Marketing of Financial Services Part 2

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    MARKETING OFFINANCIAL SERVICES

    Module II

    InsuranceRamesh Bagla

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    Introduction Insurance is pooling of risks.

    In a contract of Insurance, the Insurer

    (insurance company) agress/undertakes, inconsideration of a sum of money (premium),to make good the loss suffered by the insuredagainst a specified risk such as fire or

    compensate the insured/beneficiaries on thehappening of a specified event such asaccident or death.

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    Introduction Two parties to an insurance contract:

    I. Insurer/assurer/underwriter

    II. Insured/assured/beneficiary The document laying down the terms of thecontract is called Insurance Policy

    The property which is insured is called the

    subject matter of insurance The interest that the insured has in thesubject matter is called insurable interest

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    Nature of Insurance Risk sharing and risk transfer

    Co-operative device

    Risk assessment in advance

    Compensation at the occurrence of contingency

    Amount of payment depends upon the actualloss

    Huge no. of Insured persons It is very different from charity or gambling

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    Types of Insurance Life Insurance

    Term Policy

    Whole Life Policy Endowment

    Annuities

    Unit Linked Policy Group Life Insurance

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    Meaning of Life Insurance The life branch of insurance includes

    insurance that pays benefits on a

    persons:

    - Death

    - Living a certain length of time

    - incapacity

    - injury or incurring a disease

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    Basic elements of a life InsurancePolicy

    Risk Cover benefit payable in the eventof death/incapacity

    Saving benefit payable in the event of

    survival.

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    Term Life Insurance Plans It gives protection for a limited number of years atthe end of which the policy expires, meaning itterminates with no maturity value.

    The face value of the policy is payable only if the

    insureds death occurs during the policy period. Such policies can be issued for as less as 1 year,but conventionally are being issued for a number ofyears.

    Types of Term Insurance

    Level Term InsuranceDecreasing Term Insurance Increasing Term Insurance Renewable Term Insurance Convertible Term InsuranceTerm Insurance with Return of Premium

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    Whole Life Insurance Plans The risk is covered for the entire life, no

    policy term is specified

    The sum assured is paid to the nomineeonly on the death of the insured

    Premiums have to be paid throughout the

    life of the insured or for a shorter period asper the terms of the conract

    There is no survival benefit

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    Endowment Insurance Plans Pure endowment insurance is a plan in which

    the benefit is payable to the insured only on

    survival after the specified term.

    Endowment policies which combine thefeatures of pure endowment and term

    insurance, pay the assured sum either on thedeath of the assured or after a fixed term.

    Thus, claims under an endowment policy

    may arise either on death or on maturity

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    Annuities Annuity is a form of pension in which an

    insurance co. makes a series of periodicpayments to a person(annuitant)/his

    dependents over a number of years(term)in return of a payment either inlumpsumor in instalments

    Types of annuities Immediate Annuity

    Deferred Annuity

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    Unit Linked Insurance Policy(ULIP)

    ULIP combines the benefits of insuranceprotection and return on investment inmanaged fund

    Each premium paid by the insured is splitin 2 parts

    Premium for insurance cover

    Investment in mutual funds units

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    Group Life Insurance Products

    Group Insurance covers a similar/homogeneous group of individuals under asingle Master Policy

    It is normally taken by an employer, alabour union or a voluntary association

    Individuals covered in the GroupInsurance Scheme are not parties to theInsurance Contract

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    Types of Insurance

    Non Life/General Insurance

    Fire

    Marine Motor/Accident

    Health/Medical

    Liability

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    Features of General insurance Policy cover for absolute value

    Normally annual contracts Insurable interest is of prime importance

    Insurance can be taken for self or third-

    party The sum assured is the actual/assessed

    value

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    Fire Insurance Fire Insurance provides for financial loss due

    to fire and other specified hazards

    Examples of property covered under Fire

    Insurance Buildings & their contents

    Goods in the open

    Dwellings & their contents

    Furniture/fixtures/fittings

    Pipelines located inside/outsidebuildings/compounds

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    Fire Insurance Examples of fire hazards covered under a typical

    fire insurance policy Fire Explosion/implosion

    Aircraft Damage Lightening Riots,Strikes,malicious and terrorism damage Impact damage

    Subsidence & lanslide incl road slides Missile testing operations Flood, earthquake, storm, tempest, tornado,cyclones Bursting of water tanks, apparatus and pipes

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    Motor/Accident Insurance Statutorily mandated under the Motor Vehicles Act, totake care of those who may get injured in an accident.

    The insurance of damage to the vehicle is notmandatory

    Liabilities normally covered are Any liability arising in respect of death/bodily injury to any

    person incl. the owner of the vehicle Any liability arising in respect of damage to any property

    of a third party

    Any liability arising in respect of death/bodily injury of anypassenger of a public vehicle

    Any liability arising under workmens compensation act forinjury to a paid driver/conductor

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    Health/Medical Insurance It covers mainly two types of benefits

    Reimbursement of medical expenses relatedto specific diseases

    Hospitalisation

    Types of Policies available

    Individual Mediclaim Policy

    Group Mediclaim Policy

    Cancer Insurance by ICS & CPAA

    Overseas Medical cover

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    Liability Insurance

    Liability Insurance covers

    Employee liabilities Employee state insurance liability

    Non industrial risks

    Professional liabilities

    Product liabilities

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    Micro Insurance Micro-insurance is the insurance for the low-income groups

    It is different from insurance in generalinasmuch as it is a low value product(involving modest premium and benefitpackage) which requires different design and

    distribution strategies such as premiumbased on community risk rating (as opposedto individual risk rating),

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    Micro Insurance There is an active involvement of an

    intermediate agency representing the targetcommunity

    Micro Insurance is fast emerging as animportant risk covering tool for the low-income people engaged in wide variety of

    income generation activities, and whoremain exposed to variety of risks mainlybecause of absence of cost-effective riskhedging instruments.

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    Miscellaneous Insurance Loss of profit

    Engineering construction all risk, industrialall risk, machinery breakdown etc.

    Apart from standard covers, GeneralInsurance Companies also offer customizedor tailor-made policies based on the

    personal requirements of a customer.

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    Legal Framework for Insurance Sector

    The main acts governing insurance are

    The Insurance Act 1935

    IRDA Act 1999

    IRDA (micro- insurance) Regulations 2005

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    IRDAInsurance Development & RegulatoryAuthority(IRDA) was constituted under IRDAAct 1999, with the following objectives:

    To protect the interests of the policyholders

    To regulate, promote and ensure orderlygrowth of the insurance industry and for

    matters connected therewith or incidentalthereto.

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    Composition of IRDA

    The Authority is a ten member teamconsisting of

    A Chairman Five whole-time members

    Four part-time members

    - all appointed by the Government of

    India

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    Duties, Powers and Functions of IRDA

    (a) issue to the applicant a certificate of registration,renew, modify, withdraw, suspend or cancel suchregistration;

    (b) protection of the interests of the policy holders inmatters concerning assigning of policy, nominationby policy holders, insurable interest, settlement ofinsurance claim, surrender value of policy and otherterms and conditions of contracts of insurance;

    (c) specifying requisite qualifications, code of conductand practical training for intermediary or insuranceintermediaries and agents;

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    Duties, Powers and Functions of IRDA

    (d) specifying the code of conduct forsurveyors and loss assessors;

    (e) promoting efficiency in the conduct of

    insurance business;(f) promoting and regulating professional

    organisations connected with the insurance andre-insurance business;

    (g) levying fees and other charges for carrying outthe purposes of the IRDA Act;

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    Duties, Powers and Functions of IRDA

    (h)calling for information from, undertakinginspection of, conducting enquiries andinvestigations including audit of the insurers,intermediaries, insurance intermediaries and

    other organisations connected with theinsurance business;

    (i) control and regulation of the rates, advantages,terms and conditions that may be offered by

    insurers in respect of general insurancebusiness not so controlled and regulated by theTariff Advisory Committee under section 64U ofthe Insurance Act, 1938 (4 of 1938);

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    Duties, Powers and Functions of IRDA

    (j) specifying the form and manner in which books ofaccount shall be maintained and statement ofaccounts shall be rendered by insurers and other

    insurance intermediaries;(k) regulating investment of funds by insurance

    companies;

    (l) regulating maintenance of margin of solvency;(m) adjudication of disputes between insurers and

    intermediaries or insurance intermediaries;

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    Duties, Powers and Functions of IRDA

    (n) supervising the functioning of the Tariff AdvisoryCommittee;

    (o) specifying the percentage of premium income of theinsurer to finance schemes for promoting andregulating professional organisations referred to inclause (f);

    (p) specifying the percentage of life insurance businessand general insurance business to be undertaken by

    the insurer in the rural or social sector; and(q) exercising such other powers as may be prescribed.

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    Insurance Ombudsman The position of Insurance Ombudsman was created by a

    Government of India Notification in November 1998.

    The main function of the Ombudsman is to quicklydispose of the grievances of insured customers andlessen the problems involved in redressing complaints.

    This institution is vital and relevant to protect theinterests of policyholders and also shape their belief inthe system.

    The existence of an Insurance Ombudsman has helpedgenerate and sustain faith and confidence amongst bothconsumers and insurers alike.

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    Insurance Ombudsman

    Ombudsmen are chosen from various fields such as theCivil Services, Insurance Industry and J udicial Services.

    They are appointed for a term of three years or till theyturn sixty-five years of age.

    Currently there are twelve Insurance Ombudsmenappointed in different parts of the country. They all havedefined jurisdictions.

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    Risk management

    At the most general level, risk is used todescribe any situation where there is

    uncertainty about what outcome mayoccur. Risk can be thought of as :

    - Expected Risk

    - Unexpected Risk.

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    Risk Management Risk may be defined as the possibility that a future

    occurrence may cause harm or losses

    Risk may also provide opportunities. By taking risks,companies sometimes achieve considerable gains.

    However, companies need Risk management to analyzepossible risks in order to balance potential gains againstpotential losses and avoid expensive mistakes.

    Risk management is best used as a preventive measure

    rather than as a reactive measure. Companies benefitmost from considering their risks when they areperforming well and when markets are growing in orderto sustain growth and profitability.

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    Types of Risks

    Material Risk- Building, Plant &

    Machinery,Furniture,Fixtures,fittings,Stocks.

    Consequential Risk- Loss of production, Lossof profit, Loss of market, Good will.

    Social Risk Loss of reputation/Social

    StatusLegal Risk- Product liability, Public liability.

    Political Risk- Subsidies, Sanctions etc.

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    Types of Risk facing Business

    Business Risk

    Price Risk Credit Risk Pure Risk

    Commodity price risk Exchange rate risk Interest risk Damage to assets Legal Liability Worker injury Employee benefits

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    Types of Risk facing individuals

    Personal Risk

    Earnings Medical expenses Liability Financial AssetsPhysical assets Longevity

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    Risk ManagementRisk management process:

    1. Establish the context and Identify the risks

    2. Evaluate the potential frequency and

    severity/magnitude of loss3. Develop and select methods for managing

    the risks

    4. Implement the chosen methods

    5. Monitor the performance of chosen

    methods and develop strategies on an

    ongoing basis.

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    Marketing Mix Strategy for Insurance

    Product

    Scan Existing Products/services offered bydomestic & international Insurance Cos.

    Identify Segments & Services not covered rural & unorganised sector

    Design innovative products having strong

    USPs for the needs of target segmentcomplying with environmental and regulatoryconditions

    Strong product positioning

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    Marketing Mix Strategy for Insurance

    Price

    In the insurance business, the pricingdecisions are concerned with:

    Premium Interest for default in premium payment

    Commission payable to intermediaries

    Pricing to take care of the nature of riskcoverage, paying capacity of the targetsegment and commercial viability

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    Marketing Mix Strategy for Insurance

    Place Location of the insurance branches should ensure:

    Coverage of target segment Smooth accessibility Availability of infrastructural facilities

    Safety and security

    Personal selling is the most effective way for selling ofinsurance products. An insurance agent should have: Local orientation Thorough knowledge of products and services

    Never say die attitude High level of motivation and service aptitude Personal selling is the most effective way for selling of

    insurance products

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    Marketing Mix Strategy for Insurance

    Promotion Advertisement

    Choice of media print/television/radio/internet Visuals & Copy effective communication of USP to

    the target audience Cost effectiveness Support to product positioning

    Publicity Focus on target segment

    Projecting the image of socially responsible customercaring organisation

    Organisation of camps & events Demonstration/articulation of product benefits

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    Marketing Mix Strategy for Insurance

    Promotion Word of mouth

    Influencing the opinion leaders Aiming for customer delight for positive word of mouth

    Strong service recovery mechanism to check negativeword of mouth Happy channel partners do make a difference

    Sales promotionThoughtful Freebies to customers & agents

    Rebates/discounts/bonus Free add-on features in policies

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    Marketing Mix Strategy for Insurance

    Process Well defined processes and service

    standards for underwriting, processing &

    settlement of claimsStrong process orientation of Agents and staff

    at all levels

    Regular mapping of service delivery against

    the service standards to identify and rectifythe service quality gaps

    Continuous technology upgradation forprocess revamping and better service delivery

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    Marketing Mix Strategy for Insurance

    People Most important component of marketing mix

    for the insurance industry

    Behavioral profiling at the time of recruitmentto ensure that front line staff and agents havestrong service aptitude and customerorientation

    Regular training and knowledge updation ofinsurance personnel to ensure that theyunderstand the changing levels of customerexpectations

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    Marketing Mix Strategy for Insurance

    Physical evidence

    Company logo and signage should personifyand convey the company policy and ethos

    Product information brochures must furnishall important information in easy and lucidlanguage and should contain answers toFAQs

    Office interiors and staff disposition mustcreate a warm and customer friendlyenvironment

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    Marketing Channels in the Insurance

    Sector in India In today's scenario, insurance companies have

    moved from selling insurance to marketing an

    essential financial product. The distributors haveto become trusted financial advisors for theclients and trusted business associates for theinsurance companies.

    This has been the result of :- enhanced customer exposure

    - increased competition

    - evolution of newer channels of distribution

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    Marketing Channels in the Insurance

    Sector in India The distinction of channels is based on:

    - personal distribution systems

    - direct response systems Personal Distribution Systems agents, brokers,

    corporate agents such as bancassurance, and worksitemarketing channels

    Direct response systems channels whereincustomer purchases insurance directly. These channelsutilize media channels like Internet, telemarketing, directmail, call centers, etc

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    Marketing Channels in the Insurance

    Sector in India

    Traditionally tied agents have been the

    primary channels. However, with growing impact of IRDA

    and competition, alternative channels are

    not only being considered but also heavilyfocused upon.

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    Agents

    An insurance agent solicits/procures insurancebusiness for an insurer in consideration for acommission

    A license must be obtained from IRDA to act asan insurance agent

    Today's insurance agent has to know whichproduct will appeal to the customer, and also

    know his competitor's products in the samespace to be an effective salesman who can sellhis company, the product, and himself to thecustomer

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    Brokers An insurance broker is an independent insurance

    agent who works with many insurance companies tofind the best available policies for his/her clients.

    A typical insurance agent works for one specificcompany, and chooses from within that company'spolicies for clients.

    An insurance broker is different from the typical agentin this regard, the two are otherwise similar. Bothstructure policies, settle claims, and usually work on acommission basis.

    The main eligibility criteria to become a directinsurance broker is minimum a bachelors degree anda capital of Rs.50lac

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    BrokersFunctions of a Broker obtaining detailed information of the client's business

    and risk management philosophy rendering advice on appropriate insurance cover and

    terms maintaining detailed information base of availableinsurance products

    providing requisite underwriting information asrequired by an insurer in assessing the risk to decide

    pricing terms and conditions for cover submitting quotation received from insurer/s for

    consideration of a client

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    Brokers providing services related to insurance

    consultancy and risk management

    assisting in the negotiation of the claims

    maintaining proper records of claims

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    Bancassurance 'Bancassurance', is the term used to describe the

    partnership or relationship between a bank and aninsurance company whereby the insurancecompany uses the bank sales channel in order tosell insurance products

    Bank staff and tellers, rather than an insurancesalesperson, become the point of sale/point ofcontact for the customer. Bank staff are advisedand supported by the insurance company throughproduct information, marketing campaigns and

    sales training. Both the bank and insurance company share thecommission. Insurance policies are processed andadministered by the insurance company.

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    Internet and call centers

    Insurance companies have portals and call centres tosell insurance on the Net These channels arepredominantly used for selling personal insuranceproducts

    However, these channels have had only limitedsuccess in India The variety and complexity of theinsurance product does not make it easily amenable toon-line sale

    The commercial/industrial client require the services ofan intermediary.It is also increasingly being realisedthat technology can be used only for policy servicingand not for actual sales.

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    Internet and call centers

    In India, the levels of penetration are nothigh at the moment

    Even all those who have access to theInternet have not started transacting onthe Net for fear of security breaches

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    Marketing Strategies in Indian

    Insurance Sector Value For Money

    Sea change in the way the basic insurance products arepackaged Insurance products are innovatively tailor made to

    provide a bundle of desired benefits to the customersThis is done through the introduction of riders, which

    have added value to the risk cover at minimal cost.Riders are nothing but add-ons coming along with thebase policies for a slightly additional premium

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    Marketing Strategies in Indian

    Insurance Sector Tapping the Niche Markets

    Private insurers are concentrating on designing attractiveproducts by investing heavily on research - studying lifeexpectancy and health statistics across age groups, incomelevels, professionals and regions on their own instead ofrelying on data with state insurers

    The products are designed with a technical team of actuaries

    and a product development team working closely together totarget the niche market. The innovations for the niche marketsare abound

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    Marketing Strategies in Indian

    Insurance Sector Tapping the Niche Markets

    The segments, which have attracted almost all

    the players, are the women and the childrensegments. Though the State insurer has hadthese products sufficiently for a longer time, it

    faces stiff competition from the private players inthese segments.

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    Marketing Strategies in Indian

    Insurance Sector Tapping the Niche Markets Tata AIG General Insurance, for the first time in the country, has also

    launched a specialized product for Accountants after the success withspecialized products such as Directors and Officers policy in India, inits bid to segment the market for professional indemnity policies

    The policy has been designed with the assistance from BombayChartered Accountants Society. This policy covers claims pertaining

    to professional mistakes committed in the performance of duties. Italso provides for coverage of all legal expenses incurred in defendingsuch claims

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    Marketing Strategies in Indian

    Insurance Sector Thrust to the rural markets Towards ensuring equitable distribution of insurance policies in

    every corner of the country, IRDA stipulates the rural obligations to

    be met by the players over the years. The rural obligation on part of the new private insurance companies

    is incremental in nature. It goes from 5% to 15% over the period of 5years for life insurance and from 2% to 5% in case of generalinsurance. IRDA has also defined what it meant by rural

    1. The place should have a population of less than 50002. Secondly, the density of the population should be less than 400persons per square kilometer.3. 75% of the male population should be engaged in agriculturalpursuit.

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    Marketing Strategies in Indian

    Insurance Sector Tapping unconventional distribution

    channels

    All the players depend heavily on their agentsforce to reach out - LIC has reached a figure of8,50,000 agents and planned to increase it to 1million

    Now they are trying out other distributionchannels also, like corporate agents such asbanks, internet and call centers for directmarketing