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Under the new regime on ULIPs that is supposed to be in place from 1st September, private insurance companies would lose out to LIC
Unit-linked insurance plans (ULIPs), the mainstay of insurance companies, would become less attractive from 1st September. The Insurance Regulatory and Development Authority (IRDA) has set out new norms for ULIPs that mean lower commissions and lower surrender charges, which insurance companies bemoan may be good for the consumers but would deal a body blow to the insurance companies.
Since the new norms were announced, it is widely assumed that insurance companies would now prefer to sell traditional plans such as moneyback and endowment policies. But if that is so, it would also alter the competitive landscape. Not all companies are fully geared to sell traditional plans as well. Life Insurance Corporation of India (LIC), the oldest and largest insurance company, has been selling traditional plans for decades before the advent of ULIPs and its selling machine is
well-oiled to sell such plans. On the other hand, the private insurance companies are at a serious disadvantage in this regard.
"LIC has a different model with a large network of development officers (DOs) and a huge network of agents, which can engage the customer and explain to them the intricacies of traditional plans. No private insurance company has this," says the marketing head of a large private insurance company.
"The private insurance companies are comfortable selling ULIPs, which are far easier to sell. All that our agents need to do is explain that part of the money goes into the stock market and one gets an insurance cover along with it. It is much more transparent than traditional policies," the source from the private insurance company added.
This is why ULIPs have, by far, been the top-selling product for insurance companies in the past five years. Now, with the market having to shift gears and sell more of traditional plans, the selling process and strategy will have to be different. "In this, LIC will be at a significant advantage," concedes the source. Through its network of eight zonal offices, 100 divisional offices, over 2,000 branch offices and one million agents, built over 52 years, LIC is by far the most well-versed in selling traditional plans which are more opaque and so need customer attention and engagement. LIC agents can do this far better than private insurance companies. "LIC's model of having a network of development officers allows them to engage the customer much more. A DO's job, while selling policies, is also training of agents and meeting prospective clients. Private insurance companies don't have such an extensive, well-oiled system. They rely more on younger sales people and these people tend to change jobs more often. LIC's DOs don't quit their jobs as often, with the result that customer relationships are much stronger," says an LIC source.
It remains to be seen whether private insurance companies are able to quickly change their model and come back to the growth track. But to follow LIC's model would be expensive and time-consuming and having invested hundreds of cores of capital with no returns in sight so far, it would be hard for them to engage in another round of intensive long-term investment. This is especially critical because insurance companies are now planning public offerings. They would have to go the market with a partly broken business model.
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