A

PROJECT REPORT ON

“WORKING CAPITAL MANAGEMENT”

AT

UNIVERSAL SOMPO GENERAL INSURANCE

COMPANY LTD

SUBMITTED BY

SHWETA GUPTA

INDIRA INSTITUTE OF CAREER STUDIES

IN PARTIAL FULFULLMENT OF THE REQUIREMENTS OF

P.G.P+SMU
BATCH (2009-2011)

1
 DECLARATION

I hereby declare that the project report titled “WORKING CAPITAL MANAGEMENT

” at UNIVERSAL SOMPO GENERAL INSURANCE Co. Ltd. is my own work and

has been carried out under the able guidance of MR.Bisheshwari Singh, Business

Head-North Gurgaon . All care has been taken to keep this report error free and I

sincerely regret for any unintended discrepancies that might have crept into this

report. I shall be highly obliged if errors (if any) be brought to my attention.

Thank You

SHWETA GUPTA

2
ACKNOWLEDGEMENT

3
 ACKNOWLEDGEMENT

I take this opportunity to express my deep sense of gratitude to all those who have
contributed significantly by sharing their knowledge and experience in the completion of this
project work.

I am greatly obliged to PROF.P.K.DIVAKARAN for providing me the right kind of

opportunity and facilities to complete this venture.

My first word of gratitude is due to MR.Bisheshwari Singh, Gurgaon, my corporate guide,

for his kind help and support and for his valuable guidance throughout the project. I am
thankful to him for providing me with necessary insights and helping me out at every single
step.

My heartfelt thanks to my respected Faculty Guide namely PROF.Vishaka, without his

continuous help the project would not have been materialized in the present form. His
valuable suggestions helped me at every step.

Finally, I would also like to thank all my dear friends for their kind cooperation, advice and
encouragement during the long and arduous task of preparing this report and carrying out the
project.

At last but not the least, who are always at the top of my heart, my dear family members
whose blessings, inspiration and encouragement have resulted in the successful completion of
this project.

SHWETA GUPTA
ISCS PUNE

4
 DECLARATION

I SHWETA GUPTA, student of P.G.P III Semester of INDIRA

SCHOOL OF CAREER STUDIES, PUNE hereby declare that the Summer
Training Report on “WORKING CAPITAL MANAGEMENT” of
UNIVERSAL SOMPO GENERAL INSURANCE COMPANY LIMITED,
Is my original work and has not been submitted by any other person.

I also declare that I have done my work sincerely and accurately

even then if any mistake or error had kept in it, I request the readers to point out
these errors and guide me to remove these errors in future.

Internal Guide Signature of the Candidate

5
 TABLE OF CONTENTS

 Introduction

 UNIVERSAL SOMPO GENERAL INSURANCE COMPANY LTD.

 An Organization overview
 USP (Unique selling propost)
 Evolution of company
 Product and service

 GENERAL INSURANCE
 What is insurance
 Classifation of insurance
 Removal of tariffs
 Impact of detariffing
 How insurance work
 How premium is calculated

 Research Methodology

 WORKING CAPITAL AT A GLANCE

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 THEORTICAL ASPECTS OF WORKING CAPITAL
MANAGEMANT

 WORKING CAPITAL MANAGEMENT

 RECEIVABLES MANAGEMENT
 INVENTROY MANAGEMENT
 CASH MANAGEMENT

 ANALYSIS OF WORKING CAPITAL MANAGEMENT

 COMPARATIVE P&L ACCOUNT
 TREND ANALYSIS
 CASH FLOW ANALYSES
 RATIO ANALYSIS

 FINDINGS AND CONCLUSIONS

 LIMITATIONS
 BIBLIOGRAPHY

7
COMPANY PROFILE

8
Organization overview

Introduction

Success is a journey, not a destination. If we look for examples to prove this quote then we
can find many but there is none like that of USGIC. Universal Sompo General Insurance
Pvt Ltd received the License and Certificate of Registration from IRDA (Insurance
Regulatory and Development Authority) in November 2007. It is a first of its kind venture,
i.e. Public - Private Partnership in General (Non-Life) Insurance Industry.

Success sutras of USGIC

The success story of USGIC is driven by 8 success sutras adopted by it namely trust,
integrity, dedication, commitment, enterprise, hard work and team play, leaning and
innovation, empathy and humanity. These are the values that bind success with Universal
Sompo General Insurance company.

Vision of USGIC

To emerge as a market leader in our chosen domain by winning customer, Confidence

through superior value and continually enhancing the same. To achieve &sustain market
leadership, USGIC shall aim for complete customer satisfaction, by combining its human and
technological resources, to provide world class quality services. In the process USGIC shall
strive to meet and exceed customer’s satisfaction and industry standards.

Mission statement

To provide superior value for our customers. Stable returns for our shareholders. Stimulating
work environment for our employees. Safety consciousness for the Society.

9
UNIQUE SELLING PROPOST(USP)
Bancassurance a hugely successful distribution channel is the USP of our Company;
capitalizing on the tremendous reach of this channel Universal Sompo, is perhaps the first
company to present a plethora of products, commercial and retail to suit every need and
pocket.
Our Company is a pioneer, of sorts too, in introducing all our most popular products on
Genisys configuration, a sturdy web based platform. All our products, as approved by IRDA,
would be added to the menu available so that our clientele can conveniently choose from the
selection offered.
We have excellent health products, both standalone policies and co -branded exclusive
products in conjunction with our bank partners, designed exclusively for their customers. Our
TPAs i.e. TTK Health Services & Paramount Health services and Family Health Plan are
providing seamless services ensure that in the unfortunate event of hospitalization our
esteemed customers make a fast recovery to good health, safe in knowledge that we would
take care of their medical expenses.
We have many ideas to further enhance our services to ensure that our valued customers'
choice of Universal Sompo as their own insurer becomes inevitable rather than a matter of
choice. Thank you for visiting our site. We look forward to assisting you in your efforts to
ensure protection and security for yourself, family and property at every step.

USGIC shall strive

To be compliance oriented.
To ensure prompt action / feedback on Customer grievance.
To monitor and enhance service levels constantly.

10
Evolution of the company

Universal Sompo General Insurance Co. Ltd. (universal Sompo) – a joint venture between
Allahabad Bank, Sompo Japan Insurance Inc., Dabur Investments, Karnataka Bank and
Indian Overseas Bank. Universal Sompo is a uniquely symbolic example of fruitful public-
private sector partnerships.

The joint venture has been capitalized with shareholders funds of over 230 cr. including share
premium.

Insurance Regulatory and Development Authority granted the License and Certificate of
Registration to the company in November 2007.

Of all the five partnering companies, Sompo Japan Insurance Inc. is a Fortune 500 company
based in Tokyo, Japan. With a 15,000 strong workforce and a capital worth 70 Billion Yen,
the company earned Rs. 50,000 crores as total premium income for the year 2006-2007,
which is almost twice the premium income of the General Insurance Industry in India.

Three of the Indian partners are leading banks with a combined asset base of Rs. 92,602
crores and over 4000 branches and distribution centers. Plus the 4th largest FMCG Company
in India with over 15 million retail outlets. The JV partners will extend their vast distribution
reach and customer base for soliciting our bouquet of non-life insurance business. In addition,
the company's distribution network will also consist of brokers, agents and focused below the
line direct marketing promotions.

The company is present across almost all product lines, classified into five major classes:
 Property
 Marine
 General Accident
 Workmen Compensation
 Motor
 Health
 Fire and burglary

11
UNIVERSAL SOMPO GENERAL INSURANCE COMPANY
PRIVATE LIMITED
COMPANY PROFILE

Public – Private Partnership in Indian General Insurance Industry Firm Footing

 Name：Universal Sompo General Insurance Company Ltd. (USGI)

 Registered : 310-311, Trade Centre, Opp. MTNL Bldg, Bandra Kurla

 Address : Complex.Bandr(East), Mumbai 400051

 Capital : Rs.235 crores

 Directors：Executive Chairman Mr O.N. Singh
Managing Director Mr Koichi Hattori

 Incorporated : 5th January 2007

 Business ：General Insurance in India including Reinsurance

 Shareholders :

• Allahabad Bank (National)30％

• Indian Overseas Bank (National) 19％
• Karnataka Bank (Private)15％
• Dabur Investment 10％
• Sompo Japan Inc26％

Company Profile as on 31th March 2009

Capital –70 billion yen (USD 698 Million)

Net Underwritten Premium 2008 –09: US$ 13 billion

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Employees –16,095, Agents –54,282

Network –41 branch and liaison offices in 26 countries

Total Ordinary income –US$ 17.9 billion for 2008-2009 (twice the total Indian General
Insurance Industry)

Distribution network –105 Regional Offices, 516 Branch offices.

Claim handling network –233 claim service centers

Company’s philosophy –“To be a sophisticated Risk Solution Provider to

Individuals and Corporates”

Unique proposition based on differentiating elements of “Time’, “Cost” and “know-how”

Products and services for the individual, corporate and small

entrepreneur
Drawing upon the financial strengths and distribution reach of Indian partners and backed by
insurance expertise of Sompo Japan, Universal Sompo intends to be a diversified player,
participating in healthy competition to augment insurance capacity in the country through
prudent underwriting, offering innovative and customized Risk Solutions to range of
customer segments including Rural and Social sector, utilizing varied Distribution channels.

13
Our bouquet of insurance products includes Health & Critical Illness, Personal Accident &
Disability, Home, Motor, and Property for individuals, Offices, Shopkeepers Package and
other non-life packages for Small Entrepreneurs, besides Employee Benefit, Operational,
Project Insurance, Liability and other special products for Corporates. Detailed information
on our products and services are available in our product brochures.

They aim to provide our customers with peace of mind through advice on Risk Management
(pre and post loss), Portfolio analysis, Business Continuity Planning (Business - Non Stop).

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<India>Universal Sompo

Outlets in South Asia

<India>Universal Sompo
<Japan>Sompo Tokyo Head Office
<Vietnam>UI C
<Philippines>PGA Sompo Japan
<Malaysia>Berjaya Sompo Insurance
<Singapore>Sompo Japan Insurance (Spore)
<Australia>Sompo Japan Australia branch
<Myanmar>Yangon Rep Office
<Thailand>Sompo Japan Thailand
<Indonesia>Sompo Japan Indonesia

15
Business Performance –April 2010 (Net Premium Fig in lacs)

16
17
Bancassurance –Growth Story

Existing Tie-Ups
Indian Overseas Bank
Allahabad Bank
Karnataka Bank
Lucknow Kshetriya Grammin Bank
Triveni Kshetriya Grammin Bank
Sharda KGB
MP APEX Bank
Rajasthan State Co-Operative Banks
Rajasthan Finance Corporation
Jhalawar Sahakari Land Development Bank
In Pipeline
Pandiyan KGB, Nilanchal KGB, Survodaya Co-Op Bank. Mumbai Distt Co-Op Bank, We
are in talks with other 50 SCB’s and 1 Major PSU Bank for Corporate Tie-Up

18
USGI's Operational Performance FY 09-10

Our Existing Clientele

Airports Authority of India Department of Trade Tax, Govt. Of UP

Amity International Dharampal Satyapal Limited
Bellsonica Auto Component India Pvt. DOW Chemical
Ltd.
Bridgestone India Pvt. Ltd. Euronet Services India
British Oxygen Company Ltd Goshi India Auto Parts Pvt. Ltd
Bhushan Steel Limited Groz Engineering
Bush Foods Overseas Health Education Society
Cabcon India Himadri Chemicals
Canon India Pvt Ltd Hi-Lex India Pvt. Ltd.
Dabur India Hitachi Group

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Honda Motorcycles &Scooters India Pvt.
Ltd
Honda Siel Cars India Ltd.
Jaquar & Co. Ltd
Jindal Steel & Power Ltd
JSL
KFSL ( Kribhco Shyam Fertilizer)
J K Lakshmi Cement Ltd.
MCC PTAManali Petrochemicals
Maruti Suzuki India Ltd.
Mizuho Corporate Bank
Minda Corporation Ltd.
Minda Furukawa Electric Pvt. Ltd.
Monnet Ispat& Energy Ltd

NHK Spring India Ltd.

Orient Fashion Export Limited
Reliance Industries Ltd
Renault Nissan Technology
Suzuki Motor Cycle India Pvt Ltd
Telecommunications consultants India Ltd
Tilda Riceland Private Limited
Unison Hotels Ltd (Hotel Grand)
YKK India
Yutaka Auto parts India
Uflex Ltd.

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SERVICES
All Customers:
Toll free no.( 247)
Web enabled service platform –customer guidance, product brochures, claim forms, process,
do's and dont's, FAQs
Cashless claims settlement –Motor, Health
Pan India network of service providers –surveyors and TPA
Managed care partners –quality screened repair workshops, hospitals, builders, plumbers,
white goods dealers
Minimal documentation, easy processes
Value added services –road side assistance, valet service (motor claim), self-attested
documents, and health check-up
Information over SMS – surveyor deputation, claim approval, policy renewal.

Corporate Clients
Dedicated Account Managers

Direct access to senior management team at the Regional and Corporate Office

Risk Inspection, portfolio advisory services, Business Continuity Planning

MOU with pre-agreed service standards

Facility for e-Marine, e-Travel and e-Motor

Panel of surveyors and pre agreed documentation

On-account payment in case of large losses

Advice on loss prevention & minimization

Employee education and awareness programs

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Customer Service Commitment
Understanding that Claims service is at the heart of an insured-insurer relationship, our
Claims philosophy is to 'to achieve fair and timely settlement through proactive management
of each claim in a customer friendly and transparent manner. 'Our aim is to help our
customers quickly tide over the financial loss arising out of the incidence of a covered peril
so that they can get back to normal 'Life & Business As Usual'.

Our 24 hours Helpline, SMS and web enabled service platform for customer guidance, claim
forms, processes, Do's and Don'ts, FAQs, minimal documentation, cashless claim
settlement, pan India network of service providers, quality screened partners, on-account
payment in case of large loss are some other efforts to ease claimants' anxieties and to make
sure that our customers get the best possible service at all times

Corporate Responsibility
Corporate Responsibility (CR) is about how our core business principles translate into
commitments for each of our key stakeholders, Customers, Employees, Business Partners,
Regulators, Shareholders, Community and Environment.
In line with our mission statement, an important CR issue that we will work to address
would be, to develop market leading understanding of safety and risk management in the
society - down to the individual property level, providing preventative advice to our
customers.

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Why choose Universal Sompo ?
 Strong lineage of financial giants with proven track record.
 Only company in the country with public/private partnership
 Pan India distribution and servicing capability
 World class services and products
 Competitive prices
 Simple worded, easy to understand policy documents, terms and conditions

Sompo Japan -New Topics

SompoJapanestablishedaJointHoldingCompanynamed“NKSJHoldings”withNIPPONKOAIn
suranceCo.on1stApril2010.Thisgroup’sOrdinaryincomewillbeJPY2,869,500million(=US$28
,638millon)andisranked10thinworldwideGeneralInsuranceMarket.

Sompo Japan was the only Japanese financial institution to be honoured as One of the
“Global 100 Most Sustainable Corporations in the World” for two consecutive years.

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Products to be Filled in 2010-11
The products of the company are divided into categories:
 Retail
 Commercial
 Benefit product

BENIFIT PRODUCT

 Aapat Suraksha Bima Policy

 Individual Personal Accident Policy
 Group Personal Accident Policy (Long Term Also)
 Individual Health Insurance Policy
 Group Health Insurance Policy
 IOB-Health Care Plus Policy
 Janata Personal Accident Policy
 Long Term JPA

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INSURANCE
HISTORY
Insurance in India started without any regulations in the nineteenth century of British
colonial era. After the independence, the Life Insurance was nationalized in 1956, and then
the general insurance business was nationalized in 1972, with 4 insurance companies
operating under the supervision of General Insurance Corporation of India. It was expected
that the subsidiary companies would provide effective competition to each other. For more
than two decades, the subsidiary companies have acquired considerable experience,
expertise and financial strength and have also established reasonable standards of conduct of
business.

What is Insurance?
“Insurance is a contract between two parties whereby one party called insurer undertakes in
exchange for a fixed sum called premiums, to pay the other party called insured a fixed
amount of money on the happening of certain events.”

Insurance is a protection against financial loss arising on the happening of an unexpected

event. Insurance companies collect premiums to provide for this protection. A loss is paid
out of the premiums collected from the insuring public and the Insurance Companies act as
trustee to the amount collected.

The economic value of a human life arises out of its relations to the other lives. Whenever
continuance of a life is financially valuable to others, either to family dependents, business
associates, or educational and philanthropic situations, the necessity for the life insurance is
present.

For example, in a life policy by paying a premium to the Insurer, the family of the insured
person receives a fixed compensation on the death of the insured.

Similarly, in car insurance, in the event of the car meeting with an accident, the insured
receives the compensation to the extent of damage.

It is a system by which the losses suffered by a few are spread over many, exposed to similar
risks.

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Why should you like to take Insurance?

Insurance is desired to safeguard oneself and one’s family against possible losses on account
of risk and perils. It provides financial compensation for the losses suffered due to the
happening of any unforeseen events.

By taking a life Insurance a person can have peace of mind and need not worry about the
financial consequences in case of any untimely death.

Let us consider the family of four, which consist of a man, a woman and their two children.
The earning member of the family works hard to get the money flowing to meet the
requirements of his family. They have plans to have their own house constructed in the next
two years. Everything is going as per the plans.

What could be the various events that could upset the plans?

Burglary

Death

Accidental Permanent Disability

Sickness & Critical Illness

All these events are forfituous in nature, i.e., they are out of control of the family and more
in the hands of destiny. Moreover all of these events can actually erode the wealth of the
family.

In order to reduce the element of risk to which this family is subjected and to safeguard the
wealth or economic value, insurance should be carried out.

There are two different branches of insurance, which are Life and Non-Life Insurance.
While Life Insurance insures the life of a person, Non-life insures everything else.

Insurance ensures protection of economic value of assets. Assets are insured against
the risk of being destroyed or made non-functional due to any accidental
occurrence.

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Name some areas covered under Life and Non-Life Insurance
Certain Insurance contracts are also made compulsory by legislation. For example, Motor
Vehicle Act 1988 stipulates that a person driving a vehicle in a public place should hold a
valid insurance policy covering “Act” risks. Another example of compulsory insurance
pertain to the Environment Protection Act, Wherein a person using a carrying hazardous
substances (as defined in the Act) must hold a valid public liability (Act) policy.

What are the other benefits of taking Insurance?

Tax Relief: Under section 88 of Income Tax Act, a portion of premium is paid for life
insurance policies are deducted from tax liability. Similarly, exemption is available for
Health Insurance Policy premiums.

Money paid as claim including Bonus under a life policy is exempted from payment of
Income Tax. However annuities received under certain pension plans are taxable.

Encourage Savings: An insurance scheme encourages thrift among individuals. It

inculcates the habits of saving compulsorily, unlike other saving instruments, wherein the
saved money can be easily withdrawn.

In insurance parlance risk implies:

Peril to be insured against e.g. Fire, theft etc.
Person/ Property e.g. young people vis-à-vis old people.
While we are on this subject, let discuss insurance and assurance, the two terms, which are
used interchangeably and also understood wrongly at times.

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CLASSIFATION OF INSURANCE

Insurance

Life General Insurance

Insurance

Fire Marine Miscellaneous

Health
Insurance

LIFE INSURANCE
The insurance sector went through a full circle of phases from being unregulated to
completely regulate and then currently being partly deregulated. It is governed by a number
of acts.

The Insurance Act of 1938 was the first legislation governing all forms of insurance to
provide strict state control over insurance business.

Life insurance in India was completely nationalized on January 19, 1956, through the Life
Insurance Corporation Act. All 245 insurance companies operating then in the country were
merged into one entity, the Life Insurance Corporation of India.

Human life is an income generating assets. This asset can be lost through unexpected death
or made non functional sickness or disability caused by accident. There is no certainty that
death will happen. On the other hand there is a certainty that death will happen. But it’s
remaining uncertain.

Life insurance protects against loss of income of individual. Life Insurance

 Does not protect the asset
 Does not prevent loss

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NON- LIE INSURANCE
 FIRE INSURANCE
 MARINE INSURANCE
 MISCELLANEOUS

FIRE INSURANCE
 Standard Fire and Special Perils Policy
 Consequential Loss-Fire Insurance Policy
 Industrial All Risk Insurance

MARINE INSURANCE

 Marine Cargo –Open Policies (Inland & Import/ Export) and Annual Sales Turn over
Policies
 Marine Cargo -Specific Transit Policies ( Inland & Import/ Export )
 Tea Crop Insurance Policy

MISCELLANEOUS INSURANCE

 Burglary Policy
 All Risk Insurance Policy
 Workmen’s Compensation Policy
 Jeweller Block Insurance Policy
 Public Liability (Industrial & Storage Risks)
 Money Insurance
 Public Liability (Act) Insurance
 Products Liability
 Public Liability (Non Industrial)
 Commercial General Liability Policy
 Fidelity Guarantee
 Banker’s Indemnity
 Travel Insurance
 Credit Insurance
 Errors & Omission

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FIRE INSURANCE

Loss due to FIRE, LIGHTINING, EXPLOSION, IMPLOSION,, RIOTS & STRIKES,

IMPACT BY RAIL, AIRCRAFT DAMAGE, EARTH QUAKE, FLOOD, STORM,
TEMPEST, TORNADO, TYPHOON, CYCLONES & LAND SLIDE.
Fire insurance policies may be issued on REINSTATEMENT value basis. Although the
insured gets new property which is in similar condition and of same kind, to protect the
basic of idea of indemnity the property will not be of superior nature.

MARINE INSURANCE

In this branch what is provided as indemnity becomes commercial indemnity because,

almost all the policies issued are agreed value policies.
To be precise the insured and the insurer agree that the sum insured is the value of
the property insured. The agreed amount is then payable in case of total loss, with no
attachments what so ever.

Type of marine insurance

A. cargo insurance
 B. hull insurance

Cargo insurance provides insurance cover in respect of loss of or damage to goods during
transit by RAIL, ROAD, SEA, AIR OR REGISTERED POST.

TYPE OF CONTRACT RESPONSIBILITY

FREE ON BOARD SELLER IS RESPONSIBLE TILL THE
(F.O.B) GOODS ARE PLACED ONBOARD.

COST & FREIGHT THE BUYERS RESPONSIBILITY STARTS

(C & F) FROM THE TIME THE GOODS ARE
PLACED ONBOARD

COST INSURANCE THE SELLER IS RESPONSIBLE FOR

30
& FREIGHT (C.I.F) ARRANGING INSURANCE WHICH IS
INCLUDED IN THE COST OF THE GOODS.

A further security in the form of insurance policy is also required by the bank to protect its
interest in case of goods suffering loss or damage while in transit, in which case the importer
may not make the payment. The terms and conditions of the insurance are specified in the
letter of CREDIT.

The RISKS covered in a marine policy falls under three categories

• MARINE PERILS
• EXTRANEOUS PERILS
• WAR & STIRKES, RIOTS & CIVIL
COMMOTION RISKS (S.R.C.C

MARINE PERILS: are the perils associated with rivers, seas.

EXTRANEOUS PERILS: means not relevant. Ex: theft, pilferage non deliveries are
some of the extraneous perils. Loss due to WAR, STRIKES and CIVIL COMMOTIONS
(SRCC) can also be covered under a Marine policy. The consequences of these perils may
result in total loss.

HEALTH INSURANCE

Health insurance in a narrow sense would be ‘an individual or group purchasing health care
coverage in advance by paying a fee called premium.’ In its broader sense, it would be any
arrangement that helps to defer, delay, reduce or altogether avoid payment for health care
incurred by individuals and households. Given the appropriateness of this definition in the
Indian context, this is the definition, we would adopt. The health insurance market in India is
very limited covering about 10% of the total population. The existing schemes can be
categorized as:

(1) Voluntary health insurance schemes or private-for-profit schemes;

(2) Employer-based schemes;
(3) Insurance offered by NGOs / community based health insurance, and
(4) Mandatory health insurance schemes or government run schemes

IRDA Regulations (Registration of Indian Insurance Companies) 2000 defines health

insurance as- “Health Insurance business or Health cover as affecting of contracts which
provide sickness benefit or medical or surgical or hospital expense benefits, whether
inpatient or outpatient, on an indemnity basis, reimbursement , pre-paid or hospital or other
plans basis, including assured benefits and long term care.”
31
Health Insurance is the method to finance health care. The ILO defines health care as- “the
reduction or elimination of uncertain risk of loss for the individual or household by
combining a larger number of similarly exposed individuals or households who are included
in a common fund that makes good the loss caused to any one member.”

Second largest contributor to general insurance premiums after motor insurance ~20% of the
market in FY09 and is expected to be 26% of the market in FY10 fastest growing segment –
5 year growth rate of 37%. Annual premiums in FY09 of $1.4 billion –expected to increase
to $6.2 billion by FY15

Growth drivers-
Ageing population
Improving per-capita income and awareness
Increasing healthcare costs
Increasing health insurance by employers
In the absence of any major social security support in the India, the need for health insurance
is a subject of prime importance
It is estimated that only 3-4% of the Indian population has some form of health insurance.
Private insurers are more aggressive in this segment.
Loss ratio has been high at ~141% in 2006-07, and 107% in 2007-08 largely driven by the
group health portfolio.
Prior to detariffing, this coverage was commonly bundled with fire insurance and companies
made a profit on the whole due to fire tariffs being much higher. Now after detariffing this
cross subsidization cannot continue.
Life insurers can now sell health policies and recently two companies specializing in health
insurance have set up shop (Star Health & Allied Insurance and Apollo DKV)

32
Perceptions about Health Insurance in India

33
Health Insurance – Focus Areas
 Health Insurance - potential to become a Rs.25000 crores industry by 2012.
 No. of Elderly People in the Developing World will TRIPLE in 25yrs. (WHO)
 In India, the no. of people above 60 yrs is about 8% today, with that no. expected to
hit 21% by 2025. (Asia Insurance Review)

34
Health Insurance – The Way Ahead
Creating awareness on Rights & Responsibilities

Data Pool – Regulator as a repository

Standardization of Cost
TPAs
Health Providers

Increased Tax benefit

Removal of Service Tax

Standardization of definition – a right step ahead

Standard Pre-Existing exclusion defined w.e.f. 01/06/08

Gradation of Health service providers

Pool for Senior Citizen

Renewability / Portability

Compulsory Health Benefits for organized sector

Government role on mass healthcare initiatives

GENERAL INSURANCE VS. LIFE INSURANCE

Several life insurance companies have of late plunged into health segment, which till
recently was dominated by general insurance companies. Among others, ICICI Prudential
has launched Hospital care and Crisis Cover and Bajaj Allianz, the Care First Plan. Life
insurance Corporation, too, plans to roll out products soon. But, are these products different
from those offered by general insurance companies, popular as Medi-claim policies?
A comparison of Health Insurance offered by a Life and a General Insurer:
Nature of Contract Life Insurer General Insurer
Period of Coverage Contracts are usually made Contracts are usually, though
for a longer duration not invariably, are made for a
short period of usually one

35

Obligation of the Insured Once the contract has been
made, the insured is
generally under no obligation
to report any change of
circumstances affecting the
risk insured unless a change
in actual nature of contract is
requested by the Insured
Premiums The premiums for a life
assurance contract remains
fixed over the period of
contract.
Benefit Payout Pays a lump sum,
irrespective of whether the
policyholder has incurred
those expenses on his
hospital stay.
Valuation of Liabilities A deterministic Approach
(the life and morbidity table)
may be adequate for the
valuation of life assurance
liabilities.
Taxation Portion of premium paid in
respect of health insurance
covering the assessee as well
as any member of family is
deducted from taxable
income under section 80 D.
year or less and at the end of
that year are renewable by
mutual consent of the insurer
and the insured.
At each renewal there is an
onus on the insured to
observe utmost good faith in
informing the insurer of any
changes in circumstances
which affect assessment of
cost of risk borne by the
insurer.
The premiums may vary at
each renewal to reflect
changes in individual
circumstances.
Pays claims according to the
hospital expenses that a
person incurs depending, on
the amount of cover that a
policy holder has taken.
A stochastic approach (with
statistical models more
complicated than life and
morbidity table) has to be
considered for general
insurance.
Premium paid in respect of
health insurance policies is
deducted from taxable
income under section 80 D.

Advantages of Health insurance offered by Life insurance companies: Because of the

long term nature of the plans, the policy holder can plan in advance his future medical/care
expenses. But it is not so under General insurance. Since, the general insurance policies are
subject to renewal every year, if the policy holder has been making several claims and is
considered a risk, the general insurance company may deny renewal or renew it for a much
higher premium.

Advantages of Health insurance offered by General insurance companies: Though a

lump sum amount is paid by life insurers and is of long term nature, this comes with a cost.
They charge bigger premiums as compared with general insurers. In addition, most general

36
insurance companies offer medical charges up to 30 days before a person is hospitalized and
pay the claims if a person has been undergoing a treatment at home- also called domiciliary
hospitalization. The life insurers seem to lack this facility at this point in time.

Removal of Tariffs (“Detariffing”)

Detariffing occurred in three phases-

 One of the significant milestones has been the withdrawal of premium pricing
restrictions initiated from Jan 1, 2007
 From Jan 1, 2007 – Jan 1, 2009, insurers were permitted to structure the premium
rates, but were not allowed to vary the coverage, terms, conditions, policy wordings
etc. This period allowed to migrate towards risk based pricing.
 From Jan 1, 2009 the IRDA allowed the insurers to file variation in deductibles,
coverage amounts, etc. This phase has allowed flexibility in terms of breadth of
coverage.
 Detariffing of rates has led to a virtual price war in certain lines of business such as
Fire and Engineering thereby resulting in an adverse impact on profitability.

Impact of Detariffing
 Loss ratios have increased for FY08 compared to FY07 and are expected to continue
to worsen in FY09
 Fire has seen premium correction of approx 60-70% and motor has witnessed a
decrease in rates of approx 30-40%
 Health insurance shows a high level of underwriting losses mainly due to the group
health portfolio, but has showed an improvement in FY08
 Growth in gross premiums decreased significantly from 21.5% in FY03 – 07 to 9.9%
in FY09
 Sum assured continues to grow at a healthy rate – increase of approx 16% in FY09
and 23% in FY08
 Increased focus on scientific risk based pricing and improving underwriting
capabilities
 Improvement in risk management and claim control
 Eliminate cross subsidization between lines of business (e.g. health and fire)
 Emphasis on customer service and relationship management

37
IMPACT OF TARIFFS

The price of an insurance product is linked to the scope of the cover. The tariff mechanism
provides floor rates for various insurance products based on estimates of average of all
losses across insurance companies, average administrative costs including commissions and
average expected profit.
In India, the Tariff Advisory Committee (TAC) established under the Insurance Act 1938 is
vested with the functions of administering the rates, terms, advantages and conditions in the
general insurance business which are under tariff. The major classes of general insurance
business under tariff regime as in 2006 before detariffing of the market were Fire,
Petrochemicals, Engineering and Motor. The endeavor has been to ensure that the rates are
fixed appropriately and equitably keeping in mind the interests of both insurers and
policyholders through a scientific method of rating.
Upto 1972, some data was being received at TAC from the insurers. After nationalization in
1972, the data flow reduced. Further, there was no system of dissemination of data to the
public. Even the four public sector insurers were not able to publish consolidated data on
each class of insurance. Thus scientific rating became a casualty. As a result pricing of
different classification of risks was done in an ad-hoc manner. This resulted in cross
subsidization among different class of risks and also within a class the better risks
subsidizing the loss making risks.

Apart from this, the insurer in a regulated market did not have flexibility in pricing or
innovation of products as they had to adhere to the terms and conditions of the tariff in letter
and spirit. With the standardization of covers, freezing of rates, terms and conditions, there
was little choice available to the insuring public in terms of products and prices. Thus, while
the parameters or risk factors fixed in the tariff were adhered to for rating purposes, new and
emerging risk factors could not be dove-tailed into the tariff for want of data on those
factors. On the customer’s side, there was a perception that the better risks were being
charged as much premium if not more than those for the high risk ones. In short there was
no distinction between good risks and bad risks as the same rate applied to all.

Post IRDA Act 1999

IRDA Act was enacted with the objective to protect the interests of insurance policy holders
and to regulate, promote and ensure orderly growth of the insurance industry. Though the
benefits of liberalization can be seen with increase in volumes of premium, there was little
innovation in the tariff driven General Insurance business. Even after the opening up of the
insurance sector, the general insurance business was predominantly governed by the tariffs
prescribed by TAC.
38
Considering prevalence of such tariffs against the principles of competition, there was a
constant demand from insurers and other industry experts to abolish the tariffs. However,
sudden removal of tariffs can result in unhealthy price-wars thereby affecting the solvency
of the company itself. It means that there is need for sustainable growth on scientific lines
and enhanced customer satisfaction.

THE PROCESS OF DE-TARIFFING

Evolution of De-tariffing Concept

In a competitive market, the products need to be priced equitably based on their individual
risk experience which was not practiced due to tariff restrictions. It was alleged that tariffs
were rigid based on out-dated statistical data, and that premium rates were not revised in
response to the market dynamics. It resulted in heavy cross subsidy of premium for those
lines of business which had persistent high claims ratio, for e.g. Motor Third Party.

In other profitable portfolios, tariff rates were higher than rates for similar risks in other
parts of the world. Hence, General insurance companies and other Stake holders in the
insurance market had been voicing the demand for the removal of tariff as the existence of
tariff was considered contrary to free market principles and insurance products need to be
priced based on free market forces.

Reasons for transition to detariff regime

Pursuant to liberalization and the entry of private insurers, the motor underwriting scenario
changed drastically. On one hand the private players refrained from underwriting the loss
making areas such as standalone liability policy and on the other, they clamoured for
detariffing of motor portfolio. They also had in place sophisticated IT set ups and systems
capable of statistical analysis of various risk factors over and above the ones prescribed by
the motor tariff.

The awareness among customers in the wake of liberalization also resulted in a movement
towards risk based rating rather than a rigid tariff structure. Representations have been
received by the IRDA that insurers were not willing to offer Mandatory Third Party Liability
cover and that there were loading the own damage policies. The response of the insurance
companies was that the third party liability insurance was not a viable business without cross
subsidizing with the premia from own damage portfolio.

The Authority has accordingly considered moving to a tariff free regime in a phased
manner. To begin with, by notification dated 31.10.2002, it constituted a Committee under
the Chairmanship of Justice T.N.C. Rangarajan to examine the various aspects of motor
underwriting including de-tariffing and pooling arrangements.

39
De-tariffing of Marine Hull Insurance
Continuing the spirit of competition, vide circular Ref No. IRDA/CIR/Mrn-Hull/086/Mar-05
dated 23rd March, 2005; all general insurers who wish to write marine hull class of business
were allowed to go out of the tariff from 1.4.2005. However, it was mandated that they shall
follow the existing policy wordings, terms and conditions including clauses such as the
Institute clauses till further orders. On the other hand the terms & conditions for the war risk
insurance policy shall be identical to the existing Government of India Scheme until further
orders, which continues till date.

ADVANTAGES OF DE-TARIFFING
 Competition will improve efficiency
􀀀

 Efficiency will lead to reduction of premia and benefit policyholders

 It is part of the reforms towards liberalized economy.

The fears apprehended are:

 De-tariffing may make insurance unavailable at reasonable premia.
 Companies may form cartels and jack up the premia.
 Free market may lead to insolvency of companies and loss of protection for
policyholder.

40
CHANGING DIMENSION OF INSURANCE MARKET
On September 23, 2005, the Insurance Regulatory Development Authority of India (IRDA)
announced that non life-insurance companies would be tariff-free regime with effect from
brought under a January 1, 2007.

After detariffing these companies would be allowed to fix the premiums for the insurance
products they offered based on their own analysis and of the risk involved in each case,
without government regulation.

In other words, detariffing would increase the role and responsibility of the underwriter, and
cause a shift from rule-based underwriting to risk-based decision-making.

Commenting on the move to set up a tariff-free regime in general insurance, the Chairman of
the IRDA, C.S. Rao, said "The proposed detariffing in general insurance industry would lead
to a major shift in the focus of insurance companies from corporate business to individuals,
resulting in higher insurance penetration in the country."

J. Cyril, President of the Oriental Insurance Company officers' Association and former
Secretary-General of the Confederation of Insurance officers' Associations, said, "All along,
the private sector in the industry had greater flexibility in quoting premiums because of
certain practices like commissions and incentives. Detariffing will enable the public sector
companies to quote competitive rates."

According to analysts, the impact of detariffing would vary from segment to segment in the
insurance sector. The engineering and fire insurance premiums, which were a lucrative
business for the insurance companies, were expected to fall, whereas premiums in the loss-
making motor insurance segment were expected to increase after a detariffed regime was set
up.
 Marine hull/cargo insurance premiums were also expected to fall, because profitable risks
covered by the companies would be offered at a competitively lower price. The health
insurance companies were expected to experience profits as cross subsidization would be
eliminated.

Until 2006, health insurance products accounted for less than 1% of the business of life
insurance firms, in terms of premium value. Life insurance providers were allowed to offer a
limited range of critical care products along with their life insurance policies. 
However, premiums from standalone health care insurance products sold by general
insurance companies contributed to almost 11-12% of the total premium value pool. At a

41
stage where the health insurance companies lacked transparency and regulation of services,
the detariffing policy was expected to play a significant role in remedying this situation.
Also, this sector was expected to expand its services by providing customized policies to
customers based on their individual risk profiles.
The Insurance Regulatory and Development Authority Act, 1999 is an Act to provide for the
establishment of an authority to protect the interests of holders of insurance policies, to
regulate, promote and ensure orderly growth of an insurance industry and for matters
connected therewith or incidental thereto and further to amend the Insurance Act, 1938, the
Life Insurance Corporation Act, 1956 and the General Insurance Business (Nationalizations)
Act, 1972.
The Parliament ratified the Insurance Regulatory and Development Authority Bill, 1999 on
7-12-1999, thus stigmatizing the monopoly of the Life Insurance Corporation and General
Insurance Corporation over the insurance sector.

The Bill, adopted by the Lok Sabha on December 2, was passed in the Rajya Sabha on 7-12-
1999. The Insurance Regulatory & Development Authority Act, 1999 seeks to open up the
insurance sector for private companies with a foreign equity of 26 per cent.  It is also aimed
at ending the monopoly of the Life Insurance Corporation (LIC) and General Insurance
Corporation (GIC) in the insurance sector of the country.
Finance Minister, Mr. Yashwant Sinha, asserted that the government was not in favour of
State monopolies.  Reiterating that the policy of the government was one that was for
competition, Mr. Sinha, however, assured the House that there would be a level playing field
for the private and State owned insurance companies: "The Regulatory Authority will not do
to the public sector what it would not do to a private company", he said as he allayed fears
that the legislation would be detrimental to the interests of the social sector.

Stating that the government is under no pressure to bring in the Bill, the Finance Minister
said that the Government is bringing the Bill on its own accord.
Mr. Sinha, on his part, said the government had given "ample notice" of its intention to
privatise the insurance sector.

Mr. Sinha set at rest doubts about dilution of equity of the LIC and GIC.  The present
government, he said, has no intention to privatise these corporations: "Neither is it our case
that the LIC and GIC have not functioned.  They have discharged their responsibility well
but they need to do more". He said adding that it was not possible for the LIC and GIC to
cover a country as large as India in its entirety" "That is why penetration of LIC and GIC has
been inadequate".

Drawing the attention of the House to the fact that LIC and GIC had branches in 26
countries, he sought to know from the members that when LIC and GIC could go to other
countries then why couldn't others countries come to India.  The 26 per cent equity cap does
not mean surrendering freedom, he clarified.

On the issue of loss of sovereignty, he said that similar references were expressed when the
banking sector was opened up but the experience has been quite to the contrary.  The LIC
and GIC, he asserted, are geared to face competition.

42
This comprehensive write-up comprising the Insurance Regulatory and Development
Authority Act, 1999 with short comments and Regulations relating thereto would serve the
purpose of a ready reference on the subject.  A creative feedback from the learned readers,
bringing to our notice any mistake, error or omission or discrepancy that might have crept in
this book in spite of our sincere efforts to avoid those, is most welcome, for it will help us
improve the overall quality, style and presentation of the book in the forthcoming editions

Private company

To ensure better corporate governance and transparency in the insurance sector, the
Insurance Regulatory and Development Authority (IRDA) has decided not to issue licences
to companies registered as private limited insurance companies under the Indian Companies
Act 1956.

According to an IRDA official, prospective entrants in the insurance sector have been asked
to register their companies as public limited companies instead. 
"Existing private limited insurers have been asked to become public limited," he said.
Accordingly Aviva Life Insurance Company India Pvt Ltd changed its incorporation status
in November 2007 and is now Aviva Life Insurance Company India Ltd.

"Becoming public limited does not mean that the company is planning any public issue. It is
mainly to comply with the regulator's directive," said an Aviva spokesperson.

When contacted the spokesperson of the Bangalore-based MetLife India Insurance Co Pvt
Ltd said the company was awaiting the Registrar of Companies' sanction for the change in
its incorporated status.

Originally a private limited company, another Bangalore-based life insurer, ING Vysya Life
Insurance Company Ltd, became a public limited company in 2005 when the promoters
changed hands.

Is IRDA correcting a monumental blunder?

Interestingly all three private limited insurers licensed by IRDA are those in the life
insurance business.

"That is all the more reason for worry as life insurers deal with large quantum of public
funds, generally parked on a long-term basis by policyholders, say 10 to 30 years," says P
Prabhakar, a Chennai-based practicing chartered accountant and an insurance sector analyst.
Welcoming IRDA's latest move, he says, "IRDA committed a monumental and pathological
blunder in licensing three private limited life insurers."

A blunder ? Citing the provisions of Insurance Act 1938 he says, "Section 2C of the Act
clearly states that an insurance company should be "public company" Prabhakar explains.

43
According to him the regulator must have relied on the provision of the IRDA (Registration
of Indian Insurance Companies) Regulations, 2000 and Section 2(7A) of Insurance Act 1938
inserted in the Act only in 1999.

Regulation 5 of IRDA (Registration of Indian Insurance Companies) Regulations, 2000

reads as follows: "An applicant shall be eligible to apply for requisition referred to in sub-
regulation (1) of regulation 2, if such applicant upon registration will be an Indian Insurance
Company as defined in section 2(7A) of the Act"
And Section 2(7A) defines an Indian insurance company as one formed and registered under
Companies Act 1956. However, it is silent on the nature of incorporation - private or public
limited - of the company.

"Whether it is a conscious silence or an unintended omission is not clear. However, the fact
that three private limited companies have been permitted by the IRDA shows that it is a
deliberate omission. The legal position is delightfully vague and it appears, it has been
intended to be so," opines R Ramakrishna, a member of Malhotra Committee on Insurance
Reforms and former executive director (Actuarial) Life Insurance Corporation of India.

Broadly speaking under Companies Act 1956 two kinds of companies can be formed viz
private limited and public limited.

Add Prabhakar “When the Insurance Act was extensively amended in 1999, Section 2C was
not touched”. The section is much older than Section 2(7A), which is of 1999 vintage.
Logically a new legal provision cannot override its elder unless specifically mentioned."

On the face of it may seem the lacuna was unintended, but it is not so if one reads Section
6A (2) the Insurance Act that deals with voting rights of the shareholders of a public
company.

As per this section the voting rights of shareholders in the case of a public company is
strictly proportionate to the paid up amount of the shares held up by him.

The section is conspicuously silent about private limited companies. They can fall back on
the Companies Act that provides for disproportionate voting rights.

Spokespersons of MetLife India and Aviva India declined to comment on the kind of voting
rights the promoters - foreign and Indian- had on their respective shares.

Why not a 'Pvt Ltd' company?

Arguing in favour of private limited insurers an industry official preferring anonymity says,
"In the case of a private limited companies transfer of shares can be restricted by the articles
of association. This gives comfort to the foreign shareholders who by law can hold only 26
per cent stake. In a public company there is no level playing field for the foreign partner."

44
Responding to that Prabhakar says, "There cannot be a level playing field between majority
and minority promoters."

Nevertheless the field seems to be level in the case of a public limited company as any
promoter can exit the venture without seeking other party's permission.

Perhaps what could be considered as negligence or careless in drafting of the insurance law
is the mention of Companies Act 1913 in several places instead of Companies Act 1956 - the
governing law the Indian incorporated companies.

Transparency is at a premium

Allowing private limited companies to deal with huge public money actually hinders the two
good concepts viz corporate governance and transparency.
Under Companies Act anybody can get a copy of a public limited company's annual report
from the Registrar of Companies even it is not listed on the bourses.

On the other hand the annual reports of private limited companies are not accessible to the
public.
"Look at the banking sector. First of all there are not private limited banks. Secondly each
and every bank has to publish its accounts in the newspapers and each and every bank
branch displays them in their premises. Why such a transparency is not there in the
insurance sector," Prabhakar poses.

Today transparency is at a premium in the insurance sector with very few enlightened
companies putting their annual reports on their corporate websites or sharing it with
journalists for further dissemination, unlike notable exceptions like Bajaj Allianz.

Counter an executive with a private life insurance company. "Policyholders do not need to
know the profit / loss account or the balance sheet of a life insurer as they are not investors
or a creditor. It takes at least seven years for a life insurer to break even. If a prospect sees a
life insurance company making losses he may not buy a policy."

According to him all the information required by a prospect to decide on a product purchase
is available in the public domain.
"IRDA ensures the solvency of insurance companies. So publishing the annual reports will
be a competitive disadvantage," he argues.

Strongly disagreeing with that view S V Mony, secretary general, Life Insurance Council of
India says, "A policyholder and a prospective policyholder have every right to know the
financial health of a life insurer."

According to Prabhakar, IRDA guarantees just the risk / insurance portion of the premium
paid and not the safety of the money's invested in the stock markets under the unit linked
policies. The policyholder bears the entire investment risk. Hence he has every right to know
the financials of the company."

45
Even an unsecured creditor has a right to repayment whereas a poor policyholder has no
recourse in the event a company loses his savings when the stock market collapses.

Prabhakar further adds, “The time has come for IRDA to stipulate that domestic insurer's of
certain age should publish their annual accounts in newspapers. Life insurers should not be
allowed to keep their accounts under wraps in perpetuity. A policyholder should know
whether the life insurer has sufficient assets to pay off its liabilities."
Only when the accounts are thrown open insurers would be forced to look at their
operational efficiencies and not just the top line growth.

Unravelling the embedded values

The other area that IRDA should look at is the calculation of embedded value-the current
value of future profits from the existing policies- by the life insurers.

Many life insurers are playing the top line growth game with an eye on coming out with an
initial public offering.

Some life insurers have started announcing the embedded value of their business and some
have started issuing employees stock options.

The IRDA should start looking at the actuarial assumptions under which the embedded
value is calculated so that lay people are not fooled with fancy valuations. 

Perhaps to bring some sort of comparability amongst insurers IRDA could ask the insurers
to declare the basis/assumptions on which the embedded value is calculated by an insurer.

WHAT IS DETARIFFING IN INSURANCE?

Insurance premiums are fixed by a body known as the Tariff Advisory Committee which

controls and regulates the rates, advantages, terms and conditions that may be offered by
insurers in respect of General Insurance Business relating to Fire, Marine (Hull), Motor,
Engineering and Workmen Compensation. Detariffing refers to doing away with such
fixation of tariffs.

Responding to the demands from the industry, the IRDA has notified in September 2005 that
a detariffing regime in respect of non-life insurance viz. liability insurance , indemnity
insurance, personal lines like health insurance, and marine hull insurance, will come into
place with effect from January 1, 2007.

Detariffing is expected to make the prices of these premiums market driven. It is expected
that the premiums will take a southward direction. In a detariffed regime insurance
companies are expected to focus on personal lines of business like health
and motor insurance in a stronger way than at present.

46
How Insurance Works?
The mechanism of insurance is very simple. People who are exposed to the same risks come
together and agree that, if any one of them suffers a loss, the others will share the loss and
make good to the person who lost. All people who send goods by ship are exposed to the
same risks, which are related to water damage, ship sinking, piracy, etc. Those owning
factories are not exposed to these risks, but they are exposed to different kinds of risks like,
fire, hailstorms, earthquake, lightning, burglary, etc. Like this, different kinds of risks can be
identified and separate groups made, including those exposed to such risks. By this method,
the heavy loss that any one of them may suffer (all of them may not suffer such losses at the
same time) is divided into bearable small losses by all. In other words, the risk is spread
among the community and the likely big impact on one is reduced to smaller manageable
impacts on all.

If a Jumbo Jet with more than 350 passenger’s crashes, the loss would run into several
crores of rupees. No airline would be able to bear such a loss. It is unlikely that many Jumbo
Jets will crash at same time. If 100 airline companies flying Jumbo Jets, come together into
an insurance pool, whenever one of the Jumbo Jets in the pool crashes, the loss to be borne
by each airline would come down to a few lakhs of rupees. Thus, insurance is a business of
sharing
.
There are certain principles, which make it possible for insurance to remain a fair
arrangement. The first is that it is difficult for any one individual to bear the consequences of
the risks that he is exposed to. It will become bearable when the community shares the
burden. The second is that the perils should occur in an accidental manner. Nobody should
be in a position to make the risk happen. In other words, none in the group should set fire to
his assets and ask others to share the costs of damage. This would be taking unfair advantage
of an arrangement put into place to protect people from risks they are exposed to. The
occurrence has to be random, accidental, and not the deliberate creation of the insured
person.

The manner in which the loss is to be shared can be determined before-hand. It may be
proportional to the risk that each person is exposed to. This would be indicative of the

47
benefit he would receive if the peril befell him. The share could be collected from the
members after the loss has occurred or the likely shares may be collected in advance, at the
time of admission to the group. Insurance companies collect in advance and create a fund
from which the losses are paid.

The collection to be made from each person in advance is determined on assumptions. While
it may not be possible to tell beforehand, which person will suffer, it may be possible to tell,
on the basis of past experiences, how many persons, on an average, may suffer losses. The
following two examples explain the above concept of insurance:

Example 1
In a village, there are 400 houses, each valued at Rs. 20000. Each year, on the average, 4
houses get burnt, resulting into a total loss of Rs. 80000. If all the 400 owners come together
and contribute Rs. 200 each, the common fund would be Rs. 80000. This is enough to pay
Rs. 20000 to each of the 4 owners whose houses got burnt. Thus, the risk of 4 owners is
spread over 400 house-owners of the village.

Example 2
There are 1000 persons who are all aged 50 and are healthy. It is expected that of these, 10
persons may die during the year. If the economic value of the loss suffered by the family of
each dying person is taken to be Rs. 20000, the total loss would work out to Rs. 200000. If
each person in a group contributed Rs. 200 a year, the common fund would be Rs. 200000.
This would be enough to par Rs. 20000 to the family of each of the ten persons who die.
Thus, the risks in the case of 10 persons are shared by 1000 persons.

48
How Premiums are Calculated
• Property and Business Interruption
• General Liability
• Motor Vehicle

The role of insurance in society is to increase financial certainty in the case

of catastrophic loss

49
Market Conditions

50
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51
Property and Business Interruption

• Loadings
– Inferior construction
– Cyclone / earthquake zones
– Lack of physical protection
– Claims history

• Discounts
– High asset values
– Strong risk management protocols
– Sprinklers, hoses, etc
– Attractive risks

• Rate applied to declared Property and Business Interruption values.

• Example
0.10% x $125,000,000 = $125,000
(plus GST / FSL / Stamp Duty as applicable)

Methods for Reducing Premiums

• Retain more risk

– Higher deductibles / excesses
– First loss sums insured

• Reduce coverage
– Fire & perils instead of physical loss
– Motor vehicle third party only instead of comprehensive

• Retain certain classes of insurance

– Machinery breakdown
– Fidelity Guarantee

52
RESEARCH METHODOLOGY
53
RESEARCH METHODOLOGY

When we talk of research methodology, we not only talk of the research methods but also
the comparison of the logic behind the methods, we used in this context of our research
study and explain why we are using a particular method or technique and why using the
others.

Research methodology is a way to systematically solve the research problem. It may be

understood as a science of studying how research is done systematically. In this, we study
the various steps that are generally adopted by researcher in studying his research problem
along with the logic behind them.

“The present study is based upon the case study method of research to investigate
procedures at micro level”.

54
As the study is analyzing probing in nature, thus, entirely based on the secondary data
gathered through the annual reports of the company. Therefore it provides a historical
perspective of decisions.

RESEARCH

Research refers to search for knowledge. Research is an original contribution to the existing
stock of knowledge making for its advancement. It is the pursuit of truth with the help of
study, observation, comparison and experiment. In short, the search for knowledge through
objective and systematic method of finding solution of the problem is research. The advance
learner’s dictionary of current English gives the meaning of research “a careful investigation
or inquiry especially through search for new facts in any branch of knowledge”.

RESEARCH METHODS

55
Research methods may be understood as those methods/techniques that are used for
conduction of research. All those methods which are used by the researcher during the
course of studying his research problem, are termed as research methods . Keeping in view,
the research methods can be put into following three groups:
 In the first group we include those methods which are concerned with the
collection of data. These methods will be used where the data already
available are sufficient to arrive at the required solution.
 The second group consists of those statistical techniques which are used to
establish relationships between the data and the unknown.
 The third group consists of those methods which are used to evaluate the
accuracy of the obtained results.

56
COLLECTION OF DATA
There are several ways of collecting the appropriate data which differ considerably in
context of money, cost, time and other sources at the disposable of the researcher.
There are two types of data:
 Primary data
 Secondary data

Primary data
Primary data are those which are collected afresh and for the first time, and thus happen to
be original in character. In case of descriptive research, researcher performs survey whether
sample survey or census survey, thus we obtain primary data either through
 Observation
 Direct communication with respondent
 Personal interview

Secondary data
Secondary data are those which have already been collected by someone else and have
already been passed through statistical process.

In this project report, both types of data have been used. Mainly, secondary data is used
such as annual reports of last two years of Universal Sompo General Insurance Company.

57
WOKING CAPITAL AT A GLANCE

58
 WORKING CAPITAL AT A GLANCE

 INTRODUCTION
 TYPES
 FEATURES
 DETERMINANTS
 COMPONENTS
 WORKING CAPITAL CYCLE

59
INTRODUCTION

A successful sales program is necessary for earning profits by any business enterprise. Sales
don’t convert into cash instantly. There is a time lag between the sale of goods and receipt of
cash.

Therefore, there is a need for working capital in the form of current assets to deal with the
problem arising out of the lack of immediate realization of cash against goods sold.
Therefore sufficient working capital is necessary to sustain sales activity.

Defination of Working Capital:-

According to C.W. Gestenbergh-

“Working capital is ordinarily defined as the excess of the current assets over current
liabilities”.

According to Lawrence. J. Gitmen

“The most common defination of working capital is the difference of the

firm’s current assets and current liabilities.”

Defination of working capital management:-

“Working capital management involves the relationship between a firm's short-term assets
and its short-term liabilities. The goal of working capital management is to ensure that a firm
is able to continue its operations and that it has sufficient ability to satisfy both maturing
short-term debt and upcoming operational expenses. The management of working capital
involves managing inventories, accounts receivable and payable, and cash.”
-From WWW.STUDYFINANCE.COM

60
Management of working capital

Guided by the above criteria, management will use a combination of policies and techniques
for the management of working capital. These require managing the current assets -
generally cash and cash equivalents, inventories and debtors. There are also a variety of
short term financing options which are considered.

Cash management – identify the cash balance which allows for the business to meet day to
day expenses, but reduces cash holding costs

Inventory management - identify the level of inventory which allows for uninterrupted
production but reduces the investment in raw materials and hence increases cash flow; see
Just In Time (JIT) and Economic order quantity (EOQ).

Debtors management - identify the appropriate credit policy, i.e. credit terms which will
attract customers, such that any impact on cash flows and the cash conversion cycle will be
offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and
allowances.

Short term financing - inventory is ideally financed by credit granted by the supplier;
dependent on the cash conversion cycle, it may be necessary to utilize a bank loan (or
overdraft), or to "convert debtors to cash" through "factoring".

61
TYPES

Working capital can be classified either on the basis of concept or on the basis of periodicity
of its requirement.

1) ON THE BASIS OF CONCEPT

On the basis of concept working capital is of 2 types.

A) Gross working capital - Gross working capital is represented by the total Current
assets.
Gross working capital = Total current assets

B) Net working capital - Net working capital is the excess of current assets over current
liabilities.
Net working capital = Current assets – Current liabilities

2) ON THE BASIS OF REQUIREMENT

On the basis of requirement working capital is also of 2 types.

A) Permanent working capital- It is that amount of investment which should always be

there in the fixes or minimum current assets like inventory, accounts receivables or cash
balance etc. to carry out business smoothly. Such an amount can’t be reduced if the firm
wants to carry on business operations without interruption.

B) Variable working capital - The excess the amount of working capital over permanent
working capital is known as variable working capital. It may also be subdivided into two
parts.

Seasonal working capital - Such capital is required to meet out the seasonal demands of
busy periods occurring at stated intervals.

Special working capital - Such capital is required to meet out the extra-ordinary needs for
contingencies. Events like strike, fire, unexpected competition, rising price tendencies, or
initiating a big advertisement campaign require such capital.

62
FEATURES

Working capital is regarded as the excess of current assets over current liabilities.

Working capital indicates circular flow of funds in the day-to-day activities of business.
That’s why it is also called circulating capital.

Working capital represents the minimum amount of investment in raw materials, work-in
progress, finished goods, stores and spares, accounts receivables and cash balance.

DETERMINANTS

Nature of business – The effect of the general nature of the business on working capital
requirements can’t be exaggerated. Rail, roads and other public utility services have large
fixes investment so they have the lower requirements of current assets. Industrial and
manufacturing enterprises, on the other hand, generally require a large amount of working
capital.

Production policies – if the production is evenly spread over the entire year, working
capital requirements are greater, because the inventories will be unnecessarily accumulated
during of season period. But if the production schedule favours a varying production plan as
per the seasonal requirements, working capital is required to a greater extent during a
specified season only. The production policies are affected by so many factors availability of
raw materials, labour, stocking facility etc & therefore, whatever the productions policies
are, the firm has to arrange its working capital requirements accordingly.

Proportion of the cost of raw materials to total cost - In those industries where cost of
proportion is a large proportion of total cost of the goods produced, requirements of working
capital will be comparatively large.

Length of period of manufacturing – The time which elapses between the commencement
and end of the manufacturing process has an important bearing upon the requirements of
working capital. The manufacturing cycle may be shorter for certain concerns & longer for
others it depends on the type of the product to be manufactured, work to be done through
machine labour & hand labour, degree of rationalization of manufacturing procedures
through times, motion & fatigue studies etc.

Terms of purchase - If suppliers allow continuous credit, payment can be postponed for
some time and can be made out of the sale proceeds of the goods produced. In such a case,
the requirements of working capital will be reduced.

63
Dynamic Attitudes – As a company grows, it is logical to expect the large amount of
working capital will be required.

Business cycles – Requirement of working capital also varies with the business. When the
price level is up due to boom conditions, the inflationary conditions create demand for more
working capital. During depression also a heavy amount of working capital is needed due to
the inventories being locked unsold and book debts uncollected.

Requirement of cash - The working capital requirements of a company are also influenced
by the amount of cash required by it for various purposes. The greater the requirement of
cash, the higher will be the working capital needs of the company.

Dividend policy of concern – If the management follows a conservative dividend policy the
needs of working capital can be met with the retained earnings. The relationship between
dividend policy and working capital is well established and mostly companies declare
dividend after a careful study of their cash requirements

Other Factors - Other factors, which affect the requirement of working capital, are lack of
co-operation in production and distribution policies, transport and communication facilities,
the fiscal and tariff policies of the government etc.

COMPONENTS

Main components of working capital are as follows:

Cash – Cash is the most liquid and important component of working capital. Holding cash
involves cash in the sense that the present worth of cash held for a year is less than the value
of cash on today. During inflationary situations as exist today the cost of holding includes
the deterioration in the value of the cash due to inflation. Cash, therefore, results in enhanced
liquidity, but lower profitability. Despite in the cost involved it is pertinent to hold cash
because it facilitates the attainment of some important motives.

Marketable Securities – Though marketable securities provides a such lower yield that the
firm’s operation assets. They serve two useful functions. Firstly, they act as a substitute for
cash, and secondly, are used as temporary investment. Where these securities are held in lieu
of the cash balance, they act as a substitute for transactional or precautionary balances.
Normally, these aren’t used as speculative balances, but only as a guard against the possible
shortage of bank credit.

Marketable securities (as temporary investment) may be held for one of the following
reasons:

Seasonal or cyclical operations - To meet known financial requirements. Construction of

an additional plant. Immediately after the sale of long-term securities.

64
Account Receivable - Though accounts receivable are a vital investment of any business
organization, little analytical work as been done to determine credit policies. Maintaining
account receivable has its cost implications in that the firm’s monetary resources are tied up.
This is of greater significance in the inflationary economy, because of the depreciation in the
value of money. Basically, this is a two-step account. When goods are shipped, inventories
are reduced and accounts receivable is created. When payment is made, this account is
reduced and the cash level increases. Accounts receivables are, therefore a function of the
volume of credit sales and the average length of time between sales and collections.

Inventory – Inventories represent a substantial amount of a firm’s current assets.

Management of inventories should be efficiently carried out so that this investment doesn’t
become too large, as it would result in blocked capital which could put to productive use
elsewhere. On the other hand, having too small an inventory could result in loss of sale or
loss of customer goodwill. An optimum level of inventory should therefore be maintained.

WORKING CAPITAL CYCLE

Working capital cycle indicates the length of time between a firm’s paying for materials
entering into stock and receiving the cash from sale of finished goods. In a manufacturing
firm, the duration of time required to complete the sequence of events is called operating
cycle.

In case of a manufacturing company, the operating cycle is the length of time necessary to
complete the following cycle of events: -

Conversion of cash into raw materials

Conversion of raw materials into work-in-progress

Conversion of work-in-progress into finished goods

Conversion of finished goods into accounts receivable

Conversion of accounts receivable into cash

The above operating cycle is repeated again & again over the period depending upon the
nature of the business & type of product etc. the duration of the operating cycle for the
purpose of estimating working capital is equal to the sum of duration allowed by the
suppliers.

65
Working capital cycle can be expressed as: R+W+F+D-C

Where R=Raw Material Storage Period =Avg. Stock of Raw Material / Avg. Cost of
Production per day

W=Work in Progress Holding Period = Avg. Work in Progress Inventory /Avg. Cost of
Production per day

F=Finished Goods Storage Period = Avg. Stock of Finished Goods / Avg. Cost of Goods
Sold per day

D=Debtors Collection Period= Avg. Book Debts / Avg. Credit Sales per day

C=Credit Period Availed = Avg. Trade Creditors/Avg. Credit Purchases per day

66
OPERATING CYCLE OF MANUFACTURING BUSINESS

Accounts
Receivables

Cash Finished Goods

PURCHASES

PRODUCTION
PRODUCTION PROCESS
Raw Materials Work-in-Process
PROCESS

67
THEORTICAL ASPECTS OF WORKING CAPITAL
MANAGEMANT

WORKING CAPITAL MANAGEMENT

NATURE OF WORKING CAPITAL MANAGEMENT

Working capital management is three dimensional in nature-

1) It is concerned with the formulation of policies with regard to profitability, liquidity and
risk.

2) It is concerned with the decisions about the composition and level of current assets

3) It is concerned with the decisions about the composition and level of current liabilities.

Policies regarding to Profitability

Liquidity and Risk

Composition of Level of Composition of Level

of Current Liabilities
Current Assets

68
GOAL OF WORKING CAPITAL MANAGEMENT

Working capital management is concerned with the problems that arise in attempting to
manage the current assets, the current liabilities and the interrelationship that exists between
them.

The term current assets refer to those assets which is the ordinary course of business can be
converted into cash within one year. Major current assets are cash, marketable securities,
accounts receivable and inventory.

Current liabilities are those liabilities, which are intended, at their inception, to be paid in the
ordinary course of business within a year, out of the current assets or earnings of the
concern.

Current liabilities are accounts payable, bills payable, bank overdraft, and outstanding
expenses. Working capital is that portion of firm’s assets which is financed by long-term
funds.

Interaction between current assets and current liabilities is the main theme of the theory of
working capital management.

Goal of working capital management is to manage the firm’s current assets and liabilities in
such a way so that a satisfactory level of working capital is maintained.

The second important segment of working capital management is deciding the optimum
level of investment in various current assets. There are three important current assets cash,
accounts receivables and inventory

69
RECEIVABLES MANAGEMENT

INTRODUCTION

The term receivable is defined as “debt owed to the firm by customers arising from sale of
goods or services in the ordinary course of business”. When a firm makes an ordinary sale of
goods or services and doesn’t receive payment, the firm grants trade credit accounts
receivable, which could be collected in the future. Receivables Management is also called
trade credit management.

OBJECTIVE

The objective of receivables management is “to promote sales and profits until that point is
reached where the return on investment in further funding receivables is less than the cost of
funds raised to finance that additional credit”.

BENEFITS

Investments in receivables involve both benefits and costs. The extension of trade credit has
a major impact on sales, costs and profitability. Other things being equal, a relatively liberal
policy and, therefore, higher investments in receivables, will produce larger sales. However,
costs will be higher with liberal policies than with more stringent measures.
Therefore, accounts receivables management should aim at a trade-off between profit
(benefit) and risk (cost).

CREDIT POLICY

The credit policy of a firm provides the framework to determine:

Credit standards

Credit terms

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Credit Analysis

Credit Standard
The term credit standards represent the basic criteria for the extension of credit to those
customers to whom goods could be sold on credit. If a firm has more slow-paying
customers, its investment in accounts receivables will increase. The firm will also be
exposed to higher risk of default.

Credit Terms

Credit terms specify duration of credit and terms of payment by customers. Investment in
accounts receivables will be high if customers are allowed extended time period for making
payments.

Credit Analysis

Credit analysis and investigation is an aspect of credit policies of a firm.

Two basic steps are involved in the credit investigation process:

 Obtaining credit information
 Analysis of credit information

It is on the basis of credit analysis that the decisions to grant credit to a customers as well as
the quantum of credit would be taken.

71
INVENTORY MANAGEMENT

INTRODUCTION

Inventories constitute the principal item in the working capital of the majority of trading and
industrial companies. In inventory we include raw materials, finished goods, work-in-
progress, supplies and other accessories. To maintain the continuity in the operations of
business enterprises, a minimum stock of inventory is required.

Management of inventory is designed to regulate the volume of investment in goods on

hand and the types of goods carried in stock to meet the needs of production and sales while
at the same time, the investment in them is to be kept at a reasonable level.

CONCEPT

The inventory management” is used in two ways- Unit Control and Value Control.
Production and purchase officials use this word in term of unit control whereas in
accounting this word is used in term of value control .Investment in inventory is one the
largest asset item of business enterprises particularly those engaged in manufacturing.

The proper management and control of the capital invested in the inventory should be the
prime responsibility of accounting department because resources invested in inventory aren’t
earning a return for the company. Rather, on the other hand, they are costing the firm money
both in terms of capital costs being incurred and loss of opportunity income that is being
foregone.

OBJECTIVES

The basic managerial objectives of inventory control are two-

1) The avoidance of over-investment or under-investment in inventories.

2) To provide the right quantity of standard raw material to the production department at the
right time.

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TECHNIQUES OF INVENTORY CONTROL

The Selective Inventory Control or ABC System of Control

Maximum Stock Limit

Minimum Stock Limit

Re-ordering Level

Economic Order Quantity

ABC System of Control

The various inventory items are, according to this system, categorized into three classes-

1. A
2. B
3. C

The item included in-group involve the largest investment. Therefore, inventory control
should be the most rigorous and intensive and the most sophisticated inventory control
techniques should be applied to these items. The C group consists of items of inventory
which involve relatively small investments although the numbers of items is fairly large.
These items deserve minimum attention. The B group stands midway. It deserves less
attention than A but more than C. It can be controlled by employing less sophisticated
techniques.

Maximum Stock Limit

This represents the quantity if inventory above which it should not be allowed to be kept.
The following formula may be applied to calculate the maximum stock-

Maximum Stock = Reorder Level – Minimum Consumption during Minimum

Lead Time + Lot Size.

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Minimum Stock Limit

This represents the quantity below which stock should not be allowed to fall. The main
purpose of this level is to ensure that production isn’t held up due to storage of any material.

Minimum Stock Limit = Re-order Level – Normal storage during Lead Time

Re- Ordering Level

It is the point at which if stock of the material in store reaches, the storekeeper should
initiate the purchase requisition for fresh supplies of the material. This level is fixed
somewhere between the maximum and minimum levels in such a way that the difference of
quantity of the material between the reordering level and the minimum level will be
sufficient to meet requirements of production upto the time of fresh supply of the material.

The reorder point = Lead time in days * Average daily usage of inventory

Economic Order Quantity

It is the quantity of inventory, which can be reasonably ordered at a time and purchased
economically. It is also known as Standard Order Quantity or Economic Lot Size. By
definition “Economic Order Quantity is that size or order at which the total cost of ordering
and holding are the minimum.

In determining the economic order quantity the problem is one to set a balance between two
opposing costs, namely, namely ordering costs and carrying costs. The ordering costs are
basically the costs of getting an item into the firm’s inventory.

Carrying costs, sometimes also known as holding costs are the costs of possessing the
materials. These costs are combined known as “Associated Costs”.

Hence, the management tries to reconcile them and this reconciliation point is economic
order quantity.

74
ANALYSIS OF WORKING CAPITAIL
MANAGEMENT

75
 OBJECTIVES OF THE STUDY

 To study the various proportions of working capital of Universal sompo

general insurance.
 To find out different ratios related with working capital.
 To check the impact of cash flows on working capital of Universal
sompo general insurance.
 To know the current trend of Assets and Liabilities.

76
METHODS OF WORKING CAPITAL ANALYSIS

There are so many methods for analysis of financial statements but Universal sompo general
insurance used the following techniques:-
 Comparative size statements
 Trend analysis
 Cash flow statement
 Ratio analysis
A detail description of these methods is as follows:-

COMPARATIVE SIZE STATEMENTS:-

When two or more than two years figures are compared to each other than we called
comparative size statements in order to estimate the future progress of the business, it is
necessary to look the past performance of the company. These statements show the absolute
figures and also show the change from one year to another .

Benefits of this method to the USGI:-

 To indicate the trends, these statements show the change in target, sales, and
expenses.
 To make the data simple and more understandable.

TREND ANALYSIS:-

77
To analyse many years’ financial statements USGI uses this method. This indicates the
direction on movement over the long time and help in the financial statements.

Procedure for calculating trends:-

1. Previous year is taken as a base year.
2. Figures of the base year are taken 100.
3. Trend % are calculated in relation to base year.

Benefits:-
 It is beneficial to find out the long run changes.
 It is helpful in future forecasting.

CASH FLOW STATEMENT:-

Cash flow statements are the statements of changes in the financial position prepared on the
basis of funds defined in cash or cash equivalents. In short cash flow statement summaries
the cash inflows and outflows of the firm during a particular period of time.

Benefits for the USGI:-

 To prepare the cash budget.
 To compare the cash budgets .
 To show the position of the cash and cash equivalents.

RATIO ANALYSIS:-
Ratio analysis is the process of the determining and presenting the relationship of the items
and group of items in the statements.
According to Batty j. management accounting “Ratio can assists management in its basics
functions of forecasting , planning, coordination, control and communication”.

Benefits of ratio analysis to USGI:-

1. Helpful in analysis of financial statements.

78
 2. Helpful in comparative study.
3. Helpful in locating the weak spots of the USGI.
4. Helpful in forecasting.
5. Estimate about the trend of the business.
6. Fixation of ideal standards.
7. Effective control.
8. Study of financial soundness.

Types of ratio:-

 Liquidity ratio: They indicate the firm’s ability to meet its current obligation
out of current resources.

 Current ratio:- Current assets / Current liabilities

 Quick ratio:- Liquid assets / Current liabilities
Liquid assets =Current assets – Stock -Prepaid expenses

 Leverage or Capital structure ratio: This ratio discloses the firm’s ability
to meet the interest costs regularly and long term solvency of the firm.

 Debt equity ratio:- Long term loans / Shareholders funds or Net Worth
 Debt to total fund ratio:- Long terms loans/ share holder funds + long
term loan
 Proprietary ratio:- Shareholders fund/ shareholders fund + long term
loan

 Activity ratio or Turnover ratio:- They indicate the rapidity with which the
resources available to the concern are being used to produce sales.

 Stock turnover ratio:- Cost of goods sold/Average stock

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 (Cost of goods sold = Net sales/ Gross profit, Average stock=Opening
stock + closing stock/2)
 Debtors turnover ratio:- Net credit sales/ Average debtors +Average
B/R
 Average collection period:- Debtors + B/R /Credit sales per day ( Credit
sales per day=Net credit sales of the year/365)

 Creditors Turnover Ratio:- Net credit purchases/ Average Creditors

+ Average B/P

 Average Payment Period :- Creditors + B/P/ Credit purchase

Per day

 Fixed Assets Turnover ratio:- Cost of goods sold/Net fixed

Assets (Net Fixed Assets = Fixed Assets – depreciation
 Working Capital Turnover Ratio:- Cost of goods sold/ Working
Capital (working capital= current assets – current liability)

 Profitability Ratios or Income ratios:- The main objective of every

business concern is to earn profits. A business must be able to earn adequate
profit in relation to the risk and capital invested in it.

 Gross profit ratio:- Gross profit / Net Sales * 100 (Net sales = Sales –
Sales return)

 Net profit Ratio:- Net profit / Net sales * 100 (Operating Net Profit=
operating net profit/ Net Sales *100 or operating Net profit= gross profit
– operating expenses)

 Operating Ratio :- Cost of goods sold + Operating expenses/

80
 Net Sales * 100 (Cost of goods sold = Net Sales – Gross profit,
Operating expenses = office & administration expenses + Selling &
distribution expenses + discount + bad debts + interest on short term loans)

 Earning per share(E.P.S.) :- Net Profit – dividend on preference share /

No. of equity shares

 Dividend per share(D.P.S.) :- Dividend paid to equity share

Holders / No. of equity shares *100.

 Dividend Payout ratio(D.P.) :- D.P.S. / E.P.S. *100

81
RATIO ANALYSIS FOR UNIVERSAL SOMPO GENERAL
INSURANCE COMPANY LIMITED

 Current ratio
2008 C.R.=1321.22/969.15 =1.36

2009 C.R.=1517.69/1266.86 =1.20

Comment:

As compared to previous year, current ratio has decreased in current year

because of increase in current liabilities.

 Quick ratio
2008 Q.R.=570.49/969.15=0.59

2009 Q.R.=693.55/1266.86=0.55

Comment:

As compared to previous year, quick ratio has slightly decreased in current

year.

DEBT EQUITY RATIO:-

2008 D.E.R = 1979.67/4982.08 = 0.40
2009 D.E.R = 2951.56/6230.04 = 0.47

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 Interest coverage ratio

2008 I.C.R.=1201.90/103.38=11.67 times

2009 I.C.R.=2189.26/111.84=19.57 times

Comment:

Interest coverage ratio is increasing as compared to previous year. This

indicates that the firm will be able to pay the interest on long term loans
regularly.

 Fixed assets turnover ratio

2008 F.A.T.R.=5159/3004.63=1.72 times

2009 F.A.T.R.=6097/3390.44=1.80 times

Comment:

This ratio reveals how efficiently the fixed assets are being utilized. As
compared to previous year, this ratio is increasing which indicates that
there is better utilization of fixed assets.

 DEBT TO TOTAL FUND RATIO:-

2008 D.T.F.R. =1979.67/6961.75 = 0.28 or 28.0%

2010 D.T.F.R. = 2951.56/9181.60 = .32 or32.0%

 PROPRIETARY RATIO:-
2008 P.R. = 4982.08/6961.75 = 0.71 or 71.0%

2009 P.R. = 6230.04/9181.60 = 0.67 or 67.0%

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 Capital turnover ratio:-
2008 C.T.R.=5159/3356.70=1.54 times

2009 C.T.R.=6097/3641.27=1.67 times

Comment:

This ratio reveals how efficiently capital employed is being used. As

compared to previous year, this ratio is increasing which indicates that
there is better use of capital employed.

 Working capital turnover ratio:-

2008 W.C.T.R.=5159/352.07=14.65 times

2009 W.C.T.R. =6097/250.83=24.3 times

Comment:

This ratio reveals how efficiently working capital has been utilized in
making sales. As compared to previous year, this ratio is increasing
which indicates the efficient use of working capital.

 Stock turnover ratio

2008 S.T.R.=5159/715=7.22 times

2009 S.T.R.=6097/784.44=7.77 times

Comment:

This ratio indicates whether stock has been efficiently used or not. As
compared to previous year, there is a slight increase in this ratio

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 GROSS PROFIT RATIO:-
2008 G.P.R. = 1494/6621*100 = 22.56%

2009 G.P.R.=2507/8604*100 = 29.14%

 NET PROFIT RATIO:-

2008 N.P.R.=1202/6621*100 = 18.15%
2009 N.P.R.=2189/8604*100 = 25.44%

 OPERATING NET PROFIT RATIO:-

2008 O.N.P.R. = 1590.9/6621*100 = 24.02%
2009 O.N.P.R. =2619/8604*100 = 30.44%
 EARNING PER SHARE:-
2008 E.P.S. = 8630000000/91808510 = RS. 94
2009 E.P.S. = 15360000000/91428571 = RS.168
 DIVIDEND PER SHARE:-
2008 D.P.S.=1836176200/91808510 = RS.20
2009 D.P.S.=2514285703/91428571 = RS.27.5
 DIVIDEND PAYOUT RATIO:-
2008 D.P.R.=20/94*100 = 22.0%
2009 D.P.R.=27.5/168*100 =17.0%

85
Proportion of various sources of working capital in percentage:
Current assests, loans and advances:

 Interest accured on investments

2008
1.46/2026.76*100=0.07%
2009
0.70/2342.39*100=0.02%

 Inventories
2008
750.73/2026.76*100=37.04%
2009
824.14/2342.39*100=35.18%

 Sundry debtors
2008
413.45/2026.76*100=20.39%
2009
576.48/2342.39*100=24.64%

 Cash and bank balances

2008
155.58/2026.76*100=7.67%
2009
116.38/2342.39*100=4.96%

86
  Loans and advances
2008
705.54/2026.76*100=34.83%
2009
824.69/2342.39*100=35.20%

Current liabilities and provisions:

 Current liabilities
2008
969.15/1273.37*100=76.10%
2009
1266/1450.06*100=87.36%

 Provisions
2008
304.22/1273.37*100=23.90%
2009
183.20/1450.06*100=12.63%

87
 COMPARATIVE P&L ACCOUNT
(For the year 2008-09)

(Rs. in Crores)

FY09 FY08 %change

Net turnover 14,095.2 10,224.0 38
Other income 317.7 267.9 19
Total expenditure 10,122.8 8,155.3 24
Operating 4,290.1 2336.6 84
profit(PBIDT)
Interest 228.6 218.3 5
Depreciation 610.0 563.1 8
Exceptional Items - 4.1 -

Profit before tax 3,451.5 1,559.3 121

Total tax expenses 1,092.1 402.7 171
Net Profit after Total 2,359.4 1,156.6 104
Tax
Minority share 391.9 116.0 238
Net profit 1,967.5 1,040.6 89

88
 Trend Analysis
(For liability side of 2008-09)
(Rs. in
Crores)
Particulars 2009 2008 Base Current Trend
Trend % %

Current Liability
Liability 1,266.86 969.15 100 130.73
Provisions 183.20 304.22 100 60.21
Total(A) 1,450.06 1,273.37 100 113.87

Fixed Liability
Share Capital 91.69 91.69 100 100
Reserves & surplus 6,138.35 4,890.39 100 125.5
Loans 2,951.56 1,979.67 100 149.09
Def. Tax liability 582.55 584.38 100 99.68
Total(B) 9,764.15 7,546.13 100 129.39

Total liability(A+B) 11,214.21 8,819.50 100 127.15

89
 TREND ANALYSIS
(For assets side of 2008-09)
(Rs .in Crores)
Particulars 2009 2008 Base Current
Trend % Trend %

Fixed Assets
Fixed Assets 4,582.79 3,298.27 100 138.94
Fixed assets held 14.33 12.76 100 112.30
for disposable
Investments 4,274.70 3,481.71 100 122.79
Total(A) 8,871.82 6,792.74 100 130.60

Current Assets
Stock 824.14 750.73 100 109.77
Interest Accrued .70 1.46 100 47.94
Debtors 576.48 413.45 100 139.43
Cash 116.38 155.58 100 74.80
Loans 824.69 705.54 100 116.88
Total(B) 2,342.39 2,026.76 100 115.59

Total Assets(A+B) 11,214.21 8,819.50 100 127.15

90
 CASH FLOW ANALYSIS
(For 2008-09)
(Rs. in
Crores)
FY09 FY08
SOURCES OF CASH
Cash from operations(net of taxes) 1816.0 1077.1
Increase in debts 947.6 --
Non operating cash flow 114.0 67.1
Decrease in cash and cash equivalent 39.2 --
Decrease in working capital -- 205.2
2916.8 1349.4
Uses of cash
Net increase in investments 647.1 549.2
Net capital expenditure 1598.2 399.5
Decrease in debts -- 53.3
Increase in working capital 83.3 --
Interest 109.4 112.7
Dividend 478.8 165.8
Increase in cash and cash equivalent -- 68.9
2916.8 1349.4

91
 CASH FLOW STATEMENT
(FOR YEAR 2008-09)

(Rs. In Crores)

2009 2008

Cash flow from operating

activities

Net Profit Before Tax 2189.26 1201.90

Depreciation 317.91 291.64
Interest Expenses 111.84 103.38
Interest Income (31.84) (29.48)
Dividend Income (81.43) (38.04)
Profit/loss on sale of fixed (4.62) 3.99
Assets(Net)
Profit on sale of Long Term (2.70) (62.57)
Investments (Net)
Profit on sale of Current (49.41) (7.27)
Investments(Net)
Operating profit before 2449.01 1330.06
working capital changes
Trade and other receivables (314.56) (116.66)
Inventories (73.41) (72.41)
Assets Held for Disposal (1.57) 0.97
Trade Payables 306.17 159.70
Cash generated from 2365.64 1668.74
Operations
Direct Taxes Paid (Net) (632.97) (380.42)
Net Cash from operating 1732.67 1288.32
activities
Cash flow from investing
activities
Purchase of fixed assets 326.4 410.5
92
Sale of fixed assets (354.13) (388.73)
Purchase of Investments (150.11) (173.66)
Sale of Investments (128.19) (91.57)
Investments/Advances in (16.77) (11.75)
Joint Ventures, Subsidiaries
& others

Interest received (322.8) (255.21)

Net Cash from / (used (301.75) (231.24)
in) investing activities
Cash flow from financing 19.71 5.65
activities
Proceeds from (75.41) (792.83)
borrowings
Repayments of 666.13 53.64
borrowings
Interest paid (1294.15) 24.74
Dividends paid 3.37 1.79
Corporate dividend tax 74.29 55.28
Dividend received 39.37 86.32
Net cash from / (used in) (868.44) (796.65)
financing activities
net increase/decrease in (140.78) 117.37
cash & cash equivalent
At Beginning of year 227.48 110.11
At end of year 86.7 227.48
Dividend received(Net)

93
 (PROFIT & LOSS A/C)
(For 2008-09)

(Rs. in Crores)
2009 2008

INCOME
Gross sales 9,607.97 7,638.41
Less: Excise duty 986.29 985.80
Net sales 8,603.59 6,652.61
Interest & dividend 113.27 67.53
Income
Other income 168.49 152.41
Increase/Decrease in (16.44) (43.48)
stock
8,868.91 6,829.07
EXPENDITURE
Raw material consumed 2,219.32 1,822.69
Manufacturing expenses 1,744.33 1,580.34
Purchases of finished 321.16 240.15
&other products
Payments to 459.40 407.64
&provisions for
employees
Selling, distribution, 1,505.69 1,181.33
administration &other
expenses
Interest 111.84 103.38
Depreciation 317.91 291.64
6,679.65 5,627.17
Profit before tax and 2,189.26 1,201.90

94
exceptional items
Surplus on pre-payment - 4.13
of sales tax loan
Write back of provision 37.10 -
for diminution
Profit before tax 2,226.36 1,206.03
Provision for current tax (692.38) (369.82)
Deferred tax 1.83 27.00
Profit after tax 1,535.81 863.21
Debenture redemption 38.56 8.62
reserve no longer
required
0.05 0.25
Investment allowance
reserve no longer
required
Balance brought
forward from previous 878.37 815.35
year

2,452.79 1,687.43
Profit available for
appropriation
Appropriations:

Interim dividend 252.10 -

Proposed dividend - 183.35
Corporate dividend tax 35.36 25.41
General reserve 1200.00 600.00
Balance carried to 965.33 878.37
balance sheet
2,452.79 1,687.43

95
 BALANCE SHEET
(For year at 31st march2009)

(Rs. In Crores) FY (2009) FY (2008)

SOURCES OF FUNDS
SHARE HOLDERS
FUND
share capital 91.69 91.69
Reserves and Surplus 6,138.35 4,890.39
Loan funds
Secured Loans 2,291.00 1,386.12
Unsecured Loans 660.56 593.55
2,951.56 1,979.67
Deferred tax liabilities 582.55 584.38
TOTAL 9,764.15 7,546.13
APPLICATIONS OF
FUNDS
Fixed assets
Gross Block 6,770.97 6,114.12
Less: Depreciation 3,380.53 3,109.49
Net Block 3,390.44 3,004.63
Capital Work-in-Progress 1,192.35 293.64
4,582.79 3,298.27
Fixed Assets held for 14.33 12.76
disposal
Investments 4,274.70 3,481.71
Current assets, loans &
advances
Interest accrued on 0.70 1.46
Investments
Inventories 824.14 750.73
Sundry Debtors 576.48 413.45
Cash and Bank Balances 116.38 155.58
Loans and Advances 824.69 705.54
2,342.39 2,026.76
Less:

Current liabilities &

96
provisions
Liabilities 1,266.86 969.15
Provisions 183.20 304.22
1,450.06 1,273.37
Net Current Assets 892.33 753.39
TOTAL 9,764.15 7,546.13

97
 CONCLUSIONS
 In 2009 there is increase in current assets by 24% than 2008 and there is increase in current
liability by 17%, because of greater increase in current assets than in current liabilities, the
position of Working capital has improved.
 The % of Fixed Assets has come down in 2009 from 2008.

 As per current ratio firm is able to pay its current liability.

 Quick ratio presents a better test of short term financial position, which shows better
working capital position of firm.

 Debt equity ratio and debt to total fund ratio presents protection to long term lenders
and shows sufficient working capital in the firm.

 G.P. and N.P. have increased from previous year.

 Cash flow statement indicates outflow of cash in comparison to past year.

 Due to better long term and short term financial condition firm’s working capital
position is better than that of previous year.

98
 LIMITATIONS

 Based on financial statements these statements suffer from certain

limitations.
 Affected by window dressing.
 Company provides only secondary data, so certain type of bias is in
study.
 Unsuitable for forecasting.

99
 BIBLIOGRAPHY

 Financial Management
By M.Y. Khan & P.K. Jain
 Financial Management
By D. K. Goyal

 Annual Reports of UNIVERSAL SOMPO GENERAL

INSURANCE COMPANY Ltd.
2007-08
2008-09

 www.universal sompo general insurance company.com

 www.google.com
 www.irda.com
 www.insurance.com


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