Emerging Trends and Influence of Business Strategies on Distribution channel of Life Insurance Sector in India

Transcription

1 Emerging Trends and Influence of Business Strategies on Distribution channel of Insurance Sector in India *Mr.P. NagaRaj **Dr.B.R.MeghaRaj ***Dr.M.Sudir Reddy Abstract The life insurance sector in India had its birth in the early part of the nineteenth century. For improved management of the insurance business, numerous acts have been passed from moment in time. Two worth mentioning events in the history of life insurance are i) the formation of the life Insurance corporation of India in 1956, which served as a monopoly till the year 2000 followed by ii) the opening up of the insurance sector to the private players in 1999, who were given the authorization to manoeuvre either single headed or as joint venture with any other private player(s) and/or overseas partners. This drastic regulatory change brought an end to the monopoly status of LIC, and also encouraged the private players to enter into the insurance space. To keep pace with the fast changing industry environment, one of the functions that is gaining strategic importance is the coming up of newer channel of distribution, which would extend the business to newer markets and serve the customer cost efficiently, progressively and quickly. This research discuss the various different channels (that emerged in the deregulated period and changed the overall industry trend).the research considered seven dominating private players in the life insurance industry to understand the recent patterns in distribution. The analysis clearly shows a move away from the traditional channels by the private sector. Key words: Insurance, Distribution channels, Policy, Premium, Business Strategies. Introduction: By 2012 Indian Insurance is a US$72 billion industry. However, only two million people (0.2% of the total population of 1 billion) are covered under Mediclaim, whereas in developed nations like USA about 75% of the total populations are covered under some insurance scheme. With more and more private companies in the sector, this situation is expected to change. In 1956, all the private entities and provident societies were nationalized, which gave birth to the Insurance Corporation of India The primary regulator for insurance in India is the Insurance Regulatory and Development Authority (IRDA) which was established in 1999 under the government legislation called the Insurance Regulatory and Development Authority Act, The insurance plays a major role in the life of the humanity. Slowly people started to realize the necessity of the insurance and In the current economic environment, insurers will need to be more selective about which markets to enter or exit, addressing both geographies and product lines; which distribution models to utilize; and how best to manage costs while maintaining productivity. Desirable targets include companies with access to strong bancassurance or other distribution channels, entities with an established presence in the market, companies with a complementary product set, and organizations that have already invested in new technologies to reach customers. These needs are unending as long as life exists. There are many financial alternatives to diffuse the risk, but the most important, and the best alternative is insurance. Insurance Penetration: This parameter considers life insurance premium as a percentage of the country's gross domestic product (GDP). The position of our country with respect to the developed economies and some Asian nations is clear from the Table. 1. Insurance Density: This parameter refers to the life insurance premium per capita. The concrete improvement of the country's position in this regard can be observed from the Table.2 *Research Scholar JNTU Hyderabad, rajupodila@gmail.com,Ph: **Professor Sri Krishnadevaraya University, Ananthapur, Dept of Business Management, Ph:

2 *** Associate Professor Jawaharlal Nehru Technological University Hyderabad, School of Business Management, Ph: Table 1: Insurance Penetration: A Cross-Country Comparison (All figures are in %) Country Australia France Germany UK United States Japan Singapore India Bangladesh INA World Source: Insurance Regulatory Development Authority INA: Information Not Available Table 2: Insurance Density: A Cross-Country Comparison(Below mentioned figures are in US$) Country Australia France Germany UK United States Japan Singapore India Bangladesh INA World Source: Insurance Regulatory Development Authority INA: Information Not Available Objectives:

3 Focus on distribution trends in the life Insurance sector. To assess the distribution channels of Insurance companies Aware of Sustainable Insurance opportunities and its barriers. Literature Review: It is observed from the study of different research works that though the development of distribution is a true trend within the industry, very few studies have concentrated on the same. Some of the studies together with their area of research are cited in the following section: Gidwani, S.J. (1996) tries to find probable solution as to why human life is valued after death in monetary terms and to what extent the life insurance is needed for an individual. He adopts three methods to study the situation. (i) Ability to look into one s pocket to decide how much one can save fixed sum of money so that maximum life insurance can be purchased. (ii) Calculate individual average earning from future personal effort over the remaining year of productive life time, and (iii) Total expenditure met during lifetime represents cost of acquisition of human asset which is productive in subsequent year. Modawat, S.L. (1997) studies the change that had taken place between two decades in life insurance with particular reference to policyholders weal and loops. The twin objective at the time of inception was to provide protection to all the section of society and to make available the investment in priority sectors. The study revealed no spectacular increase in business from rural areas but all efforts were made to exploit the vast and untapped potential from rural business. fund registered an increase at 12.83% in the year % the net lapse ratio was due to the misguidance of agents and development officers but targets were fixed realistically to bring down it. Shekar Chandra (1998) in his article Future strategies for insurance discussed various issues relating to life Insurance. He has given a detailed note about new kinds of products and intimacy with the constant technology adoption for survival as well as for consistent growth. Raghu Gulati (1999) in his survey attempts to observe the insurance market in relation to products and customers. A basic understanding of life insurance business, product portfolio, strategy the company adopts, demographic analysis, the customer strategy that the organization repeatedly follows when launching insurance etc. is studied. The study also reveals that the company has deep penetration in urbanareas, but the people are under insured, yet there exist potential to increase the coverage of insurance. 50% of Insurance Company business comes from rural areas and agents seem to be the most effective channels regarding sales. In product strategy, if the customer is in need of basis insurance product, the company should come forward to launch term profit that is to be matched with risk; a unit link productis to be launched etc. Jaya Basu and Chandra Sekhar (2000) discuss the problem faced by the insurance players towards majority of population being ignorant of the policies. Only 15 per cent of the total population is insured and the penetration level of insurance policies in India is only 0.5% as against 2.86% in Israel and 2.43% in Hong Kong. If this status is to be increase in India, there is a need to create customer awareness in rural areas, innovate low-prices units with a low premium and right distribution techniques with planning for rigorous training to agents, direct marketing, bank assurance etc, which can definitely prove to be a boon to new the companies entering this sector. PareshParasnis (2001) in an article briefly discusses the various channels of distribution in the life insurance industry in India and new avenue cues being explored by the new player. The greater importance is given to the customer not only for meeting his requirements but also the impact in times of fulfilment, quality of service rendered, complexity of products etc is given priority. To conclude, the life insurance industry in transition presents

4 - opportunities, but is also fraught with challenges of an - unknown magnitude. Therefore, only the best will survive in the long-term which enables to spot the emerging trends and helps to capitalize the benefits of its customers. Pradeep Gupta and Sanjay Bhyana (2002) discuss the challenges and strategies in the insurance industry in India. An attempt was made to know the market position of different insurance brands and business practices codes given by IRDA to maintain some minimum standard. As per study after liberalization in November 1999, awareness of LIC brand shows 100% as against ICICI prudential awareness 70% followed by HDFC, with 52%. The study of TapenSinha states that 312 million middle class consumers in India have enough financial resources, but only 2.5% of the population has insurance coverage and India is the sixth largest market in the world. Kaliyamoorthy and Suresh (2003) study the changes in the key factors like demographic, social, economic, political factors and strategic choices that are responsible for the growth of the service sector comparison of insurance contribution in the developed and developing countries. It clearly state the terms of saving mobilization. The study states that with the entry of private companies, competition has brought in changes but Company started offering some of the service which even the private insurance companies have not yet begun. It is necessary to keep a close watch on the trends of the industry to analyze its future development. Ravi Shanker (2004) attempts to know the objectives namely the reform adopted by Insurance Company after Nationalization, its impact, influencing factors in competition and marketing strategies adopted by the insurance companies. The findings of the study are as per the reforms, the direct insurers to have a Minimum paid up capital of Rs.1 billion invest from policyholders funds only in India and to restrict international companies to a Minority equity holding of 26% in any new company. The two possible limitations are (i) The rate of premium of Gross Domestic Product which is indeed comparatively low in India and (ii) new players find it easier to capture existing customers by offering better service and other advantages. Kumar Jagendra (2005) in his study revealed that the life insurance penetration, India is just about 2% of Gross Domestic Product. The life insurance premium per capital is just Rs.550. The Insurance Company is the largest player with over 2000 officers. After liberalization, it has improved its efficiency and customer services. Among the private life insurance companies ICICI prudential life insurance and Birla Sun life are the first and second largest players other prominent companies in competition are - Bajaj Allianz, HDFC, Standard life, Kodak Mahindra, ING Vysya, Aviva, Met,etc..The present study intends to prepare the profile of life policyholders to examine the preference of the policyholders towards various types of policies, and to probe into the reasons behind the insurance product purchases in rural area. The study indicates that respondents belonging to the age group dominate the rural insurance market around 70% of the respondents have monthly income below Rs The women segment is still untapped in rural areas, only 12% of the total respondents were females. Agents are the most important source of information and motivation as rural people just take a policy which the agent suggests to them. A large number of respondents have got insured themselves for life risk coverage and for future contingencies. Insurance Company has got the maximum (93%) market share among various life insurance players. Money back policy is the most preferred policy in rural areas followed by JeevanAnand and endowment policy. Most of the respondents were found to be satisfied with the performance of the insurance companies. A study conducted by Rajesham, Ch. and Rajender, K. (2006) article Changing Scenario of Insurance Sector Indian Journal of marketing revealed that insurance companies of India are required to come up with multi-benefit policies including tax benefits with quality based timely customer services and need to focus on health insurance which is one of the untapped areas of insurance including services through innovative products, smart marketing and aggressive distribution with internet facility with much individual attention transparency and flexibility to increase the quality and volume of insurance business.today, the focus is on selling more products to existing customers to improve profitability, therefore customer focused strategies require an effective CRM ensuring insurance firms monitor the ebb and flow of customer behaviour, giving them a holistic 360-degree view for their customers.

5 Patil, P.B. and Thakkar, P.N. (2007) article Impact of Disinvestment on Banking and Insurance Sector revealed that a strong competition among the insurance companies has led to better services being provided by customer satisfaction can be known from the customer retention ratio. Now most of the companies are customer centric approach, rather than product centric approach which is leading to customer-retention ratio.a study conducted by SunaynaKhurana (2008) article Customer Preferences in Insurance industry in India, revealed that the insurance sector plays a very important role in the development of any economy. It is necessary for the economic and overall development of any country. Praveen Sanu, GauravJaiswal and Vijay Kumar Panday (2009)95 in their article, A Study of Buying Behaviour of Consumers towards Insurance Company, Prestige institute of Management and research, Gwalior, revealed that in present Indian market, the investment habits of Indian consumers are changing very frequently. The individuals have their own perception towards various types of investment plans. Selvavinayagam, K. and Mathivanan, R. (2010) article has revealed that the competitive climate in the Indian insurance market has changed dramatically over the last few years. At the same time, changes have been taking place in the government regulations and technology. The expectations of policyholders are also changing. The existing insurance companies have to introduce many new products in the market, which have competitive advantage over the products of life insurance companies. Ramanathan, K.V. (2011) research has resulted in the development of a reliable and valid instrument for assessing customer perceived service quality, awareness level, and satisfaction level of customers towards life insurance industry. Here, service quality needs to be measured using a six dimensional hierarchal structure consisting of assurance, competence, personalized financial planning, corporate image, tangibles and technology dimensions. This would help the service managers to efficiently allocate resources, by focusing on important dimensions first. There is no right and wrong in this. The success of marketing insurance depends on understanding the social and cultural needs of the target population, and matching the market segment with the suitable intermediary segment. The Origins of Sustainable Development This effort goes back to the revelations of Rachel Carson s Silent Spring in Initially the environmental movement was viewed as anti-business and anti-development. Planning for the United Nations Conference on the Human Environment, held in Stockholm in 1972, many, particularly in the developing world, raised concerns that a focus on the environment would only present obstacles to development, slowing their efforts to catch up to the developed world. The Stockholm event raised awareness of environmental issues and began a process of incorporating them into global development discussions. But the conflicts continued. For every organisation there will be pro s and con s, opportunities and barriers.if the management will overcome all the obstacle and utilizing the opportunities optimally then sustainable development will feasible. Prime Opportunities for Sustainable Insurance: While insurers are already involved in sustainability issues, three areas cry out for greater attention: Providing micro insurance linked to microfinance Researching emerging risks and sharing such knowledge with stakeholders Developing insurance products and services for natural resources Barriers to Sustainable Insurance: There are two types of obstacles to sustainable insurance structural barriers that affect the whole financial sector and barriers to insurability. The main structural barriers are: Misperception Often, businesses have the preconception that ESG issues are irrelevant, while other parties view the profit motive of businesses as being incompatible with sustainability.

6 Institutional Rigidity regulatory frameworks prevent an effective response. Laws may inhibit insurers from issuing innovative products such as derivatives and foreign companies from entering developing countries. Insufficient Capacity the private financial sector in developing countries is very weak. Vulnerability the worst-affected people are the least able to cope. Key Strategies to Develop Sustainable Insurance Markets The analysis in this report suggests strategies for insurers to implement a campaign of deeper and more proactive engagement in sustainable insurance. Risk Knowledge research and analysis are essential. A thorough understanding of the risks involved and how to manage them effectively is critical and may require special projects and the acquisition of new skills. Public-Private Partnerships this can be an appropriate model for insuring ESG risks, particularly in developing countries and for catastrophic loss potentials. Partnering for Distribution consumers often view insurance as an unpleasant and occasional duty even when it relates to savings. If insurers do not have local presence, it is often vital to partner with other organisations that can access clients and earn their trust. Research Methodology: Sample Design: Purposive sampling has been used for the study. The top seven private players (in terms of market share) in the life insurance industry about whom information could be gathered were considered for the present study. The sample covers ICICI Prudential Insurance, Bajaj Allianz Insurance, Birla Sun Insurance, Tata AIG Insurance, ING Vysya, Aviva Insurance, and Max New York Insurance Data Sources: Secondary sources like the website of IRDA were used to collect data on various distribution channels relevant for the purpose of the study. Research Methodology:In order to identify the changing distribution pattern, the percentage contribution from different channels was analyzed for the entire industry. Moreover, through various calculations, the trend in terms of policy and premium was observed. Distribution Trends in the Insurance Industry: The focal point of the study is to comprehend the changing / emerging trends in distribution of life insurance policies. However, the focus of the present paper is only on the marketing aspect of distribution. In the following sections, the changing pattern in the sector is discussed. Table 3: Share of Distribution Channels in Individual New Business Premium Channel of distribution (All figures are in %) insurer Individual agents Banks Corporate agents Others Brokers Referrals Direct selling Private

7 LIC Industry Private LIC Industry Private LIC Industry Private LIC Industry Source: Accumulate by the author(from External data) Individual agents' contribution in generating new individual business showed a continuous declining trend. The Table 3 also shows a difference in the attitude of the two sectors with respect to their dependence on various channels. In terms of premium generation, LIC relies 'almost solely on the agents, its traditional distribution channel. However, the private sector is reducing its dependence on individual agents. Instead, the private sector as a whole is exploring new channels like banks-for increasing the individual business premium-that have the contribution about 20 percent on an average during the four years. Another noticeable point of differences is that referrals as a channel were contributing a significant 9% for the private sector, however, their contribution in case of LIC was very low. The role of broker showed a slightly increased trend for the private sector, but their contribution was only around 5percent.The corporate agents who included bancassurance contribution around 30 percent on an average for the private sector, but their contribution for LIC was only 1.5 percent. Table 4: Business Generation from Different Distribution Channels (All figures are in %) Channel and its Contribution Year ICICI Prudential Bajaj Allianz Birla Sun Tata AIG ING Vysya Aviva Max New York

8 Individual agents and INA Corporate (banks plus agents others) [on the basis of policies] INA INA Individual agents and INA Corporate Agents ( banks plus others) [on the basis of premium] INA INA Source: compute by the author(from External data) INA: Information not available Individual and Corporate Agents: In order to comprehend the distribution trend within the industry,i have focused on the role that is being played by the individual and corporate agents of insurers.in order to get a better insight about the emerging scenario, an analysis was made on the basis of the contribution of the channels in terms of policies and premium.the Table 4 points towards the contribution of individual and corporate agents to increase the individual business of the leading private insurers. A closer look at Table 4 makes it clear that the individual agents and corporate agents play a dominating role in the individual life insurance business. Individual Agents (Exclusively): The Table 5 points towards the contribution of individual agents only because they have been playing a very important role in the industry. The Table 5 focuses on the contribution of individual agents only (i.e., excluding corporate agents). It clearly depicts a declining trend in terms of contribution to business (considering both policies and premium). A look at the figures clearly points towards the continuous declining pattern in the case of ICICI Prudential Insurance and Bajaj Allianz Insurance (based on the number of policies). For the others, a consistent movement was not observed. The figures in the Table 5 show that in spite of growth in other channels, the role of agents has been substantial. The average of last five years figures shows the following contribution to the policy sales from the agents: ICICI Prudential Insurance:50 percent, Bajaj Allianz Insurance:57 percent, Birla sun life :74.84 percent, Tata AIG Insurance :67.55 percent, ING Vysya life Insurance :74 percent, Aviva Insurance, where the percentage contribution from individual agents was less than 50 percent. Table 5: Contribution of Individual Agents Name of the life insurer Year On what basis? ICICI Prudenti al Bajaj Allianz Birla Sun Tata AIG ING Vysya Aviva Max New York Number of policies Percentage premium Number of policies Percentage premium INA INA

9 Number of policies Percentage Number of premium policies INA INA Percentage Number of premium policies INA INA Percentage premium Source: compute by author(from External data) INA: Information not available Bancassurance: This is a new concept that has been emerging in India. By bancassurance we mean selling of insurance policies through banks. It is a win-win policy for both the banks and the insurance players - the banks gain because they earn fee-based income, and the insurers get an advantage since they use the banks' existing network to spread their business to the rural parts of the country without developing a brick and mortar model. The Table 6 highlights the contribution of banc assurance in generating individual business for the selected companies. Recent Trends: I have made certain observations on the basis of annual reports collected from the IRDA website till A changing pattern is visible. At the same time, I have also looked into the effect of stringent rules introduced by the IRDA for the corporate agents on the distribution trend. According to a newspaper report, as a result of the regulatory changes, the importance and favorability of corporate agents has come down drastically. The Table 6 presents the details about the decline in the number of corporate agents due to the changes brought in the IRDA. Table: 6 Fall in the Number of Corporate Agents after the Regulatory Changes Insurer April 2010 December 2011 Fall in number of corporate agents HDFC Tata AIG Reliance * Bajaj Allianz Birla Sun Insurance LIC* Industry Source:, Companies Report* figures are till March 2011 Furthermore, there have been reports which have mentioned that the number of agents for the life insurers fell from 28.03

10 lakhs in September 2010 to lakhs in September 2011, a decline of 12.5 percent. There have been reports that have mentioned about the growing importance of online sales, which reduces the overall distribution cost. insurers like SBI, HDFC Standard, AegonReligare, Bharti AXA etc. are already selling their policies online. In addition to this, another channel that is being targeted is the sale of policies through retail outlets - known as mall assurance and telcassurance. The former is being used by Future Generali Insurance (which contributed to 10 percent of the sales) and the latter is being used by Bharti Insurance, using which 20 percent of the policies were sold. Hence, it is clear that newer channels of distribution in the life insurance sector will emerge with changes in the external environment and with modifications in the industry environment. Managerial Insinuation: The study has serious implications with reference to the business strategies of the life insurers. The paper shows the evolving nature of the industry and points towards the development in the distribution strategies adopted by different players. Furthermore, the analysis of the data will help the decision makers to understand the performance of the various channels in terms of business growth and premium per policy. Limitations: Mainly the limitations of the study are based on the secondary data only. If the Primary data had to consider it would assisted to analyze the budding trends influence of distribution channels on the sector. By come across importunate rates of different distribution channels, it is indispensible to take required steps to overcome the deficient performance. For this reason, questionnaire and opinionnaire based study is mandatory and it can be concede out in order to identify the reasons for their poor performance on the part of the insurance, channels and the customers. Conclusion: It is comprehensible from the current study that comparing with developed nations or developing nations India is ranking very low in life insurance penetration, density. All the regulatory authorities and government have to educate the citizens about the life or health policies. In the above study it depicts US having 75% of insured population but in India it is just 0.2 percent, here we can see the negliance of the semi government bodies or full pledged governments. In India most of the citizens are in the speculation on insurance, until unless drastic regulations taken place our insurance sector won t place in world best ranking. However still the good contribution of individual agents or banc assurance business is improving but the maximum share of population is not insuring. Distribution channels are the strategies to magnetize the customers to maximize their revenges but no single company is thinking fullpledgedly with humanity grounds( about BPL population).it is crystal clear that these distribution channels are mandatory and significant as competition in the industry become gets tougher. According to the calculation this development is something positive for an industry. References: Insurance regulatory and development authority (IRDA) ( ) IRDA Annual reports retrieved Gidwani, S.J., How Much Insurance does a Man Need, Chartered Secretary, Jan 1996, P Modawat, S.L., Two Decades of Insurance - A Study in Policyholders Wears and Woes,Indian Journal of Commerce, Vol. XXX, Part III, No. 112, September 1997, P Shekar Chandra, Future Strategies for Insurance, The Indian Journal, December 1998, P.81. Raghu Gulati, Study of Insurance Market: Products and Customers, (GE Capital, India), Jaya Basu and Chandra Sekhar, Insuring the Profits, ICFAI, Reader, September 2000, P PareshParasnis, Distribution of Insurance - An Industry in Transition, Chartered Secretary, Aug 2001, P

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