New Delhi: Eric B. Campbell recounts the tale with a smile. In 1976, a savvy insurance agent in the US discovered that Campbell was dating a girl, whom he would eventually marry, and pitched the need for a life insurance policy. Campbell succumbed and bought his first policy, one from New York Life.
Thirty-one years later, Campbell, now executive vice-president and chief distribution officer, New York Life International, Llc., visits India at regular intervals to sharpen the distribution network of the company’s joint venture, Max New York Life, and perhaps train his agents to be as savvy as the one who sold him his first policy.
Campbell’s visits to India come at a time when insurers’ premia are growing at a scorching pace. The annual report of the Insurance Regulatory and Development Authority (Irda) for 2005-06 said the industry’s premium collections in April-September 2006-07 grew by 162% year-on-year to Rs29,664.64 crore.
Distribution, mainly through insurance agents and banks, has emerged as the single most important factor driving the business of Indian life insurers. The complicated nature of an insurance policy has made the efficacy of distribution channels the key determinant in a company’s profitability.
“Insurance is sold, whereas a banking product is bought,” says U.S. Roy, managing director and chief executive officer of SBI Life Insurance Co. Ltd.
“Overall, the distribution channel is the primary deciding factor in customer choice. Trust takes a long time to build up,” he adds.
But once it does, it helps in a big way. “It is primarily the SBI brand which attracted me. I need not think twice, I know what SBI is,” says V. Amrithavarshini, a Chennai-based SBI Life customer who bought a policy last September.
SBI Life, where India’s largest bank State Bank of India (SBI) has a 74% equity stake and the balance is held by the French firm Cardif SA, broke even in March 2006, its the fourth year of operations, becoming the first private insurer to do so. SBI Life leveraged the 14,000-odd bank branches of its parent SBI to push insurance policies.
In India, penetration is very low, making distribution channels important, says Roy. India’s insurance penetration (gross premium as a percentage of gross domestic product) was 2.53% in 2005, against a global average of 4.34% the same year.
The distribution channels’ importance also puts them in a position to influence customer choice. “Most people do not understand insurance; what they understand is what is conveyed by distributors,”says Rahul Aggarwal, director, Optima Risk Management Services Ltd, which carries out broking in both life and non-life products.
The influence of distribution channels on customer choice holds the potential of partially neutralizing product innovations as they would push the product that is the flavour of the month.
For instance, unit-linked insurance products, which unlike traditional insurance products such as endowment policies, allow the customers to choose from one among the investment options offered by the company. Insurers offer equity investments as an option in unit-linked products, and in the wake of the boom in the stock market, these products are gaining market share.
Thanks to the bull run in the markets, distribution channels have been hawking these products regardless of the customer’s ability to bear the risk.
The market share of unit-linked products increased to 44.78% in 2005-06 from 32.54% in the previous year. “The customers’ response to the unit-linked products in the last two years clearly reflects their preference for such products,” said the Irda report for 2005-06.
Despite the huge influence of distribution channels, some insurers feel novelty in designing insurance packages has not lost its relevance.
“Product innovation will continue to be important, but it will not give you sustainable long-term advantage unless you keep innovating,” says Vivek Khanna, director, marketing, Aviva India.