Setting Up An Insurance Agency - The Difficulties Involved

Setting Up An Insurance Agency

Talent Shortages
 
Both local and foreign companies often have difficulty finding sufficient talent to fuel their growth ambitions in China and India. This challenge of finding suitable recruits is even more acute in the life insurance industry, which is relatively new and lacks an established talent base. This has given rise to considerable poaching of talent and turnover rates are significantly higher than in other parts of the world. The problem is not likely to disappear in the near future.
 
Although China and India are obviously populous nations with large pools of talent in absolute terms, the demand for these candidates far exceeds the supply. This is even more acute for foreign players, who generally require higher standards for employment. According to a McKinsey survey, less than 10 percent of Chinese job candidates, on average, would qualify for employment with a foreign company. 

Effective managers are in short supply as well. We estimate that given the global aspirations of many Chinese companies, 75,000 leaders will be needed over the next 10-15 years who can work effectively in global environments; in 2005 there were only 3,000 to 5,000. Multinationals operating in China, therefore, have had to import managers, often from Hong Kong, Taiwan, and Singapore due to their language capabilities.
 
Talent shortage is not only a problem at the management level. Agent recruitment has become vastly competitive and poaching is a common phenomenon. As a result, most companies have adopted a "whoever walks through the doors" approach to recruiting. In India, of 100 candidates recruited to become agents, almost 20 either fail the initial certification or leave immediately after initial training to pursue other options. Of the remaining 80 only 40 can be considered "active" with the remaining 40 largely dormant, though they remain registered agents of the company.
 
Finally, of the 40 active agents, roughly 10 remain active beyond one year, selling at least one policy a month. Suffice to say that this practice is not sustainable in the long term; most insurers will need to find ways to improve their recruiting and retention practices.
 
Increasing Complexity in Managing the Product Portfolio 

Most Chinese and Indian insurers are constantly challenged by the need to balance market-share growth with bottom-line profitability. There is a tendency to maintain growth and market-share gains at all costs. As a result, many players rely on low-margin and short-term products to maintain their share. Currently, high valuations seem to reward this focus on growth, but selling unprofitable products will come back to haunt life insurers in the long run. Therefore, insurers would serve themselves well by constantly reviewing and rationalizing the economics of the product portfolio.
 
Furthermore, life insurers with a one-size-fits-all product portfolio are increasingly faced with the diverging needs of very different customer segments in China and India. In India, for example, players are faced with the very different needs of at least three core segments of the market--high-act-worth customers, low-income urban groups, and the rural population. 

The high-net-worth segment will eventually want to move from a narrow range of proprietary insurance products to a broad, potentially open architecture product range that spans a broader set of investment products. To a certain degree, this is happening in distribution already, so insurers are faced with the option of entering into alliances for the full suite of personal financial services products, such as mutual funds, brokerage, real estate, consumer finance, and banking - or producing some, or all, of these products in-house. 

The low-income urban group requires very different products and operating processes. Products need to be simple, with documentation that is easy to understand and complete, subject of course, to meeting regulatory requirements. Payment terms need to be flexible with low upfront payments and openness to topping up thereafter, based on the consumer's more volatile income streams. 

Finally, the rural population will require life insurance players to offer a more appealing product suite by bundling products from a range of partners to satisfy the local needs. For example, life insurers could partner with general insurance players to create a bundled product that addresses mortality risk as well as health, crop, and property-related risk. Similarly, they could partner with banks or consumer-credit companies to provide a bundled home loan product with life insurance cover.
 
Other product niches to explore include health insurance and pension offerings. In the absence of government-funded health insurance and state-sponsored pensions (excepting those for government employees), we believe there is a very substantial opportunity for these products.

The Need for Distribution Excellence

Success for Chinese and Indian insurance players will hinge on achieving excellence in distribution, in particular by raising agency productivity while simultaneously exploring new models in nonagency distribution.
 
In both China and India, tied agents, who operate at a very basic level of sophistication, make most sales. New competitors and incumbents, in principle, tread the same path here, although there are some degrees of difference in quality and training. In general, the agent turnover rate is extremely high, and productivity is skewed (the bottom third of these agency forces often produce less than 1 percent of sales). 

Productivity is low and the sales process is often a simple "product push." On the other hand, this also reflects the limited experience most customers in China and India have with financial products in general and life insurance in particular - especially in the mass market segment which is the key domain for life agents.
 
In India, the life insurance agency force has grown at a rapid pace, from approximately one million agents in 2000 to close to two million in 2007. Similar to China, overall inactivity and attrition rates of 50-70 percent are causing big headaches for life insurers. With recruitment aimed at growing the base at any cost, productivity has suffered.
 
The good news is that there is significant room for improvement. With such scale, the difference between good and poor execution will make all the difference. Through the right set of interventions, players have proven that productivity can be increased, with large differentials between the top and lowest performing players. In 2006, the top-ranking company in terms of agent productivity, among five domestic Chinese insurers analyzed by McKinsey, yielded an agent productivity of 2.8 times greater than that of the least productive company. Moreover, this productivity was not achieved by giving up growth.

As in all life markets, distribution is the key to success in China and India. However a blind rush to build scale will almost certainly be counterproductive in the longer run. The significant disparities in the productivity of the Chinese sales force and the diminishing efficiency of the Indian sales force illustrate that quality and quantity are both required to create sustainable value.

Another challenge in distribution is the need to tap into the growth opportunities in second- and third-tier cities and in rural areas. One way to capture this market potential is to design new innovative agency structures and approaches to recruiting and managing agents. Some Indian players such as BAJAJ-Allianz, ICICI-Prudential, and Reliance have employed a franchisee model to quickly expand their agent base.
 
Targeting mainly rural areas and cities without current coverage, these models typically involve recruiting current insurance agents or entrepreneurs with an existing customer base (for example, car dealers) and providing the franchisee with training and some infrastructure (for example, an IT system). This franchise business is generally separate from that of the tied-agency channel. By 2007, ICICI-Prudential had around 35,000 agents in this system and Reliance had 40,000. However, it remains to be seen whether this model can stand the test of time, as quality and mis-selling issues from this model can pose significant risks to the franchise.
 
Further, there is a more complex game to be played in accessing consumers from different sociogeographic layers. Growth is not only generated by the expansion of economic development into third-tier cities and rural areas, but also by the rapidly growing and more affluent middle class. China and India will add another 100 million middle-class households in just five years. Their needs are diverse and their full potential will only be captured by companies who recognize these differences and evolve their distribution structure to address them.
 
This means that players in these markets should look to professionalizing their agency, innovating to maximize reach, and tailoring their value proposition to cater to specific, high-potential market segments. But beyond the professionalization and innovation of the agency force, differentiated product offerings coupled with innovative sales channels will create new distribution opportunities. Benefiting from an existing branch network, bancassurance will certainly play a role in opening second- and third-tier markets as well as catering to more affluent segments who rely more heavily on their relationship managers and the banks' wealth management offerings.
 
In China, bancassurance has provided a means for new players to capture market share from the Big 3. In 2007, the three biggest attackers - New China Life, Taikang Life, and Taiping Life - sold 50 percent or more of their business through bancassurance, compared to 29 percent for the Big 3 and the 34 percent share of bancassurance in the overall market.
 
However, volume expansion into bancassurance has come at the expense of profitability; as retail banking distribution is still dominated by the four large banks (Agricultural Bank of China, Industrial and Commercial Bank of China, Bank of China, and China Construction Bank) who have enormous bargaining power over the life insurers in sharing economics from new sales.
 
In India as well, LIC sells only 1.2 percent of its premiums through bancassurance - while private players see 22 percent of their premiums coming through this channel.

We believe bancassurance, as a percentage of new sales, will probably stay at its current level in China. The reason is that most major banks are already selling life insurance and have collected the low-hanging fruit. While they are good at selling simple investment products, it is hard for them to move up the value chain and sell more sophisticated policies because their staff lack the expertise required to engage in sales of this kind. 

In India, however, bancassurance is at an earlier development stage and we expect it to continue to grow from the current share of just over 9 percent of new business to over 20 percent by 2012 as more banks take up bancassurance and improve their ability to sell insurance products to their consumers,
 
Beyond agency and bancassurance, we have also begun to see players experiment with new distribution and service models that are more aligned with specialized customer segments. For example, India's Future-Generali India Life Insurance and Future-Generali India Insurance (non-life venture) are targeting 30 percent of their business to come from malls operated by the Indian partner, Future Group. These malls had a combined footfall of 140 million in 2006. The policies will start at a low unit cost catering to this segment of customers. 

"Future-Generali has designed simple insurance covers that can be easily understood by the customer and can be sold over the counter," said G.N. Bajpai, chairman of Future-Generali. Similarly, Bharti-AXA is exploring a "shopassurance" model with its retail joint ventures. This model has been successful in the UK with retailers like Tesco. These experiments are in their early stages, and time will tell whether they are going to succeed in these markets.

China and India are markets with enormous long-term growth potential and are critical for the world's leading life insurance players. These are also markets where leading local players will gain enough size and clout to start competing outside their own markets. Simply put, these are markets where the competitive outcome will not only have repercussions within the domestic market, but have the potential to reshape the global life insurance landscape. To find out more, you can check Setting Up An Insurance Agency.

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