With the opening up of not only the insurance industry, but also of insurance distribution, there has been significant excitement about the emergence of "alternate" channels. However, a closer look at the ground realities, customer behavior and characteristics of the current stage of market development suggests that the impact of multi-channel distribution will be dramatic only in the general insurance business. It will be much more gradual on the life insurance side.

In life insurance, we believe that tied agents will remain the dominant channel in the foreseeable future. This is because of both market conditioning and the greater emphasis on savings elements of insurance products. Bancassurance, which has been the flavour of the month for some time now, is likely to be effective only as a referral point rather than a sales channel, as even now banking activity predominantly resides with the public sector banks and they are nowhere near ready to take on additional selling responsibilities. International analogs also suggest that even in markets with a long history of "alternate" channels, tied agents still own a large part of the total life insurance sales.

For general insurance, there is a variety of options being opened up to increase the reach and penetration of products targeting individual customers. For example, in the case of motor insurance, most new entrants (and some of the four subsidiaries of General Insurance Corporation) have tied up with auto manufacturers or their dealers and are offering their policies at the point-of-sale. What's new? The fact that with a formal tie-up at the company level, consumers are now going to get the benefit of services such as cashless claims settlement, automatic approval for certain claims, etc. Since motor insurance is the single largest class of business (not only for products sold to individuals but also overall), initial activity has of course been concentrated here. However, as the new companies expand their products to other insurance products for individuals, there will be much more activity, primarily through originator tie-ups.

GIC-Premiums By Size Of Account

More than half the current fire insurance market is concentrated in a handful of mega-sized companies

Insurable assets of the firm(Rs crore) Source: Capitaline and CMIE database ValueNotes Research, Monitor Analysis

The real impact of the ''opening up'' of insurance distribution will be felt in the way commercial insurance is sold in India. This was almost completely controlled by "tied producers", i.e., employees of the four subsidiaries of the GIC, ever since all private general insurance companies were nationalised in 1972. With the relevant legislative changes enacted by the Parliament recently, the stage is now set for entry of new intermediaries in the business. The new regulations allow for the formation of both corporate agents-entities that will be tied to a single insurance company and will represent the insurance company in selling insurance products to prospective customers-and brokerages that will represent the customers in an insurance transaction and will be free to source the best product, service and price arrangement from any insurance company in India.

This is a landmark event, as GIC's uni-channel distribution system is characterised by numerous elements that are severely value constraining for both insurance companies and for their customers. First, it is a high-cost channel-large number of producers and the over-engineered administrative and servicing infrastructure add up to a significant amount. The current structure will, therefore, be detrimental to GIC's competitiveness in the post-privatised industry, as the new entrants will not replicate such a high fixed cost base. Thus in the short term, development of alternate channels such as corporate agencies and brokerages will allow insurance companies, including gic, to access business on a lower, variable cost basis. Over the longer term, as some classes of insurance are de-tariffed, a part of the cost savings would benefit the customers in the form of lower prices.

Next, state ownership and resultant bureaucratic processes have created a hierarchy where skills are valued less than tenure. This impacts customers directly as they are constrained to deal with a set of ''intermediaries'' who are likely incapable of assessing the true insurance requirements and structuring appropriate products. For GIC, it is an opportunity loss in up selling and cross selling, which would enhance account revenues and profitability. Emergence of vibrant alternate distribution systems staffed by qualified personnel will result in better assessment of the risks that a customer faces and, therefore, contribute to both growing the insurance industry in India and making it more robust.

Third, and consequent to the first two issues, the gic system is also plagued by a slow decision making process. Development of insurance brokerages will be beneficial since companies will now be able to deal with a single point of contact for all their insurance needs and it will be incumbent upon the broker to source individual covers from best-in-class carriers.

These factors point to a future where a bulk of the commercial insurance premiums will be routed through distribution intermediaries and not through the traditional ''GIC pattern''. While this conclusion should hold true in the medium-to-long term, there are considerations that will limit the pace of development of alternate channels over the next one to two years.

A close look at the financials of the four GIC companies reveals that they have returned consistent underwriting losses (their overall profitability emanating from the investment incomes they earn). However, within these overall results, underwriting profit performance varies dramatically across commercial insurance and personal insurance-while the fire and marine lines of businesses are very profitable, results in areas like motor insurance and health insurance drags overall numbers down to a situation of underwriting losses. Thus, GIC companies will respond aggressively towards any threat to their marketshares in commercial insurance, as share losses in commercial insurance business will impact overall profitability dramatically. While this does not necessarily mean a limiting condition for the growth of alternate channels (GIC companies can defend their marketshare by sourcing business from alternate channels), it probably will become a limiting condition, as it is likely that GIC companies will be far slower to adopt new practices than their private competitors.