Professional Documents
Culture Documents
PESTLE Analysis
Insurance Sector
<Authors Name & Roll No.>
2011
Executive Summary
Environmental scanning is one component of the global environmental analysis. Environmental monitoring, environmental forecasting and environmental assessment complete the global environmental analysis. The global environment refers to the macro environment which comprises industries, markets, companies, clients and competitors. Environmental scanning can be defined as the study and interpretation of the political, economic, social and technological events and trends which influence a business, an industry or even a total market. The factors which need to be considered for environmental scanning are events, trends, issues and expectations of the different interest groups. Issues are often forerunners of trend breaks. A trend break could be a value shift in society, a technological innovation that might be permanent or a paradigm change. Issues are less deep-seated and can be 'a temporary short-lived reaction to a social phenomenon. A trend can be defined as an environmental phenomenon that has adopted a structural character. This report deals with the Macro-Environmental Analysis for the Insurance Sector. The study is conducted in two parts. The first part is for the Insurance Industry as a whole which deals with the effects of Political, Economic, Social, Technological and Legal factors on the Insurance Sector. Furthermore, the second part helps in understanding How these factors are affecting companies in the Insurance sector. The three organizations selected for this study are LIC India, SBI life and ICICI Prudential.
Table of Contents
Executive Summary........................................................................................................................................ i Table of Contents .......................................................................................................................................... ii List of Figures ............................................................................................................................................... iii 1 Introduction .......................................................................................................................................... 1 1.1 1.2 1.3 1.4 1.5 2 The concept................................................................................................................................... 1 The PESTLE model ......................................................................................................................... 2 The PESTLE process ....................................................................................................................... 3 Applications and when to use it.................................................................................................... 3 Advantages and disadvantages of using a PESTLE analysis .......................................................... 3
Part I Industry Analysis ....................................................................................................................... 5 2.1 2.2 2.3 2.4 Insurance in India .......................................................................................................................... 5 History ........................................................................................................................................... 6 Industry structure ......................................................................................................................... 6 PESTLE Analysis for Insurance Sector............................................................................................ 6
Part II Company Analysis ................................................................................................................... 12 3.1 3.2 3.3 LIC India ....................................................................................................................................... 12 State Bank of India Life Insurance ............................................................................................... 14 ICICI Prudential............................................................................................................................ 15
Bibliography ........................................................................................................................................ 16
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List of Figures
Figure 1: PESTLE Framework ......................................................................................................................... 1
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1 Introduction
PESTLE stands for - Political, Economic, Sociological, Technological, Legal, and Environmental. PESTLE analysis is in effect an audit of an organizations environmental influences with the purpose of using this information to guide strategic decision-making. The assumption is that if the organization is able to audit its current environment and assess potential changes, it will be better placed than it has competitors to respond to changes.
3. Encourages the development of external and strategic thinking. 4. Can enable an organization to anticipate future business threats and take action to avoid or minimize their impact. 5. Can enable an organization to spot business opportunities and exploit them fully. 1.5.2 1. 2. 3. 4. Disadvantages To be effective this process needs to be undertaken on a regular basis. The best reviews require different people being involved each having a different perspective. Access to quality external data sources, this can be time consuming and costly. The pace of change makes it increasingly difficult to anticipate developments that may affect an organization in the future. 5. The data used in the analysis may be based on assumptions that subsequently prove to be unfounded (good and bad).
Bharti AXA Life Insurance Future Generali Life Insurance IDBI Fortis Life Insurance Canara HSBC Oriental Bank of Commerce Life Insurance Religare Life Insurance Star Union Dai-ichi Life Insurance Cholamandalam MS General Insurance HDFC Ergo General Insurance Company ICICI Lombard General Insurance IFFCO Tokio General Insurance National Insurance Company Ltd New India Assurance Oriental Insurance Company Reliance General Insurance
2.2 History
Insurance in India has its history dating back until 1818, when Oriental Life Insurance Company was started by Anita Bhavsar in Kolkata to cater to the needs of European community. The proindependence era in India saw discrimination between the lives of foreigners (English) and Indians with higher premiums being charged for the latter. In 1870, Bombay Mutual Life Assurance Society became the first Indian insurer. The history of Insurance in India dates back to 1818, when Oriental Life Insurance Company was established by Europeans in Kolkata to cater to their requirements. Nevertheless, there was discrimination among the life of foreigners and Indians, as higher premiums were charged from the latter. In 1870, Indians took a sigh of relief when Bombay Mutual Life Assurance Society, the first Indian insurance company covered Indian lives at normal rates. In 1912, the Govt. of India passed two acts - the Life Insurance Companies Act, and the Provident Fund Act - to regulate the insurance business. National Insurance Company Ltd, founded in 1906, is the oldest existing insurance company in India. Earlier, the Insurance sector had only two state insurers - Life Insurers i.e. Life Insurance Corporation of India (LIC), and General Insurers i.e. General Insurance Corporation of India (GIC). In December 2000, these subsidiaries were de-linked from parent company and were declared independent insurance companies: Oriental Insurance Company Limited, New India Assurance Company Limited, National Insurance Company Limited and United India Insurance Company Limited.
Insurance business in rural / social sector: - All insurers are required to undertake such percentage of their insurance business, including insurance for crops, in the rural social sector as specified by the IRDA. Capital requirement: - The paid up equity of an insurance company applying for registration to carry on life insurance business should be Rs 100 Crores. Investment of funds outside India: - Insurers outside India as per Section 27-C cannot invest the funds of policyholders. Power to investigation or inspection: - The IRDA may, at any time, order in writing a person as investigating authority to investigate the affairs of any insurer and report to it. Government has power to change the tax policy against life insurance industry. Tax policy: - Another factor, which affects the insurance sector, is the tax policy. The tax reforms in India are such that it encourages the citizens to invest in the insurance sector. The tax policy of the government is particular relevant for life insurance which is a long-term contract and inculcates among the policyholders the habit of saving. Taxation of returns on investment influences, investment decisions and high rates of taxation will discourage the desire to save. Already in India there are complaints that the rates of return on life policies are not what they could be. The other factors, which affect the insurance sector, are the employment law, and government stability. These are the factors, which affect the insurance industry 2.4.2 Economic Factors Interest rate at bank and interest rate of P.F variation very much affect to life insurance industry, because people always attract by higher return. Therefore, they do not prefer lower return policy. Unemployment also affects insurance industry, because the unemployment people will not have earning, so saving also affect to life insurance sector Life insurance industry will directly affected by Earthquake, Monsoon, and Natural calamity. Increased Economic Activity: Although economic activity has slowed down since 1996, sooner or later there will be an upswing. The increase in the growth rate in various sectors accompanied by the growth in trade in the context of fulfilling of commitments to the WTO will signal a growth in the demand for insurance covers of new types. For example, aviation insurance cover will be on an increasing scale in view of the need for more frequent air travel for men and for transporting materials. This would necessitate substantial property, liability and personal insurance. Interest Rates: During the last years the government has rationalized interest rate creates better business opportunities for the life insurance sector because the substitute products are graded lower by the customers. On the other hand the value of the holdings of the insurance companies will increase. Low interested rates mean low investment return for reinsures causing negative impact on their overall net profitability as pricing is to a certain extent sensitive to interest rate fluctuations. As interest rates fall, bond value rise, and insurers feel richer. On the liability side, reserves are not explicitly discounted so lower interest rates do not increase reserves, lower inflation means lower expected future claims payments which lowers required reserves. This in turn increases surplus, again allowing insurers to feel 7
richer. Therefore, low interest rates and low inflation result in higher assets, lower liabilities, hence greater surplus and greater risk capacity resulting in less demand for, and greater surplus of reinsurance. Low interest rates and low inflation reduce the ability of reinsures to offset technical losses by using financial products and should, as a consequences, force market competition downloads. However, this will also serve to weaken the balance sheets of insurers and create an increase in the demand for balance sheet protections. Lastly, these conditions move risk from the liability side of the balance sheet to the asset side while actually generating new needs for cover. Inflation rate: Inflation can also be one of the causes to change the scenario of the insurance sector. High inflation for instance, would tend to reduce the insurance business, particularly life, because the real value of the money paid back to the policyholder on maturity of the policy would go down and would, therefore, lose its attraction for the investor. At the most, the insuring public may prefer pure risk plans (terms insurance), which have a low premium outlay. 2.4.3 Socio-Cultural Factors The basic social factors that affect the life insurance sector are as under: Population: Growth in the population is a major factor pushing up the demand. It is also going to exert a special influence on the life insurance market in other ways. Apart from exerting pressure on demand for goods and services, and through that, ill effects of uncontrolled growth of population also could spur the growth of demand. For example, overcrowding in public places of entertainment, public support, or too many vehicles on the road can result in hazards like stampedes and pollution, which require covers and still are not sold on a large scale today. Thus the positive as well as the negative aspects of population growth are going to spur demand. Life style: The peculiar lifestyle of a country or an age also influences the insurance business. Change therein produces different demands for life insurance. For e.g. All over the world, family size is shrinking and the fact that in decades to come, both presents are more frequently likely to work outside the home will mean that there could be a greater possibility of property loss. Similarly, a larger number of vehicles on the roads for people commuting to their jobs or business would mean larger incidence of accidents. This will increase the demand for life insurance products. Of course, there is also the other possibility that wherever it is possible, some people will try to spend a part of their time working at home either because they would like to be with their families or because they find it more convenient. Thus these are how changing life style of the citizens is affecting the life insurance industry Level of education: India is one of the developing countries: the level of education is very low here. The literacy rate is very poor. More than 50% of the population is still uneducated or more or less not educated. Thus the people are not able to understand the concept of the life insurance. Among the educated people the quality of the education is still a big question mark. Thus the awareness is not created and it has become a big challenge for the industry. Thus one of the factors, which affect the life insurance sector, is low level of education. Level of earning: Another factor, which affects the life insurance sector, is the level of earning. In India the rule of 80-20 is working. The 80% of the total population is having the 20% of the wealth and the 8
20% of the total population is having 80% of total wealth. Thus the richer are richer and poorer are poorer. Due to this the life insurance sector is affected very much. Societal benefits: In view of the fact that large sections of India have inadequate life insurance cover, an important social responsibility of the government relates to spreading it far and wide. In addition, the government attempts to extent life insurance with certain social obligations in view in both urban and the rural areas through such means special schemes for the weaker sections, and by tilting of the life insurance companies investments in favors of social developments. 2.4.4 Technological Factors Internet as an intermediary in the current Indian market customer is not aware about the intrinsic value of insurance. He thinks of insurance only in the mount of March as a tax saving measure. The security provide by an insurance cover is rarely thought about. In such a scenario Internet can be an effective medium for educating the consumers about insurance. It serves as a single window for disseminating product, process and procedural information to the consumers. Product development and target marketing through the Internet: with increase in the number of insurance companies there will be a need for market segmentation and subsequently product designed for each of them. In such a scenario Internet can be an effective channel for pushing product specific information to a particular market segment. Consumer feedback about a particular product as well as suggestions for different types or covers can also be generated through the Internet. Retail marketing is a commonly expected concept and the providers of the retail products and service will try out for larger market and market share. There would be cut through competition and the real benefit would be to the customers in terms of better products, distribution, pricing, post transaction service and technology. Technology will perhaps be the single largest driver of the retail thrust. The entire strategy will evolve around the absolute ability of the organization. The customer will demand for greater convenience of excess to the product/ service and all at low cost of delivery. Therefore the use of technology and specifically the Internet with realigned strategies would be one of the key factors to success. Constraints of locations, timing and accessibility would not be a hurdle for either customers or businesses. Maintaining the database: The most important factor that is affecting the insurance industry is the marinating the database of the customers. The insurance industry has a huge list of the customers. In order to maintain it in manual format it is really the work of stupidity. With the change in time the computers has taken the work of this things. Thus with the development of the technology it has becoming possible to maintain such huge database very easily. A person can switch over to the computer and get the details of the customer very easily. Thus maintaining the database has really become easy due to the development in technology. E-business insurance in India: The Internet has played a vital role in transforming the business of the 21st century. Computers are now being used extensively for creating a storing data, information with the help of complex and sophisticated technological tools in every kind of business. This change having been widely accepted, the advantages are numerous such as fast processing improved. Efficiency, cost 9
reduction are among several other benefits. However, with every positive change, there is an evil attached and technology is no exception. In technical is an evil attached and technology is no exception. In technical terms, increased sophistications of technology brings with it, an increased factor of risk involved. The risk can be of various attributes, for example, the risk of data being lost due to a virus attack, the theft of important and confidential information and so on, which ultimately results in losses for the business entity. With this change in the business process, insurers have to devise new methods for assessing, underwriting and servicing claims for the so-called e-business insurance. Insurers face challenges to ascertain risks, in order to quantify them because such risks dont have any past data, which makes it all the more difficult for actuaries. Moreover, what financial impact a particular risk can have is very difficult to be determined. For example, if some hackers obtain credit card information of few customers, its a loss for banks, their credibility, customers and also their brand. Will an insurance policy cover all of this is million dollar question hence; the difficulty is to design a cover first of all, which really answers the needs of customers. But even after designing and pricing such products with difficulty, the challenge to underwrite and handle claims for such policies remains existent. Impact on distribution channels: Distribution channels are the most important part of the insurance industry. The scenario is continuously changing in this industry. In future the customers are expected to be more technology oriented, better informed, more knowledgeable and more demanding. The insurers will have to offer all types of channel to customer and it is the customer who will have the right to choose the channel suiting him/ her. Dual income families with young children, singles with long working days and flexi-timers all demand high level of sophistication and ease when it comes to service. Hence the companies have to be very careful and cautious in catering to the needs of these customers who provides a good amount of business to the insurers. Thanks to the technological advancement and increased de regulation and sophistication, the carriers and producers can now reach the customers in different ways as has been proved in the US market and other developed nations the web is extensively used for the access of information but when it comes to the purchase of policy, the offline mode is preferred. The private player in India seems to have identified this and have put substantial information on their websites regarding policies, quotes and contact information among other routine stuff. 2.4.5 Legal Factors Legal factors: these are related to the legal environment in which firms operate. In recent years in India there have been many significant legal changes that have affected firms' behavior. The introduction of age discrimination and disability discrimination legislation, an increase in the minimum wage and greater requirements for firms to recycle are examples of relatively recent laws that affect an organizations actions. Legal changes can affect a firm's costs (e.g. if new systems and procedures have to be developed) and demand (e.g. if the law affects the likelihood of customers buying the good or using the service).
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Different categories of law include: Consumer laws: These are designed to protect customers against unfair practices such as misleading descriptions of the product Competition laws: These are aimed at protecting small firms against bullying by larger firms and ensuring customers are not exploited by firms with monopoly power Employment laws: These cover areas such as redundancy, dismissal, working hours and minimum wages. They aim to protect employees against the abuse of power by managers Health and safety legislation: These laws are aimed at ensuring the workplace is as safe as is reasonably practical. They cover issues such as training, reporting accidents and the appropriate provision of safety equipment
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The Life Insurance Corporation of India (LIC) is the largest state-owned life insurance company in India, and also the country's largest investor. It is fully owned by the Government of India. It also funds close to 24.6% of the Indian Government's expenses. It has assets estimated of 9.31 trillion (US$ 202.03 billion). It was founded in 1956. Headquartered in Mumbai, financial and commercial capital of India, the Life Insurance Corporation of India currently has 8 zonal Offices and 101 divisional offices located in different parts of India, at least 2048 branches located in different cities and towns of India along with satellite Offices attached to about some 50 Branches, and has a network of around 1.2 million agents for soliciting life insurance business from the public. 3.1.1 Company Details Type: Government owned corporation Industry: Founded: Headquarters: Key people: Products: Total assets: Owner(s): Employees: Subsidiaries: Insurance 1 September 1956 Mumbai, India T. S. Vijayan (Chairman), D. K. Mehrotra, Thomas Mathew and A. Dasgupta (MD) Life insurance & Pensions, Mutual funds 9.31 trillion (US$ 202.03 billion) Government of India 112,184 (2008) LIC Housing Finance Limited, LIC (Nepal) Ltd., LIC (Lanka)Ltd. LIC (International) BSC(C) Website LICindia.com
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3.1.2 3.1.2.1 1. 2. 3. 4. 5.
PESTLE Analysis Political Factors Increased service tax on premium 5% discount on corporate premium Hike in FDI limit Pricing control in general insurance Favorable regulation for rural insurance
3.1.2.2 Economic Factors 1. Increase in Gross Domestic Savings 3.1.2.3 1. 2. 3. 4. 5. 3.1.2.4 1. 2. 3. Social Factors Low insurance coverage Rise in elderly population Changing Indian perception Growth of Islamic insurance Increase in lifestyle diseases Technological Factors Automation of processes Increase in CRM solutions Internet driven information era
3.1.2.5 Legal factors 1. Government subsidies to SBI for lower income people
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SBI Life Insurance is a joint venture life insurance company between State Bank of India (SBI), the largest state-owned banking and financial services company in India, and BNP Paribas Assurance. SBI owns 74% of the total capital and BNP Paribas Assurance the remaining 26%. SBI Life Insurance has an authorized capital of 2,000 crores (US$ 434 million) and a paid up capital of 1,000 crores (US$ 217 million). 3.2.1 Company Details Type: Joint Venture Industry Insurance Founded: Headquarters: Key people: Products: Owner(s): Employees: Website: 3.2.2 March 2001 Mumbai, India (Various other locations in India) Mr. Mahadev Nagendra Rao, MD & CEO Life insurance Pensions SBI, BNP Paribas 10,000 on-roll employees and 67,500 agents SBI Life
PESTLE Analysis
3.2.2.1 Political factors 1. Government support. 3.2.2.2 1. 2. 3. Social Cultural factors People with low literacy level prefer SBI. As it is biggest nationalized Bank. Established its branches in every corner of the country. Less communication barrier.
3.2.2.3 Legal factors 1. Reserve Bank of India / IRDA do consider while SBIs performance or opinion before passing any new regulations.
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ICICI Prudential is a joint venture between ICICI Bank and Prudential plc engaged in the business of life insurance in India based in Mumbai. ICICI Prudential is the largest private insurance company and second largest insurance in India after LIC. ICICI Prudential Life Insurance Company is a joint venture between ICICI Bank, a premier financial powerhouse, and Prudential plc, a leading international financial services group headquartered in the United Kingdom. ICICI Prudential was amongst the first private sector insurance companies to begin operations in December 2000 after receiving approval from Insurance Regulatory Development Authority (IRDA).ICICI Prudential Life's capital stands at 37.72 billion (as on March, 2008) with ICICI Bank and Prudential plc holding 74% and 26% stake respectively. For the year ended March 31, 2008, the company garnered Retail New Business Weighted premium of 6,684 crores, registering a growth of 68% over the last year and has underwritten nearly 3 million retail policies during the period. The company has assets held over . 30,000 crores as on April 30; 2008. Since the liberalization of Indian Insurance sector, ICICI Prudential Life Insurance has been one of the earliest private players. Since the time, ICICI Pru Life has been the leader in terms of market share as indicated by the IRDA (Insurance Regulatory and Development Authority, the regulator for Indian Insurance Industry) at its website. 3.3.1 PESTLE Analysis
3.3.1.1 Political factors 1. Government provides more support to LIC INDIA and SBI life insurance. As they are government owned. 3.3.1.2 Economic factors 1. Lower income people do not get flexibility through ICICI Prudential as they get in LIC or SBI. 3.3.1.3 1. 2. 3. 4. 5. Social cultural factors People have more faith in LIC India. Not easily accessible by lower class of society. Urban population prefers ICICI bank. Attract those customers who have good Education level. Attract those customers who have good standard of living.
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4 Bibliography
http://en.wikipedia.org/wiki/PEST_analysis accessed on 10/10/2011 http://en.wikipedia.org/wiki/Environmental_scanning accessed on 12/10/2011 http://www.researchandmarkets.com/reports/1814353/the_private_health_insurance_market_in_indi a accessed on 12/10/2011 http://www.licindia.in/history.htm accessed on 15/10/2011 http://www.sbilife.co.in/sbilife/content/8_3425 accessed on 15/10/2011 http://www.iciciprulife.com/public/default.htm accessed on 16/10/2011
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