Financial Daily from THE HINDU group of publications
Friday, Sep 24, 2004
Money & Banking - Insight
Insurance and rural market Cost-effective delivery system holds the key
Naren N. Joshi
The penetration of insurance in India is pitiably low at just about 1.6 per cent of GDP. If the overall market has to grow and expand, insurance companies will need to look at newer segments rather than fight for a share in the same pie.
There exist a vast potential in the rural areas where more than 70 per cent of the population lives. But it is common perception and belief among the insurance companies that it is expensive to do business in the rural areas.
Most of them are focussing only on meeting the regulatory requirements from the rural areas and do not see them as commercially viable rural business opportunities, waiting to be exploited.
One of the positive and welcome outcomes of this year's Budget, presented by the Finance Minister, Mr P. Chidambaram, has been the revival of interest in the `resurgent rural reality'. Rural India has once again begun reclaiming its rightful space in the marketing strategies of most organisations. A number of senior corporate executives have been hotfooting to the interiors. Government plans of huge investments in the rural sector will certainly have the effect of pushing up rural incomes at a much faster rate. With higher purchasing power in the hands of the bulk of rural folk, the demand for goods and services is expected to rise in tandem. This is what most marketers would be interested in.
The strong saving habit is underscored by the finding that even the relatively low-income families tend to save about a third of their annual earnings.
Annual household money flows
The average annual incomes are Rs 54,000 in segment A, Rs 40,000 in segment B and Rs 32,000 in segment C. In segment A, the annual income range is Rs 20,000-2,00,000; in Segment B it is Rs 15,000-1,50,000 and in Segment C Rs 5,000-80,000.
According to a study by FICCI-ING Insurance promoted Foundation of Research, Training and Education, a high level of awareness about insurance, particularly life insurance, is seen. About one-third of the respondents owned some insurance product or the other. Among those who owned insurance, there was a feeling of being under-insured and those who did not have one, felt the need for insurance cover. Insurance was largely seen as a risk-cover instrument and not so much as an investment option.
Penetration of insurance products
The rural market is vibrant and holds tremendous potential for growth of insurance business, particularly because of the strong saving habit.
It is worth highlighting the existence of a continuum of economic activity between rural and urban areas. Intermediate settlements, such as important villages, kasbas and tehsil towns play a key role in the process of rural-urban economic integration. Several towns are essentially overgrown villages of the past and have continued to retain their essential rural character. These towns have, indeed, proved critical to rapid economic growth of the rural areas in their hinterland as they provide them significant marketing and financial support.
While the prospects in the rural sector are promising, the real challenge lies in distributing and delivering systems cost-effectively and efficiently. It is common knowledge that the cost of building exclusive delivery systems for selling insurance would be prohibitive. However, valuable data are available on the existence of extensive network built by the rural development agencies, banks, cooperative institutions, NGOs, micro-financing institutions, women's SHGs, youth clubs, panchayats and some industrial houses in the rural sector. Insurance companies would, therefore, be well-advised to harness this infrastructure and work out collaborative arrangements with these institutions to their mutual advantage.
These institutions, having spent huge amounts for creating the infrastructure, will be happy to collaborate and recover some of their costs. The insurance companies would save on large investments that would be required to build up dedicated distribution and delivery systems and leverage the existing network at marginal costs. This, indeed, is a unique `win-win' situation.
Since delivery channels would really hold the key to a successful strategy, a look at some:
Utility of newly-emerging post-office
As per the Department of Post's Annual Report 2001-02, 1,55,279 post-offices, including 1,38,756 in rural areas, India has the largest postal network in the world. On an average, a post-office serves an area of 21.17 sq. km. and a population of 6614.
Possible rural agents to market insurance policies
Efforts were made during the study to identify the potential rural agents. While the following categories of persons could be identified as potential agents, their competency to sell insurance products has to be ascertained by companies.
TV cable operator
Youth club members
Doctors and school teachers
Registered medical practitioners and teachers are the more educated persons in a village and command considerable respect and influence. Villagers also trust them.
Many of them have worked as agents for LIC, post-office and other financial institutions.
As these persons are well-educated, they can be easily trained under the IRDA curriculum and appointed as insurance agent by the private agencies. Rural market is vibrant and holds tremendous potential for growth of insurance business. These are the markets, which would provide the future numbers and growth, and the companies which take early decision to enter these markets would certainly have the early mover advantage.
The general notion that it is expensive to do business in the rural areas due to its inaccessibility and other factors, does not hold good due to the institutional infrastructure there, which can be profitably harnessed for reaching out to these areas. The challenge of developing a cost-effective delivery system is not insurmountable and there is enough scope for innovative collaborations.
The process of penetration in the rural areas could be pushed further through an appropriate use of IT and a more pragmatic definition of `Rural'.
(The author is Chief Representative, ING Insurance International B.V., New Delhi.)
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