Distribution challenges: How will the Insurance Industry

By Banit Singh Sawhney, MBA II Mktg

The Distribution Challenge

India is arguably one of the most challenging and promising emerging insurance markets. Its rapidly growing economy, plus a young and huge population spell ample opportunities for the development of insurance. There is however much to be done to realize this potential. A few challenges to be tackled here would be to improve insurer solvency, raise a standard among insurance practitioners, asset management capabilities, distribution challenges, operation risk mitigation etc.

Reach: The ultimate challenge
More than 50% of India’s population lives in tier II-III cities and in rural India. While tied agents continue to play an important role in distribution, alternative channels like corporate agents, brokers, and bancassurance are starting to play a greater role in distribution.

The Power of Brick and Mortar: The Indian Banks
The penetration of commercial banks in India is unmatched, and no form of agent led sales-force can compete with it. There are around 68,500 branches of scheduled commercial banks. Each branch serves an average of around 16,000 people. The only other national institution with a bigger reach than this is the Indian Postal Service. Banks have expanded not only in urban areas; they have also grown in semi-urban and rural areas. Of the total number of branches of commercial banks, 32,600 branches are in rural areas and 14,400 are semi-urban branches.

Banks therefore provide great potential to be tapped. The HNI and Corporates in India are saturated in terms of product offerings. The growth would come from the 200 million strong Indian middle class. This would principally be from personal and rural banking.

The fastest and the most cost effective way to target this segment would be by selling insurance policies through their local banks. These local banks provide credibility, assurance and unprecedented reach for a life Insurance company.
World View World over where “Bancassurance” brings majority of the business, the full-integration model is in operation. France is undoubtedly one of the countries where the breakthrough in bancassurance has been spectacular. In the space of just two years, Predica, Crédit Agricole’s life insurance subsidiary first set up in 1986, became France’s 3rd biggest life insurance company in terms of premium-income. It should be noted that one of the effects of the rapid growth in bancassurance activities in France has been the creation of new market opportunities rather than weakening of the traditional insurance business.

Today, French bancassurance operators are doing better than insurance companies on individual risk. In 2003, the French Bancassurance Group (chaired by Michel Villatte, CEO of Predica), accounted for 60% of sales in life assurance, with premium income of €55 billion. At the end of 2003, 5 bancassurance operators were amongst the top 10 life insurance companies (base: premium income). CNP is obviously in the top three, but its status sets it apart from the others. Its distribution strategy, based not only on partnerships with establishments such as La Poste, the Caisses d’Epargne but also the mutual insurance companies, financial institutions and even local authorities, makes it difficult to compare with other bancassurance operators active in the French market.

The field of French bancassurance has recently changed following mergers between certain banks:
• The merger of the BNP and Paribas networks produced BNP Paribas Assurance, which encompasses the activities of Cardif and Natio;
• The merger of Crédit Agricole and Crédit Lyonnais, which resulted in a “new version” Predica, combining the activities of Assurances Fédérales Vie and Médicale de France;
• Even more recently, the takeover of Crédit Maritime by Banques Populaires.

In France, bancassurance seems to be at the dawn of a fourth stage-that of concentration.

Hence it can be seen that bancassurance and other distribution channels like the Postal service etc. are actually driving growth in the Insurance sector.

Bancassurance - The way forward: Why?
• Low cost to acquire and process customer applications. Bancassurance provides one of the lowest Cost-per-Transaction.
• The psyche of the Indian customer is to believe in a reputable name. The major banks have a strong relationship with their existing customer base. Hence it would be easier to convince people to invest.
• Average insurance premium in India would be comparatively lower than developed countries. Hence generally agents would not target the segments catered through these banks due to very low margin.
• Easy availability of customer care executives would lend better credibility and
will improve service quality and experience.

The Present Indian Scenario
It is not hard to figure out that the leading insurance players in India are already using the Bancassurance model .A brief overview would show that many leading companies have Ranking As per Market Share Name Distribution

1 8,00,000 agents.
479027 individual agents, 159 corporate agents and four lakh plus agents under
2 Agents 1,00,000 Bancassurance partner ICICI Bank 3 agency channel Bancassurance partnersinclude Standard Chartered Bank. (reason , it had a good customer base of HNIs & corporate customers), Syndicate Bank , Centurion Bank ("B" class city presence).
4 Individual agency, corporate agency including brokers and credit life. Bancassurance partners SBI ( 14000 branches )
5 Personal Finance Assistance(25,000), corporate agents, brokers Bancassurance partners including HSBC, United Bank of India and The Orissa State Co-operative Bank, rural and direct marketing. The company has 140 branch in 60 major cities.
6 It has got 44 branches all over India.

Insurance advisors( 25000)
Bancassurance partners include CitiBank,DCB,Karur Vysya
Bank,BNP Paribas,Syrian Catholic and a few co-operatives
Tata AIG Life Insurance
Company Ltd
BIRLA SUN LIFE
INSURANCE COMPANY LIMITED
Life Insurance Corporation of India
ICICI Prudential
Bajaj Allianz Life Insurance
SBI LIFE INSURANCE

already tied up to foster growth and penetration.
Some Alternate Channels In order to increase penetration into the Indian market, companies could look at :

Medical Tie ups
Tie-up and increase distribution through leading hospital chains e.g. the Apollo Group etc. It could start with a campaign that promotes health care, good living and a secure future. It could be a good move looking at the way the Medical Service Industry is slated to grow.

Automobile Tie ups
Distributing life insurance through automobile companies like Maruti, Hyundai, Honda, Toyota etc. depending upon the target customer segment, could be another option. The auto industry is booming currently thanks to the rapid consumer spending of the middle class. As it is the Per-Capita-GDP to Insurance Ratio and the Population to Lives Insured Ratio is abysmally low compared to other emerging markets, such an agreement would take the company to a place where target customers frequently visit in sizeable numbers.
Innovative advertising should help the cause as people could be made to realize that if they are taking a car insurance, their lives are more important than the car and hence the requirement for a life insurance too is advisable.

Rural Partnerships
The company can look for possibilities of a tie-up with various micro-finance organizations, Self Help Groups, and NGO’s. A partner like ITC’s e-choupal could help make inroads into the rural markets.

Indian Postal Services
As soon as the regulation is passed by the government to allow partnership with postal services of India (which practically reaches every household in India), the companies would move in to exploit this channel.

Conclusion
The insurance market today is seeing cut-throat competition, with new entrants like Reliance turning on the heat on existing players, not just in the customer market but even in the job market. The industry will definitely see a round of consolidation in the near future with minor players either merging into each other or forming a bigger company.

The company that survives in the long run will not be the company that offers the highest returns, advertises the most or earns huge margins, but a company that sticks to its strategy, adjusting it when the situation demands and constantly innovating its offering and reach to suit the customers’ changing requirements and segment demographics.

We will be delighted to receive feedback, ideas and contributions on forthright@sibm.net . Please feel free to contact any RF member regarding your
suggestions and thoughts. Once again, have a very Happy Diwali!!