Implementation Strategies for Hybrid Channels for Un-served Rural Insurance Market:
Introduction:
Globalization, Privatization and Liberalization have transformed the brick and mortar Indian economy to click and mortar. Every industrial sector is inching towards its pinnacle of performance. Western media writes in length about India’s growth. There is a surge of foreign direct investment in all sectors by MNC’s. Regulations are rewritten to suit the requirements. Domestic companies are restructuring their business to meet the competition. A booming economy is always in need of huge funds to meet its infrastructure ambitions and industrial financing. Insurance sector can provide such funds. Therefore, insurance sector is of vital importance to Indian economy.
The importance of insurance sector is summarized below:
Industry has shown unprecedented growth since its inception in the year 1907. The post independence era was dominated by public sector corporations. Their gigantic empire is facing severe threat from private and MNC alliances. The economy has seen innovative insurance offerings attached with value added services. The Public sector LIC and GIC restructured their businesses to face the competition. There is a northward movement of policies insured and the premium amount collected. Though the market share of LIC has come down in recent years
The aggression to expand in urban market suddenly opened a Pandora’s Box for insurance companies. 80% of the policies registered last year came from the urban India which represents just 21% of the Indian population. The poor reach of insurance in the rural areas and the sheer numbers make rural market with tremendous potential. This poor figure is largely due to the lack of adequate distribution channels and lack of suitable products. By tapping such under-served niches, new entrants can expand the market substantially.
Distribution – A Paradigm Shift
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 does 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 India’s 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. There would be substantial shifts in the distribution of insurance in India so as to serve the ‘bottom of the pyramid’.
Conventional Insurance channels and their disadvantages in rural India:
Channel 1
Company-------Agent -------Customer
Channel 2
Agent------Informer-------Customer------Company
Traditionally an agent played vital role in reaching the masses. His vulnerability to sell differentiated service mix of insurance companies becomes the bone of contention. Most of the agents look for better commission oriented policies which he/she is getting from endowment.
Insurance companies are unable to penetrate into rural areas through agent oriented channels. Some of the disadvantages are listed below
1. Product factors
Modern channels of distribution and their disadvantages
Departing from conventional channels insurance companies adopted modern channels to sell their products. They recruited MBA’s as ‘Sales Executives’ in their team to sell advanced policies. They are provided with laptops and software to present about the policies unlike the previous agents who were carrying on through word of mouth. Huge differentiation bought in service mix also complicated the job of agents who are usually not well educated. Modern channels adopted direct marketing tools like Internet, selling through company sales executives. They are also selling through intermediaries like franchisees and NBFC’s. Some of the banks came out with their own bank assurances. Though these modern channels are well equipped to serve changing needs of customers, their success in hugely potential rural market is very less. The reasons for their failure to serve such markets are
Hybrid channels:
(Thinking out of the box)
Hybrid channels possess both the conventional and modern channel behavior. They use technology and specialization in selling consumer goods. The best part of these channels is they are run and managed by the rural people who are inaccessible to insurance companies so far. Some of the channel formats that we are going to discuss are even having the strong backup of government. Mere presence of government brings the confidence in rural people. There are four types of Hybrid channels we are going to discuss in this article. They are
This is the Indian version of Bangladeshi successful microfinance saga. In this channel format group of rural women form an association. The objectives of these groups are to provide the financial help to the needy and ensure better saving by the rural Indian women. This concept is very successful in the states like Karnataka and Andhra Pradesh. This has attracted corporates like HLL, who are looking at penetrating into rural India. HLL is now selling many of its products through this channel. This is a win - win situation for both. Now there are more than 2 lakh Sthree Shakti groups in 2 lakh villages. This shows the enormous potential of this channel. Unlike agents who are not regularly in touch with the people, these women groups reside in village and are familiar. This brings more confidence in investors. Lack of money to pay premium can be substituted by these groups. Hence continuation of the policy is assured.
e- Choupal :
One of the corporate initiatives by ITC to reach rural India has turned out to be a big channel. ITC was able to procure more number of goods in huge volumes directly from the customer. This has eliminated middlemen from the scene. ITC found the potential and initiated ‘e-Sagar’; a super market concept in rural India. The demand for such store attracted ITC to enter FMCG business where it is doing extremely well. The concept usually runs by two important persons. One Sanchalak and another Sanyojak. Sanchalak acts as middlemen between customer and company. Sanyojak gives training and acts as a bridge between the company policy and customer. Their influence on the farmers is unquestionable. Insurance companies can leverage the technology and reach factors of this e- Choupal initiatives to sell their policies.
PDS stores:
This is the retail format of government’s public distribution system. It reaches below poverty line and poverty line population. Government sells cereals, kerosene and other essential goods through this type of channel. People visit such type of shops once in a month to purchase their goods. PDS store keeper knows the market better than anybody because of his interaction with people. This PDS store can act as a retail channel to sell the insurance policies.
Rural Cooperatives:
Rural cooperatives can be divided into following types
Rural cooperative banks
APMC’s
Sugar and rice mills
These are association of farmers working for betterment of people in rural villages. Rural cooperative banks are the major source of loans for farmers. Insurance companies can sell the policies with the loan on single premium basis. APMC (Agricultural Produce Marketing Cooperatives) which governs the selling of farmer produce and its billing may play significant role in selling insurance products. Sugar and rice mills where farmers wait for longer period to get their money can also act as important sources. These cooperatives can sell the insurance packages with effectiveness.
NGO’s( Non Government Organizations): These organizations are serving rural India with a cause. People recognize and believe NGO’s more. Hence NGO’s can act as a better channel to sell the insurance product.
Strategies and implementations to reach the rural population through hybrid channels:
The 5-‘A’ approach to strategy:
Awareness:
Affordability:
References:
ITC V/s HLL, Business World, Jan 2005
www.indiainfoline.com
www.irdaindia.org
www.lic.com
2005 Report of Ministry of Rural Development, India
www.hll.com
By
Prof: A. K. Pandey and Dr. Prasad Kulkarni
Faculty, MBA department
M.V.J. College of Engineering
Channasandra Bangalore- 67
Introduction:
Globalization, Privatization and Liberalization have transformed the brick and mortar Indian economy to click and mortar. Every industrial sector is inching towards its pinnacle of performance. Western media writes in length about India’s growth. There is a surge of foreign direct investment in all sectors by MNC’s. Regulations are rewritten to suit the requirements. Domestic companies are restructuring their business to meet the competition. A booming economy is always in need of huge funds to meet its infrastructure ambitions and industrial financing. Insurance sector can provide such funds. Therefore, insurance sector is of vital importance to Indian economy.
The importance of insurance sector is summarized below:
- It encourages people to invest for their future risk covers.
- It provides security for industries and individuals
- It acts as a saving instrument.
- It generates long term funds for infrastructural development
Industry has shown unprecedented growth since its inception in the year 1907. The post independence era was dominated by public sector corporations. Their gigantic empire is facing severe threat from private and MNC alliances. The economy has seen innovative insurance offerings attached with value added services. The Public sector LIC and GIC restructured their businesses to face the competition. There is a northward movement of policies insured and the premium amount collected. Though the market share of LIC has come down in recent years
The aggression to expand in urban market suddenly opened a Pandora’s Box for insurance companies. 80% of the policies registered last year came from the urban India which represents just 21% of the Indian population. The poor reach of insurance in the rural areas and the sheer numbers make rural market with tremendous potential. This poor figure is largely due to the lack of adequate distribution channels and lack of suitable products. By tapping such under-served niches, new entrants can expand the market substantially.
Distribution – A Paradigm Shift
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 does 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 India’s 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. There would be substantial shifts in the distribution of insurance in India so as to serve the ‘bottom of the pyramid’.
Conventional Insurance channels and their disadvantages in rural India:
Channel 1
Company-------Agent -------Customer
Channel 2
Agent------Informer-------Customer------Company
Traditionally an agent played vital role in reaching the masses. His vulnerability to sell differentiated service mix of insurance companies becomes the bone of contention. Most of the agents look for better commission oriented policies which he/she is getting from endowment.
Insurance companies are unable to penetrate into rural areas through agent oriented channels. Some of the disadvantages are listed below
1. Product factors
- All insurance packages are of long duration which rural masses are not ready to accept.
- The liquidity position of these policies is very less compared to gold and land which are major sources of investment for rural people.
- The services are not bundled with crop insurance and live stock insurance. Majority of the rural India depends on agriculture which is rain fed. Therefore decision to continue with the policies depends on the outcome of the crop yield.
- Scarcity of agents in remote village is another cause for not selling insurance policies.
- Illiteracy and undivided family of insurer
- Most of the financial fraud cases happens in the rural areas ( read by agents)
- Less number of branches of insurance companies in rural India which prevents directs communication of villager
- India with 6, 20,000 villages spread in huge territory which is difficult to cover. 7% of the rural India still inaccessible for electricity and transportation.
- The face value of the insurance scheme and premium to be paid periodically is beyond the reach of 16% population who earns less than Rs 50 per day.
- Mass media reach is still discouraging in rural India. Companies should look at unconventional mode of channels.
Modern channels of distribution and their disadvantages
- Company sales team
- Customer
- Internet
- Franchisee
- Company
- NBFC
- Banks
Departing from conventional channels insurance companies adopted modern channels to sell their products. They recruited MBA’s as ‘Sales Executives’ in their team to sell advanced policies. They are provided with laptops and software to present about the policies unlike the previous agents who were carrying on through word of mouth. Huge differentiation bought in service mix also complicated the job of agents who are usually not well educated. Modern channels adopted direct marketing tools like Internet, selling through company sales executives. They are also selling through intermediaries like franchisees and NBFC’s. Some of the banks came out with their own bank assurances. Though these modern channels are well equipped to serve changing needs of customers, their success in hugely potential rural market is very less. The reasons for their failure to serve such markets are
- Lesser presence of NBFC’s and Banks in rural areas
- Companies are not in position to recruit huge number of sales executives, as it is having direct impact on its financial position
- Internet penetration is significantly less and even today we are having 35 % of the population who are illiterates.
- Franchisee may find the rural market unattractive in terms of return on investment and economic value added.
Hybrid channels:
(Thinking out of the box)
- e- Choupal
- Sthree Shakti
- PDS stores
- Rural cooperatives& mills
- Company NGO’s & Post Offices
Hybrid channels possess both the conventional and modern channel behavior. They use technology and specialization in selling consumer goods. The best part of these channels is they are run and managed by the rural people who are inaccessible to insurance companies so far. Some of the channel formats that we are going to discuss are even having the strong backup of government. Mere presence of government brings the confidence in rural people. There are four types of Hybrid channels we are going to discuss in this article. They are
- Sthree Shakti
- e- Choupal
- PDS stores
- Rural Cooperatives
- NGO’s & Post Offices
This is the Indian version of Bangladeshi successful microfinance saga. In this channel format group of rural women form an association. The objectives of these groups are to provide the financial help to the needy and ensure better saving by the rural Indian women. This concept is very successful in the states like Karnataka and Andhra Pradesh. This has attracted corporates like HLL, who are looking at penetrating into rural India. HLL is now selling many of its products through this channel. This is a win - win situation for both. Now there are more than 2 lakh Sthree Shakti groups in 2 lakh villages. This shows the enormous potential of this channel. Unlike agents who are not regularly in touch with the people, these women groups reside in village and are familiar. This brings more confidence in investors. Lack of money to pay premium can be substituted by these groups. Hence continuation of the policy is assured.
e- Choupal :
One of the corporate initiatives by ITC to reach rural India has turned out to be a big channel. ITC was able to procure more number of goods in huge volumes directly from the customer. This has eliminated middlemen from the scene. ITC found the potential and initiated ‘e-Sagar’; a super market concept in rural India. The demand for such store attracted ITC to enter FMCG business where it is doing extremely well. The concept usually runs by two important persons. One Sanchalak and another Sanyojak. Sanchalak acts as middlemen between customer and company. Sanyojak gives training and acts as a bridge between the company policy and customer. Their influence on the farmers is unquestionable. Insurance companies can leverage the technology and reach factors of this e- Choupal initiatives to sell their policies.
PDS stores:
This is the retail format of government’s public distribution system. It reaches below poverty line and poverty line population. Government sells cereals, kerosene and other essential goods through this type of channel. People visit such type of shops once in a month to purchase their goods. PDS store keeper knows the market better than anybody because of his interaction with people. This PDS store can act as a retail channel to sell the insurance policies.
Rural Cooperatives:
Rural cooperatives can be divided into following types
Rural cooperative banks
APMC’s
Sugar and rice mills
These are association of farmers working for betterment of people in rural villages. Rural cooperative banks are the major source of loans for farmers. Insurance companies can sell the policies with the loan on single premium basis. APMC (Agricultural Produce Marketing Cooperatives) which governs the selling of farmer produce and its billing may play significant role in selling insurance products. Sugar and rice mills where farmers wait for longer period to get their money can also act as important sources. These cooperatives can sell the insurance packages with effectiveness.
NGO’s( Non Government Organizations): These organizations are serving rural India with a cause. People recognize and believe NGO’s more. Hence NGO’s can act as a better channel to sell the insurance product.
Strategies and implementations to reach the rural population through hybrid channels:
The 5-‘A’ approach to strategy:
- Assurance
- Awareness
- Availability
- Affordability
- Acceptance
Awareness:
- Create awareness about the insurance products to channel members.
- Train and motivate the channel members
- Educate them on the win-win situation
- Reach maximum number of hybrid channel members
- Ensure better service mix available with intermediaries
Affordability:
- Policy should start from face value of Rs 5000- Rs 10000.
- Premium should vary from Rs 50 to Rs 500.
- People accept a policy of short duration because of their financial constraints
- People accept the policies which are liquid in nature.
- People accept life time validity policy. Though some policy lapses are there which can be filled any time depending on Monsoon and crops
- People accept the policies which are bundled like crop insurance and weather insurance.
- Hence insurance companies must develop policies of less premium value, short duration, liquid in nature and available with trusted people
References:
ITC V/s HLL, Business World, Jan 2005
www.indiainfoline.com
www.irdaindia.org
www.lic.com
2005 Report of Ministry of Rural Development, India
www.hll.com
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