CHAPTER-1 INTRODUCTION TO FUNDAMENTAL ANALYSIS

1.1EXECUTIVE SUMMARY

Executive Summery is a brief introduction of each chapter. It contains very few details of each chapter. Executive Summery is a very important because the reader or user can know the details; objective etc of the report is a very useful to them on. The objective of this study is to understand the and fundamental analysis in insurance sector. The study may be viewed as a formal study wherein research problem requires examining the current state of the banks in a typically structured manner with validation - rejection of certain hypothesis and ascertaining probable opportunities.

METHODOLOGY
METHODS OF DATACOLLECTION : Research Design  Sources of Data  Secondary Sources    Articles Books Newspapers : : Descriptive & Causal. Primary and Secondary

Descriptive analysis will be used in order to draw conclusion. Outcome of the study will be presented in tables and graphs for easy understanding of the findings of the research. Frequency distribution charts are used while analyzing and number so achieved are presented in a percentage form so as to represent it through graph.

1

1.2 OBJECTIVES OF THE STUDY The study is viewed as a formal study wherein research problem requires examining the current state of the fundamental analysis in insurance sector in a typically structured manner with validation - rejection of certain hypothesis and ascertaining probable opportunities.

To ascertain and analyze the strength of public & private sector banks through measurement of performance indicators

To analyze trends in significant heads of balance sheet and profit & loss account.

To study about companies financial standing in the market.

Ratios forming part of analysis are calculated based on the data available through secondary sources and validity of that data cannot be ascertained. Though ratios have been computed using practices to the best of our knowledge.

To study how financial ratios is essential for analyzing companies growth and development.

2

1.3 INTRODUCTION

Fundamental Analysis involves examining the economic, financial and other qualitative and quantitative factors related to a security in order to determine its intrinsic value. It attempts to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and individually specific factors (like the financial condition and management of companies). Fundamental analysis, which is also known as quantitative analysis, involves delving into a company’s financial statements (such as profit and loss account and balance sheet) in order to study various financial indicators (such as revenues, earnings, liabilities, expenses and assets). Such analysis is usually carried out by analysts, brokers and savvy investors. Many analysts and investors focus on a single number--net income (or earnings)--to evaluate performance. When investors attempt to forecast the market value of a firm, they frequently rely on earnings. Many institutional investors, analysts and regulators believe earnings are not as relevant as they once were. Due to nonrecurring events, disparities in measuring risk and management's ability to disguise fundamental earnings problems, other measures beyond net income can assist in predicting future firm earnings.

Fundamental analysis is the examination of the underlying forces that affect the well being of the economy, industry groups, and companies. As with most analysis, the goal is to derive a forecast and profit from future price movements. At the company level, fundamental analysis may involve examination of financial data, management, business concept and competition. At the industry level, there might be an examination of supply and demand forces for the products offered. For the national economy, fundamental analysis might focus on economic data to assess the present and future growth of the economy. To forecast future stock prices, fundamental analysis combines economic, industry, and company analysis to derive a stock's current fair value and forecast future value. If fair value is not equal to the current stock price, fundamental analysts believe that the stock is either over or under valued and the market price will ultimately gravitate towards fair value. Fundamentalists do not heed the advice of the random walkers and believe that markets are weak-form efficient. By believing that prices do not accurately reflect all available information, fundamental analysts look to capitalize on perceived price discrepancies.

Investors can use any or all of these different but somewhat complementary methods for stock picking. For example many fundamental investors use technicals for deciding entry and exit points. Many technical investors use fundamentals to limit their universe of possible stock to 'good' companies.

3

1.4Two Approaches of fundamental analysis
While carrying out fundamental analysis, investors can use either of the following approaches 1. Top-down approach: In this approach, an analyst investigates both international and national economic indicators, such as GDP growth rates, energy prices, inflation and interest rates. The search for the best security then trickles down to the analysis of total sales, price levels and foreign competition in a sector in order to identify the best business in the sector. 2. Bottom-up approach: In this approach, an analyst starts the search with specific businesses, irrespective of their industry/region. Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. When applied to futures and forex, it focuses on the overall state of the economy, interest rates, production, earnings, and management. When analyzing a stock, futures contract, or currency using fundamental analysis there are two basic approaches one can use; bottom up analysis and top down analysis.[1] The term is used to distinguish such analysis from other types of investment analysis, such as quantitative analysis and technical analysis. Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts. There are several possible objectives:
   

to conduct a company stock valuation and predict its probable price evolution, to make a projection on its business performance, to evaluate its management and make internal business decisions, to calculate its credit risk.

Investors can use any or all of these different but somewhat complementary methods for stock picking. For example many fundamental investors use technicals for deciding entry and exit points. Many technical investors use fundamentals to limit their universe of possible stock to 'good' companies. The choice of stock analysis is determined by the investor's belief in the different paradigms for "how the stock market works". See the discussions at efficient-market hypothesis, random walk hypothesis, capital asset pricing model, Fed model Theory of Equity Valuation, market-based valuation, and behavioral finance.

Fundamental analysis includes:
1. Economic analysis 2. Industry analysis 3. Company analysis On the basis of these three analyses the intrinsic value of the shares are determined. This is considered as the true value of the share. If the intrinsic value is higher than the market price it is recommended to buy the share . If it is equal to market price hold the share and if it is less than the market price sell the shares.

4

CHAPTER-2 STEPS TO EVALUATE FUNDAMENTAL ANALYSIS 2.1GENERAL STEPS TO FUNDAMENTAL EVALUATION
Even though there is no one clear-cut method, a breakdown is presented below in the order an investor might proceed. This method employs a top-down approach that starts with the overall economy and then works down from industry groups to specific companies. As part of the analysis process, it is important to remember that all information is relative. Industry groups are compared against other industry groups and companies against other companies. Usually, companies are compared with others in the same group. For example, a telecom operator (Verizon) would be compared to another telecom operator (SBC Corp), not to an oil company (ChevronTexaco).

2.1.1 Economic Forecast
First and foremost in a top-down approach would be an overall evaluation of the general economy. The economy is like the tide and the various industry groups and individual companies are like boats. When the economy expands, most industry groups and companies benefit and grow. When the economy declines, most sectors and companies usually suffer. Many economists link economic expansion and contraction to the level of interest rates. Interest rates are seen as a leading indicator for the stock market as well. Below is a chart of the S&P 500 and the yield on the 10-year note over the last 30 years. Although not exact, a correlation between stock prices and interest rates can be seen. Once a scenario for the overall economy has been developed, an investor can break down the economy into its various industry groups.

5

If most companies are expected to benefit from an expansion. To assess a industry group's potential. Many times it is more important to be in the right industry than in the right stock! The chart below shows that relative performance of 5 sectors over a 7-month time frame. market size. If the economy is forecast to contract. being in the right sector can make all the difference. its industry group is likely to exert just as much. As the chart illustrates. there are very few lone guns out there. While the individual company is still important. an investor would want to consider the overall growth rate. and importance to the economy.1. then risk in equities would be relatively low and an aggressive growth-oriented strategy might be advisable. biotech. utilities and energy-related stocks. When stocks move. 6 . A defensive strategy might involve the purchase of consumer staples. semiconductor and cyclical stocks. A growth strategy might involve the purchase of technology. influence on the stock price. or more.2.2 Group Selection If the prognosis is for an expanding economy. An investor can narrow the field to those groups that are best suited to benefit from the current or future economic environment. then certain groups are likely to benefit more than others. an investor may opt for a more conservative strategy and seek out stable income-oriented companies. they usually move as groups.

Investors are usually interested in finding the leaders and the innovators within a group. If the plan. solid management and sound financials. even strong management can make for extraordinary success in a mature industry (Alcoa in aluminum). model or concept forms the bedrock upon which all else is built. an investor would need to narrow the list of companies before proceeding to a more detailed analysis.A comparative analysis of the competition within a sector will help identify those companies with an edge.2.1. Some of the questions to ask might include: How talented is the management team? Do they have a track record? How long have they worked together? Can management deliver on its promises? If management is a problem. and those most likely to keep it. model or concepts stink.1. The analysis could focus on selecting companies with a sensible business plan. 7 . The first task is to identify the current business and competitive environment within a group as well as the future trends. technology. an investor might analyze the resources and capabilities within each company to identify those companies that are capable of creating and maintaining a competitive advantage.1. strengths and weaknesses. there is little hope for the business.5 Business Plan The business plan. 2. a company requires top-quality management. be it marketing. product position and competitive advantage? Who is the current leader and how will changes within the sector affect the current balance of power? What are the barriers to entry? Success depends on an edge. How do the companies rank according to market share.1. 2. the questions may be: Is the company's direction clearly defined? Is the company a leader in the market? Can the company maintain leadership? 2. the questions may be these: Does its business make sense? Is it feasible? Is there a market? Can a profit be made? For an established business. Even the bestlaid plans in the most dynamic industries can go to waste with bad management (AMD in semiconductors). Alternatively.4 Company Analysis With a shortlist of companies.6 Management In order to execute a business plan. it is sometimes best to move on.3 Narrow Within The Group Once the industry group is chosen. For a new business. market share or innovation. Investors might look at management to assess their capabilities.

However. Below is a list of potential inputs into a financial analysis. Accounts Payable Accounts Receivable Acid Ratio Amortization Assets .1. expenses and profits or an 8 .2.Long-term Management Market Growth Market Share Net Profit Margin Pageview Growth Pageviews Patents Price/Book Value Price/Earnings PEG Price/Sales Product Product Placement Regulations R&D Revenues Sector Stock Options Strategy Subscriber Growth Subscribers Supplier Relationships Taxes Trademarks Weighted Average Cost of Capital The list can seem quite long and intimidating.Current Assets .Current Liabilities . There are many different valuation metrics and much depends on the industry and stage of the economic cycle. A complete financial model can be built to forecast future revenues.Fixed Book Value Brand Business Cycle Business Idea Business Model Business Plan Capital Expenses Cash Flow Cash on hand Current Ratio Customer Relationships Days Payable Days Receivable Debt Debt Structure Debt:Equity Ratio Depreciation Derivatives-Hedging Discounted Cash Flow Dividend Dividend Cover Earnings EBITDA Economic Growth Equity Equity Risk Premium Expenses Good Will Gross Profit Margin Growth Industry Interest Cover International Investment Liabilities .7 Financial Analysis The final step to this analysis process would be to take apart the financial statements and come up with a means of valuation. an investor will learn what works best and develop a set of preferred analysis techniques. after a while.

investor can rely on the forecast of other analysts and apply various multiples to arrive at a valuation. The final step of the fundamental analysis process is to synthesize all data. Some of the more popular ratios are found by dividing the stock price by a key value driver. while those at the low end may constitute relatively good value. In addition. an understanding will develop of which companies stand out as potential leaders and innovators. RATIO Price/Book Value Price/Earnings Price/Earnings/Growth Price/Sales Price/Subscribers Price/Lines Price/Page views Price/Promises COMPANY TYPE Oil Retail Networking B2B ISP or cable company Telecom Web site Biotech This methodology assumes that a company will sell at a specific multiple of its earnings.8 Putting It All Together After all is said and done. 9 . Those at the high end may be considered overvalued. other companies would be considered laggards and unpredictable. an investor will be left with a handful of companies that stand out from the pack. Over the course of the analysis process. An investor may rank companies based on these valuation ratios.1. 2. revenues or growth. analysis and understanding into actual picks.

non-cyclical (consumer staples).2. Even some technicians will agree to that.2 Value Spotting Sound fundamental analysis will help identify companies that represent a good value. Fundamental analysis can help uncover companies with valuable assets. rewards of fundamental analysis is the development of a thorough understanding of the business. an investor will be familiar with the key revenue and profit drivers behind a company.1 Long-Term Trends Fundamental analysis is good for long-term investments based on very long-term trends. a strong balance sheet. Earnings and earnings expectations can be potent drivers of equity prices. A good understanding can help investors avoid companies that are prone to shortfalls and identify those that continue to deliver. A stock's price is heavily influenced by its industry group. stable earnings. 2. 10 . but less tangible. 2. Warren Buffett and John Neff are seen as the champions of value investing. technological or consumer trends can benefit patient investors who pick the right industry groups or companies. By studying these groups. After such painstaking research and analysis. The ability to identify and predict long-term economic. In addition to understanding the business. demographic. growth oriented (computer). fundamental analysis allows investors to develop an understanding of the key value drivers and companies within an industry. low-risk (utilities). and staying power.2. value driven (oil). Some of the most legendary investors think long-term and value. cyclical (transportation) or income-oriented (high yield).2.2. Graham and Dodd. investors can better position themselves to identify opportunities that are high-risk (tech).2 STRENGTHS OF FUNDAMENTAL ANALYSIS 2.3 Business Acumen One of the most obvious.

Instead. these are the less tangible factors surrounding a business things such as the quality of a company's board members and key executives. an analyst might look at the stock's annual dividend payout. QUANTITATIVE MEETS QUALITATIVE Neither qualitative nor quantitative analysis is inherently better than the other. no analysis of Coca-Cola would be complete without taking into account its brand recognition. assets and more with great precision. When examining its stock. Turning to qualitative fundamentals. but that doesn't tell you a whole lot unless you know what fundamentals are. but you can be sure that it's an essential ingredient contributing to the company's ongoing success. Anybody can start a company that sells sugar and water. Obvious items include things like revenue and profit. quantitative factors. many analysts consider qualitative factors in conjunction with the hard. for example. often as opposed to its size or quantity. It's tough to put your finger on exactly what the Coke brand is worth. but fundamentals also include everything from a company's market share to the quality of its management. The financial meaning of these terms isn't all that different from their regular definitions. However. 11 . Qualitative – related to or based on the quality or character of something. quantitative fundamentals are numeric. but few companies on earth are recognized by billions of people.3 FUNDAMENTALS: QUANTITATIVE AND QUALITATIVE You could define fundamental analysis as "researching the fundamentals". measurable characteristics about a business. patents or proprietary technology. its brand-name recognition. Here is how the MSN Encarta dictionary defines the terms:   Quantitative – capable of being measured or expressed in numerical terms. As we mentioned in the introduction. the big problem with defining fundamentals is that it can include anything related to the economic well-being of a company. You can measure revenue. profit.2. It's easy to see how the biggest source of quantitative data is the financial statements. In our context. Take the Coca-Cola Company. P/E ratio and many other quantitative factors. earnings per share. The various fundamental factors can be grouped into two categories: quantitative and qualitative.

an investor can estimate the intrinsic value of a firm and thus find opportunities where he or she can buy at a discount. Nobody knows how long "the long run" really is. you determine that it really is worth $25. the stock market will reflect the fundamentals.4 THE CONCEPT OF INTRINSIC VALUE Before we get any further. If all goes well. For example. There is no point in buying a stock based on intrinsic value if the price never reflected that value. One of the primary assumptions of fundamental analysis is that the price on the stock market does not fully reflect a stock's "real" value. This leads us to one of the second major assumptions of fundamental analysis: in the long run. By focusing on a particular business. This is what fundamental analysis is all about. why would you be doing price analysis if the stock market were always correct? In financial jargon. this true value is known as the intrinsic value. After all. This is clearly relevant because an investor wants to buy stocks that are trading at prices significantly below their estimated intrinsic value. It could be days or years. 12 .2. you determine the intrinsic value of the firm to be $25. the investment will pay off over time as the market catches up to the fundamentals. we have to address the subject of intrinsic value. let's say that a company's stock was trading at $20. In other words. After doing extensive homework on the company.

It is based on the theory that the market price of a security tends to move towards its 'real value' or 'intrinsic value.1 Benefits Of Fundamental Analysis Fundamental analysis helps in: 1. which takes into consideration: 1.' Thus. commodities and indices. Situational analysis of a company. which is calculated by using the debt to equity ratio and the current ratio (current assets/current liabilities) 3. 2. the intrinsic value of a security being higher than the security’s market value represents a time to buy. Industry sector analysis. Identifying long-term investment opportunities since it involves real-time data. investors should sell it. Valuation The valuation of any security is done through the discounted cash flow (DCF) model.1HOW DOES FUNDAMENTAL ANALYSIS WORKS Fundamental analysis is carried out with the aim of predicting the future performance of a company. which involves considering currencies. 5. If the value of the security is lower than its market price. Financial analysis of the company. 2. Identifying the intrinsic value of a security. Dividends received by investors 2.1. which involves the analysis of companies that are a part of the sector. 4. Earnings or cash flows of a company 3. 13 . Macroeconomic analysis. Debt. TOOLS AND RATIOS 3.CHAPTER-3 MERITS AND DEMERITS. 3. The steps involved in fundamental analysis are: 1.

Performance ratios 14 . Standardize information from financial statements across multiple financial years to allow comparison of a firm’s performance over time in a financial model.It is beneficial only for long-term investments 3.Book Value 9.Earnings per Share –EPS 2. these are: 1. In general. 2.The same set of information on macroeconomic indicators can have varied effects on the same currencies at different times.Projected Earning Growth – PEG 4. Measure key relationships by relating inputs (costs) with outputs (benefits) and facilitates comparison of these relationships over time and across firms in a financial model.Price to Sales – P/S 5. Standardize information from financial statements from different companies to allow an apples to apples comparison between firms of differing size in a financial model. there are 4 kinds of financial ratios that a financial analyst will use most frequently.2 Drawbacks Of Fundamental Analysis Too many ecnomic indicators and extensive macroeconomic data can confuse novice investors.Dividend Payout Ratio 7.Price to Earnings Ratio– P/E 3.3.Price to Book – P/B 6.2FUNDAMENTAL ANALYSIS TOOLS These are the most popular tools of fundamental analysis.Return on Equity 3.3RATIO ANALYSIS financial ratios are tools for interpreting financial statements to provide a basis for valuing securities and appraising financial and management performance. 3.Dividend Yield 8.1. A good financial analyst will build in financial ratio calculations extensively in a financial modeling exercise to enable robust analysis Financial ratios allow a financial analyst to: 1. 1.

4 TECHNICAL ANALYSIS is the practice of anticipating price changes of a financial instrument by analyzing prior price changes and looking for patterns and relationships in price history. because they refer to human expectations. It is the price at which one person agrees to buy and another agrees to sell. he will buy it. 15 . As we all know firsthand. fundamental analysis) becomes less important than knowing what other investors expect it to sell for. If prices are based on investor expectations. he will sell it. The price of a security represents a consensus. If he expects the security's price to rise. if the investor expects the price to fall. But there is usually a fairly strong consensus of a stock's future earnings that the average investor cannot disprove. Solvency ratios These 4 financial ratios allow a good financial analyst to quickly and efficiently address the following questions or concerns: 1) Performance ratios  What return is the company making on its capital investment?  What are its profit margins? 2) Working capital ratios  How quickly are debts paid?  How many times is inventory turned? 3) Liquidity ratios  Can the company continue to pay its liabilities and debts? 4) Solvency ratios (Longer term)  What is the level of debt in relation to other assets and to equity?  Is the level of interest payable out of profits 3.e. they just cannot afford to ignore either fundamental or technical analysis. Liquidity ratios 4. The price at which an investor is willing to buy or sell depends primarily on his expectations. These simple statements are the cause of a major challenge in forecasting security prices. then knowing what a security should sell for (i. Working capital ratios 3.2. Since all the investors in the stock market want to make the maximum profits possible. That's not to say that knowing what a security should sell for isn't important--it is.. humans expectations are neither easily quantifiable nor predictable.

fundamental analysis allows investors to develop an understanding of the key value drivers and companies within an industry. Earnings and earnings expectations can be potent drivers of equity prices. The ability to identify and predict long-term economic. low-risk (utilities). but less tangible. investors can better position themselves to identify opportunities that are high-risk (tech).1Long-term Trends Fundamental analysis is good for long-term investments based on long-term trends. Warren Buffett and John Neff are seen as the champions of value investing. Business can change rapidly and with it the revenue mix of a company. Even some technicians will agree to that.5 WHY ONLY FUNDAMENTAL ANALYSIS 3. rewards of fundamental analysis is the development of a thorough understanding of the business. cyclical (transportation) or income-oriented (high yield). 3.5. 3. The charts of the technical analyst may give all kinds of profit alerts. a strong balance sheet. In addition to understanding the business. By studying these groups. Some of the most legendary investors think long-term and value.5. investors can better position themselves to categorize stocks within their relevant industry group. A good understanding can help investors avoid companies that are prone to shortfalls and identify those that continue to deliver.4 Knowing Who's Who Stocks move as a group. value driven (oil). an investor will be familiar with the key revenue and profit drivers behind a company.5. and staying power. stable earnings. but there’s little in the charts that tell us why a group of people make the choices that create the price patterns. 16 . 3.5. demographic.2 Value Spotting Sound fundamental analysis will help identify companies that represent a good value. Graham and Dodd. Knowing a company's business and being able to place it in a group can make a huge difference in relative valuations. After such pains taking research and analysis. but plain retailers.3 Business Insights One of the most obvious. very longterm. signals and alarms. Fundamental analysis can help uncover companies with valuable assets.3. technological or consumer trends can benefit patient investors who pick the right industry groups or companies. growth oriented (computer). This has happened with many of the pure internet retailers. which were not really internet companies. A stock's price is heavily influenced by its industry group. non-cyclical (consumer staples). By understanding a company's business.

When this happens. the only question is how much so.2 Industry/Company Specific Valuation techniques vary depending on the industry group and specifics of each company. This is not to say that there are not misunderstood companies out there. a different technique and model is required for different industries and different companies. However.1 Time Constraints Fundamental analysis may offer excellent insights. but is not likely to be the best model to value an oil company. 3. A subscription-based model may work great for an Internet Service Provider (ISP). which can limit the amount of research that can be performed. even on a worst-case valuation. Any changes to growth or multiplier assumptions can greatly alter the ultimate valuation. an average-case valuation and a worst-case valuation.6 WEAKNESSES OF FUNDAMENTAL ANALYSIS 3. The chart below shows how stubbornly bullish many fundamental analysts can be. For this reason. the analyst basically claims that the whole street has got it wrong.6.3 Subjectivity Fair value is based on assumptions. 3. but it is quite brash to imply that the market price. but it can be extraordinarily time-consuming.3. most models are almost always bullish.6. This can get quite time-consuming. is wrong. Time-consuming models often produce valuations that are contradictory to the current price prevailing on Wall Street.6. Fundamental analysts are generally aware of this and use sensitivity analysis to present a base-case valuation. and hence Wall Street. 17 .

Robertson Stephens. it has become popular to value a business as a multiple of its revenues. because so many companies were and are losing money. so too do growth and multiplier assumptions. They read the reports written by the sell-side analysts who work for the big brokers (CIBC. "there are lies.6. There is an old Wall Street adage: the value of any asset (stock) is only what someone is willing to pay for it (current price). it is important to take into consideration any biases a sell-side analyst may have. 18 ." When it comes to massaging the data or spinning the announcement.4 Analyst Bias The majority of the information that goes into the analysis comes from the company itself. Just as stock prices fluctuate. Buy-side analysts work for mutual funds and money managers. The buy-side analyst. Only buy-side analysts tend to venture past the company statistics. except that the multiple was higher than the PE of many stocks! Some companies were considered bargains at 30 times revenues. If Wall Street values a stock at 50 times earnings and the current assumption is 30 times. DLJ to name a few). there is pressure to adjust growth and multiplier assumptions to compensate. This would seem to be OK. CS First Boston. In 1999. the S&P 500 typically sold for 28 times free cash flow.3. In some cases this may be as a large shareholder. Even though there are restrictions in place to prevent a conflict of interest. 3. However. it is usually on different terms. and statistics. When reading these reports. Merrill Lynch. the analyst would be pressured to revise this assumption higher. CFOs and investor relations managers are professionals. Paine Weber. on the other hand. damn lies.5 Definition of Fair Value When market valuations extend beyond historical norms. brokers have an ongoing relationship with the company under analysis. Companies employ investor relations managers specifically to handle the analyst community and release information. As Mark Twain said.6. is analyzing the company purely from an investment standpoint for a portfolio manager. If there is a relationship with the company. Are we to believe Wall Street and the stock price or the analyst and market assumptions? It used to be that free cash flow or earnings were used with a multiplier to arrive at a fair value. These brokers are also involved in underwriting and investment banking for the companies.

improved financial viability and institutional strengthening. It also represents the possibility of an outcome being different from the expected. regardless of size. danger. Insurance sector in India was traditionally dominated by state owned Life Insurance Corporation and General Insurance Corporation and its four subsidiaries. which permits statistical prediction of losses and provides for payment of losses from funds contributed (premiums) by all members who transferred risk. Insurance plays a crucial role in every risk management program. with the ultimate objective of improving the allocative efficiency of resources through operational flexibility. exposure to mischance‖. chance of bad consequences. The banking and insurance system has witnessed greater levels of transparency and standards of disclosure. 19 . Financial sector reforms in India in 90s have advocated the objectives of opening the constituent segments to competition & liberalized operations.CHAPTER-4 FUNDAMENTAL ANALYSIS IN INSURANCE SECTOR 4. insurance almost always represents the ultimate hedging device to protect the budget and the overall financial integrity of the firm against a single catastrophe or sharply skewed loss experience. uncertainty. Risk: Risk can be defined as ―peril. loss.1 INTRODUCTION TO INSURANCE Insurance is a social device in which a group of individuals (insured) transfer risk to another party (insurer) in order to combine loss experience. Government of India is now considering increase in FDI in insurance sector up to 49% from the existing 26%. The thrust of financial reforms was to promote a diversified. Increasing integration with global markets then became another catalyst for further reforms. If it is known for certain that a loss will occur. efficient and competitive financial system. Risk may be defined as the possibility of adverse results flowing from any occurrence. In whichever form. there is no risk. Enhanced competition among diverse players has been encouraged. hazard. The management of financial sector has been oriented towards gradual rebalancing between efficiency & stability and the changing shares of public and private ownership.

The term risk is used in insurance business to also mean either a peril to be insured against (e. Customers are offered unbundled products with a variety of benefits as riders from which they can choose. Computerization of operations and updating of technology has become imperative in the current scenario. have always seen life insurance as a tax saving device. fire is a risk to which property is exposed) or a person or property protected by insurance (e. 4. Indians. young drivers are often not considered good risk for motor insurance companies). Saturation of markets in many developed economies has made the Indian market even more attractive for global insurance majors. After the entry of the foreign players the industry is seeing a lot of competition and thus improvement of the customer service in the industry.g.      Direct selling Corporate agents Group selling Brokers and cooperative societies Banc assurance Customers have tremendous choice from a large variety of products from pure term (risk) insurance to unit-linked investment products. Consumers remain the most important centre of the insurance sector. Foreign players are bringing in international best practices in service through use of latest technologies The insurance agents still remain the main source through which insurance products are sold.g. are now suddenly turning to the private sector that are providing them new products and variety for their choice. The concept is very well established in the country like India but still the increasing use of other sources is imperative. At present the distribution channels that are available in the market are listed below.2 PRESENT SCENARIO OF INSURANCE INDUSTRY India with about 200 million middle class household shows a huge untapped potential for players in the insurance industry. which is not 20 . The insurance sector in India has come to a position of very high potential and competitiveness in the market. More customers are buying products and services based on their true needs and not just traditional money back policies.

A research conducted exhibited that the rural consumers are willing to dole out anything between Rs.Insurance is a device to share the financial loss of few among many others.1 THE FUNCTIONS OF INSURANCE CAN BE BIFURCATED INTO THREE PARTS: 1. 4. C. there are still some key new products yet to be introduced . Secondary Functions 3. Insurance is a mean by which few losses are shared among larger number of people. accidents and uncertainty. by sharing the risk with others. but the consumers are also aware about motor. Risk is the basis for determining the premium rate also. The rural consumer is now exhibiting an increasing propensity for insurance products.2. daughter's marriage. Primary Functions 2.e.g. Collective bearing of risk .considered very appropriate for long-term protection and savings. accidents and cattle insurance. In a study conducted by MART the results showed that nearly one third said that they had purchased some kind of insurance with the maximum penetration skewed in favor of life insurance. 900 as premium each year. However. Insurance cannot check the happening of the risk. 500 and Rs. Insurance is actually a protection against economic loss. health products.Insurance determines the probable volume of risk by evaluating various factors that give rise to risk. Assessment of risk . The perceived benefits of buying a life policy range from security of income bulk return in future. 21 . In the insurance the awareness level for life insurance is the highest in rural India. Provide Protection . in that order. The study also pointed out the private companies have huge task to play in creating awareness and credibility among the rural populace. the study adds. There is lots of saving and investment plans in the market. B.2. children's education and good return on savings.The primary function of insurance is to provide protection against future risk.3. Other Functions The primary functions of insurance include the following: A. All the insured contribute the premiums towards a fund and out of which the persons exposed to a particular risk is paid. but can certainly provide for the losses of risk.

C. which makes the foreign trade risk free with the help of different types of policies under marine insurance cover. B. 22 . C.Insurance cautions individuals and businessmen to adopt suitable device to prevent unfortunate consequences of risk by observing safety instructions. 4. Insurance is device whereby the uncertain risks may be made more certain. 4.2 THE SECONDARY FUNCTIONS OF INSURANCE INCLUDE THE FOLLOWING: A. Prevention of losses cause lesser payment to the assured by the insurer and this will encourage for more savings by way of premium. insurance is a compulsory way of savings and it restricts the unnecessary expenses by the insured's For the purpose of availing income-tax exemptions also.Insurance is a device. people invest in insurance.Insurance relieves the businessmen from security investments. Contributes towards the development of larger industries . Even the financial institutions may be prepared to give credit to sick industrial units which have insured their assets including plant and machinery.3 THE OTHER FUNCTIONS OF INSURANCE INCLUDE THE FOLLOWING: A.Insurance is an international business. Source of earning foreign exchange . B. etc.D. Risk Free trade .2. Provide Certainty .Insurance serves as savings and investment. installation of automatic sparkler or alarm systems.Insurance provides development opportunity to those larger industries having more risks in their setting up. Means of savings and investment . The country can earn foreign exchange by way of issue of marine insurance policies and various other ways. Small capital to cover larger risks .2. Prevention of Losses . by paying small amount of premium against larger risks and uncertainty. Reduced rate of premiums stimulate for more business and better protection to the insured.Insurance promotes exports insurance. which helps to change from uncertainty to certainty.

Endowment Policy b. Alongside. The Insurance Policy India is regulated by certain acts like the Insurance Act (1938).4. Joint Life Policy f.3. Group Insurance Policy 4. cash. Travel Insurance 23 . General insurance 4.3. household goods.2 General Insurance -this sector covers almost everything related to property. Money-back Policy e. Motor Insurance d.3 FEATURES OF INSURANCE INDUSTRY Insurance Policy India provides the clients with the details required for the coverage in the policy. Home Insurance b. The insurance policy determines the covers against risks. Term Life Policy d. The major segments covered under general Insurance Policy India are: b. vehicle. There are two types of insurance covers: 1. It plays a important role in the Indian insurance sector. health and also one's liability towards others. Whole Life Policy c. Health Insurance c. General Insurance Business Nationalization) Act (1972). the Life Insurance Corporation Act (1956).1 Life insurance-this sector deals with the risks and the accidents affecting the life of the customer. date of commencement of the policy and their adopting organizations. Life insurance 2. Insurance Regulatory and Development Authority IRDA) Act (1999). this insurance policy also offers tax planning and investment returns. There are various types of life Insurance Policy India: a. sometime opens investment options with insurance companies setting high returns and also informs about the tax benefits like the LIC in India.

with a premium of Rs. E. Jana Shree Bima Yojana-this is coverage of Rs.5000 for natural death and of Rs.50. Shiksha Sahyog Yojana-a scheme providing an educational scholarship of Rs.25000 on due to accidental death. D. 000.70 and for children it is Rs.scheme-covering workers in case of loss of jobs.15 per annum. 000 on natural death and Rs. F.300 per quarter per child is given for a period of four years. Mediclaim Insurance Policy-a scheme covering the age group from 5-80 years with a tax benefit of up to Rs.15 per annum.200 for single member. B. G. H. Ashray Bima Yojana.25.000 for partial disability.2. Videsh Yatra Mitra Policy-a scheme-covering medical expenses during the period of overseas travel. Social Security Group Scheme -a scheme covering the age group of 18-60 years and an insurance of Rs. 000 and premium Rs. The premium amount is fixed at Rs. 24 . Personal Accident Insurance Scheme for Kissan Credit Card – a scheme covering all the KCC holders up to an age of 70 years.Some of the well-known Insurance Policy in India are: A.000 for accidental death and 25.10.50. Jan Arogya Bima Policy-a scheme for the adult’s up to the age of 45 years is Rs. Raj Rajeshwari Mahila Kalyan Yojana-a scheme providing protection to woman in the age group of 10 to 75 years with an insurance of Rs. C. Bhagya Shree Child Welfare Bima Yojana-a scheme covering one girl child in a family up to the age of 18 whose parents age does not exceed 60 years. The limit coverage is fixed at Rs. I. Insurance coverage includes 50. 000 for accidental death.5000 per annum.

Life insurance is a unique investment that helps you to meet your dual needs .4.4 NEED OF INSURANCE Today. life insurance is unique in that it gives the customer the reassurance of asset protection. insurance products also have a strong inbuilt wealth creation proposition. and protecting your assets. Given the plethora of choices. planning for one's retirement will begin to take precedence. Simultaneously. the instrument in which you invest should offer corresponding benefits pertinent to the new life stage. it could be buying a house.saving for life's important goals. an investment can play two roles . 25 .asset appreciation or asset protection.4. property. For a young. newly married couple. there is no shortage of investment options for a person to choose from. Once. they decide to start a family. Let us look at these unique benefits of life insurance in detail. the goal changes to planning for the education or marriage of their children.1 Asset Protection From an investor's point of view. Modern day investments include gold. Life insurance is the only investment option that offers specific products tailor made for different life stages. as your life stage and therefore your financial goals change. and hence ensures that the financial goals of that life stage are met. life insurance. along with a strong element of asset appreciation. mutual funds and of course. Clearly. The core benefit of life insurance is that the financial interests of one's family remain protected from circumstances such as loss of income due to critical illness or death of the policyholder.2 Goal based savings Each of us has some goals in life for which we need to save. It thus ensures that the benefits offered to the customer reflect the needs of the customer at that particular life stage. 4. While most financial instruments have the underlying benefit of asset appreciation.4. fixed income instruments. 4. As one grows older. The customer therefore benefits on two counts and life insurance occupies a unique space in the landscape of investment options available to a customer. it becomes imperative to make the right choice when investing your hard-earned money.

An insurer's underwriting performance is measured in their combined ratio. 1938 for life & general insurance respectively.Underwriting Expenses. Approved investments: Investments which are in accordance with the provisions of section 27A & 27B of Insurance Act.  Central Government securities  State Government securities  Other Approved Securities  Funding to State Governments for housing / electricity purposes  Debentures/ bonds  Preference shares  Equity shares  Term loans  Unsecured short term loans 26 . at-hand at any given moment that an insurer has collected in insurance premium but has not been paid out in claims. The investment regulations are made in exercise of power conferred by Sections 27A. Insurers start investing insurance premium as soon as it is collected and keeps earning interest on it until claims are paid out. 27B: General insurance business investments. 27B. 27D and 114A of the Insurance Act.5 BUSINESS MODEL OF INSURANCE COMPANY Insurance Business Model: Profit = Earned Premium + Investment Income Incurred Loss . Insurance companies also earn investment profits on ―float‖. 114A: power of Authority to make regulations.4. 27D: Manner & conditions of investment. The loss ratio (incurred losses and loss-adjustment expenses divided by net earned premium) is added to the expense ratio (underwriting expenses divided by net premium written) to determine the company's combined ratio. A combined ratio of less than 100 percent indicates profitability. 27C: Prohibition for investment of funds outside India. ―Float‖ or available reserve is the amount of money. 27A: Life insurance business investments. 1938. Insurance companies in India have to invest in the following as per IRDA guidelines. The combined ratio is a reflection of the company's overall underwriting profitability. while anything over 100 indicates a loss.

The reinsurance market is dominated by a few very large companies. life and non-life insurers are subject to different regulations. tax and accounting rules. insurance business is divided into the following major categories: 1) Life Insurance (Transacted by life insurers) 2) Fire Insurance 3) Marine Insurance and 4) Miscellaneous Insurance (Transacted by non-life insurers) No composite insurance companies are permitted as per law. By contrast.1 TYPES OF INSURANCE COMPANIES Insurance companies may be classified as • Life insurance companies. Customer Protection:Insurance Industry has Ombudsmen in 12 cities.life insurance cover usually covers a shorter period.CHAPTER-5 TYPES. non. annuities and pensions products. such as one year. DEVELOPMENT AND FUNDAMENTAL PRINCIPAL OF INSURANCE 5. • Reinsurance companies In most countries. who sell life insurance. with huge reserves. in accordance with the Ombudsman Scheme. Each Ombudsman is empowered to redress customer grievances in respect of insurance contracts on personal lines where the insured amount is less than Rs. 27 . In India. Reinsurance companies are insurance companies that cover risks of other insurance companies. 20 lakhs. who sell other types of insurance. The main reason for the distinction between the two types of company is that life business is very long term in nature — coverage for life assurance or a pension can cover risks over many decades. • Non-life or general insurance companies. allowing them to reduce their risks and protect themselves from very large losses.

Ltd 4. ICICI Lombard General Insurance Co. SBI Life Insurance Co. Tata AIG Life Insurance Company Limited 5.1. Reliance General Insurance Co. Ltd 6. Royal Sundaram Alliance Insurance Co. Ltd 3. 2010) 1. Kotak Mahindra Old Mutual Life Insurance Limited 10. Ltd 5. Ltd 5. Ltd 3.1 LIFE INSURANCE COMPANIES LICENCED BY IRDA (Sept. 2010) 1. Tata AIG General Insurance Co. Ltd 7.400 Crores. Capital Deployed – more than Rs. HDFC Standard Life Insurance Co. Life Insurance Corporation of India 2.2 NON-LIFE INSURANCE COMPANIES LICENCED BY IRDA (Sept. Ltd 2. Ltd 6. The Oriental Insurance Co. Reliance Life Insurance Company Limited. Ltd 10. Large mobilization of savings next only to banks. 7.1. Ltd 8. Ltd 5. Significant participant in the capital markets. Bajaj Allianz General Insurance Co. 9. Met Life India Insurance Company Ltd. ICICI Prudential Life Insurance Co. Birla Sun Life Insurance Co. Ltd. IFFCO Tokio General Insurance Co. National Insurance Co.5. 16. ING Vysya Life Insurance Company Pvt. United India Insurance Co. 8. The New India Assurance Co. Ltd 4. Ltd 9. Assets 28 .2 LIFE INSURANCE INDUSTRY IN INDIA More than a century in India.

more than 2. in return for payment to an insurance company of a sum of money. Single premium/ multiple premium. administrative capabilities. Usually a contract provides payment of an amount on the date of maturity or on specified dates or on death of the assured. IRDA has come out with various guidelines and regulations on different subjects. Collateral Life Insurance is a contract for payment of a sum of money to the person assured or to the person entitled for receiving the sum. Disability 4. Sum assured in-force – more than 23. single life/ group. An annuity is a method by which a person can receive a yearly sum. Contract provides for periodic payment of premium. Old age 3. Number of direct employees. on happening of an event insured against. Family protection 2. Types: Medical/ Non-medical. When a person has a reasonably large sum of money and wants to provide an income for himself after retirement he can buy an annuity. Number of agents –more than 25 lakhs. in some form or the other depending upon its philosophy. Insurance Regulation: World over. an annuity. Whole Life Policies and Endowment policies are permanent type of policies. Invested in Infrastructure – more than Rs. does not result in undue losses to the insurers themselves resulting in their insolvency and that the legitimate interest of the insuring public is protected. Four hazards of human life: 1.5 lakhs.under management – more than Rs. Death Utility of life insurance: 1. Term assurances are temporary contracts which provide basic death risk cover.200 Crores.600 Crores. Number of In-force policies – approximately 26 Crores.600 Crores. 8. Savings 3. with profit/ without profit. 90. the State. conducted by competent persons. Number of branches – more than 8500. socioeconomic/political compulsions and preferences regulates insurance business. 29 . The objective of regulation is to ensure that the business is run fairly. Loss of employment 2. 47. Tax saver 4.

The Indian Mercantile Insurance limited was set up to transact all classes of general insurance business. The life insurance business began with the setting up of the Oriental Life Insurance Company in 1818.5. particularly to rural areas 2. Substantial amendments were made in 1950 to the Insurance Act to include provisions relating to investments. A comprehensive law was enacted in 1938 (the Insurance Act) which consolidated earlier legislation and provided for administrative and regulatory measures for the regulation of insurance business in India.5 crore from the Government of India. The other objectives of nationalization of the life insurance industry were: 1. Around the time of India's Independence. To spread the reach of life insurance. To conduct the business with utmost economy. (These included 46 composite insurers. 245 Indian and foreign insurers and provident societies taken over by the central government. periodic filing of returns.3 DEVELOPMENT OF INDIA INSURANCE INDUSTRY Developments in Indian Insurance Industry: The Indian Insurance Industry is nearly two centuries old. controls on management expenses and commissions and for the appointment of administrators in respect of financially unsound companies. consistent with safety of capital 5. The first piece of legislation to regulate the conduct of life business was the Indian Life Assurance Companies Act. To prudently invest funds in order to maximize yield to policy holders. equity capital requirements. 1912. Bombay Mutual life assured Society. The need for additional avenues of finance to fund Plan expenditure was another key consideration for passing the LIC Act in 1956. To charge premiums no higher than warranted by strict actuarial considerations 4. in a spirit of trusteeship 3. formed in 1870 was the first Indian owned life insurer. there were 236 insurers in India. The general insurance industry took roots with the setting up of the Triton Insurance Company in 1850 in Calcutta.) The financial failure of some insurers at a time when the country was progressively moving towards a centrally planned command economy set the stage for nationalization of the life insurance business in 1956. leading to the creation of the Life Insurance Corporation of India with a capital contribution of Rs. In 1907. comprising of foreign companies and branches and provident societies. To render prompt and efficient service to policy holders 30 .

National. The Committee was also required to make specific suggestions regarding LIC and GIC which would help to improve their functioning in the changing environment.life insurance business in India was nationalized by taking over the operations of then existing 107 companies and organizing them in to 4 companies. Postal Life Insurance should be allowed to operate in the rural market. In 1972.1bn should be allowed to enter the industry. was realized by government as early as 1993 when the Committee on Reforms in Insurance Sector (CRIS) was formed under the Chairmanship of Mr. In 1994. Foreign companies may be allowed to enter the industry in collaboration with the domestic companies. Avoid preferential treatment in underwriting as also claims payment In 1968. The terms of reference of the Committee included examination of the present structure of the insurance industry and to make recommendations keeping in view the structural changes currently under way in other parts of the financial system and in the economy. iii) Regulatory Body: The Insurance Act should be changed. Only one State Level Life Insurance Company should be allowed to operate in each state. No Company should deal in both Life and General Insurance through a single entity. Marine. the committee submitted the report and some of the key recommendations were: i) Structure: Government stake in the insurance Companies to be brought down to 50% Government should take over the holding of GIC and its subsidiaries so that these subsidiaries can act as independent corporations All the insurance companies should be given greater freedom to operate ii) Competition: Private Companies with a minimum paid up capital of Rs. An Insurance Regulatory body should be set up Controller of Insurance (a part of the Finance Ministry then) should be made independent. non. Tariff Advisory Committee (TAC) was formed and rates and terms in Fire.6. General Insurance Corporation of India (GIC) was formed as holding company for these 4 companies as also to take care of reinsurance needs. Motor and Engineering businesses were brought under tariff. 31 . Recommendations for the strengthening and modernizing of the insurance regulatory system and matters relevant for the healthy and long term development of the insurance sector were also sought from the Committee. R N Malhotra. oriental & United India. New India. The committee was set up in the context of the several initiatives aimed at creating a more efficient and competitive financial system suitable for the requirements of the economy.

GIC and its subsidiaries are not to hold more than 5% in any company (There holdings to be brought down to this level over a period of time if was more) v) Customer Service: LIC should pay interest on delays in payments beyond 30 day. it was decided to allow competition by stipulating the minimum capital requirement of Rs. The advantages of liberalization are expected to be in terms of: • • • • • Development of nation’s infrastructure Market development through new intermediaries and distribution channels Enhanced level of customer satisfaction Competitive pricing as against tariff rates Professionalism & technology driven processes The committee emphasized that in order to improve the customer services and increase the coverage of the insurance industry should be opened up to competition. GIC was separated from 4 state owned general insurance companies in 2001 and was made exclusively a reinsurance company 32 . But at the same time. (2) lack of customer focus and low service levels and (3) expectation of additional funding for infrastructure. could be (1) low insurance penetration. Computerization of operations and updating of technology to be carried out in the insurance industry. The committee felt the need to provide greater autonomy to public sector insurance companies in order to improve their performance and enable them to act as independent companies with economic motives.iv) Investments: Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%. Insurance companies must be encouraged to set up unit linked pension plans. the committee felt the need to exercise caution as any failure on the part of new players could ruin the public confidence in the industry. Hence. Opening up of Indian insurance sector for competition: Three major reasons for inviting competition in the sector where Government had monopoly. New companies came into India’s insurance horizon from 2000 onward.100 crores.

Utmost Good Faith: In all General Insurance contracts we know that a property or interest or liability or life is offered for insurance and the insured has to take decisions on the acceptance of the proposal. To enable him to take necessary decision in this regard. 33 . Insurable Interest is a must and only then the insurance contract is enforceable at law. Life or Liability. This principle differentiates a Contract of insurance from wager. officials appointed by a court of law to take care of a property may also insure the property.g. this must be insured and the Insured should have a legally recognizable relationship thereto. Insurable Interest may arise in the following manner: • • • • Ownership: Absolute ownership entitles the owner to insure the property. • An employer can insure his employee under a Personal Accident Policy as he has insurable interest in them. This is the commonest method whereby Insurable Interest arises.e. Partial Interest is also insurable e. Administrators and executors i.5. A creditor can also insure the life of his debtor but only to the extent of his loan. These facts influence the judgment of the insurer in deciding about the acceptance or otherwise of the risk and the rate of premium to be charged. Lack of insurable interest renders the contract null and void. The Insured should be benefited by the safety of the property or is prejudiced by its loss. For Insurable Interest to exist there must be Property. a mortgagee. if accepted.4 FUNDAMENTAL PRINCIPLE OF THE INSURANCE 1. The only relationship recognized by law for this purpose is the one between a husband and wife. If he decides to accept the proposal a premium commensurate with the risk has to be charged. Relationship does not automatically constitute insurable interest. the insurer must have certain facts about the risk offered. Rights. 2. Such facts are known as material facts. Insurable Interest: Insurable interest means the legal right to insure. Interest.

There should not be a profit made by insured out of a loss. Proximate cause has been defined as "the active. 6. Subrogation may be defined as the transfer of rights and remedies of the insured to the insurers who have indemnified the insured in respect of the loss. Common Law has. However. Common Law has therefore. despite his having several insurances on the subject-matter. Proximate cause: Generally. it may so happen that that the insured may recover his loss under his policy and he may also have rights against third parties. he will obviously make a profit out of loss. 5. the insured is allowed to enforce his rights against third parties and to retain whatever damages he receives from them. evolved the doctrine of subrogation as corollary to the principle of indemnity. so as to constitute a valid claim. Contribution: An insured may have several insurances on the same subject matter. 34 . In other words. as it arises only after payment of loss. evolved the doctrine of contribution whereby the insured is prevented from recovering more than his loss. the proximate cause of the event has to be peril covered by the policy. efficient cause that sets in motion a train of events which brings about a result without the intervention of any force started and working actively from a new and independent source". Indemnity: To place insured after a loss in the same financial position as far as possible as he occupied before the loss. the claims are payable under insurance policies if they arise out of events which are proximately caused by the insured perils. Subrogation: The principle of indemnity seeks to prevent the insured from making profit out of loss. he will certainly make a profit and the principle of indemnity will be infringed. therefore.3. after the insurance claim is settled. If he recovers his loss under all these insurances. (Would not apply for life and personal lines of insurance business) 4. The Common Law right of subrogation is implied an all contracts on indemnity. If. This will be an infringement of the principle of indemnity.

Help determine the reserves and surplus the company must establish to cover future losses. Determine rates that are fair for the company and the policyholder. The Life Insurance Corporation Act. The Personal Injuries (Compensation Insurance) Act. agents. The insurance company (insurer). Actuary plays an important role in designing and pricing of insurance covers. The Marine Insurance Act. Some of them would be involved full time being employed by the business while others would offer their services on a job or contract basis. Insurance legislation: Though Insurance Act. The General Insurance Business (Nationalization) Act. there are many other acts directly or indirectly applicable to insurance. 1991. Insurance Regulatory Development Authority Act. Actuaries assemble and analyze statistics to: • • • Calculate probability of a loss. 1938 is the basic legislation governing insurance. The War Injuries (Compensation Insurance) Act. information technology. 1963. brokers. In India. specializing in statistical estimation of various risks and their financial consequences. The business primarily concerns with receipt of premium & issue of policy and claims processing & payment. 9. consultants. Carriage of Goods Act. auditing. Professionals could be from the field of engineering. third party administrators. An actuary is a financial expert. loss assessors. 1963. To name a few: Companies Act. 1999. The Public Liability Insurance Act. Intermediaries in insurance: Effective functioning of multiple agencies is an essential prerequisite of the insurance business. we are aware of services offered by professionals like engineers. taxation etc. courts and clients (insured). 35 . publicity.7. 1956. reinsurance brokers. Income Tax Act. 1958. Also helps in the areas of loss reserving. chartered accountants and cost accountants. The Negotiable Instruments Act. software consultants. 1943. accounting. The actuarial profession in India is relatively unknown. 8. The Motor Vehicles Act. Actuary: The business enterprise relies on advice and services rendered by professionals from various disciplines for smooth conduct of operations. There are various elements in this chain. surveyors. 1972. investments etc.

Underwriters consider many things in making their decisions. The way underwriters know which business to accept is determined by how the insurance company defines its market. • Review applications. Underwriter is a technician trained in evaluating risks and determining rates and coverage for them. • • • • In life insurance: Assessment and valuation of mortality risks In property insurance: risk appraisal and pricing accordingly In investment: investment decisions In health insurance: analysis of morbidity data and pricing accordingly 11. but also in the areas of general insurance. Underwriter is responsible for selecting the people and properties the company will insure. 36 . Underwriting: Underwriting is the process of selecting risks for insurance and determining in what amounts and on what terms the insurance company will accept the risk. Their insurance contracts and rates reflect their marketing decisions.10. The process also includes rejection of those risks that do not qualify. pension etc. every company must decide which risks they want to accept and how much they must be compensated to accept those risks. The term derives from the practice at Lloyd's of each person willing to accept a portion of the risk writing his name under the description of the risk. That is. Scope for actuarial profession: Actuarial expertise can not only be used in the area of life insurance. • Evaluate hazards and risks: • Determine what premium is sufficient for coverage. health insurance.

To ensure that we can afford to pay that compensation. that person is entitled to compensation. One of the main reasons one should insure is to protect one’s belongings and assets against financial loss. in case we should cause a loss to another person. there are policies that cover the hull of ships and so on.CHAPTER-6 GENERAL NON LIFE INSURANCE AND COMPANY ANALYSIS 6. Marine Hull & Cargo also fall under this group. Products offering Personal Accident cover are benefit policies.1 GENERAL / NON-LIFE INSURANCE One faces a lot of risks in our daily lives. Examples are insuring property like house and belongings against fire and theft or vehicles against accidental damage or theft. General Insurance comprises of insurance of property against fire. Health etc. The non-life companies also offer policies covering machinery against breakdown. The law also requires us to be insured against some liabilities. When one has earned and accumulated property. Further. There are also other miscellaneous covers. There are products that cover property against burglary. Non-life insurance companies have products that cover property against Fire and allied perils. Insuring anything other than human life is called non-life or general insurance or Property & casualty insurance. personal insurance such as Accident and Health Insurance and liability insurance which covers legal liabilities. air and road. an insurance company will take the responsibility of compensating the financial losses. A Marine Cargo policy covers goods in transit including by sea. For a payment (premium). burglary etc. That is.life insurance business. Health insurance covers offered by non-life insurers are 37 . Insurance is a way of protecting against these financial losses. flood. Injury due to accident or hospitalization for illness and surgery can also be insured. insurance of motor vehicles against damages and theft forms a major chunk of non. Personal insurance covers include policies for Accident. the law requires us to buy liability insurance so that the responsibility of paying the compensation is transferred to an insurance company. Some of these lead to financial losses. protecting it is prudent. theft etc. Your liabilities to others arising out of the law can also be insured and is compulsory in some cases like motor third party insurance. storm etc.

a policy that covers property. Public Liability Insurance Policy etc. you don’t have to pay for the treatment at the hospital and then make a claim for reimbursement of the expenses.. there are few products that are somewhat long-term. There are general insurance products that are in the nature of package policies offering a combination of the covers mentioned above. allow for reinstatement of the Sum Insured by payment of proportionate premium for the remaining period of the policy. That is. there are package policies available for householders and shop keepers. The proposal form needs to be filled in completely and correctly by a proposer to ensure that the cover is adequate and the right one. However. Certain policies. insurers offer group discounts. It is important for proposers to read and understand the terms and conditions of a policy before they enter into an insurance contract. Normally when a group is covered. Most general insurance covers are annual contracts. In no case can an insured get more than the actual pecuniary loss incurred. Nowadays health insurance policies – which cover hospitalization costs – have also a cashless settlement of claims. however. Liability insurance covers such as Motor Third Party Liability Insurance. Some of the covers such as Motor Third Party and Workmen’s Compensation policy are compulsory by statute. who liaises with the hospitals and directly makes the payment for your treatment as per the terms of your policy and coverage. if there are two policies in vogue. Liability Insurance not compulsory by statute is also gaining popularity these days. i. Accident and health insurance policies are available for individuals as well as groups. the loss shall be shared by both the policies.mainly hospitalization covers either on reimbursement or cashless basis. Workmen’s Compensation Policy. offer cover against legal liabilities that may arise under the respective statutes— Motor Vehicles Act. For instance. The insurance company has a service provider called the third party administrator (TPA) health services. In indemnity policies. Cashless service is offered through Third Party Administrators (TPA) who have arrangements with various service providers. If the property is 38 . The Workmen’s Compensation Act etc. In case of an indemnity cover (one that seeks to compensate the actual loss)--for instance. A group could be a group of employees of an organization or holders of credit cards or deposit holders in a bank etc. hospitals.e. The actual claim will be the actual extent of financial loss as validated by documents like bills. the upper limit of a claim is the sum assured and this usually applies for the period of the policy. TPAs also provide service for reimbursement claims. Sometimes the insurers themselves process reimbursement claims.

and animal driven cart insurance. it is a loss.1 Fire Insurance-Fire insurance covers you against loss or damage to property caused by fire or lightning and a list of other perils.2 GENERAL INSURANCE PRODUCTS: 6. On the basis of experience gained on implementation of Comprehensive Crop Insurance scheme from 1984 till 1988. why should one buy insurance? General insurance is not meant to be for savings or investment returns. 39 . 6. 6. Cycle rickshaw policy. To approach it as something from which returns should be obtained is not the correct approach as there is a price to pay for protecting a property worth lakhs for a few hundred rupees.1.3 Crop Insurance: India is one of the few countries in the world to have an agricultural insurance scheme.1 Rural Insurance: Sections 32 B and 32 C of the Insurance Act provide for obligation on insurers towards rural and social sector.underinsured. a new scheme National Agricultural Insurance Scheme (Rashtriya Krishi Bima Yojana) was introduced in 1999. Agricultural pump set policy. It is a feeling in most buyers that if one buys a policy and don’t make a claim. Horticulture/ floriculture insurance. IRDA has.1. accordingly issued regulation for ―Obligations of insurers to Rural & Social Sectors 2000‖.1. There can be more than one claim in the policy period but the sum assured is usually the limit for the policy period unless reinstated. What you pay for is the protection against a risk. Sericulture (silk worm) insurance. No risk commences unless you have paid the premium in full. failed well insurance. It is meant for protection. Honey Bee insurance. as may be specified by IRDA. So.2. 6. 64 VB of insurance act. Poultry insurance. 6.2 Existing Rural Insurance Covers: Cattle insurance. In India general insurance policies are annual and the premium payment is in advance as per sec. the insured shall bear a rateable proportion of the loss.

6.9 Workmen's Compensation Insurance-Workmen's Compensation insurance provides payment for accidental bodily injury and/or disease sustained by your employees whilst in the course of employment. overhaul or removal to other position in the workplace.2.2. safe or strong room or by hold-up while in your premises.2. surgical expenses incurred as a result of accident.6. 6. 6.3 Marine Insurance-Marine insurance covers loss or damage to goods whilst in transit by sea.2.6 Personal Accident Insurance-Personal Accident insurance will cover you for bodily injury or death arising from an accident.11 Machinery Breakdown Insurance-Machinery Breakdown insurance covers unforeseen and sudden damage to machinery whilst at work or at rest and during cleaning. 6.2 Consequential Loss Insurance-Consequential Loss insurance covers you for loss in net profit and fixed charges following interruption of business caused by risks which are insured under a Fire policy.2.10 Public Liability Insurance-Public Liability insurance covers your legal liability to third parties for accidental bodily injury or loss of or damage to property whilst in the course of business.2. 6. 40 .2. 6. 6.7 Money Insurance-Money insurance will cover loss or damage to money whilst in transit and by theft from locked drawer.8 Fidelity Guarantee Insurance-Fidelity Guarantee insurance provides cover for loss of money or goods either belonging to employers or for which they are responsible as a result of acts of fraud or dishonesty by an employee. sickness or disease. It also covers legal liability for bodily injury or property damage to third parties. 6. inspection.2.4 Motor Insurance-Motor insurance covers motor vehicle against loss or damage caused by accidents.2.2. Marine Hull insurance is available for the vessel.5 Health Insurance-Hospital and Surgical expenses insurance covers hospital expenses. 6. air or rail.

for payment of the benefits provided by the contract.3. windstorm.3. 6. 6.2.6 Insurer: The party that provides. customers must fill out an application.3. or on whose behalf.6. 6. 6. Proposal form: When buying insurance.8 Penetration: The proportion of premium generated by a country’s insurance industry of the Gross Domestic Product of the economy explains penetration of insurance in a country. 41 .4 Deductible/excess: This is the amount the insured will be required to contribute before they can make a claim.3. If you take out an insurance policy. 6. Your insurance company is your insurer.1 Proposer/applicant: A person seeking insurance. you are the insured.3.2 Business interruption: Provides coverage for a loss of earnings if the policyholder's business is shut down by fire.2. Insurance 6. or other insured event. 6.7 Insured: In property and liability insurance. 6.3 Claim: A demand made by the insured.3.3.12 Machinery and Equipment All Risks Insurance-Machinery and Equipment All Risks insurance covers all risks of accidental physical loss or damage to property including the risk of loading and unloading. Details on the application help the insurance company decide what policy and premium level is right for that customer. It is important to make sure all details on the application are correct or the payout may be affected. benefits in the event of loss. for a fee. explosion. benefits are payable.3 SOME TERMS USED IN GENERAL INSURANCE6.3. the person to whom. 6. or the insured's beneficiary.5 Exclusions: Specific circumstances listed in the policy for which the insurer will not provide benefit payments.13 Contractors All Risks Insurance-Contractors All Risks insurance covers the loss or damage to contract works and all other materials on site as well as legal liability to third parties arising out of the performance of a contract.

6. The companies are. Prabhadevi.ICICI Prudential Life Insurance Company Incorporation Year Chairperson Managing Director Registered Office 2000 Ms.4 COMPANY ANALYSIS After analyzing the economy and the respondent industry that are taken into consideration now its turn of the companies in the insurance industry and their performance and the environment they are operating into. ICICI Pru Life Towers. Vaidyanathan. 1089 Appasaheb Marathe Marg.Chanda D. Here we have taken 2 companies of insurance industry and have analyzed it. Debt to Equity and Interest coverage of each company. 1. a leading international financial services group 42 . Kochhar Mr. Website www. Mumbai 400025.1.iciciprulife. and prudential plc. ICICI Prudential Life Insurance Company 2. VALUATION RATIOS  CURRENT RATIO =Current Assets /Current Liabilities  Debt to Equity =Total Debt (Short Term +Long Term)/Equity + Preference  Interest Coverage=Earnings Before Interest And Tax/Interest 6.4.V.com ICICI Prudential Life Insurance Company is a joint venture between ICICI Bank. Bajaj Allianz Life Insurance Company Limited While analyzing the company the factor considered are Current Ratio. a premier financial powerhouse.

580.061.713949582 2006 3. It has a strong presence across India with 1.711.106 10. in 2008 it was 0. ICICI Prudential Life has one of the largest distribution networks amongst private life insurers in India.7139 and in 2006 it was 0.000 (as on December 31.046 5.6032 INFERENCE In terms of Current Ratio. 780 crores (as of December 31. For the past thirteen years. ICICI Prudential Life's capital stands at Rs.873 0.174.265 11.081.713 0.6660. ICICI Prudential was amongst the first private sector insurance companies to begin operations in December 2000 after receiving approval from Insurance Regulatory Development Authority (IRDA). in 2007 it was 0.083 0.303.6346.183.917 0. holding 74% and 26% stake respectively.603217534 INTERPRETATION The above table shows the Current Ratio of ICICI PRUDENTIAL in 2009 is 0.4.662 16.096 micro-offices) and an advisor base of over 230. TABLE NO-1 CURRENT RATIO YEAR CA CL CR 2009 7.66607055 2007 7. 2009).960 branches (including 1.634682162 2008 10.headquartered in the United Kingdom. 2009) with ICICI Bank and Prudential plc. ICICI Prudential Life has retained its leadership position in the life insurance industry with a wide range of flexible products that meet the needs of the Indian customer at every step in life. ICICI PRUDENTIAL is high in 2007 and lower in 2006 43 .934.

94063 -393.419 44 .399 and in 2006 it was -17.077. in 2007 it was -88.001005588 0.TABLE NO-2 DEBT EQUITY RATIO YEAR DEBT EQUITY DEBT/ EQUITY 0. in 2008 it was -393.001202278 2009 54035 47801758 2008 37935 37724213 2007 40393 20716828 2006 14247 11850000 INTERPRETATION The DEBT EQUITY RATIO in 2009 was 0.00113038 0.07744 -88.001949768 0.0010055.0012022 INFERENCE The high D/E Ratio is in 2007 and lower is in 2008 TABLE NO-3 INTEREST COVERAGE RATIO YEAR PBIT INTEREST PBIT/ INTEREST -183.94. in 2007 it was 0.41999 INTERPRETATION The Interest coverage ratio in 2009 was -183. and in 2006 it was 0. in 2008 it was 0.0019497.39975 2009 -47258763 256924 2008 -46042734 117134 2007 -23611574 267100 2006 -11840436 165786 -71.0011303.

the income of Bajaj Allianz Insurance went up to Rs. Yerawada. The company was founded in 2001 and is headquartered in Pune.bajajallianz.E Plaza.in Bajaj Allianz Life Insurance Company Limited engages in life insurance business in India. Bajaj Allianz Life Insurance Company Limited is a subsidiary of Bajaj Holdings and Investment Limited. G. Grnd floor. It also registered a net profit of Rs. India. Allianz SE is a leading insurance conglomerate globally and one of the largest asset managers in the world.2. 00. Pune-411006 Email Website life@bajajallianz.866 crores with a growth of 11% over the previous year. 45 . Therefore ICICI PRUDENTIAL is at a high financial risk in all the four years 6.in www. Airport Road.co. BAJAJ ALLIANZ Life Insurance Company Limited Incorporation Year Chairman Company Secretary Registered Office 2001 Mr. 2001 when it received the certificate of Registration from Insurance Regulatory and Development Authority (IRDA) for conducting General Insurance business in India including Health Insurance.2.Rahul Bajaj Sameer Bakshi Bajaj Allianz Life Insurance Company Limited .co.95 crore. one of the largest Insurance Company and Bajaj Finserv. Bajaj Allianz Life Insurance is a union between Allianz SE.INFERENCE Low Interest Coverage ratio (<2) is perceived to have a high degree of financial risk.000 Crores). As on the end of March 2009. in the last financial year. Allianz SE has over 115 years of financial experience and is present in over 70 countries around the world. highest by any private insurer. managing assets worth over a Trillion (Over INR. 55. Bajaj Allianz Insurance started its journey on May 2.4.

097 INTERPRETATION The above table shows the Current Ratio of BAJAJ ALLIANZ in 2009 was 0.295.in 2008 it was 0.288.TABLE NO-4 CURRENT RATIO Year Current assets Current liabilities Current ratio 14.6483 INFERENCE In terms of Current Ratio of BAJAJ ALLIANZ.104.661 0.523357488 7.5233.261 0.350 2007 3.081.648382509 2009 8.47866003 4.711 2006 2.358.903 0.572276346 10.646. therefore the company has no financial problem.4786 and in 2006 it was 0. 46 .5722. in 2007 it was 0. the higher is in 2006 and lower is in 2007 TABLE NO -5 DEBT EQUITY RATIO YEAR DEBT EQUITY DEBT/EQUITY 2009 0 6724719 2008 0 5773150 2007 0 4034165 2006 0 2670720 INFERENCE There is no debt –equity ratio.295 2008 5.074 0.495.016.

in 2008 it was 8.8372089 9. in 2007 it was 9.077043 2009 3911618 492334 2008 2965405 335559 2007 1935565 205122 2006 1184287 98061 INTERPRETATION The Interest coverage ratio in 2009 was 7. Therefore in BAJAJ ALLIANZ all the four years it was >2 therefore the company is in a good financial condition 47 .83.94504949 8.TABLE NO-6 INTEREST COVERAGE RATIO YEAR PBIT INTEREST PBIT/ INTEREST 7.94.43 and in 2006 it was 12.07 INFERENCE Low Interest Coverage ratio (<2) is perceived to have a high degree of financial risk.4361648 12.

7. such as depreciation. 5. 3.CHAPTER. For a company. Management discussion and analysis (MD&A) gives investors a better understanding of what the company does and usually points out some key areas where it performed well. 9. The balance sheet lists the assets. The cash flow statement strips away all non-cash items and tells you how much actual money the company generated. financing and investing. 8. liabilities and shareholders' equity.7 CONCLUSION 7. 10. You should never blindly invest in a company. 2. Financial reports are required by law and are published both quarterly and annually. Audited financial reports have much more credibility than unaudited ones. The income statement takes into account some non-cash items. 4. the top line is revenue while the bottom line is net income. Always read the notes to the financial statements. its market and the industry in which it operates. The cash flow statement is divided into three parts: cash from operations . They provide more in-depth information on a wide range of figures reported in the three financial statements 48 . 6.1 OBSERVATION AND FINDING 1. Whenever you're thinking of investing in a company it is vital that you understand what it does.

There is no debt –equity ratio. the higher is in 2006 and lower is in 2007 3. it differs from person to person but usually influence seems to be the only means as we look around which force people or magnetize them to develop liking towards a company or organization irrespective of what its offerings are. And in BAJAJ ALLIANZ. Low Interest Coverage ratio (<2) is perceived to have a high degree of financial risk. Low Interest Coverage ratio (<2) is perceived to have a high degree of financial risk. 6. It is essential to understand the purpose of each part of these statements and how to interpret them. 4. ICICI PRUDENTIAL is high in 2007 and lower is in 2008.e. Therefore in BAJAJ ALLIANZ all the four years it was >2 therefore the company is in a good financial condition 5. And in BAJAJ ALLIANZ. In terms of Current Ratio. Thus. 2. And in BAJAJ ALLIANZ. therefore the company has no financial problem. Lastly to conclude it can be said that there are many tools available which help in analyzing a company’s strength which is again subjective i. Therefore ICICI PRUDENTIAL is at a high financial risk in all the four years. ICICI PRUDENTIAL is high in 2007 and lower in 2006. One of the most important areas for any investor to look at when researching a company is the financial statements. In terms of Debt-Equity Ratio. In terms of Interest coverage ratio. analysis help only to make believe ourselves that whether there is anything erroneous with the company or not which may not actually turn out to be. what is its credibility in the market and whether it is ethical in its operations or not.2 CONCLUSION 1.7. 49 .

com 50 . 2.economictimes. WEB SITE VISITED 1. www. 7.moneycontrol.indiatimes.Aarti Kalyanraman : N.scribd.Bandgar.sebigov.com http://articles.  Portfolio Management . 6.com http://economictimes.com www.infomedia. 4.Philip Kotler And Gery Armstrong.com www. 8.BIBLIOGRAPHY BOOKS  Principles Of Marketing Management . 3.  Insurance Fund Management .in www.nseindia.com http://www.P.K.com www. 5.indiatimes.altavista. Lakshmi Kavitha.