The day of the risk manager is dawning

Is an insurance policy the be all and end all of managing various risks? "No. Actually, insurance or risk transfer is a part of a company's overall risk management function," says S.V. Mony, director India, GIO Australia Holdings and former chairman, General Insurance Corporation of India (GIC).

With the government taking its own time to pass the Insurance Regulatory and Development Authority (IRDA) Bill, Indian corporates who have signed MOUs with foreign insurance majors, including Cholamandalam Guardian Risk Services Ltd, Tata-AIG, Alphic Allianz and GIO Sanmar Risk Management Services, have decided to use the interim period fruitfully, by offering risk management services to Indian corporates.

What has helped them is the strict enforcement of environment laws that has forced domestic corporates to invest a fortune in installation of safety equipment. As a result, the corporate sector naturally began to take a hard look at their insurance premium outgo. Their logic being, increased safety means reduced accident risk and it should be reflected by savings in premium without compromising on risk cover.

Says Rajan Narayanan, executive vice president, Mahindra & Mahindra, Mumbai, "As a part of our cost cutting strategy, we reduced our insurance premium outgo by investing in safety equipment like installation of fire hydrant systems, which is a one-time expenditure, and availed higher discounts on our fire insurance premium."

Similarly, after studying the cost:benefit ratio of insuring the incoming materials from vendor's plant, Mahindra & Mahindra forced its transporters to take extra care while transporting its consignments. In the process, the auto major stopped buying transit insurance policies.

Given this situation, the question that arises is: are risk managers the spoilsports of the insurer's party? "Risk managers are not the underwriter's spoilsports. On the other hand, risk managers, in real terms, increase the premium income and profitability of the underwriters by proper and adequate coverage, coupled with reduced incidence of claims owing to strict loss control measures," argues S. Balachander, president, GIO Sanmar Risk Management Services, a 51:49 joint venture between the Chennai-based Sanmar group and GIO Australia Holdings.

Further, risk management is not a mere premium saving device. It is a science and needs a lot of engineering and finance talents to assess the probability of risks and ruins, adds Mony. Nevertheless, in the Indian context, he agrees that premium reduction is the carrot which Indian companies are made to get interested in risk management services. Given that the risk profile is highly complex today, several corporates have realised that risk management is a management function rather than a line function.

Gone are the days when corporate the sector took out an insurance policy at the insistence of its lender or insurance agent. Today, companies buy insurance as a last resort after exhausting other loss minimisation efforts. As to what risk management really is, it is a process of indentifying, evaluating, controlling, retaining and transferring of risks to which a company's assets/personnel are exposed. While it may sound more like a safety-oriented and line function, the truth is that the risk managers also take into account the financial implication and the future business plans of the company.

After identification of probable hazards, evaluating their occurrence frequency and the severity and the measures of avoidance of loss-making events, the crucial function of a risk manager comes in deciding the retention level, analysing the cost benefit ratio vis a vis transferring the risk for a charge to a third party/insurer, explains Mony. The risk manager also draws up disaster management plans. "With effective risk management, organisations can achieve better profitability and productivity resulting from fewer interruptions," says Mony.

According to a risk manager, Indian companies are insuring their assets only to the extent of 70 per cent of their insurable value, which will hinder smooth settlement of claim due to the operation of `average clause' in an insurance contract.

Says an official of Cholamandalam Guardian Risk Services, "The market for our services is picking up fast." GIO Sanmar Risk Management Services has bagged about 15 accounts in a matter of two months. According to Balachander, the potential is more in case of medium scale industries. Awareness about risk management services is high amongst high-risk industries such as petrochemicals, refineries, chemicals, consumer durables, electronics and telecom.

Most of the services offered in risk management have been more in evidence over the past two years, too short a time to really judge their potential. One of the reasons for this service not gaining popularity earlier, as it did in developed countries is that overseas, insurers are reluctant to issue policies -- fire/personnel --without large `deductibles'. That is, the insured is forced to bear a good sum to the loss and only those losses over and above a specified limit will be reimbursed by the insurers. This forced the corporates there to go in for risk management services in a big way. But in India, till date, general insurance is a state monopoly with straightjacket policies. As a result, there is no incentive for the corporate sector to manage its risks effectively.

Says T. Ramanan, group controller - risk management, Hindustan Lever and chairman, The Indian Institute of Insurance and Risk Management, "We can see two kinds of approaches to insurance from Indian corporates. The first is the head-in-the-sand approach -- to view insurance as a cruel financial necessity or a necessary evil. Due to ignorance, insurance is arranged for lesser sums. The second approach is, insure everything in sight. This is dangerous in that a sense of false security is implanted at all levels of management because of omnibus protection."

According to him, IRDA can give direction and impetus to this new profession by:
(a) bringing the risk management examinations to India
(b) set up standards of qualifications, both theoretical and practical, so that this profession is encouraged in the corporate sector. He is also in favour of all activities being conducted by the various institutions on risk management being merged to an apex body.