INSURANCE

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The customer is the most important visitor in our premises. He is not dependent on us. We depend on him. He does not disturb our work. He is the purpose of it. He is not a stranger in our business. He is a part of it. We do not do him a favour when we serve him. He does us a favour by giving us an opportunity to do it. -- Mahatma Gandhi

Introduction

The service sector accounts for more than half of India's G !: 51.16 per cent in 199899. This sector has gained at the expense of both the a"ricultural and industrial sectors through the 1990s. The rise in the service sector's share in G ! "ar#s a structura$ shift in the %ndian econo"& and ta#es it c$oser to the funda"enta$s of a deve$oped econo"& 'in the deve$oped econo"ies( the industria$ and service sectors contribute a "a)or share in G ! *hi$e agricu$ture accounts for a re$ative$& $o*er share+.

The service sector's share has gro*n fro" ,-.69 per cent in 1990-91 to 51.16 per cent in 1998-99. %n contrast( the industria$ sector's share in G ! has dec$ined fro" .5.-8 per cent to ...01 per cent in 1990-91 and 1998-99 respective$&. The agricu$tura$ sector's share has fa$$en fro" -0.9- per cent to .6.8- per cent in the respective &ears.

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/o"e econo"ists caution that if the service sector b&passes the industria$ sector( econo"ic gro*th can be distorted. The& sa& that service sector gro*th "ust be supported b& proportionate gro*th of the industria$ sector0 other*ise the service sector gro*n *i$$ not be sustainab$e

1ithin the services sector( the share of trade( hote$s and restaurants increased fro" 1..5. per cent in 1990-91 to 15.68 per cent in 1998-99. The share of transport( storage and co""unications has gro*n fro" 5..6 per cent to 2.61 per cent in the &ears under reference. The share of construction has re"ained near$& the sa"e during the period *hi$e that of financing( insurance( rea$ estate and business services has risen fro" 10... per cent to 11.,, per cent. The fact that the service sector no* accounts for "ore than ha$f the G ! probab$& "ar#s a *atershed in the evo$ution of the %ndian econo"&.

Customer satisfaction $redominates the success of an enter$rise% In the service industr& 'here intan"i(les are mar)eted* the im$ortance of customer satisfaction is all the more si"nificant% Service is said to (e the shar$est ed"e of mar)etin" strate"&% Sales and service are the t'o im$ortant 'in"s of service industr& li)e +IC* ITI and the $ost office% If one of the 'in"s turns 'ea) the or"ani,ation cannot rise (ecause the 'ea)er 'in" 'ill ham$er its fli"ht% -ence the em$hasis should not (e concentrated onl& on the sales (ut on service as$ects too% .esides a su$$ortive role in $romotin" sales effort* servicin" influences the institutional ima"e% !rom$t and effective service (oosts the morale of the

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sales force to $resent a (old form and hold their $ros$ects% Service encom$asses the service rendered to clients (efore* durin"* and after sales% A fe' e0am$les of services are the -otel industr&* Airline industr&* Insurance industr&* Trans$ortation industr&* etc%

Insurance ma& (e descri(ed as a social device to reduce or eliminate ris) of loss to life and $ro$ert&% Under the $lan of insurance* a lar"e num(er of $eo$le associate themselves (& sharin" ris)s attached to individuals% The ris)s* 'hich can (e insured a"ainst* include fire* the $erils of sea* death and accidents and (ur"lar&% An& ris) contin"ent u$on these* ma& (e insured a"ainst at a $remium commensurate 'ith the ris) involved% Thus collective (earin" of ris) is insurance%

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Definitions

Genera$ efinition In the 'ords of 2ohn Ma"ee* 3Insurance is a $lan (& themselves 'hich lar"e num(er of $eo$le associate and transfer to the shoulders of all* ris)s that attach to individuals%4

3unda"enta$ efinition In the 'ords of %S% -ansell* 3Insurance accumulated contri(utions of all $arties

$artici$atin" in the scheme%4

4ontractua$ efinition In the 'ords of 5ustice Tindall* 3Insurance is a contract in 'hich a sum of mone& is $aid to the assured as consideration of insurer6s incurrin" the ris) of $a&in" a lar"e sum u$on a "iven contin"enc&%4

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Characteristics of Insurance

1% Sharin" of ris)s #% Coo$erative device /% Evaluation of ris) 1% !a&ment on ha$$enin" of a s$ecial event 7% The amount of $a&ment de$ends on the nature of losses incurred% 8% The success of insurance (usiness de$ends on the lar"e num(er of $eo$le insured a"ainst similar ris)% 9% Insurance is a $lan* 'hich s$reads the ris) and losses of fe' $eo$le amon" a lar"e num(er of $eo$le% :% The insurance is a $lan in 'hich the insured transfers his ris) on the insurer% ;% Insurance is a le"al contract 'hich is (ased u$on certain $rinci$les of insurance 'hich includes utmost "ood faith* insura(le interest* contri(ution* indemnit&* causes $ro0ima* su(ro"ation* etc% 1<% The sco$e of insurance is much 'ider and e0tensive%

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Scope or Kinds of Insurance

.roadl&* insurance ma& (e classified into the follo'in" cate"ories= i% ii% iii% Classification on the (asis of nature of insurance Classification from (usiness $oint of vie' Classification from ris) $oint of vie'

%% 5n The 6asis 5f 7ature 5f 6usiness >n the (asis of nature of (usiness* insurance ma& (e the follo'in" t&$es= 1% +ife insurance #% ?ire insurance /% Marine insurance 1% Social Insurance* and 7% Miscellaneous insurance% a@ Aehicle insurance on (uses* truc)s* motorc&cles* etc% (@ !ersonal accident insurance c@ .ur"lar& insurance - Ba"ainst theft* dacoit etc%@ d@ +e"al lia(ilit& insurance Binsurance 'here(& the assured is lia(le to $a& the dama"es to $ro$ert& or to com$ensate the loss of $ersonal in5ur& or death% This is in the form of fidelit& "uarantee insurance* automo(ile insurance and machines etc%@ e@ Cro$ insurance Bcro$s are insured a"ainst losses due to heav& rain and floods* c&clone* drau"hts* cro$ diseases* etc%@

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f@ Cattle insurance - Binsurance for indemnit& a"ainst the loss of castles from various )inds of diseases@ In addition to the a(ove* insurance $olicies are availa(le a"ainst crime* medical insurance* (ulloc) cart insurance* 5e'elr& insurance* c&cle ric)sha' insurance* radio-T%A% insurance* etc%

%%. 4$assification fro" 6usiness !oint of 8ie* ?rom (usiness $oint insurance can (e classified into t'o (road cate"ories= 1% +ife insuranceC and #% General Insurance General insurance (usiness refers to fire* marine* and miscellaneous insurance (usiness 'hether carried on sin"l& or in com(ination 'ith one or more of them (ut does not include ca$ital redem$tion (usiness and annuit& certain (usiness%

%%%. 4$assification fro" 9is# !oint of 8ie* ?rom ris) $oint of vie'* insurance can (e classified into four cate"ories= 1% !ersonal insurance #% !ro$ert& insurance /% +ia(ilit& insurance 1% ?idelit& "uarantee insurance

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Functions of Insurance

!ri"ar& 3unctions 1% !rovide $rotection= - Insurance cannot chec) the ha$$enin" of the ris)* (ut can $rovide for the losses of ris)% #% Collective (earin" of ris)= - Insurance is a device to share the financial losses of fe' amon" man& others% /% Assessment of ris)= - Insurance determine the $ro(a(le volume of ris) (& evaluatin" various factors that "ive rise to ris) 1% !rovide certaint&= - Insurance is a device* 'hich hel$s to chan"e from uncertaint& to certaint&%

/econdar& 3unctions 1% !revention of losses= - Insurance cautions (usinessman and individuals to ado$t suita(le device to $revent unfortunate conseDuences of ris) (& o(servin" safet& instructions% #% Small ca$ital to cover lar"e ris)s= - Insurance relives the (usinessman from securit& investment* (& $a&in" small amount of insurance a"ainst lar"er ris)s and uncertaint&% /% Contri(utes to'ards develo$ment of lar"er industries%

5ther 3unctions Means of savin"s and investment%

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Origin and Development of Insurance

Insurance in the modern form ori"inated in the Mediterranean durin" 1/E11th centur&% The earliest references to insurance have (een found in .a(&lonia* the Gree)s and the Romans% The use of insurance a$$eared in the account of North Italian merchant (an)s 'ho then dominated the international trade in Euro$e at that time% Marine insurance is the oldest form of insurance follo'ed (& life insurance and fire insurance% The $atterns that have (een used in En"land follo'ed in other countries also in these )inds of insurance% The ori"in and "ro'th of Marine Insurance* life Insurance* ?ire Insurance and miscellaneous insurance are "iven (elo'=

1. :arine %nsurance The oldest and the earliest records of marine $olic& relates to a Mediterranean vo&a"e in 1/19% In the &ear 11<<* a (oo) 'ritten (& a merchant of ?lorence* indicates $remium rates char"ed for the shi$ments (& sea from +ondon to !isa% Marine Insurance s$read from Ital& to tradin" routes in other countries of Euro$e%

:arine %nsurance in %ndia There is evidence that marine insurance 'as $racticed in India some three thousand &ears a"o% In earlier da&s travelers (& sea and land 'ere e0$osed to ris) of losin" their vessels and merchandise (ecause of $irac& on the o$en seas% Moreland has maintained that the $ractice of insurance 'as Duite common durin" the rule of A)(ar to Auran",e(* (ut the nature and covera"e of insurance in this $eriod is not 'ell )no'n% It 'as the .ritish*

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insurers 'ho introduced "eneral insurance in India* in its modern form% The .ritishers o$ened "eneral insurance in India around the &ear 19<<% The first com$an&* )no'n as the Sun Insurance >ffice +td% 'as set u$ in Calcutta in the &ear 191<% This follo'ed (& several insurance com$anies of different $arts of the 'orld* in the field of marine insurance% In 1;9#* the "overnment of India nationali,ed the "eneral insurance (usiness (& formin" GIC%

.. ;ife %nsurance The earl& develo$ments of life insurance 'ere closel& lin)ed 'ith that of marine insurance% The first insurers of life 'ere the marine insurance under'riters 'ho started issuin" life insurance $olicies on the life of master and cre' of the shi$* and the merchants% The earl& insurance contracts too) the nature of $olicies for a short $eriod onl&% The under'riters issued annuities and $ension for a fi0ed $eriod or for life to $rovide relief to 'ido's on the death of their hus(ands% The first life insurance $olic& 'as issued on 1: th 2une 17:/* on the life of Filliam Gi((ons for a $eriod of 1# months%

;ife %nsurance in %ndia The .ritish com$anies started life insurance (usiness in India* (& issuin" $olicies e0clusivel& on the lives of Euro$ean soldiers and civilians% The& sometimes issued $olicies on the lives of Indian6s (& char"in" e0tra% ifferent insurance com$anies li)e .om(a&

Insurance Com$an& +T % B19;/@ and >riental +ife Assurance Com$an& B1:1:@ 'as formed to issue life assurance $olicies in India% Graduall&* the first Indian Com$an& named as .om(a& Mutual +ife Insurance Societ& +td% 'as formed in ec% 1:9<% .& 1;91* the

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total num(ers of com$anies 'or)in" in India 'ere 17* out of 'hich 9 'ere Indian and the remainin" 'ere .ritish com$anies% After several chan"es have (een made for the $eriod from 1;/< to 1;/:* the Government of India $assed Insurance Act* 1;/:% The act still a$$lies to all )inds of insurance (usiness (& institutin" necessar& amendments from time to time%

-. 3ire %nsurance ?ire insurance has its ori"in in German& 'here it 'as introduced in munici$alities for $rovidin" com$ensation to o'ners of the $ro$ert&* in return for an annual contri(ution* (ased on the rent of those $remises% The fire insurance in its $resent form started after the most disastrous fire in human histor& )no'n as the 'Great ?ire' in +ondon* 'hich had destro&ed several (uildin"s% It dre' the attention of the $u(lic and the first fire insurance commerciall& transacted in 1889% The Industrial Revolution B19#<-1:7<@ "ave much im$etus to fire insurance% The Nineteenth centur& mar)ed the develo$ment of fire insurance%

3ire %nsurance in %ndia In India* fire insurance 'as started durin" the .ritish re"ime% The oldest of these com$anies include the Sun Insurance >ffice* Calcutta B191<@* +ondon Assurance and Ro&al E0chan"e Assurance B19#<@* !hoeni0 Assurance Com$an& B19:#@* etc%

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,. :isce$$aneous %nsurance ue to the increasin" demands of the time* different forms of insurance have (een develo$ed% Industrial Revolution of 1;th centur& had facilitated the develo$ment of accidental insurance* theft and dacoit* fidelit& insurance* etc% In #<th centur&* man& t&$es of social insurance started o$eratin"* vi,%* unem$lo&ment insurance* cro$ insurance* cattle insurance* etc% This 'a& the (usiness of insurance develo$ed simultaneousl& 'ith human and social develo$ment% Toda&* the use of com$uters in the field of insurance is freDuentl& increasin"% Insurance (ecomes an inse$ara(le $art of human develo$ment%

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Pre-Liberalization Scenario
%ndian <istor&: Ti"e to turn the c$oc# bac#-and open up insurance ?ift& &ears a"o* India had a (ustlin"* if some'hat chaotic* entirel& $rivate insurance industr&% The &ear after Inde$endence* #<; life Insurance com$anies 'ere doin" (usiness 'orth Rs91#%98 crore B'hich "re' to an ama,in" Rs #;7*97: crore in 1;;7-;8@% ?orei"n insurers had a lar"e mar)et share 1< $er cent for "eneral insurance (ut there 'ere also $lent& of Indian com$anies* man& $romoted (& (usiness houses li)e the Tatas and almias% The first Indian-o'ned life insurance com$an&* the .om(a& Mutual +ife Assurance Societ&* 'as set u$ in 1:9< (& si0 friends% It Insured Indian lives at the normal rates instead of char"in" a $remium of 17 to #< $ercent as forei"n insurers did% Its "eneral insurance counter$art* Indian Mercantile Insurance Com$an& +td%* o$ened in .om(a& in 1;<9% A $lethora of insufficientl& re"ulated $la&ers 'as a sure reci$e for a(use* es$eciall& (ecause there 'as no se$aration (et'een (usiness houses and the insurance com$anies the& $romoted% The Insurance Act* 1;/:* introduced state controls on insurance* includin" mandator& investments in a$$roved securities* (ut re"ulation remained ineffective% In 1;1;* !urshottamdas Tha)urdas* chairman of the >riental Assurance Com$an&* admitted= GFe cannot den& that* toda&* there is a tendenc& on the $art of insurance com$anies in "eneral to ma)e illicit "ains% Can 'e overloo) the cutthroat com$etition for acDuirin" (usinessH And still 'orse is the dishonest $ractice of ad5ustin" of accounts%G After a 1;71 inDuir&* the "overnment 'as disma&ed that com$anies had

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hi"h e0$ense and $remium rates* 'ere s$eculatin" in shares* and "ivin" loans re"ardless of securit&% No 'onder that (et'een 1;17 and 1;77* #7 insurers 'ent into liDuidation and #7 transferred their (usiness to other com$anies% This rec)less record sto)ed the $ro-nationali,ation fires% The 1;78 life insurance Nationali,ation 'as a to$-secret intri"ueC for fear that unscru$ulous insurers 'ould si$hon funds off if 'arned% The "overnment resolved to first ta)e over the mana"ement of life insurance com$anies (& ordinance* then their o'nershi$% The then finance minister C% % eshmu)h later 'rote= 'Seth Rama)rishna almia6s e0traction of Rs%##7 crore

Bmisa$$ro$riation (& the .harat Insurance Com$an&@ 'as a heaven-sent o$$ortunit&% Fe 'ere read& to nationali,e* 'ith ever& detail 'or)ed out%G >n 1; 2anuar& 1;78* the ne's 'as announced on the radio* thou"h even the director- "eneral of AIR 'as not sho'n the s$eech% The ne0t mornin"* at ; am* 'hile e0ecutives 'ere franticall& see)in" details over the trun) tele$hone* sa&s eshmu)h in his auto(io"ra$h&* our officers 'al)ed into the

res$ective insurance offices* sho'ed their authorit& and then too) over the (usiness% I (elieve this 'ill (e re"arded as one of the (est )e$t secrets of the Government of India in all times to come%G The ordinance transferred control of #17 insurers to the "overnment% +IC* esta(lished ei"ht months later* too) over their o'nershi$% General Insurance had its turn in 1;9#* 'hen 1<9 insurers 'ere amal"amated into four com$anies headDuartered in the four metros* 'ith GIC as a holdin" com$an&% Nationali,ation (rou"ht some (enefits% Insurance s$read from an ur(an-oriented* hi"h-end (usiness to a mass one% Toda&* 1: $er cent >f +IC's ne' (usiness is rural% Net $remium income in "eneral insurance "re' from Rs### crore in 1;9/ to Rs 7*;78 crore in 1;;7- ;8% Iet* ri"id controls ham$er o$erational fle0i(ilit& and initiative so (oth customers service and 'or) culture toda& are dismal% The

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frontier s$irit of the earl& insurers has (een lost% Insurance com$anies have also (een timid in mana"in" their investment $ortfolios% Com$etition (et'een the four GIC su(sidiaries remains illusor&% If Nationali,ation ever had a $ur$ose* it has (een served% It's no' time to turn (ac) the cloc) in some res$ects* and o$en u$ the sector a"ain% The "overnment alread& intends to insist on lar"e minimum ca$ital reDuirements* a stron" re"ulator* and a health& distance (et'een insurers and industr&% To ensure that histor& doesn't re$eat itself%

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hree !uestions about Insurance Liberalization

The decision to allo' $rivate com$anies to sell insurance $roducts in India rests 'ith the la'ma)ers in !arliament% >$enin" u$ the insurance sector reDuires crossin" at least t'o le"islative hurdles% These are the $assa"e of the Insurance Re"ulator& Authorit& BIRA@ .ill* 'hich 'ill ma)e IRA a statutor& re"ulator& (od&* and amendin" the +IC and GIC Acts* 'hich 'ill end their res$ective mono$olies% In 1;;1 the "overnment a$$ointed a committee on insurance sector reforms B'hich is )no'n as the Malhotra Committee@ 'hich recommended that insurance (usiness (e o$ened u$ to $rivate $la&ers and laid do'n several "uidelines for orchestratin" the transition% In $articular* 'e do not address man& other related Duestions such as 'hether forei"n Band not 5ust $rivate@ $la&ers should (e allo'ed* 'hat ca$ should there (e on forei"n eDuit& o'nershi$* 'hether (an)s and other financial institutions should (e allo'ed to o$erate in the insurance (usiness* 'hether firms should (e allo'ed to sell (oth life and non-life insurance* and so on% The three Duestions that 'e address are= 1+ 1h& a$$o* entr& to private p$a&ers? The choice (et'een $u(lic and $rivate mi"ht amount to choosin" (et'een the lesser of t'o evils% An insurance contract is a G$romise to $a&G contin"ent on a s$ecified event% In the case of insurance and (an)in"* smooth functionin" of (usiness de$ends heavil& on the continuation of the trust and confidence that $eo$le $lace on the solvenc& of these financial institutions% Insurance $roducts are of little value to consumers if the& cannot trust the com$an& to )ee$ its $romise% ?urthermore* (an)in" and insurance sectors are vulnera(le to the G(an) runG s&ndrome* 'herein even one insolvenc& can tri""er $anic

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amon" consumers leadin" to a 'ides$read and com$lete (rea)do'n% This im$lies the need for a $u(lic re"ulator* and not $u(lic $rovision of insurance% Indeed in India* insurance 'as in the $rivate sector for a lon" time $rior to inde$endence% The +ife Insurance Cor$oration of India B+IC@ 'as formed in 1;78* 'hen the Government of India (rou"ht to"ether over t'o hundred odd $rivate life insurers and $rovident societies* under one nationali,ed mono$ol& cor$oration* in the 'a)e of several (an)ru$tcies and mal$ractice6s'% Another im$ortant 5ustification for Nationali,ation 'as to raise the muchneeded funds for ra$id industriali,ation and self-reliance in heav& industries* es$eciall& since the countr& had chosen the $ath of state $lannin" for develo$ment% Insurance $rovided the means to mo(ili,e household savin"s on a lar"e scale% +IC's stated mission 'as of mo(ili,in" savin"s for the develo$ment of the countr& and also conductin" (usiness in the s$irit of 1% A com$rehensive historical account of +ife insurance (usiness in India and +IC in $articular is $rovided in +IC B1;9<@ and +IC B1;;1@ res$ectivel&% #% This latter em$hasis on trusteeshi$ 'as relevant then* in li"ht of ma5or insolvencies and fraudulent $ractices of so man& $rivate insurance com$anies $rior to 1;78%

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Trusteeship

The non-life insurance (usiness 'as nationali,ed in 1;9# 'ith the formation of General Insurance Cor$oration BGIC@% Thus the fact that insurance is a state mono$ol& in India is an artifact of recent histor& the rationale for 'hich needs to (e e0amined in the conte0t of li(erali,ation of the financial sector% If traditional infrastructure and Gsemi-$u(lic "oodsG industries such as (an)in"* airlines* telecom* $o'er* and even $ostal services Bcourier@ have si"nificant* $rivate sector $resence* continuin" a state mono$ol& in $rovision of insurance is indefensi(le% This is not to den& that there are some valid "rounds for (ein" cautious a(out $rivate sector entr&% Some of these concerns are= a@ That there 'ould (e a tendenc& of $rivate com$anies to Gs)imG the mar)etsC thus $rivate $la&ers 'ould concentrate on the lucrative mainl& ur(an se"ment leavin" the un$rofita(le se"ment to the incum(ent +IC% (@ That 'ithout adeDuate re"ulation* the funds "enerated ma& not (e de$lo&ed in sectors B'hich &ield lon"-term social (enefits@* such as infrastructure and $u(lic "oodsC similar 'ithout re"ulation* $rivate firms ma& rene"e on their social sector investment o(li"ations% Meetin" these concerns reDuires a stron" re"ulator& (od&% Another commonl& e0$ressed fear is that there 'ould (e massive 5o( losses in the industr& as a 'hole due to com$uteri,ation% This ho'ever does not seem to (e corro(orated (& the countries' e0$erience'% Moreover* a$art from consideration (ased on theoretical $rinci$les alone* there is sufficient evidence that su""ests that introduction of $rivate $la&ers in insurance can onl& lead to "reater (enefits to consumers% This can (e seen from the fact that the s$read in

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insurance in India is lo' com$ared to international (enchmar)s% The t'o convention measures of the s$read of insurance are $enetration and densit&% The former measure B$remiums $er unit@ of G !* and the latter* $remiums $er ca$ita% +ess than 9J of the* $o$ulation in India has life insurance cover% India has the (i""est life insurance sector in the 'orld if 'e "o (& the num(er of $olicies sold* (ut the num(er of $olicies sold $er 1< $ersons is ver& lo'% The demand for insurance is li)el& to increase 'ith risin" $er-ca$ita incomes* risin" literac& rates and increase of the service sector* as has (een seen from the e0am$le of several other develo$in" countries% In fact* o$enin" u$ of the insurance sector is an inte"ral $art of the li(erali,ation $rocess (ein" $ursued (& man& develo$in" countries% There are several other factors that call for $rivate sector $resence% ?irstl&* a state mono$ol& has little incentive to innovate or offer a 'ider ran"e of $roducts% This can (e seen (& a lac) of certain $roducts from +lC's $ortfolio* and lac) of e0tensive ris) cate"ori,ation in several GIC $roducts* such as health insurance% In fact* it seems reasona(le to conclude that man& $eo$le (u& life insurance 5ust for the ta0 (enefits* since almost /7 $er cent of the life insurance (usiness is in March* the month of financial closin"% This su""ests that insurance needs to (e sold more vi"orousl&% More com$etition in this (usiness 'ill s$ur firms to offer several ne' $roducts* and more com$le0 and e0tensive ris) cate"ori,ation% The s&stem of sellin" insurance throu"h commission a"ents needs a (etter incentive structure* 'hich a state mono$ol& tends to stifle% ?or e0am$le +IC $a&s out onl& 7 $er cent of its income as commissions* 'hereas this share in Sin"a$ore is 18 $er cent* and in Mala&sia it is close to #< $ercent%

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?inall&* $rivate sector entr& into insurance mi"ht (e sim$l& a fiscal necessit&% Since lar"e scale funds form lon" term contractual savin"s need to (e mo(ili,ed* es$eciall& for investment in infrastructures the o$tion of not havin" more B$rivate@ $la&ers in the insurance sector is too costl&% .+ 1hat shou$d be the "ar#et structure= In this section* 'e anal&,e the Duestion 'hether there should (e unlimited $rivate entr& insurance mar)ets or 'hether onl& a fe' $la&ers are allo'ed to o$erate% This Duestion hin"es around the issue of Gadverse selectionG descri(ed (elo'% Individuals (u&in" an insurance contract $a& a $rice Bcalled the G$remiumG@ to the insurance com$an& and the insurance com$an& in turn $rovides com$ensation if a s$ecified event occurs% .& ma)in" such contractual arran"ements 'ith a lar"e num(er of individuals and or"ani,ations the insurance com$an& can s$read the ris)% This "ives insurance its GsocialG character in the sense that it entails $oolin" of individual ris)s% The $rice of insurance i%e%* the $remium is (ased on avera"e ris)% This $remium is too hi"h for $eo$le 'ho $erceive themselves to (e in a lo' ris) cate"or&% If the insurer cannot accuratel& determine the ris) cate"or& of ever& customer and $rices insurance on the (asis of avera"e ris)* he stands to lose all the lo' ris) customers% This in turn increases the avera"e ris)* 'hich means $remium have to (e revised u$'ards* 'hich in turn drives a'a& even more customers and so on% This is )no'n as the $ro(lem of Gadverse selectionG% Adverse selection $ro(lem arises 'hen a seller of insurance cannot distin"uish (et'een the (u&er's t&$e i%e%* 'hether the (u&er is a lo' ris) or a hi"h t&$e% In the e0treme case* it ma& lead to the com$lete (rea)do'n of insurance mar)et%

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Another $henomenon* the $ro(lem of Gmoral ha,ardG in sellin" insurance* arises 'hen the uno(serva(le action of (u&er a""ravates the ris) for 'hich insurance is (ou"ht% ?or e0am$le* 'hen an insured car driver e0ercises less caution in drivin"* com$ared to ho' he 'ould have driven in the a(sence of insurance* it e0em$lifies moral ha,ard% Given these $ro(lems un(ridled* com$etition amon" lar"e num(er of firms is considered detrimental for the insurance industr&% ?urthermore* even the limited com$etition in insurance needs to (e re"ulated% Insurance com$anies can differentiate amon" various ris) t&$es if there is a 'ide difference in ris) $rofile of the (u&ers insurin" a"ainst the stron" insurers% It also called for )ee$in" life insurance se$arate from the "eneral insurance% It su""ested the re"ulation of insurance intermediaries (& IRA and the introduction of (ro)ers for (etter K$rofessionalisation'% -+ The 9o$e of %9> Ba@ B(@ Bc@ the $rotection of consumers' interest* to ensure financial soundness of the insurance industr& and To ensure health& "ro'th of the insurance mar)et%

These o(5ectives must (e achieved 'ith minimum "overnment involvement and cost% IRA's functionin" can (e financed (& lev&in" a small fee on the $remium income of the insurers thus $uttin" ,ero cost on the "overnment and "ivin" itself autonom&% !rotection of Customer Interests

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IRA's first (rief is to $rotect consumer interests% This means ensurin" $ro$er disclosure* )ee$in" $rices afforda(le (ut also insistin" on some mandator& $roducts* and most im$ortantl& ma)in" sure that consumers "et $aid (& insurers% Ensurin" $ro$er disclosure is called isclosure Re"ulation% Insurance contracts are

(asicall& contin"enc& a"reements% The& can (e full of inscruta(le 5ar"on and esca$e clauses% An avera"e consumer is li)el& to (e confused (& them% IRA must reDuire insurers to frame trans$arent contracts% Consumers should not have to 'a)e u$ to un$leasant sur$rises* findin" that certain contin"encies are not covered% The IRA also has to ensure that $rices of $roducts sta& reasona(le and certain mandator& $roducts are sold% The 5o( of )ee$in" $rices reasona(le is relativel& eas&* since com$etition amon" insurers 'ill not allo' an& one com$an& to char"e e0or(itant rates% The dan"er often is that $rices ma& (e too lo' and mi"ht ta)e the insurer dan"erousl& close to (an)ru$tc&% As for mandator& $roducts* those that involve common and 'ell)no'n ris)s* certain standardi,ation can (e enforced% ?urthermore* IRA can insist that for such $roducts the $rices also (e standardi,ed% ?rom the consumer's $oint of vie' the most im$ortant function of IRA is ensurin" claim settlement% Luic) settlement 'ithout unnecessar& liti"ation should (e the norm% ?or e0am$le* in motor vehicle insurance* ado$tin" no-fault $rinci$le can s$eed u$ man& settlements% Currentl&* +IC in India has a claims settlement ratio of ;9J* an im$ressive num(er (& an& standards% -o'ever* it hides the fact that this settlement is $la"ued (& lon" dela&s* 'hich reduce the value of settlement itself%

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If consumers have a com$laint a"ainst an insurer the& can "o to a (od& formed (& association of insurers% The decision of such a (od& 'ould (e (indin" on the insurers* (ut not on the com$lainant% If com$lainants are not satisfied* the& can "o to court% Some countries such as Sin"a$ore have such a s&stem in $lace% This s&stem offers a first and Duic)er choice of settlin" out of court% IRA can encoura"e the insurers to have such a "rievance redressal mechanism% This s&stem can serve the function of ad5udication* ar(itration and conciliation% The second area of IRA's activit& concerns monitorin" insurer (ehavior to ensure fairness% It is es$eciall& here that IRA's choice of (ein" a (loodhound or a 'atchdo" 'ould have different im$lications% Fe thin) that an initial tou"h stance should "ive 'a& to a more for(earin" and $rudential a$$roach in re"ulatin" insurance firms% Fhen the industr& has a fe' firms there is some chance of collusion% IRA must (e alert to collusive tendencies and ma)e sure that $rices char"ed remain reasona(le% -o'ever* some coo$eration amon" the insurance com$anies could (e considered desira(le% This is es$eciall& in lines 'here claim e0$erience of an& one com$an& is not sufficient to ma)e accurate forecasts% Collusion amon" com$anies on information sharin" and rate settin" is considered Gfair'% IRA must have severe $enalties in case of fraud or mismana"ement% Since insurance (usiness involves mana"in" trust mone&* in some countries the a$$ointment of senior mana"ers and G)e& $ersonnelG has to (e a$$roved (& the insurance re"ulator& a"enc&% Ensurin" Solvenc& of Insurers

Page #1

There are (asicall& four 'a&s of ensurin" enou"h solvencies% ?irst is the $olic& of a $rice floor% Second is the restriction on ca$ital and reserves* i%e%* on 'hat )ind of investments and s$eculative activities firms can ma)e% Third is $uttin" in $lace entr& (arriers to restrict the num(er of com$etitors% ?ourth is the creation of an industr& financed "uarantee fund to (ail out firms hit (& une0$ectedl& hi"h lia(ilities% Entr& restrictions of the IRA are im$lemented throu"h a licensin" reDuirement* 'hich involves ca$ital adeDuac& amon" other thin"s% Since there are economies of scale and sco$e in insurance o$erations it mi"ht (e (etter to have onl& a fe' lar"e firms% There is ho'ever no ma"ic num(er re"ardin" the o$timal num(er of firms% Restrictin" com$etition $rovides a sco$e for hi"her $rofits to the com$anies there(& stren"thenin" their solvenc& $osition% After Dualif&in"* the entrants are continuousl& su(5ected to restrictions on reserves and investments* 'hich ensure on"oin" solvenc&% Additionall&* a "uarantee fund* created (& mandator& contri(utions from all insurance com$anies is used to (ail out an& insurance com$an&* 'hich mi"ht (e in financial trou(le% This "uarantee fund does not im$l& that firms can char"e 'hatever the& 'ish to their consumers% All insurance com$anies 'ould have an incentive to monitor the activities of their rival $eer firms% This is (ecause insolvenc& of an& insurance com$an& 'ould entail a $rice* 'hich all the insurance com$anies 'ould have to shoulder% !eer revie' of accounts can also (e institutionali,ed% IRA can have several 'a&s for earl& detection of a $otential insolvenc&% ?or e0am$le* in the USA there is an Insurance Re"ulator& Information S&stem BIRIS@ that re"ularl& com$utes certain )e& financial ratios from financial statements of firms% If some of these

Page #7

ratios fall outside "iven limits the com$an& is as)ed to ta)e corrective action% Insolvenc& can also arise out of reinsurers a(andonin" insurance com$anies in the lurch* as 'itnessed in the USA in 1;:<'s% Reinsurance is a (i""er (usiness dominated (& lar"e international reinsurers% Such liti"ation (et'een reinsurer and insurance com$anies involves cross (oundar& le"alities and can dra" on for &ears% IRA must evolve a set of o$erational "uidelines to deal 'ith reinsurance matters% 5verseeing %nsurance %nter"ediaries

Insurance intermediaries such as a"ents* (ro)ers* consultants and surve&ors are also IRA6s 5urisdiction% IRA has to evolve "uidelines on the entr& and functionin" of such intermediaries% +icensin" of a"ents and (ro)ers should (e reDuired to chec) a"ainst their indul"in" in activities such as t'istin"* re(atin"* fraudulent $ractices* and misa$$ro$riation of funds% IRA can also consider allo'in" (an)s to act as a"ents Bas o$$osed to under'riters@ of insurers in mass (ase t&$es of $roducts% Given their 'ide net'or) of (ranches and their customer (ase* the (an)s can access this mar)et for insurance $roducts and also earn commission income% The incremental cost of $rovidin" such insurance $roducts 'ould (e much lo'er% !romotin" Gro'th in the Insurance Industr& a societ& e0$eriences man& (enefits from the s$read of insurance (usiness% Insurance contri(utes to economic "ro'th (& ena(lin" $eo$le to underta)e ris)& (ut $roductive activit&% In the $ast* "ro'th of trade has (een facilitated (& the develo$ment of insurance services% >ne onl& needs to loo) at the histor& of insurance to see ho' evolution of insurance hel$ed trade flo's alon" various trade routes% !romotion of insurance also $rovides for lon"-term funds* 'hich are utili,ed to fund (i" infrastructure

Page #8

$ro5ects% These $ro5ects t&$icall& have $ositive e0ternalities* 'hich (enefit societ& at lar"e% IRA can ensure "ro'th of insurance (usiness 'ith (etter education and $rotection to consumers* and (& ma)in" the insurance (usiness a level $la&in" field% The& can also su$$ort Indian insurance com$anies in the international field% IRA thus has to frame the rules* desi"n $rocedures for enforcement and also ma)e o$erational "uidelines% All this 'ith virtuall& no relevant historical data ma)es the tas) ver& difficult% An initial conservative a$$roach Bthe (loodhound@ is 5ustified since there is no $rior e0$erience to fall (ac) on* and it 'ould (e $rudent to err (& re"ulatin" more6 rather than less% As e0$erience accumulates* the IRA can rela0 its initial harsh stance and ado$t a more accommodatin" stance Bthe 'atchdo"@% Re"ulation is al'a&s an evolutionar& $rocess and e0$erience constantl& has to feed into $olic& ma)in"% Care must (e ta)en so that this $rocess does not slo' do'n and cause re"ulator& la"s% Re$eat IRA can also consider allo'in" (an)s to act as a"ents Bas o$$osed to under'riters of insurers in mass (ase t&$es of $roducts% Given there 'ide net'or) of (ranches their customer (ase* the (an)s can access this mar)et for insurance $roducts and also commission income% The incremental cost of $rovidin" such insurance $roducts 'ould (e much lo'er% Such a move of allo'in" (an)s to o$erate insurance (usiness and* versa is consistent 'ith a 'orld'ide trend of "reater inte"ration of (an)in" and insurance%

Page #9

Post Liberalization Scenario

Fhile no as$ect of the reform $rocess in India has "one smoothl& since its ince$tion in 1;;1* no individual initiative has stirred the $rover(ial hornets' nest as much as the $ro$osal to li(erali,e the countr&'s insurance industr&% -o'ever* the $olitical de(ate that follo'ed the su(mission of the re$ort (& the Malhotra Committee has $resuma(l& come to an end 'ith the ratification of the Insurance Re"ulator& Authorit& BIRA@ .ill (oth (& the central Ca(inet and the standin" committee on finance% This section traces the evolution of the life insurance com$anies in the US from firms under'ritin" $lain vanilla insurance contracts to those sellin" so$histicated investment contracts (undled 'ith insurance $roducts% In this conte0t* it (rin"s into focus the im$ortance of $ortfolio mana"ement in the insurance (usiness and the nature and im$act of $ortfolio related re"ulations on the asset Dualit& of the insurance com$anies% It also $rovides a rationale for the increased autornatisation of insurance com$anies* and the increased em$hasis on a"ent-inde$endent mar)etin" strate"ies for their $roducts% If $olitici,ed* re"ulations have $otential to adversel& affect the $ricin" of ris)s* es$eciall& in the non-life industr&* and hence the via(ilit& of the insurance com$anies% ?inall&* the (ac)dro$ of US e0$erience $rovides some $ointers for Indian $olic&ma)ers%

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%ntroduction The insurance sector continues to def& and stall the course of financial reforms in India% It continues to (e dominated (& the t'o "iants* +ife Insurance Cor$oration of India B+IC@ and the General Insurance Cor$oration of India BGIC@* and is mar)ed (& the a(sence of a credi(le re"ulator& authorit&%

The first si"n of "overnment concern a(out the state of the insurance industr& 'as revealed in the earl& nineties* 'hen an e0$ert committee 'as set u$ under the chairmanshi$ of late R%N%Malhotra% The Malhotra Committee* 'hich su(mitted its re$ort in 2anuar& 1;;1* made some far-reachin" recommendations* 'hich* if im$lemented* could chan"e the structure of the insurance industr&% The Committee ur"ed the insurance com$anies to a(stain from indiscriminate recruitment of a"ents* and stressed on the desira(ilit& of (etter trainin" facilities* and a closer lin) (et'een the emolument of the a"ents and the mana"ement and the Duantit& and Dualit& of (usiness "ro'th% It also em$hasi,ed the need for a more d&namic mana"ement of the $ortfolios of these com$anies* and $ro$osed that a "reater fraction of the funds availa(le 'ith the insurance com$anies (e invested in non-"overnment securities% .ut* most im$ortantl&* the Committee recommended that the insurance industr& (e o$ened u$ to $rivate firms* su(5ect to the conditions that a $rivate insurer should have a minimum $aid u$ ca$ital of Rs% 1<< crore* and that the $romoter's sta)e in the other'ise 'idel& held com$an& should not (e less than #8 $er cent and not more than 1< $er cent% ?inall&* the Committee $ro$osed that the li(erali,ed insurance industr& (e re"ulated (& an autonomous and

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financiall& inde$endent re"ulator& authorit& li)e the Securities and E0chan"e .oard of India BSE.I@% Su(seDuent to the su(mission of its re$ort (& the Malhotra Committee* there 'ere several a(ortive attem$ts to introduce the Insurance Re"ulator& Authorit& BIRA@ .ill in the !arliament% It is evident that there 'as (road su$$ort in favour of li(erali,ation of the industr&* and that the (one of contention 'as essentiall& the sta)e that forei"n entities 'ere to (e allo'ed in the Indian insurance com$anies% In Novem(er 1;;:* the central Ca(inet a$$roved the .ill 'hich envisa"ed a ceilin" of 1< $er cent for non-Indian sta)eholders= #8 $er cent for forei"n colla(orators of Indian $romoters* and 11 $er cent for nonresident Indians BNRI6s@* overseas cor$orate (odies B>C.6s@ and forei"n institutional investors B?II6s@% -o'ever* in vie' of the 'ides$read resentment a(out the 1< $er cent ceilin" amon" $olitical $arties* the .ill 'as referred to him* standin" committee on finance% The committee has since recommended at each $rivate com$an& (e allo'ed to enter onl& one of the three areas of (usiness-life insurance* "eneral or nonlife insurance* and reinsuranced that the overall ceilin" for forei"n sta)eholders in these com$anies (e reduced to #8 $er cent from the $ro$osed 1< $er cent% The committee has also recommended that the minimum $aid u$ share ca$ital of the ne' insurance com$anies (e raised to Rs% #<< crore* dou(le the amount $ro$osed (& the Malhotra Committee%

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?cono"ic 9ationa$e

The insurance industr& is a )e& com$onent of the financial infrastructure of an econom&* and its via(ilit& and stren"ths have far reachin" conseDuences for not onl& its mone& and ca$ital mar)ets*' (ut also for its real sector% ?or e0am$le* if households are una(le to hed"e their $otential losses of 'ealth* assets and la(our and non-la(our endo'ments 'ith insurance contracts* man& or all of them 'ill have to save much more to $rovide for events that mi"ht occur in the future* events that 'ould (e inimical to their interests% If a si"nificant $ro$ortion of the households (ehave in such a fashion* the "ro'th of demand for industrial $roducts 'ould (e adversel& affected% Similarl&* if firms are una(le to hed"e a"ainst G(adG events li)e fire and the-5o( in5ur& of a lar"e num(er of la(ourers* the e0$ected $a&offs from a num(er of their $ro5ects* after factorin" in the e0$ected losses on account such G(adG events* mi"ht (e ne"ative% In such an event* the $rivate investment 'ould (e adversel& affected* and certain $otentiall& ha,ardous activities li)e minin" and frei"ht transfers mi"ht not attract an& $rivate investment% It is not sur$risin"* therefore* that economists have lon" ar"ued that insurance facilit& is necessar& to ensure the com$leteness of a mar)et%

Page /1

5rgani@ationa$ /tructures and their %"p$ications

Insurance com$anies can (e (roadl& divided into four cate"ories= stoc) com$anies* mutual com$anies* reci$rocal e0chan"es* and +l&od's com$anies% The former t'o are the dominant forms of or"ani,ational structures in the US insurance industr&% A stoc) com$an& is one that initiall& raises ca$ital (& issue of shares* li)e a (an) or a non-(an) financial institution* and su(seDuentl& "enerates more funds for investment (& sellin" insurance contracts to $olic&holders% In other 'ords* there are three sets of sta)eholders in a stoc) insurance com$an&* namel&* the shareholders* mana"ers and the $olic&holders% A mutual com$an&* on the other hand* raises funds onl& (& sellin" $olicies such that the $olic&holders are also $artners of the com$anies% -ence* a mutual com$an& has onl& t'o "rou$s of sta)eholders* namel&* the $olic&holder cum $art o'ners and the mana"ers%

The 9o$e of !ortfo$io :anage"ent

!ortfolio and asset-lia(ilit& mana"ement are im$ortant for (oth life and $ro$ert&-lia(ilit& insurance com$anies% -o'ever* the latter face the $ro(lem that their lia(ilities are far more un$redicta(le than the lia(ilities of the life insurance com$anies% ?or e0am$le* "iven a sta(le mortalit& ta(le and other historical data* it is easier to $redict the a$$ro0imate num(er of death claims* than the a$$ro0imate num(er of claims on account of car accidents and fire% As a conseDuence of such uncertaint&* and $erha$s also moral ha,ard stemmin" from reinsurance facilities* asset-lia(ilit& mana"ement of $ro$ert&-lia(ilit& com$anies in the US has left much to (e desired% -ence* a meanin"ful discussion a(out the chan"in" nature and role of $ortfolio mana"ement for US's

Page /#

insurance com$anies is $ossi(le onl& in the conte0t of the e0$erience of its life insurance com$anies% Althou"h the role of an insurance $olic& is si"nificantl& different from that of investments* economic a"ents li)e households have increasin"l& vie'ed insurance contracts as a $art of their investment $ortfolio% This chan"e in $erce$tion has not affected much the status of the $ro$ert& lia(ilit& or non-life insurance $olicies* 'hich are still vie'ed as $lain vanilla insurance contracts that can (e used to hed"e a"ainst unforeseen calamities% As a conseDuence of these chan"es* 'hich (rou"ht a(out a (undlin" of insurance and investment $roducts* $ortfolio mana"ement of life insurance com$anies toda& is similar to that of a (an) or non-(an) financial com$an&% The& have to* Bi@ loo) out for ar(itra"e o$$ortunities in the mar)et $lace (oth across mar)ets and over time* Bii@ use value-at-ris) modelin" to ensure that their reserves are adeDuate to a(sor( mar)et related shoc)s* Biii@ ensure that there is no mismatch of duration (et'een their assets and lia(ilities* and Biv@ ensure that the ris)-return trade-off of their $ortfolios remain at an acce$ta(le level% urin" the 1;:<s* the life insurance com$anies "raduall& reduced the duration of the fi0ed income securities in their $ortfolio* there(& ensurin" "reater liDuidit& for their assets% The& also moved a'a& from lon"-term and $rivatel& $laced de(t instruments and increasin"l& invested in e0chan"e traded financial $a$er* includin" mort"a"e-(ac)ed securities% -o'ever* 'hile the increased liDuidit& of their $ortfolios reduced their ris) $rofiles* the& also reDuired active mana"ement of these $ortfolios in accordance 'ith the chan"in" lia(ilit& structures and mar)et conditions% Toda&* 'hile life insurance

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com$anies com$ete for mar)et share (& chan"in" the nature and structure of their $roducts* their via(ilit& is criticall& de$endent on the Dualit& of their $ortfolio and asset lia(ilit& mana"ement%

%"p$ications of 4ost :anage"ent

As is the case 'ith most com$etitive industries* $rofita(ilit& and via(ilit& of a firm in the insurance industr& si"nificantl& de$ends on its mar)et share* and its a(ilit& to minimi,e its cost of o$erations 'ithout com$romisin" the Dualit& of its service and ris) mana"ement% !erha$s the easiest 'a& to reduce cost is to reduce the cost of $rocessin" and under'ritin" $olic& a$$lications% In the US* the avera"e cost of $rocessin" and under'ritin" an a$$lication has (een estimated to (e in e0cess of US #7<% As a

conseDuence* insurance com$anies have increasin"l& resorted to re$lacement of $ersonnel (& com$uter-(ased Ge0$ertG s&stems 'hich a$$l& the vettin" models used (& the com$anies' Bhuman@ e0$erts to a 'ide ran"e of $ro(lems%G -o'ever* the US com$anies have found it more difficult to reduce their cost of mar)etin" and distri(ution% A si"nificant $art-of these e0$enses accrue on account of the commissions $aid to e0clusive andEor inde$endent a"ents* the usual rate of commission (ein" 17-/< $er cent* de$endin" on the line of (usiness% In order to miti"ate the cost-related $ro(lem* insurance com$anies in the US are increasin"l& loo)in" at alternative 'a&s to mar)et and distri(ute their $roducts% irect

mar)etin" has "ained $o$ularit&* as has mar)etin" (& 'a& of sellin" insurance $roducts

Page /1

throu"h other financial or"anisations li)e (an)s and (ro)ers% These actions mi"ht lead to si"nificant reduction of cost of o$erations of insurance com$anies* (ut it is not o(vious as &et as to ho' the small $olic&holders 'ill fare in the a(sence of $o'erful intermediaries 'ith (ar"ainin" $o'er vis-M-vis the insurance com$anies%

The %"pact of 9egu$ation

Fhile $ortfolio and cost mana"ement are im$ortant determinants of the via(ilit& of insurance com$anies* the US e0$erience indicates that the nature and e0tent of re"ulation too $la&s a )e& role in determinin" the via(ilit& of these com$anies% The insurance industr& in the US has historicall& (een one of the most re"ulated financial industries% The nature of re"ulation of life insurance com$anies* ho'ever* has differed si"nificantl& from the nature of re"ulation of $ro$ert&-lia(ilit& com$anies% Re"ulation of the former has t&$icall& em$hasi,ed asset Dualit&* 'hile the re"ulation of the latter has lar"el& concerned itself 'ith $olic&holder's G'elfare%G ?urther* the non-life industr& has suffered si"nificantl& as a conseDuence of chan"in" le"al ethos% In the recent $ast* the US courts have retroactivel& "ranted citi,en$olic&holders covera"e a"ainst ha,ards* li)e those from use of as(estos* that 'ere not factored into the actual insurance contract% As a conseDuence* the $remia actuall& earned (& the $ro$ert& lia(ilit& com$anies fell short of the GfairG $rices of these contracts* and hence these com$anies had to (ear hu"e losses on account of these $olicies% -o'ever* 'hile $olitics and chan"in" ethos mi"ht to"ether have dealt an unfair (lo' to the non-life insurance com$anies* the im$ortance of re"ulation cannot (e overem$hasi,ed% The

Page /7

c&clical nature of the firms6 $rofita(ilit& reDuires that the& (e monitoredEre"ulated such that the& are not in default durin" the unfavora(le $hases of the c&cle% The $ro$ert&lia(ilit& c&cle is t&$icall& initiated (& an e0o"enous shoc) 'hich increases the industr&'s $rofits% The hi"her $rofits ena(le the com$anies to under'rite more $olicies at a lo'er $rice% urin" this $hase* the insurance mar)et is (elieved to (e Gsoft%G The decrease in

$rice durin" the soft $hase* in turn* reduces the $rofita(ilit& of the com$anies* and initiates the do'nturn in the c&cle leadin" to the GhardG $hase% -ard mar)ets are characteri,ed (& hi"her $rices and reduced volumes% >nce the hi"her $rices restore the industr&'s $rofita(ilit&* the mar)et softens a"ain and the c&cle starts a"ain%

/u""ing up: !ointers for %ndian !o$ic&"a#ers

A si"nificant $art of the activities of the insurance industr& of an econom& entails mo(ili,ation of domestic savin"s and its su(seDuent dis(ursal to investors% At the same time* ho'ever* the& "uarantee minimum $a&offs to (oth individuals and com$anies (& 'a& of the $ut-li)e insurance contracts% As discussed a(ove* these contracts can si"nificantl& affect (ehavior of economic a"ents and* in "eneral* are $erceived to lead to (etter outcomes for economies% ?or e0am$le* it is not difficult to ima"ine the closure of a com$an& that had not made $rovisions for dama"es on account of Bsa&@ $roduct related lia(ilit& (ecause it had (elieved that it 'as $rotected from such dama"es (& an insurance $olic&%G The conseDuent insolvenc& of the com$an& can affect a num(er of (an)s and other com$anies

Page /8

adversel&* and a s&stemic $ro(lem 'ill (e $reci$itated% In other 'ords* the insurance industr& in an& countr& should (e su(5ected to re"ulations that are at least as strin"ent as* and $erha$s more strin"ent than those "overnin" the activities of other financial or"anisations% It is evident from the a(ove discussion that decisions a(out 'hat constitutes acce$ta(le $ortfolio Dualit&* and the e0tent of $rice re"ulation hold the )e& to insurance re"ulation in a $ost-li(erali,ation insurance mar)et% As the US e0$erience su""ests* insurance com$anies are usuall& su(5ected to strin"ent asset Dualit& norms% Indeed* 'hile a $art of their $ortfolio mi"ht com$rise of eDuit&* mort"a"es and other relativel& ris)& securities* much of their $ortfolio is made u$ of (onds and% liDuid Band hi"hl& rated@ mort"a"e (ac)ed securities% An Indian insurance com$an&* on *the other hand* is constrained (& the fact that the mar)et for fi0ed income securities is ver& illiDuid such that onl& "ilts and AAA and AAN rated cor$orate (onds have liDuid mar)ets% At the same time* a(sence of a mar)et for liDuid mort"a"e (ac)ed securities denies these com$anies the o$$ortunit& to enhance the &ield on their investment 'ithout si"nificantl& addin" to $ortfolio ris)% This mi"ht not $ose a $ro(lem in the a(sence of com$etition* es$eciall& if the "overnment hel$s to increase the returns to the $olic&holders (& 'a& of ta0 (rea)s* (ut mi"ht $ose a serious $ro(lem if li(erali,ation leads to G$riceG com$etition amon" a lar"e num(er of insurance com$anies Su(seDuent to li(erali,ation* the Indian insurance industr& mi"ht also (e at the receivin" end of re"ulations "overnin" insurance $rices E$remia% S$ecificall&* there mi"ht (e hi"hl& $olitici,ed interventions in the mar)ets for 'or)ers' com$ensation and medical insurance%

Page /9

The "overnment mi"ht also (e under $ressure to Gre"ulateG the $rices of infrastructure related lines li)e frei"ht and marine insurance% In $rinci$le* the ris)s associated 'ith such lia(ilit& insurance $olicies ma& (e hed"ed (& 'a& of reinsurance% .ut if the reinsurers $rice the ris)s' accuratel& and the Indian insurance com$anies are forced to under $rice the ris)s* the mar"ins of the insurance com$anies 'ill (e affected adversel&* there(& reducin" their lon" term via(ilit&% In vie' of these $olitical and financial realities* it mi"ht (e (etter to su(sidi,e the $olic&holders of $oliticall& sensitive lines directl& or indirectl& throu"h ta0 (enefits* if at all* rather than distort the $ricin" of the ris)s themselves% At the end of the da&* it has to (e reali,ed that 'hile com$etition enhances the efficienc& of mar)et $artici$ants* the $rocess of Gcreative destruction*G 'hich ensures the sustenance and enhancement of efficienc&* is not strictl& a$$lica(le to the financial mar)ets% -ence* 'hile e0it is $erha$s the most efficient o$tion for insolvent firms in man& mar)ets* insolvenc& of financial intermediaries6 calls for "overnment action and usuall& affects the "overnments' (ud"etar& $ositions adversel&% At the same time* other thin"s remainin" the same* the ris) of insolvenc& is $erha$s hi"her for insurance com$anies than for other financial intermediaries (ecause of the o$tion-li)e nature of their lia(ilities% Therefore* com$etition in the insurance industr& has to (e tem$ered 'ith a$$ro$riate $rudential norms* re"ular monitorin" and other re"ulations* there(& ma)in" the ro(ustness of the industr& criticall& de$endent on the efficienc& of and re"ulator& $o'ers accorded to the $ro$osed Insurance Re"ulator& Authorit&%

Page /:

?ffect 5f 9efor"s

A num(er of concerns are (ein" e0$ressed re"ardin" the o$enin" u$ of the Insurance sector% .ut most of them seem to (e unfounded% The national interest lies in increasin" the $enetration of insurance $roducts* increasin" the retention of $remia in India and mo(ili,in" resources for infrastructure needs% Com$etition means that $la&ers a""ressivel& tar"et $otential customers and this 'ill increase the $enetration of insurance% The retention of $remia in India has (ecome a sensitive issue 'ith some $eo$le 'ho demand that the $resent out"o of around Rs%1< (n (& the 'a& of reinsurance (e sto$$ed% These $eo$le in the name of safe"uardin" the national interest are in fact com$romisin" the interests of the nation% If no reinsurance is ta)en it im$lies that the insurance com$an& is under'ritin" the entire ris) itself% Thus a sin"le earthDua)e or a c&clone can 'i$e out the entire com$an&% >ne recent e0am$le is the calamit& that struc) the state of Gu5arat 'herein total claims stood at Rs%1#< (n% >nl& Rs%#; (n 'as settled locall& 'ith overseas reinsurers settlin" the (alance% The Insurance sector is a service industr& and international com$anies 'ill hel$ (uild local $rofessionals 'ith 'orld class e0$ertise (& introducin" the (est "lo(al $ractices% Com$etition 'ill also develo$ a (etter understandin" of consumer reDuirements leadin" to more customi,ed $roducts a$t for the mar)et $lace% .esides it 'ould also im$rove the tertiar& sector tremendousl&% evelo$ment of the tertiar& sector 'ould include ne'

avenues for actuaries* accountants* stoc)(ro)ers and others%

Page /;

Thus it is seen that the a$$rehensions (ein" e0$ressed do not hold much 'ater and the o$enin" u$ of the Indian insurance sector 'ould (rin" a(out s'ee$in" chan"es not onl& for the consumers (ut the econom& as a 'hole%

The 4urrent /cenario: ?ffects on !o$ic& <o$ders

The $rimar& reasons for (u&in" an insurance $olic&* 'hether life or non-life is to $rotect us from va"aries of life% Fe do not invest in insurance for returnsC rather 'e invest in it for re"retta(le necessities% Thou"h a lar"e $ro$ortion of $olicies availa(le in the countr& $rovide for returns* (ut no(od& is loo)in" for returns to the inflation rate% Some $eo$le do loo) for ta0 concessions* (ut lots of thin"s have chan"ed no'% ?irst* ta0 rates are not as hi"h as the& used to (e% Secondl&* concessions are still limited to a #<J ta0 shield% ?inall& other ta0 savin" schemes* li)e $u(lic $rovident fund offers (etter returns% In India insurance is sold and not (ou"ht% +ife Insurance Cor$oration has nearl& ei"ht& $roducts* (ut investors )no' onl& a(out a handful% That6s (ecause the a"ents of +IC $ush $olicies 'ith the hi"hest $remium to $oc)et a hi"her $remium% Same is the case 'ith General insurance% Com$anies offerin" General insurance $roducts-li)e medical* housin"* motor and industrial insurance- have more than 17< $roducts to sell% .ut a'areness is even lo'er than life insurance $roducts% It (ecomes o(vious that GIC lac)s the mar)etin" results%

Page 1<

4hange

Fhether $u(lic sector com$anies li)e it or not chan"e is the around the corner% General insurance sector 'ill soon (e o$ened u$ to $rivate and forei"n com$etition% The $otential for the ne' entrants is immenseC life and non-life $remiums add u$ to around #J of the G !* 'here as the "lo(al avera"e stands at :J% Indians as such have a hi"h savin"s rate and (rid"in" the e0istin" "a$ $oints at immense $otential% 1hat does this "ean for the consu"er=

Insurance com$anies 'ill introduce more term $olicies% These $olicies $rovide $rotection for a s$ecified time $eriod* and do not offer an& returns% These 'ill cover sim$le reDuirements of the insurance for the investor% In effect a term $olic& translates into lo' $remium out"o* 'hich frees the ca$ital for investment into other investment vehicles* 'hich offer (etter returns% Currentl& term $olicies constitute onl&1J of the total num(er of $olicies issued (& +IC* 'hile the "lo(al avera"e is 17-#< $er cent% A$art from the $lain vanilla $olicies* ne' entrants 'ill also offer consumers a choice of $roducts 'ith lo' $remiums% Endo'ment $olicies 'ill chan"e too% The insurer* in line 'ith his $recise ris) a$$etite* 'ill (e a(le to invest in a variet& of indices or sector s$ecific 'here in the returns 'ould (e hi"her% Instead of current fi0ed returns schemes insurance com$anies 'ill issue unit lin)ed schemes* inde0ed funds* or even real estate funds% Another o$$ortunit& is offered (& a $ension contract% -ere the o$tions offered could (e inde0ed annuit&* immediate annuit& or a deferred annuit&% The sco$e of ne' $roducts is also immense in the non-life

Page 11

se"ment% Com$anies 'ould offer $roducts for niche se"ment* li)e disa(ilit& $roducts* 'or)ers com$ensation insurance* renter6s covera"e and em$lo&ment $ractices lia(ilit& insurance% The "eneral insurance industr& is e0$ected to "ro' at the rate of #7J $er annum% Scared of ne' entries in the insurance sector* GIC has started offerin" ne' $olicies li)e Ra5 Ra5esh'ari% It covers disa(ilit& from accidents* the accidental death of the s$ouse and le"al e0$enses resultin" from the divorce% At $resent some of the "ood $olicies offered to consumer 'ith their res$ective (enefits are%

!R> UCTS .ENE?ITS !ure term insurance B$ure life 'ithoutAer& lo' $remiumsC effective ris) covera"e% insurance $olic&@% isa(ilit& $olic&

Covers disa(ilit& to a lon"er tenure to life time disa(ilit& .eneficial for a cou$leC lo' $remium out"o Saves the customer the trou(le of ma)in" claims and re$urchasin" the $roducts% !olic&-holder has the fle0i(ilit& of choosin" one of the ris) covers instead of the entire $ac)a"e%

?irst to die $olic& Re$lacement $olic&

?le0i(ilit& in home insurance $olic&

4hanne$s

Insurance com$anies 'ill also "et savv& in distri(ution% Enhanced mar)etin" thus 'ill (e crucial% Alread& man& com$anies have full o$eration ca$a(ilities over a 1#-hour $eriod%

Page 1#

?acilities such as customer service center are alread& into #1-hour mode% These 'ill $rovide services such as motor vehicle recover&% Technolo"& 'ill also $la& a im$ortant role on the mar)et% Effects of technolo"ies are discussed in another section% 9ura$ areas

Accordin" to Malhotra committee re$ort the $enetration of insurance in India is around ##J% This indicates that a vast ma5orit& of rural $o$ulation is not covered% Thou"h GIC offers man& $roducts for this se"ment li)e* cro$ $olic&* sil) 'orm $olic& etc* .ut due to $overt& ma5orit& of the $o$ulation cannot offered to "et insured% entrants are ho$eful of coverin" the vast tract of rural masses% Insurance industr& in the ne0t centur&* has uncovered trends that sho' increasin" diversit& that adds to challen"es and o$$ortunities% es$ite this* ne'

Challenges"Opportunities

Page 1/

The stud&* G#1st Centur&

emo"ra$hics for the +ife--ealth Industr&* Gdelineates the

follo'in" challen"es and o$$ortunities= !o$ulation around the 'orld is a"in"C num(er of $eo$le in the old a"e (rac)et is "ro'in" continuousl&% As the $o$ulation a"es $roducts such as annuities* IRAs and defined contri(ution retirement $lans have enormous "ro'th $otential% The chan"in" com$osition of households from traditional famil& units to sin"le households also $resents unta$$ed mar)ets 'ith real needs for life* health and retirement $roducts% Gro'in" income ineDualit& means that insurers should find a 'a& to mar)et cost-effectivel& to all economic sectors* $articularl& the middle class* 'ho run the ris) of (ein" a(andoned (& insurers chasin" the 'ealth&% Insurers must reco"ni,e that small (usinesses no' ma)e u$ a "ro'in" $ortion of the 'orld econom&* $resentin" a hu"e o$$ortunit& for "ro'th in this mar)et% The o$enin" u$ of this sector has (een lon" standin" and 'ith the $assin" of The Insurance Re"ulator& and ta)en% IR A is formed as an authorit& to $rotect the interests of holders of insurance $olicies* to re"ulate* $romote and ensure orderl& "ro'th of insurance industr& and for matters connected there'ith or incidental thereto% evelo$ment Authorit& - IR A (ill a si"nificant ste$ has (een

Fith the Insurance Re"ulator& and evelo$ment Act* the focus shifted to the follo'in"=

Page 11

The Insurance Re"ulator& and

evelo$ment Authorit& BIR A@ should "ive

$riorit& to health insurance 'hile issuin" certificates of re"istrationC

!olic&holders' funds 'ill (e invested in the social sector and infrastructure% The $ercenta"e ma& (e s$ecified (& the IR A and such re"ulations 'ill a$$l& to all insurers o$eratin" in the countr&C

Insurers 'ill (e e0$ected to underta)e a certain $ercenta"e of (usiness in the rural or social sector and $rovide $olicies to $ersons residin" in rural areas* 'or)ers in the unor"ani,ed and informal economicall& (ac)C

In case the insurers fail to meet the social sector o(li"ation a fine of Rs%#%7 mn 'ould (e im$osed the first time% Su(seDuent failures 'ould result in cancellation of licences%

6an# >ssurance

In the develo$ed nations of USA and UO* (an)s account for #<J and 1;J of all insurance $roducts sold% This fi"ure is 7<J for ?rance% This sho's the e0tent of sco$e that .an) assurance% Fhen tal)in" of (an)s 'e need to remem(er that there 'ill (e t'o re"ulatin" (odies* IR A and R.I% It is said that this is the reason for the slo' reaction of the (an)s to'ards this sector% -o'ever there are the N.?Cs that are also in the fora&% -o'ever* the non(an)in" finance com$anies BN.?Cs@ $lannin" to enter the insurance sector 'ill (e

Page 17

su(5ected to strin"ent $erformance and net 'orth $arameters set (& the Reserve .an) of India% The R.I re"ulations come in li"ht of the fact that most (an)s are loo)in" at their N.?C outfits for fora&in" into insurance sector% Some N.?Cs are $lannin" seriousl& to enter into memorandum of understandin" 'ith forei"n insurance com$anies% In a set of draft "uidelines issued to all scheduled commercial (an)s BSC.s@ and select financial institutions B?Is@* the central (an) had laid out $arameters that need to (e met as of March /1* #<<<=

A minimum net 'orth of Rs 7 (nC A minimum ca$ital reDuirement of Rs%1 (n*Bthis is mandator& for an& $la&er in the sector* includin" (an)s@

A minimum ca$ital adeDuac& ratio of 1< $er cent Entr& throu"h a 5oint venture A net $rofit record for last three &earsC Net non-$erformin" assets BN!As@ that Gare reasona(leGand A "ood trac) record in the case of su(sidiaries as 'ell%

?or N.?Cs* the other eli"i(ilit& criteria for 5oint venture $artici$ant 'ill (e= The ca$ital adeDuac& ratio of the N.?C en"a"ed in loan and investment activities holdin" $u(lic de$osits should (e not less than 17 $er cent and for other N.?Cs at 1# $er centC and the level of non-$erformin" assets should (e not more than 7 $er cent of the total outstandin" leasedEhire $urchase assets and advances ta)en to"ether%

Page 18

In India* 'hen one tal)s of (an)s* the lar"el& influential and effective* Coo$eratives cannot (e far (ehind% Their hand in the success of (an)in" in rural and other non-ur(an areas cannot (e (& an& means* underestimated% The comin" cha$ter ta)es a loo) at their $lans and their stren"ths vis-M-vis their fora& in the insurance mar)et%

4ooperatives

The coo$erative (an)s in the nation cover over 87J of the rural $o$ulation and have over <%17/-mn coo$erative societies cover all the villa"es% These coo$eratives cover 'hat the insurance sector needs to (e tar"eted at - The mass of the rural Indian $o$ulation% -o'ever* the norms laid do'n for entr& in the insurance sector immediatel& 'ashed a'a& this sectors ho$e to "et in this line of (usiness% -o'ever* after re$resentations to IR A* it 'as allo'ed to enter into the health sector for a start% In fact the coo$eratives 'ill (e (etter eDui$$ed and 'illin" to (rin" the insurance $roducts to the rural Indians and educate them on the (enefits of insurance and hel$ mo(ili,e funds from them* 'hich can (e effectivel& used for lon"-term national (enefits% In fact* one of the lar"est coo$eratives in Sin"a$ore* NTUC INC>ME* is 'or)in" in the The esteemed Mr% Sharad !a'ar is also for"in" a coo$erative alliance to (enefit from the ne' re"ulations% It is the cash rich Maharashtra Coo$erative that the $olitician is tr&in" to "et into this sector% The coo$erative is $lannin" to a$$l& for a national coo$erative licence so that it can (e a national coo$erative insurance $la&er%

Page 19

Non $rofit or"anisations are also li)el& to hel$ ta$ that class of $eo$le that 'ould have other'ise (een ne"lected (& the ne' $la&ers% Fhile "rou$s li)e SEFA are t&in" u$ 'ith ne' $la&ers to let them meet their tar"ets of social and rural sector* similarl& other "rou$s are li)el& to tie-u$ too* to use their )no'led"e and data(ase of $eo$le%

>gents A 6ro#ers:

The "uidelines "overnin" are e0$ected (& end of >cto(er #<<<* (ut 'hat is )no'n so far is that the a"ents in insurance (usiness 'ill no' (e allo'ed to sell atleast the $roducts of three life or three non-life insurance com$anies% Mr% Ran"achar& has said that a minimum ca$ital of Rs #%7 mn 'ould (e reDuired for underta)in" (ro)era"e in life and "eneral insurance $roducts* and Rs 1#%7 mn for ta)in" u$ a com$osite a"enc&% IR A also $ro$oses to reduce the level of income $aid to (ro)ersEa"ents of life and "eneral insurance (usiness% Currentl& the& receive 19%7J of the $remium $a&a(le on the $olic&% The re"ulator feels that these levels are Duite hi"h and the& need to (e (rou"ht do'n to more internationall& realistic levels considerin" the ne' insurance environment% IR A is "oin" to allo' three )inds of (ro)era"e firms to o$erate in the Indian insurance sector* Insurance* Re-insurance and Com$osite% It is "oin" to allo' a minor forei"n eDuit& sta)e in them 'ith a ca$ of 1;J% Com$osite (ro)ers are the ones 'ho can sell +ife P General insurance $roducts and reinsurance $roducts also% The ca$ital reDuirement for the (ro)in" firm 'ill (e Rs%#%7 mn% The IR A is also li)el& to ca$ the (ro)era"e commissions to 17J%

Page 1:

%nvest"ent 4riteria

All insurers 'ill (e "overned (& the investment criteria laid do'n (& the IR A% The& are read as (elo'= 3or ;ife insurer

+ife insurance com$anies 'ill have to invest #7J in the "overnment and another #7J in other a$$roved securities% 17J of investment 'ill have to (e invested in the infrastructure sector and social sector% The (alance /7J 'ill (e availa(le to the com$anies to invest in the ca$ital mar)ets 'ere the return on investment are si"nificantl& hi"her% 9ura$ sector

The criteria for investment in the rural sector for +ife Insurance com$anies is the follo'in" J of the total $olicies 'ritten in the corres$ondin" &ear* 7J in the 1st financial &ear* 9J in the #nd financial &ear* 1<J in the /rd financial &ear* 1#J in the 1th financial &ear* 17J in the 7th financial &ear*

!rudentia$ nor"s

The insurers* (oth +ife and Non-life* should not invest more than 17J of the total ca$ital em$lo&ed in eDuit& shares and de(entures%

+oans are not to form more than 1<J of the estimated annual accretion of funds% >n accountin" norms for the sector se$arate statements 'ould (e reDuired for an& activit& 'hich &ields 1< $er cent or more revenue%

Page 1;

To ensure that there is never a lac) of audit in the insurance com$an&* there 'ill (e t'o auditors* one 'ith a tenure of four &ears and the second 'ith a five &ear tenure%

An& insurance com$an& 'ould (e loo)in" at 1<J "ro'th in (usiness in a short term of 1< &ears and #<J over lon"-term i%e% #< &ears% The com$an& cannot (e e0$ected to $ut aside its mone& for the develo$ment of schools and sanitation facilities and villa"e funds develo$ment and see the mone& "ivin" no E ne"li"i(le return% Moreover the infrastructure $ro5ects in India are never sure of seein" the li"ht of the da&% The& invaria(l& "et lost in the vast (ureaucratic s&stem and corru$tion $revailin" in the nation% Thus this demand 'as seen to (e unreasona(le* (ut the forei"n $la&ers are not too unha$$&* as the& see themselves to (e lon" term $la&ers in the nation%

rea"s That Turned 7ight"are

As in an& successful 5oint venture* the $artners have to (e eDuals% If there is an& e0$ectations that are not lived u$to (& the $artner then 'e see feelin"s of discomfort arisin" in the venture% Fhen India announced that it 'ill o$en u$ its insurance sector* forei"n insurers sa' the unthin)a(le and latched on to the o$$ortunit& $resented (efore them% The& set u$ re$resentative offices* si"ned MoU 'ith numerous domestic $la&ers% The ur"enc& of it all sa' to it that there 'as no careful readin" of the scenario and the com$etencies of their $artners%

Page 7<

A fe' of the reasons for the (rea)do'n in the ventures are enlisted here'ith= 1% This 'as also the time 'hen the IR A 'as settin" out the "uidelines% >nce the& 'ere out* and it allo'ed onl& #8J eDuit& $artici$ation for the forei"n $la&ers in the mar)et* forei"n insurers reali,ed that their $ies 'ere not "oin" to (e as (i" as the& had envisa"ed% Man& decided to close sho$s in India and left the nation leavin" their domestic $artners in the cold% #% Also* no' 'ith the "uidelines out for all to read* the forei"n insurers realised that the investment criterion 'as inhi(itin" $rofit "ro'ths% The returns did not 5ustif& the investments* 'as their understandin"% /% Fith the ma5orit& sta)e (ein" 'ith the domestic $artner* forei"n insurers 'ould not have sa& in the mana"ement of the com$an& and im$ortant decisions could (e considered 'ithout them% !a& $ac)a"es* technolo"& transfer* $roducts and their $ricin" 'hen offered (& the forei"n insurers 'ould not mean that the& 'ould run the sho'% 1% omestic insurers realised that the& had the u$$er hand in the da& to da& 'or)in" of the com$an& and as)ed for a (i""er $ie in the venture% Their "reed onl& scared the alread& tensed forei"n insurers%

Page 71

The a(ove are the (road reasons that sa' a num(er of insurance 5oint ventures fall (& the lane and not see the li"ht of the da&% The follo'in" is the list of 5oint ventures that turned sour% a(ur-Allstate CGNU-.om(a& &ein"

Chu((-Oota) Mahindra

Ea"lestar-ITC

Rothschilds-Godre5

UA!-Inte"rated ?inance

Ci"na-Ran(a0&

Manulife-UTI

GI>-Sanmar Grou$

Allian,-Al$ic

a(ur-+i(ert& Mutual

Ro&alPSun alliance- CM Shriram

Page 7#

The a(ove list of failed 5oint ventures has not deterred the other $la&ers and the& have decided their channels of distri(ution%

4hanne$s of istribution

The distri(ution net'or) of (an)s is 'hat a lot of $la&ers are interested in% Initiall&* S.I 'as as)in" a $remium for it to (e $artnerin" 'ith an& insurer on the sole $remise that the (an) commands a net'or) that is un$aralleled in the (an)in" industr& in India toda&% Similarl& other (an)s are (ecomin" insurers to levera"e their net'or) of (ranches* in 5oint ventures 'ith forei"n $la&ers 'ho have the e0$ertise in the insurance sector% Mar)etin" alliances 'ith $eo$leEcom$anies havin" a $h&sical $resence is a "ood distri(ution strate"& too% The online 'orld is not "oin" to (e left (ehind% A num(er of sites have started offerin" $olicies online% Fhat needs to (e (orne in mind is that no matter 'hat channel one ma& use* the follo'in" factors 'ill (e critical in decidin" the success or failure of the venture= Initial setu$ cost -i"h mar"in to a"entsE(ro)ers Trained and e0$erienced $ersonal 'ill (e critical to the success of the insurer%

Page 7/

An

internal

control

mechanism

to

)ee$

ta(

on

e0$enses%

;i#e$& 3actor 5f /uccess

In the no' o$en sector on insurance* the follo'in" is 'hat I feel 'ill determine the success of the com$an& in $articular and the industr& in "eneral= - > change in the attitude of the popu$ation Indians have al'a&s (een 'ar& of em$lo&in" their hard-earned mone& in a venture that 'ill $a& them on their death% Insurance has al'a&s (een used as a Ta0 savin" tool% No more* no less% It is u$to the insurers to educate the $eo$le to secureEinsure their future a"ainst an& un)no'n calamit& and ma)e a shield around their families and (usinesses%

- >n open and transparent environ"ent created under the %9 >. The reason for this (ein" on the to$ of our understandin" is that 'hen ever 'e have seen an& sector o$en u$ in India there are al'a&s "re& areas and unsure $olicies% These are not e0actl& 'hat an& $la&er* (e it Indian or forei"n* loo)s for% It creates an air of uncertaint& in all the decision ma)in" $rocess% Insurance as a sector reDuires $la&ers 'ho are stron"

Page 71

financiall& and are 'illin" to 'ait for returns% Their confidence can (e (olstered onl& if there is an o$en and a trans$arent $olic& "uidelines% This 'ill also hel$ the consumers feel safe that the re"ulator& is an active one and cares to do ever&thin" $ossi(le to )ee$ thin"s under control and hel$ the insurance environment "ro' maturel&%

- > *e$$-estab$ished distribution net*or#. To cater to the lar"est democrac& in the 'orld is (& no means a ca)e'al)% Insurance $rofits are directl& related to num(er of insured and this is in turn related to the reach% The case in e0am$le is of the State .an) of India% The 5oint ventures announced have a flavour of net'or) (ein" a critical decider% This is so (ecause as $er the "uidelines 17J of the $olicies 'ritten (& the 7th financial &ear 'ill have to come from the rural area% The (an)s are the onl& ones 'ho have that reach%

- Trained professiona$s to bui$d and se$$ the product. It is said that the insurance a"ent is the (est salesman in the 'orld% -e ma)es &ou $a&* re"ularl&* an amount $romisin" to $a& (ac) onl& on &our death% Thus the $la&ers 'ill reDuire an e0cellent sales team to sell their $roducts in the no' com$etitive environment% The im$ortance can (e seen from the fact that a lot of +ICEGIC $ersonal is (ein" $oached (& the ne' $la&ers%

Page 77

> "ore rationa$e approach to the invest"ent criteria.

This is a ver& critical area as far as the "overnment and the $la&ers are concerned% The "overnment as fi0ed u$ the investment $attern for the $la&ers to meet its social o(li"ations% The $la&ers feel that the com$ulsion is un5ust and 'ill affect their return on investments% >ne ma& 'onder then 'h& is it that I have listed it as success factor% The reason* m& dear* is that it is in the lar"er interests of the societ&% The more the $eo$le insured* the (etter the revenues* follo'ed (& (etter securit&* follo'ed (& (etter morale and $roductivit&% >n a national level the criteria's ensure that the mone& does not "o out of the nation% Fe also need to (ear in mind that the insurers are here not for charit& (ut for $rofits% So their interest are also to (e )e$t in mind%

- ?ncourage"ent of ne*er and better products and $etting the hac#ne&ed ones die out. This 'ill itself ensure the mar)et "ro's% And that ever& classEsociet& "ets a $roduct that (est suits them%

the insurers.

> stringent accounting practice to prevent fai$ures a"ongst

Ever& insurer 'ill have the hard-earned mone& of the masses% An& failure of the insurer on account of un'arranted $rofli"ac& 'ill cost the nation in "eneral and the insured in $articular% To $revent an& underhand 'or)in"s of the insurer and to $revent them from "oin" (ust* a strin"ent accountin" $ractice is im$erative%

Page 78

> $eve$ p$a&ing fie$d at a$$ stages of deve$op"ent in the sector for a$$ the p$a&ers.

An un(iased environment is 'here the (est comes out of the $la&ers% Their real stren"th shines throu"h% This is the (eaut& of ca$italism that 'e are tr&in" to achieve in our customi,ed manner% This 'ill onl& hel$ the industr& "ro' and so 'ill the societ&% And last (ut not the least $atience amon"st the $la&ers and consumers to 'ait for the $ot of "old at the end of the rain(o'%

Page 79

A $otential for $rofit= unta$$ed o$$ortunities 'ill (e vital for ne' entrants to choose their $roduct and service offerin"s carefull&% In doin" so the& must consider t'o $ossi(le $itfalls% ?irst* 'hen estimatin" the $otential of the Indian insurance mar)et it is tem$tin" to loo) at macro-economic varia(les such as the ratio of $remium to G ! 'hich is indeed com$arativel& lo' in India% ?or e0am$le* India6s life insurance $remium as a $ercenta"e of G ! is 1%/ $er cent a"ainst 7%# $er cent in the US* 8%7 $er cent in the UO or : $er cent in South Oorea% Given India6s lar"e $o$ulation* the num(er of $otential (u&ers of insurance is certainl& attractive% The second tra$ is the tendenc& to tar"et the (usiness of e0istin" com$anies rather than e0$andin" the mar)et% Ne' $la&ers find it easier to tr& to ca$ture e0istin" customers (&

Page 7:

offerin" (etter service or other advanta"es% Iet* the (enefits of this strate"& are li)el& to (e limited% ?or e0am$le* 7< $er cent of the current demand for "eneral insurance comes from the cor$orate se"ment% Fe do e0$ect that after the mar)et o$ens u$* com$anies 'ill move (et'een insurers as the& sho$ around for the (est rates* $roducts and service% Nevertheless* 'e antici$ate that the cor$orate se"ment as a 'hole 'ill not (e a (i" "ro'th area for ne' entrants% This is (ecause $enetration is alread& "ood* com$anies receive "ood service (ecause of their si,e and rates are tariff-"overned% In (oth volumes and $rofita(ilit& therefore* the sco$e for e0$ansion is modest% A (etter a$$roach ma& (e to e0amine s$ecific niches 'here demand can (e met or stimulated% In our vie' ne' entrants 'ould (e (est served (& a micro-level a$$roach on t'o fronts% ?irst* the& should tar"et s$ecific niches 'hich are currentl& served $oorl& or not at all% +ife insurance $roducts $rovide a "ood e0am$le% The& com$ete 'ith investment and savin"s o$tions li)e mutual funds% It is im$erative that the& should offer com$ara(le returns and fle0i(ilit&% ?or instance* $ure $rotection $roducts li)e term assurance account for u$ to #< $er cent of $olicies sold in develo$ed countries% In India* the fi"ure is less than one $ercent (ecause $olicies are infle0i(le% .esides* no Indian life assurance $roduct is lin)ed to non-traditional investment avenues such as stoc) mar)et indices% Therefore* returns are lo'er than those on other savin"s instruments%

Page 7;

Similar $ro(lems a$$l& to $ensions% The lac) of a com$rehensive social securit& s&stem com(ined 'ith a 'illin"ness to save means that Indian demand for $ension $roducts 'ill (e lar"e% -o'ever* current $enetration is $oor% .& March 1;;:* +IC6s $ension $remium 'as onl& Rs% one (illion% Ma)in" $ension $roducts into attractive savin" instruments 'ould reDuire onl& sim$le innovations alread& common in other mar)ets% ?or e0am$le* their returns mi"ht (e tied to inde0-lin)ed funds or a s$ecific (as)et of eDuities% .u&ers could (e allo'ed to s'itch funds (efore the annuities (e"in and to invest different amounts at different times% -ealth insurance is another se"ment 'ith "reat $otential (ecause e0istin" Indian $roducts are insufficient% .& the end of 1;;:* GIC6s Mediclaim scheme covered onl& #%7 million $eo$le% Indian $roducts do not cover disa(ilit& arisin" out of illness or disa(ilit& for over 1<< 'ee)s due to accident% Neither do the& cover a $otential loss of earnin"s throu"h disa(ilit&% The second $ron" of a ne' insurer6s strate"& could (e to stimulate demand in areas that are currentl& not served at all% ?or e0am$le* Indian "eneral insurance focuses on the manufacturin" se"ment% -o'ever* the services sector is ta)in" a lar"e and "ro'in" share of India6s G ! Ban estimated 1: $er cent in 1;;:-;;@% This offers e0$ansion o$$ortunities% ?or e0am$le* revenue from remote $rocessin" activities in information technolo"& is estimated at US 'ith various lia(ilit& covers% !otential (u&ers for most of this insurance lie in the middle class% Ne' insurers must se"ment the mar)et carefull& to arrive at a$$ro$riate $roducts and $ricin"% E0istin" 7< (illion in the ne0t ten &ears% Insurers could res$ond

Page 8<

$la&ers can also $rofita(l& e0$loit these areas% Reco"ni,in" the $otential* in the $ast three &ears* the nationali,ed insurers have alread& (e"un to tar"et niches li)e $ensions* 'omen or children%

9eaching out: distribution issues

Fe antici$ate that distri(ution 'ill (e a )e& determinant of success for all insurance com$anies re"ardless of a"e or o'nershi$% The nationali,ed insurers currentl& have a lar"e reach and $resence% Ne' entrants cannot-and do not-e0$ect to su$$lant or du$licate such a net'or)% .uildin" a distri(ution net'or) is e0$ensive and time consumin"% Iet* if insurers are to ta)e advanta"e of India6s lar"e $o$ulation and reach a $rofita(le mass of customers* ne' distri(ution avenues and alliances 'ill (e im$erative% This is also true for the nationali,ed cor$orations* 'hich must find fresh avenues to reach e0istin" and ne' customers% Fe e0$ect su(stantial shifts in the distri(ution of insurance in India% Man& of these chan"es 'ill echo international trends% Forld'ide* insurance $roducts move alon" a continuum from $ure service $roducts to $ure commodit& $roducts Bsee chart@%

Page 81

4hart

Page 8#

Initiall&* insurance is seen as a com$le0 $roduct 'ith a hi"h advice and service com$onent% .u&ers $refer a face-to-face interaction and $lace a hi"h $remium on (rand names and relia(ilit&% As $roducts (ecome sim$ler and a'areness increases* the& (ecome off-the-shelf* commodit& $roducts% Sellers move to remote channels such as the tele$hone or direct mail% Insurance is sold (& various intermediaries* not necessaril& insurance com$anies% In the UO for e0am$le* retailer Mar)s P S$encer no' sells insurance $roducts% At this $oint* (u&ers loo) for lo' $rice% .rand lo&alt& could shift from the insurer to the seller%

Some $otential Indian $la&ers ho$e that their antici$ated technolo"& advanta"e 'ill allo' them to increase their reach* $artl& (& usin" remote channels% -o'ever* financial services com$anies "lo(all& and in India find that customers are ma)in" the shift to such channels slo'l& and onl& for less com$le0 transactions% In India* insurance* es$eciall& life insurance is still a service $roduct% Indeed* even the successful international direct insurers focus on standard covers such as motor insurance% Fe therefore (elieve that in India technolo"& 'ill not re$lace a distri(ution net'or)* thou"h it 'ill offer advanta"es li)e (etter customer service% Iet* 'e e0$ect chan"es in distri(ution alon" other $arameters% .an)s and finance com$anies 'ill emer"e as an attractive distri(ution channel for insurance% This trend 'ill (e led (& t'o factors 'hich alread& a$$l& in other 'orld mar)ets% ?irst* (an)in"*

Page 8/

insurance* fund mana"ement and other financial services 'ill all form a set of services rather than dis$arate ones% Second* (an)s and finance com$anies are (ein" driven to increase their $rofita(ilit& and $rovide ma0imum value to their customers% Therefore* the& are themselves loo)in" for a ran"e of $roducts to distri(ute% In India too* (an)s ho$e to ma0imi,e e0$ensive e0istin" net'or)s (& sellin" a ran"e of $roducts% Fe antici$ate that rather than formal o'nershi$ arran"ements* a loose net'or) of alliance (et'een insurers and (an)s 'ill emer"e% In the US* (an)s lease s$ace to insurers 'ithin their (an) (ranches or retail $roducts from multi$le insurers% Insurers in India should also e0$lore distri(ution throu"h non-financial or"anisations% ?or e0am$le* insurance for consumer items such as refri"erators can (e offered at the $oint of sale% This $i""&(ac)s on an e0istin" distri(ution channel and increases the li)elihood of insurance sales% Alliances 'ith manufacturers or retailers of consumer "oods 'ill (e $ossi(le% Fith increasin" com$etition* the& are 'ooin" customers 'ith various incentives* of 'hich insurance can (e one% Another $otential channel that reduces the need for an o'ned distri(ution net'or) is 'or)site mar)etin"% Insurers 'ill (e a(le to mar)et $ensions* health insurance and even other "eneral covers throu"h em$lo&ers to their em$lo&ees% These $roducts ma& (e $urchased (& the em$lo&er or sim$l& mar)eted at the 'or)$lace 'ith the em$lo&er6s coo$eration% ?inall&* some $otential Indian entrants into insurance ho$e to ride their e0istin" distri(ution net'or)s and customer (ases% ?or e0am$le* financial or"anisations li)e

Page 81

ICICI* - ?C or Oota) Mahindra intend to ta$ the thousands of customers 'ho alread& (u& their de$osits* consumer loans or housin" finance% >ther ho$eful entrants antici$ate s$ecific alliances such as 'ith hos$itals to $rovide health cover% ifferent distri(ution channels (rin" their o'n challen"es% ?irst* com$anies 'ill have to ensure a stron" (rand identit&% istri(ution throu"h third $arties means that it is those

com$anies rather than the insurers 'ho often rea$ the (enefits of customer lo&alt&% This accelerates the shift of insurance to a commodit& $roduct% Second* since man& ne' com$anies alread& offer other financial services $roducts* the& 'ill (e tem$ted to sell onl& their o'n $roducts% The& must (alance this a"ainst the advanta"es of offerin" customers a 'ide $roduct ran"e% This is es$eciall& im$ortant (ecause 'e antici$ate the rise of $ure financial service retailers 'ho do not have an& o'ned $roducts and offer a (road ran"e of $roducts from different $roviders to consumers% >voiding the pitfa$$s: other issues

Most of the o$$ortunities and challen"es that 'e have discussed a$$l& eDuall& to e0istin" and ne' insurers% It must (e em$hasi,ed that the o$enin" of the insurance mar)et is far from a (ad thin" for nationali,ed insurers% Fith a stron" $resence* a 'ide net'or) and considera(le (rand eDuit&* the& are in a "ood $osition to ta$ the ver& same se"ments $rofita(l&* 'hile im$rovin" their $roduct and service offerin"s% Fe antici$ate that the& 'ill continue to hold a stron" mar)et share $osition%

Page 87

All insurers in a li(erali,ed Indian mar)et 'ill have to address a host of other issues% The& 'ill have to=

+evera"e information technolo"& to service lar"e num(ers of customers efficientl& and (rin" do'n overheads% Technolo"& can com$lement or su$$lement distri(ution channels cost-effectivel&% It can also hel$ im$rove customer service levels considera(l&%

Use data 'arehousin"* mana"ement and minin" to "au"e the $rofita(ilit& and $otential of various customer and $roduct se"ments and ensure effective cross sellin"% Understandin" the customer (etter 'ill allo' insurance com$anies to desi"n a$$ro$riate $roducts* determine $ricin" correctl& and increase $rofita(ilit&%

Ensure hi"h levels of trainin" and develo$ment not 5ust for staff (ut for a"ents and distri(ution or"anisations% E0istin" or"anisations 'ill have to train staff for (etter service and fle0i(ilit&* 'hile all com$anies 'ill have to train em$lo&ees to co$e 'ith ne' $roducts and an intensive use of information technolo"&% The im$ortance of alliances and tie-u$s means that com$anies 'ill have to inte"rate related (ut se$arate $roviders into their s&stems to ensure seamless deliver&%

.uild stron" relationshi$s 'ith intermediaries such as a"ents% The a"enc& force is an im$ortant customer interface and com$anies must $artner 'ith this "rou$ to reach customers and serve them effectivel&%

Indian insurance is on the threshold of dee$ and fundamental chan"es% The life insurance industr& 'as nationalised in 1;78 and the "eneral insurance industr& in 1;9#% .efore that

Page 88

India had a thrivin" and com$etitive insurance industr& 'ith hundreds of $rivate and forei"n o$erators% Indian com$anies held a 8< $er cent mar)et share even then% Iet* insufficient re"ulation also meant that there 'ere a num(er of a(uses% In a re-o$ened Indian insurance mar)et* re"ulators must formulate stron" and fair "uidelines and ma)e sure that old and ne' $la&ers are su(5ect to the same rules% Com$anies* mean'hile must (e $re$ared to set and meet hi"h standards for themselves% The (i" challen"e for (oth com$anies and re"ulators is to ensure that the& re$licate the (enefits of the $ast 'hile eliminatin" its ills%

# P$s Of Services %ar&eting %i'

In the 9 !6s 'e 'ill (e concentratin" on +ife insurance se"ment% !roduct :ix +ife insurance is a device or $lan of s$readin" a $ossi(le financial loss over a lar"e num(er of $ersons* 'hich is too heav& to (e convenientl& (orne (& an individual% It see)s to reduce the financial uncertainties arisin" from the natural contin"encies - old a"e and death% It is a

Page 89

"uarantee "iven (& one B+ife Insurance com$an&@ to another BinsuredE$olic&holder@ 'here(& the former underta)es to $a& a sum of mone& to the latter Bor nominee in case of death@ on the ha$$enin" of the event insured a"ainst%

+ife insurance is a $eculiar $roduct% It is Duite different from other commercial $roducts% ?irst* 'hat +ife Insurance sells is not a tan"i(le $roduct (ut an intan"i(le one at $resent - a $romise to inform in future% Fhen this o(li"ation is met* i%e%* the insured event ta)es $lace* the mone&* 'hose $resence can (e felt* re$laces the $romise% Fith this amount the insured $erson or his de$endents can meet o(li"ations on account of food* clothin" and shelter% Secondl&* life insurance $roduct continues to e0ist over a lon" $eriod of time and for ma)in" its service availa(le* the insured $erson has to "o on $a&in" the $urchase $rice B$remium@ throu"hout the term of the $olic&% This ensures that the (enefits alread& accrued under 3sale'' are not lost% ?inall&* the seller Bin India* the +ife Insurance Cor$oration of India@ has not onl& to sell his $roduct (ut also to )ee$ the contract in force (& continuous and efficient servin"% In other 'ords* 'ith res$ect to life insurance $roducts sales and services "o to"ether%

A $eculiar feature of the +ife Insurance mar)et in India is that thou"h it is a (u&er's mar)et* (& and lar"e* the seller* i%e%* the +ife Insurance Cor$oration of India has to ta)e a decision 'hether to sell a $articular $olic& to a $articular $erson or not* on the (asis of the information disclosed (& the (u&er himself in the $ro$osal form%

A"ain* +ife Insurance mar)et can (e divided into t'o-(road se"ments Q Ksource6 and Kuse6

Page 8:

mar)et% The former im$lies the sum total of $olic&holders of +IC and the latter the various industries* electricit& (oards* housin" finance institutions* "overnment 'ho have made use of the economic reservoir created out of $remium mone& collected% This $air restricts to Ksource6 mar)et onl&%

;%4Bs !roduct :ix

+ife Insurance Cor$oration B+IC@ of India has various $lans of insurance $olicies% A ne' scheme is launched as $er the mar)etin" (ud"et% The co-coordinated efforts of Mar)etin" ivisions* the Mar)etin" Mana"er* the evelo$ment >fficer and finall& the a"ents are

res$onsi(le for the launch of an& ne' scheme% At $resent* +IC services around 9< $lans 'ith various $olicies attached to it% Some of their famous or recentl& launched $olicies are=Ne' 2eevan ShreeC Ne' .ima OiranC 2eevan SnehaC Children6s Mone& .ac) !olic&C 2eevan Sura(hiC .ima !lusC .ima Nivesh Tri$le Cover%

The !rice :ix !remium is the $rice* 'hich the $erson see)in" insurance $a&s to the +IC for $urchasin" in

Page 8;

the +ife Insurance $olic&% It is nothin" (ut the cost of insurance from $urchaser6s $oint of vie'% It is the consideration $aid (& each insured for (uildin" u$ a certain asset called the Kassured sum6 'ith the insurer% The amount of $remium has a (earin" on the ris) involved in coverin" a life% The ris) in turn in has a (earin" on the a"e of the life to (e covered* his or her ha(its* se0* famil&* race* ha(itat* food ha(its* education* etc% +ife insurance $remium increases 'ith the a"e since the $ro(a(ilit& of death increases* ho'ever the insurance for the convenience of clientele and their o'n administrative convenience* char"e a level $remium uniform throu"hout the contract $eriod% Actuall&* sli"htl& more $remium (ein" $aid at the initial sta"es* alon" 'ith investment returns on it% It 'ill (e set of a"ainst the increases in $remium at later a"es% The actual $rocess of acce$tin" a $erson for +ife Insurance and coatin" a$$ro$riate $remium is )no'n as under'ritin"%

;%4Bs !rice :ix

There are three main factor6s considered (efore fi0in" an& $rice for a $olic&% The& are as follo's= -

:orta$it& 9ating

There is a !o$ulation Census* 'hich is conducted re"ularl& in the countr&% +IC uses the information from this census and derives a com$arison (et'een the different a"e "rou$s

Page 9<

and the deathEmortalit& rate $er 1<<< $eo$le in that $articular a"e "rou$% The ones 'ith hi"her mortalit& are "iven the least ratin"% These 'ould (e the $o$ulation "rou$ 'ith a hi"h death rate% Thus the "rou$s 'ith the least death rate havin" a lon"er life s$an 'ould reDuire insurance cover more than the other a"e "rou$Es% Thus the& 'ould (e rated hi"hl& and the $rice of that $olic& 'ould (e fi0ed accordin"l&%

%nsurab$e %nterest

The conce$t of insura(le interest means that the insured should have a "enuine need for ta)in" an insurance cover% Thus to ensure this there is an initial !remium amount 'hich has to (e $aid% e$endin" on this initial amount collected* the $rice of the $lan is decided%

:anage"entBs ?xpenses

These 'ould consist of the administrative and sellin" e0$enses as there 'ould (e nil cost of $roduction% The& could (e in the form of fi0ed office e0$enses li)e rent* electricit&* stationar& and salaries to all the em$lo&ees and other such related cost%

The !ro"otion :ix and !$ace :ix As +ife insurance is a $ersonali,ed service* $ersonal sellin" $la&s an im$ortant role in $romotin" the same% !lace and $romotion are (ein" hi"hli"hted here since the a"ents and develo$ment officer 'ho form the $illars of +ife Insurance mar)et structure dischar"e these t'o im$ortant functions% A"ents are !R men of insurance com$anies at the "rassroot level% The role in (uildin" u$ "ood customer relation is crucial% The& 'or) under the "uidance and direct su$ervision of develo$ment officers% The& to"ether sell the ri"ht t&$e

Page 91

of $olicies suita(le to the needs of clients for the ri"ht amount at the ri"ht time Ba"e@% The a"ents render various other services and also $la& a vital role in $olic& servicin"% The evelo$ment >fficers under each .ranch office (eside "uidin" and su$ervisin" activities of the a"ents are also res$onsi(le for their recruitment and trainin" so as to develo$ a sta(le a"enc& force% The& activate the e0istin" a"ents and motivate the ne' ones% Also the& render all such services to the $olic&holders as 'ill $roduce (etter $olicies% A"ents and develo$ment officers* as the intermediaries in the distri(ution s&stem of the 'hole* develo$ and increase the +ife Insurance (usiness in a $lanned 'a&%

?or $romotin" +ife Insurance (usiness* sales $romotion activities are also carried out (& the a"ents% Calendars* (a"s* diaries* etc% are also "iven to the $olic&holders as a to)en of "ifts% +IC also trains their a"ents* as the& do not tend to increase or u$date their )no'led"e re"ularl& so as to serve (etter to their customers% S$ecial trainin" $ro"rams are held for them%

;%4Bs !$ace :ix

+IC has one cor$orate office at KIo"e)shma6* 'hich is in Mum(ai% The& have 1: Main .ranches* 'hich ma)e u$ one ,one% There are total seven ivision% There are total 1: such divisions 'hich ma)e u$ a Io"e)shma Ronal >ffices%

9 Ronal >ffices

1: such divisions

Page 9#
1: Main .ranches

A sin"le (ranch of +IC consists of four different de$artments namel&= Sales Ne' .usiness Accounts !olic& Servicin"

These (ranches 'or) as $er the co-coordinated efforts of these de$artments% ?or the em$lo&ees of +IC Bdevelo$ment >fficersE A"ents@* there is no such fi0ed formula of Insurance%

No' 'ithin a (ranch* follo'in" is the decentrali,ed or"ani,ation structure in +IC=

Mana"erEAdministrative >fficer

evelo$ment >fficer B!%R%>%@

A"entE -i"h Grade Assistance

!eons* etc

Page 9/

?rom the a(ove decentrali,ed or"ani,ation structure* 'e find that there is a main Mana"erE Administrative >fficer* is res$onsi(le to control the em$lo&ees under him% Then 'e have the evelo$ment >fficer* 'ho accordin" to +IC is their !R officer% This evelo$ment

>fficer carries out the duties of a !R officer% Under the

evelo$ment >fficer* there are the

a"ents 'ho are mainl& res$onsi(le for carr&in" out the tas) of sellin" the $olicies to the res$ective clients%

;%4Bs !ro"otion :ix

4o""unication /trateg&

+IC mainl& uses direct sellin" as their means of communicatin" 'ith its customers% The a"ents directl& contact the clients and vice-versa% The& advertise throu"h various media li)e ne's$a$ers* ma"a,ines* television* hoardin"s* etc% ?or internal communication there are 5ournals* 'hich are distri(uted amon" the em$lo&ees% These ma"a,ines "ive a 1<-17 &ears $ast information a(out the com$an&% The& also "ive a la&man all the )no'led"e a(out +IC6s $ro"ress% The cost of this 5ournal amounts to onl& Rs% 17% Also com$anies li)e Siemens use the "rou$ Su$er-Annuition Scheme of +IC as a $erDuisite to all its em$lo&ees in the form of $ensions and other retirement (enefits% In this 'a&* +IC ensures that it is not 5ust the human (ein" 'ho should (e ensured (ut even the com$an& 'here he is em$lo&ed is eDuall& res$onsi(le of ta)in" care of the future social 'elfare of the em$lo&ee%

:edia

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The (asic media used (& +IC is (& 'a& of irect Communication 'ith the customers% This ma& (e throu"h 'ritten corres$ondence or face-to-face communication via the tele$hone% The 'e(site '''%licindia%com $rovides detailed information to an& la&man a(out the com$an&* its $olicies* its (ranches* and its net'or) as such%

The !rocess :ix The $rocess involved in the insurance industr& should (e customer friendl&% The s$eed and accurac& of $a&ment is of vital im$ortance% The $rocessin" methodolo"& should (e such that it $rovides ease and convenience to the customers% Installment schemes should also (e streamlined to cater to the "ro'in" demands of the customers and )ee$ $ace 'ith the com$etition in the mar)et% The ne' develo$ments* 'hich 'ill smoothen the $rocess flo'* are IT and ata Farehousin"% ?irstl&* information technolo"& 'ill hel$ in servicin" lar"e

num(er of customers efficientl& and (rin" do'n overheads% Technolo"& can com$lement and su$$lement distri(ution channels cost effectivel&% It can also hel$ im$rove customer service levels considera(le% Secondl&* the use of data 'arehousin"* mana"ement and minin" 'ill hel$ to "au"e the $rofita(ilit& and $otential of various customer and $roduct se"ments% Understandin" the customer (etter 'ill allo' insurance com$anies to desi"n a$$ro$riate $roducts* determine $ricin" correctl& and increase $rofita(ilit&%

The !eop$e :ix .ein" a service industr& involvin" a hi"h level of $eo$le interaction* it is im$ortant to use

Page 97

this resource efficientl& in order to satisf& customers as also to have a com$etitive ed"e in the mar)et% The t'o )e& areas* 'hich need to (e )e$t under consideration* are trainin" and develo$ment and stron" relationshi$s 'ith intermediaries% Trainin" the em$lo&ees to introduce them to ne' $roducts* use of information technolo"& for efficienc&* (oth at the staff and the a"ents level or the distri(ution or"ani,ations is one of the )e& areas to loo) into% Also (uildin" stron" relationshi$s 'ith intermediaries* such as a"ents* 'ill hel$ in meetin" customer needs and serve them effectivel&%

4usto"er Groups

The various customer "rou$s can (e cate"ori,ed in the follo'in" manner=1. irect 4usto"er

The direct customer is the o'ner of the insurance $olic&% It is under his name that the $olic& has (een a$$roved% -e ma& not (e the final (eneficiar& of the service $rovided% In case of cor$orate insurance* services li)e $ensions* "rou$ incentives are en5o&ed (& the res$ective individual%

.. %ndirect 4usto"er The indirect customers are the famil& mem(ers or the $ersons for 'hom the $rotection of the insurance cover has (een ta)en% ?or e0am$le* the insurance $olic& ta)en (& an earnin" class $erson for insurin" the future of his famil& incase of an& unforeseen events% The future (enefits are en5o&ed (& the famil& mem(ers* 'hich are the indirect customers%

Page 98

-. 9egu$ator The insurance (usiness is re"ulated (& the IR A BInsurance Re"ulator& and evelo$ment Authorit&@ as $er the ne' economic reforms%

,. 4o"petitors +IC has a clean mono$ol& over the mar)et% As $er +IC6s claims this mono$ol& 'ill remain for at least another five &ears as the "estation $eriod for the ne' entrants to (ecome $otent $la&ers is also e0$ected to (e the same% .ut there are threats from the ne' and emer"in" $rivate sector% The various com$etitors for +IC in the $rivate sector are ICICI !rudential* - ?C Standard* TATA AIG* .irla Sun +ife Insurance and man& others%

5. %nterna$ 4usto"ers The em$lo&ees of +IC are the internal customers% The details re"ardin" their hierarch& are desi"nation have (een covered in the K$eo$le mi06%

!h&sica$ ?vidence In the case of Insurance* $h&sical evidence can (e the a$$earance and dressin" of the a"ents and the frontline staff* the office dScor* the office (uildin" on the 'hole* the Dualit& of $a$er used in the forms* etc%

Page 99

he ( I$s of Services %ar&eting

%ntangibi$it& Insurance as 'e )no' is "uarantee a"ainst ris)* and neither "uarantee nor ris) is tan"i(le% -ence Insurance (usiness falls under the cate"or& of Services mar)etin"% Thou"h mar)eters tr& to (rin" in some amount of tan"i(ilit& throu"h 'ritten documents li)e $olic& forms and authori,ation letters%

%nseparabi$it&

Page 9:

At the time of ma)in" a contract and throu"h out the $roceedin"s* (oth the $arties have to (e $resent% The service cannot ta)e $lace 'ithout the $resence of (oth the $arties* 'hich are the service $rovider and the client% .ut this is not the case in life insurance $olic&C thou"h the client does nominate his nominee hence a"ain there has to (e a $erson $resent%

%nconsistenc& After all it is $eo$le dealin" 'ith $eo$le and not machines dealin" 'ith $eo$le* hence some amount of inconsistenc& does ta)e $lace al'a&s% !rivate firms are tr&in" to reduce this and tr&in" to standardi,e the 'or)in" (ut com$anies li)e +IC B"ovt% o'ned@ do not ta)e much interest in such matters%

In com$anies li)e +IC the s&stems are not stron"C hence em$lo&ees do not (ehave 'ell% -ence the (ehaviour of the em$lo&ees* a"ents etc% are not consistent* therefore a customer mi"ht "et a different e0$erience each time he interacts 'ith the com$an&%

%nventor& There is inse$ara(ilit& and intan"i(ilit& in insurance therefore the Duestion of inventor& doesn6t arise% The com$anies cannot $roduce the service first and store it to "ive it to the ultimate consumer% -ence there can (e no inventor& for services%

Page 9;

%ar&et Segmentation
The entire mar)et is se"mented into four cate"ories=-

1.+ 6usiness 4$ass These are the customers 'hich are self-em$lo&ed% The& are tar"eted 'ith $olicies relatin" to the u$$er end of the mar)et%

..+ /ervice '?arning+ 4$ass

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These are the customers 'hich (elon" to the limited salaried income class% The& are mainl& tar"eted 'ith $olicies of social securit& considerin" their limited income and future situation is ta)en into consideration% These $olicies serve as a $rotection to the families of the salaried income man in case of an& une0$ected death%

-.+ >gricu$tura$ ;aborers The la(orers are those 'ho 'or) on the farm% The& don6t o'n that $articular holdin"% The& are mainl& serviced in the rural areas of the countr&% The $olicies tar"eted are the one6s 'hich fall under the lo'er end of the se"ment* "ivin" a sense of $rotection to the need&E$oor 'or)er in case of an& unforeseen events%

,.+ 3ar"ers +i)e the la(orers* even the& are tar"eted mainl& in the rural areas* (ut the difference is that the& o'n the $articular land holdin"% The& are further divided into the small* mar"inal and lar"e holdin"s% A"ain the& are tar"eted 'ith various $lans as $er their $urchasin" $o'er%

Services %ar&eting riangle

The conce$t of services mar)etin" trian"le in com$arison of +IC is as follo's=-

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45:!>7C-;%4 The a(ove dia"ram e0$lains the services trian"le 'ith its three constituents* namel&* the com$an&* the $rovider and the consumer% Each can (e e0$lained in the follo'in" manner=-

%nterna$ 4o"pan& :ar#eting

?xterna$ :ar#eting

The com$an& +IC ma)es various $romises to its customers throu"h e0ternal mar)etin"% The 'a& and means of mar)etin" have alread& (een covered in the mar)etin" mi0%

%nteractive :ar#eting !958% ?9->G?7T/ !rovider 457/D:?9/!5;%4C <5; ?9/

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The +IC a"ents and the

evelo$ment >fficers act as the front-line staff and the& are in

direct contact 'ith the $otential or e0istin" customers% The& are the ones 'ho )ee$ or satisf& the $romises made (& the com$an&% The mar)etin" of insurance (asicall& comes under conce$t sellin"% The +IC a"ents are thus "iven various incentives* re'ards* commissions and all the necessar& trainin" reDuired% As re"ards incentive* the& receive !+I B!roductivit& +in)ed Incentive@ 'hich is (ased on the increase in $remium amount and the sums assured (& the a"ent% The& are also "iven e0tra commissions in case of $olicies 'hich are of hi"h value% There are normal $romotions for an& "ood 'or) done on a re"ular (asis% The +IC a"ents* "enerall&* 'or) under the trainin" and "uidance of their res$ective evelo$ment >fficers% .ut as $er a ne' rule* the a$$licant has to under $reliminar& trainin" from the Insurance Institute of India 'hich is reco"ni,ed (& +IC li)e I?SERT* !une and the other one in -&dera(ad% Then he a$$lies and "ets a licence to $ractice (usiness% -e also under"oes a test from +IC and after $assin" this test* he 'or)s under the trainin" of the evelo$ment >fficer% A$art from the a(ove* there are M ! BMana"ement

evelo$ment Centre@ 'hich is for the Mana"ers and other e0ecutives a(ove them and the TC B evelo$ment Trainin" Centre@ 'hich is for the evelo$ment >fficers% The various at +IMRA* Sin"a$ore

E0ecutive* the irectors and the Ronal Mana"ers under"o T P

4onsu"ers

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The consumersE (u&ers are the $olic& holder% A$art from the routine life insurance $olicies* +IC also deals in -ousin" ?inance* Mutual ?unds* !ension and Grou$ Insurance as its allied (usiness activities% Thus the ran"e of consumers is far and 'ide%

)nal*zing the Service

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1. 4ategori@ing the /ervice !rocess. The t'o $arameters used in this are= 7ature of the act: - it is intangible* (ecause one cannot $h&sicall& see the result* 'hich occurs after the $erformance of the service in this case% 9ecipient of the service= - here it is the information that is "iven to the customer that is in $rocess% An& action that is done (& the $rovider is not directed to'ards the (od&* mind or an& "ood% -ence 'e can sa& that it is an information-processing (ecause it is the information that 'ill decide 'hether the customer 'ill avail of the service or not%

.. :ethods of /ervice e$iver& The t'o $arameters used in this are= 7ature of interaction >vai$abi$it& of service out$ets= - here the customer has a choice of "oin" to the closest (ranch or local office% That is there are a num(er of outlets or offices from 'hich he can avail of the services% >r he can al'a&s contact the $rovider or the a"ents throu"h eas& access and availa(ilit&% -ence multiple set of outlets%

-. 7ature of e"and for the /ervice - 9e$ated to its /upp$&.

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The t'o $arameters used in this are= ?xtent to *hich supp$& is $i"ited= - in this case there are ver& fe' times 'hen there is $ea) demand% At such times the demand can (e usuall& (e met 'ithout a ma5or dela&% Thus the supply is enough to meet the sudden s$urt in demand% ?xtent of de"and f$uctuation overti"e= -it is ver& narrow. This means that the rise in demand is not that 'ide that it cannot (e mana"ed% A narro' demand fluctuation occurs%

,. >ttributes of the /ervice ?xperience The t'o $arameters used in this are= ?xtent to *hich peop$e are part of the service = - as customer involvement is very high 'e can sa& that the& form an im$ortant $art of the service% .ased on the reDuirement of each customer ever& $olic& 'ill have to (e tailored to suit him* and accordin"l& he 'ill (e a(le to avail of certain $olicies and not all% ?xtent to *hich eEuip"ent are part of the service = - as it relies more on the $eo$le* it is not that de$endant on technolo"&% -ence 'e can sa& that it is low on this $arameter% This is (ecause technolo"& is not that e0tensivel& used in this industr& as it still follo's the traditional distri(ution channels%

5. 9e$ationship *ith 4usto"ers

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The t'o $arameters used in this are= 7ature of service de$iver&: - as a customer once ta)es a $olic&* he has to )ee$ in touch 'ith the insurer for $a&ment of $remium* maturit& date etc% -ence it is an on"oin" $rocess* so 'e can sa& that there is continuous service deliver&% T&pe of re$ationship bet*een custo"er and provider= - onl& a customer 'ho has ta)en a $olic& can avail of the facilities $rovided (& the insurer% That means that there is the e0istence of the relationshi$ (et'een them* due to the formation of a membership relationship that e0ists (et'een them%

he Flo+er of ,Service$ Page :9

The conce$t of the ?lo'er of service has (een com$ared in relation to the $ractices of ;%4% In the follo'in" lines* the various $etals 'hich surround the core $roduct of +IC have (een (riefl& e0$lained%

4ore !roduct

A$art from $rimaril& servicin" life insurance $olicies* +IC is also en"a"ed in (usinesses relatin" to -ousin" ?inance* Mutual ?unds* !ension and Grou$ Insurance* and Social Securit&%

/upp$e"entar& /ervices

The various su$$lementar& services 'hich fall under various cate"ories are e0$lained as follo's=-

%nfor"ation

+IC has its o'n Information Centres in Santacru, BF%@* Mum(ai and !une% .& dialin" 81#7777* one can find out an& information re"ardin" an& $olicies* $lans* o$erations or an& information relatin" to +IC% The other num(er 81:9877 "ives the individual $olic& holder* information a(out his $olic& as re"ards $remium* duration* and an& other information relatin" s$ecificall& to his $olic&% The !une num(er is 77/8181% +IC has its official 'e(site* '''%licindia%com* 'hich "ives all the information re"ardin" their $roducts* services and all the information a(out +IC6s o$erations% +IC also has an in-(uilt K$lan su""estor6 on its 'e(site* 'hich automaticall& $rocesses the information su$$lied (& the $otential customer and the res$ective $olic& is su""ested%

Page ::

4onsu$tation

+IC6s mainl& $rovides consultanc& services throu"h its information centre* its 'e(site* and its a"ents 'hich 'or) on a $ersonali,ed (asis and offer advices relatin" to various $lans and $olicies%

5rder-ta#ing

As far as order-ta)in" is concerned* +IC has its $ersonnel cate"ori,ed as A"ents* evelo$ment >fficers* Assistant .ranch Mana"er* .ranch Mana"er and various other e0ecutives in the to$ mana"ement% The order is ta)en de$endin" on the amountEvalue of the service% !olicies ran"in" from :-1< la)hs are serviced (& the a"ents* and then ones (et'een one la)h to five la)hs are serviced (& the Mana"er* Senior evelo$ment >fficer% There are also the Sales

ivisional Mana"er 'hich have their o'n ran"e of $olic& servicin"% The

Sales Mana"er is in char"e of $olicies 'hich are $riced a(ove Rs% 1 Crore%

The order ta)in" mechanism is mainl& (& 'a& of a$$lication forms% These forms are made availa(le throu"h the a"ents or the& can also (e do'nloaded from the 'e(site% The various forms (elon" to various a"e cate"ories li)e the K?orm No% /<<6 'hich is a $ro$osal for insurance on o'n life* the K?orm No% /8<6 is for $olic& duration of 1< &ears or more and various other forms%

The $otential $olic& holder has to $a& the initial $remium amount and then under"o a medical e0amination of various cardiolo"ical* $atholo"ical and radiolo"ical tests%

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After such $h&sical e0aminations are successfull& com$leted* the $lan or $ro$osal is transacted%

6i$$ing

The $olic& holder has to $a& the $remium amount in fi0ed durations as $er the a"reement% +IC sends reminders to the $olic& holders (& 'a& of $ost to inform the $olic& holder re"ardin" various details li)e amount* due date* $olic& under 'hich it (elon"s* etc%

!a&"ent

A $olic& holder can ma)e the $a&ment of the $remium amount in the follo'in" 'a&s=1% -e can send the cheDues directl& to (ranch* #% There are rural (an)s 'hich have tie-u$s 'ith +IC* /% The $a&ment can (e done throu"h '''%(ill5unction%com* 1% The $a&er can send a draft or a standin" order to the (an)%

Pest )nal*sis

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 !o$itica$-;ega$ 3actors

%nsurance /ector 9efor"s

There are various efforts made (& the "overnment to ma)e the industr& more d&namic and customer friendl&% To (e"in 'ith* the Malhotra committee 'as set u$ 'ith the o(5ective of su""estin" chan"es that 'ould achieve the much reDuired d&namism%

The :a$hotra 4o""ittee 9eport

In 1;;/* Malhotra Committee* headed (& former ?inance Secretar& and R.I Governor R% N% Malhotra* 'as formed to evaluate the Indian insurance industr& and recommend its future direction% In 1;;1* the committee su(mitted the re$ort and "ave the follo'in" recommendations=

/tructure

Government sta)e in the insurance Com$anies to (e (rou"ht do'n to 7<J% Government should ta)e over the holdin"s of GIC and its su(sidiaries so that these su(sidiaries can act as inde$endent cor$orations%

All the insurance com$anies should (e "iven "reater freedom to o$erate%

4o"petition

Page ;1

!rivate Com$anies 'ith a minimum $aid u$ ca$ital of Rs%1(n should (e allo'ed to enter the industr&%

No Com$an& should deal in (oth +ife and General Insurance throu"h a sin"le entit&% ?orei"n com$anies ma& (e allo'ed to enter the industr& in colla(oration 'ith the domestic com$anies%

!ostal +ife Insurance should (e allo'ed to o$erate in the rural mar)et% >nl& one State +evel +ife Insurance Com$an& should (e allo'ed to o$erate in each state%

Re"ulator& .od&% The Insurance Act should (e chan"ed% An Insurance Re"ulator& (od& should (e set u$% Controller of Insurance BCurrentl& a $art from the ?inance Ministr&@ should (e made inde$endent%

%nvest"ents

Mandator& Investments of +IC +ife ?und in "overnment securities to (e reduced from 97J to 7<J

GIC and its su(sidiaries are not to hold more than 7J in an& com$an& BThere current holdin"s to (e (rou"ht do'n to this level over a $eriod of time@

4usto"er /ervice

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+IC should $a& interest on dela&s in $a&ments (e&ond /< da&s Insurance com$anies must (e encoura"ed to set u$ unit lin)ed $ension $lans Com$uteri,ation of o$erations and u$datin" of technolo"& to (e carried out in the insurance industr&

>verall* the committee stron"l& felt that in order to im$rove the customer services and increase the covera"e of the insurance industr& should (e o$ened u$ to com$etition%

.ut at the same time* the committee felt the need to e0ercise caution as an& failure on the $art of ne' $la&ers could ruin the $u(lic confidence in the industr&%

-ence* it 'as decided to allo' com$etition in a limited 'a& (& sti$ulatin" the minimum ca$ital reDuirement of Rs%1 (n% This amount is not ver& hi"h for forei"n firms* as it translates to onl& a(out UST#7 million% ?urther* to date it is unclear 'hether eDuit& should (e $a&a(le in one "o or should (e (rou"ht in as installments% Also* the forei"n eDuit& $artici$ation 'as to (e restricted to onl& 1<J%

The committee felt the need to $rovide "reater autonom& to insurance com$anies in order to im$rove their $erformance and ena(le them to act as inde$endent com$anies 'ith economic motives% ?or this $ur$ose* it had $ro$osed settin" u$ an inde$endent re"ulator& (od&%

The industr& and ana$&sts find that there is $ac# of c$arit& in the fo$$o*ing areas:-

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Thou"h covera"e of rural areas 'as to (e made com$ulsor&* it raises the Duestion as to 'ho 'ould su(sidi,e the rural $olicies as the& 'ould (e difficult to service and hence costs 'ill "o u$%

There is some confusion 'ith res$ect to investments% Fhere the funds should (e investedH Currentl& 9<J of the funds 'ith +IC P GIC are invested in Government securities% Fould ne' entrants (e allo'ed to invest in G>I securitiesH

The re$ort also does not enumerate e0it o$tions availa(le to the ne' entrants% In the event of failure* there should (e an arran"ement made 'here(& the other com$anies $ool in to (ail the customers* 'ho in all $ro(a(ilit& 'ould (e middle class individuals%

>n the (asis of the re$ort* the then ?inance Minister !% Chidam(aram $ro$osed the o$enin" u$ of insurance to the $rivate sector* includin" multinational com$anies%

Fith the notification of the constitution of the %nsurance 9egu$ator& and

eve$op"ent

>uthorit& BIR A@ in A$ril #<<<* the dec)s are finall& cleared for forei"n investment in the insurance sector% The "overnment notified the constitution of the IR A as a statutor& authorit&% N% Ran"achar& 'ill (e its chairman till 2une #<</% The notification of the (ill's $assa"e 'as dela&ed as it could onl& (e done 'ith the constitution of the IR A on A$ril 1;* #<<<% This IMI loo)s at the "ro'th $ros$ects in the sector in the near future%

Page ;1

?ollo'in" the $assa"e of the Insurance Re"ulator& evelo$ment Authorit& .ill (& (oth the houses of the Indian !arliament late 1;;;* the sta"e is no' set for the esta(lishment of a fundamentall& ne' le"al re"ime for insurance sector in India% The ne' Act o$ens the sector to $rivate $artici$ation* esta(lishes an inde$endent re"ulator* and allo's forei"n entr& into the mar)et throu"h eDuit& $artici$ation u$ to a level of #8 $ercent% Individual Indian com$anies 'ill (e reDuired to (rin" do'n their eDuit& holdin" to #8 $ercent throu"h sales of shares to the $u(lic 'ithin 1< &ears%

After the $assa"e of the .ill last &ear* in A$ril #<<< the "overnment notified the constitution of the IR A as a statutor& authorit&% N% Ran"achar& 'ill (e its chairman till 2une #<</% The notification of the (ill's $assa"e 'as dela&ed as it could onl& (e done 'ith the constitution of the IR A on A$ril 1;* #<<<% Fith the notification of IR A and rules for o$enin" u$ the sector in $lace* the first $rivate insurance com$an& 'ith forei"n $artici$ation can start o$eration (& the fall of #<<<% The IR A la' is the culmination of the recommendations made (& the R%N% Malhotra committee that 'as constituted in 1;;1 'ith the o(5ective of su""estin" chan"es that 'ould achieve the reDuired d&namism in the insurance sector% >verall* the committee stron"l& felt that in order to im$rove the customer services and increase the covera"e of the insurance industr& should (e o$ened u$ to com$etition% -ence* it 'as decided to allo' com$etition in a limited 'a& (& sti$ulatin" the minimum ca$ital reDuirement of Indian Ru$ees 1 (illion% This amount is not hi"h for forei"n firms* as it translates to onl& a(out US #/ million%

Page ;7

The Insurance Re"ulator&

evelo$ment Authorit& BIR A@ is the re"ulator& authorit&*

'hich loo)s over the related as$ects of the insurance (usiness% The IR A (ill $rovides "uidance for three levels of $la&ers Q Insurance Com$anies* Insurance .ro)ers and Insurance A"ents%

?cono"ic 3actors

Effect of Reforms

!enetration 5f %nsurance

Thou"h the !u(lic Sector Insurance Com$anies have (een successful in achievin" and contri(utin" to the National E0cheDuer over the &ears* a hu"e mar)et lies unta$$ed due to reasons li)e= The mono$olistic nature of the mar)etC ?ocused mar)etin"C Indian $s&che%

The (usiness of Insurance* (& 'a& of "eneratin" $remium income* adds si"nificantl& to the G ! of develo$ed countries% Thou"h the $otential mar)et in India for the Insurance (usiness is lar"e* &et the $roducts offered and $enetration achieved is far less com$ared to international standards% Estimates sho' that a mea"er /7-1< million* out of the total Indian $o$ulation have so far come under the insurance um(rella%

Page ;8

The +ife Insurance sector is one of the )e& areas 'here enormous (usiness $otential e0ists% In India currentl& the life insurance $remium as a $ercenta"e of G ! is 1%/ J a"ainst 7%# J in the U%S% Estimates sa& that the $otential mar)et is so hu"e that it can "ro' (& 17-19 J $er annum% Fith the entr& of $rivate insurance com$anies* the Indian insurance mar)et ma& finall& (e a(le to ma)e dee$er $enetration into ne'er se"ments and e0$and the mar)et si,e manifold and can au"ment the flo' of lon"-term financial resources for the "ro'th of infrastructure%

General Insurance is another se"ment* 'hich has (een "ro'in" at a fast $ace% As $er the current com$arative statistics* the "eneral insurance $remium has (een lo'er than life insurance% General Insurance as a $ercenta"e of G ! 'as a mere <%7 J in 1;;8%

:ore 4o"petition

A num(er of concerns are (ein" e0$ressed re"ardin" the o$enin" u$ of the Insurance sector% .ut most of them seem to (e unfounded% The national interest lies in increasin" the $enetration of insurance $roducts* increasin" the retention of $remia in India and mo(ili,in" resources for infrastructure needs% Com$etition means that $la&ers a""ressivel& tar"et $otential customers and this 'ill increase the $enetration of insurance%

The retention of $remia in India has (ecome a sensitive issue 'ith some $eo$le 'ho demand that the $resent out"o of around Rs%1< (n (& the 'a& of reinsurance (e sto$$ed% These $eo$le in the name of safe"uardin" the national interest are in fact com$romisin" the interests of the nation% If no reinsurance is ta)en it im$lies that the insurance com$an& is

Page ;9

under'ritin" the entire ris) itself% Thus a sin"le earthDua)e or a c&clone can 'i$e out the entire com$an&%

The ar"ument that forei"n com$anies 'ill re$atriate $remium income throu"h reinsurance is mis$laced% Even no' a si"nificant $art of the $remium is distri(uted to reinsurers and much of the hi"h insurance ris)s are reinsured overseas% >ne recent e0am$le is the calamit& that struc) the state of Gu5arat 'herein total claims stood at Rs%1#< (n >nl& Rs%#; (n 'as settled locall& 'ith overseas reinsurers settlin" the (alance% Moreover* ever& re"ulator $rescri(es that the $remium earned is retained in the countr& and the lia(ilities under the contract are matched 'ith assets in the same countr&% In fact the o$enin" u$ of the sector 'ill increase the retention of $remia in India and thus reduce out"o of the valua(le forei"n e0chan"e%

The a$$rehension that there 'ould (e a fli"ht of ca$ital is also not (orne (& the e0$erience of other countries% If an&thin"* there has (een a stron" inflo' of forei"n ca$ital in the first 7 &ears for introducin" ne' $roducts and maintainin" the reDuisite ca$ital adeDuac& ratio%

The fear that ne' com$anies 'ill dis$lace e0istin" $la&ers is also unfounded% In fact in China* Mala&sia* Indonesia and Thailand 'here insurance firms 'ere allo'ed entr& the forei"n com$anies account for onl& 1<J of the mar)et share% In South Oorea the o$enin" u$ of the sector sa' the .i" Si0 domestic $la&ers* 'ho initiall& controlled the entire mar)et* increase their (usiness from / to /9 trillion 'on (& 1;;9% The forei"n com$anies 'ere not a(le to ca$ture more than <%1J of the domestic mar)et% Closer home* 'e have the

Page ;:

e0$erience of the (an)in" sector 'here des$ite the $resence of /; forei"n (an)s their share in overall (usiness is less than 1<J%

Thus it is seen that the a$$rehensions (ein" e0$ressed do not hold much 'ater and the o$enin" u$ of the Indian insurance sector 'ould (rin" a(out s'ee$in" chan"es not onl& for the consumers (ut the econom& as a 'hole%

5pening 5f the %nsurance /ector

In India* a$$ro0% 8<J of the total health e0$enditure comes from self $aid cate"or& as a"ainst "overnment6s contri(ution of #7-/< J% A ma5orit& of $rivate hos$itals are e0$ensive for a normal middle class famil&% The o$enin" u$ of the insurance sector to $rivate $la&ers is e0$ected to "ive a shot in the arms of the healthcare industr&% -ealth Insurance 'ill ma)e healthcare afforda(le to a lar"e num(er of $eo$le% Currentl&* in India onl& # million $eo$le B<%# J of total $o$ulation of 1 (illion@* are covered under Mediclaim* 'hereas in develo$ed nations li)e USA a(out 97 J of the total $o$ulation are covered under some insurance scheme% General Insurance Com$an& has never a""ressivel& mar)eted health insurance% Moreover* GIC ta)es u$ to 8 months to $rocess a claim and reim(urses customers after the& have $aid for treatment out of their o'n $oc)ets% This 'ill "ive a "reat advanta"e to $rivate $la&ers li)e Ci"na 'hich is $lannin" to launch Smart Cards that can (e used in hos$itals* $atient "uidance facilities* travel insurance* etc%

Page ;;

6roadening The 6enefits: 5pening Dp

Fhat is the li)el& im$act of o$enin" u$ India6s insurance sectorH An often-voiced concern is that $rivate $la&ers* es$eciall& forei"n ones* 'ill s'am$ the mar)et* "ra((in" a lar"e share% This h&$othesis has (een dis$roved in emer"in" mar)ets 'orld'ide% Fe (elieve the threat has (een over-$la&ed in India%

Multinational insurers are indeed )eenl& interested in emer"in" insurance (ecause their home mar)ets are saturated 'hile emer"in" countries have lo' insurance $enetrations and hi"h "ro'th rates% International insurers often derive a si"nificant $art of their (usiness from multinational o$erations% As earl& as 1;;1* man& of the UO6s lar"est life and "eneral insurers derived 1< $er cent to 8< $er cent of their total $remia from outside their home mar)ets% The fi"ure at Commercial Union 'as 98 $er cent in that &ear%

Fhile the im$act of "lo(al o$erations on their (usiness ma& (e lar"e* t&$icall& forei"n insurers ta)e onl& a small share of an individual countr&6s mar)et% In Tai'an for e0am$le* forei"n com$anies too) onl& a / $er cent share even seven &ears after o$enin" u$% In Oorea* their share 'as 1 $er cent after #< &ears% In China* a lar"e and com$le0 mar)et li)e India* $rivate insurers have not made much head'a&%

Iet* ne' entrants find insurance attractive (ecause even a small share of a lar"e and "ro'in" mar)et can (e $rofita(le% The Oorean insurance mar)et for e0am$le* 'as onl& the /<th lar"est mar)et in the 'orld (& $remium volume in 1;91% It moved u$ to 8th lar"est in 1;;8% In an& case* in India multinational insurers 'ill (e restricted to a minorit&

Page 1<<

shareholdin" in ne' com$anies% The ne' entrants 'ill therefore (e $rivate Indian com$anies%

Nationali,ed insurers are ham$ered (& their lar"e scale of o$erations* $u(lic sector (ureaucracies and cum(ersome $rocedures% Therefore* $otential $rivate entrants e0$ect to score in the areas of customer service* s$eed and fle0i(ilit&% The& $oint out that their entr& 'ill mean (etter $roducts and choice for the consumer% Critics counter that the (enefit 'ill (e slim* (ecause ne' $la&ers 'ill concentrate on affluent* ur(an customers as forei"n (an)s did until recentl&%

This mi"ht seem a lo"ical strate"&% Start-u$ costs-such as those of settin" u$ a conventional distri(ution net'or)-are lar"e and hi"h-end niches offer (etter returns% -o'ever* 'e (elieve that the middle-mar)et offers the "reatest $otential% This ma& (e still (ein" an ur(an mar)et (ut "oes (e&ond the affluent se"ment%

Insurance* even more than (an)in"* is a volumes "ame% A ver& e0clusive a$$roach is unli)el& to $rovide meanin"ful num(ers% Therefore* $rivate insurers 'ould (e (est served (& a middle-mar)et a$$roach* tar"etin" customer se"ments that are currentl& unta$$ed%

Fe antici$ate that man& ne' $la&ers 'ill indeed ta)e this a$$roach* e0tendin" the (enefits of a freer mar)et$lace to a 'ide (ase of customers% ?aced 'ith com$etition* 'e (elieve that the nationali,ed insurers 'ill im$rove their "ame* as the& are alread& tr&in" to do% The customer 'ill (e the (eneficiar&%

Page 1<1

> 4hanging ;andscape: 4o"petition and >$$iances

Man& $otential entrants are e0istin" financial or"ani,ations 'ith a stron" infrastructure* "ood customer (ases and (rand eDuit&% .efore loc)in" into com$an& structures or alliances* the& must understand their o'n ca$a(ilities%

In our e0$erience* most emer"in" mar)et or"ani,ations loo)in" to enter insurance "o throu"h a similar c&cle* driven (& the sta"es of com$etition Bsee chart 1@% Initiall&* after the "overnment first allo's $rivate com$etition* entr& (arriers such as ca$ital reDuirements are hi"h% E0$ertise and ca$ital are the scarce resources% Com$anies that are ne' to the (usiness conclude that the& need an esta(lished insurer as a $artner% This is $artl& (ecause the& over-estimate the e0$ertise reDuired and $artl& (ecause the $artner6s ca$ital contri(ution is valua(le%

Ne0t* the& decide that a 5oint venture is the a$$ro$riate vehicle for such a $artnershi$% In fact* man& other forms of alliance are $ossi(le% ?or e0am$le* a"reements 'ith information technolo"& vendors can ensure stron" s&stems* or distri(ution alliances can ensure reach% Since e0$ertise and s&stems can (e (ou"ht* ne' com$anies eventuall& reali,e that the scarce resource is (rand stren"th% The& t&$icall& find that the $artner is una(le to deliver ever&thin" that the& e0$ect* or that the same results can (e achieved alone% The& therefore move to a stand-alone (asis relativel& Duic)l&%

Page 1<#

The reason for this unsatisfactor& c&cle is that or"ani,ations do not s$end enou"h time understandin" their o'n stren"ths% A virtuous c&cle for a ne' insurer 'ould (e"in 'ith a strate"ic revie' to determine 'hich se"ments of insurance to enter* follo'ed (& a revie' to identif& internal ca$a(ilities% .ased on this information com$anies can e0amine alliance selection* ans'erin" Duestions li)e= Fhat su$$ort do 'e needH this su$$ortH Fhat form of alliance is a$$ro$riateH Fhat can third-$art& or"ani,ations actuall& offerH o 'e need a $artner or merel& a su$$lier to $rovide

The& can then select the ri"ht $artnersC ne"otiate alliances and move on to (usiness $lannin"* $roduct desi"n and $ricin"% -o'ever* our e0$erience indicates that most or"ani,ations start (& selectin" a $artner* devotin" too little time to the $recedin" ste$s% Indeed* some a"reements (et'een $otential Indian and international entrants have fallen throu"h alread&% Ne' entrants 'ould (e 'ell advised to loo) ahead to the sta"e 'here (rand stren"th 'ill (e a (i" com$etitive advanta"e and s)etch their alliances accordin"l&% In fact 'e (elieve that alliances related to distri(ution rather than to $roducts or technolo"& 'ill $rove most valua(le in the lon" run%

There is tremendous sco$e for forei"n com$anies in this sector% Clearl&* there is considera(le sco$e to raise $er ca$ita life $remium if the mar)et is effectivel& ta$$ed% Fith an insura(le $o$ulation of /<< million* $er ca$ita life $remium can (e raised to a level of US #<< to /<< and hence the mar)et can e0$and (& 7< to 97 times over the e0istin" si,e%

Page 1</

India has traditionall& (een a hi"hl& savin"s oriented countr&% If the insurance mar)et is $ro$erl& ta$$ed* it is $ossi(le to raise life $remium as a $ercenta"e of G ! from the e0istin" level of 1%#; $ercent to 1< $ercent% This 'ill (rin" an ei"ht-fold increase in the e0istin" volume of life $remium%

+ife $remium as a $ercenta"e of G S 'gross do"estic saving+ is Duite lo' in India and it is $ossi(le to raise life $remium as a $ercenta"e of G S in India from the e0istin" levels% The (i" Duestion is 'hether the $la&ers are a(le to effectivel& e0$loit the $otential (& creatin" and mar)etin" attractive insurance $roducts 'ith hi"h rates of return on $remium investments%

/ocia$-4u$tura$ 3actors

!opu$ation :ix

India has an amor$hous middle-class of a(out #7<-/<< million $eo$le 'ho can afford to (u& life* health* and disa(ilit& and $ension $lan $roducts% >ut of this onl& ## $ercent have insurance and that too covers onl& #7 $ercent of their needs and financial ca$acit&% The remainin" :< $ercent have no insurance cover% The life insurance mar)et of India* therefore* is $racticall& unta$$ed%

Page 1<1

/hrin#age 5f Fobs

The a$$rehension that com$etitive Insurance 'ill result in shrin)a"e of 5o(s is eDuall& untrue% The num(er of $eo$le 'or)in" in Insurance sector is much less as com$ared to UO* USA* and Thailand etc% Fith e0$ected increase in the (usiness the 5o( o$$ortunities 'ill increase rather than decrease%

The Insurance sector is a service industr& and international com$anies 'ill hel$ (uild local $rofessionals 'ith 'orld class e0$ertise (& introducin" the (est "lo(al $ractices% Com$etition 'ill also develo$ a (etter understandin" of consumer reDuirements leadin" to more customi,ed $roducts a$t for the mar)et $lace% .esides it 'ould also im$rove the tertiar& sector tremendousl&% evelo$ment of the tertiar& sector 'ould include ne'

avenues for actuaries* accountants* stoc)(ro)ers and others% 9ura$-Drban :ix

It must (e (orne in mind that India is a $redominantl& rural countr& and 'ill continue to (e so in the near future% Ne' $la&ers ma& tend to favor the Gcream&G la&er of the ur(an $o$ulation% .ut* in doin" so* the& ma& 'ell miss a lar"e chun) of the insura(le $o$ulation% A stron" case in $oint is the current (usiness com$osition of $redominant mar)et leader Q the +ife Insurance Cor$oration of India% The lion's share of its ne' (usiness comes from the rural and semi-rural mar)ets% In a countr& of 1 (illion $eo$le* mass mar)etin" is al'a&s a $rofita(le and cost-effective o$tion for "ainin" mar)et share% The rural sector is a $erfect case for mass mar)etin"%

Page 1<7

Com$etition in rural areas tends to (e G)inder and "entlerG than that in ur(an areas* 'hich can easil& (e termed cutthroat And the "enerall& smaller $olic& amounts in rural areas 'ould (e more than offset (& the hi"her volume $otential in these areas in contrast 'ith ur(an areas% Identif&in" the ri"ht a"ents to harness the full $otential of the vi(rant and d&namic rural mar)ets 'ill (e im$erative% Rural insurance should (e loo)ed u$on as an o$$ortunit& and not an o(li"ation% A smaller (undle of innovative $roducts in s&nc 'ith rural needs and $erce$tion and an efficient deliver& s&stem are the t'o as$ects that have to (e develo$ed in order to $enetrate the rural mar)ets%

Techno$ogica$ 3actors %nfor"ation Techno$og& >nd ;%4

+IC has (een one of the $ioneerin" or"ani,ations in India 'ho introduced the levera"e of Information Technolo"& in servicin" and in their (usiness% ata $ertainin" to almost 1<

crore $olicies is (ein" held on com$uters in +IC% Fe have "one in for relevant and a$$ro$riate technolo"& over the &ears%

1;81 sa' the introduction of com$uters in +IC% Unit Record Machines introduced in late 1;7<6s 'ere $hased out in 1;:<6s and re$laced (& Micro$rocessors (ased com$uters in .ranch and ivisional >ffices for .ac) >ffice Com$uteri,ation% Standardi,ation of

-ard'are and Soft'are commenced in 1;;<6s% Standard Com$uter !ac)a"es 'ere develo$ed and im$lemented for >rdinar& and Salar& Savin"s Scheme BSSS@ !olicies%

Page 1<8

3ront ?nd 5perations

Fith a vie' to enhancin" customer res$onsiveness and services* in 2ul& 1;;7* +IC started a drive of 5n ;ine /ervice to !o$ic&ho$ders and >gents through 4o"puter% This on line service ena(led $olic&holders to receive immediate $olic& status re$ort* $rom$t acce$tance of their $remium and "et Revival Luotation* +oan Luotation on demand% Incor$oratin" chan"e of address can (e done on line% Luic)er com$letion of $ro$osals and dis$atch of $olic& documents have (ecome a realit&% All our #<1: (ranches across the countr& have (een covered under front-end o$erations% Thus all our 1<< divisional offices have achieved the distinction of 1<<J (ranch com$uteri,ation% Ne' $a&ment related Modules $ertainin" to (oth ordinar& P SSS $olicies have (een added to the ?ront End !ac)a"e caterin" to +oan* Claims and evelo$ment >fficers6 A$$raisal% All these modules hel$ to reduce timela" and ensure accurac&%

:etro >rea 7et*or#

A Metro$olitan Area Net'or)* connecting 2, branches in :u"bai 'as commissioned in Novem(er* 1;;9* ena(lin" $olic&holders in Mum(ai to $a& their !remium or "et their Status Re$ort* Surrender Aalue Luotation* +oan Luotation etc% from >7C .ranch in the cit&% The S&stem has (een 'or)in" successfull&% More than 1<*<<< transactions are carried out over this Net'or) on an& "iven 'or)in" da&% Such Net'or)s have (een im$lemented in other cities also%

Page 1<9

1ide >rea 7et*or#

All 9 Ronal >ffices and all the MAN centres are connected throu"h a Fide Area Net'or) BFAN@% This 'ill ena(le a customer to vie' his $olic& data and $a& $remium from an& (ranch of an& MAN cit&% As at Ma& #<<#* 'e have ;1 centers in India 'ith more than 1/#< (ranches net'or)ed under FAN%

%nteractive 8oice 9esponse /&ste"s '%89/+

IARS has alread& (een made functional in 7; centers all over the countr&% This 'ould ena(le customers to rin" u$ +IC and receive information Be%"% ne0t $remium due* Status* +oan Amount* and Maturit& $a&ment due* Accumulated .onus etc%@ a(out their $olicies on the tele$hone% This information could also (e fa0ed on demand to the customer%

;%4 5n The %nternet

>ur Internet site is Informative% Fe have dis$la&ed information a(out +IC P its su(sidiaries-+IC BInternational@ E%C%* +IC BNe$al@ +td* +IC Mutual ?und* +IC -ousin" ?inance and their $roducts% Efforts are on to u$"rade our 'e( site to ma)e it d&namic and interactive% The addressesEe-mail Ids of our Ronal >ffices* Ronal Trainin" Centers* Mana"ement evelo$ment Center* >verseas .ranches* ivisional >ffices and also all

.ranch >ffices 'ith a vie' to s$eed u$ the communication $rocess%

Page 1<:

!a&"ent 5f !re"iu" >nd !o$ic& /tatus 5n %nternet

+IC has "iven its $olic&holders a uniDue facilit& to $a& $remiums throu"h Internet a(solutel& free and also vie' their $olic& details on Internet $remium $a&ments% There are 11 service $roviders 'ith 'hom + I C has si"ned the a"reement to $rovide this service%

%nfor"ation Gios#s

Fe have set u$ 17< Interactive Touch screen (ased Multimedia OI>SOS in $rime locations in metros and some ma5or cities for dissemination information to "eneral $u(lic on our $roducts and services% These OI>SOS are ena(lin" to $rovide $olic& details and acce$t $remium $a&ments%

%nfo 4enters

Fe have also set u$ : call centers* manned (& s)illed em$lo&ees to $rovide &ou 'ith information a(out our !roducts* !olic& Services* .ranch addresses and other or"ani,ational information%

Page 1<;

-rievance .andling %echanism for Polic* .olders

+IC has more than : la)h a"ents all over the countr&% The& are the first and nearest $oints of contact for $olic& holders for redressal of their "rievances 'ith re"ard to the $olicies ta)en (& them% Their a"ents are 'ell trained and assist the $olic& holds in most areas of $olic& servicin"%

-o'ever* to ta)e care of the $ro(lems 'hich a"ents find difficult to solve% Grievance redressal officers have (een a$$ointed at the (ranch* ,onal and central offices% In the (ranch* the (ranch mana"er is the desi"nated Grievance 9edressa$ 5fficer. The mar)etin" mana"ers at these Re"ional and ivisional offices are other desi"nated

officers% These officers set aside # hours on ever& Monda& to hear the "rievances of the $olic& holders* 'ithout an& $rior a$$ointments% There are also free tele$hone lines $rovided to the $olic& holders at Mum(ai for callin" the desi"nated officers at the divisionalU,onal and central offices in connection 'ith the redressal of their "rievances% There are 4o"p$aint ce$$s at the divisional offices and com$laint sections at the ,onal offices and central office for attendin" to com$laints from $olic& holders% Claim Revie' Committee has (een a$$ointed at all the ,onal offices and at all the central offices for considerin" the a$$eals a"ainst re$udiation of lia(ilit& under some claims for su$$ression of facts material to the assessment to the ris)% The divisional offices* 'hile re$udiation lia(ilit& also inform the claimant that if heUshe is not satisfied 'ith the decision the heEshe ma& a$$roach this revie' committee% This committee at the ,onal offices has the (enefit of the $resence of a retired i"h courtEdistrict )ud"e (esides / senior officers from the

Page 11<

,onal offices% The intention of the cor$oration in inductin" such retired 5ud"es is to ensure not onl& "reater trans$arenc& in o$erations (ut also to ensure that an inde$endent 5udicial o$inion ma&(e availa(le so that the decision can stand (& an& court of la'%

The Ronal Revie' committee 'ill receive all a$$eals irres$ective of the claim amount and revie' them% Their decision u$ to net claim of # la)h Rs 'ill (e final% -o'ever* claimants 'ith net claim amounts e0ceedin" # la) and not satisfied 'ith the decision of the Ronal Claims Revie' committee at the central office and commended it% .esides* the central "overnment in e0ercise of $o'ers conferred (& the su( section1 of the section 111 of the Insurance Act* 1;/: have (een $leased to frame the Redressal of !u(lic Grievances rules* 1;;: vide notification dated 11-1-;:% These rules see) to resolve com$laints relatin" to settlement of claims etc%* in re$ect of insurance com$anies in a cost-effective* efficient and im$artial manner% These rules also $rovide for the a$$ointment of one or more $ersons as 5"buds"an for achievin" the $ur$ose of the said rules% The >m(udsman under the rules ma& receive and consider=a@ Grievances relatin" to an& $artial or toal re$udiation of lia(ilit& (& an& insurer% (@ An& dis$ute in re"ard to $remium

Page 111

Customer Service and !ualit*

.et'een one insurer and another* the differentiatin" factor 'ill (e the in this e0$erience of the customer% There is not much li)elihood of much difference in the terms of the $olic& itself% There 'ould (e no difficult& in an& insurer offerin" the same (enefits as another insurer% Technolo"& is not e0clusive% !remiums could (e different de$endin" on the efficienc& of mana"ement% .ut life insurance is seldom (ou"ht on the (asis of the chea$est $rice% The e0$erience durin" $urchase* after $urchase and at the time of the claim 'ill ma)e the difference% This e0$erience is the result of the nature of customer service%

In case of insurance* the e0$erience after the $urchase is the continued attention and concern sho'n to the customer* 'ould reassure him that the $romise he (elieved in 'hile ma)in" the $urchase 'as not mis$laced% If he does not receive such attention and e0$ression of concern* he could start dou(tin" the servicin"-$rovider% A$art from the hel$ in $rocessin" the claim 'hen it occurs* $ost sales servicin" 'ould include re"ular reminders as to the customer6s o(li"ation li)e $a&ment of rene'al* furnishin" of data as ma& (e reDuired* com$liance 'ith 'arranties and so forth%

Mana"ements around the 'orld have learnt that Ksatisfied customers6 are the onl& route for sustained "ro'th in com$etitive environment% The& are no' strivin" to ma)e customer increasin"l& ha$$&% The o$$ortunit& to do so is not much in are availa(le not

Page 11#

much intan"i(le com$onents of $roducts of $roducts* (ut in intan"i(le service com$onents% +ife Insurance* (ein" a $ure intan"i(le* $rovides $lent& of o$tion%

The Dualit& of service is 'hat customer sa&s it is% -e 5ud"es the or"ani,ation (& his e0$erience% The 5ud"ement is influenced (& the e0tent to 'hich his $resence and the needs are reco"ni,ed% !eo$le "et (adl& u$set 'hen the& are not heard* 'hen the& are i"nored or s$o)en to im$otentl&* 'hen their inDuiries are treated irrelevant* 'hen the& are (rusDuel& told to 'ait* etc% the& feel "ood 'hen someone listens to 'hat the& have to sa&* sho's consideration for the $ro(lem and e0$lains 'h& somethin" is done or not done%

A "rievance is a s&m$tom that the Dualit& is not $erceived as satisfactor&% A customer has a "rievance 'hen he does not "et 'hat he thin)s he is entitled to% A "rievance is to (e ta)en seriousl& (ecause it "ives clues s to 'hat is "oin" 'ron"* it indicates 'hat customer e0$ects or the customer ma& (e lost% Fhen a "rievance is attended to Duic)l& and seriousl& there is satisfaction* 'hich* in turn* 'i$es out the adverse e0$erience%

Page 11/

LIC$s Customer /elationship %anagement

The ?"erging /cenario

Fith the emer"ence of com$etition* +IC has im$lemented strate"ic moves for (usiness "ro'th* as 'ell as ensured Dualit& im$rovement in service standards% As on toda&* the& have (een $rovidin" service to around 1# crore $olic& holders and their trac) has (een 'ell ac)no'led"ed as reflected throu"h continual u$"radation of service standards culminatin" into a 'orld class $erformance in the area of claim settlement o$erations% It is 'ell ac)no'led"ed that +IC has (een a(le to $rovide a$$ro$riate IT su$$ort in furtherance of $rom$t service to their valued $olic& holders% The com$le0 tas) of conversion of com$uteri,ation of all the (ranches 'ith their conversion as ?ront +ine offices has (een com$leted in a$hase manner% In addition to this* the launchin" of the IARS facilit&* MAN and Fide Area Net'or) o$erations has hel$ed the co-o$eration im$rove its servicin"%

+IC6s stren"th lies in= a% Fide net'or) of (ranches coverin" rural areas% (% A lar"e and 'ell- s$read a"enc& or"ani,ation% c% An ac)no'led"ed record of $erformance% d% AdeDuate &ield 'ith hi"h ris) cover (ein" offered )ee$in" the $olic& holders satisfied in the e0istin" in the economic scenario% e% A 'ell acce$ted (rand eDuit& throu"hout the countr&%

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In addition to this* +IC has an esta(lished and 'ell administered Grievance Redressal Mechanism and 'ith >m(udsman intervention* the customers a$$ear to (e 'ell attended% -o'ever* this mechanism has to (e restructured )ee$in" in vie' the additional le"al $rovisions laid do'n (& the re"ulator as e0$ounded in the IR A act%

3uturistic >pproach

Till toda&* +IC en5o&ed a mono$ol&% It is no' that realit& e0ists in the are of mar)etin" Bi%e% sales and after sales service o$erations@% It 'ill no' have to follo' a multi-faceted strate"& to'ards customer retention and also e0$andin" to a ne' clientele% Fith the ne' face of the mar)et* relationshi$ mana"ement seems to (e the ne' mantra%

At the nucleus of this a$$roach is the conce$t of Customer Relationshi$ mana"ement% The need is to have a com$rehensive revie' of the (usiness )ee$in" in vie' customer e0$ectations%

4usto"er 5rientation

+IC* to (e in the rec)onin"* has to have an efficient feed-(ac) s&stem* so as to understand 'hat the customer desires in terms of $roduct desi"n* service $rocedures* relationshi$ convinience* accessi(ilit&* res$onses in terms of $ersonali,ed service* attendance* core and com$limentar& on an individual (asis% The ne' $la&ers in the mar)et li)e ICICI* - ?C etc% 'ill definitel& (e ver& a""ressive in the o$en mar)et% +IC has to "o ahead 'ith their former customers* e0istin" customer* in a ver& "entle and courteous manner* reassurin" them of their (etter services 'ith $ersona* attention%

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Mana"ed customer relations hel$ to=

1%

esi"n the $roduct

#% Ono' &our com$etitive ed"e in the mar)et 'ith diversified $roduct launch (& the com$etitors% /% Understand customers $erce$tion of our e0istin" service standards% 1% !redict customers future e0$ectations% 7% Ena(le us to $roceed 'ith se"mental mar)etin" Beither customer oriented or $roduct oriented@% 8% Assess im$act of economic chan"es* fiscal and commercial $olicies* mar)et and industrial o$erations vis-M-vis customer demand%

9e$ationship :anage"ent !rocess

It is ver& im$ortant that ever&one in the or"ani,ation should acce$t and live (& the "oal of customer satisfaction% All challen"es should (e converted to o$$ortunities for e0$ansion% There has to (e a $hiloso$hical and cultural orientation% >nce the $rocess is launched* it should lead the entire or"ani,ation to achieve 1<<J retention of e0istin" customers* 'ith full satisfaction of their e0$ectations and this class of customers 'ill s$read throu"hout the countr& and carr& +IC6s (rand eDuit& (& 'ord of mouth% There should (e relationshi$ e0istin" 'ith former customers since the& are o$inion ma)ers% Such customers 'ill include former $olic&holders and also their intermediaries% The intermediaries i%e%* a"ents are their internal customers and if the& are 'ell loo)ed after and )e$t ha$$&* the& can $rovide a smooth $ace leadin" to their value customers%

Page 118

/trategic :oves e$lo&in" multifunctional service tools for the convenience of their valued customers% Retention of $rofessional a"ents Bclu( mem(ers@ to retain the e0istin" $olic&holders% !rovidin" online data su$$ort to these $rofessional 'ith $ro$er safe"uard $rocedures% Mana"ement of multi$le mar)ets includes the sales and after sales service to $ros$ects and customers* re$resentin" different se"ments identified on the (asis of economic conditions* financial status* occu$ational* cultural differences and of course* re"ional

$rofessional* social and diversification% -

!artici$ation of the (u&er ri"ht from the sta"e i%e% >??ER% Conductin" Customer need% !rofile Surve&s to )no' the e0istin" famil& and individual

Information sharin" 'ith the valued customers= +IC6s (ranch officials and mar)etin" officials should remain in touch 'ith customers at different levels throu"h communication and corres$ondence%

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he Insurance Potential -- Future

India has an amor$hous middle class of a(out /7<-/<< million $eo$le 'ho can afford to (u& life* health and other insurance $roducts% >ut of this onl& ##J have insurance and that too covers onl& #7J of their needs% The insurance mar)et in India is therefore $racticall& unta$$ed% At $resent the si,e of insurance mar)et in India is $e""ed at a$$ro0imatel& UST ;#%7 (illion% >f the total si,e of the mar)et :<J is of life insurance and #<J of non-life insurance% Accordin" to estimates dra'n (& some international insurance consultants* the insurance mar)et is li)el& to "ro' at an avera"e rate of a(out 17J for the ne0t five &ears% In antici$ation of ta$$in" the hu"e mar)et* a num(er of insurance com$anies have set u$ their res$ective offices in India and tied u$ 'ith various Indian com$anies%

Fith the entr& of com$etition* the mar)et is 'itnessin" a 'ide arra& of $roducts from $la&ers 'hose num(ers are set to "ro'% In such a scenario* the differentiators amon" the various $la&ers are the $roducts* $ricin" and service%

Toda& the Indian consumers are increasin"l& (ecomin" more a'are and are activel& mana"in" their financial affairs% Toda&* 'hile (oundaries (et'een various financial $roducts are (lurrin"* $eo$le are increasin"l& loo)in" not 5ust at $roducts* (ut at inte"rated financial solutions that can offer sta(ilit& of returns alon" 'ith total $rotection%

To satisf& these m&riad needs of $roducts* insurance $roducts 'ill need to (e customi,ed% Insurance toda& has emer"ed as an attractive and sta(le investment alternativel& that

Page 11:

offers total $rotection - +ife* -ealth and Fealth% In terms of returns* insurance $roducts toda& offer com$etitive returns ran"in" (et'een 9J to ;J% .esides returns* 'hat reall& increases the a$$eal of insurance is the (enefit of life $rotection from insurance $roducts alon" 'ith health cover (enefits% Consumers toda& also see) $roducts that offerin" fle0i(le o$tions* $referrin" $roducts 'ith (enefits un(undled and customi,a(le to suit their diverse needs% Fhile sales of traditional life insurance $roducts li)e individual* 'hole life and term 'ill remain $o$ular* sale of ne' $roducts li)e sin"le $remium* investment lin)ed* retirement $roducts* varia(le life and annuit& $roducts are also set to rise% ?irms 'ill need to constantl& innovate in terms of $roduct develo$ment to meet ever-chan"in" consumer needs% -o'ever* $roduct innovations are Duic)l& and easil& cloned% !ricin" 'ill also not var& si"nificantl&* 'ith most $roduct $remiums hoverin" around a narro' (and%

In this com$etitive scenario* a )e& difference 'ill (e the customer e0$erience that each insurance $la&er can offer in terms of Dualit& of advice on $roduct choice* alon" 'ith $olic& servicin" and settlement of claims% Service should focus on enhancin" the customer e0$erience and ma0imi,in" customer convenience% +on"-term "ro'th in the (usiness 'ill "reatl& de$end on the distri(ution net'or)* 'here the em$hasis must evolve from merel& sellin" insurance to actin" as financial advisors* hel$in" customer's $lan their finances de$endin" on $ersonal reDuirements% This calls for a stron" focus on trainin" of the distri(ution force to act as financial consultants and (uild a lon" lastin" relationshi$ 'ith the customer% This 'ould hel$ create sustaina(le com$etitive advanta"e not easil& matched%

Page 11;

The main reason 'h& the leadin" insurance com$anies in the 'orld and the leadin" cor$orate "rou$ in India have sho'n a )een interest in the insurance sector* is the vast $otential for future (usiness% Restricted* as the mar)et has (een* throu"h the o$erations of the t'o mono$olies B+IC and GIC@* it is "enerall& felt that the sector can "ro' e0$onentiall& if it is o$ened u$% The decade 1;:9-;9 has 'itnessed a com$ounded "ro'th rate of mar"inall& more than 1<J in life insurance (usiness% +IC $redicts for itself that its (usiness has $otential to "ro' (& 18%#9J $%a% in a decade 1;;9-#<<9 B+IC* 1;;9@% If 'e ta)e a loo) at insurance covera"e inde0 for the a"e "rou$ of #<-7; &ears a considera(le "a$ (et'een India and other countries in Asia can (e o(served% In this scenario* naturall& insurance com$anies see a vast $otential%

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S0O )nal*sis
After Understand the 'hole Insurance Sector* I have $re$ared SF>T Anal&sis of the Sector=

/trengths

The industr& is "ro'in" 'hich is a si"n of recover& of the econom& leadin" to creation of a sta(le econom&% It is one of the (oomin" sectors%

.etter livin" standards and Dualit& of life% +o' claim-hi"h $rofit% ASO Good returns on investment of life funds in avenues% -ealth& $roduct line* com$etitive $rices and e0cellent customer services directed to customer satisfaction% Than)s to com$etition%

IR A actin" as a Fatch o"% Technolo"& 'ill $la& a strate"ic role in $rovidin" a com$etitive ed"e- (e it in aidin" desi"n and administration of $roducts or (uildin" life lon" customer relationshi$s% It 'ill also hel$ enhance service* ensure effective and efficient deliver& s&stem and also 'ill lead to "reater customi,ation of $roducts and "reater trans$arenc&% ?or e0am$le* +IC has IARS BInte"rated Aoice Res$onse S&stem@ and also $rovides the facilit& of online $remium $a&ment throu"h (ill5unction%com and timesmone&%com

Trans$arenc& of mana"ement (& all e0istin" $la&ers in terms of $remium collected* invested* $rofit "enerated and distri(uted and the commission structure%

>nl& source of safe and hi"h &ield no'ada&s%

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1ea#nesses

It reDuires hu"e initial investment% The Indian com$anies* 'hich have colla(orated* 'ith (i" forei"n insurance com$anies are novice to this field%

.rea) even 'ill (e reached after 9 &ears of o$erations% ASO No other intermediaries are allo'ed to sell insurance e0ce$t a"ents% ASO IR A has s$ecified norms* 'hich restricts life cor$us to (e invested in hot scri$ts that could earn hi"her returns and also add fuel to economic develo$ment% The :7J of the $remium amount or the cor$us must (e invested in Government Securities 'hich &ields around ASO returns could (e converted into /< Q/7J if mana"ed and churned 'ell (& allo'in" them to invest on stoc) and forei"n mar)ets% This norm 'ould reduce the attractiveness of the insurance $olicies to the consumers* here(&* reducin" the total demand for the insurance as a 'hole%

5pportunities

!ie 'orth Rs% /#*<<< crore is 'aitin" to (e "ra((ed (& insurers% India* no dou(t* is a hi"hl& underinsured countr&* 'ith $enetrated level of onl& 1%/J of G ! as a"ainst #%:8J in Israel and #%1/J in -on" Oon"%

Total Indian insura(le $o$ulation is around /#J* 'hich is insured (& 17 to ##J a &ear a"ainst industr& "ro'th of 19J%

Page 1##

Time to refurnish Q .& G%N% .a5$ai Bchairman* +IC@ So man& $la&ers are in the industr&* 'hich leads to (etter $roduct at (est $rice and a(ove all 'ill increase the a'areness of insurance (& $romotional activities%

Shift in customers6 $ers$ective to see insurance as a ris) mana"ement tool rather than a ta0 savin" and savin" tool%

-i"her dis$osa(le income and lo' inflation rate Nuclear ?amilies Q the 5oint famil& s&stem has stron" roots ion the countr&% In the event of calamit&* other mem(ers of the famil& come to rescue* es$eciall& 'ith financial assistance%

3See rural sector < rural India 'hich is more than 8<J* see them as o$$ortunit& not as an o(li"ation4* IR A%

More $enetration of insurance leads to more savin"s leadin" to more investment* 'hich means more em$lo&ment hence "eneratin" more income* 'hich a"ain means increased consum$tion and savin"s% All these leads to economic "ro'th%

ue to ne' entrants insurance is comin" out of its ima"e of (ureaucrac&% It has touched ne' hori,ons than)s to com$etition%

If IR A allo's .ancassurance* mar)et 'ill have read&made distri(ution channel availa(le in terms of !SU and !rivate (an)s 'hich 'ill lead to one ste$ and one sto$ financial assistance to customers%

The lac) of a com$rehensive social securit& s&stem com(ined 'ith a 'illin"ness to save means that Indian demand for $ension $roducts 'ill (e lar"e%

Page 1#/

Threats

If IR A allo's (ro)ers* (an)s and other intermediaries to sell inurance* it 'ill (e 'orst for a"ents 'ho are not at all com$etitive in this "ro'in" $hase%

To $enetrate in the mar)et ver& fast and to earn heft& commission com$an& could have also $ro(lem of 'ron" under'ritin" and due to carelessness failure of one $rivate $la&er could sha)e out all the other $rivate $la&ers in the mar)et%

Unsta(le inter-national and international conditions* clouds of 'ar (et'een t'o nations* terrorists attac)* riots and other (io-'ars lend hu"e devastation and com$anies should $re$are itself for it%

As insurers claim their $roducts as $rovidin" ta0 (enefit% That 'ould not (e an& lon"er the----% Mr% Sinha has alread& ta)en a first ste$ to cancel out all the investment (enefits on $olicies B(oth sections :<CC and :< @ (& restructurin" the sla( set off $er)s (enefits% U$to Rs% 1*7<*<<< More than 1*7<*<<< 1<J #<J

E0ce$t +IC* 'hich is )no'n to invest all sur$lus to ---- economic develo$ment* other than +IC the $ro(lem 'ith $rivate $la&ers is that the 3$rofit 'ill (e fora&ed in their countries 'hich ----- our forei"n e0chan"e deficit to smaller e0tent (ut it is to (e an ar"ua(le matterVIR A is li)el& to come out 'ith certain norms for $rofit rede$lo&ment%

Page 1#1

/ecommendations

There are a fe* insurances( *hich %ndian %nsurance co"panies do not provide. <ence so"e ne* product deve$op"ent is reEuired in this sector. > fe* of the po$icies are(

1% Industr& all ris) $olicies #% +ar"e $ro5ects ris) cover /% Ris) (e&ond a floor level 1% E0tended $u(lic and $roduct lia(ilit& cover 7% .ro)in" and ca$tivities% 8% Alternative ris) financin" 9% isa(ilit& insurance

:% AntiDue insurance ;% Me"a sho' insurance 1<% Cele(rit& visits to the countr&%

Page 1#7

Conclusion

!ro(a(l&* India must (e one of the lo'est insured countries in the 'orld i%e% 9 $er cent% This scenario has to chan"e% Fe should not onl& have 1<< $er cent insurance* (ut also 1<< $er cent social securit&%

!ersonall& and $atrioticall& I feel Indian Insurance com$anies should cover Indian Insurance (usiness* 'e cannot insist on the same "lo(all&% So Indian Insurance com$anies have to (e more customers friendl& and sufficient so that 'e can com$ete 'ith the (est in the 'orld%

The& need to im$rove their services and offer ma0imum customer satisfaction%

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