On the Determinants of Solvency Margin of Indian General Insurers

Abstract

Solvency ratio is an important indicator of the financial health of an insurance firm and denotes its ability to survive in the long run. It is the ratio of the amount of Available Solvency Margin (ASM) to the amount of Required Solvency Margin (RSM). Available Solvency Margin means the excess value of assets over the value of life insurance liabilities and other liabilities of policyholders' and shareholders' funds. While life insurers are considered financial intermediaries, general insurers are perceived as risk takers. This underlines the importance of solvency for general insurers as an indicator of their financial health. Indian general insurers have been striving hard to maintain the mandatory solvency ratio of 1.5. Although most of the companies have maintained the required solvency margin, the effect of the Motor Third party Insurance Pool is making their business difficult. The authority has hence relaxed the solvency norms for the future periods .In this context, this study aims to model the factors significantly affecting the financial health of Indian general insurers taking solvency ratio as dependent variable. This is an empirical study. It has taken all the 19 Indian general insurers (4 public and 15 private) as sample and used annual data pertaining to 7 financial years, viz., 2005-06 to 2011-12. The required data were taken from the Insurance Regulatory and Development Authority of India ([RDA) data base and Annual Reports of the respective firms. This study employs multiple linear regression model. For this purpose, the company specific characteristics such as capital adequacy, reinsurance actuarial issues, efficiency and profitability, investment performance and combined ratio are regressed against the solvency ratio. It is found that capital adequacy, earnings and profitability, investment performance, combined ratio and total assets (proxy for size) are the determinants of solvency ratio of general insurers in India.