Irda Oct08

Volume VI, No. 10

October 2008

Intermediary:
The Vital Link

’Ë◊Ê ÁﬂÁŸÿÊ◊∑§ •ı⁄U Áﬂ∑§Ê‚ ¬˝ÊÁœ∑§⁄UáÊ

Editorial Board
J. Hari Narayan
C.R. Muralidharan
S.V. Mony
K.N. Bhandari
Vepa Kamesam
Ashvin Parekh

Editor
U. Jawaharlal
Hindi Correspondent
Sanjeev Kumar Jain
Printed by Alapati Bapanna and
published by J. Hari Narayan on behalf of
Insurance Regulatory and Development Authority.
Editor: U. Jawaharlal
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(with design inputs from Wide Reach)
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e-mail: irdajournal@irda.gov.in

© 2007 Insurance Regulatory and Development Authority.
Please reproduce with due permission.
Unless explicitly stated, the information and views published in this
Journal may not be construed as those of the Insurance Regulatory
and Development Authority.

From the Publisher

I
ntermediaries have a key role to play in the need for a direct contact with the prospect still
success of some financial services. Insurance, continues to be predominantly in vogue. Although
globally in general, and in emerging markets the awareness levels of the general masses as
in particular; has always depended upon the skills regards insurance have been going up, the Indian
of the distributor. In India, historically it has been insurance industry is still not at a stage where
the ubiquitous agent who has been responsible the common public can assess their insurance
for not just garnering business but also in requirements; and plan their insurance portfolio
disseminating whatever information that was there themselves. In this regard, it has to be
at his disposal. This phenomenon greatly appreciated that the distributor has to be more
contributed to the growth of insurance even in of a wholesome professional rather than a mere
the remote corners of the country. insurance salesperson. Such a healthy situation
would lead to the prospect taking an informed
In the post-liberalized scenario, we have seen the
decision which in turn will be responsible for
introduction of other channels of distribution viz.
higher business retentions, especially in the area
bancassurance, brokers, corporate agents etc.
of life insurance.
which have been increasingly consolidating their
strengths in the Indian domain. In the case of The focus of this issue of the Journal is on ‘Role
corporate customers particularly, the role of the of the Intermediary in Insurance’. One more
intermediary goes beyond merely identifying the aspect of the healthy growth of Indian insurance
insurance needs of the client. There is need for business in the post-liberalized scenario is the
a comprehensive assessment of the several risks introduction of riders in insurance contracts,
that they are exposed to; and accordingly work which obviate the need for buying an insurance
on a total risk management package. It is gratifying policy for each of the client’s needs. ‘Riders in
to observe that this aspect has come to be seen Insurance Policies’ will be the focus of the next
in the Indian insurance industry. The role of issue of the Journal.
brokers in this regard is hugely important.
Similarly, the corporate agents have been steadily
growing in their strength, owing to the access
they have to their vast client base.

In the case of individual business, however, the J. Hari Narayan

Relevance of Distribution Channels
F O C U S
- N.M. Govardhan 7

Need for Intermediation
- P.C.James 11

On the Steady Path of Progress
- VG Dhanasekaran 16

What Has Been and What Will Be?
- V Sithapathy 21
I S S U E

Bancassurance in India
- Anand Pejawar 23

Role of the Intermediaries
in Insurance
- S.K. Sethi 29

Statistics - Life Insurance 4
Vantage Point
U. Jawaharlal 6 THINKING CAP
§y™Á uƒuåÆÁ™N˛ EÁ{∫ uƒN˛ÁÃ
üÁuáN˛∫m EuáuåÆ™: 1999 40
üÁNw˛uoN˛ ÃÊN˛b osÁ EÁú N˛Á V∫ 32 Prognosis Bright
uƒ∆z o: ßÓNÊ˛ú Nz˛ ÃÊtß| ™ı - G. Prabhakara
ÃÏåyoÁ ßÁub 44
Statistics - Non-Life Insurance 46
35 Emerging Risks
Round up 47 - Sanjib Chaudhuri

from the editor

Scaling New Heights
- Through Effective Distribution

T
he success of a product depends to a great extent on the efficacy of the distributor. Especially when
the product is of an intangible nature, the distributor plays a key role in enhancing the product’s
visibility. Insurance, particularly in emerging markets, still needs to be pushed and in this regard, the
distributor’s role-play is very vital. Historically, the agent has shouldered the responsibility of distribution
entirely. In a domain that was devoid of competition, it was not a big constraint. The products that were in
circulation were mostly homogenous in nature and did not need great professionalism. It should, however,
be admitted that given the limited scope; the institution of agents has done a tremendous job, especially in
ensuring that insurance reaches the farthest corners of a geographically vast country.
The opening up of the insurance industry to private participation led to the genesis of several players in the
market, most of them in partnership with some of the big names in global insurance. A natural consequence
of this phenomenon was the introduction of some products that were hitherto unheard of in the Indian
insurance market. It also meant that a great deal of professionalism was required to be introduced into the
job of distributing the products. The tremendous success of the erstwhile insurers in tandem with the new
ones in the liberalized landscape meant that this professionalism was always existing, waiting to be tapped to
its fullest extent.
The new-found dynamism and vibrancy in the market meant that there is need for other channels of distribution
as well. This led to the introduction of brokers, corporate agents, bancassurance etc. who co-existed with
the time-tested channel of agents. The uniqueness of the brokers is that while they are paid by the
insurers, they are not tied to any particular insurer and hence are in a position to advise the client of the
best of the available services. This aspect has certainly raised the bar in the domain of insurance distribution.
Similarly, the corporate agents have the advantage of making use of their vast network of resources to
spread the message of insurance. Banks in India have been synonymous with unlimited reach – especially the
hitherto inaccessible rural areas. This wide reach has put them in good stead for augmenting their business
skills with insurance selling. While the extent of success of each of these channels is a debatable issue,
there is no doubt that they have contributed a great deal to the visibility of insurance in the country.
‘Role of the Intermediary in Insurance’ is the focus of this issue of the Journal. We open the debate with
words of wisdom from the Chairman of the Committee on Distribution Channels Mr. N.M. Govardhan who
takes a look at the evolution of the different distribution channels in vogue today. The best of financial
services have reached mostly to the urban elite and the rural masses have not been so fortunate in this
regard. This aspect is highlighted by Mr. P.C. James who writes that a farmer who is informed of the advantages
of agriculture insurance would certainly perform better. In the next article, Mr. V.G. Dhanasekharan discusses
the transition of a broker from a mere distributor to a wholesome risk manager. Mr. V. Sitapathy argues that
the institution of brokers has certainly added a new dimension to insurance business in the Indian market.
Mr. Anand Pejawar, in his article describes how bancassurance could add value to insurance distribution; and
in turn, improve the business retentions of insurers. In the last article on the issue focus, we have Mr. S.K.
Sethi throwing light on how a broker can provide the ultimate difference in serving insurance clients. In the
‘Thinking Cap’ section, we have two articles for you – the first based on the inaugural address delivered by
Mr. G. Prabhakara at the seminar on Balance Scorecard for Life Insurers; and the second by Mr. Sanjib
Chaudhuri who analyses the issue of emerging risks for insurers.
Riders provide a great deal of flexibility by being optional and at the choice of the applicant. The focus of
the next issue of the Journal will be on ‘Riders in Insurance Contracts’.

U. Jawaharlal

Report Card:LIFE
First Year Premium of Life Insurers for the Period Ended August, 2008
Sl
Premium u/w (Rs. in Crores) No. of Policies / Schemes No. of lives covered under Group Schemes
No. Insurer
August, 08 Up to August, 08 Up to August, 07 August, 08 Up to August, 08 Up to August, 07 August, 08 Up to August, 08 Up to August, 07
1 Bajaj Allianz
Individual Single Premium 32.99 139.89 193.51 7960 32677 32282
Individual Non-Single Premium 344.16 1404.56 1285.57 224974 926797 974635
Group Single Premium 0.12 0.96 4.91 0 0 0 123 1073 3716
statistics - life insurance

Group Non-Single Premium 12.46 42.28 8.26 51 220 111 550825 1858419 231538
2 ING Vysya
3 Reliance Life

irda journal
4 SBI Life

4
5 Tata AIG

Oct 2008
6 HDFC Standard
7 ICICI Prudential
8 Birla Sunlife
9 Aviva
10 Kotak Mahindra Old Mutual

11 Max New York
12 Met Life
13 Sahara Life
14 Shriram Life
15 Bharti Axa Life
statistics - life insurance

16 Future Generali Life
Individual Single Premium 0.28 0.43 63 91
Individual Non-Single Premium 2.92 5.62 2526 8752
Group Single Premium 0.00 0.00 0 0 0 0
Group Non-Single Premium 3.92 6.64 13 29 155266 201481
17 IDBI Fortis Life

irda journal

5
18 Canara HSBC OBC Life

Oct 2008
19 Aegon Religare
Private Total
20 LIC
Grand Total

Note: 1. Cumulative premium/policies upto the month is net of cancellations which may occur during the free look period.
2. Compiled on the basis of data submitted by the Insurance companies

vantage point

Providing Product Flexibility
RIDERS IN INSURANCE

‘RATHER THAN THE COMPULSION TO BUY AN INSURANCE PRODUCT FOR EVERY NEED, THERE MUST BE CUSTOMIZED

SOLUTIONS THAT CAN BE WORKED OUT WITH VARYING OPTIONS. RIDERS PROVIDE THIS FLEXIBILITY TO A GREAT EXTENT’
SAYS U. JAWAHARLAL.

M
ost life insurance contracts are ‘riders’ in life insurance parlance have as a huge advantage especially in case of
in the nature of an assurance the ability to dynamically alter the term covers if the policyholder opts for
wherein there is a promise to pay coverage under a contract; and thus an automatically renewable facility,
the sums assured either on the date of eventually turning out to be customized thereby obviating the need for risk
maturity or in case of an earlier death. solutions. In the pre-liberalized scenario, assessment at the end of the term. For
This quality of assurance has been the there were hardly any riders – with the underwriters, there has to be additional
hallmark of the success of life insurers accident benefit rider being the most consideration of the risk on account of
historically, as ‘tangible benefits’ is what popular one. Riders or add-ons were the riders, as the total amount of payout
is at the top of priorities for the average introduced on a major scale after may rise rapidly in case of the happening
Indian mindset. Conversely, it is also the privatization of the industry; and presently of the event.
reason for the pure risk or term covers there are some players who manage with
In the non-life insurance class, although
enjoying only partial success. While a just a few basic covers. They leverage
one does not use the term ‘riders’, the
gradual reversal of this trend can be the availability of riders in different
add-ons that are available should be
observed, it is still far from where it combinations thereby resulting in several
judiciously made use of. Insurers and
should have been. Apart from this, customized options for the policyholder.
particularly distributors have to highlight
product availability was also limited to
The beauty of the riders is that applicants the availability of such add-ons and work
only a few; until the industry was thrown
do not have to look for separate policies out possible insurance solutions for the
open for private participation. This meant
for their needs; and in working with the client rather than enforcing him to buy a
that policyholders needed to buy
add-on options can fulfill their insurance product for each of his needs.
different products for different needs,
needs. The downside is that these riders
within the given range of availability. ‘Riders in Insurance Contracts’ will be the
cost additionally – after all, there is no
focus of the next issue of the Journal.
The flexibility of product differentiation such thing as a free lunch – and also limit
We look forward to a healthy debate on
has a lot to do with how various solutions the quality of assurance of life insurance
the issue from different stakeholders of
can be arrived at by simply changing a contracts, in view of their being
the industry.
few optional add-ons. These add-ons or contingent in nature. However, it comes

Multiple Options
for a Policy Holder
in the next issue...

irda journal 6 Oct 2008

issue focus

Relevance of Distribution Channels
EMERGING INSURANCE MARKETS

N.M. GOVARDHAN ASSERTS THAT TIME-TESTED DISTRIBUTION CHANNELS STILL HAVE A KEY ROLE TO PERFORM FOR A

SUCCESSFUL INSURANCE BUSINESS, ESPECIALLY IN EMERGING MARKETS.

Introduction tax incentives helped in increasing spectacularly. In general insurance there
Marketing of life insurance and general demand for life insurance. With increasing has been good progress, but it still lags
insurance products is a predominant ageing population and governments behind many countries. The table below
activity of all insurance companies. moving from public to private pension sourced from Swiss Re is indicative of
Insurance being an intangible commodity schemes, the demand for life insurance India’s position in the global insurance
has to be sold. The concepts, terms and products has also increased. In emerging scenario.
conditions, benefits and privileges have markets the growth in life insurance
to be explained to the customers. tripled to 21.1% from 7.5%in 2005. The Insurance penetration
Penetration and density of insurance is global non-life business grew by 1.5% in
Countries* % GI Premium/ GDP
linked to the sweep and reach of the 2006 recovering from last year’s
% LI Premium/ GDP
marketing of insurance through various stagnation. The global growth
distribution channels. The Board and top performance in non-life business varied US 4.80% 4.00%
management of insurance companies are between industrialized countries at .6% Japan 2.20% 8.30%
keen to develop the various distribution and emerging markets at 11%”. India 0.60% 4.10%
channels for effective growth of new Malaysia 1.70% 3.20%
IRDA annual report 2006-07 shows the
business and to gradually increase the China 1.00% 1.70%
penetration of life insurance at 4.1% of
vast reservoir of life insurance and Continents
GDP, and premium density at around 1600;
general insurance funds. North America 4.70% 3.90%
as compared to the U.K at 13% of GDP
Europe 3.00% 5.30%
It is pertinent to examine how India stands and premium density at around 5100. In
Asia 1.60% 5.00%
in relation to the global insurance general insurance, India lags behind at
scenario. The world insurance scenario around 0.6% of GDP and premium density
as reported by the IRDA annual report at around 400; as compared to the U.S.A
2006-07 is as under: and Switzerland which are the leaders at With increasing
“Worldwide insurance premium amounted
4.7% of GDP and premium density at ageing population
to US$ 3723 billion in 2006 comprising of
around 2000. (Insurance penetration is and governments
measured as a ratio of premium to GDP.
US$ 2209 billion in Life and US$ 1514 billion moving from public
Insurance density is measured as a ratio
in Non Life Business…It may be interesting
of premium to total population).
to private pension
to note that in most of the countries the
schemes, the
growth in life insurance premium was It appears that in India, post opening up
faster than growth in economic activity. of the insurance sector; in particular life
demand for life
Booming stock markets favoring unit insurance penetration and premium insurance products
linked products, regulatory changes and density have increased quite has also increased.


issue focus

The low penetration in general insurance meaning a firm or company formed under
has been attributed to low penetration the Companies Act, 1956 or a banking
in retail insurance products. company or a Bank/RRB or a co-operative
society registered under the Co-operative
Different Distribution Channels The persistency societies Act, 1912 or a panchayat or a
Individual Agent: The individual agent has NGO/MFI covered under the Co-op
rate in
been the bedrock and the lynchpin in Societies Act or a NBFC registered with
Bancassurance, RBI or any other institution. They assist
the marketing of insurance, especially life
insurance. The professional agent has due to the greatly in the spread of insurance
been the strongest link between the life continuous through the greater reach of the
insurer and the customer. The contact with the institutions.
professional agent has the onerous role client is better Brokers: Brokers are permitted to sell
of explaining the concepts, terms and
than in other products of more than one insurer.
conditions, benefits and privileges of the Brokers have been very predominant in
insurance contract. He has to analyze the channels.
the non life arena. Large risks require
financial requirements and risks faced by quite sophisticated expertise. Brokers
the customers and market insurance plans have played a very key role in this area
suited to the needs and means of the both in selling products and in servicing
customers. All insurance companies, and of Insurance claims. Brokers have now
of agents has not increased
life insurance companies in particular, also entered the Life Insurance market.
astronomically as in life insurance. There
have recognized the paramount
is a feeling amongst general insurers that Bancassurance: Bancassurance is
importance of this channel. The number
there is a necessity to liberalise the developing as an important channel in
of agents has grown at a spectacular rate.
present rules to attract more agents by India. This is due to the large reach and
Training institutes have developed all over
allowing agents to sell products of more customer base of banks in both urban and
the country inculcating professional skills
than one non-life insurer. rural areas in India. The persistency rate
and teaching the intricacies of plans, the
It is essential to note that commission, in Bancassurance, due to the continuous
concepts, terms and conditions, benefits
incentives and disincentives could be contact with the client is better than in
and privileges of insurance contracts to
structured to improve low lapse rates, other channels. The ease of payment of
the ever increasing number of agents. Of
persistency and conservation ratios. premium and the facility of maturity/claim
course there has also been a large
payments through the bank account make
turnover of agents. Perhaps only 20% of Perhaps a certain amount of flexibility in
it a customer friendly channel.
agents recruited, do develop as this regard could be given to the insurers.
professional career agents. This has been It is to be noted that Bancassurance
Corporate Agents: The number of
a cause of concern as insurers realize, models vary widely both in India and
corporate agents has grown in recent
especially in life insurance that low lapse globally. The differences could be in
years. Corporate agent is a concept
rates, high persistency and a good ownership, point of sale, specially
introduced with a view to taking
conservation ratio are the sine qua non designed products, sharing of the client
advantage of the presence of a large
of a good efficient life insurer. To this database and in the administration and
number of entities with a sizeable client
end, insurers are encouraging servicing. The various models may require
base, contacts and goodwill already
professionalism and greater competency different levels of assistance from the
operating in the market. With multi
amongst agents. Insurer. Hence perhaps different
locations and a network of people assisting
compensation levels are necessary.
In general insurance the retail agent them, these entities have a different
markets mainly the personal lines of Fire, structure and purpose. Hence their Referrals: This is a new concept very
Motor, Burglary, Household Insurance, existing network could be utilized to similar to getting a prospecting list and
Travel Insurance and Health Insurance. market insurance. The corporate agent leads to effect sales with customers. It is
Due to the low ticket size, the number could thus be defined as a person - evident that in addition to banks, there


issue focus

could be various other entities which the vast databases. Hence this model Current Issues
could act as a referral provider due to could be encouraged and regulated with ULIPs: There has been in recent years a
the large database of members/clients, tight guidelines to prevent any abuses very large increase in the portfolio of unit
like credit cardholders association especially in compensation levels, which linked Insurance products. This
members, society members etc. In short, should be in relation to the services phenomenon is present globally and is not
such institutions could share or market rendered. confined to India. It is pertinent to
their database to provide leads to the examine the reasons for the large spurt
Direct Marketing: In the new
intermediaries to sell insurance in unit linked insurance products.
technological environment, new
products. The referral provider is not a Traditional products of term, whole life
innovative marketing systems have evolved.
licensed intermediary, but can be and endowment had in built guarantees
The use of inter-net, web based sales, e-
regulated by the insurance Regulator, of maturity benefits with some limited
marketing, telecalling, mobile SMS have
through approval of the terms of the interest guarantees depending on the
made giant strides in reaching out to
agreement, between the insurer and the plan. With-profit plans developed to give
customers. This is an emerging channel
referral provider. The U.K model of an upside benefit due to favorable
which in future may grow in size and
introducer envisages introduction of investments, with an assured guarantee
proportion of sales. This channel requires
customers to insurance products and of basic sum assured and vested bonuses,
active regulation which should be on
insurers. The regulatory provisions inter with the added attraction of terminal
issues of transparency, disclosure, privacy,
alia envisages access to database, bonuses. Essentially it was a bundled
contract, TRAI guidelines etc. It would
voluntary participation of the customers, product combining protection and
be necessary to give full complete
contract only between insurers and investment with increasing guarantees of
information through soft copies of
insured, no principal-agent relationship basic sums assured and vested bonuses.
proposal forms, schedules, policies etc.
between referral/introducer and insurer. The volatile investment environment
Micro insurance: This is an initiative to meant that interest guarantees over a
Referral providers enhance the
reach out to low income groups both in long term could be quite hazardous and
penetration of insurance through
the urban and rural areas covering life, required additional reserving. Regulators
provision of good prospecting lists and
general and health areas. Co-operative insisted on policyholders’ reasonable
banks, RRBs, Micro finance institutions expectation to be met, resulting in
registered with the RBI, NGOs registered stronger reserves and solvency provisions.
as trusts, should be permitted to Further, customers and analysts felt that
distribute micro insurance policies. The traditional with-profit bonus declarations
definition of micro insurance agency and terminal bonuses were not very
could be widened to include any entity transparent. This led to the development
The volatile registered under the societies act. of unit linked insurance products which
investment For micro insurance policies, the claims unbundled the protection and investment
parts of the plan; and caught the
environment administration should be jointly
undertaken by the insurer and the imagination of policyholders who could
meant that interest see transparently the net asset values.
distributor; as the distributor can be
guarantees over a accessed more easily by the rural The added attraction was the freedom
long term could be customer. The mode of payment for the to choose the investment funds
quite hazardous claim settlement/ bonus and maturity depending on the risk profile of the
customer. Investing a greater proportion
and required could be flexible (allow cash etc as the
rural markets still don’t have access to in equities gave customers over a long
additional term of over 15 years a very attractive
bank accounts) and the distributor could
reserving. be permitted to participate in claim return. However the pitfall was that the
disbursement. Product design could be investment risk was to be borne by the
left to the insurer. policy holders, as the net asset values


issue focus

are risk averse. Perhaps, also new Both preventive and curative medicare
innovative products combining elements was needed to be financed. This has led
of the traditional and the ULIPs may to emergence of a host of Health
appear. Intermediaries should also sell Insurance products. Active support from
ULIPs or traditional policies on a long term the Government and the regulator has
basis. spurred the growth of these products.
Employers have
The intricacies of these Health Insurance
recognized the Pension Products: Life expectancy at age
products have to be carefully explained
60 (in 2001) in India is 15.7 for males and
need to keep their to the customers by intermediaries,
17.1 for females which translates to male
employees healthy, pensioners expected to live to age 76 and
highlighting the benefits, and the
fit and energetic, female pensioners expected to live to age
limitations and restrictions transparently.

for increased 77. Now in 2008, this life expectancy at Training of Intermediaries: The sale of
effective age 60 should have gone up by another traditional and the new innovative
one or two years. products in life and general insurance as
production and
discussed above, requires very strong well
performance. The life insurers who bring out attractive
trained professional intermediaries.
investment oriented pension products
These intermediaries should be financial
would capture the pension market. The
services savvy and be able to intelligently
senior citizens of today are much better
understand the nuances, the intricacies
off than in previous years both health wise
of the fast changing economic, financial
and financially. In fact many of them do
and investment environments, as well as
seem to have an income more than in
were entirely dependant on the market to advise customers on their risk
their working life time. Further, the
and there were no guarantees on the management plans. The need is for
improvement in healthcare, quality of life
investment returns, similar to the risks in financial planners and risk management
and scope for working even after
Mutual Funds, where there is no specialists. The intermediaries of today
retirement has made senior citizens, a
guarantee on capital or interest. The should be conversant with not only the
group which requires attention in
prerequisite for the sale of such products life and general insurance market, but also
providing additional pension income from
is that the concepts, terms and the Mutual Funds and Securities markets
investment oriented pension products -
conditions, benefits and privileges are with an understanding of the role of the
invention of annuities with the increasing
properly explained to the customer. banks. Training institutions should be able
longevity is a crying need for Actuaries
to cater to the changing needs and to
Customers, in course of time seeing the to devise new sophisticated products.
develop strong professional skills of the
volatility in the market, have been Intermediaries should take advantage of
insurance intermediaries.
demanding limited guarantees of capital this new developing market.
and minimal interest guarantees. Insurers Health Insurance: It is of note that
are now offering such products. With the generally 8% to 12% pf GDP is possibly
present turmoil in Indian and global spent on healthcare in various countries.
markets, possibly some more limited The need for Health Insurance products
guarantees would be welcomed. Perhaps have spiraled. Employers have recognized
the solution lies in selling balanced funds the need to keep their employees
and possibly with-profit plans to first healthy, fit and energetic, for increased The author is ex-Chairman, LIC of India;
and Chairman of the Committee on
insurance customers and to those who effective production and performance. Distribution Channels.


issue focus

Need for Intermediation
AGRICULTURE INSURANCE

P.C.JAMES EMPHASIZES THAT THE NEED FOR INTERMEDIATION IN AGRICULTURE INSURANCE IS ALL THE MORE EMPHATIC,

IN VIEW OF THE HIGH LEVELS OF ILLITERACY AND THE COMPLEXITY OF INSURANCE WORDINGS.

R
isk is being increasingly seen, not for rapid development and ensuring of things, the infusion of credit and
merely as a negative and fearsome economic success for all. Society has insurance play a significant role. Along this
spectre, but more as a necessary mastered technologies, techniques and tangent of thought and policy making,
enhancer for economic advancement. services that are increasingly affordable there is a consumer oriented approach
Risk taking has been ever present in and learnable; and these can act as to move away from free, compulsory and
human lives and new developments have stepping stones for rapid development. universal schemes; to optional or voluntary
had risk taking as an inescapable necessity These technologies and services need to schemes which charge fully or partly for
in whichever field there has been move down to all the segments of society. services rendered, and such services are
innovation and advancement. People In this context the infusion of financial to be offered through a plentiful menu
across all economic activities and services into peoples’ lives is being seen of product options as well as competing
occupations know they live in a risk as critical to achieve the affordability and product/service providers.
economy. This means that to thrive and sustainability required for their
succeed today, risks have to be factored betterment. Financial inclusion thus has
in, with the chance of both a generous become a dominant theme in all policy
upside as well as a rarer but unforeseen level discussions and decision making.
chance of shocks and losses. So there is Financial literacy follows this need as a Society has
a felt need for risk management and risk pre-requisite for effective financial
mastered
transfer in all areas of activity. Earlier inclusion as knowledge and familiarity
when people had to manage their risks, grows and deepens the usage of such
technologies,
they often attempted a simplistic products for generating higher techniques and
diversification, such as by planting a efficiencies and returns. services that are
variety of crops in their fields, but this increasingly
usually resulted in spreading their In the fight against poverty and
vulnerability to the disadvantaged, it is
affordable and
resources thinly and getting poor returns.
People also tended to avoid risks considered desirable to step up the learnable; and
altogether and thus shied away from assistance to them in their effort to these can act as
investing or taking loans and fatalistically rapidly climb up the developmental ladder. stepping stones for
The emphasis has been to shift from a
took the low road to go on with the rapid development.
traditional and meager livelihood reactive, unplanned and poorly targeted
approaches. cash infusion ex-post disasters and losses,
to developing an ex-ante approach that
Today the world needs and encourages can step up the right investments and
more investments and risk taking to go manage their risks better. In this scheme


issue focus

The Indian agriculture sector, which and secondly, if agriculture is well imbued poorly educated. Carrying such insurance
commands a lowly 18% of the GDP, with the latest financial services and other to the backwoods and the forgotten
however finds nearly 70% of the inputs, Indian agriculture which is already segments that do not have ready access
population squeezed into it for their a world leader in many agricultural to the knowledge and complexities of
livelihood directly or indirectly, with at products, can be the plentiful granary of these essential products have been a
least 50% of them actually engaged in the world. vexatious challenge to policy makers and
direct farming. This makes almost all of development oriented institutions.
them close to, if not fully, being mired in The dependency of a large number of
the zone of transient or chronic poverty. farmers makes for a majority of them being In this context, the rapid rise of
Therefore there is an urgent need to either small or marginal, and this creates microfinance concepts and of rural NGOs
reach them with frugally engineered and a vicious cycle of under investments, poor has cut through seemingly insurmountable
lean-managed modern economic tools and capital formation and perpetual barriers including those relating to
practices that in more costly versions vulnerability. This stunts their capability fundamental issues such as those of moral
have served well the other sectors of the to meet not only their basic needs but hazard and adverse selection. Micro
economy, so as to increase their also excludes them from higher order mutuality principles are found to address
prosperity and well being. This has two benefits such as education, health, and and police effectively the many avenues

very liberating possibilities for the other quality of life enhancing goods and of misutilisation feared; and mutuality

economic wellbeing of the country. First, services. This impecunious environment based stewardship has brought exemplary

very large numbers in the rural sector also threatens the continuation of the discipline in financial and insurance
various insecurities they face in their behavior that is sometimes not seen even
can escape from the clutches of poverty;
lives. Ex-post relief after disasters, though in the best developed markets. Good
essential, does not give them the insurance practices thus can be learned
confidence that ex-ante measures can by neophyte insureds if mentored
do, to build their lives on the back of properly. This is the reason why the IRDA
incentives for growth and protection Micro-insurance regulations have
against future uncertainties and underlined the need for the
Market based, hardships. Thus the introduction of demonstrated ‘involvement of committed
financial products and especially people’ when insurers select NGOs and
choice oriented,
insurance products become necessary to SHGs to act as their agents. The concept
risk targeted and ensure the stability and sustainability of of commitment alone makes sense for
actuarially priced their livelihoods. bestowing enlarged functions and
products have empowerment to micro-insurance agents
Insurance, in the rural environment need
mostly remained when marketing insurance products,
to be nurtured, as contrary to the nature despite lesser onus on capacity building
the privilege of the of rural simplicity and backwardness, it as compared to other intermediaries.
financially literate tends to flourish in a high information
elites and stayed environment; and its products are Insurance faces further problems when
clear of the contractual, complex and intangible. This going deep into the countryside. There
has generally compelled policy makers to is almost no mind space or wallet share
ignorant and the
go in for compulsory, free or near free, for concepts that can mitigate the risk
poorly educated. universal types of insurance covers that in their lives. Even though experience
have generally produced sub-optimal teaches the rural citizen that risk is
results. Market based, choice oriented, pervasive in their lives, translating the
risk targeted and actuarially priced issues of risk transfer needs a whole array
products have mostly remained the of pioneering and path breaking work.
privilege of the financially literate elites Insurance awareness needs to be created
and stayed clear of the ignorant and the in the face of high levels of skepticism;


issue focus

CUSTOMER INSURER
Despite felt need, customers do not Helps the insurer to attract good risks.
appear to enjoy buying insurance - There is always a knowledge asymmetry
consumer needs considerable faced by the insurer with regard to an
motivational push to buy. insured. Intermediaries can reduce these
considerably.
Creating awareness of the products on Following on the above, the pricing of
offer and advising the methods to risks become far more accurate and Only insurers and
translate customer need into a best buy,
lowers the search costs of the insured.
helps to retain low risk customers and
price rightly higher risk customers.
intermediaries that
Insurance products are couched in a The services of the intermediary helps
understand these
complex contract, in a language that is everyone in the insurance market as requirements will
difficult to understand, and which offer otherwise the frictional costs that can
intangible benefits of a promissory arise out of asymmetric information can finally build
nature. All this needs customer hand- thrust a premium load on all
holding and assurance, to reduce the policyholders, leading to less demand
markets and
uncertainty costs of the insured. and credibility of the service offered. capture rural hearts
Intermediaries assist in crossing the many The intermediary can bring to the table and wallets.
procedural hassles involved such as filling the behavioral aspects of the insured's
the proposal form, production of risk, which even a comprehensive risk
documents etc. and thus the intermediary survey cannot bring out.
reduces the complexity costs involved.

There are needs for additional services Intermediaries can act as market makers,
such as endorsements to the policy, match buyer needs with insurer's products
renewals, refunds etc. and this enhances and service capability, give feedback on
the lifetime value of the coverage. customer demand and aspirations. micro products need to be designed for
In the unfortunate event of a claim, the The intermediary carries to the market specific local requirements and
insured needs even more handholding and new products, and helps to gauge market
reactions to new offerings proffered by demonstrated for their affordability and
liaisoning with the insurer to speed
assessment and settlement. insurers and help to discover and validate effectiveness; the process and practices
the price points at which sales can maximize. of taking cover need to be simplified and
They help to evaluate customer needs Intermediaries provide detailed the paperwork almost eliminated; the
and help to ensure that the full line of information to assist the insurer in services offered must be marked by a
insurance protection based as per life ensuring that risks are properly
cycle and occupational needs is offered underwritten and that claims are sense of urgency to indemnify, on terms
to the consumer for consideration. considered fairly and settled fast. understood by villagers and not on the
They can make meaningful the security They can help to carry out research, basis of paradigms that give comfort to
of the cover offered and the transparency test and develop new products, or new distant company bureaucracies and so on.
and understandability of the products services.
Only insurers and intermediaries that
purchased. This enhances the feeling of
security for the insured. understand these requirements will finally
build markets and capture rural hearts
The intermediary helps to shield They help insurer competitiveness by
customer against the actuarial mindset and wallets.
collection of risk specific or general
of the insurer who can callously treat information.
an insured as one of the thousands of Beyond the producer parameters lie an
policy-holders they deal with daily.
important chasm that has been least
They help the customer to evolve with They assist in policy renewal and claims understood in the Indian context, owing
the changes that are taking place in the documentation, and the lifelong
the dearth of dynamic intermediary
marketplace with regard to better retention of the customer through a
products and prices. double tier of relationships. cadres or institutions in the period when
the sector was nationalized. As it is,
They thus give the necessary risk They can give feedback on the quality
management, informational, relational reaching insurance to the average
of service rendered by the insurer and
and liaisoning services to the insured. the reputation of the insurer in the consumer is a difficult task; and reaching
market and thus enhance insurer it to difficult and unfamiliar territories is
competitiveness.
well nigh impossible unless committed


issue focus

intermediary institutions are built up, and • In the Indian context agricultural Given these difficult features of enrolling
they see at least a break even revenue insurances will be area based, that is, and covering farmers, agriculture
model for their operations. all the insureds in a homogenous area insurance intermediaries are facilitated
will have the same indemnity level for a by some of the innovations brought about
The importance and indispensability of given crop. This is owing to the fact by the regulations introduced by the
intermediaries in insurance business has that an agricultural risk is close to being IRDA. The introduction of corporate
been validated both in practice and a systemic risk or an ‘in-between’ risk agency has allowed banks, in general; rural
theory. Customers have a whole gamut of in a given area. banks; co-operative societies and banks;
values that intermediaries can bring, and panchayats and local authorities; NGOs;
insurers have even more requirement of • This creates the problem of ‘basis risk’ MFIs and NBFCs; and any other institution
intermediaries to ensure credible which means that as against the that may be specifically approved by the
underwriting, rating and connectivity standard index of loss on which the Authority to act as corporate agents. The
with their customers. Given the high whole given area is being indemnified, introduction of the broker in the
informational environment in which individual farmers will have a higher or insurance market has given a welcome
insurance works, this indispensability has lower yield, but will get the same opportunity for dedicated intermediaries
many facets some of which are described amount of claim per insured unit. to offer complex and difficult-to-
in summary form below. introduce products in the agriculture
• Product features depend on various
insurance market. Finally the
Coming to agricultural insurance, it may factors such as the area fertility,
introduction of the micro-insurance
be seen that it has its own complexities specific area climate features, the
regulations has brought in institutions that
that confront insurers and intermediaries season concerned and the type of crop
work in the heart of rural areas, namely
and thus add on to the complexities cultivated. Hence the product
the NGOs, the MFIs and the SHGs.
insureds already face when dealing with structures will vary from area to area.
other usual insurances. A few such special Given the shallow reach achieved in the
features include the following: • Premium rates are likely to be very high,
rural belt till now for voluntary insurance
and there may or may not be subsidy
covers, and the need to scale up rapidly
offered by the government.
so as to enable the farmers to move from
low risk taking to higher investment
• The marketing windows are very short
Product features and the premium needs to be collected
oriented risk, taking the following
depend on various before the risk periods, which are small,
intermediary approaches appear more
credible and sustainable.
factors such as the start.
area fertility, • Institutionalized intermediation with a
• Farmers are in distant places and need
specific area to be kept in touch with and motivated
clear committed rural upliftment
climate features, to buy despite the many handicaps in
philosophy and a business model that
encompasses multiple benefits to
the season communication and distances. The
farmers will be more sustainable and
concerned and the product updates need to be brought
credible, and can carry the awareness
to them; and where necessary, premium
type of crop building costs and other costs to
financing assistance needs to be tied
cultivated. Hence up to enable the farmer to pay the
convince and commit farmers to risk
the product premium in time.
transfer products.

structures will vary • Area based approaches to selling
• The ticket size of individual premium is
from area to area. insurance will be more viable for
likely to be small and hence to make
generating volumes and setting the
the profession viable, large numbers of
mutuality principle in lime light, and to
farmers need to be covered.


issue focus

• Creating a platform where all insurers In India insurance penetration levels are
through the intermediary can offer a so low that it can be said that virtually
menu of the full range of insurance no retail customer is insured voluntarily.
covers, as also allied financial products, The future lies in insuring all and
can help to make insurance a preferably through willing voluntary basis.
Premium financing proposition of long term interest and This calls for the transformation of the
arrangements need value to them. current mindsets, and more importantly
to be in place and the proliferation of large numbers of
• Premium financing arrangements need
intermediary credible intermediary institutions as also
to be in place and intermediary individuals; and the increased use of
capability to capability to arrange for them may prove technology to kill distances and hassling
arrange for them invaluable so that a cash flow mismatch paperwork. Regulatory facilitation will also
may prove of the farmer does not affect his be required to enable the insurers and
invaluable so that a protection. intermediaries to tackle the challenges
cash flow mismatch • A one stop service centre is needed to
of insuring all in the near term to bring
the fruits of development to all.
of the farmer does ensure all hassle reduction even when
not affect his documentation and other hassles are
protection. minimised. Communication channel
through such centers need to be kept
open and unclogged particularly when
there is rush for insurance on the last The author is General Manager,
day of coverage cut-off date, and when Agriculture Insurance Company of India
Ltd. The views expressed are the author’s
bring down the risks of adverse claims come flooding in due to covered own and in no way represent the viewpoint
selection and moral hazard. disasters and losses. of the organization.

We welcome consumer experiences.
Tell us about the good and the bad you
have gone through and your suggestions.
Your insights are valuable to the industry.
Help us see where we are going.

Send your articles to:
Editor, IRDA Journal, Insurance Regulatory and Development Authority,
Parisrama Bhavanam, III Floor, 5-9-58/B, Basheerbagh, Hyderabad 500 004
or e-mail us at irdajournal@irda.gov.in


issue focus

On the Steady Path of Progress
INSURANCE BROKERS

VG DHANASEKARAN OBSERVES THAT THE INSTITUTION OF BROKERS HAS MADE A LOT OF POSITIVE DIFFERENCE TO
INSURANCE BUSINESS IN INDIA, AND IS GROWING STRONGER BY THE DAY.

I
t has been more than five years now progress brokers have made. Have they The number of new licenses issued by
since insurance brokers have become been able to fulfill the expectations of IRDA was 26 in 2005, declined to 22 in 2006,
a part of the fabric of the Indian insurers, clients and the regulator? Where slightly improved to 27 in 2007 and is at
insurance market. The first set of broking do we go from here and how do we 10 as of August, 2008.
licenses were issued in January 2003 and ensure a healthy growth? This article
Another trend witnessed in India is the
expectations were naturally high as attempts to do a sort of reality check on
tilt that brokers have towards retail lines
stakeholders in the industry anticipated how the role of the insurance broker has
insurance. Worldwide, brokers
a paradigm shift in the way Insurance was evolved in these years.
concentrate more on large and medium
being bought and sold. In a country used
sized commercial business while retail is
to dealing with the ubiquitous “agent” Indian Broking Industry - Some
left to the agents but in India it is not so.
(who by definition is an agent of and quick statistics
One reason could be the large uninsured
represented the insurer’s interests), Growth in numbers
retail market and its growing consumer
here was a sophisticated, knowledgeable If we look at the statistics pertaining to
class. Personal lines products often drive
alternative - a person who worked on the growth of insurance brokers in India,
a developing economy’s initial growth in
behalf of his clients. we find that as against forty brokers as
insurance penetration and India may be
on 31st March, 2003 (when the broking
As we look back at these five years, we no exception to that.
industry was born), we now have 263
need to do an assessment on what
insurance brokers (as on August, 2008).
Business Volumes
In a little over five years, the number of
The most significant measure of any
insurance brokers has increased manifold.
industry’s growth and presence is the
And, the party is still on with more and
volume of business it has done. For
Personal lines more adding to the numbers.
insurance broking, we could look at
products often How it started: Forty insurance brokers aggregate premium placed or brokerage
drive a developing as on 31st March 2003 as a benchmark.
economy’s initial • Direct Brokers: 24
On an aggregate non-life market premium
growth in • Composite Brokers: 12 of approx Rs.29000 crores in FY07-08
insurance • Reinsurance brokers: 4 (excluding Agriculture Insurance Co.),
penetration and Where it is now: 263 insurance brokers
brokers have been instrumental in placing
business of around 4100 crores i.e. around
India may be no as on 4th August 2008
15% of total business. On the other hand,
exception to that. • Direct Brokers: 225
the brokers’ commission has increased
• Composite Brokers: 32 from Rs.125 crs in FY 04-05 to
• Reinsurance brokers: 6 approximately Rs.420 crs (official figures


Irda Oct08

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