Insurance industry and valuation of insurance companies in india


Insurance Acts of the Apostless as a accelerator in economic growing of a state. It is closely related to nest eggs and investing that comes from, life insurance, funded pension systems and to some extent the non-life insurance industry. In 2003, the Indian insurance market ranked 19th globally and was the 5th largest in Asia.

LIC ( Life Insurance Corporation ) & A ; GIC ( General Insurance Corporation ) had monopoly prior to the enlargement of insurance market to private companies. LIC was established in 1956 and controlled all life-insurance policies across the state. These were authorities tally organisations. The Insurance concern is divided into four categories:

  • Life Insurance concern
  • Fire
  • Devil dog
  • Assorted Insurance.

Following the Insurance Regulatory and Development Act in 1999, India abandoned the public sector exclusivity of the insurance industry and switched to a market-driven competitory industry. This displacement has brought approximately many alterations and developments in the insurance industry in India. Domestic private-sector companies were permitted to come in both the life and general insurance concern and foreign companies were allowed to take part and fall in these domestic companies albeit with a cap of 26 % investing.

The aims of this study are to analyze the current position of the insurance industry, its prospective growing and the rating methods

used for insurance companies in developed and under-developed states.


  • Current Market Structure
  • Introduction to Life & A ; General Insurance and Reinsurance in India
  • Scope for Expansion of Indian Insurance Industry
  • Market Challenges and drawbacks
  • IRDA and its Regulations
  • Evaluations methods for Insurance Companies
  • Future growing of Insurance Industry
  • Decision

Current Market Structure

Today there are 16 private participants with aggregative control of 27 % of the life insurance market and 15 private participants in the general insurance industry. Entry of private sector has fuelled the growing in the sector driven by new merchandises and aggressive selling schemes. LIC still covers bulk market portion with other private companies turning at dismaying rates. ICICI Prudentail has the bulk market portion among the private companies and is to keep its market leading with an estimated market portion of 28 % by FY08 ; followed by HDFC Standard Life ( 13 % ) , Birla Sun Life ( 11 % ) and Bajaj Allianz ( 11 % ) . The premium growing for the private sector participant is expected to stay at around 60 % over FY05-10, with market portion of private participants estimated to increase to 45 % by FY10.

With low barriers to entry, there will be increased competition and better quality of service within the following decennary in the Indian insurance industry. An insurance study by LIC & A ; KPMG showed that one-year growing in mean premium is 8.2 % in India compared to a planetary norm of merely 3.4 % . The Associated Chambers of Commerce and Industry of India ( ASSOCHAM ) has projected a 500 % addition in the size of current Indian insurance concern from US $ 10 billion to US $ 60 billion by 2010 peculiarly in position of part that the rural and semi-urban insurance will do to it.

Below are the distribution of companies in Life Insurance Industry:

Below are the distribution of companies in General Insurance Industry:

Life Insurance

Life Insurance industry is under the stage of babyhood after 50 old ages of monopoly.

LIC, the market leader in this section, is a province owned organisation and has had a monopoly in the life insurance concern for over four decennaries until 2001.

LIC still remains the market leader, by a broad border, with an estimated market portion of 73 % ( based on new concern APE in FY05 ) . However, at the border, it has been fring market portion to private sector participants.

Types of Insurance Policies

  • Single Premium v/s Regular Premium
  • Unit of measurement linked v/s Traditional
  • Pure Hazard Policies ( Term ) v/s Savings + Hazard
  • Participating v/s Non Participating

Entire assets of life insurance companies in 2002-2003 were Rs. 2,80,450 crore and it increased to 3,52,608 crore in 2003-2004. Life Insurance financess account for 15 % of family nest eggs.

General Insurance

General insurance industry grew by 20 per cent in the first five months of 2006-07 due to strong public presentation by private participants. India ‘s non-life insurance industry received gross premiums of INR 161 billion in 2003, which represented a quintuple addition from INR 28 billion in 1990 and an mean 6 % growing in existent footings over the period. Most of these private-sector companies have foreign spouses with a upper limit of 26 % of portions, but there are besides strictly domestic companies ( e.g. Reliance General Insurance Company Limited ) .


At present, the eight private participants together have approximately 35 per cent of the market portion. At present there are 13 general insurance participants in the market including private and governmental.

New India Assurance ( NIA ) grew concern by 11.95 per cent to roll up Rs 2,093 crore in premium in April-August this financial. NIA was followed by Oriental Insurance Company, which clocked 11.63 per cent growing in concern at Rs 1,667 crore and a market portion of 15.99 per cent. National Insurance saw a level growing and collected Rs 1,542 crore in premium and a 14.79 per cent portion of the market. United India grew premium income by 7.19 per cent at Rs 1,488 crore and a market pie of 14.27 per cent.

Mix of non-life concern & A ; merchandises

The mix of non-life concern in India resembles most other developing regional economic systems. Motor and fire policies are the anchor of non-life concern in India. They besides contributed the most to overall premium growing in the last five old ages. Compared to other markets, personal lines insurance is besides comparatively well-developed in India. This is chiefly manifested in personal motor and private residential fire policies. In fact, among emerging markets with a similar degree of per capita income, India has the highest portion of personal lines concern.

After the gap of the sector to private participants, more new merchandises were introduced. To take an illustration, one joint-venture non-life insurance company introduced 29 different merchandises during one twelvemonth, harmonizing to the IRDA. They included merchandises liability, corporate screen, professional insurance policies, burglary screen, single and group wellness policies, conditions insurance, recognition insurance, travel insurance and so on. Some of these merchandises were wholly new ( e.g. conditions insurance ) while others were already available through the public insurance companies.

Regulation and Duty

Before deregulating in 1999, non-life merchandises that were available in the market were instead limited and similar across the four GIC subordinates. They could besides be classified by whether they were regulated by duties: fire insurance, motor vehicle insurance, technology insurance and workers ‘ compensation etc that came under duty ; and burglary insurance, Mediclaim, personal accident insurance etc that did non. In add-on, most specialised insurance ( e.g. racehorse insurance ) did non fall under duty ordinances.


Reinsurance in India was defined for the first clip in the Insurance Act of 1938. Following the transition of the General Insurance Business ( Nationalization ) Amendment Act in 2002, the GIC was designated the exclusive national reinsurer. Specifically, the authorities carved out the general insurance concern from the reinsurance concern of GIC and declared the GIC as the national reinsurer. As such, the GIC now undertakes merely reinsurance concern, while the four populace sector general insurance companies continue to manage direct non-life insurance concern. The Corporation ‘s reinsurance

plan has been designed to run into the aims of optimising the keeping within the state, guaranting equal coverage for exposures and developing equal capacities within the domestic market.

Life and General Reinsurance

Life insurance companies in India do non reinsure amongst each other, and life reinsurance is chiefly placed with international professional reinsurers. The ordinances besides require that any reinsurer used must hold a minimal evaluation of BBB from Standard & A ; Poor ‘s, or a similar international evaluation organisation.

Furthermore, insurance companies can non hold a reinsurance agreement with companies to which they are linked by shareholding, unless the agreement is regarded as competitory and the IRDA has given its blessing to such an agreement. LIC is the lone life insurance company that presently accepts inward reinsurance from its operations outside of India. There is no life reinsurer in India and GIC is the lone domestic reinsurer who can subvention life reinsurance. While the GIC has small life reinsurance expertness, it is buttonholing the authorities to oblige Indian insurance companies to give it more concern. At present, LIC gives about 10 % of its reinsurance to GIC, a ratio that is likely to increase in the hereafter.

While the life reinsurance premium income from India has been comparatively little due to maximal keeping demands, the concern is likely to turn with lifting premium volumes and the lifting Numberss of instances with big amounts insured. Looking frontward, an of import country of reinsurers ‘ engagement will be facultative support for big and deficient hazards. Reinsurers, with experience in facultative underwriting, can be utile concern spouses for life insurance companies in measuring and accepting big hazards. In fact, reinsurance will be a valuable instrument in assisting to further develop the India life insurance market.

Scope for enlargement of Indian Insurance Market

Presently there is a immense range for this industry to turn with increased disposable income among the working category in India. Up to 80 % of India ‘s population is uninsured today.

Changing Demographics

Life anticipation is turning with progresss in medical specialty and engineering. The rapid

rise in income degrees and the high proportion of Indians below 30 old ages of age

( estimated at 60 % of India ‘s entire population of 1bn ) should be a important driver

for life insurance in coming old ages.

The following tabular array shows the age-wise distribution of population in future old ages:

Families gaining over Rs5mn per twelvemonth are turning the fastest ( at 27 % p.a. ) , and many of them are still either uninsured or under-insured. Further incrementally there is a displacement go oning from big joint households to atomic households, which increases the demand insurance amongst these families as the dependence ratio increases significantly. Antipathy to debt by most of the new coevals families has besides led to higher monthly debt service demand. Increasing debt service has besides resulted in higher demand for insurance as most of the households have a individual staff of life earner.

Low Penetration

Presently there is really low incursion in India specially in rural topographic points. Taping those markets will hike the insurance industry. Denationalization of the insurance industry in 2000 improved incursion from 1.4 % of GDP in 2000 to 2.6 % of GDP in 2006 in India as seen in the chart below.

Life insurance market in semi-urban and rural districts is expected to lift to US $ 20 Billion grade in the approaching four old ages from the bing value of less than US $ five Billion. Life insurance incursion in India was less than 1 per cent boulder clay 1990-91. During the 1990s, it was between 1 and 2 per cent and from 2001 it was over 2 per cent. In 2005 it had increased to 2.53 per cent.

Against this, the non-life public sector insurance companies have been instead slow to react to the germinating competition. Both the Authority and the industry have been playing an active function in increasing consumer consciousness.

Large subdivisions of rural India are still untasted because of long distances, hapless distribution and high return costs. To understand the chances for insurance companies in rural India, it is really of import to understand the demands of India ‘s villagers, their day-to-day lives, their curious demands and their occupational constructions. There are husbandmans, craftsmen, milkmen, weavers, insouciant labourers, building workers and tradesmans and so on. In the context of international comparing, insurance incursion in India is low but commensurate with its degree of per capita income.

Coevals of Employment

There is a high demand for skilled insurance agents to explicate the trifles and understand the assorted merchandises offered in the market. With such high demand, the insurance industry has created range for enlargement in the employment industry excessively. Life insurance industry provides increased employment chances. Employees in insurance sector as on 31st March, 2005 is around 2 hundred thousand. Agents, corporate agents, developing constitutions provide excess employment chances. Many of these gaps are in rural sectors.

Foreign Investment

India differs from other Asiatic markets in the sense that its life insurance market is still to a great extent dominated by autochthonal participants, partially reflecting the fact that de-monopolization merely took clasp in 2000. In contrast, most Asiatic life insurance sectors are already to a great extent populated by foreign insurance companies. Foreign non-life insurance companies have achieved incursion in India similar to those in other Asiatic markets. It can be expected that foreign insurance companies will go on to spread out their market portion in India in the coming old ages, notwithstanding the fact that public sector insurance companies are besides proactively beef uping their concern schemes to contend lifting competition.

With the entry of private foreign houses, consumer cognition is increasing through international attack of advertisement and selling. With range for foreign investing to increase to 49 % , foreign companies will pay more attending to the Indian market. Besides most of the private sector participants have set up a huge distribution web, including over 250,000 agents ( LIC has over a million agents ) , most of whom are more qualified than LIC agents. A qualified work force and an extended distribution web has farther helped the private insurance companies to increase consciousness about life insurance.

The outlook of Indian policy holders is merely from an investing position, and with foreign influence this is altering to awareness of insurance as security and protection.

Potential in Pension and Health attention markets

The Indian insurance industry is still dominated by investing linked insurance merchandises like gift and ULIP. Pure insurance merchandises like term and wellness are non yet popular, mostly owing to the mentality of the mean Indian consumer. This is predicted to alter with more western exposure and consciousness of other insurance merchandises. Pension system and wellness insurance are increasing with urbanisation. Today the entire pension programs in India sum to less than USD 4 billion which is really hapless.

The pension sector offers the undermentioned benefits:

  • An non-funded, defined benefit pension strategy which would assist to cut down authorities outgo that presently stands at 1.5 % of GDP.
  • Opening up the sector is besides likely to ensue in drawn-out coverage, which presently stands at around 10 % of the working population, covering employees of little houses.

Tax Breaks

The revenue enhancement construction in India is besides favourable for the insurance industry in the signifier of tax write-offs and freedoms. Over the past several old ages, Government of India has been offering assorted revenue enhancement benefits to promote persons to purchase life insurance. Soon revenue enhancement inducements offered are:

    1. Tax write-offs from gross income are permitted up to INR 100,000.
    2. Tax write-offs from part to pension financess up to INR 10,00 is permitted
    3. Maximal tax write-off for wellness and medical insurance is permitted up to INR 10,000.
    4. Exemptions from income are permitted up to 1/3 of sum enthroning in relation to pensions are tax-exempt.
    5. All decease benefits or adulthood returns from a life policy are tax-exempt.

Tax Incentives have been a cardinal growing driver for the life insurance concern over the past two decennaries, mostly owing to the absence of consciousness of other benefits of life insurance. Historically LIC collected the majority of its premium income in the last one-fourth of the fiscal twelvemonth, when people used to purchase insurance to cut down their revenue enhancement liabilities. However the tendency has changed in the past few old ages, with the private insurance companies driving the growing by increasing the consciousness.

Market Challenges and Drawbacks

Some of the factors that have slowed down the growing of the industry are as follows:

  • A slow down in unit linked concern growing which has contributed 70 % of entire premium income in FY06
  • Decelerate down in individual premium policies owing to a alteration in ordinance Sustainability of scorch premium policies, particularly post June’06 when the new alterations proposed by IRDA come into drama which, in our position, could negatively impact the growing of individual premium policies.
  • Pull offing the distribution web, particularly the agent abrasion rates
  • pull offing the cost as most of the insurance companies have already priced in higher economic systems of graduated table in their burden construction.

Increased Wagess

Rapid enlargement of the insurance concern and an abrasion rate amongst life insurance agents has resulted in an estimated 30-40 % rise in pay measures. In peculiar, the deficit of statisticians, specialised agents and selling people has meant life insurance companies are paying up about 50 % more than they had originally budgeted when they had entered the sector, about 5 old ages ago. This is partially due to the much higher money that life insurance companies are holding to pass on preparation and on keeping of employees.


Distribution still appears to be a cardinal challenge for insurance companies. Despite the big subdivision web of Indian Bankss, banc confidence has still non to the full evolved in India. Bank subdivisions still account for around 10 % of all policies sold. In contrast, most insurance companies still rely on the bureau theoretical account. Almost 80 % of the policies are sold through agents who have to be good trained.

Quality of agents and directors

Unfortunately for the industry, in the absence of skilled work force, employee turnover has emerged as one of the challenges confronting the industry. Harmonizing to many of the insurance companies, employee turnover in the life insurance section is running at 35-40 % . The job appears to stem from pull offing concern directors ‘ ( typically people who manage about 100 agents ) aspirations and maintaining gait with the rise in salary degrees offered by rivals. As a consequence, there is a concern that holding sufficient employees could be the biggest challenge for the larger participants to guarantee that they face no capacity restraints while quickly turning their concern.

Decline of ULIP ‘s

Impact on first twelvemonth premium growing, owing to the merchandise mix acquiring progressively skewed towards unit linked policies which could go a challenge if we see a rectification in capital markets. The growing progressively may come from the more regular gift and whole life policies and new merchandises like wellness insurance and pension merchandises. Importantly, even post the lag, we still anticipate growing rates for ULIP ‘s ( first twelvemonth premiums ) to still be in the scope of 40-50 % owing to the increasing appetency for equity markets. The proportion of retail money in equities is still under 3 % which is expected to assist underpin the overall flows into equity markets over the average term. Further, the unit linked policies continue to offer investors the option of puting in both a common fund merchandise and besides acquire life screen. In the absence of a long path record, the concluding ‘standard ‘ premises that go into the concluding pricing of a policy and the expected returns over the life of a policy may stop being lower than the ‘actual ‘ disbursal ratio over the policy life. This could, in our position, well lower the profitableness for insurance companies.

Other Factors

On the regulative side, there are outstanding issues refering solvency ordinances, farther liberalizing of investing regulations, caps on foreign equity shareholdings every bit good as the enforcement of monetary value duties in the non-life insurance sector.

The proliferation of banc confidence is quickly altering the manner insurance merchandises are distributed in India. This will besides hold strong deductions on the procedure of fiscal convergence and capital market development in India.

IRDA and Regulations

IRDA ( Insurance Regulatory Development Authority ) Act was formed in 1999 to advance market efficiency and guarantee consumer protection of the insurance industry.

Several ordinances were laid down to command guarantee a just market after private companies were allowed to come in the market some of which are:

  • Capital Requirement: A minimal capital demand of INR 1 billion for new entrants and INR 2 billion of reinsures. This helped see that companies were good established with long term ends.
  • Foreign Direct Investment: is capped at 26 % soon.

This puts a strain on Indian boosters and blocks foreign investing in the insurance industry. However, presently there is an on-going proposal to raise this cap to 49 % . With this, there will be an inflow of foreign investing and enlargement of the insurance industry further.

  • Company List: All the new life insurance companies would hold to compulsorily name their companies within 10 old ages of get downing their operations.
  • Rural sector demand: Life insurance participants are required to publish minimal no of policies in rural countries and in societal sector.

Solvency controls:

Insurance companies have to detect the needed solvency border ( RSM ) .20.

For general insurance companies, this is the higher of RSM-1 or RSM-2, where RSM-1 is based on 20 % of the higher of ( I ) gross premiums multiplied by a factor A,21 or ( two ) cyberspace premiums ;

RSM-2 is based on 30 % of the higher of ( I ) gross cyberspace incurred claims multiplied by a factor B, or ( two ) cyberspace incurred claims ;

There is besides a lower bound of INR 500 million for the RSM.

Life insurance companies have to detect the solvency ratio, defined as the ratio of the sum of available solvency border to the sum of needed solvency border

In add-on,

The needed solvency border is based on mathematical militias and amount at hazard, and the assets of the policyholders‘ fund ;

The available solvency border is the surplus of the value of assets over the value of life insurance liabilities and other liabilities of policyholders ‘ and stockholders ‘ financess.


In 1958, Section 27A of the Insurance Act was modified to qualify the followers

investing government:

  • Cardinal authorities market securities of non less than 20 % ;
  • Loans to National Housing Bank including ( a ) above should be no less than 25 % ;
  • In province authorities securities including ( B ) above should be no less than 50 % ; and
  • In socially oriented sectors including the populace sector, concerted sector, house edifice by policyholders, own-your-own-home strategies including ( degree Celsius ) above should be no less than 75 % .

For General Insurance, The guideline for investing was set out as follows: ( a ) cardinal authorities securities of no less than 25 % ; ( B ) province authorities and public sector bonds of no less than 10 % ; and ( degree Celsius ) loans to province authoritiess, assorted lodging strategies of no less than 35 % . The staying 30 % investing could be in the market sector in the signifier of equity, long-run loans, unsecured bonds and other signifiers of private sector investing.

General insurance concern lines that are capable to tariffs include fire, motor, marine hull, tea harvest, technology, industrial all hazards, concern break, personal accident and workers ‘ compensation. Duties are managed by the Tariff Advisory Committee.

Evaluation Methods used for Insurance Companies

Different rating methods are used for insurance companies in different states.

Embedded Value ( EV )

The widely used method for rating of insurance companies worldwide is EV. This is the add-on of stockholders net worth and the value of in-force concern. Stockholders net worth equals the amount of net assets of life insurance companies adjusted to reflect market values of these assets. Value of in-force concern equals the present value of jutting future after-tax regulated net incomes to be generated from policies in force. Appraisal value ( AV ) adds the value of future new concern ( good will ) to the EV.

The embedded value is higher for life insurance companies that can present across all these variables.

  • Investing Tax returns: Higher investing return will supply better investing borders for insurance companies, raising overall profitableness and embedded value
  • Expenses: Better cost control, running under budgeted disbursal will supply better disbursal net income
  • Doggedness: This measures how successful insurance companies are able to retain its clients
  • Claims: Better mortality and morbidity experience would present higher hazard net income
  • Merchandise Mix: and in conclusion, merchandise mix will impact all of the above.

For case, insurance companies holding a higher proportion of the traditional gift and whole life policies, ( all else being the same ) would hold a higher embedded value owing to the both the higher burden in these policies and besides owing to the longer life of the policy supplying the insurance companies with a more drawn-out hard currency flow. In contrast ULIP ‘s have lower burden and besides shorter continuances. The individual premium policies have the lowest embedded value holding no reclamation premiums.

In kernel, EV is the present value of the current concern base, while AV is EV plus the value of the company ‘s growing potency. Normally for a typical life insurance company, the EV would be the big constituent while the AV would be a much smaller proportion. Normally in markets where there is a developed life insurance market, the ratings would be given to run between the EV and AV.

Problem with utilizing EV and Appraisal Value for India

Unfortunately, the Indian insurance industry and has merely spurted growing and presently all private companies are incurring big losingss and initial set-up costs, therefore the EV and Appraisal value methods of rating are non utile. For most life insurance companies, the disbursals are likely to be still rather high owing to high get down up costs and money spent on making a distribution web, selling and advertisement and spread outing agent web ( as they all rely on the bureau theoretical account ) as they are all quickly scaling up their concerns. Further, owing to the high modesty demands and the high acquisition costs that most life insurance companies have to incur, they are still doing accounting losingss. Most of these insurance companies could interrupt even in about another 2-3 old ages by around FY09.

Solution ( NBAP )

The best suited rating method at the current stage of the insurance industries is NBAP ( new concern achieved net income ) . It is the present value of the hereafter net incomes

expected from the new concern written through that policy. Each merchandise carries different NBAP borders. ULIP ‘s for illustration have a NBAP border of around 19-20 % v/s 30-33 % borders for traditional gift merchandises. Single premium policies, in

contrast, are the least profitable with an estimated NBAP border of around 3-4 % .

An insurance company like LIC, which is at an advanced phase of its life rhythm, would likely hold EV accounting for 80-90 % of entire value of the house, while for new companies 80-90 % of the value will come from the NBAP computation.

For the bulk of the private insurance companies, the EV is likely to be really little owing to the really little value of the in force concern as they have been in being for merely about 6-7 old ages. Therefore, the value of the bing concern ( EV ) will be merely a little proportion of the entire actuarial value of the company with the new concern constituent of AV ruling. Hence, the rating of these companies would mostly be a map of their AV and they could potentially merchandise at a premium to their AV depending upon the likeliness of them being able to accomplish the jutting growing rates and the implicit in actuarial values.

Evaluations of Liabilitiess in Life Insurance

Evaluation of liabilities for life insurance companies require premises of the rate of involvement, rate of mortality, degree of future disbursals etc. Two methods to value liabilities of insurance companies which are Gross Premium method and Net premium method.

Gross Premium Valuation


= ( P.V of the benefits contracted to be collectible + P.V of the hereafter disbursals likely to be incurred + P.V of fillips likely to be declared in the hereafter ) – ( P.V of premium receivable )

An of import characteristic of this method is its transparence. It is possible for any one analyzing the rating study to judge whether sufficient borders have been provided for possible inauspicious developments. At the same clip, the method has one serious drawback, viz. , its sensitiveness to the assorted parametric quantities used. A fringy addition in the rating rate of involvement or a lessening in the expected degree of future fillips could take to a important decrease in liability and release of larger excess for distribution than what could be considered as prudent.

Net Premium Evaluation

Liability under a policy

= P.V of benefits contracted to be collectible – P.V of the true/net premium.

No expressed proviso is made for either hereafter disbursals or future fillips as under the gross premium method.

Practices in Different Developed states

1 ) United Kingdom:

Presently, the United Kingdom may possibly be the lone industrial state in which the net premium rating is prescribed as the statutory method of rating.

2 ) Canada

The statutory method of rating prescribed in Canada since 1992 is known as the Policy Premium Method ( PPM ) . The PPM is a gross premium prospective method of rating. Policy premium merely means the premium charged under a policy, i.e. , gross premium. The premises sing rating parametric quantities are based on the best estimations of future experience with proviso for inauspicious divergences. Though this method is similar to the gross premium rating discussed earlier, there are some important differences.

3 ) Australia

The statutory method of rating prescribed in Australia is the ‘Margin on Services Method ‘ . In this method, the liability is defined as the amount of I ) the best estimation value of policy liabilities, which is the sum required to run into future disbursals and benefits and two ) the value of future expected net income borders on the services provided to policyholders such as insurance of mortality hazards and ongoing disbursals of disposal.

4 ) Germany

The gross premium method of rating that is by and large used in Germany. The net premium method of rating, with Zillmer accommodation, is besides permitted.

Since 1986, the Indian insurance industry has been following the gross premium method of rating.

General Insurance

While good defined processs are in topographic point in about all the states for the rating of liabilities under the life insurance concern, it is non so in instance of the general insurance concern. The systems in trend are more general than specific. The lone judicial admission is that the system followed should be in conformity with the GAAP. As per the European directives, the balance sheet needs merely to demo the managers ‘ sentiment about the fiscal place of the general insurance company. In the USA, the managers have liberty to put an appropriate value on the liabilities. In general, it is the duty of the accounting profession to guarantee that the value placed on the liability is just and sensible. In many European states, it is the revenue enhancement governments and non the insurance regulators who require that the sum of militias shown be estimated scientifically.

Investings of insurance companies have been mostly in bonds floated by GOI, PSU ‘s, province authoritiess, local organic structures, corporate organic structures and mortgages of long term nature.

Liability ( known as the Technical Reserve ) under a general insurance portfolio can be loosely defined as the amount of:

  • the sum of premium estimated as required to cover the hazard during the balance policy period falling after the balance sheet day of the month ( Unearned or Un-expired Premium Reserve – UPR ) ,
  • the sums expected to be paid in future in regard of the claims already reported by the balance sheet day of the month ( Loss Reserve ) ,
  • the sum expected to be paid in future in regard of claims that might hold occurred but could non be reported to the insurance company till the balance sheet day of the month ( Incurred But Not Reported – IBNR ) ,
  • the direct disbursals expected to be usually incurred for the colony of the above two categories of claims, and
  • militias required to be held on a prudent footing towards calamity losingss or a individual incident giving rise to multiple claims.

Investings Evaluation

By and large, under life insurance policies, premiums are received in progress and after supplying for acquisition and direction disbursals, the current cost of claims and other spending, the balance of premium is available for investing. These balance premiums and the investing income is available to run into claims, which would happen in ulterior old ages.


The aims regulating the investing are liquidness, safety and optimisation of output, provided that the plus profile is loosely attuned to the liability profile.


The liquidness, i.e. , the ability of an plus to be converted into hard currency instantly and without loss, is more relevant in the instance of the general insurance concern as its contracts are for really short footings and it is besides more susceptible to crisp and random fluctuations in claim spending than the life insurance concern. The liquidness may besides be of importance to a life insurance company during its formative old ages, because of higher incidence of disbursals of direction.

However, this would bit by bit decrease with growing in size, since the premium and investing income together would so be more than sufficient to run into operational disbursals and policy spending. Safety and optimisation of output are what any insurance company would look to usually.

In Canada, Australia and the UK, the insurance companies have no limitation in the affair of investing of financess. Controls are exercised, non at the clip of investing, but merely at the clip of presentation of solvency. For the intent of this presentation, there are rating regulations for assets, cap on each plus class in any one organisation and admissibility regulations, so as to take the companies towards care of a prudent plus profile.

In the USA, although both the society and the Government have accepted that competition should be the driving rule that should steer their economic system, there are both qualitative and quantitative investing limitations in insurance. The qualitative restrictions specify eligible types of investings and minimal quality standards for eligible investings. Quantitative restraints have the double aim of guaranting portfolio variegation and forestalling unwanted control of other houses by insurance companies through big investings in any one house. Until 1951, insurance companies were non permitted to put in common stock.

Insurance Profitableness

An insurance company makes net incomes by three ways:

  • when the existent mortality rates are lower than the estimated hazard premium charged
  • when economic systems of graduated table are better than what has been priced in the policy and
  • when returns on investings are higher.

Profitability besides depends on the merchandise mix.

A life insurance company ‘s net incomes ‘ are a consequence of the difference of:

Grosss earned by manner of:

  • Hazard premium received from the policies sold by the insurance company ;
  • Investing output earned on the financess it invests ; and
  • Other burdens originating from efficiency additions.


Payouts made by manner of

  • Claims ;
  • Operating disbursals of the insurance company ; and
  • Interest paid out

However, in the Indian context, most of the private insurance companies are still at a really early phase of the insurance life rhythm holding begun their operations merely about five old ages ago. To that extent, for all the private Indian life insurance companies, their disbursals are likely to be much higher the investing output may non be well higher than the involvement paid out.

Some ratios to mensurate the net income, effectivity and selling scheme of insurance companies are ROA ( Return on Assets ) , ROE ( Return on Equity ) and Lapse ratio.

  • ROE for insurance companies should lie between 10 to 15 %
  • ROA should lie between 0.5 to 1.0 % scope.
  • Lapse ratio is calculated by spliting the nonchurchgoing life of insurance contracts during a specified period and contracts in consequence at the start of the specified period.

Life Insurance

An insurance company like LIC, which is at an advanced phase of its life rhythm, would likely hold EV accounting for 80-90 % of entire value of the house, while for new companies 80-90 % of the value will come from the NBAP computation. As of 2006 ICICI Prudential is the lone private company that has reported NBAP so far. They showed a NBAP of INR 528 crore in FY2005-06 from INR 312 crore in 2004-05. Bajaj Allianz reported net income of INR 63 crore in 2006-07, the most profitable company so far. They mobilized new concern premium of INR 4270 crore which is the largest any private sector life insurance company has sold so far.

General Insurance

The non-life insurance industry reported premium income within India of Rs.20359 crore in 2005-06 as against Rs.17480.59 crore during 2004-05, exhibiting a growing of 16.46 per cent. During the twelvemonth, the four public sector non-life insurance companies underwrote premium of Rs.14997.06 crore as against Rs.13972.96 crore in 2004-05, i.e. , a growing of 7.33 per cent ( 4.77 per cent in 2004-05 ) . The eight private sector insurance companies underwrote premium of Rs.5361.53 crore as against Rs.3507.62 crore in 2004-05 describing a growing of 52.85 crore ( 55.35 per cent in 2004-05 ) .

Tax return to the Stockholders

Three of the public sector non-life insurance companies which reported net net incomes in 2005-06 have contributed Rs.266 crore to the treasury as dividends. Due to net losingss reported by National, no dividends were declared. New India besides declared bonus portions in the ratio of one for every three portions held. Of the seven private non-life insurance companies which reported net incomes in 2005-06, two declared dividends. While ICICI Lombard declared dividends for the 3rd back-to-back twelvemonth, IFFCO Tokio declared the 3rd one-year dividend holding skipped it in the fiscal twelvemonth 2004-05.

Below is the dividends paid by public sector insurance companies for 2005-2006:

Growth and Future

With a big population and untapped market, insurance happens to be a large chance in India. The insurance concern ( measured in the context of first twelvemonth premium ) grew at 47.93 per cent in 2005-06, exceling the growing of 32.49 per cent achieved in 2004-05. With dismaying growing in the yesteryear, the insurance industry is predicted to turn even faster in the coming old ages.

Life Insurance

Life insurance industry recorded a premium income of Rs.105875.76 crore during 2005-06 as against Rs.82854.80 crore in the old fiscal twelvemonth, entering a growing of 27.78 per cent. The part of first twelvemonth premium, individual premium and reclamation premium to the entire premium was Rs.21275.75 crore ( 20.09 per cent ) ; Rs.17509.78 crore ( 16.54 per cent ) ; and Rs.67090.21 crore ( 63.37 per cent ) , severally.

The 12 non-life participants collected Rs 10,427 crore in premium during April-August 2006 as compared to Rs 8,668 crore in the corresponding period in old twelvemonth in the general insurance industry.

Entire Sector Premiums are expected to turn at 16 % p.a. for the following 5 old ages. Private sector is expected to turn at 59 % CAGR. Private participants are expected to derive market portion of 45 % by 2010. GDP from insurance sector which constituted 12 per cent of GDP in 2000-01 increased to 19.3 per cent in 2004-05 harmonizing to the IRDA.

While the overall sector premium growing will go on to be in the 15-20 % scope, premium income for the private sector is expected to turn at a much faster rate ( estimated at 59 % CAGR over 2005-2010 ) as they are expected to go on to derive market portion owing to:

  • Increasing demand for new merchandises like wellness insurance and pension financess
  • Aggressive enlargement of distribution web
  • Low base consequence

Growth To Decelerate Near Term ( FY07 )

A crisp slowing in the ‘single premium ‘ policies is expected as the regulator, IRDA, has late come out with ordinances qualifying that from June’06 onwards, all ULIP ‘s would hold to hold a life screen of at least 3 old ages and has besides lowered the maximal committee that can be paid on ULIP ‘s. In peculiar, this affects all unit linked policies which were structured as individual premium policies. Hence, the FYP growing may slow to 35 % from a judicious 85 % last twelvemonth. Players like Bajaj Allianz and SBI Life that have a high proportion of individual premium policies may see sharper slowing. We, nevertheless, expect traditional policies ( endowment / whole life ) to turn at +40-50 % dad. Hence, in FY07, the FYP ( first twelvemonth premiums ) growing is expected to slow to 30 % ( v/s 93 % in FY06E ) driven by a crisp lag in individual premium policies to under 20 % from 120 % in FY06E. However, traditional merchandises ( whole life and gift ) are expected to garner more impulse and that should, assist back up overall industry growing ( private participants ) at +30 % .

Convergence of Financial sectors

Some economic experts have predicted the convergence of fiscal sectors with insurance companies in the hereafter. This has already taken topographic point in European Unions and the USA ( Glass-Steagall Act 1933 ) will beef up the insurance industry further.

The improved public presentation in the economic system is besides reflected in the insurance industry. The premium underwritten in India and abroad by life insurance companies in 2005-06 increased by 27.78 per cent which was higher than the growing ( 24.31 per cent ) in 2004-05. In the instance of non-life insurance companies the corresponding growing was 15.61 per cent as against a growing of 11.57 per cent in the old twelvemonth. First twelvemonth premium including individual premium accounted for 36.63 per cent of the entire life premium. Renewal premium accounted for the staying. First twelvemonth premium including individual premium recorded a growing of 47.94 per cent driven by a important leap in the unit-linked concern. During the twelvemonth, four public sector non-life insurance companies reported a growing of 6.87 per cent in underwriting of premium in and outside India whereas the eight private sector insurance companies reported

a growing of 52.85 per cent. The market portion of the private non-life insurance companies in 2005-06 has increased to 25.13 per cent from 19 per centum attained in the old twelvemonth. The figure of policies written by the private insurance companies increased by 73.90 per cent whereas for the populace sector insurance companies it decreased by 1.54 per cent.


India is among the most promising emerging insurance markets in the universe. The major drivers include sound economic basicss, a lifting middle-income category, an bettering regulative model and lifting hazard consciousness.

The basis for recognizing potency was arguably laid in 2000 when India undertook to open the domestic insurance market to private-sector and foreign companies. Significantly, foreign participants participated in most of these new companies – despite the limitation of 26 % on foreign ownership. Incumbent state-owned insurance companies have so far managed to keep their ain and retain dominant market places. Yet, their market portion is likely to worsen in the close to medium term. Important stairss have therefore been already taken, but there are still major hurdlings to get the better of if the market is to recognize its full potency. To get down with, India needs to foster liberalise investing ordinances on insurance companies to strike a proper balance between insurance solvency and investing flexibleness. With the current proposal in the parliament to raise the foreign investing cap to 49 % , the hereafter has possible. Furthermore, both the life and non-life insurance sectors would profit from less invasive ordinances.

In the life sector, insurance companies will necessitate to increase attempts to plan new merchandises that are suited for the market and do usage of advanced distribution channels to make a broader scope of the population. There is immense untapped potency, for illustration, in the mostly undeveloped private pension market and the rural sector. Private insurance companies will hold a cardinal function to play in functioning the big figure of informal sector workers. The same is true for the wellness insurance concern. In add-on, the rapid growing of insurance concern will set increasing force per unit area on insurance companies ‘ capital degree. The current equity keeping ceilings, nevertheless, could restrict the ability of new companies to quickly shoot capital to fit concern growing.

A cardinal challenge for India ‘s non-life insurance sector will be to reform the bing duty construction. From a pricing position, the Indian non-life section is still to a great extent regulated. Some 75 % of premiums are generated under the duty system, which means that they are frequently below market glade degrees. Reinsurance in India is chiefly provided

by the General Insurance Corporation of India ( GIC ) , which receives 20 % mandatory cedings from other non-life insurance companies.

Equally far as reinsurance is concerned, policymakers have to acknowledge that insurance and reinsurance can non be treated in the same mode. Due to the alone nature of reinsurance, it is necessary to de-link the sector from ordinances regulating direct insurance companies. To let ramification of foreign reinsurers, for illustration, would do the market more attractive for international participants and procure screen for natural calamity hazards which, today, are chiefly uninsured.

Finally, the mostly underserved rural sector holds great promise for both life and non-life insurance companies. To unleash this potency, insurance companies will necessitate to demo long-run committedness to the sector, design merchandises that are suited for the rural population and utilize appropriate distribution mechanisms.