INSURANCE

Meaning of Insurance• Insurance is a policy from a large financial

institution that offers a person, company, or other entity ,reimbursement or financial protection against possible future losses or damages.

• Insurance is bought in order to hedge the possible risks of the future which may or may not take place. This is a mode of financially insuring that if such a incident happens then the loss does not affect the present well-being of the person or the property insured. Thus, through insurance, a person buys security and protection.

Meaning of Insurance contd…

• The risks of the large group of persons are pooled and the actual loss suffered is compensated from the pooled funds, is the modes operandi of insurance.

• In the contract of insurance, the insurer (insurance company) agrees/undertakes, in consideration of a sum of money (Premium), to make good the loss suffered by the insured against a specified risk such as fire and any other similar contingency or compensate the insured or benefactors on the happening of a specified event such as accident or death.

Meaning of Insurance contd…• It is a contract

• Protects against financial losses caused by

unforeseen events

• Insurance company provides a certain

amount of money

• In return the insured makes periodic

payments

Insurance

• Though loss of life or injuries incurred cannot be measured in financial terms, insurance attempts to quantify such losses financially.

• Insurance can be defined as the process of reimbursing or protecting a person from contingent risk of losses through financial means, in return for relatively small, regular payments to the insuring body or insurance company.

• Insurance can range from life to medical to general

Life Insurance

Medical Insurance

General Insurance

Insurance - Concepts

The Normal Roles

INSURANCE COMPANY

AGENTS BROKERS

CONSUMERS

Factors affecting Life Risk

• Age

• Physical Condition

• Personal History

• Family History

• Occupation

• Habits

Types of products

• Term Insurance

• Permanent Insurance

• All other types available are combinations

of these two generic products

Term Insurance

• Provides insurance for a specified period

• low cost

• if life assured dies, death benefit paid to the beneficiary (in lumpsum or at regular intervals)

• if life assured survives till end of the term, protection ceases

• death benefits can be level or decreasing

Term Insurance• Level - the death benefit remains same at

all points during the term

• Decreasing - Death benefit systematically

decreases with time

Permanent Insurance

• Provides protection for ones entire life time or upto a specific age

• More costly than Term Insurance

• Combines Savings with Insurance - has cash value

• Can have either level or increasing death benefits

Permanent Insurance Types

• Whole Life - provides a guaranteed level death benefit for a fixed premium

• Flexible Whole Life - it may have~ flexible death benefit(Variable Life)~ flexible premiums

Some Other Variants

• Endowment Assurance - a combination of term and whole life insurance which involves:Payment Of Sum Assured

• upon death during a fixed term

• at end of the term if Insured survives the term

Variable Vs. Universal Life• Variable

~ Fixed premium

~ Separate reserves held in separate account and invested~ Death Benefit And Cash Values vary according to actual investment experience~ Option of investing in different funds lies with policy owner~ Death Benefit guaranteed irrespective of Investment results~ Investment risk passed on to Policy Holders

• Universal

# Unbundled Contract - separates protection and savings # Flexible premium# Portion of premium used to purchase Term Assurance # Balance less expenses goes to investment# Policy owner allotted “Units” at “Sell” rate of company

Universal Variable Life

• Amalgam of Variable And Universal life features

• Similar to Universal Life except that Investment vehicle can be chosen by Insured

• No minimum guaranteed rates

• Money can be moved from one Fund to another - “Switching”

Life Insurance - Process Flow

Process flow : Life Insurance

• Main Departments involved– Intermediaries– New Business– Accounts– Policy Servicing– Claims

NEW BUSINESS PROCESS

INSURANCE INTERMEDIARY MEETSCLIENT/LIFE ASSURED- Assesses the need of the client- explains various products available- gets the necessary proposal forms filled in

and signed- gets medical examination done depending

upon requirements

LIFE INSURANCE OFFICE- assesses risks that it is exposed to

(underwrites )- calculates premium- fianlises proposal which results into a

policy (contract)- pays commission to the intermediary- sends out evidence of contract

(document) to the life assured

POLICY SERVICING PROCESS

Note: The servicing of a policy would include – change in address, change in beneficiary,assignment (transfer of rights), loan on the policy etc.

LIFE INSURANCE OFFICE- receives premium for

life assured- pays commission to

intermediary- pays a share of profits

to life assured (if he hasopted for it at theoutset)

INTERMEDIARY- receives commission- informs the life assured

about procedures forservicing aspects as andwhen required

LIFE ASSURED- pays premiums as

and when they falldue

- informs life office/intermediary aboutany alterations asand when required

C L A IM P R O C E S S IN G :

N o te : T h e v a rio u s ty p e s o f c la im s a re :- M a tu rity C la im :T h is is the am oun t o f face va lue ava ilab le to th e life assu red a t

the e nd o f the te rm- D e a th C la im : T h is is the am oun t a va ilab le to th e b ene fic ia ry up o n th e de a th o f the

life assu red .- S u rre n d e r : T h is is the am oun t a va ilab le to th e o w ne r o f a life in su rance po lic y

upon vo lu n ta ry te rm ina tion o f th e p o lic y be fo re it becom es pa ya b le o n m a tu rity o r ondea th o f the life in su red .

- A n tic ip a te d P ay m e n t : T h is is a p rede fin ed ins ta lm en t based on a p rop o rtion o f the face am oun t du ring the p rem ium pa ym en t pe rio d .

L IF E A S S U R E D- g ive s nece ssa ry p ap ers

L IF E IN S U R A N C E O F F IC E- ca lcu la te s c la im a m o u nt a s p e r

ru les- p ays c la im to life a ssu red o r

b enefic ia ry

Advantages of InsuranceThe Insurance has become an integral part of

business and human life. The following are the advantages of insurance:

Providing Security:

Spreading Risk:

Source for Collecting Funds:

Encourage Savings:

History• The origin of insurance is very old .

• The time when we were not even born.

• man has sought some sort of protection from the unpredictable calamities of the nature.

• The basic urge in man to secure himself against any form of risk and uncertainty led to the origin of Insurance.

• The insurance came to India from UK. with the establishment of the Oriental Life insurance Corporation in 1818.

• The Indian life insurance company act 1912 was the first statutory body that started to regulate the life insurance business in India.

• By 1956 about 154 Indian, 16 foreign and 75 provident firms were been established in India.

• Then the central government took over these

companies and as a result the LIC was formed

• Since then LIC has worked towards spreading life insurance and building a wide network across the length and the breath of the country.

• After the liberalization the entrance of foreign players has added to the competition in the market.

• The Insurance sector in India governed by Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and General Insurance Business (Nationalisation) Act, 1972, Insurance Regulatory and Development Authority (IRDA) Act, 1999 and other related Acts.

• Life Insurance Corporation of India (LIC)

• Life Insurance Corporation of India (LIC) was formed in September, 1956 by an Act of Parliament, viz., Life Insurance Corporation Act, 1956, with capital contribution from the Government of India.

• The then Finance Minister, Shri C.D. Deshmukh, while piloting the bill, outlined the objectives of LIC which are:

To conduct the business with the utmost economy, in a spirit of trusteeship;

To charge premium no higher than warranted by strict actuarial considerations; to invest the funds for obtaining maximum yield for the policy holders consistent with safety of the capital;

To render prompt and efficient service to policy holders, thereby making insurance widely popular.

• Since nationalization, LIC has built up a vast network of 2,048 branches, 100 divisions and 7 zonal offices spread over the country.

• The Life Insurance Corporation of India also transacts business abroad and has offices in Fiji, Mauritius and United Kingdom.

• LIC is associated with joint ventures abroad in the field of insurance, namely, Ken-India Assurance Company Limited, Nairobi; United Oriental Assurance Company Limited, Kuala Lumpur and Life Insurance Corporation (International) E.C. Bahrain.

• The Corporation has registered a joint venture company in 26th December, 2000 in Kathmandu, Nepal by the name of Life Insurance Corporation (Nepal) Limited in collaboration with Vishal Group Limited, a local industrial Group. An off-shore company L.I.C. (Mauritius) Off-shore Limited has also been set up in 2001 to tap the African insurance market.

• The General insurance business in India, on the other hand, can trace its roots to the Triton Insurance Company Ltd., the first general insurance company established in the year 1850 in Calcutta by the British.

• In 1957 General Insurance Council, a wing of the Insurance Association of India, frames a code of conduct for ensuring fair conduct and sound business practice.

• In 1972 The General Insurance Business (Nationalization) Act.1972 nationalized the general insurance business in India with effect from 1st January 1973.

It was after this that 107 insurers amalgamated and grouped into four companies :

• The National Insurance Company Ltd.

• The New India Assurance Company Ltd.,

• The Oriental Insurance Company Ltd. and

• The United India Insurance Company Ltd.

• GIC incorporated as a company

• General Insurance Corporation (GIC) which was the holding company of the four public sector general insurance companies has since been de linked from the later and has been approved as the "Indian Reinsurer" since 3rd November 2000.

• The share capital of GIC and that of the four companies are held by the Government of India. All the five entities are Government companies registered under the Companies Act.

Reforms in insurance sector• Insurance sector has been opened up for

competition from Indian private insurance companies with the enactment of Insurance Regulatory and Development Authority Act, 1999 (IRDA Act).

• As per the provisions of IRDA Act, 1999, Insurance Regulatory and Development Authority (IRDA) was established on 19th April 2000 to protect the interests of holder of insurance policy and to regulate, promote and ensure orderly growth of the insurance industry.

• IRDA Act 1999 paved the way for the entry of private players into the insurance market which was hitherto the exclusive privilege of public sector insurance companies/ corporations.

• Under the new dispensation Indian insurance companies in private sector were permitted to operate in India with the following conditions:

• Company is formed and registered under the Companies Act, 1956;

• The aggregate holdings of equity shares by a foreign company, either by itself or through its subsidiary companies or its nominees, do not exceed 26%, paid up equity capital of such Indian insurance company;

• The company's sole purpose is to carry on life insurance business or general insurance business or reinsurance business.

• The minimum paid up equity capital for life or general insurance business is Rs.100 crores.

• The minimum paid up equity capital for carrying on reinsurance business has been prescribed as Rs.200 crores.

• The Authority has notified 27 Regulations on various issues which include Registration of Insurers, Regulation on insurance agents, Solvency Margin, Re-insurance, Obligation of Insurers to Rural and Social sector, Investment and Accounting Procedure, Protection of policy holders' interest etc.

• Applications were invited by the Authority with effect from 15th August, 2000 for issue of the Certificate of Registration to both life and non-life insurers. The Authority has its Head Quarter at Hyderabad.

INSURANCE MARKET IN INDIA• 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.

• Innovative products and aggressive distribution have become the say of the day.

Distribution scenario in the Indian market• In today's Indian insurance market, the challenge

to insurers and intermediaries is two-pronged:

• Building faith about the company in the mind of the client

• Intermediaries being able to build personal credibility with the clients

• Traditionally tied agents have been the primary channels for insurance distribution in the Indian market; the public sector insurance companies have their branches in almost all parts of the country and have attracted local people to become their agents. 

• The agents are from various segments in society and collectively cover the entire spectrum of society.

• A person who has lived in the locality for many years sells the products of the insurance company with a local branch nearby. 

• This ensures the last mile touch point being closer to the customer.

• Of course, the profile of the people who acted as agents suggests they may not have been sufficiently knowledgeable about the different products offered, and may not have sold the best possible product to the client. Nonetheless, the customer trusted the agent and company.

• This arrangement worked adequately in the absence of competition.

• In today's scenario agents continue as the prime channel for insurance distribution in India, as is the case in most markets, supported by call centers to a small extent.

• Almost all the new players follow this model primarily because the regulations for other channels are yet to be put in place.

• However there is great excitement in the industry over the impending broker regulations, and companies are planning possible channels in their enthusiasm to increase volumes.

• The belief that all these channels will grow and seamlessly integrate to bring in business seems a fallacy.

• What has emerged is a much more difficult and evolving market scene with existing players, more new players coming in, and global marketing practices and ideas being tested.

• But none of this has changed the fundamental character of the market, which we believe will take more time than expected.

• Both the public and new private sector companies are fighting their own battles from the perspective of customer perception management:

DISTRIBUTION CHANNELS• Till date 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. It therefore makes sense to look at well balanced, alternative channels of distribution.

• LIC has already well established and have an extensive distribution channel and presence.

What should the companies look at• Basically companies have to take a look at the

intermediaries they are using, whether it is optimal to use them, and what are the alternatives?

• The new companies have attempted appealing only to the middle, upper middle and elite classes in the major cities.

• Contrasted with Public sector insurance companies, with their offices across the country, the new companies have miles to go before they reach anywhere.

• They must overcome the mindset of the customer that life insurance is Life Insurance Corporation of India (LIC) and general insurance is General Insurance Corporation of India (GIC) if they hope to grow in the market.

• Meanwhile, the public sector companies are going to great lengths to revamp their image to look and feel more contemporary

Distribution scenario in the Indian marketPublic sector companies Private sector companies

Identity is well established, but the perception of " poor service providers" is a stigma.

Have to build their identity in a market where the public does not distinguish them.

Products are not attractive and flexible

enough but expensive. Remove the perception that anything that looks good is expensive

To retain their creamy layer clientele who are the most likely to be wooed by the new companies

Work against the people's mindset that they are not here for the long term

Retain and attract good intermediaries. Attract intermediaries especially agents with the requisite qualifications and attributes who can market the company and the product.

Match the aura created by the new companies in the urban market.

Run the risk of tapping an already insured market for repeat insurance instead of tapping new virgin pockets in the market

• The strategy should be to use multiple banks according to their presence in different regions.

• Success would come by using bancassurance where it will be most effective - i.e., selling simple, cheap products to the masses at a low cost.

• This awareness is growing and is evident from the fact that nearly every insurance company has partnered with one or many banks to implement bancassurance.

Focus on multiple distribution channels• Though a multi-channel strategy is better suited for the

Indian market as well, it is important to keep in mind that this market is really a conglomeration of multiple markets.

• Each of the markets within this conglomeration requires a different approach.

• Apart from geographical spread the socio-cultural and economic segmentation of the market is very wide, exhibiting different traits and needs. 

• Let us look at the various insurance distribution channels and the challenges faced by them from these perspectives.

Agents• Today's insurance agent has to know which

product will appeal to the customer, and also know his competitor's products in the same space to be an effective salesman who can sell his company, the product, and himself to the customer.

• To the average customer, every new company is the same.

• Perceptions about the public sector companies are also cemented in his mind.

• Today's insurance agent has to know which product will appeal to the customer, and also know his competitor's products in the same space to be an effective salesman who can sell his company, the product, and himself to the customer.

• To the average customer, every new company is the same.

• Perceptions about the public sector companies are also cemented in his mind.

• The new companies are looking for educated, aware individuals with marketing flair, an elite group who can be attracted only with high remuneration and the lure of a fashionable job.

• all of this may not be possible in this business with its price pressures and the complexity of selling insurance.

• Unable to attract this segment, they have started easing recruitment conditions as against the stringent norms they had earlier, thereby diluting the process.

• While the public sector companies are able to attract agents, they continue to suffer from high attrition rates due to indiscriminate agent appointment. 

• The most successful of these companies' tied agents are hardly of the elite variety of salesman.

• They are still the neighborhood do gooders -- the postman, the schoolteacher, and the shopkeeper -- who know the people and are themselves known in the community.

• The challenge here is the lack of knowledge of the competitive market and the inability to do intelligent comparisons with the competitor's products.

• Educating and training these agents is a serious challenge for the insurance company.

• The relevance of this kind of agent continues even today as agents are sought or contacted by families by word of mouth.

• Insurance companies are need not to follow the path of FMCG's/credit card companies, believing that a suited and booted customer care consultant or financial consultant will necessarily appeal to the average Indian customer.

• Another social feature in the market is the considerable respect for age in Indian society and a belief that an older person knows better.

• A very young up-market agent who is a typical salesman may not appeal to a large segment of the middle class, which is looking for a solid trustworthy person from whom they can buy insurance.

• In this context it might be a rewarding exercise to recruit some older people (who have taken VRS2 from banks and other financial institutions) to sell some lines of products like pension plans, annuities etc.

• Gender of agents is another relevant feature in the rural context that makes a difference, especially for the female population. Women to whom the customers can relate --e.g., nurses, gram sevikas -- can target the female segment of the population more effectively.

• What is applicable for the rural women and children health programs and population control programs is equally applicable for insurance selling also.

• Max New York Life has adopted a version of this strategy by appointing gram sahayaks to sell and service the rural customers.

• With this kind of segmentation of intermediaries the challenge for the insurance company lies in training and educating these people to become effective sales persons.

• But this in no way diminishes the benefits of intermediary segmentation.

Brokers

• With the broker regulation under review and expected any time, this could be the next hope, especially for the urban market. 

• This will be a new experience for the insurance customer, accustomed to brokers in financial services, real estate, and travel and tourism.

• For historical reasons the image that 'broker' carries in the minds of the customer is not very favorable.  

• Thus the new breed of insurance brokers face the challenge of establishing credibility.

Brokers

• The positives are that brokers in the urban arena can attract the elite and the upper middle class customer. 

• Brokers represent the customer and will sell the products of more than one company.

• They seek to determine the best fit for the client and can effectively address the mind block faced by the public about the various companies.

• This is applicable in the case of life insurance for the high-end and corporate/group segment.   

Brokers

• In the non-life segment, broking is not entirely new, as reinsurance brokers were arranging exotic covers.

• For individual customers also, with a wide range of competitive products, the broker can get a good deal.

• The corporate broking companies will have to play a prominent role.

Brokers

• If NGOs based in rural areas can be attracted into the rural sector cooperatives arena, they stand a good chance of succeeding and can help the new players get a foothold in the rural market.

• These are the players with the potential to make the difference, as they have the trust of the people.

• We envisage scenarios like that in Bangladesh's micro lending growth and  the milk co-operatives in Gujarat selling insurance in addition to milk production and distribution.

• It would be a new dawn in Indian insurance distribution! With the right impetus the Indian rural insurance scenario could be one with high business volume and tremendous growth potential.

Brokers• ICICI Prudential Insurance and HDFC

Standard Life Insurance have already partnered with NGOs to sell some low cost insurance in rural areas.

• However, the challenge lies in establishing regulations that protect the customer and attract the right players into the brokerage market rather than creating another middlemen segment eroding the premium.

Bancassurance

• Banks in India are all pervasive, especially the public sector banks.

• Can they also become the foremost channel for distribution of insurance? 

• Perhaps in the future.

• The public sector banks, with their vast branch networks, are also plagued by a rigid unionized workforce and archaic systems, and lack vision of a broader service spectrum encompassing non-banking products.

• The newer banks are constrained by their lack of reach and meager branch strength. For banks to become a predominant channel for selling insurance will require a paradigm shift.

Bancassurance

• But the encouraging fact for insurance companies waiting for bancassurance to take off is that bank branches are here to stay, and customers do want them.

• A customer survey by Deloitte Consulting in the western developed markets found that for banking activities, customers place high importance on having convenient branches in their banking relationships.

• This is good news for the Indian banks with their many branches, and also makes a strong case for taking up bancassurance.

Bancassurance

• The major lines of business that can be sold through bancassurance successfully are term insurance, creditor insurance, and non-life products like Property, Motor and Personal accident, Homeowners comprehensive insurance etc.

• An example is SBI Life, which is waiting for the broker regulation to be put in place in order to move ahead aggressively with the bancassurance model.

• One of their major product lines is creditor insurance, and they have launched their first creditor insurance product, which covers the liabilities of the creditor in case of death of debtor.

Bancassurance

• SBI Life is planning a similar product for home loan borrowers of State Bank of India. 

• This model has high relevance in the Indian context with far-flung villages where the insurance potential is in volume and not in high per capita premiums.

• Some advantages and disadvantages are:

Bancassurance

Advantages of bancassurance

Disadvantages of bancassurance

High credibility (as trustworthy caretakers of money) with the public

Economic viability for the banks to take up as bancassurance is a volume business

A ready customer base Training of people and lack of vision and awareness

Low cost channel for selling simple vanilla products

Useful for selling only certain lines of products

Extensive reach including the rural pockets

Initial investment in systems and processes and people training