INSURANCE

LEARNING POINTS
 Introduction
 The offer
 Industry analysis
 Players
 Key functions
 Market mixes
 Future challenges

“Peoples don’t want to communicate with an organisation or a computer.

They want to talk to real, live responsive, responsible person who will listen
And help them get satisfaction.”
_The Michelson,
State farm insurance
INTRODUCTION
The Indian insurance industry, ever since it came into existence, has been dominated by the
public sector, Life Insurance Corporation of Indian (LIC) and General Insurance Corporation
of Indian (GIC) being the predominant players in life and non-life insurance. In order to tap
the vast insurance potential and to mobilize long-term savings, reforms for revitalizing and
restructuring of the public sector companies and opening up the sector to private players were
the need of hour. In 2000, the government decided to liberalize the sector and, giving in to
global pressures, allowed foreign players to enter the Indian insurance market. It allowed
foreign equity participation of up to 49% in the insurance business.

After deregulation and with the entry of foreign players, a statutory body was needed to
regulate the market and promote a healthy market structure. For this, the insurance regulatory
authority (IRA) was established. IRA’s role comprises following three functions:

(a) To protect the consumer’s interest.

(b) To ensure financial soundness and solvency of insurance industry and
(c) To ensure healthy growth of the insurance market.

THE INSURANCE OFFER

Insurance is a hedge against future risks. Thus a life insurance is a contract between an
insurer and a customer (the insured/assured) that if the customer expires within the
contractual period after buying a policy. Then the beneficiary gets the sum assured.

Similar is it for properties, health etc. Insurance as a concept was born when a raging fire
destroyed a major portion of London in the year 1666. Lloyd’s of London the famous insurer,
was conceived in a coffee house. The concept of insurance –life, marine, fire etc. – propelled
entrepreneurial desire as well as risky trading.

The main thesis behind insurance is the same as that of banking: to be a facilitator in
collecting small amounts of money from a large population to benefit a few during the latter’s
times of dire need. Yet a larger motive, especially for developing economies like India is to
channel these massive collections of funds for macro-investment for the command economy.
They are not only venerable, old institutions (some of them are as old as 150 years) but also
rich in reserves. Pension funds and mutual funds come only a distant second.
TYPES OF INSURANCE
There are two types of insurance:

 Life: insuring the lives of people

 Non-life or general insurance: Which include insurance of properties against theft,
breakage, fire, marine, earthquakes, accident and health.

There are some basic differences between the two types of insurance. These differences
have enormous implications in the service offer design, segmentation, targeting,
positioning, marketing, pricing, communication etc. These differences are:

 Premiums paid in life insurance satisfy versatile needs: savings, investments, risks.
Non- life insurance premiums mostly have risks connotation.

 policy is pure risk-based, also called term insurance. In the latter’s case the assured
does not get any return on maturity and the premium is considerably lower. In
contrast, there are no returns in non-life insurance. The insured is covered only for
the risk.

 There are fixed terms of contract for life insurance, wherein both the parties – the
insurer and insured- agree to the terms. E.g. Mr. Roy has taken a 20years policy for
himself from ICICI Prudential. His policy fixed with the same no. and the same
premium amount that he has to pay by the same fixed and mutually-agreed-upon
dates. In general insurance, say insurance for a car, the policy contract is valid for
one calendar year. If the customer is interested then he redraws/renews the policy.
This is a separate contractual document. The preceding documents and
contract/policy for the car are all in a bundle/file called docket.

Let us look at the classification of insurance:

Initially, insurance was seen as a complex product with a high advice and service
component. Buyers preferred a face-to-face interaction and placed a high premium on
brand names and reliability.

As products become simpler and awareness increased, they become off-the-shelf comdity
products. Sellers moved to remote channels such as the telephone or direct mail. Insurance
began to be sold by the various intermediaries, not necessarily only by insurance
companies. This trend will be seen happening indicating a further rise in the product-service
continuum and the key element would be distribution.
INDUSTRY ANALYSIS

The insurance industry is divided into

INSURANCE INDUSTRY

LIFE NON-LIFE

STRUCTURE

Structure of the insurance industry

Life insurance

Existing structure

ACTUARIESS
MINISTRY OF
LIC
FINANCE
AGENTS

CUSTOMER
 Emerging structure

MINISTRY OF FINANACE LIC AGENTS

BROKERS
CONSUMERS

IRDA NEW ENTRANTS AGENTS

General insurance
Actuaries
Existing structure

Ministry of finance GIC Subsidiaries

Agents
Consumer

Surveyor
Role of brokers vis-a-vis agents

In both, the pre-nationalization and the post-nationalization period, only agents were
operating in the Indian insurance market. Now, the government has introduced brokers
subject to an amendment to the Insurance act, 1938. A broker is not tied to any particular
insurance company. He can sell the products of all companies. And hence, his option to the
customer would be impartial. Also, a broker is supposed to have more expertise and better
infrastructure to service the policy holders. Thus, the introduction of brokers would benefit
policyholders.

SIZE: The insurance industry in India is Rs.400 billion business, and together with banking
services, adds about 7% to India’s GDP. The gross premium collection is about 2% of GDP
and has been growing by 15%-20% per annum. India also has the highest number of life
insurance policies in force in the world, and total invisible funds with the LIC are almost 8%
of GDP.

LIC has Rs. 6,128 billion of business in force and a life fund of Rs. 1,540 billion, with over
100 million policies in force during the year ended March 31, 2000. LIC has over 2,000
branches in India and approximately 800,000 agents in the country.

Non-life insurance in India was so far provided by GIC and its four subsidiaries viz. New
India Assurance, Oriental Insurance, National Insurance and United India Assurance.

PLAYERS: The public sector companies include LIC and GIC. The following are private
players operating in India.

Indian company Foreign partner

The Tata Group AIG
ICICI Prudential
HDFC Standard life
SPIC MetLife
ILFS Cigna
Max India New York life
20th century Canada life
Vysya bank ING
Cholamandalam Axa
SBI Alliance capital/Cardiff
IDBI Principal
Bajaj Allianz
KEY FUNCTIONS: every insurance company would have the following key functional are
which can be divided into internal and external:

1) Internal to the organisation:

Underwriting
Claims management
Investment
2) External to the organisation
Customer management
Distribution channel

COMPETITION: The Indian insurance industry is characterized by tough

competition from both public-sector companies which hold almost 98% of the market
share and also from other private insurance company

Competition may be said to spam four stages in the life of a product /service.The
company at the STAGE Ifaces barriers to ntry as many approvals and criteria need to
be met before it can be established.

In STAGE II,it faces operational bottlenecks due to lack of expertise and required
skills.the company may face competition from the public sector due to lack of an
efficient distribution network.Here the scarce resources in the expertise in terms of
marketing and distribution

STAGE III is ideally where the company faces stiff competition from from other
insurance companies ,the products almost being same .

In STAGE IV,the competition is in terms of creating brand awareness and loyalty.

These four stages may be represented as:

COMPETITION

STAGE-I STAGE-II STAGE-III STAGE-IV

Closed Barriers to entry Close substitutes Problems of

Market,entry is are high. available. distinguishing and
controlled by state. creating brand
Expertise to Service highly
loyalty
operate essential. intangible.

licence obtainable Problems in

marketing.
 SCARCE RESORCE

Permission Expertise capital Brand

from the strength
state

MARKET MIXES

1. Price
The three main factors used to determine the premium rates under a life insurance
plan are mortality, expenses and interest. Significant changes in any of these factors
normally entail revision of premium rates.

2. Promotion and Distribution

While companies have been successful in product innovation, most of them are still
grappling with the right mix of distribution channel for:
a. Capturing maximum market share to build brand equity.
b. Building strong and effective customer relationship.
c. Cost-effective customer service.

This calls for selection of the right type of distribution channel mix along with
prudent and efficient FOS (fleet on street) management.

Distribution network

While the traditional channel of tied-up advisor or agents would be the chief
distribution channel, insurers should innovate and find new method of delivering the
product to customers. Corporate agency, brokerage, bancassurance, e-insurance, co
operative societies and panchayats are some of the channels which can be tapped by
the insurers to reach the appropriate market segments.

FOS management: The major issues to be addressed in insurance FOS management

are high attrition, lack of motivation and product knowledge .these issues can
effectively be tackled by continuous training, performance-linked reward systems and
career counselling.
 Customer education and service
Insurance, particularly life insurance, is never bought but sold. To convince a large
population, which is comparatively not well informed about the intangible benefits of
life insurance, is indeed an onerous task. This apart, the task would be to position
insurance as a risk-planning tool rather than a tax-saving and investment tool. In the
present competitive scenario, a key differentiator would be professional customer
service in terms of quality of advice on product choice along with policy servicing.
Servicing should focus on enhancing the customer experience and maximizing
customer convenience. This calls for an effective CRM system that would eventually
create a sustainable competitive advantage and build a long-lasting relationship.

The following diagram depicts the distribution network from the initial stage 1 to
stage 3 where a customised product is provided to the customer.

Stage1 Stage 2 Stage 3

Insurer
A New product configured based
Sell product
oncustomer needs
Insurer Customer
a B
insurer Customer Configures insurer A
B Customer
aInsurer
AA
package A.M.C
C B
New Customer
0
product

Insurer
D Bank
C

New channels of distribution adopted by foreign players

Different players in the insurance market are adopting various channels of

distribution.

1. Aggregators and portals:- e.g. Inswab and Quotesmith

2. Financial portal:- e.g. Charles Schwab, Yahoo Finance
3. Direct insurers:- Directline, Geico Direct
4. Traditional insurers using electronic chanels:- e.g. aigdirect.com, Zurich direct
5. “One stop shop” financial services:- Citigroup, GE Financial network
FUTURE CHALLANGES

With privatization of the insurance industry, government has taken a bold step
forward. The benefits can be manifold.
 Opening of the sector to private firms will foster competition, innovation, and
variety in product. It would also generate greater awareness of the need to buy
insurance as a service and not merely for tax exemption, which is what is
currently done.
 Potential private entrants can expect to score in the areas of customer service,
speed and flexibility.
 Will lead to exploration of new distribution and marketing channels .
 By tapping such underserved niches, new entrants can expand the insurance
market substantially.
 Health insurance is another segment with great potential that can be tapped
because the existing Indian products are insufficient.
 Insurance premium can decrease due to severe competition, thus benefiting
the customer.
 Access to insurance too will probably become more widespread. The role of
intermediaries would decrease and sale of insurance through direct channels
and banks would increase. Simple products like term insurance might be sold
through the telephone or direct mail to high-net-worth clients.