International Journal of Science and Research (IJSR)

ISSN (Online): 2319-7064

Index Copernicus Value (2016): 79.57 | Impact Factor (2017): 7.296

Determinants of Insurance Investment: A Case

Study of Life Insurance Corporation of India
D.Vanitha1, Dr. V. S. Rajakrishnan2
1
M. Com, M.Phil, Research Scholar, Department of Commerce, E.G.S.Pillay Arts and Science College, Nagapattinam

2
M.Com, MBA, M.Phil, Ph.D, Associate Professor and Research Supervisor, Department of Commerce, E.G.S.Pillay Arts and Science
College, Nagapattinam

Abstract: Indian insurance markets have changed radically and deeply in the last countable years. Deregulation, globalization of
insurance institutions, intensified competition, electronic commerce, banc assurance, and the emergence of new risks are among the
challenges confronted by insurance markets. These trends pose both global and local challenges for insurance firms as key
advancement in insurance and financial services markets influence insurance markets on a global scale. The paper endeavored to link
insurance investment decisions with underwriting activities of insurance companies.Although, underwriting and investment are two
important and related business activities of insurance companies, impact of underwriting activities on investment for life insurers has
not been rigorously examined in the literature. Using a sample of public life insurer, this article conducts an empirical investigation of
how underwriting impact investment in the period of 2004–2017. The result of study suggests that premium and claim is significantly
influenced the investment of insurance sector. In the aftermath ofexpanding liberalization in the insurance industry together with the
worldwide financial crisis has posed a great deal of challenges for insurance regulatory authorities in monitoring investment of
insurance companies.Researcher believes the current paper provides some helpful bits of knowledge in this vein.

Keywords: Insurance, Investment, Underwriting

1. Introduction At present, there are 24 life insurance companies operating

in the country and 28 general insurance companies
The life of a human is loaded with risks which can be certain (including the Export Credit Guarantee Corporation and
or uncertain in nature. Insurance is the compelling answer Agriculture Insurance Corporation of India). There are five
for lessen these risks. Insurance, becoming one of the standalone health insurance companies Star Health & Allied
exigent financial services just as banking, mutual funds and Insurance Co., Apollo Munich Health Insurance Co., Max
wealth management, possesses an important position in Bupa Health Insurance Co., Religare Health Insurance Co.,
financial sector of economy. The Historicalperspective of and Cigna TTK Health Insurance Co., falls under preview of
insurance sector uncovers that nationalization had given flair general insurance companies. General Insurance Corporation
of risk to number of problems in area of operational of India (GIC) acts as a national reinsurer for Indian
efficiency, image, productivity, and quality of portfolio, insurance companies. The insurance sector is a colossal one
which raised the urgency for insurance sector reform for and growing at healthy rate. In life insurance business, India
creating more efficient and competitive social security is ranked11th among the 88 countries, for which data is
system suitable to requirement of economy (Pal, 2007) published by Swiss Re while India ranks 21st in global non-
(Sinha, 2002).The year 1999 saw upheaval in the life insurance markets. India‟s share in global life insurance
Indianinsurance sector, as major sea changes took place with market was 2.00 per cent during 2016.
ending of government monopoly, and passage of Insurance
Regulatory and Development Authority (IRDA) bill, lifting However, the share of Indian non-life insurance premium in
entry restriction for private players and sanction to foreign global non-life insurance premium was small at 0.66 per
players to enter the market with some limit on foreign cent. Since the passage in 1999 of the Insurance Regulatory
ownership (Haridas, 2011) (Gulati, 2007). and Development Authority Act, which permitted the entry
of private and foreign firms into the insurance sector, the
Insurance sector has undergone a phenomenal change after market share of the state-run firms has decreased to 71%
liberalisation. Earlier, Life Insurance Corporation of India (2012-13) for life insurance and to 56% (2015-16) for non-
(LIC) was the only means for insurance. But now days, flair life insurance. (IRDA annual report, 2016-17)
of wind change, private sector has been shown tremendous welldeveloped and evolved insurance sector is a boon for
growth in terms of better customer service and aggressive economic development as it provides long-term funds for
marketing strategies, and give better competition to LIC. In infrastructure development while simultaneously
spite of these, LIC rules the roost with a market share of strengthening the country„s risk-taking ability
about 70 per cent and become unshakable mainly due to its (Mitra&Ghosh, 2010). Life insurance and nonlife insurance
brand & its sheer reach. LIC has powerful network of have accumulated a significant amount of fund over time,
coverage, launching attractive advertisement at regular which can be invested productively in the economy. The
interval to create awareness among general public and mutual dependence of insurance and capital market plays an
introducing phenomenal business strategies by offering instrumental role in channellingfundsand investment
colourful scheme products. capabilities to augment the development potential of the
Indian economy. Investment analysis give complete picture
on efficiency with which fund entrusted to management has
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Paper ID: ART20183757 DOI: 10.21275/ART20183757 81
 International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Index Copernicus Value (2016): 79.57 | Impact Factor (2017): 7.296
been deployed. In addition to these, this attempt to furnish of individual agents working in life insurance industry,
relevant information for its various users like creditors, number of products and riders, growth of life insurance
bankers, financial institutions, equity shareholder, suppliers, business and premium income, lapse / forfeiture ratio and
customers and government etc., for their decision making. settlement of death claims in Indian life insurance industry.
The result of study indicated an improved sign of
Investment management is the critical area of operation in performance in terms of number of offices, number of
any financial institution, in any insurance company, which agents, new business policies, and premium income etc.
has to generate reserve for claim that might arise (and over a
period, a large corpus of fund is build up) keeping in view Purusothaman (2013) examined the growth of Life
the different risk level, regulations and a variety of Insurance Corporation in India and attributes responsible for
investment objective implicit in mind of policyholders and growth of investment. For the purpose of research primary
shareholders. (Vaidyanathan, 2001)Insurance companies data was collected through questionnaire and variables are
invest their shareholder‟s funds, policyholder‟s fund and identified using factor analysis and cluster analysis. The
other temporally available financial resources, which have a empirical results of study show that cluster I with 44.84% of
valuable contribution to firm as well as to economy(Palande, customers were weak in awareness, advertisement, and
Shah &Lunawat, 2003).Investment earnings made by speed of decisions and adoption of technology. Cluster II
insurance firms make a valuable contribution to their with 43.95% of customers with strongattributes from LIC.
operating results, thereby improving their competitiveness The cluster III with a minimum of 11.21% with moderate
(Lomott, 2011). attributes in assured returns, service behavior, and
information about new schemes, transparency and corporate
Insurance investment activity will also be diversify the firm's image. In their study they have also found that 50%
capital base and hence enhance its ability to settle claims customers are loyal to LIC.
when they occur (Kakuba, 2007). It is therefore, necessary to
study the investment management of Life Insurance Panda (2013) analyzed the investment pattern of LIC of
Corporation of India (LIC) after the liberalization India and its risk taking ability while investing in different
policyregime and as also the changes that might have segments. The paper has used autocorrelation through linear
occurred or any restructuring that might have been done by trend analysis for keeping present and past years in the
the LIC in the wake of entry of private players in the life analysis of segment wise investment with Box Ljung
insurance sector. Researcher believes that rigorous statistics. The result of study indicated a significant increase
examination can shed light on the relationship between in trends in case of G-securities segment, S-securities plus
insurers‟ underwriting and investment activities. Thus the housing/infrastructure, corporate sector & project loan while
evidence on the linkage between insurers‟ underwriting and investment in housing and infrastructure alone does not
investment activities should be of significant interest to reveal any significant increase.
regulators, investors, policyholders and insurance managers,
especially when insurance investment pattern has been going Parekh (2013) observed that investment function of
through regulatory consideration from last countable years. insurance industry in India is not so vibrant when compared
Review of Literature with global counterparts. Therefore, he has suggested
government to recognize the importance of insurance sector
Bedi& Singh (2011) evaluated the overall performance of in financial landscape and introduce more fiscal stimulus
life insurance industry between pre and post economic and tax incentive to strengthen its role in saving
reform era, covering the period 1980 to 2009. The study mobilization.
revealed that there is an enormous improvement in the
performance of Indian life insurance industry due to the Basu (2013) asserted that investment function cannot be
policy of LPG. In addition to this, there is also a huge taken as incidental to but crucial to business of non-life
change in the investment pattern of LIC, Which show an insurance. Investment management in general insurance
increasing trend toward the investment in stock market by industry is at the cusp of a new inflection point with
LIC from 60% to 93% from 1980 to 2009 due to the recentimplementation of IRDA (Investment Regulation)
effective regulation of SEBI and increasing transparency of 2013, coupled with the expectation of passing insurance bill
stock market. in parliament. Author believed that favorable global and
domestic macro-economic factors will demand for high level
Cummins and Venard (2008) illustrated that the important of efficiency in portfolio management to foster the
global trends are the increasing sophistication of insurance profitability of operation, paving the way for higher
products, theglobalization of risk diversification through insurance penetration in country Jawaharlal (2013)
reinsurance, and the emergence of megafinancial emphasized that investment have to be managed with a high
intermediaries. On the side, the important local differences level of dexterity which lead to never failure of insurance
are political, legal and cultural component as well as companies to honor the claim when incurred. Author has
differences in financial markets, taxation, regulatory system, suggested that deployment of funds should be strictly
insurance investment strategies and insurance distribution regulated which will avoided all chances of defaulting. In
systems. addition to this, national priorities also have to keep in mind
while setting sectorial limits. Vaidyanathan & Sriram (2000)
Chaudhary&Kiran (2011) studied the recent trend in life expressed the views on the regulatory framework for
insurance industry in term of various indicators like growth investments of insurance and pension funds in India. In
in total number of offices of life insurers, growth in number addition to this, they have also referred to investment
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Paper ID: ART20183757 DOI: 10.21275/ART20183757 82
 International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Index Copernicus Value (2016): 79.57 | Impact Factor (2017): 7.296
practices in other countries to identified possible changes in Table 2(a): Model Summary
investment criteria which will benefit all constituents of Model R R Square Adjusted Std. Error of
industry. They have also recommended investment pattern R Square the Estimate
for regulated asset, which to a great extent based on 1 .997a .994 .992 39771.87
suggested investment pattern of Malhotra committee (1994) Source: Computed through SPSS
in which a bifurcation was made between regulated asset
and free assets, and free assets of life insurance should Table 2(b): ANOVA
beinvested in approved and unapproved investment based on Model Sum of Squares Df Mean Square F Sig.
insurers discretion. Regression 2.703E12 2 1.352E12 854.44 .000a
Residual 1.740E10 11 1.582E9
Total 2.721E12 13
Objectives
Source: Computed through SPSS
1) To study the investment management of insurance
a. Predictors: (Constant), Claim, Premium
companies.
b. Dependent Variable: Investment
2) To analyze the impact of underwriting operations on
investment of LIC.
Table 2(c): Coefficients
3) To identify the problems and suggest suitable measures
Model Unstandardized Standardized t Sig.
for improvement and development of investment of LIC.
Coefficients Coefficients
B Std. Error Beta
Hypotheses (Constant) -39657.300 27725.933 -1.430 .180
H01.1: There is no significant impact of premium on PREMIUM 3.185 .492 .486 6.469 .000
investment of LIC CLAIM 5.011 .717 .525 6.986 .000
H01.2: There is no significant impact of claim on investment Source: Computed through SPSS
of LIC
Table 3: Collinearity Statistics
2. Methodology Collinearity Statistics
Tolerance VIF
The study is based on the secondary data, collected from .103 9.69
authentic and corporate websites, magazines, journals,
.103 9.69
annual reports and financial statements of LIC and IRDA for
the year 2004-05 to 2016-17. To analyze the impact of Source: Computed through SPSS
underwriting activities on investment, multiple regression
model has been developed. The investment is dependent Table 4: Autocorrelation
Autocorrelation
variable denoted by “Y” and the predictors (premium and
Durbin-Watson 1.940
claim) are independent variables or explanatory variables
Source: Computed through SPSS
that are designated as X1& X2. As the number of
explanatory variables is two, relationship between the
It is apparent from the table 1 that investment has shown a
variables is explored by usingmultiple regression model.
rising trend since 2010-11 to 2016-17 and investment
Further the analysis has been done through the SPSS.
increased from 193282.99 in 2010-11 to 1574296.00 in
Regression Equation Y= ß0+ ßıX1+ ß2X2 +Ɛ Investment=
2016-17.It is also observed from the table that premium has
ß0+ ß1 (Premium) + ß2 (Claim) + Ɛ
been showing an increasing trend since 2010-11 to 2016-17
Y is the value of dependent variable “Investment”.
and premium increased from 34892.02 in 2010-11 to
X1 is the value of independent variable “Premium”.
236942.30 in 2016-2017 Similarly, claim has been showing
X2 is the value of independent variable “Claim”.
an increasing trend since 2010-11 to 2016-17 except for year
ß0 is the regression constant.
2017-18 and claim increased from 14036.84 in 2010-11 to
ß1 is the partial regression coefficient for independent
216329.00 in 2016-17. It is clear that growth rate of
variable “Premium”
investment, claim and premium are showing mix trend. The
ß2 is the partial regression coefficient for independent
highest growth rate was 34.4 percent in case of investment
variable “Claim”
in year 2013-14, while premium have highest growth rate
42.7 in year 2011-12 and claim have highest growth rate 57
Sample
in year 2016- Lowest growth rate was 10.4 in case of
For the purpose of study “Life Insurance Corporation of
investment in year 2011-12, while premium have negative
India” is selected as a sample which represents about 70
growth rate -0.2 in year 2011-and claim have negative
percent of life insurance sector in India.
growth rate -7.2 in year 2017-18.
Table 1: Investment, premium and claim of LIC
Years Investment (Cr) Premium (Cr) Claim (Cr)
2010-11 193282.99 34892.02 14036.84 The value of R2 represents the portion of variation of the
2011-12 245387.72 49821.91 17476.64 dependent variable Y accounted for by the independent
2012-13 258732.22 54628.49 20530.39 variables in regression model. The R2 of „0‟ indicates no
2013-14 347959.14 63167.60 23923.75 relationship between the predicator‟s variables in the model
2014-15 418288.99 70901.90 28440.45 and dependent variable whereas R2 of 1 indicates that 100%
2015-16 463771.14 90792.22 33927.11 of the variability of dependent variable has been accounted
2016-17 559200.56 127822.84 53286.46 for by the predicators.
Source: IRDA Annual reports from 2004-05 to 2016-17

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Paper ID: ART20183757 DOI: 10.21275/ART20183757 83
 International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Index Copernicus Value (2016): 79.57 | Impact Factor (2017): 7.296
Here in the table 2(a) R2= 99.7% indicating a very strong amount that the variance of each regression coefficient is
predictability of a regression model which implies that a increased over that with uncorrelated explanatory variables
relatively high proportion of the variation of the dependent (Keith, 2006). At a point when a explanatory variable has a
variable investment is accounted for by the independent strong linear relationship with other explanatory variables,
variables (premium and claim) in this regression model. the related VIF is large and is confirmation of
multicollinearity (Shieh, 2010). The rule of thumb for a
The F-ratio in the ANOVA table tests whether the overall large VIF value is ten (Keith, 2006) (Shieh, 2010).
regression model is a good fit for the data. For multiple Tolerance measures the influence of one independent
regression an analogous test makes use of F statistic. The variable on all other independent variables. Tolerance levels
overall significance of the multiple regression model is for correlations range from zero (no independence) to one
tested with the hypotheses. (completely independent) (Keith, 2006). Small values for
H0: ßı=ß2=0Ha: At least one of the regression coefficients is tolerance and large VIF values show the presence of multi-
≠0. collinearity (Keith, 2006). From table 3, it was observed that
all VIF values are lies between 1-10 as well as TOL inclines
Table 2(b) shows the analysis of variance (ANOVA) of the towards 1. Therefore there is non-existence of multi-
variables with f values of 854.44(Sig. 000) for investment collinearity.
which clearly shows that there is a strong relationship
between the dependent variable (investment) and the Autocorrelation- is correlation between members of series of
independent variables (premium and claim) at 5 % levels observation ordered in time or space. The classical linear
(i.e., the regression model is a good fit of the data). regression assumes independence of observations or
independence of residuals, that the disturbance term relating
As the value of investment is dependent on more than one to any observation is not influenced by disturbance term
independent variable so the partial regression coefficient relating to any other observation. The most commonly used
occurred. The partial coefficients are analogous to ß0 which test to detect serial correlation is that developed by
is the slope of regression model. The partial regression statisticians Durbin and Watson, popularly known as the
coefficients and the regression constant of a multiple Durbin- Watson d statistic. As a rule of thumb the value of
regression model are population values and are unknown. Durbin- Watson d statistic should be the value lie between 1-
Y (Investment) =-39657.300+ (3.185 x premium) + (5.011 x 4(Gujarati, Porter &Gunasekar, 2009). From table 1, it is
claim) + ɛ observed that the Durbin-Watson value is 1.940, which is lie
between 1- 4.Therefore, there is non-existence of
The result shows the coefficient of X1(premium) as 3.185, autocorrelation.
which means that single unit change in the premium would
result in a predicted increase of 3.185 units in the investment Normality-the errors should be normally distributed.
of LIC, all other variables being held constant. Premium Technically, normality is essential just for the t-tests to be
have significant positive impact on investment of life valid; estimation of the coefficients just obliges that the
insurance corporation of India as reflected by its p value errors be identically and independently distributed. Finally,
(.000) which is less than 0.05, which leads to rejection of you need to check that the residuals (errors) of the regression
null hypothesis.The coefficient of X2 (claim) is 5.011, line are approximately normally distributed. Histogram and
which means that single unit change in the claim would Normal P-P Plot are more demanding methods to spot
result in a predicted increase of 5.011 units in the deviations from normality, and are moderately simple to
investment, all other variables being held constant. Claim interpret as departures from a straight line (Ballance, n.d).In
have significant positive impact on investment of Life this paper we use Normal P-P Plot which shows that errors
Insurance Corporation of India as reflected by its p value are normally distributed.
(.000) which is less than 0.05, which leads to rejection of
null hypothesis. 4. Conclusion
3. Assumption of Multiple Regression analysis India is firmly on the path of reforms since 1991. Financial
operators are being liberalised to take decisions in a
Multiple regression relies upon certain assumptions about developed and regulated environment and assume
the variables and error term used as a part of the analysis. At responsibility for their decisions. The time has come when
the point, when these assumptions are not met the outcomes we have to give similar freedom to insurance industry to
may not be reliable, bringing about a Type I or Type II error, invest their funds in assets they consider appropriate,
or over- or under-estimation of significance or effect size(s) keeping in view the interests of their clients and the
(Osborne and Waters, 2002).Accordingly, it can only be opportunities available in the environment. However, the
appropriate to use multiple regression if data "passes" three environment should be well developed and regulated so that
basic assumptions that are required for multiple regression to investment manager enjoys investing. Otherwise, insurance
give a valid result i.e. Multicollinearity, Autocorrelation and sector would soon find their investment choices restricted
Normality. and the accessible alternatives would not provide them an
opportunity to fabricate a protected and adjusted portfolio.
Multicollinearity- the presence of perfect or exact, linear Notwithstanding, this freedom needs to be painstakingly
relationship among some or all independent variables of aligned to dodge any untoward occurrences and make the
regression model.Multicollinearity generally identified reforms sustainable. Under writing and investment are two
through VIF or Tolerance level. The VIF is an index of the essential and related business activities of insurance
Volume 7 Issue 7, July 2018
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Licensed Under Creative Commons Attribution CC BY
Paper ID: ART20183757 DOI: 10.21275/ART20183757 84
 International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Index Copernicus Value (2016): 79.57 | Impact Factor (2017): 7.296
companies. Investment decision is influence by underwriting
activities of insurance companies.

In this paper an attempt has been made to assess the impact

premium and claim on investment of insurance companies.
It is found in the study that on general premise, a relatively
high proportion of the variation of the dependent variable
investment is accounted for by the independent variables
(premium and claim).The result of first hypotheses
uncovered that there exists a statistically significant impact
of premium on investment of Life Insurance Corporation of
India. The result of second hypotheses stated that there
exists a statistically significant impact of claim on
investment of Life Insurance Corporation of India. The
paper serves as the first methodical investigation of the
impact of underwriting activities on investment. In
particular, it is of interest to see whether insurers embrace an
integrated approach to considering their underwriting profile
so that risk of unavailability of fund can be mitigating. In the
aftermath of expanding liberalization in the insurance
industry together with the worldwide financial crisis has
posed a great deal of challenges for insurance regulatory
authorities in monitoring investment of insurance
companies. Researcher believes the current paper provides
some helpful bits of knowledge in this vein.

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Paper ID: ART20183757 DOI: 10.21275/ART20183757 85