Solvency Determinants of Public-Sector General Insurance Firms in India

Abstract

In the pre-reform era, the four major public-sector general insurers, carrying on multi-line operations, dominated the Indian general insurance sector with a market share close to 100 per cent. But with the enactment of the Insurance Regulatory and Development Authority of India (IRDAI) Act in 1999, the public-sector general insurers began to face stiff competition from the entry of private and foreign players. Though the four major public-sector general insurers still remains to dominate the Indian non-life insurance market with a collective market share of 50.24 percent at the end of the FY 2014-15, butan abrupt rise in the number of private players has raised concerns about the solvency position of the public-sector general insurance firms from the viewpoint of safeguarding policyholders' interests. The present study investigated the solvency determinants of the four major public-sector general insurance firms in India. The study has employed the multiple linear regression analysis to establish a relationship between the solvency ratios, as dependent variable, and the firm-specific factors (i.e. Loss Ratio, Operating Expense Ratio, Market Shares, Return on Equity and Liquid Ratio) as independent variables. The study covers a period from 2008-09 to 2014-15, with an emphasis on the post-recessionary phase of developments in the country's general insurance sector. The findings showed that solvency was positively related with return on equity, market shares and liquid ratios. On the contrary, solvency was negatively related with operating expense and loss ratios. The results further emphasized the need for the public-sector general insurers to focus on operational efficiencies and liquidity position for ensuring a sound solvency position.