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Types of insurance and performance measurement of insurance companies Essays
Types of insurance and performance measurement of insurance companies Essays Types of insurance and performance measurement of insurance companies Essay Types of insurance and performance measurement of insurance companies Essay Chapter 3: LITERATURE REVIEW Insurance concern involves a batch of hazard because it provides screen against future uncertainness that clients will confront either in their ordinary life or in the class of making concern. Insurance services vary with the types of hazard against which a client wishes or intends to see. This chapter is a reappraisal of literature concentrating on the types of insurance and public presentation measuring of insurance companies. The remainder of this chapter is organized as follows. Section one is about categorization of insurance. Section two discusses the public presentation of insurance companies based on grounds on extant literature. Section three briefly discusses the impact of corporate administration on insurance companiesÃ¢â¬â¢ public presentation. Section four reports the research spread. 3.1 Insurance Categorization Insurance can be grouped into three chief classs viz: ( 1 ) Life Assurance, ( 2 ) General Insurance and ( 3 ) Re-Insurance ( Financial Stability Forum, 2000 ) . Life Assurance Life confidence purposes to counterbalance the insured beneficiariesÃ¢â¬â¢ in the event of his/her decease. Unlike general insurance, life confidence is different ( Brockettet Al., 1994 ) . The fund to counterbalance life confidence client is generated from the premium contributed by the insured. Because mortality rate is comparatively low in many states ( both developed and emerging ) unanticipated eventuality as loss of life is besides comparatively low. In this vena Carson ( 2000 ) contends that life confidence companies are financially stable and that could be seen from their fiscal studies. The growing of industry at all degrees ( runing from primary, secondary to third ) has entailed the demands for new insurance services under the umbrella of life confidence. For case Gracia ( 2001 ) suggests that industrialisation has called for the demands for employee pension fund, cash-back life confidence policy and life confidence with place loans installations. In developed economic systems there are newer merchandises in footings of investings which possible life insured can put. General Insurance General insurance covers all insurances other than life confidence ( Meador et al, 2000 ) . Because of the assorted merchandises that general insurance offers and the chance of the hazard is unsure, risk-taking is higher ( Mansor and Radam, 2000 ) . Recent concern development in emerging economic systems like India, China, Brazil and Russia has significantly driven the general insurance market. Yao et Al ( 2007 ) contends that China has recorded an one-year addition of about 25 per centum in general insurance over the last decennary. Re-insurance Existing literature provides different definitions of re-insurance and re-insurers. This is because of its complex characteristics ( Cole and McCullough, 2008 ) . In a nutshell, reinsurance is the insurance for insurance companies. It provides an insurance screen to the insurance companies which have undertaken a legal contract to see clients for life or general intent insurance. Reinsurance may be regarded as the intensive attention unit of the insurance companies. By buying reinsurance, the insurance companies have taken protection against immense losingss that could lure to bankruptcy. It is compulsory for all insurance concern across the Earth to buy re-insurance policy. 3.2 Performance Measurement Extant literature in accounting and finance has chiefly used the fiscal studies to measure public presentation of any concern organisation in any sector including the insurance sector. Some have used the conventional ratio analysis attack whereas others have tended to sophisticate their attack by utilizing a set of selective indexs which they argue pertain to a specific sector. For case the CARAMELS theoretical account which is besides used by the World Bank to find public presentation of houses in the non-banking fiscal services sector. CARAMELS comprise of a series of ratios computed from the fiscal studies to measure public presentation. Both faculty members and practicians argue that fiscal studies are the most appropriate and relevant beginning of informations to measure public presentation of a house ( Nguyen, 2004 ) because they are prepared harmonizing to proper accounting criterions every bit good as audited in conformity with relevant auditing criterions ( Boolaky, 2012 ; B oolaky, et Al, 2013 ) . Ratio Analysis Conventional fiscal ratios are used to mensurate the underwriting public presentation of insurance companies. Harmonizing to Angoff ( 2005 ) the loss ratio represents the pure cost of insurance coverage as opposed to the disbursal ratio which is the non-claims-related activities of the insurance company. The amount of these two ratios the combined ratio therefore reports the effectivity and efficiency of underwriting operations ( Bergeret Al., 1992, Cummins and Danzon, 1997, and Hoyt and Powel, 2005 ) . Ratio analysis is a fiscal analysis tool to dissect a fiscal study in instance one needs to cognize how good or bad a company is making. They provide utile indexs for determination devising ( Watsonet al. ,2002 ) . Management uses ratios to measure public presentation in each map of the company whereas analysts use them to make up ones mind on their pick of investing. Regulators use ratio analysis as one of their supervisory tools. Ratios provide signals about hazard degree in the company. Using ratios it is possible to find public presentation during both good and bad old ages. Frequently analysts use a set of ratios when carry oning clip series public presentation analysis of companies ( Worrell, 2004 ) . Hirao and Inoue ( 2004 ) uses cost ratio to measure efficiency and effectivity of insurance sector in the Nipponese context whereas Bikker and Bos ( 2008 ) use the conventional ratio of profitableness to measure efficiency of Bankss. Fiscal Reporting for insurance concern has some extra revelation demands over and above the normal revelation model. In this context any insurance company has to follow with the International Financial Reporting Standards ( IFRS ) 4: Accounting for Insurance Contracts. However, ratios remain the footing for analyzing the public presentation of these companies ( Liu, 2009 ) . Below is a description of some cardinal ratios used in the literature to measure insurance company public presentation. Long Term Stability Any company has to hold sufficient capital to go on concern. In the instance of insurance concern, it is required by jurisprudence that each insurance company meets the capital adequateness threshold. Any company in the industry will be considered insolvent if it does non hold the minimal capital demand ( Sterling, 2000 ) . Klumpes ( 2004 ) uses a set of public presentation benchmarking in fiscal services sector with particular mention to the life insurance industry in the UK and draws attending on the importance of solvency, reinsurance every bit good as investings made by the insurance companies when measuring the fiscal wellness of an insurance company. Solvency is measured by comparing the assets and the liabilities of a company. Brockett et Al ( 1998 ) suggests that it is the safety valve of the insurance company which it can utilize to protect itself against any unanticipated vagaries. In the context of Mauritius any company including insurance has to go through the solvency trial set by the companies Act 2001 in add-on to the capital adequateness trial of the Insurance Act. The intent of modulating solvency both for the long and short term is to extenuate the hazard associated with market failures ( Fenn et al, 2008 ) . In general insurerÃ¢â¬Ës capital must be capable of supplying screens to any hereafter hazard event ( Daset Al., 2003 ) . Asset Backing The strength of a company rests in its assets. This implies both non-current and current assets of the companies. In the context of insurance sector because insurance is itself investing concern, the more diversified is its investing portfolio the more stable and less hazardous is the concern. Generally insurance companies would be given to follow a low geartrain policy in order to guarantee that is assets may be used in the event of a ruinous state of affairs. In this context all insurance companies are led to follow a conservative fiscal geartrain policy. Furthermore variable such as investing in existent belongings and its possible to bring forth hard currency are of import. If the ability to bring forth hard currency from existent belongings is low so the hazard associated with those assets are considered high. However if they can be easy converted into hard currency to settle debts so they will be considered as less hazardous ( Jeng et al, 2007 ) . Profitableness Profitableness is defined as the ability of a concern entity to bring forth net income. It is measured by a figure of ratios such as net net income border, return on assets, return on equity, assets turn over. Extant literature has used these ratios to show public presentation of concern entities including insurance concern. In the insurance sector Berger and Mester ( 1997 ) concentrate more on standard net income efficiency instead than normal net income. They argue that the efficiency of net income is a more comprehensive step of insurance public presentation than cost efficiency. Harmonizing to them gain efficiency measures the firmÃ¢â¬â¢s ability to recognize maximal net income under a given status. Yuan and Phillips ( 2008 ) argue that alternate net income efficiency assesses alteration in a firmÃ¢â¬â¢s net incomes adjusted for random mistake. Efficiency alterations depend on direction attempts and environmental variables. When comparing standard net income efficiency with alternate net income efficiency, the latter uses the variable end product measures than variable end product monetary values. Many other research workers have worked on net income efficiency of insurance companies ( see Berger et Al, 2000 ; Ward, 2002, Klumpes, 2004 ; Jarraya and Bouri, 2013 ) . 3.3 Corporate Administration and Performance There are several surveies which have investigated the consequence of corporate administration on insurance companiesÃ¢â¬â¢ public presentation. Cummins and Weiss ( 2000 ) suggest that stock companies and common financess public presentation differs because of different corporate administration attack. They argue that common companies are characterized by lower managerial discretion as opposed to stock companies. Greene and Segal ( 2004 ) reveal that common companies and stock companies are both cost efficient. But others argue that common companies are least efficient than stock companies ( Diboky and Ubl, 2007 ) . Hardwick et Al ( 2004 ) look into the relationship between size of the board of managers and insurance houses efficiency and infer that there is a direct relationship between the two variables. Hyraxet Al. , ( 2003 ) suggest that effectual direction is an of import driver of the fiscal strength of an insurance company. Furthermore, unsound efficiency indexs could bespeak possible jobs in the direction of proficient and investing hazards. Boolaky ( 2007 ) investigates how conformity with corporate administration codification by the fiscal services sector in Mauritius contributes towards effectual public presentation. His survey was based on the whole population of the fiscal services houses and he drew informations from their one-year studies. His findings suggest that houses with higher conformity degree are more effectual and efficient. 3.4 Research Gap Research on the insurance sector is really rich around the universe. Some research workers have investigated the bureau hazard in the insurance concern whilst others have delved into determiners of public presentation. But bulk of these surveies were confined to big economic systems including developed, emerging and developing economic systems. As yet there is no published survey on the insurance sector of Mauritius and in peculiar on the public presentation development of this sector. My undertaking aims to make full the spread by carry oning a clip series analysis on the public presentation of three cardinal insurance companies in Mauritius over a period of 50 old ages. Ratio analysis is used to calculate the public presentation indexs and unit root trial to look into for stationarity. More inside informations are given in chapter 4- Research Methodology.