The customer is the most important visitor in our premises. He is not dependent on us. We depend on him.

He does not disturb our work. He is the purpose of it. He is not a stranger in our business. He is a part of it. We do not do him a favour when we serve him. He does us a favour by giving us an opportunity to do it. -- Mahatma Gandhi

Introduction

The service sector accounts for more than half of India's GDP: 51.16 per cent in 1998-99. This sector has gained at the expense of both the agricultural and industrial sectors through the 1990s. The rise in the service sector's share in GDP marks a structural shift in the Indian economy and takes it closer to the fundamentals of a developed economy (in the developed economies, the industrial and service sectors contribute a major share in GDP while agriculture accounts for a relatively lower share).

The service sector's share has grown from 43.69 per cent in 1990-91 to 51.16 per cent in 1998-99. In contrast, the industrial sector's share in GDP has declined from 25.38 per cent to 22.01 per cent in 1990-91 and 1998-99 respectively. The agricultural sector's share has fallen from 30.93 per cent to 26.83 per cent in the respective years.

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Some economists caution that if the service sector bypasses the industrial sector, economic growth can be distorted. They say that service sector growth must be supported by proportionate growth of the industrial sector; otherwise the service sector grown will not be sustainable

Within the services sector, the share of trade, hotels and restaurants increased from 12.52 per cent in 1990-91 to 15.68 per cent in 1998-99. The share of transport, storage and communications has grown from 5.26 per cent to 7.61 per cent in the years under reference. The share of construction has remained nearly the same during the period while that of financing, insurance, real estate and business services has risen from 10.22 per cent to 11.44 per cent. The fact that the service sector now accounts for more than half the GDP probably marks a watershed in the evolution of the Indian economy.

Customer satisfaction predominates the success of an enterprise. In the service industry where intangibles are marketed, the importance of customer satisfaction is all the more significant. Service is said to be the sharpest edge of marketing strategy. Sales and service are the two important wings of service industry like LIC, ITI and the post office. If one of the wings turns weak the organization cannot rise because the weaker wing will hamper its flight. Hence the emphasis should not be concentrated only on the sales but on service aspects too. Besides a supportive role in promoting sales effort, servicing influences the institutional image. Prompt and effective service boosts the morale of the sales force to present a bold form and hold their prospects. Service encompasses the

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service rendered to clients before, during, and after sales. A few examples of services are the Hotel industry, Airline industry, Insurance industry, Transportation industry, etc.

Insurance may be described as a social device to reduce or eliminate risk of loss to life and property. Under the plan of insurance, a large number of people associate themselves by sharing risks attached to individuals. The risks, which can be insured against, include fire, the perils of sea, death and accidents and burglary. Any risk contingent upon these, may be insured against at a premium commensurate with the risk involved. Thus collective bearing of risk is insurance.

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Definitions

General Definition In the words of John Magee, Insurance is a plan by themselves which large number of people associate and transfer to the shoulders of all, risks that attach to individuals.

Fundamental Definition In the words of D.S. Hansell, Insurance accumulated contributions of all parties participating in the scheme.

Contractual Definition In the words of justice Tindall, Insurance is a contract in which a sum of money is paid to the assured as consideration of insurers incurring the risk of paying a large sum upon a given contingency.

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Characteristics of Insurance

1. 2. 3. 4. 5. 6.

Sharing of risks Cooperative device Evaluation of risk Payment on happening of a special event The amount of payment depends on the nature of losses incurred. The success of insurance business depends on the large number of people insured

against similar risk. 7. Insurance is a plan, which spreads the risk and losses of few people among a large

number of people. 8. 9. The insurance is a plan in which the insured transfers his risk on the insurer. Insurance is a legal contract which is based upon certain principles of insurance

which includes utmost good faith, insurable interest, contribution, indemnity, causes proxima, subrogation, etc. 10. The scope of insurance is much wider and extensive.

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Scope or Kinds of Insurance

Broadly, insurance may be classified into the following categories: i. ii. iii. Classification on the basis of nature of insurance Classification from business point of view Classification from risk point of view

I. On The Basis Of Nature Of Business On the basis of nature of business, insurance may be the following types: 1. 2. 3. 4. 5. a) b) c) d) Life insurance Fire insurance Marine insurance Social Insurance, and Miscellaneous insurance. Vehicle insurance on buses, trucks, motorcycles, etc. Personal accident insurance Burglary insurance - (against theft, dacoit etc.) Legal liability insurance (insurance whereby the assured is liable to pay the

damages to property or to compensate the loss of personal injury or death. This is in the form of fidelity guarantee insurance, automobile insurance and machines etc.) e) Crop insurance (crops are insured against losses due to heavy rain and

floods, cyclone, draughts, crop diseases, etc.)

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f)

Cattle insurance - (insurance for indemnity against the loss of castles from

various kinds of diseases) In addition to the above, insurance policies are available against crime, medical insurance, bullock cart insurance, jewelry insurance, cycle rickshaw insurance, radio-T.V. insurance, etc.

II. Classification from Business Point of View From business point insurance can be classified into two broad categories: 1. 2. Life insurance; and General Insurance

General insurance business refers to fire, marine, and miscellaneous insurance business whether carried on singly or in combination with one or more of them but does not include capital redemption business and annuity certain business.

III. Classification from Risk Point of View From risk point of view, insurance can be classified into four categories: 1. 2. 3. Personal insurance Property insurance Liability insurance 4. Fidelity guarantee insurance

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Functions of Insurance

Primary Functions 1. Provide protection: - Insurance cannot check the happening of the risk, but can

provide for the losses of risk. 2. Collective bearing of risk: - Insurance is a device to share the financial losses of few

among many others. 3. Assessment of risk: - Insurance determine the probable volume of risk by

evaluating various factors that give rise to risk 4. Provide certainty: - Insurance is a device, which helps to change from uncertainty to

certainty.

Secondary Functions 1. Prevention of losses: - Insurance cautions businessman and individuals to adopt

suitable device to prevent unfortunate consequences of risk by observing safety instructions. 2. Small capital to cover large risks: - Insurance relives the businessman from security

investment, by paying small amount of insurance against larger risks and uncertainty. 3. Contributes towards development of larger industries.

Other Functions Means of savings and investment.

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Origin and Development of Insurance

Insurance in the modern form originated in the Mediterranean during 13/14th century. The earliest references to insurance have been found in Babylonia, the Greeks and the Romans. The use of insurance appeared in the account of North Italian merchant banks who then dominated the international trade in Europe at that time. Marine insurance is the oldest form of insurance followed by life insurance and fire insurance. The patterns that have been used in England followed in other countries also in these kinds of insurance. The origin and growth of Marine Insurance, life Insurance, Fire Insurance and miscellaneous insurance are given below:

1. Marine Insurance The oldest and the earliest records of marine policy relates to a Mediterranean voyage in 1347. In the year 1400, a book written by a merchant of Florence, indicates premium rates charged for the shipments by sea from London to Pisa. Marine Insurance spread from Italy to trading routes in other countries of Europe.

Marine Insurance in India There is evidence that marine insurance was practiced in India some three thousand years ago. In earlier days travelers by sea and land were exposed to risk of losing their vessels and merchandise because of piracy on the open seas. Moreland has maintained that the practice of insurance was quite common during the rule of Akbar to Aurangzeb, but the nature and coverage of insurance in this period is not well known. It was the British,

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insurers who introduced general insurance in India, in its modern form. The Britishers opened general insurance in India around the year 1700. The first company, known as the Sun Insurance Office Ltd. was set up in Calcutta in the year 1710. This followed by several insurance companies of different parts of the world, in the field of marine insurance. In 1972, the government of India nationalized the general insurance business by forming GIC.

2. Life Insurance The early developments of life insurance were closely linked with that of marine insurance. The first insurers of life were the marine insurance underwriters who started issuing life insurance policies on the life of master and crew of the ship, and the merchants. The early insurance contracts took the nature of policies for a short period only. The underwriters issued annuities and pension for a fixed period or for life to provide relief to widows on the death of their husbands. The first life insurance policy was issued on 18 th June 1583, on the life of William Gibbons for a period of 12 months.

Life Insurance in India The British companies started life insurance business in India, by issuing policies exclusively on the lives of European soldiers and civilians. They sometimes issued policies on the lives of Indians by charging extra. Different insurance companies like Bombay Insurance Company LTD. (1793) and Oriental Life Assurance Company (1818) was formed to issue life assurance policies in India. Gradually, the first Indian Company named as Bombay Mutual Life Insurance Society Ltd. was formed in Dec. 1870. By 1971, the

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total numbers of companies working in India were 15, out of which 7 were Indian and the remaining were British companies. After several changes have been made for the period from 1930 to 1938, the Government of India passed Insurance Act, 1938. The act still applies to all kinds of insurance business by instituting necessary amendments from time to time.

3. Fire Insurance Fire insurance has its origin in Germany where it was introduced in municipalities for providing compensation to owners of the property, in return for an annual contribution, based on the rent of those premises. The fire insurance in its present form started after the most disastrous fire in human history known as the 'Great Fire' in London, which had destroyed several buildings. It drew the attention of the public and the first fire insurance commercially transacted in 1667. The Industrial Revolution (1720-1850) gave much impetus to fire insurance. The Nineteenth century marked the development of fire insurance.

Fire Insurance in India In India, fire insurance was started during the British regime. The oldest of these companies include the Sun Insurance Office, Calcutta (1710), London Assurance and Royal Exchange Assurance (1720), Phoenix Assurance Company (1782), etc.

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4. Miscellaneous Insurance Due to the increasing demands of the time, different forms of insurance have been developed. Industrial Revolution of 19th century had facilitated the development of accidental insurance, theft and dacoit, fidelity insurance, etc. In 20th century, many types of social insurance started operating, viz., unemployment insurance, crop insurance, cattle insurance, etc. This way the business of insurance developed simultaneously with human and social development. Today, the use of computers in the field of insurance is frequently increasing. Insurance becomes an inseparable part of human development.

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Pre-Liberalization Scenario
Indian History: Time to turn the clock back-and open up insurance Fifty years ago, India had a bustling, if somewhat chaotic, entirely private insurance industry. The year after Independence, 209 life Insurance companies were doing business worth Rs712.76 crore (which grew to an amazing Rs 295,758 crore in 1995-96). Foreign insurers had a large market share 40 per cent for general insurance but there were also plenty of Indian companies, many promoted by business houses like the Tatas and Dalmias. The first Indian-owned life insurance company, the Bombay Mutual Life Assurance Society, was set up in 1870 by six friends. It Insured Indian lives at the normal rates instead of charging a premium of 15 to 20 percent as foreign insurers did. Its general insurance counterpart, Indian Mercantile Insurance Company Ltd., opened in Bombay in 1907. A plethora of insufficiently regulated players was a sure recipe for abuse, especially because there was no separation between business houses and the insurance companies they promoted. The Insurance Act, 1938, introduced state controls on insurance, including mandatory investments in approved securities, but regulation remained ineffective. In 1949, Purshottamdas Thakurdas, chairman of the Oriental Assurance Company, admitted: "We cannot deny that, today, there is a tendency on the part of insurance companies in general to make illicit gains. Can we overlook the cutthroat competition for acquiring business? And still worse is the dishonest practice of adjusting of accounts." After a 1951 inquiry, the government was dismayed that companies had

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high expense and premium rates, were speculating in shares, and giving loans regardless of security. No wonder that between 1945 and 1955, 25 insurers went into liquidation and 25 transferred their business to other companies. This reckless record stoked the pro-nationalization fires. The 1956 life insurance Nationalization was a top-secret intrigue; for fear that unscrupulous insurers would siphon funds off if warned. The government resolved to first take over the management of life insurance companies by ordinance, then their ownership. The then finance minister C.D. Deshmukh later wrote: 'Seth Ramakrishna Dalmias extraction of Rs.225 crore (misappropriation by the Bharat Insurance Company) was a heaven-sent opportunity. We were ready to nationalize, with every detail worked out." On 19 January 1956, the news was announced on the radio, though even the director- general of AIR was not shown the speech. The next morning, at 9 am, while executives were frantically seeking details over the trunk telephone, says Deshmukh in his autobiography, our officers walked into the respective insurance offices, showed their authority and then took over the business. I believe this will be regarded as one of the best kept secrets of the Government of India in all times to come." The ordinance transferred control of 245 insurers to the government. LIC, established eight months later, took over their ownership. General Insurance had its turn in 1972, when 107 insurers were amalgamated into four companies headquartered in the four metros, with GIC as a holding company. Nationalization brought some benefits. Insurance spread from an urban-oriented, high-end business to a mass one. Today, 48 per cent Of LIC's new business is rural. Net premium income in general insurance grew from Rs222 crore in 1973 to Rs 5,956 crore in 1995- 96. Yet, rigid controls hamper operational flexibility and initiative so both customers service and work culture today are dismal. The

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frontier spirit of the early insurers has been lost. Insurance companies have also been timid in managing their investment portfolios. Competition between the four GIC subsidiaries remains illusory. If Nationalization ever had a purpose, it has been served. It's now time to turn back the clock in some respects, and open up the sector again. The government already intends to insist on large minimum capital requirements, a strong regulator, and a healthy distance between insurers and industry. To ensure that history doesn't repeat itself.

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Three Questions about Insurance Liberalization

The decision to allow private companies to sell insurance products in India rests with the lawmakers in Parliament. Opening up the insurance sector requires crossing at least two legislative hurdles. These are the passage of the Insurance Regulatory Authority (IRA) Bill, which will make IRA a statutory regulatory body, and amending the LIC and GIC Acts, which will end their respective monopolies. In 1994 the government appointed a committee on insurance sector reforms (which is known as the Malhotra Committee) which recommended that insurance business be opened up to private players and laid down several guidelines for orchestrating the transition. In particular, we do not address many other related questions such as whether foreign (and not just private) players should be allowed, what cap should there be on foreign equity ownership, whether banks and other financial institutions should be allowed to operate in the insurance business, whether firms should be allowed to sell both life and non-life insurance, and so on. The three questions that we address are: 1) Why allow entry to private players? The choice between public and private might amount to choosing between the lesser of two evils. An insurance contract is a "promise to pay" contingent on a specified event. In the case of insurance and banking, smooth functioning of business depends heavily on the continuation of the trust and confidence that people place on the solvency of these financial institutions. Insurance products are of little value to consumers if they cannot trust the company to keep its promise. Furthermore, banking and insurance sectors are vulnerable to the "bank run" syndrome, wherein even one insolvency can trigger panic

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among consumers leading to a widespread and complete breakdown. This implies the need for a public regulator, and not public provision of insurance. Indeed in India, insurance was in the private sector for a long time prior to independence. The Life Insurance Corporation of India (LIC) was formed in 1956, when the Government of India brought together over two hundred odd private life insurers and provident societies, under one nationalized monopoly corporation, in the wake of several bankruptcies and malpractices'. Another important justification for Nationalization was to raise the muchneeded funds for rapid industrialization and self-reliance in heavy industries, especially since the country had chosen the path of state planning for development. Insurance provided the means to mobilize household savings on a large scale. LIC's stated mission was of mobilizing savings for the development of the country and also conducting business in the spirit of 1. A comprehensive historical account of Life insurance business in India and LIC in particular is provided in LIC (1970) and LIC (1991) respectively. 2. This latter emphasis on trusteeship was relevant then, in light of major insolvencies and fraudulent practices of so many private insurance companies prior to 1956.

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Trusteeship

The non-life insurance business was nationalized in 1972 with the formation of General Insurance Corporation (GIC). Thus the fact that insurance is a state monopoly in India is an artifact of recent history the rationale for which needs to be examined in the context of liberalization of the financial sector. If traditional infrastructure and "semi-public goods" industries such as banking, airlines, telecom, power, and even postal services (courier) have significant, private sector presence, continuing a state monopoly in provision of insurance is indefensible. This is not to deny that there are some valid grounds for being cautious about private sector entry. Some of these concerns are: a) That there would be a tendency of private companies to "skim" the markets; thus private players would concentrate on the lucrative mainly urban segment leaving the unprofitable segment to the incumbent LIC. b) That without adequate regulation, the funds generated may not be deployed in sectors (which yield long-term social benefits), such as infrastructure and public goods; similar without regulation, private firms may renege on their social sector investment obligations. Meeting these concerns requires a strong regulatory body. Another commonly expressed fear is that there would be massive job losses in the industry as a whole due to computerization. This however does not seem to be corroborated by the countries' experience'. Moreover, apart from consideration based on theoretical principles alone, there is sufficient evidence that suggests that introduction of private players in insurance can only lead to greater benefits to consumers. This can be seen from the fact that the spread in

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insurance in India is low compared to international benchmarks. The two convention measures of the spread of insurance are penetration and density. The former measure (premiums per unit) of GDP, and the latter, premiums per capita. Less than 7% of the, population in India has life insurance cover. India has the biggest life insurance sector in the world if we go by the number of policies sold, but the number of policies sold per 10 persons is very low. The demand for insurance is likely to increase with rising per-capita incomes, rising literacy rates and increase of the service sector, as has been seen from the example of several other developing countries. In fact, opening up of the insurance sector is an integral part of the liberalization process being pursued by many developing countries. There are several other factors that call for private sector presence. Firstly, a state monopoly has little incentive to innovate or offer a wider range of products. This can be seen by a lack of certain products from LlC's portfolio, and lack of extensive risk categorization in several GIC products, such as health insurance. In fact, it seems reasonable to conclude that many people buy life insurance just for the tax benefits, since almost 35 per cent of the life insurance business is in March, the month of financial closing. This suggests that insurance needs to be sold more vigorously. More competition in this business will spur firms to offer several new products, and more complex and extensive risk categorization. The system of selling insurance through commission agents needs a better incentive structure, which a state monopoly tends to stifle. For example LIC pays out only 5 per cent of its income as commissions, whereas this share in Singapore is 16 per cent, and in Malaysia it is close to 20 percent.

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Finally, private sector entry into insurance might be simply a fiscal necessity. Since large scale funds form long term contractual savings need to be mobilized, especially for investment in infrastructures the option of not having more (private) players in the insurance sector is too costly. 2) What should be the market structure? In this section, we analyze the question whether there should be unlimited private entry insurance markets or whether only a few players are allowed to operate. This question hinges around the issue of "adverse selection" described below. Individuals buying an insurance contract pay a price (called the "premium") to the insurance company and the insurance company in turn provides compensation if a specified event occurs. By making such contractual arrangements with a large number of individuals and organizations the insurance company can spread the risk. This gives insurance its "social" character in the sense that it entails pooling of individual risks. The price of insurance i.e., the premium is based on average risk. This premium is too high for people who perceive themselves to be in a low risk category. If the insurer cannot accurately determine the risk category of every customer and prices insurance on the basis of average risk, he stands to lose all the low risk customers. This in turn increases the average risk, which means premium have to be revised upwards, which in turn drives away even more customers and so on. This is known as the problem of "adverse selection". Adverse selection problem arises when a seller of insurance cannot distinguish between the buyer's type i.e., whether the buyer is a low risk or a high type. In the extreme case, it may lead to the complete breakdown of insurance market.

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Another phenomenon, the problem of "moral hazard" in selling insurance, arises when the unobservable action of buyer aggravates the risk for which insurance is bought. For example, when an insured car driver exercises less caution in driving, compared to how he would have driven in the absence of insurance, it exemplifies moral hazard. Given these problems unbridled, competition among large number of firms is considered detrimental for the insurance industry. Furthermore, even the limited competition in insurance needs to be regulated. Insurance companies can differentiate among various risk types if there is a wide difference in risk profile of the buyers insuring against the strong insurers. It also called for keeping life insurance separate from the general insurance. It suggested the regulation of insurance intermediaries by IRA and the introduction of brokers for better professionalisation'. 3) The Role of IRA (a) (b) (c) the protection of consumers' interest, to ensure financial soundness of the insurance industry and To ensure healthy growth of the insurance market.

These objectives must be achieved with minimum government involvement and cost. IRA's functioning can be financed by levying a small fee on the premium income of the insurers thus putting zero cost on the government and giving itself autonomy. Protection of Customer Interests

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IRA's first brief is to protect consumer interests. This means ensuring proper disclosure, keeping prices affordable but also insisting on some mandatory products, and most importantly making sure that consumers get paid by insurers. Ensuring proper disclosure is called Disclosure Regulation. Insurance contracts are basically contingency agreements. They can be full of inscrutable jargon and escape clauses. An average consumer is likely to be confused by them. IRA must require insurers to frame transparent contracts. Consumers should not have to wake up to unpleasant surprises, finding that certain contingencies are not covered. The IRA also has to ensure that prices of products stay reasonable and certain mandatory products are sold. The job of keeping prices reasonable is relatively easy, since competition among insurers will not allow any one company to charge exorbitant rates. The danger often is that prices may be too low and might take the insurer dangerously close to bankruptcy. As for mandatory products, those that involve common and wellknown risks, certain standardization can be enforced. Furthermore, IRA can insist that for such products the prices also be standardized. From the consumer's point of view the most important function of IRA is ensuring claim settlement. Quick settlement without unnecessary litigation should be the norm. For example, in motor vehicle insurance, adopting no-fault principle can speed up many settlements. Currently, LIC in India has a claims settlement ratio of 97%, an impressive number by any standards. However, it hides the fact that this settlement is plagued by long delays, which reduce the value of settlement itself.

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If consumers have a complaint against an insurer they can go to a body formed by association of insurers. The decision of such a body would be binding on the insurers, but not on the complainant. If complainants are not satisfied, they can go to court. Some countries such as Singapore have such a system in place. This system offers a first and quicker choice of settling out of court. IRA can encourage the insurers to have such a grievance redressal mechanism. This system can serve the function of adjudication, arbitration and conciliation. The second area of IRA's activity concerns monitoring insurer behavior to ensure fairness. It is especially here that IRA's choice of being a bloodhound or a watchdog would have different implications. We think that an initial tough stance should give way to a more forbearing and prudential approach in regulating insurance firms. When the industry has a few firms there is some chance of collusion. IRA must be alert to collusive tendencies and make sure that prices charged remain reasonable. However, some cooperation among the insurance companies could be considered desirable. This is especially in lines where claim experience of any one company is not sufficient to make accurate forecasts. Collusion among companies on information sharing and rate setting is considered "fair'. IRA must have severe penalties in case of fraud or mismanagement. Since insurance business involves managing trust money, in some countries the appointment of senior managers and "key personnel" has to be approved by the insurance regulatory agency. Ensuring Solvency of Insurers

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There are basically four ways of ensuring enough solvencies. First is the policy of a price floor. Second is the restriction on capital and reserves, i.e., on what kind of investments and speculative activities firms can make. Third is putting in place entry barriers to restrict the number of competitors. Fourth is the creation of an industry financed guarantee fund to bail out firms hit by unexpectedly high liabilities. Entry restrictions of the IRA are implemented through a licensing requirement, which involves capital adequacy among other things. Since there are economies of scale and scope in insurance operations it might be better to have only a few large firms. There is however no magic number regarding the optimal number of firms. Restricting competition provides a scope for higher profits to the companies thereby strengthening their solvency position. After qualifying, the entrants are continuously subjected to restrictions on reserves and investments, which ensure ongoing solvency. Additionally, a guarantee fund, created by mandatory contributions from all insurance companies is used to bail out any insurance company, which might be in financial trouble. This guarantee fund does not imply that firms can charge whatever they wish to their consumers. All insurance companies would have an incentive to monitor the activities of their rival peer firms. This is because insolvency of any insurance company would entail a price, which all the insurance companies would have to shoulder. Peer review of accounts can also be institutionalized. IRA can have several ways for early detection of a potential insolvency. For example, in the USA there is an Insurance Regulatory Information System (IRIS) that regularly computes certain key financial ratios from financial statements of firms. If some of these

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ratios fall outside given limits the company is asked to take corrective action. Insolvency can also arise out of reinsurers abandoning insurance companies in the lurch, as witnessed in the USA in 1980's. Reinsurance is a bigger business dominated by large international reinsurers. Such litigation between reinsurer and insurance companies involves cross boundary legalities and can drag on for years. IRA must evolve a set of operational guidelines to deal with reinsurance matters. Overseeing Insurance Intermediaries

Insurance intermediaries such as agents, brokers, consultants and surveyors are also IRAs jurisdiction. IRA has to evolve guidelines on the entry and functioning of such intermediaries. Licensing of agents and brokers should be required to check against their indulging in activities such as twisting, rebating, fraudulent practices, and misappropriation of funds. IRA can also consider allowing banks to act as agents (as opposed to underwriters) of insurers in mass base types of products. Given their wide network of branches and their customer base, the banks can access this market for insurance products and also earn commission income. The incremental cost of providing such insurance products would be much lower. Promoting Growth in the Insurance Industry a society experiences many benefits from the spread of insurance business. Insurance contributes to economic growth by enabling people to undertake risky but productive activity. In the past, growth of trade has been facilitated by the development of insurance services. One only needs to look at the history of insurance to see how evolution of insurance helped trade flows along various trade routes. Promotion of insurance also provides for long-term funds, which are utilized to fund big infrastructure

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projects. These projects typically have positive externalities, which benefit society at large. IRA can ensure growth of insurance business with better education and protection to consumers, and by making the insurance business a level playing field. They can also support Indian insurance companies in the international field. IRA thus has to frame the rules, design procedures for enforcement and also make operational guidelines. All this with virtually no relevant historical data makes the task very difficult. An initial conservative approach (the bloodhound) is justified since there is no prior experience to fall back on, and it would be prudent to err by regulating more rather than less. As experience accumulates, the IRA can relax its initial harsh stance and adopt a more accommodating stance (the watchdog). Regulation is always an evolutionary process and experience constantly has to feed into policy making. Care must be taken so that this process does not slow down and cause regulatory lags. Repeat IRA can also consider allowing banks to act as agents (as opposed to underwriters of insurers in mass base types of products. Given there wide network of branches their customer base, the banks can access this market for insurance products and also commission income. The incremental cost of providing such insurance products would be much lower. Such a move of allowing banks to operate insurance business and, versa is consistent with a worldwide trend of greater integration of banking and insurance.

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Post Liberalization Scenario

While no aspect of the reform process in India has gone smoothly since its inception in 1991, no individual initiative has stirred the proverbial hornets' nest as much as the proposal to liberalize the country's insurance industry. However, the political debate that followed the submission of the report by the Malhotra Committee has presumably come to an end with the ratification of the Insurance Regulatory Authority (IRA) Bill both by the central Cabinet and the standing committee on finance. This section traces the evolution of the life insurance companies in the US from firms underwriting plain vanilla insurance contracts to those selling sophisticated investment contracts bundled with insurance products. In this context, it brings into focus the importance of portfolio management in the insurance business and the nature and impact of portfolio related regulations on the asset quality of the insurance companies. It also provides a rationale for the increased autornatisation of insurance companies, and the increased emphasis on agent-independent marketing strategies for their products. If politicized, regulations have potential to adversely affect the pricing of risks, especially in the non-life industry, and hence the viability of the insurance companies. Finally, the backdrop of US experience provides some pointers for Indian policymakers.

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Introduction The insurance sector continues to defy and stall the course of financial reforms in India. It continues to be dominated by the two giants, Life Insurance Corporation of India (LIC) and the General Insurance Corporation of India (GIC), and is marked by the absence of a credible regulatory authority.

The first sign of government concern about the state of the insurance industry was revealed in the early nineties, when an expert committee was set up under the chairmanship of late R.N.Malhotra. The Malhotra Committee, which submitted its report in January 1994, made some far-reaching recommendations, which, if implemented, could change the structure of the insurance industry. The Committee urged the insurance companies to abstain from indiscriminate recruitment of agents, and stressed on the desirability of better training facilities, and a closer link between the emolument of the agents and the management and the quantity and quality of business growth. It also emphasized the need for a more dynamic management of the portfolios of these companies, and proposed that a greater fraction of the funds available with the insurance companies be invested in non-government securities. But, most importantly, the Committee recommended that the insurance industry be opened up to private firms, subject to the conditions that a private insurer should have a minimum paid up capital of Rs. 100 crore, and that the promoter's stake in the otherwise widely held company should not be less than 26 per cent and not more than 40 per cent. Finally, the Committee proposed that the liberalized insurance industry be regulated by an autonomous and

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financially independent regulatory authority like the Securities and Exchange Board of India (SEBI). Subsequent to the submission of its report by the Malhotra Committee, there were several abortive attempts to introduce the Insurance Regulatory Authority (IRA) Bill in the Parliament. It is evident that there was broad support in favour of liberalization of the industry, and that the bone of contention was essentially the stake that foreign entities were to be allowed in the Indian insurance companies. In November 1998, the central Cabinet approved the Bill which envisaged a ceiling of 40 per cent for non-Indian stakeholders: 26 per cent for foreign collaborators of Indian promoters, and 14 per cent for nonresident Indians (NRIs), overseas corporate bodies (OCBs) and foreign institutional investors (FIIs). However, in view of the widespread resentment about the 40 per cent ceiling among political parties, the Bill was referred to him, standing committee on finance. The committee has since recommended at each private company be allowed to enter only one of the three areas of business-life insurance, general or nonlife insurance, and reinsuranced that the overall ceiling for foreign stakeholders in these companies be reduced to 26 per cent from the proposed 40 per cent. The committee has also recommended that the minimum paid up share capital of the new insurance companies be raised to Rs. 200 crore, double the amount proposed by the Malhotra Committee.

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Economic Rationale

The insurance industry is a key component of the financial infrastructure of an economy, and its viability and strengths have far reaching consequences for not only its money and capital markets,' but also for its real sector. For example, if households are unable to hedge their potential losses of wealth, assets and labour and non-labour endowments with insurance contracts, many or all of them will have to save much more to provide for events that might occur in the future, events that would be inimical to their interests. If a significant proportion of the households behave in such a fashion, the growth of demand for industrial products would be adversely affected. Similarly, if firms are unable to hedge against "bad" events like fire and the-job injury of a large number of labourers, the expected payoffs from a number of their projects, after factoring in the expected losses on account such "bad" events, might be negative. In such an event, the private investment would be adversely affected, and certain potentially hazardous activities like mining and freight transfers might not attract any private investment. It is not surprising, therefore, that economists have long argued that insurance facility is necessary to ensure the completeness of a market.

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Organizational Structures and their Implications

Insurance companies can be broadly divided into four categories: stock companies, mutual companies, reciprocal exchanges, and Llyod's companies. The former two are the dominant forms of organizational structures in the US insurance industry. A stock company is one that initially raises capital by issue of shares, like a bank or a non-bank financial institution, and subsequently generates more funds for investment by selling insurance contracts to policyholders. In other words, there are three sets of stakeholders in a stock insurance company, namely, the shareholders, managers and the policyholders. A mutual company, on the other hand, raises funds only by selling policies such that the policyholders are also partners of the companies. Hence, a mutual company has only two groups of stakeholders, namely, the policyholder cum part owners and the managers.

The Role of Portfolio Management

Portfolio and asset-liability management are important for both life and property-liability insurance companies. However, the latter face the problem that their liabilities are far more unpredictable than the liabilities of the life insurance companies. For example, given a stable mortality table and other historical data, it is easier to predict the approximate number of death claims, than the approximate number of claims on account of car accidents and fire. As a consequence of such uncertainty, and perhaps also moral hazard stemming from reinsurance facilities, asset-liability management of property-liability companies in the US has left much to be desired. Hence, a meaningful discussion about the changing nature and role of portfolio management for US's

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insurance companies is possible only in the context of the experience of its life insurance companies. Although the role of an insurance policy is significantly different from that of investments, economic agents like households have increasingly viewed insurance contracts as a part of their investment portfolio. This change in perception has not affected much the status of the property liability or non-life insurance policies, which are still viewed as plain vanilla insurance contracts that can be used to hedge against unforeseen calamities. As a consequence of these changes, which brought about a bundling of insurance and investment products, portfolio management of life insurance companies today is similar to that of a bank or non-bank financial company. They have to, (i) look out for arbitrage opportunities in the market place both across markets and over time, (ii) use value-at-risk modeling to ensure that their reserves are adequate to absorb market related shocks, (iii) ensure that there is no mismatch of duration between their assets and liabilities, and (iv) ensure that the risk-return trade-off of their portfolios remain at an acceptable level. During the 1980s, the life insurance companies gradually reduced the duration of the fixed income securities in their portfolio, thereby ensuring greater liquidity for their assets. They also moved away from long-term and privately placed debt instruments and increasingly invested in exchange traded financial paper, including mortgage-backed securities. However, while the increased liquidity of their portfolios reduced their risk profiles, they also required active management of these portfolios in accordance with the changing liability structures and market conditions. Today, while life insurance

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companies compete for market share by changing the nature and structure of their products, their viability is critically dependent on the quality of their portfolio and asset liability management.

Implications of Cost Management

As is the case with most competitive industries, profitability and viability of a firm in the insurance industry significantly depends on its market share, and its ability to minimize its cost of operations without compromising the quality of its service and risk management. Perhaps the easiest way to reduce cost is to reduce the cost of processing and underwriting policy applications. In the US, the average cost of processing and underwriting an application has been estimated to be in excess of USD 250. As a consequence, insurance companies have increasingly resorted to replacement of personnel by computer-based "expert" systems which apply the vetting models used by the companies' (human) experts to a wide range of problems." However, the US companies have found it more difficult to reduce their cost of marketing and distribution. A significant part-of these expenses accrue on account of the commissions paid to exclusive and/or independent agents, the usual rate of commission being 15-30 per cent, depending on the line of business. In order to mitigate the cost-related problem, insurance companies in the US are increasingly looking at alternative ways to market and distribute their products. Direct marketing has gained popularity, as has marketing by way of selling insurance products

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through other financial organisations like banks and brokers. These actions might lead to significant reduction of cost of operations of insurance companies, but it is not obvious as yet as to how the small policyholders will fare in the absence of powerful intermediaries with bargaining power vis--vis the insurance companies.

The Impact of Regulation

While portfolio and cost management are important determinants of the viability of insurance companies, the US experience indicates that the nature and extent of regulation too plays a key role in determining the viability of these companies. The insurance industry in the US has historically been one of the most regulated financial industries. The nature of regulation of life insurance companies, however, has differed significantly from the nature of regulation of property-liability companies. Regulation of the former has typically emphasized asset quality, while the regulation of the latter has largely concerned itself with policyholder's "welfare." Further, the non-life industry has suffered significantly as a consequence of changing legal ethos. In the recent past, the US courts have retroactively granted citizenpolicyholders coverage against hazards, like those from use of asbestos, that were not factored into the actual insurance contract. As a consequence, the premia actually earned by the property liability companies fell short of the "fair" prices of these contracts, and hence these companies had to bear huge losses on account of these policies. However, while politics and changing ethos might together have dealt an unfair blow to the non-life insurance companies, the importance of regulation cannot be overemphasized. The

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cyclical nature of the firms profitability requires that they be monitored/regulated such that they are not in default during the unfavorable phases of the cycle. The propertyliability cycle is typically initiated by an exogenous shock which increases the industry's profits. The higher profits enable the companies to underwrite more policies at a lower price. During this phase, the insurance market is believed to be "soft." The decrease in price during the soft phase, in turn, reduces the profitability of the companies, and initiates the downturn in the cycle leading to the "hard" phase. Hard markets are characterized by higher prices and reduced volumes. Once the higher prices restore the industry's profitability, the market softens again and the cycle starts again.

Summing up: Pointers for Indian Policymakers

A significant part of the activities of the insurance industry of an economy entails mobilization of domestic savings and its subsequent disbursal to investors. At the same time, however, they guarantee minimum payoffs to both individuals and companies by way of the put-like insurance contracts. As discussed above, these contracts can significantly affect behavior of economic agents and, in general, are perceived to lead to better outcomes for economies. For example, it is not difficult to imagine the closure of a company that had not made provisions for damages on account of (say) product related liability because it had believed that it was protected from such damages by an insurance policy." The consequent insolvency of the company can affect a number of banks and other companies

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adversely, and a systemic problem will be precipitated. In other words, the insurance industry in any country should be subjected to regulations that are at least as stringent as, and perhaps more stringent than those governing the activities of other financial organisations. It is evident from the above discussion that decisions about what constitutes acceptable portfolio quality, and the extent of price regulation hold the key to insurance regulation in a post-liberalization insurance market. As the US experience suggests, insurance companies are usually subjected to stringent asset quality norms. Indeed, while a part of their portfolio might comprise of equity, mortgages and other relatively risky securities, much of their portfolio is made up of bonds and. liquid (and highly rated) mortgage backed securities. An Indian insurance company, on ,the other hand, is constrained by the fact that the market for fixed income securities is very illiquid such that only gilts and AAA and AA+ rated corporate bonds have liquid markets. At the same time, absence of a market for liquid mortgage backed securities denies these companies the opportunity to enhance the yield on their investment without significantly adding to portfolio risk. This might not pose a problem in the absence of competition, especially if the government helps to increase the returns to the policyholders by way of tax breaks, but might pose a serious problem if liberalization leads to "price" competition among a large number of insurance companies Subsequent to liberalization, the Indian insurance industry might also be at the receiving end of regulations governing insurance prices /premia. Specifically, there might be highly politicized interventions in the markets for workers' compensation and medical insurance.

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The government might also be under pressure to "regulate" the prices of infrastructure related lines like freight and marine insurance. In principle, the risks associated with such liability insurance policies may be hedged by way of reinsurance. But if the reinsurers price the risks' accurately and the Indian insurance companies are forced to under price the risks, the margins of the insurance companies will be affected adversely, thereby reducing their long term viability. In view of these political and financial realities, it might be better to subsidize the policyholders of politically sensitive lines directly or indirectly through tax benefits, if at all, rather than distort the pricing of the risks themselves. At the end of the day, it has to be realized that while competition enhances the efficiency of market participants, the process of "creative destruction," which ensures the sustenance and enhancement of efficiency, is not strictly applicable to the financial markets. Hence, while exit is perhaps the most efficient option for insolvent firms in many markets, insolvency of financial intermediaries calls for government action and usually affects the governments' budgetary positions adversely. At the same time, other things remaining the same, the risk of insolvency is perhaps higher for insurance companies than for other financial intermediaries because of the option-like nature of their liabilities. Therefore, competition in the insurance industry has to be tempered with appropriate prudential norms, regular monitoring and other regulations, thereby making the robustness of the industry critically dependent on the efficiency of and regulatory powers accorded to the proposed Insurance Regulatory Authority.

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Effect Of Reforms

A number of concerns are being expressed regarding the opening up of the Insurance sector. But most of them seem to be unfounded. The national interest lies in increasing the penetration of insurance products, increasing the retention of premia in India and mobilizing resources for infrastructure needs. Competition means that players aggressively target potential customers and this will increase the penetration of insurance. The retention of premia in India has become a sensitive issue with some people who demand that the present outgo of around Rs.10 bn by the way of reinsurance be stopped. These people in the name of safeguarding the national interest are in fact compromising the interests of the nation. If no reinsurance is taken it implies that the insurance company is underwriting the entire risk itself. Thus a single earthquake or a cyclone can wipe out the entire company. One recent example is the calamity that struck the state of Gujarat wherein total claims stood at Rs.120 bn. Only Rs.29 bn was settled locally with overseas reinsurers settling the balance. The Insurance sector is a service industry and international companies will help build local professionals with world class expertise by introducing the best global practices. Competition will also develop a better understanding of consumer requirements leading to more customized products apt for the market place. Besides it would also improve the tertiary sector tremendously. Development of the tertiary sector would include new avenues for actuaries, accountants, stockbrokers and others.

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Thus it is seen that the apprehensions being expressed do not hold much water and the opening up of the Indian insurance sector would bring about sweeping changes not only for the consumers but the economy as a whole.

The Current Scenario: Effects on Policy Holders

The primary reasons for buying an insurance policy, whether life or non-life is to protect us from vagaries of life. We do not invest in insurance for returns; rather we invest in it for regrettable necessities. Though a large proportion of policies available in the country provide for returns, but nobody is looking for returns to the inflation rate. Some people do look for tax concessions, but lots of things have changed now. First, tax rates are not as high as they used to be. Secondly, concessions are still limited to a 20% tax shield. Finally other tax saving schemes, like public provident fund offers better returns. In India insurance is sold and not bought. Life Insurance Corporation has nearly eighty products, but investors know only about a handful. Thats because the agents of LIC push policies with the highest premium to pocket a higher premium. Same is the case with General insurance. Companies offering General insurance products-like medical, housing, motor and industrial insurance- have more than 150 products to sell. But awareness is even lower than life insurance products. It becomes obvious that GIC lacks the marketing results.

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Change

Whether public sector companies like it or not change is the around the corner. General insurance sector will soon be opened up to private and foreign competition. The potential for the new entrants is immense; life and non-life premiums add up to around 2% of the GDP, where as the global average stands at 8%. Indians as such have a high savings rate and bridging the existing gap points at immense potential. What does this mean for the consumer?

Insurance companies will introduce more term policies. These policies provide protection for a specified time period, and do not offer any returns. These will cover simple requirements of the insurance for the investor. In effect a term policy translates into low premium outgo, which frees the capital for investment into other investment vehicles, which offer better returns. Currently term policies constitute only1% of the total number of policies issued by LIC, while the global average is 15-20 per cent. Apart from the plain vanilla policies, new entrants will also offer consumers a choice of products with low premiums. Endowment policies will change too. The insurer, in line with his precise risk appetite, will be able to invest in a variety of indices or sector specific where in the returns would be higher. Instead of current fixed returns schemes insurance companies will issue unit linked schemes, indexed funds, or even real estate funds. Another opportunity is offered by a pension contract. Here the options offered could be indexed annuity, immediate annuity or a deferred annuity. The scope of new products is also immense in the non-life

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segment. Companies would offer products for niche segment, like disability products, workers compensation insurance, renters coverage and employment practices liability insurance. The general insurance industry is expected to grow at the rate of 25% per annum. Scared of new entries in the insurance sector, GIC has started offering new policies like Raj Rajeshwari. It covers disability from accidents, the accidental death of the spouse and legal expenses resulting from the divorce. At present some of the good policies offered to consumer with their respective benefits are.

PRODUCTS BENEFITS Pure term insurance (pure life withoutVery low premiums; effective risk coverage. insurance policy). Disability policy

Covers disability to a longer tenure to life time disability Beneficial for a couple; low premium outgo Saves the customer the trouble of making claims and repurchasing the products. Policy-holder has the flexibility of choosing one of the risk covers instead of the entire package.

First to die policy Replacement policy

Flexibility in home insurance policy

Channels

Insurance companies will also get savvy in distribution. Enhanced marketing thus will be crucial. Already many companies have full operation capabilities over a 12-hour period.

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Facilities such as customer service center are already into 24-hour mode. These will provide services such as motor vehicle recovery. Technology will also play a important role on the market. Effects of technologies are discussed in another section. Rural areas According to Malhotra committee report the penetration of insurance in India is around 22%. This indicates that a vast majority of rural population is not covered. Though GIC offers many products for this segment like, crop policy, silk worm policy etc, But due to poverty majority of the population cannot offered to get insured. Despite this, new entrants are hopeful of covering the vast tract of rural masses. Insurance industry in the next century, has uncovered trends that show increasing diversity that adds to challenges and opportunities.

Challenges/Opportunities

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The study, "21st Century Demographics for the Life-Health Industry, "delineates the following challenges and opportunities: Population around the world is aging; number of people in the old age bracket is growing continuously. As the population ages products such as annuities, IRAs and defined contribution retirement plans have enormous growth potential. The changing composition of households from traditional family units to single households also presents untapped markets with real needs for life, health and retirement products. Growing income inequality means that insurers should find a way to market cost-effectively to all economic sectors, particularly the middle class, who run the risk of being abandoned by insurers chasing the wealthy. Insurers must recognize that small businesses now make up a growing portion of the world economy, presenting a huge opportunity for growth in this market. The opening up of this sector has been long standing and with the passing of The Insurance Regulatory and Development Authority - IRDA bill a significant step has been taken. IRDA is formed as an authority to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of insurance industry and for matters connected therewith or incidental thereto.

With the Insurance Regulatory and Development Act, the focus shifted to the following:

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The Insurance Regulatory and Development Authority (IRDA) should give priority to health insurance while issuing certificates of registration;

Policyholders' funds will be invested in the social sector and infrastructure. The percentage may be specified by the IRDA and such regulations will apply to all insurers operating in the country;

Insurers will be expected to undertake a certain percentage of business in the rural or social sector and provide policies to persons residing in rural areas, workers in the unorganized and informal economically back;

In case the insurers fail to meet the social sector obligation a fine of Rs.2.5 mn would be imposed the first time. Subsequent failures would result in cancellation of licences.

Bank Assurance

In the developed nations of USA and UK, banks account for 20% and 19% of all insurance products sold. This figure is 50% for France. This shows the extent of scope that Bank assurance. When talking of banks we need to remember that there will be two regulating bodies, IRDA and RBI. It is said that this is the reason for the slow reaction of the banks towards this sector. However there are the NBFCs that are also in the foray. However, the nonbanking finance companies (NBFCs) planning to enter the insurance sector will be

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subjected to stringent performance and net worth parameters set by the Reserve Bank of India. The RBI regulations come in light of the fact that most banks are looking at their NBFC outfits for foraying into insurance sector. Some NBFCs are planning seriously to enter into memorandum of understanding with foreign insurance companies. In a set of draft guidelines issued to all scheduled commercial banks (SCBs) and select financial institutions (FIs), the central bank had laid out parameters that need to be met as of March 31, 2000:

A minimum net worth of Rs 5 bn; A minimum capital requirement of Rs.1 bn,(this is mandatory for any player in the sector, including banks)

A minimum capital adequacy ratio of 10 per cent Entry through a joint venture A net profit record for last three years; Net non-performing assets (NPAs) that "are reasonable"and A good track record in the case of subsidiaries as well.

For NBFCs, the other eligibility criteria for joint venture participant will be: The capital adequacy ratio of the NBFC engaged in loan and investment activities holding public deposits should be not less than 15 per cent and for other NBFCs at 12 per cent; and the level of non-performing assets should be not more than 5 per cent of the total outstanding leased/hire purchase assets and advances taken together.

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In India, when one talks of banks, the largely influential and effective, Cooperatives cannot be far behind. Their hand in the success of banking in rural and other non-urban areas cannot be by any means, underestimated. The coming chapter takes a look at their plans and their strengths vis--vis their foray in the insurance market.

Cooperatives

The cooperative banks in the nation cover over 65% of the rural population and have over 0.453-mn cooperative societies cover all the villages. These cooperatives cover what the insurance sector needs to be targeted at - The mass of the rural Indian population. However, the norms laid down for entry in the insurance sector immediately washed away this sectors hope to get in this line of business. However, after representations to IRDA, it was allowed to enter into the health sector for a start. In fact the cooperatives will be better equipped and willing to bring the insurance products to the rural Indians and educate them on the benefits of insurance and help mobilize funds from them, which can be effectively used for long-term national benefits. In fact, one of the largest cooperatives in Singapore, NTUC INCOME, is working in the The esteemed Mr. Sharad Pawar is also forging a cooperative alliance to benefit from the new regulations. It is the cash rich Maharashtra Cooperative that the politician is trying to get into this sector. The cooperative is planning to apply for a national cooperative licence so that it can be a national cooperative insurance player.

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Non profit organisations are also likely to help tap that class of people that would have otherwise been neglected by the new players. While groups like SEWA are tying up with new players to let them meet their targets of social and rural sector, similarly other groups are likely to tie-up too, to use their knowledge and database of people.

Agents / Brokers:

The guidelines governing are expected by end of October 2000, but what is known so far is that the agents in insurance business will now be allowed to sell atleast the products of three life or three non-life insurance companies. Mr. Rangachary has said that a minimum capital of Rs 2.5 mn would be required for undertaking brokerage in life and general insurance products, and Rs 12.5 mn for taking up a composite agency. IRDA also proposes to reduce the level of income paid to brokers/agents of life and general insurance business. Currently they receive 17.5% of the premium payable on the policy. The regulator feels that these levels are quite high and they need to be brought down to more internationally realistic levels considering the new insurance environment. IRDA is going to allow three kinds of brokerage firms to operate in the Indian insurance sector, Insurance, Re-insurance and Composite. It is going to allow a minor foreign equity stake in them with a cap of 49%. Composite brokers are the ones who can sell Life & General insurance products and reinsurance products also. The capital requirement for the broking firm will be Rs.2.5 mn. The IRDA is also likely to cap the brokerage commissions to 15%.

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Investment Criteria

All insurers will be governed by the investment criteria laid down by the IRDA. They are read as below: For Life insurer

Life insurance companies will have to invest 25% in the government and another 25% in other approved securities. 15% of investment will have to be invested in the infrastructure sector and social sector. The balance 35% will be available to the companies to invest in the capital markets were the return on investment are significantly higher. Rural sector

The criteria for investment in the rural sector for Life Insurance companies is the following % of the total policies written in the corresponding year, 5% in the 1st financial year, 7% in the 2nd financial year, 10% in the 3rd financial year, 12% in the 4th financial year, 15% in the 5th financial year,

Prudential norms

The insurers, both Life and Non-life, should not invest more than 15% of the total capital employed in equity shares and debentures.

Loans are not to form more than 10% of the estimated annual accretion of funds. On accounting norms for the sector separate statements would be required for any activity which yields 10 per cent or more revenue.

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To ensure that there is never a lack of audit in the insurance company, there will be two auditors, one with a tenure of four years and the second with a five year tenure.

Any insurance company would be looking at 10% growth in business in a short term of 10 years and 20% over long-term i.e. 20 years. The company cannot be expected to put aside its money for the development of schools and sanitation facilities and village funds development and see the money giving no / negligible return. Moreover the infrastructure projects in India are never sure of seeing the light of the day. They invariably get lost in the vast bureaucratic system and corruption prevailing in the nation. Thus this demand was seen to be unreasonable, but the foreign players are not too unhappy, as they see themselves to be long term players in the nation.

Dreams That Turned Nightmare

As in any successful joint venture, the partners have to be equals. If there is any expectations that are not lived upto by the partner then we see feelings of discomfort arising in the venture. When India announced that it will open up its insurance sector, foreign insurers saw the unthinkable and latched on to the opportunity presented before them. They set up representative offices, signed MoU with numerous domestic players. The urgency of it all saw to it that there was no careful reading of the scenario and the competencies of their partners.

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A few of the reasons for the breakdown in the ventures are enlisted herewith: 1. This was also the time when the IRDA was setting out the guidelines. Once they were out, and it allowed only 26% equity participation for the foreign players in the market, foreign insurers realized that their pies were not going to be as big as they had envisaged. Many decided to close shops in India and left the nation leaving their domestic partners in the cold. 2. Also, now with the guidelines out for all to read, the foreign insurers realised that the investment criterion was inhibiting profit growths. The returns did not justify the investments, was their understanding. 3. With the majority stake being with the domestic partner, foreign insurers would not have say in the management of the company and important decisions could be considered without them. Pay packages, technology transfer, products and their pricing when offered by the foreign insurers would not mean that they would run the show. 4. Domestic insurers realised that they had the upper hand in the day to day working of the company and asked for a bigger pie in the venture. Their greed only scared the already tensed foreign insurers.

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The above are the broad reasons that saw a number of insurance joint ventures fall by the lane and not see the light of the day. The following is the list of joint ventures that turned sour. Dabur-Allstate CGNU-Bombay Dyeing Chubb-Kotak Mahindra Eaglestar-ITC Rothschilds-Godrej UAP-Integrated Finance Cigna-Ranbaxy Manulife-UTI GIO-Sanmar Group Allianz-Alpic Dabur-Liberty Mutual Royal&Sun alliance-DCM Shriram

The above list of failed joint ventures has not deterred the other players and they have decided their channels of distribution.

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Channels of Distribution

The distribution network of banks is what a lot of players are interested in. Initially, SBI was asking a premium for it to be partnering with any insurer on the sole premise that the bank commands a network that is unparalleled in the banking industry in India today. Similarly other banks are becoming insurers to leverage their network of branches, in joint ventures with foreign players who have the expertise in the insurance sector. Marketing alliances with people/companies having a physical presence is a good distribution strategy too. The online world is not going to be left behind. A number of sites have started offering policies online. What needs to be borne in mind is that no matter what channel one may use, the following factors will be critical in deciding the success or failure of the venture: Initial setup cost High margin to agents/brokers Trained and experienced personal will be critical to the success of the insurer. An internal control mechanism to keep tab on expenses.

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 Likely Factor Of Success In the now open sector on insurance, the following is what I feel will determine the success of the company in particular and the industry in general: - A change in the attitude of the population Indians have always been wary of employing their hard-earned money in a venture that will pay them on their death. Insurance has always been used as a Tax saving tool. No more, no less. It is upto the insurers to educate the people to secure/insure their future against any unknown calamity and make a shield around their families and businesses.

- An open and transparent environment created under the IRDA. The reason for this being on the top of our understanding is that when ever we have seen any sector open up in India there are always grey areas and unsure policies. These are not exactly what any player, be it Indian or foreign, looks for. It creates an air of uncertainty in all the decision making process. Insurance as a sector requires players who are strong financially and are willing to wait for returns. Their confidence can be bolstered only if there is an open and a transparent policy guidelines. This will also help the consumers feel safe that the regulatory is an active one and cares to do everything possible to keep things under control and help the insurance environment grow maturely.

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- A well-established distribution network. To cater to the largest democracy in the world is by no means a cakewalk. Insurance profits are directly related to number of insured and this is in turn related to the reach. The case in example is of the State Bank of India. The joint ventures announced have a flavour of network being a critical decider. This is so because as per the guidelines 15% of the policies written by the 5th financial year will have to come from the rural area. The banks are the only ones who have that reach.

- Trained professionals to build and sell the product. It is said that the insurance agent is the best salesman in the world. He makes you pay, regularly, an amount promising to pay back only on your death. Thus the players will require an excellent sales team to sell their products in the now competitive environment. The importance can be seen from the fact that a lot of LIC/GIC personal is being poached by the new players.

A more rationale approach to the investment criteria.

This is a very critical area as far as the government and the players are concerned. The government as fixed up the investment pattern for the players to meet its social obligations. The players feel that the compulsion is unjust and will affect their return on investments. One may wonder then why is it that I have listed it as success factor. The reason, my dear, is that it is in the larger interests of the society. The more the people insured, the better the revenues, followed by better security, followed by better morale

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and productivity. On a national level the criteria's ensure that the money does not go out of the nation. We also need to bear in mind that the insurers are here not for charity but for profits. So their interest are also to be kept in mind.

- Encouragement of newer and better products and letting the hackneyed ones die out. This will itself ensure the market grows. And that every class/society gets a product that best suits them.

the insurers.

A stringent accounting practice to prevent failures amongst

Every insurer will have the hard-earned money of the masses. Any failure of the insurer on account of unwarranted profligacy will cost the nation in general and the insured in particular. To prevent any underhand workings of the insurer and to prevent them from going bust, a stringent accounting practice is imperative.

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A level playing field at all stages of development in the sector for all the players. An unbiased environment is where the best comes out of the players. Their real strength shines through. This is the beauty of capitalism that we are trying to achieve in our customized manner. This will only help the industry grow and so will the society. And last but not the least patience amongst the players and consumers to wait for the pot of gold at the end of the rainbow.

A potential for profit: untapped opportunities will be vital for new entrants to choose their product and service offerings carefully. In doing so they must consider two possible pitfalls. First, when estimating the potential of the Indian insurance market it is tempting to look at macro-economic variables such as the ratio of premium to GDP which is indeed

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comparatively low in India. For example, Indias life insurance premium as a percentage of GDP is 1.3 per cent against 5.2 per cent in the US, 6.5 per cent in the UK or 8 per cent in South Korea. Given Indias large population, the number of potential buyers of insurance is certainly attractive. The second trap is the tendency to target the business of existing companies rather than expanding the market. New players find it easier to try to capture existing customers by offering better service or other advantages. Yet, the benefits of this strategy are likely to be limited. For example, 50 per cent of the current demand for general insurance comes from the corporate segment. We do expect that after the market opens up, companies will move between insurers as they shop around for the best rates, products and service. Nevertheless, we anticipate that the corporate segment as a whole will not be a big growth area for new entrants. This is because penetration is already good, companies receive good service because of their size and rates are tariff-governed. In both volumes and profitability therefore, the scope for expansion is modest. A better approach may be to examine specific niches where demand can be met or stimulated. In our view new entrants would be best served by a micro-level approach on two fronts. First, they should target specific niches which are currently served poorly or not at all. Life insurance products provide a good example. They compete with investment and savings options like mutual funds. It is imperative that they should offer comparable

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returns and flexibility. For instance, pure protection products like term assurance account for up to 20 per cent of policies sold in developed countries. In India, the figure is less than one percent because policies are inflexible. Besides, no Indian life assurance product is linked to non-traditional investment avenues such as stock market indices. Therefore, returns are lower than those on other savings instruments. Similar problems apply to pensions. The lack of a comprehensive social security system combined with a willingness to save means that Indian demand for pension products will be large. However, current penetration is poor. By March 1998, LICs pension premium was only Rs. one billion. Making pension products into attractive saving instruments would require only simple innovations already common in other markets. For example, their returns might be tied to index-linked funds or a specific basket of equities. Buyers could be allowed to switch funds before the annuities begin and to invest different amounts at different times. Health insurance is another segment with great potential because existing Indian products are insufficient. By the end of 1998, GICs Mediclaim scheme covered only 2.5 million people. Indian products do not cover disability arising out of illness or disability for over 100 weeks due to accident. Neither do they cover a potential loss of earnings through disability. The second prong of a new insurers strategy could be to stimulate demand in areas that are currently not served at all. For example, Indian general insurance focuses on the manufacturing segment. However, the services sector is taking a large and growing share of Indias GDP (an estimated 48 per cent in 1998-99). This offers expansion

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opportunities. For example, revenue from remote processing activities in information technology is estimated at USD 50 billion in the next ten years. Insurers could respond with various liability covers. Potential buyers for most of this insurance lie in the middle class. New insurers must segment the market carefully to arrive at appropriate products and pricing. Existing players can also profitably exploit these areas. Recognizing the potential, in the past three years, the nationalized insurers have already begun to target niches like pensions, women or children.

Reaching out: distribution issues

We anticipate that distribution will be a key determinant of success for all insurance companies regardless of age or ownership. The nationalized insurers currently have a large reach and presence. New entrants cannot-and do not-expect to supplant or duplicate such a network. Building a distribution network is expensive and time consuming. Yet, if insurers are to take advantage of Indias large population and reach a profitable mass of customers, new distribution avenues and alliances will be imperative. This is also true for the nationalized corporations, which must find fresh avenues to reach existing and new customers. We expect substantial shifts in the distribution of insurance in India. Many of these changes will echo international trends. Worldwide, insurance products move along a continuum from pure service products to pure commodity products (see chart).

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Chart

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Initially, insurance is seen as a complex product with a high advice and service component. Buyers prefer a face-to-face interaction and place a high premium on brand names and reliability. As products become simpler and awareness increases, they become off-the-shelf, commodity products. Sellers move to remote channels such as the telephone or direct mail. Insurance is sold by various intermediaries, not necessarily insurance companies. In the UK for example, retailer Marks & Spencer now sells insurance products. At this point, buyers look for low price. Brand loyalty could shift from the insurer to the seller.

Some potential Indian players hope that their anticipated technology advantage will allow them to increase their reach, partly by using remote channels. However, financial services companies globally and in India find that customers are making the shift to such channels slowly and only for less complex transactions. In India, insurance, especially life insurance is still a service product. Indeed, even the successful international direct insurers focus on standard covers such as motor insurance. We therefore believe that in India technology will not replace a distribution network, though it will offer advantages like better customer service. Yet, we expect changes in distribution along other parameters. Banks and finance companies will emerge as an attractive distribution channel for insurance. This trend will be led by two factors which already apply in other world markets. First, banking,

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insurance, fund management and other financial services will all form a set of services rather than disparate ones. Second, banks and finance companies are being driven to increase their profitability and provide maximum value to their customers. Therefore, they are themselves looking for a range of products to distribute. In India too, banks hope to maximize expensive existing networks by selling a range of products. We anticipate that rather than formal ownership arrangements, a loose network of alliance between insurers and banks will emerge. In the US, banks lease space to insurers within their bank branches or retail products from multiple insurers. Insurers in India should also explore distribution through non-financial organisations. For example, insurance for consumer items such as refrigerators can be offered at the point of sale. This piggybacks on an existing distribution channel and increases the likelihood of insurance sales. Alliances with manufacturers or retailers of consumer goods will be possible. With increasing competition, they are wooing customers with various incentives, of which insurance can be one. Another potential channel that reduces the need for an owned distribution network is worksite marketing. Insurers will be able to market pensions, health insurance and even other general covers through employers to their employees. These products may be purchased by the employer or simply marketed at the workplace with the employers cooperation. Finally, some potential Indian entrants into insurance hope to ride their existing distribution networks and customer bases. For example, financial organisations like

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ICICI, HDFC or Kotak Mahindra intend to tap the thousands of customers who already buy their deposits, consumer loans or housing finance. Other hopeful entrants anticipate specific alliances such as with hospitals to provide health cover. Different distribution channels bring their own challenges. First, companies will have to ensure a strong brand identity. Distribution through third parties means that it is those companies rather than the insurers who often reap the benefits of customer loyalty. This accelerates the shift of insurance to a commodity product. Second, since many new companies already offer other financial services products, they will be tempted to sell only their own products. They must balance this against the advantages of offering customers a wide product range. This is especially important because we anticipate the rise of pure financial service retailers who do not have any owned products and offer a broad range of products from different providers to consumers. Avoiding the pitfalls: other issues

Most of the opportunities and challenges that we have discussed apply equally to existing and new insurers. It must be emphasized that the opening of the insurance market is far from a bad thing for nationalized insurers. With a strong presence, a wide network and considerable brand equity, they are in a good position to tap the very same segments profitably, while improving their product and service offerings. We anticipate that they will continue to hold a strong market share position.

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All insurers in a liberalized Indian market will have to address a host of other issues. They will have to:

Leverage information technology to service large numbers of customers efficiently and bring down overheads. Technology can complement or supplement distribution channels cost-effectively. It can also help improve customer service levels considerably.

Use data warehousing, management and mining to gauge the profitability and potential of various customer and product segments and ensure effective cross selling. Understanding the customer better will allow insurance companies to design appropriate products, determine pricing correctly and increase profitability.

Ensure high levels of training and development not just for staff but for agents and distribution organisations. Existing organisations will have to train staff for better service and flexibility, while all companies will have to train employees to cope with new products and an intensive use of information technology. The importance of alliances and tie-ups means that companies will have to integrate related but separate providers into their systems to ensure seamless delivery.

Build strong relationships with intermediaries such as agents. The agency force is an important customer interface and companies must partner with this group to reach customers and serve them effectively.

Indian insurance is on the threshold of deep and fundamental changes. The life insurance industry was nationalised in 1956 and the general insurance industry in 1972. Before that

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India had a thriving and competitive insurance industry with hundreds of private and foreign operators. Indian companies held a 60 per cent market share even then. Yet, insufficient regulation also meant that there were a number of abuses. In a re-opened Indian insurance market, regulators must formulate strong and fair guidelines and make sure that old and new players are subject to the same rules. Companies, meanwhile must be prepared to set and meet high standards for themselves. The big challenge for both companies and regulators is to ensure that they replicate the benefits of the past while eliminating its ills.

7 Ps Of Services Marketing Mix

In the 7 Ps we will be concentrating on Life insurance segment. Product Mix Life insurance is a device or plan of spreading a possible financial loss over a large number of persons, which is too heavy to be conveniently borne by an individual. It seeks to reduce the financial uncertainties arising from the natural contingencies - old age and death. It is a

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guarantee given by one (Life Insurance company) to another (insured/policyholder) whereby the former undertakes to pay a sum of money to the latter (or nominee in case of death) on the happening of the event insured against.

Life insurance is a peculiar product. It is quite different from other commercial products. First, what Life Insurance sells is not a tangible product but an intangible one at present - a promise to inform in future. When this obligation is met, i.e., the insured event takes place, the money, whose presence can be felt, replaces the promise. With this amount the insured person or his dependents can meet obligations on account of food, clothing and shelter. Secondly, life insurance product continues to exist over a long period of time and for making its service available, the insured person has to go on paying the purchase price (premium) throughout the term of the policy. This ensures that the benefits already accrued under sale'' are not lost. Finally, the seller (in India, the Life Insurance Corporation of India) has not only to sell his product but also to keep the contract in force by continuous and efficient serving. In other words, with respect to life insurance products sales and services go together.

A peculiar feature of the Life Insurance market in India is that though it is a buyer's market, by and large, the seller, i.e., the Life Insurance Corporation of India has to take a decision whether to sell a particular policy to a particular person or not, on the basis of the information disclosed by the buyer himself in the proposal form.

Again, Life Insurance market can be divided into two-broad segments source and use

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market. The former implies the sum total of policyholders of LIC and the latter the various industries, electricity boards, housing finance institutions, government who have made use of the economic reservoir created out of premium money collected. This pair restricts to source market only.

LICs Product Mix

Life Insurance Corporation (LIC) of India has various plans of insurance policies. A new scheme is launched as per the marketing budget. The co-coordinated efforts of Marketing Divisions, the Marketing Manager, the Development Officer and finally the agents are responsible for the launch of any new scheme. At present, LIC services around 70 plans with various policies attached to it. Some of their famous or recently launched policies are:New Jeevan Shree; New Bima Kiran; Jeevan Sneha; Childrens Money Back Policy; Jeevan Surabhi; Bima Plus; Bima Nivesh Triple Cover.

The Price Mix Premium is the price, which the person seeking insurance pays to the LIC for purchasing in

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the Life Insurance policy. It is nothing but the cost of insurance from purchasers point of view. It is the consideration paid by each insured for building up a certain asset called the assured sum with the insurer. The amount of premium has a bearing on the risk involved in covering a life. The risk in turn in has a bearing on the age of the life to be covered, his or her habits, sex, family, race, habitat, food habits, education, etc. Life insurance premium increases with the age since the probability of death increases, however the insurance for the convenience of clientele and their own administrative convenience, charge a level premium uniform throughout the contract period. Actually, slightly more premium being paid at the initial stages, along with investment returns on it. It will be set of against the increases in premium at later ages. The actual process of accepting a person for Life Insurance and coating appropriate premium is known as underwriting.

LICs Price Mix

There are three main factors considered before fixing any price for a policy. They are as follows: -

Mortality Rating

There is a Population Census, which is conducted regularly in the country. LIC uses the information from this census and derives a comparison between the different age groups

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and the death/mortality rate per 1000 people in that particular age group. The ones with higher mortality are given the least rating. These would be the population group with a high death rate. Thus the groups with the least death rate having a longer life span would require insurance cover more than the other age group/s. Thus they would be rated highly and the price of that policy would be fixed accordingly.

Insurable Interest

The concept of insurable interest means that the insured should have a genuine need for taking an insurance cover. Thus to ensure this there is an initial Premium amount which has to be paid. Depending on this initial amount collected, the price of the plan is decided.

Managements Expenses

These would consist of the administrative and selling expenses as there would be nil cost of production. They could be in the form of fixed office expenses like rent, electricity, stationary and salaries to all the employees and other such related cost.

The Promotion Mix and Place Mix As Life insurance is a personalized service, personal selling plays an important role in promoting the same. Place and promotion are being highlighted here since the agents and development officer who form the pillars of Life Insurance market structure discharge these two important functions. Agents are PR men of insurance companies at the grassroot level. The role in building up good customer relation is crucial. They work under the guidance and direct supervision of development officers. They together sell the right type

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of policies suitable to the needs of clients for the right amount at the right time (age). The agents render various other services and also play a vital role in policy servicing. The Development Officers under each Branch office beside guiding and supervising activities of the agents are also responsible for their recruitment and training so as to develop a stable agency force. They activate the existing agents and motivate the new ones. Also they render all such services to the policyholders as will produce better policies. Agents and development officers, as the intermediaries in the distribution system of the whole, develop and increase the Life Insurance business in a planned way.

For promoting Life Insurance business, sales promotion activities are also carried out by the agents. Calendars, bags, diaries, etc. are also given to the policyholders as a token of gifts. LIC also trains their agents, as they do not tend to increase or update their knowledge regularly so as to serve better to their customers. Special training programs are held for them.

LICs Place Mix

LIC has one corporate office at Yogekshma, which is in Mumbai. They have 18 Main Branches, which make up one Division. There are total 18 such divisions which make up a zone. There are total seven Yogekshma Zonal Offices.

7 Zonal Offices

18 such divisions

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18 Main Branches

A single branch of LIC consists of four different departments namely: New Business Sales Accounts Policy Servicing These branches work as per the co-coordinated efforts of these departments. For the employees of LIC (development Officers/ Agents), there is no such fixed formula of Insurance.

Now within a branch, following is the decentralized organization structure in LIC:

Manager/Administrative Officer

Development Officer (P.R.O.)

Agent/ High Grade Assistance

Peons, etc

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From the above decentralized organization structure, we find that there is a main Manager/ Administrative Officer, is responsible to control the employees under him. Then we have the Development Officer, who according to LIC is their PR officer. This Development Officer carries out the duties of a PR officer. Under the Development Officer, there are the agents who are mainly responsible for carrying out the task of selling the policies to the respective clients.

LICs Promotion Mix

Communication Strategy

LIC mainly uses direct selling as their means of communicating with its customers. The agents directly contact the clients and vice-versa. They advertise through various media like newspapers, magazines, television, hoardings, etc. For internal communication there are journals, which are distributed among the employees. These magazines give a 10-15 years past information about the company. They also give a layman all the knowledge about LICs progress. The cost of this journal amounts to only Rs. 15. Also companies like Siemens use the group Super-Annuition Scheme of LIC as a perquisite to all its employees in the form of pensions and other retirement benefits. In this way, LIC ensures that it is not just the human being who should be ensured but even the company where he is employed is equally responsible of taking care of the future social welfare of the employee.

Media

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The basic media used by LIC is by way of Direct Communication with the customers. This may be through written correspondence or face-to-face communication via the telephone. The website www.licindia.com provides detailed information to any layman about the company, its policies, its branches, and its network as such.

The Process Mix The process involved in the insurance industry should be customer friendly. The speed and accuracy of payment is of vital importance. The processing methodology should be such that it provides ease and convenience to the customers. Installment schemes should also be streamlined to cater to the growing demands of the customers and keep pace with the competition in the market. The new developments, which will smoothen the process flow, are IT and Data Warehousing. Firstly, information technology will help in servicing large number of customers efficiently and bring down overheads. Technology can complement and supplement distribution channels cost effectively. It can also help improve customer service levels considerable. Secondly, the use of data warehousing, management and mining will help to gauge the profitability and potential of various customer and product segments. Understanding the customer better will allow insurance companies to design appropriate products, determine pricing correctly and increase profitability.

The People Mix Being a service industry involving a high level of people interaction, it is important to use

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this resource efficiently in order to satisfy customers as also to have a competitive edge in the market. The two key areas, which need to be kept under consideration, are training and development and strong relationships with intermediaries. Training the employees to introduce them to new products, use of information technology for efficiency, both at the staff and the agents level or the distribution organizations is one of the key areas to look into. Also building strong relationships with intermediaries, such as agents, will help in meeting customer needs and serve them effectively.

Customer Groups

The various customer groups can be categorized in the following manner:1. Direct Customer The direct customer is the owner of the insurance policy. It is under his name that the policy has been approved. He may not be the final beneficiary of the service provided. In case of corporate insurance, services like pensions, group incentives are enjoyed by the respective individual.

2.

Indirect Customer The indirect customers are the family members or the persons for whom the protection of the insurance cover has been taken. For example, the insurance policy taken by an earning class person for insuring the future of his family incase of any unforeseen events. The future benefits are enjoyed by the family members, which are the indirect customers.

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3.

Regulator The insurance business is regulated by the IRDA (Insurance Regulatory and Development Authority) as per the new economic reforms.

4.

Competitors LIC has a clean monopoly over the market. As per LICs claims this monopoly will remain for at least another five years as the gestation period for the new entrants to become potent players is also expected to be the same. But there are threats from the new and emerging private sector. The various competitors for LIC in the private sector are ICICI Prudential, HDFC Standard, TATA AIG, Birla Sun Life Insurance and many others.

5.

Internal Customers The employees of LIC are the internal customers. The details regarding their hierarchy are designation have been covered in the people mix.

Physical Evidence In the case of Insurance, physical evidence can be the appearance and dressing of the agents and the frontline staff, the office dcor, the office building on the whole, the quality of paper used in the forms, etc.

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The 4 Is of Services Marketing

Intangibility Insurance as we know is guarantee against risk, and neither guarantee nor risk is tangible. Hence Insurance business falls under the category of Services marketing. Though marketers try to bring in some amount of tangibility through written documents like policy forms and authorization letters.

Inseparability

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At the time of making a contract and through out the proceedings, both the parties have to be present. The service cannot take place without the presence of both the parties, which are the service provider and the client. But this is not the case in life insurance policy; though the client does nominate his nominee hence again there has to be a person present.

Inconsistency After all it is people dealing with people and not machines dealing with people, hence some amount of inconsistency does take place always. Private firms are trying to reduce this and trying to standardize the working but companies like LIC (govt. owned) do not take much interest in such matters.

In companies like LIC the systems are not strong; hence employees do not behave well. Hence the behaviour of the employees, agents etc. are not consistent, therefore a customer might get a different experience each time he interacts with the company.

Inventory There is inseparability and intangibility in insurance therefore the question of inventory doesnt arise. The companies cannot produce the service first and store it to give it to the ultimate consumer. Hence there can be no inventory for services.

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Market Segmentation
The entire market is segmented into four categories:-

1.) Business Class These are the customers which are self-employed. They are targeted with policies relating to the upper end of the market.

2.) Service (Earning) Class

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These are the customers which belong to the limited salaried income class. They are mainly targeted with policies of social security considering their limited income and future situation is taken into consideration. These policies serve as a protection to the families of the salaried income man in case of any unexpected death.

3.) Agricultural Laborers The laborers are those who work on the farm. They dont own that particular holding. They are mainly serviced in the rural areas of the country. The policies targeted are the ones which fall under the lower end of the segment, giving a sense of protection to the needy/poor worker in case of any unforeseen events.

4.) Farmers Like the laborers, even they are targeted mainly in the rural areas, but the difference is that they own the particular land holding. They are further divided into the small, marginal and large holdings. Again they are targeted with various plans as per their purchasing power.

Services Marketing Triangle

The concept of services marketing triangle in comparison of LIC is as follows:-

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COMPANY-LIC

Internal Marketing

External Marketing

Interactive Marketing PROVIDER-AGENTS CONSUMERSPOLICY HOLDERS

The above diagram explains the services triangle with its three constituents, namely, the company, the provider and the consumer. Each can be explained in the following manner:-

Company

The company LIC makes various promises to its customers through external marketing. The way and means of marketing have already been covered in the marketing mix.

Provider

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The LIC agents and the Development Officers act as the front-line staff and they are in direct contact with the potential or existing customers. They are the ones who keep or satisfy the promises made by the company. The marketing of insurance basically comes under concept selling. The LIC agents are thus given various incentives, rewards, commissions and all the necessary training required. As regards incentive, they receive PLI (Productivity Linked Incentive) which is based on the increase in premium amount and the sums assured by the agent. They are also given extra commissions in case of policies which are of high value. There are normal promotions for any good work done on a regular basis. The LIC agents, generally, work under the training and guidance of their respective Development Officers. But as per a new rule, the applicant has to under preliminary training from the Insurance Institute of India which is recognized by LIC like IFSERT, Pune and the other one in Hyderabad. Then he applies and gets a licence to practice business. He also undergoes a test from LIC and after passing this test, he works under the training of the Development Officer. Apart from the above, there are MDP (Management Development Centre) which is for the Managers and other executives above them and the DTC (Development Training Centre) which is for the Development Officers. The various Executive, the Directors and the Zonal Managers undergo T & D at LIMRA, Singapore

Consumers

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The consumers/ buyers are the policy holder. Apart from the routine life insurance policies, LIC also deals in Housing Finance, Mutual Funds, Pension and Group Insurance as its allied business activities. Thus the range of consumers is far and wide.

Analyzing the Service

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1. Categorizing the Service Process. The two parameters used in this are: Nature of the act: - it is intangible, because one cannot

physically see the result, which occurs after the performance of the service in this case. Recipient of the service: - here it is the information that

is given to the customer that is in process. Any action that is done by the provider is not directed towards the body, mind or any good. Hence we can say that it is an information-processing because it is the information that will decide whether the customer will avail of the service or not.

2. Methods of Service Delivery The two parameters used in this are: Nature of interaction Availability of service outlets: - here the customer has a choice of going to the closest branch or local office. That is there are a number of outlets or offices from which he can avail of the services. Or he can always contact the provider or the agents through easy access and availability. Hence multiple set of outlets.

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3. Nature of Demand for the Service - Related to its Supply. The two parameters used in this are: Extent to which supply is limited: - in this case there are very few times when there is peak demand. At such times the demand can be usually be met without a major delay. Thus the supply is enough to meet the sudden spurt in demand. Extent of demand fluctuation overtime: -it is very narrow. This means that the rise in demand is not that wide that it cannot be managed. A narrow demand fluctuation occurs. 4. Attributes of the Service Experience The two parameters used in this are: Extent to which people are part of the service: - as customer involvement is very high we can say that they form an important part of the service. Based on the requirement of each customer every policy will have to be tailored to suit him, and accordingly he will be able to avail of certain policies and not all. Extent to which equipment are part of the service: - as it relies more on the people, it is not that dependant on technology. Hence we can say that it is low on this parameter. This is because technology is not that extensively used in this industry as it still follows the traditional distribution channels.

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5. Relationship with Customers The two parameters used in this are: Nature of service delivery: - as a customer once takes a policy, he has to keep in touch with the insurer for payment of premium, maturity date etc. Hence it is an ongoing process, so we can say that there is continuous service delivery. Type of relationship between customer and provider: - only a customer who has taken a policy can avail of the facilities provided by the insurer. That means that there is the existence of the relationship between them, due to the formation of a membership relationship that exists between them.

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The Flower of Service

The concept of the Flower of service has been compared in relation to the practices of LIC. In the following lines, the various petals which surround the core product of LIC have been briefly explained.

Core Product

Apart from primarily servicing life insurance policies, LIC is also engaged in businesses relating to Housing Finance, Mutual Funds, Pension and Group Insurance, and Social Security.

Supplementary Services

The various supplementary services which fall under various categories are explained as follows:-

Information

LIC has its own Information Centres in Santacruz (W.), Mumbai and Pune. By dialing 6125555, one can find out any information regarding any policies, plans, operations or any information relating to LIC. The other number 6187655 gives the individual policy holder, information about his policy as regards premium, duration, and any other information relating specifically to his policy. The Pune number is 5536161. LIC has its official website, www.licindia.com, which gives all the information regarding their products,

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services and all the information about LICs operations. LIC also has an in-built plan suggestor on its website, which automatically processes the information supplied by the potential customer and the respective policy is suggested.

Consultation

LICs mainly provides consultancy services through its information centre, its website, and its agents which work on a personalized basis and offer advices relating to various plans and policies.

Order-taking

As far as order-taking is concerned, LIC has its personnel categorized as Agents, Development Officers, Assistant Branch Manager, Branch Manager and various other executives in the top management. The order is taken depending on the amount/value of the service. Policies ranging from 8-10 lakhs are serviced by the agents, and then ones between one lakh to five lakhs are serviced by the Development Officer. There are also the Sales Manager, Senior Divisional Manager which have their own range of policy servicing. The Sales Manager is in charge of policies which are priced above Rs. 1 Crore.

The order taking mechanism is mainly by way of application forms. These forms are made available through the agents or they can also be downloaded from the website. The various forms belong to various age categories like the Form No. 300 which is a proposal for insurance on own life, the Form No. 360 is for policy duration of 10 years or more and various other forms.

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The potential policy holder has to pay the initial premium amount and then undergo a medical examination of various cardiological, pathological and radiological tests. After such physical examinations are successfully completed, the plan or proposal is transacted.

Billing

The policy holder has to pay the premium amount in fixed durations as per the agreement. LIC sends reminders to the policy holders by way of post to inform the policy holder regarding various details like amount, due date, policy under which it belongs, etc.

Payment

A policy holder can make the payment of the premium amount in the following ways:1. He can send the cheques directly to branch, 2. There are rural banks which have tie-ups with LIC, 3. The payment can be done through www.billjunction.com, 4. The payer can send a draft or a standing order to the bank.

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Pest Analysis

Political-Legal Factors

Insurance Sector Reforms

There are various efforts made by the government to make the industry more dynamic and customer friendly. To begin with, the Malhotra committee was set up with the objective of suggesting changes that would achieve the much required dynamism.

The Malhotra Committee Report

In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor R. N. Malhotra, was formed to evaluate the Indian insurance industry and recommend its future direction. In 1994, the committee submitted the report and gave the following recommendations:

Structure

Government stake in the insurance Companies to be brought down to 50%. Government should take over the holdings of GIC and its subsidiaries so that these

subsidiaries can act as independent corporations. All the insurance companies should be given greater freedom to operate.

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Competition

Private Companies with a minimum paid up capital of Rs.1bn should be allowed to

enter the industry. entity. Foreign companies may be allowed to enter the industry in collaboration with the domestic companies. Postal Life Insurance should be allowed to operate in the rural market. No Company should deal in both Life and General Insurance through a single

Only one State Level Life Insurance Company should be allowed to operate in each state. Regulatory Body. The Insurance Act should be changed. An Insurance Regulatory body should be set up. Controller of Insurance (Currently a part from the Finance Ministry) should be

made independent.

Investments Mandatory Investments of LIC Life Fund in government securities to be reduced

from 75% to 50% GIC and its subsidiaries are not to hold more than 5% in any company (There

current holdings to be brought down to this level over a period of time)

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Customer Service LIC should pay interest on delays in payments beyond 30 days Insurance companies must be encouraged to set up unit linked plans

pension

Computerization of operations and updating of technology to be carried out in the insurance industry Overall, the committee strongly felt that in order to improve the

customer services and increase the coverage of the insurance industry should be opened up to competition. But at the same time, the committee felt the need to exercise caution

as any failure on the part of new players could ruin the public confidence in the industry.

Hence, it was decided to allow competition in a limited way by stipulating the minimum capital requirement of Rs.1 bn. This amount is not very high for foreign firms, as it translates to only about US$25 million. Further, to date it is unclear whether equity should be payable in one go or should be brought in as installments. Also, the foreign equity participation was to be restricted to only 40%.

The committee felt the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with

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economic motives. For this purpose, it had proposed setting up an independent regulatory body.

The industry and analysts find that there is lack of clarity in the following areas:-

Though coverage of rural areas was to be made compulsory, it raises the question as

to who would subsidize the rural policies as they would be difficult to service and hence costs will go up. There is some confusion with respect to investments. Where the funds should be

invested? Currently 70% of the funds with LIC & GIC are invested in Government securities. Would new entrants be allowed to invest in GOI securities? The report also does not enumerate exit options available to the new entrants. In the

event of failure, there should be an arrangement made whereby the other companies pool in to bail the customers, who in all probability would be middle class individuals.

On the basis of the report, the then Finance Minister P. Chidambaram proposed the opening up of insurance to the private sector, including multinational companies.

With the notification of the constitution of the Insurance Regulatory and Development Authority (IRDA) in April 2000, the decks are finally cleared for foreign investment in the insurance sector. The government notified the constitution of the IRDA as a statutory authority. N. Rangachary will be its chairman till June 2003. The notification of the bill's

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passage was delayed as it could only be done with the constitution of the IRDA on April 19, 2000. This IMI looks at the growth prospects in the sector in the near future.

Following the passage of the Insurance Regulatory Development Authority Bill by both the houses of the Indian Parliament late 1999, the stage is now set for the establishment of a fundamentally new legal regime for insurance sector in India. The new Act opens the sector to private participation, establishes an independent regulator, and allows foreign entry into the market through equity participation up to a level of 26 percent. Individual Indian companies will be required to bring down their equity holding to 26 percent through sales of shares to the public within 10 years.

After the passage of the Bill last year, in April 2000 the government notified the constitution of the IRDA as a statutory authority. N. Rangachary will be its chairman till June 2003. The notification of the bill's passage was delayed as it could only be done with the constitution of the IRDA on April 19, 2000. With the notification of IRDA and rules for opening up the sector in place, the first private insurance company with foreign participation can start operation by the fall of 2000. The IRDA law is the culmination of the recommendations made by the R.N. Malhotra committee that was constituted in 1994 with the objective of suggesting changes that would achieve the required dynamism in the insurance sector. Overall, the committee strongly felt that in order to improve the customer services and increase the coverage of the insurance industry should be opened up to competition. Hence, it was decided to allow competition in a limited way by stipulating the

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minimum capital requirement of Indian Rupees 1 billion. This amount is not high for foreign firms, as it translates to only about USD 23 million.

The Insurance Regulatory Development Authority (IRDA) is the regulatory authority, which looks over the related aspects of the insurance business. The IRDA bill provides guidance for three levels of players Insurance Companies, Insurance Brokers and Insurance Agents.

Economic Factors

Effect of Reforms

Penetration Of Insurance

Though the Public Sector Insurance Companies have been successful in achieving and contributing to the National Exchequer over the years, a huge market lies untapped due to reasons like: The monopolistic nature of the market; Focused marketing; Indian psyche.

The business of Insurance, by way of generating premium income, adds significantly to the GDP of developed countries. Though the potential market in India for the Insurance business is large, yet the products offered and penetration achieved is far less compared to

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international standards. Estimates show that a meager 35-40 million, out of the total Indian population have so far come under the insurance umbrella.

The Life Insurance sector is one of the key areas where enormous business potential exists. In India currently the life insurance premium as a percentage of GDP is 1.3 % against 5.2 % in the U.S. Estimates say that the potential market is so huge that it can grow by 15-17 % per annum. With the entry of private insurance companies, the Indian insurance market may finally be able to make deeper penetration into newer segments and expand the market size manifold and can augment the flow of long-term financial resources for the growth of infrastructure.

General Insurance is another segment, which has been growing at a fast pace. As per the current comparative statistics, the general insurance premium has been lower than life insurance. General Insurance as a percentage of GDP was a mere 0.5 % in 1996.

More Competition

A number of concerns are being expressed regarding the opening up of the Insurance sector. But most of them seem to be unfounded. The national interest lies in increasing the penetration of insurance products, increasing the retention of premia in India and mobilizing resources for infrastructure needs. Competition means that players aggressively target potential customers and this will increase the penetration of insurance.

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The retention of premia in India has become a sensitive issue with some people who demand that the present outgo of around Rs.10 bn by the way of reinsurance be stopped. These people in the name of safeguarding the national interest are in fact compromising the interests of the nation. If no reinsurance is taken it implies that the insurance company is underwriting the entire risk itself. Thus a single earthquake or a cyclone can wipe out the entire company.

The argument that foreign companies will repatriate premium income through reinsurance is misplaced. Even now a significant part of the premium is distributed to reinsurers and much of the high insurance risks are reinsured overseas. One recent example is the calamity that struck the state of Gujarat wherein total claims stood at Rs.120 bn Only Rs.29 bn was settled locally with overseas reinsurers settling the balance. Moreover, every regulator prescribes that the premium earned is retained in the country and the liabilities under the contract are matched with assets in the same country. In fact the opening up of the sector will increase the retention of premia in India and thus reduce outgo of the valuable foreign exchange.

The apprehension that there would be a flight of capital is also not borne by the experience of other countries. If anything, there has been a strong inflow of foreign capital in the first 5 years for introducing new products and maintaining the requisite capital adequacy ratio.

The fear that new companies will displace existing players is also unfounded. In fact in China, Malaysia, Indonesia and Thailand where insurance firms were allowed entry the

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foreign companies account for only 10% of the market share. In South Korea the opening up of the sector saw the Big Six domestic players, who initially controlled the entire market, increase their business from 3 to 37 trillion won by 1997. The foreign companies were not able to capture more than 0.4% of the domestic market. Closer home, we have the experience of the banking sector where despite the presence of 39 foreign banks their share in overall business is less than 10%.

Thus it is seen that the apprehensions being expressed do not hold much water and the opening up of the Indian insurance sector would bring about sweeping changes not only for the consumers but the economy as a whole.

Opening Of the Insurance Sector

In India, approx. 60% of the total health expenditure comes from self paid category as against governments contribution of 25-30 %. A majority of private hospitals are expensive for a normal middle class family. The opening up of the insurance sector to private players is expected to give a shot in the arms of the healthcare industry. Health Insurance will make healthcare affordable to a large number of people. Currently, in India only 2 million people (0.2 % of total population of 1 billion), are covered under Mediclaim, whereas in developed nations like USA about 75 % of the total population are covered under some insurance scheme. General Insurance Company has never aggressively marketed health insurance. Moreover, GIC takes up to 6 months to process a claim and reimburses customers after they have paid for treatment out of their own pockets. This will

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give a great advantage to private players like Cigna which is planning to launch Smart Cards that can be used in hospitals, patient guidance facilities, travel insurance, etc.

Broadening The Benefits: Opening Up

What is the likely impact of opening up Indias insurance sector? An often-voiced concern is that private players, especially foreign ones, will swamp the market, grabbing a large share. This hypothesis has been disproved in emerging markets worldwide. We believe the threat has been over-played in India.

Multinational insurers are indeed keenly interested in emerging insurance because their home markets are saturated while emerging countries have low insurance penetrations and high growth rates. International insurers often derive a significant part of their business from multinational operations. As early as 1994, many of the UKs largest life and general insurers derived 40 per cent to 60 per cent of their total premia from outside their home markets. The figure at Commercial Union was 76 per cent in that year.

While the impact of global operations on their business may be large, typically foreign insurers take only a small share of an individual countrys market. In Taiwan for example, foreign companies took only a 3 per cent share even seven years after opening up. In Korea, their share was 1 per cent after 20 years. In China, a large and complex market like India, private insurers have not made much headway.

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Yet, new entrants find insurance attractive because even a small share of a large and growing market can be profitable. The Korean insurance market for example, was only the 30th largest market in the world by premium volume in 1971. It moved up to 6th largest in 1996. In any case, in India multinational insurers will be restricted to a minority shareholding in new companies. The new entrants will therefore be private Indian companies.

Nationalized insurers are hampered by their large scale of operations, public sector bureaucracies and cumbersome procedures. Therefore, potential private entrants expect to score in the areas of customer service, speed and flexibility. They point out that their entry will mean better products and choice for the consumer. Critics counter that the benefit will be slim, because new players will concentrate on affluent, urban customers as foreign banks did until recently.

This might seem a logical strategy. Start-up costs-such as those of setting up a conventional distribution network-are large and high-end niches offer better returns. However, we believe that the middle-market offers the greatest potential. This may be still being an urban market but goes beyond the affluent segment.

Insurance, even more than banking, is a volumes game. A very exclusive approach is unlikely to provide meaningful numbers. Therefore, private insurers would be best served by a middle-market approach, targeting customer segments that are currently untapped.

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We anticipate that many new players will indeed take this approach, extending the benefits of a freer marketplace to a wide base of customers. Faced with competition, we believe that the nationalized insurers will improve their game, as they are already trying to do. The customer will be the beneficiary. A Changing Landscape: Competition and Alliances

Many potential entrants are existing financial organizations with a strong infrastructure, good customer bases and brand equity. Before locking into company structures or alliances, they must understand their own capabilities.

In our experience, most emerging market organizations looking to enter insurance go through a similar cycle, driven by the stages of competition (see chart 1). Initially, after the government first allows private competition, entry barriers such as capital requirements are high. Expertise and capital are the scarce resources. Companies that are new to the business conclude that they need an established insurer as a partner. This is partly because they over-estimate the expertise required and partly because the partners capital contribution is valuable.

Next, they decide that a joint venture is the appropriate vehicle for such a partnership. In fact, many other forms of alliance are possible. For example, agreements with information technology vendors can ensure strong systems, or distribution alliances can ensure reach. Since expertise and systems can be bought, new companies eventually realize that the scarce resource is brand strength. They typically find that the partner is unable to deliver

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everything that they expect, or that the same results can be achieved alone. They therefore move to a stand-alone basis relatively quickly.

The reason for this unsatisfactory cycle is that organizations do not spend enough time understanding their own strengths. A virtuous cycle for a new insurer would begin with a strategic review to determine which segments of insurance to enter, followed by a review to identify internal capabilities. Based on this information companies can examine alliance selection, answering questions like: What support do we need? Do we need a partner or merely a supplier to provide

this support? What form of alliance is appropriate? What can third-party organizations actually offer?

They can then select the right partners; negotiate alliances and move on to business planning, product design and pricing. However, our experience indicates that most organizations start by selecting a partner, devoting too little time to the preceding steps. Indeed, some agreements between potential Indian and international entrants have fallen through already. New entrants would be well advised to look ahead to the stage where brand strength will be a big competitive advantage and sketch their alliances accordingly. In fact we believe that alliances related to distribution rather than to products or technology will prove most valuable in the long run.

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There is tremendous scope for foreign companies in this sector. Clearly, there is considerable scope to raise per capita life premium if the market is effectively tapped. With an insurable population of 300 million, per capita life premium can be raised to a level of USD 200 to 300 and hence the market can expand by 50 to 75 times over the existing size. India has traditionally been a highly savings oriented country. If the insurance market is properly tapped, it is possible to raise life premium as a percentage of GDP from the existing level of 1.29 percent to 10 percent. This will bring an eight-fold increase in the existing volume of life premium.

Life premium as a percentage of GDS (gross domestic saving) is quite low in India and it is possible to raise life premium as a percentage of GDS in India from the existing levels. The big question is whether the players are able to effectively exploit the potential by creating and marketing attractive insurance products with high rates of return on premium investments.

Social-Cultural Factors

Population Mix

India has an amorphous middle-class of about 250-300 million people who can afford to buy life, health, and disability and pension plan products. Out of this only 22 percent have insurance and that too covers only 25 percent of their needs and financial capacity. The

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remaining 80 percent have no insurance cover. The life insurance market of India, therefore, is practically untapped.

Shrinkage Of Jobs

The apprehension that competitive Insurance will result in shrinkage of jobs is equally untrue. The number of people working in Insurance sector is much less as compared to UK, USA, and Thailand etc. With expected increase in the business the job opportunities will increase rather than decrease.

The Insurance sector is a service industry and international companies will help build local professionals with world class expertise by introducing the best global practices. Competition will also develop a better understanding of consumer requirements leading to more customized products apt for the market place. Besides it would also improve the tertiary sector tremendously. Development of the tertiary sector would include new avenues for actuaries, accountants, stockbrokers and others. Rural-Urban Mix

It must be borne in mind that India is a predominantly rural country and will continue to be so in the near future. New players may tend to favor the "creamy" layer of the urban population. But, in doing so, they may well miss a large chunk of the insurable population. A strong case in point is the current business composition of predominant market leader the Life Insurance Corporation of India. The lion's share of its new business comes from

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the rural and semi-rural markets. In a country of 1 billion people, mass marketing is always a profitable and cost-effective option for gaining market share. The rural sector is a perfect case for mass marketing.

Competition in rural areas tends to be "kinder and gentler" than that in urban areas, which can easily be termed cutthroat And the generally smaller policy amounts in rural areas would be more than offset by the higher volume potential in these areas in contrast with urban areas. Identifying the right agents to harness the full potential of the vibrant and dynamic rural markets will be imperative. Rural insurance should be looked upon as an opportunity and not an obligation. A smaller bundle of innovative products in sync with rural needs and perception and an efficient delivery system are the two aspects that have to be developed in order to penetrate the rural markets.

Technological Factors Information Technology And LIC

LIC has been one of the pioneering organizations in India who introduced the leverage of Information Technology in servicing and in their business. Data pertaining to almost 10 crore policies is being held on computers in LIC. We have gone in for relevant and appropriate technology over the years.

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1964 saw the introduction of computers in LIC. Unit Record Machines introduced in late 1950s were phased out in 1980s and replaced by Microprocessors based computers in Branch and Divisional Offices for Back Office Computerization. Standardization of Hardware and Software commenced in 1990s. Standard Computer Packages were developed and implemented for Ordinary and Salary Savings Scheme (SSS) Policies.

Front End Operations

With a view to enhancing customer responsiveness and services, in July 1995, LIC started a drive of On Line Service to Policyholders and Agents through Computer. This on line service enabled policyholders to receive immediate policy status report, prompt acceptance of their premium and get Revival Quotation, Loan Quotation on demand. Incorporating change of address can be done on line. Quicker completion of proposals and dispatch of policy documents have become a reality. All our 2048 branches across the country have been covered under front-end operations. Thus all our 100 divisional offices have achieved the distinction of 100% branch computerization. New payment related Modules pertaining to both ordinary & SSS policies have been added to the Front End Package catering to Loan, Claims and Development Officers Appraisal. All these modules help to reduce timelag and ensure accuracy.

Metro Area Network

A Metropolitan Area Network, connecting 74 branches in Mumbai was commissioned in November, 1997, enabling policyholders in Mumbai to pay their Premium or get their Status Report, Surrender Value Quotation, Loan Quotation etc. from ANY Branch in the

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city. The System has been working successfully. More than 10,000 transactions are carried out over this Network on any given working day. Such Networks have been implemented in other cities also.

Wide Area Network

All 7 Zonal Offices and all the MAN centres are connected through a Wide Area Network (WAN). This will enable a customer to view his policy data and pay premium from any branch of any MAN city. As at May 2002, we have 91 centers in India with more than 1320 branches networked under WAN.

Interactive Voice Response Systems (IVRS)

IVRS has already been made functional in 59 centers all over the country. This would enable customers to ring up LIC and receive information (e.g. next premium due, Status, Loan Amount, and Maturity payment due, Accumulated Bonus etc.) about their policies on the telephone. This information could also be faxed on demand to the customer.

LIC On The Internet

Our Internet site is Informative. We have displayed information about LIC & its subsidiaries-LIC (International) E.C., LIC (Nepal) Ltd, LIC Mutual Fund, LIC Housing Finance and their products. Efforts are on to upgrade our web site to make it dynamic and interactive. The addresses/e-mail Ids of our Zonal Offices, Zonal Training Centers,

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Management Development Center, Overseas Branches, Divisional Offices and also all Branch Offices with a view to speed up the communication process.

Payment Of Premium And Policy Status On Internet

LIC has given its policyholders a unique facility to pay premiums through Internet absolutely free and also view their policy details on Internet premium payments. There are 11 service providers with whom L I C has signed the agreement to provide this service.

Information Kiosks

We have set up 150 Interactive Touch screen based Multimedia KIOSKS in prime locations in metros and some major cities for dissemination information to general public on our products and services. These KIOSKS are enabling to provide policy details and accept premium payments.

Info Centers

We have also set up 8 call centers, manned by skilled employees to provide you with information about our Products, Policy Services, Branch addresses and other organizational information.

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Grievance Handling Mechanism for Policy Holders

LIC has more than 8 lakh agents all over the country. They are the first and nearest points of contact for policy holders for redressal of their grievances with regard to the policies taken by them. Their agents are well trained and assist the policy holds in most areas of policy servicing.

However, to take care of the problems which agents find difficult to solve. Grievance redressal officers have been appointed at the branch, zonal and central offices. In the branch, the branch manager is the designated Grievance Redressal Officer. The marketing managers at these Regional and Divisional offices are other designated officers. These officers set aside 2 hours on every Monday to hear the grievances of the policy holders, without any prior appointments. There are also free telephone lines provided to the policy holders at Mumbai for calling the designated officers at the divisional\zonal and central offices in connection with the redressal of their grievances.

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There are Complaint cells at the divisional offices and complaint sections at the zonal offices and central office for attending to complaints from policy holders. Claim Review Committee has been appointed at all the zonal offices and at all the central offices for considering the appeals against repudiation of liability under some claims for suppression of facts material to the assessment to the risk. The divisional offices, while repudiation liability also inform the claimant that if he\she is not satisfied with the decision the he/she may approach this review committee. This committee at the zonal offices has the benefit of the presence of a retired igh court/district kudge besides 3 senior officers from the zonal offices. The intention of the corporation in inducting such retired judges is to ensure not only greater transparency in operations but also to ensure that an independent judicial opinion maybe available so that the decision can stand by any court of law.

The Zonal Review committee will receive all appeals irrespective of the claim amount and review them. Their decision up to net claim of 2 lakh Rs will be final. However, claimants with net claim amounts exceeding 2 lak and not satisfied with the decision of the Zonal Claims Review committee at the central office and commended it. Besides, the central government in exercise of powers conferred by the sub section1 of the section 114 of the Insurance Act, 1938 have been pleased to frame the Redressal of Public Grievances rules, 1998 vide notification dated 11-1-98. These rules seek to resolve complaints relating to settlement of claims etc., in repect of insurance companies in a cost-effective, efficient and impartial manner. These rules also provide for the appointment of one or more persons as Ombudsman for achieving the purpose of the said rules. The Ombudsman under the rules may receive and consider:-

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a) Grievances relating to any partial or toal repudiation of liability by any insurer. b) Any dispute in regard to premium

Customer Service and Quality

Between one insurer and another, the differentiating factor will be the in this experience of the customer. There is not much likelihood of much difference in the terms of the policy itself. There would be no difficulty in any insurer offering the same benefits as another insurer. Technology is not exclusive. Premiums could be different depending on the efficiency of management. But life insurance is seldom bought on the basis of the cheapest price. The experience during purchase, after purchase and at the time of the claim will make the difference. This experience is the result of the nature of customer service.

In case of insurance, the experience after the purchase is the continued attention and concern shown to the customer, would reassure him that the promise he believed in while making the purchase was not misplaced. If he does not receive such attention and

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expression of concern, he could start doubting the servicing-provider. Apart from the help in processing the claim when it occurs, post sales servicing would include regular reminders as to the customers obligation like payment of renewal, furnishing of data as may be required, compliance with warranties and so forth.

Managements around the world have learnt that satisfied customers are the only route for sustained growth in competitive environment. They are now striving to make customer increasingly happy. The opportunity to do so is not much in are available not much intangible components of products of products, but in intangible service components. Life Insurance, being a pure intangible, provides plenty of option.

The quality of service is what customer says it is. He judges the organization by his experience. The judgement is influenced by the extent to which his presence and the needs are recognized. People get badly upset when they are not heard, when they are ignored or spoken to impotently, when their inquiries are treated irrelevant, when they are brusquely told to wait, etc. they feel good when someone listens to what they have to say, shows consideration for the problem and explains why something is done or not done.

A grievance is a symptom that the quality is not perceived as satisfactory. A customer has a grievance when he does not get what he thinks he is entitled to. A grievance is to be taken seriously because it gives clues s to what is going wrong, it indicates what customer expects or the customer may be lost. When a grievance is attended to quickly and seriously there is satisfaction, which, in turn, wipes out the adverse experience.

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LICs Customer Relationship Management

The Emerging Scenario

With the emergence of competition, LIC has implemented strategic moves for business growth, as well as ensured quality improvement in service standards. As on today, they have been providing service to around 12 crore policy holders and their track has been well acknowledged as reflected through continual upgradation of service standards culminating into a world class performance in the area of claim settlement operations. It is well acknowledged that LIC has been able to provide appropriate IT support in furtherance of prompt service to their valued policy holders. The complex task of conversion of computerization of all the branches with their conversion as Front Line offices has been completed in aphase manner. In addition to this, the launching of the IVRS facility, MAN and Wide Area Network operations has helped the co-operation improve its servicing.

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LICs strength lies in: a. Wide network of branches covering rural areas. b. A large and well- spread agency organization. c. An acknowledged record of performance. d. Adequate yield with high risk cover being offered keeping the policy holders satisfied in the existing in the economic scenario. e. A well accepted brand equity throughout the country.

In addition to this, LIC has an established and well administered Grievance Redressal Mechanism and with Ombudsman intervention, the customers appear to be well attended. However, this mechanism has to be restructured keeping in view the additional legal provisions laid down by the regulator as expounded in the IRDA act.

Futuristic Approach Till today, LIC enjoyed a monopoly. It is now that reality exists in the are of marketing (i.e. sales and after sales service operations). It will now have to follow a multi-faceted strategy towards customer retention and also expanding to a new clientele. With the new face of the market, relationship management seems to be the new mantra.

At the nucleus of this approach is the concept of Customer Relationship management. The need is to have a comprehensive review of the business keeping in view customer expectations.

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Customer Orientation LIC, to be in the reckoning, has to have an efficient feed-back system, so as to understand what the customer desires in terms of product design, service procedures, relationship convinience, accessibility, responses in terms of personalized service, attendance, core and complimentary on an individual basis. The new players in the market like ICICI, HDFC etc. will definitely be very aggressive in the open market. LIC has to go ahead with their former customers, existing customer, in a very gentle and courteous manner, reassuring them of their better services with persona, attention. Managed customer relations help to:

1. Design the product 2. Know your competitive edge in the market with diversified product launch by the competitors. 3. Understand customers perception of our existing service standards. 4. Predict customers future expectations. 5. Enable us to proceed with segmental marketing (either customer oriented or product oriented). 6. Assess impact of economic changes, fiscal and commercial policies, market and industrial operations vis--vis customer demand.

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Relationship Management Process It is very important that everyone in the organization should accept and live by the goal of customer satisfaction. All challenges should be converted to opportunities for expansion. There has to be a philosophical and cultural orientation. Once the process is launched, it should lead the entire organization to achieve 100% retention of existing customers, with full satisfaction of their expectations and this class of customers will spread throughout the country and carry LICs brand equity by word of mouth. There should be relationship existing with former customers since they are opinion makers. Such customers will include former policyholders and also their intermediaries. The intermediaries i.e., agents are their internal customers and if they are well looked after and kept happy, they can provide a smooth pace leading to their value customers. Strategic Moves Deploying multifunctional service tools for the convenience of their valued customers. Retention of professional agents (club members) to retain the existing policyholders. Providing online data support to these professional with proper safeguard procedures. Management of multiple markets includes the sales and after sales service to prospects and customers, representing different segments identified on the basis of economic conditions, financial status, occupational, cultural differences and of course, regional

professional, social and diversification.

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Participation of the buyer right from the stage i.e. OFFER. Conducting Customer need. Profile Surveys to know the existing family and individual

Information sharing with the valued customers: LICs branch officials and marketing officials should remain in touch with customers at different levels through communication and correspondence.

The Insurance Potential -- Future

India has an amorphous middle class of about 350-300 million people who can afford to buy life, health and other insurance products. Out of this only 22% have insurance and that too covers only 25% of their needs. The insurance market in India is therefore practically untapped. At present the size of insurance market in India is pegged at approximately US$ 92.5 billion. Of the total size of the market 80% is of life insurance and 20% of non-life insurance. According to estimates drawn by some international insurance consultants, the insurance market is likely to grow at an average rate of about 15% for the next five years. In anticipation of tapping the huge market, a number of insurance companies have set up their respective offices in India and tied up with various Indian companies.

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With the entry of competition, the market is witnessing a wide array of products from players whose numbers are set to grow. In such a scenario, the differentiators among the various players are the products, pricing and service.

Today the Indian consumers are increasingly becoming more aware and are actively managing their financial affairs. Today, while boundaries between various financial products are blurring, people are increasingly looking not just at products, but at integrated financial solutions that can offer stability of returns along with total protection.

To satisfy these myriad needs of products, insurance products will need to be customized. Insurance today has emerged as an attractive and stable investment alternatively that offers total protection - Life, Health and Wealth. In terms of returns, insurance products today offer competitive returns ranging between 7% to 9%. Besides returns, what really increases the appeal of insurance is the benefit of life protection from insurance products along with health cover benefits. Consumers today also seek products that offering flexible options, preferring products with benefits unbundled and customizable to suit their diverse needs. While sales of traditional life insurance products like individual, whole life and term will remain popular, sale of new products like single premium, investment linked, retirement products, variable life and annuity products are also set to rise. Firms will need to constantly innovate in terms of product development to meet ever-changing consumer needs. However, product innovations are quickly and easily cloned. Pricing will also not vary significantly, with most product premiums hovering around a narrow band.

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In this competitive scenario, a key difference will be the customer experience that each insurance player can offer in terms of quality of advice on product choice, along with policy servicing and settlement of claims. Service should focus on enhancing the customer experience and maximizing customer convenience. Long-term growth in the business will greatly depend on the distribution network, where the emphasis must evolve from merely selling insurance to acting as financial advisors, helping customer's plan their finances depending on personal requirements. This calls for a strong focus on training of the distribution force to act as financial consultants and build a long lasting relationship with the customer. This would help create sustainable competitive advantage not easily matched.

The main reason why the leading insurance companies in the world and the leading corporate group in India have shown a keen interest in the insurance sector, is the vast potential for future business. Restricted, as the market has been, through the operations of the two monopolies (LIC and GIC), it is generally felt that the sector can grow exponentially if it is opened up. The decade 1987-97 has witnessed a compounded growth rate of marginally more than 10% in life insurance business. LIC predicts for itself that its business has potential to grow by 16.27% p.a. in a decade 1997-2007 (LIC, 1997). If we take a look at insurance coverage index for the age group of 20-59 years a considerable gap between India and other countries in Asia can be observed. In this scenario, naturally insurance companies see a vast potential.

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SWOT Analysis
After Understand the whole Insurance Sector, I have prepared SWOT Analysis of the Sector:

Strengths

The industry is growing which is a sign of recovery of the economy leading to creation of a stable economy. It is one of the booming sectors.

Better living standards and quality of life. Low claim-high profit. ASK Good returns on investment of life funds in avenues. Healthy product line, competitive prices and excellent customer services directed to customer satisfaction. Thanks to competition.

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IRDA acting as a Watch Dog. Technology will play a strategic role in providing a competitive edge- be it in aiding design and administration of products or building life long customer relationships. It will also help enhance service, ensure effective and efficient delivery system and also will lead to greater customization of products and greater transparency. For example, LIC has IVRS (Integrated Voice Response System) and also provides the facility of online premium payment through billjunction.com and timesmoney.com

Transparency of management by all existing players in terms of premium collected, invested, profit generated and distributed and the commission structure.

Only source of safe and high yield nowadays.

Weaknesses

It requires huge initial investment. The Indian companies, which have collaborated, with big foreign insurance companies are novice to this field.

Break even will be reached after 7 years of operations. ASK No other intermediaries are allowed to sell insurance except agents. ASK IRDA has specified norms, which restricts life corpus to be invested in hot scripts that could earn higher returns and also add fuel to economic development. The 85% of the premium amount or the corpus must be invested in Government Securities which yields around ASK returns could be converted into 30 35% if managed and churned well by allowing them to invest on stock and foreign

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markets. This norm would reduce the attractiveness of the insurance policies to the consumers, hereby, reducing the total demand for the insurance as a whole.

Opportunities

Pie worth Rs. 32,000 crore is waiting to be grabbed by insurers. India, no doubt, is a highly underinsured country, with penetrated level of only 1.3% of GDP as against 2.86% in Israel and 2.43% in Hong Kong.

Total Indian insurable population is around 32%, which is insured by 15 to 22% a year against industry growth of 17%.

Time to refurnish By G.N. Bajpai (chairman, LIC) So many players are in the industry, which leads to better product at best price and above all will increase the awareness of insurance by promotional activities.

Shift in customers perspective to see insurance as a risk management tool rather than a tax saving and saving tool.

Higher disposable income and low inflation rate Nuclear Families the joint family system has strong roots ion the country. In the event of calamity, other members of the family come to rescue, especially with financial assistance.

See rural sector 0 rural India which is more than 60%, see them as opportunity not as an obligation, IRDA.

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More penetration of insurance leads to more savings leading to more investment, which means more employment hence generating more income, which again means increased consumption and savings. All these leads to economic growth.

Due to new entrants insurance is coming out of its image of bureaucracy. It has touched new horizons thanks to competition.

If IRDA allows Bancassurance, market will have readymade distribution channel available in terms of PSU and Private banks which will lead to one step and one stop financial assistance to customers.

The lack of a comprehensive social security system combined with a willingness to save means that Indian demand for pension products will be large.

Threats

If IRDA allows brokers, banks and other intermediaries to sell inurance, it will be worst for agents who are not at all competitive in this growing phase.

To penetrate in the market very fast and to earn hefty commission company could have also problem of wrong underwriting and due to carelessness failure of one private player could shake out all the other private players in the market.

Unstable inter-national and international conditions, clouds of war between two nations, terrorists attack, riots and other bio-wars lend huge devastation and companies should prepare itself for it.

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As insurers claim their products as providing tax benefit. That would not be any longer the----. Mr. Sinha has already taken a first step to cancel out all the investment benefits on policies (both sections 80CC and 80D) by restructuring the slab set off perks benefits. Upto Rs. 1,50,000 More than 1,50,000 10% 20%

Except LIC, which is known to invest all surplus to ---- economic development, other than LIC the problem with private players is that the profit will be forayed in their countries which ----- our foreign exchange deficit to smaller extent but it is to be an arguable matterIRDA is likely to come out with certain norms for profit redeployment.

Recommendations

There are a few insurances, which Indian Insurance companies do not provide. Hence some new product development is required in this sector. A few of the policies are,

1. Industry all risk policies 2. Large projects risk cover 3. Risk beyond a floor level 4. Extended public and product liability cover 5. Broking and captivities.

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6. Alternative risk financing 7. Disability insurance 8. Antique insurance 9. Mega show insurance 10. Celebrity visits to the country.

Conclusion

Probably, India must be one of the lowest insured countries in the world i.e. 7 per cent. This scenario has to change. We should not only have 100 per cent insurance, but also 100 per cent social security.

Personally and patriotically I feel Indian Insurance companies should cover Indian Insurance business, we cannot insist on the same globally. So Indian Insurance companies have to be more customers friendly and sufficient so that we can compete with the best in the world.

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They need to improve their services and offer maximum customer satisfaction.

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