Life Insurance Marketing in India (B) The

Changing Distribution Norms

"The key task is to grow the distribution network and tap the huge potential in an
underinsured, under serviced market."

- Saugata Gupta, Chief (Marketing), ICICI Prudential Life Insurance, in 2001.

Revamping Distribution
In early 2002, India's state owned insurer, Life Insurance Corporation (LIC), announced tie-
ups with Corporation Bank, Oriental Bank of Commerce, Bank of Punjab and Nedungadi
Bank for sale of its products through their branches. The aim of the tie-ups was to diversify
LIC's distribution channels and increase product penetration. Industry observers were not
surprised by this move. They felt that LIC had no option but to explore new channels of
distribution to maintain its position as the market leader.

The liberalization of the Indian insurance industry in 2000 led to

the entry of private insurance companies with MNC as their
partners. Reaching anywhere near LIC's vast network, built over
decades, was going to be extremely tough for the new players.

Consequently, private insurers decided to rely on aggressive

advertising and promotional measures and use hitherto untried
distribution channels. Private insurers began exploring the
various distribution channels available instead of concentrating
on individual agents, a channel LIC had been using for decades.
To minimize cost, these companies tied up with established
financial services companies and used their distribution network
instead of setting up their own network.

According to insurance industry observers, distribution was expected to emerge as one of the
key factors for the success of private insurers in India. They also felt that insurance
intermediaries and new distribution channels would become the strongest drivers of growth
for the insurance sector and that multi-channel distribution would become the norm. With
even LIC adapting these new channels of distribution, the distribution of insurance
products/services seemed all set to undergo a radical overhaul.

Background Note
The life insurance industry in India dates back to 1818, when the Oriental Life Insurance
Company set up office in Kolkata. In 1823, the Bombay Life Assurance Company started
operations in Mumbai, India.
The 'Indian Life Assurance Companies Act' was passed in 1912; this was followed
by the Indian Insurance Companies Act, 1928. These acts allowed the
government to collect data regarding life and non-life businesses conducted by
both Indian and foreign insurance companies. Later, the 1928 act was amended
and a new act, the 'Insurance Act' was passed in 1938. By the mid-1950s, 154
Indian insurers, 16 foreign insurers and 75 provident societies were operating in
the country. The life insurance business was concentrated in urban areas and
was confined to the higher strata of society. In 1956, the management of these
companies was taken over by the Government of India. LIC was formed in
September 1956 through the LIC Act 1956, with a capital of Rs 50 million. One of
the main objectives of forming LIC was to make insurance cover available to a
large number of people, particularly to the lower segments of society.

In 1972, the government took over management control of 106 private general insurance
companies and formed the General Insurance Corporation (GIC). Over the years, LIC
expanded its network all over the country and became one of the largest corporations in
India. LIC had seven zonal offices, 100 divisional offices, 2,048 branch offices and army of
agents totaling 6,28,031. Growth in Indian insurance industry was minimal in the 1960s and
1970s because of low savings and the low level of literacy. In addition, the insurance industry
lacked sufficient funding and infrastructure. However, changes in the economy in the 1980s,
such as growth in the rate of industrialization, improvement in infrastructure, the capital
markets, increase in the savings rate and substantial capital formation resulted in tremendous
growth in the life insurance industry.

Over the years, LIC launched several group insurance and social security schemes to enhance
its reach in the rural areas. In the early 1990s, the government felt it necessary to reform the
industry, provide better coverage to the citizens and to increase the flow of long-term
financial resources to finance the growth of infrastructure. In 1993, the Indian government set
up the Malhotra Committee to suggest reforms in the industry. The committee, which
submitted its report in 1994, recommended opening of the insurance sector to private players,
improving service standards, and extending insurance cover to larger sections of the
population. Various labor unions and political parties in the country opposed the committee's
suggestions.

They felt that the entry of private players would lead to job cuts by the nationalized players to
make them more competitive. There were a host of other arguments against these reforms. As
a result, the government decided to restrict foreign stake in insurance companies to only 26%,
which was well below the 51% required by the Insurance Bill for controlling the management
of the company. Though one of LIC's basic objectives was to 'provide insurance cover to all
Indians,' insurance penetration in India remained very low. According to reports, only 65
million people were covered by insurance. R N Jha, LIC's former Executive Director,
commented in his book, Insurance in India, "Insurance coverage has been extended only to
about 25% of the insurable population in 40 years". In other words, the insurance market in
India was largely untapped.

In developed countries, per capita insurance premium1 was much higher than in India. In
1999, per capita insurance premium was only $8 in India while it was $4,800 in Japan, $1000
in Republic of Korea, $887 in Singapore, $823 in Hong Kong and $144 in Malaysia.

In the world market, in terms of gross insurance premium, India's share was only 0.3%,
though it had the second highest population in the world. In the same year (1999), Japan's
share was 31%, the European Union's 25%, South Africa's 2.3% and Canada's – 1.7%. And
in 2001, while the ratio of insurance premium to the Gross Domestic Product (GDP)2 was 9%
in UK and Japan, and 5% in the US, it was only 1.9% in India.

Attracted by the huge, untapped insurance market in India, many private players entered the
market after the Insurance Bill was passed in late 2000. A majority of these were
collaborations between an Indian company and a leading MNC insurance/financial services
company (Refer Table I). By 2002, with 0.8 million agents all over the country, LIC had an
enviable reach.

However, the fact remained that more than 75% of the Indian insurable population was
untapped. According to industry observers, one of the main reasons for the low insurance
penetration was the poor distribution and marketing strategies adopted by LIC. Prior to
liberalization, due to its monopoly status, LIC seemed to have had no strategically devised
distribution strategies in place. It depended entirely on individual agents, which it had trained
over the years to distribute its products. LIC made no efforts to use other distribution
channels (Refer Exhibit I for various distribution channels for selling life insurance).

LIC's agents were not well qualified for their work. Prior to
liberalization of the Indian insurance industry, no minimum
qualification was laid down for people who wanted to become
insurance agents. Agents generally acted like brokers; they cared
more for their commissions than the needs of the customer. As a
result, they did not make the effort to educate customers about
the insurance products being offered.

To distribute insurance products, LIC employed a large number

of marketing people as 'Development Officers'. These officers
employed and trained a number of agents. Development Officers
received bonuses from the business generated by their agents, in
addition to their salary.

Consequently, LIC ended up paying bonuses and commissions twice for every new policy
and subsequent renewal of premiums – to both agents and Development Officers. It was
reported that after only a few years of recruitment of agents, Development Officers earned
huge amounts as commissions. Despite this, the attrition rate among the agents was very
high, largely because LIC selected the wrong kind of people in the first place.

LIC's bid to implement strict incentive schemes and 'career agent' type of distribution failed
due to the powerful Union of Development Officers. However, with the entry of new players,
the insurance market changed dramatically. Analysts commented that the private insurers
seemed all set to make the industry market-driven, wherein technical expertise and service
excellence would be the key success factors. The private companies, to make their presence
felt and expand their reach, experimented with new distribution channels.

Distribution Initiatives of the New Players

Post-liberalization, a fierce battle commenced in the Indian insurance industry for garnering
market share. New insurance companies used all available channels of distribution, right from
 individual agents and corporate agents to bancassurance. Bancassurance soon emerged as one
of the most lucrative insurance distribution channels.

Distribution Initiatives of the New Players Contd...

According to analysts, it not only helped insurance companies increase market
penetration and premium turnover, it also helped banks increase their Return on
Assets (ROA – annual earnings divided by total assets). This was because, even
with a constant asset base, bancassurance contributed to enhanced ROA through
fee income. (Refer Table III for various bancassurance agreements). Allianz Bajaj
Life Insurance (Allianz Bajaj) planned to build a multi-channel distribution
network, which included agents, corporate agents and strategic alliances with
banks, Bajaj Auto network and other direct marketing initiatives. In late 2001, it
signed a Memorandum of Understanding (MOU) with Standard Chartered Bank
for an exclusive bancassurance distribution agreement. According to reports,
Standard Chartered was to act as the corporate agent for the company, and the
partnership was expected to leverage the bank's 60 branches across the
country.

Standard Chartered Finance (a subsidiary of Standard Chartered Bank) was also expected to
ianz Bajaj's products. Companies such as HDFC Standard Life, ICICI Prudential Life, and SBI Life insurance
erage the branch network of their parent companies, HDFC, ICICI Bank and SBI respectively, for distributing
their products.

ut to the bank's existing customers would be very easy for the insurance companies as the banks already had a
well-established relationship with their customers.

BI had a network of over 9,000 branches, SBI stood to gain a lot by utilizing the bancassurance channel. It was
reported that by the end of 2001, 21 branches of SBI were distributing SBI-Cardiff's group policies.

Many analysts believed that bancassurance would play a very important role in India because
banks were familiar with the target customers' needs, had a strong service delivery
mechanism, good quality administration, complete integration of insurance and bank products
and services, qualified personnel and an organized tracking system for reporting on agents'
time and the results of bank referrals. However, it was also pointed out that the partnership
between insurers and banks could run into problems.

The most common problems that partners could face were inefficient manpower
management, lack of sales culture within the bank, lack of branch personnel's involvement,
insufficient product promotions, failure in integrating marketing plans of both bank and
insurance company, limited database expertise of the bank and inadequate incentives to the
bank personnel involved in sales of insurance products. Despite the growing thrust on
bancassurance, most of the players believed that individual agents would continue to play a
major role in the Indian insurance industry.

According to Anuroop Singh, CEO, Max New York Life, the new distribution
channels would not be able to completely replace individual agents. He said,
"Over 90% of the life insurance schemes the world over are sold through
individual agents. Agents will be the primary channel of distribution in India and
so we have invested substantially in training our life insurance agent advisers
here." Max New York worked towards making the quality of its agents its main
differentiating factor. The company adopted the career agent system instead of
LIC's general agent system. Max New York paid attention to the agent selection
process so as to recruit the best talent available. The selection process
comprised four stages – screening, psychometric tests, career seminars and final
interview. Agents were trained in the various products the company offered and
the insurance needs of the customers so that they were in a position to offer
them sound advise.

The training covered 152-hours, instead of the mandatory 100 hours stipulated by IRDA. The
program involved modules on understanding the consumer psyche and the financial market,
and developing selling skills and the right attitude.

Commenting on the need for training agents, Mr. Debashis Sarkar, senior vice president,
marketing, Max New York, said, "Internal employees are all opinion shapers and indirect
brand-builders and brand promise needs to be replicated down the chain at every customer
touch point."

The company also made training an ongoing process, and ensured that the training program
addressed the needs of agents through development of skills and knowledge through a
program spreading over 500 hours over two years.

HDFC Standard Life decided to rely on individual consultants and corporate agents for
distributing its products. According to company sources, individual consultants were
expected to play a key role in the sales process. The company therefore invested 20 man-
months in developing training programs for consultants.

The company also trained its consultants through institutions approved by IRDA. In addition,
HDFC Standard Life tied up with corporate agents all over country. It had already tied up
with HDFC and some other banks to distribute its products. To increase its coverage in rural
areas, HDFC Standard Life held talks with NGOs that were involved with HDFC's housing
schemes in rural areas.

Birla Sun Life announced the appointment of Village Extension Workers (VEWs) who would
help create awareness about insurance in villages. Generally, these VEWs were from social
improvement projects promoted by the Aditya Birla Group of companies. Each VEW was put
in charge of a cluster of 10-15 villages.

Many other major private insurers were laying emphasis on the recruitment and
development of quality agents to enhance their brand image in the market and
attract customers. LIC ran an advertisement campaign that featured one of its
most successful agents to highlight its belief in the individual agent system.
Meanwhile, the Government of India opened up yet another avenue for
distributing insurance products in August 2002: brokers (Refer Exhibit II). Foreign
brokerage firms were also allowed, but only through a tie-up with an Indian
partner and a 26% cap on equity. IRDA planned to finalize regulations by
September 2002 and issue licenses to four categories of brokers - direct general
insurance broker, direct life insurance broker, reinsurance broker, composite
broker, and insurance consultant (Refer Exhibit III).

What Lies AheadAfter the decision to allow brokerage firms was announced, many
Indian and foreign firms expressed their interest in entering the Indian insurance market.
HSBC Bank announced its intention to set up an insurance brokerage firm in India.

The Tatas also planned to enter the insurance brokerage business, focusing on both corporate
and retail clients (reportedly through a strategic partnership with the Hong Kong based
Jardine Matheson group).

As marketing, distribution and technical superiority were expected to be the decisive factors
for success in the Indian insurance sector in the future, the new players seemed to have a
good chance.

With the growing popularity of new distribution channels in the Indian insurance market,
Private insurers hoped to effectively leverage the strengths of the new distribution channels.
The above belief was strengthened by the emergence of another new channel – the Internet.
According to reports, in 2001, around 12% of the insurance products were sold through the
Internet, and this figure was expected to grow as Internet penetration increased.

Because of increasing competition in a crowded market, private insurers were trying to

leverage every possible medium. According to analysts, in the not-too-distant future, even
departmental stores, ATMs, Internet kiosks and supermarkets would be selling insurance.

Exhibits
Exhibit I: Distribution Channels in Life Insurance
Exhibit II: Insurance Regulatory and Development Authority (Insurance Brokers and
Insurance Consultants) Regulations, 2002
Exhibit III: Categories of Brokers