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A Project Report on
“Ratio Analysis of IDBI Federal Life Insurance Co LTD”
A Summer Internship Project Report
Submitted to
AURORA’S BUSINESS SCHOOL
In Partial Fulfilment of the summer internship programme of
Post Graduate Diploma in Management (PGDM)
By
Mr. Kishan Kumar Sharma
DM-10-033
Aurora’s Business School,
Near NIMS, Punjagutta, Hyderabad. - 500 482
Tel: 040 2335 1891/92, 2335 0061/692 URL: www.absi.edu.in e-mail us: [email protected]
Certificate
This is to certify that the project work entitled
“Ratio Analysis of IDBI Federal Life Insurance Co LTD”
is the bona-fide work done by
Mr. Kishan Kumar Sharma
DM-10-033
As a part of their curriculum of
Post Graduate Diploma in Management (PGDM),
Aurora‟s Business School, Hyderabad.
Internal Guide SIP Co-ordinator Director
Aurora‟s Business School, Near NIMS, Punjagutta, Hyderabad. - 500 482
Tel: 040 2335 1891/92, 2335 0062/692 URL: www.absi.edu.in e-mail us: [email protected]
2
DECLARATION
This is to inform that I have completed a project work on “Ratio Analysis of IDBI
Federal Life Insurance Co LTD” while pursuing PGDM in Aurora‟s Business School.
I hereby declare that this project report is the original work carried out by me as
part of my academic course and has not been submitted to any other University or
Institution for the award of any degree or diploma.
Name : Kishan Kumar Sharma
Roll No. : DM-10-033 Signature
ACKNOWLEDGEMENT
I would like to thank everyone who is involved in assisting me in producing this
project report by bringing out creativeness in this project.
I would like to take this opportunity to thank my company guide Mr. Chandu
Sudheer Kumar Manager Distribution Officer at IDBI Federal Life Insurance Co Ltd.
Project guide Professor Venugopal Rajamanuri Faculty and Mrs. Harika faculty,
Aurora‟s Business school, for their undeterred guidance for the completion of the report.
I would also like to thank Mr. Viney who in spite of his busy schedule has co-
operated with me continuously and indeed, his valuable contribution and guidance have
been certainly indispensable for my project work
My parents need special mention here for their constant support and love in my life.
I also thank my friends and well-wishers who have provided their whole hearted support to
me in this exercise. I believe that this effort has prepared me for taking up new challenging
opportunities in future.
I hope that I can build upon the experience and knowledge that I have gained and
make a valuable contribution towards this industry.
With Regards and Gratitude
Mr. Kishan Kumar Sharma
Contents
Introduction ......................................................................................................................................... 1
Theoretical Background ................................................................................................................... 3
Industry Analysis ................................................................................................................................. 6
Company Analysis ............................................................................................................................ 25
Executive Summary: ........................................................................................................................ 36
Objective: ........................................................................................................................................... 37
Scope ................................................................................................................................................... 38
Methodology ...................................................................................................................................... 39
Analysis ............................................................................................................................................... 40
Conclusion .......................................................................................................................................... 57
Appendix ............................................................................................................................................. 58
Bibliography: ...................................................................................................................................... 67
List of Figures
Fig: 4.1 Current Ratio………………………………………………………………………………………………………………...…….40
Fig: 4.2 Quick Ratio……………………………………………………………….…………………………………………………..…….41
Fig: 4.3 Cash Ratio……………………………………………………………….……........................................................42
Fig: 4.4 New Business Ratio….………………………………………………………………………………………………………….43
Fig: 4.5 Return on Sales…………………………………………………………….........................................................44
Fig: 4.6 Return on Equity…………………………………………………………....………………………………………………….45
Fig: 4.7 Net Premiums Written………………………………………………………………………………………………………46
Fig: 4.8 Net Retention Ratio…………………………………………………………………………………………………………..47
Fig: 4.9 Commission’s Paid Ratio……………………………………………………………………………………………………48
Fig: 4.10 Expense Ratio………………………………………………………….………………………………………………………49
Fig: 4.11 Claim Ratio…………………………………………………………………......................................................50
Fig: 4.12 Combined Ratio…………………………………………………………..………………………………………………….51
Fig: 4.13 Renewal Expense Ratio………………………………………………..….................................................52
Fig: 4.14 Overall Expense Ratio………………………………………………..…………………………………………………..53
Fig: 4.15 Loss Ratio…………………………………………………………….………………………………………………………...54
List of Tables Table 6.2.1: Balance sheet of 2011-2012………………………………….………………………………………………...….59
Table 6.2.2: Balance sheet of 2012-2013…………………………………….…………..........................................60
Table 6.2.3: Balance sheet of 2013-2014……………………………………….………..........................................61
Table 6.2.4: P & L Account of 2011-2012………………………………………….…………………………………………....62
Table 6.2.5: P & L Account of 2012-2013………………………………………….……………………………………………..63
Table 6.2.6: P & L Account of 2013-2014………………………………………….………………………………………….....64
SUBMITTED BY:
Name of the student Kishan Kumar Sharma
Enrolment Number DM-10-033
Elective FINANCE
Mobile Number +91-7032152933
Email Id [email protected]
Linkedin https://www.linkedin.com/pub/kishan-
sharma/a2/a82/361
Twitter @kishansharma112
Name of the Organization IDBI Federal Life Insurance Co Ltd.
Address Branch:3-5-922,
Sri Sai Balaji Residency,
near Narayanaguda Flyover, Himayathnagar,
Hyderabad-500029
Main activity Insurance
Head of the Organization Vighnesh Shahane
Designation CEO
Office Phone +919666604367
Company Guide Chandu Sudheer Kumar
Designation of The Company Guide Manager Distribution
Company Guide E-mail id [email protected]
Reporting Date 4th May 2015
SIP Topic RATIO ANALYSIS AT IDBI FEDERAL LIFE
INSURANCE CO LTD.
1
Introduction
Importance and advantages of Ratio Analysis
Ratio analysis is an important tool for analyzing the company‟s financial performance and
for comparative analysis. The main important advantages of the accounting ratios are
follows:
i. Analyzing Financial Statements
ii. Judging Efficiency
iii. Locating Weakness
iv. Formulating Plans
v. Comparing Performance
Analyzing Financial Statements:
Accounting ratios are useful for understanding the financial position of the company.
Different users such as investors, management bankers and creditors use the ratio to
analyze the financial situation of the company for their decision making purpose.
Judging Efficiency:
These ratios are important for judging the company‟s efficiency in terms of its
operations. They help judge how well the company has been able to utilize its assets and
earn profits.
Locating Weakness:
Accounting ratios can also be used in locating weakness of the company‟s operations
even though its overall performance may be quite good.
Formulating Plans:
Although accounting ratios are used to analyze the company‟s past financial
performances, they can also be used to establish future trends of its financial performance.
As a result, they help formulate the company‟s future plans.
2
Comparing Performance:
It is essential for a company to know how well it is performing over the years and as
compared to other firms of the similar nature.
3
Theoretical Background
Ratio Analysis:
Ratio analysis is used to evaluate various aspects of a company‟s operating and
financial performance such as its efficiency, liquidity, profitability and solvency. The trend of
these ratios over time is studied to check whether they are improving or deteriorating.
Ratios are also compared across different companies in the same sector to see how they
stack up, and to get an idea of comparative valuations. Ratio analysis is a cornerstone of
financial statements.
Ratio analysis can be done for manufacturing companies and service companies.
IDBI is a service based company.
We are going to calculate Current Ratio, Quick Ratio, Cash Ratio, New Business ratio,
Return on Sales, Return on Equity, Commission Ratio, Net Premium ratio, Expense Ratio,
Renewal Expense Ratio, Overall Expense Ratio, Loss Ratio and Combined Ratio.
a) Current asset: A balance sheet account that represents the value of all assets that
are reasonably expected to be converted into cash within one year in the normal
course of business. Current assets include cash, accounts receivable, inventory,
marketable securities, prepaid expenses and other liquid assets that can be readily
converted to cash
CA = Current asset / Current Liabilities
b) Quick Ratio: An indicator of a company‟s short-term liquidity. The quick ratio
measures a company‟s ability to meet its short-term obligations with its most liquid
assets.
QR = (cash and equivalents + marketable securities + accounts receivable) /
current liabilities
c) Cash Ratio: The ratio of a company's total cash and cash equivalents to its current
liabilities. The cash ratio is most commonly used as a measure of company liquidity. It
can therefore determine if, and how quickly, the company can repay its short-term
debt. A strong cash ratio is useful to creditors when deciding how much debt, if any,
they would be willing to extend to the asking party
CR = {(Cash + Bank Balance) – (Inventory + Trade-Receivables)} / Current Liability.
4
d) New Business Ratio: New business premium refers to premium earned on new
contracts (policies) written in a given year. In any financial year new business premium
would thus include:
1. Single premium earned in that year.
2. First year premium on regular premium policies written in that year.
3. First year premium from regular premium written in previous years.
NBR = New Business of Previous Year / New Business of Current Year.
e) Return on Sales: A ratio widely used to evaluate a company's operational
efficiency. ROS is also known as a firm's "operating profit margin".
ROS = Net Income (before interest and tax) / Total Sales * 100
f) Return on Equity: The amount of net income returned as a percentage of
shareholders equity. Return on equity measures a corporation's profitability by
revealing how much profit a company generates with the money shareholders have
invested.
ROE = Net Income / Shareholders Equity * 100
g) Commission ratio: The ratio is calculated from current year commissions paid
divided by total revenue of that particular year.
CPR = Current year commissions paid/ Total Revenue * 100
h) Expense Ratio: The percentage of premium used to pay all the costs of
acquiring, writing, and servicing insurance and reinsurance. There is only one method
to measure the expense ratio, a trade basis, which is expense divided by written
premium and on a statutory basis when the expense is divided by earned premium.
ER = Operating Expenses/ Premium Earned * 100
i) Renewal Expense Ratio: RER is an indicator of the efficiency of an insurer.
RER is the proportion of the renewal premium income spent by the insurer on
payment commission and on expenses of management after allowing for cost of new
business of the year.
RER = renewal expenses/ renewal premium income.
5
j) Overall Expense Ratio: OER is calculated as Management expenses to gross
direct premium.
OER = Management expenses/ gross direct premium * 100
k) Net Premiums Written Ratio: NPW ratio is calculated as Net premium to
gross premium.
NPR = Net premium / Gross premium
l) Loss Ratio: The difference between the ratios of premiums paid to an insurance
company and the claims settled by the company.
LR = Claims paid / total earned premium.
m) Combined Ratio: The combined ratio measures the underwriting performance by
combining the loss ratio with the expense ratio and commission ratio. It will indicate
whether there is sufficient premium to cover the cost of claims. The expenses will
include the costs of reinsurance, claims handling, underwriting and administration.
n) Net Retention Ratio: The proportion of earnings kept back in the business as
retained earnings. The retention ratio refers to the percentage of net income that is
retained to grow the business, rather than being paid out as dividends. It is the
opposite of the pay-out ratio, which measures the percentage of earnings paid out to
shareholders as dividends.
Net Retention ratio = Net Income – Dividends / Net Income.
o) Claim Ratio: The claims ratios are claims payable as a percentage of premium
income. This is the equivalent of gross profit margin for an insurance business. An
insurer's investment income is also part of its core business so the comparison with
gross profit is not exact.
Combined ratio = (Claims + Expenses + Commission) * 100 / earned premium
6
Industry Analysis
Industry Overview:
In 1818, British established the first insurance company in India in Calcutta, the
Oriental Life Insurance Company. This Company however failed in 1834. In 1829, the
Madras Equitable had begun transacting life insurance business in the Madras Presidency.
1870 saw the enactment of the British Insurance Act and in the last three decades of the
nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897)
were started in the Bombay Residency. This era, however, was dominated by foreign
insurance offices which did good business in India, namely Albert Life Assurance, Royal
Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard
competition from the foreign companies.
In 1914, the Government of India started publishing returns of Insurance Companies
in India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to
regulate life business. In 1928, the Indian Insurance Companies Act was enacted to enable
the Government to collect statistical information about both life and non-life business
transacted in India by Indian and foreign insurers including provident insurance societies. A
number of amendments were drawn upon in 1938. The Insurance Amendment Act of 1950
abolished Principal Agencies. However, there were a large number of insurance companies
and the level of competition was high. There were also allegations of unfair trade practices.
The Government of India, therefore, decided to nationalize insurance business.
An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance
sector and Life Insurance Corporation came into existence in the same year. The LIC
absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies-245 Indian and
foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was
reopened to the private sector. In 1968, the Insurance Act was amended to regulate
investments and set minimum solvency margins. The Tariff Advisory Committee was also
set up then. In 1972 with the passing of the General Insurance Business Act, general
insurance business was nationalized with effect from 1st January, 1973. 107 insurers were
amalgamated and grouped into four companies, namely National Insurance Company Ltd.,
the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the
United India Insurance Company Ltd. The General Insurance Corporation of India was
incorporated as a company in 1971 and it commence business on January 1sst 1973.
7
Milestones in the Life Insurance Business in India:
Year Milestones in the life insurance business in India
1912 The Indian Life Assurance Companies Act enacted as the first statute to regulate the
life insurance business.
1928 The Indian Insurance Companies Act enacted to enable the government to collect
statistical information about both life and non-life insurance businesses.
1938 Earlier legislation consolidated and amended to by the Insurance Act with the objective
of protecting the interests of the insuring public.
1956 245 Indian and foreign insurers and provident societies taken over by the central
government and nationalized. LIC formed by an Act of Parliament, viz. LIC Act, 1956,
with a capital contribution of Rs. 5 crore from the Government of India.
This millennium has seen insurance come a full circle in a journey extending to nearly 200 years.
The process of re-opening of the sector had begun in the early 1990s and the last decade and more
has seen it been opened up substantially. In 1993, the Government set up a committee under the
chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in
the insurance sector. The objective was to complement the reforms initiated in the financial sector. The
committee submitted its report in 1994 wherein, among other things, it recommended that the private
sector be permitted to enter the insurance industry. They stated that foreign companies are allowed to
enter by floating Indian companies, preferably a joint venture with Indian partners.
The IRDA opened up the market in August 2000 with the invitation for application for
registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the power to
frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000 onwards framed
various regulations ranging from registration of companies for carrying on insurance business to
protection of policyholders‟ interests.
During the 2003 financial year, life insurance premiums increased by an estimated 12.3% in real
terms to INR 650 billion (USD 14 billion) while non-life insurance premiums rose 12.2% to INR 178
billion (USD 3.8 billion). Growth in insurance premiums has been averaging at 11.3% in real terms over
the last decade. There are strong arguments in favour of sustained rapid insurance business growth in
the coming years, including India‟s robust economic growth prospects and the nation‟s high savings
rates.
8
Recent Trends in the Insurance Sector:
1. Modern Marketing Approach:
Marketing strategies for insurance in the emerging scenario could be
understood in terms of the following steps: In India Insurance is sold and not bought. The
agents / Advisors by using various strategies sell the product by convincing the customers.
Moreover, they push Policies with the highest premium to pocket a higher commission. The
consultative approach to selling is the modern approach, which helps customers and
prospects to buy. A consultant makes calls and sells just like any other sales person. The
difference is in their attitude, their approach and their commitment. Here, the customer is
seen as a person to be served and not a person to be sold. It helps the purchaser to make
an intelligent decision. The four-step process includes:
Need Discovery
Selection of the Product
Need satisfaction presentation
Serving the sale
This approach to selling their products requires understanding of concepts and
principles borrowed from the fields of psychology, communications, and sociology and
needs a lot of personal commitments and self – discipline from the seller.
2. Product Innovations:
Insurers are continuously innovating new products based on forward-looking
models. They have developed new products addressing the new challenges in society and
products to address the hazards from new environmental issues. Understanding the
customers better has enabled Insurance companies to design appropriate products,
determine price correctly and to increase profitability. Product development is made
possible by integrating actuarial, ratings, claims and illustration systems. At present, the Life
Insurers are concentrating on the pension schemes and the Non-Life Insurers on many
innovative schemes of various realms and thereby enriching their market share. Moreover,
with increased commoditization of insurance products, brand building is going to play a vital
role.
9
3. Customer Education & Services:
In the present competitive scenario, a key differentiator is the professional
customer service in terms of quality of advice on product choice along with policy servicing.
Servicing focus is on enhancing the customer's experience and maximizing his convenience.
This calls for an effective CRM system, which eventually creates sustainable competitive
advantage and enables to build long lasting relationship.
4. Distribution Network:
While the traditional channel of tied up advisors or agents is the chief
distribution channel, insurers are looking to innovate and find new methods of delivering the
products to customers. Corporate agency, brokerage, Banc assurance, e-insurance
cooperative societies and panchayats are some of the channels, which are being tapped by
the insurers to reach the appropriate market segments. Now days, the urban masses are
tapped with the new techniques provided by Information Technology through Internet.
Rural masses are attracted by the consultative approach adopted by the Insurers. Moreover,
they attract the customers through telephone and mobile also.
5. Present Scenario of the Industry
The insurance sector is a colossal one and is growing at a speedy rate of
15-20%. Together with banking services, insurance services add about 7% to the country‟s
GDP. A well-developed and evolved insurance sector is a boon for economic development
as it provides long- term funds for infrastructure development at the same time
strengthening the risk taking ability of the country.
The insurance industry in India has come a long way since the time when
businesses were tightly regulated and concentrated in the hands of a few public sector
insurers. Following the passage of the Insurance Regulatory and Development Authority
(IRDA) Act in 1999, India abandoned public sector exclusivity in the insurance industry in
favour of market-driven competition. This shift has brought about major changes to the
industry. The beginning of a new era of insurance development has seen the entry of
international insurers, the proliferation of innovative products and distribution channels, as
well as the raising of supervisory standards. Significantly, the insurance business was opened
on two fronts.
10
Firstly, domestic private-sector companies were permitted to enter both life
and non-life insurance business. Secondly, foreign companies were allowed to participate,
albeit with a cap on shareholding at 26%. With the introduction of the 1999 IRDA Act, the
insurance sector joined a set of other economic sectors on the growth march.
The Insurance sector was opened up for private participation five years ago.
The insurance market has witnessed dynamic changes which includes presence of a fairly
large number of insurers both life and non-life segment. Most of the private insurance
companies have formed joint venture partnering well recognized foreign players across the
globe. The share of LIC for this period has come down to 75 percent, while the private
players have grabbed over 24 percent.
The primary growth drivers of this industry are as under:
Government Tax Benefits: Insurance companies enjoy the EEE benefits
giving insurance products an advantage over mutual funds.
Rising focus on the rural market: Since more than two-thirds of India„s
population lives in rural areas, micro insurance is seen as the most suitable aid to
reach the poor.
Today there are 25 general insurance companies including the ECGC and Agriculture
Insurance Corporation of India and 24 life insurance companies operating in the country.
11
Purpose and Need of Insurance:
Insurance is a mechanism that helps to reduce the effects of adverse situations in the
economical way. It promises to pay to the owner or beneficiary of the asset, a certain sum if
the loss occurs. The risk only means that there is a possibility of loss or damage. The
damage may or may not happen. Insurance is done against the possibility that the damage
may happen. There has to be an uncertainty about the risk. The earthquake may occur, but
the building may not have been affected at all. The word „possibility‟ implies uncertainty.
Insurance is relevant only if there are uncertainties. In case of a human being, death is
certain, but it‟s time is uncertain. The person is insured, because of the uncertainty about
the time of his death. In the case of a person who is ill, the time of death is not uncertain,
though not exactly known. It would be „soon‟. He can‟t be insured.
Insurance as a tool to Manage Risk:
Managing your risk constitutes a major element of your financial plan. In this section,
we discuss two broad areas: managing insurable risks (such as your life and home) and
managing investment risk (the variability of returns on your investments)
12
Basic Concepts of Insurance:
1) Perils and hazards:
i. A peril is an immediate, specific event, causing a loss and giving rise to risk
ii. An accident or illness is a peril
iii. A hazard is a condition that gives rise to a peril
Three Types of Hazards:
a) Physical hazards are characteristics of the individual that increase or reduce
the chance of peril. Examples are body structure (height related to weight),
blood pressure, sugar levels, cholesterol levels, etc.
b) Moral Hazards are habits or activities that increase risk, such as drug or
alcohol use. These have social, as well as, personal effects
c) Morale Hazards are individual activities that arise from a state of mind, such
as the casual indifference toward one's body as exhibited by individuals with
hazardous hobbies, such as jumping horses or flying ultra-light aircraft
Certain occupations are also morale hazards, such as professional, industrial
diving or bridge painting
2) Law of Large numbers:
Basically, the law of large number means that the larger the number of units
that are individually exposed to an event, the greater the likelihood that the actual
result of that exposure will equal the expected result. Insurance companies use the
law of large numbers to lessen their own risk of loss by pooling a large enough
number of people together in an insured group.
3) Adverse Selection:
Adverse selection occurs when the insured deliberately hides certain
pertinent information from the insurer. The information may be of critical nature as
these help in ascertaining the risk profile of the insured and accordingly help in
determining the correct premiums. However, non-disclosure of the information
which impacts the life of the insured can lead to faulty determination of premiums
13
and may lead to loss of the insurance company as the insurer will find it difficult to
do a prudent asset liability management owing to payment of more claims compared
to the receipt of premiums.
4) Insurable Risk:
There are various essential conditions that need to be fulfilled before
acceptance of insurability of any risk. In case of a scenario where the loss is too huge
that no insurer would want to pay for it, the risk is said to be uninsurable.
5) Self-insurance:
A method of managing risk by setting aside a pool of money to be used, if an
unexpected loss occurs. Theoretically, one can self-insure against any type of loss.
However, in practice, most people choose to buy insurance against potentially large,
infrequent losses. For example, at minimum, most people carry auto insurance and
health insurance.
14
Insurance and Risk:
1) Meaning of risk:
Risk is the potential of losing something of value. Values (such as physical
health, social status, emotional wellbeing or financial wealth) can be gained or lost when
taking risk resulting from a given action, activity and/or inaction, foreseen or unforeseen.
Risk can also be defined as the intentional interaction with uncertainty. Uncertainty is a
potential, unpredictable, unmeasurable and uncontrollable outcome, risk is a consequence of
action taken in spite of uncertainty.
2) Types of pure risk:
i. Personal Risks: The risks that directly affect an individual are known as
personal risks. They involve the possibility of the complete loss are reduction of
earned income, extra, expense and the depletion of financial assets. There are
four major personal risks.
ii. Property Risks: All non-living things owned by persons are property. Real state
land and building, vehicles machines and equipment‟s goods raw materials
furniture etc. are the common examples of property damaged or lost from
numerous causes. Real estate and personal property can be damaged by fire
lightening tornadoes, windstorms, earthquakes floods etc. There are two major
types of loss associated with the destruction or theft or property.
iii. Liability insurance: Is a part of the general insurance system of risk financing to
protect the purchaser (the "insured") from the risks of liabilities imposed by
lawsuits and similar claims. It protects the insured in the event he or she is sued
for claims that come within the coverage of the insurance policy.
3) The principle of pooling of risk:
To offset the possible effect of a loss, all those at risk can contribute a relatively
small sum of money (premium) to fund (pool) operated by an insurance company. The many
small sums of money people pay in premiums form a large pool of money. When a
contributor to the pool suffers a loss there is enough money to compensate (indemnify)
them. The result of co-operating with others in this way is that risks are 'spread' or 'shared'
15
between the many people and organizations that have contributed to the insurance pool.
For this reason insurance is sometimes said to be the 'pooling of risks'
4) Methods of handling Risk:
Because risk is the possibility of a loss, people, organizations, and society usually
try to avoid risk, or, if not avoidable, then to manage it somehow. There are 5 major
methods of handling risk
i. Avoidance,
ii. Loss control,
iii. Retention,
iv. Non-Insurance transfers,
v. Insurance.
16
Fundamental Principles of Insurance:
1) Indemnity:
This is the insurance principle by which a policy-holder is compensated for a loss
incurred. There are several important aspects to this principle.No profiteering. Although we
take out insurance to receive some money in compensation should we experience a loss,
we are not supposed to make a profit from our claim for compensation. The idea is that the
insurance policy should indemnify the insured, in other words return him or her to the
financial position before the event took place. Over insurance. If the insured over insures an
item (more than its true value), in the event of a loss he or she will only be compensated for
the true value under insurance. If a loss occurs where the item is underinsured, the policy-
holder will only receive a proportion of the loss.
2) Insurable Interest:
With the exception of life assurance (where a husband and wife can insure the life of
each other) it is not possible to insure against a risk unless you have an 'insurable interest'.
In other words, the insured must be the one that will suffer financially if an event occurred.
You can insure the house or car you own, but you cannot insure the car or house of your
neighbour. If your neighbour's house burns down you have lost nothing (unless you have
some property there, in which case you would have insurable interest).
3) Utmost Good Faith:
This aspect of insurance means that the parties to an insurance contract must be
truthful in the declaration they make. Obviously, this ruling affects the proposer who
provides the information upon which the insurer decides the premium and issues a policy.
4) Subrogation:
To subrogate means 'to take place of'. When an insurance company pays out
compensation on a claim, the money they pay out takes the place of article damaged. For
instance, if your car is 'written off' (too badly to be repaired), the insurance company will
indemnify you for the value of the car. The money they pay you takes the place of the car,
the damaged vehicle now becomes the property of the insurance company, who will sell it
and retain the scrap value.
17
5) Contribution:
It would be easy for a situation to arise in which a claim could occur where two
insurance companies are liable to indemnify the insured for the same vent, for example,
where two policies overlap. In such a case, both insurance companies will contribute
towards payment for the claim.
6) Proximate cause:
When an insurance policy covers a particular risk, it is quite possible that damage
may incurred which is not directly related to the terms of policy, but which still may be
indemnified by the insurance company. For example, your house may be covered by fire
insurance and, of course, the insurance company would be expected to pay out
compensation as a result of a fire; but they will also pay for damage to doors caused by the
fireman having to break into the house to fight the fire. However, such a claim will only be
allowed if the loss incurred is closely related to the original event. For example, if your car
is damaged in an accident and you leave it unattended for a long period of time the
insurance company would not necessarily be expected to pay for a travel rug stolen from
the back seat.
18
Risk Management:
1) Meaning and Objectives of Risk management:
Risk Management is a discipline for dealing with uncertainty. How the
discipline is practiced can lead to an organization achieving or failing in its objectives.
2) Steps in Personal Risk Management:
i. Identify the hazards.
ii. Decide who might be harmed and how.
iii. Evaluate the risks and decide on precautions.
iv. Record your significant findings.
v. Review your assessment and update if necessary.
3) Risk Control and Risk Financing:
Identifying risks is just the beginning, actions must be taken to do something
to eliminate or control the risk before it has the chance to cause injury, damage or
financial loss. This is called Risk Control. Risks can be transferred to other parties
either by contract or insurance. Or the risk can be reduced by implementing
procedures or controls such as administrative procedures, engineering, repairs or
maintenance, or security measures to reduce the chance of the risk occurring. Risk
Financing is an easy-to-use-and-understand reference explaining the various risk
finance options for any organization's liability and workers compensation risks. It
covers all the alternatives with cutting-edge analyses and explanations of
traditional insurance rating plans and alternative market options.
19
Insurance Pricing and Premium Calculation:
1) Objectives of rate making/rating:
Insurance is designed to reimburse your financial costs if you are affected
by an unexpected event such as damage to or loss to your property.
Examples of events that can be insured against include:
Home being flooded
Car being stolen
Being unable to work due to ill health
When you buy a policy to cover you against a risk, insurers use risk pricing to
work out how likely it is that you will make a claim and the likely size of that claim to
calculate your premiums (payments).
2) Important Factors in rating:
i. Age
ii. Health
iii. Whether you smoke
iv. How safely you drive
v. The likelihood of property flooding
vi. Where you live
3) Risk assessment and rating:
When insurers use risk pricing to set your premium, they consider the
different risk characteristics that might affect your policy. These characteristics help
insurers charge a fair price that reflects the risk of each customer making a claim, to
make sure you pay a premium that is in the interests of the fair treatment of all
customers.
20
Insurers can use risk pricing characteristics including:
Age
Health
Whether you smoke
How safely you drive
The likelihood of property flooding
Where you live
Insurers cannot use risk pricing characteristics on:
Gender
Race
Religion or belief
Sexual Orientation
21
Analysis of Life Insurance needs:
1) Economic value of human life:
The economic value of human life involves the length of life, and the net
economic contribution that a person could be expected to make during his or her
lifetime. Both of these areas involve issues that can be established through expert
testimony.
Total net economic value involves the life expectancy, the value of the person's
earnings and other economic contributions, and the valuation of the present value of
a stream of future uncertain monetary amounts.
2) Replacement of future income of the insured:
Insurance Cover will pay out a lump sum (or annual benefit if family income
benefit has been chosen) in the event of the death of the life assured. This could be
used to replace lost future income - and with it help give back a feeling of security to
those left behind. At a difficult time, it can ease money worries and help prevent
financial hardship.
22
Types of Life Insurance policies:
1) Term Insurance:
Term Insurance is the cheapest form of life insurance that provides full financial
coverage for a defined period of time. In the event of any unforeseen situation the
policyholder‟s family is taken care of and financial stability is ensured. Death benefit is
payable to the nominee who is usually a family member. You can choose to get a
lump sum amount or combination of lump sum and monthly amount as per your
requirement. Some companies also cover permanent or partial disability wherein the
policyholder‟s regular income is disrupted.
2) Whole Life Policy:
Whole life is a type of life insurance contract that provides insurance coverage of
the contract holder for his or her entire life. Upon the inevitable death of the
contract holder, the insurance playout is made to the contract‟s beneficiaries. These
policies also include a savings component, which accumulates a cash value. This cash
value is one of the key elements of whole life insurance.
3) Endowment Policy:
In endowment because as I said it is a combination of insurance and investment it
means if during the term of policy that life assured dies in such case beneficiaries will
get the benefits. Benefits are sum assured under the policy and also if there is bonus
or guaranteed returns or something that will also be paid to the beneficiaries.
However if the person survives throughout the term of policy at the time of
maturity whatever sum assured plus other benefits in form of interim bonus or
vested bonus that will be paid to the person himself who has bought the policy.
4) Investment Linked Insurance:
An investment-linked insurance plan is a life insurance that combines investment
and protection. Your premiums provide not only a life insurance cover, but part of
the premiums will also be invested in specific investment funds of your choice. You
get to choose how to allocate your insurance premiums towards protection and
investment.
23
5) Insurance Linked Annuities:
An investment-linked annuity is a type of lifetime annuity where your retirement
income varies to reflect changes in the value of investments such as stocks and shares.
So while you can benefit from stock market growth, there‟s also a risk that your income
could fall. However, all investment-linked annuities guarantee a minimum income.
6) Life Insurance policy Riders:
A provision of an insurance policy that is purchased separately from the basic policy
and that provides additional benefits at additional cost. Standard policies usually leave
little room for modification or customization, beyond choosing deductibles and coverage
amounts. Riders help policyholders create insurance products that meet their specific
needs.
7) Key man insurance:
Key man insurance can be defined as an insurance policy where the proposer as well
as the premium payer is the employer, the life to be insured is that of the employee and
the benefit, in case of a claim, goes to the employer. The `key man‟ here would be any
person employed by a company having a special skill set or substantial responsibilities
and who contributes significantly to the profits of that organization.
24
LIFE INSURANCE COMPANIES IN INDIA APPROVED BY
IRDA
1. Aegon Religare Life Insurance Co. Ltd.
2. Aviva Life Insurance Co. India Ltd.
3. Bajaj Allianz Life Insurance Co. Ltd.
4. Bharti AXA Life Insurance Co. Ltd.
5. Birla Sun Life Insurance Co. Ltd.
6. Canara HSBC Oriental Bank of Commerce Life Insurance Co. Ltd.
7. DHFL Pramerica Life Insurance Co. Ltd.
8. Edelweiss Tokio Life Insurance Co. Ltd
9. Exide Life Insurance Co. Ltd
10. Future Generali India Life Insurance Co. Ltd.
11. HDFC Standard Life Insurance Co. Ltd.
12. ICICI Prudential Life Insurance Co. Ltd.
13. IDBI Federal Life Insurance Co. Ltd.
14. India First Life Insurance Co. Ltd.
15. Kotak Mahindra Old Mutual Life Insurance Ltd.
16. Life Insurance Corporation of India
17. Max Life Insurance Co. Ltd.
18. PNB MetLife India Insurance Co. Ltd.
19. Reliance Life Insurance Co. Ltd.
20. Sahara India Life Insurance Co. Ltd.
21. SBI Life Insurance Co. Ltd.
22. Shriram Life Insurance Co. Ltd.
23. Star Union Dai-Ichi Life Insurance Co. Ltd.
24. Tata AIA Life Insurance Co. Ltd.
25
Company Analysis
Company introduction:
IDBI Federal Life Insurance is one of India‟s growing life insurance companies and
offers a diverse range of wealth management, protection and retirement solutions to
individual and corporate customers.
IDBI Federal Life Insurance Co Ltd is a joint-venture of IDBI Bank, India‟s premier
development and commercial bank, Federal Bank, one of India‟s leading private sector banks
and Ageas, a multinational insurance giant based out of Europe.
Having commenced operations in 2008, IDBI Federal was able to achieve breakeven
within just 5 years; the Company‟s passion for innovation and growth helped it achieve this
feat.
Through a nationwide network of 2,754 branches of IDBI Bank and Federal Bank,
and a sizeable network of advisors and partners, IDBI Federal Life Insurance has achieved
presence across the length and breadth of the country. As on December 31, 2014, the
company has issued nearly 6.8 lakh policies with a sum assured of over Rs. 39,425 crores.
IDBI Federal Life Insurance has total assets under management of 4,041 crores and a robust
capital base of over 800 crores, as on December 31, 2014.
26
Products of IDBI Federal:
IDBI federal is providing various insurance policies for the commonwealth of the
people and its customer in particular. The various insurance policies provided by the
company are:
INCOMESURANCE:
IDBI Federal Incomesurance Endowment and Money Back Plan is loaded with lots of
benefits which ensure that policyholder get Guaranteed Annual Pay-out along with insurance
protection which will help policyholder to reach their goals with full confidence.
Incomesurance Plan is very flexible and allows policyholder to customise their Plan as per
your individual and family‟s future requirements. Moreover it also allows policyholder to
choose Premium Payment Period, Pay-out Period, Pay-out Options and more.
HEALTHSURANCE:
Presenting the IDBI Federal Healthsurance Hospitalisation and Surgical Plan. If
policyholder aged 18 years to 55 years and currently in good health, this new insurance plan
is designed to help policyholder to manage the extra financial burden that comes with
hospitalisation, by providing a wide range of attractive benefits.
TERMSURANCE:
IDBI Federal Termsurance Protection Plan (Termsurance) comes with three cover
options which policyholder can select on the basis their requirement. Termsurance is
designed with a host of benefits & options aimed at satisfying their every need. It not only
allows policyholder to customise their plan as per their individual and family‟s needs, it also
comes with a host of benefits like convenient insurance cover options, flexible premium
payment terms, choice of policy term and lots more flexible options.
RETIRESURANCE:
A retirement plan designed to accumulate money to aid a comfortable retirement.
The plan provides a guaranteed return on investment and grows steadily over the years to
ensure that policyholder have a corpus on their retirement date, guaranteed.
27
CHILDSURANCE:
Whether policyholder‟s child wants to be a doctor, an engineer, an MBA, a
sportsman, a performing artist, or dreams of being an entrepreneur, the IDBI Federal
Childsurance Dream builder Insurance Plan will keep you future-ready against both, changing
dreams and life‟s twists. It allows policyholder to create build and manage wealth by
providing several choices and great flexibility so that policyholder‟s plan meets their specific
needs. Childsurance allows policyholder to protect their child plan with triple insurance
benefits so that their wealth-building efforts remain unaffected by unforeseen events and
their child‟s future goals can be achieved without any hindrance.
WEALTHSURANCE:
The Wealthsurance Milestone Plan is a unique Insured Wealth Plan designed to help
cross different milestones in one‟s life. It enables customers to save and build wealth under
the protection of Insurance to meet their financial goals. The Wealthsurance Milestone Plan
offers a wide range of Investment options, Insurance options and unmatched flexibility that
allows customers to customize a plan suited to their needs. Customers can plan for their
milestones like completion of school education for their child, a marriage, acquisition of a
new house and so on. This Plan comes with a wide range of 13 investment options and 7
insurance benefits - all packaged with a low charge structure and unmatched flexibility.
BONDSURANCE:
The IDBI Federal Bondsurance Advantage Plan is a single premium plan where
policyholder needs to make just a one-time investment. At the end of the chosen period,
policyholder will receive a guaranteed maturity amount. In case of death of the insured
person before the Maturity Date, a guaranteed Death Benefit will be paid.
GROUP MICROSURANCE:
IDBI Federal Group Microsurance Plan provides affordable life insurance cover to
groups. This plan is extremely useful to Micro Finance Institutions, Self Help Groups and
NGOs to insure the lives of their group members and thus provide security to the group
members‟ families. The plan can also be used for providing loan protection to the group
members‟ families.
28
HOMESURANCE:
IDBI Federal Homesurance Plan is a mortgage reducing term assurance plan –
MRTA, which offers protection to their home from their home loan. The Plan provides a
cover equal to the outstanding balance of their home loan against any unfortunate events
that may occur to policyholder. This plan gives people the option of a Single Premium.
LOANSURANCE:
Loansurance is a cost-effective way to ensure that the outstanding debt is settled in
the unfortunate event of death of the insured member. This term assurance plan provides
cover to a policyholder directly liable for loan repayment (and the partners, in case of a
partnership), as per the benefit schedule.
29
Vision mission of IDBI federal life insurance:
Vision: To be the leading provider of protection wealth management and retirement
solutions those meet the needs of our customers and add value to their lives.
Mission: To be transparent in the way we deal with our customers and to act with
integrity. To invest in and build quality human capital in order to achieve our mission.
Values:
Transparency
Value to customers
Rock solid and delivery on promise
Customer-friendly
Profit to stakeholders
30
Organization structure of the IDBI federal:
IDBI Federal has line structure as its Organizational structure. Features of
line organization are:
In line structure, authority flows from the top level to lower levels through various
managerial positions. There is vertical flow of authority and responsibility.
There are many levels of management depending upon the scale of business and
decision-making ability of managers. Each level of management has equal rights.
There is unity of command. Every person is accountable to his immediate boss.
There is limit on subordinates under one manager. A manager has control only over
the subordinates of his department.
Chairman
CEO/CFO/COO
HOD
Zonal Manager
Regional Manager
Branch Manager
Senior Manager
Relationship Manager
31
Market Share of IDBI Federal:
IDBI Federal‟s New Business Premium grows by 23%, compared to industry‟s
negative growth of -15%.
Achieves 44% increase in the number of new business policies sold.
Product mix further shifts to long-term traditional products, thereby driving
profitability through product-mix. Traditional products account for 83% of new
business premium.
13th month persistency improves to 76%. Among top 5 companies in persistency
experience.
63.4
7 5.88
5.66
4.40
3.14
2.73
2.46
2.30
1.27 1.27 1.05
1.02
0.99
0.99
0.58
0.53
0.42
0.41 0.41
0.39
0.33
0.20 0.09
MARKET SHARE FOR FY'12~FY'13
(IN %)
Life Insurance Corporation of India
ICICI Prudential Life Insurance Co. Ltd
HDFC Standard Life Insurance Co. Ltd
SBI Life Insurance Co. Ltd
Max Life Insurance Co. Ltd
Bajaj Allianz Life Insurance Co Ltd
Birla Sun life Insurance Co. Ltd
Reliance Life Insurance Co. Ltd
Tata AIG Life Insurance Co. Ltd
ING Vysya Life Insurance Co. Ltd
MetLife Life Insurance Co Ltd
Aviva Life Insurance Co Ltd
Canara HSBC OBC Life Insurance Co Ltd
Kotak Life Insurance Co Ltd
Star Union Dai - Ichi Life Insurance Co. Ltd
Future Generali Life Insurance Co Ltd
IDBI Federal Life Insurance Co. Ltd
India First Life Insurance Co.
Ltd Bharti Axa Life Insurance Co.
Ltd Aegon Religare Life Insurance Co.
Ltd Shriram Life Insurance Co.
Ltd DLF Pramerica Life Insurance Co.
Ltd
32
Financial Highlights of IDBI Federal Life:
‘INR Cr’s
2011-12 2012-13 2013-14
Premium Income
New Business Premium 311.01 345.13 315.69
Renewal Premium 425.69 459.55 510.55
Total Premium 736.7 804.68 826.25
New Business Annualised Premium Equivalent
(APE)
224.65 275.96 278.97
Profit/(loss) before tax -69.86 9.24 80.12
Provision for tax - - -
Profit/(loss) after tax -69.86 9.24 80.12
Sum Assured in force 21578.08 28508 34549.04
Assets under management 2528.58 2963.64 3508.85
Expense Ratio 25.59% 24.00% 23.00%
IDBI have achieved a profit of 80 crore in this financial year, 9 crore in the last
financial year. Despite challenges, the company recorded total new business (APE), growth
of 1.1% against a decline of -4.9% recorded by private life insurance players In the new
business of individual life segment (APE), IDBI has achieved a growth of 8.5% compared to -
3.4% recorded by private life insurance companies. In both the parameters above, IDBI‟s
growth rate was among the top 10 companies which posted positive growth during FY
2013-14.
Our company‟s market share in the individual life new business (APE) improved to
1.54% in 2013-14 as compared to 1.38% in the previous year. We also registered a growth
of 11% in Renewal Premium over the previous year.
Efficient expense management is a constant focus at IDBI Federal Life Insurance. We
constantly monitor and review our operating model to ensure that costs remain an
advantage. This has helped us further reduce our expense ratio during the year. Our
expense ratio is creditable among our peers in the industry.
33
Milestones in IDBI Federal Life:
2006-IDBI Bank, Federal Bank and Belgian-Dutch insurance major Fortis Insurance
International NV signed a MOU to start a life insurance company
2008-IDBI Fortis Life Insurance Co. Ltd., which started its operations in March 2008
2008-IDBI Federal becomes one of the fastest growing new life insurers to collect
premiums worth Rs 100 crores
2009-IDBI Fortis announces Rs 250cr capital infusion
2009-Nimbus ropes in IDBI Fortis as title sponsor of India–Sri Lanka series
2009-'IDBI Fortis' Boss-Ka-Boss receives PRCI Award
2009-IDBI Fortis receives bronze Dragon at 'PMAA 2009
2010-IDBI Fortis now renamed as IDBI Federal Life Insurance Company
2011-IDBI Federal launches Retiresurance Guaranteed Pension Plan
2012-IDBI Federal makes its online debut
2013-IDBI Federal in association with Phoenix Foundation organizes a trek for the
physically challenged
2013-IDBI Federal breaks-even in Five years; posts maiden profit of Rs 9.24 crore.
34
Insurance Penetration is measured as ratio of Premium to GDP (in US dollars).
Asian Countries 2012 2013
Total Life Non-Life Total Life Non-Life
Hong Kong 12.4 11 1.4 13.2 11.7 1.5
India 4 3.2 0.8 3.9 3.1 0.8
Japan 11.4 9.2 2.3 11.1 8.8 2.3
Malaysia 4.8 3.1 1.7 4.8 3.2 1.7
Pakistan 0.7 0.4 0.3 0.7 0.5 0.3
Singapore 6 4.4 1.6 5.9 4.4 1.6
0
2
4
6
8
10
12
14
Total Life Non-Life Total Life Non-Life
2012 2013
Hong Kong
India
Japan
Malaysia
Pakistan
Singaporeper
cen
tage
35
Channel-wise distribution of New Business Premium (in percentages)
Analysis of the Fig:
In 2013-14, the Bancassurance channel represented 75% of the new business against
22% sold through the Agency channel and 3% via our Direct Channel.
At the end of March 2014, our agency network spans 59 branches across the
country out of which 811 agency managers support the activities of 8,531 agents.
DISTRIBUTION OF SHARE HOLDING:
The details of Shareholding Pattern of the Company as on March 31, 2014 are as under:
„INR
S.no Names of Share Holders No. of Shares Held(in crores) Percentages
1 IDBI Bank Ltd 38.4 48%
2 Federal Bank Ltd 20.8 26%
3 Ageas Insurance
international N.V
20.8 26%
Total 80 100%
Bancassurance Agency Direct Marketing
2012-13 3.75 1.05 0.2
3.75
1.05
.20
2013-14
36
Executive Summary:
This thesis work studies, compares and analyses past financial data of IDBI Federal
Life Insurance Company to bring out results to determine whether they are favourable or
unfavourable. Two financial statements (balance sheet and income statement) are prepared
in comparative form for financial analysis purpose. This report also seeks to find out where
the company stands with respect to Industry Standards.
Finally, recommendations have been provided.
For this study data have been collected from the following sources:
Company Annual Reports
Business Periodicals
IRDA Website
This report first provides a brief overview of the Insurance Industry in India and of
IDBI Federal Life Insurance in particular. After this the detailed analysis has been carried out.
37
Objective:
To use the technique of ratio analysis to evaluate the financial performance of IDBI
Federal life Insurance Co Ltd. To evaluate the performance of the sector with the
help of secondary data sources.
38
Scope
This study is limited to using ratio analysis for analysing the performance of IDBI
Federal. The study is examining only one company. The time period of the study is
limited to 3years.
39
Methodology
The ratios that were used include: Current Ratio, Quick Ratio, Cash Ratio, New
Business ratio, Return on Sales, Return on Equity, Commission Ratio, Net Premium
Written, Expense Ratio, Renewal Expense Ratio, Overall Expense Ratio, Loss Ratio,
Combined Ratio, Net Retention Ratio and Claim Ratio
The report referred to secondary data sources such as the company‟s financial
statements, annual reports, website and IRDA documents.
40
Analysis
Project on Ratio Analysis:
Current ratio:
CR = Current asset / Current Liabilities.
„INR
Year Current Asset Current Liabilities
2011-12 19.37 cr‟s 18.88 cr‟s
2012-13 28.04 cr‟s 22.42 cr‟s
2013-14 26.36 cr‟s 17.82 cr‟s
Year 2011-12 2012-13 2013-14
CR 1.02 1.25 1.47
Fig: 4.1 Current Ratio
Interpretation:
The Current Ratio shows an increasing trend, which is a positive sign of the
company toward its financial growth. This is good news for the investors and even for the
policy holders.
1.02
1.25
1.47
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
Current Ratio
2011-12 2012-13 2013-14
41
Quick Ratio:
QR = {Current Asset – Inventory‟s} / Current Liabilities.
„INR
Year Current Asset Current Liabilities Inventory’s
2011-12 19.37 cr‟s 18.88 cr‟s -
2012-13 28.04 cr‟s 22.42 cr‟s -
2013-14 26.36 cr‟s 17.82 cr‟s -
Year 2011-12 2012-13 2013-14
QR 1.02 1.25 1.47
Fig : 4.2 Quick Ratio
Interpretation:
As we can clearly see that the ratios are showing an increasing trend which shows
the efforts of the company to grow up.
1.02
1.25
1.47
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
Quick Ratio
2011-12 2012-13 2013-14
42
Cash Ratio:
Cash Ratio = {(Cash + Bank Balance) – (Inventory + Trade-Receivables)} / Current
Liability
„INR
Year Current Asset Current Liabilities Inventory’s
2011-12 19.37 cr‟s 18.88 cr‟s -
2012-13 28.04 cr‟s 22.42 cr‟s -
2013-14 26.36 cr‟s 17.82 cr‟s -
Year 2011-12 2012-13 2013-14
CR 1.02 1.25 1.47
Fig: 4.3 Cash Ratio
Interpretation:
As we can see that the cash ratio also shows the increasing trend which is again an
positive sign for the company.
1.02
1.25
1.47
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
Cash Ratio
2011-12 2012-13 2013-14
43
New Business Ratio:
NBR = New business of previous year / New business of current year
„INR
Year 2011-12 2012-13 2013-14
New Business 345.13 cr‟s 315.69 cr‟s 484.49 cr‟s
Year 2011-12 2012-13 2013-14
NBR - 0.91 1.53
Fig: 4.4 New Business Ratio
Interpretation:
As we can see that the new business ratio of financial year 2012-13 is far better than
2011-12 ratios. This indicates that the sales of the year 2012-13 have been increased, that
also means that the demand of the company products has been increased.
0
0.91
1.53
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
New Business Ratio
2011-12 2012-13 2013-14
44
Return on Sales:
ROS = Net Income (before interest and tax) / Total Sales * 100
„INR
Year Net Income Total Sales
2011-2012 -69.86 cr‟s 736.70 cr‟s
2012-2013 9.24 cr‟s 804.69 cr‟s
2013-2014 80.11 cr‟s 825.64 cr‟s
Year 2011-2012 2012-2013 2013-2014
ROS -9.48 1.14 9.71
Fig: 4.5 Return on Sales
Interpretation:
The ROS indicating that it is steep increase from FY 2011-2012 to FY 2013-2014 from (-
9.48) to (9.71) at net income as a proportion of total sales. There is an increase in PAT (Profit
after Tax) and they got more incomes from investments.
-9.48
1.14
9.71
-15
-10
-5
0
5
10
15
ROS
Return on Sales
2011-2012 2012-2013 2013-2014
45
Return on Equity:
ROE = Net Income / Shareholders Equity * 100
„INR
Year Net Income Total Sales
2011-2012 -69.86 cr‟s 736.70 cr‟s
2012-2013 9.24 cr‟s 804.69 cr‟s
2013-2014 80.11 cr‟s 825.64 cr‟s
Fig: 4.6 Return on Equity
Interpretation:
The ROE indicating that there is a steep increase from FY 2011-2012 to FY 2013-2014
from (-8.73) to ( 10.02) at net income as a proportion of total equity. There is a increase in
PAT (Profit after Tax) and they got more incomes from investments.
-8.73
1.11
10.02
-10
-5
0
5
10
15
ROE
Return on Equity
2011-2012 2012-2013 2013-2014
Year 2011-2012 2012-2013 2013-2014
ROE -8.73 1.11 10.02
46
Net Premiums Written:
NPW ratio is calculated as Net premium to gross premium.
„INR
Year Net Premium Gross Premium
2011-2012 731.15 cr‟s 736.70 cr‟s
2012-2013 797.99 cr‟s 804.68 cr‟s
2013-2014 817.71 cr‟s 826.24 cr‟s
Fig: 4.7 Net Premiums Written
Interpretation:
The NPW indicating that it is maintained study at from FY 2011-2012 to FY 2013-
2014 from (99.24) to (98.96) at net premium as a proportion of gross premium. This is
because, compared to the previous year there was an increase in reinsurance ceded.
99.24 99.16 98.96
95
96
97
98
99
NRR
Net Premium's Written
2011-2012 2012-2013 2013-2014
Year 2011-2012 2012-2013 2013-2014
NPW 99.24 99.16 98.96
47
Net Retention Ratio:
The proportion of earnings kept back in the business as retained earnings. The
retention ratio refers to the percentage of net income that is retained to grow the business,
rather than being paid out as dividends. It is the opposite of the pay-out ratio, which
measures the percentage of earnings paid out to shareholders as dividends.
The retention ratio is 100% for companies that do not pay dividends, and is zero for companies that pay out their entire net income as dividends also known as “Plowback
ratio”.
Net Retention ratio = Net Income – Dividends / Net Income.
„INR
Year 2011-12 2012-13 2013-14
Net Income (-69.86 cr‟s) 9.24 cr‟s 80.11 cr‟s
Dividend NIL NIL NIL
Year 2011-12 2012-13 2013-14
Net Retention Ratio 100 100 100
Fig: 4.8 Net Retention Ratio
Interpretation:
As we can see that the NRR is 100 yoy, which means that company is not paying any dividends, and the reason behind is, company is newly established and working hard to earn
profits.
100 100 100
0
20
40
60
80
100
120
2011-12 2012-13 2013-14
Net Retention Ratio
2011-12
2012-13
2013-14
48
Commission’s Ratio:
The ratio is calculated from current year commissions paid divided by total revenue
of that particular year.
CR = Current year commissions paid/ Total Revenue * 100
„INR
Fig: 4.9 Commission‟s Paid Ratio
Interpretation:
The CPR indicating that there is a slight increase from FY 2011-2012 to FY 2013-
2014 from (8.67) to (10.95) at current year commissions paid as a proportion of total sales.
Comparing previous year they paid high commissions. This is because of increased sales.
8.67
10.17 10.95
0
2
4
6
8
10
12
CPR
Commission's paid
2011-2012 2012-2013 2013-2014
Year C.Y Commissions paid Total Revenue
2011-2012 63.92 cr‟s 736.70 cr‟s
2012-2013 84.04 cr‟s 826.24 cr‟s
2013-2014 88.08 cr‟s 804.68 cr‟s
Year 2011-2012 2012-2013 2013-2014
CR 8.67 10.17 10.95
49
Expense Ratio:
ER = Operating Expenses/ Premium Earned * 100
„INR
Year Operating Expenses Premium earned
2011-2012 188.50 cr‟s 731.15 cr‟s
2012-2013 193.10 cr‟s 797.99 cr‟s
2013-2014 189.15 cr‟s 817.71 cr‟s
Year 2011-2012 2012-2013 2013-2014
ER 25.78 24.19 23.13
Fig: 4.10 Expense Ratio
Interpretation:
The ER indicating that there is a slight decrease from FY 2011-2012 to FY 2013-2014
from (25.78) to (23.33) at operating expenses as a proportion of total premium. Comparing
previous year operating expenses such as training expenses, service tax on premium and
rent, rates and taxes were lower.
25.78
24.19
23.13
21
22
23
24
25
26
ER
Expense Ratio
2011-2012 2012-2013 2013-2014
50
Claims Ratio:
The claims ratios are claims payable as a percentage of premium income. This is the
equivalent of gross profit margin for an insurance business. An insurer's investment income
is also part of its core business so the comparison with gross profit is not exact.
The loss ratio is similar, but is sometimes defined subtly different as claims paid
(rather than payable).
The claims ratio can be combined with the expense ratio to produce the combined Ratio.
„No. of Claims
Year 2011-12 2012-13 2013-14
Claims Intimated 932 687 841
Claims Settled 842 550 932
Year 2011-12 2012-13 2013-14
Claim Ratio 90.34 80.10 90.30
Fig: 4.11 Claim Ratio
Interpretation:
As we can see that the companies‟ claims ratio is satisfactory. In the FY 2012-13 it
came down but gain in the next year it again came up.
90.34
80.1
90.3
70
75
80
85
90
95
2011-12 2012-13 2013-14
Claim Ratio
2011-12
2012-13
2013-14
51
Combined ratio:
The combined ratio measures the underwriting performance by combining the loss
ratio with the expense ratio and commission ratio. It will indicate whether there is sufficient
premium to cover the cost of claims. The expenses will include the costs of reinsurance,
claims handling, underwriting and administration.
Combined ratio = (Claims + Expenses + Commission) * 100 / earned premium
„INR
Year 2011-12 2012-13 2013-14
Claims 85 cr‟s 297 cr‟s 348 cr‟s
Expenses 188.50 cr‟s 193.10 cr‟s 189.15 cr‟s
Commission 63.92 cr‟s 84.04 cr‟s 88.08 cr‟s
Total 337.42 cr’s 574.14 cr’s 625.23 cr’s
„INR
Year 2011-12 2012-13 2013-14 Premium Earned 736.70 cr‟s 804.68 cr‟s 826.24 cr‟s
Year 2011-12 2012-13 2013-14 Combined ratio 45.74 71.35 75.67
Fig: 4.12 Combined Ratio
Interpretation:
As it is clearly seen that the combined ratios is less than 100 which shows that the
company is showing underwriting profits.
45.74
71.35 75.67
0
20
40
60
80Combined ratio
2011-12
2012-13
2013-14
52
Renewal Expense Ratio:
RER = renewal expenses/ renewal premium income. *100
„INR
Year Renewal expenses Renewal premium income
2011-2012 11.84 cr‟s 425.69 cr‟s
2012-2013 16.19 cr‟s 459.54 cr‟s
2013-2014 19.65 cr‟s 510.55 cr‟s
Fig: 4.13 Renewal Expense Ratio
Interpretation:
The RER indicating that there is an increase year on year from 2.78 to 3.84 at
renewal expenses as a proportion of renewal premium. They renewals have increased
compared to previous year. This indicates improvement in quality of business.
2.78
3.52 3.84
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
RER
Renewal Expense Ratio
2011-2012 2012-2013 2013-2014
Year 2011-2012 2012-2013 2013-2014
RER 2.78 3.52 3.84
53
Overall Expense Ratio:
OER is calculated as Management expenses to gross direct premium.
OER = Management expenses/ gross direct premium * 100
„INR
Year Management Expense Gross Direct Premium
2011-2012 252.42 cr‟s 736.70 cr‟s
2012-2013 281.19 cr‟s 804.63 cr‟s
2013-2014 273.55 cr‟s 826.24 cr‟s
Fig: 4.14 Overall Expense Ratio
Interpretation:
The OER indicating that there is a slight decrease from FY 2011-2012 to FY 2013-
2014 from (34.2) to (33.1) at management expenses as a proportion of gross premium. This
is because of decrease in operating expenses.
34.2
34.9
33.1
31
32
33
34
35
36
OER
Overall Expenses Ratio
2011-2012 2012-2013 2013-2014
Year 2011-2012 2012-2013 2013-2014
OER 34.2 34.9 33.1
54
Loss Ratio:
The difference between the ratios of premiums paid to an insurance company and
the claims settled by the company. Loss ratio is the total losses paid by an insurance
company in the form of claims. The losses are added to adjustment expenses and then
divided by total earned premium.
LR = Claims paid / total earned premium * 100
„INR
Year Claims Paid Total Premium
2011-2012 84.87 cr‟s 736.70 cr‟s
2012-2013 296.77 cr‟s 826.24 cr‟s
2013-2014 349.49 cr‟s 804.68 cr‟s
Fig: 4.15 Loss Ratio
Interpretation:
The LR indicating that there is a steep increase from FY 2011-2012 to FY 2013-2014
from (11.52) to (42.29) at claims paid as a proportion of total premium. Comparing previous
year they had more claims to repay.
11.52
36.88 42.29
0
10
20
30
40
50
LR
Loss Ratio
2011-2012 2012-2013 2013-2014
Year 2011-2012 2012-2013 2013-2014
LR 11.52 36.88 42.29
55
Ratios and Trend of IDBI Federal Life:
Sl.No Ratio's 2011-12 2012-13 2013-14 Trend Cause
1 Current Ratio 1.02 1.25 1.47 Steep
Increase
Due to increase in asset over
liabilities
2 Quick Ratio 1.02 1.25 1.47 Steep
Increase
Due to increase in asset over
liabilities
3 Cash Ratio 1.02 1.25 1.47 Steep
Increase
Due to increase in asset over
liabilities
4 New Business
Ratio
- 0.91 1.53 Steep
Increase
Due to increased sales
5 Return on
Sales
-9.48 1.14 9.71 Steep
Increase
Due to Income from
investments
6 Return on
Equity
-8.73 1.11 10.02 Steep
Increase
Due to Income from
investments
7 Net Premiums
Written
99.24 99.16 98.96 Slight
Decrease
There is a slight decrease in
collecting of premiums
8 Net Retention
Ratio
100 100 100 Even There is no Dividend paid
9 Commission
Ratio
8.67 10.17 10.95 Increasing High sales in Insurance policies
10 Expense Ratio 25.78 24.19 23.13 Decreasing Are reduced in which terms are
related in Insurance Business
11 Claim Ratio 90.34 80.10 90.30
Increased Company is covering most of
the claims
12 Combined
Ratio
45.74 71.35 75.67 Steep
Increase
Expenses are reduced
13 Renewal
Expense Ratio
2.78 3.52 3.84 Slight
Increase
Renewals are high
14 Overall
Expense Ratio
34.2 34.9 33.1 Decreasing There is a decrease in operating
expenses
15 Loss Ratio 11.52 36.88 42.29 Steep
Increase
High amount of claims were
paid
56
IDBI Federal is out performing on many parameters, such as, Current Ratio, Cash
Ratio, QR, ROS and ROE it has performed spectacularly well. Recovering from negative
figures in 2011-2012 this is a complete turnaround for the company. At the same time it
could be success of its lower in it expense ratio and NPW for which its future increase.
However the loss ratio registered as subsequently increases. As a consequence of higher
amount of claims paid out by the company.
57
Conclusion
According to the calculations we can say that the ratios Return on Sales is showing
improved performance year on year due to investments income by investors.
Similarly Return on Equity had the steep increase year on year.
IDBI had paid the high commissions to their agents and brokers in the FY 2013-2014
compared to the previous year
Expense ratio is showing the slight decrease from the FY2011-2012 to FY2013-2014
just a 2.65%
Net premium written is also showing the slight decrease from the FY 2011-2012 to
FY 2013-2014 just a 0.28 %
IDBI had the high renewals compared to the previous FY2011-2012.
There is a decrease in management expenses in the IDBI from the FY2011-2012 to
FY 2013-2014
IDBI paid the high claims for both the death and maturity benefits in the FY2013-
2014.
Overall we can say that the IDBI is showing the profitability position year on year in
the Insurance sector.
58
Appendix
Table 6.2.1: Balance sheet of 2011-2012
Table 6.2.2: Balance sheet of 2012-2013
Table 6.2.3: Balance sheet of 2013-2014
Table 6.2.4: P & L Account of 2011-2012
Table 6.2.5: P & L Account of 2012-2013
Table 6.2.6: P & L Account of 2013-2014
Table 6.2.7: IDBI FEDERAL LIFE position in India according to IRDA.
59
Table 6.2.1: Balance sheet of 2011-2012
60
Table 6.2.2: Balance sheet of 2012-2013
61
Table 6.2.3: Balance sheet of 2013-2014
62
Table 6.2.4: P & L Account of 2011-2012
63
Table 6.2.3: P & L Account of 2012-2013
64
Table 6.2.4: P & L Account of 2013-2014
65
Table 6.2.7: IDBI FEDERAL LIFE position in India according to IRDA.
Market Position Life Insurance Companies
1 Life Insurance Corporation Of India
2 ICICI Prudential Life Insurance Co. Ltd
3 HDFC Standard Life Insurance Co. Ltd
4 SBI Life Insurance Co. Ltd
5 Max Life Insurance Co. Ltd
6 Bajaj Allianz Life Insurance Co Ltd
7 Birla Sun life Insurance Co.Ltd
8 Reliance Life Insurance Co. Ltd
9 Tata AIG Life Insurance Co. Ltd
10 ING Vysya Life Insurance Co. Ltd
11 MetLife Life Insurance Co Ltd
12 Aviva Life Insurance Co Ltd
13 Canara HSBC OBC Life Insurance Co Ltd
14 Kotak Life Insurance Co Ltd
15 Star Union Dai-Ichi Life Insurance Co. Ltd
16 Future General Life Insurance Co Ltd
17 IDBI Federal Life Insurance Co. Ltd
18 India First Life Insurance Co. Ltd
19 Bharti Axa Life Insurance Co. Ltd
20 Aegon Religare Life Insurance Co. Ltd
66
For the calendar year 2012, IDBI Federal Ranked 17th and its Equity Fund ranked No
1 among 72 ULIP funds bearing testimony to the company‟s fund management expertise.
IDBI Federal Life Insurance has achieved break even in 2012-13, its fifth year of operations.
The company has reported a maiden profit of Rs 9.24 crore in 2012-13, thus making it one
of the fastest to break-even in the Life Insurance industry. In an industry challenged by falling
margins, shrinking new business volumes, high cost ratios and low profitability, this is a
significant achievement.
One of the major reasons behind the growth of IDBI Federal Life Insurance has been
its employees. The organization regards its employees as valuable assets and takes pride in
the fact that it has one of the finest workforces in the general insurance industry.
67
Bibliography:
http://www.basunivesh.com/2014/02/05/irda-claim-settlement-ratio-2012-
2013-what-it-indicates/
http://www.idbifederal.com/Pages/FinancialStatement.aspx?Year=null
http://freepress.in/insurance/market-share-of-all-life-insurance-companies-
india
http://www.dnaindia.com/money/report_belgian-insurer-ageas-to-exit-
idbi-federal_1703359
http://www.thehackettgroup.com/casestudies/cytec/
http://www.basunivesh.com/2015/01/08/irda-claim-settlement-ratio-2013-
2014-which-is-best-life-insurance-company/
