India and UK Financial Insurance Industry Analysis

India and UK Financial damages Industry AnalysisChapter 1 IntroductionThe monetary performance of amends labor contribute be assessed by knowing either its strategies or by knowing its profitability. Know leadge of strategy go forth helps in examining internal and external shoes of a comp both. Comparative subject field of damages vault of heaven is analysis of financial performance of whatsoever oddmentitution company. This is directly linked with the earning potential and effectiveness of heed strategies of a company.Choosing a wise damages is in truth crucial because of, balance to the perils and returns. The reason for choosing Indian and UK policy industry for the enquiry is because of improved stintingalal berth of the rural and attach in the value of insurance policy in the country during last several years. The UK Economy is the largest in Europe and is in resembling manner ranked as the fifth worldwide as per the market exchange rates, in bourns o f GDP (Broadberry et al, 1992) were Indian economy is now improving and it is now booming ingathering in insurance companies were greatest effect of Indian economy during the last several years.This would need a grate deal of financial planning knowledge, as well as the knowledge close the current financial market indeed it can comp be the different to the insurance companies the analysis of different insurance companies from India and UK. Also insurance companies has to manage their investment in such a way that the principal amount should not erode, investor should get the sure returns those company has promised. This would invite a grate deal of knowledge about the portfolio management of the risk and return and comparative degree study of insurance industries.Comparative study of insurance is also a topic of hunger for many economists. Till date many researches has been carried out for comparative study of financial analysis in banking sphere and very few research has be en taken on insurance industry. The main purpose of the research is to find comparative study of insurance companies in India and UK. What characteristic leave behind de depotine of insurance industry is the main thrust behind the research. Further research is carried out to know in depth relationship of various characteristics that will make up the of Indian and UK insurance industry. The main outline objectives of the research ar as underA Research Design is the framework or plan for a study which is used as a guide in collecting and analyzing the data collected. It is the blue print that is fol execrableed in completing the study. The underlying objective of research cannot be attained without a proper research design. It specifies the methods and procedures for acquiring the information needed to conduct the research effectively. It is the over every last(predicate) ope symmetrynal prototype of the project that stipulates what information needs to be collected, from which s ources and by what methods.Objectives of the researchThis research has been carried out to comparative study of insurance companies and analyzes financial performance between Indian and UKs insurance companies. The main aims of the research atomic number 18To analyze financial performance of insurance companies in India and UKTo evaluate factors that de termine financial performance of insurance companiesTo carry out strategic financial analysis of insurance in India and UKThe structure of the research paper is as follows Chapter 2 reviews the literature on comparative study of insurance sector Chapter 3 describes the subject matter of the research the Indian and UK economy and insurance industries Chapter 4 outlines the methodology and data used in this study Chapter 5 presents the analysis and Findings and Chapter 6 discusses the results obtained in the context of the underlying theory the findings of another(prenominal) empirical research Chapter 7 concludes the research outli ning the limitations of the current study and makes recommendations for further work.Chapter 2 Literature Review2.1 TheoryInsurance is, a contract in which one party agrees to compensate another party fir any losses or damages caused by risk identified in the contract in exchange for the payment of a lump summarize or full pointic amounts of money to the first party. In simple meaning facilitates recompense during crisis situations, insurance means promise of compensation for any potential future(a) losses.Insurance is a form of risk management mainly used to hedge against the risk of a contingent loss. It is designed to protect the financial certificate system of an individual, company or other entity in the case of unexpected loss. Insurance is define as the realistic transfer of the risk of a loss, from one entity to another, in exchange for a subvention. It is a contract between two parties the underwriter (the insurance company) and the insured (the person or unit seeki ng the cover) in which the insurer agrees to pay the insured for financial losses arising out of any unforeseen casefuls in return for a regular payment of gift. These unforeseen events are defined as risk and that is why insurance is called a risk cover.Insurance whitethorn be described as a social device to fall down or eliminate risk of loss to carriage and property. Under the plan of insurance, a large number of people correlate themselves by sharing risks affiliated to individuals. The risks which can be insured against include fire, the perils of sea, death and accidents and burglary. Any risk contingent upon these, may be insured against at a premium suitable with the risk touch. Thus collective bearing of risk is insurance.Analyzing insurance companies is very different from analyzing corporate and thus presents unique challenges and industry specific issues. The ability of any insurance company to meet its policy obligations is the foundation of the industry. Absent the trust of policyholders in the financial integrity of any insurer and the industry as a whole, this risk transfer mechanism/industry would collapse. This truth is even to a greater extent acute in the ES industry where no guaranty funds exist, take out New Jersey.However, rapid maturement of Insurance sector during the situation liberalization tip is seen as the most substantive event in financial sector hist. in view of the fact that then, lot of changes take place in the sector as it was exposed to new challenges of competitive competition. For the first measure, the hugger-mugger and unconnected players were given entry and thus the sector saw a wonderful rate of growth in its chore. A well-developed insurance sector is needed for economic training for a rising economy like India as it provides pine-term funds for physical and social infrastructure progress at the same time make stronger the risk taking ability.The investment supplies for India in the upcoming years a re well-known. Thus, Insurance sector, to some extent, can enable investments in infrastructure developing to help maintain economic growth of the country. In this backdrop, we raise two questions what is the contribution of insurance sector growth towards economic development and financial intermediation in India and United Kingdom. Our study does not stop here as we take a step further to examine the financial and economic growth effects of Insurance sector reforms and the rate of growth of reforms.The insurance companies offer a comprehensive range of insurance plans. The most common types include term livelihood policies, endowment policies, joint animation policies, whole life policies, lend cover term assurance policies, unit-linked insurance plans, group insurance policies, pension plans, and annuities. oecumenical insurance plans are also available to cover motor insurance, home insurance, travel insurance and wellness insurance.Due to the growing contract for insura nce, more than(prenominal) and more insurance companies are now emerging insurance sector all over the world. With the opening up of the economy, several international leaders in the insurance sector are trying to venture into the insurance industry.The comparative study of insurance sector, Analysis of ratios are calculated from companys balance sheet and income statement and are used to evaluate the performance of the company in a particular reporting period.Analysis of ratios can be compared to the previous years in tell apart to assess trends or between the comparable companies across the industry in classify to get the relative performance estimation. It is very important that every ratio should have a reference point the industry (sector) average or median. The ratio analysis works better if comparing ratios not with the complete make up of companies within a particular industry, but with a preferred subset of companies that share certain features, produce the similar pro duct, and have identical macroeconomic and organisational factors bear on them.For the study of companies, operating in several industries it can be helpful to run a cross-sectional analysis to identify a group of firms, involved in the same mix of industries. In some cases a proportion to the economy averages can be meaningful, especially in successful or compress economies. in that respectfore, stable margins may be a good indicator during the recession, while the industry and economy averages are declined.It is also important to that usually conclusions can not be made from reviewing one set of ratios. That creates a necessity of a complex analysis of one set of ratios against another. The classification of the objective ratio for the comparison may require a substantial amount of work and a good judgment in order to evaluate a range of possible and acceptable values.Although the understandable simplicity, such ratios have certain limitations that often make them most usefu l at identify questions to be answered rather than giving answers to them. There are multiple factors affecting and limiting comparative study of insurance sector, in particular the actual comparability of the firms and different accounting policies used by them are among the most important ones.The issue of comparability may become one the critical aspects to pay attention to while performing the analysis. Various macroeconomic or legislative factors may apply to the companies in the same industry but in different countries that sometimes makes a direct comparison inappropriate. Comparisons with other companies may become even more difficult because of different accounting policies, especially outside the US. Thus different accounting methods may result in significantly different ratio values that require normalization by the analyst.2.2 Classification of insurance sectorThere are mainly two types of insurance life and non-life (general)Life insurance is touch on with making prov ision for specific event happening to the individual, such as death whereas universal Insurance(non-life) is more unremarkably concerned with provision for a specific event affects properly, such as fire, flood , larceny, burglary etc.The major difference between Life Insurance and General Insurance is the Principal of indemnity. Indemnity means making good the loss i.e. for tangible goods, one can make good for the loss that has been caused due to reasons like theft, fire or natural disaster. Here basically we can value the exact monetary value of a commodity, but in case of life insurance the principal of indemnity does not work, since we can not value in any way the value of human life.2.3 There are five-spot main sectorsLife InsuranceHome InsuranceAuto InsuranceHealth InsuranceDisability InsuranceSection 2 (11) of Insurance do work 1938 defines Life Insurance Business as followsLife insurance Business is the business of effecting contracts of insurance upon human life, inc luding any contract whereby the payment of money is assured on death or the happening of any contingency dependent on human life and any contract which is subject to the payment of premium for a term dependent on human life and shall be deemed to include. (Mukherjee and Hanif, 2007)In simple term we define life insurance as a contract in which the insurer in consideration of certain premium, either in a lump sum or by other triennial payments, agrees to pay to the assured sum of money , on the happening of specific event contingent on the human life.2.4 Benefits of insurance industriesLife insurance has long been a staple in basic estate planning. Life insurancecan provide an income tax-free death benefit* far in surplus of the premiums paid. However, much of the life insurance proceeds can be wasted if the ownership and beneficiary designations are not properly structured.Superior to Any former(a) Saving PlanUnlike any other savings plan, a life insurance policy affords full prot ection against risk of death. In the event of death of a policy holder the insurance company makes available the full sum assured to the policyholders near and dear ones.Encourages and Forces ThriftA saving deposit can easily be withdrawn. The payment of life insurance premiums, however, is considered sacrosanct and is viewed with the same seriousness as the payment of interest on a mortgage. Thus, a life insurance policy in effect brings about compulsory savings.Easy Settlement and Protection against CreditorsA life insurance policy is the only financial instrument the proceeds of which can be protected against the claims of a creditor of the assured by effecting a valid assignment of the policy.Administering the bequest for BeneficiariesSpeculative or unwise expenses can promptly cause the proceeds to be squandered. Several policies have foreseen this possibility and provide for payments over a period of years or in a combination of installments and lump sum amounts.Ready Marketa bility and Suitability for Quick BorrowingA life insurance policy can, after a certain time period (generally three years) ,be surrendered for a cash value. The policy is also acceptable as a security for a commercial loan, for example, a student loan. It is particularly advisable for housing loans when an acceptable LIC policy may also cause the lending first appearance to give loan at lower interest rates.Disability BenefitsDeath is not only hazard that is insured many policies also include disability benefits. Typically, these provide for outpouring of future premiums and payments of monthly installments spread over certain time period.Accidental Death BenefitsMany policies can also provide for an extra sum to be paid (typically equal to the sum assured) if death occurs as a result of accident.Tax ReliefUnder the Indian Income Tax Act, the following tax eternal sleep is available20% of the premium paid can be deducted from your total income tax liability.100% of the premium pa id is deductible from your total taxable income.When these benefits are factored in, it is found that most policies offer returns that are comparable or even better than other saving modes such as PPF, NSC etc. Moreover, the cost of insurance is a very negligible.The issue of comparability may become one the critical aspects to pay attention to while performing the analysis. Various macroeconomic or legislative factors may apply to the companies in the same industry but in different countries that sometimes makes a direct comparison inappropriate. Comparisons with other companies may become even more difficult because of different accounting policies, especially outside the US. Thus different accounting methods may result in significantly different ratio values that require normalization by the analyst.Seasonality may also affect the ratios if the business is a subject to seasonal fluctuations in demand, thus year-end values may not be enough representatives and should also be norma lized.Most of the ratios are preferred to be within the industry averages or economy norms. For example, all turnover ratios belong to this category. However, for some ratios the extreme deviations from the industry averages may mean that the company is highly attractive for the investors. This is usually true for all ratios dealing with income or cash flows.There are different insurance companies that offer wide range of insurance options and an insurance purchaser can strike as per own convenience and preference. Several insurances provide comprehensive coverage with affordable premiums. Premiums are periodical payment and different insurers offer diverse premium options.Insurance companies may be classified into two groupsLife insurance companies (which sell life insurance, annuities and pensions products) andNon-life, General, or Property/Casualty insurance companies (which sell other types of insurance).Life insurance is concerned with making provision for specific event happe ning to the individual, such as death whereas General Insurance(non-life) is more unremarkably concerned with provision for a specific event affects properly, such as fire, flood , theft, burglary etc.The major difference between Life Insurance and General Insurance is the Principal of indemnity. Indemnity means making good the loss i.e. for tangible goods, one can make good for the loss that has been caused due to reasons like theft , fire or natural disaster. Here basically we can value the exact monetary value of a commodity, but in case of life insurance the principal of indemnity does not work, since we can not value in any way the value of human life.2.5 Introduction of insurance sectorIndiaIn India, the concept of insurance was never a serious thought as compared to other countries. People still are under insured, life insurance premium to gross Domestic Product (GDP) ratio is a mere 1.4% as compared to a wellnessier rate of 8% amongst other developing with worthless state of work provided.Presently in India, the insurance sector is nationalized, services are rendered by Life Insurance Corporation of India (LIC) and General Insurance keep company (GIC) along with its 4 subsidiaries .While LIC provides life insurance, GIC is concerned with non life insurance. Motor, marine, fire, health and personal accident insurance. LIC employs people in various departments publicity, public relation department , development department, personal department , accounts department, legal department ,investment department , inspection department, mortgages department vigilance department, foreign department, corporate planning department, building department etc.Of late, fan tans nod for the insurance Regulatory and Development Authority (IRDA) bill has changed the whole scenario. With the passage of the bill, entry of Private Indian as well as foreign companies, a long with existing players, in the insurance sector will add variety and quality to the present insu rance services. The other peremptory impact would be on creation of new employment opportunities. Till now employment in the insurance sector was considered akin to any government job, but now with private participation, it will assume significance importance and probably become an exciting career option.UKsThe UK Insurance sector trunk a crucial contributor to the UK economy after the public, banking and manufacturing sectors. The industry accounts for approximately 10% of total UK IT expenditure, and positive growth is expected to continue for the abutting few years as insurance firms begin to realize the benefits to be gained from IT investment.Although the United Kingdom (UK) insurance market is now one of the five largest in the world, relatively little is known about the practices of the major firms and policy-makers which influence its operations. In particular, whilst the determinants of rating agencies assessments of United States (US) insurers is well documented, publi shed studies have yet to provide comprehensive cause about insurance company ratings in the UK. (Hardwick, P and et al, 2000)2.6 Current scenario of insurance industryBreaking of strict monopoly of LIC was not an easy task where to an audience who spelled insurance as LIC. LIC is working for last 50n years and caved its name for itself in the Indian psyche. Insurance being long term contract, an established name means persuasion of security and more importantly LIC policies come with the safety tag-the most touted government guarantee.To enter private insurers with an altogether new agency force, all ready to hawk freshly designed insurance policies. and the market scene a government owned established insurance entity-the Life insurance Corporation with a field force of over 6,00,000agents and more than 80 products to choose from.Purchase of Insurance is a decision that determine by a number of demographic as well as personal behavior factors. Main responsible factors include Ag e, Income, Education, Risk, etc. whatsoever of the important determinants as review by different scientists in their research are as under2.7 Risk and return in industryRisk seems to be a fact of life experienced by an individual as well as by a whole organization. This risk may be economic, physical or financial. There is an attach in unexpected losses caused by natural disasters as well as accidental damage. Wealth is subject to possible loss, and therefore everyone from individual to the whole financial firm desire to invest in loss prevention activities that reduce the probability of loss (Hoffman, 2007). A sense of security may be the next basic goal after food, clothing, and shelter.There are various forms of risk is exist in the market. All the risks are differed from each other. Some risks creates a quick big impact on a business while, the impact of some risks can be seen at a long run. The risk in business is always associated with losses. Prevention and management of ri sk is only possible after having sufficient information regarding its intensity. Preventing and managing risk is one of the burning issues for the corporate world. The management of any company is always looking for the thing that will reduce the risk on their investment and definitely gives some output on the account of their investment. The last-ditch thing that will satisfy this need is the return. Return is the proportionate sum of capital given to the investors for their investment. In other words, return is some kind of security against the investment made for any kind a business.Figure 2.1 Risks management in businessAssetMarketCreditOperatingBusiness eventLiquidityCatastropheNon-CatastropheRiskFinancial risk is mainly divided in to 2 main categories i.e. Systematic or Market risks and Unsystematic risk. The risk associated with an investment can be broadly divided into two categories based on nature and occurrence of risk. Some risks are associated with the firm, and that r isks are called as firm-specific, whereas the rest of the risk is associated with market condition and generally affects all investments in whole market. The firm specific risk can be further sub-divided in to various categories. Some firm specific risks are affect s project value that is called Project specific risk and in some cases projects value is modify by the nature of competitions and that type of risks are known as Competitive risks. Some risks are affecting the value of a whole industry and so known as Industry associated risks. In some cases, all the companies in a market will affect by macro economic factors and so that type of risk is known as Market specific risk (Friend and Bicksler, 1977).Default risk is the risk fallen on the part of financial institution or a creditors for your investments i.e. weather they are able to make a monthly return on your asset or not. To achieve short term financial goals most of the investors preferred cash investments. The only limita tion with use of cash investments is that, they are unable to produce higher returns over long term as compared to other financial options. The only reason for this is cash investments are unable to adjust inflation rates. In other words cash investments are not preferable source of investment for long term project. So, what are the other options that will satisfies needs for investment of long term project.2.8 Empirical research scotch decisions are made on both the negative as well as positive issues. Positive issue studies on insurance step by step integrated these issues via assimilating developments in the field of risk and uncertainty following works by Arrow (1963), Lewis (1989), (1953) and others. The economics on insurance demand became more attentive on evaluating the amount of risk to be shared between the insured and the insurer rather than evaluation of life or property values.Economic value judgments are made on both the normative as well as positive issues. Later stud ies on insurance gradually incarnate these issues via assimilating developments in the field of risk and uncertainty following works by von Neumann and Morgenstern (1947), Arrow (1953), Debreu (1953) and others. The economics on insurance demand became more purposeful when determining the amount of risk to be shared between the insured and the insurer rather than evaluation of property values.Headen and Lee (1974) studied the effects of short run financial market behaviour and consumer expectations on purchase of ordinary life insurance and developed structural determinants of life insurance demand.Morris and Barbara A (2003) study about Risk Insurance and mean study related with a Wedge between Insurers and Reinsurers, authored by credit analysts and legitimate disagreements between insurers and reinsurers about the values attributed. Criteria and claims values, insurers and reinsurers are equally concerned with the Risk.Cole et al, (2008) theoretical in observed research related to the comparative analysis between property-casualty insurance industry, studies commonly focus on either insurers or reinsurers.Richard et al (2008) give article of features a presentation and discussant comments on hurricane and wind insurance organized by Richard A., for the American Risk and Insurance Association (ARIA) 2007 Annual Meeting in Quebec City, Quebec, Canada.Venard et al. (2008) determine in the article of analyzes Hungarys insurance sector as an important part of the countrys economic transition from a centrally planned economy to a market economy. It details the historic economic development of the Hungarian insurance market from a state monopoly to a competitive.Yu, Tong et al 2008) study about Intangible assets facilitates insurers capacity to retain existing business and attract new clients. In his study it can be shows that analyze how the incentives to protect intangible assets affect asset risk-taking behaviour of property and ability insurers.Browne et al. (1993) concluded that income and social security expenditures are significant determinants of insurance demand. They further concluded that inflation has a negative correlation with demand of purchasing for insurance.Beck and Webb (2003) identified the two main services provided by life insurance income replacement for premature death and long-term savings instruments. They further found that demographic variables, higher levels of education and greater urbanisation as self-employed person factors in explaining insurance demand.Income has been found to be having a positive association with health insurance purchase decision consistently in different studies conducted in different countries Propper (1989) in UK Cameron, Trivedi (1988) in Australia and Hurd and McGarry (1997) in USA.Health insurance choice essentially entailed a simple decision whether or not to purchase private health insurance (Barrett and Conlon 2003). Binary discrete choice models using either logit or probit has been used to analyse determinants of this type of purchase decision. Cameron and Trivedi and Cameron (1991) specified a conditional expected good function that is associated with alternative health care regimes. The consumer chooses the regime that maximizes expected utility.Feldstein (1973) has argued that as the price of health care increases, the demand for insurance should increase as well because this causes an increase in the risk of net worth depletion and thus an increase in the demand for insurance. Healthcare expenditure largely depends on healthcare costs. Recent research has documented that most of the secular change in health insurance coverage can be attributed to higher health care costs (Cutler et al. 2002).Zietz (2003) and Hussels et al (2005) has studied about purchasing behaviour of a customer to purchase life insurance over a period of 50 years. The research further concluded that there is a positive association observed between increase in savings behaviour , financial services industry and demand for life insurance.Beenstock et al. (1988) noted that marginal tendency to insure i.e. increase in insurance spending when income rises by 1$, differs from country to country and premium rates are varies directly with real rates of interest.Browne and Kim (1993) found from his study that income and social security expenditures are significant determinants of insurance demand however, inflation has a negative correlation with demand of insurance.Beck et al. (2003) found out the two main services provided by life insurance income replacement for premature death and long-term savings instruments. They considered three demographic variables i.e. young dependency ratio, old dependency ratio and life expectancy, higher levels of education and greater urbanization as independent factors in explaining insurance demand.Income is positively co-related with purchase of health insurance product, concluded from various studies conducted in different count ries by Propper (1989) in UK Cameron and Trivedi (1988) in Australia and Hurd and McGarry (1997) in USA.Barrett and Conlon (2003) concluded from their study that choice of health insurance essentially entailed a simple decision whether or not to purchase private health insurance. Binary discrete choice models using either logit or probit has been used to analyze determinants of this type of purchase decision.Cameron and Trivedi (1991) specified a conditional expected utility function that is associated with alternative health care regimes. The consumer chooses the regime that maximizes expected utility.Feldstein (1973) noted that as the price of health care increases, the demand for insurance should also increase. This is because an increase in the risk of net worth depletion. Healthcare expenditure largely depends on healthcare costs.Nyman (1999) noted that higher healthcare costs may led to higher demand for insurance in the face of rising costs. However, people belonging to diff erent income groups are likely to respond differently to these changes. Kronick and Gilmer (1999) argue persons with low incomes and few assets buy insurance primarily to protect their health.Van De Ven and Van Praag (1981) noted that, education and income are generally positively correlated. Higher income generally decreases the prospect cost associated with the purchase of private health insurance. Overall, increases in both income and education would be expected to lead to an increase in the probability of buying the insurance.Some studies conducted in context with the financial performance of General Insurance Companies of India. The Researcher has studied those research works which are as followsPerformance of various plans marketed by Life Insurance Corporation of India A case study of Rajkot Division, A dissertation by Mrs.Sonal Naina evalua