DISTRIBUTION CHANNELS OF LIFE INSURANCE

Transcription

1 CHAPTER IV DISTRIBUTION CHANNELS OF LIFE INSURANCE

2 DISTRIBUTION CHANNELS OF LIFE INSURANCE This chapter deals with the various aspects related to emergence of different distribution channels after privatization of life insurance sector with a major focus on the role of traditional distribution channels in insurance, emerging distribution channels which are already in the adoption stream and ones to be adopted. Distribution channels are the drivers which extends services to satisfy the demands of thousands of customers. This chapter also looks at channel-wise performance of these in order to create a platform of success for life insurance companies. When trying to achieve the objective of this research, growth and financial analysis of distribution channels on life insurance companies perspective was done and it was discovered that both public sector insurer and private sector life insurance companies have adopted different channels of distribution to deliver products and services to customers and it was revealed that growth of channels is upwards which shows prospects of distribution channels success in future. 4.1 Distribution Scenario in the Indian Market In today s Indian Insurance market, the challenge to insurers and intermediaries is two-pronged: Building faith about the company in the mind of the client Intermediaries being able to build personal credibility with the clients Prior to privatization, the only public sector insurer LIC was having the monopoly in insurance sector.lic was having its branches in almost all parts of the country and it attracted people local people to become their agents..traditionally, tied agents had been the primary channel of insurance distribution in the Indian market. The agents are from various segments in society and collectively cover the entire spectrum of society. of course, the profile of the people who acted as agents, may not have been sufficiently knowledgeable about the different products offered and may not have sold the best possible product to the client. Nonetheless, the customer trusted the agent and company. This arrangement worked adequately in the absence of competition. 38

3 In today s scenario, life insurance companies have adopted different channels for distributing their products. A broad categorization of channels currently being used in the distribution of life insurance products is presented in Figure 4.1 Figure 4.1 Distribution Channels of Life Insurance BROKER AGENCY BANCASSURANCE DIRECT MARKETING DISTRIBUTION CHANNELS WORK SITE MARKETING INTERNET MARKETING CORPORATE AGENCY Life Insurance companies have to provide servicing capabilities for the process of sale, kind of products and demand of the customers as it differs significantly among different distribution channels. This phenomena is explained in Figure 4.2. Which shows that internet marketing does not involve direct interaction with the customer and simple product will be suitable for the mass market segment. Figure 4.2 further indicates that agency channel helps customers to plan their financial requirements by personally interacting with them. 39

4 Figure 4.2 Role of Distribution Channels in Purchase of Life Insurance Products Individual Advice Broker Customers Agency Bancassurance Mass Market Internet Marketing Simple Products Complex Source: Bancassurance channel provides the same platform for banking and insurance services. The customers are provided with well trained staff to access and plan their financial security. It is further indicated that brokers play the role of one stop shop by providing choice to the customers to make comparative analysis of insurance policies of different life insurance companies and they provide the best suitable plan according to the demand of the customer. However, there is great excitement in the industry over the impending regulations and companies are planning possible channels in their network to increase volumes. The new companies have attempted appealing only to the middle, upper middle and elite classes in the major cities. Contrasted with Life Insurance Corporation of India and its offices across the country, the new companies have miles to go before they reach anywhere. Both Life Insurance Corporation and private sector companies are fighting their own battles from the perspective of customer perception management. 40

5 Table 4.1 Present Position of Distribution Network Public Sector Company Private Sector Companies Identity is well established, but the Have to build their identity in a market perception of poor service providers is a where the public should distinguish them. stigma. Products are not attractive and flexible Remove the perception that anything that enough but expensive. looks good is expensive To retain their creamy layer clientele who Work against the people s mindset that are most likely to be wooed by the new they are not here for the long term companies Retain and attract good intermediaries Attract intermediaries especially agents with the requisite qualifications and attributes who can market the company and the product. Source: Table 4.1 shows that LIC is well-established insurer which is the reward of its monopoly in public sector. It is having a strong intermediary base, especially agents extending satisfactory services to the customers. In this process, all private companies are targeting are the same market but no attempt is being made to increase the size of the pie. For example, attempts are made to complete the quota of rural insurance in percentage terms, the rural market potential is yet to be tapped. The new insurers are trying to attract the right kind of talent into their distribution force. 4.2 Growth of Distribution Channels. A major contributor to the growth story of life insurance companies is the distribution network. Indian regulations allow distribution by insurance companies throughout India. There are close to three million licensed life insurance agents, split almost equally between the state-owned LIC and the private players. Agents generate 80% of LIC s new business and about half for private companies. There are also about 41

6 3,000 corporate insurance agents, mostly banks, brokers and firms engaged in personal loans. Bancassurance is now emerging as a key distribution channel through a network of more than 70,000 branches of banks. Last year, banks generated about 20% of new business for private life companies. Banks are the primary sales channel for a few insurers such as HDFC Standard Life and SBI Life. They contribute about 40% of their new business (Asia pacific insurance review, The insurance market place is undergoing a transformation that may eventually lead to significant changes in how consumers purchase insurance products. A variety of distribution channels are currently used in this market place and some insurers utilize a combination of distribution channels. These include the internet-led channels, company-led channels, bank-led channels, and agent-led channels. Although less frequently used, company-led distribution channels through mediums such as direct mail or telephone call centers have seen increasing growth. While an agent is still required in this setting, this person typically does not meet with the insured. While it is true that insurance purchasers today have more options available than they did five years ago, it is unclear if and when these channels will dominate existing insurance distribution channels. Several obvious factors that impact on a channel s adoption are consumer attitudes and preferences (Trembly, 2001). In India, the structure of economic development has undergone a considerable change in the last decade with the service sector becoming a major part of the economy contributing to more than 60% of real GDP in the last five years (RBI, 2010; IMF, 2010). Growth in the services sector has been substantive and has resulted in the emergence of a new breed of larger more sophisticated service companies. Services cover a wide gamut of activities like insurance, trading, banking & finance, infotainment, real estate, transportation, security, management & technical consultancy (Riddle, 1986). Marketing of life insurance service is critical and complex for various obvious reasons that include time span, periodicity and potentiality of claims and higher brand switching costs affecting the buying behavior. In the present scenario, insurance companies are facing problem of transiting from a perceived selling activity to a structured strategic marketing activity. Insurance marketing is basically just the marketing of life insurance products. Insurance marketing emphasizes the importance 42

7 of the customer preferences and priorities. Major objectives of life insurance distribution channels are to increase customer awareness, successful distribution of insurance products, developing corporate image, improving customer service and improving customer base. It is necessary to change the whole organizational management structure of an insurance company, the channels of technologies of communication with clients. Insurer has to analyze the nature of the customer s needs and plan their products and services in such a way that they can give satisfaction to the customers and face the competitors. Planning needs analysis of the insurance market to take a decision, prediction, and forecasting as to future needs of customers. All these programs involve a number of functions (7Ps), which are to be planned carefully. The combination of these functions is known as insurance service marketing mix (Kotler,Bloom,1984). Marketing mix is the planned package of elements, which will support the organization in reaching its target markets and specific objectives. The marketing mix has its origin in marketing of goods for consumer markets and consists of the wellknown 4Ps: Price, Promotion, Place and Product. Numerous modifications to the 4 Ps have been proposed, the most concerted criticism came from the services marketing area (Chakraborty, 2011). 4.3 Analysis of Distribution Channels Distribution is a key determinant of success of all insurance companies. Section 4.3 states that in life insurance markets various insurance covers are provided either directly or through various distribution channels individual agents, corporate agents including bancassurance and brokers. These are generally called the traditional channels. In today s scenario agents continue as the prime channel for insurance distribution in India and almost all the players follow this model primarily. However, with new developments in consumer behaviour, evaluation of technology and deregulation, new distribution channels have been developed successfully and rapidly in recent years. (Chakraborty, 2011). To maximize reach in the market place, many insurers are aiming to derive channel advantage because each channel has unique strengths. For example, a direct 43

8 sales force is usually optimal for complex, high cost transactions where face-to-face interaction is expected and required. Brokers and corporate agents can dramatically expand market reach through local access and penetration. The internet can be used to get the message out to untold millions, at an extremely low cost. The companies that choose and cleverly integrate the right mix of channels can build go-to-market systems that respond optimally to each of the requirements of the products and markets. They can, for example, use expensive sales force representatives only to acquire and grow the most important key accounts. They can then use brokers to reach dispersed groups of smaller customers and to provide local sales support. They can use call centers to close simple sales, generate sales leads for other channels and follow up on direct mail campaigns. They can use the internet to reach customers who prefer to serve themselves and want to save money. These efforts add up to a huge competitive advantage in terms of revenue growth, market reach, customer loyalty and higher productivity. (Rao, 2004) Bancassurance This section deals with analysis of bancassurance channel. Bancassurance in its simplest form is the distribution of life insurance products through a bank s distribution channel. Insurance companies see bancassurance as a tool for increasing their market penetration and premium turnover. It takes various forms in various countries depending upon the demography, economic and legislative climate of that country. It was introduced in India when insurance industry was opened up for private players. In India, a bank can tie up with one general insurance and one life insurance Company as mandated by IRDA bancassurance practice is yet to be much popular. (Singh, 2011). The banking sector in India comprises of more than 67,000 branches and around 20 crore bank accounts. Banks have expertise on the financial needs, saving patterns and life stages of the customers they serve. A bank also has much lower distribution costs than insurance companies and thus is the fastest emerging distribution channel. For insurers, tying up with banks provides extensive geographical spread countrywide customer access; it is the logical route for insurers to take. 44

9 However, the evolution of bancassurance as a concept and its practical implementation in various parts of the world, have thrown up a number of opportunities and challenges. The motives behind bancassurance also vary. For banks, it is a means of product diversification and a source of additional fee income. Insurance companies see bancassurance as a tool for increasing their market penetration and premium turnover. The customer sees bancassurance as a benefit in terms of reduced price, high quality product and delivery at doorsteps Reasons behind Entry of Banks in Bancassurance Channel By leveraging their strengths and finding ways to overcome their weaknesses, banks could change the face of insurance distribution. Sale of personal line insurance products through banks meets an important set of consumer needs. Most large retail banks engender a great deal of trust in broad segments of consumers, which they can leverage in selling them personal life insurance products. In addition, a bank s branch network allows face to face contact that is important in the sale of personal insurance. Other bank strengths are their marketing and processing capabilities. Banks have extensive experience in marketing to both existing customers (for retention and cross selling) and non-customers (for acquisition and awareness). They also have access to multiple communications channels, such as statement inserts, direct mail, ATMs, telemarketing, etc. Banks proficiency in using technology has resulted in improvements in transaction processing and customer service (Kumar, 2000) Based on the above discussion, certain reasons for considering bancassurance model can be explained as follows: Life insurance premium represents 55% of the world insurance premium and as the life insurance is basically a saving market. So, it is one of the methods to increase deposits of banks. Insurers operate through bancassurance, own and control relationships with customers. Insurers found that direct relationships with customers gave them greater control of their business at a lower cost. Insurers who operate through the agency relationship are hardly having any control on their relationship with their clients. 45

10 The ratio of expenses to premium is an important efficiency factor. It is noticed very well that expenses ratio in insurance activities through bancassurance is extremely low. This is because the bank and the insurance company is benefiting from the same distribution channels and people. It is believed that the prospects for increased consolidation between banking and insurance is more likely dominated and derived by the marketing innovations that are likely to follow from financial service modernization. Such innovations would include cross selling of insurance and increased use of internet by consumers. One of the most important reason of considering bancassurance by banks is increased return on assets (ROA). One of the best ways to increase ROA, assuming a constant asset base, is through fee income. Banks that build fee income can cover more of their operating expenses, and one way to build fee income is through the sale of insurance products. Banks those effectively crosssell financial products can leverage their distribution and processing capabilities for profitable operating expense ratios. Insurers have much to gain from marketing through banks as they have found it difficult to grow using traditional agency systems because price competition has driven down margins and increased the compensation demands of successful agents. Over the last decade, life agents have sold fewer and larger policies to a more upscale client base. Middle-income consumers, who comprise the bulk of bank customers, get little attention from most life agents. By capitalizing on bank relationships, insurers will recapture much of this underserved market. Most insurers that have tried to penetrate middle-income markets through alternative channels such as direct mail have not done well. Clearly, a change in approach is necessary. As with any initiative, success requires a clear understanding of what must be done, how it will be done and by whom. The place to begin is to segment the strengths that the bank and insurer bring to the business opportunity. (Karunagaran, 2006) 46

11 Scope for Bancassurance in India The sale of insurance products will help the banks to earn significant commissions particularly for regular premium products. In addition, one of the major strategic gains from implementing bancassurance successfully is the development of a sales culture within the bank. This can be used by the banks to promote traditional banking products and other financial services as well. By now, it has become clear that as economy grows it not only demands stronger and vibrant financial sector but also necessitates to provide with more sophisticated and variety of insurance and banking products and services. As India is being considered one of the fast developing economy among the emerging market economies, financial sector has also grown much vibrant with the financial reforms. In fact, in recent years, it is noticed that even the global economic growth hinges on growth prospects of the emerging economies like India to a greater extent. Significantly, Indian economy has recorded an average growth over stability and indications are that it may grow at even better rate in the near future. Moreover, as India has already more than 200 million middle class population coupled with vast banking network with largest depositors base, there is greater scope for use of bancassurance. In simple words, bancassurance has promised to combine insurance companies competitive edge in the distribution of insurance products through their vast retail networks Recent Trends of Bancassurance in India Bancassurance is still in infancy in India and it is too early to assess the exact position. Banks even offer space in their own premises to accommodate the insurance staff for selling the insurance products or giving access to their clients database for the use of the insurance companies. As number of banks in India have begun to act as corporate agents to one or the other insurance company, it is a common sight that banks are canvassing and marketing the insurance products across the counters. The present IRDA regulations restrict bankers to act as a corporate agent on behalf of more than one life insurance company. In the case of ICICI-Prudential Life Insurance Company, within two years of its operations, it could reach more than 25 major cities in India and as much as 20 per cent 47

12 of the life insurance sales are through the bancassurance channel (Malpani 2004). In the case of ICICI bank, SBI and HDFC Bank insurance companies are subscribers of their respective holding companies. ICICI bank sells its insurance products practically at all its major branches, besides it has bancassurance partnership arrangements with 19 other banks as also as many as 200 corporate tie-up arrangements. Thus, among the private insurance companies, ICICI Prudential seems to exploit the bancassurance potential to the maximum. ICICI stated that Bank of India has steadily grown the life insurance segment of its business since its inception. ICICI Prudential had also reported to have entered into similar tie-ups with a number of RRBS, to reap the potential of rural and semi-urban Aviva Life Insurance had reported that it has tie-ups with as many as 22 banking companies, which includes private, public sector and foreign banks to market its products. Similarly, Birla Sun Life insurer reported to have tie-up arrangements with 10 leading banks in the country. A distinct feature of the recent trend in tie-up arrangements was that a number of cooperative banks have entered into bancassurance arrangement. This has added advantage for insurer as well as the cooperative banks, such as the banks can increase the non-fund based income without the risk participation and for the insurers the vast rural and semi-urban market could be tapped without its own presence. Bancassurance alone has contributed richly to as much as 45 per cent of the premium income in individual life segment of Birla Sun Life Insurer (Javeri, 2006). Incidentally, even the only public sector player LIC reported to have tie-up with 34 banks in the country, it is likely that this could be the largest number of banks selling single insurance company s products. Ironically, LIC also has the distinction of being the oldest and the largest presence of its own in the country. SBI Life Insurance for instance, is uniquely placed as a pioneer to usher bancassurance into India. The company has been extensively utilizing the SBI Group as a platform for cross-selling insurance products along with its numerous banking product packages such as housing loans, personal loans and credit cards. There has also been a decrease in the share of direct selling in the total individual new business. Its share has gone down from 2.42 per cent in to 1.90 per cent in While private insurers have procured 4.35 per cent of their new business through direct selling. LIC has procured only 0.61 per cent of their new 48

13 business through this channel. The share of corporate agents in the new business premium procured by the private life insurers was significant at per cent in as compared to per cent in On the other hand, LIC has per cent of the new business premium from individual agents. With such heavy reliance on the agency force, the contribution of corporate agents for LIC has been a mere 2.79 per cent. Table 4.2 Individual New Business Performance of Life Insurers for Channel- Wise Insurer Individual Corporate Agents Brokers Direct Total Referrals Agents Banks Others Selling Individual New Business Private LIC# Industry * Any entity other than banks but licensed as a corporate agent. # Does not include its overseas new business premium. Note: New business premium includes first year premium and single premium. Figure 4.3 Individual New Business Premium of Life Insurers Channel Wise Source : IRDA Annual Report

14 Direct selling continues to be the dominant channel of distribution for group business, with a share of per cent during The corresponding share in the previous year was per cent. While LIC has procured 4.38 per cent of the group business through its traditional individual agency force, private insurers procured 4.26 per cent through this channel. Another important channel for the private insurers was banks. During the year , banks contributed per cent of the total group business in case of the private insurers. This figure stood at per cent in the previous year. Insurer Private LIC# Industry Table 4.3 Group New Business Performance of Life Insurers for Individual Corporate Agents Agents Banks Others Channel Wise Brokers Direct Selling * Any entity other than banks but licensed as a corporate agent. # Does not include its overseas new business premium. Total Individual New Business Note: New business premium includes first year premium and single premium. Figure 4.4 Group New Business Premium of Life Insurers Channel Wise Referrals Source : IRDA Annual Report

15 4.3.2 Brokers Section deals with broker regulations to be issued by IRDA and the various aspects relating to working of the channel. The image that broker carried in the mind of the customer is not very favorable. Thus, the new breed of insurance brokers faces the challenge of establishing credibility. The positives are that brokers in the urban arena can attract the elite and the upper middle class customer. Brokers represent the customer and will sell the products of more than one company. They seek to determine the best fit for the client and can effectively address the mind block faced by the public about the various companies. This is applicable in the case of life insurance for the high-end and corporate group segment. However, the challenge lies in establishing regulations that protect the customer and attract the right players into the brokerage market rather than creating another middlemen segment eroding the premium. Insurance brokers are professionals who assess risk on behalf of a client, advice on mitigation of that risk, identify the optional insurance policy structure, bring together the insured and insurers. Brokers by definition are not tied to any one insurer and have a chance to present as many options as possible to clients. Also, brokers have a unique advantage as they can combine the life, non-life and health insurance requirements of a client. This allows brokers to work with relatively smaller companies in a profitable manner. Individual insurers and agents would not have the same economies of scale in serving small clients. Brokers are constantly exposed to people and product offerings of different companies. Brokers participate in training programmes conducted by different companies. A few brokers are part of international broking networks. This puts brokers in a unique position to understand market trends and developments. A good broker will harness this information to create deep market expertise. Such expertise has three main benefits. First, brokers educate clients about product options and then push insurers hard to develop the appropriate products. The result is a steady improvement in product quality. Second, brokers can express a client s case in language that insurers understand. Brokers bridge this gap. Thirdly, brokers bridge the gap between insurer and insured (Chakraborty, 2011). 51

16 People who have spent years in the industry take up the broking profession because it provides the highest level of customer service and satisfaction. Entrepreneurs find that the broking route provides them with excellent opportunities to serve customers in an unbiased manner. The broker has to build customer servicing capability. In fact, the ability of a broker to retain a client, quite often depends upon its servicing strengths. When an insurance claim is made, it is the broker who is always the customer s champion and pushes the insurer towards timely and appropriate claim payment. No insurer or agent can play this role adequately because of the inherent conflict of interest between the claimant and the insurance company. IRDA has significant role to play in strengthening the broker s role in industry. First, it should attract high quality talent and capital in the channel. The quality of the players will be the foremost determinant of the development of the channel. Second, IRDA should incentivize focus of pure protection solutions. The low ticket size of pure protection plans and the current commission structure results in small absolute earnings for the channel. In the backdrop of low consumer awareness, the cost of acquiring a customer is high, hence the current compensation does not provide an economic rationale of intermediaries to focus on such pure risk products, (IRDA Journal, Nov 2012) Agency Channel Agency is the largest distribution channel of almost all life insurance companies, comprising a large advisor force that targets various customer segments. The strength of agency channels lies in an aggressive strategy of expanding and procuring quality business. With focus on sales & people development, tied agency has emerged as a robust, predictable and sustainable business model. All life insurance companies have an agency-building distribution strategy under which they recruit, train, finance, and supervise their agent/advisers. For decades, agency was the only distribution channel for life insurance in India. Even today more than 70% of business is carried through insurance agents. Through agency channel, personal contact and relationship can be established with the customer. The system of agents is a major source of both presales and post sales services to customers, since it has the direct relationship with customers. Due to personal contact, it can provide 52

17 valuable feedback about the need and expectation of consumers. However, it is nowadays considered as an old fashioned channel and not fully updated with latest technologies. (Chakraborty, 2011). Table 4.4 Details of Individual Agents of Life Insurers Insurer As on 1 st April, 2011 Additions during Deletions during As on 31 st March, 2012 AEGON RELIGARE AVIVA BAJAJ ALLIANZ BHARTI AXA BIRLA SUNLIFE CANARA HSBC DLF PRAMERICA EDELWEISS TOKIO FUTURE GENERALI HDFC STANDARD ICICI PRUDENTIAL IDBI FEDERAL INDIAFIRST ING VYSYA KOTAK MAHINDRA MAX LIFE METLIFE RELIANCE SAHARA SBI LIFE SHRIRAM LIFE STAR UNION DAI-ICHI TATA AIA PRIVATE TOTAL LIC INDUSTRY TOTAL Source : IRDA Annual Report,

18 Today s insurance agents has to know which product will appeal to the customer, and also know his competitor s products in the same space to be an effective salesman who can sell his company, the product and himself to the customer. To the average customer, every new company is the same. Figure 4.5 Factors Affecting Performance of Agents Agent Recruitment Follow up and service calls Performance of an Agent Agent business startup plan Taking reference from customer Agent meeting the customer Agent assisting the customer Source: 54

19 The new companies are looking for educated, aware individuals with marketing flair, an elite group who can be attracted only with high remuneration, all of which may not be possible in this business with its price pressures and the complexity of selling insurance. Unable to attract this segment, they have started easing recruitment conditions as against the stringent norms they had earlier, thereby diluting the process. While the public sector insurer LIC is able to attract agents, it continues to suffer from high attrition rates due to indiscriminate agent appointment. The challenge here is the lack of knowledge of the competitive market and the inability to do intelligent comparisons with the competitor s products. Education and training of these agents is a serious challenge for the insurance company. Another social feature in the market is the considerable respect for age in Indian society and a belief that an older person knows better. A very young up- market agent who is typical salesman may not appeal to a large segment of the middle class, which is looking for a solid trustworthy person from whom they can buy insurance. Gender of agents is another relevant feature in the rural context that makes a difference, especially for the female population. Women to whom the customers can relate e.g. nurses, gram sevikas can target the female segment of the population more effectively. What is applicable for the rural women and children health programs and population control programs is equally applicable for insurance selling also. Max Life has adopted a version of this strategy by appointing gram sahayaks to sell and service the rural customers. With this kind of segmentation of intermediaries the challenge for the insurance company lies in training and education these people to become effective sales persons (Lakhsmikutty and Baskar, 2007) Internet Marketing The growth of the Internet has led to a great deal of speculation and discussion regarding its potential impact on traditional distribution channels. Though India is joining the fast growing breed of net users, using net for transactions has not yet caught up. Though few companies provide online insurance service, the usage is still a small fragment. The insecurity associated with transactions over the net is still an inhibiting 55

20 factor. At present, most of the insurance companies have product information and illustrative tools available on the web. But web is not seen evolving into a means for direct selling of insurance in the current scenario. In the Indian market, where insurance is sold after considerable persuasion and face to face selling, selling over the net which must be initiated by the client, would take some more time (Gilbert and Bachedler, 2000). While the adoption rate of the Internet as a distribution channel has been low, companies have seen widespread adoption of the Internet as a support channel. Insurers are using the Internet to provide general information of financial services products (e.g., insurance, investments) and planning involving the use of these products, to provide specific information of the company and its product lines, to provide administrative support to its policyholders and to serve as a prospecting and communication tool for its agent-led channel (Dumm,Hoyt 2002). Rogers (1995) suggested that widespread diffusion of an innovation will lead to significant changes in the market channels themselves. As noted above, we have seen widespread diffusion of the usage of the internet in insurance industry. However, the adoption patterns have been quite different in different companies. Internet helps to collect information for consumers. It is a two-stage process. The consumers first use the Internet to collect information on products or services. They, then return to the agent to complete the purchase. This behavior highlights the current role that the Internet plays in providing support to the agent-led channel (Dumm, Hoyt 2002). Initially, insurance was seen as a complex product and buyers preferred face-toface interactions with intermediaries. Now a days, the advantage of technology allows insurers to increase their reach into the market. All insurers have websites through which they provide information about products and services. In India, internet penetration is still low legality of agreements is posing a difficult problem. The insecurity associated with transactions over the net is still an inhibiting factor. Internet has not been evolved into a means for direct selling of insurance in the current scenario. In the Indian market, where insurance is sold after considerable persuasion even after face-to-face selling, the selling over the net, which must be initiated by the client, would take some more time (Chakraborty, 2011). 56

21 4.3.5 Worksite Marketing Worksite marketing is the distribution method providing voluntary insuance products to employees at their work place with the sponsorship of their employer, which is done on a deduction from their payroll. The contract for insurance is directly made with the employee rather than the employer. Benefits to the Insurer: o Captive customer base o Potential to sell individual insurance and group insurance o High trust factor o High hit ratio for the intermediaries The challenges would be the cost effectiveness, product customization and efficient post sales servicing, which would determine continued business. Technology has a key role to play in worksite marketing to ensure cost benefits. Banks and financial institutions have been successfully marketing credit cards and other financial products using this channel (Laksmikutty and Baskar, 2006). In this channel, life insurers send team to a target group and explain the products either individual or group products suitable to them. The target group may be employees of a particular company or an educational institute. Insurance companies will be able to sell insurance products particularly, pension and health plans through this channel. One possible reason for insufficient development of this channel in India is that employers generally expect some kind of incentive to provide the facilities to the life insurers for making presentations and making arrangements for deduction of premium from salaries. With changes in human resources management polices and compensation packages, group products or work site products do have a definite market that cannot be ignored (Chakraborty, 2011). Insurance companies have provided coverage with mix of group and individual products. These include traditional group insurance products that have become voluntary because the employee is now required to pay either some or all of the premium, portable group insurance products that employees can take with them when they change jobs and individual products of many kinds, including life insurance, long 57

22 term care, disability, auto, home owners, critical illness, and annuities. Till date, many insurance companies have been disappointed by low penetration for worksite marketed products. The transition from defined benefit to defined contribution pension plans are used to provide perspective on possible changes in life and health insurance products sold in a worksite setting. Numerous factors are important for these sales innovative product design, competitive pricing, superior marketing material. However, the most important expertise is enrollment actually signing up employees for the insurance coverage. In today s worksite business model, the insurers who open new employer account are primarily responsible for enrolling employees, either by doing it themselves or outsourcing the task.this enrollment procedures often do an inadequate job of educating and counselling employees about their benefit choices and often do not support the application process well, e.g. leaving employees to fill out their own forms. The result is that employee enrollment often falls below target goals, raising unit costs and threatening the insurer s profitability. There are always more new customer opportunities, which offer higher premium potential and consequently higher commissions. The emergence of worksite marketing from a small niche of the insurance market to a major distribution channel depends on the integration of new technologies with traditional distribution methods. This new marketing and sales platform will generate substantially higher sales and customer satisfaction at reduced costs. The future prospect for the worksite channel is extremely promising. But competing in the worksite arena today requires the ability to do worksite marketing. Commitment and focus are needed, but are not enough to guarantee success (News Direct Newsletter, Fall 2000) Corporate Agency Channel The corporate agency channel is a key one for life insurance companies and it is facing stringent licensing guidelines. Since April 2012, the life insurance industry has lost nearly a third of its corporate agents, while for most of the bigger private life insurers, the number has shrunk by more than 50 per cent. For instance, HDFC Life now has only 10 corporate agents, compared with 374 in April Bajaj Allianz Life 58

23 evidenced decline of 66 per cent. Life Insurance Corporation (LIC) of India has reduced the number of corporate agency tie-ups by 42 per cent during the period (Bhattacharya, 2012) Details of Corporate Agents of Life Insurers and Number of Policies Sold Table 4.5 shows that there was a noticeable change in the number of corporate agents in year in comparison to due to strict IRDA regulations. At present, in private sector life insurance companies 642 corporate agents are working and incase of LIC there are 240 corporate agents. Table 4.5 Details of Corporate Agents of Life Insurers Insurer As on 1 st April, 2011 Additions during Deletions during Private LIC Industry Source : Indian Insurance Statistics As on 31 st March, Figure 4.6 Details of Number of Corporate Agents Source : Indian Insurance Statistics

24 Over the years, there has been a perceptible shift away from the individual agency channel. The contribution to the new business premium procured through individual agents has slightly decreased to per cent during from per cent reported during the previous year. The share of corporate agents, which was per cent during , has increased to per cent in the year Since the new guidelines on the corporate agency channel were introduced, many small corporate agents have made a quit. Hence, the numbers have come down. The main focus remains the traditional agency channel, which accounts for nearly 65 per cent of total new business.. After introducing stringent guidelines on licensing of corporate agents in June 2012, which tightened the licence renewal process, IRDA also recommended regular on-site inspection of corporate agents to curb various malpractices that had crept into the system. There have been many instances in which the same set of individuals have floated different corporate agencies and employed people without valid licences for selling products. With IRDA s regular recommendations regarding on-site inspection of corporate agents, these companies are getting out of the system (Bhattacharya, 2012). The movement of the number of corporate agents. Table 4.6 Analysis of Average Number of Policies Sold AVERAGE NUMBER OF INDIVIDUAL POLICIES SOLD BY CORPORATE AGENTS Private LIC Industry Source: IRDA annual report,

25 Figure 4.7 Average Number of Policies Sold Source: IRDA annual report, From the Table 4.6, it is observed that the average number of individual policies sold by the corporate agents of LIC has shown significant increase during the last two years. The share of business in number of individual policies of private insurers and LIC is exhibited in Table 4.6. It is interesting to see that the share of individual policies sold through corporate agents of the private insurers is increasing over the years Details of Corporate Agents of Life Insurers This section deals with detailed number of corporate agents of life insurance companies presently operating in India along with additions and deletions. 61

26 Table 4.7 Details of Corporate Agents of Life Insurers Insurer As on 1 st April, 2011 Additions during Deletions during As on 31 st March, 2012 AEGON RELIGARE AVIVA BAJAJ ALLIANZ BHARTI AXA BIRLA SUNLIFE CANARA HSBC DLF PRAMERICA EDELWEISS TOKIO FUTURE GENERALI HDFC STANDARD ICICI PRUDENTIAL IDBI FEDERAL INDIAFIRST ING VYSYA KOTAK MAHINDRA MAX LIFE METLIFE RELIANCE SAHARA SBI LIFE SHRIRAM LIFE STAR UNION DAI-ICHI TATA AIA PRIVATE TOTAL LIC INDUSTRY TOTAL Source : IRDA annual report,

27 In an overall sense, the new guidelines bring some discipline into the system. The insurers will incur additional expenditure if it has to monitor the compliance of its corporate agents. The decision has to permit only insurance qualified persons to man the corporate agency, the Met Life has start up with capital of Rs. 15 Lakh, appeared high and would restrict the small professional players from entering the business. The old regulations permit partnership firms and sole proprietorships to act as corporate agents.. IRDA restricting multiple corporate agencies with different insurers and prohibition of sub-agencies and other intermediaries under the corporate agents will prove to be a positive step ( Direct Marketing Channel Section deals with the details about another key distribution channel that is direct marketing. Direct marketing means selling products by dealing directly with consumers rather than through intermediaries. More recently telemarketing, direct radio selling, magazine and T.V advertising, and on-line computer shopping have been developed Benefits of Direct Marketing There is no need to share profit margins and the insurer has complete control over the sales process. There may also be specific market factors that encourage direct selling. There may be a need for an expert sales force, to demonstrate products, provide detailed presale information and after-sales service. Retailers, distributors, dealers and other intermediaries may be unwilling to sell the product. Existing distribution channels making it hard to obtain clientele like direct marketing channel. Insurers have resorted to direct marketing wherein insurance companies get in touch with the customers without the aid of an intermediary. A separate department has been set up and officers were deputed to solicit and administer insurance 63

28 business. The advantage of this system is the reduction of cost incurred by the agency system. Company owned sales team concept is now employed by a majority of new players and has proved more effectiveness in customer creation and retention. However, as compared to the system of agents, contribution of direct marketing is considerably low. It was reported that contribution of direct marketing channel in case of public sector insurer is 26.86% and private sector life insurance companies is reported as 23.63%) in the year (Chakraborty, 2011). This chapter highlights different distribution channels of life insurance companies available for conducting insurance business. Intelligent segmentation of these channels to match the market segmentation is something indispensible that will help the companies to move towards the appropriate direction. The choice of right channel lies on the hands of insurance companies, to make sure that they have fulfilled the demands of their customers. These channels are identified as the prime driver for growth of any organization. Distribution channels are the enabling mechanism through which organizations ensure that their products and services reach the market and it also decides the growth graph of companies. The identified challenges are impacting and hindering the fast developing distribution scenario in the insurance industry. Social, legal, corporate and many other factors were identified to have slowed down the fast pace of distribution network. 64