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Challenges faced by public sector insurance

1. Introduction 2. Objective 3. History of insurance 4. Transition phase in insurance sector in India 5. Insurance sector reforms and Role of IRDA 6. List of public sector companies 7. Present scenario (based on financial parameters) 8. Challenges 9. Future strategies to face challenges 10.Conclusion

Introduction With such a large population and the untapped market area of this population Insurance happens to be a very big opportunity in India. It was due to this immense growth that the regulations were introduced in the insurance sector and in continuation Malhotra Committee was constituted by the government in 1993 to examine the various aspects of the industry. Since then the insurance industry has gone through many sea changes .The competition LIC started facing from these companies were threatening to the existence of LIC. Since the liberalization of the industry the insurance industry has never looked back and today stand as the one of the most competitive and exploring industry in India. The entry of the private players and the increased use of the new distribution are in the limelight today. The use of new distribution techniques and the IT tools has increased the scope of the industry in the longer run. Due to emergence of private and foreign players in the market and also because of increase in the use of technology, change in government policies there has been a radical change in the insurance sector. With this change and various other developments and issues, this project involves the study of the challenges that the public sector face in order to survive in the market.

Indian Insurance Industry Background/ Indian Insurance Market History The insurance laws in India were developed in the footsteps of English insurance laws. The insurance business in India started off with the marine business as was the case in England and gradually extended to other businesses like life and fire insurance. At that time, the English sold the insurance policies to the businessmen of Indian origin at rates which were above the normal prevalent rates, based on the assumption that the expected lifespan of Indians was comparatively less and more risk-prone. In 1871, the first Indian insurance company named `Bombay Mercantile Life Assurance Society' commenced its business operations in India at normal rates of premium, i.e., at the rate applicable to the English people. This was followed by the establishment of `The Oriental Government Security Life Assurance Company' in 1874, the `Bharat' in 1896 and the `Empire of India' in 1897. These and several other Indian companies were started as a result of the Swadeshi movement in the early 1900s. At this stage, in order to check the mushrooming of the life insurance business and its agencies, the need for a regulating authority was recognized for the first time that took shape in the form of the `Indian LIC Act' in 1912. The period between 1928 and 1956 held a significant aspect in the development of insurance laws in India. During this period, serious attempts were made to infuse professionalism in the Indian insurance sector through innovative products and by educating the masses about the benefits of insurance. As a result, a new Insurance Act was adopted in 1938 to monitor

the activities of life insurance companies in India. The enactment of the Insurance Act, 1938, provided stability to the growing insurance business and the earlier legislations were consolidated and amended to protect the interest of the insuring public. The next significant piece of legislation that came into effect was the introduction of the Life Insurance Act on September 1, 1956. The nationalization of the life insurance business in India saw the emergence of country's only public sector life insurance company, Life Insurance Corporation of India (LIC), which was formed as a result of the takeover of 170 companies and 75 provident fund societies. The company was formed with an initial capital contribution of Rs. 50 mn. This initiated the rising dominance of LIC in the Indian insurance sector that prevailed till the 1990s, when the Government of India proposed reforms in the insurance sector to end the monopoly of the public sector life insurance company in India. Prompted by the impact of liberalization and globalization of the Indian economy in the early 1990s, the Government of India appointed a highpowered committeeMalhotra Committeein 1993 under the chairmanship of RN Malhotra, former Finance Secretary and Governor of the Reserve Bank of India. The committee emphasized the private sector participation in the life insurance business, thereby lifting the entry barriers of private players and allowing foreign players to enter the market with some limits (26%) on foreign direct investment. On the basis of the Malhotra Committee recommendations, the Central Government enacted the Insurance Regulatory and Development Authority (IRDA) Act in 1999. With the enactment of this Act, the private sector

companies started to diversify into life insurance business in a bid to capture the hugely untapped insurance market in India. Several public and private sector financial institutions such as the State Bank of India (SBI), HDFC Bank and ICICI Bank entered into the life insurance market. Also, quite a number of multinationals like the Tatas and Birlas followed suit.

Insurance Sector Reforms and Role played by IRDA The government in a bid to complement the reforms initiated in the financial sector established a committee headed by former finance secretary and Reserve Bank of India (RBI) governor, Mr. R.N. Malhotra to evaluate the industry and to recommend its future direction. This committee suggested the following changes:

Government stake in insurance companies be brought down to 50%. The takeover of the holding of GIC and its subsidiaries in order to Allowing private enterprise in the sector in companies with paid up No single entity to function in both Life and General insurance Foreign companies to be allowed only in combination with an Indian Changes to be made to the Insurance Act. An independent insurance regulatory authority to be setup. Reduction in the mandatory investments of LIC life fund in GIC and its subsidiaries are not to hold more than 5% in any Rapid computerization of branches. Payment of interest on delayed claims.

facilitate their functioning as independent corporation. capital of a minimum of Rs. 100 crore. segments. partner.

government securities to be brought down from 75% to 50%. company.

The insurance sector began its reform process with the passage of the IRDA (the Insurance Regulatory and Development Authority) bill in parliament in December 1999. However with the setting up of IRDA, the government has de-regulated the sector opening it for the private players. The entry of private players has enabled the industry to look at alternative distribution channels. To get the maximum pie of the premium, every insurance company is adopting new distribution and marketing strategies. The FDI was hiked from 26% to 49% for private players of insurance sector.

PRESENT SCENARIO OF INSURANCE INDUSTRY

India with about 200 million middle class household shows a

huge untapped potential for players in the insurance industry. Saturation of markets in many developed economies has made the Indian market even more attractive for global insurance majors. The insurance sector in India has come to a position of very high potential and competitiveness in the market. Indians, have always seen life insurance as a tax saving device, are now suddenly turning to the private sector that are providing them new products and variety for their choice.

Consumers remain the most important centre of the insurance sector.

After the entry of the foreign players the industry is seeing a lot of competition and thus improvement of the customer service in the industry. Computerization of operations and updating of technology has become imperative in the current scenario. Foreign players are bringing in international best practices in service through use of latest technologies

The insurance agents still remain the main source through which

insurance products are sold. The concept is very well established in the country like India but still the increasing use of other sources is imperative. At present the distribution channels that are available in the market are listed below.

Direct selling Corporate agents Group selling Brokers and cooperative societies Bancassurance

Customers have tremendous choice from a large variety of products

from pure term (risk) insurance to unit-linked investment products. Customers are offered unbundled products with a variety of benefits as riders from which they can choose. More customers are buying products and services based on their true needs and not just traditional moneyback policies, which is not considered very appropriate for long-term protection and savings. There is lots of saving and investment plans in the market. However, there are still some key new products yet to be introduced - e.g. health products.

List of Public Sector Insurance Companies Life: the largest public sector Life Insurance company in India is LIC Non Life: there are four public sector general insurance company in India. They are: New India Assurance Company Ltd. Established by Sir Dorab Tata in 1919, New India is the first fully Indian owned insurance company in India. New India was a pioneer among the Indian Companies on various fronts, right from insuring the first domestic airlines in 1946 to satellite insurance in 1980. With a wide range of policies New India has become one of the largest non-life insurance companies, not only in India, but also in the Afro-Asian region.

United India Insurance Company Limited

United India Insurance Company Limited was incorporated as a Company on 18th February 1938. General Insurance Business in India was nationalized in 1972. 12 Indian Insurance Companies, 4 Cooperative Insurance Societies and Indian operations of 5 Foreign Insurers, besides

General Insurance operations of southern region of Life Insurance Corporation of India were merged with United India Insurance Company Limited. After Nationalization United India has grown by leaps and bounds and has 18300 work force spread across 1340 offices providing insurance cover to more than 1 Crore policy holders. The Company has variety of insurance products to provide insurance cover from bullock carts to satellites.

Oriental Insurance Ltd. The Oriental Insurance Company Ltd was incorporated at Bombay on 12th September 1947. The Company was a wholly owned subsidiary of the Oriental Government Security Life Assurance Company Ltd and was formed to carry out General Insurance business. The Company was a subsidiary of Life Insurance Corporation of India from 1956 to 1973. In 2003 all shares of the company held by the General Insurance Corporation of India has been transferred to Central Government. Oriental specializes in devising special covers for large projects like power plants, petrochemical, steel and chemical plants. The company has developed various types of insurance covers to cater to the needs of both the urban and rural population of India.

General Insurance of India Ltd.

The entire general insurance business in India was nationalized by General Insurance Business (Nationalization) Act, 1972 (GIBNA). The Government of India (GOI), through Nationalization took over the shares of 55 Indian

insurance companies and the undertakings of 52 insurers carrying on general insurance business. It was incorporated on 22 November 1972 under the Companies Act, 1956 as a private company limited by shares. GIC was formed for the purpose of superintending, controlling and carrying on the business of general insurance. As soon as GIC was formed, GOI transferred all the shares it held of the general insurance companies to GIC. Simultaneously, the nationalized undertakings were transferred to Indian insurance companies. After a process of mergers among Indian insurance companies, four companies were left as fully owned subsidiary companies of GIC (1) National Insurance Company Limited, (2) The New India Assurance Company Limited, (3) The Oriental Insurance Company Limited, and (4) United India Insurance Company Limited. The next landmark happened on 19th April 2000, when the Insurance Regulatory and Development Authority Act, 1999 (IRDAA) came into force. This act also introduced amendment to GIBNA and the Insurance Act, 1938. An amendment to GIBNA removed the exclusive privilege of GIC and its subsidiaries carrying on general insurance in India. In November 2000, GIC is renotified as the Indian Reinsurer and through administrative instruction, its supervisory role over subsidiaries was ended. With the General Insurance Business (Nationalization) Amendment Act 2002 (40 of 2002) coming into force from March 21, 2003 GIC ceased to be a holding company of its subsidiaries. Their ownership was vested with Government of India.

Challenges for public sector insurance The public sector insurance companies in India has its dominance in this sector since a long time. With the entry of foreign and private players in the market and also because of various reforms introduced in the insurance sector, the public sector insurance is facing various challenges to maintain its status in the market. The following are challenges faced by public sector insurance. Privatization/ competition: The new millennium has exposed the insurance sector to new challenges of competition and struggle for survival in this era of privatization, liberalization, deregulation and globalization. The opening up of the sector has posed new challenges for the public sector insurance companies. Due to liberalization and globalization, insurance sector is now open to private and foreign players. Due to this, the survival for public sector insurance companies has come to stand. Various private and foreign players with their best strategies and world class products has captured the maximum portion of the uninsured sector of India. Yet there are many to be covered. The question arises is that how would the public sector insurance company would survive? Will the public sector insurance company be able to face the challenge posed by private and foreign players in the market? Insurance investors developed economies, particularly from Western Europe and the US find Indian market as having greater growth potential than their domestic markets. Therefore, a high level of interest exists for these companies to acquire insurance concerns. Many international players are eyeing the vast potential of the Indian market and are already making plans

to enter. The entry of the foreign players in the sector with more financial resources/ better experience and lower operational costs will have an advantage over the Indian companies involved in the business. The bigger private players claim that, opening up insurance will give policyholders better products and service. Better experience provides them with the wherewithal to have a better product mix and more operational flexibility. Moreover, they will operate with a lean staff and lower operational cost. The domestic insurance industry will as a result, have to face a greater competition. Market share 2007:

Public sector insurance companies have repeated the need for boosting capital to meet the competition challenge from the private sector. PSU insurers conveyed that their current capitalization is insufficient for sustaining growth and increasing their penetration levels into the rural markets. The combined net worth (equity plus reserves) of all the four PSU

insurers (New India Assurance, United India Insurance, National Insurance and Oriental Insurance) was in the region of about Rs 12,000 crore in 2007. They earned profits averaging about Rs 450 crore each per annum, as the Sensex marched to 14,000 points. Profits from investment trading were not sustainable and could turn out to be counter productive. Besides, with capital constraints, PSU insurers have been conceding market share to the private sector. Pvt market share: Private sector's share was expanded to 35 per cent. This situation was increasingly beginning to ring alarm bells among the PSUs. This is despite PSU's expansive presence in the country. One of the major factors for the loss of market share was that unlike the private sector, PSUs were obsessed with solvency and maintaining high levels of retention. Solvency margin: The prescribed solvency margin (the excess of capital and value of assets over the insured liabilities) by the insurance regulator is 150 per cent. Retention ratio: The private sector insurers have been operating at very low retention ratios of under 50 per cent. Retention ratio implies the amount of premium retained within the country. Instead most of the private sector insurers were ceding business to foreign reinsurers to maintain solvency and at the same time earning large ceding commissions. Ceding by PSU insurers to foreign insurers was less than 30 per cent, implying retention of 70 per cent. But reducing retention is an option before the PSUs, if the Government maintains its opposition to the equity raising efforts.

This implies that PSUs would also consider increasing their ceding of liabilities to maintain solvency. Such a move would have other negative effects by way of reduction in investments within the country, including infrastructure. PSU non-life insurers are currently among the largest financiers of long-term debt of state governments, domestic equity markets and rural infrastructure. Moreover the current level of capitalization is on an insurance penetration of less than one per cent of the Gross Domestic Product. If the penetration is to improve to 2 per cent, the Asian average, there is little alternative to additional infusion.

FDI in Insurance Foreign Direct Investment (FDI) is now widely perceived as an important resource for expediting the industrial development of developing countries in view of the fact that it flows as a bundle of capital, technology, skills and sometimes even market access. India's case is typical in this context. After following a somewhat restrictive policy towards FDI, India liberalized her FDI policy regime considerably since 1991. This liberalization has been accompanied by increasing inflows. The liberalization has also been accompanied by changes in the sectoral composition, sources and entry modes of FDI. Both Indian and foreign players find their place in this sector, though still domestic investors have an upper hand, as foreign investors face the 26%

investment cap. Recent years have witnessed a lot of proposals being advanced for increasing this investment cap to 49% for the foreign investors. The government also has agreed on various occasions about this change in the investment climate, though the investment limit still stands at 26%. Proponents of this increase in investment cap argue that increasing the investment cap would encourage FDI in the insurance sector and consequently the benefits of FDI will follow. In this paper, we closely examine the issue of increasing the foreign equity in the insurance sector. We also suggest that time is still not ripe enough to increase FDI in the insurance sector as this will not give heartening results. The following are the reasons why this FDI limit should not be amplified:

New Technology - A Fairy Tale: Often the FDI hike is backed by the arguments that it will lead to a new technology being brought to the home country especially in the context of a developing country like India. But this does not hold any water when we talk about insurance sector as in the insurance sector technology is not at all significant. The mortality rate and other principles of insurance are based on the conditions prevailing in India, as the policy holders are Indians. The need to bring in high technology in this sector is a mere farce and any justification provided on these grounds is baseless. Hence, neither the product nor the technology is required from foreign countries. Also, even in the existing scenario of FDI up to 26%, no such inflow of technology has been witnessed. Disregard to the Rural Sector: Increasing foreign equity in insurance sector will lead to an imbalanced ambience of competition, leading to disfavoring of the rural quarter. During the year 2003-04,

the market share of 12 private companies together was 8% in terms of number of policies while the market share of private companies in terms of new premium income was 13%. This is because the private companies have been targeting the urban elite and are only concerned with earning premiums of higher denominations. Though this in itself may not be objected to, their complete absence from rural and other socially purposive insurance cover and investment creates an uneven climate of competition against the public sector. It is definitely a matter of concern that they will become much more aggressive in this respect with the availability of increased foreign capital. Even at present with foreign equity standing at 26%, the private sector have distanced themselves from rural and social oriented projects. For example, in the area of general insurance the motor third party insurance, which is at present running in losses, is solely handled by public sector companies. Additionally, the IRDA Annual Report 2002-2003 clearly notes that fire and engineering portfolios accounted for 32.63% and 7% respectively for the premium underwritten by the private players; while in respect of the public sector companies these profit making portfolios accounted for 19.43% and 4.5% respectively. On the other hand, motor and health contributed around 41% and 7.5% of the business underwritten by the public sector as against 27% and 5.5% respectively for the private insurers. Hence, increase in foreign equity would fortify the private companies without the burden of social responsibility.

Disciplining of Private Insurance Companies: If we examine the present FDI clout, the IRDA has been grossly unsuccessful in monitoring the working of the private companies. The IRDA Annual

Report 2002-2003, reflects certain notices served to private companies, but again there was no follow up of such notices. Till today there has been no scrutiny of the working of these private companies, although companies like American International Group (AIG) and Prudential are involved in several charges of violation of regulations involving malafide accounting practice. On the contrary, Life Insurance Corporation (LIC) and public sector general insurance are burdened with social responsibilities. This again contributes to the situation of unhealthy competition. If this foreign clout is increased to 49%, it will only strengthen the lack of monitoring of private companies and sets an uneven platform for competition.

Flow of Funds for Infrastructure - An Eye Wash: Arguments like increase in FDI limit will make available the inflow of infrastructure unsustainable, as insurance is all about mobilizing savings for long term investment in social and infrastructural sector. For example, 95% of the policies sold by Birla Sun Life and 80% of the policies of ICICI Prudential are unit-linked, leading to investments of funds largely for equity and only symbolically for infrastructure. Whereas, LIC has invested around Rs. 40,000 cr in power generation, road transport, water supply, housing and other social sector activities. There is no dispute about the fact that private enterprises only target those activities that provide reasonable opportunities for earnings and place social welfare at a much lower priority. Hence, when the private companies are shying away to muster funds for infrastructure at the present 26% foreign clout, it will not be sensible to assume that this situation will change by increasing the FDI limit. Foreign investors would only be concerned with the returns their funds would generate

and would not in the least be concerned about the infrastructural progress of the developing country they invest in and as a result, they refrain from investing their funds in projects having a slow gestation period.

Private Players and their Poor Performance: Trailing the opening of insurance sector for private players in 1999, with foreign equity up to 26%, 12 private companies have entered the life insurance sector. Out of these 12 only Housing Development Finance Corporation (HDFC) has foreign equity of 18.6%, whereas all others have foreign equity of 26%. Likewise, eight private companies have penetrated into general insurance, out of which six companies have foreign equity of 26%. According to an IRDA annual report, nine out of the 12 companies in life insurance and four out of eight in general insurance have suffered huge losses. As against this, LIC and Reliance (with no foreign equity) have registered grand profits in life and general insurance respectively. Thus, if profitability is the criteria for judging efficiency then private players (with 26% foreign equity) have failed manifestly on all possible fronts. In such circumstances, increasing this maximum value of foreign equity further may turn out to be suicidal. Doubtable Repute of Foreign Players: Many of the foreign players operating in India through joint ventures have dreadful reputations in their home countries. For e.g., the Prudential Financial Services (ICICI's partner in India) is facing several allegations of fraud in the US. Identical is the case of Standard Life of UK (HDFC's partner in India). Additionally, several issues of SIGMA (a reputed Swiss

Journal on Insurance) further reflects this plight. Hence, any increase in FDI limit will further augment this poor situation.

Distribution channels/ Marketing

The strong growth in the Indian insurance sector is primarily due to the intense marketing strategies and techniques adopted by the insurance companies. Further, the private insurance companies have started focusing on untapped rural areas offering tremendous growth opportunities. This will help in raising the private sectors share in rural market. Private insurance companies have a vast product portfolio in terms of maturity period and premium amounts, giving people a large number of alternatives to choose from as per their requirement. Also, private players have better market capitalization over public companies as they provide high return and aggressively market their products. Due to the adoption of aggressive marketing techniques by private players, the competition in the sector has further intensified, which is reducing the market share of public sector insurance companies. However, the public sector companies have widened their product range and improved their quality to match with those offered by private players, giving them long term advantage. There has been an aggressive techniques been followed by the private insurance companies to market or distribute their products. With its new and innovative products and with the strong strategies has able to tap the large portion of the market. India is at the lower end of the spectrum when it comes to penetration of the market. The main reason for low insurance penetration in India has been the ineffective distribution and marketing

strategies adopted by the public sector insurance companies. they reportedly never had any strategic marketing game plans and due to its monopolistic nature the need for serious marketing efforts were never felt. Traditionally tied agents were the single channel through which insurance policies were sold. Insurance agents would sell policies to their family, friends and would then direct their efforts towards people outside this circle. the number of people that a single agent could reach was limited. Moreover, the concept of a development officers position in the organization set up of public sector lost its relevance over a period of time since the concept is followed only on word and not in spirit with huge expenses outflows. Apart from selling policies through agents, brokers are also used as a distribution channel. Taking a cue from private players, Life Insurance Corporationis focusing on bancassurance and other alternative channels for business growth. Bancassurance is a mode of delivery or sale of insurance products through banks. Bancassurance selling insurance policies through banks was turning out to be an unreliable model for insurance companies. This is because banks are setting up their own insurance ventures on one hand and changing insurance partners, lured by the hefty premium offered by a competing insurer, on the other. Under insurance regulation, each bank can tie up with only one insurer but the insurer can have tie-ups with more than one bank. Although bancassurance accounts for just 2 per cent of LICs new business premium, it is bracing up for the challenge. It has hired 800 people for referral tie-ups with several brokerages and regional rural banks. Insurance

companies are now looking at alternative channels such as brokerages and retail chains to bridge the gap. The insurance major generates a mere two per cent of its business (in terms of first premium income) through alternative channels. In comparison, private players generate 30 per cent of revenue through these channels. While LIC has been catching up on the model of alternative distribution network, for private players this has been a successful business model since a long time New and innovative technologies Insurance in India is expanding its horizon. With India emerging as one among the fastest growing economies in the world, and with its vast population, there is a huge untapped potential for insurers. On the other hand, the emergence of Internet is creating new values for both customers and companies, which has in a way compelled insurance companies to explore their potential as a new distribution channel. This paper attempts to understand the customer awareness, usage and perception towards the Internet as a channel for insurance distribution. The results indicate that though the awareness is high, the usage is notably low. Customers perceive trust/credibility, support, information, communication and prospecting as significant factors affecting their decision of choosing Internet for insurance products

Internet is dramatically changing the way business is done. Considered as a major component of competitive advantage, market penetration, and management competency, Internet is a technology that facilitates the

extension of an organizations' strategic capability. It is a driver which reengineers business processes, and enhances existing distribution channels. Organizations are utilizing the Internet to extend their image and capabilities for reaching their old as well as new customers, thus increasing their market size and differentiating their products and services. The adoption of Internet-driven business models is a logical outcome of insurers, as Internet is quickly establishing itself as a mode of communication. The important contributing factors for the success of Internet are: its ability to achieve transactional efficiencies, obtain wider reach, maintain customer's interest and provide round the clock service to customers. It also assists in reducing costs, creates faster cycle time, and facilitates improved purchasing decisions through organized information. Internet provides endless options for both companies and consumers. While companies use Internet for marketing their offers, customers can say a hand in the creation of the product that will make them satisfied. As a result customers and companies can have a better relationship than ever before. It is important to note that no one can satisfy fully the knowledge-empowered customer in the world of Internet. Customers will always self-select distribution. If Internet is to experience significant gains as a distribution channel, then it is imperative to understand the customer's perception. Attitudes and preferences of customers are obvious factors that impact the adoption of Internet as a channel for distribution Detariffing

Detariffing in the insurance industry has definitely shaken the industry. The premium income has come down sharply, competition has intensified and the insurers are facing the heat to retain business. The coming days will not be easy as the insurers will have to move with a strategy to balance the premium with risk and this will require expert risk managers to advise clients for proper insurance coverage. The general insurance business in India was detariffed w.e.f. January 1, 2007. Before detariffing, it was widely believed that detariffing will sharply bring down the rates and hot up the competition in the general insurance sector. This belief was not untrue. Detariffing resulted into severe competition among the general insurers. There was cut-throat competition for grabbing the corporate portfolios. The premium came down sharply. In some cases, it is learnt that up to 70% discount was offered to undertake the insurance business. The impact of detariffication would not be seen immediately, but would take a couple of years for it to be reflected in the balance sheets of the insurers. Insurers have had an unfortunate track record of not being able to profitably manage even the non-tariff portfolios, with total rating controls left to them. The theory of cross-subsidization of rates, offered as the excuse for it, is only partly true. The insurers have refused to acknowledge that the risk management expertise to underwrite risks was lacking in their business models. A market that has produced underwriting losses for over 15 years in the tariff regime is now expected to behave rationally given the rating freedom.

Differentiation Strategies of insurance companies It discusses with the possible strategies that can be used by insurance companies in India to differentiate their product and service offerings from their competitors. It also discusses with some of the new offerings by various players, possible innovations in the insurance sector in terms of products, customer service, and distribution network. The objective of differentiation is to create inimitable, sustainable competitive advantage over the competitors for a period of time. Insurance company can differentiate themselves in the following areas: Product Customer service Distribution channels Promotion Brand building Hedging the insurers

Product Differentiation It can be achieved in terms of new products, identifying new target segments, tailored products and bundled products. New Products Pension products:

With companies switching to defined contribution plans from defined benefit plans, there is a lot of scope for products that provide fixed income or a lump sum at retirement. Insurance companies can tie up with corporate bodies and sell their products directly to the employees. Unit linked policy: The investor that pays a premium every year, apart of which is allocated towards his life cover, and the balance is invested in funds of his choice after deduction of his certain expenses. SBI Life has recently forayed into this segment. Top- up- facility: Here investor can pay additional premiums as and when it pleases him and give instructions that the premiums be invested in existing funds. Riders: It is an option that allows one to enhance insurance cover. It provides the insurance company a means to customize the product to a clients needs and allow customers to time riders purchase. Today, many of the life insurance products offer several riders. Example: LIC has decided to offer term assurance rider to those taking the revised Jeevan Dhara product. Tailored products: Sales agents, brokers and other intermediaries can help a potential customer identify all risks that he or she may be exposed to and also help in devising a policy specifically tailored to customer needs. For example, an urban

residential customer may be recommended a comprehensive policy covering fire, burglary, television and other domestic appliances, etc., policies with or without motor accident liability. Moreover, the terms and conditions of the policies may be different for different customers. For instance, a rural customer is more likely to be exposed to perils of land slide, flood,etc. as compared to an urban customer. In such cases, either such unlikely perils may not be covered under the policy or they may be covered at very low rates, depending on the risk profile. Bundled products: Bundling refers to providing an insurance cover simultaneously with the purchase of another financial or commodity products. Bundling with other financial products: The insurance products requires upfront investments and thus fights for the share of the customers wallet with other financial products like stocks, bonds, mutual funds, etc. the insurance buyers bears an opportunity cost for purchasing the insurance product, which he would ideally like to be reimbursed. Most insurance companies make significant profits from their investment activities financed by funds from insured. The insurance companies can return the portion of the generated profits to their long standing customers and differentiate themselves. Also, companies with good supply of funds and efficient asset management policies in place will be able to promise and

deliver returns on the customers investment. Therefore, it would also help in building competitive advantage. Life insurance companies have already started doing it on a small scale. Examples of bundled financial products that can be provided include: Mutual funds ( value or growth or some index based) with multi year health insurance, which has a fixed premium per year. The customer would potentially get return on his investment, in addition to being insured for health problems. The insurance company would be able to attract more customers and lock them for multiple years, boosting their reserves and revenues.

Mutual funds with life insurance policies, where in a certain portion of

the premium is diverted to the resource pool for asset management (mutual fund activities), while the rest is invested for risk cover.

Mutual funds with multi year car insurance Life plus health plus personal accident insurance. Tata AIG has

recently announced a health insurance plan with life cover called the tata aig health first. Home loans with insurance covering fire, burglary, etc. Car loans with motor insurance (third party liability and own damage)

Tractor and farm equipment loans with crop and livestock insurance, whether insurance, etc. Some of the above bundled product may require regulatory changes. This is likely to happen considering that the Indian insurance market is slowly changing from a tariff based to non-tariff based market.

Bundling with commodity product: Insurance can be automatically provided when certain commodities are sold to the consumer. An example is automatic provision of dental insurance when tooth paste is sold. Other commodities with which insurance products can be tied up include: Branded gold, P.Cs, laptops, mobile phones with burglary and third Branded furniture with fire insurance. party liability.

Customer service: Ease of payment of premiums: Payment terms and easy payment facilities can also be a powerful differentiator. There can be a facility provided for payment of productsatleast for the renewals- through ATMs, credit cards or the internet. This would save a lot of time for the end customer, and also free a agents to focus on sales. Moreover, it would also help in cutting administrative cost and boosting the companys bottom line. Easier claim settlement: World over, underwriting risk, claims management, risk surveys, etc. are very simplified due to technology. Indian players can look into these aspects to create differentiation. Training of agents and customer relationship management: Insurance is a product that is typically sold and not bought. Insurance products need a significant amount of hand holding and explanation at least

when the customer is new to this concept or the particular insurance category. Agents are the face of the company and well trained agents serve not only as a signaling mechanism regarding the companys credibility and financial solvency, but also as one of the most important parameters of customer satisfaction. The agent should earn the role of a trusted advisor and help the customer in identifying various risks that he/ she is exposed to at different times and the various covers available for the same. Moreover effective use of CRM tools would help to identify cross selling opportunities- needs at various stages of the customers life cycle, and also study customer behavior to identify possible moral hazards. Even setting up call center and help- lines to provide customers full time service can go a long way in building relationship. E- service: E- service or customer service through the internet and e- mail will paly a vital role in facilitating the process of servicing insurance products. Insurers should realize their ability to provide superior e- service, apart from e- sales, to their policy holders.

Distribution network The conventional channels of distribution in the insurance industry can be broadly classified into 3 catagories: 1. Direct 2. Indirect and 3. Partners. The different channels within this category are listed as follows: Channels Direct selling Agents Direct marketing Financial Advisors/ consultants Indirect selling Partner selling Call centers (sales calls) Bundled products with commodity purchase Bundled products with other financial intruments Bancassurance Postal Department Selling through corporates As an example of alternative distribution channel insurance companies can tie-up with their parent financial services companies to use their network and customer base, and offer them a range of financial products. Other new and emerging distribution schemes include bancassurance, use of postal network, etc.

Bancassurance:

With the evolution of inter connected financial services banks are converting themselves into one stop financial super markets. This has promoted too big classes of financial institutions: Banks and Insurance companies, to combine and deliver an innovative product bancassurance. In bancassurance insurance products are sold through banks network of branches. Selling through Indias postal network: India has extremely well developed postal network, which is even stronger than the network of banks in the country. Post offices have been established even in the interior parts of the country. Insurance companies can tie-up with the postal department to sell and distribute various insurance covers. This would certainly require upfront training cost, as the postal employees in turn need to educate and sell the concept and benefits of insurance to the people in rural areas. Such tie up would open up Indias entire hinter land, which is largely untapped. This can be a sustainable source of growing revenues. Brokers: A large majority of the customers are unaware of the various risk that can be covered by insurance policies. Therefore, brokers can serve as effective intermediaries that help customers in identifying the exact products they need. By spreading awareness of their products among brokers, insurance companies can also reduce transaction cost associated with selling through their own agents.

Marketing Strategies of Non-Life : Insurers and Their Current Limitations - A Lalitha Associate Professor, Osmania University College for Women, Hyderabad. The author can be reached at annamrajulalitha@yahoo.com This article analyzes the selling strategies that the non-life insurers have followed, prior to the detariffication of premium rates. The insurers had behaved, more as retail sellers of insurance products than as marketers. The insurance covers were pre-packaged and also carried fixed price tags. The detariffication of rates has now raised the bar significantly for insurers to justify the premium rates they quote to customers in terms of risk management expertise and loss control advices offered, in addition to the scope of an insurance cover. The non-life insurance market, despite its liberalization in 2007 has continued to perform till the end of 2006, under a strict legal regime of price tariffs for over 70% of the market in the segments of fire, engineering, motor and workers' compensation portfolios. The Insurance Regulatory and Development Authority (IRDA) added on new insurance players and new distribution channels during this period, heightening competitive pressures for business generation resulting in unethical and undesirable practices. Since the covers are pre-packaged with fixed price tags, the interaction

between the buyer and the seller was restricted to the choice of the insurer and no more. With detariffing of rates, the marketing scene has dramatically changed involving the buyers of insurance in price negotiation and other value-added elements. It was no more a question of selling covers, but one of marketing involving insurers to evaluate risk exposures, price them as well as offer advice on loss control measures. The marketing process has been activated. But having relied in the past mainly on salaried staff to sell covers directly, insurers have not yet been successful in building a qualified agency force. The corporate governance and the inherited organizational structures and processes are those that rather administered the insurance business procured than one that created awareness for insurance and the need for it among the vast non-customer segment. Affordability, accessibility and acceptability of insurance covers are at the heart of any marketing strategy. The business models of the public and private sector on marketing approach are also different. Detariffication initiative has brought the marketing process into focus highlighting the inadequacies of the present marketing format. Consequent to the detariffication of the market, from January 2007, the marketing strategies earlier employed by the non-life insurers seem to have suddenly become sterile and outdated. In the tariff regime, the insurance covers of the prized portfolios of fire, engineering and motor, constituting about 70% of the total market of Rs. 28,000 cr ($7 bn) were all pre-packaged and sold with a fixed price tag, with no negotiation possible on either. At its very essence, the differentiation among insurers was the mythical element of `customer service', common to all, but which none understood, what it really meant.

The Science of Marketing has Changed All such marketing practices and strategies seem to have suddenly changed in the post-detariffed scenario. The premium price tags attached to insurance covers have been removed; which means that each insurer could price each of the covers within the product coverage, separately as per his choice. The pricing freedom given calls upon an insurer to come up with new marketing strategies to justify the price he wishes to charge; and to incidentally elaborate what customer perceived value he is adding on to his product, if any, when compared to the prices of his competitors. Competition for acquisition or retention of business would have to be based now on both the price and on the value additions to the product, service and relationship, as a customer perceived them. The marketing game to be played has suddenly become complex, challenging and even confusing. Insurers' Marketing Dilemma-Value vs. Price The real dilemma of insurers, post-detariffication, is not about how to market insurance covers, but one of constructing a price to be offered, with identifiable value additions to the product. Not having been familiar with the applicable principles on which a rate is to be based, and unable to come up with a measurable value proposition, an insurer finds himself in a situation, in which he is unable to guide a customer on what the latter should really be looking at, when evaluating the insurance offers he has received, except the pricing element. Inevitably, price has become a dominant factor, and often the only deciding factor. Can anyone blame a customer for basing his decision only on the

lowest price offered? It is for an insurer to resolve the price, based on the value proposition he has embedded in it. Highlighting the differences is the sole responsibility of the insurer. If an insurer is unable to precisely offer or highlight comparable superior customer advantages in his offerthen his business processes, his risk management and claims advisory services and practices, his corporate governance standards and values, and the customer orientation of his staff may have to be reworked, so as to provide additional perceived benefits that a customer could access, as freebies and as value additions to the price quoted. Insurers need to reframe their mental models of marketing. Ineffective Use of Distribution Hampers Marketing In a tariff regime, insurers were more or less performing their roles, as retail sellers of insurance products (not even as wholesalers), selling mostly tariff covers at tariff prices, and off the shelf. Now they have not only the pricing freedom but also a new set of distribution channels of professional agents, corporate agents, brokers, referrals and bancassurance through banks. Many insurers are yet averse to use these distribution channels for reaching out to non-customers, due to their mindset of `sticking to the old knitting' current customers and direct selling. Insurers are now challenged, at the technical, marketing and managerial levels, to defend their current marketing processes and strategies, on value-based marketing. To widen the scope of their marketing operations, they need to sell to non-customers and enter new marketing segments, not explored fully. Meeting these challenges calls for professional and committed distribution channels, with differentiated

marketing strategies for execution. And building them up involves real hard work and takes time, commitment and application. Let me deal with a few aspects of marketing in the current free pricing market including the objectives of marketing, the corporate approach and responsibilities towards marketing, pricing as a negotiating tool, the use of IT in marketing, corporate policy towards customer orientation and the buyers' attitudes in decision-making process. A few specific new marketing strategies would also be referred to. Objectives of Marketing Strategies Marketing strategies, fundamentally, have to be structured and executed around the objectives of (i) converting non-customers into customers (ii) retaining the present customers (iii) sell more products to current customers (iv) convert customers of competitors to one's own and (v) enter new segments or markets or portfolios that are now underserved and unserved. For achieving each one of these objectives, an insurer must devise marketing strategies that are separately crafted and identify the specific distribution channel, most suited to execute them. It is observed that, currently, there are no discernible corporate marketing strategies laid down by an insurer, in the achievement of his chosen business objectives, which are to be implemented by his selling force, except that every insurer wants to acquire premiums, from whatever sources are available in the market. Fuzzy thinking in defining marketing strategies, selection of portfolio segmentation and lack of focus in enhancing the

capabilities of the distribution channels has characterized the past marketing efforts in the tariff regime. Marketing - Now a Strategic Approach In a detariffed regime, an insurer should focus on the target portfolios he wants to zero in upon. Under each such target portfolio, the various types and categories of customers he wants to recruit should also be identified. The selected portfolio and the types of category of customers so identified would need different marketing strategies and specified distribution channels to stimulate corporate marketing efforts. Accountability for execution of plans and strategies as well as performance measurements should be fixed in clear terms on nominated executives in terms of numbers, volumes, profits and focus. Marketing strategies should primarily develop the unique value-creation and delivery for all insurance products for each category of customers and in every portfolio of the insurer. This would make it necessary for an insurer to ponder over what uniqueness he can exhibit, at least in one area of extreme importance to a larger number of customers. This process would involve identifying the special characteristics the insurer has developed in various models, like the marketing model, the operational model, the human resource model and the organizational model and articulate them clearly for the customers to be aware of them. Making an insured realize that he is buying a premium brand, for which he has to pay slightly more, if need be, would depend upon how the above business models are constructed and communicated to the customer. Insurers seem to

be mentally immobilized now in their communication strategies on valuedifferentiation. They, less realistically, believe that the customers are only interested in a lower price. It is not true. In the absence of any differentiation in the value creation and service delivery, it would only be the price that would really matter to a customer. Insurers must know that all customers are not alike in their buying preferences to choose only price as the deal breaker. They must also believe in themselves that they are professionally worth the price they quote for a deal. Customers must be made to know that worth, should it become necessary. Board's Marketing Responsibilities At the Board level, the marketing priorities have to be decided segmentwise, customer category-wise and portfolio-wise, in terms of numbers, volumes and margins, which the enterprise has to follow. The core competencies required for execution of such marketing plans and the resources that are internally available to support them needs to be assessed. The vulnerabilities of the enterprise to competitive pressures needs an analysis and remedial action. Clarity in strategic thinking is necessary. Leveraging available internal human resource assets and full exploitation of databases of installed IT systems for improving informational availability and sharing of data across departments to benefit its customer segment should be dovetailed into marketing strategies. The quality and nature of distribution channels to be utilized to reach the marketing goals is an important aspect of a marketing strategy. Understanding and coping with

competition is another aspect of marketing, about which the involvement of the Board is necessary. It is rather doubtful if the boards of insurance companies are involved in such activities now. More often than not, the managements do not provide their Boards with an annual survey of past and future market trends and how competition, regulation, international markets and customer preferences are changing. Neither is there any course correction made at quarterly intervals. The agendas of the Boards are filled with excuses and reasons of what and why things have gone wrong, from the rosy pictures painted in the beginning of the fiscal. Therein lies the lack of marketing accountability. Should Pricing be a Marketing Strategy? Since product differentiation has not yet gained importance in selling insurance covers in the detariffed scenario, price has become an important factor to a customer in making his buying decision. Insurers should understand that the price they quote, not only includes the financial protection offered under the product soldcommon to all insurersbut also includes the loss prevention and loss minimization services they could render to an insured and the availability of the quality of their fair and fast claim servicing models. Either an insurer is now unwilling to provide that assurance or is not really capable of acting on it. In these two segments, and in the financial security they guarantee by their net worth, they should be able to project the differentiating benefits on offer to a customer that would lower the ultimate costs of insurance to an insured. But they should produce necessary evidence of their superior technical

expertise and customer-orientation to back up their claims. Insurers should start to strengthen their capabilities in these areas to educate the customer of the benefits of superior risk handling and in the realization of the use of insurance cover, as a quicker financial remedy, should an accident unfortunately occur. An insurer's pricing model in the current detariffed scenario is seen to be based on three approaches: penetration pricing, defensive pricing and riskbased pricing. To get a new business account, an insurer's preferred pricing approach is the penetration pricing. An insurer has to offer the lowest price to win the account. With frequency of claim reporting at less than 10% of such policies issued, taking chances on `no claim' occurring would seem rather attractive, particularly if his reinsurance program too permitted it. If it is a renewal business account, and particularly with no prior loss experience, a holding insurer's natural inclination is to defend the account at any price. As an ongoing relationship with a customer is in force, an insurer does get a chance to lower his price below that of the competing insurers. If the account were lost, it would hurt an insurer's business morale. Hence the fight for retention is fierce. The risk-based approach to pricing has not taken off, though such an approach is the most appropriate and equitable one to all stakeholders. But this approach would call for an inspection of a risk, evaluating risk management practices of an insured and the insurers own past experience of similar risks, based on professional expertise and technical analysis. Such rating models are not yet a part of the underwriting policies of an insurer, and, it may require external pressure from reinsurers to implement such

applications. Till then, penetration pricing and defensive pricing would rule the marketing roost. With additional insurance capacity entering the market by the entry of other seven or eight new insurance players, the pressures on lowering prices further would be more intense. The prospect of any recovery on the prices, therefore, seems too remote for another few years. How would the current players play their underwriting game? With operational costs likely to go up, due to reduced growth rates in profitable lines of business, containing claims costs represents another major challenge. The market environment is likely to be more daunting for all insurers and margins would come under pressure. Use of IT in Marketing IT, as a marketing tool, is a concept that insurers have not yet appreciated enough. Databases showing customer profiles that can be accessed for additional marketing purposes have not yet been built. The profit or loss that each customer has generated is unavailable with insurers for them to provide differentiated customer services. IT as a medium to reduce cost structures is not yet tried out. It could be used to sell additional covers and for making important touch points with customers. When a substantial number of reinsurance transactions are taking place by e-mail, insurers still seem to be reluctant to engage in similar transactions with their own customers. IT usage as a marketing tool would be a great strategy in years to come. Buyer's Involvement in Current Marketing Process In the tariff regime, the buyer did not have any perceptible degree of involvement either in choosing the cover or its price. The two elements came

bundled together. Now with pricing freed, an insured understands the negotiating process better, and on his terms. A buyer, therefore, is more involved and does `reverse marketing'as a price maker himself, for a product that he was always routinely buying. The logic is simple. An insured was never sold an insurance cover, in the past, based on any differentiated value embedded in the transaction. Insurers were not innovative enough to explain or differentiate their value delivery mechanism, in terms of risk mitigation efforts and hassle-free claims settlement services. Inevitably, therefore, price has become the only negotiating issue now. It is for an insurer to rework his marketing strategy, based on the quality of the value delivery mechanism to make an insured pay an extra amount, for the perceived value. If an insurer is unable to project this image, and get it accepted by the customer, penetration and defensive pricing approaches are the only choices available to him. One must be aware that any marketing strategy, ultimately is to be based on what a customer really perceives, as real value addition to the product or service he is buying. A few customers, of course, want only cheap prices. Yet a few others may prefer assured hassle-free claim settlements. Yet a few others may need a free technical consultation for structuring a cost-effective insurance program. Other customers may value loyalty and relationship of the intermediary more and are led by them. There are customers, who may base a purchase on brand loyalty. A lot of customers may buy because they have close links with a particular distribution channel network like the agent.

It is difficult to say that a particular marketing strategy is the only right one for all types of customers. Entering a new market in personal insurance segment would require a level of trust and confidence that only a known agent to a customer can assure. Life insurance buying typifies the role of the individual agent in assuring and inspiring trust and confidence of his customers in him. Referrals are another marketing strategy to buyers with similar needs. Customer Orientation as Marketing Strategy Customer orientation is an important organizational cultural factor in the implementation of all marketing strategies. The entire organization must be imbued with eagerness, firstly, to attract customers for the enterprise and then, secondly, to be committed to provide them with the best quality service, in whatever function the staff may be engaged in. Ultimately, even the support staff that works must be made aware of how their work reflects on the customers and their convenience by assisting the frontline staff. One of the questions the management and the staff of an enterprise should answer is about the kinds of problems that most customers experience with them, once they have bought their product and its service. How are they dealing with such customer issues and are they serious in finding solutions to them? Any fragmentation in the spirit of customer orientation is easily seen through by the insured. Insurers' human resource policies, by and large, currently lack such customer orientation. Revitalizing such proactive orientation in itself should be a part of corporate marketing strategy.

Customers are now not owned by the entire enterprise but only by a few selected departments that directly interact with them. Issuance of newsletters, holding discussions with customers on risk handling, getting updates on customer business developments, building intimacy with the officials of the customer need to be a part of building customer relationships. Inviting important customers to address the insurer's staff is another innovation. It is much easier to sell more to current customers, as one knows the unfulfilled customer needs; and such sales may also be non-competitive and are less expensive than soliciting a new customer. Distribution Channel Strategies Marketing strategies must focus not only on the selected business segment to push sales but also on the selection of the right distribution channel to do so. It is the quality of the distribution channel employed that also adds value to the product. The channel should primarily become a medium to solve an insured's insurance problems. Direct marketing, `affinity marketing' with employer groupsas resource points, agency development, leveraging bancassurance as a distribution medium, brokers as insured's representatives, offer of risk management and loss control as well as disaster planning assistance tools, offering claim advisory services to quicken claim settlements, creating alternative sources for dispute resolution mechanisms could all form an integral part of every marketing strategy.

It is evident that the present agency force of insurers is demotivated and is lacking in technical and selling skills. They are compelled to function largely on their own steam, without any guidance from any insurer's functionary. The past mindset of contempt for agents has come to haunt insurers; and an insurer's poor performance is due to his over-dependence on the corporate segment for volumes and in his poor involvement in building his agency force. In 2006-07 the agency outgo for the market dropped by over Rs. 100 cr, despite the gross direct premium having grown by over Rs. 5,000 cr. How do insurers propose to respond to this benign neglect of the agency force?

Conclusion Insurers need to break out of the entrapment of the price bubble in which they have now closeted themselves. Customers have the right to ask why they should pay higher premiums than what their competitors are prepared to charge for the same product. Price is a visible manifestation of value to a customer. It is, however, for insurers to explain the real benefits of insurancerisk avoidance, its handling and minimization, a quick payout of a claim, when needed, with a guaranteed assurance to do so, and backed by a gold standard

of financial security. These are the real standards of value that an insured should look at, as invisible value elements that should be of greater concern to him, and not mere price alone. Financial net worth, infrastructure, empowerment of staff to settle customer issues locally, acceptable methods of dispute resolutions, market reputation for fairness, speed and equity in settlement of claims, superior risk management advices, market dominance in a particular area of specialization of importance to a customer, making it easy for a customer to do business with the particular insurer, quality of reinsurance support, educating customers on coverage and their rights are a few intangible differences among insurers that a customer cannot easily spot. Insurers thus have a wide field to work upon. Building marketing strategies around such areas of importance, as above, should form an integral part of an insurer's business activity and marketing strategies. Insurers either do not possess these advantages or are unaware of their superior internal strengths that are lying dormant and hence unexploited. Insurers should do more to change their corporate personalities and reintroduce themselves to their customers with what they can deliver, in addition to premium price. Until then, all talk on marketing strategies are either hits or misses, with no discernible difference to the customers, who are in the driving seat, dictating terms. There is as yet light at the end of the tunnel for insurers. But the journey time-wise seems long, though the distance is short. Hence they must start

walking briskly towards the end of the tunnel. Status quo is just not a solution in the achievement of excellence in their corporate behavior towards their customers. Lack of focus on what they want is driving them to frustration in deciding the road to travel. The market has moved on beyond the management capabilities of the current set of insurers. They should reinvent their business philosophies and function with more determined purposes. Competition and regulation are the main operational challenges. In the same vein, the attitudes of the customers that treat all insurance covers as commodities is another factor. How does one add customer perceived economic value to the product, the service, the business process and the corporate behavior, different from the other insurers is the biggest challenge of all for any insurer? Here, being innovative with the product, the service, the process, building a brand name, creation of new markets, reducing costs are other challenges. Winning the customers' minds is the biggest challenge of all. Cash-rich but time-poor customers' numbers are growing. Putting account executives at customers' offices is a big challenge. The above analysis provides a snapshot of unique opportunities available to all insurers that are driven by dreams to win the battles of excellence. Unfortunately, instead of the customer that should be the goal of all attention, it is now the competitor that is focused upon almost singly. That must change.

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