Efficiency and Effectiveness in Competitive Era in General Insurance Companies in Public Sector- A Journey of from Objectives to Results in 2012-13

Planning to make an organisation efficiently effective in a competitive business is like seafaring in troubled waters – your craft should be strong in design with effective systems, your crew should be motivated and excellent and you have to have a damn good idea about the path to ensure a successful journey from objective to results. The most important factor, undoubtedly, is the knowledge of the environment in which one operates.

When one contemplates to achieve efficiency and effectiveness in performance it is the challenges in the environment, both internal and external, that should get priority attention and more significant is how quickly the organisation respond to the dynamic environment and realign its Organisation structure by creating a customer driven culture that is ready to take the competition with full zeal and enthusiasm.

Managing change, creating a vision for the future and creating motivated workforce are the mantras for successfully leading in competitive world. Hence, the question is, are our State Run Insurers set to stride on it by aligning the organisation and driving its people towards same destination.

Stake holders and critics are always full of recommendations about becoming more effective, competitive and efficient. They talk at length about the importance of the bottom line and incremental gains by reengineering the total quality efforts in all areas of operation by one and all in the organisation.

They always expect the employees putting their best efforts and processes delivering full back-end support in achieving competitive edge. It is not so that they are wrong in their expectation but it is equally very crucial for the very existence of any organisation that it functions as per their aspiration and this efficiently effectiveness is seen in the organisation culture and operational results. Gaps are bound to be there in strategies and their implementation as well as in working of the employees but  the same should be filled in by training people and modifying processes through a proper review system.

Efficiency and Effectiveness should not be misunderstood as same .Efficiency is doing things right whereas the effectiveness is doing the right things. However doing the right thing is often overshadowed by doing things right. What employees often view as being efficient can many times impact the company negatively therefore it is important for organisations to create an environment where employees are encouraged to look for ways to become more efficient, but do so without degrading the level of customer service and quality. When you align your Corporate Objectives and Strategies in your organisation culture you have to keep close watch on enviornment in which you operate. General Insurance Industry especially the PSUs operates in an open system and are heavily influenced by its environment.

To achieve effectiveness in its plan and its execution through its workforce and efficiency in implementation of strategies in dynamic environment organizational effectiveness need to be closely tied to organizational culture. Organizational culture is the collective behaviour of people that are part of an organization, It is formed by the organization values, visions, norms, working language, systems, and symbols, it includes beliefs and habits.

It is also the pattern of such collective behaviours and assumptions that are taught to new organizational members as a way of perceiving, and even thinking and feeling. Organizational culture affect the way employees interact with each other, with clients, and with stakeholders.

Keeping goal to become Effective Efficient Market Leader in current competitive market.  Is the journey of PSUs in 2012-13 is going to be different or they will drive on same bumpy road to reach this destination or going to loose the track on the way ? The enviornment is dynamic and it cannot be expected to be static.

Last year Thailand’s flood-induced losses dampened Asian insurers’ earnings and capitalisation and its impact will surely be seen in raise of catastrophe insurance premiums and also in Single Event Terms in Reinsurance Programmes of Indian Insurers. Impact of these losses resulted in exhausted capacities of Thai insurers and these losses also pushed Indian Re-insurer GIC- Re to book maiden loss in its history.

The National Re-insurer has already reported a loss of Rs 733 crore for the nine months in Dec 2011 as against a net profit of Rs 1056 crore in corresponding period. The loss is fallout of its exposure to Thailand flood losses, earthquake losses in Japan and also due to Motor portfolio where the industry had to take a huge hit because of additional provision based on actuarial assessment. The rates for Flood and Earthquake rates have already been corrected from 1st of March and similar corrections are expected in basic fire and engineering sectors where the discounting of rates went upto 90-92%.

The uncontrolled loss in Motor TP has resulted in demise of Motor TP Pool just when it was five years old. Health Portfolio has also emerged as fastest growing portfolio but the loss ratio of this sector is constantly testing the strategies of the insurers both in private and public sector.

The three T’s ( TP, TPA & TMP) that have bothered PSU insurer’s past are not going to make their future perfect. Motor Third Party Portfolio has always been the Achilles’ heel of general insurance companies in India and it has always tested the strategies of General Insurers to deal with unlimited liability concept with limited Resources.

The administrators of Health Portfolio (TPAs) have also not been able to deliver the results as was expected from them and the insurers need to re-align again their strategies towards product and its servicing through its administrators and service providers without hitting the sentiments of its customers. Last but not least is the third ‘T” that relates to transfer and mobility policy of PSUs. There is a school of thought that feels that TMP need to have strategically balanced to achieve the organisation’s need without hitting hard the employees morale and that is most important factor to ensure the effectiveness and efficiency of any organisation.

Let’s have a look to all three Ts and to start with we should see what is expected to change in the Motor TP Segment. The New Motor Vehicle Act is expected to come into play any time as the Legislature is expected to clear it in next year. Regulator has already announced the demise of Motor TP Pool and the birth of new Declined Risk Pool The Captains of the industry who conceived and delivered the third-party pool,in 2007 would have never thought that it will die in five years.

Infact this pool was the subject of distress from its early days. Private insurers complained that they were being burdened with the results of inadequate due diligence undertaken by the State-owned insurers, and that they were being forced to share losses based on their market share, irrespective of the size of their motor portfolio. PSU insurers complained that they had to write such business throughout the country, whereas private insurers had the luxury of cherry-picking their risks in developed cities.

There were also shared concerns about the overall efficiency of the pool and the absence of a real incentive to manage claims so as to reduce payouts and associated costs. As a significant indicator of the problems experienced, in 2009 to 2010 the pool made an underwriting loss of approximately Rs.6.74 billion. In January 2012 the IRDA directed insurers to revise their reserves with retrospective effect: from 153% to 159% for 2007 by 2012; to 188% for 2008 by 2013; to 200% for 2009 by 2014; and to 213% for 2010 by 2015. The total impact on insurers is said to be around Rs82 billion and it will be a constant burden in immediate future for insurers.

The Motor Third Party Pool is going to be dismantled from 1st of April and will be replaced with a Declined  Risk  Pool. The Declined Risk Pool this time however will be relevant only to commercial vehicles third party liability risks alone and the miscellaneous vehicles and the package covers of commercial vehicles will be out of the scope of this pool. This pool will also be administered by GIC Re.

The stated purpose of the declined risk pool includes the equitable and fair sharing of risks by all insurers and claims management efficiency The new pool structure, from the day one of new financial year will be an important first step for all insurers in India towards addressing the issues around commercial vehicle third-party and reforming the same will have great bearing on their balance sheet and solvency margins.

The effectiveness of the insurers will depend on their Business Model and Underwriting criteria for ceding of CV business to Declined Risk Pool. This underwriting criteria, reference point of which shall be limited to the age & type of the vehicle and its geographical parameters, will have to be filed with the Regulator.

Insurers will have to devise their strategy and will have to align their workforce to match with it as in new scenario they will not be allowed to refuse a third party commercial vehicle risk. They either have to underwrite the risk to their account or have to cede it to Declined risk pool if the same falls outside the Underwriting Criteria of that Company retaining 20% of each such risk to its Net.

Every insurer is obliged to achieve a minimum target of third-party motor insurance business, which is calculated on the basis of an insurer’s total gross premium and the industry’s total motor premium. The insurers who achieve this target will have no share in the business ceded to the declined risk pool, whereas the share of the others will be in proportion to their respective shortfall in meeting the target.

The declined risk pool is to be extinguished at the end of every underwriting year on a clean-cut basis by transferring the risks at par to the insurers in line with their share. As the Regulator and industry captains work hard to make the process of risk underwriting responsible and fool-proof. In Motor segment there are fresh hopes that general insurers  will finally turn profitable in the near future. It depends how these players take the call in 2012-13 which shall be the first year to test Declined Pool Scenario in India.

Besides TP Portfolio the Motor OD portfolio is also expected to see sea change in 2012-13. At present in Indian Market Motor Dealers are getting a handsome percentage of premium cake in form of infrastructure expenses against the business placed through them mainly for new vehicles and in some cases they get around 50% of premium without the burden of carrying risk.

The Regulator has come out with a discussion paper on bundling of products and it is expected that new strategies would come into play by players of game. This is  more significant as the Commercial vehicles will be out of the ambit of Motor Pool and the new commercial vehicles will also not qualify for New Declined Risk Pool as the package covers are not available to declined pool.

The insurers will have to take the risk of these commercial vehicles in their kitty as a part of package policy and for long they can not afford to transfer the premium kitty to the extent of 50% of premium to someone who do not carry the share of risk may it be dealer or manufacturer. The effectiveness of the insurers will depend on their quick reaction to this changed market scenario. Some surely will lead the market and other may wait to be the followers.

Another T relates to TPAs who are responsible to administer the Health Portfolio that has also started hitting the industry hard and impact of which is clearly visible in the Balance Sheet of the insurers. The Insurance Information Bureau, the statistical body affiliated to the Regulator, has released a set of comprehensive data on health insurance claim aspects based on periodical reports filed by TPAs and insurers. The claims paid by insurance companies had jumped by over 82 per cent to Rs 74 billion in FY2009-10 over the previous year, with bulk of the claims relating to circulatory, digestive, urology, eye and infection problems. Maximum claims came from policyholders in the age group 41-60 years.

The data analysis also reveals that around 80 per cent of claims were under Rs.25,000 and the overall claim severity had increased by 27 per cent in FY2009-10 compared to the preceding year. A notable feature is that claim severity was 83 per cent higher in case of cashless mediclaim than under reimbursement benefit policies during the last two years. Similar trends have been observed in current financial year. In Last year PSUs worked out the possibility of PPN in big cities and offered specified rates to various hospitals.

Those hospitals which have agreed to their packaged rates became part of PPN. If any policy-holder goes to a non-PPN hospital then he or she will not get cashless facility but can apply for reimbursement of expenses as per contract It may be noted that four PSU general insurers along with TPAs have worked out package rates for some of the procedures and hospitalisation expenses which are commonly claimed under health insurance policies.

This is an effort to make the portfolio self-sufficient and if it goes well both in concept and practice the results will surely improve in next financial year. Another feature that was added to this portfolio was Portability.

The Regulator issued guidelines relating to Portability in Health cover which became effective from 1 July 2011, allowing individual policyholders to switch providers on the same policy terms, particularly without losing the credit gained for preexisting conditions in terms of waiting period. This may bring about an improvement in service standards but it carries over some risk of potential adverse selection too and it will test the strategies of insurers how they handle this issue in near future.

Before discussing the third T we should also look into the drastic price cutting environment that we have seen in Property segment as it is equally relevant for efficiency and effectiveness of insurers. In an environment of fierce and rapidly shifting competition, in 2012-13 too the Price Competition is set to increase in Property Segment and insurers have a smaller margin of error in their risk analysis assessment before deciding to carry the risk at very marginal rates.

To stay competitive and not to allow bottom line to go red will be another task on the shoulders of the decision makers as well as those implementing the strategies at operating level to ensure that they do not indulge in the fierce rate cutting just to check their topline and growth and in the process putting stress on their Net.

If unchecked the habit of rate cutting may get inherited in the culture of the organisation and its rollback may become very difficult hence what is needed is to establish and implement a strong decision-making process and a role clarity in the organisation structure by aligning marketing efforts of its operating leaders with the risk taking capabilities and capacity of the organisation.

Rating the risks and carrying them at viable rates in present scenario  will be an important task in 2012-13 to insurers who will see hardened treaty conditions and stringent re-insurance terms. to maintain their capacity and by writing bad risks they will only worsen their solvency which is under regular vigil of the Regulator.

The link between organizational effectiveness and results puts a premium on understanding how General Insurers in public sector function organizationally. Right man at right place is the mantra of effectiveness but are right people available for right places is a big question. At some zones especially the west zone that has vast business potential there is acute shortage of staff in PSUs whereas at some places the manpower is more than adequate.

The PSUs have tried to address this situation through TMP  (Transfer and Mobility Policy) but whether TMP has addressed this issue or it has demotivated the manpower has some questionmark which HR Deptts of these organisations in public sector have to find out. The employees transferred on TMP generally do not feel that their work is well aligned to the priorities of the organization and their time often get clashed with Organisation’s priorities. Rules without exception can not provide solution that can be effective in all situations.

In PSUs it is difficult to modify the rules and when transfer policy becomes the core business and managing the affairs go to the backdrop then effectiveness and efficiency gets affected. One should not forget that the average age of PSU workforce is in 50s as in past few years new blood has not been infused in these Organisations and at this age it is difficult to motivate them to work at any place with same passion and gusto. PSUs have  tremendous organizational assets and fully automated processes to support its core business but, weaknesses in HR issues hold them back from achieving their full potential for impact.

The PSUs have a challenge to devise strategies to motivate this workforce so that they are ready to serve the organisation with full spirit at places wherever there is shortage and they also have a challenge to make these people technology savy so that they can deliver the job through computerised systems placed now in every office. Further from this year there will be huge retirements complicating the situation at some important business centres for these PSUs.

In a Journey of from Objectives to Results in 2012-13 question that comes in the mind is the State-run-General Insurers  clear on their strategic priorities that will enable their organization to achieve desired impact over  next year and several years ahead ? Have they communicated their strategy clearly enough that everyone within the organization understands where they are going, why, and how they will get there? Some PSUs have made their Vision Statements and Corporate Objectives and have tried to infuse the same among all employees as clear priorities for one and all in the organisation.

Clear priorities are the “north star” against which an organization can align its people, structure, and processes, and build its culture. If it happens the year 2012-13 will be a very effective period for PSUs. The environment is surely going to offer some opportunities enabling them to improve rates in next financial year, economy is also showing a progressive trend, cross subsidisation is expected to cease, risk-based pricing is expected to be in place, supporting demographic profiles suggest more demand to personal and health covers and in this scenario if the HR function is aligned in such a way that employees feel putting their best to achieve the vision statement of the organisation the new success story can be written by these State run insurers. One way to assess and improve the effectiveness of people in any organisation is to determine how they are aligned against the organization’s priorities.

Are the best people allocated against the things that matter the organisation most? Has the Organisational structure been re-designed to take lower priority work away from these people so they excel only in critically important areas. In last few years PSUs have put their best people in Service Centres and TP Hubs which are special cells to take care of Customers needs and their legal claims. The Turn around time shows that it has worked well for them to gain the confidence of the customers. These organisations know well that without being customer centric it is difficult to survive in competition. They seem to be on right tack and towards the destination customer and  by strengthening these back end support offices the efficiency and effectiveness will surely improve.

To stay competitive insurers in public sector will have to have a right Re-insurance Programme to build capacities to meet the demand and will have to place right creative and innovative people heading their operating offices so that they can match their strengths with the weaknesses of the competitors. These people should also be trained to match their technical skills to remain effective in the market and they should be motivated to ensure that they are focused to organisational goals and they in habit it as organisation culture.

To support these motivated people there should be equally efficient and effective business support systems and back-end offices with equally motivated staff there too. In nutshell if you are watching the competition with proper business plan and right structure and right people in place the writing on wall is clear. It shows a new success story  and a destination to which all insurers will like to drive in 2012-13.

By: Vinay Verma, M.com, F.I.I.I., FICWA, ACS, PGDMM, PGDIM, Manager Marketing, Oriental Insurance, Ahmedabad, Published in The Insurance Times, April, 2012