ONINNOVATION IN INDIAN INSURANCE INDUSTRY

NIRBHAY PANDEY

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 knowledge.

Also, the report presented has not been published anywhere

else.

PREFACE

A well-developed and evolved insurance sector is needed for economic development as it provides long term funds for infrastructure development and at the same time strengthens the risk taking ability. It is estimated that over the next ten years India would require investments of the order of one trillion US dollar. The Insurance sector, to some extent, can enable investments in infrastructure development to sustain economic growth of the country.

ULIPs, insurance-cum-investment, are life insurance plans whose returns are linked to the stock markets. ULIP returns fluctuate with the ups and downs in the stock market. Mutual Fund are collective investment vehicles that pool resources of various investors and invests these resources in a diversified portfolio comprising of stocks, bonds or money market instruments. Although both these products are somewhat different in their working but more or less the fund pooled in both of them are invested similarly. With the advent of Unit Linked Insurance Plans, the life insurance products have changed from being only a life cover product to an investment vehicle with built-in features of life insurance and tax benefits. These days’ innovative products are flooding the market which offers the features of a traditional insurance policy with added benefits of high return from the market instruments.

Bancassurance, new concept catching up fast in India. One of the more recent examples of financial diversification is ‘Bancassurance’, the term given to the distribution of insurance products through branches & other distribution channels of the banks. The concept that originated in France now constitutes the dominant model in a number of European and other countries and the same is fast catching up in India as well.

Health Insurance, With proliferation of various health care technologies and general price rise, the cost of care has also become very expensive and unaffordable to large segment of population. The government and people have started exploring various health financing options to manage problems arising out of growing set of complexities of private sector growth, increasing cost of care and changing epidemiological pattern of diseases.

ACKNOWLEDGEMENT

Gratitude is the hardest of emotions to express and often does not find adequate words to convey the entire one feels, although it is difficult to mention the nature of all, who gave me their full support and cooperation throughout my dissertation work. I take the opportunity to intent my sincerer gratitude to my mentor ,,,,,,,,,,,,,,,,,,,,,,for his helpful guidance during the research period. This project report result is not only the outcome of the efforts put in by me but also by many helpful hands like the faculty members , my mentor and many of my friends.

THANK YOU

CONTENTS

Introduction

he Indian insurance market is experiencing lot of cosmic changes. After the insurance sector was opened in 1999 for the

private sector it is seeing a lot of changes are taking places both in product and providing service to its customer’s. Before 1999 the picture was totally different, there was only two insurance plan which covered life and non Life and two government owned insurance company .The two government owned insurance company are Life Insurance corporation of India ltd( L.I.C)and the other was General Insurance Company (G.I.C) .

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Due to this there was government monopoly existing in the insurance sector where there was only two dominant players LIC and GIC offering few number of product. But after opening up of this sector to the private and foreign companies, large number of private and foreign companies appeared in insurance sector,

providing variety of insurance products with majority of insurance company laying more stress on home loan insurance. Thus creating lot of competition in the insurance sector as each of companies wanted to acquire greater market share.

Call for InnovationDemographic changes, channel optimization pressures, changing compliance environment, and increasing competition are forcing insurers to increase the pace of product innovation to meet their growth and profitability objectives. This paper examines the causes of product introduction inefficiencies and discusses approaches to improving capabilities to achieve rapid product introduction.The period of stable product portfolios that rarely change is long past the insurance industry. As with other industries, insurance is being forced to respond to the ever-changing demands of distributors and customers. Carriers refresh their product portfolio by either adding new products or enhancing existing ones to meet

market demands. Periodically, they also discontinue non- performing products, though it does not eliminate the need to support servicing of policyholders.

This constant addition of new products, while continuing to support old ones, has been a major contributor to the complex environment insurers find themselves in today.

Retooling the internal operations of a company to support new products is difficult, time consuming and costly, but necessary.

In the “good old days” when companies relied on a single, relatively simple back office system, changes were easy to make, test and move to production. In today’s multiple, complex back office systems with their plethora of interfaces and inter dependencies, making a change in one system can have multiple

and unforeseen consequences across the enterprise – assuming you can determine where to make the change in the first place.

Business Drivers for Product Introduction

While most experts agree that the demand for new and creative products is going to intensify, the ability of insurance companies to respond cost effectively is diminishing.

Insurers have always been aware of the importance of new product launches and their effect on sales and profitability. Industry analysts have confirmed the importance of keeping product portfolios fresh and current to meet market demands. A recent Celent study1 reaffirms that market demands like ‘Time to Market’ and ‘Ease of Doing Business’ are among the top business issues for both Life/Health and P&C insurers (Fig. 1). The report identifies ‘Improving Time to Market’ as the most frequently cited market demand. This is borne out by the fact that ‘Improvements to Policy Administration Systems’ – which in turn positively influences the time-to-market issue –has been identified by all respondents as one of the top three IT initiatives for 2007.

Business drivers that accentuate the need to quickly and cost-effectively launch new or enhanced products can be grouped under the following four major heads (Fig. 2):

Customer demand: Competition in the insurance marketplace has raised the level of customer awareness. Today, customer expectations are very specific and customers have plenty of choices before them. Customer demographics are also changing. The earliest of the 77 million baby boomers turned sixty in 2006. Insurers need to cater to the diverse demands of the post-retirement life of this economically active group and also the discerning young generation whose needs and expectations are dramatically different. Many economic factors such as stock market performance, interest rates, inflation, etc. also contribute to the rapidly changing customer needs.

Pressure from distributors: The demands of distributors – especially the successful ones – are increasing. Distributors looking to differentiate themselves in the marketplace expect insurers to develop and market distributor-specific products. Additionally, distributors are seeking ways to increase their client’s wallet share by offering additional products to address perceived gaps in coverage or investment needs. Pressure from competitors: Insurance companies are being pressured by both insurance and non-insurance financial services competitors.

As new product offerings from innovative insurance companies gain traction in the market, other companies feel the pressure to copy. To prevent non-insurance competitors from gaining further market share, insurance companies develop products that take full advantage of their unique tax and protection characteristics. The mounting competitive pressure makes it imperative for insurance companies to keep a close watch on the market and design, develop and implement new insurance products that better address the needs of the market.

Regulations – the moving target: Insurance is a highly regulated industry that must constantly review and adjust its product offerings to ensure compliance. In addition, the changing regulations often offer new opportunities to aggressive and innovative carriers. Regulations impact every aspect of the product design and development process – product filings, rate approvals, regulatory reporting, tax treatment, disclosure, etc.

What Ails the Product Development Process?

The product development or enhancement process in a typical insurance company requires a high level of collaboration and coordination among various stakeholders from product design, programming, legal, compliance, operations, marketing, training, etc.

More than 50% resources of the total product development lifecycle are taken by the implementation phase. The actual implementation of new products entails substantial resource

investments. The process also necessitates many handoffs between the stakeholders.

The emerging trends in the industry in terms of product

innovation

Riders and unit linked products have led some of the visible

innovations in the market place. Riders can be used to customize

life insurance for varying customer requirements, provide health

coverage, and improve a product's competitive profile through

improved customer value. Health oriented life insurance covers,

asset allocation products, saving products, which offer downside

protection with the opportunity to participate in upsides, worksite-

marketing products, and customized group corporate retirement

products are among the emerging innovative product categories.

Regulation will also play a crucial role in the speedy emergence

and efficacy of other innovative product offerings and categories.

Finally, as the pension market develops, variable annuities (VA)

and equity-indexed annuities could emerge as part of the product

suite of life insurance companies. Clearly, product innovation is a

major strategic imperative for insurers. The key is to offer products

based on deep insights of consumer needs. In the long term, only

such products survive and grow into a meaningful and profitable

component of an insurer's product portfolio.

The opening up of the insurance sector saw the emergence of innovations introduced by private players, initially in terms of product offerings. The insurance industry, which till then had seen minimal product innovations, saw the advent of unit linked insurance products (ULIPs). Moreover, liberalization of the sector also saw the advent of over-the-counter and pre-underwritten products that are offered by banks to its customers. These are products with no underwriting that are cross-sold with home loans and the like. Innovations have also come about in the area of value added services as companies started providing value additions like online purchase of insurance policies, payment of premiums by credit cards and online tracking of net asset values (NAVs).

The rise in preference for ULIPs as compared to traditional products

Apart from protection benefits, ULIPs provide policyholders an opportunity to earn returns linked to the underlying financial markets. Also, unlike conventional products, the charges in ULIPs are transparent. Top-ups, premium redirection options, facility to switch partially or fully from one fund to another, etc, make these products very flexible. Lower regulatory capital requirements vis-à-vis endowment products have also helped insurers drive down the costs of these products. These factors coupled with stellar returns in the equity markets have made ULIPs, particularly, appealing.

ULIPs give customers an option to participate in equity and debt markets depending on their risk appetite. Traditional products did not offer the facility to choose and change their pattern of investment in a particular policy. ULIPs are useful for those who want to be insured but at the same time are interested in investing in an avenue, which matches their risk-return profile. ULIPs are best suited for those who have a conceptual understanding of financial markets and are genuinely looking for a flexible, long-term investment-cum-insurance. ULIPs have gained in popularity due to the flexibility they offer to policyholders in choosing the investment pattern along with the transparency in charges besides the ease of comparison of the final illustrated values.

A BRIEF HISTORY OF UNIT LINKED INSURANCE PLAN

ULIP stands for Unit Linked Insurance Plan. It provides for life insurance where the policy value at any time varies according to the value of the underlying assets at the time. ULIP is life insurance solution that provides for the benefits of protection and

flexibility in investment. The investment is denoted as units and is represented by the value that it has attained called as Net Asset Value (NAV).ULIP came into play in the 1960s and became very popular in Western Europe and America. The reason that is attributed to the wide spread popularity of ULIP is because of the transparency and the flexibility which it offers.As times progressed the plans were also successfully mapped along with life insurance need to retirement planning. In today’s times, ULIP provides solutions for insurance planning, financial needs, financial planning for children’s future and retirement planning. These are provided by the insurance companies or even banks. These investments can also be used for tax benefit under section 80C.

5 steps to selecting the right ULIP

Here's a 5-step investment strategy that will guide investors in the selection process and enable them to choose the right unit-linked insurance plans (ULIPs).

But before we get there, let's understand what ULIPs are all about?

For the generation of insurance seekers who thrived on insurance policies with assured returns issued by a single public sector enterprise, unit-linked insurance plans are a revelation.

Traditionally insurance products have been associated with attractive returns coupled with tax benefits. The returns part was often so compelling that insurance products competed with investment products for a place in the investor's portfolio.

Perhaps insurance policies then were symbolic of the times when high interest rates and the absence of a rational risk-return trade-off were the norms.

The subsequent softening of interest rates introduced a degree a much-needed rationality to insurance products like endowment plans; attractive returns at low risk became a thing of the past. The same period also coincided with an upturn in equity markets and the emergence of a new breed of market-linked insurance products like ULIPs.

While in conventional insurance products the insurance component takes precedence over the savings component, the opposite holds true for ULIPs.

More importantly ULIPs (powered by the presence of a large number of variants) offer investors the opportunity to select a product which matches their risk profile; for example an individual with a high risk appetite can shun traditional endowment plans (which invest about 85% of their funds in the debt instruments) in favour of a ULIP which invests its entire corpus in equities.

In traditional insurance products, the sum assured is the corner stone; in ULIPs premium payments is the key component. ULIPs are remarkably alike to mutual funds in terms of their structure and functioning; premium payments made are converted into units and a net asset value (NAV) is declared for the same.

Investors have the choice of enhancing their insurance cover, modifying premium payments and even opting for a distinct asset allocation than the one they originally opted for.

Also if an unforeseen eventuality were to occur, in case of traditional products, the sum assured is paid along with accumulated bonuses; conversely in ULIPs, the insured is paid either the sum assured or corpus amount whichever is higher.

Insurance seekers have never been exposed to this kind of flexibility in traditional insurance products and it would be fair to say that ULIPs represent the new face of insurance.

While few would dispute the value-add that ULIPs can provide to one's insurance portfolio and financial planning; the same is not without its flipside.

For the uninitiated, understanding the functioning of ULIPs can be quite a handful! The presence of what seem to be relatively higher expenses, rigidly defined insurance and investment components and the impact of markets on the corpus clearly make ULIPs a complex proposition. Traditionally the insurance seeker's role was a passive one restricted to making premium payments; ULIPs require greater participation from both the insured and the insurance advisor.

As is the case with most evolved investment avenues, making informed decisions is the key if investors in ULIPs wish to truly gain from their investments. The various aspects of ULIPs dealt with in this publication will certainly further the ULIP investor's cause.

How to select the right ULIP

For a product capable of adding significant value to investors' portfolios, ULIPs have far too many critics. We at Personally have interacted with a number of investors who were very disillusioned with their ULIPs investments; often the disappointment stemmed from poor and inappropriate selection.

We present a 5-step investment strategy that will guide investors in the selection process and enable them to choose the right ULIP.

1. Understand the concept of ULIPs

Do as much homework as possible before investing in an ULIP. This way you will be fully aware of what you are getting into and make an informed decision.

More importantly, it will ensure that you are not faced with any unpleasant surprises at a later stage. Our experience suggests that investors on most occasions fail to realise what they are getting into and unscrupulous agents should get a lot of 'credit' for the same.

Gather information on ULIPs, the various options available and understand their working. Read ULIP-related information available on financial Web sites, newspapers and sales literature circulated by insurance companies.

2. Focus on your need and risk profile

Identify a plan that is best suited for you (in terms of allocation of money between equity and debt instruments). Your risk appetite should be the deciding criterion in choosing the plan.

As a result if you have a high risk appetite, then an aggressive investment option with a higher equity component is likely to be more suited. Similarly your existing investment portfolio and the equity-debt allocation therein also need to be given due importance before selecting a plan.

Opting for a plan that is lop-sided in favour of equities, only with the objective of clocking attractive returns can and does spell disaster in most cases.

3. Compare ULIP products from various insurance companies

Compare products offered by various insurance companies on parameters like expenses, premium payments and performance among others. For example, information on premium payments will help you get a better picture of the minimum outlay since ULIPs work on premium payments as opposed to sum assured in the case of conventional insurance products.

Compare the ULIPs' performance i.e. find out how the debt, equity and balanced schemes are performing; also study the portfolios of various plans. Expenses are a significant factor in ULIPs, hence an assessment on this parameter is warranted as well.

Enquire about the top-up facility offered by ULIPs i.e. additional lump sum investments which can be made to enhance the policy's savings portion. This option enables policyholders to increase the premium amounts, thereby providing presenting an opportunity to gainfully invest any surplus funds available.

Find out about the number of times you can make free switches (i.e. change the asset allocation of your ULIP account) from one investment plan to another. Some insurance companies offer multiple free switches every year while others do so only after the completion of a stipulated period.

4. Go for an experienced insurance advisor

Select an advisor who is not only conversant with the functioning of debt and equity markets, but also independent and unbiased. Ask for references of clients he has serviced earlier and cross-check his service standards.

When your agent recommends a ULIP from a given company, put forth some product-related questions to test him and also ask him why the products from other insurers should not be considered.

Insurance advice at all times must be unbiased and independent; also your agent must be willing to inform you about the pros and cons of buying a particular plan. His job should not be restricted to doing paper work like filling forms and delivering receipts; instead he should keep track of your plan and offer you advice on a regular basis.

5. Does your ULIP offer a minimum guarantee?

In a market-linked product, protecting the investment's downside can be a huge advantage. Find out if the ULIP you are considering offers a minimum guarantee and what costs have to be borne for the same.

Unit Linked Insurance Plans (ULIPs)

For the generation of insurance seekers who thrived on insurance policies with assured returns issued by a single public sector enterprise, unit-linked insurance plans are a revelation.

Traditionally insurance products have been associated with attractive returns coupled with tax benefits. The returns part was often so compelling that insurance products competed with investment products for a place in the investor's portfolio. Perhaps insurance policies then were symbolic of the times when high

interest rates and the absence of a rational risk-return trade-off were the norms.

The subsequent softening of interest rates introduced a degree a much-needed rationality to insurance products like endowment plans; attractive returns at low risk became a thing of the past. The same period also coincided with an upturn in equity markets and the emergence of a new breed of market-linked insurance products like ULIPs. While in conventional insurance products the insurance component takes precedence over the savings component, the opposite holds true for ULIPs.

More importantly ULIPs (powered by the presence of a large number of variants) offer investors the opportunity to select a product which matches their risk profile; for example an individual with a high risk appetite can shun traditional endowment plans (which invest about 85% of their funds in the debt instruments) in favour of a ULIP which invests most of its corpus in equities.

In traditional insurance products, the sum assured is the corner stone; in ULIPs premium payments is the key component. ULIPs are remarkably alike to mutual funds in terms of their structure and functioning; premium payments made are converted into units and a net asset value (NAV) is declared for the same.

Investors have the choice of enhancing their insurance cover, modifying premium payments and even opting for a distinct asset allocation than the one they originally opted for. This calls for enhanced flexibility in ULIPs. Also if an unforeseen eventuality were to occur, in case of traditional products, the sum assured is paid along with accumulated bonuses; conversely in ULIPs, the insured is paid either the sum assured or corpus amount whichever is higher.

Insurance seekers have never been exposed to this kind of flexibility in traditional insurance products and it would be fair to

say that ULIPs represent the new face of insurance. While few would dispute the value-add that ULIPs can provide to one's insurance portfolio and financial planning; the same is not without its flipside.

For the uninitiated, understanding the functioning of ULIPs can be quite a handful! The presence of what seem to be relatively higher expenses, rigidly defined insurance and investment components and the impact of markets on the corpus clearly make ULIPs a complex proposition. Traditionally the insurance seeker's role was a passive one restricted to making premium payments; ULIPs require greater participation from the insured.

Charges and Expenses

ULIPs work very similar to a mutual fund with an added benefit of life cover and tax deduction. They have a mandate to invest the premiums in varying proportions in gsecs (government securities), bonds, the money markets (call money) and equities. The primary difference between conventional savings-based insurance plans like endowment and ULIPs is the investment mandate- while ULIPs can invest up to 100% of the premium in equities, the percentage is much lower (usually not more than 15%) in case of conventional insurance plans. ULIPs are also available in multiple options like ‘aggressive’ ULIPs (which can invest up to 100% in equities), ‘balanced’ ULIPs (which invest 40-60% in equities) and ‘debt’ ULIPs (which invest only in debt and money market instruments).

Broadly speaking, ULIP expenses are classified into three major categories:

1) Mortality charges

Mortality expenses are charged by life insurance companies for providing a life cover to the individual. The expenses vary with the

age, sum assured and sum-at-risk for the individual. There is a direct relation between the mortality expenses and the above mentioned factors. In a ULIP, the sum-at-risk is an important reference point for the insurance company. The sum-at-risk is the difference between the sum assured and the investment value the individual’s corpus as on a specified date. Usually, the mortality charges are levied on the per thousand sum assured.

2) Sales and Fund Administration expenses

Insurance companies incur these expenses for operational purposes on a regular basis. The expenses are recovered from the premiums that individuals pay towards their insurance policies. Agent commissions, sales and marketing expenses and the overhead costs incurred to run the insurance business on a day-to-day basis are examples of such expenses.

3) Fund management charges (FMC)

These charges are levied by the insurance company to meet the expenses incurred on managing the ULIP investments. A portion of ULIP premiums are invested in equities, bonds, g-secs and money market instruments. Managing these investments incurs a fund management charge, similar to what mutual funds incur on their investments. FMCs differ across investment options like aggressive, balanced and debt ULIPs; usually a higher equity option translates into higher FMC.

Apart from the three expense categories mentioned above, individuals may also have to incur certain expenses, which are primarily ‘optional’ in nature- the expenses will be incurred if certain choices that are made available to individuals are exercised.

a) Switching charges

Individuals are allowed to switch their ULIP options. For example, an individual can switch his fund money from 100% equities to a balanced portfolio, which has say, 60% equities and 40% debt. However, the company may charge him a fee for ‘switching’. While most life insurance companies allow a certain number of free switches annually, a switch made over and above this number is charged.

b) Top-up charges

ULIPs allow individuals to invest a top-up amount. Top-up amount is paid in addition to the premium amount for a particular year. Insurance companies usually deduct a certain percentage from the top-up amount as charges. These charges are usually lower than the regular charges that are deducted from the annual premium.

c) Cancellation charges

Life insurance companies levy cancellation charges if individuals decide to surrender their policies before the mandated lock-in period which is usually three years. These charges are levied as a percentage of the fund value on a particular date.

The Compounded Annual Growth Rate (CAGR) of the fund goes up over a period of time. This is because the ULIP expenses even out over a period of time. The ‘evening out’ occurs because although the expenses are high in the initial years, they fall thereafter. And as the years roll by, the expenses tend to ‘spread themselves’ more evenly over the tenure of the ULIP. Another reason is also because the expenses are levied on the annual premium amount, which stays the same throughout the tenure. Therefore, the expenses do not have any impact on the returns generated by the corpus.

Fund management charges also have an effect on the returns. FMC is levied on the corpus, which keeps fluctuating over the tenure.

The returns also depend to a large extent on how well the insurance company manages the investment. Individuals therefore, need to

bear in mind that expenses are an important variable while evaluating ULIPs across life insurance companies. They have the potential to make a considerable difference to the returns generated over a period of time.

HEALTH INSURANCE

“Growth 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 education”: -------Amarty K Sen

Expenditure on health by the Government continues to be low. It is not viewed as an investment but rather as a dead loss!

States under financial constraints cut expenditure on health Still India is way behind many fast developing countries such as China, Vietnam and Sri Lanka in health indicators

In case of government funded health care system, the quality and access of services has always remained major concern.

Very rapidly growing private health market has developed in India & they are helping in bridging the gap between what government offers and what people need

Why there is need of huge health insurance demand in India?

With proliferation of various health care technologies and general price rise, the cost of care has also become very expensive and unaffordable to large segment of population. The government and people have started exploring various

health financing options to manage problems arising out of growing set of complexities of private sector growth, increasing cost of care and changing epidemiological pattern of diseases.

Health scenario in India

India spends about 6.5 to 7% of GDP on Health care (official estimates hover around 6%) out of which 1.3% is in the Govt. sector (this accounts for 22% of overall spending) and 4.7% in private sector (78% of overall spending).

National level of spending on Health care under five year plans has decreased - it was 3.3% in first plan & 0.7% in eighth plan. The national spending also includes family planning, water, sanitation for rural areas etc. Majority of funds (approx. 50%) go in salary & administration from Govt. spending budget.

There are various types of health coverage's in India. Based on ownership the existing health insurance schemes can be broadly divided into categories such as:

Government or state-based systems

Market-based systems (private and voluntary)

Employer provided insurance schemes

Member organization (NGO or cooperative)-based systems

Popular plans of ICICI Lombard

Critical Care Insurance 80 D of the Income Tax Critical Care protects you or your spouse against loss of income on diagnosis of any of the 9 major medical illnesses and procedures. The first of its kind, it offers a lump sum benefit on diagnosis of Cancer, Bypass Surgery,

Heart Attack, Kidney Failure, Major Organ Transplant, Stroke, Paralysis, Heart Valve Replacement Surgery or Multiple Sclerosis. Critical Care Insurance also provides cover against accidental death and permanent total disablement (PTD).

10 K Tax Saver Plan - IntroductionThe `10K Tax Saver Health Insurance Policy’ has a fixed premium and enables you to save up to Rs. 3,366* under Section 80 D of the Income Tax Act.

Family Floater Health Plan - Introduction For the first time in India, one single policy takes care of the hospitalization expenses of your entire family. Family Floater Health Plan takes care of all the medical expenses during sudden illness, surgeries and accidents

Personal Accident Insurance ICICI Lombard Personal Accident Insurance policy covers you against Accidental Death, Permanent Total Disablement (PTD) and Permanent Partial Disablement (PPD). As a special offer, we now bring 3 new Personal Accident flexible plan options (Accidental Death & Permanent Total Disablement cover only) with a sum insured of Rs. 3, 5 and Rs. 10 Lakh.

Bajaj Allianz

Health Guard : Bajaj Allianz covers you and your family against expensive medical care including pre & post hospitalization expenses. Sum assured up to 5 lacs per insured.

Critical illness: Protection against the 10 major life threatening illness like Cancer, Heart Attack, Paralysis, Kidney failure, Stroke, etc. In transplant surgery donor expense are covered. Sum assured apt 50 lacs per insured.Silver health : Bajaj Allianz’s Silver Health is a health insurance plan specifically for people aged between 46-75yrs which protects you and your spouse in case you need expensive medical care.Hospital cash : A policy that provides a daily allowance for each day of hospitalization. Benefits is doubled in case of ICU admission. Income tax exemption under SEC 80 D.Personal guard :This policy covers against accidental death and comes with several additional benefits like hospital confinement allowance, children's education bonus.E- opinion: Bajaj Allianz launches e-opinion rider, which will cover the expenses of 2nd opinion e-consultation services for serious illness in India

United India Insurance Products

Personal Accident Policy Mediclaim Policy

Overseas Mediclaim Policy for Business and holiday

Overseas Mediclaim Policy for Employment and Studies

Overseas Mediclaim Policy for Corporate Frequent Traveler

Road safety package Policy

Uni medicare Policy

The New India Assurance

Health Plus Medical Expenses Policy Mediclaim Policy

Personal Accident Policy

Overseas Mediclaim Policy

Star Health And Allied Insurance Company

Star True Value Health Insurance is an offering designed to offer health insurance to the masses. The premiums are very economical, making it within the reach of many. The insurance is available in various options ranging from a minimum sum assured of Rs.30,000 to a maximum of Rs. 80,000. The premium depends on the age of the person proposed for the insurance.

STAR Medi Classic policy to provide for reimbursement of hospitalization expenses.

NRI All Care, to insure the health of family members of Non-Resident Indians. It provides for financial help and assistance, should a medical emergency arise.

Family Health Optima to protect all members of a family from financial setbacks in the event of a serious illness. The coverage is applicable equally to all members of the family.

Senior citizen red carpet It provides cover for anyone over the age of 60 and permits entry right up to the age of 69 with continuing cover after that. It is our way of caring for a generation that has done so much to build the country we have today.

US Vs GERMAN HEALTH INSURANCE MODEL

Conclusion From Comparison

German system is clearly superior to American system

German system is social health insurance based on solidarity delegation and free choice

American system is based on private market philosophy .

Thus the German system is much more suited to the needs of the developing countries.

Constraints in adopting German models in India

• For social health insurance to work the work force has to be organized and working in formal sector so that their incomes are clear and there is a mechanism for payroll deduction of the contribution.

• It also needs a well-developed regulatory framework and culture of solidarity and self-regulation so that well off section of the community is willing to pay for the costs of sickness

Universal compulsory social health insurance is not possible in India at this stage.

Micro Health Insurance

Characteristics of the MHIs

• Organized by NGOs

• Targeting the poor

• Provides a comprehensive package

• Collects affordable premiums

• NGOs and communities manage the administration

• Usually requires some external resources for financial viability.

Imperative of Liberalization in Health insurance

Poor country like India ,where only asset people have is their bodies

Early 1990 govt key tool to manage fiscal deficit was decrease Govt Expenditure

Poor Quality of health service by govt-

Clients did not demanded better service as it was free of cost

Current health scenario

• Accounts for 1.2% of expenditure on health of country

• TPA has not only speeded the claim process but reduced the insurer burden

• Total claim 64% were settled in 1 month & 89% in 1-3 month

Challenges Faced by India

India has 48 doctors per 100,000 persons which is fewer than in developed nations

Wide urban-rural gap in the availability of medical services: Inequity

Poor facilities even in large Government institutions compared to corporate hospitals (Lack of funds, poor management, political and bureaucratic interference, lack of leadership in medical community

INNOVATION IN DISTRIBUTION CHANNEL

DISTRIBUTION CHANNELS

Present Distribution Channels for Insurance Products in India

Insurance industry in India for fairly a longer period relied heavily on

traditional agency (individual agents) distribution network IRDA (2004). As

the insurance sector had been completely monopolized by the public sector

organizations for decades, there was slow and rugged growth in the

insurance business due to lack of competitive pressure. Therefore, the zeal

for discovering new channels of distribution and the aggressive marketing

strategies were totally absent and to an extent it was not felt necessary. The

insurance products, by and large, have been dispensed mainly through the

following traditional major channels:

(1) development officers,

(2) individual agents and

(3) Direct sales staff.

It was only after IRDA came into existence as the regulator, the other forms

of channels, viz., corporate agents including Bancassurance, brokers (an

independent agent who represents the buyer, rather than the insurance

company, and tries to find the buyer the best policy by comparison

shopping2 ), internet marketing and telemarketing were added on a

professional basis in line with the international practice. As the insurance

sector is poised for a rapid growth, in terms of business as well as number of

new entrant tough competition has become inevitable. Consequently,

addition of new and more number of distribution channels would become

necessary.

With the opening up of the insurance sector and with so many players

entering the Indian insurance industry, it is required by the insurance

companies to come up with innovative products, create more consumer

awareness about their products and offer them at a competitive price. New

entrants in the insurance sector had no difficulty in matching their products

with the customers' needs and offering them at a price acceptable to the

customer.

But, insurance not being an off the shelf product and one which requiring personal counseling and persuasion, distribution posed a major challenge for the insurance companies. Further insurable population of over 1 billion spread all over the country has made the traditional channels of the insurance companies costlier. Also due to heavy competition, insurers do not enjoy the flexibility of incurring heavy distribution expenses and passing them to the Customize form, With these developments and increased pressures in combating competition, companies are forced to come up with innovative techniques to market their products and services. At this juncture, banking sector with it's far and wide reach, was thought of as a potential distribution channel, useful for the insurance companies. This union of the two sectors is what is known as Bancassurance.

Distribution - the key differentiator

It has been two years since the Indian insurance market has opened up, and the new entrants into the market have set up shop in every major city. The public sector companies have already established themselves in the market. But there are multiple challenges faced by these insurance companies, of which two are critical:

Designing of products suiting the market

Using the right distribution channel to reach the customer

BANCASSURANCE- An innovative distribution channel

Your bank has already changed a great deal over the past decade. Your

banker was once content to collect your deposits and then lend the money to

companies at a profit. Now he wants to lend to you as well. It could be a

loan for a new house, a new car or even for education in a foreign university.

Then there are products like demat services and mutual funds. Soon, there

will be more. When you walk into your bank six months from now, it is

likely that they will try to sell a host of insurance products to you even.

Welcome to Bancassurance. Bancassurance - a term coined by combining

the two words bank and insurance (in French) - connotes distribution of

insurance products through banking channels. Bancassurance encompasses

terms such as `Allfinanz' (in German), `Integrated Financial Services' and

`Assure banking'. This concept gained currency in the growing global

insurance industry and its search for new channels of distribution. Banks,

with their geographical spread and penetration in terms of customer reach of

all segments, have emerged as viable sources for the distribution of

insurance products. Presently, there’s more activity here than anywhere else.

And every one wants to jump onto the bandwagon for a piece of the action

cake. The insurance industry has finally woken up from its long slumber to

an altogether new awakening.

It is the rise of a new dawn that has brought with it opportunities galore. From innumerable insurers, to affordable and quality covers for the consumer, from increase in distribution channels to incorporating information technology measures, from net selling to bringing about increased transparency - its all there. The ubiquitous agent is no more the only distribution channel today for insurance products. Increase in distribution channels has among others also seen the concept of Bancassurance taking roots in India, and it is emerging to be a viable solution to mass selling of insurance products. Bancassurance is a long-standing dream of offering a seamless service of banking, life & non-life products. India, being the one of the most populous country in the world with a huge potential for insurance companies, has an envious chain of bank branches as the lifeline of its financial system. Banks with over 65,000 branches & 65% of household investments are the backbone of the Indian financial market. In India, there are 75 branches per million inhabitants. Clearly, that's something insurance companies - both private and state-owned - would find nearly impossible to achieve on their own. Considering it as a channel for insurance gives insurance an unlimited exposure to Indian consumers. Banks have expertise on the financial needs, saving patterns and life stages of the customers they serve. Banks also have much lower distribution costs than insurance companies and thus are the fastest emerging distribution channel. For insurers, tying upcompanies and thus are the fastest emerging distribution channel. For insurers, tying up with banks provides extensive geographical spread and countrywide customer access; it is the logical route for insurers to take.

The banking and Insurance industry has change rapidly in the changing and

challenging economic environment through out the world. In the

competitive and liberalized environment everyone is trying to do better than

others and consequently survival of the fittest has come into effect.

Insurance companies are also to be competitive by cutting cost and serving

in a better way to the customers. Now the time has come to choose and

adopt appropriate distribution channel through which the insurance

companies can get the maximum benefit and serve. Customers in manifold

ways. The intermediaries in the insurance business and the distribution

channels used by carriers will perhaps be the strongest drivers of growth in

this sector. Multi channel distribution and marketing of insurance products

will be the smart strategy of continue to play an important role in

distribution, alternative channels like corporate agents brokers and

bancassurance will play a greater role in distribution. The time has come for

the industry To gradually move from traditional individual agents towards

new distributional channels with a paradigm shift in creating awareness and

not just selling products. The game is old but the rules are new and still

developing. Ensconced a monopoly run from the nationalized days

beginning in 1956, the insurance industry has indeed awakened to a

deregulated environment which several private players have partnered with

multinational insurance giants. However despite of its teaming one billion

populations, India still has a low insurance penetration of 1.95 percent, 51st

in the world. Despite the fact that India boosts saving rate around 25 percent,

less than 5% is spent on insurance. To streamline the saving into insurance,

bancassurance is the best channel to tackle four challenges facing the

industry :-

product innovation,

distribution,

customer service,

investments.

What is Bancassurance?

Bancassurance is the distribution of insurance products through the bank's

distribution channel. It is a phenomenon wherein insurance products are

offered through the distribution channels of the banking services along with

a complete range of banking and investment products and services. To put it

simply, Bancassurance, tries to exploit synergies between both the insurance

companies and banks.

Bancassurance if taken in right spirit and implemented properly can be win-

win situation for the all the participants' viz., banks, insurers and the

customer.

Bancassurance commonly means selling insurance products under the same

roof of a bank. Though Bancassurance had roots in France in the 1980s, and

spread across different parts of Continental Europe since, it has spread its

wings in Asia –in particular, In India, there are a number of reasons why

Bancassurance could play a natural role in the insurance market

(1) Banks have a huge network across the country.

(2) Banks can offer fee-based income for the employees for insurance sales.

(3) Banks are culturally more acceptable than insurance companies. Dealing

with (life) insurance, in many parts of India, conjure up an image of a bad

omen. Some bank products have natural complementary insurance products.

For example, if a bank gives out a home loan, it might insist on a life

insurance cover so that in case of death of the borrower, there is no problem

in paying off the home loan.

Similarly, a car loan could only be given if comprehensive auto insurance is

taken out on that particular car. we trace some of the salient developments of

banks in India. Section 3 discusses how the lack of coordination between

bank regulation and insurance regulation created confusion in the

development of Bancassurance. Section 4 details two main problems facing

banks in India: bad loans and overstaffing. Section 5 describes some of the

long term drivers of Bancassurance in general. We discuss some salient

issues of entry of banks into the insurance industry in section 6. The entry of

the State Bank of India created special problems in the insurance industry.

Sections 7 and 8 discuss Bancassurance experience in other countries – in

particular, two experiences in Asia are highlighted. In section 9, we discuss

America versus European modalities and their relevance for India. In section

10, we assess then success of Bancassurance model in India. Section 11

details some salient reasons why banks are getting into insurance business.

In section 12, we develop a model of entry of banks in insurance business. In

the following section, we discuss the results. Final section concludes.

Bank…… Insurance - Synergy:

Synergy, as commonly defined is a mutually advantageous conjunction

where the whole is greater than the sum of the parts. Someone have very

thoughtfully conveyed – “Synergy lets you easily share a single mouse and

keyboard between multiple computers, each with its own display.” The

synergy that the world is witnessing in bancassurance is no different. The

synergy here allows sharing of the same distribution channel and networks

(mouse and keyboard) between banking companies and insurance companies

(multiple computers), each with different nature and variety of product

(display). The benefits that a bank can reap from this form of alliance

includes increased brand –equity, customer retention apart from the

revenues.

a. Fee-based income for bank – non-funds revenue:

Internationally, insurance activities contribute significantly to banks’ total

domestic retail revenues. Fee-based selling helps to enhance the levels of

staff productivity in banks. This is crucial to bring higher motivation levels

in banks in India. The revenue earned through Bancassurance alliances are

categorized as revenues through fee based income.

Such revenues are non-funds revenue and have an additional advantage to

the bank that it carries no capital reserve maintenance provision with it.

Similarly, increase brand equity and customer retention by becoming full-

service provider is something that every bank would care for. Off late, all

Indian banks are trying to increase their proportion of fee based income in

their total income. The trend is shown in This is because according to Basel

norms, the fee based income is risk-free and does not consume any capital.

b. Lower distribution costs:

Bancassurance has empirically proven to lower the distribution costs of

insurers by 22-23% due to high sales productivity. Selling insurance to

existing mass market banking customers is far less expensive than selling to

a group of unknown customers. Experience in Europe has shown that

Bancassurance firms have a lower expense ratio. This benefit could go to the

insured public by way of lower premiums. Further for any new entrant in the

insurance market, using the already established network and infrastructure of

banks makes mores sense than building the entire chain from the scratch.

Similarly, banks can put their energies into the `small-commission

customers’ that insurance agents would tend to avoid.

Larger customer base

Structured sales approach

Use Bank’s database for

target segment demographics

Benefits to the insurance company

More funds to deploy into investment

Customizing product to the

customer

IT infrastructure of the bank (ATMs)

Customer relationships:

Insurance companies lag far behind in terms of effective customer

relationship that they could maintain. The trust and esteem with which a

customer holds bank will not be same for an insurance company. Similarly

for banks, it gives them an opportunity to serve their existing customers

better. Increased brand equity and customer retention by becoming full-

service provider is something that every bank would care for. There is now a

need for explicit distinction between at least three customer segments for

Bancassurance:

The traditional "mass market" Bancassurance

o Private Bancassurance (aimed at wealthy individuals)

o Corporate Bancassurance and SMEs (small to medium-

sized enterprises) to reach their employees

c. Operational efficiency:

According to Boston Consulting group, the US banks were able to capture

10-15% of investment and insurance markets by targeting 20% of customers

and operate at expense levels 30-50% lower than those of traditional

insurers.

One of the most important reasons of considering Bancassurance by Banks

is increased return on assets (ROA). One of the best ways to increase ROA,

assuming a constant asset base, is through fee income. Banks that build fee

income can cover more of their operating expenses, and one way to build fee

income is through the sale of insurance products. Banks that effectively

cross-sell financial product can leverage their distribution and processing

capabilities for profitable operating expense ratios.

The ratio of expenses to premiums, an important efficiency factor in insurance activities through Bancassurance is extremely low. This is because the bank and the insurance company is benefiting from the same distribution channels and people.

Expansion of banks in India

Penetration of commercial banks in India has been quite extensive. There are

around 66,000 branches of scheduled commercial banks. Each branch serves

an average of 15,000 people. The only other national institution with a

bigger reach is the postal service.2 Banks have not only been successful in

the urban areas. It has also grown tremendously in the rural areas. Of the

total number of branches of commercial banks, there are 32,600 branches in

rural areas, and 14,400 semi-urban branches. In addition, there are 196

exclusive regional rural banks in deep hinterland. There is research evidence

to show that the deliberate expansion policy of banks in rural areas has

contributed to poverty reduction in India (see, Burgess and Pandey,

forthcoming). Instead of simple headcounts, if we take other bank

penetration measure like total value of deposits as a percent of GDP, it is

also exhibiting an upward trend. This means bank deposits are growing at a

rate much faster than the gross domestic product (Figure1). Banks have

become the main saving vehicle in the economy. Between 1985 and 1995,

the growth of deposits in banks stalled at under 35% of the GDP (that itself

is a high number by the standard of the developing economies). From 1995,

the banking sector started growing again. The deposits in banks grew

another 10% of GDP by 2000. This level of growth in bank deposit has been

totally unprecedented in India since independence. Why did the bank

deposits take a leap? One simple (but partial) reason is a substitution from

the stock market.

In 1994, Indian stock market was hit by the worst scandal of manipulation

of stock prices in its long history. The stocks fell sharply driving many

investors into safer investment options. Rising saving rate during the late

1990s led to sustained growth of bank deposits (that is, additional

investment in the stock market came in the form of fresh money and not a

flow of money out bank saving. The rising saving came as a result of rising

income across the board. With this background, it is therefore not surprising

that banks have become a vehicle for selling insurance products.

Financial Institutions in Insurance Business: RBI Rules

Banks are regulated by the Indian central bank, the Reserve Bank of India

(RBI).

Therefore, the RBI has set down the rules for the entry of banks in the field of insurance. In 1999, the Governor of the Reserve Bank of India declared: "Presently, there is no provision in the Banking Regulation Act whereby a bank could undertake the insurance business. The Act may have to be amended before banks could undertake insurance business. Alternatively, there is a provision in the Banking Regulation Act whereby banks could take any other form of business which the central government may notify.

Thus, if the central government notifies insurance business as a lawful

activity for a banking 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". However, the following year, in a

set of draft guidelines issued to all scheduled commercial banks and select

financial institutions, the RBI laid out a set of parameters that need to be

met.

(1) The net worth of the bank/financial institution should not be less than

Rs.5 billon.

(2) The capital adequacy ratio of the bank/financial institution should be not

be less than 10%.

(3) The bank/financial institution should have track record of at least three

continuous years of profits.

(4) The level of net Nonperforming Assets should be 1% below the industry

average.(5) The track record of performance of existing subsidiaries of

banks/financial institutions should be “satisfactory”.3 Some confusion arose

from the circular. Therefore, the RBI proposed a series of amendments in

March 2000. In addition to the entry of banks, the RBI also laid down a set

of guidelines for the entry of Non-Bank Financial Companies (NBFC) into

insurance business (June 30, 2000)4. There were two critical differences in

the requirements proposed for the NBFCs.

First, the capital adequacy ratio of the NBFC (applicable only to those

holding public deposits) should not be less than 12 percent if engaged in

equipment leasing/hire purchase finance activities and 15 percent if it is a

loan or investment company.

Second, the level of nonperforming assets should be no more than 5 percent

of total outstanding leased/hire purchase assets and advances. On November

28, 2001, the same rules were extended to cover “All India” Financial

Institutions.5 Specifically the rules for these institutions were set at the same

level as the NBFCs noted above. Some confusion still remained whether it

was possible for the financial institutions to accept fees for their services

directly or not. The RBI 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 “should not adopt any restrictive

practice of forcing its customers to go in only for a particular insurance

company”.

In the 2001 Report on Currency and Finance, the RBI laid down its views in

more concrete term. “The Reserve Bank, in recognition of the symbiotic

relationship

between banking and the insurance industries, has identified three routes of

banks’

participation in the insurance business, viz.,

(i) providing fee-based insurance services without risk participation,

(ii) (ii) investing in an insurance company for providing infrastructure

and services support and

(iii) Setting up of a separate joint-venture insurance company with risk

participation. The third route, due to its risk aspects, involves

compliance to stringent entry norms. Further, the bank has to

maintain an ‘arms length’ relationship between its banking

business and its insurance outfit. For banks entering into insurance

business with risk participation, the prescribed entity (viz., separate

joint-venture company) also enables to avoid possible regulatory

overlaps between the Reserve Bank and the Government/IRDA.

The joint-venture insurance company would be subjected entirely

to the IRDA/Government regulations.”

Entry of Banks in Insurance Business

On December 28, 2000, the State Bank of India (SBI) announced a joint

venture Partnership with Cardif SA (the insurance arm of BNP Paribas

Bank). This Partnership won over several others (with Fortis and with GE

Capital). Many experts in the industry have awaited the entry of the SBI. It

was well known that the SBI has long harbored plans to become a universal

bank (a universal bank has business in banking, insurance and in security).

For a bank with more than 13,000 branches all over India, this would be a

natural expansion.

In the first round of license issue, the SBI was absent. There were several

reasons for this delay. First, the SBI was seeking a foreign partner to help

with new product design. Second, it did not want the partner to become

dominant in the long run (when the 26% foreign investment cap is

eventually lifted). It wanted to retain its own brand name.

Third, it wanted a partner that is well versed in the universal banking

business. This criterion ruled out an American partner where underwriting

insurance business by banks has been strictly forbidden by law (although

with the passage of the Gramm-Leach-Blily Act, this is not quite as drastic

as before). Cardif is the third largest insurance company in France. More

than 60% of life insurance policies in France are sold through the banks.

Fourth, the Reserve Bank of India (RBI) needed to clear participation by the

SBI because in India banks are allowed to enter other businesses on a “case

by case” basis. The SBI entry is groundbreaking for several reasons. This

was the first for an Indian bank to enter the insurance market.10 Second, even

though the regulators have said that banks would not (generally) be allowed

to hold more than 50% of an insurance company, the SBI was allowed to do

so (with a promise that its share would be eventually diluted). Ever since the

entry of the SBI, a number of other insurance companies have declared their

desired banking partners. In this process, both life and nonlife companies

have tied up with banks. The list of partnerships is in Table 2. Note that

some of the partnerships listed here are simply at the Memorandum of

Understanding (MoU) stage. They are yet to take any concrete form. These

alliances are listed in Table 2. A number of interesting facts emerge from the

table. The first obvious feature of Table 2 is the “natural partnerships” in the

list.

Specifically, HDFC Life Insurance is tied with HDFC Bank, ICICI

Prudential with ICICI Bank and so on. The second striking feature of the

table is the proliferation of banks partnering with single insurance

companies. Given that there are only two dozen insurance companies and

hundreds of banks, this outcome is to be expected.

Moreover, insurance companies are targeting different market segments by

affiliating with banks that do niche banking. Take the example of Aviva.

Aviva has evolved a three-layered strategy. The first layer is a tie-up with

ABN Amro and American Express. It caters to high net worth urban

customers. The second layer is a tie up with Canara Bank. Through this

nationalized bank with 2,400 branches, it reaches customers across the

length and breadth of the country. The third layer, at a regional level, a tie-

up with Lakshmi Vilas bank focuses on the region specific customers. This

tie-up helps them reach customers in rural and semi-urban centers in Tamil

Nadu and Andhra Pradesh. The third feature is best illustrated by an

example. Allianz Bajaj does not have the same banking partners for the life

sector as in the non-life sector. These two lists do not match. The same is

true for several other companies.

Fourth, some banks appear to have tied up with several insurance

companies. For example, Citibank appears in the list of a number of life as

well as in the non-life insurance company lists. This fact will become

important as the warning of the RBI that banks “should not adopt any

restrictive practice of forcing its customers to go in only for a particular

insurance company” become an issue in the future.

Fifth, the most recent addition to the list is the Oriental Insurance Company.

In January 2004, it declared that it would distribute insurance policies

through the post offices after it announced a joint venture with the

Department of Posts. Given that the post offices have unprecedented reach

around the country with 155,600 branches, it could distribute policies to the

customers even in very remote areas. The Department of Posts is the only

institution with a reach bigger than the banks in India.

There are several other banks in the pipeline for the approval of the IRDA.

They include the Punjab National Bank, the Principal Group and Vijaya

Bank. Two of them are well-established banks in India. The Principal

Group, an international financial institution, is mainly in pension business

around the globe. 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 deregulated in India.

The latest group to receive an outright charter for operating insurance

operation is Sahara Group (on March 5, 2004). Sahara’s entry is notable for

two important reasons. First, Sahara is the only company to enter the Indian

market without any foreign partner. It thus becomes the only purely

domestic company to be granted a license to operate in the insurance sector.

Second, it operates the largest Non-Bank Financial Company in India. It has

over 50 million depositors. To put it differently, one in every 20 Indians has

an account with Sahara. It serves the country through 1,700 establishments.

Since the company is diversified,11 it can use multiple channels for

distribution of its product – not the least through its NBFC capacity.

Bancassurance in India

Bancassurance in India is a very new concept, but is fast gaining

ground. In India, the banking and insurance sectors are regulated by

two different entities (banking by RBI and insurance by IRDA) and

bancassurance being the combinations of two sectors comes under the

purview of both the regulators. Each of the regulators has given out

detailed guidelines for banks getting into insurance sector. Highlights

of the guidelines are reproduced below:

RBI guideline for banks entering into insurance sector provides three options

for banks. They are:

Joint ventures will be allowed for financially strong banks wishing to

undertake insurance business with risk participation;

For banks which are not eligible for this joint-venture option, an

investment option of up to 10% of the net worth of the bank or Rs.50

crores, whichever is lower, is available;

Finally, any commercial bank will be allowed to undertake insurance

business as agent of insurance companies. This will be on a fee basis

with no-risk participation.

The Insurance Regulatory and Development Authority (IRDA) guidelines

for the Bancassurance are:

Each bank that sells insurance must have a chief insurance executive

to handle all the insurance activities.

All the people involved in selling should under-go mandatory training

at an institute accredited by IRDA and pass the examination

conducted by the authority.

Commercial banks, including cooperative banks and regional rural

banks, may become corporate agents for one insurance company.

Banks cannot become insurance brokers.

RBI Guidelines for the Banks to enter into Insurance Business

Following the issuance of Government of India Notification dated August 3,

2000, specifying ‘Insurance’ as a permissible form of business that could be

undertaken by banks under Section 6(1)(o) of the Banking Regulation Act,

1949, RBI issued the guidelines on Insurance business for banks.

1 Any scheduled commercial bank would be permitted to undertake

insurance business as agent of insurance companies on fee basis, without

any risk participation. The subsidiaries of banks will also be allowed to

undertake distribution of insurance product on agency basis.

2 Banks which satisfy the eligibility criteria given below will be permitted to

set up a joint venture company for undertaking insurance business with risk

participation, subject to safeguards. The maximum equity contribution such

a bank can hold in the joint venture company will normally be 50 per cent of

the paid- up capital of the insurance company. On a selective basis the

Reserve Bank of India may permit a higher equity contribution by a

promoter bank initially, pending divestment of equity within the prescribed

period.

The eligibility criteria for joint venture participant are as under:

I. The net worth of the bank should not be less than Rs.500 crore

ii. The CRAR of the bank should not be less than 10 per cent;

iii. The level of non-performing assets should be reasonable;

iv. The bank should have net profit for the last three consecutive years;

v. The track record of the performance of the subsidiaries, if any, of the

concerned bank should be satisfactory.

3. In cases where a foreign partner contributes 26 per cent of the equity with

the approval of Insurance Regulatory and Development Authority/Foreign

Investment Promotion Board, more than on public sector bank or private

sector bank may be allowed to participate in the equity of the insurance joint

venture. As such participants will also assume insurance risk, only those

banks which satisfy the criteria given in paragraph 2 above, would be

eligible.

A subsidiary of a bank or of another bank will not normally be allowed to

join the insurance company on risk participation basis. Subsidiaries would

include bank subsidiaries undertaking merchant banking, securities, mutual

fund, leasing finance, housing finance business, etc.

Banks which are not eligible for ‘joint venture’ participant as above, can

make investments up to 10% of the net worth of the bank or Rs.50 crore,

whichever is lower, in the insurance company for providing infrastructure

and services support. Such participation shall be treated as an investment

and should be without any contingent liability for the bank.

The eligibility criteria for these banks will be as under :

i. The CRAR of the bank should not be less than 10%;

ii. The level of NPAs should be reasonable;

iii. The bank should have net profit for the last three consecutive years.

6. All banks entering into insurance business will be required to obtain prior

approval of the Reserve Bank. The Reserve Bank will give permission to

banks on case to case basis keeping in view all relevant factors including the

position in regard to the level of non-performing assets of the applicant bank

so as to ensure that non-performing assets do not pose any future threat to

the bank in its present or the proposed line of activity, viz. ,insurance

business. It should be ensured that risks involved in insurance business do

not get transferred to the bank and that the banking business does not get

contaminated by any risk which may arise from insurance business. There

should be ‘arms length’ relationship between the bank and the insurance

outfit.

Holding of equity by a promoter bank in an insurance company or

participation in any form in insurance business will be subject to compliance

with any rules and regulations laid down by the IRDA/Central Government.

This will include compliance with Section 6AA of the Insurance Act as

amended by the IRDA Act, 1999, for divestment of equity in excess of 26

per cent of the paid up capital within a prescribed period of time.

2. Latest audited balance sheet will be considered for reckoning the

eligibility criteria.

3.Banks which make investments under paragraph 5 of the above guidelines,

and later qualify for risk participation in insurance business (as per

paragraph 2 of the guidelines) will be eligible to apply to the Reserve Bank

for permission to undertake Insurance business on risk participation basis

Insurance Agency Business/ Referral Arrangement

The banks (includes SCBs and DCCBs) need not obtain prior approval of

the RBI for engaging in insurance agency business or referral arrangement

without any risk participation, subject to the following conditions :

the bank should comply with the IRDA regulations for acting as ‘composite

corporate agent’ or ‘referral arrangement’ with Insurance companies.

The bank should not adopt any restrictive practice of forcing its customers

to go in only for a particular insurance company in respect of assets financed

by the bank. The customers should be allowed to exercise their own choice.

iii. The bank desirous of entering into referral arrangement, besides

complying with IRDA regulations, should also enter into an agreement with

the insurance company concerned for allowing use of its premises and

making use of the existing infrastructure of the bank. The agreement should

be for a period not exceeding three years at the first instance and the bank

should have the discretion to renegotiate the terms depending on its

satisfaction with the service or replace it by another agreement after the

initial period. Thereafter, the bank will be free to sign a longer term contract

with the approval of its Board in the case of a private sector bank and with

the approval of Government of India in respect of a public sector bank.

As the participation by a bank’s customer in insurance products purely on a

voluntary basis, it should be stated in all publicity material distributed by the

bank in a prominent way. There should be no ’linkage’ either direct or

indirect between the provision of banking services offered by the bank to its

customers and use of the insurance products.

The risks, if any, involved in insurance agency/referral arrangement should not get transferred to the business of the bank.

Bancassurance in India - A SWOT Analysis

In India, as elsewhere, banks are seeing margins decline sharply in their core

lending business. Consequently, banks are looking at other avenues,

including the sale of insurance products, to augment their income. The sale

of insurance products can earn banks very significant commissions

(particularly for regular premium products). In addition, one of the major

strategic gains from implementing Bancassurance successfully is the

development of a sales culture within the bank. This can be used by the bank

to promote traditional banking products and other financial services as well.

Table details the comparative figures of Bancassurance deals taken up by

various Indian Insurance companies.

Strengths • Huge number of people without life insurance (91.73

million out of 1 billion had life insurance in 1999)

• Millions of people traveling in and out of India can be

tapped for Overseas Mediclaim and Travel Insurance

policies

• 200 million households waiting for householder’s

insurance

• Good range of products from LIC/GIC

• Good amount of R&D into insurance

Weaknesses • Not much IT initiative from leading insurance players

(LIC and GIC)

• Higher tax nets for the middle class

• No Tax exemptions for products like householder,

travel policies etc

• Inflexibility of the products

Opportunities • Bank’s database can help insurance companies devise

policies

• Better IT infrastructure from the bank’s side can help

integrating

Threats • Risks in integrating approach, thinking and work

culture

• Non-response from target customers because banks

are considered as insurance company agents by the

customers

• Investors might suffer if the new rate of return on

capital is lower than the existing rate of return

Long Term Drivers of Bancassurance in India:

The staffing problem has redirected some banks to Bancassurance and so has

the Reduction of bad loan problem. But, they are not the long term drivers of

banc assurance in India. The long term drivers in India are going to be the

following.

(1) The culturally more acceptable banking transactions. Banking does not

have the same stigma that (life) insurance carries. This factor will diminish

in importance over time as people become more educated.

(2) Banks can offer fee-based income for insurance sales. This can be

attractive under current rigid structure of wage benefits. At present, banks

are prohibited from offering commission to the bank employees for selling

insurance products. Banks have found ways to circumvent the problem. For

example, they offer "car allowance" for the employees selling insurance.

(3) Narrowing bank margins are another key driver.

(4) Banks have complementary products with insurance products such as

the auto insurance, home insurance or annuities.

(5) When the pension reform is undertaken (and it is in the works), banks

can become natural institutional vehicles for private pension products. In

some countries, banks are explicitly prohibited from selling pension

products (e.g., Australia). In some other countries, banks are the leading

private pension providers (e.g., Mexico).

(6) Healthcare insurance sector can also benefit from Bancassurance. In

India, only 2.5 million people have access to healthcare facilities. On the

other hand, 5% of personal income is spent on healthcare. Banks can

distribute and facilitate administration of healthcare insurance.

(7) In many countries, the absence of banks from selling insurance seems to stem from regulatory reasons. In India, privatization of the insurance sector signaled an accommodating approach from both the insurance regulator and the banking regulator for banks entertaining the thoughts of selling insurance.

How successful has the Bancassurance model been in India?

There have been two broad classes of agreements between banks and

insurance Companies

. (1) Pure Distribution Agreements. Under this class, there are two sub-

classes of arrangements: (1a) Referral Arrangement and (1b) Corporate

Agency Arrangement.

(2) Joint Venture Agreements. There has been a range of such arrangements

from loose to integrated form of distribution partnerships. There has been a

substantial growth of bancassurance in India. Within two years, the share of

bancassurance in the insurance distribution business has gone from zero to

20% of new business in the private sector.

Provides us a sense of how rapidly Bancassurance is growing in India. Some

experts are predicting that within a decade, this proportion could rise to 35%

to 40%. There is evidence that policies sold through Bancassurance add

more value. In the July 2003 issue of the Asia Insurance Post, the Mr.P.

Nandagopal of Birla Sun Life was quoted as saying, “The average size of the

policy for the agency channel is Rs 19,500 per policy and for the

Bancassurance channel it is Rs 39,000 per policy.” Although such concrete

numbers are not available industry-wide, there is general consensus that

bancassurance is indeed bringing in customers of higher value.

Why Banks are highly motivated to Enter in Insurance Business Now

Why banks have an incentive to promote Bancassurance in India?

(1) Overstaffing problem can mitigated without resorting to drastic and

politically unacceptable solutions like large scale firing.

(2) Banks seek to retain customer loyalty by offering them an expanded and

more sophisticated range of products (than simple bank deposits of few

varieties).

(3) Insurance distribution will increase the fee-based earnings of banks.

(4) Fee-based selling helps to enhance the levels of staff productivity in

banks. This is a key driver for raising motivation among bank workers.

Banks have some in-built advantages in some of these areas. (1) Banks can

put their energies into the small-commission customers that insurance agents

would tend to avoid. (2) Banks’ entry in distribution helps to enlarge the

insurance customer base rapidly. This helps to popularize insurance as an

important financial protection product.

(3) Bancassurance helps to lower the distribution costs of insurers. A study

by Tillinghast, Towers and Perrin in the UK shows that the cost of selling

insurance through direct sales force is approximately twice as high as the

cost of selling through Bancassurance. However, the cost of selling the

products through independent financial advisers is approximately the same

as Bancassurance (quoted in Sigma 7/2002). Acquisition cost of insurance

customer through banks is low. Selling insurance to existing mass market

banking customers is far less expensive than selling to a group of unknown

customers. Experience in Europe has shown that Bancassurance firms have a

lower expense ratio. This benefit could go to the insured in the form of lower

premiums. Banks could have an important role to play in the pension sector

when deregulated. Banks can provide collection and payments of pension

contributions. Banks can also play a major role in developing a viable

healthcare program in India.

How Bancassurance advantageous to banks:

Productivity of the employees increases.

By providing customers with both the services under one roof, they

can improve overall customer satisfaction resulting in higher customer

retention levels.

Increase in return on assets by building fee income through the sale of

insurance products.

Can leverage on face-to-face contacts and awareness about the

financial conditions of customers to sell insurance products.

Banks can cross sell insurance products Eg: Term insurance products

with loans.

Advantages to insurers

Insurers can exploit the banks' wide network of branches for

distribution of products. The penetration of banks' branches into the

rural areas can be utilized to sell products in those areas.

Customer database like customers' financial standing, spending habits,

investment and purchase capability can be used to customize products

and sell accordingly.

Since banks have already established relationship with customers,

conversion ratio of leads to sales is likely to be high. Further service

aspect can also be tackled easily.

Advantages to consumers

Comprehensive financial advisory services under one roof. i.e.,

insurance services along with other financial services such as banking,

mutual funds, personal loans etc.

Enhanced convenience on the part of the insured

Easy access for claims, as bank is a regular go.

Innovative and better product ranges.

Some of the Bancassurance tie-ups in India are:

Insurance Company Bank

Birla Sun Life Insurance Bank of Rajasthan, Andhra Bank, Bank of

Co. Ltd.Muscat, Development Credit Bank, Deutsche

Bank and Catholic Syrian Bank

Dabur CGU Life

Insurance Company Pvt.

Ltd

Canara Bank, Lakshmi Vilas Bank, American

Express Bank and ABN AMRO Bank

HDFC Standard Life

Insurance Co. Ltd.Union Bank of India

ICICI Prudential Life

Insurance Co Ltd.

Lord Krishna Bank, ICICI Bank, Bank of India,

Citibank, Allahabad Bank, Federal Bank, South

Indian Bank, and Punjab and Maharashtra Co-

operative Bank.

Life Insurance Corporation

of India

Corporation Bank, Indian Overseas Bank,

Centurion Bank, Satara District Central Co-

operative Bank, Janata Urban Co-operative Bank,

Yeotmal Mahila Sahkari Bank, Vijaya Bank,

Oriental Bank of Commerce.

Met Life India Insurance

Co. Ltd.

Karnataka Bank, Dhanalakshmi Bank and J&K

Bank

SBI Life Insurance

Company Ltd.State Bank of India

Bajaj Allianz General

Insurance Co. Ltd.Karur Vysya Bank and Lord Krishna Bank

National Insurance Co. City Union Bank

Ltd.

Royal Sundaram General

Insurance Company

Standard Chartered Bank, ABN AMRO Bank,

Citibank, Amex and Repco Bank.

United India Insurance

Co.Ltd.South Indian Bank

Business Models:

The alliance between banks and insurance companies can be structured in

varied manners, depending upon the type of synergy one is looking for.

Corporate Agency Model is slowly gaining importance across various

nations because of ease in implementation and distribution of authority-

responsibility relationship. Insurance products wrapped around the bank's

deposit and loan products (Wrapper Model) are also gradually gaining in

popularity due to their simple product design while the referral model tie-up

has not been able to really take off. The options available to the banks are:

• Banks selling products of their insurance subsidiary exclusively.

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.

• Banks selling products of an insurance affiliate on an exclusive

basis.

In this model, the bank gets into an agreement with an insurance

agency and sells their insurance product to its existing customers. In

this setup also, the banks might get into an exclusive agreement with

the insurance company.

• Banks offering products of several insurance companies as `super

market’.

Here the bank gets into agreement of selling insurance products of as

much insurance companies possible and sells it to its customers. Here

the customers can choose between wide ranges of products but the

insurance companies would not prefer this as their products would not

be always preferred.

(1)Corporate Broker model:

A corporate broker is effectively a principal corporate adviser to an

investment trust company. Here the bank is acting as a corporate adviser to

an insurance company. The broker would make a certain amount of money

from dealing commissions and market making and a great deal more from

relatively infrequent corporate deals. This relationship does not end up in

long term relationship or exclusive relationships between the bank and the

insurance companies.

(2)Corporate Agency Model:

In India, insurance companies prefer corporate agency tie-ups with banks, as

against referral arrangements. Another advantage for banks is that the risk is

borne entirely by the insurance company. The growth potential of corporate

agency system is immense because we can cross sell several products to our

customers. Insurance agents sell only insurance or mutual fund products.

Innovation of products is also possible under the corporate agency

arrangement.

This model is attractive for the banks as it offers handsome returns (up to

35% in the first year of new business procured) involves very low start-up

costs (investment in the time and licensing of employees) and the business

risk is underwritten entirely by the insurance companies. Insurance products

wrapped around the Bank's loan and deposit products have also been gaining

in popularity due to their mass appeal and simple product design while the

referral model tie-ups have not been that successful. A few banks like

Allahabad Bank and Bank of India have even migrated from the referral

model to the Corporate Agency model.

Traditional vs. Expanded Bancassurance Models:

In some markets, face-to-face contact is preferred, which tends to favour

Bancassurance development. Nevertheless, banks are starting to embrace

direct marketing and Internet banking as tools to distribute insurance

products. New and emerging channels are becoming increasingly

competitive, due to the tangible cost benefits embedded in product pricing or

through the appeal of convenience and innovation.

Finally, 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.

Banks: The focal point :

Traditionally, the banks and financial institutions are the key pillars of

India’s financial system. Public have immense faith in banks. Share of bank

deposits in the total financial assets of households has been steadily rising

(presently at about 40%). Indian Banks have constantly proven their

capability reach the maximum number of households. In India at present

there are total of 65700 branches of commercial banks, each branch serving

an average of 15,000 people. Out of these are 32600 branches are catering to

the needs of rural India and 14400 to semi-urban branches, where insurance

growth has been most buoyant.

(196 exclusive Regional Rural Banks in deep hinterland.) Rural and semi-

urban bank accounts constitute close to 60% in terms of number of accounts,

indicating the number of potential lives that could be covered by insurance

with the frontal involvement of banks.

Further still banks sell a very small portion of the products. This means there

is a huge scope of banks selling insurance products. A study conducted in

US shows that people are willing to buy insurance products from their banks

as they consider banks as a single point of buying all financial products.

Further there is a severe need of insurance for agriculture 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. As

banks already have a strong foothold, it would be hugely beneficial for the

insurance companies.

BANC ASSURANCE PRODUCT PHILOSPHY

Bancassurance: emerging trends, opportunities and

challenges

According to a recent sigma 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.

Bancassurance, the provision of insurance services by banks, is an

established and growing channel for insurance distribution, though 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 in 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.

The outlook for Bancassurance remains positive. While development in

individual markets will continue to depend heavily on each country’s

regulatory and business environment, bancassurers could profit from the

tendency of governments to privatize health care and pension liabilities. 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: Emerging Trends

Though Bancassurance has traditionally targeted the mass market,

bancassurers have begun to finely segment the market, which has resulted in

tailor-made products for each segment. The quest for additional growth and

the desire to market to specific client segments has in turn led some

bancassurers to shift away from using a standardized, single channel sales

approach to adopting a multiple channel distribution strategy. Some

bancassurers are also beginning to focus exclusively on distribution.

Wealth management, pioneered by Assurance has found its way in

Bancassurance alliances. Termed as Private Bancassurance, the concept

combines private banking and investment management services with the

sophisticated use of life assurance as a financial planning structure to

achieve fiscal advantages and security for wealthy investors and their

families

As a medium of selling insurance products, Bancassurance moved from

second position in 2004 to first position in 2006. Worksite marketing which

was in the top position in 2004 fell to fourth position in 2006.

Banks’ insurance sales are high in countries where the products tend to be

relatively simple and are a natural fit with banks’ existing products. The life

insurance products most successfully sold by bancassurers are mostly

simple-deposit-substitutes such as single-premium unit-linked or

capitalization products. In France, financial institutions accounted for 66%

of single premium unit-linked life business in 2005. In general, bancassurers

have been less successful in selling more complex savings products such as

pensions.

Manhattan consulting group in its survey has found positive co-relation between number

of products an institution deal in an the attrition levels. It showed that with increase in

product count, the attrition level tends to decrease sharply as the employee engagement

increases.

Quantum of products Attrition

levels

One Product (interest

bearing account)

27%

One Additional product 20%

2 or more products 17%

Bancassurance: The Challenges

Banks could be more enduring than individual agents when selling

insurance, but Bancassurance relationships are not. Since the opening up of

the insurance sector in ’00, as many as six Bancassurance alliances have

ended in divorce says Economic Times.

If Bancassurance was termed as marriage between banks and insurance, then

the probability of divorces can’t be ruled out. Critics opine that

Bancassurance is a controversial idea, and it gives banks too great a control

over the financial industry. The challenge to sustain such alliances could be

immensely daunting. The difference in regulation, not only across countries

but between banks and insurance industry as well has been cited as the

primary reason. The difference in trade customs, work culture in these

industries is another impediment.

Sales front:

Bank employees are traditionally low on motivation. Lack of sales culture

itself is bigger roadblock than the lack of sales skills in the employees.

Banks are generally used to only product packaged selling and hence selling

insurance products do not seem to fit naturally in their syste

HR issues:

Human Resource Management has experienced some difficulty due to such

alliances in financial industry. Poaching for employees, increased work-load,

additional training, maintaining the motivation level are some issues that has

cropped up quite occasionally. So, before entering into a Bancassurance

alliance, just like any merger, cultural due diligence should be done and

human resource issues should be adequately prioritized.

Public and private divide:

Private sector insurance firms are finding ‘change management’ in the

public sector a major challenge. State-owned banks get a new chairman,

often from another bank, almost every two years, resulting in the distribution

strategy undergoing a complete change. In the private sector, the M&A

activity is one of the causes for change.

In the past, Dena Bank, which had originally partnered Kotak Mahindra

Life, switched loyalty to the public sector Life Insurance Corporation? So

did Allahabad Bank, which had a tie-up with ICICI Prudential Life

Insurance. Punjab National Bank and Vijaya Bank have been forced to drop

their Bancassurance partnerships after they chose to set up an insurance

broking JV.

Group companies dilemma:

The other conflict that most insurers face is when they have a bank within

their own group. Half of the insurance firms in India are part of a financial

group that has a bank. They include ICICI Bank, State Bank of India, ING

Vysya, HDFC, Jammu & Kashmir Bank, and Kotak Mahindra Bank. 

According to Rajesh Relhan, head of Bancassurance, Aviva Life, there is a

fear among banks that at some point in future their insurance partner may

end up cross-selling banking services to their policyholders. Besides,

companies that sell predominantly through agents experience channel

conflict when both agents and banks target the same customer.

Operational Challenges:

The developments in the 21st century, particularly due to increase in non-life

insurance products pose further problems to the Bancassurance alliances:

The shift away from manufacturing to pure distribution requires banks

to better align the incentives of different suppliers with their own.

Increasing sales of non-life products, to the extent those risks are

retained by the banks, require sophisticated products and risk

management.

The sale of non-life products should be weighted against the higher

cost of servicing those policies.

Banks will have to be prepared for possible disruptions to client

relations arising from more frequent non-life insurance claims.

Bancassurance to Banc-sec-urance: A step towards Universal Banking

Securities business seems an automatic extension to banks and insurance.

This integration will be a step further towards universal banking and would

leverage the efficiencies developed by alliance of banks and insurance

companies. It will be for customers who want to get a one-stop shop for all

financial products. So the banks should transform themselves to a

wholesome entity. This has to be integrated with the internet banking and

other IT infrastructure, for e.g. customers should be able to pay insurance

premium, margin money on security transaction via the net-banking facility

and the ATM network.

a. Involvement of Co-operative banks:

Insurance industry has very low penetration rate in India. The market and

scope in rural India is immense and largely untapped. The insurance

companies should actively try to involve co-operative and regional rural

banks amongst their potential alliances along with the big and multinational

banks. These co-operative banks will have greater reach in villages of rural

India and will also operate at economic cost.

b. Minimize conflicts of interest between the bank and the insurer:

A formal and standard agreement between these banks and the insurance

companies should be taken up and drafted by an national regulatory body.

These agreements must have necessary clauses of revenue sharing. In case

of possible conflicts, the bank management and the management of the

insurance company should be able to resolve conflicts amicably. If they are

not solved, there can be a apex body set up by IRDA to solve these types of

issues. This could be done by

Setting up distribution procedures consistent with the manual systems

in most banks.

Establishing credible service level agreements between the bank and

the insurer.

c. I nvolvement of senior bank management and skill development at

the operating level at bank branches:

The Bancassurance alliances should be taken up at the top management

level. Such strategic actions require the senior management support not only

during the decision stage but also at the time of implementation. Their active

participation in the process is very much necessary for the success of such

initiatives. The employee base that would be interacting with the insurance

customers should also be properly trained in order to equip themselves with

the skills required in selling insurance products. The bank employees would

not be aware of these selling skills if proper training is not given.

d. Bancassurance and pension sector:

Pension sector is at the verge of being deregulated. Once this sector is

deregulated, banks would get the dual benefits of managing these huge

pension funds and the opportunity to sell mainly health insurance products

to these pension sector customers. Low cost of collecting pension

contributions is the key element in the success of developing the pension

sector. Money transfer costs in Indian banking are low by international

standards. Portability of pension accounts is a vital requirement which

banks can fulfill in a credible framework.

e. Focus on Group insurance schemes:

Considering the behavior of the Indian customers, group insurance is the

way to go about. As joint accounts or individual accounts of families are

very prominent, we will have to sell these insurance products to these

members of the family as a group.

This would be easier in terms of collection of premiums as 1 or 2 members

of the family would be working and linking insurance premiums from these

savings/ salary accounts would be easier and hassle-free.

f. Targeting frequent travelers (travel insurance):

In India, though some of the airlines have travel insurance, there is no

income from these frequent travelers. As frequent travelers are targeted by

these airlines by giving confessional fares, banks can sell them travel

insurance at some confessional premiums. This would be additional revenue

to the insurance company as well.

g. Tie-ups with residential complex builders (householder’s insurance):

House loans and householder’s insurance can be linked. Banks have huge

exposures to house loans. Now as far as the customers are concerned, they

would prefer householder’s insurance also as a package along with the house

loans. The collection of premiums would also not be a problem. Normally

these customers give post-dated cheques. Therefore premiums can also be

collected in the similar fashion. Some concessions to the customers can be

given like extension of payment period etc. Insurance in business activities

can also be targeted as banks have considerable exposure to corporate loans.

h. National level healthcare programme:

Banks can play a major role in developing a viable healthcare programme in

India. Only 2.5 million people have access to healthcare facilities. There is a

growing demand for healthcare products which banks can distribute (and

facilitate administration). Banks would be the best medium to distribute

health insurance plans and create awareness amongst the people. The

Government of India and its planning commission can leverage this

Bancassurance concept to launch a nation wide healthcare programme.

Bancassurance: Future outlook and Recommendations:

The outlook for Bancassurance remains positive. While development in

individual markets will continue to depend heavily on each country’s

regulatory and business environment, bancassurers could profit from the

tendency of governments to privatize health care and pension liabilities. 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. We recommend

following for sustainable and inclusive growth in Bancassurance alliances.

DETARIFFING -AN INNOVATIVE STRATEGIC TOOL

Detariffing insurance sector — A cover for all

Detariffing means that the pricing of insurance policies are left to the individual insurance companies concerned, to decide and offer, based on their analysis and perception of risk.

The general insurance business in the country was nationalized on January 1, 1973 by the merger and grouping of more than 107 non-life firms into four public sector companies. The IRDA (Insurance Regulatory and Development Authority of India) Act, 1999, paved the way for the entry of private players into the insurance market, till then the preserve of the public sector. There are now 30 insurance companies in the market, of which 14 are in the general insurance business. The market share of the four PSU insurance companies stood at around 77 per cent as on March, with the rest shared by the private companies. But the growth of the private companies has been strident in the recent past.

Detariffing advantages

The IRDA has prepared a road map for detariffing all categories of general insurance business from January 1, 2007. According to the IRDA, the advantages of the detariffing are encouragement to scientific rating and adoption of better risk management practices; elimination of cross-subsidization leading to independent pricing for each line of business; development of innovative practices, and generating customer-friendly options for the policyholders. The proposed detariffing in the general insurance industry would lead to a major shift in the focus of the companies, resulting in higher penetration in the country. Detariffing entails moving from rule-based underwriting systems and practices to risk-based decision-making of the subject matter offered for underwriting. It means that the pricing of insurance policies is left to the individual insurance company, based on an analysis and perception of risk. Competition is expected to whittle down the fat margins that insurers enjoy in fire and engineering insurance, eliminate cross-subsidies and force companies to look at small businesses. How does it matter to consumers? The consumer has not benefited much from the insurance liberalization1 process. Under the market regime, the insurance companies will be forced to

rate risks scientifically. The only way insurance companies can make profit and, thereby, maintain their solvency ratio without going back to their shareholders is by prudent underwriting. The downside is that the balance-sheets of non-life insurance companies could be splashed in red, and buyers with small insurance needs may be ignored. On detariffing, the rating will be based on the risk profile of the customer; it will be in the customers' interest to make his risk profile better. A risk should be judged on its own merits and detariffing will force insurers to scale up their risk-assessment capability and give the underwriting function its due importance in the insurance process. After all, this is the core function of analyzing and pricing transfer of risk. By far the biggest impact of detariffing would be on motor insurance. Here too, good customers would gain. Now, a car-owner with no claims subsidizes another who makes large claims. In the detariff regime, car-owners with a good track record will gain. Barring commercial motor vehicles and medical insurance, premium on assets (that is, fire, engineering and property risk covers) are forecast to drop by at least 40 per cent in a detariffed regime due to intense competition. The premium for trucks and other transport vehicles is expected to go up substantially as the related claims ratio, especially for the third party legal liability segment, has been very high and the premium charged has not been commensurate with the risk exposure. Impact on Insurance Companies

Falling premium income without a concomitant reduction in claims is likely to bring down the profits of insurance companies, their solvency ratios and, consequently, their international ratings which, in turn, would affect their reinsurance placements and underwriting capability. Only the fire and engineering risk business is profitable based on current tariffs, and the profit margins on these segments would now be put to severe strain due to competitive pressures. Conversely, customers must also be on their guard to keep an eye on the financial health of their insurance company to avoid bankruptcy, which is a common phenomenon in the international market. Automobile companies will also be under pressure to reduce repair cost. Role of Professional Intermediaries

World over, the concept of risk management has now become a part of corporate governance. Professional risk managers enable cost-effective

protection through scientific methods of identification, evaluation and management of risk exposures. Faced with daunting choice in selecting the right insurance cover at the right price from the right insurer, consumers will look up to domain experts such as insurance brokers for advice to get the best that the market has to offer. Insurance broker vs. agent

As per IRDA norms, an agent can only represent a single insurance company and market its products while insurance brokers obtain clients the best possible coverage from any insurance company. Insurance brokers are professionals who assess risk, design the optimal insurance policy structure, obtain the best terms, execute insurance contracts and assist in the settlement of claims. Value-addition is provided in the form of innovative tailor-made products. Insurance companies are legally mandated to absorb their service charges within the premium paid by the insured. It will be the insurers who will be under pressure to justify the rates and performance and yet earn profits. The move to detariff is also likely to hasten the process of infusing more capital into the private insurance companies as and when the parliamentary approval is obtained for the Finance Ministry proposal for increasing the foreign direct investment limit from the present 26 per cent to 49 per cent.

De-tariffing of General Insurance Market

Withdrawal of Tariff rates

The Tariff Advisory Committee vide its circular ref. TAC/7/06 dated 4thDecember 2006 decided that the rates, terms, conditions and regulationsapplicable to Fire, Engineering, Motor, Workmen’s Compensation and otherclasses of business currently under tariffs shall be withdrawn effective from 1 January, 2007.The IRDA under section 14(2)(i) of the IRDA Act, 1999 has notified that theTariff general regulations (other than those relating to rating), terms, conditions, clauses, warranties, policy and endorsement wordings applicable to the above mentioned classes of business as well as Marine Hull Insurancebusiness shall continue to be followed until further orders. The rates of premium may be varied subject to compliance with the Guidelines on ‘File and Use’ of General Insurance Products notified.

Motor Third Party Insurance Rates

The motor insurance tariffs will no longer be applicable with effect from 1stJanuary 2007. Accordingly, in exercise of powers conferred by Section 14(2)(i) of the Insurance Regulatory and Development Authority Act, 1999 the Authority has issued the following directions:

Insurers shall provide motor third party liability insurance cover to allvehicles at the rates prescribed by the Authority.Insurers shall not refuse cover for third party risk.Policies in force on 1st January 2007 shall not be cancelled for the purpose of revision of premium rates mid-term.

The Insured shall not be forced to take any additional cover which he is not willing to take.This Circular as well as the prescribed schedule of premium rates shall be prominently displayed on the Notice Board of every underwriting office of the insurer where it can be viewed by the public.

Motor Third Party Insurance Pool

The Authority, after consultation with the Committee constituted underSection 110G of the Insurance Act, has issued a direction under Section 34 of the Insurance Act that all general insurers shall collectively participate in a Pooling arrangement to share in all motor third party insurance businessunderwritten by any of the registered general insurers in accordance with thefollowing provisions :

PARTICIPATION

The participation of General Insurance Corporation of India (GIC) in thePooled business shall be such percentage of the motor business that is ceded to it by all insurers as statutory reinsurance cessions under Section 101A of the Insurance Act. The business remaining after such cession to GIC shall beshared among all the registered general insurers writing motor insurancebusiness in proportion to the gross direct general insurance premium in allclasses of general insurance underwritten by them in that financial year.Underwriting of business: Underwriting offices of insurers shall follow the

underwriting instructions of the General Insurance Council in the matter ofprocedures for underwriting and documentation and accounting and settlement of balances. The business shall be underwritten at rates and terms and conditions of cover as notified by the Authority from time to time. No vehicle owner shall be denied third party insurance cover in respect of his vehicle which is holding a valid permit for use on public roads except on grounds of attempted fraud.Claims processing and settlement: All claims in respect of third party death or injury or physical damage shall be processed for settlement in a speedy and efficient manner in accordance with the instructions of the General Insurance Council. For this purpose, the Council shall adopt a pro-active claims settlement policy adopting the most efficient claims processing practices possible.Administration of the Pooling arrangement: The GIC shall act as the administrator of the pooling arrangement. It will act under the guidance of the General Insurance Council. For this purpose, the Council may establish such Committees of insurers as are necessary to operate the Pooling arrangement and process and settle claims in the most efficient manner.Remuneration: There will be no agency commission or brokerage payable in respect of motor third party insurance business. The underwriting insurer will be paid a reinsurance commission of 10% on the premium ceded by it to all the other insurers and reinsures. The GIC as administrator shall be paid a fee of 2.5% of the total premium on motor third party insurance business inrespect of the business underwritten for the pooled account.Review: The Authority will review the operation of the pooling arrangement and the need for regulation of the premium rates and terms of cover and will issue such directions from time to time as may be considered necessary.

Role of Tariff Advisory Committee

With the abolition of tariffs, the role of the Tariff Advisory Committee willundergo a change. It can perform the following useful functions:

Collection of data on premiums and claims, analysis of such data and dissemination of the results to the insurers.

Report to IRDA on the underwriting health of the market and any aberrations in market behaviors.

Constitution of Expert Groups at the request of the General Insurance Council to look into underwriting issues and recommend necessary action.

Organize training to underwriters at the market level and attend to public grievances on non-availability of insurance and try to

resolve the issues by discussion with insurers.

File and Use Guidelines

These guidelines are issued by the IRDA under the provisions of Section 14(2)(i) of the IRDA Act 1999.(The purpose of the guidelines is to create an orderly procedure to ensure that the products offered by insurers and the rates of premium charged areappropriate and fair as between the insurer and the policyholders)The guidelines apply to all insurance products – both non-tariff and thosewhich were governed by Tariffs prior to 1st January 2007.However, insurers shall not vary the coverage, terms and conditions,warranties, clauses and endorsements under the tariffs until 31st March, 2008.

Underwriting Policy

Filing of products will be accepted by IRDA only after the insurer has filed the underwriting policy as approved by the Board of Directors of the insurer.

The Underwriting policy placed before the Board shall cover important aspects such as :

The underwriting approach of the company in the matter of expectationof underwriting profit. The margins that will be built into the rates of premium to cover acquisition costs, promotional expenses, expenses of management, catastrophe reserve and profit margin and the credit that will be taken for investment income in the design of rates, terms and conditions of cover, and how they will be modified based on the actual operatingratios of the insurer.The list of products that will fall into each of the sub-categories, asprovided in the Guidelines. For this purpose, the products are classified into two broad classifications, namely class rated products and individual ratedproducts. These are further classified into the following 5 sub-categories.

Class rated products

Internal tariff rated Products: These are standard products that can be sold by any of the offices of the insurer with the rates, terms and conditions of cover, including choice of deductible where applicable, as set out in an internal guide tariff.Examples are: Fire insurance with certain sum insured or category of risk limitations, Motor insurance other than fleets, Personal Accident Insurance other than groups, health insurance other than groups, burglaryinsurance, fidelity insurance and so on.

Packaged or customized Products: These are products specially designed for an individual client or class of clients, in terms of scope of cover, basis of insurance, deductibles, rates and terms and conditions of cover.

These will include insurance packages like Homeowner’s Comprehensive or Shopkeeper’s Comprehensive or Banker’s Blanket insurance and so on.

Individual rated products

Individual experience rated products: These are products where the rates, terms and conditions of cover are determined by reference to the requirements of and the actual claims experience of the insured concerned.These will typically be insurances with a high frequency but low intensity of loss occurrence.Examples are: Cargo insurance, Group P.A. or Health, Motor Fleets, Hull insurance and so on.

Exposure rated products: These are products where the rates, terms and conditions of cover are determined by an evaluation of the exposure to loss in respect of the risk concerned, independent of the actual claims experience of that risk.Examples are : Earthquake risk, Public Liability insurance for high hazard occupancies and so on.Insurances of large risks: For the purpose of these guidelines, large risks are

insurances for total sum insured of Rs.2500 crore or more at one location for property insurance, material damage interruption combined; and businessRs.100 crores or more per event for liability insurances.

These are typically insurances that are designed for individual large clients and where the rates, terms and conditions of cover may be determined by reference to the international markets.The delegation of authority to various levels of management for quoting rates and terms and for underwriting. In particular, the Board should appoint the Appointed Actuary

or Financial Adviser or the Chief Financial Officer or any other top management executive who does not have any responsibilityfor business development to act as the moderator of rates and terms that are quoted on individually rated risks.The role and extent of involvement of the Appointed Actuary in review of statistics to determine rates, terms and conditions of cover in respect of internal tariff rated risks and products designed for a class of clients;The internal audit machinery that will be put in place for ensuring quality in underwriting and compliance with the corporate underwriting policy.The procedure for reporting to the Board on the performance of the management in underwriting the business including the forms and frequency of such reports.

Filing of Products

No general insurance product may be sold to any person unless therequirements of the guidelines are complied with in respect of that product.The requirements of IRDA are as follows:

Design and rating of products must always be on sound and prudentunderwriting basis. The contingencies insured under the product shouldbe clear and provide transparent cover which is of value to the insured.All literature relating to the product should be in simple language and easily understandable to the public at large. As far as possible, a similar sequence of presentation may be followed. All technical terms should be clarified in simple language for the benefit of the insured.The insurance product should comply with all the requirements of the Protection of Policyholders’ Interests Regulations, 2002.

The pricing of products should be based on data and with technical justification (e.g. adequate statistical information on the claims experience).The terms and conditions of cover shall be fair between the insurer and the insured. For example, the conditions and warrantees should be reasonable and capable of compliance. The exclusions should not limit cover to an extent that the value of insurance is lost. The cover provided should be of value to the policyholder and should offer needed protection. The policyholder should not be forced to buy covers that he does not need as a pre-condition of being granted cover that he needs. The time allowed for reporting of claims should be reasonable.The policyholder should not be required to do things that are onerous after a claim to maintain his eligibility for protection nor should the Policyholder be prevented from resuming his business expeditiously by the claims process.

Role of Actuary

The Appointed Actuary, in consultation with the underwriters of the insurer,shall determine the requirements for compilation and analysis of data of sums insured, premiums and claims at the stage of product design itself and ensure that such data is captured at the stage of effecting insurance, on claims intimation and on all claims payments.Analysis of data referred to in previous para above should enable review ofrates, loadings and discounts for every rating factor used in the determination of premium rates. While filing the product a certificate by the Appointed Actuary should accompany every product stating the rating factors for which data will be captured and that adequate capacities and capabilities have been put in place for collection, compilation and analysis of such data.

Documents required to be filed

The documents to be filed in respect of every new product or revision of anexisting product in respect of products classified as ‘class rated’ productsabove shall be among others :Statement filing particulars of the product in Form A; Copies of Prospectus and other sales literature relating to the product; Copy of Proposal Form;Copy of Policy Form and copies of the standard endorsements to be used with the policy; One should look for simple easy to understand language. The conditions applicable to the policyholder should be clearly set out and he should be told of the claims registration and quantification procedures. There should also be information on the disputes resolution procedures.And Copy of the Underwriter’s Manual in respect of the product along withthe list of declined risks, if any. Particulars in Form A relate to, among other things, the following:

Full details of the product Coverage, exclusions, special features, if any Delegated authority for underwriting and claims Rates and terms Basis of rating, etc. Certificate by Principal Officer or Designated Officer Certificate by Appointed Actuary Certificate by Lawyer

Certificate by Principal Officer or Designated Officer

This is to confirm that:

The rates, terms and conditions of the above mentioned product filedwith this certificate have been determined in compliance with the IRDA Act, 1999, Insurance Act, 1938, and the Regulations and guidelines issued there under, including the File and Use guidelines.The prospectus, sales literature, policy and endorsement documents, and the rates, terms and conditions of the product have been prepared on a technically sound basis and on terms that are fair between the insurer and the client and are set out in language that is clear and unambiguous.

These documents are also fully in compliance with the underwriting and rating policy approved by the Board of Directors of the insurer. The statements made in the filing Form A are true and correct. The requirements of the revised File and Use guidelines have been fully complied with in respect of this product.

Certificate by Appointed Actuary

This is to confirm that:

I have carefully studied the requirements of the File and Use Guidelines in relation to the design and rating of insurance products. The rates, terms and conditions of the above mentioned product are determined on a technically sound basis and are sustainable on the basis of information and claims experience available in the records of the insurer.An adequate system has been put in place for collection of data on premiums and claims based on every rating factor that will enable review of the rates and terms of cover from time to time. It is planned to review the rates, terms and conditions of cover based on emerging experience (enter periodicity of review). The requirements of the revised File and Use guidelines have been

fully complied with in respect of this product.

Certificate by the Lawyer of the insurer

This is to confirm that:

I have carefully studied the prospectus, sales literature, policy wordings and endorsement wordings relating to the above mentioned product in the light of the IRDA (Protection of Policyholders’ Interests) Regulations 2002, and the File and Use Guidelines.The above mentioned documents are written in clear unambiguous language, and properly explain the nature and scope of cover, the exceptions and limitations, the duties and obligations of the insured and the effect of non-disclosure of material facts.These documents are in compliance with the Policyholders’ ProtectionRegulations and Insurance Advertisements and Disclosure Regulations.

Every insurer shall constitute a Technical Audit Department that will becharged with the responsibility to ensure that all underwriting is done incompliance with these guidelines. Such audit should be done at least onceevery quarter during the year 2007. The reports of the Technical Audit shall be placed before the Board of Directors.

Compliance Officer

Each insurer shall appoint a senior official as “Compliance Officer” to ensure compliance with the requirements of the guidelines by the insurer. The Compliance Officer shall not

be an officer who is also holding responsibility for underwriting.The Compliance Officer shall be responsible, interalia, to monitor the business activities of the insurer and ensure that all products being sold by the insurer are in compliance with the underwriting policy as approved by the Board and also with these guidelines;

Where a risk is co-insured, the primary responsibility to comply with theseguidelines will rest with the leading co-insurer. However, all other co-insurers will remain responsible to satisfy themselves by enquiry that the guidelines have been complied with.

IRDA Approval

Where individual particulars of the product are required to be filed with IRDA, such product shall not be sold unless the required particulars have been filed with IRDA and IRDA has no queries in respect of rates, terms and conditions or the accompanying documents of that product within a period of thirty days from the date of receipt of the filing in its office.Where IRDA raises any query in relation to a product within the stipulatedperiod of thirty days, the insurer shall not offer that product for sale until allqueries have been satisfactorily resolved and IRDA confirms in writing that it has no further queries in respect of that product.

General Insurance Council

The General Insurance Council has been establishing itself as a self regulating organization and has setup its Secretariat at Mumbai. It is expected that the Council will function as an

Industry Association, which will liaise with the Government, IRDA and give the feedback of the industry on various issues to the Regulator in addition to addressing market conduct issues.