In insurance, the onus now lies with the seller

Written by Prakash Praharaj | Updated: Jun 14 2013, 06:34am hrs
Protecting consumer interest while selling financial products is being debated globally and the focus has shifted from the principle of caveat emptor ie buyers beware to sellers beware. The International Association of Insurance Supervisors (IAIS) in its latest version of Insurance Core Principles, Standards, Guidance and Assessment Methodology has codified 26 insurance core principles (ICPs) along with guidance notes. The ICPs provide a globally accepted framework for the sector and the guidance are relevant in addressing the challenges faced by us in India.

Some of the ICPs that are relevant from risk management point of view are corporate governance, internal controls and enterprise risk management. The 2010 Ulip guidelines and 2013 traditional products guidelines have turned advantage intermediaries to advantage customers. But despite new Ulip products being more customer friendly, the business share of Ulips has gone down on low customer interest, lower incentive for intermediaries and a volatile market.

Major risks

Business risk: The focus is on short-term targets and market share rather than on long-term growth. Individual regular premium is the best bet against volatile business growth and creating long-term value. Selling suitable products will rebuild trust. Financial planning at life stage revisits will create long-term relationship and will help improve persistency.

Reputation risk: Misselling is the major risk to reputation. Misselling impact business growth and renewal collections and potential sales. Need-based selling is the best preventive action for mitigating reputation risk.

Regulatory risk: Regulation is inevitable in any business and it is better to anticipate change and adapt. Now a days regulators are more concerned about protecting customers. Regulatory interventions are taking place in designing of products, promotion of long-term protection business, reduction of costs and better corporate governance. The challenges before insurers are adapting to frequent and fast changes, retaining insurance agents, redesigning systems and processes and strengthening internal controls and compliance culture.

Strategic risk: There should be top management clarity on short-term versus long-term growth, individual versus group business, single versus regular premium, linked versus non-linked business, top line versusbottom line and direct (online) versus intermediaries distribution.

Simpler products should be offered for different consumer segments. Distribution channels on distinct consumer segments will be more effective and can create pull effect. Online direct sales should be promoted to reach the younger generation. Consumer research should be undertaken to detect needs of various segments. Sales force should be professionalised with financial planning skills.

Human resources risk: The remuneration policy should not encourage excessive or inappropriate risk taking, especially at the senior level, compromising the interests of the insurer and the stakeholders.

Enterprise risk management

The objectives of enterprise risk management (ERM) are continued growth, earnings stability, continuity of operations, survival, meeting externally imposed obligations and social responsibility. Firms can protect and create value for stakeholders. Not managing the risks may result in variable business performance, increase in customer grievances, tarnishing of the brand, regulatory penalties, attrition, increased cost of capital and reduction in enterprise value. The mandate for ERM should start from the top management and percolate down.

The challenges for implementing ERM comes from resistance to change, business units reluctance to implement risk-adjusted results, decision making driven by top line growth, lack of understanding of the key interdependencies of various functions and viewing risk management function as a mere control function.

Role of chief risk officer

A robust risk management function, which is well positioned, resourced and properly authorised and staffed, is an essential element of an effective risk management system. This function is best led by a chief risk officer (CRO) who understands all business verticals and reports to the CEO. The CRO should have the authority and obligation to inform the board promptly on anything that may have an effect on the risk management system of the insurer.

The writer is former chief risk officer, SBI Life