Contract Certainty, Governance & Risk – Thoughts from a Leader: Mr. Sandeep Phadnis (Happenings@RQBE, Issue 29).

Our guest’s expertise ranges from governance and compliance to the full spectrum of risk, including risk transfer. He has a rare feather in his cap. A hands on experience in Liability class policy wordings. A true champion of Contract Certainty!

Mr. Sandeep Phadnis has 25 years’ professional experience in Corporate Secretarial & Legal functions.  He is Head Secretarial at Kirloskar Brothers Limited, an iconic 130 year old brand. Mr. Phadnis is an Associate member at both The Institute of Company Secretaries of India and The Institute of Chartered Secretaries & Administrators, UK. 

He sits on the Boards of Karad Projects and Motors Limited, The Kolhapur Steel Limited, SPP Pumps Inc. and Syncroflo Inc., Atlanta.

Our guest’s expertise ranges from governance and compliance to the full spectrum of risk, including risk transfer. He has a rare feather in his cap. A hands on experience in Liability class policy wordings. A true champion of Contract Certainty!

Mr. Sandeep Phadnis has 25 years’ professional experience in Corporate Secretarial & Legal functions.  He is Head Secretarial at Kirloskar Brothers Limited, an iconic 130 year old brand. Mr. Phadnis is an Associate member at both The Institute of Company Secretaries of India and The Institute of Chartered Secretaries & Administrators, UK. 

He sits on the Boards of Karad Projects and Motors Limited, The Kolhapur Steel Limited, SPP Pumps Inc. and Syncroflo Inc., Atlanta.

Q: What makes policy wordings particularly of a specialist insurance offering unique?

A: Insurance policies, for long, have been worded by the lawyers in our country. These used to be typically health, vehicle, marine and life contracts. With the advent of special insurance products, the need was felt to have specialists for insurance policy wordings.

The specialist insurance products are offered by insurers so as to suit the needs of the customers, which may deviate from the standard products. Most of the times, such policies are customized to suit the specific needs. In such cases, the policy wordings play a very significant role. The wordings in such cases should hit the balance between the customers’ expectations, the insurer’s offerings and the regulatory provisions. It is not an easy task to satisfy all the stakeholders and that’s where the policy wordings play a crucial role.

Q: Can contract structure be a differentiator in the sense that it is explicit and there is no room for ambiguity?

A: An insurance contract is an arrangement in which one party, the insurer, accepts significant insurance risk from another party, the policyholder, to compensate the policyholder if a specific uncertain future event impacts the policyholder for a defined consideration called insurance premium.

Taking forward what I have said in the answer to earlier question, I feel it is very important to have the insurance policy drafted by an expert. It has to be explicit and there should be no room for different interpretation as it has the potential to lead the same to litigation. The policy ought to be read in toto to derive the correct meaning. One cannot read the wording in isolation. These need to be read and understood in both letter and spirit. For which it is essential that the policy is structured properly with no ambiguity.

Q: Should consumers of complex insurance solutions invest in better understanding of coverage wordings?

A: The complex insurance policies entail high amount of premium. And in that case it is pertinent that the consumer understands what he is getting in return. Not many consumers are yet investing in the better understanding of insurance contracts.

There are insurance brokers who have the expertise in insurance policy wordings and provide these services to the consumers. However, it is always better to have an in house expert who understands the policy wordings and knows not only the agreed terms but also what is going on within that can impact the policy in future. Probably broker may not have access to this.

Q: Do you get a sense that customers here are beginning to value quality of coverage rather than price alone?

A: Earlier days, consumers used to care only for insurance premium rather than coverage. So it was quantity over quality. They were not much concerned about what they were getting in return. It was mostly governed by the thought that I have done my job by paying the lowest possible premium for the insurance cover without really bothering about what all they got in return.

With many private players entering the insurance arena, there is already a lot of competition in place. And actually insurance has become a ‘sector’ to recognize. People have started realizing that it is a Buyer’s market. With resulting growing awareness customers have started realizing the importance of quality of offerings. They do expect a lot of value added services rather than just the product. This is what is keeping the insurance industry on its toes continuously.

Q: What in your mind needs to be done to ensure ‘contract certainty’ comes of age in our market?

A: Contract certainty is achieved by the complete and final agreement of all terms between the insured and insurer before inception. The full wordings need to be agreed before the parties formally commit to the contract of insurance. I feel there should be a Code of Conduct, which can act as a Charter document while ensuring contract certainty. The Code may make it mandatory that the policy wordings or a term sheet is shared with the consumer before inception of the insurance contract.

Q: Do you believe risk transfer involving reputational risks is part and parcel of an organisation’s governance process?

A:  I believe that a major challenge for businesses worldwide today is getting ready for the unexpected. While preparing the risk mitigation plan, often reputational risk is overlooked or underestimated. Risk management is a part of the governance process and it also entails transfer of risk. The insurable risks can be transferred to insurers. However, reputational risk and evaluation of loss of reputation is difficult to quantify and transfer. The consumers have to manage these risks on their own. The slightest error, whether unintentional or intentional, can not only quickly escalate into a major incident that causes damage to the reputation but also causes damage to the resources at hand. While designing the Governance process, the attention also needs to be paid to the reputational risk and mitigation plan for the same.

Q: As a Key Management Person (KMP) and ‘gatekeeper of governance’ do you believe a Company Secretary rather than the CFO will increasingly be the key decision maker in risk transfer?

A: I have always believed that the roles of Company Secretary and the Chief Financial Officer complement each other. They both are KMPs and have very important roles to play. While CS is nominated as a Compliance Officer, the CFO also has to pay attention to various compliances as well. The CFO has a good understanding of the financial implications of any decision on the business whereas the CS can evaluate the regulatory and contractual aspects of a decision. Because of this, I feel that these two positions should jointly be the key decision makers in risk management process.

Q:  Given your experience as a director on boards across the world, what are your thoughts on a) Level of governance at Indian boards vis-à-vis rest of the world? b) Is the role of independent director on Indian boards getting more onerous?

A. I have been fortunate to receive exposure to the Boards of companies in other countries and their proceedings. The Governance level in Indian companies that I have worked were always at par with the global standards. More or less the governance requirements all over are similar, some are more stringent abroad. Because of Clause 49 of the erstwhile Listing Agreement, all listed Indian entities were following good governance norms. With that many unlisted Indian entities also started following these norms voluntarily.

Today the independent director’s role has become more challenging due to intense scrutiny from stakeholders, greater demands imposed by regulatory requirements and an increase in overall complexity of the business environment in which corporates function. The rights and wrongs of these provisions including the extent to which the law should prescribe the corporate governance practices is a subject matter of intense debate in the Corporate World and its policy makers.