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Why Mis-selling is ruining industries

In Uncategorized on September 5, 2020 at 5:28 am
Misselling in health insurance and how to avoid being a victim - Turtlemint

Few days back, I have visited a public-sector and a private sector bank in Delhi. Surprisingly, when I get off my vehicle towards the bank, bank sales executives rushed towards me. Initially, I was too exhilarated with joy to observe executives’ excitement to serve the customer, but my happiness could not last long. They were not interested in offering any banking service to me. Instead, they found a new prey to sell insurance policies. Wittingly, they told me the new misleading rule of the bank that I can’t avail of any featured services of banks until I take an investment policy from them.

My initial conception was that bancassurance is a win-win situation for both banks and insurance companies as it is adding a revenue stream for banks in terms of incentives, while insurance companies has added a new channel of sales. My new experience was an eye-opener. I discussed it with few of my friends, they also faced the similar situation. I realized that it is the time when banks are going to book heavy losses. Whether realised or not, if banks will not focus on selling banking service to a customer and mis-sell insurance or investment products, they are doing some harm to themselves and doing permanent damage to the insurance industry. What motivated banks to pay more incentives to sell insurance policies than selling their own FDs and other services.

Another surprise to me is the institutionalization of bad practices. It is not the case of some banks, rather many others. Slowly and gradually, these malpractices become the norm of society, though unethical ones. I believe that the wrong incentivisation policy hurt the Indian banking industry. The driving force is the level of commission payments offered to sales staff for volume selling. The challenge lies in providing the right product in the right market. If I need COVID-19 policy, instead, I am being offered ULIP policies. Bank agents do not bother to explore customer needs. In addition, they force customers to buy something else, which is perhaps not needed. I am still intrigued to explore why mis-selling is not considered cheating/fraud when a customer is duped into gaining high incentives by an agent. Misrepresentation of facts is also common in mis-selling.

In laymen’s terms, mis-selling is generally observed when bank employees fail to act in the client’s best interest, provide inappropriate or wrong advice, fail to consider customer needs and circumstances to buy the policy, and mainly engage in low-risk profiling of customer. Selling of insurance policies should be ‘fair, clear, and non-misleading.’ In the financial industry, mis-selling has disastrous consequences. Every year, worldwide regulators fine numerous companies due to mis-selling. Some of the research found evidence that regulators’ fines and penalties make more damage (ten times) to the reputation of the company than actual financial loss.

Mis-selling is a result of the failure of risk governance at multiple levels. At the operational level, the sales executives have no concerns about the adverse implications of their actions on the company’s overall reputation, brand, and financial health. They think about their short-term incentives. In fact, in the current situation, following acceptable practices will lead to non-achievement of the sales target, resulting in job loss later for them.

Four years back, I had a brainstorming with the Chief Human Resource Officer (CHO) of the company about reasons for employee turnover. He told me that at that point, the company employed around 14000 employees, out of which 4000 are at the senior and middle level. The employee turnover per year for the rest 10,000 employees is 100%. That means that no employee is staying in the company for more than a year at the bottom of the pyramid. Think of what kind of value training will generate in this scenario.

At the strategic level, where is the oversight for these sales agreements? How is senior management ensuring that sales managers are taking care of due processes during sales? Where is the initiative to build customer trust? How executives follow ethical practices in marketing?

At the collective level, insurance companies and banks are considered to employ risk experts, underwriters, actuaries, and Chief Risk Officers. The adverse impact of bancassurance on banks and insurance companies was not evaluated yet despite expertise and capabilities.  

Cognition is essential to control mis-selling. Risk savvy workforce is needed to tackle the problem at the moment. Sales people should be given the opportunity to work for a shorter duration in risk management, claims management, and other departments on a rotation basis to understand different perspectives to sales. I have observed this trend in Germany. Agents should be taught the subject of mis-selling and relevant case studies to understand the long-term consequences of their actions.

Overall, the Insurance company’s sales policies need serious transformation at large.

The research argued that “the risk of mis-selling is particularly acute when the firm hires the same agents to both prospects for new customers and provide product advice.” The firms’ internal standards are in question for selling policies and advising customers. If steeper incentives are offered for sales representatives’ benefits, instead of customer benefits in the state of low regulatory fines, the mis-selling will persist longer.


Inderst, R., & Ottaviani, M. (2009). Misselling through agents. American Economic Review99(3), 883-908.

The Future of Health Risk at Workplace

In Uncategorized on March 20, 2020 at 11:23 am

The people-centric workplace is known for its good profits and higher growth. In contrast, many organisations favor progress of corporate scorecard inattentive to its impact on employee health scorecard. What is the future of health risk at workplace? Let’s understand this by some examples.

Hilton (USA) has been ranked at the number one workplace in Fortune 100 Best Companies to work for 2019. Hospitality at its core, Hilton offers one of the best guest services due to its unique team members. The company is a firm believer in investing in employees and team development for its best services. Clearly, Hilton is not in the business of social services; the differentiating factor is its unique strategy to serve customers. In 2019, Hilton generated approximately 9.5 billion dollars in revenue, significantly up from the last year (8.91 billion US dollars). The power of word of mouth for friendly staff and safe working environment worked wonders for the company. Words spread automatically by people, whether it is about employment conditions or customer service. Indirect benefits for low expenditure in advertising and enhanced brand building are, in general, not accounted in any balancesheet. This is all about creating an eco-system for higher performance of employees, but what about the wellbeing of employees.

workplace safety

Two years back, the impressive statement of Ex-Chairman of Sundaram Fasteners (part of the $7.2 billion TVS group) at annual conference of Entrepreneur Café at Chennai made a mark: an organisation is growing when its employees are growing along with corporate success. For example, buying a new house, education of children, their certification, and promotion. To sum up, employee associates their wellbeing with the company’s prosperity like a family. The value of an organisation should be imbibed in employee’s day to day life.

A few years back, when I was studying at University of Edinburgh Business School for my Ph.D, I came to know the concept of green footprints of business school. On average, students were used to walking more than 5 miles per day which is a far distant aim for students in India. They are working day and night to secure good marks and placement. Same is happening at corporate level. I observe very rarely attention is paid to student green footprints or employee footprints. Issues related to Cardiac arrest, blood sugar, obesity, and depression are at an all-time high. Recently, I have visited a few academic institutions and found many professors and senior executives are dying suddenly due to cardiac arrest and cancer, leaving all personal and corporate responsibilities in the lurch. That gives me an idea about the possibility of linking a healthier workplace and healthier lifestyle with a corporate scorecard in the future?

A recent attempt was the development of Worksite Health ScoreCard by CDC to establish benchmarks and track improvements (evaluation) over time. The aim was to assist employers and business coalitions to create healthier workplaces. Simultaneously, state or local health departments also can use the tool for monitoring worksite practices and track improvements in worksite health promotion programs over time to more effectively direct resources to support employers.

This idea can be utilised for not only to fulfill work and safety regulation, creating a better eco-system, but also for discounting insurance premiums and for preventive healthcare by state and national health insurance bodies such as Modicare in India or Medicare in the US. Though low cost, high access, data aggregation are an added advantage of this new approach, however, there could be some concerns related to the privacy of employees and misuse of data by companies. Nowadays, many companies are offering free health check-ups, dispensaries, along with medical insurance to their employees as a part of facilities in overall salary.

Nonetheless, issues in healthcare at the holistic level are still in silos. Health authorities at the state and national level are clueless, how to improvise quality of healthcare, increase access, reduce cost with an overall aim to improve health and wellbeing of society.

Imagine a different situation, when employers and states are no more able to handle the rising healthcare cost burden anymore. Insurance companies are also over-burdened and forced to charge so hefty premium that it may become unaffordable for the large population. What are the possibilities to deal with such kind of risk? Another situation, if a state knows that 75% of healthcare cost is due to preventable chronic conditions such as heart disease, cancer, stroke, chronic obstructive pulmonary disease (bronchitis, emphysema), and diabetes, what actions they should do?

Our corporate actions have great social impacts. Personal health is closely linked with Corporate HealthCard. Similarly, global Pandemics like COVID-19 present a live example about how social health risk is linked with our personal health risk. Management of health risk is essential for business. Good physical, mental, corporate and social health would be a performance driver in the future.


Loeppke, R., Edington, D. W., & Bég, S. (2010). Impact of the prevention plan on employee health risk reduction. Population health management13(5), 275-284.

Investment in a start-up is not a child’s play

In fraud, General, Risk, Uncategorized on September 24, 2019 at 3:25 am

80% -90% of Start-up businesses fail in the first few years of operations. Given this data, investment in a start-up is not a child’s play. Being a Ph.D. in risk management and having studied large institutions where the failure rate is far lesser, I was always intrigued about how angel investors calculate the risk of start-ups to make an investment decision. At the same time, it would be equally difficult for start-ups to convince the investors for their potential and ability to perform.

Recently I visited the University of Southampton for my research and met an interesting lady who was an angel investor with enormous funds to invest particularly in Ghana. My questions became specific as I heard the word ‘Ghana’. Why an angel investor wants to invest in Ghana only? What motivates her to take such a decision. Very soon, the lady revealed the reasons: one by one setting a story. She taught me investment risk in a unique way, which I cannot forget lifetime.

The lady had seven children, five dogs and two visiting foxes living with her in a beautiful house at London along with her husband, who was a medical practitioner. She said, “if you are a mom/dad, it is easy to understand what an investment in a start-up means. Consider your child as your angel investment and marriage of child as an exit for the investment. Investment in Ghana was not a new idea as for a parent from Ghana just wanted the child alike”.

Similar to a promoter-based company, when you invest in your child, it is full of optimism while if it is for others (start-ups), many times, investors are not that optimistic. The concerns are raised about principal risk, return risk, valuation risk, and many others. A company may not fail to deliver the promised product or fail. The returns will be variable in frequency, time, and amount. The main difference between the two situations is about trust why people tend to trust their own child than others.

Most often, start-up makes a mistake in demonstrating why investors can trust them and those who can demonstrate, most often receive the investment. To maintain that trust, they are required to answer some what if questions of angel investors which deals with risk management.

What is new about start-up: is it a product or a service? What is the start-up target market for the product? What if you don’t find a market for your product?

How will you make your product/service profitable? Show your business plan. What are the business objectives? What if you will face issues related to higher expenses, delays in projects, labor problems, license issues, stiff competition, and testing of the product.

What if you require funds over its existing cash resources to develop market capabilities?

How is management planning to execute the business for viability and success? What if you find that management is not enough experienced and expert in dealing with it?

 How you will manage fraud, and what are the controls? What if you find that the company’s management team is involved in fraud?

Further, I met another start-up business CEO who received large funding from angel investor by just showing how he can prepare the best British tea. Angel investor asked the start-up CEO how you will address the need of the British being Indian? He argued that he knows British culture, and taste better than British and can offer a British Tea. If he likes it, he will give him funding, if not, it’s okay. Eventually, he got the funding.

Investment in start-ups requires a fair understanding of the risk management and particularly two major aspects: how to develop trust and ability to answer what if questions. Remember, trust is developed first for the team; the product comes next. It is well said,

The first-rate team with a second-rate idea will always outperform a second-rate team with a first-rate idea.”
― Brian Cohen


Governance @ Distance

In board members, corporate governance, Finance, fraud, General, Management, Uncategorized on April 5, 2019 at 1:12 pm


Transparency, higher commitment, and independence are buzz words for good corporate governance. The role of independent directors plays an important role in Corporate governance to keep an eye on the board activities to flag off non-promoter group issues. However, the challenge is neither the independent directors get appropriate compulsory training to understand their roles and responsibilities in an organisation nor the appropriate data promptly to act upon effectively. Board has a limited duration to understand and reflect on issues. Sometimes the independent directors are from different industries and are not able to understand the context and indulge in granularities, though, diversity of thoughts may add significant value. Governance at distance is often seen where the board chairman leads the discussion and independent directors often distant from reality less engaged in a discussion.

According to recent Board Practice Report by Deloitte Centre for Board Effectiveness and Society for Corporate Governance, almost 80% of board members think that their primary focus is on company strategy, 42% attributes risk oversight as important and 29% focuses on board selection. To sum up, strategy formulation, risk oversight and board selection are three important roles of board. In this blog, I will talk about the issues related to the first two.

In the current business environment, the markets are turbulent more than ever. World over, not only regulators, every stakeholder such as partners, and creditor are accusing board if anything goes wrong in governance. Social media and newspapers have abundant stories of poor risk governance. A board strategy cannot be the same in normal, turbulent and crisis situations. Strategic change has become important for companies. Punjab National Bank (PNB) in India has recently faced one of the biggest frauds in history, and within a short period, the company’s board needs to change the strategy of the company to address the crisis. Not only the fraud affected the PNB strategy, but it also impacted the strategy of other banks in India and the global market. The strategies perfectly working in normal market conditions may not work in crisis situation. Are companies’ board trained and prepared to handle how to change the company’s strategy in normal, volatile and crisis situations?

Post-2008 crisis, the role of the board in enterprise-wide risk oversight has become challenging. No specific training is provided to the board to refresh their knowledge on the subject. Many companies still don’t know what are their key risks and issues in the management of risks. Surprisingly, directors don’t know their roles and responsibility in risk oversight. Understanding the inter-connectivity of risk is the next big challenge, and a very few companies are able to link risk management with strategy and compensation system. How the board of directors perform their duty in overseeing the executive decisions and how compensation structures and practices drive an executive’s risk-taking. Many such questions need to be answered.

Let us understand the logic of why the understanding of risk is paramount for the board for effective corporate governance. Shareholders want a higher return for higher risk and vice-a-versa. One of the roles of the board is to define the risk appetite (the amount and extent of risk the company is willing to take as promised to shareholders) in the company. The informal approach of risk management will bring several surprises in the organization and may hinder the fulfillment of organisational objectives. To deal with the situation, the board needs to effectively oversee the organisation key risks holistically and disclose them to shareholder at appropriate times so that value at risk can be calculated. The only quantification of risk exposure will not suffice; the quality of risk-taking directly impacts the profitability of a company. Quality of risk profile also needs a significant attention. Balancing the risk while adding value to the organisation is only possible when risk management is well understood by board, implemented in a formal way and linked to the organisational strategy.

I strongly believe that the board should get a refresher course or a certificate course to carry out their duties effectively. Governance at a distance is not working. Categorization of risks in market risks, operational risk, and strategic risk has become bizarre and mundane.  Helicopter view of risk for oversight has become unacceptable as stakeholders want to understand what were the key risks of the organisation last year, whether risks are increasing or decreasing and the reasons behind them. Higher interaction and participation of the board by probing questions will certainly enhance the current state of governance. Higher engagement of the board is the key to good governance.

Understanding ‘Conflict of Interest’ is need of hour in India

In Banking, corporate governance, fraud, Insurance, Legal, Management, Uncategorized on December 23, 2018 at 3:57 am


I was not really shocked to read another issue of conflict-of-interest for Bank of Maharashtra after Chanda Kochhar case at ICICI Bank. Conflict of interest issues has been discussed for several years in news and media. Banking than insurance industry have more examples to such nature, though in the government we have seen examples where lawmakers have taken up roles resulting in the conflict-of-interest. This is because Insurance regulator in India has mentioned it specifically in Corporate Governance Guidelines that Conflict of interest and nature of interest should be defined, yet banking regulator is lagging behind. RBI guidelines indicated that there should be no conflict of interest but do not indicate ‘how to identify and take actions’ for such activities. Conflict of interest arises when a board member takes the strategic decision considering personal interest. Board members of all significant MNC’s in the global market place have to sign either ethical framework/Compliance guidelines or follow conflict of interest policy.

There is a desperate need of Conflict of Interest policy for Indian banking system. Ideally, it should be at all levels in the organisation  from managers to board members. For example, In some cases in India, bank managers are receiving more incentives than their salaries for selling insurance policies which divert their attention from selling banking products. Technically, insurance policies are sold by both banks and insurance companies while banking products are not even sold by their core employees, why? Why not introduce reverse bancassurance where insurance companies can also offer banking products. The reason is ‘KYC’. Some practitioners argue that banks know their customer more than insurance companies. Others argue that in a bank, customers receive money, while in insurance companies they pay money. The differentiation in the quality of agents between banks and insurance also sets the increased expectations. In a bank, a top MBA graduate joins as manager while in insurance companies they do not pay such salary at managerial level. Instead, I saw a reverse trend of hiring graduates in banking following insurance industry to lower the cost.

How do banks promote their products when half of the time banking executives spend on selling insurance? They cannot ignore banking services but what they can easily overlook is controls. Another conflict of interest arises related to favoritism by CMD of banks or CMD of insurance companies: who can question them. In case of banks, it could be a case of favouritism in granting new loans or extending the existing loans which may, later on, turn as NPA while in case of insurance companies, it may be a market investment to gain personal benefits.

What is a Conflict of Interest Policy?

A Conflict of Interest policy can be prepared by the Corporate legal department and must be signed by all board members at the first organizational board meeting. It should be mandated that no board member should be allowed to serve without signing this policy. It includes fiduciary duties (considering organizational interest for financial and legal matters), the duty of loyalty (putting board responsibilities for outside interests), and duty of confidentiality ( keeping how key business will deal with private information). Moreover, it should define the key definition about ‘interested person’ and ‘financial interest,’ duty to disclose and procedures for addressing conflict of interest for board and individuals. The process of deriving reasonable cause to show the violation of conflict of interest should also be discussed. Some questions like how compensation of director will impact the board quality of discussion. There is a requirement of the annual review of conflict of interest policy, the disclosure of outside interests and re-signing of the policy.

Worldwide, Conflict of Interest issue is not resolved in good faith. Recently, I have met Group CROs and senior executives of German Insurance Companies and regulator. The regulatory board in Germany and their staff have to sign an ethical framework compulsorily. The logic behind signing an ethical framework is that every employee in the organization takes the responsibility of disclosure of conflict of interest. This also depicts their promise of not engaging in any such activity. Thus, conflict of interest can be reduced by promoting a cognitive risk culture where everyone understands the risk of conflict of interest and their associated role in dealing with the risks.  India may follow German market for good practices to deal with the emerging issue of ‘Conflict of Interest’.

comments welcome !

Why Good Risk Governance is essential for firms?

In Uncategorized on October 15, 2016 at 5:56 pm

“ Behind a successful man, there is a great woman” – Famous saying

We can also say that the success of a business is based on good risk governance. Risk and governance are inseparable in current dynamic business environment, and when together adds beauty to social life as well as personal life . In fact, good risk governance acts like a mature woman in providing oversight and guidance on major business decision involved based on their inter-disciplinary experience, and knowledge. Business values are set similar to the foundations of value system in a house.

Failure of governance is one of the major causes of insolvency of companies in the last few decades. Developed countries such as UK are considered to be proficient in developing risk governance than the developing countries. Controlling risk and uncertainty is painful, perhaps combating all of risk and uncertainty with 100% success rate is extremely challenging. Do we understand the reasons why it is so? There are few ideas:

  • Doing nothing and believe in fate;
  • Learn risk governance and implement it ;
  • Implement a well-developed risk governance framework by experience professionals
  • Join a foundation course or read a book on risk governance and then implement it and for mature practice hire experts.


This is only applicable when we at least understand the value of good risk governance.

Is it possible to run an enterprise whether it is large or small without setting formal risk oversight, processes, risk limits and controls? It is very clear that diffusion of risk governance (governance related to risk related matters) across countries is very divergent due to different understanding  and the way it is implemented. There is no standard format to implement risk governance. Without foundational understanding of the concept, trial/error is not a prudent option at early stages however, affording high cost of enrolling experts pose financial challenge.

Tremendous governance gaps are overlooked from decades. Risk is like belief in death, we always know there is death but whether we will die, may be that’s not acceptable notion. Similarly, none of us are worried because we always think – it will happen to others and not to us. Risk issues that are relevant for the corporate board may not hold true for the committees. There is a significant gap in the understanding, communicating and especially in dealing with the risk. One of the major aims of risk governance is to reduce surprises in the organisation by understanding current risk, anticipating future risks and developing systems with enough resilience so as to demonstrate good risk governance practices. In reality, inclusion/exclusion of a single risk such as cyber security takes considerable time and effort. Further, not upgrading information systems to track, monitor and integrate risk raised  tensions. There are many unanswered questions:

To handle this, we need risk specialists in the board who can make independent internal controls. Board level risk committees are common.

  • Are these committees have enough understanding of risk or situation is like ‘a blind man is leading another blind’ ?

Tone at the top tolerates exceptions, complacency, and unequal treatment which should not ideally be considered.

  • What are the limits of these exceptions?
  • How much corporate frauds can be tolerated? Who is responsible?
  • Does blame game actually works?

There is no state of urgency of implementing good risk governance. It is a lousy, multi-year process with no reward. The benefits of good governance are always visible in bad times. However, in good times, it is considered as a compliance or administrative burden which has reflected in more tick-box approach rather than actual implementation. It is the ethical, behavioural and moral conducts of a woman which makes a woman ‘great’ not simply the beauty. Definition of great woman varies significantly so do the definition of good risk governance but both of them surely protect from a ‘fall’ and motivates for a ‘rise’ in personal life and business environment. Thats what risk governance means to us in practice.

Your comments are welcome.


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.

Why Understanding of Risk Management is Important for Managers?

In Uncategorized on September 17, 2015 at 4:25 am

Understanding of risk is complex which scare people to develop its understanding. Michael Power, Professor of London School of Economics (LSE), has brought attention to different boundaries of risk management from ‘Risk Management of nothing’ to ‘Risk Management of Everything’. This can be interpreted: one cannot totally avoid the risk management and cannot claim to include all existing risk. Inclusion and exclusion of risk depends upon the understanding of risk itself within management.

In this blog, first I will discuss what a manager is supposed to do and why he/she faces dilemmas in management of risks. Then how those dilemmas can be tackled through better understanding of risk management.

A manager does not supposed to do all work by himself/herself rather he/she engage in planning, organising, directing and controlling. The management major role is to enhance motivation of the team to deliver work in timely and effective manner with agreed quality to achieve organisational objectives.

Risk navigation can be a tight rope walk

Several questions arise when management process actually followed during practice at grassroot level.

  1. How to estimate the risks during planning of management activities
  2. How to organise work so that it can get complete on time with agreed quality without operational errors?
  3. If I pass on the information to my colleagues, how I will make sure it is understood same and performed in the same manner as directed?
  4. There is a likely chances of realizing a gap between the expectation set and the actual results? How to control the risk to achieve organisational objectives?

Management knowledge of risk should not only confined to resolving dilemmas but also to enhance strategies. A better planning, organising, directing and controlling can only be achieved if management understand their own risks. For example, if a company would like to construct a building and have experience of 5 years. The company recorded its own risks for example 100 risks related to construction in particular geography and use industry risk data. This company can better estimate the risk from a new company in the market having no experience of handling construction risks.

All companies face operational errors whether they are large or small. Understanding of the operational risks can make safety systems more profound and robust to deal with possible errors. It is observed that corrections of errors do not pose much issues rather repetition of errors make blunders and cause failures.

The understanding of risks also support managers to grow in their career path. Board of the director, CEO of the company has to deal with risks at strategic level which have higher impact though, general management has to face only day to day risks. Expectation of understanding of risk from an agent of the company and director would be substantially different. Risk Management is an important part of Management at all level and cannot be separated. Don’t, get frighten from risk just learn to deal with it, the benefits will follow you.

“A ship is always safe at the shore – but that is NOT what it is built for.” – Albert Einstein

Multiple Interpretation of Risk and Uncertainty

In Uncategorized on March 5, 2015 at 3:28 pm

Risk deals with syndrome of multiple interpretations and boundary less. Through this blog, I would like to clarify few terms associated with risk and uncertainty.  

Risk and loss: We usually relate risk with loss.  Loss is a common experience that can be encountered many times during a lifetime by losing someone or something or that result in disadvantage. A common difference between a loss and risk is former results only in negative consequence while risk may have positive or negative consequences though, people often forget benefits out of taking good risks.

Perils and Hazard:  Hazard arises from the material, operational, or occupational characteristics of an insured property. It is a substance for which there is valid evidence that it is combustible, compressed, and explosive or water (moisture) reactive. Though, a peril is something that can cause a loss. Examples include falling, crashing your car, fire and lightning while a hazard is any condition or situation that makes it more likely that a peril will occur.

A hazard may be Physical hazards, like smoking, or skydiving or Moral hazards (most of which are avoidable), like dishonesty for example burning down the stocks in the godown when your company goes bankrupt to collect insurance money or buying insurance on someone with yourself as beneficiary and then killing them or Morale hazards, like a careless attitude since “insurance will pay for it.” Simply put, hazards are the circumstances or source of potential damage whereas peril is a serious or immediate danger.

Insurance companies deals with small, medium and large risk of individuals and corporate. They use plethora of such terms very frequently which is often confused by many. A most classic example is “what is difference between risk and uncertainty”.  Insurance companies are happy to insure predictable risk which should not certainly happen.  

Interpretation 1:  Unpredictable risk cannot be insured. 

Interpretation 1: Unpredictable risk cannot be insured

Interpretation 2:  An uncertainty is insurable or not? For example natural disaster are predictable and unpredictable both – so, some are insured whereas all cannot be insured.

Interpretation 3: The risk which will certainly occur after a period of time or after an event, is also not insurable.

Interpretation 4: Risk has its own characteristics so do the loss.

Interpretation 5: Insurance is more dependent upon perils though, premium rate varies significantly on the basis of hazards.

There can be many more. Understanding of risk and uncertainty is highly debatable so do its measurability and immeasurability. A possible reason for multiple interpretation can be Risk viewed from multiple perspectives. This makes subject interesting however, it appears more complex if seen holistically.

Does Enterprise Risk Management add any value to traditional risk management?

In Uncategorized on April 27, 2014 at 12:06 pm

There has always been a debate over the requirement of ERM specialist when the same work can be done by a risk manager in traditional organisations.  The debate poses questions in our mind – Does ERM make any sense in cost benefit analysis? and How to check that risk is truly embedded in the organisation?

There is high cost, time and money involved in implementation of ERM while under traditional risk management, each unit manager is responsible to manage their own unit risk.  Traditional risk management does not provide interaction among the various risks which is seriously reflected in corporate decision making. It is a small example of how corporate fails if they don’t understand the problems and risks within their own units. This lead to genesis of idea of ‘Enterprise Risk Management’. ERM is an umbrella term which considers all risks in the organisation in holistic manner and helps companies to achieve their objectives within their risk appetite.

The next question that needed to be addressed is What is the right time to implement ERM? The industry realize the value of ERM only in hard times when some CAT event happen, or major regulatory penalty occur. These event wipe out major reserve of the insurance companies if not adequate risk management has been taken care of.  In hard market, the corporates have no money or very less money to spend on procedure for implementation of ERM, so, it is only the good time (soft market), when companies can invest on implementation of ERM.

In the last few weeks, I have visited many insurance companies in Indian insurance market and found that they are still in the position of understanding the value of ERM.  ERM has only positive and negative aspect – if perceived value of ERM is not understood, it will be looked certainly as a cost to the company and if understood it creates efficiency and reduce cost. The common and most adopted approach is defensive approach to tick mark the risk management options which is required by the regulatory bodies. Other developed markets have learnt their lessons in recent financial crisis and realized the value of ERM but now they face problem of understanding of ERM and benchmarking. My next blog will discuss the stages of development of risk management throughout the world. 

Feel free to contact me for any consultation or discussion of ERM in your organization. “ruchi(dot)agarwal at-the-rate”