A COMAPARATIVE STUDY ON MEASURING THE OPERATING EFFICIENCY OF PUBLIC SECTOR NON-LIFE INSURANCE COMPANIES OF INDIA RITU HOODA 1 DR. RAJKUMAR 2 KESHAV KUMAR 3 1 Research Scholar, MDU, Rohtak, India 2 Professor, Institute of Management Studies and Research, MDU, Rohtak, India 3 Research Scholar, MDU, Rohtak, India Abstract Indian insurance industry was liberalized in January, 2000, with the passage of the IRDA Act. The liberalization was brought about with the objectives to increase coverage of population, better Choice of products with informed decisions, promote competition, encourage the entrance and joint partnership of foreign players with the Indian insurers, so as to boost innovation, advance economy of operations, enhance customer centricity and service excellence, improve the efficiency of the public sector companies and above all to create economic activity for the purpose of benchmark growth rate. Keywords:, General, Operating Efficiency, Claims Analysis Introduction provides financial protection against a loss arising out of happening of an uncertain event. A person can avail this protection by paying premium to an insurance company. is a contract between two parties whereby one party agrees to undertake the risk of another in exchange for consideration known as premium and promises to pay a fixed sum of money to the other party on happening of an uncertain event (death) or after the expiry of a certain period in case of life insurance or to indemnify the other party on happening of an uncertain event in case of general insurance. The party bearing the risk is known as the 'insurer' or 'assurer' and the party whose risk is covered is known as the 'insured' or 'assured'. in India has its history dating back to 1818, when the Oriental Life company was started by Europeans in Kolkata to cater to the needs of the European community. Later developments were as follows: 173
1850 The first general insurance company, Triton, established in Calcutta by the British Government. 1870 Bombay Mutual Life Assurance Society 1907 Indian Mercantile The Indian Life Act, enacted as the first statute to regulate the life insurance 1912 business. Indian Companies Act, enacted to enable the government to collect statistical 1928 information about both life and non-life insurance businesses. The Act: Comprehensive Act to regulate the insurance business in India Earlier 1938 legislation consolidated and amended to by the Act with the objective of protecting the interests of the insuring public. Nationalization of life insurance business in India with a monopoly awarded to the Life Corporation of India245 Indian and foreign insurers and provident societies taken over by the 1956 central government and nationalized. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crores from the Government of India. Nationalization of general insurance business in India with the formation of a holding company 1972 General Corporation (GIC) The General Business (Nationalization) Act, 1972 nationalized the general insurance business in India with effect from 1st January, 1973. 107 insurers amalgamated and grouped into four companies viz. (i) The National Ltd., (ii) Assurance Ltd., (iii) The Oriental Ltd. and (iv) The Ltd. GIC incorporated as a company. 174
1993 Setting up of Malhotra Committee 1994 Recommendations of Malhotra Committee 1995 Setting up of Mukherjee Committee 1996 Setting up of (interim) Regulatory Authority (IRA) Recommendations of the IRA 1997 Mukherjee Committee Report submitted, but not made public 1997 The Government gives greater autonomy to Life Corporation, General Corporation and its subsidiaries with regard to the restructuring of boards and flexibility in investment norms aimed at channeling funds to the infrastructure sector. 1998 The cabinet decides to allow 40 foreign equity in Public insurance companies - 26 of foreign companies and 14 to Non-Resident Indians and Foreign Institutional Investors. The Standing Committee headed by Murali Deora decides that foreign equity in Public 1999 insurance should be limited to 26. The IRA bill is renamed the Regulatory and Development Authority Bill. 1999 Cabinet clears Regulatory and Development Authority Bill. 2000 President gives Assent to the Regulatory and Development Authority Bill. 2003 Law Commission initiates comprehensive consolidation of insurance laws. At present, the Regulatory and Development Authority (IRDA), is the statutory body entrusted with the responsibility for regulation of the operations of the insurance companies as well ensuring the orderly development and growth of the insurance business in India. The main concern of the IRDA is the protection of the policyholder s interest. List of General Companies Public Sector New India Assurance National The Oriental Co. Ltd. Co. Ltd. Agriculture of India Ltd. Private Sector Bajaj Allianz General Co. Ltd. ICICI Lombard General Co. Ltd. IFFCO-Tokio General Co. Ltd. Reliance General Co. Ltd. 175
Royal Sundaram Alliance Co. Ltd TATA AIG General Co. Ltd. Cholamandalam General Co. Ltd. REVIEW OF LITERATURE Arora (1988), in her doctoral work, studied quantitative analysis of the investment policy of GIC and examined critically the role played by the GIC in providing finance to industry. The study revealed that the Investment Policy of GIC evolved within the ambit of the provisions of the Act 1938, and the guidelines issued by the government from time to time, with a view to maximizing investment income, ensuring safety, liquidity of funds and be consistent with national objectives and priorities under the guidelines. Manjit Singh &Rohit Kumar (2009) found in their study Emerging Trends in Financial performance of General Industry in India that by creating a competitive atmosphere in the market the entry of private sector Companies had strengthening of general insurance business. Shreedevi D and Manimegalai D (2013), compared public and private sector general insurance companies in India. The study found that insurers are operating under conditions of shrinking premiums, growing customer expectations, tightening regulations, tougher competition, rising operational costs, etc. In India, general insurance companies were in a budding stage and performance of Assurance was satisfactory as compared to others general insurance companies studied,. Rabindra Ghimire (2013), used the CARAMEL model to depict the financial efficiency and health of general insurance industry in Nepal and concluded that, the financial efficiency of insurance sector insufficient there. Regulatory Authority of Nepal should have to pay more attention to maintain the financial efficiency of the insurance industry and the management of insurers need to be more efficient and effective. CHAITRA K.S (2014) The CAGR of the main source of income i.e., Premium has been increased by 8.56%. The CAGR of the major components of expenses are as follows Claims -12.04%, Commission 4.88%, operating expenses 20.06%. It has been noted that the CAGR of income is much lower than the CAGR of the major component of expenses. There has been a drastic increase in operating expenses. Due to the above reasons it is noted that the overall increase in the profits is just 7.89%. 176
OBJECTIVES OF THE STUDY To measure the operational efficiency of public sector non-life insurance companies of India. METHODOLOGY OF THE STUDY The study is based on secondary sources of data. The main sources of data are journals, articles, newspapers, online data base of Indian economy, IRDA, various economic surveys etc. To analyse the data, different statistical tools i.e. Anova have been applied with the help of tables, diagrams etc. Period of Study The study period is to be converted 5 years; from 2010-11 to 2014-15. Tools & Techniques For the present study, Ratio- Analysis in percentage as an Accounting tools and F- Test ONE WAY ANOVA is used as tools of Statistics. ANALYSIS AND INTERPRETATION 1. RETURN ON NET WORTH The return on net worth indicates the profitability of the owner s investments. Every business is established with a view to getting returns in the form of profit on the amount invested, so there should be a minimum of return on investment. It is also known as return on shareholder s funds. 1.1 Return on Net Worth of Selected Public Sector Non-Life Companies of India (Period from 2010-11 to 2014-15) (In Percentage) Year/ 2010-11 3.07-6.12 2.75 2011-12 4.59 2.54 12.13 2012-13 6.06 10.90 21.12 2013-14 9.84 12.63 15.92 2014-15 5.38 14.72 12.32 Source: Annual Report of Accounts of respective companies from IRDA H0 (Null Hypothesis) : All the selected Public Sector Non-Life Companies of India have equal Return on Net Worth ratio with respect to Profit After Tax and net worth. H1 (Alternative Hypothesis) : All the selected Public Sector Non-Life Companies of India have not equal Return on Net Worth ratio with respect to Profit After Tax and net worth. 177
ANOVA Return Sum of Squares df Mean Square F Sig. Between Groups 143.554 2 71.777 1.707.223 Within Groups 504.618 12 42.052 Total 648.172 14 From the F test one way ANOVA Table as calculated above it shows that Calculated value of Fc = 1.707 while tabular value of Ft = 0.223 which show that calculated value Fc is greater than tabular value Ft. Fc > Ft Hence Null Hypothesis is accepted and Alternative Hypothesis is rejected. Return on Net Worth ratio with respect to Profit After Tax and Shareholder s fund norms is equal for selected Public sector non-life insurance companies. 2. LIQUIDITY ANALYSIS Every business must have sufficient working capital for day to day running of the business. This ratio indicates the financial soundness of the business firm in terms of the premium and other revenue generated. For working capital management, Liquidity analysis is of vital importance. Mismanagement or inadequacy of the working capital would result in failure of the business. 2.1 Ratio Of Liquid Assets To Liability Of Selected Public Sector Non-Life Companies Of India Year/ 2010-11 48.26 81.30 29.32 2011-12 46.54 85.77 29.02 2012-13 41.87 78.16 26.69 2013-14 17.87 83.16 30 2014-15 21.56 45 30 Source: Annual Report of Accounts of respective companies from IRDA H0 (Null Hypothesis) : All the selected Public Sector Non-Life Companies of India have equal Liquid assets to Liability ratio. H1 (Alternative Hypothesis) : All the selected Public Sector Non-Life Companies of India have unequal Liquid assets to Liability ratio. 178
LA ANOVA Sum of Squares df Mean Square F Sig. Between Groups 6135.799 2 3067.899 18.695.000 Within Groups 1969.199 12 164.100 Total 8104.998 14 From the F test one way ANOVA Table as calculated above it shows that Calculated value of Fc = 18.695 while tabular value of Ft = 0.000 which show that calculated value Fc is greater than tabular value Ft. Fc > Ft.Hence Null Hypothesis is rejected and Alternative Hypothesis is accepted that Liquid assets to Liability ratio is not equal for selected Public sector non-life insurance companies. Dependent Variable: Liquidity Analysis (I) Multiple Comparisons Assurance Co. Ltd Mean Difference (I-J) Std. Error Sig. 95% Confidence Interval Lower Upper Bound Bound -39.45800 * 8.10185.001-61.0726-17.8434 6.21400 8.10185.729-15.4006 27.8286 Tukey HSD 39.45800 * 8.10185.001 17.8434 61.0726 45.67200 * 8.10185.000 24.0574 67.2866 Assurance Co. Ltd Assurance Co. Ltd -6.21400 8.10185.729-27.8286 15.4006-45.67200 * 8.10185.000-67.2866-24.0574-39.45800 * 9.90394.012-68.9107-10.0053 6.21400 6.47095.725-17.8084 30.2364 Dunnett T3 39.45800 * 9.90394.012 10.0053 68.9107 45.67200 * 7.54710.009 17.5908 73.7532 Assurance Co. Ltd *. The mean difference is significant at the 0.05 level. -6.21400 6.47095.725-30.2364 17.8084-45.67200 * 7.54710.009-73.7532-17.5908 179
3. SOLVENCY TEST Solvency ratio is one of the various ratios used to measure the ability of a company to meet its long term debts. Moreover, the solvency ratio quantifies the size of a company s after tax income, not counting non-cash depreciation expenses, as contrasted to the total debt obligations of the firm. 3.1 Solvency Ratio of Selected Public Sector Non-Life Companies of India Year/ 2010-11 2.89 2.9 1.34 2011-12 2.71 2 1.33 2012-13 2.52 2.50 1.51 2013-14 2.54 2.61 1.64 2014-15 2.36 2.44 1.68 Source: Annual Report of Accounts of respective companies from IRDA H0 (Null Hypothesis) : All the selected Public Sector Non-Life Companies of India have equal solvency ratio. H1 (Alternative Hypothesis) : All the selected Public Sector Non-Life Companies of India have an unequal solvency ratio. SOL ANOVA Sum of Squares df Mean Square F Sig. Between Groups 3.687 2 1.843 31.802.000 Within Groups.696 12.058 Total 4.382 14 From the F test one way ANOVA Table as calculated above it shows that Calculated value of Fc = 31.802 while tabular value of Ft = 0.000 which show that calculated value Fc is greater than tabular value Ft. Fc > Ft.Hence Null Hypothesis is rejected and Alternative Hypothesis is accepted that solvency ratio is not equal for selected Public sector non-life insurance companies. 180
Dependent Variable: SOL Tukey HSD Dunnett T3 (I) Assurance Co. Ltd Assurance Co. Ltd *. The mean difference is significant at the 0.05 level. Multiple Comparisons Mean Difference (I-J) Std. Error Sig. 95% Confidence Interval Lower Bound Upper Bound.11400.15226.740 -.2922.5202 1.10400 *.15226.000.6978 1.5102 -.11400.15226.740 -.5202.2922.99000 *.15226.000.5838 1.3962-1.10400 *.15226.000-1.5102 -.6978 -.99000 *.15226.000-1.3962 -.5838.11400.17160.877 -.4169.6449 1.10400 *.11626.000.7566 1.4514 -.11400.17160.877 -.6449.4169.99000 *.16306.003.4663 1.5137-1.10400 *.11626.000-1.4514 -.7566 -.99000 *.16306.003-1.5137 -.4663 4. OPERATING ANALYSIS Analysis of profitability and earning is an important indicator of financial performance and one parameter to measure the profitability is an operational activity of any organization which can properly calculate by applying operating analysis of the respective business. Non-Life insurance is purely a service base industry and operating expense of service industry is like production and labor costs of manufacturing unit that is only because service industry has no concern with material and labor cost it has concern with providing services to their client which has its cost. 181
4.1 Operating Profit Ratio of Selected Public Sector Non-Life Companies of India Year/ 2010-11 -12.06-5.72 3.88 2011-12 -3.16 1.78 7.04 2012-13 1.00 0.25 14.27 2013-14 1.06 1.55 10.54 2014-15 -3.51 2.8 8.56 Source: Annual Report of Accounts of respective companies from IRDA H0 (Null Hypothesis) : All the selected Public Sector Non-Life Companies of India have equal Operating Profit Ratio. H1 (Alternative Hypothesis) : All the selected Public Sector Non-Life Companies of India have an unequal Operating Profit Ratio. Operating Profit ratio ANOVA Sum of Squares df Mean Square F Sig. Between Groups 394.668 2 197.334 10.730.002 Within Groups 220.693 12 18.391 Total 615.362 14 From the F test one way ANOVA Table as calculated above it shows that Calculated value of Fc = 10.730 while the tabular value of Ft =.002 which show that calculated value Fc is greater than the tabular value Ft. Fc > Ft Hence Null Hypothesis is rejected and Alternative Hypothesis is accepted that All the selected Public Sector Non-Life Companies of India have an unequal Operating Profit Ratio. Dependent Variable: Operating Profit Ratio Tukey HSD (I) Assurance Co. Ltd Multiple Comparisons Mean Difference (I-J) Std. Error Sig. 95% Confidence Interval Lower Upper Bound Bound -3.46600 2.71228.433-10.7020 3.7700-12.19200 * 2.71228.002-19.4280-4.9560 3.46600 2.71228.433-3.7700 10.7020-8.72600 * 2.71228.019-15.9620-1.4900 182
12.19200 * 2.71228.002 4.9560 19.4280 8.72600 * 2.71228.019 1.4900 15.9620-3.46600 2.83196.562-12.1943 5.2623-12.19200 * 2.95456.011-21.1230-3.2610 Dunnett T3 Assurance Co. Ltd 3.46600 2.83196.562-5.2623 12.1943-8.72600 * 2.30649.016-15.5760-1.8760 *. The mean difference is significant at the 0.05 level. 12.19200 * 2.95456.011 3.2610 21.1230 8.72600 * 2.30649.016 1.8760 15.5760 5. MANAGEMENT SOUNDNESS ANALYSIS A particularly interesting form of financial performance analysis of insurance companies is the analysis of management efficiency. The efficient management shall reflect in operating expenses, and gross premium, affecting overall operating efficiency of the insurance concerns, reflecting management soundness. Sound management is crucial for the financial stability of insurers. 5.1 Ratio of Operating Expenses and Gross Premium of Selected Public Sector Non-Life Companies of India Year/ 2010-11 27.06 23.62 35 2011-12 19.15 20.51 28.47 2012-13 21.60 19.99 32.29 2013-14 21.75 19.16 30.62 2014-15 24.77 28.06 37.24 H0 (Null Hypothesis) : All the selected Public Sector Non-Life Companies of India have equal Management efficiency with respect to Operating Expenses and Gross Premium H1 (Alternative Hypothesis) : All the selected Public Sector Non-Life Companies of India have unequal Management efficiency with respect to Operating Expenses and Gross Premium. 183
Management Soundness Analysis ANOVA Sum of Squares df Mean Square F Sig. Between Groups 344.776 2 172.388 14.832.001 Within Groups 139.473 12 11.623 Total 484.249 14 From the F test one way ANOVA Table as calculated above it shows that Calculated value of Fc = 14.832 while tabular value of Ft = 0.001 which show that calculated value Fc is greater than tabular value Ft. Fc > Ft Hence Null Hypothesis is rejected and Alternative Hypothesis is accepted that Management efficiency norms as per Operating Expenses to Gross Premium is different for selected public sector non-life insurance companies. Dependent Variable: mgtsoundness Tukey HSD Dunnett T3 (I) Assurance Co. Ltd Assurance Co. Ltd *. The mean difference is significant at the 0.05 level. Multiple Comparisons Mean Difference (I-J) 6. REINSURANCE AND ACTUARIAL ISSUES: 95% Confidence Interval Std. Lower Upper Error Sig. Bound Bound.59800 2.15617.959-5.1544 6.3504-9.85800 * 2.15617.002-15.6104-4.1056 -.59800 2.15617.959-6.3504 5.1544-10.45600 * 2.15617.001-16.2084-4.7036 9.85800 * 2.15617.002 4.1056 15.6104 10.45600 * 2.15617.001 4.7036 16.2084.59800 2.13526.988-5.7591 6.9551-9.85800 * 2.07555.004-16.0178-3.6982 -.59800 2.13526.988-6.9551 5.7591-10.45600 * 2.25389.005-17.1267-3.7853 9.85800 * 2.07555.004 3.6982 16.0178 10.45600 * 2.25389.005 3.7853 17.1267 Reinsurance ratio is also known as risk retention ratio, this ratio indicates the risk bearing capacity of the country s insurance sector. Reinsurance and Actuarial issue ratios 184
reflect the overall underwriting strategy of the insurer and depict the proportion of risk retained and passed on to the reinsurers and indicates the risk bearing capacity of the country s insurance sector. IMF prescribes in this standard viz. ratio of Net Premium to Gross Premium. 6.1 Ratio of Net Premium and Gross Premium of Selected Public Sector Non-Life Companies of India Year/ 2010-11 80.24 87.4 82.8 2011-12 82.9 87.1 78.9 2012-13 80.8 86.5 79.95 2013-14 85.4 87.98 81.8 2014-15 87.2 86.01 84.9 Source: Annual Report of Accounts of respective companies from IRDA H0 (Null Hypothesis) : All the selected Public Sector Non-Life Companies of India have equal Risk Retention norm with respect to Net Premium and Gross Premium. H1 (Alternative Hypothesis) : All the selected Public Sector Non-Life Companies of India have unequal Risk Retention norm with respect to Net Premium and Gross Premium. Reinsurance And Actuarial Issues ANOVA Sum of Squares df Mean Square F Sig. Between Groups 74.478 2 37.239 7.434.008 Within Groups 60.112 12 5.009 Total 134.590 14 From the F test one way ANOVA Table as calculated above it shows that Calculated value of Fc = 7.434 while tabular value of Ft = 0.008 which show that calculated value Fc is greater than tabular value Ft. Fc > Ft.Hence Null Hypothesis is rejected and Alternative Hypothesis is accepted that Risk Retention norms as per Net Premium to Gross Premium is different for selected Public sector non-life insurance companies. 185
Dependent Variable: ReinsuranceAndActuarialIssues Tukey HSD Dunnett T3 (I) Assurance Co. Ltd Assurance Co. Ltd Multiple Comparisons Mean Difference (I-J) Std. Error Sig. 95% Confidence Interval Lower Upper Bound Bound -3.69000 1.41553.056-7.4664.0864 1.63800 1.41553.499-2.1384 5.4144 3.69000 1.41553.056 -.0864 7.4664 5.32800 * 1.41553.007 1.5516 9.1044-1.63800 1.41553.499-5.4144 2.1384-5.32800 * 1.41553.007-9.1044-1.5516-3.69000 1.37393.119-8.5493 1.1693 1.63800 1.69928.716-3.4467 6.7227 3.69000 1.37393.119-1.1693 8.5493 5.32800 * 1.11172.014 1.4996 9.1564-1.63800 1.69928.716-6.7227 3.4467-5.32800 * 1.11172.014-9.1564-1.4996 7. CLAIMS ANALYSIS The standard is an important indicator of whether their pricing policy is correct or not. It reflects the quantum of claims in the premiums earned. The ratio prescribed for this analysis is Net Claims Incurred to Net Premium. Further Classification can be made on the base of Business Segment of each company. 186
7.1 Ratio of Net Claim and Net Premium of Selected Public Sector Non-Life Companies of India Year/ 2010-11 85.71 17.7 88.2 2011-12 79.5 18.9 86.4 2012-13 81.9 79.3 81.54 2013-14 82.56 77.7 85.9 2014-15 84.42 84.02 81.89 Source: Annual Report of Accounts of respective companies from IRDA H0 (Null Hypothesis) :All the Selected Public Sector Non-Life Companies of India have equal Claim ratio with respect to Net Claim and Net Premium. H1 (Alternative Hypothesis) : All the Selected Public Sector Non-Life Companies of India have unequal Claim ratio with respect to Net Claim and Net Premium. Claims Analysis ANOVA Sum of Squares df Mean Square F Sig. Between Groups 2675.167 2 1337.583 3.416.067 Within Groups 4698.341 12 391.528 Total 7373.508 14 From the F test one way ANOVA Table as calculated above it shows that Calculated value of Fc = 3.416 while tabular value of Ft = 0.067 which show that calculated value Fc is greater than tabular value Ft. Fc > Ft. Hence Null Hypothesis is accepted and Alternative Hypothesis is rejected that Claim management for all business norms as per Net Claim to Net Premium is equal for selected Public sector non-life insurance companies. FINDINGS AND CONCLUSIONS 1. Return on Net Worth ratio with respect to Profit After Tax and Shareholder s fund norms is equal for selected Public sector non-life insurance companies. 2. Liquid assets to Liability ratio is not equal for selected Public sector non-life insurance companies. 3. Solvency ratio is not equal for selected Public sector non-life insurance companies. 4. All the selected Public Sector Non-Life Companies of India have an unequal Liquid assets to Liabilities Ratio. 5. Management efficiency norms as per Operating Expenses to Gross Premium is different for selected public sector and Public sector non-life insurance companies. 187
6. Risk Retention norms as per Net Premium to Gross Premium is different for selected Public sector non-life insurance companies. 7. Claim management for all business norms as per Net Claim to Net Premium is equal for selected Public sector non-life insurance companies. Sr. No. NAME OF THE HYPOTHESIS Fc Ft F c > F t OR F c < F t H o H 1 1 Return On Net Worth 1.707.223 F c > F t Accepted Rejected 2 Liquidity Analysis 18.695.000 F c > F t Rejected Accepted 3 Solvency Test 31.802.000 F c > F t Rejected Accepted 4 Operating Analysis 10.730.002 F c > F t Rejected Accepted 5 Management Soundness Analysis 14.832.001 F c > F t Rejected Accepted 6 Reinsurance And Actuarial Issues 7.434.008 F c > F t Rejected Accepted 7 Claims Analysis 3.416.067 F c > F t Accepted Rejected REFERENCES 1. B. S. Bodla, M.C.Grg Kinds of Agency System / Intermediaries (2007) Management Principles & Practice Deep & Deep Publications. 2. C. R. Kothari (2004), Research Methodology 3. Annual Reports of IRDA 2010-11 to 2014-15 4. Arora, M.N. (1987), "The Life Corporation of India (Financial & Organizational Aspects: 1956 to 1986)," Ph.D. Thesis, Submitted to Faculty of Commerce, Banaras Hindu University, Varanasi. 5. Manjit Singh & Rohit Kumar (2000), Emerging Trends in Financial Performance of General Industry in India, Indian Management studies, Journal 13, pp (31-44) 6. Shreedevi D and Manimegalai D (2013) A Comparative Study of Public and Private Non- Life Companies in India, International Journal of Financial Management, Vol.2,Issue 1,Feb. 2013, pp13-20 7. Rabindra Ghimire (2013) Financial Efficiency of Non Life Industries in Nepal The Lumbini Journal of Business and Economics, Vol-III, No.- 2, July -2013,ISSN 2091-1467 8. www.irda.org 9. www.google.com 10. www.generalinsuranceco.com 11. www.instituteofinsurance.com 188