1 INTRODUCTION In today's dynamic and competitive business environment, survival, growth and profitability are the essence goals of all industries. Porter's Five Forces model is currently being adopted as the powerful management tool of choice by many organizations. The essence of this model is that it can help senior managers to make right decision and build and sustain competitive advantages in the organization level. This document presents the overview approach of Porter’s five forces framework across organizations. And critically evaluation of porter’s five forces model mainly focused on identifying the benefits and limitations of it and exploring some perceived issues or problems regarding implementation. India’s rapid rate of economic growth over the past decade has been one of the more significant developments in the global economy. This growth has its roots in the introduction of economic liberalization in the early 1990s, which has allowed India to exploit its economic potential and raise the population’s standard of living. Health insurance and pension systems are fundamental to protecting individuals against the hazards of life and India, as the second most populous nation in the world, offers huge
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1
INTRODUCTION
In today's dynamic and competitive business environment, survival, growth and
profitability are the essence goals of all industries. Porter's Five Forces model is currently
being adopted as the powerful management tool of choice by many organizations. The
essence of this model is that it can help senior managers to make right decision and build and
sustain competitive advantages in the organization level. This document presents the
overview approach of Porter’s five forces framework across organizations. And critically
evaluation of porter’s five forces model mainly focused on identifying the benefits and
limitations of it and exploring some perceived issues or problems regarding implementation.
India’s rapid rate of economic growth over the past decade has been one of the more
significant developments in the global economy. This growth has its roots in the introduction
of economic liberalization in the early 1990s, which has allowed India to exploit its economic
potential and raise the population’s standard of living.
Health insurance and pension systems are fundamental to protecting individuals against
the hazards of life and India, as the second most populous nation in the world, offers huge
potential for that type of cover. Furthermore, fire and liability insurance are essential for
corporations to keep investment risks and infrastructure projects under control. Private
insurance systems complement social security systems and add value by matching risk with
price. Accurate risk pricing is one of the most powerful tools for setting the right incentives
for the allocation of resources, a feature which is key to a fast developing country like India.
By nature of its business, insurance is closely related to saving and investing. Life
insurance, funded pension systems and non-life insurance, will accumulate huge amounts of
capital over time which can be invested productively in the economy. In developed countries
(re)insurers often own more than 25% of the capital markets. The mutual dependence of
insurance and capital markets can play a powerful role in channeling funds and investment
expertise to support the development of the Indian economy.
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OBJECT OF THE STUDY
PRIMARY OBJECTIVE
To study the Porter’s Five Forces analysis of general insurance industry with special
reference to L & T General Insurance limited, Chennai.
SECONDARY OBJECTIVES
To trace out the threat of new entrants in insurance industry.
To study the bargaining power of buyers in insurance industry.
To measure the competitive rivalry within the insurance industry.
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NEED FOR THE STUDY:
Larsen & Turbro Finance Limited is a 16 years old company, it was initially
incorporated as a Non-Banking Financial Company. L&T Finance offers number of financial
products and services for trade, industry and agriculture. The company focus segments are
corporate products, construction products, commercial vehicles and Tractors. Recently L&T
extended their business into insurance industry and they are interested to identify their
opportunity to excel in the general insurance industry. Hence the researcher is interested to do
“the porter’s five force analysis of insurance industry with special reference to L&T
Insurance” focuses on
To identify the entry level problems
To know the bargaining power of buyer
To measure the competitive rivalry with in the industry
SCOPE OF STUDY:
The study titled “The porters five force analysis of insurance companies in Chennai
with special reference to L&T Insurance Ltd”. Outcome of this analysis may help the growth
of their business in future. The study further help to manage the competitors in market focuses
on the various factors which facilitates for starting an insurance company and threat which
may block the entry of insurance companies.
On analyzing all the five forces the researcher had sort out only the following three
forces, which is applicable for insurance industry.
Entry level problems of insurance companies
Bargaining power of buyers
Competitive rivalry with in the industry
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INDUSTRY PROFILE
AN OVERVIEW OF INDIA’S INSURANCE MARKET
Insurance in India used to be tightly regulated and monopolised by state-run insurers.
Following the move towards economic reform in the early 1990s, various plans to revamp the
sector finally resulted in the passage of the Insurance Regulatory and Development Authority
Act of 1999. Significantly, the insurance business was opened on two fronts. Firstly, domestic
private-sector companies were permitted to enter both life and non-life insurance business.
Secondly, foreign companies were allowed to participate, albeit with a cap on shareholding at
26%. With the introduction of the 1999 IRDA Act, the insurance sector joined a set of other
economic sectors on the growth march.
INSURANCE DEVELOPMENT AND POTENTIAL
Notwithstanding the rapid growth of the sector over the last decade, insurance in India
remains at an early stage of development. At the end of 2003, the Indian insurance market
was the 19th largest in the world, only slightly bigger than that of Denmark and comparable to
that of Ireland. This was despite India being the second most populous country in the world as
well as the 12th largest economy. Yet, there are strong arguments in favour of sustained rapid
insurance business growth in the coming years, including India’s robust economic growth
prospects and the nation’s high savings rates.
The dynamic growth of insurance buying is partly affected by the income elasticity of
insurance demand. It has been shown that insurance penetration and per capita income have a
strong non-linear relationship. Based on this relation and other considerations, it can be
postulated that by 2014 the penetration of life insurance in India will increase to 4.4% and that
of non-life insurance to 0.9%.
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HISTORY OF INSURANCE DEVELOPMENT IN INDIA
MODERN INSURANCE CAME WITH A BRITISH ACCENT
Insurance in its modern form first arrived in India through a British company called
the Oriental Life Insurance Company in 1818, followed by the Bombay Assurance Company
in 1823, and the Madras Equitable Life Insurance Society in 1829. They insured the lives of
Europeans living in India. The first company that sold policies to Indians with “fair value”
was the Bombay Mutual Life Assurance Society starting in 1871. The first general insurance
company, Triton Insurance Company Limited, was established in 1850.
History of insurance
In India, insurance has a deep-rooted history. It finds mention in the writings of Man
(Manusmrithi), Yagnavalkya (Dharmasastra) and Kautilya (Arthasastra). The writings talk in
terms of pooling of resources that could be re-distributed in times of calamities such as fire,
floods, epidemics and famine. This was probably a pre-cursor to modern day insurance.
Ancient Indian history has preserved the earliest traces of insurance in the form of marine
trade loans and carriers’ contracts. Insurance in India has evolved over time heavily drawing
from other countries, England in particular.
It came to India as a legacy of British occupation. General Insurance in India has its
roots in the establishment of Triton Insurance Company Ltd., in the year 1850 in Calcutta by
the British. In 1907, the Indian Mercantile Insurance Limited was set up. This was the first
company to transact all classes of general insurance business. In 1957 saw the formation of
the General Insurance Council, a wing of the Insurance Association of India. The General
Insurance Council framed a code of conduct for ensuring fair conduct and sound business
practices. In 1968, the Insurance Act was amended to regulate investments and set minimum
solvency margins.
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In 1972 with the passing of the General Insurance Business Act, general insurance
business was nationalized with effect from 1st January, 1973. 107 insurers were amalgamated
and grouped into four companies, namely National Insurance Company Ltd., the New India
Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India
Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a
company in 1971 and it commence business on January 1st 1973.
This millennium has seen insurance come a full circle in a journey extending to nearly
200 years. The process of re-opening of the sector had begun in the early 1990s and the last
decade and more has seen it been opened up substantially. In 1993, the Government set up a
committee under the chairmanship of R. N. Malhotra, former Governor of RBI, to propose
recommendations for reforms in the insurance sector. The objective was to complement the
reforms initiated in the financial sector. The committee submitted its report in 1994 wherein,
among other things, it recommended that the private sector be permitted to enter the insurance
industry. They stated that foreign companies are allowed to enter by floating Indian
companies, preferably a joint venture with Indian partners.
Following the recommendations of the Malhotra Committee report, in 1999, the
Insurance Regulatory and Development Authority was constituted as an autonomous body to
regulate and develop the insurance industry. The IRDA was incorporated as a statutory body
in April, 2000. The key objectives of the IRDA include promotion of competition so as to
enhance customer satisfaction through increased consumer choice and lower premiums, while
ensuring the financial security of the insurance market.
The IRDA opened up the market in August 2000 with the invitation for application for
registrations. Foreign companies were allowed ownership of up to 26%. The Authority has
the power to frame regulations under Section 114A of the Insurance Act, 1938 and has from
2000 onwards framed various regulations ranging from registration of companies for carrying
on insurance business to protection of policyholders’ interests.
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In December, 2000, the subsidiaries of the General Insurance Corporation of India
were restructured as independent companies and at the same time GIC was converted into a
national re-insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in July,
2002. Today there are 24 general insurance companies including the ECGC and Agriculture
Insurance Corporation of India and 23 life insurance companies operating in the country.
The insurance sector is a colossal one and is growing at a speedy rate of 15-20%.
Together with banking services, insurance services add about 7% to the country’s GDP. A
well-developed and evolved insurance sector is a boon for economic development as it
provides long- term funds for infrastructure development at the same time strengthening the
risk taking ability of the country.
PROBLEMS WHICH ARE FACED BY INSURANCE COMPANIES
By Flora Richards-Gustafson, How Contributor updated:
Factors in the economy, risk management, keeping costs low and retaining business in
a competitive market are issues insurance companies face on a regular basis, According to
Price Waterhouse Coopers. Uncertainty regarding the economy along with changes in how
people do business keep this industry on its toes as it strives to meet the demands of
consumers and ensure long-term success.
Maintaining Funds in Hard Economic Times
Price Waterhouse Coopers stated that instead of seeing collapsing assets, insurance
companies have to deal with problems relating to collapses in hedge funds, structured
securities and equities, according to the company's "Top Nine Insurance Industry Issues in
2009" publication. As a result, credit markets seized sales in life insurance policies dropped,
asset management fees lowered and bond and mortgage insurers lost significant amounts of
capital.
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In an effort to hold on to whatever funds they have, insurance companies are doing
what they can to deny claims, pay less in settlements and defend their claim decisions in
court, a battle that can take several years, according to a 2007 CNN article.
Solvency:
Companies that offered whole and term life insurance began offering "market-sensitive"
products in an effort to expand product portfolios, according to Price Waterhouse Coopers.
This gave policyholders competitive returns and gave insurance companies an edge in the
financial service market. Consequently, reserve calculations are subjective, more complex and
the investment portfolios require more attention in order to manage them so returns and cash
flow align with future liabilities. Market sensitive products that involve long- and short-term
investments for companies that sell life insurance are seeing low returns. As a result,
insurance companies need to look at other avenues to ensure solvency and increase retention
efforts.
Reducing Costs:
Cost cutting efforts can have devastating consequences to insurance companies, but is
an issue they face in an effort gain capital. Insurance companies, as they determine which
costs to cut, must look at forces behind costs. This helps them ensure a cut in one area does
not increase the cost in another, which can make an insurance company less competitive. For
example, cutting employee benefits reduces employee retention, or cuts in staff can lead to
long turn-around times. Financial Web states that as insurance company costs increase, their
capital decreases. Additionally, insurance companies face difficulties when it comes to
creating improvement plans that reduce costs when the plans lack a basis in resources,
priorities, dependencies and the integration of the human element, such as training,
communication and performance management.
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COMPANY PROFILE
Larsen & Toubro Limited (L&T) is India’s largest engineering and construction
conglomerate with additional interests in electrical, electronics and IT. A strong customer-
focus approach and constant quest for top-class quality have enabled L&T to attain and
sustain leadership over 6 decades. EPC project business constitutes a critical part of the
L&T’s engineering core. L&T has integrated its strengths in basic and detailed engineering,
process technology, project management, procurement, fabrication and erection, construction
and commissioning, to offer single point responsibility under stringent delivery schedules.
Strategic alliances with world leaders enable L&T to access technical know-how and execute
process intensive, large scale turnkey projects to maintain its leadership position.
L&T’s international presence is on the rise, with a global spread of over 30 offices
and joint ventures with world leaders. Its large technology base and pool of experienced
personnel enable it to offer integrated services in world markets. L&T enjoys a brand image
in India and several countries offshore. With factories and offices located all over the country
and abroad, L&T operations are supplemented by a comprehensive distribution network and
nationwide ramifications for customer service and delight.
The Company’s businesses have been classified into 6 Operating Division, viz.,
Engineering Construction & Contracts Division (ECCD)
Engineering & Construction Projects Division (E&C-Projects)
Heavy Engineering Division (HED)
Electrical & Electronics Division (EED)
Machinery & Industrial Products Division (MIPD) and
Technology Services Division.
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HISTORY:
Larsen & Toubro Limited is the biggest legacy of two Danish Engineers, who
built a world-class organization that is professionally managed, and a managed and a leader in
India’s engineering and construction industry. It was the business of cement that brought the
young Mr. Henning Holck-Larsen and Mr. S.K. Toubro into India. They arrived on Indian
shores as representatives of the Danish engineering firm F L Smith & Co in connection with
the merger of cement companies that later grouped into the Associated Cement Companies.
Together, Mr. Holck-Larsen and Mr. Toubro founded the partnership firm of L&T in
1938, which was converted into a limited company on February 7, 1946. Today, this has
metamorphosed into one of India’s biggest success stories. The company has grown from
humble origins to a large conglomerate spanning engineering and construction. ECC was
conceived as Engineering Construction Corporation Limited in April 1944 and was
incorporated as wholly owned subsidiary of Larsen & Toubro Limited. L&T’s founders Mr.
Holck – Larsen and Mr. Toubro laid the foundation for ECC. It has today emerged as India’s
leading construction organization.
VISION:
L&T shall be a professionally-managed Indian multinational, committed to total
customer satisfaction and enhancing shareholder value.
L&T shall be an innovative, entrepreneurial and empowered team constantly
Creating value and attaining global benchmarks.
L&T shall foster a culture of caring, trust and continuous learning while meeting
expectations of employees, stakeholders and society.
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L&T INSURANCE
OVER VIEW
L&T General Insurance Company Limited (L&T Insurance) is a wholly owned
subsidiary of Larsen & Toubro Limited - one of the world's top 50 most reputed companies in
the June 2009 issue of Forbes-Reputation Institute’s “World’s Most Reputable
Companies” survey.
COMPANY VISION
Our vision is to be an insurance company distinct in character, calibre and capability.
We are committed and equipped to offer the same levels of service in the insurance space that
our parent (Larsen & Toubro Limited) is renowned for, in its other fields of business. We
bring to the table the credibility, financial strength and expertise, backed by a world class
brand and seven decades of unmatched leadership of the L&T Group. We will cater to all
lines of general and health insurance throughout the country.
L&T Insurance will be a state-of-the-art technology-driven company that delivers
world-class services. We seek to create a single technological platform that integrates all the
key functions to provide seamless services to our customers through any interface of their
choice.
Finally, it is our people who will help us achieve our vision. L&T Insurance comprises
of an array of top notch Insurance Professionals who have come together to combine their
experience and expertise to create an entity which will lead by innovation, backed by a
prudent underwriting approach.
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Our Heritage
Larsen & Toubro Ltd is a USD 9.8 billion technology, engineering and construction
group with operations spread across the globe. It was ranked as 14th by the Economic
Times in their survey of the Top 500 Companies in India. Another feather in its cap was
added when L&T was ranked 47th in the world in the June 2009 issue of Forbes-Reputation
Institute’s “World’s Most Reputable Companies” survey. In this survey, L&T was the only
engineering and construction company in the world to have made it to the top 200.
Having established its foothold in engineering and construction, electrical and
electronics, industrial products and information technology, L&T forayed into the financial
services space. Financial Services has been identified as a strategically important business for
L&T Group. It has been L&T’s vision to become a ‘wholesome’ player in this area of
business. With an entire range of products and service offerings, L&T’s ‘Financial Services’
initiative will cater to an entire spectrum of customers, and their various financial needs. The
launch of the General Insurance business is a major step in this direction.
Philosophy
Creating a world-class insurance company by constantly maintaining exalted quality
standards in all their endeavors.
Providing sustained innovation by working towards ever-evolving solutions. Customer
satisfaction has always been their ultimate goal and they remain committed to
constantly delivering customer needs with their innovative products and services.
Focusing on different customer segments. They endeavor to provide a complete range
of general insurance products and specialized services for various customer segments
across Individuals, Small and Medium Enterprises, Corporate with business lines that
include Property & Casualty, Automobile, Health, and a special focus on Rural and
Micro Insurance.
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Following a disciplined underwriting approach, in the competitive market conditions
prevailing today. This discipline and its importance to the company have been
ingrained in all our employees. They work hard to constantly reinforce customer trust
in us.
Our Values
In order to become an insurer of choice, they believe in building their business on
Integrity – by conducting our business with utmost fairness and honesty
Transparency – by maintaining clean records accessible to all our customers and
stakeholders
Professionalism - through building strong relationships based on tolerance, trust and
mutual cooperation
Active social responsibility - by ensuring that the growth of our society and nation
parallels the growth of the business
High customer focus – by anticipating and proactively responding to all your
priorities and needs
Providing mutual value – by constantly working towards building a relationship
based on mutual value and respect, thereby ensuring optimal usage of your financial
resources
CORPORATE GOVERNANCE
Governance is a key component of corporate leadership. At L&T, every action is
filtered through integrity and fairness. With a ‘trust crisis’ emerging across sectors, the only
antidote is transparency. Highest priority is given to visible accountability across financial and
non-financial segments – without making any exceptions.
They consistently adopt innovative approaches for leveraging resources, fostering a healthy
growth, converting opportunities into achievements and development of human resources to
take the company forward.
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GOVERNANCE STRUCTURE
To run a transparent and accountable business requires effective upholding of the
principles that they stand for. This responsibility is vested in company experienced and
erudite team of executive and non-executive directors, the highest decision-making body
within the organization.
Our four-tier governance structure ensures greater management accountability and
credibility, increased public confidence and a well performing management in place.
FOUR TIER GOVERNANCE STRUCTURE
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Board of directors
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TYPES OF INSURANCE
Health Insurance
A health insurance policy will provide a cover to you and your family against sudden
medical contingency or bodily injury.
Every human being is exposed to various health hazards. Medical emergency can strike
anyone without pre-warning.
The reasons why health insurance is a must:
Medicines have become quite expensive
Private hospitals are too expensive
Diagnostic charges are beyond common man’s reach
Specialists come at a price
People opt for Travel Insurance which covers them against medical expenses they may
incur while travelling abroad (outside country of residence)
Health risk is a personal risk, which could arise from various factors viz.
Physical condition
Accident related
Occupational related
Environment related
Life style related
Travel related
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Motor Insurance
Motor insurance protects you against damage caused to your vehicle or third party if
you have an accident. It is a contract between you and the insurance company. You agree to
pay the premium and the insurance company agrees to pay your losses as defined in your
policy. Motor insurance provides property, liability and medical coverage
Property coverage pays for damage to or theft of your car.
Liability coverage pays for your legal responsibility to others for bodily injury or property
damage.
Home Insurance
Your most important asset is your home. Fire, earthquakes, and floods are all too often
a part of our life today. With natural disasters and man-made accidents not just a possibility,
but an eventuality, it is essential that you secure your home from natural and man-made
disasters. Home insurance policy makes sure you have a peace of mind by protecting the
structure and/or the contents of your home. Home insurance provides compensation for loss
of or damage to a home and it’s contents.
Travel Insurance
Travel insurance policies have been intended to insure you against certain events when
you take a holiday or trip to make your trip stress-free. Before going on a trip you need to
address all your travel worries. Medical treatment abroad can be costly and one never knows
when one would require it. There might also be other situations, which one might face like
loss of passport, flight delay, and baggage and so on. Without appropriate travel insurance,
you may be exposed to significant financial liability.
Personal Accident Insurance
Accidents occur unexpectedly, many individuals choose to purchase insurance coverage
to help family members and loved ones deal with the associated financial instability.
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Personal Accident is an insurance cover which is recommended to you and your family in the
event of accidental death, but also to cover disablement, leading to loss of earning capacity.
Personal accident policies cover you for four contingencies in the event of an accident: death,
permanent total disability, permanent partial disability and temporary total disability.
Personal Accident Insurance is inexpensive and it is recommended that you select the highest
level of cover available. Even if you already have permanent health insurance, you should
also have Personal Accident insurance to provide cover in case of accidents.
Commercial Insurance
Large corporations or even Smaller Companies have varied needs for insurance. Most
insurance companies offer a comprehensive set of products designed to protect business,
From the above table it is clear that new India having more market shares, secondly united India followed that national, oriental and ICICI Lombard. SBI, Raheja QBE and L&T having least market shares.
TABLE NO: 4.13
Growth rate of general insurance industry in past four years
From the above table it is clear that growth rate of the insurance industry, increased in 2008 up to 12.51 points, in 2009 it was reduced in to 0.69 points & in 2010 it was increased at 23.26 points based on 2007 total value.
TABLE NO: 4.14
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Insurance Products offered by L&T Insurance (Rupees in Crores)