Determinants of Financial Performance of Indian Life Insurance Sector: Panel Evidence

(ProQuest: ... denotes formulae omitted.)IntroductionInsurance sector in India has 53 players, 24 in life, 28 in non-life and 1 in reinsurance. The penetration of insurance industry in India was 3.90% in 2013, while its Asian counterparts have as high as 17.6% (Thailand) and as low as 0.5% (Kuwait). However, comparing the world average and Asian average of 6.3% and 5.4%, respectively, of insurance penetration in 2013, India certainly can embark on a higher growth trajectory considering the demographic advantage and economic potential of Indian population. Taking life insurance sector in particular, Indiau0027s penetration is 3.1% against the worldu0027s 3.5% and Asiau0027s 3.8%. India ranks 15 among 88 countries in terms of premium in 2013 (Sigma, 2014). Needless to say, the spread of awareness of the societal benefits of insurance like indemnification of loss, reduction of worry and fear, source of investment funds, loss prevention and enhancement of credit (Rejda, 2011), and personal benefits like safety, protection, fulfillment of various needs, savings and investment and benefits to business like reduction of uncertainty, increase in efficiency, employee welfare, etc. (Mishra and Mishra, 2011) may enhance better penetration of insurance services. Again, the role of a regulator who ensures an enabling environment for the insurance players as well as policyholders is no less important in this context.Indian life insurance industry grew at a CAGR of 31% between 2001 and 2010 in contrast to a strikingly low CAGR of 2% between 2010 and 2012 in new business premium (KPMG, 2013). Capital invested by private and foreign players in the industry has grown at a CAGR of about 20% in the last decade. The private players are gradually establishing themselves and the opportunities of digital era economies would help the insurance sector to cut its expense ratios considerably over the years. Since 2006, private insurance companies have started breaking even and reporting profits. Total assets of life insurance sector has grown at a CAGR of 16% in the last 10 years. The regulator has unleashed many reforms and regulations to create a healthy competitive environment for the existing and new players, bearing the interest of the policyholders in mind.Financial performance analysis helps in measuring how well a firm can use assets from its primary mode of business and generate revenues. Profitability, turnover, capital, costs, etc., are analyzed individually and through ratios to understand and examine the financial health of a given firm or industry. Maximizing profit is an important goal of business, which in turn also indicates the long-term sustainability of the company and the return earned by the shareholders. Financial performance, usually measured by profitability, is determined by various factors which vary with the industry chosen. Given the importance of analyzing financial performance, an understanding of the factors that contribute to the financial performance can highlight the areas where suitable action can be initiated. In the case of insurance sector, new business premiums, renewal premiums, control on expense ratios, new products focused on value creation, infusion of capital, margins, assets and investments, and macroeconomic conditions have been widely researched among the determinants of profitability. This paper attempts to study a selected set of firm-specific factors that determine the profitability of the life insurance sector in India.Literature ReviewFinancial performance and its determinants have been extensively studied for banking sector across countries. To present a few from the vast literature, Berger (1995) and Neeley and Wheelock (1997) have studied the determinants of US banku0027s financial performance using different proxies. In developing countries, Barajas et al. (1999) (Columbia), Afanasieff et al. (2002) (Brazil), Guru et al. (2002) (Malaysia), Naceur and Goaied (2001) (Tunisia), Tarawneh (2006) (Oman), Shoaib (2011) (Pakistan) and many more have examined the relationship of financial performance and a host of independent variables. …