Insurance by jjcower


									          The customer is the most important visitor in our premises.
         He is not dependent on us. We depend on him.
         He does not disturb our work. He is the purpose of it.
         He is not a stranger in our business. He is a part of it.
         We do not do him a favour when we serve him.
         He does us a favour by giving us an opportunity to do it.
                                                     -- Mahatma Gandhi


The service sector accounts for more than half of India's GDP: 51.16 per
cent in 1998-99. This sector has gained at the expense of both the
agricultural and industrial sectors through the 1990s. The rise in the service
sector's share in GDP marks a structural shift in the Indian economy and
takes it closer to the fundamentals of a developed economy (in the
developed economies, the industrial and service sectors contribute a major
share in GDP while agriculture accounts for a relatively lower share).

The service sector's share has grown from 43.69 per cent in 1990-91 to
51.16 per cent in 1998-99. In contrast, the industrial sector's share in GDP
has declined from 25.38 per cent to 22.01 per cent in 1990-91 and 1998-99
respectively. The agricultural sector's share has fallen from 30.93 per cent to
26.83 per cent in the respective years.

Some economists caution that if the service sector bypasses the industrial
sector, economic growth can be distorted. They say that service sector

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growth must be supported by proportionate growth of the industrial sector;
otherwise the service sector grown will not be sustainable

Within the services sector, the share of trade, hotels and restaurants
increased from 12.52 per cent in 1990-91 to 15.68 per cent in 1998-99. The
share of transport, storage and communications has grown from 5.26 per
cent to 7.61 per cent in the years under reference. The share of construction
has remained nearly the same during the period while that of financing,
insurance, real estate and business services has risen from 10.22 per cent to
11.44 per cent. The fact that the service sector now accounts for more than
half the GDP probably marks a watershed in the evolution of the Indian

Customer satisfaction predominates the success of an enterprise. In the
service industry where intangibles are marketed, the importance of customer
satisfaction is all the more significant. Service is said to be the sharpest edge
of marketing strategy. Sales and service are the two important wings of
service industry like LIC, ITI and the post office. If one of the wings turns
weak the organization cannot rise because the weaker wing will hamper its
flight. Hence the emphasis should not be concentrated only on the sales but
on service aspects too. Besides a supportive role in promoting sales effort,
servicing influences the institutional image. Prompt and effective service
boosts the morale of the sales force to present a bold form and hold their
prospects. Service encompasses the service rendered to clients before,
during, and after sales. A few examples of services are the Hotel industry,
Airline industry, Insurance industry, Transportation industry, etc.

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Insurance may be described as a social device to reduce or eliminate risk of
loss to life and property. Under the plan of insurance, a large number of
people associate themselves by sharing risks attached to individuals. The
risks, which can be insured against, include fire, the perils of sea, death and
accidents and burglary. Any risk contingent upon these, may be insured
against at a premium commensurate with the risk involved. Thus collective
bearing of risk is insurance.

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General Definition
In the words of John Magee, “Insurance is a plan by themselves which large
number of people associate and transfer to the shoulders of all, risks that
attach to individuals.”

Fundamental Definition
In the words of D.S. Hansell, “Insurance accumulated contributions of all
parties participating in the scheme.”

Contractual Definition
In the words of justice Tindall, “Insurance is a contract in which a sum of
money is paid to the assured as consideration of insurer‟s incurring the risk of
paying a large sum upon a given contingency.”

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Characteristics of Insurance

   1. Sharing of risks
   2. Cooperative device
   3. Evaluation of risk
   4. Payment on happening of a special event
   5. The amount of payment depends on the nature of losses incurred.
   6. The success of insurance business depends on the large number of
      people insured against similar risk.
   7. Insurance is a plan, which spreads the risk and losses of few people
      among a large number of people.
   8. The insurance is a plan in which the insured transfers his risk on the
   9. Insurance is a legal contract which is based upon certain principles of
      insurance which includes utmost good faith, insurable interest,
      contribution, indemnity, causes proxima, subrogation, etc.
   10.The scope of insurance is much wider and extensive.

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Scope or Kinds of Insurance

Broadly, insurance may be classified into the following categories:
i.     Classification on the basis of nature of insurance
ii.    Classification from business point of view
iii. Classification from risk point of view

I. On The Basis Of Nature Of Business
On the basis of nature of business, insurance may be the following types:
      1. Life insurance
      2. Fire insurance
      3. Marine insurance
      4. Social Insurance, and
      5. Miscellaneous insurance.
            a) Vehicle insurance on buses, trucks, motorcycles, etc.
            b) Personal accident insurance
            c) Burglary insurance - (against theft, dacoit etc.)
            d) Legal liability insurance (insurance whereby the assured is liable
               to pay the damages to property or to compensate the loss of
               personal injury or death. This is in the form of fidelity guarantee
               insurance, automobile insurance and machines etc.)
            e) Crop insurance (crops are insured against losses due to heavy
               rain and floods, cyclone, draughts, crop diseases, etc.)
            f) Cattle insurance - (insurance for indemnity against the loss of
               castles from various kinds of diseases) In addition to the above,
               insurance policies are available against crime, medical insurance,

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             bullock cart insurance, jewelry insurance, cycle rickshaw
             insurance, radio-T.V. insurance, etc.

II. Classification from Business Point of View
From business point insurance can be classified into two broad categories:
   1. Life insurance; and
   2. General Insurance
General insurance business refers to fire, marine, and miscellaneous insurance
business whether carried on singly or in combination with one or more of
them but does not include capital redemption business and annuity certain

III. Classification from Risk Point of View
From risk point of view, insurance can be classified into four categories:
   1. Personal insurance
   2. Property insurance
   3. Liability insurance
   4. Fidelity guarantee insurance
Functions of Insurance

Primary Functions
   1. Provide protection: - Insurance cannot check the happening of the risk,
      but can provide for the losses of risk.
   2. Collective bearing of risk: - Insurance is a device to share the financial
      losses of few among many others.
   3. Assessment of risk: - Insurance determine the probable volume of risk
      by evaluating various factors that give rise to risk

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   4. Provide certainty: - Insurance is a device, which helps to change from
      uncertainty to certainty.

Secondary Functions
   1. Prevention of losses: - Insurance cautions businessman and individuals
      to adopt suitable device to prevent unfortunate consequences of risk by
      observing safety instructions.
   2. Small capital to cover large risks: - Insurance relives the businessman
      from security investment, by paying small amount of insurance against
      larger risks and uncertainty.
   3. Contributes towards development of larger industries.

Other Functions
Means of savings and investment.
Origin and Development of Insurance

Insurance in the modern form originated in the Mediterranean during 13/14th
century. The earliest references to insurance have been found in Babylonia,
the Greeks and the Romans. The use of insurance appeared in the account of
North Italian merchant banks who then dominated the international trade in
Europe at that time. Marine insurance is the oldest form of insurance followed
by life insurance and fire insurance. The patterns that have been used in
England followed in other countries also in these kinds of insurance. The
origin and growth of Marine Insurance, life Insurance, Fire Insurance and
miscellaneous insurance are given below:

 1. Marine Insurance

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The oldest and the earliest records of marine policy relates to a Mediterranean
voyage in 1347. In the year 1400, a book written by a merchant of Florence,
indicates premium rates charged for the shipments by sea from London to
Pisa. Marine Insurance spread from Italy to trading routes in other countries of

 Marine Insurance in India
There is evidence that marine insurance was practiced in India some three
thousand years ago. In earlier days travelers by sea and land were exposed to
risk of losing their vessels and merchandise because of piracy on the open
seas. Moreland has maintained that the practice of insurance was quite
common during the rule of Akbar to Aurangzeb, but the nature and coverage
of insurance in this period is not well known. It was the British, insurers who
introduced general insurance in India, in its modern form. The Britishers
opened general insurance in India around the year 1700. The first company,
known as the Sun Insurance Office Ltd. was set up in Calcutta in the year
1710. This followed by several insurance companies of different parts of the
world, in the field of marine insurance. In 1972, the government of India
nationalized the general insurance business by forming GIC.

 2. Life Insurance
The early developments of life insurance were closely linked with that of
marine insurance. The first insurers of life were the marine insurance
underwriters who started issuing life insurance policies on the life of master
and crew of the ship, and the merchants. The early insurance contracts took
the nature of policies for a short period only. The underwriters issued
annuities and pension for a fixed period or for life to provide relief to widows

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on the death of their husbands. The first life insurance policy was issued on
18th June 1583, on the life of William Gibbons for a period of 12 months.

 Life Insurance in India
The British companies started life insurance business in India, by issuing
policies exclusively on the lives of European soldiers and civilians. They
sometimes issued policies on the lives of Indian‟s by charging extra. Different
insurance companies like Bombay Insurance Company LTD. (1793) and
Oriental Life Assurance Company (1818) was formed to issue life assurance
policies in India. Gradually, the first Indian Company named as Bombay
Mutual Life Insurance Society Ltd. was formed in Dec. 1870. By 1971, the
total numbers of companies working in India were 15, out of which 7 were
Indian and the remaining were British companies.
After several changes have been made for the period from 1930 to 1938, the
Government of India passed Insurance Act, 1938. The act still applies to all
kinds of insurance business by instituting necessary amendments from time to

 3. Fire Insurance
Fire insurance has its origin in Germany where it was introduced in
municipalities for providing compensation to owners of the property, in return
for an annual contribution, based on the rent of those premises. The fire
insurance in its present form started after the most disastrous fire in human
history known as the 'Great Fire' in London, which had destroyed several
buildings. It drew the attention of the public and the first fire insurance
commercially transacted in 1667. The Industrial Revolution (1720-1850) gave

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much impetus to fire insurance. The Nineteenth century marked the
development of fire insurance.

 Fire Insurance in India
In India, fire insurance was started during the British regime. The oldest of
these companies include the Sun Insurance Office, Calcutta (1710), London
Assurance and Royal Exchange Assurance (1720), Phoenix Assurance
Company (1782), etc.

4. Miscellaneous Insurance
Due to the increasing demands of the time, different forms of insurance have
been developed. Industrial Revolution of 19th century had facilitated the
development of accidental insurance, theft and dacoit, fidelity insurance, etc.
In 20th century, many types of social insurance started operating, viz.,
unemployment insurance, crop insurance, cattle insurance, etc. This way the
business of insurance developed simultaneously with human and social
development. Today, the use of computers in the field of insurance is
frequently increasing. Insurance becomes an inseparable part of human

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Pre-Liberalization Scenario

Indian History: Time to turn the clock back-and open up insurance

Fifty years ago, India had a bustling, if somewhat chaotic, entirely private
insurance industry. The year after Independence, 209 life Insurance
companies were doing business worth Rs712.76 crore (which grew to an
amazing Rs 295,758 crore in 1995-96). Foreign insurers had a large market
share 40 per cent for general insurance but there were also plenty of Indian
companies, many promoted by business houses like the Tatas and Dalmias.
The first Indian-owned life insurance company, the Bombay Mutual Life
Assurance Society, was set up in 1870 by six friends. It Insured Indian lives
at the normal rates instead of charging a premium of 15 to 20 percent as
foreign insurers did. Its general insurance counterpart, Indian Mercantile
Insurance Company Ltd., opened in Bombay in 1907.

A plethora of insufficiently regulated players was a sure recipe for abuse,
especially because there was no separation between business houses and the

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insurance companies they promoted. The Insurance Act, 1938, introduced
state controls on insurance, including mandatory investments in approved
securities, but regulation remained ineffective. In 1949, Purshottamdas
Thakurdas, chairman of the Oriental Assurance Company, admitted: "We
cannot deny that, today, there is a tendency on the part of insurance
companies in general to make illicit gains. Can we overlook the cutthroat
competition for acquiring business? And still worse is the dishonest practice
of adjusting of accounts." After a 1951 inquiry, the government was
dismayed that companies had high expense and premium rates, were
speculating in shares, and giving loans regardless of security. No wonder
that between 1945 and 1955, 25 insurers went into liquidation and 25
transferred their business to other companies.

This reckless record stoked the pro-nationalization fires. The 1956 life
insurance Nationalization was a top-secret intrigue; for fear that
unscrupulous insurers would siphon funds off if warned. The government
resolved to first take over the management of life insurance companies by
ordinance, then their ownership. The then finance minister C.D. Deshmukh
later wrote: 'Seth Ramakrishna Dalmia‟s extraction of Rs.225 crore
(misappropriation by the Bharat Insurance Company) was a heaven-sent
opportunity. We were ready to nationalize, with every detail worked out."
On 19 January 1956, the news was announced on the radio, though even the
director- general of AIR was not shown the speech. The next morning, at 9
am, while executives were frantically seeking details over the trunk
telephone, says Deshmukh in his autobiography, our officers walked into the
respective insurance offices, showed their authority and then took over the
business. I believe this will be regarded as one of the best kept secrets of the

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Government of India in all times to come." The ordinance transferred control
of 245 insurers to the government. LIC, established eight months later, took
over their ownership. General Insurance had its turn in 1972, when 107
insurers were amalgamated into four companies headquartered in the four
metros, with GIC as a holding company. Nationalization brought some
benefits. Insurance spread from an urban-oriented, high-end business to a
mass one. Today, 48 per cent Of LIC's new business is rural. Net premium
income in general insurance grew from Rs222 crore in 1973 to Rs 5,956
crore in 1995- 96. Yet, rigid controls hamper operational flexibility and
initiative so both customers service and work culture today are dismal. The
frontier spirit of the early insurers has been lost. Insurance companies have
also been timid in managing their investment portfolios. Competition
between the four GIC subsidiaries remains illusory. If Nationalization ever
had a purpose, it has been served. It's now time to turn back the clock in
some respects, and open up the sector again. The government already
intends to insist on large minimum capital requirements, a strong regulator,
and a healthy distance between insurers and industry. To ensure that history
doesn't repeat itself.

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Three Questions about Insurance Liberalization

The decision to allow private companies to sell insurance products in India
rests with the lawmakers in Parliament. Opening up the insurance sector
requires crossing at least two legislative hurdles. These are the passage of
the Insurance Regulatory Authority (IRA) Bill, which will make IRA a
statutory regulatory body, and amending the LIC and GIC Acts, which will
end their respective monopolies. In 1994 the government appointed a
committee on insurance sector reforms (which is known as the Malhotra
Committee) which recommended that insurance business be opened up to
private players and laid down several guidelines for orchestrating the
transition. In particular, we do not address many other related questions such
as whether foreign (and not just private) players should be allowed, what cap
should there be on foreign equity ownership, whether banks and other
financial institutions should be allowed to operate in the insurance business,
whether firms should be allowed to sell both life and non-life insurance, and
so on. The three questions that we address are:

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1) Why allow entry to private players?

The choice between public and private might amount to choosing between
the lesser of two evils. An insurance contract is a "promise to pay"
contingent on a specified event. In the case of insurance and banking,
smooth functioning of business depends heavily on the continuation of the
trust and confidence that people place on the solvency of these financial
institutions. Insurance products are of little value to consumers if they
cannot trust the company to keep its promise. Furthermore, banking and
insurance sectors are vulnerable to the "bank run" syndrome, wherein even
one insolvency can trigger panic among consumers leading to a widespread
and complete breakdown. This implies the need for a public regulator, and
not public provision of insurance. Indeed in India, insurance was in the
private sector for a long time prior to independence. The Life Insurance
Corporation of India (LIC) was formed in 1956, when the Government of
India brought together over two hundred odd private life insurers and
provident societies, under one nationalized monopoly corporation, in the
wake of several bankruptcies and malpractice‟s'. Another important
justification for Nationalization was to raise the much-needed funds for
rapid industrialization and self-reliance in heavy industries, especially since
the country had chosen the path of state planning for development. Insurance
provided the means to mobilize household savings on a large scale. LIC's
stated mission was of mobilizing savings for the development of the country
and also conducting business in the spirit of

   1. A comprehensive historical account of Life insurance business in
      India and LIC in particular is provided in LIC (1970) and LIC (1991)

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   2. This latter emphasis on trusteeship was relevant then, in light of major
      insolvencies and fraudulent practices of so many private insurance
      companies prior to 1956.

    Trusteeship

The non-life insurance business was nationalized in 1972 with the formation
of General Insurance Corporation (GIC). Thus the fact that insurance is a
state monopoly in India is an artifact of recent history the rationale for which
needs to be examined in the context of liberalization of the financial sector.
If traditional infrastructure and "semi-public goods" industries such as
banking, airlines, telecom, power, and even postal services (courier) have
significant, private sector presence, continuing a state monopoly in provision
of insurance is indefensible. This is not to deny that there are some valid
grounds for being cautious about private sector entry. Some of these
concerns are:

   a) That there would be a tendency of private companies to "skim" the
      markets; thus private players would concentrate on the lucrative
      mainly urban segment leaving the unprofitable segment to the
      incumbent LIC.

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   b) That without adequate regulation, the funds generated may not be
      deployed in sectors (which yield long-term social benefits), such as
      infrastructure and public goods; similar without regulation, private
      firms may renege on their social sector investment obligations.
      Meeting these concerns requires a strong regulatory body. Another
      commonly expressed fear is that there would be massive job losses in
      the industry as a whole due to computerization. This however does not
      seem to be corroborated by the countries' experience'.

Moreover, apart from consideration based on theoretical principles alone,
there is sufficient evidence that suggests that introduction of private players
in insurance can only lead to greater benefits to consumers. This can be seen
from the fact that the spread in insurance in India is low compared to
international benchmarks. The two convention measures of the spread of
insurance are penetration and density. The former measure (premiums per
unit) of GDP, and the latter, premiums per capita. Less than 7% of the,
population in India has life insurance cover. India has the biggest life
insurance sector in the world if we go by the number of policies sold, but the
number of policies sold per 10 persons is very low.

The demand for insurance is likely to increase with rising per-capita
incomes, rising literacy rates and increase of the service sector, as has been
seen from the example of several other developing countries. In fact,
opening up of the insurance sector is an integral part of the liberalization
process being pursued by many developing countries. There are several
other factors that call for private sector presence. Firstly, a state monopoly
has little incentive to innovate or offer a wider range of products. This can
be seen by a lack of certain products from LlC's portfolio, and lack of

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extensive risk categorization in several GIC products, such as health
insurance. In fact, it seems reasonable to conclude that many people buy life
insurance just for the tax benefits, since almost 35 per cent of the life
insurance business is in March, the month of financial closing. This suggests
that insurance needs to be sold more vigorously. More competition in this
business will spur firms to offer several new products, and more complex
and extensive risk categorization. The system of selling insurance through
commission agents needs a better incentive structure, which a state
monopoly tends to stifle. For example LIC pays out only 5 per cent of its
income as commissions, whereas this share in Singapore is 16 per cent, and
in Malaysia it is close to 20 percent.

Finally, private sector entry into insurance might be simply a fiscal
necessity. Since large scale funds form long term contractual savings need to
be mobilized, especially for investment in infrastructures the option of not
having more (private) players in the insurance sector is too costly.

2) What should be the market structure?

In this section, we analyze the question whether there should be unlimited
private entry insurance markets or whether only a few players are allowed to

This question hinges around the issue of "adverse selection" described
below. Individuals buying an insurance contract pay a price (called the
"premium") to the insurance company and the insurance company in turn
provides compensation if a specified event occurs. By making such
contractual arrangements with a large number of individuals and

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organizations the insurance company can spread the risk. This gives
insurance its "social" character in the sense that it entails pooling of
individual risks. The price of insurance i.e., the premium is based on average
risk. This premium is too high for people who perceive themselves to be in a
low risk category. If the insurer cannot accurately determine the risk
category of every customer and prices insurance on the basis of average risk,
he stands to lose all the low risk customers. This in turn increases the
average risk, which means premium have to be revised upwards, which in
turn drives away even more customers and so on. This is known as the
problem of "adverse selection". Adverse selection problem arises when a
seller of insurance cannot distinguish between the buyer's type i.e., whether
the buyer is a low risk or a high type. In the extreme case, it may lead to the
complete breakdown of insurance market.

Another phenomenon, the problem of "moral hazard" in selling insurance,
arises when the unobservable action of buyer aggravates the risk for which
insurance is bought. For example, when an insured car driver exercises less
caution in driving, compared to how he would have driven in the absence of
insurance, it exemplifies moral hazard.

Given these problems unbridled, competition among large number of firms
is considered detrimental for the insurance industry. Furthermore, even the
limited competition in insurance needs to be regulated. Insurance companies
can differentiate among various risk types if there is a wide difference in risk
profile of the buyers insuring against the strong insurers. It also called for
keeping life insurance separate from the general insurance. It suggested the
regulation of insurance intermediaries by IRA and the introduction of
brokers for better „professionalisation'.

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3) The Role of IRA

   (a)      the protection of consumers' interest,
   (b)      to ensure financial soundness of the insurance industry and
   (c)      To ensure healthy growth of the insurance market.

These objectives must be achieved with minimum government involvement
and cost. IRA's functioning can be financed by levying a small fee on the
premium income of the insurers thus putting zero cost on the government
and giving itself autonomy. Protection of Customer Interests

IRA's first brief is to protect consumer interests. This means ensuring proper
disclosure, keeping prices affordable but also insisting on some mandatory
products, and most importantly making sure that consumers get paid by

Ensuring proper disclosure is called Disclosure Regulation. Insurance
contracts are basically contingency agreements. They can be full of
inscrutable jargon and escape clauses. An average consumer is likely to be
confused by them. IRA must require insurers to frame transparent contracts.
Consumers should not have to wake up to unpleasant surprises, finding that
certain contingencies are not covered.

The IRA also has to ensure that prices of products stay reasonable and
certain mandatory products are sold. The job of keeping prices reasonable is
relatively easy, since competition among insurers will not allow any one
company to charge exorbitant rates. The danger often is that prices may be
too low and might take the insurer dangerously close to bankruptcy. As for
mandatory products, those that involve common and well-known risks,

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certain standardization can be enforced. Furthermore, IRA can insist that for
such products the prices also be standardized.

From the consumer's point of view the most important function of IRA is
ensuring claim settlement. Quick settlement without unnecessary litigation
should be the norm. For example, in motor vehicle insurance, adopting no-
fault principle can speed up many settlements. Currently, LIC in India has a
claims settlement ratio of 97%, an impressive number by any standards.
However, it hides the fact that this settlement is plagued by long delays,
which reduce the value of settlement itself.

If consumers have a complaint against an insurer they can go to a body
formed by association of insurers. The decision of such a body would be
binding on the insurers, but not on the complainant. If complainants are not
satisfied, they can go to court. Some countries such as Singapore have such a
system in place. This system offers a first and quicker choice of settling out
of court. IRA can encourage the insurers to have such a grievance redressal
mechanism. This system can serve the function of adjudication, arbitration
and conciliation.

The second area of IRA's activity concerns monitoring insurer behavior to
ensure fairness. It is especially here that IRA's choice of being a bloodhound
or a watchdog would have different implications. We think that an initial
tough stance should give way to a more forbearing and prudential approach
in regulating insurance firms. When the industry has a few firms there is
some chance of collusion. IRA must be alert to collusive tendencies and
make sure that prices charged remain reasonable.            However, some
cooperation among the insurance companies could be considered desirable.

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This is especially in lines where claim experience of any one company is not
sufficient to make accurate forecasts. Collusion among companies on
information sharing and rate setting is considered "fair'.

IRA must have severe penalties in case of fraud or mismanagement. Since
insurance business involves managing trust money, in some countries the
appointment of senior managers and "key personnel" has to be approved by
the insurance regulatory agency. Ensuring Solvency of Insurers

There are basically four ways of ensuring enough solvencies. First is the
policy of a price floor. Second is the restriction on capital and reserves, i.e.,
on what kind of investments and speculative activities firms can make. Third
is putting in place entry barriers to restrict the number of competitors. Fourth
is the creation of an industry financed guarantee fund to bail out firms hit by
unexpectedly high liabilities. Entry restrictions of the IRA are implemented
through a licensing requirement, which involves capital adequacy among
other things. Since there are economies of scale and scope in insurance
operations it might be better to have only a few large firms. There is
however no magic number regarding the optimal number of firms.
Restricting competition provides a scope for higher profits to the companies
thereby strengthening their solvency position.

After qualifying, the entrants are continuously subjected to restrictions on
reserves and investments, which ensure ongoing solvency. Additionally, a
guarantee fund, created by mandatory contributions from all insurance
companies is used to bail out any insurance company, which might be in
financial trouble. This guarantee fund does not imply that firms can charge
whatever they wish to their consumers. All insurance companies would have

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an incentive to monitor the activities of their rival peer firms. This is because
insolvency of any insurance company would entail a price, which all the
insurance companies would have to shoulder. Peer review of accounts can
also be institutionalized.

IRA can have several ways for early detection of a potential insolvency. For
example, in the USA there is an Insurance Regulatory Information System
(IRIS) that regularly computes certain key financial ratios from financial
statements of firms. If some of these ratios fall outside given limits the
company is asked to take corrective action.       Insolvency can also arise out
of reinsurers abandoning insurance companies in the lurch, as witnessed in
the USA in 1980's. Reinsurance is a bigger business dominated by large
international reinsurers. Such litigation between reinsurer and insurance
companies involves cross boundary legalities and can drag on for years. IRA
must evolve a set of operational guidelines to deal with reinsurance matters.

    Overseeing Insurance Intermediaries

Insurance intermediaries such as agents, brokers, consultants and surveyors
are also IRA‟s jurisdiction. IRA has to evolve guidelines on the entry and
functioning of such intermediaries. Licensing of agents and brokers should
be required to check against their indulging in activities such as twisting,
rebating, fraudulent practices, and misappropriation of funds. IRA can also
consider allowing banks to act as agents (as opposed to underwriters) of
insurers in mass base types of products. Given their wide network of
branches and their customer base, the banks can access this market for
insurance products and also earn commission income. The incremental cost
of providing such insurance products would be much lower. Promoting

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Growth in the Insurance Industry a society experiences many benefits from
the spread of insurance business. Insurance contributes to economic growth
by enabling people to undertake risky but productive activity. In the past,
growth of trade has been facilitated by the development of insurance
services. One only needs to look at the history of insurance to see how
evolution of insurance helped trade flows along various trade routes.
Promotion of insurance also provides for long-term funds, which are utilized
to fund big infrastructure projects. These projects typically have positive
externalities, which benefit society at large. IRA can ensure growth of
insurance business with better education and protection to consumers, and
by making the insurance business a level playing field. They can also
support Indian insurance companies in the international field.

IRA thus has to frame the rules, design procedures for enforcement and also
make operational guidelines. All this with virtually no relevant historical
data makes the task very difficult. An initial conservative approach (the
bloodhound) is justified since there is no prior experience to fall back on,
and it would be prudent to err by regulating more‟ rather than less. As
experience accumulates, the IRA can relax its initial harsh stance and adopt
a more accommodating stance (the watchdog). Regulation is always an
evolutionary process and experience constantly has to feed into policy
making. Care must be taken so that this process does not slow down and
cause regulatory lags.

Repeat IRA can also consider allowing banks to act as agents (as opposed to
underwriters of insurers in mass base types of products. Given there wide
network of branches their customer base, the banks can access this market
for insurance products and also commission income. The incremental cost of

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providing such insurance products would be much lower. Such a move of
allowing banks to operate insurance business and, versa is consistent with a
worldwide trend of greater integration of banking and insurance.

Post Liberalization Scenario

While no aspect of the reform process in India has gone smoothly since its
inception in 1991, no individual initiative has stirred the proverbial hornets'
nest as much as the proposal to liberalize the country's insurance industry.
However, the political debate that followed the submission of the report by
the Malhotra Committee has presumably come to an end with the ratification
of the Insurance Regulatory Authority (IRA) Bill both by the central Cabinet
and the standing committee on finance. This section traces the evolution of
the life insurance companies in the US from firms underwriting plain vanilla
insurance contracts to those selling sophisticated investment contracts
bundled with insurance products. In this context, it brings into focus the
importance of portfolio management in the insurance business and the nature
and impact of portfolio related regulations on the asset quality of the
insurance companies. It also provides a rationale for the increased
autornatisation of insurance companies, and the increased emphasis on
agent-independent marketing strategies for their products. If politicized,
regulations have potential to adversely affect the pricing of risks, especially
in the non-life industry, and hence the viability of the insurance companies.

                                                                     Page 26
Finally, the backdrop of US experience provides some pointers for Indian

The insurance sector continues to defy and stall the course of financial
reforms in India. It continues to be dominated by the two giants, Life
Insurance Corporation of India (LIC) and the General Insurance Corporation
of India (GIC), and is marked by the absence of a credible regulatory

The first sign of government concern about the state of the insurance
industry was revealed in the early nineties, when an expert committee was
set up under the chairmanship of late R.N.Malhotra. The Malhotra
Committee, which submitted its report in January 1994, made some far--
reaching recommendations, which, if implemented, could change the struc-
ture of the insurance industry. The Committee urged the insurance compa-
nies to abstain from indiscriminate recruitment of agents, and stressed on the
desirability of better training facilities, and a closer link between the
emolument of the agents and the management and the quantity and quality
of business growth. It also emphasized the need for a more dynamic man-
agement of the portfolios of these companies, and proposed that a greater
fraction of the funds available with the insurance companies be invested in

                                                                    Page 27
non-government securities. But, most importantly, the Committee recom-
mended that the insurance industry be opened up to private firms, subject to
the conditions that a private insurer should have a minimum paid up capital
of Rs. 100 crore, and that the promoter's stake in the otherwise widely held
company should not be less than 26 per cent and not more than 40 per cent.
Finally, the Committee proposed that the liberalized insurance industry be
regulated by an autonomous and financially independent regulatory author-
ity like the Securities and Exchange Board of India (SEBI).

Subsequent to the submission of its report by the Malhotra Committee, there
were several abortive attempts to introduce the Insurance Regulatory
Authority (IRA) Bill in the Parliament. It is evident that there was broad
support in favour of liberalization of the industry, and that the bone of
contention was essentially the stake that foreign entities were to be allowed
in the Indian insurance companies. In November 1998, the central Cabinet
approved the Bill which envisaged a ceiling of 40 per cent for non-Indian
stakeholders: 26 per cent for foreign collaborators of Indian promoters, and
14 per cent for nonresident Indians (NRI‟s), overseas corporate bodies
(OCB‟s) and foreign institutional investors (FII‟s). However, in view of the
widespread resentment about the 40 per cent ceiling among political parties,
the Bill was referred to him, standing committee on finance. The committee
has since recommended at each private company be allowed to enter only
one of the three areas of business-life insurance, general or non-life
insurance, and reinsuranced that the overall ceiling for foreign stakeholders
in these companies be reduced to 26 per cent from the proposed 40 per cent.
The committee has also recommended that the minimum paid up share

                                                                   Page 28
capital of the new insurance companies be raised to Rs. 200 crore, double
the amount proposed by the Malhotra Committee.

    Economic Rationale

The insurance industry is a key component of the financial infrastructure of
an economy, and its viability and strengths have far reaching consequences
for not only its money and capital markets,' but also for its real sector. For
example, if households are unable to hedge their potential losses of wealth,
assets and labour and non-labour endowments with insurance contracts,
many or all of them will have to save much more to provide for events that
might occur in the future, events that would be inimical to their interests. If a
significant proportion of the households behave in such a fashion, the
growth of demand for industrial products would be adversely affected.
Similarly, if firms are unable to hedge against "bad" events like fire and the-
job injury of a large number of labourers, the expected payoffs from a
number of their projects, after factoring in the expected losses on account
such "bad" events, might be negative. In such an event, the private invest-
ment would be adversely affected, and certain potentially hazardous
activities like mining and freight transfers might not attract any private
investment. It is not surprising, therefore, that economists have long argued
that insurance facility is necessary to ensure the completeness of a market.

                                                                      Page 29
    Organizational Structures and their Implications

Insurance companies can be broadly divided into four categories: stock
companies,    mutual   companies,    reciprocal   exchanges,    and    Llyod's
companies. The former two are the dominant forms of organizational
structures in the US insurance industry. A stock company is one that initially
raises capital by issue of shares, like a bank or a non-bank financial
institution, and subsequently generates more funds for investment by selling
insurance contracts to policyholders. In other words, there are three sets of
stakeholders in a stock insurance company, namely, the shareholders,
managers and the policyholders. A mutual company, on the other hand,
raises funds only by selling policies such that the policyholders are also
partners of the companies. Hence, a mutual company has only two groups of
stakeholders, namely, the policyholder cum part owners and the managers.

    The Role of Portfolio Management

Portfolio and asset-liability management are important for both life and
property-liability insurance companies. However, the latter face the problem

                                                                      Page 30
that their liabilities are far more unpredictable than the liabilities of the life
insurance companies.

For example, given a stable mortality table and other historical data, it is
easier to predict the approximate number of death claims, than the
approximate number of claims on account of car accidents and fire. As a
consequence of such uncertainty, and perhaps also moral hazard stemming
from reinsurance facilities, asset-liability management of property-liability
companies in the US has left much to be desired. Hence, a meaningful
discussion about the changing nature and role of portfolio management for
US's insurance companies is possible only in the context of the experience of
its life insurance companies.

Although the role of an insurance policy is significantly different from that
of investments, economic agents like households have increasingly viewed
insurance contracts as a part of their investment portfolio. This change in
perception has not affected much the status of the property liability or non-
life insurance policies, which are still viewed as plain vanilla insurance
contracts that can be used to hedge against unforeseen calamities.

As a consequence of these changes, which brought about a bundling of
insurance and investment products, portfolio management of life insurance
companies today is similar to that of a bank or non-bank financial company.
They have to, (i) look out for arbitrage opportunities in the market place
both across markets and over time, (ii) use value-at-risk modeling to ensure
that their reserves are adequate to absorb market related shocks, (iii) ensure
that there is no mismatch of duration between their assets and liabilities, and
(iv) ensure that the risk-return trade-off of their portfolios remain at an

                                                                       Page 31
acceptable level. During the 1980s, the life insurance companies gradually
reduced the duration of the fixed income securities in their portfolio, thereby
ensuring greater liquidity for their assets. They also moved away from long-
term and privately placed debt instruments and increasingly invested in
exchange traded financial paper, including mortgage-backed securities.
However, while the increased liquidity of their portfolios reduced their risk
profiles, they also required active management of these portfolios in
accordance with the changing liability structures and market conditions.
Today, while life insurance companies compete for market share by
changing the nature and structure of their products, their viability is critically
dependent on the quality of their portfolio and asset liability management.

    Implications of Cost Management

As is the case with most competitive industries, profitability and viability of
a firm in the insurance industry significantly depends on its market share,
and its ability to minimize its cost of operations without compromising the
quality of its service and risk management. Perhaps the easiest way to reduce
cost is to reduce the cost of processing and underwriting policy applications.
In the US, the average cost of processing and underwriting an application
has been estimated to be in excess of USD 250. As a consequence, insurance
companies have increasingly resorted to replacement of personnel by
computer-based "expert" systems which apply the vetting models used by
the companies' (human) experts to a wide range of problems."

                                                                       Page 32
However, the US companies have found it more difficult to reduce their cost
of marketing and distribution. A significant part-of these expenses accrue on
account of the commissions paid to exclusive and/or independent agents, the
usual rate of commission being 15-30 per cent, depending on the line of

In order to mitigate the cost-related problem, insurance companies in the US
are increasingly looking at alternative ways to market and distribute their
products. Direct marketing has gained popularity, as has marketing by way
of selling insurance products through other financial organisations like banks
and brokers. These actions might lead to significant reduction of cost of
operations of insurance companies, but it is not obvious as yet as to how the
small policyholders will fare in the absence of powerful intermediaries with
bargaining power vis-à-vis the insurance companies.

    The Impact of Regulation

While portfolio and cost management are important determinants of the
viability of insurance companies, the US experience indicates that the nature
and extent of regulation too plays a key role in determining the viability of
these companies. The insurance industry in the US has historically been one
of the most regulated financial industries. The nature of regulation of life
insurance companies, however, has differed significantly from the nature of
regulation of property-liability companies. Regulation of the former has
typically emphasized asset quality, while the regulation of the latter has
largely concerned itself with policyholder's "welfare."

                                                                    Page 33
Further, the non-life industry has suffered significantly as a consequence of
changing legal ethos. In the recent past, the US courts have retroactively
granted citizen-policyholders coverage against hazards, like those from use
of asbestos, that were not factored into the actual insurance contract. As a
consequence, the premia actually earned by the property liability companies
fell short of the "fair" prices of these contracts, and hence these companies
had to bear huge losses on account of these policies. However, while politics
and changing ethos might together have dealt an unfair blow to the non-life
insurance   companies,     the   importance    of   regulation   cannot    be
overemphasized. The cyclical nature of the firms‟ profitability requires that
they be monitored/regulated such that they are not in default during the
unfavorable phases of the cycle. The property-liability cycle is typically
initiated by an exogenous shock which increases the industry's profits. The
higher profits enable the companies to underwrite more policies at a lower
price. During this phase, the insurance market is believed to be "soft." The
decrease in price during the soft phase, in turn, reduces the profitability of
the companies, and initiates the downturn in the cycle leading to the "hard"
phase. Hard markets are characterized by higher prices and reduced
volumes. Once the higher prices restore the industry's profitability, the
market softens again and the cycle starts again.

    Summing up: Pointers for Indian Policymakers

A significant part of the activities of the insurance industry of an economy
entails mobilization of domestic savings and its subsequent disbursal to
investors. At the same time, however, they guarantee minimum payoffs to

                                                                    Page 34
both individuals and companies by way of the put-like insurance contracts.
As discussed above, these contracts can significantly affect behavior of
economic agents and, in general, are perceived to lead to better outcomes for

For example, it is not difficult to imagine the closure of a company that had
not made provisions for damages on account of (say) product related liability
because it had believed that it was protected from such damages by an
insurance policy." The consequent insolvency of the company can affect a
number of banks and other companies adversely, and a systemic problem
will be precipitated. In other words, the insurance industry in any country
should be subjected to regulations that are at least as stringent as, and
perhaps more stringent than those governing the activities of other financial

It is evident from the above discussion that decisions about what constitutes
acceptable portfolio quality, and the extent of price regulation hold the key
to insurance regulation in a post-liberalization insurance market. As the US
experience suggests, insurance companies are usually subjected to stringent
asset quality norms. Indeed, while a part of their portfolio might comprise of
equity, mortgages and other relatively risky securities, much of their
portfolio is made up of bonds and. liquid (and highly rated) mortgage backed
securities. An Indian insurance company, on ,the other hand, is constrained
by the fact that the market for fixed income securities is very illiquid such
that only gilts and AAA and AA+ rated corporate bonds have liquid
markets. At the same time, absence of a market for liquid mortgage backed
securities denies these companies the opportunity to enhance the yield on
their investment without significantly adding to portfolio risk. This might

                                                                    Page 35
not pose a problem in the absence of competition, especially if the
government helps to increase the returns to the policyholders by way of tax
breaks, but might pose a serious problem if liberalization leads to "price"
competition among a large number of insurance companies

Subsequent to liberalization, the Indian insurance industry might also be at
the receiving end of regulations governing insurance prices /premia.
Specifically, there might be highly politicized interventions in the markets
for workers' compensation and medical insurance. The government might
also be under pressure to "regulate" the prices of infrastructure related lines
like freight and marine insurance. In principle, the risks associated with such
liability insurance policies may be hedged by way of reinsurance. But if the
reinsurers price the risks' accurately and the Indian insurance companies are
forced to under price the risks, the margins of the insurance companies will
be affected adversely, thereby reducing their long term viability. In view of
these political and financial realities, it might be better to subsidize the
policyholders of politically sensitive lines directly or indirectly through tax
benefits, if at all, rather than distort the pricing of the risks themselves.

At the end of the day, it has to be realized that while competition enhances
the efficiency of market participants, the process of "creative destruction,"
which ensures the sustenance and enhancement of efficiency, is not strictly
applicable to the financial markets. Hence, while exit is perhaps the most
efficient option for insolvent firms in many markets, insolvency of financial
intermediaries‟ calls for government action and usually affects the
governments' budgetary positions adversely. At the same time, other things
remaining the same, the risk of insolvency is perhaps higher for insurance
companies than for other financial intermediaries because of the option-like

                                                                         Page 36
nature of their liabilities. Therefore, competition in the insurance industry
has to be tempered with appropriate prudential norms, regular monitoring
and other regulations, thereby making the robustness of the industry
critically dependent on the efficiency of and regulatory powers accorded to
the proposed Insurance Regulatory Authority.

    Effect Of Reforms

A number of concerns are being expressed regarding the opening up of the
Insurance sector. But most of them seem to be unfounded. The national
interest lies in increasing the penetration of insurance products, increasing
the retention of premia in India and mobilizing resources for infrastructure
needs. Competition means that players aggressively target potential
customers and this will increase the penetration of insurance.

The retention of premia in India has become a sensitive issue with some
people who demand that the present outgo of around Rs.10 bn by the way of
reinsurance be stopped. These people in the name of safeguarding the
national interest are in fact compromising the interests of the nation. If no
reinsurance is taken it implies that the insurance company is underwriting
the entire risk itself. Thus a single earthquake or a cyclone can wipe out the
entire company.

One recent example is the calamity that struck the state of Gujarat wherein
total claims stood at Rs.120 bn. Only Rs.29 bn was settled locally with
overseas reinsurers settling the balance.

                                                                    Page 37
The Insurance sector is a service industry and international companies will
help build local professionals with world class expertise by introducing the
best global practices. Competition will also develop a better understanding
of consumer requirements leading to more customized products apt for the
market place. Besides it would also improve the tertiary sector
tremendously. Development of the tertiary sector would include new
avenues for actuaries, accountants, stockbrokers and others.

Thus it is seen that the apprehensions being expressed do not hold much
water and the opening up of the Indian insurance sector would bring about
sweeping changes not only for the consumers but the economy as a whole.

    The Current Scenario: Effects on Policy Holders

The primary reasons for buying an insurance policy, whether life or non-life
is to protect us from vagaries of life. We do not invest in insurance for
returns; rather we invest in it for regrettable necessities. Though a large
proportion of policies available in the country provide for returns, but
nobody is looking for returns to the inflation rate.

Some people do look for tax concessions, but lots of things have changed
now. First, tax rates are not as high as they used to be. Secondly,
concessions are still limited to a 20% tax shield. Finally other tax saving
schemes, like public provident fund offers better returns.

In India insurance is sold and not bought. Life Insurance Corporation has
nearly eighty products, but investors know only about a handful. That‟s

                                                                  Page 38
because the agents of LIC push policies with the highest premium to pocket
a higher premium.

Same is the case with General insurance. Companies offering General
insurance products-like medical, housing, motor and industrial insurance-
have more than 150 products to sell. But awareness is even lower than life
insurance products. It becomes obvious that GIC lacks the marketing results.

    Change

Whether public sector companies like it or not change is the around the
corner. General insurance sector will soon be opened up to private and
foreign competition. The potential for the new entrants is immense; life and
non-life premiums add up to around 2% of the GDP, where as the global
average stands at 8%. Indians as such have a high savings rate and bridging
the existing gap points at immense potential.

         - What does this mean for the consumer?

Insurance companies will introduce more term policies. These policies
provide protection for a specified time period, and do not offer any returns.
These will cover simple requirements of the insurance for the investor. In
effect a term policy translates into low premium outgo, which frees the
capital for investment into other investment vehicles, which offer better
returns. Currently term policies constitute only1% of the total number of
policies issued by LIC, while the global average is 15-20 per cent. Apart

                                                                   Page 39
from the plain vanilla policies, new entrants will also offer consumers a
choice of products with low premiums.

Endowment policies will change too. The insurer, in line with his precise
risk appetite, will be able to invest in a variety of indices or sector specific
where in the returns would be higher. Instead of current fixed returns
schemes insurance companies will issue unit linked schemes, indexed funds,
or even real estate funds. Another opportunity is offered by a pension
contract. Here the options offered could be indexed annuity, immediate
annuity or a deferred annuity. The scope of new products is also immense in
the non-life segment. Companies would offer products for niche segment,
like disability products, workers compensation insurance, renter‟s coverage
and employment practices liability insurance. The general insurance industry
is expected to grow at the rate of 25% per annum. Scared of new entries in
the insurance sector, GIC has started offering new policies like Raj
Rajeshwari. It covers disability from accidents, the accidental death of the
spouse and legal expenses resulting from the divorce. At present some of the
good policies offered to consumer with their respective benefits are.

PRODUCTS                                BENEFITS
Pure term insurance (pure life without Very low premiums; effective risk
insurance policy).                      coverage.
Disability policy                       Covers disability to a longer tenure to
                                        life time disability
First to die policy                     Beneficial for a couple; low premium

                                                                     Page 40
Replacement policy                     Saves the customer the trouble of
                                       making claims and repurchasing the
Flexibility in home insurance policy   Policy-holder has the flexibility of
                                       choosing one of the risk covers
                                       instead of the entire package.

         - Channels

Insurance companies will also get savvy in distribution. Enhanced marketing
thus will be crucial. Already many companies have full operation
capabilities over a 12-hour period. Facilities such as customer service center
are already into 24-hour mode. These will provide services such as motor
vehicle recovery. Technology will also play a important role on the market.
Effects of technologies are discussed in another section.

         - Rural areas

According to Malhotra committee report the penetration of insurance in
India is around 22%. This indicates that a vast majority of rural population is
not covered. Though GIC offers many products for this segment like, crop
policy, silk worm policy etc, But due to poverty majority of the population

                                                                     Page 41
cannot offered to get insured. Despite this, new entrants are hopeful of
covering the vast tract of rural masses.

Insurance industry in the next century, has uncovered trends that show
increasing diversity that adds to challenges and opportunities.


The study, "21st Century Demographics for the Life-Health Industry,
"delineates the following challenges and opportunities:

Population around the world is aging; number of people in the old age
bracket is growing continuously. As the population ages products such as
annuities, IRAs and defined contribution retirement plans have enormous
growth potential.

The changing composition of households from traditional family units to
single households also presents untapped markets with real needs for life,
health and retirement products. Growing income inequality means that
insurers should find a way to market cost-effectively to all economic sectors,
particularly the middle class, who run the risk of being abandoned by

                                                                    Page 42
insurers chasing the wealthy. Insurers must recognize that small businesses
now make up a growing portion of the world economy, presenting a huge
opportunity for growth in this market.

The opening up of this sector has been long standing and with the passing of
The Insurance Regulatory and Development Authority - IRDA bill a
significant step has been taken.

IRDA is formed as an authority to protect the interests of holders of
insurance policies, to regulate, promote and ensure orderly growth of
insurance industry and for matters connected therewith or incidental thereto.

With the Insurance Regulatory and Development Act, the focus shifted to
the following:

      The Insurance Regulatory and Development Authority (IRDA) should
       give priority to health insurance while issuing certificates of
      Policyholders' funds will be invested in the social sector and
       infrastructure. The percentage may be specified by the IRDA and such
       regulations will apply to all insurers operating in the country;
      Insurers will be expected to undertake a certain percentage of business
       in the rural or social sector and provide policies to persons residing in
       rural areas, workers in the unorganized and informal economically

                                                                      Page 43
      In case the insurers fail to meet the social sector obligation a fine of
       Rs.2.5 mn would be imposed the first time. Subsequent failures would
       result in cancellation of licences.

    Bank Assurance

In the developed nations of USA and UK, banks account for 20% and 19%
of all insurance products sold. This figure is 50% for France. This shows the
extent of scope that Bank assurance.

When talking of banks we need to remember that there will be two
regulating bodies, IRDA and RBI. It is said that this is the reason for the
slow reaction of the banks towards this sector. However there are the NBFCs
that are also in the foray. However, the non-banking finance companies
(NBFCs) planning to enter the insurance sector will be subjected to stringent
performance and net worth parameters set by the Reserve Bank of India.

The RBI regulations come in light of the fact that most banks are looking at
their NBFC outfits for foraying into insurance sector. Some NBFCs are
planning seriously to enter into memorandum of understanding with foreign
insurance companies. In a set of draft guidelines issued to all scheduled
commercial banks (SCBs) and select financial institutions (FIs), the central
bank had laid out parameters that need to be met as of March 31, 2000:

      A minimum net worth of Rs 5 bn;
      A minimum capital requirement of Rs.1 bn,(this is mandatory for any
       player in the sector, including banks)

                                                                     Page 44
      A minimum capital adequacy ratio of 10 per cent
      Entry through a joint venture
      A net profit record for last three years;
      Net non-performing assets (NPAs) that "are reasonable"and
      A good track record in the case of subsidiaries as well.

For NBFCs, the other eligibility criteria for joint venture participant will be:

The capital adequacy ratio of the NBFC engaged in loan and investment
activities holding public deposits should be not less than 15 per cent and for
other NBFCs at 12 per cent; and the level of non-performing assets should
be not more than 5 per cent of the total outstanding leased/hire purchase
assets and advances taken together.

In India, when one talks of banks, the largely influential and effective,
Cooperatives cannot be far behind. Their hand in the success of banking in
rural and other non-urban areas cannot be by any means, underestimated.
The coming chapter takes a look at their plans and their strengths vis-à-vis
their foray in the insurance market.

    Cooperatives

The cooperative banks in the nation cover over 65% of the rural population
and have over 0.453-mn cooperative societies cover all the villages. These
cooperatives cover what the insurance sector needs to be targeted at - The
mass of the rural Indian population. However, the norms laid down for entry
in the insurance sector immediately washed away this sectors hope to get in

                                                                      Page 45
this line of business. However, after representations to IRDA, it was allowed
to enter into the health sector for a start.

In fact the cooperatives will be better equipped and willing to bring the
insurance products to the rural Indians and educate them on the benefits of
insurance and help mobilize funds from them, which can be effectively used
for long-term national benefits. In fact, one of the largest cooperatives in
Singapore, NTUC INCOME, is working in the

The esteemed Mr. Sharad Pawar is also forging a cooperative alliance to
benefit from the new regulations. It is the cash rich Maharashtra Cooperative
that the politician is trying to get into this sector. The cooperative is planning
to apply for a national cooperative licence so that it can be a national
cooperative insurance player.

Non profit organisations are also likely to help tap that class of people that
would have otherwise been neglected by the new players. While groups like
SEWA are tying up with new players to let them meet their targets of social
and rural sector, similarly other groups are likely to tie-up too, to use their
knowledge and database of people.

    Agents / Brokers:

The guidelines governing are expected by end of October 2000, but what is
known so far is that the agents in insurance business will now be allowed to
sell atleast the products of three life or three non-life insurance companies.
Mr. Rangachary has said that a minimum capital of Rs 2.5 mn would be

                                                                       Page 46
required for undertaking brokerage in life and general insurance products,
and Rs 12.5 mn for taking up a composite agency.

IRDA also proposes to reduce the level of income paid to brokers/agents of
life and general insurance business. Currently they receive 17.5% of the
premium payable on the policy. The regulator feels that these levels are quite
high and they need to be brought down to more internationally realistic
levels considering the new insurance environment.

IRDA is going to allow three kinds of brokerage firms to operate in the
Indian insurance sector, Insurance, Re-insurance and Composite. It is going
to allow a minor foreign equity stake in them with a cap of 49%. Composite
brokers are the ones who can sell Life & General insurance products and
reinsurance products also. The capital requirement for the broking firm will
be Rs.2.5 mn. The IRDA is also likely to cap the brokerage commissions to

    Investment Criteria

All insurers will be governed by the investment criteria laid down by the
IRDA. They are read as below:

         - For Life insurer

Life insurance companies will have to invest 25% in the government and
another 25% in other approved securities. 15% of investment will have to be
invested in the infrastructure sector and social sector. The balance 35% will
be available to the companies to invest in the capital markets were the return
on investment are significantly higher.

                                                                    Page 47
          - Rural sector

The criteria for investment in the rural sector for Life Insurance companies
is the following % of the total policies written in the corresponding year, 5%
in the 1st financial year, 7% in the 2nd financial year, 10% in the 3rd
financial year, 12% in the 4th financial year, 15% in the 5th financial year,

          - Prudential norms

      The insurers, both Life and Non-life, should not invest more than 15%
       of the total capital employed in equity shares and debentures.
      Loans are not to form more than 10% of the estimated annual
       accretion of funds.
      On accounting norms for the sector separate statements would be
       required for any activity which yields 10 per cent or more revenue.
      To ensure that there is never a lack of audit in the insurance company,
       there will be two auditors, one with a tenure of four years and the
       second with a five year tenure.

Any insurance company would be looking at 10% growth in business in a
short term of 10 years and 20% over long-term i.e. 20 years. The company
cannot be expected to put aside its money for the development of schools
and sanitation facilities and village funds development and see the money
giving no / negligible return. Moreover the infrastructure projects in India
are never sure of seeing the light of the day. They invariably get lost in the
vast bureaucratic system and corruption prevailing in the nation. Thus this
demand was seen to be unreasonable, but the foreign players are not too
unhappy, as they see themselves to be long term players in the nation.

                                                                     Page 48
    Dreams That Turned Nightmare

As in any successful joint venture, the partners have to be equals. If there is
any expectations that are not lived upto by the partner then we see feelings
of discomfort arising in the venture. When India announced that it will open
up its insurance sector, foreign insurers saw the unthinkable and latched on
to the opportunity presented before them. They set up representative offices,
signed MoU with numerous domestic players. The urgency of it all saw to it
that there was no careful reading of the scenario and the competencies of
their partners.

A few of the reasons for the breakdown in the ventures are enlisted herewith:

   1. This was also the time when the IRDA was setting out the guidelines.
      Once they were out, and it allowed only 26% equity participation for
      the foreign players in the market, foreign insurers realized that their
      pies were not going to be as big as they had envisaged. Many decided
      to close shops in India and left the nation leaving their domestic
      partners in the cold.
   2. Also, now with the guidelines out for all to read, the foreign insurers
      realised that the investment criterion was inhibiting profit growths.
      The returns did not justify the investments, was their understanding.
   3. With the majority stake being with the domestic partner, foreign
      insurers would not have say in the management of the company and
      important decisions could be considered without them. Pay packages,

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      technology transfer, products and their pricing when offered by the
      foreign insurers would not mean that they would run the show.
   4. Domestic insurers realised that they had the upper hand in the day to
      day working of the company and asked for a bigger pie in the venture.
      Their greed only scared the already tensed foreign insurers.

The above are the broad reasons that saw a number of insurance joint
ventures fall by the lane and not see the light of the day. The following is the
list of joint ventures that turned sour.

              Dabur-Allstate
              CGNU-Bombay Dyeing
              Chubb-Kotak Mahindra
              Eaglestar-ITC
              Rothschilds-Godrej
              UAP-Integrated Finance
              Cigna-Ranbaxy
              Manulife-UTI
              GIO-Sanmar Group
              Allianz-Alpic
              Dabur-Liberty Mutual
              Royal&Sun alliance-DCM Shriram

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The above list of failed joint ventures has not deterred the other players and
they have decided their channels of distribution.

    Channels of Distribution

The distribution network of banks is what a lot of players are interested in.
Initially, SBI was asking a premium for it to be partnering with any insurer
on the sole premise that the bank commands a network that is unparalleled in
the banking industry in India today. Similarly other banks are becoming
insurers to leverage their network of branches, in joint ventures with foreign
players who have the expertise in the insurance sector.

Marketing alliances with people/companies having a physical presence is a
good distribution strategy too.

The online world is not going to be left behind. A number of sites have
started offering policies online. What needs to be borne in mind is that no
matter what channel one may use, the following factors will be critical in
deciding the success or failure of the venture:

      - Initial setup cost
      - High margin to agents/brokers
      - Trained and experienced personal will be critical to the success of
         the insurer.

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      - An internal control mechanism to keep tab on expenses.

     Likely Factor Of Success

In the now open sector on insurance, the following is what I feel will
determine the success of the company in particular and the industry in

           - A change in the attitude of the population

Indians have always been wary of employing their hard-earned money in a
venture that will pay them on their death. Insurance has always been used as
a Tax saving tool. No more, no less. It is upto the insurers to educate the
people to secure/insure their future against any unknown calamity and make
a      shield       around       their    families        and    businesses.

           - An open and transparent environment created under the

The reason for this being on the top of our understanding is that when ever
we have seen any sector open up in India there are always grey areas and
unsure policies. These are not exactly what any player, be it Indian or

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foreign, looks for. It creates an air of uncertainty in all the decision making
process. Insurance as a sector requires players who are strong financially and
are willing to wait for returns. Their confidence can be bolstered only if
there is an open and a transparent policy guidelines. This will also help the
consumers feel safe that the regulatory is an active one and cares to do
everything possible to keep things under control and help the insurance
environment grow maturely.

         - A well-established distribution network.

To cater to the largest democracy in the world is by no means a cakewalk.
Insurance profits are directly related to number of insured and this is in turn
related to the reach. The case in example is of the State Bank of India. The
joint ventures announced have a flavour of network being a critical decider.
This is so because as per the guidelines 15% of the policies written by the
5th financial year will have to come from the rural area. The banks are the
only ones who have that reach.

         - Trained professionals to build and sell the product.

It is said that the insurance agent is the best salesman in the world. He makes
you pay, regularly, an amount promising to pay back only on your death.
Thus the players will require an excellent sales team to sell their products in

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the now competitive environment. The importance can be seen from the fact
that a lot of LIC/GIC personal is being poached by the new players.

          - A more rationale approach to the investment criteria.

This is a very critical area as far as the government and the players are
concerned. The government as fixed up the investment pattern for the
players to meet its social obligations. The players feel that the compulsion is
unjust and will affect their return on investments. One may wonder then why
is it that I have listed it as success factor. The reason, my dear, is that it is in
the larger interests of the society. The more the people insured, the better the
revenues, followed by better security, followed by better morale and
productivity. On a national level the criteria's ensure that the money does not
go out of the nation. We also need to bear in mind that the insurers are here
not for charity but for profits. So their interest are also to be kept in mind.

       - Encouragement of newer and better products and letting the
        hackneyed ones die out.

This will itself ensure the market grows. And that every class/society gets a
product that best suits them.

        - A stringent accounting practice to prevent failures amongst the

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Every insurer will have the hard-earned money of the masses. Any failure of
the insurer on account of unwarranted profligacy will cost the nation in
general and the insured in particular. To prevent any underhand workings of
the insurer and to prevent them from going bust, a stringent accounting
practice is imperative.

      - A level playing field at all stages of development in the sector
          for all the players.

An unbiased environment is where the best comes out of the players. Their
real strength shines through. This is the beauty of capitalism that we are
trying to achieve in our customized manner. This will only help the industry
grow and so will the society.

And last but not the least patience amongst the players and consumers to
wait for the pot of gold at the end of the rainbow.

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A potential for profit: untapped opportunities will be vital for new entrants
to choose their product and service offerings carefully. In doing so they must
consider two possible pitfalls.

First, when estimating the potential of the Indian insurance market it is
tempting to look at macro-economic variables such as the ratio of premium
to GDP which is indeed comparatively low in India. For example, India‟s
life insurance premium as a percentage of GDP is 1.3 per cent against 5.2
per cent in the US, 6.5 per cent in the UK or 8 per cent in South Korea.
Given India‟s large population, the number of potential buyers of insurance
is certainly attractive.

The second trap is the tendency to target the business of existing companies
rather than expanding the market. New players find it easier to try to capture

                                                                    Page 56
existing customers by offering better service or other advantages. Yet, the
benefits of this strategy are likely to be limited.

For example, 50 per cent of the current demand for general insurance comes
from the corporate segment. We do expect that after the market opens up,
companies will move between insurers as they shop around for the best
rates, products and service. Nevertheless, we anticipate that the corporate
segment as a whole will not be a big growth area for new entrants. This is
because penetration is already good, companies receive good service
because of their size and rates are tariff-governed. In both volumes and
profitability therefore, the scope for expansion is modest.

A better approach may be to examine specific niches where demand can be
met or stimulated. In our view new entrants would be best served by a
micro-level approach on two fronts.

First, they should target specific niches which are currently served poorly or
not at all. Life insurance products provide a good example. They compete
with investment and savings options like mutual funds. It is imperative that
they should offer comparable returns and flexibility. For instance, pure
protection products like term assurance account for up to 20 per cent of
policies sold in developed countries. In India, the figure is less than one
percent because policies are inflexible. Besides, no Indian life assurance
product is linked to non-traditional investment avenues such as stock market
indices. Therefore, returns are lower than those on other savings instruments.

Similar problems apply to pensions. The lack of a comprehensive social
security system combined with a willingness to save means that Indian

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demand for pension products will be large. However, current penetration is
poor. By March 1998, LIC‟s pension premium was only Rs. one billion.
Making pension products into attractive saving instruments would require
only simple innovations already common in other markets. For example,
their returns might be tied to index-linked funds or a specific basket of
equities. Buyers could be allowed to switch funds before the annuities begin
and to invest different amounts at different times.

Health insurance is another segment with great potential because existing
Indian products are insufficient. By the end of 1998, GIC‟s Mediclaim
scheme covered only 2.5 million people. Indian products do not cover
disability arising out of illness or disability for over 100 weeks due to
accident. Neither do they cover a potential loss of earnings through

The second prong of a new insurer‟s strategy could be to stimulate demand
in areas that are currently not served at all. For example, Indian general
insurance focuses on the manufacturing segment. However, the services
sector is taking a large and growing share of India‟s GDP (an estimated 48
per cent in 1998-99). This offers expansion opportunities. For example,
revenue from remote processing activities in information technology is
estimated at USD 50 billion in the next ten years. Insurers could respond
with various liability covers.

Potential buyers for most of this insurance lie in the middle class. New
insurers must segment the market carefully to arrive at appropriate products
and pricing. Existing players can also profitably exploit these areas.

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Recognizing the potential, in the past three years, the nationalized insurers
have already begun to target niches like pensions, women or children.

        - Reaching out: distribution issues

We anticipate that distribution will be a key determinant of success for all
insurance companies regardless of age or ownership. The nationalized
insurers currently have a large reach and presence. New entrants cannot-and
do not-expect to supplant or duplicate such a network. Building a
distribution network is expensive and time consuming. Yet, if insurers are to
take advantage of India‟s large population and reach a profitable mass of
customers, new distribution avenues and alliances will be imperative. This is
also true for the nationalized corporations, which must find fresh avenues to
reach existing and new customers.

We expect substantial shifts in the distribution of insurance in India. Many
of these changes will echo international trends. Worldwide, insurance
products move along a continuum from pure service products to pure
commodity products (see chart).

                                                                   Page 59

Initially, insurance is seen as a complex product with a high advice and
service component. Buyers prefer a face-to-face interaction and place a high
premium on brand names and reliability.

As products become simpler and awareness increases, they become off-the-
shelf, commodity products. Sellers move to remote channels such as the
telephone or direct mail. Insurance is sold by various intermediaries, not
necessarily insurance companies. In the UK for example, retailer Marks &
Spencer now sells insurance products. At this point, buyers look for low
price. Brand loyalty could shift from the insurer to the seller.

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Some potential Indian players hope that their anticipated technology
advantage will allow them to increase their reach, partly by using remote
channels. However, financial services companies globally and in India find
that customers are making the shift to such channels slowly and only for less
complex transactions. In India, insurance, especially life insurance is still a
service product. Indeed, even the successful international direct insurers
focus on standard covers such as motor insurance. We therefore believe that
in India technology will not replace a distribution network, though it will
offer advantages like better customer service.

Yet, we expect changes in distribution along other parameters. Banks and
finance companies will emerge as an attractive distribution channel for
insurance. This trend will be led by two factors which already apply in other
world markets. First, banking, insurance, fund management and other
financial services will all form a set of services rather than disparate ones.
Second, banks and finance companies are being driven to increase their
profitability and provide maximum value to their customers. Therefore, they
are themselves looking for a range of products to distribute.

In India too, banks hope to maximize expensive existing networks by selling
a range of products. We anticipate that rather than formal ownership
arrangements, a loose network of alliance between insurers and banks will
emerge. In the US, banks lease space to insurers within their bank branches
or retail products from multiple insurers.

Insurers in India should also explore distribution through non-financial
organisations. For example, insurance for consumer items such as
refrigerators can be offered at the point of sale. This piggybacks on an

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existing distribution channel and increases the likelihood of insurance sales.
Alliances with manufacturers or retailers of consumer goods will be
possible. With increasing competition, they are wooing customers with
various incentives, of which insurance can be one.

Another potential channel that reduces the need for an owned distribution
network is worksite marketing. Insurers will be able to market pensions,
health insurance and even other general covers through employers to their
employees. These products may be purchased by the employer or simply
marketed at the workplace with the employer‟s co-operation.

Finally, some potential Indian entrants into insurance hope to ride their
existing distribution networks and customer bases. For example, financial
organisations like ICICI, HDFC or Kotak Mahindra intend to tap the
thousands of customers who already buy their deposits, consumer loans or
housing finance. Other hopeful entrants anticipate specific alliances such as
with hospitals to provide health cover.

Different distribution channels bring their own challenges. First, companies
will have to ensure a strong brand identity. Distribution through third parties
means that it is those companies rather than the insurers who often reap the
benefits of customer loyalty. This accelerates the shift of insurance to a
commodity product. Second, since many new companies already offer other
financial services products, they will be tempted to sell only their own
products. They must balance this against the advantages of offering
customers a wide product range. This is especially important because we
anticipate the rise of pure financial service retailers who do not have any

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owned products and offer a broad range of products from different providers
to consumers.

        - Avoiding the pitfalls: other issues

Most of the opportunities and challenges that we have discussed apply
equally to existing and new insurers.

It must be emphasized that the opening of the insurance market is far from a
bad thing for nationalized insurers. With a strong presence, a wide network
and considerable brand equity, they are in a good position to tap the very
same segments profitably, while improving their product and service
offerings. We anticipate that they will continue to hold a strong market share

All insurers in a liberalized Indian market will have to address a host of
other issues. They will have to:

      Leverage information technology to service large numbers of
       customers efficiently and bring down overheads. Technology can
       complement or supplement distribution channels cost-effectively. It
       can also help improve customer service levels considerably.
      Use data warehousing, management and mining to gauge the
       profitability and potential of various customer and product segments
       and ensure effective cross selling. Understanding the customer better
       will allow insurance companies to design appropriate products,
       determine pricing correctly and increase profitability.
      Ensure high levels of training and development not just for staff but
       for agents and distribution organisations. Existing organisations will

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       have to train staff for better service and flexibility, while all
       companies will have to train employees to cope with new products
       and an intensive use of information technology. The importance of
       alliances and tie-ups means that companies will have to integrate
       related but separate providers into their systems to ensure seamless
      Build strong relationships with intermediaries such as agents. The
       agency force is an important customer interface and companies must
       partner with this group to reach customers and serve them effectively.

Indian insurance is on the threshold of deep and fundamental changes. The
life insurance industry was nationalised in 1956 and the general insurance
industry in 1972. Before that India had a thriving and competitive insurance
industry with hundreds of private and foreign operators. Indian companies
held a 60 per cent market share even then.

Yet, insufficient regulation also meant that there were a number of abuses. In
a re-opened Indian insurance market, regulators must formulate strong and
fair guidelines and make sure that old and new players are subject to the same
rules. Companies, meanwhile must be prepared to set and meet high standards
for themselves. The big challenge for both companies and regulators is to
ensure that they replicate the benefits of the past while eliminating its ills.

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7 P‟s Of Services Marketing Mix

In the 7 P‟s we will be concentrating on Life insurance segment.

Product Mix
Life insurance is a device or plan of spreading a possible financial loss over a
large number of persons, which is too heavy to be conveniently borne by an
individual. It seeks to reduce the financial uncertainties arising from the
natural contingencies - old age and death. It is a guarantee given by one (Life
Insurance company) to another (insured/policyholder) whereby the former
undertakes to pay a sum of money to the latter (or nominee in case of death)
on the happening of the event insured against.

Life insurance is a peculiar product. It is quite different from other
commercial products. First, what Life Insurance sells is not a tangible product
but an intangible one at present - a promise to inform in future. When this
obligation is met, i.e., the insured event takes place, the money, whose
presence can be felt, replaces the promise. With this amount the insured
person or his dependents can meet obligations on account of food, clothing
and shelter. Secondly, life insurance product continues to exist over a long
period of time and for making its service available, the insured person has to
go on paying the purchase price (premium) throughout the term of the policy.
This ensures that the benefits already accrued under “sale'' are not lost.
Finally, the seller (in India, the Life Insurance Corporation of India) has not
only to sell his product but also to keep the contract in force by continuous
and efficient serving. In other words, with respect to life insurance products

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sales and services go together.

A peculiar feature of the Life Insurance market in India is that though it is a
buyer's market, by and large, the seller, i.e., the Life Insurance Corporation of
India has to take a decision whether to sell a particular policy to a particular
person or not, on the basis of the information disclosed by the buyer himself
in the proposal form.

Again, Life Insurance market can be divided into two-broad segments –
„source‟ and „use‟ market. The former implies the sum total of policyholders
of LIC and the latter the various industries, electricity boards, housing finance
institutions, government who have made use of the economic reservoir created
out of premium money collected. This pair restricts to „source‟ market only.

    LIC’s Product Mix
Life Insurance Corporation (LIC) of India has various plans of insurance
policies. A new scheme is launched as per the marketing budget. The co-
coordinated efforts of Marketing Divisions, the Marketing Manager, the
Development Officer and finally the agents are responsible for the launch of
any new scheme. At present, LIC services around 70 plans with various
policies attached to it.
Some of their famous or recently launched policies are:-
       - New Jeevan Shree;
       - New Bima Kiran;
       - Jeevan Sneha;
       - Children‟s Money Back Policy;
       - Jeevan Surabhi;

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      - Bima Plus;
      - Bima Nivesh Triple Cover.

The Price Mix
Premium is the price, which the person seeking insurance pays to the LIC for
purchasing in the Life Insurance policy. It is nothing but the cost of insurance
from purchaser‟s point of view. It is the consideration paid by each insured for
building up a certain asset called the „assured sum‟ with the insurer. The
amount of premium has a bearing on the risk involved in covering a life. The
risk in turn in has a bearing on the age of the life to be covered, his or her
habits, sex, family, race, habitat, food habits, education, etc. Life insurance
premium increases with the age since the probability of death increases,
however the insurance for the convenience of clientele and their own
administrative convenience, charge a level premium uniform throughout the
contract period. Actually, slightly more premium being paid at the initial
stages, along with investment returns on it. It will be set of against the
increases in premium at later ages. The actual process of accepting a person
for Life Insurance and coating appropriate premium is known as underwriting.

    LIC’s Price Mix
There are three main factor‟s considered before fixing any price for a policy.
They are as follows: -

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          - Mortality Rating
There is a Population Census, which is conducted regularly in the country.
LIC uses the information from this census and derives a comparison between
the different age groups and the death/mortality rate per 1000 people in that
particular age group. The ones with higher mortality are given the least rating.
These would be the population group with a high death rate. Thus the groups
with the least death rate having a longer life span would require insurance
cover more than the other age group/s. Thus they would be rated highly and
the price of that policy would be fixed accordingly.

          - Insurable Interest
The concept of insurable interest means that the insured should have a genuine
need for taking an insurance cover. Thus to ensure this there is an initial
Premium amount which has to be paid. Depending on this initial amount
collected, the price of the plan is decided.

          - Management’s Expenses
These would consist of the administrative and selling expenses as there would
be nil cost of production. They could be in the form of fixed office expenses
like rent, electricity, stationary and salaries to all the employees and other
such related cost.

The Promotion Mix and Place Mix
As Life insurance is a personalized service, personal selling plays an
important role in promoting the same. Place and promotion are being
highlighted here since the agents and development officer who form the

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pillars of Life Insurance market structure discharge these two important
functions. Agents are PR men of insurance companies at the grassroot level.
The role in building up good customer relation is crucial. They work under the
guidance and direct supervision of development officers. They together sell
the right type of policies suitable to the needs of clients for the right amount at
the right time (age). The agents render various other services and also play a
vital role in policy servicing. The Development Officers under each Branch
office beside guiding and supervising activities of the agents are also
responsible for their recruitment and training so as to develop a stable agency
force. They activate the existing agents and motivate the new ones. Also they
render all such services to the policyholders as will produce better policies.
Agents and development officers, as the intermediaries in the distribution
system of the whole, develop and increase the Life Insurance business in a
planned way.

For promoting Life Insurance business, sales promotion activities are also
carried out by the agents. Calendars, bags, diaries, etc. are also given to the
policyholders as a token of gifts. LIC also trains their agents, as they do not
tend to increase or update their knowledge regularly so as to serve better to
their customers. Special training programs are held for them.

    LIC’s Place Mix
LIC has one corporate office at „Yogekshma‟, which is in Mumbai. They have
18 Main Branches, which make up one Division. There are total 18 such
divisions which make up a zone. There are total seven Zonal Offices.

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                                 7 Zonal Offices

                               18 such divisions

                               18 Main Branches
A single branch of LIC                                consists of four different
departments namely:

 Sales         New Business                Accounts        Policy Servicing

These branches work as per the co-coordinated efforts of these departments.
For the employees of LIC (development Officers/ Agents), there is no such
fixed formula of Insurance.

Now within a branch, following is the decentralized organization structure in
                      Manager/Administrative Officer

                      Development Officer (P.R.O.)

                      Agent/ High Grade Assistance

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                              Peons, etc
From the above decentralized organization structure, we find that there is a
main Manager/ Administrative Officer, is responsible to control the
employees under him. Then we have the Development Officer, who according
to LIC is their PR officer. This Development Officer carries out the duties of a
PR officer. Under the Development Officer, there are the agents who are
mainly responsible for carrying out the task of selling the policies to the
respective clients.

  LIC’s Promotion Mix

      - Communication Strategy
LIC mainly uses direct selling as their means of communicating with its
customers. The agents directly contact the clients and vice-versa. They
advertise through various media like newspapers, magazines, television,
hoardings, etc. For internal communication there are journals, which are
distributed among the employees. These magazines give a 10-15 years past
information about the company. They also give a layman all the knowledge
about LIC‟s progress. The cost of this journal amounts to only Rs. 15. Also
companies like Siemens use the group Super-Annuition Scheme of LIC as a
perquisite to all its employees in the form of pensions and other retirement
benefits. In this way, LIC ensures that it is not just the human being who

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should be ensured but even the company where he is employed is equally
responsible of taking care of the future social welfare of the employee.

      - Media
The basic media used by LIC is by way of Direct Communication with the
customers. This may be through written correspondence or face-to-face
communication via the telephone. The website provides
detailed information to any layman about the company, its policies, its
branches, and its network as such.

The Process Mix
The process involved in the insurance industry should be customer friendly.
The speed and accuracy of payment is of vital importance. The processing
methodology should be such that it provides ease and convenience to the
customers. Installment schemes should also be streamlined to cater to the
growing demands of the customers and keep pace with the competition in the
market. The new developments, which will smoothen the process flow, are IT
and Data Warehousing. Firstly, information technology will help in servicing
large number of customers efficiently and bring down overheads. Technology
can complement and supplement distribution channels cost effectively. It can
also help improve customer service levels considerable. Secondly, the use of
data warehousing, management and mining will help to gauge the profitability
and potential of various customer and product segments. Understanding the
customer better will allow insurance companies to design appropriate
products, determine pricing correctly and increase profitability.

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The People Mix
Being a service industry involving a high level of people interaction, it is
important to use this resource efficiently in order to satisfy customers as also
to have a competitive edge in the market. The two key areas, which need to be
kept under consideration, are training and development and strong
relationships with intermediaries.
Training the employees to introduce them to new products, use of information
technology for efficiency, both at the staff and the agents level or the
distribution organizations is one of the key areas to look into. Also building
strong relationships with intermediaries, such as agents, will help in meeting
customer needs and serve them effectively.

  Customer Groups
The various customer groups can be categorized in the following manner:-
   1. Direct Customer
   The direct customer is the owner of the insurance policy. It is under his
   name that the policy has been approved. He may not be the final
   beneficiary of the service provided. In case of corporate insurance, services
   like pensions, group incentives are enjoyed by the respective individual.

   2. Indirect Customer
   The indirect customers are the family members or the persons for whom
   the protection of the insurance cover has been taken. For example, the
   insurance policy taken by an earning class person for insuring the future of

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   his family incase of any unforeseen events. The future benefits are enjoyed
   by the family members, which are the indirect customers.

   3. Regulator
   The insurance business is regulated by the IRDA (Insurance Regulatory
   and Development Authority) as per the new economic reforms.

   4. Competitors
   LIC has a clean monopoly over the market. As per LIC‟s claims this
   monopoly will remain for at least another five years as the gestation period
   for the new entrants to become potent players is also expected to be the
   same. But there are threats from the new and emerging private sector. The
   various competitors for LIC in the private sector are ICICI Prudential,
   HDFC Standard, TATA AIG, Birla Sun Life Insurance and many others.

   5. Internal Customers
   The employees of LIC are the internal customers. The details regarding
   their hierarchy are designation have been covered in the „people mix‟.

Physical Evidence
In the case of Insurance, physical evidence can be the appearance and dressing
of the agents and the frontline staff, the office décor, the office building on the
whole, the quality of paper used in the forms, etc.

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The 4 I‟s of Services Marketing

Insurance as we know is guarantee against risk, and neither guarantee nor risk
is tangible. Hence Insurance business falls under the category of Services
marketing. Though marketers try to bring in some amount of tangibility
through written documents like policy forms and authorization letters.

At the time of making a contract and through out the proceedings, both the
parties have to be present. The service cannot take place without the presence
of both the parties, which are the service provider and the client. But this is
not the case in life insurance policy; though the client does nominate his
nominee hence again there has to be a person present.

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After all it is people dealing with people and not machines dealing with
people, hence some amount of inconsistency does take place always. Private
firms are trying to reduce this and trying to standardize the working but
companies like LIC (govt. owned) do not take much interest in such matters.

In companies like LIC the systems are not strong; hence employees do not
behave well. Hence the behaviour of the employees, agents etc. are not
consistent, therefore a customer might get a different experience each time he
interacts with the company.

There is inseparability and intangibility in insurance therefore the question of
inventory doesn‟t arise. The companies cannot produce the service first and
store it to give it to the ultimate consumer. Hence there can be no inventory
for services.

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Market Segmentation

The entire market is segmented into four categories:-

1.) Business Class
These are the customers which are self-employed. They are targeted with
policies relating to the upper end of the market.

2.) Service (Earning) Class
These are the customers which belong to the limited salaried income class.
They are mainly targeted with policies of social security considering their
limited income and future situation is taken into consideration. These policies
serve as a protection to the families of the salaried income man in case of any
unexpected death.

3.) Agricultural Laborers

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The laborers are those who work on the farm. They don‟t own that particular
holding. They are mainly serviced in the rural areas of the country. The
policies targeted are the one‟s which fall under the lower end of the segment,
giving a sense of protection to the needy/poor worker in case of any
unforeseen events.

4.) Farmers
Like the laborers, even they are targeted mainly in the rural areas, but the
difference is that they own the particular land holding. They are further
divided into the small, marginal and large holdings. Again they are targeted
with various plans as per their purchasing power.

Services Marketing Triangle

The concept of services marketing triangle in comparison of LIC is as

                                                                  Page 78

             Internal                                 External
            Marketing                                 Marketing

                            Interactive Marketing
 PROVIDER-AGENTS                                       POLICY HOLDERS

The above diagram explains the services triangle with its three constituents,
namely, the company, the provider and the consumer. Each can be explained
in the following manner:-

    Company

The company LIC makes various promises to its customers through external
marketing. The way and means of marketing have already been covered in the
marketing mix.

    Provider

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The LIC agents and the Development Officers act as the front-line staff and
they are in direct contact with the potential or existing customers. They are the
ones who keep or satisfy the promises made by the company. The marketing
of insurance basically comes under concept selling. The LIC agents are thus
given various incentives, rewards, commissions and all the necessary training
required. As regards incentive, they receive PLI (Productivity Linked
Incentive) which is based on the increase in premium amount and the sums
assured by the agent. They are also given extra commissions in case of
policies which are of high value. There are normal promotions for any good
work done on a regular basis. The LIC agents, generally, work under the
training and guidance of their respective Development Officers. But as per a
new rule, the applicant has to under preliminary training from the Insurance
Institute of India which is recognized by LIC like IFSERT, Pune and the other
one in Hyderabad. Then he applies and gets a licence to practice business. He
also undergoes a test from LIC and after passing this test, he works under the
training of the Development Officer. Apart from the above, there are MDP
(Management Development Centre) which is for the Managers and other
executives above them and the DTC (Development Training Centre) which is
for the Development Officers. The various Executive, the Directors and the
Zonal Managers undergo T & D at LIMRA, Singapore

    Consumers

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The consumers/ buyers are the policy holder. Apart from the routine life
insurance policies, LIC also deals in Housing Finance, Mutual Funds, Pension
and Group Insurance as its allied business activities. Thus the range of
consumers is far and wide.

Analyzing the Service

1. Categorizing the Service Process.

The two parameters used in this are:-

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  Nature of the act: - it is intangible, because one cannot physically see
    the result, which occurs after the performance of the service in this case.
  Recipient of the service: - here it is the information that is given to the
    customer that is in process. Any action that is done by the provider is not
    directed towards the body, mind or any good. Hence we can say that it is
    an information-processing because it is the information that will decide
    whether the customer will avail of the service or not.

2. Methods of Service Delivery

The two parameters used in this are:-

  Nature of interaction
  Availability of service outlets: - here the customer has a choice of going
    to the closest branch or local office. That is there are a number of outlets
    or offices from which he can avail of the services. Or he can always
    contact the provider or the agents through easy access and availability.
    Hence multiple set of outlets.

3. Nature of Demand for the Service - Related to its Supply.

The two parameters used in this are:-

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  Extent to which supply is limited: - in this case there are very few times
     when there is peak demand. At such times the demand can be usually be
     met without a major delay. Thus the supply is enough to meet the sudden
     spurt in demand.
  Extent of demand fluctuation overtime: -it is very narrow. This means
     that the rise in demand is not that wide that it cannot be managed. A
     narrow demand fluctuation occurs.

4. Attributes of the Service Experience

The two parameters used in this are:-

  Extent to which people are part of the service: - as customer
     involvement is very high we can say that they form an important part of
     the service. Based on the requirement of each customer every policy will
     have to be tailored to suit him, and accordingly he will be able to avail of
     certain policies and not all.
  Extent to which equipment are part of the service: - as it relies more
     on the people, it is not that dependant on technology. Hence we can say
     that it is low on this parameter. This is because technology is not that
     extensively used in this industry as it still follows the traditional
     distribution channels.

5. Relationship with Customers

The two parameters used in this are:-

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  Nature of service delivery: - as a customer once takes a policy, he has to
    keep in touch with the insurer for payment of premium, maturity date etc.
    Hence it is an on-going process, so we can say that there is continuous
    service delivery.
  Type of relationship between customer and provider: - only a
    customer who has taken a policy can avail of the facilities provided by
    the insurer. That means that there is the existence of the relationship
    between them, due to the formation of a membership relationship that
    exists between them.

The Flower of „Service‟

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The concept of the Flower of service has been compared in relation to the
practices of LIC. In the following lines, the various petals which surround the
core product of LIC have been briefly explained.

    Core Product
Apart from primarily servicing life insurance policies, LIC is also engaged in
businesses relating to Housing Finance, Mutual Funds, Pension and Group
Insurance, and Social Security.

    Supplementary Services
The various supplementary services which fall under various categories are
explained as follows:-

   - Information
LIC has its own Information Centres in Santacruz (W.), Mumbai and Pune.
By dialing 6125555, one can find out any information regarding any policies,
plans, operations or any information relating to LIC. The other number
6187655 gives the individual policy holder, information about his policy as
regards premium, duration, and any other information relating specifically to
his policy. The Pune number is 5536161. LIC has its official website,, which gives all the information regarding their products,
services and all the information about LIC‟s operations. LIC also has an in-
built „plan suggestor‟ on its website, which automatically processes the
information supplied by the potential customer and the respective policy is

   - Consultation

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LIC‟s mainly provides consultancy services through its information centre, its
website, and its agents which work on a personalized basis and offer advices
relating to various plans and policies.

   - Order-taking
As far as order-taking is concerned, LIC has its personnel categorized as
Agents, Development Officers, Assistant Branch Manager, Branch Manager
and various other executives in the top management. The order is taken
depending on the amount/value of the service. Policies ranging from 8-10
lakhs are serviced by the agents, and then ones between one lakh to five lakhs
are serviced by the Development Officer. There are also the Sales Manager,
Senior Divisional Manager which have their own range of policy servicing.
The Sales Manager is in charge of policies which are priced above Rs. 1

The order taking mechanism is mainly by way of application forms. These
forms are made available through the agents or they can also be downloaded
from the website. The various forms belong to various age categories like the
„Form No. 300‟ which is a proposal for insurance on own life, the „Form No.
360‟ is for policy duration of 10 years or more and various other forms.

The potential policy holder has to pay the initial premium amount and then
undergo a medical examination of various cardiological, pathological and
radiological tests.

After such physical examinations are successfully completed, the plan or
proposal is transacted.

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   - Billing
The policy holder has to pay the premium amount in fixed durations as per the
agreement. LIC sends reminders to the policy holders by way of post to
inform the policy holder regarding various details like amount, due date,
policy under which it belongs, etc.

   - Payment
A policy holder can make the payment of the premium amount in the
following ways:-
1. He can send the cheques directly to branch,
2. There are rural banks which have tie-ups with LIC,
3. The payment can be done through,
4. The payer can send a draft or a standing order to the bank.

Pest Analysis

    Political-Legal Factors

                                                                 Page 87
         - Insurance Sector Reforms
There are various efforts made by the government to make the industry more
dynamic and customer friendly. To begin with, the Malhotra committee was
set up with the objective of suggesting changes that would achieve the much
required dynamism.

         - The Malhotra Committee Report
In 1993, Malhotra Committee, headed by former Finance Secretary and RBI
Governor R. N. Malhotra, was formed to evaluate the Indian insurance
industry and recommend its future direction. In 1994, the committee
submitted the report and gave the following recommendations:

         - Structure
    Government stake in the insurance Companies to be brought down to
    Government should take over the holdings of GIC and its subsidiaries
      so that these subsidiaries can act as independent corporations.
    All the insurance companies should be given greater freedom to

         - Competition
    Private Companies with a minimum paid up capital of Rs.1bn should be
      allowed to enter the industry.
    No Company should deal in both Life and General Insurance through a
      single                                                            entity.

                                                                    Page 88
   Foreign companies may be allowed to enter the industry in
   collaboration with the domestic companies.
 Postal Life Insurance should be allowed to operate in the rural market.
   Only one State Level Life Insurance Company should be allowed to
   operate in each state.
 Regulatory Body.
 The Insurance Act should be changed.
 An Insurance Regulatory body should be set up.
 Controller of Insurance (Currently a part from the Finance Ministry)
   should be made independent.

      - Investments
 Mandatory Investments of LIC Life Fund in government securities to
   be reduced from 75% to 50%
 GIC and its subsidiaries are not to hold more than 5% in any company
   (There current holdings to be brought down to this level over a period
   of time)

      - Customer Service
  LIC should pay interest on delays in payments beyond 30 days
  Insurance companies must be encouraged to set up unit linked pension
    Computerization of operations and updating of technology to be
    carried out in the insurance industry

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      Overall, the committee strongly felt that in order to improve the
          customer services and increase the coverage of the insurance industry
          should be opened up to competition.
      But at the same time, the committee felt the need to exercise caution
          as any failure on the part of new players could ruin the public
          confidence in the industry.

Hence, it was decided to allow competition in a limited way by stipulating the
minimum capital requirement of Rs.1 bn. This amount is not very high for
foreign firms, as it translates to only about US$25 million. Further, to date it is
unclear whether equity should be payable in one go or should be brought in as
installments. Also, the foreign equity participation was to be restricted to only

The committee felt the need to provide greater autonomy to insurance
companies in order to improve their performance and enable them to act as
independent companies with economic motives. For this purpose, it had
proposed setting up an independent regulatory body.

The industry and analysts find that there is lack of clarity in the following

    Though coverage of rural areas was to be made compulsory, it raises
       the question as to who would subsidize the rural policies as they would
       be difficult to service and hence costs will go up.

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    There is some confusion with respect to investments. Where the funds
      should be invested? Currently 70% of the funds with LIC & GIC are
      invested in Government securities. Would new entrants be allowed to
      invest in GOI securities?
    The report also does not enumerate exit options available to the new
      entrants. In the event of failure, there should be an arrangement made
      whereby the other companies pool in to bail the customers, who in all
      probability would be middle class individuals.

On the basis of the report, the then Finance Minister P. Chidambaram
proposed the opening up of insurance to the private sector, including
multinational companies.

With the notification of the constitution of the Insurance Regulatory and
Development Authority (IRDA) in April 2000, the decks are finally cleared
for foreign investment in the insurance sector. The government notified the
constitution of the IRDA as a statutory authority. N. Rangachary will be its
chairman till June 2003. The notification of the bill's passage was delayed as it
could only be done with the constitution of the IRDA on April 19, 2000. This
IMI looks at the growth prospects in the sector in the near future.

Following the passage of the Insurance Regulatory Development Authority
Bill by both the houses of the Indian Parliament late 1999, the stage is now set
for the establishment of a fundamentally new legal regime for insurance sector
in India. The new Act opens the sector to private participation, establishes an
independent regulator, and allows foreign entry into the market through equity
participation up to a level of 26 percent. Individual Indian companies will be

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required to bring down their equity holding to 26 percent through sales of
shares to the public within 10 years.

After the passage of the Bill last year, in April 2000 the government notified
the constitution of the IRDA as a statutory authority. N. Rangachary will be
its chairman till June 2003. The notification of the bill's passage was delayed
as it could only be done with the constitution of the IRDA on April 19, 2000.
With the notification of IRDA and rules for opening up the sector in place, the
first private insurance company with foreign participation can start operation
by the fall of 2000. The IRDA law is the culmination of the recommendations
made by the R.N. Malhotra committee that was constituted in 1994 with the
objective of suggesting changes that would achieve the required dynamism in
the insurance sector. Overall, the committee strongly felt that in order to
improve the customer services and increase the coverage of the insurance
industry should be opened up to competition. Hence, it was decided to allow
competition in a limited way by stipulating the minimum capital requirement
of Indian Rupees 1 billion. This amount is not high for foreign firms, as it
translates to only about USD 23 million.

The Insurance Regulatory Development Authority (IRDA) is the regulatory
authority, which looks over the related aspects of the insurance business. The
IRDA bill provides guidance for three levels of players – Insurance
Companies, Insurance Brokers and Insurance Agents.

    Economic Factors

                                                                   Page 92
Effect of Reforms

   - Penetration Of Insurance
Though the Public Sector Insurance Companies have been successful in
achieving and contributing to the National Exchequer over the years, a huge
market lies untapped due to reasons like: -
          The monopolistic nature of the market;
          Focused marketing;
          Indian psyche.
The business of Insurance, by way of generating premium income, adds
significantly to the GDP of developed countries. Though the potential market
in India for the Insurance business is large, yet the products offered and
penetration achieved is far less compared to international standards. Estimates
show that a meager 35-40 million, out of the total Indian population have so
far come under the insurance umbrella.

The Life Insurance sector is one of the key areas where enormous business
potential exists. In India currently the life insurance premium as a percentage
of GDP is 1.3 % against 5.2 % in the U.S. Estimates say that the potential
market is so huge that it can grow by 15-17 % per annum. With the entry of
private insurance companies, the Indian insurance market may finally be able
to make deeper penetration into newer segments and expand the market size
manifold and can augment the flow of long-term financial resources for the
growth of infrastructure.

General Insurance is another segment, which has been growing at a fast pace.
As per the current comparative statistics, the general insurance premium has

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been lower than life insurance. General Insurance as a percentage of GDP was
a mere 0.5 % in 1996.

   - More Competition
A number of concerns are being expressed regarding the opening up of the
Insurance sector. But most of them seem to be unfounded. The national
interest lies in increasing the penetration of insurance products, increasing the
retention of premia in India and mobilizing resources for infrastructure needs.
Competition means that players aggressively target potential customers and
this will increase the penetration of insurance.

The retention of premia in India has become a sensitive issue with some
people who demand that the present outgo of around Rs.10 bn by the way of
reinsurance be stopped. These people in the name of safeguarding the national
interest are in fact compromising the interests of the nation. If no reinsurance
is taken it implies that the insurance company is underwriting the entire risk
itself. Thus a single earthquake or a cyclone can wipe out the entire company.

The argument that foreign companies will repatriate premium income through
reinsurance is misplaced. Even now a significant part of the premium is
distributed to reinsurers and much of the high insurance risks are reinsured
overseas. One recent example is the calamity that struck the state of Gujarat
wherein total claims stood at Rs.120 bn Only Rs.29 bn was settled locally
with overseas reinsurers settling the balance. Moreover, every regulator
prescribes that the premium earned is retained in the country and the liabilities
under the contract are matched with assets in the same country. In fact the

                                                                     Page 94
opening up of the sector will increase the retention of premia in India and thus
reduce outgo of the valuable foreign exchange.

The apprehension that there would be a flight of capital is also not borne by
the experience of other countries. If anything, there has been a strong inflow
of foreign capital in the first 5 years for introducing new products and
maintaining the requisite capital adequacy ratio.

The fear that new companies will displace existing players is also unfounded.
In fact in China, Malaysia, Indonesia and Thailand where insurance firms
were allowed entry the foreign companies account for only 10% of the market
share. In South Korea the opening up of the sector saw the Big Six domestic
players, who initially controlled the entire market, increase their business from
3 to 37 trillion won by 1997. The foreign companies were not able to capture
more than 0.4% of the domestic market. Closer home, we have the experience
of the banking sector where despite the presence of 39 foreign banks their
share in overall business is less than 10%.

Thus it is seen that the apprehensions being expressed do not hold much water
and the opening up of the Indian insurance sector would bring about sweeping
changes not only for the consumers but the economy as a whole.

   - Opening Of the Insurance Sector
In India, approx. 60% of the total health expenditure comes from self paid
category as against government‟s contribution of 25-30 %. A majority of
private hospitals are expensive for a normal middle class family. The opening
up of the insurance sector to private players is expected to give a shot in the

                                                                     Page 95
arms of the healthcare industry. Health Insurance will make healthcare
affordable to a large number of people. Currently, in India only 2 million
people (0.2 % of total population of 1 billion), are covered under Mediclaim,
whereas in developed nations like USA about 75 % of the total population are
covered under some insurance scheme. General Insurance Company has never
aggressively marketed health insurance. Moreover, GIC takes up to 6 months
to process a claim and reimburses customers after they have paid for treatment
out of their own pockets. This will give a great advantage to private players
like Cigna which is planning to launch Smart Cards that can be used in
hospitals, patient guidance facilities, travel insurance, etc.

   - Broadening The Benefits: Opening Up
What is the likely impact of opening up India‟s insurance sector? An often-
voiced concern is that private players, especially foreign ones, will swamp the
market, grabbing a large share. This hypothesis has been disproved in
emerging markets worldwide. We believe the threat has been over-played in

Multinational insurers are indeed keenly interested in emerging insurance
because their home markets are saturated while emerging countries have low
insurance penetrations and high growth rates. International insurers often
derive a significant part of their business from multinational operations. As
early as 1994, many of the UK‟s largest life and general insurers derived 40
per cent to 60 per cent of their total premia from outside their home markets.
The figure at Commercial Union was 76 per cent in that year.

                                                                   Page 96
While the impact of global operations on their business may be large,
typically foreign insurers take only a small share of an individual country‟s
market. In Taiwan for example, foreign companies took only a 3 per cent
share even seven years after opening up. In Korea, their share was 1 per cent
after 20 years. In China, a large and complex market like India, private
insurers have not made much headway.

Yet, new entrants find insurance attractive because even a small share of a
large and growing market can be profitable. The Korean insurance market for
example, was only the 30th largest market in the world by premium volume in
1971. It moved up to 6th largest in 1996. In any case, in India multinational
insurers will be restricted to a minority shareholding in new companies. The
new entrants will therefore be private Indian companies.

Nationalized insurers are hampered by their large scale of operations, public
sector bureaucracies and cumbersome procedures. Therefore, potential private
entrants expect to score in the areas of customer service, speed and flexibility.
They point out that their entry will mean better products and choice for the
consumer. Critics counter that the benefit will be slim, because new players
will concentrate on affluent, urban customers as foreign banks did until

This might seem a logical strategy. Start-up costs-such as those of setting up a
conventional distribution network-are large and high-end niches offer better
returns. However, we believe that the middle-market offers the greatest

                                                                     Page 97
potential. This may be still being an urban market but goes beyond the
affluent segment.

Insurance, even more than banking, is a volumes game. A very exclusive
approach is unlikely to provide meaningful numbers. Therefore, private
insurers would be best served by a middle-market approach, targeting
customer segments that are currently untapped.

We anticipate that many new players will indeed take this approach, extending
the benefits of a freer marketplace to a wide base of customers. Faced with
competition, we believe that the nationalized insurers will improve their game,
as they are already trying to do. The customer will be the beneficiary.
   - A Changing Landscape: Competition and Alliances
Many potential entrants are existing financial organizations with a strong
infrastructure, good customer bases and brand equity. Before locking into
company structures or alliances, they must understand their own capabilities.

In our experience, most emerging market organizations looking to enter
insurance go through a similar cycle, driven by the stages of competition (see
chart 1). Initially, after the government first allows private competition, entry
barriers such as capital requirements are high. Expertise and capital are the
scarce resources. Companies that are new to the business conclude that they
need an established insurer as a partner. This is partly because they over-
estimate the expertise required and partly because the partner‟s capital
contribution is valuable.

                                                                     Page 98
Next, they decide that a joint venture is the appropriate vehicle for such a
partnership. In fact, many other forms of alliance are possible. For example,
agreements with information technology vendors can ensure strong systems,
or distribution alliances can ensure reach. Since expertise and systems can be
bought, new companies eventually realize that the scarce resource is brand
strength. They typically find that the partner is unable to deliver everything
that they expect, or that the same results can be achieved alone. They
therefore move to a stand-alone basis relatively quickly.

The reason for this unsatisfactory cycle is that organizations do not spend
enough time understanding their own strengths. A virtuous cycle for a new
insurer would begin with a strategic review to determine which segments of
insurance to enter, followed by a review to identify internal capabilities.
Based on this information companies can examine alliance selection,
answering questions like:
    What support do we need? Do we need a partner or merely a supplier to
      provide this support?
    What form of alliance is appropriate?
    What can third-party organizations actually offer?

They can then select the right partners; negotiate alliances and move on to
business planning, product design and pricing. However, our experience
indicates that most organizations start by selecting a partner, devoting too
little time to the preceding steps. Indeed, some agreements between potential
Indian and international entrants have fallen through already. New entrants

                                                                  Page 99
would be well advised to look ahead to the stage where brand strength will be
a big competitive advantage and sketch their alliances accordingly. In fact we
believe that alliances related to distribution rather than to products or
technology will prove most valuable in the long run.

There is tremendous scope for foreign companies in this sector. Clearly, there
is considerable scope to raise per capita life premium if the market is
effectively tapped. With an insurable population of 300 million, per capita life
premium can be raised to a level of USD 200 to 300 and hence the market can
expand by 50 to 75 times over the existing size. India has traditionally been a
highly savings oriented country. If the insurance market is properly tapped, it
is possible to raise life premium as a percentage of GDP from the existing
level of 1.29 percent to 10 percent. This will bring an eight-fold increase in
the existing volume of life premium.

Life premium as a percentage of GDS (gross domestic saving) is quite low in
India and it is possible to raise life premium as a percentage of GDS in India
from the existing levels. The big question is whether the players are able to
effectively exploit the potential by creating and marketing attractive insurance
products with high rates of return on premium investments.

    Social-Cultural Factors

   - Population Mix
India has an amorphous middle-class of about 250-300 million people who
can afford to buy life, health, and disability and pension plan products. Out of

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this only 22 percent have insurance and that too covers only 25 percent of
their needs and financial capacity. The remaining 80 percent have no
insurance cover. The life insurance market of India, therefore, is practically

   - Shrinkage Of Jobs
The apprehension that competitive Insurance will result in shrinkage of jobs is
equally untrue. The number of people working in Insurance sector is much
less as compared to UK, USA, and Thailand etc. With expected increase in the
business the job opportunities will increase rather than decrease.

The Insurance sector is a service industry and international companies will
help build local professionals with world class expertise by introducing the
best global practices. Competition will also develop a better understanding of
consumer requirements leading to more customized products apt for the
market place. Besides it would also improve the tertiary sector tremendously.
Development of the tertiary sector would include new avenues for actuaries,
accountants, stockbrokers and others.

   - Rural-Urban Mix

It must be borne in mind that India is a predominantly rural country and will
continue to be so in the near future. New players may tend to favor the
"creamy" layer of the urban population. But, in doing so, they may well miss a
large chunk of the insurable population. A strong case in point is the current
business composition of predominant market leader – the Life Insurance

                                                                     Page 101
Corporation of India. The lion's share of its new business comes from the rural
and semi-rural markets. In a country of 1 billion people, mass marketing is
always a profitable and cost-effective option for gaining market share. The
rural sector is a perfect case for mass marketing.

Competition in rural areas tends to be "kinder and gentler" than that in urban
areas, which can easily be termed cutthroat And the generally smaller policy
amounts in rural areas would be more than offset by the higher volume
potential in these areas in contrast with urban areas. Identifying the right
agents to harness the full potential of the vibrant and dynamic rural markets
will be imperative.

Rural insurance should be looked upon as an opportunity and not an
obligation. A smaller bundle of innovative products in sync with rural needs
and perception and an efficient delivery system are the two aspects that have
to be developed in order to penetrate the rural markets.

    Technological Factors

   - Information Technology And LIC

LIC has been one of the pioneering organizations in India who introduced the
leverage of Information Technology in servicing and in their business. Data
pertaining to almost 10 crore policies is being held on computers in LIC. We
have gone in for relevant and appropriate technology over the years.

                                                                  Page 102
1964 saw the introduction of computers in LIC. Unit Record Machines
introduced in late 1950‟s were phased out in 1980‟s and replaced by
Microprocessors based computers in Branch and Divisional Offices for Back
Office Computerization. Standardization of Hardware and Software
commenced in 1990‟s. Standard Computer Packages were developed and
implemented for Ordinary and Salary Savings Scheme (SSS) Policies.

   - Front End Operations
With a view to enhancing customer responsiveness and services, in July 1995,
LIC started a drive of On Line Service to Policyholders and Agents
through Computer. This on line service enabled policyholders to receive
immediate policy status report, prompt acceptance of their premium and get
Revival Quotation, Loan Quotation on demand. Incorporating change of
address can be done on line. Quicker completion of proposals and dispatch of
policy documents have become a reality. All our 2048 branches across the
country have been covered under front-end operations. Thus all our 100
divisional   offices   have   achieved   the distinction   of 100% branch
computerization. New payment related Modules pertaining to both ordinary &
SSS policies have been added to the Front End Package catering to Loan,
Claims and Development Officers‟ Appraisal. All these modules help to
reduce time-lag and ensure accuracy.

   - Metro Area Network
A Metropolitan Area Network, connecting 74 branches in Mumbai was
commissioned in November, 1997, enabling policyholders in Mumbai to pay
their Premium or get their Status Report, Surrender Value Quotation, Loan
Quotation etc. from ANY Branch in the city. The System has been working

                                                                Page 103
successfully. More than 10,000 transactions are carried out over this Network
on any given working day. Such Networks have been implemented in other
cities also.

   - Wide Area Network
All 7 Zonal Offices and all the MAN centres are connected through a Wide
Area Network (WAN). This will enable a customer to view his policy data
and pay premium from any branch of any MAN city. As at May 2002, we
have 91 centers in India with more than 1320 branches networked under

   - Interactive Voice Response Systems (IVRS)
IVRS has already been made functional in 59 centers all over the country.
This would enable customers to ring up LIC and receive information (e.g. next
premium due, Status, Loan Amount, and Maturity payment due, Accumulated
Bonus etc.) about their policies on the telephone. This information could also
be faxed on demand to the customer.

   - LIC On The Internet
Our Internet site is Informative. We have displayed information about LIC &
its subsidiaries-LIC (International) E.C., LIC (Nepal) Ltd, LIC Mutual Fund,
LIC Housing Finance and their products. Efforts are on to upgrade our web
site to make it dynamic and interactive. The addresses/e-mail Ids of our Zonal
Offices, Zonal Training Centers, Management Development Center, Overseas
Branches, Divisional Offices and also all Branch Offices with a view to speed
up the communication process.

                                                                 Page 104
   - Payment Of Premium And Policy Status On Internet
LIC has given its policyholders a unique facility to pay premiums through
Internet absolutely free and also view their policy details on Internet premium
payments. There are 11 service providers with whom L I C has signed the
agreement to provide this service.

   - Information Kiosks
We have set up 150 Interactive Touch screen based Multimedia KIOSKS in
prime locations in metros and some major cities for dissemination information
to general public on our products and services. These KIOSKS are enabling to
provide policy details and accept premium payments.

   - Info Centers
We have also set up 8 call centers, manned by skilled employees to provide
you with information about our Products, Policy Services, Branch addresses
and other organizational information.

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Grievance Handling Mechanism for Policy Holders

LIC has more than 8 lakh agents all over the country. They are the first and
nearest points of contact for policy holders for redressal of their grievances
with regard to the policies taken by them. Their agents are well trained and
assist the policy holds in most areas of policy servicing.

However, to take care of the problems which agents find difficult to solve.
Grievance redressal officers have been appointed at the branch, zonal and
central offices. In the branch, the branch manager is the designated
Grievance Redressal Officer. The marketing managers at these Regional
and Divisional offices are other designated officers. These officers set aside
2 hours on every Monday to hear the grievances of the policy holders,
without any prior appointments. There are also free telephone lines provided
to the policy holders at Mumbai for calling the designated officers at the
divisional\zonal and central offices in connection with the redressal of their
There are Complaint cells at the divisional offices and complaint sections at
the zonal offices and central office for attending to complaints from policy
holders. Claim Review Committee has been appointed at all the zonal
offices and at all the central offices for considering the appeals against
repudiation of liability under some claims for suppression of facts material
to the assessment to the risk. The divisional offices, while repudiation
liability also inform the claimant that if he\she is not satisfied with the
decision the he/she may approach this review committee. This committee at

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the zonal offices has the benefit of the presence of a retired igh court/district
kudge besides 3 senior officers from the zonal offices. The intention of the
corporation in inducting such retired judges is to ensure not only greater
transparency in operations but also to ensure that an independent judicial
opinion maybe available so that the decision can stand by any court of law.

The Zonal Review committee will receive all appeals irrespective of the
claim amount and review them. Their decision up to net claim of 2 lakh Rs
will be final. However, claimants with net claim amounts exceeding 2 lak
and not satisfied with the decision of the Zonal Claims Review committee at
the central office and commended it. Besides, the central government in
exercise of powers conferred by the sub section1 of the section 114 of the
Insurance Act, 1938 have been pleased to frame the Redressal of Public
Grievances rules, 1998 vide notification dated 11-1-98. These rules seek to
resolve complaints relating to settlement of claims etc., in repect of
insurance companies in a cost-effective, efficient and impartial manner.
These rules also provide for the appointment of one or more persons as
Ombudsman for achieving the purpose of the said rules. The Ombudsman
under the rules may receive and consider:-
   a) Grievances relating to any partial or toal repudiation of liability by
      any insurer.
   b) Any dispute in regard to premium

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Customer Service and Quality

Between one insurer and another, the differentiating factor will be the in this
experience of the customer. There is not much likelihood of much difference
in the terms of the policy itself. There would be no difficulty in any insurer
offering the same benefits as another insurer. Technology is not exclusive.
Premiums could be different depending on the efficiency of management.
But life insurance is seldom bought on the basis of the cheapest price. The
experience during purchase, after purchase and at the time of the claim will
make the difference. This experience is the result of the nature of customer

In case of insurance, the experience after the purchase is the continued
attention and concern shown to the customer, would reassure him that the
promise he believed in while making the purchase was not misplaced. If he
does not receive such attention and expression of concern, he could start
doubting the servicing-provider. Apart from the help in processing the claim
when it occurs, post sales servicing would include regular reminders as to
the customer‟s obligation like payment of renewal, furnishing of data as may
be required, compliance with warranties and so forth.

Managements around the world have learnt that „satisfied customers‟ are the
only route for sustained growth in competitive environment. They are now
striving to make customer increasingly happy. The opportunity to do so is
not much in are available not much intangible components of products of

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products, but in intangible service components. Life Insurance, being a pure
intangible, provides plenty of option.

The quality of service is what customer says it is. He judges the organization
by his experience. The judgement is influenced by the extent to which his
presence and the needs are recognized. People get badly upset when they are
not heard, when they are ignored or spoken to impotently, when their
inquiries are treated irrelevant, when they are brusquely told to wait, etc.
they feel good when someone listens to what they have to say, shows
consideration for the problem and explains why something is done or not

A grievance is a symptom that the quality is not perceived as satisfactory. A
customer has a grievance when he does not get what he thinks he is entitled
to. A grievance is to be taken seriously because it gives clues s to what is
going wrong, it indicates what customer expects or the customer may be
lost. When a grievance is attended to quickly and seriously there is
satisfaction, which, in turn, wipes out the adverse experience.

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LIC‟s Customer Relationship Management

    The Emerging Scenario
With the emergence of competition, LIC has implemented strategic moves
for business growth, as well as ensured quality improvement in service
standards. As on today, they have been providing service to around 12 crore
policy holders and their track has been well acknowledged as reflected
through continual upgradation of service standards culminating into a world
class performance in the area of claim settlement operations.
It is well acknowledged that LIC has been able to provide appropriate IT
support in furtherance of prompt service to their valued policy holders. The
complex task of conversion of computerization of all the branches with their
conversion as Front Line offices has been completed in aphase manner. In
addition to this, the launching of the IVRS facility, MAN and Wide Area
Network operations has helped the co-operation improve its servicing.

LIC‟s strength lies in:
   a. Wide network of branches covering rural areas.
   b. A large and well- spread agency organization.
   c. An acknowledged record of performance.
   d. Adequate yield with high risk cover being offered keeping the policy
      holders satisfied in the existing in the economic scenario.
   e. A well accepted brand equity throughout the country.

In addition to this, LIC has an established and well administered Grievance
Redressal Mechanism and with Ombudsman intervention, the customers

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appear to be well attended. However, this mechanism has to be restructured
keeping in view the additional legal provisions laid down by the regulator as
expounded in the IRDA act.

    Futuristic Approach
Till today, LIC enjoyed a monopoly. It is now that reality exists in the are of
marketing (i.e. sales and after sales service operations). It will now have to
follow a multi-faceted strategy towards customer retention and also
expanding to a new clientele. With the new face of the market, relationship
management seems to be the new mantra.

At the nucleus of this approach is the concept of Customer Relationship
The need is to have a comprehensive review of the business keeping in view
customer expectations.

    Customer Orientation
LIC, to be in the reckoning, has to have an efficient feed-back system, so as
to understand what the customer desires in terms of product design, service
procedures, relationship convinience, accessibility, responses in terms of
personalized service, attendance, core and complimentary on an individual
basis. The new players in the market like ICICI, HDFC etc. will definitely
be very aggressive in the open market. LIC has to go ahead with their former
customers, existing customer, in a very gentle and courteous manner,
reassuring them of their better services with persona, attention.
Managed customer relations help to:

                                                                    Page 111
   1. Design the product
   2. Know your competitive edge in the market with diversified product
      launch by the competitors.
   3. Understand customers perception of our existing service standards.
   4. Predict customers future expectations.
   5. Enable us to proceed with segmental marketing (either customer
      oriented or product oriented).
   6. Assess impact of economic changes, fiscal and commercial policies,
      market and industrial operations vis-à-vis customer demand.

    Relationship Management Process
It is very important that everyone in the organization should accept and live
by the goal of customer satisfaction. All challenges should be converted to
opportunities for expansion. There has to be a philosophical and cultural
orientation. Once the process is launched, it should lead the entire
organization to achieve 100% retention of existing customers, with full
satisfaction of their expectations and this class of customers will spread
throughout the country and carry LIC‟s brand equity by word of mouth.
There should be relationship existing with former customers since they are
opinion makers. Such customers will include former policyholders and also
their intermediaries.
The intermediaries i.e., agents are their internal customers and if they are
well looked after and kept happy, they can provide a smooth pace leading to
their value customers.
    Strategic Moves
          - Deploying multifunctional service tools for the convenience of
             their valued customers.

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         - Retention of professional agents (club members) to retain the
            existing policyholders.
         - Providing online data support to these professional with proper
            safeguard procedures.
         - Management of multiple markets includes the sales and after
            sales service to prospects and customers, representing different
            segments identified on the basis of        economic conditions,
            financial status, occupational, professional, social and cultural
            differences and of course, regional diversification.
         - Participation of the buyer right from the stage i.e. OFFER.
            Conducting Customer       Profile Surveys to know the existing
            family and individual need.
         - Information sharing with the valued customers: LIC‟s branch
            officials and   marketing officials should remain in touch with
            customers at different levels       through communication and

The Insurance Potential -- Future

                                                                   Page 113
India has an amorphous middle class of about 350-300 million people who
can afford to buy life, health and other insurance products. Out of this only
22% have insurance and that too covers only 25% of their needs. The
insurance market in India is therefore practically untapped. At present the
size of insurance market in India is pegged at approximately US$ 92.5
billion. Of the total size of the market 80% is of life insurance and 20% of
non-life insurance. According to estimates drawn by some international
insurance consultants, the insurance market is likely to grow at an average
rate of about 15% for the next five years. In anticipation of tapping the huge
market, a number of insurance companies have set up their respective offices
in India and tied up with various Indian companies.

With the entry of competition, the market is witnessing a wide array of
products from players whose numbers are set to grow. In such a scenario, the
differentiators among the various players are the products, pricing and

Today the Indian consumers are increasingly becoming more aware and are
actively managing their financial affairs. Today, while boundaries between
various financial products are blurring, people are increasingly looking not
just at products, but at integrated financial solutions that can offer stability of
returns along with total protection.

To satisfy these myriad needs of products, insurance products will need to be
customized. Insurance today has emerged as an attractive and stable
investment alternatively that offers total protection - Life, Health and
Wealth. In terms of returns, insurance products today offer competitive

                                                                       Page 114
returns ranging between 7% to 9%. Besides returns, what really increases the
appeal of insurance is the benefit of life protection from insurance products
along with health cover benefits.
Consumers today also seek products that offering flexible options, preferring
products with benefits unbundled and customizable to suit their diverse
needs. While sales of traditional life insurance products like individual,
whole life and term will remain popular, sale of new products like single
premium, investment linked, retirement products, variable life and annuity
products are also set to rise. Firms will need to constantly innovate in terms
of product development to meet ever-changing consumer needs. However,
product innovations are quickly and easily cloned. Pricing will also not vary
significantly, with most product premiums hovering around a narrow band.

In this competitive scenario, a key difference will be the customer
experience that each insurance player can offer in terms of quality of advice
on product choice, along with policy servicing and settlement of claims.
Service should focus on enhancing the customer experience and maximizing
customer convenience. Long-term growth in the business will greatly
depend on the distribution network, where the emphasis must evolve from
merely selling insurance to acting as financial advisors, helping customer's
plan their finances depending on personal requirements. This calls for a
strong focus on training of the distribution force to act as financial
consultants and build a long lasting relationship with the customer. This
would help create sustainable competitive advantage not easily matched.

The main reason why the leading insurance companies in the world and the
leading corporate group in India have shown a keen interest in the insurance

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sector, is the vast potential for future business. Restricted, as the market has
been, through the operations of the two monopolies (LIC and GIC), it is
generally felt that the sector can grow exponentially if it is opened up. The
decade 1987-97 has witnessed a compounded growth rate of marginally more
than 10% in life insurance business. LIC predicts for itself that its business has
potential to grow by 16.27% p.a. in a decade 1997-2007 (LIC, 1997). If we
take a look at insurance coverage index for the age group of 20-59 years a
considerable gap between India and other countries in Asia can be observed.
In this scenario, naturally insurance companies see a vast potential.

SWOT Analysis
After Understand the whole Insurance Sector, I have prepared SWOT
Analysis of the Sector:


                                                                    Page 116
   The industry is growing which is a sign of recovery of the economy
     leading to creation of a stable economy. It is one of the booming
   Better living standards and quality of life. Low claim-high profit.
   ASK Good returns on investment of life funds in avenues.
   Healthy product line, competitive prices and excellent customer
     services directed to customer satisfaction. Thanks to competition.
   IRDA acting as a Watch Dog.
   Technology will play a strategic role in providing a competitive edge-
     be it in aiding design and administration of products or building life
     long customer relationships. It will also help enhance service, ensure
     effective and efficient delivery system and also will lead to greater
     customization of products and greater transparency. For example,
     LIC has IVRS (Integrated Voice Response System) and also provides
     the facility of online premium payment through and
   Transparency of management by all existing players in terms of
     premium collected, invested, profit generated and distributed and the
     commission structure.
   Only source of safe and high yield nowadays.

   It requires huge initial investment.
   The Indian companies, which have collaborated, with big foreign
     insurance companies are novice to this field.
   Break even will be reached after 7 years of operations.

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 ASK No other intermediaries are allowed to sell insurance except
 ASK IRDA has specified norms, which restricts life corpus to be
    invested in hot scripts that could earn higher returns and also add fuel
    to economic development. The 85% of the premium amount or the
    corpus must be invested in Government Securities which yields
    around ASK returns could be converted into 30 –35% if managed and
    churned well by allowing them to invest on stock and foreign markets.
    This norm would reduce the attractiveness of the insurance policies to
    the consumers, hereby, reducing the total demand for the insurance as
    a whole.


 Pie worth Rs. 32,000 crore is waiting to be grabbed by insurers.
 India, no doubt, is a highly underinsured country, with penetrated
    level of only 1.3% of GDP as against 2.86% in Israel and 2.43% in
    Hong Kong.
   Total Indian insurable population is around 32%, which is insured by
    15 to 22% a year against industry growth of 17%.

 Time to refurnish – By G.N. Bajpai (chairman, LIC)
    So many players are in the industry, which leads to better product at
    best price and above all will increase the awareness of insurance by
    promotional activities.

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   Shift in customers‟ perspective to see insurance as a risk management
     tool rather than a tax saving and saving tool.
   Higher disposable income and low inflation rate
     Nuclear Families – the joint family system has strong roots ion the
     country. In the event of calamity, other members of the family come
     to rescue, especially with financial assistance.
   “See rural sector 0 rural India which is more than 60%, see them as
     opportunity not as an obligation”, IRDA.
   More penetration of insurance leads to more savings leading to more
     investment, which means more employment hence generating more
     income, which again means increased consumption and savings. All
     these leads to economic growth.
   Due to new entrants insurance is coming out of its image of
     bureaucracy. It has touched new horizons thanks to competition.
   If IRDA allows Bancassurance, market will have readymade
     distribution channel available in terms of PSU and Private banks
     which will lead to one step and one stop financial assistance to
   The lack of a comprehensive social security system combined with a
     willingness to save means that Indian demand for pension products
     will be large.


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   If IRDA allows brokers, banks and other intermediaries to sell
     inurance, it will be worst for agents who are not at all competitive in
     this growing phase.
   To penetrate in the market very fast and to earn hefty commission
     company could have also problem of wrong underwriting and due to
     carelessness failure of one private player could shake out all the other
     private players in the market.
   Unstable inter-national and international conditions, clouds of war
     between two nations, terrorists attack, riots and other bio-wars lend
     huge devastation and companies should prepare itself for it.
   As insurers claim their products as providing tax benefit. That would
     not be any longer the----. Mr. Sinha has already taken a first step to
     cancel out all the investment benefits on policies (both sections 80CC
     and 80D) by restructuring the slab set off perks benefits.
                  Upto Rs. 1,50,000         20%
                  More than 1,50,000        10%
   Except LIC, which is known to invest all surplus to ---- economic
     development, other than LIC the problem with private players is that
     the “profit will be forayed in their countries which ----- our foreign
     exchange deficit to smaller extent but it is to be an arguable
     matter…IRDA is likely to come out with certain norms for profit


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There are a few insurances, which Indian Insurance companies do not
provide. Hence some new product development is required in this sector.
A few of the policies are,

1. Industry all risk policies
2. Large projects risk cover
3. Risk beyond a floor level
4. Extended public and product liability cover
5. Broking and captivities.
6. Alternative risk financing
7. Disability insurance
8. Antique insurance
9. Mega show insurance
10. Celebrity visits to the country.


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Probably, India must be one of the lowest insured countries in the world i.e.
7 per cent. This scenario has to change. We should not only have 100 per
cent insurance, but also 100 per cent social security.

Personally and patriotically I feel Indian Insurance companies should cover
Indian Insurance business, we cannot insist on the same globally. So Indian
Insurance companies have to be more customers friendly and sufficient so
that we can compete with the best in the world.

They need to improve their services and offer maximum customer

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