project on Impact of Innovation on Private Sector Insurance Industry in India

CHAPATER 1
INTRODUCTION AND THEORETICAL BACKGROUND
Introduction
The Statement of the Problem
The Indian economy is the tenth largest economy in the world on the basis of
nominal GDP, and third largest on the lines of purchasing power parity (PPP). Based
on per-capita-income, India is ranked 141 st by nominal GDP and 130th by GDP (PPP)
in 2012, as per IMF. India still remains the 19 th largest exporter and 10 th largest
importer in the entire world. The economy slowed down to 5% in the year 2012-13
fiscal year in comparison to the previous fiscal year’s 6.2%. On August 28 th, 2013 the
Indian rupee touched all time low of 68.8 against the USD. The government
introduced control on investments outside India by corporate as well as individuals.
India grew at 9% in the year 2010-2011; thus the growth has reduced to half of 9% in
just three years. Wile the Government of India expects the growth rate to be
anywhere around 6.1%-6.7% for the year 2013-14, while the apex bank of the
country, the RBI expects it to be around 5.7%. Macroeconomic imbalance can be
corrected through policy steps that are material to stimulate growth.
Investments are necessary for the growth of an economy; savings of the economy
contribute towards the investments. Insurance companies are a major source for
mobilization of savings from middle and lower income groups of the economy.
Insurance serves a number of important economic functions that are, to a large
extent, distinct from other financial intermediaries. In the recent few years, many
lines of research have begun to chart the specific role of insurance in the economic
growth process and as well as in the well-being of the poor. Research outcomes
have shown that insurance contributes significantly to economic growth by improving
investment climate and promoting a more efficient blend of activities than would be
undertaken in the non-existence of risk management instruments. This contribution
is increased by the complementary improvement of banking and other financial
instruments. Research has shown that non-life insurance contribution towards
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growth in emerging economies at various levels of development. While life insurance
makes a significant contribution to growth mainly in developed countries, because
life insurance forms a smaller part of the total insurance market in low or middle
income countries.
Without insurance, business and trade and commerce will find it hard to face the
brunt of major perils like fire, floods, earthquake, loss of key personnel etc. Financial
institutions would crumble down if the manufacturing units financed by them are
reduced to ashes by any natural disaster. The financial institutions are also covered
if the borrowers default on their loans.
Need and Significance of the Study
Many CEOs are under the impression that innovation leads to growth and therefore
it’s very important to a company. Growth takes place only in the absence of
misconceptions regarding innovation are cleared. The misconceptions are:





Innovation can be delegated.
Middle management is an ally of innovation.
Innovative people work for money.
Innovation is lucky accident.
The more open the innovation process, the less disciplined. (Fisher, 2011)

In a very competitive world it’s necessary to innovate. Today, you may introduce a
new product and patent it, but within six months or so some company in some other
part of the world may produce something similar to your product. The only way out is
to be relentlessly innovative. Companies that challenge what they do, challenge
themselves to come out with new products and different ways of doing things, and
constantly improve on the things they already do will survive this competition.
Examples in this area are Apple and Samsung. They have been very good at
innovating (Balasubramanian, 2013).
Innovation is important for insurance industry in India because it being one of the
largest sources of savings it must improve its contribution. The industry needs to
improve its contribution as the government requires these saving of the public for
economic development through investment in infrastructure development projects.
Innovation is the basis of economic development as such it is instrumental for any

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developing country. Study shows that intellectual property protection is not the basis
for innovation in these countries (Moldaschl 2010).
Liberalization helped open up to investments, development of sectors like aviation,
liability and credit; fast growing auto industry; new products in health insurance;
growing reach of internet and information technology have contributed to the growth
of this industry. While the challenges to the industry are it’s a price driven
competition, delay in introduction of new products, low focus on understanding the
customer, lack of skilled resources, costly traditional channels (ICICI Lombard,
2011).
Therefore innovation regarding product, process, service and business model are a
must for an insurance company. These innovations are likely to increase the
premium growth, reduce the speed of claims settlement, and increase convenience
to customers. The penetration level in India is as low as 0.6% of GDP, therefore
product innovation and business model innovation is the necessity of the hour to
improve the penetration levels in India by meeting the needs of the customers from
all segments of the society, especially the last mile.
Therefore this study has been conducted with the following objectives:
1. To understand the different types of innovation in Indian non-life insurance
companies.
2. To study the impact innovation has on the financial performance of Indian
non-life insurance companies. The financial performance parameters studied
are:o
o
o
o
o
o
o
o
o
o

Total premium
Total claims
Claims ratio
Reserve for unexpired risk
Profit before tax
Net profit
Commission and management expenses
Under writing profit /loss
Operating profit
Operating expenses

Scope of Study
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1. The study is limited to non-life insurance companies in India.
2. The study is carried out for the period 2003-2012.
3. The study is limited to understanding the impact of innovation on the financial
performance of insurance companies.
Definitions


Innovation can be defined aso anything that provides a new perceived benefit to a customer or
employee;
o conversion of knowledge and ideas into a benefit, which may be for
commercial use or for the public good; the benefit may be new or
improved products, processes or services;
o innovation is the result of -a shock (a major failure) to the system,
problematic search, random variability in experimentation, deliberate
decision to invest in learning, match between a need and ideas which
already exist, formal vehicles for stimulating innovation such as
research and development, managerial risk seeking or risk averse
behaviour, availability of slack resources, management philosophy and



organizational climate, and customer needs (Ijuri and Kuhn, 1988).
Product innovation is achieved through either of the followingo Product extension (same base product with slight
modifications; identical product in a new segment)
o New platform product (net product from which product
extensions are possible)
o New-to-the-company products and
o New-to-the-world (never been done before; no market
exists)



Process innovation innovations that change the way a product or service is



delivered.
Business model innovation This is the sense of innovation in the broader
context of companies and markets. Innovation’s meaning here is to alter the
landscape of business. Ray Meads says that a patentable solution that
changes the basis of business for that specific industry sector is called



business model innovation
Unexpired risk A reserve account opened at the discretion of the insurer if it
believes the amount of funds kept in the unearned premium reserve account
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is not sufficient to cover the amount of risk perceived. While unearned
premium reserve minimums are set by law, an unexpired risk reserve is
voluntary .

1. Types of Innovation

Fig 1: Innovation Types
Innovation is spoken of usually in the area of product, service, process and business
model. Product innovation refers to launch of new products that are radically new in
the market or are incrementally changed from the existing ones. Service innovation
refers to the idea of enhancing the relationship between the customer and the
company. The process innovation refers to reduction in paper work for the company
and easy ways to store and extract data and also the way a service or product is
delivered. Business model innovation refers to changes in the way a company
conducts its business, example while all other health insurance companies are going
in for a TPA model Max Bupa Health Insurance Company is eliminating them
(Economic Times, 2010).
2 Innovation Theories
Joseph Schumpeter (1930), Austrian economist, a pioneer in the field of innovation
and innovation management, studied the impact of market innovation on capitalist
system. In his book “Capitalism, Socialism and Democracy” he described a process
where

“the

opening

up

of

new

markets

and

the

organizational

development…….illustrate the same process of industrial mutation, that incessantly
revolutionizes the economic structure from within, destroying the old one and
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creating a new one. He coined this process “creative destruction”. On studying this
he concluded that the ability of the company to innovate depends on the size of the
company. This he believed to be true due to the flexibility of companies smaller in
size, but he changed his view years later because these companies have larger
resources and more market power. This innovation theory suffers from the lack of
empirical evidence.
This lack of evidence led academics over the next few decades to explore other
variables that could explain what companies would be in a position to innovate and
the circumstances under which they would innovate. Therefore, in the late 1970s, the
Incremental-Radical dichotomy was one of the first theories of innovation to emerge.
Pioneer of the Incremental-Radical innovation dichotomy is unknown, but many
authors have expressed the same thing in many different terminology. Abernathy
(1978) gave the difference between incremental and radical innovation, while Michel
Porter illustrated this concept in the form of continuous and discontinuous
technological changes.
To differentiate Incremental innovation from Radical innovation two dimensions can
be used, namely- internal and external dimension. The internal dimension is based
on knowledge and resources available and involved. Incremental innovation builds
on existing knowledge and resources within the company, competence-enhancing.
While the radical innovation looks for new knowledge and or resources leading to
competence-destroying. Therefore, incumbents will be in a comfortable position
using the incremental innovation, while new entrants will be in a better position using
he radical innovation because they needn’t alter their knowledge background. The
best example of incremental innovation is Kodak. The company was a market leader
in the photography market for many years; the company strengthened its position
using the incremental innovation. It was tough to fight the radical innovation to keep
it position as the era of technology required a new knowledge, resources and
mindset.
Another innovation dichotomy is sustaining vs disruptive innovation. This is the
central theme of Clayton Christensen’s work. The term disruptive innovation was
coined by Clayton Christensen (1997) in the book ‘The Innovator’s Dilemma’. His

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study showed that innovations that were radical still reinforced the incumbent’s
position in certain industries. This is contrary to the previous models of innovation.
Sustaining innovation most often doesn’t result in downfall of established companies
because it adds to the performance of the existing products by adding value to the
customers. While the disruptive innovation provide what the traditional customers
might not want, at least to begin with.
Chesbrough (2003) came up with another innovation type called the “open
innovation”. Ideas are generated both in and out of the company, so a new
innovation model is required. “Open innovation” is the use of purposive inflow and
outflow of information to accelerate internal innovation, and expand the markets for
external use of innovation. The locus of innovation is the firm, as a combiner of
ideas, technology and knowledge. Having noted some of the prominent theories of
innovation lets have a look at various styles of innovation
3 Innovation Styles
Each one of us has different ways of expressing our talents, knowledge, values and
interests. As humans we all have a colossal ability to be creative and innovative, but
we express this potential differently. The individual approach towards innovation and
change is a blend of four Innovation Styles namely-visioning, exploring,
experimenting, and modifying.
Each of the four innovation styles is a different approach towards the process of
innovation and change: taking on challenges, reaching breakthroughs, implementing
them and making a valid contribution through your work. This is a much broader
concept than the creative thinking style that educates "left-brain" and "right-brain"
way of thinking.
Each individual has an inclination towards one of the four innovation styles but, the
seeds of the remaining styles are dormant in every individual. Every innovation style
is similar to a language, while one may easily express oneself in one or two styles,
one should learn to use all four.
Knowing the Styles helps to...


Leverage your strengths as individuals and as a team;
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


Generate a more comprehensive as well as creative set of ideas;
Depersonalize interpersonal conflict and build more synergistic work teams





with diverse people;
Present your creative ideas and innovations more effectively;
Lead better creativity sessions;
Manage change more effectively.

Individuals who use the modifying and experimenting styles most prefer to gather
facts first then use their intuition to make sense out of the data. Individuals who
prefer the visioning and exploring styles have an inclination to use their intuition to
build up hypotheses first and then gather facts to support those insights.
1 Visioning Style
Some people like to focus on the end result. They have a vision of what they desire
to create. They let their goals be their guide. They provide individuals of the team
with direction, inspiration and momentum. They emphasize Visioning
People favouring the visioning style trust their instincts and prefer to make choice.
They look for solutions that focus on maximizing potential rather than focusing on
what has gone on in the past. Driven by their long-term goals and the organization's
mission, they solve problems by relying on their vision of the future to guide them.
This style is characterized by people who are persistent, determined, hardworking,
and visionary.
The visioning style supports innovation in the following manner:



It provides the "big picture" and long-term direction;
It focuses on the vision / goal though the path to get there is uncertain; and
By being in touch with what people really want.

Over emphasis on visioning style can hinder innovation in the following manner:

By not considering options that may differ from the visionary’s goals /




focus;
Impatience with no change taking place;
Unrealistic view about the level of change and resistance involved in
manifesting their vision.
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Important questions the visioning style answers are:



What is the purpose to be achieved ?
What do we wish could happen?
What is the right thing to do?

The visioning style may not bring about the required result if the individual is 



Not having an opportunity to dream;
Implementation details;
Focusing on the obstacles.

The visioning style's favourite idea killer
That idea is too timid; it's not bold enough.
Myth: There exist creative people who are early adopters, and less creative people
who oppose change.
Truth: To create change, you need to engage all of the styles.
2

Exploring

Style

Some people like to look at unexplored territory. They thrive on the unfamiliar and
unpredictable path. They come up with fresh ideas from the thin air. They tend to add
a sense of adventure to any project and open up the potential for dramatic
breakthroughs. They emphasize Exploring.
People favouring the Exploring Style prefer to use their insights to guide them. They
question suppositions and often put into practice their ideas despite resistance. They
are adventurous, dislike routine, and like to be met head-on.
This style supports innovation in the following manner-

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

By challenging accepted ways of seeing things and seeking out novel
approaches to problems;



By tackling the confused change with their own intestinal fortitude;



By being risk-takers, often jumping before they look.

Over emphasis on this style can hinder innovation

By thinking of "blue sky" possibilities and ignoring details;



By discounting work that has been done.

This style answers these questions about a problem


What if?



Have you thought to start from beginning?



Assumptions that are taken for granted?

This style can go wrong because of reasons like

Rejecting ideas because they don't relate to current reality;



Rules and structure;



Having to finish what they start.

This style's favourite idea killer
Idea is too conventional, not out of the box enough.
Myth- To come up with breakthrough ideas, you should try to be "original".
Truth-Ttrying to be "original" is another way of censoring our ideas. Breakthrough
ideas come when we just let all the ideas flow

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3.Experimenting Style
Some people like to experiment. Once they agree on a common process or way of
thinking, they can troubleshoot anything. They contribute to the team by adding
careful testing and getting input from all concerned in order to confirm ideas. They
emphasize Experimenting.
When people use the Experimenting Style, they emphasize fact finding and
information gathering. They seek solutions by applying pre-established processes
and trial and error. As problem solvers, they like to collect as many facts and
opinions as possible before they make their decision. They are curious, practical,
and good team players.
This style supports innovation


By providing methods and / or systems to take risks in stages (i.e., with a
good research design) even when the outcome / goal is uncertain;



By getting people to collaborate and become involved in the decision making;



By developing a process of planning and working together;



By leveraging existing technologies or methods in new ways.

Over emphasis on this style can hinder innovation


By getting lost in the details of implementation or being too concerned with the
process;



By overemphasizing testing over action;



By losing perspective on what really matters.

This style answers the following questions about a problem


What are some ways to find some immediate steps to take?



How can we get other people's creative input on this?
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

What are the components of this problem?

This style can go haywire because of

Ignoring risks and not paying attention to implementation requirements;



Not having a clear goal or purpose;



Alternatively, spending a lot of time discussing possible goals.

This style's favourite idea killer
“That idea is too idealistic; it could never happen.”
Myth- There is a right way to be creative.
Truth- Einstein and Edison were both very creative, with very different styles.
Einstein had a preference for exploring and visioning. Edison had a
preference for experimenting.

4 Modifying Style
Some people feel comfortable moving forward one step at a time; they like to build
on what they already know is true and proven. They provide a team with the stability
and thoroughness it needs to do a quality job. They emphasize Modifying.
People who take a modifying approach to innovation are most comfortable working
with facts and making decisions. They like to solve problems. They seek solutions by
applying methods that have worked in the past. These people tend to be precise,
reliable, efficient, and disciplined.
This style supports innovation


By being responsive to immediate needs and maximizing available resources;



By helping the short-term motivation of groups by finding practical ways of
getting immediate success;
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

By keeping the change relevant to current needs.

This style can hinder innovation if it is overemphasized


By being too tied to present circumstances and not recognizing far-reaching
goals;



By missing less obvious opportunities;



By verbalizing obstacles and constraints too early in the process, when
divergent thinking is needed.

Important questions about a problem that are answered by this style


How can we improve on this?



What has been done before?



What doesn't work about this?

This style can backfire on the grounds of


Changing direction in midstream or pursuing ideas that have not been thought
through;



Lack of follow-through.

This style's favourite idea killerThat idea is too crazy; it's not worthy of consideration.
Myth- Some people are not creative, and they can't be taught to be creative.
Truth- Everyone has the capacity for creative ideas. The trick is to distract ourselves
from our natural blocks to creative expression.

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Chapter 2
LITERATURE REVIEW
Literature Review
The importance of this study in relation to innovation has already been
stressed in the previous chapter.
The review of literature attempted in this chapter has been carried out and presented
with the objectives of:
a)

providing a reasonably self explanatory overview of the previous work done in

this area, and
b)

developing the base for this work.

Keeping this in mind, the following sequence has been adopted to present the review
of related literature:
1. Studies on Insurance
2. Studies on Innovation
3. Studies on Innovation in Insurance
4. Studies on Factors Promoting Innovation
Studies on Insurance
Outreville (1990) has determine relationship between financial and economic
development and property-liability insurance premium written. In order to prove this
hypothesis the property-liability insurance industry across 55 developing countries
was studied. The result showed a positive relationship between GDP per capita and
property-liability premia per capita. The result also showed that a percent rise in GDP
caused more than a percent rise in demand for insurance products. Second
objective was to prove a positive relationship between insurance development
(defined as insurance penetration or ratio of Insurance premia to GDP) and financial
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development (ratio of M2 to GDP). By using penetration as a proxy for insurance
development and ratio of M2 to GDP as a proxy for financial development OLS
(ordinary least squares) method of regression was conducted and the results yielded
a positive to the hypothesis. This further emphasizes that for insurance demand
financial development is an important factor. Third objective was to prove that the
demand for property-liability insurance premium per capita as a function of GDP per
capita. The results state that the elasticity of demand is greater than one and there
exists a positive relationship between demand for insurance and financial
development. Price is statistically insignificant variable.
ICICI Lombard (2011) has revealed that India has large young population, a growing
economy with projected growth rate for the next three to four years being 9%;
currently it has slowed down for various reasons, huge investment in infrastructure
and low insurance penetration just about 0.6% of GDP. We did much better than
many other countries during the financial crisis. Motor insurance is the largest
portfolio (40%) and health insurance (27%) is growing fast behind motor. Coming to
the distribution channels individual agents contributed the maximum while the other
modes of distribution are still getting popular.

Liberalization helped open up to

investments, development of sectors like aviation, liability and credit; fast growing
auto industry; new products in health insurance; growing reach of internet and
information technology have contributed to the growth of this industry. While the
challenges to the industry are it’s a price driven competition, delay in introduction of
new products, low focus on understanding the customer, lack of skilled resources,
costly traditional channels.
Kramer (1997) suggests that to protect the interest of policyholders the solvency of
the insurer should be constantly under check. Every insurer must be evaluated on
three rounds-1) verification round involves consistency check & solvency check; 2)
assessment round analyses the financial statements thoroughly and 3) evaluation by
account manager. The assessment can be done using N.E.W.S (non-life early
warning system) which is a combination of traditional statistical tools with artificial
intelligence-techniques (neural network and expert system). This model classifies
firms based on the insurer’s degree of risk. This is another innovation.

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Vishwanath (2003) focuses mainly on demutualization process of insurance
companies and identifies the reasons why some mutuals take to organizational
structure change. It found that the primary reason for demutualization is the need for
capital. By statute mutuals are limited in their capital raising activities while stock firm
can raise funds through variety of equity & debt offerings. Property-liability mutuals
exhibit lower surplus to asset ratio prior to demutualization, this is eased after the
demutualization. Demutualization prevents future financial distress.
Li, Moshirian, & Sim, (2003) is the first to study the determinants of intra industry
trade (IIT) in insurance services in light of growing significance of trade in financial
services. The article analyzes and measures the magnitude of IIT in insurance
services for the United States. The empirical results of the determinants of IIT
indicate that foreign direct investment in insurance services (FDI) is a significant
contributor to the volume of trade in insurance services. These empirical findings
confirm the new theoretical trade models that, unlike the traditional trade theory that
considered trade and foreign direct investment in insurance services as substitutes,
trade and FDI complement each other and hence multinational insurance companies
are contributing to an increase in the volume of trade in insurance services.
Furthermore, this study shows that trade intensity between the United States and its
trading partners leads to product differentiation in insurance services and hence an
increase in consumer welfare.
Studies on Innovation
Kanter (2008) has stated that innovation is a buzz word every few years; it
resurfaces as a prime focus of growth strategy. When it does companies make same
old mistakes. Kanter tells us how to avoid these errors. Many existing companies
fuel growth by discovering new products & services. Yet many companies make the
same mistakes which hinder the growth in their effort to innovate. E.g.: some
companies invest only in those ideas they think are blockbusters. Result? Small
ideas that could have generated big profits get rejected. Other companies err on the
side of process –strangling innovation by subjecting them to strict performance
criteria that the existing business follows. Consequence? Retrofitted versions of old
ideas. To avoid such traps Kanter suggests applying lessons from past failures, e.g.:
augment potential “big bets” with promising midrange ideas & incremental

innovations; add flexibility to innovation planning, budgeting, & reviews. Some others
make structure mistakes- isolating innovators & main stream business managers.
The remedy is to create or tighten the human connections between innovators &
managers. Another mistake is the skills mistake, shuffling of innovators from team to
team & assuming that technical people should lead the team. Solution for this
mistake is to select innovation leaders with strong interpersonal skills. They’ll keep
the team intact & help embrace collective goals, leverage on another’s strength &
share knowledge when innovation is under development.
Tubiana () studies that due to the conservative nature of the industry it enjoys
innovation and innovation is unnoticed. From the first written insurance in Babylon by
King Hammurabi’s men to the industry’s current use of big data to cut cost & improve
results. According to Clayton Christensen innovation can be of three types:


Empowering “innovations” move products from costly items available to
the few to mass-market items available to many. These expand the
market. E.g. L & T general insurance company that came out with an
innovative idea which had at its core the objective to become & remain
a company that depends on mobile solutions right from day one. Mobile
insurance has broken the trade-offs that limited the affordability &



distribution of insurance products in many of the developing nations.
Sustaining “innovations” are essentially product replacements, moving
from one model to another that may be better, but has a basic similarity.
E.g. Insurance Telematics is the integrated use of user- generated
source data. Use of telecommunication & analytics support insurance
related products & services, this involves collection, transmission,
normalization, & analysis of vehicle &/or the driving behavioral data,
through interactive cellular or satellite service connections & often with
dedicated collection devices, although smart phones & mobile apps are



gaining momentum.
Efficiency “innovations” reduce production or distribution costs.

Rose (2009) studied that innovation has been recognized as an important driver of
growth; many empirical studies point out that innovation has led to introduction of
new products & services with lower prices. Historically, innovation was treated as a

residual measure of growth; this article helps to understand growth by measuring
innovation. New services & products due to innovation are captured in the GDP & NI
and product accounts, but the investment to achieve innovation is not captured. This
information is required to improve our understanding of economic growth. This paper
discusses two frameworks for measuring innovation: 1) innovation activity can be
measured by measuring the intangible assets that are created by & fed back into the
innovation process at the firm or organizational level, which can then be scaled up to
national level. Intangible assets can be categorized into three types-human capital,
intellectual capital, and organizational capital. Framework 2 measures innovation
investments, especially the broader investments that set the stage for innovation.
Studies on innovation in Insurance
Merton (2013) has studied that new products & services are created to enable
people to do a task better than they previously could do or couldn’t-e.g. cashless
hospitalization is available by using a health insurance product. But innovations carry
risk; riskiness depends on the choice people make in using it. Like investment,
innovation also deals with risk & return. Five rules of thumb to be aware of while
thinking of innovation & its effect are:

To make a judgment on the risk & return a mathematical model is






needed
Acknowledge the models limits
Expect the unexpected
Understand the use & the user
Check the infrastructure

Moshirian, (1999) analyzes international insurance services. He defines international
insurance services in the context of the new definition of trade in financial services.
Cross-border trade and foreign direct investment in insurance services are
categorized into four distinct groups, based on the movement of providers and
receivers of insurance services. The empirical results of a model of the movement of
providers in insurance services indicate that insurance premiums and the national
income of the host countries contribute to the expansion of multinational insurance
companies. Furthermore, bilateral trade, labor costs, economic growth and the cost
of capital also contributing to the expansion of international insurance services. In

addition, the empirical results indicate that FDI in banking is a complement to the
expansion of international insurance services.
Accenture insurance survey (2012) the results of this survey indicate that innovation
is the key to customer acquisition and retention in the evolving market place. The
market place is no more the same way as it was a decade ago; it has become more
competitive, changing customer needs And the insurance industry is moving from a
push side to pull side industry. Consumers have high expectations on their current
insurers, in terms of new products, services, process-ease of procuring policies,
easy to understand policies etc. More than half of the consumers surveyed were
willing to pay more for customised products, implying a huge demand for
personalized products and relevant services. And many insurers have responded to
this change. At a time when the industry is at a turning point, it’s necessary to
concentrate on customer driven-innovation to achieve differentiation. For instance to
attract the Gen Y the companies need to invest huge sums of money in the next Gen
distribution channels. The survey has come out with some steps for profitable
growth


Deep understanding of the customer,
An integrated multi-channel capability that meets customer’s




preferences,
Effective digital marketing that capitalizes on social media,
“Retailization” –learning from the success of innovative



retailers, &
An efficient underlying infrastructure that enables agility.

Anand (n.d.) Out of the box ideas are either developed internally or externally –
acquired from the outside environment. Joint venture is one such mode of taking to
innovative ideas from the external environment. This is a mode of growth &
expansion in the target market by applying “Resolve or involve” ideology, even
though there is a study that suggests 50% of JVs are unsuccessful. The indigenous
factors of growth that are currently seen in Indian insurance industry can be
attributed to innovative techniques, products, processes introduced & applied by
Indian & foreign JV entrants.

Bhattad (2013)To reach out to customers & provide them with a consistent & positive
experience, the insurers are leveraging on the new & multiple distribution channelsbancassurance, social media, online purchase, mobile, & call centre. These are used
to better reach customers & improve operational performance. Moreover, these
channels are rapidly gaining momentum with the present generation of youth who
are tech savvy. As these channels are gaining momentum & prominence, though
less than initial expectations, customers in many markets still consider taking an
advice from their agents to buy a life insurance policy. But this is not the case with
non-life insurance products. Insures are leveraging on growing technology to reach
customers & to incorporate their feedback quickly. Insurers are also focusing on
creating an effective & comprehensive distribution channel while simultaneously
working to break-down the entire sales process so that components to be automated
can be identified.
Trends identified across insurance industry:



Rise in use of internet among customers to buy insurance products.
Rise in use of social media as a distribution channel.
Rise in use of SaaS solutions to enable insurance distribution process across



multiple channels
Rise in use of technological solutions to automate the underwriting process &
direct sales.

Jütting, J. (2009) for any developing nation affordable health care is a must, but it
remains a dream for many of the people. The root cause- cost of health care. In
recent past many business models have come up to cater to this problem. Some of
them are –insurance through microfinance institutions & community-based health
insurance (CBHI). In a CBHI scheme, the risk is transferred to a community based
organization to cover the health cost. This has reduced the cost of insuring the poor
as the adversity in selection is reduced. This has been started by health providers, in
addition to mobilizing resources to address health risks. These schemes are
important tools for protecting people from falling into poverty as a result of their
health expenditure.
Deloitte (2011) studied that in the past insurers achieved new business revenue
growth through a product driven growth strategy but now the forward thinking

insurers are concentrating on leveraging distribution channels. Other areas of growth
are cross selling through bancassurance, takaful insurance, and other Islamic
financial products, telemarketing, and virtual marketing to sell insurance products.
Some alternate channels to increase penetration are worksite marketing-marketing
financial products, paid for by the employee, facilitated and endorsed by the
employer. Its success depends on the education and training of the agents& brokers,
cost & convenience and employer’s cooperation. Some of the Indian companies that
have considered this channel are –Tata AIG, HDFC Standard Life, ICICI Lombard,
Kotak, and Reliance. This is an opportunity for emerging economies; the ever
expanding work force in developing countries is to increase from 54% in 2000 to
91% by 2030, with citizens from china & India accounting for 44%. Micro insurance
being the other channel operates through three models: partner-agent model,
provider driven model, and community based model. E.g. Bajaj Allianz covers more
than 2 million people in the rural India. Village coverage is policy which covers the
entire village for an umbrella sum assured for all the inhabitants. Telemarketing is
another mode of distribution that is gaining popularity in the developing economies
which have high mobile connections-India. With increasing sales of smart phones in
the developing countries (BRICs) insurance products can be sold & serviced using
these phones. Kiosks are another mode of distribution, through bancassurance
insurers can service the needs of HNIs customized products.

Setting up of

insurance shops on the road side is another distribution channel.
Studies on factors promoting Innovation
Haak (2013) analysed that for companies to build their competitiveness using their
competences its necessary to have a sound corporate R&D centre. These centres
provide the companies with breakthrough innovation & help them leverage on their
competences. Companies like-IBM, GE, AT&T have wonderful centralized corporate
R&D centres. In any business, these centres take up long-term, innovative, radical
projects. While decentralized centres are more responsible & accountable, leading to
short-term bias & suboptimal use of scarce resources. To manage long-term projects
& radical innovation it’s necessary to have a centralized R&D centre. For an
innovation to be successfully implemented there should be integration of R&D with
other functions of the organization; otherwise the innovation ideas don’t kick-off well.
Since innovation is based on invention it’s not possible for breakthrough or

incremental innovation to take place without it. A study states that management,
policies, resources & incentives system are key areas for an organization to look
after to stimulate innovation.
CIFP (2013)

The opportunity for Indian insurers to expand on a large scale is

through the use of bancassurance, this will prove to be a new medium that give the
push to reach new customers as India is the 6 th most densely banked nation in the
world. The potential for this distribution channel is huge. This has to replace the face
to face channel which is huge cost contributor. Align the distribution channels based
on the segmentation of customers: HNIs-private wealth managers, registered
investment advisors; for affluent-insurance brokers/dealers, independent agents,
lawyers and CAs, CFPs; middle market-banks, worksite marketing; mass market-call
centers, direct mail, and internet. IT innovation power new solutions for insurancemobile phone insurance, radio-frequency identification (RFID): it’s a tracking
technology that gives a more accurate method of assessing claims & minimizes
risks. GPS & Telematics, Health infomatics: with increasing use of technology in
hospitals to store patients’ information it’s easier to sell products based on the
available info (http://www.cifplearning.com).
Summary of the literature review
Growth of insurance industry is a must in every economy, more so in a developing
economy. Importance of the growth of insurance industry is highlighted by the need
for funds to develop infrastructure in the economy. Therefore innovation is necessary
in insurance industry, more so in a developing country. The innovation must have a
significant impact on the financial performance parameters to justify the need for
innovation. This literature above highlights this aspect. The study in the further
chapters highlights the impact on the financial performance of the private sector nonlife insurance companies in India.

Chapter 3
Data Collection and Methodology
Nature of the Study
1. The study is quantitative in nature. The current study is an empirical attempt
to understand innovation and the impact it has on the financial performance of
insurance companies in India.
2. The study is partly qualitative to the extent it describes the different
innovations in Indian non-life insurance companies.
Objectives of the Study
1. To understand the different types of innovation in Indian private sector non-life
insurance companies.
2. To study the impact of innovation on the financial performance of Indian
private sector non-life insurance companies. The financial performance
parameters studied are:o Total premium
o Total claims
o Claims ratio
o Reserve for unexpired risk
o Profit before tax
o Net profit
o Commission and management expenses
o Under writing profit /loss
o Operating profit
o Operating expenses

Hypothesis
The following hypothesis has been developed for this study:

There is no significant relationship between innovation and financial performance in
Indian non-life insurance sector.
Sampling Procedure
The following sampling procedure has been adopted for this study:
Sample of the Study
The study includes all private sector non-life insurance companies in India as on
June 1st 2013, registered with Insurance Regulatory and Development Authority
(IRDA), India.
Therefore the companies studied are:


















Bajaj Allianz General Insurance
Bharti AXA General Insurance
Cholamandalam MS General Insurance
Future Generali General Insurance
HDFC ERGO General Insurance
ICICI Lombard General Insurance
IFFCO Tokio General Insurance
L & T General Insurance
Reliance General Insurance
Royal Sundaram General Insurance
SBI General Insurance
Shriram General Insurance
Tata AIG General Insurance
Universal Sompo General Insurance
Apollo Munich health Insurance
Max Bupa Health Insurance
Religare health Insurance

Based on past studies (Rose, 2009), the following financial parameters were
selected for analysis:
o
o
o
o
o
o
o

Total premium
Total claims
Claims ratio
Reserve for unexpired risk
Profit before tax
Net profit
Commission and management expenses

o Under writing profit /loss
o Operating profit
o Operating expenses

Data Sources
Quantitative data was obtained from secondary data sources as follows:
1. Indian insurance statistics, 2011-2012 published by the Insurance Regulatory
and Development Authority, India.
2. Official websites of the selected companies.
Qualitative data regarding the innovations of private sector non-life insurance
companies was obtained from:
3. Economic Times website.
4. Articles and papers published in professional journals.
5. Official websites of the selected companies

Limitations


The study is limited to studying innovation in Indian Non-Life Insurance




Companies, including Health Insurance Companies.
The study is limited to private insurance companies.
The study is limited to product, service, process and business model
innovation.

CHAPTER 4.
DATA ANALYSIS AND INTERPRETATION
In this chapter the results of data analysis have been presented and interpreted.
Qualitative Analysis
In this section the various types of innovations implemented by different companies
have been described.

1 Product Innovation
Ten years after privatization, the insurance industry has undergone a
significant change. The changes may have gone unobserved year on year, but a
closer look at the performance in the year 2001 & 2011, there certainly has been a
noteworthy change.
The industry has taken a step further on numerous front- in terms of increased
penetration-even though this is far behind many of the other developed countriesincreased coverage of property/lives, more customer friendly products, a rapid
growth in distribution channels, better reach, better competitiveness in the market,
this has laid the pathway to innovation in this industry.
The most commonly understood form of product innovation is that which introduces
or improves a product or service – a change in what is offered to end users. There
has been a remarkable change in the type of products available over the last one
decade. Products that were not available or the customer were least aware of are
now available and have become very popular as they offer real value to the
customer. Also, earlier the insurance market was more of a seller’s market, but with
growing financial literacy the Indian insurance market is turning into a buyer’s
market.

27

Some of the example of product innovation are as follows:- In the year 2012, Apollo
Munich Health Insurance a standalone health insurance company launched a novel
health insurance products which no other insurer in the industry was offering -Optima
Restore. This is product with never-before feature and benefits.

The product

includes cashless hospitalization care, quick settlement of claims; also this product
covers the insured for life time. Did any other healthi insurer ever think of insuring the
insured for life time? No, but this company did. Apart from providing financial help on
hospitalization, it provides for ‘reinstatement’ of the basic sum insured if it were to
exhaust during the hospital treatment. This is the ‘restore benefit’. on availing the
insurance amount once it reinstates the sum insured completely without additional
charges. For the first claim free year the company gives bonus by way of 50%
increase of the basic sum insured, however it increases to 100% of the basic sum
insured. With this multiplier benefit that doubles the health cover in just two years,
the product is new compared to other health products. Also, this product provides a
benefit of no sublimit on the room rent and it takes care of the additional expenses
that stand as a peril towards quality medical treatment. In the health insurance
industry the insurers have come out with products that include out-patient
department expenses, disease management, and wellness offering.
The auto industry has moved from providing standard products to products that
provide assistance services- such as towing services, replacement vehicles, and
emergency support service. Some others have moved on to provide products which
offer the customer with the facility of ‘pay-as-you-drive’, road side coverage.
In the year ending 2003, Tata AIG had come out with a policy to protect accountants
from client’s claims. General professional indemnity cover, in India until 2003, was
available for professionals providing fee-based services, but TATA AIG was the first
to bring out a tailor-made product that covered the accounting profession. This policy
was designed with the assistance of the Bombay Chartered Accountants Society and
KM Dastur, insurance brokers. The policy covers claims that are pertaining to
professional negligence, wrongful acts committed, or alleged to have committed to
have committed in the performance of the professional’s duties. It also covers legal
expenses incurred in defending such claims; however it will not cover the claims
from regulators, but will limit the cover to defending the accountants from their own
clients. Unlike other professional indemnity policies which restrict their claim to 25%
28

of the aggregate limit, this product pays 100% of the limit liability. In addition to this it
is the duty the policy to defend wording, meaning TATA AIG will handle the entire
defence till the lawsuit reaches a logical conclusion.

The policy also covers the

claims arising out of the fraudulent or dishonest conduct of any of his/her employee
for which the insured is held liable, provided the insured is not involved in the act
TATA AIG also came up with another product ‘Green Channel Settlement’ which
makes vehicle accident repairs and claims easier for the insured. It also provides
warranty on accident repairs to those customers having TATA AIG’s auto insurance.
Customers having the TATA AIG auto insurance policy can avail free-pick-up of their
vehicle from their doorstep, get repairing facility at any of their 100 company
accredited garages
Bajaj Allianz General Insurance launched a new insurance product that covers
cancellation or postponement of a wedding due to fire and other perils, in the year
2004-2005. The company was the first in the industry to introduce this unique
product. The package covers the monetary loss following the cancellation or
postponement of wedding due to fire and allied perils, accident to bride/groom,
accident to blood relatives resulting in hospitalization within 7 days prior to the
printed/declared wedding date, damage to property, money in safe, burglary and
public liability.
2 Services Innovation
Providing service to the customer before or after sales is important to have a captive
customer base. The services provided are different from company to company
depending on the industry they are present. For a company that provides tangible
products after-sale services take a back seat-meaning the company needs to spend
more time on providing the best product, user friendly product, & availability of the
product. But when it comes to a service provider, especially a financial service
provider, servicing is very important to retain the customer. It becomes important
because a financial service provider provides financial security- bank, insurance
company, mutual fund Company etc...

29

An insurance company provides services like intimating the customer of annual
premium payments, addressing the changes in -addresses, nominations, phone
numbers; claims settlement in the least possible time, time taken to procure a policy
from the company. In insurance or for that matter in any financial service institution
service is of the utmost importance. Services provide have to be newer and there
should be continuous improvement & innovation in them. Innovation is a must
because through services the company is in constant touch with the customer, this
will provide information regarding the customers’ need points or their distress point
that need to be addressed. Therefore, service is a function which has constant
interaction with the customer.
Some of the innovations with regard to services are discussed below.


Bajaj Allianz in the year ending 2013 won the ‘Best service company of the
year’. Unlike all other companies that have centralized claims settlement
and management model, this company has come out with a new
decentralized claims management model. The result, it has shown the
highest efficiency in claims settlement. This has been demonstrated
through the total claims settlement ratio as well as average turnaround



times for claims settlement.
For any claims settlement the customer is expected to come to the local
office/branch of the company, this is very tiring or may not be possible for
the customer to come to the office to make a claim on the insurer.
Therefore, Bharti AXA came up with a solution in the year 2012-‘claims
settlement at home.’ The insurer has taken the responsibility of ensuring



customer satisfaction, by assuring claims settlement on intimation.
Future Generali general insurance company with its large chain of malls
under the Future group has brought a new concept of ‘mallassurance’ in
2009. Any mall today has a very large population of people from various
backgrounds, age groups that visits for variety of reasons. To capture this
population the easiest way was by introducing this concept of
mallassurance wherein an insurance policy is bought by the customer in a



mall and the formalities to complete the contract are very limited.
In 2011,HDFC ERGO came out with ‘cashless claim service at any of their
1600+ authorized network of garages’ for motor insurance policy holders.
30

Also they have launched a website to purchase policies online with only


three clicks of a button.
ICICI has always been a leader on technology front is it in banking or
insurance industry.
o ICICI Lombard embraced technology from the very beginning of its
existence, in the year 2003 it took a decision to deliver insurance
using technology.
o In the same year 2003, it decided to provide customized solutions to
every customer of theirs to maintain their service quality.
o In the year 2006, ICICI Lombard has strengthened its servicing
capabilities across all distribution channels. A web based policy
administration system has been implemented for retail products
which provide scalability, flexibility and ease of use. Point-of-Sale
(POS) solutions that allow transactions even in the off line mode
were developed and deployed, thereby reducing the dependency on
internet connectivity and enhancing the reach of the organization.
o Instant issuance of policies with the least number of steps in the
process.
o Road side cover assistance in case of unexpected breakdowns.
o ICICI Lombard launches mobile application 'Insure'
o A 12-inch sized instrument akin to the machines that are used to
swipe debit and credit cards at merchant establishments may well



change the way the Indian health insurance industry functions.
Technology Innovation- Religare Health Insurance introduced a Mobile App to
overcome challenges such as inaccuracy in premium calculations and
excessive paperwork leading to high business applied-to-issued ratios. The
application now serves as a ready reckoner for premium calculation, payment
realization, network hospital checklist and others for the sales staff during



customer interactions.
Technology Innovation New India Assurance Company launched a Mobile App
that is available on Google Play Store for its policy holders. Customers can
download this App and use it for renewing and paying premium for their
policies. This App gives the customer to pay his premiums from where ever
he/she is. The customer need not travel to the designated offices or branches
leaving behind his/her important work. All this can be done with the click of a
button on the mobile. Thanks to technology.
31

3 Process Innovation
Process innovation is important as this kind of innovation helps change the way a
service or product is delivered to the final customer. In some cases this innovation
can lead to paperless business, while in some others it helps to procure the desired
product or service in the least time possible, for example some of the insurers
provide a policy cover with in two minutes or the entire process is complete within
three steps using the internet or mobile Apps. This kind of innovation has taken the
insurance industry much ahead compared to the 1980s and the 1990s.
4 Business Model Innovation
Business model is a plan that is implemented by a company to generate revenue
and make profits from the business operations.
Business model was the buzzword in dotcom boom, it was used by everybody. A
business model can be simple or complex. A restaurant’s business model is to earn
money by providing the food to its customers, while that of a websites model might
be or might not be clear, as there are many ways of earning money for these
companies. Therefore, business model innovation is a must for sustainable growth.
Business innovation means a business’s attempt to reinvent itself in order to obtain a
competitive edge and stimulate company growth (http://www.ehow.com). With the
rise in technology the term business model came to prominence. The rise is closely
related to the emergence and diffusion of commercial activity on the internet. It’s a
way to differentiate oneself and to explain their competitive position.
One of the first people to use the term business model were ‘Konczal (1975) and
Dottore (1977). Both used in the area of data and process modeling. Closely related
to the word business model is in the information management the word architecture
of an information system. Architecture information system is the master plan of an
information system with all its components and relationships among the components.
Besides being the basis for an information system Eriksson and penker have given
some purposes of the word business model


To better understand the existing business
A basis for changing or improving the existing business structure and
operations
32



To experiment with a new business concept or to emulate or study a



concept that is used by the competitor
To look out for out sourcing opportunities

The word business model is being used widely now days. While the term refers to
the model of an existing business in information management, the term can also
mean a plan to describe or design a new business.
Most companies for a sustainable growth have concentrated on efficiency or just
good marketing. It was either through streamlining processes or introducing new
products to ensure growth by achieving smaller environmental footprint. Product or
process innovation is a must and helps the company to move closer to sustainable
development, but they don’t address the underlying value structure of the company.
These innovations are incrementally better, but not transformative. Product or
process innovation shouldn’t be mistaken for business model innovation.

Quantitative Data Analysis
Table shows the analysis of regression of change in innovation magnitude with that
of growth in miscellaneous premium.
Table - shows results of regression analysis between magnitude changes in
innovation with miscellaneous premium.
Types of Innovation

Coefficient
33

P-value

Product Innovation
Services Innovation
Processes Innovation
Business
Model
Innovation
Total Innovation

s
-212.70
-3368.95
-8299.17

0.23
0.22
0.00

1240.65
-253.64

0.51
0.15

An analysis of the above table shows that processes innovation magnitude has a
significant impact on premium growth. The cell highlighted in grey represents
significance at 95%.

Impact of Innovation on Claims
Table shows the analysis of regression of change in innovation magnitude with that
of growth in total claims incurred.
Table :- shows results of regression analysis between magnitude changes in
innovation with net total claims incurred.

Coefficient
Types of Innovation
Product Innovation
Services Innovation
Processes Innovation
Business
Model

s
-117.89
-1345.62
-4809.56

P-value
0.51
0.51
0.01

Innovation
Total Innovation

884.49
-143.50

0.51
0.41

An analysis of the above table shows that processes innovation magnitude has a
significant impact on growth in total claims incurred. The cell highlighted in grey
represents significance at 95%.

34

Table shows the results of comparison of premium growth between the two groups of
companies.
Table:- Table showing comparison of total claims ratio due to innovation.
Types of Innovation

Product
Change
Service
Change
Process
Change
Business

Mean
Companies

Companies

P-value

with

without

Innovation

Innovation

-0.24

-0.17

0.88

-2.37

-0.04

0.02

-0.02

-0.21

0.87

-1.19
-0.53

-0.07
0.11

0.15
0.20

Innovation
Innovation
Innovation
Model

Innovation Change
Total Innovation Change

From the above table it can be noticed that the mean growth in claims ratio for firms
without product innovation, service innovation, business model innovation and total
innovation is much higher than companies which have innovated in these areas. The
means are statistically significantly different incase of service innovation but not
statistically significantly different in case of product innovation, process innovation
and business model innovation, it still shows that the non-innovator firms have
advantage over innovating firms. The cell highlighted in grey represents significance
at 95%.

Table shows the results of comparison of premium growth between the two groups of
companies.
Table:- Table showing comparison of change in commission & management
expenses due to innovation.
Types of Innovation

Mean

P-value

35

Product

Innovation

Change
Service

Innovation

Change
Process
Change
Business

Companies

Companies

with

without

Innovation

Innovation

0.44

0.59

0.65

0.48

0.53

0.94

0.53

0.53

1.00

0.95
0.62

0.47
0.44

0.35
0.60

Innovation
Model

Innovation Change
Total Innovation Change

From the above table it can be noticed that the mean change in commission and
management expenses for firms with business model innovation and total innovation
is much higher than companies which have not innovated in these areas. Though the
means are not statistically significantly different, it still shows the advantage
innovating firms have over non-innovators.

Table shows the results of comparison of premium growth between the two groups of
companies.
Table :-Table showing comparison of total operating expenses due to
innovation.
Types of Innovation

Product

Innovation

Change
Service

Innovation

Change
Process

Innovation

Change

Mean
Companies

Companies

with

without

Innovation

Innovation

0.62

0.43

0.24

0.62

0.51

0.73

0.41

0.52

0.78

36

P-value

Business

Model

Innovation Change
Total Innovation Change

0.78
0.64

0.48
0.40

0.24
0.14

From the above table it can be noticed that the mean total operating expenses for
firms with product innovation, service innovation business model innovation and total
innovation is much higher than companies which have not innovated in these areas.
Though the means are not statistically significantly different, it still shows the
advantage innovating firms have over non-innovators.

Chapter 5
Summary, Conclusion and Suggestions
Conclusions and Recommendations

With the dawn of the new millennium innovation has become the buzz word in
every industry. Rapid growth in information technology is the game changer in all the
industries. Those companies that embrace quick changes in technology have the
first mover advantage, be it manufacturing companies or financial services
companies. Innovation in information technology has provided the financial services
providers a new set of services, process or business models. The concept of pay-as37

you-drive is a brilliant product innovation, while this is possible to take place only in
the presence of information technology, this is service innovation. This product can
be renewed on the go, no paper work required, a paperless transaction, a new
process.

Conclusions
This study was conducted with the following hypothesisThere is no significant relationship between innovation and financial
performance in Indian non-life insurance sector.
Based on the results of the study it has been found that there is significant impact of
individual innovation types on different financial performance parameters. Therefore
the hypothesis of the study has not been found to be true.

38

Implications of the Study
Based on the analysis the following are the implications


Different types of innovation have a significant impact on different
financial performance parameters of insurance companies. Therefore,
it is necessary to promote that specific type of innovation depending on



the need.
Innovation is a long-term investment; therefore one shouldn’t expect
immediate results. Firms must continue innovating in spite of shortterm hiccups.

Scope for further Study



This study can be carried out on the Indian life insurance companies.
Comparison of Indian innovation styles in the private sector non-life insurance
companies with those of global innovation styles in the non-life insurance can
bestudied.

BIBLIOGRAPHY AND REFERENCES

Bibliography

Craig, E., Hou, C., & McCarthy, B. F. (2012). The looming global analytics talent
mismatch in insurance.
Damanpour, F. (2010). An integration of research findings of effects of firm size
and market competition on product and process innovations. British
Journal of Management, 21(4), 996-1010.
Hager, C. (2006). Determining degree of innovation in business models by
applying

product

innovation

theory.

MSc

in

Innovation

&

Entrepreneurship. University of Oslo, Oslo.
Huston, L., & Sakkab, N. (2006). Connect and develop. Harvard business review,
84(3), 58-66.
Jütting, J. (2009). INNOVATIONS IN INSURING THE POOR.
Osborn, D. V. (2012). Innovation in distribution models at the base of the pyramid.
Ghosal, M. (2012). Role of insurance in economic development of India. ZENITH
International Journal of Business Economics & Management Research,
2(7), 81-92.

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