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G V Rao*
Mr. G. V. Rao
The author is Chairman of GVR Risk Management Associates Pvt. Ltd, Hyderabad, India. An
Insurance veteran, he superannuated as the Chairman & Managing Director of the Oriental
Insurance Company Limited, India. He has served as a member of IRDA committee on Broker
Remuneration and Regulation. He was also a member of the Reinsurance Advisory Committee of
Government of India to IRDA. He can be contacted at gvrao70@gmail.com.
Synopsis
Risk management has two aspects: physical hazard and moral hazard. Rating, even under the tariff
regime, dealt with only the physical hazard. Insurers are thus poor learners of discovering the
contribution of moral hazard of customers to risk management. The emphasis today is on only
pricing, again, relating to the physical features of the risk.
The writer argues that insurers are losing money from about 12% of insured as claimants, who take
away the entire insurance fund contributed by the participating 100%. Insurers, therefore, must
more assiduously begin learning their insurance business from their claimants and their business
profiles than from those that do not put in claims. Insurers, by getting disconnected from the claims’
surveying and evaluating systems, and by depending totally on surveyors, are unable to learn any
lessons from the claimants either.
The writer urges that in terms of saving of money, the field of claims settlement offers greater
opportunities to devise superior processes of risk management. This could be a pre-cursor to learn
more about risk management, at the acceptance stage. Beginning at the end is a new idea the writer
wants to seriously propose.
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Are Insurers experts in Risk Management?
The public perception of non-life insurers is that they are highly regarded experts in doling out risk
management advice in the identification, mitigation and pricing of risk exposures they accept from
an insured. The tariff regime, with its strict practices of providing rate discounts on the availability
of fire fighting appliances and the nature of these equipments, gave an elevated status to risk
management practices, by indulging in risk inspections, by their specially trained Risk Engineers.
Irrespective of the outcomes on the pricing front, an intelligent discussion between them on the
processes, criteria for risk segregation, the special features of risk mitigation and probable
maximum loss calculations etc. lent an air of specialist expertise. Building a new relationship
between the two on exchange of risk information gave each of them an air of mutual respect. It was
not so much the rating processes per se, but it was the effort made by an insurer to understand the
risk ramifications of an insured better and for the insurers to provide inexpensive risk management
advice that was impressive.
When detarffing took place in 2007, the insurers, who had themselves lost their appetite for risk
management practices in 2001, also found that customers were interested more in talking about rate
reductions than on any meaningful discussion on loss prevention or loss mitigation measures. The
slide in risk management activity thus went down another notch. Insurers in the process lost
professional respect as well.
With customers dictating prices to be charged, after detariffication in 2007, insurers are now finding
that they are neither fully capable of providing any risk management advice, due to a lack of
specialist and trained personnel with them; nor has any customer shown interest to accept such a
service that was discontinued years ago, as unnecessary for pricing purposes.
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Even if the offer is renewed, it is more gratuitous and not for purposes of rate fixation. The risk
management world has changed for the worse. To blame insurers alone is rather unkind. It all
started with the IRDA, who regarded inspections as burdensome, realizing later in 2007 that they
are absolutely necessary in a non-tariff world.
The LPA was a very useful organization in surveying and analyzing post claim occurrences and was
charged with the responsibility of making suggestions to avoid such occurrences of accidents in the
future. Such claims’ analysis, over a period of time, offered insurers a wealth of information on
preventive methods to be shared with their potential customers and the insured society in general.
The PSU insurers did their utmost in winding it up rather than finding ways to enhance its
effectiveness.
In short, the non-life insurance industry was never interested, at any point on time, in either learning
or disseminating risk management expertise. If the rates were found insufficient, the obvious course
was to raise rates and not educate customers on more improved methods of loss prevention. Those
insurers, who now bemoan pressures on them to reduce rates, must know where the responsibility
for the current state of benign neglect of risk management concepts originated from.
But since the deed is now done, apportioning blame for it does not serve anyone’s purpose and least
of all to our analysis, except to say that the mental models of insurers remain the same, even now.
Insurers must, however, now find new ways to deal with the disinclination of customers on
receiving risk management advice.
Insurance is now in the formatting stage of striking deals than underwriting by first principles. Risk
management, at the best of times, deals with the physical features of the risk and how losses can be
prevented and mitigated. It is such a risk management concept that has fallen into disuse. It is a sad
situation but is not as hopeless as it might seem.
A large number of claims relate to moral hazard of customers for which no amount of original risk
management advices at acceptance stage would have sufficed. How does an insurer deal with this
kind of evil? In this field, the surveyor is an important link in the claim process. Survey work is an
outsourced process and it is a legal necessity too.
At the stage of striking deals on premium rates, innovations in claim sharing could be one source of
risk mitigation. These issues of concern must be talked about between the two parties. If insurers
are losing money on underwriting operations, it is due to a few claimants, say about 10% to 15% of
claimants taking away the total fund contributions by 100%. If risk management cannot be practiced
at the stage of risk acceptance, by charging higher rates, insurers must examine the profiles of
claimants and then develop claim patterns to devise underwriting controls, more specifically to such
insured customer-claimants. It is evident that such an analysis has not been attempted before nor is
there a move towards doing so now.
The second uncertainty relates to how much claim amount would be paid and thirdly when would it
be paid? It is suggested that by taking a proactive stand on claims an insurer can save money by
negotiating claims for lower amounts, more quickly, more reasonably and more fairly than
otherwise through the medium of courts, adding to costs and interest payments and enabling a
claimant to pad up claims, believing that insurers would pay lower amounts, at the end of all
negotiations. The evaluation the moral hazard of a customer manifests at the time of claims, which
may have escaped when acceptance of the risk was made.
Secondly, the surveyors should be asked to furnish monthly reports on the status of each claim
given for survey. This would sensitize the surveyor that his performance is under strict watch. Each
claim should be discussed before the finalization of the claim to make insurers’ control on the
surveyor supreme.
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Thirdly, insurers should consider a process popular at the Lloyd’s of London. They categorize
claims in to high value and complex claims and those that are not. The claims in the former
category are dealt with by officers of higher rank and more closely to save claim amounts without
disrupting client relationships. It helps in boosting the brand name and possibly save money as well.
Those that are causing losses to the company are those with poor physical hazard and with
questionable doubts on their moral hazard as well. Risk management should in the normal course
deal with both these two aspects. The failure on one—the evaluation of physical hazard and its
improper pricing should not diminish the importance to be accorded to potential savings on claims
from these claimants.
Similarly, those giving higher profits should be given superior service like say the up-gradation of
seats done in airline industry. Risk management is all about claim settlement and about those
customers who make claims. Those that do not put in claims are only contributing to profits of the
company.
It is an alternative proposed to deal with the inadequate underwriting and claim practices, which
seem now to have gripped the non-life insurance industry. Today, there is no risk management of
any kind, either at the stage of underwriting or at the stage of settling claims. Insurers must become
strong at reading both the hazards, physical and moral.
The writer supports that, under the given circumstances, eliminating or minimizing moral hazard,
learning the ropes of understanding the physical hazard factors better from claims, and elevating
customer service standards, based on their individual profits and losses, should be the goals of risk
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management. The efforts required for achieving such goals do not necessarily call for the labors of
an Atlas. Risk management can begin from any level and then built upwards.
Could this be a reality? Or is it just a pipe dream? Readers are asked to read, evaluate and suggest
improvements on this sketch placed before them.