Channels of Distribution for Insurance Products

Channels of dissemination for amends Products PRAKASH PRABHAKAR PATIL DPGD/JL10/0480 Specialization Banking, Investment and restitution Welingkar make up of Management Development & Research Year of submission May 2012 ACKNOWLEDGMENT I would like to ac acknowledgeledge and extend my heartfelt gratitude to the fol slumping persons who mould do the completion of this project possible. I am highly indebted to Wellingkar Institute of Management for this opportunity and constant guidance as well as for providing demand in establishment regarding the project.I would like to express my gratitude towards my p arnts & colleagues of HDFC Life indemnity for their kind co-operation and encouragement which help me in completion of this project. I would like to express my special gratitude and convey to constancy persons for giving me such(prenominal)(prenominal) attention and time. Prakash Patil TABLE OF CONTENTS Content Page No Introduction policy Market in India A speedily look 4 Distribution Channel Definition & Importance 6 authorized distribution origins for Insurance products 8 Tied ( path) Channel 9 Corporate Agency 13 Brokers 14 Bancassurance 17 Online/ Internet 23 Micro insurance policy 26 Worksite Marketing 28 Indian Postal Services 30 telecommerce 32 KIOSK or Virtual Marketing 33 Background 34 Methodology 35 Problems in Distribution of Insurance products in India 35 Conclusions & Recommendations 44 Limitations 48 Bibliography 49 INTRODUCTION ? Insurance Market in India A Quick look Life indemnity industry in India has asleep(p) with many phases since its start in 1818 with the establishment of the Oriental Life Insurance c whollyer in Calcutta. In 1829, the Madras Equitable had begun transacting life history indemnity worry in the Madras Presidency. 870 saw the enactment of the British Insurance Act and in the last three decades of the clubhouseteenth century, the Bombay Mutual (1871), Oriental (1874) and Empi re of India (1897) were started in the Bombay Residency. This era, however, was dominate by foreign redress offices which did good seam in India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian offices were up for great(p) competition from the foreign companies. In 1914, the brass of India started publishing returns of Insurance Companies in India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life cable.In 1928, the Indian Insurance Companies Act was enacted to modify the Goernment to collect statistical information well-nigh both life and non-life business transacted in India by Indian and foreign insurers including provident amends societies. In 1938, with a fascinate to protecting the interest of the Insurance human race, the earlier legislation was consolidated and amended by the Insurance Act, 1938 with comprehensive supplyings for effective defend over the activities o f insurers. The Insurance Amendment Act of 1950 abolished Principal Agencies. even, there were a large morsel of restitution companies operating in India by independence and the level of competition was high. there were as well as allegations of unfair trade practices. thitherfore, post independence, Government of India decided to nationalize insurance business.Accordingly in January 1956, communization of life insurance was d atomic number 53 by formation of Life Insurance Corporation (LIC) by absorbing 154 Indian, 16 non-Indian insurers and 75 provident societies. In 1972, planetary insurance business was also nationalized with effect from 1st January, 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd. , the New India Assurance Company Ltd. , the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was in corporald as a company in 1971 which commenced it s trading operations in 1st January 1973. There has been considerable time lag between reforms of insurance arena and rest of financial sector.Therefore in 1993, Government of India set up committee chaired by RN Malhotra, former governor of RBI, to propose recommendations for reforms in Insurance sector. Committee submitted its report in 1994 wherein it recommended to open the Insurance Sector for close and foreign players. Following the recommendations of the Malhotra Committee report, in 1999 the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. The IRDA was in collectived as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance client atvirtuosoment finished increased consumer choice and lower insurance premiums, while ensuring the financial security of the insurance marketplace place.The IRDA opened up the market in August 2000 with the invitation for application for registrations. external companies were allowed ownership of up to 26%. A number of amendments were brought in conglomerate insurance related statutes, viz. , Insurance Act, 1938, LIC Act, 1956 and General Insurance Business communization Act, 1972 (GIBA). The Progress in the general developments in the insurance sector were swift and to a greater finish prominent after the establishment of IRDA. The four public sector non-life insurance companies were de-linked from being subsidiary of the General Insurance Company of India. Now they operate independently and compete with each other. With the progress of reforms, Insurance market has been flooded with a number of players.As at end- promenade 2006, among the life insurers, there were 23 companies in private sector and Life Insurance Corporation of India (LIC) was the solitary public sector company. Among non-life insurers, nine companies were in private sector and four companies were in public sector (Annex II). As regarding the present size of the insurance market in India, it is stated that India accounts non even one per cent of the global Insurance market. However, studies commence degreeed go forth that Indias insurance market is expected to grow rapidly in the following 10 yrs. The Indian Insurance Industry A Case Study Lets understand the rules for formation of Insurance Company in India. alphabet is foreign company having diverse business interests, including the arketing and selling of insurance products in the United States of America (USA). It has a strong infra construction, good customer base and pit equity. alphabet has heard that the Indian insurance market has opened up and seeks just about information about opportunities there. rudiment wants to link with an Indian company (XYZ) by forming a say venture and wants to know the occur of equity it erect hold in an Indian peg venture company and the insurance products it back sell in India. The company has distributable profits in three (3) preceding financial years, prior to the year in which sh bes with differential unspoileds argon to be issued Further, first principle has a subsidiary in India (the ABC Sub).ABC wants to know whether ABC Sub can bow into a joint venture with XYZ. Observations and Comments The Indian governance has recently passed the Insurance Regulatory Development Authority Act, 1999 (the IRDA) whereby amendments live been make to the existing insurance laws prevailing in the country, namely, the Insurance Act, 1938 (the Ins Act), the Life Insurance Corporation Act, 1956 (the Life Act), and the General Insurance Business (Nationalisation) Act, 1972 (the GIB Act). An authority called the Insurance Regulatory Development Authority (the Authority) has been formal to regulate the insurance sector. ( plane section 3 of the IRDA) The Authority, inter alia, lead prolong the power to Issue applicants a certificate of registration re refre shed, modify, withdraw, suspend or cancel such registration. (Section 14(2)(a) of the IRDA) A certificate of registration allow for have to be renewed annually. (Section 3A of the Ins Act r/w the First register of the IRDA) Prescribe prudential norms such as solvency margins and investment guidelines for insurance companies (Section 14(2)(k) and (l) of the IRDA) Protect interests of policyholders in matters concerning assignments of policies, nominations by policyholders, insurable interest, settlement of insurance claims, surrender value of policies, and other terms and conditions of contracts of insurance. (Section 14(2)(b) of the IRDA)However, the Indian Government has retained with itself the power to issue directions on questions of policy. (Section 14(2)(b) of the IRDA) The definition of an Indian insurance company has been amended to include any insurer being a company- 1. Which is form and registered under the Companies Act, 1956 2. In which the aggregate belongings of equity sh ars by a foreign company, either by itself or through its subsidiary companies or its nominees does not exceed twenty-six per cent (26%) of the paid-up chapiter and 3. Whose sole purpose is to carry on life insurance business or general insurance business or reinsurance business. (Section 2(7A) of the Ins Act r/w the First Schedule of the IRDA)The explanation to this section provides that a foreign company is a company that is not a domestic company. (Section 2(23A) of the Income-tax Act, 1961 r/w section 2(7A) of the Ins Act r/w the First Schedule of the IRDA) The IRDA by amending the Ins Act clearly provides that the aggregate holding of equity shargons by a foreign company, either by itself or through its subsidiary companies or nominees should not exceed 26% of the paid-up great of the insurance company. It has been clarified that the twenty-six per cent (26%) jacket applicable to foreign companies go out also apply to foreign institutional investors, non-resident Indians and overseas corporate bodies. Section 2(7A)(b) of the Ins Act r/w the First Schedule of the IRDA) Thus, a foreign company is now permitted to own upto 26% of the equity in an Indian joint venture company. Therefore, if ABC proposes to form a joint venture with XYZ, ABCs shareholding will be restricted to a minority shareholding of 26% in the joint venture company. It must be noted that the Indian insurance company must be a public limited company. (Section 2C of the Ins Act) Now, let us larn that ABC has a subsidiary company in India (the ABC Sub) in which it owns a fifty-one per cent (51%) equity and decides that ABC Sub should enter into the insurance joint venture with XYZ. This will not be permissible.According to recent informal pronouncements of the Authority, Indian companies that are subsidiaries of overseas companies will not be allowed to tie-up with other Indian companies to do insurance business. The Authority perceives this as violation of the twenty-six per c ent (26%) equity cap by forming insurance companies. ABC can, however, along with some(prenominal) other foreign companies have a stake in an insurance company operating in India as long as the feature equity stake of all foreign companies does not exceed twenty-six per cent (26%). The Authority will not register any new insurance company carrying on the business of life or general insurance unless it has a minimum paid-up swell of Rs. 100 crores. No composite manifest for life and non-life business will be granted.For companies in the reinsurance sector, a minimum paid-up outstanding of Rs. 200 crores is required. (Section 6 of the Ins Act) The foregoing paid-up share capital must be brought into the new company within six (6) months of issue of the license. (Section 6 of the Ins Act r/w the First Schedule of the IRDA) In addition, any insurer will be required to undertake such percentages of life insurance or general insurance business in the rural or social sector, as speci fied in the Official Gazette by the Authority in this behalf. (Section 27D of the Ins Act r/w the First Schedule of the IRDA) Further more(prenominal), a new insurance company will be permitted to invest policyholders funds sole(prenominal) in India. Section 27C of the Ins Act r/w the First Schedule of the IRDA) E genuinely insurer shall, in respect of its life insurance business, be required to deposit with the Reserve Bank of India, either in cash or in approved securities, a sum equal to one per cent (1%) of its total gross premium written in India, not, however, exceeding Rs. 10 crores. In respect of the general insurance business, this sum will equal three per cent (3%) of its total gross premium written in India, not, however, exceeding Rs. 10 crores. In respect of re-insurance business, this sum will equal Rs. 20 crores. (Section 7(i) of the Ins Act r/w the First Schedule of the IRDA) It has been provided that an Indian promoter holding more than twenty-six per cent (26%) o f the paid-up equity capital of an Indian insurance company will ave to divest in a phased manner the share capital in excess of twenty-six per cent (26%), after a period of ten (10) years from the date of commencement of business by the Indian insurance company. (Provision to section 6AA of the Ins Act r/w the First Schedule of the IRDA) On the one hand, the Indian organisation has restricted foreign equity ownership in Indian insurance companies to twenty-six per cent (26%) whereas on the other hand, it wants Indian partners to divest their equity holdings to twenty-six per cent (26%) after ten (10) years. Recently government has been in considering increasing the limit on foreign investments up to 49% from current 26%. Also norms for IPO are expected to be finalized dead which would enable companies to go public for raising funds.The IRDA has allowed three kinds of insurance brokerage firms to operate in the country, namely, insurance, re-insurance, and composite brokerage firm s. The twenty-six per cent (26%) equity cap will apply to such firms too, except that composite brokers may enjoy a higher equity cap of forty-nine per cent (49%). Company formation consideration On complying with the registration formalities, ABC and XYZ will have to enter into a shareholders agreement. The main issue that arises here is exercise of control in the function of the joint venture company. Generally, exercise of control can be at two levels Board of Directors and Shareholders. Under the Companies Act, 1956 (the Cos.Act) a company can carry on activities by passing either of two resolutions, special resolutions and ordinary resolutions. Ordinary resolutions can be passed by shareholders having 50% plus one shares with voting rights in the company, whereas special resolutions can be passed solely by shareholders having 75% shares with voting rights in the company. A special resolution is, inter alia, required to amend the enumeration and Articles of Association of a company, to issue further shares through a rights issue, to give loans or guarantees to other companies, etc. With a twenty-six per cent (26%) equity stake, ABC will only be in a position to block special resolutions. It will not be able to control the day-to-day functioning of the joint venture company.Additionally, the Authority has prescribed that foreign insurance companies cannot retain Board control in Indian insurance joint venture companies. Therefore, ABC will not be able to ap quest majority directors on the joint venture companys Board. Another pertinent point that arises is infusion of funds to the extent of seventy-four per cent (74%) of the equity of the joint venture company by the Indian partner, namely, XYZ. XYZ will have to bring in a minimum amount of 74 cores, if the joint venture company seeks to enter into the business of life or general insurance. Further, in the event of increase of share capital, XYZ will have to pump in an amount equal to its seventy-four per cent (74%) equity stake.This can cause some lines. It should be noted that preference shares cannot be issued by companies carrying on life insurance business (Section 6A(1)(i) of the Ins Act). As such, the joint venture company carrying on life insurance business cannot comply with the capitalization stipulations by issuing preference shares to ABC In such circumstances, the parties can consider entering into a three-way joint venture either with another(prenominal) Indian company or with a bank. The Reserve Bank of India (RBI) has permitted banks to enter into the insurance sector and to invest up to fifty per cent (50%) of their paid-up capital in insurance joint ventures.The liberalization of the Indian insurance sector has open up the sector to private competition. If ABC and XYZ can establish the right amount of trust and take a long-term perspective on the Indian market, their joint venture can be a major success. ? Distribution Channel Definition & Importance in India n insurance Industry The process of making a product or service available to customer for use or consumption at desired place and time by set of two or more interdependent organizations. It can also be termed as an Intermediary between end consumer and seller or service provider. Intermediaries typically charge a mark-up or commission for participating in the channel.Post nationalization of Insurance companies, tied agentive roles were 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 puffed local good deal to wrick their agents. The agents are from various shares in society and collectively cover the absolute 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 interchange 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 terms of Insurance Penetration symmetry (defined as ratio of insurance premium to GDP), a key indicator of the spread of insurance coverage and insurance culture, India compares very scummyly by outside(a) standards. The acumen ratio was less than one per cent in 1990s and it mendd to 5. 2% by year ended on March 2009. As against this, as per report from Swiss Re penetration ratio by year ended on March 2009, in respect of some of the unquestionable countries, viz. , UK and South Africa at 12. 90%. In Asia, Taiwan and Hong Kong had registered their respective ratio of as high as 16. 8% and 11. 0%. Insurance penetration for the world was placed at 7. 0% which was far ahe ad than that of India. Refer instrument panel 1) Thus in a country with 1. 21 billion overall population, the penetration ratio indicates that steady there is vast majority of population still outside reach of Insurance especially in rural and semi-urban areas, in the context of the absence of social security schemes. This clearly suggests that there is a vast opportunity to tap in insurance sector by broadening the distribution channels. Nearly as old as the banking industry or perhaps even older, insurance as a model of risk counsel, is centuries old. though the industry began in a small way, it evolved to sire an integral part of the financial services businesses over time.Table 1 International Comparison Of Insurance Penetration, March 2009. Developed Countries Country Total Life Non-Life Australia 6. 40 3. 40 3. 00 Brazil 3. 10 1. 60 1. 50 France 10. 30 7. 20 3. 10 Germany 7. 00 3. 30 3. 0 Russia 2. 50 0. 00 2. 50 South Africa 12. 90 10. 00 2. 90 Switzerland 9. 80 5. 40 4. 50 United Kingdom 12. 90 10. 00 3. 00 United States 8. 00 3. 50 4. 50 Asian Countries Country Total Life Non-Life Bangladesh 0. 90 0. 70 0. 20 Hong Kong 11. 00 9. 60 1. 40 India 5. 20 4. 60 0. 60 Japan 9. 90 7. 80 2. 10 Malaysia 4. 40 2. 90 1. 0 Pakistan 0. 70 0. 30 0. 40 PR China 3. 40 2. 30 1. 10 Singapore 6. 80 5. 10 1. 70 South Korea 10. 40 6. 50 3. 90 Sri Lanka 1. 40 0. 60 0. 90 Taiwan 16. 0 13. 80 3. 00 Thailand 4. 00 2. 40 1. 60 World 7. 00 4. 00 3. 00 Source Swiss Re, Sigma various volumes * Insurance penetration is measured as ratio of premium (in US Dollars) to GDP (in US Dollars) Data relates to financial year ? Current distribution channels for Insurance products in India- Traditionally before privatization insurance products were only sold by agents.Strategy also worked due to absence of competition in market. However post privatization, competition got tougher and need for alternate channels of distribution was strongly felt. Currently insura nce products are being distributed through following channels Current distribution of Insurance products in India Insurers ? Tied (Agency) Todays insurance agent has to know which product will appeal to the customer, and also know his competitors products in the same billet 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 which 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 a re 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 people from neighborhood 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 competitors products. Educating and train these agents is a honest 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 advised not to follow the path of FMCGs/credit card companies, believing that a suited and booted customer care consultant or financial consultant will necessarily appeal to the average Indian customer.In this context it might be a rewarding exe rcise to recruit some older people (who have taken Voluntary Retirement 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. With this kind of segmentation of intermediaries the challenge for the insurance company lies in procreation and educating these people to become effective sales persons. plainly this in no way diminishes the hits of intermediary segmentation. SWOT summary on Agency Channel Strengths- Typicality of Indian customers who always favors known and reliable intermediary. Through agency, individua lized contact and relationship can be conventional with the customer. Agents usually enjoy personal credibility with customers. Agents provide various presales and post sales services to customers. This channels awareness and acceptability is maximum among people. Cross selling is possible through this channel. Due to personal contact, it can provide valuable feedback about the need and expectation of consumers. Weakness- Insurers have to bare higher cost to set up of agency channel network and provide readiness to personnel Higher commission rates forces insurers to deduct high charges from policy. High attrition rate of agents is a serious concern. Due to this, initial investment done on training and educating the agents goes waste. Attrition causes the problem of servicing orphan policies. Agents are generally not technical school savvy. Opportunities- High net worth individuals who prefer relationship over cost can be tapped. Technology can be embraced to convert prosp ect into business. Commissions structure can be designed in such a way that agents would want to stay active for long term. Threats- Alternate distribution channels are more preferred by the insurers due to cost effectiveness over agency channel. At present, the number of agents working in life insurance industry is approximately 15 hundred thousands but a majority of them are dormant which leads to poor activity ratio. Out of the massive agency force approximately only 20% are active. What is need of the hour is not the quantity but the quality. Having some productive and lots of unproductive lot drags down the morale of the community of agents, leads to discontent within the profession and the respect for the profession is downgraded. Over manpower has its cost to the company in terms of unrecovered or under recovered training cost.Also, opportunity cost in terms of a more productive agent serving in place of a dormant agent cant be looked over. Over manpower also contributes to mis-selling and refunds. Adequate concept, product and soft learning training is indispensible for professionalizing agency force. IRDA mandates companies to impart 100 hour training to its agents and today most of the companies have in-house training installing. But number of agents attending subsequent product trainings at the time of product launches and other soft skill training sessions gets rock-bottom substantially. It leads to poor knowledge about companys whole basket of offerings and agents selling only a few products instead of doing a true need-based selling to customers.The concern of the regulator towards outgrowth proportion of linked products in companies total percentage of business can also be attributed to biasedness of training programs in favor of linked products. Training becomes all the more all important(p) in todays competitive environment where the agent is not only selling insurance but the company providing insurance. Adequate and quality initial trai ning at the time of licensing is like laying a strong existence for agents entering the industry and subsequent trainings are like sharpening the agents willingness to stay competitive. Agents are off-roll employees of an insurance company and keeping them motivated is a big challenge. Companies run trueness and engagement programs and sales incentive programs (like short term contests) providing various monetary and non-monetary benefits.They serve well to motivate the agents to perform better, increase interaction of agents with the companies, promote heart and soul of healthy competition among the agents and to recognize good performing agents, provided these programs are easily understandable, transparent and quick in benefit disbursal. This profession is also not odd untouched by Information Technology. Most of the companies have a dedicated agents portal but the number of agents accessing them is less than satiscircumstanceory. One tint forward in making the agents more e fficient and professional is to make them more tech-savvy through training and other means. Looking at the regulatory front, a dispute redressal mechanism for the agents should be established by the IRDA. Insurance selling is a tough job.Agents are facing sharp competition from other alternating(a) distribution channels and with so many insurance players in the fray, their job has become all the more difficult. Though the image of an agent has undergone lot of diverseness since the time it was first introduced but still agents face a lot of sales ohmic resistance. Insurance companies need to consciously endeavor into dedicated efforts for the image makeover of their agents which will go much beyond calling them advisors or financial consultants instead of agents. Agents are the true Brand Ambassadors of the company and they deserve a fair interposition from the insurers. In spite of multitude of other distribution channels coming up, tied agency is here to stay because of attitu de and typicality of Indian customers.What is needed is a genuine effort in recruitment, training and development of a good agency force critical for growth and survival, knowing that for a long-term business like insurance quality, productivity and ethical values must be deep-rooted fully in the workforce. ? Corporate Agency The corporate agent is an reference book of the agent as the insurance agent is an individual and if two agents join together and form a firm or company, it becomes corporate agent. The procedure to become a corporate agent is the same as that of an agent but may have to contribute the share capital of 15 lakh at the discretion of the insurer. Corporate agency channel was the key distribution channel for Insurance. Since IRDA allowed corporate agents into distribution of Insurance, it flourished like anything.It has a major advantage of cost affordability over traditional agency channel for insurers. However due to increased complaints of mis-selling and high lapsation of policies sourced through corporate agencies was a growing concern over the time. Majority of the policies were sold as a short term investment option rather than long term security. Customers were kept under dark about various charges of policy and other terms and conditions which makes insurance policy a long term investment option. Also there were instances where same set of individuals have floated different corporate agencies and they even employed people without valid licenses. To overcome these challenges and protect customer interest, IRDA came up with tringent licensing norms for corporate agencies in June 2010 which tighten the license renewal process that do many small corporate agents ineligible as they were not conforming to the new norms. In addition of this IRDA also recommended regular on-side inspection of corporate agents to control various mal practices that had entered the system. Due to IRDAs on-side inspection companies wherein same set of individ uals have floated different corporate agencies went out of business. In November 2011, IRDA came out with persistency ratio for corporate agents according to which it would mandatory for corporate agents to retain at least 50% of their clients. These norms with cap on commission have made its viability questionable.Also IRDA proposed a disincentive for lapsation in the form of commission claw back by the insurer, on a proportionate basis. Alternatively, a part of the first year commission should be withheld to be paid based on persistency in later years. These guidelines have ensured the restriction of the agencies which used to sell the insurance policies only for higher first year commission by use malpractices and only those who are willing to do long term and ethical business can survive. ? Brokers Insurance brokers is being completely new distribution channel which can sell the products of all the insurers on all India basis but minimum capital requirement is 50 lakh with pro per office infrastructure and manpower.Every Insurance Broker will have to pay annual fees of 0. 5% of his brokerage and insure himself under Professional gift insurance. Broker channel offers several benefits for customers like Choice, expertise and customer servicing. These are elaborated below. Choice- There are about 50 insurance companies in India and as a result hundreds of different product options which can help customer to choose product exactly as per his need. Unfortunately the benefit of this market diversity never reaches the customers if they purchase insurance through agents. Brokers by definition are not tied to any one insurer and have a bias to present as many options as possible to clients.Also, brokers have a unique advantage as they can combine the life, non-life and health insurance requirements of a client. A broker can explain the distinctions of these different product types to a client and pick the most relevant options. This allows brokers to work with co mparatively diminutiver companies in a profitable manner. Individual insurers and agents would not have the same economies of scale in serving small clients. Expertise- Brokers are constantly loose to people and product offerings of different companies. Brokers participate in training programme conducted by different companies. This puts brokers in a unique position to understand market trends and developments. A good broker will harness this information to create deep market expertise.Such expertise has three main benefits. First, brokers can educate clients about product options and then push insurers hard to develop the appropriate products. The result is a steady improvement in product quality. Second, brokers can express a clients showcase in a language that insurers understand and vice versa. Quite often clients are confused when faced with all the technicalities of insurance. Brokers bridge this gap. Finally, the expertise is indispensable in effectively managing the clie nts risk, particularly in volatile times. Customer Servicing- Because of the privileged customerbroker relationship, the broker has to build customer servicing capability.In fact the ability of a broker to retain a client, quite often depends upon its servicing strengths. No insurer or agent can play this single-valued function adequately because of the inherent conflict of interest between the claimant and the insurance company. Benefits to Industry and regulators point of view- Brokers offer several benefits to the regulator as well. The strong customer focus of a broker is an obvious benefit. Moreover, primarily because of their deep expertise, brokers can be a very effective route to collate consumer feedback on its guidelines and regulations. Brokers go through a rigorous screening process by the regulator. Fly-by-night operators are effectively screened out.Therefore, a robust broking channel will result in fewer customer grievances and mis-selling issues. Last but not the le ast brokers are very effective in reducing the cost of distribution. The experience in several countries has been that intermediation costs reduce as the broking channel becomes better established. The IRDA has a significant role to play in strengthening the brokers role in industry. First, it should attract high quality talent and capital in the channel. The quality of the players will be the foremost determinant of the development of the channel. Second, IRDA should look to incentivize focus on saturated protection solutions.The low ticket size of pure protection plans and the current commission structure results in small absolute earnings for the channel. In the backcloth of low consumer awareness, the cost of acquiring a customer is high, hence the current compensation does not provide an economic rationale for intermediaries to focus on such pure risk products. Finally, in its developmental role, IRDA can educate customers on the advantages, roles and responsibilities of a br oker. Issues faced by Brokers Channel- The Brokers segment offers a mystifying problem to the insurers. This segment is able to reach out to a wide audience and has gained pace over the decade since liberalization.Hence it is an effective channel to gain market share. But profitability issues remain due to greater costs incurred on this high maintenance channel. Given that the Indian customer, just as customers in the developing world, will not like to pay upfront charges for consulting, the broker too needs to maintain his overheads by placing the policy that makes the most economic sense, rather than one that would benefit the customer the most. That said, brokers segment is a specialized channel that will continue to maintain a reasonable share in the new business premiums. The positives are that brokers in the urban arena can attract the elite and the upper middle fellowship customer.Brokers represent the customer and will sell the products of more than one company. They seek t o determine the best fit for the client and can effectively address the mind block faced by the public about the various companies. This is applicable in the case of life insurance for the high-end and corporate/group segment. In the non-life segment, broking is not intactly 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. We are still in the early years of the industrys growth in India. The best is yet to come.We expect that over time the market will mature and the broking channel will develop with considerable depth and robustness. ? Bancassurance Comprehensive medium of Insurance distribution The banking & Insurance industry have charged rapidly in the ever-changing and challenging economic environment through out the globe. In the competitive & open environment each & every one wants to do better than others. And they know that if they are not able to provide better service they wont survive in Industry. Insurance companies are also to be competitive by trim cost & serving in the better way to customers. Now the time has come to choose and adopt appropriate distribution channel.The Bancassurance is the distribution of insurance products through the banks distribution channels. It is a phenomenon where in insurance products are offered through the distribution channels of the banking services along with a complete range of banking & investment products & services. In simple term we can say Bancassurance tries to exploit synergies between both the insurance companies & banks. Bankers Perspective- In the post reforms, the financial sector has more number of players of both domestic and foreign and the dividing line between the banks and non-banking financial institutions activities had considerably thinned down. Overlapping in one anothers functions/ areas have become more com mon than exception.The direct upshot of these developments led to intensive competition in the banking sector and which in turn had a strong bearing on the banks net interest margin (spread). In fact the emerging scenario is likely to bring down the banks spread even thinner. Despite the monstrous size of public sector banks, they too observed decline in their spread. Further, banking system in India was prone to very high NPAs (Non Performing assets) which was further ruining the effect on banks. Therefore, banks were compelled to be constantly on the look out for stable alternate sources of earnings in the form of non- traditional and fee based sources of incomes and variegation towards new areas such as bancassurance, promises greater scope for further enhancement in earnings with no menace of increase in NPAs.Persistent endeavor in scouting for new technology, new products/ services/ new avenues, has become necessary for the growth as well as sustainability of banking system. I t is in this context possibly, bancassurance could well be an appropriate choice for banks to increase their stable source of income with relatively less investments in the form of new infrastructure. As far as banking sectors infrastructure is concerned, only a few countries could match with India for having largest banking network in terms of bank branches spreading almost throughout the length and breadth of the country. As on year end on March 2011, no of branches of all banks across India stands at staggering 89622 with growth of 36% since 2010.Out of this large network of branches around 62% of branches are located in rural and semi urban areas and the remaining around 38% are in urban and metropolitan areas. as well as the commercial banking system, India has large rural credit cooperatives as also urban cooperative banking network. Taken together these institutional set up, the ratio of population served by a bank branch would work out to be far lower. Thus, on the one han d we have a very low insurance penetration and low insurance density as compared with the international standards on the other hand, India has a widely stretched and well established banking network infrastructure.It is this contrasting smear to absorb the two systems by way of bancassurance strategy to reap the benefits of synergy. This is an opportune time for both banking and the insurance sectors to come closer and forge an alliance for the mutual benefit. For, both the regulators, i. e. , RBI and IRDA have al posit proffered appropriate policy guidelines and set in a congenial environment for such an endeavor. Besides, the Government of Indias unquestionable policy to provide insurance cover to the low income households and the people at large at a minimum cost are also favorable. Table 2 POPULATION GROUP-WISE NUMBER OF BRANCHES OF BANKS IN INDIA YEAR RURAL SEMI-URBAN URBAN METROPOLITAN TOTAL 1970 3063 3718 1744 1606 10131 1980 15105 8122 5178 4014 32419 1990 34791 11324 8042 5595 59752 2000 32734 14407 10052 8219 65412 2001 32562 14597 10293 8467 65919 2002 32380 14747 10477 8586 66190 2003 32303 14859 10693 8680 66535 2004 32121 15091 11000 8976 67188 2005 32082 15403 11500 9370 68355 2006 30579 15556 12032 11304 69471 2007 30551 16361 12970 11957 71839 2008 30914 17791 14416 13038 76159 2009 31576 19075 15479 13921 80051 2010 32497 20707 16884 14935 85023 2011 33495 22631 17712 15784 89622 Source RBI annual report, 2010-11. Note Data are exclusive of administrative offices.Above all, in India still vast majority of banking operations are conducted manually at the banks branch level with relatively less automation such as ATMs, tele-banking, internet banking, etc. , unlike many developed countries. This stands out as an added advantage for the banks to have direct embrasure with the customers, to understand their needs/tastes and preferences, etc. , and accordingly customize insurance products. In fact there is also greater scope for innovation of new insurance products in the process. Therefore bancassurance can be a feasible activity and viable source of additional revenue for the banks. Insurers Perspective-Contemporaneously, with the sweeping financial reforms in the insurance sector and the consequent opening up of this sector, all the private entities plunged almost simultaneously with a very little spacing of time and the entire insurance sector has been exposed to stiff competition. Insurers too have much to gain from bancassurance. The cost of the traditional agency channel is prohibitive with the high risk of agency turnover ranging between 30 to 40% every year, thus making the entire recruiting and training expenses going down the drain. Moreover, the price competition has reduced the profit margins and increased the compensation demands of the successful agents. The incentive pattern has a lot to do in this spiraling of the cost of the agency channel. Bancassurance has come in very handy for winning the middle income market which forms the bulk of the bank customers.With Bancassurance, the cost of opening new insurance branches comes down drastically for the insurer. With an agreement with a bank, all the thousand and more branches of the bank become the extended arms of the insurer. Customer Perspective- The most immediate advantage for customers is that, in insurance business the question of trust plays a greater role, especially due to the inbuilt requirement of a long term relationship between the insurer and the insured. In India, for decades, customers were used to the monopolistic attitude of public sector insurance companies, despite there were many drawbacks in their dealing, they enjoyed customer confidence, this trend continues even now in general due to their Government ownership.The customers to move over to private insurance companies that are collaborated with foreign companies which are less known to the Indian public would take little more time. The void betw een the less known newer private insurance companies and the prospective insured could be comfortably filled by the banks because of their well established and long cherished relationship. Under these circumstances, any new insurance products routed through the bancassurance channel would be well received by the customers. Bancassurance is always a win-win station for customers. It provides greater convenience by providing all the financial needs under one roof.The customer need not always wait for his insurance agent to come and render service. Whenever the client goes to the bank for his/her other needs like housing loan, overdraft, some draft issuance etc, he can complete his insurance needs too. Its always easier to deal with one agent for all the financial needs rather than separate agents for every product. For paying renewal premium for policy would also be easier with services like ECS, Billpay or standing Instructions. Reduced distribution cost for insurers will lead to re duced premiums for policies. SWOT Analysis on Bancassurance Strengths- In a country of more than one billion population, sky is the limit for selling insurance products.There is a vast untapped authority as the life insurance industry just covered around 20 crores of people the number of policies will be more in view of the multiplicity of the policies per person. Millions of people travel out of India every year for various reasons, necessitating the purchase of Travel insurance and Health insurance. This is besides their need for conventional policies. There are a lot of sunrise industries like the IT sector, the hospitality sector, the healthcare portfolio, the education sector, BPOs and the call centers, R & D etc, providing a huge pool of professionals ready to be tapped for their insurance needs. Weakness- The difference in working style and culture of the banks and insurance sector needs greater appreciation.Insurance is a business of compendium unlike a typical banking se rvice, it requires great drive to sell/ market the insurance products. It should, however, be recognized that bancassurance is not simply about selling insurance but about changing the mindset of a bank. Moreover, in India since the majority of the banking sector is in public sector and which has been widely disparaged for the lethargic attitude and poor quality of customer service, it needs to refurbish the blemished image. Else, the bancassurance would be difficult to succeed in these banks. Unlike, the banking service, there is no guarantee for insurance products that all efforts that a bank staff spends in explaining to a customer would clinch the deal due to the very nature of the insurance products.This frustration of the bank staff has the hazard of spillover effect even on their regular banking business. With the financial reforms and technological revolution embracing the financial system, there has been a great deal of flexibility in the mind set of people to accept chang e. The above outlined problems need not, however, deter the banking sector to embark on bancassurance as any form of resistance from the bank employees could be tackled by devising an appropriate incentive system commensurate with intensive training to the frontline bank staff. On other hand, the middle class population is over-burdened today by the inflationary pressures.This is considerably reducing the amount of savings of a middle class income group. Also absence of elementary IT requirements is still the case in many of the PSU and co-operative bank branches which is a concern area. Opportunities- Bank has a huge database to work on. This has to be analyzed thoroughly and similar groups should be churned out in order to sell the bancassurance products. Since the Government pensions and other payments are handled through the bank branches, the bank can become a rallying point for more and more insurance business. Banks can become the One stop shop where a customer can apply for banking, mortgages, pensions, investment and insurance products. Threats-The bank employee is so well entrenched in his classical way of working that there is a definite threat of resistance to any change the Bancassurance may bring in. The knowledge level of the bank staff on insurance matters is so low that all enquiries of the customers are turned over to the insurer much to the mortification and discomfiture of the client. The bank employee simply becomes a post man in transferring the problems of the client. The same trouble comes in the matter of other servicing aspects like the policy revivals or claims. There are hazards of direct competition to conventional banking products. The bank personnel may become resistant to sell insurance products, fearing that the banks savings may be diverted to the insurance companies.The strategy should be using multiple banks according to their presence in different regions. Success would come by using bancassurance where it will be most eff ective i. e. selling simple, cheap products to the masses at a low cost. This awareness is growing and is evident from the fact that well-nigh every insurance company has partnered with one or many banks to implement bancassurance. ? Online Sales Channel A feasible alternative India is joining the fast growing breed of net users and using net for banking transactions is also growing rapidly. Now almost all the public and private sector banks provide online banking facility as an add-on advantage with savings accounts.In insurance industry, just few years back internet was used mostly used by Insurers for insurance policy servicing, promotion of new products and providing various tools like illustrative calculators etc However selling insurance products online is a relatively new concept in India. Lets understand the need of online distribution in Insurance industry. In 2010, the insurance regulator tightened norms which forced insurers to cut down commission to agents. The regulat or also made it mandatory for agents to achieve a minimum level of productivity and persistency of business. As a result of these tough measures the number of life insurance agents dropped from 28. 03 lakh in September 2010 to 24. 53 lakh in September 2011.Until a couple of years back most life insurers were swearing by face to face sales and maintained that online would be largely used for servicing. Change in the regulatory environment, which has compelled insurers to cut distribution costs, is leading companies to look at new low-cost channels for distribution. Recent developments in information technology (IT) and web-enabled systems have made it easier for insurers to run global operations in a way that would not have been possible even two years ago. Insurers are already reaping advantages from IT improvements in internal efficiencies in areas as diverse as underwriting, claims, policy administration, financial report and human resources.But efficiencies go beyond these inte rnal ones. In the coming years, the internet will have at least two major effects on the insurance industry cost efficiencies and broader distribution. These efficiencies will come as insurers experience a greater availability of data from the internet and the transfer of business processes from manual-related or computer-related systems to newer communication related systems. Such internet-style technology will reduce cost reduce the level of effort and improve accessibility to large-scale data. Data assembly becomes much easier under the internet approach and thus affects costs and value of insurance.The internet will bring insurers to a whole new base of customers and will allow them to sample new markets that would have been too expensive to enter. Making information available to potential customers and the ability to market products to the new audience will have a tremendous impact. Advantages of Online distribution- It would reduce the internal administration and management costs by automating business processes, permitting real-time networking of company departments, and improving management information. It would reduce the commissions paid to intermediaries since it can be sold directly to clients. It would reduce the cost of training staff and other miscellaneous expenses required to run a branch. Response time for a conversion of policy would be much lesser than the manual submission. 24 hour connectivity for purchase and servicing of insurance policies. This would enable customer to pay premiums, get NAV, track due dates etc. as per his or her convenience. It will enable online request for quotes and data gathering which will improve efficiency. It will reduce the re-keying and typing errors which would save time and decrease risk. Compared to online stock broking or online banking, development of internet in insurance industry is somewhat cautious. There are some factors which makes the online selling of insurance policies difficult. Diffic ulties in selling Insurance online- The complexity of many insurance products can make it difficult to automate the provision of information. However with improved technology and continuous innovations sometimes later it may be possible to automate complex information and offer that product online. In many cases, it is difficult to standardize claims settlement. E. g. Claims involves various investigations which needs to be carried out before making decision and would be subjective on case to case basis. This process often involves people and companies who are not in a contractual relation with insurers. Internet is particularly suitable for products where contact with company is very frequent.For Insurance products, contact with customer is often infrequent. Once policy is carried out, with some type of insurance the policy holder and insurers would get in touch only in case of occurrence of insured event. In India many customers still view internet as an insecure medium. This p revents large transactions being carried out through Internet and it deters the transmission of confidential information, both of which are essential aspects of insurance policies. While the technology capability is there, improvement in bandwidth and infrastructure are needed. There is also a need of simpler products where auto-under writing is feasible.Automobile insurance, one of the segments of insurance purchased off the shelf in India, would be the ideal segment to start with. On the life side, term assurance for standard lives with simplified underwriting is a possibility. Nowadays many general insurance products like Travel Insurance, Auto Insurance, Health Insurance and in case of life insurance Term Insurance are being sold over internet successfully. Because of the simple nature of these products insurers are have standardized the terms and conditions to be able to sell products online. Online selling has given them chance to go beyond the normal markets and sell these pr oducts to new entrants altogether. ? MicroinsuranceMicroinsurance is the protection of low -income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved. Low-income people can use microinsurance, where it is available, as one of several tools (specifically designed for this market in terms of premiums, terms, coverage, and delivery) to manage their risks. India currently has the most dynamic microinsurance sector in the world. Liberalization of the economy and the insurance sector has created new opportunities for insurance to reach the vast majority of the poor, including those working in the informal sector. Even so, market penetration is largely driven by supply, not demand.It is often assumed that a microinsurance policy is simply a low -premium insurance policy. This is not so. There are a number of other important factors. Low-income clients often Live in remote rural areas, requiring a different distribution channel to urban insurance products Are often illiterate and strange with the concept of insurance, requiring new approaches to both marketing and contracting. Tend to face more risks than wealthier people do because they cannot afford the same defenses. So, for example, on average they are more prone to illness because they do not eat as well, work under hazardous conditions and do not have regular medical check ups. Have little experience of dealing with formal financial institutions, with the exception of the National Bank of Agriculture and Rural Development (NABARD) Linkage Banking programme. Traditiona