|
|
|
            
|
CASE GAME The Case Of Insurance Diversification Contd. Balancing The Portfolio There are four reasons why firms like Pacific Mazda are enthusiastically examining the prospects of diversifying into insurance. First, the IRDA has opened a new category of insurance intermediaries-the corporate agents. This is in tune with the global insurance business model. Second, the motor insurance premia in India are likely to be hiked. This is also in tune with the imperatives of insurance liberalisation in the country because the premia, fixed by the Tariff Advisory Committee, have been depressed for too long and are unremunerative for an insurer. Third, the level of commission payable to intermediaries is being raised by the IRDA from 5 per cent to 15 per cent. Finally, Indian motor insurance business is worth Rs 3,500 crore per annum, which straightaway translates to a commission of around Rs 500 crore. This is seen as easy money by any enterprise which has a huge customer base.
Banks, auto-majors, even petrol dealers... everyone is attracted by the non-fund income that seems to be there for the asking. All you need to do, goes the logic, is to tweak the supply chain a little and sell insurance cover as a value-added proposition. Leveraging. That is what they call it. The purpose of insurance liberalisation is to ensure that the customer has a choice. But when a customer becomes part of a captive pool, and is forced to buy a variety of products from the same source, where is the choice? When Pacific Mazda expects its customer to fall in line with its norms, the customer would be getting the wrong end of the stick. Pacific Mazda may have 60 per cent market share of the passenger car market today, but what happens when-because of competitive pressures in the auto-making business itself-its market predominance were to be diluted down the line? Pooling will be affected because, after all, the larger the base of the insured population, the better will be the average yield, and the lower the overall risk. Since Pacific Mazda would not offer insurance coverage to customers of its competitor brands, it will only lead to a fragmentation of the motor insurance market. And fragmentation is not good for the customer. The reason why Pacific Mazda should be wary of entering insurance is that the management of risk is not easy. This is particularly true of non-life insurance, where establishing a correlation between premium and risk is a complex task. You need a vast and diversified data base. You need to have the ability to anticipate contingencies. The easiest part of the motor insurance business for Pacific Mazda lies in marketing the motor insurance product, collecting the premia, and investing the funds. But the most difficult task is in managing the risk. You require indepth knowledge and wide experience. You need to balance the portfolio. That is why no auto major in the world has got into insurance either directly or as an agent. Of course, it also has a lot to do with consumer awareness. It is strong in markets such as the US, where a ''captive'' market is seen as an anathema to forces of competition and free enterprise.
There are indeed synergies between automotive manufacturing and insurance. Distribution network and relationship management with the customer are two areas where they are evident. If exploited well, it can lead to overall reduction in management expenses. It is noteworthy that the exclusive franchise system in the auto industry, which prevailed for generations, is gradually losing its relevance. Auto-makers are likely to form quasi-owned distribution companies. It is equally likely that insurance companies will acquire or invest in their distribution partners. Growth opportunities will always exist for boutique-sized businesses providing specialised services, as part of competition with volume players. This is where Pacific Mazda has the advantages of both. As the relationship between the insurer and distributor changes, so too will be the compensation models and sources of revenue for the distributor. Value-conscious consumers are, of course, willing to pay for services rendered. But the greatest challenge to a distributor in moving to a fee-for-service model lies in establishing a fair price for services. The price is regulated today by the State in the automotive insurance business. It is only when tariff control gives way to free market pricing that Pacific Mazda should have a better first mover advantage over its competitors. Auto-insurance is often considered a ''commodity'' product. But it can't be denied that it offers a range of options and alternatives, with varied implications of purchasing the right coverage and the right limits. This is where the professional management practices of Pacific Mazda can help in building a new business. The important issue is what ought to be the route that Pacific Mazda should take-a standalone outfit conducting full-fledged insurance or a satellite structure that provides support to other insurers. The recent threat of ''disintermediation'' has haunted distributors in several industries. Many have wondered whether insurance satellite distributors will soon find themselves cut out of the insurance delivery system. However, for every example of intermediaries being squeezed out of the picture, there are comparable examples of ''reintermediation'' where intermediaries are being introduced into new relationships. If an intermediary is adding value to the transaction, its position is secure. Pacific Mazda is in such a position of reintermediation for next generation insurers. It is always better in the insurance industry to take the first ''second-mover'' advantage than follow the costly route of discovery-driven market. With some checks and guards, Pacific Mazda should be able to take the route of a niche boutique with tentacles spread over its extended distributor network. The company is indeed in a commanding position that can drive a few business advantages its way. But Pacific Mazda should improve the performance standards of its distribution partners. It must drive down the importance of interdependence in the system. The level, depth, and substance of communications need to be improved.
There are arguments both in favour of, and against diversification into motor insurance on the part of an automotive manufacturer like Pacific Mazda. On the positive side, it helps acquire new customers, retain the existing customers, expand the margins base, and add sheen to the company's corporate image. But there is also the flipside. Insurance business is capital intensive. It may expose a company such as Pacific Mazda to ''earnings shocks''. It is no secret that motor insurance is generally bundled together at the time of actual sale of a car. In India, The ''new'' automobile business is dominated by motor dealers at least in the first year. Since the motor insurance is tariff governed, the customer does not have a choice over price. What he looks for is a standard product, backed by simple and efficient claims service. Thus, Pacific Mazda would do well to sell insurance as a bundled product through the network of dealers. Motor insurance is the biggest chunk of general insurance business. In certain countries in Asia, it exceeds 50 per cent of the total non-life business. Thus, any player with significant captive motor business-such as Pacific Mazda-would have compelling reasons to diversify into insurance. Motor is a business that requires segmentation analysis to find profitable business. For example, in India, the ''own- damage'' portion of motor insurance is profitable, while the ''third-party insurance'' is not. The fact that Pacific Mazda has a good network of service engineers and dealers should enable it to control the ''own-damage'' claims effectively. A big benefit for the company-and of course, for its dealers-will be that vehicles will come only to accredited dealers for repairs. This will increase the income of both the dealers and also-through the uptake of genuine spare parts-for Pacific Mazda. It will significantly add to the company's bottomline too. In fact, this will be the most compelling reason for Pacific Mazda to get into motor insurance. However, before taking a policy decision on diversification into motor insurance, it is important for Pacific Mazda to undertake a detailed study covering:
|
|
Issue Contents Write to us Subscription Syndication INDIA TODAY | INDIA TODAY PLUS | COMPUTERS TODAY |
TEENS TODAY
© Living Media India Ltd |
 |
 |
