Novi Dewan Indian Life and Health Insurance Industry

Novi Dewan Indian Life and Health Insurance Industry GABLER EDITION WISSENSCHAFT International Management Science Editors Michael Frenkel, WHU – Otto Beisheim School of Management Frank Himpel (Managing Editor), University of Mainz Anshuman Khare, Athabasca University Pete Nye, University of Washington Katharina J. Auer-Srnka, University of Vienna

Editorial Advisory Board Klaus Bellmann, University of Mainz Marc Förstemann, A.T. Kearney René Haak, German Federal Ministry of Education and Research Evi Hartmann, European Business School Sabine T. Köszegi, University of Vienna Markus Pütz, University of Wuppertal Jürgen Schröder, University of Mannheim Paula M.C. Swatman, University of South Australia Michael Weller, Clifford Chance Jochen Wittmann, Dr Ing hc F Porsche AG

The aim of International Management Science is to promote international research and understanding of strategic issues in management topics. The series embraces a wide range of methodologies, approaches, traditions, and schools of thought. The mission of International Management Science is to meet the demands of the scholarly community sharing an interest in the management of strategic contexts in the regions of North America, Europe, Asia, and Australia. Novi Dewan

Indian Life and Health Insurance Industry

A Marketing Approach

With forewords by Martin Fassnacht and Dirk Schmidt-Gallas

GABLER EDITION WISSENSCHAFT Bibliographic information published by Die Deutsche Nationalbibliothek Die Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data is available in the Internet at .

1st Edition 2008 All rights reserved © Betriebswirtschaftlicher Verlag Dr.Th. Gabler | GWV Fachverlage GmbH, Wiesbaden 2008 Editorial Office: Frauke Schindler / Anita Wilke Gabler-Verlag is a company of Springer Science+Business Media. www.gabler.de

No part of this publication may be reproduced, stored in a retrieval system or transmitted, mechanical, photocopying or otherwise without prior permission of the copyright holder.

Registered and/or industrial names, trade names, trade descriptions etc. cited in this publication are part of the law for trade-mark protection and may not be used free in any form or by any means even if this is not specifically marked. Cover design: Regine Zimmer, Dipl.-Designerin, Frankfurt/Main Printed on acid-free paper Printed in Germany ISBN 978-3-8349-0946-6 Foreword

The Indian market with its one billion plus population, presents lucrative and diverse opportunities for various industries. However, the intricacies that make up this market are not very well known to most people, particularly those living in developed countries. India with its numerous and varied sub-cultures presents a microcosmic view of the world itself – it constitutes a small, representative system that has analo- gies to a larger world in configuration and/or development. This makes the study of the Indian insurance industry especially pertinent and appealing as it goes beyond the Indian market, facilitating an understanding of the dynamics of other countries/markets with similar growth paths. In her book, Novi Dewan provides an insight into the history, development, current situation and the emerging challenges and opportunities of the insurance industry in India. She methodically focuses on the marketing aspects of the life and health insurance industry with respect to the four Ps (product, price, place, promotion). In order to substantiate her findings, Miss Dewan has conducted and presented the results of an empirical study that comprises standardized interviews with decision makers of Indian insurance companies. The book is divided into four main sections. In the first section, the author presents an understanding of the overall Indian Insurance Industry vis-à-vis other markets. Additionally, the rapid changes in the regulatory environment and the consequent economic impact on the industry are discussed. In the second and third sections, Miss Dewan systematically elaborates on the life and health insurance industry in light of classical elements of marketing – the 4Ps and her empirical findings. The book ends with an outlook and prescriptive approach summarizing the best practices for the two industries. It is indeed an excellent book for anyone interested in an in depth understanding of insurance in general, the Indian insurance industry in specific, the corresponding marketing facets and best practices and a consequent comprehension of the insurance sector in countries with similar trajectories of growth.

Professor Martin Fassnacht WHU – Otto Beisheim School of Management Associate Dean and Holder of the Otto Beisheim Endowed Chair of Marketing and Commerce Foreword

The heat is on. While many mature insurance markets are halting in stagnation, new and fast-growing economies are appearing on the international stage of the insurance business and are offering opportunities that sometimes leave the bystanders breathless. This has not gone unnoticed. Major players from across the globe have been joining the gold rush and entering promising markets such as India or China to conquer the Asia-Pacific region and reap the benefits from the enormous growth materialising there. Due to regulatory requirements, most of them enter partnerships to avoid setting up a distribution network from scratch or to benefit from a partner’s local experience. India is, by all accounts, a prime target of this movement. Once a crown jewel of the British Empire, it is already on its way towards developing into a gem of the global insurance industry. However, the market today is still comparably small. Its gross written premiums of about 25 billion USD (world: 3,151 billion USD) only put it in fourth place in the Asia-Pacific, well behind Japan holding roughly 64% of the region’s market, South Korea (approx. 11%) and China (approx. 8%). India currently only accounts for slightly more than three percent of the region’s premium. This market’s charm, however, stems from its enviable growth story. The potential seems enormous. International comparisons show, for example, that only countries like Egypt or Mexico have a lower penetration of life insurance (India approx. 2.5%), looking meagre compared to Taiwan’s staggering 11%. More than 100 million households are well aware of the life insurance concept without owning one. The potential of those who are not yet educated about insurance seems to offer even bigger potential in light of a population of over one billion. But India is catching up at a fast pace. While the whole region has grown by less than four percent in 2005, India’s growth stands at 14%. New life policies have grown by more than 35% in 2005, and privately held insurance companies (as opposed to the public sector offering insurance) have realised an even more impressive growth rate of above 73%. The outlook continues to be bold: The Indian insurance market is forecasted to have grown by more than 60% in 2010, considerably outpacing the dynamic development of the Asia-Pacific region (which will have grown by 23% in the same time frame). A brief look back into history – During its colonial aftermath, the Indian insurance market was private, then taken over by the government. Since 2000, more and more rights have been granted to private insurance providers. While the public providers still hold a market share of about 80%, privately held insurance companies by far outpace them as mentioned above. Legal privatisation is VIII Foreword followed by an unstoppable factual privatisation, driven by the expertise that top- notch foreign partners inject into the partnerships with local experts to provide superior products and services. While only 73% of all grievances are solved by publics, the ratio of privates stands at more than 93%. Other markets have gone down this road already and they are vivid testimonials to the dangers along the way. Price wars, loss-leading products without cross-selling ever materialising, a focus on growth that sacrifices profits, and returns that are hard- ly attractive to investors can be the disappointing results. India is not immune. Since January 2007, the formerly regulated tariffs have been opened to the free market game play. It is important, however, to understand that the Indian market is coming from much less than a balance. While fire and motor policies, for example, have been very profitable, others such as health and marine insurance were cross-subsidised. It remains to be seen whether deregulation will lead to fire and motor prices falling and even more importantly, if the prices of health, marine and others can be brought up to compensate. Increasing prices have always been the kingpin of all pricing measures, only mastered by few. The current state of pricing in China warrants a word of caution, as India may follow a similar path. The underwriting discipline and capability of many Chinese players is very low. Growth is put before profitability and the appetite for risk seems insa- tiable. Rogue pricing is used to buy market share. Consequently in India, a well-defined appetite for risk must be underscored by sound underwriting practices that have yet to be established and costs should be con- tained by proven measures to fight fraud (such as in Indonesia, where the insurance company dictates the repair shop that has to be used when a motor claim is made). This is important since risk costs are the lower boundaries of price and therefore vital for proper tariff-setting in a market economy. The price, however, is only the flip-side of the value provided to the customer. Hence, the challenges run deeper than can be tackled with proper underwriting and risk-based pricing. As of April 2008, not only the prices but also the terms and conditions can be set freely by insurance companies in India. Novi Dewan’s book impressively shows that today’s insurance products in India are lacking differentiation and that the customer segmentation currently used is inap- propriate, as it is mainly based on demographics or life-cycle stages. As a consequence, delivering real customer value that would justify profitable prices will prove a daunting task. The author also demonstrates the idiosyncratic characteristics of the Indian insurance market that will make the simple transfer of existing models from other parts of the world impossible. Among them are: Foreword IX

• Geography: 75% of all households in Bangalore possess life insurance, whereas the overall penetration is less than three percent. • Society: Despite a strong middle class, the divide between rich and poor seems to widen, calling for a multi-tiered approach to develop the market. • Demographics: Younger generations turning their backs on rural India to pursue their happiness in the big cities render traditional models of retirement funding fragile. • Culture: The Indian consumer considers himself indestructible and therefore not in need of insurance – behaviour well-known from other markets such as Malaysia.

Miss Dewan goes well beyond a pure description of the status quo. She uses a comprehensive and well-proven arsenal of scientific instruments to render managerially- relevant prescriptions. She concentrates her studies on life and health insurance. These two business lines are wisely chosen: Life insurance constitutes 80% of the present insurance business in India and health insurance used to be a loss-leading product that may well serve as the acid test of whether the free market will only serve to drive prices down or whether insurers succeed in translating product value into a healthy bottom-line. The author systematically develops a marketing concept for the Indian insurance market. Much of what she derives for the life and health markets should be conceptu- ally transferable to the general insurance arena. She includes all aspects of the classical marketing mix, the 4 Ps of product, price, placement and promotion. The scientific work is never done as a l’art pour l’art, but always yields tangible practical implications. This is garnished with the results from an empirical study among stakeholders of the Indian insurance market such as senior executives as well as the regulator and best practices from current players. The reader can expect three types of lessons: 1. A comprehensive description of the status quo of the Indian insurance market. 2. Hands-on advice for successful insurance marketing in this environment. 3. Insights for other markets that may follow a similar trajectory.

What is this book about? At the very core, it is about market excellence which I define as the ability of an insurance company to • understand customer, competitor and sales dynamics • define innovative and powerful value propositions based on this understanding • deliver exceptional value to the customer • extract this value to the benefit of the insurer by charging high prices, not low prices. X Foreword

Our projects show that this skill set is largely underdeveloped in the insurance world. Our comparative studies show that many other industries are well ahead of the insurance sector. Even the banking industry as a very traditional industry is three to five years ahead of insurers. The insurance industry in general is inward-looking, resistant to change, sees the customer as a cost-driver rather than a profit-driver, poor in designing customer-oriented value propositions and believes that pricing should be based on risk and other costs. However, cost-based pricing is something that other more advanced and customer- oriented industries have abandoned decades ago. It’s the value that counts. The typi- cal excuses that insurance products allegedly are commodities that are being sold rather than bought do not carry any weight. What does that mean for successful marketing in India? There have to be differen- tiated offerings for a polarised society with a strong middle class. Customer segmentation has to be done based on benefits, not demographics. Price elasticities, the relationship between price adjustments and their impact on volumes have to be re- searched to allow pricing that optimises the bottom-line. The low financial literacy of the Indian consumer makes customer perceptions much more important than objective measures. Typically, the insurance industry turns a blind eye on such psychological phenomena. Finally, the trade-off between growth and profits must be addressed early. Many markets have been drawn into price wars in the past by insurance executives putting growth before profits hoping that as soon as a high market share has been realised, profits will follow. In most cases, this has not materialised. India and other comparable markets offer ample opportunity for breathtaking profitable growth. Will insurance executives reap the benefits of this growth without de- stroying their profits?

Dr. Dirk Schmidt-Gallas Partner and Global Head of Insurance, Simon-Kucher & Partners www.simon-kucher.com Preface

India, with a population of over 1 billion, offers magnanimous potential for insurance by virtue of two aspects foundational to the concept of insurance: [a] risk reduction through pooling and [b] probability theory and law of large numbers. India’s rapid rate of economic growth over the past decade has been one of the more significant developments in the global economy. This growth has its roots in the introduction of economic liberalization in the early 1990s, which has allowed India to exploit its economic potential and raise the population’s standard of living. Insur- ance has a very important role in this process. Health insurance and pension systems are fundamental to protecting individuals against the hazards of life. Private insurance systems complement social security systems and add value by matching risk and price. Accurate risk pricing is one of the most powerful tools for setting the right incentives for the allocation of resources, a feature which is key to a fast developing country like India. By nature of its business, insurance is closely related to saving and investing. Life insurance, funded pension systems and (to a lesser extent) non-life insurance, will accumulate huge amounts of capital over time which can be invested productively in the economy. In developed countries (re)insurers often own more than 25% of the capital markets. The mutual dependence of insurance and capital markets can play a powerful role in channeling funds and investment expertise to support the development of the Indian economy. (Sinha) The massive population, sound economic fundamentals, huge consuming middle class, an improvement in the insurance regulatory framework and increasing awareness amongst Indians about the relevance of health and life insurance in India as instruments of risk mitigation, security, tax-savings and even investment (with ULIPs), call for an understanding of the insurance industry in India. This study forms the master thesis which is part of the 16-month MBA program at the WHU – Otto Beisheim School of Management, in collaboration with Simon Kucher and Partners. The main purpose of this study is to understand the current status of the Indian Insurance Industry in general and life and health insurance industry in specific from a marketer’s point of view. This report intends to serve as a research input by projecting a picture of the Indian Insurance Market and thereby helping readers understand the insurance paradigm of other emerging markets – like Latin America and certain markets in Asia, that closely mirror India’s development pattern. Moreover, the aim of this report is to provide a strategic marketing perspective; hence I have sought to make the report comprehensive by adopting a scientific approach through – the projection of best practices, marketing methodologies and tools, mapping empirical data from latest insurance journals, magazines and specialized XII Preface books onto these tools and finally summarizing primary data which includes interviews/surveys of insurance executives/senior management. The study begins with an analysis of evolution of insurance in India to understand its relevance in today’s context; it then moves on to understanding the dynamic market environment owing to the changes in the Indian insurance backdrop that have been brought about through deregulation and now de-tariffing of the general insurance area. An understanding of the role of the regulator (Insurance Regulatory Develop- ment Authority of India) is crucial in order to comprehend the regulator’s contribution in shaping and promoting the Indian insurance business through laws that seek to protect the policyholder’s interest, enhance the competitive environment, promote innovation and improve the sophistication of customer service. The study then analyses the status quo of the Indian market vis-à-vis the Asian and Global insurance market. The study develops to analyze the life and health insurance market in depth in lieu of the elements of marketing mix; projecting best practices and empirical evidence via the survey “Emerging Opportunities and Challenges for the Insurance Industry in India.” The report concludes with an outlook for the Indian insurance industry and a summary of best practices. The report intends to provide an overview of the health and life insurance industry; the data from this report should be furthered in order to enhance research in any particular facet of marketing of the two areas – life and health. Moreover, the scope of this research may be augmented by considering other areas of insurance in India. Fi- nally, as mentioned previously, the insights from this report can be used to serve as a model basis for other emerging markets, thus an analysis of insurance in similar markets may be developed along the lines of this study.

Acknowledgment This study has been plausible because of the impetus, contribution and relentless help and support of several people. I would like to thank my parents, Mr. Bhushan Dewan and Dr. (Mrs) Ranjna Dewan for their constant support and ideas even while they are miles away in India. I would like to thank Jan Richard and Matthew Armstrong for everything. They also re-revised my thesis and supported me during my phases of difficulty. My friends and mentors – Ravi Punjabi, Zeeshan Sultan and Kabir Wadiwala for being my strongest pillars of encouragement since I have known them. I would like to thank the perfect financial services team at Simon Kucher & Partners who offered diligent support and guidance even though I was working from home. Alexander Dechent, my mentor at Simon Kucher, who, despite his ongoing project deliveries and responsibilities at SKP, offered exceptional suggestions, precise thought process, relentless guidance, continual follow-up and an immense amount of Preface XIII time and efforts, that played a key role in the direction and formulation of my thesis. Moreover, Vanessa Behling for her presence, Daniel Loskamp for his philanthropic contribution to my research via an article that he sent. I would like to thank Heidi Hoffmann, the program manager of the MBA program, for a well-designed program and the endless and kind support she offered me and several others in helping us integrate into the lovely environment of the school and culture, my classmates, for their exotic complementarities and attributes; that served as a steady source of entertainment and learning. Prof. Dr. Jurgen Weigand, the Dean of the program, an exceptional professor and a constant source of rock steady inspira- tion and help. He guided, spoke, discussed and suggested each and every time he could despite his busy schedule and endless commitments. Prof. Dr. Michael Frenkel, the Dean of the school, one of the best professors, the kindest and most humble individual with his untiring spirit for the school, the program and its students; and his conscientious effort towards improving the school and paying attention to every little feedback and/or complaint. Dr. Dieter Lauszus, SKP, who interviewed me and was very kind and approachable even on the interview day, Dr Dirk Schmidt-Gallas, also leading the financial services team at SKP, who interviewed me on business and domain knowledge and skills; and merely by his style of interviewing taught me the critical ways of addressing business problems and arriving at thought-process-driven and logic-driven appropriate solutions in an efficient and yet meticulous way. Dr. Schmidt-Gallas was the one responsible for giving me this prospect to work on the “Insurance Industry in India” and integrating me in his team at Franfurt. Dr. Lauszus’ and Dr. Schmidt-Gallas’ research papers on insurance and pricing served contributory to several sections of my thesis. Prof. Dr. Hermann Simon, the CEO of Simon Kucher and Partners, who was so kind to personally meet with me on my interview day and bestow me with the lovely opportunity to work with his esteemed organization. I would like to thank Dr. Frank Himpel, editor, Anita Wilke, editorial office at Gabler and Mr. Baier, who formatted the manuscript, for their incessant support and follow-up while editing this book. They offered me their time and insightful ideas on how to go about publishing this study into a book. Without them this book would not be a possibility. Last, but not the least, I would like to thank Prof. Dr. Martin Fassnacht, the Associ- ate Dean of WHU, my supervising professor. An outstanding professor, he taught us marketing in a way that was unique, enjoyable and engaging. A meticulous mentor, who always took pains to read, made contributory suggestions, and offered his revered views and opinion to everything that I presented to him for advice and an un- varying teacher, who appreciated and cared for his students in his own kind way.

Novi Dewan Contents

Foreword Prof. Fassnacht ...... V Foreword Dr. Schmidt-Gallas ...... VII Preface ...... XI Table of Illustrations ...... XVII 1 Insurance Industry in India ...... 1 1.1 Insurance – Introduction and History ...... 2 1.2 An Analysis of Evolution of Insurance in India ...... 6 1.3 Dynamic Market Environment for Insurance in India ...... 14 1.4 Authorities and Regulatory Environment ...... 27 1.5 Status Quo – The Indian Market vis-à-vis other Markets ...... 32 2 Life Insurance ...... 45 2.1 Industry Outlook and Major Players ...... 46 2.2 Market Opportunities and Challenges: Empirical Results and Analysis . . 52 2.3 Urgent Needs and Customer Segmentation ...... 56 2.4 Products ...... 62 2.5 Pricing Criteria ...... 70 2.6 Distribution Channels ...... 76 2.7 Communication Strategy ...... 90 3 Health Insurance ...... 101 3.1 Industry Outlook and Major Players ...... 102 3.2 Market Opportunities and Challenges: Empirical Results and Analysis . . 108 3.3 Urgent Needs and Customer Segmentation ...... 112 3.4 Products ...... 118 3.5 Pricing Criteria ...... 126 3.6 Distribution Channels ...... 130 3.7 Communication Strategy ...... 139 4 Conclusion ...... 143 4.1 Outlook for the Life and Health Insurance Market in India ...... 144 4.1 Summary of the Best Practices ...... 147 Appendix ...... 151 Bibliography ...... 165 About the Author ...... 169 Table of Illustrations

Fig. 1: Financial Savings of the Household Sector (Graph) ...... 6 Fig. 2: Financial Savings of the Household Sector (Table) ...... 7 Fig. 3: Milestones of Evolution of Insurance before Nationalization ...... 8 Fig. 4: Rural Share of Life Insurance Business in India ...... 9 Fig. 5: Milestones of Evolution of Insurance after Nationalization in 1956 . . . 11 Fig. 6: Relationship between national savings and life insurance premium, 1950–1991 ...... 13 Fig. 7: Convergence of Efficiency amongst the 4 public sector general insurers (1997–2003) ...... 14 Fig. 8: Factors influencing the Company Marketing Strategy ...... 15 Fig. 9: PEST Analysis ...... 16 Fig. 10: Facets while considering effects of de-tariffing ...... 19 Fig. 11: Porter’s Five Force Analysis of the Insurance Industry ...... 20 Fig. 12: Anita McGahan’s Model for Strategies in Dynamic Environments . . . 24 Fig. 13: LUDI’s Internationalization Cube ...... 26 Fig. 14: Status of Grievances – Non-Life Insurers (2005–2006) ...... 28 Fig. 15: Status of Grievances – Life Insurers (2005–2006) ...... 28 Fig. 16: Investment Regulations for the Life Insurance Business ...... 30 Fig. 17: Investment Regulations for the General Insurance Business ...... 31 Fig. 18: Key Highlights of Indian Insurance vis-à-vis Asia Pacific & Global Insurance Markets ...... 34 Fig. 19: Market Value Comparison Chart ...... 35 Fig. 20: Market Value (Growth Rate) Comparison Chart ...... 36 Fig. 21: Market Segmentation: Life and Non-Life ...... 36 Fig. 22: Market Segmentation: By Geography ...... 37 Fig. 23: Market Value Forecast: 2010 ...... 39 Fig. 24: Market Value (% growth) forecast: 2010 ...... 40 Fig. 25: Insurance Penetration Comparison Chart in the Life Insurance Area . . 41 Fig. 26: Insurance Penetration Comparison Chart in the Non-Life Area ...... 41 Fig. 27: Insurance Density Comparison Chart in the Life Insurance Area . . . . . 42 Fig. 28: Insurance Density Comparison Chart in the Non-Life Insurance Area . 43 Fig. 29: Market Share development for first year, renewal and total premium for Life Insurers ...... 47 Fig. 30: New Policies Issued: Life Insurers Development and Market Share . . . 48 Fig. 31: SEC for Urban India ...... 57 Fig. 32: SEC for Rural India ...... 58 XVIII Table of Illustrations

Fig. 33: Relation between SEC and HPI ...... 60 Fig. 34: Pricing Levels based on Profit Potential and Professionalism ...... 72 Fig. 35: New Business Underwritten through various Intermediaries in Life Insurance ...... 78 Fig. 36: Representation of Relationships of Agents and Brokers with Insurers I 83 Fig. 37: Representation of Relationships of Agents and Brokers with Insurers II 83 Fig. 38: Key Differences between Brokers and Agents ...... 83 Fig. 39: The Role of Service Communications in determining Marketing and Firm Value ...... 91 Fig. 40: IMC Audience Contact Tools ...... 93 Fig. 41: TV Advertisement Volumes for the year 2006 by Category ...... 94 Fig. 42: Seasonality Trend of Advertising for the Insurance sector on TV: 2005–2006 ...... 94 Fig. 43: Top 3 Channels contributed 52% of ad volumes in the Insurance Sector on TV: 2006 ...... 95 Fig. 44: Top 5 Advertisers of the Insurance Sector on TV in 2006 ...... 95 Fig. 45: Options of Service Communications for making Services Tangible . . . 96 Fig. 46: Approach proposed for Financing of Health Expenditure ...... 104 Fig. 47: Overall Healthcare Financing Situation in India ...... 104 Fig. 48: Health Insurance Development (in Rupees Billion) ...... 105 Fig. 49: Development of Number of Policies issued year wise ...... 106 Fig. 50: The Stimulus-Organism-Response Model ...... 112 Fig. 51: Health Matters Survey and SOR Model ...... 113 Fig. 52: Asian Attitude Comparisons to risk and insurance ...... 114 Fig. 53: Customer Segments and Segmentation Variables for Bajaj Allianz . . . 116 Fig. 54: Five Patterns of Target Market Selection ...... 117 Fig. 55: Shortcomings & Innovations in the Development of the Mediclaim Policy ...... 121 Fig. 56: Evolution of Medical Insurance Business ...... 122 Fig. 57: A Health Insurer’s Cost Sheet ...... 126 Fig. 58: Types of “Risks” subject to “Downstream Delegation” or Outsourcing 132 Fig. 59: Workflow for the Cashless Treatment ...... 133 Fig. 60: Top Growing Segments of Insurance Sector for TV Advertising in the year 2006 ...... 140 Chapter 1: Insurance Industry in India

This chapter starts with an analysis of evolution of insurance in India which is essential because insurance in India commenced with a de-regulated environment (or private firms), moved to a regulated/government owned environment and finally completed a full circle with de-regulation in the year 2000. The next sub-chapter discusses the dynamic market environment for insurance in India, in lieu of the changing regulations, de-tariffing of the general insurance industry and discussions about increase in foreign-equity cap. This sub-chapter examines the environmental factors from the insurer’s point of view, de-tariffing and its consequences, the porter’s 5 forces analysis, the kind of change and trajectory that the industry is expected to undergo, the type of internationalization strategy that a foreign player must pursue. The next sub-chapter details the role of the authority/regulator in shaping and promoting the business environment and enlists the statutory functions of the IR- DA (the regulator). The final sub-chapter examines the Indian Market as-is vis-à-vis other markets; the Asian and Global Insurance markets illustrating market value, market value forecast, premium share of the total market across geographies and categories, insurance penetration, insurance density and competitive landscape comparisons. 2 1 Insurance Industry in India

1.1 Insurance – Introduction and History

Introductory Terms to Insurance An essential commodity in terms of social security, insurance simplistically defined has two fundamental characteristics – Transferring or shifting risk from one individual to a group – Sharing losses, on some equitable basis, by all members of the group From an individual’s point of view, insurance is an economic device whereby the individual substitutes a small certain cost (the premium) for a large uncertain financial loss (the contingency insured against) that would exist if it were not for the insurance. The primary function of insurance is to create a counterpart of risk, which is security. From a social point of view, insurance is an economic device for reducing and eliminating risk through the process of combining a sufficient number of homogenous exposures into a group to make the losses predictable for the group as a whole (Vaughan and Vaughan).

Insurance Sector Revisited Looking back in the Time Machine Interesting accounts of ancient commerce have revealed the initial attempts of hu- mans at insurance. Around 6000 years ago, Babylonians, whose home in the Tigris- Euphrates Valley lay at the crossroads of early world traffic, had developed business practices to high degrees of sophistication. Babylon, a territory where all important land trade routes converged, became the clearing house of trade. Though Babylon built up a worthy commercial system, and its people were the first to enjoy the fruits of political economy, the travelers were exposed to risks of robbery, pirates and un- canny winds at the seas. Human ingenuity was set to work and, in course of time, a practice developed that debt of the trader, both principal and interest, should be ab- solved if certain specified contingencies occur. By 2000 BC, the Babylonians and ancient Hindus were familiar with the essentials of the insurance contract as indicated by the provisions included in the codes of Hammurabi and Manu; the Babylonian contract and the code of Hammurabi applying mostly to caravans, and Manu Dhar- mashastra referring to both seaborne and overland traffic. Better and more sophisticated insurance came of age in the 11th century, on the beach of Hastings, when King Harold (who carried a large Personal Disability Insur- ance) was shot dead by a Norman bowman firing through a narrow slit in the defense wall. His queen immediately got in touch with the insurance company enclosing a 1.1 Insurance – Introduction and History 3 plan, as required on the claim form showing the path of the arrow. The insurers examined the policy for a few days and grew desperate at their inability to find a way of le- gitimately escaping the deal, when a bright “employee” noticed a gap in the defenses. Keeping the defenses without gap was a policy condition and was Harold’s responsibility, “Here”, he said, “if the gap wasn’t there, the arrow would never have gotten through, so there can be no claim” and that was how the “loophole” entered the history of insurance or more precisely said the ingenuity in drafting the policy document with clauses and “if-conditions” (Ayyar).

Understanding Insurance Insurance is a service, which is sought to be commoditized for better conceptualization in keeping with the other unification trends running across the world. Insurers sell a promise to pay or defray on a future date for a predefined contingency. The function of insurance is to protect a few against the heavy financial impact of the expected loss by dispersing the losses among many who are exposed to homogenous risks. Initially insurance business structure was architected in three dimensions: – The cross section of people, property or interest – Pre-determinable risks – Time ambit of coverage (Mishra and Mishra)

Insurance products were designed around such dimensions. Then started the era of classification of such products – choices of handling the assorted products created two classes of insurers – life and non-life; life meant human life. The discovery driven insurance industry encountered the problem of size. To prune the vertical risk size another class of insurance business evolved, which is now fa- mous as reinsurance (Mishra and Mishra).

Augmentation of the Sector Insurance products slowly incorporated other developments in the society and eco- nomics. Monetization of economy assorted the income of people into propensity to consume and propensity to save. Such individual savings were pooled to classes of investments depending on the economies of scope, scale and prioritization for the purpose of common social good. There was need to internalize functional efficiency in mobilizing the savings. Functional efficiency consists of allocative and operative efficiency. Insurance sector got the share of these savings in the equilibrating process of allocative efficiency. Thus, the insurance sector found a new way to augment its business. Insurance products packaged savings features with risk management fea- 4 1 Insurance Industry in India tures. The demand for operative efficiency forced insurers to define their core competencies; thus called for compartmentalization of insurance activities either by dictates of operative efficiency or by statutory and prudential regulations. Originally meant to be a support service, the sector proved its excellence like a solid sphere and developed hydra-headed growth characteristics. The possibilities were pruned by regulations and that seemed to be the only constraining factor for the all- engulfing growth possibilities of the sector; which explains, as the global thrust on deregulation and liberalization compels nations to open up doors for the insurance sector growth, there is a stampede to enter into the sector. The cardinal attraction of the insurance sector is harnessing long term funds for long term investments in ever expanding sectors like infrastructure, technology and R & D. The earning potential of these sectors seem almost endemic (Mishra and Mishra). 1.1 Insurance – Introduction and History 5

Tools and Methodology

Tools and methodologies have been used in order to contextually understand the In- dian life and health insurance market through a scientifically driven approach. They are as follows – Porter’s 5 Forces for Industry Analysis – The PEST Framework for Macroeconomic Environmental Analysis – Anita McGahan’s Model for evaluating the Dynamic Market Environment – Ludi’s Internationalization Cube to understand the Internationalization strategy of foreign players in India – Ansoff’s Matrix to understand the Marketing Strategy pursued by an insurer – The 4Ps of Marketing analyzed in depth to understand the Marketing Facets for both Life and Health Insurance in India – Certain Service Marketing Tools used, since Insurance is a service

Moreover, certain information has been “boxed” in order to bring specific issues to the foreground – The “Management in Action” boxes intend to depict certain strategies that insurers in India have implemented; serving as best practices or role models for the rest of the industry. – “The Regulator Says” boxes throw light on the regulatory developments of consequential importance to the Indian Insurance scenario. – “Critical Support Functions” boxes detail the significance of certain functions like Claims Management, Underwriting and Risk Management. – “Customer Management and Retention” boxes seek to discuss aspects critical to customer centricity and orientation like Customer Relationship Management, Sim- plicity of Insurance Contracts etc. – “Consumer Insight” boxes detail latest survey results or studies offering a deeper understanding of the Indian consumer thus a subsequent enhancement of latest local market knowledge. 6 1 Insurance Industry in India

1.2 An Analysis of Evolution of Insurance in India

An account of the Indian Economy and Insurance in Context

The Indian economy has been growing rapidly and the growth impulses continued during 2005–2006. There has been sustained manufacturing activity and impressive performance of the services sector along with a reasonable recovery in the agricultural sector. The agricultural and allied activities registered a growth of 3.9% due to improvement in the agricultural production. The industrial sector improved by 7.6% and the services sector maintained a higher growth of 10.3%. Thus, the growth in real GDP was 8.4% during 2005–2006 as opposed to 7.5% in 2004–2005. Within the services sector, there has been an improved performance in finance, insurance, real estate and business services. There has been a substantial increase in the GDP ema- nating from insurance. The deregulation of the sector in 2000 has contributed to insurance growth. GDP from insurance sector which constituted 12% of the GDP in 2000–2001, has increased to 19.3% in 2004–2005. The gross domestic savings, a component of which is the financial savings of the household sector, as a percentage of GDP increased to 29.1% in 2004–2005.

Figure 1: Financial Savings of the Household Sector – Gross (IRDA) 1.2 An Analysis of Evolution of Insurance in India 7

Financial Savings as a Percentage of GDP The financial savings of the household sector as a percentage of the GDP has increased from 11.9% in 2000–2001, to 16.7% in 2005–2006. Moreover, of this financial savings of the household sector, insurance funds equated to 13.6% in 2000–2001, which increased to 14.2% in 2005–2006, peaking at 16% in 2004–2005. All in all, insurance funds as a component of the financial savings formed 1% of the GDP in 1991, 1.5% in 2000, 1.6% in 2001 to a 2.4% in 2006 (IRDA). Please see the illustrations below which elucidate a development of financial savings of the household sector.

Item 2000– 2001– 2002– 2003– 2004– 2005– 2001 2002 2003 2004 2005 2006

Financial savings (FS) 11,90% 12,70% 13,10% 13,80% 14,00% 16,70% as a % of GDP Currency (as a % of FS) 6,30% 9,70% 8,90% 11,20% 8,50% 8,80% Currency (as a % of GDP) 0,70% 1,20% 1,20% 1,50% 1,20% 1,50% Deposits (as a % of FS) 41,00% 39,40% 40,90% 38,30% 37,00% 47,40% Deposits (as a % of GDP) 4,90% 5,00% 5,40% 5,30% 5,20% 7,90% Shares and Debentures 4,10% 2,70% 1,70% 0,10% 1,10% 4,90% (as a % of FS) Shares and Debentures 0,50% 0,30% 0,20% 0,00% 0,20% 0,80% (as a % of GDP) Claims on Governement 15,70% 17,90% 17,40% 23,00% 24,40% 14,70% (as a % of FS) Claims on Governement 1,90% 2,30% 2,30% 3,20% 3,40% 2,50% (as a % of GDP) Insurance Funds (as a % of FS) 13,60% 14,20% 16,10% 13,70% 16,00% 14,20% Insurance Funds (as a % of GDP) 1,60% 1,80% 2,10% 1,90% 2,20% 2,40% Provident and Pension Funds 19,30% 16,10% 15,00% 13,60% 12,90% 10,00% (as a % of FS) Provident and Pension Funds 2,30% 2,00% 2,00% 1,90% 1,80% 1,70% (as a % of GDP)

Figure 2: Financial Savings of the Household Sector – Gross (IRDA)

Insurance in India has completed a full circle; from being private with minimal government intervention before 1956, to the nationalization of life insurance and formation of a monopoly (with Life Insurance Corporation of India) in 1956, and nationalization of general insurance in 1972 and finally back to deregulation in 2000. 8 1 Insurance Industry in India

First, I will present the milestones of the insurance industry before nationalization, essentially because the denationalized structure brought back to play (in 1999) important legal rules from 1938.

Milestones of the Evolution of Insurance before nationalization in 1956 The Insurance Act, 1938 was the first comprehensive piece of legislation for Insur- ance in India. It covered both life and general insurance companies and clearly defined what would come under the life insurance business, the fire insurance business and so on. It covered aspects ranging from deposits, supervision of insurance companies, investments, commissions of agents, directors appointed by the policyholders, among others. This act lost its significance after nationalization in 1956 (of Life In- surance) and in 1972 (of General Insurance). With the privatization in the late 20th century, it has returned as the backbone of the current legislation of insurance companies (Sinha).

Figure 3: Milestones of Evolution of Insurance before Nationalization (Sinha) 1.2 An Analysis of Evolution of Insurance in India 9

Rationale for Nationalization of the Life Insurance Business in 1956 The genesis of nationalization of life insurance in India came from a document pro- duced by Mr. H.D. Malaviya (on behalf of the Indian National Congress) called “In- surance Business in India”. In his document, Mr. Malaviya made four important claims to justify nationalization. First, he argued that insurance is a “cooperative en- terprise”, under a socialist form of government; therefore it is more suited for the government to be in the insurance business on behalf of the people. Second, he claimed that Indian insurance companies were excessively expensive. Third, he argued that private competition had not improved services to the “public” or to the policyholders. Preventive activities like better public health, medical check-up, hazard prevention had not improved, according to him. Fourth, he commented that the lapse ratios of life policies were very high and leading to “national waste” (Sinha). Several of his arguments that were analyzed proved to stand on rather weak grounds. For example, his claim that Indian insurance companies were very expensive was justified by comparing the overall expenses of life insurers in India with those of the UK and the USA. However, the base or denominator he used for India resulted in amplifica- tion of the figures beyond credible. Anyway, the nationalization of the Life Insurance business in 1956 was justified by the government on three distinct grounds. First, the government wanted to use the resources for its own purpose. This clearly meant that the government was unwilling to

Figure 4: Rural Share of Life Insurance Business in India (Annual Reports of LIC for different years) 10 1 Insurance Industry in India pay the market return on assets (otherwise they could have raised the capital whether insurance companies were public or private). Second it sought to increase the market penetration through nationalization. There can be two reasons why nationalization would make more sense than privatization for market penetration (Sinha). [a] The government, by virtue of being a monopoly, could generate huge economies of scale and thereby reduce costs of operation and thus reap higher volumes, by transferring the lower costs into lower prices for the public. [b] Through nationalization, the government may be able to take life insurance to rural areas where it may not be possible for private insurers to be profitable. This goal was definitely achieved by the newly formed monopoly to a considerable extent. Please see the illustration below “Rural share of Life Insurance Business”. The last reason cited for nationalization was that the government found the number of failures of life insurance companies to be unac- ceptable. Thus, with the Life Insurance Corporation Act of 1956, the 245 insurance companies of both Indian and foreign origin in 1956 were nationalized by the government acquisition of the management of the companies; and the Life Insurance Corporation of India was created on 1st September, 1956, as a result; LIC has grown to be the largest insurance company in India as of 2007.

Rationale for the non-nationalization of the General Insurance Business in 1956 However, general insurance was not nationalized in 1956. The then Finance Minister addressed it in his speech as follows, “I would like to explain briefly why we have decided not to bring in general insurance into the public sector. The consideration which influenced us the most is the basic fact that general insurance is a part and par- cel of the private sector of trade and industry and functions on a year to year basis. Errors of omission and commission in the conduct of the business do not directly affect the individual citizen. Life Insurance Business, by contrast, directly concerns the individual citizen whose savings, so vitally needed for economic development, may be affected by any acts of folly or misfeasance on the part of those in control or be re- tarded by their lack of imaginative policy.”

Milestones of the Evolution of Insurance after Nationalization in 1956 The diagram below illustrates the key milestones in the evolution of insurance in In- dia from the nationalization of life insurance in 1956, to the IRDA (Insurance Regu- latory and Development Authority) act in 1999 that led to the deregulation of the insurance industry in India. 1.2 An Analysis of Evolution of Insurance in India 11

Figure 5: Milestones of Evolution of Insurance after Nationalization in 1956 (Sinha)

Nationalization of General Insurance in 1972 General Insurance was nationalized in 1972 (with effect from January 1st, 1973). There were 107 general insurers operating at that time. These were mainly large city oriented companies catering to the organized sector (trade and industry). They were of different sizes, operating at different levels of sophistication and were assigned to four different subsidiaries (roughly of equal size) of the General Insurance Corpora- tion (GIC). The four subsidiaries were [1] the National Insurance Company, [2] the New India Assurance Company, [3] the Oriental Insurance Company, [4] the United India Insurance Company with head offices in Calcutta (now Kolkata), Bombay (now Mumbai), New Delhi, and Madras (now Chennai) respectively, collectively known as NOUN for their initials. There were several goals for setting up such a structure [a] the subsidiaries were expected to “set up standards of conduct and sound practices in the general insurance business and render efficient customer service”, [b] the GIC would assist controlling their expense, [c] the GIC would help in the channeling of funds, [d] this structure would help bring general insurance in rural areas, [e] GIC was also designated as the national reinsurer, [f] finally, all four subsidiaries were expected to compete with one another. Most of these goals remained rather elu- sive and were not achieved to a massive degree (Sinha). 12 1 Insurance Industry in India

Development of the Life Insurance Industry during the Nationalized Era By 2000, LIC had 100 divisional offices in 7 zones with 2,048 branches. There were over 680,000 active agents across India with a total of 117,000 employees in the LIC. I will now present facets that explicate the development of the life insurance market in India. The largest product category of the life insurance market in India has been individual life insurance. The types of the policies sold were mainly whole life, endowment and “money back” policies. Money back policies return a fraction of the nominal value of the premium paid by the policyholder at the termination of the contract. Until recently, term life policies were not available in the Indian market. Note that even in 2001, individual life business accounted for 92% of all life insurance market. The number of new policies sold each year went from about 0.95 million a year in 1957 to around 22.49 million in 2001. The total number of policies in force increased from 5.42 million in 1957 to 125.79 million in 2001. Thus, on both counts there has been a 25-fold increase in the number of policies sold. Of course, during the same period, the population has grown from 413 million in 1957 to over 1,033 million in 2001. On a per capita basis, there were 0.0023 new policies in 1957 compared with 0.0218 new policies in 2001. Total policies per capita went from 0.0131 in 1957 to 0.1218 in 2001. Thus, whether we examine the new policies sold or the total number of policies in force, there has been a tenfold increase during that period. Therefore, if we examine the headcount of policies as an indication of penetration, there has been a substantial rise. A part of this rise is directly attributable to a deliberate policy of rural expansion of the Life Insurance Corporation. Between 1985 and 2001, total life business had grown from below 18 billion rupees to over 500 billion rupees. During that period, the price index increased fourfold. Thus, if there were no change in life insurance bought in real terms, it would have accounted for 78 billion rupees worth of business (Sinha). In recent years, life insurance saving has played a bigger role in national savings. Please see the figure below. Note: The figure is plotted with Gross Domestic Savings as a percent of GDP on the horizontal axis and Gross Life Premium as a percent of GDP on the vertical axis. Thus, there are fifty-two data points each pair representing data for a given year. It clearly reveals a nonlinear relationship between these two variables. Specifical- ly, at relatively lower levels of saving rate (that correspond to a lower level of income), a rise in saving rate does not lead to a rise in life insurance premium expressed as a fraction of GDP. However, beyond a threshold; with the threshold value of saving rate being 20% for India, the life premium as a percent of GDP starts to grow rapidly. India seems to have reached that deflection point. 1.2 An Analysis of Evolution of Insurance in India 13

Moreover, we have already seen earlier in this chapter that insurance savings as a percentage of financial savings has increased over the years (till 2006).

Figure 6: Relationship between national savings and life insurance premium, 1950–1991 (Calculated based on data from the Central Statistical Organization Database)

Deregulation of Insurance in India with the IRDAAct, 1999 With effect from 1st, January, 2000, with the passage of the IRDA Act, the Indian In- surance Industry was privatized or deregulated. The deregulation was brought about with the following objectives: to increase coverage of population, propel a choice of better products with informed decisions, promote competition, encourage the entrance and joint partnership of foreign players with the Indian insurers, boost innovation, advance economy of operations, enhance customer centricity and service excellence and improve the efficiency of the public sector companies. The Insurance Reg- ulatory and Development Authority (IRDA) was formulated as an independent body that would monitor and shape the insurance business in India. The IRDA has separat- ed out life, non-life and reinsurance insurance businesses and therefore a company has to have separate licenses for each line of business. Each license has its own capital requirements (around USD 24 million for life and non-life and USD 48 million for reinsurance business). The role and the statutory functions of the IRDA will be discussed in chapter 1.3 that deals with Authorities and Regulatory environment. To illustrate the positive direct or indirect effects of deregulation of insurance in In- dia, I have presented a graph below, which represents the convergence of efficiency of the four public sector general insurers (now independent of the GIC): [1] the Na- 14 1 Insurance Industry in India tional Insurance Company, [2] the New India Assurance Company, [3] the Oriental Insurance Company, [4] the United India Insurance Company, in 2003. The technical efficiency of each of the above is used as a parameter of comparison, with the number of employees (labor), the number of offices (physical capital) and commission paid as the inputs, and premiums and claims as two alternative measures of outputs. The relative efficiency was calculated using the data envelopment analysis (DEA), a mathematical programming framework (Sinha) The graph depicts that New India Insurance has consistently stayed as the company with the highest technical efficiency. Moreover, it shows that after some initial change the relative efficiency level among the public sector general insurance companies converged, in 2003.

Figure 7: Convergence of Efficiency amongst the four public sector general insurers 1997–2003 (Sinha)

1.3 Dynamic Market Environment for Insurance in India

An Era of Change The insurance industry has experienced significant change over the past few decades. But never before have the changes been so pronounced, the pace so rapid and the scope so broad. Insurers are in the midst of a true paradigm shift. Their governing rules are changing. Their functional bodies are blurring. Buyers are becoming more sophisticated about services and value, and are ever more demanding. This heightened form of consumerism is spurring a new demand pressure on insurance products. At the same time, the industry is experiencing traditional financial pressures, as well as new competition, new market entrants, new substitutes for traditional insur- 1.3 Dynamic Market Environment for Insurance in India 15 ance offerings. The industry is responding in many ways. For example, there is an enhanced focus on market selection, new and varied distribution channels, bundling and unbundling of products and services, all in an effort to customize and achieve greater value while re-engineering and consolidating for efficiency.

The Dynamic Environment and the Insurer’s point of View In view of the ever-changing landscape of the Insurance Industry in India, insurers need to revisit the core competencies and the cardinal features of their underlying strategy. The schematic diagram below illustrates the key aspects influencing the insurer’s strategy, conducive to the marketing point of view.

Figure 8: Factors Influencing Company Marketing Strategy (Kotler and Lane)

PEST Analysis Of the facets illustrated above, it would make logical sense to take an outside-in view and begin by analyzing the environment, a backdrop amidst which a new firm would like to enter or an existing insurer would like to relook its strategy. Thus, I have illustrated all factors contributory to the environment via the PEST (P-Political/Legal 16 1 Insurance Industry in India

Factors, E- Economical Factors, S – Social/Cultural Factors, T – Technological/Phys- ical Factors) framework. Political Factors: The regulatory aspects of the political factors will be discussed in chapter 1.3. De-tariffing, the opening up of the market to free pricing and flexible policy terms and conditions (which came into effect on the 1st January, 2007), is the most essential aspect that is set to revolutionalize the face of the insurance industry by directly affecting the insurers, concerned intermediaries, customers and stakeholders; thus, a separate subsection detailing its prime characteristics will be dedicat- ed to de-tariffing.

Political Factors Economic Factors – De-tariffing of general insurance with effect – Increase in contribution of insurance to the GDP from 1st Jan, 2007 – Increase in gross domestic savings as a – Safety valve imposed by the IRDA, of not percentage of GDP changing the terms and conditions of the – Decline in savings in the form of insurance funds policies till 31st Mar, 2008 – Buoyancy in the Indian stock market – Investment regulations – Insurance business (first year premium) grew at – Social and rural sector obligations 47.93% in 2005–2006

PEST Technological Factors Social Factors – Building up data warehouses – Insurance penetration stood at 2.53% for life – Increase in CRM solutions insurance, 0.62% for non-life insurance, – Increased use of online portals for policy thus huge scope purchase, renewal, claims processing etc. – Huge middle class – Impending importance of technology to lower – Increase in lifestyle diseases costs in a de-tariffed scenario – Higher demand for old age provisions – Grievance redressal cells – Increasing awareness among the population – Online Complaints reporting mechanisms with – Growth of insurance catering to certain the regulatory body groups – Islamic insurance, micro insurance – Using bank databases to cross sell insurance etc. products through bancassurance

Figure 9: PEST Analysis (Research and Understanding gathered from several sources and Author)

Economical Factors: – Increase in contribution of insurance to the GDP: GDP from insurance sector constituted 12% of GDP in 2000–01, increased to 19.3% in 2004–2005. – Gross domestic savings as a per cent of GDP increased to 29.1% in 2004–2005. Savings in the form of life insurance funds accounted for 15.1% of the gross financial savings. – A decline in the savings in the form of insurance funds was witnessed, even though life insurers increased their business during the year. 1.3 Dynamic Market Environment for Insurance in India 17

– Buoyancy in the Indian stock market due to strong macroeconomic fundamentals, robust corporate results, positive investment climate and sound business outlook. – Insurance business (first year premium) grew at 47.93% in 2005–2006, surpassing the growth of 32.49% in 2004–2005

Technological and Social Factors: These are self-explanatory in the illustration. The “Grievance Redressal Cell” of the technological factors will be elaborated upon in section 1.3.

De-tariffing and its consequences A tariff market is one where the premium rates, policy terms and deductibles are controlled and to be applied uniformly by all the underwriters. The market portfolio mix for general insurers on tariff/non-tariff covers during the tariff regime were as follows: 73.09% of the overall premiums were tariffed, and 29.91% was non-tariffed. Health formed a part of the non-tariffed portfolio which implied that insurers could set their own prices and adopt flexible policy terms and conditions. The primary effects of the tariffed regime were – Cross subsidization: Profitable businesses like fire and motor which were tariffed paid for un-profitable businesses of a company like health and marine cargo insurance (which were non-tariffed), thus making these (health and marine cargo insurance) available to customers at throw away prices. The profitable businesses, thus cross-subsidized the unprofitable businesses. This is also the core reason for the absence of any standalone health insurance company until 2006, because such an insurer would not be able to compete with the general insurers, for whom health insurance was one of the businesses that could be easily subsidized despite exorbi- tant claim-to-premium ratios at 130%. – “Good” customers paid for “bad” customers: In a tariffed regime, where prices were uniform, all the “good” customers, who had a better risk management history with lower risks and thus consequently fewer claims, ended up paying for “bad” customers with higher risks. In fact the tariffed regime, induced complacency in the customer, who had no incentive to improve their risk profile or management as he would get reimbursed anyway. – Underwriting skills smothered: The biggest defect of the tariffed regime was the complete dearth of underwriting skills. For businesses that were tariffed, underwriting was rule based rather than risk based (as it should be for insurance); and for businesses that weren’t tariffed, underwriting did not matter on account of depend- ency on the profitable tariffed businesses. Thus although underwriting is the core 18 1 Insurance Industry in India

activity defining the profitability of an insurance company, the tariffed regime nul- lified its significance. – Complete lack of quality data: Risk profiling, customer history, data warehouse, data mining, management information systems were deemed insignificant and just investments with a rather negative net present value because of their irrelevance to the pricing of an insurance product; thus subsequently leading to complete lack of quality data available to insurers and intermediaries, and reliance on outdated information that was provided by the Tariff Advisory Committee.

The movement from a tariffed to a de-tariffed regime will occur in a phased manner In order to prevent cut-throat competition with the lifting of tariffs, the IRDA has decided to move from the tariffed to a de-tariffed regime in a phased manner. This phased process would act as a safety valve for insurers and help preserve the sanctity of the industry. – Phase 1: • What is it? Opening up of the free market pricing policy with effect from 1st of January, 2007. However, insurers cannot change their policy terms and conditions during this phase (of the businesses that belonged to the tariffed part of the portfolio mix) • Process of Preparation in this phase includes: • – Data compilation and stratification • – Data warehousing, analysis of data and sending data to the appointed actuary – Phase 2: • What is it? With effect from 1st April, 2008, insurers can change their policy terms, conditions, wordings, tariff rules and regulations. This phase would include launching new or redefined products. • Process of Preparation in this phase includes: • In order to launch new products with options to choose perils and add-on covers and considerations on “what are the most urgent requirements of the customer?”, define product concepts like [a] policies purely on first loss covers, [b] policies on selective perils basis, [c] policies considering agreed value covers etc.

Effects and Consequences of Lifting of Tariffs In order to understand the consequences of de-tariffing, I will present its impact on various facets of the Indian insurance archetype that would invariably alter the trail of progression of the industry as a whole. This account of effects would also serve in understanding the nature of change and trajectory of industry evolution on Anita Mc Gahan’s Model for strategies in dynamic environments. 1.3 Dynamic Market Environment for Insurance in India 19

Please see the illustration below depicting the various facets while considering effects of de-tariffing.

Figure 10: Facets while considering the effects of de-tariffing (Author)

Please find below Porter’s 5 Forces for industry analysis, as there are several elements in the 5 forces analysis that overlap with the current rage that de-tariffing brings. Thus they will have to be discussed in congruence. Note with respect to the Porter’s 5 Forces Illustration: All aspects related to de-tariffing are marked with a “D” followed by a “+” sign indicating it has a positive effect on insurers, “–” sign indicating it has a negative effect on insurers, and “+/–” sign if it has both positive and negative effect on insurers. The points in the illustration that are not preceded with a “D” are unrelated to the de-tariffing aspect and would have pro- gressively occurred irrespective of the de-tariffed scenario. TPA = Third Part Administrator Facets explicated Marketing Facets – Pricing: • Industry experts predict that fire and motor premiums would go down by 30–35% (these were part of the tariffed, thus profitable businesses). This is at- tributed to the tendency of players to undercut one another, due to free market 20 1 Insurance Industry in India

Barriers to Entry ✔ FDI Ceiling ✔ Capital requirements ✔ Experience with respect to understanding of the market ✔ Elaborate distribution requirements Buyer/Customer Power ✔ “Lock-in” of buyers Suppliers’ Power ✔ D+ Widening product range ✔ D– Reduced commission ✔ D– Increasing price offered by reinsurance sensitivity of customers Industry Rivalry companies with de-tariffing ✔ ✔ D± Increased competition ✔ D– Initial effects of D- Increased efficiency of in a de-tariffed scenario Detarifed scenario Brokers necessitated ✔ ✔ D– Large corporate clients ✔ Industry concentration in both Limited actuaries in the ✔ D– Switching costs life and non-life marked ✔ ✔ D+ Good risk customer ✔ Foreign players entering Reinsurance concentration ✔ will not longer subsidize bad ✔ Restricted competition due Lock in & high switching risk customer to regulations costs for firms ✔ ✔ Low penetration, thus less ✔ Solvent Margin requirements Cession to the National number of buyers ✔ Low penetration of Insurer ✔ ✔ Yearly renewal for non-life insurance Dependence on IT providers products ✔ Dependence on TPAs ✔ Multiple distribution ✔ Orphaned customers due ✔ Sale of Bancassurance Threat of Substitutes to high attribution of ✔ D– Increased competition, thus agents substitutes due to de-tariffing ✔ Government pension schemes ✔ Tax savings instruments ✔ Emerging substitutes ✔ Switching costs of customers ✔ Dependence on Children in rural India Figure 11: Porter’s Five Force Analysis of the Insurance Industry (Author through accumulated readings and research)

pricing policy, thus resulting in some type of cut-throatism and a price war. [Ini- tial ill effects of a de-tariffed scenario – Industry Rivalry, Porter’s 5 forces.] • Health and marine premiums will have to rise due to end of cross-subsidization by their profitable counterparts (motor and fire). • There will be a rise of sophisticated price segmentation methods: for example, having location based pricing in place, people in cities would pay higher premiums than those in suburbs. – Products: • De-tariffing will propel competition because of a need to differentiate, thus promote heightened innovation in product design; for example, there may be health insurance products developed for people with specific hereditary diseases which were not in existence earlier. – Distribution channels: • Need of an innovative combination of distribution channels to increase the number of touch points with the customers and maximize customer reach via channel effectiveness. 1.3 Dynamic Market Environment for Insurance in India 21

• Achieving operational efficiencies in channels would be inevitable; as prices would go down initially and costs will have to be kept at an all time low, if the stipulated solvency margins have to be maintained.

Customers – “Good” customers will cease to subsidize “bad” customers, as each customer would pay premiums based on his/her risk profile [Good customers will no longer subsidize bad customers – Buying Power, Porter’s 5 Forces] – Due to de-tariffing, competition would heighten and consequently result in new and innovative products, thus resulting in increased consumer choice and heightened customer centricity and service. [Increased competition in a de-tariffed scenario – Buying Power, Porter’s 5 forces] – Price sensitivity of customers will increase in areas where competition results in an initial price fight. [Increasing price sensitivity of customers – Buying Power, Porter’s 5 forces] – The obvious consequence of the de-tariffed regime is increasing customer awareness and aggravated premium tension. – The moral hazard will end with high risk customers coming in the spot light as they can no longer find “cover” under the low risk customers. – The information asymmetry would reduce as customers would be willing to disclose more information to get a better risk rating in case they are good customers; thus complete and furnished information from customers would be rewarded with discounts. – Policyholders would be incentivized to improve their risk portfolio, as doing so would be compensated for. – Large corporate clients’ bargaining power would be enhanced in the fire and motor portfolio where prices will be slashed; however, corporate clients would be lost in the health insurance area where prices will have to be increased to ensure the profitability of these businesses. [Large Corporate Clients – Buying Power, Porter’s 5 forces.]

Reserving – The IRDA (regulatory authority) has stipulated regulations with respect to the solvency margin that companies must adhere to; solvency margin is the extent to which assets need to be over the liabilities for the insurer. In lieu of the same, insurers cannot indulge in price wars to the extent that their solvency margins will be hurt, thus serving as a necessary evil. Moreover, insurers are answerable to the shareholders for their bottom line, which is why they cannot afford to let it get affected too drastically. 22 1 Insurance Industry in India

Regulations – The IRDA (regulatory authority) has disallowed cross subsidization of businesses in light of the solvency margin argument; however, if insurers do need to cross subsidize, they can do so by presenting a proposal to the IRDA with a justification for the same. – Actuaries have been appointed to insurers to help them in their underwriting activities and rate making process. – The phased process sequenced by the IRDA acts as a safety valve (as discussed earlier).

Reinsurance – If competition based on price increases, it would imply reduced prices, however same liabilities or better put, increased liability for the same price suggests that the insurers would pass on more liabilities to the reinsurer (who in turn gives commission to the insurer for the percentage of premium received and obviously even carries partial risk of the insurer in return). More liabilities to the reinsurer without corresponding increase in premium would reduce the commissions that insurers can get out of reinsurers. [Reduced commission offered by reinsurers in case of de- tariffing – Supplier’s Power , Porter’s 5 forces.]

Investments – Price reduction by insurers would call for more efficient management of their investment portfolio and thus cautious and conscientious pooling of resources to reap maximum returns, in order to be able to augment their bottom line and sustain their solvency margins.

Risk Management and Underwriters – The switch from a tariffed to a de-tariffed regime calls for a transition from rule based underwriting to risk profile based underwriting. – This would imply classification of risks into class rated risks and individual rated risks. • Class rates: where risks of a class have similar risk factors and individual variations are not financially significant; for example motor risks in India • Individual rates: where each risk has significant variation in risk factors and the financial magnitude justifies individual rating – for example engineering risks (Bhattacharya). – More time and money will need to be invested in risk profiling through and data collection. 1.3 Dynamic Market Environment for Insurance in India 23

– Low pricing will not be the basis for creating the best company; it will be based upon risk acceptance, service delivery standards and commensurate remunerative pricing. – Efforts will have to be made to overcome the steep learning curve with respect to sophistication in risk management practices. – Underwriters will have to team up with the marketing department and rate policies based on claims data collected at a micro level which would include [a]product level knowledge per se, [b]enhanced customer domain knowledge and corresponding merit rating of the same – Use of IT and innovative techniques to improve decision making via data warehousing, data mining and other business intelligence systems augmenting micro level data analysis will have to be used to improve efficiency and quality of decision making.

Brokers – The de-tariffed regime would enhance the broker’s role and transform him into a financial advisor; as Mr. Sunderasan, the Chair Professor of National Insurance Academy put it “The Broker will be the eyes of the insurer and the voice of the customer.” This means he will use his proximity to the customer and market intelligence to help design new products, develop new markets and improve pricing strategies. The broker’s role as the voice of the customer would imply: a requirement analysis of the prospective insured, matching the price within the desired budget, using customer (insured) response to provide feedback to the insurers, and enhancing his value addition by providing a bundle of services. [Increased efficiency of the brokers necessitated – Supplier’s Power, Porter’s 5 Forces] – Brokers may face reduced margins from insurers (on account of price cutting mechanisms the effects of which will have to be borne by all the intermediaries involved) and may even be compelled to switch from a commission based model to a fee based one.

Transition to a de-tariffed regime will have deep, certain and temporary financial impact on the insurers before the industry cycles settle. In order to find a way to create a lasting value in the customer’s mind, there is a need to ensure fair pricing, balance between the interests of insurer, insured and other stakeholders. Since a price war is in the offing, unmindful viability of the insurers will need to be kept in check and it would be essential to moor pricing on sound technical base to prevent the market from going out of control. Finally priorities with respect to growth versus profit need to be defined as both may elude for some time. 24 1 Insurance Industry in India

Anita Mc Gahan’s Model for Strategies in Dynamic Environments Anita Mc Gahan’s model helps analyze the nature of change and interpret the trajectory of industry evolution. Based on the kind of change (architectural or foundational), the nature of the industry trajectory is determined. In architectural change, core activities and in foundational change, core assets are threatened.

Figure 12: Anita McGahan’s Model (McGahan & Mapping and Interpretation by Author)

Core activities are defined as recurring actions that create value both by making the industry’s suppliers more willing to transact and by generating greater willingness to pay among industry’s buyers. Core assets are durable resources that make the firm more efficient or effective at performing core activities and can include intangibles such as brand and knowledge capital. Core assets are threatened with obsolescence when a new approach accelerates their real rate of depreciation (McGahan). Thus in this case, – The old “core” activities include [a] rule based underwriting, [b] reliance on others: intermediaries like Third Party Administrators for activities like claims management and with minimal interference by insurers. – Core assets would be [a] historical customer data [b] distribution network [c] relationship with intermediaries [d] cushion of assets over liabilities (solvency margin) [e] investment portfolio. 1.3 Dynamic Market Environment for Insurance in India 25

In context of [i] the account on consequences of de-tariffing and [ii] the increasing of the FDI cap (equity participation that foreign investors can have in their Indian counterparts from 26% to 49%) that is in the offing, the nature of change can be defined as “intermediating” wherein core activities are threatened but core assets are not. The new core activities would be [a] accurate risk assessment & management, [b] risk driven underwriting, [c] efficient and responsive claims management and [d] effective fraud management minimizing errors of omission and commission replacing old “core” activities which include [a] rule based underwriting, [b] detachment on insurers with respect to claims management, by ignorant dependence on Third Party Ad- ministrators. However, core assets remain intact and will only have to be strength- ened to improve their efficiency and effectiveness towards the newly established core activities.

LUDI’s Internationalization Cube (Kaufmann, Panhans and Poovan) To conclude our discussions on the dynamic market environment and industry analysis, I would present the suggested internationalization strategy for foreign insurers in India by means of the Ludi’s Internationalization cube. In the cube – National Focus: when the concerned firm decides to expand base within its home country without venturing abroad. – Export Orientation: when the firm would like to make use of the market opportunities abroad and export products while not setting base in the foreign location. – Business Transfer: would imply the firm setting base in the foreign location as a replica of the business done back home, however, this would be customized to serve the local market in the foreign base through local partners, investment and strategy. – Global Integration: would imply when this contribution from business transfer would be looped into the supply chain of providing the finalized product to the world market or a subset of it.

The current best strategy for foreign players in India is Business Transfer, with foreign value creation and independence with respect to integration across borders (as in the business at the foreign location – India in this case, would not be dependent on the business at the home location). Moreover, foreign firms must pursue entry by means of a joint venture with Indian insurers or partners in order to get access to the market know how and existing customer base and consequently share their risk management expertise and responsiveness in claims management. 26 1 Insurance Industry in India

Please see the illustrations below.

Figure 13: LUDI’s Cube (Kaufmann, Panhans and Poovan & Mapping and Interpretation by Author) 1.4 Authorities and Regulatory Environment 27

1.4 Authorities and Regulatory Environment

The Insurance Regulatory and Development Authority (IRDA) is a national agency of the Government of India, based in Hyderabad. It was formed by an act of Indian Parliament known as IRDAAct 1999, which was amended in 2002 to incorporate some emerging requirements. Mission of IRDA as stated in the act is “to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto.”

The role of the IRDA as a developer The role of the IRDA as a developer includes • Shouldering the responsibility of developing a nascent insurance market • Striking a right balance between developing and regulating the industry • Protection of Policy holders’ Interests – Mission of IRDA • Interests of policy holders as the prime objective while framing regulations (Prab- hakara)

The Statutory functions of the IRDA The statutory functions of the IRDA include 1. Issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration. The applicants may be the insurer, broker or the TPA.

The Regulator Says: License to Operate for an Insurer An insurance company gets a license to operate from the regulator once it receives approvals for the 3-staged application process (R1 through R3) from the IRDA. The IRDA by clearing an R1 (stage 1) application gives in-principle approval to a proposed insurance venture. The R1 application contains the details of promoters of the proposed insurance company, capital structure, directors and key persons, proposed external auditors, financial projections, regions in which business will be transacted, and the manner in which rural and social obligations will be fulfilled. The R2 application contains details of geographical spread, distribution, sales promotions, underwriting, investments, IT, customer services, retention limits and reinsurance training, internal controls, expenses of administration, premium rates for products along with rebates. The R3 application contains the classes of business which may be transacted and a confirmation from the stakeholders on the company’s capitalization (Syed). 28 1 Insurance Industry in India

2. Protection of the interests of the policyholders in matters concerning assignment of policy, nomination by policyholders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance. The mission statement of the authority attaches immense importance to the protection of the policyholders’ interest. In order to achieve this, the IRDA has set up a cell that handles grievances against insurers. Grievances received by the authority are taken up with insurers for examination/re-examination and speedy resolu- tion. A greater awareness amongst the policyholders was seen about the existence of a Grievance Cell at the Authority. The Regulations for Protection of Policy- holders’ interests, 2002 requires every insurer to have an effective grievance redressal system. Policyholders who have complaints against insurers are required to first approach the grievance/customer cell of the concerned insurer. If they do not receive a response from the insurer within a reasonable period of time or are

Insurer Grievances Reported Total Resolved Pending Break up according as on during during as on to the nature 31st March, the year the year 31st March, of grievance 2005 2006 2006 2006 (i) (ii) (iii) (iv)

Public 707 1331 2038 1488 550 279 101 149 21 Sector (73.01%) Private 23 196 219 204 15 9 0 6 0 Sector (93.15%) Total 730 1527 2257 1692 565 288 101 155 21 (74.97%) 50.9% 17.88% 27.43% 3.72%

Figure 14: Status of Grievances – Non-Life Insurers 2005–2006 (IRDA)

Public 992 851 1843 467 1376 109 212 590 465 Sector (25.33%) Private 133 540 673 270 403 36 92 157 118 Sector (40.11%) Total 1125 1391 2516 737 1779 145 304 747 583 (29.29%) 8.15% 17.08% 41.98% 32.77%

Figure 15: Status of Grievances – Life Insurers 2005–2006 (IRDA) 1.4 Authorities and Regulatory Environment 29

dissatisfied with the response of the company, they may approach the Grievance Cell of the IRDA. Please see the tables below, depicting the status of grievances of non-life insurers and life insurers in 2005–2006. The figures 1692 in the first table and 737 in the second table depict the number of grievances resolved by Insurance ombudsmen in non-life and life areas respectively over the year 2005–2006. In the table (i) through (iv) signify the following: (i) signifies grievance due to non-settlement/delay in settlement of claim (ii) signifies grievance due to repudiation/partial settlement of claim (iii) signifies policy issues (non-renewal/cancellation/non-issuance/other issues related to policy) (iv) signifies other reasons

3. Specifying requisite qualifications, code of conduct and practical training for intermediaries or insurance intermediaries and agents. The IRDA has specified mandatory training and pre-recruitment exams for individual and corporate agents that they need to clear before licensing. 4. Specifying the code of conduct for surveyors and loss assessors. The code of conduct for surveyors and loss assessors is specified in the IRDA Regulations for Surveyors and Loss Assessors, 2000. 5. Promoting efficiency in the conduct of insurance business. For example, the Authority raised the limit of losses required to be surveyed by a licensed surveyor and loss assessor for settlement of claims for the flash floods in Surat, Gujrat as a special case for a period of two months from the date of issue of the order. 6. Promoting and regulating professional organizations connected with insurance and reinsurance business. IIRM (the Institute of Insurance and Risk Management), in order to achieve its mission of spreading insurance education, continues to receive cooperation from international bodies, relevant institutions and insurance regulatory authorities. 7. Levying fees and other charges for carrying out the purposes of the Act. The Authority levies both registration and renewal fees from the insurers and various intermediaries associated with the insurance business. The registration fee for an insurer for example, is Rs. 50,000 and the renewal fees are 1/10th of 1 percent of gross direct premium written in India, subject to a minimum of Rs. 50,000 and a maximum of Rs. 50 million. 8. Calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organizations connected with the insurance business. 30 1 Insurance Industry in India

9. The de-tariffing of the general insurance business and file and use guidelines prescribed by the IRDA to best deal with de-tariffing; setting up an agenda for insurers to permit a desired switch, in order to smoothly transit from a tariffed regime which called for no underwriting skills to a regime where prices need to be set based on prudent risk assessment and underwriting. 10. Specifying the form and manner in which books of accounts shall be maintained and statements of accounts shall be rendered by insurers and other insurance intermediaries. 11. Regulating investment of funds by the insurance companies. Please see the illustrations below; they depict the investment regulations for life and non-life insurance businesses. 12. Regulating maintenance of margin of solvency. Every insurer is required to maintain a certain solvency margin. Solvency margin is defined as the excess of assets over liabilities; the main purpose of which is to ensure that insurers have sufficient financial muscle especially in a service like insurance, where costs cannot be pre-accounted for, implying costs are realized after the price/premium has already been paid for, making the business highly susceptible to uncertainty. 13. Adjudication of disputes between insurers and intermediaries or amongst various insurance intermediaries (IRDA). 14. Specifying the percentage of life insurance business and general insurance business to be undertaken by the insurers in the rural and social sector. As part of the initiatives to increase the spread of insurance to rural and socially backward sectors, the Authority notified the Regulations on obligations of insur-

Type of Investment Percentage 1 Government Securities 25% 2 Government Securities or other approved securities Not less (Including 1 above) than 50% 3 Approved investments as specified in Schedule Infrastructure and Social Sector: Not less Explanation: Infrastructure and Social Sector shall have the meaning as than15% in given in regulation 2(h) of IRDA (Registration of Indian Insurance Companies) Regulations, 2000 and as defined in the IRDA (Obligations to Rural and Social Sector) Regulations, 2000 respectively. Others to be governed by Exposure/Prudential norms specified Not exceeding in Regulation 5 20% 4 Other than in Approved Investments to be governed by Not exceeding Exposure/Prudential norms specified in Regulation 5 15% Figure 16: Investment Regulations for the Life Insurance Business (IRDA) 1.4 Authorities and Regulatory Environment 31

Type of Investment Percentage 1 Central Government Securities being not less than 20% 2 State Government Securities and other Guaranteed securities including (i) above being not less than 30% 3 Housing and loans to State Government for Housing and Fire Fighting equipment, being not less than 5% 4 Investments in Approved Investments as specified in Schedule 2 a Infrastructure and Social Sector: Explanation: Infrastructure and Social Sector shall have the meaning Not less than as in given in regulation 2(h) of IRDA (Registration of Indian 10% Insurance Companies) Regulations, 2000 and as defined in the IRDA (Obligations to Rural and Social Sector) Regulations, 2000 respectively. b Others to be governed by Exposure/Prudential norms specified in Not exceeding Regulation 5 30% 5 Other than in Approved Investments to be governed by Not exceeding Exposure/Prudential norms specified in Regulation 5 25% Figure 17: Investment Regulations for the General Insurance Business (IRDA)

ers to the rural and social sectors in the year 2000 consequent upon the amendment of the Insurance Act, 1938. The obligations require – Life Insurers to fulfill – 7, 9, 12, 14, 16 and 18% of total policies in first six years of operation as rural obligations. – General Insurers to fulfill – 2, 3 and 5% of total gross premium in I, II and subsequent years as rural obligations. – 5000, 7000, 10000, 15000, 20000 and 25000 of lives as social sector obligations by all insurers in first six years of operation (Prabhakara) 15. Moreover, by virtue of the IRDA’s regulatory role in the area of consumer protection, the Authority has been instrumental in implementing the following: – Introduction of cashless transactions by third party administrators in health insurance – Maintenance of minimum solvency margins as mentioned earlier – Protection of policyholder’s interests regulations, 2002 – Widening of distribution channels in order to increase insurance accessibility – Entry of banks in the “bancassurance” model – Monitoring of the underwriting policy through file and use – Formulation of the Grievance Redressal Cell as discussed – Formulation of a committee to study existing grievances’ mechanisms to formulate uniform guidelines and prescribe improvement steps for the insurers 32 1 Insurance Industry in India

– Promotion of micro-insurance to reach rural areas – Prescribing guidelines for insurers with respect to simplicity of contracts et al to reduce the principal agent problem between the insurer and the insured and thereby diminish the occurrence of grievances on account of errors of omission, or frauds on account of errors of commission.

The Regulator Says: FDI Cap

“Overseas companies are allowed to own a maximum insurance companies in India” unshackled the industry control seven years ago as part of a phased liberalization financial services business. However, a federal proposal ownership limit to 49% has run into political headwinds, communists and unions lobbying against higher Recently (18th, May 2007), Allianz, based in Munich partnered with Bajaj Auto in ventures for general and has been granted the option to raise its equity holdings companies from 26% to 50% (Bhattacharjee); thus [a] the state is considering the proposal (put forth raise the cap on overseas ownership of insurance companies a full-fledged regulation is definitely in the offing.

1.5 Status Quo – The Indian Market as-is vis-à-vis other Markets

This section will primarily deal with establishing the context of the Indian insurance market vis-à-vis the Asian and the Global Insurance market. The primary results for this chapter include – Market Value • India: The Indian insurance market grew by 14% in 2005 to reach a value of $ 25.1 billion (Datamonitor). • Asia: The Asia-Pacific insurance market grew by 3.7% in 2005 to reach a value of $ 763.5 billion (Datamonitor). • World: The global insurance market grew by 4.7% in 2005 to reach a value of $ 3,151 billion (Datamonitor). – Market Value Forecast • India: In 2010, the market is forecast to have a value of $ 40.5 billion, an increase of 61.3% since 2005 (Datamonitor). 1.5 Status Quo – The Indian Market as-is vis-à-vis other Markets 33

• Asia: In 2010 the market is forecast to have a value of $ 941.5 billion, an increase of 23.3% since 2005 (Datamonitor). • World: In 2010, the market is forecast to have a value of $ 3,997 billion, an increase of 26.9% since 2005 (Datamonitor). – Market Segmentation I • India: Life insurance accounts for 80.6% of gross premiums written within the market (Datamonitor). • Asia Pacific: Life insurance accounts for 75.2% of gross premiums written within the market (Datamonitor). • World: Life insurance accounts for 57.6% of gross premiums written within the market (Datamonitor). – Market Segmentation II • India: India accounts for 3.3% of gross premiums written within the Asia-Pacif- ic insurance (Datamonitor). • Asia: Japan accounts for 63.5% of gross premiums written within the market (Datamonitor). • World: The Americas account for 39.9% of gross premiums written within the market (Datamonitor).

Market Definition The insurance market consists of the non-life insurance sector and the life insurance sector. The value of the market is shown in terms of gross premium incomes. The life insurance sector covers all life insurance products including annuities, which can be linked to retirement savings plans. The non-life insurance sector consists of the accident and health and the property and casualty insurance segments. The insurance market depends on a variety of economic and non-economic factors and future performance is difficult to predict. The forecast given below is not based on a complex economic model, but is intended to propose a rough idea, thereby suggesting the direction in which the market is likely to move. This forecast is based on a correlation between past market growth and growth of base drivers, such as house price growth, GDP growth and long-term interest rates. Any currency conversions used in the following information have been calculated using constant 2005 annual average exchange rates. For the purpose of the data, Asia-Pacific comprises of Australia, China, India, Japan, South Korea, Singapore, and Taiwan. Europe comprises Belgium, the Czech Republic, Denmark, France, Germany, Hungary, Italy, the Netherlands, Norway, 34 1 Insurance Industry in India

Poland, Russia, Spain, Sweden, and the United Kingdom. The Americas comprises the US, Canada, Brazil, and Mexico. The global market comprises Asia-Pacific, Eu- rope, and the Americas (Datamonitor).

Illustration 1: The illustration below gives key highlight and a comparison between the Indian, Asia-Pacific, and Global Insurance Market.

Criteria Indian Asia Pacific Global Insurance Insurance Insurance Market Market Market

Total Gross Premiums in 2005 $ 25.1 Billion $ 763.5 Billion $ 3150.7 Billion and CAGR for the 5 year period and 15.3% and 2.5% and 5% (2001 to 2005) Most lucrative segment in 2005, Life Insurance, Life Insurance, Life Insurance, Premium written, Equivalent to $ 20.2 Billion, $ 574.4 Billion, $ 1,815.6 billion, what % of market value 80.6% 75.2% 57.6% Performance of the market, Performance Performance Performance Anticipated CAGR for the forecasted to forecasted to forecasted to 5 year period, decelerate, 10%, accelerate, 4.3%, decelerate, 4.9%, Market Value by the end of 2010 Gross premium Gross premium Gross premium of $ 40.5 billion of $ 941.5 billion of $ 3,997 billion

Figure 18: Illustration 1 – Key highlights of the Indian Insurance vis-à-vis the Asia Pacific and Global Insurance Markets (Datamonitor)

Illustration 2: The illustration below gives the insurance market value in USD Billion for the market in India vis-à-vis that of Asia Pacific and the World. Note: The Market Value measured in $ Billion represents the amount of premium collected by the respective industry in $ Billion. If one gives a quick glance at the graph, one might feel that the Indian Insurance Market forms a fair proportion of the Asia-Pacific Insurance Market, which in turn contributes to a fair amount of the Global Insurance premium. However, a closer look would reveal that the vertical axis scale is logarithmic, implying the units in which the scale proceeds are not constant, in fact represent a geometric progression. I had to make use of this scale, in order to be able to view the market value of the Indian Insurance on the graph, which was almost invisible in a constant distance scale. However, before one jumps to conclu- sions, one would have to note that for comparison sake, all premiums have been converted into USD. Thus there are two points to note from this graph [a] The Indian In- surance Industry is in a highly nascent stage in the global scenario, as is vivid by the 1.5 Status Quo – The Indian Market as-is vis-à-vis other Markets 35 proportion of premium with respect to that Asia-Pacific and consequently with respect to that of the Global Scene. This goes in lines with the low penetration of Insur- ance in India (being 2.53% of the GDP). [b] However, the graph further amplifies the starkness of comparison because all figures are in dollars and thus ignoring the purchasing power parity concept and the fact that tariffs were controlled during this period that left companies with limited choice to determine prices based on good underwriting skills, and risk management techniques.

Figure 19: Illustration 2 – Market Value Comparison Chart (Datamonitor)

Illustration 3: Depicts the Market Value comparison between the Indian, Asia Pa- cific and World Insurance Markets with respect to growth rates of premiums using CAGR (Compounded Annual Growth Rate) This graph depicts that the Insurance premium growth rate of India is greater than that of the Global rate which in turn is greater than the Asia-Pacific rate, while of course the base is smaller (as we have seen in the previous illustration). The Indian insurance market grew by 14% in 2005 to reach a value of $ 25.1 billion. The compound annual growth rate of the market in the period 2001–2005 was 15.3%. The Asia-Pacific insurance market grew by 3.7% in 2005 to reach a value of $ 763.5 billion. The compound annual growth rate of the market in the period 2001–2005 was 2.5%. The global insurance market grew by 4.7% in 2005 to reach a value of $ 3,151 billion. The compound annual growth rate of the market in the period 2001–2005 was 5% (Datamonitor). 36 1 Insurance Industry in India

Figure 20: Illustration 3 – Market Value (% Growth) Comparison Chart (Datamonitor)

Illustration 4: This illustration depicts the share of life and non-life insurance in each of the markets – India, Asia Pacific and World.

Figure 21: Illustration 4 – Market Segmentation – Life & Non-Life (Datamonitor) 1.5 Status Quo – The Indian Market as-is vis-à-vis other Markets 37

Illustration 5: Depicts the Indian Insurance’s contribution to the Asia Pacific Mar- ket Value as a percentage of premium, and in turn Asia Pacific Insurance contribution to the Global Insurance Paradigm as a percentage of premium. It gives geography- based market segmentation. Graph [a] indicates that India accounts for 3.3% of gross premiums written within the Asia-Pacific insurance market. In comparison, China generates a further 7.9% of Asia-Pacific market value.

Figure 22: Illustration 5 – Market Segmentation – By Geography (Datamonitor)

Graph [b] indicates that the Americas account for 39.9% of gross premiums written within the global insurance market. In comparison, Europe and Asia Pacific generate a further 35.8% and 24.2% respectively of global gross premiums written. Thus India accounted for 0.7986% of the global gross premiums written in 2005. 38 1 Insurance Industry in India

A Snapshot of the Competitive Landscape [a] The competitive landscape of the Indian Insurance Market India’s large rural population is migrating to urban areas, creating a large “new customer” demographic for India’s insurance companies. India’s booming economy is also conducive to a positive performance from insurance companies. India’s leading insurance company is the Life Insurance Corporation of India (LIC). The company has more than 2,000 branch offices located all over India, with its corporate office in Mumbai. India’s second largest insurance company and its largest non-life insurance company, New India Assurance, is India’s first entirely Indian-owned general insurance company. The company’s revenue for the fiscal year 2005 increased 37.5% on the previous year to reach a 2005 of $18.6 billion. India’s public sector general insurance companies are in the process of restructuring their operations to cope with the competitive pressures unleashed by the private players.

[b] The competitive landscape of the Asia-Pacific Insurance Market Japan’s life insurance market continues to dominate Asia-Pacific’s insurance landscape. However, the declining birth rate and aging population of Japan have created a substantial alteration in the insurance needs of the Japanese. As the consumer demographic diversifies, companies need to widen their insurance packages, particularly with regard to life insurance. Nippon Life Insurance Company, the leading insurance company in Japan and Asia-Pacific, is responding to this by focusing more on their medical insurance plans as opposed to death protection. Nippon’s revenue in the fiscal year ending March 2006 reached $ 62.9 billion; this represents a 6.5% increase on the previous year, a recovery from the declining revenues Nippon Life Insurance Company faced in the previous fiscal year. Income from insurance and reinsurance premiums constituted 70% of the company’s revenue. Dai-Ichi Mutual Life Insurance Company, Asia-Pacific and Japan’s second largest insurance company, had 11.5 million individual insurance policies in force in the fiscal year ending March 2006. The company’s premium income was $ 30.9 billion, a 4% fall on the previous year, although its total revenues rose by 6% to $ 45.9 billion.

[c] The competitive landscape of Global Insurance Market Fiscal year 2005 was marked by the impact of hurricanes in the US and other natural disasters, which threatened earnings for insurers. This followed a year of below average major damage costs in 2004. Allianz Group is one of the leading companies in the global insurance market. In fiscal 2005, its gross premiums written in property and casualty increased by 0.6% to 1.5 Status Quo – The Indian Market as-is vis-à-vis other Markets 39

$ 54.8 billion, while life and health statutory premiums rose by 6.5% to $ 59.8 billion. Allianz considers Europe to be its core market, and France, Germany, and Italy showed strong growth in premiums written. Another major player in the global market is AIG. In fiscal 2005, it reported that in its general insurance division net premiums written had increased by 3% on 2004, to reach $ 41.9 billion. The group has an extensive international property and casualty insurance operation, and also a personal lines business focused on high net worth clients and car insurance. In its life insurance and retirement services business, premiums, deposits, and other income amounted to $ 66.4 billion, a marginal decrease on the previous fiscal year. Both Allianz and AIG have partnered with Indian counterparts and have ventured into the Indian foray – Allianz with the Bajaj group (the biggest producer of two wheelers in India) and AIG with the Tata Group (one of the biggest conglomerates in the country).

Illustration 6: Depicts market value forecast in $ billion for the Indian Insurance market vis-à-vis the Asia Pacific and Global Insurance market. It suggests; in 2010, the Indian insurance market is forecast to have a value of $ 40.5 billion, an increase of 61.3% since 2005. In 2010 the Asia-Pacific insurance market is forecast to have a value of $ 941.5 billion, an increase of 23.3% since 2005. In 2010, the global insurance market is forecast to have a value of $ 3,997 billion, an increase of 26.9% since 2005.

Figure 23: Illustration 6 – Market Value Forecast – 2010 (Datamonitor) 40 1 Insurance Industry in India

Notice the use of the logarithmic scale here as well, in order to permit viewing of the Indian market vis-à-vis the Asian and World.

Illustration 7: Suggests the market value forecast up to 2010, in terms of the compounded annual growth rate (CAGR). The CAGR of the Indian Insurance market in the period 2005–2010 is predicted to be the highest at 10%, followed by the Global Insurance CAGR at 4.9%, and the Asia Pacific CAGR at predicted to be 4.3%. The smaller base obviously for the CAGR in India justifies the higher growth rate; however, the current CAGR from 2000–2005 for India stood at 15.3%. The decrease in the relative CAGR from 15.3% to 10% for the Indian insurance market can be explained because the base has obviously increased for India from 2001 to the new point of comparison in 2005; thus an apparent reduction in CAGR is justified.

Figure 24: Illustration 7 – Market Value (%Growth) Forecast – 2010 (Datamonitor)

Illustration 8: Projects the development of insurance penetration in the life area across continents and selected countries over the years 2003 through 2005. Insurance penetration is measured as the ratio (in percent) of the premium to the GDP. Insur- ance penetration for a country is a measure depicting reach. Interesting facets to note for the same are: the world life insurance penetration stood at 4.34%, the US at 4.14%, Germany at 3.06%, Asia at 5.16%, Japan at 8.32%, Taiwan remarkably high at 11.17%, China at 1.78%, India at 2.53% and Mexico at 0.68%. 1.5 Status Quo – The Indian Market as-is vis-à-vis other Markets 41

Figure 25: Illustration 8 – Insurance Penetration Comparison Chart in the Life Insurance Area (IRDA)

Illustration 9: Projects the Insurance Density comparison chart for the life insurance area across continents and selected countries. Insurance density is defined as the insurance premium per capita or the ratio of the insurance premium of the nation to

Figure 26: Illustration 9 – Insurance Penetration in the Non-Life Insurance Area for the years 2003 through 2005 (IRDA) 42 1 Insurance Industry in India the population of the nation. Two points to note are [a] the scale used in the illustration below is logarithmic scale to permit visualization of the figures of countries like India, China, Egypt and Latin America. [b] However, since the figures depict the insurance density in dollars, it does not factor in the purchasing power parity concept. The Insurance density (in 2005) for the world life stood at 299.5, the US at 1753.2, Germany at 1042.1, Asia at 149.6, Japan at 2956.3, Taiwan remarkably high at 1699.1, China at 30.5, India at 18.3 and Mexico at 49.9. It is interesting to note that a “small” country like Taiwan has such high insurance penetration and insurance density rates. Although Mexico had a very low penetration rate in the Life Area 0.68%, its insurance density is almost 3 times of India.

Illustration 10: Projects the Insurance penetration rates comparison chart for the non-life insurance area for the years 2003–2005. The world over, insurance penetration in life is higher than that of non-life areas.

Figure 27: Illustration 10 – Insurance Density in the Life Insurance Area for the years 2003 through 2005 (IRDA)

Illustration 11: Projects the insurance density development comparison chart for non-life areas. In general, the insurance density for non-life is lower than that of life. In the case of India it was as low as 4.4 for non-life in 2005. 1.5 Status Quo – The Indian Market as-is vis-à-vis other Markets 43

Figure 28: Illustration 11 – Insurance Density in the Non-Life Insurance Area for the years 2003 through 2005 (IRDA) Chapter 2: Life Insurance

“Industry outlook and the Main Players” for life insurance in India discusses the market share, the profits for life insurers and exemplifies the strategies that work for them by discussing the generic approaches of the Life Insurance Corporation of India. The next sub-chapter discusses empirical data via responses and views of insurance executives and knowledge leaders on the outlook of insurance over the next 5 years. The “Urgent Needs and Customer Segmentation” reveals the socio-economic-classification (SEC) used to cate- gorize the population of India, which serves as an input to the customer segmentation exercise. It throws light on the HPI (Household Potential Index) which overcomes the drawbacks of SEC by categorizing individuals based on their consumption propensity rather than a rigid approach of the SEC which may not correspond to the lifestyle consumption patterns of a household. Fur- thermore, customer segmentation at a micro level has been explicated through best practices. The chapter on “Product” discusses common life insurance policies in force in India, riders that can be judiciously used to offer customized solutions, best practices in product design and finally best practices in the way product offerings are structured. “Pricing” discusses the importance of combining cost-plus pricing with a outside-in customer-oriented view on pricing. “Distribution Channels” throws light on various lateral distribution channels with a focus on the potential of bancassurance and the role of agents. Finally, “Communication Strategy” discusses television advertising as a key communication element for insurance in India, concluding with a TV ad-analysis. 46 2 Life Insurance

2.1 Industry Outlook and Major Players

Introduction When it was part of the British Empire, India with its splendor and natural riches, was known as the “jewel in the crown.” Today, foreign insurance companies, especially those in the life sector, tend to view India in a similar, if less lyrical light. With its rapidly expanding economy, burgeoning middle class and overall population of more than a billion, India is seen as a land of promise (O’Connor). Joint venture is recognized as the preferred route into the Indian insurance market, for reasons beyond the foreign direct investment cap. Joint ventures help in combining local knowledge, distribution network and infrastructure with global experience. The year on year growth for private insurers in the life insurance industry has exceeded 100%, with private insurers now gaining 20% of the market share. Peter Alexander Smyth, the regional general manager of ING Asia Pacific said to this outstanding growth “Outside managers are likely to be unused to high growth rates like these; however, Indian managers are unfazed by this”; which is why although foreign players bring in a lot of experience, managers feel this may not be everything. It is essential to think locally in a dynamic environment and understand the rhythm and cycles of the local market before exacting a business model from the foreign location onto a new market. This discussion helps us to further the base established in the previous chapter with respect to the kind of internationalization strategy that a foreign player must pursue, wherein we concluded it should be “business transfer” with a “joint venture”. The Life Insurance Industry in India recorded a premium income of Rs.1058.7 billion (1Euro is approximately Rs. 55) during 2005–2006 as against Rs. 828.5 billion in the previous financial year recording a growth of 27.78%. The contribution of the first year premium, single premium and renewal premium to the total premium was Rs. 212.7 billion (20.09%), Rs. 175.09 billion (16.54%) and Rs. 670.90 billion (63.37%), respectively. The private sector with a total premium of Rs. 150.8 billion formed 14.25% of the total premium. The Life Insurance Corporation (LIC) which is the only public sector company in the life insurance area, with a premium of Rs. 907.9 billion formed the remaining 85.75% of the total premium underwritten in the industry. Overall, the size of the life insurance market increased on the strength of growth in the economy and concomitant increase in per capita income (IRDA).

Market Share With these premiums underwritten, the private sector and the LIC experienced a 95.19% and 20.85% growth respectively, over the previous year (2004–2005). The 2.1 Industry Outlook and Major Players 47 higher growth for the private insurers needs to be viewed in context of the lower base. However, the private insurers have improved their market share from 9.33% in 2004–2005 to 14.25% in 2005–2006. Please see the illustrations below that reflect the market share development over the years 2004–2005 to 2005–2006 for the LIC and private insurers with respect to the first year premium, renewal premium and total premium.

Figure 29: Market Share Development for first year, renewal and total premium for Life Insurers (IRDA)

Increase in the renewal premium is a good measure of the quality of the businesses underwritten by the insurers. It reflects increase in their persistency ratio and enables insurers to bring down their overall costs of doing business. The renewal premium underwritten by the life insurance industry recorded a growth of 18.46% during 2005–2006 as against 20.85% in 2004–2005. The private insurers and LIC reported growths of 122.56% and 14.32% respectively during the year. The proportion of the linked and non-linked business has changed to 44.78% and 55.22% respectively in 2005–2006 as against 32.54% and 67.46% for linked to non- 48 2 Life Insurance linked in 2004–2005. This shift in preference towards linked products has coincided with the positive developments in the stock market. New policies issued by life insurers showed an overall growth of 35.29% in 2005–2006 as opposed to a decline of 8.44% in the previous year. Please see the illustration below depicting the new policies issued by life insurers in India. The first bracket “y-o-y” indicates year on year growth over the previous year, and the second bracket indicates the market share (with respect to the number of new policies issued) for that particular year.

Insurer 2004–2005 2005–2006

Private 2233075 (34.62% y-o-y) (9% of total) 3871410 (73.37% y-o-y)(11% of total) Sector LIC 23978123(–11.09% y-o-y) (91% of total) 31590707 (31.75% y-o-y) (89% of total) Total 26211198 (–8.44% y-o-y) 35462117 (35.29% y-o-y)

Figure 30: New Policies Issued – Life Insurers, Development and Market Share 2004–2005, 2005–2006 (IRDA)

Management in Action: Customer Satisfaction Survey Tata AIG Life Insurance Company aces the VOICE Customer Satisfaction Survey A survey conducted by the Voluntary Organization in Interest of Consumer Edu- cation (VOICE) revealed Tata AIG Life Insurance Company (Tata AIG Life) as the clear winner in terms of customer satisfaction in the life insurance category in 2006. This was India’s first-ever customer satisfaction study for the insurance sector. Furthermore, the survey revealed that Tata AIG Life had a high recall as a reputed brand name. The ability to provide innovative and customer-focused service such as allowing the maximum grace period for premium payment has not only further distinguished Tata AIG Life from other life insurance companies but also appealed to consumers. Commenting on the survey results, Trevor Bull, managing director, Tata AIG Life Insurance Company, said, “The quest of the company has always been to be the best at what we do rather than adopting a simplistic market share at all costs approach. Achieving this VOICE recognition required huge effort from Tata AIG Life team; however retaining the number one position will be tougher. Being ranked the best in the life insurance category by an independent consumer group 2.1 Industry Outlook and Major Players 49

is an encouraging and fitting manifestation of our successful completion of five years of service in the insurance industry. We look forward to the challenges that lie ahead and are confident of maintaining and improving further our current standards of service and efficiency.” The survey, which was conducted across eight cities and covered around 1,250 life insurance customers, evaluated the different life insurance companies on the parameters of tangibility, problem solving ability, reliability, responsiveness, assurance and empathy. The objective of the survey was to understand and measure overall customer satisfaction within the insurance sector. The Voluntary Or- ganization in Interest of Consumer Education (VOICE) is a voluntary action group, whose objective is to protect and further the interests of the consumer. Tata AIG Life Insurance Company (Tata AIG Life) is a joint venture company, formed by the Tata Group and American International Group, Inc (AIG). Tata AIG Life combines the Tata Group’s pre-eminent leadership position in India and AIG’s global presence as the world’s leading international insurance and financial services organization. The Tata Group holds 74 per cent stake in the insurance venture with AIG holding the balance 26 per cent. Tata AIG Life provides insurance solutions to individuals and corporate. Tata AIG Life Insurance Company was licensed to operate in India on February 12, 2001 and started operations on April 1, 2001 (Press).

Profits for the Life Insurers and the Strategy of LIC The Life Insurance industry is capital intensive and insurers are required to inject capital at frequent intervals to achieve growth in premium income. Given the high rates of commissions payable (22.52% of the premiums was the industry average in 2005–2006), expenses towards setting up operations, training costs incurred towards developing the agency force, creating a niche for its products, achieving reasonable levels of persistency, providing for policy liabilities, and maintaining the solvency margin, make it difficult for insurers to earn profits in the initial 5–7 years of their operations. SBI Life Insurance Company was the first private insurer to turnaround with a net profit of Rs. 20.3 million in 2005–2006. SBI (State Bank of India) is one of the largest banks in the country; thus bancassurance continued to be SBI Life’s key distribution channel contributing to 43% of the premium underwritten, consequently massively reducing costs of operations, leading to an earlier break even. All private insurers reported a deficit in their revenue accounts 2005–2006 and thus necessitat- ing further injection of capital by shareholders. LIC continued to report a surplus of 50 2 Life Insurance

Rs. 127 billion, of which Rs. 6.2 billion was transferred to the Government of India in tune with the provisions of Section 28 of the LIC Act, 1956 (IRDA). LIC, which has been in existence since 1956, is the largest life insurer of the country and had a market share of 85.75% in 2005–2006. Despite liberalization and thus increased competition on account of new entrants, LIC continues to maintain its position, profitability, government obligations and is also successfully achieving mammoth growth rates despite its colossal base. A critical analysis of LIC’s strategy in lieu of the generic methods of competition proposed by Michael Porter would thus be of immense help as it serves amongst areas of learning for the rest of the industry.

Management in Action: Best or Worst Practices – LIC’s Strategies On opening up of the insurance market, whichever offers the same product at the lowest premium would thrive and prosper. This is “cost leadership” in insurance. LIC has both advantages and disadvantages in this aspect with respect to new entrants. Its first mover advantage, existing distribution network through established agency system and walk-in business potentials gives a degree of cost advantage. Its rigidities in organizational structure, systems in place, state of technology in conflict with the existing level of manpower may give it a cost disad- vantage. However, there are economies of scale in the huge number of policies it has achieved, and economies of scope, especially in the case of renewal premium and new related products. (I will briefly discuss LIC’s product portfolio in chapter 2.3.) The investment income arising out of deployment of premium income will contribute to cost leadership, in other words lowering of premium. If, however, new entrants enter the market with state-of-the-art investment technology and successfully append their premium income to other investible resources to match the size of the LIC investments, then LIC’s cost leadership will be under pressure. This will typically be the case if banks and development banks come into competition with LIC. The second generic strategy is one of “differentiation”. LIC has earned phenomenal brand equity as the life insurer of the nation. Any new entrant has to compete with this cardinal differentiation, where LIC scores an advantage in the short and medium term. For price sensitive customers, LIC has policies which can be catered for a very low premium like LIC’s Term Assurance policy, thus achieving a “cost focus”. Any new entrants serving such customers will be fraught with high transaction costs and will not be able to match premiums. “Jeevan Surabhi”, “Money Back Policy”, “Beema Sandesh”, “Jeevan Griha”, “Jeevan Shri” are examples of LIC marketed policies with various unbundling, 2.1 Industry Outlook and Major Players 51

rebundling of risks and addition of frills to make them more attractive to segments of customers, thus achieving a “differentiation focus”. The fifth competitive strategy “speed” without sacrificing any of the aforesaid advantages can be achieved by pro-actively positioning itself into the top echelon, through strategic alliances and corresponding arrangements with – for example the Indian Post etc, and restructuring its business around the core competencies (Mishra and Mishra).

The Players The various players in the Indian life insurance industry include one public sector player – The Life Insurance Corporation and 15 private insurers (since liberalization in 2000), which include several joint ventures between foreign insurance players with Indian companies. They are as follows in descending order of premiums underwritten (premiums underwritten in 2005–2006 are mentioned in brackets) – ICICI Prudential (Rs. 42.6 billion) – Bajaj Allianz (Rs. 31.3 billion) – HDFC Standard Life Insurance (Rs. 15.69 billion) – Birla Sun Life Insurance (Rs. 12.59 billion) – SBI Life Insurance (Rs. 10.75 billion) – Tata AIG Life (Rs. 8.80 billion) – Max New York Life (Rs. 7.88 billion) – Mahindra Kotak Life (Rs. 6.21 billion) – Aviva Life (Rs. 6.00 billion) – ING Vysya (Rs. 4.25 billion) – Reliance Life (Rs. 2.24 billion) – Met Life (Rs. 2.05 billion) – Sahara Life (Rs. 0.27 billion) – Shriram Life (Rs. 0.103 billion) – Bharati AXA ( no premiums in 2005–2006, as 2006 was its first year of operation)

Conclusion The economy and capital markets play a dominant role in the life insurance market; this is the supply side phenomenon. Improving operations, proper distribution, after- sales services and a full service product range can only improve the demand-side phenomenon. The hallmark of life insurers operations historically has been conser- 52 2 Life Insurance vatism. Life insurers tend to enjoy favorable gains in investments, mortality and office productivity, which beget predominantly solid balance sheets. Given the relatively inelastic demand for life insurance products, companies seem largely immune to external changes in markets or in the economy. However, although the market conditions affect firms to varying degrees, the overall economic environment’s impact on the life insurer’s performance is potentially significant, a critical issue as this performance is of direct consequence to various stakeholders – policyholders, benefici- aries, investors, capital markets and government. In the life insurance industry, there are evident trends towards emphasis on returns on investment, tax efficiency, and on product performance. Projections for social security, national insurance systems and rising longevity are leading to an encouragement of retirement savings (Mishra and Mishra). Moreover, the introduction of ULIPs (Unit Linked Insurance Plans) has been the most significant innovation in the life insurance industry since the product design of ULIPs addresses several concerns like liquidity, flexibility and transparency and at the same time providing increased autonomy (and corresponding risk) to the insured. It may be interesting to note that in 2005, only a small portion of the life insurers’ business was reinsured; however, this may be offset by the increased risk borne by policyholders, through the increase in ULIPs in the Life Insurance Busi- ness. All in all, consumer demands in the life insurance industry are tending to encourage a focus on the marketing of individual investment vehicles with a more holistic view of overall financial management.

2.2 Market Opportunities and Challenges – Empirical Results and Analysis

Introduction

This section highlights the results from the survey questionnaire (please see appendix). The purpose of the survey was to understand the esteemed opinion of insurance executives on the emerging opportunities and challenges and the outlook for the next 5 years for the insurance industry in India. The survey was sent to the senior management of various insurers in India, faculty at the best insurance institute in India: Na- tional Insurance Academy, associates employed by the regulatory body and the decision maker: IRDA and other opinion leaders and insurance knowledge experts. I developed the questionnaire based on current relevant research and an understanding of debatable issues pertinent to the development and evolutionary path for the insurance market in India. In order to make the survey holistic and accommodate for various 2.2 Market Opportunities and Challenges – Empirical Results and Analysis 53 facets contributory to the emerging opportunities and challenges and outlook for the Indian insurance milieu, the survey was developed around six primary sections: [1] Tariffed vs. De-tariffed regime, [2] Foreign players’ participation, [3] Health Insur- ance, [4] Life Insurance, [5] IRDA: its role and developments and [6] Innovation and Best Practices. Respondents were asked to project their opinion as applicable (For example life insurers who do not have health insurance products, would obviously leave the “health insurance” section out). On account of the limited time available and the exhaustiveness of the survey, the number of responses per industry was limited. While this means that the data cannot be statistically projected (for per industry basis); however, majority of the questions in the survey were expert opinion related or subjective, which help divulge the inclination of industry experts on the whole. Thus a subjective elucidation of the same is deemed essential; else one fears loss of substance while attempting to convert the information from the subjective to the objective. Whilst sections 1, 2, 5 and 6 are applicable to the insurance industry in general and thus both health and life insurance, section 3 is explicitly structured around health and section 4 around life insurance. In this chapter, I will depict the views as per the responses to section 4. In chapter 3.2, I will present the opinions as per responses to section 3. And finally, the responses to section 1, 2, 5 and 6 would be illustrated in chapter 4.1 (which is “Future Outlook for the Insurance Industry in India”). Here some statistical methods have been used on account of a reasonable number of responses, which includes responses of both health and life insurers, as these questions (1, 2, 5 and 6) were by and large pertinent to both industries. For the results below, please refer to the corresponding questions of section 4 of the survey in the appendix.

Results To 4[a], the CEO of one key life insurer responded that their customer segmentation includes individuals between the age of 0 and 50, living in metros and tier-2 towns and earning incomes across the range. He added that their product and distribution suite are “multi-crossing” across several segments, implying that a product being offered to one customer segment, may also be offered to another segment and that several such crossovers exist across their entire gamut of products. However, to cater to the rural and social sector requirements, they have a specialist rural/social sector dis- tributions and products unit in place. Whilst, most products are offered to individuals till the age of 50, and after that age limit, only renewals are possible, some insurers have elevated the age limit to draw a policy from 50 years to 60 years. 54 2 Life Insurance

4[b]: the claims to premium ratio for the main life insurance product of life insurers averages at 50%. 4[c]: the retention rate for life insurance products in general ranges from 70% to 85%. The purpose of understanding the retention rate in life insurance is to reveal lapses in a business where terms of policies are obviously longer than those for motor or health insurance. Moreover, it is an industry wide known fact that a policyholder’s act of ceasing to pay the premium before the term ends or before maturity has a higher direct negative financial impact on him compared to the insurer. 4[d]: While one industry expert unaffiliated to an insurance company stated that on an average, frauds detected by a life insurer in a year are about 50, the CEO of a life insurer disclosed that his company detected in excess of 400 frauds across all product lines, annually. 4[e]: Since there were multiple views on this, I would present the views of insurers as opposed to those of faculty or members of the group of respondents not affiliated directly to the insurance companies, on grounds that senior management can opinion- ate on the course of the business environment as it happens. Thus, the most urgent requirements for the Indian life insurance industry were in the order as follows, 1 being the most urgent requirement: [1] Increasing professionalism amongst agents and brokers, [2] reaching out (selling policies) to the segment of society that is below the poverty line, [3] moving from the perception of life insurance policies solely as tax savings vehicles to investment vehicles, [4] right pricing strategies based on accurate risk assessment (differences between good and bad risk) and underwriting skills, [5] not punishing the rightful claimant on account of the misconduct of fraudulent claimants, [6] customer satisfaction with respect to efficient and quick claims settlement, [7] use of CRM tools and data warehousing for linking historical customer information and thereby coming up with accurate assessments, [8] tracking fraudulent claims, [9] simplicity of contracts and contract language, [10] developing life insurance products that also incorporate other functionalities, like ULIPs, credit insurance, children’s marriage savings plans etc. The above also reflect primarily the views of the CEO respondent in 4[d]. It is thus fascinating to note that despite 400 frauds detected across all product lines annually in his company, contrary to what one would intuitively believe to be on his radar for the industry, he ranks “tracking fraudulent claims” as number 8. Thus implying, something as seemingly urgent as this, is essential but not deemed as essential as the 7 other factors ranked above it. 4[f]: Most effective mediums of advertising/promotion for the core life insurance products are ranked as follows, with 1 being the most effective channel drifting downwards: [1] Newspaper, [2] Television, [3] Outdoors (billboards etc), [4] Maga- zines, [5] Radio, [6] Internet. However, some respondents did mention in the “others” 2.2 Market Opportunities and Challenges – Empirical Results and Analysis 55 column, that the most effective promotional activities are realized by distribution partners and through word of mouth recommendations, adding customers from similar reference groups, like family members or organization circle or friends. 4[g]: Life insurers are opting for several channels of distribution to maximize reach and optimize penetration. Respondents had the following views towards the effectiveness of 7 different distribution channels on a “likert scale” that runs from least effective [1] to most effective [5]. The primary views included: more effective [4] or most effective [5] for bancassurance, neither effective nor ineffective [3] for telcassurance, less effective [2] to neither effective nor ineffective [3] for online distribution, neither effective nor ineffective [3] for malls and supermarkets (this channel is still being test- ed for majority of the insurers). Certain extremes exist in opinions, with some respondents claiming that no life insurer has a tie up with postal services yet, while some deeming it to be neither effective nor ineffective [3]. This may technically indicate similar things, as the survey has not provided for an option to check a NA (not applicable) box, thus a interfacial deficiency of the survey, unless it was penned down next to it. Automobile tie-ups on the other hand was another contradiction, where one insurer responded that it was not applicable to life insurers, while some deemed it more effective [4], which are obviously two very different aspects. Another area mirroring con- tradicting views is medical tie-ups, with some respondents rating it [1] least effective while others rating it [4] more effective. However, this needs to be viewed in light of the necessity of existential infrastructure in place to appropriately use medical tie ups in an efficient manner for life insurance products, via cross selling life insurance policies to primarily health insurance customers. Furthermore, question 4[g] requested respondents to answer in lieu of their individual companies’ competencies, thus clearly justifying outliers or a so-called extremism in opinion. Having said that, the responses on the life insurance industry reveal the following key highlights: 1. New policies are issued to customers between ages 0 and 50, with some insurers elevating the age limit to 60. 2. Many crossovers exist between customer segments and the products and distribution suite. 3. Social and rural obligations necessitate a separate specialist rural/social distribu- tions and products unit. 4. Claims to premiums ratio average at 50%, much more positive figures than health insurance figures will later reveal. 5. Retention rate for life insurance policies ranges between 70 and 85%. 6. Frauds are company dependent, and are as high as 400 frauds across product lines (annually) for some companies. 56 2 Life Insurance

7. Increasing the professionalism amongst agents and brokers, increasing reach to the segment of society that is below poverty line and moving from the perception of life insurance policies seen as tax savings vehicles to protection, savings and investment vehicles are the three most urgent requirements for the life insurance industry in India. 8. Promotion through distribution partners, word of mouth recommendations, news- papers and television are the most effective channels of communication. 9. Bancassurance is deemed as the most effective distribution channel over and above the conventional agency model; malls and supermarkets are growing as alternative channels of distribution but are still in the testing stage for majority of the insurers.

2.3 Urgent Needs and Customer Segmentation

Socio Economic Classification of India – Urban and Rural India “Life insurance business” which means the business of effecting contracts of insurance upon human life, is the most lucrative category of insurance globally with the highest penetration and reach. Moreover, the IRDA recently framed regulations on the obligations of insurers towards the rural and social sectors, binding all insurers to fulfil their requirements on an annual basis. 18% of the total policies in the first 6 years of operation of a Life Insurer must be policies extended to lives in rural areas. The Life Insurance Corporation of India (the leading Life Insurance Company in In- dia) has been extending coverage to the economically weaker sections of the society through various social security group schemes targeting masses and non-conventional groups in the unorganized sector. Coming up next is an essential examination of the possible customer segments, by uncovering the foundational Socio-Economic Classification (SEC) of India; this is of consequential importance for the following reasons. First, empirical evidence shows that the Indian Life Insurance penetration (percentage of the premium to GDP) is 2.53% (which is below the global average of 4.34%), thus implying huge potential in the middle and lower segment of society. Second, the rural and social obligations imposed by the authority necessitate an un-biased examination of the overall market. Finally, the actuality that serving the rural/weaker sections is, if truth be told, giving impetus to both market share and profitability of the life insurers in India, making the customer segments insurers would have earlier ignored, an indispensable current priority. 2.3 Urgent Needs and Customer Segmentation 57

The SEC Classification SEC, that is Socio-economic Classification is a classification made in the urban and the rural sector, to identify the consumption pattern and the household purchase behavior. Based on education levels, occupation, type of household, the population is divided into separate bands, called the Socio-economic Classes. The Urban Sector in India is divided into SEC A1, A2, B1, B2, C, D, E1, and E2. These classes are calculated as a function of Educational qualifications of the Chief Wage Earner1 and his occupation. The table below details the categorization based on the various criteria.

Education th and 12 th Illiterate 4 years of School 5–9 years of School SSC/HSC (equivalent to 10 Grade respectively) SSC/HSC but not Graduate Graduate/Post- Graduate General Graduate/Post- Graduate Professional Occupation

Unskilled Worker E2 E2 E1 D D D D Skilled Worker E2 E1 D C C B2 B2 Petty Traders E2 D D C C B2 B2 Shop Owners D D C B2 B1 A2 A2 Business/Industrialist with Number of Employees [a] None D C B2 B1 A2 A2 A1 [b] 1 to 9 C B2 B2 B1 A2 A1 A1 [c] 10+ B1 B1 A2 A2 A1 A1 A1 Self-Employed/ DDDB2B1A2A1 Professional Clerical Job/Salesman DDDC B2B1B1 Supervisory Level D D C C B2 A2 A2 Officer/Executives CCCB2B1A2A2 – Junior Officers/Executives B1 B1 B1 B1 A2 A1 A1 – Middle, Senior Figure 31: SEC for Urban India (Exchange4Media)

1 Chief Wage Earner = CWE and is the person who contributes the most to the household expenses 58 2 Life Insurance

Similarly, the Rural Sector in India is divided into SEC R1, R2, R3 and R4. These classes are calculated as a function of Educational Qualifications of the CWE (Chief Wage Earner) and the type of the household he stays in – Pucca (Solid), Semi Pucca (Semi Solid Houses) or Kaccha (Houses made of weak material like earth or hay). Please see the table below for the rural SEC categorization.

Education of the Type of House Chief Wage Earner (CWE) Pucca Semi-Pucca Kutcha

Illiterate R4 R4 R4 Self-learning /No School R3 R4 R4 Up to Grade 4 R3 R3 R4 Up to Grade 9 R3 R3 R4 SSC/HSC R2 R3 R3 College R1 R2 R3 Graduate/Post-Graduate General R1 R2 R3 Graduate/Post-Graduate Professional R1 R2 R3

Figure 32: SEC for Rural India (Exchange4Media)

More generally speaking, urban Indian households have broadly been classified as ✓ ‘high’ socioeconomic class referring to SEC A & SEC B ✓ ‘mid’ socioeconomic class referring to SEC C, and ✓ ‘low’ socioeconomic class referring to SEC D & SEC E.

However, an analysis of the SEC classification indicates that consumption patterns may not be completely reflected in an education vs. occupation chart and lifestyle patterns would thus reflect the consumption patterns more closely and effectively than the income levels.

The Drawbacks of SEC “Socio Economic Classification (SEC) is often said to be lacking in discriminating the truly potential households and audience. Also, as we recognize, SEC is an indicator or a pointer towards the “likely to consume” set but often defies the reality of not pointing clearly towards the “consuming class”, which is the purpose of any targeting by a marketer. The drawback of using Monthly Household Income (MHI) lies in the difficulty of capturing the correct data, as the respondent is hesitant to disclose the correct MHI” (Sodhani). 2.3 Urgent Needs and Customer Segmentation 59

The various assumed variables augmenting the SEC (like durable ownership, frequency of travel by air, intensity of consuming various products and services, recent purchase date etc.) come with the negative aspect of “judgment” of the individuals concerned. This is because the variables are defined around the specific ownership of a particular product or service, which is rather subjective considering the vast spectrum of Indian preferences and micro cultures, thus also highly skewed if some individuals happen to posses those very goods or services. An alternative method which eradicates this problem will thus be discussed below.

The Concept of HPI The above argument has given rise to a more subjective (rather than objective) perspective to the calculation of SEC and thus is a debatable classification. An alternative to the traditional MHI is the concept of HPI, or Household Potential Index. Ex- perts believe that it is a more scientific method used to segregate and target the “consuming” class. HPI enables a direct comparison of the urban and rural population on the same scale. It divides the population into 3 classes: a) Upper most segment of the consuming class (the “lakhpathis” or “crorepathis” who also spend and consume) “Lakhpati” is a Hindi word used loosely to describe a person who is rich and own lakhs of rupees, where 1 lakh Rupees = 100, 000 Rupees. Similarly “Crorepati” is somebody who owns crores of rupees, where 1 crore is equivalent to 10 million or 100 lakhs. b) Middle segment which is the core target for growth of several categories, considering the rising middle class in India. c) The lower most segment, which is the “volume generator” for many FMCG categories and lower end durables and services (Sodhani).

Another advantage of the HPI method is that it permits factoring in of the premium goods. “Premium” goods are those that are “wanted by many” but “consumed by few”. Simply put, “premuimness” is defined as the inverse of penetration. If the penetration level of a good is low, it commands a higher premium. For example 41 per cent of all homes in India have Television. But only 2 per cent have a flat TV. Hence homes with a flat TV are considered to be “premium” by the HPI measure (Sodhani). Thus ‘premiumness’ thus needs to be factored in while deciding the classification in order to reflect a consumption pattern associated with lifestyle; which can be catered by the HPI calculation, but not by SEC method. The concept of HPI allocates high 60 2 Life Insurance scores for less penetrated product categories and services and correspondingly lower scores to the more penetrated or mass consumed categories. Thereby, HPI eliminates judgmental factors and is therefore a more systematic approach, making it applicable across all segments of households, from the “super affluent” to the “truly-needy”. Moreover, it obviates the need of any distinction between rural and urban households.

HPI is a holistic measure of potential, and is not just based on few durables In order to ensure that a specific ownership of a durable or consumption of a particular category of an FMCG product or services does not result in amplified scores, 50 different measures have been incorporated into the HPI system. HPI considers a wide spectrum of categories from durables, FMCGs, services, which are covered in IRS (Indian Readership Survey) and scores are assigned in a scientific and automated method to products owned, consumed and used. In addition to product categories, HPI also takes into account the key differentiating household demographics such as, highest education in the household, number of working members, education of the housewife, area occupied by the household vis-à-vis the number of people residing etc. Please take a look at the table below. Going by the definition of SEC, A1 should be the most affluent class. However this is far from reality. As per HPI, if we look at the top 1 per cent of consuming homes in India, only 39 per cent is from the upper- most SEC A1 and the remaining 61 per cent is from other SECs in Urban and Rural segments. Additionally, an interesting inference that the analysis suggests is the proximity in the affluence of SEC Urban and Rural households, which were earlier segre-

SEC Size of HPI Top 1% HPI Top 2.8% HPI Top 5.3% Segment (Size equal to (Size equal to that (Size equal to that (in %) that of SEC A1) of SEC A1 + A2) of SEC A1 + A2 + B1) consists of

A1 1 39% of A1 26% of A1 17% of A1 A2 1.8 31% of A2 28% of A2 23% of A2 B1 2.5 12% of B1 16% of B1 18% of B1 B2 + R1 5.2 10% of B2 + R1 14% of B2 + R1 19% of B2 + R1 C 6 5% of C 8% of C 12% of C D + R2 14.3 2% of D + R2 5% of D + R2 7% of D + R2 E + R3 35. 3 1% of E + R3 3% of E + R3 4% of E + R3 R4 33.8 0% of R4 0% of R4 0% of R4

Figure 33: Relation between SEC and HPI (Exchange4Media) 2.3 Urgent Needs and Customer Segmentation 61 gated; SEC R1, SEC R2 are close to SEC B2, SEC D of urban respectively. Con- versely speaking, 61 per cent of SEC A1 does not feature in the Top 1 per cent of the consuming households.

Concluding remarks on HPI and SEC Methodology Finally, another advantage that works for HPI is that HPI scores can be modified and recomputed with time. As penetration increases, products consequently lose their relative level of premium over time and hence new variables need to be introduced as and when the need is felt. For example, motorcycle, which is a growing category today, need not be one of the parameters in HPI (say 5 years hence) if majority of the consuming homes possess one in the year 2010 (Sodhani). By an astute combination of HPI with the SEC system, marketers and planner can now refine the market prioritization. From a Marketer’s perspective – whilst SEC entails understanding the “potential” of markets, HPI indicates the “consumption intensity” of markets, which can be understood from the mean HPI scores of markets.

Micro Segmentation While the SEC classification enhanced by the HPI methodology is useful for the macro segmentation of the life insurance market, these techniques cannot be deemed adequate to serve as inputs for product design formulation. These techniques must thereby be augmented by a subsequent needs analysis method (to trace the most urgent needs), thus calling for micro-segmentation within these major classifications. The primary segmentation variables for the Indian Life Insurance market are age and stage of life. While age helps estimate the ballpark for the most urgent needs, the stage of life or circumstance helps design customized products to suit the event. Says Shivaji Dam, Managing Director of OM Kotak Mahindra Life Insurance, “Any event that may change considerably the financial course of your life warrants a review of your insurance cover. These could be anything from landing with a job to getting married to having a child to taking a home loan to the retirement of one’s parents.” Debashish Sarkar, Senior Vice-President, Marketing, Max New York Life In- surance asserts: “Assessing your life insurance needs is not a one-time exercise. It is a dynamic process that must be revised as often as possible.” In fact, he argues, it is a good practice for your life insurance advisor to visit you every year, “not just to col- lect the premium for your policy, but to understand how your life circumstances have changed over the year” (N. Krishnamurthy). 62 2 Life Insurance

Management in Action: Best Practices – Segmentation HDFC Standard Life Insurance offers life plans based on the stage of the life or circumstance that one belongs to. Please see the stages and the corresponding needs that can be satiated by the products offered for the respective stages. Stages Main Needs [1] Young and Single [a] Save for a home and wedding [b] Tax Planning [c] Saving for Golden Years (retirement) [2] Just Married [a] Planning for a home/securing your home loan liability [b] Saving for a vacation [c] Saving for the first child [3] Proud Parents [a] Providing for children’s education [b] Safeguarding family against loan liabilities [c] Savings for post-retirement [4] Planning for [a] Provide for regular income post–retirement retirement [b] Immediate tax benefits [c] Lead a secure, comfortable & independent lifestyle when retired (HDFC Standard Life Insurance)

Similarly Max New York Life (MNYL) has designed its products [1] By Life Stages and [2] By needs. By life stages includes stages [a] Single, [b] Married, [c] Married with children, [d] Planning for retirement. By needs includes [a] Savings [b] Investment [c] Education for children [d] Marriage for children [e] Protection. (Max New York Life) The products of MNYL will be discussed in the following chapter.

2.4 Products

Common Life Insurance Policies in India

Insurance sector reforms have introduced structural reforms to bring competition and greater efficiency to the insurance market. The underlying idea of the insurance sector is to unleash the enormous financial assets held by households by expanding the 2.4 Products 63 range of investment options with a promise of increasing returns to the users. The unleashed funds can be used to create matching term assets. The basic customer needs met by life insurance policies are protection and savings. Policies that provide protection benefits are designed to protect the policyholders (or his/her dependents) from the financial consequences of unwelcomed events such as death, disability or long term sickness. Policies that are designed as savings contracts allow the policyholders to build up funds to meet specific investment objectives such as income in retirement or repayment of a loan. Most life insurance policies provide a mixture of savings and protection benefits. The common types of life insurance policies in force in India are as follows 1. The Endowment Assurance: with two basic variants [a] Non-participating (without profit) and [b] Participating (with profit) endowment assurance. Non-participating policy offers a guaranteed amount of money at the maturity date, in exchange of a single premium at the start of the policy or a series of premiums throughout the term of the policy. If the policyholder dies before maturity, a sum is paid on his death. Policyholder can surrender the policy before maturity and receive a lump sum (called the surrender or cash value) at the time. The policyholder can keep the policy in force without paying further premiums; in this case, a reduced sum may be granted. There is usually a provision to take a loan up to 90% of the surrender value in the policy provision. In case of participating polices, the policyholder is entitled to receive profits in the form of bonus as regular cash payments. 2. Money Back Plan is a popular savings plan providing for lump sum period at period intervals (like 20% at the end of 5 years, then 10 years, 15 years and 40% at the end of 20 years). Here too the policy can be offered in a non-participating or participating format. In case of the death of the insured, the assured sum plus an additional guarantee would be received. This kind of policy usually has no loan facility; but does have a surrender value. 3. Whole Life Assurance provides a benefit on the death of the policyholder whenever that may occur during the currency of the policy. It is a pure protection instrument providing for long-term financial protection to the dependents. Paid up value assured option may be granted in case of early death of the insured. 4. Term Assurance Policy is a measure of pure protection, however for a limited period or term. It is the cheapest policy available; generally no payment is made if the policyholder survives. These policies are structured with no “surrender value” and “paid up” policy options. 5. Immediate Annuity meets the policyholder’s need for a regular income (in exchange of a single premium) after her retirement. The policy can also be struc- 64 2 Life Insurance

tured to provide an income for a limited period of time for nominal expenses. The policy usually comes with no surrender value option. 6. Deferred Annuity; here the policyholder pays regular premiums for a period up to the specified “vesting date”, when the sum assured may be offered in full or part of the pension, also meeting any cash obligation at that time, like a housing loan payment (Bhattacharya).

Riders or Customized Solutions The riders in the Life Insurance policy have been likened to toppings of a pizza which can be ordered as per one’s needs. Just as the cost of the pizza changes by the toppings that one prefers, the cost of the policy (or the total premium) also changes with the rider that a policyholder orders for herself. The convenience of having riders in a policy eliminates the want to obtain a separate policy for each of the needs. By taking just one policy, several needs can be fulfilled by going in for several riders; thus offering a great deal of flexibility by means of a customized solution to the policyholders. The overriding factor, however, is that these riders have to be paid for and in some cases can be quite expensive. The liberalization of the insurance industry in India and the foreign entrants has triggered the importance of riders with several insurers offering riders with their base policies, thus serving as a value enhancement. A look at some of the riders would enable a clearer understanding of their role. 1. Accident Death Rider is the oldest and the most popular among several riders. Un- der this rider, the beneficiary receives an additional amount (besides the sum assured under the policy), if the policyholder were to die in an accident. The term “accident” covers a wide range of events and the premium for this rider is affordable, making it doubly attractive. Nevertheless, there is a maximum limit put on the amount of coverage of the policy and an upper age limit as well (usually 70 years). 2. Premium Waiver Benefit Rider is one where the payment of further premiums by the policyholder is totally waived if the policyholder were to be afflicted with one of the covered crippling eventualities and be disabled to live a normal life. The policy continues as if the premiums are being remitted regularly and the policy is in full force. 3. Guaranteed Insurability Rider is one wherein the further renewal of the policy when the present term ends is guaranteed without proving further insurability, which one would have to do normally (without the presence of this rider). Be- sides, in case the insured would like to surrender his policy (which is rather un- 2.4 Products 65

profitable if the term was long), the rider gives him the flexibility of choosing shorter terms with guaranteed insurability at the end. 4. Critical Illness Rider is one wherein a policyholder can combine the advantage of a health insurance without going in for a separate health insurance policy, providing coverage against a list of diseases restricted as per age, personal and family profile of the policyholder. 5. Family Income Benefit Rider is an accentuated value addition to the policy, as it ensures a regular stream of income for the family if the sole breadwinner of the family dies during the active working period, hence taking care of both the cash and income needs of the family.

Insurers are leveraging on the utilities of these riders to come up with customized solutions rather than rigid bundled products, while offering only a few base products. While this sounds very customer friendly and dynamic, the public awareness of life insurance in all its glory and benefits is not at an elevated level; and insurance is primarily seen as an investment tool by a large section of people. Thus the public is unused to getting no return on investment for these riders at maturity or a surrender value. Considering the exclusive risk coverage features of the riders, IRDA initially prescribed an upper limit (30% of the premium paid on the base policy) on the premium paid towards the coverage of riders in a life insurance policy. This has nonetheless caused furore in the industry and would change with improved awareness and perhaps active lobbying (Jawaharlal).

Best Practices: Product Design Innovation – Unit Linked Insurance Plans The introduction of unit-linked insurance plans (ULIPs) has been, possibly, the single-largest innovation in the field of life insurance in the past several decades. In a swoop, it has addressed and overcome several concerns that customers had about life insurance – liquidity, flexibility and transparency and their lack there- of. These benefits are possible because ULIPs are differently structured products and leave many choices to the policyholder. Broadly speaking, ULIPs are best suited for those who have a conceptual understanding of financial markets and are genuinely looking for a flexible, long-term savings-cum-insurance solution. Simply put, ULIPs are structured such that the protection (insurance) element and the savings element can be distinguished and hence managed according to one’s specific needs. Traditionally, the savings element of insurance has been opaque, giving policyholders no control over asset allocation, no transparency, no flexibility to match 66 2 Life Insurance

one’s lifestyle, inexplicable returns and an expensive, complicated exit. ULIPs, by separating the two parts within the same product and managing them inde- pendently, offer insurance buyers what no traditional policy had – continuous information about how their policy is working for them. For those who want a con- venient, economical, one-stop solution, ULIPs are the best bet. The key to good financial planning is to understand one’s current and future financial goals, risk appetite and portfolio mix. This done, the next step is to allo- cate assets across different categories and systematically adhere to an investment pattern, so that they work in tandem to meet one’s requirements over the next month, year or decade. Because of their flexibility to adjust to different life stage needs, ULIPs fit in very well with financial planning efforts. What is more, as a systematic investment plan, ULIPs greatly diminish the hazards of investing in a volatile market and using the concept of ‘Rupee Cost Averaging’ allows the policyholder to earn real returns over the long term. When buying a ULIP, customers are advised to look for and understand the nuances as [A] Charges: First, understanding all the charges levied on the product over its tenure, not just the initial charges, which would include the fixed administrative charges, the fund management charges, mortality charges and spreads, and that too, not only in the first year but also through the term of the policy. Some companies levy a spread between the buy and sell rates of the units, which can significantly reduce the value of the investment over the long-term. Close examination and questioning of such aspects will reveal the growing power of one’s investment. [B] Fund Options and Management: Next, understanding the various fund options available and the fund management philosophy and objectives of each of them. This would entail examination of the track record of the funds thus far and how they are performing in comparison to benchmarks. Ques- tions such as – who manages the funds and what experience do they have? Are there adequate controls? Looking at how easily one can access information about the fund’s performance when one needs it – are there daily NAVs? Is the portfolio disclosed regularly? [C] Features: Most ULIPs are rich in features such as allowing customers to top-up or switch between funds, increase or decrease their protection level, or premium holidays. Carefully understanding the conditions and charges associated with each of these is crucial. For instance, is there a minimum amount that must be switched? Is there a charge on the same? Must one go through medical underwriting if one needs to increase the sum assured? [D] Company: Cus- tomers must insure with a brand they can trust would honor its commitment and 2.4 Products 67

service them according to their requirements. [E] Monitoring: Having bought a ULIP, the customer must check at least once a quarter how his fund is performing, and consider a switch if there is a change in the level of risk he is willing to take or in his personal market view (Nanda).

Management in Action: Max New York Life Products As discussed in the previous chapter, Max New York Life (MNYL) has structured its product offerings along [a] Various Stages of Life or [b] Needs as the primary segmentation variables. I would now go on to elucidate the various products offered by MNYL in the respective stages and/or need areas. The Products by Life Stage are 1. Single a. Whole Life (Participating) for Protection (the need being fulfilled is protection) b. Level Term Plan (Non-Participating) for Protection c. Five Year Term Renewable & Convertible (Non-Participating) for Pro- tection d. Life Maker Unit Linked Plan which is Unit Linked, thus flexible investment 2. Married includes the above 1[a] to [d] and a. Life Pay Money Back Plan for Savings b. Life Partner Plus (Money Back) for Protection c. Life Invest which is Unit Linked 3. Married with children which includes products 1[a], 1[d], 2[a], 2[c] and a. Child Endowment for Children. It is a participating policy. b. Stepping Stones (Money Back) for Children. It is a participating policy. c. Life Gain Endowment Plan (Participating) for Savings d. Life Gain Plus a Limited Pay Endowment Plan (Participating) for Savings 4. Planning for Retirement which includes 1[a], 1[d], 3[c], 3[d], 2[b], 2[c] and a. Easy Life Retirement Plan (Participating) for Retirement b. Life Maker Pension Plan which is Unit Linked The Products by Needs are 1. Savings which includes 1[a], 1[d], 2[a], 2[b], 3[a], 3[b], 3[c], 4[a] and 4[b] 2. Investments which includes 1[a], 1[d], 2[c], 3[c], 3[d] and 4[b] 68 2 Life Insurance

3. Education for children which includes 1[a], 1[d], 3[a], 3[b], 2[a] and 2[c] 4. Marriage for children which includes 1[a], 1[d], 3[a], 3[b], 2[a], 2[c], 3[c] and 3[d] 5. Protection which includes 1[a], 1[b] and 1[c]

A bird’s eye view of the product categorization depicts the sophistication with which needs and life stages are matched with the product offerings. Moreover, it is interesting to note how products 1[a] and 1[d] are marketed for every need or stage of life, thus serving as the base products across categories. Furthermore, each of these offerings can be augmented by opting for additional customizations via riders. These offerings are dealt with in detail highlighting the core needs’ ful- fillment of the same, in the company’s website and brochures, thus helping consumers choose the most apt and fitting products (Max New York Life).

Product Level Concepts A product is a bundle of satisfaction. It is more than just a tangible offering; a product is anything that can be offered to a market to satisfy a need or want. In planning its market offering, the marketer needs to address 5 product levels, with each level adding more customer value and the 5 constituting a customer value hierarchy (Kotler and Keller). The fundamental level is “core benefit”; in insurance the core benefit would correspond to protection, savings or investment or all. The next level is the “basic product”. The basic product would be one that satisfies any or all the core benefits as deemed necessary. For example the plain Vanilla Whole Life policy serves the Pro- tection benefit. The next level “expected product” includes the set of attributes and conditions that buyers normally expect when they purchase the product. For example – besides the product itself, the buyer would expect effective claims management when the insured event occurs. Several riders’ options now form a part of the expected product level category, as all insurers provide for the same and thus the provision of the same no longer serving as a differentiator. The “augmented product” level, which exceeds customer expectations and thereby acts as the core differentiator for the insurer, would include features like speedy and proactive claims settlement, minimal errors of commission especially in a highly emotional and sensitive scenario like death of the insured and genuine empathy on behalf of the insurer by providing exclusive service at home at a time as comfortable by the dependants or family of the deceased. Fi- nally the “potential product” would encompass all possible augmentations and trans- formations the product or offering might undergo in the future. 2.4 Products 69

Thus, claims management is a highly critical “support” function that fulfills the expected product requirement, however, if enhanced to the augmented product level, efficient, timely and empathetic claims settlement could be a core differentiator for the life insurer.

Critical Support Functions: Claims Settlement Customer services become even more important when it is a one-time purchase and majority of the customers are unaware of the product variations available in the market. Life insurance is one such industry. A satisfied customer is the great- est brand ambassador and one negative experience by a customer can cost the insurance company very dearly. This is especially valid in death claims on account of the seriousness and grief of the occasion. The fact that the occasions of interaction are few, imply less cumulative effort on behalf of the insurer, however with a higher “weight” allocated to the experience. Life insurers do not have to deal with year on year renewals and thus lapses. Any lapse that occurs due to non-payment of premiums costs the insured more. Even an early surrender of a policy has a negative net present value for the insured, which is why customer lifetime value (CLV) sustenance can be achieved by a life insurer with greater ease than it can be by general insurers. A good experience would translate into heightened customer loyalty thus enhanced CLV for the insured (in case of the maturity claim) or dependent (in case of a death claim) and their family members. Unlike tangibles, where it is possible to examine the product prior to purchase, the real test of insurance is after purchase – at the time of claims settlement. Thus claims settlement in life insurance can be classified as the single, most crucial re- alization of product satisfaction. Claims settlement has become one of the cor- nerstones for continued customer loyalty for LIC. LIC has laid great emphasis on expeditious settlement of maturity and death claims. LIC settles 1.43 claims every second with highly transparent and fair claims settlement operations. Only in case of suppression of material information, is a claim repudiated. However, the number of claims repudiated is very small since the extent of moral hazard is relatively lower in life insurance as opposed to non-life insurance. Nonetheless, in such a case the claimants can make a representation for consideration by the Claims Review Committees (CRCs) at the zonal and central offices. The claims settlement operations of LIC improved from 4.02 million “claims settled” and 0.144 million “claims outstanding” in 1994–95 to 10.3 million “claims settled” and 0.016 million “claims outstanding” in 2003–04, thus making enhanced claims management as the Key Success Factor of LI (Rajesh). 70 2 Life Insurance

2.5 Pricing Criteria

Insurance sector uniqueness and Indian Life Insurance in context Insurance sector is unique in its core financial technology. The sector has high level of behavioral inputs in recognition of income, expenses, liabilities and profits. Here the system intuitively follows target costing or in case of a structural imbalance of costs the system goes for reverse engineering. The insurance sector determines the price first and then looks askance at the cost of underwritten risk claims (Mishra and Mishra, Insurance Sector Revisited). In India, where the insurance sector is at a nascent stage, rate making or pricing in insurance consists of arriving at plain vanilla or naked price of funding the future promises. The ideal price is arrived at by applying a principle propounded by one S.S. Huebner known as the principle of “life displacement cost” of an individual or family. This life’s displacement cost or alternatively human life value is equal to the discounted present value of income less the life’s own consumption over its remaining lifetime. The extent to which this benchmark optimal human life value will be converted into life policy depends on the paying capacity of the customer, positional advantage of the customer to self insure the risk and relative opaqueness of the insurance products to the investment decision-maker in the family (Mishra and Mishra, Getting Closer to Life Insurance). For majority of the general insurance businesses in India which until 31st Decem- ber 2006 were still operating in a tariffed regime, a transition from rule based pricing to risk based pricing is already a herculean task, essentially because of the dearth of underwriting skills in the tariffed regime. Actuarial science, accurate risk profiling and enhancement in underwriting quality in India have momentous scope for improvement. In the life insurance area, underwriting is relatively easy on account of the certainty of the eventuality – death or maturity, thus definitely accounted for while “pricing”. However, even in the life insurance area pricing is still cost-plus and subject to the quality of underwriting skills, which is why improvements in risk profiling and underwriting will augment the overall profit potential of the Indian Life In- surance Industry.

Actuary Method and Pricing Elements for a Whole Life Policy For example let us consider the plain vanilla life insurance policy is a whole life policy without profit. Annual premiums are payable until the death for sum assured. The method through which such a premium is determined is known as actuary evaluation. Actuary method relies on the theory of large numbers and uncertainty ingrained in 2.5 Pricing Criteria 71 the probable happening of a certain event like death during and after the duration confined between now and the life expectancy at birth as prevailing on the date of evaluation. A careful analysis of the sentence is essential to understand the elements involved. The core pricing elements for a whole life policy are as follows – Larger is the number of lives insured the better for the theory of large numbers to work. – Life expectancy at birth keeps on changing due to changes in the health care and other welfare activities in the society. The greater the life expectancy, the less will be the premium for the sum assured. – As individuals may predecease or live beyond their life expectancy, the riskiness of the premium depends on the extent of such observed variation. The premium should be relatively more for larger variations. – There are phases in life expectancy duration where the death shows unsteady pattern. That is why providers avoid contracting such covers during childhood and beyond a cut-off old age limit. The covers are available during the phase of steady state of distribution of death. (Although a higher premium should be charged for the “outlier” phases instead of not offering a cover at all; this would benefit both parties: the insurer and the insured.) – Within the steady state, the earlier one opts for the policy, lesser is the amount of the premium. – If the payment of premium is monthly or quarterly, the premium gets divided with resultant adjustments downwards for earlier payments but upwards for increased transaction costs. – The policy provides the self-assessed and agreed displacement cost of human value to the nominee of the life insured. – If the same policy was with bonuses, which are calculated on a yearly basis per thousand of the sum assured, the premium would obviously accommodate for these additional bonuses.

Management in Action: Best Practice in Risk Profiling SBI Life Insurance launches “Agency Online” Portal to help insurance advisors understand customer risk profiles SBI Life Insurance Company Limited launched the ‘Agency Online’, an exclusive portal designed to meet the needs of its growing insurance adviser base on the 16th of May, 2007. The CEO Uday Sankar Roy said in a press release: “Agency Online is an initiative towards empowering our insurance advisers with 72 2 Life Insurance

tools that facilitate self-learning and delivering right advice.” A key feature is ‘Profile Score’ that helps understand customer's risk profile and offer solutions that meet investment objectives. Moreover, “The portal offers advisors’ customer friendly tools that include premium calculators, understanding risk profile, customer portfolios, product flip charts and policy tracker” he added. SBI Life Insurance is a joint venture between the State Bank of India(SBI) and Cardif SA of France with the paid-up capital of Rs. 500 crore (US $ 123 Million) (PTI).

Professional Price Management Process Although a preliminary business concept, most managers tend to forget that not only is price a profit driver (by virtue of the statement profit = pric e* quantity – costs), but it is also the strongest profit driver; implying no other variable change (of the profit equation) gives as much impetus to the profit as does price. Moreover, price is a strong marketing instrument, a change in which provokes customer and competitor response (Fassnacht). Simply put, price is the strongest lever to increase profits (Schmidt-Gallas and Lauszus). In an industry like insurance, where majority of the costs are incurred (via claims) after the pricing is already set, it becomes crucial to fully exploit the profit potential of pricing: [a] to serve as reserves for the future, [b] to abide by the solvency

Figure 34: Pricing Levels based on the Profit Potential and Professionalism (Fassnacht) 2.5 Pricing Criteria 73 margins regulations and [c] finally, to make profits over and above the reserves that may be paid out in claims. As illustrated above, as a firm moves from cost-plus pricing to competitive pricing to value-based pricing, the potential to make profits increases. In India, streamlining and honing the underwriting skills would be the pillar of cost-plus pricing. Although value-based pricing is essential, it is of utmost criticality to be able to cover the costs (due to solvency margin regulations), which is why speedy, efficient and accurate risk profiling and underwriting is a foundational precursor to value-based pricing. Thus please see the “Critical Support Functions” box below on best practice suggestions for underwriting in life insurance. Next, to fully reveal the profit potential of pricing the entire marketing value chain – from product to the price to distribution must be professionally managed. This involves mastering 5 tasks. 1. Value Pricing and Segmentation 2. Knowledge about the price elasticity 3. Cross selling 4. Sales optimization 5. Optimization of the pricing process (Schmidt-Gallas and Lauszus)

Let us look at each of these tasks in the Indian Life Insurance Context 1. Value pricing and segmentation: The price set must skim the customers’ willingness to pay. Thus it is essential to understand the following. a. Which parameters offer the “must-have” value to customers? (Schmidt-Gallas and Lauszus) For example for a whole life policy the “must-have” value is protection. In a money back policy, the most urgent need is savings and in a unit linked policy, the most urgent requirement is transparent and flexible investment. b. Are there any innovative new parameters? (Schmidt-Gallas and Lauszus) The riders like accident death rider, premium waiver rider, family benefit rider, guaranteed insurability rider and critical illness riders are innovative new parameters, a combination of which can provide customized solutions. These features can be better understood by a conjoint analysis which reveals the price- value proposition of the individual attributes thus suggesting an optimal pricing for the final product.

Critical Support Functions: Underwriting in Life Insurance A risk which cannot be quantified cannot be underwritten is the golden rule of insurance. Underwriting is the process of selecting and classifying exposures 74 2 Life Insurance

and the lifeblood of insurance business. Knowledgeable underwriting is the key to a gainful future for an insurance company. Underwriting profits are directly proportional to the skill level of the underwriters. The old systems of underwriting were quite slow and expensive. The exercise used to take an hour or more in- volving culling out medical information from the prospect and completing the application with over a 100 questions that needed answers. Traditional underwriting makes sales difficult and the issue of policy expensive. It is cost-effective only for big size policies. The total time taken is sometimes of the order of 6 weeks. There is a growing need to upgrade underwriting skills in tune with the improvement in mortality. In Underwriting – faster, cheaper and better delivery is the mantra. The process of underwriting can be streamlined by mechanizing most of the decisions. The reduction of human intervention in the underwriting process will reduce subjectivity and also enhance the risk management practices of the insurance company. This also aids to even out the processing load which shows high variations in the life insurance business. A tool that can enhance the speed of the underwriting process and the issue of insurance policies, several times over is tele-underwriting. Many insurance companies are gearing up to adopting tele-underwriting. The move would help them lower acquisition cost, speed up application process, maintain the mortality goals and of course help customer friendliness. It reduces paper work thereby helping the field staff to sell more without digressions; essentially totally transforming the underwriting functions. “Tele-underwriting” had its origin in the early nineties. The modus operandi is: the call center professionals conduct telephonic interviews with insurance applicants with the exclusive aim of ordering medical records. Thereby this leads to both cost and time saving for the insurance companies. A great idea, it has the potential for substantial savings. It is a step in the right direction and is a big benefit to the advisor. It reduces for the agent the burden of taking a personal history or asking an applicant medical questions. As a consequence it would allow them more time to concentrate on selling. It is a win-win situation as the client is bene- fited – because of tele-underwriting being a “once-and-done” method. Even the insurance company reaps benefits as it is able to obtain quality underwriting information. The reasons are not far to seek – the personnel asking the questions are experienced underwriters. Reflexive (drill-down) medical questions are used to get an accurate picture of applicants. This neutral third-party interview is much superior to an agent or an underwriter interview in terms of the quality of information obtained. 2.5 Pricing Criteria 75

The essential precursor for success of tele-underwriting rests on the capability to elicit risk salient information with the least number of questions. The better the quality of questions, the superior is the protective information. All in all, the success potential of tele-underwriting is vivid and far-reaching – tele-underwriting has lead to a significant drop in the cycle time; that is the intervening period between the submission of an application and the time the policy is issued; the figures are touted at 40% to 50% (T. S. Rao).

2. Knowledge about the price elasticity: Before making any changes in the price, it is essential to understand the corresponding price elasticity that is how the quantity in sales would change if the prices are increased or decreased. This is essential because a price increase is justified only to the extent that the impact of sales lost is not ousting the price, in a way that causes the profit to plummet. Nevertheless, a certain increase in premium would result in lesser sales lost with respect to the bottom line of the company. 3. Cross selling: This would include targeted bundling of insurance benefits and their conjoint offering in the market (Schmidt-Gallas and Lauszus). For example under the “Married with Children” stage Max New York Life offers products targeted towards savings for education or marriage of children over and above the basic policies (whole life and term policies). Each of these products encapsulate a different set of product features satisfying related but non-overlapping needs, thus making these products complementary and consequently achieving cross selling of the products. This level of product design sophistication goes a long way in helping command the right prices based on the value proposition of the bundle, and thus exhausting the profit potential of pricing via cross selling. 4. Sales Optimization: The Management needs optimize its sales force, keeping in mind the importance of the on-location sales representative; thus calling for an optimal balance between effectiveness (proximity to the customer) and efficiency (costs reduction through online sales) (Schmidt-Gallas and Lauszus). Besides, the current incentive system of the agency force in India is a commission model based on revenue, thus misdirecting the sales personnel to focus on volumes rather than the profit or bottom line. This could serve as a key learning for a new entrant into the Indian market, who could now use a margin-based commission model to in- centivize his sales force, thus giving impetus in the right direction. 5. Optimization of pricing process: In companies with a high “pricing IQ”, all price- related decisions are organized systematically and clearly. Three decisive elements characterize a pricing process: the components, the input dimensions and 76 2 Life Insurance

the chronological structure. The components are the information, methods, models, guidelines for decision making, qualifications, competencies, incentive systems and timing. Aside from objective information such as data on revenue, customers and competition, the input dimensions are subjective dimensions like the assessments and experiences of the management. Finally, there is the chronological structure: Supported by the pricing strategy, an audit must objectively and honestly check the current practices, success and improvement potential of pricing. Based on this review of the status quo, price decisions concerning the key aspects discussed above have to be made and established in the market by means of a systematic implementation plan (Schmidt-Gallas and Lauszus).

Finally it is important to combine the internal pricing view of the company with the external market oriented view, by essentially combining the underwriting skills, risk management perspective and actuarial experience (of the internal pricing view of the firm) with the marketer’s view, the one closest to the market, which begets an in depth understanding of the willingness to pay of potential policyholder, in order to maximize the capacity of a right pricing technique.

2.6 Distribution Channels

The three ‘A’s for spreading the message of insurance, as an instrument of financial security, are: (i) the affordability of the product to the consumer, (ii) its acceptability, as need based and necessary at the given cost and (iii) its easy accessibility if the other two ‘A’s are found acceptable to the consumer (Rao). The distribution channel is the third A: accessibility and plays the role of discovering and highlighting the risk exposure needs of the consumer and supplying him with the product that best serves his needs. The speed with which the insurer reaches the market place, the quality of interaction, and the constituents of the distribution channels i.e. the intermediaries have at the market place will decide the growth graph of the company. The market share of the entity will depend on the share of heart, mind and wallet of the customer and it is no wonder organizations globally are continuously engaging themselves in upgrading the capabilities of their intermediaries. Agents of insurers, brokers representing the consumers as their agents and direct selling by insurers constitute the core of the distribution chain of the marketing of insurance products. One very interesting dimension of the whole process of intermediation (in insurance industry) is that world over the tied agency channel has yielded place to multiple distribution channels. This is primarily to ensure that through capacity building, economies of scale 2.6 Distribution Channels 77 are achieved, the reach is increased, and the customer base is enlarged, in order to have an adequate channel mix for different segments of market and to ultimately ensure growth in volumes. This transformation has happened not without any basis, for, today, markets are moving from being product driven to customer driven. Hence it has become essential for companies to reinvent themselves, in their run to be ahead of the competitors (Viswanathan). Since the entry of private players in 2000, there have been substantial shifts in the distribution of insurance in India. While many of these changes echo international trends and the expertise brought in by private players, the Indian life (or non-life for that matter) insurance distribution is predominantly agency driven. The transformation which has been brought in by the opening of the sector has changed the value proposition for the distribution channels. Today the customer has multiplicity of choices of service providers; of products and services; distribution channels etc. As a sequel to this, the distribution channels have to be customer focused as compared to product focused, keep in mind the long term results as against the low hanging fruits, migrate from a push orientation to a pull orientation and move to strategy-driven activities vis-à-vis transaction-driven activities. Building a distribution network is expensive and time consuming. Nonetheless, if insurers want to keep up with their current mammoth growth rates, developing innovative and efficient distribution channels that bridge the reach and give impulsion to the penetration is of utmost criticality. Additionally, the measuring rod for the efficacy of each constituent of the distribution channels will be the pace and ease with which the new paradigm shifts is adopted by them.

Status quo The charts below depict the contribution of various intermediaries in underwriting new businesses in the life insurance sector of India. The information suggests the dominance of the agency driven model (primarily individual agents) for the Life Insurance Corporation of India (Government owned). However, the private players that arrived post 2000 (liberalization of the insurance industry in India), have pursued a conscientious mix of several intermediaries to generate business. Although the private life insurers, like the LIC, do derive a majority of their business from the individual agents, a substantial portion of their new life premium is written by intermediaries like corporate agents (banks and others), brokers, referral and direct business. I will now evaluate the essential distribution channels against the backdrop of the Indian life insurance development. 78 2 Life Insurance

Figure 35: New Business Underwritten through various intermediaries in Life Insurance (Annual Report, IRDA, 2005–2006)

Bancassurance Bancassurance is the provision of insurance and banking products and services through a common distribution channel or to a common client base. India has a savings rate of 26% of which savings with banks constitute more than 50% of the domestic household savings. This presents an enviable opportunity for insurers to take advantage of banks in India, both domestic and foreign, have networks that span the whole country, thus reaching the most remote locations and cutting across all social classes. Increasing customer sophistication is leading banks to devise holistic financial solutions including insurance, long-term savings and retirement (Sahgal). The relevance of bancassurance in the Indian sector works as a hand-in-glove situation for both insurance companies and banks. Integration of the financial service industry in terms of banking, securities business and insurance is a growing worldwide phenomenon (R. Krishnamurthy). 2.6 Distribution Channels 79

1. Banks are the key pillars of India’s financial system and the common Indian public has immense faith in banks as is elucidated from the fact above: wherein savings with banks constitute more than 50% of the domestic household savings. 2. The agency network of insurance has not been successful in penetrating many areas as is obvious by the insurance penetration and density in India.2 With about 65,000 branches across India and an estimated average of 16,500 customers per branch (Sahgal), banks, on the contrary enjoy immense reach to households and considerable goodwill in the rural regions as well. A majority of customers continue to visit their bank’s branch to meet their savings and credit needs; bancassurance thus provides an availability of scale to insurers. 3. Banks have an enormous retail base, showing huge retail thrust with a growth of 50% (Bhaskaran). Share of ‘individuals’ as a category in bank accounts is steadily increasing. Rural and semi-urban bank accounts constitute close to 60% in terms of number of accounts, indicating the number of potential lives that could be covered by insurance with the frontal involvement of banks (R. Krishnamurthy). 4. The huge customer data available at banks provide for immense cross selling opportunities. Banks can put their energies into the ‘small-commission customers’ that insurance agents would tend to avoid. Banks’ entry in distribution helps to en- large the insurance customer base rapidly. This helps to popularize insurance as an important financial protection product. 5. Bancassurance helps to lower the distribution costs of insurers. Acquisition cost of insurance customer through banks is low. Selling insurance to existing mass market banking customers is far less expensive than selling to a group of unknown customers. Experience in Europe has shown that bancassurance firms have a lower expense ratio. This benefit could go to the insured public by way of lower premiums. 6. Banks have an important role to play in the pension sector. Low cost of collecting pension contributions is the key element in the success of developing the pension sector. Money transfer costs in Indian banking are low by international standards. Portability of pension accounts is a vital requirement which banks can fulfill in a credible framework (R. Krishnamurthy).

Having understood the benefits of bancassurance for insurers, let us now analyze what bancassurance has to offer to banks. 1. Banks world over have realized that offering value-added services such as insurance, helps to meet client expectations. Competition in the Personal Financial Ser-

2 Insurance penetration which is measured as a ratio (in percent) of premium to the GDP is 2.53% for the life insurance sector in India, while being 11.17% for a country like Taiwan. In- surance density, measured as the premium per capita, is USD 18.3. 80 2 Life Insurance

vices area is getting ‘hot’ in India. Banks seek to retain customer loyalty by offering them a vastly expanded and more sophisticated range of financial products fulfilling an assortment of needs. 2. Insurance distribution helps to increase the fee-based earnings of banks to a considerable extent. Insurance activities contribute significantly to banks’ total domestic retail revenues. Margins for Indian banks are being squeezed – in 1994, banks borrowed money at 10% and lent out at 14%; now banks borrow at 9% and have to lend at 9.5%, giving them a very small window for profits. Thus a fee- based model would help banks improve their bottom-line. 3. There is an increasing emphasis on ROE (return on equity) and productivity and a global pressure on banks to become financial powerhouses; thus pure banking does not seem to be a viable option any more. 4. Fee-based selling helps to enhance the levels of staff productivity in banks. This is vitally important to bring higher motivation levels in banks in India. 5. Retail thrust and a growing sense of customer segmentation implies that banks are offering financial products to customers at a more micro level, consequently indicating a higher risk for customers and banks and the need for risk management products (Bhaskaran).

The main types of bancassurance are [a] corporate agency, wherein banks can earn fees, [b] referral arrangements, where banks share customer database with insurance companies, [c] joint ventures, where banks and insurance companies develop new products together (Bhaskaran). Despite the rapid growth of the life insurance industry in India (at 144% year on year increase in the first 7 months of 2006), bancassurance in India is still in its nascent stages, with the business generated by bancassurance for life insurance in total being less than 7%, (IRDA) whereas in markets like Italy and Spain, the same accounts for more than 50% of the total new business (Sahgal). In Asian markets such as Singapore, Hong Kong and Taiwan, bancassurance has a share approaching 40%. In the year 2006 up to January 2007, bancassurance generated almost 22 to 25% of the business in the private sector, suggesting a significant shift from the purely agency sales model prevalent prior to 2002 and a welcome endorsement of the bancassurance-led-strategy pioneered in India by Aviva. Aviva today is a leading bancas- surer with 30 agreements and 65% of its new business premium being generated from this channel3 (Sahgal).

3 In India total sales from the Aviva and Dabur Group joint venture increased to $135 million with over 21,000 agents (FD Wire). 2.6 Distribution Channels 81

The primary models of bancassurance in India are [a] Natural partnerships for example SBI Life and SBI, (which include a parent and a subsidiary relationship) [b] Banks partnering with single insurance companies [c] Insurance companies partnering with different banks for example, Aviva has partnered with ABN Amro/AMEX to reach corporate and urban customers, with Canara Bank to reach national masses, with LVB to reach the local population of the state of Tamil Nadu. [d] Insurance companies may have separate partners for their life and non-life insurance business. [e] A bank may partner with several insurance companies, (more like a supermarket of insurance products) (Bhaskaran). Future growth and trends in the bancassurance area suggest that strategic align- ment and expeditious execution are increasingly being recognized as the key drivers of success. Insurers need to select partners, through a judicious analysis of the banks’ business, products, processes and customers. Banks are primarily doing “walk-in” business, however this mindset of “walk-in” business has to be adapted to suit the “selling” business that suits insurance products. One of the critical dilemmas of branch persons, deciding the priority between a bank product, insurance product and mutual fund, has to be dealt with through a common understanding and training of sales staff. The primary purpose of bancassurance, as the name suggests, is to sell both insurance and bank products; thus selling just one of the two products would de- feat the purpose of the channel and subsequently not bring any significant synergies or substantial cost advantages, which can be derived through economies of scope (of selling two products through the same channel). Increased sophistication in bundling products and selling a whole gamut of financial instruments would benefit both banks and insurers. Unfortunately, the dual regulator environment (for banks and insurance companies) does hinder operational freedom of such alliances. Moreover, if a bank wishes to manufacture and sell insurance products, it needs to have a net worth of Rs. 5 billion and establish a separate business unit or a subsidiary to do so. Until regulations are completely favorable, insurance companies must definitely use the bancassurance channel, as is and aim to exhaust its potential to reach out to the untapped customer network base, as are advanced markets like Europe.

Role of Agents Despite the growing importance of bancassurance, the Indian life insurance sector is still primarily agency driven; 86% of the new business premium (for public and private insurers in total) in 2005–2006 was underwritten through individual agents (IRDA). Tied agents have traditionally been the primary channels for insurance distribution in the Indian market. The LIC has branches in almost all parts of the country and has attracted local people to become their agents, apparent by the verity that the 82 2 Life Insurance

LIC still generated 98.37% (2005–2006) of its first year business through individual agents. Traditionally, a person who has lived in a locality for many years sells the products of the insurance company with a local branch nearby. While these agents may not have been sufficiently knowledgeable about the different products offered and may not have sold the best possible product to customers, the customers trusted the company and the agents as locals (Sinha). In lieu of status-quo, it would pay to understand the role and importance of the traditional agency system, and discuss essential steps to enhance its current standing. The key features of an agent are as follows – He acts as the face of the insurance company and allocates primacy to the insurer’s interest. He collects premium on behalf of the insurance company. – An agent has an exclusive single insurer relation, implying he cannot represent multiple insurers and hence is “tied” to a single insurer. – The agent identifies prospective clients for the insurance company and carries out a “Sell” transaction with the customers. – He does not require any kind of capital investment to start his services; however he does require undergoing some training and clearing agents’ examinations, spon- sored by a single insurer. – Since he is more or less the face of the insurer, the insurer is responsible for the conduct of an insurer. – Agents can only make straightjacket or un-negotiated offers. – Normally, switching of agents is discouraged (Ramachandaran) (ICICI Lombard).

While brokers act as intermediaries too, the relationship of brokers and agents with the insurance companies differs substantially. (Please see the illustrations below to understand the differences between the two.) However, the skill sets requirements for the two are similar to a large extent, the foremost requirements being – understanding insurer’s business and risk management philosophy, – detailed knowledge of the available insurance market and capacities, – high customer orientation, – advising customer according to their needs, – ability to sell multiple products to the same customer at the same time (thus cross selling) or over a period of time (thus enhancing the customer lifetime value (CLV) of the customer), – providing market intelligence to the insurers by giving them latest consumer insights and feedback, contributing to new product development and/or existing product modifications, – a good working knowledge of the IRDA regulations and a willingness to adhere to them 2.6 Distribution Channels 83

Figure 36: Representation of the Relationships of Agents and Brokers with Insurers – I (Sawhney)

Figure 37: Representation of the Relationships of Agents and Brokers with Insurers – II (Sawhney)

Agent Broker

Procures premium for his insurer Offers advice for optimal cover Exclusive single insurer relationship Works with multiple insurers Identifies prospective clients Identifies prospective risk issues No capital investment Minimum Rs. 5 Million + Capital Straight jacket offer Negotiated covers

Figure 38: Key Differences between Brokers and Agents (Ramachandaran) 84 2 Life Insurance

Challenges and Complexities: In the distribution of Life Insurance Policies

In spite of the collapse of the traditional protection mechanisms such as joint family and community support, the need for life insurance is yet to be fully appreciated in the Indian society. This is possibly due to the fact that while the ground realities have changed, the mindsets are still in transition. Selling life insurance, therefore, is not merely about presenting the features and benefits of the products and helping the customer choose the right plan. On most occasions, it starts at the more basic level of dispelling wrong notions about life insurance and convincing the prospect about the need for the same. This is what makes distribution the toughest of the chain of activities in the business of life insurance. This is also why, of all the financial products, life insurance is rated as the most difficult to sell. The resistance to life insurance in our society casts an additional burden on the distribution network and induces a higher degree of fatigue. It also leads to lower conversion rates (number of sales to number of sales attempted) resulting in lower productivity levels of the agents. The costs of distribution, both direct and indirect, are also on the higher side due to higher commissions and incentives, which cannot be avoided due to the above reasons. The training costs are also quite high in view of the constant need to give inputs, motivate and en- thuse the sales persons to keep them in performing mode. The higher percentage of commissions and other incentives notwithstanding, attrition rate among life insurance agents is extremely high (up to 50%), not only further adding to the costs in terms of pre-licensing training expenses but also wasting the organizational efforts in training and hand-holding these agents. Adverse fallout of this attrition is that policies sold by the terminated agents end up as ‘orphans‘ (which means the customer is left stranded without an agent). A majority of such policies are lapsed, putting both the insurer and policy holder to loss (Kumar). “Orphans” that is policyholders and insurers bereft of their agents, has been a growing stigma for life insurers in India. I will thus present a case study to explicate how Max New York Life dealt with the impending issue of high agent attrition and orphaned policyholders, and earned profitability and accolades from industry experts by tackling the problem through early thought leadership. 2.6 Distribution Channels 85

Management in Action: Best Practice in Customer Retention and Management Case Study: Max New York Life Insurance: Orphan Policy or Direct Customer – A Paradigm Shift Max New York Life Insurance co. Ltd is a life insurance company, formed through a partnership between Max India Limited and New York Life, a Fortune 100 company. As a life insurer, a few “firsts” that Max New York Life is proud of are – First to offer “free look” period on all policies – First to be awarded the ISO 9001:2000 certification – First to have a customer toll free number – First to launch a formal Six Sigma program – First to have a whole life policy with coverage up to 100 years – First US GAAP profitable company in India – First to pay cash bonuses to its policyholders – First to have a Direct Customer Service Program An orphan policy holder is one who is now bereft of his agent. However, the policy holders are not the only ones that are orphaned; the insurers who lose their agents are orphaned as well. 86 2 Life Insurance

The voice of an “Orphan Policyholder” – I do not have an agent, what happens to me now? – The agent I know is gone. How will you help me? – Whom do I call now, for any help? – How will the company keep in touch with me? – Shouldn’t I get out of the relationship while I can? What do these customers want?

Concerns for the life insurer – Growing customer attrition in the segment where the agent is no longer there – High customer complaints in this segment – Adverse impact on goodwill and image – Poor proof of customer centricity – Direct and indirect opportunity loss

Looking at the big picture 2.6 Distribution Channels 87

Early thought leadership matters; In 2002 Max New York Life saw this as an opportunity to – Provide services “directly” to such customers – Provide services in a manner the best agents would have done for the customers – Retain and delight this segment of customers – Ensure that customer expectations are met – Arrest policy lapses

Instead of asking these customers to send letters, redirecting them to customer help lines, asking them to visit the branch office or buying time by waiting for the customer to call or write in, MNYL decided to take a “Feet on street” approach through the launch of their “Direct Customer Services Program”. This entailed an employee of the company to act as an agent; he would visit the customer at his doorstep; this employee was the Customer Relationship Manager (CRO) with a sales background and trained with high customer centricity.

The Direct Customer Services Program

Their initial engagement model was based on premium size: • First MNYL focused on category A • In 2003, they focused on category A and B • Now (2007), they focus on all four categories – A, B, C, D 88 2 Life Insurance

The Activities that MNYL does to complement the Direct Customer Services Program include – Customer relationship officer (CRO) recruitment and training – Introduce CROs to customers – Pro-actively engage with customers – Act like Agents – Meet with customers often – Focus on customer complaints – Provide Point of Sales services – Remind customers about renewals – Trace non-contactable customers – Keep customers updated – Reinstate lapsed policies – uild relationship with customers – Help with Claim process – Generate leads – Renewals follow up 2.6 Distribution Channels 89

Results of implementing the Program and the Engagement Model: Indicate the success MNYL has moved from retention to service to delight, to now up selling and cross selling.

(Thomas M. Daniel, Max New York Life)

Role of Brokers In India, brokers are now emerging as powerful outsourced vendors for insurance marketing. While brokers have done well and captured a good share in the non-life business, their contribution on the life side has been relatively insignificant. Further- more, de-tariffing of the general insurance lines of business, and its corresponding effect on health insurance, will give further momentum to the role of brokers in health insurance. I will thus build upon the information provided in this chapter (with respect to agents and brokers) in chapter 3.6 (distribution channels in health insurance) and throw some light on the role of brokers in the Indian context.

Other Relevant Emerging Channels Automobile Tie ups Automobile tie-ups involve distributing life insurance through automobile companies like Maruti, Hyundai, Honda, and Toyota depending upon the target customer 90 2 Life Insurance segment. The auto industry is booming currently thanks to the ease of access to car loans and the rapid consumer spending of the middle class (Sawhney). As the insurance density and penetration in India is abysmally low compared to other emerging markets, such an agreement would take the insurer to a place where target customers frequently visit in sizeable numbers. Innovative and emotional advertising should promote the cause as people could be made to realize that – while the purchase of car insurance is natural and mandatory, their lives are more precious than the car itself and hence the life insurance policy too would be advisable.

Indian Post Earlier, in this chapter, I mentioned the importance of capacity building and economies of scale to enhance the reach and volumes achieved by insurers in India. The Indian Post has 150,000 outlets, thus creating a reach far more valuable than any bancassurance tie-up. Moreover, this would give the Post to earn up to 15% in agency commission (Hindu Business Line).

Malls and Supermarkets Selling insurance policies through malls and supermarkets is gaining momentum especially with the youth in India. However, retailing of life insurance products require well educated interfaces on account of the complexities that the products carry. More- over, it is crucial for the insurance advisor to provide the right advice keeping in mind the long-term interests of the policy holder. They say a satisfied customer of an advisor is like a never ending referral database. The atmosphere in a mall or supermarket may not be necessarily conducive to such an objective – as it converts the “financial advisory” role to appear more or less like a “sales” person role. Thus the use of malls and supermarkets as distribution channels, needs to be revisited and streamlined.

2.7 Communication Strategy

Value Contribution of Branding and Communications Service communications affect the value of a service firm in various ways. Service communications are – A driver of customers’ perceived service quality – A driver of customers’ brand image – A driver of customers’ behavior directly, for example by presenting special offers and enticing the customers to trigger the purchase. 2.7 Communication Strategy 91

Figure 39: The Role of Service Communications in determining Marketing and Firm Value (Bruhn and Georgi)

Life Insurance – Is “awareness” the reason why? The press and industry experts have constantly cited the low awareness (about insurance) as the foremost reason for the poor penetration of insurance in the country. However, a recent survey conducted by the National Council for Applied Economic Research for understanding the awareness issues of life insurance in India, projected findings suggesting – that a huge number of households did not possess a life insurance policy despite being aware of its presence. Please see the “Consumer Insight” box which details the core statistics and findings.

Communication Elements Promotion has been defined as the coordination of all seller-initiated efforts to set up channels of information and persuasion in order to sell goods and services or to promote an idea. While implicit communication occurs through the various elements of marketing mix, most of an organization’s communications with the marketplace take place as part of a carefully planned and controlled promotional program. The basic tools used to accomplish an organization’s communication objectives are often referred to as the promotional mix (Belch and Belch). 92 2 Life Insurance

Consumer Insight: Life Insurance Survey Results 78 million households in rural India and 31 million in urban India were aware of Life Insurance but did not possess any policy Notwithstanding increased savings in bank deposits and post office schemes, In- dians are still averse to saving money in life insurance policies, a survey conducted by National Council for Applied Economic Research has found. Main Statistics: Seventy-eight million households in rural India and thirty-one million in urban India were aware of life insurance but did not possess any policy, the report said on 12 April. The main reason for not possessing a policy: “A misplaced optimism and the ‘nothing will happen to me’ syndrome was a major reason behind several Indian households being reluctant to go in for insurance cover,” said Rajesh Sud, Execu- tive Director Distribution, Max Newyork Life, which commissioned the survey. Survey details and statistics: The survey, which covered a sample of 63,016 households in 1976 villages and 2,255 urban wards, and was conducted during October 2006 and September 2006 found that • 88% households in urban areas saved their money through various instruments while the proportion in rural areas was 79%. • Bank deposits continued to be the most preferred form of savings with 50.9% of people opting for it. About 36% preferred to keep their money at home and just 5% deposited in post office. Only 0.1% purchased bonds. • Among the reasons for savings, education and emergency provisioning topped the list with nearly 80% and 82% saving for those purposes. • A total of 62.7% saved for social ceremonies while 22.4% saved for consumer goods, the report said. • Nearly 20.7% people borrowed money in rural areas while only 7.4% took loans in urban wards. • 51% people took loans for the purchase of consumer durables while 19% borrowed money to meet education expenses. Around 14% households headed to banks to meet their health expenses. • Both Karnataka and the capital city of Karnataka, Bangalore were above the national average in terms of ownership of life insurance. While 92% households in Karnataka were aware of it, 53% owned it and 75% of Bangalore households owned a policy. • Only 14% female life insurance owners existed as compared to 86% being men (PTI) 2.7 Communication Strategy 93

Integrated marketing communications (IMC) involves co-ordination of various promotional elements and other marketing activities that communicate with a firm’s customers. In developing an IMC strategy, a company combines the various promotional mix elements, balancing the strengths and weaknesses of each to produce an effective communications program (Belch and Belch). Despite the growing importance of IMC and enhancing the customer experience at all plausible touch points through innovative methods, most senior management (respondents of my survey on “Emerging Opportunities and Challenges for the Indian Insurance Industry”) consistently cited television and newspaper as the first and second most effective media of communication.

Figure 40: IMC Audience Contact Tools (Belch and Belch)

Television Advertising and the Insurance Industry – Status Quo Since television was cited as the most effective medium of advertising and it does have the widest reach, I would like to present trends with respect to television advertising in the Insurance sector. First, in a country like India, where a huge population lives below poverty line, it might be interesting to note that Indians love their television – number of households owning television sets was 66.1% in 2004–2005; (Agencies) thus implying a magnanimous reach in a country where the literacy rate is at barely 60% (CIA – The World Factbook). The key findings of a survey conducted by Adex India with respect to “Insurance Sector Advertising on Television” were as follows – The Insurance sector accounts for 27 per cent share of ad volumes in Banking/ Finance/Investment Industry on TV in the year 2006. 94 2 Life Insurance

– The Insurance sector saw a growth of 47% in advertisement volumes on TV in the year 2006 over 2005. – Insurance advertising on television was lead by ‘Life Insurance’ with 89 per cent share of volumes in the year 2006. – Life Insurance saw a rise of 47% in ad volumes on television in 2006 compared to the previous year.

TV Ad Volumes for the year 2006 by category

Figure 41: (AdEx Analysis)

Seasonality trend of advertising for Insurance sector on TV across the years 2005–2006

Figure 42: (AdEx Analysis) 2.7 Communication Strategy 95

– Q1 (January to March) saw the highest number of advertisements of insurance companies on television across both years 2005 and 2006. – Highest advertisement volumes of Insurance sector were contributed by Hindi News channels.

Top 3 channels contributed 52% share of ad volumes in Insurance sector on TV in year 2006

Figure 43: (AdEx Analysis)

Top 5 advertisers of the Insurance sector on TV in 2006

Figure 44: (AdEx Analysis) 96 2 Life Insurance

– Private players dominated advertising with 81 per cent share on television in year 2006. – ‘HDFC Standard Life Insurance’ topped the advertisers list on television with a 24% advertisement volumes share (AdEx Analysis).

Advertisement Analysis – HDFC Standard Life Insurance The last graph shows that HDFC Standard Life Insurance topped the advertisers list on television with a 24% advertisement volumes share. In order to understand the kind of advertising that is deemed effective in India, I will present a storyboard of an HDFC Life ad and map the same to a matrix that deals with “options of service communications for making services tangibles”. An important task of mass communications is to make the intangible tangible. Due to their process character, services are intangible and therefore cannot be examined physically or be touched. Therefore, mass communications use certain means to make services tangibles which refer to one of the two functions: materialization and personification. The materialization strategy aims at presenting physical elements of the service resources, process or outcome. The personification function establishes an association between the recipient and other persons in order to make the service tangible (Bruhn and Georgi).

Tangibilization Means Materialization Personification

Service Factors

External Factors – Before–after comparisons – Seeing reference customers – Packaging of service objects – Testimonials – Visualizing need satisfaction – Celebrities Internal Factors – Material internal factors – Top management – Object samples – Employees – Utilization of symbols – Visualization of service process

Figure 45: Options of service communications for making services tangible 2.7 Communication Strategy 97

Storyboard of an HDFC Standard Life Insurance TV Ad, with translation

As his daughter comes home dejected, her father asks, “Kya hua Neha?” (English: “What happened Neha? Anything wrong?”)

She replies sadly, “U.S. ki scholarship mili, par aadhi.” (“I received the scholarship for the US, but just half the amount”)

Her aunt assures her, “Baaki apne U.S. wale Uncle bhar denge.” (“Your Uncle from the US will pay the remaining half, child.”)

But her father is against taking a favor from someone 98 2 Life Insurance

… as he adds, “Koi hai to aapke liye paison ka intezaam kar raha hai … jab aap itni si thi.” (“Somebody has been saving for you, since you were this tiny.”)

As the girl realizes that her father has been saving up for her, she is overjoyed.

Voiceover: “HDFC Standard Life Insurance ke Children’s Plans … Double Insurance Benefit ke saath.” (HDFC Standard Life Insurance’s Children Plans with Double Insurance benefits)

As her father remarks how she has grown up, the girl says, “Nahi Papa, main to itni si hun!” (“No, Papa, I am just this tiny!”) 2.7 Communication Strategy 99

Ad analysis – The tag line and the musical for the Ad is – “Sar uthaa ke Jiyo” which means live your life with your head held high (implying respectfully). – The ad touches on emotional elements that bind a family in India, and touches emotions like self-respect, self-sufficiency, and self-esteem etc the qualities parents would like their children to develop. – It vividly connects to middle class families because for most of the youth in India, the preferable foreign destination for higher studies is the US; however, the cost for the education is definitely above ones means, connecting the ad to reality. – Thus, the ad achieves “personification” through “reference customer”, the ambitious young girl who dreams of building a wonderful career by opting for education in the US. – The ad achieves “materialization” of service communications through a “visualization of needs satisfaction” Chapter 3: Health Insurance

“Industry outlook and the Main Players” for health insurance in India discusses key consumer insights, the health insurance industry in contextual background with the health expenditure in the country, number of uninsured, health insurance premium and policies development over a time line; also ex- emplifying the main issues and challenges for health insurance in India. The next sub-chapter discusses empirical data via responses and views of insurance executives and knowledge leaders on the outlook of insurance over the next 5 years. The “Urgent Needs and Customer Segmentation” reveals the results of a survey with respect to key consumer insights, and projects these findings onto the S-O-R model. The chapter highlights regional differences in perspectives, needs and attitudes across selected nations in Asia with respect to health insurance. Furthermore, through best practices, it explicates customer segmentation at a micro level. The chapter on “Product” discusses health insurance product design facets, product development history of the “mediclaim” policy and the concept of managed health care which is gaining momentum in the global health insurance development. The chapter suggests a product range to suit various customer segments and the best practices in product offerings are elaborated upon. “Pricing” discusses the key pricing criteria and the increased importance of accurate pricing in health insurance, supplemented by accounts of policy discussions reflecting the pricing criteria, the premiums charged and the sums insured. “Distribution Channels” primarily discusses the role & contribution of and effectiveness-enhancing measures for TPAs and role of brokers. Finally, “Communication Strategy” concludes with a TV ad-analysis. 102 3 Health Insurance

3.1 Industry Outlook and Major Players

The Mind of the Indian Consumer While researching for his book, “Best Guide to Buy Health Insurance”, Mr. Suresh Sethi, CEO of RIA Insurance Brokers Private Limited, discovered myths about health insurance that are core to the average, naive Indian consumer. They were – “I will not have to go in for hospitalization, it won’t happen to me.” (undying unrealistic optimism with a “sound” backing of faith in the Gods and Goddesses) – “I will buy health insurance when I need it.” (unrealistic expectations from health insurance, rooting from low awareness about the purpose that a health insurance policy fulfills and the way it truly works) – When told that a health insurance policy cannot be simply purchased on the occurrence of the disease, as that defies the very purpose of insurance which is meant to cover events that cannot be predicted (illness in this case) and therefore this new found disease would have to be excluded from the coverage, he says “I am smart enough to manage Health Insurance at a short notice, I have contacts and will manage it.” (self-confidence beyond realism)

The main inferences that one can draw from the statements above and the current In- dian health insurance context are – The average Indian consumer is living in denial as far health insurance is concerned. – He is aware of the existence of health insurance, but is not sure why he would need it “before time”. – He has probably heard of the poor claims settlement ratio in the Indian health insurance scenario and fears that the insurance companies are “out to scam him.” – He fears procedural delays that are so often heard of in claim settlements in the In- dian health insurance context. – This consumer probably does possess a life insurance policy but will refrain from purchasing a health insurance policy because death is inevitable and out of his control; however, health is within his control, and he is confident that “nothing can happen to him.” – Moreover, constant paralleling with life insurance policies compels him to aban- don the idea of possessing a health insurance policy on grounds that a health insurance policy gives him no returns (at the end of the term), as do several life insurance money-back and endowment policies. 3.1 Industry Outlook and Major Players 103

A knowledge and understanding of these consumer inferences are critical to compre- hending the landscape in which the Indian health insurance industry is emerging. Furthermore, the above validate some drastic figures that were revealed by a recent World Bank Study. (Please see consumer insight box below.)

Consumer Insights: World Bank Study Statistics – 85% of the working population in India do not have Rs. 500,000 as instant cash – 14% do have Rs. 500,000 instant cash but will face a financial crunch subsequently – Only 1% can afford to spend Rs. 500,000 instantly and easily – 99% of the Indians will face a financial crunch in case of any illness (Sethi)

To help place the above figures in perspective, the hospitalization costs of some treatments are as follows- Rs. 200,000 to 250,000 for angioplasty, Rs. 250,000 to 350,000 for open heart surgery, Rs. 30,000 to 50,000 for a hernia surgery (Sethi).

Indian Health Insurance in Context – Status quo Health insurance constitutes a paltry 10% of the total industry revenue and has not kept in pace with the expansion of the healthcare industry on the whole. India stands at a humble 127th position in the Human Development Report, 2005. Other health in- dicators also appear to be equally somber. The total health expenditure in India is 6.1% of the Gross Domestic Product (GDP), out of which public expenditure is just 1.3% of the GDP. The per capita spending on health is USD 96. Compared to this, other developing countries like Brazil and Jordan in the moderate development slot spend 7.9% and 9.8% of the GDP on health respectively. Their per capita spending on health is also higher at USD 611 and USD 418 respectively (Oza). The World Health Organization has defined a possible approach of financing of health expenditure. Please see the illustration below. In context with the illustration above, public spending in health care is squat at 17% of the health care financing. Additionally, the market is underdeveloped and largely financed out of pocket: over 85% of the health care expenses are substantiated by out of pocket expenses (unplanned for, non-contributory spending) (Parera). Population profile of the Indian Population indicates that 55% of the Indian population (605 million) is below 35 years of age, 25% (275 million) is between 36–50 years of age and 20% (220 million) is above 50 years of age. In India, an issue that re- 104 3 Health Insurance

Figure 46: Approach for Financing of Health Expenditure (Parera) cently raised concerns and invited negative publicity of health insurers has been their ceasing to insure individuals above 50 years of age. However, the IRDA has recently set up a committee (focusing on senior citizens) with an aim to address this issue. With a population of 1.1 billion and a health insurance premium of Rs. 17.19 billion in 2004–2005, the per capital health insurance premium in India stood at a negligible amount of Rs. 15.63. On the other hand, the Pharmaceutical Industry, another industry part of the healthcare sector of India had revenues of over Rs. 350 billion, clearly reflecting the incongruence of pace within the health sector itself (Sethi).

1.1 Billion Total Population

–17 million Private Medical Insurance (Mediclaim) –38 million Employees State Insurance Scheme –40 million Central Government Health Scheme (CGHS) – 7 million Indian Railways –55 million Public Sector Enterprises –50 million Community Insurance 893 million Uninsured

Figure 47: Overall Healthcare Financing Situation in India (Mendiratta) 3.1 Industry Outlook and Major Players 105

Adding another dimension to the profile above; of the total population of 1.1 billion, 356 million belong to the middle income group, of which only 17 million are covered by a private health insurance scheme. The situation of overall healthcare financing in India is as elucidated below. The overall health insurance premium development over the last couple years has been illustrated in the graph below

Figure 48: Health Insurance Premium Development – In Rupees Billion (Sethi) * The figures in 2006–2007 represent a projected value.

Although the base is small, the health insurance sector is growing at an encouraging pace of 35% year-on-year, thus making it one of the fastest growing segments in the non-life area. Furthemore, the health insurance penetration has increased from 0.1% of the population in 1991–1992 to 1.5% in 2005–2006, another indicator of progress in the right direction. The illustration below depicts the number of policies issued year wise (2001–02 to 2005–06) for 3 of the 4 public sector companies. Data for the private insurers was unavailable. Moreover, the private insurers entered the market only in 2001. The 4 public sector insurers developed their core health insurance product “Mediclaim” in 1986. The graph above illustrates that New India Assurance is the best performing company in terms of the number of policies issued. Whilst United India was not performing as well initially, the liberalization triggered competition; and in 2005–2006 United India seems to have caught up with Na- tional. 106 3 Health Insurance

Figure 49: Development of Number of Policies issued year wise (Sethi)

Main Issues and Challenges for Health Insurance in India An understanding of the key issues and challenges for health insurance in India is vital to the development of a new strategy or amendment of an existing one. 1. Tariffed Regime: With claims-to-premium ratio at 130% (on an average), the health insurance sector in India has been a loss making portfolio. However, this was triggered on account of complacency in underwriting skills, and competing on price for health products, while seeking cross subsidization of this loss making segment by profitable businesses (motor). 2. Dearth of Underwriting Skills: Insurers lacked rational pricing. A shift to the de- tariffed regime, will now cause cross subsidization to end and will give impetus to health insurance as a profit making business. However, this poses a new problem for non-life insurers: honing appropriate underwriting skills that were dormant enough to disappear in the tariffed regime will be a staggering task.# 3. Price Hikes and Attrition: Appropriate pricing strategies (that reap initial profits now, and sustained profitable growth in the future) would imply that insurers have to be on their toes in order to address customer reaction to the price hikes. This reaction may include attrition (on account of price sensitivity), which is further aggravated by the yearly renewal of policies and thus a corridor for customers to step down, in turn making it herculean for insurers to acquire new customers. 3.1 Industry Outlook and Major Players 107

Thus a price hike has to be complemented/ justified by customized product solutions, creative bundling and unbundling of risks, increased awareness of products, and innovation in various facets of the marketing value chain from product design to pricing to distribution channels. 4. Moral Hazard Dilemma: On one hand, insurers have to seek to reduce moral hazard and adverse selection; whilst on the other hand, by virtue of judicious acumen, they have to seek to increase number of policies sold, for “insurance” as a concept to make sense: via pooling of risk on account of law of large numbers. 5. Information Asymmetry and Fraudulent Claims: Reducing information asymmetry and installing effective systems preventing fraudulent claims are the need of the hour. These would also help reduce errors of omission wherein a valid claimant is denied claim amount or has to face unnecessary delays. 6. Provider unpreparedness: There is no standardization with respect to treatment protocols and quality, either through registration or accreditation. There is no way of controlling claims as prices vary from one hospital to another and over time. 7. Intermediary unpreparedness: Third Party Administrators (TPAs) were rammed in the scene in lieu of the procedural handling of cashless transactions, unfortunately, without provision of adequate information systems and streamlined processes. Thus training TPAs and extending support to them via responsive and effective claims settlement tools is an impending need. This would help insurers reduce the incongruence between themselves and the TPAs; who by most customers are regarded as the face of the insurer, thus a cardinal touch point. 8. Regulatory barrier: The 26% foreign equity cap is definitely a challenge and it is difficult to find a “local” partner in a risky, less understood business which was de-regulated only 6 years ago. Additionally, there exists a high capital requirement of USD 22 million suggesting that in the first few years of operations, insurers will have to charge premiums that are sufficient to compensate for the investment, however, sacrificing volumes on account of price sensitivity and once again posing a hindrance in achieving the law of large numbers. 9. Payer unpreparedness: The insurer is unable to design schemes that are profitable due to lack of comprehensive data on health requirements and usage patterns of different socio economic segments.

The Key Players The players in the health insurance sector in India include all the general insurers (or non-life insurance companies). The LIC, although primarily into life insurance prod- 108 3 Health Insurance ucts, does offer products that cater to the needs of the health insurance market. The list of players as of 2005–2006 includes – New India Assurance Co. Ltd – National Insurance Co. Ltd – The Oriental Insurance Co. Ltd – United India Insurance Co. Ltd – Bajaj Allianz General Insurance Co. Ltd – Cholamandalam MS General Insurance Co. Ltd – HDFC Chubb General Insurance Co. Ltd – ICICI Lombard General Insurance Co. Ltd – IFFCO-Tokio General Insurance Co. Ltd – Reliance General Insurance Co. Ltd – Royal Sundaram Alliance Insurance Co. Ltd – Tata AIG General Insurance Co. Ltd – Star Health and Allied Insurance Co. Ltd

3.2 Market Opportunities and Challenges – Empirical Results and Analysis

Having already established the context for empirical results and analysis in chapter 2.2, without further ado, I will present to you the results and analysis of Section 3 of the questionnaire. Please refer to the same in the appendix for any clarifications.

Results 3[a]: the responses of the CEO of Bajaj Allianz will be discussed in the following chapter amongst best practices. Due to the subjectivity of the question, not all respondents listed the customer segments precisely. Nevertheless, most respondents did enumerate the segmentation variables, offering significant cues to the key attributes used for deriving primary customer categories and groups in the health insurance arena. For some respondents, their primary customer segment included individuals living in metropolitan cities (Mumbai, Delhi, Kolkata, Chennai, Hyderabad and Banga- lore) in age group 35 to 55. Their firms also had employee group schemes with relevant corporate clients. Another respondent belonging to the senior management of a reputed insurer specified that the primary customer segment at his organization included middle class individuals in the age group 35–45 living in metros. “Health in- 3.2 Market Opportunities and Challenges – Empirical Results and Analysis 109 surance, I believe, is a long term contract despite it having to be renewed on a yearly basis; thus it has been our target to develop a long term relationship with the population which would grow in income levels”, he added. This is justified because of the ever burgeoning income levels of the Indian middle class. He further clarified, “Un- fortunately, we have currently narrowed our focus to the Metros, because medical practices across the country are not uniformly well developed or sophisticated and thus do not provide grounds for managed care solutions where we would like to build our expertise and forte in.” Another respondent (who’s company provides products in both life and health areas) claimed that his firm offered products across all segments (age, sex and income), except the rural segment where minimum premiums would in- hibit purchase for a large cross section of the population. Additionally, the insurer provides for traditional life and ULIP policies to which medical riders can be attached. Some respondents precisely defined that their main customer segments would include city dwelling, middle class families with children where age of the primary insured is less than 45 years; certain classes of rural customers; and employees (and their families) belonging to huge corporations, thereby implying group schemes and consequently benefiting from cost economies of scope and scale. 3[b]: responses were varied and ranging from less than 50% to almost peaking at 130%. The ranges above 110% would normally entail, claims to premium ratios for group schemes. Despite the range, responses were skewed within a limited band- width in the lower end. While there were varied figures above 100%, which included 105%, 110%, 120%, 124%, 130%, anything below 100% was also below 60%. This signifies that firms were either pricing their products backed by sound underwriting and pricing mechanisms thus providing for a cushion for additional administrative, sales and employee costs and decent margins, or they were breeding obvious loss making portfolios with certain categories, where the claims to premium ratio was above 100%; and this doesn’t even include costs besides the claims. 3[c]: responses averaged at about 80%. One respondent revealed individual figures for both individual and group policies, with the retention rates being more than 95% and more than 80% respectively. This is counterintuitive and rather alarming, considering that one would believe that group policies, by virtue of being tied up with the employer would be easily renewed. However, this can mean one of two things. One, there is a reduction in the number of overall groups attached to an insurer’s group scheme. This would necessitate, the retention rate to be defined as (total number of groups renewed in n+1)/(total number of groups enrolled in year n.) Two, there is an elevated employee attrition in corporate Indian firms, thus projecting a lower overall retention rate for the group schemes. Contextually, here, the retention rate will have to be defined as (total number of individuals who renewed their policies that belongs 110 3 Health Insurance to a group scheme in year n+1)/(total number of individuals who were enrolled by means of the group scheme policy in year n). 3[d]: the number of frauds detected ranged between 60 and 150, although most respondents admitted that they “suspect” a higher figure. The fact that insurers suspect higher frauds reveals an obvious flaw of the system: one that breeds on a principal agent problem, leaving both parties insecure and constantly anxious and wondering if each is being “scammed”, thus resulting in unfriendly measures or exaggeration on both sides. 3[e]: obviously, not all respondents replied similarly. In order to better comprehend the responses, I would present the “mode” and “mean” rank corresponding to every one of the 10 criteria. For “Right pricing strategies based on accurate risk assessment and underwriting skills”, the mode ranks were 1 and 3 with equal number of occur- rences and the mean was 2. For “Tracking fraudulent claims”, the mode and mean ranks were both 8. For “Customer satisfaction with respect to efficient and quick claims settlements”, the mode was 2 and mean was 2.25. For “Enhanced and improved service provided by TPAs”, a mode did not exist due to varied answers, but the mean was 5.25. This was an outlier, with some respondents claiming that this was a very urgent requirement while some others giving it the least importance with a rank of 10. For “Increasing professionalism amongst agents and brokers”, the mode and mean ranks were both 3. For “Reaching out to the segment of society that is below the poverty line”, the mode was 9 and the mean 6.75. The mean was pushed up because of some responses that suggested this aspect was an urgent requirement. For, “Developing health insurance products that cover different diseases”, the mode was 7 and the mean 8. For, “Developing health insurance products that cover day-to-day doctor visits”, the mode was 6 and mean 7.25. For, “Use of CRM tools and Data warehousing for linking historical customer information and thereby coming up with accurate assessments”, the mode did not exist due to varied answers, and the mean was 6. For, “Simplicity of contracts and contract language”, the mode is undefined as it was varied, and mean was 6.5. 3[f]: a similar approach (as 3[e]) has been adopted to understand the effectiveness of promotional media. The effectiveness was rated as follows is as follows: News- papers with a mode and mean of 2 and 2, Television with a mode and mean of 1 and 1.25, Radio with a mode and mean of 5 and 4, Magazines with a mode and mean of 6 and 4.75, Internet and Outdoor each with no definite mode but a mean of 4.5. 3[g]: Health insurers are opting for several channels of distribution to maximize reach and optimize penetration. Respondents had the following views towards the effectiveness of 7 different distribution channels on a “likert scale” that runs from least effective [1] to most effective [5]. The primary views included [5] most effec- 3.2 Market Opportunities and Challenges – Empirical Results and Analysis 111 tive for bancassurance, [1] least effective for medical tie-ups, with one outlier claiming it to be [5] most effective for the rural population, [4] more effective to [5] most effective for automobile tie-ups, with one outlier claiming it to be neither effective nor ineffective, [2] less effective to [3] neither effective nor ineffective for malls and supermarkets, with a few companies testing this channel, while others finding it less effective. There exists one outlier, with this channel being rated [4] more effective. Postal service was rated [5] most effective primarily for the rural segment and deemed [2] less effective otherwise. Life insurers who have ventured into health insurance products claimed that they do not have any postal tie-ups yet. Telcassurance was rated [5] most effective or [4] more effective by a few respondents who felt that this channel had proven effective for families in middle and upper middle class or for first time customers. Other respondents had company specific varied answers to this channel. To, online distribution, the responses varied across the gradient of the likert scale. Having said that, the responses on the health insurance industry reveal the following key highlights: 1. The main customer segments include middle class families with children with the key insured between ages 35 to 55 and employee group schemes with huge corporations, thus permitting cost economies. 2. The claims to premium ratio ranges between 50% and 130%, with anything below 100%, being skewed at less than 60% and anything above 100% being uniformly distributed till 130%. Moreover, the group schemes seem to be the loss making portfolios 3. The retention rate averages at 80% with some insurers projecting a retention rate of 95% for individual schemes and 80% for group schemes; counterintuitive but justifiable figures. 4. The frauds range between 60 and 150, with some insurers suspecting a higher number. 5. The most urgent requirements for the Indian health insurance industry are [1] Right pricing strategies based on accurate risk assessment (differences between good and bad risk) and underwriting skills, [2] Customer satisfaction with respect to efficient and quick claims settlement, [3] Increasing professionalism amongst agents and brokers and [4] Enhanced and improved service provided by Third Party Administrators. 6. The most effective channels of communication are [1] Television and [2] News- paper. 7. The most effective distribution channels are [1] Bancassurance across urban and rural segments and [2] Postal services specifically for the rural sector. 112 3 Health Insurance

3.3 Urgent Needs and Customer Segmentation

The Socio Economic Classification and the Household Potential Index that was covered earlier in the Life Insurance Segment is of acute importance in the Indian Health Insurance Scenario as well, as health insurance in India is a highly under-penetrated area (with a lower relative penetration to life insurance in India4), thus implying higher level of “premiumness” (a concept which implies that a product or service is “wanted by many” but “consumed by few”), consequently suggesting that health insurance consumption in India would correspond to higher HPI score and would initially be a profitable business by aiming for the higher socio-economic classes. In order to precisely and holistically uncover the most urgent customer needs and corresponding profitable customer segments for the Health Insurance Market in India, I have relied on my analysis of empirical data that was disclosed in a recent unique Health Survey “Health Matters” Index 2006 conducted by one of the leading Life Insurance Companies: Tata AIG Life that seeks to enter into the health insurance area in the de-tariffed era (which would imply profitability after an initial predicted price war hopefully settles). “Health Matters” is a comprehensive, first-of-its-kind survey to assess the awareness and the need for accident and health insurance as well as critical illness covers in India. The survey was conducted with a sample size of 1200 respondents across Mumbai, Delhi, Hyderabad, Kolkata, Chandigarh and Bangalore.

Figure 50: The Stimulus-Organism-Response Model (Philip Kotler)

4 Indian non-life penetration is lower than the life penetration where penetration is measured as a ratio of the percentage of premium to GDP. Although the life insurance penetration in India is lower than the global average for the same, the non-life penetration in India is relatively much lower compared to the global average of the non-life insurance penetration. Thus I used the term “relatively” to compare the penetration of life and non-life insurance in India. To be precise, in 2005, the life insurance penetration in India was 2.53% vs. the global 4.34%, whilst the non-life insurance penetration in India was a meager 0.61% vs. a global 3.81% (Novi). 3.3 Urgent Needs and Customer Segmentation 113

The target respondents were working men and women in the age group of 25 years and above belonging to Socio-Economic Classification A and B with a personal income of more than Rs. 3000 per month. In order to better map the findings from the survey which reveal the characteristics of the buyers in general, it is first essential to understand the context, which can be il- luminated through the comprehension of the underlying model: the stimulus-organism-response (S-O-R) model, where stimulus includes the market or other environment or contextual stimuli, organism includes the buyer/consumer characteristics and buying decision process, and response is how the consumer evokes a response to

Serial Respondents Features and Buyer Characteristics Number Survey Findings

1 The survey was conducted with a sample size of Cultural Factor: 1200 respondents across Mumbai, Delhi, Hyderabad, Subcultures Kolkata, Chandigarh and Bangalore Geographical regions – (Metros of India). metros 2 The target respondents were working men and Personal Factor: women in the age group of 25 years and above. Age and Stage in the Life Cycle: Age 3 The target respondents belonged to Socio-Economic Cultural Factor: Social Classification A and B. Class – Socio-Economic Classification 4 The target respondents had a personal income of Personal Factor: more than Rs. 3000 per month. Occupation and Economic circumstances 5 71 per cent of Indians are not adequately financially Personal Factor: protected against any major illnesses. [a] Lifestyle and Values [b] Economic circumstances 6 72 per cent of respondents will not be able to sustain Personal Factor: themselves and their dependents financially for more Economic circumstances than a year if their main source of income was eliminated due to sickness or accident. 7 65 per cent respondents felt that they were Consumer psychology inadequately covered to meet the rising healthcare, stage: Motivation, hospitalization and surgical expenses. Perception 8 67 per cent were extremely concerned about Consumer psychology accidents and disabilities adversely affecting their stage: Motivation, financial stability Perception 9 43 per cent of respondents did not feel the need to be Consumer psychology covered by health insurance. stage: Ignorance Figure 51: Key Findings from the “Health Matters” Survey; Source of Findings: Tata AIG Survey, “Health Matters” Index 2006; Source of Insights and Buyer Behavior Analysis: Author 114 3 Health Insurance make the purchase. Once in context, the findings of the survey can be appreciated better. Please see the illustration below, depicting the S-O-R model and projecting the facets encompassing each of these: stimulus, organism and response. The “Health Matters” survey suggests vital findings which offer cues to imminent need of health insurance amidst the Indian market milieu. In the table (Fig. 51) below I have proposed corresponding buyer characteristics and consumer psychology (in reference to the S-O-R model) for the respective respondents’ features and survey findings. The 9th finding in the table above is “43% of the respondents did not feel the need to be covered by health insurance”: This is significantly alarming and indicates a lack of awareness towards the relevance and need for health insurance, in the backdrop of rising healthcare costs and an increasingly stressful life that leads to a higher suscep-

Country India Hongkong Singapore Malaysia Thailand

Customer Needs Derived from

% of individuals 72% 50% 55% 71% 38% who will run out of funds in case of critical illness within a year Amount of savings Rs. 200,000 Rs. 545,842 Rs. 538,849 Rs. 229,455 Rs. 432,000 required to cover (4927 USD) (HK$ (Sng$ (RM $ (Baht$ medical expenses 95,174) 18,731) 43,855) 351,429) for a critical (13448 (13204 (5642 (10631 illness USD) USD) USD) USD) Multiple of annual 2.6 times 6.2 times 6.8 times 3.3 times 5.8 times income required for insurance coverage % of individuals 68% 66% 49% 78% 74% who do not have post retirement medical coverage % of people who 69% 50% 34% 45% NA started investing in their twenties Types of insurance Hospital/ Critical Critical NA NA that consumers are surgical illness illness most interested in expenses and and hospital/ and life income surgical insurance protection expenses Figure 52: Asian Attitudes Comparisons to risk and insurance (Tata AIG) 3.3 Urgent Needs and Customer Segmentation 115 tibility to major illnesses. Thus, although the low penetration of health insurance in India suggests optimism with respect to the achievable potential of the market, this particular finding poses a considerable challenge to health insurers since the consumer psychology stage suggested by this finding is that of ignorance. A comparison with a similar survey commissioned by the AIG to assess the Asian region’s attitudes to insurance and risk revealed the following insightful differences between the attitudes and primary needs of Indians and individuals belonging to other Asian economies. The survey also evaluated the perceptions of consumers towards various benefits offered by accident and medical insurance products and revealed that about 65 per cent respondents rate cashless hospitalization admission and care as an extremely important attribute in selecting a medical insurance product. Interestingly, the survey revealed a high preference among respondents, of about 79 per cent, who expressed their desire to purchase a health insurance product for their children. It further revealed that the average age of owning an insurance policy in India is 28 years which is a positive sign and indicates a growing awareness amongst the youth towards the need and importance of insurance. While 41 per cent of respondents expressed a preference for private medical care post retirement, only 27 per cent expressed a desire for public medical care post retirement. The “Health Matters” Index survey is an initiative by Tata AIG Life aimed at assessing and understanding the needs and expectations of consumers for insurance products. This survey will be an annual exercise of Tata AIG Life with the objective of evaluating and understanding the changing market needs for products like accident/health insurance. Whilst the survey provides interesting insights about the perception and orientation of consumers towards life and health insurance, it will also help create an annual index that would track the progress of the growth of this sector and benchmark India against other Asian countries. The findings of this survey can aid in customizing suite and offering innovative insurance solutions to the Indian consumer (Mr. Bimal Balasingham).

Segmentation Process for the Health Insurance Market in India Markets are not homogenous. A company cannot connect with all customers in large, broad and diverse markets. Consumers vary on many dimensions and often can be grouped according to one or more characteristics. A company needs to identify which market segments it can serve effectively. Such decisions require a keen understanding of consumer behavior and careful strategic thinking (Kotler and Lane, Market Segmentation). 116 3 Health Insurance

I will use the results of my survey “Emerging Opportunities and Challenges in the Health Insurance Industry in India” (Please see appendix) in order to illuminate the segmentation process for the health insurance market in India. I will consider the best practices as adopted by Bajaj-Allianz (a joint venture between Bajaj Auto Limited of India and Allianz AG of Germany). The respondent is a senior management person who represented his views based on the current and next 3 years outlook for Bajaj Al- lianz in India. The major segmentation variables are geographic, demographic and behavioral. Please see the table below depicting the main customer segments and the corresponding variables used for segmentation for Bajaj-Allianz’s health insurance products.

Serial Customer Segment Segmentation Variables Number

1 Age group 25–55 years, Middle Class Demographic: Age, Socio-economic & Upper Middle Class, living in Class Metros and Major cities Geographic: region 2 Self employed, Upper Middle Class, Demographic: Socio-economic Class, in Metros and Major cities Occupation Geographic: region 3 Salaried and Self employed, Demographic: Socio-economic Class, Middle Class and Upper Middle Class, Occupation in Smaller cities Geographic: region 4 Employees of small and medium sized Demographic: Occupation business organization Behavioral: Usage rate is heavy as it includes buyers who are part of membership groups (social factors); furthermore renewal premium is bound to be high. 5 Large corporate in manufacturing and Demographic: Occupation service industry Behavioral: Usage rate is heavy as it includes buyers who are part of membership groups (social factors); moreover renewal premium is bound to be high due to the group scheme, thus giving impetus to loyalty status.

Figure 53: Customer Segments and Segmentation Variables for Bajaj Allianz (Emerging Op- portunities and Challenges for the Indian Insurance Industry, Author)

In the segmentation process, it is essential to analyze the segment profitability. Al- though, it was difficult to get micro data revealing profitability at the segment level, the degree of product profitability does signal soundness of the underlying segmenta- 3.3 Urgent Needs and Customer Segmentation 117 tion policy. Implying, since an accurate segmentation policy represents the necessary (but insufficient condition) for the success of the corresponding products, an analysis of the claims-to-premium ratio for an insurance product can conversely depict the degree of attractiveness of the underlying segmentation policy. Responses to my survey on “Emerging Opportunities and Challenges for the Indian Insurance Industry” reveal that: the main health insurance product for Bajaj-Allianz is “Health Guard” with a claims-to-premium ratio of 67% in 2006–2007. This means that for every Rs. 100 of premium collected, Rs. 67 is the claims paid out. This is an exceptional ratio, considering non-life insurance market was still tariffed until 1st of Jan, 2007 and companies were unable to decide their prices. Moreover, several non-life companies have had health claims-to-premium ratio as lofty as 130%, thus calling for the potential cross subsidization of the unprofitable health insurance business by the other more profitable businesses, in order to maintain the stipulated solvency margin. This can also be cited as the single main reason for the dearth of standalone health insurance companies in the Indian insurance environment until recently. However, the claims-to-premium ratio for group health schemes at Bajaj-Allianz has been over 120%. This obvious unprofitability suggests that Bajaj Allianz needs to either redefine or drop the group scheme related segments, before going in for the next target market selection.

Figure 54: Five Patterns of Target Market Selection (Philip Kotler) 118 3 Health Insurance

The retention ratio for Bajaj-Allianz stands at 85% for their health insurance products in general; this again suggesting an overall segmentation policy success. Finally, the pattern of target market selection for Bajaj Allianz (as most other non- life insurance companies) is selective specialization implying the selection of multiple segments, each of course objectively attractive and appropriate, promising to be a moneymaker (Abell). Please see the illustrations of the “Patterns of Target Market Selection” below.

3.4 Products

Health Insurance Product Design Facets Every upside has its downside. The Indian healthcare sector has made impressive strides and is surging ahead with an annual growth rate of 13% per annum. Increased literacy rate, higher levels of income and an increased awareness have been contributory factors. The downside includes cost escalation; declining budget provisions for public health; emergence of new killer diseases like aids and innovation in the wrong hands thus further soaring costs. For the health insurance industry, even the upside has added complexity. The Health Insurance Industry in India has not been able to keep pace with burgeoning of the economy and rise of the middle class; moreover, the downside of the healthcare sector has further pulled down its momentum. While regulations like the 26% cap on foreign equity and high capital investment requirements hinder the plausible growth, these are unavoidable circumstances and the issue lies primarily in the way the health insurance products are designed. If designed meticulously and in sync with all the facets going into its development, this very product could augment partnerships with intermediaries, providers (hospitals etc), enhance customer satisfaction, promote customer life time value and subsequently extract its deserved value through premiums that are profitable. The facets that determine the health insurance “product” delivery are those that have to be essentially considered during the design and development of the product. Thus the product design aspects are – Hazards in claims settlement: Delays and errors of omission in claims settlement was considered as a hindrance (for their selection of the product) for 70% of a population in a survey by Srabanti Chakravati (Chakravati). – Information Lag: 60% of the population sampled claimed information lag was a hindrance in their selection of the product (Chakravati). This arises from unclear and in-transparent policy contract; complex and hidden clauses in contracts. 3.4 Products 119

– Adverse selection: In the tariffed regime, a “good-risk” customer paid as much premium as a “bad-risk” customer. Insurance companies adversely selected bad risk customers as well; which meant that good customers were suffering at the expenses of the bad ones. The problem of adverse selection can now be sorted by different products for different segments, and differential pricing methodologies coupled with a database with claims data record. – Introduction of cashless hospitalization without infrastructure in place: Although a customer oriented advancement, cashless hospitalization products need to be supported by the right infrastructure and systems in place. This would require closer tie ups with hospitals, assuring standardization of pricing strategies, less frequent changes in price and training and support of TPAs. – Fraud Management: Transparency of contracts, full disclosure of clauses would minimize frauds in health insurance; because information asymmetry triggers moral hazard or revengeful attitude in consumers to scam the insurer as they might have felt when the policy was thrust before them. Moreover, data warehouses with detailed information that can assist in data mining and drawing correlations would assist in tracking fraudulent behavior. – Tenure of renewal: Products with increased term of renewal is the call of the hour; these would help reduce decisions triggered by price sensitivity, provide a window to build customer loyalty, improve CLV, reward good-risk customers with claims bonuses, increase the number of customers through network effects by lur- ing other customers belonging to the same reference group (for example family members). – Focused Products satiating Focused Needs: India with its huge population, has scores of people infected by several diseases. Health Insurance products could include coverage of a certain group of diseases like diabetes (ICICI Prulife introduced a product called “Diabetes Care” for those who might be afflicted by it and are within 25–60 years of age). – Age no bar: Instead of barring individuals above the age of 50 from health insurance coverage, insurers must devise customized products for this age group with correspondingly higher premiums on account of higher probability of occurrence of diseases or insured events. – Location Wise: Insurers must devise different product or lines extensions for different locations, depending on whether it is a rural or urban location, depending on the propensity of the kinds of diseases probable, depending on the slightly tweaked demographics; all of these would call for different pricing mechanisms; which is justified because health care costs in rural areas are negligible compared to the spi- raling costs in the metros. 120 3 Health Insurance

– Group Policies Impetus: Insurers need to seek out group contracts not just big corporates, but groups that include: student bodies, colleges, schools, doctors, professional organizations members etc. Group policies imply discount to the group and benefits to the insurer via economies of scale and scope thus reduced acquisition, retention and administrative costs. – Group Policies Portability: Portability of insurance from group to individual policy must be permitted when an individual leaves the group or gets retired; additionally, this does not affect the insurer, who continues to enjoy the law of large numbers. Furthermore, customers must be allowed transfer to a new one (or retain his existing policy), as he desires, when he changes employers and thus the corresponding insurers that the employer has tied up with.

Regular Checkups Coverage: In India, although hospitalization costs have sky-rock- eted, the regular checkups (or more commonly referred to as Out Patient Department charges) have not risen beyond affordability. However, most individuals visit doctors for curing daily infections which does not call for hospitalization. Most insurers in India do not cover these expenses (perhaps on account of the expected fraud, due to non-mechanization of private hospitals’ billing system). But, the survey by Srabanti, revealed that lack of out-patient coverage was quoted as the biggest hindrance for non-consideration of a health insurance policy by 80% of the sampled population (Chakravati).

The Regulator Says: The Finance Minister raised the tax exemption limit for health insurance The finance minister of India, P. Chidambaram, in his reply to the debate of the finance bill said “Honorable Members may also note that we have raised the exemption limit for health insurance premium from Rs. 10,000 to Rs. 15,000 for individuals and in the case of senior citizens to Rs. 20,000. A senior citizen will get a minimum relief of Rs. 2,000 per year.” (P. Chidambaram) The primary motive for insurance policies is supposed to be risk mitigation. However, until recently, the Indian consumer saw the insurance policy, primarily as a tax saving instrument. In fact, insurers even advertised the insurance policies in a similar light: with the extent of tax saved being projected as the key incentive to take up the policy. Although, with the increasing awareness of the Indian consumer, risk coverage has become the essence; however, the traditional mindset remains and tax savings can still be used to lure consumers. Thus, the piece of information above (the FM’s reply to the finance bill debate), brings good news for both the insurers and the insured. 3.4 Products 121

Product Development History of the “Mediclaim” Policy Health insurance in India was initiated by the launch of the “Mediclaim” policy by the four general insurance companies (the current public sector general insurers) in 1986. Thus understanding the developments of the Mediclaim policy would unveil the development of health insurance products over time. The Mediclaim provides reimbursement of hospitalization and domiciliary hospitalization expenses (expenses for treatment of such illness which would normally require hospitalization but which is treated at home under compelling circumstances as per doctor’s advice only.) The treatment taken in India qualifies for reimbursement. Under Third-Party-Administra- tion (TPA) system, there has been an initiation of cashless service in case of hospitalization, up to a limited extent. The table below traces the innovations in medical insurance due to inadequacies of Mediclaim scheme in India.

Limitations in Mediclaim Solutions Introduced

New Born not covered Cradle Care As age increases, income drops Bhavishya Arogya granted with higher in old age premiums Premium only, thus becomes an Asha Deep, Jeevan Asha, Nav Prabhat outgo if no claims lodged (coveringlimited diseases and life cover) Does not offer cash benefits for change of Dreaded Disease Cover lifestyle, specialized treatments and equipments Attendants’ costs, donor’s expenses, ambulance Tertiary Care charges not covered Dental Treatment Excluded Smile Care Spend first claim later reimbursement policy Hospital tie up and introduction of TPA s as intermediaries for cashless hospitalization Health Cover not suitable for economically Jana Arogya backward class Renewal hassles & possibility of policy Long term hospitalization discontinuity Costs not covered- private nursing care, Health Quarter Plan health check up; admission to hospital not assured; provider vigilance not offered; health tips and guidance not gives For negotiations possible in group policies Group Tailored covers

Figure 55: Shortcomings and Innovations in the Development of the Mediclaim Policy (Mishra and Mishra) 122 3 Health Insurance

Managed Health Care Until recently, we identified health as merely the absence of disease. Doctors concen- trated on fighting acute illnesses such as tuberculosis, polio and small pox that threatened entire communities. Biomedical researchers focused their efforts on identifying viruses and bacteria that cause disease and then developing “silver bullets” such as antibiotics and vaccines to fight them. Our definition of health now would include a marriage of body, mind and environment. General insurers can be leaders in this new healthcare paradigm. Such companies can build partnerships among doctors and other health professionals who provide patients with a full spectrum of coordinated care services from preventive efforts and primary care to specialty treatment and follow- up. These seamless systems can help patients control their symptoms everyday at home, work or school, rather than waiting to visit the doctor when they are seriously ill. Instead of managing the cost of healthcare, member establishments or plan procuring companies can focus on managing the care itself. At each point along the continuum of care, such companies can use information-driven programs to improve their care-receiver’s health and quality of life. The major components of the care management approach include: disease prevention and wellness; early detection; the management of chronic illness; and partnerships to improve healthcare quality.

Figure 56: Evolution of Medical Insurance Business (Chatagny) 3.4 Products 123

This transformation from a fragmented, fee-for-service, biomedical model to a pre- paid system based on coordination, health management and wellness would require investments in information systems, re-engineering programs and mergers designed to achieve economies of scale. It would necessitate insurers expanding their geographic markets, forming strategic alliances with healthcare providers, pharmaceutical companies, information management vendors and even competitors; resulting in a cost reduction, access to new markets and achievement of their business and statutory objectives (Mishra and Mishra).

Product Range to Suit Various Segments The following products have been suggested to suit various segments 1. Long Term Hospitalization/Domiciliary Hospitalization (DH) Insurance Policy; with term periods choice of 1, 5, 10 years. 2. Tertiary Care Insurance; which could cover major ailments like strokes, open and close heart surgeries, malignancy, neurosurgery, joint replacement, grievous in- jury including multiple fractures, encephalitis and nephritis. 3. Long Term Retirement Benefit Plan, with reimbursement options for the complete lifetime of an individual without age restrictions; however, by use of differential pricing for increasing amounts insured.

Consumer Insight: De-tariffing and Group Health Insurance Schemes There will be a reduction in the Group Insurance Schemes in the Indian Health Insurance Industry. Following the lifting of price controls, experts predict that this year there will be an increase in cases of cancellation of group health policies. This is the initial side-effect of 'de-tariffing' with effect from Jan- uary this year. Earlier, the Indian non-life insurance industry followed tariffs set by the Tariff Advisory Committee. There were tariffs for fire, engineering and motor lines of businesses ensuring profitability for the insurance companies. On the other hand, health, marine and personal accident were non-tariff lines of businesses. Here, corporates especially, the IT, ITES and engineering companies had to pay negligible premium on their group health policies, if they had a large property or engineering policy. Under the new system, because of the end of cross-subsidization, insurers are hesitant to offer large discounts on group health covers. Already, companies such as Oriental Insurance, ICICI Lombard, Bajaj Allianz and others have hiked the premiums for group health insurance and they are underwriting the portfolio on a stand-alone basis. 124 3 Health Insurance

Says Sandeep Dadia, director, Enam Insurance Brokers, “There could be a situation where insurance companies get aggressive on market share or volumes and underwrite group health insurance at a low premium.” According to him, sometimes the insurance company expects to control losses over time. But when they are unable to do so and the claim-to-premium ratio rises, the insurer renegotiates the pricing with the corporate. Then, it is left to the corporate to either accept the new rate or look for a cheaper option. For an option. For an employee, things could change quite dramatically. Sandeep added “Earlier, you had the luxury of free health insurance for yourself and your family, as well. Now you may have to either take family floaters or take separate health insurance products for family members. That means that you have to shell out the money from your own pocket.” Moreover, said Anoop Mathur, vice-president, corporate accounts at How- den Insurance Brokers, “Individuals should avail of an individual health insurance policy, especially in high attrition sectors such as IT, ITES and financial services, depending on their age profile. The premium paid against such health insurance policies also gets benefits under income tax laws, up to Rs. 15,000. This effectively brings down the overall cost of health insurance.” (Syed, Free Health Insurance from Office? No More!) The two reasons cited above [a] increase in cancellation of group health insurance policies by corporates [b] and increased attrition rate at these corporates imply: that individuals will now be more conscientious and aware of the available individual health insurance schemes, by virtue of selective perception.

4. Seafarer’s Health policy, which is justified because there are over 40,000 seafarers in Mumbai itself. These individuals are covered by the government only while at sea, which may be 6 months a year. The policy could include [a]hospitalization and DH, could cover the seafarers, while they are back on port and their families, the year around, [b]personal accident continuous cover for both the seafarer and his family, [c] long term retirement benefit plan for the seafarer and his spouse. 5. Destination India, designed for NRI (non-resident Indians) who visit India and/or their families for only a short duration, about once in 2 years. This would be a short period policy offered for a maximum of 180 days, with covers on personal accident, medical & repatriation, personal baggage, delayed baggage, loss of pass- port, personal liability and hijack benefit. 6. Health Quarter’s Plan, designed for the parents and family of the NRIs in India, providing for health insurance package with accident insurance; with an emotional appeal to children settled abroad, reminding them to take care of their parents. 3.4 Products 125

(ICICI Bank has already launched one such policy called “Rishtey” which in Hin- di is a word for close relations with an emotional connotation.)

Gram Arogya Yojna (Hindi phrase for Village Disease-Free Policy); which would re- ly on economies of scale, for covering the entire village in a standardized fashion. Any number of members above the average family size would pay additional premium. “Floaters” would be used to permit usage of the insured sum by one or all members of the family within the policy period (Mishra and Mishra).

Best Practices: Bajaj Allianz General Insurance Co Ltd’s “Health Guard” Policy To my survey “Emerging Opportunities and Challenges for the Insurance Indus- try in India”, Kamlesh Goyal, the CEO of Bajaj Allianz responded that his main health product for individuals is “Health Guard” with a claims ratio at 67% (a good ratio when the industry average is almost at 110%) and a retention rate of 85%. Thus the policy deserves to be elucidated. How will the Health Guard Policy benefit the insured? Core features – Covers medical expenses for the insured and his family during hospitalization – Covers pre and post hospitalization expenses – Covers emergency ambulance charges (upto Rs. 1000) – Provides cashless facility – Provides cumulative bonus of 5% to the sum assured for every claims free year

Eligible Age – 5 to 55 years – Age at entry should not be over 55 years – Children below 5 eligible if their parents are concurrently insured by Bajaj- Allianz Restrictions on the Value of the Sum Insured – Sum insured value of Rs. 750,000–Rs. 1,000,000 is available only up to 40 years of age (subject to clean proposal form and medical tests) – Sum insured value of above Rs. 300,000 is not available for citizens above 50 years of age

Exclusions: [1] All diseases/injuries existing at the time of proposing this insurance. [2] Any disease contracted during the first 30 days of commencement of the policy. [3] Certain diseases such as hernia, piles and cataract (liability restricted to 10% of SI, max up to Rs. 25,000), and sinusitis shall be covered after waiting period of 2 years. [4] Non allopathic medicine. [5] Congenital diseases. [6] All expenses arising from AIDS and related diseases. [7] Cosmetic, aesthetic or related treatment. [8] Use of intoxicating drugs, alcohol. [9] Joint replacement surgery (other than due to accidents shall have a waiting period of four years). 126 3 Health Insurance

Details of Coverage that the policy covers: The member has access to cashless facility at various empanelled hospitals in India (subject to exclusions and conditions). In case the member opts for hospitals besides the empanelled ones, the expenses incurred by him shall be reimbursed within 14 days from submission of all documents. Pre and post hospitalization expenses covers relevant medical expenses incurred 60 days prior to and 90 days after hospitalization. 10% copayment is to be paid by the member if treatment is carried out in hospitals other than network hospitals. Family discounts of 10% as applicable; health check-up in BA diagnostic centers or reimbursement upto Rs. 1000 at the end of 4 claims free years.

3.5 Pricing Criteria

Premium Rs. 100

Less commission paid Rs. 17.5 TPA Rs. 10 Net Rs. 72.5 Claim Rs. 140 to Rs. 180 Loss Rs. 107.5

Figure 57: A Health Insurer’s Cost Sheet (Sethi)

The above table depicts the cost situation for health insurance in the tariffed regime – for every Rs. 100 collected in premium, the insurer incurred a loss of Rs. 107.5. This table offers a very crucial insight – the criticality of rate making (pricing) in the de- tariffed scenario, and how this would determine the financial muscle of an insurer, the adherence to the stipulated solvency margin and finally the existence of the insurer in a few years from now. It is normally believed that any insurance pricing exercise is expected to give a price that will cover the cost of all likely claims, popularly known as “pure premium”. However, this unfortunately does not include the claim settlement/adjustment expenses and insurer’s administrative expenses. Even if the price does project for the same, there are several disadvantages to be found in this cost plus pricing method. The biggest catch lies here–we are talking about estimating future claims cost on a portfolio of risks that are yet to be written. One would thereby suggest relying on [a] past claims data, [b] picking up a homogeneous portfolio of risks, [c] fit a suitable distribution to claims frequency and claims severity, and [d] estimate the likely claims frequency and claims severity for future. However, extrapolating for the future on the basis of what happened in the past hinges on a very basic assumption that 3.5 Pricing Criteria 127 is the past will repeat itself in the future, which may not mirror the way we would want it to. The following factors could materially alter the future claims experience 1. Expected inflation in the future different from reality – suggesting the claims could be much higher with an increased rate of inflation. 2. There may be an underlying trend or pattern of an upswing or downturn of the claims frequency and severity; this trend and the underlying causal factors (which may be seasonal issues, macro economical factors, and changes in related service providers like hospitals) needs to be identified and factored in. 3. Business mix might have changed over the period. This may materially affect the frequency and severity projections. Even though the claims analysis might have been carried out for each homogeneous group of risks separately, the data quantity and credibility issue would force some heterogeneity in the data. For example, a group covered for critical illness may seem like they have fairly homogenous risks, however, a closer look would reveal that individual differences in family history, profiles, genetic diseases would result in a highly differential claim filing pattern. 4. A change in the claims administration will alter the expenses: for example the introduction of TPAs to manage the cashless facility. 5. Regulatory and legislative changes may also alter the claims severity and/or frequency of certain classes of insurance. 6. A slight change in the policy terms and conditions can impact the claims frequency and severity substantially. For example an introduction or withdrawal of deductibles would not only have an immediate corresponding financial impact, but also an indirect one by altering perception. For instance, an introduction of a de- ductible implies that the insured would have to pay for a share of the initial claims, thus reducing the tendency of moral hazards or frauds. All of the above facts illustrate that a sole reliance on the cost-plus approach of pricing would be unwise and would have to be substantiated by a judicious use of price management techniques hinging on the willingness to pay of the customer, thus adopting an outside in approach.

Premiums Charged and Corresponding Sum Insured I will now elaborate on the pricing dimensions of two health insurance policies for ICICI Lombard (which has been ranked as the number 1 insurer amongst private players and has earned reputation and success in its few years of operation). The product highlights, policy coverage information, key benefits, eligibility and the core need of critical care have been further illustrated to justify the pricing dimensions. 128 3 Health Insurance

Currently the primary pricing dimensions [a] Age of the Insured and [b] Sum Insured. [c] The Number of Adults and kids in the family seeking the policy.

Product 1: Critical Care (ICICI Lombard) [a] Product Information: Critical Care protects the insured and spouse against loss of income on diagnosis of any of the 9 major medical illnesses and procedures. The first of its kind, it offers a lump sum benefit on diagnosis of Cancer, Bypass Surgery, Heart Attack, Kidney Failure, Major Organ Transplant, Stroke, Paralysis, Heart Valve Replacement Surgery or Multiple Sclerosis. Critical Care Insurance also provides cover against accidental death and permanent total disablement. [b] Policy Coverage: Critical Care offers a choice of coverage on both the sum insured and the tenure of the policy. One can choose the sum insured of Rs. 600,000 or Rs. 1,200,000 over a period of 3 or 5 years. The premium would be calculated accordingly. [c] Key Benefits: The key benefits include (i) Comprehensive Cover – Lump sum benefit on diagnosis of any of 9 Critical Illnesses, Personal Accident and Permanent Total Disablement (PTD) Cover, (ii) Policy Coverage (see [b]), (iii) No health check up required (iv)No 30 day waiting period (cooling off period), benefit paid immediately on diagnosis. [d] Eligibility: The eligibility criteria include (i) The insured can be one or one’s spouse, (ii) The insured needs to be between 20 and 45 years of age, (iii) Age is calculated as on the date the policy is issued (age completed as on last birthday). [e] Need for Critical Care: The need for critical arises on account of – (i) India is home to 60 million Coronary Heart patients, (ii) India’s economic loss due to heart related disease could be $236 billion till 2015, (iii) At any given time there will be 3 million cancer patients in India (World Health Organization) [f] Premium Table: Policy Tenure/ Sum Insured = Rs. 600,000 Sum Insured = Rs. 1,200,000 Age Groups (Years) 3 Years (Rs.) 5 Years (Rs.) 3 Years (Rs.) 5 Years (Rs.)

20–25 5,800 9,700 11,600 19,400 26–30 6,600 11,280 13,200 22,600 31–35 8,300 14,000 16,600 28,000 36–40 10,300 18,400 20,600 36,800 41–45 20,500 38,200 41,000 76,440 3.5 Pricing Criteria 129

Product 2: Family Floater Health Plan (ICICI Lombard) [a] Product Information: A single policy taking care of the hospitalization expenses of the entire family. Family Floater Health Plan takes care of all the medical expenses during sudden illness, surgeries and accidents.

[b] Policy Coverage: The policy covers medical expenses: (i) Incurred as an inpa- tient during hospitalization for more than 24 hours, including room charges, doctor/ surgeon’s fee, medicines, etc. (ii) 30 days prior to hospitalization (iii) 60 days post hospitalization (iv) Day care expenses incurred on advance technological surgeries like dialysis, radiotherapy, chemotherapy, requiring less than 24 hours of hospitalization (v) Pre-existing diseases can be covered after the 4th year provided the policy is renewed for 4 consecutive years.

[c] Key Benefits: Key benefits of the policy include (i) one policy for the entire family, (ii) income tax benefit under section 80 D, (iii) 5% discount on premium for every claim free year, (iv) digitally signed policy available online, (v)no health checkup required till the age of 45 years, (vi) hassle free claims, (vii) cashless facility available at over 3500 hospital networks in more than 175 cities in India, (viii) multiple payment options; and up to 2 year policies without increased premium in the second year or renewal hassles.

[d] Eligibility: The eligibility criteria include (i) The enrolment age (of the senior most family member) should be between 19 years to 60 years, (ii) Other members in the plan can be less than 19 years of age (i.e. up to 91 days), (iii) The policy cover is renewable till the age of 70 years, (iv) The customer can buy the policy for any family member(s), (v) For the purpose of income tax exemption u/s Sec. 80D, the policy should be bought only for self, spouse, dependent children and dependent parents.

[e] Need for Floater: The need for the Floater is justified on the following grounds (i) Healthcare costs have been rising at more than 20 percent on an annual- ized basis and out of pocket spending on healthcare still continues to be around 75 percent (Times of India), (ii) Tax Savings up to Rs. 3366 u/s 80 D of the Income Tax Act Supplements employer-based health plans with higher sum insured and medical benefits, (iii) Individuals require to have an insurance that caters solely to their health needs, apart from life insurance and investments, that provides cover against expenses incurred during hospitalization, as well as before and after, (iv) Avail cashless hospitalization through ICICI Lombard’s network of 3500 hospitals across India. 130 3 Health Insurance

[f] Premium Table:

Plan Details Plan A Plan B Plan C Individual 2 Adults 2 Adults & 1 Kid

Age of senior 1 L 2 L 3 L 2 L 3 L 2 L 3 L most family member 5–18 yrs. 1790 1990 2290 – – – – 19–35 yrs. 2490 2690 3100 4035 4650 5229 6024 36–45 yrs. 3120 3370 3744 5055 5616 6249 6990 46–55 yrs. 5700 6000 6667 9600 10667 10794 12041 56–60 yrs. 8167 11760 13067 12954 14441

Plan Details Plan D Plan E Plan F 2 Adults & 2 Kids 1 Adult & 1 Kid 1 Adult & 2 Kids

Age of senior 2 L 3L 2 L 3 L 2 L 3 L most family member 5–18 yrs. – – – – – – 19–35 yrs. 6423 7398 3533 4069 4406 5073 36–45 yrs. 7443 8364 4094 4600 4916 5556 46–55 yrs. 11988 13415 6593 7378 7188 8082 56–60 yrs. 14148 15815 7782 8698 8268 9282 Note: “L” means lakhs where 1 lakh =100,000 2nd row which includes 1 L etc indicates the amount of sum insured (ICICI Lombard).

3.6 Distribution Channels

An Introduction to Marketing Channels Marketing channels are sets of independent organizations involved in the process of making the product or service available for use or consumption. Decisions about the marketing channel system are amongst the most critical facing the management. In fact the channels chosen, affect all other marketing decisions – pricing for one would be highly dependent on the kind of channel selected (Kotler and Lane, Designing and Managing Value Networks and Channels.) While channels play an essential role in delivery of products, their importance in services is actually contributory to the real- ization of the service itself. In insurance for example, the “product” is realized [a] 3.6 Distribution Channels 131 while selling the insurance policy and [b] during the claim settlement process. Thus any party concomitant to accomplishment of the processes responsible for the final delivery of service, form the essence of distribution channels. What is more, these parties on account of their proximity to the customer can best alter their purchase decision and additionally provide insights to the insurers or the service producers. In managing its intermediaries a firm must decide how much effort to devote to push versus pull marketing. A push strategy involves the producer using its sales force and trade promotion money to induce intermediaries to carry, promote, and sell the products/services to its end users. Push strategy is appropriate where there is low brand loyalty in a category, brand choice is made in the store, the product is an im- pulse item, and product benefits are well understood. A pull strategy involves the manufacturer using advertising and promotion to persuade consumers to ask intermediaries for the product, thus inducing the intermediaries to order it. Pull strategy is appropriate when there is high brand loyalty and high involvement in the category, when people perceive differences between brands, and when people choose the brand before they go to the store (Kotler and Lane, Designing and Managing Value Net- works and Channels). A mixture of pull and push strategies may be employed by health insurer – pull because an insurance policy is a high involvement product; push however, because the new introduction of policies, “free-look” period and shorter term periods, induce customers to adopt policies on a trial and error basis.

Introduction of TPAs in the Indian Health Insurance Milieu Claims management in Health Insurance in India is a no-win situation with the insurer feeling that claims are always exaggerated, and hence is looking for opportunities of cutting corners; the client, on the other hand, is aware of the insurer’s propensity or the tendency to cut corners and feels compelled to make exaggerated claims. Another aspect of health insurance claims settlement is the extent of preconditions that are made mandatory in the policy. For example, the insurance is covered for cases which necessitate hospitalization for at least 24 hours. In such a scenario, the policyholder has the tendency to enforce upon himself the hospitalization for the minimum period so that his or her claim can be settled. It would, on the contrary, make more sense to have in place the actual cause of hospitalization as a factor for passing the claim rather than insisting on a condition like minimum time of hospitalization, which induces moral hazard and cost hikes. In such a scenario, it would be better if there is mechanism which could work as a go-between and the role of the TPAwould thus fill the gap here in normal circumstances. Thus the TPA concept was introduced post- opening up of the industry, to introduce cashless hospitalization and propel healthcare and promote health insurance amongst Indians (Jawaharlal and Kumar). 132 3 Health Insurance

Who are TPAs? Third Party Administrators (TPAs) are middlemen in the chain of integrated delivery systems that bring all the components of healthcare delivery such as physicians, hospitals, clinics, household healthcare, long-term care facilities and pharmacies into a single entity. This is meant to provide quality healthcare and services at affordable costs, which hitherto were unheard of. Moreover, TPAs are expected to bring about a change in the mindset of the masses regarding the concept of managed and preventive healthcare. A system like this seeks to encourage appropriate treatment, and preventive care, but discourages over-treatment and attempts to promote cost contain- ment and quality healthcare delivery (Ganesan and Jayaprakash).

What does a TPA do? The above illustration is a graphical conceptualization that was originally suggested in “Downstream Risk and Delegation” by National Association of Managed Care Regulators in June 2001. The conceptualization projects the following: with the ad- vent of TPA, the health insurers can avail the opportunity of outsourcing their admin-

Figure 58: Type of “Risks” Subject to “Downstream Delegation” or “Outsourcing” (Kumar) 3.6 Distribution Channels 133 istrative services including claims settlement to them. A TPA will attend to all the administrative duties and will charge a single clubbed fee for all. It will have to assume all the risks associated with those functions. The risk portfolio of the insurers can be broadly classified into two types: financial risks and service risks. Financial risks involves activities like pricing products (insurance plans), setting reserves, determining and implementing investment policy, and other measures. Service risks include the duties of insurers like provider relations activities, care management, delivery-related functions as well as marketing, underwriting, premium collection and benefit payment. TPAs assume significant portion of both the afore-mentioned types of risks thus availing the insurers a cost cutting medium (Kumar).

Role of the TPA Currently the role and services of the TPA entail bearing primarily the service risks, whilst the insurer will be the sole bearer of the financial risks. The TPAs in India presently cater only to the corporate clients. Furthermore, the entry of TPAs implies

Figure 59: Workflow for the Cashless Treatment (Ganesan and Jayaprakash) 134 3 Health Insurance the arrival of the cashless system of payment for healthcare services. The policyholders would receive every healthcare facility required, depending on their needs and high medical costs would not be a deterrent. Cashless hospitalization means that the policyholder will be able to avail medical services at designated hospitals and his bills will be settled through TPAs (instead of tracking insurers for claims later), who will additionally offer a 24-hour toll free helpline, access to physicians, specialists, diagnostic centers and ambulance services. By January 2005, 10 out of 14 TPAs had been shortlisted by state insurers with fees for the same set at 5.5% (of the total business volume) for the north and south zones, 5.4% for the east and west zones. In case of private insurers, the fee set was around 10 to 11% (Ganesan and Jayaprakash). The illustration below depicts the workflow of the processes carried out in case of a cashless facility, highlighting the role of the TPA within.

Stumbling Blocks in Operational Issues (of the functioning of TPAs) The core reason for the failure of TPA s in India has been the lack of coordination between TPAs and insurers. These hindrances have risen on account of agonies and issues faced by all of the involved parties participating in the service provision – hospitals, insurers and TPAs.

Hospitals – First unhappy with the initial fee they had to pay for TPAs to empanel them as members. Hospitals do not feel the need to pay to belong to a network, as they are getting volumes of business anyway. – There is dissatisfaction by the hospitals due to the delayed payment and huge outstanding bills of the patients. Hospitals have reported that some bills have been pending for 6 months to a year and that TPAs/insurers need to speed up their claims settlement processes. – TPAs do not have an exhaustive network of member hospitals, implying limited coverage: one of the main reasons cited for the lackluster take off of the TPAs. – Some doctors do not appreciate the fact that some third party needs to validate their style of treatment to verify the authenticity of the claim. – Finally, in some cases it is felt that doctors use insured individuals as an opportunity to earn more money, thus slapping exaggerated expenses onto insurers.

Insurers – Initially when the services were introduced, there was agitation on behalf of the insurance employees who feared a loss of their jobs. Thus the initial startup suffered a setback. 3.6 Distribution Channels 135

– The service fee provided by the insurers is still quite low. – Many insurers believe that TPAs are interfering in the companies’ state of affairs; as is apparent by the option for the policyholder to choose between the TPA or not, and pay a lower premium if they do not use TPA services, a highly de-motivating move against the TPAs (Ganesan and Jayaprakash). – Finally, insurers are displeased with the regulatory restriction on the selection of TPAs – which states that public sector general insurers can appoint 5 TPAs but not more than 2 in one region, making the functioning straight jacketed for the insurance companies and the TPAs (Jawaharlal and Kumar).

TPAs – A disparity in fees and in-transparency in charges of various hospitals has added difficulty to the claims data forecast thus making the smooth functioning of the TPA a distant reality. Despite attempts to change the system and suggest standardization by way of grading of hospitals and treatments as super-major, major, inter- mediate and minor categories and fixing the ceiling accordingly, little has pro- gressed on this front. – The regulatory restriction against marketing of healthcare products by the TPA has squeezed the scope of TPAs in providing service to the healthcare industry. – Moreover, they are required to pay a 1% of their income as fee to the regulator over and above the Rs. 20,000 as license fee. The minimum working capital of Rs. 10 million and a minimum asset worth of Rs. 2.5 million at any point of time, coupled with a 26% cap on the foreign equity make functioning rather stringent (Jawaharlal and Kumar). – The lack of coordination between the insurer and TPA creates drastic dilemmas like • Inability to estimate the number of policyholders in the spectrum. • Delay in payments for service charges. • The “free-look” period of 15 days wherein the customer can cancel his policy poses a problem for the TPA who is not promptly informed; this delay leading to added confusion and waste of time and opportunity cost in examining data that is of no relevance any more. – TPAs are allocated to specif0ic regions; however since their only clients are corporate clients, they need to open offices in zones where the client is: implying increased unprecedented costs. – Weak profit margins for the TPAs leave them with less employees handling customer queries and educating customers on health insurance conditions and exclusions. 136 3 Health Insurance

– The issuance of identity cards to customers is not streamlined and automated (Ganesan and Jayaprakash).

Corrective Measures to Improve the TPA Situation Fine tuning the relationship between the TPAs and Insurers can solve several problems and thereby improve the quality of the marketing channel, and consequently the brand image of the insurer itself. – A centralized regional office can be established to control the issue of all health insurance policies and its administration. A representative officer from the TPA can be positioned here who would function as a coordinator between the TPA and insurer. – The servicing issues of the TPA for regions other than authorized regions can be delegated to nodal TPAs of the respective regions – similar to the cellular phone networks in India. – An effective software system should be developed for deployment across TPAs and insurers, to monitor fund performance, its needs; whenever the flow reaches a critical level, the system would alert the insurer and TPAs with rules engines de- ployed for the same. – Mandatory periodic meetings between the TPAs and insurers to improve communication and discuss impending issues. – A common database should be created wherein important fields like disease, sex, age, region etc which needs to be shared with TPAs and insurers; such a database would help in identifying patterns of diseases, regional variations, cost control measures, identification of fraudulent cases, bringing down claims ratio, increasing professionalism among insurers, hospitals and TPAs and knowledge management and training of TPAs (Ganesan and Jayaprakash).

Brokers and their role in the Health Insurance Segment Having already discussed brokers in the life insurance chapter 2.6, I would now advance the discussion by highlighting the role of the broker, key broker traits, what the brokers bring to the client and what they bring to the insurer. The concept of insurance broking was introduced in India in 2002 and is still at a nascent stage. Presently there are about 250 brokers and around 15 per cent of general insurance kitty is through direct brokers (Press Trust of India). 3.6 Distribution Channels 137

Role of the Broker – Understanding the clients business and risk management philosophy. – Detailed knowledge and comprehension of the available insurance market and capacities. – The broker sells and markets the products (thus reducing the marketing costs) and the insurer underwrites it. – The broker renders assistance during the claims settlement process. – The broker assists in understanding the risk retention policy of the insurer. – He provides periodic market updates.

The Broker Traits essential in a de-tariffed regime are – Inspiring confidence and trust, – Furnishing complete information, – Explanation of the insurance contract terms to the client, – And quicker response time with respect to market information, settlement of claims.

Brokers will bring the following to the client – Peace of mind and tranquility. – Take care of the entire documentation, especially as far as the claims portfolio is concerned. – Quality of service is regularly upgraded. – Contract certainty; thus clearly defining and explaining all clauses and conditions, helping interpret all aspects of the contract, making what-if scenarios for the client and thereby minimizing the tendency of grievance occurrence. – Value added services like asset valuation, human resource management, calculat- ing the life displacement cost (which is the discounted cash flow of future earnings in a life investment plan).

Brokers will bring the following to the insurer – Fair competition amongst insurers by representing the customer rather than the insurer, – Sound rating of risks, – Reduction in marketing time and costs; improving response time and market knowledge of the insurer by virtue of their proximity to the customers and fair representation of the customers, – Develop or co-produce the products suited for the market, – Selling the right product to the right person based on the apt understanding of risk appetite of the clients and knowledge and experience in risk rating. 138 3 Health Insurance

The Regulator Says: Regional Rural Banks (RRBs) can now join the insurance play

RBI has permitted RRBs to take up corporate agency for insurance companies Reserve Bank of India (RBI), the regulator for banks in India has come out with norms for regional rural banks (RRBs), enabling them to take up corporate agency of insurance companies. Until now RRBs have been acting as insurance intermediaries by referring their customer base to insurers but were not permitted to sell directly or take up corporate agency. In terms of the new guidelines, RRBs can become corporate agents for insurance companies after qualifying under the Insurance Regulatory and Development Authority’s norms for corporate agency. This will open a new revenue stream for RRBs as first year commissions on sale of insurance policies are very high: up to 20% for a bank on an average. In its circular to all RRBs, RBI has said as a measure of providing further business opportunities, RRBs would be allowed to take up corporate agency business, without risk participation, for distribution of all insurance products, including health insurance and animal insurance. “RRBs need not obtain prior approval of RBI for taking up corporate agency business for distribution of insurance products without risk participation. How- ever, a report may be sent to the concerned Regional Office of Reserve Bank within 15 days of commencing the insurance agency business,” the central bank said in its circular. According to insurance companies, the entry of RRBs will improve penetration of health insurance in rural areas since they have the distribution network. Besides, since they are part of the payment system, insurers can offer premium collection service locally without having a local branch. The entry of RRBs will also enable insurance companies in pushing forward with their micro-insurance plans. RBI has said besides complying with IRDA regulations for a composite corporate client, RRBs cannot adopt any restrictive practice of forcing its customers to go in only for a particular insurance company in respect of assets financed by the bank. As the participation by a bank’s customer in insurance products is purely on a voluntary basis, it should be stated in all publicity material distributed by them in a prominent way. There should be no ‘linkage’ either direct or indirect between the provisions of banking services offered by the bank to its customers and use of the insurance products. (Times News Network (TNN)) The last state- 3.7 Communication Strategy 139

ment, although in consumer interest, seems to suggest a potential hindrance to the RRBs with respect to bundling insurance products with their bank products. This, unfortunately obviates the banks and insurance companies from exploiting the profit potential of product bundling, subsequently preventing the two from fully realizing the benefits of bancassurance. This may also be cited as a negative side effect of the “dual regulator” scene: Reserve Bank of India (RBI) for banks and the Insurance Regulatory Authority of India (IRDA) for insurers.

3.7 Communication Strategy

Consumer Insight: Health Insurance in India; is awareness the key? In an interview with the Times of India, Dr. Prasad, CEO of the Apollo Hospital Chains in India explained, “Certain state-of-the-art treatments can be expensive for the common man. That’s the reason why we need to make health insurance mandatory. People need to be informed about it. There’s an urgent need for awareness about health insurance. When you buy a bike you have to pay up the insurance. Why not be more particular about human life. It’s precious.” Vijay Reddy an associate with the Insurance Institute of India added, “70 per cent of middle class families’ savings are spent on healthcare. Sometimes people even end up selling their property to pay up their expenses. But investing in health insurance will make a difference. Insurance is something that you need not when you have an emergency but way in advance (Sanam). Shantanu Dutta, a journalist for a news portal commented “Health insurance, which is what most of the developed world lives by has not “really” taken off in the country as with large population living just in survival mode, coping with troubles and issues today is their concern and not the difficulties that may crop up tomorrow” (Dutta).

Service communications is a tool for value delivery in the marketing value chain which alters customers’ brand image, customers’ perceived service quality and customer’s behavior directly; thereby altering the marketing and firm value (Bruhn and Georgi). The above illustration projects health and accident insurance as the second largest growing segment for Television advertising in the year 2006, with a growth rate of 82%. The CEO of Bajaj Allianz General Insurance Co. Ltd believes that television advertising is by far the most effective channel of communication in India with re- 140 3 Health Insurance

Figure 60: Information Source: Adex Analysis spect to reach and coverage, specially because the number of households possessing a television set (as a % of the population) is greater than the literacy percentage of the population. Insurance is a long term business and carefully planned value proposition creation that is consistently and perennially projected in the advertising, promotion and integrated marketing communication activities of an insurer, is the essence of brand identification, recollection, and customer loyalty initiation. Let us thus take a look at the storyboard of one of the television ads and draw an analysis from the same.

Storyboard of New India Assurance Television AD (Agency FAQs)

Having made her purchases an old woman steps out of a shop 3.7 Communication Strategy 141

Three goons spot her and follow her with plans to rob her

Just as they close in, a call “Mom” makes them stop and turn around

A guy standing at the shop calls out to the lady, “Mom, wait”

As the son walks in, the rogues quickly turn away looking strangely busy tying their laces and praying 142 3 Health Insurance

MVO: “Where you go often depends on what you have with you. New India Assur- ance, Assurance of the leader”

Analysis of the AD – Emotional orientation and connection, efficiently achieving “personification” and “materialization” – A very well improvised situation, where the “goons” are implicitly compared to an unlikely event or uncertainty and the “son” who is watching what is going on is implicitly compared to the health insurance policy. – The core need satisfied by the product is communicated very distinctly – with an uncertain situation in the offing but a “protection” or “security” in place to combat its occurrence or impact. – Moreover, the emotional angle of the ad is enhanced because it is left for the viewer to imagine whether the “son” who called out was really the lady’s son or a passerby who happened to observe the situation and intelligently saved the lady on time, without creating a traditional “fight scene”. If this “son” is imagined to be a stranger doing a good deed – once again the product has been improvised into someone who is dormant but comes to rescue you when you are in dire straits. – A humor aspect enhances the message effectiveness by the way the “goons” react pretending to pray, tie their shoe lace etc when the “son” approaches again paralleling it to instant risk evasion when the security is around. – Finally the MVO (male voice over) subtly but succinctly conveys the message “Where you go, often depends on what you have with you. New India Assur- ance, Assurance of the Leader” (New India Assurance is truly the leader in the general insurance area) Chapter 4: Conclusion

This is the concluding chapter which discusses the outlook for the health and life insurance industry based on primary data from the “emerging opportunities and challenges for the insurance market in India” survey. The thesis clos- es with a summary of the best strategies and practices in the Industry. 144 4 Conclusion

4.1 Outlook for the Life and Health Insurance Market in India

The new wave of regulations, increased foreign players’ entry, rising consumerism and awareness, insurmountable insurance business growth rates, innovative distribution channels, profit determining product designs and pricing techniques, emotional advertising and the looming necessity of making speedy business decisions, all embellish the current insurance business environment in India. Having discussed these varied aspects in the report, the reality that precedes and determines the future can now be best exemplified through a candid evaluation of the survey (Emerging Opportunities and Challenges for the Insurance Market in India) results. Every response to the survey has been evoked by an opinion leader and/or chief ex- ecutive or key senior management of the corresponding insurance company. As each of these individuals is also the prime decision maker of his/her company and shapes the business evolution of the firm in concern and in turn the industry, each of these results will highlight a projected pattern from time t (where t is May 2007) and trajectory of development from then on for the firm in specific and consequently the industry in general. Thus, I will now summarize the findings of the survey (sections 1, 2, 5 and 6) which serves as a directional outlook to the industry. Please refer to the questionnaire in the appendix for the corresponding detailed questions.

Section 1 “Tariffed vs. De-tariffed Regime” Results: 1. The results for the “biggest defects of a tariffed regime” were averaged, with the most prominent defects being (in this order) ii) Lack of underwriting skills, as prices were determined by the Tariff Advisory Committee and iv) Companies lacked quality data to understand whether the pricing policies made sense or whether the companies are running smoothly. 2. The “biggest challenges that come with a de-tariffed regime” are as follows (in this order) ii) Initial price cuts, iii) Collection of risks and its link to claims’ data and i) Developing responsible underwriting skills. 3. The responses for “positive developments in a de-tariffed regime” include the ability to deliver the “appropriate price” to the individual customer through differential pricing, ability to use customer insight and underwriting expertise to deliver profitable growth, a better understanding of “risk”, differentiation through risk management and risk profiling and the ability to hone customer centric innovation. 4.1 Outlook for the Life and Health Insurance Market in India 145

Section 2 “Foreign Players’Participation” Results: 1. To the foreign player cap hike question, most responses stated that it should be increased to 49% (option iii). However, one respondent believed otherwise suggesting that the foreign cap is alright at 26% (option i) under the following justifiable grounds: “I personally believe that there is no real value add in increasing the shareholding except in reducing the exposure of the Indian entity. Unless the foreign entities can demonstrate their ability to adapt to the nuances of the Indian In- surance market, increase in shareholding does not automatically imply an increase in penetration, customization or even introduction of products benefiting the Indi- an consumer” 2. Question 2[b] is concerned with understanding the expertise that foreign players bring on a likert scale ranging from 1 which implies least contribution to 5 which is the most contribution of foreign players for each of the factors. The results to this answer have been portrayed statistically by the usage of mode to understand the most frequent response, and mean to understand the average of all responses. The results are as follows: Foreign players bring in: “good underwriting skills and thereby help formulate better pricing techniques for insurance products” with 4 and 5 both as modes and a mean of 4.2, “product innovation expertise and thereby help formulate more customized solutions” with 3 and 5 both as modes and a mean of 4, “an operational edge through technological efficiency” with 5 as mode and 3.8 as mean, “good risk perception and risk management skills” with mode of 4 and mean 4.4, “increased brand awareness amongst end customers” with mode 3 and mean 3.2, “expertise through more innovative distribution channels” with 4 and 5 as modes and 4 as mean, “sufficient amount of capital that Indian players may not have” with mode of 4 and mean of 4.4, “best practices in recruiting and training staff” with mode of 5 and mean of 3.8, “expertise with respect to efficient and speedy claims management” with modes of 5 and 4 and mean of 4, “bring in expertise with respect to fraud management” with mode of 4 and mean of 4.4. Thus, based on the highest averages, the maximum contribution of foreign players is felt in good risk perception and risk management skills, sufficient amount of capital that Indian players may not have and expertise with respect to fraud management. 3. There were mixed responses to question 2[c] on whether the respondents felt that a foreign player with an Indian partner is better off than a standalone foreign subsidiary, however a slight majority responded with a “yes”, less than half indicated a “no” and few others a “neither disagree nor agree”. 4. To understand the reasons why foreign players with Indian partners were better off than standalone foreign partners, scores had to be allocated to 5 statements such that they add up to 50 for the 5. This question was to be answered only by 146 4 Conclusion

those who responded with a “yes” in the previous question. However, despite a smaller subset responding, the following are the core results: brand awareness of the Indian partner and its existing customer base are seen as biggest advantages to the foreign counterpart.

Section 5 “IRDA – Its role and Developments” Results: 1. For question 5[a], a similar data analysis method is used as above (Section 2 Re- sults, Point 2). Here too a likert scale has been used with 1 being least effective and 5 the most effective in the concerned task. Thus a projection of the mode and mean is used to analyze the effectiveness of the role of the IRDA in development and regulation of the insurance market in India. The results for the contribution of the IRDA in the various areas are as follows: “promoting product innovation” with mode of 4 and mean of 3.2, “addressing customer grievances” with mode of 3 and mean of 3.6, “addressing insurance companies’ concerns” with mode 3 and mean 3.4, “laying guidelines for agents and intermediaries” with mode 4 and mean 4, “quick and speedy changes with respect to optimum business environment” with modes of 3 and 4 and mean of 3.2, “reach with respect to various customer segments with modes of 3 and 4 and mean of 3.2, “providing support to foreign players in the Indian insurance market” with mode 3 and mean 3.2. Thus, relatively, the most effective areas of contribution of the IRDA towards the development and regulation of the insurance market in India are “laying guidelines for agents/intermediaries” and “addressing customer grievances”. 2. For the detailed questions in 5[b], please refer to the questionnaire in the appendix. To [1] Solvency margins, an equal majority said that it was “tough to adhere to, but necessary” and “achievable and necessary”, thus the underlying facet being that individual firms with different capital structures find it difficult or achievable (as the case may be) to adhere to these regulations, but all of respondents agree that these regulations are necessary for the smooth functioning of a cost-first and uncertain business like insurance. To [2] Social and Rural Obligations, a majority responded with “Achievable and necessary”. To [3] De-tariffing safety valve, a majority responded with a “Yes”. To [4] Permission from IRDA with respect to cross-subsidization, there was a mixed response with an equal number of respondents indicating a “yes” and a “no”. To each [5] Investment Regulations, [6] Agents’ qualifications requirements, [7] Board of Members’ approval for underwriting, the majority replied with a “yes”. 3. The responses for the most essential change or development that the IRDA must implement for the overall development of the Indian insurance market were as follows: establish regulations for the improvement in claims service, enhance the ac- 4.2 Summary of the Best Practices 147

counting regulations which has a mismatch in the recognition of revenues and costs, allow for more innovative product approvals and begin to improve penalties for non-compliance/misconduct versus regulations. A reasonable number of respondents felt that the IRDA must grant more freedom to the insurer in transacting its core business, and that the primary role of a regulator should be to ensure the solvency of the underwriter and must be limited to the fiscal and financial soundness of the firm; thus implying that the IRDA must refrain itself from getting into the micro management of every aspect of business for which they lack expertise.

Section 6 “Innovation and Best Practices” Results: 1. Most questions in this section are company specific; thus I will present the general information that helps elucidate an industry trend, and mention the company specific information of one company “Tata-AIG”. 2. To 6[a], all respondents felt the importance of a data warehouse for the company, thus responding with option [i]. 3. To 6[b], whilst 40% said that “it already existed”, the remaining 60% stated that a data warehouse was “in progress of development” in his/her respective firm. 4. TATA – AIG’s Responses: (All responses include only publically available information, in lieu of the confidentiality of the insurer). Tata-AIG’s CEO Trevor Bull feels that “Invest Assure Gold” is their star product on account of its uniqueness, though he suspects that it would continue to remain their star product for more than 2 years, suggesting the dynamicity of the industry’s products. The number of policies and premium collected for this product is unavailable since it is a recently launched product. Some of the innovations that Tata-AIG is proud of are as follows: Tata-AIG: is the first life insurance company to launch a standalone medical product, the first life insurer to launch micro insurance products following the regulations last year (2006), was voted as number 1 in customer satisfaction by the VOICE survey, is one of the only two private insurers to have a balance of traditional life and ULIP products with a 50–50 split on a portfolio basis; others are dependent on ULIP with more than 80% now. Finally Tata-AIG prides itself in its unique agency model that minimizes agent attrition and reaps economies.

4.2 Summary of the Best Practices

In conclusion, I would like to reinstate the best marketing strategies employed by various life and health insurers. These strategies serve as industry wide best practices and stand out primarily because of efficiency, uniqueness and/or local market prox- 148 4 Conclusion imity of the implementation or formulation of the strategy. The account of the best practices in the Indian insurance industry includes: Life Insurance: 1. TATA-AIG for its 50–50 portfolio balance in ULIP and traditional life insurance products. Most life insurers currently pride themselves in the huge profits that ULIPs bring to them and are thus constantly adjusting their portfolio of businesses in favor of ULIPs; all except two life insurers (one of the two being Tata-AIG) have now a portfolio mix of 85:15 for ULIPS versus traditional products. Whilst, this may seem like a profitable strategy now, since ULIPs are primarily investment vehicles linked to the stock market and additionally transfer the burden of investment to the policyholder, it is however short-lived to imagine that infinite growth based on this product alone, is possible. In their book on Corporate Fi- nance, Brealey and Meyers proved that according to the market efficiency theory, it was impossible for investors to make abnormal returns on the stock market con- tinually and if so this would only be in lieu of additional information that wasn’t publicly available to the market as a whole. In light of this theory, it is only wise for Tata-AIG to maintain a reasonably balanced portfolio of ULIP versus traditional life products. Moreover, in the two day national conference on “Emerging opportunities and challenges for insurance market” at Jaipur, India Feb 2007, experts like Prof Sunderasan of the National Insurance Academy at Pune stated that, life insurers must focus in developing products that first cater to the true and basic needs of insurance: security and savings. 2. For customer segmentation in life insurance, marketers and planners must use an astute combination of the HPI with the SEC system, and thereby refine their market prioritization. From a Marketer’s perspective: whilst SEC entails understanding the “potential” of markets, HPI elaborates on the “consumption intensity” of markets. 3. HDFC Standard Life Insurance establishes the best practice in needs satisfaction by offering products based on the stage of life or the circumstance that one belongs to. For every stage, HDFC has products satisfying different needs. The main stages around which the product offerings are structured are: Young and Single, Just Married, Proud Parents and Planning for Retirement. 4. Riders provide the flexibility of choosing amongst several options without having to sign a separate policy for every need. Hence, they offer customized solutions, without having to opt for rigidly bundled product offerings. The key riders that can be “added on” to a life insurance policy include accident death rider, premium waiver benefit rider, guaranteed insurability rider, critical illness rider and family income benefit rider. 4.2 Summary of the Best Practices 149

5. Although overreliance on Unit Linked Insurance Plans may prove detrimental to the fiscal soundness of a firm in the long run, there is no denying that ULIPs are amongst the best practices with respect to product design innovations providing for liquidity, flexibility, transparency and control over asset allocation to the policyholder. Besides offering the above benefits to the policyholder, ULIPs also transfer the investment burden from the insurer to the policyholder. 6. Max New York Life offers a whole gamut of products serving various life stages (like HDFC Standard Life Insurance) and needs. The main life stages include Single, Married, Married and with Children and Planning for Retirement, and the main needs around which products are structured include Savings, Investments, Education for Children, Marriage for Children and Protection. 7. The best practices in life pricing includes SBI Life Insurance’s “Agency Online” portal developed to help insurance advisors understand customer risk profiles. Moreover, best strategies entail combining the cost-plus: efficient underwriting and rate making approach with the professional price management approach through the mastering of 5 main tasks: value pricing and segmentation, knowledge about price elasticity, sales optimization and optimization of the pricing process. Additional best practices includes tele-underwriting, a procedure that serves to streamline processes and enhance efficiency by mechanizing most of the decisions and thereby reducing subjectivity. 8. In distribution channels, bancassurance provides for a hand-in-glove or complementary situation for both insurers and banks, benefiting the insurers with a the huge retail base of the bank, the existing customer network and lowered distribution costs, and the banks with increased fee-based earnings, retail thrust and a growing sense of customer segmentation by provision of a whole range of financial products. 9. Max New York Life’s “Direct Customer Services Program”, the feet-on-street model to address the orphan policyholders is a best practice solution giving impetus to distribution via increased customer proximity and consequently increased CLV. 10. Television advertising is the most effective medium of communication for life insurers in India and HDFC Standard Life’s advertisement on children endowment plans elicits best practice in aptly communicating through emotional advertising and achieving both “materialization” via “visualization of needs satisfaction” and “personification” via “reference customers”. Health Insurance: 1. The segmentation methodology used by Bajaj Allianz, aptly defining segments based on an astute mix of demographic, geographic and behavioral variables, cou- 150 4 Conclusion

pled with the pattern of target market selection which includes “selective specialization” based on competencies are amongst best practices underlying urgent needs identification and the corresponding customer categories. 2. Managed health care, the major components of which include seamless systems managing disease prevention and wellness, early disease detection, the management of chronic illness and valuable partnerships to improve healthcare quality, are amongst the forward looking product related best practices for the health insurance industry in India. Certain insurers, like ICICI Lombard are already moving in the right direction by providing insurance covers for hereditary diseases like Diabetes. 3. Bajaj Allianz’s “Health Guard” policy with a retention rate of 85% and a claims- to-premium ratio of 67%, with cashless facilities and wide eligibility spanning individuals between 5 and 55 years of age, is one of the better designed and profitable policies in the health insurance arena today. 4. ICICI Lombard’s “Critical Care” policy and “Family Floater Health Plan” are amongst the more sophisticated products designs adopting differential pricing techniques based on various criteria: age of the insured, sum insured, number of adults and number of children in the family. 5. Brokers and TPAs are the key intermediaries in the value chain for health insurers; however, the current situation demands improvements in managing the quality and contribution of the two mediators: by enhancing interaction between the insurer and them, providing for continual and flawless support through automated environments and finally, grooming and enhancing their role to permit truly value additive activities towards both policyholders and insurers. 6. New India Assurance stands out in its emotionally oriented and subtle communication strategy with impactful materialization and personification. Appendix

Emerging Opportunities and Challenges for the Indian Insurance Market

A Survey for Insurance Executives

Dear Sir/ Ma’am,

The purpose of this survey is to understand your esteemed opinion on the emerging opportunities and challenges for the insurance industry in India. The survey has been divided into 6 sections – 1] Tariffed vs. De-tariffed regime, 2] Foreign players’participation, 3] Health Insurance, 4] Life Insurance, 5] IRDA – its role and developments 6] Innovation and Best Practices.

Please answer the questions based on how it may relate to you or your company or to your overall understanding of the industry as a whole.

This information is being used for research purposes by Novi Dewan, under the men- torship of Prof. Martin Fassnacht, Head of the Marketing Chair at WHU – Otto Beisheim School of Management.

Thank you very much for your time and efforts.

Warmest Regards, Novi Dewan Marketing Speaker, WHU – Otto Beisheim School of Management Burgplatz 2, Vallendar 56179 Germany [email protected] [email protected]

Tel.: 0049 173 6719 826 152 Appendix

Points to Note 1. Section 1] “Tariffed vs. De-tariffed regime” has three main questions A a), b) and c) 2. Section 2] “Foreign players’ participation” has four main questions A a), b), c) and d) 3. Section 3] “Health Insurance” has seven main questions A a), b), c), d), e), f), g) 4. Section 4] “Life Insurance” has seven main questions A a), b), c), d), e), f), g) 5. Section 5] “IRDA – its role and developments” has three main questions A a), b), c) 6. Section 6] “Innovation and Best practices” has nine main questions A a), b), c), d), e), f), g), h), i) 7. Please try and answer all sections 1 through 6 and fill in whichever may be applicable to you. 8. Respondents from insurance companies – a. Please fill in sections 1), 2), 3), 4), 5), 6) b. Based on whether you are a non-life or life insurance company, you can choose between 3) and 4) respectively. 9. Respondents who are not from insurance companies, but from bodies affiliated with the insurance industry like News agencies, Institutes, Regulatory Body or other Independent Bodies – a. Please fill in sections 1), 2), 5) and b. Also please try and fill as much as applicable from sections 3), 4) and 6).

1) Tariffed vs. de-tariffed regime a) What were the biggest defects of a tariffed regime? Give each of the following statements a score (or weight) so that the sum of individual scores is 50. For example … (i) 10, (ii) 5, (iii) 15, (iv) 9, (v) 11; Therefore sum of (i) + (ii) + (iii) + (iv) + (v) = 50. A higher score indicates a higher weight allocated to the particular statement. i) Cross subsidization of loss making businesses by the profit incurring business ii) Lack of Underwriting skills, as prices were determined by the Tariff Adviso- ry Committee iii) Good customer paid for the bad customer, due to a single non-historical pricing policy iv) Companies lacked quality data; thus lacked an understanding of whether the pricing policies made sense or whether companies ran smoothly v) No incentive on the part of the insured to improve his/her risk portfolio Appendix 153 b) What are the biggest challenges that come with a de-tariffed regime? Give each of the following statements a score (or weight) so that the sum of individual scores is 50. For example… (i) 10, (ii) 5, (iii) 15, (iv) 9, (v) 11; Therefore sum of (i) + (ii) + (iii) + (iv) + (v) = 50. A higher score indicates a higher weight allocated to the particular statement. i) Developing responsible underwriting skills ii) Initial price cuts iii) Collections of risks and its link to claims’ data iv) Differentiation through customer relationship management v) Developing innovative products and distribution channels c) What, according to you, will be the positive developments in a de-tariffed regime? Please name at least two.

2) Foreign players’ participation a) Most private insurance companies in India are joint ventures between Indi- an banks or insurance companies and foreign players. However, the current cap for foreign player participation in an insurance company in India is 26%. Please select the option that you think will be most beneficial to the Indian insurance industry in general. Please select one option only. i) Foreign player cap is alright at 26% ᮀ ii) Foreign player cap should be increased to 35% ᮀ iii) Foreign player cap should be increased to 49% ᮀ b) 2000 saw the de-regulation of the Indian Insurance Industry, thereby wit- nessing the entrance of several foreign players into the Industry. What are the primary benefits for an Indian company to team up with foreign players in the Indian Insurance market? What expertise do the foreign players bring? Please score the following statements on a scale of 1 to 5, 1 indicating the least level of importance with respect to the contribution by the foreign player and 5 indicating the maximum level of importance for the corresponding statement. Please mark against one number only reflecting the level of contribution for every statement. 154 Appendix

Foreign players bring in 123 45 Least Less Neither less More Most contri- contri- nor more contri- contri- bution bution contribution bution bution

A] Good underwriting skills, and thereby ᮀᮀᮀ ᮀᮀ help formulate better pricing techniques for insurance products B] Product innovation expertise and ᮀᮀᮀ ᮀᮀ thereby help formulate more customized solutions C] An operational edge through ᮀᮀᮀ ᮀᮀ technological efficiency D] Good risk perception and risk ᮀᮀᮀ ᮀᮀ management skills E] Increased brand awareness amongst ᮀᮀᮀ ᮀᮀ the end customers F] Expertise through more innovative ᮀᮀᮀ ᮀᮀ distribution channels G] Sufficient amount of capital that ᮀᮀᮀ ᮀᮀ Indian players may not have H] Best practices in recruiting and ᮀᮀᮀ ᮀᮀ training staff I] Expertise with respect to efficient ᮀᮀᮀ ᮀᮀ and speedy claims management J] Bring in expertise with respect to ᮀᮀᮀ ᮀᮀ fraud management K] Others (if so, please name at least ᮀᮀᮀ ᮀᮀ one such) c) Do you think that foreign players with Indian partners are better off than a standalone foreign subsidiary? Please select one option only. i) Yes ᮀ ii) No ᮀ iii) Neither agree nor disagree ᮀ d) If yes, then why do you think foreign players in a joint venture with Indian partner are better off than a standalone foreign subsidiary in India? Give each of the following statements a score (or weight) so that the sum of individual scores is 50. For example … (1) 10, (2) 5, (3) 15, (4) 9, (5)11; Therefore Appendix 155

sum of (1) + (2) + (3) + (4) + (5) = 50. A higher score indicates a higher weight allocated to the particular statement. (1) Brand awareness of the Indian partner brand (2) An existing customer base (3) An existing distribution network (4) Knowhow of the Indian market and customer segments (5) Awareness of customer related frauds

3) Health Insurance, Please answer the following questions if your company deals with health insurance products. a) Please name at least 3 main customer segment categories for your health insurance products. For example Customer Segment 1 – Age Group 25 to 50, Upper Middle Class, Living in Metros. Please define the customer segments based on as many characteristics as you like. b) What is the “claims to premium ratio” for your main health insurance product? c) What is the retention rate for your health insurance products in general? d) How many frauds (frauds/claims) has your company detected in the last year? e) What according to you are the most urgent requirements for the Indian health insurance industry? Please rank the following criteria based on the level of urgency, 1 being the most urgent and 10 being the least urgent. Please make sure that no two items have the same rank.

Rank

(1) Right pricing strategies based on accurate risk assessment (differences between good and bad risk) and underwriting skills (2) Tracking fraudulent claims (3) Customer satisfaction with respect to efficient and quick claims settlement (4) Enhanced and improved service provided by Third Party Administrators (TPAs) (5) Increasing professionalism amongst agents and brokers 156 Appendix

(6) Reaching out (selling policies) to the segment of society that is below poverty line (7) Developing health insurance products that cover different diseases (8) Developing a health insurance product that covers day-to-day doctor visits (9) Use of CRM tools and Data Warehousing for linking historical customer information and thereby coming up with accurate assessments (10) Simplicity of contracts and contract language f) What are the most effective (maximum reach and thereby maximum sales achieved) mediums of advertising/promotion for core health insurance products of your company? Please rank the following channels/media for promotion based on the level of urgency, 1 being the most effective and 7 being the least effective. Please make sure that no two items have the same rank.

Rank

(1) Newspaper (2) Television (3) Radio (4) Magazines (5) Internet (6) Outdoor (Billboards etc) (7) Others (please mention in case there are more) Please add the “others” here g) Health Insurance companies these days are opting for several channels of distribution for maximizing reach and optimizing penetration. On a scale of 1 (1 being least effective) to 5 (5 being most effective), please indicate the overall effectiveness of the distribution channel with respect to its sales to a desired customer segment from the perspective of your company or as per your knowledge for health insurance in general. Please mark against one number for each distribution channel that reflects the level of effectiveness according to you. Please mention the customer segment most suitable to the distribution channel, for example “Bank customers”, “Teenagers”, “Middle aged , lower middle class” etc. Appendix 157

Distribution Channel 1 2 3 4 5 Name the Least Less Neither More Most Customer effective effective effective effective effective Segment nor most suit- ineffective able to the channel

1) Bancassurance (using ᮀᮀᮀ ᮀᮀ banks for distribution of insurances) 2) Medical tie-ups ᮀᮀᮀ ᮀᮀ (tie-ups with huge private and public hospital chains) 3) Automobile tie-ups ᮀᮀᮀ ᮀᮀ (distribution of insurance policies through automobile companies) 4) Telcassurance ᮀᮀᮀ ᮀᮀ (distribution through telephone marketing) 5) Online distribution ᮀᮀᮀ ᮀᮀ (through your company website or any other internet portal medium) 6) Malls and Supermarkets ᮀᮀᮀ ᮀᮀ (distribution of insurance policies) 7) Postal services ᮀᮀᮀ ᮀᮀ (the Indian Post) 8) Others (kindly ᮀᮀᮀ ᮀᮀ mention at least one)

4) Life Insurance. Please answer the following questions if your company deals with life insurance products. a) Please name at least 3 main customer segment categories for your life insurance products. For example Customer Segment 1 – Age Group 25 to 50, Up- per Middle Class, Living in Metros. Please define the customer segments based on as many characteristics as you like. b) What is your “claims to premium ratio” for your main life insurance product? 158 Appendix c) What is the retention rate for your life insurance products in general? (This question is being asked to understand whether some people stop paying their life insurance premiums) d) How many frauds (frauds/claims) has your company detected in the last year? e) What according to you are the most urgent requirements for the Indian life insurance industry? Please rank the following criteria based on the level of urgency, 1 being the most urgent and 10 being the least urgent. No two items must have the same rank.

Rank

(1) Right pricing strategies based on accurate risk assessment (differences between good and bad risk) and underwriting skills. (2) Tracking fraudulent claims (3) Customer satisfaction with respect to efficient and quick claims settlement (4) Not punishing the rightful claimant on account of the misconduct of fraudulent claimant (5) Increasing professionalism amongst agents and brokers (6) Reaching out (selling policies) to the segment of society that is below poverty line (7) Developing life insurance products that also incorporate other functionalities, for examples ULIPs, Credit Insurance, Children’s Marriage Savings Plan etc. (8) Moving from the perception of a life insurance policy solely as a tax savings instrument to a savings, protection and investment vehicle (9) Use of CRM tools and Data Warehousing for linking historical customer information and thereby coming up with accurate assessments (10) Simplicity of contracts and contract language f) What are the most effective (maximum reach and thereby maximum sales achieved) mediums of advertising/promotion for core life insurance products of your company? Please rank the following channels/media for promotion based on the level of urgency, 1 being the most effective and 7 being the least effective. No two items must have the same rank. Appendix 159

Rank

1. Newspaper 2. Television 3. Radio 4. Magazines 5. Internet 6. Outdoor (Billboards etc) 7. Others (please mention in case there are more) Please add the “others” here g) Life Insurance companies these days are opting for several channels of distribution for maximizing reach and optimizing penetration. On a scale of 1 (1 being least effective) to 5 (5 being most effective), please indicate the overall effectiveness of the distribution channel with respect to its sales to a desired customer segment from the perspective of your company or as per your knowledge for life insurance companies in general. Please select one number that reflects the level of effectiveness according to you. Please mention the customer segment most suitable to the distribution channel, for example “Bank customers”, “Teenagers”, “Middle aged , lower middle class” etc.

Distribution Channel 1 2 3 4 5 Name the Least Less Neither More Most Customer effective effective effective effective effective Segment nor most suit- ineffective able to the channel

4) Telcassurance ᮀᮀᮀ ᮀᮀ (distribution through telephone marketing) 5) Online distribution ᮀᮀᮀ ᮀᮀ (through your company website or any other internet portal medium) 6) Malls and Supermarkets ᮀᮀᮀ ᮀᮀ (distribution of insurance policies) 7) Postal services ᮀᮀᮀ ᮀᮀ (the Indian Post) 8) Others (kindly ᮀᮀᮀ ᮀᮀ mention at least one)

5) IRDA – its role and developments a. IRDA is playing an essential role in the development and regulation of the insurance market in India. Please select one number that reflects the level of effectiveness according to you.

Contribution of IRDA 123 45 in the following areas Least Less Neither More Most effective effective effective effective effective nor ineffective

A] Promoting Product Innovation ᮀᮀᮀ ᮀᮀ B] Addressing customer grievances ᮀᮀᮀ ᮀᮀ C] Addressing insurance ᮀᮀᮀ ᮀᮀ companies’ concerns D] Laying Guidelines for Agents/ ᮀᮀᮀ ᮀᮀ Intermediaries Appendix 161

Contribution of IRDA 123 45 in the following areas Least Less Neither More Most effective effective effective effective effective nor ineffective

E] Quick and speedy changes with ᮀᮀᮀ ᮀᮀ respect to optimum business environment F] Reach with respect to various ᮀᮀᮀ ᮀᮀ customer segments G] Support to foreign players in the ᮀᮀᮀ ᮀᮀ Indian insurance market b. IRDA has several laws in place keeping in mind the overall well being of the industry. Some laws/regulations and the reasons for their existence have been explained below. Please select your opinion for each of the regulations. 1. Solvency Margin: The IRDA expects every insurance company to have a certain solvency margin (assets > liabilities by a certain amount) which is meant to act as a safety buffer. Do you feel the solvency margin for you is (please select just one option) a. Too tough to adhere to, and unnecessary ᮀ b. Tough to adhere to, but necessary ᮀ c. Neither tough nor easy ᮀ d. Achievable and necessary ᮀ e. Easy to adhere, must be made more stringent ᮀ 2. Social and Rural Obligations: The IRDA has prescribed certain social and rural obligations. Do you think these obligations are (please select just one option) a. Too tough to adhere to, and unnecessary ᮀ b. Tough to adhere to, but necessary ᮀ c. Neither tough nor easy ᮀ d. Achievable and necessary ᮀ e. Easy to adhere, must be made more stringent ᮀ 3. De-tariffing safety valve: The de-tariffing of general insurance took effect on the 1st of Jan, 2007. However, IRDA stated that the policies and terms 162 Appendix

and conditions with respect to the policies cannot be changed until the 1st of April, 2008. The purpose of this was to serve as a safety valve, so that insurance companies do not engage in a “bloody war”. Do you think this is justified? (Please select just one option) a. Yes ᮀ b. No ᮀ c. Neither Agree nor Disagree ᮀ

4. Permission from IRDA with respect to cross-subsidization: One of the major goals of de-tariffing has been to discontinue the cross subsidization of loss making areas like health insurance by the more profitable areas like motor insurance. However the IRDA has a regulation that permits companies to cross subsidize certain lines, wherein the Board of Directors can present their case with a valid reason for cross-subsidization. Do you think this is a good option to have? (Please select just one option) a. Yes ᮀ b. No ᮀ c. Neither Agree nor Disagree ᮀ

5. Investment requirements: The IRDA has prescribed investment regulations for both Life and General Insurance Business with respect to investments in Central Government Securities, State Government Securities, Infrastructure and Social Sector, Housing Loans etc. Do you think these are in general fair? (Please select just one option) a. Yes ᮀ b. No ᮀ c. Neither Agree nor Disagree ᮀ

6. Agents’ qualifications requirement: IRDA has prescribed lower limits of qualifications and training requirements for agents to improve the overall quality of this staff. Do you think these requirements are sufficient? (Please select just one option) a. Yes ᮀ b. No ᮀ c. Neither Agree nor Disagree ᮀ

7. Board of Members Approval for Underwriting: IRDA has formulated a regulation, wherein the Board of Directors needs to approve the under- Appendix 163

writing strategy of the management. Besides ensuring that the Board is informed, this makes the Board directly accountable for the underwriting strategy. Moreover, insurers now have to spend time on their underwriting skills, as this new law will reduce information asymmetry between the Board and the Insurer. Of course, however this involves the Board in the operations of the company. Do you think this regulation/strategy makes sense? (Please select just one option) a. Yes ᮀ b. No ᮀ c. Neither Agree nor Disagree ᮀ c. Mention one most essential change or development that the IRDA must implement, for the overall development of the Indian Insurance Market i.

5) Innovation and Best Practices a. Do you feel the importance of a data warehouse for your company? (Please select just one option) i. Yes ᮀ ii. No ᮀ iii. Neither agree nor disagree ᮀ b. If so, what is the state of development for the same in your company? Please select the statement applicable. (Please select just one option) i. Already there ᮀ ii. In Progress of development ᮀ iii. Will begin development in the next 1 year ᮀ iv. Planning to develop it ᮀ c. Please name one product that you think is your star product i. d. Why do you think this is your star product? i. 164 Appendix e. What is the number of policies sold in your star product? (information on a monthly or annual basis, please mention the month or year) i. f. What is the premium collected for this product? (information on a monthly or annual basis, please mention the month or year whichever you may use) i. g. Do you think this will continue to be your star product in the next 2 years? i. h. If not, which product do you think will be your new star product? i. i. What are the one or more innovations that your company is particularly proud of? i. Bibliography

Abell, Derek. “Five Patterns of Target Market Selection.” Kotler, Philip and Kevin Lane. Mar- keting Management 12e. New Jersey: Pearson, Prentice Hall, 2006. 262. AdEx Analysis. Insurance Sector Advertising on TV in the year 2006. 27 March 2007. 21 May 2007 . Agencies. Even rural India shining: Survey. 02 May 2007. 21 May 2007 . Agency FAQs. Agency Faqs>Advertising>Television>Storyboard>New India Assurance. 18 November 2004. 2 June 2007 . Ayyar, V Sesha. “Insurance: Origin and Developments.” Kumar, K B S. Non-Life Insurance. Hyderabad: ICFAI University Press, 2006. 132–133. Belch, George and Michael Belch. “An introduction to Integrated Marketing Communication.” Advertising and Promotions – An Integrated Marketing Communications Perspective. San Diego: McGraw Hill, 2006. 1–36. Bhaskaran, R. “Bancassurance – Developments in India.” Two Day National Conference on “Emerging opportunities and challenges in the Indian Insurance Indsutry”. Jaipur: Insurance Times and Government of Rajasthan State Insurance, 8, 9 February 2007. Bhattacharya, Anabil. “General Insurance Market Leading to a Tariff Free Regime.” The Insur- ance Times. Jaipur: The Insurance Times, 2007. 30–41. Bhattacharya, Anabil. “Life Insurance Products & Strategies for successful marketing in Urban and Rural India.” Life Insurance Today (2006): 5–7. Bruhn, Manfred and Dominik Georgi. “Communicating Service Value.” Bruhn, Manfred and Dominik Georgi. Services Marketing – Managing the Service Value Chain. England: Prentice Hall, 2006. 268–297. Chakravati, Srabanti. “Reasons Behind Low Penetration of Health Insurance Schemes in In- dia.” Kumar, K B S. Non Life Insurance. Hyderabad: ICFAI Press, 2006. 35–44. Chatagny, Jean Michael. “Why has Health Insurance not taken off?” Insurance Summit CII. Mumbai: Swiss Re, 10 October 2006. CIA – The World Factbook. CIA World Factbook. 21 May 2007 . Datamonitor. Global Insurance. Market Analysis. New York: Datamonitor, 2006. –. Insurance in Asia Pacific. Market Analysis. New York: Datamonitor, 2006. –. Insurance in India. Market Analysis. New York: Datamonitor, 2006. –. “Multiple reports on the Indian Insurance, Asia Pacific Insurance and Global Insurance Mar- ket.” New York: Datamonitor, 2006. Dutta, Shantanu. The paradox of silent cradles and obese generals. 4 May 2007. 20 May 2007 . Exchange4Media. Socio Economic Classification (SEC) of India. 13 July 2005. 13 May 2007 . Fassnacht, Prof. Martin. “Importance of Price.” Brand and Price - Price Management . Koblenz: Marketing Chair at WHU, MBA Class of 2007. Ganesan, S and S Jayaprakash. “TPAs in India: Can they be Turning Point Administrators?” Ku- mar, KBS. Non-Life Insurance. Hyderabad: ICFAI Press, 2006. 69–78. HDFC Standard Life Insurance. Knowledge Centre - Know more about insurance. 27 May 2007 . 166 Bibliography

Hindu Business Line. Oriental Insurance Products through post offices – Pilot project kicked off in 7 states. 5 February 2004. 21 May 2007 . ICICI Lombard. “Financial Intermediaries in Non-Life Insurance.” FICCI, 16 October 2001. ICICI Lombard. Health Insurance Policy India. 01 June 2007 . IRDA. Annual Report 2005–2006. Annual Report. Hyderabad: IRDA Journal, 2005–2006. IRDA. Annual Report IRDA 2005–2006. Annual Report. Hyderabad: IRDA, 2006. –. Annual Report, IRDA, 2005–2006. Annual Report. Hyderabad: IRDA, 2005–2006. Jawaharlal, U and K B S Kumar. “The Teething Troubles of TPAs.” Kumar, KBS. Non Life In- surance. Hyderabad: ICFAI Press, 2006. 79–87. Jawaharlal, U. “Riders or Customized Solutions?” Kumar, K B S. Insurance – Customer Ser- vice. Hyderabad: ICFAI Press, 2006. 104–107. Kaufmann, Lutz, et al. China Champions. Koblenz: EMP, 2005. Kedia, Sanjay. “Strategies and Experiences in Managing Risk Transfers – A Broker’s Perspec- tive.” New Delhi: IFC, 22 August 2006. Kotler, Philip and Kevin Lane Keller. “Setting Product Strategy.” Kotler, Philip and Kevin Lane Keller. Marketing Management 12e. New Jersey: Pearson and Prentice Hall, 2006. 371–399. Kotler, Philip and Kevin Lane. “Defining Marketing for the 21st Century.” Kotler, Philip and Kevin Lane. Marketing Management 12e. New Jersey: Prentice Hall, 2006. 3–31. Kotler, Philip and Kevin Lane. “Designing and Managing Value Networks and Channels.” Kotler, Philip and Kevin Lane. Marketing Management 12 e. New Jersey: Prentice Hall and Pearson, 2006. 466–501. Kotler, Philip and Kevin Lane. Market Segmentation. New Jersey: Pearson, Prentice Hall, 2006. Krishnamurthy, Narayan. “At Every Step of Life...” Kumar, K B S. Insurance – Customer Ser- vice. Hyderabad: ICFAI Press, 2006. 32–37. Krishnamurthy, R. Bancassurance in Insurance Distribution: Key Issues in the Indian Context . New Delhi, 15 October 2001. Kumar, K B S. “TPAs: A Cure for the Indian Health Sector.” Kumar, K B S. Non-Life Insurance. Hyderabad: ICFAI Press, 2006. 63–68. Kumar, V. Sai. “Life Insurance Products in India – Issues in Distribution.” IRDA (December 2006): 22–23. Max New York Life. Max New York Life India: Easy Plan Finder. 27 May 2007 . –. Max New York Life India: Easy Plan Finder, Planning Retirement, Savings, Investment, In- surance. 27 May 2007 . McGahan, Anita M. How Industries Evolve. Boston: HBS Press, 2004. Mendiratta, Deepak. “Rise of Health Insurance in India.” Health Insurance Conference 2007, IFC. Washington DC: International Finance Corporation, 20 April 2007. Mishra, K C and Simita Mishra. “Getting Closer to Life Insurance.” Mishra, K C and Simita Mishra. The Game is Changing – Insurance Reloaded. Hyderabad: ICFAI Press, 2005. 7–16. Mishra, K C and Simita Mishra. “Health Insurance to Managed Care.” Mishra, K C and Simita Mishra. The Game is Changing – Insurance Reloaded. Hyderabad: ICFAI Press, 2005. 145–167. Mishra, K C and Simita Mishra. “Insurance Sector Revisited.” Mishra, K C and Simita Mishra. The Game is Changing – Insurance Reloaded. Hyderabad: ICFAI Press, 2005. 1–6. Bibliography 167

Mishra, K C and Smita Mishra. “Insurance Sector Revisited .” Mishra, K C and Smita Mishra. The Game is Changing – Insurance Reloaded. Hyderabad: ICFAI University Press, 2005. 1–6. Mishra, K C and Smita Mishra. The Game is Changing – Insurance Reloaded. Hyderabad: IC- FAI Press, 2005. Mr. Bimal Balasingham, Director, Tata AIG Life Insurance Company Ltd. Media Releases; Tata AIG. 21 December 2006. 17 May 2007 . Nanda, Puneet. Investing in ULIPs - Read This First. 20 May 2005. 27 May 2007 . O’Connor, Robert. “For Life Writers, India Looms as Another “Jewel”.” BestWeek. AM Best Company Inc, April 2007. Oza, Arman. “Health Insurance: Awaiting Congruence.” Kumar, K B S. Non-Life Insurance. Hyderabad: ICFAI Press, 2006. 19–27. P. Chidambaram. Full Text of Finance Minister’s reply to the debate on Finance Bill. 4 May 2007. 20 May 2007 . Parera, Russell. “Health Insurance in India - Devising an Appropriate Model.” New Delhi: KPMG, 18 October 2004. Prabhakara, G. Importance of Sound Awareness and Education on Risks and Insurance issues. Istanbul, 13 April 2007. Press Trust of India. Enam Insurance Broker gets IRDA license. 17 May 2007. 18 May 2007 . Press. Tata Group: Tata AIG LIfe Insurance: Media Releases. 10 May 2006. 18 May 2007 . PTI. Indians need awareness on life insurance – a survey. 12 April 2007. 20 May 2007 . –. SBI Life Launches a Technology Initiative for Advisors – Business Live News – The Eco- nomic Times. 18 May 2007. May 18 2007 . Rajesh, J. “Claims Settlement: The Key Success Factor of LIC.” Kumar, K B S. Insurance – Customer Service. Hyderabad: ICFAI Press, 2006. 88–94. Ramachandaran, K. “Role of Brokers: Redefining Products and Service Excellence.” New Delhi: International Finance Corporation, 22 August 2006. Rao, GV. “Brokers in India and Other Markets.” IRDAJournal (December 2006): 11–14. Rao, T S Ramakrishna. “Tele-Underwriting in Life Insurance.” IRDA Journal October (2006): 18–20. Sahgal, Anil. “Bancassurance helps tap household savings.” Two Day National Conference on “Emerging Opportunities and Challenges in the Insurance Industry” February 2007: 73–74. Sanam, Chitra. Don’t fall ill, unless you’re rich. 5 May 2007. 20 May 2007 . Sawhney, Banit Singh. Distribution Challenges – How will the insurance industry respond? Pa- per. Pune, 2006. Schmidt-Gallas, Dr Dirk and Dieter Lauszus. “Profitable Growth: Manage your Pricing or Lose Money.” Simon Kucher and Partners (2006): 1–9. Sethi, Suresh. “Developments in Health Insurance in India.” National Conference on “Emerg- ing Challenges and Opportunities in the Insurance Industry”. Jaipur: The Insurance Times, 2007. Slide 3. Sinha, Tapen. An Analysis of Evolution of Insurance in India. An Analysis. Mexico, 2004. –. The Indian Insurance Industry – Challenges and Prospects. Analysis. UK: University of Not- tingham, 2004–2005. 168 Bibliography

Sinha, Tapen. The Indian Insurance Industry – Challenges and Prospects. Analysis. UK: Univer- sity of Nottingham, 2004–2005. Sinha, Tapen. The Indian Insurance Industry: Challenges and Prospects. A report. UK, 2003. Sodhani, Vineet. Target your truly consuming homes better, HPI from IRS. 13 July 2005. 17 May 2007 . Syed, Falaknaaz. Free Health Insurance from Office? No More! 7 May 2007. 21 May 2007 . –. Three more insurers on the horizon. 18 May 2007. 18 May 2007 . Thomas M. Daniel, Max New York Life. “Orphan Policy or Direct Customer – A Paradigm Shift.” Two Day National Conference on Emerging Opportunities and Challenges in Indian Insurance Industry. Jaipur: The Insurance Times, 2007. Times News Network (TNN). RRBs can join Insurance Play, but can’t take any risk. 4 May 2007. 20 May 2007 . Vaughan, Emmet and Therese Vaughan. Essentials of Insurance – A Risk Management Perspec- tive. Iowa: John Wiley and Sons, Inc, 1995. Viswanathan, S. “Role of Distribution Channels.” IRDA (December 2006): 20–21. Wikipedia. Insurance in India. 22 May 2007 . About the Author

Novi Dewan, an Engineer by profession recently completed her MBA as Valedictorian of the MBA Class of 2007 at the WHU – Otto Beisheim School of Management, Germany with international mod- ules at Kellogg School of Management, North- western University, US; Indian Institute of Manage- ment (IIM), Bangalore, India; and CEIBS, Shang- hai, China. She is currently a research scholar at the Chair of Microeconomics and Industrial Organization at WHU. She was selected amongst a pool of high caliber candidates for the Harvard Program for Asian and International Relations (HPAIR) which was held in Hong Kong, in August, 2007. Her paper on shakeout theories titled “When entrepreneurial spirit is not enough” was published and selected for the Max Planck Annual Conference at Indian Institute of Management, Bangalore in October, 2007. Her main areas of interest include Neuroeconomics and Social Entrepreneurship. In her free time, Novi enjoy traveling, exploring new cultures and sub-cultures, hiking, writing, solving Sudoku puzzles, bowling and learning new adventure sports.