Managing Health Insurance Business in a VUCA World

Introduction

In today’s volatile, uncertain, complex and ambiguous (VUCA) world, it is important that employees at managerial and key leadership positions understand the strategic thinking in insurance firms – right from scanning the competitive environment, to aligning the mission of the firm to meet stakeholder expectations. Today, insurance firms need to lead, formulate and execute strategies effectively to deliver business excellence and customer delight.

The Indian health insurance market in India has grown over the last one decade in terms of premium collection as well as number of lives enrolled. The market share of private insurers has increased from 12% in 2012-2013 to over 21% in 2017-2018 (see Exhibit 1). However, the problem facing the industry has been regarding the increase in claim ratio and underwriting losses. In 2017-18, public sector general insurers recorded highest claims ratio, followed by private sector general insurers and stand-alone health insurers with government business accounting for highest claim ratio, followed by group and individual business, however, in the previous years, group business accounted for highest claim ratio (see Exhibit 2). All three types of insurers experienced underwriting losses in the last 5 years, but losses decreased by 22% from 2016-17 to 2017-18 with only 5 insurers showing underwriting profits in 2017-18 (see Exhibit 3).In addition to these challenges, the insurance regulatory environment is also changing at a rapid pace. Various regulations have been introduced in the last 5 years with respect to changes in shareholdings, investments, registration and scope of businesses, code of conduct, product filing, coverage, standardization, registration of network providers and quality standards and to protect interests of policy holders (See Exhibit 4).Some of these challenges as well as regulatory changes faced by the health insurance industry can be attributed to the volatile, uncertain, complex and ambiguous environment. Thus, it is important to understand the characterises of such environment and to find strategic solutions to manage such an environment.

In this article we first discuss the different aspects of the VUCA world with reference to the health insurance industry in India. We then propose a framework to manage the business in a fast-changing environment along with highlighting the importance of strategic thinking and focus on ‘what you should do’. We also discuss how the 3-Circle framework can be used by the insurance executives to manage the VUCA World.

New Health Insurance Regulations (in last 5 years)

Table 1: Health insurance regulations in past 5 years

IRDA (Third Party Administrators – Health Services) Regulations was initially passed in 2001

The VUCA World

The ways in which we conduct or think about our businesses have substantially changed within a decade. The term VUCA – which stands for volatility, uncertainty, complexity and ambiguity – is a common phrase these days in the corporate world.The rapid changes taking place in political, economic, social and technological fronts are making the organizational world increasingly VUCA(Sarkar, 2016).As per Bob Johansan the term VUCA world was first coined at the Army War College, the graduate school for future generals; it’s the elite training environment for the Army. In a VUCA world, if you’re not confused, you’re not paying attention. Both getting confused and frightened is part of the game too (Euchner, J., 2013).

The VUCA environment is not new. In fact, when the Mongols suddenly arrived at the gates of Europe in the thirteenth century, it was VUCA, and the known world changed forever. VUCA is also seen as a relative term – it is relative to the tools we have for dealing with VUCA-ness. It is an arms race – the world is becoming more complicated, and we need better tools to deal with the complications of the world(“Strategy in a VUCA world,” 2013).

1. Bennett and J. Lemoine in their 2014 Harvard Business Review article suggest that VUCA conflates four distinct types of challenges that demand four distinct types of responses. They had proposed a guide to identifying, getting ready for, and responding to events in each of the four VUCA categories.

Volatile

The characteristics of a volatile situation is that the challenge is unexpected or unstable and may be of unknown duration, but it’s not necessarily hard to understand and the knowledge about it is often available. For example, price fluctuate in health insurance premium after a natural disaster or an outbreak like Dengue. Or unavailability of hospital beds for insured customer due to collapse of a 1000 bedded hospital due to earthquake.

What should you do?

The approach followed for managing a volatile situation is to build in slack and devote resources to preparedness. The steps are typically expensive and the investment that you plan should match the risk at hand.

Uncertain

The characteristic of an uncertain world is that despite a lack of other information, the event’s basic cause and effect are known. Change is possible but not given. For example – a health insurer’s pending product launch muddies the future of the business and market.

What should you do?

The approach suggested to handle the uncertain environment is to invest in information. To collect, interpret, and share the relevant information. This works best in conjunction with structural changes, such as adding information analysis networks, that can reduce on going uncertainty.

Complex

The key characteristic of a complex world is that the situation has many interconnected parts and variables. Some information is available or can be predicted, but the volume or nature of it can be overwhelming to process. For example, an insurance company doing business in many countries, all with unique regulatory environments, customer expectations, and cultural values.

What should you do?

The suggested approach to manage complex situation is to restructure, and to bring on or develop specialists, and build up resources adequate to address the complexity.

Ambiguous

In an ambiguous situation the causal relationship is completely unclear. There are no precedents that exist, and one faces ‘unknown unknowns. For example, an insurance company moves into rural segment not entered earlier or launch health insurance products such as wellness package outside its core competencies.

What should you do?

In such kind of a situation, the approach that is suggested is to do experiments. The experiments are carried out to quickly understand the cause and effect relationships. Hypothesis should be generated and tested on the phenomenon that is being faced. The experiments should be designed in such a way that lessons learned can eb broadly applied.

In addition, to the above guide there are few other management tools like the ‘three circle model’ that can help manage the VUCA world.

The 3 Circle model

This model is a very simple tool (see Exhibit 5) that can be used by insurance executives to thing strategically about their company, their competitors and the customer value in a VUCA world.

The key questions that you ask related to the major actors (customers, company and competitor) are as under:

• What value does the customer seek?
• What value does the customer perceive in company’s offering? and,
• What value does the customer perceive in competitor offering?

As there are three circle that overlap each other, there are seven different areas that gets demarcated i.e., A, B, C, D, E, F & G. Each area depicts a very interesting space.

The 3 Circle Model: Key Sections

What executives should do is that they should try to list down at least three points against each of the seven area. For example –

• The three USPs of the company health insurance product offerings
• Three industry standards that needs to be followed (e.g., quality of network hospital, complaint redressal, etc.)
• Three factors that are associated with cost of doing business in the health insurance industry e.g., managing regulatory filings, licences, etc.
• The three USPs of the competitor’s product that you don’t offer currently
• The three white space opportunities that exist but not currently offered by any insurance companies
• Three value that you think is being created by the company, but the customer doesn’t see it that way.

Since, we have used this tool time and again during various Management Development Programmes (MDPs), we have seen the power of insights that it creates for senior executives. It helps them to analyse and foresee some of the volatile, uncertain, complex and ambiguous situations that they might face regarding creating customer value.

Conclusion

In this article we first provide an insight into the health insurance business (last 5 years trends) and highlight some of the challenges faced by the health insurance industry regarding increasing claim ratio and underwriting losses. The different aspects of the VUCA world with reference to the health insurance industry in India is highlighted. We then propose a framework to manage the business in a fast-changing environment along with highlighting the importance of strategic thinking and focus on ‘what you should do’. We also discuss how the 3-Circleframework can be used by the insurance executives to manage the VUCA World with a focus on creating customer value.