CHAPTER 2. Life Insurance Distribution: With Special Reference to Bancassurance

CHAPTER 2 Life Insurance Distribution: With Special Reference to Bancassurance

CHAPTER 2 Life Insurance Distribution - With Special Reference to Bancassurance 2.1 Purpose of the chapter The purpose of this chapter is to study the distribution channels used by life insurance companies to distribute their products. Agents are the most used channel of distribution since years. But with the liberalization policy of government for life insurance sector and private players entering the market, many new channels have been used by the life insurance companies to distribute their products which are highlighted in this chapter. Other channels which private insurance companies started using are brokers, internet, etc. This chapter also focuses on the new channel of distribution used by life insurance companies i.e. Bancassurance. 2.2 Insurance Distribution Distribution has turned out to be a competitive business strategy in the financial services industry. Distribution has become the primary means by which financial services companies now compete, both as retailers and wholesalers of financial products and services. With consumers demanding ever greater choice and control over their financial affairs, it is customers rather than providers who now choose which channels they use for different products and services. Hence there exists a need for multichannel strategy for insurers. While agents were the only dominant channel of insurance distribution in the yesteryears, the distribution mechanism has undergone a sea change in the recent years. Leading insurers are responding with more flexible distribution strategies, extending their brand strengths and professional expertise to a new range of direct channels. 29

In the present Indian insurance market, the challenge to insurers and intermediaries is two-pronged: (1) Building faith about the company in the mind of the client, (2) Intermediaries being able to build personal credibility with the clients1. Agents have been the primary channels for insurance distribution from years. Not only public sector companies but also private sector companies have their branches in different parts of the country. And they attract the people from the local area to become the agent of their company. The agents are from various segments in society and collectively cover the entire spectrum of society. A person who has lived in the locality for many years sells the products of the insurance company with a local branch nearby. This ensures the last mile touch- point being closer to the customer. Of course, the profile of the people who act as agents suggest they may not have sufficient knowledge about the different products offered, and may not sell best possible product to the client. Hence agent training has become the crucial step after recruiting. Now-a-days the companies give training to their agents on various topics like the products they offer, other investment alternatives available in the market, taxation planning, IRDA (Insurance Regulatory and Development Authority of India) rules and regulation, etc. to help them sell better products to the clients. With the increase in private players in the insurance sector the competition has increased tremendously. As agents is still continuing as the prime channel for insurance distribution, private insurance companies are exploring the various distribution channels available instead of only concentrating on individual agents - a channel that LIC had been using for decades. To minimize the operational cost, these companies have entered into business agreements with established financial service companies (Table No. 2.1). 1 Sreedevi Lakshmikutty and Shridharan Baskar, "Insurance Distribution in India: A Perspective, Knowledge Digest, MIB Group Inc., 2003. 30

Table 2.1 Private Players in the Indian Life Insurance Market Company Indian Partner Foreign Insurer Birla Sun Life Aditya Birla Group Sun Life, Canada Om Kotak Kotak Mahindra Finance Old Mutual, South Africa HDFC Standard Life HDFC Standard Life, UK Royal Sundaram Sundaram Finance Royal Sun, UK ICICI Prudential ICICI Prudential, UK Max New York Life Max India New York Life, USA Tata-AIG Tata Group AIG, USA ING Vysya Vysya Bank ING Insurance, The Neitherlands Aviva Life Insurance Dabur CGU Life, UK MetLife India Jammu & Kashmir Bank MetLife, USA Bajaj Allianz Bajaj Auto Allainz, Germany SBI Life Insurance SBI Cardiff, France AMP Sanmar Life Insurance Source: www.knowledgedigest.com Sanmar Group AMP, Australia 2.3 Distribution Channels in Life Insurance 2.3.1 Agents An agent is someone who legally represents the insurer and has the authority to act on the insurer s behalf 2. An agent is not an employee of the organization. An agent could represent one insurer or a group of affiliated insurers (referred to as multiple line exclusive agencies). Most agents work in clearly demarcated geographical boundaries. In some cases, insurers employ agents on salary. Life Insurance agents typically work under a contract with one insurer. In the Indian context, the regulators have clearly provided that an agent shall represent a single insurer only. 2 Dorfman, Mark S (1978), "Introduction to Insurance", New Jersey: Prentice Hall. 31

IRDA also makes provision for institutional agents. This may help distribution of insurance product in a specific way and bring in professionalism in insurance marketing3. A Life Insurance agent is required to solicit and procure new Life Insurance business, in a manner, that is consistent with the interest of the consumers and of the insurance company4. For this purpose, an agent would require to do the following: a. Contact prospective customers, understand their needs and motivate them to buy a product; b. Complete all formalities related to the purchase; c. Keep in touch with the customers to make sure that renewal premiums are paid; and d. Assist in claim settlement. The IRDA, pursuant to the powers conferred under Section 42 read with Section 114A of the Act, has made and notified the above titled Regulations, w.e.f. 19-7-2000 for agents. Some of the important requirements, as prescribed in these Regulations are discussed herewith5: a. Minimum qualifications: The applicant shall possess the minimum qualification of a pass in 12th standard or equivalent examination. b. Practical training: The applicant shall have completed from an approved institution, at least, 100 hours practical training. c. Examination: The applicant should have passed the pre-recruitment examination conducted by the Insurance Institute of India, Mumbai, or any other examination body. Agents are the most ancient channel members for the life insurance sector. To be an insurance agent has become more difficult a job in the present market 3 Vasanthi- Srinivasan, Prakash P and Sitharanhu, "Selection of Agents: a Challenge for the Indian Insurance Industry, 5th Annual Asia Pacific Risk and insurance Conference, July 15-18, 2001. 4 Insurance Institute of India (2000), Life Insurance, Bangalore: Indian Institute of Management. 5 D Varadarajan, The Law Governing Insurance Agents, The ICFAI University, 2002, Pg. 138-140. 32

situation. An agent needs to be multi-skilled to attract the customer and sell the products. To the average customer every new company is the same. Hence, it is the agent who makes the difference in the services he provides to the customer, and builds the image of the company. At the same time with the increase in the number of private companies the competition in the insurance sector has also increased tremendously. Hence, the company has to train their agents so that they know which product will appeal to the customer. The agents not only should be aware of the products which are offered by his company but also with,the products which are offered by the competitive companies to be an effective salesperson. The new companies are looking for educated, aware individuals with marketing flair, an elite group who can be attracted only with high remuneration and the lure of a fashionable job, all of which may not be possible in this business with its price pressures and the complexity of selling insurance6. The individual agency numbers showed a net increase of over 26 per cent in the year 2007-08. From 19.93 lakhs at the beginning of 2007-08, the number of individual agents increased to 25.20 lakhs by the end of the year. The private life insurers had recorded a phenomenal increase of 49 per cent as compared to a relatively lower 8 per cent increase registered by LIC. It is also for the first time after the opening up of the sector that the private insurers have more number of individual agents than LIC. While the number of agents at the end of the year in LIC s fold stands at 11.93 lakhs, the number for all the private insurers put together is 13.26 lakhs.7 6 Sreedevi Lakshmikutty and Shridharan Baskar.'lnsurance Distribution in India: A Perspective, Knowledge Digest, MIB Group Inc., 2003. ' 7 IRDA Annual Report 2007-2008. 33

Table 2.2 Details of Individual Agents of Life Insurers (2007-2008) Insurer As on April 1,2007 Additions Deletions As on March 31,2008 Private 890152 772910 336314 1326748 LIC 103047 234852 144155 1193744 Total 1993199 1007762 480469 2520492 Source: IRDA Annual Report 2007-2008 One major concern that emerges from the table 2.2 data is the high percentage of turnover of agents. In 2007-08, while the total number of agents appointed is 10.07 lakhs, the number of agents terminated is as high as 4.80 lakhs. The high turnover is a huge drain on the financials of the insurers who spend lot of money and time on prospecting, appointing and training of these agents. The policies procured by these agents are rendered orphan on their termination and thereafter result often into lapsation due to lack of servicing support. 2.3.2 Brokers With the broker regulation under review and expected any time, this could be the next hope, especially for the urban market. This will be a new experience for the insurance customer, accustomed to brokers in financial services, real estate, and travel and tourism. For historical reasons the image that broker carries in the minds of the customer is not very favorable. Thus the new breed of insurance brokers faces the challenge of establishing credibility. The positives are the brokers in the urban arena can attract the elite and the upper 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 if life insurance for the highend and corporate/group segment. 34

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. 2.3.3 Internet Though India is joining the fast growing breed of the net users, using net for transactions has not yet caught up. Though a few banks provide online banking, the usage is still a small fragment. The insecurity associated with transactions over the net is still an inhibiting factor. At present most of the insurance companies have product information and/or illustrative tools on the web. We do not see the web evolving 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. Of all the distribution channels, the most discussed and anticipated channel is the Internet channel. The widespread diffusion of the Internet has created an explosion in the growth of electronic channels, including direct channels (that is, individual company web sites), electronic markets, or electronic intermediaries over which multiple buyers and sellers do business 8, 9 and other cybermediaries8. Prior to the advent of the Internet, most purchasers of insurance products used traditional agent distribution channels. Given its reliance on traditional channels, the insurance marketplace has only recently begun to reflect this broader growth in. electronic channels. The Internet was expected to have a major negative impact on the traditional agent-led distribution channel. However, consumers have not shown a marked preference 8 Malone, T. W., J. Yates, and R. I. Benjamin, 1987. "Electronic Markets and Electronic Hierarchies, Communications of the ACM, 30:484-497. 9 Sarkar, M.B., B. Butler, and C. Steinfeld, 1995. Intermediaries and Cybermediaries: A Continuing Role for Mediating Players in the Electronic Marketplace," Journal of Computer Mediated Communication, Vol. 1, No. 3. 35

for purchasing insurance product via the Internet10. Currently, less than two percent of insurance products are purchased via the Internet. 2.4 Bancassurance Bancassurance - of French origin - in its purest form refers to a bank issuing insurance policies under its own name and retaining the risk on its books. However, in its broad sense, it can also mean a bank selling insurance products through its won insurance subsidiary / allied company / any other insurer. The concept is not just a distribution alliance. It signifies a long-term relationship to provide a wider range of financial products to a common customer base, by exploiting synergies inherent in the partnering institutions* 11. The reason for the banks to promote insurance business re, overstaffing, which can be solved without large scale'firing, seeking customer loyalty by offering satisfactory and expanded base for services, increased fee-based, and finally leading to staff productivity in banks. These are the key drivers to raise the motivation levels as banks put their energy into small commission customers which the insurance agents avoid. This, in turn, increases the customer base with banks distributions and also lowers the cost of distribution. The cost of selling insurance to existing banks mass market customers is calculated as far less than selling to a group of unknown customers. This can be said to benefit the insured in terms of lower premiums12. Bancassurance as a concept first begin in India, when the insurance industry opened up to private participation in December 1999. It is the concept used to describe the sale of insurance products in a bank. Bancassurance, which is also known as Allfinanz - describes a package of financial services that can 10 Trembly, Ara C., 2001, Why the insurance industry has failed in. the online distribution channel, National Underwriter (Ute & Health Services edition), 105:19-21. 11 V G Chari, Bancassurance - A Business Sourcing Model to Indian Banks", Insurance Chronicle, The ICFAI University Press, September 2003. 12 Tapen Sinha, Bancassurance in India, Insurance Chronicle, The ICFAI University Press, July 2005. 36

fulfill both banking and insurance needs at the same time. The features like distribution, legal, fiscal, cultural and behavioral aspects form an integral part of the concept. Distribution is the key issue in bancassurance and is closely linked to the regulatory climate of the country. Bancassurance is a one-stop financial service to meet the requirements of banking services and also to provide reliable protection to customers. The reasons for bancassurance to be popular are13: Conducive environment: Progressive dismantling of laws relating to undertaking of insurance businesses by banks, increasing automation, growing needs for private retirement plans to complement public pensions, the concern for providing total financial services to customers, etc. have paved the way for bancassurance. Cost effectiveness: Insurers look to bancassurance as an alternative cost effective mode of distribution as against the costly agency services. It is estimated that 50% of the insurer s structure is directly or indirectly related to distribution. Fee-based income: A bank expects to increase its fee-based income and overall productivity by leveraging its branch network, brand image and client base by optimally using its assets / infrastructure and by positioning itself as an one-stop-shop with value-added service for its customers, thereby increasing customer loyalty and retention. Bancassurance enables a bank to satisfy the risk protection needs of its clients without assuming underwriting risk. Innovations and efficiency: Increased convergence of banking and insurance would lead to melding of their corporate cultures, skills and synergizing / innovating the marketing of financial services. 13 B Panda, Bancassurance, Newsletter, Indian Bank Management Academy for growth & Excellence, Chennai. 37

2.4.1 Structural Classification of Bancassurance Models 1. Referral Model Banks intending not to take risk could adopt referral model wherein they merely part with their client data base for business lead for commission. The actual transaction with the prospective client in referral model is done by the staff of the insurance company wither at the premise of the bank or elsewhere. Referral model is nothing but a simple arrangement, wherein the bank, while controlling access to the clients data base, parts with only the business leads to the agents / sales staff of insurance company for a referral fee or commission for every business lead that was passed on14.the following diagram represents the system for managing referrals. Figure 2.1 Referral System Source: Roger A. Klein, "Bancassurance in Practice, Munich Re Group, 2001. 14 A. Karunagaran, Bancassurance: A Feasible Strategy for Banks in India?, Reserve Bank of India Occasional Papers, Vol. 27, No. 3, Winter 2006. 38

At the heart of the system is the branch referral process. This explains who does what, when and how, in order to properly generate, fully record and effectively monitor referrals in bank branches. To make the referral system work effectively, it is essential to have the following systems in place: a) Training system: A training system has to be very carefully designed so that all the parties can be given proper knowledge about the system, the company and its products. This will help the employees to perform their duties and responsibilities effectively. b) Selection procedures and system of allocation of branches to agents: The selection of the agents should be made very carefully so that they can maintain their quality work. Also the agents should be committed the work they perform for the bank. Similarly, an intelligent system of allocation of branches to the agents will help ensure that the agents are allocated to branches on a sound basis that aims to support the development of the agent-branch relationship. c) Measurement, evaluation and reward system: The measurement of the performance of the agents and the employees should be well designed so that they get appropriate motivation by the stem. Activities like record keeping, appraisal system should be introduced to encourage the employees. d) Control System: An effective and non-bureaucratic system of controls will help mitigate the various risks that may undermine the smooth operation of the referral system. 39

2. Corporate Agency Model The other form of non-risky participatory distribution channel is that of corporate agency, wherein the bank staff is trained to appraise and sell the products to the customers. Here the bank as an institution acts as corporate agent for the insurance products for a fee / commission. This seems to be more viable and appropriate for most of the mid-sized banks in India as also the rate of commission would be relatively higher than the referral arrangement15. Usually under the Corporate Agency model the products of the insurer are distributed on an as is where is basis without any customization for the bank. Thus, the entire spectrum of products ranging from pure protection plans, popular money back plans, and complex unit liked products, simple endowment plans to the pension products are available through this model. It therefore, requires suitable understanding of the products before identifying and targeting the customers16. An idea as to how the distribution under the corporate agency model is being implemented in India can be seen in figure 2.2. Figure 2.2 Corporate Agency Distribution Model Source: V V Ravi Kumar, "Emerging Structure of Bancassurance in India, The ICFAI University,,2006, pg. 164. 15 A. Karunagaran, Bancassurance: A Feasible Strategy for Banks in India?, Reserve Bank of India Occasional Papers, Vol. 27, No. 3, Winter 2006. 16 V V Ravi Kumar, "Emerging Structure of Bancassurance in India", The ICFAI University, 2006, pg. 164. 40

3. Insurance as Fully Integrated Financial Service/ Joint ventures Apart from the above two, the fully integrated financial service involves much more comprehensive and intricate relationship between insurer and bank, where the bank functions as fully universal in its operation and selling of insurance products is just one more function within. Where banks will have a counter within sell/market the insurance products as an internal part of its rest of the activities. This includes banks having a wholly owned insurance subsidiary with or without foreign participation. In Indian case, ICICI bank and HDFC banks in private sector and State Bank of India in the public sector, have already taken a lead in resorting to this type of Bancassurance model and have acquired sizeable share in the insurance market, also made a big stride within a short span of time. The great advantage of this strategy being that the bank could make use of its full potential to reap the benefit of synergy and therefore the economies of scope. This may be suitable to relatively larger banks with sound financials and has better infrastructure. Internationally, the fully integrated Bancassurance have demonstrated superior performance (Krishnamurthy, 2003). Even if the banking company forms as a subsidiary and insurance company being a holding company, this could be classified under this category, so long as the bank is selling the insurance products along side the usual banking services. As per the extant regulation of insurance sector the foreign insurance company could enter the Indian insurance market only in the form of joint venture, therefore, this type of bancassurance seems to have emerged out of necessity in India to an extent. There is great scope for further growth both in life and non-life insurance segments as GOI is reported have been actively considering to increase the FDI s participation to the upto 49 per cent. 41

2.4.2 Experts views on Bancassurance The bancassurance channel contributed 21.2 per cent of the total business for Kotak Mahindra Old Mutual Life Insurance in 2007-08. This business has come through one private bank, 22 co-operative banks and the 400 branches pan- India, asserts Mr Shekhar Bhandari, Sr Vice-President Sales, Kotak Mahindra Life Insurance for the insurer. Bancassurance continues to be an important distribution channel and it currently contributes more than 50 per cent of Aviva Life Insurance Company business17. According to Mr. S Muralidharan, Chief Sales Officer, SBI Life Insurance, corporate agency contracts are better because in such an arrangement customers deal with the bank employees who they know well. Therefore, there is an element of trust. Bank employees are in a better position to understand the needs of the customer and serve them better. On the contrary, referral arrangements so riot add value to the bank - they only lend their database to the insurer. SBI Life insurance has corporate agency agreements with SBI and its associate banks. Mr. Arun Singh Barhat, General Manager, Dena Bank, said: With corporate agency we can earn higher commission, without any capital investment. We are also able to dedicate separate staff for training. N the case of referral model, manpower shortage was a big problem. Mr. Hemant Kaul, President, Retail Banking, UTI Bank said, Referral is a flirtation, while corporate agency will formalize the relationship. Referral is opportunistic. It could happen that neither bank nor the insurance company will participate. As against this, corporate agency requires dedicated manpower, career training and commitment." According to Mr. Rahul Sinha, Vce President, Marketing, Kotak Life Insurance, In the case of a retirement product, it would work in a fantastic way on a referral basis. But ULIP (Unit Linked Insurance Plans) would work better if it is a corporate agency18. 17 The Hindu Business Line, Friday, Feb 27 2009 18 The Hindu Business Line, May 31, 2005 42

2.5 Chapter Bibliography Books D Varadarajan, The Law Governing Insurance Agents, The ICFAI University, 2002, Pg. 138-140. V V Ravi Kumar, Emerging Structure of Bancassurance in India, The ICFAI University, 2006, pg. 164. Journals/Magazines Dorfman, Mark S (1978), Introduction to Insurance, New Jersey: Prentice Hall. Sarkar, M.B., B. Butler, and C. Steinfeld, 1995. Intermediaries and Cybermediaries: A Continuing Role for Mediating Players in the Electronic Marketplace, Journal of Computer Mediated Communication, Vol. 1, No. 3 Sreedevi Lakshmikutty and Shridharan Baskar, Insurance Distribution in India: A Perspective, Knowledge Digest, MIB Group Inc., 2003. Sreedevi Lakshmikutty and Shridharan Baskar, Insurance Distribution in India: A Perspective, Knowledge Digest, MIB Group Inc., 2003. Tapen Sinha, Bancassurance in India, Insurance Chronicle, The ICFAI University Press, July 2005. V G Chari, Bancassurance - A Business Sourcing Model to Indian Banks, Insurance Chronicle, The ICFAI University Press, September 2003. Others A. Karunagaran, Bancassurance: A Feasible Strategy for Banks in India? Reserve Bank of India Occasional Papers, Vol. 27, No. 3, Winter 2006. B Panda, Bancassurance, Newsletter, Indian Bank Management Academy for growth & Excellence, Chennai. Insurance Institute of India (2000), Life Insurance, Bangalore: Indian Institute of Management. IRDA Annual Report 2007-2008. Malone, T. W., J. Yates, and R. I. Benjamin, 1987. Electronic Markets and Electronic Hierarchies, Communications of the ACM, 30: 484-497. 43

The Hindu Business Line, Friday, Feb 27, 2009. The Hindu Business Line, May 31, 2005. Trembly, Ara C., 2001, Why the insurance industry has failed in the online distribution channel, National Underwriter (Life & Health Services edition), 105: 19-21. Vasanthi Srinivasan, Prakash P and Sitharamu, Selection of Agents: a Challenge for the Indian Insurance Industry, 5th Annual Asia Pacific Risk and insurance Conference, July 15-18, 2001. 44