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A STUDY ON PERFORMANCE OF INSURANCE INDUSTRY IN INDIA

Article  in  International Journal of Emerging Markets · June 2013

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 A STUDY ON PERFORMANCE OF INSURANCE
INDUSTRY IN INDIA
Dr. Karthik Mohandoss* Dr.M.Balamurugan**
ABSTRACT

Life insurance is not simply a business proposition. It is not just a question of mobilization of resources
for development; it is a question of citizen’s sense of security. It provides a link between the present
and the future. Today India is one of the fastest growing economies of the world. It is now Asia's third
largest economy and has made inroads into the global top 10 in terms of Gross Domestic Product
(GDP). GDP originating from the service sector recorded a growth rate of 9.30 per cent in 2010-
2011. The contours of insurance business have been changing across the globe and rippling effect
of the same can be observed in the Indian market as well. Insurance Industry is a growth-oriented
industry. The life insurance sector in India has seen an array of changes in the past one decade. The
economic scenario which emerged after globalization, privatization and liberalization has thrown a
new challenge before the insurers. Now it has to be more competitive in order to meet the needs and
demands of its customers. With a huge population base and large untapped market, life insurance
industry has a big opportunity in India for National as well as foreign investors. The profitability of the
life insurance companies has also been changed due to change in operating activity like selling new
policies, appointment of active agents, giving commission to the agents and evaluating maturity
value. The growth of insurance business of private sector companies has been higher than government
sector.

Keywords: Life Insurance, GDP, profitability, growth, economy, competitive.

Introduction individuals to large investments. The investments

The Life Insurance Industry in India is one of the
hard-core parts of the service sector. It plays a vital
role in the economic development of our nation. It
not only provides safety against life risk for
individuals but also acts as savings, financial
intermediary, and promoter of investment activities
and stabilizer of financial markets. This in turn
generates long- term invertible funds for nation
building and enhances standard living of the people.
Financial systems are an important element for the
economic growth process, because they have a
function which provides funds for wide spreading of
new technologies and accumulation of capital funds.
Developed financial systems which are effectively
fulfilling the functions can increase efficiency in
addition to economic growth. These functions are
such as orientation of small deposit is owned by
are diversified to reduce the risk of depositors,
reducing collecting and evaluating information costs
about the projects which is applied by the
specialized agencies.
The life insurance sector in India has seen an array
of changes in the past one decade. The economic
scenario which emerged after globalization,
privatization and liberalization has thrown a new
challenge before the insurers. Now it has to be more
competitive in order to meet the needs and
demands of its customers. The reforms contributed
to increase the awareness of the insuring public
about the wider range of choice of insurance
products and the price offered by the competing
insurers in the market. The customers know well
about their rights and remedies, availability of
various grievance redress mechanisms,

* Assistant Professor, Alagappa University Study Centre, Puliangudi.

** Assistant Professor, Department of Management Studies, St.Michael College of Engg. & Tech, Kalayarkoil

Primax International Journal of Commerce and Management Research. Vol.1, Issue No.1, April-June 2013 Page 73
progressive decontrol and detoxification of pricing
of insurance products. The technical know-how,
expertise and wide experience of multinationals that
have joined with the Indian companies have
revolutionized almost all aspects in the industry.
Life Insurance of India
The first company that sold policies to Indians with
?fair value? was the Bombay Mutual Life Assurance
Society starting in 1871. For the next hundred years,
life insurance was confined mostly to the wealthy
living in large metropolitan areas. The Life Insurance
Corporation of India was formed by an Act of
Parliament viz. LIC Act 1956, with the motto of
spreading life insurance to all segments of people
in the country. The eagerly awaited Insurance
Regulatory and Development Authority (IRDA) Bill
to open the insurance sector India to private and
foreign players was passed by the Loksabha on
December 2, 1999 and by the Rajyasabha in
December 1999. After passing this Act the entry of
the private players is increased year-by-year. At the
end of 31st March 2011 there are 23 private players
operating in India.
Review of Literature
Gamarra(2007) estimated cost and profit efficiency
of three groups of German life insurance companies:
multichannel insurers, direct insurers, and
independent agent insurers. Nonparametric DEA is
used to estimate efficiencies for a sample of German
life insurers for the years 1997-2005. Testing a set
of hypothesis, she found economic evidence for the
coexistence of the different distribution systems
which is the absence of comparative performance
advantages of specialised insurers. Further, she
found evidence for scale economies in the German
life insurance industry.
In the Indian context, Tone and Sahoo(2005) were
the first to study efficiency of the life insurance sector
as they applied new cost efficiency model to examine
the performance of Life Insurance Corporation (LIC)
of India. The findings show a significant
heterogeneity in the cost efficiency scores over the
Primax International Journal of Commerce and Management Research.
course of 19 years. A decline in performance after
1994–1995 can be taken as evidence of increasing
allocative inefficiencies arising from the huge initial
fixed cost undertaken by LIC in modernizing its
operations. A significant increase in cost efficiency
in 2000–2001 is, however, cause for optimism that
LIC may now be realizing a benefit from such
modernization. This will stand them in good stead
in terms of future competition. Results from a
sensitivity analysis are in broad agreement with the
main findings of this study.
Need of the Study
With a huge population base and large untapped
market, life insurance industry has a big opportunity
in India for National as well as foreign investors. Till
1999 there was only one public Insurer –Life
Insurance Corporation of India. Liberalization and
privatization of the insurance sector has brought
23 private players till date and has offered
tremendous opportunities. Now the state owned LIC
has been compelled to review their philosophy and
method of working in order to be ready for
competition with private sector companies.
After liberalization the public life insurer’s market
share started declining year-by-year due to the
ineffective marketing strategy adopted by the private
players. In order to sustain in the market, players
opt various innovative policies at affordable
premiums and enhanced services to withhold their
existing policy holders and to attract new ones. The
survival of the company may depend on the pro-
active strategy in the product designing, marketing
techniques, customized service and claim and
settlement practices. This may have a direct impact
on the productivity and financial efficiency of the
insurers. This initiated the researcher to evaluate
how these companies are performing in the post-
liberalized period in India.
This raised the following questions:
What is the growth and progress of the life insurance
companies in India after liberalization? Which
factors are affecting the financial efficiency of the
life insurance companies in India?
Vol.1, Issue No.1, April-June 2013 Page 74
Objectives of the Study
The following are the objectives of the study:
• To analyze the growth and progress of the Indian
life insurance companies in post- liberalization
period.
• To examine the factors influencing the financial
efficiency of the life insurance companies in
India.
• To offer findings and to make suggestions for
the improvement of Insurance companies in
India.
Hypothesis of the Study
In this study the following hypotheses has been
framed.
There is no significant difference among Gross
premium, number of companies, claims paid,
operating expenses, commission expenses, income
from investment, number of agencies, number of
policies, and profitability.
Research Methodology
By carrying out Analytical study the performance of
life insurance companies in India are determined.
Data and Sources of Data
The present study is based on secondary data. Data
for this study are obtained from the IRDA (Insurance
Regulatory Development Authority) annual reports,
Bulletins and statement of accounts of the various
Life Insurance Companies.
Period of the Study
The study covers a period of ten years from the
accounting year 2001-2002 to 2010-2011.
Sampling Design
Among 24 Life Insurers in India 12 life insurance
companies have been selected through Purposive
sampling method. The selection method is based
on the first date of incorporation of the life insurance
companies. The following table shows the list of
insurance companies selected for this study.

List of sample companies included in the present study

Table - 1 : Insurance Companies in India
Sl.No. Insurance company Date of Incorporation
1 Life Insurance Corporation of India 01.09.1956
2 HDFC standard life insurance 23.10.2000
3 Max New York life insurance 15.11.2000
4 ICICI prudential life insurance 24.11.2000
5 OM Kotak life insurance 10.01.2001
6 Birla Sun life insurance 31.01.2001
7 Tata AIG life insurance 12.02.2001
8 SBI life insurance 29.03.2001
9 ING Vysya life insurance 02.08.2001
10 Allianz Bajaj life insurance 03.08.2001
11 Met Life India insurance 06.08.2001
12 Reliance Life insurance 03.01.2002

(Source : Secondary data)

Primax International Journal of Commerce and Management Research. Vol.1, Issue No.1, April-June 2013 Page 75
Framework of Analysis
Multiple Régression Analysis
Multiple regression is a statistical process by which
several variables are used to predict another
variable. The following formula was used:
Y = a+B1 X1 + B2 +…………+BnXn
While selecting the independent variables to a larger
extent, variables which were less correlated were
selected in order to avoid multicolinearity problem.
The F ratio and P valve for the model were also
computed to test their significance. If the computed
P value was lower than the critical level of d=0.05
the model was determined as statistically significant.
The co-efficient of determination R2 was also
computed to find the percentage of the explaining
power of the model R2 which would always increase
when all independent variables are added, adjusted
R2 will come down if the added variable does not
reduce the unexplained variations. The adjusted R2
was calculated by
Adjusted R2 = 1-(1-R2)(N-1)/(N-K)
N = Number of Sample observations
K = Number of parameters
If the adjusted R2 is close to R2 the addition of any
further independent variable would not help in better
prediction, when there is a wide difference, it is an
indication of the need for the inclusion of some more
independent variables. Further the best subset
regression was computed by generating all the
possible combinations of the selected independent
variables. The two variables model with higher R2
was chosen as the best model.
Compound Annual Growth Rate
Compound Annual Growth Rate of the variable is
computed per annum. The following formula is used
to compute the growth rate.
When there is a continuous growth of the variable
the formula is used:
(End value / Beginning value) 1-n-1
Where n = Number of years
When there is a variable growth of the variable the
formula used is:
N (1+r1) )1+r2) (1+rn)—1
R growth rate
All the ratios are used to find out the growth rate of
variables.

Result and Discussions

Table - 2 : Multiple Regressions
Sl.No. Company’s R2 Adj R2 ‘t’ Significant
1 LIC .990 .908 .195 .219
2 BIRLA 1.000 .999 5.141 .001
3 ICICI .837 .267 -1.889 .463
4 ING 1.000 .997 -4.375 .041
5 HDFC .999 .988 -.928 .078
6 MAX NEW .923 .655 1.113 .243
7 RELIANCE .997 .991 2.728 .001
8 TATA AIG 1.000 .999 -5.536 .017
9 MET LIFE .961 .826 1.919 .129
10 SBI LIFE 1.000 1.000 4.875 .009
11 BAJAJ ALLIANCE 1.000 1.000 .585 .000
12 KOTAK .978 .804 -1.906 .316
(Source : Secondary data)

Primax International Journal of Commerce and Management Research. Vol.1, Issue No.1, April-June 2013 Page 76
Hypothesis
It is clear from the above table that the hypothesis is
accepted (no significant) in the influencing factors
namely gross premium, number of companies,
claims paid, operating expenses, commission
expenses, income from investment, number of
agencies, number of policies and profitability.
Table 2 shows multiple regression of the
determinants of profit. The model for the LIC explains
99 per cent of the variations in its profit. The adjusted
R2 is closer to R2 and this indicates that no new
variables need to be added. The computed P values
.219 were higher than the critical value at the 0.05
level. The agencies are closer to the 0.05 level (0.18).
The BIRLA explains 100 per cent of the variations in
its profit. The adjusted R2 is closer to R2 and this
indicates that no new variables need to be added.
The computed P (.001) values were less than the
critical value at the 0.05 level. The companies are
significant at the 0.05 level (0.009).
The ICICI recorded 83 per cent of the variations in
its net profit. The adjusted R2 is not closer to R2.
The computed P values (.463) were higher than the
critical value at the 0.05 level. Hence the companies
(.19) is closer to the 0.05 level.
The ING has 100 per cent of the variations in its
profit. The adjusted R2 is closer to R2 and this
indicates that no new variables need to be added.
The computed P values is .041 were higher than
the critical value at the 0.05 level. The claims are
closer to the 0.05 level (0.10).
The HDFC holds 99 per cent of the variations in its
profit. The adjusted R2 is closer to R2 and this
indicates that no new variables need to be added.
The computed P (.078) values were higher than the
critical value at the 0.05 level. The operating
expenses are closer to the 0.05 level (0.13).
The MAX NEW carries 92 per cent of the variations
in its profit. The adjusted R2 is not closer to R2.
Primax International Journal of Commerce and Management Research.
The computed P values were higher than (.243) the
critical value at the 0.05 level. The fixed assets (0.32)
are closer to the 0.05 level than the other variables.
The RELIANCE explains 99 per cent of the variations
in its profit. The adjusted R2 is very closer to R2and
this indicates that no new variables need to be
added. The computed P (.001) values were less
than the critical value at the 0.05 level, when the
claims and operating expenses (0.001) are
significant at the 0.05 level.
The TATA AIG recorded 100 per cent of the variations
in its profit. The adjusted R2 is very closer to R2.
This indicates that no new variables need to be
added. The computed P values were higher (.017)
than the critical value at the 0.05 level. The claims
(.084) are closer to the 0.05 level.
The MET LIFE explains 96 per cent of the variations
in its profit. The adjusted R2 is not closer to R2. The
computed P values were .129 higher than the critical
value at the 0.05 level, when the all the variables are
above the 0.05 level.
The SBI LIFE held 100 per cent of the variations in
its profit. The adjusted R2 is equal to R2. This
indicates that no new variables need to be added.
The computed P values .009 were higher than the
critical value at the 0.05 level. The commission
expenses (0.036) are closer to the 0.05 level.
The BAJAJ ALLIANCE holds 100 per cent of the
variations in its profit. The adjusted R2 is equal to
R2. The computed P values .000 were less than
the critical value at the 0.05 level, the policies (0.005)
are significant at the 0.05 level.
The KOTAK presents 97 per cent of the variations
in its profit. The adjusted R2 is not closer to R2. The
computed P values were higher (.316) than the
critical value at the. 0.05 level. This model is
statistically not significant, when the all variables are
higher than the 0.05 level.
Vol.1, Issue No.1, April-June 2013 Page 77
 Table – 3 : Annual Growth Rate

Year LIC BIRLA ICICI ING HDFC MAX RELLIA- TATA MET SBI BJAJA KOTAK
NEW NCE AIG LIFE LIFE ALLIANCE

2002-03 0.05 52.63 107.14 300.00 350.00 53.33 105.88 116.67 166.67 100.00 94.12 211.11
2003-04 0.23 41.38 137.93 62.50 44.44 43.48 37.14 100.00 100.00 90.00 48.48 39.29
2004-05 0.05 29.27 57.97 46.15 246.15 93.94 66.67 53.85 118.75 63.16 212.24 10.26
2005-06 1.05 83.02 60.55 78.95 66.67 31.25 96.25 80.00 22.86 48.39 270.59 6.98
2006-07 3.65 52.58 233.14 169.12 198.67 40.48 1.27 23.61 23.26 200.00 54.67 63.04
2007-08 9.60 263.51 235.85 44.81 27.01 64.41 368.55 217.98 77.36 44.93 14.82 101.33
2008-09 20.14 22.68 7.35 0.00 7.03 263.40 53.69 60.42 102.13 144.50 15.59 31.13
2009-10 7.26 -1.21 -8.61 -4.15 -6.73 0.00 8.91 -3.30 34.21 1.02 -1.12 8.59
2010-11 3.72 -5.37 -27.02 -2.76 -12.32 -28.51 0.08 -17.31 5.88 27.33 -5.13 -5.58
(Primary Data)

The annual rate of growth is found to be 20.14 in
the year 2008-09 is a maximum and 0.05 is a
minimum in the years 2002-03 and 2004-05 on the
basis of number of companies in LIC. The average
growth of LIC in the number of companies in the
year 2007-08 with a value 9.60.The growth of
number of companies in BIRLA was achieved highest
in the year 2007-08 is 263.51 and lowest 5.37
negative growth in the year 2010-11. The average
growth rate 83.02 recorded in the year 2005-06.
ICICI highest growth was recorded in the year 2007-
08 and the lowest negative growth was recorded in
the year 2010-11 is 235.85 and 27.02 respectively.
ING the highest growth was attained in the year
2001-02 and the lowest negative record was attained
in the year 2010-11 was 300.00 and 2.76
respectively.
The highest growth was recorded the HDFC in the
year 2002-03 when the figure stood at 350.00 . The
minimum growth was recorded in the year 2010-11
when the figure touched negative growth of 12.32.
MAX NEW held a gradual increase in growth yearly
with the record reaching 263.40 in the year 2008-
09. The negative growth was recorded in the year
2010-11 when the figure touched 28.51.
TATA AIG holds a maximum growth was recorded in
the year 2007-08 (217.98) and minimum negative
growth in the year 2010-11 (17.31). Since the year
2001-02 , the MET LIFE has been declining records
of growth rate. The year 2002-03 had been the year
of highest growth with the value reaching 166.67.
The least growth rate of 5.88 was recorded in the
year 2010-11.
SBI LIFE had a record of growth rate was attained
in the year 2006-07 was 200 the highest and the
lowest record was attained in the year 2009-10 was
1.02. KOTAK held a negative growth rate of 5.58 in
the year 2010-11 and the highest growth was
recorded in the year 2002-03 was 211.11.
RELIANCE went through a phase of decreasing
growth from the year 2001-02 to 2010-11, that is
105.88 to 0.08 respectively. The highest growth was
recorded in the year 2007-08 (368.55). BAJAJ
ALLIANCE recorded the negative growth rate in the
year 2010-11 was 5.13 as against the highest record
of 270.59 in the year 2005-06.
Findings
By applying Multiple Regression Analysis among the
insurance companies, it is found that BIRLA,
RELIANCE and BAJAJ ALLIANZE insurance
companies are significant at 0.05 level. The MET
LIFE and KODAK shows that all variables are above
the level of 0.05, while other companies included
for the study are closer to the significant level.

Primax International Journal of Commerce and Management Research. Vol.1, Issue No.1, April-June 2013 Page 78
The study reveals that the growth rate of SBI LIFE
is high (27.33), followed by MET LIFE with growth
rate of 5.88. The MAX NEW insurance company has
the highest negative growth rate 28.51, followed by
ICICI with 27.02.
Suggestions
• The LIC has to innovatively alter the operating
models, business processes, channel
management and human resource strategy to
control the operating expenses and the combined
ratios to compete with private players.
• With the entry of private insurers in life insurance
business, it is obvious that some proportion of
new business will go in the hands of private life
insurers. At this stage LIC is in urge to retain its
customers.
• In order to increase the growth rate, the
insurance companies has to introduce many new
products to suit the customer needs like pension
plan, special group policies, etc.
• The insurance company has to concentrate on
the rural areas in order to increase the business.
• The insurance companies should conduct more
extensive market research before introducing
insurance products targeted at specific segments
of the population so that insurance can become
more meaningful and affordable.
Conclusion
The existence of life insurance companies is found
even before nationalization in India. After
nationalization the Life Insurance Corporation of
India was incorporated by the constitution. The
liberalization, privatization and globalization policies
has made the insurance companies in India to
expand their business territory across the globe. On
the other hand many foreign insurance companies
have also entered into Indian insurance market. The
present scenario reveals that the growth of insurance
business of private sector companies has been
higher than that of government sector. The
competition has become hectic between them, which
ultimately benefits the consumer
Primax International Journal of Commerce and Management Research.
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