Trends Opportunities in Insurance Sector

8/4/2019 Trends Opportunities in Insurance Sector

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General Insurance in India

Trends and Opportunities

Authored by:

10FN-055 KUMAR RAKESH [email protected]

10IT-017 MIHIR KATYAYAN [email protected]

10HR-049 PARAG DE [email protected]

10DM-083 MANISH MOHANTY [email protected]

10IB-041 MURALI PODILE [email protected]

10FN-056 M SIDDHARTHA [email protected]

INSTITUTE OF MANAGEMENT TECHNOLOGY, GHAZIABAD


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Table of Contents

Executive Summary: ........................................................................... 3Introduction: ........................................................................................ 4Literature review: ............................................................................... 8Research Gaps: .................................................................................. 10Objectives:.......................................................................................... 10Hypothesis: ......................................................................................... 10Methodology: ..................................................................................... 11Data Analysis: .................................................................................... 11Conclusion: ........................................................................................ 19Bibliography ...................................................................................... 20


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Executive Summary:

In the year 1999, Government of India deregulated the insurance sector. The opening of the

sector to the private players has paved way for stiff competition resulting in launch of quality

products. This stiff competition has also resulted in negative impact on profitability of

insurance providers. According to Dr. Mark J. Perry, the insurance industry ranks 86 in profit

margin. This existing disparity of huge opportunities of growth but low profitability may

prove to be a big hindrance in the expansion of insurance schemes in India.

To address the issue of profitability in the Indias Insurance sector, we , through our research,

intend to understand possible ways to increase the profitability of the sector. We propose two

ways for the purpose.

First we looked into the premiums earned and the claims being incurred by the insurance

providers and examined their correlation. Since the general insurance is divided broadly in

Health, Motor, Fire and Marine, we examine these separate sectors independently with the

same objective and methodology. We propose that an insurance provider by increasing the

claims it is incurring will actually increase the premium it earns, opposed to the general

perception that reducing the claims incurred by the insurance provider would increase the

profitability. Hence better processing of the claim will result in more premium and hence

revenue generation for the insurance provider.

Secondly we concentrated on the management expense ratio of the insurance provider and

explored the possibility of existence of a relation between the management expense ratio and

the market share of the firm. The Proposal is that a reduction in management expense ratio

would increase the market share of an insurance provider resulting in increase in its

profitability.


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Introduction:

Insurance is a tool where insurer (insurance company) takes a premium for hedging the

insured (policy-holder) against some kind of contingent risk and hence when such a risk

arises the policy-holders claim gets settled. For an example a motor insurance is taken to

safeguard policy-holders vehicle against damages like theft, fire etc.

Indian General insurance industry is dominated by players which can be broadly classified

into Government players and private insurance players. List of general insurance companies

registered in India:

Table 2.1

GENERAL INSURANCE COMPANIES IN INDIA

Sl.

No

Insurers Foreign Partners Regn.

No.

Date of

Registration

Year of

Operation

1. Royal Sundaram AllianceInsurance

Royal Sun Alliance,UK

102 23.10.2000 2000-01

2. Reliance GeneralInsurance Co.

--- 103 23.10.2000 2000-01

3. IFFCO-TOKIO GeneralInsurance Co.

TOKIO Marine Asia

Pte. Ltd, Japan

106 04.12.2000 2000-01

4. TATA AIG GeneralInsurance Co. Ltd.

AmericanInternational Group,Inc. (AIG). USA

108 22.01.2001 2000-01

5. Bajaj Allianz GeneralInsurance Co.

Allianz, Germany 113 02.05.2001 2001-02

6. Cholamandalam MSGeneral Insurance Co.

Mitsui Sumitomo,Japan

123 15.07.2002 2002-03

7. ICICI Lombard GeneralInsurance Co.

Fairfax through itsaffiliates, Canada

115 03.08.2001 2001-02

8. HDFC ERGO GeneralInsurance Co. (EarlierHDFC General InsuranceCo. from 27.9.2000 to5.4.2008)

ERGO, Germany 125 27.09.2000 2002-03

9. Star Health & AlliedInsurance Company

Limited

Individual Promoters,UAE

129 16.03.2006 2006-07


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Table 2.1

GENERAL INSURANCE COMPANIES IN INDIA

Sl.

No

Insurers Foreign Partners Regn.

No.

Date of

Registration

Year of

Operation

10. Apollo DKV InsuranceCompany Ltd.

DKV, Germany 131 03.08.2007 2007-08

11. Future Generali IndiaAssurance Company Ltd.

ParticipatieMaatschapijGraafsschap HollandNV, Netherlands(Generali)

132 04.09.2007 2007-08

12. Universal Sompo GeneralInsurance Company Ltd.

Sompo, Japan 134 16.11.2007 2007-08

13. Shriram GeneralInsurance Company Ltd.

Sanlam, South Africa 137 08.05.2008 2008-09

14. Bharti AXA GeneralInsurance Company Ltd.

AXA Holdings,France

139 27.06.2008 2008-09

15. Raheja QBE GeneralInsurance Company Ltd.

QBE, Australia 141 11.12.2008 2008-09

16. New India Assurance Co.Ltd.

---

17. National Insurance Co.Ltd.

---

18. The Oriental InsuranceCo. Ltd.

---

19. United India InsuranceCo. Ltd. ---20. Export Credit Guarantee

Corporation Ltd.---

21. Agriculture InsuranceCo. of India Ltd.

---


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Indian general insurance industry has multiple product offerings in multiple Line of business.

The LOBs are: Motor Insurance, Fire Insurance, Credit insurance, Aviation Insurance, Health

insurance, Rural Insurance etc.

Just 5 percent of the more than $20 billion of damage from the quake of 2005 in Sichuan

province was covered by insurance, according to estimates from the China InsuranceRegulatory Commission. By contrast, about half of the $120 billion of estimated costs fromHurricane Katrina, the most expensive storm in U.S. history, was insured by companies or thefederal government, according to data compiled by analysts at Property Claim Services. Thisshows the vulnerability of the under penetrated countries like India and China, as well as theneed and potential for growth of Insurance sector in such countries.

The Fig 2.1 & Fig 2.2 below shows the comparison of insurance density and insurancepenetration in comparison to World and China

Fig 2.1 Insurance density - measured as ratio of premium (in US Dollar) to total population

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

2001 2002 2003 2004 2005 2006 2007 2008

India

India Non-Life

PR China

PR China Non-Life

World

World Non-Life


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Fig 2.2 Insurance penetration - measured as ratio of premium (in US Dollars) to GDP (in USDollars)

With the Indian economy is forecasted to grow at 7.5% in 2010 and given rising income

levels and higher risk awareness among insured, the countrys insurers are optimistic about

demand for their products. However, intense competition from new entrants, deregulation and

a moderation in returns from the equities market will pressure pricing and ultimately short-

term profitability.

Hence there is a need for stream-lining the process of insurance business and predicting the

profit maximization by statistical analysis.

0

1

2

3

4

5

6

7

8

9

2001 2002 2003 2004 2005 2006 2007 2008

India

India Non-Life

PR China

PR China Non-Life

World

World Non-Life


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Literature review:

Motor insurance Industry of India:

Auto Insurance in India deals with the insurance covers for the loss or damage caused to theautomobile or its parts due to natural and man-made calamities. It provides accident cover for

individual owners of the vehicle while driving and also for passengers and third party legal

liability. There are certain general insurance companies who also offer online insurance

service for the vehicle.

Auto Insurance in India is a compulsory requirement for all new vehicles used whether for

commercial or personal use. The insurance companies have tie-ups with leading automobile

manufacturers. They offer their customers instant auto quotes. Auto premium is determined

by a number of factors and the amount of premium increases with the rise in the price of the

vehicle. The claims of the Auto Insurance in India can be accidental, theft claims or thirdparty claims. Certain documents are required for claiming Auto Insurance in India , like duly

signed claim form, RC copy of the vehicle, Driving license copy, FIR copy, Original estimate

and policy copy.

The auto insurance generally includes:

Loss or damage by accident, fire, lightning, self ignition, external explosion, burglary,housebreaking or theft, malicious act.

Liability for third party injury/death, third party property and liability to paid driver On payment of appropriate additional premium, loss/damage to electrical/electronic

accessories

The auto insurance does not include:

Consequential loss, depreciation, mechanical and electrical breakdown, failure orbreakage

When vehicle is used outside the geographical area War or nuclear perils and drunken drivingSome of the leading Insurance Companies offering Auto Insurance in India are:

Bajaj Allianz - Bajaj Allianz's Motor Insurance ICICI Lombard - Motor Plans, Two Wheeler Package Policy United India Insurance Co. - Motor Package and Liability Only Policies The New India Assurance Co. - Motor Policy


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Fire Insurance Industry of India:

Fire insurance is a part of property insurance which includes specialized forms of insurance

such as flood insurance, earthquake insurance and home insurance. Property is insured in two

main ways - open perils and named perils. Open perils cover all the causes of loss not

specifically excluded in the policy. Common exclusions on open peril policies include

damage resulting from earthquakes, floods, nuclear incidents, acts of terrorism and war.

Named perils require the actual cause of loss to be listed in the policy for insurance to be

provided. The more common named perils include such damage-causing events as fire,

lightning, explosion and theft.

In India Fire insurance policy is governed by All India Fire Tariff. It lays down the rules of

coverage premium rates and conditions of fire policy. This is being renamed to Standard Fire

and Special Perils Policy. The fire insurance policy governs the risk of dwellings, offices,

shops, hospitals (Located outside the compounds of industrial/manufacturing risks) Industrial

/ Manufacturing Risks Utilities located outside industrial/manufacturing risks Machinery and

Accessories Storage Risks outside the compound of industrial risks Tank farms / Gas holders

located outside the compound of industrial risks.

Health Insurance Industry of India:

Insurance is undoubtedly such a mechanism by way of which, risks or outcomes or losses

from uncertain events (such as ill health, disability) is shared between people who are not

related to each other but yet have a share in the loss of the community at large. Thus, theprimary function of health insuranceis the reduction of such uncertainty that is, uncertaintyregarding the incidence of illness and secondly the uncertainty regarding the adequacy of the

health insurance cover also. The need for health insurance is also increasing now -adays, as

with the growth of mechanized life styles, individuals and families are getting exposed to

health and life hazards. Health insurance rightly provides timely and affordable financial

assistance for medical expenditure. But unfortunately not all those who need are able to take

this insurance cover for various reasons, such as high premiums, applicability of too many

conditions and a host of exclusions. Moreover, for the government, the burden of

provisioning and financing of health care is also constrained by factors that include,incessantly growing population, hostile economic environment, increasing cost of care, and

narrowing tax bases. In such a situation, the burden on the individuals to finance for their

health care also increases. At present the share of health insurance in the health financing, in

India, accounts for a mere 1.2 per cent of the total expenditure on health (Rao, Sujatha).

Other health care financing schemes operating in India include the Employees State

Insurance Scheme and Central Government Health Scheme, which generally cover the people

working in the organized sectors. The rural poor and those working in the unorganized

sectors thus have limited access to the underfunded and under staffed Public hospitals where

in the quality of care is low with no proper facilities, equipments and drugs. As a result they

are forced to seek care from expensive private hospitals thus resulting in high out-of-pocket
http://en.wikipedia.org/wiki/Flood_insurancehttp://en.wikipedia.org/wiki/Earthquake_insurancehttp://en.wikipedia.org/wiki/Home_insurancehttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Home_insurancehttp://en.wikipedia.org/wiki/Earthquake_insurancehttp://en.wikipedia.org/wiki/Flood_insurance


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spending. Properly designed health insurance plans at such times, can rightly provide timely

financial assistance and mitigate these out-of-pocket spending. In fact, a well-defined health

insurance plan can also become an income protection plan for the poor.

Research Gaps:

In this project we have studied on the profitability factors of insurance firms in India. We

found out that to increase the profit margin insurance companies are focusing on improving

their managerial efficiency, advertising of new policies etc. In our project we concentrated

our study on how claims incurred also has a relationship with the profits of the insurance

firms and thus we established a correlation of the same and market demand is constant.

Objectives:

To identify opportunities of increasing the profit margin of insurance companies. This isachieved by concentrating on two aspects:

Find correlation and dependence between claims incurred and premium earnedby an insurance company.

Finding correlation and dependence between management expense ratio andmarket share of the insurance company.

Hypothesis:

Null hypothesis: There is no relation between claims incurred and premium earned.

General perception in the industry is that by decreasing claims incurred amount, the total

profit will increase. Also, a change in the operational and management expense costs will

not affect the profitability. For both these cases, we will do a regression analysis. Thus,

in statistical terms, the corresponding value of slope parameter, b, will be equal to 0, i.e.

b=0.

Alternate Hypothesis: There is dependency between claims incurred and net premium of

the insurance companies. Increase in claims incurred will result in an increase inpremium earned which will increase the profit margins in the long run. Also, a change in

the operational and management expense costs will affect the profitability margins. In

statistical terms, the corresponding slope parameter, b, will not be equal to zero, i.e. b0.

We will do data analysis for various insurance sectors to arrive at a conclusion for this

hypothesis.


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Methodology:

Steps involved for arriving at a conclusion for the above mentioned Hypothesis:

1. Data figures, including claim ratio, management expense ratio, claims incurred andnet premium earned, are obtained for various different Insurance companies, like

public firms including New India Insurance, Oriental Insurance, National Insurance

and United Insurance as well as private firms including Royal Sundaram, Bajaj

Allianz, Tata AIG, IFFCO-TOKIO, ICICI Lombard, Reliance, Cholamandalam and

HDFC. The data figures are obtained over a period of minimum of 3 years.

2. Descriptive analysis of the claim incurred and the net premium is calculated to checkthe quality of our sample.

3. Simple regression analysis is done, using SPSS and Microsoft Excel, taking intoconsideration claims incurred and net earned premium for 10 companies for the year

2008-09. Similarly, simple regression is done on the management expense ratio

values for 2 different companies.

4. Finally, using the regression results, we arrive at a conclusion and present theimplications based on researchers perspective.

Data Analysis:

Data regression analysis, taking net premium as the dependent variable and the claims incurred

as the independent variable, is carried on for 4 different sectors: Motor Insurance, Fire

Insurance, Health Insurance and Marine Insurance. Sector wise grouped results are detailed

below:

Motor Insurance Analysis:

Result of simple regression:

Dependent variable Net premium earned

Independent variable Claims incurred

a (intercept) 25091.59

b( slope) 0.86

Coefficient of determination 0.9403

P value 3.56036E-06

Estimated premium earned values for each 10 companies are arrived at for the year 2008-09.

These values are compared with the actual premium earned value for the year 2008-09 using

the following graphical display:


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In the above graph, blue dots depict the actual net premium earned for the year 2008-09 while

red line being the regression line. This shows that actual earned premium value also follow

the trend shown by the regression line.

Thus, using the above tabular result and graphical representation, researchers can analyse and

list down the following points:

The coefficient of determination is 0.9402. Hence, 94.02 percent of variation in netpremium due to claims incurred is explained by the model. Also, we can say thatexplanatory power of the model is 94.02%.

The intercept value obtained is 25091.59, which is the autonomous value. The slope parameter obtained is 0.86. Thus, 1 unit of change in claims incurred results

in 0.86 units change in net premium earned. With 95% confidence interval, the slope

interval value ranges from 0.68 to 1.04.

The p value obtained is 3.56*10^-6 which is very less than 0.05 hence we can rejectour null hypothesis with 95% confidence. Thus claims incurred have a statistical

significance on net premium.

Fire Insurance Analysis:


0

50000

100000

150000

200000

250000

0 50000 100000 150000 200000 250000

Regression Line

2008-09

Claims Incurred (Rs. Lakhs)

PremiumE

arned(Rs.

Lakhs)


Independent variable Claims incurred

a (intercept) -1850.42

b( slope) 1.428


P value 5.40E-06


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The coefficient of determination is 0.9335. Hence, 93.35 percent of variation in netpremium due to claims incurred is explained by the model. Also, we can say that

explanatory power of the model is 93.35%.

The intercept value obtained is -1850.42, which is the autonomous value. The slope parameter obtained is 1.428. Thus, 1 unit of change in claims incurred

results in 1.428 units change in net premium earned. With 95% confidence interval,the slope interval value ranges from 1.117 to 1.74.



-20000

0

20000

40000

60000

80000

100000

120000

0 20000 40000 60000 80000

Premiu

mE

arned(Rs.Lakh)

Claims Incurred (Rs. Lakh)

Fire Insurance Scatter Plot & Regression Line

Regression Line

2008-09


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Health Insurance Analysis



Independent variable Claims incurreda (intercept) 4085

b( slope) 0.85


P value 1.243E-06











The intercept value obtained is 4085, which is the autonomous value.

0

20000

40000

60000

80000

100000

120000

140000

0 20000 40000 60000 80000 100000 120000 140000

Regression Line

Scatter Diagram


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The slope parameter obtained is 0.85. Thus, 1 unit of change in claims incurred resultsin 0.85 units change in net premium earned. With 95% confidence interval, the slope

interval value ranges from 0.72 to .98

The p value obtained is 1.243*10^-6 which is very less than 0.05 hence we can rejectour null hypothesis with 95% confidence. Thus claims incurred have a statisticalsignificance on net premium.

Marine Insurance Analysis


Dependent variable Net premium

Independent variable claims incurred

a (intercept)377.237

b( slope) 0.928Coefficient of determination 0.9342

P value5.24128E-06







0

5000

10000

15000

20000

25000

30000

0 5000 10000 15000 20000 25000 30000

Regression Line

2008-09


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The intercept value obtained is 377.237, which is the autonomous value. The slope parameter obtained is 0.928. Thus, 1 unit of change in claims incurred

results in 0.928 units change in net premium earned. With 95% confidence interval,

the slope interval value ranges from 0.7276 to 1.129.



Managerial and Operational Expense Ratio Analysis

Regression analysis is done for a private and a public insurance firm independently.

Data for a private firm IFFCO-TOKYO is as follows:

Year Market Share Expense Ratio

2002-03 1.43 22.48

2003-04 1.95 19.7

2004-05 2.69 19.36

2005-06 4.18 172006-07 4.41 17.76

Graphical representation for the above mentioned data is as follows:


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Simple regression results:

MarketShare(%) = 14.029 - .576*Expratio +

(2.728) (.141)

(5.142) (-4.087)

(.014) (.026)



Co-efficient of Determination is 0.847726 which means 84.7% of the variation inthe Market share(%) can be explained by the variation in the Exp. Ratio.

Durbin-Watson statistic comes to be 1.804 which states the absence of any co-relation.

Data for a public firm, New India Insurance Limited, is as follows:

Year Market Share Expense Ratio

2002-03 32.37 18.6

2003-04 29.75 27.23

2004-05 27.65 23.3

2005-06 26.6 23

2006-07 22.9 19.41

0

5

10

15

20

25

2002-03 2003-04 2004-05 2005-06 2006-07

Market Share (in %)

Admin Expense ratio


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Graphical representation for the above mentioned data is as follows:

Result of Regression:

Dependent variable Market Share(%)

Independent variable

Admin

Expenses(Ratio)

a (intercept)25.115

b( slope) 0.122


P value.847

In this case the significance of Anova comes to be 0.848 which makes this relation

insignificant .Hence we do not reject the null hypothesis and we make the implication that in

case of government insurance industry we can not predict the relation between market share

and management expense ratio .

0

5

10

15

20

25

30

35

2002-03 2003-04 2004-05 2005-06 2006-07

Market Share(In %)

Admin Ratio


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Conclusion:

Models selected in various sectors of insurance are significant with respect to 0.05

significance level. Hence, these models can be used to arrive at final conclusions regarding

the motor insurance claims ratio results:

Increase in claims incurred results in increase in customers for the company which inturn results in increase in net earned premium for the company. This shows a positive

change for net premium based on claims incurred. Thus, we can say that Claims

incurred by a company play a role in deciding the net premium earned by the

company.

From the descriptive analysis of the public and private insurance firms it is seen thatthe range of claims incurred in public firms are much higher than that of the private

firms. This can happen as the public insurance companies have a wide range of

operation and they also serve many non-profit insurance policies while the private

firms focuses on profits.

Also, the following conclusions can be listed using the management and operational expense

ratio analysis:

Decreasing the management expense ratio for private companies the share percentageincreases.

o Private players start with large investments in technology, which helps them tobuild robust data management systems .These characteristics enables them

with quick and effective decision-making and pricing, eventually helping them

increase the market share. But in case of government insurance companies the same doesnt stand true.

o Government players have only recently started upgrading their systems andhave to grapple with transition issues which in turn show in the increase

expenses. They are encumbered by legacy systems and fragmented systems

and hence have not fully utilized the effect.

Thus, we can finally interpret that increasing the claims incurred by a company and

starting to use new technology with a reduction in operational and managementexpenses will have a positive effect on the profitability of the company.


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Bibliography

[1] Commission on macroeconomics, WHO - Health insurance in India

[2] Health Insurance Claims in India: A Sample Study, V. Jayalakshmi (International Institute

for Insurance and Finance, Hyderabad)

[3] Health Insurance in India Opportunities, Challenges and Concerns, Dileep Mavalankar

Ramesh Bhat (IIM Ahmedabad)

[4] International Institute for Insurance and Finance, Hyderabad, Swiss Re

[5] IRDA,www.irda.gov.in, last accessed on 13 August 2010

[6] All India Fire Terrif,www.tac.org.in, last accessed on 16 August 2010

[7] Indian management Studies Journal 13(2009) 31-44: Emerging trends in Financial

Performance of General Insurance industry in India.

[8] Moodys ICRA Global Insurance: Indian General Insurance Industry Outlook.
http://www.irda.gov.in/http://www.irda.gov.in/http://www.irda.gov.in/http://www.tac.org.in/http://www.tac.org.in/http://www.tac.org.in/http://www.tac.org.in/http://www.irda.gov.in/

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