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Distribution system
Distribution System is the relationship between distribution channels, market segments and also products is very important. Insurance companies should continuously innovate and integrate the distribution channel, make them be the part of the occupying market and highly promoting the development of their own.
Agents are necessary for the selling life insurance due to the following reasons: Insurance is an idea that has to be explained and its usefulness clarified personally Each prospective buyer has special needs and requires specialized solutions Personalized guidance can be given only when there is a live interaction with the agent Significant amount of money is to be set aside immediately and regularly for a long term in future for a benefit, which is vague and far away. The insurer has to access the risk involved in every proposal for insurance for which the necessary information would include details on personal life styles, habits, family etc. The agent, who gets to meet the proposer closely, is in a position to provide some of this valuable information.
The distinction of channels in the developed markets are personal distribution systems and direct response systems. Personal distribution systems include all channels like agencies of different models and brokerages, banc assurance, and work site marketing. Direct response distribution systems are the method whereby the client purchases the insurance directly. This segment, which utilizes various media such as the Internet, telemarketing, direct mail, call centers, etc., is just beginning to grow.
Private Sector Companies Have to build their identity in a market where the public does not distinguish them. Remove the perception that anything that looks good is expensive Work against the people's mindset that they are not here for the long term Attract intermediaries especially agents with the requisite qualifications and attributes who can market the company and the product. Run the risk of tapping an already insured market for repeat insurance instead of tapping new virgin pockets in the market
Insurance Models
Direct Marketing by the insurance company Partner-agent model De-linked model Service Provider Model
Partner-agent model
Approved intermediary organisations act as insurance agents. Identify the customers, negotiate with insurance companies about the adequacy of products and premium rates to be paid, collect the premium Assist in clients in claim processing and settlement
De-linked model
Community based insurance facility where NGO/MFI or federation of the groups act as insurer Coverage of risk remains with the insurer Sum insured, design and pricing of products, adverse selection, collection, claim verification and settlement data collection and maintenance, assessing client satisfaction etc are undertaken internally by the insurer
Distribution Channels
Agents Formal Banks Regional Rural Banks Cooperative Banks NGOs & MFIs Post Offices Internet & Rural Kiosks & Rural Knowledge Centers
Agents
Prime channel for insurance distribution in urban areas Trust of the company & customer must Knowledge of different products Postman,School teacher, shopkeeper, gram sevikas, gram sahayaks Training & educating poses a challenge Not an optimum channel as 42 % of 600,000 villages have population of less than 500
Formal Banks
27 PSBs have19, 104 rural branches and 30 Pvt.SBs 1,111 Private banks are constrained by their lack of reach and meager branch strength Banking sector has shown propensity towards the larger size accounts Within the foreseeable future they will normally not be able to fully serve that market
Post Offices
There are about 129,000 rural post offices. Post Office itself is offering insurance products to the poor Its efficacy as an intermediary channel needs to be explored
Appointment of agent
Eligibility Life Insurance Corporation of India has eligibility requirements. You should be at least 18 years of age or above and the 12th standard pass. If you are an eligible candidate, try to locate a local branch office of LIC and schedule an appointment with the Development Officer. An interview will be conducted by the branch manager of LIC to determine if you can qualify to undergo training. The training will be conducted by the Divisional/Agency Training Center. The said training is conducted until the 100 hours is complete and it will cover the different aspects of life insurance and the business. Once youve completed the training, you will be allowed to take the pre-licensing exam by IRDA (Insurance Regulatory and Development Authority). IRDA will give you a license if you pass the exam and you can now become an insurance agent. The branch office of LIC where you applied will already absorb you into their team of insurance agents. An LIC agent should be ambitious, outgoing, can handle different personalities, and treat clients as bosses. You are free to decide on your working hours so you can pick the most convenient time to work. The good thing about becoming an LIC agent is that you have a chance to earn unlimited income. LIC will provide the needed support which includes advertising, first-rate training, and in-house consultant.
REMUNERATION TO AGENTS
Persons appointed by an insurer may be remuneration in any of the following ways:
Payment of fixed monthly salary Payment of commission related to the business done Part payment of fixed salary and part payment of commission based on business done.
Commission to agents is specified as a percentage of premiums paid. This percentage may vary between different plans of insurance. It may also vary from year to year, high in first year and lower in subsequent years. Commission may be paid right through the term of the policy or may be paid only for a fixed number of years. In India, provisions exist whereby agents who have performed certain qualifying levels of business during 10 years of the agency are entitled to receive commission for the rest of their lives under certain conditions. Commission is also payable to the heirs after the agents death. Bonus commission is also payable on the first year premium as an incentive for higher performance. This is a percentage of the eligible first year commission increases.
Agents of the LIC are entitled to term insurance and gratuity benefits. The amount of term insurance is linked to the average annual commission (renewal) earned in the three agency years preceding his death. The following other conditions also have to be fulfilled:
The agent should not have completed 50 years on the date of appointment as an agent. The death must take place before he has completed 60 years of service He must have an insurance policy on his own life for at least Rs.5000 SA and the policy must have been in force at the time of his death. He must have completed at least 3 years as an agent at the time of his death.
An agent will be eligible for gratuity if he has worked continuously for 15 years or more and his agency is not terminated due to fraud, conviction on a charge of criminal misappropriation, criminal breach of trust, cheating or forgery, acting against the interests of the insurer, offering rebate or giving false information in the agency application form with a view to defraud the insurer. The amount of gratuity is related to the renewal commission earned in the last 15 qualifying years preceding the date of claiming gratuity. 180th part of the aggregate of the qualifying year renewal commission is the eligible rate. Gratuity is admissible at the eligible rate for each qualifying year for the first fifteen qualifying years and at half the eligible rate for the subsequent ten qualifying years subject to a maximum. Gratuity is paid only once in the agency career.
Functions Of The Insurance Agent: Life insurances agent has the unique role of such a person, who enjoys the trust of two parties - the prospect and the insurer simultaneously in the same transaction. To simplify, functions of a life insurance agent could be divided into two parts, viz. 'Pre-sale functions'; 'Post-sale functions'
Function Before Sales: Contact prospects Study their insurance needs Completion of formalities for proposal of new insurance viz, Filling of form Arranging for Medical Examination Collection proofs of age and income Any other information required by the underwriters
Function After Sales: Ensure payment of renewal premiums. Assist policyholder for nomination / or change thereof. Assist the policyholder in case he wants to get loan against the policy assignment. Assist the policyholder or the claimant to comply with the requirement for getting timely settlement of claims.
Every possible adverse consequence that requires to be taken care of constitutes a need for insurance. The needs of people for life insurance can be classified as under: Stage 1 Family: Protection of the interests of the family against loss of income resulted because of the death of the bread-winner. Stage 2 Children: Provision for higher education, marriages, Start-in life. Stage 3 Old age: Post- retirement income for self and family/dependants. Stage 4 Special Needs: Disability, accidents, expenses for treatment of diseases. Loss of income as a result of sickness. Stage 5Avoiding the loss of wealth (assets) due to depreciation or inflation. Generally, all these needs exist simultaneously, but not in the same measures, for all persons. The variations between people will depend on the ages, size of families and dependants and the nature of other properties and incomes. Insurance plans of various kinds are designed to meet these one plan alone may not meet all the needs. All the needs can be met through a judicious mix of plans.
When would the premium be payable? Variations are in the frequency of payment (monthly), quarterly, halfyearly or yearly), as well as the period during which it is payable. Some plans provide for premiums to be paid for a period less than the term. Does the SA increase? This can happen because of participation in surpluses and bonus additions or because of guaranteed increases in S.A. Does the SA reduce? This can also happen, if the plan is to meet reducing liabilities under a mortgage. Are there additional benefits? These, also called supplementary benefits, may be provided by way of riders, in addition to the basic covers.
Endowment Assurance
Advantages :
Compulsory savings Old Age Provision Accumulation of Fund Types of Endowment Policies Ordinary Endowment Policy Double Endowment Pure Endowment Policy Anticipated Endowment of Money back Policy Triple Benefit Endowment Policy Marriage Endowment Policy Educational Endowment Policy
Policy Rider
A rider is a clause or condition that is added on to a basic policy providing an additional benefit, at the choice of the proposer. For example, a provision that in the event of death of the life assured by accident, the SA would be double can be a rider on an Endowment policy. This rider can be added on to a policy under any plan. The option to participate in valuation surplus can also be offered as a rider. Insurers find it convenient to have a small number of basic, plans, with riders being offered as options, so that effectively the prospect has a number of options, to choose from each plan can be taken with any one or more of the riders.
Some of the riders being offered by insurers in India are mentioned below:
Increased death benefit, being twice or even more the survival benefit. Accident benefits allowing double the SA if death happens due to accident. Permanent disability benefits, covering loss of limbs, eyesight, hearing, speech, etc. Premium waives which would be useful in the case of childrens assurance, if the parent dies before vesting date or in the case of permanent disability and sickness. Dreaded disease cover, providing additional payments (in or in installments), if the life insured requires medical attention because of specified conditions like cancer, cardiac or cardiovascular surgeries, stroke, kidney failure, major organ transplants, major burns, total blindness caused by illness or accident, etc. Guaranteed increase in cover at specified periods or annually. Cover to continue beyond maturity age for same SA or higher SA. Option to increase cover within specified limits or dates.
As per the regulations made by the IRDA in April 2002 and amended in October 2002. The premium on all the riders relating to health or critical illnesses shall not exceed 100% of the basic premium of the main policy. And the premium on all the other riders put together should not exceed 30% of the basic premium. This virtually puts a limit n the number of riders that can be offered with any policy. It is possible that this limit of 30% may be changed from time to time.
ANNUITIES
Annuity may be defined as the payment of amounts periodically during the life time of the annuitant in consideration of the payment of an agreed sum to insurance company. The Annuity is called the up-side-down application of the life insurance principle. When a person purchases a life insurance contract he agrees to make a series of payment (premiums) to the insurer in return for which the insurer agrees to pay a specified sum to the beneficiaries, in case of death of the life assured. When a person buys an annuity contract, he pays the insurer a specified capital sum, may be in installments, in return for a promise from the insurer to make a series of payments to him as long as he lives.
CLASSIFICATION OF ANNUITIES
A. By Commencement of Income:
Immediate Annuity. Annuity Due. Deferred Annuity.
D. By Disposition of Proceeds:
Life Annuity. Guaranteed Premium Annuity.
Group Insurance is a plan of insurance that provides cover to a large number of individuals under a single policy called the master policy. Group insurance schemes are used by the Government, as instruments of social welfare. Group Gratuity Schemes are related to gratuity payments. Gratuity is paid to employees who retire or die and also to those who resign, after having put in specified periods of minimum service, usually 15 years. The Group Superannuation Scheme is offered to employers in order to facilitate the funding and disbursement of pensions. Pensions are payable to employees who retire from service on attaining the age of superannuation or retirement.
REINSURANCE
Reinsurance is a contract of insurance whereby one insurer (called the reinsurer or assuming company) agrees, for a portion of the premium, to indemnify another insurer (called the reinsured or ceding company) for losses paid by the latter under insurance policies issued to its policyholders.
- Insured
- Underlying Insured
- Insurer
TRANSFERRING RISK
REINSURANCE
Risk
ELEMENTS OF REINSURANCE
Reinsurance is a form of Insurance. There are only two parties to the reinsurance contract - the Reinsurer and the Reinsured - both of whom are empowered to insure.
ELEMENTS OF REINSURANCE
(continued) The subject matter of a reinsurance contract is the insurance liability the Reinsured has assumed under insurance policies issued to its own policyholders. A reinsurance contract is an indemnity contract.
Forms of Reinsurance
PROPORTIONAL
Quota Share Reinsurer covers the same percent on each risk Surplus Share Reinsurers share based on type or size of risk
EXCESS OR NON-PROPORTIONAL
Excess Each Risk/ Excess Each Per Risk Occurrence (Catastrophe) Aggregate Excess (Stop Loss)
Per Risk Excess of Loss Reinsurer covers excess of a predetermined amount; limits apply separately to each loss
Reinsurer covers Reinsurer over a covers over a predetermined predetermined aggregate limit amount or limit of loss or loss ratio for a for all losses specific arising out of period of one event or time occurrence Per Risk Aggregate Excess of Loss Reinsurer covers over aggregate claims for a risk in a specified period of time
FORMS OF REINSURANCE
PROPORTIONAL (OR PRO-RATA)
PAY PREMIUM ON A SHARE BASIS COLLECT LOSSES ON SAME SHARE
EXCESS OF LOSS
PAY PREMIUM ON NEGOTIATED PRICE COLLECT LOSSES ONLY WHEN RETENTION IS EXCEDED.
Forms of Reinsurance
Catastrophe Excess of Loss
Covers all losses in an event Occurrence is defined as a geographic area (flood and Riot) or a time period (wind, quake, fire and winter storm) Usually Limited to two Occurrences Additional Cover Needed Sold in Layers Usually has two risk warranty
Functions of Reinsurance
Financing
Stabilization Capacity
Catastrophe Protection
Services
Financing
is growing and needs additional surplus to maintain acceptable premium to surplus ratios.
Unearned premium demands reduce surplus. Marketing considerations dictate that an insurer enter new lines of business or new territories.
Stabilization
Marketing Consideration Policyholders and stockholders like to be identified with a stable and well managed company. Management Consideration Planning for long term growth and development requires a more stable environment than an insurance companys book of business is apt to provide.
Capacity
Refers to an insurers ability to provide a high limit of insurance for a single risk, often a requirement in todays market. Reinsurance can help limit an insurers loss from one risk to a level with which management and shareholders are comfortable.
Catastrophe Protection
Objective is to limit adverse effects on P&L and surplus from a catastrophic event to a predetermined amount. Covers multiple smaller losses from numerous policies issued by one primary insurer arising from one event.
Services
1. 2. 3. 4. 5. 6. 7. Claims Audit Underwriting Product Development Actuarial Review Financial Advice Accounting, EDP and other systems Engineering - Loss Prevention
Marketing of Reinsurance
1. Broker (Intermediary) Market
Reinsurance Intermediary
Provides Business for Reinsurers Brings Parties Together - Helps Negotiate Reinsurance Terms Acts as Agent of Ceding Company Compensated by Reinsurer
Marketing of Reinsurance
2. Direct Writers
Contact Primary Insurers Directly Through Salaried Employees Frequently Assume 100% of Reinsurance Program
Special Provisions
i. The work of replacement or reinstatement must be commenced and carried out with reasonable dispatch and in any case must be completed within 12 months after the destruction or damage or within such further time as the insurer may (during the said 12 months) in writing allow, otherwise no payment beyond the amount which would have been payable under the Policy. Until expenditure has been incurred by the insured in replacing or reinstating the property destroyed or damaged the insurer shall not be liable for any payment in excess of the amount which would have been payable under the policy if this memorandum had not been incorporated therein.
ii.
iii.
If at the time of replacement or reinstatement the sum representing the cost which would have been incurred in replacement or reinstatement if the whole of the property covered had been destroyed exceeds the sum insured thereon at the breaking out of any fire or at the commencement of any destruction of or damage to such property by any other peril insured against by this policy then the Insured shall be considered as being his own insurer for the excess and shall bear a rateable proportion of the loss accordingly. This memorandum shall be without force or effect if (a) The Insured fails to intimate to the Insurer within 6 months from the date of destruction or damage or such further time as the Insurer may in writing allow his intention to replace or reinstate the property destroyed or damaged. (b) The Insured is unable or unwilling to replace or reinstate the property destroyed or damaged on the same or another site.
iv.
Floating Policy
Insurance cover for situations where the total insurable amount can be reasonably estimated but cannot be determined accurately-enough for computing correct premium, until the insurance policy comes to an end. For example, a trader will take a floating policy on a sum estimated to be large enough to cover shipments during a period (say, one year) and pays premium accordingly. As the shipments are sent out, the insurer is informed and the value of those shipments is deducted from the insured sum. This procedure is repeated until the insured sum is almost exhausted. The insurer then recomputes the premium according to the total value of the alreadysent shipments, and adjusts it against the premium paid by the trader. At this stage the trader takes another floating policy and whole process starts over again.