International Journal of Advanced Research and Development

International Journal of Advanced Research and Development

ISSN: 2455-4030
Impact Factor: RJIF 5.24
www.advancedjournal.com
Volume 3; Issue 1; January 2017; Page No. 898-904

A study on the financial performance of general insurance companies in India

1
Jenita Monteiro, 2 Nijumon K John
1
Student, Christ University, Bangalore, Karnataka, India
2
Assistant Professor, Christ University, Bangalore, Karnataka, India

Abstract
The insurance sector has undergone several changes post liberalization leading to the development of the economy. Many private
players took up the opportunity and entered the market giving severe competition to the existing insurance companies. As this
industry is risky, it is important to appraise the performance of general insurance companies to determine their financial standing
of public and private sector general insurance companies. It considers the major source of income and expenses to see its impact
on its operating efficiency. The data is taken from secondary sources for ten years from 2006-07 to 2015-16. Tools used for the
study include ratio analysis, correlation, multiple regression analysis and descriptive statistics. The results show that public
insurance companies have better management soundness and profitability as compared to private insurance companies. Also,
variables such as commission expenses, operating expenses, investment income and net premium do not have an impact on the net
profit.

Keywords: non-insurance companies, net premium, commission expenses, operating expenses, management soundness,
profitability

1. Introduction India, hence, it becomes critical to appraise the performance

Insurance is a risk transfer form of risk management which of insurance companies particularly those from general
permits the insured to transfer the cost of his potential risk to insurance segment. Therefore, this study will be undertaken to
another in exchange for compensation which is known as evaluate the comparative financial performance of the public
premium. In other words, it is a method whereby the insurer and private non-life insurers to determine their financial
agrees to reimburse the losses of the insured from specified standing post the liberalization period.
loss causing events. Insurance serves as a risk management To determine the financial performance of banks, a model
and wealth preservation tool. Insurance gives protection to called CAMELS framework is used. However, for insurance
individuals, businesses and other entities against significant companies, a similar model is used, i.e. CARAMELS
losses which may arise due to unforeseen events. Anyone who framework. It stands for capital adequacy, asset quality,
wants to protect themselves against financial hardships will reinsurance, adequacy of claims and actuarial, management
take insurance. An individual or a business entity might soundness, earnings and profitability, liquidity and sensitivity
consider insurance to protect one’s family after ones’ death to market risk. Here, reinsurance and the actuarial part is
from loss of income, to ensure repayment of debt, to cover added to the existing CAMELS framework. The main aim of
contingent liabilities, to protect the business against business this model is to determine the operational efficiency of the
interruption and loss thereof, protection against lawsuits, etc. insurance companies. It allows for the measure of the financial
Insurance may cover losses arising from fire, marine, vehicle soundness of the company.
risk, etc. Most individuals own insurance in some form or
another whether it’s auto, medical, liability, disability or life 2. Literature Review
insurance. Ketan Popat (2014) [11] has undertaken the study to assess the
The insurance sector is one the emerging sectors in India. Post financial soundness and liquidity of non-life insurers for
liberalization, the insurance sector has undergone a lot of selected sector companies in India. Top four companies have
changes which has led to the restructuring of the Indian been taken from public sector and private sector each. The
economy. Prior to the liberalization, the government had a data used for the purpose of the study is mainly from
monopoly over insurance companies, whereas after this secondary sources such as magazines, journals, websites, etc.
reform was passed, many private players entered the market. Seven years data ranging from 2005-06 till 2011-12 has been
Private entities provided tough competition to the existing considered. Ratio analysis, F-test and one - way ANOVA has
insurance companies by providing diversified services to its been used for analysing the data. The return on net worth for
customers. the public sector non-life insurers was around 10% and that of
The nature of the insurance industry is risky and there is private sector companies was 20%. The standard liquidity
scepticism regarding working with insurance companies in ratio should be 200%, but in this study, it was less than 100%

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for companies in both sectors. This indicates that there is poor of the companies has been analysed taking four parameters,
liquidity. The performance of these companies is average as i.e., Premium incomes, Market Share, New Policies Issued
compared to standard norms of general industries. and Claims Settlement Ratio. Results have shown that the
Nikolina Smajla (2014) [14] has thrown light upon one of the insurance penetration and density in India is low compared to
recent models used to analyze the financial soundness of the global scenario. Disparities are seen among the north and
insurance companies, that is the CARAMELS model. The south states in terms of penetration and density. If the
scope of the study limits to Croatian insurance companies. insurance industry needs to be successful then it should be
The author states that the actual method used by companies in cost competitive, improve the distribution techniques and
Croatia to control and regulate the insurance sector is different provide products that cater to the customers behaviour.
from this model, and gives a different view in relation the Parkash Chandel, Naveen Kumar (2016) [4] analyze the growth
soundness of the insurance sector. of the Indian Insurance industry with reference to the top ten
Chandel, Naveen Kumar (2016) [4] analyze the growth of the economies of the world. To understand the growth and
Indian Insurance industry with reference to the top ten opportunities available in the insurance sector, premium,
economies of the world. To understand the growth and insurance density and penetration have been considered as it
opportunities available in the insurance sector, premium, gives a reflection upon the level of development in the
insurance density and penetration have been considered as it insurance sector. The study has shown that the Indian
gives a reflection upon the level of development in the insurance sector has shown consistent growth, however in
insurance sector. The study has shown that the Indian comparison to the top economies in the world, the Indian
insurance sector has shown consistent growth, however in insurance sector is at the lowest level in all parameters.
comparison to the top economies in the world, the Indian
insurance sector is at the lowest level in all parameters. 3. Data collection
Showket Ahmad Dar, Ishfaq Ahmad Thaku (2015) [5] has used The data is collected for the public and private insurance
the CARAMEL model to evaluate the financial soundness of companies for a period of ten years data from 2006-07 to
top general insurance companies in the public and private 2015-16. The data considered for the study are incurred
sector in India. Three indicators have been used which are claims, net premium, operating expenses, commission
earnings and profitability, management soundness and expenses, and net profit. The data is collected from Annual
liquidity. Ratio analysis has been employed in this study, and report and Public Disclosure report which has been published
tools such as mean, standard deviation and F-test has been by the General Insurance Companies, books relating to
used to test the parameters under the CARAMEL model. insurance management and websites. Majority of the data is
From the paper, it is seen that the public-sector companies gathered from IRDA annual reports and Indian Insurance
show significant differences in the ratios that have been Statistics.
calculated for liquidity. The higher F-value for the private
sector companies shows insignificant differences for private 4. Research methodology
insurers. But, both the private and public-sector companies The statistical tools used for the purpose of the study are:
lack high degree of liquidity. In terms of variability, public  Ratio Analysis - CARAMEL framework
companies seem to have insignificant differences as shown by  Mean and Standard Deviation
higher F-Value whereas high degree of variation is seen  Correlation Coefficient
among the public insurers. The greater F-Value for public  Multiple Regression Analysis
insurers reveals that companies do not differ significantly in  Descriptive Statistics
terms of this ratio for earnings and profitability. In contrast,
the F-Value of private sector discloses that companies have 5. Analysis- discussion & results
significant differences in pattern of this ratio. 5.1 Descriptive statistics
B. Nagaraja (2015) [9] explains the relationship between the Descriptive statistics have been found for key ratios in the
performance of the insurance industry and the economic public and private insurance companies for the purpose of
development of the country. The author has stated that the comparison for a period of 10 years. The ratios are based on
growth rate in policies issues and the premium have shown a profitability and management soundness. In this case, loss
negative trend over the last three years. The paper focuses on ratio, expense ratio, combined ratio, investment income ratio
a comparative analysis on the life and non-life insurance and management soundness has been considered.
companies in the public and private sector. The performance

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Table 1: Descriptive Statistics of Public and Private Non-Insurance Companies

Public companies descriptive statistic

Loss ratio Expense ratio Combined ratio Investment income ratio Management soundness
Mean 0.840325867 Mean 0.28764236 Mean 1.127968227 Mean 0.346459182 Mean 0.23984
Standard Error 0.046767532 Standard Error 0.006787617 Standard Error 0.050576877 Standard Error 0.023327243 Standard Error 0.006405
Median 0.886530886 Median 0.289923378 Median 1.166114637 Median 0.316887411 Median 0.235292
Mode #N/A Mode #N/A Mode #N/A Mode #N/A Mode #N/A
Standard Deviation 0.147891923 Standard Deviation 0.021464331 Standard Deviation 0.15993813 Standard Deviation 0.073767219 Standard Deviation 0.020254
Sample Variance 0.021872021 Sample Variance 0.000460718 Sample Variance 0.025580205 Sample Variance 0.005441603 Sample Variance 0.00041
Kurtosis 8.066664974 Kurtosis 0.476249609 Kurtosis 7.335190349 Kurtosis -0.756079049 Kurtosis -1.90603
Skewness -2.715795486 Skewness 0.803247215 Skewness -2.482956563 Skewness 0.868261703 Skewness 0.150829
Range 0.534748832 Range 0.068208254 Range 0.602957086 Range 0.188827518 Range 0.051176
Minimum 0.43551523 Minimum 0.262913837 Minimum 0.698429067 Minimum 0.278899093 Minimum 0.214753
Maximum 0.970264062 Maximum 0.33112209 Maximum 1.301386152 Maximum 0.467726611 Maximum 0.265929
Sum 8.403258669 Sum 2.876423602 Sum 11.27968227 Sum 3.464591815 Sum 2.398404
Count 10 Count 10 Count 10 Count 10 Count 10
Confidence Confidence Confidence Confidence Confidence
0.105795509 0.015354657 0.114412846 0.052769889 0.014489
Level (95.0%) Level (95.0%) Level (95.0%) Level (95.0%) Level (95.0%)
Private companies descriptive statistic
Loss ratio Expense ratio Combined ratio Investment income ratio Management soundness
Mean 0.787050828 Mean 0.34987093 Mean 1.136921757 Mean 0.154925338 Mean 0.203197
Standard Error 0.019487683 Standard Error 0.017936414 Standard Error 0.015923347 Standard Error 0.009826657 Standard Error 0.015707
Median 0.796356813 Median 0.338045741 Median 1.14348155 Median 0.145815054 Median 0.219208
Mode #N/A Mode #N/A Mode #N/A Mode #N/A Mode #N/A
Standard Deviation 0.061625464 Standard Deviation 0.056719923 Standard Deviation 0.050354044 Standard Deviation 0.031074617 Standard Deviation 0.049671
Sample Variance 0.003797698 Sample Variance 0.00321715 Sample Variance 0.00253553 Sample Variance 0.000965632 Sample Variance 0.002467
Kurtosis -0.13095449 Kurtosis 0.266545253 Kurtosis -0.06685849 Kurtosis -0.584682557 Kurtosis 7.694998
Skewness -0.081113324 Skewness 0.978932302 Skewness -0.245374923 Skewness 0.599169152 Skewness -2.64762
Range 0.202027998 Range 0.18030779 Range 0.164654305 Range 0.096804288 Range 0.176834
Minimum 0.680164573 Minimum 0.281710836 Minimum 1.048225004 Minimum 0.112787819 Minimum 0.068264
Maximum 0.882192571 Maximum 0.462018626 Maximum 1.212879309 Maximum 0.209592107 Maximum 0.245098
Sum 7.870508278 Sum 3.498709296 Sum 11.36921757 Sum 1.549253383 Sum 2.031966
Count 10 Count 10 Count 10 Count 10 Count 10
Confidence Confidence Confidence Confidence Confidence
0.044084201 0.040574988 0.036021113 0.022229442 0.035532
Level (95.0%) Level (95.0%) Level (95.0%) Level (95.0%) Level (95.0%)

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a) Loss Ratio: The mean of loss ratios for public non- income ratios for public non-insurance companies over a
insurance companies over a tenure of 10 years is 0.84, tenure of 10 years is 0.34 and for private is 0.15. This
whereas for private companies it is 0.78. This suggests that implies that the investment income ratio is greater for
the loss ratio is greater for public non-insurers as public insurance companies as compared to private. The
compared to private non-insurance companies. The standard deviation is 0.07 and 0.03 for public and private
standard deviation for loss ratio of public non-insurance non-insurance companies, where the variation is lesser in
companies is 0.14, whereas of private it is 0.06. There is case of private non-insurers. The median is 0.31 for public
less variance for private insurance companies as compared companies and 0.14 for private companies. The median is
to public insurance companies. The median is 0.88 for greater for public companies as their mean ratio also is
public insurers and 0.79 for private insurers. The skewness greater. They are positively skewered and platykurtic.
is negative for both public and private companies. Also, e) Management Soundness: The mean of management
the kurtosis in both cases is leptokurtic. soundness ratios for public non-insurance companies over
b) Expenses Ratio: The mean of expenses ratios for public a tenure of 10 years is 0.23, whereas for private companies
non-insurance companies over a tenure of 10 years is 0.28 it is 0.2. This shows that the management soundness is
and for private non-insurers is 0.34. The mean expenses better in case of public companies as compared to private
ratio is greater for private companies. The standard companies. The median is 0.23 and 0.21 for public and
deviation is 0.021 for public non-life insurers and 0.05 for private insurers respectively. The standard deviation is
private companies, which shows that there is higher 0.02 for public insurers and 0.04 for private insurers,
variance in private companies. The median ratio is 0.28 which again shows that public companies have lesser
and 0.33 for public and private non-insurers respectively. variance in compared to private companies.
Both are positively skewed and they are platykurtic.
c) Combined Ratio: The mean of combined ratios for public 5.2 Correlation
non-insurance companies over a tenure of 10 years is 1.12 The correlation of key variables is done to determine the
and for private insurance companies it is 1.13, which correlation between key variables of the insurance companies.
shows that the mean value of combined ratios is almost The variables taken are commission expenses, operating
similar for both private and public non-insurance expenses, investment income, net premium and net profit. The
companies. The standard deviation is 0.15 which is higher correlation coefficient is a value that lies between -1 to +1. To
for public companies as private companies, where standard interpret correlation, it is said that the closer the value is to 1,
deviation is just 0.05. The median again is very similar, the stronger the relationship between the variables, and closer
1.16 and 1.14 for public and private non-insurers the value to 0, it means that there is no correlation between the
respectively. Both are negatively skewed. variables.
d) Investment Income Ratio: The mean of investment

Table 2: Correlation among Key Variables in Public Non-Insurance Companies

Correlation in public companies
Commission expenses Operating expenses Investment income Net premium Net profit
Commission expenses 1
Operating expenses 0.9705 1
Investment income 0.9411 0.9751 1
Net premium 0.9916 0.9870 0.964 1
Net profit -0.1122 -0.184 -0.277 -0.145 1

Interpretation between net profit and net premium is -0.145.

The above table shows the correlation among the variables in From this we can see that the correlation among the following
public non- insurance companies. Results show that the variables, i.e., commission expenses, operating expenses,
correlation co-efficient between operating expenses and investment income and net premium, there is a positive
commission expenses is 0.9705, The correlation coefficient correlation. Not only is it positive, but there is a very strong
between investment income and commission expenses is relationship among these variables, because it is known that
0.9411, between net premium and commission expenses is the closer the value to 1, the stronger the relationship between
0.9916, between commission expenses and net profit is - variables.
0.1122. The correlation coefficient between operating However, the correlation among all the variables against net
expenses and investment income is 0.97, net premium and profits show a negative correlation. Which means the
operating expenses is 0.98 but the correlation between relationship between net profit and commission expenses,
operating expenses and net profit is -0.18. The correlation operating expenses, investment income, net premium is
between investment income and net premium is 0.96 and negative, which infers there is no relationship between these
investment income and net profit is -0.277, the correlation variables.

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Table 3: Correlation among Key Variables in Private Non-Insurance Companies

Correlation in private companies
Commission expenses Operating expenses Investment income Net premium Net profit
Commission expenses 1
Operating expenses 0.9655 1
Investment income 0.9772 0.9933 1
Net premium 0.9829 0.9888 0.9879 1
Net profit 0.0804 -0.02123 0.04382 -0.03585 1

Interpretation relationship among these variables, because it is known that

The above table shows the correlation among the variables in the closer the value to 1, the stronger the relationship between
private companies. Results show that the correlation co- variables.
efficient between operating expenses and commission However, the correlation among certain variables against net
expenses is 0.965, The correlation coefficient between profits show a negative correlation. There is a negative
investment income and commission expenses is 0.977, relationship between net profit with commission expenses and
between net premium and commission expenses is 0.982, operating expenses. But unlike the case in public non-insurers,
between commission expenses and net profit is 0.080. The for private insurance companies, there is a positive
correlation coefficient between operating expenses and relationship between net profit with investment income and
investment income is 0.993, net premium and operating net premium. But since the value is very close to 0, it signifies
expenses is 0.98 but the correlation between operating there is no much relationship among these variables.
expenses and net profit is -0.02. The correlation between
investment income and net premium is 0.987 and investment 5.3 Multiple regression
income and net profit is 0.04, the correlation between net A multiple regression analysis was conducted to see the effect
profit and net premium is -0.035. of commission expenses, investment income, net premium and
From this we can see that the correlation among the following operating expenses against net profit.
variables, i.e., commission expenses, operating expenses, The regression equation: LS net_profit c commission_
investment income and net premium, there is a positive expenses investment_income net_premium operating_
correlation. Not only is it positive, but there is a very strong expenses

Table 4: Private Sector Non- Life Insurers - Regression Analysis

Dependent Variable: NET_PROFIT
Method: Least Squares
Date: 01/25/18 Time: 23:03
Sample: 1 10
Included observations: 10
Variable Coefficient Std. Error t-Statistic Prob.
C 2211.933 4615.957 0.479193 0.652
COMMISSION_EXPENSES 8.103721 6.36898 1.272374 0.2592
INVESTMENT_INCOME 3.308583 3.173087 1.042701 0.3449
NET_PREMIUM -1.009132 0.624906 -1.614853 0.1673
OPERATING_EXPENSES -0.885774 2.554132 -0.3468 0.7429
R-squared 0.554856 Mean dependent var 879.662
Adjusted R-squared 0.19874 S.D. dependent var 1734.701
S.E. of regression 1552.785 Akaike info criterion 17.84034
Sum squared resid 12055707 Schwarz criterion 17.99163
Log likelihood -84.2017 Hannan-Quinn criter. 17.67437
F-statistic 1.558078 Durbin-Watson stat 3.053956
Prob(F-statistic) 0.315595

Hypothesis see if there was any impact of commission expenses,

Null Hypothesis: The commission expenses, investment investment income, net premium and operating expenses on
income, net premium and operating expenses has no impact the net profit of the private non-life insurer companies.
on the net profit of the private non-life insurers. Here, we can see that the f-statistic 1.55, the probability values
Alternate Hypothesis: The commission expenses, investment are as follows; for commission expenses 0.2592, investment
income, net premium and operating expenses has to impact on income 0.3449, net premium 0.1673, and operating expenses
the net profit of the private non-life insurers. 0.7429. Since the f-statistic and the p-value is greater than
0.05, we accept the null hypothesis.
Interpretation The commission expenses, investment income, net premium
The above table shows the results of the multiple regression and operating expenses have no impact on the net profit of the
analysis that was conducted on the private non-life insurers to private non-life insurers.

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Table 5: Public Sector Non- Life Insurers - Regression Analysis

Dependent Variable: NET_PROFIT
Method: Least Squares
Date: 01/25/18 Time: 23:07
Sample: 1 10
Included observations: 10
Variable Coefficient Std. Error t-Statistic Prob.
C 6104.78 8251.259 0.73986 0.4926
COMMISSION_EXPENSES 0.312143 7.975915 0.039136 0.9703
INVESTMENT_INCOME -1.345439 1.177175 -1.142938 0.3048
NET_PREMIUM 0.199064 0.695219 0.286333 0.7861
OPERATING_EXPENSES 0.137242 1.398301 0.098149 0.9256
R-squared 0.295277 Mean dependent var 2018.593
Adjusted R-squared -0.268501 S.D. dependent var 1518.613
S.E. of regression 1710.38 Akaike info criterion 18.03367
Sum squared resid 14626993 Schwarz criterion 18.18496
Log likelihood -85.16836 Hannan-Quinn criter. 17.8677
F-statistic 0.523747 Durbin-Watson stat 0.902515
Prob(F-statistic) 0.724676

Hypothesis private players have entered the market, it is important that

Null Hypothesis: The commission expenses, investment they are able to perform their services with due care and
income, net premium and operating expenses has no impact diligence, at the same time they should provide products and
on the net profit of the public non-life insurers. services by considering the needs of the consumers.
Alternate Hypothesis: The commission expenses, investment
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