- Published: July 29, 2022
- Updated: July 29, 2022
- University / College: Princeton University
- Language: English
- Downloads: 36
RiskInvestopedia defines insurance as a contract in which an individual or entity receives financial protection or reimbursement against losses from an insurance company.[i]The insurance industry works on the principle of large numbers. Insurance CompanyCustomerProtectionIn this context, an insurance broker is an intermediary who represents the customer and helps or assists in procuring insurance. By definition, the insurance broker in an independent entity. The key distinction between an insurance broker and an insurance agent is that the agent represents an insurance company while the broker represents customers. The insurance brokerage and service sector encompasses insurance distribution, consulting, claims processing and other administrative services across various lines of property & casualty insurance, life insurance, retirement services and health insurance[ii].
Need for Insurance Broking
While it is normal to assume that the phenomenal growth in information technology would have reduced the need for insurance intermediaries, we should analyse this under the context of global de-regulation. Prior to 1990’s, information asymmetry and transaction costs were the prime reasons for insurance broking industry. Information and communication technology revolution has greatly reduced the inefficiencies in the insurance market but de-regulation and liberalization of insurance markets has resulted in greater product differentiation, which results in lower market transparency and thus increased need for intermediaries.
Functions of an Insurance Broker
The different functions of an insurance broker can be classified as follows[iii]:-
Information function :-
Provide information and advice to clients based on their insurance needsEconomies of scale and scope make it cheaper for a broker to search the insurance market than an individual buyerCan provide unbiased information on insurers’ skills, capacities, financial strengths and reputationDeeper understanding of client’s business can help provide greater risk information to insurers reducing moral hazard and adverse selection problemsInsurers can use this information to better price their policies
Market-maker function:-
Make the complex and multidimensional process of matching insurers with buyersIncrease industry transparency and competitivenessLeverage business volume to gain favourable terms and conditions for smaller and mid-sized insurance buyers
Transformation function:-
Perform pooling or aggregation function for reinsurance
Reduction of participation costs:-
Reduce time through expertise to execute complex , cross-border risk trading and risk management functionsParticipation costs are significant for small and mid-sized businesses
Service function:-
Increased efficiency in deal executions (purchase of insurance), deal monitoring and maintenance ( changes in risk profiles, renewals), claims management and arbitration
Insurance broking in India
Insurance broking industry in India came into existence after the recommendations of the Malhotra committee. Insurance Regulatory and Development Authority (IRDA) was established in 1999 with the passing of IRDA Act of 1999 on 19th April, 1999. Insurance broker regulations came into effect from 16th October, 2002. As a result, licenses were issued by IRDA and broking operations came into being with the sole purpose of rendering professional service to the insurance buyers. Regulation(1)(i) of IRDA (Insurance Brokers) Regulations, 2002 defines insurance broker as a person for the time being licensed by the authority under regulation 11, who for a remuneration arranges insurance contracts with insurance companies and/or reinsurance companies on behalf of his clients[iv].
Market overview
As data for Indian insurance broking sector was not publicly available, we have used revenue/growth of insurance sector as proxy for the growth expected in insurance broking sector. The insurance sector grew at a CAGR of10. 7% in the period 2007-2011 as shown below. The total market value of insurance sector amounted to $74. 2 billion in 2011. Even though we see that the insurance sector is growing rapidly, India still accounts for only 5. 7% of the insurance sector in Asia. In the Indian context, the penetration of insurance broking is about 20%. Next, we compare the share of insurance broking sector of Asia in the global market and also, share of India in the Asian insurance broking market. Global insurance broking sector amounted to $ 43. 7 billion in 2011 of which Asia accounted only for $4. 6 billion.
Market segmentation
According to IRDA, brokers are classified into 3 types. The ‘ direct broker’ is authorized to arrange for the placement of insurance of clients, with insurers in India. He may deal with both life and general insurance. The ‘ reinsurance broker’ is authorized to place reinsurance business of clients who are insurers, with reinsurers. The ‘ composite broker’ is authorized to handle both direct business as well as reinsurance business. As on 30th June, 2012, the total number of in-force licenses stood at 333, out of which 284 are direct brokers, 43 are composite brokers and 6 are reinsurance brokers.
Market outlook
Though data for growth of insurance broking sector is not available, we can reasonably assume that the growth of insurance broking sector is dependent on insurance sector. The insurance sector is all set to grow at a projected rate of 16. 3% during 2011-2016.
Indian Insurance Broking Landscape
Types of people/institutions starting insurance broking companiesRecent regulationsCompanies vs complexityGeograpical analysisInsurance business divided by geography and Insurance broking divided by geography – opportunity ? Different insurances segregated by complexity and thus attractiveness for brokingGeneral/standard products and what is potentialBespoke contracts esp in certain areas? Marine, hull, aircraft.. where premiums are highOut of the 333 licenses that are currently mentioned in the IRDA annual report, closer scrutiny revealed very interesting results. Only 284 are active licenses and 49 licenses have been cancelled or are under the process of being revoked. Out of the big three in the insurance broking world – Marsh, Mclennan and Company (MMC), Aon and Willis, only MMC and Aon are still active while Willis’ license was cancelled by IRDA in 2010[1]due to regulatory violations. The results of the analysis are shown below.
Division by type of licenses
86% of the licenses are direct broking licenses through which brokers operate in either general insurance or life insurance or both. There are only 4 standalone reinsurance brokers and 35 composite brokers i. e. have licenses to operate in both reinsurance and direct broking businesses.
Geographical distribution of insurance broking companies in India
Out of the total 284 active insurance broking companies, 55% are concentrated in Maharashtra (Mumbai and Pune) and NCR region (New Delhi, Noida and Gurgaon). Tamil Nadu(Chennai, Coimbatore and Trichy) and West Bengal (Kolkata) come next with 10% each. The other states in which broking companies have a presence are Andhra Pradesh( Hyderabad), Punjab(Chandigarh and Ludhiana), Karnataka(Bangalore), Kerala(Cochin and Thrissur), Gujarat(Surat, Ahmedabad, Rajkot, Bharuch), Madhya Pradesh( Bhopal, Indore), Uttar Pradesh(Lucknow, Agra, Kanpur, Varanasi) and Rajasthan(Jaipur). Firstly, Out of the 28 states in India, only 12 have broking companies present in themMumbai, Kolkata, New Delhi , Hyderabad and Chennai alone have 189 out of 284 licenses. This means that Tier II and Tier III cities hardly have any broking presence
Segmentation by promoters
While most of the insurance broking companies are promoted by individuals, a few MNCs have set up shop in India mainly to cater to their global clients. Also, many Indian conglomerate houses like Tatas, Birlas, Ambanis and Hindujas have entered this business.
Insight into Indian insurance consumer
Ernst & Young’s ” Voice of the customer : Time for insurers to rethink their relationships” was studied and the key findings are listed below.
Key findings on Life and Pensions
Indian customers are satisfied and confident on the insurance companies and their products contrary to the common perception that confidence in the industry is low. The mean customer satisfaction rating among the surveyed customers was 7. 9/10 compared to 7. 3/10 for UK and ChinaIndian insurers’ quality of service is below that of other service sectors. 55% of low income customers and 50% of middle and high income customers believe that the service levels provided by insurers is below par. The three main issues where service levels could be improved were:-Claims ManagementGeneral AdministrationResponse times and communicationMis-selling of products is a key concern. While customers are satisfied at the time of purchase, at a later date they realize that some features of policies are not in line with initial promises of agents74% of Indian customers who purchase insurance research before making a purchase compared to 44% in China and 37% in UK. Most consumers focus on price competitiveness and hence, online research and price comparison are proving to be key drivers in purchase decisionsIntermediaries play an important role in selling of insurance. Personal interaction with the consumers is key to influence their purchase decision.
Key findings on non-life insurance
Analysis of the Insurance Broking Industry : External Strategic Context
USA
Rivalry Among Competitors
Factors influencing Rivalry
Rating
Degree of Industry Concentration
Low
High
Industry growth rate compared to economy growth rate
Lower
Higher
Fixed or Storage costs as percentage of total costs
High
Low
Differentiation creating price premiums
Low
High
Switching cost for switching to other competitors
Low
High
Openness of terms of sales
Secret
Open
Excess capacity in the industry – present and expected
Large
NA
Small
Strategic stakes – competitors only in this industry or diversified
High
Low
Homogeneity of Competitors
Low
High
RIVALRY: Overall Rating
Low
High
Market is dominated by the big 3 – MMC, Aon and Willis (combined 2011 revenues $26 billion) but there are over 4000 players in the market and competition in mid and small market is intense but less in big bracket businessThere are a large number of players (4000+) with revenues of $23 billion but the top 3 constitute – Aon, MMC and Willis – constitute most of the marketInsurance broking industry is to grow at 3. 0% in 2012 and 3. 5% in 2013Being a service business, fixed cost is relatively low but various states in the U. S have different locked-in capital requirements. Further, recent crisis has led to higher capital requirements globallyMajority of the firms are non-differentiated but global firms like Aon, MMC and Willis provide specialist consulting services, global capabilitiesMarket prices, open and highly competitive. Specialist brokers have capabilities that can’t be imitated by others and hence pricing can be complex in very few insurance classes
Barriers to exit
Assets specificity – assets cannot be elsewhere
High
Small
Cost of exit – if exiting industry
High
Small
Social & Govt restrictions on exiting industry
High
Small
Strategic interrelationships between business & others
High
Low
Emotional Barriers
High
Low
EXIT BARRIERS: Overall Rating
High
Low
Minimal barriers to exit are present for insurance brokers. High specialised knowledge assets are key in this industry in big bracket businss but in mid and small business, it is moderateExit costs are low as it is services business with no long term obligation to customersU. S states regulate insurance. Government restrictions are minimal
Barriers to Entry
Factors Influencing Entry
Rating
Economies of scale
Small
Large
Product differentiation creating price premiums
Low
High
Brand identity requiring brand building by entrant
Low
High
Switching cost for switching to other competitors
Low
High
Access to channels of distribution
Easy
Limited
Capital requirements
Small
Large
Access to technology/Distribution channels
Easy
Restricted
Access to raw materials
Easy
Restricted
Other Advantages Independent of Scale
Low
High
Expected Retaliation
Low
High
Government protection against entry
None
High
ENTRY BARRIERS: Overall Rating
Low
High
Moderately high barriers to entry due to lock-in capital, license regulations and training requirements. Further, as it is state regulated, different requirements in each U. S StateLarge economies of scale exploited for lowering cost of commoditized products. Global presence can also be leveraged for big global clientsDifferentiation present for risk management/customized insurance products and consulting servicesBig 3 are established brands. There are several large regional playersOnline channels are easily accessible. Hence. access to potential customer base is easyCapital requirement differs in each state but is moderately highAccess to technology is easy and it is leveraged for business especially after Graham-leach-Bliley actInsurance policy freely available for sale in the market and customers are essentially the entire country populationFree market rules. Licensing and regulation exists only to prevent frauds
Buyer Power
Factors influencing Buyer Power
Rating
Intrinsic Leverage
Buyer Concentration relative to industry
High
Low
Volume of Buyers Purchases
Large
Small
Availability of substitutes to industry’s products
Many
Few
Switching costs (to alternate products)
Low
High
Buyer Information/Expertise
High
Low
Buyer’s threat of backward integration relative to industry’s threat of backward integration
High
Nil
Low
Price Sensitivity
Product Differences
Small
High
Brand Identity
Low
High
Contribution to quality of buyer’s final product/experience
Low
High
Contribution to cost of buyer’s final product
High
Low
Buyer’s profitability
Low
Nil
High
BUYER POWER: Overall Rating
Low
High
Buyers tend to be either individual consumers or medium to large businesses. Their negotiating position tends to be moderately high as they can get quotes from multiple brokersLarge number of small buyers, with low switching cost lead to improving quality of the industrySubstitutes such as direct sales , online exist only for standard products. Complex products need customer specific risk underwritingLow switching cost due to 4000+ firmsCost can escalate in protracted claims management cases. Even otherwise, costs in searching and pitching to customers is high due to nature of industry (services, fee based in U. S)
Supplier Power
Factors influencing Supplier Power
Supplier Concentration relative to your industry concentration
High
Low
Availability of substitute inputs for your industry
Few
Many
Switching cost for switching to other suppliers/alternate inputs
High
Low
Supplier’s threat of forward integration
High
Low
Your threat of backward integration
Low
High
Contribution to quality of your product
High
Low
Contribution to cost of your final product
High
Low
Your importance to supplier
Low
High
SUPPLIER POWER: Overall Rating
High
Low
High attractiveness as bargaining power of suppliers is low. Insurers depend on brokers for business, especially higher quality business and hence provide rebates/discounts to policy premiums. Almost 60% of insurance business in U. S is placed by brokersLarge no. of suppliers exist. There are over 1000 insurance companies in USLow no. of substitutes as direct selling/online is the only substitue for insurance brokers and it is not developed still. Investment banks entered this sector but have not been successfulSwitching cost is moderately high as entire clientele is through broker onlyInsurance brokers are into risk consulting and self-insurance setup practices that may pose some threat to insurersInsurance companies expect low claims ratio and hence quality should be maintained due to supplier pressureInsurance companies expectation of lower claims ratio leads to careful selection of broking customers. There is a loss of opportunity here
Complimentor Power
Factors influencing Complementor Power
Rating
Complementors can influence buyer decision/choice/ Switching Cost
High
Low
Concentration of Key Complementors relative to industry
High
Low
Assymetric integration. Complementors can invade your space whereas you can not
High
Low
Ease of Unbundling : Customers can purchase & use complement independently
Difficult
Easy
Availability of substitutes to complementor’s product
Few
NA
Many
Switching cost for the industry
High
Low
Market Growth Rate
Slow
High
COMPLIMENTOR POWER: Over all Rating
Low
High
Moderately complementor power as limited to only certains products in general insurance categories – auto insurance, travel insurance etc. Insurance typically of a lower cost than the complementing product to buyer. However, having insurance from a reliable provider becomes paramount in that case and hence the need for a broker to have reliable information. Threat also exists to the broker from the auto car dealer/ travel agent as the buyer is in process of being offered a bundled product.
Threat from Substitutes
Factors influencing Threat from Substitutes
Rating
Availability of close substitutes
High
Low
Switching cost for switching to substitutes
Low
High
Substitute’s price-value equation
Better
Worse
Profitability of the producers of substitutes
High
Low
SUBSTITUTE’s THREAT : Overall Rating
High
Low
Low threat from substitutes. However, this is on the rise with the growth of online retailing of insurance products, entry of insurance and other financial services companies into insurance brokingHigh as for standard products, direct sales from insurers is also on the rise. Further customers shop for price only in standard productsLow cost of switching, especially with the advent of online web interfaces for standard transaction based services. For specialized risk consulting, it is moderateSubstitute channels are on the rise as technology is leveraged but this hasn’t changed the industry profile in the last decade and the top players continue to dominate especially online direct sales.
Government Actions
Possible Government actions
Rating
Industry protection
Low
High
Industry regulation (pollution, etc.)
High
Low
Customs and tariff restrictions abroad – bilateral arrangements
High
NA
Low
GOVERNMENT ACTIONS: Over all Rating
Low
High
Strict government regulations lower industry attractiveness for insurance brokingFree market enterprise and only CPD is required every yearHighly unregulated but some restrictions may be state specific
Adjacent Industries
” Captive insurance” have been emerging especially for large conglomerates as alternatives to insurance for risk management. Captive insurance companies are insurance companies established with the specific objective of insuring risks emanating from their parent group or groups, but they sometimes also insure risks of the group’s customers[2].
Overall attractiveness
INDUSTRY PROFITABILITY
High Levels of Industry ProfitabilityWeak RivalryDifficult to EnterWeak BuyersWeak SuppliersPoor SubstitutesWeak Complimentors
5
4
3
2
1
Strong RivalryEasy to EnterPowerful BuyersPowerful SuppliersClose SubstitutesPowerful ComplimentorsLow Levels of Industry Profitability
Rivalry
Entrants
Buyers
Suppliers
Substitutes
Complimentors
INDUSTRY ACTORS
India
Rivalry Among Competitors
Factors influencing Rivalry
Rating
Degree of Industry Concentration
Low
High
Industry growth rate compared to economy growth rate
Lower
Higher
Fixed or Storage costs as percentage of total costs
High
Low
Differentiation creating price premiums
Low
High
Switching cost for switching to other competitors
Low
High
Openness of terms of sales
Secret
Open
Excess capacity in the industry – present and expected
Large
NA
Small
Strategic stakes – competitors only in this industry or diversified
High
Not allowed by IRDA
Low
Homogeneity of Competitors
Low
High
RIVALRY: Overall Rating
Low
High
Rivalry is based primarily on services offered due to non-differentiated product. Stringent regulations and a huge potential market lead to moderate competitive rivalry.
333 registered brokers in India. Market unsaturated as brokers geographically spread out in the major metropolitan cities. Insurance industry showed a decline of 1. 57% in life insurance while a growth of 24. 19% in non-life insurance in FY 2011-12The regulations stipulate a lock-in capital requirement of 50 lakh – 2. 5 crore. Also, theoretical and practical training imparted by an institution which is recognized by IRDA is required for license approval. Market prices, open or else tariffed by IRDA
Barriers to Exit
Rating
Assets specificity – assets cannot be elsewhere
High
Small
Cost of exit – if exiting industry
High
Small
Social & Govt restrictions on exiting industry
High
Small
Strategic interrelationships between business & others
High
Low
Emotional Barriers
High
Low
EXIT BARRIERS: Overall Rating
High
Low
Minimal barriers to exit are present for insurance brokers.
Business in mostly transaction based and though knowledge assets are required, it is not keyPaid-up capital can be recovered easily. No regulations are applicable to exit.
Barriers to Entry
Factors Influencing Entry
Rating
Economies of scale
Small
Large
Product differentiation creating price premiums
Low
High
Brand identity requiring brand building by entrant
Low
High
Switching cost for switching to other competitors
Low
High
Access to channels of distribution
Easy
Limited
Capital requirements
Small
Large
Access to technology/Distribution channels
Easy
Restricted
Access to raw materials
Easy
Restricted
Other Advantages Independent of Scale
Low
High
Expected Retaliation
Low
High
Government protection against entry
None
High
ENTRY BARRIERS: Overall Rating
Low
High
Moderately high barriers to entry due to lock-in capital, license regulations and training requirements.
Large economies of scale are exploited for lowering cost of commoditized productDifferentiation present for risk management/customized insurance products. No established brand currently exists in insurance broking sector. Online channels are easily accessible. Hence access to potential customer base is easy. Paid-up capital of 50 lakh – 2. 5 crore locked in for as long as the broker is in business. Insurance policy freely available for sale in the market. Government protection against entry is high due to strict IRDA regulations and guidelines.
Buyer Power
Factors influencing Buyer Power
Rating
Intrinsic Leverage
Buyer Concentration relative to industry
High
Low
Volume of Buyers Purchases
Large
Small
Availability of substitutes to industry’s products
Many
Few
Switching costs (to alternate products)
Low
High
Buyer Information/Expertise
High
Low
Buyer’s threat of backward integration relative to industry’s threat of backward integration
High
Nil
Low
Price Sensitivity
Product Differences
Small
High
Brand Identity
Low
High
Contribution to quality of buyer’s final product/experience
Low
High
Contribution to cost of buyer’s final product
High
Low
Buyer’s profitability
Low
Nil
High
BUYER POWER: Overall Rating
Low
High
Buyers tend to be either individual consumers or medium to large businesses. Their negotiating position tends to be moderate as they can get quotes from multiple brokers but the buyers are highly isolated and fragmented in nature.
Large number of small sized buyersSubstitutes such as direct sales exist only for standard products. Complex products need customer specific risk underwritingLarge number of small buyers, with low switching cost lead to improving quality of the industryCost can escalate in protracted claims management cases. Even otherwise, costs in searching and pitching to customers is high due to nature of industry
Supplier Power
High attractiveness as bargaining power of suppliers is low. Insurers depend on brokers for business, especially higher quality business and hence provide rebates/discounts to policy premiums. Though the necessity of insurance brokers to be independent and unbiased along with regulatory conditions reduces the bargaining power of suppliers further and increase attractiveness
Large no. of suppliers exist. There are close to 40 insurance companies in India. Direct selling is the only substitute for insurance brokers and it is not developed stillSwitching cost is moderately high as entire clientele is through broker onlyInsurance companies expect low claims ratio and hence quality should be maintained due to supplier pressureInsurance companies expectation of lower claims ratio leads to careful selection of broking customers. There is a loss of opportunity hereBrokers are very important to insurance companies. Close to 20% of insurance business in India is placed by brokers
Complimetor Power
Factors influencing Complementor Power
Rating
Complementors can influence buyer decision/choice/ Switching Cost
High
Low
Concentration of Key Complementors relative to industry
High
Low
Assymetric integration. Complementors can invade your space whereas you can not
High
Low
Ease of Unbundling : Customers can purchase & use complement independently
Difficult
Easy
Availability of substitutes to complementor’s product
Few
NA
Many
Switching cost for the industry
High
Low
Market Growth Rate
Slow
High
COMPLIMENTOR POWER: Over all Rating
Low
High
Moderately complementor power as limited to only certains products in general insurance categories – auto insurance, travel insurance etc.
Insurance typically of a lower cost than the complementing product to buyer. However, having insurance from a reliable provider becomes paramount in that case and hence the need for a broker to have reliable information. Threat also exists to the broker from the auto car dealer/ travel agent as the buyer is in process of being offered a bundled product.
Threat from substitutes
Factors influencing Threat from Substitutes
Rating
Availability of close substitutes
High
Low
Switching cost for switching to substitutes
Low
High
Substitute’s price-value equation
Better
Worse
Profitability of the producers of substitutes
High
Low
SUBSTITUTE’s THREAT : Overall Rating
High
Low
Low threat from substitutes. However, this is on the rise with the growth of online retailing of insurance productsAvailability of substitutes is moderate as for standard products, direct sales from insurers is possibleSwitching cost is low, especially with the advent of online web interfaces. Neutral as substitute channels are still underdeveloped, especially online direct sales.
Government actions
Possible Government actions
Rating
Industry protection
Low
High
Industry regulation (pollution, etc.)
High
Low
Customs and tariff restrictions abroad – bilateral arrangements
High
NA
Low
GOVERNMENT ACTIONS: Over all Rating
Low
High
Strict goverrnment regulations lower industry attractiveness for insurance broking
FDI investment is capped at 26% and moderately high entry. Futher CPD required every year. Licensing to be done every 3 yearsIndustry regulation is moderately high as broking premium capped (as % of premium) by IRDA on all classes of insurance
Adjacent Industries
No such players are existent in India. However, abroad the concept of ” captive insurance” has been emerging especially for large conglomerates as alternatives to insurance for risk management. Captive insurance companies are insurance companies established with the specific objective of insuring risks emanating from their parent group or groups, but they sometimes also insure risks of the group’s customers.
Overall attractiveness
INDUSTRY PROFITABILITY
High Levels of Industry ProfitabilityWeak RivalryDifficult to EnterWeak BuyersWeak SuppliersPoor SubstitutesWeak Complimentors
5
4
3
2
1
Strong RivalryEasy to EnterPowerful BuyersPowerful SuppliersClose SubstitutesPowerful ComplimentorsLow Levels of Industry Profitability
Rivalry
Entrants
Buyers
Suppliers
Substitutes
Complimentors
INDUSTRY ACTORS
Overall Assesment
2012
2015
What is most important
What can we influence
Rivalry
Barrier to Entry
Buyer Power
Supplier Power
Complementor Power
Threat of Substitutes
Government Action
Adjacent Industries
Overall Attractiveness
ive Forces
Analysis
Using Porter’s five forces we analyzed the attractiveness of the Indian and U. S Insurance broking sector on 7 parameters:-Rivalry from competitorsBargaining power of suppliersBargaining power of buyersThreat from substitutesBarriers to EntryBarriers to ExitGovernment Actions
Methodology
The insurance broking industry in India was studied from secondary data from IRDA Annual report 2011-2012, Marketline industry reports on Indian insurance and broking sectors and Insurance Brokers Association of India. The US broking industry was studied from Moody’s report on Insurance brokers, Moody’s analysis of Marsh & Mclennan Companies (MMC) and MMC’s annual report. We calculated the attractiveness of each of the parameters and gave it a score (1-5) and averaged the score across the different parameters to come with an overall attractiveness score. The detailed approach is illustrated in Appendix II. The graphical representation of the results is given below for both Indian and the U. S A.
Results
In the graph above, we can see that the U. S insurance broking industry is more attractive due to government actions and the bargaining powers enjoyed buy the buyers i. e. customers purchasing insurance while the Indian industry has higher barriers to entry mainly due to protection by IRDA guidelines. The differences observed above are typical of an emerging market and developed market.
Insurance Industry value chain
In this section, we look at the entire value chain for an insurance company from product development to financial management of the assets. We also have identified the areas in the value chain that the insurance broker adds value to the insurance company and the customers.
IRDA Insurance Broking Guidelines – Key points
Regulating Authority
Insurance Regulatory and Development Authority
Paid-up Capital Requirement
Direct Broker – INR 50 LakhsReinsurance Broker – INR 200 LakhsComposite Broker – INR 250 Lakhs
FDI Limit
26%
Remuneration
Direct general Business: -1. 10% on law-mandated insurance covers2. 12. 5% on other tariffed products3. 17. 5% on non-tariffed productsIndividual Life Insurance:-1. 30% of 1st year premium & 5% on subsequent yearsAnnuity :-1. 2% of single premium policies2. 7. 5% of 1st year premium in multi year policies and 2% on renewalsGroup Insurance:-1. 0. 5% to 7. 5% of risk premium
Global trends in the Insurance Broking Industry
Globally, the clout of brokers has increased despite the advances in information and communication technology. This has benefitted the customers as brokers’ pressure has driven down insurance prices by squeezing insurers. Further, major players like Aon, MMC and Willis have grown inorganically by M&As and the industry has seen a lot of consolidation over the last 10 years. Since 2000, deregulation in Europe and other parts in the West has led to many new entrants like investment banks, internet companies offering financial services and specialized risk consultants. The traditional revenue model in the broking industry has been transaction based i. e commissions paid by clients and insurance companies. In India, the brokers are not allowed to charge a fee from clients and commissions are only paid by insurance companies.
Appendix -1
The measure of insurance penetration and density reflects the level of development of insurance sector in a country. While insurance penetration is measured as the percentage of insurance premium to GDP, insurance density is calculated as the ratio of premium to population (per capita premium).
