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PSUs: A better half or worse

In Banking, corporate governance, Insurance, Legal, Risk on February 17, 2018 at 4:58 am


Indian PSU’s such as Life Insurance Corporation (LIC) is no doubt a better half of Indian Insurance Industry with total assets of USD 340 billion. Following the leaders from China, Germany, and France (ranked 1st, 2nd and 3rd in Forbes list of Global Insurers), LIC is ranked among top 50 global insurance companies though still unlisted in a global stock exchange where almost all large insurance companies are listed. On the other side, there are several worse halves in Indian financial industry. Post 2007-2008 crisis, bad NPAs in banking and insurance frauds have pushed the liquidity position in Indian financial industry and raised the debates over the inefficiency of PSUs. Almost half of the premium from general and health insurance business in India comes from four large Public Sector General Insurance Companies and more than half from one single public sector life insurance company (LIC). The recent initiative of the government to merge the three worse halves (National Insurance Company, United Indian Insurance Company, and Oriental Insurance Company) to make one better half is one attempt towards providing them strategic direction. In this blog, I am going to discuss what went wrong with these PSUs and how they became the victim of resistance to change (Senge, 2014) and the way forward to become the better half.

Indian PSUs lived on their today with forgone tomorrow and not able to adapt to global practices. For example, when a company is listed in NASDAQ, it has to comply with several rules particularly implementation risk governance and risk management at the holistic level. Implementation of Enterprise Risk Management (ERM) and risk governance takes years to set up infrastructure, create an eco-system for good risk culture and monitoring the risks. Indian PSUs, in general, face several challenges to follow these global practices due to lack of tone from the top.

Challenge 1: We don’t have time for this stuff

After decentralisation in 1997, PSUs had to work hard to remain their market share from aggressive private sector market players. The race of cut-throat competition looks never ending in which PSU adopted a defensive approach. The PSUs senior executives were busy in expansion or retention of market share and others in managing the business operations. Practically, the issue was who has time for risk management in growth-oriented markets. In fact, if the government want them to follow risk management, PSUs need time for reflection and practice.

Challenge 2: We have no help

 If PSUs even accept that implementation of risk governance and risk management is important to maintain their global position and part of the requirement to maintain legitimacy in the international market, who will help them. The PSUs in last few years attempted to execute ERM with the support of some market consultants but found the issues of inadequate coaching, guidance, and support.

Challenge 3: This stuff is not relevant

 PSUs are unaware of the benefits of these global practices due to lack of exposure. Senior executives ask these questions: What I will achieve if I implement risk governance in five years? They are also unaware about why new efforts and learning capabilities are relevant for their business goals. In fact, they face several challenges related to fear, anxiety or concerns for exposure what if the implementation of ERM does not derive any value? This challenge is more related to the negative assessment of the problem.

Challenge 4: We have the right way/they don’t understand us

 PSUs are facing the challenge of overwork. Before decentralisation of 1997, the employees used to work with comfort (10 am to 5 pm) and after entry of private players in the insurance industry, the work pressure suddenly starts percolating. Executives are working day and night with no great appreciation and still called as worse half. New recruitments have been stopped and with under-staffed and over worked departments, the executives are responsible for not only to regain the market position but also to compete in the global market. How is it possible? On the top of that, now the new expectation of adapting ERM and risk governance. Who has time for this stuff? They have the right way but nobody understands them, they have given their whole life for the development of the company but not instead of recognition, the divestment is the worst idea.

Challenge 5: We keep reinventing the wheel

PSUs arguments are based on the premise that okay if world’s top 50 insurance companies are implementing ERM and so we should also implement it. Tell us how they have done it. Why we keep reinventing the same wheel which has been discovered by so many organisations ignoring the current research. A research from Harvard says that there is no one way to implement risk management in an organisation, it depends on the context so it would be different for all organisation. ‘One size does not fit for all’ holds true in case of implementation of ERM (Mikes & Kaplan, 2015).

What may work for PSUs?

Certainly, PSUs need profound change to overcome many challenges they are facing to adopt global practices. Can a short-term training be helpful to PSUs in overcoming those challenges?

Daniel H. Kim, co-founder of the MIT Center for Organisational Learning, found major limitation in the way traditional companies think. His findings revealed that companies would like to mention individual factors critical to success which remain in isolation rather seeing them interrelated sets. For example, companies try to make top 10 risks list or critical factors hampering the achievement of organisational objectives without thinking the key ways in which the risks are related to each other. Then next issue is the companies want to set priorities. He found that list based approach has several problems such as ‘Divide and Conquer Strategy’ where the people do not consider important intersections among different factors. He believed that System thinking and organisation learning can put a theory in place how managerial action can resolve the problems. These learning can be put in PSUs in the current context.

To improve PSUs current position, they can form a group along with private insurance companies to learn risk management at the industry level. My previous two blogs on ‘do Indian Insurance Market need a Professional CRO forum’ and ‘role of CRO Forum’ explain the concept in detail.

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The major questions PSUs need to ask before engaging in learning approach:

Why is the change required? What went wrong?

Who wants change to happen? What results are expected?

How the change will happen and who will support it?

Who will be involved and what is our personal contribution and gain?

Peter Senge, Assistant Professor at MIT, believed that to make these learning efforts sustainable, the efforts should be so designed that each effort could learn from each other. A lesson from several kinds of literature for PSUs is: “Don’t try to learn in silos, learn together, learn from others and share learning. Start from small, create trust, set the example, understand interconnected issues, and then resolve critical issues. This way, PSUs can resolve many issues at one go”.



Who is the owner of risk in an organisation?

In Banking, CRO, Finance, Insurance, Legal, Risk Management on July 17, 2016 at 5:10 pm

In this blog, I indulge in a debate that who is the owner of risk – Is it CEO, CRO or different parties and how organisational risk is linked to society?

Chief Executives such as CEO and CRO provide foundation to a firm’s sustainability with their generic, specific capabilities, expertise and leadership to control and administer resources in current dynamic business environment. Role of CEO and CRO in relation to risk have presented greater ambiguity in practice and questioned the existence of widespread myth “CRO is the owner of risk and is the ultimate risk manager of the company.

Roles of CEO and CRO are significantly different however, often it is considered that CEO is expected to make risk based decision making while ownership of risk lies with CRO and accountabilities is set to the board.


An actor is not implementer, an implementer is not decision maker and a decision maker is not held accountable.

During practice, a CEO acts as a ‘Risk Manager’, ‘Decision maker’ and ‘Influence of risk culture’.  To become a successful CEO, a CEO has to demonstrate his/her abilities to cope up with failures while gaining strategic leverage by exploiting opportunities.  A CEO influences significantly the risk culture of an organisation. Consider an organisation with Japanese, Chinese, British or American CEO, you may imagine the difference in culture as different expectations are set. A CEO style should complement with Company’s culture. If a company is relationship focused, and believes in shared decision making, its CEO should promote collaborative efforts. Another CEO may bring a ‘PUSH-PUSH BACK’ culture by enforcing rules without understanding the difficulties of ground staff.

A CRO acts as ‘Implementer and reporter of risks’, ‘Risk Advisor’ and ‘Communicator of risk culture’. CRO implements risk management policy and reports integrated risks to CEO. He/she also advises on critical risks for important projects, supports in formulation of risk policy when needed by the board and further to CEO on risk related matters. Expectations are set by the board, Chairman and CEO in risk related matters such as how much and what kind of risk the company is willing to take.

Other than CEO, CRO and board, there are other contender of ‘ownership of risk’ in the company.

  • Each and every person working in the organisation are the owners of their own risk.
  • Head of Departments are owners of their department’s risk
  • Shareholders are the owners of the company’s entire risk
  • Stakeholders are the owners of company’s entire risk
  • Risk and uncertainty is beyond the capacity of ownership

This week, I attended International Sociological Association (ISA) conference in Vienna which impacted my thought process of linking risk with society. A business success cannot be determined by its profit/loss or share market price without thinking of impact of its actions on society. Roots of organisations emerge from sociology as organisations are considered as ‘social entities’. Thinking about only economic benefits leaving society apart, may not be a sustainable long term strategy. This is perhaps the reason why ‘reputation risk’ has become one of the challenge for companies in global markets. Companies have burnt their fingers and learnt several lessons in recent financial crisis. The need of clear ownership, roles and responsibility of risk have been clearly known to companies and require attention in risk policy formulation and implementation. Michael Porter, a Professor of Harvard known for his highest influence on executives and countries, highlighted that businesses need to focus upon ‘shared value’ by integrating their economic interest with interest of the society to promote sustainability.  This raised a question “Should companies bother about ‘social interest’ in their risk related decision making process?”

Risk management based on ‘shared value’ for all stakeholders considering social interest has a great potential in promoting sustainable practices. Perhaps, this can deal with the issues of ownership of risk. It is usually debated who owns the risk but it is hardly discussed to whom this risk belongs to.



Do Indian insurance market need a professional CRO forum?

In Finance, Legal, Risk Management, Uncategorized on January 18, 2016 at 3:01 am

Recently, I interviewed CRO’s and senior management of Indian and UK insurance companies and found that most of UK insurance companies CROs often discuss risk related matter locally every month and at least attend two international CRO forums/institutes such as GARP, IRM or CRO forums at London market every year. They have also attended many risk certifications and top risk trainings. Surprisingly, I found rarely any CRO in India discuss risk related matters at local level and very occasionally they attend international level forums.

Decision Making Process, Risk Management

A CRO forum is a group of professional risk managers and CRO developing and promoting industry best practices in risk management. It is a platform where CRO’s can join together and discuss their issues. Recently, there is an increase in financial investments by foreign partners of many Indian insurance companies such as Standard Life, Aviva, AXA, Tokio Marine and Bupa. Efficient risk management is one of the most crucial aspect by these giant foreign MNC’s. India is emerging insurance market and there is high potential for growth.

Insurance companies in India are managing risk in their own silos from long time. Currently, there is no common forum where insurance companies can discuss their problems in managing risk and improve awareness about emerging risks. A platform is needed where foundational information can be provided on how to adopt and implement robust risk frameworks. A common pool of funds needed for research for setting examples of best practices and learning from mistakes. Perhaps, a Centre for Risk Governance would be best option.

Risk management implementation has to be enhanced at local, national and international level but how that remains an open question. Visibility of benefits of improving risk management practices are not short-term. Without enough capital, training of senior management in risk management is practically impossible. In such scenario, a CRO forum can play a promising role in uplifting Indian insurance industry risk management expertise. This is a need of hour.

Building trust and sharing data pose another challenge. Does it risk the reputation of insurance companies? Think of positive side, if it could be possible to have a forum where we can discuss risk related issues, enhance risk capacities and embed risks into strategic decision making, it would be few of the most desired objective for the companies. This obviously, require a professionally managed CRO forum with independent governing body.

Kindly share your views.

Insurance Defined

In Finance, Insurance, Legal on May 3, 2012 at 8:05 am

Insurance is a form of risk management primarily used to hedge against the risk of contingent loss. Insurance is a contract between two parties where in exchange of premium, the risk is transferred from one party to another party.

Insurance classical definition

Insurance is an agreement where, for a stipulated payment called the premium, one party (the insurer) agrees to pay to the other a defined amount upon the occurrence of a specific loss.  The party who pays the amount to the party on occurrence of specified loss is called Insurer. The party who pays a stipulated payment is called Insured. A defined amount which insured pay to Insurer is called Premium.

Financial definition of Insurance

Insurance is the financial mechanism by which cost of unexpected loss is redistributed. Here, loss expenses transferred to insurance pool and loss is redistributed to the members of pool.

We see losses at many stages in our day to day life whether it is corporate or individual. Losses may be of high or low severity, may affect single or group of persons. It may involve single region or multiple region and even countries. Sometimes losses are too low which can be ignored but on the other hand, it can be so severe that it can eat up whole life saving of a person.

For example:

Let’s take an example of Fire insurance pool where losses are redistributed among masses.

In the Mumbai Trombay area, many oil refining and petroleum units have high risk of fire. They transfer their fire risk by paying Rs 50,000 in fire pool. In total 50 units agreed and pool reached to the (Rs 2500, 000). Fire broke out in one of the unit of Trombay area and it affected the one adjoining unit also which resulted loss of Rs 2500,000. Now loss expense of 2 units can be paid from fire insurance pool. If no insurance pool existed, the unfortunate victims will loose 2500,000. Here loss expense incurred by two units will be redistributed among 50 corporates.

Legal definition

Insurance definition under Indian law: “Insurance is legal contract where one party agrees to pay another party an agreed amount to compensate its unfortunate losses.” Here ‘amount’ is called premium and contract is called policy.