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India and UK Financial Insurance Industry Analysis

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Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.

Chapter 1: Introduction

The financial performance of insurance industry can be assessed by knowing either its strategies or by knowing its profitability. Knowledge of strategy will helps in examining internal and external position of a company. Comparative study of insurance sector is analysis of financial performance of any insurance company. This is directly linked with the earning potential and effectiveness of management strategies of a company.

Choosing a wise insurance is very crucial because of, balance to the risks and returns. The reason for choosing Indian and UK insurance industry for the research is because of improved economical status of the country and increase in the value of insurance in the country during last several years. The UK Economy is the largest in Europe and is also ranked as the fifth worldwide as per the market exchange rates, in terms of GDP (Broadberry et al, 1992) were Indian economy is now improving and it is now booming growth in insurance companies were greatest effect of Indian economy during the last several years.

This would need a grate deal of financial planning knowledge, as well as the knowledge about the current financial market thus it can compare the other to the insurance companies & the analysis of different insurance companies from India and UK. Also insurance companies has to manage their investment in such a way that the principal amount should not erode, & investor should get the assured returns those company has promised. This would involve a grate deal of knowledge about the portfolio management of the risk and return and comparative study of insurance industries.

Comparative study of insurance is also a topic of hunger for many economists. Till date many researches has been carried out for comparative study of financial analysis in banking sector and very few research has been taken on insurance industry. The main purpose of the research is to find comparative study of insurance companies in India and UK. What characteristic will determine of insurance industry is the main thrust behind the research. Further research is carried out to know in depth relationship of various characteristics that will make up the of Indian and UK insurance industry. The main outline objectives of the research are as under;

A Research Design is the framework or plan for a study which is used as a guide in collecting and analyzing the data collected. It is the blue print that is followed in completing the study. The basic objective of research cannot be attained without a proper research design. It specifies the methods and procedures for acquiring the information needed to conduct the research effectively. It is the overall operational pattern of the project that stipulates what information needs to be collected, from which sources and by what methods.

Objectives of the research

This research has been carried out to comparative study of insurance companies and analyzes financial performance between Indian and UK’s insurance companies. The main aims of the research are:

  • To analyze financial performance of insurance companies in India and UK
  • To evaluate factors that determine financial performance of insurance companies
  • To carry out strategic financial analysis of insurance in India and UK

The structure of the research paper is as follows: Chapter 2 reviews the literature on comparative study of insurance sector; Chapter 3 describes the subject matter of the research: the Indian and UK economy and insurance industries ; Chapter 4 outlines the methodology and data used in this study; Chapter 5 presents the analysis and Findings and Chapter 6 discusses the results obtained in the context of the underlying theory the findings of other empirical research; Chapter 7 concludes the research outlining the limitations of the current study and makes recommendations for further work.

Chapter 2: Literature Review

2.1 Theory

Insurance is, a contract in which one party agrees to compensate another party fir any losses or damages caused by risk identified in the contract in exchange for the payment of a lump sum or periodic amounts of money to the first party. In simple meaning facilitates recompense during crisis situations, insurance means promise of compensation for any potential future losses.

Insurance is a form of risk management mainly used to hedge against the risk of a contingent loss. It is designed to protect the financial security of an individual, company or other entity in the case of unexpected loss. Insurance is defined as the realistic transfer of the risk of a loss, from one entity to another, in exchange for a premium. It is a contract between two parties - the insurer (the insurance company) and the insured (the person or unit seeking the cover) in which the insurer agrees to pay the insured for financial losses arising out of any unforeseen events in return for a regular payment of "premium". These unforeseen events are defined as "risk" and that is why insurance is called a risk cover.

Insurance may be described as a social device to decrease or eliminate risk of loss to life and property. Under the plan of insurance, a large number of people correlate themselves by sharing risks attached to individuals. The risks which can be insured against include fire, the perils of sea, death and accidents and burglary. Any risk contingent upon these, may be insured against at a premium commensurate with the risk involved. Thus collective bearing of risk is insurance.

Analyzing insurance companies is very different from analyzing corporate and thus presents unique challenges and industry specific issues. The ability of any insurance company to meet its policy obligations is the foundation of the industry. Absent the trust of policyholders in the financial integrity of any insurer and the industry as a whole, this risk transfer mechanism/industry would collapse. This truth is even more acute in the E&S industry where no guaranty funds exist, except New Jersey.

However, rapid growth of Insurance sector during the situation liberalization period is seen as the most significant event in financial sector hist. in view of the fact that then, lot of changes take place in the sector as it was exposed to new challenges of competitive competition. For the first time, the private and foreign players were given entry and thus the sector saw a wonderful rate of growth in its business. A well-developed insurance sector is needed for economic development for a rising economy like India as it provides long-term funds for physical and social infrastructure progress at the same time make stronger the risk taking ability.

The investment supplies for India in the upcoming years are well-known. Thus, Insurance sector, to some extent, can enable investments in infrastructure development to help maintain economic growth of the country. In this backdrop, we raise two questions: what is the contribution of insurance sector growth towards economic development and financial intermediation in India and United Kingdom. Our study does not stop here as we take a step further to examine the financial and economic growth effects of Insurance sector reforms and the rate of growth of reforms.

The insurance companies offer a comprehensive range of insurance plans. The most common types include: term life policies, endowment policies, joint life policies, whole life policies, loan cover term assurance policies, unit-linked insurance plans, group insurance policies, pension plans, and annuities. General insurance plans are also available to cover motor insurance, home insurance, travel insurance and health insurance.

Due to the growing demand for insurance, more and more insurance companies are now emerging insurance sector all over the world. With the opening up of the economy, several international leaders in the insurance sector are trying to venture into the insurance industry.

The comparative study of insurance sector, Analysis of ratios are calculated from company's balance sheet and income statement and are used to evaluate the performance of the company in a particular reporting period.

Analysis of ratios can be compared to the previous years in order to assess trends or between the comparable companies across the industry in classify to get the relative performance estimation. It is very important that every ratio should have a reference point - the industry (sector) average or median. The ratio analysis works better if comparing ratios not with the complete set of companies within a particular industry, but with a preferred subset of companies that share certain features, produce the similar product, and have identical macroeconomic and governmental factors affecting them.

For the study of companies, operating in several industries it can be helpful to run a cross-sectional analysis to identify a group of firms, involved in the same mix of industries. In some cases a comparison to the economy averages can be meaningful, especially in successful or constricting economies. Therefore, stable margins may be a good indicator during the recession, while the industry and economy averages are declined.

It is also important to that usually conclusions can not be made from reviewing one set of ratios. That creates a necessity of a complex analysis of one set of ratios against another. The classification of the objective ratio for the comparison may require a substantial amount of work and a good judgment in order to evaluate a range of achievable and acceptable values.

Although the understandable simplicity, such ratios have certain limitations that often make them most useful at identify questions to be answered rather than giving answers to them. There are multiple factors affecting and limiting comparative study of insurance sector, in particular the actual comparability of the firms and different accounting policies used by them are among the most important ones.

The issue of comparability may become one the critical aspects to pay attention to while performing the analysis. Various macroeconomic or legislative factors may apply to the companies in the same industry but in different countries that sometimes makes a direct comparison inappropriate. Comparisons with other companies may become even more difficult because of different accounting policies, especially outside the US. Thus different accounting methods may result in significantly different ratio values that require normalization by the analyst.

2.2 Classification of insurance sector

There are mainly two types of insurance life and non-life (general)

Life insurance is concerned with making provision for specific event happening to the individual, such as death whereas General Insurance(non-life) is more commonly concerned with provision for a specific event affects properly, such as fire, flood , theft, burglary etc.

The major difference between Life Insurance and General Insurance is the Principal of indemnity. Indemnity means “making good the loss” i.e. for tangible goods, one can make good for the loss that has been caused due to reasons like – theft, fire or natural disaster. Here basically we can value the exact monetary value of a commodity, but in case of life insurance the principal of indemnity does not work, since we can not value in any way the value of human life.

2.3 There are five main sectors:

Life Insurance

Home Insurance

Auto Insurance

Health Insurance

Disability Insurance

Section 2 (11) of Insurance Act 1938 defines Life Insurance Business as follows:

“Life insurance Business is the business of effecting contracts of insurance upon human life, including any contract whereby the payment of money is assured on death or the happening of any contingency dependent on human life and any contract which is subject to the payment of premium for a term dependent on human life and shall be deemed to include.” (Mukherjee and Hanif, 2007)

In simple term we define life insurance as a contract in which the insurer in consideration of certain premium, either in a lump sum or by other periodical payments, agrees to pay to the assured sum of money , on the happening of specific event contingent on the human life.

2.4 Benefits of insurance industries

Life insurance has long been a staple in basic estate planning. Life insurance can provide an income tax-free death benefit* far in excess of the premiums paid. However, much of the life insurance proceeds can be wasted if the ownership and beneficiary designations are not properly structured.

Superior to Any Other Saving Plan

Unlike any other savings plan, a life insurance policy affords full protection against risk of death. In the event of death of a policy holder the insurance company makes available the full sum assured to the policyholder’s near and dear ones.

Encourages and Forces Thrift

A saving deposit can easily be withdrawn. The payment of life insurance premiums, however, is considered sacrosanct and is viewed with the same seriousness as the payment of interest on a mortgage. Thus, a life insurance policy in effect brings about compulsory savings.

Easy Settlement and Protection against Creditors

A life insurance policy is the only financial instrument the proceeds of which can be protected against the claims of a creditor of the assured by effecting a valid assignment of the policy.

Administering the Legacy for Beneficiaries

Speculative or unwise expenses can quickly cause the proceeds to be squandered. Several policies have foreseen this possibility and provide for payments over a period of years or in a combination of installments and lump sum amounts.

Ready Marketability and Suitability for Quick Borrowing

A life insurance policy can, after a certain time period (generally three years) ,be surrendered for a cash value. The policy is also acceptable as a security for a commercial loan, for example, a student loan. It is particularly advisable for housing loans when an acceptable LIC policy may also cause the lending institution to give loan at lower interest rates.

Disability Benefits

Death is not only hazard that is insured; many policies also include disability benefits. Typically, these provide for waiver of future premiums and payments of monthly installments spread over certain time period.

Accidental Death Benefits

Many policies can also provide for an extra sum to be paid (typically equal to the sum assured) if death occurs as a result of accident.

Tax Relief

Under the Indian Income Tax Act, the following tax relief is available

20% of the premium paid can be deducted from your total income tax liability.

100% of the premium paid is deductible from your total taxable income.

When these benefits are factored in, it is found that most policies offer returns that are comparable or even better than other saving modes such as PPF, NSC etc. Moreover, the cost of insurance is a very negligible.

The issue of comparability may become one the critical aspects to pay attention to while performing the analysis. Various macroeconomic or legislative factors may apply to the companies in the same industry but in different countries that sometimes makes a direct comparison inappropriate. Comparisons with other companies may become even more difficult because of different accounting policies, especially outside the US. Thus different accounting methods may result in significantly different ratio values that require normalization by the analyst.

Seasonality may also affect the ratios if the business is a subject to seasonal fluctuations in demand, thus year-end values may not be enough representatives and should also be normalized.

Most of the ratios are preferred to be within the industry averages or economy norms. For example, all turnover ratios belong to this category. However, for some ratios the extreme deviations from the industry averages may mean that the company is highly attractive for the investors. This is usually true for all ratios dealing with income or cash flows.

There are different insurance companies that offer wide range of insurance options and an insurance purchaser can select as per own convenience and preference.
Several insurances provide comprehensive coverage with affordable premiums. Premiums are periodical payment and different insurers offer diverse premium options.

Insurance companies may be classified into two groups:

Life insurance companies (which sell life insurance, annuities and pensions products) and

Non-life, General, or Property/Casualty insurance companies (which sell other types of insurance).

Life insurance is concerned with making provision for specific event happening to the individual, such as death whereas General Insurance(non-life) is more commonly concerned with provision for a specific event affects properly, such as fire, flood , theft, burglary etc.

The major difference between Life Insurance and General Insurance is the Principal of indemnity. Indemnity means “making good the loss” i.e. for tangible goods, one can make good for the loss that has been caused due to reasons like – theft , fire or natural disaster. Here basically we can value the exact monetary value of a commodity, but in case of life insurance the principal of indemnity does not work, since we can not value in any way the value of human life.

2.5 Introduction of insurance sector

India

In India, the concept of insurance was never a serious thought as compared to other countries. People still are under insured, life insurance premium to gross Domestic Product (GDP) ratio is a mere 1.4% as compared to a healthier rate of 8% amongst other developing with poor state of services provided.

Presently in India, the insurance sector is nationalized, services are rendered by Life Insurance Corporation of India (LIC) and General Insurance Company (GIC) along with its 4 subsidiaries .While LIC provides life insurance, GIC is concerned with non life insurance. – Motor, marine, fire, health and personal accident insurance. LIC employs people in various departments – publicity, public relation department , development department, personal department , accounts department, legal department ,investment department , inspection department, mortgages department vigilance department, foreign department, corporate planning department, building department etc.

Of late, parliament’s nod for the insurance Regulatory and Development Authority (IRDA) bill has changed the whole scenario. With the passage of the bill, entry of Private Indian as well as foreign companies, a long with existing players, in the insurance sector will add variety and quality to the present insurance services. The other positive impact would be on creation of new employment opportunities. Till now employment in the insurance sector was considered akin to any government job, but now with private participation, it will assume significance importance and probably become an exciting career option.

UK’s

The UK Insurance sector remains a crucial contributor to the UK economy after the public, banking and manufacturing sectors. The industry accounts for approximately 10% of total UK IT expenditure, and positive growth is expected to continue for the next few years as insurance firms begin to realize the benefits to be gained from IT investment.

Although the United Kingdom (UK) insurance market is now one of the five largest in the world, relatively little is known about the practices of the major firms and policy-makers which influence its operations. In particular, whilst the determinants of rating agencies’ assessments of United States (US) insurers is well documented, published studies have yet to provide comprehensive evidence about insurance company ratings in the UK. (Hardwick, P and et al, 2000)

2.6 Current scenario of insurance industry

Breaking of strict monopoly of LIC was not an easy task where to an audience who spelled insurance as LIC. LIC is working for last 50n years and caved its name for itself in the Indian psyche. Insurance being long term contract, an established name means feeling of security and more importantly LIC policies come with the safety tag-the most touted government guarantee.

To enter private insurers with an altogether new agency force, all ready to hawk freshly designed insurance policies. and the market scene – a government owned established insurance entity-the Life insurance Corporation with a field force of over 6,00,000agents and more than 80 products to choose from.

Purchase of Insurance is a decision that determine by a number of demographic as well as personal behavior factors. Main responsible factors include Age, Income, Education, Risk, etc. Some of the important determinants as review by different scientists in their research are as under

2.7 Risk and return in industry

Risk seems to be a fact of life experienced by an individual as well as by a whole organization. This risk may be economic, physical or financial. There is an increase in unexpected losses caused by natural disasters as well as accidental damage. Wealth is subject to possible loss, and therefore everyone from individual to the whole financial firm desire to invest in loss prevention activities that reduce the probability of loss (Hoffman, 2007). A sense of security may be the next basic goal after food, clothing, and shelter.

There are various forms of risk is exist in the market. All the risks are differed from each other. Some risks creates a quick big impact on a business while, the impact of some risks can be seen at a long run. The risk in business is always associated with losses. Prevention and management of risk is only possible after having sufficient information regarding its intensity. Preventing and managing risk is one of the burning issues for the corporate world. The management of any company is always looking for the thing that will reduce the risk on their investment and definitely gives some output on the account of their investment. The ultimate thing that will satisfy this need is the return. Return is the proportionate sum of capital given to the investors for their investment. In other words, return is some kind of security against the investment made for any kind a business.

Figure 2.1 Risks management in business

Asset

Market

Credit

Operating

Business

Event

Liquidity

Catastrophe

Non-Catastrophe

Risk

Financial risk is mainly divided in to 2 main categories i.e. Systematic or Market risks and Unsystematic risk. The risk associated with an investment can be broadly divided into two categories based on nature and occurrence of risk. Some risks are associated with the firm, and that risks are called as firm-specific, whereas the rest of the risk is associated with market condition and generally affects all investments in whole market. The firm specific risk can be further sub-divided in to various categories. Some firm specific risks are affect s project value that is called Project specific risk and in some cases projects value is affected by the nature of competitions and that type of risks are known as Competitive risks. Some risks are affecting the value of a whole industry and so known as Industry associated risks. In some cases, all the companies in a market will affect by macro economic factors and so that type of risk is known as Market specific risk (Friend and Bicksler, 1977).

Default risk is the risk fallen on the part of financial institution or a creditors for your investments i.e. weather they are able to make a monthly return on your asset or not. To achieve short term financial goals most of the investors preferred cash investments. The only limitation with use of cash investments is that, they are unable to produce higher returns over long term as compared to other financial options. The only reason for this is cash investments are unable to adjust inflation rates. In other words cash investments are not preferable source of investment for long term project. So, what are the other options that will satisfies needs for investment of long term project.

2.8 Empirical research

Economic decisions are made on both the negative as well as positive issues. Positive issue studies on insurance gradually integrated these issues via assimilating developments in the field of risk and uncertainty following works by Arrow (1963), Lewis (1989), (1953) and others. The economics on insurance demand became more attentive on evaluating the amount of risk to be shared between the insured and the insurer rather than evaluation of life or property values.

Economic value judgments are made on both the normative as well as positive issues. Later studies on insurance gradually incorporated these issues via assimilating developments in the field of risk and uncertainty following works by von Neumann and Morgenstern (1947), Arrow (1953), Debreu (1953) and others. The economics on insurance demand became more purposeful when determining the amount of risk to be shared between the insured and the insurer rather than evaluation of property values.

Headen and Lee (1974) studied the effects of short run financial market behaviour and consumer expectations on purchase of ordinary life insurance and developed structural determinants of life insurance demand.

Morris and Barbara A (2003) study about Risk & Insurance and mean study related with a Wedge between Insurers and Reinsurers, authored by credit analysts and legitimate disagreements between insurers and reinsurers about the values attributed. Criteria and claims values, insurers and reinsurers are equally concerned with the Risk.

Cole et al, (2008) theoretical in observed research related to the comparative analysis between property-casualty insurance industry, studies commonly focus on either insurers or reinsurers.

Richard et al (2008) give article of features a presentation and discussant comments on hurricane and wind insurance organized by Richard A., for the American Risk and Insurance Association (ARIA) 2007 Annual Meeting in Quebec City, Quebec, Canada.

Venard et al. (2008) determine in the article of analyzes Hungary's insurance sector as an important part of the country's economic transition from a centrally planned economy to a market economy. It details the historic economic development of the Hungarian insurance market from a state monopoly to a competitive.

Yu, Tong et al 2008) study about Intangible assets facilitates insurers' capacity to retain existing business and attract new clients. In his study it can be shows that analyze how the incentives to protect intangible assets affect asset risk-taking behaviour of property and ability insurers.

Browne et al. (1993) concluded that income and social security expenditures are significant determinants of insurance demand. They further concluded that inflation has a negative correlation with demand of purchasing for insurance.

Beck and Webb (2003) identified the two main services provided by life insurance: income replacement for premature death and long-term savings instruments. They further found that demographic variables, higher levels of education and greater urbanization as independent factors in explaining insurance demand.

Income has been found to be having a positive association with health insurance purchase decision consistently in different studies conducted in different countries Propper (1989) in UK: Cameron, Trivedi (1988) in Australia and Hurd and McGarry (1997) in USA.

Health insurance choice essentially entailed a simple decision - whether or not to purchase private health insurance (Barrett and Conlon 2003). Binary discrete choice models using either logit or probit has been used to analyse determinants of this type of purchase decision. Cameron and Trivedi and Cameron (1991) specified a conditional expected utility function that is associated with alternative health care regimes. The consumer chooses the regime that maximizes expected utility.

Feldstein (1973) has argued that as the price of health care increases, the demand for insurance should increase as well because this causes an increase in the risk of net worth depletion and thus an increase in the demand for insurance. Healthcare expenditure largely depends on healthcare costs. Recent research has documented that most of the secular change in health insurance coverage can be attributed to higher health care costs (Cutler et al. 2002).

Zietz (2003) and Hussels et al (2005) has studied about purchasing behaviour of a customer to purchase life insurance over a period of 50 years. The research further concluded that there is a positive association observed between increase in savings behaviour, financial services industry and demand for life insurance.

Beenstock et al. (1988) noted that marginal tendency to insure i.e. increase in insurance spending when income rises by 1$, differs from country to country and premium rates are varies directly with real rates of interest.

Browne and Kim (1993) found from his study that income and social security expenditures are significant determinants of insurance demand; however, inflation has a negative correlation with demand of insurance.

Beck et al. (2003) found out the two main services provided by life insurance: income replacement for premature death and long-term savings instruments. They considered three demographic variables i.e. young dependency ratio, old dependency ratio and life expectancy, higher levels of education and greater urbanization as independent factors in explaining insurance demand.

Income is positively co-related with purchase of health insurance product, concluded from various studies conducted in different countries by Propper (1989) in UK: Cameron and Trivedi (1988) in Australia and Hurd and McGarry (1997) in USA.

Barrett and Conlon (2003) concluded from their study that choice of health insurance essentially entailed a simple decision - whether or not to purchase private health insurance. Binary discrete choice models using either logit or probit has been used to analyze determinants of this type of purchase decision.

Cameron and Trivedi (1991) specified a conditional expected utility function that is associated with alternative health care regimes. The consumer chooses the regime that maximizes expected utility.

Feldstein (1973) noted that as the price of health care increases, the demand for insurance should also increase. This is because an increase in the risk of net worth depletion. Healthcare expenditure largely depends on healthcare costs.

Nyman (1999) noted that higher healthcare costs may led to higher demand for insurance in the face of rising costs. However, people belonging to different income groups are likely to respond differently to these changes. Kronick and Gilmer (1999) argue persons with low incomes and few assets buy insurance primarily to protect their health.

Van De Ven and Van Praag (1981) noted that, education and income are generally positively correlated. Higher income generally decreases the opportunity cost associated with the purchase of private health insurance. Overall, increases in both income and education would be expected to lead to an increase in the probability of buying the insurance.

Some studies conducted in context with the financial performance of General Insurance Companies of India. The Researcher has studied those research works which are as follows:

Performance of various plans marketed by Life Insurance Corporation of India – A case study of Rajkot Division, A dissertation by Mrs.Sonal Naina evaluates the operating efficiency of Rajkot Division with different plans in Saurashtra University. She tries to find out which type of policy is sold more than others and their reasons.

Dr.P.Pariasamy (2005) has written a book, “Principles and Practices of Insurance”, published by Himalayas Publishing House further that the book provides detail coverage of risk management general insurance, Lice Insurance, Fire insurance and Marine insurance in a comprehensive way.

Mr.Sandip Batra (2004), IRDA Journal, an article written, titled “Need for Change”. In this article, he has study about insurance and main focused on proposed amendments and progress of national insurance and united insurance in India. He has covered the effects of the change in the Law on Insurance industry.

Chartered Financial analyst (2003) has study for special survey of insurance sector. An issue covers many articles such as “A High Growth Market”, “New distribution Channels”, “Customer Focus”, “Legal Issues”.

Dr. A.N.Agrawal has considered, the Insurance in India and A study of Insurance aspect of social security in India. This has published by Allahabad Law Journal Press. He covers history of Insurance sector of India and Legal aspect of Insurance.

CHAPTER 3: SUBJECT REVIEW

Indian and UK insurance industry and Economy

This research is conceded out to comparative study of insurance companies having business in India and UK and also having in some other countries. Before entering into analysis part it is wise to know about economy and insurance status of India and UK. The purpose of this chapter is to give adequate background information on economy and insurance status of India and UK. This chapter will give an idea about feasibility of this research. Further details are given below:

3.1 The Indian economy and Insurance Market

Indian economy is the 12th biggest in the world, with a GDP of $1.25 trillion and 3rd biggest in terms of purchasing power equivalence With factors like a stable 8-9 per cent annual growth, growing foreign exchange reserves, a active capital market and a rapidly expanding FDI inflows, it is on the pivot of an ever rising growth curve.

Insurance is one most important sector which has been on a constant growth curve since the revival of Indian economy. Taking into report the giant population and growing per capita income besides several other dynamic factors, a huge opportunity is in store for the insurance companies in India. According to the newest research result, nearly 80% of Indian population is without life insurance cover while health insurance and non-life insurance continue to be under intercontinental standards. And this part of the population is also subjected to weak social security and pension systems with hardly any old age income security.

As per result, insurance in India is principally used as a means to recover personal finances and for income tax planning; Indians have a tendency to invest in properties and gold followed by bank deposits. They selectively spend in shares also but the percentage is very small--4-5%. This in itself is an indicator that growth potential for the insurance sector is massive. It’s a business rising at the rate of 15-20% per annum and currently is of the order of $47.9 billion.

Graph 3.1 Indian insurance markets 2000 to 2011

(http://www.indiaprwire.com/)

According to this table India is a huge market for life insurance that is directly comparative to the growth in premiums and an increase in life density. With the entry of private sector players backed by foreign expertise, Indian insurance market has become more vibrant. Competition in this market is increasing with company’s constant shot to lure the customers with new product offerings. However, the market share of private insurance companies relics very low -- in the 10-15% range. Even to this day, Life Insurance Corporation (LIC) of India dominate Indian insurance sector. The important hand of government still dominates the market, with price controls, limits on ownership, and other restraints.

In India, insurance have been an entrenched history. It finds mention in the writings of Manu ( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). This is almost certainly a predecessor to modern day insurance. Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade loans and carriers’ contracts. Insurance in India has evolved over time greatly drawing from other countries, England in particular.

Further that since, in 1818 saw in Calcutta the advent of life insurance business in India with the organization of the Oriental Life Insurance Company. This Company failed in 1834.However in 1829; in the Madras Presidency the Madras Equitable has begun transacting life insurance business. In the nineteenth century saw the enactment of the British Insurance Act and in the last three decades , the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) be ongoing in the Bombay Residency. However this era was dominated by overseas insurance offices which did greatest business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard rivalry from the foreign companies.

The Government of India on track published returns of Insurance companies in India in 1914. In 1912 the Indian Life Assurance Companies Act, was the first constitutional measure to regulate life business, the Indian Insurance Companies Act in 1928, was enacted to enable the Government to collect statistical information about both life and non-life business transact in India by Indian and foreign insurers together with provident insurance societies. With a view to protecting the interest of the Insurance public in 1938, the in advance legislation was consolidated and amended by the Insurance Act, with complete provisions for effective control over the activities of insurers.

However, after the growth of insurance market there were a large number of insurance companies and the high level of rivalry found. There were also allegation of inequitable trade practices. After that Government of India, decided to nationalize insurance business.

In 19th January 1956, a regulation was issued in nationalizing the Life Insurance sector and Life Insurance Corporation came into existence in the same year. Further that the LIC wrapped up 154 Indian, 16 non-Indian insurers as also 75 wise societies 245 Indian and foreign insurers in all. When the Insurance sector was reopened to the private sector the LIC had control cultivate the late 90s.

It all started with Property Insurance

Everyone knows what life insurance or property insurance is and usually knows something about how it works but not everyone knows the history and reasons for and behind insurance in general. In the most basic sense, insurance is the compensating of a person or business for a loss. There are many types of insurance to cover any situation including, auto insurance, health insurance, dental insurance, home insurance, personal insurance and even pet insurance.

A type of Property Insurance first became popular about 3000 BC in China. Chinese merchants, as well as their investors, wanted to ensure that they would see a profit from their goods that they shipped overseas. In the event that a ship was lost at sea or pirated, an insuring partner would reimburse the owners of the ship and goods. To pay for the loss the merchant would be sold into slavery to the insurer until the debt was repaid. This was a mutually beneficial arrangement since a merchant could not afford to pay for the lost goods or even to buy a ship unless someone invested.

In Babylon merchants and investors devised a system of contracts in which the supplier of money for a trade venture agreed to cancel the loan if the trader was robbed of his goods. The trader who borrowed the money paid an extra amount for this protection in addition to the usual interest. As for the lender, collecting these premiums from many traders made it possible for him to absorb the losses of the few. This arrangement proved to be more appealing and sensible than the earlier one. Later this series of contracts was extended to include provisions for a family's home and even covered murder, the start of life insurance.

In fact, this law still exists today as part of our own laws for protection against losses at sea and the very word "insurance" is derived from the Latin word for "security."

List of Indian insurance sector:

Life Insurers

List of public sector industries:

Life Insurance Corporation of India

List of private Sector industries:

IFFCO-Tokio General Insurance Co. Ltd.

Reliance General Insurance Co. Limited

Royal Sundaram Alliance Insurance Co. Ltd.

TATA AIG General Insurance Co. Limited

Cholamandalam General Insurance Co. Ltd.

Export Credit Guarantee Corporation

HDFC Chubb General Insurance Co. Ltd.

Max New York Life Insurance Co. Limited

MetLife Insurance Company Limited

Om Kotak Mahindra Life Insurance Co. Ltd.

SBI Life Insurance Company Limited

TATA AIG Life Insurance Company Limited

AMP Sanmar Assurance Company Limited

Dauber CGU Life Insurance Co. Pvt. Limited

National Insurance Company Limited

New India Assurance Company Limited

Oriental Insurance Company Limited

United India Insurance Company Limited

Bajaj Allianz General Insurance Co. Limited

ICICI Lombard General Insurance Co. Ltd.

Allianz Bajaj Life Insurance Company Limited

Birla Sun-Life Insurance Company Limited

HDFC Standard Life Insurance Co. Limited

ICICI Prudential Life Insurance Co. Limited

ING Vysya Life Insurance Company Limited

List of reinsurer industries

General Insurance Corporation of India

Todays evaluate the difference in market share of Private Sector Life Insurance Companies over a Year's time.

Graph 3.2 the market share price of private sector

(http://india.dalalstreet.biz/earningsnews/)

Top 5 Life Insurance Companies in India at the end of April-2008 is below:
Insurance company

Percentage

ICICI Prudential Life

22.1%

Bajaj Allianz

13.8%

SBI Life

9.8%

Reliance Life

8%

Max New York

8%

(http://india.dalalstreet.biz/)
Top five Gaines in Life Insurance Business in a Year
Reliance Life +3.9% increase in total private life insurance market share
Birla Sun life +3.3% increase in total private life insurance market share
Met Life +2.8% increase in total private life insurance market share
Aviva +2% increase in total private life insurance market share
SBI Life +1.7% increase in total private life insurance market share

Life Insurance Corporation of India has mobilises Rs. 12,361 crore of new business premium in March, 2007 - the maximum recorded by the business in any single month. This has enabled the corporation post new business premium of Rs. 55,934 crores in 2006-07 a 118% development over the previous year. LIC’s has been the increase driver for the entire life insurance industry which grows 110.7% to Rs. 75,406 crore in present financial year from Rs. 35,897 during the previous year.

The rise in premium gives LIC a market share of over 74% of the total new business premium mobilise in India, which is considerably superior than the 72% as on March 31, 2006. The rise in premium is mainly on account of unit-linked policies which account for nearly 70% of the total individual premium.

The corporation face a challenge in increasing its company during the current financial set the huge base. Also a large fraction of the policy are in the nature of single premium policies, which give an amount of Rs. 24,927 crore, a nearly 44% of the premium rise by the corporation during the F.Y. 2006-07.

Table 3.1 premiums of life insurance companies in India in 2005 to 2007

(Source IRDA, Macquarie research, March 2008)

For the moment, the private life insurance industry has recorded a development of 89% with total new business premium of Rs. 19,471 corer as against Rs. 10,252 corer in the equivalent period last year. ICICI Prudential continues to be the biggest private life insurance player with a market share of 7% followed by Bajaj Allianz Life Insurance which has a market share of 5.7%.

The companies that have recorded greatest increase in the fiscal '06-07 include Reliance Life Insurance, which grow 381%, followed by SBI Life Insurance which grew 209%. The high development has enabled SBI Life to move into the number three position after Bajaj Allianz Life Insurance.

Graph 3.3 premium/policy for the year 2006 to 2008

(Source IRDA, Macquarie research, March 2008)

The average premium per policy has improved by 15 per cent for the private sector. “This is contrary to our expectations it have been expectant ticket sizes to shrink as incremental growth is being driven by smaller towns and health products. We like this trend (see Figure) however, because we believe superior ticket sizes are margin-accretive as they reduce processing costs,"(IRDA research observed is 2008)

3.2) The UK economy and Insurance Market

The United Kingdom is one of the world's most important countries in terms of financial and trading sector. The UK Economy is the biggest in Europe and is also ranked as the fifth worldwide as per the market exchange rates, in terms of GDP (Harbury and Lipsey, 1993). The UK Economy is characterizing by a free market connecting a low taxation and regulation on the part of the organization. Along with New York City and Tokyo, London is one of the most significant centres of trade and business in the world. Total of 70% from an overall country’s GDP is comes from the financial services and business related industries.

The economy of United Kingdom is the best and stable among the top countries in Europe and with moderately good economic performance. There is seen to be more declines in share from developed industries as compared to other financial service sectors for the duration of last several years. The service sector accounts for 65% of GDP, while developed occupies only 20% of nationwide output. In last several years Insurance business gives wonderful results as well as very high returns and helps in boosting the economical growth in UK. It is believed that without Insurance it was not possible to meet require of rising people with relation to their economy.

Insurance also provides risk protection cover for small businesses and employ over half the population of financial sector of company. Insurance also helps manage risks for businesses’ various stakeholders with an interest in the firm’s stability, and lowers the cost of financial distress and bankruptcy. Insurance also provides direct advice on good quality risk management and sensible risk-reduction.

Insurance market in UK

The UK insurance is biggest insurance market in Europe and 3rd biggest market in the world. Insurance market is a significant source of overseas income in UK. Insurance market in UK is having a total number of 339,000 employees, which make more than 30% of total financial services. Insurance in UK controls about added 17% of total investment in the London stock market. Out of all insurance companies Lloyd’s insurance company has the biggest market in UK.

The main types of insurance in United Kingdom are:

Life and pensions

Health and protection

General insurance

General insurance

General insurance companies involves in giving insurance for common purposes. General insurance will give business a vital role for giving a risk free life to insurers by minimizing the impact of unexpected and unwelcome risk. It lets individuals and businesses for unexpected future events, and helps them organizing their lives and businesses with enhanced conviction. The net claims for general insurance per running day in UK are about £74 million.

Life and Pensions

Insurance industries are also occupied in giving risk secure to personal life and life after employment i.e. retired people. The insurance industry is also making contributions to the nation's health by supporting the private medical sector. A life insurer offers valuable financial safety in early death of insurers if members of the family are dependent on earnings, as well as it will gives a range of ways for saving in future. The net claims for pension and life insurance per running day in UK are about £222 million.

Health and protection

There is maximum risk is seen in relative to health issues. The life insurance is mainly deals with such category of health linked with issues and giving insurance to minimize risk from health hazards. The UK insurance industries provide claim benefits for any kind of injury or illness. It also enables to plan for older age people and considered various benefit plans to suit their needs.

List of Insurance Companies

Insurance business in UK is one of the largest businesses in country, having very large number of companies and divided in to sub categories based on type of insurance they provide and their working pattern. The main insurance industries are divided as general insurance industries and health insurance industries. There are thousands of insurance companies are e in UK. List of various insurance companies are given below:

Life Insurance Companies

List of Domestic Insurance Companies

Sony Life Insurance Company, Ltd

T&D Financial Life Insurance Company

TAIYO Life Insurance Company

Yamato Life Insurance Co

Asahi Mutual Life Insurance Company

Mitsui Life Insurance Company Limited.

ORIX Life Insurance Corporation

List of Foreign-Controlled Companies

AXA Life Insurance Co., Ltd.

Hartford Life Insurance K.K

AIG Edison Life Insurance Company

AIG Star Life Insurance Co., Ltd

PCA Life Insurance Co., Ltd.

The Prudential Life Insurance Co., Ltd.

ING Life Insurance Company. Ltd

List of Subsidiaries of Non life insurance companies

Tokio Marine &Nichido Life Insurance Co., Ltd.

The Fuji Life Insurance Company, Ltd.

Sompo Japan DIY Life Insurance Co. Ltd.

Mitsui Sumitomo MetLife Insurance Co., Ltd.

Aioi Life Insurance Company, Limited

Sompo Japan Himawari Life Insurance Co., Ltd

NIPPONKOA Life Insurance Company, Limited

List of Foreign Insurance Companies

Zurich Life Insurance Company Ltd.

CARDIF Assurance Vie

American Family Life Assurance Company of Columbus

American Life Insurance Company

Non-Life Insurance Companies
List of Domestic companies

Hitachi Capital Insurance Corporation

Mitsui Direct General Insurance Co. Ltd.

Sony Assurance Inc.

The Fuji Fire &Marine Insurance Co. Ltd

Tokio Marine &Nichido Fire Insurance Co. Ltd.

Mitsui Sumitomo Insurance Co., Ltd.

NIPPONKOA Insurance Co. Ltd.

SECOM General Insurance Co. Ltd.

List of Foreign-controlled Companies

Ace Insurance

Allianz Fire and Marine Insurance Japan LTD

JI Accident. Fire Insurance Co.,Ltd.

Meiji Yasuda General Insurance Co.,Ltd.

Subsidiaries of life insurance companies

The AXA Non-Life Insurance Co.,Ltd.

The Sumi-Sei General Insurance Co.,Ltd

List of Reinsurance Companies

The Taisei Reinsurance Company, Ltd.

The Toa Reinsurance Co. Ltd.

The Japan Earthquake Reinsurance Co. Ltd.

Overview of the UK insurance market

Insurance market in UK is in advance elevated interest in the midst of share holders and business people due to its need and superior demand in market. UK insurance market is divided in 2 main categories,

General or Non- Life Insurance

Life Insurance

An insurer gets greatest benefit from investing in such firms in UK. According to most recent data, UK insurers established £44bn and £219bn in premium income for general insurance and for life insurance, correspondingly. The worldwide net written premiums of UK insurers amounted to £43.6bn in 2007, an increase of 5.3% over 2006.

In Table.1 is shown Data on revenue account of insurance companies in UK. The given data represent those Premiums for UK risks rise by 2.8% to £31.3bn. Worldwide net claims also increase, to £29.0bn from £25.3bn in 2006. Claims for UK risks increase by 14.1% over 2006 to £21.6bn.

Table.3.2.1 Revenue Account insurer’s in 2008 for UK

(Association of British Insurers 2008)

The UK underwritten profit of £1.5bn in 2006 turned addicted to an underwriting loss of £0.9bn in 2007, while the worldwide profit of £1.6bn in 2006 fell to very little profit of £97m in 2008. In profitable years, underwritten results can be pretentious by the companies reserving for prospect less profitable times. On the other hand, underwriting results can be better by a releasing of reserves in a year of poor presentation. Table 1 shows the underwritten result for UK general insurance market as a percentage of net written premiums.

Graph 1 below shows the growth of UK net premium income over the earlier period decade, come apart by extensive type of long-term business. It must be familiar that both the premiums received and benefits paid figures include the transfer of money, for the most part of the pension funds of individuals or group schemes, from one pension provider to another. These pension transfers accounted for £93.0bn (54.6%) of the £170.2bn in total benefits paid out to policyholders in the UK in 2007. Changes in pension policy from April 2006 contributed significantly to this movement for individual pension contract.

Graph 3.2.1 UK Net written premium during 1997-2007

(Association of British Insurers 2008)

It can be seen from the given data that, net printed premium for insurance industries in UK shows quickly increase in their value. Major source for net written premium during defined time was group pensioners and least premium was obtained from other insurance market.

Underwriting ratios for Insurance industry is very important tool to judge the performance of company. Generally, a company with lower underwriting ratios is safer to invest and vice versa. Looking to data for last five years, it can be seen that overall UK operating ratios for the five classes of general insurance business (Motor, Accident & Health, Property, Liability and Pecuniary Loss) have worsened in 2007.

Graph 3.2.2 UK underwriting results as a percentage of net written premiums during 1995-2007

(Association of British Insurers 2008)

Graph 3.3 Results on Underwriting Ratios for UK insurance companies in last 20 years

(Association of British Insurers 2008)

The claims ratio was 69.2% and expenses and commission accounted for a further 32.3% of the premiums received. Once changes in provisions were taken into consideration, there was an underwriting loss of 3.0% of premiums. In 1998, the last low point in the underwriting cycle, the claims ratio was 74.2%, and the expenses ratio was 33.0%. This led to an underwriting loss of 10.4% of premiums. Underwriting ratios are important tool for any prediction about company and its profitability. Data on such Underwriting ratios for UK based insurance companies in last 2 decades shown in Graph.3 above:

Chapter 4: Methodology

This research is carried out to comparative study of insurance companies in United Kingdom and India. The research includes six different insurance companies having business in UK and India. The data period for analysis is of last five years financial performance of a company as seen from its original balance sheets. The method of analysis is starts with examining balance sheets of different companies and ending with financial ratio analysis followed by statistical analysis of the data. This chapter gives an idea about a whole set of methodology to be followed for determining study of an insurance company. A step wise methodology to be followed is given below:

4.1 Types of Research

Before entering into financial analysis directly, it is wise to know about principle of methodology. Saunders, Lewis and Thorn hill (2003) defined that “Methodology refers to the theory of how a research should be undertaken”. A flourishing research should include accurate collection of data and ending with truthful analysis of the same. Methodology style differs varyingly to the needs and demand of the research to be undertaken. However the methodology can be broadly classified into two approaches namely:

Phenomenological

Positivist

Phenomenology and positivism are two different perspectives that will determine style of research. Within the large discussion of the history of science, positivism has come to mean inquiry based on measurable variables and provable prepositions. The phenomenological investigator determines the underlying structures of an experience by interpreting the originally given descriptions of the situation in which the phenomenon occurs.

Phenomenology is a kind of qualitative method. It doesn’t deal with numbers or calculation actually. It will help to determine strategies and cultural aspects of a company. Action research, case study research and ethnography are the example of phenomenological research. Qualitative data sources include observation and participant observation, interviews and questionnaires, documents and texts, and the researcher's impressions and reactions (Myers, 2008).

The word phenomenon comes from the Greek word phaenesthai, which means to flare up, to show itself, to appear (Bullington and Karlsson, 1984). In a broad sense that which appears provides the impetus for experience and for generating new knowledge. The aim of the phenomenological research inquiry is to determine what an experience means for the persons who have had the experience and are able to provide a comprehensive description of it.

From the individual descriptions general or universal meanings are derived, in other words the essence of structure of the experience. In fact it is difficult to re-evaluate older qualitative studies by examining the way the researchers analysed their data. However, a review of both the philosophy and the methodology of the phenomenological system of inquiry indicate an approach that is meticulous in both its collection and analysis of data.

Phenomenology is the first method of knowledge because it begins with "things themselves". Phenomenology type of research eliminates everything that represents a preconception, expected presuppositions, and reaching a state of freshness and openness. Final result is obtained the way of earlier research and that is non dependent by the customs, beliefs or by knowledge based on unrelated experience from everyday research.

Another type of research is a quantitative type. Positivist is a kind of quantitative research. This type of research will handles the numerical data value. Survey analysis, laboratory experiments, formal methods and numerical methods such as mathematical modeling are the common examples of positivist research.

Positivist approach is a qualitative aspect of research where, one can conduct a research according to the models or strategies laid down by the previous researchers and draw conclusions out of them. Positives follows the way that is well defined earlier and determine final value and believe that a particular value is independent to the method of analysis and kind of instruments.

Positivist studies generally attempt to test theory, in an attempt to increase the predictive understanding of phenomena (Orilikowski and Baroudi, 1991). Positivism is a kind of quantitative analysis deals with measurement of data. It is based on mathematics principles and practices. Majority of researches which handles data are falls into positivist category.

4.2 Research Problem

Financial performance of a company is evaluated by two different means. The first approach to determine financial performance of a company is to know about its strategies the other approach deals with determining its profitability. Profitability entitles how profitable a company is. Better performance of which countries company having favours high investment from investors. For this reason, comparative study of insurance sector of profitability is gaining high attention from the researchers. Many comparative studies have been carried out on banking industry as well as insurance industry. Based on such concept, this research is carried out to comparative study of insurance companies in UK and India. The whole research is carried out on six different insurance industries (three Indian and three UK). The main purpose of this research is to analyze various financial performances of insurance company and how it’s deferent from each other.

4.3 Research Style chosen

The Positivist approach is the best suited approach for this research. This research is about comparative study for insurance companies. The research is carried out on six different insurance companies in UK and India. The main quantitative analysis methods includes financial ratio analysis and statistical analysis i.e. correlation and regression analysis and Anova test, details on these is given below with more explanation.

4.4 Hypothesis

Based on the fact insurance is world wild industry and practice may be similar the hypothesis is as below:

“Financial characteristic of Indian and UK’s company are not quite different”

4.5 Research question

Do Indian and UK’s insurance companies defer in risk and return characteristics?

4.6 Methods of Analysis

To access the research question the following method of analysis are adopted:

Characteristic of financial statement will be analyzed.

Important ratio will be plotted.

Test will be conducted for similarity.

Result will be interpreted and discarded.

Comparative study of insurance company is mainly analysed by calculating financial ratios from the balance sheets of the company. Ratios are following correlation and regression analysis as a part of statistical analysis.

Ratio Analysis

In Ratio analysis, prime ratios to be calculated are Profitability ratio i.e. Return on Equity (ROE), Return on capital employed (ROCE), Return on Revenue (ROR); Liquidity ratio, Capital ratio and Underwriting ratios i.e. Loss ratio, Expense ratio and combined ratio. The description for ROE, Expenses Ratio, Loss Ratio and capital ratio is given below.

I. Profitability Ratios:

As in any company, profitability is a key determinant for deciding whether to invest or not. Insurance company’s profitability can be expressed by the value of its premium/underwriting income and investment income. Underwriting income is any revenue derived from issuing insurance policies, while investment income is total income from investing an insurance policy. Profitability of insurance company is determined mainly in three distinct steps. Main ratios for determining profitability are,

Return on Equity (ROE)

Return on Equity

Return on Equity is calculated by dividing net operating income by average common equity. Equity value is very important as shareholder’s point of view. This figure will determine the amount of profit that will given to the equity shareholder’s directly after interest and taxes.

II. Underwriting Ratios:

After profitability, next important term is underwriting


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