Ratio Analysis in the Insurance Industry - Essay Example

Portfolio: Ratio Analysis in the Insurance Industry Industry analysis Insurance business involve all about risk management. In this business, premiums are collected by the insurance companies from the policy holders. The collected money is invested in low risk businesses and reimbursed to the client when need arises, especially during the maturity of the policy. Many factors are considered when it comes to a person looking for a good insurance company. The most important factor that both the consumer and the investors should look at is the financial strength of the insurance company and its ability to meet the obligations of the policyholder (Achleitner 2002). When the fundamentals are portrayed to be poor, not only does it indicate a poor investment opportunity, but it also hinders the growth of the industry. It is usually a bad image and information to the insurance clients if they realize that their insurance company is not in good financial position to pay them, if it is faced with a huge number of claims. Future Continued Performance Taking a look at the current performance of the insurance industry, it is hard to predict the position that insurance companies will occupy in future. Even an insurance company is successful in the present period does not guarantee success in future. Some of the reasons leading to future uncertainties of insurance industry include customer experience. For instance, if the insurance company does not offer products desired by the customer, then him or her will automatically go elsewhere searching for the same product. it is thus important for insurance companies to find issues affecting their clients and come up with appropriate ways of responding to the identified issues. Basing on the present characteristics of customers, it is apparent that the future customer will be at the center stage in shaping the system of life insurance. Available researches have revealed that the new customer is not ready to buy products unless he has full information of it. The Future of Insurance Industry In addition, future customers will not have time to interact with agents or having a conversation with them. Many future customers will be interested in finding out facts about life insurance and not just talking to agents. In spite of the fact that agents are very helpful through provision of information to the insured, future customers will mostly avoid speaking to the agents and instead find out facts about products offered by various insurance companies on their own. Thus future customers will be mostly relying on their personal research so as to vet insurance companies and their respective policies. Therefore, insurance companies need to embrace the use of web, mobiles and call centers so as to remain relevant and compete effectively in future. Also, companies will have to maximize the use of online tools as well as allowing prospective insured’s to learn and even shop on their own. Insurance agents will have to refine their approach while interacting with customers by treating each of them as knowledgeable individual consumers. There will be need for currents insurance agents to transform into digital agents so as to comply with new market trends in insurance industry. Economic Trends The changes in economic trends across the world have also produced shifts in the performance of various insurance companies. Among the economic changes being experienced in the world include inflation, the rate of interests being charged by financial institutions, international economics and consumer sentiments. For instance, increase interest rates will result in negative effects among both financial and housing organizations. Insurance too will be affected negatively due to increased interest rates. On the other hand, economic growth in any given region will promote operation activities of organizations having a large operating base and presence in that region. Also, consumer cyclical industries will be adversely affected by sentiments made by consumers. Companies Operating Within the Industry There are many companies operating within the insurance industry. Some companies have undergone expansion to the extent of venturing into new international markets while others have remained to concentrate their operations in a given country, region or continent. After conducting a thorough research on various insurance companies, there are a total of four companies whose operations were convincing thus necessitating their research. The companies that will be analyzed are Qatar Islamic Insurance Company, Qatar General Insurance and Re-Insurance Company, Qatar Insurance Company, Al Khaleej Takaful Group Company and Doha Insurance Companies. To begin with Qatar General Insurance Company is one of the largest and internationally recognized company operating in the insurance industry. The company has its head quarter in Qatar from where it offers policies to both businesses and individuals. The company is guided by fundamental purpose of tailoring coverage as well as delivering innovative and efficient services aimed at reducing losses upon the clients as well as being able to manage the losses upon their occurrence. The company is continuously changing its operation procedures so as to meet and conform to ever changing marketing trends, aimed at satisfying customers’ expectations. The company offers competitive products that have been differentiated pricewise by the help of its subsidiaries. The products include general insurance services while subsidiary companies offer reinsurance services. The other insurance company is Al Khaleej Takaful Group Company. The company offers differentiated cooperative insurance products to the public, at competitive pricing. Despite the outstanding reputation of the company, of over 67 years in the Arab world, the top management is constantly developing and embraces technological advancement in the market. The company has empowered its human capital with appropriate and current information as well as skills aimed at upholding integrity and professional ethics while delivering outstanding services and quality products to customers. Also, the company has an established distribution network in the Arab world aimed at enabling the company achieves fair return on the shareholders’ equity. Also, there are measures whose target is to enable the company continue operating successfully not only in the present period abut also in future operations, through innovation. Doha Insurance Company is among the list of successful companies in Qatar’s insurance industry. The company offers a wide variety of insurance policies specifically designed to offer reliable solution to client’s financial problem. Policies cover both personal and corporate areas, thereby increasing suitability of the company in covering financial risks that clients may incur. The pricing of various policies have increased competitiveness of the company by positioning it among the best insurance companies in Qatar. Since operations in the insurance industry is shifting with the market trend as well as technological advancements, Doha Insurance Company is also involved in implementing measures aimed at integrating technological and innovative ideas to better satisfy varying needs and expectations of clients. The company website offers a reliable source of information to the prospective customers who wish to conduct their own investigation before getting into contract with the company. Qatar Insurance Company is another successful company that is actively involved offering high quality services in the insurance industry. The present statistics as well as information found on the company’s website reveals its strength and competitiveness in the industry. The company offers tailor made insurance policies ranging from business to personal. The technology embraced by the company provides a reliable platform for prospective insured to carry out investigation about the company and its policies in an easy and comfortable way. Clients can easily access company information via the information via the internet at their convenient time. An example of technological advancement embraced by the company is the use of automatic insurance machines. Operation of Qatar Insurance Company is guided by highest ethical standards as required for stringent process certification. Also, insurance solutions offered by the company ensure highest financial security to all the clients. Pricing of policies by Qatar insurance company is friendly and affordable to many clients due to a large number of available options for prospective customers to choose from (Akhigbe & Madura 2001). The company is actively involved in activities aimed at promoting the success and expansion in the future. Among future plans developed and being implemented by the company is acquisition of other companies to increase its competitiveness in the insurance industry. Company Analysis SWOT Analysis Qatar General Insurance Company tailors insurance policies so as to suit clients’ needs. It has been doing this for a long time and thus this is its major strength. However, it has not succeeded in ensuring that its tailor-made policies cover most of the citizens in the country. This is its major weakness. There exists opportunities for Qatar General Insurance Company in the life insurance sector. Doha insurance Company has succeeded in placing itself as the corporate insurer of choice by many corporates. Its inherent weakness is that its mode of operation does not allow for extensive coverage of the available and potential market. There exists opportunities for Doha Insurance Company in embracing technological advancements that can be used to eliminate bottlenecks in business operations. Qatar General Insurance and Re-Insurance Company has its major strength in being able to use the current technology in its operations. This has made it possible for customers to get any information they need from the company’s website. It has managed to place itself at a highly competitive position in the insurance industry. Due to its high ethical standards, the company uses considerably longer time to process applications and this presents itself as a weakness. There exists opportunities for this company by expanding its market share and capturing the larger portion of the uninsured citizens. The annual financial reports of the four insurance companies will be obtained from their websites, where the data will be retrieved for the analysis of these ratios. The analysis will majorly cover the historical ratios of 2013. The main ratio categories that will be analyzed include profitability ratios, leverage ratios, liquidity ratios, Management efficiency and market ratios (Kwon & Jones 2008). A couple of various ratios will be selected and calculated in a similar way, across the companies for uniformity, and used for comparison. The industry ratios will be sourced from the internet and used to compare the achieved calculated results of individual companies. Companies will also be compared against themselves. Profitability Ratios i) Return on Assets (ROA) Return on Asset is the ratio that measures the amount earned in return from all the assets that have been employed in the business. Because the assets are usually financed through both equity and debt, the ratio is sometimes referred to as return on capital. While calculating Return On Assets of the four insurance companies, the following formula has been used: . The table below summarizes the calculation of this ratio for the four insurance companies for the year 2013. Company Name Net Income + Interest Expense Average Total Assets ROA (2013) Qatar Islamic Insurance 5,178,540 501,782,787 0.01 Qatar General Insurance and Re-Insurance 2,252,855 7,124,067 0.32 Doha Insurance 94,623,806 1,319,383,672 0.072 Qatar Insurance 863,727 11,632,508 0.074 As a general rule, the insurance industry should have around 0.5-1% of the Return on Asset Ratio. The results from the four insurance firms above do not meet the industry requirement. It means, in 2013, the four insurance companies do not receive the expected return on the assets they invested. The Qatar General insurance company is seen to at least move closer to the required value of ROA. However, the other three companies are very far from it. ii) Return on Equity (ROE) This is another profitability ratio that measures the return received from the provided capital by the common stockholders. It is calculated by dividing the net income by the shareholders’ equity. The table below summarizes the Return on Equity for the four insurance companies in 2013. Name of Company Net Income Shareholder’s Equity ROE Qatar Islamic Insurance 862,643 100,000,000 0.00862 Qatar General Insurance and Re-Insurance 2,252,855 2,252,303 1.0002 Doha Insurance 92,082,568 548,535,840 0.168 Qatar Insurance 863,727 840,307 1.028 From the calculations above, it can be vividly seen that Qatar Insurance Company receives the highest returns on the shareholders’ equity invested. While this is happening, the industry recommended amount is about 10-15%, and only Doha just slightly surpasses this amount. Qatar Islamic Insurance lags behind with only 0.8% and this means, it does not meet the average industry requirement. Liquidity Ratios i) Current Ratio (Aid Test Ratio) Current ratio or the acid test ratio is that ratio that investigates the extent to which a company is able to meet its short-term obligations by using its current assets without involving its inventories. To calculate the current ratio, current liabilities is divided by current assets. As a general rule, any current ratio that is less than 1 is usually considered to be of a company that will have a hard time repaying its short-term debts (Baranoff & Sager, 2002). Current ratios above 1 are usually preferred, but higher values of the ratio are even more preferred. The table below summarizes the calculations of the current ratios of the four insurance companies in the year 2013. Name of Company Current Assets Current Liabilities Current Ratio Qatar Islamic Insurance 200,096,419 27,709,257 7.22 Qatar General Insurance and Re-Insurance 151,083 983,047 0.15 Doha Insurance 187,153,577 75,442,571 2.48 Qatar Insurance 3,351,905 746,200 4.49 From the above calculations, it can be seen that most of the insurance companies have their current ratios above 1 except for Qatar General Insurance Company. This implies that the other companies are able to meet their short-term financial obligations without any problem, by the use of their current assets. At the same time, it can be seen that Qatar Islamic Insurance is more liquid as it has the highest current ratio followed by Qatar Insurance and then by Doha. Leverage Ratios i) Debt Ratio Debt ratio refers to the ratio that shows the quantity of the company’s assets that is financed through the use of both the long-term and short-term debts. When calculating this ratio, the proportion of the total debts that includes both the short-term and the long-term debts is included and divided by the total assets (Billio, Getmansky, Lo, & Pelizzon, 2010). When the ratio is high, the leverage rate of the company is considered to be high. This also implies that the firm has a lower capacity of debts to show that the firm is not able to raise more capital through debts since it already has higher debt levels. The table below summarizes the calculation of debt ratios for the four insurance companies in 2013. Company Name Total Debt Total Asset Debt Ratio Qatar Islamic Insurance 29,099,543 203,161,209 0.14 Qatar General Insurance and Re-Insurance 2,344,637 7,124,067 0.33 Doha 896,467,513 1,377,996,939 0.65 Qatar 6,250,820 11,632,508 0.54 From the calculations above, it is vividly clear that the debt ratios of these four companies are less than 1, hence the companies are not highly leveraged. However, Doha Insurance seems to have the highest leverage ratio of 0.65, hence, it stands at a risky situation to become highly leveraged. Qatar Islamic Insurance has the lowest leverage level, meaning, it has a higher capacity to obtain dent finance as its current debt status allows it. The leverage capacity starts from Qatar Islamic Insurance to Qatar General Insurance, to Qatar Insurance and end with Doha Insurance as the highly leveraged. ii) Debt-Equity Ratio This is another leverage ratio that is widely used to show an indication on the financial leverage. The ratio is easily computed by expressing the long-term debts as a percentage of the total equity. Total equity refers to both the common and the preferred equity of a company. When the debt ratio is high, there is a possibility of a greater leverage of the firm which leads to higher financial risk. The table below summarizes the calculations of debt-equity ratio for the four insurance companies as at 2013. Company Name Long-Term Debt Total Equity Debt-Equity Ratio Qatar Islamic 56,808,800 174,061,666 0.33 Qatar General 1,361,590 4,779,430 0.28 Doha 821024942 481,529,426 1.71 Qatar 5,267,773 5,504,620 0.96 From the calculations above, it is well shown that firms like Qatar General and Qatar Islamic Insurance are lowly leveraged. They have the debt-equity ratios of 028 and 0.33 respectively. This show that the two companies are not badly off when it comes to borrowing finances since they have low debt rates currently. Qatar Insurance has a debt-equity ratio of 0.96 which is almost getting to 1. As it stands, the company is not considered to be highly leveraged, but the company needs to check on their debt rates as it is soon getting to become highly leveraged (Kwon & Jones, 2008). Doha has the highest debt-equity ratio of 1.71 and this is very high. It shows that Doha is highly leveraged and is at a bad state financially. As it stands currently, Doha is as a high financial risk. References Achleitner, P., Biebel, J., & D.Wichels. (2002). Does WTC matter for the investment policy of P/C insurance companies? Geneva Papers on Risk and Insurance- Issues & Practice, 27(2), 275-284. Akhigbe, A., & Madura, J. (2001). Intra-industry signals resulting from insurance company merger. The Journal of Risk and Insurance, 68(3), 489–506. Baranoff, E., & Sager, T. (2002). The relations among asset risk, product risk, and capital in the life insurance industry. Journal of Banking and Finance, 26(6), 1181-1197. Billio, M., Getmansky, M., Lo, A., & Pelizzon, L. (2010). Measuring systemic risk in the finance and insurance sectors. MIT Sloan Research Paper No. 4774-10. London: MIT. Kwon, H., & Jones, B. (2008). Applications of a multi-state risk factor/mortality model in life insurance. Insurance, Mathematics and Economics, 43(3), 394-402. Read More