I would like to express my gratitude towards my parents & colleagues of HDFC Life Insurance for their kind co-operation and encouragement which help me in completion of this project. I would like to express my special gratitude and thanks to industry persons for giving me such attention and time. Prakash Patil TABLE OF CONTENTS |Content |Page No | |Introduction - Insurance Market in India - A Quick look 4 | |Distribution Channel – Definition & Importance |6 | |Current distribution channels for Insurance products |8 | |Tied (Agency) Channel |9 | |Corporate Agency |13 | |Brokers |14 | |Bancassurance |17 | |Online/ Internet |23 | |Microinsurance |26 | |Worksite Marketing |28 | |Indian Postal Services |30 | |Telemarketing |32 | |KIOSK or Virtual Marketing |33 | |Background |34 | |Methodology |35 | |Problems in Distribution of Insurance products in India |35 | |Conclusions & Recommendations |44 | |Limitations |48 | |Bibliography |49 | INTRODUCTION ? Insurance Market in India - A Quick look Life insurance industry in India has gone through many phases since its start in 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. In 1829, the Madras Equitable had begun transacting life insurance business in the Madras Presidency. 870 saw the enactment of the British Insurance Act and in the last three decades of the nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay Residency. This era, however, was dominated by foreign insurance offices which did good business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard competition from the foreign companies. In 1914, the Government of India started publishing returns of Insurance Companies in India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life business.
In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and non-life business transacted in India by Indian and foreign insurers including provident insurance societies. In 1938, with a view to protecting the interest of the Insurance public, the earlier legislation was consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for effective control over the activities of insurers. The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a large number of insurance companies operating in India by independence and the level of competition was high. There were also allegations of unfair trade practices. Therefore, post independence, Government of India decided to nationalize insurance business.
Accordingly in January 1956, nationalization of life insurance was done by formation of Life Insurance Corporation (LIC) by absorbing 154 Indian, 16 non-Indian insurers and 75 provident societies. In 1972, general insurance business was also nationalized with effect from 1st January, 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd. , the New India Assurance Company Ltd. , the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 which commenced its operations in 1st January 1973. There has been considerable time lag between reforms of insurance sector and rest of financial sector.
Therefore in 1993, Government of India set up committee chaired by RN Malhotra, former governor of RBI, to propose recommendations for reforms in Insurance sector. Committee submitted its report in 1994 wherein it recommended to open the Insurance Sector for Private and foreign players. Following the recommendations of the Malhotra Committee report, in 1999 the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market.
The IRDA opened up the market in August 2000 with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%. A number of amendments were brought in various insurance related statutes, viz. , Insurance Act, 1938, LIC Act, 1956 and General Insurance Business Nationalization Act, 1972 (GIBA). The Progress in the overall developments in the insurance sector were swift and more prominent after the establishment of IRDA. The four public sector non-life insurance companies were de-linked from being subsidiary of the General Insurance Company of India. Now they operate independently and compete with each other. With the progress of reforms, Insurance market has been flooded with a number of players.
As at end-March 2006, among the life insurers, there were 23 companies in private sector and Life Insurance Corporation of India (LIC) was the solitary public sector company. Among non-life insurers, nine companies were in private sector and four companies were in public sector (Annex II). As regarding the present size of the insurance market in India, it is stated that India accounts not even one per cent of the global Insurance market. However, studies have pointed out that India’s insurance market is expected to grow rapidly in the next 10 years. The Indian Insurance Industry: A Case Study Let’s understand the rules for formation of Insurance Company in India. ABC is foreign company having diverse business interests, including the arketing and selling of insurance products in the United States of America (USA). It has a strong infrastructure, good customer base and brand equity. ABC has heard that the Indian insurance market has opened up and seeks some information about opportunities there. ABC wants to tie-up with an Indian company ("XYZ") by forming a joint venture and wants to know the amount of equity it can hold in an Indian joint venture company and the insurance products it can sell in India. The company has distributable profits in three (3) preceding financial years, prior to the year in which shares with differential rights are to be issued; Further, ABC has a subsidiary in India (the "ABC Sub").
ABC wants to know whether ABC Sub can enter into a joint venture with XYZ. Observations and Comments The Indian government has recently passed the Insurance Regulatory Development Authority Act, 1999 (the "IRDA") whereby amendments have been made to the existing insurance laws prevailing in the country, namely, the Insurance Act, 1938 (the "Ins Act"), the Life Insurance Corporation Act, 1956 (the "Life Act"), and the General Insurance Business (Nationalisation) Act, 1972 (the "GIB Act"). An authority called the Insurance Regulatory Development Authority (the "Authority") has been established to regulate the insurance sector. (Section 3 of the IRDA) The Authority, inter alia, will have the power to: Issue applicants a certificate of registration; renew, modify, withdraw, suspend or cancel such registration. (Section 14(2)(a) of the IRDA) A certificate of registration will have to be renewed annually. (Section 3A of the Ins Act r/w the First Schedule of the IRDA) • Prescribe prudential norms such as solvency margins and investment guidelines for insurance companies (Section 14(2)(k) and (l) of the IRDA) • Protect interests of policyholders in matters concerning assignments of policies, nominations by policyholders, insurable interest, settlement of insurance claims, surrender value of policies, and other terms and conditions of contracts of insurance. (Section 14(2)(b) of the IRDA)
However, the Indian Government has retained with itself the power to issue directions on questions of policy. (Section 14(2)(b) of the IRDA) The definition of an "Indian insurance company" has been amended to include "any insurer being a company- 1. Which is formed and registered under the Companies Act, 1956; 2. In which the aggregate holding of equity shares by a foreign company, either by itself or through its subsidiary companies or its nominees does not exceed twenty-six per cent (26%) of the paid-up capital; and 3. Whose sole purpose is to carry on life insurance business or general insurance business or reinsurance business. (Section 2(7A) of the Ins Act r/w the First Schedule of the IRDA)
The explanation to this section provides that a "foreign company" is a company that is not a domestic company. (Section 2(23A) of the Income-tax Act, 1961 r/w section 2(7A) of the Ins Act r/w the First Schedule of the IRDA) The IRDA by amending the Ins Act clearly provides that the aggregate holding of equity shares by a foreign company, either by itself or through its subsidiary companies or nominees should not exceed 26% of the paid-up capital of the insurance company. It has been clarified that the twenty-six per cent (26%) cap applicable to foreign companies will also apply to foreign institutional investors, non-resident Indians and overseas corporate bodies. Section 2(7A)(b) of the Ins Act r/w the First Schedule of the IRDA) Thus, a foreign company is now permitted to own upto 26% of the equity in an Indian joint venture company. Therefore, if ABC proposes to form a joint venture with XYZ, ABC's shareholding will be restricted to a minority shareholding of 26% in the joint venture company. It must be noted that the Indian insurance company must be a public limited company. (Section 2C of the Ins Act) Now, let us assume that ABC has a subsidiary company in India (the "ABC Sub") in which it owns a fifty-one per cent (51%) equity and decides that ABC Sub should enter into the insurance joint venture with XYZ. This will not be permissible.
According to recent informal pronouncements of the Authority, Indian companies that are subsidiaries of overseas companies will not be allowed to tie-up with other Indian companies to do insurance business. The Authority perceives this as violation of the twenty-six per cent (26%) equity cap by forming insurance companies. ABC can, however, along with several other foreign companies have a stake in an insurance company operating in India as long as the combined equity stake of all foreign companies does not exceed twenty-six per cent (26%). The Authority will not register any new insurance company carrying on the business of life or general insurance unless it has a minimum paid-up capital of Rs. 100 crores. No composite license for life and non-life business will be granted.
For companies in the reinsurance sector, a minimum paid-up capital of Rs. 200 crores is required. (Section 6 of the Ins Act) The foregoing paid-up share capital must be brought into the new company within six (6) months of issue of the license. (Section 6 of the Ins Act r/w the First Schedule of the IRDA) In addition, every insurer will be required to undertake such percentages of life insurance or general insurance business in the rural or social sector, as specified in the Official Gazette by the Authority in this behalf. (Section 27D of the Ins Act r/w the First Schedule of the IRDA) Furthermore, a new insurance company will be permitted to invest policyholders' funds only in India. Section 27C of the Ins Act r/w the First Schedule of the IRDA) Every insurer shall, in respect of its life insurance business, be required to deposit with the Reserve Bank of India, either in cash or in approved securities, a sum equal to one per cent (1%) of its total gross premium written in India, not, however, exceeding Rs. 10 crores. In respect of the general insurance business, this sum will equal three per cent (3%) of its total gross premium written in India, not, however, exceeding Rs. 10 crores. In respect of re-insurance business, this sum will equal Rs. 20 crores. (Section 7(i) of the Ins Act r/w the First Schedule of the IRDA) It has been provided that an Indian promoter holding more than twenty-six per cent (26%) of the paid-up equity capital of an Indian insurance company will ave to divest in a phased manner the share capital in excess of twenty-six per cent (26%), after a period of ten (10) years from the date of commencement of business by the Indian insurance company. (Provision to section 6AA of the Ins Act r/w the First Schedule of the IRDA) On the one hand, the Indian government has restricted foreign equity ownership in Indian insurance companies to twenty-six per cent (26%) whereas on the other hand, it wants Indian partners to divest their equity holdings to twenty-six per cent (26%) after ten (10) years. Recently government has been in considering increasing the limit on foreign investments up to 49% from current 26%. Also norms for IPO are expected to be finalized shortly which would enable companies to go public for raising funds.
The IRDA has allowed three kinds of insurance brokerage firms to operate in the country, namely, insurance, re-insurance, and composite brokerage firms. The twenty-six per cent (26%) equity cap will apply to such firms too, except that; composite brokers may enjoy a higher equity cap of forty-nine per cent (49%). Company formation consideration • On complying with the registration formalities, ABC and XYZ will have to enter into a shareholders’ agreement. The main issue that arises here is exercise of control in the functioning of the joint venture company. Generally, exercise of control can be at two levels Board of Directors; and Shareholders. • Under the Companies Act, 1956 (the "Cos.
Act") a company can carry on activities by passing either of two resolutions, special resolutions and ordinary resolutions. Ordinary resolutions can be passed by shareholders having 50% plus one shares with voting rights in the company, whereas special resolutions can be passed only by shareholders having 75% shares with voting rights in the company. A special resolution is, inter alia, required to amend the Memorandum and Articles of Association of a company, to issue further shares through a rights issue, to give loans or guarantees to other companies, etc. With a twenty-six per cent (26%) equity stake, ABC will only be in a position to block special resolutions. It will not be able to control the day-to-day functioning of the joint venture company.
Additionally, the Authority has prescribed that foreign insurance companies cannot retain Board control in Indian insurance joint venture companies. Therefore, ABC will not be able to appoint majority directors on the joint venture company's Board. Another pertinent point that arises is infusion of funds to the extent of seventy-four per cent (74%) of the equity of the joint venture company by the Indian partner, namely, XYZ. XYZ will have to bring in a minimum amount of 74 cores, if the joint venture company seeks to enter into the business of life or general insurance. Further, in the event of increase of share capital, XYZ will have to pump in an amount equal to its seventy-four per cent (74%) equity stake.
This can cause some problems. It should be noted that preference shares cannot be issued by companies carrying on life insurance business (Section 6A(1)(i) of the Ins Act). As such, the joint venture company carrying on life insurance business cannot comply with the capitalization stipulations by issuing preference shares to ABC In such circumstances, the parties can consider entering into a three-way joint venture either with another Indian company or with a bank. The Reserve Bank of India ("RBI") has permitted banks to enter into the insurance sector and to invest up to fifty per cent (50%) of their paid-up capital in insurance joint ventures.
The liberalization of the Indian insurance sector has open up the sector to private competition. If ABC and XYZ can establish the right amount of trust and take a long-term perspective on the Indian market, their joint venture can be a major success. ? Distribution Channel – Definition & Importance in Indian insurance Industry The process of making a product or service available to customer for use or consumption at desired place and time by set of two or more interdependent organizations. It can also be termed as an Intermediary between end consumer and seller or service provider. Intermediaries typically charge a "mark-up" or "commission" for participating in the channel.
Post nationalization of Insurance companies, tied agents were the primary channels for insurance distribution in the Indian market; the public sector insurance companies have their branches in almost all parts of the country and have attracted local people to become their agents. The agents are from various segments in society and collectively cover the entire spectrum of society. A person who has lived in the locality for many years sells the products of the insurance company with a local branch nearby. This ensures the last mile touch point being closer to the customer. Of course, the profile of the people who acted as agents suggests they may not have been sufficiently knowledgeable about the different products offered, and may not have sold the best possible product to the client. Nonetheless, the customer trusted the agent and company. This arrangement worked adequately in the absence of competition.
In terms of ‘Insurance Penetration Ratio’ (defined as ratio of insurance premium to GDP), a key indicator of the spread of insurance coverage and insurance culture, India compares very poorly by international standards. The penetration ratio was less than one per cent in 1990s and it improved to 5. 2% by year ended on March 2009. As against this, as per report from Swiss Re penetration ratio by year ended on March 2009, in respect of some of the developed countries, viz. , UK and South Africa at 12. 90%. In Asia, Taiwan and Hong Kong had registered their respective ratio of as high as 16. 8% and 11. 0%. Insurance penetration for the world was placed at 7. 0% which was far ahead than that of India. Refer: Table 1) Thus in a country with 1. 21 billion overall population, the penetration ratio indicates that still there is vast majority of population still outside reach of Insurance; especially in rural and semi-urban areas, in the context of the absence of social security schemes. This clearly suggests that there is a vast opportunity to tap in insurance sector by widening the distribution channels. Nearly as old as the banking industry or perhaps even older, insurance as a model of risk management, is centuries old. Though the industry began in a small way, it evolved to become an integral part of the financial services businesses over time.
Table 1: International Comparison Of Insurance Penetration, March 2009. Developed Countries |Country |Total |Life |Non-Life | |Australia |6. 40 |3. 40 |3. 00 | |Brazil |3. 10 |1. 60 |1. 50 | |France |10. 30 |7. 20 |3. 10 | |Germany |7. 00 |3. 30 |3. 0 | |Russia |2. 50 |0. 00 |2. 50 | |South Africa |12. 90 |10. 00 |2. 90 | |Switzerland |9. 80 |5. 40 |4. 50 | |United Kingdom |12. 90 |10. 00 |3. 00 | |United States |8. 00 |3. 50 |4. 50 | Asian Countries Country |Total |Life |Non-Life | |Bangladesh |0. 90 |0. 70 |0. 20 | |Hong Kong |11. 00 |9. 60 |1. 40 | |India# |5. 20 |4. 60 |0. 60 | |Japan |9. 90 |7. 80 |2. 10 | |Malaysia |4. 40 |2. 90 |1. 0 | |Pakistan |0. 70 |0. 30 |0. 40 | |PR China |3. 40 |2. 30 |1. 10 | |Singapore |6. 80 |5. 10 |1. 70 | |South Korea |10. 40 |6. 50 |3. 90 | |Sri Lanka |1. 40 |0. 60 |0. 90 | |Taiwan |16. 0 |13. 80 |3. 00 | |Thailand |4. 00 |2. 40 |1. 60 | |World |7. 00 |4. 00 |3. 00 | Source: Swiss Re, Sigma various volumes * Insurance penetration is measured as ratio of premium (in US Dollars) to GDP (in US Dollars) # Data relates to financial year ? Current distribution channels for Insurance products in India:- Traditionally before privatization insurance products were only sold by agents.
Strategy also worked due to absence of competition in market. However post privatization, competition got tougher and need for alternate channels of distribution was strongly felt. Currently insurance products are being distributed through following channels: Current distribution of Insurance products in India Insurers ? Tied (Agency) Today's insurance agent has to know which product will appeal to the customer, and also know his competitor's products in the same space to be an effective salesman who can sell his company, the product, and himself to the customer. To the average customer, every new company is the same. Perceptions about the public sector companies are also cemented in his mind.
The new companies are looking for educated, aware individuals with marketing flair, an elite group who can be attracted only with high remuneration and the lure of a fashionable job, all of which may not be possible in this business with its price pressures and the complexity of selling insurance. Unable to attract this segment, they have started easing recruitment conditions as against the stringent norms they had earlier, thereby diluting the process. While the public sector companies are able to attract agents, they continue to suffer from high attrition rates due to indiscriminate agent appointment. The most successful of these companies tied agents are hardly of the elite variety of salesman.
They are still the people from neighborhood -- the postman, the schoolteacher, and the shopkeeper -- who know the people and are themselves known in the community. The challenge here is the lack of knowledge of the competitive market and the inability to do intelligent comparisons with the competitor's products. Educating and training these agents is a serious challenge for the insurance company. The relevance of this kind of agent continues even today as agents are sought or contacted by families by word of mouth. Insurance companies are advised not to follow the path of FMCG's/credit card companies, believing that a suited and booted customer care consultant or financial consultant will necessarily appeal to the average Indian customer.
In this context it might be a rewarding exercise to recruit some older people (who have taken Voluntary Retirement from banks and other financial institutions) to sell some lines of products like pension plans, annuities etc. Gender of agents is another relevant feature in the rural context that makes a difference, especially for the female population. Women to whom the customers can relate --e. g. , nurses, gram sevikas -- can target the female segment of the population more effectively. What is applicable for the rural women and children health programs and population control programs is equally applicable for insurance selling also. With this kind of segmentation of intermediaries the challenge for the insurance company lies in training and educating these people to become effective sales persons.
But this in no way diminishes the benefits of intermediary segmentation. • SWOT Analysis on Agency Channel Strengths:- • Typicality of Indian customers who always favors known and reliable intermediary. • Through agency, personal contact and relationship can be established with the customer. Agents usually enjoy personal credibility with customers. • Agents provide various presales and post sales services to customers. • This channel’s awareness and acceptability is maximum among people. • Cross selling is possible through this channel. • Due to personal contact, it can provide valuable feedback about the need and expectation of consumers. Weakness:- Insurers have to bare higher cost to set up of agency channel network and provide training to personnel • Higher commission rates forces insurers to deduct high charges from policy. • High attrition rate of agents is a serious concern. Due to this, initial investment done on training and educating the agents goes waste. Attrition causes the problem of servicing orphan policies. • Agents are generally not tech savvy. Opportunities:- • High net worth individuals who prefer relationship over cost can be tapped. • Technology can be embraced to convert prospect into business. • Commissions structure can be designed in such a way that agents would want to stay active for long term. Threats:- Alternate distribution channels are more preferred by the insurers due to cost effectiveness over agency channel. At present, the number of agents working in life insurance industry is approximately 15 lakhs but a majority of them are dormant which leads to poor activity ratio. Out of the massive agency force approximately only 20% are active. What is need of the hour is not the quantity but the quality. Having some productive and lots of unproductive lot drags down the morale of the community of agents, leads to discontent within the profession and the respect for the profession is downgraded. Over manpower has its cost to the company in terms of unrecovered or under recovered training cost.
Also, opportunity cost in terms of a more productive agent serving in place of a dormant agent can’t be looked over. Over manpower also contributes to mis-selling and refunds. Adequate concept, product and soft skill training is indispensible for professionalizing agency force. IRDA mandates companies to impart 100 hour training to its agents and today most of the companies have in-house training facility. But number of agents attending subsequent product trainings at the time of product launches and other soft skill training sessions gets reduced substantially. It leads to poor knowledge about company’s whole basket of offerings and agents selling only a few products instead of doing a true need-based selling to customers.
The concern of the regulator towards growing proportion of linked products in companies’ total percentage of business can also be attributed to biasedness of training programs in favor of linked products. Training becomes all the more important in today’s competitive environment where the agent is not only selling insurance but the company providing insurance. Adequate and quality initial training at the time of licensing is like laying a strong foundation for agents entering the industry and subsequent trainings are like sharpening the agents’ willingness to stay competitive. Agents are off-roll employees of an insurance company and keeping them motivated is a big challenge. Companies run loyalty and engagement programs and sales incentive programs (like short term contests) providing various monetary and non-monetary benefits.
They serve well to motivate the agents to perform better, increase interaction of agents with the companies, promote spirit of healthy competition among the agents and to recognize good performing agents, provided these programs are easily understandable, transparent and quick in benefit disbursal. This profession is also not left untouched by Information Technology. Most of the companies have a dedicated agent’s portal but the number of agents accessing them is less than satisfactory. One step forward in making the agents more efficient and professional is to make them more tech-savvy through training and other means. Looking at the regulatory front, a dispute redressal mechanism for the agents should be established by the IRDA. Insurance selling is a tough job.
Agents are facing sharp competition from other alternative distribution channels and with so many insurance players in the fray, their job has become all the more difficult. Though the image of an agent has undergone lot of change since the time it was first introduced but still agents face a lot of sales resistance. Insurance companies need to consciously endeavor into dedicated efforts for the image makeover of their agents which will go much beyond calling them advisors or financial consultants instead of agents. Agents are the true Brand Ambassadors of the company and they deserve a fair treatment from the insurers. In spite of multitude of other distribution channels coming up, tied agency is here to stay because of attitude and typicality of Indian customers.
What is needed is a genuine effort in recruitment, training and development of a good agency force critical for growth and survival, knowing that for a long-term business like insurance quality, productivity and ethical values must be deep-rooted fully in the workforce. ? Corporate Agency The corporate agent is an extension of the agent as the insurance agent is an individual and if two agents join together and form a firm or company, it becomes corporate agent. The procedure to become a corporate agent is the same as that of an agent but may have to contribute the share capital of 15 lakh at the discretion of the insurer. Corporate agency channel was the key distribution channel for Insurance. Since IRDA allowed corporate agents into distribution of Insurance, it flourished like anything.
It has a major advantage of cost affordability over traditional agency channel for insurers. However due to increased complaints of mis-selling and high lapsation of policies sourced through corporate agencies was a growing concern over the time. Majority of the policies were sold as a short term investment option rather than long term security. Customers were kept under dark about various charges of policy and other terms and conditions which makes insurance policy a long term investment option. Also there were instances where same set of individuals have floated different corporate agencies and they even employed people without valid licenses. To overcome these challenges and protect customer interest, IRDA came up with tringent licensing norms for corporate agencies in June 2010 which tighten the license renewal process that made many small corporate agents ineligible as they were not conforming to the new norms. In addition of this IRDA also recommended regular on-side inspection of corporate agents to control various mal practices that had entered the system. Due to IRDA’s on-side inspection companies wherein same set of individuals have floated different corporate agencies went out of business. In November 2011, IRDA came out with persistency ratio for corporate agents; according to which it would mandatory for corporate agents to retain at least 50% of their clients. These norms with cap on commission have made its viability questionable.
Also IRDA proposed a disincentive for lapsation in the form of commission claw back by the insurer, on a proportionate basis. Alternatively, a part of the first year commission should be withheld to be paid based on persistency in later years. These guidelines have ensured the restriction of the agencies which used to sell the insurance policies only for higher first year commission by using malpractices and only those who are willing to do long term and ethical business can survive. ? Brokers Insurance brokers is being totally new distribution channel which can sell the products of all the insurers on all India basis but minimum capital requirement is 50 lakh with proper office infrastructure and manpower.
Every Insurance Broker will have to pay annual fees of 0. 5% of his brokerage and insure himself under Professional Indemnity insurance. Broker channel offers several benefits for customers like Choice, expertise and customer servicing. These are elaborated below. Choice:- There are about 50 insurance companies in India and as a result hundreds of different product options which can help customer to choose product exactly as per his need. Unfortunately the benefit of this market diversity never reaches the customers if they purchase insurance through agents. Brokers by definition are not tied to any one insurer and have a bias to present as many options as possible to clients.
Also, brokers have a unique advantage as they can combine the life, non-life and health insurance requirements of a client. A broker can explain the distinctions of these different product types to a client and pick the most relevant options. This allows brokers to work with relatively smaller companies in a profitable manner. Individual insurers and agents would not have the same economies of scale in serving small clients. Expertise:- Brokers are constantly exposed to people and product offerings of different companies. Brokers participate in training programme conducted by different companies. This puts brokers in a unique position to understand market trends and developments. A good broker will harness this information to create deep market expertise.
Such expertise has three main benefits. First, brokers can educate clients about product options and then push insurers hard to develop the appropriate products. The result is a steady improvement in product quality. Second, brokers can express a client's case in a language that insurers understand and vice versa. Quite often clients are confused when faced with all the technicalities of insurance. Brokers bridge this gap. Finally, the expertise is vital in effectively managing the client's risk, particularly in volatile times. Customer Servicing:- Because of the privileged customer–broker relationship, the broker has to build customer servicing capability.
In fact the ability of a broker to retain a client, quite often depends upon its servicing strengths. No insurer or agent can play this role adequately because of the inherent conflict of interest between the claimant and the insurance company. Benefits to Industry and regulators point of view:- Brokers offer several benefits to the regulator as well. The strong customer focus of a broker is an obvious benefit. Moreover, primarily because of their deep expertise, brokers can be a very effective route to collate consumer feedback on its guidelines and regulations. Brokers go through a rigorous screening process by the regulator. Fly-by-night operators are effectively screened out.
Therefore, a robust broking channel will result in fewer customer grievances and mis-selling issues. Last but not the least; brokers are very effective in reducing the cost of distribution. The experience in several countries has been that intermediation costs reduce as the broking channel becomes better established. The IRDA has a significant role to play in strengthening the broker's role in industry. First, it should attract high quality talent and capital in the channel. The quality of the players will be the foremost determinant of the development of the channel. Second, IRDA should look to incentivize focus on pure protection solutions.
The low ticket size of pure protection plans and the current commission structure results in small absolute earnings for the channel. In the backdrop of low consumer awareness, the cost of acquiring a customer is high, hence the current compensation does not provide an economic rationale for intermediaries to focus on such pure risk products. Finally, in its developmental role, IRDA can educate customers on the advantages, roles and responsibilities of a broker. Issues faced by Brokers Channel:- The Brokers segment offers a mystifying problem to the insurers. This segment is able to reach out to a wide audience and has gained pace over the decade since liberalization.
Hence it is an effective channel to gain market share. But profitability issues remain due to greater costs incurred on this high maintenance channel. Given that the Indian customer, just as customers in the developing world, will not like to pay upfront charges for consulting, the broker too needs to maintain his overheads by placing the policy that makes the most economic sense, rather than one that would benefit the customer the most. That said, brokers segment is a specialized channel that will continue to maintain a reasonable share in the new business premiums. The positives are that brokers in the urban arena can attract the elite and the upper middle class customer.
Brokers represent the customer and will sell the products of more than one company. They seek to determine the best fit for the client and can effectively address the mind block faced by the public about the various companies. This is applicable in the case of life insurance for the high-end and corporate/group segment. In the non-life segment, broking is not entirely new, as reinsurance brokers were arranging exotic covers. For individual customers also, with a wide range of competitive products, the broker can get a good deal. The corporate broking companies will have to play a prominent role. We are still in the early years of the industry's growth in India. The best is yet to come.
We expect that over time the market will mature and the broking channel will develop with considerable depth and robustness. ? Bancassurance – Comprehensive medium of Insurance distribution The banking & Insurance industry have charged rapidly in the changing and challenging economic environment through out the globe. In the competitive & open environment each & every one wants to do better than others. And they know that if they are not able to provide better service they won't survive in Industry. Insurance companies are also to be competitive by cutting cost & serving in the better way to customers. Now the time has come to choose and adopt appropriate distribution channel.
The Bancassurance is the distribution of insurance products through the bank's distribution channels. It is a phenomenon where in insurance products are offered through the distribution channels of the banking services along with a complete range of banking & investment products & services. In simple term we can say Bancassurance tries to exploit synergies between both the insurance companies & banks. Bankers Perspective:- In the post reforms, the financial sector has more number of players of both domestic and foreign and the dividing line between the banks and non-banking financial institutions’ activities had considerably thinned down. Overlapping in one another’s functions/ areas have become more common than exception.
The direct upshot of these developments led to intensive competition in the banking sector and which in turn had a strong bearing on the banks’ net interest margin (spread). In fact the emerging scenario is likely to bring down the banks’ spread even thinner. Despite the monstrous size of public sector banks, they too observed decline in their spread. Further, banking system in India was prone to very high NPA’s (Non Performing assets) which was further ruining the burden on banks. Therefore, banks were compelled to be constantly on the look out for stable alternate sources of earnings in the form of non- traditional and fee based sources of incomes and diversification towards new areas such as bancassurance, promises greater scope for further enhancement in earnings with no menace of increase in NPA’s.
Persistent endeavor in scouting for new technology, new products/ services/ new avenues, has become necessary for the growth as well as sustainability of banking system. It is in this context possibly, bancassurance could well be an appropriate choice for banks to increase their stable source of income with relatively less investments in the form of new infrastructure. As far as banking sector’s infrastructure is concerned, only a few countries could match with India for having largest banking network in terms of bank branches spreading almost throughout the length and breadth of the country. As on year end on March 2011, no of branches of all banks across India stands at staggering 89622 with growth of 36% since 2010.
Out of this large network of branches nearly 62% of branches are located in rural and semi urban areas and the remaining around 38% are in urban and metropolitan areas. Besides the commercial banking system, India has large rural credit cooperatives as also urban cooperative banking network. Taken together these institutional set up, the ratio of population served by a bank branch would work out to be far lower. Thus, on the one hand we have a very low insurance penetration and low insurance density as compared with the international standards; on the other hand, India has a widely stretched and well established banking network infrastructure.
It is this contrasting situation to absorb the two systems by way of ‘bancassurance strategy’ to reap the benefits of synergy. This is an opportune time for both banking and the insurance sectors to come closer and forge an alliance for the mutual benefit. For, both the regulators, i. e. , RBI and IRDA have already proffered appropriate policy guidelines and set in a congenial environment for such an endeavor. Besides, the Government of India’s unequivocal policy to provide insurance cover to the low income households and the people at large at a minimum cost are also favorable. Table 2: POPULATION GROUP-WISE NUMBER OF BRANCHES OF BANKS IN INDIA YEAR |RURAL |SEMI-URBAN |URBAN |METROPOLITAN |TOTAL | |1970 |3063 |3718 |1744 |1606 |10131 | |1980 |15105 |8122 |5178 |4014 |32419 | |1990 |34791 |11324 |8042 |5595 |59752 | |2000 |32734 |14407 |10052 |8219 |65412 | |2001 |32562 |14597 |10293 |8467 |65919 | |2002 |32380 |14747 |10477 |8586 |66190 | |2003 |32303 |14859 |10693 |8680 |66535 | |2004 |32121 |15091 |11000 |8976 |67188 | |2005 |32082 |15403 |11500 |9370 |68355 | |2006 |30579 |15556 |12032 |11304 |69471 | |2007 |30551 |16361 |12970 |11957 |71839 | |2008 |30914 |17791 |14416 |13038 |76159 | |2009 |31576 |19075 |15479 |13921 |80051 | |2010 |32497 |20707 |16884 |14935 |85023 | |2011 |33495 |22631 |17712 |15784 |89622 | Source: RBI annual report, 2010-11. Note: Data are exclusive of administrative offices.
Above all, in India still vast majority of banking operations are conducted manually at the bank’s branch level with relatively less automation such as ATMs, tele-banking, internet banking, etc. , unlike many developed countries. This stands out as an added advantage for the banks to have direct interface with the customers, to understand their needs/tastes and preferences, etc. , and accordingly customize insurance products. In fact there is also greater scope for innovation of new insurance products in the process. Therefore bancassurance can be a feasible activity and viable source of additional revenue for the banks. Insurers Perspective:-
Contemporaneously, with the sweeping financial reforms in the insurance sector and the consequent opening up of this sector, all the private entities plunged almost simultaneously with a very little spacing of time and the entire insurance sector has been exposed to stiff competition. Insurers too have much to gain from bancassurance. The cost of the traditional agency channel is prohibitive with the high risk of agency turnover ranging between 30 to 40% every year, thus making the entire recruiting and training expenses going down the drain. Moreover, the price competition has reduced the profit margins and increased the compensation demands of the successful agents. The incentive pattern has a lot to do in this spiraling of the cost of the agency channel. Bancassurance has come in very handy for winning the middle income market which forms the bulk of the bank customers.
With Bancassurance, the cost of opening new insurance branches comes down drastically for the insurer. With an agreement with a bank, all the thousand and more branches of the bank become the extended arms of the insurer. Customer Perspective:- The most immediate advantage for customers is that, in insurance business the question of trust plays a greater role, especially due to the inbuilt requirement of a long term relationship between the insurer and the insured. In India, for decades, customers were used to the monopolistic attitude of public sector insurance companies, despite there were many drawbacks in their dealing, they enjoyed customer confidence, this trend continues even now mainly due to their Government ownership.
The customers to move over to private insurance companies that are collaborated with foreign companies which are less known to the Indian public would take little more time. The void between the less known newer private insurance companies and the prospective insured could be comfortably filled by the banks because of their well established and long cherished relationship. Under these circumstances, any new insurance products routed through the bancassurance channel would be well received by the customers. Bancassurance is always a win-win situation for customers. It provides greater convenience by providing all the financial needs under one roof.
The customer need not always wait for his insurance agent to come and render service. Whenever the client goes to the bank for his/her other needs like housing loan, overdraft, some draft issuance etc, he can complete his insurance needs too. It’s always easier to deal with one agent for all the financial needs rather than separate agents for every product. For paying renewal premium for policy would also be easier with services like ECS, Billpay or standing Instructions. Reduced distribution cost for insurers will lead to reduced premiums for policies. SWOT Analysis on Bancassurance Strengths:- In a country of more than one billion population, sky is the limit for selling insurance products.
There is a vast untapped potential as the life insurance industry just covered around 20 crores of people – the number of policies will be more in view of the multiplicity of the policies per person. Millions of people travel out of India every year for various reasons, necessitating the purchase of Travel insurance and Health insurance. This is besides their need for conventional policies. There are a lot of sunrise industries like the IT sector, the hospitality sector, the healthcare portfolio, the education sector, BPOs and the call centers, R & D etc, providing a huge pool of professionals ready to be tapped for their insurance needs. Weakness:- The difference in working style and culture of the banks and insurance sector needs greater appreciation.
Insurance is a ‘business of solicitation’ unlike a typical banking service, it requires great drive to ‘sell/ market the insurance products. It should, however, be recognized that ‘bancassurance’ is not simply about selling insurance but about changing the mindset of a bank. Moreover, in India since the majority of the banking sector is in public sector and which has been widely disparaged for the lethargic attitude and poor quality of customer service, it needs to refurbish the blemished image. Else, the bancassurance would be difficult to succeed in these banks. Unlike, the banking service, there is no guarantee for insurance products that all efforts that a bank staff spends in explaining to a customer would clinch the deal due to the very nature of the insurance products.
This frustration of the bank staff has the danger of spillover effect even on their regular banking business. With the financial reforms and technological revolution embracing the financial system, there has been a great deal of flexibility in the mind set of people to accept change. The above outlined problems need not, however, deter the banking sector to embark on bancassurance as any form of resistance from the bank employees could be tackled by devising an appropriate incentive system commensurate with intensive training to the frontline bank staff. On other hand, the middle class population is over-burdened today by the inflationary pressures.
This is considerably reducing the amount of savings of a middle class income group. Also absence of elementary IT requirements is still the case in many of the PSU and co-operative bank branches which is a concern area. Opportunities:- Bank has a huge database to work on. This has to be analyzed thoroughly and similar groups should be churned out in order to sell the bancassurance products. Since the Government pensions and other payments are handled through the bank branches, the bank can become a rallying point for more and more insurance business. Banks can become the 'One stop shop' where a customer can apply for banking, mortgages, pensions, investment and insurance products. Threats:-
The bank employee is so well entrenched in his classical way of working that there is a definite threat of resistance to any change the Bancassurance may bring in. The knowledge level of the bank staff on insurance matters is so low that all enquiries of the customers are turned over to the insurer much to the disappointment and discomfiture of the client. The bank employee simply becomes a post man in transferring the problems of the client. The same trouble comes in the matter of other servicing aspects like the policy revivals or claims. There are hazards of direct competition to conventional banking products. The bank personnel may become resistant to sell insurance products, fearing that the bank's savings may be diverted to the insurance companies.
The strategy should be using multiple banks according to their presence in different regions. Success would come by using bancassurance where it will be most effective i. e. selling simple, cheap products to the masses at a low cost. This awareness is growing and is evident from the fact that nearly every insurance company has partnered with one or many banks to implement bancassurance. ? Online Sales Channel – A feasible alternative India is joining the fast growing breed of net users and using net for banking transactions is also growing rapidly. Now almost all the public and private sector banks provide online banking facility as an add-on advantage with savings accounts.
In insurance industry, just few years back internet was used mostly used by Insurers for Policy servicing, promotion of new products and providing various tools like illustrative calculators etc... However selling insurance products online is a relatively new concept in India. Let’s understand the need of online distribution in Insurance industry. In 2010, the insurance regulator tightened norms which forced insurers to cut down commission to agents. The regulator also made it mandatory for agents to achieve a minimum level of productivity and persistency of business. As a result of these tough measures the number of life insurance agents dropped from 28. 03 lakh in September 2010 to 24. 53 lakh in September 2011.
Until a couple of years back most life insurers were swearing by face-to-face sales and maintained that online would be largely used for servicing. Change in the regulatory environment, which has compelled insurers to cut distribution costs, is leading companies to look at new low-cost channels for distribution. Recent developments in information technology (IT) and web-enabled systems have made it easier for insurers to run global operations in a way that would not have been possible even two years ago. Insurers are already reaping advantages from IT improvements in internal efficiencies in areas as diverse as underwriting, claims, policy administration, financial reporting and human resources.
But efficiencies go beyond these internal ones. In the coming years, the internet will have at least two major effects on the insurance industry: cost efficiencies and broader distribution. These efficiencies will come as insurers experience a greater availability of data from the internet and the transfer of business processes from manual-related or computer-related systems to newer communication related systems. Such internet-style technology will reduce cost; reduce the level of effort and improve accessibility to large-scale data. Data accumulation becomes much easier under the internet approach and thus affects costs and value of insurance.
The internet will bring insurers to a whole new base of customers and will allow them to sample new markets that would have been too expensive to enter. Making information available to potential customers and the ability to market products to the new audience will have a tremendous impact. Advantages of Online distribution:- • It would reduce the internal administration and management costs by automating business processes, permitting real-time networking of company departments, and improving management information. • It would reduce the commissions paid to intermediaries since it can be sold directly to clients. • It would reduce the cost of training staff and other miscellaneous expenses required to run a branch. Response time for a conversion of policy would be much lesser than the manual submission. • 24 hour connectivity for purchase and servicing of insurance policies. This would enable customer to pay premiums, check NAV, track due dates etc. as per his or her convenience. • It will enable online request for quotes and data gathering which will improve efficiency. • It will reduce the re-keying and typing errors which would save time and decrease risk. Compared to online stock broking or online banking, development of internet in insurance industry is somewhat cautious. There are some factors which makes the online selling of insurance policies difficult. Difficulties in selling Insurance online:- The complexity of many insurance products can make it difficult to automate the provision of information. However with improved technology and continuous innovations sometimes later it may be possible to automate complex information and offer that product online. • In many cases, it is difficult to standardize claims settlement. E. g. Claims involves various investigations which needs to be carried out before making decision and would be subjective on case to case basis. This process often involves people and companies who are not in a contractual relation with insurers. • Internet is particularly suitable for products where contact with company is very frequent.
For Insurance products, contact with customer is often infrequent. Once policy is carried out, with some type of insurance the policy holder and insurers would get in touch only in case of occurrence of insured event. • In India many customers still view internet as an insecure medium. This prevents large transactions being carried out through Internet and it deters the transmission of confidential information, both of which are essential aspects of insurance policies. While the technology capability is there, improvement in bandwidth and infrastructure are needed. There is also a need of simpler products where auto-under writing is feasible.
Automobile insurance, one of the segments of insurance purchased “off the shelf” in India, would be the ideal segment to start with. On the life side, term assurance for standard lives with simplified underwriting is a possibility. Nowadays many general insurance products like Travel Insurance, Auto Insurance, Health Insurance and in case of life insurance Term Insurance are being sold over internet successfully. Because of the simple nature of these products insurers are have standardized the terms and conditions to be able to sell products online. Online selling has given them chance to go beyond the normal markets and sell these products to new entrants’ altogether. ? Microinsurance
Microinsurance is the protection of low -income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved. Low-income people can use microinsurance, where it is available, as one of several tools (specifically designed for this market in terms of premiums, terms, coverage, and delivery) to manage their risks. India currently has the most dynamic microinsurance sector in the world. Liberalization of the economy and the insurance sector has created new opportunities for insurance to reach the vast majority of the poor, including those working in the informal sector. Even so, market penetration is largely driven by supply, not demand.
It is often assumed that a microinsurance policy is simply a low -premium insurance policy. This is not so. There are a number of other important factors. Low-income clients often: • Live in remote rural areas, requiring a different distribution channel to urban insurance products; • Are often illiterate and unfamiliar with the concept of insurance, requiring new approaches to both marketing and contracting. • Tend to face more risks than wealthier people do because they cannot afford the same defenses. So, for example, on average they are more prone to illness because they do not eat as well, work under hazardous conditions and do not have regular medical check –ups. Have little experience of dealing with formal financial institutions, with the exception of the National Bank of Agriculture and Rural Development (NABARD) Linkage Banking programme. Traditiona
