CHAPTER VI FINDINGS, CONCLUSIONS AND SUGGESTIONS

Transcription

1 CHAPTER VI FINDINGS, CONCLUSIONS AND SUGGESTIONS 139

2 The insurance industry in India has witnessed paradigm shift in a relatively short span of time since liberalization (1999). Since liberalization there has been surge in premiums, players and outreach in Indian insurance industry. Post liberalisation and favourable regulatory environment put in force by the regulator (IRDA), has given fillip to insurance penetration and insurance density. The insurance industry, like many other industries, has also become competitive with insurers offering multiple products and with continued product differentiations. Combinations of these factors, along with strong economic growth during last decade or so, have positioned India as a regional insurance hub, and now aspire to become an international financial centre. In Post liberalization scenario insurance industry has changed significantly because of several factors. Channel innovation has ensured that insurers are able to reach to a wider customer base and technology innovations have enabled the industry to leapfrog over developed markets. The liberalization has also been extended to pricing by way of detariffication and in future may further be extended to product terms and structure. New business segments such as micro and health insurance have also grown very fast. However, given the global economic scenario and its fallout on the Indian economy, the Indian insurance industry has also witnessed the negative impact of the economic meltdown during the last one and a half year. A slowdown in premium growth rates was seen in the year 2009, which is expected to continue during the coming one or two years (Ernst & Young, 2010). The recent change in the market environment has forced players to revisit their expansion plans as well as their overall business strategy. Several players are seeking to undertake cost efficiency measures, process re-engineering, and are reviewing their organizational structure etc. It is very surprising that increasing public reach, inflating premiums, product innovations has been accompanied by increasing underwriting losses, which remains the big issue even today. Against this backdrop, the study was aimed at evaluating the impact of liberalization on financial performance of insurance industry and how insures are responding to these changes which is of utmost importance. In present study an attempt 140

3 has been made in previous chapters to analyse the financial performance of public insurance and private insurance companies together with comparative financial performance of public and private insurers. The present chapter sums up the main findings of the study and lastly outlines the relevant suggestions in this regard. The present study has particularly been undertaken to gain insight into the impact of liberalization on various aspects under study insurance companies. In this context, CARAMEL parameters were analysed to study impact of liberalization on capital adequacy, asset quality, reinsurance and actuarial issues, management soundness, earnings and liquidity of insurance companies, so that the study will be helpful in formulating an effective financial strategy and risk management policy. In addition, the study has embarked the study of security analysis of the non-life insurers as per ISI standards and lastly the impact of various factors on the overall solvency of the insurers have tested. Findings: The primary findings and conclusions are given hereunder:- 1. Capital Adequacy The minimum capital requirement for the insurance company to get registered has been fixed by IRDA at `100 crores, however, there are no regulatory capital adequacy norms for insurance companies as are applicable to banks. Simply IRDA has put in force solvency norm requiring every non-life insurance company to maintain the ratio of 1.5, monitored quarterly, and the stipulation enables them to formulate and finalize their business plans and be in a position to meet the capital requirements in a timely manner. However, insurance companies are on their own moving towards risk based capital approach, making arrangements to implement solvency II norms which the IRDA are supposed to implement by 2012 (Ernst &Young, 2010). The capital adequacy ratio has been high enough although no minimum requirements are prescribed, meaning that companies have adequate cushion to counter the underwriting risks. The capital adequacy 141

4 ratio analyses presents picture on two fronts viz; risks to capital and capital to total assets ratio The analysis depicts different look of both the sectors, the public sector insures have strong capital adequacy ratios but is witnessing a fall in titanic style whereas private sector has recorded low capital adequacy ratios but are showing surge year after year. The detailed findings of Capital Adequacy parameter are summarized as under:- i. The companies under study present a good show of capital adequacy ratio in respect of both the sectors, reflecting enough cushion for risks. The companies have shown good result so far as maintaining of ratio is concerned, which is evident from the mean score of the capital adequacy ratios. However, the proportion of net premium witnessed decline in case of public insurers whereas in case of private insurers marginal increase has been recorded, reflecting the market presence of public insurers and gradual fading away of their market share. In contrast increasing trends in the premium for private insurers reflect their gaining foothold in the market. The decreasing ACGR in public insurers does not necessarily mean negative growth, there has been growth witnessed in reserves also which has negatively influenced the ACGR. ACGR of net premium to capital ratio reflects the aggression of private insurers in tapping the new pastures, compared to public insurers, in whose case almost all companies witnessed negative values. Thus one can conclude that private insurers has followed stringent policy of gaining market and simultaneously maintaining adequate capital requirements to meet the solvency prescribed norms in this regard. ii. The business volumes are supported by the fair amount of capital for all the public insurers; however, decreasing trend has been witnessed in case of United and New India. They therefore require infusing more capital in the future in spite of the fact that additional capital infusion by these insurers to the tone of`50 crores each during has already been made. Further, the analysis capital adequacy ratio reveals that the assets base has been increasing and the underwriting losses are being met through the realization of loans and advances especially by United and New India insurance companies. 142

5 iii. The mean score of capital to total assets represents stable state for both public and private sectors. The private insurers relied heavily on capital to build the investments and assets whereas the public insurers had the reserves built in the pre reform period that served the purpose of displaying solvency status of the public insurers. Consequently more capital was not required to be infused, the high ACGR also indicates insignificant growth of public insurers in respect of this ratio. Private insurers in certain cases resorted to borrowings to meet the required ratio and there has been remarkable negative growth in the ratio, indicating total assets increase in good proportion to capital, also one can attribute this state of affair to the restrictive policy of IRDA on investments. This is a good sign of sustainability and increasing financial performance. iv. National insurance company shows higher standard deviation of amongst the public sector indicating high fluctuations in the ratio on account of premium collection. The ACGR, however, shows the negative growth in case of New India (-6.10), National (-0.45) and United (-4.81), only Oriental insurance company has witnessed a meagre growth of 0.66 that too is insignificant due to fluctuations in the premiums collection throughout the study period. v. It has been found that amongst public sector insurers, only Oriental is showing insignificant positive ACGR of 0.66 while as the rest of the public insurers are seen to have reported negative insignificant growth. vi. The variability in terms of standard deviation for all public sector companies is very low, however, New India (SD 3.294) and United (SD 3.937) have shown slight variability compared to the other two public sector insurers vii. The analysis shows that there is significant difference in the ratio for the companies as F value is recorded at 5.75 for private insurers. The companies have recorded significant negative growth in the ratio due to increase in the investments, although there has been infusion of fresh capital by the concerns 143

6 but only to meet the solvency requirements and proportion of increase in investment has been more compared to the increase in capital. viii. The public insurers seem to be relying less on equity capital due to the huge reserves accumulated during pre-liberalization era, in contrast, private insurers heavily relied on capital for displaying their solvent status. 2. Asset Quality The asset quality of insurers is the measure of reliance on equity to built sound and quality assets portfolio of the company. The requirement of `100 crores makes any company eligible to do insurance business in India, however, it is subject to revision by the company itself to meet solvency requirements. The pattern of ratio may differ for the public and private sectors as public sector insurers hold good amount of reserves and therefore may not need more capital infusion. The growing market penetration and presence by private insurers in underwriting risks do impact there solvency margins and as result of which there are evidences of fresh capital infusion by almost all the private insurers. The journey of Indian insurance market towards free market has pushed private insurers to have more capital base to operate freely in the risk prone market. The analysis of asset quality ratio of both the sectors reveals the following picture: i. There has been varying results in the ratio between the two sectors, the public insurers display synergy in the ratio pattern and private insurers seem to have varying and more volatility in the ratio. ii. The public insurers witnessed less reliance of equity base for assets improvement, which is evident from behaviour of the ratio in case of all public insurers as the average ratio is below 1 percent. This ratio has shown declining trend throughout the study period. The ACGR also confirms the same by recording the negative growth in the ratio except for United which infused fresh `50 crores to its equity base to meet the solvency requirement. 144

7 iii. The ratio of equities to total assets is less than one percent for the public sector insurers and it has witnessed minor fluctuation in the average ratio over the period of study. It is evident from the analysis that the United is the only company to witness ACGR of 6.60 percent, rest have witnessed negative insignificant growth due to increase in the investment and other assets. iv. Among private insurers, in terms of significance, Bajaj (0.000), IFFCO (0.051), ICICI (0.009), Reliance (0.007), Cholamandalam (0.001) and HDFC (0.050) have witnessed significant ACGR, while as Tata AIG has recorded insignificant (0.217) ACGR because they have heavily relied on equity to make improvements in asset quality. v. The decreasing ratio was as a result of earlier robust growth in the investments, fixed assets and advances and increase in the short term assets base of the companies, with the exception of United, where considerable decrease was seen in the investments, loans and other short term assets. The analysis of ratio in case of private sector insurers, presents similar picture. The highest ratio in terms of mean score is witnessed for ICICI (48.440) and Royal (44.144) and lowest in case of HDFC (29.724) and Bajaj (30.278). vi. vii. In terms of variability, the highest variability in the ratio is recorded in case of Oriental insurer (SD=5.563) and lowest for New India (SD=5.466) among public sector companies. However, in terms of variability, the highest variability in the ratio is recorded in case of Oriental insurer (SD=5.563) and lowest for New India (SD=5.466) amongst public sector companies. The private sector insurer seems to have acquired assets blocking more capital at initial stage. The negative growth in equity to total assets ratio in case of all the private insurers indicates that the companies fattened their asset base and now rely less on equity. Further, the IRDA regulation to maintain investments in the government and semi government sectors rescues their dependence on equity. This result also corroborates with significant decreasing trend of ACGR, except in case 145

8 of Tata AIG, within the private sector. The conclusion of the analysis manifests that assets base improves while the companies make progress in their business, which is a healthy sign for the companies, regulators and ultimately to customers. 3. Reinsurance and Actuarial Issues Reinsurance of risks means sharing of premium claims and profits also. The retention of more business underwritten depicts increasing risk bearing capability of insurers, which is a healthy sign in insurance business. The insurers are required to reinsure their 15 percent of tariffed and 10 percent of de-tariffed business (IRDA, ) and therefore all the insurers pass on their risks quantitatively to the minimum possible extent. The growing reinsurance ratio also indicates the growing capability to handle risks efficiently, however, the public and private sectors differ to a larger extent in this context. The parameter also indicates the position of technical reserves in an organisation to meet unforeseen claims. The main findings of reinsurance and actuarial analysis are given here under: i. The mean score for reinsurance ratio in case public sector insurers is better for all companies in the sector and New India has topped the list among them. The F-test also shows the increasing significant self-reliance to handle risks for these companies. The companies pass on risks only in the requisite quantum and rest of underwritten business are retained by them. ii. iii. The ratio for New India has shown consistent increase over the period of study and ranges between percent and percent. However, for other three PSUs the ratio witnessed sharp increase during the study period and swelled up from to percent, to percent and to percent respectively for Oriental, National and United insurance companies. Public Sector insurers have strong technical reserve base, therefore, they have more risk tolerance capacity during the adverse selection of insurance business and this holds good because of growing retention ratio. 146

9 iv. The private sector insurers also adopted the same pattern that is indicated by the growing risk retention ratio, however, initial transfer of risk can be justified on the ground that the private insurers did not had enough assets and investment base to cover unusual claims and sustenance could have been affected if adverse situation might have taken place. The important manifestation is revealed from F value (3.20) that companies differ significantly in terms of variability in terms of this ratio. v. The growing tendency has been seen among private insurers in terms of maturity and trust in positive underwriting and not merely racing to grab market and transfer risk. Most of the private sector companies have shown significant ACGR except in case of Reliance (0.078), Cholamandalam (0.072) and HDFC (0.225). vi. vii. In terms of the technical reserves to claims ratio, highest variability is recorded for New India (SD=13.10) and United (SD=17.85) insurers while lowest for National (SD=6.07) and Oriental (SD=7.62) among the public sector insurers. The high F value also shows the significant results as P = Further, ACGR is also corroborating the variability results as Oriental (-2.7) and national (-1.50) have shown negative growth. However, in terms of variability, the highest variability is recorded for Reliance (SD=32.45) and ICICI (SD=26.93) while lowest for Royal (SD=1.36), Cholamandalam (SD=1.77) and Tata AIG (SD=2.87). The retention of risks is common in case of both the public and private sectors insurers, which is a healthy sign. However, public insurers are more risk tolerant due to the fact that they posses sound reserve base. In contrast, the private sector insurers seem to hold fewer margins of risks comparatively. The situation requires insurers to be more cautious in business selection, which until now has been loss making, so that it may not erode customer faith and their solvency status. 4. Management Soundness 147

10 Management soundness in insurance business means operational soundness. This ratio reflects the operational efficiency of the insurer and indicates cost efficiency of the business, which ultimately reflects the efficiency of decisions regarding proper utilization of funds. The prescribed ratio of operational expenses to gross premium under Insurance Act, 1938 is restricted to 20 percent. Liberalized Indian non-life insurance market is characterised as loss incurring, the ratio will better judge the operational efficiency and preferably when used across various business segments, it will bring to front the underwriting performance and also will act as operational benchmark for the years to come. In the post de-tariffed regime the insurers are required to be more alert in respect of underwriting business and this indicator of management soundness surely should be one of the basic competitive tools for a successful insurer. The decreasing ratio is considered desirable, the findings of the analysis are summarized below:- i. The public sector insurers have been primarily characterized as high cost concerns in the sense that they incur large expenses in the initial years. However, study shows that there has been improvement in management soundness ratio. United insurance company on one hand has witnessed increase in the business and simultaneously proportional decrease was seen in the ratio. Other PSU s were also quite successful in their operations and there was a marginal decease in the management soundness ratios of New India, Oriental and National insurers. ii. iii. Among the private sector only IFFCO and Cholamandalam were successful in witnessing decrease in the ratio, the decrease was as a result of increasing business procurement witnessed in the increasing market shares of both the companies. Rest of the companies show phenomenal increase in the ratio which is not considered to be desirable for the companies. Tata AIG, HDFC, Reliance, Bajaj and Royal Sundaram were found to be worst hit as their ratios reflect major swing and were recorded with higher figures. There has been no major difference in the ratio when comparing the two sectors, although public insurers were expected to be at a lower side given the past experience but that has not been observed. In fact the major decrease has been 148

11 because of increasing pressure from regulator to mend the underwriting performance and restrict the operational expenditure. iv. The private sector on the other hand has established business and there has been varying expenditure incurring on establishment, recruitment and other allied services. However, IRDA has shown concern in their publications stressing for efficient underwriting business. From the analysis it can be deduced that there has been increase in the market presence of private sector companies, however, their management soundness has also been affected. Expenses for business acquisition, with growth shifting towards retail lines and incurring higher initial expenditure for expanding their networks have been on the rise because of the intense competition prevailing in the industry. Private players are required to restrict it, otherwise the players may get hit by a double edged weapon of underwriting losses and deteriorating management soundness, which any transitional insurance market cannot afford at the time of competition. 5. Earnings and Profitability In the earnings and profitability section, the focus of the analysis is on the operational and non operational income. This analysis is done by computing five ratios, the first three ratios embrace the major components of underwriting performance and rest of the two determine the non operational income and return to shareholders. The first three ratios of this analysis are required to be minimal for the positive and sustaining financial performance of the insurance company and reflect their underwriting efficiency are positively correlated with capital adequacy. The analysis of overall underwriting performance includes loss ratio, expense ratio and combined ratio, analysis of which reveals that every rupee of earned premium is draining in the shape of claims and costs plus some portion from non operational income which the insurers seem to adjust initially out of cross subsidization and investment income. However, the price war in the post detarrifed regime has resulted in thinning of profit margins from profitable segments and prevailing bearish capital market. Therefore, insurers need to be choosy in business selection, otherwise their funds may get drain away and to meet stipulated solvency norm, 149

12 shareholders might not sustain continuous funding without return resulting in the insolvency of the companies. The findings of this analysis are outlined here under:- a) Claim Analysis Claims figures as sub-dimension to the parameter earnings and profitability, higher claims surely reflects higher drainage of funds. However, keeping in mind the risks insured, an insurer surely lands in a position where it has to pay claims. What matters here is the good risk management practice which embraces proper risk evaluation and risk selection. Good evaluation aims at profitable pricing, even if the insurer incurs claims. The individual and comparative analysis of the public and private sector insurers reflect the following results: i. The public insurers had the highest claim ratio, ranging between and 89 percent, and percent, and percent and and percent for New India, Oriental, National and United insurance companies. However, ratio has no significance difference because P value hints towards increase in claims incurred. The ACGR also indicates increased incurred claims as it has positive growth for all public sector insurers except United where it has witnessed negative growth with high variability (SD=3.27). ii. The public sector insurers witnesses high claims across various lines of business and there has been growing tendency except United showing signs of stability as the study concludes. The loss has been on account of marine and miscellaneous segments where motor third party was the highest claim incurring segment. The public insurers continue to underwrite the loss making business and when seen the total business composition the miscellaneous business accounted for the majority portfolio to which the private insurers were reluctant. iii. The average claims turn to be high, however, with marginal exponential increase witnessed by all the public insures except United where the negative growth is a silver lining to the precedence. 150

13 iv. The private insurers had the claims ranging between and 68.95, and 71.91, and 83.44, and 85.35, and 60.54, and 79.87, and and and percent for Royal, Bajaj, IFFCO, ICICI, Tata, Reliance, Cholamandalam and HDFC respectively. However compared to the public insurers, the loss ratio has significant difference amongst private insurers because P value (0.001) is less than 5 percent level of significance and as such it can be claimed that private insurers have been able to control claims incurred. v. The analysis highlights the superior status of the private insurers as the average claims turn to be lower than the public insurers and exponential growth also indicates by and large similar phenomenon. The decreasing claims ratio is considered to be a good sign. Whereas the higher claims incurring system may seem to be unavoidable for the analysts of the insurance sector as there may be the argument that incurring claims cannot be restricted by any means. However when talked in free price regime, the argument may not have any relevance, as the companies are free to set prices for their products, consequently the insurers should have priced the products higher with profitable margins and ultimately less claims portion and as a result profitable underwriting. But when seen individually, claim portion is higher, which clearly is the case of premium deficiency. Moreover the identical products offered by the competing companies force them to price lower in order to gain market as a result of which profitability is at stake. The case is more profoundly seen in case of private insurers where regulator needs to intervene for the better and transparent insurance environment of the country. b) Expense Analysis Expenses are necessary for running any organization but unwarranted increase may narrow the profitability share in insurance business. Section 40 C of Insurance Act, 1938 requires the insurers to restrict their operating expenses as a result of which considerable attention is paid to this issue in IRDA publications. Decreasing ratio thought to be 151

14 desirable, the ratio employed is financial basis which highlights the upper hand of public insurers in comparison to private insurers, the findings of which are summarized as follows:- i. The four public insurers witnessed the ratio ranging between & 31.71, & 36.11, & and & percent for New India, Oriental, National and United Insurance companies respectively. The expenses covering differed quantitatively across various segments and fire segment incurred high expense ratio, followed by marine and the least for miscellaneous segment. However, decreasing trend was witnessed as the study proceeded. ii. The negative exponential growth was witnessed in case of public insurers and analysis depicts overall decreasing trend in terms of ECGR. It can be observed from the analysis of claim ratio that that up to , ratio of New India, Oriental and United India insurers was by and large under a control, but thereafter has witnessed sharp increase. It means that these companies were not able to put control on loss rate, perhaps because of poor risk management. However, surprisingly, United India was successful to record the all-time lowest claim ratio of percent during iii. The ratio of incurred expenses to net premium ranged between & 36.71, & 31.66, & 28.76, & 34.38, & 46.17, & 38.96, & and & for Royal, Bajaj, IFCO, ICICI, Tata, Reliance Cholamandalam and HDFC respectively. iv. The private insurance companies have significantly high degree of variability in the expenses ratio, which means they are not able to put stringent control on operating expenses and is reflected in their declining profitability. v. The analysis reveal high costs incurred in the initial years attributed to costs incurred on establishing business and networks where as it saw stable tendency as the study progressed. The expense incurred differed across various segments and 152

15 fire segment was seen as high expensive segment followed by marine and miscellaneous segments. vi. The companies differ significantly in the pattern of controlling the operational expenses and show efficient underwriting management. In comparison to public insurers, private insurers average expenses is recorded at , , , , , , and respectively for Bajaj, IFFCO, Royal, HDFC, ICICI, Tata AIG, Cholamandalam and Reliance insurance companies. The means of expense ratio of private insurance companies is very high compared to IRDA benchmark of 20 percent. The main reason for this is believed to be the race of private insurers to gain more market share from untapped market. The Comparative analysis of the two sectors in fact indicates public insurers are more cost efficient compared to private insurers. However, keeping in view the already invested expenditures on distribution and other establishments by public insurers, private companies seem to have achieved a lot in the short span. The regulator also has so far been lenient in its approach in this respect, enabling private insurers to stabilize their business. However, whether it be public or private sector insurers, there is definitely a need to resort to economical underwriting and for this purpose, more economical distribution networks need to be adopted and simultaneously expenses incurred on management need to be curtailed for promising and profitable underwriting. c) Combined Ratio Analysis The combined ratio is a ratio of incurred losses to earned premiums plus incurred expenses to written premiums (Rejda, 2001). The ratio being the combination of loss ratio and expense ratio, measures underwriting performance of insurers. The ratio above 100 percent means that the underwriting has been unprofitable and in simple language, every rupee earned as premium is drained along with some portion from the earnings out of non-operational income. 153

16 i. The combined ratio analysis is corroborating with result of loss and expense ratios because the combined ratio has also been recorded on higher side for New India, Oriental and National insurers during and However, United insurer has been able to record healthy combined ratio during the same period, which is really good for their financial health. ii. iii. iv. From the F test, it can be observed that all the companies within the sector differ significantly in the pattern of ratio. The ACGR is showing minor but insignificant growth in the ratio for all public sector insurance companies except for United, where negative, but significant growth (ACGR -4.38) is witnessed. The analysis of combined ratio of public sector insurers reveal that combined ratio of all the public insurers have is above 100, which clearly signals that underwriting has not been profitable. The average ratio is high for the United (127.05), National (123.56), Oriental (122.46) and New India (111.80) insurers respectively. E-growth reflects that the increasing trend has been marginal for public sector insurers and United insurer emerged to be the single insurer witnessing decreasing trend in the combined ratio. The private sector insurers on the other hand are seen to be quite high in the ratio, IFFCO (203.56) emerged as the insurer reporting highest average combined ratio among the private sector followed respectively by Bajaj (183.62), ICICI (172.67), Royal (163.72), HDFC (144.96), Reliance (133.15), Cholamandalam (124.61) and Tata (113.74) insurers. ICICI and IFFCO are found to report highest e growth of & respectively conformed by the high standard deviation witnessed during the study period. v. In terms of variability, the highest variability is witnessed in case of IFFCO (SD=67.55) and ICICI (SD=60.49) and lowest in case of Tata AIG (SD=10.86), Royal (SD=15.71) and HDFC (SD=18.427). The combined ratio 154

17 is showing high degree of significant variation in the ratio amongst the companies in the sector. vi. The comparative statistical analysis indicates that the underwriting has not been profitable for both the sectors. The ratio higher than 100 percent means that operational income along with the portion from non-operational income is drained out in losses and expenses. d) Investment Income Analysis Investment income has always come to the rescue of insurers in writing off of the underwriting losses. The practice being more prominent in public insurers, simultaneously, the private sector insurers rely fairly on the investment income. The investment income earlier used to be quite good in quantum; however, given the global melt down, the impact is being witnessed in Indian market as well. The impact is being witnessed in the overall profitability trends of the insurers in general and investment income in particular. The analysis of the investment income ratio reflects the following results: i. Public insurers are seen to have high margin of investment income on the investments made during pre-liberalisation era, the benefits of which are still being reaped. The average ratio for the last five years is reported by United, Oriental, National and New India insurers at 35.44, 31.17, and 26.4 respectively. Most of the insurers in the sector are seen to lose gradually the margin of investment income which is quite visible in their growth showing negative figures. ii. iii. The New India, Oriental and United seem to have been worst hit whereas National insurer has recorded an upward trend in the initial years, however, it settled to a bit higher than initial year s ratio. This scenario also hints towards poor financial risk management on the part of companies. The private sector on the other hand does not reflect, high quantum of investment income in their security portfolios. However, steady increase in returns on 155

18 investment is reflected by e growth and standard deviation respectively. The insurers in the sector reported marginal increase and lies at 9.75, 8.95, 8.08, 7.69, 7.50, 7.40, 6.93 and 6.40 respectively for ICICI, Bajaj, Reliance, Tata, IFFCO, Cholamandalam, Royal and HDFC insurers. In terms of variability, the private sector insurers have witnessed higher variability as standard deviation is recorded at 0.748, 0.819, 1.608, 1.635, 1.720, 1.784, and for Cholamandalam, Tata AIG, Reliance, Bajaj, IFFCO, Royal and HDFC respectively. The global melt down surely have its impact on the profitability of the deregulated corporate sector in India. However, as the insurance sector is not too much open for FDI (26%), marginal impact has been seen on overall profitability of the sector. The most vulnerable area of impact being investment side, consequently the ripples is seen in investment income of insurers, which have seen a marginal decrease as the study progresses. What immediately needs to be done is to focus on the underwriting profitability of the insurers. e) ROE Analysis Return on Equity or Net Worth of a company measures the ability of the management of the company to generate adequate returns for the capital invested by the owners of a company. ROE has been high for public insurers in the initial years, since the insurers suffered huge underwriting losses; the impact is seen on the ratio in the following ways; i. The public sector insurers present a promising picture of the ROE in earlier years; however, the impact of competitive pricing is reflected in the overall return on equity. In terms of variability, as is evident, all the public sector companies have shown high degree of variability as standard deviation was recorded at 271.8, 230.5, and 55.9 for New India, National, Oriental, and united insurers respectively. The variability in the ratio is authenticated by the P value indicating that the companies differ significantly in the 156

19 pattern of ratio. New India witnessed negative insignificant growth because of instantaneous fall in ratio during However, surprisingly United India witnessed marginal insignificant growth in the return. ii. iii. iv. The fall would have been great if the PSUs have had the equity component more in the overall capital structure, however the investments and other assets base held by the company not only corrects the solvency surveillance but also the leaves the proportion for shareholders to rely upon. The private sector also could not escape from the impact and consequently the decreasing trend in the ratio is seen across majority of the concerns. In terms of variability, the highest variability was witnessed in case of Reliance (SD=70.37) and Bajaj (SD=23.41) and lowest in case of Royal (SD=5.23) and Cholamandalam (SD=4.93). The results of the ratio are significant in terms of F value. The PSUs which were thought to be better placed could not generate enough funds from operations to meet investor s demands as a result of which investment income also could not set off the increasing underwriting losses. Liquidity The contract of non life insurance policy usually lasts for one year; consequently insurers are more vulnerable to liquidity crises, if sufficient provisioning is not made. Hampton 1993 in his guidelines suggests that liquidity ratio should be greater or equal to 100. However, when seen in the context of Indian insurers, none of the insurers under study seem to follow the benchmark, the following results are inferred from the individual and comparative analysis of the public and private sector insurers. i. The public insurers differ significantly as far as liquidity position is concerned. New India (55.804) seems to doing better when compared within the sector 157

20 with major fluctuations witnessed across the study period. Others to follow are, National (39.718), Oriental (38.976) and United (31.619). ii. iii. iv. Public sector insurers, more or less reflect same pattern of liquidity for the study period. Public insurers seem to be ahead in the ratio when compared with private insurers. The average liquidity ratio for the public insurers is seen at , , and for New India, National, Oriental and United insurers. New India, however reflects sharp increase in the ratio, which indicates liquidity position of the insurer is stabilizing, Oriental insurer also seem to be making good provisions for current liabilities. Among the private insurers, IFFCO Tokio seems to be making good provisions for liabilities of immediate attention. Although it also does not meet the standard, however, the average liquidity ratio is seen at Cholamandalam and HDFC are seen to have instincts of stability reflected in the growth of current assets, which may result in a better liquidity state in the years to come. In terms of variability, highest variability was witnessed in case of Reliance (SD=14.986) and HDFC (SD=9.750) while lowest in case of Royal (SD=4.019) and ICICI (SD=4.397). The higher significant F value indicates significant difference in ratio of private sector insurers, where as insignificant ACGR presents the promising picture of better liquidity position of HDFC and Cholamandalam insurers. Since non-life insurers are risk takers featured with liabilities of short duration, it becomes imperative for the insurers to report comfortable liquidity state, which if not mend well in time may result in liquidity crises and compel the companies to acquire more funds for meeting immediate liability, resulting into worsening of return to shareholders. Findings as per Insurance Solvency International Limited (ISI) 158

21 While evaluating performance of insurers, as per the standards prescribed by Insurance Solvency International Limited (ISI), following findings are derived: i. Underwriting losses have always been a concern for public insurers and this has seen remarkable increase during the study period. Consequently the sector is not able to meet the third (Underwriting Profits /Investment Income) standard prescribed by ISI. ii. iii. Investment income is also reported to meet a marginal decrease which is reflected in the standard discussed ahead, the investment income, which earlier were used to set off underwriting losses are not reported to be adequate in meeting underwriting losses. The Investments held earlier, are being sold to meet the losses which is quite visible by the marginal decrease in the technical reserve position and thereby affected their ability to meet solvency norm. Private insurers are seen to be ahead grabbing more market share which is quite visible in the business volume fluctuation. Except HDFC Ergo, none of the private insurers are seen to meet the standard of change in premium. Consequently evidences of fresh capital apart from minimum requirement of`100 crores is seen to meet solvency norm. iv. Funds available in the companies in the shape of technical reserves and shareholders funds are also not reported up to mark to cushion growing business volumes, which is a concern for private insurers. Consequently fifth standard is not seen to be met by the private insurers under study. v. Decrease in overall profitability has been as a result of underwriting losses for private insurers, which is quite obvious from the last standard of ISI. The private insurers are not seen to report the ratio as per benchmark. Findings as per Solvency Determinants Based on the results depicted in multiple regression of various functional areas of nonlife insurers under study, following facts are concluded to have come on to surface: 159

22 i. The non-life insurers solvency is affected by the Firm size. Several factors may be responsible but the most obvious one seems to be the nature of business done by the non-life insurers. ii. Predictor, Claims ratio suggest that it has the expected sign and strongly suggests that higher claim ratio has been contributing negatively to overall insurer solvency status. iii. The operating margin which is also significant had the negative impact on the insurers solvency due to the soaring margins. iv. Lastly, the combined ratio is found to be statistically significant in and suggests that despite higher outflow; solvency has been improving, which is quite unexpected. Secondary Findings i. Insurers in both the sectors are seen to have affected by price deregulation of January The same is indicated in the soaring profit margins and premium deficiency of the companies in both the sectors. ii. Cross subsidization of unprofitable business segments by profitable business segments which has been practice, prior to price deregulation saw a sudden shift and the profitable fire products are now being sold on competitive rates. iii. The market imperfections have been reduced to a great extent. Every segment now is being seen in terms of profitability, it can generate. Unaddressed issues of price insufficiency, expenditures level, ROE, investments are properly discussed and their individual impact is being ascertained. iv. There has been a shift seen in the underwriting. Every individual segment is evaluated in terms of profitability and revenue generation. Severe loss making segments, like motor, third party, O.D etc. are being discussed to devise policy for their profitable possibilities. v. The regulator has been strict regarding the solvency margins and now the margins are being monitored on quarterly basis, which may check unethical and unsound practices of inflated better financial position depiction. 160

23 vi. Public insurers are seen to dispose off the earlier held investments to meet the underwriting losses. The profit generated from sale of investments is being used to pose to be profitable by public insurers, which is alarming. vii. The private insurers in fact are seen to meet the underwriting losses out of the capital, which is worrying for the sustainability of the insurers. Consequently evidences of fresh capital infusion are resultant of that. viii. Investment income has witnessed a remarkable decrease throughout the study period, which is alarming. The decrease in investment income side compels the public insurers to sell investments and profits got from such deals are used to set off underwriting losses ix. Maximum losses have been reported by miscellaneous segment comprising of motor health and other segments of non life business and simultaneously public insurers were found to accept the risk voraciously to improve market presence and as a result suffering huge underwriting losses. x. Earlier profitable segments of business products are now being sold at competitive prices making the situation worse for the incumbents. xi. Despite the whooping increase in premium collection by both the sectors, penetration still remains at lowest. The situation reflects that market is expanding but not exploited as per the increase of individual savings. xii. The retail and customized insurance products is still a dream despite price deregulation. Suggestions In the light of the analysis and findings, following suggestions are reproduced for development of efficient insurance sector:- i. In terms of capital adequacy, public insurers need to restructure their capital portfolio. Relying merely on reserves position may not last longer, given the fact that investments held by public insurers are being sold profitably to support underwriting losses. 161

24 ii. Private insurers need to have required quantum of technical reserves for better support to unexpected claims. iii. Inclusion of more equity will surely make the asset quality of the insurers better and public insurers in particular need to resort to it for reporting required solvency status. iv. For the improvement of reinsurance ratio, proper management of technical reserves position will help private insurers to retain and manage maximum risk efficiently. v. Proper check on management expenses will help improve management efficiency. For the improvement in this parameter, unprofitable branches and unproductive work force if curtailed will save a huge amount for public insurers in the shape of management expenses, which otherwise is concern for public and private insurers. vi. Proper risk evaluation, pricing and risk selection will surely help insurers in proper claim management, expense management and consequently will lead to decrease in combined ratio for the insurers and ultimately will result into underwriting profitability. vii. Regulator IRDA should allow insurers to have a diversified and risk balanced investment portfolio. The move will help insurers to enhance investment income. The increasing investment income will cushion underwriting losses to a good extent. viii. Risk based capital is the need of the hour, which requires companies to underwrite business as per the capital strength and as such adequate capital requirement for all companies should made regulatory in order to take sufficient underwriting business exposures. ix. Increasing focus on underwriting discipline should be undertaken to avoid underwriting losses, to increase profitability and to be competitive. Every segment should be seen in terms of underwriting capacity and be priced accordingly. x. The underwriting should aim at profitable underwriting rather than mere share gaining chase. Proper risk evaluation is also facilitated by price deregulation, and 162

25 xi. xii. xiii. xiv. xv. xvi. xvii. in view of increasing purchasing power of individuals, profitable but competitive pricing should be the area of focus. Only operational performance should be taken into consideration, while reflecting company s performance. More importantly every segment should highlight its underwriting performance at the end of financial year and imperfections may accordingly be weeded out. The sector should be allowed to raise funds from stock market to enable them report profitable figures. Consequently the insurers will focus on profitable business underwriting will lead to better liquidity management on the part of insurers. Deregulation should be followed by reregulation in the key areas of risk evaluation and product pricing. This is the only way for profitable pricing otherwise in the coming time, insurance industry will be facing insolvencies of some key insurance players, which may damage customer trust and consequently the sector will remain untapped. Proper risk management practices to be made mandatory. Especially operational and market risk management should addressed in case of all insurance companies on the lines bank risk management so that hard earned money of insured is protected. Management expenses should be properly put into cap and insurers who don t adhere to the cap should be fined and ultimately legally challenged. New, effective and cost efficient distribution channels should be the focus area to restrict growing marketing costs. Regression analysis suggests that proper risk selection is mandatory to avoid too much incurring claims, which otherwise is eating away the solvency status of the non life insurers. FDI cap be enhanced from 26 to 49 percent which the primary requirement of times. The move has got its own advantages like more capital flow, more employment, and technical knowhow and in the long run cost efficiency and profitability for insurers and exchequer as such. 163

26 xviii. xix. xx. xxi. xxii. Earlier file and use concept of product pricing be implemented with fresh vigour to enable insurers to price profitably their products. Market gain chase by the insurers will come to halt by it and insurers may focus on efficient underwriting. Otherwise to which they are worried about their sustainability in the market. Customized insurance products, as per the needs of customers. One of the bigger advantages of price deregulation is different prices for different needs; however, the facility is only present in economic literature for Indian customers. The insurers need to properly tailor their products accordingly. Proper risk selection and thereafter proper risk evaluation should be done by all insurers. In view of growing tendency of grabbing more market chase, proper risk selection process is ignored, which consequently leads to poor risk evaluation, and ultimately losses. Proper actuarial order of product pricing will surely arrive at profitable pricing, provided re-regulation of prices. Adoption of cost effective and viable distribution system should be made mandatory. Modern era of computers and IT calls for looking of cost effective and viable distribution system of insurance products, the benefits of which can show immediate impact in the shape of decreasing costs and adding to profits margin. 164