September 2001 | Alok Agarwal

On the premium track

The underwriting is on the wall as far as Tata AIG General Insurance is concerned: cut down on risks and costs while offering top-quality products and service to make the most of a market full of potential and possibilities. We profile a company which believes in the safety-first route to success

It is the nature of new-borns to take random risks. Not so Tata AIG General Insurance, the seven-month old joint venture that has brought the Tatas and the American International Group Inc together. For Tata AIG, new players in an old business, safety is the foundation on which it hopes to cement success in the non-life insurance segment.

But swearing by safety is only the first step of a mission whose ultimate goal is to win the trust and confidence of customers and, thereby, become an entrenched, long-term competitor in a sector that is currently among the most dynamic in the country. Innovative products and seamless service, driven by customised technology, are what Tata AIG says it will deliver to realise its ambitions.

Given the impeccable credentials of its two partners, that is an objective well within the company's reach. AIG, headquartered in the United States and with a presence in 130 countries, is the only insurance company in the world that has continuously posted underwriting profits in the non-life category for the last eight years. As for the Tata group, a little known fact should put matters in perspective: it pioneered the insurance business in the country by setting up the hugely successful New India Assurance way back in 1919.

Important as they are, reputations alone won't win the day for Tata AIG. Building customer confidence and thereby growing slowly and steadily is what it is aiming at. "We do not want to be the largest or the biggest or any such thing, nor do we want to make huge profits," says V Krishnan, vice president, agency operations. "We just want to keep our word year after year, we want to grow steadily but surely, and we want to post quality profits. The idea is to under-promise but over-perform."

This is where the safety equation comes into play. The emphasis is on ensuring that the customer feels he is in secure hands, as well as taking clear-cut underwriting options. "Our underwriting choices are strict," says Mr Krishnan. "We do not even insure trucks; that's how safe we play it. Our claim rate will top out at 54 per cent. Other companies may be doing 80 or even 90 per cent but thats their decision. We will take cases on our own terms."

It is this same 'play safe' policy which has made Tata AIG cut down on risk where reinsurance is concerned, even though it may mean relatively smaller margins. "Profits can be easily ramped up by compromising on your reinsurance programme but we are not doing that," explains Mr Krishnan.

That means a gross margin of only 3 per cent for Tata AIG to manage all its costs. Whats left over will be its underwriting profit, the amount arrived at after deducting expenses and claims from premiums. This is the vital bit most insurance companies see little of and Indian non-life insurance companies none at all.

Underwriting profits are conspicuous by their absence from the balance sheets of the country's non-life insurance concerns. Taken together, National Insurance, New India Assurance, Oriental Insurance, United India Insurance and General Insurance posted a profit of Rs1,273 crore in 2000, but this amount came from investments. The companies suffered an underwriting loss of Rs1,215 crore, which means they did not make any operating profits at all. The situation has been the same for the last six years and profits have accrued from investment activities only.

AIG, on the other hand, has a strong record when it comes to making underwriting profits in the non-life category. Tata AIG intends to follow the same philosophy while banking on the experience and expertise of AIG and the financial and brand muscle of the Tata group (almost 75 per cent of Tata AIG's equity of Rs125 crore has been put up by the Tatas).

Tata AIG will need all the strength it can garner to realise its aims. Competition for places in the non-life insurance sun is certain to be fierce. Though the company was the first off the private-sector blocks, the blue-chip pack behind it has joined the battle in right earnest. Reliance General Insurance, Bajaj Alliance, Royal Sundaram Alliance and ICICI Lombard have already joined the fray and other big names are preparing to do so.

Dalip Verma

The quality of the opposition aside, talking about profits is a bit premature at this stage. Tata AIG expects to break even only after four years, and post positive cash flows from the fifth year onwards. Given the odds, is the business really worth being in? Managing director Dalip Verma has no doubts. "Insurance is the most under-tapped sector in India," he says. "Insurance is the future."

Mr Verma should know, having spent his entire working life in New India Assurance before joining AIG in 1996. The Indian insurance sector was then on the threshold of being opened up. International insurance giants were setting up shop in the country and scouting around for domestic partners. The Tata group, considering its experience in the field and the respectability its name commands across the world, was a natural choice for AIG to link up with.

"The Tata name evokes trust in the minds of people, a characteristic so essential in the insurance business," says Mr Krishnan, another New India Assurance product who joined AIG. The two, along with Arun Agarwal, vice president (commercial lines), were instrumental in bringing AIG and the Tatas together to launch the new venture, which got going on January 11 this year with commercial operations beginning in April.

Nobody questions the size and potential of the Indian non-life insurance market. Tapping this market is what Tata AIG is gearing itself up for. Clearly, technology will be a key factor in the company's strategy but equal importance is being given to people, products, distribution networks, efficient service, staff training and, not the least, costs.

Cost control is, in fact, to be the top priority. Says Mr Krishnan: "Delaying settlement claims and playing with reinsurance are the two simplest and most common methods adopted by insurance companies to boost profits. But we are not doing either of these. Instead, we have decided to keep a check on other costs. State-run insurance companies incur almost 23 per cent of their total costs on management expenses. We will peg ours at about 9 per cent."

The backbone of Tata AIG's game plan is a technological framework that the company has spent about Rs15 crore to put in place. Says Mr Verma: "We have brought in AIG's proprietary system, which has been customised to India's requirements in association with Tata Consultancy Services. Our entire data and operations are computerised and online." The Tata AIG data centre, called the "brain and nerve" hub by Mr Verma, is a fire-proof marvel of technology.

Tata AIG currently has six completely networked branches, one each in Mumbai, Delhi, Chennai, Kolkata, Hyderabad and Bangalore. The company plans to add six more branches, in Chandigarh, Pune, Ahmedabad, Cochin and Guwahati, by the end of the year. The six branches already established have a staff strength of about 160 people; the next six will need an additional 30 to 40 people only.

More than the numbers, Tata AIG is betting on its system to bring home the bacon. "Our system allows us to work faster," says Mr Verma. "It helps us to get more customers, enables us to contact them easily and our turnaround time is very quick. Ultimately it is client servicing which will separate the men from the boys." The company has hired a mix of insurance as well as non-insurance people committed to providing a level of service that is focused on the customer.

That kind of service has resulted in, says Mr Verma, Tata AIG being able to settle motor vehicle claims within 24 hours. "Normally companies take anything between one to six months [to settle such claims]. In the United States, motor vehicle claims get settled in 38 minutes. We are striving to get there."

Auto Insurance

Where Tata AIG, like other private players, lags behind its state-run competitors is in distribution and reach, both crucial in a retail-centric business like insurance. The big five state agencies have 8,000 branches at their command. Tata AIG's distribution network is, in comparison, quite small. Mr Verma acknowledges the drawback and has already drawn up a strategy to overcome it: "Distribution channels are not developed for a new entrant. This is the challenge and we are employing non-traditional methods, like tele-marketing and direct marketing, to increase our reach and penetration."

Tata AIG has hired about 500 agents, all on a commission basis, and that figure is likely to go up to 1,000 by the end of March 2002. "This is where technology comes into play," says Mr Krishnan. "Our systems will help us improve our reach and penetration. The idea is to empower our intermediaries. Our agent in, say, Kolhapur, can sell or issue policies from there through the Internet even at midnight."

While distribution reach, training and the like can be controlled by the company, falling tariff rates in the non-regulated sector are another matter. Mr Verma, though, is in favour of it because this will go a long way in expanding the market. The Tata AIG managing director feels that since tariff rates are fixed by the Tariff Advisory Committee, Indian consumers end up paying more than people in other countries. "Lower premiums will result in higher volumes, which is a win-win situation for the consumer as well as the company."

Tata AIG has a wide range of products in its basket and it is the simplicity and customisation of these products that the company hopes will attract customers. "We craft policies which are meaningful to the customer," says Mr Krishnan. "It should add value to his requirements. It should not be like a readymade shirt that I tell him to wear."

The idea is to make procedures as plain as possible. Whereas state companies require prospective customers to pass a medical exam before they can buy a policy, all that Tata AIG requires its customers to do is answer three questions. Once this is done and other conditions are satisfied, the agent can issue the policy from his computer in a matter of minutes by connecting to the company's website.

A strong connection is what Tata AIG intends to establish in the days to come as it endeavours to scoop up a significant share from the potential goldmine that is the Indian insurance business.