Porter’s 5 forces

Buyer/customer power

 Education regarding actual structure

 Easy access to grievances redressal
 Price sensitive buyers—difficult to increase the average premium collection—actual data from
word file
 Huge no of products available more or less similar—difficult to convince consumers to buy our
product—no particular USP----to sell products..have to negotiate a good deal with buyers. Need
large corporate clients
 No renewal—huge losses to companies---minimal surrender charger to b levied

Supplier power
Customer power

The customer power in case of life insurance industry is very high for the following reasons

 Little USP with respect to products offered

With 23 private & 1 public life insurance player in the market, there is a huge
number of products available for the consumer to choose from. On an average 7-8
products are introduced by every player in 1 year. These cover ULIP, traditional ,
pension plans, child plans, health plans, etc. With strict IRDA regulations coming into
effect from 1st September 2010, there is little differentiation between the products.
Hence to convince the consumers to buy BSLI products and not of any other bigger
player like IPru, LIC, SBI Life, special features such as riders need to be offered to
consumers which the consumers can easily negotiate with, increasing their
bargaining power. Riders offered by BSLI in the individual segment have been the
lowest among the top 7 life insurance players.

 Price sensitivity
The profitability of insurance companies depends on the average size of the
premium or the ticket size collected. However consumers are very price sensitive
when buying insurance products and stick to products having lower premiums,
increasing the commission charges & affecting profitability of firms. With a ticket
size of 12698 Rs BSLI has had the worst ticket size in the top 8 bracket.

 Integrated, large buyers

The large buyers like institutions have higher premium payments. Hence these are
key customers to the companies. Due to their high bargaining power, special
packages & services such as easier terms & conditions for payments of renewal
premium, etc. need to be offered to these customers.

 Decrease in surrender charges

Earlier if the consumer failed to pay renewal premium on time, his policy would
lapse & there would be high surrender charges levied. Now with surrender charges
capped at maximum of 20% for long term products, there is expected to be an
increase in the switching of consumers from 1 product/ firm to another again
affecting the firms adversely.
 Supplier’s power
 Supply of capital
With the Indian partner of BSLI and most of life insurance players being top
conglomerates in India, the flow of capital from” suppliers” i.e Indian & foreign
partners is not a big issue. In addition BSLI has changed its focus from growth in
2007-08 to profitability, limiting its capital expenditure plans

 Supply of human capital

With scarce resources available for critical areas like underwriting (30% is manual
for BSLI)&actuaries and the fact that BSLI and in life insurance industry general is not
known for its compensation packages, makes retaining key personnel difficult.

 Third party distributors (TPD) & agents

With the need to limit the operating expenses, companies need to put a cap on
commission charges. BSLI has the fifth lowest commission/premium ratio among
private players at 9.21%. In face of declining commissions , there is a threat of
decreasing top line of players like BSLI who donot have a bank network to sell their
products
Potential Entrants:
In the Life Insurance sector there are at present 23 players in the country. They are a mix of
public sector (LIC and SBI Life) and Private sector companies who are involved in the business of
Life Insurance. The Government of India has capped the FDI in Life insurance sector to 26%.
Also they give out licenses on a limited scale. Currently most of the life-insurance companies in
India are making losses since inception. Life Insurance business is such that for new entrants
the barriers are very high. You need to have a good distribution network for promoting your life
products. Also the business is such that of the first year premiums (which form a part of the top
line revenue) a good portion goes to the agents (about 25-30%) as commission. This brings
down the profits drastically. Also since the sector is closely regulated by the IRDA, the
companies have to keep bringing in fresh capital each year to make good the losses incurred in
the policy holder’s account and due to the existing regulation of maintaining a high reserve for
all the future liabilities that might arise out of the policies lives covered. It is thus a very high
capital intensive business to start with. This makes the entry barriers very high.

EXIT Barrier

Low High
Low, Stable Low, Risky
Returns Returns
Low

ENTRY Barrier High, Stable High, Risky

Returns returns
Life Insurance
Sector.
High

Industry Competition:
There is a lot of intense competition in this industry. Although there are only 23 companies in
this sector as of today, the competition among them is very tough. LIC being the oldest Life
insurance company in India has a very big portfolio and a very huge customer base (over 30,000
crores of assets under management). The life insurance business competitiveness can be based
on 3 major aspects:

Technology: Automation, Outsourcing, Innovation, Internet

Birla Sun life lags behind in automation and outsourcing areas. Some of its competitors
have been able to reap rich benefits of automation. ICICI Prudential has used technology very
effectively to increase its premiums. Looking at the leaders in the sector BSLI can look to
outsourcing some of its functions like Agent training, CRM, Fund accounting and NAV
calculations, Data warehousing and IT infrastructure management to reduce its cost.

Distribution: Agency, Branches, Innovativeness, Banc-assurance, Bargaining Power.

BSLI has maximum agency centers in central India as compared to its rivals excluding the PSU
companies. BSLI is yet to realize full potential of the Banc-assurance channel. Major players
have fully utilized their bank branching channels and this has reduced their expenses greatly
whereas smaller players like BSLI have to pay out higher commissions to agents instead of
establishing the bank-branch network.

Products: Portfolio size, Time of inception, Selling Strategy, Average duration & Portfolio mix.
BSLI ranks in the middle range when it comes to introducing new products in the market. LIC
being the oldest company in the sector, it has the largest assets under management and the
largest portfolio size (about 55-60% of the market share). BSLI is less focused on the ULIP
products unlike Reliance which has about 96% of its revenues coming from ULIP products. ULIPs
are generally favored because they reduce the amount of reserves that the company has to
maintain over time and can lead to higher profitability.

The top five players have massive reach due to either having their own bank branch network or
having a huge branch network of their own.

Substitutes:
The Life insurance business is such that it does not have any substitute product. The number of
products offered by the life insurance companies is very high but the basic product of providing
life insurance remains the same, only with different innovative ideas about how to group it with
some other product features like ULIPs (which form the main part of the revenue earned by
them). But many people view Insurance as just another means of saving taxes or just another
investment avenue. For such cases there a variety of substitute products like mutual funds and
tax saving bonds etc which can compete well with life insurance products. Also ULIPs which
form a majority of the revenue share today are under scrutiny by the IRDA and SEBI. Due to
changing regulations they may face stiff competition from the Mutual fund industry. Mutual
fund management charges are much lesser than the fund management charges of the ULIPs.