Performance of Insurance Sector-A Literature Review

Dr. Bhag Singh Bodla

(Professor & Chairman, University School of Management, KUK. Email- bsbkuk@gmail.com)
Ms. Seema
(Research Scholar, University School of Management, KUK. Email-seemachauhan66@gmail.com)

Indian Insurance Market

The insurance industry of India consists of 52 insurance companies of which 24 are in life
insurance business and 28 are non-life insurers. Among the life insurers, Life Insurance Corporation
(LIC) is the sole public sector company. Apart from that, among the non-life insurers there are six public
sector insurers. In addition to these, there is sole national re-insurer, namely, General Insurance
Corporation of India. Other stakeholders in Indian Insurance market include Agents (Individual and
Corporate), Brokers, Surveyors and Third Party Administrators servicing Health Insurance claims.
Out of 28 non-life insurance companies, 5 private sector insurers are registered to underwrite
policies exclusively in Health, Personal Accident and Travel insurance segments. They are Star Health
and Allied Insurance Company Ltd, Apollo Munich Health Insurance Company Ltd, Max Bupa Health
Insurance Company Ltd, Religare Health Insurance Company Ltd and Cigna TTK Health Insurance
Company Ltd. There are two more specialized insurers belonging to public sector, namely, Export Credit
Guarantee Corporation of India for Credit Insurance and Agriculture Insurance Company Ltd for Crop
Insurance. Insurance penetration of India i.e. Premium collected by Indian insurers is 3.96 % of GDP in
FY 2012-13. Per capita premium underwritten i.e. insurance density in India during FY 2012-13 is US$
53.2.

Non-Life Insurance Business Performance:

2012-13
Public Sector
Premium Underwritten (Rs in Crores)

2011-12
Private
Sector

Public Sector

Private Sector

35022.12

27950.69

30560.74

22315.03

689.68

380.56

528.41

329.3

Number of Offices

6190

1466

5281

1394

Incurred Claim Ratio

79.56

84.79

89.22

88.22

Number of Grievances

20164

60358

12721

82790

Grievances Resolved During the Year

19057

60230

11110

82741

Grievance Resolved (in percent)

94.51

99.79

87.33

99.94

New Policies Issued (in Lakhs)

Life Insurance Business Performance:

2012-13
Public
Sector
Premium Underwritten (Rs in
Crores)

2011-12
Private
Sector

Public
Sector

Private
Sector

208803.58

78398.91

202889.28

84182.83

367.82

74.05

357.50

84.42

3526

6759

3455

7712

Benefits Paid (Rs in Crores)

134922

57571

117497

35635

Individual Death Claims (Number

of Policies)

750576

127906

731336

122864

Individual Death Claims Amount

Paid (Rs in Crores)

7222.90

2147.32

6559.51

1849.23

Group Death Claims (Number of

lives)

245467

119970

244314

158093

Group Death Claims Amount Paid

(Rs in Crores)

1697.37

949.08

1586.75

794.99

New Policies Issued (in Lakhs)

Number of Offices

Claim Settlement Ratio (in

percent)

99.25

99.74

97.42

89.34

Review of Literature:Many researchers have shown interest in the field of Insurance sector. Various studies are
available regarding Privatization in Indian Insurance Sector and its growth and efficiency and
effectiveness. Several others parameters like efficiency of Indian Insurance Sector due to FDI
involvement, comparative performance evaluation of Indian Life and Non-Life Insurance companies
after the privatization (IRDA bill, 2000) are also considered in review of literature. The findings of these
studies are:
BARROS (1996) made a study titled Competition effects of price liberalization in
Insurance. This paper proposed a methodology to assess the degree of market power in homogeneous
insurance lines and how it changed with price liberalization. Since price liberalization is associated with
a fundamental change in market rules, the analysis by reduced form equations, with a parameter shift
after the relevant episode, is inappropriate. A different approach was thus used. Two models were
constructed to account for the different interaction mechanisms which may prevail before and after price
liberalization. The analysis was based on econometric estimation of firms' first-order condition for profit
maximization in sales effort choices. An application to the Portuguese auto-insurance market was
presented. Two distinct time periods were considered and panel data is used: 1982- 1988, characterized
by price regulation, and 1989-1990, characterized by pricing freedom. A clear change in firms' market
conduct has occurred after the price liberalization episode. The writer found that for the latter period
(1989- 1990) firms behaved in a more competitive way than in the previous period (1982-1988), where a
significant degree of collusion was identified.
BOUBAKRI and COSSET (1998) made a study in order to check the performance of newly
emerged privatized firms titled The Financial and Operating Performance of Newly Privatized
Firms: Evidence from Developing Countries.
The writers set the objectives to determine/check whether, following privatization, the firms increase
(i) their profitability, (i) their operating efficiency, (iii) their capital expenditures, and (iv) their output.
They also examined the impact of privatization on employment levels, capital

Structure and dividend policies. For the purpose of examining the change in the financial and operating
performance data from 79 companies from 21 developing countries that experienced full or partial
privatization during the period from 1980 to 1992 were taken. And the use of accounting performance
measures adjusted for market effects in addition to unadjusted accounting performance measures is
done. And the writers found that both unadjusted and market-adjusted results show significant increases
in profitability, operating efficiency, capital investment spending, output, employment level, and
dividends. It was also observed that there is a decline in leverage following privatization but this change
is significant only for unadjusted leverage ratios. The results are generally robust when writers partition
data into various subsamples.
Cummins and Santomero (1999) found that deregulation could deteriorate the efficiency and
productivity of financial institutions in his paper titled Change in the life insurance
industry: Efficiency, technology and risk management. For Spanish insurance
industry, Cummins and Misas (2006) found that on an average, Spanish insurers experienced positive
technical change during the study period and the firms were catching up to the frontier implying that
consolidation generally helped, although the industry had negative technical change (i.e., technical
regress). There has been an extensive research examining the role of consolidation, organizational form
and distributions systems in the US insurance industry such as Cummins, Tennyson and Weiss (1999),
Cummins, Weiss and Zi (1999), and Berger, Cummins, and Weiss (1997).
Ranade and Ahuja (1999) presented overview of Life Insurance Operations in India in their
research paper titled life Insurance in India- Emerging Issues. They have identified the emerging
strategic issues in light of liberalization and the impending private sector entry into insurance. The need
for private sector entry has been justified on the basis of enhancing the efficiency of operations,
achieving a greater density and penetration of life- insurance in the country, and for a greater
mobilization of long-term savings for long gestation infrastructure projects. The writers described that in
the wake of such coming competition, the LIC, with its 40 years of experience and wide reach, is in an
advantageous position. However, unless it addresses strategic issues such as changing demography and
demand for pensions, demand for a wider variety of products, and having greater freedom in its
investments, LIC may find it difficult to adapt to liberalized scenario.

Rao (2000) studied privatization and foreign participation in Life Insurance Sector. He
observed macroeconomic implications of privatization and foreign participation in the insurance sector,
especially the life insurance sector, are far-reaching as the life insurance industry, coterminous with the
Life Insurance Corporation (LIC) of India, is dominant in two aspects: pooling and redistributing risks
across millions of policyholders and performing financial intermediation. He suggested that the issue of
privatization and foreign participation must be approached carefully with a 'step-by-step approach', and
should be preceded by microeconomic institutional and legal reforms.
Sinha (2002) studied a journey titled Privatization of the Insurance Market in India: from the
British Raj to Monopoly Raj to Swaraj she observed that the IRDA has taken a "slowly slowly"
approach. It has been very cautious in granting licenses. It has set up fairly strict standards for all aspects
of the insurance business (with the probable exception of the disclosure requirements).she is in favor of
this statement that too many regulations kill the incentive for the newcomers; too relaxed regulations
may induce failure and fraud that led to nationalization in the first place and India is not unique among
the developing countries where the insurance business has been opened up to foreign competitors.
Bakshi (2002) attempted to contribute some strategies for Indian insurance companies after
liberalization in insurance sector. He touched upon various parameters for which strategies are given.
These aspects are (i) job generation and skills required,(ii) strategies for life insurers and non-life
insurers; legislation (iii) related to customer/investors protection. He also described some tends for the
future.
Sinha, Pratap Ram (2006) attempted to measure the operating efficiency of life Insurance
companies in his research paper named Operating Efficiency of Life Insurance Companies: A Data
Envelopment Approach. He compared the operating efficiency of 13 life insurance companies for the
financial year 2004-05 using the Data Envelopment approach (DEA). Secondary data were used and
taken from the annual reports of IRDA for the respective years. Thus operating income and the net
premium income of the observed life insurance companies have been taken as the output and the number
of agents employed by the companies and equity capital as the outputs. The finding was- efficiency
score of the life insurance companies with the same of the LIC show that the private insurance
companies are still lagging behind LIC however the difference is less sharp in terms of net premium
generation- the mean efficiency score of the private life insurance companies is only 36% if the

operating income is taken as the output indicator; which however increases to 54%, if the net premium
income is taken as the output indicator. In terms of net premium income, not only LIC but SBI life also
has a technical efficiency score of 1(these are technically efficient), rest have technical score less than 1.
In terms of operating income, no life insurance company except LIC was found to be technically
efficient.
Limitation-The result is based on the observation of one financial year and that too during the early
stage or de regulation. During the deregulation, the market concentration is declining and it may be
improved in coming 15-20 years.
Garg (2008) compared the technical and scale efficiency of 12 companies in India from the
financial year 2002-2003 to 2005-2006 using Data Envelopment Approach in his paper titled
Efficiency of General Insurance Industry in India in the post-liberalization Era: A Data
Envelopment Approach. He analyzed in to three cases, first case involves net premium as the output
against number of agents and operating expenses as inputs, the second case involves operating income
as the output against number of agents and operating expenses as inputs. Insurers who turned out to be
efficient under both CRS and VRS were the same in both the cases except for the year 2003-04.the third
case involves equity capital, number of agents and operating expenses as inputs and net premium
income as output.
Vadlamannati (2008) conducted a study titled Do Insurance Sector Growth and Reforms
Affect Economic Development? Empirical Evidence from India. The purpose of this paper is twofold. First, to investigate the relationship between insurance sector growth and economic development.
Second, to examine whether insurance sector reforms and rate of growth of these reforms are
influencing economic development, and to see if there is any long-run equilibrium and linear
combination between them. The period selected for the study is from 1980 to 2006. The data used are
mostly secondary in nature from various sources like websites of the Government of India, Reserve
Bank of India and the World Banks World Development Indicators 2006 and special data generated by
World Bank research groups. The results of the first part are interesting, showing that both the life and
total insurance sectors growth influence economic development, but the effects of non-life insurance
sector growth are felt only after a year. Another interesting result that emerges is that insurance sector
growth during the post-reforms period and postinsurance sector reforms period has a very strong
impact on economic development in India. This shows that the reforms process in general,

And in the insurance sector especially, has worked to the advantage of the economic development
process in the country. However, a comparison of the impact on economic development of insurance
sector growth during the economic reforms period with insurance sector reforms period shows that the
economic reforms interaction relation is much stronger. This tells us that economic reforms (the
liberalization programme) have a greater impact on economic development of the country than mere
insurance sector reforms.
Sinha and Chattergy (2009) estimated cost efficiency of the Life insurance companies
operating in India using the new cost efficiency approach suggested by Tone (2002) in their research
paper Are Indian Life Insurance Companies Cost-effective. The writers fount that there is an
upward trend in cost efficiency of the observed life insurers between 2002-03 and 2004-05.However, the
trend was reversed for the next two years i.e. 2005-06 and 2006-07.This has been so because of the fact
that during the initial years of observation, mean cost efficiency of the private life insurers was rising but
the trend was reversed in 2005-06 and 2006-07.
Cummins and Weiss (2011) reviewed the modern frontier efficiency and productivity
methodologies in research paper titled Analyzing firm performance in the insurance industry using
frontier efficiency and productivity methods. These methodologies have been developed to analyze
firm performance, emphasizing applications to the insurance industry. The writers focused on the two
prominent methodologies- stochastic frontier analysis using econometrics and non parametric frontier
analysis using mathematical programming. The paper considered the underlying theory of the
methodologies as well as estimation techniques and the definition of inputs, outputs and prices. And for
this purpose the writers chose 74 insurance efficiency studies are studies from 1983-2011 and 37
chapters published in upper tier journals from 2000 to 2011 are reviewed in detail. Of the 74 total
studies, 59.5% utilized Data Envelopment Analysis as the primary methodology. And it is also found
that there is growing consensus among researches on the definitions of inputs, outputs, and prices.
Das and Debnath (2012) compared the performance of public and private insurers after
liberalization of insurance sector in India. The objectives were to analyze the life insurance sector in
terms of premium collection, policies underwritten, death claim settlement, profit position and market
share after the liberalization of the insurance sector and to study the different marketing channels

adopted by the life insurance sector. He found that liberalization of the life insurance market has not
only ended the monopoly of LIC but also affected its market share. In terms of premium collection and
number of policies sold, private insurers growth rate is much higher compared to that of LIC resulting
in private insurers cornering a good % of market share and it is also observed that the financial crisis
has definitely made some impact on the private insurers which can be judged from the fact that in 200910 the private insurers sale of policies was less compared to that in 2008-09.
Sharma (2013) conducted a study titled Analysis of FDI in insurance sector in India and the
objectives set for the study were (i) to know the strength/opportunities and weakness/threats in insurance
sector, to know the significance and issues related to FDI in Insurance sector. The author considered the
Governments proposal of raising the FDI slab from 26%-49% and found that (i) India has a large
population with increasing per capita income that is why new products were launched while distribution
channels have been broadened up including internet and bank branches, (ii)These developments were
instrumental in propelling business growth, in real terms, of 19% in life premiums and 11.1% in non-life
premiums between 1999 and 2003.(iv)Indias improving economic fundamentals will support faster
growth in per capita income in the coming years, which will translate into stronger demand for insurance
products. (v)Strong growth can be sustained for 3040 years before the market reaches saturation.
(vi)There is plenty of room for growth in personal accident, health and other liability classes.
And she identified some weaknesses prevalent (i)India is among the lowest-spending nations in
Asia in respect of purchasing insurance (China, which spent USD 36.3 per capita on insurance products
& Indian spent USD 16.4) . (ii) Even after the liberalization of the insurance sector, the public sector
Insurance companies have continued to dominate the insurance market. (iii) In the long run, other forms
of non-price competition like aggressive advertisement wars are likely to lead to increasing costs,
eventually harming the interests of the consumers. (iv) A key challenge for Indias non-life insurance
sector will be to reform the existing tariff structure. (v) From a pricing perspective, the Indian non-life
segment is still heavily regulated and (vi) Reinsurance is only provided by GIC and reputation of the
Foreign Partners. Several myths are there which should be considered according to the writer.
She also observed some myths related to FDI like (i) FDI cap hike is necessary to improve
insurance penetration and to improve product offering (ii) FDI cap hike is necessary to increase infer
investments.

Kapoor, Harsha (2013), Managing Director of Avizare solutions opined in his article FDI in
Insurance -For a Better Future that increasing the limit of FDI in Insurance sector will bring positive
changes. He said the Brazil, India and China are three such countries which offer identifiable
opportunities with low penetration rates and high economic growth rates. Life premium has grown at a
CAGR of over 23% during last decade and is expected to grow at 15% over next decade. He also
mentioned some growth drivers e.g. rising income and growth of middle class, societal changes and
urbanization, financial sophistication. It is also estimates that if limit is increased up to 39% then level of
FDI in insurance sector will be pegged at INR 400bn by year 2020 from INR 68 bn (57 bn in life
insurance and 11 bn in General Insurance). Some suggestions are made that in order to grow properly,
insurance companies will have to shift focus to untapped markets, innovate products and services,
achieve operational efficiency, and strengthen risk management practices.
Ghosh, Amlan (2013) tried to find the impact of reforms taken place regarding insurance sector
on growth of Insurance sector. The objective was to check whether there is significant impact of certain
reforms on the performance and growth of insurance companies business. For this purpose, the writer
has identified the dependent variables and explanatory variable along with a few control variables that
affect the overall life insurance development in India. The index named life Insurance Reforms Index
was constructed after this research. Secondary data were used and taken from various sources like
annual reports of LIC and IRDA, website of RBI etc. Data period is considered from 1990/1991 to
2008/2009. The writer found that there is significant impact of reform process on development in
insurance sector and on overall economy. Thus in order to improve the performance of the industry and
the economy, reforms should be taken wisely.
Dutta (2013) made a study titled Impact of privatization on productivity: A non- parametric
analysis of Indian Insurance Sector. The objective was to analyze the impact after privatization era in
insurance sector i.e. 2000 and after (when IRDA came into existence) on the productivity of insurance
business in India. For the purpose of analyzing the productivity changes in life and non-life insurance
business, the application of non-parametric Malnquist Indices was used. Three principal approaches
have been used for measuring the output: the asset or the intermediation approach, The user-cost
approach and value-added approach. The intermediation approach views the insurance company as a
financial intermediary that manages a reservoir of assets, borrowing funds from policyholders, investing
them on capital markets, and paying out claims, taxes and costs. The user-cost method determines

whether a financial activity is an input or output based on its net contribution to the revenues of the
financial institution. The value-added approach counts output as important if they contribute a
significant benefit, based on operating cost allocations.
For analysis of the productivity, a five years (20052006 to 20092010) panel data on three
inputs and two outputs of 15 life and 12 non-life insurers has been considered. Data availability for this
study is restricted to the information submitted by the insurers in compliance with the regulatory
authority (IRDA). He found that total factor productivity decreased in case of non-life insurance
business but it increased in case of life insurance. Several reasons are found behind the changes. In life
insurance business, technological regress and lower pure technical efficiency are the main causes of
decreasing total productivity, though there is an improvement in scale efficiency, which gives a higher
technical efficiency. On other side, in case of non-life insurance business, technological progress is the
sole cause of productivity improvement.
The empirical results from this study suggest that technological improvement for Indian life insurance
firms are very much needed to raise the efficiency and productivity. The implications of the findings are:
to improve and gain productivity, Indian insurance industry should focus on technological
improvements, skill enhancement of employees and market expansion with higher penetration level and
aggressive marketing strategies.
Some similar studies to - Life insurance in India: the relationship between reforms and growth in
Business
In the study The Malmquist total factor productivity index, Bjurek (1996) defined Malmquist
output and input quantity indexes specified by Caves et al. (1982). Based on these indexes, a Malmquist
total factor productivity index has derived for general production structures. The definition maintains the
fundamental characteristic of productivity index as a ratio between an output quantity change index and
an input quantity change index.
Camanho and Dyson (2006) develop the measures, based on the Malmquist index, that enable
the decision-making units internal inefficiencies to be distinguished from those associated with their
group characteristics. The applicability of these measures is illustrated with the assessment of bank
branches performance.
Chakraborty, Sengupta, and Dutta (2011) found that the productivity growth in life insurance
industry is mainly dominated by five out of 14 most efficient firms. The technological regress is

interpreted as the firms needing more inputs to produce their outputs in the terminal year (2009)
compared to what they needed at the beginning of the study period (2005).
The discussion paper in IRDA report (2011-2012) sought to discuss issues relating to tying and
bundling insurance policies with other services and goods and how conflicts of interest that arise
need to be dealt with. Several situations are described which give rise to conflicts of interest- (i) the
relationship between the distribution channel or a group entity and the targeted market segment, (ii) the
contractual relationship between the distribution the distribution channel and the insurance company,
(iii) impact of the cost of the distribution channel on the contracting terms between the insurers and
policyholders and (iv) marketing methodology that may lead to client confusion.

Conclusion
Several findings emerge from these studies:
The period after privatization in Insurance sector emerged very competitive and healthy for the
growth of the insurance sector. Many authors used the approach DEA to check the efficiency of the life
and non-life insurance companies and it was found that these companies are now more efficient as
compared to the era before IRDA act( privatization in Insurance Sector). If we see from comparison
point of view then still its public sector which is leading in Life Insurance sector. When financial and
operating efficiency was checked and comparison is made with existing firms then it was found that
newly established companies are also performing well, public sector existing company is ahead of them
though, but margin is very well. Strategies are studied in this report which was given after IRDA act to
the insurance companies in order to run their business effectively; these were not given for all the
aspects. Certain issues were identified which emerged due to Privatization.

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