As part of a drive to curtail losses, the four public sector general insurance companies are going in for a makeover. The four state-owned general insurers- New India Assurance, National Insurance, United India Insurance and Oriental Insurance - have undertaken a restructuring exercise to improve underwriting profits.

"We have set a target with the government saying how much would be the underwriting profit or losses. The need to reduce losses has been made clear to us. Therefore, we will be looking at reducing underwriting losses and will focus on departments that are making losses," said M Ramadoss, chairman and managing director of New India Assurance.

As part of the restructuring, the four insurers - who have been dealing with legacy issues for the past few years - are reconciling the list of claims with those that have been paid but are not reflected in their books. "There are a lot of cases in which insurers have paid the claims but the provisions, some of which are in excess of the amount paid, are still sitting on the books," said a non-life insurance executive.

In addition, they have undertaken a business process re-engineering (BPR) exercise, which includes implementation of core insurance solutions and centralising the claim settlement process. Business is being reorganised into verticals focused on different segments - bancassurance, large companies and agency - and a performance-linked incentive scheme is being introduced for employees.

As a precursor to this, the state-owned general insurers have started measuring the performance of employees on a regular basis in terms of business generated, commission paid on the risk underwritten and the claims incurred. "Earlier, performance was only measured after the annual accounts were finalised, which was somewhere around July-August. But now, companies are trying to measure performance on a monthly basis so that mid-course corrections can take place," said an insurance company executive.

This is akin to the exercise undertaken by banks in the 1990s. During the 2009-10 financial year the finance ministry had asked public sector general insurers to implement Core Insurance Solutions (CIS), in line with the experience of public sector banks, where the implementation of core banking solutions has helped customers carry out transactions across the country. While Oriental Insurance, the smallest of the four state-owned players, has already implemented CIS, the other three will follow suit over the next 12 months.

New India Assurance, Oriental Insurance and United India Insurance had appointed Boston Consulting Group, while National Insurance had hired PricewaterhouseCoopers for the restructuring exercise. The process is expected to conclude in the next six months. "Technology is the cutting edge and we expect to implement the core insurance system by 2010. We are focusing on better underwriting practices by adding an element of incentive to performance," said United India Insurance chairman and managing director G Srinivasan.

United India has divided strategic business units into bancassurance, motor dealer offices and large corporate and agency offices, while Oriental has segmented the market into four groups - agency, corporate, brokers and bancassurance. On servicing claims, United India is strengthening settlement offices and speeding up claim settlement by third-party administrators (TPAs), while Oriental is offering more business to TPAs which have provided it with substantial business.

"As part of our re-engineering, we have added an element of incentive linked to the performance for branches, which will be based on number of claims settled and number of claims incurred by the group. The branch with the lower combined ratio will be incentivised," Srinivasan added. The underwriting performance of an insurance company is measured by its combined ratio.

A combined ratio of less than 100 per cent indicates underwriting profitability and better return on the amount placed at risk, while a ratio of more than 100 indicates an underwriting loss. The combined loss ratio of the four general insurance companies is hovering at 123-130 per cent.

It is calculated by adding the loss ratio and the expense ratio. The loss ratio is calculated by dividing the loss by the earned premium. The expense ratio is calculated by dividing the operational expenses by the earned premium. The expense ratio of the general insurance companies is around 20 per cent.

"We had appointed consultants when we were losing market share. The ministry has asked the other three insurance companies to implement the CIS, since we had already started it in 2005. We expect to bring down our combined ratio by 10 per cent, from 135 per cent at present," said a senior executive at Oriental Insurance.

Insurers expect the re-engineering process to result in improved bottomlines. National India had undertaken an IT-led business process re-engineering exercise and is close to implementing CIS. The ministry had initiated talks on a possible merger of the four public sector insurers, but the insurers themselves said that no opinion had been formalised, and that there was no pressure on them to finalise anything immediately. "If there is disinvestment and the ministry decides that we should come up with an IPO, the concerns are whether all four companies will come up with the public offer separately or as one company. If at all there is a merger it will be driven by the IPO. Underwriting losses is only part of the discussion and merging the four PSUs will not ensure underwriting profits," Ramadoss added.

In the last one year public sector players have stemmed the decline in their market share. Due to high discounts insurers had to suffer underwriting losses. PSUs retain 80-85 per cent risk while private players retain around 50-55 per cent risk. PSUs with more elbow room in writing bigger risks dominate the corporate business. Though these players lack in customer service, they are confident of increasing their market share because of public confidence, financial ability and better technical expertise.

To bring down claims in the health segment, the four insurers are jointly forming a TPA, and have appointed KPMG as the consultant. KPMG has submitted its report.

Source: Business Standard