A Report on performance of the Insurance Company in Bangladesh PDF

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The Performance of Insurance Companies Listed in Dhaka Stock Exchange SUBMITTED TO: Md. Bokhtiar Hasan Lecturer Department of Finance and Banking Faculty of Business Administration Islamic University, kushtia Date of Submission: 17th September, 2014 Submitted By: Group-C (Bearing Roll.No. 1021021-10...

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A Report on performance of the Insurance Company in Bangladesh Md. Delowar Hossain

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The Performance of Insurance Companies Listed in Dhaka Stock Exchange

SUBMITTED TO:

Md. Bokhtiar Hasan Lecturer Department of Finance and Banking Faculty of Business Administration Islamic University, kushtia

Date of Submission: 17th September, 2014

Submitted By: Group-C (Bearing Roll.No. 1021021-1021030)

NAME ORIN OSMAN ORIN MD. DELOWAR HOSSAIN MOHAMMAD ALI

ROLL NO.

REG. NO.

1021021 1021022 1021023

1488 1489 1490

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MD. MORSHEDUL HAQUE MD. NASIM REZA MD. RABIUL ISLAM NAZMUL HOSSAIN MD. ASADUL ISLAM SHARUZZMAN SHAMIM RAHAMAN

1021024 1021025 1021026 1021027 1021028 1021029 1021030

1491 1492 1493 1494 1495 1496 1497

Session: 2010-2011 Department of Finance and Banking Faculty of Business Administration Islamic University, Kushtia.

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Letter of Transmittal 17th September, 2014 Md. Bokhtiar Hasan Lecturer Department of Finance and Banking Faculty of Business Administration Islamic University, kushtia Subject: Submission of Report Sir With due respect, we would like to inform you that, it is a great pleasure for us to submit the report on ―The performance of Insurance Companies Listed in Dhaka Stock Exchange” .We have tried to make the report a comprehensive one within the given time. We earnestly thank you for your guidance during the preparation of the report. Any sort of suggestion regarding the report will be greatly acknowledged and we will be gratified if our report serves its purpose. We, therefore, request you to accept this report and give our proper suggestion to work in my professional life and we pray and hope that the mistakes, the report may have will be kindly excused. Lastly, I beg your kind consideration for evaluating this report. Yours faithfully Group-C Department of Finance and Banking Faculty of Business Administration Islamic University, Kushtia.

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Acknowledgement Our endeavor will come true if the actual purpose of this report becomes fulfilled. First of all we would like to express our gratitude to almighty Allah. Then we would like to special thank to our honorable course instructor, Mr. Bokhtiar Hasan, Lecturer, Department of Finance and Banking, Islamic University, Kushtia, for assigning us such type of challenging task and guiding and instructing us continuously to complete the task. We cordially remember Dhaka Stock Exchange authority providing us necessary data to prepare the report.

Finally, we would like to thank our signor batch students and all other person whose influence and inspiration has enabled us to complete this report.

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TABLE OF CONTENT Part-1: Introductory Part

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1.1. Introduction Part-2: Types of Insurance in Context of Bangladesh and World 2.1.1 Property Insurance 2.1.2. Life Assurance 2.1.3. Marine and Aviation insurance 2.1.4. Pecuniary Insurance 2.1.5. Motor Insurance 2.1.6. Liability Insurance 2.1.7. Health and Protection Insurance 2.2. Objective of the Report 2.3. Literature Review 2.4 Methodology

Part-3: Evaluating the Performance of General Insurance Companies Through Ratio Analyses 3.1. Profitability Ratios 3.1.1. Net profitability Ratio

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3.1.2. Return On Assets (ROA) 3.1.3. Return On Equity (ROE) 3.1.4. Earnings Per Share (EPS) 3.1.5. Investment Turnover

3.2. Liquidity

Ratios

3.2.1. Current Ratio 3.2.2. Quick Ratio 3.2.3 Cash Turnover

3.3. Leverage Ratios 3.3.1. Debt Ratio 3.3.2. Debt to total Assets Ratio

Appendix: All calculation

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Executive Summary This report is based on financial statements of 2009, 2010, 2011 2012 and 2013 of General Insurance Company Limited listed in DSE. It was a great opportunity to experience and gather knowledge different types of insurance operations. Our faculty supervisor helped us to choose the topic―Financial Performance Analysis of general Insurance Company Limited‖.

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In the new competitive business era, Insurance sector is getting more competitive in Bangladesh. In this sector the most used financial statements are the balance sheet and profit and loss account where the balance sheet shows the financial position and profit and loss account shows the net profit or net loss of an insurance company. Ratio Analysis deals with these statements

―The Performance of this industry are done through ratio analysis of 4 different companies of general Insurance listed in DSE from the 35 companies.‖ That are

In this report,

   

Eastland Insurance co. Ltd. Global Insurance Co. Ltd Federal Insurance co. Ltd Green Delta Insurance Company Limited

By doing industry analysis one can easily compare the financial performance of the companies. Ratio analysis helps a company to take necessary steps regarding the conditions, finding the loop holes of the company and then the necessary steps can be taken to prevent the condition. Then the stock valuation is done with the help of market information and then found out whether the stock price of company is undervalued or overvalued and found out the probable reasons of specific condition Furthermore, the overall condition, problems, prospects and the recommendations of insurance companies or insurance sector have been discussed considering the four industries. Then, the recommendations for the general insurance company have been found out so that it can take a look of those and develop its condition to develop it existence in the insurance industry. At the end, it can be said that general insurance companies are the leading non-life insurance companies in the insurance industry. They have own reputation and market. For sustaining in the insurance industry it needs to compete with other companies. For that reason it should focus on the innovation and development by competing itself so that it can uplift its own standard from the previous standard.

Part 1: Introductory Part 10

1.1 Introduction

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nsurance is a system of spreading the risk of one to the shoulders of many. It is a contract whereby the insurers, on receipt of a consideration

known as premium, agree to indemnify the insured against losses arising out of certain specified unforeseen contingencies or perils insured against. Insurance is not a new business in Bangladesh. Almost a century back, during British rule in India, some insurance companies started transacting business, both life and general, in Bengal. Insurance business gained momentum in East Pakistan during 1947-1971, when 49 insurance companies transacted both life and general insurance schemes. These companies were of various origins British, Australian, Indian, West Pakistani and local.10 insurance companies had their head offices in East Pakistan, 27 in West Pakistan, and the rest elsewhere in the world. These were mostly limited liability companies. Some of these companies were specialized in dealing in a particular class of business, while others were composite companies that dealt in more than one class of business. After the emergence of the People’s Republic of Bangladesh in 1971, the government, in order to make available the fruit of liberation to the general mass, nationalized the insurance industry along with the banks in 1972 by Presidential Order No. 95. By virtue of this order, save and a c c e p t p o s t a l l i f e i n s u r a n c e a n d f o r e i g n l i f e i n s u r a n c e c o m p a n i e s ( o t h e r t h a n t h e P a k i s t a n i c o m p a n i e s ) , a l l c o m p a n i e s a n d o r g a n i z a t i o n t r a n s a c t i n g a l l t yp e s o f i n s u r a n c e b u s i n e s s i n Bangladesh came under this nationalization order. At the same time, five insurance corporations were initially established by the Government;  Jatiya Bima Corporation (National Insurance Corporation) ,  Teesta Bima Corporation (Teesta Insurance Corporation)

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 Karnaphuli Bima Corporation (Karnaphuli Insurance Corporation),  Rupsa Jiban Bima Corporation (Rupsa Life Insurance Corporation),  Surma Jiban Bima Corporation (Surma Life Insurance Corporation). O n 1 4 t h M a y, 1 9 7 3 t h e I n s u r a n c e C o r p o r a t i o n A c t V I , 1 9 7 3 w a s e n a c t e d u n d e r w h i c h t h e previous five corporations were abolished and the following two corporations emerged:

 Sadharan Bima Corporation for General Insurance  JibonBima Corporation for Life Insurance The basic idea behind the formation of four underwriting corporations, two in each main branch of life and general, was to encourage competition even under a nationalized system. But the burden of administrative expenses incurred in maintaining two corporations in each front of life and general and an apex institution at the top outweighed the advantages of limited competition. Consequently, on 14 May 1973, a restructuring was made under the Insurance Corporations Act 1973. Following the Act, in place of five corporations the government formed two: the SadharanBima Corporation for general business, and JibanBima Corporation for life business. After 1973, general insurance business became the sole responsibility of the SadharanBima Corporation. Life insurance business was carried out by the JibanBima Corporation, the American Life insurance Company, and the Postal Life Insurance Department until 1994, when a change was made in the structural arrangement to keep pace with the new economic trend of liberalization. The Insurance Corporations Act 1973 was amended in 1984 to allow insurance companies in the private sector to operate side by side with SadharanBima Corporation and JibanBima Corporation. The Insurance Corporations Amendment Act 1984 allowed floating of insurance companies, both life and general, in the private sector subject to certain restrictions regarding business operations and reinsurance. Under the new act, all general insurance businesses emanating from the public sector were reserved for the state owned SadharanBima Corporation, which could also underwrite insurance business emanating from the private sector. The Act of 1984 made it a requirement for the private sector insurance companies to obtain 100% reinsurance protection from the SadharanBima Corporation. This virtually turned SadharanBima Corporation into a reinsurance organization, in addition to its usual activities as direct insurer. Sadharan Bima Corporation itself had the right to

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reinsure its surplus elsewhere outside the country but only after exhausting the retention capacity of the domestic market. Such restrictions aimed at preventing outflow of foreign exchange in the shape of reinsurance premium and developing a reinsurance market within Bangladesh. The control over insurance companies including their functions relating to investments, taxation and reporting is regulated mainly by the Insurance Act

1938 and the Finance Acts.

Part-2:Types of Insurance in Context of Bangladesh and World Private individuals and businesses need different types of 'general insurance', so we can split general insurance into two areas. One: personal insurances (or 'personal lines') where the policyholder is a private individual. And two: commercial insurances (or 'commercial lines') where the policyholder is a firm or some other kind of organization. Within general insurance there are a number of different categories.

2.1.1. Property insurance Property insurance includes a range of covers, which may be needed by businesses to protect their physical property, such as buildings, machinery and stock. Private individuals need property insurance too, but this is typically provided in a home insurance policy.

2.1.2. Life assurance A life assurance (or insurance) policy pays a specified sum if the person assured (or insured) dies, or if they survive a given term of years.

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2.1.3. Marine and aviation insurance Marine policies cover the property or 'interest' insured against perils of the sea such as bad weather, stranding, collision, fire and seizure, while aviation insurance covers damage on the ground or in the air, and liabilities for cargo and passengers.

2.1.4. Pecuniary insurance 'Pecuniary' means relating to money and pecuniary insurance covers businesses against purely financial losses (e.g. from fraud, legal expenses or business interruption) rather than physical damage to property

2.1.5. Motor insurance Available for private cars, motorcycles, commercial vehicles and fleet insurance. Motor is one of the compulsory insurance classes and anyone using a motor vehicle on the public highway must have it

2.1.6. Liability insurance We all have a legal duty to behave reasonably to others. If we injure someone or damage their property through negligence, we are legally obliged to pay compensation. Liability insurance is there to insure individuals and businesses against this risk.

2.1.7. Health and protection insurance Personal accident and sickness cover pays out in the event of death, permanent disablement or loss of eyes or limbs due to accident or if the insured is unable to work due to accident (or sickness). Private Medical insurance(PMI) pays for inpatient and outpatient treatment outside the NHS. Creditor insurance covers credit repayments (e.g. on mortgage and credit card loans) in the event of unemployment, accident or sickness.

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2.2. Objective of the Report The key objectives of preparing the report is to take snapshot of present and past conditions of general insurance companies listed Dhaka Stock Exchange and visualize the future of this industry considering present and future trends. problems and prospects of the General insurance company in Bangladesh. The other objectives of this study are to identify the strength and weakness of this industry some suggestions to overcome the problems identified so as to ensure smooth functioning and growth of insurance. To know about the best practices of insurance of Bangladesh is also another objective of this study.

2.3. Literature Review Wood and Wilkinson (1985) analyzed the disclosure practices of general insurance companies of U.K. Findings show that the financial statements of general insurance companies are heavily dependent on estimates. There were inconsistencies in the accounting of different companies. They suggested that there is an urgent need for a recognized standard of general insurance company’s accounting. They pointed to a Statement of Recommended Practice (SORP) developed by experts within the industry, which will focus on the methods of accounting for different aspects of general insurance business. Cummins and Weiss (1993) investigate the efficiency of PC insurers by estimating stochastic cost frontiers for three size-stratified samples of property-liability insurers over the period 1980–1988. A transom cost function and input share equations are estimated using maximum

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likelihood techniques. The results show that large insurers operate in a narrow range around an average efficiency level of about 90 percent relative to their cost frontier. Efficiency levels for medium and small insurers are about 80 and 88 percent in relation to their respective frontiers. Wider variations in efficiency are present for these two groups in comparison with large insurers. Large insurers slightly over-produce loss settlement services, while small and medium-size insurers under-produce this output. The small and intermediate size groups are characterized by economies of scale, suggesting the potential for cost reductions from consolidations in the industry. Joshi (2004) stated that though the basic accounting principles are same for accounting of general insurance business, there are certain intricacies in accounting of various general insurance transactions. The study is focused on legal norms with regard to accounts and audit. Study revealed that every insurer carrying on general insurance business has to comply with the requirements of schedule B - which is divided into five parts. Study also discussed about organization structure, accounting of commission, claim accounting, expenses of management, co-insurance and consolidation of the accounts of an insurance company having number of offices in India and abroad

Riaz et al (2006) analyzed the annual reports of 10 insurance companies listed on the Dhaka Stock Exchange (DSE), selected on random basis for 2001 and 2004. Findings of the study showed that insurance companies do not comply with all the mandatory requirements in the annual reports. Also they did not disclose adequate voluntary disclosure in their annual reports. There was improvement in the reporting practices over time because of increasing awareness of corporate governance. Insurance companies lag behind the banking companies in compliance with disclosure due to lack of proper regulations in this sector. Chen, Yao, and Yu (2007) find that active equity mutual funds managed by insurance companies Underperform peer funds by over 1% per year. The lower returns of insurance funds are not due to less risky investments; instead insurance funds have lower risk-adjusted returns, and their fund flows are less sensitive to performance when they perform poorly. Across insurance funds, those with heavy advertising, directly established by insurers, using parent firms’ brand names, or whose managers simultaneously manage substantial non-mutual-fund assets, are more likely to underperform. The authors conclude that insurers’ efforts to cross-sell mutual funds aggravate agency problems that erode fund performance

2.4. Methodology

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In order to generate this report only secondary data has been used. The source that have been used to gather and collect data is given belowi. ii. iii. iv.

Annual Report (2009-2013) of Eastland Insurance co. Ltd. Global Insurance Co. Ltd, Federal Insurance co. Ltd, and Green Delta Insurance Company Limited Website of Dhaka Stock Exchange (DSE) and Bangladesh Securities and Exchange Commission(BSEC) Newspaper of the Trade and Business. Website of the Eastland Insurance co. Ltd. Global Insurance Co. Ltd, Federal Insurance co. Ltd, and Green Delta Insurance Company Limited

Part-3: Evaluating The Performance of General Insurance Companies Through Ratio Analysis 3.1. Profitability Ratio Profitability ratios provide information about management's performance in using the resources of the business. Many entrepreneurs decide to start their own businesses in order to earn a better return on their money than would be available through a bank or other low-risk investments. it is important to note that many factors can influence profitability ratios, including changes in price, volume, or expenses, as well as the purchase of assets or the borrowing of money

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3.1.1. Net profitability Ratio: It measures the overall profitability of the company, or how much is being brought to the bottom line. In general terms, net profitability shows the effectiveness of management. Though the optimal level depends on the type of business, the ratios can be compared for firms in the same industry.

Formula:

Net Profitability =

Net Income Net Sales

Company Name Eastland Insurance Co. Ltd

2009 41%

2010 57%

2011 65%

2012 44%

2013 53%

Average 52%

Global Insurance Co. Ltd Federal Insurance Co. Ltd Green Delta Insurance Co. Lt...