Quarterly Journal on Management
From the publishers of THE HINDU BUSINESS LINE
Vol. 2 :: Iss. 3 :: February 1999
A look at the use of IT in the insurance and finance sectors.
K. Nitya Kalyani
You don't just do disorganised business if you don't use information technology. In the skewered world of the Indian public sector, you can even be refused the 'privilege' of hiking your prices to ensure profitability.
Take the case of the general insurance industry in India which has been pottering around with computerisation since the mid-eighties and today has a patchy system.
This neglect has insurance companies where it hurts most as it has denied them remunerative pricing. One demon the general insurers have been fighting for a long time is the inordinate losses on motor third party insurance, working out to about three or four times the premium collected. This is eating into the profits from other classes of business too.
The price setting body for this industry is the Tariff Advisory Committee (TAC). But as far as the motor premiums are concerned, the actual go ahead comes from the Government, and the decision is a political one. Reason? The clout of the truckers. They don't want to pay more for insurance, so too bad if the insurance industry is making losses on this.
When things turned from bad to worse and the TAC proposed a premium hike in late 1997 citing unprofitable business, all hell broke loose, with the truckers going on strike.
The hike was phased out over three years, the first tranche taking effect early last year. The truckers were in no mood to let it go, and the matter was placed with the Insurance Regulatory Authority (IRA) for adjudication.
The IRA has placed the hike in abeyance, the major reason being, as the IRA Chairman puts it, that the insurance industry had no historical data to backup its position that it was bleeding to death due to high third party claims.
Behind that lacuna is the pathetic state of computerisation of the industry and the historical neglect of this vital infrastructure due to union pressure.
Ironic, because insurance is based on the law of large numbers, and here is an industry that has no clue about the numbers!
Manually, it may have been a nightmarish proposition to monitor all the motor policies and their claims experience. However, with a reasonably good computer system, it would have been a cinch.
Insurance companies the world over gather underwriting and claims data meticulously and guard them zealously. In their more evolved forms, insurance companies even pool data which is held by an external, neutral agency, for the privilege of having access to global data. Either way, they know who they have insured and who have come back with claims. They can access this information by age, profession, gender, ethnic background, or domicile of the vehicle owner, or even by the type of vehicles they own.
They have a framework of where to place a red-haired teenage white male who owns a sports car, for instance, and where to place a middle aged black doctor who owns a five year old coupe.
This framework really gives the insurer a value he can place on the chances of this customer having a car crash and coming up with a claim. Each of these, and other similar characteristics, is given a specific weightage and has its effect on the final premium that the company will charge a customer.
Typically the factors that will raise the premium rates would be youth, owning a sports car or having been ticketed for traffic offences (the last one alone can send the premium through the roof, and in cases of repeat offenders deny them insurance coverage in toto).
Being a married professional, driving a relatively sober, family type, car and having a blemish free driving record can all make your premiums lower.
So, given carefully chosen indicators, this system can place you in a more or less homogenous group with its own risk profile, and the result is a more equitable system where you pay the premium that reflects the level of risk that the insurance company takes when it insures you. And when your circumstances change - say, you move to a crowded city from a small town - that information goes to your insurer's computer system, and your risk profile and your premiums are suitably altered.
This level of fine rates is possible when a company maintains its own records electronically, but when all companies file the data with an industry common underwriting and claims data agency, as they are required to do in the US, the claims profiles relating to different factors emerge on a country wide basis rather than as restricted to one company, leading to better risk evaluation and premium quotations.
In India, however, there are very broad lines along which you pay premiums. Like whether the vehicle is being used for commercial purposes or personal transportation, or in terms of territory, whether you live in Mumbai or anywhere else in the country! You, with sober driving habits driving to office and back in a city will pay the same premium as any rash or incompetent driver whom you see on the roads.
With the spread of customer contact point computerisation, and the capacity to issue computer generated policies across the counter, all that it requires for building up a database is the capturing of this data at the underwriting point. And later adding claims data relating to this policy, if any.
This is just not done! No insurance company branch office will be able to tell you even, for instance, how many Maruti 800s are insured with them, much less how many claims can be expected from this category based on past experience. Hence the catch-all rate that tries to make a crude stab at a remunerative price.
If external reasons, and what a senior insurance executive calls 'extreme head-in-the-sand attitude' have prevented the industry from adopting and benefiting from information technology soon enough and sufficiently enough, realisation has set in slowly about IT's benefits. Combined with the general frenzy wrought by the magic words of bank computerisation, the insurance companies have also woken up.
According to various news reports, almost all branches of Indian insurance companies are to be equipped with computers in the next year or two. Connectivity, the lifeblood of information technology, is however another matter. That is likely to take a much longer time.
Where computers are more in evidence, and perhaps, slowly being used and appreciated, is in the offices of the top executives, though not by the executives themselves!
"I don't use the computers myself," says Mr G. Krishnamurthy, Chairman of the Life Insurance Corporation of India (LIC) but his support staff uses them extensively to supply him with the up-to-date data he demands. "I can make decisions more confidently," he reflects, thinking of the days when historical data meant that decisions had to be cautious and hedgy.
If the industry at the customer contact level is lacking in IT savvy and doesn't care, the regulator of the industry is taking particular care. The IRA is envisaging complete computerisation for itself, and will be demanding matching levels of information technology usage from those it regulates and hopes to get the industry to have and retrieve data efficiently.
The IRA is moving in the right direction. One of the most IT savvy industries the world over is the insurance industry with its long term contracts and investments. The volumes and the mass of personal data demand the use of IT which rewards the company with instant retrieval of asset and liability positions to put it at its simplest.
While insurance companies in the west were among the first businesses to computerise, the trend has a strange reflection in India too. Foreign insurers, who are waiting at representative offices in India to set up shop when the law of the land allows them to do so, are turning to IT as a lead-on activity.
Some of them have been recruiting IT professionals, setting up systems here, and handling the back office work for their companies in the US and elsewhere. As an offsite back office, India not only provides tha advantage of lower costs but can also provide a pool of the best software minds in the world.
Royal Guardian Exchange plc, which has an agreement with the Murugappa Group to start an insurance company, has been working on software development for its UK operations for some time now. Metlife of New York, one of the larger life insurance companies in the US and the first to computerise its operations there, has floated an IT subsidiary which will slowly take on back office work.
More has been heard about computerisation in banks, and less done in view of the size of the industry and the volumes of its records and transactions. Computerisation was brought in through a painful process of negotiation and at a price in an industry where the unions have been legendary opponents of computerisation.
The price was not only the computerisation allowance and increment that had to be paid to the staff and officers, but also in the delay in going electronic, losing out on various advances in technology that the industry could have progressively taken advantage of, and also in the huge reconciliation backlog that the industry is still sitting on while competitors have raced far, far ahead.
And now they have the Chief Vigilance Commissioner forcing them to jumpstart computerisation to cut out fraud and corruption!
Of the finance related fields, perhaps it is only the non banking finance companies that have exhibited open arms as far as IT is concerned. The irony here is that not many can afford it, especially in these hard times, but the pioneers got there several years ahead. Sundaram Finance, for instance, has been at it for well over a decade and are almost fully connected too. Of course, their network and volumes will not match that of any nationalised bank, but then neither is their staff strength to volume of transactions ratio! And for that, IT is almost entirely responsible.
The company first went in for computerisation in order to handle the volumes involved in handling fixed deposits, so that they could provide better service to their depositors - a class that the company has had a special relationship with ever since its inception.
And then IT has its so obvious benefits when it comes to its lending portfolio and monitoring its lease receivables that there was no looking back. Some of the other top NBFCs have also extensively used IT for their operations, and are constantly upgrading, while others have resource constraints.
The difference has been immense, as Mr T. T. Srinivasa Raghavan, Deputy Managing Director, Sundaram Finance recalls. "When we started out doing leases, we spent the better part of a day working out the lease rentals schedules for a single contract." Today, you can play around with the period, the rate or any other parameter and get a new deal structured at the touch of a button. "We can structure a deal that the customer wants, and not just dump him with the one and only lease deal worked out painstakingly in advance."
In other words, IThas provided the freedom to give the customer what he wants, rather than force him to take what the company has.