Life Insurance Marketing in India (B) The Changing Distribution Norms
"The key task is to grow the distribution network and tap the huge potential in an underinsured, under serviced market." - Saugata Gupta, Chief (Marketing), ICICI Prudential Life Insurance, in 2001.
In early 2002, India's state owned insurer, Life Insurance Corporation (LIC), announced tieups with Corporation Bank, Oriental Bank of Commerce, Bank of Punjab and Nedungadi Bank for sale of its products through their branches. The aim of the tie-ups was to diversify LIC's distribution channels and increase product penetration. Industry observers were not surprised by this move. They felt that LIC had no option but to explore new channels of distribution to maintain its position as the market leader. The liberalization of the Indian insurance industry in 2000 led to the entry of private insurance companies with MNC as their partners. Reaching anywhere near LIC's vast network, built over decades, was going to be extremely tough for the new players. Consequently, private insurers decided to rely on aggressive advertising and promotional measures and use hitherto untried distribution channels. Private insurers began exploring the various distribution channels available instead of concentrating on individual agents, a channel LIC had been using for decades. To minimize cost, these companies tied up with established financial services companies and used their distribution network instead of setting up their own network. According to insurance industry observers, distribution was expected to emerge as one of the key factors for the success of private insurers in India. They also felt that insurance intermediaries and new distribution channels would become the strongest drivers of growth for the insurance sector and that multi-channel distribution would become the norm. With even LIC adapting these new channels of distribution, the distribution of insurance products/services seemed all set to undergo a radical overhaul.
The life insurance industry in India dates back to 1818, when the Oriental Life Insurance Company set up office in Kolkata. In 1823, the Bombay Life Assurance Company started operations in Mumbai, India.
the government felt it necessary to reform the industry. 100 divisional offices. LIC's former Executive Director. the Indian government set up the Malhotra Committee to suggest reforms in the industry. per capita insurance premium was only $8 in India while it was $4.28. improvement in infrastructure. $887 in Singapore. recommended opening of the insurance sector to private players.
In 1972. India's share was only 0.031. with a capital of Rs 50 million. increase in the savings rate and substantial capital formation resulted in tremendous growth in the life insurance industry. Insurance in India. The life insurance business was concentrated in urban areas and was confined to the higher strata of society. LIC expanded its network all over the country and became one of the largest corporations in India. particularly to the lower segments of society. Later. changes in the economy in the 1980s. LIC had seven zonal offices.The 'Indian Life Assurance Companies Act' was passed in 1912. such as growth in the rate of industrialization. though it had the second highest population in the world. improving service standards. Over the years. the management of these companies was taken over by the Government of India. $1000 in Republic of Korea. In other words. LIC launched several group insurance and social security schemes to enhance its reach in the rural areas. In developed countries. By the mid-1950s. commented in his book. Growth in Indian insurance industry was minimal in the 1960s and 1970s because of low savings and the low level of literacy. which was well below the 51% required by the Insurance Bill for controlling the management of the company. In the world market. They felt that the entry of private players would lead to job cuts by the nationalized players to make them more competitive. In addition. There were a host of other arguments against these reforms. 154 Indian insurers. 1928. this was followed by the Indian Insurance Companies Act. and extending insurance cover to larger sections of the population. per capita insurance premium1 was much higher than in India. "Insurance coverage has been extended only to about 25% of the insurable population in 40 years". the government took over management control of 106 private general insurance companies and formed the General Insurance Corporation (GIC). The committee. 2. Though one of LIC's basic objectives was to 'provide insurance cover to all Indians. As a result. the capital markets. One of the main objectives of forming LIC was to make insurance cover available to a large number of people.800 in Japan. In the early 1990s. 16 foreign insurers and 75 provident societies were operating in the country. $823 in Hong Kong and $144 in Malaysia. LIC was formed in September 1956 through the LIC Act 1956. These acts allowed the government to collect data regarding life and non-life businesses conducted by both Indian and foreign insurance companies. the 1928 act was amended and a new act. Over the years. which submitted its report in 1994. However.3%. the insurance industry lacked sufficient funding and infrastructure. R N Jha. provide better coverage to the citizens and to increase the flow of long-term financial resources to finance the growth of infrastructure. the 'Insurance Act' was passed in 1938. Various labor unions and political parties in the country opposed the committee's suggestions. According to reports.' insurance penetration in India remained very low. In 1993. In 1999. only 65 million people were covered by insurance. Japan's
. the insurance market in India was largely untapped.048 branch offices and army of agents totaling 6. In the same year (1999). In 1956. in terms of gross insurance premium. the government decided to restrict foreign stake in insurance companies to only 26%.
A majority of these were collaborations between an Indian company and a leading MNC insurance/financial services company (Refer Table I).3% and Canada's – 1. experimented with new distribution channels.8 million agents all over the country. in addition to their salary. According to industry observers. Agents generally acted like brokers. a fierce battle commenced in the Indian insurance industry for garnering market share. By 2002.
Distribution Initiatives of the New Players
Post-liberalization. they cared more for their commissions than the needs of the customer. South Africa's 2. right from
. It depended entirely on individual agents. to make their presence felt and expand their reach. while the ratio of insurance premium to the Gross Domestic Product (GDP)2 was 9% in UK and Japan.9% in India. Prior to liberalization of the Indian insurance industry. Prior to liberalization. It was reported that after only a few years of recruitment of agents. one of the main reasons for the low insurance penetration was the poor distribution and marketing strategies adopted by LIC. due to its monopoly status. which it had trained over the years to distribute its products. Despite this. Consequently. no minimum qualification was laid down for people who wanted to become insurance agents. LIC's bid to implement strict incentive schemes and 'career agent' type of distribution failed due to the powerful Union of Development Officers. with the entry of new players. As a result. New insurance companies used all available channels of distribution. the fact remained that more than 75% of the Indian insurable population was untapped. it was only 1. with 0. These officers employed and trained a number of agents. Attracted by the huge. wherein technical expertise and service excellence would be the key success factors. they did not make the effort to educate customers about the insurance products being offered. LIC employed a large number of marketing people as 'Development Officers'. untapped insurance market in India. And in 2001. the attrition rate among the agents was very high. LIC ended up paying bonuses and commissions twice for every new policy and subsequent renewal of premiums – to both agents and Development Officers. the insurance market changed dramatically. Analysts commented that the private insurers seemed all set to make the industry market-driven.7%. LIC had an enviable reach. LIC made no efforts to use other distribution channels (Refer Exhibit I for various distribution channels for selling life insurance).share was 31%. many private players entered the market after the Insurance Bill was passed in late 2000. Development Officers received bonuses from the business generated by their agents. The private companies. However. largely because LIC selected the wrong kind of people in the first place. Development Officers earned huge amounts as commissions. LIC seemed to have had no strategically devised distribution strategies in place. the European Union's 25%. However. LIC's agents were not well qualified for their work. To distribute insurance products. and 5% in the US.
. According to reports. it also helped banks increase their Return on Assets (ROA – annual earnings divided by total assets). Bajaj Auto network and other direct marketing initiatives. and SBI Life insurance erage the branch network of their parent companies.. CEO.
According to Anuroop Singh. insufficient product promotions. and the partnership was expected to leverage the bank's 60 branches across the country. bancassurance contributed to enhanced ROA through fee income.
ut to the bank's existing customers would be very easy for the insurance companies as the banks already had a well-established relationship with their customers. HDFC. it not only helped insurance companies increase market penetration and premium turnover. Companies such as HDFC Standard Life.
BI had a network of over 9. the new distribution channels would not be able to completely replace individual agents. lack of branch personnel's involvement. limited database expertise of the bank and inadequate incentives to the bank personnel involved in sales of insurance products. it signed a Memorandum of Understanding (MOU) with Standard Chartered Bank for an exclusive bancassurance distribution agreement. qualified personnel and an organized tracking system for reporting on agents' time and the results of bank referrals. 21 branches of SBI were distributing SBI-Cardiff's group policies. most of the players believed that individual agents would continue to play a major role in the Indian insurance industry. complete integration of insurance and bank products and services. it was also pointed out that the partnership between insurers and banks could run into problems. lack of sales culture within the bank. Many analysts believed that bancassurance would play a very important role in India because banks were familiar with the target customers' needs. He said. Max New York Life. The most common problems that partners could face were inefficient manpower management. which included agents. (Refer Table III for various bancassurance agreements).000 branches. Standard Chartered was to act as the corporate agent for the company." Max New York worked towards making the quality of its agents its main
.individual agents and corporate agents to bancassurance. In late 2001. Bancassurance soon emerged as one of the most lucrative insurance distribution channels.
According to analysts. good quality administration. This was because. SBI stood to gain a lot by utilizing the bancassurance channel. Agents will be the primary channel of distribution in India and so we have invested substantially in training our life insurance agent advisers here. Despite the growing thrust on bancassurance.
Distribution Initiatives of the New Players Contd. ICICI Prudential Life.
Standard Chartered Finance (a subsidiary of Standard Chartered Bank) was also expected to ianz Bajaj's products. However. corporate agents and strategic alliances with banks. It was reported that by the end of 2001. "Over 90% of the life insurance schemes the world over are sold through individual agents. for distributing their products. had a strong service delivery mechanism. Allianz Bajaj Life Insurance (Allianz Bajaj) planned to build a multi-channel distribution network. failure in integrating marketing plans of both bank and insurance company. ICICI Bank and SBI respectively. even with a constant asset base.
It had already tied up with HDFC and some other banks to distribute its products. LIC ran an advertisement campaign that featured one of its most successful agents to highlight its belief in the individual agent system. career seminars and final interview. HDFC Standard Life tied up with corporate agents all over country.direct general insurance broker. Meanwhile. and insurance consultant (Refer Exhibit III). direct life insurance broker.
What Lies AheadAfter the decision to allow brokerage firms was announced." The company also made training an ongoing process. To increase its coverage in rural areas. HDFC Standard Life held talks with NGOs that were involved with HDFC's housing schemes in rural areas. IRDA planned to finalize regulations by September 2002 and issue licenses to four categories of brokers . The selection process comprised four stages – screening. The company therefore invested 20 manmonths in developing training programs for consultants. reinsurance broker. many
Indian and foreign firms expressed their interest in entering the Indian insurance market. HDFC Standard Life decided to rely on individual consultants and corporate agents for distributing its products. marketing.
The training covered 152-hours. individual consultants were expected to play a key role in the sales process. Commenting on the need for training agents. The program involved modules on understanding the consumer psyche and the financial market. Mr. these VEWs were from social improvement projects promoted by the Aditya Birla Group of companies. "Internal employees are all opinion shapers and indirect brand-builders and brand promise needs to be replicated down the chain at every customer touch point. Birla Sun Life announced the appointment of Village Extension Workers (VEWs) who would help create awareness about insurance in villages. psychometric tests. Agents were trained in the various products the company offered and the insurance needs of the customers so that they were in a position to offer them sound advise. composite broker.differentiating factor. Max New York.
Many other major private insurers were laying emphasis on the recruitment and development of quality agents to enhance their brand image in the market and attract customers. said. and developing selling skills and the right attitude. Foreign brokerage firms were also allowed. The company also trained its consultants through institutions approved by IRDA. Debashis Sarkar. the Government of India opened up yet another avenue for distributing insurance products in August 2002: brokers (Refer Exhibit II). senior vice president. The company adopted the career agent system instead of LIC's general agent system.
. Max New York paid attention to the agent selection process so as to recruit the best talent available. instead of the mandatory 100 hours stipulated by IRDA. According to company sources. In addition. but only through a tie-up with an Indian partner and a 26% cap on equity. Generally. Each VEW was put in charge of a cluster of 10-15 villages. and ensured that the training program addressed the needs of agents through development of skills and knowledge through a program spreading over 500 hours over two years.
2002 Exhibit III: Categories of Brokers
.HSBC Bank announced its intention to set up an insurance brokerage firm in India. in the not-too-distant future. in 2001. The Tatas also planned to enter the insurance brokerage business. around 12% of the insurance products were sold through the Internet. The above belief was strengthened by the emergence of another new channel – the Internet. Private insurers hoped to effectively leverage the strengths of the new distribution channels. According to analysts. According to reports. the new players seemed to have a good chance. distribution and technical superiority were expected to be the decisive factors for success in the Indian insurance sector in the future. and this figure was expected to grow as Internet penetration increased. ATMs. Internet kiosks and supermarkets would be selling insurance. even departmental stores. As marketing. private insurers were trying to leverage every possible medium. Because of increasing competition in a crowded market. focusing on both corporate and retail clients (reportedly through a strategic partnership with the Hong Kong based Jardine Matheson group).
Exhibit I: Distribution Channels in Life Insurance Exhibit II: Insurance Regulatory and Development Authority (Insurance Brokers and Insurance Consultants) Regulations. With the growing popularity of new distribution channels in the Indian insurance market.