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Transcript of 26314882 Innovation in Insurance Industry
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ONINNOVATION IN INDIANINSURANCE INDUSTRY
NIRBHAYPANDEY
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DECLARATION
I hereby declare that the Dissertation on:
Innovation in Indian Insurance Industry
Submitted in partial fulfillment of the requirement for the
two year PGDM (Insurance & Risk Management) is
collected by my own efforts and it is true and real to the
best of my knowlede!
"lso# the report presented has not been published anywhere
else!
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PREFACE
" well$de%eloped and e%ol%ed insurance sector is needed for
economic de%elopment as it pro%ides lon term funds for
infrastructure de%elopment and at the same time strenthens the
risk takin ability! It is estimated that o%er the ne&t ten years India
would require in%estments of the order of one trillion 'S dollar!
he Insurance sector# to some e&tent# can enable in%estments in
infrastructure de%elopment to sustain economic rowth of the
country!
ULIPs# insurance$cum$in%estment# are life insurance plans whose
returns are linked to the stock markets! 'IP returns fluctuate with
the ups and downs in the stock market! Mutual *und are collecti%e
in%estment %ehicles that pool resources of %arious in%estors and
in%ests these resources in a di%ersified portfolio comprisin of
stocks# bonds or money market instruments! "lthouh both these
products are somewhat different in their workin but more or less
the fund pooled in both of them are in%ested similarly! +ith the
ad%ent of 'nit inked Insurance Plans# the life insurance products
ha%e chaned from bein only a life co%er product to an
in%estment %ehicle with built$in features of life insurance and ta&
benefits! hese days, inno%ati%e products are floodin the market
which offers the features of a traditional insurance policy with
added benefits of hih return from the market instruments!
Bancassurance,new concept catchin up fast in India! -ne ofthe more recent e&les of financial di%ersification is
./ancassurance,# the term i%en to the distribution of insurance
products throuh branches 0 other distribution channels of the
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banks! he concept that oriinated in *rance now constitutes the
dominant model in a number of 1uropean and other countries and
the same is fast catchin up in India as well!
Healt Insurance,+ith proliferation of %arious health caretechnoloies and eneral price rise# the cost of care has also
become %ery e&pensi%e and unaffordable to lare sement of
population! he o%ernment and people ha%e started e&plorin
%arious health financin options to manae problems arisin out of
rowin set of comple&ities of pri%ate sector rowth# increasin
cost of care and chanin epidemioloical pattern of diseases!
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AC!NO"LED#E$ENT
Gratitude is the hardest of emotionsto e!ress and often does not findade"uate #ords to $on%e& the entireone fee's( a'thou)h it is diffi$u't to
mention the nature of a''( #ho )a%eme their fu'' su!!ort and $oo!erationthrou)hout m&dissertation #or*+ I ta*e the o!!ortunit& to intent m&sin$erer )ratitude to m&mentor ((((((((((((((((((((((for his he'!fu')uidan$e durin) the resear$h !eriod+ This !ro,e$t re!ort resu't isnot on'& the out$ome of the efforts!ut in -& me -ut a'so -& man& he'!fu'hands 'i*e the fa$u't& mem-ers ( m&mentor and man& of m& friends+
THAN.YOU
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CONTENT%
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Introduction
he Indian insurance market is e&periencin lot of cosmic
chanes! "fter the insurance sector was opened in 2333 for the
pri%ate sector it is seein a lot of chanes are takin places both in
product and pro%idin ser%ice to its customer,s! /efore 2333 the
picture was totally different# there was only two insurance plan
which co%ered life and non ife and two o%ernment owned
insurance company !he two o%ernment owned insurancecompany are ife Insurance corporation of India ltd( !I!4)and the
other was General Insurance 4ompany (G!I!4) !
T
Due to this there was o%ernment monopoly e&istin in the
insurance sector where there was only two dominant players I4
and GI4 offerin few number of product! /ut after openin up of
this sector to the pri%ate and forein companies# lare number of
pri%ate and forein companies appeared in insurance sector#
pro%idin %ariety of insurance products with ma5ority of insurancecompany layin more stress on home loan insurance! hus creatin
lot of competition in the insurance sector as each of companies
wanted to acquire reater market share!
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Call for InnovationDemoraphic chanes# channel optimi6ation pressures# chanin
compliance en%ironment# and increasin competition are forcin
insurers to increase the pace of product inno%ation to meet their
rowth and profitability ob5ecti%es! his paper e&amines the causesof product introduction inefficiencies and discusses approaches to
impro%in capabilities to achie%e rapid product introduction!
he period of stable product portfolios that rarely chane is lon
past the insurance industry! "s with other industries# insurance is
bein forced to respond to the e%er$chanin demands of
distributors and customers! 4arriers refresh their product portfolio
by either addin new products or enhancin e&istin ones to meet
market demands! Periodically# they also discontinue non$
performin products# thouh it does not eliminate the need to
support ser%icin of policyholders!
his constant addition of new products# while continuin to
support old ones# has been a ma5or contributor to the comple&
en%ironment insurers find themsel%es in today!
7etoolin the internal operations of a company to support new
products is difficult# time consumin and costly# but necessary!
In the 8ood old days9 when companies relied on a sinle#
relati%ely simple back office system# chanes were easy to make#
test and mo%e to production! In today,s multiple# comple& back
office systems with their plethora of interfaces and inter
dependencies# makin a chane in one system can ha%e multiple
and unforeseen consequences across the enterprise assumin youcan determine where to make the chane in the first place!
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/usiness Dri%ers for Product Introduction
+hile most e&perts aree that the demand for new and creati%e
products is oin to intensify# the ability of insurance companies to
respond cost effecti%ely is diminishin!
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Insurers ha%e always been aware of the importance of new product
launches and their effect on sales and profitability! Industry
analysts ha%e confirmed the importance of keepin product
portfolios fresh and current to meet market demands! " recent
4elent study2 reaffirms that market demands like .ime to Market,and .1ase of Doin /usiness, are amon the top business issues
for both ife;
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client,s wallet share by offerin additional products to address
percei%ed aps in co%erae or in%estment needs! Pressure from
competitors: Insurance companies are bein pressured by both
insurance and non$insurance financial ser%ices competitors!
"s new product offerins from inno%ati%e insurance companies
ain traction in the market# other companies feel the pressure to
copy! o pre%ent non$insurance competitors from ainin further
market share# insurance companies de%elop products that take full
ad%antae of their unique ta& and protection characteristics! he
mountin competiti%e pressure makes it imperati%e for insurance
companies to keep a close watch on the market and desin#
de%elop and implement new insurance products that better addressthe needs of the market!
7eulations the mo%in taret: Insurance is a hihly reulated
industry that must constantly re%iew and ad5ust its product
offerins to ensure compliance! In addition# the chanin
reulations often offer new opportunities to aressi%e and
inno%ati%e carriers! 7eulations impact e%ery aspect of the productdesin and de%elopment process product filins# rate appro%als#
reulatory reportin# ta& treatment# disclosure# etc!
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+hat "ils the Product De%elopment ProcessA
he product de%elopment or enhancement process in a typicalinsurance company requires a hih le%el of collaboration and
coordination amon %arious stakeholders from product desin#
prorammin# leal# compliance# operations# marketin# trainin#
etc!
More than B>C resources of the total product de%elopment
lifecycle are taken by the implementation phase! he actual
implementation of new products entails substantial resourcein%estments! he process also necessitates many handoffs between
the stakeholders!
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Te e&er'in' trends in te industry in ter&s o( )roduct
innovation
7iders and unit linked products ha%e led some of the %isible
inno%ations in the market place! 7iders can be used to customi6e
life insurance for %aryin customer requirements# pro%ide health
co%erae# and impro%e a products competiti%e profile throuh
impro%ed customer %alue!
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and equity$inde&ed annuities could emere as part of the product
suite of life insurance companies! 4learly# product inno%ation is a
ma5or strateic imperati%e for insurers! he key is to offer products
based on deep insihts of consumer needs! In the lon term# only
such products sur%i%e and row into a meaninful and profitable
component of an insurers product portfolio!
he openin up of the insurance sector saw the emerence of
inno%ations introduced by pri%ate players# initially in terms of
product offerins! he insurance industry# which till then had seen
minimal product inno%ations# saw the ad%ent of unit linked
insurance products ('IPs)! Moreo%er# liberali6ation of the sector
also saw the ad%ent of o%er$the$counter and pre$underwritten
products that are offered by banks to its customers! hese are
products with no underwritin that are cross$sold with home loansand the like! Inno%ations ha%e also come about in the area of %alue
added ser%ices as companies started pro%idin %alue additions like
online purchase of insurance policies# payment of premiums by
credit cards and online trackin of net asset %alues (F"Es)!
Te rise in )re(erence (or ULIPs as co&)ared to traditional
)roducts
"part from protection benefits# 'IPs pro%ide policyholders anopportunity to earn returns linked to the underlyin financial
markets! "lso# unlike con%entional products# the chares in 'IPs
are transparent! op$ups# premium redirection options# facility to
switch partially or fully from one fund to another# etc# make these
products %ery fle&ible! ower reulatory capital requirements %is$
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$%is endowment products ha%e also helped insurers dri%e down
the costs of these products! hese factors coupled with stellar
returns in the equity markets ha%e made 'IPs# particularly#
appealin!
'IPs i%e customers an option to participate in equity and debt
markets dependin on their risk appetite! raditional products did
not offer the facility to choose and chane their pattern of
in%estment in a particular policy! 'IPs are useful for those who
want to be insured but at the same time are interested in in%estin
in an a%enue# which matches their risk$return profile! 'IPs are
best suited for those who ha%e a conceptual understandin of
financial markets and are enuinely lookin for a fle&ible# lon$term in%estment$cum$insurance! 'IPs ha%e ained in popularity
due to the fle&ibility they offer to policyholders in choosin the
in%estment pattern alon with the transparency in chares besides
the ease of comparison of the final illustrated %alues!
A BRIEF HISTORY OF UNIT LINKED INSURANCE
PLAN
'IP stands for 'nit inked Insurance Plan! It pro%ides for life
insurance where the policy %alue at any time %aries accordin to
the %alue of the underlyin assets at the time! 'IP is life
insurance solution that pro%ides for the benefits of protection and
fle&ibility in in%estment! he in%estment is denoted as units and is
represented by the %alue that it has attained called as Fet "sset
Ealue (F"E)!'IP came into play in the 23@>s and became %ery popular in
+estern 1urope and "merica! he reason that is attributed to the
wide spread popularity of 'IP is because of the transparency and
the fle&ibility which it offers!
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he subsequent softenin of interest rates introduced a deree a
much$needed rationality to insurance products like endowment
plans attracti%e returns at low risk became a thin of the past! he
same period also coincided with an upturn in equity markets and
the emerence of a new breed of market$linked insurance productslike 'IPs!
+hile in con%entional insurance products the insurance component
takes precedence o%er the sa%ins component# the opposite holds
true for 'IPs!
More importantly 'IPs (powered by the presence of a lare
number of %ariants) offer in%estors the opportunity to select a
product which matches their risk profile for e&le an indi%idual
with a hih risk appetite can shun traditional endowment plans
(which in%est about HBC of their funds in the debt instruments) in
fa%our of a 'IP which in%ests its entire corpus in equities!
In traditional insurance products# the sum assured is the corner
stone in 'IPs premium payments is the key component! 'IPs
are remarkably alike to mutual funds in terms of their structure and
functionin premium payments made are con%erted into units anda net asset %alue (F"E) is declared for the same!
In%estors ha%e the choice of enhancin their insurance co%er#
modifyin premium payments and e%en optin for a distinct asset
allocation than the one they oriinally opted for!
"lso if an unforeseen e%entuality were to occur# in case of
traditional products# the sum assured is paid alon with
accumulated bonuses con%ersely in 'IPs# the insured is paideither the sum assured or corpus amount whiche%er is hiher!
Insurance seekers ha%e ne%er been e&posed to this kind of
fle&ibility in traditional insurance products and it would be fair to
say that 'IPs represent the new face of insurance!
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+hile few would dispute the %alue$add that 'IPs can pro%ide to
ones insurance portfolio and financial plannin the same is not
without its flipside!
*or the uninitiated# understandin the functionin of 'IPs can bequite a handfulJ he presence of what seem to be relati%ely hiher
e&penses# riidly defined insurance and in%estment components
and the impact of markets on the corpus clearly make 'IPs a
comple& proposition! raditionally the insurance seekers role was
a passi%e one restricted to makin premium payments 'IPs
require reater participation from both the insured and the
insurance ad%isor!
"s is the case with most e%ol%ed in%estment a%enues# makin
informed decisions is the key if in%estors in 'IPs wish to truly
ain from their in%estments! he %arious aspects of 'IPs dealt
with in this publication will certainly further the 'IP in%estors
cause!
Ho* to select te ri't ULIP
*or a product capable of addin sinificant %alue to in%estorsportfolios# 'IPs ha%e far too many critics! +e atPersonally ha%e
interacted with a number of in%estors who were %ery disillusioned
with their 'IPs in%estments often the disappointment stemmed
from poor and inappropriate selection!
+e present a B$step in%estment stratey that will uide in%estors in
the selection process and enable them to choose the riht 'IP!
+ Understand te conce)t o( ULIPs
Do as much homework as possible before in%estin in an 'IP!
his way you will be fully aware of what you are ettin into and
make an informed decision!
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More importantly# it will ensure that you are not faced with any
unpleasant surprises at a later stae! -ur e&perience suests that
in%estors on most occasions fail to realise what they are ettin
into and unscrupulous aents should et a lot of credit for the
same!
Gather information on 'IPs# the %arious options a%ailable and
understand their workin! 7ead 'IP$related information a%ailable
on financial +eb sites# newspapers and sales literature circulated
by insurance companies!
- Focus on your need and ris. )ro(ile
Identify a plan that is best suited for you (in terms of allocation of
money between equity and debt instruments)! Kour risk appetite
should be the decidin criterion in choosin the plan!
"s a result if you ha%e a hih risk appetite# then an aressi%e
in%estment option with a hiher equity component is likely to be
more suited! Similarly your e&istin in%estment portfolio and the
equity$debt allocation therein also need to be i%en due importance
before selectin a plan!
-ptin for a plan that is lop$sided in fa%our of equities# only with
the ob5ecti%e of clockin attracti%e returns can and does spell
disaster in most cases!
/ Co&)are ULIP )roducts (ro& various insurance co&)anies
4ompare products offered by %arious insurance companies on
parameters like e&penses# premium payments and performance
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amon others! *or e&le# information on premium payments
will help you et a better picture of the minimum outlay since
'IPs work on premium payments as opposed to sum assured in
the case of con%entional insurance products!
4ompare the 'IPs performance i!e! find out how the debt# equity
and balanced schemes are performin also study the portfolios of
%arious plans! 1&penses are a sinificant factor in 'IPs# hence an
assessment on this parameter is warranted as well!
1nquire about the top$up facility offered by 'IPs i!e! additional
lump sum in%estments which can be made to enhance the policys
sa%ins portion! his option enables policyholders to increase the
premium amounts# thereby pro%idin presentin an opportunity to
ainfully in%est any surplus funds a%ailable!
*ind out about the number of times you can make free switches
(i!e! chane the asset allocation of your 'IP account) from one
in%estment plan to another! Some insurance companies offer
multiple free switches e%ery year while others do so only after the
completion of a stipulated period!
0 #o (or an e1)erienced insurance advisor
Select an ad%isor who is not only con%ersant with the functionin
of debt and equity markets# but also independent and unbiased!
"sk for references of clients he has ser%iced earlier and cross$
check his ser%ice standards!
+hen your aent recommends a 'IP from a i%en company# put
forth some product$related questions to test him and also ask himwhy the products from other insurers should not be considered!
Insurance ad%ice at all times must be unbiased and independent
also your aent must be willin to inform you about the pros and
cons of buyin a particular plan!
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doin paper work like fillin forms and deli%erin receipts instead
he should keep track of your plan and offer you ad%ice on a reular
basis!
2 Does your ULIP o((er a &ini&u& 'uarantee3
In a market$linked product# protectin the in%estments downside
can be a hue ad%antae! *ind out if the 'IP you are considerin
offers a minimum uarantee and what costs ha%e to be borne for
the same!
Unit Lin.ed Insurance Plans 4ULIPs5
*or the eneration of insurance seekers who thri%ed on insurance
policies with assured returns issued by a sinle public sector
enterprise# unit$linked insurance plans are a re%elation!
raditionally insurance products ha%e been associated with
attracti%e returns coupled with ta& benefits! he returns part was
often so compellin that insurance products competed with
in%estment products for a place in the in%estors portfolio! Perhaps
insurance policies then were symbolic of the times when hih
interest rates and the absence of a rational risk$return trade$off
were the norms!
he subsequent softenin of interest rates introduced a deree a
much$needed rationality to insurance products like endowment
plans attracti%e returns at low risk became a thin of the past! he
same period also coincided with an upturn in equity markets and
the emerence of a new breed of market$linked insurance products
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like 'IPs! +hile in con%entional insurance products the
insurance component takes precedence o%er the sa%ins
component# the opposite holds true for 'IPs!
More importantly 'IPs (powered by the presence of a larenumber of %ariants) offer in%estors the opportunity to select a
product which matches their risk profile for e&le an indi%idual
with a hih risk appetite can shun traditional endowment plans
(which in%est about HBC of their funds in the debt instruments) in
fa%our of a 'IP which in%ests most of its corpus in equities!
In traditional insurance products# the sum assured is the corner
stone in 'IPs premium payments is the key component! 'IPs
are remarkably alike to mutual funds in terms of their structure and
functionin premium payments made are con%erted into units and
a net asset %alue (F"E) is declared for the same!
In%estors ha%e the choice of enhancin their insurance co%er#
modifyin premium payments and e%en optin for a distinct asset
allocation than the one they oriinally opted for! his calls for
enhanced fle&ibility in 'IPs! "lso if an unforeseen e%entuality
were to occur# in case of traditional products# the sum assured ispaid alon with accumulated bonuses con%ersely in 'IPs# the
insured is paid either the sum assured or corpus amount whiche%er
is hiher!
Insurance seekers ha%e ne%er been e&posed to this kind of
fle&ibility in traditional insurance products and it would be fair to
say that 'IPs represent the new face of insurance! +hile few
would dispute the %alue$add that 'IPs can pro%ide to ones
insurance portfolio and financial plannin the same is not withoutits flipside!
*or the uninitiated# understandin the functionin of 'IPs can be
quite a handfulJ he presence of what seem to be relati%ely hiher
e&penses# riidly defined insurance and in%estment components
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and the impact of markets on the corpus clearly make 'IPs a
comple& proposition! raditionally the insurance seekers role was
a passi%e one restricted to makin premium payments 'IPs
require reater participation from the insured!
Car'es and E1)enses
'IPs work %ery similar to a mutual fundwith an added benefit of
life co%er and ta& deduction! hey ha%e a mandate to in%est the
premiums in %aryin proportions in secs (o%ernment securities)#
bonds# the money markets (call money) and equities! he primary
difference between con%entional sa%ins$based insurance plans
like endowment and 'IPs is the in%estment mandate$ while
'IPs can in%est up to 2>>C of the premium in equities# the
percentae is much lower (usually not more than 2BC) in case of
con%entional insurance plans! 'IPs are also a%ailable in multiple
options like .aressi%e, 'IPs (which can in%est up to 2>>C in
equities)# .balanced, 'IPs (which in%est L>$@>C in equities) and
.debt, 'IPs (which in%est only in debt and money market
instruments)!
/roadly speakin# 'IP e&penses are classified into three ma5orcateories:
+5 $ortality car'es
Mortality e&penses are chared by life insurance companies for
pro%idin a life co%er to the indi%idual! he e&penses %ary with the
ae# sum assured and sum$at$risk for the indi%idual! here is a
direct relation between the mortality e&penses and the abo%e
mentioned factors! In a 'IP# the sum$at$risk is an importantreference point for the insurance company! he sum$at$risk is the
difference between the sum assured and the in%estment %alue the
indi%idual,s corpus as on a specified date! 'sually# the mortality
chares are le%ied on the per thousand sum assured!
http://www.personalfn.com/investment/ms/targetbook.asp?title=The%20definitive%20guide%20to%20Mutual%20Funds&filename=MSMAY2005.html&bookId=15http://www.personalfn.com/investment/ms/targetbook.asp?title=The%20definitive%20guide%20to%20Mutual%20Funds&filename=MSMAY2005.html&bookId=15 -
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-5 %ales and Fund Ad&inistration e1)enses
Insurance companies incur these e&penses for operational purposes
on a reular basis! he e&penses are reco%ered from the premiums
that indi%iduals pay towards their insurance policies! "entcommissions# sales and marketin e&penses and the o%erhead costs
incurred to run the insurance business on a day$to$day basis are
e&les of such e&penses!
/5 Fund &ana'e&ent car'es 4F$C5
hese chares are le%ied by the insurance company to meet the
e&penses incurred on manain the 'IP in%estments! " portion
of 'IP premiums are in%ested in equities# bonds# $secs andmoney market instruments! Manain these in%estments incurs a
fund manaement chare# similar to what mutual funds incur on
their in%estments! *M4s differ across in%estment options like
aressi%e# balanced and debt 'IPs usually a hiher equity
option translates into hiher *M4!
"part from the three e&pense cateories mentioned abo%e#
indi%iduals may also ha%e to incur certain e&penses# which areprimarily .optional, in nature$ the e&penses will be incurred if
certain choices that are made a%ailable to indi%iduals are e&ercised!
a5 %*itcin' car'es
Indi%iduals are allowed to switch their 'IP options! *or e&le#
an indi%idual can switch his fund money from 2>>C equities to a
balanced portfolio# which has say# @>C equities and L>C debt!
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'IPs allow indi%iduals to in%est a top$up amount! op$up amount
is paid in addition to the premium amount for a particular year!
Insurance companies usually deduct a certain percentae from the
top$up amount as chares! hese chares are usually lower than
the reular chares that are deducted from the annual premium!
c5 Cancellation car'es
ife insurance companies le%y cancellation chares if indi%iduals
decide to surrender their policies before the mandated lock$in
period which is usually three years! hese chares are le%ied as a
percentae of the fund %alue on a particular date!
he 4ompounded "nnual Growth 7ate (4"G7) of the fund oesup o%er a period of time! his is because the 'IP e&penses e%en
out o%er a period of time! he .e%enin out, occurs because
althouh the e&penses are hih in the initial years# they fall
thereafter! "nd as the years roll by# the e&penses tend to .spread
themsel%es, more e%enly o%er the tenure of the 'IP! "nother
reason is also because the e&penses are le%ied on the annual
premium amount# which stays the same throuhout the tenure!
herefore# the e&penses do not ha%e any impact on the returnsenerated by the corpus!
*und manaement chares also ha%e an effect on the returns! *M4
is le%ied on the corpus# which keeps fluctuatin o%er the tenure!
he returns also depend to a lare e&tent on how well the insurance
company manaes the in%estment! Indi%iduals therefore# need to
bear in mind that e&penses are an important %ariable while
e%aluatin 'IPs across life insurance companies! hey ha%e the
potential to make a considerable difference to the returns enerated
o%er a period of time!
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HEALTH
IN%URANCEGrowth in national income by itself is not enough, if the
benefits do not manifest themselves in the form of more food,
better access to health and education8 7777777A&arty ! %en
E1)enditure on ealt 6y te #overn&ent continues to 6e
lo* It is not vie*ed as an invest&ent 6ut rater as a dead
loss9
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%tates under (inancial constraints cut e1)enditure on ealt
%till India is *ay 6eind &any (ast develo)in' countries
suc as Cina, :ietna& and %ri Lan.a in ealt
indicators
In case o( 'overn&ent (unded ealt care syste&, te ;uality
and access o( services as al*ays re&ained &a
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sector 4tis accounts (or --@ o( overall s)endin'5 and 0?@ in
)rivate sector 4?@ o( overall s)endin'5
National level o( s)endin' on Healt care under (ive year )lans
as decreased 7 it *as //@ in (irst )lan = ?@ in ei't )lanTe national s)endin' also includes (a&ily )lannin', *ater,
sanitation (or rural areas etc $a
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)re&iu& and ena6les you to save u) to Rs /,/>> under
%ection D o( te Inco&e Ta1 Act
Fa&ily Floater Healt Plan 7 Introduction
For te (irst ti&e in India, one sin'le )olicy ta.es care o( teos)italiation e1)enses o( your entire (a&ily Fa&ily Floater
Healt Plan ta.es care o( all te &edical e1)enses durin'
sudden illness, sur'eries and accidents
Personal Accident Insurance
ICICI Lo&6ard Personal Accident Insurance )olicy covers
you a'ainst Accidental Deat, Per&anent Total Disa6le&ent4PTD5 and Per&anent Partial Disa6le&ent 4PPD5 As a s)ecial
o((er, *e no* 6rin' / ne* Personal Accident (le1i6le )lan
o)tions 4Accidental Deat = Per&anent Total Disa6le&ent
cover only5 *it a su& insured o( Rs /, 2 and Rs + La.!
Ba7?2yrs
*ic )rotects you and your s)ouse in case you need e1)ensive
&edical care
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Hos)ital cas 8 A )olicy tat )rovides a daily allo*ance (or
eac day o( os)italiation Bene(its is dou6led in case o( ICU
ad&ission Inco&e ta1 e1e&)tion under %EC D
Personal 'uard 8Tis )olicy covers a'ainst accidental deat
and co&es *it several additional 6ene(its li.e os)italcon(ine&ent allo*ance, cildrens education 6onus
E7 o)inion8 Ba
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$ediclai& Policy
Personal Accident Policy
Overseas $ediclai& Policy
%tar Healt And Allied Insurance Co&)any
%tar True :alue Healt Insurance is an o((erin' desi'ned to
o((er ealt insurance to te &asses Te )re&iu&s are very
econo&ical, &a.in' it *itin te reac o( &any Te insurance
is availa6le in various o)tions ran'in' (ro& a &ini&u& su&
assured o( Rs/, to a &a1i&u& o( Rs , Te
)re&iu& de)ends on te a'e o( te )erson )ro)osed (or teinsurance
%TAR $edi Classic )olicy to )rovide (or rei&6urse&ent o(
os)italiation e1)enses
NRI All Care, to insure te ealt o( (a&ily &e&6ers o( Non7
Resident Indians It )rovides (or (inancial el) and assistance,
sould a &edical e&er'ency arise
Fa&ily Healt O)ti&a to )rotect all &e&6ers o( a (a&ily (ro&
(inancial set6ac.s in te event o( a serious illness Te covera'e
is a))lica6le e;ually to all &e&6ers o( te (a&ily
%enior citien red car)et It )rovides cover (or anyone over te
a'e o( > and )er&its entry ri't u) to te a'e o( > *it
continuin' cover a(ter tat It is our *ay o( carin' (or a
'eneration tat as done so &uc to 6uild te country *e avetoday
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Conclusion Fro& Co&)arison
#er&an syste& is clearly su)erior to A&erican syste&
#er&an syste& is social ealt insurance 6ased on
solidarity dele'ation and (ree coice
A&erican syste& is 6ased on )rivate &ar.et )iloso)y
Tus te #er&an syste& is &uc &ore suited to te
needs o( te develo)in' countries
U% :s #ER$AN HEALTH IN%URANCE $ODEL
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Constraints in ado)tin' #er&an &odels in India
For social ealt insurance to *or. te *or. (orce as to
6e or'anied and *or.in' in (or&al sector so tat teirinco&es are clear and tere is a &ecanis& (or )ayroll
deduction o( te contri6ution
It also needs a *ell7develo)ed re'ulatory (ra&e*or. and
culture o( solidarity and sel(7re'ulation so tat *ell o((
section o( te co&&unity is *illin' to )ay (or te costs o(
sic.ness
Universal co&)ulsory social ealt insurance is not )ossi6le in
India at tis sta'e
$icro Healt Insurance
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Caracteristics o( te $HIs
Or'anied 6y N#Os
Tar'etin' te )oor
Provides a co&)reensive )ac.a'e
Collects a((orda6le )re&iu&s
N#Os and co&&unities &ana'e te ad&inistration
Usually re;uires so&e e1ternal resources (or (inancial
via6ility
I&)erative o( Li6eraliation in Healt insurance
Poor country li.e India ,*ere only asset )eo)le ave is teir
6odiesEarly + 'ovt .ey tool to &ana'e (iscal de(icit *as decrease
#ovt E1)enditure
Poor uality o( ealt service 6y 'ovt7
Clients did not de&anded 6etter service as it *as (ree o( cost
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Current ealt scenario
Accounts (or +-@ o( e1)enditure on ealt o( country TPA as not only s)eeded te clai& )rocess 6ut reduced
te insurer 6urden
Total clai& >0@ *ere settled in + &ont = @ in +7/
&ont
Callen'es Faced 6y India
India as 0 doctors )er +, )ersons *ic is(e*er tan in develo)ed nations
"ide ur6an7rural 'a) in te availa6ility o( &edical
services8 Ine;uity
Poor (acilities even in lar'e #overn&ent institutions co&)ared
to cor)orate os)itals 4Lac. o( (unds, )oor &ana'e&ent,
)olitical and 6ureaucratic inter(erence, lac. o( leadersi) in
&edical co&&unity
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IFF-E"I-F IFDIS7I/'I-F 4>L)! "s
the insurance sector had been completely monopoli6ed by the public sector
orani6ations for decades# there was slow and rued rowth in the
insurance business due to lack of competiti%e pressure! herefore# the 6eal
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for disco%erin new channels of distribution and the aressi%e marketin
strateies were totally absent and to an e&tent it was not felt necessary! he
insurance products# by and lare# ha%e been dispensed mainly throuh the
followin traditional ma5or channels:
(2) de%elopment officers#
(=) indi%idual aents and
(N) Direct sales staff!
It was only after I7D" came into e&istence as the reulator# the other forms
of channels# viz.# corporate aents includin /ancassurance# brokers (an
independent aent who represents the buyer# rather than the insurance
company# and tries to find the buyer the best policy by comparison
shoppin= )# internet marketin and telemarketin were added on a
professional basis in line with the international practice! "s the insurance
sector is poised for a rapid rowth# in terms of business as well as number of
new entrant touh competition has become ine%itable! 4onsequently#
addition of new and more number of distribution channels would become
necessary!
+ith the openin up of the insurance sector and with so many players
enterin the Indian insurance industry# it is required by the insurance
companies to come up with inno%ati%e products# create more consumer
awareness about their products and offer them at a competiti%e price! Few
entrants in the insurance sector had no difficulty in matchin their products
with the customers needs and offerin them at a price acceptable to the
customer!
/ut# insurance not bein an off the shelf product and one which requirin
personal counselin and persuasion# distribution posed a ma5or challene for
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the insurance companies! *urther insurable population of o%er 2 billion
spread all o%er the country has made the traditional channels of the
insurance companies costlier! "lso due to hea%y competition# insurers do not
en5oy the fle&ibility of incurrin hea%y distribution e&penses and passin
them to the 4ustomi6e form# +ith these de%elopments and increased
pressures in combatin competition# companies are forced to come up with
inno%ati%e techniques to market their products and ser%ices! "t this 5uncture#
bankin sector with its far and wide reach# was thouht of as a potential
distribution channel# useful for the insurance companies! his union of the
two sectors is what is known as /ancassurance!
Distribution - the key differentiator
It has been two years since the Indian insurance market has openedup# and the new entrants into the market ha%e set up shop in e%ery
ma5or city! he public sector companies ha%e already established
themsel%es in the market! /ut there are multiple challenes faced by
these insurance companies# of which two are critical:
Desinin of products suitin the market
'sin the riht distribution channel to reach the customer
/"F4"SS'7"F41$ "n inno%ati%e distribution channel
Kour bank has already chaned a reat deal o%er the past decade! Kour
banker was once content to collect your deposits and then lend the money to
companies at a profit! Fow he wants to lend to you as well! It could be a
loan for a new house# a new car or e%en for education in a forein uni%ersity!
hen there are products like demat ser%ices and mutual funds! Soon# there
will be more! +hen you walk into your bank si& months from now# it is
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likely that they will try to sell a host of insurance products to you e%en!
+elcome to /ancassurance! /ancassurance $ a term coined by combinin
the two words bank and insurance (in *rench) $ connotes distribution of
insurance products throuh bankin channels! /ancassurance encompasses
terms such as O"llfinan6 (in German)# OInterated *inancial Ser%ices and
O"ssure bankin! his concept ained currency in the rowin lobal
insurance industry and its search for new channels of distribution! /anks#
with their eoraphical spread and penetration in terms of customer reach of
all sements# ha%e emered as %iable sources for the distribution of
insurance products! Presently# there,s more acti%ity here than anywhere else!
"nd e%ery one wants to 5ump onto the bandwaon for a piece of the action
cake! he insurance industry has finally woken up from its lon slumber to
an altoether new awakenin!
It is the rise of a new dawn that has brouht with it opportunities alore!
*rom innumerable insurers# to affordable and quality co%ers for the
consumer# from increase in distribution channels to incorporatin
information technoloy measures# from net sellin to brinin about
increased transparency $ its all there! he ubiquitous aent is no more the
only distribution channel today for insurance products! Increase indistribution channels has amon others also seen the concept of
/ancassurance takin roots in India# and it is emerin to be a %iable
solution to mass sellin of insurance products! /ancassurance is a lon$
standin dream of offerin a seamless ser%ice of bankin# life 0 non$life
products! India# bein the one of the most populous country in the world
with a hue potential for insurance companies# has an en%ious chain of bank
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branches as the lifeline of its financial system! /anks with o%er @B#>>>
branches 0 @BC of household in%estments are the backbone of the Indian
financial market! In India# there are ?B branches per million inhabitants!
4learly# thats somethin insurance companies $ both pri%ate and state$
owned $ would find nearly impossible to achie%e on their own! 4onsiderin
it as a channel for insurance i%es insurance an unlimited e&posure to Indian
consumers! /anks ha%e e&pertise on the financial needs# sa%in patterns and
life staes of the customers they ser%e! /anks also ha%e much lower
distribution costs than insurance companies and thus are the fastest emerin
distribution channel! *or insurers# tyin upcompanies and thus are the fastest
emerin distribution channel! *or insurers# tyin up with banks pro%ides
e&tensi%e eoraphical spread and countrywide customer access it is the
loical route for insurers to take!
he bankin and Insurance industry has chane rapidly in the chanin and
challenin economic en%ironment throuh out the world! In the
competiti%e and liberali6ed en%ironment e%eryone is tryin to do better than
others and consequently sur%i%al of the fittest has come into effect!
Insurance companies are also to be competiti%e by cuttin cost and ser%in
in a better way to the customers! Fow the time has come to choose and
adopt appropriate distribution channel throuh which the insurance
companies can et the ma&imum benefit and ser%e! 4ustomers in manifold
ways! he intermediaries in the insurance business and the distribution
channels used by carriers will perhaps be the stronest dri%ers of rowth in
this sector! Multi channel distribution and marketin of insurance products
will be the smart stratey of continue to play an important role in
distribution# alternati%e channels like corporate aents brokers andbancassurance will play a reater role in distribution! he time has come for
the industry o radually mo%e from traditional indi%idual aents towards
new distributional channels with a paradim shift in creatin awareness and
not 5ust sellin products! Te 'a&e is old 6ut te rules are ne* and still
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de%elopin! 1nsconced a monopoly run from the nationali6ed days
beinnin in 23B@# the insurance industry has indeed awakened to a
dereulated en%ironment which se%eral pri%ate players ha%e partnered with
multinational insurance iants!
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simply# /ancassurance# tries to e&ploit syneries between both the insurance
companies and banks!
/ancassurance if taken in riht spirit and implemented properly can be win$
win situation for the all the participants %i6!# banks# insurers and the
customer!
/ancassurance commonly means sellin insurance products under the same
roof of a bank! houh /ancassurance had roots in *rance in the 23H>s# and
spread across different parts of 4ontinental 1urope since# it has spread its
wins in "sia in particular# In India# there are a number of reasons why
/ancassurance could play a natural role in the insurance market
(2) /anks ha%e a hue network across the country!
(=) /anks can offer fee$based income for the employees for insurance sales!
(N) /anks are culturally more acceptable than insurance companies! Dealin
with (life) insurance# in many parts of India# con5ure up an imae of a bad
omen! Some bank products ha%e natural complementary insurance products!
*or e&le# if a bank i%es out a home loan# it miht insist on a life
insurance co%er so that in case of death of the borrower# there is no problem
in payin off the home loan!
Similarly# a car loan could only be i%en if comprehensi%e auto insurance is
taken out on that particular car! we trace some of the salient de%elopments of
banks in India! Section N discusses how the lack of coordination between
bank reulation and insurance reulation created confusion in the
de%elopment of /ancassurance! Section L details two main problems facin
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banks in India: bad loans and o%erstaffin! Section B describes some of the
lon term dri%ers of /ancassurance in eneral! +e discuss some salient
issues of entry of banks into the insurance industry in section @! he entry of
the State /ank of India created special problems in the insurance industry!
Sections ? and H discuss /ancassurance e&perience in other countries in
particular# two e&periences in "sia are hihlihted! In section 3# we discuss
"merica %ersus 1uropean modalities and their rele%ance for India! In section
2># we assess then success of /ancassurance model in India! Section 22
details some salient reasons why banks are ettin into insurance business!
In section 2=# we de%elop a model of entry of banks in insurance business! In
the followin section# we discuss the results! *inal section concludes!
Ban.JJ Insurance 7 %yner'y8
Synery# as commonly defined is a mutually ad%antaeous con5unction
where the whole is reater than the sum of the parts! Someone ha%e %ery
thouhtfully con%eyed Synergy lets you easily share a single mouse and
keyboard between multiple computers, each with its own display. he
synery that the world is witnessin in bancassurance is no different! he
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synery here allows sharin of the same distribution channel and networks
(mouse and keyboard) between bankin companies and insurance companies
(multiple computers)# each with different nature and %ariety of product
(display)! he benefits that a bank can reap from this form of alliance
includes increased brand equity# customer retention apart from the
re%enues!
a Fee76ased inco&e (or 6an. K non7(unds revenue8
Internationally# insurance acti%ities contribute sinificantly to banks, total
domestic retail re%enues! *ee$based sellin helps to enhance the le%els of
staff producti%ity in banks! his is crucial to brin hiher moti%ation le%els
in banks in India! he re%enue earned throuh /ancassurance alliances are
cateori6ed as re%enues throuh fee based income!
Such re%enues are non$funds re%enue and ha%e an additional ad%antae to
the bank that it carries no capital reser%e maintenance pro%ision with it!Similarly# increase brand equity and customer retention by becomin full$
ser%ice pro%ider is somethin that e%ery bank would care for! -ff late# all
Indian banks are tryin to increase their proportion of fee based income in
their total income! he trend is shown in his is because accordin to /asel
norms# the fee based income is risk$free and does not consume any capital!
6 Lo*er distri6ution costs8
/ancassurance has empirically pro%en to lower the distribution costs of
insurers by ==$=NC due to hih sales producti%ity! Sellin insurance to
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e&istin mass market bankin customers is far less e&pensi%e than sellin to
a roup of unknown customers! 1&perience in 1urope has shown that
/ancassurance firms ha%e a lower e&pense ratio! his benefit could o to the
insured public by way of lower premiums! *urther for any new entrant in the
insurance market# usin the already established network and infrastructure of
banks makes mores sense than buildin the entire chain from the scratch!
Similarly# banks can put their eneries into the Osmall$commission
customers, that insurance aents would tend to a%oid!
Custo&er relationsi)s8
Insurance companies la far behind in terms of effecti%e customer
relationship that they could maintain! he trust and esteem with which a
customer holds bank will not be same for an insurance company! Similarly
for banks# it i%es them an opportunity to ser%e their e&istin customers
arer customerbase
Structured salesapproach
'se /ank,sdatabase for
taret sement
demoraphics
Benefits to the
insurance
company
More funds todeploy into
in%estment
4ustomi6inproduct to the
customer
I infrastructure of
the bank ("Ms)
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better! Increased brand equity and customer retention by becomin full$
ser%ice pro%ider is somethin that e%ery bank would care for! here is now a
need for e&plicit distinction between at least three customer sements for
/ancassurance:
he traditional mass market /ancassurance
o Pri%ate /ancassurance (aimed at wealthy indi%iduals)
o 4orporate /ancassurance and SM1s (small to medium$
si6ed enterprises) to reach their employees
c O)erational e((iciency8
"ccordin to /oston 4onsultin roup# the 'S banks were able to capture
2>$2BC of in%estment and insurance markets by taretin =>C of customers
and operate at e&pense le%els N>$B>C lower than those of traditional
insurers!
-ne of the most important reasons of considerin /ancassurance by /anks
is increased return on assets (7-")! -ne of the best ways to increase 7-"#
assumin a constant asset base# is throuh fee income! /anks that build fee
income can co%er more of their operatin e&penses# and one way to build fee
income is throuh the sale of insurance products! /anks that effecti%ely
cross$sell financial product can le%erae their distribution and processin
capabilities for profitable operatin e&pense ratios!
he ratio of e&penses to premiums# an important efficiency factor in
insurance acti%ities throuh /ancassurance is e&tremely low! his is because
the bank and the insurance company is benefitin from the same distribution
channels and people!
E1)ansion o( 6an.s in India
Penetration of commercial banks in India has been quite e&tensi%e! here are
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around @@#>>> branches of scheduled commercial banks! 1ach branch ser%es
an a%erae of 2B#>>> people! he only other national institution with a
bier reach is the postal ser%ice!=/anks ha%e not only been successful in
the urban areas! It has also rown tremendously in the rural areas! -f the
total number of branches of commercial banks# there are N=#@>> branches in
rural areas# and 2L#L>> semi$urban branches! In addition# there are 23@
e&clusi%e reional rural banks in deep hinterland! here is research e%idence
to show that the deliberate e&pansion policy of banks in rural areas has
contributed to po%erty reduction in India (see# /uress and Pandey#
forthcomin)! Instead of simple headcounts# if we take other bank
penetration measure like total %alue of deposits as a percent of GDP# it is
also e&hibitin an upward trend! his means bank deposits are rowin at a
rate much faster than the ross domestic product (*iure2)! /anks ha%e
become the main sa%in %ehicle in the economy! /etween 23HB and 233B#
the rowth of deposits in banks stalled at under NBC of the GDP (that itself
is a hih number by the standard of the de%elopin economies)! *rom 233B#
the bankin sector started rowin aain! he deposits in banks rew
another 2>C of GDP by =>>>! his le%el of rowth in bank deposit has been
totally unprecedented in India since independence! +hy did the bank
deposits take a leapA -ne simple (but partial) reason is a substitution from
the stock market!
In 233L# Indian stock market was hit by the worst scandal of manipulation
of stock prices in its lon history! he stocks fell sharply dri%in many
in%estors into safer in%estment options! 7isin sa%in ratedurin the late
233>s led to sustained rowth of bank deposits (that is# additional
in%estment in the stock market came in the form of fresh money and not a
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flow of money out bank sa%in! he risin sa%in came as a result of risin
income across the board! +ith this backround# it is therefore not surprisin
that banks ha%e become a %ehicle for sellin insurance products!
Financial Institutions in Insurance Business8 RBI Rules
/anks are reulated by the Indian central bank# the 7eser%e /ank of India
(7/I)!
herefore# the 7/I has set down the rules for the entry of banks in the field
of insurance! In 2333# the Go%ernor of the 7eser%e /ank of India declared:
Presently# there is no pro%ision in the /ankin 7eulation "ct whereby abank could undertake the insurance business! he "ct may ha%e to be
amended before banks could undertake insurance business! "lternati%ely#
there is a pro%ision in the /ankin 7eulation "ct whereby banks could take
any other form of business which the central o%ernment may notify!
hus# if the central o%ernment notifies insurance business as a lawful
acti%ity for a bankin company# perhaps banks would be able to undertake
insurance business! It may# of course# be necessary to specify what type of
insurance business they could undertake! C!
(N) he bank;financial institution should ha%e track record of at least three
continuous years of profits!
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(L) he le%el of net Fonperformin "ssets should be 2C below the industry
a%erae!(B) he track record of performance of e&istin subsidiaries of
banks;financial institutions should be 8satisfactory9!N Some confusion arose
from the circular! herefore# the 7/I proposed a series of amendments in
March =>>>! In addition to the entry of banks# the 7/I also laid down a set
of uidelines for the entry of Fon$/ank *inancial 4ompanies (F/*4) into
insurance business (Qune N># =>>>)L! here were two critical differences in
the requirements proposed for the F/*4s!
*irst# the capital adequacy ratio of the F/*4 (applicable only to those
holdin public deposits) should not be less than 2= percent if enaed in
equipment leasin;hire purchase finance acti%ities and 2B percent if it is a
loan or in%estment company!
Second# the le%el of nonperformin assets should be no more than B percent
of total outstandin leased;hire purchase assets and ad%ances! -n Fo%ember
=H# =>>2# the same rules were e&tended to co%er 8"ll India9 *inancial
Institutions!BSpecifically the rules for these institutions were set at the same
le%el as the F/*4s noted abo%e! Some confusion still remained whether it
was possible for the financial institutions to accept fees for their ser%ices
directly or not! he 7/I cleared their position in two separate circulars: one
for the scheduled commercial banks and the other for the other institutions!
It also stated that financial institutions 8should not adopt any restricti%e
practice of forcin its customers to o in only for a particular insurance
company9!
In the =>>2Report on !urrency and "inance,the 7/I laid down its %iews in
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more concrete term! 8he 7eser%e /ank# in reconition of the symbiotic
relationship
between bankin and the insurance industries# has identified three routes of
banks,
participation in the insurance business# %i6!#
(i) pro%idin fee$based insurance ser%ices without risk participation#
(ii) (ii) in%estin in an insurance company for pro%idin infrastructure
and ser%ices support and
(iii) Settin up of a separate 5oint$%enture insurance company with risk
participation! he third route# due to its risk aspects# in%ol%es
compliance to strinent entry norms! *urther# the bank has to
maintain an .arms lenth, relationship between its bankin
business and its insurance outfit! *or banks enterin into insurance
business with risk participation# the prescribed entity (%i6!# separate
5oint$%enture company) also enables to a%oid possible reulatory
o%erlaps between the 7eser%e /ank and the Go%ernment;I7D"!
he 5oint$%enture insurance company would be sub5ected entirely
to the I7D";Go%ernment reulations!9
Entry o( Ban.s in Insurance Business
-n December =H# =>>># the State /ank of India (S/I) announced a 5oint
%enture Partnership with 4ardif S" (the insurance arm of /FP Paribas
/ank)! his Partnership won o%er se%eral others (with *ortis and with G1
4apital)! Many e&perts in the industry ha%e awaited the entry of the S/I! It
was well known that the S/I has lon harbored plans to become a uni%ersal
bank (a uni%ersal bank has business in bankin# insurance and in security)!
*or a bank with more than 2N#>>> branches all o%er India# this would be a
natural e&pansion!
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In the first round of license issue# the S/I was absent! here were se%eral
reasons for this delay! *irst# the S/I was seekin a forein partner to help
with new product desin! Second# it did not want the partner to become
dominant in the lon run (when the =@C forein in%estment cap is
e%entually lifted)! It wanted to retain its own brand name!
hird# it wanted a partner that is well %ersed in the uni%ersal bankin
business! his criterion ruled out an "merican partner where underwritin
insurance business by banks has been strictly forbidden by law (althouh
with the passae of the Gramm$each$/lily "ct# this is not quite as drastic
as before)! 4ardif is the third larest insurance company in *rance! More
than @>C of life insurance policies in *rance are sold throuh the banks!
*ourth# the 7eser%e /ank of India (7/I) needed to clear participation by the
S/I because in India banks are allowed to enter other businesses on a 8case
by case9 basis! he S/I entry is roundbreakin for se%eral reasons! his
was the first for an Indian bank to enter the insurance market!2>Second# e%en
thouh the reulators ha%e said that banks would not (enerally) be allowed
to hold more than B>C of an insurance company# the S/I was allowed to do
so (with a promise that its share would be e%entually diluted)! 1%er since the
entry of the S/I# a number of other insurance companies ha%e declared their
desired bankin partners! In this process# both life and nonlife companies
ha%e tied up with banks! he list of partnerships is in able =! Fote that
some of the partnerships listed here are simply at the Memorandum of
'nderstandin (Mo') stae! hey are yet to take any concrete form! hese
alliances are listed in able =! " number of interestin facts emere from the
table! he first ob%ious feature of able = is the 8natural partnerships9 in the
list!
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Specifically#
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throuh the post offices after it announced a 5oint %enture with the
Department of Posts! Gi%en that the post offices ha%e unprecedented reach
around the country with 2BB#@>> branches# it could distribute policies to the
customers e%en in %ery remote areas! he Department of Posts is the only
institutionwith a reach bier than the banks in India!
here are se%eral other banks in the pipeline for the appro%al of the I7D"!
hey include the Pun5ab Fational /ank# the Principal Group and Ei5aya
/ank! wo of them are well$established banks in India! he Principal
Group# an international financial institution# is mainly in pension business
around the lobe! In India# it is likely to enter in a partnership with a bank
with national distribution network in order to ramp up pension products once
pension becomes dereulated in India!
he latest roup to recei%e an outriht charter for operatin insurance
operation is Sahara Group (on March B# =>>L)! Sahara,s entry is notable for
two important reasons! *irst# Sahara is the only company to enter the Indian
market without any forein partner! It thus becomes the only purely
domestic company to be ranted a license to operate in the insurance sector!
Second# it operates the larest Fon$/ank *inancial 4ompany in India! It has
o%er B> million depositors! o put it differently# one in e%ery => Indians has
an account with Sahara! It ser%es the country throuh 2#?>> establishments!
Since the company is di%ersified#22 it can use multiple channels for
distribution of its product not the least throuh its F/*4 capacity!
Bancassurance in India
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/ancassurance in India is a %ery new concept# but is fast ainin
round! In India# the bankin and insurance sectors are reulated by
two different entities (bankin by 7/I and insurance by I7D") and
bancassurance bein the combinations of two sectors comes under the
pur%iew of both the reulators! 1ach of the reulators has i%en out
detailed uidelines for banks ettin into insurance sector! C of the net worth of the bank or 7s!B>
crores# whiche%er is lower# is a%ailable
*inally# any commercial bank will be allowed to undertake insurance
business as aent of insurance companies! his will be on a fee basis
with no$risk participation!
he Insurance 7eulatory and De%elopment "uthority (I7D") uidelines
for the /ancassurance are:
1ach bank that sells insurance must ha%e a chief insurance e&ecuti%eto handle all the insurance acti%ities!
"ll the people in%ol%ed in sellin should under$o mandatory trainin
at an institute accredited by I7D" and pass the e&amination
conducted by the authority!
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4ommercial banks# includin cooperati%e banks and reional rural
banks# may become corporate aents for one insurance company!
/anks cannot become insurance brokers!
RBI #uidelines (or te Ban.s to enter into Insurance Business
*ollowin the issuance of Go%ernment of India Fotification dated "uust N#
=>>># specifyin .Insurance, as a permissible form of business that could be
undertaken by banks under Section @(2)(o) of the /ankin 7eulation "ct#
23L3# 7/I issued the uidelines on Insurance business for banks!
2 "ny scheduled commercial bank would be permitted to undertake
insurance business as aent of insurance companies on fee basis# without
any risk participation! he subsidiaries of banks will also be allowed to
undertake distribution of insurance product on aency basis!
= /anks which satisfy the eliibility criteria i%en below will be permitted to
set up a 5oint %enture company for undertakin insurance business with risk
participation# sub5ect to safeuards! he ma&imum equity contribution such
a bank can hold in the 5oint %enture company will normally be B> per cent of
the paid$ up capital of the insurance company! -n a selecti%e basis the
7eser%e /ank of India may permit a hiher equity contribution by a
promoter bank initially# pendin di%estment of equity within the prescribed
period!
Te eli'i6ility criteria (or > crore
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ii! he 47"7 of the bank should not be less than 2> per cent
iii! he le%el of non$performin assets should be reasonable
i%! he bank should ha%e net profit for the last three consecuti%e years
%! he track record of the performance of the subsidiaries# if any# of the
concerned bank should be satisfactory!
N! In cases where a forein partner contributes =@ per cent of the equity with
the appro%al of Insurance 7eulatory and De%elopment "uthority;*orein
In%estment Promotion /oard# more than on public sector bank or pri%ate
sector bank may be allowed to participate in the equity of the insurance 5oint
%enture! "s such participants will also assume insurance risk# only those
banks which satisfy the criteria i%en in pararaph = abo%e# would be
eliible!
" subsidiary of a bank or of another bank will not normally be allowed to
5oin the insurance company on risk participation basis! Subsidiaries would
include bank subsidiaries undertakin merchant bankin# securities# mutual
fund# leasin finance# housin finance business# etc.
/anks which are not eliible for .5oint %enture, participant as abo%e# can
make in%estments up to 2>C of the net worth of the bank or 7s!B> crore#
whiche%er is lower# in the insurance company for pro%idin infrastructure
and ser%ices support! Such participation shall be treated as an in%estment
and should be without any continent liability for the bank!
he eliibility criteria for these banks will be as under :
i! he 47"7 of the bank should not be less than 2>C
ii! he le%el of FP"s should be reasonable
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iii! he bank should ha%e net profit for the last three consecuti%e years!
@! "ll banks enterin into insurance business will be required to obtain prior
appro%al of the 7eser%e /ank! he 7eser%e /ank will i%e permission to
banks on case to case basis keepin in %iew all rele%ant factors includin the
position in reard to the le%el of non$performin assets of the applicant bank
so as to ensure that non$performin assets do not pose any future threat to
the bank in its present or the proposed line of acti%ity# viz. #insurance
business! It should be ensured that risks in%ol%ed in insurance business do
not et transferred to the bank and that the bankin business does not et
contaminated by any risk which may arise from insurance business! here
should be .arms lenth, relationship between the bank and the insurance
outfit!
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Insurance A'ency Business Re(erral Arran'e&ent
he banks (includes S4/s and D44/s) need not obtain prior appro%al of
the 7/I for enain in insurance aency business or referral arranement
without any risk participation# sub5ect to the followin conditions :
the bank should comply with the I7D" reulations for actin as .composite
corporate aent, or .referral arranement, with Insurance companies!
he bank should not adopt any restricti%e practice of forcin its customers
to o in only for a particular insurance company in respect of assets financed
by the bank! he customers should be allowed to e&ercise their own choice!
iii! he bank desirous of enterin into referral arranement# besides
complyin with I7D" reulations# should also enter into an areement with
the insurance company concerned for allowin use of its premises and
makin use of the e&istin infrastructure of the bank! he areement should
be for a period not e&ceedin three years at the first instance and the bank
should ha%e the discretion to reneotiate the terms dependin on its
satisfaction with the ser%ice or replace it by another areement after the
initial period! hereafter# the bank will be free to sin a loner term contract
with the appro%al of its /oard in the case of a pri%ate sector bank and with
the appro%al of Go%ernment of India in respect of a public sector bank!
"s the participation by a bank,s customer in insurance products purely on a
%oluntary basis# it should be stated in all publicity material distributed by the
bank in a prominent way! here should be no ,linkae, either direct or
indirect between the pro%ision of bankin ser%ices offered by the bank to its
customers and use of the insurance products!
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he risks# if any# in%ol%ed in insurance aency;referral arranement should
not et transferred to the business of the bank!
Bancassurance in India 7 A %"OT Analysis
In India# as elsewhere# banks are seein marins decline sharply in their core
lendin business! 4onsequently# banks are lookin at other a%enues#
includin the sale of insurance products# to aument their income! he sale
of insurance products can earn banks %ery sinificant commissions
(particularly for reular premium products)! In addition# one of the ma5or
strateic ains from implementin /ancassurance successfully is the
de%elopment of a sales culture within the bank! his can be used by the bank
to promote traditional bankin products and other financial ser%ices as well!
Ta6ledetails the comparati%e fiures of /ancassurance deals taken up by
%arious Indian Insurance companies!
%tren'ts > million households waitin for householder,s
insurance
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Good rane of products from I4;GI4
Good amount of 70D into insurance
"ea.nesses Fot much I initiati%e from leadin insurance players
(I4 and GI4)
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in importance o%er time as people become more educated!
(=) /anks can offer fee$based income for insurance sales! his can be
attracti%e under current riid structure of wae benefits! "t present# banks
are prohibited from offerin commission to the bank employees for sellin
insurance products! /anks ha%e found ways to circum%ent the problem! *or
e&le# they offer car allowance for the employees sellin insurance!
(N) Farrowin bank marins are another key dri%er!
(L) /anks ha%e complementary products with insurance products such as
the auto insurance# home insurance or annuities!
(B) +hen the pension reform is undertaken (and it is in the works)# banks
can become natural institutional %ehicles for pri%ate pension products! In
some countries# banks are e&plicitly prohibited from sellin pension
products (e!!# "ustralia)! In some other countries# banks are the leadin
pri%ate pension pro%iders (e!!# Me&ico)!
(@)
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here ha%e been two broad classes of areements between banks and
insurance 4ompanies
! (2) Pure Distribution "reements! 'nder this class# there are two sub$
classes of arranements: (2a) 7eferral "rranement and (2b) 4orporate
"ency "rranement!
(=) Qoint Eenture "reements! here has been a rane of such arranements
from loose to interated form of distribution partnerships! here has been a
substantial rowth of bancassurance in India! +ithin two years# the share of
bancassurance in the insurance distribution business has one from 6ero to
=>C of new business in the pri%ate sector!
Pro%ides us a sense of how rapidly /ancassurance is rowin in India! Some
e&perts are predictin that within a decade# this proportion could rise to NBC
to L>C! here is e%idence that policies sold throuh /ancassurance add
more %alue! In the Quly =>>N issue of the "sia Insurance Post# the Mr!P!
Fandaopal of /irla Sun ife was quoted as sayin# 8he a%erae si6e of the
policy for the aency channel is 7s 23#B>> per policy and for the
/ancassurance channel it is 7s N3#>>> per policy!9 "lthouh such concrete
numbers are not a%ailable industry$wide# there is eneral consensus that
bancassurance is indeed brinin in customers of hiher %alue!
"y Ban.s are i'ly &otivated to Enter in Insurance Business No*
"y 6an.s ave an incentive to )ro&ote Bancassurance in India3
(2) -%erstaffin problem can mitiated without resortin to drastic and
politically unacceptable solutions like lare scale firin!
(=) /anks seek to retain customer loyalty by offerin them an e&panded and
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more sophisticated rane of products (than simple bank deposits of few
%arieties)!
(N) Insurance distribution will increase the fee$based earnins of banks!
(L) *ee$based sellin helps to enhance the le%els of staff producti%ity in
banks! his is a key dri%er for raisin moti%ation amon bank workers!
/anks ha%e some in$built ad%antaes in some of these areas! (2) /anks can
put their eneries into the small$commission customers that insurance aents
would tend to a%oid! (=) /anks, entry in distribution helps to enlare the
insurance customer base rapidly! his helps to populari6e insurance as an
important financial protection product!
(N) /ancassurance helps to lower the distribution costs of insurers! " study
by illinhast# owers and Perrin in the 'R shows that the cost of sellin
insurance throuh direct sales force is appro&imately twice as hih as the
cost of sellin throuh /ancassurance! >=)! "cquisition cost of insurance
customer throuh banks is low! Sellin insurance to e&istin mass market
bankin customers is far less e&pensi%e than sellin to a roup of unknown
customers! 1&perience in 1urope has shown that /ancassurance firms ha%e a
lower e&pense ratio! his benefit could o to the insured in the form of lower
premiums! /anks could ha%e an important role to play in the pension sector
when dereulated! /anks can pro%ide collection and payments of pension
contributions! /anks can also play a ma5or role in de%elopin a %iable
healthcare proram in India!
Ho* Bancassurance advanta'eous to 6an.s8
Producti%ity of the employees increases!
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/y pro%idin customers with both the ser%ices under one roof# they
can impro%e o%erall customer satisfaction resultin in hiher customer
retention le%els!
Increase in return on assets by buildin fee income throuh the sale of
insurance products!
4an le%erae on face$to$face contacts and awareness about the
financial conditions of customers to sell insurance products!
/anks can cross sell insurance products 1: erm insurance products
with loans!
Advanta'es to insurers
Insurers can e&ploit the banks wide network of branches for
distribution of products! he penetration of banks branches into the
rural areas can be utili6ed to sell products in those areas!
4ustomer database like customers financial standin# spendin habits#
in%estment and purchase capability can be used to customi6e products
and sell accordinly!
Since banks ha%e already established relationship with customers#
con%ersion ratio of leads to sales is likely to be hih! *urther ser%ice
aspect can also be tackled easily!
Advanta'es to consu&ers
4omprehensi%e financial ad%isory ser%ices under one roof! i!e!#
insurance ser%ices alon with other financial ser%ices such as bankin#
mutual funds# personal loans etc!
1nhanced con%enience on the part of the insured
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1asy access for claims# as bank is a reular o!
Inno%ati%e and better product ranes!
%o&e o( te Bancassurance tie7u)s in India are8
Insurance Co&)any Ban.
/irla Sun ife Insurance
4o! td!
/ank of 7a5asthan# "ndhra /ank# /ank of Muscat#
De%elopment 4redit /ank# Deutsche /ank and
4atholic Syrian /ank
Dabur 4G' ife
Insurance 4ompany P%t!
td
4anara /ank# akshmi Eilas /ank# "merican
1&press /ank and "/F "M7- /ank
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/a5a5 "llian6 General
Insurance 4o! td!Rarur Eysya /ank and ord Rrishna /ank
Fational Insurance 4o!
td!
4ity 'nion /ank
7oyal Sundaram General
Insurance 4ompany
Standard 4hartered /ank# "/F "M7- /ank#
4itibank# "me& and 7epco /ank!
'nited India Insurance
4o!td!South Indian /ank
Business $odels8
he alliance between banks and insurance companies can be structured in
%aried manners# dependin upon the type of synery one is lookin for!
4orporate "ency Model is slowly ainin importance across %arious
nations because of ease in implementation and distribution of authority$
responsibility relationship! Insurance products wrapped around the banks
deposit and loan products (+rapper Model) are also radually ainin in
popularity due to their simple product desin while the referral model tie$up
has not been able to really take off! he options a%ailable to the banks are:
Ban.s sellin' )roducts o( teir insurance su6sidiary e1clusively
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In this model# banks setups its own insurance subsidiary and sells its
insurance products! In this setup# the products of this insurance
subsidiary are not allowed to be sold by any other bank!
Ban.s sellin' )roducts o( an insurance a((iliate on an e1clusive
6asis
In this model# the bank ets into an areement with an insurance
aency and sells their insurance product to its e&istin customers! In
this setup also# the banks miht et into an e&clusi%e areement with
the insurance company!
Ban.s o((erin' )roducts o( several insurance co&)anies as su)er
&ar.etG
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4-5Cor)orate A'ency $odel8
In India# insurance companies prefer corporate aency tie$ups with banks# as
aainst referral arranements! "nother ad%antae for banks is that the risk is
borne entirely by the insurance company! he rowth potential of corporate
aency system is immense because we can cross sell se%eral products to our
customers! Insurance aents sell only insurance or mutual fund products!
Inno%ation of products is also possible under the corporate aency
arranement!
his model is attracti%e for the banks as it offers handsome returns (up to
NBC in the first year of new business procured) in%ol%es %ery low start$up
costs (in%estment in the time and licensin of employees) and the business
risk is underwritten entirely by the insurance companies! Insurance products
wrapped around the /anks loan and deposit products ha%e also been ainin
in popularity due to their mass appeal and simple product desin while the
referral model tie$ups ha%e not been that successful! " few banks like
"llahabad /ank and /ank of India ha%e e%en mirated from the referral
model to the 4orporate "ency model!
Traditional vs E1)anded Bancassurance $odels8
In some markets# face$to$face contact is preferred# which tends to fa%our
/ancassurance de%elopment! Fe%ertheless# banks are startin to embrace
direct marketin and Internet bankin as tools to distribute insurance
products! Few and emerin channels are becomin increasinly
competiti%e# due to the tanible cost benefits embedded in product pricin or
throuh the appeal of con%enience and inno%ation!
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*inally# the marketin of more comple& products has also ained round in
some countries# alonside a more dedicated focus on niche client sements
and the distribution of non$life products! he dri%e for product
di%ersification arises as bancassurers reali6e that o%er$reliance on certain
products may lead to undue %olatility in business income! Fe%ertheless#
bancassurers ha%e shown a willinness to e&pand their product rane to
include products beyond those related to bank products!
Ban.s8 Te (ocal )oint 8
raditionally# the banks and financial institutions are the key pillars of
India,s financial system! Public ha%e immense faith in banks! Share of bank
deposits in the total financial assets of households has been steadily risin
(presently at about L>C)! Indian /anks ha%e constantly pro%en their
capability reach the ma&imum number of households! In India at present
there are total of @B?>> branches of commercial banks# each branch ser%in
an a%erae of 2B#>>> people! -ut of these are N=@>> branches are caterin to
the needs of rural India and 2LL>> to semi$urban branches# where insurance
rowth has been most buoyant!
(23@ e&clusi%e 7eional 7ural /anks in deep hinterland!) 7ural and semi$
urban bank accounts constitute close to @>C in terms of number of accounts#
indicatin the number of potential li%es that could be co%ered by insurance
with the frontal in%ol%ement of banks!
*urther still banks sell a %ery small portion of the products! his means there
is a hue scope of banks sellin insurance products! " study conducted in
'S shows that people are willin to buy insurance products from their banks
as they consider banks as a sinle point of buyin all financial products!
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*urther there is a se%ere need of insurance for ariculture and other
insurance products like health insurance in the rural areas! Insurance
companies would not be able to establish their sales force in rural areas! "s
banks already ha%e a stron foothold# it would be huely beneficial for the
insurance companies!
BANC A%%URANCE PRODUCT PHILO%PHM
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/ancassurance: emerin trends# opportunities and
challenes
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"ccordin to a recent sima study# /ancassurance is on the rise# particularly
in emerin markets! +orldwide# insurers ha%e been successfully le%erain
/ancassurance to ain a foothold in markets with low insurance penetration
and a limited %ariety of distribution channels!
/ancassurance# the pro%ision of insurance ser%ices by banks# is an
established and rowin channel for insurance distribution# thouh its
penetration %aries across different markets! 1urope has the hihest
/ancassurance penetration rate! In contrast# penetration is lower in Forth
"merica# partly reflectin reulatory restrictions! In "sia# howe%er#
/ancassurance is ainin in popularity# particularly in 4hina# where
restrictions ha%e been eased! he research shows that social and cultural
factors# as well as reulatory considerations and product comple&ity# play a
sinificant role in determinin how successful /ancassurance is in a
particular market!
he outlook for /ancassurance remains positi%e! +hile de%elopment in
indi%idual markets will continue to depend hea%ily on each country,s
reulatory and business en%ironment# bancassurers could profit from the
tendency of o%ernments to pri%ati6e health care and pension liabilities! In
emerin markets# new entrants ha%e successfully employed /ancassurance
to compete with incumbent companies! Gi%en the current relati%ely low
/ancassurance penetration in emerin markets# /ancassurance will likely
see further sinificant de%elopment in the comin years!
Bancassurance8 E&er'in' Trends
houh /ancassurance has traditionally tareted the mass market#
bancassurers ha%e beun to finely sement the market# which has resulted in
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tailor$made products for each sement! he quest for additional rowth and
the desire to market to specific client sements has in turn led some
bancassurers to shift away from usin a standardi6ed# sinle channel sales
approach to adoptin a multiple channel distribution stratey! Some
bancassurers are also beinnin to focus e&clusi%ely on distribution!
+ealth manaement# pioneered by "ssurance has found its way in
/ancassurance alliances! ermed as Pri%ate /ancassurance# the concept
combines pri%ate bankin and in%estment manaement ser%ices with the
sophisticat