Insuarancesector SIDDANNA M BALAPGOL
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Transcript of Insuarancesector SIDDANNA M BALAPGOL
1
UDAY SINGH MEENAUDAY BHARATHA REDDYUDIT KHANDELWALUDIT KUMARUDIT NARAYAN SINGH
Insurance Industry
Insurance2
We face a lot of risks in our daily lives. Some of these lead to financial losses. Insurance is a way of protecting against these financial losses. For a payment (premium), an insurance company will take the responsibility of compensating your financial losses
3
INTRODUCTION AND OVERVIEW
Insurance Sector
Insurance Introduction4
What is “insurance”?Why do we need it?How has the insurance industry and the law of insurance evolved?
What is “Insurance”?5
Commercial mechanism for transferring risk and spreading loss
Economic Concept of Insurance: 1. Insurer offers policy to cover specified risks2. Insurer collects policy premiums from customers3. Insurer invests premiums4. Insurer pays money to insured customers in the event of losses covered by policy.
What is “Insurance”6
Theoretically, everybody comes out ahead (so long as losses do not exceed returns of invested premiums; and all parties honor their contractual obligations).
Theoretically, the insurance industry bridges private interests and public good.
Why do we need insurance?7
Why do we need insurance?8
Insurance Law9
Sources of Insurance Obligations Policy/Insurance Agreement Common Law (contract theories; tort
theories) Statutes Regulations
The law of insurance is multi-layered. The prudent researcher will consider each of the layers when approaching a research problem.
10
HISTORICAL CONTEXT PROVIDES INSIGHT AND PERSPECTIVE INTO TODAY’S INSURANCE
INDUSTRY
The History of Insurance
The History of Insurance11
3000 B.C.E. Mesopotamian merchants assess “risk surcharges” in transactions with caravan operators and traders to protect their capital.
1750 B.C.E. Code of Hammurabi formalizes concepts of “bottomry” and “respondentia” (protection against loss of hull and cargo, respectively) – the underpinnings of maritime insurance.
History of Insurance12
1574 Queen Elizabeth I grants to Richard Candler the right to establish an insurance office in the Royal Exchange Building for the preparation and registration of policies.
1601 Britain’s Parliament enacts the Assurances Act of 1601 creating an assurance commission for resolving policy disputes. 43 Eliz. 1 c. 12.
History of Insurance13
1666 Great Fire of London. Shortly thereafter, Nicholas Brabon opens the first fire insurance office in England. It eventually becomes The Phoenix Assurance Company. Over the next two decades, more fire insurance companies start up.
History of Insurance
1690s Fire insurance companies form the first professional fire brigades.
14
Lloyd’s of London
Late 1600s Edward Lloyd’s Coffee House. Seafarers, merchants and insurers meet for insurance business and coffee.
Lloyd’s of London
1688 Edward Lloyd starts a shipping newspaper and reads out shipping news from a pulpit in his coffee house; attracts even more shipowners and insurers
16
History of Insurance
1751 Benjamin Franklin and other capitalists start the Philadelphia Contributorship, the first successful fire insurance company in America.
History of Insurance18
Mid-18th Century Many insurance companies are more likely than banks to have substantial cash reserves. Insurance companies function as lending institutions.
Mid-18th Century Insurance underwriting is prosperous industry in America. Lloyd’s of London also draws a significant share of Colonial America’s underwriting business (capitalization).
Rise of Risk Management
1906 S.F. Earthquake
Lloyd’s underwriter, Cuthbert Heath, orders agents to “pay all claims in full regardless of policy terms”. Lloyd’s pays $50 Million in claims.
Rise of Risk Management
Public confidence in insurance industry soars; industry booms; risk management innovations; new types of insurance emerge.
20
Lloyd’s of London
Today, Lloyd’s of London is an insurance icon
Not an insurance company, but an exclusive insurance market
22
PRE TO POST LIBERALIZATION
Changing Customer Expectations
in Insurance Sector
23
Comparisons of factors influencing Insurance market
Pre Liberalisation Post Liberalisation Motivating Factor(s) for Considering Insurance
• Security 43%• Savings 14%• Tax Rebate 43%
• Security 50%• Savings* 34%• Tax Rebate 16% * children’s education, daughter’s marriage, retirement plan
Sources of Information on Insurance & Product Awareness
• Friends, Colleagues, Relatives and Agent
• Low awareness of several insurance products due to poor communication in spite of availability
• Additionally from direct mailers, consumer meets, internet & media (mass media & outdoor)• Rising level of awareness of new products of both LIC and private companies
Choice of First Policy
• Money Back 60%• Endowment 40%• Whole Life 0%
• Money Back 42%• Endowment 48%• Whole Life 10% This change in product-mix reflects maturing of the insurance customer
24
Pre Purchase Process : LIFE
Pre Liberalisation Post Liberalisation
Approach of the Agent and Consumer’s Experience
• Approach of Agent - informal and through referral• Long term family type of relationship• Often selling insurance as commodity• Average communication skills
• Approach - more professional, sometimes aggressive (in one or two private company agents) • Proactive in contacting prospects directly, often has to start from selling concept of insurance rather than product• Conducts financial health check up and then offers suitable products / solutions• Better communicator & presenter• Handles larger number of queries
Awareness & Consideration of Private Players
Private Companies Overall SECA SEC B SEC C Awareness 73% 93% 83% 50% Consideration 35% 65% 30% 10%• SEC B & C prospect not influenced much by direct contact of agent and generally takes decision only after consulting informed family member or friend.
25
Awareness of New Products- LIFE
Though most SEC A & some SEC B customers have generally heard of change in product offering after liberalization but unable to provide any details.
Only some customers have mentioned new products such as Products with multiple riders-medical, accident, waiver of premium rider Pension/retirement benefit plans Flexi premium plans – product with single premium and short time premium option
Some customers exposed to new products perceive new products similar to old ones and do not offer any additional advantage.
“ New policies are like old wine in new bottle”
26
Purchase Process : LIFE
Pre Liberalisation Post Liberalisation
Discount Offering Practices• No. of customers getting discount : 50%
• Rate of discount : 25%-50% of first year premium
• Customers getting discount : 33% (highest in Delhi)
• Rate of discount : More or less same
Policy Delivery• Mode - Registered post for LIC, hand delivered by agent in 23% cases
• Time taken Up to 1 week 0% One month 65% > 1 month 35%
• Mode - Registered post for LIC - Courier for private companies• In both cases, policy comes in attractive, protective plastic jacket• Time taken LIC Private Co Up to 1 week 5% 85% Up to one month 77% 15% > 1 month 18% 0%
27
Post Purchase Process : LIFE
Pre Liberalisation Post Liberalisation
Correspondence (other than premium notice) from Company / Agent
• Generally no correspondence from either company or agent except for late premium payment reminder from company• Agent maintained informal contact with close customers
• Mailers from both private companies & LIC on products & services, greeting cards on birthdays, anniversary and new year • Phone calls from private company call centres • Agent in regular contact for offering new products
Delay in Premium Payment• Incidence of delay high 30% (due to irregular receipt of premium notice from company / reminder from agent)
• Incidence of delay low 15% (more regular receipt of premium notice from company / reminder from agent)
28
Changing Customer Expectations - LIFE
Role of IRDA Educate public on regulatory safeguards, investment guidelines and plough back of profits
(several people had expressed concern about security of their money, credibility of private insurance company’s investment of funds in foreign markets and repatriation of profits to foreign countries)
Inform public on Social and Rural obligations of private players (several people believed that only LIC was responsible for insuring the poor)
29
Changing Trends in Savings Pattern
Pre Liberalisation Post Liberalisation Saving Instruments % of Respondents Insurance 23 Bank Deposit 28 PPF 19 NSC 12 Shares 7 Post office 7 Bonds 0 Gold 4_ TOTAL 100
Saving Instruments % of Respondents Insurance 33 Bank Deposit 44 PPF 8 NSC 0 Shares 3 Post office 3 Bonds 9 Gold 0_ TOTAL 100
* When the respondents were asked where they would invest their extra income, if any, the top responses were recorded as above
30
Other Non-life Policies (Health, Property, Accident)
Awareness of Tata AIG, ICICI Lombard, Cholamandalam, Bajaj Allianz and Royal Sundaram among private companies
No respondent interviewed had taken insurance from any private company Respondents did not feel the need to take a separate accident insurance policy, as
most of them perceived it to be covered under life insurance Companies regular in sending notice for renewal of policy (pre and post
liberalisation) Instances of paying premium by credit card observed (post liberalisation) Customers satisfied with both company and agent (pre and post liberalisation)
31
Vehicle InsuranceAccident Claim Surveyor comes unannounced and after several days, customer unable to meet him and
explain his case face to face Company approves claim for amount much less than repair estimate submitted Agent often does not take responsibility to facilitate process of claim settlement Owner has to pay repair bill and only then claim payment from company Claim settlement takes from 1 to 3 months
Theft or Total Loss Claim settlement process lengthy and cumbersome – FIR, RC, road tax and other documents
to be submitted. In theft cases, company awaits non-recovery closure of case by police before settling claim.
For this reason claim settlement takes months. General perception is that amount paid is lower than market value
Claim Settlement Process – NON-LIFE
32
Health Insurance (only one case encountered) Hospital bill has to be paid by insured and this causes heavy financial burden Claim process involves much paper work - first customer has to send request
to company for sending claim form, then he puts together all bills in original, doctor’s medical prescriptions and hospital discharge certificate giving history of illness and treatment and sends these documents along with claim form
Several queries from company on pre-existence of disease, settlement process cumbersome and time consuming
No claim settlement encountered in Property and Accident Insurance
Claim Settlement Process – NON-LIFE
33
Motor Vehicle Insurance Renewal notice should be received regularly from company/agent Collection centres should be set up for depositing renewal cheque Premium payment at petrol pumps Accident/Total Loss claims should be settled for full estimated value Claim should be settled in 30 days Inclusion / Exclusion clauses should be explained at the time of issuing policy to avoid problems at time of claim settlement
Health Insurance Non hospitalisation cases should also be entitled for claim settlement Pre-existing diseases should be detected through rigorous medical check-up at
policy issue stage, company should not reject claim for this reason later Direct payment by company to hospital through TPA arrangement Issue Medi-Card so that patient can be admitted in hospital without having to deposit heavy admission fee
Changing Customer Expectations – NON-LIFE
34
Reasons for not taking Insurance Low liquidity in insurance Low returns in insurance compared to other investments No assured regular source of income of respondent Lack of knowledge about insurance process & how it works
Future intention & inclination towards taking Insurance Among non-policy holders, SEC A generally not interested in insurance, prefer
other Investments for better returns (bank deposits) SEC B & C undecided as yet, may consider insurance in future for family
security reasons, only from LIC ( likely to be money back)
Non Policy Holders (Life)
35
General Insurance
Insurance other than ‘Life Insurance’ falls under the category of General Insurance. General Insurance comprises of insurance of property against fire, burglary etc
36
General Insurance
The non-life insurance sector is on an upswing! The non-life insurance industry in India has grown by over 16 % p.a. over the last 5 years. There is a vast business potential that lies untapped, as more and more cities enter the development phase….
37
INDIAN INSURANCE INDUSTRY
MAJOR PLAYERS OF GENERAL INSURANCE MARKET
Conduct
38
Big Companies of General Insurance
Bajaj AllianzICICI LombardTata AigNational insuranceNew India AssuranceOriental insurance
39
Bajaj Allianz
Bajaj Allianz General Insurance Company Limited is a joint venture between Bajaj Auto Limited and Allianz SE. Both enjoy a reputation of expertise, stability and strength
Bajaj Allianz today has a network presence in over 200 towns spread across the length and breadth of the country. From Surat to Siliguri and Jammu to Thiruvananthapuram, all the offices are interconnected with the Head Office at Pune.
40
Bajaj Allianz
Dealing in these sectors:-
1. Travel Insurance2. Health Insurance3. Corporate Insurance4. Motor Insurance
41
ICICI - Lombard
ICICI Lombard General Insurance Company Limited is a 74:26 joint venture between ICICI Bank Limited and the Canada based $ 26 billion Fairfax Financial Holdings Limited. ICICI Bank is India's second largest bank
Lombard Canada Ltd, a group company of Fairfax Financial Holdings Limited, is one of Canada's oldest property and casualty insurers. ICICI Lombard General Insurance Company received regulatory approvals to commence general insurance business in August 2001.
42
ICICI - Lombard
Dealing in three sector:-1. Health Insurance2. Motor Insurance3. Home Insurance
43
Health insurance
A health insurance policy will provide a cover to you and your family against sudden medical contingency or bodily injury.
44
Motor Insurance
Motor insurance protects you and your vehicle against every comprehensible risk related to your vehicle – theft or damage to it, death of the driver and passengers in an accident, and damage caused by your vehicle to another person or property.
45
Home insurance
It is imperative that you secure your home from natural and man-made catastrophes.
The maximum coverage is up to Rs. 1,00,000 for up to 6 months. The cover is available only if you are insuring the structure of your home.
46
TATA-AIG
Tata AIG General Insurance Company Ltd. is a joint venture company, between Tata Sons and American International Group
Tata AIG General Insurance Company, which started its operations in India on January 22, 2001 offers the complete range of general insurance for automobile, home, personal accident, travel, energy, marine, property and casualty, as well as several specialized financial lines.
47
TATA - AIG
Dealing in three sector:-
1. Individual 2. Small business 3. Corporate
48
Individual
“Every stage of life, you are open to immense risk and immense opportunity and Tata AIG has the ideal bouquet of insurance products for each of those risks and opportunities.”
49
Small business
Tata AIG offers a comprehensive risk solution through various Multiline Package Policies:-
Society PolicyOffice PolicyManufacturing Unit – Package Policy
50
Corporate
"From blue chips to local marketers, whatever the size of your business, Tata AIG has the insurance you are looking for.”
Accident & HealthTravelEnergyPropertyMarine
51
National Insurance Company Limited
National Insurance Company Limited was incorporated in 1906 with its Registered office in Kolkata. Consequent to passing of the General Insurance Business Nationalisation Act in 1972, 21 Foreign and 11 Indian Companies were amalgamated with it and National became a subsidiary of General Insurance Corporation of India (GIC) which is fully owned by the Government of India
52
National Insurance Company Limited
It deals in these policies:-
1. Personal line Insurance2. Rural Line Insurance 3. Industrial Line Insurance 4. Commercial Line Insurance
53
CONTRIBUTION OF LIFEINSURANCE SECTOR IN
THE INDIAN ECONOMY
Performance
54
STRUCTURE OF INSURANCE INDUSTRY
Historical Perspective
(i) Prior to 1956 242 companies operating
(ii) 1956 – 2001 Nationalisation – LIC Monopoly player
Government control
(iii) 2001 -- Opened up sector
55
Present Structure of Insurance Industry
• (i) (a) LIC – Fully owned by Government(b) Postal Life Insurance
56
Present Structure of Insurance Industry (contd...)
• (ii) Private players -1. Bajaj Allianz Life Insurance Co. Ltd.2. Birla Sun Life Insurance Co. Ltd. (BSLI)3. HDFC Standard Life Insurance Co. Ltd. (HDFC
STD LIFE)4. ICICI Prudential Life Insurance Co. Ltd. (ICICI
PRU)5. ING Vysya Life Insurance Co. Ltd. (ING VYSYA)6. Max New York Life Insurance Co. Ltd. (MNYL)
57
Private players –(contd…)
7. MetLife India Insurance Co. Pvt. Ltd. (METLIFE)8. Kotak Mahindra Old Mutual Life Insurance Co. Ltd.9. SBI Life Insurance Co. Ltd. (SBI LIFE)10. TATA AIG Life Insurance Co. Ltd. (TATA AIG)11. AMP Sanmar Assurance Co. Ltd. (AMP SANMAR)12. Aviva Life Insurance Co. Pvt. Ltd. (AVIVA)13. Sahara India Life Insurance Co. Ltd. (SAHARA
LIFE)14. Shriram Sunlam
58Present Structure of Insurance Industry (contd...)
(iii) Other likely players – 1. PNB Life Insurance2. Reliance Life Insurance3. Axa Bharti Enterprises
59
CONTRIBUTION TO INDIAN ECONOMY
Life Insurance is the only sector which garners long term savings
Spread of financial services in rural areas and amongst socially less privileged
Long term funds for infrastructureStrong positive correlation between
development of capital markets and insurance /pension sector
Employment generation
60
Aggregation of Long Term Savings
(i) Total Assets of Life Insurance Companies2002 – 2003 2,80,450 cr2003 – 2004 3,52,608 cr2004 – 2005 4,23,000 cr
(ii) Total Premium generated2002 – 2003 57,708 cr2003 – 2004 66,278 cr2004 – 2005 79,000 cr2005 – 2006 94,000 cr2006 – 2007 1,12,000 cr2007 – 2008 1,33,000 cr
61
Aggregation of Long Term Savings
(iii) Industry is growing @ 19 p.a.
(iv) Life Insurance funds account for 15% of household savings.
(v) The industry has the potential to increase the share to 20%.
62
Spread of financial services in rural areas and amongst socially underprivileged
• IRDA Regulations provide certain minimum business to be done(i) in rural areas(ii) in the socially weaker sections
• Life Insurance offices are spread over nearly 1400 centres.
• Presence of representative in every tehsil – deeper penetration in rural areas.
63
Spread of financial services in rural areas and amongst socially underprivileged
• Insurance agents numbering over 6.24 lakhs in rural areas.
• Policies sold in rural areas (2004-05) – No. of policies - 55 lakhs
Sum assured - 46,000 crores• Social security - No. of lives covered
2003-04 17.4 lakhs 2004-05 42.1 lakhs
64
Long term funds for infrastructure
• For GDP to grow at 8 to 10%, qualitative improvement in infrastructure is essential.
• Estimates of funds required for development of infrastructure vary widely.
• An investment of 6,19,600 crore is anticipated in the next 5 years (Source : SSKI India)
• Tenure of funding required for infrastructure normally ranges from 10 to 20 years.
• Major portion of these funds are routed through debt/private equity participation.
65
Long term funds for infrastructure(contd...)
• Part funding through Central Government/State Government budgetary allocations. Insurance companies invest in Central/State Government approved securities which ultimately also used for infrastructure projects.
• As per IRDA norms, the pattern of investment of life insurance companies’ funds are
(i) In Central Government, State Government and other approved securities – not less than 50%
(ii) Infrastructure – 15%
66
Long term funds for infrastructure(contd...)
• Investment in the infrastructure projects is a natural fit for life insurance companies who have long duration funds. Average Term of Life Policies is 23 years.
• Has investments of over Rs.40,000 cr in infrastructure.
• It is expected life insurance sector be able to generate approximately Rs.15,000 cr for infrastructure investment in 2006-2007 with amount increasing every year.
67
Development of Capital Markets/Economic Growth
•Industry also contributes in economic development through investments in capital market. Present level of investments is over Rs. 40,000 crore. (Mark to Market basis around 80,000 crores).
•Annual Investment of around 9000 crores in capital markets.
•Contribution to Five Year Plans 9th Plan 2,30,900 crores Last Two Years 1,70,900 crores
•
68
Development of Capital Markets/Economic Growth
Helps inculcate a sense of security by protecting earning of people in case of untimely death.Benefits to Policy Holders
2002 – 2003 20,800 cr2003 – 2004 24,200 cr2004 – 2005 28,700 cr
69
EMPLOYMENT GENERATION
• Life insurance industry provides increased employment opportunities.
• Employees in insurance sector as on 31st March, 2005 is around 2 lakhs.
• Many agents depend on insurance for their livelihood – No. of agents on 31st March 2004 – 15.59 lakhs
•Brokers, corporate agents, training establishments provide extra employment opportunities.
• Many of these openings are in rural sectors
70
SPECIAL FEATURES
Capital Intensive Industry
2002 – 03 2003 – 04
(i) Total Income 1631 cr 4053 cr
(ii) Capital employed 2219 cr 3239 cr
(Data excludes LIC)
71
GROWTH POTENTIAL
At present insurance penetration in India is quite low – 2.26% of GDP.
In Korea the penetration stands at 6.77%,
In Singapore – 6.38%.
72
PHASE OF TRANSITION
• Life Insurance industry is under the phase of infancy after 50 years of monopoly
• Competition from within and other sectors of financial market
• Needs environmental support till it reaches a comfort zone
73
FICCI CONFERENCE
“INDIAN INSURANCE INDUSTRY: NEW AVENUES
FOR GROWTH”
NEW DELHI, 19 OCTOBER 2004
Indian Insurance Sector
74
INDIA INSURANCE INDUSTRY STATUS
Insurance premiumas % of GDP
Insurance premiumper capita (Rs)
2.3%
590
0.62%
160
Number of players 14 14(1)
Premium income (Rs '000 Cr)
63 17
2004 2004
Life Non-Life
~1.2%
~280
~0.4%
~100
1 4
27.5 9.4CAGR: 23% CAGR: 16%
2000 2000
India Has Come A Long Way In The Last Four Years
Several new products and channelsSeveral new products and channels
(1) Includes 4 nationalised companiesSource: IRDA, Swiss Re
75Twelfth largest economy in the world (2002)Real GDP (USD Bn)
Note: Real GDP estimatesSource: EIU, World Bank, Analyst reports, Literature review
180370
480500570590
670770
94012901300
15101640
2390
PolandTaiwa
RussiaMexicIndia
KoreaSpain
CanadBrazilChina
ItalyUK
FranceGermaJapan
USA 102904280
Stable and low inflation ratesAverage inflation rate from 1999-2002
12.5%10.0%
6.7% 6.3%
3.8%
0.5% 0.3% 0.0%
Indonesia Brazil India Korea Thailand
Russia Poland Taiwan China
-0.2%
High, steady growth among different economiesGDP CAGR from 1993 to 2002
INDIA'S COMPARATIVE ECONOMIC POSITION IS IMPROVING Relative to Developed and Developing Economies
Stable BoP position (2002)Current account surplus as a % of GDP
0.3 0.7
-4.4 -3.4
1.9
4.7 5.4 6.38.3
India '94 Brazil China Thailand Malaysia
MexicoIndia '02 Indonesia Philippines
-13-11-9-7-5-3-1
13579
1113
India's Average GDP growth (93-02)
India(93-02)
TaiwanThailandMalaysia Brazil Japan
% GDP growth
MaxAverageMin
10
-10
-5
5
0
13
-13
India(83-02)
China S Korea
HK Mexico UK USA
76
Example: Life insurance penetration increases with affluence
0
2
4
6
8
10
12
0 1 2 31,000 10,000 100,000100
(1) PPP adjusted GDP per capita higher by a factor of ~5-6; lower income categories not shownSource: Swiss Re; NCAER
Insurance premium as % GDP
GDP per capita in USD (log scale)
Threshold for insurance pick-up
Three avenues for growth
Addition of new customers
Existing customers buy more
Extension to new geographies
1
2
3INDIA
... INSURANCE IS POISED FOR GROWTH
77
OVERALL HOWEVER INSURANCE STILL UNDER PENETRATED ...
... But still remains # 19 in insurance terms...
... with some product categories nascent
• Pension scheme
• Annuity scheme
• Health insurance
• Disability and critical illness insurance
• Professional liability
• Crop insurance
• Income protection
• Credit insurance
17
47
47
50
59
60
112
164
171
247
1055
479
India
...
China
Spain
Netherlands
Canada
S Korea
Italy
France
Germany
UK
Japan
USA1
11
19
Premium income ($ Bn)
78
AS A FULLER PRODUCT LIST COME ON OFFER LATENT DEMAND WILL GET RELEASED
Pre 2000
Endowment and money back policy - ~98% to total premium income
Products with guaranteed returns, limited, if any term
Products viewed as necessary evil for tax-breaks
Personal non-life insurance products (except motor) virtually nil
Corporates buying Non life
Today
Variety of products with riders covering disability,critical illness, accidents etc.
Increasing acceptance of variable returns and pure term products
Unit linked products
New products emerging to cater to personal needs:• Health • Travel
(overseas/domestic)• Household articles• Building
(structure/content)• Mobile insurance• Credit insurance• ...
Tomorrow
Pension scheme
Annuity scheme
Income protection
Increased term
Home building – structure and contents (penetration in India ~1% v/s ~70% in UK)
Health insurance (penetration in India 1-2% v/s 10% in UK)
Corporate and professional liability
Life
NonLife
79CUSTOMER AWARENESS IS KEY
... due to low awareness for several types of insurance
17
19
45
9
6
2Theft
Fire
Home
Accident
Health
Auto
% customers with unaided awareness of different types of insurance in metros
Low penetration of personal non life products...
2
1
2
39
12
8
Theft
Fire
Home
Accident
Health
Auto
% customers having boughtinsurance in metros
Source: Survey of about 306 customers across Delhi, Mumbai and Kanpur conducted in 2002
1. THREAT OF NEW ENTRANTS2. POWER OF SUPPLIERS3. POWER OF BUYERS4. AVAILABILITY OF SUBSTITUTES5. COMPETITIVE RIVALRY
Porter's 5 Forces Analysis
1-Threat of New Entrants.
. The average entrepreneur can't come along and start a large insurance company. The threat of new entrants lies within the insurance industry itself. Some companies have carved out niche areas in which they underwrite insurance. These insurance companies are fearful of being squeezed out by the big players.
Another threat for many insurance companies is other financial services companies entering the market. What would it take for a bank or investment bank to start offering insurance products? In some countries, only regulations that prevent banks and other financial firms from entering the industry. If those barriers were ever broken down, like they were in the U.S. with the Gramm-Leach-Bliley Act of 1999, you can be sure that the floodgates will open.
2-Power of Suppliers.
The suppliers of capital might not pose a big threat, but the threat of suppliers luring away human capital does. If a talented insurance underwriter is working for a smaller insurance company (or one in a niche industry), there is the chance that person will be enticed away by larger companies looking to move into a particular market.
3-Power of Buyers
The individual doesn't pose much of a threat to the insurance industry. Large corporate clients have a lot more bargaining power with insurance companies. Large corporate clients like airlines and pharmaceutical companies pay millions of dollars a year in premiums. Insurance companies try extremely hard to get high-margin corporate clients
4-Availability of Substitutes
This one is pretty straight forward, for there are plenty of substitutes in the insurance industry. Most large insurance companies offer similar suites of services. Whether it is auto, home, commercial, health or life insurance, chances are there are competitors that can offer similar services. In some areas of insurance, however, the availability of substitutes are few and far between. Companies focusing on niche areas usually have a competitive advantage, but this advantage depends entirely on the size of the niche and on whether there are any barriers preventing other firms from entering.
5-Competitive Rivalry.
The insurance industry is becoming highly competitive. The difference between one insurance company and another is usually not that great. As a result, insurance has become more like a commodity - an area in which the insurance company with the low cost structure, greater efficiency and better customer service will beat out competitors. Insurance companies also use higher investment returns and a variety of insurance investment products to try to lure in customers. In the long run, we're likely to see more consolidation in the insurance industry. Larger companies prefer to take over or merge with other companies rather than spend the money to market and advertise to people.
86
Thank You