Abstract: Insurance, particularly non-life insurance, is an economic activity, which because of its complexity, is difficult to properly comprehend. Rather, is easily susceptible to misunderstanding. It has endowed itself with some kind of mystery, very often evoking a negative attitude to-wards the sector. Therefore, the sector has comparatively limited acceptance in the society. Viewed in the light of its potential the sector seems comparatively less developed amongst the financial services. Therefore increased awareness by demystification and highest level of transparency are need of the hour to set it on an equal footing with other economic activities. Mass insurance awareness / education will not only go a long way in de- mystifying the sector but also portraying properly, its true value as an essential service. Simplification and transparency of the highest standard are the sin-qua-non for a decent beginning in mass insurance education. Simplification is required not only in products, processes, policy wordings and information availability, but also in the manner and format of the information presentation to the target audience. A gordian knot to unravel. The article attempts to present some views on the comparative method as a toal for proper understanding of this economic activity. It emphasises the importance of the manner and format of information presentation to make it intelligible. The views can be a basis for fruitful deliberations and further initiatives by all stakeholders. It is hoped that, it will act as trigger for fresh ideas.
Societies keep on changing. The nature and the pace of changes may vary from time to time and from society to society. Twenty first century changes are dominated by huge developments in the areas of financial inclusion and information & communication technology. This has led to wider participation of members of society in the corporate life. Such participation has heightened the need for increased intelligence and vigilance, particularly in the light of several corporate failures witnessed in the past. It is a repeatedly proven fact, that no amount of oversight can guarantee what a culture and conduct of self discipline and self regulation can offer. The repeated failures across the sectors, as well as across the countries has created a greater thirst, for sound and reliable as well as intelligible knowledge, amongst members of the society. Understanding the environment around us, reacting / responding to its dynamics and proactively initiating changes to adapt it to suit our self interest, are unique attributes of all living beings. For understanding a subject / phenomena, there is no method better than the method of comparative study. Amongst all methods of acquiring and enhancing knowledge and understanding, comparative method is the king. Contribution of comparative method to the human wisdom has been huge and immeasurable. For study of certain dimensions this may be the only method. And in others it is used to confirm or contradict the knowledge and understanding gained by other methods. This method is inherent in all spectrums of human life – social, political, economic, cultural and scientific. All of us are aware of it and are naturally conditioned to employ this method in our day to day life, consciously or unconsciously. The purpose of this write up is to examine different facets and dimensions of this comparative method in gaining knowledge and understanding of matters relating to insurance, particularly non-life insurance. While doing so, the write up looks at a few past and present practices and their efficacy. In addition, it attempts to flag the deficiencies in such practices for exploring future modifications / improvements.
In our industrialised, technology driven society, though life has become more comfortable, it has not become risk-free and is not totally devoid of life crippling risks. On the other hand over the years, it has grown riskier than what it was, a few hundred years ago. Though earlier day’s life was characterised / marked by subsistence economy, yet it was sustainable and otherwise was no less rich and less profound than the one of today’s advanced and developed societies. Risks were and are inherent and integral to living and they will continue to be so. They might see / reflect drastic mutations with changing times and environment. So do our perceptions about the risks. There is no magic wand to ward them off. It appears, errors in our developmental efforts, driven by highly materialistic interests, have lead to geometric aggravation of risks. We are all familiar with the climate change induced heightened frequency of storms, floods, tsunamis, increased frequency and magnitude of seismic activity, currently raging covid-19 pandemic and menacingly spreading terrorist activities, all of them testimonies the said risk aggravations. Human curiosity in exploring the universe too is fraught with huge unknown risks. Risks and rewards go together is a simple fact with no exaggeration. If we wish to progress we have to take calculated risks and manage them. Therefore insurance, a risk management tool, in all its forms, plays a crucial role and occupies an important position in the economic activities of today’s society irrespective of the nature of its socio-political structure. Hence understanding correctly, the different dimensions of the role of insurance in socio-economic life, is a matter of interest to all planners, administrators, academicians and leaders across the society. As said above, the common man too is very much interested in such understanding, as today, he is not immune to adverse effects of such socio economic set-ups. It seems, there is a need for upgrading the current practices which facilitate the knowledge and understanding of working and efficiency of insurance sector. I think current practices in this regard, evolved over the years, can be improved to a great extent in the following four areas.
- Measurements in Nominal vs Real Terms,
- Inevitable Comparison of Apples with Oranges,
- Use and Misuse of Aggregation, and
- Acceptable Standards / Benchmarks of Right
Before we dwell upon each one of the above areas, let me attempt to prove, with few examples, the premise of gap or deficiency in the present practices, felt by an average person in understanding the sector.
Over the years, societies have developed two primary indicators to facilitate understanding and judgment on the role of insurance in the economy and the stage of its development. First, indicator is called “insurance penetration” and the second one is known as “insurance density”. While insurance as a percentage of country’s GDP is an indicator of penetration, the insurance premium per citizen represents insurance density. In India penetration is little less than 1.0 % for general insurance and is about 3.7% for insurance (Life and Nonlife together) and Indian Insurance (nonlife) density works out approximately to Rs 1241/- (2019-20). These two indicators on their own, I do not think, make any sense to an average person. However, if these indicators are presented along with, say the corresponding penetration indicator of South Africa (or any other country/ies), which is 13.77%(2017), or insurance density in South Africa to be approximately 15 times that of India, or along with the corresponding figures of the previous year (or any other earlier point of time/s or periods), it starts making some sense to the reader. Similarly if the insurance penetration of non life insurance of 0.99% is presented along with corresponding indicator 7.7% of banking industry it will make some sense. Yet, in both cases it is not an adequate and complete understanding. It does not convey the clear picture even to the well read ones. Will such information enable the reader to decisively conclude that the high South African indicators stand for better insurance awareness and capacity of Afrikaner’s and they do not stand for the poor and riskier environment prevailing in that country ? Similarly can it be rightly concluded that role of insurance is secondary to that of banking because of the low figure of insurance penetration compared to that of banking ? This dilemma is true of / for many insurance parameters. Let us examine another parameter. Expense ratio. If an average reader is presented with the expense ratios of organisations in different sectors ( Insurer, Banker, Mutual fund, Manufacturer) will he be able to make any sense of true efficiency from such figures ? Definitely not. In an annual report of a leading banker, the operating expenses were expressed as a percentage of net interest income ( Interest earned on loans and advances less interest paid on deposits). This measure may be good and meaningful for an intra-sector comparison. But when it comes to intersector comparison, it has no value. Correct revenue on which expense ratio is to be calculated for inter-sector sector comparison has to be an addition of both inward and outward interests and not the net of them. Because banks render service to both segments of customers (Borrowers as well as depositors). Net interest income as a revenue is unique to banking. Similarly there is no corresponding item in banking comparable to claims cost in insurance. Thus making inter-sector comparison a nonsense. May be, the outward interest can represent the same. Similarly there are no readily available items in manufacturing industry comparable to the claims cost of insurers. In two leading manufacturing organisations the cost of material with related expenses of power, freight, wages and manufacturing overheads amounted to 65-70 percentage of the total cost. This may well correspond to the the claims cost of insurers. Re-organising such factors would definitely facilitate some meaningful inter-sector comparison. At times even intra-sector comparison will be confusing. Take an example relating to insurance commission as a percentage of premium. This ratio of a leading insurer used to be unreliably very low compared to other comparable insurers, thereby confusing the reader in their judgment. Take another instance where a trainee participant from a neighboring country, when asked about the Motor TP claims ratio of his country, replied, that the ratio is around 30 to 35%. Being used to ratios ranging from 150% to 250% observed in my country, I was confused and left struggling to comprehend the comparative status, like a computer keeps hanging. These examples, which constitute only the tip of the iceberg, suggest that the best and safe thing for an average person is to avoid any attempt to understand insurers and insurance. Something similar to throwing the baby out with the bath water. No surprise, society’s attitude towards insurance sector is ice cold. Precisely it is this dilemma, which provoked me to think of improvements in comparative method of study, so that a beginning can be made towards presenting the facts in the understandable realm of average reader. Comparison normally takes three forms. First, comparing the same subject / phenomenon over a period of time, second, comparing same subject or phenomenon amongst the peers, and the third, comparing the subject or phenomena with other subjects / phenomena. Context could be the additional dimension of comparison. The logic and rationale behind these comparisons, is not only to review and assess past performance, plan future progress and prepare for improving efficiency but also to gain knowledge and understanding of all dimension of the economic activity and its role in our life. Now let us examine possible scope for up-gradations, in each one of the four areas mentioned above.
Measurements in Nominal vs Real Terms.
The day, human beings gifted themselves with money as a means of exchange and bid good-bye to the barter system, unknowingly they introduced themselves to a novel concept of nominal value. Over the years this concept percolated and spread across all dimensions of human life, so that even so called invaluable life today gets assigned with some nominal value. Thus, it has become a norm to measure and assess all economic activities / events in nominal values. It is so ubiquitous and common, so much so that, when some one refers to the most popular indicator of economic activity, the GDP of a country, the reference is for nominal GDP unless otherwise mentioned / qualified. Measuring and assessing them in real terms is an exception and occupies a secondary place. This is true of many economic activities, including insurance. Ease and convenience are the hallmarks of this practice. Developing and maintaining measurements in real terms is difficult and inconvenient. It is this tendency of avoiding the inconvenience and the difficulty, is behind the failure to realise the organisational slide into problems to which past generations have been the witnesses. Yes, nominal comparisons are also meaningful and useful. But at times they may not convey true and complete story. Also, the smart and clever ones, in the absence of measurements in real terms, can use the same for misleading the reader. Hence comparisons in real value terms along with the nominal value comparisons, are necessary to know the true, correct and complete facts as well as status. Slowly we have to evolve and adopt such parameters. The basic insurance value (Gross Domestic Premium) is a product of number of policies issued / number of persons insured / sum insured (persons/property/income) / indemnity offered and the rates of premium charged. Except for some internal analyses in performance reviews, the interplay of these factors in the final value rarely gets presented to the general readers. Falling rates of premiums may fail to disclose the service expansion in terms of increased coverage and vice-versa. Similarly rising rates of premium may conceal the contraction or lack of growth in the service and vice-versa. Therefore sum-insured, number of persons covered, number of policies issued and derivative parameters based on such factors should necessarily form part of the reportage. Even if some of them are available today, they are not presented in a manner and format in which they should be. The format and manner of their presentation should be such that it facilitates easy and intelligible reading. Such a step will also take the operational transparency to the next level. In India life insurers use sum insured as one of the service parameters and general insurers have not been using it to the same extent, despite being making lot of noises about the gap in insured and uninsured values (Under insurance). Similarly one of the leading banker prominently discloses the number of customers served. Yes there are practical problems in operationalizing some such disclosures, but they are not insurmountable. Economists, long back, recognised the weaknesses of depending merely on nominal values and for better comprehension, they started presenting the GDP of a country at current prices as well as constant prices with reference to a base year. We need to explore the possibility of such a measure for reporting insurance values.
Inevitable Comparison of Apples with Oranges
Being part of Indian insurance industry, I was always curious to know the value of its contribution to our society. Following questions kept on popping up regularly. Is it, as good as that of bankers ? How does it compare with that of a manufacturing industry ? Where do we stand in comparison with other services and particularly with other financial services ? Satisfying answers to quench the curiosity were not simply available, though some rough measures could have been used to facilitate some judgment of approximate kind. But definitely beyond the capability of an average man. Moreover a few drops of water given to a highly thirsty creature instead of quenching the thirst, is more likely to increase the emotional and psychological gravity of the thirst. No two human beings are exactly alike, nor are two organisations. That is not an excuse for avoiding peer comparison of economic activities of such entities, because all of them use same economic inputs and society is entitled to know, where these inputs are used best. This argument definitely holds good for organisations operating in a particular sector. Can this argument be used, with equal force, to compare organisations engaged in dissimilar economic activities ? Will such comparison not yield absurd results ? Comparison of an insurance entity, with a manufacturing entity, or other service organisation like a telecom company can only land us in a realm of confusion. Even comparison with another service organisation in the financial field like a bank or a mutual fund too would take us no-where. This is equally true of the comparison involving two insurers, one a life insurer and another a non life insurer. In all such cases we are attempting to compare oranges with apples. In other words we are comparing the incomparables. While acknowledging the absurdities which may crop-up in such primary comparisons, we can not ignore the need for and utility of such comparison for the purpose of assessing efficiency in use of scarce economic inputs. Therefore it is necessary to develop tools and mechanisms for meaningful inter-sectoral comparison. Only, these tools and mechanisms of comparison may have to be slightly different from the ones used for intra-sectoral comparison. It is possible to evolve such tools of higher level / grade to facilitate the comparison of dissimilar organisations / organisation which are significantly different / engaged in significantly different activities. All organisations use the same inputs (Land, labour, capital and entrepreneurship). The difference is only in the proportion of these inputs. The proportion of land / material will be relatively high in a manufacturing organisation. If all organisations irrespective of its nature, develop measurements based on the input factors or common factors, meaningful inter-sectoral comparison gets facilitated. Current practices may also have to be modified to some extent to facilitate such comparison. For example : while manufacturing organisations, separately present the marketing and sales expenses as part of their reporting, the same is not the practice in insurance industry. Wages paid to the workers in manufacturing industry are separated from the compensation given to other employees. But in some sectors including financial sector such practice does not exist. Thus hampering the process of comparison. May be comparable and the corresponding cost of blue collar equivalent employees of such organisations have to be segregated. If a comparison has to be facilitated suitable modifications have to be adopted. There could be several such areas, which only an open mind can identify, where synchronisation amongst reporting of different sectors is required and possible.
Use and Misuse of Aggregation
No doubt insurance is a business of aggregation. This unique business attribute of the insurance sector does not liberate the sector from the concept of segmental reporting. Concept of segmental reporting is a financial tool developed by accountants to assess the segmental performance and it is an anti-dote for deficiencies of aggregation. Segmental report is part of the annual reporting for the insurers too. It endows insurers’ reports with high level of transparency. The reporting practice in this regard so far, has been on product based segments. A better and scientific segmentation has to be peril based. It can also be based on the subject matter of insurance – person, property (-passive at rest, active at rest, passive in transit, active in transit), liability and income. Often statistics is compared to a bikini. It conceals the vital. Similarly current product based segmentation though provides detailed breakups, it does not bring out the vital intelligence to guide right decision making. This is a radical suggestion, but is based on logical and rational thinking. It is not the insurance product which decides the outcome. It is the frequency and severity of the peril and / or the nature and susceptibility of the subject matter insured that decides the outcome. We need to establish the linkage of outcome with the peril and / or with the nature of subject matter insured. This should improve not only the quality of reporting but also the quality of rating. It will also significantly upgrade the transparency of the industry. The opposition / resistance to this suggestion can only be due to the difficulty involved in achieving such segmentation. It is challenges of this kind, which afford opportunities and prove to be the turning points in the course of creative history. Apart from its value in facilitating true and objective assessment of performance, its role in comparative analyses by synchronised reporting needs to be realised. It carries in it the most potent seeds of product simplification too.
Acceptable Standards / Benchmarks
‘Single digit’, ‘double digit’, ‘negative’ are some of the growth adjectives frequently observed in the reports of business correspondents of media organisations informing the readers on business growth of insurers. Similarly claims ratio, expense ratio, profitability, and solvency are other parameters on which such reports often speak eloquently. Very often they are compared with those very performance parameters in the previous / previous corresponding period. Comparison with the similar performance parameters of the peer organisations is another dimension on which they try to report. Concerned Regulator too, at periodic intervals report such performance parameters. Managements of the organisations do the same reporting, with a difference that the positive ones getting highlighted and the negative ones getting downplayed. All this is very fine to get some idea about the performance of the organisation. Those few in the relevant field who are familiar (being reasonably literate in the relevant activities) do make some sense (if not complete) out of such reportage. But for others and the common man who may not be so literate, these reportings mean nothing. They do not make much sense. It is said and literally true that you can take the horse to the water but you cannot make it drink. Though making sense out of reading, requires a real thirst in the reader, yet otherwise also it is possible to make reporting more meaningful to everyone. Reporting the performance by comparing it with some benchmarks is one such way. The best example in this regard is the reportage on rainfall. In addition to the annual variation, it is always compared with the long-term average. In view of this, readers understanding becomes more meaningful than its mere comparison either with previous period or with that of peer/s. The period comparisons have a limited purpose of flagging the performance of some specific period. Peer comparison is effective only in an intensely / fiercely competitive market. On the other hand comparison with the benchmark / standard has a much broader and general purpose. Equally enlightening / illuminating example in this regard is the practice of checking the BP or sugar level against the more scientifically set benchmarks. Therefore developing standards and bench marks and presenting the performance against those standards or benchmarks can add substantially to the reporting quality. Currently this exercise of setting benchmarks exists in a limited way in organisational target setting exercise. In addition, some kind of bench marks set by the regulator, are found with regard to 1. Expense ratio, and 2. Solvency. There are also some benchmarks in the citizens charter commitments / regulatory prescriptions (Service standards for policy issuance, claim settlement, grievance redressals). It is necessary to raise this exercise to the next level. Objectivity of all these benchmarks have to be regularly reviewed and reaffirmed. In the past it has been observed that only crises drive the changes or improvements. Mostly reactive and rarely proactive. Organizational planning does involve setting targets and these targets do act as as benchmarks. But they are mostly for internal consumption. Unrealistic approach towards target setting and wide off the mark performance, frequently observed, is a reflection of scant regard shown for such standards. Benchmarks / standards are always dynamic varying from time to time and place to place. To a great extent they emerge from the past performance achieved somewhere. Technological developments do set the ground for new standards. Short term, medium term and long term standards may be different. But there has to be consistency amongst them. Whether the growth has to be in double digits or single digit, depends on the stage of development it has already achieved. Expecting double digit growth in a well developed market is not rational. Similarly low growth rate is a crime in an underdeveloped market. Initially expecting high growth in a startup is not rational, but an adolescent startup can grow in leaps and bounds. Mature adult organisation may not have the kind of growth displayed by a start-up. But it has the muscles to withstand all vicissitudes to deliver sustained growth. Standards of margins depend on the client base. High margins are not ethical in an organisation serving a poor client. Appropriate standards / benchmarks have to be developed based on various general factors mentioned herein above (and there could be many more). By their very nature the standards cannot be static, hence a mechanism has to be in place to regularly keep the developed benchmarks updated. Elements of operational items for which standards are needed have to be constantly monitored. Un-monitored standards are no standards. The goals an organisation wishes to pursue may be the prerogative of each organisation. When we are talking of the standards or benchmarks we do not mean to interfere with organization prerogatives. But we are talking about some guide posts meant for higher purpose having community interest at core and for enhancing readers understanding. In each one of the above areas, “how much is too much ?” is question whose answer, can never have consensus. The issue is of quality over quantity. Very often deluge of information (repeated presentation of the same set) confuses the reader and puts him off. Most of it is routine stuff. The significant one, if any, either remains hidden or gets crowded out by the routine. Therefore the manner and method of presentation is extremely important and needs, not only be thoroughly throughout but also regular follow up for incremental improvements. Standards / benchmarks should help in identifying the significant ones by easily locating deviations / exceptions, to make them the focus of reporting. To sum up, the hustle and bustle of day to day corporate life focussed more on the immediate needs, has no scope for looking back, nor does it leave any scope for finer aspects of commoner’s interest. Yet, self interest calls for some real introspection at regular intervals. No opportunity, how so ever small, which enhances the simplification of processes and systems and increases transparency, be wasted. It is several such small incremental improvements in retrospect, represent / constitute the achievement of some thing which once was deemed unachievable / impossible. Irrespective of the outcome, some churning of ideas is always a welcome sign of life. Let us try to live. Some action points :
- Start to disclose readily available real term service measures / parameters (To begin with number and type of customers, or sum insured) and simultaneously start developing mechanisms to extract as many such additional parameters measures as possible over a specified period and make their disclosure a routine
- Review the manner and format of reporting to increase the intelligibility and transparency. Inter-sector comparison of key factors should also be the focus of such revision. appropriate Report on performance, and Report on state of affairs / status should focus on exceptions /deviations and exclude the routine.
- A broader institutional framework (may be Institute of Chartered Accountants of India, has to work towards evolving practices which can facilitate inter-sector Simultaneously organisations have to ensure the necessary flexibility in their systems, so that it becomes easier to adapt to changes.
- Performance analyses, and review by an independent, authoritative body other than regular overseeing Such a body should have right kind of people.
- A body representing the industry has to examine and work on the theme of evolving benchmarks / standards / norms against the backdrop of which the performance needs to be.
