26314882 Innovation in Insurance Industry

8/13/2019 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&amples 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&ample 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&ample# 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&ample 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&amples 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&ample#

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


30/174

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


31/174

$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


32/174

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


33/174

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


35/174

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


37/174

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


38/174

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


40/174

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


41/174

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!


42/174

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&ample# 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


43/174

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


44/174

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


45/174

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)


46/174

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


47/174

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


48/174

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!


49/174

(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


50/174

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!


51/174

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!


52/174

Specifically#


53/174

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!


55/174

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


56/174

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


60/174

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)


61/174

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&ample# 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


63/174

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


66/174

/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


67/174

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


68/174

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!


69/174

*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!


70/174

*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


71/174

/ancassurance: emerin trends# opportunities and

challenes


72/174

"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

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