Paper 10

AJRMVolume1,Issue3(June,2012)ISSN:22776621
A Peer Reviewed International Journal of Asian Research Consortium
AJRM:
ASIAN JOURNAL OF RESEARCH IN MARKETING CRITICAL ISSUES OF SERVICE MARKETING IN INDIA: A CASE OF LIFE INSURANCE INDUSTRY
SANJAY KANTI DAS* *Assistant Professor & Head, Department of Commerce, Lumding College, Lumding, Nagaon, Assam - 782447, India. ABSTRACT Insurance has been an integral part of financial services system and recognized as a cornerstone of a countrys financial health & symbol of progress. Insurance provides for the financial security of citizens & offers valuable investment advices & serves as an effective step towards both individual and national financial stability. The waves of globalization have deeply influenced the insurance sector worldwide. Financial globalization has strongly supported by globalization of insurance. Globalization of insurance market, as a part of the overall process of liberalization in emerging and other countries enabled the foreign insurance companies to enter in those countries & benefited both. Triggered by the sound fundamentals in global economy & internationalization of world markets, several countries turned towards free market regimes in banking and insurance, putting an end to several decade-old state-owned controlled markets. There was a remarkable progress in the Indian insurance industry soon after the acceptance and adaptation of LPG in the year 1991. After 1991, the Indian life insurance industry has geared up in all respects, as well as it being forced to face a lot of healthy competition from many national as well as international private insurance players. In this paper an effort is made to study the current issues and challenges faced by the life insurance business houses in India. It is observed that high operating cost, delayed break even, convergence of accounting standard etc are the major issues of Life insurance companies in India. KEYWORDS: Financial Globalization, Life Insurer, Critical Issues, Service Marketing, Life Insurance Corporation of India. ___________________________________________________________________________
JournalofAsianResearchConsortium49 http://www.aijsh.org

INTRODUCTION Insurance industry seems to surpass the tough times in the world with the help of support provided by government. The insurance sector in the world seems to be emerging through difficult times, with significant support from the government .The policymakers and regulators of different countries have started strengthening the regulations on the basis of the learning from the financial crisis. Particularly, the European market is facing new threats although its fight with the old ones still continues. At the same time, emerging economies has taken new initiatives to safeguard their financial services learning from the economic crisis in the developed economies. The Insurance sector in India has completed a full circle from being an open competitive market to nationalization and back to a liberalized market again. From 2000, many private players entered into insurance industry with effect of privatization of insurance sector as per R.M. Malhotra Commissions recommendations and formation of IRDA. The Government having tried various models for the insurance industry such as privatization with negligible regulations (Pre-1956), nationalization (1956- 2000) and having observed sub-optimal performance of the sector, resorted to adapting a hybrid model (Rastogi & Sarkar, 2007) of both these, resulting in privatization of the sector with an efficient regulatory mechanism (Post 2000).This was initiated with the aim of making the industry competitive so that there are more players offering a greater variety of products over a larger sections of the population. During the initial phase of privatization of Insurance sector in India, the penetration was very low. Indian as well as foreign companies reaped the benefits of a low base and have reported high rate of growths in the last decade. But times have changed now and the way forward is going to be tough. They have to start focusing on the different strategies like customer retention strategy, operational discipline, regulatory developments and opportunities for innovation to drive sustainable growth and profitability. The Indian Government and policy makers have then found themselves at cross roads more than once. The large scales fraudulent practices, mismanagement of companies in the first half of the early twentieth century resulted in a major restructuring of the industry and caused the sector to transfer from an unregulated to a highly regulated one. The industry functioned under a monopoly for several decades thereafter. However, other problems surfaced such as limited reach and penetration of enterprise and deteriorating servicing standards. In 1991, with the Indian Govt. initiating liberalization of various other strategic industries, a possible change in strategy was supported by various committees and experts. A milestone was achieved when the nation decided to privatize the industry along with requisite regulations.

Source: Adapted from Rastogi, Shilpa & Sarkar, Runa , 2007. JournalofAsianResearchConsortium51 http://www.aijsh.org With this hybrid model, the industry was thus privatize along with market regulation of players who have the necessary financial strength to withstand the demands of growing and nascent market, the necessity to have fit and proper persons in charge of business, the implementation of a solvency regime that ensures continuous financial stability, and above all, the presence of an adequate number of insurers to provide competition and choice to customers has led to the establishment of a regime committed to an overall development of the market in normal times. GLOBALIZATION OF INSURANCE MARKET Insurance is an integral part of national economy and a strong pillar of financial market. Therefore, waves of globalization have also deeply influenced the insurance market worldwide. Financial Market Globalization has also been strongly supported by Globalization of Insurance. With the increase in Trade, Direct Investment and Portfolio Investment, there has been an ever growing demand for Insurance services particularly in the emerging markets. Globalization of Insurance market, as a part of the overall process of liberalization in emerging and other countries enabled the foreign insurance companies to enter in those countries and benefited both. The driving force of insurance market globalization has been

identified by Swiss Re (Sigma No.4/2000) as the push factors and Pull Factors. The Push factors are the motives behind the movement of foreign insurance companies while the pull factors are the motives behind allowing the foreign companies to operate in local market, I) PUSH FACTORS : Insurance Companies move out to emerging markets due to Increasing Global Trade , Growing Direct Investment , Potential Future Growth in Emerging Markets , Saturation in industrialized countries and Strong growth in emerging countries and expected Efficiency Gains through Diversification , Economics of scale etc II) PULL FACTORS: The important pull factors in emerging markets Emerging Markets have Strong Economic growth and Trade, and there are substantial requirements of capital in Emerging Markets to cover major risks. There are several benefits to the countries allowing foreign insurance companies to operate in their countries which can be broadly classified into Economy related, and Insurance marked related. The various factors which have largely led to the development of the insurance sector in its present form can be classified into two groups: Market driven factors and the regulatory driven factors. MARKET DRIVEN FACTORS: To meet the varying needs of various individuals, the insurance players have a vast range of products in their bouquet. Almost all companies offer the flexibility to customer as per their needs. To reach out to the consumers, the companies in the industry today have widened their distribution channels by approaching prospective customers through agents, brokers and banc assurance. Information Technology also acts as an alternative channel mostly through internet, for marketing of insurance products. Exponential growth of household savings, purchasing power, the middle class and the countrys working population (25-60 yrs) is expected to increase from 675.8 million in 2006 to 795.5 million in 2026. Financial services sector, specifically insurance sector can tap this increased disposable income group people. REGULATION DRIVEN FACTORS: The industry is now opened to private players but have to take license from IRDA on annual renewal system. IRDA holds the right to cancel the license of the insurance company if it feels that the insurer fails to conduct its business in a manner prejudicial to the interest of the policy holders. The Insurance players today are expected to invest the funds judiciously with the combined objectives of liquidity, maximization of yield and safety by conferring to the Authoritys guidelines on investments. The IRDA has taken a few more initiative to further regulate and develop the sector viz. detariffication except for auto third party liability has been introduced and now the insurers can underwrite the type of risks which they want to underwrite at their own desirable rates , & reduction in the number of years of existence for issuance of IPOs. Furthermore, the insurance regulator IRDA has introduced various development initiatives for health insurance segment and ULIP management. There are several other important issues on which IRDA is working on. Firstly, the convergence of the Indian accounting standards with the IFRS; the settlement of norms (Issuance of IPOs and mergers & acquisitions), the establishment of a

more robust system to collect and disseminate appropriate insurance related data & several other initiatives. OBJECTIVES OF THE STUDY 1. To study the current status of Life Insurance market in India 2. To know the market share of LIC of India in Life insurance business. 3. To study the major issues and challenges that is facing the life insurer in India in the globalized environment. 4. To assess the future marketing strategies of insurance industries. 5. To suggest measures based on the findings of the study. RESEARCH METHODOLOGY The research methodology of this study is related to evolutionary research method. Basically, secondary data is used for the study. The secondary data consisted of published annual reports for the concerned years of Life Insurance Corporation of India, website of LIC, website of IRDA, Journal, Magazines of LIC of India, reference books, etc. Figures related to insurance companies are taken from the all-annual reports of the Insurance Regulatory and Development Authority (IRDA). These were compiled, tabulated and analyzed. REVIEW OF LITERATURE Among early studies, Arora (2002) highlighted that LIC was likely to face tough competition from private insurers having large established network and their trained intermediaries throughout India. Verma (2003) analyzed the various types of products offered by public sector giant and the new global players in the private sector. Kumar and Taneja (2004) highlighted the opportunities and challenges before the insurance industry in India due to liberalization, globalization and privatization. Bhattacharya (2005) advocated that bancassurance provided the best opportunities to tap the large potential in rural and semi urban areas as banks have a strong network of more than 40000 branches in these areas. He suggested that the insurers should focus on Single Premium policies, Unit Linked Insurance, Pension Market and Health Insurance. Kumar (2005) highlighted that private insurance players introduced a wider range of insurance products and set up brand promotion as part of their new strategy. These new covers had flexibility and added benefits to suit the needs of customers who were unsatisfied with the traditional and rigid plans. Kulshrestha and Kulshrestha (2006) highlighted that demand for life insurance in rural India was expanding at the annual rate of 18 per cent as compared to 3.9 per cent in urban areas which provided good opportunity for life insurers to perform. Peter Darker (1999) admitted that by providing financial protection against the major eighteenth and nineteenth century risk of dying too soon, life insurance became the biggest financial industry of that century. Providing financial protection against the new risk of not dying soon enough may well become that next centurys major and most profitable financial industry. Jain (2004) revealed that the waves of liberalization have done wonders to raise the insurance occupation to the status of a career with a bright future in India. He has also

articulated that the average mindset, particularly of younger generation in India is very amenable to these changes in insurance, which is as an avenue where exhilarating opportunities are opened up in changed environment. Sukla (2006) reviewed, the euphoria is well earned and the economic measures of liberalization initiated in insurance sector are well looked at. Six years into competitive market, the Indian insurance industry exhibited a healthy growth trend of new business and market share. Rao (2007) reported, Insurance is a vital economic activity and there is an excellent scope for its growth in the emerging markets. The opening up of the insurance sector has raised high hopes among people both in India and abroad. The recent de-traiffication in the non-life domain has provided a great deal of operational freedom to the players. Sabera (2007) indicated, Government of India liberalized the insurance sector in March 2000, which lifted the entry restrictions for private insurance players, allowing foreign players to enter into the market and start their operations in India. The entry of private players helps in spreading and keeping the operation in the Indian insurance sector which in turn results in restructuring and revitalizing of public sector companies. Krishnamurthy (2007a, 2007b) pointed out that, the country is witnessing growing insurance awareness with such new generation products making entry, even in Tier 2 and Tier 3 cities. Private insurers have already made an impressive beginning. Liberalization has led to a new distribution channel, Banc assurance, a concept that is already firmly rooted in European countries. Sheela (2007) studied that the Indian market both the urban and the rural offers tremendous growth opportunities for insurance companies, the need of the hour is to understand the changing needs of customers and their occupational structure. Chakraborty (2007) examined that the Indian insurance industry underwent a drastic transformation with the entry of private players who captured a significant market share (26.6%) during 2005-06. Rajendran and Natarajan (2010) were found that the business in India and the business outside India as well as the total businesses of LIC are always in an increasing trend. A lot of studies were made on the performance of insurance sector in the country but there are dearth of literature on the critical issues and challenges of life insurance companies in the country. Hence, this study differs from the earlier as the major thrust of the paper is upon the performance of life insurance sector in North Eastern Region of India. STATUS AND GROWTH OF INSURANCE SECTOR After privatization, insurance industry has seen significant growth. Due to low penetration and huge potential, many foreign and domestic players have entered the sector. Moreover, several reforms and policy measures have provided a favorable environment for insurance companies to flourish in the country. The insurance sector in India is primarily divided into life and non-life, apart from a very small segment comprising re-insurance. Both the life and non-life insurance segments, which were nationalized in the 1950s and 1960s, respectively, witnessed an across-the-board liberalization process in 2000. After the reforms, the number of players has increased from one in life insurance and four in non-life insurance in 2000 to 23 players in life insurance sector & 24 in non-life segment till Sept. 2010 (including one re-insurer in the non-life segment) (Table- 1).

TABLE 1: REGISTERED INSURERS IN INDIA (AS ON 30TH SEPTEMBER, 2010) Type of business Life Insurance General Insurance Reinsurance Total Public Sector 1 6* 1 8 Private Sector 22 18** 0 40 Total 23 24 1 48
Note: * Includes specialised insurance companies - ECGC and AIC ** Includes three Standalone Health Insurance Companies Star Health & Allied Insurance Co., Apollo Munich Health Insurance Co.and Max Bupa Health Insurance Co.; Includes L&T General Insurance Company Ltd., which was granted registration in 2010-11.
The table 2 below depicts the number of offices of private and public sector insurances companies. It is observed that the growth rate in the expansion of private sector branches are increasing in alarming way while the branches/ offices of LICI are increasing in a tardy way. The high rate of growth in the number of offices reflects the growing interest of private players in the insurance market in India. TABLE 2: NO OF LIFE INSURANCE OFFICES* IN INDIA(AS ON 31ST MARCH) Insurer Private Total LICI Industry Total JournalofAsianResearchConsortium55 http://www.aijsh.org 2001 13 2186 2199 2002 116 2190 2306 2003 254 2191 2445 2004 416 2196 2612 2005 804 2197 3001 2006 1645 2220 3865 2007 3072 2301 5372 2008 6391 2522 8913 2009 8785 3030 2010 8768 3250
11815 12018
*Offices (Section 64VC of the Insurance Act, 1938) opened after seeking approval of the Authority; Source: Annual Reports IRDA
The reasons for the strong foundation for insurance services in India are: growing middle class segment, rising incomes, increasing awareness of insurance, as well as investments and infrastructure spending. The total premium earned by the insurance industry has grown at a CAGR of 24.6% between FY 03 and FY 09 to touch INR 2, 523.9 billion in FY 09. GROWTH IN TOTAL INSURANCE PREMIUMS With several reforms and policy regulations, the Indian Insurance Sector has witnessed tremendous growth in the recent past. According to a report by the Associated Chambers of Commerce and Industry of India (ASSOCHAM), a growth of over 200% is likely to be seen in Indian insurance business by 200910, in which private insurance business would grow at 140% in view of aggressive marketing techniques (Pathak & Tripathi, 2010).

Growth of life insurance in terms of CAGR is 25.8% between FY 03 and FY 09. Premium of life insurance as a percentage of Indias GDP increased from 2.7% to 6.7% and life insurance premium per capita grew from INR 528.40 to INR 1, 921.90 during the period. The number of policies issued increased at a CAGR of 12.3% during this period. The Life Insurance Council has projected 18% growth in total premium income for the life insurance industry in the financial year 2009-10 and this projection was duly achieved (Economic Times, April 10, 2010). It is observed from Table 3 that LICI faces some trouble during the years of 2007-08 & 200809 as they could not able to perform good business in terms of new business. On the other hand, the private players in the life insurance market though faces keen competition but able to maintain average increasing trend in respect to new policy issue. As a whole, the life insurance industry could not collect and maintain the aggressive business during the FY 08 and FY 09 which may responsible for financial crisis in the world economy. Further, it is observed that the amount new business policy issued has increased at a CAGR of 5.36% in case LICI and negative growth rate of 2.02 % in case of private players. But as a whole, the amount of new business policies issued increased in the insurance industry increased at a CAGR of 9.26 % TABLE 3: NEW POLICIES ISSUED- LIFE INSURERS (RUPEES IN LAKH) Insurer LICI Private Sector Total JournalofAsianResearchConsortium56 http://www.aijsh.org 2003-04 269.68 165.68 286.27 2004-05 239.78 (-11.09) 223.31 (34.62) 262.11 (-8.44) Source: Annual Reports of IRDA 2005-06 315.91 (31.75) 387.14 (73.36) 354.62 (35.29) 2006-07 382.29 (21.01) 792.23 (104.64) 416.52 (17.46) 2007-08 376.13 (-1.61) 132.62 (-83.26) 508.74 (22.14) 2008-09 359.13 (-4.52) 150.11 (13.19) 509.24 (0.10) 2009-10 388.63 (8.21) 143.62 (-4.32) 532.25 (4.52)
Data: Fig in brackets indicates growth over previous year (in %)
Moreover, from Table 4, it is observed that the total premium earned by the insurance industry has grown at a CAGR of 22.49 % ranging between FY-01 (Rupees 34898.47 crores) to FY 2010 to touch Rupees 265450.37 crores. The total premium earned by the LIC has grown at a CAGR of 18.22% from Rupees 34892.02 crores in 2000-01 to Rupees 186077.31 crores in 2009-10. The total premium earned by the private players has grown at a CAGR of 156.46% from Rupees 6.45 crores in 2000-01 to Rupees 79373.06 crores in 2009-10. Further, it is observed that the growth in CAGR in case of private players is much higher than the growth in CAGR in case of LICI in terms of total insurance premium.

TABLE 4:TOTAL LIFE INSURANCE PREMIUM (RUPEES IN CRORE) Insurer LICI Private Total Industry Total Insurer LICI Private Total Industry Total 2005-06 90792.22 (20.85) 15083.54 (95.19) 105875.76 (27.78) 34898.47 2000-01 34892.02 6.45 2001-02 49821.91 (42.79) 272.55 (4124.31) 50094.46 (43.54) 2006-07 127822.84 (40.79) 28242.48 (87.24) 156065.32 (47.38) 2002-03 54628.49 (9.65) 1119.06 (310.59) 55747.55 (11.28) 2007-08 149789.99 (17.19) 51561.42 (82.57) 201351.41 (29.01) 2003-04 63533.43 (16.30) 3120.33 (178.83) 66653.75 (19.56) 2008-09 157288.04 (5.01) 64497.43 (25.09) 221785.47 (10.15) 2004-05 75127.29 (18.25) 7727.51 (147.65) 82854.80 (24.31) 2009-10 186077.31 (18.30) 79373.06 (23.06) 265450.37 (19.69)
Source: Annual Report IRDA. (Fig in brackets represents the growth over the previous year)
MARKET SHARE OF LIFE INSURERS Market share of all life insurance is depicted in below figures which are based on first premium. Market share is determined in terms of premium received by the companies. JournalofAsianResearchConsortium57 http://www.aijsh.org TABLE 5: MARKET SHARE OF LIFE INSURER (%) Year LICI Private Sector 1999-00 100 0 2000-01 99.98 0.02 2001-02 99.46 0.54 2002-03 97.99 2.01 2003-04 95.32 4.68 2004-05 90.67 9.33 2005-06 85.75 14.25 2006-07 81.90 18.10 2007-08 74.39 25.61 2008-09 70.92 29.08 2009-10 70.10 29.90 Source: IRDA Annual Report It is observed from the Table 5 that LICI was the sole agency providing life insurance business till 2000. After the entry of private sector, the share of LICI is in decreasing trend.

As on 2009-10, the market share of LICI is 70.1% while the private sector is 29.90%. Moreover, from Table 6 it is observed that the market share of unit linked policy business is much prominent among the private players, while non-unit linked business as a share of insurance market is very popular in case of LICI. However, it is evident that the customers preference towards ULIPs in case of private players and non-ULPs in case of LICI is very high as against non-ULIPs of private players and ULIPs of LICI. TABLE 6: TRENDS IN LIFE INSURANCE BUSINESS UNIT LINKED INSURANCE PLANS Insurer Private LICI Industry Total Insurer Private LICI Industry Total Unit Linked Business (%) 2005-06 82.30 29.76 41.77 2005-06 17.70 70.24 58.23 2006-07 88.75 46.31 56.91 2006-07 11.25 53.69 43.09 2007-08 90.33 62.31 70.30 2007-08 9.67 37.69 29.70 2008-09 86.75 22.06 40.87 2008-09 13.25 77.94 59.13 2009-10 86.00 25.4 43.52 2009-10 14.00 74.60 56.48
Non-unit Linked Business (%)
Data: Percentage share of ULIP Premium out of Total Premium. Source: Annual Report, IRDA 2007-08, IRDA 2009-10 and others
Further, it is observed from the study that ULIPs are most favored among the customers recently and perhaps may be increasing toward the trend of equality between ULIPs and NonULIPs in the coming years. Many private sector players have entered the market to provide the highly customized products and the prompt service to the customers. A larger number of Indian customers have started purchasing insurance because of the aggressive marketing, innovative and customized products as well as effective distribution channel strategies of the new private players. Insurance industrys growth is expected to be boosted by the role of private sector players in the country.
Individual Life Insurance constitutes almost 80 % of the business whereas group life insurance products form a very small segment. Unit-linked Insurance Products (ULIPs) are preferred the most by the customers but the new regulation as well as the economic slowdown has shifted the focus from ULIPs to traditional products (Table 6).

NUMBER OF PRODUCTS AND RIDERS Marketers try to satisfy their customers by providing the products which they require. Since customers needs vary, a wide variety of products is generally made available to suit their specific requirements. Further, the requirements of customers change overtime which necessitates the introduction of new products and deletion of unsuitable products from the productmix. Prior to 2000, LICs product-mix consisted of products mainly falling in the category of whole life and endowment policies. From time to time, many new products were added and withdrawn, a few of which (e.g. Money Back Policies, Jeevan Mitra Policy etc.) became very popular among the people. LIC also tried to include features like accidental death, disability benefit and premium waiver clauses in many of its policies. However, all these benefits were not available in all type of policies. Further, addition of such benefits added complexities to the product. Moreover, many policies like unit linked policies and term insurance policies were not provided by LIC. After entry of private players in life insurance industry, there has been a big change in the kind of products provided by insurers. Many products like unit linked plans, single premium plans and pension plans have become quite popular these days. Further, insurers have tried to keep the basic products of life insurance quite simple by providing multiple riders separately which a customer can choose as per his requirements on payment of extra premium, thus making possible for the customer to match the products with his requirements, However, riders cannot be bought separately or independently of a basic policy. This paragraph gives a view of various products and riders launched by life insurers in recent years. It reveals that ICICI Prudential Life Insurance Company Limited launched total 91 new products from 2000-01 to 2011. There were five more private life insurers who launched more than 40 new products. It is worth noting that LIC also launched 53 new products. Thus, after the entry of private insurers flow of new products was very high. Further, many new type of riders have been made available to the public. The main riders available in life insurance industry today include term rider, accidental death benefit, accidental total permanent disability, waiver of premium on death, waiver of premium on disability, critical illness rider, income benefit rider, family income benefit rider etc. JournalofAsianResearchConsortium59 http://www.aijsh.org OPPORTUNITIES FOR GROWTH 1. It is estimated from the survey of literature that aspirers will comprise 46% of the population by 2012, representing a formidable emerging bankable class. Insurance is seen as long term savings instrument by this segment of the society providing higher return at low risk, given the lack of alternative investment options. Key challenges in this segment are managing profitability due to low ticket size & high underwriting risk. 2. After the recent financial crisis, insurance companies want to reduce their costs and outsourcing some of the non-core processes like claims processing, policy management etc, can help them to reduce their cost and focus on the core processes. India is seen as one of the favorable partners for the outsourcing business. Services such as analysis and decision support are likely to be the higher-end, billing ratebased services that will drive value growth for BPO organizations. 3. The health insurance sector is one of the booming sectors of the insurance industry as people are becoming more aware about the health insurance and their health care so

taking advantage of this, private sector insures are more competitive in this segment. Life insurer companies are likely to primarily target the young population to amortize the risk over the policy term. 4. According to the Old Age Social and Income Security (OASIS Report, 1999), there will be 113 million Indians over 60 years of age by 2016 and 179 million by 2026. On the one hand, this is good news as the life expectancy has increased but on the other hand, it has also increased the risk that people will outlive their savings. Indians will have an expected life span of 80 years, i.e. live a full 20 non-earnings years. Health care costs have also increased many folds eroding retirees purchasing power. 5. Social security provided by the Government of India is very limited; in fact that less than 4% of the population is covered under any social security scheme. Only Government employees are entitled to pension benefits after retirement. Opening up of the pension sector and the establishment of a new pension regulator have made this segment highly attractive. Hence, insurance products are being considered as the next best option to secure the future. To facilitate insurance and social security cover for the economically weaker sections of society, the Pension Fund Regulatory & Development Authority (PERDA) has launched a pension scheme, since April 2010, for rickshaw-pullers, barbers, daily wage earners etc. 6. The transition from Solvency I to Solvency II norms by 2012 is likely to increase the demand for actuaries & risk management professional. The regulator has also asked insurance companies to get their risk management system and processes audited every 3 years by an external auditor to ensure the solvency of private sector companies. Hence, the need for professionals is expected to rise. Furthermore, insurance companies will now be able to calculate risk better, bringing enhanced stability in their operations and transparency in the sector. CHALLENGES BEFORE THE INDUSTRY JournalofAsianResearchConsortium60 http://www.aijsh.org The four main challenges facing the insurance industry are product innovation, distribution, customer service, and investments. Unit-linked personal insurance products might find greater acceptability with rising customer awareness about customized, personalized and flexible products. Flexible products and new technology will play a crucial role in reducing the cost and, therefore, the price of insurance products. Finding niche markets, having the right product mix through add-on benefits and riders, effective branding of products and services and product differentiation will be some of the challenges faced by new companies. New age companies have started their business with low product variety. Some of these companies have been able to float 3 or 4 products only and some have targeted to achieve the level of 8 or 10 products. At present, these companies are not in a position to pose any challenge to LIC and all other four companies operating in general insurance sector, but if we see the quality and standards of the products which they issued, they can certainly be a challenge in future. Because the challenge in the entire environment caused by globalization and liberalization the industry are facing the following challenges. 1. The existing insurer, LIC and GIC, have created a large group of dis-satisfied customers due to the poor quality of service. Hence, there will be shift of large number of customers from LIC and GIC to the private insurers.

2. Increased awareness and importance of insurance among public especially in urban areas compels more customized products and pricing methodology as per the needs of the customers. 3. Tariff free regime poses biggest challenge in quoting accurate pricing for the risks covered. 4. Customer expectations and awareness have significantly increased in recent years, particularly in terms of better and speedy service, accurate pricing and customized solutions. 5. LIC may face problem of surrender of a large number of policies, as new insurers will woo them by offering of innovative products at lower prices. 6. There is a likelihood of exit of young dynamic managers from LIC to the private insurer, as they will get higher package of remuneration. 7. LIC has overstaffing and with the introduction of full computerization, a large number of the employees will be surplus. However, they cannot be retrenched. Hence the operating costs of LIC will not be reduced. This will be a disadvantage in the competitive market, as the new insurers will operate with lean office and high technology to reduce the operating costs. 8. Reaching the consumer expectations on par with foreign companies such as better yield and much improved quality of service particularly in the area of settlement of claims, issue of new policies, transfer of the policies and revival of policies in the liberalized market is very difficult to LIC and GIC. 9. Intense competition from new insurers in winning the consumers by multi-distribution channels, which will include agents, brokers, corporate intermediaries, bank branches, affinity groups and direct marketing through telesales and internet. 10. Major challenges in canalizing the growth of insurance sector are product innovation, distribution network, investment management, customer service and education. CRITICAL ISSUES OF LIFE INSURANCE INDUSTRY 1. NEED TO RAISE FDI IN INSURANCE: Importance of FDI in the insurance sector is well recognized by the experts and also referred at many forums over the last years. The sector is highly capital intensive, since its development period is too long. It requires capital infusion at regular intervals and particularly in India the need for capital infusion is highly necessary to reduce fixed cost and to cover Indias the vast geographic spread. But at present, the FDI in the insurance sector is restricted to 26% which is a huge deterrent to growth in the industry. 2. HIGH EXPENSE RATIO/ OPERATING COST: Both expense ratio and operating ratio is very high in the Indian insurance sector, especially for the private players. In FY 09, the private sector life insurance segment had an expense ratio (operating expenses & commission expenses) of 30.6%. It is observed that the CAGR of operating expenses for LICI is 13.06 % (03-04 to 9-10) while this is 42.29 % for other

private players (see Table 7 A & B). Public sector companies have been in existence for a couple of decades and hence, have managed to reduce their expenses over time. However, experts on insurance field (Seth, 2010) believed that the expenses ratio should be around 10-15% from long term sustainability & profitability perspectives. A high expense ratio directly impacts profitability. Since the insurance industry is still at a nascent stage, many companies are yet to break down & rising expenses can further delay this process. TABLE 7A: TOTAL PREMIUM, COMMISSION EXPENSES AND OPERATING EXPENSES OF LIFE INSURERS (RUPEES IN CRORE) Year Total Premium (TP) Commission Expenses(CE) LICI 2003-04 63533.43 2004-05 75127.29 2005-06 90792.22 2006-07 127822.84 2007-08 149789.99 2008-09 157288.04 2009-10 186077.31 Private Sector 3120.33 7727.51 15083.54 28242.48 51561.42 64497.43 79373.06 Total 66653.75 82854.8 105875.76 156065.32 201351.41 221785.47 265450.37 LICI 5742.91 6203.23 7100.19 9173.58 9614.69 10055.09 12132.56 Private Sector 415.42 854.73 1543.1 3085.4 5089.61 5474.27 6052.75 Total 6158.33 7057.96 8643.29 12258.98 14704.3 15529.36 18185.31
Source: Annual Report, IRDA 2007-08, IRDA 2009-10 and others
TABLE 7B: TOTAL PREMIUM, COMMISSION EXPENSES AND OPERATING EXPENSES OF LIFE INSURANCE (RUPEES IN CRORE) Year Operating Expenses (OE) PC OF OE over TP LICI 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 5186.49 6241.26 6041.56 7085.84 8309.32 9064.29 12245.82 PRIVATE SECTOR 1402.44 2229.47 3569.48 6500.01 11989.34 16763.03 16561.11 TOTAL 6588.94 8470.47 9611.04 13585.85 5.54 20298.66 25827.32 5.76 6.58 Source: Annual Report, IRDA 2007-08, IRDA 2009-10 and others 28806.93 25.99 20.86 11.65 10.85 5.55 23.02 23.25 8.71 10.08 LIC 8.16 8.31 6.65 PVT 44.95 28.85 23.66 TOTAL 9.89 10.22 9.08

3. NEED TO STRENGTHEN CORE PRODUCT PROPOSITION: Although the life insurance sector has shown rapid growth over the last few years, low margin single premium products & potentially volatile ULIPs have accounted for most of the growth. These products are proven to be easily sold, but merely focusing on these could weaken the growth and long term profitability for Indias life insurers. (Table 4) 4. DELAYED BREAK EVEN FOR PRIVATE INSURANCE COMPANIES: Breakeven point is achieved in the insurance industry when the new business premium is equal to the renewal premium. However, as the Indian industry is growing, the volume of new premiums is much more than the renewal premiums. Globally, life insurance Companys break even is six to eight years but in India, it has not achieved & it may take another couple of years due to recent financial crisis in the world. Other reasons for delayed breakeven are the high operating expenses like management costs, real estate prices, salaries, distribution expenses and technology expenses which are higher than what was accounted for in the original business plans of insurers. Moreover, the capital intensive nature of the life insurance segment has extended this process by a couple of years. 5. LACK OF PROFESSIONAL AGENCY CHANNEL: In the distribution of products, agency channel accounts nearly 80-85% of new business. The agency force in India has also grown rapidly but the overall inactivity and attrition rates are quite high which are estimated to be 50-55% which are significantly higher than the global benchmarks of about 25%. It is reported (McKinsey Global Survey, 2011) that proper strategies are not implemented while selecting the agency forces in a life insurance market in India. Lack of professional agency channel and other alternative channels of insurance business hinders the growth of Indian insurance market. JournalofAsianResearchConsortium63 http://www.aijsh.org 6. PROMOTION OF BANC ASSURANCE: It is further observed from the survey of existing literature that customers prefer banc assurance channel next to agency channel. Given the highest penetration of banking products, banc assurance could be the single most important channel for insurers to rapidly acquire new customers. However, cross-sell rates in Indian banking are significantly lower than those in developed markets. In developed economics like Spain, Italy & France, between 12 & 24% of a banks customer would have brought insurance through the bank. In India, this number is estimated to be less than 0.5% for Public sector banks, 1 to 2 % in private sector banks and 2to 4 % for foreign banks (Swiss Re Sigma, 2004). A lot of factors are responsible for such low rate of banc assurance namely high variance in selling skills, low operational flexibility in respect to develop sell culture, low technological capabilities , lack of process integration etc. 7. OTHER GLOBAL INSURANCE ISSUES: There are several important issues on which IRDA is working on. The convergence of the Indian Accounting Standards with the IFRS , the settlement of norms which will relate to the issuance of IPOs (initial public offers) and M&As (mergers and acquisitions), the establishment of a

more robust system to collect and disseminate appropriate insurance related data and several other initiatives are the main issues of global insurance issues. FUTURE MARKETING STRATEGIES The following innovative marketing strategies should be adopted to grow and survive in the Indian Insurance Market. 1. UNDERSTANDING CUSTOMER NEEDS: Use data warehousing, management and mining to gauge the profitability and potential of various customer and product segments and ensure effective cross selling. Understanding the customer better will allow insurance companies to design appropriate and customized products, determine pricing correctly and increase profitability. 2. HIGH-LEVEL TRAINING AND DEVELOPMENT: Ensure high level of training and development not just for staff but also for agents and distribution organizations. Existing organizations will have to train staff for better service and flexibility, while all companies will have to train employees to cope with new products and an intensive use of information technology. 3. ALLIANCE & TIE UP: The importance of alliances and tie-ups means that companies will have to integrate related but separate providers into their systems to ensure seamless delivery. 4. AGENT RELATIONSHIP: Build strong relationships with intermediaries such as agents. 5. MARKET SEGMENTATION: They must segment the market carefully to arrive at the appropriate products and pricing and should cater the needs of every individual. JournalofAsianResearchConsortium64 http://www.aijsh.org 6. REVAMPED MARKETING STRATEGY: Worldwide, insurance products move along a continuum from pure service products to pure commodity products then they could be sold through the medical shops, groceries, novelty stores etc. Once commodization, popularity and awareness of the products are attained then the products can move to remote channels such as the telephone or direct mail. Brand loyalty could shift from the insurer to the seller. RECOMMENDATION AND SUGGESTIONS 1. For the development of the life insurance sector, improvement in the insurance density and insurance penetration is a must. Hence, efforts need to be instituted for such improvement. Development of insurance products including special group policies to cater to different categories should be a priority, especially in rural areas. 2. The life insurers should conduct more extensive market research before introducing insurance products targeted at specific segments of the population so that insurance can become more meaningful and affordable. 3. Understanding the customer better will enable insurance companies to design appropriate products, determine price correctly and increase profitability.

4. Selection of right type of distribution channel mix along with prudent and efficient FOS [Fleet on Street] management. 5. An efficient CRM system, which would eventually create sustainable competitive advantages and build a long-lasting relationship 6. Insurers must follow best investment practices and must have a strong asset management company to maximize returns. 7. Promoting health insurance and using e-broking to increase the business. 8. Proper steps for the promotion of Banc assurance. 9. Policy holders should be made aware of their rights and obligations. Policy holders should know the essential aspects of sales talk, insurance policy, claim form, claims process etc. 10. Consumer awareness campaign should be encouraged to improve financial literacy/ insurance literacy levels by conducting workshops, distributing leaflets, distributing literature etc. in both urban and rural areas. 11. Life insurance companies should comply with the advertisement code as prescribed by the ASCI (advertisement Standard Council of India) to ensure that misleading advertisement not issued. 12. Life insurers should streamline their grievance redressal machinery for efficient and effective service. In addition to own committee members, life insurance companies should draw more representations from industry, insurance agents, womens organization and other interest groups. JournalofAsianResearchConsortium65 http://www.aijsh.org 13. Insurance companies adhere to fair trade practices and transparent disclosure norms while addressing the policyholders or the prospects 14. Institutions like universities and colleges should be encouraged to spread insurance awareness and educating the students/ customers on their rights and obligations. CONCLUSION Global integration of financial markets resulted from de-regulating measures, technological information explosion and financial innovations. Liberalization and Globalization have allowed the entry of foreign players in the Insurance sector. With the entry of private and foreign players in the Insurance business, people have got a lot of options to choose from. Radical changes are taking place in customer profile due to the changing life style and social perception, resulting in erosion of brand loyalty. To survive, the focus of the modern insurers shifted to a customer-centric relationship. Opening up the sector will certainly mean new products, better packaging and improved customer service. Both new and existing players will have to explore new distribution and marketing channels. Potential buyers for most of this insurance lie in the middle class. New insurers must segment the market carefully to arrive at appropriate products and pricing.

Recognizing the potential, in the past three years, the nationalized insurers have already begun to target niches like pensions, women or children. It is concluded from the observation and the analysis that life insurance sector in India has enlarged by more than twice after the formation of IRDA. It is also observed that LIC is losing its market share in favour of new entrants or private companies. While analyzing the data of various countries, a clear picture has emerged that developed countries have higher rate of insurance penetration whereas developing and under developed nations have relatively lesser rate of it. Being the largest insurance company in India, it is obvious that LIC has the largest strength of insurance agents and insurance business. It is further seen that LIC is well ahead of private insurers in terms of premium collection. It is worth noticing that all private companies suffered huge losses, but again, only LIC earned profits. It can be said that, LIC is the only life insurer in India that is fairly settled but the market share of LICI is decreasing day by day. Private players play a rivalry role in the insurance market. Further, it is observed that there should be a large gap between new business premium amount and renewal premium, but in case of Indian insurance business, this gap is too narrow. Moreover, the operating expenses of both private and public players are too high which needs to be minimized. Over the past three years, around 40 companies have expressed interest in entering the sector and many foreign and Indian companies have arranged anticipatory alliances. The threat of new players taking over the market has been overplayed. As is witnessed in other countries where liberalization took place in recent years, we can safely conclude that nationalized players will continue to hold strong market share positions, but there will be enough business for entry to be profitable. REFERENCES 1. Arora, R.S. (2002). Financial Reforms and Service SectorA Study of Life Insurance Industry in India, in B.B. Tandon and A.K. Vashisht (Eds.), Financial Sector ReformsAn Unpublished Agenda for Economic Development: 259-270, New Delhi: Deep & Deep, 2002. 2. Bhattacharya, Anbil. (2005). Challenges before Life Insurance Industry, Life Insurance Today, 1 (8), 3-6. 3. Boston Consulting Group Report (2007). Survey of 4125 Individuals in BCG's next billion consumer research, BCG analysis, 16. 4. Chakraborty, Joy (2007). Private Life Insurance Companies in India: Growing Prospects and Challenges, Insurance Chronicle, the ICFAI University Press, VII (VIII), 29-39. 5. Das, Sankar (2004). Role of Agents in Competitive Regime, the Journal, Jan- June, 35-43, < http://www.insuranceinstituteofindia.com>. 6. Jain, A. K. (2004). Journal of Insurance Institute, India, 30, 53. 7. Kulshresth, Laxmi R., Kulshresth, Anuja (2006). Liberalization and Rural Insurance Prospects and Challenges, Life Insurance Today, 1(10), 9-13.

8. Kumar, Jogendra (2005). Insurance: Industry on Growth Path, Life Insurance Today, 1 (9), 6-10. 9. Kotler, P. and Keller, K. (2009). Principles of Marketing, 13th edn, New Delhi, Prentice Hall of India. 10. Krishnamurthy (2007a). A Study on Investors Satisfaction with Special Reference to the Nilgiris District, Organizational management, XXII (4), 9-12. 11. Krishnamurthy (2007b). Life Insurance: Less Rigid Norms May Help, Survey of Indian Industry, The Hindu. 12. Kulkarni, S .J. & Sagar, P. N. (2011). Recent Trends in Marketing Strategy of LICI, Journal of Insurance Institute, I (1), 20-25. 13. Mathew M.J. (2009). Insurance (Principles and Practice), RBSA Publishers, Jaipur. 14. McKinsey Global Survey (2011). Proprietary Survey conducted by the Consultancy firm, McKinney of Indian life insurance report, <http://www.mckinseyquarterly.com>. 15. Pathak, Suman & Tripathi, Vibhuti (2010). Sales Force Turnover: An Exploratory Study of the Indian Insurance Sector, Management, 5 (1), 319. 16. Peter, D. (1999) Innovate or Die, Economist. 1(2), 41-55. 17. Rajendran, R. and Natarajan, B. (2010). The impact of liberalization, privatization, and globalization (LPG) on Life Insurance Corporation of India (LIC), African Journal of Business Management, 4 (8), 1457-1463. 18. Rao, C. S. (2007). The Regulatory Challenges Ahead, Insurance Chronicle, 7, 10. JournalofAsianResearchConsortium67 http://www.aijsh.org 19. Rao, Nagaraja K., Kumar Mukul, Kumari Ruchi (2011). Reaching Rural Masses through Insupreneurship: A Study with reference to LICI, Journal on Banking Financial Services & Insurance Research, 1(3), 99-110. 20. Rastogi, Shilpa & Sarkar, Runa (2007). Enhancing competiveness: The case of the Indian Life Insurance Industry, <http://.www.dspace.iimk.ac.in/bitstream/2259/512/1/559-568+.pdf>. 21. Sabera K. (2007). Changes in insurance sector (A Study on Public Awareness), Insurance Chronicle, 7 (1), 37. 22. Seth, Pallavi (2010). Insurance: Managing the Coming Boom amidst Multiple Challenges, National Insurance Summit, New Delhi. 23. Sheela and Arti (2007). A Study on the Awareness of Life Insurance Policies in Visakhapatnam, Insurance Chronicle, The ICFAI University Press. VII (IX), 61-67. 24. Sukla, A.K. (2006). The impact of LPG on life Insurance, Journal of Insurance Institute, India, 32, 10.

25. Verma, Vinay (2003). New Trends in Product Design: An Overview of Life Insurance Products, The Insurance Times, 23 (6), 16-28. WEB REFERENCES a) www.economywatch.com/indianeconomy/india-insurance-sector b) http://economictimes.indiatimes.com c) www.irdaindia.org d) www.irda.gov.in e) http://www.insuranceinstituteofindia.com f) http://www.mckinseyquarterly.com

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AJRMVolume1,Issue3(June,2012)ISSN:22776621

A Peer Reviewed International Journal of Asian Research Consortium

Data: Fig in brackets indicates growth over previous year (in %)

Non-unit Linked Business (%)

Source: Annual Report, IRDA 2007-08, IRDA 2009-10 and others

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