happiest minds insurance domain overview 1 2

Insurance Domain Overview

Understanding How Insurance WorksAuthor – Varun Arya

Happiest People, Happiest Customers

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Agenda

• Money, Money & Money• What is Insurance?• Principles of Insurance• Business of Insurance• Types of Insurance• KPIs of Insurance

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Money, Money & Money

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•How big is this?

$4300000000000

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The Numbers

• $4.3 trillion in premium collections globally

$1.6 trillion – Europe $1.4 trillion – North America$1.16 trillion – Asia

Thrice as big as India’s GDP - $1.43 trillion

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Insurance Pie for the IT Industry

• $140.2 billion in 2013

• Continued growth to $154.5 billion in 2015

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Opportunity in India

Abysmally low Insurance Penetration in India• Life Insurance – 4%• General Insurance – 1%

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So, What is Insurance?

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Insurance Defined

• Risk transfer. Contract between 2 parties. Insurers and Insured. Insured pays a premium, insurer promises to pay for loss.

• Can you transfer any risk ? Betting in a casino in Vegas? Jumping from a multistory building for adventure?

• Some characteristics? So what are they?

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Characteristics of Insurable Risk

• Large number of similar exposure units• Definite loss• Accidental loss• Large loss• Affordable premium• Calculable loss• Limited risk of catastrophically large losses

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Principles Governing Insurance

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Principles Governing Insurance

• Principle of Utmost Good Faith• Principle of Insurable Interest• Principle of Indemnity• Principle of Subrogation• Principle of Contribution• Principle of Proximate Cause

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Principle of Utmost Good Faith

• A positive duty voluntarily to disclose, accurately and fully, all facts material to the risk being proposed, whether requested or not.

• Doctrine of “Uberrimae Fides” and not doctrine of “Caveat Emptor”

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Principle of Insurable Interest

• There must be some property, right, interest, liability or potential liability capable of being insured.

• The insured must stand in a relationship with the subject matter of insurance whereby he benefits from its safety, well being or freedom from liability and would be prejudiced by its loss, damage or existence of liability

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Principle of Indemnity

• On the happening of the insured event for which the insurance policy is taken up the insured should be replenished the amount of loss.

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Principle of Subrogation

• Subrogation means the restitution of the rights of an assured in favor of the insurer against the third party for any damages caused by him in place of the assured after the insurer has indemnified him for the loss.

• The principle of subrogation is invoked when a third party is responsible for the loss.

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Principle of Contribution

• As per the doctrine of contribution the indemnity provided for the loss occurring on the asset, which is insured with several insurers has to be proportionately shared among them according to the rateable proportion of the loss

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Principle of Proximate Cause

• The term “Proximate cause“ literally means the nearest cause or direct cause. In insurance parlance it relates to the immediate cause of the mishap, which resulted in the loss

• Car damaged in house fire. Covered by Property Insurance and not Auto.

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Business of Insurance

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Value Chain of Insurance

• Marketing• Risk Modeling• Sales• Policy Administration• Billing• Claims• Customer Service

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Business Model

Profit = Underwriting Income + Float

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Types of Insurance

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Insurance

Life General

Auto Property Marine Health

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Insurance KPIsThe Business Metrics

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Net Income Ratio

• This KPI measures the profitability of an Insurance company

• NIR = Net Income/Earned Premium

• The higher the better

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Policy Sales Growth

• This KPI helps us measure whether an Insurer is hitting sales targets or not

• PSG = (Current Sales – Prev Sales)/ Prev Sales

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Renewal Ratio

• This KPI measures the policy renewals over a set period of time

• Hints at the customer satisfaction level

• RR= Renewals/Policies Sold

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Claims Ratio

• This KPI measures claims as a percentage of total earned premium.

• Direct Impact on profitability

• CR = Claims/Earned Income

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Quotas Vs Production

• This KPI measures the effectiveness of agents and sellers at meeting desired target sales

• Calculation – Quoted Business/Revenue

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Average Time to Settle a Claim

• This KPI measures back office efficiency in claims processing

• Differs according to the type of Insurance

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Customer Satisfaction

• No one standard measure across industry

• Generally measured by doing surveys

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Average Cost per Claim

• This KPI is a cost measure. The lower the better

• Calculation – Total Cost of Claims/No. of Claims

• Important to categorize by the type of claim

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Sales Ratio

• This KPI helps an Insurer understand the results its pricing policy is yielding

• No. of Quotes/ No. of Wins

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Combined Ratio

• Loss Ratio + Expense Ratio

• More than 100% is red zone

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