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IndianManagement

Studies Journal

Emerging Trends in Financial Performanceof General Insurance Industry in India

Manjit Singh and Rohit Kumar Department of Commerce. Punjabi University. Patiala

Government Ripudaman College. Nabha

The rapid expansion of Public Sector Insurance companies since nationalisation

has given rise to a number of problems related to the image, operational efficiency,

productivity, and the quality of portfolio of the system as a whole. Liberalization and

privatisation of the insurance sector has offered tremendous opportunities and since the

onset of reforms, the public sector insurance companies have been compelled to review their

philosophy and method of working, in order to be ready for competition with private sector

companies. The present study attempts to evaluate the emerging trends in the growth and

financial performance of General Insurance Companies in India. The study reveals that the

insurance market has witnessed dynamic changes due to liberalization and privatisation of

insurance sector and the industry witnessed significant growth, which is mainly contributed

by private sector companies. The study further reveals that the Private Sector General

Insurance Companies' results present better efficiency in terms of expenses of management

ratio, combined ratio, underwriting results ratio and they are increasing their market share

year by year, whereas the performance of Public Sector General Insurance Companies in

terms of net earnings, and return on net worth ratio is better than that of Private Sector

General Insurance Companies. The study highlights that public sector insurance companies

are suffering from losses when it comes to their core insurance business, but still manage

to get good net earnings, which is mainly ascribed to the investment income. The study

concludes that undoubtedly, the entry of Private Sector Insurance Companies has

contributed to the strengthening of General Insurance business as a whole by creating a

competitive atmosphere.

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The Indian economy continues to outperform expectations and has recently

joined the trillion dollar club. India's GDP for 2006-07 is estimated at Rs.41, 00,000

crore, which comes to $ 1.01 trillion, making it the 11th largest economy in the world

in nominal dollar terms. The service sector has remained the main engine of the

growth, contnbuting more than 55% of the GDP (Vgayan,2007). Insurance is consideredas one of the mainline fmancial services like banking, mutual funds and wealth

management products and it occupies an important position in the financial sectorof an economy. It contributes to economic development through risk management,

protection of assets and mobilization of savings, leading to capital formation in the

country.

The historical perspective of the General Insurance Companies reveals that

the rapid expansion of Insurance Companies since nationalisation had given rise to

a number of problems related to the image, operational efficiency, productivity, and

the quality of portfolio of the system as a whole and there have been persistent

complaints about deterioration in customer service. Close on the heels of the successof the privatisation initiatives in the banking sector, insurance sector reforms were

initiated following the report ofR. N. Malhotra Committee, which was set up in 1993

with an objective of complementing the reforms in the financial sector. The reforms

are aimed at creating more efficient and competitive financial system suitable for the

requirement of the economy. The year 1999 saw a revolution in the Indian insurance

sector, as major structural changes took place with the ending of the government

monopoly, and the passage of the Insurance Regulatory and Development Authority

(IRDA) Bill, lifting entry restrictions for private players, and allowing foreignplayers to enter the market with some limits on direct foreign ownership. The

insurance industry has been maintaining its constant growth rate of 15% to 16%

over the last few years. While insurance penetration was 1.93% in 1999, it rose to

4.8% in the year 2006. Thus, it got more than doubled in 7 years. While the increase

is impressive in the case of life insurance, where it increased from 1.39% to 4.1 %,

it remained stagnant at nearly 0.6% in the case of non-life insurance (Rao, 2007). One

of the reasons for low penetration in general insurance has been lack of concerted

efforts to effectively tap the retail segment (Parekh, 2007).The reforms of Indian Insurance Sector brought substantial changes in the

level of competition, business environment, managing strategies, service quality and

advance technology front. The wind of liberalisation, globalization and privatisation

has opened new vistas in the insurance industry in the generation of intensely

competitive environment. The post-liberalized insurance industry in India has been

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witnessing a discernible shift from the sellers' to the buyers' market. The reformed

insurance industry has offered a plethora of new customer friendly products, newdelivery channels like bancassurance, corporate agents, brokers and direct selling

through the internet, greater use of computerisation and information technology.

The reforms at this stage need to be reviewed in order to assess their compatibility

vis-a-vis the growth and performance of insurance industry in India. The deregulation

of General Insurance Industry in India is having far reaching consequences in terms

of market size, structure and operational practices. While the effects of privatisation

and deregulation on the firm's performance have received bulk of attention in the

national and international business research and has suggested that liberalizationhas positive long-term effect on economic growth and firm's performance (Dollar,

1992; Sachs and Warner, 1997; Chennappa, 2006; Sinha, 2006; Detzel & Banerjee,

2008), relatively little has been said about trends in the financial performance of

General Insurance Industry in India in the post-reforms period. The present study

seeks to fill the research gap and attempts to analyse the growth, fmancial

performance, opportunities and challenges for General Insurance Companies in

India in the post-liberalization period.

The study is conceived with the following objectives :

L To study the em~ing trends in the growth and performance of General

Insurance Companies in India.

II. To appraise the comparative fmancial performance of the Public Sector and

the Private Sector General Insurance Companies in India.m . To suggest the strategies for improving the performance of General Insurance

Companies in India.

The present study is based on secondary data mainly collected from annual

reports of insurance comp,anies, IRDA annual reports and journals, and websites.

The scope of the study has been restricted to five top general insurance companies,

i.e., two Public Sector and three Private Sector companies on the basis of their market

share. The criterion adopted for selecting the Private Sector companies is the year

of their registration. The reforms in the insurance industry were initiated in the year

1999 and the Private Sector general insurance companies started their business in2000. Total six companies were registered during this period. However, for the

purpose of uniformity, top three Private Sector companies registered on the basis

of their market share have been selected. The time frame of the study is from 2002

to 2007. To make an appraisal of comparative growth & financial performance of

both the Public & the Private Sector, the study mainly focuses on financial

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parameters used in insurance industry, such as Gross Direct Premium, Expense of Management Ratio, Claim Incurred Ratio, Combined Ratio, UndeIWriting ResultsRatio, Net Earnings Ratio, and Return on Net worth Ratio. This set of six fmandalparameters is not exhaustive but provides an overall picture of the performance of General Insurance companies.

The Public Sector General Insurance companies have experienced branchexpansion network since nationalization, but the quantitative expansion has notalways been matched by a corresponding improvement in the performance. Sincethe onset of reforms, these insurance companies have been compelled to reviewtheir philosophy and method of working, in order to be ready for competition withprivate sector companies. Attempts have been made to remain competitive bydoing things better and faster, and by ensuring cost effectiveness with performance.Large number of initiatives have been taken by these public sector companies tocompete with private sector companies, but despite all that, their market share isdeclining. Table 1 details the growth in the gross direct premium and the marketshare of the public sector and the private sector companies in the post-liberalizationperiod.

As is evident from the table, there is an increasing trend in the grossdirect premium of all the General Insurance Companies during the period understudy. A comparative analysis reveals that growth is more profound in the private

sector companies. The figures related to four public sector companies present asingle digit growth, whereas the private sector players are growing at more than50 per cent rate during the period under study. The table also "highlightsthat ICICILombard comes out to be the fastest growing company in the general insurancebusiness. The table further reveals that there is very fast erosion in the marketshare of Public Sector General Insurance Companies and Private Sector GeneralInsurance Companies are consolidating their position very fast. Overall, the generalinsurance industry grew by 15.62% in 2005-06; and in 2006-07, it witnessed 21.51%

growth. The market share of Public Sector has decreased from 90.92% to 66.65%and that of Private Sector has increased from 9.08% to 33.35% during the periodunder study. ICICI Lombard's market share has increased from 1.42% to 11.53%during this period and has emerged as the largest Private Sector General InsuranceCompany.

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Table 1

Gross Direct Premium and Market Share of General Insurance Companies

Name of the Gross Direct PremiumMarket Share of Company in the Gen.

CompanyInsurance Industry (%)

2002-03 2003-04 2004-05 2005-06 2006-07 2002-03 2003-04 2004-05 2005-06 2006-07

New India Insurance 4812.79 4921.47 5103.16 5675.44 5936.78 32.37 29.75 27.65 26.60 22.90

Co. (14.64) (2.26) (3.69) (11.22) (4.61)Oriental Insurance Co. 2868.15 2899.74 3090.55 3609.77 4020.78 19.29 17.53 16.75 16.92 15.51

(14.79) (1.10) (6.58) (16.80) (11.39)

ICICI Lombard 211.66 486.73 873.86 1582.86 2989.02 1.42 2.94 4.73 7.42 11.53

(678.90) (13Q.43) (79.63) (81.16) (88.85)

BajajAllianz 296.48 476.53 851.62 1272.29 1786.34 1.99 2.88 4.61 5.96 6.89

(618.60) (60.97) (78.81) (49.43) (40 .44)

IFFCO-Tokio 213.33 322.24 496.64 892.72 1144.72 1.43 1.95 2.69 4.18 4.41

(206.81) (51.52) (54.33) (79.84) (28.23)

Total Four Public 13520.44 14284.65 14948.82 15976.4417283.45

90.9286.35 81.00

74.87 66.65Sector Companies ( 13.45) (5.65) (4.65) (6.87) (8.18)

Total Eight Private 1349.80 2257.83 3507.62 5362.66 8646.57 9.08 13.65 19.00 25.13 33.35

Sector Companies (188.73) (67.28) (55.26) (52.89) (61.24)

Grand Total 14870.25 16542.49 18456.45 21339.10 25930.02 100 100 100 100 100

(20.06) (11.25) ( 11.57) (15.62) (21.51 )

Source : Compiled from IRDA Journals.

Note: The figures given in parentheses indicate the growth of Gross Direct Premium in percentage terms.

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The ratio of Expenses of Management as percentage of gross direct premiumreflectshow muchpercentage of revenue is beingutilisedfor expenseson management.This ratio is a pointer of the cost effectiveness and the productivity. Expenses of Management are, generally, operating expenses which include employees'remuneration and benefits, office and administrative expenses, etc. and a higherratio reflects financial instability of the business because a decrease in revenuemay result in losses, whereas lower ratio is an indicator of better operationalperformance. It becomes important to examine, how far the public sector GeneralInsurance Companies have been in a position to reduce their operating costs, inthe post-liberalization period.

Table 2

Expenses of Management Ratio

Name of the Company 2002-03 2003-04 2004-05 2005-06 2006-07

New India Insurance Co. 18.60 27.23 23.30 23.00 19.41

Oriental Insurance Co. 22.75 26.70 23.61 23.53 18.76

ICICI Lombard 20.26 18.20 17.00 18.75 16.60

Bajllj Allianz 23.00 21.25 17.00 19.00 17.00

IFFCO- Tokio 22.48 19.70 19.36 17.00 17.76

Table 2 explains that as far as the Expenses of Management Ratio areconcerned, the Private Sector General Insurance Companies' performance is betterthan that of Public Sector General Insurance companies. The competitiveenvironment has compelled the Public Sector General Insurance Companies toreduce their expenses of management and inculcate more operational efficiencies.New India Insurance Company reduced expenses of management from 27.23 percent in 2003-04 to 19 Al in 2006~07 and Oriental Insurance Company reduced itsmanagement expenses from 26.70 to 18.76 per cent during that corresponding

period. Among the Private Sector general insurance companies, ICICI Lombardseems to be the most cost effective having least expenses of management ratio.Overall, the private sector insurance companies' results present lower expenses of management ratio than public sector companies, though the figures also point outthat public sector companies are also working on inculcating efficiencies to becomecompetitive.

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Table 4Combined Ratio


New India Insurance Co 74.68 82.37 72.13 87.02 80.79


ICICI Lombard 28.24 32.46 34.53 43.18 43.70

Bajaj Allianz 57.70 52.64 43.44 48.60 50.00

IFFCO- Tokio 35.64 42.04 43.14 44.20 52.33

Table 4 reveals that the combined ratio of the Public Sector General Insurance

Companies is higher than that of Private Sector General Insurance Companies. It isdue to their higher expenses of management and incurred claim ratio. But over aperiod of time, an increasing trend in the combined ratio of private sector

insurance companies is also discernible, whereas no consistency in the combined

ratio could be established in the case of Public Sector General InsuranceCompanies, though the fact remains that the overall ratio is quite high and thesecompanies need to relook into that.

Trends in Underwriting Result Ratio

The underwriting results of a general insurance company are depicted bytaking net written premium minus increase in the unexpired risk reserve minus

expense of management minus claim incurred minus commission. The underwriting

results indicate the performance of the insurance company from core insurancebusiness. The underwriting result ratio is calculated by dividing underwriting result

to net written premium.

Tallie 5

Underwriting Result Ratio

Name of the Company 2002-03. 2003-04 2004-05 2005-06 2006-07

New India Insurance Co (13.94) ( 1 8.66) (16.90) (27.62) (13.75)Oriental Insurance Co. (14.72) (21.83) (27.18) (26.52) (17.93)

lCICI Lombard (5.06) 13.90 .84 (4.6) (3.82)

Bajaj Allianz (1.82) .38 8.53 3.30 2.44

IFFCO- Tokio (2.40) .25 1.89 (2.37) (2.43)

Source : Compiled from Annual Reports of General Insurance Companies.Note: The figures given in parentheses indicate underwriting loss ratio.

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Bajaj Allianz has suffered losses from its underwriting activities. It is

constantly earning profits from underwriting activities from 2003-04 onwards. A peepinto the annual reports of the insurance companies reveal that the underwriting

losses of Public Sector General Insurance Companies are much higher than those

of the Private Sector General Insurance Companies and this is mainly ascribed to low

reinsurance of their business and their higher expenses of management and incurred

claim. The main cause of their excessive management expenses is having a massive

strength of manpower. On the other hand, private companies get most of their

business reinsured to reduce their losses from underwriting. More so, they have

minimum staff strength and advanced technology at their disposal. So, Public Sector

General Insurance Companies have to reduce the staff strength and use more

technology to compete with the Private Sector. The General Insurance business in

India has been detariffed with effect from 1st January 2007 and even, companies are

allowed to change the policy wordings with effect from 1st April 2008. Now, it is a

better time for the Public Sector to revisit their loss making portfolios to improve

upon their underwriting results.

The Net Earnings Ratio shows how profitable the insurance business is.

This ratio reflects the summary of all activities during the period under review. The

Net Earnings Ratio has been calculated by dividing profit after tax to net written

premium. Table 6 explains that the net earnings of the Public Sector General Insurance

Companies have improved during the period under study.

Table 6

Net Earnings Ratio




ICICI Lombard 7.40 24.48 15.06 6.85 4.71

Bajaj AlIianz 5.31 7.57 9.80 7.38 7.25

IFFCO- Tokio 9.08 7.19 6.27 3.00 4.67

The table mirrors that Net Earnings Ratio of New India Insurance Co.

increased from 7.27 per cent in 2002-03 to 30.72 per cent in 2006-07 and Oriental

Insurance Co. improved this ratio from 5.65% per cent to 17.27 per cent. However,

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Net Earnings Ratio of private players presents a mix trend and as such standsnowhere closer to the public sector companies in terms of net earnings. It isinteresting to note that the private sector could not increase its net earnings despitehaving better underwriting results. An investigation into the annual reports of all theinsurance companies under study revealed that the reason for better performanceof net earnings of Public Sector is their higher investment income. Public sectorinsurance companies are making huge investments in the capital market and due toexcellent performance of the market, the profits of these insurance companies are

also booming, though they are suffering from losses from their core insurancebusiness.

Return on net worth ratio indicates how well the resources of the ownershave been used (Anthony and Reece, 1995). It measures the return accruing toowners' capital. It is computed by dividing profit after tax to Net Worth. Table 7shows the return accruing to owners' capital in the General Insurance companiesunder study.

Table 7

Return on Net worth Ratio




ICICI Lombard 3.20 14.10 19.40 13.40 8.60

Bajaj AlIianz 9.00 16.00 26.00 18.00 28.00

IFFCO- Tokio 5.95 8.67 11.75 7.00 9.00

As is evident from the table, Return on Net Worth of all the GeneralInsurance Companies is increasing from year to year, though the growth is moreprofound in the case of New India Insurance Co., Oriental Insurance Co., and BajajAllianz. In 2006-07, Bajaj Allianz has witnessed the highest return on net worthratio, i.e., 28 per cent closely followed by Oriental Insurance Co. and New IndiaInsurance Co. with the percentage values of 24.55 and 24.44 respectively.As mentioned earlier, this is mainly ascribed to better underwriting results in thecase of Bajaj Allianz and high investment income in the case of Oriental InsuranceCompany and New India Insurance Company.

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SUGGESTIONS FOR IMPROVING PERFORMANCE OF GENERAL

mSURANCECOMPANIES

The preceding discussion reveals that the insurance market has witnesseddynamic changes due to liberalization and privatisation of insurance sector. Thegrowth rate of Private Sector General Insurance Companies is much higher thanthat of Public Sector General Insurance Companies and these Private Sectorcompanies are increasing their market share year by year. Liberalization of thissector has offered tremendous opportunities to tap the potential of the lucrativemarket. The following suggestions will further enhance their performance on growth,profitability and efficiency.

The productivity trend in the General Insurance industry reveals thatprivate sector insurance companies are more cost effective as compared to publicsector companies. It is mainly ascribed to the use of information technology,professional approach, and lean work force. So, to improve upon the operationalefficiency in the public sector insurance companies, it is suggested that thesecompanies should expand the use of information technology and make theiremployees more smart and receptive to the technological changes.

It has been highlighted in the present study that underwriting resultsof the public sector insurance companies are poor as they have been sufferingfrom losses in their core insurance business. One of the main reasons for thatis lesser reinsurance of the business as compared to that of private sectorinsurance companies. Public sector companies are depending more and more onthe investment income to increase their earnings, and getting more exposed tothe risks, which may prove to be risky in the long run. It is suggested that these

public sector insurance companies should try to balance their investment activitiesto keep their risk complexion at reasonable level by getting more businessreinsured. .

The competitive environment poses the most difficult challenge toprovide return as compared to other financial options. Therefore, there is pressureon insurance companies to provide better operational results. Since the customeris the focus of the business, not only marketing practices acquire criticalimportance, but the manner in which the customer is served also needs close

attention, and at the same time they have to make their own business viable. Thecustomer is now much better informed and his expectations are on the rise inmarketing. These changing circumstances are exerting pressure on the existingplayers in the industry to rewrite their strategies and policies. It is time that thesecompanies raised their level of customer services to fight for survival in the

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