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“A study on Financial Performance of Indian Life and Non – Life Insurance Industry”

Final Project Report

Submitted to Punjab Technical University in partial fulfillment of the requirements For the degree of

MASTER OF BUSINESS ADMINISTRATION

By

SATINDER SINGH 7009220469

GIAN JYOTI INSTITUTE OF MANAGEMENT AND TECHNOLOGY MOHALI 2009

FINAL PROJECT REPORT

Final Project Report

Submitted to Punjab Technical University in partial fulfillment of the requirements For the degree of

MASTER OF BUSINESS ADMINISTRATION

By

SATINDER SINGH 7009220469

GIAN JYOTI INSTITUTE OF MANAGEMENT AND TECHNOLOGY MOHALI 2009

CERTIFICATE I

This is to certify that the thesis entitled “A study on Financial Performance of
Indian Life and Non – Life Insurance Industry” submitted for the degree of

MBA in the subject of Marketing for the Punjab Technical University, Jalandhar is a bonafide research work carried out by Satinder singh under my supervision and that no part of this thesis have been submitted for any other degree. This assistance and help received during the course of investigation have been fully acknowledged.

___________________________ Major Advisor Kavita Mahajan

CERTIFICATE II

This is to certify that the thesis entitled “A study on Financial Performance of
Indian Life and Non – Life Insurance Industry ” submitted by Satinder singh to

the Punjab Technical University, Jalandhar in partial fulfillment of the requirements of the degree of MBA in a subject of Marketing has been approved by the student’s Advisory committee after an oral examination on the same, in collaboration with an External Examiner.

__________________________ (Kavita Mahajan) Major Advisor

______________________ External Examiner

DECLARATION

I declare that the project entitled “A study on Financial Performance of Indian Life and Non – Life Insurance Industry” is a record of independent research work carried out by me during the academic year 2007-08 under the able guidance of my project guide Lect. Kavita mahajan of Gian Jyoti Institute of Management and Technology, Mohali .

Place: Mohali Date: 2009

Satinder Singh Gian Jyoti Institute of Management and Technology

Acknowledgements
First of all I would like to thank God Almighty for his blessing for completing this project successfully. The satiation and euphoric that accompany the successful completion of task, would be incomplete without the mention of the people who made it possible. After all, success is the epitome of hard work, severance, undeferred missionary, zeal, steadfast determination and most of all encouraging guidance. So, with immense gratitude, I acknowledge all those whose guidance and encouragement served as a “beacon light” and crowned my efforts with success. I sincerely thankful to Mr. Vimal Aggarwal (Director) Gian Jyoti Institute of Management and Technology giving me an opportunity to work on final project. I thank him for being a constant source of inspiration, mentor and above all for his encouragement. His experience was itself a great source of knowledge and information for me. Despite his demanding schedule, he bestowed every possible facility to me; so as to carry on the project work without any encumbrance. I would like to express my profound sense of gratitude to Lect. Kavita mahajan – Gian Jyoti Institute of Management and Technology, Mohali my project guide for guiding me as well as providing me the support to conduct this project. This graduate with his more than 5 years of work experience has all the tools required to guide a student. With a deep sense of gratitude and indebtedness, I sincerely and whole-heartedly thank my fellow colleagues and the staff at Gian Jyoti Institute of Management and Technology for giving me value suggestions and advice throughout the execution of the project. This project would not have been concluded successfully within time without their support and help.

Last but not the least; I thank my parents, Mr. Hardial Singh and Mrs. Rajinder kaur and all of my family members, my well wishers who inspired me and bringing me up in a successful environment and teaching me all the basic etiquettes and ethics required for my growth in an organization.

Satinder Singh 7009220469 Gian Jyoti Ins. of Mgmt. and Tech.

A study On Financial Performance of Indian Life & Non – Life Insurance Industry
Study involves an analysis of financial performance of the Non – Life insurance sector in India using financial ratios such as claims ratio and combined ratio. It also involves assessment of compliance with IRDA regulations - Solvency margins and Rural and Social Sector Obligations - by the existing insurers.

Satinder Singh

Table of Contents
Executive Summary ....................................................................................................... 5 Chapter 1: Introduction ................................................................................................. 9 1.2 Statement of Problem ................................................................................. 18 1.3 Purpose of Study ........................................................................................ 19 1.4 Objectives ................................................................................................... 19 1.5 Research Questions ......................................................................................19 Chapter 2: Literature Review ........................................................................................21 2.1 Conceptual Review .....................................................................................22 2.2 Empirical Review ....................................................................................... 29 2.3 Contextual Review ......................................................................................39 Chapter 3: Research Methodology ............................................................................... 48 3.1 Nature of Study ............................................................................................48 3.2 Indian Insurance Industry - A Historical Perspective ...................................48 3.3 Research Design .......................................................................................... 50 3.4 Mode of Analysis .........................................................................................51 Chapter 4: Insurance Industry Analysis ............................................................... ......53 4.1 Compliance Solvency Margin and Rural and Social sector obligation ...... 53 4.2 Financial Performance of the Non – life Insurance Sector ......................... 56 Chapter 5: Findings, Conclusion and Recommendation ........................................... 90 5.1 Findings .......................................................................................................90 5.2 Conclusion ...................................................................................................98 5.3 Recommendations .......................................................................................99 5.4 Scope for Future Research ......................................................................... 103 Chapter 6: References ................................................................................................. 104 6.1 Journals ...................................................................................................... 104 6.2 Websites ..................................................................................................... 105

List of Tables

Table 1.1: Key Market Indicators ................................................................................ 13 Table 1.2: Milestones of Insurance Regulations in the 20th Century ......................... 16 Table 2.1: Industry Income Statement ........................................................................ 33 Table 4.1: Spread between written and earned premium as percentage of written Premium .............................................................. 65 Table 4.2: Incurred Claims Ratio ............................................................. ...................67 Table 4.3: Combined Ratio ..........................................................................................70 Table 4.4: Capacity Ratio .............................................................................................73 Table 4.5: Operating Profit .......................................................................................... 75 Table 4.6: Year on Year Growth in Operating Profit / Loss .........................................75 Table 4.7: Operating profit / Net premium earned ....................................................... 79 Table 4.8: Profit After Tax ........................................................................................... 80 Table 4.9: Year on Year Growth in Profit after Tax ..................................................... 82 Table 4.10: Profit after Tax / Net Premium Earned ...................................................... 86 Table 4.11: Equity share capital of Non – Life Insurance companies ........................... 88 Table 4.12: Return On Equity ........................................................................................ 89

Table 4.13: Reserves ...................................................................................................... 91

List of Figures Figure 2.1: Financial Performance ................................................................................. 48 Figure 4.1: Non – Life Insurance Premium Written ...................................................... 60 Figure 4.2: Growth in Total Net Premium Earned Non – Life Insurers ........................ 61 Figure 4.3: Net Premium Earned by Non – Life Private Insurers –2003 – 2008 ........... 62 Figure 4.4: Net Premium Earned by Non – life Public Insurers – 2003 – 2008 ............. 63 Figure 4.5: Average Claims Ratio Non – Life Insurers (2003 – 2007) ........................... 69 Figure 4.6: Operating Profit of Non – Life Insurers ....................................................... 77 Figure 4.7: Average Operating Profit / Loss Non – Life Insurers ................................... 78 Figure 4.8: Profit after Tax Private Non – Life Insurers ................................................. 80 Figure 4.9: Profit after Tax Public Non – Life Insurers ................................................... 84 Figure 4.10: Average PAT for Non – Life insurers ......................................................... 84 Figure 4.11: Total equity share capital of non – life insurers .......................................... 88

Executive Summary
India is one of the world’s fastest growing economies, with real GDP rising to 9.4 per cent in 2006-07 as against 9.0 per cent in 2005-06. India’s share in world GDP thus has increased to 6.3 per cent in 2006 measured in terms of purchasing power parity. Growth in per capita income also accelerated to 8.4 per cent in 2006-07 from 7.4 per cent in 2005-06. Economic fundamentals strongly suggest that there is a tremendous potential for the insurance sector to attain a high growth level. The insurance penetration in a country depends on its level of economic activity, risk awareness among the people and the deepening of the financial system. With a large population and an untapped market, insurance industry has a huge growth potential in India. The improved performance in the domestic economy has an impact on the insurance industry, in particular. Higher per capita income, domestic savings and availability of more instruments for parking surplus funds facilitates growth in the activities of financial services, particularly insurance. At the time of opening up of the sector in 1999, insurance was viewed primarily as a tax saving device. However, policyholders’ perspective began gradually changing towards an insurance cover irrespective of the tax incentives. Most of the private insurance companies are joint ventures with recognized foreign players across the globe. Consumer awareness has improved. Competition has brought more products and improved the customer service. It has had a positive impact on the economy in terms of income generation and employment opportunities in this sector. The purpose of this study is to assess the financial performance of the Indian non - life insurance industry from 2003 till 2007. This about three to four years after the private sector initiatives commenced in this sector. Insurance is a highly regulated industry , therefore the study also aims at examining the key IRDA regulations, in the context of the financial norms to be adhered to by all the new and existing insurers in the non – life Indian sector. The study thus examines the compliance of these norms by the non – in particular – the Solvency margins and Rural and Social Sector Obligations. This study is conducted on the non – life sector as this form of insurance gets the least attention by the

insured in India. Barring vehicle insurance which is compulsory, the other forms of property indemnities are rarely given the due attention particularly in the retail market.

India currently is at mid – size on non – life market but the predicted growth is attracting foreign investments and competition. The new private insurers are growing at a fast rate as such a study of this sector would be of extreme interest and relevance for both new and existing insurers in the Indian market. Data for the study was collected from the secondary source such as IRDA Annual reports, official gazettes and e-journals - available to the public over the web. Some of the Key findings from the study are: • The Combined ratio for all the insurers was more then 100. Combined ratio of all the private insurers has definitely been reducing gradually over the period of five years from 2003 to 2007 and getting close to 100 per cent but in case of public insurers the combined ratio has mostly remained the same or there has been a marginal increase. Public insurers have a very high capacity ratio at least 5 times that of the generally accepted upper limit of 3, all through out the span of five years. Except for Bajaj Allianz, ICICI Lombard and Reliance all the other private insurers maintained a capacity ratio well below three over the period of five years. This relatively high written premium’s not commensurate with the backing of equity is not a comforting sign. Public sector insurers continue to dominate in terms of amount of premium underwritten but private sector insurers continue to grow and penetrate at a very rapid pace. Average growth in net underwritten premium was 7.76 per cent in case of four public insurers while in case of eight private insurers it was 85.05 per cent. Growth in total net premium earned between year ending 2003 and 2004, in case of private insurers, was 98.42 per cent. Thereafter there was a steep decline in the growth rate of net premium earned; the annual growth between year 2006 and 2007 was 61.70 per cent. In case of private insurers the spread between premium underwritten and premium earned is showing an either decreasing or a sine wave trend from 2003 to 2007. In case of public insurers the pattern of spread over the five year period is slightly different. Operating profits over the span of five years are highly unstable and volatile for both public as well as private insurers. Thus trend in the growth of operating

profits is also highly varying. Operating profit as a percentage of net premiums earned also does not indicate any typical trend because of the volatile numerator. • Based on the findings the study recommendations are directed both to the insurance regulator as well as the Insurance companies both private and public.

Chapter 1: Introduction
1.1: Background
The insurance sector in the country has come to a full circle from starting off as a private market prior to the nationalization of the sector and now back to a liberalized market again, where both the public and private sector companies compete. An evolving and sustainable insurance sector is important for economic growth. The improved performance in the domestic economy is reflected in the insurance industry as well. Higher per capita income, increased domestic savings and availability of more instruments for parking surplus funds have facilitated growth in the activities of financial services1. The insurance penetration in a country depends on its level of economic activity, risk awareness among the people and the deepening of the financial system. With a large population and an untapped market, insurance industry has a huge growth potential in India. India is one of the world’s fastest growing economies, with real GDP rising to 9.4 per cent in 2006-07 as against 9.0 per cent in 2005-06. India’s share in world GDP thus has increased to 6.3 per cent in 2006 measured in terms of purchasing power parity. Growth in per capita income also accelerated to 8.4 per cent in 2006-07 from 7.4 per cent in 2005-06. Economic fundamentals strongly suggest that there is a tremendous potential for the insurance sector to attain a high growth level. The improved performance in the domestic economy is also reflected in the performance of the insurance industry. Higher per capita income, domestic savings and availability of more instruments for parking surplus funds have facilitated the growth in the activities of financial services like insurance. Insurance in India once was a synonym to Life Insurance Corporation (LIC) but it is slowly moving away from that. The opening up of the sector to the private players witnessed the introduction of number of new products and possibly making the Indian insurance markets as one of the fastest growing. The factors that support the possibilities for increased penetration of the Indian insurance market are the emerging socio – economic changes, increased wealth, education and increase awareness2. The insurance

sector in India was opened-up for private participation in the year 1999 and has completed seven years in a liberalized environment. By mid-2004, the number of insurers in India had been augmented by the entry of new private sector players to a total of 28, up from five before liberalisation. As many as 24 private companies have been granted licenses as of 31st March, 2007 to conduct business in life and general insurance (Table 1.1). Table 1.1 Key Market Indicators 20 07 $ 41.74 billion

2001 Size of Market, Life and $8 Billion a year Non - Life Total global insurance premium Rate of Annual Growth Average 20% (1990-99)

$ 3723 billion for Life Life: 47.38 per cent

Geograp hical Restrictio n for new players Equity Restrictio n in a new Indian insuranc e company Registrat ion Restrictio n

None, Players can operate all None, Players can operate all over the over the country country

Foreign promoter can hold up Foreign promoter can hold up to 26% of to 26% of the equity the equity

Composite available

registration

not Composite registration not available

Number Type of of Busine Registere ss d compani es Life Insurance General Insurance ReInsurance Total 1 4 1 6

Publi c Sect or

Priva Tot te al Secto r

Type of Busin ess

Public Sector

Private Sector

Total

10 6 0 16

11 10 1 22

Life 1 16 Insurance General 6 11 Insurance Re10 Insurance Total 8 27

17 17 1 35

At the time of opening up of the sector in 1999, insurance was viewed primarily as a tax saving device. However, policyholders’ perspective is slowly changing towards taking insurance cover irrespective of tax incentives. The insurable populace is looking for products which suit their specific requirements. As of now a variety of choices are available in the market meeting the requirements of different cross-sections of the society and across age groups. The level of penetration tends to rise as income levels increase. Within a span of 7 years since deregulation, industry has grown almost 5 fold from a USD 8 billion in 2001 to USD 41.74 in 2007. Growth rate of various businesses (Life and Non – life) has almost doubled (Table 1.1). This indicates the growing need and demand for insurance products coupled with improving understanding and awareness among the consumers since the entry of private companies. The Authority and the industry have been playing an active role in increasing consumer awareness about the importance of insurance. Insurance are reaching out to untapped semi-urban and rural areas through advertisement campaigns and by offering products suitable to meet the specific needs of the people in these segments. The insurers are increasingly introducing innovative products to meet the specific needs of the prospective policyholders.

Innovative products, imaginative marketing, and aggressive distribution has enabled upcoming private insurance companies to sign up Indian customer’s faster growing expectations at the time of opening up of the sector. A range of new products have been launched to cater to different segments of the market, while traditional agents are being supplemented by other channels including the Internet and bank branches. These developments are influential in propelling business growth. While IRDA continues to pursue a cautious approach in issuing licenses to new insurance companies and regulations continue to be stringent, existing companies have a huge potential to grow and penetrate huge Indian market in terms of both life and non – life insurance. Especially with saturation of many developed economies Indian market has become even more attractive for global insurance majors. The insurance market in India has witnessed dynamic changes including presence of a number of insurers in both life and non-life segment. On 7 December 1999 the government finally passed the Insurance Regulatory and Development Authority (IRDA) Act. This Act repealed the monopoly conferred to the Life Insurance Corporation in 1956 and to the General Insurance Corporation in 1972. The authority created by the Act is called the Insurance Regulatory and Development Authority (IRDA). Table 1.2 summarizes some of the milestones in the Indian insurance regulations. Key IRDA Regulations

Table 1.2: Milestones of insurance regulations in the 20th Century Yea Significant regulatory event r 191 First piece of insurance regulation promulgated – Indian Life 2 Insurance Company Act, 1912 192 Promulgation of the Indian Insurance Companies Act 8 193 Insurance Act 1938 introduced, the first comprehensive 8 legislation to regulate insurance business in India 195 Nationalisation of life insurance business in India 6 197 Nationalisation of general insurance business in India 2 199 Setting-up of the Malhotra Committee 3 199 Recommendations of Malhotra Committee released 4 199 Setting-up of Mukherjee Committee

5 199 6 199 7 199 7

Setting-up of an (interim) Insurance Regulatory Authority (IRA) Mukherjee Committee Report submitted but not made public The Government gives greater autonomy to LIC, GIC and its subsidiaries with regard to the restructuring of boards and flexibility in investment norms aimed at channelling funds to the infrastructure sector The cabinet decides to allow 40% foreign equity in private insurance companies – 26% to foreign companies and 14% to non-resident Indians (NRIs), overseas corporate bodies (OCBs) and foreign institutional investors (FIIs) The Standing Committee headed by Murali Deora decides that foreign equity in private insurance should be limited to 26%. The IRA Act was renamed the Insurance Regulatory and Development Authority (IRDA) Act Cabinet clears IRDA Act President gives assent to the IRDA Act

199 8

199 9

199 9 200 0

Features of the 1999 IRDA Act
The Insurance Regulatory and Development Act of 1999, was set up to protect the interest of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry. The Act effectively reinstituted the Insurance Act of 1938 with (marginal) modifications. Whatever was not explicitly mentioned in the 1999 Act was referred back to the 1938 act. The salient features of the 1999 IRDA Act and as applicable on March 2007 are discussed in the following pages. Licensing The IRDA Act, 1999, sets out details of registration of an insurance company along with renewal requirements. The minimum capital requirement for direct non-life and life insurance business is INR 100 crore (i.e. INR 1 billion). The IRDA regulates the entry and exit of players, capital norms, and maintains a strict watch on the equity and solvency situation of insurers. Should an application be rejected, the applicant will have to wait for a minimum of two years to make another proposal, which will have to be with a new set of promoters and for a different class of business.

For renewal, IRDA stipulates a fee of one-fifth of one percent of total gross premiums written direct by an insurer in India during the financial year pre-ceding the renewal year. It also seeks to give a detailed background for each of the following key personnel: chief executive, chief marketing officer, appointed actuary, chief investment officer, chief of internal audit and chief finance officer. Details of the sales force, activities in rural business and projected values of each line of business are also required. Further, the Act sets out the reinsurance requirement for (general) insurance business. For all general insurance a compulsory cession of 20%, regardless of the line of business, to the General Insurance Corporation (the designated national re-insurer) is stipulated. Currently, India allows foreign insurers to enter the market in the form of a joint venture with a local partner, while holding no more than 26% of the company’s shares. Compared to the other regional markets, India has more stringent restrictions on foreign access. Solvency Margins Insurers have to observe the required solvency margin (RSM). For general insurers, this is the higher of RSM-1 or RSM-2, where • RSM-1 is based on 20% of the higher of (i) gross premiums multiplied by a factor A*,21 or (ii) net premiums • RSM-2 is based on 30% of the higher of (i) gross net incurred claims multiplied by a factor B*, or (ii) net incurred claims • There is also a lower limit of INR 500 million (INR 1 Billion in case of reinsurer) for the RSM. In India, IRDA had prescribed the solvency ratio (Ratio of Actual Solvency Margin to the Required Solvency Margin) of 1.5 for all insurers. If this ratio is more or equivalent to 1.50 then the insurer is considered to be solvent. The detailed Factor A and Factor B tabulated by the IRDA Obligation of insurers to rural and social sectors The IRDA (Obligations of insurers to rural or social sectors) Regulations, 2002 lay down the obligations of insurers (registered post opening up of the sector) for the first six years of their operations. For general insurers share of premiums from the rural sector shall be, (a) 2% in the first financial year; (b) 3% in the second financial year; and (c) 5% thereafter (of total gross premium income written direct in that year). In addition, each company is obliged to service the social sector as follows. In respect of all insurers, (a) 5000 lives in the first financial year; (b) 7500 lives in the second financial year; (c) 10,000 lives in the third financial year; (d) 15,000 lives in the fourth financial

year; (e) 20,000 lives in the fifth financial year and (f) 25,000 lives in the sixth financial year. As of FY 2007 – 08 the Authority is in the process of reviewing the extent of obligations beyond the sixth year. While those who have entered in the seventh year of operations in the FY 2007-08 the obligations would continue to be as applicable to them in the sixth year of operations. Most of the private insurance companies are joint ventures with recognized foreign players across the globe. Consumer awareness has improved. Competition has brought more products and improved the customer service. It has a positive impact on the economy in terms of income generation and employment opportunities in the sector. An evolving insurance sector is of vital importance for economic growth. It encourages savings habit and also provides a safety to both enterprises as well as individuals by assuming the risk on behalf of them. 1.2 Statement of Problem India’s rapid rate of economic growth over the past decade has been one of the very significant developments in the global economy. This growth has been a result of the introduction of economic liberalisation in the early 1990s, which has allowed India to exploit its economic potential and raise the population’s standard of living. Insurance has a very important role in the growing economy. Health insurance and life insurance are fundamental to protecting individuals against the hazards of life and India, as the second most populous nation in the world, offers huge potential this type of insurance cover. Furthermore, non – life insurance such as fire insurance is essential for corporations to keep investment risks and infrastructure projects under control. By nature of its business, insurance is closely related to saving and investing. 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 liberalisation of industry has seen the entry of international insurers, an increase in the number of innovative products as well as distribution channels. 1.3 Purpose of Study The purpose of this study is to assess the financial performance of the Indian non - life insurance industry since 2003 till 2007. The study aims at highlighting key IRDA regulations to be followed by all the new and existing insurers in the non – life Indian sector. The study also assesses the compliance by the non – life insurers with key IRDA regulations – Solvency margins and Rural and Social Sector Obligations.

1.4 Objectives • • To study the financial performance of the non – life insurance sector in India. To assess the compliance with IRDA regulations towards Solvency Margins and Rural and Social Sector Obligations, by the non - life insurers operating in India.

1.5 Research Questions • • How has non – life insurance sector performed, financially, during the period 2003 to 2007? Have the insurers complied with the IRDA regulations for Solvency Margins and Rural and Social Sector Obligations during the span of 2003 – 2008?

1.6 Scope and Limitation • • • Study is confined to only 12 non – life insurance sector companies in India. This research is carried out within a time boundary and thus an in depth study could not be conducted. This research is carried out primarily on the secondary data, available in the form of reports and articles, due to time and resource constraints. Only the data available through public sources (internet, journals, magazines, annual reports etc.) is considered for the study. Study conducted for a period from year ending 2003 until year ending 2007. As such only the companies having operation over this span have been considered.

Chapter 2: Literature Review
This section provides a perspective to the subject of study i.e. financial performance of non – life insurance sector in India. This will simulate the reader as well as the researcher in to getting a deeper understanding of the sector and its financial performance. Literature review will help emphasize the reason why this study is important and relevant to the current scenario. Literature review involves extensive reading and helps the researcher to get a closer look at various insurers are performing. This research aims to promote a better understanding of non – life insurance in India today. In addition it would also provide background information on the right institutional and legal frameworks which an insurer operating in India needs to abide by. Literature review is not just meant to be a theoretical collection of concepts rather it is the work of people in the industry carried out based on the real time scenario and thus would give the researcher and anyone reading the report a more practical preview about the subject.

This chapter is further divided into following sections: 2.1 Conceptual Review 2.2 Empirical Review 2.3 Contextual Review 2.1 Conceptual Review In legal terms insurance is a contract whereby, for specified consideration, one party undertakes to compensate the other for a loss relating to a particular subject as a result of the occurrence of designated hazards. The normal activities of daily life carry the risk of enormous financial loss. Many persons are willing to pay a small amount for protection against certain risks because that protection provides valuable peace of mind. The term insurance describes any measure taken for protection against risks. When insurance takes the form of a contract in an insurance policy, it is subject to requirements in statutes, Administrative Agency regulations, and court decisions. In an insurance contract, one party, the insured, pays a specified amount of money, called a premium, to another party, the insurer. The insurer, in turn, agrees to compensate the insured for specific future losses. The losses covered are listed in the contract, and the contract is called a policy. When an insured suffers a loss or damage that is covered in the policy, the insured can collect on the proceeds of the policy by filing a claim, or request for coverage, with the insurance company. The company then decides whether or not to pay the claim. The recipient of any proceeds from the policy is called the beneficiary. The beneficiary can be the insured person or other persons designated by the insured. Insurance companies collect the premiums for a certain type of insurance policy and use them to pay the few individuals who suffer losses that are insured by that type of policy. A contract is considered to be insurance if it distributes risk among a large number of persons through an enterprise that is engaged primarily in the business of insurance. Warranties or service contracts for merchandise, for example, do not constitute insurance. They are not issued by insurance companies, and the risk distribution in the transaction is incidental to the purchase of the merchandise. Warranties and service contracts are thus exempt from strict insurance laws and regulations.

Types of Insurance
Insurance companies create insurance policies by grouping risks according to their focus. This provides a measure of uniformity in the risks that are covered by a type of policy, which in turn allows insurers to anticipate their potential losses and to set premiums accordingly4. The most common forms of insurance policies include life and non – life

(which includes health, automobile, homeowners' and renters', Personal Property, fire and casualty, marine, and inland marine policies etc). Life insurance provides financial benefits to a designated person upon the death of the insured. Many different forms of life insurance are issued. Some provide for payment only upon the death of the insured; others allow an insured to collect proceeds before death. A person may purchase life insurance on his or her own life for the benefit of a third person or persons. Individuals may even purchase life insurance on the life of another person. For example, a wife may purchase life insurance that will provide benefits to her upon the death of her husband. This kind of policy is commonly obtained by spouses and by parents insuring themselves against the death of a child. Health insurance policies cover only specified risks. Generally, they pay for the expenses incurred from bodily injury, disability, sickness, and accidental death. Health insurance may be purchased for one's self and for others. All automobile insurance policies contain liability insurance, which is insurance against injury to another person or against damage to another person's vehicle caused by the insured's vehicle. Auto insurance may also pay for the loss of or damage to, the insured's motor vehicle. Most states require that all drivers carry, at a minimum, liability insurance under a no-fault scheme. Homeowners' insurance protects homeowners from losses relating to their dwelling, including damage to the dwelling; personal liability for injury to visitors; and loss of, or damage to, property in and around the dwelling. Renters' insurance covers many of the same risks for persons who live in rented dwellings. As its name would suggest, personal property insurance protects against the loss of, or damage to, certain items of personal property. It is useful when the liability limit on a homeowner's policy does not cover the value of a particular item or items. For example, the owner of an original painting by Pablo Picasso might wish to obtain, in addition to a homeowner's policy, a separate personal property policy to insure against loss of, or damage to, the painting. Businesses can insure against damage and liability to others with fire and casualty insurance policies. Fire insurance policies cover damage caused by fire, explosions, earthquakes, lightning, water, wind, rain, collisions, and riots. Casualty insurance protects the insured against a variety of losses, including those related to legal liability, Burglary and theft, accidents, property damage, injury to workers, and insurance on credit extended to others. Fidelity and surety bonds are temporary, specialized forms of casualty insurance. A fidelity bond insures against losses relating to the dishonesty of employees, and a surety bond provides protection to a business if it fails to fulfill its contractual obligations. Marine insurance policies insure transporters and owners of cargo shipped on an ocean, a sea, or a navigable waterway. Marine risks include damage to cargo, damage to the

vessel, and injuries to passengers. Inland marine insurance is used for the transportation of goods on land and on land-locked lakes. Many other types of insurance are also issued. Group health insurance plans are usually offered by employers to their employees. A person may purchase additional insurance to cover losses in excess of a stated amount or in excess of coverage provided by a particular insurance policy. Air-travel insurance provides life insurance benefits to a named beneficiary if the insured dies as a result of the specified airplane flight. Flood insurance is not included in most homeowners' policies, but it can be purchased separately. Mortgage insurance requires the insurer to make mortgage payments when the insured is unable to do so because of death or disability.

Premiums
Premiums are a regular periodic payment for an insurance policy, also called insurance premium6. Different types of policies require different premiums based on the degree of risk that the situation presents. For example, a policy insuring a homeowner for all risks associated with a home valued at $200,000 requires a higher premium than one insuring a boat valued at $20,000. Although liability for injuries to others might be similar under both policies, the cost of replacing or repairing the boat would be less than the cost of repairing or replacing the home, and this difference is reflected in the premium paid by the insured. Premium rates also depend on characteristics of the insured. For example, a person with a poor driving record generally has to pay more for auto insurance than does a person with a good driving record. Furthermore, insurers are free to deny policies to persons who present an unacceptable risk. For example, most insurance companies do not offer life or health insurance to persons who have been diagnosed with a terminal illness.

Claims
An insurance claim is the actual application for benefits provided by an insurance company. The most common issue in insurance disputes is whether the insurer is obligated to pay a claim. The determination of the insurer's obligation depends on many factors, such as the circumstances surrounding the loss and the precise coverage of the insurance policy. Insurers Business Model Profit = earned premium + investment income - incurred loss - underwriting expenses Insurers make money in two ways - through underwriting, the process by which insurers selects the risks to insure and decide how much in premiums to charge for accepting those risks and by investing the premiums they collect from the insured. The most complicated aspect of the insurance business is the underwriting of policies. Using a wide assortment of data, insurers predict the likelihood that a claim will be made against their policies and price products accordingly. To this end, insurers use actuarial science to quantify the risks they are willing to assume and the premium they will charge

to assume them. Data is analyzed to fairly accurately project the rate of future claims based on a given risk. Actuarial science uses statistics and probability to analyze the risks associated with the range of perils covered, and these scientific principles are used to determine an insurer's overall exposure. Upon termination of a given policy, the amount of premium collected and the investment gains thereon minus the amount paid out in claims is the insurer's underwriting profit on that policy. Insurance companies also earn from investment. Available reserve is the amount of money, at hand at any given moment that an insurer has collected in insurance premiums but has not been paid out in claims. Insurers start investing insurance premiums as soon as they are collected and continue to earn interest or returns on them until claims are paid out.

2.2 Empirical Review
The property/casualty (P/C) insurance industry reported an annualized statutory rate of return on average surplus of 12.3 percent in 2008, down from 14.4 percent in 2007. The decline in profitability in 2008 was expected and is primarily attributable to a marginal deterioration in underwriting performance, which pushed the full-year combined ratio up to 95.6 from 92.4 in 2007. Net written premium growth was down 0.6 percent in 2007, the first such decline since 1943. At the same time policyholder surplus, a measure of capacity increased 6.5 percent to a record US $517.9 billion. Though profits remained reasonably strong, industry margins did fall short of those realized by the Fortune 500 group of companies, which turned in an estimated average return on equity (ROE) in the 13 to 14 percent range in 2008. Net written premiums declined by $2.6 billion or 0.6 in 2008, down from a 4.2 percent increase during in 2007, which experienced strong growth in property-related insurance premiums in hurricane-exposed areas. Last year’s decline was the first in 64 years, when premium growth fell in 1943 in the midst of World War II. One observation from 2007 is that insurer profits going forward will become increasingly dependent on investment earnings as underwriting performance steadily deteriorates. Table 2.1 Industry income statement * ($ Billions) Particulars $ Net Earned Premiums 439. 1 Incurred Losses (Including loss adjustment 298. expenses) 6 Expenses 119. 1 Policyholder Dividends 2.4 Net Underwriting Gain (Loss) 19.0 Investment Income 54.6 Other Items -0.9

Pre-Tax Operating Gain Realized Capital Gains (Losses) Pre-Tax Income Taxes Net After-Tax Income Surplus (End of Period) Combined Ratio

72.7 9.0 81.7 19.8 61.9 517. 9 95.6

Worldwide insurance premium amounted to US $ 3723 billion in 2006 comprising of US $ 2209 billion in life and US $ 1514 billion in general insurance business. At this level the premium has increased by 5.0 per cent in real terms in 2006 as compared to 2.5 per cent in 2005. The growth in life insurance premium was about 7.7 per cent which is the highest since 2000. In most of the countries the growth in life insurance premium was faster than growth in the economic activity. The global non-life business grew by 1.5 per cent in 2006 recovering from previous year’s stagnation. The global growth performance in non-life business varied between industrialized countries and emerging markets. While industrialized countries had shown a small growth of 0.6 per cent, the emerging markets exhibited a robust growth of 11.0 per cent in the non-life insurance business. This growth was higher than 7 per cent recorded in 2005. In emerging markets, strong economic developments and introduction of mandatory cover in areas such as motor, third party liability and health were key drivers of growth. Strong underwriting discipline and absence of major catastrophes helped improving the profits of general insurance business in 2006. As some of the Asian economies like Hong Kong, Singapore, Taiwan and South Korea are being reclassified as industrialized countries, the premium share of industrialized countries increased to 92.0 per cent in 2006 from 87.0 per cent in 2005. The share of emerging markets in the total world premium was 8.0 per cent in 2006. The global outlook for 2007 suggests a mixed picture. While healthy growth is expected in life insurance with strong development of savings and pension products, the non-life insurance premiums are likely to stagnate. The outlook for profits remains robust with life sector making further progress on profitability. The combined ratios for non-life insurance are expected to deteriorate due to sluggish premium growth thereby affecting profitability. insurance companies have tended to play it safe, pursuing incremental improvements to keep products evolving in step with the market. That’s clearly important but they also need to establish some development tracks that pursue breakthrough offerings with potential to fundamentally boost their competitiveness. Companies will need to look beyond the products themselves, and consider ways to create broader value propositions that combine products, services, and distribution strategies.

2.3 Contextual Review
Growth is a constant in the insurance industry. To become, or remain, a major player, insurers are expected to consistently deliver double-digit revenue growth. Mergers and acquisitions, geographic expansion, product development, cross-selling and client retention are all vital strategies. Insurers are expanding into emerging markets such as Central and Eastern Europe (CEE), Russia and India, which are generally underinsured but increasingly affluent. In the mature markets, demographic changes are driving new product development as insurance companies adjust to the changing needs of their core domestic client base. Insurance companies recognise that continued growth, especially top – line revenue growth, is critical to success. Driving growth will be more challenging than before for property and casualty (P & C) insurers in 2007, as the market in expected to soften. Meanwhile, life insurance companies continue to focus on investing to grow their business, with many insurers targeting the expanding retirement market. To succeed with their growth initiatives, insurance companies will need to find ways to bring innovative new products to customers, enhance distribution, and develop effective approaches to seize opportunities presented by emerging markets. In the countries of Central and Eastern Europe (CEE) and the Commonwealth of Independent States (CIS), economies are growing and the regulatory environment for insurance is strengthening. Since the insurance markets of Central and Eastern Europe began to open up to foreign investment in the early 1990s, there has been increased presence in the region of most of the major global insurance groups. In the early years the main emphasis was on establishing a presence, building a network and gaining market share. Many of the former state monopolies have been privatized, new companies have been set up by national as well as international investors and regulation and regulators have been bolstered. Yet, despite strong growth rates over the last 15 years, and impressive figures of 19 percent growth in life and 9 percent in non-life insurance in 2006, the region’s insurance markets continue to lag behind Western Europe, both as a percentage of GDP and per capita. To put this into perspective, the total written premiums for the combined CEE/CIS region are slightly higher than those of Ireland while the combined population exceeds that of the United States of America. It would be a mistake to treat the region, even if one excludes Russia from the definition, as homogenous. When one considers economic development, population, pension and health reform, regulation, European Union membership or even demographics, no two countries are alike. Most obviously, the countries vary widely in size – the populations of Ukraine, Poland and Romania amount to more than 100 million; the three Baltic States total just 7 million in aggregate. More generally, the countries’ insurance markets are also

at very different stages of their economic and regulatory development. However, while there is little downside in terms of risk and uncertainty in approaching developing countries like Ukraine, Belarus, Albania or Serbia studies have shown that majority of benefits are for companies which entered the markets first. Because of the diversity of the region, any approach has to be tailored to meet the specific market, economic and political situation of the target country. Performance across a range of different financial indicators, and ultimately delivering strong and consistent earnings, is crucial. Cost management, operational excellence and the optimization of business operating models are all on the agenda. Many of the larger insurers are complex, diverse entities that have been very successful in mergers and acquisitions and in growing their product sets and geographic scope. There is huge potential in the industry for increased IT investment, improved operational efficiency and cost savings. Why should an insurance group, awash with cash, prioritize effective cash management? The general insurance industry generates an abundance of cash, retains it for long periods, and pays out vast amounts in claims settlements, so why should there be a concern about the financial performance? It is simply because cash management affects profitability. It’s surprising then that cash management does not seem to be at the top of every insurance group’s agenda. If premium income, reinsurance claims and investment income are the metaphorical taps supplying the “cash” bath then claims payments, reinsurance premium and operating expenses are the main items forming an orderly queue down the drain. Effective cash management is about maximizing the flow through the taps, letting as little down the drain as possible and limiting the amounts lost through splashes caused by inefficient management of the cash operating cycle. Ultimately it is about keeping the level of bath water as high as possible to improve returns to shareholders. So where do the leakages and splashes come from that might flush a group’s profits down the drain?

Premium income leakages
• • • • • • Bad debts, where the underwriting team focus on writing the risk itself but not on the insured’s ability to pay. Incomplete and inaccurate billing. Failure to process reinstatement premiums promptly Ineffective credit control The net accounting system which means that companies may not even be aware who they are owed premium by, let alone chase it Unallocated cash.

Reinsurance function leakages
• Failure to claim resulting from inadequate linkage between inwards claim agreement and processing of reinsurance collection notes

• • • • •

Time lags between inwards claims being paid and the associated reinsurance being billed Bad debt through reinsurer credit risk Avoidance by re-insurers through poor or missing policy wording Inadequate credit control policies and procedures Unallocated cash not being processed.

Investment income leakages
• • • • • Lack of a group-wide treasury function pooling all the group’s free cash and maximizing returns on a group basis The treasury function not being equipped to follow industry best practice Lack of a system to upstream cash leading to monies sitting in low or no interest rate accounts for too long Lack of cash forecasting leading to investment penalties when monies are required at short notice Inefficient or non-existent asset versus liability matching leading to losses from interest rate and exchange rate fluctuations.

Performance of insurance company in financial terms is normally expressed in net premium earned, profitability from underwriting activities, annual turnover, return on investment, return on equity etc. These measures can be classified as profit performance measures and investment performance measures (Fig 2.1). Profit performance includes the profits measured in monetary terms. It is the difference between the revenues and expenses. Investment performance can take two different forms. One the return on assets employed in the business other than cash, and two, return on the investment operations of the surplus of cash at various levels earned on operations. All the financial measures mentioned pertain to the efficiency of operations. Key Financial Indicators: 1. Gross and Net premium 2. Profit from underwriting 3. Average profit per branch and per employee 4. Average cost per each type of policies 5. Average annual cost per employee 6. Return on Investment & other lending activities

Performance is evaluated both on financial and non-financial achievements of business. Financial performance is understood in terms of various financial ratios, which are divided as profit performance measures and investment performance measures. Nonfinancial measures include a range of indicators with orientation of customers, growth, and value to the community and societies. Maintaining a balance between these measures in order to achieve success is a highly growing concern among the managers in modern organizations. Financial Performance Profit Performance Investment Performance Net Premium Earned Profit from Underwriting Activities Investment in Companies Assets Investments Outside Governance is crucial in an industry that is fundamentally concerned with the management of risk and is closely watched by a range of global, national and state regulators. Insurance companies face challenges to improve the quality of their risk management, underwriting discipline and risk pricing. In many cases improvements are still required in the basic documentation and reporting of risk. Extensive pressures are being faced by insurance finance functions to ensure they continue to support the strategic needs of the business. At the same time, finance teams have to address a number of other issues that affect their day-to-day operations. Many local and international insurance companies are focusing on both organic and nonorganic growth in Asia as a key element of their business strategies. Finance teams are required to be knowledgeable to review and check the reasonableness of this information for financial reporting purposes. While potential for growth of insurance sector in India is tremendous, deepening of the financial system within the sector will make businesses more cost effective and profitable. Finance function needs to be viewed less as a support function and more as strategic and business led service.

Chapter 3: Research Methodology

3.1 Nature of Study

This study is exploratory in nature. The chapter deals with an historical perspective of the Indian insurance industry followed by the research design and a detailed method of analysis used to conduct the study.

3.2 Indian Insurance Industry - A Historical Perspective
Insurance first arrived in India through a British company called the Oriental Life Insurance Company in 1818, followed by the Bombay Assurance Company in 1823, and the Madras Equitable Life Insurance Society in 1829. The first general insurance company, Triton Insurance Company Limited, was established in 1850. For the next hundred years, both life and non-life insurance were confined mostly to the wealthy living in large metropolitan areas. Regulation of insurance companies began with the Indian Life Assurance Companies Act, 1912. In 1938, all insurance companies were brought under regulation when a new Insurance Act was passed. It covered both life and non-life insurance companies. It clearly defined what would come under life and non-life insurance business. The Act also covered, among others, deposits, supervision of insurance companies, investments, commissions of agents and directors appointed by the policyholders. This piece of legislation lost significance after the insurance business was nationalised in 1956 (life) and 1972 (non-life), respectively. When the market was liberalized again to private participation in 1999, the earlier Insurance Act of 1938 was reinstated as the backbone of the current legislation of insurance companies, as the IRDA Act of 1999 was superimposed on the 1938 Insurance Act. Since opening up of the insurance sector in 1999, 24 private companies have been granted licenses by 31st March, 2007 to conduct business in life and general insurance. Of the 24, 15 were in the life insurance and 9 (including a standalone health insurance company) in general insurance.

3.2.2 Non - Life Insurance Business
Non-life insurance was not nationalised in 1956 along with life insurance. This was done on the grounds that general insurance was a part and parcel of the private sector of trade and industry and functioned on a year to year basis. Any Errors and omission in the conduct of its business would not directly affect the individual citizen. Life insurance business, on the contrary, directly concerned the individual citizen whose savings, so vitally needed for economic development, would be affected by any errors or an act of folly on the part of those in control. Sixteen years later, in 1972, non-life insurance was finally nationalised. At that time there were 107 general insurance companies. They were of different sizes, operating at different levels of sophistication. Upon nationalisation, these businesses were assigned to the four subsidiaries (roughly of equal size) of the General Insurance Corporation of India (GIC).

GIC was also designated the national reinsurer. By law, all domestic insurers were to cede 20% of their gross direct premium in India to the GIC. The idea was to retain as much risk as possible domestically. After the passage of the 1999 IRDA Act, the GIC was de-linked from its four subsidiaries. Each subsidiary, with their headquarters based in the four largest metropolitan areas, became independent. The only function the GIC retained was that of national reinsurer. However, the government still remains the sole owner of the four former GIC subsidiaries. As of March 2007, there were as many as 17 general insurance companies of which 11 are private companies and 6 are public companies. Among the 6 public sector general insurance companies, there are two specialised insurance companies viz. Agricultural Insurance Company, which handles Crop Insurance business and Export Credit Guarantee Corporation which transacts export credit insurance. Besides these two specialized companies there are also two standalone health insurance companies in the private sector, of which one has not commenced operations as of 2007.

3.3 Research Design
This study is conducted for non – life sector as this form of insurance is least popular in India. India currently is a mid – size non – life market but the predicted growth is attracting foreign investments and competition. The new private insurers are growing at a fast rate; as such a study of this sector would be of extreme interest and relevance for new or existing insurers in the Indian scenario. The general insurance industry generates an abundance of cash, retains it for long periods, and pays out vast amounts in claims settlements. Since efficient management affects profitability, there is a need to be concerned about the financial management of these insurers. If premium income, reinsurance claims and investment income are the metaphorical taps supplying the cash then claims payments, reinsurance premium and operating expenses are the main items forming an orderly queue down the drain. This study uses secondary data available from IRDA Annual reports. It also uses government documents such as gazettes available to public. Published e-journals have also been used as a source of secondary data.

3.4 Mode of Analysis
The financial analysis has been carried out using ratios. Various graphical tools such as bar charts and tables have also been used. Analysis is carried out based on facts and statistics about the industry. Some of the ratios used as financial performance indicators are mentioned below:

• • • •

Claims Ratio = Net Claims / Net Premium Earned Return on Equity = Profit After Tax / Equity Combined Ratio = (Incurred Claims + Expenses) / Net Earned Premium Capacity Ratio = Underwritten Premium / Equity

Combined ratio is a measure of profitability used by an insurance company to indicate how well it is performing in its daily operations. Capacity ratio is a statistic which reflects insurer’s leverage of equity in terms of premium underwritten. In order to provide insurance coverage the insurance company has to pledge assets to support the losses on that insurance. This surplus is provided to the insurance companies by the investors in the form of equity. Thus limiting factor for overall insurance capacity is the equity available. Other financial measures analysed are Net premium earned, Net premium written, Operating profits, Profit after tax, Equity Share Capital, and Reserves. Compliance with the two of the key IRDA regulations – Solvency Margins and Rural and Social Sector Obligations – has also been analysed.

Chapter 4: Insurance Industry Analysis

4.1 Compliance Solvency Margin and Rural and Social sector obligation 4.1.1 Solvency Margins
Based on the facts available in the IRDA annual reports, except TATA AIG all other private insurers have maintained the solvency margins through out the period between 2003 and 2008. TATA AIG was unable to maintain the solvency ratio from 2003 until 2005. In 2006 and 2008 it maintained a solvency ratio of 1.68 and 1.85 respectively. In case of public insurance, New India and United have consistently maintained solvency ratio higher then 1.5 from 2003 to 2007. Solvency ratio of New India was always above 3 while that of United was always above 2.2. Oriental’s solvency ratio was below 1.5 until 2005. In 2006 and 2007 Oriental maintained a solvency ratio of 1.97 and 2.17 respectively. National insurance had a solvency ratio of 2.03 in 2003 before it dipped below 1.5 and continued to remain below the stipulated level until 2006. In 2007 national insurance managed a solvency ratio of 1.76.

ICICI Lombard and Bajaj Allianz improved their solvency margins from 1.29 and 1.22 respectively in 2005 – 06 to 2.08 and 1.56 in 2006 – 07 respectively. All 4 public and 8 private sector companies maintained the stipulated solvency margins thus complying with the IRDA regulations.

4.1.2 Rural and social sector Obligations
The Regulations framed by the Authority on the obligations of the insurers towards rural and social sectors stipulate obligations to be fulfilled by insurers on an annual basis (as detailed in chapter 4.1). For meeting these obligations the regulations further provide that if the operation of the insurer is less than 12 months, proportionate percentage or number of lives, as the case may be, shall be underwritten. In addition, public sector general insurance companies are required to ensure that the quantum of insurance business in the rural and social sector underwritten by them shall not be less than what has been recorded in 2001-02 i.e. before the issue of regulations.

Rural Sector Obligations of the Eight private insurers in 2003 five insurers have met, both the rural and the social sector obligations. In one instance insurer met the social sector obligation but fell short of compliance on the rural sector and was asked to ensure compliance in the following year of operation. Two insurers –Cholamandalam and HDFC Chubb - commenced operations only during the year 2002 – 03 and thus their compliance is too early to gauge. The four public sector insurers were required to underwrite rural and social sector business during the year, which was in excess of the business underwritten in the financial Year 2001-02. As such, the public sector non-life insurers met with their obligations under the regulations. During the year ending 2004, among eight private insurers seven met their rural and social sector obligation. HDFC Chubb which was for whom 2003 – 04 was first full year of operation failed to comply with rural as well social sector obligation for the second time and a clarification was sought for. Cholamandalam which fell short of rural and social sector obligation in 2003 made up for the shortfall in 2003 – 04 while also complying to the that years obligations. Amongst the public sector non-life insurers, while the four insurers complied with the rural sector obligations for the year 2003-04, in case of two insurers there was a shortfall in compliance with the social sector obligations. All the eight private sector non-life insurers met their rural and social sector obligations in the financial year 2004-05. While the four public sector insurers complied with the rural sector obligations for the year 2004-05, in case of two insurers there was a shortfall in the compliance with respect to their social sector obligations. As per IRDA all eight private sector non – life insurers met their rural and social sector obligations in 2006 –

07. All four public sector insurers also complied with the rural sector obligations for 2006 – 07. While, three public sector insurers complied with the social sector obligations for 2006-07, New India Assurance Co. Ltd. fell short of compliance towards the sector. New India Assurance was levied a penalty of INR 500 thousand for non-compliance with its social sector obligations and was advised to fulfill the shortfall in 2007-08 and 2008-09.

4.2 Financial Performance of the Non – life Insurance Sector
There are at present 17 general insurance companies which have been granted registration for doing non-life insurance business in the country. Of these 6 are in public sector and the rest in private sector. Of the 11 private sector companies, two have been granted license during 2007-08. As such their financial data has not be included in this analysis. A stand alone health insurance company was licensed in March 2006. Of the public sector companies, two are specialized insurance companies; one for credit insurance (ECGC) and another for Agriculture (AIC). Thus the analysis is this section is confined to 4 public sector companies and 8 private insurance companies. Premium Written The analysis reveal that the average underwritten premium growth was at 7.76% in the case of the 4 public insurers and at an average of 85.08% in case of 8 private insurers, in the span five years from 2003 to 2007. From the analysis, Fig 4.1 indicates seen private sector companies are witnessing a steeper growth in terms of premium underwritten as compared to the public sector companies. Though public sector companies dominate the amount of premium underwritten, private sector insurers continue to grow at a rapid pace and pose a serious competition. From 2003 to 2007 public sector witnessed an increase of almost INR 3500 crore in the amount of premium underwritten, while during the same period private sector insurers had a growth of about INR 7500 crore – more than twice as that of their public sector counterparts.

Net Premium Earned Analysis of total net premium earned shows a very interesting trend as in Fig 4.2. Between years ending March 03 and March 04 premium earned by the private insurers grew at 98.42%. Thereafter the sector witnessed a significant dip and annual percentage growth in premium earned came down to 61.70% at the end of year 2007. Net earned premium for the private sector grew at an average rate of 75.78% over the span of five years.

Public sectors insurance companies had a much more steady growth as compared to the private sector insurers. Between periods of 2003 to 2004 public sector witnessed a growth of 9.30%. In the following two years there as a decline but the decline was not as steep as in case of private insurers. Net premium earned by the public sector insurers declined to 6.25% for the year ending 2005, with reference to previous year, before climbing again and witnessing an annual growth 8.15% for the year ending 2007. Net premium earned by the public sector was at an average rate of 7.60% from 2003 to 2007. Non – life insurance industry on the whole saw a trend similar to that of public sector in terms of premium earned as can be seen from fig 4.2. Annual growth at the end of year 2004 was 12.92%. This growth came down to a relatively insignificant low of 11.56% before increasing again and reaching annual growth rate of 17.04% at the end of year 2007. Average rate of net premium earned by the non – life industry was 13.67% from year ended 2003 to year ended 2007. Based on the analysis, company wise premium earned from 2003 to 2007 is been highlighted in Fig 4.3 (Private insurers) and Fig 4.4 (Public insurers).

Private insurers like Royal Sundaram and TATA AIG had a relatively steady growth rate in the net premiums earned over the span of five years as may be seen in Fig 4.3. However, premium earned by these two companies went up by almost four times within a span of five years.

In case of companies like reliance the premium earned went up from INR 9.31 crore in 2003 to INR 244.26 crore in 2007. Premium earned for ICICI Lombard went up from INR 27.22 crore in 2003 to INR 1066.65 crore in 2007; increase by almost 39 times within five years. Bajaj Allianz has also been witnessing an abnormal growth pattern in the net premiums earned. Cholamandalam and HDFC Chubb witnessed an abnormal growth from 2003 to 2004 but since that the annual rate of net premiums earned has stabilised as until 2007. Such abnormal growth in premiums earned could be attributed to the aggressive attempts made by the private insurers to penetrate the market besides the introduction of innovative products and use of various distribution channels. On the contrary to private insurers public insurers have been experiencing a very steady growth in the net premiums earned Fig 4.4. However, the premium earned by public insurers is much higher than that by the private insurers because of the pre-liberalisation monopoly enjoyed by these public insurers. This monopoly gives public insurers a vast existing customer base compared to private insurers who are still trying to penetrate the market. National Insurance had a minor increase in net premium earned during the years 2004, 2005 and 2006 however for 2007 the amount was almost the same as 2006. New India insurance continuously experienced a growth in premium earned all through the five years but at a steady rate. Oriental also experienced a steady growth similar to that of

New India. United India however experience hardly any growth in terms of premium earned over the span of five years. Public insurers thus face a competitive threat from the private insurers who are able to penetrate the market deeper and thus add to their premium earned each year at rates much higher then that of the public insurers.

Spread Between written and earned premium as a percentage of written premium
As analysed from Table 4.1, in case of private insurers this spread is showing an either decreasing or a sine wave trend from 2003 to 2007. Bajaj Allianz and ICICI Lombard show a relatively steady spread. Bajaj Allianz had a spread of 14.75 per cent in 2003 which went up to 22.61 per cent in 2005 and again came down to 19.35 per cent in 2007. While ICICI Lombard in 2003 has a spread of 38.84 per cent which went up to 39.08 per cent in 2004 before starting to decrease and came down to 26.48 per cent. This trend in Bajaj Allianz and ICICI Lombard indicate a relatively stable business in terms of insurance covers underwritten, over the five year span.

Table 4.1 Spread between written and earned premium as percentage of written premium Insurer 2006 - 2005 – 2004 - 2003 - 2002 07 06 05 04 03 Private Bajaj Allianz 19.35% 16.08% 22.61% 19.47% 14.75% Cholamandalam 20.08% 10.31% 20.60% 50.68% 75.56% HDFC Chubb -5.39% 3.69% 11.17% 55.06% 93.56% ICICI Lombard 26.48% 28.10% 32.81% 39.08% 38.84% IFFCO TOKIO 5.68% 27.66% 25.30% 24.83% 43.60% Reliance 51.57% 2.83% 22.48% 23.80% 51.63% Royal Sundaram 14.37% 15.98% 14.06% 15.40% 29.93% Tata AIG 8.22% 15.21% 12.38% 23.87% 34.58% Public New India 4.56% 5.10% 3.28% 1.25% 6.24% United 6.18% 1.42% 0.46% 0.68% -0.81% Oriental 6.56% 5.78% 4.28% 2.98% 2.25% National 3.07% -2.99% 5.93% 4.82% 7.74% On the other hand for HDFC Chubb which had a spread of 93.56 per cent in 2003 it came down to -5.39 per cent in 2007. This trend indicates that insurer has hardly underwritten any policies over the span of five years and is only earning primarily from the premium of already existing policy holders. Similarly, all the other private insurers show a decreasing trend, with a very high spread in 2003 but the spread has decreased at a

relatively fast pace. Such trend could primarily be a result of decrease in business in terms of policies underwritten as against the premium earned, while the risk of defaulting on the part of the insured’s could also be a factor. In case of public insurers the pattern of spread over the five year period is slightly different. United and New Oriental insurance show an increasing trend of spread from 2003 to 2007. In 2003 spread for United was -0.81 per cent, this went up to 1.42 per cent in 2006 before a sudden increase to 6.18 per cent in 2007. While in case of Oriental there has been a steady increase from 2.25 per cent in 2003 to 6.56 per cent in 2007. In case of New India and National a decrease in spread can be seen. In 2003 spread for New India was 6.24 per cent and that for National was 7.74 per cent. This decreased to 1.25 per cent in 2003 for New India and -2.99 per cent in 2006 for National. In 2007 spread was at 4.56 per cent and 3.07 per cent respectively for New India and National. Though the spread is much lower and stable compared to that of private insurers there is no constant trend indicating a high variance in terms of amount of business underwritten or irregular earnings of premium from already existing insured’s. Incurred Claims Ratio Total net incurred claims during 2007-08 was INR 13041.64 crore as against INR 12118.07 crore in 2005-06, increase of 7.62 per cent over the 2005 - 06. Average claims ratio for private insurers from 2003 – 2007 was approximately 75.75 per cent while that for public insurers was 86.24 per cent, as analysed. Table 4.2 Incurred Claims Ratio Insurer 2006 - 2005 07 06 Private Bajaj Allianz 66.26% 69.92% Cholamandalam 55.60% 77.98% HDFC Chubb 57.05% 57.63% ICICI Lombard IFFCO TOKIO Reliance Royal Sundaram Tata AIG Public New India United Oriental National 76.30% 72.79% 70.90% 61.08% 54.27% 80.34% 90.26% 87.66% 86.51% 73.77% 70.54% 63.81% 64.81% 56.08% 88.13% 93.09% 87.64% 102.43 % 2004 05 61.02% 77.03% 66.36% 71.78% 67.99% 79.87% 65.62% 55.14% 77.11% 92.41% 89.88% 84.96% - 2003 04 65.30% 87.66% 77.87% 88.58% 72.68% 90.20% 67.77% 58.89% 75.60% 86.22% 80.49% 88.36% - 2002 03 69.22% 56.36% 209.52 % 65.48% 72.13% 205.69 % 76.60% 72.47% 81.87% 90.33% 79.03% 82.39% -

Analysis in Table 4.2 gives the incurred claims ratio by 12 non life insurers over a five year period. HDFC Chubb and Reliance has a very high claims ratio in the year ending March 2003 because it was their initial year of operations. HDFC Chubb and Reliance had a claims ratio of 209.52 per cent and 205.69 per cent in the year ending 2003 which came down to 57.05 per cent and 70.90 per cent, respectively, in 2007.

IFFCO TOKIO and Bajaj Allianz have maintained almost same claims ratio over the five year period at an average of 66.34 per cent and 71.34 per cent respectively. In case of ICICI Lombard claims ratio has gone up from 65.48 per cent in 2003 to 76.30 per cent in 2007. Cholamandalam initially had a claims ratio of 56.36 per cent in the year 2003 which went up to 87.66 per cent in 2004. Then ratio again started to come down again in the following year to approximately 77 per cent and was down to 55.60 per cent at the end of 2007. On an average TATA AIG maintained lowest claims ratio of 59.37 per cent over the five year period while reliance had the highest average claims ratio of 102.09 per cent, followed by HDFC Chubb having an average claims ration 93.68 per cent over the five year period (Fig 4.5). From the analysis it may be seen that in case of public insurers, New India insurance had a claims ratio of 81.87 per cent in 2003 which went down to 77.11 per cent in 2005 before rising again to 80.34 per cent for year 2007. Average claims ratio over the five year period in case of New India was 80.61 per cent (Fig 4.5).

United India insurance had claims ratio at 90.33 per cent in 2003 which came down to approximately 86 per cent in 2004 before starting to rise again and going up to 93.09 per cent at the end of 2006 and back to 90.26 per cent in 2007. The five year average claims ratio for United India was 90.46 per cent (Fig 4.5).

Oriental insurance experienced a claims ratio of 79.03 per cent at the end of 2003. This ratio continued to increase in the following year touching a high of 89.88 per cent in 2005 and then coming down to 87.66 per cent in 2007. The average claims ratio for Oriental insurance was 84.94 per cent for the five year period (Fig 4.5).

National insurance maintained a fairly stable claims ratio except in 2006 when its claims ratio went up to 102.43 per cent. Claims ratio for National was at 82.39% in 2003 which went up to 88.36 per cent in 2004 and in 2007 came to 86.51 per cent. Average claims ratio was 88.93% in case of National insurance (Fig 4.5). Combined Ratio A ratio below 100 per cent indicates that the company is making an underwriting profit while a ratio above 100 per cent means that it is paying out more money in claims that it is receiving from premiums. Table 4.3 gives the combined ratio for all the public and private non – life insurers operating in India. Analyses reveal that all the insurers throughout the five year span have had a combined ratio greater 100 per cent.

Table 4.3 Combined Ratio Insurer 2006 - 2005 07 06 Private Bajaj Allianz 107.55 105.50 % % Cholamandalam 118.05 142.60 % % HDFC Chubb 102.63 99.31% % ICICI Lombard 123.06 130.29 % % IFFCO TOKIO 110.18 114.73 % % Reliance 144.97 114.29 % % Royal Sundaram 101.97 106.83 % % Tata AIG 104.98 109.01 % % Public New India 105.76 119.85 % % United 127.95 137.60 % % Oriental 115.70 123.76 % % National 115.61 134.37 % %
Data Source: IRDA Annual reports

2004 05 101.20 % 137.46 % 105.00 % 141.78 % 104.65 % 151.30 % 107.65 % 101.95 % 108.65 % 132.31 % 124.26 % 117.22 %

- 2003 04 108.94 % 225.85 % 179.05 % 201.64 % 120.53 % 216.79 % 117.50 % 111.87 % 112.88 % 123.53 % 120.14 % 118.95 %

- 2002 03

-

112.49 % 1233.64 % 2388.10 % 219.50 % 195.37 % 491.95 % 148.96 % 140.58 % 108.89 % 119.84 % 114.19 % 112.95 %

A ratio greater then 100 per cent does not necessarily mean that company is making losses, because this does not include investment income, but it does indicate that there is need for more efficient management within the non – life insurers. Insurers are continuously paying more then what they are earning in the form of premiums. Combined ratio for all the private insurers has improved gradually over the span of five years. Bajaj Allianz had a better combined ratio among all the private insurers. It maintained a ratio of 113 per cent in 2003 which is now come down to 108 per cent as of 2007. Cholamandalam and HDFC Chubb had an extremely high combined ratio in 2003 (Table 4.3) but since then it has come down drastically. Reliance had almost 500 per cent combined ratio in 2003 which has now come down to 145 per cent as of 2007. ICICI

Lombard and IFFCO TOKIO also had a combined ratio around the 200 per cent mark in 2003 which is come down to 120 per cent and 110 per cent respectively, as of 2007. In case of Royal Sundaram and TATA AIG the combined ratio was at 148 per cent and 140 per cent respectively in 2003 which as of 2007 has come down to 102 per cent and 105 per cent respectively. Though there is no particular pattern of movement in the combined ratio of all the private insurers, it has definitely been reducing over the period and getting close to 100 per cent for most of the private insurers. Analysis further shows that public insurers have not had much change in the combined ratio over the five years. In case of United India combined ratio as a matter of fact has gone up from 120 per cent in 2003 to 128 per cent in 2007. New India insurance had a combined ratio of 109 per cent in 2003 which is come down to only 106 per cent in 2007. The same in case of Oriental and National insurance has gone up from marginally from 114 per cent and 113 per cent in 2003 respectively to 116 per cent in 2007 for both. Looking at the combined ratio it can definitely be said that while private insurers are able to more efficiently reduce expenses or manage claims or even increase their premium earned, the public insurers have not been able to do the same. The fact that the combined ratio for private insurers has changed a lot over the five years but not so in case of public insurers over the same period leaves a scope of improvement for the management of public life insurers.

Capacity Ratio
Capacity ratio is a ratio of underwritten premium to equity. It is a statistic which reflects insurer’s leverage in terms of premium underwritten. It is generally considered that capacity ratio should not exceed 3. Table 4.4 analyses the capacity ratio of public and private non – life insurers over the span of five years from 2003 to 2007. From the analysis it may be seen that between private and public insurers, public insurers have a very high capacity ratio at least five times that of the generally accepted upper limit of 3. Among the private insurers Bajaj Allianz initially maintained a capacity ratio of 1.65 and 2.61 in 2003 and 2004. But it has gone up significantly since then and in 2007 the capacity ratio was 9.44 for Bajaj Allianz. ICICI Lombard and Reliance also had a capacity ratio much higher then 3 in 2007. Capacity ratio of ICICI Lombard gradually increased from 0.41 in 2003 to 3.00 in 2006 and 4.32 in 2007. However, in case of Reliance capacity ratio in 2003 was 0.19 and 0.54 in 2006 before it suddenly went up to 4.89 in 2007. All the other private insurers maintained a capacity ratio well below three over the period of five years.

Table 4.4 Capacity Ratio Insurer 2006 07 Private Bajaj Allianz 9.44 Cholamandalam 1.12 HDFC Chubb 1.07 ICICI Lombard 4.32 IFFCO TOKIO 2.64 Reliance 4.89 Royal Sundaram 2.78 Tata AIG 1.85 Public New India 23.76 United 16.86 Oriental 28.80 National 28.55

2005 06 6.35 0.69 1.15 3.00 2.17 0.54 2.12 1.73 21.71 22.26 25.00 26.83

- 2004 05 4.36 0.63 1.12 1.46 2.35 0.61 1.55 2.08 25.97 21.73 22.18 28.32

- 2003 04 2.61 0.34 0.74 0.59 1.33 0.34 1.20 1.53 36.35 21.51 20.33 25.09

- 2002 03 1.65 0.04 0.07 0.41 0.70 0.19 0.84 1.03 35.16 20.92 18.98 21.31

-

Public insurers have continuously maintained capacity ratio above 16. Capacity ratio for New India in 2003 was 35.16 which had gradually decreased to 23.76 in 2007. In case of United India the capacity ratio in 2003 was 20.92 which went up slightly before coming down to 16.86 in 2007. While, capacity ratio for Oriental has increased from 18.98 in 2003 to 28.80 in 2007 that in case of National has increased from 21.31 in 2003 to 28.55 in 2007. One of the primary reasons for such capacity ratio in case of public insurers would be the low influx of equity over the period. However, this may not be of serious concern to the public insurers due to strong government support. Private insurers have been regularly increasing their equity capital to support their operations and thus are able to maintain a much lower capacity ratio. Insurers with lower capacity ratio will be in much

better position to service any rise in unexpected claims as against those with high capacity ratio.

Operating Profits
Most of the private non – life insurers have been making operating losses or relatively minor profits over the period from 2003 to 2007 (Table 4.5) as brought out by the study. In the case of public insurers except National insurance, rest of the insurers have been making operating profit though it has been highly varying on annual basis. National Insurance has been making operating losses from 2004 to 2006 before making a huge operating profit in 2007. Among the private insurers Bajaj Allianz has been making incremental operating profits from 2003 till 2007. In 2003 it made an operating profit of INR 8.06 crore which has gone up to INR 7.52 crore in 2007 at an average increase of INR 51.35 crore over the five year period. ICICI Lombard has also been making profit on an incremental basis. ICICI Lombard made an operating loss in 2003 amounting to INR 7.05 crore. Thereafter it made operating profits of INR 26.99 crore and INR26.43 crore in 2004 and 2005 respectively. This operating profit went down to INR 18.04 crore and again going up to INR 22.92 crore in 2007. IFFCO TOKIO incurred a major operating loss in 2006 amounting to INR 193.45 crore.

Analysis further show that among public insurers New India insurance which made a loss of INR 24.08 crore in 2003 has made an extra ordinary profit of INR 736.73 in 2007. New India made an operating profit of INR 108.54 crore and INR 232.74 crore in 2004 and 2005 respectively. This profit then came down in 2006 to INR 36.02 before shooting up in 2007.

National Insurance also consistently made losses from 2004 to 2006 particularly in 2006 where it made operating loss of INR 305.17 crore. It made an operating profit of INR 69.47 crore in 2003 and INR 246.22 crore in 2007. United and Oriental has continued to making operating profits though they were in highly varying amount as can be seen in table.

shows the average operating profit / loss incurred by each of the non – life insurers over the span of 5 years from 2003 to 2007. It can be seen in Fig 4.7 that only three public insurers have made substantial amount of operating profits in the span of 5 years. Only two private insurers have made relatively higher operating profits when compared to other private insurers.

Operating Profit to Net Premium Earned Analysis of this ratio in table 4.7 does not indicate any clear trend or pattern particularly due to highly volatile operating profit. The volatility of operating profit among various insurers is already analysed earlier. Except for Bajaj Allianz among the private insurers all other private insurers have a high level of variance in terms of operating profit as a percentage of net premium earned. 4.7 Operating Profit / Net Premium Earned Insurer 2006 - 2005 - 2004 07 06 05 Private Bajaj Allianz 11.08% 11.40% 17.97% Cholamandalam 5.91% -9.66% -13.74% HDFC Chubb ICICI Lombard IFFCO TOKIO Reliance Royal Sundaram Tata AIG Public New India United Oriental National -1.41% 2.15% 3.86% -5.49% 5.22% 4.00% 16.25% 4.84% 11.09% 8.90% 0.73% 3.42% -55.91% 20.21% 1.30% 6.33% 0.87% 2.30% 6.13% -11.04% -10.01% 12.26% 3.24% 0.31% 15.58% 8.85% 6.18% 1.03% 10.05% -0.09%

2003 04

- 2002 03

-

9.66% -72.26% -75.61% 34.13% 52.23% 1.18% -10.59% 0.99% 3.02% 7.74% 15.09% -0.97%

5.23% 935.45% 2147.62 % -25.89% -0.58% 8.37% -21.79% -23.14% -0.73% 3.10% 8.27% 3.53%

Profit after Tax (PAT) Study of PAT (Table 4.8 and Fig 4.8) further shows that Bajaj Allianz and ICICI Lombard among the private insurers have been making higher profit over the five year period. PAT for Bajaj Allianz has gradually increased from INR 9.63 Crore in 2003 to INR 75.37 crore in 2007. ICICI Lombard had an PAT of INR 3.29 crore in 2003 which went up to INR 31.78 crore in 2004 and since then has been gradually increased to INR 68.36 crore in 2007. IFFCO TOKIO and TATA AIG have also been making profits over the span of five years but the growth over the period is not as substantial as ICICI Lombard or Bajaj Allianz. IFFCO TOKIO made a profit of INR 6.36 crore in 2003 which increase to INR 27.13 crore in 2007 at an average rate of INR 14.48 crore between 2003 and 2007.

Table 4.8 Profit After Tax (INR in Insurer 200 200 200 2 - 3 - 4 03 04 05 Private Bajaj Allianz 9.63 21.6 47.0

Crore) 200 2006 5 - - 07 06 51.5 75.37

Avera ge 41.07

STD Deviati on 25.92

Cholamandala m HDFC Chubb ICICI Lombard Iffco Tokio Reliance Royal Sundaram Tata AIG Public New India United Oriental National

-3.10 -6.32 3.29 6.36 14.3 4 -4.99 12.9 1 255. 81 170. 99 63.9 9 134. 91

9 -6.15 22.1 9 31.7 8 9.58 8.99 8.01 15.2 9 590. 21 380. 44 316. 47 71.2 3

9 -3.34 -7.99 48.3 5 14.7 2 5.83 5.01 12.2 4 402. 23 307. 71 330. 52 131. 12

6 -3.12 4.41 50.3 1 14.6 2 14.3 7 8.63 13.6 0 716. 38 425. 23 283. 92 106. 25

12.49 2.50 68.36 27.13 1.62 21.19 21.57

-0.64 -5.92 40.42 14.48 9.03 7.57 9.96

7.45 10.57 24.47 7.91 5.52 9.37 13.27

1459. 95 528.8 6 497.2 7 421.2 8

684.92 362.65 298.43 130.46

467.62 133.80 154.97 189.83

Data Source: IRDA Annual Report

TATA AIG had a loss of INR 12.91 crore in 2003 but then 2004 saw a profit of INR 15.29 crore, more then two fold growth. TATA AIG made a PAT of INR 21.57 crore in 2007. Royal Sundaram has also been making profit after a loss of INR 4.99 crore in 2003. PAT in 2007 for Royal Sundaram was INR 21.19 crore. HDFC Chubb and Cholamandalam have been making losses. Cholamandalam make loses for four continues years since 2003, before making a profit in 2007 of INR 12.49 crore. HDFC Chubb had losses for three continuous years from 2003 before making a small profit of INR 4.41 crore in 2006 which dipped to INR 2.5 crore in 2007. Profits of Reliance have been come down sine 2003. Reliance had a PAT of INR 14.34 crore in 2003. PAT went down in 2004 and 2005 to INR 8.99 crore and INR 5.83 crore respectively, before rising to INR 14.37 crore in 2006 and then coming down again to INR 1.6 crore in 2007. Bajaj Allianz and ICICI Lombard have been the most profitable firms among the private non – life insurers. Cholmandalam and HDFC Chubb have been the loss making firm over the five year span. Remaining four private insurers have made profit but not as substantial as that of Bajaj Allianz or ICICI Lombard.

Table 4.9 Year on Year Growth in Profit After Tax Insurer 2003 - 2004 - 2005 - 2006 04 05 06 07 Private Bajaj Allianz 125.23 117.10 9.49% 46.18% % % Cholamandalam 98.39% -45.69% -6.59% 500.32 % HDFC Chubb 251.11 -63.99% -43.31% % 155.19 % ICICI Lombard 865.96 52.14% 4.05% 35.88% % IFFCO TOKIO 50.63% 53.65% -0.68% 85.57% Reliance -37.31% -35.15% 146.48 -88.73% % Royal Sundaram -37.45% 72.26% 145.54 260.52 % % Tata AIG -19.95% 11.11% 58.60% 218.44 % Public New India 130.72 -31.85% 78.10% 103.80 % % United 122.49 -19.12% 38.19% 24.37% % Oriental 394.56 4.44% -14.10% 75.14% % National -47.20% 84.08% 181.03 496.50 % %

Table 4.9 and Table 4.8 indicate a highly volatile profit after tax for public as well as private insurers. This volatility can be analysed from standard deviation calculated in table 4.8 .

Among private insurers, Reliance with a average profit after tax of INR 9.03 crore has a standard deviation of INR 5.52 crore. While, over the same span of five years Bajaj Allianz had an average profit after tax of INR 41.07 crore with a standard deviation of INR 25.92 crore. In case of public insurers United had an average profit after tax of INR 362.65 crore with a standard deviation of INR 133.80 crore. New India had a standard deviation of INR 467.62 crore with an average profit after tax of INR 684.92. Such huge difference between companies in public and private sector, in terms of profit after tax, is mainly on account of higher premiums earned by the public insurers as a virtue of their already existing customer base. But high variance between companies within their respective sectors may be as a result of varying investment pattern and thus a varying amount of income from other sources besides the difference in premium earned and operational efficiency. Average PAT over the five year period for all the non life insurers is shown in Fig 4.10. All the four public insurers have been making profits over the five year time period except in 2005 – 06 when National insurance made a loss of INR 106.25 crore. New India insurance has been showing highest amount of profit after tax among all the insurers during all the five years. New India insurance made a PAT of INR 1459.95 crore in 2007 and increase of almost INR 1200 crore from 2003. PAT took a dip in 2005 before rising again. PAT for New India in 2007 was double of that in 2006, a trend similar to that in 2003 and 2004 as well. Average PAT over the five year period has been INR 648.91 crore for New India. For United India insurance profits almost doubled to INR 380 crore in 2004 from INR 170.99 crore in 2003. Profits went down slightly in 2005 before rising again in 2006 and 2007. PAT in 2007 was INR 528 crore. Average PAT from 2003 to 2007 has been INR 362.65 crore for United India Insurance.

During 2004, PAT for Oriental insurance went up nearly four times as that in 2003 then didn’t change much in the following year before falling down by about 14 per cent.

Profits again increased by approximately 75 per cent in 2007 as against profits in 2006. Oriental made an average PAT of INR 298.43 crore between 2003 and 2007. National insurance has been making least profits among the four public insurers. Though the PAT in 2003 was INR 134.91 crore it went down by almost 50 per cent in 2004 then again rising by almost 85 per cent in 2005 to INR 131.12 crore. In the year 2006 National insurance actually made a loss of INR 106.25 crore before registering a five fold increase in 2007 to make a PAT of INR 421.28 crore. Average profit made by National insurance over the five year time span has been INR 130.46 crore. It is clear that public sector insurers have been making higher profit after tax during the period among all the insurers (Fig 4.8, 4.9, 4.10). New India insurance has highest over PAT among all 12 non – life insurers. Among private insurers ICICI Lombard and Bajaj Allianz have been performing well. HDFC Chubb and Cholamandalam have been experiencing an overall loss during the period. Other four private insurers are also able to make an overall profit.

Profit Earned after Tax to Net Income
Analysis of this ratio in table 4.10 does not bring any peculiar trend or pattern mainly due to volatile profit after tax. The volatility of profit after tax among various insurers is already analysed earlier. Except for Bajaj Allianz all the other insurers have a high level of variance in terms of profit after tax as a percentage of net premium earned. Table 4.10 Profit After Tax / Net Premium Earned Insurer 2006 - 2005 - 2004 - 2003 07 06 05 04 Private Bajaj Allianz 8.99% 8.79% 12.70% 9.40% Cholamandalam 9.81% -3.53% -4.70% -25.81% HDFC Chubb ICICI Lombard IFFCO TOKIO Reliance Royal Sundaram Tata AIG Public New India United Oriental National 1.78% 6.41% 4.95% 0.66% 6.35% 5.65% 32.19% 22.28% 18.48% 15.22% 3.19% 9.53% 4.23% 26.63% 3.46% 4.76% 17.38% 19.38% 12.05% -3.85% -6.70% 22.42% 8.39% 12.14% 2.89% 5.38% 10.68% 14.23% 15.57% 4.92% -55.68% 40.19% 9.56% 34.16% 6.06% 10.65% 16.44% 17.81% 16.04% 2.98%

2002 03

-

6.25% 281.82% 1504.76 % 12.08% 16.10% 153.86% -6.52% -15.58% 7.76% 8.11% 3.45% 6.86%

Equity Share capital Most of the private insurers are operating as joint venture with foreign insurers in India. IRDA regulations allow only 26 per cent of holding by foreign promoter. From the analysis it may be seen that all the private insurers, except Reliance, have 26 per cent of foreign investment in its operations. Reliance has no joint venture with any foreign insurer. In year 2003 private insurers had a total equity more twice as that of the public insurers. Private insurance firms together had a total equity amounting to INR 879.58 crore while public insurers had total equity of only INR 400 crore (Fig 4.11).

In the year 2004 private insurers equity increased by INR 166.82 crore to INR 1046.40 crore while that of public insurers remained the same. The increase in private insurer’s equity was mainly due to ICICI Lombard’s increase in capital by INR 110.40 crore, Cholamandalam’s capital increase by INR 36.96 crore and HDFC Chubb’s capital increase by INR 19.18 crore (Table 4.11). In 2005, there was not much increase in the private insurer’s equity, which remained at INR 1048.35 crore. However, public insurer’s equity went up by INR 50 crore taking the total to INR 450 crore. This increase in public insurer’s total equity was due to increase in capital of New India by INR 50 Crore. In year 2006, private insurer’s equity went up by INR 230.40 crore to INR 1278.75 crore. This increase was mainly due to capital increase of INR 120 crore by IFFCO TOKIO, INR 70 crore by TATA AIG and INR 25 crore by ICICI Lombard. Public insurer’s total equity went up by another INR 50 crore due to influx of fresh capital by New India. In 2007 private insurer’s equity went up by INR 122.03 crore mainly because of fresh capital of INR 90.71 crore and INR 30 crore by ICICI Lombard and TATA AIG respectively. Public insurer’s equity went up by another INR 50 crore this time due fresh capital influx by United India.

Table 4.11 Equity Share Companies (INR in Crore) Name of the 2002 insurer 03 Bajaj Allianz 109.46 Cholamandalam 105.00 HDFC Chubb 100.22 ICICI Lombard 109.60 IFFCO TOKIO 100.00 Reliance 102.00 Royal Sundaram 129.80 Tata AIG 123.50 New India 100.00 United 100.00 Oriental 100.00 National 100.00

Capital of Non – Life Insurance 2003 - 2004 - 200504 05 06 109.64 109.82 110.05 141.96 141.96 141.96 119.40 119.57 124.74 220.00 220.00 245.00 100.00 100.00 220.00 102.00 102.00 102.00 129.90 130.00 140.00 123.50 125.00 195.00 100.00 150.00 200.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 200607 110.13 141.96 124.91 335.71 220.00 103.07 140.00 225.00 200.00 150.00 100.00 100.00

Among private insurer’s ICICI Lombard has highest equity investment of INR 335.71 crore as of 2007, increase of almost INR 230 crore in 5 years. Among public Insurers New India has highest equity investment of INR 200 crore in 2007 and increase of INR 100 crore in 5 years. Private insurers have been injecting much higher amounts of fresh capital when compared to public insurers and at a very rapid pace. Over the period from 2003 – 2007 all private insurers together have injected fresh equity capital of INR 521.20 crore. During the same period public insurers have introduced fresh capital of INR 150 crore.

Return on Equity Table

Table 4.12 Return On Equity Insurer 2006 - 2005 07 06 Private Bajaj Allianz 68.44% 46.85% Cholamandalam 8.80% -2.20% HDFC Chubb 2.00% 3.54% ICICI Lombard 20.36% 20.53% IFFCO TOKIO Reliance Royal Sundaram Tata AIG Public New India United Oriental National 12.33% 1.57% 15.14% 9.59% 729.98 % 352.57 % 497.27 % 421.28 % 6.65% 14.09% 6.16% 6.97% 358.19 % 425.23 % 283.92 % 106.25 %

2004 05 42.88% -2.35% -6.68% 21.98% 14.72% 5.72% 3.85% 9.79% 268.15 % 307.71 % 330.52 % 131.12 %

- 2003 04

- 2002 03

-

19.78% -4.33% -18.58% 14.45% 9.58% 8.81% 6.17% 12.38% 590.21 % 380.44 % 316.47 % 71.23%

8.80% -2.95% -6.31% 300.18 % 6.36% 14.06% -3.84% -10.45% 255.81 % 170.99 % 63.99% 134.91 %

As may be noted from the analysis in table 4.12, the return on equity has been highly inconsistent over the five year period in case of both private as well as public non – life insurers. HDFC Chubb and Cholamandalam have been making persistent losses for a period of four and three years respectively and thus have a negative return on equity. However, in 2007 Cholamandalam gave a return on equity of 8.8 per cent while HDFC Chubb gave a return on equity of 2.2%. Return on Equity for Bajaj Allianz has gone up tremendously from 8.8 per cent in 2003 to 68.44 per cent in 2007 thus giving a five year average return of 37.35 per cent. ICICI

Lombard experienced an extremely high return on equity in 2003, but since 2004 it has maintained a return of equity between 14.5 per cent and 22 per cent. Public insurers have a very high return on equity, with highest average return on equity of 440.47 per cent, over five year time span, from New India. While, the lowest return on equity among public insurers was the National insurer which had an average of 130.46 per cent for time span of 2003 - 2007.

Reserves Reserves form a very important part of an insurer’s operations. Maintenance of reserves ensures liquidity to the insurer in case of any unforeseen loss or a sudden rise in claims. Analysis of reserves shows that most of the private players do not maintain or maintain very low levels of reserve and are indirectly exposed to high level of business and operational risks. Table 4.13 gives reserves maintained by non – life insurers. Cholamandalam and HDFC Chubb have no reserves through the period of 2003 – 2007. Table 4.13 Reserves (INR Insurer 2006 07 Private Bajaj Allianz 293.28 Cholamandalam 0.00 HDFC Chubb 0.00 ICICI Lombard 457.00 IFFCO TOKIO 76.74 Reliance 156.33 Royal Sundaram 2.44 Tata AIG 18.80 Public New India 5820.16 United Oriental National 2609.91 1925.79 1333.48 Crore) 2005 - 2004 06 05 157.02 0.00 0.00 127.92 59.90 50.78 0.00 0.00 4608.03 2257.40 1545.52 1010.02 68.79 0.00 0.00 29.40 18.48 36.41 0.00 0.00 4166.41 1929.58 1318.61 1116.27

- 2003 04 21.7 0.00 0.00 5.93 10.60 30.57 0.00 0.00

- 2002 03 0.01 0.00 0.00 0.00 7.01 21.58 0.00 0.00 3,304.0 6 1,346.0 3 733.91 972.17

-

3843.50 1692.64 1022.18 1015.2

At the same time private insurers like Bajaj Allianz, ICICI Lombard, IFFCO TOKIO and Reliance have increased their reserves. Bajaj Allianz increased its reserves from almost

nil in 2003 to INR 293.28 crore in 2007. ICICI Lombard had no reserves in 2003 but the reserves in 2007 amount to INR 457 crore. Reliance also increased it reserves from INR 21.58 crore in 2003 to INR 156.33 crore in 2007. While, IFFCO TOKIO increased it reserves from INR 7.01 crore in 2003 to INR 76.74 crore in 2007. Royal Sundaram and TATA AIG had no reserves until 2006. In 2007, Royal Sundaram managed reserve of INR 2.44 crore while TATA AIG managed a reserve of INR 18.80 crore.

Public insurers have a huge amount in reserves predominantly due to their long period of existence in the market and monopoly enjoyed by them prior to liberalisation in 1999. However, public insurers also have been consistently adding to their reserves. New India increased its reserves from INR 3304 crore in 2003 to INR 5820.16 crore in 2007. At the same time United India increased its reserves from INR 1346 crore in 2003 to INR 2609 crore in 2007. Oriental and National also increased their reserves from INR 733.91 and INR 972.17 respectively in 2003 to INR 1925.79 and INR 1333.48 respectively in 2007. Financial performance of private insurers is steadily improving as they continue to aggressively enter the Indian market and underwrite more policies, though none of them at this point as high profitable when compared to the public insurers. Public insurers continue show better performance mainly because of the already existing customer base. A year on year analysis of growth in underwritten premiums clearly indicates that private insurers are much ahead of public insurers, indicating a much higher profitability in the long term. Private insurers are also gradually bringing down their combined ratio close to hundred per cent indicating better operational efficiency. While public insurers still continue to maintain a much higher combined ratio indicating a need for improvement in operations and management efficiency.

Chapter 5: Findings, Conclusion and Recommendation

The Findings, Conclusions and recommendation based on the analysis performed in Chapter 4 forms the contents of this chapter

5.1 Findings
Combined ratio has been reducing gradually over the period of five years and getting close to 100 per cent for most of the private insurers. In case of public insurers the combined ratio has mostly remained the same or there has been a marginal increase. Thus, reflecting an efficient management of claims and expenses or an increase in net premium earned by the private non – life insurers. Public insurers have a very high capacity ratio at least 5 times that of the generally accepted upper limit of 3, all through out the span of five years. This is on account of the lower Equity base of the public insurers. Except for Bajaj Allianz, ICICI Lombard and Reliance all the other private insurers maintained a capacity ratio well below three over the period of five years. Bajaj Allianz initially maintained a capacity ratio of 1.65 and 2.61 in 2003 and 2004. But it went up significantly high since then and in 2007 the capacity ratio was 9.44 for Bajaj Allianz. ICICI Lombard and Reliance also had a capacity ratio much higher then 3 in 2007. Capacity ratio of ICICI Lombard gradually increased from 0.41 in 2003 to 3.00 in 2006 and 4.32 in 2007. However, in case of Reliance capacity ratio in 2003 was 0.19 and 0.54 in 2006 before it suddenly went up to 4.89 in 2007. Public insurers have continuously maintained capacity ratio above 16. Capacity ratio for New India in 2003 was 35.16 which had gradually decreased to 23.76 in 2007. In case of United India the capacity ratio in 2003 was 20.92 which went up slightly before coming down to 16.86 in 2007. While, capacity ratio for Oriental has increased from 18.98 in 2003 to 28.80 in 2007 that in case of National has increased from 21.31 in 2003 to 28.55 in 2007. Public sector insurers continue to dominate in terms of amount of premium underwritten but private sector insurer’s growth and penetration is at a very rapid pace. The net underwritten premium grew at an average of 7.76 per cent in case of four public insurers while in case of eight private insurers it grew at an average of 85.05 per cent. Between 2003 and 2007 public sector witnessed an increase of almost INR 3700 Crore in the amount of premium underwritten while private sector registered an increase by INR 7500 – more then twice as that of their public counterparts. Total net premium earned between year ending 2003 and 2004, in case of private insurers, grew by 98.42 per cent. Thereafter there was a steep decline in the rate at which net premium was earned; the annual growth between year 2006 and 2007 was 61.70 per cent. Net premium earned grew at an average of 75.78 per cent over the period of five years.

Due to their high base public sector insurers experienced a very steady growth in terms of net premium earned. Average annual rate of net premium earned by public sector was 7.60 per cent over the five year period. Between 2003 and 2004 public sector witnessed a growth of 9.30 per cent. Sector experienced a slight dip in the years ending 2005 and 2006 with annual net premium earned growing at an annual rate of 6.25 per cent and 6.69 per cent respectively. For the year ending 2007 net premium earned went up to 8.15%. In case of private insurers the spread between premium underwritten and premium earned is showing an either decreasing or a sine wave trend from 2003 to 2007. The premium underwritten is akin to the “order booking” evidenced in industries other than services. Bajaj Allianz and ICICI Lombard show a relatively steady spread. Bajaj Allianz had a spread of 14.75 per cent in 2003 which went up to 22.61 per cent in 2005 and again came down to 19.35 per cent in 2007. While ICICI Lombard in 2003 has a spread of 38.84 per cent which went up to 39.08 per cent in 2004 before starting to decrease and came down to 26.48 per cent. On the other hand for HDFC Chubb which had a spread of 93.56 per cent in 2003 it came down to -5.39 per cent in 2007. Similarly, all the other private insurers show a decreasing trend, with a very high spread in 2003 but the spread has decreased at a relatively fast pace. In case of public insurers the pattern of spread over the five year period is slightly different. United and New Oriental insurance show an increasing trend of spread from 2003 to 2007. In 2003 spread for United was -0.81 per cent, this went up to 1.42 per cent in 2006 before a sudden increase to 6.18 per cent in 2007. While in case of Oriental there has been a steady increase from 2.25 per cent in 2003 to 6.56 per cent in 2007. In case of New India and National a decrease in spread can be seen. In 2003 spread for New India was 6.24 per cent and that for National was 7.74 per cent. This decreased to 1.25 per cent in 2003 for New India and -2.99 per cent in 2006 for National. In 2007 spread was at 4.56 per cent and 3.07 per cent respectively for New India and National. Average claims ratio, from 2003 – 2007, in case of private life insurers was 75.75 per cent while that in case of public insurers was 86.24 per cent. Reliance and HDFC Chubb experienced a very high claims ratio of over 200 per cent in the year ending 2003. However, the claims ratio then came down to an average of 75 per cent in case of reliance and 65 per cent in case of HDFC Chubb for the following years until 2007. Claims ratio for ICICI Lombard went up from 65 per cent in 2003 to 76 per cent in 2007. Claims ratio for Cholamandalam in 2003 was 56 per cent which went up to 88 per cent in 2004 and then started coming down over next three years. Claims ratio in 2007, for Cholamandalam, was 55 per cent. IFFCO – TOKIO and Bajaj Allianz maintained a fairly constant claims ratio throughout the period between 2003 and 2007. Average Incurred claims ratio for IFFCO – TOKIO and Bajaj Allianz 71 per cent and 66 per cent respectively for the span of five years. Claims ratio for Tata AIG and Royal Sundaram came down from 73 per cent and 77 per cent respectively in 2003 to 54 per cent and 61 per cent respectively in 2007. Claims ratio in case of public insurers was higher than that in case of private insurers over the five year period. All the public insurers maintained a fairly constant claims ratio

between 80 and 90 per cent from 2003 to 2007. Average claims ratio over the five year period in case of New India, United, Oriental and National was 81 per cent, 91 per cent, 85 per cent and 89 per cent respectively. National insurance had a high claims ratio of 102 per cent in 2006. Most of the private life insurers have been making operating losses or relatively small amount of operating profits. Bajaj Allianz has been continuously making profit from 2003 to 2007. Its profits increased from INR 8.06 crore in 2003 to INR 92.94 crore in 2007. ICICI Lombard had an operating loss in 2003 but has been making profit for the following years. IFFCO – TOKIO had an operating profit of INR 52.35 crore in 2004 then a dip to INR 5.68 crore in 2005 followed by a huge loss of INR 193 crore in 2006 and a profit of INR 21 crore in 2007. Cholamandalam and HDFC Chubb have been making operating losses for four out of five years. On a five year average, among all the private insurers, only Bajaj Allianz and ICICI Lombard have made substantial operating profits. Maximum operating profits are made by the public insurers among all the non – life insurers. Except National insurance, have been making substantial operating profits during duration of five years. National Insurance made an operating profit in 2003 followed by operating loss for three consecutive years – Loss going up to INR 305 crore in 2006 – then a high operating profit of INR 246 crore in 2007. New India insurance made a loss of INR 24 crore registered an extra ordinary profit of INR 726 crore in 2007. On an average over the five year period, except National insurance, all other insurers have made average annual operating profits. National insurance made an overall operating loss of INR 3 crore while Oriental and New India made operating profits around INR 200 crore and United made an average annual operating profit of INR 83.71 crore. Operating profits over the span of five years are highly unstable and volatile for both public as well as private insurers. Thus trend in growth of operating profits is also highly varying. Operating profit as a percentage of net premium earned also does not indicate any peculiar trend because of the volatile numerator. Among private insurers Bajaj Allianz and ICICI Lombard have registered relatively significant amount of profits after tax. Profits after Tax in case of Bajaj Allianz has gone up from INR 9.63 crore in 2003 to INR 75.37 crore in 2007. ICICI Lombard registered a profit after tax of INR 3.29 crore in 2003 which came went up to INR 31.78 crore in 2004 and since has increased steadily to INR 68.36 crore in 2007. IFFCO – TOKIO has also been registering profits for the five year period. Tata AIG and Royal Sundaram incurred losses in 2003 but have been making profits since then. Profits registered by public insurers are much higher than profits of all the private insurers put together. New India insurance has been making highest amount of profits among all the public insurers. Profit after tax for New India more then doubled in 2007 from that in 2006. National Insurance has been making the lowest profits among all the

four public insurers. Though National insurance made a loss in 2006 it registered an operating profit of nearly INR 400 crore in 2007. Profit after tax is also highly volatile for both public as well as private insurers as analysed using standard deviation. In 2003 private insurers together had a private equity of INR 879.58 crore while public insurers had an equity capital of INR 400 crore. The paid up equity capital in case of private insurers went up to INR 1400 crore in 2007 while that for public insurers went up to INR 550 crore. Among private insurer’s ICICI Lombard has made the highest equity investment of almost INR 230 crore in the five year span. Among public insurer New India made the highest investment of INR 100 crore between 2003 and 2007. Maintenance of reserves ensures liquidity for the insurer in case of any unforeseen loss or a sudden rise in claims. Besides Bajaj Allianz, ICICI Lombard and Reliance all the other players have very low or zero reserves when compared to the amount of claims incurred and net premium earned. Cholamandalam and HDFC Chubb had zero reserves from 2003 until 2007. Bajaj Allianz and ICICI Lombard increased their reserves tremendously from INR 21.7 crore and INR 5.93 crore in 2003 respectively to INR 293.28 and INR 457 respectively. Reliance also increased its capital from INR 30.57 crore in 2003 to INR 156.33 crore in 2007. Public insurers maintain a very high amount of reserves. New India increased its reserved from INR 3304 crore in 2003 to INR 5820 crore in 2007. During the same time United India, Oriental and National also increased their reserve levels from INR 1346 crore, INR 734 crore and INR 972 crore respectively to INR 2609 crore, INR 1926 crore and INR 1334 crore respectively. Private insurers except TATA AIG have maintained the required solvency ratio from 2003 to 2007. TATA AIG was unable to maintain the solvency ratio from 2003 until 2005. In 2006 and 2007 it maintained a solvency ratio of 1.68 and 1.85 respectively. Public insurers – New India and United India – have consistently maintained solvency ratio higher then 1.5 from 2003 till 2007. New India maintained a solvency ratio higher then 3 while United maintained solvency ratio above 2. Oriental’s solvency ratio was below 1.5 from 2003 to 2005 but during 2006 and 2007 it maintained a solvency ratio of 1.97 and 2.17 respectively. Of the eight private sector insurers five met both rural and social sector obligations in 2003. One insurer met the social sector obligation but fell short of rural sector obligation and was asked to ensure compliance in the following year. Two insurers Cholamandalam and HDFC Chubb commenced operations only during the year 2002 – 03 and thus their compliance was not ensured. All the four public sector insurers met the rural and social sector obligations. In 2004 out of eight seven insurers met with their rural and social sector obligation while HDFC Chubb failed to comply with both obligations. Among public insurers all four

complied with the rural sector obligation while only two complied with social sector obligations. For 2005 till 2007 all the private insurers met the rural as well as social obligation. Among public insurer three complied with social sector obligation while all four complied with rural sector obligation in 2005. In 2007 New India Assurance fell short of compliance with the social sector obligations. It was levied a penalty of INR 500 thousand and was also advised to fulfill the shortfall in 2007 – 08 and 2008 – 09.

5.2 Conclusion
At the time of opening up of the sector in 1999, insurance was viewed primarily as a tax saving device. However, policyholders’ perspective is slowly changing towards taking insurance cover irrespective of tax incentives. The improved performance in the domestic economy is also reflected in the insurance industry. Higher per capita income, domestic savings and availability of more instruments for parking surplus funds have facilitated growth in the activities of financial services like insurance. Study reveals that private insurers are growing aggressively and a very fast pace posing the strong competition for the public insurers who are still dominating because of their already existing huge base. Though none of the private insurers are highly profitable when compared with public insurers the growth experienced by them clearly indicate high levels of penetration and better profitability in the long term. Whilst India currently remains a medium-sized non-life market, the growth expected over the medium to long term is attracting increasing levels of foreign investment and competition.

5.3 Recommendations
The insurance industry also provides crucial financial support to the growing economy like India by transferring funds from the insured to capital investment, which is critical for continued economic expansion and growth. Development of the insurance sector is thus necessary to support the infra - structural changes in the economy. Insurers must work towards improving net premiums earned to bring down the claims ratio and increase their profits. Higher profits would mean better reserves which in turn would assist the insurer to operate in times of unexpected eventualities and also help them maintain liquidity at all times. Insurers – public and private – need to improve their operational efficiency and attempt to bring down their combined ratio as close to 100 as possible or even lower then that. This would in turn call for efficient management of claims, reduction in operating

expenses and at the same increase in net premium earned. Improved combined ratio would mean higher profits earned through operational activities rather then other investment activities. There should be a specified maximum capacity ratio for the insurers so that at any point of time the insurers have funds available to service any unexpected claims. It would also mean that if an insurer has reached this maximum capacity ratio, then any further increase in equity should translate into increase in premium underwritten and vice versa to maintain the required ratio. Public sector insurers need to ensure year on year increase in the amount of underwritten premiums. Currently, they continue to make profits from existing customer base but to continue to earn higher profits they need to increase underwritten premiums. Increase in underwritten premium would also mean access to newer markets and increase in already existing customer base. Public as well as private insurers must work towards reducing their claims ratio which is currently above 70 per cent in case of private insurers and above 80 per cent in case of public insurers. This can be done by increasing the amount of net premiums earned each year. Public Insurers have a low capital base, and perhaps the sovereign backing they have may justify this. However, as seen in many public entities, particularly what one witnessed with the Investment Company like the Unit Trust of India, a similar bail out package would become inevitable in the context of a liquidity crisis. IRDA could consider increasing the upper limit of foreign direct investment thus allowing more foreign players to expand market share in India. This would allow more inflow of foreign capital which would increase liquidity and improve solvency. It would also assist in introduction of more innovative products, increased awareness as well as more competition and thus better performance on part of the insurers. While the proliferation of private sector insurers is a clear response to the gradual market opening, the mix of products remains similar to the pre-liberalisation era. Motor, fire and marine continue to account for the bulk of the business. With new business opportunities for various industrial sectors, non – life insurers must introduce innovative products to ensure achieve higher profitability and a steady long term growth. IRDA must introduce segmental reporting by the insurers in terms of business from the individuals and from the corporate. This would assist analysing the penetration of the insurers in to Indian market as well as to judge the awareness of insurance among the individuals. In terms of Corporate Governance, Insurance companies could be mandated to disclose the number claims received and settled. The disclosure should also include the litigations

initiated by the Insured and not accepted as a liability, but disclosed as a contingent liability in their annual reports. Non – Life sector needs to consider more innovative mix of products addressing risks such as those posed by natural calamities. Products such as insurance against floods, earthquakes and such natural calamities or terrorism insurance would attract more people and thus improve underwritten premiums. Such products can be introduced in a combined effort with the government to achieve better market reach as well as maintain required financial support in terms of liquidity. The largely underserved rural sector holds great opportunity of growth for non-life insurers. To realise this potential, insurance companies must show long-term commitment to the sector. Insurers will have to design products that are suitable for the rural population and utilise appropriate distribution mechanisms. Products such as crop insurance or weather insurance are already introduced but on a very small scale by only few insurers. Private as well as public insurers must work towards developing similar schemes. Insurers will also have to pay special attention to the characteristics of the rural labour force, like the prevalence of irregular income streams and preference for simple products, before they can successfully penetrate this sector. Insurance industry is facing varied challenges such as losses due to acts of terrorism and rising incidents of natural calamities. The damage caused by natural calamities poses a big strain on profitability of the insurers. While macro-economic backdrop remains favourable to growth, there are still major hurdles to overcome in order for India to realise the growth potential of its insurance industry.

5.4 Scope for Future Research
• Research could be conducted on the nature of growth in the written premiums accounted by the Private Insurers – as newspaper reports have indicated that the growth witnessed has been largely on account of premiums written by the public insurers moving over to the Private players Disclosures are not available as to drop in the earned premium as a percentage of written premium. This could be also attributed to the insured not renewing their policies. A study here would be useful. With India mandated to conform to the IFRS standards by 2011. It would be useful to study the Insurance sectors preparedness to comply with the IFRS 4 standard that governs insurance contracts. The claims ratios for private Insurers have been low as compared to the Public Insurers. A study need be conducted to belie reports emanating in the media that private players are generally reluctant to settle Insurance claims as compared to the Public Insurers

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Chapter 6: References

6.1 Journals 1. “Growth Imperative”, Global Insurance Industry Outlook Issues on the horizon (2007), Deloitte 2. IRDA Annual Reports (2003 – 2007) 3. Nelson, Brandan, and Ellenbuerger, Frank, September 2007, Frontiers in Finance, KPMG International, Switzerland 4. Quinton, Adrian; Coops, Anthony; and Gorman, Mat, September2007, KPMG’s Frontier in Finance, KPMG International, Switzerland 5. Ramanadh, Kasturi; spring 2006, “Performance Management in Insurance Corporation”, Journal of Business Administration Online,

6.2 Websites 1. Legal definition of Insurance, The free dictionary, Farlex Inc., http://legaldictionary.thefreedictionary.com/insurance, June 03, 2008 2. Premium Definition, Investorwords.com, WebFinance http://www.investorwords.com/3785/premium.html, June 03, 2008 Inc,

3. Hartwig, Dr. Robert P, “2007 - Year End Results”, Insurance Information Institute, April 9, 2008, www.iii.org/media/industry/financials/2007yearend/ , June 03, 2008. 4. www.bimaonline. 5. www.google.co.in/Indian insurance industry. 6.www.irda india.org