ON

INNOVATION IN INDIAN
INSURANCE INDUSTRY

NIRBHAY
PANDEY
 DECLARATION

I hereby declare that the Dissertation on:

Innovation in Indian Insurance Industry
Submitted in partial fulfillment of the requirement for the
two year PGDM (Insurance & Risk Management) is
collected by my own efforts and it is true and real to the
best of my knowledge.
Also, the report presented has not been published anywhere
else.
 PREFACE
A well-developed and evolved insurance sector is needed for
economic development as it provides long term funds for
infrastructure development and at the same time strengthens the
risk taking ability. It is estimated that over the next ten years India
would require investments of the order of one trillion US dollar.
The Insurance sector, to some extent, can enable investments in
infrastructure development to sustain economic growth of the
country.

ULIPs, insurance-cum-investment, are life insurance plans whose

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

Bancassurance, new concept catching up fast in India. One of

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

Health Insurance, With proliferation of various health care

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

Gratitude is the hardest of emotions

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

THANK
YOU
CONTENTS
 Introduction

T he Indian insurance market is experiencing lot of cosmic

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

Due to this there was government monopoly existing in the

insurance sector where there was only two dominant players LIC
and GIC offering few number of product. But after opening up of
this sector to the private and foreign companies, large number of
private and foreign companies appeared in insurance sector,
providing variety of insurance products with majority of insurance
company laying more stress on home loan insurance. Thus creating
lot of competition in the insurance sector as each of companies
wanted to acquire greater market share.
 Call for Innovation
Demographic changes, channel optimization pressures, changing
compliance environment, and increasing competition are forcing
insurers to increase the pace of product innovation to meet their
growth and profitability objectives. This paper examines the causes
of product introduction inefficiencies and discusses approaches to
improving capabilities to achieve rapid product introduction.
The period of stable product portfolios that rarely change is long
past the insurance industry. As with other industries, insurance is
being forced to respond to the ever-changing demands of
distributors and customers. Carriers refresh their product portfolio
by either adding new products or enhancing existing ones to meet

market demands. Periodically, they also discontinue non-

performing products, though it does not eliminate the need to
support servicing of policyholders.

This constant addition of new products, while continuing to

support old ones, has been a major contributor to the complex
environment insurers find themselves in today.

Retooling the internal operations of a company to support new

products is difficult, time consuming and costly, but necessary.

In the “good old days” when companies relied on a single,

relatively simple back office system, changes were easy to make,
test and move to production. In today’s multiple, complex back
office systems with their plethora of interfaces and inter
dependencies, making a change in one system can have multiple
and unforeseen consequences across the enterprise – assuming you
can determine where to make the change in the first place.
Business Drivers for Product Introduction

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

Business drivers that accentuate the need to quickly and cost-

effectively launch new or enhanced products can be grouped under
the following four major heads (Fig. 2):

Customer demand: Competition in the insurance marketplace has

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

Pressure from distributors: The demands of distributors –

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

As new product offerings from innovative insurance companies

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

Regulations – the moving target: Insurance is a highly regulated

industry that must constantly review and adjust its product
offerings to ensure compliance. In addition, the changing
regulations often offer new opportunities to aggressive and
innovative carriers. Regulations impact every aspect of the product
design and development process – product filings, rate approvals,
regulatory reporting, tax treatment, disclosure, etc.
What Ails the Product Development Process?
The product development or enhancement process in a typical
insurance company requires a high level of collaboration and
coordination among various stakeholders from product design,
programming, legal, compliance, operations, marketing, training,
etc.

More than 50% resources of the total product development

lifecycle are taken by the implementation phase. The actual
implementation of new products entails substantial resource
investments. The process also necessitates many handoffs between
the stakeholders.
The emerging trends in the industry in terms of product
innovation
Riders and unit linked products have led some of the visible
innovations in the market place. Riders can be used to customize
life insurance for varying customer requirements, provide health
coverage, and improve a product's competitive profile through
improved customer value. Health oriented life insurance covers,
asset allocation products, saving products, which offer downside
protection with the opportunity to participate in upsides, worksite-
marketing products, and customized group corporate retirement
products are among the emerging innovative product categories.
Regulation will also play a crucial role in the speedy emergence
and efficacy of other innovative product offerings and categories.
Finally, as the pension market develops, variable annuities (VA)
and equity-indexed annuities could emerge as part of the product
suite of life insurance companies. Clearly, product innovation is a
major strategic imperative for insurers. The key is to offer products
based on deep insights of consumer needs. In the long term, only
such products survive and grow into a meaningful and profitable
component of an insurer's product portfolio.

The opening up of the insurance sector saw the emergence of

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

The rise in preference for ULIPs as compared to traditional

products

Apart from protection benefits, ULIPs provide policyholders an

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

ULIPs give customers an option to participate in equity and debt

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

A BRIEF HISTORY OF UNIT LINKED INSURANCE

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

5 steps to selecting the right ULIP

Here's a 5-step investment strategy that will guide investors in the

selection process and enable them to choose the right unit-linked
insurance plans (ULIPs).

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

For the generation of insurance seekers who thrived on insurance

policies with assured returns issued by a single public sector
enterprise, unit-linked insurance plans are a revelation.

Traditionally insurance products have been associated with

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

Perhaps insurance policies then were symbolic of the times when

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

While in conventional insurance products the insurance component

takes precedence over the savings component, the opposite holds
true for ULIPs.

More importantly ULIPs (powered by the presence of a large

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

In traditional insurance products, the sum assured is the corner

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

Investors have the choice of enhancing their insurance cover,

modifying premium payments and even opting for a distinct asset
allocation than the one they originally opted for.

Also if an unforeseen eventuality were to occur, in case of

traditional products, the sum assured is paid along with
accumulated bonuses; conversely in ULIPs, the insured is paid
either the sum assured or corpus amount whichever is higher.

Insurance seekers have never been exposed to this kind of

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

For the uninitiated, understanding the functioning of ULIPs can be

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

As is the case with most evolved investment avenues, making

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

How to select the right ULIP

For a product capable of adding significant value to investors'

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

We present a 5-step investment strategy that will guide investors in

the selection process and enable them to choose the right ULIP.

1. Understand the concept of ULIPs

Do as much homework as possible before investing in an ULIP.

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

Gather information on ULIPs, the various options available and

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

2. Focus on your need and risk profile

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

As a result if you have a high risk appetite, then an aggressive

investment option with a higher equity component is likely to be
more suited. Similarly your existing investment portfolio and the
equity-debt allocation therein also need to be given due importance
before selecting a plan.

Opting for a plan that is lop-sided in favour of equities, only with

the objective of clocking attractive returns can and does spell
disaster in most cases.

3. Compare ULIP products from various insurance companies

Compare products offered by various insurance companies on

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

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

Enquire about the top-up facility offered by ULIPs i.e. additional

lump sum investments which can be made to enhance the policy's
savings portion. This option enables policyholders to increase the
premium amounts, thereby providing presenting an opportunity to
gainfully invest any surplus funds available.

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

4. Go for an experienced insurance advisor

Select an advisor who is not only conversant with the functioning

of debt and equity markets, but also independent and unbiased.
Ask for references of clients he has serviced earlier and cross-
check his service standards.

When your agent recommends a ULIP from a given company, put

forth some product-related questions to test him and also ask him
why the products from other insurers should not be considered.

Insurance advice at all times must be unbiased and independent;

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

5. Does your ULIP offer a minimum guarantee?

In a market-linked product, protecting the investment's downside

can be a huge advantage. Find out if the ULIP you are considering
offers a minimum guarantee and what costs have to be borne for
the same.

Unit Linked Insurance Plans (ULIPs)

For the generation of insurance seekers who thrived on insurance

policies with assured returns issued by a single public sector
enterprise, unit-linked insurance plans are a revelation.

Traditionally insurance products have been associated with

attractive returns coupled with tax benefits. The returns part was
often so compelling that insurance products competed with
investment products for a place in the investor's portfolio. Perhaps
insurance policies then were symbolic of the times when high
interest rates and the absence of a rational risk-return trade-off
were the norms.

The subsequent softening of interest rates introduced a degree a

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

More importantly ULIPs (powered by the presence of a large

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

In traditional insurance products, the sum assured is the corner

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

Investors have the choice of enhancing their insurance cover,

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

Insurance seekers have never been exposed to this kind of

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

For the uninitiated, understanding the functioning of ULIPs can be

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

Charges and Expenses

ULIPs work very similar to a mutual fund with an added benefit of

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

Broadly speaking, ULIP expenses are classified into three major

categories:

1) Mortality charges

Mortality expenses are charged by life insurance companies for

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

Insurance companies incur these expenses for operational purposes

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

3) Fund management charges (FMC)

These charges are levied by the insurance company to meet the

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

Apart from the three expense categories mentioned above,

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

a) Switching charges

Individuals are allowed to switch their ULIP options. For example,

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

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

c) Cancellation charges

Life insurance companies levy cancellation charges if individuals

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

The Compounded Annual Growth Rate (CAGR) of the fund goes

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

Fund management charges also have an effect on the returns. FMC

is levied on the corpus, which keeps fluctuating over the tenure.

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

bear in mind that expenses are an important variable while

evaluating ULIPs across life insurance companies. They have the
potential to make a considerable difference to the returns generated
over a period of time.
 HEALTH
INSURANCE
“Growth in national income by itself is not enough, if the
benefits do not manifest themselves in the form of more food,
better access to health and education”: -------Amarty K Sen

Expenditure on health by the Government continues to be

low. It is not viewed as an investment but rather as a dead
loss!
 States under financial constraints cut expenditure on health
Still India is way behind many fast developing countries
such as China, Vietnam and Sri Lanka in health
indicators

In case of government funded health care system, the quality

and access of services has always remained major concern.

Very rapidly growing private health market has developed in

India & they are helping in bridging the gap between what
government offers and what people need

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

With proliferation of various health care technologies and

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

Health scenario in India

India spends about 6.5 to 7% of GDP on Health care (official

estimates hover around 6%) out of which 1.3% is in the Govt.
sector (this accounts for 22% of overall spending) and 4.7% in
private sector (78% of overall spending).

National level of spending on Health care under five year plans

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

There are various types of health coverage's in India.

Based on ownership the existing health insurance schemes
can be broadly divided into categories such as:

Government or state-based systems

Market-based systems (private and voluntary)

Employer provided insurance schemes

Member organization (NGO or cooperative)-based systems

Popular plans of ICICI Lombard

Critical Care Insurance

80 D of the Income Tax Critical Care protects you or your
spouse against loss of income on diagnosis of any of the 9 major
medical illnesses and procedures. The first of its kind, it offers
a lump sum benefit on diagnosis of Cancer, Bypass Surgery,
Heart Attack, Kidney Failure, Major Organ Transplant,
Stroke, Paralysis, Heart Valve Replacement Surgery or
Multiple Sclerosis. Critical Care Insurance also provides cover
against accidental death and permanent total disablement
(PTD).

10 K Tax Saver Plan - Introduction

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

Family Floater Health Plan - Introduction

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

Personal Accident Insurance

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

Bajaj Allianz

Health Guard : Bajaj Allianz covers you and your family

against expensive medical care including pre & post
hospitalization expenses. Sum assured up to 5 lacs per insured.

Critical illness: Protection against the 10 major life threatening

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

United India Insurance Products

• Personal Accident Policy

• Mediclaim Policy
• Overseas Mediclaim Policy for Business and holiday
• Overseas Mediclaim Policy for Employment and Studies
• Overseas Mediclaim Policy for Corporate Frequent
Traveler
• Road safety package Policy
• Uni medicare Policy

The New India Assurance

• Health Plus Medical Expenses Policy

 • Mediclaim Policy
• Personal Accident Policy
• Overseas Mediclaim Policy

Star Health And Allied Insurance Company

Star True Value Health Insurance is an offering designed to

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

STAR Medi Classic policy to provide for reimbursement of

hospitalization expenses.

NRI All Care, to insure the health of family members of Non-

Resident Indians. It provides for financial help and assistance,
should a medical emergency arise.

Family Health Optima to protect all members of a family from

financial setbacks in the event of a serious illness. The coverage
is applicable equally to all members of the family.

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

Conclusion From Comparison

• German system is clearly superior to American system

• German system is social health insurance based on
solidarity delegation and free choice
• American system is based on private market philosophy .
• Thus the German system is much more suited to the
needs of the developing countries.
Constraints in adopting German models in India
• For social health insurance to work the work force has to
be organized and working in formal sector so that their
incomes are clear and there is a mechanism for payroll
deduction of the contribution.
• It also needs a well-developed regulatory framework and
culture of solidarity and self-regulation so that well off
section of the community is willing to pay for the costs of
sickness
Universal compulsory social health insurance is not possible in
India at this stage.

Micro Health Insurance

Characteristics of the MHIs

• Organized by NGOs
• Targeting the poor
• Provides a comprehensive package
• Collects affordable premiums
• NGOs and communities manage the administration
• Usually requires some external resources for financial
viability.

Imperative of Liberalization in Health insurance

Poor country like India ,where only asset people have is their
bodies
Early 1990 govt key tool to manage fiscal deficit was decrease
Govt Expenditure
Poor Quality of health service by govt-
Clients did not demanded better service as it was free of cost
Current health scenario
• Accounts for 1.2% of expenditure on health of country
• TPA has not only speeded the claim process but reduced
the insurer burden
• Total claim 64% were settled in 1 month & 89% in 1-3
month

Challenges Faced by India

• India has 48 doctors per 100,000 persons which is
fewer than in developed nations
• Wide urban-rural gap in the availability of medical
services: Inequity

Poor facilities even in large Government institutions compared

to corporate hospitals (Lack of funds, poor management,
political and bureaucratic interference, lack of leadership in
medical community
 INNOVATION IN
DISTRIBUTION CHANNEL

DISTRIBUTION CHANNELS

Present Distribution Channels for Insurance Products in India

Insurance industry in India for fairly a longer period relied heavily on
traditional agency (individual agents) distribution network IRDA (2004). As
the insurance sector had been completely monopolized by the public sector
organizations for decades, there was slow and rugged growth in the
insurance business due to lack of competitive pressure. Therefore, the zeal
for discovering new channels of distribution and the aggressive marketing
strategies were totally absent and to an extent it was not felt necessary. The
insurance products, by and large, have been dispensed mainly through the
following traditional major channels:
(1) development officers,
(2) individual agents and
(3) Direct sales staff.
It was only after IRDA came into existence as the regulator, the other forms
of channels, viz., corporate agents including Bancassurance, brokers (an
independent agent who represents the buyer, rather than the insurance
company, and tries to find the buyer the best policy by comparison
shopping2 ), internet marketing and telemarketing were added on a
professional basis in line with the international practice. As the insurance
sector is poised for a rapid growth, in terms of business as well as number of
new entrant tough competition has become inevitable. Consequently,
addition of new and more number of distribution channels would become
necessary.

With the opening up of the insurance sector and with so many players
entering the Indian insurance industry, it is required by the insurance
companies to come up with innovative products, create more consumer
awareness about their products and offer them at a competitive price. New
entrants in the insurance sector had no difficulty in matching their products
with the customers' needs and offering them at a price acceptable to the
customer.
But, insurance not being an off the shelf product and one which requiring
personal counseling and persuasion, distribution posed a major challenge for
the insurance companies. Further insurable population of over 1 billion
spread all over the country has made the traditional channels of the
insurance companies costlier. Also due to heavy competition, insurers do not
enjoy the flexibility of incurring heavy distribution expenses and passing
them to the Customize form, With these developments and increased
pressures in combating competition, companies are forced to come up with
innovative techniques to market their products and services. At this juncture,
banking sector with it's far and wide reach, was thought of as a potential
distribution channel, useful for the insurance companies. This union of the
two sectors is what is known as Bancassurance.

Distribution - the key differentiator

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

• Using the right distribution channel to reach the customer

BANCASSURANCE- An innovative distribution channel

Your bank has already changed a great deal over the past decade. Your
banker was once content to collect your deposits and then lend the money to
companies at a profit. Now he wants to lend to you as well. It could be a
loan for a new house, a new car or even for education in a foreign university.
Then there are products like demat services and mutual funds. Soon, there
will be more. When you walk into your bank six months from now, it is
likely that they will try to sell a host of insurance products to you even.
Welcome to Bancassurance. Bancassurance - a term coined by combining
the two words bank and insurance (in French) - connotes distribution of
insurance products through banking channels. Bancassurance encompasses
terms such as `Allfinanz' (in German), `Integrated Financial Services' and
`Assure banking'. This concept gained currency in the growing global
insurance industry and its search for new channels of distribution. Banks,
with their geographical spread and penetration in terms of customer reach of
all segments, have emerged as viable sources for the distribution of
insurance products. Presently, there’s more activity here than anywhere else.
And every one wants to jump onto the bandwagon for a piece of the action
cake. The insurance industry has finally woken up from its long slumber to
an altogether new awakening.

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

The banking and Insurance industry has change rapidly in the changing and
challenging economic environment through out the world. In the
competitive and liberalized environment everyone is trying to do better than
others and consequently survival of the fittest has come into effect.
Insurance companies are also to be competitive by cutting cost and serving
in a better way to the customers. Now the time has come to choose and
adopt appropriate distribution channel through which the insurance
companies can get the maximum benefit and serve. Customers in manifold
ways. The intermediaries in the insurance business and the distribution
channels used by carriers will perhaps be the strongest drivers of growth in
this sector. Multi channel distribution and marketing of insurance products
will be the smart strategy of continue to play an important role in
distribution, alternative channels like corporate agents brokers and
bancassurance will play a greater role in distribution. The time has come for
the industry To gradually move from traditional individual agents towards
new distributional channels with a paradigm shift in creating awareness and
not just selling products. The game is old but the rules are new and still
developing. Ensconced a monopoly run from the nationalized days
beginning in 1956, the insurance industry has indeed awakened to a
deregulated environment which several private players have partnered with
multinational insurance giants. However despite of its teaming one billion
populations, India still has a low insurance penetration of 1.95 percent, 51st
in the world. Despite the fact that India boosts saving rate around 25 percent,
less than 5% is spent on insurance. To streamline the saving into insurance,
bancassurance is the best channel to tackle four challenges facing the
industry :-

product innovation,
distribution,
customer service,
investments.

What is Bancassurance?

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

distribution channel. It is a phenomenon wherein insurance products are
offered through the distribution channels of the banking services along with
a complete range of banking and investment products and services. To put it
simply, Bancassurance, tries to exploit synergies between both the insurance
companies and banks.
Bancassurance if taken in right spirit and implemented properly can be win-
win situation for the all the participants' viz., banks, insurers and the
customer.
Bancassurance commonly means selling insurance products under the same
roof of a bank. Though Bancassurance had roots in France in the 1980s, and
spread across different parts of Continental Europe since, it has spread its
wings in Asia –in particular, In India, there are a number of reasons why
Bancassurance could play a natural role in the insurance market

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

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

(3) Banks are culturally more acceptable than insurance companies. Dealing
with (life) insurance, in many parts of India, conjure up an image of a bad
omen. Some bank products have natural complementary insurance products.
For example, if a bank gives out a home loan, it might insist on a life
insurance cover so that in case of death of the borrower, there is no problem
in paying off the home loan.

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

taken out on that particular car. we trace some of the salient developments of
banks in India. Section 3 discusses how the lack of coordination between
bank regulation and insurance regulation created confusion in the
development of Bancassurance. Section 4 details two main problems facing
banks in India: bad loans and overstaffing. Section 5 describes some of the
long term drivers of Bancassurance in general. We discuss some salient
issues of entry of banks into the insurance industry in section 6. The entry of
the State Bank of India created special problems in the insurance industry.
Sections 7 and 8 discuss Bancassurance experience in other countries – in
particular, two experiences in Asia are highlighted. In section 9, we discuss
America versus European modalities and their relevance for India. In section
10, we assess then success of Bancassurance model in India. Section 11
details some salient reasons why banks are getting into insurance business.
In section 12, we develop a model of entry of banks in insurance business. In
the following section, we discuss the results. Final section concludes.

Bank…… Insurance - Synergy:

Synergy, as commonly defined is a mutually advantageous conjunction
where the whole is greater than the sum of the parts. Someone have very
thoughtfully conveyed – “Synergy lets you easily share a single mouse and
keyboard between multiple computers, each with its own display.” The
synergy that the world is witnessing in bancassurance is no different. The
synergy here allows sharing of the same distribution channel and networks
(mouse and keyboard) between banking companies and insurance companies
(multiple computers), each with different nature and variety of product
(display). The benefits that a bank can reap from this form of alliance
includes increased brand –equity, customer retention apart from the
revenues.
a. Fee-based income for bank – non-funds revenue:

Internationally, insurance activities contribute significantly to banks’ total

domestic retail revenues. Fee-based selling helps to enhance the levels of
staff productivity in banks. This is crucial to bring higher motivation levels
in banks in India. The revenue earned through Bancassurance alliances are
categorized as revenues through fee based income.

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

the bank that it carries no capital reserve maintenance provision with it.
Similarly, increase brand equity and customer retention by becoming full-
service provider is something that every bank would care for. Off late, all
Indian banks are trying to increase their proportion of fee based income in
their total income. The trend is shown in This is because according to Basel
norms, the fee based income is risk-free and does not consume any capital.

b. Lower distribution costs:

Bancassurance has empirically proven to lower the distribution costs of

insurers by 22-23% due to high sales productivity. Selling insurance to
existing mass market banking customers is far less expensive than selling to
a group of unknown customers. Experience in Europe has shown that
Bancassurance firms have a lower expense ratio. This benefit could go to the
insured public by way of lower premiums. Further for any new entrant in the
insurance market, using the already established network and infrastructure of
banks makes mores sense than building the entire chain from the scratch.
Similarly, banks can put their energies into the `small-commission
customers’ that insurance agents would tend to avoid.

Use Bank’s
database for
target segment
demographics
Customizing
IT infrastructure of
product to the
the bank (ATMs)
customer
Benefits to the
insurance
company

Larger customer Structured sales

base approach

More funds to
deploy into
investment

Customer relationships:

Insurance companies lag far behind in terms of effective customer

relationship that they could maintain. The trust and esteem with which a
customer holds bank will not be same for an insurance company. Similarly
for banks, it gives them an opportunity to serve their existing customers
better. Increased brand equity and customer retention by becoming full-
service provider is something that every bank would care for. There is now a
need for explicit distinction between at least three customer segments for
Bancassurance:
The traditional "mass market" Bancassurance
o Private Bancassurance (aimed at wealthy individuals)
o Corporate Bancassurance and SMEs (small to medium-
sized enterprises) to reach their employees

c. Operational efficiency:

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

10-15% of investment and insurance markets by targeting 20% of customers
and operate at expense levels 30-50% lower than those of traditional
insurers.
One of the most important reasons of considering Bancassurance by Banks
is increased return on assets (ROA). One of the best ways to increase ROA,
assuming a constant asset base, is through fee income. Banks that build fee
income can cover more of their operating expenses, and one way to build fee
income is through the sale of insurance products. Banks that effectively
cross-sell financial product can leverage their distribution and processing
capabilities for profitable operating expense ratios.
The ratio of expenses to premiums, an important efficiency factor in
insurance activities through Bancassurance is extremely low. This is because
the bank and the insurance company is benefiting from the same distribution
channels and people.

Expansion of banks in India

Penetration of commercial banks in India has been quite extensive. There are
around 66,000 branches of scheduled commercial banks. Each branch serves
an average of 15,000 people. The only other national institution with a
bigger reach is the postal service.2 Banks have not only been successful in
the urban areas. It has also grown tremendously in the rural areas. Of the
total number of branches of commercial banks, there are 32,600 branches in
rural areas, and 14,400 semi-urban branches. In addition, there are 196
exclusive regional rural banks in deep hinterland. There is research evidence
to show that the deliberate expansion policy of banks in rural areas has
contributed to poverty reduction in India (see, Burgess and Pandey,
forthcoming). Instead of simple headcounts, if we take other bank
penetration measure like total value of deposits as a percent of GDP, it is
also exhibiting an upward trend. This means bank deposits are growing at a
rate much faster than the gross domestic product (Figure1). Banks have
become the main saving vehicle in the economy. Between 1985 and 1995,
the growth of deposits in banks stalled at under 35% of the GDP (that itself
is a high number by the standard of the developing economies). From 1995,
the banking sector started growing again. The deposits in banks grew
another 10% of GDP by 2000. This level of growth in bank deposit has been
totally unprecedented in India since independence. Why did the bank
deposits take a leap? One simple (but partial) reason is a substitution from
the stock market.

In 1994, Indian stock market was hit by the worst scandal of manipulation
of stock prices in its long history. The stocks fell sharply driving many
investors into safer investment options. Rising saving rate during the late
1990s led to sustained growth of bank deposits (that is, additional
investment in the stock market came in the form of fresh money and not a
flow of money out bank saving. The rising saving came as a result of rising
income across the board. With this background, it is therefore not surprising
that banks have become a vehicle for selling insurance products.

Financial Institutions in Insurance Business: RBI Rules

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

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

activity for a banking company, perhaps banks would be able to undertake
insurance business. It may, of course, be necessary to specify what type of
insurance business they could undertake". However, the following year, in a
set of draft guidelines issued to all scheduled commercial banks and select
financial institutions, the RBI laid out a set of parameters that need to be
met.
(1) The net worth of the bank/financial institution should not be less than
Rs.5 billon.
(2) The capital adequacy ratio of the bank/financial institution should be not
be less than 10%.
(3) The bank/financial institution should have track record of at least three
continuous years of profits.
(4) The level of net Nonperforming Assets should be 1% below the industry
average.(5) The track record of performance of existing subsidiaries of
banks/financial institutions should be “satisfactory”.3 Some confusion arose
from the circular. Therefore, the RBI proposed a series of amendments in
March 2000. In addition to the entry of banks, the RBI also laid down a set
of guidelines for the entry of Non-Bank Financial Companies (NBFC) into
insurance business (June 30, 2000)4. There were two critical differences in
the requirements proposed for the NBFCs.

First, the capital adequacy ratio of the NBFC (applicable only to those
holding public deposits) should not be less than 12 percent if engaged in
equipment leasing/hire purchase finance activities and 15 percent if it is a
loan or investment company.

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

of total outstanding leased/hire purchase assets and advances. On November
28, 2001, the same rules were extended to cover “All India” Financial
Institutions.5 Specifically the rules for these institutions were set at the same
level as the NBFCs noted above. Some confusion still remained whether it
was possible for the financial institutions to accept fees for their services
directly or not. The RBI cleared their position in two separate circulars: one
for the scheduled commercial banks and the other for the other institutions.
It also stated that financial institutions “should not adopt any restrictive
practice of forcing its customers to go in only for a particular insurance
company”.

In the 2001 Report on Currency and Finance, the RBI laid down its views in
more concrete term. “The Reserve Bank, in recognition of the symbiotic
relationship
between banking and the insurance industries, has identified three routes of
banks’
participation in the insurance business, viz.,
(i) providing fee-based insurance services without risk participation,
(ii) (ii) investing in an insurance company for providing infrastructure
and services support and
(iii) Setting up of a separate joint-venture insurance company with risk
participation. The third route, due to its risk aspects, involves
compliance to stringent entry norms. Further, the bank has to
maintain an ‘arms length’ relationship between its banking
business and its insurance outfit. For banks entering into insurance
business with risk participation, the prescribed entity (viz., separate
joint-venture company) also enables to avoid possible regulatory
overlaps between the Reserve Bank and the Government/IRDA.
The joint-venture insurance company would be subjected entirely
to the IRDA/Government regulations.”
Entry of Banks in Insurance Business
On December 28, 2000, the State Bank of India (SBI) announced a joint
venture Partnership with Cardif SA (the insurance arm of BNP Paribas
Bank). This Partnership won over several others (with Fortis and with GE
Capital). Many experts in the industry have awaited the entry of the SBI. It
was well known that the SBI has long harbored plans to become a universal
bank (a universal bank has business in banking, insurance and in security).
For a bank with more than 13,000 branches all over India, this would be a
natural expansion.
In the first round of license issue, the SBI was absent. There were several
reasons for this delay. First, the SBI was seeking a foreign partner to help
with new product design. Second, it did not want the partner to become
dominant in the long run (when the 26% foreign investment cap is
eventually lifted). It wanted to retain its own brand name.
Third, it wanted a partner that is well versed in the universal banking
business. This criterion ruled out an American partner where underwriting
insurance business by banks has been strictly forbidden by law (although
with the passage of the Gramm-Leach-Blily Act, this is not quite as drastic
as before). Cardif is the third largest insurance company in France. More
than 60% of life insurance policies in France are sold through the banks.

Fourth, the Reserve Bank of India (RBI) needed to clear participation by the
SBI because in India banks are allowed to enter other businesses on a “case
by case” basis. The SBI entry is groundbreaking for several reasons. This
was the first for an Indian bank to enter the insurance market.10 Second, even
though the regulators have said that banks would not (generally) be allowed
to hold more than 50% of an insurance company, the SBI was allowed to do
so (with a promise that its share would be eventually diluted). Ever since the
entry of the SBI, a number of other insurance companies have declared their
desired banking partners. In this process, both life and nonlife companies
have tied up with banks. The list of partnerships is in Table 2. Note that
some of the partnerships listed here are simply at the Memorandum of
Understanding (MoU) stage. They are yet to take any concrete form. These
alliances are listed in Table 2. A number of interesting facts emerge from the
table. The first obvious feature of Table 2 is the “natural partnerships” in the
list.
Specifically, HDFC Life Insurance is tied with HDFC Bank, ICICI
Prudential with ICICI Bank and so on. The second striking feature of the
table is the proliferation of banks partnering with single insurance
companies. Given that there are only two dozen insurance companies and
hundreds of banks, this outcome is to be expected.
Moreover, insurance companies are targeting different market segments by
affiliating with banks that do niche banking. Take the example of Aviva.
Aviva has evolved a three-layered strategy. The first layer is a tie-up with
ABN Amro and American Express. It caters to high net worth urban
customers. The second layer is a tie up with Canara Bank. Through this
nationalized bank with 2,400 branches, it reaches customers across the
length and breadth of the country. The third layer, at a regional level, a tie-
up with Lakshmi Vilas bank focuses on the region specific customers. This
tie-up helps them reach customers in rural and semi-urban centers in Tamil
Nadu and Andhra Pradesh. The third feature is best illustrated by an
example. Allianz Bajaj does not have the same banking partners for the life
sector as in the non-life sector. These two lists do not match. The same is
true for several other companies.
Fourth, some banks appear to have tied up with several insurance
companies. For example, Citibank appears in the list of a number of life as
well as in the non-life insurance company lists. This fact will become
important as the warning of the RBI that banks “should not adopt any
restrictive practice of forcing its customers to go in only for a particular
insurance company” become an issue in the future.

Fifth, the most recent addition to the list is the Oriental Insurance Company.
In January 2004, it declared that it would distribute insurance policies
through the post offices after it announced a joint venture with the
Department of Posts. Given that the post offices have unprecedented reach
around the country with 155,600 branches, it could distribute policies to the
customers even in very remote areas. The Department of Posts is the only
institution with a reach bigger than the banks in India.
There are several other banks in the pipeline for the approval of the IRDA.
They include the Punjab National Bank, the Principal Group and Vijaya
Bank. Two of them are well-established banks in India. The Principal
Group, an international financial institution, is mainly in pension business
around the globe. In India, it is likely to enter in a partnership with a bank
with national distribution network in order to ramp up pension products once
pension becomes deregulated in India.

The latest group to receive an outright charter for operating insurance

operation is Sahara Group (on March 5, 2004). Sahara’s entry is notable for
two important reasons. First, Sahara is the only company to enter the Indian
market without any foreign partner. It thus becomes the only purely
domestic company to be granted a license to operate in the insurance sector.
Second, it operates the largest Non-Bank Financial Company in India. It has
over 50 million depositors. To put it differently, one in every 20 Indians has
an account with Sahara. It serves the country through 1,700 establishments.
Since the company is diversified,11 it can use multiple channels for
distribution of its product – not the least through its NBFC capacity.

Bancassurance in India
Bancassurance in India is a very new concept, but is fast gaining
ground. In India, the banking and insurance sectors are regulated by
two different entities (banking by RBI and insurance by IRDA) and
bancassurance being the combinations of two sectors comes under the
purview of both the regulators. Each of the regulators has given out
detailed guidelines for banks getting into insurance sector. Highlights
of the guidelines are reproduced below:
RBI guideline for banks entering into insurance sector provides three options
for banks. They are:

• Joint ventures will be allowed for financially strong banks wishing to

undertake insurance business with risk participation;
• For banks which are not eligible for this joint-venture option, an
investment option of up to 10% of the net worth of the bank or Rs.50
crores, whichever is lower, is available;
• Finally, any commercial bank will be allowed to undertake insurance
business as agent of insurance companies. This will be on a fee basis
with no-risk participation.

The Insurance Regulatory and Development Authority (IRDA) guidelines

for the Bancassurance are:

• Each bank that sells insurance must have a chief insurance executive
to handle all the insurance activities.
• All the people involved in selling should under-go mandatory training
at an institute accredited by IRDA and pass the examination
conducted by the authority.
 • Commercial banks, including cooperative banks and regional rural
banks, may become corporate agents for one insurance company.
• Banks cannot become insurance brokers.

RBI Guidelines for the Banks to enter into Insurance Business

Following the issuance of Government of India Notification dated August 3,
2000, specifying ‘Insurance’ as a permissible form of business that could be
undertaken by banks under Section 6(1)(o) of the Banking Regulation Act,
1949, RBI issued the guidelines on Insurance business for banks.

1 Any scheduled commercial bank would be permitted to undertake

insurance business as agent of insurance companies on fee basis, without
any risk participation. The subsidiaries of banks will also be allowed to
undertake distribution of insurance product on agency basis.

2 Banks which satisfy the eligibility criteria given below will be permitted to
set up a joint venture company for undertaking insurance business with risk
participation, subject to safeguards. The maximum equity contribution such
a bank can hold in the joint venture company will normally be 50 per cent of
the paid- up capital of the insurance company. On a selective basis the
Reserve Bank of India may permit a higher equity contribution by a
promoter bank initially, pending divestment of equity within the prescribed
period.

The eligibility criteria for joint venture participant are as under:

I. The net worth of the bank should not be less than Rs.500 crore
ii. The CRAR of the bank should not be less than 10 per cent;
iii. The level of non-performing assets should be reasonable;
iv. The bank should have net profit for the last three consecutive years;
v. The track record of the performance of the subsidiaries, if any, of the
concerned bank should be satisfactory.

3. In cases where a foreign partner contributes 26 per cent of the equity with
the approval of Insurance Regulatory and Development Authority/Foreign
Investment Promotion Board, more than on public sector bank or private
sector bank may be allowed to participate in the equity of the insurance joint
venture. As such participants will also assume insurance risk, only those
banks which satisfy the criteria given in paragraph 2 above, would be
eligible.
A subsidiary of a bank or of another bank will not normally be allowed to
join the insurance company on risk participation basis. Subsidiaries would
include bank subsidiaries undertaking merchant banking, securities, mutual
fund, leasing finance, housing finance business, etc.
Banks which are not eligible for ‘joint venture’ participant as above, can
make investments up to 10% of the net worth of the bank or Rs.50 crore,
whichever is lower, in the insurance company for providing infrastructure
and services support. Such participation shall be treated as an investment
and should be without any contingent liability for the bank.

The eligibility criteria for these banks will be as under :

i. The CRAR of the bank should not be less than 10%;
ii. The level of NPAs should be reasonable;
iii. The bank should have net profit for the last three consecutive years.

6. All banks entering into insurance business will be required to obtain prior
approval of the Reserve Bank. The Reserve Bank will give permission to
banks on case to case basis keeping in view all relevant factors including the
position in regard to the level of non-performing assets of the applicant bank
so as to ensure that non-performing assets do not pose any future threat to
the bank in its present or the proposed line of activity, viz. ,insurance
business. It should be ensured that risks involved in insurance business do
not get transferred to the bank and that the banking business does not get
contaminated by any risk which may arise from insurance business. There
should be ‘arms length’ relationship between the bank and the insurance
outfit.
Holding of equity by a promoter bank in an insurance company or
participation in any form in insurance business will be subject to compliance
with any rules and regulations laid down by the IRDA/Central Government.
This will include compliance with Section 6AA of the Insurance Act as
amended by the IRDA Act, 1999, for divestment of equity in excess of 26
per cent of the paid up capital within a prescribed period of time.

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

eligibility criteria.

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

and later qualify for risk participation in insurance business (as per
paragraph 2 of the guidelines) will be eligible to apply to the Reserve Bank
for permission to undertake Insurance business on risk participation basis
Insurance Agency Business/ Referral Arrangement
The banks (includes SCBs and DCCBs) need not obtain prior approval of
the RBI for engaging in insurance agency business or referral arrangement
without any risk participation, subject to the following conditions :
the bank should comply with the IRDA regulations for acting as ‘composite
corporate agent’ or ‘referral arrangement’ with Insurance companies.

The bank should not adopt any restrictive practice of forcing its customers
to go in only for a particular insurance company in respect of assets financed
by the bank. The customers should be allowed to exercise their own choice.
iii. The bank desirous of entering into referral arrangement, besides
complying with IRDA regulations, should also enter into an agreement with
the insurance company concerned for allowing use of its premises and
making use of the existing infrastructure of the bank. The agreement should
be for a period not exceeding three years at the first instance and the bank
should have the discretion to renegotiate the terms depending on its
satisfaction with the service or replace it by another agreement after the
initial period. Thereafter, the bank will be free to sign a longer term contract
with the approval of its Board in the case of a private sector bank and with
the approval of Government of India in respect of a public sector bank.

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

voluntary basis, it should be stated in all publicity material distributed by the
bank in a prominent way. There should be no ’linkage’ either direct or
indirect between the provision of banking services offered by the bank to its
customers and use of the insurance products.
The risks, if any, involved in insurance agency/referral arrangement should
not get transferred to the business of the bank.

Bancassurance in India - A SWOT Analysis

In India, as elsewhere, banks are seeing margins decline sharply in their core
lending business. Consequently, banks are looking at other avenues,
including the sale of insurance products, to augment their income. The sale
of insurance products can earn banks very significant commissions
(particularly for regular premium products). In addition, one of the major
strategic gains from implementing Bancassurance successfully is the
development of a sales culture within the bank. This can be used by the bank
to promote traditional banking products and other financial services as well.
Table details the comparative figures of Bancassurance deals taken up by
various Indian Insurance companies.

Strengths • Huge number of people without life insurance (91.73

million out of 1 billion had life insurance in 1999)
• Millions of people traveling in and out of India can be
tapped for Overseas Mediclaim and Travel Insurance
policies
• 200 million households waiting for householder’s
insurance
 • Good range of products from LIC/GIC
• Good amount of R&D into insurance
Weaknesses • Not much IT initiative from leading insurance players
(LIC and GIC)
• Higher tax nets for the middle class
• No Tax exemptions for products like householder,
travel policies etc
• Inflexibility of the products
Opportunities • Bank’s database can help insurance companies devise
policies
• Better IT infrastructure from the bank’s side can help
integrating
Threats • Risks in integrating approach, thinking and work
culture
• Non-response from target customers because banks
are considered as insurance company agents by the
customers
• Investors might suffer if the new rate of return on
capital is lower than the existing rate of return

Long Term Drivers of Bancassurance in India:

The staffing problem has redirected some banks to Bancassurance and so has
the Reduction of bad loan problem. But, they are not the long term drivers of
banc assurance in India. The long term drivers in India are going to be the
following.
(1) The culturally more acceptable banking transactions. Banking does not
have the same stigma that (life) insurance carries. This factor will diminish
in importance over time as people become more educated.

(2) Banks can offer fee-based income for insurance sales. This can be
attractive under current rigid structure of wage benefits. At present, banks
are prohibited from offering commission to the bank employees for selling
insurance products. Banks have found ways to circumvent the problem. For
example, they offer "car allowance" for the employees selling insurance.

(3) Narrowing bank margins are another key driver.

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

the auto insurance, home insurance or annuities.
(5) When the pension reform is undertaken (and it is in the works), banks
can become natural institutional vehicles for private pension products. In
some countries, banks are explicitly prohibited from selling pension
products (e.g., Australia). In some other countries, banks are the leading
private pension providers (e.g., Mexico).
(6) Healthcare insurance sector can also benefit from Bancassurance. In
India, only 2.5 million people have access to healthcare facilities. On the
other hand, 5% of personal income is spent on healthcare. Banks can
distribute and facilitate administration of healthcare insurance.

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

How successful has the Bancassurance model been in India?

There have been two broad classes of agreements between banks and
insurance Companies
. (1) Pure Distribution Agreements. Under this class, there are two sub-
classes of arrangements: (1a) Referral Arrangement and (1b) Corporate
Agency Arrangement.

(2) Joint Venture Agreements. There has been a range of such arrangements
from loose to integrated form of distribution partnerships. There has been a
substantial growth of bancassurance in India. Within two years, the share of
bancassurance in the insurance distribution business has gone from zero to
20% of new business in the private sector.
Provides us a sense of how rapidly Bancassurance is growing in India. Some
experts are predicting that within a decade, this proportion could rise to 35%
to 40%. There is evidence that policies sold through Bancassurance add
more value. In the July 2003 issue of the Asia Insurance Post, the Mr.P.
Nandagopal of Birla Sun Life was quoted as saying, “The average size of the
policy for the agency channel is Rs 19,500 per policy and for the
Bancassurance channel it is Rs 39,000 per policy.” Although such concrete
numbers are not available industry-wide, there is general consensus that
bancassurance is indeed bringing in customers of higher value.
Why Banks are highly motivated to Enter in Insurance Business Now

Why banks have an incentive to promote Bancassurance in India?

(1) Overstaffing problem can mitigated without resorting to drastic and
politically unacceptable solutions like large scale firing.
(2) Banks seek to retain customer loyalty by offering them an expanded and
more sophisticated range of products (than simple bank deposits of few
varieties).
(3) Insurance distribution will increase the fee-based earnings of banks.
(4) Fee-based selling helps to enhance the levels of staff productivity in
banks. This is a key driver for raising motivation among bank workers.
Banks have some in-built advantages in some of these areas. (1) Banks can
put their energies into the small-commission customers that insurance agents
would tend to avoid. (2) Banks’ entry in distribution helps to enlarge the
insurance customer base rapidly. This helps to popularize insurance as an
important financial protection product.
(3) Bancassurance helps to lower the distribution costs of insurers. A study
by Tillinghast, Towers and Perrin in the UK shows that the cost of selling
insurance through direct sales force is approximately twice as high as the
cost of selling through Bancassurance. However, the cost of selling the
products through independent financial advisers is approximately the same
as Bancassurance (quoted in Sigma 7/2002). Acquisition cost of insurance
customer through banks is low. Selling insurance to existing mass market
banking customers is far less expensive than selling to a group of unknown
customers. Experience in Europe has shown that Bancassurance firms have a
lower expense ratio. This benefit could go to the insured in the form of lower
premiums. Banks could have an important role to play in the pension sector
when deregulated. Banks can provide collection and payments of pension
contributions. Banks can also play a major role in developing a viable
healthcare program in India.
How Bancassurance advantageous to banks:

• Productivity of the employees increases.

 • By providing customers with both the services under one roof, they
can improve overall customer satisfaction resulting in higher customer
retention levels.
• Increase in return on assets by building fee income through the sale of
insurance products.
• Can leverage on face-to-face contacts and awareness about the
financial conditions of customers to sell insurance products.
• Banks can cross sell insurance products Eg: Term insurance products
with loans.

Advantages to insurers

• Insurers can exploit the banks' wide network of branches for

distribution of products. The penetration of banks' branches into the
rural areas can be utilized to sell products in those areas.
• Customer database like customers' financial standing, spending habits,
investment and purchase capability can be used to customize products
and sell accordingly.
• Since banks have already established relationship with customers,
conversion ratio of leads to sales is likely to be high. Further service
aspect can also be tackled easily.

Advantages to consumers

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

insurance services along with other financial services such as banking,
mutual funds, personal loans etc.
• Enhanced convenience on the part of the insured
 • Easy access for claims, as bank is a regular go.
• Innovative and better product ranges.

Some of the Bancassurance tie-ups in India are:

Insurance Company Bank
Bank of Rajasthan, Andhra Bank, Bank of Muscat,
Birla Sun Life Insurance
Development Credit Bank, Deutsche Bank and
Co. Ltd.
Catholic Syrian Bank
Dabur CGU Life
Canara Bank, Lakshmi Vilas Bank, American
Insurance Company Pvt.
Express Bank and ABN AMRO Bank
Ltd
HDFC Standard Life
Union Bank of India
Insurance Co. Ltd.
Lord Krishna Bank, ICICI Bank, Bank of India,
ICICI Prudential Life Citibank, Allahabad Bank, Federal Bank, South
Insurance Co Ltd. Indian Bank, and Punjab and Maharashtra Co-
operative Bank.
Corporation Bank, Indian Overseas Bank,
Centurion Bank, Satara District Central Co-
Life Insurance Corporation
operative Bank, Janata Urban Co-operative Bank,
of India
Yeotmal Mahila Sahkari Bank, Vijaya Bank,
Oriental Bank of Commerce.

Met Life India Insurance Karnataka Bank, Dhanalakshmi Bank and J&K
Co. Ltd. Bank

SBI Life Insurance

State Bank of India
Company Ltd.
Bajaj Allianz General
Karur Vysya Bank and Lord Krishna Bank
Insurance Co. Ltd.
National Insurance Co.
City Union Bank
Ltd.
Royal Sundaram General Standard Chartered Bank, ABN AMRO Bank,
Insurance Company Citibank, Amex and Repco Bank.
United India Insurance
South Indian Bank
Co.Ltd.

Business Models:

The alliance between banks and insurance companies can be structured in

varied manners, depending upon the type of synergy one is looking for.
Corporate Agency Model is slowly gaining importance across various
nations because of ease in implementation and distribution of authority-
responsibility relationship. Insurance products wrapped around the bank's
deposit and loan products (Wrapper Model) are also gradually gaining in
popularity due to their simple product design while the referral model tie-up
has not been able to really take off. The options available to the banks are:

• Banks selling products of their insurance subsidiary exclusively.

 In this model, banks setups its own insurance subsidiary and sells its
insurance products. In this setup, the products of this insurance
subsidiary are not allowed to be sold by any other bank.
• Banks selling products of an insurance affiliate on an exclusive
basis.

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

agency and sells their insurance product to its existing customers. In
this setup also, the banks might get into an exclusive agreement with
the insurance company.

• Banks offering products of several insurance companies as `super

market’.

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

much insurance companies possible and sells it to its customers. Here
the customers can choose between wide ranges of products but the
insurance companies would not prefer this as their products would not
be always preferred.

(1)Corporate Broker model:

A corporate broker is effectively a principal corporate adviser to an
investment trust company. Here the bank is acting as a corporate adviser to
an insurance company. The broker would make a certain amount of money
from dealing commissions and market making and a great deal more from
relatively infrequent corporate deals. This relationship does not end up in
long term relationship or exclusive relationships between the bank and the
insurance companies.
(2)Corporate Agency Model:
In India, insurance companies prefer corporate agency tie-ups with banks, as
against referral arrangements. Another advantage for banks is that the risk is
borne entirely by the insurance company. The growth potential of corporate
agency system is immense because we can cross sell several products to our
customers. Insurance agents sell only insurance or mutual fund products.
Innovation of products is also possible under the corporate agency
arrangement.
This model is attractive for the banks as it offers handsome returns (up to
35% in the first year of new business procured) involves very low start-up
costs (investment in the time and licensing of employees) and the business
risk is underwritten entirely by the insurance companies. Insurance products
wrapped around the Bank's loan and deposit products have also been gaining
in popularity due to their mass appeal and simple product design while the
referral model tie-ups have not been that successful. A few banks like
Allahabad Bank and Bank of India have even migrated from the referral
model to the Corporate Agency model.

Traditional vs. Expanded Bancassurance Models:

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

Bancassurance development. Nevertheless, banks are starting to embrace
direct marketing and Internet banking as tools to distribute insurance
products. New and emerging channels are becoming increasingly
competitive, due to the tangible cost benefits embedded in product pricing or
through the appeal of convenience and innovation.
Finally, the marketing of more complex products has also gained ground in
some countries, alongside a more dedicated focus on niche client segments
and the distribution of non-life products. The drive for product
diversification arises as bancassurers realize that over-reliance on certain
products may lead to undue volatility in business income. Nevertheless,
bancassurers have shown a willingness to expand their product range to
include products beyond those related to bank products.

Banks: The focal point :

Traditionally, the banks and financial institutions are the key pillars of
India’s financial system. Public have immense faith in banks. Share of bank
deposits in the total financial assets of households has been steadily rising
(presently at about 40%). Indian Banks have constantly proven their
capability reach the maximum number of households. In India at present
there are total of 65700 branches of commercial banks, each branch serving
an average of 15,000 people. Out of these are 32600 branches are catering to
the needs of rural India and 14400 to semi-urban branches, where insurance
growth has been most buoyant.
(196 exclusive Regional Rural Banks in deep hinterland.) Rural and semi-
urban bank accounts constitute close to 60% in terms of number of accounts,
indicating the number of potential lives that could be covered by insurance
with the frontal involvement of banks.

Further still banks sell a very small portion of the products. This means there
is a huge scope of banks selling insurance products. A study conducted in
US shows that people are willing to buy insurance products from their banks
as they consider banks as a single point of buying all financial products.
Further there is a severe need of insurance for agriculture and other
insurance products like health insurance in the rural areas. Insurance
companies would not be able to establish their sales force in rural areas. As
banks already have a strong foothold, it would be hugely beneficial for the
insurance companies.

BANC ASSURANCE PRODUCT PHILOSPHY

Bancassurance: emerging trends, opportunities and
challenges
According to a recent sigma study, Bancassurance is on the rise, particularly
in emerging markets. Worldwide, insurers have been successfully leveraging
Bancassurance to gain a foothold in markets with low insurance penetration
and a limited variety of distribution channels.
Bancassurance, the provision of insurance services by banks, is an
established and growing channel for insurance distribution, though its
penetration varies across different markets. Europe has the highest
Bancassurance penetration rate. In contrast, penetration is lower in North
America, partly reflecting regulatory restrictions. In Asia, however,
Bancassurance is gaining in popularity, particularly in China, where
restrictions have been eased. The research shows that social and cultural
factors, as well as regulatory considerations and product complexity, play a
significant role in determining how successful Bancassurance is in a
particular market.
The outlook for Bancassurance remains positive. While development in
individual markets will continue to depend heavily on each country’s
regulatory and business environment, bancassurers could profit from the
tendency of governments to privatize health care and pension liabilities. In
emerging markets, new entrants have successfully employed Bancassurance
to compete with incumbent companies. Given the current relatively low
Bancassurance penetration in emerging markets, Bancassurance will likely
see further significant development in the coming years.

Bancassurance: Emerging Trends

Though Bancassurance has traditionally targeted the mass market,

bancassurers have begun to finely segment the market, which has resulted in
tailor-made products for each segment. The quest for additional growth and
the desire to market to specific client segments has in turn led some
bancassurers to shift away from using a standardized, single channel sales
approach to adopting a multiple channel distribution strategy. Some
bancassurers are also beginning to focus exclusively on distribution.
Wealth management, pioneered by Assurance has found its way in
Bancassurance alliances. Termed as Private Bancassurance, the concept
combines private banking and investment management services with the
sophisticated use of life assurance as a financial planning structure to
achieve fiscal advantages and security for wealthy investors and their
families
As a medium of selling insurance products, Bancassurance moved from
second position in 2004 to first position in 2006. Worksite marketing which
was in the top position in 2004 fell to fourth position in 2006.
Banks’ insurance sales are high in countries where the products tend to be
relatively simple and are a natural fit with banks’ existing products. The life
insurance products most successfully sold by bancassurers are mostly
simple-deposit-substitutes such as single-premium unit-linked or
capitalization products. In France, financial institutions accounted for 66%
of single premium unit-linked life business in 2005. In general, bancassurers
have been less successful in selling more complex savings products such as
pensions.

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

between number of products an institution deal in an the attrition levels. It
showed that with increase in product count, the attrition level tends to
decrease sharply as the employee engagement increases.
 Quantum of products Attrition
levels
One Product (interest 27%
bearing account)
One Additional product 20%
2 or more products 17%

Bancassurance: The Challenges

Banks could be more enduring than individual agents when selling

insurance, but Bancassurance relationships are not. Since the opening up of
the insurance sector in ’00, as many as six Bancassurance alliances have
ended in divorce says Economic Times.

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

the probability of divorces can’t be ruled out. Critics opine that
Bancassurance is a controversial idea, and it gives banks too great a control
over the financial industry. The challenge to sustain such alliances could be
immensely daunting. The difference in regulation, not only across countries
but between banks and insurance industry as well has been cited as the
primary reason. The difference in trade customs, work culture in these
industries is another impediment.

Sales front:
Bank employees are traditionally low on motivation. Lack of sales culture
itself is bigger roadblock than the lack of sales skills in the employees.
Banks are generally used to only product packaged selling and hence selling
insurance products do not seem to fit naturally in their syste
HR issues:
Human Resource Management has experienced some difficulty due to such
alliances in financial industry. Poaching for employees, increased work-load,
additional training, maintaining the motivation level are some issues that has
cropped up quite occasionally. So, before entering into a Bancassurance
alliance, just like any merger, cultural due diligence should be done and
human resource issues should be adequately prioritized.
Public and private divide:
Private sector insurance firms are finding ‘change management’ in the
public sector a major challenge. State-owned banks get a new chairman,
often from another bank, almost every two years, resulting in the distribution
strategy undergoing a complete change. In the private sector, the M&A
activity is one of the causes for change.
In the past, Dena Bank, which had originally partnered Kotak Mahindra
Life, switched loyalty to the public sector Life Insurance Corporation? So
did Allahabad Bank, which had a tie-up with ICICI Prudential Life
Insurance. Punjab National Bank and Vijaya Bank have been forced to drop
their Bancassurance partnerships after they chose to set up an insurance
broking JV.

Group companies dilemma:

The other conflict that most insurers face is when they have a bank within
their own group. Half of the insurance firms in India are part of a financial
group that has a bank. They include ICICI Bank, State Bank of India, ING
Vysya, HDFC, Jammu & Kashmir Bank, and Kotak Mahindra Bank.
According to Rajesh Relhan, head of Bancassurance, Aviva Life, there is a
fear among banks that at some point in future their insurance partner may
end up cross-selling banking services to their policyholders. Besides,
companies that sell predominantly through agents experience channel
conflict when both agents and banks target the same customer.
Operational Challenges:

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

insurance products pose further problems to the Bancassurance alliances:

• The shift away from manufacturing to pure distribution requires banks

to better align the incentives of different suppliers with their own.
• Increasing sales of non-life products, to the extent those risks are
retained by the banks, require sophisticated products and risk
management.
• The sale of non-life products should be weighted against the higher
cost of servicing those policies.
• Banks will have to be prepared for possible disruptions to client
relations arising from more frequent non-life insurance claims.

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

Securities business seems an automatic extension to banks and insurance.

This integration will be a step further towards universal banking and would
leverage the efficiencies developed by alliance of banks and insurance
companies. It will be for customers who want to get a one-stop shop for all
financial products. So the banks should transform themselves to a
wholesome entity. This has to be integrated with the internet banking and
other IT infrastructure, for e.g. customers should be able to pay insurance
premium, margin money on security transaction via the net-banking facility
and the ATM network.
a. Involvement of Co-operative banks:

Insurance industry has very low penetration rate in India. The market and
scope in rural India is immense and largely untapped. The insurance
companies should actively try to involve co-operative and regional rural
banks amongst their potential alliances along with the big and multinational
banks. These co-operative banks will have greater reach in villages of rural
India and will also operate at economic cost.

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

A formal and standard agreement between these banks and the insurance
companies should be taken up and drafted by an national regulatory body.
These agreements must have necessary clauses of revenue sharing. In case
of possible conflicts, the bank management and the management of the
insurance company should be able to resolve conflicts amicably. If they are
not solved, there can be a apex body set up by IRDA to solve these types of
issues. This could be done by
 Setting up distribution procedures consistent with the manual systems
in most banks.
 Establishing credible service level agreements between the bank and
the insurer.
c. Involvement of senior bank management and skill development at

the operating level at bank branches:

The Bancassurance alliances should be taken up at the top management

level. Such strategic actions require the senior management support not only
during the decision stage but also at the time of implementation. Their active
participation in the process is very much necessary for the success of such
initiatives. The employee base that would be interacting with the insurance
customers should also be properly trained in order to equip themselves with
the skills required in selling insurance products. The bank employees would
not be aware of these selling skills if proper training is not given.

d. Bancassurance and pension sector:

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

deregulated, banks would get the dual benefits of managing these huge
pension funds and the opportunity to sell mainly health insurance products
to these pension sector customers. Low cost of collecting pension
contributions is the key element in the success of developing the pension
sector. Money transfer costs in Indian banking are low by international
standards. Portability of pension accounts is a vital requirement which
banks can fulfill in a credible framework.

e. Focus on Group insurance schemes:

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

way to go about. As joint accounts or individual accounts of families are
very prominent, we will have to sell these insurance products to these
members of the family as a group.
This would be easier in terms of collection of premiums as 1 or 2 members
of the family would be working and linking insurance premiums from these
savings/ salary accounts would be easier and hassle-free.

f. Targeting frequent travelers (travel insurance):

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

income from these frequent travelers. As frequent travelers are targeted by
these airlines by giving confessional fares, banks can sell them travel
insurance at some confessional premiums. This would be additional revenue
to the insurance company as well.

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

House loans and householder’s insurance can be linked. Banks have huge
exposures to house loans. Now as far as the customers are concerned, they
would prefer householder’s insurance also as a package along with the house
loans. The collection of premiums would also not be a problem. Normally
these customers give post-dated cheques. Therefore premiums can also be
collected in the similar fashion. Some concessions to the customers can be
given like extension of payment period etc. Insurance in business activities
can also be targeted as banks have considerable exposure to corporate loans.

h. National level healthcare programme:

Banks can play a major role in developing a viable healthcare programme in
India. Only 2.5 million people have access to healthcare facilities. There is a
growing demand for healthcare products which banks can distribute (and
facilitate administration). Banks would be the best medium to distribute
health insurance plans and create awareness amongst the people. The
Government of India and its planning commission can leverage this
Bancassurance concept to launch a nation wide healthcare programme.

Bancassurance: Future outlook and Recommendations:

The outlook for Bancassurance remains positive. While development in

individual markets will continue to depend heavily on each country’s
regulatory and business environment, bancassurers could profit from the
tendency of governments to privatize health care and pension liabilities. In
emerging markets, new entrants have successfully employed Bancassurance
to compete with incumbent companies. Given the current relatively low
Bancassurance penetration in emerging markets, Bancassurance will likely
see further significant development in the coming years. We recommend
following for sustainable and inclusive growth in Bancassurance alliances.
 DETARIFFING -AN INNOVATIVE
STRATEGIC TOOL

Detariffing insurance sector — A cover for all

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

Detariffing advantages

The IRDA has prepared a road map for detariffing all categories of general
insurance business from January 1, 2007. According to the IRDA, the
advantages of the detariffing are encouragement to scientific rating and
adoption of better risk management practices; elimination of cross-
subsidization leading to independent pricing for each line of business;
development of innovative practices, and generating customer-friendly
options for the policyholders.
The proposed detariffing in the general insurance industry would lead to a
major shift in the focus of the companies, resulting in higher penetration in
the country.
Detariffing entails moving from rule-based underwriting systems and
practices to risk-based decision-making of the subject matter offered for
underwriting. It means that the pricing of insurance policies is left to the
individual insurance company, based on an analysis and perception of risk.
Competition is expected to whittle down the fat margins that insurers enjoy
in fire and engineering insurance, eliminate cross-subsidies and force
companies to look at small businesses.
How does it matter to consumers?

The consumer has not benefited much from the insurance liberalization1
process. Under the market regime, the insurance companies will be forced to
rate risks scientifically. The only way insurance companies can make profit
and, thereby, maintain their solvency ratio without going back to their
shareholders is by prudent underwriting.
The downside is that the balance-sheets of non-life insurance companies
could be splashed in red, and buyers with small insurance needs may be
ignored.
On detariffing, the rating will be based on the risk profile of the customer; it
will be in the customers' interest to make his risk profile better. A risk
should be judged on its own merits and detariffing will force insurers to
scale up their risk-assessment capability and give the underwriting function
its due importance in the insurance process. After all, this is the core
function of analyzing and pricing transfer of risk. By far the biggest impact
of detariffing would be on motor insurance. Here too, good customers would
gain. Now, a car-owner with no claims subsidizes another who makes large
claims. In the detariff regime, car-owners with a good track record will gain.
Barring commercial motor vehicles and medical insurance, premium on
assets (that is, fire, engineering and property risk covers) are forecast to drop
by at least 40 per cent in a detariffed regime due to intense competition.
The premium for trucks and other transport vehicles is expected to go up
substantially as the related claims ratio, especially for the third party legal
liability segment, has been very high and the premium charged has not been
commensurate with the risk exposure.

Impact on Insurance Companies

Falling premium income without a concomitant reduction in claims is likely

to bring down the profits of insurance companies, their solvency ratios and,
consequently, their international ratings which, in turn, would affect their
reinsurance placements and underwriting capability.
Only the fire and engineering risk business is profitable based on current
tariffs, and the profit margins on these segments would now be put to severe
strain due to competitive pressures.
Conversely, customers must also be on their guard to keep an eye on the
financial health of their insurance company to avoid bankruptcy, which is a
common phenomenon in the international market. Automobile companies
will also be under pressure to reduce repair cost.
Role of Professional Intermediaries

World over, the concept of risk management has now become a part of
corporate governance. Professional risk managers enable cost-effective
protection through scientific methods of identification, evaluation and
management of risk exposures.
Faced with daunting choice in selecting the right insurance cover at the right
price from the right insurer, consumers will look up to domain experts such
as insurance brokers for advice to get the best that the market has to offer.

Insurance broker vs. agent

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

De-tariffing of General Insurance Market

Withdrawal of Tariff rates

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

Motor Third Party Insurance Rates

The motor insurance tariffs will no longer be applicable with

effect from 1st
January 2007. Accordingly, in exercise of powers conferred
by Section 14(2)(i) of the Insurance Regulatory and
Development Authority Act, 1999 the Authority has issued
the following directions:

Insurers shall provide motor third party liability insurance

cover to all
vehicles at the rates prescribed by the Authority.
Insurers shall not refuse cover for third party risk.
Policies in force on 1st January 2007 shall not be cancelled
for the purpose of revision of premium rates mid-term.
The Insured shall not be forced to take any additional cover
which he is not willing to take.
This Circular as well as the prescribed schedule of premium
rates shall
be prominently displayed on the Notice Board of every
underwriting
office of the insurer where it can be viewed by the public.

Motor Third Party Insurance Pool

The Authority, after consultation with the Committee

constituted under
Section 110G of the Insurance Act, has issued a direction
under Section 34 of the Insurance Act that all general
insurers shall collectively participate in a Pooling
arrangement to share in all motor third party insurance
business
underwritten by any of the registered general insurers in
accordance with the
following provisions :

PARTICIPATION

The participation of General Insurance Corporation of India

(GIC) in the
Pooled business shall be such percentage of the motor
business that is ceded to it by all insurers as statutory
reinsurance cessions under Section 101A of the Insurance
Act. The business remaining after such cession to GIC shall
be
shared among all the registered general insurers writing
motor insurance
business in proportion to the gross direct general insurance
premium in all
classes of general insurance underwritten by them in that
financial year.
Underwriting of business: Underwriting offices of insurers
shall follow the
underwriting instructions of the General Insurance Council in
the matter of
procedures for underwriting and documentation and
accounting and settlement of balances. The business shall be
underwritten at rates and terms and conditions of cover as
notified by the Authority from time to time. No vehicle owner
shall be denied third party insurance cover in respect of his
vehicle which is holding a valid permit for use on public
roads except on grounds of attempted fraud.
Claims processing and settlement: All claims in respect of
third party death or injury or physical damage shall be
processed for settlement in a speedy and efficient manner in
accordance with the instructions of the General Insurance
Council. For this purpose, the Council shall adopt a pro-
active claims settlement policy adopting the most efficient
claims processing practices possible.
Administration of the Pooling arrangement: The GIC shall act
as the administrator of the pooling arrangement. It will act
under the guidance of the General Insurance Council. For this
purpose, the Council may establish such Committees of
insurers as are necessary to operate the Pooling
arrangement and process and settle claims in the most
efficient manner.
Remuneration: There will be no agency commission or
brokerage payable in respect of motor third party insurance
business. The underwriting insurer will be paid a reinsurance
commission of 10% on the premium ceded by it to all the
other insurers and reinsures. The GIC as administrator shall
be paid a fee of 2.5% of the total premium on motor third
party insurance business in
respect of the business underwritten for the pooled account.
Review: The Authority will review the operation of the
pooling arrangement and the need for regulation of the
premium rates and terms of cover and will issue such
directions from time to time as may be considered
necessary.

Role of Tariff Advisory Committee

With the abolition of tariffs, the role of the Tariff Advisory Committee will
undergo a change. It can perform the following useful functions:
 • Collection of data on premiums and claims, analysis of such data and
dissemination of the results to the insurers.

• Report to IRDA on the underwriting health of the market and any

aberrations in market behaviors.

• Constitution of Expert Groups at the request of the General Insurance

Council to look into underwriting issues and recommend necessary
action.

• Organize training to underwriters at the market level and attend to

public grievances on non-availability of insurance and try to
resolve the issues by discussion with insurers.

File and Use Guidelines

These guidelines are issued by the IRDA under the provisions

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

Underwriting Policy

Filing of products will be accepted by IRDA only after the

insurer has filed the underwriting policy as approved by the
Board of Directors of the insurer.
The Underwriting policy placed before the Board shall cover
important aspects such as :
The underwriting approach of the company in the matter of
expectation
of underwriting profit. The margins that will be built into the
rates of premium to cover acquisition costs, promotional
expenses, expenses of management, catastrophe reserve
and profit margin and the credit that will be taken for
investment income in the design of rates, terms and
conditions of cover, and how they will be modified based on
the actual operating
ratios of the insurer.
The list of products that will fall into each of the sub-
categories, as
provided in the Guidelines. For this purpose, the products are
classified into two broad classifications, namely class rated
products and individual rated
products. These are further classified into the following 5
sub-categories.

Class rated products

Internal tariff rated Products: These are standard products

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

Packaged or customized Products: These are products

specially designed for an individual client or class of clients,
in terms of scope of cover, basis of insurance, deductibles,
rates and terms and conditions of cover.
These will include insurance packages like Homeowner’s
Comprehensive or Shopkeeper’s Comprehensive or Banker’s
Blanket insurance and so on.

Individual rated products

Individual experience rated products: These are products

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

Exposure rated products: These are products where the

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

insurances for total sum insured of Rs.2500 crore or more at

one location for property insurance, material damage
interruption combined; and business
Rs.100 crores or more per event for liability insurances.

These are typically insurances that are designed for

individual large clients and where the rates, terms and
conditions of cover may be determined by reference to the
international markets.
The delegation of authority to various levels of management
for quoting rates and terms and for underwriting. In
particular, the Board should appoint the Appointed Actuary
or Financial Adviser or the Chief Financial Officer or any
other top management executive who does not have any
responsibility
for business development to act as the moderator of rates
and terms that are quoted on individually rated risks.
The role and extent of involvement of the Appointed Actuary
in review of statistics to determine rates, terms and
conditions of cover in respect of internal tariff rated risks and
products designed for a class of clients;
The internal audit machinery that will be put in place for
ensuring quality in underwriting and compliance with the
corporate underwriting policy.
The procedure for reporting to the Board on the performance
of the management in underwriting the business including
the forms and frequency of such reports.

Filing of Products

No general insurance product may be sold to any person

unless the
requirements of the guidelines are complied with in respect
of that product.
The requirements of IRDA are as follows:

Design and rating of products must always be on sound and

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

The pricing of products should be based on data and with

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

Role of Actuary

The Appointed Actuary, in consultation with the underwriters

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

The documents to be filed in respect of every new product or

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

• Full details of the product

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

Certificate by Principal Officer or Designated Officer

This is to confirm that:

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

These documents are also fully in compliance with the

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

Certificate by Appointed Actuary

This is to confirm that:

I have carefully studied the requirements of the File and Use

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

This is to confirm that:

I have carefully studied the prospectus, sales literature,

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

Every insurer shall constitute a Technical Audit Department

that will be
charged with the responsibility to ensure that all
underwriting is done in
compliance with these guidelines. Such audit should be done
at least once
every quarter during the year 2007. The reports of the
Technical Audit shall be placed before the Board of Directors.

Compliance Officer

Each insurer shall appoint a senior official as “Compliance

Officer” to ensure compliance with the requirements of the
guidelines by the insurer. The Compliance Officer shall not
be an officer who is also holding responsibility for
underwriting.
The Compliance Officer shall be responsible, interalia, to
monitor the business activities of the insurer and ensure that
all products being sold by the insurer are in compliance with
the underwriting policy as approved by the Board and also
with these guidelines;

Where a risk is co-insured, the primary responsibility to

comply with these
guidelines will rest with the leading co-insurer. However, all
other co-insurers will remain responsible to satisfy
themselves by enquiry that the guidelines have been
complied with.

IRDA Approval

Where individual particulars of the product are required to

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

General Insurance Council

The General Insurance Council has been establishing itself as

a self regulating organization and has setup its Secretariat at
Mumbai. It is expected that the Council will function as an
Industry Association, which will liaise with the Government,
IRDA and give the feedback of the industry on various issues
to the Regulator in addition to addressing market conduct
issues.