Insurance history of Indian subcontinent can be traced to 1000 years B.C. in

Transcription

1 CHAPTER - IV INDIAN LIFE INSURANCE INDUSTRY & DISTRIBUTION STRATEGY 4.1 HISTORY OF INSURANCE IN INDIA Insurance history of Indian subcontinent can be traced to 1000 years B.C. in the form of the practice then prevalent as recorded in Manusmruti Social Code of Ancient India - of the state providing security cover to the traders for transit risks in consideration of the charges paid by them to the treasury. It is interesting to note that the provisions in the financial code of Manusmruti were progressive and scientific in terms of computation of revenue tax on traders for security taking into consideration the route and duration of transit and commodity involved (Samarth, 2003). Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade loans or carriers contracts. These can be found in Kautilya s Arthashastra, Yagnvalkya s Dharmashastra in addition to Manusmriti. These works show that the system of credit and the law of interest were well developed in India. They were based on a clear appreciation of the hazard involved and the means of safeguarding against it. (Tryst with Trust, LIC of India). Insurance practice (non life insurance business), was developed further in India as can be seen in the historical records of medieval period of Emperor Akbar s regime, showing the developed system of providing cover by the State to the farmers for their loss by either natural hazards or damage by the hostilities and warlike operations taking place in the empire s territory. (Samarth, 2003) Other rulers in Indian subcontinent also followed directives for the protection of farmers developed in

2 Emperor Akbar s regime in their Kingdoms. Life insurance practice was not in vogue in ancient India. This is primarily due to the joint family system, which provided the shelter to the dependants. 4.2 DEVELOPMENT DURING BRITISH ERA: AD: The business of life insurance in India in this current form started in India in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta, which failed in 1834 (Bhattacharya, et al 2003). However, the success of Indian life insurance can be traced back roughly to the second decade of the nineteenth century when the Madras Equitable began transacting life insurance business in the Madras Presidency in After that, it was a rather dull phase with regard to the growth in life insurance business, which is primarily due to the very critical phase through which the British insurance companies were passing due to mismanagement and inexperience, thus resulting in the failure of several British life insurance companies before 1870 and leading to the enactment of the British Insurance Act, Subsequently till the 70s of the nineteenth century, only certain European companies operating in parts of India did life insurance business on some scale. But Indian enterprise in this sphere later began to expand and in the last three decades of the nineteenth century the following companies were started in the Bombay Presidency: a) Bombay Mutual (1871) b) Oriental (1874) c) Empire of India (1897) Although few other companies were also set up in other parts of India, this period of the 19 th century was dominated by foreign insurance offices, which did good 86

3 business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance. The Indian offices that were set up during this period came up the hard way and had to struggle against the prevailing prejudice against life insurance and natural ignorance of the people. The recorded history of Insurance business in India, however, began in 1914 when the Government 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 insurance business. Later in 1928 the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and non-life insurance business transacted in India by Indian and foreign insurers including provident insurance societies. In 1938, with a view to protecting the interest of insuring public, the earlier legislation was consolidated and amended by the Insurance Act 1938 with comprehensive provisions for detailed and effective control over the activities of insurers. Table 4.1 gives the details of number of life insurance companies of both Indian and foreign origin operating in India during the period 1928 to 1945, the number of Indian life insurance companies operating in India had steadily increased and the number of foreign life insurance companies has decreased over the same period. Table 4.1: Number of life insurance companies operating in India prior to independence Year Number of Indian Offices Number of Non Indian offices Total Source: Bhattacharya

4 The impact of Gandhiji s Swadeshi Movement was felt in the insurance circles with the increasing support of clients to domestic companies. By 1947 Indian Insurance Industry s domestic sector controlled over 50% of premiums in Life as well as General Insurance sector. Domestic industry sector developed in competition and at times with conflicts arising from our political struggle and yet in broad co-operation with foreign Insurance sector, predominantly represented by British Insurance companies, whose contribution to the development of Insurance expertise and practice in Indian-subcontinents market must be duly recognised. It is worth recording that Indian Insurers led by the New India Assurance Company started their overseas operation during this period through establishment of their agencies and branches in Africa, Asia and in United Kingdom. 4.3 TRANSFORMATION OF INDIAN INSURANCE INDUSTRY DURING THE PERIOD Indian Life offices Non Indian Life offices Table 4.2: Life insurance business in India in 1945 and No of Policies Insured Amount Premium Income No of Policies (Rs in lakhs) Insured Amount Premium Income Total % of non Indian figures to Total 3.67% 0.93% 9.91% 2.85% 7.32% 8.07% Source: Bhattacharya, 2003 Number of policies issued by life insurance companies during 1945 and 1955 is given in Table 4.2. It can be observed that the Indian life insurance companies dominated the markets in both the years, since there were a large number of insurance companies and the level of competition was high. There were also 88

5 allegations of unfair trade practices. The Government of India, therefore, decided to nationalise the insurance business. An Ordinance issued on 19th January 1956 nationalised the Life Insurance sector and Life Insurance Corporation of India (LIC) came into existence in the same year. The LIC absorbed 154 Indian, 16 non-indian insurers as also 75 provident societies. Since then LIC was the only player till the late 90s when the Insurance sector was reopened for the private sector Nationalisation, Rationale Public sector control of Banking and Insurance sectors was the economic item on the agenda of India s national movement right from 1930 when in the historical Lahore Congress session along with the resolution of full independence this item on the economic agenda was also passed. However as advocated by then India s Finance Minister - eminent economist C.D.Deshmukh - the nationalisation of Life sector was not done as a political objective but as an economic priority. As per actuarial assessment, the majority of the small-medium size life insurance companies that had developed in Indian market during the British era were financially weak and likely to collapse in time to come. It was therefore, necessary to consolidate the entire Life business under the control of public sector Corporation leading to the establishment of Life Insurance Corporation of India. (Bodla, et al 2003). The nationalization of life insurance was justified mainly on three counts: 1) It was perceived that private companies would not promote insurance in rural areas. 2) The Government would be in a better position to channel resources for saving and investment by taking over the business of life insurance. 89

6 3) Bankruptcies of life insurance companies had become a big problem (at the time of takeover, 25 insurance companies were already bankrupt and another 25 were on the verge of bankruptcy). Table 4.3: Average sum assured per policy (New business) Year India Outside India Total Rs Source: Bodla, et al, 2003 Table 4.4: New business - Individual insurance (excluding annuities) (No. of policies in lakhs and sum assured in Crores of Rs.) Year In India Out of India Total No. of Policies Sum Assured No. of Policies Sum Assured No. of Policies Sum Assured Source: Bodla, et al,

7 Table 4.5: Individual insurance business in-force Year Indian Non-Indian Total Business March 31st (Rs. in Crores) Source: Bodla, et al, 2003 During the period between 1956 and 2000, Life Insurance Corporation of India, the monopoly public sector life insurance company has made significant stride in life insurance business through massive network of branches spanning the entire country. Number of policies sold by LIC of India has been increasing over the years, denoting the distribution reach and penetration capability of LIC of India. Similarly the total sum assured under the policies issued by LIC of India has also increased from Rs crores in to Rs.91, Crores during , as is evident from Table 4.4. Average sum assured under a policy, which was Rs.2950 in the year 1956 grew up to Rs.53, 700 during the year 2000, details of which are available in Table 4.3. Similarly individual inforce insurance business, which was Rs.1220 Crores in the year 1955, grew up to Rs Crores during the year 2000, which is shown in Table

8 4.4 ECONOMIC REFORM DECADE Announcement of liberalisation of Indian Economy was done in the budget session of India s Lok sabha in 1992 and one of the major items on the agenda was the decision of restructuring Indian Insurance Sector from its nationalised form into a new form suitable to meet the demands of the era of liberalisation of economy. In 1993, the Government set up a committee under the chairmanship of R N Malhotra to propose recommendations for reforms in the insurance sector (Malhotra committee Report, 1994). 4.5 MALHOTRA COMMITTEE FINDINGS In 1974, the Administrative Reforms Commission of the Government put forward certain recommendations in pursuance of which the LIC formulated its objectives: a) To spread life insurance much more widely and in particular to the rural areas, and to the socially and economically backward classes with a view to reaching all insurable persons in the country and providing them, at a reasonable cost, adequate financial cover against death. b) To maximise mobilisation of people s savings by making insurance linked savings adequately attractive. c) To bear in mind, in the investment of funds, the primary obligation to its policyholders, whose money it holds in trust, without losing sight of the interest of the community as a whole; the funds to be deployed to the best advantage of the investors 92

9 as well as the community as a whole, keeping in view national priorities and obligations of attractive return. d) To conduct business with utmost economy and with the full realisation that the moneys belong to the policyholders. e) To act as trustees of the insured public in their individual and collective capacities. f) To meet the various life insurance needs of the community that would arise in the changing social and economic environment. g) To involve all people working in the Corporation to the best of their capability in furthering the interest of the insured public by providing efficient service with courtesy. h) To promote amongst all agents and employees of the Corporation a sense of participation, pride and job satisfaction through discharge of their duties with dedication towards achievement of corporate objectives. Keeping in view these objectives, the committee stated that LIC had achieved several of the objectives of nationalisation; but at the same time, it pointed out several negative constraints. The Committee appointed MARG, a market research organization to conduct a market survey among users of life insurance to find out their satisfaction levels with LIC and to assess their perceptions regarding a possible liberalization of the insurance sector. As per the findings as well as the statistics of growth furnished by LIC, the committee found the following: A) On the positive side, LIC had 1) Spread the insurance culture fairly widely. 2) Mobilised large savings for national development and financed socially important sectors such as housing, electricity, water supply and sewerage. 3) Acquired considerable financial strength and gained confidence of the insuring public. 93

10 4) Had built up a large talented pool of insurance professionals. B) On the negative side, 1. The vast marketing and services network of LIC was inadequately responsive to customer needs. 2. Insurance awareness was low among the general public. 3. Marketing of life insurance with reference to the customer needs left much to be desired. 4. Term assurance plans were not being encouraged and unit linked assurance was not available. 5. Insurance covers were costly and returns from life insurance were significantly lower compared to other savings instruments due to the following reasons. a) Excessive government directed investments of LIC funds. b) The marketing organisation was weak and turnover of agents extremely high. c) Development officers concentrated on their incentives to the neglect of training the agents and building up an efficient agency organization. d) There was excessive lapsation of policies. 6. LIC management was top heavy and excessively hierarchical, especially at the central and the zonal offices, and was overstaffed; Work culture within the organisation was unsatisfactory. 7. Trade unionism had contributed to the growth of restrictive practices. 8. Failure to adequately computerise had seriously affected the efficiency of the service provided to customers. 9. The functioning of LIC was constrained in some respects as it was covered by the definition of State as well as governmental interference. 94

11 10. On the issue of competition, the major resistance came from the employees unions and representatives of agents. However a majority of those covered in the survey was in favour of liberalisation, albeit with certain reservations with regard to the rural sector as well as the poor man. On the basis of the above report, the Committee proposed the following recommendations: 1. Private sector be permitted to enter insurance industry with a minimum paid up capital of Rs 100 crore. Foreign insurance companies be allowed to enter by floating Indian companies, preferably a joint venture with Indian partners. 2. LIC be converted into a company and its capital be raised to Rs 200 crore, 50 percent to be owned by the Government and the rest by the public at large, with suitable reservation for its employees. The capital of GIC be also raised to Rs 200 crore with similar composition. 3. All insurance companies be treated on equal footing and governed by the provisions of the Insurance Act. The Office of Controller of Insurance be restored its full functions under the Act. 4. Postal life insurance be permitted to transact life insurance business in rural areas. It should be strengthened. 5. Relief-oriented welfare schemes be transferred to the concerned Government authorities. 6. State-level cooperative societies not more than one in a state for transacting life insurance business subject to regulation by the Insurance Regulatory Authority. The capital base should be appropriately lower. 95

12 7. GIC should function exclusively as a reinsurance company. Its four subsidiaries be completely delinked by acquisition of entire stock by the Government. Capital of each subsidiary be, thereafter, raised to Rs 100 crore, with 50 percent equity held by the Government and the rest by the public at large. 4.6 A BRIEF HISTORY OF THE INSURANCE SECTOR Table 4.6 The significant events in the history of Indian insurance industry are traced in YEAR Table 4.6: Significant events in the Indian insurance industry SIGNIFICANT EVENTS 1818 Establishment of the Oriental Life Insurance Company in Calcutta 1912 The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance businesses 1938 Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public Nationalization of life insurance business in India, 245 Indian and foreign insurers and provident societies taken over by the central government and nationalised. LIC formed by an Act of Parliament 1972 Nationalization of general insurance business in India 1993 Setting up of Amphora Committee 1994 Recommendations of Malhotra Committee 1995 Setting up of Mukherjee Committee 1996 Setting up of (interim) Insurance Regulatory Authority (IRA) Recommendations of the IRA 96

13 1997 Mukherjee Committee Report submitted but not made public The Government gives greater autonomy to LIC, GIC and its subsidiaries with regard to the restructuring of boards and flexibility in investment norms aimed at channeling funds to the infrastructure sector The cabinet decides to allow 40% foreign equity in private insurance companies-26% to foreign companies and 14% to NRI s, OCB s and FII s The Standing Committee headed by Murali Deora decides that foreign equity in private insurance should be limited to 26%. The IRA bill is renamed the Insurance Regulatory and Development Authority (IRDA) Bill 1999 Cabinet clears IRDA Bill 1999 President gives Assent to the IRDA Bill 2000 First license to Private life insurance company given by IRDA There was opposition to the liberalization of life insurance industry and the opponents of liberalisation claimed that the opening up of the sector to foreign players will lead to exploitation of consumers, wasteful expenditure and will lead to the same problems that were present prior to nationalisation. On the other hand, supporters of liberalization, in addition to arguing on the benefits to the consumer and the country in large also pointed out that the openness of the market did not mean a takeover by foreign companies even in a decade. Thus, it is unlikely that the same will happen in India, especially when the foreign insurers cannot have a majority shareholding in any company as similar opening up in other Asian countries has not resulted in domination by the foreign insurance companies. As given in the Table 4.7 even after 6 to 10 years of liberalistion, penetration by foreign companies has remained less than 10% of the overall market. 97

14 Table 4.7: Results of openness and foreign penetration of insurance in Asia Country Years market open Foreign Penetration % 11-20% China X (Partial) - X - Malaysia - - X X - Taiwan - X - X - Korea - X - X - Indonesia - - X - X Japan X - - X - Source: Sinha, INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY Liberalisation of insurance sector or the reform process started with the passage of Insurance Regulatory and Development Authority (IRDA) Act, The reforms procedure recognized the need for development of the sector in addition to the traditional concept of regulation and thus conferred the authority the obligation to develop the sector as well. IRDA has come out with several regulations and guidelines covering the insurance industry over the last few years. 98

15 4.7.1 Mission Statement of IRDA To protect the interest of and secure fair treatment to policyholders To bring about speedy and orderly growth of the insurance industry (including annuity and superannuation payments) for the benefit of the common man, and to provide long term funds for accelerating growth of the economy To set, promote, monitor and enforce high standards of integrity, financial soundness, fair dealing and competence of those it regulates To ensure the insurance customers receive precise, clear and correct information about products and services and make them aware of their responsibilities and duties in this regard To ensure speedy settlement of genuine claims, to prevent insurance frauds and other malpractices and put in place effective grievance redressal machinery To promote fairness, transparency and orderly conduct in financial markets dealing with insurance and build reliable management information system to enforce high standards of financial soundness amongst market players To take actions where such standards are inadequate or ineffectively enforced To bring about optimum amount of self regulation in day to day working of the industry consistent with the requirements of prudential regulation 99

16 Table 4.8: List of Life insurance companies in India with details of promoters Name of Name of the Indian Nature of Country of Year of Foreign Insurer Promoter Business Origin License Promoter HDFC Standard Life Insurance Co. Ltd. ICICI Prudential Life Insurance Co. Ltd Max New York Life insurance Co. Ltd Kotak Old Mutual Life Insurance Co. Ltd Birla Sun Life Insurance Co. Ltd TATA-AIG Life insurance Co. Ltd SBI life insurance Co. Ltd ING Vysya Life Insurance Co. Ltd MetLife India Insurance Co. Ltd Bajaj Allianz Life Insurance Co. Ltd Reliance Life Insurance Co. Ltd.(formerly AMP Sanmar) AVIVA life insurance company Co. Ltd Sahara India Life Insurance Co. Ltd Shriram Life insurance Co. Ltd Bharti Axa Life Insurance Co. Ltd HDFC Home Loans Standard Life Insurance ICICI Bank Banking Prudential Max Ltd Kotak Mahindra Bank Aditya Birla Group Pharma & diversified Banking New York Life Insurance United Kingdom United Kingdom USA Old Mutual South Africa Diversified Sun life Canada TATA group Diversified AIG USA 23-Oct Nov Nov Jan Jan Feb Mar Bajaj Auto Reliance ADAG Dabur India Sahara Group Shriram Group Bharti Group 2 & 3 wheeler Automobiles Diversified Health Care & FMCG Diversified Financial Services & diversified Allianz Germany No Foreign Promoter Aviva United Kingdom No Foreign Promoter Sanlam South Africa Telecom AXA France State Bank of India Banking Cardiff France Exide, Gujarat 02-Aug- Diversified ING Netherlands Ambuja & 2001 Enam J &K Bank and others Diversified MetLife USA 06-Aug Aug Jan May Feb Nov

17 Table 4.9: Paid up capital of Indian life insurance companies (As on 31 st march 2006) Name of the Insurer Paidup Capital Foreign Promoter Indian Promoter FDI % (Rs Crs) HDFC Standard Life Insurance Co Ltd (HDFC Standard Life) % ICICI Prudential Life Insurance Co Ltd (ICICI Prudential) Max New York Life insurance co Ltd (Max New York) Om Kotak Life Insurance Co Ltd (Om Kotak) Birla Sun Life Insurance co ltd (Birla Sun life) TATA-AIG Life insurance Co Ltd (TATA AIG Life) SBI life insurance Co Ltd (SBI Life) ING Vysya Life Insurance Co Ltd (ING Vysya Life) MetLife India Insurance Co Ltd (MetLife) Bajaj Allianz Life Insurance (Bajaj Allianz) Reliance Life Insurance Co. Ltd (Reliance Life) AVIVA life insurance company Co. Ltd (AVIVA Life) Sahara India Life Insurance Co. Ltd (Sahara Life) Shriram Life insurance Co Ltd (Shriram Life) % % % % % % % % % % % % % Total Source: IRDA annual report

18 Table 4.10: Total life insurance premium (RS IN CRORES) Life Insurer LIC of India Growth % for LIC of India 43% 10% 16% 19% 21% ING Vysya Life HDFC Standard Life Birla Sun life ICICI Prudential OM Kotak life TATA AIG Life SBI Life Bajaj Allianz Life Max New York Life MetLife Reliance life Aviva life Sahara life Shriram life Private Sector Growth % for private sector 4124% 311% 178% 148% 96% Total Source: IRDA annual reports 102

19 Table 4.11: Business segmentwise funds under management of life insurers (As on March 31, 2006) (RS IN CRORES) Life Insurer Life Insurance Corporation of India Life Fund Pension Fund Group Fund Unit Linked Total HDFC Standard Life Max New York Life ICICI Prudential Life Birla Sun Life TATA-AIG Life Om Kotak Life SBI life Bajaj Allianz life MetLife Reliance Life ING Vysya Life AVIVA Life Sahara Life Shriram Life Private Sector total Industry total Source: IRDA annual report

20 4.8 DEVELOPMENTS IN LIFE INSURANCE INDUSTRY- POST IRDA There are 15 life insurance companies, which have received the licenses from the regulator and the table 4.8 gives the details regarding the Indian promoters, their main business, names of foreign partner and their principal country of operations. Life insurance companies with European presence have jointly promoted more life insurance companies in India. Companies like Aviva and Standard Life which were doing business in India prior to India s independence have come back to promote new companies. Except Sahara life insurance and Reliance Life insurance, all other companies have a joint venture partner. The current (as on 31 st March 2006) paid up capital figures of the new private life insurance companies are provided in Table 4.9. Foreign direct investment in insurance industry has been capped at 26% of the total paid up capital by the regulatory authority. The size of the insurance market has been consistently growing and it is growing at a healthy trend. In terms of total premium Income, which includes both new premiums and renewal premiums, LIC of India, the public sector monopoly has been growing consistently by around 20%. (Table 4.10). The new breed of private sector companies are growing at a scorching pace and the pace of growth is higher due to their lower base as against the huge base of LIC of India. The percentage share of Life Insurance Corporation has been decreasing due to increased competition as is given in figure 4.1 and from a 100% market share in year 2000, the share of LIC of India has reduced to 74% in

21 Total funds managed by all life insurance companies stand at Rs.4.87 lakhs Crores by the end of financial year 2006, of which LIC of India accounts for Rs.4.64 lakhs Crores, which is about 95% of the total funds managed by life insurance industry. Funds managed, segment wise, by each of the life insurance companies can be seen from Table Figure 4.1: Share of life insurance market between LIC and Private life insurers 100% 80% 1% 6% 11% 21% 26% 60% 40% 99% 94% 89% 79% 74% 20% 0% Lic of india Pvt Life Insurers Source: IRDA reports Figure 4.2: Share of ULIP and Traditional products for LIC, Private companies Lic of IndiaTraditional Private Life Insurers Unit LinkedSector Source: IRDA reports

22 4.9 INNOVATION IN LIFE INSURANCE PRODUCTS With the advent of new private life insurance companies, new set of products are being launched to meet the needs and demands of customer. Traditionally LIC has been selling products, which are called conventional, whose investments are guided by the government regulation in terms of the fund deployment. The current regulation on investments of traditional products is given in the Table Since the investment guidelines are governed on the principles of safety over a long term, the returns tend to be lower in the traditional products. Moreover the cost structure like cost of mortality and expenses are not disclosed to the policy holders. Sl. No. Table 4.12: Life business Investment guidelines issued by IRDA Type of Investment Percentage i) Government Securities 25 ii) iii) Government Securities or other approved securities (including (I) above) Approved Investments as specified in Schedule Not less than 50 a) Infrastructure and Social Sector Not less than 15 b) Others to be governed by Exposure/ Prudential Norms specified in Regulation Other than in Approved Investments to be iv) governed by Exposure/ Prudential Norms specified in Regulation Source: Not exceeding 20 Not exceeding 15 Unit linked products is an innovation in the offerings by the life insurance company. In unit linked products the different components of the costs or charges are segregated from the investment component and each of the costs are separately 106

23 disclosed. In simple terms, Unit linked products are transparent in terms of costs. Moreover the customer, based on their risk taking capability can choose suitable fund options or investment opportunities made available and the investors own the risk and return arising out of the investment. Unit Linked plans have become attractive and almost 87% to the business of private life insurance companies are in Unit linked plans, as is evident from Figure OTHER ORGANISATIONS IN LIFE INSURANCE INDUSTRY In addition to IRDA, which is the regulator for the industry, there are three more organizations, Life Insurance Council, Insurance Ombudsman and Insurance Institute of India to aid the orderly development of the life insurance industry in India THE LIFE INSURANCE COUNCIL The Life Insurance Council seeks to play a significant and complementary role in transforming India s life insurance industry into a vibrant, trustworthy and profitable service, helping the people of India on their journey to prosperity. Mission of Life insurance Council To function as an active forum to aid, advise and assist insurers in maintaining high standards of conduct and service to policyholders Advise the supervisory authority in the matter of controlling expenses Interact with the Government and other bodies on policy matters Actively participate in spreading insurance awareness in India Take steps to develop education and research in insurance Help bring to India the benefit of the best practices in the world 107

24 The Life Insurance Council by providing for a three-way interaction among the insurer, the insured and regulatory body aims to ensure a convergence of interests INSURANCE OMBUDSMAN Insurance Ombudsman The institution of Insurance Ombudsman was created by a Government of India Notification dated 11th November 1998 with the purpose of quick disposal of the grievances of the insured customers and to mitigate their problems involved in redressal of those grievances. This institution is of great importance and relevance for the protection of interests of policyholders and also in building their confidence in the system. The institution has helped to generate and sustain the faith and confidence amongst the consumers and insurers. The twelve offices of the insurance Ombudsman are located at (1) Bhopal, (2) Bhubaneswar, (3) Cochin, (4) Guwahati, (5) Chandigarh, (6) New Delhi, (7) Chennai, (8) Kolkata, (9) Ahmedabad, (10) Lucknow, (11) Mumbai and (12) Hyderabad. Functions of Insurance Ombudsman Insurance Ombudsman has two types of functions to perform: (1) conciliation and (2) award making. The insurance Ombudsman is empowered to receive and consider complaints in respect of personal lines of insurance like life insurance and mediclaim from any person who has any grievance against an insurer. The complaint may relate to any grievance against the insurer i.e. (a) any partial or total repudiation 108

25 of claims by the insurance companies, (b) dispute with regard to premium paid or payable in terms of the policy, (c) dispute on the legal construction of the policy wordings in case such dispute relates to claims; (d) delay in settlement of claims and (e) non-issuance of any insurance document to customers after receipt of premium INSURANCE INSTITUTE OF INDIA The Insurance Institute of India (I.I.I) formerly known as Federation of Insurance Institutes was established in the year 1955, for the purpose of promoting Insurance education and training in the country. Institute qualifications are held in esteem both by the regulator and the industry. In its role as a leading education and training provider I.I.I. is closely associated with all the segments of the insurance industry which includes IRDA and public and private sector insurance companies. The Insurance Institute of India conducts the mandatory training for agents and is also the authorized institute for conducting examinations for licensing purpose as per guidelines issued by IRDA. The activities and programmes of the Institute, among others, assist people in the insurance Industry, to acquire the skills and expertise to meet the growing needs of multiplicity of customers- the objective being to enhance professional insurance service to the millions in this country. 109

26 4.11 IN PERSPECTIVE- INDIAN LIFE INSURANCE INDUSTRY More than a century in India Large mobilisation of savings next only to banks Significant participant in the Capital Markets Constitutes 15% of Gross Domestic Savings Assets under management - more than Rs. 4,00,000 Crores Retail customers: 92% Invested in Infrastructure - Rs. 40,000 Crores Employees close to 2,00,000. Agency force: 1.5 million Policies in force: Nearly 20 Crores Nearly 5000 offices across India and still growing Growth Penetration grew from 1.2% to 4.1% of GDP Insurance Density grew from Rs. 280 to Rs. 600 (per capita premium) Premium grown from Rs. 28,000 Crores to Rs. 1.56, 000 Crores 4.12 POTENTIAL FOR LIFE INSURANCE BUSINESS IN INDIA. Size of the life insurance market depends on several factors like growth in economy measured by GDP, percent of household savings as a part of GDS, percent of household savings in life insurance and also on demographic factors. The burgeoning middle-income population and their urge on consumption coupled with the breaking up of traditional joint family system portend well for life insurance market. With the increased awareness on life insurance products, the number of households buying insurance will increase with the economic development. 110

27 Table 4.13: Projection on the category of consumers, disposable income in India Category of Consumers Annual Income No of Households Aggregate Disposable Income Aggregate Consumption (Rs.000) (Million) (trillion, Rs, ) (trillion, Rs) Globals (>1000) Strivers ( ) Seekers ( ) Aspirers (90-200) Deprived < Globals (>1000) Strivers ( ) Seekers ( ) Aspirers (90-200) Deprived < Globals (>1000) Strivers ( ) Seekers ( ) Aspirers (90-200) Deprived < Source : (MGI India Consumer demand model ) The Economic Times, Saturday, 26th May 2007, 120 Figure 4.3: Projected numbers of consumers in India million Deprived Aspirers Seekers Strivers Globals Deprived Aspirers Seekers Strivers Globals Deprived Aspirers Seekers Strivers Globals Source: MGI India Consumer demand model) The Economic Times, Saturday, 26th May, 111

28 Indian economy is growing at a consistent pace and so is the income of the households. It can be observed from Table 4.13 the percentage of deprived to the total number of household which is currently at 49% is expected to come down to 30% in year 2015 and to a level of 18% by It means there will be more Indian households in non deprived consuming class. The aggregate disposable income of this consuming class, which is at 77% of the total aggregate disposable income in 2005 is expected to go up to 97% in year In the Aspirers segment, the typical middle-income group, the number of households is expected to increase sharply and move further into the upper middle-income category, Seekers. (Figure 4.3) These demographic conditions portend higher potential for life insurance products, as the percentage of savings by household sector in India is traditionally high and so also the contribution of life insurance premium amongst household savings PROJECTED GROWTH GROWTH IN PREMIUM Total life insurance sector premiums are estimated to rise to US$72bn by year 2010 (from US$21bn in FY06) and account for 5.5% of GDP as against 2.6% currently. The total premia include renewal premia assuming persistency rates at 75-80% for the majority of the large insurers, which is in line with the trends of the past 5 years. New business premiums are estimated to be US$23bn.ie exceeding Rs.1 lakh Crores. (Varma, et al 2007) 112

29 GROWTH IN NUMBER OF HOUSEHOLDS The average premium for a policy for private insurers is above Rs.24,000 while for LIC it has been only about Rs.8,500 until During , the average premium for LIC has moved above Rs.20,000 with the industry average premium jumping to almost Rs.25,000 from Rs.10,000 in the previous year. The total number of polices written in the past 4 years itself was greater than 115mn (with LIC selling almost 107mn of these). The number of inforce policies is expected to be more than 500 million based on the assumption that the current growth rate will continue. This 500 million is an overstatement on the number of households as the number of policies in each household would be about 4 or 5 policies. Adjusting for the multiple inforce policies, the number of households covered by at least one life insurance policy is expected to be around 1 billion by year It still denotes a huge potential for the life insurance market GROWTH IN ASSETS UNDER MANAGEMENT The total assets under management (AUM) for private sector players is estimated to increase to US$55bn by 2010 from the current level of US$6bn in LIC would have a further US$ billion as its assets under management. According to an estimate, almost US$20-25 bn is being added to the AUM every year (including LIC), which is more than the inflows in domestic mutual fund industry in The total corpus of money managed by insurance companies by the year 2010, especially in equities, could surpass assets managed by mutual funds. (Varma, et al 2007) 113

30 4.14 MARKETING OF SERVICES Life insurance is a part of financial services product segment and life insurance, by its nature is intangible, a promise by the life insurance company stating that it will honour the commitment in the eventuality of happening of the event, which has been covered in the policy. It is important to understand the key concepts relating to marketing of services and more specifically marketing of financial services for better understanding of the customer insurer relationship. (Gidhagen, 1998) DEFINITION OF SERVICES The concept of services is complicated, as a service may encompass many features, ranging from a personal service involving a complex relationship to a service more like a commodity with a tangible product, and thus more easily comprehensible. An example of the latter is car rental, where the customer drives the car very tangible and comprehensible results of the service offered whereas in the case of the former, using insurance services as an example, the customer pays for something highly impalpable, namely risk reduction. The insurance company bears the risk, which the customer consumes all the time. Customers, however, do not really comprehend the total context of the service until a loss is experienced. Different levels of personal interaction are also exemplified in both cases. Car rental is often handled in a standardised manner, not necessarily entailing personal contact other than signing a contract and receiving a key, whereas an insurance contract requires a high level of personal interaction, albeit, at times, telephonically. Service can be defined as an activity or series of activities of more or less intangible nature that normally, but not necessarily, take place in interactions between the customer and service employees 114

31 and/or physical resources or goods and/or systems of the service provider, which are provided as solutions to customer problems. This exemplifies one of the characteristics suggested to distinguish services from goods, namely intangibility. The others are inseparability, heterogeneity, perishability, and Intangibility denotes the fact that services are often not possible to feel, taste, see, hear, or smell before they are purchased; they are impalpable. Intangibility is closely related to the concept of comprehensibility, since a service is not easily defined, formulated, or grasped mentally. (Donnelly et al., 1985) Moreover, services can often not be separated from the provider, as they are, at least to some extent, produced and consumed simultaneously and thus the customer participates in the production of the service. Services are often characterised as heterogeneous, as it is difficult to achieve standardisation of output; services are perishable and cannot be stored; and a customer always has access to or the use of a service, but not ownership of the activity or facility. (Gidhagen, 1998) As per Figure 4.4, if as the services move from left to right, it can be observed that the tangible component of the product decreases and the intangible component increases. Figure 4.4: Tangibility component in Services product Source: Gidhagen,

32 One of the major features of a marketing strategy is to go beyond the physical aspects of the mere product (described as a set of attributes: tangible, intangible, physical and chemical) and to see the goods, or service, as a set of attributes that the buyer may accept as satisfying his or her needs and wants. In the case of marketing of services, however, the intangible attributes are relatively dominant and that calls for special understanding of the marketing effort. As noted above, services can be more or less tangible and this has consequences on the supplier-customer relationship CHARACTERISTICS OF SERVICES IN THE FINANCIAL MARKETS Financial services are not only intangible but are also very complex in that they consist of obviously related units, whose degree and nature of interrelationship are not completely known. Financial services can be described in terms of tangibility, complexity and, a crucial variable in marketing, comprehensibility. The latter refers in general to the customer s ability to fully comprehend the elements comprising the service. Figure 4.5: Tangibility component in Financial services product Source: Gidhagen,

33 Even though all financial services have an intangible dominant, they vary in their degree of tangibility in terms of the consumer s ability to grasp the particular service mentally to comprehend the service rendered. Even among financial services, credit card has higher degree of tangible components as against a home insurance or commercial insurance. Insurance services may be considered as more intangible than, for instance, a bank service entailing immediate withdrawal of money, as there is no instant result from the transaction of money concluding a contract, except for the very contract signed. The more intangible the service the more important the management of relationships, a factor which has to be stressed in the insurance business... The service for which the insurance premium is paid is risk reduction, something that is difficult to comprehend until a loss is experienced and the information is gathered on how the insurance company will compensate the loss KEY CONSIDERATIONS IN LIFE INSURANCE SELLING Life insurance, which has a low degree of tangibility and a high degree of complexity, is relatively more difficult to understand. In order to make such complex product more tangible for the customer, the provider must put efforts into raising the customer s level of comprehension, and this must be one of the focal objectives of the marketing strategy. Although intangible services may be difficult to comprehend, the relationship between the buyer and the seller is not. Thus relationship management, by focusing on and thereby establishing an interdependent relationship where information is mutually given and mutual trust is experienced, becomes the means by which the buyer can be helped to comprehend the offered service. A good strategy for confronting intangibility, the tangible relationship between the seller and the buyer becomes the focus in life insurance marketing strategy. In addition to the distinguishing 117

34 features of services in general and financial services in particular that have been described above, there are also two other characteristics worth mentioning. These are fiduciary responsibility and two-way information flows between provider and customer. The latter refers to the implicit responsibility of financial organizations for the management of their customers funds as well as the financial advice supplied. It is also very much a case of mutually exchanged promises between the two parties in each financial services transaction. Furthermore, there are large investments in time and efforts required by both parties in a financial relationship in order to acquire the necessary experience and information. From the customer s point of view regarding the assessment of the service provider s reliability, it is usually a fact that once satisfied, the customer will more likely remain with that financial institution than incur the costs of searching for and evaluating alternative suppliers DISTRIBUTION OF LIFE INSURANCE PRODUCTS Life insurance companies will be successful only when the insurance product/service, targeted at individuals, is made available as close to the customer as possible. Insurers can sell their products either directly to customers or through tied agents and independent intermediaries. Life insurance companies have adopted different methods or channels for distributing their products. A broad categoristion of channels currently being used in the distribution of life insurance products is given in Figure

35 Figure 4.6: Channels of insurance distribution DISTRIBUTION CHANNELS TIED AGENCY ALTERNATE CHANNELS DIRECT SALES TEAM BROKER WORK SITE MARKETING REMOTE MARKETING BANC ASSURANCE SHOP ASSURANCE CORPORATE AGENCY TELE MARKETING INTERNET MARKETING MAIL MARKETING Tied agency comprises of individuals as agent, who is an Intermediary representing the interests of the insurer and makes the product available to the customer but is not an employee of the life insurer. Different companies in India adopt different terminologies in describing the agent, like Advisor, Financial consultant etc. Tied agency is the oldest and still the single largest contributor in terms of sales for any life insurance company in India. The number of agency licenses issued by IRDA has been increasing year after year. It has reached a figure of lakh licenses (fresh and renewals) during the year LIC still continues to be the single largest recruiter of agents (Table 4.14) in the life insurance industry. 119

36 Table 4.14: Number of agency licenses issued by IRDA (Fresh licenses and license renewals) Life insurer Allianz Bajaj TATA AIG Reliance (AMP Sanmar) BIRLA Sun Life HDFC Std Life ICICI Prudential ING Vysya LIC of India Max New York MetLife OM Kotak SBI Life Aviva Life Sahara Life Shriram Life Source: IRDA reports Direct Sales Team comprises of sales personnel employed by insurers who sell the life insurance products of their employer. Direct sales team members are employees of the life insurance company and are trained and licensed to sell life insurance products to the customers. This channel is a recent entrant and is yet to make a significant contribution and the channel is facing the problem of high attrition rate. Alternate channel refers to distribution of life insurance products other than through the traditional method of tied agency and direct sales. Corporate agents refer to any partnership firm, private limited company or a public limited company undertaking the distribution of insurance products to their customers. The 120