Meghaduta - Thinksoft Newsletter (October'13)

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ISSUE 3 OCTOBER 2013

The Cloud Messenger
With technology taking a front seat in
driving the organization’s goals, Insurance
companies more than ever are dealing with
a new set of challenges when it comes to
procuring and maintaining IT solutions that
constantly undergo changes as business
needs change. Cloud Computing, Mobile
Applications and Business Analytics are
transforming the way carriers offer value
added services to their customers.

Testing times amidst the forthcoming insurance boom
The insurance sector in India is poised to go through tumultuous times in the
decade ahead. India is currently rated very low in the Human Development Index,
one of the prime factors being a poor healthcare framework for the large masses
of the population. This means the Government needs to focus on providing better
health related services on a massive scale. Against this backdrop providing health
insurance becomes critical especially since we are an under insured country by
any standards.
The growth of a combination of the public and private insurance sectors would help
achieve the desired results. With our economy also growing rapidly the need for
general insurance has also to be met. Think automobiles, fire, etc. Consumers of

Cloud computing is enabling insurers to
construct their business models to offer
new services to its customers and to create
new distribution channels that boosts its
sales. Cost advantages that come with
cloud based solutions allow insurers to
offer competitive pricing too.

insurance could range from corporate to government to retail and micro
consumers. All this has to be linked to organizations like hospitals and primary
centers that deliver healthcare, whether under the state or the private sector.
The regulatory system and framework assumes prime importance to ensure
overall compliance, fair play and ethical behavior all around. Also, there needs to
be in place systems for mitigating consumer grievance and complaints. Finally

With cloud services providing real-time
data from multiple sources, the insurance
industry is seeing a significant shift in its
business model whereby a transformation
from product centric to customer centric
thinking
is
becoming
a
routine
phenomenon.

there has to be a reliable, accurate, speedy and efficient network to manage the
flow of payments. In this scenario there is no doubt that Information Technology will
play a key role in making all this happen. This will create a large eco-system
consisting of IT service providers and Software product makers whose work and
outputs again has to be of a high quality. It is evident that the role of quality
assurance and testing services to the Insurance Sector is like a lynch-pin, on
which depends the smooth and efficient functioning of the system.

Cloud computing is helping insures avoid
up-front investments and still provide
innovative and value added services in the
business areas of underwriting, quotations
and claims management

Asvini Kumar
Chairman and Managing Director
Thinksoft Global Services Ltd

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The Risk Based Capital framework in
the Indian context
J Hari Narayan IAS was Chief Secretary of the State of Andhra
Pradesh from 2006 to 2008 and Chairman of IRDA from 2008 to
2013. Over an illustrious 39-year civil service career he was
involved with the privatization of a large PSU, the first of its kind
in India at one end through appointments at the Ministries of
Education, Coal, Defence, Food Processing and Rural
Development to the creation of the Hyderabad Software
Technology Park at the other end as MD of APIDC. Rural
Development, Care for the Elderly and Music are interests very
close to his heart
Mr. J. Hari Narayan (JHN) the immediate past chairman of the
Insurance Regulatory & Development Authority of India (IRDA)
in conversation with Abraham Kuruvilla (AK) on issues relating
to adoption of a ‘risk based capital’ framework by the Indian
insurance industry
AK: Hello Mr Hari Narayan, how important is it for
the Indian Insurance industry to adopt a risk-based
capital framework and are they ready for it?
JHN: There is a risk-based capital concept in India,
but it is not within the terms of what is understood
in international parlance. And particularly after the
Solvency-II directive has come out! That’s the first
thing we must understand. Now, within the
risk-based solvency framework that they are
talking about, companies are expected to assess
their own risk, and create an internal model as they
call it, to assess the risk which they have on their
liabilities side, as well as their assets side.
Now they are entitled to use their own model and
calculate their risk based upon that particular
model. The model however is subject to oversight
by the regulator. In the event a company doesn’t
choose to develop its own model, or if the model
developed is inadequate, then the regulator may
prescribe a model, which the company is bound to
follow. So fundamentally, that is the pattern they
follow – or rather what they have adopted within
the terms of Solvency–II. Now in India, we have a
different concept of solvency and we believe that
our system is far more robust.
AK: Related to the problems that Europe is having with
Solvency–II, what do you foresee as some of the problems that
India would have in adopting the framework?
JHN: See, merely because it is adopted in Europe, that doesn’t
mean it’s the best model to go by. Having said that, the need for
solvency is a cornerstone of the financial structure of an
insurance company, and it is so across the entire world. Briefly,
what it says is that at any point of time, the insurance company
must have assets which are sufficient to meet its liabilities. That
law applies not just in Europe, it applies all over the world and in
India too, and it is always applied in India. The question now is,
how are you going to measure your assets, and how do you
measure your liabilities. And how are you ensuring that one

Meghadūta ISSUE 3 OCTOBER 2013

equals the other. That’s the question!
So when they are talking about risk and risk-based
assessments, they’re really talking about the accuracy of
estimates. For an insurance company, whether it be liabilities or
assets, both are only estimates. No doubt competent estimates,
professionally executed estimates, but estimates nevertheless.
Take for example the question of estimating liabilities; typically,
insurance companies look at these liabilities based largely on the
past data and past track record, and project the liabilities in the
future. Now, this might work well, but I think you know about the
‘Black Swan’ event don’t you?
AK Yes, I’ve some idea!
JHN: It is a term which has become very popular after the 2008
financial crisis –fundamentally, the question is: how are you
going to, based on past experience project, for instance, a
disaster like a Fukushima, or the Christchurch earthquake, or
even the Kedarnath landslide and floods and all
that? Disasters of this dimension are very difficult
to predict. That’s why the estimate of liabilities is
always shaky. It is founded, no doubt, on statistical
mathematics, but fundamentally, since it’s based
upon the past, is that a very reliable indicator to the
future or not, is a debate that is going on at a very
esoteric level in the world of mathematics.
But having said that, essentially when you’re saying
‘risk-based’, what you’re saying is: a) we need to
assess what might be our liabilities at a point of
time, and b) the same thing holds with regard to
assets – what is the value of assets which an
insurance company holds. If you take insurance
companies in India, for instance – and that’s largely
true across the world, the pattern is not very
dissimilar – in India, for instance, insurance
companies hold about 15% of their assets in
equities. And the other 85%, bulk of it – about 55%
to 60% - is held in government securities, and the
balance 25% to 30% is held in corporate debt. So
you’ve got government debt, corporate debt and
equities. As far as equities are concerned, there is
no problem, because on the date when you are
going to assess, the value of a given asset, there is
a market value because there is discovery in most
of these shares. That is why in India, for instance, we do not allow
insurance companies to invest in the equities of non-listed
companies. The reason is, there is not sufficient discovery of
price in such instruments. But that in any case amounts to only
15% of the portfolio, generally. So the question is: how are you
going to assess the debt? What is the value of the debt which
one has? And that is the issue, as far as India is concerned.
AK: Could you elaborate?
JHN: There is a myth that all government securities are risk-free.
Now we have seen in the 2008 crisis that that may or may not be
a valid proposition. There are several government debts, for
example, which certainly were not risk-free. So the question is
whether it is wise to look at Indian government debt as risk-free.
And even government debt in India is of two kinds; one is, you’ve
got the central government debt, there are also state government

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debts, and there is also the debt, or the bonds issued by state
government instrumentalities, like for example Power Finance
Corporation and other corporations and so on. So what is the
value of this debt? Is it risk-free, truly?

might be the quality inherent in, let us say, corporate debt, or
even in a government debt, we’ve hiked up the percentage,
partly to meet the inaccuracy in estimating the risk on that factor,
and secondly it’s also the question of time.

And then there is the question of corporate debt, and where
exactly the corporate debt is. If you look at the banks now, banks
have lent money to very big corporates, and several of them are
in distress, because of various reasons, the repayment of the
loans taken by the corporates is not as per schedule, which is
why they’ve got a problem of the asset quality, and they have to
make provisions for asset quality. So when we’re looking at the
portfolio of an insurance company’s assets, the question is: what
provisions do we need to make for different classes of debt? That
is the question. And we don’t have a sufficiently robust and deep
statistical basis on which one can assess that the risk in a given
instrument is so much. The banks have done it.

Supposing we find that a company’s assets are eroding, or their
liabilities are increasing over their assets, it takes some time
before that can be recognized. Their system of accounting has to
come up from that, it has to be recognized, it has to be reported,
and so on. And having recognized it, we will again require time –
of both the management and the regulator – to take sufficient
steps to restore the equilibrium of the company. That also takes
time. And in order to allow for this time, as also allowing for a
certain uncertainty in the quality of the debt, we’ve insisted on a
margin of a 150%. So that gives us enough time – partly because
they have not really estimated the value of the debt, meaning
what is the risk associated with a different class of debt. Let us
say, if you’ve got 100 crores of bonds which are say rated at BB
and let us say it is an 8% bond – what are the chances of a
default on that? Is it more, or is it less than if you had 8% on let
us say an AAA bond. Is it more or is it less? How much more or
how much less? This kind of arithmetic and details for it are not
there. And that is why we believe that our system has met our
needs; there have been no failures of insurance companies
unlike in the west – in the west, every year, about half a dozen
insurance companies collapse, and therefore it’s a far greater
concern for them.

AK: So, Sir how do we do it?
JHN: The system we follow in India is, that the liabilities side can
be fairly well-assessed, because as far as life insurance
companies are concerned, there’s little problem in estimating
liabilities, because the statistical basis of life and life probabilities
and events and so on is very well-charted, and you can do it very
accurately. The same doesn’t hold good for non-life companies,
that’s general insurance companies, which deals with
miscellaneous types of perils, like for example, as I mentioned,
the Uttarkashi issue, or the Bombay flooding and things like this.
But in India, fortunately, those secular kinds of perils are not very
widely insured. The bulk of our insurance is in motor car
insurance and in health insurance, and these are very well
tracked. So there’s not much of a problem. The problem comes
only when you’ve really got vast property holdings, and then the
issue of assessment of risk is of far greater importance.
So coming back, in India, what we do – we require insurance
companies at all times to maintain one and a half times the
assets over the liabilities as solvencies. In other words, it is not
equal to, but it is one and a half times greater than. And that’s
how I believe it’s a very robust thing. But on the downside,
because we haven’t got well developed markers to assess what

AK: They say technology could be a crucial driver in sort of
balancing this risk. Now, what would be needed to business assure
these technologies? Would you like to add something on that?
JHN: I don’t think it is much of a technology issue. It’s a data issue,
a question of data reliability. The calculation of a risk is no big deal.
If you’ve got the statistics, it’s just a fifteen minute job. So it’s not
really a technology issue. It’s an issue of whether we have the
quality and depth of the data we require, and have we captured all
transactions accurately at a point of time. And do it systematically,
you know, quarter by quarter, month by month, or even daily for
that matter!
To some extent, the Reserve Bank of India does it, and therefore
what they have done for different classes of assets held by banks,

From Asia Pacific
### Private health insurance in Australia is limited to services
not covered by Medicare (the Govt backed basic universal
health insurance scheme) or to services provided in private
hospitals. The Australian Taxation system encourages middle
to high income earners to take out Private Health Insurance.
While most taxpayers pay a 1.5% Medicare levy, an additional
1% Medicare Levy Surcharge is payable by those taxpayers
who earn more than $76,000 and do not have Private Health
Insurance. Source http://en.wikipedia.org/wiki/Insurance_in_
Australia
### Under the Insurance Business Act (IBA) the prime
Minister of Japan has overarching authority as the regulator.
Except for powers such as granting and cancelling insurance
business licenses, most have been have been subdelegated.

--- A solvency margin of 200% or more is sound and invites
no intervention by fsA. If < 200% but > 100% fsA will issue a
“business improvement order” and would cancel the license
if less than 100 An extract; courtesy Norton Rose
### In a move to dematerialise insurance policies, the FM of
India P Chidambaram, launched, IRDA’s Insurance
Repository System. The FM wanted the IRDA to extend the
insurance repository system to non-life insurance policies
soon. “During natural calamities such as the recent floods in
Uttarakhand, people lose their insurance policies making
claim and settlement of insurance almost impossible. Loss of
identity in case of migration also affects claim and settlement
of policies. Hence we require mandatory digitisation of life
and non-life insurances in the country,” Chidambaram said.
Deccan Herald News Service Hyderabad, Sep 16, 2013

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they have calculated what should be the risk weights associated
with different classes. So the IRDA had considered that, and
based upon the expertise of the RBI on such matters, they had
calculated and sent an exposure draft, saying that we could
recalibrate our estimates based upon the risk weights as
calculated by the Reserve Bank, and then require companies to
make provisions accordingly. The question really is this:
Companies are trying to balance between the need for security of
an investment portfolio – rather, of an insurance portfolio, at the
same time, to minimize the capital required to do so. Capital is
expensive. So in countries such as in Europe, what they found as
a result of the 2008 issue was it’s always in the shareholders’
interest to keep the capital as low as possible. So they used to
keep it very low. They were skating on thin ice. And that is what
they are trying to redress. So one of the concerns which Europe
and European insurance companies have, is that they believe the
Solvency–II requirement might require companies to recapitalize
quite substantially, and that poses a problem for shareholders, for
the economy at large, and that is the question which they are
facing.
AK: Thank you Sir, have a nice day!

Banking on Insurance for all
By TCA Srinivasa Raghavan
Editorial Adviser to the CEO
The Hindu Group

Banks that opt for this will not have to start a separate entity to
apply for a broking licence. Instead, they will need to put aside a
deposit of Rs 50 lakh. It is not compulsory for them to become a
seller of insurance, at least not yet. In due course, the public
sector banks could be forced to do so because it is the finance
ministry which has been pushing this idea.
Basically, in the short term, the new policy is intended to lower
the cost of sales to insurance companies by passing these costs
on to banks in return for a commission. The idea is also to
promote long term savings.
If more people buy insurance, especially life insurance, the pool
of long term savings goes up and this will speed up the growth of
the long term bond market. At present this market is
underdeveloped because enough long term funds are not
available. A thriving market for long term bonds is a must for the
development of infrastructure finance.
It does not seem likely, however, that the banks will immediately
see a very useful business opportunity here. The degree of
responsibility and costs associated with the sale of insurance
products will almost certainly not to be their liking. Besides,
banks may prefer to remain on the agency model, which is still
allowed. Nor is the Reserve Bank of India likely to be well
disposed towards the idea. Its approval is needed for a bank to
enter the insurance broking business. It also regards banks in
insurance as a threat to financial stability.
ICICI Bank, HDFC Bank, SBI, IDBI Bank, Bank of Baroda,
Canara Bank, Bank of India, and Punjab National Bank have
their own insurance companies, and the potential for conflict of
interest is always there. It should be noted though that to limit the
damage from such potential conflicts not more than 25 per cent
of all insurance business can be placed with a bank’s own
insurance company. IRDA Chairman TS Vijayan, has been
quoted as saying as follows:
“There have been informal discussions with RBI. People have
reservations with the word broker’. Broker regulations are more
in tune with larger risks like reinsurance. But we are not
expecting banks to sell huge risk. It is a personal line of business
for them. This idea will get acceptance widely, among both
companies and banks. Today, a bank is the corporate agent of
one insurance company (Life and General). While an agent
represents the company, a broker represents the customer. As
such, banks utilise own customer base and hence represent the
customer.”

Mr. T C A Srinivasa Raghavan, an MA in economics from the
Delhi School of Economics, concluded his full-time professional
career as the Senior Associate Editor of the Hindu Business
Line. He had earlier worked in Financial Express, Indian Express,
Economic Times and Business Standard where he was in charge
of the opinion pages. Mr Raghavan has also been a consultant to
the Reserve Bank of India’s history project, advisor to the
Director of ICRIER, editor of Margin at NCAER and a senior
fellow of the Asian Institute of Transport. He is a Distinguished
Fellow of the Institute of Peace and Conflict Studies.
The Insurance Regulatory and Development Authority (IRDA)
recently allowed commercial banks to sell insurance policies of
several insurance companies, instead of just one as is now the
case. In short, they need no longer be ‘sole stockists’.


That said it is important to understand the legal difference
between an agent and a broker. Thus, whereas an agent
represents the interests of the seller, namely, the insurance
company, a broker represents the interests of the client, namely,
the buyer of the insurance. This subtle change alters the
redressal options for aggrieved customers and could lay banks
open to a host of court cases.
In the end, though, whether an idea is good or not must be
judged by seeing what it means for the common man. On
balance, when everything has been considered, it does seem as
if the ordinary people will benefit, because of two reasons: better
access to insurance products and the altered relationship
between buyer and seller.
This alone is a powerful reason for persuading banks to add the
sale of multiple insurance products to their portfolios.

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A commission less world
By Richard Leeson

2013 the Retail Distribution Review (RDR) promulgated by the
Financial Services Authority (FSA) of UK took effect and had
several fundamental impacts on the financial services sector,
most of which have yet to materialise.
RDR banned the payment of commission to financial advisers on
investment products and required those advisers to adopt new
fee charging structures known as “adviser charging”. Financial
services companies largely treated this change as a problem
requiring a “work around” solution from their IT departments.
Having successfully made the necessary changes to remove
commission payments from their products by January this year,
these companies are endeavouring to return to a world of
business as usual.

Richard Leeson has held senior positions at AEGON UK,
Prudential International and most recently was Sales &
Marketing Director for AXA International. He has been a thought
leader in the industry on the strategic impact of RDR. He has
authored many articles for trade publications on how RDR is
affecting adviser based financial advice in the UK. Richard is
also CEO of Adviser Advocate.
At the beginning of 2013, the quality of IT-Delivery of financial
services companies became their biggest strength or their
biggest weakness. The importance of this change has yet to be
felt at the highest levels of executive management. In January

Business is not as usual. Many companies are reporting falls in
new business volumes of substantial levels, Prudential
confirmed a 17% fall in bond business and Zurich Life reported a
loss of nearly a third of its new bond business in the first half of
the year. Success stories seem to exist only where commission
is still payable on products like annuities and protection business.
Advisers are less inclined to promote products in the post-RDR
world and have had to rethink their entire business models. The
new mantra for advisers is “time is money” as they consider
hourly fee-charging and project fees. This in turn is focusing their
minds on where they spend most of their time when not sitting
face to face with clients. Administration is a key focus area.
Poor service, requiring advisers to sort out client problems
cannot be billed easily to the client. Advisers either have to
accept this as part of their service or seek compensation for loss
of earnings from the providers responsible. In my own
experience in the last twenty years of dealing with fee-based
advisers, they will invariably seek compensation.

From Europe
## On September 10, 2013, the Chancellor of the Exchequer
highlighted the forthcoming ‘Current Account Switch Service’
as a core part of the plan to reform Britain’s banking system.
For the first time, the new Service will let consumers safely and
reliably switch their accounts between banks in 7 days, with a
guarantee that they will be fully protected against any financial
loss in the event a problem occurs during the switch.
https://www.gov.uk/government/news/
## An ECB paper released in early July focused on public
pronouncements on fiscal policy and state finances by officials.
It found in the short term that certain types of commentary had
a quantifiable effect on the spread between the bond yields of
Greece, Ireland and Portugal over German bunds. The impact
was biggest for Greece. The paper found that “at several points
during the crisis, certain types of political communication may

have added uncertainty rather than certainty to market
perceptions. Quote from ‘Loose Lips Sink Euro Bond
Markets in Crisis’ by Simon Kennedy, July 11, 2013 in
Bloomberg Businessweek.
## The green light from the central banks covers the use of
Amazon Web Service (AWS) in all facets of Dutch financial
operations, such as websites, mobile applications, retail
banking platforms, high performance computing and credit
risk analysis applications. Banks shifting their technology to
AWS will still have to comply with DNB rules on cloud
computing, including the requirement to compile a risk
analysis and conclude agreements about who has access to
the data and where it is physically stored. DNB must also be
granted the right to audit data stored in the cloud. Archana
Venkatraman on July 29, 2013 in ComputerWeekly.com

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Increasing compensation claims have focused the minds of the
providers I have worked with as they seek to control spiralling
costs. This has led in turn to a focused view of the impact of
administration excellence on the bottom line. For some providers
the use of service level agreements including stated
compensation amounts have been a means of reassuring
advisers of their administration offering. All of them have
increasingly become aware of the impact of IT systems on their
service delivery.
Excellence of IT delivery has been key to underpinning
excellence of service delivery to both adviser and the end
customer. The days of manual workarounds are long gone. In
today’s financial services industry and especially so in the post
RDR environment, companies need to ensure their proposition
are supported by robust systems. To achieve this requires full
and early engagement of the IT team in strategic and tactical
planning. By ensuring early engagement from the IT team it is
possible to resolve development priority conflicts swiftly and
efficiently.

Analytics in Banking and Insurance;
Prospects and Challenges
By Prof Premchander

As I walk into the ATM of any Bank and withdraw a sum of money
I would have generated volumes of data for the bank. By
identifying the location it is possible to map my travel pattern. By
identifying the times of the day and my withdrawals it is possible
to read patterns into my banking activities and spending habits.
At another level the flow of customers through the ATM can in
turn determine usage, waiting time and help make capacity
decisions and also refilling decisions so that the ATM is never out
of money and are efficiently located.
Banking generates large volumes of data at a high velocity and in
various often unrelated locations. A lot has been written about
the potential for Big Data Analytics (BDA) in Banking. Already
high fixed costs businesses, recent regulatory changes have
pushed the fixed costs even higher making it all the more
important to seek out profitable customers – that use the banks
services and pay for it. In this search for customer’s banks no
longer enjoy the luxury of traditional marketing paradigms of
developing a product and searching for customers. The race is
often to proactively assess what a customer wants and offer the
service desired within the framework of the banks objectives,
policies and the regulatory environment obtaining in that
segment.
Driving revenue is not only about acquiring new customers but
also about identifying new needs and crafting products to meet
them. More often than not the customer is unable to articulate
that need. A 360 degree view of the customer, personalized
service, improved segmentation and targeting could be some of
the benefits of BDA.. When a bank’s internal data is supported by
third party data the potential could expand many fold.
Risk management has become far more critical in recent times.
The events of the last decade have placed both regulatory and
business pressures on comprehensive risk management
policies. Risk modelling, predicting loan default, predicting fraud
and identifying exposure to various segments are but a few of the
areas where risk management could be critical. At a conceptual
level all of them could use BDA to estimate and manage risk
effectively. Banks are currently just taking baby steps in this area
and the potential is huge.

Professor Premchander Fellow IIMA: A visiting Professor at
IIMA in the Finance and Accounting Area since 2009, he was a
faculty of Finance and Control at IIMB from 1988 to 1997. Before
and in between the above academic positions he has spent an
equal amount of time in industry across SBI, Reliance, Accel
Frontline, IL&FS, IL&FS Educational Service Ltd and lastly Mu
Sigma Limited, a fast growing analytics company, as Vice
President Operations. He has offered courses in management
control systems, valuation, mergers and acquisitions and
continues to have deep interest in the latter, financing large
projects and venture capital. Prem Is also associated with a
couple of schools where he volunteers his time at their
management committees. In addition he is an independent
Director at Yuken India Limited an engineering company.


Research and strategy are yet another possible application that
can grow out of BDA. At the level of individual customers analysis
of data both internal and external could help identify high value
assets and drive products towards them. 360 degree analysis
and judicious use of external data could help reduce risk. (It could
be possible to understand payment behaviour by buying data
from telecom and utility companies). Such external data could
embellish internal data.
Banks with the storehouse of data that they possess would be
well placed to provide a range of data based services for their
clients. This could involve customer information, supply chain
information and risk profiling of suppliers and customers on
behalf of their clients.
With large opportunities, huge amount of data and pressure to
manage risk and improve profitability one would expect greater
penetration of BDA in the banking sector. Surveys show that

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while basic reporting tools are in place, in a majority of the banks,
analytic tools are rudimentary and the application of predictive
analytics is limited. In a recent survey a third of the bankers
indicated that their organization did not even use analytics.
It has to be recognised that in many situations there is often no
one to one correspondence between the use of analytics and
increase in revenue or reduction in costs. In addition with very
tight operating budgets banks have little incentive to explore new
operational technologies. Further, banking is a secretive
business with much higher levels of security and reluctance to
outsource.
Banks may have to take the following steps to get the best out of
BDA.
• Integrate the data being collected in various locations and
coming in at high speed.
• Build internal resources in analytics to help interpret
requirements from internal clients to external analytics service
providers
• Look for small wins quickly to create a demonstration effect
through an internal team.

In the final analysis the financial services sector with high
volumes of data and with data flying around at high velocity like
banks and insurance companies are eminently positioned to
benefit from the use of Big Data Analytics. The coming years, one
can look forward to greater innovation in the use of Big Data
Analytics in particular its integration with unstructured
behavioural data and third party data, to get a 360 degree view of
the business and customer.

Evaluation of Core Insurance
Solutions
By Phani Tangirala
Practice Head - Insurance, Treasury & Capital Markets
Thinksoft Global Services

The insurance sector, another financial sector, is in a slightly
different stage of adoption and development. Traditionally, the
insurance sector has used statistical tools to help in rate setting
and risk profiling. Some of us were pleasantly surprised to read
that hypertension and diabetes do not any more attract higher
charges for health insurance. Such a measure could well also be
arrived at from BDA.
This sector has been slow in adopting predictive analytics, mainly
because of the absence of integration in the large databases. As
the level of adoption of data warehousing one should be looking
to see even mid-size-insurance companies using more analytics
in policy risk scoring, fraud detection, referral scoring etc. I am
looking forward to an era when Indian insurance companies
insure the driver rather than the vehicle. Of course that may need
regulatory changes but careful drivers can hope to benefit.

It could be said that eighty percent of global IT transformation
projects in insurance companies are not successful. No
exaggeration if ‘Success’ is not just a question of going LIVE.
Though projects start with the objective of aligning technology
with corporate growth enroute there is such turmoil that just
going LIVE is often viewed as an objective in itself. Needlessly
such situations do upset business users.

From North America:
## Gov. Rick Perry has directed the Texas Department of
Insurance to establish strict rules to regulate so-called navigators
trained to help Texans purchase health coverage under
Obamacare. While the governor says the extra regulations will
ensure that people handling Texans’ private financial and health
information are properly trained and qualified, the rules could
present a significant roadblock to organizations helping to
implement the federal Affordable Care Act. Quote Becca
Aaronson on September 17, 2013 at http://www.texastribune.org/
2013/09/17/perry-directs-tdi-regulate-federal-navigator-progr/
## Canada is currently the only G8 country without some form of
overland flood coverage. “The way things stand, property owners are
not adequately protected under a system that places too much
emphasis on recovery at the expense of mitigation,” said Kathy
Bardswick, president and CEO of The Co-operators. From Canadian
Underwriter.ca September 17, 2013

## The issue of whether competition in the banking industry is
good or bad for financial stability is a complex one. …… there is
considerable uncertainty both at a theoretical and empirical
level concerning the relationship between competition and
financial stability. While there are many historical examples of
stable financial systems with limited competition such as
Canada, there seem to be relatively few examples of highly
competitive stable banking systems. The United States'
historical experience with a competitive banking system was
one of frequent crisis. For sure, competition is not the only
relevant factor with funding structure and regulation also being
important. However, it seems that other things equal, more
competition leads to a more unstable financial system. From
http://www.economist.com/debate/days/view/706 quoting Franklin
Allen, Nippon Life Professor of Finance and Economics,
Wharton School, University of Pennsylvania

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Let’s examine some very common concerns that persist after
going LIVE.
Business Case

Business Users
• System is very slow

Business
Assurance

• Transactions now involve more steps compared to legacy
systems

Project
Critical
Success
Factors

• Reports are missing
• With the new system financial books are in mess

Stakeholder
Involvement

Resource
Availablity

Executive
Sponsorship

• Too many change requests are now being received for
enhancing the software
• It worked in UAT but not in production

Change
Management

Program
Management

• The vendor fixed one problem which then reopened an older one
• Documentation/User manual is not good enough
• This is a basic requirement, yet the vendor says it’s a change
request
• Introducing new products is difficult and needs code change
Common complaints from software developers
• Users do not specify their requirements in total, we always
receive one line requirements
• Our application is working fine, it’s the data from legacy which
is giving problems
• They agreed to use canned reports, but now they want reports
in their own format.
• Users never read documentation

It is important to determine if one or more of the above factors
have contributed to the project not meeting its original objectives.
This exercise should be seen more as an activity intended to find
the “Right Way Forward” than looking at as “Fault Finding” task.
Case I
Needless to say, the involvement of the top management in the
implementation of core insurance solutions is extremely
important. Our experience in the recent past is depicted in the
following chart. It is evident that projects where the top
management involvement was not adequate in the early stages
are forced to consume more time during the crucial latter phases.

• Users never spend quality time for testing, they are always
pulled way by operational needs
• Users want everything free of cost
Most of the above concerns are generally addressed within six
months of going LIVE that is during the stabilization period. It
could however be a matter of concern if these issues are not
resolved even a year of going LIVE with new core system; a clear
symptom of flaws at strategic level than at tactical level. This
necessitates a meticulous approach towards analyzing,
assessing and resolving the issues, and to also put in place
mechanisms preventing reoccurrence of the same issues.
Critical Success Factors
We should also examine the critical factors that drive projects
towards success.


Effort saved at
later stages
Additional
effort
Time
saved
at the end

Focus Areas
Some key areas that are to need to be critically examined to
identify the source of issues discussed are: -.

8

FOCUS AREAS

DESCRIPTION

Functional Coverage

• To evaluate the extent of functionality covered by the core & identify the
manually done processes

Functional Fitment

• To asses the fitment within the functionality available

Product Configuration

• To ensure products have been configured with 100% accuracy in core as
this is life line of operations

Data Migration

• To ensure that migration of data has been effectively carried out as a
good application still fails if sitting on bad migrated data

Data Integrity

• To ensure there are no dormant in applications that are damaging the
integrity of production data. This is often negelected area which may
explodes at later time with serious consequences

Configuration Management

• To ensure effective management of source codes and to ensure that
there is efficient process of code promotion to production

Quality Assurance

• To ensure that proper Quality Assurance Process has been put in place
with necessary artifacts, tools and resources with capability

Knowledge Transfer

• To ensure that the business & IT team have sufficient knowledge on the
product as this may increase the dependency on the core vendor

Internal IT Involvement

• To evaluate the extent to which internal IT team is involved in the
operational aspects of Core System implementation

Extent of Customization

• To evaluate the extent of customization done on the product as the
objective of getting an off the shelf application will be lost if the product
undergoes extensive customization

Integration & Interfaces

• To evaluate how effectively the integration elements of the core system
are handled

Performance & Scalability

• To ensure that the core solution is capable of sealing to volumes in line
with organization growth projected for years to come.

Technology and Markets
## A Canadian company; Identa-DNA Corp is launching a
product that uses a consumer’s DNA to mark valuable assets,
a tool it says insurers can use to track items after loss or theft.
Alastair Russell, CEO of the company began developing the
product after several years of selling products from
SmartWater, a UK-based asset-marking technology company.
From Canadian Underwriter.ca June 2,, 2013
## Usage-based auto insurance is set to become a
mainstream offering, Companies that are slow to adopt
telematics and incorporate it into their products will be at a
major competitive disadvantage, suggests a new research
report from Aite Group. Seven of the 10 largest property and
casualty insurers in the world are currently offering
telematics-based UBI, or have pilots going, The majority of the
insurers offering UBI programs are operating in Europe, with at
least 56 carriers running programs there.. From Canadian
Underwriter.ca September 19, 2013
## The low penetration rate of 0.89%, according to the Qatar’s
QFCA, constitutes an attractive growth opportunity in the

insurance sector. A young population, robust economic
foundations and a programme of infrastructure and oil and
gas developments make it highly attractive to both local and
international insurers. Another reason to expect growth is
that there are very few compulsory insurance rules in Qatar.
Third-party motor liability and professional liability for
engineers are the only two categories currently obligatory,
far fewer than in many other countries. It is expected that the
next few years will see more categories added to this list –
the most widely anticipated being mandatory health
insurance for Qataris and expatriates. Extract from
http://www.oxfordbusinessgroup.com/
## Morpho (of Safran USA) today announced that its Indian
subsidiary Syscom has been certified as the first and to date
only payment card manufacturer in India for the
manufacturing and personalization of chip cards for RuPay,
by NPCI. The RuPay chip card is based on the D-PAS
platform, which is the EMV* technology of Discover Financial
Services (DFS) From http://www.rupaycard.info/ September
18, 2013

9

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E x p e r t s

While the above table gives an indication of the focus areas that
needs to be covered as a part of the evaluation process, it is not
exhaustive. Depending on the outcome after initial process of
evaluation there could be several other areas that should be
focused as a part of the evaluation process.
Evaluation Process
While the section above indicates the areas that need thorough
evaluation the following section covers the steps that are typically
involved in evaluating each of the above mentioned focus areas

1) Review
● Review the studies /
reports / documents
that show the story so
far

4) Evaluate
● Evaluate the
solutions from the
various perspectives

2) Understand

3) Identify
● Identify critical
pressure points that
may prevent the firm
from reaching overall
goals
● Identify the top issues
that lead to majority of
the problems (80:20)

● Understand the
overall business
direction of the
organization

5) Prioritize

6) Summarize

● Prioritize and
sequence the
actions based on
the solutions.

● Summarize the findings
of the evaluation.
Document the solutions
and recommend
suggestions for the
steps going forward.

Solution
The entire objective of the evaluation process is to derive at
root-cause of the issues that are hampering a smooth
functioning of core insurance solutions. While the issues could
be several and the root causes can be even more, a generic
classification of all issues generally can be limited around 3
major areas
While there are solutions available for each of the issues
categorized in the above three groups, picking up a right solution
will be a herculean tasks at
times. A team well
balanced in its composition
People
with
adequate
representation from all
quarters of stakeholders
need to be constituted that
Technology
Process
would ponder on each of
these issues and asses its
solutions based on

Cost

Time

Resources

Risk

Value

Biz Impact

Requirements
In order to conduct a thorough evaluation, it is very important that
the evaluators have complete access to information. Some key
requirements are listed below:
Requirement

Description

Project
Information

Strategy Documents, Project Charter,
Key minutes, Status Reports etc

Access to
Stakeholders

Access to project team, Project
Sponsor, business owners,
decision makers

Audit Reports

Post project audit reports (If any
audits are performed)

Sample
Documents

Manuals, Processes
Documentation, Change
Management Process, Business
Requirement and Functional
Specifications, test strategy, and
assurance plans etc

A holistic approach needs to be designed by taking all individual
solutions with responsibilities and KRAs defined. Each of the
solution and the mitigation plan needs to be documented and
tracked as a project by itself.
Case II
A leading life insurance organization in South East Asia has
embarked into an ambitious transformation project with a view
to replace their legacy policy admin systems with a solution built
with contemporary technologies. Though the solution procured
has been thoroughly evaluated for its fitment, the project has
gone into serious troubles during the User Acceptance Testing
(UAT) Phase. A planned UAT of 3 months got extended beyond
14 months with still no visibility of light at the end of the tunnel.
Key concerns being
a) many business requirements not available in the new core
insurance platform
b) business users have low confidence on the solution
c) too many defects during testing
An objective evaluation of this situation has helped the
organization to discover the root causes that have brought them
to this situation
• Stakeholder Buy-in: Evaluation of core insurance system
done without adequate involvement of business team
• Drive from the top: Top management not involved until later
stages


10

• UAT Management: Test Management process is virtually
inexistent
• Quality Gates: Poor management of quality gates in SDLC

Stake holder
Buy-in

Drive from
top

Quiz for Meghaduta
October 2013

?

Q1: The earliest form of insurance; marine insurance originated
in the 12th & 13th centuries in?
Tick: � a. Boston, � b.Florence, � c. London, � d. Shanghai

People

Q2: The doctrine that is present in the insurance law of all
common law systems is?
UAT
Management

Process

Technology

Tick: � a. Bona Fides, � b. Confide, � c. Fides et Ratio, � d.
Uberrimae Fides
Q3: Compared to 2010-11, by what percentage did the first-year
life insurance premium collected in India rise or fall in 2011-12?

Process
Gaps

Tick: � a. +20%, � b. +15%, � c. -5%, � d. -10%

It is not uncommon that the issues or root causes often do not surface from the
Technology side as much as from Process or People

Issue

Solution

Consequence

Stakeholder
Buy-in

• Project Core Committee
(PCC) has been
expanded to include
every department head
from operations.

Ownership from business
has increased significantly
thereby reducing people
issues faced by PMO

• Every major decision on
the project is discussed
with PCC to ensure
buy-in from the
operations team
Drive from
the top

Q5: On April 19, 2013, Germany stopped short of granting full
currency status to which currency?
Tick: � a. Bitcoin, � b. eBay, � c. Ripple XRP, � d. Sodexo

Tick: � a. EPC, � b. JCB, � c. RuPay, � d. Visa

• 80% of User Acceptance
UAT
Testing has been
Management
delegated to Independent
Third Party testing
company with business
users playing a mentor
role

With majority of the UAT
activities being carried by the
independent testing company,
business users are able to
focus on their operations
while still spending time only
on the qualitative aspects of
the project

Quality
Gates

Though the introduction of
stringent quality gates has
elongated the timelines
marginally, the overall quality
of deliverables has seen a
substantial improvement.

o Ownership
o Entry Criteria
o Exit Criteria
o KPIs /SLAs

Tick: � a. Aviva plc, � b. AXA S.A, � c. Berkshire Hathaway Inc,
� d. Japan Post Insurance Co Ltd

Q6: Which of these is not a payment brand?

• Project Steering
No milestones are slipped as
Committee (PSC) has
the top management is
been expanded to include directly getting involved
the CEO and CFO
Quality of deliverables also
have seen significant
• Frequency of PSC has
improvement
been increased from
monthly to bi-weekly

• Software development
life cycle quality gates
have been redefined with
clear identification of

Q4: Ranked by total non-banking assets, in 2010, which of these
insurance companies was not among the top ten insurance
companies in the world?

Q7: On the London Stock Exchange, move from open-cry to
electronic screen based trading started on?
Tick: � a. January 1980, � b. October 1984, � c. October 1986,
� d. December 1988

Please click here http://thinksoftglobal.com/meghaduta/index.php to
take the quiz
Note: Register and tick or enter the answer in the assigned box. Seven entries with
best responses will be chosen as per a lottery draw and USD 100 will be donated to
the chosen charity of each winner. Last date for responses - 30 Dec, 2013. Winners
will be communicated by email.
Answers for Meghaduta July 2013 Quiz
1.
2.
3.
4.
5.
6.
7.

Bank of Venice issued the earliest known bond to finance the war with Constantinople
Six countries constituted the European Union
Brazil had the highest number of commercial bank branches per 100,000 adults
The only cashless coca cola company in Africa is in Sudan
Pondicherry had the highest financial inclusion in the rating given by CRISIL
Awarding contracts to family and friends is associated with crony capitalism
Dial-up is not a mobile payment technique

11

T r u s t

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E x p e r t s

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