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WHAT IS GLOBALIZATION ?
Globalization is a process of interaction and integration among the people,
companies and governments of different nations, a process driven by
international trade and investment and aided by information technology. This
process has effects on the environment, on culture, on political systems, on
economic development and prosperity, and on human physical well-being in
societies around the world.
Globalization is not new, though. For thousands of years, peopleand, later,
corporationshave been buying from and selling to each other in lands at greatdistances, such as through the famed Silk Road across Central Asia that
connected China and Europe during the Middle Ages. Likewise, for centuries,
people and corporations have invested in enterprises in other countries. In fact,
many of the features of the current wave of globalization are similar to those
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prevailing before the outbreak of the First World War in1914.
But policy and technological developments of the past few decades have
spurred increases in cross-border trade, investment, and migration so large that
many observers believe the world has entered a qualitatively new phase in its
economic development. Since 1950, for example, the volume of world trade has
increased by 20 times, and from just 1997 to 1999 flows of foreign investment
nearly doubled, from $468 billion to $827 billion. Distinguishing this current
wave of globalization from earlier ones, author Thomas Friedman has said that
today globalization is farther, faster, cheaper, and deeper.
This current wave of globalization has been driven by policies that have opened
economies domestically and internationally. In the years since the Second
World War, and especially during the past two decades, many governments
have adopted free-market economic systems, vastly increasing their own
productive potential and creating myriad new opportunities for international
trade and investment. Governments also have negotiated dramatic reductions in
barriers to commerce and have established international agreements to promote
trade in goods, services, and investment. Taking advantage of new opportunities
in foreign markets, corporations have built foreign factories and established
production and marketing arrangements with foreign partners. A defining
feature of globalization, therefore, is an international industrial and financial
business structure.
Technology has been the other principal driver of globalization. Advances in
information technology, in particular, have dramatically transformed economic
life. Information technologies have given all sorts of individual economic actors
consumers, investors, businessesvaluable new tools for identifying and
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pursuing economic opportunities, including faster and more informed analyses
of economic trends around the world, easy transfers of assets, and collaboration
with far-flung partners.
Globalization is deeply controversial, however. Proponents of globalization
argue that it allows poor countries and their citizens to develop economically
and raise their standards of living, while opponents of globalization claim that
the creation of an unfettered international free market has benefited
multinational corporations in the Western world at the expense of local
enterprises, local cultures, and common people. Resistance to globalization has
therefore taken shape both at a popular and at a governmental level as people
and governments try to manage the flow of capital, labor, goods, and ideas that
constitute the current wave of globalization.
To find the right balance between benefits and costs associated with
globalization, citizens of all nations need to understand how globalization
works and the policy choices facing them and their societies.
Globalization is altering the world economic landscape in fundamental ways.
Globalization has profound implications for developing countries. It
creates important new opportunitieswider markets for trade, an
expanding array of tradable, larger private capital inflows, improved
access to technology. In a globalizing economy, alliances are a means
of expanding internationally more rapidly. Alliances make it possibleto enter new markets using the distribution networks and the specific
knowledge of the local partners. Joint ventures between domestic
companies in developing countries and foreign companies have
become a popular means for both managements to satisfy their
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objectives. India is a marginal player in global insurance market. India
is a grossly underinsured nation. For a nation with huge budgetary
deficits, the insurance sector if properly exploited could have
mobilized valuable financial resources for the government. This paper
is divided into four parts. First part focuses on globalization and its
lesson for the developing countries. The Second part addresses the
various facets of strategic alliances. The Third part deals with the
importance of alliance for the Indian insurance sector in the emerging
knowledge based economy. The Final part suggests some policy
measures to make joint venture stable and successful.
As the new millennium dawns, the role of knowledge and information has
become increasingly salient in the structure, growth and organization of
economic activity all around the world. The rapid pace of scientific and
technological development is a major factor behind the fairly dramatic
economic restructuring occurring globally. It is also widely recognized that the
creation, diffusion, adaptation and effective use of knowledge and technology is
the major factors behind the growth and development of any economy.
Globalization is altering the world economic landscape in fundamental ways. It
is driven by a widespread push toward the liberalization of trade and capital
markets, increasing internationalization of corporate production and distribution
strategies, and technological change that is rapidly dismantling barriers to the
international tradability of goods and services and the mobility of capital.
DEFINITION OF GLOBALIZATION
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Globalization can be defined in several different ways depending on the level
we choose to focus on.
At a Worldwide level Globalization refers to the growing economic
interdependence among countries as reflected in increasing cross-border
flows of goods, services, capital and know-how.
At the level of a specific country Globalization refers to the extent of
the interlink ages between a countrys economy and the rest of the
World. Some key indicators to measure the global integration of any
countrys economy are exports and import as a ratio of GDP, inward and
outward flows of foreign direct investment and portfolio investment, and
inward and outward flows of royalty payments associated with
technology transfer.
At the level of a specific industry Globalization refers to the degree to
which a companys competitive position within that industry in one
country is interdependent with that in another country. Key indicators of
the Globalization of an industry are the extent of cross-border trade
within the industry as a ratio of total worldwide production, the extent of
cross-border investment as a ratio of total capital invested in the industry,
and the proportion of industry revenue accounted for by companies that
compete in all major regions.
At the level of a specific company Globalization refers to the extent to
which a company has expanded its revenue and asset base across
countries and engages in cross-border flows of capital, goods and know-
how across subsidiaries. Key indicators of the Globalization of a
company are international dispersion of sales revenues and asset base,
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intra-firm trade in intermediate and finished goods, and intra-firm flows
of technology.
FORCES OF GLOBALIZATION
Economic globalization is a set of processes leading to the integration of
economic activity in factor, intermediate, and final goods and services markets
across geographical boundaries and the increased salience of cross-border value
chains in international economic flows. The increased competition that is
driving globalization will always produce both winners and losers. It is
therefore not surprising that some managers see current trends as a great threat
while others view them as a challenge and an opportunity. Four forces are
behind the increase in global competition:
1. Changes in consumer expectation: Consumer expectations of quality,
service and price are higher than ever and still increasing. At the same
time, future consumer preferences are becoming extremely difficult to
predict.
2. Technological change: New information technology allows companies
to run their business in a way that was impossible yesterday and at a
fraction of the price.
3. Deregulation: In recent years, the global trend with the exception of
environmental regulation has been towards deregulations and less
government intervention. In newly, deregulated industries, competition
has increased dramatically.
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4. Regional forces: There are huge regional differences in n structure and
growth rates in the world. At the same time, politically motivated
regional trade blocs, such as the European Union and be Association of
South East Asian Nations are being formed. The objective of a trade bloc
is to maximize trade within the block and limit trade between blocs to
items that cannot be produced locally. The rules of the game are
changing.
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INSURANCE SECTOR IN INDIA
The basic human trait is to be averse to the idea of taking risks. There is always
an urge to minimize the risks and take protection against possible failure. The
risk includes fire, the perils of sea, death and accidents and burglary. Any risk
may be insured against at a premium commensurate with the risk involved.
Thus collective bearing of risk is insurance. Insurance is whether life or non-life
provides people with a reasonable degree of security and assurance that they
will be protected in the event of a calamity or failure of any sort. There are
number of forces driving the services sector today. Five environmental
variables that affect all industries-customers, competitors, government,
technology and globalization-are forcing rapid changes in the service sector. In
addition, there are four factors of particular importance to service providers-
change in how quality is perceived, cost control, customer services and the newdefinitions of the customer. Services are relatively intangible, produced and
consumer simultaneously and often less produced and consumer simultaneously
and often less standardized than goods. These unique characteristics of services
present special challenges and strategic marketing opportunities to the service
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marketers. The real competition between the service marketers is set on after
globalization of the Indian economy. The service marketing organization has to
adopt professional management and its marketers have to imbibe the qualities
of professionalism in order to meet the expectation of the customers. Hence, in
this paper an attempt has been made to discuss the penetration of insurance
industry, key issues in insurance and Emerging Areas of insurance, which is
one of the leading service sector in our country.
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ORIGIN AND GROWTH OF INSURANCE SECTOR
Insurance in modern form originated in the Mediterranean during the 13th
century. The earliest references to insurance have been found in Babylonia, the
Greeks and the Romans. Marine insurance is the oldest form of insurance
followed by life insurance and fire insurance. Life insurance activity in its
modern form started in India in 1818 to provide for English widows when
oriental life Insurance Company was incorporated at Calcutta, followed by
Bombay Life Assurance Company in 1823and Tritron Insurance Company for
General Insurance in 1850. Insurance regulation formally began in India
through the passing of two acts, the Life Insurance companies Act of 1912and
the Provident Fund Act of 1912.However the first comprehensive legislation
was introduced with the Insurance Act of 1938 that provided strict state control
over insurance business in the country. After independence, the business of
India Insurance grew at a faster place as competition amongst the Indian
companies intensified. The decision of nationalization of life is-
The author argues that opening up of the
insurance sector will foster competition,
innovation and product variations. However, in
this context one has to consider various issues
at stake including demand for pension plan,
separateness of banking from insurance sector,
role of IT, possible use of postal network for
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selling insurance products and above all, the role
of Insurance Regulatory Authority.
Insurance business took place in 1956when 245 India and foreign insurance
provident societies were first merged and then nationalized. It paved the way
towards the establishment of
Life Insurance was to raise the much needed funds for rapid industrialization
and self-reliance in heavy industries. General Insurance followed suit and 1968;
the Insurance Act was amended to allow for social control over the general
insurance business. Subsequently in 1973, non-life insurance business was
nationalized and the General Insurance Business (Nationalization) Act,
1972was promulgated.
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GLOBALIZATION OF INSURANCE SECTOR IN INDIA
The experience after independence in insurance sector showed that the ultimate
objective remained largely unfulfilled due to the relatively low spread of
insurance in the
country the efficient and quality functioning of the public sector insurance
companies and the untapped potential for mobilizing long term financial
resources to finance the growth of infrastructure, the government set up an
insurance returns Committee in April, 1993 under the chairmanship of R. N.
Malhotra, to suggest reforms in the insurance sector including improving the
functioning of the LIC, GIC and strengthening the regulatory system. The
committee submitted its report to union finance minister on 7-01-1994,
recommending phased program of liberalization and called for a private sector
entry and restructuring of LIC and GIC. The subsequent government moved an
insurance bill but it was not passed, the next government moved on insurance
bill again in1998, which was referred back to a select committee of parliamentafterwards the government introduced the insurance regulatory Development
authority (IRDA) Bill in parliament with some changes in the original structure
the government of India created history on October private sector companies.
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Insurance is a Rs. 400 billion business in Indias and together with banking
services adds about 7% to Indias gross domestic product (GDP) gross premium
collection is about 2percent of GDP and growing between15 and 20 percent per
annum. India also has highest number of life insurance policies in force in the
world. Yet more than three fourth of Indias insurance population has no life
insurance cover the penetration of insurance is very low in India the following
indices support this contention. While per capita insurance premium in
developed countries is very high, it is quite low in India per capital insurance
premium in India in 1999was only $8 while it was $ 4800 for Japan, $ 1000 for
Republic of Korea, $ 887 for Singapore, and $ 823 for Hong Kong and $ 144
for Malaysia. The insurance Premium as a Percentage Of GDP was 14% for
Japan, 13% for south Africa, 12% for Korea, 9% for UK and less than 2% in
India in 1999 Similarly the insurance Premium as a percentage of Gross
Domestic saving (GDS) was 52% for U.K, 35% for other European and
American countries, it was only 9% for India in 1999 The share of India in the
World market in terms of Gross insurance premium is again very 1000. For
instance, while Japan has 31%, European Union 25%., South Africa 2.3%,
Canada 1.7%share of the global insurance premium, it is only 0.3% for India.
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INSURANCE SECTOR HURDLES
The insurance industry has been growing between 15 and 20 percent, but it lags
for behind its global counterparts. This was due to the following reasons.
1. Insurance companies create products and go out to find customers. They do
not create products that the market wants.
2. Insurance awareness among the general public is low.
3. Term- Insurance Plants are not promoted.
4. Unit -linked assurances are not available.
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5. Insurance covers are expensive. Inefficient management and low investment
yield are responsible for the high premium charged by Indian Insurance
companies Investment restrictions have been responsible for 10w yields.
6. Returns from Insurance Products are low.
7. There is a dearth of innovative and buyer-friendly insurance products.
8. Most agents and development officers are interested only in producing new
business servicing existing customers satisfactorily has not been a priority for
them the obvious reason to this is that incentives are them the obvious reason to
this is that incentives are based on new business generation and not on
satisfactory serving of existing customers it is surprise to note that more than
10% of LIC policies are surrendered or get lapsed every year.
9. There is no market research worth the name and computerization is woefully
inadequate.
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INSURANCE SECTOR EMERGING AREAS
Some of the emerging areas for insurance sector in India are:
1 DEMAND FOR PENSION PLANS:
Two relatively modern trends affect life insurance business in India
significantly. The first one is the joint family system which worked like
an insurance arrangement. With more and more nuclear families becoming the
rule, there it a greater demand for life insurance cover the second trend is that
elderly increasingly have to fend for themselves. In 1990, India had about 54
million people above the age of 60. This number is expected to increase to 100
million by 2004 and to almost 10% of the total population by 2010. Thus future
senior citizens look towards planning for their own old age and the need for
pensions and annuities. These two trends portend a large and growing marketfor life insurance in India.
2. SEPARATENESS OF BANKING AND INSURANCE:
There is lot of speculation whether banks should be allowed to operate in the
insurance sectors. The reasons for allowing banks are competition would
enhance efficiency and benefit consumers, public- men enjoy a One- Stop
Financial Service Paradigm, banks could recoup some of the lost business to
securities firms and there would be synergies in operating insurance and
banking. The reasons against are - it would create unhealthy concentration of
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market power, it would expose banks to additional and unnecessary risks and
banks would have unfair advantages since they have detailed information on
their customers financial position. This debate is for from settled and we are
likely to see some restructuring in operations of banking and insurance.
3. ROLE OF INFORMATION TECHNOLOGY:
The Business of selling life insurance requires assessing the profile of the
customer and assigning the right policy. This process is facilitated by a database
and is completely driven by information technology. If it uses this network of
database to offer their products, it would have better utilized this vastly
underutilized capacity.
4. USING POSTAL NETWORK:
Another important factor is allowing the existing network of 150000 branch
offices of post and telegraph to sell life insurances and related financial
products. Already postal banks generate more deposits than all commercial
banks and hence their role can hardly he overemphasized. Post offices can also
act as avenues or agents of non-life insurance companies. However they cannot
be expected to underwrite risks.
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5. CREATING INSURANCE AWARENESS:
It is the need of hour to create insurance awareness among he general public. It
will require a whole lot of efforts on the supply and distribution side.
6. INNOVATIVE PRODUCTS:
Insurance companies should offer innovative products to tap huge amount of
resources for the developmental activities. In developed economies, insurance
products are sold Focus of insurance industry is changing towards providing a
mix of both protection / risk cover and long- term investment opportunities.
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NEED OF GLOBALIZATION IN INSURANCE SECTOR IN INDIA
Insurers promote financial system efficiency through their role of both life and
non-life financial intermediary in the following three ways:
1. Reduction in Transaction Costs: Because it collects the premium from a very
large number of policy holders from different regions of the country and
thereby commands huge funds at their disposal.
2. Creating Liquidity: Since there is no time lag between occurrence of loss on
the one hand and receiving the claim amount by the policyholders. Moreover
the funds raised are used for long term projects, which are not required to be
paid immediately. Thus liquidity is created in the capital market.
3.Facilitating Economies of Scale in Investment: Investment in large projects
such as national road projects, railways, ports; power projects facilitate
innovations and specializationss and thereby promote economic efficiency and
productivity in the economy.
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WHY DO INSURERS DECIDE TO GO GLOBAL?
First of a11 many countries are moving away from protectionism and
state control and taking a more market-driven approach, especially in the
insurance sector. They are regulating and deregulating insurance to
encourage a stable, properly managed, and thriving industry through
privatization and opening up their markets to foreign companies
Secondly, many previously volatile economies are settling down and as a
result a new middle class is emerging in countries around the world. A
significant proportion of the population in these emerging markets is
aging. Moreover these countries place a great importance on family
values. When you can earn a decent living and when you place a high
priority on taking care of family, you save money and buy insurance.
Thirdly, the new challenges many insurers face in their local markets
from non-traditional competitors like banks, non-financial companies,
financial retail centers; direct insurers; the Internet. Mature markets like
United States are coping with market saturation both real and perceived
and with stricter sales practices regulation.
GLOBAL INSURANCE MARKET- CURRENT SCENERIO
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Insurance companies are developing primarily from industry
consolidation rather than the growth of new companies or increased
overseas branching. Mergers and acquisitions are especially prevalent in
markets where there have been a large number of undifferentiated
players, none of which have controlled more than five percent of the
market.
Vertical integration is occurring, with a merging of the roles of agents)
underwriters and risk assessors. At the same time, there is a growth in
horizontal integration between insurance firms and other competitors
such as financial investment firms) banks, credit cards companies and
retailers. But, while consolidation may bring economies of scale, it
doesnt solve basic distribution problems.
In order to remain competitive, insurance companies are increasingly
unbundling the value-added chain, contracting out non-core support
services and specializing in specific market segments. As the business
community becomes more sophisticated in understanding the risk
exposures and risk management, it is increasingly unwilling to incur the
high costs of insurance from inefficient, multi-line firms.
Banks are helping corporate clients set up captives and risk retention
groups to bypass the traditional insurance market and acquire more
effectively exposure coverage at lower administrative costs.
Alternative such as captives, risk retention groups or self insurance now
control 40-45 percent of the total commercial market. Even mid-size
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companies are moving in this direction by going to rent-a-captive
where they can rent space in a captive as risk takers.
Internet is the growing as a global distribution channel world-wide,
which is increasingly being used for marketing of insurance products and
services. This is leading to a sharp rise in use of commercial on- lines
services, which allow policyholders to view, query and update policy
information. Insurance companies have revised their marketing strategies
to accommodate the interactive marketing style of the electronic media.
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IMPACT OF GLOBALIZATION ON INDIAN INSURANCE
SECTOR
The last millennium ended with a flourish of insurance mergers and acquisitions
across the globe. 1999 saw over 630 insurance-related deals world-wide, a 15
percent increase over 1998 figures. Over 33 percent of these deals happened
during the last quarter preceding year 2000. And the Asian marketplace has
contributed significantly to this activity.
Indias developing markets afford huge opportunities for growth, surpassing
anything available in the west. Also, in the coming future, large mergers and
acquisition activities are expected. Companies with the size to influence the
market will obviously gain the best benefits of globalization. To acquire that
influence, a focused merger and acquisition strategy must be implemented since
the current competitive environment may make it impossible to achieve growth
through internal developments. Alternative approaches will only show down the
process. Since the stock markets are unrelenting and insatiable in their
expectations, insurers will have to turn to mergers and acquisitions to meet
these demands.
Other insurers will find it increasingly difficult to retain their markets. And it
will become even less viable for them to maintain even partially functional
networks or competitive standards and service. If they wish to survive, they will
have to either merge or become niche specialists. India and Korea are the two
last countries in Asia to deregulate their financial sector. Although different
markets fundamentally, they both have strong privatization programs in the
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place. This renewed focus on privatization has a twin-pronged impact since it
presents greater business opportunities and strengthens to strong link that
privatization shares with deregulation.
Liberalization of the insurance sector has allowed foreign insurers to enter the
market. Most of the foreign insurers have started rushing find local partners
within the local market. India offers immense possibilities to foreign insurers
since it is the worlds most popular country, having over a billion people still
uninsured. The insurance industry is undergoing major restructuring as firms
are moving fr,being national to global in scope, as economies of scale become
increasingly important in commodity product lines. The main insurance areas
that have already become globalizes include marine, aviation, alternative risk
financing and reinsurance.
For a developing country like India, growth in per capita GNP arid education
levels brings an increase in demand for life insurance products. Most of the
economist felt that demand for insurance products will be strongest in the
country when:
Individual are increasingly responsible for their own retirement savings and
estate planning due to the removal of government safety nets.
Fewer children to care for aging parents.
A movement away from the extended family structures to nuclear families.
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OPPORTUNITIES OPEN FOR THE PRIVATE INSURANCE COMPANIES
As the threat of retirees outliving their assets increases, alternate support and
wealth conversation mechanisms need to be found. Given their large population
bases, India will continued to be high demand market. With the liberalization
and deregulation of the Indian financial sector, the following opportunities will
be open for the private insurance companies:
1. As governments struggle with budget deficits and the threat of an aging
population outliving its assets, new opportunities in private insurance
financing are opening up in workers compensation and old age pension
schemes. This is because the government is facing acute shortage of
funds to repay the pension to the government employees and is thinking
of phasing out such schemes.
2. The growth of private health care networks brings with it an increased
demand for health insurance, either through individual contracts or group
employee benefit programs.
3. Other high demand growth areas include professional and product
liability and political risk, especially as developing economies become a
more attractive to investors.
The World Wide Web has grown rapidly, ushering in widespread usage of e-
commerce that has impacted business world-wide changing the methods under
which they have traditionally operated.
Within India, the relatively immature insurance companies are structured in a
way where they are spilt by:
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Product-commercial, personal or life, or
the distribution method-broker, agency or direct.
The Indian insurance industry cannot remain the exception to the rule any more.
Some of them have tried to implement e-business in some form or the other to
make their business more efficient and effective but no has taken a gigantic step
towards complete commitment for e-business as the way of conducting
business.
New technology will give customers better, wider and faster access to products
and services than the options offered earlier. This freedom of choice will place
demands on business and this can be achieved only when insurance companies
have revamped and improved their product and delivery service just to stay
afloat.
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RESPONSES TO GLOBALIZATION
CORPORATE RESPONSES TO GLOBALIZATION
In response to the new context, most firms have adjusted quite rapidly to the
new types of competition. The largest firms have adopted strategies that are
increasingly global, with two main objectives in mind:
1. To improve profitability by reducing costs and
2. To strengthen their technological capability.
Corporate profitability is improved by spreading fixed costs between the parent
company and its new partners. To strengthen their technological capability,
firms can either continue to internalize activities via mergers or acquisitions of
other innovative firms, or adopt an external approach and conclude co-operation
agreements or alliances based on co-operation between independent firms
around a common program. With the growth of alliances, the R&D canters of
major firms have opened up to a certain degree and knowledge has started to
flow between them, although the technology transfers involved relate to pre-
competitive programs and are tightly controlled and reserved to member of the
network. A firm can externalize some of its activities in sectors that have
attained a certain degree of maturity, and simultaneously enter into
technological alliances to develop new products or processes. If this two-fold
trend continues, it could reshape the world economy.
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GOVERNMENT RESPONSES
Globalization is seen as a disciplinary force for governments that undertake
unsustainable economic policies. High fiscal deficits and unsound financial
policies that lead to inflationary pressures, current account deficits and/or high
real interest rates, sooner or latter tend to be penalized by international investors
and global capital markets. However, the other side of this is that fiscal policy
tends to lose its capacity to act as a counter cyclical instrument oriented to
maintain full employment. The fact is that international financial markets are
very sensitive on the stance of fiscal policy of a country and uses it as anindicator of the degree macroeconomic responsibility of governments. This,
tend to encourage governments to follow persistently austere fiscal policies in
order to satisfy financial markets and gain credentials of serious fiscal
behaviors. The classical role of fiscal policy to maintain a high level of
aggregate demand when private investment or private consumption declines is
substituted by restrictive fiscal policy oriented to gain credibility and induce a
recovery only through a reactivation of private spending. In short, Government
authorities have been slower to respond to globalization. Their response has
taken three forms:
1. adjustment measures
2. policies to promote international co-operation and
3. A reluctance to accept certain consequences of globalization.
First, they have realized that the degree of interdependence is now such that
solutions are needed which go beyond national boundaries. The number of
international agreements on the health, environment, research and technical
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standards has thus increased in recent years. Second, the authorities have sought
to correct certain ill-controlled instances of globalization. Also, the authorities
have become increasingly aware that, because of growing interdependence,
national policies are less effective when they are out of line with one another.
This aspect of globalization that may often be perceived as a constraint on
national independence and a loss of sovereignty. If the rate of Globalization is
indeed accelerating, the global economic landscape will undoubtedly look very
different 20 years from now. Companies will need to adapt to this changing
landscape and those that choose to move first will have a better chance of
turning these changes into competitive advantage. The events of the last two
years in the global economy indicates as a main challenge, the seizing the
opportunities open by globalization while at the same time managing the
tensions and problems it poses particularly, for developing countries.
National prosperity is created, not inherited. It does not grow out of a countrys
natural endowments, its labour pool, its interest rates, or its currencys value,
according to Classical Economics. A nations competitiveness depends on the
capacity of its industry to innovate and upgrade. Companies gain advantage
against the worlds best competitors because of pressure and challenge. They
benefit from having strong domestic rivals, aggressive home based suppliers,
and demanding local customers. In a world of increasingly global competition,
nations have become more, not less, important. As the basis of competition has
shifted more and more to the creation and assimilation of knowledge, the role of
the nation has grown. Globalization has profound implications for developing
countries. It creates important new opportunitieswider markets for trade, an
expanding array of tradable, larger private capital inflows, improved access to
technology. The outward-oriented reforms being adopted by more and more
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developing countries make the latter both agents and beneficiaries of
globalizationthese reforms both contribute to globalization and expand
opportunities for developing countries to participate in its benefits. The new
opportunities are accompanied by tough new challenges of economic
management. Integration requires adopting and maintaining a liberal trade and
investment regime. Policy-makers are confronted more and more with a new
disciplinethe need to maintain the confidence of markets, both domestic, and,
increasingly, international. In this setting, sound economic policies command a
rising premium; the payoffs are larger, but so are the penalties for policy
inaction or errors. What is more, globalization increases competition between
policy regimes; with greater capital mobility, investors increasingly are
exploring opportunities worldwide and assessing a countrys policies not only
in the absolute but also relative to those in other countries.
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HAS GLOBALIZATION HELPED OR HURT THE INSURANCE
INDUSTRY?
Globalization has provided many benefits for the insurance industry.
Over the years there has been a dramatic increase in
professionalism throughout the industry as companies apply best
practices developed by innovators in one market to other markets around
the world.
Sharing their expertise across borders that ultimately benefits both
consumers and the industry as a whole has created a uniform regulatory
environment.
Globalization has resulted in a free flow of managerial talent
across borders. Companies like New York Life are moving smart
managers from one market to another. This helps broaden
the horizons not only of each company but also of the entire industry
itself.
There are not many instances in which globalization have hurt insurance
industry.
The high negativity as a result of globalization occurs when an insurer enters
new foreign markets and pay high price to buy all or a portion of an existing
insurer in that market, or pays ridiculous sign-on bonuses to attract
experienced agents from established companies. When the insurer comes to
know his mistake, he is left with option either to take a big write-down or
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withdraw from the market which ultimately hurts the reputations of all
foreign companies operating in that market.
Even if you have no intention of establishing a global presence, you must be
prepared to compete successfully with those who do, because you can be
certain they are assessing the potential of your corner of the world like New
York Life, you may just have what it takes to succeed on both the home
front and in the international arena.
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TECHNIQUES USED BY INSURANCE COMPANIES AFTER
GLOBALIZATION
Globalization has opened the way for insurance companies to take their
business anywhere on earth. This has increased the competition among these
companies. All these companies have large capital, huge capital and advance
technology. The target is to cover more market shares by capturing more and
more customer. To attract and retain their customer these companies are coming
out with many innovative products and service. They are also outsourcing their
many activities to focus more and more on building customers and also reducetheir cost. Almost every company deals online. These all techniques are
explained in details below.
BUSINESS PROCESS OUTSOURCING
Insurance BPOs are most likely to have exceeded the target of $690 million
when work done by captive and third-party vendors is taken into thecalculation. Nearly half of insurers use BPO. Insurers have made great
progress in terms of BPO acceptance, with the practice having gone from
being considered a risky strategy for the few to a mainstream strategic
choice. In fact, insurers to a degree feel compelled to put BPO on the C-
level agenda.
As insurance services mature and more high-end processes like analytics,
actuaries and underwriting services move to India, the BPQ industry is
upbeat.
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Claims and policy administration BPO is among the fastest growing BPO
areas.
Procurement BPO in insurance will show the fastest growth, driven by a
focus on improving efficiency in the claims fulfillment process.
India has several advantages as a leading insurance outsourcing destination.
It offers low costs and is an established destination for outsourcing. Indian
companies offer near shore services and IT outsourcers can leverage existing
relationships with large insurers.
The growth drivers are common to all verticals - cost saving, aboutfocus on
core processes of product development, innovation and marketing strategy
and minimizing risk through multiple delivery centers. For the insurance
outsourcing vertical, the critical drivers are:
Understand the Insurance regulation and statutory documentation of
various nations.
Deregulation of insurance markets in countries like India, China and Japan.
Availability of credible service providers.
Minimizing risk through multiple delivery locations.
Expanding organically and inorganically to establish a multi-location
presence to derisk client business.
Resolve more than 85% of inquiries without handing off the caller to other
administrators.
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INFORMATION TECHNOLOGY
The use of Internet technologies in the insurance industry is not just limited
to distribution; it also has a fundamental impact on almost all other
production areas. Products that are not necessarily suitable for online
marketing can still benefit from the huge opportunities for quality and
service improvements presented by e-business:
If clients already have extensive product and risk expertise, the Internet can
still be used as a marketing tool, despite high complexity and transaction
volume. Internet team rooms, for example, could support the consulting
and negotiation process.
Policy administration or claims settlement can benefit from online support:
For example, a client may seek independent advice when choosing a private
health insurer, but still be prepared to use online facilities to process and
settle doctors bills.
Brokers can use e-business solutions to bundle together the needs of a large
number of clients, handle the administration themselves, and then forward
the data to the insurer.
Modern communication technologies allow more personalized products,
faster response times, greater flexibility in insurance covers and better
support for risk management.
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ELECTRONIC BUSINESS
The current advances in information technology mark the beginning of a
veritable efficiency revolution in insurance markets. While actual translation
into new solutions is still in its infancy, the effects of e-business are the
subject of intense debate in the insurance industry. Many insurers are in the
process of implementing the new possibilities provided by technology and
testing innovative business models. Compared to long-established
companies, the new insurers of Central and Eastern Europe have the
advantage that they can introduce new business systems unencumbered by
existing models.
E-BUSINESS TRENDS IN INSURANCE
Compared to books, CDs, travel, software & hardware toys and online stock
trading or banking, development of the Internet in the worldwide Insurance
industry has been somewhat cautious. There are a host of special factors
which make the online selling of insurance products more difficult:
They are less standardized
They can be quite complex
They are usually taken out (i.e. purchased) infrequently
Regulatory hurdles
Insurance products differ in their suitability for marketing on the Internet. It
depends chiefly on how much advice is required. The more complex the
product and the bigger its financial scale (transaction volume), the greater is
the clients willingness to pay for advice. Products that are particularly
suited to Internet distribution are those that can be described and rated using
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a small number of parameters, such as motor, private liability, homeowners,
household contents and term life insurance.
INNOVATIVE PRODUCTS AND SERVICE
Globalization has force the insurance companies to become more customer
centric. The customers have become more demanding; they need new
products at reasonable prices. Before the insurance companies used to design
product first and then send it to market. Nowadays the companies design
products according to the customer preferences. The policies are also
making available easily through internet. Some famous innovations are:
Banc assurance
Unit Link Insurance Plan (ULIP)
Pension Policy
Online Trading
Reinsurance
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SWOT ANALISIS OF INSURANCE SECTOR AFTER
GLOBALIZATION
OPPORTUNITIES AND THREATS FOR INSURANCE
Globalization will have mixed blessing for India. It will entail new
opportunities for players but also, simultaneously bring threats against the
national interests.
OPPORTUNITIES
1. Opening up of the sector will ensure a larger flow of funds in two ways.
Competition a larger portion of savings will find its way into infrastructure
through insurance companies. This will change the image of India being a
highly under-insured nation.
2. After the nuclear tests, the government needs to hold out a hand of friendshipto the west to achieve aims related to national security. Insurance will be a
visible gesture.
3. From the view point of the capital markets, opening up of the insurance will
have a bullish impact. In the near term, insurance is a highly visible industry
and the fact that in spite of motivated opposition, the government is prepared to
go ahead sends a positive signal to foreign investors, even if they are not in
insurance. In the medium term, insurance companies are traditionally majors
players in stock markets. Life Insurance Corporation and General Insurance
Corporation make substantial investments in stocks. Once half-a-dozen
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companies come and start operating, the size of the pie would become larger
and huge invest able funds would come in. Insurance companies tend to be
value pickers. They invest in stocks with relatively steady earnings and a strong
asset base. So when insurers enter the market they will invest in SAIL or SBI,
even if they seem sluggish in the short-term.
4. The biggest benefit will be to the stock market because of the actual
investment flowing into infrastructure development. When longer term
insurance money flows into these areas, there would be a stupendous impetus to
growth. When GDP grows, the stock markets will grow in tandem.
5. The opening up of the insurance sector by the Government of India to private
and global players, will lead to the phenomenal growth in terms of number of
new players and new products and services.
However, it is critical that when we open the doors for insurance we protect our
own national long-term interests.
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THREATS
1. There is a fear that there will be flight of capital from India, to ensure against
this we should stipulate that capital and dividend repatriation should start only
after some years. It is also necessary to ensure that domestic capital raised
through premium is not repatriated.
2. The other fear is that the foreign insurers will cream the market. A level
playing field between LIC and GIC and other foreign companies should be
ensured.
3. The biggest fear is ownership that is the foreign insurers do not control the
management of the insurance company through backdoor. To prevent this we
should ensure that the day-to-day management is with the Indian partner and
foreign holdings do not exceed the ceiling laid down by law.
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LIBERALIZATION OF INSURANCE SECTOR
One of the major impacts of insurance globalization is liberalization.
Benefits and challenges of market access liberalization
The opening up of the insurance markets in emerging markets to foreign
competition has long been a contentious issue. Numerous arguments,
including the unfavorable balance-of-payment effect and the need to
protect infant industries, have been advanced to justify measures to
confine foreign inroads in the market. It is often the case of striking a fine
balance between the stability of the insurance market on the one hand and
ensuring efficiency and good value for consumers on the other hand.
Liberalization enhances efficiency of local insurance market. The
benefits of liberalization are multi-faceted. Foreign insurance companies
can enhance the efficiency of local insurance markets by providing
superior customer services, introducing new products and transferring
technological and managerial know-how. Liberalization increases
competition and encourages a more pronounced specialization according
to comparative advantages.
Due to their greater financial strength and risk diversification capabilities,
foreign insurers also often have superior claims paying ability, which can help
to enhance the financial condition of individuals, households and corporations
in emerging markets.
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Not only is foreign participation important in promoting financial stability, it is
also imperative to facilitating the trade and commerce of developing economies.
The availability of a reliable insurance sector has long been recognized as one
of the prerequisites in attracting foreign direct investment. Globally active
industrial and service companies expect their insurers to follow them and
provide worldwide support.
Further, the participation of foreign insurers could improve the efficiency of
capital allocation in emerging economies. Underwriting and investment
decisions made by foreign insurers based on their international experience and
best-practice considerations could send useful signals to markets for efficient
resource allocations. The availability of these signals, particularly in markets
where credit allocations are not completely based on economic considerations,
is important in improving capital productivity.
These positive considerations have underpinned the liberalization drive in
emerging markets but the pace of market opening is far from ever as there are
still concerns over the potential pitfalls of greater foreign participation.
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Malhotra Committee Major Recommendation on
Liberalization
The Malhotra Committee had made certain recommendations to the
Government to change the face of the industry and to give it a more meaningful
direction. Regarding the liberalization of the insurance industry, the Committee
made the following important
recommendations:
Private sector should be allowed to enter the insurance business. No composite insurance companies.
Number of new entrants to be controlled.
Minimum paid-up capital.
Obligation to do business in rural areas and for weaker sections of the
community.
Selective entry to foreign companies.
Technology up gradation.
Pension sector
Privatization of LIC and GIC
Establishment of an Insurance Regulator
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THE THREE KEY ISSUES THAT IMPINGE ON LIBERALIZATION
OF INSURANCE IN INDIA ARE
1. REASON FOR OPENING UP THE INSURANCE
INDUSTRY:
An insurance policy protects the buyer at some cost against financial loss
arising from a specified a risk. Different situation and different people
require different mix of risk - cost combinations. Insurance company thereby
offers schemes of different kinds. Among the emerging economies, India
is one of the least insured countries, but the potential for further growth is
phenomenal. The demand for insurance is likely to increase with rising percapital incomes, rising literacy rates and increase of the service sectors.
After Korean and Taiwanese insurance sectors were liberalized, the Korean
market has grown 3 times faster than GDP and Taiwan the rate of growth
has been almost 4 times than that of its GDP. Further, opening of the sector
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ISSUES
WHY
LIBERALIZE?
WHAT TYPE
OF
MARKET
STUCTURE?
WHAT IS THE
ROLE
OF
REGULATOR?
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to private firms will foster competition, innovation and variety of products.
It will also generate greater awareness on the need for buying insurance as a
service and not merely for tax exemption, which is currently done.
2. MARKET STRUCTURE:
What is the appropriate market structure for insurance markets? Should it be
monopoly (state or regulated) or should there be unlimited private entry or
should there only be a few regulated players? The answer is quite obvious.
When traditional public sector businesses like banking, power, telecom,
airlines and even postal services have been allowed private entry, why must
insurance remain a state monopoly? State monopoly had little incentives to
offer a wide range of products with more complex and extensive risk
categorization, better technology and better customer service including faster
settlements. Keeping in view the recommendations of insurance reforms
committee that a limited number of high capital private companies be
licensed, and no firm be allowed to operate both in life and non-life
insurance, IRDA has granted licenses to three private companies on October24, 2000 - Reliance Fire and General Insurance, HDFC Standard Life
Insurance and Royal Sundaram Alliance Insurance, to set up the shop and to
get into business.
3. ROLE OF IRDA
IRDAs primary function is to protect consumer interests. This means
ensuring proper disclosure, keeping prices affordable but also insisting on
some mandatory products, and most importantly making sure that consumers
get paid by insurers. Further, ensuring the solvency of insurers is a very
important function of regulatory authority. IRDA has evolved a set of
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operational guidelines to deal with maintaining the solvency of insurers.
Growth of insurance business entails better education and production to
customers, creating better incentives for agents and intermediaries. It has
evolved guidelines on the entry and functions of such intermediaries.
Licensing of agents and brokers are required to check their indulgence in
activities such as twisting, fraudulent practices, rebating and
misappropriation of funds.
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Case Study
Why does an insurer decide to go global? For the answer to this and several
other questions, Resource asked Gary G. Benanav, chairman and CEO of New
York Life International, to share his perspective. A Fortune 100 company, New
York Life is the largest mutual life insurance company in the U.S. and one of
the largest life insurers in the world. Founded in 1845 and headquartered in
New York City, the company and its affiliates offer life insurance, annuities and
longterm care insurance. New York Life Investment Management, LLC, a
New York Life affiliate, provides institutional asset management, retirement
plan and trust services. Other New York Life affiliates provide an array of
securities products and services such as institutional and retail mutual funds,
including 401(k) products. The companys distribution channels are career
agents (insurance products) and registered representatives (mutual funds). New
York Life prides itself onand is internationally acclaimed forits integrity,
financial strength, highly trained and responsive agents, community service,
and commitment to the mutual form of ownership.
New York Life is truly a global life insurance company. The company
first moved into the international marketplace in 1870. At that time it appointed
Harry S. Homans as general agent with offices in London and Paris to develop
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the European markets. In April 1884, Seton Lindsay was appointed to develop
the East, including China, India and the adjacent islands. By 1899, New York
Life, with US$ 1 billion of insurance in-force, had operations in 83
countries.
By 1905, the company had a worldwide agency force of 8,000 men and
women who operated out of 208 branch offices. However, foreign operations
were interrupted by the onslaught of World War I, al which time New York
Life decided to withdraw from all overseas markets. It reentered the global
arena in 1988 with the acquisition of a life insurance company in Hong Kong.
Since then, it has established operations in Argentina, China, India, Mexico, the
Philippines, South Korea, Taiwan and Thailand through New York Life
International, its overseas arm, as well as a representative office in Hanoi,
Vietnam, New York Life International offers life insurance and asset
accumulation products and services to individuals and groups in selected
emerging markets through subsidiaries, joint ventures and affiliates.
International revenue has reached US$ 1.4 billion. New York Lifes
internation6 business now represents more than 25 percent of its total life
insurance sales.
Benanav joined New York Life in 1996, where he not only heads up
New York Life International, but also serves as vice chairman of New York
Life and as a member of its board of directors and executive management
committee.
During the previous 24 years, Benanav held positions of increasing
responsibility at Aetna. In 1972, he joined Aetnas law department. From 1975
to 1986, he served as vice president and investment counsel and was Aetnas
senior financial, acquisition and divestiture lawyer. In 1986, he was promoted
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to vice president of finance and treasurer and was responsible for the
management of Aetnas banking, corporate finance, domestic and international
treasury and short-term investment activities. In 1989, he was appointed
president of Aetna International, Inc., responsible for Aetnas insurance and
financial services businesses outside the U.S. In 1992, he was promoted to
group executive, with additional responsibility for Aetnas domestic life
insurance and asset accumulation businesses. In 1994, he became the CEO of
Aetnas property/casualty operations. Before joining Aetna be was associated
with the New York law firm Shea & Gould.
Benanav also is very involved in civic, business, and international affairs.
He lectures frequently at business seminars on various financial topics, chairs
the Pacific Basin Economic Council-U.S., and serves as one of the U.S.
representatives to the Asia-Pacific Economic Cooperation (APEC) Business
Advisory Council (ABAC). He earned his MBA at the Columbia University
Graduate School of Business and his JD at Columbia Law School.
So where is Benanav taking New York Life International and why? Despite
New York Lifes phenomenal 40 percent growth over each of the past three
years, says Benanav, we knew that the long-term trend for the U.S. life
insurance market would be slower growth. Several years ago, when the board of
directors was assessing the companys long-term strategy, it rejected the idea of
seeking growth through massive diversification; to us, the logic of the financial
services supermarket was not compelling. Instead, our board decided to seek
growth through exporting our core competency, life insurance, to attractive
developing markets internationally. Incidentally, we also decided to make a
concerted effort to expand into some very attractive developing markets in the
U.S.: the rapidly growing ethnic markets. New York Life is now the leader in
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the U.S.-Chinese and U.S-Indian markets and is doing very well amongst
Korean-Americans, Vietnamese-Americans, and Hispanics.
How does New York Life decide which markets to enter? Well, while Im
not going to divulge the criteria we use to assess a market, let me say that we
use a combination of outside experts and our own staff, says Benanav. We
have excellent in-house teams, both in New York and in our Asia regional
headquarters in Hong Kong, who are very skilled in seeking out opportunities
for New York Life. One of the benefits of having an experienced, diverse staff
representing many nations is the vast local knowledge these people can bring to
an organization like New York Life. This first-hand, intimate knowledge is
impossible to get simply by visiting a country. New York Life also often
establishes representative offices in a market like the one we currently have in
Vietnam. This allows us to build relationships and closely observe the market
before opening for business there.
New York Life is looking for attractive emerging marketsgenerally those
with a growing middle class and relatively stable political and economic
environmentsinto which we can bring our core life insurance expertise.
We primarily target middle-class individuals with traditional life insurance
products built around providing long-term financial protection but we also look
at the realities of each individual market and allow our local management to
seek a product and distribution mix that makes sense for local conditions.
We may not be in as many international markets as some of our competitors,
but wherever we operate we are committed to having the best agents and
employees in the local life insurance market. If this means we expand more
slowly into new markets, thats fine with me. New York Life in the US has
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become one of the most respected, trusted brands in the country and it did this
by providing excellent products sold and serviced by the best-trained, most
professional agents in the business. This philosophy has served New York Life
for the past 158 years in the U.S. and we have no intention of changing that
philosophy outside the United States.
On the organizational front, New York Life has a very flat organization
at its home office in New York and, by extension, in its Hong Kong regional
office. We like to keep the operational decision-making as close to the markets
as possible, says Benanav. This means giving a lot of latitude to our
individual country managers who live in the markets day-to-day. Some of these
managers are expatriates, but some are citizens of the countries in which we
operate. And, in almost every instance, even where we have an expatriate
manager, his (or her) senior management team comes from the local operation
and is nationals of the country with a strong understanding of how to market in
their own country. The role of the New York and Hong Kong corporate offices
is three-pronged: to set policies and procedures, to monitor, and to mentor. The
rest is left to the managers in the local operations.
What about global branding? While we do advertise and market the
company in traditional ways in each of our markets, says Benanav, the most
effective of New York Lifes brand-building revolves around our local agents.
These agents are New York Lifes brand ambassadors, living the companys
values and providing direct, tangible service to their communities. The agents
are the face of New York Life in each and every community in the markets
where we operate so it is logical that they would be our most effective
marketing assets. And our agents are very well respected in the local markets.
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Weve brought to our international markets the same training programs
weve used to build the best agency force in the U.S. so we know that New
York Life agents in international markets are the best trained, most productive
agents in each of the local markets, too. We believe that this new pan-regional
brand advertising will complement our existing local marketing efforts.
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CONCLUSION
The needs of the nation and its people have finally prevailed and privatization
of insurance is now a reality towards further liberalization of the Indian
economy. With the opening up of the industry after reforms, private sector
operators in collaboration with their overseas partners are likely to bring in a
more professional and focused approach. Hence, in this millennium, insurance
industry is likely to play an important role in changing the economic landscape
of the country. However the success of the insurance industry will primarily
depend upon meeting the rising expectations of the consumers who will be the
real king in the liberalized Insurance market in future.