Developing APES framework for insurance management

There are three discernible levels for professional knowledge management of individuals education, training and continuous professional development.

Insurance education

Insurance training

Insurance Continuous Professional Development (CPD)

Access to best/latest thinking

Novel approaches & ideas

Better/faster innovation

Faster access to knowledge

Faster problem solving

Improved customer service

Better sharing

Effective/quicker induction

Reducing knowledge loss

Knowing who is doing what

Minimizes reinvention

Productivity performance

Insurance domain can be split into seven knowledge centers. The three elements of knowledge management differ for each category but an educational level foundation is a secure way to bring professionalism to the domain. Seven ‘A’ framework of insurance consists of

  1. A1 Agency System (Agent, broking and distribution)
  2. A2 Accountant System
  3. A3 Actuary System
  4. A4 Adjustor System (survey, loss adjustment, valuation, assessment)
  5. A5 Assuror System (Underwriting, product packaging)
  6. A6 Asset Manager System
  7. A7 Administrator System (Management, Corporate Governance, Technology, IT, Audit, Grievance reddressal)

There are three important laws, which govern the underwriter’s ratemaking in insurance.

  1. Law of large numbers
  2. Law of averages
  3. Law of statistical independence

Law of large number ensures insurance to help unfortunate few through fortunate many. Law of averages believes that events group above and below the average and tend to converge on the moving average over a time in such a way that average can be a safe guess for a quotient of events. This makes the practice of burning cost underwriting so popular. Burning cost underwriting consists of dividing all past losses by a normalized unit of events to arrive at the basis of unit price of underwriting. Law of statistical independence ensures that events occur independent of each other. But in real life all these laws are only partially applicable. Insurance runs on intelligent guess and approximation based on some prudent structures. Seven P framework of insurance underwriting helps in premium or price assessment for an assumed level of indemnity. Seven P framework identified by K C Mishra obviously consists of seven mutually exclusive and collectively exhaustive elements.

  1. P1 Place (Geographical spread of probable loss events)
  2. P2 Persons (Individual propensity to moral hazard)
  3. P3 Perils (Lines of risk events)
  4. P4 Periods (Time seasonality and cyclicity of risk events)
  5. P5 Properties (Classes of inherent risks)
  6. P6 Portions (Layers of risks)
  7. P7 PAD (Provision for adverse deviation possibilities identified)

Success of insurance pricing or premium rating depends on the size and diversity of these 7 Ps. It fails when there is concentration, convergence or homogeneity of the subject matter of insurance. This is the basis of 7P analysis propounded by K C Mishra.

There is also internal perspective for success of insurance. It can be captured in a loosely coined 7E framework.

  1. E1 Enhance profitability (By proper underwriting and investments)
  2. E2 Evaluate time to market (Reducing time to market generally improves profitability of cost leadership products but optimal time to market improves profitability of differentiation products. A second first mover often wins in insurance than the firs mover)
  3. E3 Ensure customer intimacy (Relationship with the customer improves retention, referral, cross-selling and up-selling)
  4. E4 Engage customers for life (Captures the customer value for life, which tend to be safer and steadier than life cycle or life style events of the customer)
  5. E5 Enable electronic business (This standardizes process, speeds up services and offers scope for higher transaction volume)
  6. E6 Establish strong partnerships (It helps in globalization of risk in liability side by processes like reinsurance, in asset side by improving the portfolio and in revenue by improving the wallet share)
  7. E7 Eliminate unjust costs (Anxiety to sell insurance at any cost sets a few frills, which has to be reviewed and eliminated periodically. Cost saved is straight profit without going through any through put)

To this may be added Mac Kinsey’s seven 7 framework for generic corporate strategy:

  1. S1 Superordinate Goal (Shared Goal)
  2. S2 Structure
  3. S3 Strategy
  4. S4 Systems
  5. S5 Staff (People)
  6. S6 Style (Process)
  7. S7 Skills (Competences)

Mishra’s three frameworks together with Mc Kinsey’s framework form the "APES" framework for insurance business management.

The framework encourages and fosters a flexible but disciplined approach to underwriting. Secondly it raises business and underwriting standards and thirdly it encourages the right kind of new institutions to join insurance market so it can continue to evolve and develop. It helps the regulator to review the underlying exposures and forecasted Ultimate Loss Ratios to ensure that they are in line with the regulations and guidelines. The conventions under which companies have worked so far must not become a straitjacket that is blindly applied but if used appropriately within sensible parameters of the framework the market’s profitability will improve significantly.

Regulator can gauge each company's strengths and weaknesses, its posture and approach towards regulatory compliance, what are its technical competencies, the underwriting processes that the company employs, the company’s attitude towards risk and ability to manage risk as well as assessing the attractiveness of its underlying business.

This framework is essential for the Business Planning Process. It allows regulator to see the strengths and weaknesses of the companies and concentrate on those with weaknesses. Every company may be asked to produce a business plan for the year ahead that included, amongst other things, their underwriting strategy, breakdown of portfolio and profitability forecasts for the year ahead.

The regulator can prescribe a business plan template and improve the look and feel of it as a result of feedback from companies. The heavy reporting burden often placed on companies can be assuaged and regulator only ask for information really needed and in a format that makes less work based on the framework.

Of course planning is just one, regulator should also be actively involved in analysing market conditions. Regulator can identify the classes of business, which are showing the first signs of potential underperformance, for example, property insurance, property reinsurance, marine hull, & machinery, energy and aviation etc and then the regulator takes appropriate action. If regulator intends to build a profitable future for insurance, companies must be prepared and allowed to look long and hard at their portfolios and decide if certain classes are, or will be profitable. Regulator can help companies by continuing to monitor which line of insurance industry is in the cycle, through analysing market trends and feeding this back to companies. It is reasonably natural for companies to be self-interested and fixated on their own business plans. Regulator must look at the bigger picture through this framework. This is not to be seen as break on entrepreneurial spirit. There must be appropriate controls in place and the framework rises above individual companies to the insurance order of a country.

The Framework will ensure that companies have an effective, aligned and comprehensive approach to risk management in place. As part of this development process, dedicated Risk Management Teams may review progress of the strategic process. At the heart of the framework must be Performance management. This is all about raising standards and promoting best practice within the Indian Insurance marketplace.

Companies must continue to improve and focus on underwriting discipline. Underwriters in this marketplace should make greater use of robust rating tools to help assist with their pricing. Practitioners must also monitor rate and exposure changes so that companies avoid selling products too cheaply. Eventually companies must prepare them for impending non-tariff regime. It may be delayed at places but cannot be denied. Most of Insurance business is highly specialized and therefore needs active management.

Only constant in the universe is change. No framework can remain inviolate forever. There will be more robust packaging of wisdom. Until then APES may help.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.