Insurance marketing has some unique features. It has to identify uncertainties in the operations of an economic system and create general awareness to cover these uncertainties by selling insurance products to the constituents of this economic system. The constituents of this system essentially the economic groups, if left to themselves, would rather carry their risks than buy insurance. The intangibility of this product and the contingent nature of its delivery further accentuate the problem. It is said, that world over insurance is always sold rather than bought. It is at this juncture that the insurance intermediary steps in. He is a facilitator in the whole process and has probably a more onerous marketing job than their counterparts in many other trades and services.
Intermediaries as They are Today
The four subsidiaries of GIC market their products through a three-tier marketing force consisting of: Agents, Development Officers and Officers in change of sales at branch/divisional offices.
Insurance marketing will take a different direction with the liberalisation of the sector. Why do we need a new marketing model? With increased competition from the new market entrants it would become increasingly difficult to acquire new customers. Also with the change in consumer lifestyle and technology advancement, the demand would be for purchase convenience and speed of service. These factors would see the development of a wide array of distribution channels or intermediaries in this sunrise sector. This can be further strengthened if approached from the customer’s angle:
Customers choice of a distribution channel is dictated by: Socio demographic factors, ease of access, complexity of product/service, need for advice.
Globally as a result many different channels have emerged:
• Bancassurance
• Direct Marketing
• Internet.
• Agents
• Brokers
• Company Employees
Of these in the existing scenario only the agents and the company employees are available as intermediaries in India. The introduction of these new channels and defferent kind of intermediaries would enable these new entities to use their knowledge of their clients to target products with a degree of precision. We will deal into these channels extensively.
The Agency Business as it is: A Brief Look Back
The insurance Act permitted the appointment of ‘principal agents’. In the year 1957 this system of ‘Principal Agents’ was discontinued. The insurance Act prescribed 15% of premium as the maximum commission payable to agents which was reduced, in the case of marine insurance business to 10% by an amendment to the Act in 1950. Rates of commission were further reduced in 1968, on the introduction of social control on insurance business to 5% for fire and marine business, and to 10% for miscellaneous business. After nationalisation, the agency commission structure was reviewed by the general business for corporate clients whose paid up capital was Rs. 10 lakh or more, co-operative societies with capital of Rs. 5 lakh or more, business under the control of banks where bank advances exceeded Rs. 25,000, hire-purchased vehicles, and income tax exempted charitable trusts. In such cases the client was allowed a discount on the premium in lieu of the agency commission. Later in 1980, the rate of commission was reduced from 10% to 5% in the case of engineering insurance business and also for motor business in 1986. There are certain classes of insurance business like aviation hull and liability, marine hull (Ocean going vessels), and credit insurance, on which it has been the practice not to pay commission. Commission on several classes of business relating to rural areas, the economically deprived sections of the society and on many personal lines of business (Where the premium on individual on individual policies is low) was increased from 10% to 15% to induce agents to market these classes of business.
With the nationalisation of the industry in 1968 the insurers had to depend on the field officers for business. The field officers numbers increased substantially. In some companies, they also performed some administrative functions related to marketing.
At the time of nationalisation of general insurance business there were field officers who were designed as Inspectors. A composite scheme relating to remuneration, incentives and other benefits to Inspectors – later re designated as development officers – has been in force since 1976. The scheme provided for premium-related incentives and benefits, on also disincentives including possible termination of service for persistent non performance. This scheme was revised in 1987 and in 1990, progressively raising remuneration and benefits and diluting the disincentives of development officers. Over the years, the number of development officers has increased substantially.
There is general agreement on the fact that the performance of agents and development officers has been generally unsatisfactory. It is widely believed that there are a large number of benami agents, showing up deficiencies in the process of appointment of agents, the institution of agents on the general insurance side has weakened considerably, essentially due to the progressive lowering of the rates of commission payable to them and exclusion of business of certain categories of clients for payment of agency commission. The existing structure of agency commission provided little scope for the emergence of professionals, much less of their becoming full time agents. The Insurance Act provides for issue of licence to individuals of at least 18 years of age to act as an insurance agent. The licence is issued on a declaration by the applicant in a prescribed form. There is a method of screening the genuineness of the applicant before the issue of licence but no follow up action is initiated to weed out those who are not serious in pursuing the profession.
Brokers
The institution of brokers which is well established in most insurance markets does not exist in India, except in the area of reinsurance.
Brokers are professionals who bring together the insured and insurers, carry out preparatory work for issuance of contracts, and where necessary, assist in the administration and performance of such contracts, in particular when claims arise. Brokers have a relatively more important role to play in free markets than in markets regulated partly or fully by tariffs. They are increasingly becoming professional risk managers. Unlike agents who are retained on behalf of insurers, the primary responsibility of brokers is towards the insured. They put across requirements of their clients before insurers and obtain from them appropriate insurance products. whenever standard product are not adequate, they prepare a ‘manuscript policy’ and negotiate with the insurer to optimise satisfaction of their clients. As brokers negotiate with many insurance companies, they also act as catalysts of competition in the insurance market.
To sum up, the marketing apparatus consists of agents, development officers, and insurance officials. There is a need to promote and sustain professionalism among agents. To that end, there is an urgent need to upgrade the training and skills of the agency force. The commission structure for agents should be improved to attract and retain talent in the profession and to make it an effective instrument for procuring business and spreading specially, rural, personal and non-obligatory lines of business. In keeping with contemporary trends in insurance marketing, the system of brokers should be introduced.
Bancassurance: The New Mantra
Convergence is the new mantra. There is a change in consumer preference world-wide. This change coupled with the growth of electronic distribution and the impact of Internet has given growth to alternative channels of distribution like bancassurance.
Bancassurance is a French term referring to the selling of insurance through a bank’s established distribution channels. The result is a bank that encompasses banking, insurance, lending and investment products to a bank’s customers.
Bancassurance came into existence about fifteen years ago, with the introduction of Sorasaving, a simple interest-bearing annuity product underwritten by a life insurance company, Groupama, and distributed through branches of a French bank, Credit Agricole. Sales through the bank were very successful and eventually represented 80 percent of total sales. Groupma and Credit Agricole split after certain profit sharing issues arose. This led to Credit Agricole launching Predica. Through using the bank’s distribution channel of 11,000 branches, coupled with a simple interest bearing retirement annuity type product with tax breaks, Predica came from nowhere to number two in the French life market in just two years, second only to French giant Caisse Nationale de Prevoyance (CNP).
Today bancassurance has rewritten the rules for the delivery of financial services products throughout Europe and is likely to do the same in India.
Bancassurance is already a reasonably well developed phenomenon in some European markets though, no one has achieved the success enjoyed by the French banking community. In Europe leading continental bancassurance groups derive between 20% and 30% of corporate profits from insurance-driven activities. In France, 60 percent of the banks have been selling general insurance products such as health, automobile, and housing insurance for more than five or six years. And their market is growing. In a year when the French market grew only 4 percent, the French bancassurance leader grew by almost 20 percent in 1999.
Bancassurance is only about 10 years old in the US and most banks haven’t fully utilised their well-established distribution channel to sell insurance products to America’s mass market. However, the action is picking up. Two years ago, in fact, two financial giants, Citibank and The Travelers, engineered a $37 billiion merger to form Citigroup with the goal of integrating banking and insurance operations.
The Significance of Bancassurance
The reason that bancassurance has excited so much attention, is that it is being held up as the way in which financial firms will offer services in the future. Firstly the banks who have embraced bancassurance have demonstrated that a successful entry strategy offers significant profit potential for banks. Secondly, competitive pressure will be such that once other banks have entered insurance, those banks which have not done so are forced to emulate the moves of their competitors in order to prevent losing market share. A further reason for the interest in links between banks and insurance companies is that joint ventures have sometimes been used as a method of entering a new insurance market. Such alliances include Banco Bilbao Vizcaya and AXA in Spain, Credit Lyonnais and Allianz in France, Banco di Napoli and Zurich in Italy and the Bank of East Asia and Aetna in Hong Kong. We see a similar trend in India, with a number of nationalised and private sector banks being wooed by multinational insurance companies keen to enter the Indian market.
Reasons for Banks Entering Insurance
Banks have sought to enter insurance markets because of the following reasons:
• Bank management have believed that such markets are potentially profitable.
• The value of a banking license is continuing to fall due to increased competition from non-bank banks, disintermediation and the internationalization of the banking industry. Moreover, income earned by traditional bank activities has fallen. Banks have, therefore, been under great pressure to extend their business scope. This pressure has lead to systematic consideration of the possible use of the large branch banking networks for cross-selling non-banking financial products.
• Furthermore, banks posses significant, high quality information on the financial circumstances and requirements of customers. This offers the opportunity for highly targeted marketing of other financial services including insurance.
Dimensions of Bancassurance
Bancassurance encompasses all the sales of insurance products by banks. This includes business generated by banks simply acting as agents for wholly independent insurance companies. The main organisational forms taken by bancassurance are:
1. Distribution agreements where the bank acts as an agent for an independent insurance company.
2. Distribution agreements where the bank acts as an agent for an independent insurance company in which the relationship is strengthened by cross-shareholdings.
3. Distribution by the bank of insurance products supplied by a wholly owned subsidiary.
4. Distribution by the bank of products supplied by an insurer which is a member of the same integrated financial group.
5. Distribution by the bank of products supplied by an insurer which is a member of the same holding company, although the companies are not fully integrated.
6. Distribution by the bank of insurance products supplied by an insurer which it owns jointly with an independent insurance company.
The Distribution Strategy
The success of the bancassurance program begins with the correct delivery of the product to the targeted customer. One does not have to be an insurance expert to sell simple mass market products, success lies in designing simple products that can also be sold easily by bank tellers.
Also manufacturing and distribution costs must be as low as possible. The products don’t need to be the cheapest, and the sales force doesn’t need a great deal of training to market the product.
There are typically three product distribution concepts:
• Stand Alone campaigns – where the product is promoted and sold directly to the customer typically via direct marketing and/or face-to face sales methods.
• Bundled – where the product is promoted and sold as an appropriate adjunct to the bank product and is sold via cross selling at the time of the bank product sale.
• Packaged – where the product is an inherent feature of the bank product and is sold whenever the bank product is sold.
Bancassurance in India
Will it work in India? The industry believes that bancasurance will be a big thing here. Some foreign and Indian banks – Stanchart Grindlays, ABN Amro, Citibank, HSBC, American Express, IDBI Bank, Bank of Baroda (BoB) and State Bank of India (SBI) – are hoping to replicate the French success of this insurance-cum-banking model.
The mode of entry differs from bank to bank; a few banks are sticking to the strict definition of the term by actually setting up insurance joint ventures themselves. Alliances could be the way bancassurance evolves in India, at least in the initial years. ICICI Bank and HDFC Bank will be distributing the products of their parent company partnerships, namely ICICI Prudential and HDFC Standard Life.
Given their vast distribution reach and access to customer information, Indian banks are at a great advantage. For ultimately, “whoever controls the most customers will win, and that’s where banks have a big advantage.”
Direct Marketing
With increased competition and new entrants it will increasingly become difficult to acquire new customers. Direct Marketing or DM as it is more popularly known will be one of the most frequently used delivery channels.
In the US 53% of the total media spend is on direct marketing, in comparison the spend on direct marketing in India is 14.7% only. There is still a lot of thrust on traditional channels rather than DM in India. This provides a great growth opportunity of DM as a channel in India, with companies realising the tremendous of this direct channel to the prospective customer DM will witness a tremendous boom in India.
Comparative Figures: Percentage of Media Spending by Channel
Medium United States India
Direct Mail 10.5% 1.6%
Telemarketing 44.4% 0.3%
Internet 0.2% 0.0%
Source: Lintas Direct.
Direct marketing as a channel for insurance sales has not been explored in India till now. This is a channel that has had tremendous success in the western world and is one of the most extensively used channels. In India DM as a channel is being extensively utilised by Banks and other financial institutions.
Typical Direct Marketing Channels: Above The Line: Television. Newspapers/Magazines. Radio. Below The Line: Telemarketing. Direct Mail. Internet. Inserts. Take ones. Kiosks.
E- insurance: An Emerging Field
As Companies rush to ‘e-nable’ their business, e-insurance is one of the growth areas in India.
Globally, insurance on the net has lagged behind other Financial services products, such as banking and brokerage. Of the total online users only 5% used insurance services online as depicted in Figure 1. This lag was and is due to a lack of relevant and adequate content. Traditional insurers, while leveraging on new information technologies, have been slow to utilise the Internet as an alternative distribution channel. Generally, the largest insurers have been focused on a static marketing presence online, encompassing product information, FAQ’s and quotes. Only a few insurers have added the ability to submit applications on-line and none of the large insurers allow online changes to policies. This lack of participation in the e-business revolution is seen across lines.
Two factors are attributed by the insurance companies for the slow take off. First and foremost, insurance is a product that is sold and not bought. The internet is perceived to be a buyers medium, with online customers able to search quickly and easily for the most competitive prices and a variety of products.
Insurance is one product that cannot be commoditised easily. The more personal the selling process the greater the difficulty in using the net as a medium for selling. Insurance is one product, which involves personalised selling. The process of insurance sales requires a series of face to face interactions.
The convergence effect is being felt by this industry as well. In the US personal savings will be almost evenly distributed between banking, insurance, mutual fund and other financial institutions. The insurance industry is expected to lose market share to banking and other financial institutions.
Customers today expect enhanced levels of service due to increased competition. This customer demand will result in non-traditional access to specific information. The Gartner Group in a study conducted by them feels that, in 2001, 25% of all customers contacts and enquiries for enterprises will come via the Internet, e-mail, and online forms. Bancassurance customer service, which has been almost exclusively done via telephone (96% of all transactions), will become increasingly e-mail based in the next four years, decreasing telephone related service by 28%.
In response to these trends in customer preference, insurers are mobilising their online sales and customer account management capabilities. This move towards building internet based business solutions benefits the insured by providing greater flexibility, greater customisation of information and improved customer service. For the insurance company, this drastically reduces the costs involved. Similarly, by essentially “outsourcing” administrative and cost intensive processes such as policy administration to the customer, the cost of administrating and servicing the insurance policy also decrease sharply.
The Indian Scene
The Indian market is poised for growth and the expectations are high. Currently, Internet based selling and distribution is not a factor in the Indian insurance sector. Some Indian insurance portals have emerged, such as bimaonline.com, 123 Bima.com and gateway 2 insurance.com, but these are limited to providing information and FAQs.
Three main challenges are faced by the new insurance companies in the Indian scenario each of which must be analysed and overcome by using the internet. The first challenge is to develop products and services based on market positioning and brand value. As the number of competitors grows and brand differentiation becomes low, insurance products and services will increasingly by regarded as commodities. This results in low customer loyalty and high pricing pressures. As insurance products become commodities, product, service and process strategies also evolve on similar lines.
The second major challenge to face Indian insurers will be to design and develop strategies for delivering services to well-segmented customers.
The third challenge lies in developing the right combination of customer segment and applicable distribution channel strategies.
The e-insurance market will be governed by the same five major consideration of e banking.
Growth of the Net: It is estimated that India would have about 150 million net users by 2010. These figures represent a huge buying potential.
Competition Pressures: Insurance companies because of competitive pressures would be driven into internet rather than a clear ROI justification.
Customer: The availability of net-based services will be a huge factor for customer retention.
Cross sells: When linked with other financial products, a portfolio approach to investment, savings & risk coverage will increase cross sells and customer loyalty and retention.
Costs: In the beginning e-insurance will be a cost factor rather than a profit driver, but in the long run it will be a cost-reducing factor.
Agents as They Will be
It is expected that the agents operating in the market in India would essentially be of two kinds – tied and independent. The agents could be both individual as well as corporate. It has been the practice in India not to have agency business as a profession. It may not be practical to prohibit part-time agents at this point in time but the effort should be to encourage full time agents the reasons being:
Company has little control over agent activity and cannot influence sound/ethical work practices
Productivity levels are extremely low
Persistency is poor and adversely impacts company profitability
Agent turnover is high; that affects persistency and costs of recruitment and training of agents.
It may be possible, however, to mitigate the adverse impact of part time agents by introducing minimum annual business levels that would have to be attained in order to retain their licence as also the introduction of continuous training.
A professional, committed agency force would be a prerequisite to the growth of this channel.
Agency Structure
The insurance company needs to have an agency force that is controlled but can also provide for its own future growth. The key activities of recruiting, training and managing agents be performed by people with direct exposure to the agency business. Accordingly an agency force can end up with layers of agents, with each layer reporting to its recruiters. Interaction between the layers is a key determinant of success, with control and transfer of knowledge being the principal issues. Compensation for one layer on the activities of the layers below should follow the level of interaction and influence between those layers.
It is felt that meaningful interaction would happen only up to two layers apart – that is an agent will be influenced and managed by the layer immediately above, and to a much lesser extent, the layer immediately above, and to a much lesser extent, the layer above that. Compensation should therefore be limited to the agent, his manager and the manager’s manager.
Agency Functions
The various functions that the agent should be expected to perform could include: Client identification. Marketing. Investor education and counseling. Market expansion and quality control of front-line agents. Collection of premium on behalf of the insurance company where specifically authorised to do so by the insurer. Issuance of cover notes where authorised. It should, however, be the individual companies responsibility to ensure that the processes comply with regulatory requirements.
Agency Recruitment and Licencing
This is an important part of the control mechanism to ensure the development of professionalism in the agency force. However, it is also a potential bottleneck in the development of the agency forces of the new companies, if the process is not sufficiently streamlined.
The example that is often quoted is that of China, where the regular set of agents, trained and marked the agents’ exam. The examinations were set only twice a year, with long lead times for submission of agents particulars and the process curtailed the recruitment activity, and therefore growth of their agency forces.
Agency Training
The lack of an adequately trained agency force often implies lack of professionalism resulting in clients being sold the products that carry the highest commission. The agents should demonstrate proficiency in: Product knowledge. Sales skills. Designing solutions/best advice. Tax implications. Profitability assessment of business (for non-life insurance)
• In the international markets training is a very costly activity involving the intermediaries in a considerable amount of course attendance, self-study, and field accompaniment.
• It may be useful, however, to guard against the UK trend which has emphasised product technical awareness rather than a skill based bias thus depersonalizing the agent client relationship.
• Pre-licensing insurance education and training and continuing education are both necessary in the Indian context.
The training requirements should be the responsibility of the insurers with the regulator laying down the requirements and playing a monitoring role.
Agency Remuneration
Commission is the most popular mode of remuneration in the international markets. The aim of the method of remuneration should be to: Reward agents for above average performance in key areas; Encourage career advancement; Penalise unsatisfactory practices; Offer agents an adequate income attracting quality people to the professionalism.
Brokers
The nature of the activities of the broker and the market they operate in should be the basis for categorization of brokers. The brokers should be divided into two categories. Reinsurance brokers. Other insurance brokers (Both life and non-life)
In most developed markets the insurance brokers are regulated with respect to:
Registration,
Experience, training and qualification,
Solvency requirements,
Professional indemnity.
The regulations, requirements for each should be separately laid-down.
The opening up of the insurance market to the brokers would allow them to operate in the life, non-life and re-insurance markets
• Non-life insurance as well as group life and group mortgage insurance is the domain of brokers in many markets.
• The salient functions of the brokers are expected to be:
Pre-sales and after sales service to the customers.
Provision of relevant information to the underwriters to assess risks and decide premium.
Design covers that meet the client requirements.
Recommend risk improvement and loss minimisation measures.
Assist clients in negotiating claims.
Provide risk management and insurance education.
Collection of premium.
The needs of the individual insures would determine, to a large extent, the functions that the brokers perform
Currently, in view of s.64VB and the non-acceptance of third party premia by the insurers the brokers role would be curtailed to advisory.
Internationally there are trends of brokers moving to fees rather than commission incomes.
• The remuneration for the brokers should be sufficient to take care of the staffing and infrastructure and their role and function.
• In the international markets the average level of remuneration to the insurance broker is 15-20% of the gross premium quoted to the client; this norm could apply in the form of a cap on commission in India.
• The commission for reinsurance brokers should not be capped and allowed to be governed by the international market practices
• There should be a distinction between the first year and renewal commission for brokers.
Some niche areas may, however, demand higher remuneration based on the effort.
The various duties imposed on brokers in international markets include:
Duty of disclosure.
Duty of utmost good faith.
Duty of submitting a business report.
Duty of abide by prohibited activities.
One of the salient supervision requirements is that of ensuring independence of the broker by requiring disclosure of the spread of business
A professional indemnity coverage should be made compulsory.
A code of conduct for brokers needs to be devised and put in place by the regulators.
A protection fund with contributions from the brokers needs to be created for the benefit of the consumers.
Levels of professional qualifications for each director and employee dealing with customers should be fixed.
Conclusion
The role of the intermediary has never been so fully conspicuous than now with the deregulation of the sector. We hope to see an entirely new face of insurance marketing in India, which would consciously move from a brand driven one to a pure commodity product based marketing strategy. The intermediary in its various forms would evolve and play a vital role in the development of this entire industry. This article clearly aims to highlight the importance of this crucial link. The final outcome of all this would be an industry that would be extremely customer focused. All this points to one adage, i.e. customer is the king.