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Tuesday, December 18, 2007

Micro-insurance in the Indian context...contd.

After my pilgrimage to Sabarimala (in Kerala), I had to board a bus from Pampa to Nilackal, a place about 25 kilometers from Pampa. All vehicles other than cars and jeeps are required to park at Nilackal; pilgrims after reaching Pampa board a state-run bus to reach Nilackal. I was amazed to see that the conductor was using a hand-held e-POS (Point-of-Sale) terminal for dispensing tickets. I guess the number of trips he had to make up and down ferrying passengers from the banks of the river to this parking lot did not give him time to tot up the tickets sold and reconcile it with the cash in his bag. However, with this handy device he knew exactly how many tickets he had sold, and for what value; handing this amount over to his cashier, he could then proceed almost immediately for his next trip (after a stop-over for a chai at his favorite tea shop, of course)!!! Synchronizing this hand-held device to some accounting system sitting in far-off Trivandrum or Kottayam was probably only a small step away!!!

From pampa, we reached Chengannur; as I sat at the railway station waiting to board the train to Chennai, a news item on Television caught my interest. The Indian Finance Minister, Mr. P Chidambaram was talking at a press conference after a meeting which he had attended; there he was exhorting insurance companies to sell insurance through post-offices and thereby extend the reach of their products and services to the rural segment. This was pretty much along the lines of my previous blog on micro-insurance; I, therefore decided to pursue that line of thought a little further.

With connectivity becoming ubiquitous, infrastructure and technology costs becoming affordable, it is now becoming increasingly possible to address some segments that were previously economically unviable. As is evident from the bus conductor's example, technology is available and affordable too! So what then are the important ingredients for a successful implementation of micro-insurance?

  1. Technology
  2. Infrastructure
  3. Trained resources as correspondents and facilitators
  4. Insurance products
  5. Insurance underwriters / micro-finance companies
  6. Information / knowledge of customers

This list is not in any particular order. However, it occurs to me that the information technology provider who has strong product and services capability is probably going to be the linchpin for a successful implementation. In conjunction with an insurance company / micro-finance institution which can provide the financial backbone to this business model, the technology company would play an important role of integrating the various components to make it a seamless offering.


From a technology and infrastructure stand-point, we are looking at a centrally deployed back-end software that can talk to these hand-held POS terminals either online, or offline. In most cases, connectivity would be offline. What would probably work is to have hand-held devices with insurance software products loaded on them. These could then be taken from doorstep to doorstep for collection of premiums (or even settling of claims). At the end of the day, we would have them synchronized with the back end system through a dial-up connection (or even GPRS). The e-POS terminal could also use biometric authentication to identify customers (especially useful in regions where literacy rates or low and as a means of identifying customers uniquely in a country where there is no SSN). A thermal printer attached to the hand-held device could be used to print out receipts (quite similar in concept to the bus ticket on that Pampa-Nilackal bus)! Assuming we have a group insurance scheme where a Self-Help Group is involved, then we can print out one policy covering all the Group members and not have to bother about printing separate schedules and policy covers for each member. In addition, given the irregular income streams of this customer profile, it may be necessary to issue installment premiums (and even probably waive the 64-vb rule). All of this will require the regulator's special approval; in turn insurance companies will need to provide auditable data to ensure compliance with regulations.


In addition to all this, we require relevant and good insurance products that are suitable for this market segment. We also need information about customers; information gap relating to customers, and this market segment is a huge barrier that insurance companies face in being able to offer the right kind of products for this market. With the help of a strong team of facilitators and correspondents, and the right KYC norms in place, it should soon be possible to bridge this information gap. In fact, this is perhaps the most significant role technology will play in this solution.


What is also becoming evident is that the back-end insurance system needs to have a very strong SOA orientation and will be deployed in the SaaS model. The ability to configure products specific to this customer segment is a key capability requirement for this product. Equally important is an open architecture that will allow interface to hand-held devices and be able to integrate with back-end accounting systems, and provide the required compliance-related information to regulators and statutory bodies. In addition, this will have a strong business intelligence module that will be the backbone of all the data analysis and reporting. Ensuring availability of infrastructure, connectivity and software reliability across so many geographically dispersed is a key challenge that needs to be surmounted.


There has been so much interest in micro-finance in the country in recent times. While this is certainly a huge opportunity, it also presents some really daunting challenges; this is not something one company can venture into alone! It will require a strong consortium of like-minded organizations backed by strong technology. And an organization that has the project management skills to get all of these players to work together as one team.



64 V B: In India premiums have to be paid before coverage can begin and the insurer can be 'at risk', a provision under section 64 V B of the Insurance Act.

Monday, December 17, 2007

The Long Tail of PREMIA

Recently, while making a presentation of the powerful product configuration features of PREMIA™– insurance software from 3i Infotech, I was rendered speechless by a question from the IT head of a public sector insurance company – he wanted to know if we could configure a “product-less” product! He had me stumped there; I quite didn’t know how to answer that one. I looked at him for a while…not sure if he was serious, then realizing that he indeed was, went on to “create” a description of the features of the product-less product. I’m not sure if he quite understood what I was saying; I frankly didn’t!!!
Well, the question has not gone away from the mind! Although it sounded quite ludicrous at that time, the more I thought about the question, the more differently I have been interpreting it. And it was when I was reading Chris Anderson’s “The Long Tail” that I’ve finally hit upon a meaning that makes imminent sense!
Now, what has the Long Tail got to do with this? The Long Tail is all about the almost unlimited choice created in the market because of the digital age – more importantly the evolution of the internet. The new economics is about niches, where the sum of the niches is almost as big, if not bigger than the “mainstream” products. According to Chris Anderson, the three major forces that have made this possible are:
1. Democratization of the tools of production
2. Democratization of the tools of distribution
3. Lower costs of connecting supply and demand
What exactly does this mean? I intend to write about the impact of each of these forces in greater detail; for now, let me get back to my story!
I presume what he probably was asking was if our product configuration tool was powerful enough to create virtually any kind of product; in essence, had we democratized the tool of production. It then occurred to me that perhaps the “product-less” product was perhaps the niche market! I found myself extending the concept of localization – the process of creating products / variations for a specific geography or market – further down the line: to the level of an insurance company! The niche regional market had just expanded to a lot of niches. From a software company’s perspective, we could focus on developing the core insurance products while allowing the IT departments of the insurance companies, or for that matter, their customers to develop the rest. By providing a mechanism to create the product by assembling the components, while ensuring that proper business rules were in place, we could in effect, extend the development team right across to the users. By providing this as a service, we would now be able to extend the reach far beyond what was otherwise thought possible. And finally, in allowing these products to be classified and tagged across many categories, we would be in a position to make this offering easily accessible to the customers. And this, is the beginning of the Long tail of PREMIA! (rather, my long tale on PREMIA)!!!
Viewed from an insurance company’s perspective, the solution is infinitely more powerful! They no longer need to depend on the software company to create their insurance products – they can start creating products on their own. More importantly, they can now treat each customer as a niche and work on creating products specific to his individual needs! Or, give him the tools to create his own product – personalize it to his specific needs! This is truly a “product-less” product. While a large chunk of their customers would perhaps still opt for their standard products, they will still be able to cater to the needs of a customer who has special needs. The ability to configure the various components of the product and define rates at the element- level will give the insurance company, the ability to quote extremely competitive rates, instead of a single flat rate. Combined with some intelligent data about the customer, it can become a extremely powerful mechanism of very focused rating – one that takes into account generic factors as well as customer-specific ones.
The ability to personalize a policy by selection of appropriate coverage and limits, applicable clauses and conditions provided the freedom to the customer to choose the policy that best suits his needs at the most economical rate. He is no longer strait-jacketed into selecting from within a limited set. If nothing meets his requirement, he can now create his own product. This benefit gets further amplified when an aggregation engine that will pull data from several vendors is made available!
The introduction of better KYC (Know Your Customer) policies within Banks and Insurance companies is now giving the required impetus for the third force of the long tail to kick into action – that of bringing the customer and supplier closer! We are progressing from the information era into what is now being termed the suggestion / recommendation era. The intelligence gathered about the customer and his special requirements, needs to get translated into suggestions of the most appropriate product. For example, knowledge that the driver is educated, married with a family, living in an upwardly mobile neighborhood, and with no previous record of accidents is information that can be used to suggest a policy with rates reflecting the lower risk. Further, from past experience of selling policies to similarly-profiled people, the system can also recommend an additional personal accident cover, or a homeowner’s policy. Information that his spouse also drives to work will now prompt him to select a special package policy that provides coverage to the couple at a discounted rate. And this is just the tip of the iceberg!
PREMIA, as I am given to understand, is now poised to move to the next stage of evolution – making the transition from the classical role of being a software product to becoming an integral part of the insurance company’s business. This transformation will require it to adopt a “Software as a Service” (SaaS) model, where the lower costs of distribution allow it to tap markets and niches, which were hitherto considered uneconomical. More importantly by democratizing the tools of production and distribution, it will be able to serve a larger customer base than what was previously possible. Further, breaking up a single monolithic product into multiple services allows the customer greater choice in using only those aspects that are required / used by him. Effectively, what this means is that the customer now has the ability to opt, and pay for only a claims module or policy administration module; taking this one step further, if the insurance company was to pay on the basis of usage, the revenues to the software company would be based on the usage of the software – the more policies issues, the greater the revenue, the fewer claims, the lesser the usage of the claims module. Similarly, the ability to integrate external / secondary data with the primary data generated by the system and offer recommendations would make business intelligence-based solutions a lot more meaningful.
In intend to delve deeper into this and look at each of the above aspects and see how they would have an impact on the business. Meanwhile, let me have your comments on this.
PREMIA ™ is the brand name of 3i Infotech’s insurance software. The registered trademarks of proprietary software components of other software vendors used in the article are hereby acknowledged.
Read “The Long Tail” by Chris Anderson, Random House UK, 2006 for a better understanding of the theory of the Long tail.

SaaS and Micro-insurance

Software as a Service, a.k.a SaaS has gained greater recognition and attention as its impact on the long tail of the market is getting better understood. Although ASPs and hosted environments have been around for a while now, this concept has gained greater relevance as companies figure out newer and more efficient methods of reaching out to their customers. However, what I think is significantly different this time around, is the far greater integration of Information Technology into mainstream business processes and business strategy. Apart from lowering costs through shared infrastructure, the ability to create new and probably more efficient revenue streams has made IT an integral part of the business.
The ASP model has met with relatively lower levels of success; the problem has been the lack of preparedness for such a model. Firstly, the architecture required for a hosted model has not been fully understood! Most first-generation applications that were hosted were traditional client-server architectures in the garb of n-tier hosted applications. This resulted in performances that were far below customer expectations. Secondly, customers themselves have been wary of hosted applications because of security considerations. More importantly, the level of customization for each instance (read customer) resulted in higher levels of maintenance making it quite unviable for the application service provider to pursue such a model. Software as a service, through appropriate application architecture is now becoming the linchpin that binds the operational infrastructure to the business model.
I thought I’d use micro-insurance as a concept to explain the impact of SaaS on the long tail of the market; micro-insurance, in a sense, represents that spectrum of the market which has not been addressed by the traditional insurance. This segment is characterized by:- a) low-income groups with irregular income streams, b) low levels of awareness of products and services c) geographic inaccessibility and other factors like language and literacy, to name a few. A solution that is appropriately technology-enabled and has the right kind of business facilitators who can service this market segment has a higher likelihood of making economic sense than what can be achieved by traditional methods. I outline below some of the key ingredients for this solution:
a) The insurance company, in alignment with the regulator will identify products that are well-suited for this market segment. Typically, this segment is likely to have an agrarian demographic profile, and therefore insurance products that address the rural markets like crop insurance, poultry insurance and weather insurance are likely to figure over other kinds of insurance. Also, the product structure and premium ratings need to be designed keeping the irregular income streams and / or poverty levels in mind.
b) A concept similar to motor pool insurance (prevalent in India) will need to be adopted; this means that more than one insurance company (by choice or by mandate) will need to be co-opted into serving this segment. Having partners reduces risk and lowers cost of operations.
c) Business facilitators who can provide the logistical and distribution support. A model similar to e-Choupal (ITC’s rural initiative – http://www.echoupal.com) which enlists the support of the local populace is perhaps the most effective method of addressing issues relating to reach, language, culture and even for creation of awareness.
d) A strong and robust application architecture that is scalable, configurable and preferably multi-tenant; the required infrastructure, to allow centralized delivery, deployment and maintenance of the application.
e) A SOA-based insurance application that is component-based and can be configured to meet market requirements; this is especially important since most products may be non-standard, and it should be possible to configure these products without having to custom-build them from scratch; the workflows are also likely to be different, as are the business rules that will govern them. Hence, an application that can accommodate these changes through configuration, rather than custom-development is more likely to be successful.
f) Mobility-based solution that can work asynchronously with the core application. Typically, due to geographical inaccessibility in these regions, the application is loaded onto a hand held device that can be used by business facilitators to offer services to customers. This solution will communicate to the core application in offline mode (as well as on-line mode, where possible), to update the transactions at the end of business day (or as required to ensure regulatory compliance)
g) Human interface devices like biometric identification and smart cards that will ensure secure transactions. This is especially significant in market segments (regions / countries) where unique identification of customers is an issue and / or customers are illiterate.
h) Business Intelligence tools to provide the right kind of customer analytics for further refining the product and bridging the information gap. Given the lower levels of awareness of this market, capturing customer information and using this information proactively is of paramount importance.
Of course, what has been presented above is a generic and simplistic model. However, what I think is most significant here is the fact that this whole business model can become viable and feasible only if the right kind of software service is in place. The fact that such a market has been ignored for so long, but is now gaining significance is perhaps proof that technology is enabling and opening up such possibilities. While this is at the far right of the long tail, closer to the “hits” market, SaaS will have a far greater role to play – one that will make it almost mainstream.
This article has been significantly influenced by the success of ITC’s rural initiative e-choupal (http://www.e-choupal.com) and more recently by the launch of FINO (a similar initiative by ICICI Bank – http://www.fino.co.in)
Financial inclusion has become a key thrust area in a number of countries. Financial inclusion has become a buzzword in the financial services sector, and several initiatives are afoot to reach out to this segment.

Wednesday, September 26, 2007

Random thoughts - Insurance Knowledge Management

Driving down to meet a friend, I got thinking about the topic for my dissertation - Knowledge Management in the Insurance industry. Some thoughts:

We are still in the knowledge acquisition phase as far as the maturity of KM activities are concerned, and hence we shall focus on that aspect of Knowledge Management. To give you a simple example of what KM is, and what it can do for your organization, let us look at one aspect of your business, and then pick strands of related ideas and thoughts as we make progress.

So, let me start with a simple example, say, in the Marine Business. Marine Cargo insurance, as you are all well aware of is the insurance of cargo from one place to another; the mode of transport is by Air, Sea or Land. What are the different aspects of this insurance that one needs to be aware of. For instance, the rating is dependent on the type of goods, the way it is packaged or stored, and the mode of transport. This is of course a simplistic way of looking at something. However, for the purpose of our understanding, let us just focus on these three aspects for the time being. Now, when someone who is not familiar with the business is given the responsibility of underwriting this insuance, what is it that he needs to know. Can we place a ready reckoner for him, that will help him along the way. How can he get more information about this type of insurance? Do we have a repository of our experience in this line of business? How about the industry experience - after all, to a large extent rating is driven by the general experience in this business? So, as we begin to probe this further, we realise that life would be a lot simpler if we can have this information available. More importantly, if this was available in a readily usable manner, then the benefits accruing to the company because of this is enormous: we could ensure that people made less mistakes during underwriting, for instance; or the claims process would be more diligent; the information available within the organization would help in reducing incidents of fraud. However, the way I see it, the fact that the underwriter is more knowledgeable about the subject is perhaps the biggest take-away of all. He is a lot more productive, which directly contributes to the bottomline.

More on this in a while...

Wednesday, September 12, 2007

Insurance Speak - Experian experience

Business segmentation: three categories of business segmentation
1. Classifications - Commercial mosaic classifies the business into 13 groups and 50 different types based on key variables that significantly influence behaviour.
2. Propensities - broad description given to any statistically modeled value that indicates a business's likely behaviour; for example, purchasing intentions, profitability etc.
3. Demographics - broad term used to describe any single characteristic of the business. This may include variables such as: employees per site, total turnover, net worth, pre-tax profit, sales per employee, etc.

This is a useful classification for analysis of the business. See how you can apply the same concept to the indian industry and come up with similar classification.