Asia Pacific Journal of Research Vol: I Issue XIV, February 2014 ISSN: , E-ISSN

Transcription

1 A STUDY ON THE COST CONTROL EFFICIENCY OF LIFE INSURANCE CORPORATION (LIC) OF INDIA DR.K.V.RAMANATHAN 1 ABSTRACT The cost is an important element to determine the profit of any product or service. There is a positive relation between cost and profit. Cost control is a prime objective of each and every business and to control the cost of operations and for that different kinds of strategies are adopted by them. In insurance business the expenses are incurred in several heads like, product (policy) innovation, marketing of products (advertising & sales promotion), underwriting commission, and agency commission etc. The Life Insurance Corporation (LIC) of India is taking enormous efforts in the Introduction of new products and expansion of business and incurring huge expenditures regarding this process. However, these expenditures are inevitable and reasonable one. This article is trying evaluating the cost control efficiency of LIC during the period between 2002 to 2012 (10 years). The required and relevant data have been collected through the annual reports of LIC and put under analysis. The analysis revealed that, in the first two years during the study period, LIC did not reduce its expenses, but in the last year and subsequent three years from 2007 to 2010, LIC retrenched its expenditure as a measure of contingency. They employed various strategies to keep the expenses based on their income. It is clear from the insignificant covariance of income and expenses. LIC in the first seven years spent more of its income to salaries of the employees to get their co-operations. But in the last two years, the measure of contingency made LIC to be careful enough to deal with the salaries of employees. The present study involves calculation of cost efficiency score of life insurance sector in India with the used of Data Envelopment Analysis (DEA). Life Insurance Corporation of India has consistently secured a cost efficiency score of 1 in all the years from to and scored the highest rank for all the years under study. Thus Life Insurance Corporation of India has consistently been a cost efficient organization. While in the case of the private life insurance companies, the cost efficiency score has been inconsistent Introduction The concept of Insurance means an arrangement to deal with unpleasant contingencies. Life Insurance may be defined as an insurance contract under which the insurer s liability is dependent upon the happening of a contingent event viz., death or on the expiry of a stipulated period mentioned in the policy (Charted Secretary, 1999). Life Insurance is a contract for providing the payment of a pre-determined sum of money to the policy holder, or on his untimely demise, to the nominee who is entitled to receive it. 1.Associate Professor, Research Adviser, Dayananda Sagar Business School, Bangalore, Karnataka Page 172

2 Under a contract of insurance, loss of these unfortunates are compensated by the contribution of a large number of policy holders who are also exposed to the same type of risk. In fact, the essence of insurance is the sharing of losses and the substitution of certainty in the place of uncertainty. When the risk under consideration is premature death, the possible financial hardships of the dependents of a deceased policy holder is indemnified through life insurance. So long as the maintenance of a family depends on the earning power of the bread winner and his earning power can be destroyed by death, old age or disability, life insurance continue to be the key stone of the individual and those who are dependent upon him (Bajpai, 1990). Life insurance, alone provides guarantee under all circumstances, provided the policy is kept live by paying premia in time. Significance of the Study Life Insurance Corporation (LIC) plays an important role in providing life insurance to the public. It is being accommodating more volume of public money in terms of insurance premium and it has to meet out so many expenses (costs) regarding these process. LIC is generating more volume of income through mega operational forces and this mega operational forces are consuming more expenditures (costs). LIC is incurring huge expenditures (costs) on various heads like, product innovation, business expansion, agents commission and employees salary etc. Hence all these expenses are inevitable, they must be controlled and balanced with the help of various cost control mechanisms to ensure the expected level of profitability. So, to evaluate the cost control efficiency of LIC is one of the significant studies in the current content. Statement of the Problem In the competitive business environment especially after the entry of private players in the insurance field, to control and maintain the cost of operation is an important assignment to each and every insurance company. With connection to this, the public insurance company LIC is playing a major role in life insurance in India. Hence, to evaluate its cost control efficiency is an important and inevitable one with current scenario. Objective 1. To evaluate the cost control efficiency of the LIC during the study period from 2002 to Review of Literature The adaptation of modernization is inevitable for all kinds of business. Further, the entry of private players in the field of insurance, the level of competition is strengthening every day. Due to these reasons, the insurance companies have to redesign their existing cost control device and increase their overall financial performance. Kaovu Tone and Sahoo (2007) found significant heterogeneity in the cost efficiency scores over the course of 19 years. A decline in performance after can be taken as evidence of increasing allocative inefficiencies arising from the huge initial fixed cost undertaken by LIC in modernizing its operations. A significant increase in cost efficiency in is however, a cause for optimism that LIC may now be realizing a benefit from such modernization. This will stand them in good stead in terms of future competition. Results from a sensitivity analysis are in broad agreement with the main findings of this study. Desheng Wu and Zijiang Yang (2007) mentioned in their article that, the insurance industry in Canada has undergone profound changes over the last two decades. As a result of deregulation and the subsequent convergence of the traditional four pillars (i.e., banks, insurance firms, trust companies, and investment dealers), the L&H segment faces fierce competition from nontraditional providers. Banks emerged as strong new competitors in view of their vast Page 173

3 distribution channels customer relationship management skills, and technological proficiency. Nevertheless, the aggressiveness of the insurance industry s lobbying campaign suggests that traditional players feel threatened by the size and economic clout of the banks. In addition to domestic non-traditional participants, insurers have also encountered competition from foreign companies as a result of reduced barriers to entry spurred by globalization. The competitive pressures forced many insurance companies to respond with a tighter strategic focus and changing corporate strategies in order to reduce operating costs while maintaining or improving the quality of their services. To convey the messages of a product and business an advertisement is inevitable at the same time the selection of media requires to consider several factors and evaluate the efficiency of the vehicle by way of feedback. Keet Peng Onn and Alan Mercer (1998) found in their article that, an insurance company like many in the financial services industry will advertise a product in the press and some readers will avail themselves of it often the cost of an advertisement will exceed the income derived from the accepted respondents in the following years. It only becomes profitable if acquiring names into a database results in purchases in future years of the advertised and other, cross-sold products. Therefore evaluating advertising effectiveness requires the development of future lifetime value (LTVs, which vary over time between individuals for the different products). Real examples include evaluating the media vehicle, size, contact and frequency of advertisements. Meena (1986) in her dissertation entitled Utilization of Life Insurance Corporation by Policy Holders of Madurai City concluded that unless the corporation makes its schemes attractive and effective, with good returning capacity and high bonus to the policyholders, it is bound to fail in its operations. She has also suggested that heavy expenditure has to be curtailed so that the corporation can pay better returns. Research Methodology Research Design The research design for this study is descriptive in nature. The descriptive research design tries to describe the data and information which are already available without changing its nature and dimension of the data. The reason for selecting the descriptive research design is to evaluate the data, especially the data is of secondary in nature. The data which is being used for this research is fully in secondary nature, so the application of this research design looks inevitable and significant. Nature of Data The sources of data are purely secondary. Secondary data is collected through information gathered from books, journals, magazines and annual reports of LIC of India. Source of Data The researcher has collected all the secondary data from various branches of LIC (Perambalur, Vridhachalam and Chennai). Prior to this attempt, a formal approach and request were made with the Insurance Regulatory Development Authority (IRDA) of India through proper channel and the permission was obtained to collect data from the branches of LIC. Period of study Ten years from to Page 174

4 Data Analysis The data collected from all the sources are scrutinized, edited and tabulated. The data are analyzed using SPSS (Statistical Package for Social Sciences) packages. Financial analysis techniques like, Analysis and Trend per cent are executed to analyze the financial data. Numerical Cluster Analysis is exploited to classify the different financial ratio units based on the different financial elements. The ratio analysis is performed by the mathematical formula a/b. Karl Pearson s co-efficient of correlation and trend analysis is used to study the oscillations in the data for ten years. The measures of Central Tendency, Covariance and percentage analysis are used to establish the contribution of the data in the study. Analysis and Interpretation Income to Total Expenses The ratio of Income to Total Expenses is calculated and shown in the table 1. Income to Total Expenses = (Income / Total Expenses) times The important objective of studying this ratio is to read out the interrelationship between the income and total expenses. There is an inverse relationship between these two, i.e., whenever the total expenses is increased or looked uncontrollable, correspondingly the income will decrease. Year Table - 1 Showing the Income to Total Expenses LIC of India Income Total Expenses Clusters H H M M L L L M H L Sum Mean SD CV Trend ACGR Correlation 1.00 (Source: Annual Reports of LIC) Table 1 shows the details of Income and Total Expenses of LIC for a period of 10 years from 2002 to Page 175

5 The analysis of the performances of total expenses showed that, it has been increasing most of the times but on one occasion in the year 2009 dropped by more than 20 per cent and thereon started increasing and ended up at Rs crores from Rs crores in The maximum value reached is Rs crores. The index value ranged from per cent to per cent. The mean value is Rs crores with the standard deviation at Rs crores, the covariance reached Rs crores. The trend is calculated to reach Rs crores by 2014 and thus the compounded growth rate Rs crores with the base value of Rs crores. The ratio between income and total expenses revealed that the values are high in the first two years 2003 to 2004 and But the low ratio values are noticed in the consecutive three years from 2007 to 2009 as well as in This shows that in the first two years, LIC did not reduce its expenses, but in the last years and subsequent three years from 2007 to 2010, LIC retrenched its expenditure as a measure of contingencies. They employed various strategies to keep the expenses based on their income. It is clear from the insignificant covariance of income Rs crores and expenses Rs crores. The introduction of new products and their success depends upon the expenditure separately allocated for new agent formation to popularize the profitability of new products to the customers. The notions of Stephen Hall (2008) also indicated that the allocation of new business expenses reflected in the form of increase in the number of agents to attract maximum customers. Income to New Business Expenses The ratio of Income to New Business Expenses is calculated and shown in the table 2. Income to New Business = (Income / New Business Expenses) times. The purpose of adopting this ratio is to examine the relationship between the income and new business. New business is an element of an income, so what ever be the changes incorporated on new business and then there will be a corresponding reaction on income. There is a positive correlation between these two. Table 2 Showing the Income to New Business Expenses LIC of India Year Income New Business Expenses (in crores) Clusters M H H L L L L L L L Sum Page 176

6 Mean SD CV Trend ACGR Correlation 0.99 (Source : Annual Reports of LIC) Table 2 shows the details of Income and New Business Expenses of LIC for a period of 10 years from 2002 to The performance of new business expenses is shown. Analysis of new business expenses has showed that most of the time the value increased but on two occasions in the year 2005 & 2009 it decreased as evident by every heads contribution in the analysis slipped by around 20 per cent and started increasing there after and ended up at Rs crores from Rs crores in The maximum value reached is Rs crores. The index value ranged from per cent to per cent. The mean value is with the standard deviation at Rs crores, the covariance reached Rs crores. The trend is calculated to reach Rs crores by 2014 and thus the compounded growth rate Rs crores with the base value of Rs crores. Analysis of ratio of income to new business expenses ascertains that the ratio values are high in 2004 and 2005 and for the rest of years from 2006 to 2012, the ratio values are low. This implies that LIC diverted its income to purchase new business to produce better quality products. But in the years 2002 and 2003 LIC did not concentrate more on new business. The covariance of new business per cent is significantly greater than income of the LIC. This forces to conclude elaborate interest on new business. New business is the key to expand the business volume as well as to increase the income. According to the marginal costing theory, there is positive relationship between income and expenses, i.e., whenever an income is increased simultaneously the expense is also increased. However the expenses on income must be controlled to obtain surplus (profit) on total income. The new business, new products are inevitable and order of the day at the same time, control of expenses on new business / products is also equally an important step. Otherwise the profitability on new business / products will be a question mark. While the result of this table showed that, LIC of India had spent more amounts on new business expenses during the later years of the study period and it did spent only minimum amount on new business expenses in the years 2002 and Income to Salary The ratio of Income to Salary is calculated and shown in the table 3. Income to Salary = (Income / Salary) in times It is also one of the major financial tools to indicate the financial performance of a company. There is an inverse relationship between the income and salary. If the salary looks uncontrollable, then a portion of excess income will be consumed by the salary. This will lead to decrease in the profitability. Page 177

7 Table - 3. Showing the Income to Salary LIC of India Year Income Salary Clusters L L L L L L L M H H Sum Mean SD CV Trend ACGR Correlation 0.48 (Source : Annual Reports of LIC) Table 3 shows the details of Income and Salary of LIC for a period of 10 years from 2002 to The performance of salary showed that it has been most of the time increasing but on two occasions in the year 2004 & 2010 decreased as evident by every heads contribution in the analysis slipped by around 10 per cent and 25 per cent respectively. It started increasing thereafter and ended up at Rs crores from Rs crores in The maximum value reached is Rs crores. The index value ranged from per cent to per cent. The mean value is Rs crores with the standard deviation at Rs crores, the covariance reached Rs crores. The trend is calculated to reach Rs crores by 2014 and thus the compounded growth rate per cent with the base value of Rs crores. It is meticulously observed from the ratio analysis that the ratio of income to salary of workers is low continuously for seven years from 2003 to But this is significantly high in the last two years from 2011 to This shows that LIC in the first seven years spent more of its income to salary of the employees to set their committees. But in the last two years, the measure of contiguous made LIC to be careful enough to deal with the salary of employees. The covariance of salary of employees Rs crores is consistent to say that the LIC carefully headed the salary of its employees and workers. The growing popularity of LIC housing finance and their epicurean approach in portfolio management of mutual fund investments increased their income and profitability simultaneously. The present observation is supported by Jagendra Kumar (2006) who reported Page 178

8 that the volume of income and profitability are the incidental effects of LIC housing schemes and careful approach in mutual fund investments. Findings In LIC, the performance purely depends upon conversion of sales into income. There is no significant difference between covariance of income and sales. This fore fills the intimate relationship between sales and income of LIC. This shows that in the first two years, LIC did not reduce its expenses, but in the last years and subsequent three years from 2007 to 2010 LIC retrenched its expenditure as a measure of contingency. They employed various strategies to keep the expenses based on their income. It is clear from the insignificant covariance of income and expenses. LIC in the first seven years spent more of its income to salaries of the employees to get their cooperations. But in the last two years, the measure of contingency made LIC to be careful enough to deal with the salaries of employees. The covariance of salaries of employees per cent is consistent to say that the LIC carefully headed the salaries of its employees and workers. LIC was careful in retrenching interest payment for its debts in the span of seven years. But in the last two years due to expansion of business, they are forced to increase their interest payments. The covariance of interest which is exceedingly high showed that LIC strategies on interest to debts often change towards the increase of profitability. Conclusion There is no significant difference between income and total expenses of LIC. The Government rules and other regularities analytically exhibited more variation in the expenses of LIC. So LIC may involve itself in Tax saving investments to get maximum tax benefit to the organization. This crucial move would pave the way to curb the unnecessary expenditure of the organization. LIC of India can curtail the tax by introducing meticulous products which are suitable for individual and group insurance schemes. In the year 2004 and 2005 LIC did not concentrate more on new business. It is essential for LIC to take immense steps to keep the new business in advance to avoid unnecessary expenditure to the organization. Price fluctuation of new business will affect the financial performance of LIC so the new business department must be effectively revamped to accelerate innovative business policies with in the profitability domain. REFERENCES 1. Charted Secretary, November 1999, p Bajpai, G.N., Trust with Trust, LIC, Central Office, Mumbai, Yogakshema, 1990, p Kaoru Tone and Biresh R. Sahoo, Evaluating Cost Efficiency and Returns to Scale in the Life Insurance Corporation of India Using Data Envelopment Analysis, Elsevier 2005, pp Desheng Wu, Jijiang Yang, Simultaneous Analysis of Production and Investment Performance of Canadian Life and Health Insurance Companies using Data Envelopment Analysis, Computers & Operations Research, 2007, pp Keet Peng Oun, Alan Mercer, The Direct Marketing of Insurance, European Journal of Operational Research, 1998, pp Meena, K., Utilisation of Life Insurance Corporation by Policyholders of Madurai City An Empirical Study, Unpublished Dissertation, Madurai Kamaraj University, Page 179