Life Insurance Marketing – and Distribution Challenges and Their Solutions

Life Insurance Marketing: The life insurance industry in India dates back to 1818 when the Oriental Life Insurance Company set up its office in Kolkata. In 1823, the Bombay Life Assurance Company started operations in Bombay (now Mumbai).

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Learning Objectives

In this chapter, we will learn about:
1. The life insurance market in India– historical perspective
2.  Channels of distribution and future trends
3. Bancassurance

 

3.1 LIFE INSURANCE MARKET IN INDIA: HISTORICAL PERSPECTIVE :

The life insurance industry in India dates back to 1818 when the Oriental Life Insurance Company set up its office in Kolkata. In 1823, the Bombay Life Assurance Company started operations in Bombay (now Mumbai). The Indian Life Assurance Companies Act was passed in 1912, which was followed by the Indian Insurance Companies Act, 1928.

These acts allowed the government to regulate life and non-life insurance businesses conducted by both Indian and foreign insurance companies. Later, the 1928 act was amended and a new act, the Insurance Act was passed in 1938. By the mid-1950s, 154 Indian insurers, 16 foreign insurers, and 75 provident societies were operating in the country. The life insurance business was concentrated in urban areas and was confined to the higher strata of

society. In 1956, the management of these companies was taken over by the Government of India. LIC was formed in 1956 with the help of the LIC Act 1956, with a capital of Rs. 50 million. One of the main objectives of forming LIC was to make insurance coverage available to a large number of people, particularly to the lower segments of society. In 1972, the government took over the management of 106 private general insurance companies and formed the General Insurance Corporation (GIC). Over the years, LIC expanded its network all over the country and became one of the largest corporations in India.

At present, LIC has eight zonal offices, 100 divisional offices, 2,048 branch offices and lineup of insurance agents totaling 10,02,149.1 Growth in the Indian insurance industry was not much in the 1960s and 1970s because of social and economic problems such as low literacy levels low per capita income and high inflation. In addition to this, the insurance industry lacked sufficient funding and

infrastructure. Changes in the economy, growth in the pace of industrialization, development of infrastructure, increase in the savings rate and substantial capital formation resulted in the phenomenal growth of the life insurance industry, in the 1980s. Over the years, LIC launched several group insurance and social security schemes to enhance its reach in the rural India. Though LIC was formed with the basic objective of providing insurance cover to a vast majority of the Indian population, insurance penetration in India remained very low. The market in India remained untapped with low penetration of insurance both in terms of premiums per capita and premiums as a percentage of Gross Domestic Product (GDP). R. N. Jha, former Executive Director, LIC in his book Insurance in India said, “Insurance coverage has been extended only to about 25% of the insurable population in 40 years.” Table 3.1 gives a country-wise comparison of the Indian insurance industry in 1999.2

TABLE 3.1Country-wise comparison of Indian Insurance Industry (1999)

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According to industry observers, one of the main reasons for the low insurance penetration was the poor distribution of resources and poor marketing strategies of LIC. Prior to liberalization, LIC did not devise effective strategies for distribution due to its monopoly status. The company got depended entirely on individual agents who were trained over the years to distribute its products. Besides, LIC made no effort, to use other distribution channels. There was no minimum qualification laid down for those who wanted to become insurance agents. As a result, most agents were

not well qualified for the work. There was no emphasis on providing the correct solution to the customers’ needs; no focus on either creating public awareness of insurance products or educating customers about the financial protection of their assets. Marketing personnel called Development officers were employed to distribute insurance products.

These officers, in turn, employed and trained a number of agents. Development officers received bonuses from the business generated by their agents in addition to their salary. In the absence of rules and regulations and strict standards of recruitment, the quality of agents suffered over the years. The attrition rate among the agents was high. LIC’s bid to implement strict incentive schemes and ‘career agent’ type of distribution failed due to the powerful union of development officers. In the early 1990s, the government felt the need to reform the industry, provide better coverage to the citizens, and increase the flow of long-term financial resources to finance the growth of

infrastructure. In 1993, the Indian government set up the Malhotra committee to suggest reforms in the industry. The committee, which submitted its report in 1994, recommended the opening of the insurance sector to private players, improving service standards and extending insurance cover to larger sections of the population. Various labor unions and political parties in the country opposed the committee’s suggestions. They felt that the entry of private players would lead to job cuts by the nationalized players in order to become more competitive. There were a host of other arguments against these reforms. As a result, the government decided to restrict foreign stake in insurance companies to only 26%. Attracted by the huge, untapped insurance market, many private players entered the Indian market after the insurance bill was passed in late 2000. A majority of these were collaborations between the Indian companies with leading multinational insurance/ financial services companies (refer Table 3.2).

TABLE 3.2 Some Private Players in the Indian Insurance Market

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With the entry of foreign players, the insurance market changed dramatically. Analysts commented that the private insurers were all set to make the industry market-driven,

market-driven, wherein technical expertise, and service excellence were the key factors for success. To make their presence felt and expand their reach, the private companies, experimented with new distribution channels. Liberalization caused serious competition for acquiring market share in the Indian insurance industry. New insurance companies used all available channels of distribution, starting from individual agents and corporate agents to bancassurance (selling of insurance policies through banks is called bancassurance). Bancassurance soon emerged as a lucrative distribution channel.

According to analysts, it not only helped insurance companies increase market penetration and premium turnover, but also helped the banks to increase their Return on Assets (ROA) which is annual earnings divided by the total assets. This was because, even with a constant asset base, bancassurance contributed to an enhanced ROA through fee income. 3 The bancassurance distribution model is discussed in detail later in this chapter.

3.2 CHANNELS OF DISTRIBUTION :

New distribution channels are contributing to a great extent to achieve an increasing portion of the insurance companies’ business every year. From a predominantly agent-led distribution market, life insurance is now distributed through corporate agents and brokers. The existence of multiple channels helps companies to expand their reach and focus on specific markets as well. At present the available distribution channels in the market are as follows: (i) Agent (ii) Broker (iii) Corporate agent

3.2.1 Agent:

The agency channel is one of the primary insurance distribution channels in India. There are various laws that govern the relationship between the insurance company and the agents. Some of the important legal aspects are

discussed in this section. The Indian Contracts Act affects the contract between insurance companies and their agents. Sections 182 to 238 of the Contract Act relate to the appointment and authority of agents, and the rights and duties of the principal and the agent. Section 182 of the Contract Act defines an agent as a person employed to do any act for the principal or to represent in dealings with a third person. The acts of the agent have the same legal consequences as if done by the principal himself.

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Thus, by appointing agents, the principal is enabled virtually to be in many places and to perform many acts at the same time. The agent represents the principal and performs his duties according to the principal’s directions. The agent receives a payment by way of commission or other remuneration for procuring business. Section 42 of the Insurance Act, 1938, governs the licensing of insurance agents in India. The life insurance agent is only an agent

in a limited sense; he has no authority to complete the contract in the name and on behalf of the insurer. He can only solicit insurance business, and submit them for consideration to the insurer. Insurance companies can impose other limitations and add clauses governing the scope of work in their contracts with their agents. The agent’s authority can be either expressed or implied.

Express authority:

Express authority is the authority given to the agent, either verbally or in writing. The life insurance agent’s authority to solicit proposals and to collect the initial premium is an example of express authority. When the agent’s act is within his express authority, the principal is bound by it without regard to the agent’s intentions.

Implied authority:

Implied authority is defined in Section 187, Contract Act as the authority which is “to be

inferred from the circumstances of the case; and things are spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case”. Thus, the agent is said to have implied authority to transact in accordance with the general customs of the business. According to Section 188 of the Indian Contract Act, “an agent having an authority to do an act has the authority to do every lawful thing which is necessary in order to do such act”. Life insurance agents are only allowed to collect money towards the first premiums and are not authorized to bind the insurer in any manner.

Regarding unauthorized collections, the agents are instructed to act as an agent of the party concerned, and not of the insurer, and are also warned that they alone will be answerable to the party for consequences of such unauthorized action. Insurance agents in India are required to have a license before they can start selling policies. Insurance Regulatory and

Development Authority (IRDA) issues licenses to agents under Section 42 of the Insurance Act 1938. The license is valid for 3 years. To renew his license after 3 years the agent has to undergo training for 25 hours. Only IRDA license holding agents are legally allowed to sell insurance in India. To obtain a license to sell insurance, an individual needs to meet the following criteria: (i) Should be at least18 years of age (ii) Should have a qualification up to 12th standard or equivalent or 10th standard or equivalent (depending on whether he belongs to the urban or rural area)

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(iii) Should obtain at least 50 hours of training by an IRDA authorized institute (iv) Should qualify the pre-recruitment examination conducted by the Insurance Institute of India( III) People who are mentally not sound or those who are guilty of criminal breach of trust, cheating, forgery or have attempted to commit such crimes are disqualified from obtaining an

IRDA license. IRDA has laid down a code of conduct for agents of insurance companies in the Insurance Regulatory and Development Authority (Licensing of Insurance Agents) Regulations, 2000. The code of conduct is as follows: (i) Every insurance agent shall: (a) Reveal his identity and the name of the insurance company for whom he is working (b) Disclose his license to the prospect on demand

(c) Disseminate the requisite information on insurance products offered for sale by his insurer and take into account the needs of the prospect while recommending a specific insurance plan (d) Disclose the scales of commission of the insurance product offered for sale, if asked by the prospect (e) Indicate the premium to be charged by the insurer for the insurance product offered for sale

(f) Explain to the prospect the nature of information required in the proposal form by the insurer, and also the importance of disclosure of material information in the purchase of an insurance contract (g) Bring to the notice of the insurer any adverse habits or income inconsistency of the prospect,

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in the form of a report (called insurance agent’s confidential report) along with every proposal submitted to the insurer, and any material fact that may adversely affect the underwriting decision of the insurer as regards acceptance of the proposal, by making all reasonable inquiries about the prospect (h) Inform promptly the prospect about the acceptance or rejection of the proposal by the insurer (i) Obtain the requisite documents at the time of filing the proposal form with the insurer; and other documents subsequently asked for by the insurer for completion of the proposal (j) Render necessary assistance to the

policyholders or claimants or beneficiaries in complying with the requirements for settlement of claims by the insurer (k) Advise every individual policyholder to effect nomination or assignment or change of address or exercise of options, as the case may be, and offer necessary assistance in this behalf, wherever necessary (ii) No insurance agent shall: (a) Solicit or procure insurance business without holding a valid license

(b) Induce the prospect to omit any material information in the proposal form (c) Induce the prospect to submit wrong information in the proposal form or documents submitted to the insurer for acceptance of the proposal (d) Behave in a discourteous manner with the prospect (e) Interfere with any proposal introduced by any other insurance agent (f) Offer different rates, advantages, terms and conditions other than those offered by

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his insurer (g) Demand or receive a share of proceeds from the beneficiary4 under an insurance contract (h) Force a policyholder to terminate the existing policy, and to effect a new proposal from him within three years from the date of such termination (i) Have in case of a corporate agent, a portfolio of insurance business under which the premium is in excess of fifty percent of total premium procured, in any year, from one person (who is not an individual) or one organization or one group of organizations

(j) Apply for fresh license to act as an insurance agent, if his license was earlier canceled by the designated person, and a period of five years has not elapsed from the date of such cancellation (k) Become or remain a director of any insurance company (iii) Every insurance agent shall: With a view to conserve the insurance business already

procured through him, make every attempt to ensure remittance of the premiums by the policyholders within the stipulated time, by giving notice to the policyholder orally and in writing.

3.2.2 Brokers:

Brokers are also recognized by regulation as authorized intermediaries of insurance products. Most private insurance companies have contracts with brokers to sell their products through this channel.

Insurance brokers:

Insurance brokers can be defined as professionals with technical expertise, who can give advice, professional assistance and act on behalf of the clients to arrange insurance at the best terms possible. The remuneration paid to them because of their professional skills and responsibility is called brokerage. They are always bound to act with reasonable diligence and competence and are liable to make compensation to their principal in respect of the direct consequences of their negligence,

want of skill or misconduct. Unlike an agent who represents a single insurance company, a broker represents a minimum of three insurance companies. A broker obtains quotes from various insurers based on the client’s requirements. He also advises them on the right policies so that they could purchase from a whole range of products available in the market from various insurers.

Life insurance brokers:

A life insurance broker can be an individual or a firm or a company formed under the Companies Act, 1956 (1 of 1956); or a cooperative society or any other person recognized by the IRDA to act as an insurance broker. As per the Insurance Regulatory and Development Authority, the following are the functions of a broker5: (i) To obtain detailed information of the client’s business and risk management philosophy

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(ii) To familiarize himself with the client’s business and underwriting information so that it can be explained to an insurer and others (iii) To render advice on appropriate insurance cover and terms (iv) To maintain detailed knowledge of available insurance markets, as may be applicable (v) To submit quotation received from insurer/ s for consideration of a client

(vi) To provide requisite underwriting information as required by an insurer in assessing the risk to decide pricing terms and conditions for cover (vii) To act promptly on instructions from a client and providing him written acknowledgments and progress reports (viii) To assist clients in paying premium under Section 64VB of Insurance Act, 1938 (4 of 1938) (ix) To provide services related to insurance consultancy and risk management(x) To assist in the negotiation of the claims (xi) To maintain proper records of claims

3.2.3 Corporate Agents:

are the new channel of distribution developed in the post-liberalization era. The IRDA introduced this channel to increase insurance penetration through banks, firms, NGOs, etc., who are in contact with a large number of people during the course of their normal activities and could sell insurance to those people. Corporate agents can distribute the products of the company with which they have signed a marketing agreement. Corporate agents work on a commission or profit-sharing basis. Corporate agents offer bulk business and already have knowledge of the financial sector in most cases. Since 2002, most banks have taken up a corporate agency and are doing significant insurance business. Bancassurance is recognized as a major contributor to business for insurance companies in India.

Products sold through bank-partners account for up to 70% of overall business for some life insurance companies. Unlike brokers, corporate agents can act as corporate agents of only one life insurer and one non-life insurer. The corporate agent appoints a specified person’s corporate insurance executive and for selling insurance.

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As per the IRDA, every corporate agent shall6: (a) be responsible for all acts of omission and commission of its corporate insurance executive and every specified person; (b) ensure that the corporate insurance executive and all specified persons are properly trained, skilled and knowledgeable in the insurance products they market; (c) ensure that the corporate insurance executive and the specified person do not make to the prospect any misrepresentation on policy benefits and returns available under the policy; (d) ensure that no prospect is forced to buy an insurance product;

(e) give adequate pre-sales and post-sales advice to the insured in respect of the insurance product; (f) extend all possible help and cooperation to an insured in completion of all formalities and documentation in the event of a claim; (g) give due publicity to the fact that the corporate agent does not underwrite the risk or act as an insurer; (h) enter into service level agreements with the insurer in which the duties and responsibilities of both are defined.

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Despite the growing thrust on bancassurance, most of the players believe that individual agents would continue to play a major role in the Indian insurance industry. Some companies have worked towards making the quality of its agents its main differentiating factor. They pay attention to the agent selection process to recruit the best talent available. The selection process comprises four stages— screening, psychometric tests, career seminars, and the final interview. Agents are trained in the various products the company offers, and the insurance needs of the customers so that they are in a position to offer them sound advice.

3.3 BANCASSURANCE:

Bancassurance symbolizes the convergence of banking and insurance. The term originated in France and involves the distribution of insurance products through a bank’s branch network. While bancassurance is a tremendous success in Europe, it is a relatively new concept in Australia and Asia. According to a recent study, bancassurance is on the rise,

particularly in emerging markets. Worldwide, insurers have been successfully leveraging bancassurance to gain a foothold in markets with low insurance penetration and a limited variety of distribution channels. Through bancassurance, the provision of insurance services by banks is an established and growing channel for insurance distribution, its penetration varies across

different markets. Europe has the highest bancassurance penetration rate. In contrast, penetration is lower in North America, partly reflecting regulatory restrictions. In Asia, however, bancassurance is gaining popularity, particularly in China, where restrictions have been eased. The research shows that social and cultural factors, as well as regulatory considerations and product complexity, play a significant role in determining how successful bancassurance is in a particular market.

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Many analysts believe that bancassurance would play a very important role in India as banks are familiar with the target customers’ needs, have a strong service delivery mechanism, good quality administration, complete integration of insurance and bank products and services, qualified personnel and an organized tracking system for reporting on agents’ time and the results of bank referrals. The partnership between banks and insurance companies has its downsides too. The most common problems that banks face

are inefficient manpower management, lack of sales culture within the bank and lack of branch personnel’s involvement. Insufficient product promotions, failure to integrate marketing plans of both bank and insurance company, limited database expertise of the bank and inadequate incentives to the bank personnel involved in sales of insurance products can also cause roadblocks. Various models are used by banks for bancassurance.

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Some insurance companies post their own salesperson in the bank. Sometimes the wealth management division of the bank sells insurance or the bank employees are paid incentives to sell insurance products. The outlook for bancassurance remains positive. Development in individual markets will continue to depend heavily on each country’s regulatory and business environment. In India, bancassurers could profit from the growth of private health insurance and pension fund companies. These

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products could add to the portfolio of services offered by the banks. In emerging markets, new entrants have successfully employed bancassurance to compete with incumbent companies. Given the current relatively low bancassurance penetration in emerging markets, bancassurance will likely see further significant development in the coming years. Bancassurance primarily relies on the relationship the customer has developed over a period of time with the bank.

Selling insurance products through banks is cost-effective for an insurance company compared to the agency channel, while for banks, the fee-based income comes in at very little cost. Insurers are no doubt optimistic about the channel, but it does come with some limitations. While the sale of insurance comes at a lower cost through this channel in comparison to the agency route, and the insurance company gains much through the large bank network spread across the country, the potential can be impeded if bank officials do

not actively generate insurance sales. It is yet to be seen how far buying shelf space in a bank helps push the sale of insurance. Besides, the target audience is limited to those individuals who visit the bank during the working hours. With technology changing at a rapid pace, ATMs and internet banking have reduced the individual’s visits to the bank, which could perhaps be a dampener for bancassurance. Insurance companies are positive about the bancassurance channel bringing in volume business at a low cost and banks have been eager for the fee-based income.

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Unless products are simple, easy to understand and easy to market, the potential which the bancassurance channel holds, may be difficult to realize. Bancassurance thrives on the face-to-face contact required for insurance sales. Nevertheless, banks are starting to embrace direct marketing and Internet banking as tools to distribute insurance products. The

marketing of more complex products has also gained ground in some countries alongside a more dedicated focus on niche client segments and the distribution of non-life products. The drive for product diversification arises as bancassurers realize that over-reliance on certain products may lead to undue volatility in business income.

Nevertheless, bancassurers have shown a willingness to expand their product range to include products beyond those related to bank products. Distribution is the largest element in the insurer’s cost and affects profitability. The size of the country combined with problems of connectivity in the rural areas makes insurance selling in India a difficult proposition. The distribution capabilities strongly influence product design in insurance and distribution channels to have a direct impact on the insurer’s market image. The emergence of alternative channels such as Bancassurance and the Internet is reshaping the insurance industry. India, with a population of

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more than a billion, offers unlimited growth potential, especially in rural areas. REVIEW QUESTIONS 3.1 Fill in the blanks with appropriate terms. (a) In developed countries, per capita, the insurance premium is much ________ than in India. (b) Prior to the liberalization of the Indian insurance industry, ________ minimum qualification was laid down for people who wanted to become insurance agents. (c) ________ is one of the primary insurance distribution channels in India. (d) The agent is a ________ of the principal. (e) ________ can be defined as a class of agents who are professional technical experts, who can be procured by those who want to get insured, to give advice and professional assistance and act for them in arranging insurance at the best terms possible. (f) ________ symbolizes the convergence of banking and insurance.

3.2 Give the answers in brief:

(a) What were some of the problems of the monopolized insurance industry that led to liberalization? (b) Which are the distribution channels presently available in the market? (c) What is express authority? (d) What is bancassurance and what is its scope in India? (e) Which law affects the contract between agents and insurance companies? (f) What are the requirements for obtaining a license to sell insurance?

Answers 3.1

(a) higher (b) no (c) Agency channel (d) a representative (e) Insurance brokers (f) Bancassurance

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