Unicon Investment Solution

8/8/2019 Unicon Investment Solution

1/81

A STUDY OF NEW DISTRIBUTION CHANNELS IN

INSURANCE SECTOR

SUMMER TRAINING PROJECT REPORT

SUBMITTED TOWARDS PARTIAL

FULFILLMENT

OF

MASTER OF BUSINESS ADMINISTRATION(Affi l ia ted To U.P. Technica l . Univers i ty , Lucknow)

[2009-2010]

Submitted By

ARFANA YASMIN

Roll No. 0911570019

Under the guidance of:

External Supervisor Internal SupervisorMr. RAKESH Mr . Manish Bhaskar

(Asstt.channel Manager), Lecturer,AIM.

UNICON Ghaziabad

ADVANCE INSTITUTE OF MANAGEMENT

GHAZIABAD-201009

1


2/81

PREFACE

Learning categorize you and practicing on that learningspecialize you.

Each and every theory being taught in academic institute can

only become fruitful practically. The important of any academic

courses would gain advantage and acceptance of true form;

only through practical experience. Hence it is quite necessary to

put theories as into task. This is made possible with summer

training at any of good companies under the expert guidance of

a competent person.

All organization face change in their environment with resultant

changes in their respective market and in their ability to satisfy

their market. Each organization has to face new marketing

problems and opportunities in their existing and potential

market.

The change trends and new skills being adopted by employees

in such a systematic way by getting various training sessions

which help them to make use of these new trends and

technologies.

This practical knowledge has made one thing clear in my mind

that to keep on the zenith one has to keep himself changing with

time.

The report is outcome of the summer training in unicon

investment solution.

This training is a part of curriculum of MBA program

at the department of business administration of

AIM,_GHAZIABAD. The main objective of this project

is to find new distribution channel in insurance sector

.

2


3/81

ACKNOWLEDGEMENT

Its with a great sense of satisfaction that I present my first realventure in practical computing in the form of project work.

I am thank to the UNICON for giving me a great opportunityto do my summer training in their valuable industry and makethe stage for practical exposure of my knowledge.

I am deeply indebted to Mr. RAKESH (Assistant Manager) forproviding this training and for his kind support and cooperation.

I pay my respect and gratitude to my project guide Mr.MANISH BHASKAR for her constant help and guidance.

With Regards,

(ARFANA YASMIN)

3


4/81

TABLE OF CONTENT

S.No. Contents Page No.1) Executive summary 62) Introduction 7-83) Company profile 9-204) Distribution Channels 21-35

5) Telcassurance 36-396) Bancassurance 40-637) Objectives of the study 648) Research Methodology 65-67

Research Design 65

Data collection methods 66-67

9) Analysis and Findings 68-73

List of Graphs 68

Analysis of Data 69-72

10) Findings 73

11) Limitations of the Study 7412) Conclusion and

Recommendations75-76

13) Appendices 77-80Questionnaire 78-80

14) Bibliography 81

4


5/81

EXECUTIVE SUMMARY

The liberalization followed by growth of the Indian Insuranceindustry has opened wide opportunities for Service andInfrastructure sectors. This growth has to be properly channelised.Some of the major challenges which have to be addressed forchannelising the growth of insurance sector are Product Innovation,Distribution Network, Investment Management, Customer Serviceand Education.

The aim of this project is to have an in-depth knowledge of the booming Insurance sector in India and to study the variousEMERGING DISTRIBUTION CHANNELS in insurance, whichwill help in increasing the penetration of Insurance in India andalso reduces the cost of insurers.

Firstly the Insurance industry as a whole has been studied withemphasis on various distribution channels. Then the emergingdistribution channels in insurance industry have been discussed.Emphasis is given on the new distribution channels which arerecently tried in India such as retail stores, telcassurance, andinternet. Finally the recommendations and conclusions on the basisof my understanding and analysis about the Indian InsuranceSector have been made.

5


6/81

INTRODUCTION

The road less trodden is not so much a choice but a necessity in

journeys into the unknown. For an industry that is rediscoveringitself and its markets, ventures into distant rural markets and evenniche urban markets have been quite an experience. While agentsare, and are likely to be, the predominant channel for selling lifeinsurance and personal lines of non-life insurance, other means ofreaching the customer also assume importance given the low levelsof penetration of insurance in India. I have no doubt that everyonein the insurance industry would like to see the country reach thelevels of financial security through insurance that more developed

countries have. And I am sure that this aspiration is not only drivenby commercial interests but also the aspiration for better socialsecurity and prosperity. For taking that kind of leap every effortcounts and every new idea that can harvest a few thousandcustomers will help. One never knows which of these new channelswill turn out to be a significant contributor of customers tomorrow!

"It is not the strongest species that survives nor he mostintelligent but the ones most responsive to change - CharlesDarwin

Think of insurance and the first thing that comes to mind is thepesky agent who wont take no for an answer. He tempts you withtax benefits, scares you with the thought of dying and leaving yourfamily on the streets or steps in to get your medical policy just intime for you to leave on that holiday abroad. Add to that your banktrying to sell you some insurance when you take a housing loan. Orwhen they find that you have surplus money in your account and

could do with more life insurance! And soon brokers will get to thepoint where they will offer individuals a range of policies fromdifferent insurers and find us the one that fits just right. But theseare the well known, by now, channels of reaching insurance as a

product to the customer. The new ones that are emerging slowly present an interesting picture. Take the Internet for instance.Companies are willing to provide quotes for certain types of

policies through their website. Not just Life policies or Motor, butMarine Cargo policies.. Go to a bank automatic teller machine

(ATM) and you dont come away with just cash. You arebombarded with questions on whether you would like insurance

6


7/81

policies did you check that option? Its right there below theinternet hours! Call your banks phone banking service and, aftertelling you your balance or whatever it is you seek, they will try tointerest you in a policy or two, or at least in playing host to an

agent who is eager to come in and say his piece. Or these calls outof the blue asking if you are interested in insurance or a personalloan or housing loan in three days flat!? In the rural areas there is adifferent kind of intermediation emerging. The approach there isvery community based. The local communitys thought leader has

been roped in to spread the good word. They could be non-governmental organisations (NGOs) working in education ormicrofinance in that area, or a company with consumer contactoutlets like one selling fertilisers or consumer goods of varying

kinds, or buying the produce of the land for that matter. They takeon the work of distributing insurance adding value to theircustomers and adding a fee based income to their own revenuestreams. Some have met with good success and others are in the

process of settling down to what is essentially a tremendous task.What does all this add up to? Other than more apparent marketingactivity for a product that was mostly bought rather than sold?Other than being pursued for something that you sought out andtried to buy with great difficulty? Other than intermediaries morewilling to tell you about the product than before when they just

expected to get your signature on a mostly blank proposal form andrun?! Marketers and market theory proponents say that it means

better service. That it means better product definition and hence thedevelopment of more suitable products for the end customer. Thatit means that the insurer and his intermediaries work at efficientcosts since someone else is always breathing down their necks. But it can also mean a loss of privacy. Not just in a personal way,

but also in that the confidentiality of your financial data is beingshared with people you have not authorised for access. Even if it is

the insurance company owned by your bank or represented by your bank. In future it could mean that your financial status coulddictate your insurance premiums as it does in many westerncountries now and that your financial status is being sharedwithout your consent or knowledge right now as you read this. Isthis such a big change? Certainly! As big a change as having aninsurance agent come to you to sell a policy is from the very earlydays of insurance when the board members of an insurer personallyinterviewed new applicants once in six months to decide whether

to insure him or not! And in the pipeline are policies from yourlocal post office and perhaps through your mobile phone!

7


8/81

COMPANY PROFILE

Unicon has been founded with the aim of providing world class investing

experience to hitherto underserved investor community. The technology

today has made it possible to reach out to the last person in the financial

market and give him the same level of service which was available to

only the selected few.

They give personalized premium service with reasonable commissions on

the NSE, BSE & Derivative market through our Equity broking arm

Unicon Securities Pvt Ltd. and Commodities on NCDEX and MCX

through our Commodity broking arm Unicon Commodities Pvt. Ltd.

With their sophisticated technology you can trade through your computer

and if you want human touch you can also deal through their Relationship

Managers out of our more than 100 branches spread across the nation.

They also give personalized services on Insurance (Life & General) &

Investments (Mutual Funds & IPO's) needs, through our Insurance &

Investment distribution arm Unicon Insurance Advisors Pvt. Ltd. Their

tailor-made customized solutions are perfect match to different financial

objectives. Their distribution network is backed by in-house back office

support to serve our customers promptly.

8


9/81

Unicon offers a unique feature of a single Screen Trading Platform of

NSE , BSE & Derivatives. Unicon offers both Offline & Online trading

platforms. You can Walk in or place your orders through telephone at any

of our branch locations

Online Trading Products :

uniconPlus

uniconSwift

uniconPlusBrowser based trading terminal that can be accessed by a unique ID and

password. This facility is available to all our online customers the

moment they get registered with us.

uniconSwift

Application based terminal for active traders. It provides better speed,

greater analytical features & priority access to Relationship Managers.

9
http://unicondirect.in/products_online_uniplus.asphttp://unicondirect.in/products_online_uniswift.asphttp://unicondirect.in/products_online_uniplus.asphttp://unicondirect.in/products_online_uniswift.asp


10/81

Unicon Provides expert advice to its clients for their investments in

equity & debt markets through Mutual Funds.

Our experts advice you the best investment solutions that suit you and

help you to reach your financial goals.

We help you ascertain your risk profile & guide you with the right

product mix which reduce your tax liability, increase your savings &

enhance your wealth. Weather you have a conservative, medium or

aggressive investment risk appetite, our experts would guide you to build

a portfolio to optimize the return of interest.

10


11/81

Unicon offers a unique feature of a single screen trading platform in

MCX and NCDEX.Unicon offers both Offline & Online trading

platforms. You can Walk in or place your orders through telephone at any

of our branch locations

Online Commodity Internet trading Platform through UniFlex.

Live Market Watch for commodity market (NCDEX, MCX) in one

screen.

1. Add any number of scrips in the Market Watch.

2. Tick by tick live updation of Intraday chart.

3. Greater exposure for trading on the margin available

4. Common window for market watch and order execution.

5. Key board driven short cuts for punching orders quickly.

6. Real time updation of exposure and portfolio.

7. Facility to customize any number of portfolios & watchlists.8. Market depth, i.e. Best 5 bids and offers, updated live for all

scripts.

9. Facility to cancel all pending orders with a single click.

10.Instant trade confirmations.

11


12/81

Unicon Depository Services offers dematerialization services as a

participant in Central Depository Services Limited (CDSL), through its

Depository operations. The company believes in efficient and cost-

effective and integrated service support to its brokerage business. Unicon

Securities Private Limited, as a depository participant, will offer

depository accounts for individual investors as well as corporates which

will enable them to transact in the dematerialized segment, without any

hassles.

Depository offers a safe, convenient way to hold securities as compared

to holding securities in paper form. Our service provides an integrated

single platform for all our clients ensuring a risk free, efficient and

prompt depository process.

Facilities Offered by Unicon

* De-materialization: You can submit your physical shares at the

Unicon branch for dematerialization into electronic form.

* Re-materialization:You can also request for Re-materialization

which enables you to convert the dematerialized shares into

physical form.

* Transfer: Inter and intra depository services are available through

which you can transfer shares.

* IPO: You can apply for IPO using your demat account details

and on allotment the securities are transferred directly to yourdemat account.

12


13/81

At Unicon you can invest in the Primary markets (Initial Public

Offerings) online without going through the hassles of filling up any IPO

application forms or any other paperwork.

We shall make sure that you do not miss the opportunity to

subscribe/invest in a good IPO issue by providing you an online IPO

application form, transfer of funds online through secured payment

Gateways of leading banks like ICICI, HDFC, AXIS bank.

In addition to the above we shall provide you with the In-Depth analysis

of the IPO issues which shall be hitting the Indian Markets in near future,

IPO Calendar, analysis on the recent IPO listings, prospectus, offer

documents and other IPO research reports so as to help you take an

informed decision to invest in the IPO issues.

Online IPO facility is open to all our registered clients at no cost

whatsoever. All you need is the following to subscribe online to the IPO

issues:

A trading account with Unicon

A Demat account with Unicon

An access to the net banking facility with the Banks through which

Unicon has operational Gateway facility (ICICI, HDFC and AXIS

Bank).

You must have signed a Power of Attorney (POA) agreement forapplying in IPOs online.

13


14/81

General Insurance

Unicon offers all products of General Insurance under one umbrella.

Unicon comprises of a team of distinguished professionals from

insurance, finance and other management disciplines who have vast

business & managerial experience.

Unicon team evaluates the client's business environment and studies the

risk profile. based on the results of these evaluations, Unicon team then

suggests the most cost effective , integrated insurance package that is

perfectly suited to the client's risk profile.

Unicon has a nationwide network of branches all over India, equipped

with top quality infrastructure facilities, to provide you prompt &

efficient service.

Life Insurance

Unicon offers you a Peace of Mind by offering various life insurance

plans for your unique & specific needs. Our philosophy is that for every

financial problem, there is a solution also. And we are here to give you

complete financial solutions. At the same time we offer you very Prompt

& Reliable Policy related service for enduring relationship.

We offer a very wide range of products to fulfill your particular

requirements. You can always have an access to our 83 Branch Offices

situated at prime locations of the city, or you can call our Relationship

Manager to guide on your Investments.

14


15/81

Following is the glimpse of Life Insurance Plans:

Protection Plans

Investment Plans

Child Plans

Retirement/Pension Plans

Saving Plans

NRI Plans

Health Plans

15


16/81

Unicon is a specialized property broking company. Our highly

experienced and professional teams present retail, office, industrial and

residential property opportunities to a broad base of clients. Whether it is

a residential or commercial development, Unicon offers a total solution to

our clients inclusive of market research, marketing strategy, interaction

with the professional teams and sales or leasing of the property.

Unicons professional team of consultants will assist you to identify

suitable premises that satisfy your requirements. We will help you

negotiate favorable leases and assist with the preparation of all

documentation.

Whether you are looking for a home or a place to conduct business

Unicon shall find you one

We provide customer focused transparent investment planning and

solutions. We offer products which benefit your special status. PCG has a

specialized advisory team which nurtures all your investment. We ensure

that your investments work for you rather than you for them.

Products offered:

Unicon Signature Account

Nifty Tracker

Unicon Trade Plus

Unicon Wealth Planner

16
http://unicondirect.in/products_pcg_acc.asphttp://unicondirect.in/products_pcg_nifty.asphttp://unicondirect.in/products_pcg_trade.asphttp://unicondirect.in/products_pcg_acc.asphttp://unicondirect.in/products_pcg_nifty.asphttp://unicondirect.in/products_pcg_trade.asp


17/81

Brief History of the Insurance Sector

The business of life insurance in India in its existing form started in

India in the year 1818 with the establishment of the Oriental LifeInsurance Company in Calcutta. Some of the important milestonesin the life insurance business in India are:

1912: The Indian Life Assurance Companies Act enacted as thefirst statute to regulate the life insurance business.

1928: The Indian Insurance Companies Act enacted to enable thegovernment to collect statistical information about both life and

non-life insurance businesses.

1938: Earlier legislation consolidated and amended to by theInsurance Act with the objective of protecting the interests of theinsuring public.

1956: 245 Indian and foreign insurers and provident societies takenover by the central government and nationalized. LIC formed by anAct of Parliament, viz. LIC Act, 1956, with a capital contributionof Rs. 5 crore from the Government of India. The Generalinsurance business in India, on the other hand, can trace its roots tothe Triton Insurance Company Ltd., the first general insurancecompany established in the year 1850 in Calcutta by the British.

Some of the important milestones in the general insurance businessin India are:

1907: The Indian Mercantile Insurance Ltd. set up, the firstcompany to transact all classes of general insurance business.

1957: General Insurance Council, a wing of the InsuranceAssociation of India, frames a code of conduct for ensuring fairconduct and sound business practices.

1968: The Insurance Act amended to regulate investments and set

minimum solvency margins and the Tariff Advisory Committee setup.

17


18/81

1972: The General Insurance Business (Nationalization) Act, 1972nationalized the general insurance business in India with effectfrom 1st January 1973. 107 insurers amalgamated and grouped into

four companies viz. the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental InsuranceCompany Ltd. And the United India Insurance Company Ltd. GICincorporated as a company.

INSURANCE SECTOR

The opening up of Insurance sector was a part of the on goingliberalization in the financial sector of India. The changing face of

the financial sector and the entry of several companies in the fieldof life and non life Insurance segment are one of the key results ofthese liberalization efforts. Insurance business by way ofgenerating premium income adds significantly to be the GDP. Overthe past three years, more than thirty companies have expressedinterest in doing business in India. The IRDA (InsuranceRegulatory Development Authority) is the regulatory authority,which looks over all related aspects of the insurance business. The

provisions of the IRDA bill acknowledge many issues related toinsurance sector.The IRDA bill provides guidance for three levels of players -Insurance Company, Insurance brokers and Insurance agent. LifeInsurance sector is one of the key areas where enormous business

potential exists. In India currently the life insurance premium as apercentage of GDP is 1.3 % against, 5.2 per cent in the US.

General Insurance is another segment, which has been growing at afaster pace. But as per the current comparative statistics, thegeneral insurance premium has been lower than life insurance.

General Insurance premium as a percentage of GDP was a mere0.5 per cent in 1996. In the General Insurance Business, GeneralInsurance Corporation (GIC) and its four subsidiaries viz. NewIndia Insurance, Oriental Insurance, National Insurance and UnitedIndia Insurance, are doing major business. The General InsuranceIndustry has been growing at a rate of 19 percent per year.

18


19/81

The entry of several private insurance companies, particularlyinternational insurance companies, through joint ventures, willspeed up the process of insurance mobilization. The competitionwill unleash new schemes and benefits, which will give consumers

a better Chance to save as well as insure. The regulatory system in

India is relatively new and takes some more time to make theInsurance sector a perfectly competitive one. Insurance RegulatoryAuthority of India issued regulations on 15 subjects which includedappointed. Actuary, actuarial report, Insurance agents, Solvencymargins, reinsurance, registration of Insurers, and obligation ofinsurers to rural and social sector, investment and accounting

procedure. The reform in Insurance in India is guided by factorslike availability of a variety of products at a competitive price,improvement in the quality of customer services etc. Also theemployment opportunities in the Insurance sector wil1 increase asmajor players set their business plans in India. The policy of thegovernment to open up the financial sector and the Insurance sectoris expected to bring greater FDI inflow into the country. Theincrease in the investment limit in this vital sector has generatedconsiderable business interests among the foreign Insurancecompanies" Their entry wil1 certainly change the Insurance sector

considerably.

.

19


20/81

WHAT IS A DISTRIBUTION CHANNEL?

A channel of distribution or trade channel is the path or route along

which goods move from producers to ultimate consumers orindustrial users. In other words, it is the distribution networkthrough which a producer puts his product in the hands of actualusers. The channel of distribution includes the original producer,the final buyer and any middlemen-either wholesaler or retailer.The term middleman refers to any institution or individual in thechannel which either acquires title to the goods or negotiates orsells in the capacity of an agent or broker. But facilitating agenciesthat perform or assist in marketing function are not included as

middlemen in the channel of distribution. This is because theyneither acquire title to the goods nor negotiate purchase or sale.Such facilitating agencies include banks, railways, roadways,warehouses, insurance companies, advertising agencies, etc. Thefollowing diagram (chart) is illustrative of the channel ofdistribution which may exist in a market.

20


21/81

The above chart indicates that the number of middlemen may vary.If there is direct sale by the produce to the consumers then there is

no middleman. But that is very rare. As the chart shows theproducer may sell goods to retailer who may then sell the same toconsumers. The producer may sell goods to wholesalers who mayin turn sell to retailers and the retailer may sell to consumers. Thefourth alternative channel of distribution is when any agent/dealerintervenes between the producer and retailers and acts as amiddlemen. The agent is appointed by the producer for the sale ofgoods to the retailers. Another alternative channel is there when

producers agent sells goods to wholesalers who sell to retailers.Agent/dealer is an independent person/firm buying goods andselling them to retailers. Agent/dealer may also sell to wholesalerswho may then sell to retailers and goods are thus made available toconsumers. In the channel of distribution there may be more thanone agent/dealer and wholesaler.

Channel decisions determine how the firm will reach its targetmarkets. The choice and performance of the channel are majordeterminants of an organizations success. Channel of distribution

decisions are of vital importance to all types of firms, includingproducers, wholesalers, and retailers. A key factor in selecting achannel is economic performance- estimated revenue and costflows over the planning horizon. Qualitative factors are alsoimportant in selecting channels of distribution. Given two channelalternatives that are similar in their estimated economic

performance, selection may rest on the extent of managementcontrol that the firm could exercise in the two channels. Theantitrust laws are of primary importance for channel selection

decisions.

21


22/81

Establishing the channel objectives and Constraints

The objectives include the desired level of customer service andthe desired functions intermediaries should perform. Each producerdevelops his own objectives:

Customer characteristics: Channel design is greatly influenced bycustomer characteristics. When trying to reach a large or widelydispersed customer population, long channels are needed. Ifcustomers buy small amounts frequently, long channels are needed

because of the high cost of filling small and frequent orders.

Middleman characteristics: Channel design reflects the strengths

and weaknesses of different types of intermediaries in handlingvarious tasks. For example, manufacturers representatives are ableto contact customers at a low cost per customer because the totalcost is shared by several clients. But the selling effort per customeris less intense than if the companys sales representatives did theselling.

Competitive characteristics: Channel design is influenced bycompetitors channels. Producers may want to compete in or nearthe same outlets carrying the competitors products.

Product characteristics: Perishable products require more directmarketing because of the dangers associated with delays andrepeated handling. Bulky products, such as building materials orsoft drinks, require channel arrangements that minimize theshipping distance.

Environmental characteristics: When economic characteristics aredepressed, producers want to move their goods to market in the

most economical way.

Company characteristics: Company characteristics play inimportant role in channel selection. The companys size determinesthe size of its markets and its ability to secured desired dealers. Itsfinancial resources determine which marketing functions it canhandle and which to delegate to intermediaries.

22


23/81

Market characteristics: Geography is one factor; in most cases, thegreater the distance between the producer and its market, the lessexpensive is distribution through intermediaries rather than throughdirect sales. Direct sales may be effective if a producer has

relatively few large buyers, but for larger markets middleman arerequired.

AN INTERESTING FACET OF INSURANCE

Mark Twain, the great American humorist said in his speech onAccident Insurance,

There is nothing more beneficent than accident insurance. Iveseen an entire family lifted out of poverty and into affluence by the simple boon of a broken leg. Ive had people come to me oncrutches, with tears in their eyes, to bless this beneficentinstitution. In all my experience of life, I have seen nothing so

seraphic as the look that comes into a freshly mutilated mans face

when he feels his vest pocket with his remaining hand and finds hisaccident ticket all right.

23


24/81

Following are the factors that impact the selection of a channel:

Characteristics of Short

Channels

Characteristics of Long

Channels

Market factors Business users Consumers

Geographicallyconcentrated

Geographically diverse

Extensive technicalknowledge and regularservicing required

Little technical knowledgeand regular servicing notrequired

Large orders Small orders

Product factors Perishable Durable

Complex Standardized

Expensive Inexpensive

Producer factors Manufacturer hasadequate resources to

perform channelfunctions

Manufacturer lacksadequate resources to

perform channel functions

Broad product line Limited product line

Channel controlimportant

Channel control notimportant

Competitive

factors

Manufacturing feelssatisfied with marketingintermediaries

performance inpromoting products

Manufacturer feelsdissatisfied with marketingintermediaries

performance in promotingproducts

24


25/81

4 Is affected Insurance

Insurance has four major characteristics that greatly affect themarketing and distribution.

1. Intangibility:

Unlike products, services cannot be held, touched, or seen beforethe purchase decision thus, they should be made tangible to acertain extent. Marketers should tangibilize the intangible tocommunicate service nature and quality. This can be done through:

Environment

Uniforms

Paperwork

Brochures

Insurance is a guarantee against risk and neither the risk nor theguarantee is tangible. Hence, insurance rightly come underservices, which are intangible. Efforts have been made by theinsurance companies to make insurance tangible to some extent byincluding letters and forms.

2. Inconsistency:

Service quality is often inconsistent. This is because servicepersonnel have different capabilities, which vary in performancefrom day to day. This problem of inconsistency in service qualitycan be reduced through standardization, training andmechanization. In insurance sector, all agents should be trained to

bring about consistency in providing service or, the insurance process should be mechanized to a certain extent. E.g.: the

customers can be reminded about the payment of premium throughe-mails and sms instead of agents.

25


26/81

3. Inseparability:

Services are produced and consumed simultaneously. Consumerscannot and do not separate the deliverer of the service from theservice itself. Interaction between consumer and the service

provider varies based on whether consumer must be physicallypresent to receive the service. In insurance sector too, the service isproduced when the agent convinces the consumer to buy the policyand it is said to be consumed when the claim is settled and the

policyholder gets the money. In both the above cases, it is essential

for the service provider (agent) and the consumer (policy holder) tobe present.

4. Inventory:

No inventory can be maintained for services. Inventory carryingcosts are more subjective and lead to idle production capacity.When the service is available but there is no demand, cost rises as,

cost of paying the people and overhead remains constant eventhough the people are not required to provide services due to lackof demand. In the insurance sector however, commission is paid tothe agents on each policy that they sell. Hence, not much inventorycost is wasted on idle inventory. As the cost of agents is directly

proportionate to the policy sold.

26


27/81

THE INTERNET CHANNEL

27


28/81

The Internet is likely to be the most important of the new forms ofdistribution as the government is encouraging its use (for eg. E-choupal). It is already apparent that customers are using the newInternet technology in other business fields (e.g. bookselling, air

ticketing etc.). However, insurers have been slow to get to thismarket. For example, the worldwide property and casualty marketis estimated to be worth $l50bn but less than 1% of these insurancetransactions are currently being conducted online. India is noexception to that, only iota of business is generated through thischannel. This sluggishness is perhaps a little surprising as thesimpler commoditized insurance products should sell quite well onthe Internet. Arguably, other more tangible products such asclothing, furniture and sporting equipment may not sell so well

because customers prefer to see them before making a purchase. Arecent survey states that the biggest barriers to using the Internet isproduct complexity (62%), followed by need for paper signaturesand regulatory restrictions (both 38%), security risks (32%), andcost of online development and integrating legacy systems (both29%).

The lead in selling insurance on the Internet appears to be comingfrom America, where start-up companies that cover the wholequote-to-claim insurance process online now exist. For example,

eCoverage.com is now writing motor business in 2 US states(backed by Japanese venture capital from Softbank) &GeneraLife.com is selling life assurance on the net. HoweverEuropean companies are following suit, such as ineas.com whichhas become the first European insurer to sell its productsexclusively via the Internet, already operating in the Netherlands,France, Belgium and Germany.

One way of analyzing the new business models suggests there are

currently three emerging types of web site through which insurancebusiness can be sold.

1. Shop Fronts" - These are the insurance companies ownwebsites, e.g. Direct Line. They are likely to have a short-term

prominence but are expected to reduce in importance over time ascustomer requirements for price comparisons increaseE.g. www.icicilombard.com

2. Product Aggregators" - These are brokerages which offer arange of comparable products. The website will aim to offer the

28
http://www.icicilombard.com/http://www.icicilombard.com/


29/81

best price/value combination to consumers. Therefore, insurersquoting competitive premium rates are likely to acquire most

business through this channel. Product Aggregators are expected toincrease in importance in the long term because of the speed at

which the consumer can get comparative quotes and the costs ofadvertising shop fronts.E.g. www.bimaonline.com

3. Portals - These are websites that host content from multiplewebsites. They package content from third party providers,organize it to suit their target audience, and make their money viaadvertisement or commission On such a web site, an insurer mayhave to compete against other companies if it is not the only one

advertising insurance. To get round this, portals may be developedby the larger insurers with brand and customer ownership as themajor drivers. Overall, portals are expected to grow rapidly for thesame reasons as product aggregators. E.g. www.bimaonline.com

THE INDIAN OPPORTUNITY

There are 38.5 million Indians online as of now and this number is

set to grow to 100 million by 2007-08. Sky-rocketing at a CAGRof 125%, the online travel industry is expected to become a $2-

billion industry by 2008.

The number of heavy internet users in India, the persons whospend long hours on the web, has grown to 38 per cent this year, asagainst barely 16 per cent in 2002.These heavy users are spending an average 8.2 hours per week onthe internet,I-Cube 2007 reportsaid.

Their numbers are increasingly rising over the past few years: from16 per cent in 2002 to 20 per cent in 2005 and to 38 per cent thetotal internet users in 2007 - resulting in a jump of 20 per cent overa 5-year period.In contrast, the number of 'light' users has dropped from 63 percent in 2002 to a 28 per cent in 2007, which shows the older

population spend more time on internet as against the younger lotwho are considered to be more net-savvy. While, the school goingchildren spend an average of 322.3 minutes a week on the internet,the college going students spend an average of 433.2 minutes perweek and the older men spend an average of 580.5 minutes a week.

29


30/81

Working women spend 535.3 minutes per week while women non-working women spend an average of 334.5 minutes each week.There will be 50 million internet users by March 2007. At present 25% ofthe internet users in India are from small towns and this figure is estimated toincrease further.32 per cent active users of the Internet in India use it for sourcing informationand research. Back in 2001, only 20 per cent used the Internet for searchinginformation. E-mail as a killer application is on the downslide with only 46 percent of subscribers using the Internet for e-mail, compared to 64 per cent in2001.

The Factors considered by E-consumer while purchasing

Insurance are.

All e-consumers, whether corporate entities or individuals, willcontinue to select insurance based on the following four criteria:

Price - This is usually the foremost consideration and is theprincipal driver behind shopping around.

Trust - Here there are two elements.

1. Is it secure to buy on the web / a particular website and

2. Buying from a trusted name may mean customers are happynot to research alternatives.

Convenience - Although the customer retains his power tochoose who to buy from, the pressures of the modem world willmean convenience buying becomes a threat to a value offering.i.e. a companys

Service - Service is particularly important when a product is

purchased and when a claim is made.

There is evidence from research performed by Forrester in the USthat of these four criteria, price is predominant. According to theirresearch, price has approximately 77% more impact on consumersinsurance purchase decisions than brand. Price overshadowed allother purchasing criteria, including physical presence.

The Advantages of E insurance:

* Low cost:

30


31/81

The internet is made up of electrons, so there is not really anythingphysically to grab hold of like in a brick and mortar business. Thisconsiderably reduces the costs as you don't really need any

materials or buildings, Just a computer with World Wide Webcapabilities. Internet channel is the lowest cost distributioncompared to others which are prevalent in insurance industry.

* Very fast:

It's made up of electrons so it's VERY fast. Click a link, and youcould be looking at an Australian website, click another one andyou could be in America. If you wanted to get information any

other way from these countries, you may end up having to go there.The World Wide Web eliminates the need for this. Similarly itworks in distribution you do not have to visit the insurer or call anagent for purchasing insurance while it is just a click away.

* Global reach:

For an insurerit means, you don't have to set up shop somewhereand sell to the locals. You can set up an online shop, and sell toanyone in the world. This means a huge increase in potential

revenues and a fraction of the cost it would take for you to set upshops all over the world. In U.S.A. there are virtual insurers whodont have the branch network.

* Expenses:

A major advantage to the insurer of selling through the newelectronic channels is the scope for greater automation. Under thenew channels, it is the customer who enters personal details

directly onto the web, through computer, to obtain a quotation. Ifthe customer accepts it, his data will be fed automatically to theinsurers mainframe - using an updated version of the processcalled Electronic Data Interchange (EDI). All administrationsuch as sending out policy documents and setting up direct debitscan then be processed electronically. As data is entered only once(and by the customer) there is a huge potential for reducing initialadministration expenses. Expense savings will arise not just at thefront end but also throughout the life of each policy and

particularly when a claim is made. The level of savings will bedependent on the degree of each customers appetite for electronic

31


32/81

fulfillment. Savings and improvements in service will also followfrom B2B initiatives as insurers increasingly empower distributorswith end-to-end web enabled communication and processes.Commission is also expected to reduce through the use of B2B

applications for commoditized products and move from beingpremium based to transaction and/or service based.

Examples of the comparative level of savings expected areillustrated below:

Estimated Policy Origination Cost

32


33/81

Estimated Policy Administration Cost

PROBLEMS OF INTERNET MARKETING IN INDIA

In India Internet marketing faces a lot of problems. We can divide

them into four categories. They are:-

33


34/81

1] LEGAL & REGULATION PROBLEMS: - The first set of problems emanate from the absence of legal and regulatoryframework for e-commerce.E-documentation not yet legally admissible. Most of developed

countries have embraced e-documentation as legal tender .In Indiait is not legally admissible. Current Indian laws does not providefor digital signatures, digital certification, electronic paymentsystem and on line filing of statutory documents of now a physicalsignature is necessary for approving of an online order.Internet marketing also needs effective and trusted mechanisms for

privacy and security. This has several dimensions likeconfidentiality, authentication, non-repudiation and certification.

2] ABSENCE OF TAXATION LAW: - In India, the government is yetto come up with taxation laws for e-commerce systems.

3] INFRASTRUCTURAL PROBLEMS: - India does not have theinfrastructure needed for effective Internet marketing. The basicinfrastructural problems are :-

LOW DENSITY OF TELEPHONE, PCs, and INTERNET: - In India,the telephone density, PC population and density of Internet accessare too low to support viable e-business. The one who has access to

Internet face a difficulty in logging onto the Internet because ofpoor quality of last mile connection.

NETWORK LIMITATION: - In India many companies do nothave network of their own.

INFRASTRUCTURAL BOTTLENECKS: - Infrastructuralbottlenecks at the delivery end will also hamper Internet marketingin India, delivery is not easy in India within 24 or 48 hours becauseof Indian roads and airways.

4] COMMERCIAL PROBLEMS: - Payment problem is one of thesignificant problems in India .there is low density of credit cards,debit cards, and smart cards in India and those who have cards theycannot pay to international sellers due to some regulations.

TELCASSURANCE (M-COMMERCE)

M-commerce or mobile commerce per se, is basically aboutbuying and selling products and services through wireless handheld

34


35/81

telecom devices such as mobile phones and PDAs. It is an entirelynew sales and promotion channel, which is seen as the enabler foran entire range of mobile Internet services, supporting paymentsfor telecom, information, media and entertainment services that are

available anywhere, anytime.

Touted as the next-generation of e-commerce, m-commerceenables users to access the Internet without needing to find a placeto plug in. It is one of the fastest growing e-business markets andwill involve the development and design of a host of newapplications, services, business models and technological solutions.In fact, it is seen as a complementary service option to both B2Band B2C e-commerce.

According to market reports, the term m-commerce has recentlynot only achieved widespread recognition but is also becoming ahighly visible symbol in the contemporary language of theinformation technology culture that has brought significant changesin the consumer era, along with profound changes in theterminology and technology of e-commerce. However, as contentdelivery over wireless devices becomes faster, more secure, andscalable, there is wide speculation that m-commerce will surpasswireline e-commerce as the method of choice for digital commerce

transactions.

The industries affected by m-commerce include financial services(insurance), involving mobile banking (when customers use theirhandheld devices to access their accounts and pay their bills) aswell as brokerage services, in which stock quotes can be displayedand trading conducted from the same handheld device;telecommunications, in which service changes, bill payment andaccount reviews can all be conducted from the same handheld

device; service or retail, as consumers are given the ability to placeand pay for orders on-the-fly; and information services, whichinclude the delivery of financial news, sports figures and trafficupdates to a single mobile device.

In late 90s before the explosion in the prepaid package andreduction in tariffs, a very few part of the population owned amobile phone. Latest surveys shows that a significant and growingnumber of people prefer to use a mobile phone in preference to a

fixed line telephone. People find a mobile phone more convenientand flexible, and are able to control their usage through prepaid

35


36/81

vouchers. Over 97% of the UK population has access to either afixed or mobile phone. 2.3m people live in homes without a fixed

phone and of the members of the public without a fixed line, 55%use a mobile phone.

Since they have such a widespread use, mobile phones should betaken seriously as a new method of selling insurance. Indeed, somegoods and services have already been purchased using them.

Growth drivers for m-commerce

Over the past few years, the mobile and wireless market has beenone of the fastest growing markets in India where the mobileinfrastructure is comparatively much better than the fixed-line

infrastructure.

The growth of underlying infrastructure is a large reason why weare seeing interest in m-commerce. There is a critical mass of

people who are ready to embrace m-commerce, but the strongreason which could fuel the growth would be the organized retailindustry which is showing positive signs and could be termed asthe primary reason as to why we think m-commerce could be huge.

Growth in the telecom sector makes the addressable market for m-

commerce large at over 210 million. With the mobile subscriberbase predicted to be over 500 million by 2010, m-commerce is anindustry looking for exponential growth. As a personal device amobile phone is constantly with the consumer. This is anotherimportant factor increasing the opportunity to transact. With amobile phone, the issues of physical presence at an outlet, access tothe Internet, amongst others are eliminated, giving the consumerthe opportunity to transact anytime, anywhere.

Mobile phones have greater penetration than the Internet in India.SMS has almost universal reach. Consumers are alreadycomfortable using the mobile phone for services other than voice.The mobile phone, unlike a PC, is not required to have a liveelectrical connection to function. The natural progression of thesetrends leads to commerce via a device that is connected, on the

person and offers convenience unmatched by any other channel.

The future of m-commerce

36


37/81

Experts believe that m-commerce in India will reduce the frictionin transactions associated with time, space and security. All

products and services that are standardized or with a sharedunderstanding can use m-commerce to greatly improve customer

convenience and business volumes. It would also be driven byorganized retail, entertainment, P2P transactions and trading.Besides, it would thrive on the backdrop of targeted marketing,coupons and comparative purchasing.

There are all the reasons to believe that m-commerce wouldtakeover Internet commerce in terms of the number of transactions.The number of m-commerce users would definitely outnumberInternet users and I predict more than 60 percent of the mobileusers being involved with m-commerce in one way or the otherover the next five years. We would also see lot of synergy betweenInternet and mobile commerce over coming days especially around

banking and Internet based purchases.

There is no doubt that in the coming years, m-commerce would bea significant channel. More than m-commerce, m-paymentswould have evolved. It would be interesting to watch whether it isthe banks or the mobile operators who gain ground here.

37


38/81

THE CASE OF BHARATI AXA LIFE

INSURANCE

Bharti AXA Life Insurance Company, the private life insurancejoint venture between Bharti Enterprises and AXA Group launch ofits first 'Telcassurance' initiative by establishing presence in around50 exclusive Airtel Relationship Centres (ARCs) coveringMumbai, Bangalore, Chennai, Kolkata and Hyderabad, including20 ARCs in New Delhi. Says Mr Nitin Chopra, CEO, Bharti AXALife Insurance, "We have launched 'Telcassurance' as a distributionchannel to tap the vast potential that the 40 million Airtel customer

base offers to our mass market business strategy. Our first initiative

for this channel introduces to Bharti Airtel customers visitingARCs, a range of life insurance services and access to qualityadvice on financial protection.

The fact that these services are offered by a group company of theirtrusted telecom services provider will, I believe, encourage thisvast and fast expanding consumer group to buy life insurance. Thiswill help us achieve the dual benefit of extending life insurance to

a potential and growing customer base while contributing to theoverall penetration of insurance in the country."

The company plans to establish its presence in around 250 ARCsby December 2007 to target the rapidly growing customer base ofBharti Airtel. "We aim to expand this coverage to 600-650 ARCsin the country by next year," adds Mr. Chopra. Bharti AXA Life'sinitiative at the ARCs covers branding, access to product literatureand dedicated financial advisors, with the objective of lead

generation and providing access to quality financial advice.

38


39/81

BANCASSURANCE

Bancassurance symbolizes the convergence of banking and

insurance. The term has its origins in France and involvesdistribution of insurance products through a bank's branch network.While bancassurance has developed into a tremendous successstory in Europe, it is a relatively new concept in Australia andAsia.

Most new insurers have entered into memorandum ofunderstanding with banks to use their branches as outlets for

marketing standard products. State Bank of India, Vysya Bank andJ&K Bank already has joint ventures in life insurance. Vijaya Bankand Punjab National Bank are in the midst of finalizing life andnon-life venture.

The Insurance Act allows only those companies registered underthe Companies Act to become corporate agents. This gives the newgeneration and the old private sector banks a head start over Publicsector banks, which are technically not eligible to IRDA; IBA &RBI are in discussions to iron out the various issues, as publicsector banks will play a key role in the distribution of products.

In terms of Regulations issued by the Insurance Regulatory andDevelopment Authority (IRDA) agent for insurance companieshave to obtain licenses. Such licenses may be issued to individualsor to corporate bodies, like banks, firms, co- operative societies,etc. In case of corporate agents the license will be issued to person

who is designated by the corporate bodies as Corporate InsuranceExecutives. In addition to corporate agent may avail the servicesof the specified persons, who will have to obtain certificates. Thissupplement is written for the benefit of those who are working in

banks and seek to qualify for the licenses and certificates.

The supplement is to be studied along with the main course, whichis the basis of the training and examination for the individualagents. So far, there is no such supplement for other corporate

agents in uniform manner. In the case of banks however there is

39


40/81

likely to be such common issues. That is justified for specialsupplement.

Meaning & Definition

There are many definitions of bancassurance and, in essence it doesdepend upon the model used, and the stage of development.However, the definition of a fully developed model that is mostcommonly used is:

' Manufacturing and distributing cost effectively banking and

insurance products to a common customer base

In its full holistic form it realises the full potential of the customerdatabase of the bank to develop an excellent customer focused

service for consumers, and the highest value on returns for thebank and insurer. It is not just about selling insurance products to bank customers but exploits the true synergies between, andrespective strengths of the bank and insurer.

Bancassurance is the term used to describe the sale of investment products in a bank. The word is a combination of "banc" and"assurance" signifying that both banking and insurance is provided

by the same corporate entity. The usage of the word picked up as

banks and insurance companies merged and banks sought toprovide insurance, especially in markets that have been liberalisedrecently. It is a controversial idea, and many feely that it gives the

banks too great control over the financial industry. It is no longerprohibited in USA after passage of Glass Stegalle Act in USA.Gramm-Leach-Bliley (GLB) Act further codified this.

Bancassurance is a word coined in western world, when banksbegan to get involved in marketing of insurance business. The

involvement took different forms in different countries. In somecountries, the same institution would offer both banking andinsurance products, seperately or together as customers may need,managing both in businesses themselves. This was possible whenthe institution is allowed to transact both insurance and banking

businesses. This was permitted to certain countries. The product orservices offered to the customer was the product of the bank andhad in it, some elements of insurance. This was strictly banned ininsurance.

40


41/81

In practice, however, there are variations. One variation was that banks may offer both services combined, but having done the business, pass on the insurance part of funds to an insurance

company, with whom it had an alliance or a business arrangement.Both of them may be under the same industrial group.For example when Unit Trust Of India offered Unit Linked LifeInsurance Policies, it had an arrangement with Life InsuranceCorporation to the extent of the term insurance component. ThePeerless used to offer its account holder insurance cover onaccidental death. This was done by the arrangement with generalinsurance company. Although marketed as one product, it was

done under different business entities. The funds were accountedfor and managed seperately by separate institution.

The pattern of developing in India is that the bank markets theinsurance product for fee. None of the banks services are modifiedor enhanced by the insurance service. Also the benefits offered arenot in any manner modified or enhanced with the association of the

bank. The product in no way is different from what any other agentof insurer may offer. The bank is also an agent of the insurer.

Relevance of Bancassurance in the Indian financial sector

I. Integration of the financial service industry in terms of banking, securities business and insurance is a growing worldwidephenomenon. The Universal Banking concept is evolving on theselines in India.

II. Banks are the key pillars of Indias financial system.Public have immense faith in banks.

III. Share of bank deposits in the total financial assets of households has been steadily rising (presently at about 40%).

IV. Indian Banks have immense reach to households.Total of 65700 branches of commercial banks, each branch servingan average of 15,000 people.

V. Banks enjoy considerable goodwill and access in therural regions.

41


42/81

There are 32600 branches in rural India (about 50% oftotal), and 14400 semi-urban branches, where insurance growth has

been most buoyant. 196 exclusive Regional Rural Banks in deep

hinterland.

VI. Banks have enormous retail customer base. Total of 406 million accounts with aggregate depositsof Rs.700, 000 crore as at Sept 2000.

Share of individuals as a category in bank accountsis steadily increasing.

Rural and semi-urban bank accounts constitute closeto 60% in terms of number of accounts, indicating the number of

potential lives that could be covered by insurance with the upfrontinvolvement of banks.

VII. Banks world over have realized that offering value-added services such as insurance, helps to meet client expectations.

Competition in the Personal Financial Services area isgetting `hot in India.

Banks seek to retain customer loyalty by offeringthem a vastly expanded and more sophisticated range of products.

VIII. Insurance distribution helps to increase the fee-basedearnings of banks to a considerable extent.Internationally, insurance activities contribute significantly to

banks total domestic retail revenues.

IX. Fee-based selling helps to enhance the levels of staff productivity in banks. This is vitally important to bring higher motivationlevels in banks in India.

X. Banks can put their energies into the small-commission customers that insurance agents would tend to avoid.

Banks entry in distribution helps to enlarge theinsurance customer base rapidly. This helps to popularize insuranceas an important financial protection product.

XI. Bancassurance helps to lower the distribution costs of insurers.

Acquisition cost of insurance customer through banksis low. Selling insurance to existing mass market banking

42


43/81

customers is far less expensive than selling to a group of unknowncustomers.

Experience in Europe has shown that bancassurancefirms have a lower expense ratio. This benefit could go to the

insured public by way of lower premiums.

XII. Banks have an important role to play in the pensionsector when deregulated.

Low cost of collecting pension contributions is the keyelement in the success of developing the pension sector. Moneytransfer costs in Indian banking are low by international standards.

Portability of pension accounts is a vital requirement,

which banks can fulfill, in a credible framework.

THE INDIAN SCENARIO

In India, no company is allowed to transact both insurance andbanking business. They are kept separate. In fact, even a companyregistered as an insurer has to choose between a life and non-life

business. It cannot do both. Therefore the banks in India Cannothave the advantages which are available in the European Context.

There are joint ventures in India between banks and foreigninsurers. State Bank Of India, HDFC, ICICI, and Vysya Bank areexamples. But apart from a greater willingness to help each other,the joint venture will not give either party a greater advantage inoher;s business. The joint venture is an entirely independent unitoperation, with separate personnel and funds and subject todifferent regulations.

The only way in which the bank can be associated with insurance business in india by becoming a corporate agent, for aremuneration. The bank can do so for a paricular lifr insurer. The

bank cannot develop any insurance products. It can ofcourse makesuggestions on the basis of its intimate contacts with the customers.Since 2000 many banks and isures have to agreed to arrangementsfor mutual benefit. The LIC has tied with more than one bank, soalso have other Insurers.

For more than a hundered years insurance business had been soldthrough insurance agents and their supervisors. This sytem had not

43


44/81

been very satisfactory. The LIC inherited this system. The effortsto make the agents more professional had not yield verysatisfactory results, despite incentives and training programmes.Manyof them continued to treat the agency busiess casually, as just

source of additional income. The turn over had been high and theeffort of replenishing the strength, costly. The banks have skilledstaff, to whom procurement of insurance can be assigned as a duty.

Opportunities and Challenges

An endeavor is made to identify and deliberate upon some keyopportunities and challenges relevant to the emergence of

bancassurance in India. It is proposed to consider each of the

opportunities and associated challenges together to give aperspective to the subject under discussion.

The biggest opportunity perceived by all players in the field is vastuntapped an undeserved population. It is the fact that the

penetration of the insurance sector in the rural and the semi-urbanareas is low. The challenge of tapping this vast market is ininculcating savings habit as a provision for the future. Looking atthe level of poverty, the availability of surplus funds for investingfor future economic security and the propensity to save are verynominal. Success lies in evolving novel products and schemes andlinking them to the existing relationship of the customers with the

banks.

Wide coverage of geographical areas and availability of bankingservices through branch network, especially of the PSBs, is another

potential source of great opportunity to sell insurance productsthrough banks. However it is observed that there is a fastergrowing awareness and demand among bank customers for prompt

and cost effective service and also remote access to their accounts.In spite of the hype created total branch mechanization (TBM) andfull computerization of branches, this is mostly in metro and urbancenters.

The rural and semi- urban branches still functioning using manualoperation systems. Complete integration of branch network andoperations using the communication infrastructure and maintainingit through appropriate software, the difficulty of hiring of

professionals from both the sectors with a high comfort level in hi-tech environment and establishing call centers. In the mean time

44


45/81

the challenge lies in setting up distribution procedures consistentwith the manual systems in most banks.

The opportunity to augment fee-based income is another alluring

factor, which has impetus to the concept of bancassurance in India,especially in a regime of falling interest rates and low levels ofcredit off-take. Banks need to take a careful assessment of all costsinvolved, including hidden and creeping costs to arrive at the net

benefit. Initial infrastructure set up cost training and orientationcosts, communication and lead conversion costs, employee

productivity and breakeven level of business and such other issuesneed to be gone into thoroughly. In short, an in-depth analysis ofthe value chain should be done in order to draw valid inferences

and assure oneself of the real income through fee/ commission inselling insurance products.

The insurers see leverage of existing assets of banks, mainly vastand valuable customer database as a great opportunity. While thisis true to some extent, the existing database is not available to theinsurers in a ready to use form. There was never a conscious effortmade by the bankers towards effective client segmentation,evolving of neither proactive customer acquisition policy norcreation of an institutionalized information pool.

Most of information on customers and cultivation of relationshipwith clients has been at a personal level. Thus immediate challenge

posed is to recast the available database and create customer-centric access records for efficient exploitation of this opportunity.Another area that could be of interest for bankers to sell insuranceis exploiting the corporate customers and tying up for insurance ofthe employees of corporate clients, which could be an avenue withthe easy access.

In most cases of corporate accounts bank take up an activity ofsalary disbursement of employees, offering of personal loanfacilities. Where employee base of the corporate client is quitesizeable, the economics work out favorably to open extensioncounters at the factories and work place and these would be betterequipped to sell insurance because of the exclusivity of itsoperations, good relationship with the employees and close theliaison with the top management.

Leveraging the availability of large pool of professional in bankspresents itself as an opportunity to insurers in selling their products

45


46/81

through banks. However it has been the experience elsewhere inthe world that there is need felt for adequate training of theemployees in view of vast differences in work culture. Reluctanceto learn on one hand and inability to sell complex insurance

products on the other two are important aspects of challenge fromthe human resource angle.

Bringing relevance, motivation and skill development at aoperational level at a bank branches is a key challenge that needsconsiderable attention to ensure the success of bancassurance. Oneirritant in respect of utilizing the existing bank staff isremuneration and compensation schemes. A rational, transparent,well defined and productivity linked package has to be agreed upon

and put it in place with quantitative distribution of amount payableto all persons involved in the chain.

While the above points are from the macro level view, there aresome micro aspects that need to be focused upon. Many bankshave seized the opportunity to partner with insurers seeing theapparent benefits, but to translate into reality the challenge iscreating an environment of top- level involvement of bankmanagements. There is a lot of fanfare and media coverage whileentering into partnerships, but the same enthusiasm and direction

from top to sustain the tempo may be lacking.

Resolving possible conflicts of interest, establishing credibleservice level agreements between the banks and the insurer,

parking of funds and their management, and other similar kinksneed to be straightened to ensure mutually enriching relationships.

PROS AND CONS OF BANCASSURANCE

The reforms in the insurance sector leading finally to the openingof the insurance sector for private participation have brought in itswake major changes not only in the design of the productsavailable in the market but also the manner in which they aremarketed. We have today a host of products coupled with a largenumber of intermediaries who market them.

The emergence and spread of bancassurance has been one of the

most significant developments in the retail financial services sectorin India. Many banking institutions and insurance companies have

46


47/81

found bancassurance to be an attractive - and often profitable -complement to their core businesses. While less than two per centof total premiums are generated through this channel, there areexpectations that bancassurance will grow to register a dominant

share in the widening insurance market during this decade.

World over, while both life and non-life companies seek to engagebank branches, non-life products have featured less prominently inbancassurance distribution. The major reason is the complementarynature of life insurance and banking products. Both are in thenature of savings accumulation, one short-term and the other long-term. The enormous trust that the banks command in the minds of

public is an important reason why insurance companies seek to

enter into wide ranging banking partnerships. The banks, in turn,find that the customers appreciate the provision of integratedfinancial services at the banks branches, which in turn builds

better customer loyalty and retention levels.

The insurance companies and the banks together find that theircollaboration at providing a package of financial services not only

benefits customers but also maximizes their profits.

The early bancassurance distribution arrangements in India are

taking off under two categories:-

Distribution alliances by way of corporate agency and insurancebroking relationships, and referral arrangements. Pure distributionarrangements provide both banks and insurance companies withadditional sales potential with minimum of investment.

The referral form of distribution is an arrangement, whereby thebank passes on business leads to career agents of the insurance

company with which it has a tie-up. Unlike the referralarrangement, an agency relationship has the merit of grooming the

bank staff to sell insurance products after receiving proper trainingin accordance with the syllabus prescribed for the purpose. Theregulations restrict banks to enter into corporate agencyarrangement with only one life insurer and one non-life insurer.Banks becoming a corporate agent need to designate a seniorexecutive to be the nodal point with responsibility to account foradherence to the terms of the insurance regulation. From a

regulatory perspective, we would prefer that insurance companies

47


48/81

go in for a more formal corporate agency model rather than thereferral model.In India, there are 75 branches per million inhabitants and bankshave expertise on the financial needs, saving patterns and life

stages of the customers they serve. Clearly, that's somethinginsurance companies -- both private and state-owned -- would findnearly impossible to achieve on their own. Banks also have muchlower distribution costs than insurance companies and thus areemerging as the ideal distribution channel. Tying up with banks isthe logical route for insurers to take for achieving extensivegeographical spread and countrywide customer access at minimumcost.

Until the entry of private insurers, state-owned insurance entitiesrelied solely on the tied agency force and their own employees. Butagents and employees have their limitations. After a while, the lessaggressive ones see their sources and contacts dry up, and growthin the sale of new policies decreases. Distances handicap eventhose with a sales drive. Here banks excel. They have a captive andgrowing customer base they can exploit to cross-sell products. Theconcept of universal banking-- one stop financial servicessupermarket -- which originated in Europe is slowly beginning toevolve in the Indian scenario by offering the prospect of low-cost

one-stop shopping for all of a business's financial services. Tosellers there's the prospect of scale economies and cross marketing.

Bancassurance will help cut overlapping costs and try to gaineconomies of scale and scope and, thereby, driving down unit costsin the fashion of the vertically integrated 20th century corporation.With a low-cost structure, the banks can leverage on a cost-effective bundle of business financial services, including cashmanagement, lending, capital markets, risk management,

retirement savings, and all types of commercial and personal linesof insurance.

Bancassurance has the potential to be an effective distributionchannel in India, especially because of extensive network, builtover the years. Insurance companies have to take advantage of thecustomers long-term trust and relationships with banks. Theassociation is a mutually profitable one, where the bank can widenits range of products on offer to customers and earn more, while

the insurance company gains by getting constant visibility at the

48


49/81

bank branches, and also the security of receiving premiumpayments on time.

The advent of the e-economy has also radically challenged

traditional principles of corporate strategy, including how value iscreated and the basis of competition. Today, creating value is aboutscale in the formation and management of strategic alliances. A

bundled package of commercial financial services from a financialconglomerate, for example, is likely to benefit small and middle-market businesses most. Large corporations already enjoyenormous buying power and can afford at least some internal staffthat is experts in each of the intricate areas of financial services.

The products that are likely to sell through bancassurance are

simple vanilla products. There is an element of complementarily in banking and insurance products. The various schemes fordisbursing credit are likely to generate a demand for insurancecover, and availability of insurance cover in turn will facilitatedisbursement of credit in risk prone activities. The insurancecompanies need to introduce simple products that can be sold over-the-counter at the banks. Both Banks and insurance companieshave rural and social obligations to meet as prescribed by theirrespective regulators. The Banks and insurance companies can

work together in this area and it is possible that the banks whilemeeting their obligations in terms of lending requirements to therural and social sectors can complement the efforts of the insurersin meeting the latters obligations too. Such relationships will alsohelp in synergizing the strengths and capabilities of every insurerand the banks, which with their network in the rural areas offer a

perfect opportunity.

The bancassurance model also addresses the problems of

individuals and small and medium sized establishments by providing a variety of financial services under one roof. Theconvergence of financial services reduces the operational costs ofthe banks and insurers, which can be passed on to the customerwithout materially affecting their own margins.

However large customers continue to value diverse and objectiveadvice, and use different banks, payroll companies, insurancecompanies, and tax and legal firms. This enables gaining fresh

perspectives from all of them because they fear that with a bundled

package their interests would be subordinated to those of the

49


50/81

provider. This category of customers is bound to be outside thescope of bancassurance.

Financial services and information technology have undergonerapid and massive changes in all aspects of their business: product

and services, sectoral structure, market segmentation, competitiveenvironment. Today Information Technology has changed thenature of financial markets and financial transactions. The pace andreach of change are unlikely to slowdown in the foreseeable future.While the Banks and capital markets have adapted to thesechanges, can insurance companies cope with this change? By andlarge, insurance companies have been conservative users, puttingheavy emphasis on proven reliability and toughness of ITapplications. Major applications decisions and development

processes are often ponderous and time-consuming. Whileinsurance companies accept the significance of informationtechnology in their business, they remain undecided in theirattitude towards it: is at a tactical tool or strategic lever? Is it a core

business? Does technology offer sustainable competitiveadvantage? Is it a means of differentiation among between banksand insurance companies?

On the other hand, bancassurance is a network business, whose

value increases with the number of users and wider reach, whichimplies at least some degree of inter-operability. Hence the needfor co-operative systems and networks: financial institutions have

been remarkably successful in developing and managing suchsystems and networks. There is no denying that there aresignificant issues relating to software and systems integration for

bancassurers. The transition from closed legacy systems to opennew technology is not complete, and integration of parallel legacysystems is complex. The existing institutions are adapting to thenew environment while the new entrants are coming up with thestate of art technology and hence will have no difficulty inadopting the bancassurance model.

The emergence of banks as promoters of insurance companies andthe distribution of insurance products through corporate agencymodel by the promoter banks also raises concerns about the

potential concentration of economic power and the ability of theregulators to manage risk. A more ubiquitous concern in future isthe potential for "systemic risk" in the economy. This is an area

that requires constant monitoring by the regulators.

50


51/81

Social, environmental and ethical concerns are increasinglyrecognised as a source of both risk and opportunity. Clear

procedures need to be established to include such concerns as part

of the review process of the insurers while examining bancassurance partnerships. Banks also need to have clear anddetailed procedures to protect the integrity of their customers dataand to give customers the choice as to the level of privacy theywish to enjoy.

As intermediaries, insurers are taking on new financial risks.Insurers investing in credit derivatives effectively take on bankcredit risks. Insurers, who underwrite professional indemnity

policies for bank directors and officers, effectively assume banks'operational risks. Insurance company managers must keep abreastof these developments. They must understand how theircompanies' risk profiles have changed, and how new activities canhave opposing effects on both sides of the balance sheet. Allinsurance industry professionals need to become more astute aassessing risks, and competency needs to be upgraded at all levelsin the company.

Regulators must also keep pace. In supervising individual insurers,

regulators need to look beyond insurance risks and protecting policyholders. From a broader systemic perspective, greaterengagement of insurers in financial markets raises importantquestions concerning their impact on financial stability. How wellare insurers managing this new portfolio of risks? These are issuesthat will continue to engage the attention of the regulator.

In addition to the larger issues raised about the conglomerates,there are also a number of operational issues that have to be

addressed for a successful experiment in bancassurance. Whilebanking is a short-term business, life insurance is a long-termrelationship with the client. The insurers and bankers have tounderstand and appreciate each others prospective and worktogether to make a success of the business of selling insurance.Unless the operational details are worked out and the Bank stafftrained adequately, it would be difficult to ensure a coordinatedaction at the field level. It is not enough that there is commitmentto the model at the higher management level. It should percolate to

the lower levels.

51


52/81

The large untapped potential for insurance exists in the rural areasand the branch network in those areas is primarily under publicsector management. The success of the model would, therefore,largely depend on the attitude of the employees of the public sector

undertakings. Are they likely to look at it as an opportunity or asan imposition? What should be done to motivate them to sellinsurance products? How do we devise a system of incentives forthose who participate in this programme? The effectiveness of the

programme will depend upon how successfully this issue isaddressed.

The credibility of the model comes into question if there is mis-selling. A cordial banker-customer relationship that has developedover the years would turn hostile if due to ignorance or oversight

the full implications of an insurance policy are not fully explainedby the banker or understood by the customer. There is, therefore,need for great caution in selecting the products for sale through thismedium. In addition, those in charge of sales should be trainedadequately to avoid any miscommunication.

As indicated earlier, the number of policies sold throughbancassurance model is modest as of now. I have no doubt that ithas the potential to be an effective distribution channel because ofthe extensive network, vast customer base and the desire to

maximize revenues from other sources to make up for soft interestregime. I am equally confident that bankers and insurers wouldtogether address and overcome the difficulties that arise in this

partnership and serve the interests of their institutions whileextending the benefits of insurance to the large sections of

population which need this facility and but are presently outside itsreach.

COOPERATIVES

(NGOS, SHG & MFIS)For large companies to tap vast markets at the bottom of the

pyramid (BOP), quality products and services have to be speciallydesigned and developed or selectively altered and made availableat a lower cost. Serving BOP customers is a profitable opportunityfor corporations. It is also as a social imperative as two-thirds ofthe human population belongs to bottom of the economic pyramid.

The Insurers have targeted only customers at the upper end of the

economic pyramid and have ignored BOP customers assuming thatthey are inaccessible and unprofitable. Now they are viewing BOP

52


53/81

markets as an unexploited opportunity and take proactiveinitiatives to fulfill the needs and wants of low income consumers.Moreover, through this Insurers can curtail poverty and improvethe living conditions of the worlds poorest population.

Also in India all insurers have to achieve their specified businessfrom rural sector. These are known as social norms and IRDA isvery watchful on this. Recently IRDA has announced that the

percentage of business from rural area has to be increased, hence itis likely that target of social norms will be revised upward soon.

In such a scenario cooperatives (as a distribution channel) can bevery successful. We have witnessed the interest of insurers isincreasing in bottom of pyramid.

Advantages of a co-operative/mutual insurance

Organisations in the social economy such as co-operatives, mutualsand voluntary associations may be formed because the state doesnot provide sufficient quality or quantity of a particular servicesuch as health, care and education. Consumer co-operativesgenerally emerge when existing services either are not accessibleor not available. Consumer co-operatives, such as an insurance co-operative, are considered as an extension to the individual

members household economy. They aim to improve theconditions for the consumer and the economy of the household(which includes time, knowledge, self-sufficiency and money). Theconsumer co-operative will assist the households to organise andsolve their problems through education, dialogue and improvedaccess to services and products available.

Identifying the needs of the poor

Co-operative and mutual insurers are in a better position to identifythe needs of their customers and community due to the closer linksthrough trade unions, credit unions, agricultural and consumer co-operatives. The resulting increased awareness and understandingenables a more personalised, flexible and appropriate service.

Documents

Unicon Investment Solution