INSURANCE
Meaning of Insurance
• Insurance is a policy from a large financial
institution that offers a person, company, or other
entity ,reimbursement or financial protection
against possible future losses or damages.
• Insurance is bought in order to hedge the possible
risks of the future which may or may not take
place. This is a mode of financially insuring that if
such a incident happens then the loss does not
affect the present well-being of the person or the
property insured. Thus, through insurance, a
person buys security and protection.
Meaning of Insurance contd…
• The risks of the large group of persons are pooled
and the actual loss suffered is compensated from
the pooled funds, is the modes operandi of
insurance.
• In the contract of insurance, the insurer (insurance
company) agrees/undertakes, in consideration of a
sum of money (Premium), to make good the loss
suffered by the insured against a specified risk
such as fire and any other similar contingency or
compensate the insured or benefactors on the
happening of a specified event such as accident or
death.
Meaning of Insurance contd…
• It is a contract
• Protects against financial losses caused by
unforeseen events
• Insurance company provides a certain
amount of money
• In return the insured makes periodic
payments
Insurance
• Though loss of life or injuries incurred
cannot be measured in financial terms,
insurance attempts to quantify such losses
financially.
• Insurance can be defined as the process of
reimbursing or protecting a person from
contingent risk of losses through financial
means, in return for relatively small, regular
payments to the insuring body or insurance
company.
• Insurance can range from life to medical to
general
Life Insurance
Medical Insurance
General Insurance
Insurance - Concepts
The Normal Roles
INSURANCE COMPANY
AGENTS
BROKERS
CONSUMERS
Factors affecting Life Risk
• Age
• Physical Condition
• Personal History
• Family History
• Occupation
• Habits
Types of products
• Term Insurance
• Permanent Insurance
• All other types available are combinations
of these two generic products
Term Insurance
• Provides insurance for a specified period
• low cost
• if life assured dies, death benefit paid to the
beneficiary (in lumpsum or at regular
intervals)
• if life assured survives till end of the term,
protection ceases
• death benefits can be level or decreasing
Term Insurance
• Level - the death benefit remains same at
all points during the term
• Decreasing - Death benefit systematically
decreases with time
Permanent Insurance
• Provides protection for ones entire life time
or upto a specific age
• More costly than Term Insurance
• Combines Savings with Insurance - has
cash value
• Can have either level or increasing death
benefits
Permanent Insurance Types
• Whole Life - provides a guaranteed level
death benefit for a fixed premium
• Flexible Whole Life - it may have
~ flexible death benefit
(Variable Life)
~ flexible premiums
Some Other Variants
• Endowment Assurance - a combination of
term and whole life insurance which
involves:
Payment Of Sum Assured
• upon death during a fixed term
• at end of the term if Insured survives the term
Variable Vs. Universal Life
• Variable
~ Fixed premium
~ Separate reserves held in
separate account and invested
~ Death Benefit And Cash
Values vary according to actual
investment experience
~ Option of investing in
different funds lies with policy
owner
~ Death Benefit guaranteed
irrespective of Investment
results
~ Investment risk passed on to
Policy Holders
• Universal
# Unbundled Contract separates protection and
savings
# Flexible premium
# Portion of premium used
to purchase Term Assurance
# Balance less expenses goes
to investment
# Policy owner allotted
“Units” at “Sell” rate of
company
Universal Variable Life
• Amalgam of Variable And Universal life
features
• Similar to Universal Life except that
Investment vehicle can be chosen by
Insured
• No minimum guaranteed rates
• Money can be moved from one Fund to
another - “Switching”
Life Insurance - Process Flow
Process flow : Life Insurance
• Main Departments involved
–
–
–
–
–
Intermediaries
New Business
Accounts
Policy Servicing
Claims
NEW BUSINESS PROCESS
INSURANCE INTERMEDIARY MEETS
CLIENT/LIFE ASSURED
Assesses the need of the client
explains various products available
gets the necessary proposal forms filled in
and signed
gets medical examination done depending
upon requirements
LIFE INSURANCE OFFICE
assesses risks that it is exposed to
(underwrites )
calculates premium
fianlises proposal which results into a
policy (contract)
pays commission to the intermediary
sends out evidence of contract
(document) to the life assured
POLICY SERVICING PROCESS
INTERMEDIARY
- receives commission
- informs the life assured
about procedures for
servicing aspects as and
when required
LIFE INSURANCE OFFICE
- receives premium for
life assured
- pays commission to
intermediary
- pays a share of profits
to life assured (if he has
opted for it at the
outset)
LIFE ASSURED
- pays premiums as
and when they fall
due
- informs life office
/intermediary about
any alterations as
and when required
Note: The servicing of a policy would include – change in address, change in beneficiary,
assignment (transfer of rights), loan on the policy etc.
CLAIM PROCESSING:
LIFE ASSURED
- gives necessary papers
LIFE INSURANCE OFFICE
- calculates claim amount as per
rules
- pays claim to life assured or
beneficiary
Note: The various types of claims are:
- Maturity Claim:This is the amount of face value available to the life assured at
-
-
the end of the term
Death Claim: This is the amount available to the beneficiary upon the death of the
life assured.
Surrender : This is the amount available to the owner of a life insurance policy
upon voluntary termination of the policy before it becomes payable on maturity or on
death of the life insured.
Anticipated Payment : This is a predefined instalment based on a proportion of
the face amount during the premium payment period.
Advantages of Insurance
The Insurance has become an integral part of
business and human life. The following are the
advantages of insurance:
 Providing Security:
 Spreading Risk:
 Source for Collecting Funds:
 Encourage Savings:
History
• The origin of insurance is very old .
• The time when we were not even born.
• man has sought some sort of protection
from the unpredictable calamities of the
nature.
• The basic urge in man to secure himself
against any form of risk and uncertainty led
to the origin of Insurance.
• The insurance came to India from UK. with the
establishment of the Oriental Life insurance
Corporation in 1818.
• The Indian life insurance company act 1912 was
the first statutory body that started to regulate the
life insurance business in India.
• By 1956 about 154 Indian, 16 foreign and 75
provident firms were been established in India.
• Then the central government took over these
companies and as a result the LIC was formed
• Since then LIC has worked towards
spreading life insurance and building a wide
network across the length and the breath of
the country.
• After the liberalization the entrance of
foreign players has added to the competition
in the market.
• The Insurance sector in India governed by
Insurance Act, 1938, the Life Insurance
Corporation Act, 1956 and General
Insurance Business (Nationalisation) Act,
1972, Insurance Regulatory and
Development Authority (IRDA) Act, 1999
and other related Acts.
• Life Insurance Corporation of India
(LIC)
• Life Insurance Corporation of India (LIC)
was formed in September, 1956 by an Act
of Parliament, viz., Life Insurance
Corporation Act, 1956, with capital
contribution from the Government of India.
• The then Finance Minister, Shri C.D. Deshmukh,
while piloting the bill, outlined the objectives of
LIC which are:
 To conduct the business with the utmost economy,
in a spirit of trusteeship;
 To charge premium no higher than warranted by
strict actuarial considerations; to invest the funds
for obtaining maximum yield for the policy
holders consistent with safety of the capital;
 To render prompt and efficient service to policy
holders, thereby making insurance widely popular.
• Since nationalization, LIC has built up a vast
network of 2,048 branches, 100 divisions and 7
zonal offices spread over the country.
• The Life Insurance Corporation of India also
transacts business abroad and has offices in Fiji,
Mauritius and United Kingdom.
• LIC is associated with joint ventures abroad in the
field of insurance, namely, Ken-India Assurance
Company Limited, Nairobi; United Oriental
Assurance Company Limited, Kuala Lumpur and
Life Insurance Corporation (International) E.C.
Bahrain.
• The Corporation has registered a joint
venture company in 26th December, 2000
in Kathmandu, Nepal by the name of Life
Insurance Corporation (Nepal) Limited in
collaboration with Vishal Group Limited, a
local industrial Group. An off-shore
company L.I.C. (Mauritius) Off-shore
Limited has also been set up in 2001 to tap
the African insurance market.
• The General insurance business in India, on the
other hand, can trace its roots to the Triton
Insurance Company Ltd., the first general
insurance company established in the year 1850 in
Calcutta by the British.
• In 1957 General Insurance Council, a wing of the
Insurance Association of India, frames a code of
conduct for ensuring fair conduct and sound
business practice.
• In 1972 The General Insurance Business
(Nationalization) Act.1972 nationalized the
general insurance business in India with effect
from 1st January 1973.
It was after this that 107 insurers
amalgamated and grouped into four
companies :
• The National Insurance Company Ltd.
• The New India Assurance Company Ltd.,
• The Oriental Insurance Company Ltd. and
• The United India Insurance Company Ltd.
• GIC incorporated as a company
• General Insurance Corporation (GIC) which was
the holding company of the four public sector
general insurance companies has since been de
linked from the later and has been approved as the
"Indian Reinsurer" since 3rd November 2000.
• The share capital of GIC and that of the four
companies are held by the Government of India.
All the five entities are Government companies
registered under the Companies Act.
Reforms in insurance sector
• Insurance sector has been opened up for
competition from Indian private insurance
companies with the enactment of Insurance
Regulatory and Development Authority
Act, 1999 (IRDA Act).
• As per the provisions of IRDA Act, 1999,
Insurance Regulatory and Development
Authority (IRDA) was established on 19th
April 2000 to protect the interests of holder
of insurance policy and to regulate, promote
and ensure orderly growth of the insurance
industry.
• IRDA Act 1999 paved the way for the entry
of private players into the insurance market
which was hitherto the exclusive privilege
of public sector insurance companies/
corporations.
• Under the new dispensation Indian
insurance companies in private sector were
permitted to operate in India with the
following conditions:
• Company is formed and registered under
the Companies Act, 1956;
• The aggregate holdings of equity shares by
a foreign company, either by itself or
through its subsidiary companies or its
nominees, do not exceed 26%, paid up
equity capital of such Indian insurance
company;
• The company's sole purpose is to carry on
life insurance business or general insurance
business or reinsurance business.
• The minimum paid up equity capital for life
or general insurance business is Rs.100
crores.
• The minimum paid up equity capital for
carrying on reinsurance business has been
prescribed as Rs.200 crores.
• The Authority has notified 27 Regulations on
various issues which include Registration of
Insurers, Regulation on insurance agents,
Solvency Margin, Re-insurance, Obligation of
Insurers to Rural and Social sector, Investment
and Accounting Procedure, Protection of policy
holders' interest etc.
• Applications were invited by the Authority with
effect from 15th August, 2000 for issue of the
Certificate of Registration to both life and non-life
insurers. The Authority has its Head Quarter at
Hyderabad.
INSURANCE MARKET IN INDIA
• India with about 200 million middle class
household shows a huge untapped potential for
players in the insurance industry.
• Saturation of markets in many developed
economies has made the Indian market even more
attractive for global insurance majors.
• The insurance sector in India has come to a
position of very high potential and
competitiveness in the market.
• Innovative products and aggressive distribution
have become the say of the day.
Distribution scenario in the Indian market
• In today's Indian insurance market, the challenge
to insurers and intermediaries is two-pronged:
• Building faith about the company in the mind of
the client
• Intermediaries being able to build personal
credibility with the clients
• Traditionally tied agents have been the primary
channels for insurance distribution in the Indian
market; the public sector insurance companies
have their branches in almost all parts of the
country and have attracted local people to become
their agents.
• The agents are from various segments in society and
collectively cover the entire spectrum of society.
• A person who has lived in the locality for many years sells
the products of the insurance company with a local branch
nearby.
• This ensures the last mile touch point being closer to the
customer.
• Of course, the profile of the people who acted as agents
suggests they may not have been sufficiently
knowledgeable about the different products offered, and
may not have sold the best possible product to the client.
Nonetheless, the customer trusted the agent and company.
• This arrangement worked adequately in the absence of
competition.
• In today's scenario agents continue as the prime
channel for insurance distribution in India, as is
the case in most markets, supported by call centers
to a small extent.
• Almost all the new players follow this model
primarily because the regulations for other
channels are yet to be put in place.
• However there is great excitement in the industry
over the impending broker regulations, and
companies are planning possible channels in their
enthusiasm to increase volumes.
• The belief that all these channels will grow and
seamlessly integrate to bring in business seems a
fallacy.
• What has emerged is a much more difficult and
evolving market scene with existing players, more
new players coming in, and global marketing
practices and ideas being tested.
• But none of this has changed the fundamental
character of the market, which we believe will
take more time than expected.
• Both the public and new private sector companies
are fighting their own battles from the perspective
of customer perception management:
DISTRIBUTION CHANNELS
• Till date insurance agents still remain the main
source through which insurance products are sold.
• The concept is very well established in the country
like India but still the increasing use of other
sources is imperative. It therefore makes sense to
look at well balanced, alternative channels of
distribution.
• LIC has already well established and have an
extensive distribution channel and presence.
What should the companies look at
• Basically companies have to take a look at the
intermediaries they are using, whether it is optimal
to use them, and what are the alternatives?
• The new companies have attempted appealing
only to the middle, upper middle and elite classes
in the major cities.
• Contrasted with Public sector insurance
companies, with their offices across the country,
the new companies have miles to go before they
reach anywhere.
• They must overcome the mindset of the
customer that life insurance is Life
Insurance Corporation of India (LIC) and
general insurance is General Insurance
Corporation of India (GIC) if they hope to
grow in the market.
• Meanwhile, the public sector companies
are going to great lengths to revamp their
image to look and feel more contemporary
Distribution scenario in the Indian market
Public sector companies
Private sector companies
Identity is well established, but the
perception of " poor service providers"
is a stigma.
Have to build their identity in a market
where the public does not distinguish
them.
Products are not attractive and flexible
Remove the perception that anything
that looks good is expensive
enough but expensive.
To retain their creamy layer clientele
who are the most likely to be wooed by
the new companies
Work against the people's mindset
that they are not here for the long
term
Retain and attract good intermediaries.
Attract intermediaries especially
agents with the requisite qualifications
and attributes who can market the
company and the product.
Match the aura created by the new
companies in the urban market.
Run the risk of tapping an already
insured market for repeat insurance
instead of tapping new virgin pockets
in the market
• The strategy should be to use multiple banks
according to their presence in different regions.
• Success would come by using bancassurance
where it will be most effective - i.e., selling
simple, cheap products to the masses at a low cost.
• This awareness is growing and is evident from the
fact that nearly every insurance company has
partnered with one or many banks to implement
bancassurance.
Focus on multiple distribution channels
• Though a multi-channel strategy is better suited for the
Indian market as well, it is important to keep in mind that
this market is really a conglomeration of multiple markets.
•
Each of the markets within this conglomeration requires a
different approach.
• Apart from geographical spread the socio-cultural and
economic segmentation of the market is very wide,
exhibiting different traits and needs.
• Let us look at the various insurance distribution channels
and the challenges faced by them from these perspectives.
Agents
• Today's insurance agent has to know which
product will appeal to the customer, and also
know his competitor's products in the same space
to be an effective salesman who can sell his
company, the product, and himself to the
customer.
• To the average customer, every new company is
the same.
• Perceptions about the public sector companies are
also cemented in his mind.
• Today's insurance agent has to know which
product will appeal to the customer, and also
know his competitor's products in the same space
to be an effective salesman who can sell his
company, the product, and himself to the
customer.
• To the average customer, every new company is
the same.
• Perceptions about the public sector companies are
also cemented in his mind.
• The new companies are looking for educated,
aware individuals with marketing flair, an elite
group who can be attracted only with high
remuneration and the lure of a fashionable job.
• all of this may not be possible in this business
with its price pressures and the complexity of
selling insurance.
• Unable to attract this segment, they have started
easing recruitment conditions as against the
stringent norms they had earlier, thereby diluting
the process.
• While the public sector companies are able to attract
agents, they continue to suffer from high attrition rates due
to indiscriminate agent appointment.
•
The most successful of these companies' tied agents are
hardly of the elite variety of salesman.
•
They are still the neighborhood do gooders -- the postman,
the schoolteacher, and the shopkeeper -- who know the
people and are themselves known in the community.
• The challenge here is the lack of knowledge of the
competitive market and the inability to do intelligent
comparisons with the competitor's products.
• Educating and training these agents is a serious challenge
for the insurance company.
• The relevance of this kind of agent
continues even today as agents are sought or
contacted by families by word of mouth.
• Insurance companies are need not to follow
the path of FMCG's/credit card companies,
believing that a suited and booted customer
care consultant or financial consultant will
necessarily appeal to the average Indian
customer.
• Another social feature in the market is the
considerable respect for age in Indian society and
a belief that an older person knows better.
• A very young up-market agent who is a typical
salesman may not appeal to a large segment of the
middle class, which is looking for a solid
trustworthy person from whom they can buy
insurance.
• In this context it might be a rewarding exercise to
recruit some older people (who have taken VRS2
from banks and other financial institutions) to sell
some lines of products like pension plans,
annuities etc.
• Gender of agents is another relevant feature in the
rural context that makes a difference, especially
for the female population. Women to whom the
customers can relate --e.g., nurses, gram sevikas -can target the female segment of the population
more effectively.
• What is applicable for the rural women and
children health programs and population control
programs is equally applicable for insurance
selling also.
• Max New York Life has adopted a version of this
strategy by appointing gram sahayaks to sell and
service the rural customers.
• With this kind of segmentation of
intermediaries the challenge for the
insurance company lies in training and
educating these people to become effective
sales persons.
• But this in no way diminishes the benefits
of intermediary segmentation.
Brokers
• With the broker regulation under review and expected any
time, this could be the next hope, especially for the urban
market.
•
This will be a new experience for the insurance customer,
accustomed to brokers in financial services, real estate, and
travel and tourism.
• For historical reasons the image that 'broker' carries in the
minds of the customer is not very favorable.
•
Thus the new breed of insurance brokers face the
challenge of establishing credibility.
Brokers
• The positives are that brokers in the urban arena can attract
the elite and the upper middle class customer.
• Brokers represent the customer and will sell the products
of more than one company.
• They seek to determine the best fit for the client and can
effectively address the mind block faced by the public
about the various companies.
• This is applicable in the case of life insurance for the highend and corporate/group segment.
Brokers
• In the non-life segment, broking is not entirely
new, as reinsurance brokers were arranging exotic
covers.
• For individual customers also, with a wide range
of competitive products, the broker can get a good
deal.
• The corporate broking companies will have to
play a prominent role.
Brokers
• If NGOs based in rural areas can be attracted into the rural sector
cooperatives arena, they stand a good chance of succeeding and can
help the new players get a foothold in the rural market.
• These are the players with the potential to make the difference, as they
have the trust of the people.
•
We envisage scenarios like that in Bangladesh's micro lending growth
and the milk co-operatives in Gujarat selling insurance in addition to
milk production and distribution.
•
It would be a new dawn in Indian insurance distribution! With the
right impetus the Indian rural insurance scenario could be one with
high business volume and tremendous growth potential.
Brokers
• ICICI Prudential Insurance and HDFC
Standard Life Insurance have already
partnered with NGOs to sell some low cost
insurance in rural areas.
• However, the challenge lies in establishing
regulations that protect the customer and
attract the right players into the brokerage
market rather than creating another
middlemen segment eroding the premium.
Bancassurance
• Banks in India are all pervasive, especially the public sector banks.
• Can they also become the foremost channel for distribution of
insurance?
•
Perhaps in the future.
• The public sector banks, with their vast branch networks, are also
plagued by a rigid unionized workforce and archaic systems, and lack
vision of a broader service spectrum encompassing non-banking
products.
• The newer banks are constrained by their lack of reach and meager
branch strength. For banks to become a predominant channel for
selling insurance will require a paradigm shift.
Bancassurance
• But the encouraging fact for insurance companies waiting
for bancassurance to take off is that bank branches are here
to stay, and customers do want them.
•
A customer survey by Deloitte Consulting in the western
developed markets found that for banking activities,
customers place high importance on having convenient
branches in their banking relationships.
• This is good news for the Indian banks with their many
branches, and also makes a strong case for taking up
bancassurance.
Bancassurance
• The major lines of business that can be sold through bancassurance
successfully are term insurance, creditor insurance, and non-life
products like Property, Motor and Personal accident, Homeowners
comprehensive insurance etc.
• An example is SBI Life, which is waiting for the broker regulation to
be put in place in order to move ahead aggressively with the
bancassurance model.
• One of their major product lines is creditor insurance, and they have
launched their first creditor insurance product, which covers the
liabilities of the creditor in case of death of debtor.
Bancassurance
• SBI Life is planning a similar product for home
loan borrowers of State Bank of India.
• This model has high relevance in the Indian
context with far-flung villages where the insurance
potential is in volume and not in high per capita
premiums.
• Some advantages and disadvantages are:
Bancassurance
Advantages of
bancassurance
Disadvantages of
bancassurance
High credibility (as trustworthy
caretakers of money) with the public
Economic viability for the banks to
take up as bancassurance is a volume
business
A ready customer base
Training of people and lack of vision
and awareness
Low cost channel for selling simple
vanilla products
Useful for selling only certain lines of
products
Extensive reach including the rural
pockets
Initial investment in systems and
processes and people training