McKinsey Life Insurance 2.0

Financial Services
India life insurance 2.0

New rules, new game
September 2011
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India life insurance 2.0

New rules, new game
Ramnath Balasubramanian Naveen Tahilyani Renny Thomas
The Indian Life Insurance Industry New game, new rules
Contents
Preface Executive Summary 1. Outlook for the Indian life insurance industry: what to expect 2. Major discontinuities shaping the life insurance market landscape 3. Starting position of players: where they stand and how they perform 4. Competing in the new normal: Fundamental questions for insurers Appendix McKinsey India Financial Services Leadership group 5 7 13 17 23 30 46 47
Preface
The Indian life insurance industry is at a unique point in its evolution. Since the introduction of significant regulatory changes in September 2010, there has been a marked slowdown in the industry. However, over the medium to long term, the growth prospects of the industry remain attractive, with India likely to remain one of the fastest growing major life insurance markets globally. Besides growth, the industry will need to focus on two important objectives: providing long term savings and protection, and driving profitability through sustainable business models. Going forward, the market landscape will be shaped by three major areas of discontinuityregulation, consumer behaviour and technology evolution. In this backdrop, we believe it is time for players to assess their response to some fundamental strategic questions. This report is the product of proprietary research projects conducted by McKinsey & Companys Financial Services Practice in India. These projects looked at current player positions in the life insurance industry through the Life Insurance Benchmarking survey, consumer behaviour through the Personal Financial Services (PFS) survey, and geographic variations in growth through McKinsey & Companys Granularity of Growth effort. This report is organised into four sections that i) discuss the future prospects of Indias life insurance industry, ii) outline the discontinuous changes that will impact the industry, iii) describe the starting position of players based on insights from McKinseys proprietary performance benchmarking, and iv) reflect on strategic questions for insurers that consider the changes in the environment. This publication would not have been possible without the efforts of the project team comprising Ashish N Sharma, Ananya Tripathi and Souvik Chakrabortyall consultants in McKinseys India office, and Suneet Jain, an insurance specialist in the McKinsey Knowledge Centre. We are grateful to the thoughtful inputs provided by several of our colleagues in the Asia and India Financial Services PracticeJoydeep Sengupta, Stephan Binder, Alok Kshirsagar, Ranjit Tinaikar, and Joe Ngai. We would also like to thank Leela Kirloskar and Anamika Mukharji for their editorial efforts; Kulsum Merchant and Fatema Nulwala for driving external communications; New Media for their design support; the entire Visual Aids team in India for their consistent support; and our Executive Assistant Zenobia Batliwala for her invaluable help. Our goal in this project is to provide business leaders with insights into the new normal in the Indian life insurance industry. The work is independent and has not been commissioned or sponsored by any business, government, or other institution. Ramnath Balasubramanian Junior Partner Naveen Tahilyani Partner Renny Thomas Partner
Executive Summary
The Indian life insurance industry is at an inflection point today. While the market will continue to be one of the most attractive markets for growth globally, the paradigm for success is likely to change. We expect this change to be significant, driven by discontinuities in regulations, customer behaviour, and technology adoption. In this context, the players who will emerge winners will be those who can adapt swiftly to the new paradigmby redefining their business models with careful consideration to strategic issues around agency, bancassurance, innovation, geographic footprint, and the value of existing customer franchises. Adapting to the new rules will not only help players achieve a leadership position but it will also help them build sustainable and profitable businesses.
Continued growth with increasing focus on long-term savings and protection, and profitable business models
The Indian life insurance industry has expanded significantly in terms of premiums since liberalisation in 2000. Between fiscal years 2000 and 2011, the industry grew by 28 per cent in New Business Premiums (NBP); 27 per cent in annualised premium equivalent (APE); and over 25 per cent in gross written premiums (GWP), catapulting the industry to the top 10 markets globally.1 However, growth was primarily driven by short-term investment-linked products, with limited emphasis on providing long term savings and protection coverage. The level of protection in India (as measured by the sum assured to GDP ratio) is at around 55 percent of GDP relative to benchmarks in developed markets of 150 percent to 250 percent of GDP. This relentless focus on growing new business premiums has led to several inefficiencies in business practices (e.g., creation of short-term products; incentivisation of front-line managers and agents primarily on new business; limited profiling of customer needs) and resulted in very low levels of profitability in the industry (new business margins in India are the lowest among all Asian markets). More importantly, in the past, the industry was unable to meet the true needs and requirements of the consumer. However, the recent set of regulatory changes have reset the bar extremely high in terms of protecting consumer interests and have accelerated the need to fundamentally review the business models of industry participants. Against this backdrop of regulatory change, growth momentum has slowed considerably, with the industry registering a negative growth of 13 per cent in APE (for the private sector, the negative growth was even higher at 32 per cent) between September 2010 and March 2011. In the first quarter of fiscal year 2012, the slowdown continued with the industry as a whole registering a negative APE growth of 23 per cent and the private sector registering a negative APE growth of close to 40 per cent. This degrowth is significant, even after taking into consideration the high base for the corresponding period in the previous year. While this slowdown is expected to continue for another 12 to 18 months as players adjust their business models to meet the requirements of the new environment, over the medium to long term the growth prospects of the industry continue to remain relatively attractive. Based on proprietary McKinsey research conducted across 60 countries globally (accounting for 99 per cent of the worlds premiums), the Indian life insurance industrys GWP is forecast to grow at a rate
1 NBP is the total of new premiums collected from single premium and regular premium products, with 100 per cent credit for both single and regular premium; APE is calculated based on 10 per cent credit for single premiums and 100 per cent credit for regular new premiums; GWP is the sum of new business premiums and renewal premiums collected.
of between 13 and 14 per cent from fiscal year 2010 to 2015to reach a total GWP of around USD 110 billion by 2015. Based on this forecast, India will contribute 10 per cent of total global premium growth in this period and will be one of the few major markets (top 15 in terms of total premiums) globally to grow at double digit rates over this period. Going forward, the focus of the industry must broaden beyond growth to include two very important aspects which it has largely ignored in the past decade: providing long-term savings and protection to consumers, and driving profitability in the core life insurance business through sustainable business models.
Three major discontinuities will shape the market landscape

There are three major discontinuities that will impact this industry and shape the market going forward. It is important for players to factor in these rapid changes to emerge as winners. Continued regulatory changes First, the market is likely to witness continued regulatory changes, in line with trends we observe among financial services regulators across the world. In particular, impending regulatory changes on bancassurance (likely introduction of an open architecture regime), and agency (more stringent qualification norms and process, enforcement of performance criteria), will cause insurers to further review and shift their existing business models and practices. Shifts in consumer behaviour Second, the Indian consumer is evolving rapidly, with significant shifts being observed in behaviour. McKinseys Proprietary Financial Services survey, conducted across 20,000 consumers in 13 countries in Asia, including 5,000 in India, revealed five big consumer-related trends which will impact the insurance industry. Decline in customer loyalty: In India alone, consumer loyalty2 fell by over 40 percentage points from levels observed in 2007 (79 per cent in 2007 to 40 per cent in 2011), with loyalty being driven by softer factors, such as intimacy and quality of interaction. Onset of the digital revolution: India is at the cusp of a digital revolutionthe number of internet users in India is estimated to increase by three to four times over the next five years, with current user levels of around 80 million reaching 350 to 400 million by 2015. For the first time since the research was started in 1998, the number of physical branch related transactions among financial services consumers witnessed a decline, with mobile and internet driven transactions increasing by three to four times. Need for professional financial advice: Consumers are increasingly seeking advice, in particular for financial planning; e.g., around 70 per cent of Indian consumers seek professional advice and assistance in managing their investments. Further, while insurance agents continue to remain the primary source for financial advice, banks are rapidly gaining
2 As indicated by whether consumers are willing to recommend their financial institutions to friends/family/ colleagues
share in this space (banks share has increased from 7 per cent in 2007 to 16 per cent in 2011, while that of insurance agents has fallen from 45 per cent in 2007 to 33 per cent in 2011). Concern for retirement security: Consumers are increasingly concerned with saving money for retirement. Between 2007 and 2011, the percentage of consumers who indicated a clear need to plan for retirement increased by 15 percentage points (from 56 per cent to 71 per cent). Emergence of a multi-channel world: Over 80 per cent of consumers across Asia use more than one channel across the purchase and usage process, especially for buying insurance products. Disruptions by changing technology Third, the pace of technology development and proliferation is evolving rapidly, creating opportunities for insurers to innovate in their existing businesses. In particular, four technology related shifts will be relevant. Increase of a Web 3.0 cluster of user-focused technologies, which will extensively leverage social media and facilitate collaboration, sharing, creativity, conversational marketing, customer advocacy, and innovation. Access to Big Data, which will transform the ability of companies to perform analytics through a combination of proprietary and public data, leveraging next generation processing capabilities. Growth of the Internet of Things, the extension of computing from the PC to interconnected sensors and devices that communicate through shared networks. Rise of cloud computing, the internet-based, highly scalable computing infrastructure that provides on-demand processing, application services, and data storage.
Players at different starting positions, none close to the finish line

While there is a stark difference in the starting position of players in terms of performance, none are close to achieving an appropriate balance between various economic objectives of growth, profitability and franchise quality. Business models adopted by private sector life insurers have been economically unviable, with players struggling to balance the multiple economic objectives. Between fiscal years 2000 and 2011, the total capital invested by private sector life insurers was over USD 7.5 billion, of which over 50 per cent or nearly USD 4.0 billion was invested to fund accumulated losses, which have largely been incurred to create distribution capacity. None of the private players in the industry can be classified to be in the high performance zone, i.e., with new business economics3 of less than 25 per cent and persistency4 of business higher than 75 per cent. However, players are at wide ends of the spectrum with new business
3 Operational expenditure plus commissions as a per centage of NBP sourced 4 Measured by 1 year persistency ratio
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economics varying between 22 per cent and 63 per cent for a top quartile and median player respectively. Similarly, persistency varies from low levels of 50 per cent to players with better performance demonstrating higher than 75 per cent. The wide variation in economic performance is witnessed across distribution elements where agency economics varies between 32 and 91 per cent and bancassurance varies between 23 and 66 per cent, for a top quartile and median player respectively. This difference is largely driven by differences in front-line productivity differential. In addition, the source of growth varies with some players having a higher value customer base, i.e., more than 60 per cent of policies sourced being high ticket.5 The differences in performance are also reflected in operational metrics with high performing players having as much as a 30 per cent higher straight-through processing rate of policies and around 40 per cent higher productivity of underwriters processing the policies. Even for the best performers, there is still a long way to go in meeting the elusive absolute bar in terms of performance. Therefore, players must re-align their business models in the new paradigm with careful consideration of several strategic issues.
Fundamental questions for insurers

In the context of the discontinuities shaping the market landscape and the starting position of players, we have identified and provided our perspective on five fundamental questions that insurers will need to address as they look to change the game in the new normal. Is the agency channel a lost cause or a real opportunity to energise and rejuvenate? Agency remains a significant channel across markets in Asia and is typically the biggest contributor to profits and drivers of value. The situation in India is in stark contrast to the experience of other marketswith the economics of agency significantly worse than other channels. Given this backdrop, there will likely be a sharp polarisation in the channel structure, with only four to five players being able to make the agency channel work at scale, with the rest focused on building niche geography or segment-focused models. Even for the first set of players who choose the path of building an at-scale agency, there is no short-cut to achieving agency excellenceit will be a multi-year, multi-layered business and organisation change programme which will require an integrated set of actions across various dimensions, and systematic efforts to manage change in mindsets and organisation behaviour. What will it take for insurers to create a true win-win approach for bancassurance? Given the challenges faced by the agency in India, bancassurance will emerge as an important channel going forward. The upside potential in this channel is tremendous, with most large banks offering a significant opportunity to fully penetrate into their customer franchise. There are several challenges in the current model which constrain banks and insurers from fully tapping into this opportunity: lack of tailored products for the bank channel; low front-line sales capability and productivity; inefficient operating models; no well established models for fully tapping into all customer
5 More than INR 50,000 for regular premium policies and more than INR 150,000 for single premium policies
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touchpoints and segments of the bank; lack of alignment with banks core priorities; and an ineffective governance mechanism. With the introduction of open architecture inevitable over the next few years, succeeding in the new regime will depend on the ability to create multiple primary-provider relationships with different banks through a strong service-led propositiondriving down the cost of compliance for banks and creating high switching costs for banks to move between providers. In this context, insurers will need to choose from one of two core models in their quest to balance multiple objectives: the fully integrated approach or the plug and play approach. Can insurers drive breakthrough innovations across the business system, leveraging consumer and technology discontinuities? The insurance industry has traditionally been a laggard in adopting new technologies and driving innovation. In the Indian context however, given the economic challenge which players are currently facing, and shifts in consumer behaviour, technology could play a central role in disrupting existing business models. In particular, there are four major areas for insurers to drive breakthrough innovationtransforming the sales and service experience; delivering better propositions; using the delivery machine in terms of the operating processes as a lethal weapon to drive efficiencies and better customer experience; and maximising the value of multi-channel interactions. How should insurers think about their geographic footprint and business model in the new paradigm? Historically, the majority of life insurance players have followed a national strategy, with largely similar distribution and operating models across geographies. Going forward, with increasing economic pressures, players will need to make very conscious choices about where and how to compete. The choice in terms of geography and business model will be determined by three factorsfuture growth opportunities; current starting position in terms of footprint and access to privileged assets; and differential economics across various geographic locations. Based on the above factors, the outcome in terms of geographic focus and corresponding business model could be very different across various categories of players. For example, larger insurance players may need to adopt a strategy of creating multiple home-markets across different regions and or clusterswhere they can establish a dominant position (e.g., 20 per cent plus market share) through a multilocal approach. For smaller players, and in particular new entrants, the choice to make is in terms of explicitly moving away from a national strategy by focusing on a few regions and or clusters, and going deep within that spectrum, or choosing a particular segment and creating a focused business model for that segment. How can insurers capture value from their existing franchise? Historically, insurers have focused on new customer acquisition and largely ignored their existing customer base, with limited efforts to systematically tap into their potential and create loyalty within the base. In the new paradigm, however, insurers may have no choice but to significantly shift their focus to maximising the potential of their existing base. This would not only protect their existing embedded value, but it can also unlock new growth opportunities at a significantly lower cost. In particular, there are two priorities which will be critical to driving economic value from the existing customer franchises: deepening customer relationships through a systematic approach for cross-sell and up-sell; and building a rigorous approach to managing persistency and retention.
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The economic impact of the strategic choices made by players across the issues outlined above could be significant. The economic performance of a player who is already in the top quartile today has the potential to improve by 25 to 30 per cent, in terms of operating cost to new business premium. For median players, the improvement could be between 40 and 45 per cent. Moreover, by focusing on the right products and business models, the overall level of protection in the economy could increase significantly with the sum assured increasing by 20 to 25 per cent of GDP till fiscal year 2015. This will be a significant shift in trajectory from the past, where the ratio has been stagnant for the past three years. Finally, an increase in persistency levels by 10 to 30 per cent could translate into a 20 to 25 increase in the embedded value of the franchise, resulting in significantly higher valuations. The Indian life insurance industry is witnessing discontinuous changes which will alter the landscape going forward. To compete effectively and win in this market, players will need to fundamentally rethink their strategies to compete along various dimensions. We are hopeful that this report will provide perspectives to various industry stakeholders and enable them to make the right strategic trade-offs.
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1. Outlook for the Indian life insurance industry: what to expect

Since liberalisation in 2000, the life insurance market in India has seen rapid growthby over 25 per cent in terms of gross written premiums (GWP); 28 per cent in terms of new business premium sourced (NBP); and 27 per cent in terms of annual premium equivalent (APE). India is now a top 10 market globally with GWP of USD 57 billion (in fiscal year 2010) and USD 65 billion (in fiscal year 2011). This growth has largely been on the back of investment oriented unit linked products (ULIPs), which accounted for nearly half of the new business premium sourced between fiscal years 2004 and 2011. Although there began a decline in contribution of ULIPs over the last 3 years, India continues to have the highest share of ULIP products in overall product mix among other Asian countries. Its share of ULIP in GWP in fiscal year 2011 was 45 per cent whereas other countries ranged between 6 and 30 per cent (China 13 per cent; Japan 6 per cent; Malaysia and South Korea 27 per cent). With the recent regulatory changes introduced in September 2010, there has been a marked slowdown in the industry, as players seek to realign their business models to compete in the new environment. Despite the near-term slowdown, India will remain one of the most attractive markets globally in terms of growth, driven by very strong underlying fundamentals. In this chapter, we describe what to expect as the Indian life insurance industry continues to grow.
Near-term slowdown, but medium- to long-term growth prospects remain attractive

In the past two years (since fiscal year 2010), there has been a steady slowdown in industry growth, with GWP growth at 20 per cent and 14 per cent and APE growth at 20 per cent and 10 per cent respectively in fiscal years 2010 and 2011. In the period following the introduction of regulatory changes (from September 2010 to March 2011), the industry slowed down significantly with overall industry registering negative APE growth of 13 per cent and negative NBP growth of 7 per cent. For the private sector, this decline was even sharper with 32 per cent negative growth in APE and 9 per cent negative growth in NBP. The slowdown has continued in the first quarter of fiscal year 2012 (between April and June 2011), with industry APE declining by 23 per cent and private sector APE declining by close to 40 per cent. This degrowth is significant, even after taking into consideration the high base for the corresponding period in the previous year. The slowdown in industry growth is expected to continue for another 12 to 18 months, as players look to fundamentally adapt their business models in the new environment. However, over a 5-year period, India will remain one of the most attractive markets globally in terms of growth. A recent McKinsey effort on Global Insurance Pools, which analyses over 60 insurance markets globally (accounting for 99 per cent of global life insurance premiums) indicates that between 2010 and 2015, Asia will account for over 50 per cent of incremental growth in global life insurance premiums written. India will be one of the few markets globally which will grow at double digit rates and account for 10 per cent of the incremental growth in global life insurance premiums. Between 2010 and 2015, the Indian life insurance industrys GWPs are forecast to grow at a rate between 13 and 14 per centto reach a total of around USD 110 billion by 2015. Given this outlook, India will continue to be a very important market for global players in their pursuit for growth (Exhibit 1.1).
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Exhibit 1.1
India will continue to be one of the fastest growing life insurance markets
Life insurance GWP 2010 USD bn United States Japan United Kingdom France Italy Germany China Taiwan India South Korea Spain South Africa Netherlands Australia 64 57 52 42 41 35 33 118 116 114 378 201 200 481 CAGR GWP 10-15, Per cent Share of global GWP growth 2010-15, Per cent 12.2 -2.8 6.1 6.9 0.0 3.3
3 -1 3 3 0 3 18 2
13-14
28.3 1.1 10.3 2.8 0.0
5 0 10 1 5
5.0 0.3 1.7
Note: Euro 1 = USD 1.45 Figures for other geographies are CY2009 whereas for India are fiscal year 2010 SOURCE: McKinsey Global Insurance Pools effort; McKinsey analysis
Shift towards providing long-term savings and protection for the economy
Life insurance serves a dual purposecreating a financial cushion for individuals and catalysing economic development by channelising savings into avenues for long-term investments. In addition, a funded pension system created by life insurers helps to provide social security to individuals, which is of utmost importance in a country such as India. Against this backdrop, the life insurance industry in India has a long way to go in achieving the critical objectives of providing long-term savings and protection. While the overall life insurance penetration (as measured by premiums to GDP) has increased to over 4.5 per cent of gross domestic product (GDP), the level of protection coverage remains extremely low. The sum assured to GDP for the life insurance industry in India as a whole was around 55 per cent of GDP (in fiscal year 2010 ),1 of which the contribution from the private sector was around 23 per cent of GDP for private players (fiscal year 2010). This is significantly lower than benchmarks from other markets (250 per cent for USA; 170 per cent for Korea; and 160 per cent for Malaysia, Germany and Singapore). Further, the ratio has remained stagnant for the past three years. The current low levels of protection in India indicate that the upside for growth in the industry remains significant (Exhibit 1.2). This will entail a significant shift in the proposition of the industryfrom driving short-term investment linked products to increased focus on meeting the long-term savings and protection objectives of the economy.
1 Latest year for which the figures are available
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Exhibit 1.2
The level of protection remains low in India

Low protection levels Protection (Level of sum assured) Percentage of GDP (FY 2010 for India; CY 2008 for other markets) US Korea Singapore Germany Malaysia India Thailand
55 51 176 167 165 157 249
SOURCE: Global Insight; ICI World Factbook, 2008, IRDA; Swiss Re; Country Insurance handbook; McKinsey analysis
Need to focus on profitability

The past decade has been primarily focused on driving growth in new business. This relentless focus on growing new premiums has led to several inefficiencies in business practices (e.g., creation of short-term products; incentivisation of frontline managers and distribution primarily on new business; limited profiting of customer needs) and resulted in very low levels of profitability in the industry. To help achieve high growth objectives and ambitions, insurance companies have already invested significant amounts of capital. In the past decade (ending fiscal year 2011), the total capital invested by private sector life insurers was over USD 7.5 billion, of which over 50 per cent, or close to USD 4 billion, was invested to fund accumulated losses, which have largely been incurred to create distribution capacity. However, even after a decade very few players are close to meeting the break-even targets set out in their original business plans. Of the 22 private sector players (till fiscal year 2011), only three have registered accounting profits for five years of their operations, while a further four players have registered profits in three years of their operations. Further, product margins in India are structurally low. An outside-in analysis based on declared figures of companies operating across multiple markets indicate that the new business adjusted profit (NBAP) margins in India are among the lowest across all markets in Asia ( Exhibit 1.3).
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Exhibit 1.3
India is one of the least profitable markets across Asia

RoR1, 2004-20092 bps Japan China Taiwan India South Korea Australia Hong Kong Singapore Malaysia Thailand Indonesia Philippines New Zealand Vietnam 25 118 5 -27 74 166 na 163 132 203 308 427 N/A N/A N/A 12 ~35 30-39 37-39 10 40-64 39-55 18 18 20-44 NBAP margins3 Per cent N/A 30-60
LIFE
39-73
Note: Middle East countries are excluded from this analysis 1 Return on reserves calculated as statutory net profits divided by total technical reserves (including unit linked reserves) 2 Fiscal year 2005 to 2010 for India 3 Based on range of disclosed NBAP margins by market of 3 MNC players Prudential, Axa, AIA; average for 2009 and 2010; calculated basis APE SOURCE: McKinsey Global Insurance pools (GIP) initiative; McKinsey analysis
While historically valuation multiples in the industry have been driven by growth expectations (especially when growth was upwards of 25 per cent), in a moderated growth environment insurers will need to pro-actively drive different sources of value in their business, particularly through better NBAP margins. This trend, combined with a scenario where shareholders will seek better economic return on their capital invested, will mean that players will have no choice but to shift their focus to driving profitability. This will require them to create costefficient business models and expand margins through more conscious decisions on product mix and design.
As this chapter highlights, despite the recent slowdown of growth due to regulatory changes, the life insurance market in India is attractive in the medium to long term. However, players will shift their focus much more towards providing more long-term savings and protection, while driving profitability in their core business. In the next chapter, we discuss the three big discontinuities which will shape the market landscape over the next few years.
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2. Major discontinuities shaping the life insurance market landscape

The insurance industry in India is going through unprecedented changes. However, experience globally across industries indicates that it is in times of discontinuity that the most successful innovations are seeded and scaled up. While on one hand the regulatory changes themselves represent a massive discontinuity, on the other hand there are some big disruptions on the consumer and technology front that could change the nature of insurance. In view of these discontinuous changes in the environment, insurers will need to fundamentally review and redefine their proposition and business models to compete.
Continued regulatory changes

The recent regulatory changes introduced by the Insurance Regulatory and Development Authority (IRDA) in September 2010 clearly signal an intent to shift the orientation of the industry towards longer-term savings and protection, deliver more efficient propositions to consumers and develop more efficient business modelsobjectives which have been largely ignored in the wake of the unprecedented growth of the last decade. Going forward, at least in the medium term, we expect continued regulatory changes which build off the current set of moves. In particular, impending regulatory changes on bancassurance (a likely introduction of open architecture regime) and agency (more stringent qualification norms and process, enforcement of performance criteria) will cause insurers to further review and shift their existing business models and practices. The increased regulatory intervention is in line with the trends being observed among financial services regulators globally, particularly in the wake of the global crisis. This is a reality which market participants will have to deal with and respond to by making some significant changes in the way they operate.
Coming of age of the Indian consumer

To develop insights into the financial services behaviour of consumers, McKinsey conducted its fifth proprietary Personal Financial Services survey in 2011, covering 20,000 consumers and spanning 11 countries in Asia (including 5,000 consumers in India). The research highlights the fundamental dichotomy between what consumers are looking for in insurance and how it has been positioned and sold to them. For example, over 80 per cent of Indian consumers said that they buy insurance for the primary objective of providing long-term savings and financial protection to their family. This is in complete contrast to how the product has been sold over the last few yearsas a short-term investment proposition with an upside of high returns (Exhibit 2.1). Further, Indian consumers have an inverted risk-return perception about insurance, considering it a low risk, high return product. Indian consumers perceive that insurance offers higher returns than mutual funds while being only a marginally higher risk than a bank savings account. This risk-return perception has only marginally corrected over the past decade since the research has been conducted, and indicates how consumer perception has been shaped by the way the product has been sold, despite the reality being very different (Exhibit 2.2).
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Exhibit 2.1
Indian consumers buy insurance for long-term savings and protection for family
Primary reason for purchasing life insurance Overall Asia 100% = ~4800 Long-term savings and Financial protection for my family1 Funding for retirement 16 India Emerging Asia2 Developed Asia2
63
82
56
73
15
17
Funding for children education
13
20
Other savings
1 Saving for the family 2 Average of emerging and developed Asian countries respectively SOURCE: McKinsey PFS Survey, 2011
Exhibit 2.2
Indian consumer perceives life insurance as a low risk, high return product
High
4.0 3.5 3.0 2.5
2011 2007
Mutual funds Bonds Life insurance Bank savings account Life insurance
Risk
2.0 1.5 1.0 0.5 0 0 0.5 1.0 1.5 2.0 2.5
3.0
3.5
4.0
4.5
Low
SOURCE: McKinsey PFS Survey, 2007 & 2011
Return
High
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While the current state of the consumer brings out the dichotomy, there are several shifts underway in consumer behaviour, which will have significant relevance for insurers. These include: Decline in customer loyalty: Across Asia, there has been a dramatic decline in consumer loyalty towards financial institutions. In India alone, consumer loyalty (as indicated by whether consumers are willing to recommend their financial institutions to friends/family/colleagues) has fallen by over 40 percentage points since 2007 (79 per cent in 2007 to 40 per cent in 2011). Importantly, the drivers of loyalty are changing rapidly from hard functional factors, to softer intimacy and trust-related factors. Onset of the digital revolution: India is at the cusp today of a digital revolutionthe number of internet users in India is estimated to increase by three to four times over the next five years, with current levels of around 80 million reaching 350 to 400 million by 2015. Over 80 per cent of these internet users will be under the age of 35. This digital revolution is already leading to a significant increase in remote channel usage. Between 2007 and 2011, the internet and mobile channel usage for financial services consumers in India grew by over three times, while the branch usage declined by 20 per cent (Exhibit 2.3).
Exhibit 2.3
The number of internet users in India expected to quadruple with majority <35 years of age
Large screen and small screen Large screen only Small screen only
India- Internet users Million 330-370 115-135

35
Internet users age profile 2011 % of total 100% = 15-24 100

35
99
26
4X 25-34
40
26
81 17
64 0
200
22 35-44 45-54 55+ 16 3 India

6 14 11
2009
2015
World
SOURCE: McKinsey digital consumer research; Comsource data; McKinsey analysis
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Need for professional financial advice: Consumers are increasingly seeking advice, in particular for financial planning. Over 70 per cent of Indian consumers said that they seek professional advice and assistance in managing their investments, while over 45 per cent prefer to leave all their financial decisions with their financial planner. Further, while insurance agents continue to remain the primary source for financial advice, banks are rapidly gaining a share in this space (the banks share has increased from 7 per cent in 2007 to 16 per cent in 2011, while that of insurance agents has fallen from 49 per cent in 2007 to 33 per cent in 2011). Concern for retirement security: There has been an increased awareness and need for financial security post retirement among Indian consumers. Between 2007 and 2011, the per centage of consumers who indicated a clear need for planning for retirement increased by 15 percentage points (from 56 per cent to 71 per cent) (Exhibit 2.4). Emergence of a multi-channel world: Consumers are increasingly becoming multichannel in terms of their interaction with financial institutions, with channel hopping widely prevalent across the consumer decision journey. Over 80 per cent of consumers across Asia use more than one channel during the purchase and usage process, especially for buying insurance products.
Exhibit 2.4
Consumers seeking more professional financial advice and concerned about retirement security
I prefer to leave most investment decisions to my financial advisor Percent responding strongly agree or agree
45%
33%
+12%
I am concerned about having enough money for retirement Percent responding strongly agree or agree
56% 71%
2007
2011
+15%
I would like more advice & assistance in managing my investments Percent responding strongly agree or agree
58% 70%
2007 +12%
2011
2007
2011
SOURCE: McKinsey Proprietary PFS survey
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Rapid evolution of technology

In addition to the big shifts to consumer behaviour, technology is also evolving at a rapid pace and is transforming businesses across industries. Several nascent technologies, which already are powering new offerings in sectors such as apparel, energy, health care, and entertainment, show great promise for a much broader goalhelping institutions reach entirely new segments of customers and distributors, and making them economically viable. There are several disruptive technology trends which will drive innovation in the next decade. Primary among those are four more recent developments, which to some degree are interlocking.1 Increase of a Web 3.0 cluster of user-focused technologies: This trend is based on extensively leveraging social media to facilitate collaboration, sharing, creativity, conversational marketing, customer advocacy, and innovation. In the past few years, the ability to organise communities of Web participants to develop, market, and support products and services has moved from the margins of business practice to the mainstream. Intuit is among the companies that use the Web to extend their reach and lower the cost of serving customers. For example, it hosts customer support communities for its financial and tax return products, where more experienced customers give advice and support to those who need help. The most significant contributors become visible to the community by showing the number of questions they have answered and the number of appreciative remarks they have received from other users. Based on McKinsey research and estimates, when customer communities handle an issue, the per-contact cost can be as low as 10 per cent of the cost to resolve the issue through traditional call centres. Other companies are extending their reach by using the Web for word-of-mouth marketing. P&Gs Vocalpoint network of influential mothers is a leading example. Mothers share their experiences using P&Gs new products with members of their social circle, typically 20 to 25 mothers. In markets where Vocalpoint influencers are active, product revenues have reached twice those without a Vocalpoint network. Growth of the Internet of Things: This is the phenomenon when assets themselves become elements of an information system, with the ability to capture, compute, communicate, and collaborate around information. Embedded with sensors, actuators, and communications capabilities, such objects will soon be able to absorb and transmit information on a massive scale, and will in some cases be able to adapt and react to changes in the environment automatically. These smart assets can make processes more efficient, give products new capabilities, and spark novel business models. Auto insurers in Europe and the United States are testing these waters with offers to install sensors in customers vehicles. The result is new pricing models that base charges for risk on driving behaviour rather than on a drivers demographic characteristics. Luxury-auto manufacturers are equipping vehicles with networked sensors that can automatically take evasive action when accidents are about to happen. In medicine, sensors embedded in or worn by patients continuously report changes in health conditions to physicians, who can adjust treatments when necessary. As standards for safety and interoperability begin
1 The content for the technology trends is based on an article published in the McKinsey Quarterly in 2010 Clouds, Big Data and Smart Assets : Ten tech enabled trends to watch. The authors of the article are Jacques Bughin, Michael Chui and James Manyika.
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to emerge, some core technologies for the Internet of Things are becoming more widely available. However, the range of possible applications and their business impact have yet to be fully explored. Access to Big Data: This refers to the greater access to customer data from public, proprietary, and purchased sources, as well as new information gathered from Web communities and newly deployed smart assets (the Internet of Things). Technology for capturing and analysing information is widely available at ever-lower price points. But many companies are taking data use to new levels, using IT to support rigorous, constant business experimentation that guides decisions and tests new products, business models, and innovations in customer experience. In some cases, the new approaches help companies make decisions in real time. This trend has the potential to drive a radical transformation in research, innovation, and marketing. Web-based companies, such as Amazon.com, eBay, and Google have been early leaders, testing factors that drive performancefrom where to place buttons on a Web page to the sequence of content displayedto determine what will increase sales and user engagement. Financial institutions are active experimenters as well. Capital One, which was early to the game, continues to refine its methods for segmenting credit card customers and for tailoring products to individual risk profiles. Companies selling physical products are also using big data for rigorous experimentation. The ability to marshal customer data has kept Tesco, for example, in the ranks of leading UK grocers. The brick-and-mortar retailer gathers transaction data on its 10 million customers through a loyalty card programme. It then uses the information to analyse new business opportunitiesfor example, how to create the most effective promotions for specific customer segmentsand to inform decisions on pricing, promotions, and shelf allocation. Rise of cloud computing: This trends refers to the internet-based, highly scalable computing infrastructure that provides on-demand processing, application services and data storage. Consumer acceptance of Web-based cloud services for everything from e-mail to video is now becoming universal and companies are gearing up to offer them more services. Software as a Service (SaaS), which enables organisations to access services such as customer relationship management, is growing at a 17 per cent annual rate. The insurance industry globally has typically been a laggard in terms of technology adoption. In the Indian context however, given the economic challenge which players are facing currently, and shifts in consumer behaviour, technology could play a central role in disrupting existing business models.
As this chapter outlines, the three major areas of discontinuities of regulatory action, shifting consumer behaviour, and technology adoption, will significantly shape the market landscape going forward. While they will make the environment more challenging, they will also create several opportunities, in particular for those who are willing and able to capitalise on these change and fundamentally change the way they operate. In the context of these discontinuities, in the next chapter, we discuss how various players in the industry are positioned to respond to these changes.
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3. Starting position of players: where they stand and how they perform
There is no doubt that the recent regulatory shifts will have a material impact on all life insurers in India. The ability of various players to respond to these changes and balance the economic objectives of growth, profitability and franchise quality will vary significantly, based on their starting position across various dimensions such as economics, distribution, productivity and quality of customer base. For instance, those with better economic performance (lower cost to sales) will have more time to adapt to changes while those with higher cost bases will need to act immediately. Similarly, the ones with captive bancassurance could continue to build on their strength, while those with a stronger agency try and revive the channel. Whatever their starting point, players needs to keep in context the absolute bar on performance and reassess their strategy in light of the new scenario. To understand the starting position of players in the industry, McKinsey launched a proprietary performance benchmarking effort in the second half of fiscal year 2010. The benchmarking covered eight private sector players contributing around 55 per cent of the new business premium (NBP, fiscal year 2010) and included over 400 data points for each player. As part of the exercise, players were benchmarked on several dimensions including business and product mix, channels, distribution economics, and operating costs. The insights from the benchmarking exercise are highlighted in the rest of this chapter.
Struggling to achieve a balance between economics and quality of business

The industry has struggled to balance driving new business and enhancing franchise quality. A comparison of player performance on two dimensions: 1) new business economics;1 and 2) franchise quality,2 indicates that there is no clear winner among the private life insurance players who have been able to successfully drive both these objectives. Four players had a total cost/NBP ratio of more than 100 per cent, while only three are below 25 per cent. On the other hand, only four players operated at more than 75 per cent in terms of of one-year persistency levels, while the rest of the industry operated at between 50 and 75 per cent. Among the entire set of players, no player could be categorised as operating in the high performance zone (defined as 1-year persistency of over 75 per cent and cost ratio of less than 25 per cent, Exhibit 3.1).
Massive spread in distribution economics

The benchmarking exercise revealed a huge variation among players in terms of their starting position on distribution economics. For comparing player performance, we categorised players based on their performance on the metric of new business economics, i.e., operating costs plus commissions divided by NBP.
1 As measured by operating expenses plus commissions as a per centage of NBP 2 As measured by the 1 year persistency ratio declared by insurers in the public filings
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Exhibit 3.1
No clear winner in terms of ability to drive new business economics and franchise quality
Per cent, fiscal year 2011 200 New business economics (Opex+Commission) /NBP (Percent)
100
75
50
25 5
High performance zone 25 50 75 100 Franchise quality (1 year persistency1 (Percent))
1 One yr persistency: a) For survey participants Ratio of renewal premium collected in first year of completion of a policy (of the regular premium underwritten in year T-1) to the regular premium underwritten in year T-1 b) For other industry players 1 year conservation ratio is used SOURCE: McKinsey Life Insurance Survey, 2011
At the aggregate level, top quartile performers achieved overall new business economics of 22 per cent, as compared to 63 per cent for the industry median. The gap between the top performers and the rest is especially pronounced in the agency channel, where the difference in the ratio is close to 60 percentage points (Exhibit 3.2). A deeper look reveals that the primary difference in the distribution economics is front-line productivity. For example, on agency, the top quartile performers have nearly four times higher front-line manager productivity than the median performers, even as their costs are slightly higher. This in turn is driven by better performance on almost all operating metrics, i.e., front-line manager attrition, activisation rate of agents, and higher premiums per agent (Exhibits 3.3, 3.4).
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Exhibit 3.2
Wide variation in cost position, agency being big differentiator

Operating cost & Commissions/NBP Per cent, fiscal year 2010 Tied agency
Top quartile1 Participants median
Channel shareIndividual NBP
91 32
Overall 52% ~40%
63
Bancassurance
66 23
22
39% Other channels2
~40%
Absolute bar has increased further in the new regulatory environment- for a primarily ULIP portfolio, players need to achieve cost ratio of <25% to break even
Note: Distribution economics are for respective channels 1 Top quartile players based on overall (opex+ commission) / NBP ratio 2 Includes direct sales team, broker etc. SOURCE: McKinsey Life Insurance Survey, 2011; McKinsey analysis
40 10
9% ~20%
Exhibit 3.3
Gap on agency economics is driven by front-line productivity

Agency new business premium; fiscal year 2010
Top quartile1 Participants' median
Loaded cost2 per frontline manager INR Lakhs p.a. Agency OPEX & Commissions/NBP Per cent
5.9
4.7
91
32
Premium per frontline manager INR Lakhs p.a.
76
~4X
18
Huge variation in productivity3 of frontline managers (FLM) INR 10 lakhs to ~INR 1 crore
1 Top quartile players based on overall (opex+ commission)/ NBP ratio 2 Cost including sales hierarchy cost excluding commission 3 NBP/ FLM SOURCE: McKinsey Life Insurance Survey, 2011
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Exhibit 3.4
Players are achieving higher productivity across metrics

Individual NBP, fiscal year 2010
Premium/average agent1 INR 000
244
Top quartile1 Participants' median
Premium/average agent1 2X Nos. p.a. 8.2

5.3
Premium per frontline manager INR lakh p.a.

76
122
4X
Agents per frontline manager1

18
Average policy ticket size INR 000

30
Number
26
8
17 3
14
23
18 Agent activisation rate 29%
17%
1 Monthly average of agents with the insurer 2 Top quartile players based on overall (opex+ commission)/NBP ratio SOURCE: McKinsey Life Insurance Survey, 2011
Source of growth varies significantly across players

The benchmarking reveals significant differences in terms of sources of growth and customer base between the leading performers and the other players. While top quartile performers (in terms of distribution economics) expanded their policy base (number of policies) across geographies, median performers grew almost entirely through increase in ticket size, while actually registering a de-growth in terms of policies across geographies. Players have also achieved very different outcomes in terms of their customer base. Top quartile players have a disproportionate share of higher value customers under both the regular premium and single premium category (Exhibit 3.5).
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Exhibit 3.5
More high-value customer base of some players

Mix of policies by ticket size Regular premium, Per cent, fiscal year 2010 < INR 10,000 Between INR 10,000 - 30,000 Between INR 30,000 - 50,000 100% 4% 100% Mix of policies by ticket size Single premium, Per cent, fiscal year 2010 100% 100% < INR 20,000 2% 9% Between INR 20,000 15% - 60,000 21% Between INR 60,000 24% - 50,000 20% 11% Above INR 50,000
10%
20%
5%
35%
71% 43%
More than INR 150,000
59%
49%
Top Quartile
Participants median
Top Quartile
Participants median
1 Top quartile players in term of (Total opex+ commission) / NBP SOURCE: McKinsey Life Insurance Survey, 2011
Significant variation in operational efficiency

The benchmarking exercise indicates a significant difference in operating efficiency of various players. On policy issuance, top quartile performers have up to 20 per cent lower costs than the industry median. This is primarily driven by around 30 per cent higher straight through processing (STP) rate of policies and around 40 per cent higher productivity of underwriters in processing the policies. Similarly, on persistency (thirteenth month), top quartile performers have achieved close to 30 per cent higher persistency than the industry median. This is due to the difference in operational efficiencythat is, a 20 per cent higher collection rate (0 to 30 day collection percentage) and more than 25 per cent of premium collection through alternate payment mode (ECS, credit cards, etc.).
The absolute bar remains elusive

While the benchmarking indicates a wide spread in performance across players, players will need to review their performance in the context of an absolute bar to really drive towards their desired economic objectives. For a player in the median performance zone in the industry in terms of distribution economics, achieving break-even performance in the new regulatory environment would imply a reduction in their cost ratio by over 30 percentage points, i.e., nearly 50 per cent from current levels.
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Given the economic structure of the industry, a significant part of this reduction will need to be driven by increase in productivity levels. Even for the top quartile performers in the industry, there is significant scope for improvement across various dimensions. For example, in the agency channel, a leading Asian insurer (with agents in excess of 350,000) has achieved a front-line manager attrition of less than 10 per cent and agent activisation of close to 70 per centthis is significantly higher than the current performance of top quartile players in India at 40 per cent frontline manager attrition and around 30 per cent agent activisation. Further, the agent earnings level is structurally low as compared to global standards, even for the best performing playersover 60 per cent of the agents in the industry earn less than INR 2,000 per month, with even the purchasing power parity adjusted earnings three times lower than that of China and over 20 times lower than in more mature markets such as the US and Italy (Exhibit 3.6).
Exhibit 3.6
Significant room for improvement even for the top performers

Frontline Managers attrition2 Per cent, 2010 Top Quartile1 Tied agent activisation Rate3 Per cent, 2010 Tied agent average income (PPP) INR 000 p.m., 2010 Top Quartile Participants Median Participants median ~3.0
39
29
~2.5
52
17
USA
60-65
Italy Leading Asian insurer <10 60-65 China 9.0
55-65
1 Top quartile players based on overall (opex+ commission)/ NBP ratio 2 No. of frontline managers left in 2010 /(No. of FLMs at the start of the year 2010+ No. of FLMs added in the 2010) SOURCE: McKinsey Life Insurance Survey, 2011
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In terms of persistency levels, even the best performers (in terms of distribution economics) have significantly underperformed. Further, the levels in India today are significantly lower than standards in many emerging and mature markets (Exhibit 3.7).
Exhibit 3.7
Persistency remains an area of concern across players

Both top performers and industry median1 have significantly lower persistency across channels 1 year persistency by channel 2010, Per cent
Best in class on specific metric Top quartile Industry median
Persistency levels significantly lower than global benchmarks 1 year persistency (estimates) Per cent ~99
90
86 62 50
94
85 78
94
88
61 52
56
60
Overall company
Tied agency
Bancassurance
China
Korea
France Germany
Italy
1 In terms of new business economics SOURCE: McKinsey Life Insurance Survey, 2011
The benchmarking clearly indicates that the starting position of players going into the new normal is very different. However, the discontinuities described in the earlier chapter may actually level the playing field significantly. Players who are able to capitalise on these discontinuities will be able to leap-frog others and could establish a significant gap between themselves and the rest of the industry. In the next chapter, we discuss the five fundamental areas that insurers will need to address, to establish a winning model in the new normal.
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4. Competing in the new normal: Fundamental questions for insurers

While the discontinuities outlined in the earlier chapter indicate the need for a big shift in the proposition and business model for the industry as a whole, the extent and nature of response of individual players will vary significantly depending on their starting position and capabilities. In that context, we have identified five fundamental questions that insurers will need to address as they look to change their game.
1. Is the agency channel a lost cause or a real opportunity to energise and rejuvenate?
Agency remains a significant channel across markets in Asia and is typically the biggest contributor to profits and driver of value. For example, in China, the agency channel has new business margins of over 40 per cent, while the bank channel margins are close to zero. Similarly for a leading panAsian player the profitability of agency across markets is double that of bancassurance. The situation in India is in stark contrast to the experience in other markets, with the economics of the agency significantly worse than other channels. Given the high needs on transforming this channel in India, there will likely be a polarisation of channel structures. The agency channel could get further concentrated, with only four to five players being really able to build an at-scale agency channel and the rest either marginalised or forced to scale-down to niche segment or geography focused models. An example of a highly polarised market structure is China, where agency and bancassurance each account for close to 50 per cent of the total premiums. While the top three players account for over 80 per cent of the industry agency premiums, bancassurance is much more distributed across a broader set of players. There is no shortcut to achieving agency excellenceit will require an integrated set of actions around profiles, tools, processes, performance metrics and incentives, which will need to mutually re-inforce each other to deliver the desired impact (Exhibit 4.1).
Exhibit 4.1
Agency excellence will entail making an integrated set of choices across several key areas Profiles and pool of managers:
Overall choice in terms
of tenure, productivity and cost profile of frontline staff and managers to drive towards desired economic outcome
Overall Economic Model Sales enablers 1 6
Product bundles IT tools Customer engagement

tools and scripts
Profiles and recruiting 2 On 3 boarding and training
Accountability for front-line staff
e.g., Fresh vs Experienced; internal hiring vs externally hired and staffed Profile of front-line sales staff recruitment Line managers vs. non line team
Early tenure support model Life cycle based Delivery of interventions

interventions through the line vs. dedicated training group
Clearly defined roles for
Sales zoning and placement in

micro-market
different levels in hierarchy Appropriate balance between performance reviews and coaching/mentoring
5 4 Sales management Performance management
Career path: e.g., Career sales KPIs: Balance between business Managing and growing top
volumes, quality, franchise creation and profitability roles vs. Managerial promotions
producer pool: Holistic value proposition
SOURCE: McKinsey analysis
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A successful example of a multi-year, integrated transformation of the agency channel is Ping An in China. Prior to 2002, Ping Ans agency was caught in a vicious cycle of a low-productive and low quality sales force and weak sales management systems. It subsequently embarked on a multi-year transformation programme centred around several dimensions: instilling accountability in sales management roles (i.e. district managers, agency leaders, agency admin staff); revamping agency compensation schemes; strengthening sales management routines with standardised tools and processes; re-examining standards and practices in agent recruiting, coaching and retention; establishing loyalty plans to keep top salespeople and agent leaders; and launching a large-scale capability building effort to drive change. While in the early years of the transformation, the size of the agency force was reduced significantly, it subsequently scaled it back up and is currently at over 400,000 agents. Over this period, agency productivity increased by over three times, while the activisation ratio has nearly doubled (Exhibit 4.2).
Exhibit 4.2
Integrated transformation to professionalize management and re-build agency growth engine China example
Multi-year transformation program centered around
China
Accelerated expansion after renewal of agency force and improvement in productivity levels Example: Ping Ans multi-year agency transformation has led to significant quality improvement and established market leadership in Chinas tied agent channel Number of agents 000s
350 188 200 200 205 302 356 400
Instilling accountability in sales

management roles (i.e., district managers, agency leaders, agency admin staff) compensation scheme management routines with standardized tools and processes practices in agent recruiting, coaching and retention keep top salespeople and agent leaders effort to drive change
Revamping agency
Strengthening sales
Re-examining standards and Establishing loyalty plans to Large-scale capability building

SOURCE: Literature search; McKinsey analysis
2002
03
04
05
06
07
08
2009
Agent productivity increased >3x between 2003 and 2009 Active agent ratio improved from 30% to 60% New Business margins >40%; agency generates USD 1 bn of profits
A comprehensive programme is needed to restart the cycle of higher productivity of agents resulting in higher individual compensation for agents and frontline managers which eventually will translate to higher motivation, higher sales quality and higher sales person skills. This cycle leads to a highly satisfied agency with low attrition levels which are critical for the agency to be economically feasible. In India today, we are witnessing players who are beginning to take an integrated set of actions to transform their agency forcesthis is reflected by the massive spread in economics which the top performers have been able to achieve over the rest of the industry. However, there remains a long way to go in the journey. There is no short-term fix for this channeltransforming the agency will require a multi-year, multi-layered business and
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organisation change programme with a systematic effort to initiate and manage change in mindset and organisation behaviours.
2. What will it take for insurers to create a true win-win approach for bancassurance?
Given the challenges outlined in agency, bancassurance will continue to remain an important channel in the industry. Many (8 out of 22) of the Indian private life insurance players have captive bancassurance distribution which will be an important source of competitive advantage. Further, there are several large banks in India which have the potential to offer significant volumes in partnerships if leveraged appropriately. The productivity differential is three times (as measured by NBPs as a per centage of the total savings balances of banks) between a top quartile and average bancassurance player, while it is five to six times as compared to a bottom quartile player. Even for a top performing bank in India the potential upside is hugepenetration into customer franchise remains less than 5 per cent, compared to over 20 per cent for banks across many other markets (Exhibit 4.3).
Exhibit 4.3
Potential upside for players in bancassurance productivity is huge in India

NBP/Savings account balances for banks in India
Per cent, fiscal year 2011
3.03
1.21 0.55
Top quartile1
SOURCE: McKinsey analysis
Median
Bottom quartile
Challenges in the current model Players in India face several challenges which have constrained them from fully tapping into the bancassurance opportunity. These include: 1. Products not appropriately tailored for the bank channel (e.g., products too complex to be sold by the banks front-line, lack of segmented propositions)
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2. Low front-line sales productivity driven by a) lack of simple and tailored products for the channel; b) insufficient investment in creating simple to use sales tools and scripts; c) Lack of well defined sales process, resulting in leakage at various stages; d) Insufficient coverage and support from insurer employees 3. No well established model for fully tapping into all potential touch-points and segments of the bank in a focused manner (e.g., call-center, internet, asset bundling) 4. Lack of alignment with the banks core priorities and performance management systems, resulting in limited focus on insurance down the line 5. No appropriate joint governance mechanism to resolve ongoing issues The bancassurance model will witness a further discontinuity in the near future, with the likely introduction of the open architecture regime. Global experience suggests that open architecture is an inevitable outcome, with almost all relevant markets globally operating under such a regime. While the early stages of open architecture will likely result in fragmentation due to increased competition among players, the market typically consolidates over time. Further, even in an open architecture regime, the primary provider or the preferred partner typically accounts for 80 per cent of the share of volumes at a bank. This phenomenon is very different from mutual funds, which have a much more fragmented share within a particular bank. Succeeding in an open architecture environment will depend on the ability to create multiple primary provider relationships with different banks through a strong service-led proposition, driving down the cost of compliance for banks and creating high switching costs for banks to move between providers. Winners will be those who are able to achieve the multi-fold objectives of driving volumes in this channel at a low cost, achieving a balanced product mix which provides sufficient economic incentives for the distributor and ensuring a loyal customer franchise. Having these multiple objectives is critical, as global experience suggests that while bancassurance can deliver volumes and scale in a short period of time, the profitability of the channel is typically lower than the captive agency channel, given the type of products typically sold through this channel (high proportion of short-term, single premium, investment products) and bargaining power of the banks. Moving towards a win-win outcome There are two broad best-practice models which players can adopt to achieve these multiple objectives and create a successful outcome (Exhibit 4.4):
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Exhibit 4.4
There exist 2 basic bancassurance approaches integrated or plug and play

Lever 1 Cooperate with bank partner Integrated approach Plug and play approach
Tight cooperation Reporting aligned for bancassurance Fully integrated product development Products perfectly tailored to bank
needs
Dedicated teams at the insurer to

ensure exchange and controlling
Develop 2 convincing products Effectively mar3 ket insurance products Enable and 4 motivate sales staff 5 Smoothly execute sales Examples
Product development by insurer Focus on innovation and speed in

development
Marketing and communication of
insurance products in the same way as banking products
Level of integration at the discretion of

the bank (with some push by insurer)
Full integration of insurance products in

training, incentives and sales push
Level of integration at the discretion of

the bank (with some push by insurer)
Seamless IT and process integration Fully-fledged support

Leading French insurer
Limited IT and process integration Limited support

Top 5 Spanish player
Impact of strategy
Became Top 3 life player in France;
consistent share of 13%-15% Achieved ~25% penetration of bank customer base
Became top 3-5 player in Spain
Mkt. share ~10% (08) vs. <1% (2000) Profits of EUR 120 million in 2008
(otherwise dominated by JVs/captives)
Fully integrated approach: In this approach, the bank is highly involved across the entire insurance value chainproduct development is fully integrated, marketing of insurance is the same as bank products, insurance training and incentives are aligned for bank employees, and IT and data systems are seamlessly integrated. One of the best examples of this model globally is a French specialist bancassurance player, which has premiums of over EUR 22 billion, a consistent market share of around 15 per cent and a penetration of over 25 per cent into the customer franchise. Plug and play approach: The plug and play model is operated largely by the insurer and offers standardised, white labelled products. The sales effort is largely driven by the banks front-line and there is limited integration with the insurer. It has a factory-based operating platform, which is typically common across multiple banks. A successful example is a top five player in Spain, which increased its market share from less than one per cent in 2001 to around 10 per cent in 2008 through a series of partnerships with smaller, regional banks. It achieved a top five position in a market which is dominated by large captives and generated a profit of EUR 120 million in 2008. The choice between the two models should be based on the scale of the relationship and ease of integration between the bank and the insurers. For the larger or captive relationships, the integrated approach could be very valuable. For the smaller and less mature banking partnerships, the plug and play approach could be a far more economically viable approach to achieve scale in a short period of time.
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Ensuring industry development through collaboration among industry stakeholders

The ultimate goal for the life insurance industry should be to create a sustainable and healthy market structure that is able to meet multiple objectivesdeepening access and penetration of long-term savings and protection instruments; protecting consumer interests; ensuring sufficient economic incentives for all industry participants; and ensuring financial stability. The onus for ensuring the industry moves towards the desired industry outcome lies with all industry stakeholdersthe insurance companies, intermediaries (such as distributors and other service providers) and the regulators and policy makers. In this context, there is a real opportunity to foster collaboration among the various stakeholders. Two examples of collaborative behaviour among the various industry participants are Korea and Taiwan. In Korea, the life insurance industry undertook a series of actions in the late 70s as part of a government sponsored effort to promote insurance. These included conducting consumer and distributor surveys to better understand needs and requirements, educating different segments of consumers (e.g., housewives, teachers, children, youth, journalists/ writers) and using different media to promote the concept of insurance (e.g., short movies, joint commercials, public events). These actions, supported by strong government effort (e.g., tax incentives, reorganisation of regulators) enabled the Korean insurance market to grow at over 50 per cent between 1977 and 1986. More recently, the regulator (FSS) and the industry association have come together to jointly formulate guidelines to ensure transparency and effectively redress consumer grievances.
Under the leadership of KLIA, life insurance companies in Korea proactively collaborated to attract public interest
Knowing customers Educating customers Attracting customers
Life insurance customer survey launched since Nov. 1976 Checked the trend of customer need & preference Built marketing & product strategy based on the result Solicitor survey launched since Apr. 1976 Checked knowledge & sales pattern of solicitors Defined/trained good solicitors & made plan for improving productivity
Housewives: Lectures on life insurance since Mar. 1973 Teachers: Educated benefits of insurance in terms of peoples life and economy; lectures on insurance system/ policy since Jul. 1973 Children: Held essay contest on life insurance since Jul. 1977 Young people: Held quiz contest from Apr. 1980Apr.1998 Journalist/writers: Held seminar to improve the recognition level on life insurance in 1982/1983
Short movies: Made 9 short movies on the needs of life insurance during 1973-1983 By regulation, every cinema had to show culture movies on public good before actual movies Co-commercials through media, e.g., radio, TV Started radio commercial from Sep. 1974 25 TV CF made during 1974-1999 Public works: offered medical care1 for doctor less villages from Aug. 1977
1 6 major life insurers offered 1 doctor per company 2 Systematic public works initiated in 1990 and actual fund contribution was done since 1992; during 1992-2001, KRW 2.9 billion was spent on public works SOURCE: KLIA; Press clipping
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In Taiwan, the Taiwan insurance institute was set-up as an industry funded, semigovernment body and now drives three types of initiatives: Carrying out insurance research: Review tax laws, accounting practices, centralise industry data Focusing on education and training: Seminars on relevant topics, examinations for agents, insurance professionals such as actuaries Offering mediation services: Platform for mediation of grievances between customers and companies to protect customer interests and ensure fair business practices. The Taiwanese insurance regulator and the Insurance Institute are also currently collaborating to adapt the new global accounting guidelines for the insurance industry. These examples could serve as helpful role models for the industry to take some real actions in driving collaboration among its various stakeholders.
3. Can insurers drive breakthrough innovations across the business system leveraging consumer and technology discontinuities?
As described earlier, the discontinuous shifts in consumer preferences and behaviours and the rapid evolution of technology are an opportunity for insurers to innovate and create breakthrough models. There is already evidence across multiple industriesretail, energy, health care and even the public sector/government of institutions leveraging technology to create new business models or fundamentally improve the performance of their existing models. Adopting technology and innovation may no longer be a choice for the insurance industry but the basis for survival. History indicates that companies which fail to embrace this could face an outcome as dramatic as extinction (Exhibit 4.5). From an insurance perspective, there are four major areas of opportunity to drive breakthrough innovation (Exhibit 4.6):
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Exhibit 4.5
Even the most traditional industries can be dramatically impacted by innovation

Technology propagates 20 times faster Years to reach 50mn people Facebook iPod Internet TV Radio
2 3 4 13 38
Ignoring technologies can be fatal Blockbuster example
20 times faster Revenues growing 15% per year 2000
Web-based DVD rental
Web-based video on demand
Loses ~20% market to Netflix
Issues bankruptcy warning Now
Implications of innovation even more relevant in IT-intensive industries Disruption more and more likely to come from outside the traditional players
Exhibit 4.6
Four areas to drive innovation

A Transforming the sales and service experience B Delivering better propositions C Delivery machine as a lethal weapon
Superior analytics and customer targeting Real-time sales management Delivery of insight ondemand Centralised decision support systems to speed up sales conversion cycle Instant fulfillment
Large-scale product mass customisation Real time pricing based on customer situation Risk computation based on ubiquitous computing Data-based underwriting decision support
Self-service and 24/7 availability Automatic and paperless processing (e.g., issuance, servicing and tele-claims) Flexible models (e.g., cloud)
Enterprise architecture layers Business model/ processes Business capabilities IT applications IT integration platform IT infrastructure products IT infrastructure
1 IaaS solution 2 PaaS solution 3 SaaS solution 4 BaaS solution
Cloud or provider or in-house I/S
Cloud or provider or in-house I/S
Cloud or provider I/S
Cloud or provider I/S
Maximising value of multichannel interaction Seamless interaction on hybrid channels (e.g., mobile phone based claim application) Convenient, cheap, ad-hoc insurance Social network channels (co-created affinity groups)
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Transform the sales process and experience: Innovations include leveraging technology and analytics to enable more focused targeting of customers, real-time sales management (e.g., instant leads supplied through mobile hand-held devices), delivery of information and insights on-demand to enable better customer conversations, and enabling instant fulfilment and service (e.g., through sales, service, underwriting and operations platforms fully integrated on hand-held devices). One example of an innovation leveraging technology for the front-line sales force is a leading North American life insurer. The insurer ran a pilot in partnership with a leading mobile phone solutions provider to enable automatic online enrolment for group insurance customers, through its new tablet-based solution. Early results from the pilot indicated an increase in enrolment rate from over 50 per cent to over 90 per cent. The insurer has recently announced plans to buy 1,000 tablets and roll-out the wireless enrolment project throughout its group business. Another example is the technology based platform which a top five life insurer created for its IFA network in the UK, which has enabled it to reduce its cost structure by 40 per cent and retain a significant portion of its IFA force, in a very tough and competitive market environment. Deliver better propositions: Innovations include creating customised bundles, and introducing real-time pricing based on individual needs and risk (to the extent allowed under the regulatory structures). In Europe, a top five insurer has created an interactive experience where customers can create their profile online, based on which they receive a selection of insurance products from which they can pick and choose and then continue the interaction further with the insurance representative. Another example is what Italys top three life insurer created with its new proposition in Italy, targeted towards the affluent pre-retiree segment. The proposition combined income preservation and management, with health protection and assistance, with a bridge functionality, which enabled consumers to use their investment returns to buy additional cover or re-invest their premiums paid in case of no/low claims. The proposition is delivered through a specialised sales force, which undergoes special training to be able to sell this product, and is also positioned as an opportunity for high performing agents in the general network to earn higher income. Use the delivery machine as a lethal weapon: The back-office operations of life insurance players globally are transforming from a low tech, mostly internally managed and paper intensive set up to integrated operations leveraging multiple channels (e.g., mobile phone based claim application), purchasing advanced IT resources (e.g., cloud computing), and leveraging automated decision support. For example, an insurer in Europe has put in place a seamless technology system based entirely on paperless workflows, which has enabled it to deliver 75 per cent of its policies on-the-spot to its consumers and reduce cost of processing by 50 per cent. Maximise value of multi-channel interaction: Innovations include seamless integration across multiple channels to ensure a consistent experience for consumers (e.g., real-time porting between internet and call-centre); giving consumers access to information and the ability to fulfil through multiple channels and touchpoints; and leveraging social networks for product innovation and servicing. For example, a leading financial services company in the US introduced a function in their website where the customer could make a Voice over IP (VOIP) call from any web-page, with immediate assistance from a call-centre, which would have full details, pre-populated, relevant to the area on the website where the customer had
39
a query. Introducing this functionality was a key driver in reducing their drop-offs of prospects visiting the website for purchase by 30 to 40 per cent. The more radical models that might still emerge are at the earliest stages of development and will require experimentation and testing. Players will need to take a strategic bet on the pace and extent of innovation. Those that are able to leverage these discontinuities quickly could create a significant advantage over their peers.
4. How should insurers think about their geographic foot-print and business model in the new paradigm?
Over the last few years, most Indian life insurance players have followed a national strategy with largely similar distribution and operating models across geographies. Although there have been some adjustments to the model based on the geography e.g. different agency branch model in Tier 1 versus Tier 3 cities, there have rarely been any fundamental differences in strategy adopted by insurers across these markets. The current market for insurance in India is fairly spread out from a geographic perspective. Our benchmarking effort indicated that while the top 30 cities in India accounted for close to 40 per cent of new business, the cities beyond the top 100 and the semi-urban and rural geographies contributed nearly 50 per cent of premiums (Exhibit 4.7). This geographic is in sharp contrast to the Indian asset management industry, which is highly concentrated in the top 8 cities that contribute around 90 per cent of assets under management (AUM).
Exhibit 4.7
Life insurance market is geographically broad-based

Growth and premiums is broad-based in case of the life insurance industry Individual NBP, INR crore, Average of the participants 100% Rural1 Other urban & semiurban centres2 Next 70 cities Next 22 cities 8 Metros
18%
However ~90% mutual fund industry is highly concentrated in top ~30 cities Retail AUM , Per cent 100% Rest of India Next 20 cities
11% 17%
100%
17%
Growth Percent 4
101
13% 15%
31%
31%
11
15%
11% 25%
15%
10% 27%
8 5 16 8 Metros
71% 73%
2009
1 As per IRDA definition 2 Covers ~400 Tier III cities & 3500 Towns
2010
FY 09
FY 10
Huge variation in contribution of top 30 cities across participants Ranges from ~25% to more than 60%
SOURCE: McKinsey Life Insurance Survey, 2011
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While the broader India growth story is well known, insurers need to factor in the granularity of growth to their strategy and decision making. Strategic decisions still continue to be made using simplistic methods. For example, defining how many branches need to be opened in the next year across India, or setting the agent recruitment targets for the agency manager in a life insurance branch, are often based on performance in the last year, quarter or monthbut this performance is not necessarily relative to the market potential or underlying macro-economic growth expected in the area. Clearly, the choices of where to compete and the corresponding business model will need to be based on a balance between three factors Future growth hot-spots: The next decade is likely to see discontinuous growth in different pockets of the country. To understand these discontinuities and their impact on growth, McKinsey has developed a thorough, historical and forward-looking perspective on GDP, population, income distribution and its underlying drivers at the most granular level across India through a proprietary knowledge effort titled Granularity of Growth. One of the big insights from this effort is that the past is not necessarily indicative of the future, when it comes to growth. Between 1999 and 2009, there were 23 districts in India, which had GDP growth rates of between 9 and 10 per cent. Between 2009 and 2025, 22 districts are likely to fall in this growth category. However, 20 of the 22 districts will be new districtsi.e., those that had very different growth trajectories in the past decade (Exhibit 4.8). A state such as Maharashtra, for example, will likely see one-third of its districts see a very different growth trajectory in income levels in the next decade than in the past decade (Exhibit 4.9). Any strategic decisions based on just backward looking facts will likely miss out on these growth pockets.
Exhibit 4.8
In fact, the fastest growing markets of tomorrow were not necessarily the fastest growing in the past
Number of districts in given growth range District GDP growth rate <5% 5-6% 6-7% 7-8% 8-9% 9-10% >10% Of which, new Past (1999-2000) Future (2010-30) districts 116 69 85 87 38 23 23 92 65 98 111 41 22 12 31 50 64 71 27 20 2 20 of the 22 districts likely to grow between 9-10% p.a grew at a materially different rate than in the past
SOURCE: Directorate of economics and statistics, Granularity of Growth econometric model; McKinsey analysis
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Exhibit 4.9
There are large variations in growth when you define markets at a granular level: Example Maharashtra state
Per capita GDP growth, 1999-2010 Per cent, CAGR
0-5% 5.01-6.50% 6.51-7.50% 7.51-8.50% 8.51-9.50% Above 9.50%
Per capita GDP growth, 2010-25 Per cent, CAGR
SOURCE: Directorate of economics and statistics, Granularity of Growth econometric model; McKinsey analysis
Starting position and access to privileged assets: Business model choices need to consider the starting position of different players, in terms of their footprints and access to assets. For example, insurers with access to a privileged bank partnership (i.e. through a captive relationship) will need to define its insurance strategy and business model in alignment with the geographic footprint of the partner. Similarly, players with specific infrastructure assets of the group (e.g. retail or telecom) or brand strength in a particular region will have to adopt a different approach in terms of aligning their own footprint. Differential economics between geographic locations: The economics of operating in different regions of the country also vary dramatically. For example, the cost to sales ratio for insurers in Tier 2 and Tier 3 cities is typically 20 to 30 per cent lower than those in Tier 1 cities. Much lower cost structures and attrition levels often heavily outweigh the lower ticket sizes and productivities, resulting in better economic outcomes. The economic position will also impact outcomes in terms of future footprint and models. In the context of the above three factors, life insurers will have to start making some tough choices and trade-offs in their geographic footprint and strategy. Larger insurance players may need to adopt a strategy of creating multiple home-markets across different regions and or clusterswhere they can establish a dominant position (e.g., 20 per cent plus market share) through a multi-local approach. An example of this approach is the one followed by Ping An, which is the second largest insurer in China with a close to 20 per cent overall market share. Ping An is present in around 300 cities across China, as
42
compared to its larger competitor China Life which is present in over 1,000 cities and has an overall market share of close to 40 per cent. Ping An has oriented its entire resource allocation strategy to focus on the biggest and highest potential markets, and has managed to achieve a 30 to 40 per cent market share in big cities like Shenzen, Shanghai and Beijing, which are a disproportionate part of its portfolio. For smaller players, and in particular new entrants, the choice to make is in terms of explicitly moving away from a national strategy and focusing on a few regions and or clusters and going deep within that spectrum, or choosing a segment and creating a focused business model to serve that segment (e.g., affluent in the top 20 cities) These strategic choices of where to play in turn should guide the critical decision of allocation of resources (human capital and financial) and drive various business model choices in terms of customer segments focus, product and pricing strategy, recruitment and training of field force and the broader organisation model to be adopted for different geographies.
5. How can insurers capture value from their existing customer franchise?
The growth story of the Indian life insurance industry has largely been based on a product-push approach to acquire new customers into the fold. Often, the new premium acquisition has been done by churning policies of existing customers. This approach has only resulted in high value erosion. Historically insurers have often turned a blind eye to their existing customer base, with limited efforts to systematically tap into their potential and create loyalty within the base. In the new paradigm however, insurers may have no choice but to significantly shift their focus to maximising the potential of their existing base. This would be required not only to protect their existing embedded value, but can actually be used to unlock new growth opportunities at a significantly lower cost. In particular, there are two priorities which will be critical to driving economic value from the existing customer franchise Deepen consumer relationships through up-sell/cross-sell/bundling: There are many insurers in the country today who have a customer base in excess of three million, but continue to have extremely low product holdings (less than 1.2 products per customer). The economic impact from enhancing the value of existing relationships can be significantthe cost of selling into the existing franchise is 50 to 70 per cent lower than acquiring a new customer. To maximise the value from their existing relationships, there are several actions which insurers can look to take. Capture higher wallet share at the time of customer acquisition through multiple products (e.g. riders): A large Asian insurer has achieved a rider/secondary product attachment rate of 70 to 80 per cent on its main policies sold, driven primarily by creating attractive bundles for consumers and incentivising its sales force to crosssell these bundles at the time of acquisitions. For another Asian insurer, nearly 90 per cent of its total profits are generated from up-sells to core policies, with the core products itself generating very little profits.
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Make lifestage-related cross-sell offers leveraging analytics: A large European insurer was able to achieve a 20 per cent lift in average products held by consumers by leveraging the policy data captured at issuance to generate targeted offers using a propensity model and passing on leads to agents to make the offers. Ensure sales tools support cross-sell: With the over-arching objective of ensuring that consumer interests are protected, develop simple solutions to ensure that a large distributed sales force is able to assess and recommend solutions to consumers. In China, in response to regulatory requirements of needs-based selling, companies designed a simple questionnaire, which could be filled out in less than 10 minutes and written in language that could be easily understood by people with high school education. The questionnaire response buckets customers into three to four segments, with one or two products aligned against each. Overall, the tool has been able to achieve around 70 per cent accuracy in identifying customer needs. Build a rigorous approach to managing persistency and retention: As described in the earlier part of this white paper, the persistency levels across players in India are 20 to 40 per cent lower than benchmarks observed in other markets. This by itself is a huge source of value creation, if done properly. Experience from various markets globally indicates that achieving world class persistency required an integrated approach comprising Putting in place appropriate metrics and incentives/disincentives for sales forces Designing retention specific product features to incentivise loyalty Segmenting customers based on propensity to renew/default, and using a combination of pro-active and re-active customer reach-out techniques using multiple channels such as email, call-centre, SMS Having a strong central governance body which tracks and monitors performance and is able to ensure co-ordination across different units of the organisation. Players in India will have to battle mindset (e.g., product and distribution driven mindset, experience-based decision making, complacency), and technical barriers (e.g., quality and completeness of data, flexibility in IT and operations, external research capabilities) to make change happen and capture the value from their existing franchise. Customer centricity is unlikely to be quick-fix and will be a long journey. However, there is pressing need to initiate these changes as winners in the long term will be companies that are able to create a large and loyal customer base.
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Economic impact of these choices: significant value at stake for the industry
The economic impact of the strategic choices made by players across the issues outlined above could be significant. Some of the big economic metrics where there will be a shift in outcomes include Better new business economics (measured by cost to new business premiums) The specific choices made by a different set of players and actions taken will translate into significant improvement in the new business economics. The extent of improvement will differ, based on the starting position of players. The economic performance of a player who is already in the top quartile today has the potential to improve by 25 to 30 per cent. The biggest sources of improvement would be in transforming their bancassurance models and tapping into the potential of their existing customer franchise, enabled through breakthrough innovation. For median players, the improvement could be between 40 and 45 per cent, with the biggest drivers of impact likely to be restructuring the agency model and creating the next generation bancassurance capabilities (Exhibit 4.10).
Exhibit 4.10
Impact of initiative on economic outcomes

Impact of initiatives (Indexed) on top quartile player Opex+Commissions/NBP Per cent
TOP QUARTILE PLAYER
100
4-5
8-9
4-5
9-10 Existing franchise
70-75
Current cost-to-sales
Agency
Bancassurance
Geography
Estimated cost-to-sales
Impact of initiatives (Indexed) on median player Opex+Commissions/NBP Per cent

MEDIAN PLAYER
100
12-14
19-20
3-4
6-7
55-60
Current cost-to-sales
Agency
Bancassurance
Geography
Existing franchise
Estimated cost-to-sales
Technology & innovation initiatives would impact productivity improvement across the initiatives of agency, bancassurance, geographic foot-print and existing franchise
Note : Estimation is based on modelling of changes on a sample portfolio of a top quartile and median player SOURCE: McKinsey analysis
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Deepening long-term savings and protection for consumers The shift in product mix and creation of new propositions will enable the industry to deliver better on its primary objective of providing long-term savings and protection to consumers. The overall level of protection in the economy (as measured by sum assured to GDP ratio) could increase by 20 to 25 per cent of GDP until fiscal year 2015. This will be a significant shift in trajectory from the past, where the ratio has been stagnant since 2008. Improving the quality of franchise and embedded value Adopting the series of initiatives outlined here could result in an increase in persistency levels by between 10 and 30 per cent across different players (based on their starting position). This in turn will have a significant impact on the embedded values of players, which on the existing base itself could increase by 20 to 25 per cent. The value at stake is significant, but the path to realising this value will not be easy. Insurance companies need to take a co-ordinated set of actions to position themselves for success in a dramatically different environment.
The Indian life insurance industry is at a significant inflection point in terms of its development. Over the next few years, the industry will continue to face a period of uncertainty, precipitated by some discontinuous shifts in the environment. The value at stake is significantin terms of growth, shareholder value creation and meeting consumer needs and objectives. To be successful in the new normal and fully realise the value at stake, Indian life insurance companies will need to make some tough and fundamental choices in terms of their strategy and business models and act decisively to capitalise on these unprecedented changes.
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Appendix
We outline the proprietary research carried out by McKinsey & Company and leveraged for this publication in this appendix.
PERSONAL FINANCIAL SERVICES SURVEY, 2011

McKinsey has been conducting a comprehensive survey of personal financial service usage and behaviour of customers across Asia since 1998. It is one of the most comprehensive pieces of research undertaken in Asia with 56,000 interviews conducted over the last 13 years. In 2011, the survey was also conducted jointly by McKinseys Asia Financial Services Practice and the Consumer & Shopper Insights Practice. The Consumer & Shopper Insights (CSI) Practice is a global practice of McKinsey that provides dedicated expertise and toolkit on consumer insights across industry sectors. This year, the survey profiled nearly 20,000 customers across 13 countries in Asia. In India alone, the research covered 5,000 customers. Each customer interaction is an in-depth interview across customer segments namely affluent, mass affluent and mass customers. The topics covered in the survey include ratings of banks, primary and secondary relationships, financial planning, product attitudes and penetration, channel usage and attitudes, service needs and lastly segment behaviour of small business owners.
LIFE INSURANCE BENCHMARKING SURVEY, 2011

In fiscal year 2011, McKinsey launched the first edition of the life insurance benchmarking survey covering eight players which comprised 55 per cent of the private sector market in fiscal year 2010. The survey has developed deep perspectives on the starting position of various players, industry competitive landscape and business aspects. These insights are based on around 80 data points across business and product metrics, around 200 data points spread across various channels and around 150 data points covering cost by channels. The survey provides a detailed understanding of life insurance aspects including the geographic footprint of players, economic performance and the drivers of differences among player performance, persistency and productivity (by channel and non-sales functions) and profile of customer base.
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McKinsey India Financial Services Leadership group

Vipul Agarwal Junior Partner, Mumbai Ramnath Balasubramanian Junior Partner, Mumbai Noshir Kaka Senior Partner, Mumbai Sameer Khetarpal Junior Partner, New Delhi Alok Kshirsagar Senior Partner, New Delhi Akash Lal Partner, Mumbai Laxman Narasimhan Senior Partner, New Delhi Jatin Pant Junior Partner, Mumbai Joydeep Sengupta Senior Partner, Singapore Ranvir Singh Junior Partner, Mumbai Supriyo Sinha Junior Partner, Mumbai Sasi Sunkara Partner, Mumbai Naveen Tahilyani Partner, Mumbai Toshan Tamhane Partner, Mumbai Renny Thomas Partner, Mumbai Ranjit Tinaikar Partner, Mumbai Adil Zainulbhai Senior Partner, Mumbai
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Financial Services Practice September 2011 Layout by New Media Australia Copyright McKinsey & Company
www.mckinsey.com

McKinsey Life Insurance 2.0

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Financial Services

India life insurance 2.0

India life insurance 2.0

Ramnath Balasubramanian Naveen Tahilyani Renny Thomas

The Indian Life Insurance Industry New game, new rules

The Indian Life Insurance Industry New game, new rules

The Indian Life Insurance Industry New game, new rules

Three major discontinuities will shape the market landscape

The Indian Life Insurance Industry New game, new rules

Players at different starting positions, none close to the finish line

Fundamental questions for insurers

The Indian Life Insurance Industry New game, new rules

The Indian Life Insurance Industry New game, new rules

1. Outlook for the Indian life insurance industry: what to expect

Near-term slowdown, but medium- to long-term growth prospects remain attractive

28.3 1.1 10.3 2.8 0.0

5.0 0.3 1.7

The Indian Life Insurance Industry New game, new rules

The level of protection remains low in India

Need to focus on profitability

India is one of the least profitable markets across Asia

The Indian Life Insurance Industry New game, new rules

2. Major discontinuities shaping the life insurance market landscape

Continued regulatory changes

Coming of age of the Indian consumer

Funding for children education

2.0 1.5 1.0 0.5 0 0 0.5 1.0 1.5 2.0 2.5

The Indian Life Insurance Industry New game, new rules

India- Internet users Million 330-370 115-135

Internet users age profile 2011 % of total 100% = 15-24 100

22 35-44 45-54 55+ 16 3 India

SOURCE: McKinsey digital consumer research; Comsource data; McKinsey analysis

SOURCE: McKinsey Proprietary PFS survey

The Indian Life Insurance Industry New game, new rules

Rapid evolution of technology

The Indian Life Insurance Industry New game, new rules

Struggling to achieve a balance between economics and quality of business

Massive spread in distribution economics

High performance zone 25 50 75 100 Franchise quality (1 year persistency1 (Percent))

The Indian Life Insurance Industry New game, new rules

Wide variation in cost position, agency being big differentiator

Top quartile1 Participants median

Channel shareIndividual NBP

39% Other channels2

Gap on agency economics is driven by front-line productivity

Top quartile1 Participants' median

Premium per frontline manager INR Lakhs p.a.

Players are achieving higher productivity across metrics

Top quartile1 Participants' median

Premium/average agent1 2X Nos. p.a. 8.2

Premium per frontline manager INR lakh p.a.

Agents per frontline manager1

Average policy ticket size INR 000

18 Agent activisation rate 29%

Source of growth varies significantly across players

The Indian Life Insurance Industry New game, new rules

More high-value customer base of some players

More than INR 150,000

Significant variation in operational efficiency

The absolute bar remains elusive

Significant room for improvement even for the top performers

Italy Leading Asian insurer <10 60-65 China 9.0

The Indian Life Insurance Industry New game, new rules