Evaluation of Financial Performance of Life Insurers in India

Supriyaa
Assistant Professor,
Government First Grade College,
Hesaraghatta, Bengaluru
Abstract
Insurance is been an vital part of the Indian Financial system, after 17 years of Liberalization of
Insurance Industry in India, it has taken a new trajectory as many life insurers have managed to list
themselves in the Indian bourses. The Indian Insurance is growing faster since 2000, as it has been
liberalized after more than 50 years of monopoly by LIC, where private life insurers have entered the
insurance sector with innovative practices leading to more business as it clearly needs a lot of finance
that can now be mobilized through the cleaner equity capital from a longer perspective. The life
insurers’ actions adds to transparency, governance, accountability after liberalization of sector and
also to improve the focus towards profitability of the Indian Insurance Industry. This study attempts to
measure the profitability and productivity by using the output maximization model on select six life
insurance companies.
Keywords: Life Insurers, Surplus, Profit after tax, Net premium, Net Claim, Investment Income

1. INTRODUCTION:
Indian Insurance sector is getting ready for new era, where it is building world-class risk
Management capability. The insurance sector in India has come a full circle, from being as
open competitive market to complete nationalization and then back to a liberalized market.
Insurance has a key role in stabilizing the economy, trade and commerce. The life insurance
market in India was underdeveloped and was tapped only by the states owned LIC till the
entry of private insurance. Indian customers, who have always seen life insurance as a tax
saving device, are now suddenly turning to the private sector and snapping up the new
innovative products on offer. The Private players have taken some market share from LIC,
and major growth has happened because of market expansions. The biggest challenge for the
industry today is the low levels of penetration and lack of consumer satisfaction. Insurance
sector in India has come a long way from being a nationalized to a liberalized market.
Till 1990’s the Indian Insurance market was under the Government rule, after the Economic
reforms, the New Economic policy gave a nod the deregulation and liberalization of the
sector. RN Malhotra , former Governor of RBI, Committee was set in 1993, to evaluate the
Indian Insurance Industry and recommend the future directions with the objective of
complementing the reforms initiated, aiming for more efficient and competitive financial
system viable for the economy. It also proposed for the regulatory body as IRDA under the
Insurance Regulatory and Development Authority Act, 1999, layed the groundwork for
establishing “an Authority to protect the interests of holders of insurance policies, to regulate,
promote and ensure orderly growth of the insurance industry”.
2. Review of Literature
The emerging scenario has infused greater competitive volatility in the system, because the
insurance sector has now entered into a competitive phase due to entry of more players in the
insurance field. As a result there has been expansion and growth of insurance both in the life

JIGNASA International Journal of Commerce & Management – January 2018 Page 21

and non-life business. Hence, the larger cake is now being shared by the existing and new
players. Further industry will become more professional (Shehbagramam, 2001)
The rational for the use of claim to proxy for insurance output is that the primary function of
insurance is risk pooling, i.e., the collection of funds from the policyholder pool and the
redistribution of funds to those pool members who incur losses. Claims are also a good proxy
for “real services” provided by insurers, such as coverage design and providing legal defense
in liability suits (Cummins et al., 1999). However, it is difficult to understand why the
management of insurance companies would seek to maximize the value of insurance claims,
and this therefore, violates the principal characteristic that more output should be preferred to
less (Diacon et al., 2002).
The combined ratio is a ratio of incurred losses to earned premiums plus incurred expenses to
written premiums (Rejda, 2001).
In the fragmented regulatory US life insurance industry, Michael K. Mc Shane et.al (2010)
found that the profitability measure, viz., operating return on equity is positively related to
regulatory competition. Employing survey method, Paul J.M. Klumpes (2005) found that the
senior management of UK life insurance companies used embedded value for strategic
management planning and control purposes. Taking both stock and mutual life insurers in
New York State during 1952-1966, Richard Spiller (1972) found that there is a difference in
size and product mix due to ownership structure.
Life insurers are custodians and managers of substantial investments of individuals; and
policyholders need to be confident that their insurer will be able to meet its promised
liabilities in the event that claims are made under a policy. Regulatory authorities therefore
seek to ensure that the financial soundness and performance of life insurance companies is in
sound condition. In this current scenario of growing customer base, one of the principal
concerns underlying the regulation of the insurance companies is the need to protect the
interest of and secure fair treatment to policyholders (Charumathi, 2011).
Neelaveni (2012) evaluated the performance of five life insurance companies at the time
period of 2002-03 in terms of various plans and policies on the basis of annual growth rate.
The study concluded that Life Insurance Corporation being the public sector was lagging
behind due to competition faced by private insurers whereas private life insurance companies
had performed well in terms of financial aspects.
Kumari (2013) analyzed the financial performance of both public and private life insurance
industry. For this purpose various parameters such as number of life insurance companies,
private sector offices, insurance penetration and density, growth in premium income, size of
insurance market were discussed. Financial performance was observed by calculating various
financial ratios. The study resulted that there had been a significant increase in the overall
business performance of Indian
Life insurance industry after privatization.
3. Objective of the study
• To analyze the financial performance of life insurers.
• To measure the productivity using the output maximization model.

JIGNASA International Journal of Commerce & Management – January 2018 Page 22

4. RESEARCH METHODOLOGY
Sample and Sampling Design
The study covers 6 Life insurance companies operating in India but due to non-feasibility and
time constraint, the scope of the study has been restricted to six life insurance companies
based on its date of establishment.
Period of Study: From 2011 to 2017 the number of years of study is six years
Sl. No. Life Insurance company Date of Establishment
1 LIC 01-09-1956
2 HDFC Standard Life Insurance Co. Ltd 23-10-2000
3 Max Life Insurance Co. Ltd 15-11-2000
4 ICICI Prudential Life Insurance Co. Ltd 24-11-2000
5 Kotak Mahindra Old Mutual Life Insurance Co. Ltd 10-01-2001
6 Birla SunLife Life Insurance Co. Ltd 31-01-2001

This is an empirical study. It has taken all the 6 India life insurers (1 public and 5 private) as
sample. The study period includes 6 financial years, viz. 2011-12, 2012-13,2013-14,2014-
15,2015-16 and 2016-17. The data required were drawn from IRDA data base and the public
disclosures and annual reports of the respective companies.
Data Collection
This study is based secondary data.. The secondary data was collected from various research
papers, books, journals published reports of IRDA, IRDA annual reports, annual reports of
Life insurance companies and websites.
5. Analysis and Interpretation
Objective 1: To analyze the financial performance of life insurers.
Profitability performance of the life insurers has been examined by observing surplus and
profit after tax
Table -01- Surplus of six life insurers (In Lakhs)
Life Insurers 2011-12 ₹ 2012-13 ₹ 2013-14 ₹ 2014-15 ₹ 2015-16 ₹ 2016-17 ₹
LIC 1,28,12,290 1,43,63,818 1,63,42,652 1,80,30,519 2,49,70,348 2,20,03,336
HDFC
Standard Life
37,29,154 64,21,074 42,97,811 82,20,568 95,95,791 94,76,456
Insurance Co.
Ltd
Max Life
68,42,223 1,11,08,419 61,49,723 46,32,497 65,53,154
Insurance Co. 61,35,923
Ltd
ICICI
Prudential Life 1,41,24,185 1,15,26,517
1,37,55,213 1,47,35,221 1,30,37,017 1,21,24,505
Insurance Co.
Ltd
Kotak 11,95,862 10,74,377
21,18,368 21,61,255 17,64,384 22,39,364
Mahindra Old

JIGNASA International Journal of Commerce & Management – January 2018 Page 23

 Mutual Life
Insurance Co.
Ltd
Birla SunLife
Life Insurance 64,96,815 44,02,823 38,40,256 14,30,425 9,85,371 21,44,039
Co. Ltd
Source: Annual Reports of Life Insurers 2011-12 to 2016-17

Table -01 shows the Surplus of select life insurers for the period 2011-12 to 2016-17. It is
observed that Surplus is showing upward trend of LIC, whereas private life insurers shows
the constant fluctuation in the Surplus, which depicts the impact of the capital infusion of
LIC and Insurance penetration is fluctuating when taken for private life insurers.

Table-02- Profit After Tax or PAT of Six life Insurers (In Lakhs)
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Life Insurers
₹ ₹ ₹ ₹ ₹ ₹
LIC 13133429 14375925 16566813 18237837 25178479 22317408
HDFC Standard Life
2,710,154 4,514,791 7,252,819 7,855,053 8,184,033 8,921,336
Insurance Co. Ltd
Max Life Insurance 3,332,189 4,234,468 4,359,151 4,391,104 6,599,271
4,142,418
Co. Ltd
ICICI Prudential Life 14,959,392
13,841,737 15,666,555
Insurance Co. Ltd 16,342,915 16501455 16816612
Kotak Mahindra Old
2,032,482 1,897,383
Mutual Life Insurance 2,391,334 2,288,932 2,507,469 3,032,729
Co. Ltd
Birla SunLife Life 1,399,994
4 ,607,290 5,415,031 3,707,536 2,854,029 1,228,193
Insurance Co. Ltd
Source: Annual Reports of Life Insurers 2011-12 to 2016-17
Table-02 shows the Profit after tax of some select life insurers for the period 2011-12 to
2016-17. It is observed that PAT is showing upward trend incase of LIC, HDFC Standard
life Insurance Co. Ltd, ICICI prudential Life Insurance Co. Ltd. The Max life Insurance
company limited, Kotak Mahindra old mutual life insurance company limited and Birla
Sunlife Life Insurance Company limited are facing fluctuation due to variation in operating
expenses relating to Insurance, Investment Income, Commission paid and Benefits paid.
Objective 2: To measure the productivity using the output maximization model.
Parameters used to assess productivity performance
Productivity performance of the Life insurers has been examined using the following ratios
(expressed in percentage form) of six years of six life insurers.
• Claim ratio (Net claim incurred to net written premium)
• Expense Ratio (Expenses of management to net written premium)
• Investment Income Ratio (Investment income to net written premium)
In this study, three models of output have been used to examine the efficiency and
productivity of life insurance companies in India. In the first model, net written premium has
been taken as proxy for the output; in the second, net claim incurred has been taken as output;
and in the third, net premium written and investment income have been taken as output.

JIGNASA International Journal of Commerce & Management – January 2018 Page 24

Parameter 1: Claim Ratio
Claim Ratio (Net claim incurred to net written premium)- The standard is an important
indicator of whether their pricing policy is correct or not. It reflects the quantum of claims in
the premiums earned. The ratio prescribed for this analysis is Net Claims Incurred to Net
Premium.
Table-03 Claim Ratio-(Net claim incurred to net written premium)
Life Insurers 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
LIC 45.41 42.8 66.62 56.3 51.81 56.89
HDFC Standard Life Insurance Co.
29.1 37.77 38.94 55.29 50.54 51.06
Ltd
Max Life Insurance Co. Ltd 14.44 10.56 14.37 18.11 20.72 22.93
ICICI Prudential Life Insurance Co.
14.47 98.98 98.3 80.77 65.31 67.54
Ltd
Kotak Mahindra Old Mutual Life
49.6 65.42 69.95 59.99 46.61 20.61
Insurance Co. Ltd
Birla SunLife Life Insurance Co.
47.06 72.42 78.91 74.41 78.48 84.08
Ltd
Source: Annual Reports of Life Insurers 2011-12 to 2016-17
Note: Claim Ratio= Net written premium
Table-03 show the Claims figures as sub-dimension to the parameter “earnings and
profitability”, higher claims surely reflects higher drainage of funds. However, keeping in
mind the risks insured, an insurer surely lands in a position where it has to pay claims. Good
evaluation aims at profitable pricing, even if the insurer incurs claims. The Life insurers have
the highest average claim ratio ranging from 16.86 to 72.06 of six life insurers.
Chart-01- Claim Ratio-(Net claim incurred to net written premium)

100
90 LIC
80
HDFC Standard Life Insurance Co.
70
Ltd
60
Max Life Insurance Co. Ltd
50
40 ICICI Prudential Life Insurance Co.
Ltd
30
Kotak Mahindra Old Mutual Life
20 Insurance Co. Ltd
10 Birla SunLife Life Insurance Co.
0 Ltd
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Chart-01 Analysis
Private life insurers when compared to the public insurers, the loss ratio or claim ratio has
significant difference amongst private insurers. The analysis highlights the superior status of

JIGNASA International Journal of Commerce & Management – January 2018 Page 25

the private insurers as the average claims turn to be lower than the public insurers and
exponential growth also indicates by and large similar phenomenon.
Parameter 2: Expense Ratio
Expense Ratio (Expenses of management to net written premium)- Expense analysis
indicates the expenditure incurred by the management while carrying on insurance business,
greater the expenditure, lesser will be the profit margin. The ratio prescribed for this purpose
is Management Expenses to Net Premium Earned.
Table-04 Expense Ratio (Expenses of management to net written premium)
Life Insurers 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
LIC 10.09 8.33 8.99 6.85 8.2 8.19
HDFC Standard Life Insurance Co.
12.44 11.87 11.73 10.04 11.47 12.27
Ltd
Max Life Insurance Co. Ltd 31.79 18.22 20.89 16.99 16.04 17.19
ICICI Prudential Life Insurance Co.
14.41 15.19 13.16 10.9 9.94 10.64
Ltd
Kotak Mahindra Old Mutual Life
19.17 21.05 21.98 22.48 20.29 34.51
Insurance Co. Ltd
Birla SunLife Life Insurance Co. Ltd 21.14 22.96 22.35 17.18 16.71 13.91
Source: Annual Reports of Life Insurers 2011-12 to 2016-17
Note: Expense Ratio= Net written premium
Analysis:
The companies differ significantly in the pattern of controlling the operational expenses and
show efficient underwriting management. In comparison to public insurers, private insurers
expenses in 2016-17 is recorded at 8.19, 12.27, 17.19, 10.64, 34.51, and 13.91 respectively
for LIC, HDFC Standard Life Insurance Co. Ltd, ICICI Prudential Life Insurance Co. Ltd,
Birla SunLife Life Insurance Co. Ltd, Max Life Insurance Co. Ltd and Kotak Mahindra Old
Mutual Life Insurance Co. Ltd

Chart-02-Expense Ratio (Expenses of management to Net written premium) Analysis

35
LIC
30
HDFC Standard Life Insurance Co.
25 Ltd
20 Max Life Insurance Co. Ltd

15
ICICI Prudential Life Insurance Co.
Ltd
10
Kotak Mahindra Old Mutual Life
5 Insurance Co. Ltd

0 Birla SunLife Life Insurance Co.

Ltd
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

JIGNASA International Journal of Commerce & Management – January 2018 Page 26

Chart-02 Analysis- The expense ratio of private insurance companies is very high compared
to IRDA benchmark of 20 percent in case of kotak Mahindra Old Mutual Life Insurance Co.
Ltd. The main reason for this is believed to be the race of private insurers to gain more
market share from untapped market.

Parameter: Investment Income Ratio

Investment Income Ratio (Investment income to net written premium)- Investment income
ratio quantifies the income earned on investments. The ratio prescribed is Investment Income
to Net Premiums.

Table-05 Investment Income Ratio (Investment income to net written premium)

Life Insurers 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

LIC 52.67 57.31 45.82 50.47 41.79 55.89
HDFC Standard Life Insurance Co.
2.37 22.59 42.38 82.98 11.07 57.8
Ltd
Max Life Insurance Co. Ltd 10.24 34.88 13.78 18.96 20.9 23.6
ICICI Prudential Life Insurance Co.
-1.02 46.06 75.04 123.51 6.36 67.6
Ltd
Kotak Mahindra Old Mutual Life
8.87 35.29 40.5 88.7 13.18 21.12
Insurance Co. Ltd
Birla SunLife Life Insurance Co.
-2.84 40.98 53.73 104.75 11.89 78.39
Ltd
Source: Annual Reports of Life Insurers 2011-12 to 2016-17
Note: Investment Income Ratio= Net written premium

Analysis:
Investment income has always come to the rescue of insurers in writing off of the
underwriting losses. The practice being more prominent in public insurers, simultaneously,
the private sector insurers rely fairly on the investment income. The investment income
earlier used to be quite good in quantum; however, given the global melt down, the impact is
being witnessed in Indian market as well. The impact is being witnessed in the overall
profitability trends of the insurers in general and investment income in particular. The
analysis of the investment income ratio reflects the following results: ICICI Prudential Life
Insurance Co. Ltd has average ratio considerably good for the life insurers, followed by LIC,
Birla Sunlife insurance Co. Ltd. The insurers in the sector are seen to lose gradually the
margin of investment income which is quite visible in their growth.

JIGNASA International Journal of Commerce & Management – January 2018 Page 27

Chart-03-Investment Income Ratio (Investment income to net written premium)

140 LIC
120
HDFC Standard Life Insurance Co.
100 Ltd
80 Max Life Insurance Co. Ltd

60
ICICI Prudential Life Insurance Co.
40 Ltd
Kotak Mahindra Old Mutual Life
20 Insurance Co. Ltd
0 Birla SunLife Life Insurance Co.
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 Ltd
-20

Chart 3 Analysis: The investment income to Net written Premium of LIC was 52.67 in
2011-12 whereas in 2016-17 increasing trend to 55.89. Private life insurers had increased and
manageable ratio by 2016-17.

5.1 Limitation of the study:

• The study cover six Life insurers of India as it may not generalize to whole
population.
• The data which has been used for the study mainly secondary data, so limitation of
secondary data remains with it and also applies to this study.
• The Annual report study is based on six years.
• The varied statistical techniques can be applied.

5.2 Conclusion:
Private insurers are seen to be ahead grabbing more market share which is quite visible in the
business volume fluctuation. Consequently evidences of fresh capital apart from minimum
requirement of`100 crores is seen to meet solvency norm. The global melt down surely have
its impact on the profitability of the deregulated corporate sector in India. The public life
insurance has to focus on capital adequacy and reinsurance & actuarial issues improvements as it
is lacking behind in all factors of its determinants due to which total ratio of public sector is also
getting low. Whereas the private life insurance has to focus on underwriting processes and its
related expenses, earnings & profitability, liquidity positions improvements as it is lacking behind
in all factors of its determinants. In total, The analysis highlights the superior status of the
private insurers as the average claims turn to be lower than the public insurers and
exponential growth also indicates by and large similar phenomenon.

JIGNASA International Journal of Commerce & Management – January 2018 Page 28

References:
• Cummins,J.D. and M.A.Weiss,(1993), “Measuring Cost Efficiency in the Property-Liability Insurance
Industry”, Journal of Banking and Finance,17:463-481.
• Cummins, J. David, and Mary Weiss., (1998), “Analyzing Firm Performance in the Insurance Industry
Using Frontier Efficiency Methods”. Working Paper Series 98-22.
• Cummins, J.D. and H. Zi, (1998), Comparison of frontier efficiency methods: An application to the
U.S. life insurance industry, Journal of Productivity Analysis.
• Diacon, S. R., K. Starkey, and C. D. O’Brien, (2002), “Size and Efficiency in European Long–Term
Insurance Companies: An International Comparison”. Geneva Papers on Risk and Insurance: Issues
and Practice. 27: 444–66.
• Ph. D Thesis Tanveer Ahmad Darzi(2010), “Financial performance of Insurance Industry in post-
liberalization Era in India.” University of Kashmir, Srinagar.
• IRDA Annual reports from 2011-2017
• Neelaveni, V. (2012). Financial performance of Life Insurance Companies and Products. Zenith
International Journal of Business Economics and Management Research, 2(3), 233-258.
• Subba rao, M & Srinivasulu, R. (2013). Contribution of Insurance Sector to Growth and Development
of the Indian Economy. IOSR Journal of Business and Management, 7(4), 45-52.
• Vikas sharma, S & Sudhinder singh, C. (2013). A comparative study of Public and Private Life
Insurance. Indian Journal of Applied Research, 3(1), 93-94.
• Valeed ansari, A & Wubshet fola, F. (2014). Financial Soundness and Performance of Life Insurance
Companies in India. Indian Journal of Research, 1(8), 224-253.
• Ana maria, B & Ghiorghe , B. (2014). The Determinants of Financial Performance in the Romanian
Insurance Market. International Journal of Academic Research in Accounting,Finance and
Management Sciences, 4(1), 299-308.
• Sukithar, R. (2016). Performance of Public and Private Life Insurance Companies in India: A
Comparative study. Shanlax International Journal of Commerce, 4(1), 97-99.
• Rajiben solanki. (2016). An Analytical Study of Profitability of life Insurance Companies in India: A
study of Selected Private sector Insurance Companies. Abhinav National Monthly Refereed Journal of
Research in Commerce and Management, 5(6), 8-12.
• Annual Reports of Life Insurers 2011-12 to 2016-17

JIGNASA International Journal of Commerce & Management – January 2018 Page 29