) ISI Standard of Public Insurers 127

(34) Independent Variables 130

(35) Multiple Regression Analysis 130

LIST OF FIGURES

Page No.

(1) Gross Premium Collection of Public Non Life Insurers 49

(2) Market Share of Public Non Life Insurers 50

(3) Gross Premium Collection of Private Insurers 77

(4) Market Share of Private Non Life Insurers 77

8

LIST OF ABBREVIATIONS

ACGR Annual Compound Growth Rate

ASM Available Solvency Margin

EMDC Emerging Markets and Developing Countries

Chola Cholamandalam

CRAR Capital Adequacy Ratio

EPS Earnings per Share

GoI Government of India

IRDA Insurance Regulatory Development Authority

ISI Insurance Solvency International Limited

PAT Profit After Tax

Pub S Public Sector

PSU Public Sector Undertakings

Pvt. S Private Sector

ROE Return on Equity

RSM Required Solvency Margin

RSM –NP Required Solvency Margin on Net Premium

RSM-IC Required Solvency Margin on Incurred Claims

WTO World Trade Organisation

9

CHAPTER I

INTRODUCTION

&

DESIGN OF THE STUDY

10

The insurance industry in India has passed through a period of structural changes

under the combined impact of financial sector reforms in general and insurance sector

in particular. The market for insurance services previously was monopolistic while the

market place was regulated and insurance companies were expected to receive assured

spreads over their costs of funds and systematic demand for their products. This phase

in insurance business was the result of sheltered markets and administered prices for

various insurance products. Existence of entry barriers for new insurance companies

meant that competition was restricted to existing public insurers. In case of life

segment of insurance, Life Insurance Corporation of India (LIC) had a dominant role,

while in non-life business segment, New India, United India, National and Oriental

General Insurance Corporations were having monopoly. These companies were

operating as cartel, even in areas where the freedom to price their products existed.

With the liberalisation of insurance sector, the paradigm for Indian insurance industry

has witnessed a sea change during the last decade. The emerging scenario has infused

greater competitive volatility in the system, because the insurance sector has now

entered into a competitive phase due to entry of more players in the insurance field.

As a result there has been expansion and growth of insurance both in the life and non-

life business. Hence, the larger cake is now being shared by the existing and new

players. Further industry will become more professional (Shehbagramam, 2001) and

lowering the entry barriers and growing sophistication of customers will make

insurance market oligopolistic.

It is generally believed that insurance industry will never be same again and turbulent

times are ahead for insurers. Therefore, paradigm for regulatory framework for future

11

will have to be one in which insurance companies and other entities are motivated so

that they give improved performance and at the same time be sensitive to the needs of

their policy holders (Ansari, 2003). Hence regulations should not be water tight

compartments but should be flexible. Any regulation issued today should have enough

scope for change with growth and maturity of the insurance market. In this context,

the Insurance Regulatory and Development Authority Bill (IRDA) 1999, which was

approved by both houses of parliament in December, 1999 paved the way for opening

of insurance sector to private players in the country. The IRDA which was statutorily

constituted on April 19, 2000 quickly organized itself to accomplish its primary task

of maintaining and developing efficient, fair, safe and stable insurance market for the

benefit and protection of policyholders. The authority has so far adopted a clear,

transparent and consistent regulatory and supervisory process, which has brought

credit to the nation and has received accolade from the International Association of

Insurance Supervision. Since the study concerns only non life insurance sector of

India, as a result only non life insurers are listed below in table 1.1.

Table 1.1 Registered Insurance Companies*

Sectors 2002-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Public 4 4 4 4 4 4 4 4

Private 7 8 8 8 8 8 10 13

Total 11 12 12 12 12 12 14 17

* Specialised insurers for health and export credit have been excluded from the list.

Source: Various Issues of IRDA Annual Reports.

As is evident from the table 1.1, till date IRDA has given licenses to 17 players’ viz 4

in public and 17 in private sector with GIC as the Indian reinsurer under the Act.

After this stage, it is opportune time for each insurer to play its unique role and come

out with innovative covers and selling techniques coupled with wider choice of

pricing and improved customer focus for the growth and expansion of Indian

12

insurance market. However, public sector non-life insurers will still continue to play

dominant role in the economic growth of the country, since they have wide spread of

infrastructure and sizeable financial strength.

Liberalisation of insurance industry though is expected to generate enough funds for

the development of infrastructure and boosting the economic development of the

country, but it is also believed that public sector insurers in particular and other new

Indian players will have to work with high standard of professionalism. Therefore,

promulgation of regulations only cannot improve their efficiency but they have to

hone their skills by encouraging product innovation, competitive pricing of products

and improving the customer service and satisfaction in an innovative manner. Thus,

new environment is demanding specialized knowledge and skill for very survival in

the new emerging market. Those insurers, who will adapt to the changing

environment, can survive and others will face problems even in continuing their

operations. The onus therefore lies with the players to deliver, after taking into

account continuing developments and changes. The significant innovations which

have really changed the total scenario of the Indian insurance industry especially after

liberalisation are growing use of internet by insurance customers, convergence of

financial services, mergers and acquisitions, demutualization of several large insurers,

liberalisation and globalization of insurance sector, increase in disasters, declining of

interest rates and heightened customer expectations. In view of these environmental

changes, risk has become very complex and both people and property are not properly

protected in spite of availability of coverage. The risk awareness has increased

demand for various insurance products, however, with the increase in demand for

various insurance products covering various types of risks, the players will pursue

actively all customers so as to gain major market share. Thus, insurance sector has not

only entered into a competitive mode in a short span of time, but also moved into an

expansionary phase. In this context, the net revenue generation for existing players as

well as for new players is surging because market is expanding as is evident from

decrease in insurance penetration (IRDA, 2008-09) and also becoming a market of

13

unethical practices affecting the profitability of both sectors. The decline in

profitability and underwriting losses has been attributed to their weak standing. All

this needs lot of will and courage on part of management to implement plans in the

light of long term perspective (Kumar, 2002) otherwise state owned companies may

fade away gradually (Kumar, 2002a). In addition to risk balanced challenge, another

challenge for Indian insurance industry due to liberalisation would be technology

management (Woods, 2002). In the new market ethos, the Indian insurance industry

will not only have to be part of procession that is marching in majesty for leveraging

the technology but will have to be the flag bearer. The winning strategy in such an

environment would not be risk aversion, which would be an obvious recipe for facing

extinction but managing risk in such a manner so as to profit from them.

As liberalization process marches relentlessly, it is difficult to visualize the impact on

the insurance industry. It would be safe to conclude that in market driven economy,

regulation will play crucial role in promoting entrepreneurship, creating space for a

healthy growth of the industry and sharpening focus on customer concerns. With the

increase in competition, customers will become more vulnerable and less protected.

Therefore, regulating insurance companies and their products in the Indian market as

from cross border operations, inter regulatory space for supervision; inter institutional

conflict and convergence in the financial services is mandatory. It is obvious that the

public as well as private insurance players will experience both positive and negative

impact on their financial performance. However, the players which are not in a

position to face the competition efficiently, their financial performance will be

negatively affected in post liberalization era. Therefore, what can be the real impact of

liberalization on financial performance on insurance industry in India cannot be

visualized without in depth analysis of the various parameters of financial

performance.

Table 1.2 INSURANCE PENETRATION INSIGHT AND ASIAN COUNTRIES

14

Countries 2004-04 2005-06 2006-07 2007-08 2008-09

Bangladesh 0.2 0.20 0.20 0.20 0.20

Pakistan 0.43 0.40 0.50 0.40 0.40

India 0.64 0.61 0.60 0.60 0.60

Sri Lanka 0.77 0.84 0.90 0.90 0.90

PR China 1.05 0.92 1.00 1.10 1.00

Hong Kong 1.39 1.29 1.20 1.20 1.30

Malaysia 1.88 1.82 1.70 1.50 1.50

Thailand 1.58 1.62 1.60 1.50 1.50

Singapore 1.48 1.48 1.10 1.50 1.60

Japan 2.25 2.22 2.20 2.10 2.20

Taiwan 3.07 2.93 2.90 2.80 2.90

South Korea 2.77 2.98 3.20 3.60 3.70

World 3.44 3.18 3.00 3.10 2.90

Source: IRDA Annual Report 2008-09 Insurance Penetration = Share of Premium in GDP Despite the strong record growth during the fiscal year 2005-06 of Real Gross

Domestic Product (GDP) increased by 8.4% compared to 7.5% in 2004-05, the

insurance penetration defined as insurance premium as share of Gross Domestic

Product (GDP) for non-life insurance business, declined from 0.65 of 2004-05 to

0.60 in 2008-09. Low penetration is pointer to the fact that spread of insurance

business has relatively been poor in the country and large section of insurable

population is still isolated from the insurance coverage. The phenomenon clearly

speaks about the growing and untapped potential of the market. However, when

compared to prior liberalisation scenario, the insurance penetration after

liberalisation has shown healthy growth amongst all Asian countries. It is evident

from Table 1.2 that India has healthy insurance penetration ratio ranging between

0.64 and 0.60 given the fact that all the Asian countries witnessed a heavy

downward surge. The performance of the insurance sector in financial year 2008-

09 was largely influenced by the sub-prime crisis which started in the United

15

States in late 2007 and evolved as a financial crisis in US and later engulfed

Europe and UK. By late 2008 it seeped into Asia (IRDA 2008-09).

Table 1.3

INSURANCE DENSITY INSIGHT AND ASIAN COUNTRIES Countries 2004-04 2005-06 2006-07 2007-08 2008-09

Bangladesh 0.8 0.8 0.8 0.9 1.1

Pakistan 2.2 2.8 3.6 3.9 4.0

India 4.0 4.4 5.2 6.2 6.2

Sri Lanka 7.9 9.4 12.8 14.7 19.3

PR China 12.9 15.8 19.4 25.5 33.7

Malaysia 89.2 95.3 103.0 110.6 119.5

Hong Kong 332.9 331.7 331.6 341.3 380.8

Taiwan 414.4 446.4 450.3 462.3 499.6

South Korea 412.5 495.5 591.2 727.3 621.0

Singapore 365.4 392.0 341.2 531.2 630.0

Japan 830.8 790.4 760.4 736.0 829.2

Thailand 41.3 44.4 50.0 58.9 64.9

World 220.0 219.0 224.2 249.6 264.2

Source: IRDA Annual Report 2008-09 Insurance Density =Per capita expenditure on insurance Premium

Similarly, insurance density has also improved after liberalisation as is depicted in

Table 1.3. The ratio of insurance density in India is recorded between 4.0 to 6.2 over

the period of study. Thus, it can be visualised that insurance sector has improved its

overall performance after liberalisation, but what is financial standing of various

insurance companies in public and private sector, requires detailed analysis.

Against the backdrop, it has become imperative to make in depth analysis of the

impact of liberalisation on the insurance industry in India so as to draw conclusions

16

for enhancing and synchronizing the probable benefits of insurance sector

liberalization. Such a study would go a long way in shaping the future of insurance

industry, so that this would eventually move away from mere risk mitigation entity to

catalyst of growth of economy as whole. It is believed that present study would be of

great help for regulator to design future strategy for industry, wherein they can

provide sound platform of creativity to help existing and new players effectively in

navigating the uncertain seas of external and internal environment.

Sample Size

The study has covered non-life insurance business establishments from both from

public and private sector. The public sector companies include United India Insurance,

National Insurance Company, Oriental Insurance and New India Insurance Company.

The private sector companies include Royal Sundaram, Bajaj Allianz, IFFCO Tokio,

ICICI Lombard, Tata AIG, Reliance, Cholamandalam and HDFC Ergo insurance

companies. The selection was for the whole non-life sector companies registered;

however, as the study was going on various other players joined the sector but could

not be taken due to lack of data as the study span is of five years after liberalization.

Objectives of the study

The specific objectives of this study are:

1. To analyse the financial performance of public and private sector non-life

insurers on the basis of CARAMEL parameters.

2. To make comparative statistical analysis of public and private non-life

insurance companies.

3. To gauge the impact of liberalisation on the financial performance of insurance

industry in India.

4. To examine impact of liberalisation on security analysis of state owned and

private sector companies in the light of ISI standards.

17

5. To examine impact of various factors on the solvency of non-life insurers.

6. To draw policy conclusions and offer suggestions for enhancing and

synchronizing the probable benefits of liberalization of insurance sector.

Materials and Methods

In the study both primary and secondary data has been used. The collection of primary

information has been done through personal investigation method. Secondary data

constitutes the main source of information, suitable for the purpose of present research

work. The sources of secondary data were Annual Reports of the companies and

IRDA, Directors and Auditors report, IRDA Journals, Asia Insurance Post, The

Insurance Times, Journal of Insurance Institute of India, Insurance Chronicle (ICFAI),

Daily papers and government reports relating to the issues under study. Experts in the

field were also approached for the purpose of discussion to understand the problem in

right perspective. The work of academicians on the subject has also been consulted for

the purpose analysis.

The performance of insurance companies can be measured by a number of indicators.

However, in present study, CARAMEL parameters are used to study the financial

performance of insurance companies. For measuring the performance of insurance

companies on the basis of CARAMEL parameters, the present study employs ratio

analysis with the following methodology:

A. The description of CARAMEL acronym and ratios calculated to test each

acronym are:

Capital Adequacy: Capital Adequacy can be viewed as the key indicator of an

insurer’s financial soundness. Capital is seen as a cushion to protect insured

and promote the stability and efficiency of financial system, it also indicates

whether the insurance company has enough capital to absorb losses arising

from claims. For the purpose of calculation of capital adequacy of companies

under study, two ratios have been used, prescribed by IMF and World Bank

18

(IMF, 2005). First is the ratio of Net Premium to Capital and second ratio is

Capital to Total Assets.

Asset Quality: Asset quality is one of the most critical areas in determining the

overall financial health of an insurance company. The primary factor effecting

overall asset quality is the quality of the real estate investment and the credit

administration program. Ratio of equities to total assets and ratio of Real Estate

+ Unquoted Equities + Debtors to Total Assets has been used, prescribed by

IMF and World Bank.

Reinsurance and Actuarial Issues: Reinsurance and Actuarial issue ratios

reflect the overall underwriting strategy of the insurer and depict the proportion

of risk retained and passed on to the reinsurers and indicates the risk bearing

capacity of the country’s insurance sector. IMF prescribes two ratios in this

standard viz. ratio of Net Premium to Gross Premium and ratio of Net

Technical Reserves/ Average of Net Claims paid in last three years.

Management efficiency: The ratio reflects the efficiency in operations, which

ultimately indicates the management efficiency and soundness. The indicator

prescribed is Operating Expenses to Gross Premiums.

Earnings and Profitability: IMF prescribes five sub dimensions to this

standard to limelight the earnings and profitability of the insurance companies.

The standard is two tier, covering both operational and non-operational

efficiency of the insurance companies.

Claims Analysis: The standard is an important indicator of whether

their pricing policy is correct or not. It reflects the quantum of claims in

the premiums earned. The ratio prescribed for this analysis is Net Claims

Incurred to Net Premium.

Expense Analysis: Expense analysis indicates the expenditure incurred

by the management while carrying on insurance business, greater the

19

expenditure, lesser will be the profit margin. The ratio prescribed for this

purpose is Management Expenses to Net Premium Earned.

Combined Ratio Analysis: Combined ratio is blend of claims and

expense ratio. The ratio explains the probability of profitability in

insurance operations. The ratio for this standard is Claim Ratio plus

Expense Ratio to Net Premiums.

Investment Income Analysis: Investment income ratio quantifies the

income earned on investments. The ratio prescribed is Investment

Income to Net Premiums.

ROE Analysis: Return on Equity is the measure of return to

shareholders and the ratio is Profits to Equity.

Liquidity (Liquidity Analysis): Liquidity crises may turn to be serious in the

concerns, where obligations are of short duration nature, similarly for non life

insurers, the ratio is an important standard and is current assets to current liabilities.

B. STATISTICAL ANALYSIS:

In addition to the ratio analysis, the CARAMEL parameters have been tested

statistically with the help of following statistical tools:

Mean

Standard Deviation and variance

F-Test

Regression Analysis (Growth Model).

In order to have a comprehensive view, the growth of each ratio covered by

CARAMEL is calculated by Annual Compound Growth Rate (ACGR) Method for the

last five years. The Annual Compound Growth Rate (ACGR) is calculated by using

SPSS software and statistically defined as:

Y= abt

20

Where, Y= dependent variables (Capital Adequacy, Asset quality, etc), a = Constant,

b= Slope of trend lines (Growth Rate), t= time.

Estimate of b (slope of trend line or rate of change) has been arrived as follows:

b^ = log (1+g). In this equation g (growth rate) has been obtained by taking

antilogarithm of log (1+g) and subtracting 1 from the same. The resultant value

would be multiplied by 100 to express growth rate in percentage terms. The

significance of the difference between the performances of the Insurers is verified with

the help of F-test. The F-ratio is calculated as:

F= (CESS-MESS)/2(q-1) MESS/ (n-2q)

Where

q = number of insurers, N = total number of observations (no of insurers x no

of time series observations for each ratio) CESS = Combined sum of squared errors

when both the insurers and their observations are used to estimate the regression

equation above (for each ratio); MESS = sum of the two insurers sums of squared

errors for each insurer estimated from the regression applied to each insurer (each

ratio) separately.

2(q – 1) = Numerator degrees of freedom

N – 2q = denominator degrees of freedom

C. Solvency Analysis as per Insurance Solvency International Limited (ISI)

The solvency of various insurers has been tested by comparing following ratios with

ISI benchmark ratios.

ISI Standard Ratios Benchmark

Net Premium / Shareholders Funds < 300

21

Change in Net Premium 25

Underwriting Profits / Investment Income > -25

Technical Reserves / Shareholders Funds < 350

Technical Reserves + Shareholders Funds/Net Premium < 150

Pre-tax Profits / Net Premium > 5

Source: Joo Bashir A. 2005. Performance of Insurance Sector in India, The Business Review, Vol. 11 N0. 2 P 77-86.

D. Solvency Determinants

The sensitivity of Solvency Margin has been tested with the help of multiple

regression analysis by testing following hypothesis:

Insurance Company’s Specific Factors

Hypothesis Expected Effect Firm Size + Investment Performance + Liquidity Ratio + Operating Margin + Combined Ratio - Claims Ratio - Underwriting Profitability + Market Share +

Source: Determinants of Financial Performance of Asian Insurers, The Journal of Risk and Insurance 2004, Vol.71, No.3, 469-499

In present study above mentioned eight predictors have been tested with the help of

multiple regression analysis in order to see impact of various factors on the solvency

margin of insurance companies. Available Solvency Margin (ASM) has been used as

dependent variable for the 12 non-life insurers in the industry for the period 2004-05

to 2008-09 to prove the expected impact given above. Multiple regression model has

22

been employed to include various independent variables and their impact on solvency

margin has been tested by using following equation.

Solvency(Y) = a0 + a1(Market Share) + a2(Operating Margin) + a3(Firms Size) +

a4(Investment Yield) + a5(Liquidity) + a6(Combined ratio) + a7(Claim Ratio) +

a8(Underwriting Performance) +

Dependent Variable = Available Solvency Ratio

Independent Variables are:

1. Market share

2. Operating Margin

3. Firm Size

4. Investment Yield

5. Liquidity

6. Combined Ratio

7. Claim Ratio

8. Underwriting Profitability

Period of the Study

The study is based on the impact of liberalization on Indian non-life insurance sector,

and in order to analyze the post liberalization impact, the study has been conducted for

a period of five years, i.e. from 2004-05 to 2008-09. The prime objective being to

reactivate competition in insurance sector, reforms aimed at productivity, profitability

and efficiency in the insurance sector. For this purpose the available relevant data after

liberalization has been collected and analysed.

Limitation of the Study

The study has the following limitations:

1. The study aimed at impact of liberalization on financial performance of non-

life insurance sector and has concentrated mainly on what European Union

23

called first generation reforms in insurance sector. As the study proceeded the

IRDA introduced a second generation reform that is price deregulation in the

non-life sector, except motor third party. Although its impact was witnessed on

the profitability and other key functional areas and simultaneously were

discussed briefly, however, keeping in view the second generation reforms

various unexplored areas emerged which will pave way for further scope for

research in the area of insurance sector.

2. The other key areas include the issues, fading away presence of public insurers,

solvency norm II, FDI cap, distribution channels in the modern era of IT and

computers and other reform driven issues will also be areas of great interest to

the researches which have not been discussed in detail in the study.

Scope for Further Research

The impact of price deregulation on various functional areas of insurance industry

shall be great area of interest for the researchers. Moreover with the implementation of

solvency II and risk based capital, outlook of the insurance industry will surely change

and shall pave way for further research in the area of finance and more particularly

insurance sector.

Layout of the Study

The study consists of five chapters.

Chapter 1 Introduction: The chapter gives introduction to the insurance reform

and India’s position in international context. This is followed by the

objectives, research methodology, scope and limitations of the study

and the research lay-out.

Chapter II Review of Related Research and Literature: This chapter reviews

the relevant research and the liberalization, its impact on insurance in

24

various countries, response of the companies in the earlier opened up

markets and also tries to find out the research gap.

Chapter III Evaluation of Financial Performance of Public Sector Insurers: The

chapter includes financial analysis of individual parameters of

CARAMEL for public non-life insurers.

Chapter IV Evaluation of Financial Performance of Private Sector Insurers:

The chapter includes analysis of various key CARAMEL parameters of

the private sector insurers.

Chapter V Comparative Statistical Analysis of public and private Non Life

insurers: The chapter starts with descriptive statistical analysis and e-

growth of various parameters of CARAMEL, followed by solvency

comparison on the basis of ISI standard. Lastly the factors affecting the

solvency of the insurers have been derived with the help of multiple

regression.

Chapter VI Findings, Conclusions and Suggestions: This concluding chapter

systematically sums up the findings and conclusions of the study. It also

offers creative suggestions for a consistent strategy to be implemented in

the growing insurance sector for the prospective growth and

development of the sector.

25

CHAPTER II

REVIEW OF LITERATURE

26

The insurance sector is sine-quo-non for development and economic growth of any

economy and it has been recognized for many years. The significance of insurance

was also acknowledged in the first conference of United Nations Conference on Trade

and Development (UNCTAD) in 1964 by stating that “a sound national insurance and

reinsurance market is an essential characteristic of economic growth.”1 It seems

Insurance not only facilitates economic transactions through risk transfer and

indemnification but it also promotes financial intermediation (Ward and Zurbruegg,

2000). More specifically, insurance can have effects such as promote financial

stability, mobilize savings, facilitate trade and commerce, enable risk to be managed

more efficiently, encourage loss mitigation, foster efficient capital allocation and also

can be a substitute for and complement government security programs (Skipper,

2001).

In view of importance of insurance sector in economic development one could expect

that good quantum of research might be available on studying direct impact of 1 United Nations Conference on Trade and Development (UNCTAD) 1964 in its Annual Conference, Geneva.

27

insurance services on the economic growth. However, ground reality is different that

only few researchers have analyzed the relationship between insurance market size in

terms of gross direct premium (Skipper, 1998) and property liability insurance

premium (Beenstock, et al.,1988 and Outreville, 1990) or total insurance premium

(Ward and Zurbruegg, 2000) as insurance activities indicator. It has been ascertained

from the review of literature on the subject that either little or no research has been

conducted on contribution of insurance sector on economic growth and on

ascertaining the financial performance of insurance sector as such.

Beenstock et al., (1998) and Outreville (1990) studied by considering property-

liability premium, but ignored other parts of insurance industry (such as long term

insurance, motor insurance and etc). On other hand, Ward and Zurbruegg (2000) use

aggregate variable of total insurance premium in their study. Although Ward and

Zurbruegg (2000) acknowledged Brown and Kim (1993) suggestion that total

premium fail to account for different market forces in various countries and make

comparisons difficult and fail for account for regulatory effects on pricing, but

availability of data for longer period was stated as a reason for using total premium. In

addition authors claimed:

“If one views the key economic benefits of insurance as risk transfer,

indemnification and financial intermediation, then the benefits of risk transfer

and indemnification are likely to be the major characteristics of non-life and

health insurance, while financial intermediation is a part of life insurance. Thus

an aggregate approach will embrace all of these ideas within the same

analysis.” (Ward and Zurbruegg, 2000)

Although this interpretation seems correct and logical, but some studies which have

been conducted in the economic literature about aggregation problem show it may

cause unreliable results. An example of aggregation is cross-sectional aggregation

which occurs when a number of micro variables are aggregated to get a macro

variable (Maddala and Kim, 1998). Granger, (1990) showed it is possible to have co-

28

integration at the aggregate level and not at the disaggregate level and vice versa. If it

is true, one might accept finding of Ward and Zurbruegg (2000) about no long run

relationship between economic growth and insurance market size in countries like

Austria, Switzerland, United Kingdom and the United States.

Review of other major areas

1. The role of Insurance in Economic Growth and Development.

Insurance is an important growing part of the financial sector in virtually all the

developed and developing countries (Das et al., 2003). A resilient and well regulated

insurance industry can significantly contribute to economic growth and efficient

resource allocation through transfer of risk and mobilization of savings. In addition, it

can enhance financial system efficiency by reducing transaction costs, creating

liquidity and facilitating economies of scale in investment. (Bodla et al., 2003)

Ward and Zurbruegg (2000) examine the casual relationship between growth in the

insurance industry and economic development by recognizing that the economic

benefits of insurance are conditioned by national regulations, economic systems and

culture. Further, Ward and Zurbruegg (2000) argue that an examination of the inter-

relationship between insurance and economic growth needs to be conducted on a

country-by-country basis. The study is important because in contrast to the available

evidence on the importance of banks-typified by the work of Levine and Zervos

(1998) little is known about Insurance.

The work of Outreville (1990, 1996) is notable for identifying links between an

economy’s financial development and insurance market development. Patrick, (1966)

discusses that economic growth can be either supply-led through growth in financial

development or alternatively financial development can be demand-led through

29

growth in the economy. Whereas several studies establish that financial development

is an important determinant of countries’ economic growth, the aspect of

understanding the casual relationship between insurance market growth and economic

development is still lacking. Researchers (See for example Arestis and Demetriades

(1997), Demetriades and Hussain, (1996), and Pesaran et al., (2002) have pointed out

that it is important to accommodate the casual relationships to differences in size and

direction across countries. The issue of “heterogeneity” is crucial in gauging the role

of insurance in the economy across different countries.

Similarly Outreville (1990) investigated the economic significance of insurance in

developing countries. He compares 45 developed and developing countries and

concludes that there is a positive but non-linear relationship between general

insurance premiums per capita and GDP per capita. Although there is undoubtly a

positive link between insurance and economic growth, the direction of causation

between the two is unclear. Research by Ward and Zurbruegg (2000) suggest that in

some countries, the insurance industry plays a key role in economic growth.

From the demand perspective, Beenstock, et al., (1986) and Browne and Kim (1993)

found that the role of the state in providing insurance services is a determinant of the

demand for life insurance, because the level of education and the age dependency ratio

are likely to differ across countries. According to Hofstede (1995) the level of

insurance within an economy will depend on the national culture and the willingness

of individuals to use insurance contracts as a means of dealing with risk.

Fukuyama (1995) confirms that the finding of heterogeneity is likely to be conditional

on the culture context of a given economy. Insurance will offer important economic

benefits when the activities are generally seen as risky and risks are optimally

managed through insurance contracts rather than by other risk transfer mechanisms. In

this context, Fukuyama connects these cultural differences with the level of trust in the

economy.

30

Others (see for example Skipper Jr., 2000) highlight the role of insurance in individual

and corporate risk management and their contribution to economic development.

Webb (2000) investigated the mechanism by which insurance and banking jointly

stimulate economic growth. Webb (2000) by adding banking and insurance to existing

models asked whether it might explain economic growth. The more developed and

efficient a country’s financial market the greater will be its contribution to economic

prosperity. Skipper (2000) argues for insurance as simple pass through mechanism for

diversifying risks and indemnification. He highlights insurance as a fundamental

contributor of prosperity and greater economic opportunities.

While the role of insurance as contributor to the process of economic development has

not been properly appreciated and examined in economic literature. Among Indian

authors Shrivastava and Shrivastava (2002) hold the view that there is dearth of

material inter linkage between economic development on one hand and insurance

services on the other, whereas role played by other services like banking, transport,

communication, public administration, defence etc in accelerating the national

income of an economy has been properly highlighted.

To understand the relationship between the two it is necessary to have clear concept of

insurance and more importantly the economic development, as the latter has

undergone a paradigm shift. The definition of insurance, however, has been same

without any ambiguity and difference of opinion. Insurance may be defined as a

contract between insurer and insured under which insurer indemnifies the loss of the

insured against the identified perils for which mutually agreed upon premium has been

paid by the insured. The contract lays down the time framework within which the

losses will be met by the insurer.

Samuel (2001) defines the term insurance by referring to the two important Schools of

thoughts on the subject viz, i) Transfer School and ii) Pooling School. According to

Transfer School, “insurance is a device for the reduction of uncertainty of one party,

called the insured, through the transfer of particular risks to another party ; called the

31

insured, who offers a restoration, at least in part, of economic losses suffered by the

insured” (Irving, 1956). On the other hand, according to Pooling School “the essence

of insurance lies in the elimination of uncertainty or risk of loss for the individual

through the combination of large number of similarly exposed individuals” (Alfred,

1935)

Various economists have identified various factors which contribute towards

increasing the wealth, prosperity and welfare of the masses. Smith (1776) observed

that capital is the main determinant of the number of useful and productive labourers,

who can be set to work. His literature has been titled “inquiry into the nature and

causes of the wealth of nation”,. Economists, however, believe that there are a number

of determinants of economic growth of a society.

“If a country is going to restructure and liberalize its insurance regulatory

environment, it should do so to maximize the opportunities for growth and

development. Growth is consistent with certain structures for education, the public

sector, savings and investment opportunities, private property rights, and proper fiscal

and monetary policies (Skipper et al., (2000). These are the standards of IMF

prescriptive for market development (IMF, 1996).

In most of the economic literature, the prosperity of nation was however measured

through the yard stick of increase in the national income of the economy; measured

through different variants such as Gross Domestic Product (GDP) or Net Domestic

Product (NDP), at current or constant prices. Normally in order to assess the real pace

of development, the growth of GDP at constant prices was taken into account

(Shrivastava and Shrivastava, 2002). They observe that the writing did not consider

the qualitative changes such as structural and institutional transformation of the

productive system within the ambit of the concept of economic development. The

issues such as alleviation of poverty, reduction in inequalities of income and un-

employment were assumed to be taken care of the mere growth of the GDP

(Shrivastava and Shrivastava, 2002).

32

Later writings on the subject questioned the concept of economic development solely

based upon the qualitative changes in the GDP/Per Capita GDP, as it fails to reflect

upon the qualitative changes in the life of an individual and the nation. The definition

of economic development thus should incorporate both quantitative and qualitative

changes. To incorporate both, economists distinguished the concept of growth from

that of development; former being quantitative and the latter embracing qualitative

changes in the economic institutions and organizations of the country.

In this description while examining the relationship between the two i.e., economic

development and insurance, development has been taken up in the sense of growth,

implying sustained increase in the GDP/Per Capita GDP of the country. The growth of

GDP is a function of host of factors, both economic and non-economic in nature,

which directly or indirectly subscribe to it. From an economic angle, these factors

could be grouped into the following four categories (Samuelson, 2001).

Human Resources. (Labour, Education, Discipline, Motivation, etc.)

Natural Resources. (Land, Minerals, Fuels, Climate, etc.)

Capital Formation. (Machines, Factories, Roads, etc.)

Technology (Science, Engineering, Management, Enterprises.)

2. The Role of Insurance in Financial Intermediation and Domestic Capital

Markets.

The mainstream literature on the factors of financial market development does not

explicitly include the insurance market. However, the activities of insurance

companies as financial intermediaries and as institutional investors are crucial

components of capital market development, which cannot be ignored. Conyon (1994)

states that the main role played by insurance stems from its activities as a financial

intermediary, and as such the development of the insurance market has important

implications for the accumulation of productive capital within an economy. Conyon

33

and Leech (1994) note that institutional investors (i.e., pension funds, insurance

companies and mutual funds) improve the productive potential of projects. Cole

(1997) states that a solid financial system has five components: (a) sound fiscal and

macroeconomic policies, that is public finance discipline and stable monetary,

interest, and exchange rate policies; (b) qualified and competitive financial institutions

; (c) effective prudential supervision; (d) an adequate legal system; and (e) a stable

and predictable political system.

In developing economies, financial intermediaries play relatively larger role in

supplying the funds and amongst these intermediaries insurers play an important role

(Bodla et al., 2003). Shrivastava and Shrivastava (2002) highlight the advantageous

role of insurance companies to co-operate banks, mutual funds and asset management

companies, etc. They claim, advantage with insurance companies is that they are

capable of deploying the funds in long term projects compared to banks and other

intermediaries, who invest their funds mostly in short duration projects.

Carmichael and Pomerleano (2000) highlight contribution of insurance as a promoter

of financial stability among households and firms by transferring risks to an entity

better equipped to withstand them, it encourages individuals and firms to specialize,

create wealth and undertake beneficial projects they would not be otherwise prepared

to consider.

A number of empirical studies show that the development of financial intermediaries,

including insurance, has a strong correlation with economic growth. Patrick (1996)

suggests that financial sector can either have a supply-leading or demand-following

relationship with economic growth. In the supply-leading view, economic growth can

be induced through the supply of financial services, while in the demand following

view; the demand for financial services can induce growth of financial institutions and

their assets.

34

Both supply-leading and demand-following finances are likely to coexist and Patrick

(1996) suggests that causation runs from financial to economic development (supply-

leading relationship) in the early stages of development while the direction for

causation is reversed (demand-following relationship) in the later stage. Outreville

(1996) examined factors that contribute to insurance growth by using cross-sectional

data of 48 countries. Enz (2000) examined an S-shaped relationship between per-

capita income and insurance penetration by estimating a logistic demand function for

insurance that allows income elasticity to change as the economy matures.

Many other researchers explored the question of how important the existence of

financial sector development is to economic growth. Odedokum (1996) employed bi-

directional granger causality tests by using panel data of 71 countries during 1960’s

and 1980’s and found evidence that financial sector depth granger-causes economic

growth. Also limiting the causality test to the insurance sector, Ward and Zurbruegg

(2000) conducted Granger-causality tests by using data of nine leading OECD

countries during 1961-1996. They concluded that the insurance sector Granger causes

economic growth in some countries, while the reverse is true in other countries.

Webb (2000) is of the view that insurance contributes by fostering more efficient

allocation of capital. Insurers spend time collecting information to evaluate projects,

firms and individuals in their decision to issue and price insurance and in their

investment activities. By comparison, individual savers and investors typically do not

have time, resources or ability to collect this information. In addition, activities of

insurers in continually evaluating and monitoring risks provides markets with

information on the likelihood of losses which can lead to improved resource allocation

(Webb, 2000).

The insurance sector can also contribute to the development of capital markets, by

making a pool of funds accessible to both borrowers and issuers of securities. This is

due to the fact that insurance companies have long term liabilities than banks. Catalan,

et al., (2000) studied the relationship between the development of contractual savings

35

(assets of pension funds and life insurance companies) and capital markets. By

analyzing Granger Causality between contractual savings and both market

capitalization and value traded in stock markets for industrialized countries, they find

that the growth of contractual savings Granger causes the development of capital

markets.

In developing and underdeveloped countries, the most important factor, contributing

to the process of economic development is the capital formation. The relationships

between capital formation and insurance services in both developed and developing

economies of the world has been quite pronounced and have greater significance.

Bodla et al., (2003) laid down the three essential steps in the process of capital

formation viz:

1. Real savings.

2. Mobilization and channelizing of savings through financial and non-financial intermediaries for being placed at the disposal of investors.

3. The act of investment.

Insurance can promote efficiency in the financial system by mobilization of scattered

resources, creation of liquidity and economies of scale (Gupta, 2004). The features of

insurance have been widely highlighted by Skipper (2001) with features overlapping

the process of capital formation. The contribution of insurance in the process of

capital formation is through all these stages. Insurance plays an important role in

channelizing savings into domestic investment (Skipper, 2000).

a) Insurance and Savings

The act of saving involves refraining from the present consumption and thereby

placing a proportion of income for being consumed at a later date. The act of

investment can only take place when there are savings in the economy (Shrivastava

and Shrivastava, 2002). Historically a directly proportional relation has been

36

established between savings and growth of GNP. Savings can be either financial or

non-financial (skipper, 1997). Economists generally agree as to the positive

relationship between saving rates and growth rates. “Countries that save more tend to

grow faster” (skipper, 1997). Further, skipper says “Of the world’s 20 fastest growing

economies over the preceding ten years, 14 had saving rates greater than 25 percent of

GDP and none had a saving rate of less than 18 percent”. In contrast, 14 of the 20

slowest growing countries had saving rates below 15 percent. Skipper (1997)

concludes with suggestion that rapid economic growth could stem from either

increased saving rates, the introduction of new technologies, or methods that increase

productivity.

Shrivastava and Shrivastava (2002) and Bodla et al. (2003) have come up with

relation between rate of growth of GDP, saving ratios and capital output ratio. The

authors establish direct positive correlation between the rate of savings on the one

hand and the rate of growth of GNP on the other. They define capital output ratio as

the number of units of capital required for producing one unit of output. Authors

categorize the source of generation of savings into three main heads:

a) Household sector.

b) Private Corporate Sector.

c) Public Sector.

With the help of the share of all the above heads to GDP, actual figure of the share of

the three heads to GDP reflect that household savings constitute the major proportion

of the total savings in the country (Shrivastava and Shrivastava, 2002).

b) Mobilising and Channelizing of Savings through Insurance

Insurance Companies also play a secondary but increasingly important intermediation

role. They take funds from policyholders and invest them in financial and real markets

(Hodgson, 1999). Shrivastava and Shrivastava (2002) highlight the role of insurance

37

as a financial intermediary with specialized knowledge that place the savings of

different units into most productive investment channels. The act of savings is

performed by a large number of units scattered across the country (Shrivastava and

Shrivastava, 2002). Insurers help mobilize savings in three ways. First, insurers lower

transaction costs associated with drawing together savers and borrowers compared

with direct lending and investing by policyholders. Second they create liquidity as

they invest funds from customers to make long term loans and other investments.

Whereas policyholders have ready access to loss payments and savings, borrowers do

not have to repay their loans immediately. Hence, if individuals carried out the similar

direct lending the proportion of their personal wealth held in long-term, illiquid assets

would be much higher. Third, by gathering small sums from large numbers of

policyholders, insurers are often able to provide finance on a scale required for large

infrastructure projects. This assists the national economy in expanding the set of

feasible investment projects and encouraging economic efficiency (Webb, 2000).

Insurers provide financing for one third of all corporate debt in United States and they

are pivotal in promoting financial system efficiency in the economy (Skipper et al.,

2000). He argues that insurers are main financial institutions in US who have been

able to reduce in transaction costs, create liquidity, and facilitate economies of scale in

investment compared to other financial institutions.

c) Investment

In meeting insurance needs, insurance companies also act as financial intermediaries.

In collecting and managing a pool of insurance premiums, insurers are part of the

group of institutional investors which have become key holders of financial assets and

have an increasingly important role in today’s capital markets. (OECD, 2004).

Insurance and Risk Management

Risk management can be defined as the logical development and carrying out of a

plan to deal with potential losses (Dorfman, 2002). Regda (2004) defines Risk

38

Management as a process that identifies loss exposures faced by an organization and

selects the most appropriate techniques for treating such exposures. Risk management

should not be confused with insurance management. Risk management is a much

broader concept and includes all techniques for treating loss exposures, in addition to

insurance.

Ward and Zurbruegg (2000) note that insurance further supports the functioning of the

market expensive items, such as cars, by offering risk transfer and indemnification

services to risk averse individuals. This encourages such individuals to make

purchases that they would not otherwise have made. Thus insurance provides positive

externalities in terms of increased purchases, profits and employment both within and

alongside the insurance sector. In addition, insurance facilitates innovation within an

economy by offering to underwrite new risks.

Diacon et al., (2005) highlight the role of insurance in risk management. The authors

discuss it as a way of providing qualitative economic value, with features as;

a) Risk transfer.

b) Risk based pricing.

c) Insurance supports tort liability law.

d) Investments function of insurers.

e) Advice on Risk management.

i) Works by Pooling Risk

At its most basic, insurance as an agreement where, in exchange for the payment of a

premium, the insurers agrees to pay the policyholders a defined amount in event of a

specific loss. Thus, insurance companies are risk bearers; they accept or underwrite

the risk in return for an insurance premium. Accordingly, the term insurance may be

defined as a co-operative mechanism to spread the loss caused by a particular risk

over a number of persons who are exposed to it and who agree to ensure themselves

against the risk (Bodla et al., 2003)

39

The premium paid by an individual policyholder becomes part of an insurance pool

which is at the disposal of the insurers. In setting premiums, the insurer considers the

expected losses across the insurance pool and the potential for variation. The aim is to

charge premiums that, in total, will be sufficient to cover all of the projected claim

payments for the insurance pool. This involves balancing a complex range of factors

(Anderson and Brown, 2005).

ii) Helps to manage risk

Risk management is a key contribution of the industry. Uncertainty and risk

accompany most economic activities. The acquisition of assets that characterizes most

investments also implies the acquisition of risk. Physical assets in particular are

subject to unexpected but costly damage. New endeavours, which are particular

drivers of economic growth, are typically accompanied by even more risk. Many

individuals are risk averse and prefer to avoid or minimize risk. Even entrepreneurs in

new businesses prefer to shed risk in areas that are outside of their control if they can.

Insurance frequently provides the answer to risk management issues. Many authors

identify this as a central contribution:

…the possibility of shifting risks, of insurance in the broadest sense, permits

individuals to engage in risky activities which they would not otherwise undertake

Insurance provides the vital market function of allocating and pricing risk… (Arrow,

1970).

The efficient pricing of risk and its transfer to those best equipped to handle it

contributes significantly to resource allocation and economic growth. And without a

reliable mechanism for pooling and transferring that risk, much economic activity just

simply wouldn’t take place (Costello, 2004).

…insurance facilitates innovation within an economy by offering to underwrite new

risks. (Ward and Zurbruegg, 2000)

40

Insurers enable risk to be managed more efficiently in three ways, through:

a. Risk pricing; b. Risk transformation; and c. Risk pooling and risk reduction.

In their insurance activities, insurers evaluate potential losses — the greater the

potential loss, the higher the price of insuring that risk. Insurers’ pricing of risks

provides information to policyholders about the consequences of their activities that

will assist in the efficient allocation of resources (Webb, 2000).

Insurance enables individuals to transfer their risk to insurers, transforming the

insured’s risk profile. Insurance provides an important way of transferring risk from

risk-averse individuals to companies that specialize in evaluating and dealing with

risk. Insurance companies play a critical role as specialists in information about risks

and in risk management (ACCC, 2002).

Insurance companies are not simply firms that specialize in risk. Rather, in a world of

informational asymmetries, they are specialists in gauging, monitoring and most

particularly managing risk. It is this expertise that enables insurance firms to cope

with difficulties such as moral hazard and adverse selection (ACCC, 2002). The

ability of insurers to transfer risk facilitates the purchase of significant items, such as

motor vehicles and real estate. As a result, insurance coverage can have ‘positive

externalities’, including increased purchases, profits and employment. These arise not

only from within the insurance sector but also outside it (Ward and Zurbruegg, 2000).

As noted above, insurers cover individuals against losses or manage risks by pooling

risks. Aggregation brings other benefits. By insuring a large pool of individuals who

are facing similar risks, insurance companies can predict with greater accuracy the

likelihood of an event occurring. This is based on the law of large numbers, which

states that although single events can be random and largely unpredictable, the

average outcome of many similar events can be ascertained more easily than the

41

outcome of a one-off event. The greater the number of policyholders, the more stable

and predictable is the insurer’s portfolio. This can lead to lower volatility, in turn

enabling insurers to charge smaller risk premiums and maintain more stable premiums

(Starr and Robinson, 2000).

3. Relevant Factors for Insurance Development.

Various attempts have been made to link specific variables (e.g., the legal system,

governance, enforcement, institutional aspects) to insurance and financial market

development. Swiss Re (2004) has analyzed these factors mostly from the point of the

opportunities of business. Among the factors that determine the growth of insurance

are level of savings and GDP per capita that have a positive impact on insurance but

also benefit from the existence of insurance contracts. Enz (2000) studied the relations

between the insurance demand and GDP, indicating that other supply and demand

factors (e.g., taxation, regulation, and insurance provided by the government) limit

insurance penetration.

According to Swiss Re (2004) important factors that determine the growth of the

insurance business are the distribution of wealth, legal systems and property rights, the

availability of insurance products, regulation and supervision, trust and risk

awareness. Other non-economic factors have an impact on the development of

insurance: religion, culture and education. Specific factors are identified for life

insurance and non-life insurance. For non-life; regulation (e.g., compulsory

insurance), claim awards, exposure to natural disasters, and the public sector’s role in

health. For life; economic stability (e.g., inflation, exchange rate), demography, the

tax system, the savings rate, and the pension system.

Factors influencing Insurance demand.

General Factors

42

◘ Economic growth ◘ Products offered ◘ Wealth, Distribution of Income. ◘ Distribution Channels ◘ Religion, culture ◘ Risk Awareness ◘ Education ◘ Insurance Regulation ◘ Property rights; legal certainty ◘ Trust in Insurance Source: Indian Insurance Industry, Transition and Prospects, 2002

There are several potential sources of market failures in the insurance business. Most

of the theoretical research on insurance has focused on the problems of adverse

selection and moral hazard in the insurance market. Rothscchild and Stiglitz (1976)

show that when the buyers are heterogeneous in their accident-probabilities, which is

private information to the buyer, asymmetric information between the insurer and the

policyholder inhibits the design of an efficient contract. Yet the empirical evidence of

asymmetric information in insurance markets is decidedly mixed. Several recent

empirical studies have failed to find evidence of asymmetric information in property-

causality, life and health insurance markets. These studies include Cawley and

Philipson (1999), who study the U.S. life insurance market; Cardon and Hendel

(2001), who study the U.S. health insurance market; and Chiappori and Salanie

(2002), who study the French automobile insurance market. In contrast, Cutler (2002)

reviews a substantial literature that finds evidence in support of asymmetric

information in health insurance market and Cohen (2001) offers some evidence for

adverse selection in U.S. automobile insurance markets. These conflicting results raise

the question of whether asymmetric information is a practically important feature of

insurance markets.

There are different views in the literature about the need for capital adequacy

regulation and supervision in the insurance business. The advocates of a free

insurance market without regulation and supervision and capital adequacy argue that

asymmetric information in insurance is less severe than in banking and that the case of

a crisis or failure of an insurance company is less costly than bank failures. Rees and

Kessner (1999) discuss this issue extensively, and they favor a free insurance market

43

based on the analysis of the U.K. (unregulated) and German (tightly regulated)

markets. They argue that buyers are always ready to pay for an insurer that guarantees

solvency and therefore there is always enough capital available in case of insolvency.

Therefore, the decision of insurers in terms of economic capital is efficient, and

regulation can impose deadweight loss on the market. Their argument is based on the

assumption that consumers are fully informed about the insolvency risk. Klemperer

and Meyer (1985) remove this crucial assumption of consumer information-that is, the

consumer can fully understand the solvency risk, and that consumers have the ability

to use relevant information-as per the empirical evidence, they disputer the

predominance of the U.K. unregulated insurance market and that insurance failures

(making reference to company failures during the period 1986-1999) are more severe

than the losses of other financial institutions.

In practice, despite the arguments in favour of a free and deregulated market,

regulation and supervision of insurance markets are widespread in the world.

However, in contrast to the banking sector, the argument for free regulation and

supervision in insurance is stronger than in the case of the banking sector. This

difference is based on the fact that insurance does not have the need of providing

liquidity (i.e., for withdrawal by depositors that may lead to bank runs and so-called

contagion). In addition, the insurance business has the capability of diversifying its

risk portfolio through reinsurance.

4. Defining Effectiveness in Insurance Markets

The extent to which the insurer successfully facilitates the insurance process becomes

the overarching criterion for a metric on effectiveness. How quickly, how cheaply,

how simply and among other things, how reliably an insurance company administers

its policies will help determine how effectively it assists in reducing the downside of

risk.

44

There is a dearth of literature on the subject of insurance effectiveness as framed

above. The general tendency is for intra-industry studies of deep insurance markets,

such as those of Europe or the U.S., that focus on profitability or economic efficiency,

concepts that flow directly from the microeconomic theory of the firm. The search for

variables and factors that capture insurance market effectiveness is altogether absent

from these studies because they are tailored to the research agenda of highly

developed insurance markets in which profit maximization and competition are far

more pertinent than improving the groundwork for a market that presumably should

already be working.

For instance, Diacon, et al., (2002) concentrate on an insurer’s efficiency or ability to

produce a given set of outputs (such as premiums and investment outcome) via the use

of inputs such as administrative and sales staff and financial capital. “An insurer is

said to be technically efficient if it cannot reduce its resource usage without some

corresponding reduction in outputs, given the current state of production technology in

the industry.” Cummins and Weiss (1998) similarly focus on a Pareto frontier of

economic efficiency, which is achieved when an insurer has reached cost efficiency,

or the production-maximizing (technical efficiency) and the cost-minimizing

(allocative efficiency) combination of inputs. Beyond insurer efficiency, some studies

choose to measure company performance. Avoiding some of the subjectivity

associated with profits reported by long-term insurers, for example, Mayers and Smith

(1992) utilize an operating income variable (defined as income before taxes and

dividends to policyholders) as well as annual growth in premiums. Proxies of

performance in other studies include: growth in assets (Ingham and Thompson, 1995);

return on assets (O’Hara, 1981; Genetay, 1999); growth in premiums (Armitage and

Krick, 1994); and executive remuneration/ emoluments (Brickley and James, 1987;

Field, 1988; Kroll et al., 1993; Mayers et a.l, 1997).

Related Research on Insurers' Solvency

45

McDonald (1992) summarized the factors affecting insurer insolvency, which provide

useful guidelines on an insurer's financial health, but without classifying them into

different types of insurers. In the following analysis, a review of firm-specific factors

that affect property-liability (general) and market factors that affect non life insurers

has been used. This is because life/health insurers differ greatly in terms of operations,

investment activities, vulnerabilities, and duration of liabilities from general insurers

(Brockett et al., 1994). Life insurers are said to function as "financial intermediaries"

while general insurers as "risk takers."

Firm-Specific Factors on Property-Liability Insurers' Insolvency. Many previous

studies focused on general insurers used financial characteristics as insolvency

predictors (Ambrose and Seward, 1988; BarNiv, 1990; BarNiv and McDonald, 1992;

BarNiv and Smith, 1987; Barrese, 1990; Harrington and Nelson, 1986; Hershbarger

and Miller, 1986; Willenborg, 1992). The factors that are significant for assessing

general insurers' insolvency include firm size, investment performance, underwriting

result, liquidity, operating margin, premium growth, and growth rate of surplus.

Firm Size: The financial health of any organization is influenced by, among other

factors, the size or total assets of the firm. As regulators are less likely to liquidate

large insurers, it is expected that small insurers are more vulnerable to insolvency

(BarNiv and Hershbarger, 1990; Cumrnins, Harrington, and Klein, 1995). Variables

used to measure firm size include total premium, total admitted assets, and capital and

surplus.

Investment Performance: Investment performance discloses the effectiveness and

efficiency of investment decisions. As such, investment performance becomes critical

to the financial solidity of an insurer. Kim et al., (1995) and Kramer (1996) find that

investment performance is negatively correlated to insolvency rate.

Underwriting Result: There are two key components of an insurer's total operating

income: investment income and underwriting income. As for underwriting income,

46

combined ratio is to be used as a measure of its performance. According to Browne

and Hoyt (1995) the combined ratio is positively correlated to insolvency rate.

Liquidity Ratio: Liquidity is the capability of an insurer to pay liabilities, which

include operating expenses and payment for losses/benefits under insurance policies,

when due. For an insurer, cash flow (mainly premiums and investment income) and

liquidation of assets are the two sources of liquidity (Hampton, 1993). Lee and Urrutia

(1996) found that the current liquidity ratio is a significant indicator of solvency. The

stability of the liquidity ratio is a necessary measure of corporate solvency

(Dambolena and Khoury, 1980).

Operating Margin: Intuitively, being profitable means that insurers are earning more

revenues than being disbursed as expenses. Kramer (1996) found a positive

relationship between operating margin and financial solidity, that is, operating margin

is negatively correlated to the rate of insolvency.

Premium Growth: Premium growth measures the rate of market penetration.

Empirical results indicate that rapid growth of premium volume is one of the causal

factors in insurers' insolvency (Kim et al., 1995). Being too obsessed with growth can

lead to self-destruction as other important objectives might be neglected. This is

especially true during an economic downturn, such as the Asian Financial Crisis.

Liberalisation of Insurance Industry

Market liberalization of insurance services involves removing restrictions to foreign

and domestic investment and allowing firms the freedom to set rates. In the process of

liberalizing markets, governments generally set minimum capital requirements for

insurers, introduces solvency margins and allow firms to engage in brokerage and

perhaps insurance activities (Drury, 2000; Swiss Re, 2000). Liberalized markets may

be partially (less than 100% equity ownership permitted) or completely open (100%

foreign equity ownership) to foreign competition although the WTO is pushing all

member countries towards complete openness over the long-term (WTO, 2004). The

47

sequence of steps involved in liberalizing the insurance markets involves the removal

of obligatory concessions to state run reinsurers, freedom of cross-border business,

acquisition of minority holdings in firms for joint ventures, acquisition of majority

holdings and establishing local subsidiaries (Swiss Re, 2000). It is important to

emphasize that each country falls somewhere along the “Liberalisation Continuum”

and even G-7 Nations are not considered fully liberalized in this sector (Matto, 1999).

While the effects of privatization and de-regulation on firm strategy and performance

have received the bulk of attention in the international business research (See for

example, Haveman,1992; Doh, 2000; Uhlenbruck and Castro, 2000; Uhlenbruck,

Meyer and Hitt, 2003; Teegen and Mudambi, 2004), relatively little has been said

about the effect of market liberalization on companies, particularly in financial and

insurance services, unlike privatization and de-regulation, market liberalisation

policies tend to be broader in nature and refer to the process of opening up domestic

markets to foreign competition (Tesche and Sahar, 1994). Market liberalization also

tends to occur incrementally over several policy changes rather than in one defining

moment. In financial and insurance services for example, Liberalization of the Indian

insurance sector in March 2000, and de-tarification from Jan, 1st 2007.

Prior research on the effects of liberalization trade in goods Dollar, 1992; David,

1993; Sachs and Warner, 1997) suggests that liberalization has a positive long-term

effect on economic growth in adopting countries. Trade liberalization generates

economic growth by improving resource allocation, increasing host country access to

technology, allowing firms to take advantage of economies of scale and scope and

increasing domestic competition (Dornbush, 1992). The growth effect from

liberalization can be substantial in emerging markets and developing countries, where

economic inefficiencies, an absence of technology and weak competition are often the

norm.

Given the inefficiencies that often characterize EMDCS, it is not surprising that

investors from developed countries are often eager to enter newly liberalized markets

48

and leverage their comparative advantages in these areas (Caves, 1974; 1996; Lecraw,

1991; Brewer, 1993; Gundlach and NunnenKamp, 1998).

In one of the few studies on the effects of insurance services liberalization and

participation of MNE’S, researchers found that liberalizing markets attracted greater

foreign direct investment (Ma and Pope, 2003). This increased FDI can generate

positive employment and economic spill over effects for the domestic economy.

Skipper’s study has shown that liberalization of insurance markets may enhance a

state’s economy in an indirect way; his study approaches the role of insurers as

financial intermediaries which are essential for economic development. The author is

referring to Dr. Ian P Webb’s dissertation that demonstrated that non-life insurance,

life insurance and banking (as the primary sectors of financial services) stimulate

economic growth. The results of this analysis indicate that all three sectors

significantly influence national productivity gains. Dr. Webb’s analyses prove that a

country’s economic prosperity depends on the scale of development of its financial

market structure.

After Webb’s dissertation, skipper has specified several categories that “constitute the

mechanism by which insurance contributes to economic growth”. Several issues he

identifies include; a promotion of financial stability; increasing of trade and

commerce; enhancing of financial systems and efficient risk management.

Boonyasiai (2000) examined the effects on life insurer efficiency of insurance market

opening (defined as liberalization in her study) and deregulation efforts undertaken by

Korea, The Philippines, Taiwan and Thailand. He found that liberalization and

deregulation of the Korean and Philippine life insurance industries seem to have

stimulated increases and improvements in productivity. In addition, liberalization and

deregulation of these markets created more competitive markets as witnessed by life

insurer’s improving efficiency; e.g., achieving cost savings and scale of operations.

Merely allowing greater market access without dismantling restrictive regulatory

49

regimes as was the situation with Taiwan and Thailand seems to have had little effect

on increases and improvements in productivity.

The study findings are consistent with the view that market access is a necessary, but

not a sufficient condition for contestable markets. Study findings also are consistent

with the view that, in a restrictive regulatory environment, welfare gains will be

minimal if deregulation does not closely follow market opening. Dr. Boonyasai’s

research speaks eloquently in favour of liberal insurance markets (Skipper, 2201).

Harold. D. Skipper highlights the features of liberal insurance market as a perfectly

competitive market with features as;

a) Easy entry and exit access.

b) Buyers and sellers perfectly informed.

c) Sellers offering identical products at same prices.

d) Market requiring no government direction or oversight to accomplish these

desirable social goals.

e) Market having perfect competition.

Skipper (2001) holds view that even if an ideal one cannot be realized in practice, still

this economic ideal provides a useful construct against which we can compare actual

market functioning. “We know that the closer a market is to this competitive ideal,

the more efficiently it functions. Indeed a market that is workably competitive

functions well and provides most of the benefits of perfect competition. Markets

characterized by workably competition, generally have low entry and exit barriers,

numerous buyers and sellers, good information, governmental transparency and the

absence of artificial restrictions on competition”.

Skipper however adds that rather substantial government intervention ordinarily is

necessary because of important imperfections that exist in such markets. Because of

these market imperfections (also called market failures), government intervention into

50

key areas is required to ensure healthy competition and good performance. Julai F Chu

stratifies Asian insurance markets into three levels; fully mature, transitional and

incipient, placing China and India as the two major incipient markets, which are the

world’s two most populated countries.

In view of the above research literature, although various aspects of insurance industry

have been studied and their impact has well been discussed. For example, Skipper

(2001) highlights various benefits of liberalization of insurance sector, however

afterwards the literature is silent regarding the quantification of impact of

liberalization on insurance markets worldwide. Similarly, no evidence is seen

regarding such study in India, which happens to figure among world’s most populist

country. Similarly, no such evidence which would have highlighted post liberalization

insurance performance is known till date. In this backdrop, the present study is an

inclusive attempt and includes highlighting of the quantitative impact in the post

liberalization era for Indian insurance industry and more particularly for non life side

of insurance business, which has received less attention in the economic literature.

The study focuses on the financial performance on the basis of CARAMEL

parameters prescribed by IMF and World Bank. Consequently, the next chapter of the

study is devoted to the analysis of financial performance of public sector insurance

companies on the basis of CAMRAEL model.

51

CHAPTER III

EVALUATION OF FINANCIAL

PERFORMANCE OF

52

PUBLIC SECTOR INSURERS

In the recent past, the Indian insurance market has undergone major structural

changes. The government monopoly was dissolved and private companies were

permitted to operate and intermediaries suddenly had a significant role to play. In the

country of over 1 billion people, the untapped potential for insurance and reinsurance

business is enormous; nevertheless impediments to an open and competitive market

still exist in the form of restrictions on foreign investments and mandatory reinsurance

cessions. The scenario, however, was different prior to liberalization and deregulation

of Indian insurance market. Although efforts were made to maintain an open market

for the general insurance industry by amending the Insurance Act, 1938 from time to

time, malpractices escalate beyond control. Thus the general insurance industry was

nationalized in 1972. The General Insurance Corporation (GIC) was set up as a

holding company with four subsidiaries: New India, Oriental, United India and

53

National Insurance Companies (collectively known as NOUN). It was understood that

the companies would compete with one another in the market; however, the same

could not happen at that time but was possible only after 29 years (Sinha, 2005). The

NOUN has kicked off an internal exercise to segregate the entire investment portfolio

of the GIC in 2001. The GIC had more than 2500 branches, 30 million individual and

group insurance policies and assets of about USD 1800 million at market value as the

end of 1999. It was a common suggestion that the GIC should close 20-25% of its

non-viable branches (Patel, 2001). The GIC has so far been the holding company and

reinsurer for the state run insurers. It reinsured about 20% of their business either by

having them cede reinsurance business to each other or by using industry pooling.

The rates, terms and conditions that the insurer could offer for their products were

established by the Tariff Advisory Committee (TAC), a statutory body created under

the Insurance Act 1938, the major piece of insurance legislation in effect at that time.

The nature of this tariff system meant that the premiums were fixed at the same rate

for all the companies, products were undifferentiated and coverage was limited in

almost every line. The monopoly structure and the closing of the market to foreign

and domestic private companies also meant that domestic insurers could thrive

without having to face any external challenges. In this market, there was not much

need for brokers. In any case, they were effectively kept out of the country by

regulations that prevented them from charging fees or commissions for their services.

Nevertheless some international brokers did conduct business in the market from their

offices outside of the country.

Since the Indian insurance market has thus far been dominated by public sector

companies, which have over a period of time, built up a national presence and a strong

business franchise. The operating and financial position of these players has been

characterized by huge underwriting losses (because of price inefficiency in certain

lines of business), substantially underutilized underwriting capacities, inadequate

capitalization, combined reinsurance arrangements and sizeable investment portfolios.

54

In a deregulated environment, it was expected that the available underwriting

capacities and strong financial positions of these nationalized players will enable them

to maintain their dominant positions even as competitive pressures would affect their

growth rates and business acquisition costs. The low penetration of insurance products

in the country, particularly in retail lines of business, present significant opportunities

for the public sector insurers to device innovative products and market them through

their established distribution channels. The domestic insurance industry has evolved in

the areas of retail insurance products; strategic pricing (in a de-tariffed regime); and

innovative distribution modes, and it was expected that public insurers would perform

in the liberalized era with better service and better responsiveness to consumers’

insurance needs (through superior product management), besides focusing on

appropriate risk selection so as to improve underwriting performance, which would

cushion the adverse impact of relatively lower investment yields. However,

monopolization of the insurance sector by the nationalized companies and their

limited focus on retail business has prevented the Indian non-life insurance market

from achieving its full growth potential. This scenario, however, has helped the new

entrants following the deregulation of the Indian insurance industry and lead to entry

of global insurance players in Indian market, such as the AIG Group, the Allianz

Group, Tokio-Marine, Chubb, Royal Sun Alliance and Lombard. They have mostly

started their operations in association with established domestic business houses and

contributed towards the development of newer products and delivery systems and

focus on creating a greater awareness about insurance as protection and risk

management device. These efforts have resulted in an expansion of the market over a

period of time, particularly for the retail business which has thus far received limited

focus from the public sector insurers.

The risks underwritten by an insurance company are usually covered under fire,

marine and miscellaneous portfolios, while the fire and marine portfolios primarily

cover corporate risks, the miscellaneous portfolio covers the motor, third party (TP)

and own damage (OD), engineering, aviation, health and other retail classes of risk.

55

The underwriting performance of the domestic insurance industry in the past has been

affected by increasing losses on the motor portfolio besides the poor underwriting

profitability of the domestic players (which is also the result of their limited flexibility

in risk selection), and their high level of management expenses because of heavy

salary expenditure and the abundance of non-lucrative branches.

Against this backdrop, in present chapter the financial analysis of public sector non-

life insurers has been attempted to limelight the financial standing of these companies

in post liberalisation period. The data for analysis has been collected from the

secondary sources, such as annual reports of the companies and annual reports of

IRDA and insurance statistical digest.

The classification, tabulation and analysis of the financial data collected from the

above mentioned sources, has been done as per the requirements of the study. The

selected analysis shall throw light on the selected indicators within the CARAMEL

framework, which adds the Actuarial and Reinsurance Issues to the CAMEL

methodology normally used for bank analysis. However, first the market position of

the public sector insurers has been studied.

THE PUBLIC SECTOR INSURERS’ MARKET SHARE

The four major PSUs currently operating in the Indian general insurance market are

National, Oriental, United India and New India insurance companies. In practice, the

PSUs tend to focus their efforts on maintaining a strong status and market position

within their local region rather than competing with one another. Although New India

is generally regarded as the most successful of the public sector insurers, however,

LLOYDS (2007) highlight various challenges faced by public insurers and

characterises them as the companies focusing on sales rather than profitable

underwriting, the companies with poor IT system, poor claims paying record and more

exposure to loss making motor business which results into the loss of market share

and leakage of high quality staff to private insurers.

56

Table 3.1 depicts the market share of public sector non-life insurance companies. The

public sector insurers exhibit a better growth in 2008-09, at 7.12 percent (IRDA,

2008-09); more than double the previous years’ growth rate of 3.52 (IRDA, 2007-08).

The premiums being the main input, the public sector insurers continued to underwrite

a major component of the non-life business. The four public sector insurers

underwrote a total premium of `18030.75crores in 2008-09 as against `16831.84crores

in 2007-08, registering a growth of 7.12 percent as against an increase of 3.52 percent

recorded in the previous year.

Fig. 3.2 indicates that the public sector general insurers expanded their business with

an increase in their respective premium collections. As is reflected in Table 3.1, the

major increase was witnessed in the miscellaneous and marine segments while as the

fire segment, which is seen as profitable business continued to remain under strain and

all the public sector insurers seem to lose grip on the fire segment. Despite the

increasing business, the state owned insurers continued to lose the business which

indicates that the public insurers could not keep pace with the increasing market.

Figure representing the premium collection depict that despite the increasing premium

collection, the market share of these companies declined to 59.41 percent from 79.93

percent. United India however showed signs of recovery in the last year of study and

underwrote a premium of `4277.77 crores in 2008-09 as against `3739.56 crores in the

previous year, which led to its market share to 14.09 per cent from 13.44 percent in

2007-08. However there has been gradual decrease in the market share witnessed by

all the public insurers, Table 3.1 reflects the market share of the public sector insurers.

The figures indicate that drastic fall in the market share of 7.64 percent, 5.94 percent,

4.20 percent and 2.75 percent was witnessed by National, New India, Oriental and

United respectively.

Table 3.1: Market share of public sector non life insurers

(Figures in percent) Companies 2004-05 2005-06 2006-07 2007-08 2008-09

57

New India Fire Share 18.73 17.52 18.14 14.09 14.04 Marine Share 6.00 6.26 6.40 8.29 8.10 Misc. Share 75.27 76.22 75.46 77.63 77.86 Market Share 24.09 23.54 20.14 18.97 18.15

Oriental Fire Share 16.37 15.51 13.75 12.56 11.12 Marine Share 7.80 9.22 8.85 8.90 8.39 Misc. Share 75.83 75.28 77.40 78.54 80.49 Market Share 17.26 17.32 15.77 13.69 13.06

National Fire Share 14.15 13.73 12.91 9.50 9.20 Marine Share 6.61 4.92 5.37 4.37 4.69 Misc. Share 79.24 81.34 81.72 86.13 86.11 Market Share 21.74 17.31 15.32 14.40 14.10

United Fire Share 20.07 20.46 18.99 14.02 13.34 Marine Share 8.28 6.47 7.54 8.04 7.90 Misc. Share 71.65 73.07 73.47 77.93 78.75 Market Share 16.84 15.50 14.05 13.44 14.09

Total Premium (In Lakhs)

13972.96 14997.06 16258.91 16831.84 18030.75 Total Market share Public

79.93 73.66 65.28 60.49 59.41

Source: Compiled from the Annual reports of respective companies and IRDA Annual Reports.

Fig. 3.1: Gross premium collection of public insurers

Source: Compiled from the Annual reports of respective companies and IRDA Annual Reports.

Fig. 3.2: Graphical representation of Market share of public non-life insurers

13972.9614997.06

16258.91 16831.8418030.75

02000400060008000

100001200014000160001800020000

2004-05 2005-06 2006-07 2007-08 2008-09

Gross wrotten premium

T Public

58

Source: Compiled from the Annual reports of respective companies and IRDA Annual Reports.

The market position of the public insurers though has been deteriorating, however,

surprisingly, represent robust growth is witnessed in the miscellaneous segment and

marginal accretion in marine area, where as they seem to be losing profitable fire

segment as the study progresses. In the present scenario, this situation calls for in

depth analysis of the public sector non life insurers, in the light of CARAMEL

parameters. CARAMEL model is basically ratio based model of evaluating financial

performance of insurance undertakings prescribed in the Handbook of Financial

Sector Assessment by World Bank and IMF. Das et al. (2003) has also prescribed the

same encouraged set of indicators. The Table 3.2 presents the Financial Soundness

Indicators which shall be computed for the purpose of testing financial soundness of

insurance companies.

24.09 23.54

20.14 18.97 18.1517.26 17.3215.77

13.69 13.06

21.74

17.3115.32 14.40 14.10

16.8415.50

14.05 13.44 14.09

0.00

5.00

10.00

15.00

20.00

25.00

30.00

2004-05 2005-06 2006-07 2007-08 2008-09

New India

Oriental

National

United

59

Table: 3.2: Financial Soundness Indicators

Category Indicators

Capital Adequacy Net premium/ Capital

Capital/ Total Assets

Asset Quality Equities / Total Assets

Real Estate + Unquoted Equities + Debtors/Total Assets

Reinsurance & Actuarial Issues Risk Retention Ratio ( Net Premium/ Gross Premium)

Net Technical Reserves/ Average of Net Claims paid in last three years

Management Soundness Operating Expenses/ Gross Premiums

Earnings and Profitability

Loss Ratio ( Net Claims/ Net Premiums)

Expense Ratio (Expenses / Net Premiums)

Combined Ratio (Loss Ratio + Expense Ratio)

Investment Income/ Net Premiums

Return on Equity (ROE)

Liquidity Current Assets/ Current Liabilities

Sources: Handbook of Financial Sector Assessment Published by World Bank and IMF Insurance and Issues in Financial Soundness.IMF Working Paper WP/03/138. Das et al. (2003),

1. Capital Adequacy Analysis

Capital Adequacy is viewed as the key indicator of an insurer’s financial soundness

and prudential standards recognize the importance of adequate capitalization with

solvency as key focus area of insurance supervision. However, unfortunately there are

no internationally accepted standards for capital adequacy of insurance companies.

The greater risk to the financial stability of an insurer stems from underwriting

business that is either too great in volume or too volatile for its capital base or

otherwise whose ultimate result is too difficult to determine. Analysis of capital

adequacy depends critically on realistic valuation of both assets and liabilities of the

insurance companies. Capital is seen as a cushion to protect insured and promote the

stability and efficiency of financial system, it also indicates whether the insurance

company has enough capital to absorb losses arising from claims. Although insurance

60

regulator has not prescribed any norm to maintain the minimum capital adequacy ratio

as RBI has prescribed to maintain it to a minimum of 8 percent in banking sector,

instead regulator has asked insurance companies to maintain solvency margin of 1.5

i.e. excess of assets over liabilities, monitored now on quarterly basis, moreover IRDA

issues registration to those companies only having capital base of minimum of `100

crores. For the capital adequacy analysis of the insurers two capital adequacy ratios

have been used in present study i.e. Net Premium to Capital and Capital to Total

Assets ratio. The former reflects the risk arising from underwriting operations and the

latter reflects assets risk. Net premium is a convenient proxy for the quantum of

retained indemnity risk, that is, risk the insurer retains after reinsurance, being the

risks that must be covered by own capital. Due to absence of international norm,

capital is defined as total equity capital plus reserves plus long term debt minus

miscellaneous expenses.

The healthy growth in net premium is considered to be risky unless supported by

optimal balanced capital, to act as cushion to bear shocks. Empirical results have

shown that good growth of premium volume is one of the casual factors in insurer

insolvency (Kim et al., 1995). Being too obsessed with growth can lead to self-

destruction as other important objectives might be neglected. This is especially true

during an economic downturn, such as the South Asian Financial Crisis. Table 3.3

highlights the capital adequacy ratios of the public sector non life insurers.

Table 3.3: Capital Adequacy Ratio analysis of Public Sector Non Life Insurers (Figures in percent)

Companies 2004-05 2005-06 2006-07 2007-08 2008-09 New India

1 87.275 85.711 75.332 69.003 71.691 2 21.941 17.925 22.012 21.828 27.189

61

Oriental

1 149.665 143.167 132.826 141.944 155.387 2 14.603 12.242 14.599 12.494 14.660

National

1 219.041 248.930 193.067 193.657 242.808 2 12.057 8.111 10.586 9.901 11.243

United

1 106.557 93.082 85.929 83.383 88.530 2 19.476 17.383 20.795 21.210 27.863

Source: - Compiled from the Annual Reports of public sector Insurers

Note

1. Ratio of Net Premium to Capital

2. Ratio of Capital to Total Assets

The higher capital adequacy ratio is considered as good, although no benchmark has

been prescribed by IRDA, however, to ensure safety against insolvency, high capital

adequacy ratio is desirable. The ratio of net premium to capital, witnessed mixed trend

for all public sector insurers. The National and Oriental insurance companies have

witnessed increasing trend in ratio ranging between 193.07 & 248.93 and 132.83 &

155.39 respectively, while as for United and New India insurers, the ratio has

witnessed decreasing trend is ranging between 106.56 & 83.38 and 87.28 & 69

respectively. This indicates that the business was supported by the fair amount of

capital for all the public insurers, however, the decreasing trend witnessed by United

and New India was as a result of more capital infusion by these insurers to the tone of

`50 crores each during 2006-07. This ratio indicates that National and Oriental

insurers have retained more indemnity risk and which is to be covered by capital.

Similarly, United and New India insurers have been able to shift indemnity risk and

have less burden on capital due to said risk retention.

The ratio of capital to total assets indicates the proportion of capital in the total assets

portfolio of the companies, growth in the assets of the business and how efficiently the

capital has been invested to create assets. Lower ratio may be preferred on higher one,

as higher ratio indicates total reliance on capital where as lower ratio indicate the

greater assets base of the company. The companies under study have quite satisfactory

62

ratio, except with some fluctuations, the ratio for New India ranged between 17.93 &

27.19, Oriental 12.24 &14.66, National 8.11 & 12.06 and United 17.38 & 27.86. The

major fluctuation was witnessed by New India and United where there has not been

any major change in the assets portfolio; however, the change is attributed to the

infusion of more share capital. The balance sheet analysis reveals that the advances

have been continuously decreasing for all the four PSUs, which indicate that the

underwriting losses might have been met out of sale of such assets. However this

needs further analysis.

The analysis of ratios clearly indicates that public sector insurance companies have

been able to maintain capital and companies have infused more capital over the period

of study, which might have enabled them to maintain required solvency margin,

indicating that the reserves built in the pre liberalization era are being used to meet

solvency requirements during post liberalisation period. Further, the analysis reveals

that the assets base has been increasing and the underwriting losses are being met

through the realization of loans and advances especially by United and New India

insurance companies.

2. Asset Quality Analysis

Asset quality is one of the most critical areas in determining the overall financial

health of an insurance company. The primary factor affecting overall asset quality is

the quality of the real estate investment and the credit administration program.

Investments in real estate and housing sectors amounts 10 percent of the total assets

base of the non life insurance companies. Other item which has significant impact on

an asset quality is to receive debtors. In this analysis an attempt is made to explore the

structure of assets and focus on the existence of potentially impaired assets as well as

on the degree of credit control, an insurance company exercises. The asset quality

analysis reflects the quantum of existing and potential credit risk associated with the

loan and investment portfolios, real estate assets owned and other assets, as well as

off-balance sheet transactions. The indicator “Real Estate + Unquoted Equities +

63

Debtors/Total Assets”, highlights the exposure of insurers to credit risk because these

assets classes have the largest probability of being impaired. Both real estate and

unquoted equities are illiquid assets, with real estate often being difficult to value in

less developed countries. Further, receivables (debtors) may expose the insurance

companies to considerable credit risk and overstated assets if there are insufficient

provisions for collection difficulties. The indicator, equities/total assets, reveals the

degree of insurer’s exposure to the stock market risk and fluctuations of the economy.

Equity investments that are on the balance sheet of the insurer but infact are part of

risk pass-through products to be excluded. If the proportion of equities in total assets

is significant, further examination of the portfolio is necessary, with special emphasis

on the possible correlation of exposure on the asset and liabilities side of the balance

sheet. Infact, the need to consider both sides of the balance sheet simultaneously, is

more general, while the indicators of asset quality for non-life insurers need to be

evaluated in connection with the associated liabilities and in the context of business.

For instance, it would be reasonable for a non-life insurance company to have

relatively larger proportion of assets invested in more risky (e.g. equities) or less

liquid (e.g. real estate) assets, than a life insurer which better match the future long-

term obligations. However, given the Indian scenario, the insurers are not allowed to

invest in stock markets and neither are the companies listed, as a result unquoted

equities could not be computed for the purpose. The indicator here shall reflect the

quality of assets base in comparison to equities, which is reflected in the Table 3.4.

Table 3.4: Asset Quality of public sector non life insurers

(Figures in percent) Companies 2004-05 2005-06 2006-07 2007-08 2008-09 New India

1 0.762 0.746 0.731 0.626 0.743 2 28.310 26.518 27.765 29.076 40.839

Oriental

1 1.029 0.744 0.721 0.617 0.743

2 24.29 19.14 25.51 22.49 34.37 1 0.991 0.731 0.739 0.635 0.798

64

National 2 32.53 25.90 28.41 25.05 35.55 United

1 0.960 0.737 1.129 0.982 1.157

2 25.20 23.10 23.78 22.57 34.87 Source: - Compiled from the Annual Reports of Public sector Insurance Companies

Note:

1. Ratio of Equities to Total Assets

2. Ratio of Real Estate + Unquoted Equities* + Debtors/Total Assets

*Unquoted Equities could not be figured out due to the fact that companies were not listed up to

the submission of the study; as a result, the term has been omitted in the calculation of ratio.

The analysis of the asset quality ratio clearly signals the robust growth of assets base

of the companies in comparison to the equities. The decrease in ratio was witnessed

by New India, Oriental and National where it ranged between 0.63 & 0.76 percents,

0.62 & 1.03 percents and 0.64 & 0.99 percents respectively. However, United saw an

upward swing in the ratio and it ranged between 0.74 and 1.16 percents. The

decreasing ratio was as a result of earlier robust growth in the investments, fixed

assets and advances and later increase in the short term assets base of the companies,

with the exception of United where great decrease was seen in the investments, loans

and other short term assets.

Analysis of second ratio of asset quality reveals fluctuating pattern, witnessed by all

the public concerns. The companies initially has the good ratio, however, as the study

proceeds the growth in the debtors and real estate investments could not keep pace

with the robust increase in the total assets portfolio of the public non life insurance

companies. The loans and advances saw a declining trend in the later years of the

study resulting in increase in the ratio for the last year of study. Oriental insurance

company witnessed the ratio ranging between 19.14 and 34.37 percents, where as the

ratio lied between 23.10 and 34.87 percent for United insurance company, National

witnessed the ratio ranging between 25.05 and 35.55 percent. Whereas the highest

ratio among the segment, was recorded by New India insurance company where it

remained between 26.52 and 40.84 percents.

65

In the absence of any benchmark in this regard, the fluctuations in these ratios cannot

be termed as improvement and mere degradation in the asset quality base of the

concerns, infact the companies had the higher asset quality ratios witnessed during

their life span, moreover the investments in the real estate which itself calls for the

attention of the regulator, has been properly met by the public sector non life insurers

under study. So it can be concluded that the asset quality of the companies, presents

satisfactory picture of the public non life insurance companies.

3. Reinsurance and Actuarial Issues

Reinsurance and Actuarial issues also known as the risk retention ratio reflects the

overall underwriting strategy of the insurer and depicts what proportion of risk is

passed onto the reinsurers. Overall, insurer’s capital and reinsurance cover need to be

capable of covering a plausible severe risk scenario. If the insurer relies on

reinsurance to a substantial degree, it is critical that the financial health of its

reinsurers is examined. At the industry level, this ratio indicates the risk bearing

capacity of the country’s insurance sector; however, any international comparison

needs to be taken into account wherein some countries impose a requirement to

reinsure a pre-determined percentage of business with a state-owned reinsurance

company. Like in India the insurance companies are required to reinsure 20 percent of

their business prior to de-tariffication and 15 percent of the risk after de-tariffication

and 10 percent from 2008 onwards (IRDA Annual Report 2008-09).

The adequacy of technical reserves also called as survival ratio shows the quality of

company’s estimate of the value of reported and outstanding claims, which reveals

that some of the companies are better in holding the marginally higher reserves

relatively to average claims to recent three years, triggering more detailed enquiry.

Table 3.5 highlights the position of reinsurance and actuarial issues ratio of the four

public sector insurance companies.

Table 3.5: Reinsurance and Actuarial Issues of public sector non life insurers

66

(Figures in percent) Companies 2004-05 2005-06 2006-07 2007-08 2008-09 New India

1 89.464 86.006 90.391 91.179 95.289 2 50.09 49.81 57.17 59.14 57.01

Oriental

1 70.355 66.792 68.493 75.529 77.361

2 26.57 27.79 30.41 27.42 23.37 National

1 70.111 78.417 72.555 75.327 79.964

2 18.63 14.02 17.81 18.09 15.18 United

1 73.448 69.556 67.831 72.257 74.784

2 33.58 38.37 42.24 46.19 48.35 Source: - Compiled from the Annual Reports of Insurance Companies

Note:

1. Ratio of Net Premiums to Gross Premiums 2. Ratio of Net Technical Reserves* to Average of Net Claims Paid in Last Three Years

* Reserves & Surplus taken as Net Technical Reserves

The analysis of risk retention ratio clearly indicates that the risk retention capacity of

the public sector insurers have improved since liberalization. New India has topped

the sector with fluctuation of 3 percent in 2005-06, overall witnessed consistent

increase and the ratio ranged between 86.01 percent and 95.29 percent. However,

other three PSUs have also witnessed sharp increase during the study period and the

ratio inflated from 66.79 to 77.36 percent, 70.11 to 79.96 percent and 67.83 to 74.78

percent respectively for Oriental, National and United insurance companies. In the

context of the regulation, New India seem to have breached the ceiling, however,

since the risk bearing capacity is taken as positive sign and looking at the company’s

strong capital base the issue does not seem to be worrisome. The other three PSUs

have maintained the ratio within the benchmark suggested by IRDA2, as the

benchmark for risk retention ratio is 10% and they continue to be in limits and wide

2The Re-insurance Advisory Committee at its meeting held in February, 2007 recommended to the authority that the obligatory cessions be reduced from existing 20% to 15% for the year 2007-08 and 10% for the year 2008-09. The Authority accepted there commendation and issued gazette notification giving the revised obligatory cessions for the next two years (IRDA Annual Report 2008-09)

67

gap is seen between business written and net premium which indicate the risks are

passed on well quantitatively.

By and large the Oriental, National and United insures have passed on the risk to their

reinsurers and have been able to Maintain the net premium to gross premium within

stipulated percentage of 10%. The gap between business written and net premium

earned is ranging between 28 to 30 percent for these companies.

The ratio, net technical reserves to average of net claims paid in last three years gives

a different look of the companies. The higher ratio reflects less technical reserves

compared to the average claims paid in last three years, highlighting the sound

quantification and assessment of insurance liabilities. The analysis reflects the

decreasing trend as increasing pattern of technical reserves except New India, the rest

of three companies are better placed comparatively. New India has shown higher

claims incurring trend compared to the technical reserves as a result of which the ratio

almost has the increasing trend and it is ranging between 49.81 and 59.14 percent.

United India has witnessed the continuous increasing trend and the ratio ranged

between 33.58 and 48.35 percent. National and Oriental insurance companies on the

other hand present fluctuating picture of the ratio and it lied between 14.04 & 18.63

percent and 30.41 & 23.37 percent respectively. Both the companies however, saw a

stabilizing pattern of ratio among the last year of the study has recorded lowest ratio.

In the present context the growing ratio of net premiums to gross premiums should be

seen as encouraging phenomena, however due weightage be given to the technical

reserves, which serve as shockers under the adverse selection. Since PSUs have strong

technical reserve base, therefore, they have risk tolerance during the adverse selection

of insurance business and this holds good because of growing retention ratio.

4. Management Soundness Analysis

A particularly interesting form of financial performance analysis of insurance

companies is the analysis of management efficiency. The efficient management shall

reflect in operating expenses, and gross premium, affecting overall operating

68

efficiency of the insurance concerns, reflecting management soundness. Sound

management is crucial for financial stability of insures. It is very difficult; however, to

find any direct quantitative measure of management soundness, the indicator of

operational efficiency is likely to be correlated with general management soundness.

Unsound efficiency indicators could flag potential problems in key areas, including

the management of technical and investment risks. The indicator is operating expenses

by gross premiums. Gross premiums are used because they are a reflection of the

overall volume of business activity. The analysis reflects the efficiency in operations,

which ultimately indicates the management efficiency and soundness. It also needs to

be taken into account that insurers may use different distribution channels to sell their

products and sometimes may spin off their distribution into subsidiaries or other

companies in a group.

Table 3.6: Management Soundness of public sector non life insurers (Figures in percent)

Companies 2004-05 2005-06 2006-07 2007-08 2008-09 New India 28.218 27.275 22.973 19.312 26.412

Oriental 24.186 24.121 19.199 21.628 23.067

National 22.616 25.048 21.116 22.402 22.112

United 29.304 30.958 25.565 24.403 24.111

Source: - Compiled from the Annual Reports of Insurance Companies

Note: Ratio of Operational Expenses to Gross Premiums

The ratio of operating costs to gross premium preferred to be on the lower side,

witnessed considerable decrease throughout the study period in case of all the PSUs

and in case of United it was quite encouraging to see the ratio decline by more than 6

percent from the earlier ratio 30.96 to 24.11 during the last year of study. The others

to follow were National with around 3 percent decrease i.e., to 22.11 from the earlier

69

25.04 percent, New India and Oriental were also able to bring marginal decrease of 2

percent and 1 percent respectively and the ratio ranged between 28.22 percent & 26.41

percent after witnessing good decrease in 2007-08. Oriental has also been successful

in keeping it to 23.07 percent from 24.19 percent with a major decrease in the year

2006-07.

When seen in the context of presence in the market, the expectations with the PSUs

were quite high with regard to the least expense incurring companies, due to the

national presence and distribution networks established since their inception.

However, it does not hold good and infact the companies were time and again asked

by the regulator to check operational costs (IRDA Bulletins). Moreover, the ratio

collinear with what is called as management expense ratio by the Insurance Act, 1938.

Section 40 C3 of the Insurance Act, 1938 lays down the limits for management

expenses in general insurance business. The pricing of general insurance contract is a

function of the expected claim costs, the yield available on the investable surplus and

more importantly the expenses incurred on sourcing and servicing a client. Besides

claim costs and investment yields, the price of an insurance contract should ideally

adjust to changes in expense levels.

The public sector general insurance companies would need to considerably control

and reduce their expenses ratio. Defined as the management expenses to net premium,

the growing challenge for the public sector insurance companies has been inflating

sourcing costs. Since the IRDA, has allowed insurance companies to pay commission

up to 15 percent for de-tariffed businesses and 5 percent for tariffed business (IRDA,

2008-09), its impact has been growing commission levels to retain/acquire profitable

customers in the liberalized insurance market. The management efficiency and

soundness infact is outcome of operational efficiency of the companies and in the light

of this fact the study highlights that PSUs have recorded sound operational and

management efficiency. 3 Section 40 C of Insurance Act requires insurers not to exceed the management expenses in excess of 20 percent of premiums.

70

5. Earnings and Profitability Analysis

Earnings are the key and arguably the only source of long term capital. Low

profitability may signal fundamental problems of the insurer and may consider a

leading indicator for solvency problems. Therefore, considerable attention is given to

this area so that all indicators of earnings and profitability are included in this area.

For non-life insurers, the ratio (net claims/net premium) is an important indicator of

whether their pricing policy is correct, while the expense ratio (expenses/net premium)

adds the aspect of operating costs into the analysis. It is important to note on technical

detail; while the loss ratio has earned net premium into the denominator (and, on

accrual basis, net claims are directly related to the denominator); the expense ratio is

commonly defined with written net premium in the denominator (and again, the

expenses other than claims are directly related to the denominator).

Then, the combined ratio, defined as the sum of the loss ratio and expense ratio, is a

basic, commonly used measure of profitability (but note that it is not mathematically

symmetric due to the different denominators). This indicator measures the

performance of the underwriting operation but does not take into account the

investment income. It is not uncommon to see combined ratios of over 100 percent

and this may indicate that investment income is used as a factor in setting the

premium rates. Prolonged triple-digit combined ratios, in an environment of low or

volatile investment yields, signal a drain on capital and the prospect of solvency

problems. Another indicator, investment income/net premium, focuses on the second

major revenue source-investment income. Return on equity then indicates the overall

level of profitability and return to shareholders.

The interpretation of underwriting results for non-life insurers, as summarized by the

combined ratio, must take into account their strong cyclical pattern. As shown in

Swiss Re (2001), the non-life insurance market is characterized by periods of high

premium rates (hard marks) and low premium rates (soft markets). These cycles have

71

been detected in all major developing markets; their average length is approximately

six years and they are becoming increasingly correlated across markets.

Industry sources suggest that companies often charge a premium that is below what

they feel is the economic value of the risk in soft markets because of two reasons.

First, other companies are often doing the same and no company wants to be an

outlier. Second, each company feels that it is cheaper to retain market share by

subsidizing pricing for a short period (in particular when income is supplemented by

strong investment income) than to charge economic premiums and later be forced to

spend money to rebuild market share. Most arguments cited by industry insiders

involve retaining market share, company size and reputation and this often includes

retaining agent and broker allegiance as much as customers.

The cyclical pattern of premium rates has received considerable attention in the

literature and Swiss Re (2001) cites two major hypothesis explaining it- “rational

markets with imperfect foresight” and “capital constraint hypothesis”. The first, which

best explains the cyclical pattern in continental Europe, argues that delays in

transmission of information and time lags within the regulatory processes cause lags

in price adjustment, which can exacerbate market swings. The second, explaining

cycles in the United Kingdom and United States, suggests that cycles are caused by

impediments to capital flows, which create alternating periods of excessive and

insufficient capital. The development of asset prices is one of the factors influencing

insurance market cycles under both hypotheses: a drop in asset prices can set of a hard

market, just as high prices during an asset price bubble can induce a soft market.

However for India, the market does not seem to be under the influence directly

attributable to the cyclic patterns as witnessed by major markets of the world, infact

the structural market changes have been as a result of liberalization and price

deregulation witnessed gradually.

According to the European Union directive second which says that to have a

competitive and customer friendly insurance market, companies should be free to

72

price their products. Consequently in India, the price deregulation has ignited intense

competition in the insurance market and companies are marching towards more

gaining more and more market without much thrust being laid on the prudential

pricing. This has resulted in a situation, where the breakeven which was expected

much earlier seem to be now pushed forward and in no case is expected in the coming

three to four years. Here regulator IRDA has much to exercise given the juncture

when insurance environment is marching towards free regime, any imperfection can

erode customer faith which may be hazardous for the country like India.

The five ratios comprising the indicator “Earnings and Profitability” highlight

underwriting results and investment opportunities of the concerns simultaneously. The

ratios calculated may represent the pattern, different from the earlier period’s trend,

the reason is because of unusual increase or decrease in the inputs of ratios, largely

because of price deregulation announced by IRDA in year 2007-08. The impact of the

free price regime of the products however may be the study out of context, the

analysis aims at the trend witnessed and analysis of the operational and non

operational performance witnessed during the study period and summed under the

indicator earnings and profitability of the public sector insurers after liberalization.

Table 3.7 presents a detailed analysis of earnings and profitability of PSUs. The first

ratio in the category of earnings and profitability is the ratio of net claims incurred to

net premiums, termed as claim ratio and also known as loss ratio. This ratio represents

the proportion of net claims incurred out of the earned premiums. As is evident from

the analysis of the claim ratio, it is showing increasing trend for all the public sector

insurers except United, where it has declined sharply. The low loss incurring ratio is

good for financial health of the insurers, all the four PSUs under study seem to have

high claim ratio and the ratio ranges between 84.96 & 102.43 percent, 87.64 & 99.69

percent, 78.62 & 93.09 percent and lastly 77.11 & 89 percent respectively for

National, Oriental, United and New India respectively. It can be observed from the

analysis of claim ratio that that up to 2006-07, ratio of New India, Oriental and United

73

India insurers was by and large under a bit of control, but hereafter has witnessed

sharp increase. It means that these companies were not able to put control on loss rate,

perhaps because of poor risk management. However, surprisingly, United India was

successful to manage the all time lowest claim ratio of 78.62 percent during 2008-09.

Analysis in Table 3.7 ratio presents the ratio 2 as ratio of expenses to net premiums

called expense ratio. Expenses ratio in insurance parlance is the portion of premium

used to pay all the costs of acquiring, writing and servicing insurance and reinsurance,

the non-life insurance companies under study are seen to have been witnessing

decreasing trend in this ratio which believed to be a good gesture for improving

financial strength of the insurers. The expenses ratio recorded between 31.71 & 21.18

percent, 36.11 & 28.03 percent, 32.26 & 27.65 percent and 44.51 & 32.24 percent for

New India, Oriental, National and United respectively. The ratio witnessed minor

fluctuations during the initial years of study; however as public sector insurers have

done tremendous progress in controlling the expense ratio, which surly will have

positive impact on the profitability picture.

Combined ratio, is a measure of profitability used by an insurance company to

indicate how well it is performing in its daily operations. A ratio below 100 percent

indicates that the company is making an underwriting profit, while as the ratio above

100 percent means that it is utilizing more money in paying claims and expenses that

it receives from premiums. Combined ratio defined as the sum of loss ratio and

expense ratio indicates how every rupee earned as premiums is spent. The claims ratio

is claims owed as a percentage of revenue earned from premiums. The expense ratio is

operating costs as a percentage of revenue earned from premiums. The combined ratio

is calculated by taking the sum of incurred losses and expenses and then dividing them

by earned premium. The combined ratio of the four PSUs has been exceptionally high

indicating no possibility of operational profitability, the ratio has been worsening as

the study progressed. However, the signs of stability were seen in United where the

ratio saw decreasing trend. The ratio for New India was recorded between 105.76 &

74

119.85 percent, for Oriental at 115.69 & 129.50 percent, National at 115.61 & 134.37

and for United it ranged between 137.60 & 110.56 percent. The combined ratio

analysis corroborates with result of loss and expense ratios because the combined ratio

has also been recorded on higher side for New India, Oriental and National insurers

during 2007-08 and 2008-09. However, United insurer has been able to record healthy

combined ratio during the same period, which is really good for their financial health.

A combined ratio of 100 percent does not necessarily mean that the company is

making losses, because this ratio is calculated after excluding the investment income.

Higher returns on investment has always helped Indian general insurance companies

offset underwriting losses, however, the routine has changed and there is a shift

witnessed from interest or dividend income to profit from sale of investments and the

trend is more pronounced among public sector insurers, which have reported strong

returns by selling historical equity investments. However, declining stock prices

substantially constrained investment returns of insurance companies; the profitability

of the sector might decline. To report sustainable profits, insurance companies will

need to generate income on their underwriting operations, instead of depending on

investment returns4.

The ratio presented in Table 3.7 ratio (4) represents the investment income ratio of the

public sector insurers. The ratio indicates that there has been widespread decrease in

the investment income for all insurance companies which can mainly be attributed to

the global melt down and consequently higher volatility in the Indian financial

market(IRDA 2008-09), the crises led to the deterioration in profitability due to loss

on investments. The impact is clearly seen in the context of decrease in the investment

income ratio, which ranges between 31.05 & 17.74 percent, 38.85 & 23.22 percent,

30.87 & 20.07 percent and 44.95 & 21.33 percent for New India, Oriental, National

and United respectively. New India, Oriental and United seem to have been worst hit,

where as National saw an upward trend in the initial years however it settled to a bit

4 Pawan Agrawal, Director, CRISIL Ratings,

75

higher than initial year’s ratio. This scenario also hints towards poor financial risk

management on the part of companies.

Despite the significant underwriting losses, public sector general insurance companies

have been profitable on account of their strong investment returns. The volatility in

profits witnessed has been only because of dependence on income from investments

and it has thus far been the lifesaving mechanism for the PSUs under study,

consequently the regulator which has been ensuring insulation of companies from

stock market shocks may not escape for more time. Simultaneously the support from

investment side may not last longer due to the global crises therefore; efficiency in

underwriting is very much felt to sustain in the competitive insurance environment.

The 5th ratio presented in table 3.7 represents the return on equity of the public sector

insurers under study. Since return on equity (ROE) is the reward for the investors, the

ratio seems to be decreasing over the period of study. Infact, the decreasing PAT has

been attributed to the decrease in ratio, where as in case of National and Oriental,

negative ROE has been as a result of overall losses incurred by the two companies.

The ratio for the two companies ranged between 421.28 & -149.21 and 497.27 & -

52.66 respectively, with the year 2006-07 as the prosperous to see highest ratios. New

India and United on the other hand had the ratio ranging between 729.98 & 112.08

and 425.23 & 307.71 respectively. Year 2006-07 and 2005-06 has witnessed highest

ratio for the two insurers, where as overall, the ratio represent wave like trend with

ups and downs for United and upward graph till 2006-07 followed by marginal

decrease in the next year and thereafter steep downwards trend witnessed by New

India.

The fall would have been great if the PSUs have had the equity component more in

the overall capital structure, however the investments and other assets base held by the

company not only corrects the solvency surveillance but also the leaves the proportion

for shareholders to rely upon. The situation however indicates drainage of resources,

76

the strong capital foothold made prior to liberalization is being exploited to sustain in

the competitive market, but how much time it may take IRDA to realize, who knows?

Table 3.7: Earnings and Profitability Analysis of public sector non life insurers

(Figures in percent) Companies 2004-05 2005-06 2006-07 2007-08 2008-09

New India

1 77.113 88.134 80.342 86.824 89.000 2 31.541 31.713 25.415 21.181 27.718 3 108.654 119.847 105.757 108.005 116.718 4 24.343 31.052 30.700 28.162 17.744 5 268.155 358.190 729.976 700.564 112.075

Oriental

1 89.884 87.643 87.665 90.473 99.687 2 34.377 36.113 28.030 28.635 29.817 3 124.261 123.756 115.695 119.108 129.504 4 38.847 34.911 31.002 27.857 23.215 5 330.523 283.915 497.269 9.302 -52.660

National

1 84.962 102.431 86.510 94.047 99.162 2 32.258 31.942 29.104 29.740 27.652 3 117.22 134.373 115.614 123.787 126.814 4 20.068 28.426 30.873 30.123 23.401 5 131.125 -106.252 421.277 163.430 -149.210

United

1 92.411 93.093 90.259 92.753 78.617 2 39.897 44.508 37.689 33.772 32.240 3 132.308 137.601 127.948 126.525 110.857 4 35.554 44.951 37.363 38.014 21.333 5 307.711 425.230 352.574 421.083 317.367

Source: - Compiled from the Annual Reports of Insurance Companies Note

1. Loss Ratio = (Net Claims/Net Premiums) 2. Expense Ratio = (Expenses/Net Premiums) 3. Combined Ratio = Loss Ratio + Expense Ratio 4. Ratio of Investment Income to Net Premium 5. Return on Equity (ROE)

6. Liquidity

The frequency, severity and timing of insurance claims or benefits are uncertain, so

insurers need to plan their liquidity carefully. Liquidity is usually a less pressing

problem for insurance companies at least as compared to banks, since the liquidity of

their liabilities is relatively predictable and for non life insurers the liabilities, besides

claims are for shorter period of time. Further along with the link between illiquidity

77

and insolvency, through the loss of confidence and runs, is less marked in insurance, a

loss of confidence in an insurer nearly always causes policyholders to cancel over,

demand a return of unexpired premium, and seek insurance elsewhere. Moreover the

liquidity problem may call upon capital restructuring and infusion of more capital to

heighten the liability graph.

Table 3.8 indicates the liquidity ratios of current assets to current liabilities. The ratio

saw an increasing trend, except National insurance company as the study proceeds.

The ratio lied between 46.45 & 68.80 percent, 32.37 & 47.87 percents, 38.95 & 43.56

percent and 27.40 and 35.52 percent respectively for New India, Oriental, National

and United. National insurer, however, saw sharp increase in the current liabilities as a

result the ratio witnessed a decrease in the later years.

Table 3.8: Liquidity of public sector non life insurers (Figures in percent)

Source: - Compiled from the Annual Reports of Insurance Companies Note: Liquidity = Current Assets / Current Liabilities

The rule of thumb which usually is considered to be for liquidity is that it should be

above 100 and more profoundly due to term nature of business of non life insurance,

however given that the provisions kept aside as unexpired risk reserve the growing

ratio does not seem to be worrying for the public sector insurers. The shorter tale

nature of liabilities of non life sector of business also does not call upon the insurers to

maintain the required ratio as per the general requirements, however, insurers may

Companies 2004-05 2005-06 2006-07 2007-08 2008-09 New India

46.45 52.87 51.62 59.28 68.80

Oriental

32.37 33.33 42.04 39.27 47.87

National

43.56 38.95 39.42 37.40 39.26

United 27.40 32.93 30.75 31.88 35.52

78

require more liquid funds to continue their solvent state and moreover the unforeseen

claims call for the better liquidity position of the companies, which needs to be taken

care of seriously.

The purpose of this chapter was to analyze financial performance of public sector non

life insurers. The analysis under the CARAMEL parameters has been quite

interesting, highlighting various unaddressed issues in financial performance analysis

of the insurers and it is concluded that liberalization had a positive and promising

impact on public sector insurance companies’ performance especially on capital

adequacy, management soundness and liquidity. It is concluded that though public

sector insurers were continuously loosing market but still retained more than 59

percent of market share, the business has been increasing but not at the pace required

to maintain the market share. The earnings and profitability had been affected and free

market instincts continue to worsen the earnings. Whereas the assets base has been

good throughout the study period, the underwriting losses seem to meet out of the

investment income and profitable sale of earlier investments held. The negative

impact is seen in the key underwriting and investment side of the functioning. It is

also important to note that public non life insurers have responded to the new

challenges of competition, the same is reflected in the growing operational efficiency

and expense ratios of the insurers. However underwriting profitability has been under

strain and investment income which earlier stood to compensate losses, saw greater

decrease and it is now not the interest or dividend income, which compensated the

underwriting losses but the profitable sale of investments which are being employed to

have PAT in positive figures. The growing free market regime has been a tough

challenge and earlier sheltered companies are now facing severe competition from the

private insurers who seem to learn from what may be called mistakes of public sector

insurers. The competition has already laid shadow and its impact has been seen in

losing the profitable business opportunities to private insurers and wide decease in the

market share earlier held by the state owned giants. The growing market presence of

private sector insurers therefore calls for the detailed analysis, which has been carried

79

out in the next chapter and the next chapter is devoted to financial performance

analysis of private sector insurers.

80

CHAPTER IV

EVALUATION OF FINANCIAL

PERFORMANCE OF PRIVATE SECTOR

INSURERS

81

The insurance industry in India has come a long way since the time when businesses

were tightly regulated and concentrated in the hands of a few public sector insurers.

Following the passage of the Insurance Regulatory and Development Authority Act in

1999, India abandoned public sector exclusivity in the insurance industry in favour of

market-driven competition. This shift has brought about major changes to the

industry. The inauguration of a new era of insurance development has seen the entry

of international insurers, the proliferation of innovative products and distribution

channels, and the raising of supervisory standards. However still the market is small in

terms of insurance penetration and density, and as per the international standard, India

has tremendous potential for growth. In 2008-09, the non-life insurance premium to

GDP ratio (in % terms) in India was 0.60 as compared to the world average of 2.90

(IRDA 2008-09). For the same year, the insurance premium to population ratio in

India was 6.2 (in % terms) as compared to the world average of 264.2 (IRDA 2008-

09).

One reason for the low penetration level of general insurance business in India has

been its expansion under state control for nearly three decades. Following

liberalisation, the private insurers made tremendous efforts in focussing untapped

market and targeted the customer segments with vigour, consequently which led to

gaining market share and their market presence.

In previous chapter of the study, CARAMEL parameters for public insurers were

analysed and following the precedence, present chapter is devoted to evaluation of

financial performance of private sector non-life insurers in the light of CARAMEL

parameters to limelight their financial standing in the post liberalization period. But

prior to this market position of the private sector insurers has been attempted.

THE PRIVATE SECTOR INSURERS’ MARKET SHARE

The private sector insurers have made a remarkable presence in a decade following

liberalisation, which is quite evident from the market share held by this sector. The

sector being still in infancy is managed by experienced managers with strongly

82

support by the foreign expertise (LLOYDS, 2007). They are steadily building their

customer base and, over time, they are expected to acquire an ever larger share of the

market, their share stands at 40.59.6%, as in 2009. The major eight private companies

currently operating in the Indian general insurance market are Royal Sundaram, Bajaj

Allianz, IFFCO Tokio, ICICI Lombard, Tata AIG, Reliance, Cholamandalam and

HDFC Ergo with majority of them being joint ventures with the foreign partners.

LLOYDS, (2007) highlight various strength areas of the private sector and

characterises them small and flexible in terms of good staff, systems, processes and

data, with greater focus on underwriting, strong claims paying reputation and

companies focussing on the products rather than sales.

Table 4.1 depicts the market share of private sector non-life insurance companies. The

private sector insurers exhibited a growth of 12.09 (IRDA, 2008-09) in year 2008-09

percent, but witnessed retardation in growth from growth rate of 27.12 (IRDA, 2007-

08) of 2007-08. The market share, however, increased marginally to 40.49 (2008-09)

from 39.51 (2007-08). The sector underwrote a major component of their business

from miscellaneous segment, which has suddenly seen an upward surge following de-

tarrification. The private sector insurers underwrote a total premium of

`12321.09crores in 2008-09 as against `10991.89 crores in 2007-08, registering a

marginal increase in business compared to previous year collection.

Table: 4.1- Market share of private sector non-life insurers (Figures in percent)

Companies 2004-05 2005-06 2006-07 2007-08 2008-09

Royal Sundaram

Fire Share 19.05 20.00 16.45 9.92 6.08 Marine Share 5.08 3.99 3.08 2.82 2.49 Misc. Share 75.87 76.01 82.85 87.27 91.44 Market Share 1.89 2.25 2.40 2.50 2.65

Bajaj Allianz

Fire Share 25.77 27.62 20.37 11.49 9.66 Marine Share 5.28 4.27 3.99 3.16 3.37 Misc. Share 68.96 68.11 75.28 85.35 86.97 Market Share 4.87 6.25 7.17 8.55 8.63

IFFCO Tokio Fire Share 34.79 29.49 25.43 19.07 14.21 Marine Share 6.22 5.17 11.21 5.89 8.27

83

Misc. Share 58.99 65.34 63.36 75.04 77.51 Market Share 2.84 4.38 4.60 4.05 4.53

ICICI Lombard

Fire Share 31.75 19.49 13.18 12.62 8.32 Marine Share 9.44 5.41 5.19 6.55 6.36 Misc. Share 58.81 75.10 81.63 80.83 85.32 Market Share 5.00 7.77 12.00 11.89 11.21

Tata AIG

Fire Share 18.68 20.30 19.27 16.58 17.57 Marine Share 9.11 8.36 9.87 12.50 13.57 Misc. Share 72.21 71.34 70.85 70.92 68.86 Market Share 2.56 2.81 2.85 2.81 2.71

Reliance

Fire Share 33.14 29.42 15.99 7.36 7.15 Marine Share 7.85 6.62 1.96 1.76 1.93 Misc. Share 59.01 63.96 82.05 90.88 90.92 Market Share 0.92 0.80 3.66 7.00 6.31

Cholamandalam

Fire Share 28.23 33.08 25.02 13.08 7.85 Marine Share 9.39 7.72 8.52 6.25 5.33 Misc. Share 62.38 59.20 66.46 80.67 86.81 Market Share 0.97 1.08 1.25 1.88 2.26

HDFC Ergo

Fire Share 1.03 2.91 5.72 5.82 17.33 Marine Share 0.28 0.86 1.24 1.49 2.44 Misc. Share 98.68 96.23 93.04 92.69 80.23 Market Share 1.00 0.98 0.78 0.79 1.12

Total Premium * (In Lakhs)

350764 536153 864659 1099189 1232109

Total Market share

20.07 26.34 34.72 39.51 40.59

Source: Compiled from the Annual reports of respective companies and IRDA Annual Reports.

Fig. 4.1: Gross premium collection of private insurers

84

Bajaj, 2004-05, 4.8718

Bajaj, 2005-06, 6.2494

Bajaj, 2006-07, 7.1725

Bajaj, 2007-08, 8.5536

Bajaj, 2008-09, 8.6298

Iffco, 2004-05, 2.8411

Iffco, 2005-06, 4.3850

Iffco, 2006-07, 4.5953 Iffco, 2007-08,

4.0546

Iffco, 2008-09, 4.5271

ICICI, 2004-05, 4.9991

ICICI, 2005-06, 7.7749

ICICI, 2006-07, 12.0016

ICICI, 2007-08, 11.8860ICICI, 2008-09,

11.2087

Tata, 2004-05, 2.5642

Tata, 2005-06, 2.8131

Tata, 2006-07, 2.8530

Tata, 2007-08, 2.8129Tata, 2008-09,

2.7146rel, 2004-05,

0.9250rel, 2005-06,

0.7974

rel, 2006-07, 3.6628

rel, 2007-08, 6.9955rel, 2008-09,

6.3089

Chola, 2004-05, 0.9682

Chola, 2005-06, 1.0815

Chola, 2006-07, 1.2517

Chola, 2007-08, 1.8773

Chola, 2008-09, 2.2583HDFC, 2004-05,

1.0047HDFC, 2005-06,

0.9815HDFC, 2006-07,

0.7789HDFC, 2007-08,

0.7928

HDFC, 2008-09, 1.1176

Royal

Bajaj

Iffco

ICICI

Tata

rel

Chola

HDFC

Source: Compiled from the Annual reports of respective companies and IRDA Annual Reports.

Fig. 4.2: Graphical representation of Market share of private non-life insurers

Source: Compiled from the Annual reports of respective companies and IRDA Annual Reports.

Fig. 4.2 highlights that the private sector insurers expanded their business with an

increase in their respective premium collections. The major increase was witnessed in

Total Pvt, 2004-05, 350764

Total Pvt, 2005-06, 536153

Total Pvt, 2006-07, 864659

Total Pvt, 2007-08, 1099188.54

Total Pvt, 2008-09, 1232109

Total Pvt Share

2004-05

2005-06

2006-07

2007-08

2008-09

85

the miscellaneous segment and surprisingly after price deregulation; private insurers

seem to lose the profitable fire segment. This clearly spells out that cross subsidisation

process came to a sudden end. Almost all the companies progressed well in terms of

their growing business volumes and the sector reported growth in market share in year

2009. Figure 4.1 representing the premium collection depict the uphill graph of the

private sector insurers. ICICI Lombard held the highest market share of 11.21among

the private sector. This was followed by Bajaj Allianz (8.63), Reliance (6.31), IFFCO

Tokio (4.53), Tata AIG (2.71), Royal Sundaram (2.65), Cholamandalam (2.26) and

HDFC Ergo (1.12). ICICI, Tata and Reliance insurers reported marginal decrease in

the market share, however, the other five made good advances in the business

collection. The market position of the private sector insurers indicate that private

insurers seem to focus on untapped market, rather than competing with public

insurers, which surely is a healthy sign for the market and consequently market itself.

It indicates that market overall is expanding and more people are coming under the

purview of insurance. The growing market presence of private sector insurers

therefore calls for in depth analysis in the light of CARAMEL parameters.

1. Capital Adequacy Analysis

Capital is seen as a cushion to protect insured and promote the stability and efficiency

of financial system, it also indicates whether the insurance company has enough

capital to absorb losses arising from claims. As mentioned in the earlier chapter,

regulator IRDA has not prescribed any norm to maintain the minimum capital

adequacy ratio, instead regulator has asked insurance companies to maintain solvency

margin of 1.5. For the capital adequacy analysis of the insurers two capital adequacy

ratios have been used i.e. net premium to capital and capital to total assets ratio. The

former reflects the risk arising from underwriting operations and the latter reflects

assets risk. Table 4.2 reflects the capital adequacy position of the private insurers.

Table: 4.2 Capital Adequacy Ratio Analysis of Private Sector Non Life Insurers (Figures in percent)

86

Companies Ratios 2004-05 2005-06 2006-07 2007-08 2008-09

Royal Sundaram 1 133.02 178.13 234.19 251.66 268.40 2 43.547 32.517 24.593 22.664 22.181

Bajaj Allianz 1 207.67 219.56 207.86 245.18 281.24 2 24.217 25.118 23.785 23.007 21.233

IFFCO Tokio 1 139.94 123.61 184.54 210.48 182.02 2 31.328 36.743 33.116 25.831 28.686

ICICI Lombard 1 86.45 141.50 113.15 145.65 123.15 2 32.436 22.752 31.912 28.358 29.223

Tata AIG 1 182.08 146.11 156.54 174.57 173.19 2 29.924 32.988 33.649 29.955 31.201

Reliance 1 34.70 35.33 94.16 158.16 174.25 2 62.274 59.969 35.227 34.878 37.425

Cholamandalam 1 50.04 62.27 89.66 167.89 247.98 2 61.306 54.728 42.240 33.227 28.958

HDFC Chubb 1 99.49 110.77 110.51 98.71 89.20 2 56.543 54.272 52.530 54.198 47.703

Source: - Compiled from the Annual Reports of Insurance Companies Note: 1. Ratio of Net Premium to Capital 2. Ratio of Capital to Total Assets

The companies continue to show higher capital adequacy ratio despite earning

premiums more than the capital infused. Bajaj Allianz has been leading in the ratio,

where it ranged from 207 percent to 281 percent during the period of study. This was

followed by Royal Sundaram where the ratio ranged from 133percent to 268 percent.

IFFCO Tokio recorded the ratio ranging from 123 percent to 210 percent showing a

decline in 2008-09, whereas Tata AIG has the ratio ranging 146 percent to 182

percent. The company witnessed sharp decline in 2005-06, however, making it better

in the last year of study. Cholamandalam has been the only company witnessing

continuous growth in the ratio, year 2007-08 and 2008-09 witnessed the company

with the ratio of 167 and 247 percents respectively, attributed to the robust growth of

premiums. The ratio of the company ranged between 50 and 247 percents. Reliance,

ICICI and HDFC had the ratios ranging between 34 and 174 percents, 86 and 145

87

percents and 89 to 110 percents respectively. Reliance also showed the continuous

increase in the ratio where as cyclical pattern was shown by ICICI showing increasing

and deceasing view of the ratio. HDFC initially saw an increasing trend in the ratio,

however later it decreased below the initial year ratio to the tune of 89 percent.

The ratio of capital to total assets presented in Table 4.2 indicates decreasing trend

during the period of study. This may be as a result of inclusion of borrowings in the

liabilities side of the balance sheet by the private insurance companies, in addition to

equity. The total assets position of private insurers also saw a considerable

improvement throughout the period of study. Moreover the year 2007-08 witnessed

the sharp decline in the ratio for the majority of insurance concerns, which may be

attributed to price deregulation of 2007. Reliance witnessed the ratio raging between

62 percent 35 percent, where as in case of Cholamandalam, the ratio ranged between

61 and 28 percents, marking a steep decline of 9 percent following price deregulation.

HDFC and Tata witnessed the ratio having wave like up and downward surge where

as in case of former it finally settled at 47 percent from the highest of 56 percent and

later at 31 percent from 29 percent although witnessing the ratio highest at 33 percent

in 2006-07. Royal, Bajaj, IFFCO and ICICI have the ratio ranging between 43 and 22

percent, 25 and 21 percent 36 and 25 percent and 32 and 22 percent respectively.

The analysis of ratios clearly indicates that private sector insurance companies have

been able to maintain good capital adequacy ratio and companies have infused more

capital over the period of study, which might have enabled them to maintain required

solvency margin and meet the underwriting losses. Further, the analysis reveals that

the in comparison to capital, assets base has been decreasing and the underwriting

losses are being met through the infusion of more capital in the portfolios of the

companies.

Despite the fact IRDA has made it mandatory for registration of insurance companies

to have initial capital of `100 crores; all the private concerns have been infusing more

capital. Besides increasing capital and the support of reserves, companies have also

88

relied on borrowings to cushion their liabilities. Since the claims of non life insurers

are not of long tailed nature, as in case of life segment, there are no signs of worry for

the regulator regarding the capital adequacy norm. Although there have been some

volatility in these ratios which arise as a result of gradual deregulation policy of the

government for the sector and that the growth of the assets has been more pronounced

than the growth of capital for the study period. The ratios are stable and present a

healthy picture of private insurers and it seems that their solvency position is better,

moreover it is mandatory for the insurance company to adhere to the solvency ratio

which is now monitored quarterly and the concerns falling short of the required ratio

is strictly taken care of.

2. Asset Quality Analysis

The primary factor effecting overall asset quality is the quality of the real estate

investment and the credit administration program. Investments in real estate and

housing sectors amounts 10 percent of the total assets base of the non life insurance

companies. The asset quality analysis reflects the quantum of existing and potential

credit risk associated with the loan and investment portfolios, real estate assets owned

and other assets, as well as off-balance sheet transactions. The indicator “Real Estate

+ Unquoted Equities + Debtors/Total Assets”, highlights the exposure of insurers to

credit risk because these assets classes have the largest probability of being impaired.

Table 4.3 presents look of the asset quality of the private insurers.

Table: 4.3 Asset Quality Ratio Analysis of Private Sector Non Life Insurers (Figures in percent)

Companies Ratios 2004-05 2005-06 2006-07 2007-08 2008-09

Royal Sundaram 1 43.459 32.509 24.172 21.749 20.905 2 42.64 44.46 41.06 44.44 48.12

Bajaj Allianz 1 14.914 10.350 6.493 4.393 3.481 2 23.74 30.81 21.93 32.48 42.43

IFFCO Tokio 1 24.998 28.879 24.552 18.699 15.483 2 23.50 27.99 34.98 38.00 49.12

89

ICICI Lombard 1 28.611 14.947 11.364 9.946 7.351 2 42.45 47.08 46.06 50.80 55.81

Tata AIG 1 29.924 32.913 31.054 25.925 27.594 2 26.55 33.74 30.95 35.59 53.87

Reliance 1 45.893 40.038 13.997 6.157 5.310 2 24.79 26.27 27.90 38.44 46.54

Cholamandalam 1 61.306 54.728 42.240 31.822 26.453 2 24.73 34.06 31.43 31.99 39.70

HDFC Chubb 1 56.607 54.317 51.723 53.479 47.418 2 27.33 26.41 27.53 31.61 35.74

Source: - Compiled from the Annual Reports of Insurance Companies.

Note: 1.Ratio of Equities to Total Assets 2. Ratio of Real Estate + Unquoted Equities* + Debtors/Total Assets

*Unquoted Equities could not be figured out due to the fact that companies were not listed up to the

submission of the study; as a result, the term has been omitted in the calculation of ratio.

Bajaj Allianz, ICICI and Reliance have witnessed steep decrease in the asset quality

ratio which ranged between 14.91 & 3.48 percents, 28.61 & 7.35 percents and 45.89

& 5.31 percents respectively. Tata and HDFC witnessed slight decline in the ratio

where it lied between 32.91 & 25.92 percents and 56.60 & 47.41 percents

respectively. Royal, IFFCO and Cholamandalam also had the ratios with decreasing

trend and it ranged between 43.45 & 20.90 percents, 28.87 & 15.48 percents and

61.30 & 26.45 percents.

Second ratio of the asset quality reveals that asset base of the private companies

witnessed gradual increase as the study progresses. Besides other assets, the

proportion of real estate and debtors in the total assets position of almost all the

private companies witnessed a considerable increase gradually, which may be

attributed to mandatory investment in real estate by the companies and surprisingly,

the ratio is having a positive synergy with the market share and growth in business

volumes. ICICI Lombard witnessed the higher increase in the ratio and it ranging

between 42.45 and 55.81percents, where as Tata AIG is seen to have the ratio ranging

from 26.55 and 53.87 percent. IFFCO Tokio had the ratio ranging from 23.50 to 49.12

percents and Royal has the ratio lying between 41.06 and 48.12percents. Reliance,

90

Bajaj, Cholamandalam and HDFC Ergo insurers also saw a gradual increase in the

ratio and it was ranging between 24.79 and 46.54 percents, 23.74 & 42.43 percents,

24.73 & 39.70 percents and 27.33 & 35.74 percents respectively.

From the analysis of asset quality ratios of eight private insurers, the ratio of equities

to total assets decreased by large proportion due to tremendous increase in the assets

of the companies. Although there has been exceptional growth of equities by HDFC,

ICICI, IFFCO, Royal and Tata, which is more than the IRDA requirement of `100

crores, but looking at their assets portfolio, the side has shown growth many folds

during the study period. Looking at the assets side of their position statement,

companies have also grown many folds in their investments side, since these

investments are strictly subject to regulations regarding the investment in the central

government securities (25%), state government (10%), loans to state government

(35%), the investments may be termed as risk free and at the time of unexpected

claims occurrences, the companies may not face problems insolvency.

3. Reinsurance and Actuarial Issues

Reinsurance ratio is also known as risk retention ratio, this ratio indicates the risk

bearing capacity of the country’s insurance sector; In India the insurance companies

are required to reinsure 20 percent of their business prior to de-tariffication and 15

percent of the tarrifed business risks after and 10 percent of de-tariffed risks from

2008 onwards (IRDA Annual Report 2008-09).The adequacy of technical reserves

also called as survival ratio shows the quality of company’s estimate of the value of

reported and outstanding claims, which reveals that some of the companies are better

in holding the marginally higher reserves relatively to average claims to recent three

years, triggering more detailed enquiry.

The private sector witnessed wide gap between the net premium and gross premium.

Since there has been decline in the insurance prices after de-tariffication, which

resulted in soaring profit margins and companies tend to grab more share in the

91

market and thereafter reinsure the risk with the reinsurers to share losses. The process,

however, affects their profitability and underwriting performances. Since the

country’s insurance sector is still passing through the transitional phase, IRDA has

been lenient in this approach to control such practices. However there are instances,

companies showing positive risk bearing capacities and retaining majority of the

business and passing on only the legally required portion to the reinsurers. The

detailed picture of the ratio is presented in Table 4.4 below:

Table: 4.4 Reinsurance and Actuarial Issues analysis of Private Sector Non Life Insurers

(Figures in percent)

Companies Ratios 2004-05 2005-06 2006-07 2007-08 2008-09

Royal Sundaram 1 52.398 54.387 55.764 64.203 74.445 2 - - 1.53 3.23 4.21

Bajaj Allianz 1 43.555 46.088 46.941 59.474 72.205 2 42.67 59.86 73.82 73.31 58.95

IFFCO Tokio 1 35.311 38.756 47.847 56.701 60.618 2 34.44 41.20 30.22 21.94 39.53

ICICI Lombard 1 24.673 33.337 35.685 47.388 58.013 2 36.37 62.50 100.97 86.20 96.56

Tata AIG 1 50.776 49.862 53.711 57.990 71.303 2 - - 11.45 17.06 14.51

Reliance 1 29.705 33.247 26.776 49.323 72.530 2 134.39 157.78 190.66 156.48 102.72

Cholamandalam 1 41.973 40.149 40.830 47.643 56.221 2 - - - 4.07 6.57

HDFC Chubb 1 67.898 69.241 72.314 68.019 52.908 2 - - - - -

Source: - Compiled from the Annual Reports of Insurance Companies

Note: 1. Ratio of Net Premium to Gross Premium. 2. Ratio of Net Technical Reserves* to Average of Net Claims Paid in Last Three Years. * Reserves & Surplus taken as Net Technical Reserves

92

Among the private insurers, Royal, Reliance, Bajaj, and Tata show the growing risk

bearing capacity and the same is reflected in their risk retention ratios. The ratio of net

premium to gross premium of these insurers is ranging between 52.39 & 74.44

percents, 29.70 & 72.52 percents, 43.55 & 72.20 percents and 5.77 & 71.30 percents

respectively. Others, following are IFFCO, ICICI, Cholamandalam, where the ratio

ranged between 35.31 & 60.62 percents, 24.67 & 58.01 percents, 41.97 & 56.22

percents respectively and the lowest HDFC which has shown decrease in the risk

bearing capacity from 72.31 percent to 52.91 percents.

The ratio, net technical reserves to average of net claims paid in last three years

reflects the position of technical reserves compared to the average claims paid in last

three years. The ratio for the private insurers reflects that few of the insurers reported

growing provision for claims out of the technical reserves. Reliance reported the

highest ratio ranging between190.66 & 102.72 percent, followed by ICICI, Bajaj and

IFFCO Tokio with ratios ranging between 36.37 & 100.97, 42.67 & 73.82 and 41.20

& 21.94 respectively. Tata AIG, Royal Sundaram and Cholamandalam had no

technical reserves in the initial years; however, lately the companies reported it

ranging between 11.45 & 17.06, 1.53 & 4.21 and 4.07 & 6.57 respectively. HDFC

Ergo did not report any technical reserve position.

The analysis reveals that the earlier practice of ‘underwrite and reinsure’ has faded

away to a good extent and the private insurers seem to become more risk tolerant as

they grow. However, adequate provisioning for the claims is not made overall. Except

Reliance, ICICI and Bajaj all the companies from the sector do not have good

technical reserve position to support any untoward incident incurring high claims.

4. Management Soundness Analysis

Sound management is crucial for financial stability of insures. It is very difficult;

however, to find any direct quantitative measure of management soundness, the

indicator of operational efficiency is likely to be correlated with general management

93

soundness. Unsound efficiency indicators could flag potential problems in key areas,

including the management of technical and investment risks. The indicator is

operating expenses by gross premiums and personnel expenses to Gross premiums.

Gross premiums are used because they are a reflection of the overall volume of

business activity. The analysis reflects the efficiency in operations, which ultimately

indicates the management efficiency and soundness. The analysis of the management

soundness is presented in the Table 4.5 below:

Table: 4.5 Management Soundness of Private Sector Non Life Insurers (Figures in percent)

Companies 2004-05 2005-06 2006-07 2007-08 2008-09

Royal Sundaram 22.019 22.853 22.801 25.108 27.329 Bajaj Allianz 17.502 16.398 19.383 21.812 22.862 IFFCO Tokio 19.567 17.126 17.889 17.844 17.439 ICICI Lombard 17.273 18.844 16.685 16.968 19.946 Tata AIG 23.770 26.389 27.239 29.540 32.924 Reliance 21.221 16.783 19.833 28.918 28.255 Cholamandalam 25.365 25.976 25.498 25.294 23.919 HDFC Chubb 26.237 28.863 32.965 33.588 31.694

Source: - Compiled from the Annual Reports of Insurance Companies

Note: Ratio of Operating Expenses to Gross Premium

The ratio of operating expenses to gross premium preferred to be low one, the

companies did show minor increase during the span of study. IFFCO and

Cholamandalam have been efficient enough to reduce the ratio by controlling

operating expenses despite growing premiums; ICICI has also been efficient to control

the ratio despite the marginal growth of around 2 percent in the management

soundness ratio where it ranged in 17.27 percent to 19.95 percent. Royal, Bajaj and

HDFC also saw marginal growth of 5 percent in the ratio and it lied between 22.02 &

27.33 percents, 17.50 & 22.86 percents and 26.24 & 31.69 percents. Reliance had the

ratio of operating expenses to gross premium between 21.22 percent and 28.92 percent

showing an increase of more than 7 percent however slight decrease has been

94

witnessed in the last year to the prior year of study. Tata reported the highest ratio of

management soundness witnessing continuous growth; the ratio saw a swing of more

than 9 percents throughout the study period.

Whereas there is a ceilings regarding the expenses incurred on the underwriting,

regulator “IRDA”, has been asking insurance companies time and again to be cost

efficient in underwriting, yet it has not been subject to any strict action and IRDA

seem to wait for some time to allow the sector to establish the network.

5. Earnings and Profitability Analysis

Earnings and profitability section of the study is two tier standard; focussing on

operational and non operational efficiency of the insurers. The ratios in this section

include claim ratio (also known as loss ratio), expense ratio, combined ratio,

investment income ratio and return on equity. For non-life insurers, the ratio (net

claims/net premium) is an important indicator of whether their pricing policy is

correct, while the expense ratio (expenses/net premium) adds the aspect of operating

costs into the analysis. It is important to note on technical detail; while the loss ratio

has earned net premium into the denominator (on accrual basis, net claims are directly

related to the denominator), the expense ratio is commonly defined with written net

premium in the denominator (again, the expenses other than claims are directly related

to the denominator). The combined ratio, defined as the sum of the loss ratio and

expense ratio, is a basic, commonly used measure of profitability. This indicator

measures the performance of the underwriting operation but does not take into account

the investment income. It is not uncommon to see combined ratios of over 100 percent

and this may indicate that investment income is used as a factor in the setting of

premium rates. Prolonged triple-digit combined ratios, in an environment of low or

volatile investment yields, signal a drain on capital and the prospect of solvency

problems. Another indicator, investment income/net premium, focuses on the second

major revenue source-investment income. Return on equity then indicates the overall

level of profitability.

95

The five ratios comprising the indicator “Earnings and Profitability” highlight

underwriting results and investment opportunities of the concerns simultaneously. The

ratios calculated may represent the pattern, different from the earlier period’s trend,

the reason is because of unusual increase or decrease in the inputs of ratios, largely

because of price deregulation announced by IRDA in year 2007-08. The study of

impact of the free price regime on the products, however, would be the study out of

context; the analysis aims at analysis of the operational and non operational

performance witnessed during the study period and are summed under the indicator

earnings and profitability for the private sector insurers after liberalization

Table 4.6 presents a detailed analysis of earnings and profitability of private sector

insurers. The first ratio in the category of earnings and profitability is the ratio of net

claims incurred to net premiums, termed as claim ratio or loss ratio. This ratio

represents the proportion of net claims incurred out of the earned premiums. The net

incurred claims represent the claims paid and payable that had not been ceded to

reinsurers. The net incurred claims ratio or loss ratio indicates the extent to which the

‘net premium’ is to be applied to meet this obligation and is a measure of the risk

retained by the insurer. This enables an assessment of profitability of underwriting

operations and reinsurance arrangements. The loss Ratio of the eight private concerns,

over the five year period represents cyclic pattern except for ICICI and IFFCO where

the ratio ranged between 71.78 & 85.35 percents and 67.99 & 83.44 percents

respectively. HDFC, Royal and Cholamandalam saw a decrease in the loss ratio in

year 2006-07 amounting 0.58 percent, 3 percent and 22.37 percents, the ratio ranged

between 57.04 & 80.73 percents, 61.07 & 68.95 percents and 55.60 & 77.97 percents

respectively. Bajaj and Tata witnessed the same pattern of movement in the ratio

showing increase in the second year of study thereafter decrease in the third year

following continuous increase in the next two years, the ratio lied between 61.02 &

71.91 percents and 54.27 & 60.54 percents respectively. Reliance initially had the

high loss ratio of 79.87 percents, however it decreased to 63.81 percents and thereafter

increasing continuously for two years amounting to 70.9 78.19 percents and slight

96

decrease to 77.31 percent in the last year of study. Except Reliance all the companies

showed decreasing tend prior to de-tariffication.

Analysis in table 4.6 (2) presents the ratio of expenses to net premiums called expense

ratio. Expenses ratio in insurance parlance is the portion of premium used to pay all

the costs of acquiring, writing and servicing insurance and reinsurance, the non-life

insurance companies in private sector are seen to have incurred high expenses which

resulted in high expense ratio for all the private companies. Reliance, ICICI,

Cholamandalam, IFFCO Tokio and Tata AIG are seen to have recorded the highest

expense ratio ranging from 74.070 & 38.956 percent, 70.006 & 34.382 percent,

64.698 & 42.545 percent, 55.413 & 28.768 percent and 52.925& 46.175 percent

respectively. Similarly, Royal Sundaram, Bajaj Allianz and HDFC Ergo reported

higher expense ratio ranging between 42.023 & 36.710 percent, 41.292 & 31.663

percent and 38.642 & 59.904 percent respectively. Except HDFC Ergo all the private

insurers seem to be reporting gradual decrease in their expenses.

Section 40 C of Insurance Act 1938 also lays down the guidelines in respect of

management expenses and according to the section; expenses should never exceed 20

percent of the net premiums. The private insurers seem to breach it; however, the

silver lining is that private insurers seem to have controlled management expenses to a

great extent which is reflected in their decreasing expense ratio.

Combined ratio, is a measure of profitability used by an insurance company to

indicate how well it is performing in its daily operations. A ratio below 100 percent

indicates that the company is making an underwriting profit, while as the ratio above

100 percent means that it is utilizing more money in paying claims and expenses that

it receives from premium, Hampton, (1993). Combined ratio defined as the sum of

loss ratio and expense ratio indicates how every rupee earned as premiums is spent.

The claims ratio is claims owed as a percentage of revenue earned from premiums.

The expense ratio is operating costs as a percentage of revenue earned from

97

premiums. The combined ratio is calculated by taking the sum of incurred losses and

expenses and then dividing them by earned premium.

Ratio (3) of Table 4.6 highlights the combined ratio position of the private non life

insurers. It is evident from the analysis that none of the players reported profitable

underwriting, infact IFFCO Tokio, ICICI Lombard and Bajaj Allianz reported the

ratio more than 200 percent, which means that the said insurers paid out double to

what they earned from the operations. The combined ratio for these insurers is ranging

between 122.693 & 290.055 percent, 102.531 & 248.246 percent and 151.853 &

227.095 percent respectively. Reliance, Royal and Cholamandalam insurers too had

the ratio on the higher side and it ranged between 95.720 & 198.442 percent, 149.373

& 187.818 percent and 89.036 & 168.208 percent respectively for these insurers. Tata

AIG reported the lowest combined ratio in the sector with the ratio ranging between

105.967 & 131.114 percent for the study period. Surprisingly HDFC Ergo is seen to

have witnessed significant decrease in the combined ratio and the ratio decreased from

171.720 & 134.769 percents. Although in year 2006-07 major decrease was seen in

the ratio by Reliance and Cholamandalam and instincts of profitable underwriting

were reported in the year, however, the ratio thereafter deteriorated further and

consequently resulted in underwriting losses for the said insurers.

Combined ratio analysis of the private insurers’ reveals that premiums earned is

drained away in the form of claims and expenses. This speaks of the improper risk

selection and mismanaged expenditure policy of the insurers, which is resulting in

draining away of resources both from operations and investments. The analysis

discloses that every rupee earned as premium plus the sum earned from investment

income is utilised for paying claims and expenses for acquiring business. The situation

is alarming, given the fact the market is turning to be more competitive in the near

future, the sustenance strategy in the near future will surely be proper risk selection,

proper risk pricing and cost efficient operations.

98

Ratio (4) of Table 4.6 reflects the investment income position of private sector

insurers. As is evident from the analysis, the investment income constitutes a meagre

portion of their portfolios. ICICI, IFFCO Tokio, Bajaj Allianz, HDFC and Royal

Sundaram reported the highest investment income in the sector, the ratio for these

companies ranged between 7.347 & 11.801 percents, 6.238 & 10.283 percents, 7.882

& 10.201 percents, 3.958 & 9.929 and 4.781& 9.454 percents respectively. While as

the same ratio for Tata AIG, Cholamandalam and Reliance is ranging between 6.504

& 8.685 percents, 6.275 & 8.376 percents and 10.669 & 6.968 percents respectively.

Except Reliance, the ratios for all the other companies in the sector indicate gradual

increase in the investment income, which speaks about the good asset management of

their investment portfolios.

A combined ratio of 100 percent does not necessarily mean that the company is

making losses, because this ratio is calculated after excluding the investment income.

Higher returns on investment has always helped Indian general insurance companies

offset underwriting losses, however, the routine has changed, declining stock prices

substantially constrained investment returns of insurance companies. To report

sustainable profits, insurance companies will need to generate income on their

underwriting operations, instead of depending on investment returns. It seems that the

global meltdown and the aftermath situation had the minimal impact on the

investment income of the private insurers and they are earning a steady income from

the investment incomes. However, the situation demands insurers to focus on efficient

underwriting rather than on non operational income. The prime motive for insurers

should therefore be proper risk selection and pricing to avoid any untoward situation.

Ratio (5) of Table 4.6 represents the return on equity of the private sector insurers

under study. Since return on equity (ROE) is the reward for the investors, the ratio

seems to be decreasing over the period of study for all private insurers except Bajaj

Allianz which has reported a great increase throughout the study period. The ratio for

the company ranged between 42.814& 95.818 percent. Similarly Cholamandalam saw

99

an increase in the ratio and it increased from -2.351 to 4.924 percents. ICICI too had

good quantum of the ratio in the initial year; however, it got decreased from 21.976 to

5.589 percents. Royal Sundaram, IFFCO Tokio and Tata AIG also saw decrease in the

ratio and it decreased from 15.132 percent to 2.695 percents, 14.720 to 1.016 percent

and 14.720 and 1.413 percent respectively. HDFC Ergo and Reliance had the greatest

fall in the ratio, the companies witnessed overall losses in the later years of the study

and consequently no return to shareholders was expected. The ratio for these

companies decreased from 3.526 to -12.875 percent and 14.085 to -46.268 percent

respectively. Reliance witnessed a huge fall in the ratio in year 2007-08, the ratio

decreased to the record -154.499 percent.

The analysis of the parameter “Earnings and Profitability” indicates that private

insurers incurred huge amounts in the form of losses and management expenses,

consequently which resulted in huge underwriting losses to the private players. The

investment income being meagre in proportion could not set off the underwriting

losses which led to the huge losses to some of the players.

In India, the price deregulation has ignited fierce competition in the non-life insurance

market and companies are marching forward, gaining more market without focusing

on prudential pricing. This has resulted in a situation, where the breakeven which was

expected much earlier seem to be now pushed forward and in no case is expected in

the coming three to four years. Here regulator IRDA has much to exercise, given the

juncture when insurance environment has already stepped inn in the free price regime,

any imperfection can erode customer faith which may be hazardous for the country

like India.

Table: 4.6 Earnings & Profitability Analysis of Private Sector Non Life Insurers (Figures in percent)

Companies 2004-05 2005-06 2006-07 2007-08 2008-09

100

Royal Sundaram

1 65.622 64.809 61.077 66.875 68.948 2 42.023 42.019 40.889 39.107 36.710 3 156.157 154.237 149.373 171.005 187.818 4 4.781 5.652 6.891 7.870 9.454 5 3.854 6.167 15.132 2.773 2.695

Bajaj Allianz

1 61.019 69.920 66.262 66.813 71.905 2 40.183 35.581 41.292 36.675 31.663 3 151.853 196.509 160.472 182.176 227.095 4 7.882 6.786 9.139 10.757 10.201 5 42.814 46.855 68.435 95.818 86.329

IFFCO Tokio

1 67.988 70.545 72.789 78.906 83.443 2 55.413 44.189 37.387 31.471 28.768 3 122.693 159.644 194.691 250.726 290.055 4 6.238 6.465 6.455 8.071 10.283 5 14.720 6.645 12.333 3.256 1.016

ICICI Lombard

1 71.778 73.766 76.299 78.378 85.352 2 70.006 56.525 46.757 35.807 34.382 3 102.531 130.502 163.182 218.890 248.246 4 11.011 9.885 7.347 8.685 11.801 5 21.976 20.533 20.363 27.262 5.859

Tata AIG

1 55.136 56.083 54.267 54.412 60.542 2 46.813 52.925 50.713 50.940 46.175 3 117.779 105.967 107.008 106.816 131.114 4 7.949 7.983 6.504 7.323 8.685 5 9.793 6.977 9.587 7.188 1.413

Reliance

1 79.867 63.813 70.900 78.193 77.305 2 71.438 50.479 74.070 58.629 38.956 3 111.799 126.415 95.720 133.369 198.442 4 10.669 8.649 6.968 7.048 7.070 5 5.719 14.085 1.580 -154.499 -46.268

Cholamandalam

1 77.027 77.975 55.602 62.545 71.564 2 60.431 64.698 62.449 53.090 42.545 3 127.463 120.521 89.036 117.809 168.208 4 6.275 8.376 7.532 7.442 7.375 5 -2.351 -2.198 8.796 5.098 4.924

HDFC Chubb 1 66.356 57.629 57.046 76.488 80.732 2 38.642 41.685 45.585 49.380 59.904 3 171.720 138.249 125.142 154.897 134.769 4 3.958 5.686 4.668 7.774 9.929 5 -6.654 3.526 1.602 -11.333 -12.875

Source: - Compiled from the Annual Reports of Insurance Companies

Note: a. Loss Ratio = (Net Claims/Net Premiums) b. Expense Ratio = (Expenses/Net Premiums) c. Combined Ratio = Loss Ratio + Expense Ratio d. Ratio of Investment Income to Net Premium e. Return on Equity (ROE)

101

6. Liquidity

Liquidity is usually a less pressing problem for insurance companies at least as

compared to banks, since the liquidity of their liabilities is relatively predictable and

for non life insurers the liabilities, besides claims are for shorter period of time.

However, the ratio is prescribed to be maintained more than 100 percent, Hampton,

(1993). Moreover the liquidity problem may call upon capital restructuring and

infusion of more capital to heighten the liability graph. Table 4.7 presents the liquidity

position of the private sector insurers as follows:

Table: 4.7 Liquidity Analysis of Private Sector Non Life Insurers

(Figures in percent) Companies 2004-05 2005-06 2006-07 2007-08 2008-09

Royal Sundaram 24.44 21.28 24.92 32.24 25.37

Bajaj Allianz 20.70 33.64 26.30 27.34 33.25

IFFCO Tokio 69.03 77.88 67.45 69.95 76.74

ICICI Lombard 52.21 55.61 56.54 46.24 56.55

Tata AIG 31.31 34.50 34.63 25.87 44.88

Reliance 55.50 32.72 15.44 29.49 42.77

Cholamandalam 23.90 26.59 35.46 30.64 37.11

HDFC Chubb 19.43 25.27 33.90 27.25 44.95 Source: - Compiled from the Annual Reports of Insurance Companies

Note: Ratio of Liquid Assets to Current Liabilities

Since the insurance contract lasts usually for a year, it is as such imperative on part of

insurers to maintain the ratio at 100 percent to meet the short tail liabilities. In

contrast, however, none of the private insurers seem to be meeting the standard,

although analysis reflects improvement in the ratio. Analysis reveals that IFFCO

102

Tokio reporting the highest liquidity ratio ranging between 67.45 & 77.88 percent,

followed by ICICI Lombard, where the ratio ranged between 46.24 & 56.55 percent.

This was followed by HDFC Ergo, Tata AIG and Cholamandalam, the liquidity ratios

for these insurers is ranging between 19.43 & 44.95 percent, 25.87 & 44.88 percent

and 23.90 & 37.11 percent respectively. Bajaj Allianz and Royal Sundaram had the

lower liquidity ratios ranging between 20.70 & 33.64 percent and 21.28 & 32.24

percent respectively. Reliance was a sole company reporting gradual decrease in the

liquidity position from 55.50 to 15.44 percent in the initial years; however, latterly the

company managed an upward surge in the ratio and finally settled at 42.77 percent in

year 2008-09.

The analysis reveals that private insurers need to make enough provisioning in the

liquid assets to have a better liquidity position. Otherwise, the situation may require

capital restructuring, consequently which may require more fund inflow.

The purpose of this chapter was to analyze financial performance of private sector

non-life insurers. The analysis under the CARAMEL parameters has been quite

interesting, highlighting various unaddressed issues in financial performance analysis

of the insurers and it is concluded that liberalization had a positive and promising

impact on private sector insurance companies’ performance especially on capital

adequacy and asset quality standards. It is concluded that although private sector

insurers are doing exceptionally well in gaining the market share, which is reflected in

their continuous growing business volumes and strong market presence, however,

earnings and profitability had been under strain and free market instincts continue to

worsen the earnings. Whereas the capital base has been good throughout the study

period, the underwriting losses seem to have been met out of the more capital

infusion. The negative impact is seen in the key underwriting and investment side of

the sector. It is also important to note that private non-life insurers have responded

well in risk selection, which is reflected in their claims ratio; however, growing

expenses and deteriorating management efficiency are the main area of concern for

103

the insurers. The underwriting profitability has been under strain for the insurers

which stems from growing management expenses, however, given the factor that they

are still in infancy stage, more efficient functioning in terms of underwriting and

management expenses is expected in the coming years. The growing free market

regime has been a tough challenge and competition is fierce because of presence of

public insurers who have got good market presence and strong financial base. The

competition is also felt in the areas of product pricing from public insurers, to which

private insurers are responding quite efficiently. However, the phenomenon is

worrying for the private insurers, who can have sustainability problems in the

competitive environment. The problem is being smelt and private insurers are forced

to inject more capital to arrive at solvent state, which is not the same for public

insurers, given the fact that they possess huge reserve base. The market in expanding

which is quite visible from the fact that business volumes for every individual

company is increasing, as a result head to head competition is not felt between public

and private sector insurers. However product pricing is the main weapon of

competition after de-tarrification, which resulted in the huge underwriting losses for

both the sectors. In view of these findings, it would be quite interesting to have a look

into statistically comparative financial performance of the both the sectors of non-life

insurance, which has been attempted in the next chapter to follow. The chapter also

embraces the comparison on the basis of Insurance Solvency International Limited

(ISI) standards. Moreover determinants of solvency have also been figured out

statistically by employing multiple regression of the key areas of insurance

functioning.

104

CHAPTER V

COMPARATIVE STATISTICAL ANALYSIS OF PUBLIC AND PRIVATE

NON LIFE INSURERS

105

The insurance sector is the hub of commercial activity and reflects the economic

health of a country. If this sector is healthy, the economy of the country is also

healthy; on the other hand if it is sick, the economy of the country would also be in

bubbles because risk cover will not be properly available to the other sectors of the

economy. The insurance industry till deregulation of Indian insurance sector was

concentrated to few pockets of economy and as such insurance penetration was very

low. After deregulation of insurance sector, the sector embarked upon development

programmes with regard to delivery, innovation in products and insurance penetration.

The activities undertaken by the IRDA have increased the insurance activities

manifold in terms of volume, variety of products and geographical coverage and more

so competition due to entry of new insurers have increased service diversification to a

greater extent. Insurance companies have made a shift from monopolistic environment

to perfect competitive environment and a positive drive towards the introduction of

excellence is risk coverage. In this context, the evaluation of financial performance of

insurance companies in post liberalization is imperative. In previous two chapters, an

individual analysis of the financial performance of the insurance companies have been

attempted, however, present chapter is devoted to the comparative analysis of the

public and private insurers by using relevant statistical tools.

In view of the growing skeptism regarding working of insurance companies in India, it

has become imperative to appraise the performance of insurance companies in the

light of CARAMEL parameters. The performance of companies could be judged by

106

different financial tools but qualitative aspect identified in CARAMEL framework has

far reaching implications on the overall performance of insurance companies. The

analysis based on these parameters is presently in infancy; therefore available media

of using statistical tool, an another milestone in CARAMEL framework has been used

to evaluate performance of these insurers. The comparative performance is done on

the basis of the capital adequacy, asset quality, reinsurance, management soundness,

earnings & profitability and lastly liquidity. Over and above, the factors affecting

solvency position of insurance companies is also being tested using multiple

regression analysis.

Capital Adequacy: Statistical Analysis

Adequacy of capital is important for the financial institutions to maintain customers’

confidence and preventing them from insolvency risks. Since the capital acts as

cushion to protect the interest groups, it acts as shock absorber, against the risks

arising out of instability in the country’s’ financial sector, enabling the institutions to

come out of the bankrupt state and meet their obligations in time. The adequacy of

capital is very important for the insurance company because unexpected insurer’s

losses are covered by charges to its capital. In other words, when capital is adequate

remote is probability of business failure. Although the nature of non life insurance

contracts are of short tail, however, it can put the concern in the state of insolvency if

the dues are not met in the short span which again may be dangerous for the

companies. In the absence of any specific benchmark rate in terms capital

requirement, the insurance companies are at disadvantage to predict the risks that they

may face due to capital erosion as compared to banking companies. . However, IRDA

has prescribed solvency measures to put in place of capital adequacy ratio in place to

protect the insurance companies and their clients. Under sec 64(b) of Indian Insurance

Act,1938 the non life insurance companies are required to continuously maintain the

solvency margin of 1.5, to be monitored on quarterly basis.

107

To have a comparative look of capital adequacy of public and private sector insurance

companies two capital adequacy ratios (Ratio of net premium to capital and Ratio of

capital to total assets) have been statistically tested.

Table 5.1

Statistical Analysis of Net premium to Capital of Public and Private Non life insurers

Ratios Ins. Cos Mean Ratio Std. Dev F - Value Significance (Two-Tailed) ACGR Significance

of ACGR Public Sector Insurance Companies

Net Premium to Capital

New India 77.80 8.26

89.90 0.000

-6.10 .030 Oriental 144.60 8.51 0.66 .775 National 219.50 26.34 -0.45 .925 United 91.50 9.15 -4.81 .112

Private Sector Insurance Companies

Net Premium to Capital

Royal 213.08 56.18

5.75

0.000

17.5 .013 Bajaj 232.30 31.33 7.17 .053 IFFCO 168.12 35.47 10.58 .133 ICICI 121.98 23.89 7.37 .332 Tata AIG 166.50 14.73 0.78 .827 Reliance 99.32 65.90 47.26 .012 Chola 123.57 83.30 41.93 .002 HDFC 101.74 9.08 -3.34 .302 Source: Compiled from Annual Reports of companies under study.

Table 5.1 represents statistical analysis of net premium to capital ratio of the under

study public and private non life insurance companies. The ratio of net premium to

capital of all public insurance companies registered high mean score, not differing at

0.05 level of significance level. National insurance company shows the higher

standard deviation of 26.34 amongst the public sector indicating high fluctuations in

the ratio on account of premium collection. The Annual Compound Growth Rate,

however, shows the negative growth in case of New India (-6.10), National (-0.45)

and United (-4.81), only Oriental insurance company has witnessed a slight growth of

0.66 that too is insignificant due to fluctuations in the premiums collection throughout

the study period.

The private sector companies have registered tremendous growth in terms of mean

score. The average growth for Royal, Bajaj, IFFCO, ICICI, Tata AIG, Reliance,

108

Cholamandalam, and HDFC was 213.08, 232.30, 168.12, 121.98, 166.50, 99.32,

123.57 and 101.74 respectively. The analysis shows that there is significant difference

in the ratio for the companies as F value is recorded at 5.75. The standard deviation

presented in the table represents high degree of variability in the collection of

premium for all the companies, when compared to public sector companies. Reliance,

Cholamandalam and Royal witnessed varying fluctuations in the ratio because of wide

gap in the year to year premium collection reflecting companies’ aggressive strategies

in gaining the market share, which is reflected by the Annual Compound Growth

Rate, which is recorded at 41.93, 47.26 and 17.50 respectively for these companies.

HDFC shows insignificant negative ACGR of -3.34, due to earlier increase and

thereafter drastic fall in the premium collection. The analysis reveals stable state for

Bajaj Allianz on account of high mean score with marginal standard deviation.

Further, it has been found that amongst public sector insurers; only Oriental has

shown insignificant positive ACGR of 0.66 while as the rest of the public insurers are

seen to have reported negative insignificant growth.

Table 5.2

Statistical Analysis of Capital to Total Assets of Public and Private Non life insurers

Source

:

Compil

ed from

Annual

Report

s of

compa

nies

under

study.

Ratios Ins. Cos Mean Ratio

Std. Dev F - Value Significance

(Two-Tailed) ACGR Significance of ACGR

Public Sector Insurance Companies

Capital to Total Assets

New India 22.179 3.294

22.19 0.000

6.26 .215 Oriental 13.720 1.237 0.28 .938 National 10.380 1.498 0.60 .921 United 21.345 3.937 9.15 .082

Private Sector Insurance Companies

Capital to Total Assets

Royal 29.100 9.083

8.37

0.000

-17.10 0.019 Bajaj 23.472 1.466 -3.51 0.054 IFFCO 31.141 4.170 -5.29 0.264 ICICI 28.936 3.865 0.12 0.984 Tata AIG 31.543 1.716 -0.13 0.952 Reliance 45.955 13.904 -15.60 0.076 Chola 44.092 13.784 -19.99 0.001 HDFC 53.049 3.312 -3.41 0.073

109

As is evident from the analysis of capital to total assets ratio presented in Table 5.2,

the mean score of public insurers is better and is recorded at 22.179, 13.720, 10.380

and 21.345 respectively for New India, Oriental, National and United insurers. The

variability in terms of standard deviation for all these companies is very low, however,

New India (SD 3.294) and United (SD 3.937) have slight variability compared to the

other two public sector insurers. The ACGR was high in case of United (9.15) and

New India (6.26) in the sector with insignificant growth arising due to increase in the

assets and investments and increase in the reserves and surplus. The companies seem

to rely less on equity capital due to the huge reserves accumulated during pre-

liberalization era.

The private sector insurers on the other hand have shown significantly good mean

ratio, HDFC, Reliance, Cholamandalam, Tata AIG, IFFCO, Royal, ICICI and Bajaj at

53.049, 45.955, 44.092, 31.543, 31.141, 29.100, 28.936 and 23.472 respectively. The

variability in terms of standard deviation is highest in case Cholamandalam (SD

13.784), Reliance (SD 13.904) and Royal (SD 9.083) and lowest in case of Bajaj ( SD

1.466), Tata AIG (SD 1.716), HDFC (SD 3.312), ICICI (SD 3.865) and IFFCO (SD

4.170). The companies however saw significant negative growth in the ratio due to

increase in the investments, although there has been infusion of fresh capital by the

concerns but that has been to meet the solvency requirements by the concerns and

proportion of increase in investment has been more compared to the increase in

capital.

Asset Quality Ratio: Statistical Analysis

The quality of assets is an important parameter in insurance sector to gauge their

financial strength. The asset quality ratio analysis differs in application to the banking

sector where it measures the component of bad debts in total assets strength. Incase of

insurance companies the ratio reflects the efficiency of the equity infused and growth

in the assets strength and also comparative growth in both.

110

To have a comparative look of asset quality of public and private sector insurance

companies following two asset quality ratios have been statistically tested.

1. Ratio of equities to total assets.

2. Ratio of Real Estate + Unquoted Equities + Debtors/Total Assets.

Table 5.3

Statistical Analysis of Equities to Total Assets of Public and Private Non life insurers

Ratios Ins. Cos Mean Ratio Std. Dev F - Value Significance

(Two-Tailed) ACGR Significance of ACGR

Public Sector Insurance Companies

Equities to Total Assets

New India 0.7216 0.0546

4.04 0.026

-2.26 .448 Oriental 0.7708 0.1535 -8.38 .178 National 0.7788 0.1322 -5.74 .330 United 0.9930 0.1674 6.60 .304

Private Sector Insurance Companies

Equities to Total Assets

Royal 28.56 9.51

10.41 0.000

-18.66 .013 Bajaj 7.93 4.72 -37.67 .000 IFFCO 22.52 5.36 -13.93 .051 ICICI 14.44 8.38 -31.25 .009 Tata AIG 29.48 2.77 -4.01 .217 Reliance 22.28 19.30 -61.86 .007 Chola 43.31 14.76 -22.23 .001 HDFC 52.71 3.44 -3.70 .050

Source: Compiled from Annual Reports of companies under study

The first ratio in the analysis of asset quality of insurance companies is presented in

Table 5.3. The ratio is less than one percent for the public sector insurers and has

witnessed minor fluctuation in the average ratio over the period of study. The public

sector insurers significantly differ in the ratio as there has been sharp increase in the

total assets of all the companies, however, only two of the concerns, New India and

United have increased their equity by `500 lakhs. It is evident from the analysis that

the United being sole company to witness ACGR of 6.60 percent, rest have witnessed

negative insignificant growth due to increase in the investment and other assets. The

public sector companies as per the analysis are able to meet the regulatory norm for

the initial paid up capital of `100 crores and thereafter relied heavily on reserves and

retained earnings to suffice the solvency requirement.

111

In terms of significance, Oriental company (1.78) stands at first place New India

(0.448) at last place. Analysis of the ratios for private sector insurers reveals that the

ratio differs very much from the public sector companies. The private sector

companies continuously infused more equity in their portfolio to cushion claims as a

result; there is a difference of asset quality ratio between the two sectors. The

companies significantly differ in their ratio within the private sector and had varying

average asset quality ratio of 52.71, 43.31, 29.48, 28.56, 22.52, 22.28, 14.44 and 7.93

by HDFC, Cholamandalam, Tata AIG, Royal, IFFCO, Reliance, ICICI and Bajaj

respectively. The companies saw difference in negative exponential growth over the

period which is supported by the significance level of ACGR. In terms of significance,

the companies Bajaj (0.000), IFFCO (0.051), ICICI (0.009), Reliance (0.007),

Cholamandalam (0.001) and HDFC (0.050) have witnessed significant ACGR, while

as Tata AIG has recorded insignificant (0.217) ACGR, because they have heavily

relied on equity to make improvements in asset quality.

Table 5.4

Statistical analysis of Real estate, unquoted equities and debtors to total assets

Ratios Ins. Cos Mean Ratio Std. Dev F -Value Significance (Two-Tailed) ACGR Significance

of ACGR Public Sector Insurance Companies

Real Estate + Unquoted Equities* + Debtors/ Total Assets

New India 19.328 5.466

1.17 0.353

13.58 0.076 Oriental 16.200 5.563 15.21 0.108 National 22.748 5.476 10.21 0.14 United 19.908 5.721 11.58 0.154

Private Sector Insurance Companies

Real Estate + Unquoted Equities + Debtors/ Total

Assets

Royal 44.144 2.635

4.15

0.002

2.41 0.239 Bajaj 30.278 8.143 12.14 0.163 IFFCO 34.718 9.866 17.8 0.001 ICICI 48.440 5.081 6.23 0.013 Tata AIG 36.140 10.480 14.68 0.05 Reliance 32.788 9.373 16.4 0.012 Chola 32.382 5.385 8.84 0.091 HDFC 29.724 3.914 7.16 0.042

Source: Compiled from Annual Reports of companies under study

*Unquoted Equities could not be figured out due to the fact that companies were not listed up to the submission of the study; as a result, the term has been omitted in the calculation of ratio.

112

The second ratio in the analysis of asset quality for the insurers is the ratio of real

estate, unquoted equities and debtors to total assets, which is present in table 5.4. The

highest mean score of the ratio has been witnessed amongst public sector insurers for

National Company (22.748) and lowest in case of Oriental Company (16.200). The

increase in ratio for public insurers can be attributed to increase in investments, real

estate and infrastructure and also due to marginal increase in the debtors over the

period of study. From the analysis of ratio of private sector insurers, similar picture is

witnessed. The highest ratio in terms of mean score is witnessed for ICICI (48.440)

and Royal (44.144) and lowest in case of HDFC (29.724) and Bajaj (30.278).

In terms of variability, the highest variability in the ratio is recorded in case of

Oriental insurer (SD 5.563) and lowest for New India (SD 5.466) among public sector

companies. However, in terms of variability, the highest variability in the ratio is

recorded in case of Oriental insurer (SD 5.563) and lowest for New India (SD 5.466)

amongst public sector companies. However in terms of variability, the highest

variability in the ratio is witnessed in case of Tata AIG (SD 1010.480), IFFCO (SD

9.866) and Reliance (SD 9.373), and lowest in case of Royal (SD 2.635) and HDFC

(SD 3.914) among private insurers. The ratio is insignificant in terms of “F” test for

both sectors. The ACGR, however, discloses the significant growth pattern by only

New India (13.58), where as insignificant growth of 15.21, 11.58 & 10.21 is recorded

in case of United and National insurers. In contrast, the highest significant growth was

witnessed by ICICI, Royal, Tata AIG, IFFCO, Reliance, Cholamandalam, Bajaj and

HDFC insurance companies among private sector insurers on account of increasing

investment in the real estate with minimum fluctuations except Tata AIG. The ACGR

reflects the significant exponential growth by IFFCO, Reliance and Tata insurers,

attributed to the sound investment policy in the real estate and infrastructure.

The sector overall presents the satisfactory picture of asset quality ratio in comparison

to the public insurers. What has been encouraging is that the private insurers which

lagged behind earlier in the growth of asset quality but now have shown signs of

113

acceleration gearing in the real estate portfolio resulting in sound asset quality ratio.

However, in short span of time, private insurers have performed well in the area which

surely gives them the upper hand over public insurers.

Reinsurance and Actuarial Issues: Statistical Analysis

Reinsurance and actuarial ratio are also termed as risk retention ratio. As per IRDA,

the insurance companies are required to retain at least 15 percent of tariffed business

and 10 percent of de-tariffed business (IRDA Annual Report 2008-09) and remaining

to reinsurer. In order to analyse statistically, the risk retention capacity of insurance

companies following two ratios have been analyzed:-

1. Net Premium to gross premiums. 2. Net technical reserves to average of net claims paid during last three years.

Table 5.5

Statistical Analysis net premium to gross premium of insurance companies

Ratios Ins. Cos Mean Ratio

Std. Dev F - Value Significance

(Two-Tailed) ACGR Sig. of ACGR

Public Sector Insurance Companies

Net Premium to gross

premium

New India 90.466 3.342

28.51 0.000

1.85 .111 Oriental 71.706 4.552 3.13 .117 National 75.275 4.060 2.23 .234 United 71.575 2.845 0.74 .632

Private Sector Insurance Companies

Net Premium to gross

premium

Royal 60.24 9.13

3.20 0.011

8.68 .015 Bajaj 53.65 12.07 12.66 .018 IFFCO 47.85 10.97 14.61 .002 ICICI 39.82 13.01 20.62 .002 Tata AIG 56.73 8.74 8.30 .035 Reliance 42.32 19.00 21.80 .078 Chola 45.36 6.75 7.56 .072 HDFC 66.08 7.57 -5.17 .225

Source: Compiled from Annual Reports of companies under study.

The public sector insurers have witnessed considerably the high mean score of 90.466,

75.275, 71.706 and 71.575 respectively by New India, Oriental, National and United.

The analysis of this ratio indicates thin gap between the net premiums and gross

premiums which clearly reveals that the risk retaining capacity of the companies is

114

showing healthy growth without much variability over the period of study. The higher

F value indicates that the companies significantly differ in the pattern (P = 0.000).

In terms of variability, the highest variability is recorded in the case of Oriental (SD

4.552) and lowest in case of United (SD 2.845) amongst public sector insurance

companies. The ACGR also shows significant growth on account of risk retention

ratio, lime lighting that the companies do not differ significantly in terms of mean

score, ranging from 39.82 to 66.08. The gap which is witnessed in the private sector

insurers’ ratio indicates that the companies prefer to reinsure major portion of their

business and pass on the risk to reinsurers.

In case of private sector insurance companies, highest variability is witnessed in case

of Reliance (SD 19.00), ICICI (SD 13.01), Bajaj (SD 12.07) and IFFCO (SD 10),

while lowest is recorded in case of Tata AIG (SD 8.74) and Royal (SD 9.15). The

important manifestation is revealed from F value (3.20) that companies differ

significantly in terms of variability.

Further in terms of ACGR, all companies are showing positive growth except HDFC

which has shown negative growth of 5.17. This state of affairs speaks growing

tendency among private insurers in terms of maturity and trust in positive

underwriting and not merely racing to grab market and passing on risk. The

significance in terms of ACGR, most of the private sector companies have shown

significant ACGR except in case of Reliance (0.078), Cholamandalam (0.072) and

HDFC (0.225).

Table 5.6 Analysis of Net Technical Reserves to Average of Net Claims paid

Ratios Ins. Cos Mean Ratio Std. Dev F - Value Significance (Two-Tailed) ACGR Sig. of

ACGR Public Sector Insurance Companies

Net Tech. Reserves to Av. of Net Claims paid

New India 163.93 13.10

4.31 0.074 Oriental 81.34 7.62 -2.7 0.449 National 50.23 6.07 -1.55 0.752 United 125.24 17.85 9.15 0.002

Private Sector Insurance Companies

115

Net Technical

Reserves to Average of Net Claims

paid

Royal 2.99 1.36

28.70

0.000

26.5 - Bajaj 61.72 12.79 8.49 0.283 IFFCO 33.47 7.76 -3.54 0.721 ICICI 76.52 26.93 22.74 0.069 Tata AIG 14.34 2.81 -16.19 - Reliance 148.41 32.49 -5.46 0.535 Chola 5.32 1.77 47.89 - HDFC - - - -

Source: Compiled from Annual Reports of companies under study. Note: 1. Calculated by taking average of net claims paid during last three years. 2. Reserves & Surplus have been taken as Net Technical Reserves

Sound reserve base is always necessary for the sound financial strength of insurers.

The ratio of net technical reserves to net claims presents overall risk bearing capacity

of the insurers in general and sound solvent state in particular. The ratio reveals the

company’s ability to pay claims in case of poor risk management and improper risk

pricing. As is evident from the analysis of the ratio, the mean score for new India

(Mean 163.93) and United (Mean 125. 24) is very good. This state of affairs may

mainly be attributed to huge technical reserves created during pre liberalisation era.

However, the mean score of Oriental (Mean 81.34) and National (Mean 50.23) is not

good when seen in comparison to the other two insurers, among the public sector,

which is believed to be because of high claims ratio. The mean score for private

insurers witnesses dismal picture for Royal (Mean 2.99), IFFCO (Mean 33.47), Tata

AIG (Mean 148.41) and Cholamandalam (mean 5.83), while moderate for Bajaj

(Mean 61.72) and ICICI (mean 76.52). The mean score is only strong for Reliance

(Mean 148.41) amongst private insurers.

In terms of variability, highest variability is recorded for New India (SD 13.10) and

United (SD 17.85) insurers while lowest for National (SD 6.07) and Oriental (SD

7.62) among the public sector insurers. The high F value also shows the significant

results as P = 0.000. Further, ACGR is also corroborating the variability of results as

Oriental (-2.7) and national (-1.50) shown negative growth. However, in terms of

variability, the highest variability is recorded for Reliance (SD 32.45) and ICICI (SD

26.93) while lowest for Royal (SD 1.36), Cholamandalam (SD 1.77) and Tata AIG

116

(SD 2.87). The results are also significant as P = 0.000. The results are evident from

analysis of ACGR where Cholamandalam (47.85), Royal (26.5) and ICICI (22.74)

have registered significant growth and negative growth for IFFCO (3.54), Tata AIG (-

16.19) and Reliance (-5.46). Overall the picture is worrying and more concern is felt

for private insurers, which are more vulnerable to the insolvency given the position of

technical reserves.

Management Soundness: Statistical Analysis

A perfect operational efficiency speaks of sound management in insurance business;

ultimately it is the cost and profit game and it is one of the important aspects of

insurance to which the regulator has come in motion and as per the regulation, the

insurance companies are required to control the management expenses and that they

should not exceed 20 percent of the gross premiums. For the purpose of this analysis

ratio of operational expenses to gross premiums have been analyzed for both the

sectors. The low and declining trend in this ratio is considered better.

Table 5.7 Analysis of Operational Expenditure to gross premium of Non life insurers

Ratios Ins. Cos Mean Ratio Std. Dev F - Value Significance

(Two-Tailed) ACG

R Significance

of ACGR Public Sector Insurance Companies

Management Soundness

Ratio

New India 24.838 3.669

2.94 0.065

-4.78 .410 Oriental 22.440 2.088 -2.04 .583 National 22.659 1.454 -1.57 .510 United 26.868 3.084 -6.28 .049

Private Sector Insurance Companies

Management Soundness

Ratio

Royal 24.022 2.179

13.15 0.000

5.26 .017 Bajaj 19.591 2.749 8.20 .027 IFFCO 17.973 0.944 -1.89 .302 ICICI 17.943 1.397 1.83 .531 Tata AIG 27.972 3.453 7.64 .002 Reliance 23.002 5.350 11.17 .142 Chola 25.210 0.769 -1.44 .157 HDFC 30.669 3.072 5.30 .095

Source: Compiled from Annual Reports of companies under study.

The analysis of operational expenditure to gross premium ratio as presented in Table

4.7 reveals that public insurers do not differ significantly in terms of this ratio and

117

have been able to control the operational expenditure to fair degree. The average ratio

of the insurers saw marginal decrease over the study period because of proportional

decrease in management expenditures to gross premium which was recorded at

26.868, 24.838, 22.659 and 22.440 for United, New India, National and Oriental

respectively. The ACGR also conform the same by reflection in the exponential

growth where all the four public non life insurers witnessed negative growth as

insignificant except united, witnessing negative growth of 6.28 significantly. The rest

of three do not differ significantly in exponential growth and have been given equality

in this regard. Private sector also has the ratio near to that of public insurers; the

decreasing status of the eight companies was 30.669, 27.972, 25.210, 24.022, 23.002,

19.591, 17.973 and 17.943 for HDFC, Tata, Cholamandalam, Royal Sundaram,

Reliance, Bajaj, IFFCO and ICICI respectively and the companies differ significantly

and in the pattern of ratio. ACGR of the private insurers witness significant pattern of

growth for Bajaj, Tata and Royal, where as Reliance, HDFC and ICICI also witnesses

positive growth however they do not differ significantly in the pattern. IFFCO and

Cholamandalam were the only two to witness negative ACGR; the significance level

is above 5 percent, due to fluctuating market share and expenses level, however the

companies apart from increasing market share were also able to control management

expenses proportional to gross premium to a good extent and had somewhat same

strategy to gain market apart from cutting operational costs.

Earnings and Profitability: Statistical Analysis The analysis of earnings and profitability is directed towards evaluation of operational

and underwriting efficiencies of the insurers. For this purpose a set of ratios have been

examined i.e. loss ratio, expense ratio, combined ratio, investment income ratio, and

ROE. The variation in these ratios for the select companies will have lasting impact on

their financial stability and solvency. The first three ratios of this analysis are required

to be minimal for the positive and sustaining financial performance of the insurance

company and reflect their underwriting efficiency are positively correlated with

capital adequacy.

118

i. Loss Ratio: Statistical Analysis

The claims ratio also termed as loss ratio in insurance business is defined as the claims

incurred to net premiums earned. If this ratio is high, it indicates that lesser amount is

available for expenses recovery and thereby has negative impact on profitability of the

companies and vice versa. Since there may be the argument that the amount of claims

incurred cannot be minimized as the portion include perils insured, however, insurers

differ to a good extent in terms of this ratio, highlighting the scope for efficient

underwriting.

Table 4.96

Analysis of Claim Ratio of Public and Private Non life insurers

Ratios Ins. Cos Mean Ratio Std. Dev F – Value Significance (Two-Tailed) ACGR Sig. of

ACGR Public Sector Insurance Companies

Loss Ratio

New India 84.283 5.255

2.02 0.152

2.72 .208 Oriental 91.070 4.984 2.39 .179 National 93.422 7.646 2.24 .469 United 89.427 6.143 -3.27 .171

Private Sector Insurance Companies

Loss Ratio

Royal 65.466 2.908

4.99 0.001

1.30 .437 Bajaj 67.184 4.146 2.83 .175 IFFCO 74.734 6.326 5.22 .002 ICICI 77.115 5.239 4.07 .008 Tata AIG 56.088 2.592 1.57 .337 Reliance 74.016 6.639 1.38 .704 Chola 68.943 9.653 -3.68 .504 HDFC 67.650 10.768 6.75 .214

Source: Compiled from Annual Reports of companies under study.

Note: Loss ratio is equal to claims incurred to net premiums earned

The arithmetic mean of loss ratio of the public insurers was registered at 93.422, 91.070,

89.427 and 84.283 for National, Oriental, United and New India respectively. However,

the loss ratio of the private non life insurers seem to be stable compared to public

insurers. The mean score of the ICICI, IFFCO, Reliance, Cholamandalam, HDFC,

Bajaj, Royal and Tata AIG was registered at 77.115, 74.734, 74.016, 68.943, 67.650,

67.184, 65.466 and 56.088 respectively. In terms of variability, the variation in loss ratio

is highest in case of National (SD 7.646) and United (SD 6.143), while lowest in case of

119

Oriental (SD 4.984) and New India (SD 5.255) amongst public insurers. However, ratio

has no significance difference because P value hints towards increase in claims incurred.

The ACGR also indicates increased incurred claims as it has positive growth for all

public sector insurers except United where it has witnessed negative growth (SD 3.27).

Similarly in terms of variability, the variation in loss ratio is highest in case of HDFC

(SD 6.639), Cholamandalam (SD 9.653) and Reliance (SD 6.639), while lowest in case

of Tata AIG (SD 2.592), Royal (SD 2.908) and Bajaj (SD 4.146) amongst private

insurers. However compared to the public insurers, the loss ratio has significant

difference amongst private insurers because P value (0.001) is less than 5 percent level

of significance and as such it can be smelled that private insurers have been able to

control claims incurred. The ACGR for all private companies has registered positive

growth except in case of Cholamandalam (-3.68). Hence, the analysis show that private

insurers had lower average loss ratio and lower ACGR than the public insurers

reflecting efficiency in the underwriting capabilities amongst private insurers thereby

will be reflected in higher net earnings.

ii. Expense Ratio: Statistical Analysis

In any business incurrence of operational expenses or management expenses are

necessary for proper maintenance and proper maintenance and better operational

performance and to the insurance business it is no way an exception. However,

excessive and inflated management expenses tell upon the profitability of insurance

companies and increases their burden ratio. As per IRDA, regulation, insurance

companies have been asked to restrict their operational expenses at 20 percent of gross

premium in order to insulate positive spread from their business and enable

management to create additional value for shareholders.

Table 4.10

Analysis of Expense Ratio of Public and Private Non life insurers

Ratios Ins. Cos Mean Ratio Std. Dev F - Value Significance

(Two-Tailed) ACGR Sig. of ACGR

120

Public Sector Insurance Companies Expenses incurred

to net premium

New India 27.514 4.427

6.06 0.006

-6.62 .262 Oriental 31.394 3.626 -5.17 .171 National 30.139 1.947 -3.80 .024 United 37.621 4.909 -7.02 .063

Private Sector Insurance Companies Expenses incurred to net premium

Royal 40.150 2.262

3.46 0.007

-3.42 .017 Bajaj 37.079 3.845 -4.46 .218 IFFCO 39.446 10.716 -16.51 .001 ICICI 48.695 14.918 -18.79 .002 Tata AIG 49.513 2.896 -0.66 .776 Reliance 58.714 14.628 -10.63 .249 Cholam 56.643 9.004 -9.00 .080 HDFC 47.039 8.250 10.46 .004

Source: Compiled from Annual Reports of companies under study.

The analysis of expense ratio as presented in table 4.10 reveal that mean score of

public sector insurers is registered at 27.514, 30.139, 31.394 and 37.621 for New

India, Oriental, National and United companies respectively. This indicates that the

companies differ significantly in the pattern of controlling the operational expenses

and shows efficient underwriting management. In comparison to public insurers,

private insurers average expenses is recorded at 37.079, 39.446, 40.150, 47.039,

48.695, 49.513, 56.643 and 58.714 respectively for Bajaj, IFFCO, Royal, HDFC,

ICICI, Tata AIG, Cholamandalam and Reliance insurance companies. The means of

expense ratio of private insurance companies is very high compared to IRDA

benchmark of 20 percent. The main reason for this is believed to be the race of private

insurers to gain more market share from untapped market.

In terms of standard deviation, the variability for expense ratio is witnessed highest in

case of United (SD 4.909) and New India (SD 4.427) and lowest for National (SD

1.947) and Oriental (SD 3.626) among public sector insurance companies, while as

the variability is recoded highest in case of ICICI (SD 14.918), Reliance (SD 14.628)

and Cholamandalam (SD 9.004) and lowest in case of Royal (SD 2.262), Tata AIG

(SD 2.896) and Bajaj (SD 3.845) among private insurance companies. In comparison

to public insurance companies, the private insurance companies have significantly

high degree of variability in the expenses ratio, which means they are not able to put

stringent control on operating expenses and will be reflected in declining profitability.

121

The comparative study of the ratio reveals that public insurers have been quite

successful in comparison to private insurers, where as they need to complacent

because good network branches and agents created in pre liberalization period has

acted as trump card for them. On the other hand, since the private insurers are in

infancy, as such they have incurred high operational expenses for beginning

businesses. The private insurers have also been active in putting control on operational

expense because they have tied business with various financial institutions, for sale of

their insurance products e.g. bancassurance channels, etc. moreover for creation of

network, they were supposed to incur huge operational expenses.

iii. Combined Ratio: Statistical Analysis

The combined ratio is used as a measure of insurers’ underwriting performance, the

ratio is defined as loss ratio plus expense ratio and it presents the outlook of insurers’

efficiency in underwriting operations. Desirable as minimum, the ratio defines for

every rupee of earned premium, how much amount is utilized for paying claims and

operating expenditure. If the ratio is a below 100 percent there are signs of

profitability up to the amount less by 100 percent but on the other hand if it is above

100, it means that underwriting has been loss making to the extent it is in excess of

100 percent.

Table: 4.11

Statistical Analysis of Combined Ratio of Public and Private Non life insurers

Ratios Ins. Cos Mean Ratio Std. Dev F -

Value

Significance (Two-

Tailed)

ACGR

Significance of ACGR

Public Sector Insurance Companies

Combined Ratio

New India 111.80 6.12

3.87 0.030

0.39 .855 Oriental 122.46 5.28 0.44 .794 National 123.56 7.60 0.75 .753 United 127.05 10.03 -4.38 .069

Private Sector Insurance Companies Combined

Royal 163.72 15.71

3.18 0.011

4.72 .104 Bajaj 183.62 30.01 7.29 .173 IFFCO 203.56 67.55 21.72 .000 ICICI 172.67 60.49 22.86 .000

122

Ratio Tata AIG 113.74 10.86 2.22 .526 Reliance 133.15 39.26 12.01 .190 Chola 124.61 28.45 5.32 .539 HDFC 144.96 18.42 -3.71 .424

Source: Compiled from Annual Reports of companies under study.

The analysis of the combined ratio as presented in Table 4.11, lime lights that public

sector insurers have upper hand over private insurers. The average combined ratio for

New India, Oriental, National and United was reported at 111.80, 122.46, 123.56 and

127.05 percent respectively. In terms of variability, the highest variability is recorded

in case of United insurance company (SD 10.03) and lowest in case of Oriental (SD

5.28). From the F test, it can be observed that all the companies with in the sector

differ significantly in the pattern of ratio. The ACGR is showing minor but

insignificant growth in the ratio for all public sector insurance companies except for

United, where negative, but significant growth (ACGR -4.38) is witnessed.

The private sector insurance companies on the other hand presents different look of

the ratio and mean score of the companies is recorded at 113.74, 124.61, 133.15,

144.96, 163.72, 172.67, 183.62 and 203.56 for Reliance, Cholamandalam, Reliance,

HDFC, Royal, ICICI, Bajaj and IFFCO respectively. The companies significantly

differ in the ratio and IFFCO, ICICI and Reliance saw major fluctuations over the

period of study. In terms of variability, the highest variability is witnessed in case of

IFFCO (SD 67.55) and ICICI (SD 60.49) and lowest in case of Tata AIG (SD 10.86),

Royal (SD 15.71) and HDFC (SD 18.427). The combined ratio is showing high

degree of significant variation in the ratio amongst the companies in the sector. The

level of significance indicates that the concerns under study, except Reliance, showed

consecutive higher combined ratio affecting their underwriting performance, where as

for rest of the companies the exponential growth was in single digit. HDFC was the

alone concern to be able to show desirable negative ACGR to the tone of 3.71 though

not significant representing fluctuation during 2007-08. The year 2007 witnessed the

much awaited detariffication and as a result all companies got affected and combined

ratio for all insurers in sector shows upward surge.

123

iv. Investment Income Ratio: Statistical Analysis

Investment performance discloses the effectiveness and efficiency of investment

decisions. As such, investment performance becomes critical to the financial stability

of any insurer. Kim et al. (1995) and Kramer (1996) find that investment performance

is negatively correlated to insolvency rate. Infact insurers are yet to report break even

in their operations and it is investment income which has always come to rescue and

has provided cushion for the huge underwriting losses suffered by the insurers but the

recession of 2008 has affected all the companies and their the investment income has

already witnessed decreasing trend. However, to keep the investments secure IRDA

has made it mandatory to make 75 percent investments in the government and other

approved securities, promising guaranteed returns5. The ongoing recession in the

world market had the ripples on Indian capital market also resulting in the bearish

pattern and consequently impacting return on investments and profits on sale of

investments, the trend being more pronounced among public sector insurers. It is

believed that the insurers need to wake up and give considerable thrust on

underwriting performance rather than racing to grab more market size.

Table: 4.12

Statistical Analysis of Investment Income Ratio of Public and Private Non life insurers

Ratios Ins. Cos Mean Ratio Std. Dev F - Value Significance (Two-Tailed) ACGR Sig. of

ACGR Public Sector Insurance Companies

Investment Income to

net premium

New India 26.400 5.532

2.26 0.121

-7.30 .394 Oriental 31.166 6.067 -12.55 .001 National 26.578 4.661 3.65 .609 United 35.443 8.657 -11.89 .219

Private Sector Insurance Companies

Investment Income to

net premium

Royal 6.930 1.838

2.12 0.070

16.95 .000 Bajaj 8.953 1.635 9.77 .092 IFFCO 7.502 1.720 12.22 .034 ICICI 9.746 1.784 0.09 .990 Tata AIG 7.689 0.819 0.91 .833

5 Under IRDA Act, Insurance Companies are required to always maintain an investment to the tone of 75 percent in Government, Semi Government, Infrastructure and government approved securities. (See IRDA Annual Report 2008-09)

124

Reliance 8.081 1.608 -10.28 .055 Chola 7.400 0.748 2.05 .608 HDFC 6.403 2.440 21.52 .032

Source: Compiled from Annual Reports of companies under study.

The analysis of investment income ratio of insurers is presented in Table 4.12. The

public insurers seem to be relying more on investment income to offset huge

underwriting losses incurred, the mean score of New India, Oriental, National and

United was recorded at 26.400, 31.166, 26.578 and 35.443 respectively. In terms of

variability, the highest variability is witnessed in investment income ratio for all

public sector insurers as standard deviation is witnessed at 8.657, 6.067, 5.532 and

4.661 for United, oriental, New India and national insurers respectively. The ratio has

witnessed wide fluctuation because of decline in investment income, however, the P

value>0.05, indicates that the companies do not differ significantly in the pattern of

ratio. The ACGR also indicates the negative growth in the ratio except National where

positive growth was witnessed. The ACGR of public companies, however were

insignificant in terms of exponential growth except Oriental insurer, where continuous

decrease was seen throughout the study period.

The private sector insurers were not so good in the ratio and the average ratio was

reported at 6.930, 8.953, 7.502, 9.746, 7.689, 8.081, 7.400 and 6.403 for Royal, Bajaj,

IFFCO, ICICI, Tata AIG, Reliance, Cholamandalam and HDFC respectively. The gap

between the public and private sector is also due to the fact that public insurers hold

good amount of investments in government securities and their profitable sale also

forms the part of investment income. However, the trend of increasing investment

income do reflect their efficient investment decisions and consequently offset the

underwriting losses incurred of the concerns who are far from the status of break even.

In terms of variability, the private sector insurers have witnessed higher variability as

standard deviation is recorded at 0.748, 0.819, 1.608, 1.635, 1.720, 1.784, 1.838 and

2.440 for Cholamandalam, Tata AIG, Reliance, Bajaj, IFFCO, Royal and HDFC

respectively. The P value, however, reflects the synergy in the pattern of income as

125

the companies did not differ significantly in the ratio and HDFC, Royal, IFFCO

present positive ACGR differing significantly in the growth. Rest of the private

companies witnessed mild insignificant positive growth except Bajaj and Reliance;

where in the former reported good insignificant positive growth and later witnessing

insignificant negative exponential growth to the tone of 10.28. The analysis reveals

that the trend to offsetting losses by investment income will not last longer and

bearishness in the Indian capital market coupled with upcoming tight regulations

regarding the issue will make insurers to rethink on the strategy which has been in

force more prominently in public sector undertakings. Whereas the public insurers are

better placed in the ratio and the decreasing trend in ratio suggests that due

consideration should be given to underwriting performance rather than managing

underwriting losses.

v. Return on Equity: Statistical Analysis

The Return on Equity of a company measures the ability of the management of the

company to generate adequate returns on capital invested. The public sector insurers

present a promising picture of the ROE in the early years, prior to price deregulation;

however, in later years of study, the impact of competitive pricing is obvious in the

overall return on equity. The private sector also could not escape from the impact and

consequently the decreasing trend in the ratio is seen across majority of the concerns.

Table: 4.13

Statistical Analysis of ROE Ratio of Public and Private Non life insurers

Ratios Ins. Cos Mean Ratio Std. Dev F-Value Significance (Two-Tailed) ACGR Significance of

ACGR Public Sector Insurance Companies

ROE

New India 433.8 271.8

2.57 0.091

-10.74 .723 Oriental 213.7 230.1 - - National 92.1 230.5 - - United 364.8 55.9 0.52 .931

Private Sector Insurance Companies

Royal 6.12 5.23 5.85 0.000

-15.15 .583 Bajaj 68.05 23.41 21.18 .021 IFFCO 7.59 5.84 -60.60 .051

126

ROE ICICI 19.20 7.97 -23.60 .273 Tata AIG 6.99 3.38 -15.15 .142 Reliance -35.88 70.37 - - Chola 2.85 4.93 - - HDFC -5.15 7.43 - -

Source: Compiled from Annual Reports of companies under study. Notes:

1 Dependent variable has non-positive values; no equation estimated

As is evident from the analysis of ROE presented in Table 4.13, the mean score was

recorded at 433.8, 364.8, 213.7 and 92.1 for New India, United, Oriental and National

insurers respectively. The higher ratios reflected may be attributed to higher returns in

early period of pre liberalization, but thereafter, steep decline has been experienced.

The worst hit were National and Oriental insurers, in whose cases, the ratio was

negative as a result of which ACGR could not be calculated. In terms of variability, as

is evident, all the public sector companies have shown high degree of variability as

standard deviation was recorded at 271.8, 230.5, 230.1 and 55.9 for New India,

National, Oriental, and united insurers respectively. The variability in the ratio is

authenticated by the P value indicating that the companies differ significantly in the

pattern of ratio. New India witnessed negative insignificant growth because of

instantaneous fall in ratio during 2008-09. However, surprisingly United India

witnessed marginal insignificant growth in the return.

The average return of the private insurers was recorded at 68.05, 19.20, 7.59, 6.99,

6.12, 2.85, -5.15 and -35.88 respectively for Bajaj, ICICI, IFFCO, Tata, Royal,

Cholamandalam, HDFC and Reliance insurers. All the Private sector insures depict

earlier marginal increase in the return on equity except IFFCO, Tata and

Cholamandalam, as the duo witness decreasing trend. In terms of variability, the

highest variability was witnessed in case of Reliance (SD 70.37) and Bajaj (SD 23.41)

and lowest in case of Royal (SD 5.23) and Cholamandalam (SD 4.93). The results of

the ratio are significant in terms of F value. The negative ROE ratio witnessed by

Cholamandalam and HDFC also prevented the calculation ACGR in case of both the

concerns. The ACGR indicates significant negative growth witnessed by IFFCO due

127

to almost consistent fall in the overall profitability. The ACGR also reveals

insignificant negative growth by ICICI, Royal and Tata AIG attributed to declining

profitability.

The analysis highlights the growing concern of the underwriting losses incurred by the

insurers in the non life insurance sector of India. The PSUs which were thought to be

better placed could not generate enough funds from operations to meet investor’s

demands as a result of which investment income also could not set off the increasing

underwriting losses. The worst days for these companies have begun if they primarily

rely on investment income to arrive at positive profitable figures. Moreover the price

deregulation will put more pressure on the underwriting profitability, the effect of

which has already shown its impact and in the free price regime the onus will be on

the underwriting performance rather than investment income to be a successful

company.

Liquidity: Statistical Analysis Liquidity ratio represents the ability to accommodate decreases in liability and find

increase in assets. An insurance company has adequate liquidity when it can obtain

sufficient funds either by increasing liabilities or by converting assets promptly at

reasonable costs.

Table: 4.14

Statistical Analysis of Liquidity Ratio of Public and Private Non life insurers

Ratios Ins. Cos Mean Ratio Std. Dev F - Value

Significance(Two-Tailed) ACGR Sig. of

ACGR

Public Sector Insurance Companies

Liquidity Ratio

New India 55.804 8.582

16.06 0.000

90 0.013 Oriental 38.976 6.405 9 0.028 National 39.718 2.293 -2.48 0.191 United 31.696 2.980 4.87 0.1

Private Sector Insurance Companies

Liquidity Ratio

Royal 25.650 4.019

21.00 0.000

4.9 .373 Bajaj 28.246 5.378 7.4 .297 IFFCO 72.210 4.758 1.04 .682 ICICI 53.430 4.397 -0.25 .942 Tata AIG 34.238 6.929 4.32 .572

128

Sourc

e:

Compiled from Annual Reports of companies under study.

Note: Liquidity = Current Assets to Current Liabilities The public insurers differ significantly as far as liquidity position is concerned. New

India (55.804) seems to doing better when compared within the sector with major

fluctuations witnessed across the study period. Others to follow are, National

(39.718), Oriental (38.976) and United (31.619). There has been a significant shift in

the pattern of liquidity position of New India and ACGR justifies the result with high

significant growth of 90 when compared to others. Oriental similarly saw a significant

growth of 9 where as insignificant growth was seen in case of National and United

insurers. In terms of variability, highest variability was witnessed in case of Reliance

(SD 14.986) and HDFC (SD 9.750) while lowest in case of Royal (SD 4.019) and

ICICI (SD 4.397). The higher significant F value indicates significant difference in

ratio of private sector insurers, where as insignificant ACGR presents the promising

picture of better liquidity position of HDFC and Cholamandalam insurers.

The statistical analysis of the public and private sector insurance companies indicate

that both the sectors lack better liquidity status. Since liquidity is essential in case of

all insurance companies to compensate for expected and unexpected balance sheet

fluctuations and to provide funds for the growth, therefore all the insurance companies

who have poor liquidity position are required to generate funds to meet liquidity

requirements, so as to maintain faith of customers, which are greatest assets for the

insurers in the competitive business environment.

SOLVENCY ANALYSIS AS PER ISI STANDARD

To make comparative performance analysis of public and private non life insurance

companies, the multilateral comparisons based on an index performance of various

public and private sector companies in terms of its distance from an ideal standard

prescribed by Insurance Solvency International Limited (ISI) has been attempted in

Reliance 35.184 14.988 -6.25 .740 Chola 30.740 5.632 10.22 .058 HDFC 30.160 9.750 17.53 .051

129

the light of methodology used by Joo (2005).The “Index of performance “was

developed by Insurance Solvency International Limited as a composite measure of

overall insurance companies’ performance. Under this analysis six ratios are

employed viz net premiums to shareholders funds, change in net premium,

underwriting profits to investment income, technical reserves to shareholders funds,

technical reserves plus shareholders funds to net premiums and pre-tax profits to net

premiums. This analysis is presented separately for public and private insurers as

under:-

a) ISI Standard and Public Sector Insurance Companies.

The benchmark ISI standard, for these ratios, along with prescribed ratio for public

sector insurers for a period of five years from 2004-05 to 2008-09 are presented in

table 4.15.

130

Table 4.15 Analysis of ISI Standard Benchmark of Public Sector Insurers

Companies

Years

Net

Pr

emiu

ms/

Shar

ehol

ders

Fun

ds

Cha

nge

in N

et

Prem

ium

Und

erw

ritin

g P

rofit

s /I

nves

tmen

t Inc

ome

Tec

hnic

al

Res

erve

s/Sh

areh

old

ers F

unds

T

echn

ical

Res

erve

s +

Shar

ehol

ders

Fu

nds/

Net

Pr

emiu

m

Pre-

tax

Prof

its /

Net

Pr

emiu

m

ISI Standard < 300 25 > -25 < 350 > 150 > 5

New India 2004-05 90.24* 7.16* -118.90** 96.52* 217.78* 20.48*

2005-06 90.32* 11.49* -148.67** 95.84* 216.83* 19.70*

2006-07 75.33* 4.43* -75.57** 96.68* 261.08* 35.59*

2007-08 69.00* 6.09* -85.19** 97.13* 285.69* 31.62*

2008-09 71.69* 9.10* -192.97** 97.27* 275.17* 5.66*

Oriental 2004-05 156.35* 9.10* -236.54** 92.95* 123.41** 21.27*

2005-06 151.96* 12.73* -225.71** 93.92* 127.62** 13.37*

2006-07 132.83* 7.61* -160.18** 95.06* 146.86** 23.40*

2007-08 141.94* 6.89* -198.94** 95.06* 137.42** 15.38*

2008-09 155.39* 6.63* -392.85** 94.93* 125.45** -2.88**

National 2004-05 232.86* 12.90* -352.92** 91.78* 82.36** 4.99**

2005-06 241.71* -5.27* -484.48** 90.99* 79.02** -2.22**

2006-07 193.07* 3.15* -272.58** 93.02* 99.98** 16.47*

2007-08 193.66* 9.07* -339.37** 93.58* 99.96** 5.70*

2008-09 242.81* 13.38* -475.77** 92.91* 79.45** -3.90**

United 2004-05 107.05* 0.99* -246.00** 95.07* 182.23* 14.65*

2005-06 94.42* 2.45* -212.61** 95.76* 207.33* 20.34*

2006-07 87.51* 6.62* -170.78** 96.31* 224.32* 21.93*

2007-08 84.69* 13.86* -154.85** 96.87* 232.46* 24.36*

2008-09 89.77* 18.39* -134.98** 97.19* 219.66* 15.72*

Source: Compiled and computed from the annual reports various public sector insurance companies from 2004-05 to 2008-09. * Meets ISI standard ** Does not meet ISI standard

As is evident from the analysis of net premium to shareholders funds ratio, the ratio is

within the benchmark ISI standard of less than 300 for all public sector insurers for

the period of study and as such they are able to meet this standard during the period of

study. The ratio of change in net premium for all public sector insurance companies is

131

within the benchmark of ±25 for all years of study period. Similarly, all public sector

insurers are able of meet the ISI standard of less than 350 over the study period in the

respect technical reserves to shareholders funds. However, it surprising to note that

benchmark of less than -25 for underwriting profits to investment ratio in case of

public sector insurers is more than the set standard for all years of study period and as

such public sector insurers were not able to meet ISI standard in this respect.

Further, it is evident from the analysis of technical reserves plus shareholders funds to

net premiums that only New India and United insurers are able to meet ISI standard of

less than 150 for all years of study period. While Oriental and National insurers have

failed to meet the ISI standard for all years of study period in respect of technical

reserves plus shareholders funds to net premiums. It is also clear from the analysis of

pre-tax profits to net premiums that all public sector companies are able to meet

benchmark standard of greater than 5 in this respect except for Oriental during 2008-

09 (-2.88) and National for years 2004-05 (4.99) 2005-06 (-2.22) and 2008-09 (-3.90).

b) ISI Standard and private sector Insurance Companies

The analysis of ISI standard benchmark analysis ratio for private sector insurance

companies are present in table 4.16.

132

Table 4.16: Analysis of ISI Standard Benchmark of Private Sector Insurers

Companies

years N

et

Prem

ium

s/S

hare

hold

ers

Fund

s

Chan

ge in

N

et

Prem

ium

Und

erw

riti

ng

Pro

fits

/Inv

estm

ent

Inco

me

Tech

nica

l Re

serv

es/S

hare

hold

ers

Te

chni

cal

Rese

rves

+

Shar

ehol

der

s Fu

nds/

Net

Pr

emiu

m

Pre-

tax

Prof

its

/ N

et

Prem

ium

ISI Standard < 300 25 > -25 < 350 > 150 > 5

ROYAL SUNDARAM

2004-05 155.09* 28.99** -154.17** - 64.48** 2.65**

2005-06 212.06* 47.25** -154.30** - 47.16** 3.42**

2006-07 234.19* 12.36* -56.32** 1.71* 43.43** 8.15*

2007-08 251.66* 33.65** -328.74** 4.04* 41.34** 1.07**

2008-09 268.40* 34.15** -345.26** 5.75* 39.40** 1.63**

BAJAJ ALLIANZ

2004-05 268.34* 67.34** 361.42* 38.51* 51.62** 16.06*

2005-06 261.61* 45.78** 206.94* 58.79* 60.70** 11.71*

2006-07 207.86* 20.01* 69.25* 72.70* 83.08** 13.96*

2007-08 245.18* 68.80** -67.56** 80.91* 73.79** 11.86*

2008-09 281.24* 33.62** -171.25** 83.61* 65.28** 7.92*

TATA AIG

2004-05 207.82* 37.71** 22.94* - 48.12** 9.39*

2005-06 172.70* 29.64** -4.44* - 57.90** 7.98*

2006-07 156.54* 13.33* -42.11** 7.71* 68.81** 8.66*

2007-08 174.57* 18.92* -128.10** 13.45* 64.99** 5.93*

2008-09 173.19* 29.44** -251.70** 11.56* 64.41** 1.62**

RELIANCE

2004-05 44.77* 79.33** -54.89** 26.30* 282.14* 11.64*

2005-06 36.35* -10.36* 58.18* 33.24* 366.49* 37.94*

2006-07 94.16* 339.79** -204.34** 60.27* 170.20* 0.92**

2007-08 158.16* 293.04** -752.05** 82.35* 115.29** -16.96**

2008-09 174.25* 44.67** -402.73** 85.81* 106.64** -3.61**

IFFCO TOKIO

2004-05 187.33* 76.06** 49.14* 20.20* 64.17** 10.07*

2005-06 170.88* 103.74** -78.51** 21.40* 71.04** 5.04*

2006-07 184.54* 14.49* -63.61** 25.86* 68.20** 7.75*

2007-08 210.48* 16.81* -282.84** 27.61* 60.63** 1.85**

2008-09 182.02* 30.21** -499.44** 46.02* 80.23** 0.83**

ICICI LOMBARD

2004-05 128.66* 147.18** 9.78* 11.79* 86.89** 16.79*

2005-06 196.79* 128.70** -92.59** 34.30* 68.25** 7.43*

2006-07 134.56* 45.35** -96.38** 57.65* 117.16** 7.51*

2007-08 145.65* 46.93** -97.38** 64.93* 113.23** 8.31*

2008-09 123.15* 25.94** -235.63** 74.85* 141.98** 0.01**

CHOLAMANDALAM

2004-05 63.02* 85.12** -221.90** - 158.67* -3.73**

2005-06 69.42* 10.15* -263.74** - 144.05** -2.54**

2006-07 89.66* 29.15** -29.14** - 111.53** 10.84*

2007-08 170.49* 95.52** -202.23** 2.75* 60.27** 4.24**

2008-09 251.94* 54.85** -258.18** 7.19* 42.55** 3.08**

HDFC CHUBB 2004-05 112.28* 51.40** -290.81** - 89.06** -5.95**

2005-06 115.17* 7.01* -111.99** - 86.83** 3.34**

133

2006-07 112.31* -2.35* -124.98** - 89.04** 1.78**

2007-08 100.03* 6.96* -540.05** - 99.97** -11.18**

2008-09 89.74* 19.61* -550.10** - 111.44** -14.05**

Source: Compiled and computed from the annual reports various public sector insurance companies from 2004-05 to 2008-09. * Meets ISI standard ** Does not meet ISI standard

The analysis of net premiums to shareholders funds reveals that all private sector

insurers and the period of study are able to meet ISI standard of less than 300. The

ratio of change in net premium for all private sector insurers presents fluctuating

picture as almost in all years of study period, the companies are not able to meet the

benchmark standard of ± 25 except for few years when they are able to meet to this

standard. Similar picture was witnessed for all companies in the private sector over the

period of study in respect of underwriting profits to investment ratio, where

companies are far away from set standard of less than -25. However, it is evident from

the analysis of technical reserves to shareholders funds that private sector insurers

have been able to meet the benchmark standard of less than 350 for all years of the

reference period.

The ratio of technical reserves plus shareholders funds to net premium computed in

respect of private sector insurers for the study period shows that all private companies

are able to meet the ISI standard of less than 150 in this respect except in case of

Reliance for 2004-05 (282.14), 2005-06 (366.49), 2006-07 (170.20) and

Cholamandalam for 2004-05 (158.67). The last ratio in the category of ISI standard

index is pre-tax profits/net premiums. This ratio depicts mixed picture as all

companies in private sector have been able to meet the standard of less than 5 for few

years of study period and have failed to meet the standard for remaining years.

Moreover, the ratio for the HDFC Ergo could not be computed, due to non availability

of technical reserves.

The analysis reveals that public sector insurers are generally better placed in terms of

the ISI standard, however, what is seemed to be worrisome is that the standard of

134

underwriting profitability to investment income, which has never been met by the

public sector insurers. Moreover the absolute value of the standard reflects that

underwriting losses damages overall profitability position of the public insurers and

the trend seems to be on surge. The analysis of private sector insurers on the other

hand reveals heavy fluctuation in net premium and they are not able to meet the

benchmark standard. Analysis also reveals that underwriting profitability too has been

under strain as such the sector does not meet the prescribed standard by ISI and

consequently pre-tax profits/net premium is also affected, which lead to the sectoral

inability of meeting the ISI standard.

REGRESSION ANALYSIS OF SOLVENCY OF NON LIFE INSURERS

The IRDA has issued a strict guideline towards maintenance of a ‘statutory’ solvency

reserve. Solvency margins for each class or line of business are clearly specified

IRDA (Assets, Liabilities, and Solvency Margin of Insurers) Regulations, 2000. These

regulatory guidelines are helpful in finding out the ‘solvency ratio’ [the ratio of the

total amount of available solvency margin (ASM) to the total amount of required

solvency margin (RSM)] at the firm level. The determination of “Required Solvency

Margin” (RSM) differs from life segment to non-life segment of insurance business.

Again, depending on the line of business the practice of required solvency margin

varies among different non life insurers. In addition to this, required solvency margin

of non life insurers is based on either net premiums (RSM-NP) or on net incurred

claims (RSM-IC) and ultimately the required solvency margin shall be the higher of

the amounts of RSM-NP and RSMIC. The last and final step towards calculation of

the solvency ratio is to estimate the total “available solvency margin” (ASM).

The calculation of both ASM and RSM also depends on the IRDA (Actuarial Report

and Abstract) Regulations, 2000 and it requires specific information relating to the

insurance business. These specific business information are neither available from

Annual Report, nor does IRDA make public its Actuarial Report and Abstract.

However, in present study ASM has been calculated with the help of financial

135

information available. In this context, an analysis of solvency ratio has been attempt

by using regression analysis by taking the solvency ratio as dependent variable and

various factors as identified in various research studies as independent variables. The

independent variables and their description used for multiple regression analysis in

presented here under Table 4.17.

Table 4.17 Independent Variables

Independent Variables Description

Firm Size Total Assets to earned Premiums Investment Performance Investment Income to Earned Premiums Liquidity Ratio Liquid Assets to Current Liabilities Operating Margin Total Income to Total Outgo Combined Ratio Sum of Loss Ratio and Expense Ratio (Financial Basis) Claims Ratio Net Claims Incurred to Premiums Earned Market Share Share in Total gross premium of the sector

Underwriting Profitability Profits from Operations, Excluding investment and Other Income

Table 4.18 Results of Multiple Regression Analysis for Solvency Margin of Non Life Insurance Industry

Model

Unstandardised Coefficients

Std Error

T

P

Beta Y-Intercept 3.6321 0.6918 5.25025 <0.0001

Market Share 0.02643 0.02045 1.29249 0.20201

Operating Margin -0.0377* 0.01288 -2.92582 <0.0051

Firm Size 0.00711* 0.00115 6.18232 <0.0001

Investment Income -0.01189 0.01641 -0.72417 0.47227

Liquidity 0.00547 0.00519 1.05453 0.29661

Combined ratio 0.00563* 0.00241 2.3403 <0.0232

Claims Ratio -0.06466* 0.01461 -4.42486 <0.0001

Underwriting Performance 7.84811E-8 4.21582E-6 0.01862 0.98522

R Square Adjusted R Square

0.61658 0.55643

Observations 60

* at 5 percent level of significance

136

Based on the results depicted in table 4.18 above, it is derived that against expectation,

the non-life insurers’ solvency is affected by the Firm size. Several factors may be

responsible but the most obvious one seems to be the nature of business done by the

non-life insurers. The policyholders’ liabilities are borne by the insurer for a year and

hence the fund created will be for a particular financial year. Unlike life insurers, the

non-life insurers have no net accretion to the total investible funds each year. A

typical non-life insurance policy (say health, motor vehicle, etc.) expires exactly after

a year from the date of purchase/ commencement.

One of the predictors claims ratio suggest that it has the expected sign and strongly

suggests that higher claim ratio has been contributing negatively to overall insurer

solvency status. Size of firms, which is again significant, is also going to contribute to

higher income and hence contribute towards solvency. But, the two predictors

operating margin and underwriting result proxies by the combined ratio were

significant but yielded unexpected relationship with solvency. These results may be

due to the fact that most of the firms are still trying to establish themselves in the

industry and initially spending more compared to total assets, income and

underwriting profits.

The analysis of solvency margins highlights the upper hand of public insurers over the

private insurers as per ISI standard, the status if monitored closely reflects that the

reserves built in pre-liberalisation era has helped the sector to reflect comparatively

good financial strength. However, since the study is not aimed at comparative analysis

of the two sectors, the analysis reveals that IRDA in general and individual companies

in particular need to redesign their underwriting policy, which should be aimed at

competitive and profitable business. The practice of subsidizing of investment income

to meet underwriting losses, which is in practice in full force should be redesigned to

exclude investment side from corporate functioning. The benchmark be made,

reflecting only operational performance, which in the long run should aim at

profitable underwriting of the insurance companies. The use of financial ratios and

137

multiple regression to see the impact of increasing financial performance on insurers’

solvency does not support the fact that there is negative impact on the non-life

segments of the insurance industry. Based on their financial performances, it seems

each player in the market is contended or they are together improving their ratios and

hence there is no significant shift observed to strengthen the hypothesis. However, as

ratios are important for future sustainability, firm size was observed most significant

variable, having impact on solvency margin. Indian insurance industry is growing and

the first job assigned to IRDA is to regulate and protect policyholder’s interest and

then help the development and growth of the industry. Till 1999, most of the reserves

of the public insurers were in the form of Central Govt. and State Govt. bonds and

securities. Most of their assets were secured and guaranteed by the Govt. After

liberalisation also more than 75 percent of such investments in securities and bonds

were with the Govt. If short run solvency is heavily dependent on the size of the

insurers and the growing loss ratio, it is time for the insurers to re-think and devise the

underwriting policy to embrace the risks associated and price the products accordingly

with stressing profitable pricing. Any relaxation on this ground might prove to be

costly and in the future sustainability may get affected to a great extent. The

significance of these variables may help the regulator to decide whether or not to give

insurers enough freedom to invest in the stock markets and other investment channels

with attractive rates of return.

From the statistical analysis of the 12 non life insurance companies it can be

concluded that they have performed successfully in the grabbing the market in

deregulated environment. The required solvency norms have been adhered to,

however, growing underwriting losses and unsound product pricing may not be a

sustainable strategy in a long run to acquire market share. The higher claims ratio,

which is seen to have negative impact on the solvency, could threat the solvent state of

the insurers. Need of the hour therefore is to have proper product pricing and sound

risk management practices, reregulation of prices and sound reinsurance policy. The

onus is therefore on the Regulator IRDA to interfere well in time to hold back the

138

companies from wastage of public resources. The final chapter has been devoted to

findings, conclusions and suggestions.

139

CHAPTER VI

FINDINGS, CONCLUSIONS AND

SUGGESTIONS

140

The insurance industry in India has witnessed paradigm shift in a relatively short span of

time since liberalization (1999). Since liberalization there has been surge in premiums,

players and outreach in Indian insurance industry. Post liberalisation and favourable

regulatory environment put in force by the regulator (IRDA), has given fillip to insurance

penetration and insurance density. The insurance industry, like many other industries, has

also become competitive with insurers offering multiple products and with continued

product differentiations. Combinations of these factors, along with strong economic

growth during last decade or so, have positioned India as a regional insurance hub, and

now aspire to become an international financial centre.

In Post liberalization scenario insurance industry has changed significantly because of

several factors. Channel innovation has ensured that insurers are able to reach to a wider

customer base and technology innovations have enabled the industry to leapfrog over

developed markets. The liberalization has also been extended to pricing by way of de-

tariffication and in future may further be extended to product terms and structure. New

business segments such as micro and health insurance have also grown very fast.

However, given the global economic scenario and its fallout on the Indian economy, the

Indian insurance industry has also witnessed the negative impact of the economic

meltdown during the last one and a half year. A slowdown in premium growth rates was

seen in the year 2009, which is expected to continue during the coming one or two years

(Ernst & Young, 2010). The recent change in the market environment has forced players

to revisit their expansion plans as well as their overall business strategy. Several players

are seeking to undertake cost efficiency measures, process re-engineering, and are

reviewing their organizational structure etc.

It is very surprising that increasing public reach, inflating premiums, product innovations

has been accompanied by increasing underwriting losses, which remains the big issue

even today. Against this backdrop, the study was aimed at evaluating the impact of

liberalization on financial performance of insurance industry and how insures are

responding to these changes which is of utmost importance. In present study an attempt

141

has been made in previous chapters to analyse the financial performance of public

insurance and private insurance companies together with comparative financial

performance of public and private insurers. The present chapter sums up the main

findings of the study and lastly outlines the relevant suggestions in this regard.

The present study has particularly been undertaken to gain insight into the impact of

liberalization on various aspects under study insurance companies. In this context,

CARAMEL parameters were analysed to study impact of liberalization on capital

adequacy, asset quality, reinsurance and actuarial issues, management soundness,

earnings and liquidity of insurance companies, so that the study will be helpful in

formulating an effective financial strategy and risk management policy. In addition, the

study has embarked the study of security analysis of the non-life insurers as per ISI

standards and lastly the impact of various factors on the overall solvency of the insurers

have tested.

Findings:

The primary findings and conclusions are given hereunder:-

1. Capital Adequacy

The minimum capital requirement for the insurance company to get registered has been

fixed by IRDA at `100 crores, however, there are no regulatory capital adequacy norms

for insurance companies as are applicable to banks. Simply IRDA has put in force

solvency norm requiring every non-life insurance company to maintain the ratio of 1.5,

monitored quarterly, and the stipulation enables them to formulate and finalize their

business plans and be in a position to meet the capital requirements in a timely manner.

However, insurance companies are on their own moving towards risk based capital

approach, making arrangements to implement solvency II norms which the IRDA are

supposed to implement by 2012 (Ernst &Young, 2010). The capital adequacy ratio has

been high enough although no minimum requirements are prescribed, meaning that

companies have adequate cushion to counter the underwriting risks. The capital adequacy

142

ratio analyses presents picture on two fronts viz; risks to capital and capital to total assets

ratio The analysis depicts different look of both the sectors, the public sector insures have

strong capital adequacy ratios but is witnessing a fall in titanic style whereas private

sector has recorded low capital adequacy ratios but are showing surge year after year. The

detailed findings of Capital Adequacy parameter are summarized as under:-

i. The companies under study present a good show of capital adequacy ratio in

respect of both the sectors, reflecting enough cushion for risks. The companies

have shown good result so far as maintaining of ratio is concerned, which is

evident from the mean score of the capital adequacy ratios. However, the

proportion of net premium witnessed decline in case of public insurers whereas in

case of private insurers marginal increase has been recorded, reflecting the market

presence of public insurers and gradual fading away of their market share. In

contrast increasing trends in the premium for private insurers’ reflect their gaining

foothold in the market. The decreasing ACGR in public insurers does not

necessarily mean negative growth, there has been growth witnessed in reserves

also which has negatively influenced the ACGR. ACGR of net premium to capital

ratio reflects the aggression of private insurers in tapping the new pastures,

compared to public insurers, in whose case almost all companies witnessed

negative values. Thus one can conclude that private insurers has followed stringent

policy of gaining market and simultaneously maintaining adequate capital

requirements to meet the solvency prescribed norms in this regard.

ii. The business volumes are supported by the fair amount of capital for all the

public insurers; however, decreasing trend has been witnessed in case of United

and New India. They therefore require infusing more capital in the future in

spite of the fact that additional capital infusion by these insurers to the tone

of`50 crores each during 2006-07 has already been made. Further, the analysis

capital adequacy ratio reveals that the assets base has been increasing and the

underwriting losses are being met through the realization of loans and advances

especially by United and New India insurance companies.

143

iii. The mean score of capital to total assets represents stable state for both public and

private sectors. The private insurers’ relied heavily on capital to build the

investments and assets whereas the public insurers had the reserves built in the pre

reform period that served the purpose of displaying solvency status of the public

insurers. Consequently more capital was not required to be infused, the high

ACGR also indicates insignificant growth of public insurers in respect of this

ratio. Private insurers in certain cases resorted to borrowings to meet the required

ratio and there has been remarkable negative growth in the ratio, indicating total

assets increase in good proportion to capital, also one can attribute this state of

affair to the restrictive policy of IRDA on investments. This is a good sign of

sustainability and increasing financial performance.

iv. National insurance company shows higher standard deviation of 26.34 amongst

the public sector indicating high fluctuations in the ratio on account of

premium collection. The ACGR, however, shows the negative growth in case

of New India (-6.10), National (-0.45) and United (-4.81), only Oriental

insurance company has witnessed a meagre growth of 0.66 that too is

insignificant due to fluctuations in the premiums collection throughout the

study period.

v. It has been found that amongst public sector insurers, only Oriental is showing

insignificant positive ACGR of 0.66 while as the rest of the public insurers are

seen to have reported negative insignificant growth.

vi. The variability in terms of standard deviation for all public sector companies is

very low, however, New India (SD 3.294) and United (SD 3.937) have shown

slight variability compared to the other two public sector insurers

vii. The analysis shows that there is significant difference in the ratio for the

companies as F value is recorded at 5.75 for private insurers. The companies

have recorded significant negative growth in the ratio due to increase in the

investments, although there has been infusion of fresh capital by the concerns

144

but only to meet the solvency requirements and proportion of increase in

investment has been more compared to the increase in capital.

viii. The public insurers seem to be relying less on equity capital due to the huge

reserves accumulated during pre-liberalization era, in contrast, private insurers

heavily relied on capital for displaying their solvent status.

2. Asset Quality

The asset quality of insurers is the measure of reliance on equity to built sound and

quality assets portfolio of the company. The requirement of `100 crores makes any

company eligible to do insurance business in India, however, it is subject to revision by

the company itself to meet solvency requirements. The pattern of ratio may differ for the

public and private sectors as public sector insurers hold good amount of reserves and

therefore may not need more capital infusion. The growing market penetration and

presence by private insurers in underwriting risks do impact there solvency margins and

as result of which there are evidences of fresh capital infusion by almost all the private

insurers. The journey of Indian insurance market towards free market has pushed private

insurers to have more capital base to operate freely in the risk prone market. The analysis

of asset quality ratio of both the sectors reveals the following picture:

i. There has been varying results in the ratio between the two sectors, the public

insurers display synergy in the ratio pattern and private insurers seem to have

varying and more volatility in the ratio.

ii. The public insurers witnessed less reliance of equity base for assets improvement,

which is evident from behaviour of the ratio in case of all public insurers as the

average ratio is below 1 percent. This ratio has shown declining trend throughout

the study period. The ACGR also confirms the same by recording the negative

growth in the ratio except for United which infused fresh `50 crores to its equity

base to meet the solvency requirement.

145

iii. The ratio of equities to total assets is less than one percent for the public sector

insurers and it has witnessed minor fluctuation in the average ratio over the

period of study. It is evident from the analysis that the United is the only

company to witness ACGR of 6.60 percent, rest have witnessed negative

insignificant growth due to increase in the investment and other assets.

iv. Among private insurers, in terms of significance, Bajaj (0.000), IFFCO (0.051),

ICICI (0.009), Reliance (0.007), Cholamandalam (0.001) and HDFC (0.050)

have witnessed significant ACGR, while as Tata AIG has recorded

insignificant (0.217) ACGR because they have heavily relied on equity to make

improvements in asset quality.

v. The decreasing ratio was as a result of earlier robust growth in the investments,

fixed assets and advances and increase in the short term assets base of the

companies, with the exception of United, where considerable decrease was

seen in the investments, loans and other short term assets. The analysis of ratio

in case of private sector insurers, presents similar picture. The highest ratio in

terms of mean score is witnessed for ICICI (48.440) and Royal (44.144) and

lowest in case of HDFC (29.724) and Bajaj (30.278).

vi. In terms of variability, the highest variability in the ratio is recorded in case of

Oriental insurer (SD=5.563) and lowest for New India (SD=5.466) among

public sector companies. However, in terms of variability, the highest

variability in the ratio is recorded in case of Oriental insurer (SD=5.563) and

lowest for New India (SD=5.466) amongst public sector companies.

vii. The private sector insurer seems to have acquired assets blocking more capital at

initial stage. The negative growth in equity to total assets ratio in case of all the

private insurers indicates that the companies fattened their asset base and now rely

less on equity. Further, the IRDA regulation to maintain investments in the

government and semi government sectors rescues their dependence on equity. This

result also corroborates with significant decreasing trend of ACGR, except in case

146

of Tata AIG, within the private sector. The conclusion of the analysis manifests

that assets base improves while the companies make progress in their business,

which is a healthy sign for the companies, regulators and ultimately to customers.

3. Reinsurance and Actuarial Issues

Reinsurance of risks means sharing of premium claims and profits also. The retention of

more business underwritten depicts increasing risk bearing capability of insurers, which is

a healthy sign in insurance business. The insurers are required to reinsure their 15 percent

of tariffed and 10 percent of de-tariffed business (IRDA, 2008-09) and therefore all the

insurers pass on their risks quantitatively to the minimum possible extent. The growing

reinsurance ratio also indicates the growing capability to handle risks efficiently,

however, the public and private sectors differ to a larger extent in this context. The

parameter also indicates the position of technical reserves in an organisation to meet

unforeseen claims. The main findings of reinsurance and actuarial analysis are given here

under:

i. The mean score for reinsurance ratio in case public sector insurers is better for all

companies in the sector and New India has topped the list among them. The F-test

also shows the increasing significant self-reliance to handle risks for these

companies. The companies pass on risks only in the requisite quantum and rest of

underwritten business are retained by them.

ii. The ratio for New India has shown consistent increase over the period of study

and ranges between 86.01 percent and 95.29 percent. However, for other three

PSUs the ratio witnessed sharp increase during the study period and swelled up

from 66.79 to 77.36 percent, 70.11 to 79.96 percent and 67.83 to 74.78 percent

respectively for Oriental, National and United insurance companies.

iii. Public Sector insurers have strong technical reserve base, therefore, they have

more risk tolerance capacity during the adverse selection of insurance business

and this holds good because of growing retention ratio.

147

iv. The private sector insurers also adopted the same pattern that is indicated by the

growing risk retention ratio, however, initial transfer of risk can be justified on the

ground that the private insurers did not had enough assets and investment base to

cover unusual claims and sustenance could have been affected if adverse situation

might have taken place. The important manifestation is revealed from F value

(3.20) that companies differ significantly in terms of variability in terms of this

ratio.

v. The growing tendency has been seen among private insurers in terms of

maturity and trust in positive underwriting and not merely racing to grab

market and transfer risk. Most of the private sector companies have shown

significant ACGR except in case of Reliance (0.078), Cholamandalam (0.072)

and HDFC (0.225).

vi. In terms of the technical reserves to claims ratio, highest variability is recorded

for New India (SD=13.10) and United (SD=17.85) insurers while lowest for

National (SD=6.07) and Oriental (SD=7.62) among the public sector insurers.

The high F value also shows the significant results as P = 0.000. Further,

ACGR is also corroborating the variability results as Oriental (-2.7) and

national (-1.50) have shown negative growth. However, in terms of variability,

the highest variability is recorded for Reliance (SD=32.45) and ICICI

(SD=26.93) while lowest for Royal (SD=1.36), Cholamandalam (SD=1.77) and

Tata AIG (SD=2.87).

vii. The retention of risks is common in case of both the public and private sectors

insurers, which is a healthy sign. However, public insurers are more risk tolerant

due to the fact that they posses sound reserve base. In contrast, the private sector

insurers seem to hold fewer margins of risks comparatively. The situation requires

insurers to be more cautious in business selection, which until now has been loss

making, so that it may not erode customer faith and their solvency status.

4. Management Soundness

148

Management soundness in insurance business means operational soundness. This ratio

reflects the operational efficiency of the insurer and indicates cost efficiency of the

business, which ultimately reflects the efficiency of decisions regarding proper utilization

of funds. The prescribed ratio of operational expenses to gross premium under Insurance

Act, 1938 is restricted to 20 percent. Liberalized Indian non-life insurance market is

characterised as loss incurring, the ratio will better judge the operational efficiency and

preferably when used across various business segments, it will bring to front the

underwriting performance and also will act as operational benchmark for the years to

come. In the post de-tariffed regime the insurers are required to be more alert in respect of

underwriting business and this indicator of management soundness surely should be one

of the basic competitive tools for a successful insurer. The decreasing ratio is considered

desirable, the findings of the analysis are summarized below:-

i. The public sector insurers have been primarily characterized as high cost concerns

in the sense that they incur large expenses in the initial years. However, study

shows that there has been improvement in management soundness ratio. United

insurance company on one hand has witnessed increase in the business and

simultaneously proportional decrease was seen in the ratio. Other PSU’s were also

quite successful in their operations and there was a marginal decease in the

management soundness ratios of New India, Oriental and National insurers.

ii. Among the private sector only IFFCO and Cholamandalam were successful in

witnessing decrease in the ratio, the decrease was as a result of increasing business

procurement witnessed in the increasing market shares of both the companies.

Rest of the companies show phenomenal increase in the ratio which is not

considered to be desirable for the companies. Tata AIG, HDFC, Reliance, Bajaj

and Royal Sundaram were found to be worst hit as their ratios reflect major swing

and were recorded with higher figures.

iii. There has been no major difference in the ratio when comparing the two sectors,

although public insurers were expected to be at a lower side given the past

experience but that has not been observed. In fact the major decrease has been

149

because of increasing pressure from regulator to mend the underwriting

performance and restrict the operational expenditure.

iv. The private sector on the other hand has established business and there has been

varying expenditure incurring on establishment, recruitment and other allied

services. However, IRDA has shown concern in their publications stressing for

efficient underwriting business.

From the analysis it can be deduced that there has been increase in the market presence of

private sector companies, however, their management soundness has also been affected.

Expenses for business acquisition, with growth shifting towards retail lines and incurring

higher initial expenditure for expanding their networks have been on the rise because of

the intense competition prevailing in the industry. Private players are required to restrict

it, otherwise the players may get hit by a double edged weapon of underwriting losses and

deteriorating management soundness, which any transitional insurance market cannot

afford at the time of competition.

5. Earnings and Profitability

In the earnings and profitability section, the focus of the analysis is on the operational and

non operational income. This analysis is done by computing five ratios, the first three

ratios embrace the major components of underwriting performance and rest of the two

determine the non operational income and return to shareholders . The first three ratios of

this analysis are required to be minimal for the positive and sustaining financial

performance of the insurance company and reflect their underwriting efficiency are

positively correlated with capital adequacy. The analysis of overall underwriting

performance includes loss ratio, expense ratio and combined ratio, analysis of which

reveals that every rupee of earned premium is draining in the shape of claims and costs

plus some portion from non operational income which the insurers seem to adjust initially

out of cross subsidization and investment income. However, the price war in the post de-

tarrifed regime has resulted in thinning of profit margins from profitable segments and

prevailing bearish capital market. Therefore, insurers need to be choosy in business

selection, otherwise their funds may get drain away and to meet stipulated solvency norm,

150

shareholders might not sustain continuous funding without return resulting in the

insolvency of the companies. The findings of this analysis are outlined here under:-

a) Claim Analysis

Claims figures as sub-dimension to the parameter “earnings and profitability”, higher

claims surely reflects higher drainage of funds. However, keeping in mind the risks

insured, an insurer surely lands in a position where it has to pay claims. What matters

here is the good risk management practice which embraces proper risk evaluation and risk

selection. Good evaluation aims at profitable pricing, even if the insurer incurs claims.

The individual and comparative analysis of the public and private sector insurers reflect

the following results:

i. The public insurers had the highest claim ratio, ranging between 77.11 and 89

percent, 87.64 and 99.69 percent, 84.96 and 102.43 percent and 78.62 and 93.09

percent for New India, Oriental, National and United insurance companies.

However, ratio has no significance difference because P value hints towards

increase in claims incurred. The ACGR also indicates increased incurred claims

as it has positive growth for all public sector insurers except United where it has

witnessed negative growth with high variability (SD=3.27).

ii. The public sector insurers witnesses high claims across various lines of business

and there has been growing tendency except United showing signs of stability as

the study concludes. The loss has been on account of marine and miscellaneous

segments where motor third party was the highest claim incurring segment. The

public insurers continue to underwrite the loss making business and when seen the

total business composition the miscellaneous business accounted for the majority

portfolio to which the private insurers were reluctant.

iii. The average claims turn to be high, however, with marginal exponential increase

witnessed by all the public insures except United where the negative growth is a

silver lining to the precedence.

151

iv. The private insurers had the claims ranging between 61.08 and 68.95, 61.02 and

71.91, 67.99 and 83.44, 71.78 and 85.35, 54.27 and 60.54, 63.81 and 79.87, 55.60

and 77.98 and 57.05 and 80.73 percent for Royal, Bajaj, IFFCO, ICICI, Tata,

Reliance, Cholamandalam and HDFC respectively. However compared to the

public insurers, the loss ratio has significant difference amongst private

insurers because P value (0.001) is less than 5 percent level of significance and

as such it can be claimed that private insurers have been able to control claims

incurred.

v. The analysis highlights the superior status of the private insurers as the average

claims turn to be lower than the public insurers and exponential growth also

indicates by and large similar phenomenon.

The decreasing claims ratio is considered to be a good sign. Whereas the higher claims

incurring system may seem to be unavoidable for the analysts of the insurance sector as

there may be the argument that incurring claims cannot be restricted by any means.

However when talked in free price regime, the argument may not have any relevance, as

the companies are free to set prices for their products, consequently the insurers should

have priced the products higher with profitable margins and ultimately less claims portion

and as a result profitable underwriting. But when seen individually, claim portion is

higher, which clearly is the case of premium deficiency. Moreover the identical products

offered by the competing companies force them to price lower in order to gain market as

a result of which profitability is at stake. The case is more profoundly seen in case of

private insurers where regulator needs to intervene for the better and transparent

insurance environment of the country.

b) Expense Analysis

Expenses are necessary for running any organization but unwarranted increase may

narrow the profitability share in insurance business. Section 40 C of Insurance Act, 1938

requires the insurers to restrict their operating expenses as a result of which considerable

attention is paid to this issue in IRDA publications. Decreasing ratio thought to be

152

desirable, the ratio employed is financial basis which highlights the upper hand of public

insurers in comparison to private insurers, the findings of which are summarized as

follows:-

i. The four public insurers witnessed the ratio ranging between 21.18 & 31.71, 28.03

& 36.11, 27.65 & 32.26 and 32.24 & 44.51 percent for New India, Oriental,

National and United Insurance companies respectively. The expenses covering

differed quantitatively across various segments and fire segment incurred high

expense ratio, followed by marine and the least for miscellaneous segment.

However, decreasing trend was witnessed as the study proceeded.

ii. The negative exponential growth was witnessed in case of public insurers and

analysis depicts overall decreasing trend in terms of ECGR. It can be observed

from the analysis of claim ratio that that up to 2006-07, ratio of New India,

Oriental and United India insurers was by and large under a control, but

thereafter has witnessed sharp increase. It means that these companies were not

able to put control on loss rate, perhaps because of poor risk management.

However, surprisingly, United India was successful to record the all-time

lowest claim ratio of 78.62 percent during 2008-09.

iii. The ratio of incurred expenses to net premium ranged between 42.02 & 36.71,

41.29 & 31.66, 55.41 & 28.76, 70.01 & 34.38, 52.92 & 46.17, 74.07 & 38.96,

64.70 & 42.54 and 38.64 & 59.90 for Royal, Bajaj, IFCO, ICICI, Tata, Reliance

Cholamandalam and HDFC respectively.

iv. The private insurance companies have significantly high degree of variability

in the expenses ratio, which means they are not able to put stringent control on

operating expenses and is reflected in their declining profitability.

v. The analysis reveal high costs incurred in the initial years attributed to costs

incurred on establishing business and networks where as it saw stable tendency as

the study progressed. The expense incurred differed across various segments and

153

fire segment was seen as high expensive segment followed by marine and

miscellaneous segments.

vi. The companies differ significantly in the pattern of controlling the operational

expenses and show efficient underwriting management. In comparison to

public insurers, private insurers average expenses is recorded at 37.079,

39.446, 40.150, 47.039, 48.695, 49.513, 56.643 and 58.714 respectively for

Bajaj, IFFCO, Royal, HDFC, ICICI, Tata AIG, Cholamandalam and Reliance

insurance companies. The means of expense ratio of private insurance

companies is very high compared to IRDA benchmark of 20 percent. The main

reason for this is believed to be the race of private insurers to gain more market

share from untapped market.

The Comparative analysis of the two sectors in fact indicates public insurers are more

cost efficient compared to private insurers. However, keeping in view the already

invested expenditures on distribution and other establishments by public insurers, private

companies seem to have achieved a lot in the short span. The regulator also has so far

been lenient in its approach in this respect, enabling private insurers to stabilize their

business. However, whether it be public or private sector insurers, there is definitely a

need to resort to economical underwriting and for this purpose, more economical

distribution networks need to be adopted and simultaneously expenses incurred on

management need to be curtailed for promising and profitable underwriting.

c) Combined Ratio Analysis

The combined ratio is a ratio of incurred losses to earned premiums plus incurred

expenses to written premiums (Rejda, 2001). The ratio being the combination of loss ratio

and expense ratio, measures underwriting performance of insurers. The ratio above 100

percent means that the underwriting has been unprofitable and in simple language, every

rupee earned as premium is drained along with some portion from the earnings out of

non-operational income.

154

i. The combined ratio analysis is corroborating with result of loss and expense

ratios because the combined ratio has also been recorded on higher side for

New India, Oriental and National insurers during 2007-08 and 2008-09.

However, United insurer has been able to record healthy combined ratio during

the same period, which is really good for their financial health.

ii. From the F test, it can be observed that all the companies within the sector

differ significantly in the pattern of ratio. The ACGR is showing minor but

insignificant growth in the ratio for all public sector insurance companies

except for United, where negative, but significant growth (ACGR -4.38) is

witnessed.

iii. The analysis of combined ratio of public sector insurers reveal that combined ratio

of all the public insurers have is above 100, which clearly signals that

underwriting has not been profitable. The average ratio is high for the United

(127.05), National (123.56), Oriental (122.46) and New India (111.80) insurers

respectively. E-growth reflects that the increasing trend has been marginal for

public sector insurers and United insurer emerged to be the single insurer

witnessing decreasing trend in the combined ratio.

iv. The private sector insurers on the other hand are seen to be quite high in the ratio,

IFFCO (203.56) emerged as the insurer reporting highest average combined ratio

among the private sector followed respectively by Bajaj (183.62), ICICI (172.67),

Royal (163.72), HDFC (144.96), Reliance (133.15), Cholamandalam (124.61) and

Tata (113.74) insurers. ICICI and IFFCO are found to report highest e growth of

22.86 & 21.72 respectively conformed by the high standard deviation witnessed

during the study period.

v. In terms of variability, the highest variability is witnessed in case of IFFCO

(SD=67.55) and ICICI (SD=60.49) and lowest in case of Tata AIG

(SD=10.86), Royal (SD=15.71) and HDFC (SD=18.427). The combined ratio

155

is showing high degree of significant variation in the ratio amongst the

companies in the sector.

vi. The comparative statistical analysis indicates that the underwriting has not been

profitable for both the sectors. The ratio higher than 100 percent means that

operational income along with the portion from non-operational income is drained

out in losses and expenses.

d) Investment Income Analysis

Investment income has always come to the rescue of insurers in writing off of the

underwriting losses. The practice being more prominent in public insurers,

simultaneously, the private sector insurers rely fairly on the investment income. The

investment income earlier used to be quite good in quantum; however, given the global

melt down, the impact is being witnessed in Indian market as well. The impact is being

witnessed in the overall profitability trends of the insurers in general and investment

income in particular. The analysis of the investment income ratio reflects the following

results:

i. Public insurers are seen to have high margin of investment income on the

investments made during pre-liberalisation era, the benefits of which are still being

reaped. The average ratio for the last five years is reported by United, Oriental,

National and New India insurers at 35.44, 31.17, 26.58 and 26.4 respectively.

Most of the insurers in the sector are seen to lose gradually the margin of

investment income which is quite visible in their growth showing negative figures.

ii. The New India, Oriental and United seem to have been worst hit whereas

National insurer has recorded an upward trend in the initial years, however, it

settled to a bit higher than initial year’s ratio. This scenario also hints towards

poor financial risk management on the part of companies.

iii. The private sector on the other hand does not reflect, high quantum of investment

income in their security portfolios. However, steady increase in returns on

156

investment is reflected by e growth and standard deviation respectively. The

insurers in the sector reported marginal increase and lies at 9.75, 8.95, 8.08, 7.69,

7.50, 7.40, 6.93 and 6.40 respectively for ICICI, Bajaj, Reliance, Tata, IFFCO,

Cholamandalam, Royal and HDFC insurers. In terms of variability, the private

sector insurers have witnessed higher variability as standard deviation is

recorded at 0.748, 0.819, 1.608, 1.635, 1.720, 1.784, 1.838 and 2.440 for

Cholamandalam, Tata AIG, Reliance, Bajaj, IFFCO, Royal and HDFC

respectively.

The global melt down surely have its impact on the profitability of the deregulated

corporate sector in India. However, as the insurance sector is not too much open for FDI

(26%), marginal impact has been seen on overall profitability of the sector. The most

vulnerable area of impact being investment side, consequently the ripples is seen in

investment income of insurers, which have seen a marginal decrease as the study

progresses. What immediately needs to be done is to focus on the underwriting

profitability of the insurers.

e) ROE Analysis

Return on Equity or Net Worth of a company measures the ability of the management

of the company to generate adequate returns for the capital invested by the owners of

a company. ROE has been high for public insurers in the initial years, since the

insurers suffered huge underwriting losses; the impact is seen on the ratio in the

following ways;

i. The public sector insurers present a promising picture of the ROE in earlier

years; however, the impact of competitive pricing is reflected in the overall

return on equity. In terms of variability, as is evident, all the public sector

companies have shown high degree of variability as standard deviation was

recorded at 271.8, 230.5, 230.1 and 55.9 for New India, National, Oriental,

and united insurers respectively. The variability in the ratio is authenticated

by the P value indicating that the companies differ significantly in the

157

pattern of ratio. New India witnessed negative insignificant growth because

of instantaneous fall in ratio during 2008-09. However, surprisingly United

India witnessed marginal insignificant growth in the return.

ii. The fall would have been great if the PSUs have had the equity component

more in the overall capital structure, however the investments and other

assets base held by the company not only corrects the solvency surveillance

but also the leaves the proportion for shareholders to rely upon. The private

sector also could not escape from the impact and consequently the

decreasing trend in the ratio is seen across majority of the concerns.

iii. In terms of variability, the highest variability was witnessed in case of

Reliance (SD=70.37) and Bajaj (SD=23.41) and lowest in case of Royal

(SD=5.23) and Cholamandalam (SD=4.93). The results of the ratio are

significant in terms of F value.

iv. The PSUs which were thought to be better placed could not generate

enough funds from operations to meet investor’s demands as a result of

which investment income also could not set off the increasing underwriting

losses.

Liquidity

The contract of non life insurance policy usually lasts for one year; consequently

insurers are more vulnerable to liquidity crises, if sufficient provisioning is not made.

Hampton 1993 in his guidelines suggests that liquidity ratio should be greater or equal

to 100. However, when seen in the context of Indian insurers, none of the insurers

under study seem to follow the benchmark, the following results are inferred from the

individual and comparative analysis of the public and private sector insurers.

i. The public insurers differ significantly as far as liquidity position is concerned.

New India (55.804) seems to doing better when compared within the sector

158

with major fluctuations witnessed across the study period. Others to follow are,

National (39.718), Oriental (38.976) and United (31.619).

ii. Public sector insurers, more or less reflect same pattern of liquidity for the

study period. Public insurers seem to be ahead in the ratio when compared with

private insurers. The average liquidity ratio for the public insurers is seen at

55.804, 39.718, 38.976 and 31.696 for New India, National, Oriental and

United insurers. New India, however reflects sharp increase in the ratio, which

indicates liquidity position of the insurer is stabilizing, Oriental insurer also

seem to be making good provisions for current liabilities.

iii. Among the private insurers, IFFCO Tokio seems to be making good provisions

for liabilities of immediate attention. Although it also does not meet the

standard, however, the average liquidity ratio is seen at 72.210.

Cholamandalam and HDFC are seen to have instincts of stability reflected in

the growth of current assets, which may result in a better liquidity state in the

years to come.

iv. In terms of variability, highest variability was witnessed in case of Reliance

(SD=14.986) and HDFC (SD=9.750) while lowest in case of Royal (SD=4.019)

and ICICI (SD=4.397). The higher significant F value indicates significant

difference in ratio of private sector insurers, where as insignificant ACGR

presents the promising picture of better liquidity position of HDFC and

Cholamandalam insurers.

Since non-life insurers are risk takers featured with liabilities of short duration, it

becomes imperative for the insurers to report comfortable liquidity state, which if not

mend well in time may result in liquidity crises and compel the companies to acquire

more funds for meeting immediate liability, resulting into worsening of return to

shareholders.

Findings as per Insurance Solvency International Limited (ISI)

159

While evaluating performance of insurers, as per the standards prescribed by Insurance

Solvency International Limited (ISI), following findings are derived:

i. Underwriting losses have always been a concern for public insurers and this has

seen remarkable increase during the study period. Consequently the sector is not

able to meet the third (Underwriting Profits /Investment Income) standard

prescribed by ISI.

ii. Investment income is also reported to meet a marginal decrease which is reflected

in the standard discussed ahead, the investment income, which earlier were used to

set off underwriting losses are not reported to be adequate in meeting underwriting

losses. The Investments held earlier, are being sold to meet the losses which is

quite visible by the marginal decrease in the technical reserve position and thereby

affected their ability to meet solvency norm.

iii. Private insurers are seen to be ahead grabbing more market share which is quite

visible in the business volume fluctuation. Except HDFC Ergo, none of the private

insurers are seen to meet the standard of change in premium. Consequently

evidences of fresh capital apart from minimum requirement of`100 crores is seen

to meet solvency norm.

iv. Funds available in the companies in the shape of technical reserves and

shareholders’ funds are also not reported up to mark to cushion growing business

volumes, which is a concern for private insurers. Consequently fifth standard is

not seen to be met by the private insurers under study.

v. Decrease in overall profitability has been as a result of underwriting losses for

private insurers, which is quite obvious from the last standard of ISI. The private

insurers are not seen to report the ratio as per benchmark.

Findings as per Solvency Determinants

Based on the results depicted in multiple regression of various functional areas of non-

life insurers under study, following facts are concluded to have come on to surface:

160

i. The non-life insurers’ solvency is affected by the Firm size. Several factors

may be responsible but the most obvious one seems to be the nature of business

done by the non-life insurers.

ii. Predictor, Claims ratio suggest that it has the expected sign and strongly

suggests that higher claim ratio has been contributing negatively to overall

insurer solvency status.

iii. The operating margin which is also significant had the negative impact on the

insurers’ solvency due to the soaring margins.

iv. Lastly, the combined ratio is found to be statistically significant in and suggests

that despite higher outflow; solvency has been improving, which is quite

unexpected.

Secondary Findings

i. Insurers in both the sectors are seen to have affected by price deregulation of

January 2007. The same is indicated in the soaring profit margins and premium

deficiency of the companies in both the sectors.

ii. Cross subsidization of unprofitable business segments by profitable business

segments which has been practice, prior to price deregulation saw a sudden shift

and the profitable fire products are now being sold on competitive rates.

iii. The market imperfections have been reduced to a great extent. Every segment now

is being seen in terms of profitability, it can generate. Unaddressed issues of price

insufficiency, expenditures level, ROE, investments are properly discussed and

their individual impact is being ascertained.

iv. There has been a shift seen in the underwriting. Every individual segment is

evaluated in terms of profitability and revenue generation. Severe loss making

segments, like motor, third party, O.D etc. are being discussed to devise policy for

their profitable possibilities.

v. The regulator has been strict regarding the solvency margins and now the margins

are being monitored on quarterly basis, which may check unethical and unsound

practices of inflated better financial position depiction.

161

vi. Public insurers are seen to dispose off the earlier held investments to meet the

underwriting losses. The profit generated from sale of investments is being used to

pose to be profitable by public insurers, which is alarming.

vii. The private insurers in fact are seen to meet the underwriting losses out of the

capital, which is worrying for the sustainability of the insurers. Consequently

evidences of fresh capital infusion are resultant of that.

viii. Investment income has witnessed a remarkable decrease throughout the study

period, which is alarming. The decrease in investment income side compels the

public insurers to sell investments and profits got from such deals are used to set

off underwriting losses

ix. Maximum losses have been reported by miscellaneous segment comprising of

motor health and other segments of non life business and simultaneously public

insurers were found to accept the risk voraciously to improve market presence and

as a result suffering huge underwriting losses.

x. Earlier profitable segments of business products are now being sold at competitive

prices making the situation worse for the incumbents.

xi. Despite the whooping increase in premium collection by both the sectors,

penetration still remains at lowest. The situation reflects that market is expanding

but not exploited as per the increase of individual savings.

xii. The retail and customized insurance products is still a dream despite price

deregulation.

Suggestions

In the light of the analysis and findings, following suggestions are reproduced for

development of efficient insurance sector:-

i. In terms of capital adequacy, public insurers need to restructure their capital

portfolio. Relying merely on reserves position may not last longer, given the fact

that investments held by public insurers are being sold profitably to support

underwriting losses.

162

ii. Private insurers need to have required quantum of technical reserves for better

support to unexpected claims.

iii. Inclusion of more equity will surely make the asset quality of the insurers better

and public insurers in particular need to resort to it for reporting required solvency

status.

iv. For the improvement of reinsurance ratio, proper management of technical

reserves position will help private insurers to retain and manage maximum risk

efficiently.

v. Proper check on management expenses will help improve management efficiency.

For the improvement in this parameter, unprofitable branches and unproductive

work force if curtailed will save a huge amount for public insurers in the shape of

management expenses, which otherwise is concern for public and private insurers.

vi. Proper risk evaluation, pricing and risk selection will surely help insurers in proper

claim management, expense management and consequently will lead to decrease

in combined ratio for the insurers and ultimately will result into underwriting

profitability.

vii. Regulator IRDA should allow insurers to have a diversified and risk balanced

investment portfolio. The move will help insurers to enhance investment income.

The increasing investment income will cushion underwriting losses to a good

extent.

viii. Risk based capital is the need of the hour, which requires companies to underwrite

business as per the capital strength and as such adequate capital requirement for

all companies should made regulatory in order to take sufficient underwriting

business exposures.

ix. Increasing focus on underwriting discipline should be undertaken to avoid

underwriting losses, to increase profitability and to be competitive. Every segment

should be seen in terms of underwriting capacity and be priced accordingly.

x. The underwriting should aim at profitable underwriting rather than mere share

gaining chase. Proper risk evaluation is also facilitated by price deregulation, and

163

in view of increasing purchasing power of individuals, profitable but competitive

pricing should be the area of focus.

xi. Only operational performance should be taken into consideration, while reflecting

company’s performance. More importantly every segment should highlight its

underwriting performance at the end of financial year and imperfections may

accordingly be weeded out.

xii. The sector should be allowed to raise funds from stock market to enable them

report profitable figures. Consequently the insurers will focus on profitable

business underwriting will lead to better liquidity management on the part of

insurers.

xiii. Deregulation should be followed by reregulation in the key areas of risk evaluation

and product pricing. This is the only way for profitable pricing otherwise in the

coming time, insurance industry will be facing insolvencies of some key insurance

players, which may damage customer trust and consequently the sector will

remain untapped.

xiv. Proper risk management practices to be made mandatory. Especially operational

and market risk management should addressed in case of all insurance companies

on the lines bank risk management so that hard earned money of insured is

protected.

xv. Management expenses should be properly put into cap and insurers who don’t

adhere to the cap should be fined and ultimately legally challenged. New, effective

and cost efficient distribution channels should be the focus area to restrict growing

marketing costs.

xvi. Regression analysis suggests that proper risk selection is mandatory to avoid too

much incurring claims, which otherwise is eating away the solvency status of the

non life insurers.

xvii. FDI cap be enhanced from 26 to 49 percent which the primary requirement of

times. The move has got its own advantages like more capital flow, more

employment, and technical knowhow and in the long run cost efficiency and

profitability for insurers and exchequer as such.

164

xviii. Earlier “file and use” concept of product pricing be implemented with fresh vigour

to enable insurers to price profitably their products. Market gain chase by the

insurers will come to halt by it and insurers may focus on efficient underwriting.

Otherwise to which they are worried about their sustainability in the market.

xix. Customized insurance products, as per the needs of customers. One of the bigger

advantages of price deregulation is different prices for different needs; however,

the facility is only present in economic literature for Indian customers. The

insurers need to properly tailor their products accordingly.

xx. Proper risk selection and thereafter proper risk evaluation should be done by all

insurers. In view of growing tendency of grabbing more market chase, proper risk

selection process is ignored, which consequently leads to poor risk evaluation, and

ultimately losses.

xxi. Proper actuarial order of product pricing will surely arrive at profitable pricing,

provided re-regulation of prices.

xxii. Adoption of cost effective and viable distribution system should be made

mandatory. Modern era of computers and IT calls for looking of cost effective and

viable distribution system of insurance products, the benefits of which can show

immediate impact in the shape of decreasing costs and adding to profits margin.

165

REFERENCES

166

References

ACCC (Australian Competition & Consumer Commission), 2002, Second Insurance

Industry Market Pricing Review, September 2002, ACCC, Dickson.

Anderson, J. and Brown, R., 2005, “Risk and Insurance”, Society of Actuaries, USA.

Ambrose, J. M., and J. A. Seward., 1988, Best’s Ratings Financial Ratios and Prior

Probabilities in Insolvency Prediction, Journal of Risk and Insurance, 55: 229-244.

Arestis, P., and P. Demetriades., 1997, Financial Development and Economic Growth:

Assessing the Evidence, Economic Journal, 107(442): 783-799.

Armitage, S., and P. Kirk., 1994, “The Performance of Proprietary Compared with

Mutual Life Offices”. Services Industries Journal 14: 238–61.

Arrow, K., 1970, “Essays in the Theory of Risk –Bearing”, North Holland Publishing

Company, Amsterdam and London, 137.

BarNiv, R., 1990, Accounting Procedures, Market Data, Cash-Flow Figures and

Insolvency Classification: The Case of the Insurance Industry, Accounting Review,

65: 578-604.

BarNiv, R. And R. A. Hershbarger., 1990, Classifying Financial Distress in the Life

Insurance Industry, Journal of Risk and Insurance, 57: 110-136.

BarNiv, R., and J. B. McDonald., 1992, Identifying Financial Distress in the Insurance

Industry: A Synthesis of Methodological and Empirical Issues, Journal of Risk and

Insurance, 59: 543-574.

BarNiv, R., and M. L Smith., 1987, Underwriting, Investment and Solvency, Journal

of Insurance Regulation, 5: 409-428.

Barresse, J., 1990, Assessing the Financial Condition of Insurers, CPCU Journal, 43:

37-46.

167

Beenstock M., G. Dickinson, and S. Khajuria., 1986, “The Determination of Life

Premiums: An International Cross-Section Analysis 1970–1981”. Insurance,

Mathematics, and Economics 5: 261–70.

Ben-David, D., 1993, “Equalizing Exchange: Trade Liberalization and Economic

Convergence”, The Quarterly Journal of Economics 108(3): 653-679.

Bodla B. S., M. C. Garg and K. P. Singh, 2003, “Insurance Fundamentals,

Environment and Procedures”, Deep & Deep Publications Pvt. Ltd.,

Brewer, T.L., 1993, “Government Policies, Market Imperfections, and Foreign Direct

Investment”, Journal of International Business Studies 24(1): 101-120.

Brickley, J. A., and C. M. James., 1987,“The Takeover Market, Corporate Board

Composition, and Ownership Structure: The Case of Banking”. Journal of Law and

Economics. 30: 161–80.

Brockett, P.L., W.W. Cooper, L. L. Golden, and U. Paitaktong., 1994, A Neutral

Network Method for Obtaining and Early Warning of Insurer Insolvency, Journal of

Risk and Insurance, 61: 402-424.

Browne, M. J., and R. E. Hoyt., 1995, Economic and Market Predictors of

Insolvencies in the Property-Liability Insurance Industry, Journal of Risk and

Insurance. 62: 309-327.

Browne, M. J., and K. Kim., 1993, “An International Analysis of Life Insurance

Demand”. Journal of Risk and Insurance. 60 (4): 616–34.

Carmichael, Jeffrey, and Michael Pomerleano., 2000, “The Development and

Regulation of Non-Bank Financial Institutions”. Washington, DC: World Bank.

Catalan Mario, Gregorio Impavido and Alberto R. Musalem. 2000, “Contractual

Savings or Stock Market Development Which Leads?”, World Bank Policy Research

Working Paper. No. 2421

168

Cardon, James H & Hendel, Igal, 2001, "Asymmetric Information in Health

Insurance: Evidence from the National Medical Expenditure Survey", RAND Journal

of Economics, The RAND Corporation, 32(3), 408-27, Autumn.

Catalan, Mario & Impavido, Gregorio & Musalem, Alberto R., 2000, "Contractual

savings or stock market development - Which leads?”, Policy Research Working

Paper Series. 2421, The World Bank.

Caves, R.E., 1974, “Multinational Firms, Competition, and Productivity in Host-

country Markets”, Economica 41(162): 176-193.

Caves, R.E., 1996, “Multinational Enterprise and Economic Analysis”, 2nd Edition,

New York, NY: Cambridge University Press.

Cawley John & Tomas Philipson., 1999, “"An Empirical Examination of Information

Barriers to Trade in Insurance," American Economic Review, American Economic

Association, 89(4): 827-846, September.

Chiappori, P. A. and B. Salanie, 2002, “Testing Contract Theory: A Survey of Some

Recent Work", Advances in Economics and Econometrics, 1, M. Dewatripont, L.

Hansen and S. Turnovskyeds, Cambridge University Press.

Cohen, Alma., 2001. “Asymmetric Information and Learning in the Automobile

Insurance Market”. Mimeo, Harvard University, Department of Economics.

Conyon, M., and D. Leech., 1994, “Top Pay Company Performance and Corporate

Governance”. Oxford Bulletin of Economics and Statistics. 56 (3): 229–47.

Conyon, M., 1994, “Corporate Governance Changes in UK Companies between 1988

and 1993”.Corporate Governance: An International Review. 2: 87–99.

Costello, P., 2004, “Address to the Insurance Council of Australia Conference”, paper

presented at Insurance Council of Australia Conference, Canberra, 12 August.

Cummins, J. David, and Mary Weiss., 1998, “Analyzing Firm Performance in the

Insurance Industry Using Frontier Efficiency Methods”. Working Paper Series 98-22.

169

Financial Institutions Centre, Knowledge Wharton, The Wharton School, University

of Pennsylvania,

Cummins, J. D., S. E. Harrington, and R. Klein, 1995, “Insolvency Experience, Risk

Based Capital and Prompt Corrective Action in Property-Liability insurance”,

Journal of Banking and Finance,19: 511-527.

Cutler, David M., 2002, "Employee Costs and the Decline in Health Insurance

Coverage," NBER Working Papers 9036, National Bureau of Economic Research,

Inc.

Dambolena, I. G., and S. J. Khoury., 1980, “Ratio Stability and Corporate Failure”,

Journal of Finance, 35: 1017-1026.

Das. S. Udabir, Nigel Davies and Richard Podpiera, July 2003, “Insurance and Issues

in Financial Soundness”, International Monetary Fund, Working Paper, 03/138: 01-

05.

Demetriades, P. & Hussein, K. A., 1996, “Does financial development cause

economic growth”. Journal of Development Economics. 51: 387-411.

Diacon, S. R., K. Starkey, and C. D. O’Brien., 2002, “Size and Efficiency in European

Long–Term Insurance Companies: An International Comparison”. Geneva Papers on

Risk and Insurance: Issues and Practice. 27: 444–66.

Diacon, S.; O'Brien, C. and Blake, A., 2005, "The Economic Value of General

Insurance", Research Report, Centre for Risk and Insurance Studies, Nottingham

University, Business School.

Doh, J.P., 2000, “Entrepreneurial Privatization Strategies: Order of Entry and Local

Partner Collaboration as Sources of Competitive Advantage”, Academy of

Management Review. 25(3): 551-571.

Doh, J.P., Teegen, H. and Mudambi, R., 2004, “Balancing Private and State

Ownership in Emerging Markets: Telecommunications Infrastructure: Country,

170

Industry, and Firm Influences”, Journal of International Business Studies. 35(3):

233-250.

Dollar, D., 1992, “Outward-Oriented Developing Economies Really Do Grow More

Rapidly: Evidence from 95 LDCs, 1976-85”, Economic Development and Cultural

Change. 40(3): 523-544.

Dornbusch, R., 1992, “The Case for Trade Liberalization in Developing Countries”,

Journal of Economic Perspectives. 6(1): 69-85.

Dorfman Mark S., 2008, “Introduction to Risk Management and Insurance”,

Prentice Hall of India, Ninth Edition, 44.

Drury, S., 2000, “Latin American Insurance: An Emerging Giant in the Insurance

Market”, London, UK: Reuters Business Insight.

Enz, Rudolf., 2000, “The S Curve Relation between Per Capita Income and Insurance

Penetration”. Geneva Papers on Risk and Insurance. 25 (3): 396–406.

IMF and World Bank., 2005, “Financial Sector Assessment, A Handbook”,

Published by World Bank and IMF, Washington D C 20433

Fields, J. A., 1988, “Expense Preference Behaviour in Mutual Life Insurers”. Journal

of Financial Services Research. 1: 113–29.

Fukuyama, F., 1995, “Trust: The Social Virtues and the Creation of Prosperity”.

New York: Free Press.

Genetay, N., 1999, “Ownership Structure and Performance in UK Life Offices”.

European Management Journal. 17 (1): 107-15.

Granger, C.W.J., 1990, Aggregation in Time Series Variables: A Survey. In T.

Barker and M.W. Pesaran (eds.), Disaggregation in economic modelling (Routledge,

London).

171

Gundlach, E. and Nunnenkamp, P., 1998, “Some Consequences of Globalization for

Developing Countries”, in J.H. Dunning (ed.) Globalization, Trade and Foreign

Direct Investment, Oxford, UK: Elsevier, 153-174.

Ghosh. R. N. T. M Mellotte and M. A. B Siddique (eds), Economic Development and

Change; South Asia and the Third World; New Age International Ltd.

Gupta, P. K. 2004, “Insurance and Risk Management”, Himalaya Publishing

House, New Delhi.

Gupta K. R (2000), Liberalisation and Globalisation of Indian Economy, Atlantic Publishers.

Hampton, J. J., 1993, “Financial Management of insurance Companies”, (Amacon,

NY: American Management Association).

Harrington, S. E., and J. M. Nelson, 1986, “A Regression Based Methodology for

Solvency Surveillance in the Property Liability Insurance Industry”, Journal of Risk

and Insurance, 53: 583-605.

Haveman, H.A., 1992, “Between a Rock and a Hard Place: Organizational Change

and Performance under Conditions of Fundamental Environmental Transformation”,

Administrative Science Quarterly. 37(1): 48-75.

Hershbarger, R. A., and R. K. Miller., 1986, “The NAIC Information System and the

Use of Economic Indicators in Predicting Insolvencies”, Journal of Insurance Issues

and Practices. 9: 21-43.

Hodgson, A., 1999, Derivatives and their application to insurance: a retrospective and

prospective overview, The Changing Risk landscape: implications for insurance risk

management, 1999, proceedings of a conference sponsored by Aon Group Australia

Limited, http://www.aon.com.au/pdf/reinsurance/Aon_Derivatives.pdf.

Hofstede, G., 1995, “Insurance as a Product of National Values”. Geneva Papers on

Risk and Insurance 20 (4): 423–29.

172

Ingham, H., and S. Thompson.,1995, “Mutuality, Performance, and Executive

Compensation”. Oxford Bulletin of Economics and Statistics 57: 295–307.

IMF 1996, “World Economic Outlook” International Monetary Fund, April 1996.

IMF 1995, “World Economic Outlook”, International Monetary Fund September

1995.

IRDA Annual Report, 2008-09, “Insurance Regulatory Development Authority”

Hyderabad.

IRDA Annual Report, 2007-08, “Insurance Regulatory Development Authority”

Hyderabad.

Joo, Bashir A., 2005, Performance of Insurance Sector in India, The Business Review,

11(2): 77-86

King, R. G and Ross Levine., 1993 a, “Finance, Entrepreneurship, and Growth”,

Journal of Monetary Economics, 32: 513-42.

King, R. G. and Ross Levine., 1993 b, “Finance and Growth: Schumpeter might be

right”, Quarterly Journal of Economics, 108: 717-37.

Kim, Y, D., D.R. Anderson, T.L. Amburgey and J. C. Hickman, 1995, The Use of

Event History Analysis to Examine Insurer Insolvencies, Journal of Risk and

Insurance, 62: 94-110.

Klemperer Paul and Margare Meyer., 1985, “Price Competition vs. Quantity

Competition: The Role of Uncertainty”, The RAND Journal of Economics, 17 (4):

618-638.

Kramer, B., 1996, An Ordered Logit Model for the Evaluation of Dutch Non-Life

Insurance Industry, De Economist, 144: 79-91.

Kroll, M., P. Wright, and P. Theerathon.,1993, “Whose Interests Do Hired Top

Managers Pursue? An Examination of Select Mutual and Stock Insurers”. Journal of

Business Research 26: 133–48.

173

Lee, S. H., and J. L. Urrutia., 1996, Analysis and Prediction of Insolvency in the

Property-Liability Insurance Industry: A Comparison of Logit and Hazard Models,

Journal of Risk and insurance, 63: 121-130.

Lecraw, D., 1991,“Factors Influencing FDI by TNC’s in Host Developing

Countries: A Preliminary Report”, in P.J. Buckley and J. Clegg (eds.) Multinational

Enterprises in Less Developed Countries, New York: St. Martin’s Press, 163-180.

Levine, Ross and Zervos, Sara., 1998, “Stock Markets, Banks, and Economic

Growth”. American Economic Review, 88: 537-558.

Machiraju. H. R. 2000, “Indian Financial System”, Vikas Publishing House, Pvt. Ltd.

Maddala, G.S., and I. Kim, 1998, “Unit roots, Co-integration and Structural

Change” (Cambridge University Press).

Ma, Y. L, and Pope, N. 2003, “Determinants of International Insurers’ Participation in

Foreign Non-Life Markets”, The Journal of Risk and Insurance. 70(2): 245-248.

Malhotra Committee Report on Reforms in the Insurance Sector, 1994. Government

of India, Ministry of Finance, New Delhi.

Mattoo, A., 1999, “Financial Services and the World Trade Organization:

Liberalization Commitments of the Developing and Transition Economies”, Policy

Research Working Paper 2184, The World Bank. Development Research Group.

Mattoo A., R. Rathindran and A. Subramanian, 2001, “Measuring Services Trade

Liberalization and its Impact on Economic Growth: An illustration”, World Bank

Research Working Paper 2655.

Mayers, David, and Clifford Smith, 1982, “Toward a Positive Theory of Insurance

New York”: Salomon Brothers, Centre for Study of Financial Institutions, Graduate

School of Business Administration, New York University.

174

Mayers, D., A. Shivdasani, and C. W. Smith, 1997, “Board Composition and

Corporate Control: Evidence from the Insurance Industry”. Journal of Business. 70:

33–62.

McDonald, J. B., 1992, “Predicting Insurance Insolvencies Using Generalised

Qualitative Response Models” in: Workers’ Compensation Insurance: Claims Costs,

Prices and Regulation (Boston: Kluwer Academic Publishers): 223-241.

Odedokun, M.O.,1996, “Alternative econometric approaches for analyzing the role of

the financial sector in economic growth: time-series evidence from LDCs”, Journal of

Development Economics, 50(1), 119,135.

Outreville, J. F., 1990, “The Economic Significance of Insurance Markets in

Developing Countries”. Journal of Risk and Insurance. 57 (3): 487–98.

Outreville, J. F., 1996, “Life Insurance Markets in Developing Countries”, The

Journal of Risk and Insurance, 63(2): 263 – 278, American Risk and Insurance

Association.

O’Hara, M., 1981, “Property Rights and the Financial Firm”. Journal of Law and

Economics. 24: 317–32.

Palande. P. S. (2000), “Coping with Liberalisation”, Response Books India Ltd.

Patel, Freny., 2001, "Centre wants GIC to merge unviable outfits before recast."

Business Standard, April 13, 2001.

Patrick, H., 1966, Financial Development and Economic Growth in Underdeveloped

Countries, Economic Development and Cultural Change, 14(1): 174-189.

Patrick, Hugh T., 1996, “Financial Development and Economic Growth in Under

developed Countries”. Economic Development and Cultural Change. 14 (2): 174–

89.

Pesaran, M. H., N. U. Haque, and S. Sharma, 2002, Neglected Heterogeneity

and Dynamics in Cross-Country Savings Regressions, in: J. Krishnakumar and E.

175

Ronchetti, eds., Panel Data Econometrics-Future Direction: Papers in Honour of

Professor Pietro Balestra (Amsterdam: Elsevier Science), 53-82.

Irving, Pfeffer., 1956, Insurance and Economic Theory, Richard D. Irwin, Inc,

Homewood, Illinois.

Rees, R., Kessner, E., 1999, “European insurance markets, regulation and efficiency”.

Economic Policy. 29, 363–397

Rejda, George E., “Principles of Risk Management and Insurance”, Person

Education, Eighth Edition, 2004, 38.

Rejda, G. E., 2001, “Principles of Risk management and Insurance”, 7th edition

(Reading, MA: Addison Wesley).

Rothschild Michael and Joseph Stiglitz, 1976, “Equilibrium in Competitive Insurance

Markets: An Essay on the Economics of Imperfect Information”, The Quarterly

Journal of Economics, Oxford University Press 90 (4), (Nov., 1976), 629-649.

Sachs, J.D. and Warner, A. 1997, “Fundamental Sources of Long-Run Growth”,

American Economic Review, Papers and Proceedings 87(2):184-88.

Shrivastava, D. C and Shashank Srivastava (2002), “Indian Insurance Industry,

Transition and Prospects”, New Century Publications Delhi.

Skipper, Harold D., and Robert W. Klein. 2000. “Insurance Regulation in the Public

Interest: The Path Towards Solvent, Competitive Markets.” Geneva Papers on Risk

and Insurance: Issues and Practice 25 (4): 482–504.

Skipper et al., 2000, “The European Single Insurance Market: Overview and impact of

the liberalization and deregulation processes”, Insurance and private pensions

compendium for emerging economy, Book 1, Part 1:6) b, OECD.

Skipper, H. D. Starr, Jr., C.V., Mack Robinson J., 2000, “Liberalization of insurance

market: issues and concerns”, Insurance and private pensions compendium for

emerging economy, Book 1, Part 1:6) b, OECD.

176

Skipper, Jr., Harold D., 2001, “Insurance in the General Agreement on Trade in

Services” AEI Press Washington USA P 1-84.

Skipper, H. D., Jr., 1998, “Insurance Operations and Management, International

Insurance Management, chapter 24 (Boston, Mass.: Irwin McGraw-Hill).

Skipper, Jr., H.D. 1997. “Foreign Insurers in Emerging Markets: Issues and

Concerns”. International Insurance Foundation, Washington, D.C.

Skipper, Harold D., Jr. 19997, “Protectionism in the provision of International

Insurance Service” The Journal of Risk and Journal.

Skipper, H. D., Jr., 1996, “The Role of Foreign Insurers in Transition Economies and

Developing Countries”, International Insurance Monitor, 49: 18-20.

Smith Adam, 1776, “An Enquiry into the Nature of Wealth of Nations”, Random

House Publishing Group, London.

Starr, Jr., C.V., Mack Robinson J. (2000), “Liberalization of insurance market:

issues and concerns”, Insurance and private pensions compendium for emerging

economy, Book 1, Part 1:6) b, OECD.

Sutherland James and Filip Wuebbeler, July 2007, “India 2010: A LLOYD’S View”

Lloyd’s London Publication.

Swiss Re 2004, "Exploiting the Growth Potential of Emerging Insurance Markets:

China and India in the Spotlight," Sigma, No. 5.

Swiss Re. 2000, “World Insurance in 2000: Another Boom Year for Life Insurance:

Return to Normal Growth for Non-life Insurance”, [www document]

http://www.swissre.com (accessed May 2007).

Swiss Re, 2000, "Solvency of Non-Life Insurers: Balancing Security and Profitability

Expectations." sigma No. 1/2000 (Zurich: Swiss Reinsurance Company).

177

Swiss Re, 2001, "Profitability of the Non-life Insurance Industry: It's Back to Basics

Time, sigma No. 5/2001 (Zurich: Swiss Reinsurance Company).

Tesche, J. and Sahar, T., 1994, “A Note on Economic Liberalization and Privatization

in Hungary and Egypt”, Comparative Economic Studies. 36(2): 51-72.

Uhlenbruck, K. and De Castro, J.O., 2000, “Foreign Acquisition in Central and

Eastern Europe: Outcomes of privatization in Transitional Economies”, Academy of

Management Journal. 43(3): 381- 402.

Uhlenbruck, K., Meyer, K.E. and Hitt, M.A., 2003, “Organizational Transformation in

Transition Economies: Resource-based and Organizational Learning Perspectives”,

The Journal of Management Studies. 40(2): 257-282.

USAID (U.S. Agency for International Development). 2006, “Assessment on How

Strengthening the Insurance Industry in Developing Countries Contributes to

Economic Growth”. Washington, D.C.: Chemonics International Inc. and

International Insurance Foundation.

Varkey. Titus (ed) 1997, Economic Liberalisation; Its Impact on Indian Economy,

Business and Society, “Association of Indian Economy Studies”, Illinois 1997.

Ward, Damian, and Ralf Zurbruegg. 2000. “Does Insurance Promote Economic

Growth? Evidence from OECD Countries”. Journal of Risk and Insurance. 67 (4):

489–506.

Webb Ian, Grace Martin, and Harold D. Skipper., 2002. “The Effect of Banking and

Insurance on the Growth of Capital and Output”. Working paper. Center for Risk

Management and Insurance, Georgia State University, Atlanta.

Webb, I. P., 2000, The Effect of Banking and Insurance on the growth of Capital and

Output, unpublished Ph.D. dissertation, Georgia State University.

Webb, Ian, Masci Pietro and Marco Velarde., 2005, “Challenges Facing the

Performance and Growth of Insurance Markets in Latin America: A Survey of

178

Insurance Regulators and Industry Associations”. Working paper. Inter-American

Development Bank, Washington, D.C.

Willenborg, M., 1992, In Search of Candidate Predictor Variables: Financial

Statement Analysis in the Property / Causality Insurance Industry, Journal of

Insurance Regulation, 10: 268-312.

World Trade Organization (WTO)., 2004, “Understanding the WTO: The

Agreements; Services: The Rules for Growth and Investment”, www

document.http://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm6_e.htm#annexes

(accessed July 2007).

Journals and Magazines

IRDA Annual Reports (Various Issues)

The Journal of Insurance Institute of India (Various Issues)

Insurance Chronicle (Various Issues)

Asia Insurance Post (Various Issues)

IRDA Journal (Various Journals)