General Insurance in India

Trends and Opportunities

Authored by: 10FN-055 10IT-017 10HR-049 10DM-083 10IB-041 10FN-056 KUMAR RAKESH MIHIR KATYAYAN PARAG DE MANISH MOHANTY MURALI PODILE M SIDDHARTHA krrakesh.india@gmail.com mihirkatyayan@gmail.com parag.nitt@gmail.com mohanty.manish@gmail.com xlnc.kris@gmail.com siddharth.mullapudi@gmail.com

INSTITUTE OF MANAGEMENT TECHNOLOGY, GHAZIABAD

Table of Contents

Executive Summary: ...........................................................................3 Introduction: ........................................................................................4 Literature review:................................................................................8 Research Gaps: .................................................................................. 10 Objectives: .......................................................................................... 10 Hypothesis: ......................................................................................... 10 Methodology: ..................................................................................... 11 Data Analysis: .................................................................................... 11 Conclusion:......................................................................................... 19 Bibliography....................................................................................... 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
1.

Insurers

Foreign Partners

Regn. No.
102

Date of Registration
23.10.2000

Year of Operation
2000-01

Royal Sundaram Alliance Royal Sun Alliance, Insurance UK Reliance General Insurance Co. IFFCO-TOKIO General Insurance Co. TATA AIG General Insurance Co. Ltd. ---

2.

103

23.10.2000

2000-01

3.

TOKIO Marine Asia Pte. Ltd, Japan American International Group, Inc. (AIG). USA Allianz, Germany

106

04.12.2000

2000-01

4.

108

22.01.2001

2000-01

5.

Bajaj Allianz General Insurance Co. Cholamandalam MS General Insurance Co. ICICI Lombard General Insurance Co. HDFC ERGO General Insurance Co. (Earlier HDFC General Insurance Co. from 27.9.2000 to 5.4.2008) Star Health & Allied Insurance Company Limited

113

02.05.2001

2001-02

6.

Mitsui Sumitomo, Japan Fairfax through its affiliates, Canada ERGO, Germany

123

15.07.2002

2002-03

7.

115

03.08.2001

2001-02

8.

125

27.09.2000

2002-03

9.

Individual Promoters, UAE

129

16.03.2006

2006-07

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Table 2.1 GENERAL INSURANCE COMPANIES IN INDIA Sl. No

10.

Insurers

Foreign Partners

Regn. No.
131

Date of Registration
03.08.2007

Year of Operation
2007-08

Apollo DKV Insurance Company Ltd. Future Generali India Assurance Company Ltd.

DKV, Germany

11.

Participatie Maatschapij Graafsschap Holland NV, Netherlands (Generali)

132

04.09.2007

2007-08

12.

Universal Sompo General Sompo, Japan Insurance Company Ltd. Shriram General Insurance Company Ltd. Bharti AXA General Insurance Company Ltd. Raheja QBE General Insurance Company Ltd. New India Assurance Co. Ltd. National Insurance Co. Ltd. The Oriental Insurance Co. Ltd. United India Insurance Co. Ltd. Export Credit Guarantee Corporation Ltd. Agriculture Insurance Co. of India Ltd. Sanlam, South Africa

134

16.11.2007

2007-08

13.

137

08.05.2008

2008-09

14.

AXA France

Holdings,

139

27.06.2008

2008-09

15.

QBE, Australia

141

11.12.2008

2008-09

16.

---

17.

---

18.

---

19.

---

20.

---

21.

---

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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 Insurance Regulatory Commission. By contrast, about half of the $120 billion of estimated costs from Hurricane Katrina, the most expensive storm in U.S. history, was insured by companies or the federal government, according to data compiled by analysts at Property Claim Services. This shows the vulnerability of the under penetrated countries like India and China, as well as the need 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 insurance penetration in comparison to World and China
700.0

600.0

500.0

India 400.0 India Non-Life PR China 300.0 PR China Non-Life World World Non-Life 200.0

100.0

0.0 2001 2002 2003 2004 2005 2006 2007 2008

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

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6 India 5 India Non-Life PR China 4 PR China Non-Life World 3 World Non-Life

0 2001 2002 2003 2004 2005 2006 2007 2008

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

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 shortterm profitability. Hence there is a need for stream-lining the process of insurance business and predicting the profit maximization by statistical analysis.

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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 the automobile 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 third party 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 or breakage When vehicle is used outside the geographical area War or nuclear perils and drunken driving

Some 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, the primary function of health insurance is the reduction of such uncertainty that is, uncertainty regarding 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 -a days, 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
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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 is achieved by concentrating on two aspects: Find correlation and dependence between claims incurred and premium earned by an insurance company. Finding correlation and dependence between management expense ratio and market 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 in premium 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 and net 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 check the quality of our sample. 3. Simple regression analysis is done, using SPSS and Microsoft Excel, taking into consideration 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 the implications 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 Independent variable a (intercept) b( slope) Coefficient of determination P value Net premium earned Claims incurred 25091.59 0.86 0.9403 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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250000

Premium Earned (Rs. Lakhs)

200000

150000 Regression Line 2008-09 50000

100000

0 0 50000 100000 150000 200000 250000

Claims Incurred (Rs. Lakhs)

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 net premium due to claims incurred is explained by the model. Also, we can say that explanatory 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 reject our null hypothesis with 95% confidence. Thus claims incurred have a statistical significance on net premium. Fire Insurance Analysis: Result of simple regression:
Dependent variable Independent variable a (intercept) b( slope) Coefficient of determination P value Net premium earned Claims incurred -1850.42 1.428 0.9335 5.40E-06

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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:

Fire Insurance Scatter Plot & Regression Line

120000

Premium Earned (Rs. Lakh)

100000 80000 60000 40000 20000 0 -20000 0 20000 40000 60000 80000 Claims Incurred (Rs. Lakh) Regression Line 2008-09

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 0.9335. Hence, 93.35 percent of variation in net premium 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. The p value obtained is 5.4*10^-6 which is very less than 0.05 hence we can reject our null hypothesis with 95% confidence. Thus claims incurred have a statistical significance on net premium.

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Health Insurance Analysis Result of simple regression: Dependent variable Independent variable a (intercept) b( slope) Coefficient of determination P value Net premium earned Claims incurred 4085 0.85 0.9607 1.243E-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:
140000 120000 100000 80000 Regression Line 60000 40000 20000 0 0 20000 40000 60000 80000 100000 120000 140000 Scatter Diagram

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 0.9607. Hence, 96.07 percent of variation in net premium due to claims incurred is explained by the model. Also, we can say that explanatory power of the model is 96.07%. The intercept value obtained is 4085, which is the autonomous value.

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 The slope parameter obtained is 0.85. Thus, 1 unit of change in claims incurred results in 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 reject our null hypothesis with 95% confidence. Thus claims incurred have a statistical significance on net premium. Marine Insurance Analysis Result of simple regression: Dependent variable Independent variable a (intercept) b( slope) Coefficient of determination P value Net premium claims incurred
377.237

0.928 0.9342
5.24128E-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:

30000 25000 20000 15000 10000 5000 0 0 5000 10000 15000 20000 25000 30000 Regression Line 2008-09

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.

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Thus, using the above tabular result and graphical representation, researchers can analyse and list down the following points: The coefficient of determination is 0.9342. Hence, 93.42 percent of variation in net premium due to claims incurred is explained by the model. Also, we can say that explanatory power of the model is 93.42%. 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. The p value obtained is 5.24*10^-6 which is very less than 0.05 hence we can reject our null hypothesis with 95% confidence. Thus claims incurred have a statistical significance on net premium.

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 2002-03 2003-04 2004-05 2005-06 2006-07 Market Share 1.43 1.95 2.69 4.18 4.41 Expense Ratio 22.48 19.7 19.36 17 17.76

Graphical representation for the above mentioned data is as follows:

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25

20

15 Market Share (in %) 10 Admin Expense ratio

0 2002-03 2003-04 2004-05 2005-06 2006-07

Simple regression results: MarketShare(%) = 14.029 - .576*Expratio + (2.728) (.141) (5.142) (-4.087) (.014) (.026)

Thus, using the above tabular result and graphical representation, researchers can analyse and list down the following points: Co-efficient of Determination is 0.847726 which means 84.7% of the variation in the 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 corelation.

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

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

Market Share 32.37 29.75 27.65 26.6 22.9

Expense Ratio 18.6 27.23 23.3 23 19.41

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Graphical representation for the above mentioned data is as follows:

35 30 25 20 Market Share(In %) 15 10 5 0 2002-03 2003-04 2004-05 2005-06 2006-07 Admin Ratio

Result of Regression: Dependent variable Independent variable a (intercept) b( slope) Coefficient of determination P value Market Share(%) Admin Expenses(Ratio)
25.115

0.122 0.013
.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 .

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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 in turn 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 that the 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 percentage increases. o Private players start with large investments in technology, which helps them to build 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 and have 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 management expenses 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.

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