Insurance companies are very difficult to understand and analyse. It is really A task. The reasons varies. Due to terminology, calculation, different way to show results and the nature of business. One ratio is example of this. that is Loss ratio.
Maybe right now you are all confused like i was when i listened about it first time. it is not at all difficult. in fact it is one of the most important ratio to analyse Insurance company. But still I cant found it used in India when it come to analyse in insurance companies. in fact we Indians are not analyzing them. We are making gungho for HDFC where Parent is good. Even though capital adequacy is bad, not good market share etc etc.
so What is Loss ratio?
In insurance industry, The insurance companies collect premium for entering into contract for sharing risk of something. say Risk of loosing Car. In that contingency, the company will pay Amount decided. For all of this they incur costs like administrative cost, plus Commission. But They are small. Real large part is Amount paid ( Claims ) to policy holders.
This is thing why insurance companies are difficult to analyse. Two different account. What to analyse. What I am doing? analyzing the policyholders account.
So Calculating how much amount is paid out of Collected premium is making very important ratio and that is all about what we are doing here.
Why this is important?
You an call it Gross profit ratio for insurance company. Deduct the loss ratio for insurance companies from 100 and what you get is their gross profit.
Now there are some peoples who can claim that insurance companies earn from their investments. I completely agreed. But that is not their business. in India there is something called ULIPs. As per me they are INVESTMENTS and NOT INSURANCE. So if you are analyzing company like SBI life it is looking like Asset management Company AKA Mutual Fund Company. Why i am calling it? because the moment you start paying Claims from investment it means you cant management your business. You are not profitable. and if you are not even profitable at gross level why you are even there?
Going to end this with saying
One single ratio can not tell you whole story. There are more ratios for studying the company.
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