CHAPTER II RESEARCH METHODOLOGY

Transcription

1 CHAPTER II RESEARCH METHODOLOGY This chapter deals with the following aspects: 2.1 Selection of the studyperiod, and the justification of the researchtopic. 2.2 Research universe. 2.3 Research methodology. 2.4 Limitations of the study. Research in common language means search for knowledge. It is an art of scientific investigation. According to Clifford Woody "research comprises defining and redefining problems, formulating hypothesis or suggested solutions; collecting, organizing and evaluating data; making deductions and reaching conclusions; and at last carefully testing the conclusions to determine whether they fit the formulated hypothesis".^ According to C. R. Kothari "the term research refers to the systematic method, consisting of enunciating the problem, formulating a hypothesis, collecting the facts or data, analyzing the facts and reaching certain conclusions in the form of solution/s (s) towards the concerned problem or in certain generalizations for some theoretical formulation". ^ Research requires certain method to be followed for analysis of the data or information collected and to arrive at certain conclusions. The Research Methodology followed by the researcher is as under: 19

2 2.1 SELECTION OF THE STUDY PERIOD AND JUSTIFICATION FOR CHOICE OF THE TOPIC FOR RESEARCH Selection of Period of the Study: a. The period of study, to , covers 10 ( to ) years of pre liberalization and 12 ( ) years of post liberalization. The period for pre liberalization study is considered from , as it coincides with the liberalization of Indian economy. b. The period of study includes 12 years of post liberalization and 10 years of pre liberalization. The period so selected refers to reasonable years of pre liberalisation and latest period of post liberalisation Justification for Choice of the Topic for Research: a. Life insurance is an important constituent of the financial sector. The sector has an important role in mobilization of savings and capital formation. Liberalization has led to a transition from public sector monopoly to competitive environment. This transition has created farreaching impacts on the life insurance sector. b. Life Insurance Corporation of India (LIC) was established in 1956 as a monopoly organization to conduct the nationalized life insurance business. As a part of continuation of reforms in the financial sector, the life insurance sector was liberalized and opened for private players in December The entry of private insurers in the year 2000 ended the 40+ years' monopoly of LIC. c. A liberal insurance market is the one in which market determines who should be allowed to sell insurance, what should be the prices and the nature of products. In a liberalized market, consumers are able to choose from 20

3 different insurance providers iiaving wide range of products. A decade of liberalization of life insurance has resulted in structural, operational, legal and managerial changes. Therefore, it would be interesting to study the impact of liberalization on the life insurance sector. d. The Finance Bill for further liberalization of the sector is in process; hence, this study of effects of liberalization on the life insurance sector is very much relevant. Therefore, the researcher has decided the topic '^Effects of Liberalisation on the Life Insurance SectorAn Analytical Study" Working Definitions: For the purpose of Research, the following are the working definitions of the terms used: i Life Insurance Liberalization Index (LILI) The researcher aims to analyze the effects of liberalisation on the life insurance sector so it is logical to start it with empirical measurement of liberalisation. However, there is no universally accepted measure available for this purpose. Therefore the researcher has constructed a Life Insurance Liberalization Index (LILI) to be used in the study. Liberalisation Index is developed to empirically measure the liberalization in the life insurance sector. ii. Private Sector Life Insurers Private sector life insurers refer to the life insurers established in private sector after the liberalisation of life insurance sector. iii. Life Insurance Savings Households invest their savings in a basket of financial assets. Life insurance savings refer to the savings of the households diverted towards the purchase of life insurance policies. 21

4 iv. Per Capita Life Insurance Per capita life insurance is calculated by dividing the total life insurance savings by the population. It is an average per person life insurance savings in a given year. V. Life Insurance Density Life insurance density is the life insurance premium per capita in a given year. It is expressed in USD for international comparisons. vi. Life Insurance Penetration Life insurance penetration is life insurance premium as a percentage of Gross Domestic Product in a given year. vii. Life Insurance Carrying Capacity Life insurance carrying capacity is the percentage of life insurance in force to Net National Product at current prices in a given year. viii. Life Insurance Fund Life insurance fund is the excess of premium received over current cost of life insurer during a year. ix. Reach of Life Insurance Services It refers to the quantitative availability of life insurance services in a country. It is measured as offices, individual agents and corporate agents of the insurers taken together per million population. X. Growth of Life Insurance Business Growth of life insurance business is measured terms of: i. Annual premium collection which includes first year premium, renewal premium and total premium per million population; and ii. The annual sale of new policies per million population. 22

5 xi. Premium Premium is the fragmented value of the sum assured of policy, payable continuously at regular intervals until the maturity of the policy. The sum assured of a policy is distributed into equal installments called as premium. Xii. Micro Insurance Micro insurance is the provision of insurance cover to low income persons. It is a subset of insurance. The Micro Insurance Academy India defines micro insurance as "the risk transfer device characterized by low premium and low coverage limits, and designed for low income people not served by typical social insurance schemes".^ xiii. Persistency Persistency during a period may be defined as the proportion of policies remaining in force at the end of the period out of the total policies at the beginning of the period. In other words persistency is the percentage of business retained without lapsation or being surrendered. xiv. Lapsation In general lapse is the discontinuance of policy by nonpayment of premium due. Lapsation rate is the rate at which life insurance policies terminate because of failure to pay the renewal premium by policyholders on stipulated dates. Lapse rate in a financial year is the ratio of number of policies lapsed during a financial year to the total number of policies inforce during the same year. This ratio can be based on the number of life contracts or the amount of premium. 23

6 XV. Claim Settlement A claim on a policy is a demand on insurer to fulfill its part of promise, committed to, while writing a contract. Claim settlement means monetary compensation paid to policyholder in the event of loss. xvi. Grievance A grievance or a complaint is defined as any communication that expresses dissatisfaction about an action or lack of action, about the standard of service or deficiency of service of an insurance company or any intermediary of an insurance company. xvi. Overall Expense Ratio Overall Expense Ratio is the ratio of management expenses to total premium. 2.2 RESEARCH UNIVERSE The research universe includes all the 24 life insurance service providers. It includes the Life Insurance Corporation of India in the public sector and 23 private sector life insurers. Private sector life insurers are studied as a group, rather than individually. Life Insurance Corporation of India is studied independently. 2.3 RESEARCH METHODOLOGY This research is basically analytical. The review of literature brought out two major gaps; one, lack of comprehensive coverage of the life insurance sector and two, ad hoc approaches to capturing and quantifying reforms. The researcher has attempted to bridge these gaps by the present study. Following are the broad steps under Research Methodology: 24

7 Settingup objectives Formulating Hypotlieses Identification of variables to examine the hypotheses Sources of data compilation Life Insurance Liberalisation Index Methodology for analyzing the data to test the hypotheses Setting up objectives: The objectives of the study are as follows. a. To study the impact of liberalization on the life insurance sector; b. To study the effects of liberalization on awareness about life insurance; c. To study the effect of liberalisation on consumer orientation of the life insurance sector; and d. To analyze the effects of liberalization on LIC of India Hypotlieses: To fulfill the above objectives, following four hypotheses are framed. Hypothesis1: There is impact of liberalisation on the life insurance sector. Hypotliesis2: Liberalisation has led to more awareness about life insurance as an option for savings. Hypothesis3: Liberalisation has made life insurance sector consumer oriented. Hypotliesis4: There is impact of liberalisation on Life Insurance Corporation of India. 25

8 The validity, or otherwise, of the above hypotheses will be examined by analyzing the respective data by making preliberalization and post liberalization comparisons. In the present case, no statistical tests are required to be performed for testing tlie hypotheses as the related secondary data are available in full. A simple numerical comparison of data for the preliberalization and postliberalization periods is valid for testing the above four hypotheses. Statistical tests are necessary when sampledata (part of fulldata) only are available Identification of Variables to Examine the Hypotheses: The available secondary data was reviewed and variables/parameters were identified and selected to be used for examining the hypotheses. Some of the data may not be comparable as it is, so as to enable comparison, appropriate transformation of data may be necessary. For the purposes of valid comparison, however, it is necessary to create new variables, which may be called transformed variables, by suitably combining original variables from one or more categories. These transformed variables and the original variables are then analyzed. The following Table No. 2.1 summarizes the list of original and transformed variables used in the study. Table 2.1 List of Original and Transformed Variables Sr. No Original Variable Number of Insurers Gross Domestic Product Household Savings in Life Insurance Transformed Variable Household Savings as Per Cent of Gross Domestic Product Per capita Life Insurance 26

9 Total Financial Assets of Households Financial Assets of the Household Held in the form of Life Insurance Business in Force Capital Investment in the Life Insurance Sector Total Number of Offices of Life Insurers Total Number of Individual Agents of Life Insurers Total Number of Corporate Agents of Life Insurers Total Premium Annual Sale of New Policies Life Insurance Fund Sum Assured Number and Variety of Life Insurance Products Micro Insurance Distribution Mechanism Persistency Claim Settlement Grievance Redressal Insurance Penetration Insurance Density Proportion of Population Insured Overall Expense Ratio Savings Relative Position of Life Insurance in Financial Assets held by Households Life Insurance Carrying Capacity Offices Per Million Population Individual Agents Per Million Population Corporate Agents Per Million Population Total Premium Per Million Population Policies Per Million Population Life insurance Fund Per Million Population Average Sum Assured Sources of Data Compilation: The study is based on the secondary data compiled from various sources. The major sources of data are: 27

10 Annual Reports of IRDA. IRDA Handbook of Statistics on Indian Insurance. Annual Reports of LIC of India. RBI Handbook of Statistics on Indian Economy. RBI Annual Reports. Ministry of Finance Government of India, Insurance Division. Ministry of Finance, Economic Survey. Ministry of Finance, Malhotra Committee Report. Swiss Re Sigma. Websites: and websites of private insurers. In addition to the above mentioned data sources, various periodicals and journals have been referred Life Insurance Liberalisation Index: Liberalisation of the Indian economy was initiated in However life insurance sector was liberalised in the year 1999 with the IRDA Act. This happened in two phases. First phase started with submission of Malhotra Committee Report to the Government of India in The second phase started in the year 2000 with the registration of life insurer in the private sector and the end of the monopoly of The Life Insurance Corporation of India. This transition from monopoly to competitive environment was brought about by a number of decisions, and actions related to the life insurance sector. Each such decision and action contributed to the opening of life insurance sector, albeit to varying degrees. It becomes appropriate, therefore, that this very process of liberalisation becomes the starting point of the present research. An attempt is made to empirically measure the liberalisation, on the basis of reforms introduced in the life insurance sector. The idea for computation of liberalization index 28

11 is derived from Amian Ghosh.'* Liberalisation has led to a number of reforms in the insurance sector. The reforms have been given weight age on the basis of its impact on the sector. Following reforms have been considered for this purpose. Table 2.2 List of Reforms for Computation of Life Insurance Liberalization Index (LILI) Year 1993 Description of Reform Appointment of a Committee on Reforms in the Insurance Sector (Malhotra Committee) Malhotra Committee Report submitted Malhotra Committee Report accepted by the Government Mukherjee Committee set up by the Government. Establishment of Interim Insurance Regulatory Authority 1996 (IRA) IRA Bill introduced in the Parliament and referred to Standing Committee. Mukherjee Committee Report submitted but not made public Standing Committee of Parliament on Reforms Greater Autonomy to LIC of India Standing Committee on IRA Bill submitted its Report. Cabinet decides to allow 40% foreign equity in private 1998 insurance companies, 26% to foreign companies and 14% to NRIs, FIIs, and OCB Appointment of Insurance Ombudsman. IRA Bill introduced in Loksabha (lapsed due to fall of NDA 1998 Government in April 1999) Standing Committee Report headed by Murii Deora decides foreign equity in private insurance companies to be 26%. 29

12 1999 A revised Bill renamed as IRDA Bill tabled in the Parliament 1999 IRDA Bill passed by the Parliament IRA becomes IRDA Lie (amendment) Bill introduced in Loksabha ''"'^^ above Bill referred to Standing Committee on Finance President gives assent to IRDA Act Licenses issued to private insurers. Insurance Amendment Bill 2001, introduced in the 2001 _,,. Parliament The above Bill referred to Standing Committee Insurance Amendment Bill 2001 passed Government of India appoints Consulting Group to examine insurance schemes for rural sector. Law Commission of India asked to examine Insurance Act 1938, and IRDA Act Law Commission of India submitted its Report to the Government If^DA formulates Micro Insurance Regulations. Constitution of KPN Committee on Law Commission Report by IRDA. Submission of the Report of the KPN Committee on the Law Commission's Report. IRDA forwarded its recommendations to the Government on Amendment to Insurance Laws ^^ Reform Related Decision/Action Recommendations of IRDA on Amendment to Insurance 2008 Laws considered, finalized and approved by the Government. Insurance Laws (Amendment) Bill 2008 introduced in the 2008 Parliament. It was to amend Insurance Act 1938, GIC Act 1972, and IRDA Act

13 Bill could not be passed, referred to Standing Committee on Finance. Report of the Committee on Distribution Channels submitted to IRDA. Report on Lapsation and its Impact on Indian Life Insurance Industry submitted to IRDA. th Lie (Amendment) Bill 2009 introduced in the 15'" Loksabha This Bill referred by the speaker to Standing Committee on Finance. Following the constitution of 15^^ Loksabha Insurance Laws (amendment) Bill 2008 was referred to Standing Committee on Finance (200910). Chairman Yashwant Sinha. Report of the Standing Committee on Finance (200910) 15^^ Loksabha on LIC (Amendment) Bill 2009, submitted. Amendment to LIC Act 1956, LIC (Amendment) Bill 2011 passed by the Parliament. Standing Committee on Finance submitted its report on Insurance Laws (amendment) Bill 2008 to the Government. Report of the Committee on Bancassurance submitted to IRDA. Source: Various Publications of Government of India. The following Table No. 2.3 presents the criteria for assigning scores. Table 2.3 Criteria for Assigning Scores Decisions/Actions Related to Reform Settingup Committee by the Government Report Submission/Referring Bill to Committee Acceptance of Report/Introduction of Bill Implementation of Recommendations/Passing of Bill/Autonomy extended to LIC Score

14 Justification of the scale used for assigning scores The scores to be assigned should not only be proportional to the innportance/significance of the decision/action, but also the difference between two consecutive scores should be increasing as we move from lesser important decision/action to more important decision/action. The linear/equidistant scale does not satisfy this, but an exponential/geometric scale does. The choice of 1, 2, 4, 8 scale, used in the present research, is based on such considerations Metliodology for Analyzing the Data: Methodology adopted for analyzing the secondary data to test hypotheses is as follows: Data Analysis Procedure: Data analysis procedure refers to compilation of the data on the identified variables listed in Table2.1, and examining the hypotheses for their validity by analyzing the data compiled. Tools for DataAnalysis: Data was entered into computer using Microsoft Excel Software. The raw data is tabulated and the required analysis is done with Mini Tab. The data were analyzed using the following computing tools: i. Microsoft Excel, and ii. Minitab Version 13. Certain statistical tools and techniques were applied on the data to get the results which were analysed. Statistical Tools and Techniques: Following analytical and graphical, statistical tools/techniques are used for analyzing the data to examine the hypotheses. 32

15 Analytical Tools Correlation: Correlation is a statistical tool to examine, if two variables are correlated. Correlation, however, does not necessarily mean causation. Karl Pearson's Correlation Coefficient (r): r measures the strength of linear relation between two variables. Its value lies between 1 & +1. Closer the value of r to +1 or 1, stronger is the linear correlation. Closer the value of r to '0', weaker is the linear correlation. The sign (+/) denotes the nature of correlation. '' sign indicates negative correlation, and '+' sign denotes positive correlation. Regression: Regression is statistical tool to examine if there is a correlation between one dependent variable and 2 or more independent variables. In regression, coefficient of determination, denoted by R^, indicates the extent to which the independent variable(s) account for the dispersion in the dependent variable. R^ always lies between 0 and 1, both extremes included. Closer the value of R^ is to 1; stronger is the correlation between the dependent variable and the independent variable(s), and vice versa. The connection between the correlation coefficient and the coefficient of determination is: Coefficient of determination = (Correlation coefficient) ^ Mean: Mean is a summarymeasure that is representative of the central tendency of the data. Graphical Tools Line chart: Line Chart is used to examine the pattern of variation in data over time. 33

16 Bar Chart: Bar Chart is used for visual display of frequency or number of observations in each category, when several categories exist. Dot plot: Dot plot is a visual display of dispersion in data values without reference to time. Box plot: Box plot is a visual display of dispersion in data values without reference to time, along with the display of the three quartiles. Scatter plot: Scatter plot is a graphical display of paired (x, y) observations to examine visually if two variables x and y are correlated. Table No. 2.4 summarizes the statistical tools and techniques applied for examining the 4 hypotheses formulated for the study. Table 2.4 Linking of Statistical Tools and Techniques to Hypotheses Hypotheses Hypothesis1 Hypothesis2 Hypothesis3 Hypothesis4 Statistical Tools and Techniques Used Karl Pearson's Correlation Coefficient, Regression Analysis, Mean, Scatter plot. Line chart. Bar chart. Correlation, Line chart. Dot plot. Correlation, Mean, Line chart. Dot plot. Box plot. Karl Pearson's Correlation Coefficient, Regression Analysis, Mean, Scatter plot. Line chart. Bar chart. 2.4 LIMITATIONS OF THE RESEARCH STUDY a. The study is based on the secondary data only. b. Private insurers are studied as a group, and not individually. Commensurate with the objectives of the study the research has four hypotheses. The researcher Intends to examine these hypotheses on 34

17 the basis of the analysis of secondary data connpiled fronn various sources using appropriate statistical tools and techniques. With this description of the Research Methodology used for the study let us move to the next chapter on Review of Literature. References 1. Clifford Woody as quoted by Kothari C. R., (2004), 'Research Methodology Methods and Techniques', New Age International Publishers, New Delhi, Pg.l. 2. Kothari C. R. (2004), 'Research MethodologyMethods and Techniques', New Age International Publication, Pg Micro Insurance Academy, quoted from Frequently Asked Questions (FAQs), (viewed on January 24, 2014). 4. Ghosh Amian, (2013), 'Life Insurance In India: The Relationship between Reforms and Growth in Business', The Geneva Papers on Risk and Insurance Issues and Practices, Vol.38, No.l, January, Pg. 94 and