Diagnosis of Financial Health of Himalayan General Insurance Company Limited in the Framework of IRDA. Abstract

Transcription

1 Diagnosis of Financial Health of Himalayan General Insurance Company Limited in the Framework of IRDA Keshar J. Baral, PhD Umesh Raj Rijal * Abstract Using the financial data set for the fiscal year 1993/94 through 2005/06, this paper attempts to analyze the financial health of Himalayan General Insurance Company Limited (HGICL) in the framework of Insurance Regulatory and Development Authority, India (IRDA). The financial analysis of Nepalese insurance companies in the framework of IRDA seems realistic since the nature of insurance business in Nepal and India is similar. The different indicators of IRDA show that the financial health of HGICL is in stable financial condition. 1. Introduction People may lose their lives and property in disasters such as flood, landslide, earthquake, and so on. Insurance industry plays vital role in providing financial security to the people and their property. It increases the productivity of economy by providing the assurance for an unpredictable risk to individual business entity. Insurance is a financial arrangement that redistributes the cost of unexpected losses. The insurance arrangement involves the transfer of many different exposures to loss to one insurance pool that combines the numerous exposures (Dorfman 1987). Insurance industry carries out both finance function and risk management function. In Nepal, activities carried out by Guthi system were similar to the activities of insurance industry. The history of insurance industry in Nepal dates back to 2004 B.S. in which year Nepal Insurance and Transportation Company, a captive company of Nepal Bank Ltd., was established. And currently, there are 21 insurance companies in Nepal. HGICL is a well reputed insurance company of Nepal. It was incorporated as Himalayan Life and General Insurance Co., to the Office of Company Registrar in 1988 to carry out both life and general insurance business in Nepal. The Insurance Board of Nepal did not permit to conduct the life insurance business. So it was converted into Himalayan General Insurance Co. Ltd. And it started only the non-life insurance business in Any insurance company should have sound financial health to render the better insurance services to individuals and business entities. Their health should be regularly checked up and monitored by the concerned authority. In Nepal, the Insurance Board of Nepal is the monitoring and regulatory authority. But it has yet to develop the prudential indicators to regulate and monitor the insurance companies. So, we have attempted to apply the prudential indicators developed by IRDA to check up the condition of financial health of HGICL. * Mr. Rijal is Assistant Marketing Officer of Himalayan General Insurance Company Limited.

2 2 2. Theoretical Background In this section of this article, first, basic terminologies required to conceive the theoretical aspects of financial health of insurance companies by non-finance readers are explained. And then, theoretical aspects of different indicators of good financial health of insurance companies in the IRDA framework are discussed to facilitate the readers of the article. 2.1 Basic Terminologies Gross Premium: It is the premium that is directly collected by the company from its policyholders. Company calculates premium to cover expenses, estimated loss, costs etc., and then collects premium in two ways. One way is fielding sales force, agents and other employees to sell insurance product to the consumer and collects premium. Another way is accepting the reinsurance of other company s business. Thus, gross premium comprises of premium of direct business and reinsurance business. The gross premium is sales turnover of the company. Shareholder s Fund: Shareholder s fund represents the economic interest of owners of the insurance company. It includes paid up capital, general reserve, and undistributed profit. Paid up capital is the portion of authorized capital fully paid by shareholders. General reserve is the main component of shareholder s fund. It is accumulated amount transferred from profit to shareholder s account. Another important component of shareholder s fund is undistributed profit. Net Premium: Net premium is the premium retained with company after reinsurance ceded. First, companies accept the risks and collect the gross premium. The companies retain some portion of risk and shift some to other, and pay the premium to reinsurers. The difference between gross direct premium and premium of reinsurance ceded is net premium. Reinsurance: Insurance companies also seek financial security and their practice of insuring risks in the second time is termed reinsurance. In most cases, the reinsurer gives this facility to insurance company. It works exactly the same way as insurance, although on a much larger scale. If one house burns down, insurer can easily cover the loss by other thousand policyholders' premium. Problem arises when a catastrophic event such as hurricane destroys all insured houses in a given area. Insurer cannot pay such loss. Therefore, company itself buys insurance against such events. Commission: Generally, insurance company collects premium through agents and it provides them commission. Commission is both income and expense. It is shown in revenue account of each class of business. Commission is expense when company pays to its agents to provide as agent commission. It is also income when reinsurers provide commission to insurance company for providing them reinsurers business. The rate of reinsurance commission fluctuates depending upon the performance of the insurance company. Management Expenses: Generally, these are the expenses necessary to operate business. Monthly expenses and other types of expenses that are necessary to operate the business come under management expenses. Salary, provident fund, gratuity, allowances, leave encashment, printing, conveyance, renewals, maintenance, office development, advertisement, magazines,

3 3 guest expenses, annual general meeting expenses, telephone, telex, fax, water supply and electricity, insurance, bank commission, management fee, training, rent, audit fee, legal expenses, gift, donation, technical service expenses are under the purview of management expenses in insurance companies. Claim Expenses: Claim is the major expense of the insurance company. Revenue account of each class of business shows claim payment to the insured and claim received from reinsurance. The former is expense and latter one is income of insurance company. Estimated liability for outstanding claims in respect of direct business is based on intimations received up to the year end, survey reports, information provided by clients and other sources, past experience and other applicable laws. Reserve for Unexpired Risk: Insurance company collects premium in advance and it is considered liability to the risk until the expiration of insured period. At the end of the fiscal year, risks remain still unexpired and company makes provisions of reserve for such risks. This is the reserve for unexpired risk. It is intended to cover potential exposure to risk, in connection with general insurance policies in force. Underwriting Profit: Underwriting is the process of issuing insurance policies. It determines coverage and figures out how risky the businesses and people are. It limits the risk exposure and fixes the premium for insurance policy. Each company has its own set of underwriting guidelines. Underwriting profit is obtained by selecting less risky business and avoiding the risky ones. It is the primary focus of non-life insurance operations. It is the profit after loss payments, loss adjustment expenses, underwriting expenses and other operating expenses and it measures underwriting success of the company. Operating Profit: Operating profit is the measure of a company s earning power from ongoing operation. Operating profit covers both underwriting and income or loss from investment. Broadly, it covers earned premium, losses, operating expenses and income or loss from investment activities. Sometime, underwriting operation alone may suffer loss but with the help of income from investment, company may be able to gain profit. Net Earning: Profit after tax is net earning. Net earning is calculated by adding operating profit with miscellaneous income then deducting tax. Investment: Since insurance policies guard insured entities against future events, insurance premium payments are arranged prior to the insured period. During the time between premium collection and claim payment, a huge fund is reserved for future claims. This fund is available for investment, and return on such investment is a major source of income for non-life insurance companies. Insurance companies cannot invest such investment anywhere they like. Regulatory authority provides clear guidelines for investment so that it could safeguard the policyholder s fund. 2.2 Theoretical Prescription of IRDA Framework Insurance Board of Nepal has provided some key ratios: gross premium growth rate, net premium growth rate, net claims paid to net premium, claims due to net premium, net claim

4 4 expenses to net premium, management expenses to gross premium, to diagnose the financial health of insurance companies. But these ratios are not enough to cover the overall financial performance of insurance companies. So, we have used the financial ratios developed by IRDA to diagnose the financial health of HGICL. IRDA has developed a set of prudential financial indicators to monitor and regulate the financial health of insurance industry in India. It includes gross premium growth rate, gross premium to shareholder's funds, growth rate of shareholder's fund, net retention ratio, net commission ratio, management expenses to gross premium ratio, combined ratio, technical reserve to net premium ratio, underwriting balance ratio, operating profit ratio, net earning ratio, return on net worth, reinsurance ratio, and liquid asset to liabilities ratio (BAGICL 2003). Gross Premium Growth Rate (GPGR): Growth in gross premium shows the good financial health of an insurance company. But only the sustainable growth in gross premium implies the sound financial health. Moreover, premium in relative term shows the company s ability to perform efficiently in the market environment and features out the present condition and future prospect. Segment wise analysis of gross premium growth rate shows the relative performance of each segment of insurance business. Gross premium growth rate should be at the rate of overall economic growth rate of the country. In addition, we compare the annual growth rate with the insurance industry average and draw the conclusion about the overall performance of an insurance company (see Appendix 1). Gross Premium to Shareholder's Fund Ratio (GPSFR): This ratio shows the relationship between the total gross premium and shareholder's fund. In other words, it indicates the gross premium per unit of shareholder's funds. So, the greater ratio shows the better use of shareholder's funds in the operation of the business. So, it indicates the performance of management in generating the gross revenue of insurance company relative to the shareholder's funds. Hence, the higher ratio shows the shareholder's strength. Conversely, the deteriorating ratio shows weak financial condition of shareholders. Growth Rate of Shareholder's Fund (GRSF): It is the expression of numerical relationship between shareholder's fund as at the current balance sheet date and at the previous balance sheet date. It measures the annual growth of shareholder's fund of the company. As stated earlier, shareholder's fund comprises with share capital, general reserve and undistributed profit of the insurance company. Adequate reserves and retention of profits increase the equity base of the company. So, growth rate of shareholder's funds shows the sound financial health of an insurance company. In the case of heavy loss, growth in shareholder's fund may be turned into negative. The growth rate should be enough to cover the annual inflation. So, the growth rate in shareholder's funds greater than the annual inflation rate shows sound financial health of the concerned insurance company. Net Retention Ratio (NRR): It indicates the relationship between net premium and gross premium. It is used to appraise the risk retention of the insurance company. It measures how much of the risk is being carried out by the company and how much is being passed to reinsurers. This ratio shows the risk bearing capacity of an insurance company. High retention ratio shows the retention of higher risk. In such a case, company may be in financial troubles in

5 5 the event of catastrophic losses. The optimal level of retention depends on the risk bearing capacity and experience of the concerned insurance company. Net Commission Ratio (NCR): It is another tool to appraise the financial position of the insurance company. It reflects the working efficiency of the insurance company. The huge portion of premium goes to reinsurance companies and they provide commission to insurance companies. Commission is the major source of earning for insurance companies in Nepal. At the same time, an insurance company needs to provide commission for its agent on gross premium. The net commission (difference between the commission paid and received) is compared with net premium to calculate earning available for insurance company. Thus, the higher net commission ratio shows higher earning power from agency business with reinsurance companies. Management Expenses to Gross Premium Ratio (MEGPR): This ratio indicates the relationship between expenses of management and gross premium. It measures the expenses relative to premium. The lesser the ratio the better is the performance. As gross premium grows, management expenses also grow automatically. So the management expenses should be within the limit of regulators. Insurance Board of Nepal has set a maximum limit of management expenses. For marine insurance, management expenses should not exceed 25 percent, and in other sectors it should not exceed 30 percent of gross premium. Combined Ratio (CR): It is the relationship between management expenses plus claims paid, and gross premium. The major expenses of company are claims paid and management expenses. The higher ratio shows the higher level of expenses and conversely the lower ratio shows the higher margin on gross premium. So, it measures the profitability of insurance operations. The combined ratio less than 100 percent implies that company is making profit from operation. Technical Reserve to Net Premium Ratio (TRNPR): Technical reserve comprises of reserve for unexpired risk, reserve for outstanding claims and premium deficiency reserve. TRNPR indicates the relationship between technical reserve and net premium. Generally, reserve for unexpired risk is for future unexpected event and reserve for outstanding claim is for losses that are reported but not settled. These two reserves are given to protect the company and for its sustainability. Premium deficiency reserve is not applicable to Nepalese context. So, technical reserve in Nepalese case includes reserve for unexpired risk and reserve for outstanding claims. In Nepalese context, 115 percent of estimated outstanding claims should be set aside from the earnings for reserve for outstanding claims. Similarly, 50 percent of net premium received from insurance business other than marine insurance should be set aside for reserve for unexpired risk. In the case of marine insurance the reserve for unexpired risk should be 50 percent of preceding three years' net premium received from marine insurance. This ratio measures the company s sustainability in case of huge loss. So, the higher ratio indicates that the company s financial health is relatively sound. Underwriting Balance Ratio (UBR): This ratio shows the relationship between underwriting profit/loss and net premium. It shows the percentage of underwriting profit/loss on net premium. It measures the underwriting efficiency of the company. The higher ratio shows the higher underwriting efficiency resulting in the good financial health of an insurance company.

6 6 Operating Profit Ratio (OPR): This ratio emphasizes the relationship between underwriting profit plus investment income, and net premium. It measures the operating efficiency of management. A higher ratio indicates the better operating efficiency and sound financial health of an insurance company. Net Earning Ratio (NER): It is the expression of relationship between profit after tax and net premium. It reveals how much earning is gained in comparison to net premium. So, like in manufacturing and trading companies, this ratio shows the profitability of the business operation in an insurance industry. The higher net earning ratio shows the higher earning power of an insurance company and good financial health. Return on Net Worth (RNW): This measures the return on net worth. It indicates the performance of an insurance company relative to the net worth. The higher return shows higher profitability and better financial health of an insurance company. But this may mislead the financial analysts. Since return on net worth may be high due to the high degree of leverage. In such a case, high return on net worth may not imply the sound financial health due to the presence of high degree of risk. Reinsurance Ratio (RR): This ratio shows the percent of premium paid for reinsurance business on gross premium. Reinsurance premium is used to measure the reinsured risk. So, the higher ratio shows the low retention of the business. In addition, it indicates the proportion of shifting of risk to reinsurers. The higher reinsurance ratio has two implications: first, low risk and low retention ratio of premium, and second, stabilization of financial condition of an insurance company in case of catastrophic events. 3. Method and Data Out of twenty-one insurance companies 16 general insurance companies, 4 life insurance companies and 1 composite company, we selected HGICL as our study unit. We have conducted financial analysis using 13 year financial data (fiscal year 1993/ /06) of the study unit in the framework of IRDA. This study is based on the financial information and data published in annual report of each fiscal year. So, required data and information were extracted from annual reports of the study unit. In addition, supporting information and data were downloaded from the official websites of Insurance Board of Nepal, Nepal Stock Exchange Ltd., Security Board of Nepal and IRDA. As stated in the Theoretical Background, IRDA has developed a set of financial ratios to check up the condition of financial health of an insurance company. Out of 14 indicators, we have used 13 indicators developed by IRDA (for detail see Appendix 1). Liquid assets to liabilities ratio requires for data on the policyholders liabilities separately. But the data on the policyholders' liabilities are not available. So, we have left out this ratio. ver possible we have compared the observed indicators with the industry average provided by Insurance Board of Nepal. 4. Analysis and Discussion In this section, we have analyzed the 13 indicators of financial health of study unit and have attempted to diagnose the financial health of HGICL relative to the industry average and equal weighted average of the observed indicators during the study period.

7 7 Gross Premium Growth Ratio: As stated in Theoretical Background, gross premium shows the total sale volume of an insurance company. Trend in the GPGR shows the condition of an insurance company. Positive and sustainable growth in gross premium is good for financial soundness of the company. On the whole, gross premium is growing positively during the study period (see Appendix 2). Average gross premium growth ratio is around It implies that average annual growth rate in gross premium during the study period is around 44 percent. In the first year of study period, growth ratio is extremely high and then it is highly fluctuating during the study period. It has plunged below 1 in the fiscal year 2002/03. In addition, out of 13 annual growth ratios, 9 are below the average growth ratio. Standard deviation of growth ratio is around 70 percent. All these imply that gross premium growth is not stable and sustainable during the study period. The reason behind this is the fluctuation in contractor's all risk (CAR) insurance and engineering insurance in later years and decrease in aviation insurance. This is the same in other insurance companies in Nepal. Gautam (2003) also found the highly fluctuating gross premium of Nepal Insurance Company Limited and Premier Insurance Company Limited during the fiscal year 1995/96 through 2001/02. Data on the industry growth rate ratio are available only after the fiscal year 2001/02. Gross premium growth ratios of HGICL are relatively below the Nepalese industry average in all fiscal years (fiscal year 2001/02 through 2005/06). This fact bolsters that its performance in term of gross premium growth ratio is below the industry average. Gross Premium to Shareholder's Fund Ratio: This ratio shows how efficiently management is utilizing the owners' money to generate the revenue from the operation of the business. In absolute term, both gross premium and shareholder's fund are growing year by year. But gross premium is growing at higher rate than that of shareholder's fund during the study period. Due to this, gross premium to shareholder's funds has increased dramatically during the study period. On the average, gross premium to shareholder's fund ratio is in growing trend during the study period. From 2002/03 onwards, there is fluctuation in gross premium to shareholder's fund ratio due to the fluctuation in gross premium during the study period (refer to Appendix 2). On an average, HGICL has generated around Rs.1.98 gross premium for Re.1 shareholder's fund. In 2004/05 and 2003/04, the General Insurance Company of India had and gross premium to shareholder's fund ratios respectively (GICI 2006). Though in the early year of study period, this ratio is increasing at increasing rate, in the latter years, especially from the fiscal year 1999/00 through 2005/06, it is more stable. So, this indicator implies the sound financial health of HGICL and shareholders of this company are in strong financial position. Shareholder's Funds Growth Ratio (SFGR): As stated earlier adequate equity base is essential to keep up the sound financial health of an insurance company. So, sustainable growth ratio indicates the condition of financial health of any insurance companies. Shareholder' fund is gradually increasing during the study period. In all fiscal years, growth ratio is greater than one. On the whole, this ratio is in increasing trend. The average ratio is around with a dispersion of.074 (standard deviation). The average growth rate in shareholder's fund is 10.2 percent. The data on average annual inflation rate during the study period is not easily accessible. So, average growth rate in shareholder's fund could not be compared with average annual inflation rate during the study period. But annual growth rates are compared with the annual inflation rate (MOF 1996, 1999, 2002, 2005, and 2006). In the first five years, growth rate in shareholder's fund is less than the annual inflation and after that growth rate is greater than the

8 8 annual inflation rate. Thus, in general, annual growth rate in shareholder's fund is greater than annual inflation rate during the study period. This concludes that this ratio also shows the good financial health of HGICL during the study period. Net Retention Ratio: Net retention ratio indicates the relationship between net premium and gross premium. It is used to appraise the risk retention of the insurance company. It measures how much of the risk is being carried out by the company and how much is being passed to reinsures. The retention ratio of HGICL during the study period varies from around 16 percent to 31 percent. On an average, the retention ratio during the study period is around percent with the dispersion of 4.7 percent. Relatively net retention ratio is more stable than other indicators. HGICL has borne the least risk in aviation insurance and highest in motor insurance. In case of aviation insurance, average retention ratio during the study period is around 1 percent and in the case of motor insurance, it is around 88 percent. The reason of high retention ratio in the motor insurance is that the possible loss in motor insurance is comparatively small and more predictable. But in the case of aviation insurance, it is heavy and beyond the capacity of a single insurance company. Due to this reason, insurance company retains a small portion of the risk and premium. In the case of Bajaj Allianz General Insurance Company Ltd. retention ratio in motor insurance, and aviation insurance are 75 percent and 5 percent in the fiscal year 2002/03 respectively (BAGICL 2003). Thus, relative to Indian insurance companies, retention ratio of HGICL is very low. This suggests that HGICL has borne less risk and premium resulting more stable financial condition in the case of heavy loss from insured risk. Net Commission Ratio: As stated earlier, insurance company generates revenue basically from insurance premium, commission and investment. Net commission ratio is another tool to appraise the financial position of the insurance company. It shows the percent of revenue generated from the commission especially from bringing the business to reinsurers. In other words, in our Nepalese context, net commission ratio indicates the earning capacity from the agency business with reinsurers companies. On an average, net commission is percent of net premium during the study period. This implies that HGICL has receiving the major chunk of its income without bearing low risk. But the relatively high dispersion of this ratio (17.98 percent) suggests that financial health of HGICL is more unstable during the study period. Management Expense to Gross Premium Ratio: This ratio indicates the management efficiency in controlling the management expenses. Management expense varies from around 10 percent to percent during the study period. Percentage of management expenses is exceptionally high in 1993/94. It is mainly due to the operation of company just for 4 months resulting in the low gross premium, and high promotional expenses and house rent. In other fiscal years, management expense is within the stipulated range of management expenses. On an average, management expense is percent with the dispersion of 8.4 percent during the study period. As stated earlier, the management expenses should not exceed 30 percent in other insurance and 25 percent in marine insurance. This implies that management is mobilizing the available resources more efficiently to operate the business relatively at lower management expenses. Relatively, management expenses ratio is more stable and slightly in decreasing trend during the study period. Thus, this ratio also shows the more stable financial health of HGICL during the study period.

9 9 Combined Ratio: In addition to management expenses, claims paid are the major expenses of an insurance company. This ratio shows the profitability of insurance business when both claims paid and management expenses in combination are compared to gross premium. The combined ratio of HGICL is fluctuating during the study period. It varies from around 17 percent to 41 percent with an average ratio of percent during the last 13 years. As stated earlier, company was operated only for 4 months in the first year. In this year, combined ratio is exceptionally high due to the promotional expenses. If we exclude this year, on an average, management expenses and claim paid account around percent. Though this ratio is fluctuating, it is in the decreasing trend; and the decreasing trend implies the increasing profitability of the company resulting in improving condition of financial health of HGICL during the study period. Technical Reserve Ratio: As discussed earlier, technical reserve, in the context of this paper, comprises of reserve for unexpired risk and reserve for outstanding claim. This ratio shows the company s sustainability in case of any huge loss. In all years, HGICL has maintained the required technical reserve as set by Insurance Board. On average, it has maintained percent technical reserve ratio with a dispersion of 6.7 percent. This ratio is slightly in increasing trend during the study period. This implies that HGICL is increasing its sustainability in case of any huge loss from insured risk. Underwriting Balance Ratio: This measures the underwriting efficiency of the company. This ratio is highly fluctuating during the study period from to On an average, underwriting balance ratio is percent with a dispersion of 21.4 percent. This suggests that earning from underwriting business is not stable during the study period. HGICL has always sustained loss from underwriting business in aviation insurance and almost years in marine insurance business. Major sources of underwriting profit of HGICL are fire insurance, motor insurance, CAR and engineering insurance and miscellaneous insurance (Rijal 2006). Underwriting profit has considerable place in the net premium of HGICL on one hand, and on the other, earning from underwriting business is highly fluctuating. This implies that underwriting business may adversely affect the financial health of this company if it does not manage underwriting business cautiously. Operating Profit Ratio: For insurance industry, underwriting profit and investment income are two major components of operating profit. So, this ratio measures the operating efficiency of the management. This ratio is above 44 percent in all years of study period. On an average, underwriting profit and investment income consist of around 58 percent of net premium with a dispersion of percent. The growing trend in operating profit ratio indicates that operating efficiency of management of HGICL is improving year by year. Net Earning Ratio: This shows the percentage of net premium available for shareholders of the company. In the first year, net earning ratio is negative due to high expense during the establishment year. From F/Y 1994/95 to 1996/97, net earning ratio has increased up to percent. In 1997/98, this has come down to percent; and again soared up to percent in 1999/00. It remained around 30 percent during 2001/01 to 2003/04. And finally it has plunged in percent in 2005/06. On the whole, this ratio is percent with the dispersion of 14.86

10 10 percent during the study period. The growing trend in net earning ratio during the study period indicates that financial health of HGICL is improving during the study period. Return on Net Worth: This ratio shows the return on shareholder's equity. In the early year, return on net worth is recovering gradually up to 2000/01. And then, it is gradually plunging in percent in the fiscal year 2005/06. On average, return on net worth during the study period is around percent with a dispersion of 7.7 percent. Average return on net worth does seem satisfactory but the high dispersion indicates more unstable return and high risk to shareholders. This shows more unstable financial health of HGICL during the study period. Reinsurance Ratio: It is the proxy of amount of risk transferred to insurers. Reinsurance ratio is highest in aviation insurance and lowest in motor insurance. In the case of aviation insurance, reinsurance ratio is around 99 percent and in motor insurance, reinsurance ratio is around percent. In total, average reinsurance ratio is percent during the study period with a dispersion of 4.89 percent. Low dispersion shows more stable reinsurance policy and policy of maintaining the stable business resulting in the stable financial health. Reinsurance ratio, in general, is gradually increasing during the first 9 years and then decreasing in the rest of the study period. It implies that HGICL is gradually increasing the risk bearing capacity and improving the financial health. 5. Impression Some of the indicators such as GPSFR, SFGR, NRR, MEGPR, CR, TRNPR, OPR, NER, and RR imply that HGICL is improving its financial health year by year and has reached to more stable condition by the end of study period. But some of the indicators such as GPR, UBR, RNW and NCR suggest that it is still in the danger of exposure to unstable financial condition.

11 11 Appendix 1: Set of Financial Ratios Developed by IRDA 1. Gross Premium Growth Rate (GPGR) GPt = GP GPGR (1) t 1 GP t =gross premium for current year GP t =gross premium for previous year 2. Gross Premium to Shareholder's Fund Ratio (GPSFR) GP GPSFR = SF (2) GP =gross premium rate SF =shareholder's fund 3. Growth Rate of Shareholder's Fund (GRSF) SFt GRSF = SFt 1 (3) SF t =shareholder's fund for current year SF t-1 =shareholder's fund for previous year 4. Net Retention Ratio (NRR) NP NRR = GP (4) GP =gross premium NP =net premium 5. Net Commission Ratio (NCR) CNR NCR = NP (5) CNR =commission net of reinsurance NP =net premium 6. Management Expenses to Gross Premium Ratio (MEGPR) ME MEGPR = GP (6) ME =management expenses GP =gross premium 7. Combined Ratio (CR) MECP CR = GP (7)

12 12 MECP =management expenses plus claim paid GP =gross premium 8. Technical Reserve to Net Premium Ratio (TRNPR) TR TRNPR = NP (8) TR =technical reserve NP =net premium 9. Underwriting Balance Ratio (UBR) UP UBR = NP (9) UP =underwriting profit NP =net premium 10. Operating Profit Ratio (OPR) UPII OPR = NP (10) UPII =underwriting profit plus investment income NP =net premium 11. Net Earning Ratio (NER) PAT NER = NP (11) PAT =profit after tax NP =net premium 12. Return on Net Worth (RNW) PAT RNW = NW (12) PAT =profit after tax NW =net worth 13. Reinsurance Ratio (RR) RRD RR = GP (13) RRD =risk insured GP =gross premium

13 Appendix 2: Indicators of Financial Health of HGICL (Fiscal Year 1993/94 through 2005/06) Fiscal Year GPGR GPSFR GRSF NRR NCR MEGPR CR TRNPR UBR OPR NER RNW RR 1993/ / / / / / / / / / / / / Source: Calculated from the financial data extracted from annual reports of HGICL.

14 REFERENCES Bajaj Allianz General Insurance Company Limited (BAGICL). (2003). Third annual report April 1, 2007 < Dorfman, Mark S. (1987). Introduction to insurance (3 rd edn). New Jersey: Prentice-Hall, Inc. Gautam, Shankar Prasad. (3003). A study on premium collection and investment position of Nepal Insurance Company Limited and Premier Insurance Company Limited. Masters diss., T.U. General Insurance Corporation of India (GICI ). (2005). Thirty-third annual report April 5, 2007 < Government of Nepal, Ministry of Finance (MOF). (2006). Economic survey: fiscal year 2005/2006. Kathmandu: Ministry of Finance. HMG/Nepal, Ministry of Finance (MOF). (1996). Economic survey: fiscal year 1995/1996. Kathmandu: Ministry of Finance (1999). Economic survey: fiscal year 1998/1999. Kathmandu: Ministry of Finance (2002). Economic survey: fiscal year 2001/2002. Kathmandu: Ministry of Finance (2005). Economic survey: fiscal year 2004/2005. Kathmandu: Ministry of Finance. Rijal, Umesh Raj. (2006). "Diagnosis of financial health of Himalayan General Insurance Company Limited in the framework of IRDA." MBS diss., T.U.