Subject Course Semester Topic CLASS NOTES Principles of Insurance BBA Banking and Insurance First Insurance Intermediaries DISTRIBUTION OF INSURANCE PRODUCTS Traditionally, the life insurers have been solely depended on the agency distribution force. On the contrary, the general insurance business has depended totally on the development officers. Insurance Company Insurance Agent Customer The scenario has been different for the general insurers, a no agency commission was payable for writing businesses more than 10 lakh, thus prohibiting brokers. In the emerging scenario, there will be three players the buyers will consist of consumers, employees, and employers and the carriers or the policy issuers will focus mainly on life and annuities, property and casualties, health and ancillaries and, the critical link in the system will be the distributor. Those who will provide value-added and low-cost services will be the survivors. Traditional Channel of Distribution Agents Brokers New Distributor Channels Direct marketing Corporate agents Independent Financial Advisors Telemarketing Website Marketing Retail chains Page 1 of 10
Interest marketing Banc assurance INSURANCE INTERMEDIARIES AND THEIR FUNCTIONING Insurance industry in India has been lot of changes since the opening of the sector for private participation. Industry has witnessed entry of a plethora of companies and is to witness many more to foray. There has been a lot of innovation both on the products front and also on service front. Innovation on the service front include providing call Centre facilities, providing personalized financial planning tools, e-servicing of products and the recent one is the introduction of third party administrators. The various insurance intermediaries from the consumer s and marketer s perspective are: (a) Agents (b) Brokers (c) Surveyors and Loss assessors (d) Third party administrators (e) Corporate agents The Insurance Regulatory and Development Authority (IRDA) has formulated a code of conduct for Insurance Brokers and agents and prescribed strict penalties including cancellation of licenses for default and manipulation. The code of conduct formulated by IRDA covers the entire gamut of activities including relationship with clients, sales practices, duty to disclose information to clients, claims, advertising, sub-brokers and remuneration among others. SURVEYORS AND LOSS ASSESSORS Surveyors and loss assessors are independent professionals appointed by an insurance company to assess the loss or damage, when a claim is notified under a policy issued by them. An insurance surveyor must be duly licensed by the Insurance regulatory and development authority. Licenses are issued to technically qualified people who are qualified in insurance subjects and are Fellows or Associates of the Insurance Institute of India or Chartered Insurance Institute of London or any other technically qualified like Engineering graduates or diploma holders in any disciplines, Chartered Accountants, Graduates in Medical Sciences. A surveyor after discipline the license, may be empanelled by any or all of the insurance companies in India. The insurance company selects a surveyor who is qualified to undertake the assessment of loss or damage in relation to the policy issued and also depending upon the estimated loss Page 2 of 10
involved. His duties include: Investigate and confirm the cause of loss. Advise the insured to take good care of salvage to mitigate the loss. To ensure that insured has taken all necessary steps to contain the loss. Assess the quantum of loss. Determine the liability of the insurers within the framework of the policy conditions. To act on behalf of the insurance company in disposal of salvage to realize maximum value. Though the surveyor is appointed by the insurance companies, he is required to be impartial and objective in his assessment, favouring neither the insurers nor the insured ho are the two parties to the contract under a policy. This necessitates a high degree of professionalism. Since long time, the general insurance industry was suffering on account of satisfaction with the surveyor s loss assessment report and delay in the settlement of claim. Therefore, IRDA has recently issued regulations pertaining to surveyors and loss assessors which categories on the basis of their qualification, practical experience and past experiences. THIRD PARTY ADMINISTRATORS Third party administrators are the new breed of intermediaries in the health insurance sector which facilitate the access of the policyholders to a network of hospitals/nursing homes. The introduction of whom will benefit both the insured and the insurer. TPA s maintain the databases of policy holders and issue them identity cards with unique identification numbers and handle all the post policy issues including claim settlements. They run a 24-hour toll free number which can be accessed from anywhere in the country. They have full-time medical practitioners under their employment who spontaneously take decisions on whether the ailment is covered under the policy. TPA s benefit both the insurer and insured. For insured, better services are obtained and for insurers, they substantially reduce the administrative costs. TPA license is granted to companies registered under the Companies Act 1956 having a minimum paid up capital of Rs. 1.00 crores with foreign participation not exceeding 26%. License is usually granted for a period of 3 years. Earlier, the insured was reimbursed all the hospitalization expenses, but with introduction of TPA s all the hospitalization services operate on cashless basis since the payment is directly Page 3 of 10
made to them. TPA s are entitled to commission by insurers on a mutually agreeable terms but, as per the IRDA guidelines it cannot exceed 15% of premium amount. TPA s have to tie-up with hospitals, which offer hospitalization services. Each TPA may tie-up with any number of insurers and likewise each insurer can empanel any number of TPA s. Procedure All the records of medical insurance policies of an insurer are transferred the TPA who generally issue identity cards to all the policyholders, which they have to show to the claim, policyholder has to inform TPA on 24 hour toll free line provided by the TPA. On informing the TPA, policyholder will be directed to a hospital where the TPA has a tied up arrangement. However, policyholder will have the option to join any other hospital of his choice, but in such case payment shall be on reimbursement basis. TPA issues an authorization letter to the hospital, for the treatment wherein the TPA will pay for the treatment. TPA will be tracking the case of the insured at the hospital and the point of discharge, all the bills will be sent to TPA. TPA makes the payment to the hospital and sends all the documents necessary for consideration of claims, along with bills to the insurer. Insurer reimburses the TPA. Presently, the role TPA is confined to medical/health services. However their job can be extended to: Documentation and policy issuing. Legal services and claims recovery services under subrogation rights. Record verification under adjustment policies. Medical examination services for life insurance policies and overseas Mediclaim policies. Co-insurance recovery services for both premiums and claims. Follow up of services from reinsurance companies. Servicing of motor policies. Inspection and assessment of risk prior to issuance of policy. Arbitration services. Page 4 of 10
AGENTS Most of the life insurance companies in India follow the traditional route of marketing through agents. In case of private players they are nomenclature as Insurance Advisors/Planners. The companies generally emphasize on building a good field force, trained to get people thinking about their family s financial security and recommend appropriate policies for their needs. Agents have traditionally proved to be highly successful means of distribution of insurance products. Every insurance agent has to obtain a license from IRDA before conduct of insurance business and follow a code of conduct prescribed thereunder. BROKERS Insurance brokers are professional who assess the specific insurance needs of the client, evaluate the risk and suggest a suitable insurance cover for the clients. IRDA s Annual Report 2001-02 described brokers as Insurance brokers, as professionals, are expected to fill the void in terms of providing for specific insurance needs of the client, by assessing the risk on behalf of the client, advise on the mitigation of the specified risk, identifying the optimal insurance policy structure, bring together the insured and insurers, carry out work preparatory to insurance contracts and, where necessary, assist in the administration and performance of such contracts, in particular when claims arise. As per the said report, The advent of brokers on the scene is likely to result in improvement in customer service, transfer of technology and managerial know-how, benefits to insurance companies through increased market penetration and facilitate increased retention capacities by optimizing reinsurance programmes. IRDA has issued guidelines for issue of license and regulation of affairs to insurance brokers and insurance consultants in 2002. As per the said guidelines, the brokers are divided into following categories: Category I Direct General Insurance broker Category II Direct Life Insurance broker Category III Reinsurance broker Category IV Composite broker Category V Insurance Consultant Page 5 of 10
Some of the important provisions as contained therein are: The guidelines specifically provide the qualification norms and their functions for various classes of brokers. The net worth requirement for composite insurance brokers is Rs. 2.50 crores (with a cap of 26% on foreign equity participation). For direct brokers and reinsurance brokers it is Rs. 50 lakhs and Rs. 2.00 crores respectively. In case of insurance consultants, a bank guarantee of Rs. 5.00 lakhs has to be furnished to IRDA. The brokerage is determined by the IRDA in accordance with market practices but it cannot exceed 30% of the premium. This commission shall be paid by the brokers to the insurers. Every broker has to maintain a solvency margin Rs. 25 lakhs or 10% of the gross brokerage and fees received in the previous year, whichever is higher. A statement of solvency margin from the auditors shall be furnished by the broker to the authority. The brokers are to maintain the books of accounts as prescribed and have to submit the audited financial statements and report thereon within 60 days from the end of the accounting year. The records are to be preserved for at least 5 years. The brokers have to disclose information on various matters as and when it is required by the authority. The brokers are also required to facilitate inspection when it is ordered. Unlike insurance agents who are retained by Insurance Companies, Brokers are retained by the insured and therefore their primary responsibility is towards the insured. Some of the benefits of introducing brokers in the Indian market are: (a) Improvement in customer service: With increased competition, insurance brokers have a greater motivation to introduce new and innovative products, to be more responsive to consumer needs, and to deliver higher terms quality services. Indian corporates and consumers benefits directly in terms of service as well as product and policy innovation, and are consequently able to secure appropriate insurance cover more cost effectively. (b) Transfer of technology and managerial know-how: Insurance brokers introduce international best practice in technical skills and products, training programmes, systems and technology, and managerial techniques. Currently the availability of trained manpower is a major constraint in the development of the insurance broking business in India and international players can contribute heavily in bridging this gap. (c) Benefits to insurance companies:most major global insurance companies spend the majority of their time handling commercial and industrial risks. They find dealing with Page 6 of 10
brokers to be easier and speedier because only the intricate points or special requirements need detailed discussion. Brokers also assist in creating insurance awareness, increasing market penetration and act as a catalyst to increase competition and improve customer service. (d) Foreign exchange considerations:brokers enable Indian insurers to increase their retention capacities by applying their international reinsurance skills in optimizing their reinsurance programmes, thereby effecting further saving in foreign exchange outflow. In addition, they can assist the local insurers to develop new products and accordingly increase the premium base. CORPORATE AGENTS Corporate agents are a new concept recently introduced by IRDA to facilitate the distribution of insurance products by the corporates. The main agenda to promote corporate agents is to facilitate banc assurance in India. IRDA report of 2001-02 expresses concerns on this issue and state that in India, the public sector banks and regional rural banks and microcredit institutions have wide reach and can help fulfill the basic objective of deeper insurance penetration in the country. IRDA has also issued guidelines for Licensing of corporate agents which provide for minimum educational qualifications for specified persons, and practical training requirements and code of conduct. BANC ASSURANCE Banc assurance is a concept that has rewritten the way in which insurance products are distributed in many parts of the world and has the potential to do the same in many other markets. By offering a holistic financial services package, encompassing banking, insurance, lending and investment products, banks can maximize distribution of products to a captive customer base. In markets where it is firmly established banc assurance channels can take an impressive market share of new life business around 55% in France and between 20% and 30% in many other European countries. Banc assurance (a French term) is a partnership between a life insurance company and banking institution. The need (for the insurance company) to access a large base of customers and a desire (on the part of the bank) to offer a wide range of financial products leads to these partnership in different forms. The main tenants of banc assurance s trusting relationship with customers, branch name recognition, customer profitability measurement systems in banks,, cash management relationship with corporations and the fact that banc assurance distribution is more cost effective than traditional Page 7 of 10
distribution are some of the key attraction of this channel. 27 public sector banks and 196 regional rural banks account for 92% of the branch network in India. With over 60,000 branches of commercial banks and an average population served per branch of 15,000, banc assurance is expected to be a critical distribution strategy for the insurance companies. In fact, the network includes 33,000 rural branches and 14,000 semi-urban branches, about 60% of the total number of branches. Need for Banc assurance The traditional channels of insurance are becoming costlier and obsolete by the day in India. The commission paid to the agents ranges from 5%-10% of annual premium throughout the length of the underlying policy. In contrast, the banking channels will cost just around 20% for one time, reducing the burden for the insurance companies. Declining productivity of the insurance agents and heating competition, where the insurers are finding it increasingly difficult to maintain their market share, has also made a strong case for Banc assurance. The availability of huge customer database at the banks have enabled insurers to design products that fit the choice range of the customers, increasing its popularity, thus accentuate the need for bans assurance. Also from banker s perspective, there are several reasons why banks should seriously consider Banc assurance, the most important of which 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 that effectively cross-sell financial product can leverage their distribution and processing capabilities for profitable operating expense ratios. By leveraging their strengths and financing ways to overcome their 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 consumes, which they can leverage in selling them personal line insurance products. In addition, a bank s branch network allows the face to face contact that is so important in the sale of personal insurance. Another advantage banks have over traditional insurance distributors is the lower cost per sales lead made possible by their sizable, loyal customer base. Banks also enjoy significant brand awareness within their geographic regions, again providing for a lower per-cost when advertising through print, radio and/or television. Banks that make the most of these Page 8 of 10
advantages are able to penetrate their customer base and markets for above-average market share. 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 noncustomers (for acquisition and awareness). They also have access to multiple communication channels, such as statement inserts, direct mail, ATMs, telemarketing, etc. Bank s proficiency in using technology has resulted in improvements in transaction processing and customer service. By successfully mining their customer database, leveraging their reputation and distribution systems (branch, phone and mail) to make appointments, and utilizing sales techniques and products tailored to the middle market, European banks have more than doubled the conversion rates of insurance leads into sales and have increased sales productivity to a ratio which is more than enough to make banc assurance a highly profitable proposition. Banc assurance Models Distribution Alliance In this model, the insurance company ties up with the bank for distribution of insurance products. Joint venture between insurer and bank This type of partnership brings a bank with a well-developed customer database together with a large life insurer with strong product and channel experience to develop a powerful new distribution model. In this type of venture the bank provides the lead and its reputation and brand name, while the insurer brings products and underwriting and servicing expertise. The partners combine their individual expertise to forge a best practice banc assurance operation with tailored products, tailored distribution and lead generation mechanism. This model may be applied to SBI Life Insurance. It has access to some 117 million holders of term deposits through 14,000 branches of the State Bank of India (SBI), which serve as a ready platform and a ready distribution channel. Other players such as ING Vysya are also looking at this option. They seek to set-up branches in many main cities, moving gradually into the semi-urban and rural areas. Leveraged life distribution: Under this model, the life insurance company takes the lead in partnership, while several banks act as corporate agents to provide access to middlemarket leads. Leveraged bank distribution: Under leveraged bank distribution, it is the bank that takes the lead as in the partnership, while the life insurance companies supply products for its banc assurance efforts. This model calls for a large bank with a range of effective Page 9 of 10
distribution channels (branches, ATMs, mail, phones). Each model has its own particular advantages, however they all share common features which can create competitive advantage: Enhanced customer service providing convenience, simplicity and value in a one stop environment. Leverage of existing assets such as valuable, often vast, customer databases. More income generated from an increase in overall product sales and better customer retention. Greater productivity a banc assurance sales person s productivity has been measured to be 55% higher than the agency equivalent. Quality sales culture that is customer driven. Improved staff retention higher levels of satisfaction among sales staff through good training and remuneration schemes. Cross-selling opportunities strengthening customer relationship management. Key issues to be addressed to make banc assurance successful are: Both the bank and insurance company need to improve effectiveness of the saleschannels by identifying and gaining access to target customers, adding push to market pull, training of sales staff, differentiating performance from competition and controlling cost per unit sold. Product needs to be Tailored to meet the need of the customer base and for new distribution channels. Communication needs to be streamlined to address any culture issues between the bank staff and the insurance staff. Similarly, differences in compensation structures need to be handled sensitively before these start affecting the moral of the branch staff. Traditional processes need to be redesigned not only to take advantage of the new technology, but also to affect a streamlined system between bank and the insurance company. Technology can be used to put effective use in sales support function, staff training, smoother processing, and online integrated information system. Information system needs to be reviewed and performance measurement parameters need to be specially adapted to banc assurance. Skills need to be developed and reallocation of assets and resources financial and human may also be required between the bank and insurance company. Page 10 of 10