When will we see an 'Indigo' in Indian General Insurance (GI) Industry? ……Final Part III

From Part I, it was amply clear that GI industry despite its considerable long presence in the country still faces multiple challenges ranging from not having highly skilled and motivated employees, nor highly satisfied customers, too many commodity products, broken processes, poorly designed IT systems, paucity of meaningful information, poor brand recall and inevitably, poor quality of execution. All of this inevitably reflects in world highest loss and expense ratios as well as appalling penetration rates. Of course these are general remarks and there are several honourable exceptions. However the focus has been on industry as a whole and that is where the industry falls way short of expectations.

In Part II, it also became clear that the GI industry both globally and in India, faces several disruptive forces, primary of them being the digital challenge, ‘new normal’ of excessive focus on customer experience due to unprecedented levels of consumerism and ecosystem approach. Ongoing banking reforms and industrial makeover in India also pose significant disruptions. India with its large latent general insurance potential, has become even more tantalising due to all these reasons. With the Govt. legislating the FDI stake to 49%, though with some grey areas, the Indian GI market was never more attractive.

2. Readiness of insurers: However, I am not sure as an industry we are ready to take advantage of all these disruptive trends. We might say that many changes have happened in the past, ranging from pre nationalisation focus on distribution, post nationalisation focus on distribution plus products and post liberalisation focus on distribution plus products plus customer service, but the industry has continued to expand, even though it may be changing at a glacial speed. It is useful to remind ourselves that in each of the three stages, the industry did not fully master the particular focus area and each subsequent addition was on an earlier uncompleted area.

One is also doubtful whether the Indian GI industry will be able to adapt to a radically altered marketplace. The existing insurers are putting a lot of emphasis on the technical dimension of the business i.e on the practical issues of Sales, Underwriting, product development, claims reduction and servicing. These ongoing activities are important but fail to capture the larger picture. Most of the shortcomings in the industry can primarily be ascribed to strategy, management and leadership issues within the industry. As I pointed out earlier, managements are largely inward looking, reactive and conservative. They have to adopt a much more long term view of contribution GI can make to the well being of the citizens and economic growth of the country rather than being absolutely focussed on growth rates and loss ratios. It should be clear that greater gains will come when the players generate better organisation wide strategic focus and discover innovative forms of working i.e solely in the fields of Strategy, Management and Leadership.

This requires that the operation of the industry be clearly analysed and the reality understood before undertaking any change. Unfortunately no single framework, gives us that magical silver bullet of an unbiased and objective view of industry reality. One has to use multiple frameworks.

 3. First, we can look at the industry from ‘thinking-doing’ continuum. In my view, the industry pays little attention to the ‘thinking’ part and is more inclined to get onto the ‘doing’ mode. For instance, the industry has not yet thought clearly of an integrated ‘value offering’ to different segments. One typically sees separate strands of the offering with hardly any synergy between them. The ‘value’ aspect is not addressed at all. To clarify this further, for instance, there is a product, a claims service, there could be a risk advisory service or even a counselling service or CRM or more components, with hardly any coordination or feedback loops between them. The customer does not get a full view of the offering. Inevitably the thinking-doing gap, leads to major coordination and control issues, commoditisation of the GI product and poor customer and financial outcomes. This kind of gap pervades in many spheres of insurer functioning.

4. One more lens on the industry could be from ‘constraints’ perspective as elaborated in the celebrated work of Eli Goldratt, an Israeli physicist who became a business management guru, in his celebrated book 'Theory of Constraints' (1). He asserted that every business will always have one dominant constraint which will contribute the most to the org performance deficiency and if the org can identify and solve that constraint, it can achieve much higher levels of performance. I have found it highly useful even in the industry context. What are the constraints in GI industry? In my opinion, the foremost constraint is the quality of strategy, management and leadership followed by quality of Human Resources.

5. Another useful way to understand the peculiarities of the GI industry, is to look at the GI industry from the ‘Hierarchy of Powers’ perspective of Geoffrey Moore, enunciated in his book Escape Velocity(2). He’s the chairman emeritus of three consulting firms and also a venture partner. Escape Velocity is about freeing a company’s future from the pull of the past and is thus quite relevant to GI industry as the pull of the past is very strong in terms of attitudes, operating models, structures etc. The book’s message is centered right at the intersection of strategy and execution and is thus very practical. Even though the model is focussed towards a company, it can be successfully used to analyse industries as well. Geoffrey identifies five types of economic power, each a driver of growth, organized in descending order from most general to most specific, and all of which must be aligned to achieve escape velocity and superior results. These are:

• Category Power, achieved through proactively entering and exiting categories to participate in the highest growth avenues. Growth born from category expansion
• Company Power, achieved through innovative allocations of resources to create “unmatchable” core capabilities. Growth is born from competitive advantage
• Market Power, achieved through targeting the most next generation customer segments and developing comprehensive offers and programmes to ensure winning shares. Growth is born from customer commitment
• Offer Power, achieved through disentangling three distinct forms of innovation one from another, managing each separately, to achieve differentiation, competitive neutralization, and internal productivity respectively. Growth is born from unmatchable offers, and
• Execution Power, with specific attention on transformational initiatives that realign the company around the next-generation capabilities required to execute its strategy. Growth born from reaching tipping points

If we look at this hierarchy, one sees that the GI category, though the premium is growing in double digits, is largely stagnant if one were to consider the number of new customers. As an aside, this is an area that the regulator should be working on. The GI insurers’ company power is also not much as each one of them is largely substitutable since the products/services are nearly similar. The market power has been hardly developed and customer is quite relieved if the basic service package is delivered. Rising consumer aspirations also is not making any major impact on the companies or the industry. Offer power is also not significant as mentioned in point 2 above. Execution power is also marginal due to broken proceses and improper design of IT systems. In reality, GI industry competes basically at this lowest level and that is why it has become highly commoditised. If thought through, there are many other clues which this kind of analysis can provide.

There are other perspectives also. All these perspectives can give important pointers to the strategy process and content.

6. Essential Capabilities for a disruptive environment: Finally, based on my experience of having consulted several insurers in their diagnosis and transformation programmes, I can emphatically say that insurers have to get right following four capabilities:

• Continuously enhance Awareness of its own performance expectations and actual outcomes at various levels right from org to team down to the individual employee and thereby the accountabilities
• Develop their agility to set right deviation from the performance expectations, at all levels right from org to team down to the employee
• Develop adaptation to external environment including customers, distributors, competitors, etc
• Build internal alignment across org to team to employee (3)

These are essentially cultural capabilities. Best of the organisations usually excel in these capabilities. All of us can honestly assess our companies preparedness on the above four capabilities. One could also precisely assess which of them is the biggest challenge and which one is the most developed. Agility and Adaptation come out the worst in most organisations. If a company is mediocre on all the four capabilities, then achieving results will progressively become more difficult.

7. A Road map: So how to develop above four capabilities right from the startup stage? Few select elements of this approach are:

a. Know how to use consultants wisely. Besides costing you sizeable money, consultants demand a lot of your time and involvement. Going beyond the jokes on consultants, is it unreasonable to ask, that you ought to know your situation better than anybody else and with the help of resident collective intelligence within the org, identify and solve the problems? Sometimes it does become useful to hire an external entity, with an unstated touch of neutrality and objectivity, to recommend and implement change. The bottom line: big name consultants are usually focussed on ‘deliverables’, a polite word for activities and not the organisational results. And they are safe.

b. Selecting, retaining and developing the top and middle management are most important strategic issues throughout the org journey.

c. Involving the senior management and middle management in defining the business domain The classic criticism of Theodore Levitt, encapsulated in his seminal 1960 HBR article ‘Marketing Myopia’ seems to be fully applicable to GI industry. In this article Levitt focussed on many industries/companies blind obsession with products and services rather than the benefit the consumer gets as a result of which they were wiped into oblivion. He famously said that a customer is looking for quarter inch hole rather than a quarter inch drill. Company after company has fallen prey to this affliction. As an industry, aren’t we too overly focussed on issuing policies and settling claims rather than giving customers peace of mind and freedom from trauma, post accidental events. This is probably one of the major reasons, that the industry is still stuck at table stakes level of timely issuance of policies and settlement of claims. Once the business domain definition is made, it has to be repeatedly communicated to the entire workforce.

d. Involving the senior management and middle management and working out scenarios for the development of the industry. I have personally found that scenario planning is most efficacious in bursting ‘biases/perception bubbles’ and thus better aligning people and teams. Specifically in GI sector, in line with banking trends, one could see region or function specific insurers and even micro insurance insurers with reduced capital requirements. There could be more mono line insurers focussed on one line of business besides health insurance. Due to efficiencies of coordination and control, these monoline insurers could prove to be more capital efficient. However this is all within realm of hypothesis.

e. Choosing the most appropriate strategic option and deploying resources accordingly

f. Designing an ecosystem approach to GI operation rather than a standalone approach

g. Define the business model and work out the operating model. Usually the former is done and the latter largely ignored. As a result, execution quality suffers immensely.

h. Pacing the strategy according to the resources availability. Many insurers tend to forget this and aim to achieve major changes without the supporting resources.

i. Always adhere to the basic assumptions underlying the chosen strategic option unless in light of the developments, the assumptions itself need to change

j. Integrate the Risk management process with Strategy process

k. Ruthlessly focus on execution. This is a major topic in itself and there are numerous reasons why most execution efforts falter. However one lesson for insurers is to avoid mindless replication of foreign best practices. Simply replicating foreign ‘best practices’ in India may also not be sufficient to make a market responsive model. Some of these knowledge infusions/practices may indeed be useful and relevant but they would have to be aligned to the local conditions. This lesson has been repeatedly learned by many companies at great cost in different industries in India. Take the US food giant McDonalds in India. For many years they persisted with their international products and pricing. Then they changed to India specific products. Volvo, maker of super luxury buses, initially began selling based on overseas concepts and did not see any success. They later changed approach by incorporating Indian value considerations and experienced major success. Honda also began by importing CKD kits in their early days with the attendant problem that their shock absorbers broke due to Indian road conditions. Later they had to commence Indian manufacturing. Many more examples can be given. It will be good for the GI companies to heed these lessons also while designing business strategy, products/services, processes, HR programmes and organisation structures.

l. Adoption of a comprehensive business system to solve execution challenges. Unfortunately GI industry is notorious for a heavily siloed approach and dependent largely on the skills and knowledge of the silo’s leader. The silo’s leaders may be coming from different companies with different cultures or with different ways of approaching issues. In the extreme, they may be even coming from different industries altogether due to talent and ideas crunch. Besides being heavily susceptible to the quality of the hire, a major downside of this is the respective leader tries to optimise in their respective silo and the larger company performance gets a relative lighter emphasis. Of course, this could be remedied by suitable goal setting practices like Balanced Scorecard and incentive linkage. However, there are number of companies, not so much in the GI sector, who are responding to these kind of generic challenges by adoption of a well integrated business system. A business system has its own philosophy, core principles, tools and practices. Toyota management system is one such system. It is a complete way of doing business – from recruiting, developing and retaining the best talent, to listening to customers and consistently delivering solutions that exceed expectations for quality, delivery, cost and innovation.

m. Install a performance management system at the individual, team and org level to ensure continuous improvement of performance.

n. Data and analytics have to form a core part of the strategy execution process no matter what the chosen strategy is.

o. Focus major attention on the HRM and evolve a unique HR model which is in alignment with the strategy. As pointed earlier, there is a major talent crisis within the industry. HR programmes across companies are virtually undistinguishable. The engagement and attrition levels are generally not much to talk about. A key part in the transformation of GI industry will have to be led and executed by people. In the absence of a leadership pipeline, which is enlightened enough to carry out this transformation, the industry future will remain grim. There are sectors/industries/companies which have been able to differentiate their HR programmes in line with their strategy. Are we prepared to learn from them or will we continue in a defensive orbit?

8. Regulatory Roadmap: Since the industry is heavily regulated and for good reasons, absence of a regulatory roadmap for the GI industry even for the next 2-3 years is surprising. Development of even a tentative roadmap would help promote much more orderly development of the industry.

9. Conclusion: In my opinion, the stage for general insurers in India to merely tinker with their internal processes to produce short-term results, has long gone past. Success doesn't happen by accident. Insurers need to make radical and well thought out changes to both business and operating models for competitive advantage over the long term. In line with the advice that Bill Bellows, Associate Fellow – In Thinking Network at United Technologies Pratt & Whitney Rocketdyne business unit, gives to all organisations, Insurers have to make the transition from ‘business as usual’ to ‘business as unusual’ if insurers are to truly realise the benefit of financial protection to the uninsured people, earn insuring public's trust and achieve their own success in the marketplace.

These and many other themes are forming part of my forthcoming book on revitalising insurance operations with focus on Strategy, Management and Leadership aspects rather than technical aspects.

What do you think? Do share your thoughts/questions.

(This concludes the three part article)

REFERENCES

1. The Goal: A process of Ongoing Improvement by Eliyahu M. Goldratt, Jeff Cox, 1984
2. Escape Velocity: Free Your Company’s Future from the Pull of the Past by Geoffrey A. Moore, 2011
3. The Four Pillars of High Performance: How Robust Organizations Achieve Extraordinary Results by Paul C. Light, 2005
4. The Mind of the Strategist: The Art of Japanese Business by Kenichi Ohmae, 1982