ON INNOVATION IN INDIAN INSURANCE INDUSTRY

NIRBHAY PANDEY

DECLARATION
I hereby declare that the Dissertation on: Innovation in Indian Insurance Industry Submitted in partial fulfillment of the requirement for the two year PGDM (Insurance & Risk Management) is collected by my own efforts and it is true and real to the best of my knowled e! "lso# the report presented has not been published anywhere else!

PREFACE
" well$de%eloped and e%ol%ed insurance sector is needed for economic de%elopment as it pro%ides lon term funds for infrastructure de%elopment and at the same time stren thens the risk takin ability! It is estimated that o%er the ne&t ten years India would require in%estments of the order of one trillion 'S dollar! (he Insurance sector# to some e&tent# can enable in%estments in infrastructure de%elopment to sustain economic rowth of the country! ULIPs# insurance$cum$in%estment# are life insurance plans whose returns are linked to the stock markets! ')IP returns fluctuate with the ups and downs in the stock market! Mutual *und are collecti%e in%estment %ehicles that pool resources of %arious in%estors and in%ests these resources in a di%ersified portfolio comprisin of stocks# bonds or money market instruments! "lthou h both these products are somewhat different in their workin but more or less the fund pooled in both of them are in%ested similarly! +ith the ad%ent of 'nit )inked Insurance Plans# the life insurance products ha%e chan ed from bein only a life co%er product to an in%estment %ehicle with built$in features of life insurance and ta& benefits! (hese days, inno%ati%e products are floodin the market which offers the features of a traditional insurance policy with added benefits of hi h return from the market instruments!

Bancassurance, new concept catchin up fast in India! -ne of

the more recent e&amples of financial di%ersification is ./ancassurance,# the term i%en to the distribution of insurance products throu h branches 0 other distribution channels of the

banks! (he concept that ori inated in *rance now constitutes the dominant model in a number of 1uropean and other countries and the same is fast catchin up in India as well!

Healt Insurance, +ith proliferation of %arious health care

technolo ies and eneral price rise# the cost of care has also become %ery e&pensi%e and unaffordable to lar e se ment of population! (he o%ernment and people ha%e started e&plorin %arious health financin options to mana e problems arisin out of rowin set of comple&ities of pri%ate sector rowth# increasin cost of care and chan in epidemiolo ical pattern of diseases!

AC!NO"LED#E$ENT
Gratitude is the hardest of emotions to e !ress and often does not find ade"uate #ords to $on%e& the entire one fee's( a'thou)h it is diffi$u't to mention the nature of a''( #ho )a%e me their fu'' su!!ort and $oo!eration throu)hout m& dissertation #or*+ I ta*e the o!!ortunit& to intent m& sin$erer )ratitude to m& mentor ((((((((((((((((((((((for his he'!fu' )uidan$e durin) the resear$h !eriod+ This !ro,e$t re!ort resu't is not on'& the out$ome of the efforts !ut in -& me -ut a'so -& man& he'!fu' hands 'i*e the fa$u't& mem-ers ( m& mentor and man& of m& friends+

THAN. YOU

CONTENT%

Introduction

he Indian insurance market is e&periencin lot of cosmic chan es! "fter the insurance sector was opened in 2333 for the pri%ate sector it is seein a lot of chan es are takin places both in product and pro%idin ser%ice to its customer,s! /efore 2333 the picture was totally different# there was only two insurance plan which co%ered life and non )ife and two o%ernment owned insurance company !(he two o%ernment owned insurance company are )ife Insurance corporation of India ltd( )!I!4)and the other was General Insurance 4ompany (G!I!4) ! Due to this there was o%ernment monopoly e&istin in the insurance sector where there was only two dominant players )I4 and GI4 offerin few number of product! /ut after openin up of this sector to the pri%ate and forei n companies# lar e number of pri%ate and forei n companies appeared in insurance sector# pro%idin %ariety of insurance products with ma5ority of insurance company layin more stress on home loan insurance! (hus creatin lot of competition in the insurance sector as each of companies wanted to acquire reater market share!

Call for Innovation

Demo raphic chan es# channel optimi6ation pressures# chan in compliance en%ironment# and increasin competition are forcin insurers to increase the pace of product inno%ation to meet their rowth and profitability ob5ecti%es! (his paper e&amines the causes of product introduction inefficiencies and discusses approaches to impro%in capabilities to achie%e rapid product introduction! (he period of stable product portfolios that rarely chan e is lon past the insurance industry! "s with other industries# insurance is bein forced to respond to the e%er$chan in demands of distributors and customers! 4arriers refresh their product portfolio by either addin new products or enhancin e&istin ones to meet market demands! Periodically# they also discontinue non$ performin products# thou h it does not eliminate the need to support ser%icin of policyholders! (his constant addition of new products# while continuin to support old ones# has been a ma5or contributor to the comple& en%ironment insurers find themsel%es in today! 7etoolin the internal operations of a company to support new products is difficult# time consumin and costly# but necessary! In the 8 ood old days9 when companies relied on a sin le# relati%ely simple back office system# chan es were easy to make# test and mo%e to production! In today,s multiple# comple& back office systems with their plethora of interfaces and inter dependencies# makin a chan e in one system can ha%e multiple and unforeseen consequences across the enterprise : assumin you can determine where to make the chan e in the first place!

/usiness Dri%ers for Product Introduction +hile most e&perts a ree that the demand for new and creati%e products is oin to intensify# the ability of insurance companies to respond cost effecti%ely is diminishin !

Insurers ha%e always been aware of the importance of new product launches and their effect on sales and profitability! Industry analysts ha%e confirmed the importance of keepin product portfolios fresh and current to meet market demands! " recent 4elent study2 reaffirms that market demands like .(ime to Market, and .1ase of Doin /usiness, are amon the top business issues for both )ife;<ealth and P04 insurers (*i ! 2)! (he report identifies .Impro%in (ime to Market, as the most frequently cited market demand! (his is borne out by the fact that .Impro%ements to Policy "dministration Systems, : which in turn positi%ely influences the time$to$market issue :has been identified by all respondents as one of the top three I( initiati%es for =>>?!

/usiness dri%ers that accentuate the need to quickly and cost$ effecti%ely launch new or enhanced products can be rouped under the followin four ma5or heads (*i ! =): 4ustomer demand: 4ompetition in the insurance marketplace has raised the le%el of customer awareness! (oday# customer e&pectations are %ery specific and customers ha%e plenty of choices before them! 4ustomer demo raphics are also chan in ! (he earliest of the ?? million baby boomers turned si&ty in =>>@! Insurers need to cater to the di%erse demands of the post$retirement life of this economically acti%e roup and also the discernin youn eneration whose needs and e&pectations are dramatically different! Many economic factors such as stock market performance# interest rates# inflation# etc! also contribute to the rapidly chan in customer needs! Pressure from distributors: (he demands of distributors : especially the successful ones : are increasin ! Distributors lookin to differentiate themsel%es in the marketplace e&pect insurers to de%elop and market distributor$specific products! "dditionally# distributors are seekin ways to increase their

client,s wallet share by offerin additional products to address percei%ed aps in co%era e or in%estment needs! Pressure from competitors: Insurance companies are bein pressured by both insurance and non$insurance financial ser%ices competitors! "s new product offerin s from inno%ati%e insurance companies ain traction in the market# other companies feel the pressure to copy! (o pre%ent non$insurance competitors from ainin further market share# insurance companies de%elop products that take full ad%anta e of their unique ta& and protection characteristics! (he mountin competiti%e pressure makes it imperati%e for insurance companies to keep a close watch on the market and desi n# de%elop and implement new insurance products that better address the needs of the market!

7e ulations : the mo%in tar et: Insurance is a hi hly re ulated industry that must constantly re%iew and ad5ust its product offerin s to ensure compliance! In addition# the chan in re ulations often offer new opportunities to a ressi%e and inno%ati%e carriers! 7e ulations impact e%ery aspect of the product desi n and de%elopment process : product filin s# rate appro%als# re ulatory reportin # ta& treatment# disclosure# etc!

+hat "ils the Product De%elopment ProcessA

(he product de%elopment or enhancement process in a typical insurance company requires a hi h le%el of collaboration and coordination amon %arious stakeholders from product desi n# pro rammin # le al# compliance# operations# marketin # trainin # etc! More than B>C resources of the total product de%elopment lifecycle are taken by the implementation phase! (he actual implementation of new products entails substantial resource in%estments! (he process also necessitates many handoffs between the stakeholders!

T e e&er'in' trends in t e industry in ter&s o( )roduct innovation

7iders and unit linked products ha%e led some of the %isible inno%ations in the market place! 7iders can be used to customi6e life insurance for %aryin customer requirements# pro%ide health co%era e# and impro%e a productDs competiti%e profile throu h impro%ed customer %alue! <ealth oriented life insurance co%ers# asset allocation products# sa%in products# which offer downside protection with the opportunity to participate in upsides# worksite$ marketin products# and customi6ed roup corporate retirement products are amon the emer in inno%ati%e product cate ories! 7e ulation will also play a crucial role in the speedy emer ence and efficacy of other inno%ati%e product offerin s and cate ories! *inally# as the pension market de%elops# %ariable annuities (E")

and equity$inde&ed annuities could emer e as part of the product suite of life insurance companies! 4learly# product inno%ation is a ma5or strate ic imperati%e for insurers! (he key is to offer products based on deep insi hts of consumer needs! In the lon term# only such products sur%i%e and row into a meanin ful and profitable component of an insurerDs product portfolio!

(he openin up of the insurance sector saw the emer ence of inno%ations introduced by pri%ate players# initially in terms of product offerin s! (he insurance industry# which till then had seen minimal product inno%ations# saw the ad%ent of unit linked insurance products (')IPs)! Moreo%er# liberali6ation of the sector also saw the ad%ent of o%er$the$counter and pre$underwritten products that are offered by banks to its customers! (hese are products with no underwritin that are cross$sold with home loans and the like! Inno%ations ha%e also come about in the area of %alue added ser%ices as companies started pro%idin %alue additions like online purchase of insurance policies# payment of premiums by credit cards and online trackin of net asset %alues (F"Es)! T e rise in )re(erence (or ULIPs as co&)ared to traditional )roducts "part from protection benefits# ')IPs pro%ide policyholders an opportunity to earn returns linked to the underlyin financial markets! "lso# unlike con%entional products# the char es in ')IPs are transparent! (op$ups# premium redirection options# facility to switch partially or fully from one fund to another# etc# make these products %ery fle&ible! )ower re ulatory capital requirements %is$

G$%is endowment products ha%e also helped insurers dri%e down the costs of these products! (hese factors coupled with stellar returns in the equity markets ha%e made ')IPs# particularly# appealin ! ')IPs i%e customers an option to participate in equity and debt markets dependin on their risk appetite! (raditional products did not offer the facility to choose and chan e their pattern of in%estment in a particular policy! ')IPs are useful for those who want to be insured but at the same time are interested in in%estin in an a%enue# which matches their risk$return profile! ')IPs are best suited for those who ha%e a conceptual understandin of financial markets and are enuinely lookin for a fle&ible# lon $ term in%estment$cum$insurance! ')IPs ha%e ained in popularity due to the fle&ibility they offer to policyholders in choosin the in%estment pattern alon with the transparency in char es besides the ease of comparison of the final illustrated %alues!

A BRIEF HISTORY OF UNIT LINKED INSURANCE PLAN

')IP stands for 'nit )inked Insurance Plan! It pro%ides for life insurance where the policy %alue at any time %aries accordin to the %alue of the underlyin assets at the time! ')IP is life insurance solution that pro%ides for the benefits of protection and fle&ibility in in%estment! (he in%estment is denoted as units and is represented by the %alue that it has attained called as Fet "sset Ealue (F"E)! ')IP came into play in the 23@>s and became %ery popular in +estern 1urope and "merica! (he reason that is attributed to the wide spread popularity of ')IP is because of the transparency and the fle&ibility which it offers!

"s times pro ressed the plans were also successfully mapped alon with life insurance need to retirement plannin ! In today,s times# ')IP pro%ides solutions for insurance plannin # financial needs# financial plannin for children,s future and retirement plannin ! (hese are pro%ided by the insurance companies or e%en banks! (hese in%estments can also be used for ta& benefit under section H>4!

5 steps to selecting the right ULIP

<ereDs a B$step in%estment strate y that will uide in%estors in the selection process and enable them to choose the ri ht unit$linked insurance plans (')IPs)! /ut before we et there# letDs understand what ')IPs are all aboutA *or the eneration of insurance seekers who thri%ed on insurance policies with assured returns issued by a sin le public sector enterprise# unit$linked insurance plans are a re%elation! (raditionally insurance products ha%e been associated with attracti%e returns coupled with ta& benefits! (he returns part was often so compellin that insurance products competed with in%estment products for a place in the in%estorDs portfolio! Perhaps insurance policies then were symbolic of the times when hi h interest rates and the absence of a rational risk$return trade$off were the norms!

(he subsequent softenin of interest rates introduced a de ree a much$needed rationality to insurance products like endowment plansI attracti%e returns at low risk became a thin of the past! (he same period also coincided with an upturn in equity markets and the emer ence of a new breed of market$linked insurance products like ')IPs! +hile in con%entional insurance products the insurance component takes precedence o%er the sa%in s component# the opposite holds true for ')IPs! More importantly ')IPs (powered by the presence of a lar e number of %ariants) offer in%estors the opportunity to select a product which matches their risk profileI for e&ample an indi%idual with a hi h risk appetite can shun traditional endowment plans (which in%est about HBC of their funds in the debt instruments) in fa%our of a ')IP which in%ests its entire corpus in equities! In traditional insurance products# the sum assured is the corner stoneI in ')IPs premium payments is the key component! ')IPs are remarkably alike to mutual funds in terms of their structure and functionin I premium payments made are con%erted into units and a net asset %alue (F"E) is declared for the same! In%estors ha%e the choice of enhancin their insurance co%er# modifyin premium payments and e%en optin for a distinct asset allocation than the one they ori inally opted for! "lso if an unforeseen e%entuality were to occur# in case of traditional products# the sum assured is paid alon with accumulated bonusesI con%ersely in ')IPs# the insured is paid either the sum assured or corpus amount whiche%er is hi her! Insurance seekers ha%e ne%er been e&posed to this kind of fle&ibility in traditional insurance products and it would be fair to say that ')IPs represent the new face of insurance!

+hile few would dispute the %alue$add that ')IPs can pro%ide to oneDs insurance portfolio and financial plannin I the same is not without its flipside! *or the uninitiated# understandin the functionin of ')IPs can be quite a handfulJ (he presence of what seem to be relati%ely hi her e&penses# ri idly defined insurance and in%estment components and the impact of markets on the corpus clearly make ')IPs a comple& proposition! (raditionally the insurance seekerDs role was a passi%e one restricted to makin premium paymentsI ')IPs require reater participation from both the insured and the insurance ad%isor! "s is the case with most e%ol%ed in%estment a%enues# makin informed decisions is the key if in%estors in ')IPs wish to truly ain from their in%estments! (he %arious aspects of ')IPs dealt with in this publication will certainly further the ')IP in%estorDs cause! Ho* to select t e ri' t ULIP *or a product capable of addin si nificant %alue to in%estorsD portfolios# ')IPs ha%e far too many critics! +e at Personally ha%e interacted with a number of in%estors who were %ery disillusioned with their ')IPs in%estmentsI often the disappointment stemmed from poor and inappropriate selection! +e present a B$step in%estment strate y that will uide in%estors in the selection process and enable them to choose the ri ht ')IP! +, Understand t e conce)t o( ULIPs Do as much homework as possible before in%estin in an ')IP! (his way you will be fully aware of what you are ettin into and make an informed decision!

More importantly# it will ensure that you are not faced with any unpleasant surprises at a later sta e! -ur e&perience su ests that in%estors on most occasions fail to realise what they are ettin into and unscrupulous a ents should et a lot of DcreditD for the same! Gather information on ')IPs# the %arious options a%ailable and understand their workin ! 7ead ')IP$related information a%ailable on financial +eb sites# newspapers and sales literature circulated by insurance companies!

-, Focus on your need and ris. )ro(ile Identify a plan that is best suited for you (in terms of allocation of money between equity and debt instruments)! Kour risk appetite should be the decidin criterion in choosin the plan! "s a result if you ha%e a hi h risk appetite# then an a ressi%e in%estment option with a hi her equity component is likely to be more suited! Similarly your e&istin in%estment portfolio and the equity$debt allocation therein also need to be i%en due importance before selectin a plan! -ptin for a plan that is lop$sided in fa%our of equities# only with the ob5ecti%e of clockin attracti%e returns can and does spell disaster in most cases! /, Co&)are ULIP )roducts (ro& various insurance co&)anies 4ompare products offered by %arious insurance companies on parameters like e&penses# premium payments and performance

amon others! *or e&ample# information on premium payments will help you et a better picture of the minimum outlay since ')IPs work on premium payments as opposed to sum assured in the case of con%entional insurance products! 4ompare the ')IPsD performance i!e! find out how the debt# equity and balanced schemes are performin I also study the portfolios of %arious plans! 1&penses are a si nificant factor in ')IPs# hence an assessment on this parameter is warranted as well! 1nquire about the top$up facility offered by ')IPs i!e! additional lump sum in%estments which can be made to enhance the policyDs sa%in s portion! (his option enables policyholders to increase the premium amounts# thereby pro%idin presentin an opportunity to ainfully in%est any surplus funds a%ailable! *ind out about the number of times you can make free switches (i!e! chan e the asset allocation of your ')IP account) from one in%estment plan to another! Some insurance companies offer multiple free switches e%ery year while others do so only after the completion of a stipulated period! 0, #o (or an e1)erienced insurance advisor Select an ad%isor who is not only con%ersant with the functionin of debt and equity markets# but also independent and unbiased! "sk for references of clients he has ser%iced earlier and cross$ check his ser%ice standards! +hen your a ent recommends a ')IP from a i%en company# put forth some product$related questions to test him and also ask him why the products from other insurers should not be considered! Insurance ad%ice at all times must be unbiased and independentI also your a ent must be willin to inform you about the pros and cons of buyin a particular plan! <is 5ob should not be restricted to

doin paper work like fillin forms and deli%erin receiptsI instead he should keep track of your plan and offer you ad%ice on a re ular basis! 2, Does your ULIP o((er a &ini&u& 'uarantee3 In a market$linked product# protectin the in%estmentDs downside can be a hu e ad%anta e! *ind out if the ')IP you are considerin offers a minimum uarantee and what costs ha%e to be borne for the same!

Unit Lin.ed Insurance Plans 4ULIPs5 *or the eneration of insurance seekers who thri%ed on insurance policies with assured returns issued by a sin le public sector enterprise# unit$linked insurance plans are a re%elation! (raditionally insurance products ha%e been associated with attracti%e returns coupled with ta& benefits! (he returns part was often so compellin that insurance products competed with in%estment products for a place in the in%estorDs portfolio! Perhaps insurance policies then were symbolic of the times when hi h interest rates and the absence of a rational risk$return trade$off were the norms! (he subsequent softenin of interest rates introduced a de ree a much$needed rationality to insurance products like endowment plansI attracti%e returns at low risk became a thin of the past! (he same period also coincided with an upturn in equity markets and the emer ence of a new breed of market$linked insurance products

like ')IPs! +hile in con%entional insurance products the insurance component takes precedence o%er the sa%in s component# the opposite holds true for ')IPs! More importantly ')IPs (powered by the presence of a lar e number of %ariants) offer in%estors the opportunity to select a product which matches their risk profileI for e&ample an indi%idual with a hi h risk appetite can shun traditional endowment plans (which in%est about HBC of their funds in the debt instruments) in fa%our of a ')IP which in%ests most of its corpus in equities! In traditional insurance products# the sum assured is the corner stoneI in ')IPs premium payments is the key component! ')IPs are remarkably alike to mutual funds in terms of their structure and functionin I premium payments made are con%erted into units and a net asset %alue (F"E) is declared for the same! In%estors ha%e the choice of enhancin their insurance co%er# modifyin premium payments and e%en optin for a distinct asset allocation than the one they ori inally opted for! (his calls for enhanced fle&ibility in ')IPs! "lso if an unforeseen e%entuality were to occur# in case of traditional products# the sum assured is paid alon with accumulated bonusesI con%ersely in ')IPs# the insured is paid either the sum assured or corpus amount whiche%er is hi her! Insurance seekers ha%e ne%er been e&posed to this kind of fle&ibility in traditional insurance products and it would be fair to say that ')IPs represent the new face of insurance! +hile few would dispute the %alue$add that ')IPs can pro%ide to oneDs insurance portfolio and financial plannin I the same is not without its flipside! *or the uninitiated# understandin the functionin of ')IPs can be quite a handfulJ (he presence of what seem to be relati%ely hi her e&penses# ri idly defined insurance and in%estment components

and the impact of markets on the corpus clearly make ')IPs a comple& proposition! (raditionally the insurance seekerDs role was a passi%e one restricted to makin premium paymentsI ')IPs require reater participation from the insured! C ar'es and E1)enses ')IPs work %ery similar to a mutual fund with an added benefit of life co%er and ta& deduction! (hey ha%e a mandate to in%est the premiums in %aryin proportions in secs ( o%ernment securities)# bonds# the money markets (call money) and equities! (he primary difference between con%entional sa%in s$based insurance plans like endowment and ')IPs is the in%estment mandate$ while ')IPs can in%est up to 2>>C of the premium in equities# the percenta e is much lower (usually not more than 2BC) in case of con%entional insurance plans! ')IPs are also a%ailable in multiple options like .a ressi%e, ')IPs (which can in%est up to 2>>C in equities)# .balanced, ')IPs (which in%est L>$@>C in equities) and .debt, ')IPs (which in%est only in debt and money market instruments)! /roadly speakin # ')IP e&penses are classified into three ma5or cate ories: +5 $ortality c ar'es Mortality e&penses are char ed by life insurance companies for pro%idin a life co%er to the indi%idual! (he e&penses %ary with the a e# sum assured and sum$at$risk for the indi%idual! (here is a direct relation between the mortality e&penses and the abo%e mentioned factors! In a ')IP# the sum$at$risk is an important reference point for the insurance company! (he sum$at$risk is the difference between the sum assured and the in%estment %alue the indi%idual,s corpus as on a specified date! 'sually# the mortality char es are le%ied on the per thousand sum assured!

-5 %ales and Fund Ad&inistration e1)enses Insurance companies incur these e&penses for operational purposes on a re ular basis! (he e&penses are reco%ered from the premiums that indi%iduals pay towards their insurance policies! " ent commissions# sales and marketin e&penses and the o%erhead costs incurred to run the insurance business on a day$to$day basis are e&amples of such e&penses! /5 Fund &ana'e&ent c ar'es 4F$C5 (hese char es are le%ied by the insurance company to meet the e&penses incurred on mana in the ')IP in%estments! " portion of ')IP premiums are in%ested in equities# bonds# $secs and money market instruments! Mana in these in%estments incurs a fund mana ement char e# similar to what mutual funds incur on their in%estments! *M4s differ across in%estment options like a ressi%e# balanced and debt ')IPsI usually a hi her equity option translates into hi her *M4! "part from the three e&pense cate ories mentioned abo%e# indi%iduals may also ha%e to incur certain e&penses# which are primarily .optional, in nature$ the e&penses will be incurred if certain choices that are made a%ailable to indi%iduals are e&ercised! a5 %*itc in' c ar'es Indi%iduals are allowed to switch their ')IP options! *or e&ample# an indi%idual can switch his fund money from 2>>C equities to a balanced portfolio# which has say# @>C equities and L>C debt! <owe%er# the company may char e him a fee for .switchin ,! +hile most life insurance companies allow a certain number of free switches annually# a switch made o%er and abo%e this number is char ed! 65 To)7u) c ar'es

')IPs allow indi%iduals to in%est a top$up amount! (op$up amount is paid in addition to the premium amount for a particular year! Insurance companies usually deduct a certain percenta e from the top$up amount as char es! (hese char es are usually lower than the re ular char es that are deducted from the annual premium! c5 Cancellation c ar'es )ife insurance companies le%y cancellation char es if indi%iduals decide to surrender their policies before the mandated lock$in period which is usually three years! (hese char es are le%ied as a percenta e of the fund %alue on a particular date! (he 4ompounded "nnual Growth 7ate (4"G7) of the fund oes up o%er a period of time! (his is because the ')IP e&penses e%en out o%er a period of time! (he .e%enin out, occurs because althou h the e&penses are hi h in the initial years# they fall thereafter! "nd as the years roll by# the e&penses tend to .spread themsel%es, more e%enly o%er the tenure of the ')IP! "nother reason is also because the e&penses are le%ied on the annual premium amount# which stays the same throu hout the tenure! (herefore# the e&penses do not ha%e any impact on the returns enerated by the corpus! *und mana ement char es also ha%e an effect on the returns! *M4 is le%ied on the corpus# which keeps fluctuatin o%er the tenure! (he returns also depend to a lar e e&tent on how well the insurance company mana es the in%estment! Indi%iduals therefore# need to

bear in mind that e&penses are an important %ariable while e%aluatin ')IPs across life insurance companies! (hey ha%e the potential to make a considerable difference to the returns enerated o%er a period of time!

HEALTH IN%URANCE
Growth in national income by itself is not enough, if the benefits do not manifest themselves in the form of more food, better access to health and education8 7777777A&arty ! %en

E1)enditure on ealt 6y t e #overn&ent continues to 6e lo*, It is not vie*ed as an invest&ent 6ut rat er as a dead loss9

%tates under (inancial constraints cut e1)enditure on ealt %till India is *ay 6e ind &any (ast develo)in' countries suc as C ina, :ietna& and %ri Lan.a in ealt indicators

In case o( 'overn&ent (unded ealt care syste&, t e ;uality and access o( services as al*ays re&ained &a<or concern, :ery ra)idly 'ro*in' )rivate ealt &ar.et as develo)ed in India = t ey are el)in' in 6rid'in' t e 'a) 6et*een * at 'overn&ent o((ers and * at )eo)le need

" y t ere is need o( u'e ealt insurance de&and in India3 "it )roli(eration o( various ealt care tec nolo'ies and 'eneral )rice rise, t e cost o( care as also 6eco&e very e1)ensive and una((orda6le to lar'e se'&ent o( )o)ulation, T e 'overn&ent and )eo)le ave started e1)lorin' various ealt (inancin' o)tions to &ana'e )ro6le&s arisin' out o( 'ro*in' set o( co&)le1ities o( )rivate sector 'ro*t , increasin' cost o( care and c an'in' e)ide&iolo'ical )attern o( diseases, Healt scenario in India India s)ends a6out >,2 to ?@ o( #DP on Healt care 4o((icial esti&ates over around >@5 out o( * ic +,/@ is in t e #ovt,

sector 4t is accounts (or --@ o( overall s)endin'5 and 0,?@ in )rivate sector 4?A@ o( overall s)endin'5, National level o( s)endin' on Healt care under (ive year )lans as decreased 7 it *as /,/@ in (irst )lan = B,?@ in ei' t )lan, T e national s)endin' also includes (a&ily )lannin', *ater, sanitation (or rural areas etc, $a<ority o( (unds 4a))ro1, 2B@5 'o in salary = ad&inistration (ro& #ovt, s)endin' 6ud'et, T ere are various ty)es o( ealt covera'eCs in India, Based on o*ners i) t e e1istin' ealt insurance sc e&es can 6e 6roadly divided into cate'ories suc as8 #overn&ent or state76ased syste&s $ar.et76ased syste&s 4)rivate and voluntary5 E&)loyer )rovided insurance sc e&es $e&6er or'aniDation 4N#O or coo)erative576ased syste&s Po)ular )lans o( ICICI Lo&6ard Critical Care Insurance AB D o( t e Inco&e Ta1 Critical Care )rotects you or your s)ouse a'ainst loss o( inco&e on dia'nosis o( any o( t e E &a<or &edical illnesses and )rocedures, T e (irst o( its .ind, it o((ers a lu&) su& 6ene(it on dia'nosis o( Cancer, By)ass %ur'ery, Heart Attac., !idney Failure, $a<or Or'an Trans)lant, %tro.e, Paralysis, Heart :alve Re)lace&ent %ur'ery or $ulti)le %clerosis, Critical Care Insurance also )rovides cover a'ainst accidental deat and )er&anent total disa6le&ent 4PTD5, +B ! Ta1 %aver Plan 7 Introduction T e F+B! Ta1 %aver Healt Insurance PolicyG as a (i1ed

)re&iu& and ena6les you to save u) to Rs, /,/>>H under %ection AB D o( t e Inco&e Ta1 Act, Fa&ily Floater Healt Plan 7 Introduction For t e (irst ti&e in India, one sin'le )olicy ta.es care o( t e os)italiDation e1)enses o( your entire (a&ily, Fa&ily Floater Healt Plan ta.es care o( all t e &edical e1)enses durin' sudden illness, sur'eries and accidents

Personal Accident Insurance ICICI Lo&6ard Personal Accident Insurance )olicy covers you a'ainst Accidental Deat , Per&anent Total Disa6le&ent 4PTD5 and Per&anent Partial Disa6le&ent 4PPD5, As a s)ecial o((er, *e no* 6rin' / ne* Personal Accident (le1i6le )lan o)tions 4Accidental Deat = Per&anent Total Disa6le&ent cover only5 *it a su& insured o( Rs, /, 2 and Rs, +B La. !

Ba<a< AllianD Healt #uard 8 Ba<a< AllianD covers you and your (a&ily a'ainst e1)ensive &edical care includin' )re = )ost os)italiDation e1)enses, %u& assured u) to 2 lacs )er insured, Critical illness8 Protection a'ainst t e +B &a<or li(e t reatenin' illness li.e Cancer, Heart Attac., Paralysis, !idney (ailure, %tro.e, etc, In trans)lant sur'ery donor e1)ense are covered, %u& assured a)t 2B lacs )er insured, %ilver ealt 8 Ba<a< AllianDGs %ilver Healt is a ealt insurance )lan s)eci(ically (or )eo)le a'ed 6et*een 0>7?2yrs * ic )rotects you and your s)ouse in case you need e1)ensive &edical care,

Hos)ital cas 8 A )olicy t at )rovides a daily allo*ance (or eac day o( os)italiDation, Bene(its is dou6led in case o( ICU ad&ission, Inco&e ta1 e1e&)tion under %EC AB D, Personal 'uard 8T is )olicy covers a'ainst accidental deat and co&es *it several additional 6ene(its li.e os)ital con(ine&ent allo*ance, c ildrenCs education 6onus, E7 o)inion8 Ba<a< AllianD launc es e7o)inion rider, * ic *ill cover t e e1)enses o( -nd o)inion e7consultation services (or serious illness in India

United India Insurance Products Personal Accident Policy $ediclai& Policy Overseas $ediclai& Policy (or Business and oliday Overseas $ediclai& Policy (or E&)loy&ent and %tudies Overseas $ediclai& Policy (or Cor)orate Fre;uent Traveler Road sa(ety )ac.a'e Policy Uni &edicare Policy T e Ne* India Assurance Healt Plus $edical E1)enses Policy

 $ediclai& Policy Personal Accident Policy Overseas $ediclai& Policy

%tar Healt And Allied Insurance Co&)any %tar True :alue Healt Insurance is an o((erin' desi'ned to o((er ealt insurance to t e &asses, T e )re&iu&s are very econo&ical, &a.in' it *it in t e reac o( &any, T e insurance is availa6le in various o)tions ran'in' (ro& a &ini&u& su& assured o( Rs,/B,BBB to a &a1i&u& o( Rs, AB,BBB, T e )re&iu& de)ends on t e a'e o( t e )erson )ro)osed (or t e insurance, %TAR $edi Classic )olicy to )rovide (or rei&6urse&ent o( os)italiDation e1)enses, NRI All Care, to insure t e ealt o( (a&ily &e&6ers o( Non7 Resident Indians, It )rovides (or (inancial el) and assistance, s ould a &edical e&er'ency arise, Fa&ily Healt O)ti&a to )rotect all &e&6ers o( a (a&ily (ro& (inancial set6ac.s in t e event o( a serious illness, T e covera'e is a))lica6le e;ually to all &e&6ers o( t e (a&ily, %enior citiDen red car)et It )rovides cover (or anyone over t e a'e o( >B and )er&its entry ri' t u) to t e a'e o( >E *it continuin' cover a(ter t at, It is our *ay o( carin' (or a 'eneration t at as done so &uc to 6uild t e country *e ave today,

U% :s #ER$AN HEALTH IN%URANCE $ODEL

Conclusion Fro& Co&)arison

#er&an syste& is clearly su)erior to A&erican syste& #er&an syste& is social ealt insurance 6ased on solidarity dele'ation and (ree c oice A&erican syste& is 6ased on )rivate &ar.et ) iloso) y , T us t e #er&an syste& is &uc &ore suited to t e needs o( t e develo)in' countries,

Constraints in ado)tin' #er&an &odels in India M For social ealt insurance to *or. t e *or. (orce as to 6e or'aniDed and *or.in' in (or&al sector so t at t eir inco&es are clear and t ere is a &ec anis& (or )ayroll deduction o( t e contri6ution, M It also needs a *ell7develo)ed re'ulatory (ra&e*or. and culture o( solidarity and sel(7re'ulation so t at *ell o(( section o( t e co&&unity is *illin' to )ay (or t e costs o( sic.ness Universal co&)ulsory social ealt insurance is not )ossi6le in India at t is sta'e,

$icro Healt Insurance

C aracteristics o( t e $HIs M M M M M M Or'aniDed 6y N#Os Tar'etin' t e )oor Provides a co&)re ensive )ac.a'e Collects a((orda6le )re&iu&s N#Os and co&&unities &ana'e t e ad&inistration Usually re;uires so&e e1ternal resources (or (inancial via6ility,

I&)erative o( Li6eraliDation in Healt insurance Poor country li.e India ,* ere only asset )eo)le ave is t eir 6odies Early +EEB 'ovt .ey tool to &ana'e (iscal de(icit *as decrease #ovt E1)enditure Poor Iuality o( ealt service 6y 'ovt7 Clients did not de&anded 6etter service as it *as (ree o( cost

Current ealt scenario M Accounts (or +,-@ o( e1)enditure on ealt o( country M TPA as not only s)eeded t e clai& )rocess 6ut reduced t e insurer 6urden M Total clai& >0@ *ere settled in + &ont = AE@ in +7/ &ont C allen'es Faced 6y India India as 0A doctors )er +BB,BBB )ersons * ic is (e*er t an in develo)ed nations "ide ur6an7rural 'a) in t e availa6ility o( &edical services8 Ine;uity Poor (acilities even in lar'e #overn&ent institutions co&)ared to cor)orate os)itals 4Lac. o( (unds, )oor &ana'e&ent, )olitical and 6ureaucratic inter(erence, lac. o( leaders i) in &edical co&&unity

IFF-E"(I-F IF DIS(7I/'(I-F 4<"FF1)

DISTRIBUTION CHANNELS
Present Distri6ution C annels (or Insurance Products in India Insurance industry in India for fairly a lon er period relied hea%ily on traditional a ency (indi%idual a ents) distribution network I7D" (=>>L)! "s the insurance sector had been completely monopoli6ed by the public sector or ani6ations for decades# there was slow and ru ed rowth in the insurance business due to lack of competiti%e pressure! (herefore# the 6eal

for disco%erin new channels of distribution and the a

ressi%e marketin

strate ies were totally absent and to an e&tent it was not felt necessary! (he insurance products# by and lar e# ha%e been dispensed mainly throu h the followin traditional ma5or channels: (2) de%elopment officers# (=) indi%idual a ents and (N) Direct sales staff! It was only after I7D" came into e&istence as the re ulator# the other forms of channels# viz.# corporate a ents includin /ancassurance# brokers (an independent a ent who represents the buyer# rather than the insurance company# and tries to find the buyer the best policy by comparison shoppin = )# internet marketin and telemarketin were added on a professional basis in line with the international practice! "s the insurance sector is poised for a rapid rowth# in terms of business as well as number of new entrant tou h competition has become ine%itable! 4onsequently# addition of new and more number of distribution channels would become necessary! +ith the openin up of the insurance sector and with so many players enterin the Indian insurance industry# it is required by the insurance companies to come up with inno%ati%e products# create more consumer awareness about their products and offer them at a competiti%e price! Few entrants in the insurance sector had no difficulty in matchin their products with the customersD needs and offerin them at a price acceptable to the customer! /ut# insurance not bein an off the shelf product and one which requirin personal counselin and persuasion# distribution posed a ma5or challen e for

the insurance companies! *urther insurable population of o%er 2 billion spread all o%er the country has made the traditional channels of the insurance companies costlier! "lso due to hea%y competition# insurers do not en5oy the fle&ibility of incurrin hea%y distribution e&penses and passin them to the 4ustomi6e form# +ith these de%elopments and increased pressures in combatin competition# companies are forced to come up with inno%ati%e techniques to market their products and ser%ices! "t this 5uncture# bankin sector with itDs far and wide reach# was thou ht of as a potential distribution channel# useful for the insurance companies! (his union of the two sectors is what is known as /ancassurance!

Distribution - the key differentiator It has been two years since the Indian insurance market has opened up# and the new entrants into the market ha%e set up shop in e%ery ma5or city! (he public sector companies ha%e already established themsel%es in the market! /ut there are multiple challen es faced by these insurance companies# of which two are critical: Desi nin of products suitin the market 'sin the ri ht distribution channel to reach the customer

/"F4"SS'7"F41$

"n inno%ati%e distribution channel

Kour bank has already chan ed a reat deal o%er the past decade! Kour banker was once content to collect your deposits and then lend the money to companies at a profit! Fow he wants to lend to you as well! It could be a loan for a new house# a new car or e%en for education in a forei n uni%ersity! (hen there are products like demat ser%ices and mutual funds! Soon# there will be more! +hen you walk into your bank si& months from now# it is

likely that they will try to sell a host of insurance products to you e%en! +elcome to /ancassurance! /ancassurance $ a term coined by combinin the two words bank and insurance (in *rench) $ connotes distribution of insurance products throu h bankin channels! /ancassurance encompasses terms such as O"llfinan6D (in German)# OInte rated *inancial Ser%icesD and O"ssure bankin D! (his concept ained currency in the rowin lobal insurance industry and its search for new channels of distribution! /anks# with their eo raphical spread and penetration in terms of customer reach of all se ments# ha%e emer ed as %iable sources for the distribution of insurance products! Presently# there,s more acti%ity here than anywhere else! "nd e%ery one wants to 5ump onto the bandwa on for a piece of the action cake! (he insurance industry has finally woken up from its lon slumber to an alto ether new awakenin !

It is the rise of a new dawn that has brou ht with it opportunities alore! *rom innumerable insurers# to affordable and quality co%ers for the consumer# from increase in distribution channels to incorporatin information technolo y measures# from net sellin to brin in about increased transparency $ its all there! (he ubiquitous a ent is no more the only distribution channel today for insurance products! Increase in distribution channels has amon others also seen the concept of /ancassurance takin roots in India# and it is emer in to be a %iable solution to mass sellin of insurance products! /ancassurance is a lon $ standin dream of offerin a seamless ser%ice of bankin # life 0 non$life products! India# bein the one of the most populous country in the world with a hu e potential for insurance companies# has an en%ious chain of bank

branches as the lifeline of its financial system! /anks with o%er @B#>>> branches 0 @BC of household in%estments are the backbone of the Indian financial market! In India# there are ?B branches per million inhabitants! 4learly# thatDs somethin insurance companies $ both pri%ate and state$ owned $ would find nearly impossible to achie%e on their own! 4onsiderin it as a channel for insurance i%es insurance an unlimited e&posure to Indian consumers! /anks ha%e e&pertise on the financial needs# sa%in patterns and life sta es of the customers they ser%e! /anks also ha%e much lower distribution costs than insurance companies and thus are the fastest emer in distribution channel! *or insurers# tyin upcompanies and thus are the fastest emer in distribution channel! *or insurers# tyin up with banks pro%ides e&tensi%e eo raphical spread and countrywide customer accessI it is the lo ical route for insurers to take! (he bankin and Insurance industry has chan e rapidly in the chan in challen in and

economic en%ironment throu h out the world! In the

competiti%e and liberali6ed en%ironment e%eryone is tryin to do better than others and consequently sur%i%al of the fittest has come into effect! Insurance companies are also to be competiti%e by cuttin cost and ser%in in a better way to the customers! Fow the time has come to choose and adopt appropriate distribution channel throu h which the insurance companies can et the ma&imum benefit and ser%e! 4ustomers in manifold ways! (he intermediaries in the insurance business and the distribution channels used by carriers will perhaps be the stron est dri%ers of rowth in this sector! Multi channel distribution and marketin of insurance products will be the smart strate y of continue to play an important role in distribution# alternati%e channels like corporate a ents brokers and bancassurance will play a reater role in distribution! (he time has come for the industry (o radually mo%e from traditional indi%idual a ents towards new distributional channels with a paradi m shift in creatin awareness and not 5ust sellin products! T e 'a&e is old 6ut t e rules are ne* and still

de%elopin ! 1nsconced a monopoly run from the nationali6ed days be innin in 23B@# the insurance industry has indeed awakened to a dere ulated en%ironment which se%eral pri%ate players ha%e partnered with multinational insurance iants! <owe%er despite of its teamin one billion populations# India still has a low insurance penetration of 2!3B percent# B2st in the world! Despite the fact that India boosts sa%in rate around =B percent# less than BC is spent on insurance! (o streamline the sa%in into insurance# bancassurance is the best channel to tackle four challen es facin industry :$ product inno%ation# distribution# customer ser%ice# in%estments! the

" at is Bancassurance3 /ancassurance is the distribution of insurance products throu h the bankDs distribution channel! It is a phenomenon wherein insurance products are offered throu h the distribution channels of the bankin ser%ices alon with a complete ran e of bankin and in%estment products and ser%ices! (o put it

simply# /ancassurance# tries to e&ploit syner ies between both the insurance companies and banks! /ancassurance if taken in ri ht spirit and implemented properly can be win$ win situation for the all the participantsD %i6!# banks# insurers and the customer! /ancassurance commonly means sellin insurance products under the same roof of a bank! (hou h /ancassurance had roots in *rance in the 23H>s# and spread across different parts of 4ontinental 1urope since# it has spread its win s in "sia :in particular# In India# there are a number of reasons why /ancassurance could play a natural role in the insurance market (2) /anks ha%e a hu e network across the country! (=) /anks can offer fee$based income for the employees for insurance sales! (N) /anks are culturally more acceptable than insurance companies! Dealin with (life) insurance# in many parts of India# con5ure up an ima e of a bad omen! Some bank products ha%e natural complementary insurance products! *or e&ample# if a bank i%es out a home loan# it mi ht insist on a life insurance co%er so that in case of death of the borrower# there is no problem in payin off the home loan! Similarly# a car loan could only be i%en if comprehensi%e auto insurance is taken out on that particular car! we trace some of the salient de%elopments of banks in India! Section N discusses how the lack of coordination between bank re ulation and insurance re ulation created confusion in the de%elopment of /ancassurance! Section L details two main problems facin

banks in India: bad loans and o%erstaffin ! Section B describes some of the lon term dri%ers of /ancassurance in eneral! +e discuss some salient issues of entry of banks into the insurance industry in section @! (he entry of the State /ank of India created special problems in the insurance industry! Sections ? and H discuss /ancassurance e&perience in other countries : in particular# two e&periences in "sia are hi hli hted! In section 3# we discuss "merica %ersus 1uropean modalities and their rele%ance for India! In section 2># we assess then success of /ancassurance model in India! Section 22 details some salient reasons why banks are ettin into insurance business! In section 2=# we de%elop a model of entry of banks in insurance business! In the followin section# we discuss the results! *inal section concludes!

Ban.JJ Insurance 7 %yner'y8

Syner y# as commonly defined is a mutually ad%anta eous con5unction where the whole is reater than the sum of the parts! Someone ha%e %ery thou htfully con%eyed : Synergy lets you easily share a single mouse and keyboard between multiple computers, each with its own display. (he syner y that the world is witnessin in bancassurance is no different! (he

syner y here allows sharin of the same distribution channel and networks (mouse and keyboard) between bankin companies and insurance companies (multiple computers)# each with different nature and %ariety of product (display)! (he benefits that a bank can reap from this form of alliance includes increased brand :equity# customer retention apart from the re%enues! a, Fee76ased inco&e (or 6an. K non7(unds revenue8 Internationally# insurance acti%ities contribute si nificantly to banks, total domestic retail re%enues! *ee$based sellin helps to enhance the le%els of staff producti%ity in banks! (his is crucial to brin hi her moti%ation le%els in banks in India! (he re%enue earned throu h /ancassurance alliances are cate ori6ed as re%enues throu h fee based income!

Such re%enues are non$funds re%enue and ha%e an additional ad%anta e to the bank that it carries no capital reser%e maintenance pro%ision with it! Similarly# increase brand equity and customer retention by becomin full$ ser%ice pro%ider is somethin that e%ery bank would care for! -ff late# all Indian banks are tryin to increase their proportion of fee based income in their total income! (he trend is shown in (his is because accordin to /asel norms# the fee based income is risk$free and does not consume any capital!

6, Lo*er distri6ution costs8 /ancassurance has empirically pro%en to lower the distribution costs of insurers by ==$=NC due to hi h sales producti%ity! Sellin insurance to

e&istin mass market bankin customers is far less e&pensi%e than sellin to a roup of unknown customers! 1&perience in 1urope has shown that /ancassurance firms ha%e a lower e&pense ratio! (his benefit could o to the insured public by way of lower premiums! *urther for any new entrant in the insurance market# usin the already established network and infrastructure of banks makes mores sense than buildin the entire chain from the scratch! Similarly# banks can put their ener ies into the Osmall$commission customers, that insurance a ents would tend to a%oid!
'se /ank,s database for tar et se ment demo raphics I( infrastructure of the bank ("(Ms) Benefits to the insurance company )ar er customer base More funds to deploy into in%estment Structured sales approach 4ustomi6in product to the customer

Custo&er relations i)s8 Insurance companies la far behind in terms of effecti%e customer

relationship that they could maintain! (he trust and esteem with which a customer holds bank will not be same for an insurance company! Similarly for banks# it i%es them an opportunity to ser%e their e&istin customers

better! Increased brand equity and customer retention by becomin full$ ser%ice pro%ider is somethin that e%ery bank would care for! (here is now a need for e&plicit distinction between at least three customer se ments for /ancassurance: (he traditional Pmass marketP /ancassurance o Pri%ate /ancassurance (aimed at wealthy indi%iduals) o 4orporate /ancassurance and SM1s (small to medium$ si6ed enterprises) to reach their employees c, O)erational e((iciency8 "ccordin to /oston 4onsultin roup# the 'S banks were able to capture

2>$2BC of in%estment and insurance markets by tar etin =>C of customers and operate at e&pense le%els N>$B>C lower than those of traditional insurers! -ne of the most important reasons of considerin /ancassurance by /anks is increased return on assets (7-")! -ne of the best ways to increase 7-"# assumin a constant asset base# is throu h fee income! /anks that build fee income can co%er more of their operatin e&penses# and one way to build fee income is throu h the sale of insurance products! /anks that effecti%ely cross$sell financial product can le%era e their distribution and processin capabilities for profitable operatin e&pense ratios! (he ratio of e&penses to premiums# an important efficiency factor in insurance acti%ities throu h /ancassurance is e&tremely low! (his is because the bank and the insurance company is benefitin from the same distribution channels and people! E1)ansion o( 6an.s in India Penetration of commercial banks in India has been quite e&tensi%e! (here are

around @@#>>> branches of scheduled commercial banks! 1ach branch ser%es an a%era e of 2B#>>> people! (he only other national institution with a bi er reach is the postal ser%ice!= /anks ha%e not only been successful in the urban areas! It has also rown tremendously in the rural areas! -f the total number of branches of commercial banks# there are N=#@>> branches in rural areas# and 2L#L>> semi$urban branches! In addition# there are 23@ e&clusi%e re ional rural banks in deep hinterland! (here is research e%idence to show that the deliberate e&pansion policy of banks in rural areas has contributed to po%erty reduction in India (see# /ur ess and Pandey# forthcomin )! Instead of simple headcounts# if we take other bank penetration measure like total %alue of deposits as a percent of GDP# it is also e&hibitin an upward trend! (his means bank deposits are rowin at a rate much faster than the ross domestic product (*i ure2)! /anks ha%e become the main sa%in %ehicle in the economy! /etween 23HB and 233B# the rowth of deposits in banks stalled at under NBC of the GDP (that itself is a hi h number by the standard of the de%elopin economies)! *rom 233B# the bankin sector started rowin a ain! (he deposits in banks rew another 2>C of GDP by =>>>! (his le%el of rowth in bank deposit has been totally unprecedented in India since independence! +hy did the bank deposits take a leapA -ne simple (but partial) reason is a substitution from the stock market! In 233L# Indian stock market was hit by the worst scandal of manipulation of stock prices in its lon history! (he stocks fell sharply dri%in many in%estors into safer in%estment options! 7isin sa%in rate durin the late 233>s led to sustained rowth of bank deposits (that is# additional in%estment in the stock market came in the form of fresh money and not a

flow of money out bank sa%in ! (he risin sa%in came as a result of risin income across the board! +ith this back round# it is therefore not surprisin that banks ha%e become a %ehicle for sellin insurance products! Financial Institutions in Insurance Business8 RBI Rules /anks are re ulated by the Indian central bank# the 7eser%e /ank of India (7/I)! (herefore# the 7/I has set down the rules for the entry of banks in the field of insurance! In 2333# the Go%ernor of the 7eser%e /ank of India declared: PPresently# there is no pro%ision in the /ankin 7e ulation "ct whereby a bank could undertake the insurance business! (he "ct may ha%e to be amended before banks could undertake insurance business! "lternati%ely# there is a pro%ision in the /ankin 7e ulation "ct whereby banks could take any other form of business which the central o%ernment may notify! (hus# if the central o%ernment notifies insurance business as a lawful

acti%ity for a bankin company# perhaps banks would be able to undertake insurance business! It may# of course# be necessary to specify what type of insurance business they could undertakeP! <owe%er# the followin year# in a set of draft uidelines issued to all scheduled commercial banks and select financial institutions# the 7/I laid out a set of parameters that need to be met! (2) (he net worth of the bank;financial institution should not be less than 7s!B billon! (=) (he capital adequacy ratio of the bank;financial institution should be not be less than 2>C! (N) (he bank;financial institution should ha%e track record of at least three continuous years of profits!

(L) (he le%el of net Fonperformin "ssets should be 2C below the industry a%era e!(B) (he track record of performance of e&istin subsidiaries of banks;financial institutions should be 8satisfactory9!N Some confusion arose from the circular! (herefore# the 7/I proposed a series of amendments in March =>>>! In addition to the entry of banks# the 7/I also laid down a set of uidelines for the entry of Fon$/ank *inancial 4ompanies (F/*4) into insurance business (Qune N># =>>>)L! (here were two critical differences in the requirements proposed for the F/*4s! *irst# the capital adequacy ratio of the F/*4 (applicable only to those holdin public deposits) should not be less than 2= percent if en a ed in equipment leasin ;hire purchase finance acti%ities and 2B percent if it is a loan or in%estment company! Second# the le%el of nonperformin assets should be no more than B percent of total outstandin leased;hire purchase assets and ad%ances! -n Fo%ember =H# =>>2# the same rules were e&tended to co%er 8"ll India9 *inancial Institutions!B Specifically the rules for these institutions were set at the same le%el as the F/*4s noted abo%e! Some confusion still remained whether it was possible for the financial institutions to accept fees for their ser%ices directly or not! (he 7/I cleared their position in two separate circulars: one for the scheduled commercial banks and the other for the other institutions! It also stated that financial institutions 8should not adopt any restricti%e practice of forcin its customers to o in only for a particular insurance company9! In the =>>2 Report on !urrency and "inance, the 7/I laid down its %iews in

more concrete term! 8(he 7eser%e /ank# in reco nition of the symbiotic relationship between bankin and the insurance industries# has identified three routes of banks, participation in the insurance business# %i6!#
(i) (ii)

pro%idin fee$based insurance ser%ices without risk participation# (ii) in%estin in an insurance company for pro%idin infrastructure and ser%ices support and Settin up of a separate 5oint$%enture insurance company with risk participation! (he third route# due to its risk aspects# in%ol%es compliance to strin ent entry norms! *urther# the bank has to maintain an .arms len th, relationship between its bankin business and its insurance outfit! *or banks enterin into insurance business with risk participation# the prescribed entity (%i6!# separate 5oint$%enture company) also enables to a%oid possible re ulatory o%erlaps between the 7eser%e /ank and the Go%ernment;I7D"! (he 5oint$%enture insurance company would be sub5ected entirely to the I7D";Go%ernment re ulations!9

(iii)

Entry o( Ban.s in Insurance Business -n December =H# =>>># the State /ank of India (S/I) announced a 5oint %enture Partnership with 4ardif S" (the insurance arm of /FP Paribas /ank)! (his Partnership won o%er se%eral others (with *ortis and with G1 4apital)! Many e&perts in the industry ha%e awaited the entry of the S/I! It was well known that the S/I has lon harbored plans to become a uni%ersal bank (a uni%ersal bank has business in bankin # insurance and in security)! *or a bank with more than 2N#>>> branches all o%er India# this would be a natural e&pansion!

In the first round of license issue# the S/I was absent! (here were se%eral reasons for this delay! *irst# the S/I was seekin a forei n partner to help with new product desi n! Second# it did not want the partner to become dominant in the lon run (when the =@C forei n in%estment cap is e%entually lifted)! It wanted to retain its own brand name! (hird# it wanted a partner that is well %ersed in the uni%ersal bankin business! (his criterion ruled out an "merican partner where underwritin insurance business by banks has been strictly forbidden by law (althou h with the passa e of the Gramm$)each$/lily "ct# this is not quite as drastic as before)! 4ardif is the third lar est insurance company in *rance! More than @>C of life insurance policies in *rance are sold throu h the banks! *ourth# the 7eser%e /ank of India (7/I) needed to clear participation by the S/I because in India banks are allowed to enter other businesses on a 8case by case9 basis! (he S/I entry is roundbreakin for se%eral reasons! (his was the first for an Indian bank to enter the insurance market!2> Second# e%en thou h the re ulators ha%e said that banks would not ( enerally) be allowed to hold more than B>C of an insurance company# the S/I was allowed to do so (with a promise that its share would be e%entually diluted)! 1%er since the entry of the S/I# a number of other insurance companies ha%e declared their desired bankin partners! In this process# both life and nonlife companies ha%e tied up with banks! (he list of partnerships is in (able =! Fote that some of the partnerships listed here are simply at the Memorandum of 'nderstandin (Mo') sta e! (hey are yet to take any concrete form! (hese alliances are listed in (able =! " number of interestin facts emer e from the table! (he first ob%ious feature of (able = is the 8natural partnerships9 in the list!

Specifically# <D*4 )ife Insurance is tied with <D*4 /ank# I4I4I Prudential with I4I4I /ank and so on! (he second strikin feature of the table is the proliferation of banks partnerin hundreds of banks# this outcome is to be e&pected! Moreo%er# insurance companies are tar etin different market se ments by affiliatin with banks that do niche bankin ! (ake the e&ample of "%i%a! "%i%a has e%ol%ed a three$layered strate y! (he first layer is a tie$up with "/F "mro and "merican 1&press! It caters to hi h net worth urban customers! (he second layer is a tie up with 4anara /ank! (hrou h this nationali6ed bank with =#L>> branches# it reaches customers across the len th and breadth of the country! (he third layer# at a re ional le%el# a tie$ up with )akshmi Eilas bank focuses on the re ion specific customers! (his tie$up helps them reach customers in rural and semi$urban centers in (amil Fadu and "ndhra Pradesh! (he third feature is best illustrated by an e&ample! "llian6 /a5a5 does not ha%e the same bankin partners for the life sector as in the non$life sector! (hese two lists do not match! (he same is true for se%eral other companies! *ourth# some banks appear to ha%e tied up with se%eral insurance companies! *or e&ample# 4itibank appears in the list of a number of life as well as in the non$life insurance company lists! (his fact will become important as the warnin of the 7/I that banks 8should not adopt any restricti%e practice of forcin its customers to o in only for a particular insurance company9 become an issue in the future! *ifth# the most recent addition to the list is the -riental Insurance 4ompany! In Qanuary =>>L# it declared that it would distribute insurance policies with sin le insurance companies! Gi%en that there are only two do6en insurance companies and

throu h the post offices after it announced a 5oint %enture with the Department of Posts! Gi%en that the post offices ha%e unprecedented reach around the country with 2BB#@>> branches# it could distribute policies to the customers e%en in %ery remote areas! (he Department of Posts is the only institution with a reach bi er than the banks in India! (here are se%eral other banks in the pipeline for the appro%al of the I7D"! (hey include the Pun5ab Fational /ank# the Principal Group and Ei5aya /ank! (wo of them are well$established banks in India! (he Principal Group# an international financial institution# is mainly in pension business around the lobe! In India# it is likely to enter in a partnership with a bank with national distribution network in order to ramp up pension products once pension becomes dere ulated in India! (he latest roup to recei%e an outri ht charter for operatin insurance

operation is Sahara Group (on March B# =>>L)! Sahara,s entry is notable for two important reasons! *irst# Sahara is the only company to enter the Indian market without any forei n partner! It thus becomes the only purely domestic company to be ranted a license to operate in the insurance sector! Second# it operates the lar est Fon$/ank *inancial 4ompany in India! It has o%er B> million depositors! (o put it differently# one in e%ery => Indians has an account with Sahara! It ser%es the country throu h 2#?>> establishments! Since the company is di%ersified#22 it can use multiple channels for distribution of its product : not the least throu h its F/*4 capacity!

Bancassurance in India

/ancassurance in India is a %ery new concept# but is fast

ainin

round! In India# the bankin and insurance sectors are re ulated by two different entities (bankin by 7/I and insurance by I7D") and bancassurance bein the combinations of two sectors comes under the pur%iew of both the re ulators! 1ach of the re ulators has i%en out detailed uidelines for banks ettin into insurance sector! <i hli hts of the uidelines are reproduced below: 7/I uideline for banks enterin into insurance sector pro%ides three options for banks! (hey are:

Qoint %entures will be allowed for financially stron banks wishin to undertake insurance business with risk participationI *or banks which are not eli ible for this 5oint$%enture option# an in%estment option of up to 2>C of the net worth of the bank or 7s!B> crores# whiche%er is lower# is a%ailableI *inally# any commercial bank will be allowed to undertake insurance business as a ent of insurance companies! (his will be on a fee basis with no$risk participation!

(he Insurance 7e ulatory and De%elopment "uthority (I7D") uidelines for the /ancassurance are:

1ach bank that sells insurance must ha%e a chief insurance e&ecuti%e to handle all the insurance acti%ities! "ll the people in%ol%ed in sellin should under$ o mandatory trainin at an institute accredited by I7D" and pass the e&amination conducted by the authority!

4ommercial banks# includin cooperati%e banks and re ional rural banks# may become corporate a ents for one insurance company! /anks cannot become insurance brokers!

RBI #uidelines (or t e Ban.s to enter into Insurance Business *ollowin the issuance of Go%ernment of India Fotification dated "u ust N# =>>># specifyin .Insurance, as a permissible form of business that could be undertaken by banks under Section @(2)(o) of the /ankin 7e ulation "ct# 23L3# 7/I issued the uidelines on Insurance business for banks! 2 "ny scheduled commercial bank would be permitted to undertake insurance business as a ent of insurance companies on fee basis# without any risk participation! (he subsidiaries of banks will also be allowed to undertake distribution of insurance product on a ency basis! = /anks which satisfy the eli ibility criteria i%en below will be permitted to set up a 5oint %enture company for undertakin insurance business with risk participation# sub5ect to safe uards! (he ma&imum equity contribution such a bank can hold in the 5oint %enture company will normally be B> per cent of the paid$ up capital of the insurance company! -n a selecti%e basis the 7eser%e /ank of India may permit a hi her equity contribution by a promoter bank initially# pendin di%estment of equity within the prescribed period!

T e eli'i6ility criteria (or <oint venture )artici)ant are as under8 I! (he net worth of the bank should not be less than 7s!B>> crore

ii! (he 47"7 of the bank should not be less than 2> per centI iii! (he le%el of non$performin assets should be reasonableI i%! (he bank should ha%e net profit for the last three consecuti%e yearsI %! (he track record of the performance of the subsidiaries# if any# of the concerned bank should be satisfactory! N! In cases where a forei n partner contributes =@ per cent of the equity with the appro%al of Insurance 7e ulatory and De%elopment "uthority;*orei n In%estment Promotion /oard# more than on public sector bank or pri%ate sector bank may be allowed to participate in the equity of the insurance 5oint %enture! "s such participants will also assume insurance risk# only those banks which satisfy the criteria eli ible! " subsidiary of a bank or of another bank will not normally be allowed to 5oin the insurance company on risk participation basis! Subsidiaries would include bank subsidiaries undertakin merchant bankin # securities# mutual fund# leasin finance# housin finance business# etc. /anks which are not eli ible for .5oint %enture, participant as abo%e# can make in%estments up to 2>C of the net worth of the bank or 7s!B> crore# whiche%er is lower# in the insurance company for pro%idin infrastructure and ser%ices support! Such participation shall be treated as an in%estment and should be without any contin ent liability for the bank! i%en in para raph = abo%e# would be

(he eli ibility criteria for these banks will be as under : i! (he 47"7 of the bank should not be less than 2>CI ii! (he le%el of FP"s should be reasonableI

iii! (he bank should ha%e net profit for the last three consecuti%e years! @! "ll banks enterin into insurance business will be required to obtain prior appro%al of the 7eser%e /ank! (he 7eser%e /ank will i%e permission to banks on case to case basis keepin in %iew all rele%ant factors includin the position in re ard to the le%el of non$performin assets of the applicant bank so as to ensure that non$performin assets do not pose any future threat to the bank in its present or the proposed line of acti%ity# viz. #insurance business! It should be ensured that risks in%ol%ed in insurance business do not et transferred to the bank and that the bankin business does not et contaminated by any risk which may arise from insurance business! (here should be .arms len th, relationship between the bank and the insurance outfit! <oldin of equity by a promoter bank in an insurance company or participation in any form in insurance business will be sub5ect to compliance with any rules and re ulations laid down by the I7D";4entral Go%ernment! (his will include compliance with Section @"" of the Insurance "ct as amended by the I7D" "ct# 2333# for di%estment of equity in e&cess of =@ per cent of the paid up capital within a prescribed period of time! =! )atest audited balance sheet will be considered for reckonin eli ibility criteria! N!/anks which make in%estments under para raph B of the abo%e uidelines# and later qualify for risk participation in insurance business (as per para raph = of the uidelines) will be eli ible to apply to the 7eser%e /ank for permission to undertake Insurance business on risk participation basis the

Insurance A'ency BusinessL Re(erral Arran'e&ent (he banks (includes S4/s and D44/s) need not obtain prior appro%al of the 7/I for en a in in insurance a ency business or referral arran ement without any risk participation# sub5ect to the followin conditions : the bank should comply with the I7D" re ulations for actin as .composite corporate a ent, or .referral arran ement, with Insurance companies! (he bank should not adopt any restricti%e practice of forcin its customers to o in only for a particular insurance company in respect of assets financed by the bank! (he customers should be allowed to e&ercise their own choice! iii! (he bank desirous of enterin into referral arran ement# besides use of its premises and complyin with I7D" re ulations# should also enter into an a reement with the insurance company concerned for allowin makin use of the e&istin infrastructure of the bank! (he a reement should be for a period not e&ceedin three years at the first instance and the bank should ha%e the discretion to rene otiate the terms dependin on its satisfaction with the ser%ice or replace it by another a reement after the initial period! (hereafter# the bank will be free to si n a lon er term contract with the appro%al of its /oard in the case of a pri%ate sector bank and with the appro%al of Go%ernment of India in respect of a public sector bank! "s the participation by a bank,s customer in insurance products purely on a %oluntary basis# it should be stated in all publicity material distributed by the bank in a prominent way! (here should be no ,linka e, either direct or indirect between the pro%ision of bankin ser%ices offered by the bank to its customers and use of the insurance products!

(he risks# if any# in%ol%ed in insurance a ency;referral arran ement should not et transferred to the business of the bank! Bancassurance in India 7 A %"OT Analysis In India# as elsewhere# banks are seein mar ins decline sharply in their core lendin business! 4onsequently# banks are lookin at other a%enues# includin the sale of insurance products# to au ment their income! (he sale of insurance products can earn banks %ery si nificant commissions (particularly for re ular premium products)! In addition# one of the ma5or strate ic ains from implementin /ancassurance successfully is the de%elopment of a sales culture within the bank! (his can be used by the bank to promote traditional bankin products and other financial ser%ices as well! Ta6le details the comparati%e fi ures of /ancassurance deals taken up by %arious Indian Insurance companies!

%tren't s

M M

<u e number of people without life insurance (32!?N million out of 2 billion had life insurance in 2333) Millions of people tra%elin in and out of India can be tapped for -%erseas Mediclaim and (ra%el Insurance policies

=>> million households waitin insurance

for householder,s

Good ran e of products from )I4;GI4 Good amount of 70D into insurance Fot much I( initiati%e from leadin insurance players ()I4 and GI4) <i her ta& nets for the middle class Fo (a& e&emptions for products like householder# tra%el policies etc Infle&ibility of the products /ank,s database can help insurance companies de%ise policies /etter I( infrastructure from the bank,s side can help inte ratin 7isks in inte ratin culture approach# thinkin and work

"ea.nesses

M M M M M M M

O))ortunities

T reats

M M

Fon$response from tar et customers because banks are considered as insurance company a ents by the customers

In%estors mi ht suffer if the new rate of return on capital is lower than the e&istin rate of return

Lon' Ter& Drivers o( Bancassurance in India8 (he staffin problem has redirected some banks to /ancassurance and so has the 7eduction of bad loan problem! /ut# they are not the lon term dri%ers of banc assurance in India! (he lon term dri%ers in India are oin to be the followin ! (2) (he culturally more acceptable bankin transactions! /ankin does not ha%e the same sti ma that (life) insurance carries! (his factor will diminish

in importance o%er time as people become more educated! (=) /anks can offer fee$based income for insurance sales! (his can be attracti%e under current ri id structure of wa e benefits! "t present# banks are prohibited from offerin commission to the bank employees for sellin insurance products! /anks ha%e found ways to circum%ent the problem! *or e&ample# they offer Pcar allowanceP for the employees sellin insurance! (N) Farrowin bank mar ins are another key dri%er! (L) /anks ha%e complementary products with insurance products such as the auto insurance# home insurance or annuities! (B) +hen the pension reform is undertaken (and it is in the works)# banks can become natural institutional %ehicles for pri%ate pension products! In some countries# banks are e&plicitly prohibited from sellin pri%ate pension pro%iders (e! !# Me&ico)! (@) <ealthcare insurance sector can also benefit from /ancassurance! In India# only =!B million people ha%e access to healthcare facilities! -n the other hand# BC of personal income is spent on healthcare! /anks can distribute and facilitate administration of healthcare insurance! (?) In many countries# the absence of banks from sellin insurance seems to stem from re ulatory reasons! In India# pri%ati6ation of the insurance sector si naled an accommodatin approach from both the insurance re ulator and the bankin re ulator for banks entertainin the thou hts of sellin insurance! Ho* success(ul as t e Bancassurance &odel 6een in India3 pension products (e! !# "ustralia)! In some other countries# banks are the leadin

(here ha%e been two broad classes of a reements between banks and insurance 4ompanies ! (2) Pure Distribution " reements! 'nder this class# there are two sub$ classes of arran ements: (2a) 7eferral "rran ement and (2b) 4orporate " ency "rran ement! (=) Qoint Eenture " reements! (here has been a ran e of such arran ements from loose to inte rated form of distribution partnerships! (here has been a substantial rowth of bancassurance in India! +ithin two years# the share of bancassurance in the insurance distribution business has one from 6ero to =>C of new business in the pri%ate sector! Pro%ides us a sense of how rapidly /ancassurance is rowin in India! Some e&perts are predictin that within a decade# this proportion could rise to NBC to L>C! (here is e%idence that policies sold throu h /ancassurance add more %alue! In the Quly =>>N issue of the "sia Insurance Post# the Mr!P! Fanda opal of /irla Sun )ife was quoted as sayin # 8(he a%era e si6e of the policy for the a ency channel is 7s 23#B>> per policy and for the /ancassurance channel it is 7s N3#>>> per policy!9 "lthou h such concrete numbers are not a%ailable industry$wide# there is eneral consensus that bancassurance is indeed brin in in customers of hi her %alue! " y Ban.s are i' ly &otivated to Enter in Insurance Business No* " y 6an.s ave an incentive to )ro&ote Bancassurance in India3 (2) -%erstaffin problem can miti ated without resortin to drastic and politically unacceptable solutions like lar e scale firin ! (=) /anks seek to retain customer loyalty by offerin them an e&panded and

more sophisticated ran e of products (than simple bank deposits of few %arieties)! (N) Insurance distribution will increase the fee$based earnin s of banks! (L) *ee$based sellin helps to enhance the le%els of staff producti%ity in banks! (his is a key dri%er for raisin moti%ation amon bank workers! /anks ha%e some in$built ad%anta es in some of these areas! (2) /anks can put their ener ies into the small$commission customers that insurance a ents would tend to a%oid! (=) /anks, entry in distribution helps to enlar e the insurance customer base rapidly! (his helps to populari6e insurance as an important financial protection product! (N) /ancassurance helps to lower the distribution costs of insurers! " study by (illin hast# (owers and Perrin in the 'R shows that the cost of sellin insurance throu h direct sales force is appro&imately twice as hi h as the cost of sellin throu h /ancassurance! <owe%er# the cost of sellin the products throu h independent financial ad%isers is appro&imately the same as /ancassurance (quoted in Sigma ?;=>>=)! "cquisition cost of insurance customer throu h banks is low! Sellin insurance to e&istin mass market bankin customers is far less e&pensi%e than sellin to a roup of unknown customers! 1&perience in 1urope has shown that /ancassurance firms ha%e a lower e&pense ratio! (his benefit could o to the insured in the form of lower premiums! /anks could ha%e an important role to play in the pension sector when dere ulated! /anks can pro%ide collection and payments of pension contributions! /anks can also play a ma5or role in de%elopin healthcare pro ram in India! Ho* Bancassurance advanta'eous to 6an.s8

a %iable

Producti%ity of the employees increases!

/y pro%idin customers with both the ser%ices under one roof# they can impro%e o%erall customer satisfaction resultin in hi her customer retention le%els! Increase in return on assets by buildin fee income throu h the sale of insurance products! 4an le%era e on face$to$face contacts and awareness about the financial conditions of customers to sell insurance products! /anks can cross sell insurance products 1 : (erm insurance products with loans!

Advanta'es to insurers

Insurers can e&ploit the banksD wide network of branches for distribution of products! (he penetration of banksD branches into the rural areas can be utili6ed to sell products in those areas! 4ustomer database like customersD financial standin # spendin habits# in%estment and purchase capability can be used to customi6e products and sell accordin ly! Since banks ha%e already established relationship with customers# con%ersion ratio of leads to sales is likely to be hi h! *urther ser%ice aspect can also be tackled easily!

Advanta'es to consu&ers

4omprehensi%e financial ad%isory ser%ices under one roof! i!e!# insurance ser%ices alon with other financial ser%ices such as bankin # mutual funds# personal loans etc! 1nhanced con%enience on the part of the insured

1asy access for claims# as bank is a re ular o! Inno%ati%e and better product ran es!

%o&e o( t e Bancassurance tie7u)s in India are8 Insurance Co&)any /irla Sun )ife Insurance 4o! )td! Dabur )td <D*4 4G' )ife Ban. /ank of 7a5asthan# "ndhra /ank# /ank of Muscat# De%elopment 4redit /ank# Deutsche /ank and 4atholic Syrian /ank 4anara /ank# )akshmi Eilas /ank# "merican 1&press /ank and "/F "M7- /ank 'nion /ank of India )ord Rrishna /ank# I4I4I /ank# /ank of India# I4I4I Prudential )ife 4itibank# "llahabad /ank# *ederal /ank# South Indian /ank# and Pun5ab and Maharashtra 4o$ operati%e /ank! 4orporation /ank# )ife Insurance 4orporation of India Indian -%erseas /ank# Insurance 4o )td!

Insurance 4ompany P%t! Standard )ife

Insurance 4o! )td!

4enturion /ank# Satara District 4entral 4o$ operati%e /ank# Qanata 'rban 4o$operati%e /ank# Keotmal Mahila Sahkari /ank# Ei5aya /ank# -riental /ank of 4ommerce!

Met )ife India Insurance Rarnataka /ank# Dhanalakshmi /ank and Q0R 4o! )td! S/I )ife Insurance /ank

4ompany )td!

State /ank of India

/a5a5

"llian6

General 4o!

Insurance 4o! )td! Fational Insurance

Rarur Eysya /ank and )ord Rrishna /ank

4ity 'nion /ank )td! 7oyal Sundaram General Standard 4hartered /ank# "/F "M7- /ank# Insurance 4ompany 4itibank# "me& and 7epco /ank! 'nited India Insurance South Indian /ank 4o!)td!

Business $odels8
(he alliance between banks and insurance companies can be structured in %aried manners# dependin upon the type of syner y one is lookin for! 4orporate " ency Model is slowly ainin importance across %arious nations because of ease in implementation and distribution of authority$ responsibility relationship! Insurance products wrapped around the bankDs deposit and loan products (+rapper Model) are also radually ainin in popularity due to their simple product desi n while the referral model tie$up has not been able to really take off! (he options a%ailable to the banks are: M Ban.s sellin' )roducts o( t eir insurance su6sidiary e1clusively,

In this model# banks setups its own insurance subsidiary and sells its insurance products! In this setup# the products of this insurance subsidiary are not allowed to be sold by any other bank! M Ban.s sellin' )roducts o( an insurance a((iliate on an e1clusive 6asis, In this model# the bank ets into an a reement with an insurance a ency and sells their insurance product to its e&istin customers! In this setup also# the banks mi ht et into an e&clusi%e a reement with the insurance company! M Ban.s o((erin' )roducts o( several insurance co&)anies as Fsu)er &ar.etG, <ere the bank ets into a reement of sellin insurance products of as much insurance companies possible and sells it to its customers! <ere the customers can choose between wide ran es of products but the insurance companies would not prefer this as their products would not be always preferred! 4+5Cor)orate Bro.er &odel8 " corporate broker is effecti%ely a principal corporate ad%iser to an in%estment trust company! <ere the bank is actin as a corporate ad%iser to an insurance company! (he broker would make a certain amount of money from dealin commissions and market makin and a reat deal more from relati%ely infrequent corporate deals! (his relationship does not end up in lon term relationship or e&clusi%e relationships between the bank and the insurance companies!

4-5Cor)orate A'ency $odel8 In India# insurance companies prefer corporate a ency tie$ups with banks# as a ainst referral arran ements! "nother ad%anta e for banks is that the risk is borne entirely by the insurance company! (he rowth potential of corporate a ency system is immense because we can cross sell se%eral products to our customers! Insurance a ents sell only insurance or mutual fund products! Inno%ation of products is also possible under the corporate a ency arran ement! (his model is attracti%e for the banks as it offers handsome returns (up to NBC in the first year of new business procured) in%ol%es %ery low start$up costs (in%estment in the time and licensin of employees) and the business risk is underwritten entirely by the insurance companies! Insurance products wrapped around the /ankDs loan and deposit products ha%e also been ainin in popularity due to their mass appeal and simple product desi n while the referral model tie$ups ha%e not been that successful! " few banks like "llahabad /ank and /ank of India ha%e e%en mi rated from the referral model to the 4orporate " ency model! Traditional vs, E1)anded Bancassurance $odels8 In some markets# face$to$face contact is preferred# which tends to fa%our /ancassurance de%elopment! Fe%ertheless# banks are startin to embrace direct marketin and Internet bankin as tools to distribute insurance increasin ly products! Few and emer in channels are becomin

competiti%e# due to the tan ible cost benefits embedded in product pricin or throu h the appeal of con%enience and inno%ation!

*inally# the marketin of more comple& products has also ained round in some countries# alon side a more dedicated focus on niche client se ments and the distribution of non$life products! (he dri%e for product di%ersification arises as bancassurers reali6e that o%er$reliance on certain products may lead to undue %olatility in business income! Fe%ertheless# bancassurers ha%e shown a willin ness to e&pand their product ran e to include products beyond those related to bank products! Ban.s8 T e (ocal )oint 8 (raditionally# the banks and financial institutions are the key pillars of India,s financial system! Public ha%e immense faith in banks! Share of bank deposits in the total financial assets of households has been steadily risin (presently at about L>C)! Indian /anks ha%e constantly pro%en their capability reach the ma&imum number of households! In India at present there are total of @B?>> branches of commercial banks# each branch ser%in an a%era e of 2B#>>> people! -ut of these are N=@>> branches are caterin to the needs of rural India and 2LL>> to semi$urban branches# where insurance rowth has been most buoyant! (23@ e&clusi%e 7e ional 7ural /anks in deep hinterland!) 7ural and semi$ urban bank accounts constitute close to @>C in terms of number of accounts# indicatin the number of potential li%es that could be co%ered by insurance with the frontal in%ol%ement of banks! *urther still banks sell a %ery small portion of the products! (his means there is a hu e scope of banks sellin insurance products! " study conducted in 'S shows that people are willin to buy insurance products from their banks as they consider banks as a sin le point of buyin all financial products!

*urther there is a se%ere need of insurance for a riculture and other insurance products like health insurance in the rural areas! Insurance companies would not be able to establish their sales force in rural areas! "s banks already ha%e a stron foothold# it would be hu ely beneficial for the insurance companies!

BANC A%%URANCE PRODUCT PHILO%PHM

/ancassurance: challen es

emer in

trends#

opportunities

and

"ccordin to a recent si ma study# /ancassurance is on the rise# particularly in emer in markets! +orldwide# insurers ha%e been successfully le%era in /ancassurance to ain a foothold in markets with low insurance penetration and a limited %ariety of distribution channels! /ancassurance# the pro%ision of insurance ser%ices by banks# is an established and rowin channel for insurance distribution# thou h its penetration %aries across different markets! 1urope has the hi hest /ancassurance penetration rate! In contrast# penetration is lower in Forth "merica# partly reflectin /ancassurance is ainin re ulatory restrictions! In "sia# howe%er# in popularity# particularly in 4hina# where

restrictions ha%e been eased! (he research shows that social and cultural factors# as well as re ulatory considerations and product comple&ity# play a si nificant role in determinin particular market! (he outlook for /ancassurance remains positi%e! +hile de%elopment in indi%idual markets will continue to depend hea%ily on each country,s re ulatory and business en%ironment# bancassurers could profit from the tendency of o%ernments to pri%ati6e health care and pension liabilities! In emer in markets# new entrants ha%e successfully employed /ancassurance to compete with incumbent companies! Gi%en the current relati%ely low /ancassurance penetration in emer in markets# /ancassurance will likely see further si nificant de%elopment in the comin years! how successful /ancassurance is in a

Bancassurance8 E&er'in' Trends (hou h /ancassurance has traditionally tar eted the mass market# bancassurers ha%e be un to finely se ment the market# which has resulted in

tailor$made products for each se ment! (he quest for additional rowth and the desire to market to specific client se ments has in turn led some bancassurers to shift away from usin a standardi6ed# sin le channel sales approach to adoptin a multiple channel distribution strate y! Some bancassurers are also be innin to focus e&clusi%ely on distribution! +ealth mana ement# pioneered by "ssurance has found its way in /ancassurance alliances! (ermed as Pri%ate /ancassurance# the concept combines pri%ate bankin and in%estment mana ement ser%ices with the sophisticated use of life assurance as a financial plannin families "s a medium of sellin insurance products# /ancassurance mo%ed from second position in =>>L to first position in =>>@! +orksite marketin which was in the top position in =>>L fell to fourth position in =>>@! /anks, insurance sales are hi h in countries where the products tend to be relati%ely simple and are a natural fit with banks, e&istin products! (he life insurance products most successfully sold by bancassurers are mostly simple$deposit$substitutes such as sin le$premium unit$linked or capitali6ation products! In *rance# financial institutions accounted for @@C of sin le premium unit$linked life business in =>>B! In eneral# bancassurers ha%e been less successful in sellin more comple& sa%in s products such as pensions! Manhattan consultin roup in its sur%ey has found positi%e co$relation structure to achie%e fiscal ad%anta es and security for wealthy in%estors and their

between number of products an institution deal in an the attrition le%els! It showed that with increase in product count# the attrition le%el tends to decrease sharply as the employee en a ement increases!

Iuantu& o( )roducts -ne Product

Attrition

levels (interest =?C =>C 2?C

bearin account) -ne "dditional product = or more products

Bancassurance8 T e C allen'es /anks could be more endurin than indi%idual a ents when sellin

insurance# but /ancassurance relationships are not! Since the openin up of the insurance sector in ,>># as many as si& /ancassurance alliances ha%e ended in di%orce says #conomic $imes! If /ancassurance was termed as marria e between banks and insurance# then the probability of di%orces can,t be ruled out! 4ritics opine that /ancassurance is a contro%ersial idea# and it i%es banks too reat a control o%er the financial industry! (he challen e to sustain such alliances could be immensely dauntin ! (he difference in re ulation# not only across countries but between banks and insurance industry as well has been cited as the primary reason! (he difference in trade customs# work culture in these industries is another impediment!

%ales (ront8 /ank employees are traditionally low on moti%ation! )ack of sales culture itself is bi er roadblock than the lack of sales skills in the employees! /anks are enerally used to only product packa ed sellin and hence sellin insurance products do not seem to fit naturally in their syste

HR issues8 <uman 7esource Mana ement has e&perienced some difficulty due to such alliances in financial industry! Poachin for employees# increased work$load# additional trainin # maintainin the moti%ation le%el are some issues that has cropped up quite occasionally! So# before enterin into a /ancassurance alliance# 5ust like any mer er# cultural due dili ence should be done and human resource issues should be adequately prioriti6ed! Pu6lic and )rivate divide8 Pri%ate sector insurance firms are findin .chan e mana ement, in the public sector a ma5or challen e! State$owned banks et a new chairman# often from another bank# almost e%ery two years# resultin in the distribution strate y under oin a complete chan e! In the pri%ate sector# the M0" acti%ity is one of the causes for chan e! In the past# Dena /ank# which had ori inally partnered Rotak Mahindra )ife# switched loyalty to the public sector )ife Insurance 4orporationA So did "llahabad /ank# which had a tie$up with I4I4I Prudential )ife Insurance! Pun5ab Fational /ank and Ei5aya /ank ha%e been forced to drop their /ancassurance partnerships after they chose to set up an insurance brokin QE!

#rou) co&)anies dile&&a8 (he other conflict that most insurers face is when they ha%e a bank within their own roup! <alf of the insurance firms in India are part of a financial roup that has a bank! (hey include I4I4I /ank# State /ank of India# IFG Eysya# <D*4# Qammu 0 Rashmir /ank# and Rotak Mahindra /ank!

"ccordin to 7a5esh 7elhan# head of /ancassurance# "%i%a )ife# there is a fear amon banks that at some point in future their insurance partner may end up cross$sellin bankin ser%ices to their policyholders! /esides# companies that sell predominantly throu h a ents e&perience channel conflict when both a ents and banks tar et the same customer! O)erational C allen'es8 (he de%elopments in the =2st century# particularly due to increase in non$life insurance products pose further problems to the /ancassurance alliances:

(he shift away from manufacturin to pure distribution requires banks to better ali n the incenti%es of different suppliers with their own! Increasin sales of non$life products# to the e&tent those risks are

retained by the banks# require sophisticated products and risk mana ement!

(he sale of non$life products should be wei hted a ainst the hi her cost of ser%icin those policies! /anks will ha%e to be prepared for possible disruptions to client relations arisin from more frequent non$life insurance claims!

Bancassurance to Banc7sec7urance8 A ste) to*ards Universal Ban.in' Securities business seems an automatic e&tension to banks and insurance! (his inte ration will be a step further towards uni%ersal bankin and would le%era e the efficiencies de%eloped by alliance of banks and insurance

companies! It will be for customers who want to et a one$stop shop for all financial products! So the banks should transform themsel%es to a wholesome entity! (his has to be inte rated with the internet bankin and other I( infrastructure# for e! ! customers should be able to pay insurance premium# mar in money on security transaction %ia the net$bankin facility and the "(M network! a, Involve&ent o( Co7o)erative 6an.s8 Insurance industry has %ery low penetration rate in India! (he market and scope in rural India is immense and lar ely untapped! (he insurance companies should acti%ely try to in%ol%e co$operati%e and re ional rural banks amon st their potential alliances alon with the bi and multinational banks! (hese co$operati%e banks will ha%e reater reach in %illa es of rural India and will also operate at economic cost! 6, $ini&iDe con(licts o( interest 6et*een t e 6an. and t e insurer8 " formal and standard a reement between these banks and the insurance companies should be taken up and drafted by an national re ulatory body! (hese a reements must ha%e necessary clauses of re%enue sharin ! In case of possible conflicts# the bank mana ement and the mana ement of the insurance company should be able to resol%e conflicts amicably! If they are not sol%ed# there can be a ape& body set up by I7D" to sol%e these types of issues! (his could be done by Settin up distribution procedures consistent with the manual systems in most banks! 1stablishin credible ser%ice le%el a reements between the bank and the insurer!

c! Involve&ent o( senior 6an. &ana'e&ent and s.ill develo)&ent at

t e o)eratin' level at 6an. 6ranc es8 (he /ancassurance alliances should be taken up at the top mana ement le%el! Such strate ic actions require the senior mana ement support not only durin the decision sta e but also at the time of implementation! (heir acti%e participation in the process is %ery much necessary for the success of such initiati%es! (he employee base that would be interactin with the insurance customers should also be properly trained in order to equip themsel%es with the skills required in sellin insurance products! (he bank employees would not be aware of these sellin skills if proper trainin is not i%en! d, Bancassurance and )ension sector8 Pension sector is at the %er e of bein dere ulated! -nce this sector is dere ulated# banks would et the dual benefits of mana in these hu e pension pension funds and the opportunity to sell mainly health insurance products to these pension sector customers! )ow cost of collectin sector! Money transfer costs in Indian bankin standards! banks can fulfill in a credible framework! e, Focus on #rou) insurance sc e&es8 4onsiderin the beha%ior of the Indian customers# roup insurance is the way to o about! "s 5oint accounts or indi%idual accounts of families are contributions is the key element in the success of de%elopin the pension are low by international Portability of pension accounts is a %ital requirement which

%ery prominent# we will ha%e to sell these insurance products to these members of the family as a roup! (his would be easier in terms of collection of premiums as 2 or = members of the family would be workin and linkin insurance premiums from these sa%in s; salary accounts would be easier and hassle$free! (, Tar'etin' (re;uent travelers 4travel insurance58 In India# thou h some of the airlines ha%e tra%el insurance# there is no income from these frequent tra%elers! "s frequent tra%elers are tar eted by these airlines by i%in confessional fares# banks can sell them tra%el insurance at some confessional premiums! (his would be additional re%enue to the insurance company as well! ', Tie7u)s *it residential co&)le1 6uilders 4 ouse olderGs insurance58 <ouse loans and householder,s insurance can be linked! /anks ha%e hu e e&posures to house loans! Fow as far as the customers are concerned# they would prefer householder,s insurance also as a packa e alon with the house loans! (he collection of premiums would also not be a problem! Formally these customers i%e post$dated cheques! (herefore premiums can also be collected in the similar fashion! Some concessions to the customers can be i%en like e&tension of payment period etc! Insurance in business acti%ities can also be tar eted as banks ha%e considerable e&posure to corporate loans! , National level ealt care )ro'ra&&e8

/anks can play a ma5or role in de%elopin a %iable healthcare pro ramme in India! -nly =!B million people ha%e access to healthcare facilities! (here is a rowin demand for healthcare products which banks can distribute (and facilitate administration)! /anks would be the best medium to distribute health insurance plans and create awareness amon st the people! (he Go%ernment of India and its plannin commission can le%era e this /ancassurance concept to launch a nation wide healthcare pro ramme! Bancassurance8 Future outloo. and Reco&&endations8 (he outlook for /ancassurance remains positi%e! +hile de%elopment in indi%idual markets will continue to depend hea%ily on each country,s re ulatory and business en%ironment# bancassurers could profit from the tendency of o%ernments to pri%ati6e health care and pension liabilities! In emer in markets# new entrants ha%e successfully employed /ancassurance to compete with incumbent companies! Gi%en the current relati%ely low /ancassurance penetration in emer in markets# /ancassurance will likely see further si nificant de%elopment in the comin years! +e recommend followin for sustainable and inclusi%e rowth in /ancassurance alliances!

DETARIFFIN# 7AN INNO:ATI:E %TRATE#IC TOOL

Detari((in' insurance sector N A cover (or all

Detariffing means that the pricing of insurance policies are left to the individual insurance companies concerned, to decide and offer, based on their analysis and perception of risk

(he eneral insurance business in the country was nationali6ed on Qanuary 2# 23?N by the mer er and roupin of more than 2>? non$life firms into four public sector companies! (he I7D" (Insurance 7e ulatory and De%elopment "uthority of India) "ct# 2333# pa%ed the way for the entry of pri%ate players into the insurance market# till then the preser%e of the public sector! (here are now N> insurance companies in the market# of which 2L are in the eneral insurance business! (he market share of the four PS' insurance companies stood at around ?? per cent as on March# with the rest shared by the pri%ate companies! /ut the rowth of the pri%ate companies has been strident in the recent past! Detariffin ad%anta es (he I7D" has prepared a road map for detariffin all cate ories of eneral insurance business from Qanuary 2# =>>?! "ccordin to the I7D"# the ad%anta es of the detariffin are encoura ement to scientific ratin and adoption of better risk mana ement practicesI elimination of cross$ subsidi6ation leadin to independent pricin for each line of businessI de%elopment of inno%ati%e practices# and eneratin customer$friendly options for the policyholders! (he proposed detariffin in the eneral insurance industry would lead to a ma5or shift in the focus of the companies# resultin in hi her penetration in the country! Detariffin entails mo%in from rule$based underwritin systems and practices to risk$based decision$makin of the sub5ect matter offered for underwritin ! It means that the pricin of insurance policies is left to the indi%idual insurance company# based on an analysis and perception of risk! 4ompetition is e&pected to whittle down the fat mar ins that insurers en5oy in fire and en ineerin insurance# eliminate cross$subsidies and force companies to look at small businesses! <ow does it matter to consumersA (he consumer has not benefited much from the insurance liberali6ation2 process! 'nder the market re ime# the insurance companies will be forced to rate risks scientifically! (he only way insurance companies can make profit and# thereby# maintain their sol%ency ratio without oin back to their shareholders is by prudent underwritin !

(he downside is that the balance$sheets of non$life insurance companies could be splashed in red# and buyers with small insurance needs may be i nored! -n detariffin # the ratin will be based on the risk profile of the customerI it will be in the customersD interest to make his risk profile better! " risk should be 5ud ed on its own merits and detariffin will force insurers to scale up their risk$assessment capability and i%e the underwritin function its due importance in the insurance process! "fter all# this is the core function of analy6in and pricin transfer of risk! /y far the bi est impact of detariffin would be on motor insurance! <ere too# ood customers would ain! Fow# a car$owner with no claims subsidi6es another who makes lar e claims! In the detariff re ime# car$owners with a ood track record will ain! /arrin commercial motor %ehicles and medical insurance# premium on assets (that is# fire# en ineerin and property risk co%ers) are forecast to drop by at least L> per cent in a detariffed re ime due to intense competition! (he premium for trucks and other transport %ehicles is e&pected to o up substantially as the related claims ratio# especially for the third party le al liability se ment# has been %ery hi h and the premium char ed has not been commensurate with the risk e&posure! Impact on Insurance 4ompanies *allin premium income without a concomitant reduction in claims is likely to brin down the profits of insurance companies# their sol%ency ratios and# consequently# their international ratin s which# in turn# would affect their reinsurance placements and underwritin capability! -nly the fire and en ineerin risk business is profitable based on current tariffs# and the profit mar ins on these se ments would now be put to se%ere strain due to competiti%e pressures! 4on%ersely# customers must also be on their uard to keep an eye on the financial health of their insurance company to a%oid bankruptcy# which is a common phenomenon in the international market! "utomobile companies will also be under pressure to reduce repair cost! 7ole of Professional Intermediaries +orld o%er# the concept of risk mana ement has now become a part of corporate o%ernance! Professional risk mana ers enable cost$effecti%e protection throu h scientific methods of identification# e%aluation and mana ement of risk e&posures!

*aced with dauntin choice in selectin the ri ht insurance co%er at the ri ht price from the ri ht insurer# consumers will look up to domain e&perts such as insurance brokers for ad%ice to et the best that the market has to offer! Insurance broker %s! a ent "s per I7D" norms# an a ent can only represent a sin le insurance company and market its products while insurance brokers obtain clients the best possible co%era e from any insurance company! Insurance brokers are professionals who assess risk# desi n the optimal insurance policy structure# obtain the best terms# e&ecute insurance contracts and assist in the settlement of claims! Ealue$addition is pro%ided in the form of inno%ati%e tailor$made products! Insurance companies are le ally mandated to absorb their ser%ice char es within the premium paid by the insured! It will be the insurers who will be under pressure to 5ustify the rates and performance and yet earn profits! (he mo%e to detariff is also likely to hasten the process of infusin more capital into the pri%ate insurance companies as and when the parliamentary appro%al is obtained for the *inance Ministry proposal for increasin the forei n direct in%estment limit from the present =@ per cent to L3 per cent!

De/tariffin) of Genera' Insuran$e 0ar*et

ithdra!a" of Tariff rates

The Tariff Ad#isory Co$$ittee #ide its %ir%u"ar ref& TAC'(')* dated +th De%e$ber ,))* de%ided that the rates- ter$s- %onditions and re.u"ations a//"i%ab"e to 0ire- En.ineerin.- 1otorork$en2s Co$/ensation and other %"asses of business %urrent"y under tariffs sha"" be !ithdra!n effe%ti#e fro$ 3 4anuary- ,))(& The IRDA under se%tion 3+5,65i6 of the IRDA A%t- 3777 has notified that the Tariff .enera" re.u"ations 5other than those re"atin. to ratin.6- ter$s- %onditions- %"auses- !arranties- /o"i%y and endorse$ent !ordin.s a//"i%ab"e to the abo#e $entioned %"asses of business as !e"" as 1arine Hu"" Insuran%e business sha"" %ontinue to be fo""o!ed unti" further orders& The rates of /re$iu$ $ay be #aried sub8e%t to %o$/"ian%e !ith the 9uide"ines on :0i"e and Use2 of 9enera" Insuran%e ;rodu%ts notified&

1otor Third ;arty Insuran%e Rates The $otor insuran%e tariffs !i"" no "on.er be a//"i%ab"e !ith effe%t fro$ 3st 4anuary ,))(& A%%ordin."y- in e<er%ise of /o!ers %onferred by Se%tion 3+5,65i6 of the Insuran%e Re.u"atory and De#e"o/$ent Authority A%t- 3777 the Authority has issued the fo""o!in. dire%tions= Insurers sha"" /ro#ide $otor third /arty "iabi"ity insuran%e %o#er to a"" #ehi%"es at the rates /res%ribed by the Authority& Insurers sha"" not refuse %o#er for third /arty risk& ;o"i%ies in for%e on 3st 4anuary ,))( sha"" not be %an%e""ed for the /ur/ose of re#ision of /re$iu$ rates $id-ter$& The Insured sha"" not be for%ed to take any additiona" %o#er !hi%h he is not !i""in. to take&

This Cir%u"ar as !e"" as the /res%ribed s%hedu"e of /re$iu$ rates sha"" be /ro$inent"y dis/"ayed on the Noti%e Board of e#ery under!ritin. offi%e of the insurer !here it %an be #ie!ed by the /ub"i%& 1otor Third ;arty Insuran%e ;oo" The Authority- after %onsu"tation !ith the Co$$ittee %onstituted under Se%tion 33)9 of the Insuran%e A%t- has issued a dire%tion under Se%tion >+ of the Insuran%e A%t that a"" .enera" insurers sha"" %o""e%ti#e"y /arti%i/ate in a ;oo"in. arran.e$ent to share in a"" $otor third /arty insuran%e business under!ritten by any of the re.istered .enera" insurers in a%%ordan%e !ith the fo""o!in. /ro#isions = ;ARTICI;ATION The /arti%i/ation of 9enera" Insuran%e Cor/oration of India 59IC6 in the ;oo"ed business sha"" be su%h /er%enta.e of the $otor business that is %eded to it by a"" insurers as statutory reinsuran%e %essions under Se%tion 3)3A of the Insuran%e A%t& The business re$ainin. after su%h %ession to 9IC sha"" be shared a$on. a"" the re.istered .enera" insurers !ritin. $otor insuran%e business in /ro/ortion to the .ross dire%t .enera" insuran%e /re$iu$ in a"" %"asses of .enera" insuran%e under!ritten by the$ in that finan%ia" year& Under!ritin. of business= Under!ritin. offi%es of insurers sha"" fo""o! the under!ritin. instru%tions of the 9enera" Insuran%e Coun%i" in the $atter of

/ro%edures for under!ritin. and do%u$entation and a%%ountin. and sett"e$ent of ba"an%es& The business sha"" be under!ritten at rates and ter$s and %onditions of %o#er as notified by the Authority fro$ ti$e to ti$e& No #ehi%"e o!ner sha"" be denied third /arty insuran%e %o#er in res/e%t of his #ehi%"e !hi%h is ho"din. a #a"id /er$it for use on /ub"i% roads e<%e/t on .rounds of atte$/ted fraud& C"ai$s /ro%essin. and sett"e$ent= A"" %"ai$s in res/e%t of third /arty death or in8ury or /hysi%a" da$a.e sha"" be /ro%essed for sett"e$ent in a s/eedy and effi%ient $anner in a%%ordan%e !ith the instru%tions of the 9enera" Insuran%e Coun%i"& 0or this /ur/ose- the Coun%i" sha"" ado/t a /roa%ti#e %"ai$s sett"e$ent /o"i%y ado/tin. the $ost effi%ient %"ai$s /ro%essin. /ra%ti%es /ossib"e& Ad$inistration of the ;oo"in. arran.e$ent= The 9IC sha"" a%t as the ad$inistrator of the /oo"in. arran.e$ent& It !i"" a%t under the .uidan%e of the 9enera" Insuran%e Coun%i"& 0or this /ur/ose- the Coun%i" $ay estab"ish su%h Co$$ittees of insurers as are ne%essary to o/erate the ;oo"in. arran.e$ent and /ro%ess and sett"e %"ai$s in the $ost effi%ient $anner& Re$uneration= There !i"" be no a.en%y %o$$ission or brokera.e /ayab"e in res/e%t of $otor third /arty insuran%e business& The under!ritin. insurer !i"" be /aid a reinsuran%e %o$$ission of 3)? on the /re$iu$ %eded by it to a"" the other insurers and reinsures& The 9IC as ad$inistrator sha"" be /aid a fee of ,&@? of the tota" /re$iu$ on $otor third /arty insuran%e business in res/e%t of the business under!ritten for the /oo"ed a%%ount& Re#ie!= The Authority !i"" re#ie! the o/eration of the /oo"in. arran.e$ent and the need for re.u"ation of the /re$iu$ rates and ter$s of %o#er and !i"" issue su%h dire%tions fro$ ti$e to ti$e as $ay be %onsidered ne%essary& Ro"e of Tariff Ad#isory Co$$ittee +ith the abolition of tariffs# the role of the (ariff "d%isory 4ommittee will under o a chan e! It can perform the followin useful functions:

 4ollection of data on premiums and claims# analysis of such data and dissemination of the results to the insurers! 7eport to I7D" on the underwritin health of the market and any aberrations in market beha%iors! 4onstitution of 1&pert Groups at the request of the General Insurance 4ouncil to look into underwritin issues and recommend necessary action!

-r ani6e trainin to underwriters at the market le%el and attend to public rie%ances on non$a%ailability of insurance and try to resol%e the issues by discussion with insurers!

0i"e and Use 9uide"ines These .uide"ines are issued by the IRDA under the /ro#isions of Se%tion 3+5,65i6 of the IRDA A%t 3777& 5The /ur/ose of the .uide"ines is to %reate an order"y /ro%edure to ensure that the /rodu%ts offered by insurers and the rates of /re$iu$ %har.ed are a//ro/riate and fair as bet!een the insurer and the /o"i%yho"ders6 The .uide"ines a//"y to a"" insuran%e /rodu%ts A both nontariff and those !hi%h !ere .o#erned by Tariffs /rior to 3st 4anuary ,))(& Ho!e#er- insurers sha"" not #ary the %o#era.e- ter$s and %onditions!arranties- %"auses and endorse$ents under the tariffs unti" >3st 1ar%h- ,))B& Under!ritin. ;o"i%y 0i"in. of /rodu%ts !i"" be a%%e/ted by IRDA on"y after the insurer has fi"ed the under!ritin. /o"i%y as a//ro#ed by the Board of Dire%tors of the insurer& The Under!ritin. /o"i%y /"a%ed before the Board sha"" %o#er i$/ortant as/e%ts su%h as =

The under!ritin. a//roa%h of the %o$/any in the $atter of e</e%tation of under!ritin. /rofit& The $ar.ins that !i"" be bui"t into the rates of /re$iu$ to %o#er a%Cuisition %osts- /ro$otiona" e</enses- e</enses of $ana.e$ent- %atastro/he reser#e and /rofit $ar.in and the %redit that !i"" be taken for in#est$ent in%o$e in the desi.n of rates- ter$s and %onditions of %o#er- and ho! they !i"" be $odified based on the a%tua" o/eratin. ratios of the insurer& The "ist of /rodu%ts that !i"" fa"" into ea%h of the sub%ate.ories- as /ro#ided in the 9uide"ines& 0or this /ur/ose- the /rodu%ts are %"assified into t!o broad %"assifi%ations- na$e"y %"ass rated /rodu%ts and indi#idua" rated /rodu%ts& These are further %"assified into the fo""o!in. @ sub-%ate.ories& C"ass rated /rodu%ts Interna" tariff rated ;rodu%ts= These are standard /rodu%ts that %an be so"d by any of the offi%es of the insurer !ith the rates- ter$s and %onditions of %o#er- in%"udin. %hoi%e of dedu%tib"e !here a//"i%ab"e- as set out in an interna" .uide tariff& E<a$/"es are= 0ire insuran%e !ith %ertain su$ insured or %ate.ory of risk "i$itations- 1otor insuran%e other than f"eets- ;ersona" A%%ident Insuran%e other than .rou/s- hea"th insuran%e other than .rou/s- bur."ary insuran%e- fide"ity insuran%e and so on& ;a%ka.ed or %usto$iDed ;rodu%ts= These are /rodu%ts s/e%ia""y desi.ned for an indi#idua" %"ient or %"ass of %"ientsin ter$s of s%o/e of %o#er- basis of insuran%e- dedu%tib"esrates and ter$s and %onditions of %o#er& These !i"" in%"ude insuran%e /a%ka.es "ike Ho$eo!ner2s Co$/rehensi#e or Sho/kee/er2s Co$/rehensi#e or Banker2s

B"anket insuran%e and so on&

Indi#idua" rated /rodu%ts Indi#idua" e</erien%e rated /rodu%ts= These are /rodu%ts !here the rates- ter$s and %onditions of %o#er are deter$ined by referen%e to the reCuire$ents of and the a%tua" %"ai$s e</erien%e of the insured %on%erned& These !i"" ty/i%a""y be insuran%es !ith a hi.h freCuen%y but "o! intensity of "oss o%%urren%e& E<a$/"es are= Car.o insuran%e- 9rou/ ;&A& or Hea"th- 1otor 0"eets- Hu"" insuran%e and so on& E</osure rated /rodu%ts= These are /rodu%ts !here the rates- ter$s and %onditions of %o#er are deter$ined by an e#a"uation of the e</osure to "oss in res/e%t of the risk %on%erned- inde/endent of the a%tua" %"ai$s e</erien%e of that risk& E<a$/"es are = EarthCuake risk- ;ub"i% Liabi"ity insuran%e for hi.h haDard o%%u/an%ies and so on& Insuran%es of "ar.e risks= 0or the /ur/ose of these .uide"ines- "ar.e risks are insuran%es for tota" su$ insured of Rs&,@)) %rore or $ore at one "o%ation for /ro/erty insuran%e- $ateria" da$a.e interru/tion %o$binedE and business Rs&3)) %rores or $ore /er e#ent for "iabi"ity insuran%es& These are ty/i%a""y insuran%es that are desi.ned for indi#idua" "ar.e %"ients and !here the rates- ter$s and %onditions of %o#er $ay be deter$ined by referen%e to the internationa" $arkets& The de"e.ation of authority to #arious "e#e"s of $ana.e$ent for Cuotin. rates and ter$s and for under!ritin.& In /arti%u"ar- the Board shou"d a//oint the A//ointed A%tuary or 0inan%ia" Ad#iser or the Chief 0inan%ia" Offi%er or any other to/ $ana.e$ent e<e%uti#e !ho does not ha#e any

res/onsibi"ity for business de#e"o/$ent to a%t as the $oderator of rates and ter$s that are Cuoted on indi#idua""y rated risks& The ro"e and e<tent of in#o"#e$ent of the A//ointed A%tuary in re#ie! of statisti%s to deter$ine rates- ter$s and %onditions of %o#er in res/e%t of interna" tariff rated risks and /rodu%ts desi.ned for a %"ass of %"ientsE The interna" audit $a%hinery that !i"" be /ut in /"a%e for ensurin. Cua"ity in under!ritin. and %o$/"ian%e !ith the %or/orate under!ritin. /o"i%y& The /ro%edure for re/ortin. to the Board on the /erfor$an%e of the $ana.e$ent in under!ritin. the business in%"udin. the for$s and freCuen%y of su%h re/orts&

0i"in. of ;rodu%ts No .enera" insuran%e /rodu%t $ay be so"d to any /erson un"ess the reCuire$ents of the .uide"ines are %o$/"ied !ith in res/e%t of that /rodu%t& The reCuire$ents of IRDA are as fo""o!s= Desi.n and ratin. of /rodu%ts $ust a"!ays be on sound and /rudent under!ritin. basis& The %ontin.en%ies insured under the /rodu%t shou"d be %"ear and /ro#ide trans/arent %o#er !hi%h is of #a"ue to the insured& A"" "iterature re"atin. to the /rodu%t shou"d be in si$/"e "an.ua.e and easi"y understandab"e to the /ub"i% at "ar.e& As far as /ossib"e- a si$i"ar seCuen%e of /resentation $ay be fo""o!ed& A"" te%hni%a" ter$s shou"d be %"arified in si$/"e "an.ua.e for the benefit of the insured& The insuran%e /rodu%t shou"d %o$/"y !ith a"" the reCuire$ents of the ;rote%tion of ;o"i%yho"ders2 Interests Re.u"ations- ,)),& The /ri%in. of /rodu%ts shou"d be based on data and !ith

te%hni%a" 8ustifi%ation 5e&.& adeCuate statisti%a" infor$ation on the %"ai$s e</erien%e6& The ter$s and %onditions of %o#er sha"" be fair bet!een the insurer and the insured& 0or e<a$/"e- the %onditions and !arrantees shou"d be reasonab"e and %a/ab"e of %o$/"ian%e& The e<%"usions shou"d not "i$it %o#er to an e<tent that the #a"ue of insuran%e is "ost& The %o#er /ro#ided shou"d be of #a"ue to the /o"i%yho"der and shou"d offer needed /rote%tion& The /o"i%yho"der shou"d not be for%ed to buy %o#ers that he does not need as a /re-%ondition of bein. .ranted %o#er that he needs& The ti$e a""o!ed for re/ortin. of %"ai$s shou"d be reasonab"e& The /o"i%yho"der shou"d not be reCuired to do thin.s that are onerous after a %"ai$ to $aintain his e"i.ibi"ity for /rote%tion nor shou"d the ;o"i%yho"der be /re#ented fro$ resu$in. his business e</editious"y by the %"ai$s /ro%ess& Ro"e of A%tuary The A//ointed A%tuary- in %onsu"tation !ith the under!riters of the insurersha"" deter$ine the reCuire$ents for %o$/i"ation and ana"ysis of data of su$s insured- /re$iu$s and %"ai$s at the sta.e of /rodu%t desi.n itse"f and ensure that su%h data is %a/tured at the sta.e of effe%tin. insuran%e- on %"ai$s inti$ation and on a"" %"ai$s /ay$ents& Ana"ysis of data referred to in /re#ious /ara abo#e shou"d enab"e re#ie! of rates- "oadin.s and dis%ounts for e#ery ratin. fa%tor used in the deter$ination of /re$iu$ rates& hi"e fi"in. the /rodu%t a %ertifi%ate by the A//ointed A%tuary shou"d a%%o$/any e#ery /rodu%t statin. the ratin. fa%tors for !hi%h data !i"" be %a/tured and that adeCuate %a/a%ities and %a/abi"ities ha#e been /ut in /"a%e for %o""e%tion- %o$/i"ation and ana"ysis of su%h data&

Do%u$ents reCuired to be fi"ed The do%u$ents to be fi"ed in res/e%t of e#ery ne! /rodu%t or re#ision of an e<istin. /rodu%t in res/e%t of /rodu%ts %"assified as :%"ass rated2 /rodu%ts abo#e sha"" be a$on. others = State$ent fi"in. /arti%u"ars of the /rodu%t in 0or$ AE Co/ies of ;ros/e%tus and other sa"es "iterature re"atin. to the /rodu%tE Co/y of ;ro/osa" 0or$E Co/y of ;o"i%y 0or$ and %o/ies of the standard endorse$ents to be used !ith the /o"i%yE One shou"d "ook for si$/"e easy to understand "an.ua.e& The %onditions a//"i%ab"e to the /o"i%yho"der shou"d be %"ear"y set out and he shou"d be to"d of the %"ai$s re.istration and Cuantifi%ation /ro%edures& There shou"d a"so be infor$ation on the dis/utes reso"ution /ro%edures& And Co/y of the Under!riter2s 1anua" in res/e%t of the /rodu%t a"on. !ith the "ist of de%"ined risks- if any& ;arti%u"ars in 0or$ A re"ate to- a$on. other thin.s- the fo""o!in.=

0u"" detai"s of the /rodu%t Co#era.e- e<%"usions- s/e%ia" features- if any De"e.ated authority for under!ritin. and %"ai$s Rates and ter$s Basis of ratin.- et%& Certifi%ate by ;rin%i/a" Offi%er or Desi.nated Offi%er Certifi%ate by A//ointed A%tuary Certifi%ate by La!yer

Certifi%ate by ;rin%i/a" Offi%er or Desi.nated Offi%er This is to %onfir$ that=

The rates- ter$s and %onditions of the abo#e $entioned /rodu%t fi"ed !ith this %ertifi%ate ha#e been deter$ined in %o$/"ian%e !ith the IRDA A%t- 3777- Insuran%e A%t- 37>B- and the Re.u"ations and .uide"ines issued there under- in%"udin. the 0i"e and Use .uide"ines& The /ros/e%tus- sa"es "iterature- /o"i%y and endorse$ent do%u$ents- and the rates- ter$s and %onditions of the /rodu%t ha#e been /re/ared on a te%hni%a""y sound basis and on ter$s that are fair bet!een the insurer and the %"ient and are set out in "an.ua.e that is %"ear and una$bi.uous& These do%u$ents are a"so fu""y in %o$/"ian%e !ith the under!ritin. and ratin. /o"i%y a//ro#ed by the Board of Dire%tors of the insurer& The state$ents $ade in the fi"in. 0or$ A are true and %orre%t& The reCuire$ents of the re#ised 0i"e and Use .uide"ines ha#e been fu""y %o$/"ied !ith in res/e%t of this /rodu%t& Certifi%ate by A//ointed A%tuary This is to %onfir$ that= I ha#e %arefu""y studied the reCuire$ents of the 0i"e and Use 9uide"ines in re"ation to the desi.n and ratin. of insuran%e /rodu%ts& The rates- ter$s and %onditions of the abo#e $entioned /rodu%t are deter$ined on a te%hni%a""y sound basis and are sustainab"e on the basis of infor$ation and %"ai$s e</erien%e a#ai"ab"e in the re%ords of the insurer& An adeCuate syste$ has been /ut in /"a%e for %o""e%tion of data on /re$iu$s and %"ai$s based on e#ery ratin. fa%tor that !i"" enab"e re#ie! of the rates and ter$s of %o#er fro$ ti$e to ti$e& It is /"anned to re#ie! the rates- ter$s and %onditions of %o#er based on e$er.in. e</erien%e 5enter /eriodi%ity of re#ie!6& The reCuire$ents of the re#ised 0i"e and Use .uide"ines ha#e been fu""y %o$/"ied !ith in res/e%t of this /rodu%t&

Certifi%ate by the La!yer of the insurer This is to %onfir$ that= I ha#e %arefu""y studied the /ros/e%tus- sa"es "iterature/o"i%y !ordin.s and endorse$ent !ordin.s re"atin. to the abo#e $entioned /rodu%t in the "i.ht of the IRDA 5;rote%tion of ;o"i%yho"ders2 Interests6 Re.u"ations ,)),- and the 0i"e and Use 9uide"ines& The abo#e $entioned do%u$ents are !ritten in %"ear una$bi.uous "an.ua.e- and /ro/er"y e</"ain the nature and s%o/e of %o#er- the e<%e/tions and "i$itations- the duties and ob"i.ations of the insured and the effe%t of nondis%"osure of $ateria" fa%ts& These do%u$ents are in %o$/"ian%e !ith the ;o"i%yho"ders2 ;rote%tion Re.u"ations and Insuran%e Ad#ertise$ents and Dis%"osure Re.u"ations& E#ery insurer sha"" %onstitute a Te%hni%a" Audit De/art$ent that !i"" be %har.ed !ith the res/onsibi"ity to ensure that a"" under!ritin. is done in %o$/"ian%e !ith these .uide"ines& Su%h audit shou"d be done at "east on%e e#ery Cuarter durin. the year ,))(& The re/orts of the Te%hni%a" Audit sha"" be /"a%ed before the Board of Dire%tors& Co$/"ian%e Offi%er Ea%h insurer sha"" a//oint a senior offi%ia" as FCo$/"ian%e Offi%erG to ensure %o$/"ian%e !ith the reCuire$ents of the .uide"ines by the insurer& The Co$/"ian%e Offi%er sha"" not be an offi%er !ho is a"so ho"din. res/onsibi"ity for under!ritin.& The Co$/"ian%e Offi%er sha"" be res/onsib"e- intera"ia- to

$onitor the business a%ti#ities of the insurer and ensure that a"" /rodu%ts bein. so"d by the insurer are in %o$/"ian%e !ith the under!ritin. /o"i%y as a//ro#ed by the Board and a"so !ith these .uide"inesE here a risk is %o-insured- the /ri$ary res/onsibi"ity to %o$/"y !ith these .uide"ines !i"" rest !ith the "eadin. %o-insurer& Ho!e#er- a"" other %o-insurers !i"" re$ain res/onsib"e to satisfy the$se"#es by enCuiry that the .uide"ines ha#e been %o$/"ied !ith&

IRDA A//ro#a" here indi#idua" /arti%u"ars of the /rodu%t are reCuired to be fi"ed !ith IRDA- su%h /rodu%t sha"" not be so"d un"ess the reCuired /arti%u"ars ha#e been fi"ed !ith IRDA and IRDA has no Cueries in res/e%t of rates- ter$s and %onditions or the a%%o$/anyin. do%u$ents of that /rodu%t !ithin a /eriod of thirty days fro$ the date of re%ei/t of the fi"in. in its offi%e& here IRDA raises any Cuery in re"ation to a /rodu%t !ithin the sti/u"ated /eriod of thirty days- the insurer sha"" not offer that /rodu%t for sa"e unti" a"" Cueries ha#e been satisfa%tori"y reso"#ed and IRDA %onfir$s in !ritin. that it has no further Cueries in res/e%t of that /rodu%t& 9enera" Insuran%e Coun%i" The 9enera" Insuran%e Coun%i" has been estab"ishin. itse"f as a se"f re.u"atin. or.aniDation and has setu/ its Se%retariat at 1u$bai& It is e</e%ted that the Coun%i" !i"" fun%tion as an Industry Asso%iation- !hi%h !i"" "iaise !ith the 9o#ern$entIRDA and .i#e the feedba%k of the industry on #arious issues to the Re.u"ator in addition to addressin. $arket %ondu%t

issues&