Saturday, September 27, 2014

Educate the people about risk transfer

This interview was first published in the IIB Bulletin, 2014, Vol. 1, Iss. 2, pp-4-5 
https://iib.gov.in/IRDA/Articles/IIB%20Bulletin%20Q2%202014-15.pdf

Dr. Manalur S. Sandilya, the Appointed Actuary of the largest private sector insurance company in India, ICICI Lombard General Insurance Co. Ltd, and the Advising Actuary of the only Indian Reinsurer, GIC Re, is associated with various Actuarial societies in different capacities. He is also a member of the CFA Institute, published in refereed journals, been an academician, worked in Reinsurance, held key positions in Insurance companies, and is an appreciator of Carnatic music.
IIT- Madras, IIM- Calcutta and Carnegie Mellon University, are his Alma Mater.

The thought process in insurance buying is very different in India”, says Sandilya, in a conversation with Dr. Nupur Pavan Bang of the Insurance Information Bureau of India, focusing on the property and casualty (P&C) insurance in India.

Why do you say that? In what way is it different?
The basic issue is that people don’t understand insurance. In an insurance jargon, it means, they don’t understand risk transfer. They think of insurance premium as a savings account. If they put money in an Insurance policy, they should get some money back. Some Life Insurance products fit into that model, but in general P&C products do not.

In the West [Europe, US, UK], people essentially finance long-term assets [motor car, house] with loans. The lien holder, for whom the asset is the collateral, forces insurance on them. Until very recently, in India, people were even buying houses with all cash. It is changing now. However, the mindset needs to change. P&C insurance must be seen as a necessity.

How will the mindset change? People see P&C insurance as an unnecessary expense. We all believe that bad things only happen to others.
Insurance companies and/or IRDA [remember it has both regulatory and development roles], need to educate the people about risk transfer. And, risk transfer costs money. The best way to do it is to start this at the school level. It has to be done thoroughly. In US and UK, kids become aware of the need for insurance pretty early in life – they obtain driver’s license and the necessary insurance cover on their parent’s insurance at around 16 years of age.

Educating as such is not a big thing. But, given the size of the country and the population, it becomes a humongous task. The way to drive the point has to be convincing. We need to educate with perhaps examples. Say, a natural catastrophe. When it happens, and it does happen often in India, it will hit you tremendously.

While people need to be made aware about risk transfer, how do the insurers themselves assess risk, to accept or not accept a risk?
There is really not much underwriting happening in India. It’s a broad paint-brush approach. Let’s take the case of Motor insurance. The policy is sold at the point of sale. No individual characteristic is even captured.  On my return from abroad I was surprised that one can obtain Motor TP cover without a driving license!  In health, though some characteristics are captured.

How can the industry get out of this situation?
There are two problems. The first is on the supply side. We have a shortage of trained Actuaries and underwriters. There is a serious dearth of trained personnel. The second is related to the background of the business. 50-60% of the market is controlled by the public sector undertakings (PSUs). The others have to follow them in terms of pricing and underwriting. Unfortunately, the PSUs simply base their prices on the erstwhile tariff advisory committee (TAC) recommendations. The tariff regime is totally irrelevant now.

We expected that the new companies would focus more on underwriting as they came in with foreign partnerships that had the expertise. But they could not do it because of competitive pressures. There should be government and regulatory direction to change the habits of the PSUs. Unless they change their pricing strategy, the market will not change.

Apart from the baggage of the background of the industry, are there other impediments to meaningful underwriting?
Oh yes! Lack of relevant data for one makes a huge impact. For example, in the motor insurance industry, when I am insuring a motor for the Third Party cover, the primary risk comes from the driver. In India, we do not capture any driver’s characteristics. Not even the name of the primary driver. The entire industry keeps complaining about the lack of this data, but nobody goes ahead and collects it. There has to be a regulatory imposition from the top.

There is also a cultural issue I suppose. The industry has not yet started exploring the available data as well as the Insurance companies in the West do. Would you agree?
Yes and No. ICICI Lombard is analytics driven. I suppose a lot of other companies also use the available data well. But you are right that there is scope for improvement. For example, in Health, a lot of external data is available, such as, the prior conditions that make people susceptible to many critical illnesses. Integration of such data into our underwriting process may not be happening.

You have worked in Insurance and Reinsurance in the US and Europe. Is there something you would like to convey to the budding Actuaries and Insurance professionals in India, from your experience abroad?
Indian P&C industry is more than 100 years old, yet actuaries and technical underwriters are relatively unknown in the industry.  The entry barriers are a great challenge but I see an even greater opportunity.  This is the place to be because they can and should deliver so that the industry grows into a healthy pillar of the economy.  Risk reduction is one of the foundation stones for sustained economic growth.  I wish the youngsters all the best.
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