CHAPTER- III ALTERNATIVE CHANNELS OF DISTRIBUTION

Transcription

1 CHAPTER- III ALTERNATIVE CHANNELS OF DISTRIBUTION

2 ALTERNATIVE CHANNELS OF DISTRIBUTION Distribution plays a key role for the success of any product and service. When it comes to insurance, this role is much more complicated to that of other services. The main function of any distribution channel comprise (a) information gathering (b) product promotion (c) development of contacts (d) marketing the offers with customer's need (e) negotiation (f) physical distribution (g) financing (h) risk taking. It is the distributor who makes the difference in terms of the quality of advice for choice of product, servicing of policy, post sale and settlement of claims. In the Asian markets, with their distinct cultural and social ethics, these conditions will play a major role in shaping the distribution channels and their effectiveness. The distributors have to become trusted financial advisors for the clients and trusted business associates for the insurance companies. This calls for leveraging multiple distribution channels in a cost effective and customer friendly manner. In the developed markets, agents and brokers form the major channels of 1 distribution while other complimentary channel is catching up slowly.the distribution channels prevalent in the developed countries can be broadly classified into two catagaries: (1) Personal Distribution Systems, which include all channels like agencies of different models brokerages, bancassurance and work site marketing. (2) Direct Response Distribution Systems are the methods whereby the client purchases the insurance directly. This segment,which utilizes various media such as the internet, telemarketing, direct mail, call centers etc. is just beginning to grow. [43]

3 3.1 DISTRIBUTION SCENARIO IN THE INDIAN MARKET In today's Indian insurance market, the challenges to insurers and intermediaries is two pronged; (a)building faith about the Company in the mind of client.(b)lntermediaries being able to build personal credibility with the clients. While the companies have been quite successful in dealing with the first of these challenges using the existing product features and leveraging the technical know how of their partners, most are still grappling with the right 2. channel for reaching potential customers. This chapter discusses the distribution channels prevalent in Indian insurance market, which can be classified into two main categories : 3.1 (a) PERSONAL SELLING In insurance industry, decisions regarding life, fire, motor, marine and other insurances are made at individual level, specially in case of life insurance, policies are sold, seldom bought. Personal selling has been emerged as the most important tool of marketing communication due to some typical characteristics of insurance business. A wide network of agency force use personal selling as the only tool for selling insurances. The important considerations which account for extensive use of personal selling are as follows: (i) (ii) (iii) Non-wasteful and helps to communicate with every prospects and customer, which is more direct and relevant. Two way communication with better opportunity to satisfy the target customer by assessing his views, answering his queries and presenting particular marketing with buyer's personality, background, need and financial condition. Flexibility and adaptability make possible to adjust the sales talk according to the individual difference. [ 44]

4 (iv) Result oriented other benefits which help in building long term, ongoing relationship with client, provide an effective method of opening new market. Personal Distribution system include (i) Agency Model (ii) Brokerages (iii) Bancassurance (iv) Worksite Marketing. Chart 3.1 Insurance Distribution Scenario in the Indian Market Personal Distribution Systems ~ ~ Personal Distribution Systems l 1/ 1\ I Broker I I I r r Internet Direct Mail Corporate ~ I Telemarketing I Call e Centers 3.1 a(i) AGENTS Bancassurance Models - ~ Career I- Special Advisor 1- Direct Response I- Salaried r----- Bank Employees Corporate Agencies and Brokerage Firms Traditional tied agents have been the primary channels for insurance distribution in the Indian Market. The public sector insurance companies have there branches in almost all parts of the country and have allocated local people to become their agents. The agents are from various segments of society and collectively cover the entire spectrum of society~ The statistics of individual agents company wise in both the areas life and non-life as well as in rural and urban areas has been given in the table 3.1 and 3.2 respectively. [45]

5 Table 3.1 DISTRIBUTION CHANNEL STATISTICS-LIFE INSURERS INDIVIDUAL AGENTS Name of Insurer Number of Urban Rural Allianz Bajaj Life Insurance Co. Ltd Tata AIG Life Insurance Company Ltd AMP Sanmar Insurance Co. Ltd Birla Sun Life HDFC Standard Life Insurance Co. Ltd ICICI Prudential Life Insurance lng Vysya Life Insurance Co. Pvt. Ltd Life Insurance Corporation of India Max New York Life Insurance Co. Ltd Metlife India Insurance Co. Pvt. Ltd Om Kotak Mahindra Life insurance Co. Ltd SBI Life Insurance Company Limited Source: Table 3.2 DISTRIBUTION CHANNEL STATISTICs-NON-LIFE INSURERS INDIVIDUAL AGENT Name of Insurer Number of Urban Rural Tala AIG General Insurance Company Ltd Bajaj Allianz General Insurance Co. Ltd ICICI Lombard General Insurance Co. Ltd IFFCO-TOKIO General Insurance Co. Ltd The New India Assurance Co. Ltd National Insurance Co. Ltd !--- The Oriental Insurance Co. Ltd Reliance General Insurance Company Ltd Royal Sundaram Alliance Insurance Co. Ltd United India Insurance Co. Ltd Source: The present practice of selling insurance products through the tied agency force has been found insufficient in the era of deregulation, more [ 46]

6 sophisticated and well equipped players in the market, continuously changing marketing conditions, new idea and innovation procedure adopted by financial institutions, high end customers etc. Some cropping problem with the conventional intermediaries in the present scenario are cost hike, higher expertise required and sophisticated customer segment. 3.1 a(ii) CORPORATE AGENTS Corporate agents are authorized by IRDA to sell and customize ---; products on behalf of insurance ompanies. IRDA report of expresses concerns on this issue and states that in India, the public sector banks, regional rural banks and micro credit institution have wide reach and can help fulfill the basic objective of deeper insurance penetration in the industry. The statistics of corporate agents company wise in both the areas life and non -life has been given in the table 3.3. Table 3.3 DISTRIBUTION CHANNEL STATISTICS- LIFE INSURERS CORPORATE AGENTS Name of Insurer Number of Urban Rural Allianz Bajaj Life Insurance Co. Ltd Tata AIG Life Insurance Company Ltd AMP Sanmar Insurance Co. Ltd Birla Sun Life HDFC Standard Life Insurance Co. Ltd ICICI Prudential Life Insurance lng Vysya Life Insurance Co. Pvt. Ltd Life Insurance Corporation of India Metlife India Insurance Co. Pvt. Ltd Om Kotak Mahindra Life Insurance Co. Ltd Source: [47]

7 Table 3.4 DISTRIBUTION CHANNEL STATISTICS- NON-LIFE INSURERS CORPORATE AGENT Name of Insurer Number of Urban Rural Tala AIG General Insurance Company Ltd Bajaj Allianz General Insurance Co. Ltd ICICI Lombard General Insurance Co. Ltd IFFCO-TOKIO General Insurance Co. Ltd The New India Assurance Co. Ltd National Insurance Co. Ltd The Oriental Insurance Co. Ltd Reliance General Insurance Company Ltd Royal Sundaram Alliance Insurance Co. Ltd United India Insurance Co. Ltd Source : a(iii) BROKERS With the broker regulation under review and expected any time, this could be next hope especially for the urban market. Insurance brokers are professionals who assess risk on behalf of a client, advise on the mitigation of that risk, identify the optimal insurance policy structure, bring together the insured and insurers, carry out work preparatory of such contracts in particular when claims arise. Unlike insurance agents who are retained by insurance companies, brokers are retained by the insured and therefore their primary responsibility is towards the insured. Some of the benefits of introducing brokers in the Indian market are as follows : (i) (ii) Improvement in customer service with increased competition, insurance broker have a greater motivation to introduce new and innovative products to be more responsive to consumer needs, [ 48 ]

8 (iii) (iv) (v) (vi) to deliver higher terms of services consequently able to secure appropriate insurance cover more cost effectively, to assist in creating insurance awareness, increase market penetration and act as a catalyst to increase competition and improve customer service, to enable Indian Insurers to increase their retention capacities by applying their international reinsurance skills in optimizing their reinsurance programmes, thereby affecting further saving in foreign exchange outflow, to assist the local insurers to develop new products and accordingly increase the premium base. In the non-life segment, braking 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 braking companies will have to play a prominent role~ 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. ICICI Prudential Insurance and HDFC Standard Life Insurance have already partnered with NGOs to sell some low cost insurance in rural areas~ 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 [ 49]

9 challenge of establishing credibility. In addition, 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 r; eroding the premium. State wise break up of registered brokers in Insurance Business has been depicted in the table 3.5. Table 3.5 REGISTERED BROKERS (STATE-WISE) BREAKUP State Licenses Issued Direct Reinsurance Composite Total Andhra Pradesh Chandigarh 4 4 [ tg uj~j ~a taka Kerala 3 3 Madhya Pradesh 3 3 Maharashtra New Delhi Punjab Rajasthan 5 5 Tan il Nadu Utt r Pradesh 8 8 We ~t Bengal Tofal Source: a(iv) WORK SITE MARKETING Under this strategy, the seller sends his team to the target group and explains the products and services suitable to them. Organizations such as the HDFC, ICICI, Kotak Mahindra are using this kind Of distribution strategy effectively. This area needs to be tapped, as in any country one of the biggest markets is through the worksite. With changes in human resource management policies and compensation packages, group products or work site products do have a definite market that cannot be ignored. [50]

10 The challenges would be the cost effectiveness, product customization and efficient post sales servicing, which would determine continued business. Technology has a key role to play in worksite marketing to ensure cost benefits. Banks and financial institutions have been successfully marketing credit cards and other financial products using this channel. If not an identical model, a similar approach can be used for selling insurance? 3.1 a(v) BANCASSURANCE Bancassurance denotes a partnership between a..jlf_e insuran::e company and a ban The need (for the insurance company) to access a large base of customers and a desire (on the part of the bank) to offer a range of financial products leads to these partnership in different forms. A trusting relationship with customers, brand name recognition, customer profitability measurement systems in banks, cash management, relationship with corporations and the fact that Bancassurance distribution is more cost effective than traditional distribution are some of the key attractions <6 of this channel. Bancassurers make use of various distribution channels such as: '------, Career agents Special advisers Salaried agents Bank employees Corporate agencies and brokerage firms Direct response The main characteristics of each of these channels are: Career Career agents are full-time commissioned sales personnel holding an agency contract. Career agents are generally considered to be independent contractors. Consequently an insurance company can exercise control only over the activities of the agent which are specified in his contract. Despite this [ 51 ]

11 limitation on control, career agents with suitable training, supervision and motivation can be highly productive and cost effective. Moreover their level of customer service is usually very high due to the renewal commissions, policy persistency bonuses, or other customer service-related awards paid to them. However, many bancassurers avoid this channel, believing that agents --- might oversell out of their interest in quantity and not quality. Such problems wlth-career-agenally arise, not due to the nature of this channel, but rather due to the use of improperly designed remuneration and/or incentive packages. Special Advisor Special advisers are highly trained employees usually belonging to the insurance partner, who distribute insurance products to the bank',s corporate clients. Usually they are paid on a salary basis and they receive incentive ~nsation based on their sales. Salaried Salaried agents have the same characteristics as career agents. The only difference in terms of their remuneration is that they are paid on a alary basis and they receive incentive compensation based on their sales. Some bancassurers concerned at the bad publicity which they have received as a result of their career agents concentrating heavily on sales at the expense of customer service, have changed their sales forces to salaried agent status. Bank Employees Bank employees can usually sell simple products. However, the time which they can devote to insurance sales is limited, e.g. due to limited opening hours and to the need to perform other banking duties. A further restriction on the effectiveness of bank employees in generating insurance business is that they have a limited target market, i.e. those customers who actually visit the branch during the opening hours. [52]

12 Corporate Agencies and Brokerage Firms The advantage of such arrangements is the availability of specialists needed for complex insurance matters and- in the case of brokerage firms the opportunity for the bank clients to receive offers not only from one insurance company but from a variety of companies. In addition, these sales channels are more conceived to serve the affluent bank client. Direct Response In this channel no salesperson visits the customer to induce a sale and no face-to-face contact between consumer and seller occurs. The consumer purchases products directly from the bancassurer by responding to the company's advertisement, mailing or telephone offers. This channel can be used for simple packaged products which can be easily understood by the consumer without explanation. It seems very difficult for a single distribution channel to successfully reach the bancassurer's goals and specific target markets. Many bancassurers are using multiple distribution channels. This way they avoid becoming locked into one channel and they can offer services to a greater number of target markets. 3.1 (b)direct RESPONSE DISTRIBUTION SYSTEMS Under this form of distribution, cl ient purchases the insurance policy directly. This segment utilizes various media but it is just beginning to grow. This system comprise telemarketing, direct mail, call centres etc. Marketing through telephonic devices, generating leads through calls and forwarding the leads to the main sales team of the company. Company's own sales team concept is now employed by a majority of the new players and has proved effective in customer creation and retention. Internet has brought about a revolution in the way business is done and insurance is no exception to this. According to a recent research by Tower Group, 'e-service' will play a vital role in facilitating the process of [53]

13 servicing insurance products. At present 60 to 70 percent of online consumers use the internet to search insurance company and products. The group expects a significant growth in online sales by : New Business (life) under written through various intermediaries: has been depicted in the graph 3.1. Graph 3.1 New Business Underwritten Through Various Intermediaries : (approx. figures) 100% 2.76 Ul Ul Q) c Ul ::J co ~ Q) z m Direct 80% bu siness 60% 40% 20 % D Refferal arrangement sanks individual ag ents 1 i Elother (Includ ing ~ - _:::~~.:_sl_ 0% Private sector public sector total Insurance Source: IRDA, Annual Report Whatever may be the channel, it should be cost affective and contribute to profitability by sharing responsibility for documentation serving and claim handling up to certain limits. The agency regulations introduced by IRDA are creating a cadre of professional agents though there are some abuses and malpractices in certain pockets. Introduction of brokers and their regulation framed by IRDA are attracting qualified professionals and management graduates to insurance industry. Corporate agents and institutional agents will extend the reach of insurance and help to widen and deepen the market along with other choices. Direct marketing, telemarketing, e-business, Internet websites and all others will enter the field and contribute to distribute insurance products. Younger generation especially, the new age 'yuppies' will turn these channels to buy their insurance requirements ~ 0 [54]

14 REFERENCES 1. Bhadra, Urmi, (2002) : "Insurance Intermediaries- New Channels of Distribution", The Journal of Insurance Institute of India ", Vol. No. XXVII, July-December, pp Agarwal, Abhishek, (2002) : "Indian Insurance Sector : Brokers Step in for A Better Future ", Insurance Chronicle, ICFAI Press, November, pp Jawaharlal, U. (2003) : "Distribution, The Key to Insurance Marketing ", Insurance Chronicle ICFAI Press, June, pp Bhattacharya, Anabil (2006): "Role of Broker in Current Senario ", The Insurance Times, Vol. XXVI, No. 10, October, pp Govindan, K (2006) : "Broker 's Progress ", The Insurance Times, Vol. XXVI, No. 4, April 2006, pp Jawaharlal, U.(2002) : "Brokers - A New Dawn", Insurance Ch ronicle, ICFAI Press, Hyderabad, November, pp Kumar, Jagendra (2004) : "Corporate - The Prime Drivers of Insurance Growth ", The Insurance Times, Vo l. XXIV, No. 9, September, pp Machairaju, Apparao (2003) : "Life Insurance Marketing, Emerging New Channels of Distribution, Service Concept : Need for Redesigning Education and Training of Intermediaries", Handbook of Refresher Course on Insurance and Risk management, Osmania University, pp. 72. [55]

15 9. Mishra, Govind Hari(2005) : 'Prospecting- An effective Selling Process", The Insurance Times, Vol. XXV No. 1, January, p Rao, M.B.N. (2004) : "Bancassurance in India- Banker's Perspective" The Journal of Indian Institute of Banking and Finance, Vol. 75, No.2 Aril to June,pp Sharma, N.C. (2003) : 'The selling of Life insurance in India (Part /)", Yogakshema, LIC of India, Vol. 47, No. 4, April, pp Soni, Pavleen & Singh, Raghubir (2003). : "Insurance Marketing in India : The Critical Success Factors", The Insurance Times, October, pp WEBSITES professional.com [56]