Thursday, November 19, 2015

Top 5 Diseases Analysis

This article was first published in the IIB Bulletin, Vol 2, Issue 2, pp9-10; Co-Author- Syed Md. Ismail

Many studies have indicated that Indians are now more vulnerable to non-communicable diseases than communicable diseases due to changing lifestyles and income levels. Cardiovascular diseases have displaced communicable diseases as the biggest killer in India and, according to a 2010 University of Toronto study, the leading cause of death in middle aged men is heart disease, even in poorer states such as Uttar Pradesh and Bihar.

A sub-set of the claims data for the Financial Year 2013-14 available with IIB was used. The selected data comprised of claims where the diagnosis code (ICD10) and the pincode of the hospital was provided. The selected claims consisted of both Group as well as Individual policies. The effects of Sum Insured or gender or age are not considered in this analysis. The claims selected amounted to Rs.3,355 crores of claims paid for 11,22,652 claims.

The analysis shows that circulatory diseases have the highest average claims paid among all disease categories, accounting for 13% of claims paid analyzed (Exhibit 1).

According to a report published by the Indian Association of Prevention and Social Medicine, “Decline in morbidity and mortality from communicable diseases have been accompanied by a gradual shift to, and accelerated rise in the prevalence of, chronic non-communicable diseases (NCDs) such as cardiovascular disease (CVD), diabetes, chronic obstructive pulmonary disease (COPD), cancers, mental health disorders and injuries”. The top 5 disease categories (out of 22 broad disease categories as per ICD 10) which account for 51% of claims paid, in the sample under study are, apart from circulatory disease, Injury (10%), Digestive (10%), Urology (9%) and Neoplasm (8.5%) (Exhibit 1).

The same report states that “though there have been substantial achievements in controlling communicable diseases, still they contribute significantly to disease burden of the country”. The amount of claims paid is relatively smaller for Infectious diseases, but they account for largest number of claims as per our analysis (Exhibit 1).

It was also noticed in our analysis that Mumbai accounts for the largest number of health claims, accounting for 27% of the 11,22,652 claims studied, amounting to 30% of the claims paid. The other large cities which account for significant number of claims paid are Delhi (19%), Kolkata (14%), Bengaluru (12%), Chennai (11%) and Hyderabad (10%), with others accounting for the remaining 5% only (Exhibit 2).

Exhibit 1

Exhibit 2

The case for Mental Health Insurance

This article was first published in the IIB Bulletin, Vol 2, Issue 2, pp17-18

As per the World Health Organization (WHO), Mental health refers to a broad array of activities directly or indirectly related to the mental well-being components included in the WHO's definition of health: "A state of complete physical, mental and social well-being, and not merely the absence of disease". It is related to the promotion of well-being, the prevention of mental disorders, and the treatment and rehabilitation of people affected by mental disorders.

Common forms of mental illnesses include Depression, Anxiety/ Phobias, Eating Disorder and Stress, among others. Some of the severe forms of Mental Illness are Schizophrenia, Bipolar disorder (Manic depression), Clinical depression, Suicidal tendency, and Personality disorder.

According to National Institute of Mental Health and National Alliance on Mental Illnesses, in the US, 1 in every 4 persons suffers from some form of Mental Illness or the other, while this statistic is 1 in 6 persons in India. The impact is that people with mental illness die 25 years earlier than other Americans and more than 90 percent of suicide cases are found to have one or more mental disorders.

In a study done by BeyondCore, Inc. on people insured between the ages of 18-35, in the USA, it was found that Mental Illness has a compounding effect on claims (cost of treatment). For example, the annual cost for young adults with heart failure was $42,000, for people taking antidepressants was $7,700, but people who had both heart failure and were taking antidepressants had an annual cost of $70,000 (see Figure 1). 

Figure 1: Compounding effect of Mental Illness

To the economy, the loss of earnings due to mental illness amounts to US$193 billion per annum. Globally, depression alone affects 400 million persons and was estimated to cost at least US$800 billion in 2010 in lost economic output, by WHO, a sum expected to more than double by 2030. While such statistics are not available for India, it will be reasonable to assume that the impact would be significant.

In fact, the situation in India may be worse as acknowledging suffering from some form of Mental Illness is culturally a taboo in India. On top of that, the availability of help in terms of psychiatrists, psychiatric beds, clinical psychologists, etc. is much below the required numbers. For example, there are approximately 3000 psychiatrists in India vis-à-vis a requirement of 150000.  

Health Insurance policies also exclude Mental Illness specifically. Extracts from the policy documents of a few health insurance products read as follows:
  • “the following fall under permanent exclusions: Any expense incurred on treatment of mental Illness, stress, psychiatric or psychological disorders”
  •  “this policy excludes: Psychiatric, mental disorders (including mental health treatments)”

Insurance plays a key role in Healthcare financing. Insurance is based on law of large numbers and there is no denying the large number of people suffering from mental illness. The trouble of course is that Insurance contracts are based on utmost faith and the policyholder must disclose complete known information about his physical and mental health at the time of buying the policy. The fear of inadequate disclosure by the customer may deter the Insurers from offering policies on Mental Health insurance.

Assessing the risks may remain a challenge for the underwriters till adequate data becomes available. Collating the data from various institutions like National Institute of Mental Health and Neurosciences and the Institute of Mental Health and Hospital, Agra may help the Insurance companies design appropriate products.

Use of innovative techniques may come in handy to some extent. For example, social media analytics of an individual may reveal suicidal tendencies or enquiries about specific problems like depression, anxiety, etc. Sentiment analysis can help find people at risk. These can then be verified with the customer and specific undertaking may be taken from the customer if he does not agree with the findings.

Mental illness is also a major cause for the high number of suicides in India. Intervention at the right time, access to healthcare, along with health financing will play a major role in talking the problem of suicides related to mental illness as well as prevention of the illness getting aggravated. It is a serious issue and the Insurers can play a major role to make a difference!

Wednesday, November 18, 2015

Unconventional Products on the Block

This article was first published in the IIB Bulletin, Vol 2, Issue 2, pp4-6

Mr. Sushant Sarin is the Senior Vice President- Commercial Lines, at Tata AIG General Insurance Co. Ltd. In this capacity, he is responsible for profitably growing the Commercial Lines business of Tata AIG, leading its major and corporate accounts practices and overseeing its broking and commercial agency distribution.

Under Sarin’s stewardship Tata AIG has been the leading Liabilities insurer for India Inc. Sarin helped set up Tata AIG’s operations and as part of the start-up team one of his assignments was to help bring to India Inc. the latest liability insurance products used by industry world over.

A practicing Fellow of the Insurance Institute of India, Sarin has close to 25 years of experience in the General Insurance Industry. Prior to Tata AIG, he worked in various capacities with United India Insurance Co.

Sarin is a graduate in Science from St. John’s College and holds a Post Graduate Diploma in Management & Marketing. His interests include long distance running, reading and dramatics. He is currently reading “Miles to Run Before I Sleep” by Sumedha Mahajan (Rupa Publictions, 2015).

In a conversation with Dr. Nupur Pavan Bang of the Insurance Information Bureau of India, Sarin talks about the Unconventional Insurance products which have gained significance in recent years due to the Social, Regulatory, Technological and Environmental changes taking place globally and in India, the challenges posed to the Insurers while selling such products and while assessing losses.

An ASSOCHAM-Mahindra SSG study earlier this year warned that the number of Cyber crime cases in India could rise to more than 3,00,000 cases in 2015, growing at a compounded annual growth rate (CAGR) of about 107 per cent. In such a scenario, Cyber Liability Insurance must gain importance. Is the growth in volume (in terms of Gross Written Premiums) of Cyber Liability Insurance products for the Insurance Industry, keeping pace with the increased number of crimes?

Cyber Liability Insurance is becoming very important nowadays, especially in the backdrop of rising number of instances of cyber crime and cyber data breaches. Its growth in terms of both premium as well as the number of policies being purchased has been remarkable.

At Tata AIG, we launched this product about two years back and the portfolio has grown to $2 million now. We see that more and more companies are buying Cyber Liability Insurance. Those companies which were the first movers are buying more cover and those who have not bought it yet, will start buying it.

However, when a client is looking to buy a Cyber Liability Insurance, he is buying something quite advanced and sophisticated. Tata AIG has the customers’ confidence in this product and the market share is tilted in its favour.

As you mentioned, Cyber Liability Insurance is quite advanced and sophisticated. How does a customer know what is the amount of Insurance or “Limit of Liability” that they would like to avail of?

Cyber Liability and Cyber Crime are often, though inaccurately, used as synonyms. Cyber crime refers to any crime committed using computers or over computer networks. When we think of cyber crime, we unwittingly limit our thinking to only those crimes committed using computers or over computer networks, that are related to theft and robbery of money or securities. However, confidential data or personally sensitive information such as that related to customers’ passwords for financial transactions, bank account numbers, confidential medical records, etc. are also very valuable and theft of such data or information can have dire consequences for a company or an individual.

For example, for a Bank, if someone accesses data of a Bank’s customers in an unauthorized manner, he can get into the account of any bank customer and do whatever he wants to do with the money lying in the account.

So information or data is very valuable. That’s why insurance for financial consequences of data breach, that is, Cyber Liability Insurance, becomes important.

Coming to how do companies know what should be the Limit of Liability for which they should buy insurance, this depends upon factors like the type and volume of data, origin of data, location where the data resides, sensitivity of the data, data security protocols, peer group benchmarking, etc.

So if the data originates from Europe or the US, the data privacy laws are stricter there, so more Insurance will be required. Similarly, if the data is personally sensitive or creates financial vulnerabilities, the amount of Insurance required will be much more.

How does the Insurance Company assess the loss if a data breach does happen? What are the kinds of losses that are covered by such a policy?

When money is stolen, like in the case of a recent event where a Bank discovered a fraud to the tune of a few Crores of Rupees due to fabricated credit cards, the amount of loss suffered is a straight forward calculation and this amount will be paid by an Insurance Company if the Bank has a policy covering such fraud.

However, a data breach is more complex. Cyber crime which results in a data breach may typically get discovered much later than a cyber crime where a specific amount of money is stolen. When it does get discovered, the following issues confront the company and lead to costs, expenses, fines, penalties and liability being incurred by the company:

  • How did the data go out? Forensic investigation would need to be done and it is very expensive
  • Cost of  notifying the customers, that is, data subjects, about the breach; notification costs form a very large part of the financial costs following a data breach
  • Regulatory bodies may impose a fine or penalty; the policy pays for these if these are insurable under law
  • Customers or data subjects may sue the company. Courts may awards damages to be paid to each of the affected customers
  • Reputation loss- a public relations expert may need to be hired to salvage the reputation of the Company and / or its Data Security Officer

The policy covers these and other financial consequences.  The total of these losses is the amount payable under the policy.

The year 2015 saw bans on popular food products in India. For a company, when operating in a country like India, where the regulations at times may border on being in grey, rather than black or white, Product Liability Insurance becomes important. What are the main features of such a policy?

A lot of awareness has been created in recent times about product safety and quality and of Contaminated Product Insurance as a related risk mitigation measure. Product recall is very generic Insurance Policy. A product can be recalled for any number of reasons. It could be defective or dangerous or any other reason. Contaminated product insurance is a policy specifically created for products which are for consumption by people as consumption by human beings poses a high degree of risk if the product is unsafe or harmful. The policy covers the cost of recall, cost of additional warehousing, extra manpower, disposing of extra packaging and point of sale material, cost of engaging with a Public Relations agency to undo the damage to reputation and brand to re-establish market share, loss of profits because of business interruption following the incidence of contamination, malicious product tampering and product extortion etc.

What if the policyholder (Company) doesn't disclose that a certain product is contaminated? Will the Insurance Company still be liable to pay the claims?

Insurance policies are for fortuitous /accidental events even if caused due to negligence. Intentional or known defects are not covered.

Directors’ and Officers’ (D & O) Liability Insurance is another product which should have picked up in 2015. With cases of harassment in work places on the rise and complaints on high profile executives grabbing the media attention, are more and more companies opting for D & O Liability Insurance?

D & O Liability Insurance is no more an option. Everyone is buying it. No company is secure till they buy a cover protecting management against personal liability for managerial actions.

Is loss of a company’s CEO covered under an insurance policy?

For this, we must consider two different types of insurance products that deal with two very different types of exigencies.

One type of policy which is popular is Key Man Insurance. Such policies are sold by Life Insurance companies and are generally taken by a company on the life of key employees to cover the company from the sudden loss of a ‘Key Man’ that results in financial loss to the company.

As far as a D & O policy goes, it would protect the directors and officers of a Company if the company were to lose a dynamic successful CEO to say, competition. The profitability of the company and hence the share prices could take a beating. The shareholders may sue the Board of the company for not doing enough to retain the CEO and may demand compensation for their losses. D & O Liability Insurance would come into play here.

How does the Insurer price D & O Liability Insurance? What are the factors that are accounted for when underwriting and pricing the product?

It is the collective outcome of many factors like the performance track record of a company, its asset size, whether the company is listed or not, if listed whether the listing is in India or abroad, say US or UK, compliance record, disclosure standards, the nature of business, the nationality and profile of employees, etc.

Insurance is mainly meant to mitigate the losses that a company/individual may face if certain events happen. If we go by this definition of Insurance, then many Multinational companies operating in India may want to buy a cover for Tax related risks. Is there a product in the market which covers Tax risks?

Talking of tax levies in general, tax is levied by law. If tax that is to be levied is not deducted, collected or paid, whenever it is detected, it will have to be paid. There is no fortuitousness about it. However, when there is a transaction like a merger or an acquisition happening, the tax position under law may not be clear. If the law is not clear, for such very limited situations, Tax Indemnity Insurance is available. It is by its nature a customized policy. Very few insurers have the capability to write such policies.

What is the recourse for companies which are faced with retrospective taxes being levied on them? Tax risk is certainly not something that any of these companies would like to carry themselves.

Other than insurance for the limited situations where the tax position in a transaction may not be very clear, there are no blanket or omnibus tax insurance policies. Retrospective changes in laws will not be covered by Insurance.

Ace investor Mr. Rakesh Jhunjhunwala, in an interview to CNBC TV-18, earlier this year, expressed his concerns about the valuation of e-commerce companies in India. In the recent past, there have been more voices expressing concerns about the high valuations of the e-commerce start-ups and it is being likened to the Dot Com Bubble of 2000. If there indeed is a bubble, and it bursts, the Venture Capitalists (VCs) and Angel Investors (AIs) would be the ones to lose maximum money. In such a scenario, do see a need/demand for a product to cover the risks being faced by VCs and AIs?

VCs and the AIs do a lot of due diligence before they invest. Arriving at a reasonable valuation is part of their business and they must take that risk. But if the due diligence is not done appropriately, and limited partners lose money because of the negligence of general partners, professional indemnity insurance coverage under the VC Protector policy will be useful.

Monday, August 10, 2015

Fifteen Years of Liberalization in the Insurance Sector

This article was first published in the IIB Bulletin, Vol 2, Issue 1, pp10-11: Co-Author: Syed Md. Ismail

Source: Swiss Re, Sigma various volumes and IRDA Handbook
* Insurance penetration is measured as ratio of premium (in US Dollars) to GDP (in US Dollars)
# data relates to financial year
The data labels refer to the Insurance Penetration for India

Source: Swiss Re, Sigma various volumes and IRDA Handbook
* Insurance penetration is measured as ratio of premium (in US Dollars) to GDP (in US Dollars)
# data relates to financial year
The data labels refer to the Insurance Penetration for India

Source: Swiss Re, Sigma various volumes and IRDA Handbook
# data relates to financial year
The data labels refer to the Insurance Density for India

 Source: Swiss Re, Sigma various volumes and IRDA Handbook
# data relates to financial year
The data labels refer to the Insurance Density for India

Wrong No Claim Bonus needs to be checked

This article was first published in the IIB Bulletin, Vol 2, Issue 1, pp6-7

43% of the estimated approximately Rs5000 crores fraud in the General Insurance Industry in India, as per the India Forensic center research 2011, is accounted for by the Motor Insurance Business. Staged thefts, Overstating damages/claims, multiple claims for the same damage through multiple Insurance companies and the misuse of No Claim Bonus (NCB) are just a few examples of fraud in Motor Insurance.

If a policyholder does not make a claim during the previous policy year, a discount on the premium is given to reward the policyholder while renewing the policy. However, if a claim is made, the discount is not given. In such a scenario, the policyholder may go to another Insurance company and take a policy on the vehicle, without disclosing the previous claims.

In a Simulation exercise done using hypothetical data, done by the Insurance Premium Rating Bureau, Thailand, it was found that giving higher NCB can have a serious impact on the loss ratio of the companies. For example, in figure 1 below, 155,876 vehicles came up for renewal in Underwriting Year 2010. Out of these, 71,907 vehicles should not have got a NCB. However, only 19,514 were not given NCB. Rest of the 52,393 vehicles got NCB in the range of 20% to 50%.

Figure 1: Simulation of NCB 1st Year Renewal

Figure 2: Simulation of NCB 4th Year Renewal
These charts were first presented at the Insurance Information and Ratemaking Forum of Asia, 2015 in Kuala Lumpur, Malaysia on May 28, 2015 by Chutatong Charumilind and Konthorn Chainiwattana, Insurance Premium Rating Bureau, Thailand. Reprinted with permission.

Similarly, when these vehicles came up for renewals in subsequent underwriting years, some vehicles were always awarded NCB that they did not deserve. The resulting Loss Ratio for such vehicles, which were consistently awarded wrong NCB, was a whopping 164% to the Insurer.

Plugging in NCB leakage is hence extremely important for the Insurers.

Vehicle Claims History Search is a service provided by IIB to Insurers, which is aimed at removing the information asymmetry between the Insurer and the policyholder with respect to the previous claims. The use of this service would ensure that vehicles which have had claims in the past are not rewarded with No claims bonus. The Vehicle Claims History Search facility also brings in efficiency as the Insurers do not have to depend on the previous Insurers for verification of claims, it is a low cost option which can also be integrated to the policy management system of the Insurers through the web service provided by IIB.

Need of the Hour for the Life Insurance Industry in India

This article was first published in the IIB Bulletin, Vol 2, Issue 1, pp4-5

Mr. Ian J. Watts is the Senior Vice President and Managing Director, International Operations for LL Global, Inc[1]. As head of LIMRA and LOMA’s International Operations, Watts is responsible for developing and expanding business opportunities in Asia, Latin America, the Caribbean, Europe, Africa and the Middle East.

Prior to joining LIMRA and LOMA, Watts was Global COO at ACE Life International, where he was responsible for day-to-day operations and new business development. He has held CEO positions in India and China for AIG and AIA and has extensive global experience in the UK, EMEA and Latin America. Watts was educated at Loughborough University College, earning a Business Education Council Diploma.

In a conversation with Dr. Nupur Pavan Bang of the Insurance Information Bureau of India, Watts talks about research in the Life Insurance sector, in India and globally.

In what way can the Life Insurance companies in India benefit from being associated with LIMRA and LOMA?
We can bring to the Indian Insurance market the global best practices and also world class education and development programs. Insurance companies in India still have a lot to achieve in terms of improvements in distribution productivity and profitability. We can bring quality experiences and proven systems from around the globe and help the situation here.

LIMRA does not do much research on the Indian market.
Yes. The historical research is primarily US based. In the US, there is decades of experience on trends. We can even track generation wise exposure and experience. Many US research studies now include global data. But now, strategically we will do more of international research, including surveys and studies in India.

What would be the focus of your research in India?
The focus in India is on Consumer trends and preferences with regards to purchasing Insurance.  As we work more closely with the Insurance Companies in India we will be well placed to conduct research that helps the industry continue to grow and develop. India has a large rural population and selling to this sector is a challenge but also opportunity for the Industry in India. Understanding the India Consumer purchase preference will be a focus of further research.

Distribution Channel plays an important role in determining the purchase behaviour for Insurance. What is the preferred distribution channel for Indians?
We found that while many Indians (same as the Chinese) might go to Facebook, Twitter, and other social media sites to do research on which Insurance product to buy, they still prefer “face to face” purchase of Life Insurance. This is because the products are perceived as complicated and need explaining by the Advisor.

What are the challenges with Distribution Channels globally?
Agents are still the most preferred distribution channel even in the US and Japan which are amongst the most matured Insurance markets. And you know that it is the most preferred channel in India. However, the challenge is that most of the Agents are now in the age group of 55-65 years. There are fewer agents joining the agency force every year but Consumers still prefer to purchase Insurance from an Agent. The older Agents may not know how to communicate effectively to Gen X & Y Consumers. Companies are focussing on how to attract and retain Gen X & Y Agents.

You have been both in India as well as China with AIG and AIA. What has been the experience? How do the two countries differ with respect to the Life Insurance market?
There are many differences and similarities between both important and large markets of India and China. A large population with a growing middle class, good economic growth and lower Insurance penetration rates are some of the similarities highlighting the opportunities for both markets. In India companies require only one licence to operate across the country whereas in China each Province requires a new license. Agency productivity is generally better in China as the companies there have been adopting global best practices for many years. Consumers in China are more comfortable purchasing Insurance via the internet than any other Asian market including India.

What are the global best practices that India must adopt?
LIMRA and LOMA can bring many proven global best practices to help the Indian Insurance companies improve their productivity and therefore profitability.

Scientific selection of Agents and sales staff helps companies identify those candidates most likely to succeed in an Insurance sales role. This then allows companies to invest in their best talent.

Effective and regular training and development of producers and employees improves their productivity and increases retention rates.

Compensation is a major driver of behaviour so aligning compensation to required behaviours is an effective best practice.

It is important to establish a management process and recognition framework within distribution channels and the organisation as a whole so lower performance is corrected early and higher performance is recognised effectively.

Technology plays an important role for Insurance organisations to reduce operating costs and connect closer with Consumers and customers.

[1] LIMRA, a worldwide research, consulting and professional development organization, is the trusted source of industry knowledge; helping more than 850 insurance and financial services companies in 73 countries increase their marketing and distribution effectiveness. Together, LIMRA and LOMA provide the most comprehensive competency-based training solutions in the industry.

Friday, July 10, 2015

How inflation impacts India's 'aam aadmi'

 This article was first published in the business section of on July 08, 2015; Co-author: Anisha Sircar
Sustained increases in price are often due to rising demand for existing production, when the former outpaces the productive capacity of an economy. With high money circulation, one has more money to spend and invest, but production is unable to expand in response. Prices must now rise to bring equilibrium to the market, by incentivizing producers to increase production.

If the economy is already at full capacity of output, employment and production increase becomes difficult. In order to employ more workers, wages must rise, which increases the incomes of workers, who then become better off and contribute to a further increase in demand, and the cycle continues. Unless the central bank intervenes, or another external factor brings in moderation, the process is exacerbated.

However, if the economy is not functioning at full capacity, the price rise due to excess demands puts an upward pressure on production- supply rises to meet demand and price increases gradually. But, this might lead to outright price decline as well. A drop in price would imply that the demand is too little to meet the current increased output levels. This would then result in downsizing, less money in the hands of employees, hence less disposable income for consumers, leading to even lower demand, hence price cuts.

So the see-saw of demand and supply keeps moving the prices up and down!

In the short run, inflation is about the shifts in aggregate demand with respect to aggregate supply; in the long run, inflation is a function of the Central bank’s policy measures and discretion in conducting fiscal policy.

By definition, inflation refers to a persistent rise in the general level of prices in an economy. By gauging the rate of inflation or deflation (a negative rate of inflation, referring to a decline in the level of prices, which occurred in the previous example when supply outpaced demand, and may culminate in depression) present or anticipated, producers and consumers are given the means to measure the cost of production and living.

Most often, inflation refers to price inflation, as opposed to monetary inflation which refers to the significant increase in the money supply. Consumer Price Index (CPI) is the key measure of inflation in India.

CPI measures the cost of consuming a standard basket of goods and services over a particular period. Through this index, one can evaluate the cost of living in a particular economy. For example, if the weighted average of the basket in 2013 was 200, and 206 in 2014, the rate of inflation in 2014 would be 3 per cent.

The standard basket includes food, clothing, shelter, fuel, transport, healthcare and other day-to-day purchased goods and services for rural, urban and combined groups. The weights for each component of the Consumer Price Index basket is determined by their importance, as surveyed by consumers’ total spending on that item (See Chart 1).

Chart 1: Components of Consumer Price Index

CPI is a rather stable index. It is not susceptible to large changes, and its basket items are constant, reflecting the standard items consumed by domestic households.

As such, inflation pegs down currency value, re-allocates resources, reduces potential economic growth and leads to the attrition of gross domestic savings, with less capital formation in the economy. But how are individuals really impacted by the inflation?

High inflation leads to higher interest rates; people in need of loans and mortgages find it difficult to borrow with increased costs of borrowing. For example, banks increase rates on existing borrowers of home loans during times of inflation. As home loans are mostly taken at floating rates, most customers are wont to pay more EMI per month.

When saving for retirement, education, housing, or any other plan in the foreseeable future, the rise in cost is a massive risk: buying may cost more in the future than today. Inflation distorts future goals and savings.

A bigger (if not the biggest) risk of higher inflation is posed to the lower and fixed income families. Prices for food and utilities such as water and fuel rise at a rapid rate.  Usually, being short of cash, more people use credit cards and get into a debt trap, having to take personal loans- more EMI to pay; and budgets are incisively cut for most of the lower and middle classes.

The issues associated with inflation form a double-edged sword: while prices are higher, declining one’s buying price, non-fixed income groups can benefit from increases in income (however, if income increases at a rate less than the rising price rate, buying power still declines).

This is why economically worse-off individuals bear the most significant brunt of high inflation, as they are less able to insulate themselves and hedge against the risks and uncertainty posed during inflation.

Investors in debentures and fixed-interest securities, bonds, etc. lose substantially during inflation. Similarly, retail investors with stocks in inflation-sensitive companies such as automobiles are likely to see stock prices decline as people prefer to not spend discretionary money.

Inflation is known as the Worst Tax because its effects often go unnoticed with the focus on nominal earnings rather than real earnings. If inflation is rising at 9 per cent, and one earns 6 per cent in a savings account, one may feel 6 per cent richer, when in fact one is 3 per cent poorer. Real incomes of wage earners sharply decrease, especially when wages do not rise at the same pace as the general price level, thus increasing the real cost of living.

As the value of national savings drops with less money to save now as people spend a greater part of their disposable income, individuals are left with little money to spend on any other activities.

In recent years, inflation has been perceived as a serious problem owing to public confusion about what inflation is and how to make adjustments for it. However, what is certain is that Inflation makes it difficult to make decisions about future expenditure, investment, and production with respect to current prices.

Thursday, June 25, 2015

Analytics: Missing the woods for the trees

This article was first published in the Analytics India Magazine on June 23rd, 2015; Co-author: Sanjay Fuloria (Cognizant Research Center, Hyderabad)

Big Data Talent Gap is a serious problem. Recognizing it, Universities are introducing courses on Analytics and Big Data. This has resulted in a larger supply of people who are well versed with data manipulation, handling and running codes. But, it has created a gap of another type. In an article on “Three Problems All Data Scientists Experience”, Drew Farris of Booz Allen Hamilton Inc. writes that “…problems go beyond technology and machine learning and are broadly encountered regardless of the task at hand: interpreting the problem, sourcing the data, and describing the outcomes”.

A lot of new joiners in analytics teams across companies face a serious problem especially while describing the outcomes. They fail to understand what their effort will lead to? This effort could be the software code they are working on or the project module that is assigned to them. Why only new joiners? Even employees with 6 to 7 years of experience find it difficult to look at the big picture. The institutes where they learn these analytics’ techniques are partially to be blamed. They are taught to play with the software. It could be coding or working on the dime a dozen graphic user interfaces that are available. They understand how to handle data, get the results and interpret the data. How this interpretation would lead to business gains or efficiency gains is not clear to them!

A simple example could be a segmentation exercise where the collected data is used to segment customers into various groups. These groups could be divided demographically or by using the customers’ choices and preferences. Once this segmentation is done, each segment can be profiled both on the basis of demographics and choices. Up to this point, all analytics greenhorns would do a perfect job. The next step is where complications arise. When they present this to the client, the client enquires about the usage of this exercise. They do not have an answer to this. If they can tell the client how each segment can be uniquely targeted using specific marketing campaigns and what amount of efficiency gains they would achieve, the client would be delighted. If this is done correctly, apart from the short term gain of client appreciation, they can expect long term career growth opportunities.

With so much of data available through various sources like smartphones, internet and social media sites, the requirement for experienced analytics professionals is bound to grow. The beauty of the situation is that this data availability is only going to increase with the advent of internet of things. In internet of things, devices will talk to each other with an app on your smartphone helping you to switch on your television and air conditioning just before you enter your home. A stage will come when the data of your home arrival times can be analyzed and the app will trigger the switching on of your devices   automatically without you even tapping it.

We also keep hearing of big data silos across data stores within the same organization. This happens because people with skills in data analytics do not understand which problem can be solved using the unified data. If they can be exposed to such problems and solutions, a lot of data can be unearthed from data warehouses and used productively.

There is an urgent need for institutions teaching analytics courses to equip their students with the ability to look at the larger business problem and then use their data skills to solve that. Instead of starting with the data, they should start with the business problem and while working on it they should not miss the woods for the trees. This can be done easily when the focus is on the business problem and not on the data.

Tuesday, June 23, 2015

Why does a rate cut matter?

This article was first published in on June 23rd, 2015; Co-author: Anisha Sircar, Flame University, Pune 

The Wholesale Price Index for May 2015 stood at minus 2.36 per cent, continuing its downward trend since the last seven months. The Consumer Price Index stood at 5.01 per cent, well within the range of 2-6 per cent targeted by the Reserve Bank of India. With the release of these figures on June 15, 2015, the demand for a further rate cut have resurfaced.

The industry associations like Confederation of Indian Industries and FICCI have already issued statements to the effect that Reserve Bank of India should continue the “rate easing cycle” to “support demand”.

Repo Rate
Earlier this month, on June 2, the Reserve Bank had cut the Repo rate by 0.25 per cent, third time this year. Repo rate (short for ‘Repurchase Agreement Rate’) is the rate at which the central bank lends money to commercial banks.

When banks experience a shortage of funds, they may borrow money from the RBI. When the RBI increases the repo rate, it becomes more expensive for banks to borrow money, creating a ripple effect that affects businesses and individuals.

Higher the interest rates to acquire loans, lower the profits yielded, which may result in spending cuts and a slowdown in the overall growth of companies.

Similarly, an increase in repo rate results in banks increasing their interest rates charged for consumer loans as well, thus reducing the purchasing power of individuals. The diminished ability for consumers to spend discretionary money results in reduced demand for goods and services and affects businesses as well.

Stock Markets
Stock prices are a function of business operations and expectations people have viz. companies at different points in time. If a company is seen cutting back on spending or making less profit, the expectations of people from that company may go down, resulting in a lower demand for the shares of that company. With decreased demand for the shares of a particular company, the share prices start to fall.

When a macroeconomic factor, such changes to the repo rate, affects the entire market, the indices (like Nifty or Sensex) would go up or down, representing the impact on the market as a whole.

Therefore, when the repo rate is cut, the general effect is an increase in the amount of money in circulation, which makes the stock market a more attractive area of investment.
(However, it is important to note that repo rates are not the only determinant of stock prices and market trends. It must also be noted that the stock markets represent only the organised (listed) sector of the economy. And the indices only represent some of the largest companies listed on the stock exchanges).

Market Reaction
Usually, as in January 15 this year, a repo rate cut should create a positive effect in the stock market.

On June 2, the RBI governor cut the repo rate by 25 basis points to 7.25 per cent. Raghuram Rajan announced, "Banks have started passing through some of the past rate cuts into their lending rates, headline inflation has evolved along the projected path, the impact of unseasonal rains has been moderate so far, administered price increases remain muted, and the timing of normalisation of US monetary policy seems to have been pushed back. With low domestic capacity utilisation, still mixed indicators of recovery, and subdued investment and credit growth, there is a case for a cut in the policy rate today."

The markets had been expecting a rate cut and had started to factor its positive impacts in the stock prices even before June 2. See figure 1 below. 


The market had moved up by 1.37% on May 29th, 2015 and remained flat on June 1st, in anticipation of a rate cut. However, in spite of the rate cut on June 2nd, the NIFTY fell by 2.36% and continued its downward trend for the next five trading days.

Why did this happen?
This happened because of the cautious stance of the RBI. The fall in stock prices was because the investors had already expected the third repo rate cut this year and had factored it in, anticipating, in fact, a 50 basis points repo rate cut.

The uncertainty with regards to monsoons which may result in food inflation if not managed properly by the government, rising crude prices amidst considerable volatility and geopolitical risks, and volatility in the external environment, were cited as the reasons for a 25 basis point rate cut rather than a 50 basis point rate cut.

Therefore, overall guidance from RBI was not that of a ‘cheer leader’.

Rate cut again

RBI’s various statements and interactions with the media indicate that further rate cuts in the near future is unlikely. However, with inflation figures expected to be well within RBI’s target, there may be room for further rate cut. Though, RBI would be watching the monsoon and crude oil prices like a hawk before any decision is taken!