Investor’s Preference and Satisfaction: an Empirical Investigation from Life Insurance Corporation (LIC), Thanjavur District
Dr. A. KANMANI JOAN OF ARCH
Research Advisor and Assistant Professor of Commerce
Kunthavai Naacchiyar Government Arts College for Women (Autonomous) Thanjavur, Tamilnadu, India.
E.Mail: [email protected]
P. MUTHAMIL THIRUMAGAL
Research Scholar, Bharathidasan University, Trichy, Tamilnadu, India.
Abstract: This research paper shows that insurance sector of investors is immensely important for the
present day investors in Thanjavur District. Investors, before making investments, need to collect investment related information from the internet and consult with friends, peers and investment experts before making investments. The majority of the investors prefer to invest in savings account followed by insurance scheme, offers and the like. The outcome of the research shows that most of the investors prefer LIC because of low risk and customer services in the study area.
Keywords: Insurance Sector, Insurance Scheme, Low Risk and Customer Services
1. Introduction
Research conducted in the mean-variance framework has long shown that diversification offers the benefit of reducing unsystematic risk (e.g., Sharpe, 1964, Lintner, 1965, Evans and Archer, 1968, and Fielitz, 1974). However, empirical evidence has revealed that investors do not tend to hold fully diversified portfolios. For example, Goetzmann and Kumar (2002) examine more than 40,000 equity investment accounts over a six-year period from 1991 to 1996 and find that the average investor has four stocks in her/his portfolio, while less than five percent of investors hold more than ten stocks in their portfolios. Furthermore, more than 25 percent of portfolios contain only one stock, and more than 50 percent contain fewer than three. Given the benefits typically associated with holding a diversified portfolio, the apparent lack of diversification among most investors is somewhat puzzling.
The perception that investors do not weigh downside risk equally with upside potential provides an explanation to this phenomenon. In this case, the variance is no longer an appropriate measure for risk. Kraus and Litzenberger (1976) build a three-factor CAPM framework by explicitly incorporating skewness in investors’ preference. Malevergne and Sornette (2005) derive a modified efficient frontier where higher moments (up to the eighth order) replace variance as the measure of risk. They demonstrate how the traditional portfolio optimization framework can be improved. Cooley (1977) conducts an experiment to test the perception of risk on the part of institutional investors and finds that, among 56 institutional investors who were asked to rate distributions according to perceived risk, at least 29 associated the asymmetry of return distributions with risk. In particular, the investors associated increases in risk with increases in negative skewness, indicating a preference for positive skewness.
would seek to construct portfolios that have this characteristic. However, this complicates the portfolio selection decision, because a desire on the part of investors to obtain positive skewness may not be compatible with the familiar method of constructing a diversified portfolio in order to reduce risk. As shown in Simkowitz and Beedles (1978), even though portfolio variance decreases as diversification occurs, skewness may either increase or decrease with diversification. Based on computations of the raw skewness, they find that skewness is rapidly reduced by diversification for a pool of 549 common stocks. Aggarwal and Aggarwal (1993) and Cromwell, Taylor, and Yoder (2000) also record similar results.
2. Profile of Life Insurance Corporation (LIC)
Life insurance business in India was being transacted by private companies until 1956. As a result of the long felt need and in the interest of insuring public, the life insurance business was nationalized in 1956. The nationalization resulted in the establishment of Life Insurance Corporation of India (LIC) by an act of the Parliament. The Corporation was formed and began to function on September1, 1956 by taking over 170 companies and 75 provident societies. The entire initial capital of Rs.5crore was contributed by the government of India. The objective of nationalization was described by the then finance minister, Dr. Deshmukh as “to see that the gospel of insurance is spread as far and wide as possible so that we reach beyond the more advanced urban areas well into the hither to neglected rural areas”
Headquartered in Mumbai, which is considered the financial capital of India, Life Insurance Corporation of India currently has 8 Zonal Offices, 101Divisional Offices, 2048 Branch Offices located in different cities and towns in India. The Corporation has a network of above one million agents for soliciting life insurance business from the public. It is the largest life insurance agency in the world. The LIC also transacts business abroad and has offices in Fiji, Mauritius and United Kingdom. The Corporation is associated with joint ventures abroad in the field of insurance, namely, KenIndia Assurance Company Limited, Nairobi, United Oriental Assurance Company Limited, Kuala Lumpur and Life Insurance Corporation (International) E.C. Bahrain. As a result of the insurance sector reforms process initiated in India, the monopoly of the Corporation came to an end in 2000. The long 44 years of monopoly shows many ups and downs in the business of LIC. The Corporation has been rated as No.1 Company in net worth and net profits and No. 2 in total income in India.
3. Literature Review
Dhananjay Rakshit, (2008) in his article “Capital Market in India and Abroad – A Comparative Analysis”, published in Indian Journal of Accounting, December, 2008 concluded that Indian Market is being continuously preferred by the foreign investors and the only cause of concern is its high analyzed volatility.
Deepa Mangala and R.K.Mittal (2005) in their article, “Anomalous Price behavior – An Evidence of Monthly effect in Indian Stock Market”, published in the Indian Journal of Commerce, April-June, 2005, concluded that the mean return for the first half of a trading month is significantly higher than the mean returns for the second half. The increased liquidity might induce the demand for equities resulting in the monthly effect.
financial behavior of investors. She observed that consumer behavior from the marketing world and financial economics had brought together a need to study an exciting area of ‘behavioral finance’. this study was an attempt to examine the related aspects of the fund selection behavior of individual investors towards mutual funds in the city of Mumbai.
Mittal M. and A. Dhade (2007) in their research paper “Gender Difference In Investment Risk-Taking: An Empirical Study” published in The ICFAI Journal of Behavioral Finance, 2007, Observed that risk-taking involves the selection of options that might result in negative outcomes. While present is certain, future is uncertain. Hence, all investment involves risk. Decourt (2007) indicated that the process of making investment decisions is based on the ‘behavioral economies’ theory which uses the fundamental aspects of the ‘Prospect Theory’ developed by Kahneman and Tversky (1979). James H. Lorie, Peter Dodd and Mary Hamilton, (1985) Kimpton, in their book, “The Stock Market – Theories and Evidence”, IFCAI Publication, Hyderabad, 1985 pointed out that the value of a corporation’s stock is determined by expectations regarding future earnings of the corporation and by the rate at which those earnings are discounted. In a world of no uncertainty, all securities would offer a certain return equal to the real rate of return in capital. Mittal M. and R. K. Vyas (2008) in their article “Personality Type and Investment Choice: An Empirical Study” published in The ICFAI UNIVERSITY Journal of Behavioral Finance, 2008. Observed that investors have certain cognitive and emotional weaknesses which come in the way of their investment decisions. According to them, over the past few years, behavioral finance researchers have scientifically shown that investors do not always act rationally.
Jignesh B. Shah and Smita Varodkar in their article “Capital Market: Trends in India and abroad – impact of IPO Scam on Indian Capital Market”, published in the Souvenir, All India Accounting Conference, November, 22-23, S.D.School of Commerce, Gujarat University, Ahmadabad, concluded that the recent IPO Scam indicates that even a highly automated system will not prevent mal practices. But steps should be taken by SEBI to restrict such IPO Scam by applying know your customer (KYC) and unique identification number to market players and investors.
P. K. Das (2006) in his Research paper “A Review of Tax Planning for Educational Expenses on Children”, published in The Journal of Accounting and Finance, April September 2006 concluded that Proper Tax Planning is very much helpful in minimising the burden of Income Tax for incurring expenses on children education as well as having total exemption available. He suggested that the investor should keep a proper account of all relevant expenses incurred on the education of children, during the same financial year so that planning can be made, as required, to get Deductions And Exemptions.
4. Methods and Analysis
TABLE 1 - Reliability and Validity of variables in LIC Investors Association Sl.
No.
Variables in LIC Investors association
Standardized factor loading
‘t’ statistics Composite
Reliability
Average variance Extracted 1. This LIC Investors matches my
personality
0.9042 4.1174* 0.7903 55.93
2. This LIC Investors is very trust worthy
0.8961 3.9969*
3. I am proud to own this brand 0.8447 3.8084* 4. I got same benefits from the
LIC Investors compared to others
0.8139 3.7117*
5. This LIC Investors is made to work trouble free
0.7668 3.6886*
7. Recall the low of the brand 0.7318 3.2165* 8. I believe the said responsibility
of the company
0.7104 2.9696*
9. This LIC Investors is safe to use 0.7096 2.7314* 10. This LIC Investors well
regarded by my friends
0.6997 2.6997*
11. I consider more the company of the brand
0.6818 2.5962*
12. This LIC Investors is highly zero defective
0.6924 2.4518*
13. It is moneys with brand 0.6517 2.3096* 14. The brand’s country of origin 0.6322 2.1779* Cronbach alpha: 0.8145
* Significant at five per cent level.
The standardized factor loading of the variables in LIC Investors association are greater than 0.60 which shows its content validity. The significance of ‘t’ statistics of the standardized factor loading of the variables in LIC Investors association confirm its convergent validity. It is also proved by its composite reliability and average variance extracted. The included 14 variables in LIC Investors association explain it to an extent of 81.45 per cent since their respective Cronbach alpha is 0.8145.
TABLE 2 - Level of LIC Investors Association (LBA) among the Respondents
Sl. No. LBA Number of respondents in Total
LE HE
1. Less than 2.00 54 14 68
2. 2.00–3.00 96 37 123
3. 3.01–4.00 48 91 139
4. Above 4.00 23 33 56
Total 221 175 396
* Significant at five per cent level.
The levels of LIC Investors association among the respondents are 3.01 to 4.00 and 2.00 to 3.00 which constitutes 35.10 and 33.59 per cent to the total respectively. The lesser experienced respondents with the LBA of 2.00 to 3.00 and less than 2.00 constitutes 43.44 and 24.43 per cent to its total respectively. Among the highly experienced respondents, these two are 3.01 to 4.00 and 2.00 to 3.00 which constitutes 52.00 and 21.14 per cent to its total respectively. The analysis reveals that the level of LIC Investors association among the HE is higher than that among the LE.
The switching cost represents the cost incurred to switch from one LIC Investors to another brand. The level of view on switching costs among the respondents has been measured with the help of seven variables. The respondents are asked to rate the above said variables at five point scale according to their order of acceptance. The mean score of the variable in switching costs among the LE and HE have been computed separately. The ‘t’ test has been administered to find out the significant difference among the two group of respondents regarding their view on variables in switching costs.
TABLE 3 - Respondents View on Switching Costs (LVSC)
Sl. No. Variables in LIC Investors Association Mean Score among
respondents in
‘t’ statistics
LE HE
3. It costs me to switch from one LIC Investors to another
2.8844 3.8086 -3.0017*
4. It could be a hassle switching to another brand
2.9646 3.8142 -2.9991*
5. Switching leads more pain to me 2.9907 3.7667 -2.6696* 6. Inter LIC Investors in- compatibility 2.9128 3.8042 -2.9781* 7. Switching leads to more learning 2.9969 3.8118 -3.0088* * Significant at five per cent level.
The Table 3 shows the mean score of variables in switching costs among the two group of respondents and their respective‘t’ statistics. The highly viewed variable in switching costs among the HE are ‘It could be a hassle switching to another brand’ and ‘Switching leads to more learning’ since their mean scores are 3.8142 and 3.8112 respectively. Among the LE, these are ‘switching leads to more learning’ and ‘switching leads more pain to me’ since their respective mean scores are 2.9969 respectively. Regarding the level of view on switching costs, the significant difference among the two group of respondents have been noticed in all seven variables included in it since their respective ‘t’ statistics are significant at five per cent level.
5. Discussions and Implications
The included seven variables in switching costs explain it to an extent of 81.08 per cent since the Cronbach alpha is 0.8108. The standardized factor loading of the variables in switching cost are greater than 0.60 which indicates the content validity. The significance of ‘t’ statistics of the standardized factor loading of the variables in switching costs indicates the convergent validity. It is also proved by the composite reliability and average variance extra cited since their co-efficient is greater than its minimum threshold of 0.50 and 50.00 per cent. The analysis reveals that the included variables in switching costs explain it to a reliable extent.
The important LVSC among the respondents in 3.01 to 4.00 and 2.00 to 3.00 constitutes 41.16 and 23.99 per cent to the total respectively. The important LVSC among the LE is 2.00 to 3.00 and 3.01 to 4.00 which constitutes 43.89 and 22.17 per cent to its total respectively. Among the HE, these are 2.00 to 3.00 and 3.01 to 4.00 which constitutes 37.71 and 26.29 per cent to its total respectively. The analysis reveals that the level of view on switching costs is higher among the HE then that among LE.
6. Suggestions and Conclusions
The present exhaustive research in the field of Life Insurance throw up some exciting trends which became very much clear from the above analysis. A general idea that we gathered during data compilation was the enormous awareness and knowledge among people about diverse companies and their insurance products.
People are beginning to look beyond LICI for their insurance needs and are enthusiastic to belief private players with their hard earned money. The buying behavior of consumers in respect of Life insurance products in general is initiated by number of factors viz. Psycho graphical, Economical, Social, Politico legal and Demographical.
purposes and it shows how insurance companies have been booming to magnetize public money in present times.
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