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Meghaduta - Thinksoft Newsletter (October'13)

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  • 1. T r u s tt h eE x p e r t sISSUE 3 OCTOBER 2013The Cloud Messenger With technology taking a front seat in driving the organizations 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 ofCloud 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. FinallyWith 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 managementAsvini Kumar Chairman and Managing Director Thinksoft Global Services Ltd

2. T r u s tt h eE x p e r t sThe 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! Thats 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 doesnt 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 SolvencyII. 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 SolvencyII, 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 doesnt mean its 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 oneMeghadta ISSUE 3 OCTOBER 2013equals the other. Thats the question! So when they are talking about risk and risk-based assessments, theyre 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 dont you? AK Yes, Ive 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. Thats why the estimate of liabilities is always shaky. It is founded, no doubt, on statistical mathematics, but fundamentally, since its 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 youre saying risk-based, what youre 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 thats 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 youve 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, youve got the central government debt, there are also state government2 3. 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, weve hiked up the percentage, partly to meet the inaccuracy in estimating the risk on that factor, and secondly its 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 theyve got a problem of the asset quality, and the

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