Page 37 - Insurance Times September 2020

or deficiency in the present practices, felt by an average
person in understanding the sector.

Over the years, societies have developed two primary
indicators to facilitate understanding and judgment on the
role of insurance in the economy and the stage of its
development. First, indicator is called “insurance
penetration” and the second one is known as “insurance
density”. While insurance as a percentage of country's GDP
is an indicator of penetration, the insurance premium per
citizen represents insurance density.

In India penetration is little less than 1.0 % for general
insurance and is about 3.7% for insurance (Life and Nonlife
together) and Indian Insurance (nonlife) density works out
approximately to Rs 1241/- (2019-20). These two indicators
This measure may be good and meaningful for an intra-
on their own, I do not think, make any sense to an average
sector comparison. But when it comes to intersector
person. However, if these indicators are presented along
comparison, it has no value. Correct revenue on which
with, say the corresponding penetration indicator of South
expense ratio is to be calculated for inter-sector sector
Africa (or any other country/ies), which is 13.77%(2017), or
insurance density in South Africa to be approximately 15 comparison has to be an addition of both inward and
outward interests and not the net of them. Because banks
times that of India, or along with the corresponding figures
render service to both segments of customers (Borrowers
of the previous year (or any other earlier point of time/s or
periods), it starts making some sense to the reader. Similarly as well as depositors). Net interest income as a revenue is
unique to banking. Similarly there is no corresponding item
if the insurance penetration of non life insurance of 0.99%
in banking comparable to claims cost in insurance.
is presented along with corresponding indicator 7.7% of
banking industry it will make some sense.
Thus making inter-sector comparison a nonsense. May be,
Yet, in both cases it is not an adequate and complete the outward interest can represent the same. Similarly there
understanding. It does not convey the clear picture even to are no readily available items in manufacturing industry
the well read ones. Will such information enable the reader comparable to the claims cost of insurers. In two leading
to decisively conclude that the high South African indicators manufacturing organisations the cost of material with
stand for better insurance awareness and capacity of related expenses of power, freight, wages and
Africans and they do not stand for the poor and riskier manufacturing over heads amounted to 65-70 percentage
environment prevailing in that country ? of the total cost. This may well correspond to the claims cost
of insurers. Re-organising such factors would definitely
Similarly can it be rightly concluded that role of insurance is facilitate some meaningful inter-sector comparison. At times
secondary to that of banking because of the low figure of even intra-sector comparison will be confusing.
insurance penetration compared to that of banking ? This
dilemma is true of / for many insurance parameters. Let us Take an example relating to insurance commission as a
examine another parameter. Expense ratio. If an average percentage of premium. This ratio of a leading insurer used
reader is presented with the expense ratios of organisations to be unreliably very low compared to other comparable
in different sectors (Insurer, Banker, Mutual fund, insurers, thereby confusing the reader in their judgment.
Manufacturer.......) will he be able to make any sense of true Take another instance where a trainee participant from a
efficiency from such figures ? Definitely not. In an annual neighbouring country, when asked about the Motor TP
report of a leading banker, the operating expenses were claims ratio of his country, replied, that the ratio is around
expressed as a percentage of net interest income (Interest 30 to 35%. Being used to ratios ranging from 150% to 250%
earned on loans and advances less interest paid on deposits). observed in my country, I was confused and left struggling

The Insurance Times, September 2020 33