EVALUATION OF FINANCIAL PERFORMANCE OF INSURANCE COMPANIES VIS-A-VIS DISTRIBUTION CHANNELS

CHAPTER VI EVALUATION OF FINANCIAL PERFORMANCE OF INSURANCE COMPANIES VIS-A-VIS DISTRIBUTION CHANNELS

EVALUATION OF FINANCIAL PERFORMANCE OF INSURANCE COMPANIES VIS-A-VIS DISTRIBUTION CHANNELS Insurance in India has been viewed as a tax saving instrument and risk cover in life insurance was purely incidental. The mindset continues to be the same, although the unit-linked instruments are becoming popular. The emergence of pure risk products has thus taken a back seat. Lapsation is a serious issue. Life insurers are striving to design products so as to ensure long term commitments from the policyholders. In the process there is a need for the distributors to play a key role in identifying the needs of the customer and then sell insurance according to the demand of customer so that longterm retention of customers is established. In this chapter, we analyze the progress and growth trends of different aspects which covers life insurance premium underwritten, new policies issued by insurers, expenses and benefits, death claims, profits of life insurers, number of offices operating in India as well as their geographical distribution and channel-wise performance of different life insurance companies. 6.1 Performance of Life Insurance Companies This section deals with two major aspects i.e. number of registered insurers in India and detailed analysis of life insurance premium income. 6.1.1 Registered Insurers in India The study covers the data of year 2010-11 and 2011-12 to make a comparative analysis. It is indicated that Table 6.1 is based on number of registered insurers in India. Table 6.1 shows that is the only public sector market leader and 23 private life insurance companies. 103

Table 6.1 Registered Insurers in India (as on 30 th September, 2012) Type of Business Public Sector Life Insurance 1 23 24 General Insurance 6 21 27 Reinsurance 1 0 1 8 44 52 Note : List of insurance companies registered in India is given in Annexure No.1 Source : IRDA annual report 2011-12 6.1.2 Insurance Premium Underwritten By Life Insurance Companies Life insurance industry recorded a premium income of `2,87,072 crore during 2011-12 as against `2,91,639 crore in the previous financial year, registering a negative growth of 1.57 per cent. While private sector insurers posted 4.52 per cent decline (11.08 per cent growth in previous year) in their premium income, recorded 0.29 per cent decline (9.35 per cent growth in previous year). While renewal premium accounted for 60.31 per cent (56.66 per cent in 2010-11) of the total premium received by the life insurers, first year premium contributed the remaining 39.69 per cent (43.34 per cent in 2010-11). During 2011-12, the growth in renewal premium was 4.77 per cent (6.23 per cent in 2010-11). First year premium has registered a decline of 9.85 per cent in comparison to a growth of 15.02 per cent during 2010-11. Further bifurcation of the first year premium indicates that single premium income received by the life insurers recorded negative growth of 17.21 per cent during 2011-12 (26.99 per cent growth in 2010-11). Single premium products continue to play a major role for as they contributed 20.54 per cent of s total premium income (24.94 per cent in 2010-11). In comparison, the contribution of single premium income in total premium income is 11.93 per cent for private insurance companies during 2011-12 (13.28 per cent in 2010-11). The regular premium registered a negative growth rate of 2.67 per cent in 2011-12, as against 5.32 per cent growth in 2010-11 with the private insurers witnessing negative growth of 20.37 per cent (previous year negative growth of 19.84 per cent). The continued to report high growth in the regular premium. The same stood at 10.83 per cent in 2011-12 (38.50 per cent in 2010-11). Unit-linked products 104

(ULIPs) witnessed 36.12 per cent decline in premium income from `1,09,036 crore in 2010-11 to `69,650 crore in 2011-12. On the other hand, the growth in premium income of traditional products was at 19.07 per cent, with premium income increasing to `2,17,422 crore as against `1,82,603 crore in 2010-11. Accordingly, the share of unit-linked products in total premium considerably declined to 24.26 per cent in 2011-12 as against 37.38 per cent in 2010-11). Table 6.2 Premium Underwritten by Life Insurers (` crores) Insurer 2010-11 2011-12 Regular Premium (1) 36265.36 (38.50) 27679.83 (-19.84) 63945.18 (5.32) 40194.54 (10.83) 22040.78 (-20.37) 62235.32 (-2.67) Single Premium (2) 50746.99 (11.93) 11706.01 (204.66) 62453.00 (26.99) 41667.71 (-17.89) 10039.14 (-14.24) 51706.85 (-17.21) First Year Premium [3=(1+2)] 87012.35 (21.66) 39.385.84 (2.64) 126398.18 (15.02) 81862.25 (-5.92) 32079.92 (-18.55) 113942.17 (-9.85) 105

Renewal Premium (4) 116461.05 (1.66) 48779.40 (18.98) 165240.45 (6.23) 121027.03 (3.92) 52102.91 (6.81) 173129.94 (4.77) Premium [5=(3+4)=(1+2+4)] 203473.40 (9.35) 88165.24 (11.08) 2916387.63 (9.87) 202889.28 (-0.29) 84182.83 (-4.52) 287072.11 (-1.57) Note : Figures in brackets indicate the growth (in per cent) over the previous year. Source : IRDA Annual Report, 2011-12 Figure 6.1 First Year Premium of Life Insurers Source: IRDA annual report 2011-12 106

Figure 6.2 Premium of Life Insurers Source : IRDA Annual Report 2011-12 6.2 Market Share The progress of life insurance companies depends upon the market share their market share. This section will discuss the market share of private life insurance companies and the public player. The major indicators of market share are regular premium, single premium, first year premium and renewal premium. Table 6.3 shows market share on the basis these major indicators. On the basis of total premium income, the market share of increased marginally from 69.77 per cent in 2010-11 to 70.68 per cent in 2011-12. Accordingly, the market share of private insurers has gone down marginally from 30.23 per cent in 2010-11 to 29.32 per cent in 2011-12. 107

Table 6.3 Market Share : Life Insurers (per cent) Insurer 2010-11 2011-12 Regular Premium 56.71 43.29 64.58 35.42 Single Premium 81.26 18.74 80.58 19.42 First Year Premium 68.84 31.16 71.85 28.15 Renewal Premium 70.48 29.52 69.91 30.09 Premium 69.77 30.23 70.68 29.32 Source : IRDA annual report, 2011-12 The market share of private insurers in first year premium was 28.15 per cent in 2011-12 (31.16 per cent in 2010-11). The same for was 71.85 per cent (68.84 per cent in 2010-11). Similarly, in renewal premium, continued to have a higher share at 69.91 per cent (70.48 per cent in 2010-11) when compared to 30.09 per cent (29.52 per cent in 2010-11) share of private insurers. 108

6.3 New Policies Issued By Life Insurers and Paid Up Capital Apart from market share, new policies issued and paid up capital of life insurance companies is an important factor in determining their overall financial performance. Section 6.3 deals with the details about new policies issued by life insurance companies and their paid up capital in year 2010-11 and 2011-12 6.3.1 New policies issued by life insurers This section discusses new policies issued by life insurance companies which is presented in Table 6.4.During 2011-12, life insurers issued 442 lakh new policies, out of which issued 358 lakh policies (80.90 per cent of total policies issued) and the private life insurers issued 84 lakh policies (19.10 per cent). Table 6.4 New Policies Issued by Life Insurers Insurer 2010-11 2011-12 370.38 (-4.70) 111.14 (-22.61) 481.52 (-9.53) 357.51 (-3.47) 84.42 (-24.04) 441.93 (-8.22) Source: IRDA Annual Report,2011-12 While suffered a decline of 3.47 per cent (4.70 per cent decline in 2010-11) in the number of new policies issued against the previous year, the private sector insurers continued the previous year s experience of significant decline and reported a dip of 24.04 per cent (22.61 per cent decline in 2010-11) in the number of new policies issued. Overall, the industry witnessed 8.22 per cent decline (9.53 per cent decrease in 2010-11) in the number of new policies issued. 109

6.3.2 Paid-up capital of Life Insurers This section concentrates on paid up capital which is presented in Table 6.5.The total capital of the life insurance companies as on 31st March, 2012 was `24,932 crore. During 2011-12, an additional capital of `1,270 crore was brought in by the industry. The incremental capital brought in by the private sector insurers was `1,175 crore and added `95 crore to its capital of `5 crore to raise it to `100 crore. Table 6.5 Paid-up Capital of Life Insurers* (` Crores) Insurer 31 st March, 2011 Additions during 31 st March, 2012 2011-12 5.00 95.00 23656.85 1175.07 24831.92 23661.85 1270.07 24931.92 *Excludes premium on issue of equity share capital Source : IRDA Report 2011-12 6.4 Expenses of life insurers In the above sections, discussion has been done about market share, new policies issued and paid up capital of life insurance companies. This part of the study deals with details of expenses incurred by life insurance companies.it covers commission expenses of life insurers, commission expense ratio and their operating expenses. This is shown with the help of Table 6.6 and 6.7.It is indicated in Table 6.6 that as per section 40B of the Insurance Act, 1938 that no life insurer can spend as expenses of management in any year an amount in excess of the limits prescribed under Rule 17D of the Insurance Rules, 1939. Rule 17D takes into consideration the size and age of the insurer, while laying down the limits of such expenses. The IRDA on the recommendation of the Life Insurance Council constituted under Section 64F of the Insurance Act, may enhance the limits in any year. Expenses of management refer to all charges incurred either directly or indirectly and include commission payments of all kinds, operating expenses and expenditure capitalized. 110

Table 6.6 Commission Expenses : Life Insurers Insurer 2010-11 2011-12 Regular Premium (1) 6839.08 3705.38 10544.44 Single Premium (2) 552.19 144.46 696.65 First Year Premium [3=1+2)] 73941.25 3849.84 11241.09 Renewal Premium (4) 5956.04 1132.28 7088.32 Premium [5=(3+4)=(1+2+4)] 13347.29 4982.12 18329.41 Source: IRDA Annual Report,2011-12 7716.24 3242.80 10959.04 270.28 94.64 364.92 7986.83 3337.44 11323.97 6076.53 1120.62 7197.15 14063.06 4458.05 18521.11 During 2011-12, the life insurance industry reported an increase in expenses of management as against a decline in the gross premium collected. The commission expenses ratio (commission expenses as a percentage of premiums) increased marginally to 6.45 per cent from 6.28 per cent of 2010-11. Overall, while the commission expenses increased in the case of regular premium, there has been a fall in the commission paid towards both single and renewal premium products. However, there is some variation in the position when compared between the private insurers and, as reflected in Table I.9, providing bifurcations of the commission ratios for both private and public sector life insurers. The operating expenses of the life insurers 111

decreased by 9.92 per cent in 2011-12 against an increase of 14.04 per cent in 2010-11. The operating expenses towards life insurance business stood at `29,675 crore in 2011-12, as against `32,942 crore in 2010-11. Operating expenses, as a per cent of gross premium underwritten, decreased for from 8.35 per cent in 2010-11 to 7.35 per cent in 2011-12. The same declined for private insurers from 18.10 per cent in 2010-11 to 17.53 per cent in 2011-12. For the industry as a whole, the operating expenses ratio decreased slightly from 11.30 per cent in 2010-11 to 10.34 per cent in 2011-12. Table 6.7 Commission Expense Ratio : Life Insurers (In per cent) Insurer 2010-11 2011-12 Regular Premium 18.86 13.39 16.49 19.20 14.71 17.61 Single Premium 1.09 1.23 1.12 0.65 0.94 0.71 First Year Premium 8.49 9.77 8.89 9.76 10.40 9.94 Renewal Premium 5.11 2.32 4.29 5.02 2.15 4.16 Premium 6.56 5.65 6.28 6.93 5.30 6.45 Note : Commission expenses ratio is the ratio between commission expenses and the premium underwritten by life insurers. Source: IRDA Annual Report 2011-12 112

Table 6.8 shows the operating expenses of life insurers. As the initial set-up costs incurred by any insurance company are high, the authority has granted exemption from the limits under Rule 17D to 23 private insurers in the first five years of commencement of their business operations. Table 6.8 Operating Expenses : Life Insurers (`Crore) Insurer 2010-11 2011-12 16980.28 14914.40 15962.02 14760.19 Industry 32942.30 29674.59 Source : IRDA Journal, September, 2012 Out of the twenty four life insurance companies (including 1 PSU), nine companies were in the exemption period in 2011-12. Of the balance, twelve companies (including 1 PSU) were compliant with the limits under Rule 17D/directions of the authority. 6.5 Benefits Paid By Life Insurers The customers invest in life insurance policies in order to gain benefits as well as they want to fulfill their security requirement. This section deals with the benefits paid to the customers. It is reported that life industry paid higher gross benefits of `1,53,133 crore in 2011-12 (`1,42,505 crore in 2010-11) constituting 53.34 per cent of the gross premium underwritten (48.86 per cent in 2010-11). The benefits paid by the private insurers stood at `35,635 crore (`31,232 crore in 2010-11) constituting 42.33 per cent of the premium underwritten (35.42 per cent in 2010-11). paid benefits of `1,17,497 crore in 2011-12, constituting 57.91 per cent of the premium underwritten (`1,11,274 crore in 2010-11, 54.69 per cent of the total premium underwritten). The benefits paid by the life insurers net of reinsurance were `1,52,671 crore (`1,42,151 crore in 2010-11). The benefits paid on account of surrenders / withdrawals stood at `71,208 crore, of which accounted for `41,531 crore and private sector `29,677 113

crore. The comparative previous year statistics were `76,712 crore, of which accounted for `49,774 crore and private sector `26,939 crore. In case of, out of the `41,531 crore surrenders, ULIP policies accounted for `28,197 crore (68 per cent) as against `40,761 crore, (82 per cent) in 2010-11. In case of the private insurance industry, the surrenders accounted for `28,746 crore (97 per cent) in ULIPs for 2011-12 as against `26,395 crore (98 per cent) in 2010-11. 6.6 Analysis of Death Claims Financial analysis can not be done without taking into consideration an analysis of individual and group death claims. This discussion is done in Tables 6.8 and 6.9 and Figures 6.4 and 6.5.Section 6.6.1 discusses in detail about individual death claims. 6.6.1 Individual Death Claims Individual death claims are analyzed in Table 6.8 which indicates that appears to be rendering more satisfactory in claim settlement which will be clear from discussion. In the year 2011-12, the life insurance companies settled 8.22 lakh claims on individual policies, with a total payout of `8,409 crore. The number of claims repudiated stood at 19,133 amounting to a total of `451 crore. The number of claims pending at the year-end stood at 12,316 with a total amount of `293 crore. Of these, 1,691 claims were pending for more than one year and 10,625 claims were pending for less than and upto one year. Insurer Private Industry Claims Claims paid Table 6.9 Individual Death Claims of Life Insurers 89.34 97.42 96.26 Claims repudiated 7.82 1.30 2.24 Claims written back 0.03 0.06 0.06 Source: IRDA Annual Report, 2011-12 Claims pending at end of year 2.82 1.21 1.44 (Figures in per cent of policies) Break up of claims pending duration wise (Policies) > 3 to > 6 to < 6 < 12 months months < 3 months 81.85 37.36 49.86 8.27 23.57 19.27 4.45 22.10 17.14 > 12 months 5.43 16.97 13.73 114

Figure 6.3 Duration Wise Break-up of Claims Pending Source: IRDA Annual Report, 2011-12 The claim settlement ratio of appeared to be better than that of the private life insurers. Settlement ratio of increased to 97.42 per cent during the year 2011-12 when compared to 97.03 per cent during the previous year. The percentage of repudiations also went up from 1.21 per cent in the previous year to 1.30 per cent in the year 2011-12. Similarly for private insurers, settlement ratio moved up to 89.34 per cent during the financial year 2011-12 when compared to 86.04 per cent during the previous year. Private insurers repudiated a higher number of claims when compared to. The percentage of repudiations decreased to 7.82 per cent in 2011-12 from 8.90 per cent in 2010-11. Accordingly, the industry s settlement ratio increased slightly to 96.26 per cent in 2011-12 from 95.58 per cent in 2010-11 and the repudiation ratio went up slightly as well 2.24 per cent in 2011-12 from 2.04 per cent in 2010-11. 6.6.2 Group Death Claims This part of the study deals with analysis of group death claims. Table 6.9 shows details regarding pending claims and settled claims on duration basis. During 2011-12, the life insurance industry handled a total of 3,89,088 group death claims. 115

These include 1,647 claims which were pending at the end of the previous year. The life insurance industry settled 98.96 per cent of all claims received. While settled 99.64 per cent of the claims, the private life insurers paid 97.83 per cent of all claims. The industry repudiated 0.72 per cent of the claims, written back 0.01 per cent of the claims and the remaining 0.31 per cent of the claims submitted were pending for settlement. The trend in settlement of claims in cases of individual and group death claims remained similar. On duration wise settlement of group death claims, the life insurance industry settled 41.61 per cent of all claims submitted within a period of 3 months. However, 12.58 per cent of the claims took more than 12 months to settle the claims. Table 6.10 Group Death Claims of Life Insurers (in per cent of lives covered) Insurer Claims Claims paid Claims repudiated Claims written Claims pending Break up of claims pending duration wise (Lives) back at end o f year < 3 months > 3 to < 6 > 6 to < 12 > 12 months months months Private Industry 97.83 99.64 98.96 1.92 0.00 0.72 0.02 0.00 0.01 0.24 0.36 0.31 84.55 24.74 41.61 7.00 37.34 28.78 4.37 21.99 17.02 4.08 15.92 12.58 Source: IRDA annual report 2011-12 116

Figure 6.4 Duration Wise Break-up of Claims Pending Group Policies Source: IRDA Annual Report, 2011-12 6.7 Profits of Life Insurance Companies Life insurance industry is capital intensive, and insurers are required to infuse capital at regular intervals to fund both the new business strain and to expand their infrastructure base including expenses on initial operations, training costs for development of the distribution channels, creating niche markets, achieving reasonable levels of persistency. The experience of the insurance markets globally indicates that companies in the life sector take seven to ten years to break-even. This section of the study deals with the detailed analysis of profits of life insurance companies. During the financial year 2011-12, the life insurance industry reported net profit of `5,974 crore as against `2,657 crore in 2010-11. Out of the twenty four life insurers in operations during 2011-12, fourteen companies reported profits. They are, ICICI Prudential, Birla Sunlife, HDFC Standard, Max Life, Reliance, Bajaj Allianz, SBI Life, Kotak Mahindra, Tata- AIA, MetLife, Aviva, Sahara India and Shriram. Life Insurance 117

Corporation of India has reported net profit of `1,313 crore i.e., an increase of 12.08 per cent over `1,172 crore in 2010-11. The largest private sector life insurer ICICI Prudential reported profit of `1,384 crore for the third year in a row (`808 crore in 2010-11) after incurring losses for eight consecutive years. Birla Sunlife, Max Life and Tata AIA reported profits of `461 crore, `460 crore and `260 crore respectively for the second year in succession after incurring losses for nine successive years. Bajaj Allianz reported net profit t of `1,311 crore for the third consecutive year (`1,057 crore in 2010-11). SBI Life reported profit of `556 crore; the insurer reported profits for 6 out of last 7 years, i.e., other than in 2008-09. Kotak Mahindra reported profit of `203 crore for the fourth year in a row (`102 crore in 2010-11); it reported profit for the first time in 2008-09. Aviva reported profit of `74 crore for the second time a row (`29 crore in 2010-11). Sahara India had reported a profit of `29 crore as against a profit of `28 crore during 2010-11. Sahara India had reported profits for the first time in 2007-08. Shriram Life reported net profit of `56 crore (`17 crore in 2010-11). Except, in the year 2009-10 Shriram Life reported profits from 2007-08 for 5 years in a row. HDFC Standard reported net profits of `271 crore for the first time in the current year, after incurring losses continuously for ten years. Reliance Life reported net profits of `373 crore after remaining in losses for eight years, the company had exhibited profits in the first two years of its operations. MetLife reported a profit of `33 crore, thus reporting profits continuously in the last five financial years. However, MetLife is carrying deficit in the policyholders Account from 2007-08 to 2011-12. The cumulative losses of the company at the end of financial year 2011-12 stood at `1,646 crore. The cumulative losses of the life insurance industry for the financial year 2011-12 stood at `17,945 crore (`20,177 crore in 2010-11). The cumulative losses reduced by `376 crore and `1,856 crore in the policyholders account and shareholders account respectively in the year 2011-12. 6.8 Expansion of Offices This section reveals the number of life insurance offices operating in India and their geographical distribution. Further it is indicated by Table 6.10 that there is a 118

continuous decreasing trend in the number of life insurance offices in India. The private insurers closed 768 offices and opened 305, resulting in a net reduction of 463 offices during the financial year. On the other hand, the public sector insurer established 92 new offices and closed 8, resulting in a net increase of 84 offices. With this, the number of offices of life insurers went down from 11,546 as on 31st March, 2011 to 11,167 as on 31st March, 2012. Table 6.11 Number of Life Insurance Offices* (As on 31 st March,2012) Insurer 2007 2008 2009 2010 2011 2012 Private Industry 3072 2301 5373 6391 2522 8913 8785 3030 11815 8768 3250 12018 8175 3371 11546 7712 3455 11167 Source: IRDA Annual Report, 2011-12 * Offices opened after seeking approval of the Authority As it can be observed from Table 6.12, majority of the offices of life insurers are located in semi-urban areas and other areas category. The number of offices located in metro cities are 741 in number in case of private life insurance companies. It is further indicated that has 365 offices in metro cities. The number of offices in urban areas in case of private companies is more in comparison to public life insurer. Table 6.12 Distribution of Offices* of Life Insurers (As on 31 st March, 2012) Insurer Metro Urban Semi-urban Others Private Industry 741 365 1106 1393 563 1956 3822 970 4792 1756 1557 3313 7712 3455 11167 * Offices opened after seeking approval of the Authority. Source: IRDA Annual Report, 2011-12 119

Figure 6.5 Number of Life Insurance Offices (As on 31 st March, 2012) Source: IRDA Annual Report, 2011-12 Figure 6.6 Geographical Distribution of Life Insurance Offices (as on 31 st March, 2012) Source : IRDA Journal, June 2012 120

6.9 Channel-wise Performance of Life Insurance Companies Financial appraisal of distribution channels covers different aspects of life insurance premium underwritten, new policies issued by insurers, expenses and benefits, death claims, profits of life insurers, number of offices operating in India as well as their geographical distribution.. All these aspects are discussed in this chapter from every angle in detail. The other important issue to be discussed is the channelwise performance of life insurance companies, which covers both the amount of premium as well as the number of policies. The examination of Table 6.12 reveals that Life Insurance Corporation of India () is still leading in the case agency channel with 1,38,25,496 policies and `16,650 crores of premium income. If we analyze the individual performances of the company, it is very much clear that public sector giant player is still leading the insurance sector and is able to maintain its strength in all distribution channels. 121

Table 6.13 Channel-wise performance of life insurance companies Individual New Business Performance of Life Insurers as at March, 2012 Source: IRDA journal,december 2012 122

Table 6.13 reveals the comparative analysis of life insurance companies. At present there are 23 private life insurance companies and 1 public sector player i.e. life insurance corporation of India. The premium income of all the companies differs from each other on the basis of their performance. The year on year growth record of life insurance corporation of India () is very much clear from Table 6.13 that life insurance premium carried by it is `81862.25 crores in the year 2011-12. SBI life stands at second position with life insurance premium of `6531.32 crores. On the other hand, HDFC Standard Life insurance company and ICICI Prudential Life Insurance Company are competing with each other, in which at present ICICI Prudential Life Insurance is leading. 123