The Diversity Blog

Where could healthcare be headed? Coming from a time when there was no health insurance and in fact if there was one it was for the livestock! Brave New World  (Aldous Huxely) and Future Shock (Alvin Toffler) had in particular stimulated my imagination. Thanks to origins in a medical family, there lay several influencers. One was surely the Journal of American College of Surgeons! Courtesy my father, who is their Fellow. It would generally carry interesting insights into medical malpractice including debates on tort reform in healthcare. To me, ever since, healthcare and tort go hand in hand. Two recent authors in particular have been a further influence. Antifragile by Nassem Taleb – he makes frontal attacks on how modern medicine may do more harm than good and The Signal and the Noise by Nate Silver. Nate’s focus is on politics, baseball, basketball, poker, hurricanes, global warming, stock market and Capitol Hill.

Nate talks about how being smarter about the future helps us make better decisions in the present? He reminds forecasters to stay motivated by truth rather than by politics and thereby notice a thousand little details that bring them closer to it. Because of these attitudes he believes, they can distinguish the signal from the noise. With everything from the health of the global economy to our ability to fight disease dependent on the quality of our predictions, Nate Silver’s insights are an essential read. In my presentation I endeavour to sift through some of the trends in the world of healthcare and seek help in separating the signals from the noise.

Not many of us realise that when we visit a hospital – while we may get cured of what got us there – we may, however, have contracted another disease. It could also be a side effect of a medicine administered or a combination of a procedure and the medicine. An unintended consequence or Iatrogenics! Are there insurance policies which would cover not only the hospitalisation or treatment expenses and the harmful consequences of hospitalisation, as well? It may then not just stop with Iatrogenics. What about defensive medicine? Underwriters may run into mind blocks of their own creation. A tort component to an existing health cover may be described as a combo of first and third party covers!

Recently, while addressing a predominant group of actuaries, I tried moving their cheese! But these are two different triggers, responded one of them. To my response – don’t they converge- there was an utter silence. While tort has been long embedded in the Indian jurisprudence, we blissfully stay clear – believing that we have some kind of arbitrage till such time our legal machinery becomes a well oiled one. The Companies Act 2013 is a landmark development. Moreover, the MAGGI and UBER cases – notwithstanding their respective legal outcomes – will have far reaching implications for tortious triggers and remedial measures.

Would coverage of pharma liability, clinical trials and medical malpractice be by any stretch of imagination too form a part of health cover? I asked the same audience. It takes quite an effort to converge the varying triggers and the economics of health insurance just does that. Most tend to eventually agree that cost of tort adds to health care ecosystem. If there are no R&D investments into new blockbuster drugs, how do we beat say the drug resistant microbes? Or newer lifestyle health issues? New trials will possibly lead to new drug discovery, these in turn would have risks associated with them. Likewise, someone ought to also pick up the errors and omission costs of doctors and medical establishments. If there were no risk transfer mechanism, this would be a cost push towards the consumer. Hence a more expensive healthcare environment.

We need to revisit what all constitutes healthcare cost and accept that the current form of healthcare expense is only a very narrow approach. The tort component will only grow as the complexities of modern life increasingly impact us. Underwriters and actuaries can only ignore these at their own peril. Last but not the least, can we learn from the challenges already faced by the American society?

Here’s my presentation: Tort in healthcare

Adapting long-tail pricing models: Scope for shared learning – India & China

Abstract: Long-tail liability class poses unique challenges in any jurisdiction where new products are adapted for the first time. The key issue relates to pricing. With no past experience on frequency and severity of claims, in this class, the pricing models have to be adapted from overseas environment. As tort raises its head in adapted markets, pricing adequacy will be tested in such places. In the meantime, what do markets do to ensure there are no rude shocks-in-making. Particularly when pricing pressures in the short-tail classes tend to have a rub-on effect on the longer-tailed. The paper explores the current situation in India; what are the likely pit-falls in making and possible corrective actions. Last but not the least, can India and China share some learning? Despite the differences in market evolution and legal systems, there may still be significant scope for collaboration.

Here is the thought process in the form of the presentation at Shenzhen: Adapting long-tail pricing

As I said, the Companies Act 2013 and some of the recent landmark cases which are still developing would have changed the play-field for good. The point I was making at the Progressive Lawyers Group at Chandigarh was that the onset of tort age would dramatically challenge our already over burdened legal infrastructure. The presentation highlights the emerging triggers and how would they need to be addressed. Perhaps more alternate dispute resolution and outside court settlements: Tort flood

Do you believe in miracles?

“Do you believe in miracles?” asked my new found friend Richard, on the last leg of my trip from Hangzhou to Hong Kong. When I first boarded the flight from Hong Kong and mentally prepared myself for a leap from the Pearl River delta to almost the Yangtze delta – the thought of straddling the civilisation’s fastest and highest economic growth region was uppermost in my mind. On the flight path would zip past names like Shenzhen, Zhuhai, Shantou, Guangzhou, Taiwan (across the straits), Xiamen, Fuzhou and many others as the plane advanced from the South China to the East China Sea. Some of these locations had witnessed an annual GDP growth in excess of 30%. It was as if everyone had conspired to ensure China’s staggering growth virtually from zero to hero!

It was literally a smooth landing in Hangzhou. The baggage, immigration and customs were spot on. All real superefficient. At the exit it was not a Mr Zhou but a lady in her fifties standing with a placard bearing my name. In no time I was in the sedan heading to my hotel. The only communication that I had with Ms Li (got to know the name when confirming my return drop) was a smile. She knew no English whatsoever. I am sure she learnt driving when in her thirties if not forties. But she drove as if she was doing it forever. Not many amongst the hotel staff knew any English either. However, in no time they would pull out their mobile and rely on the Google translator. I am sure they would do so if they ran into an alien as well! My English is not that good is what I heard all the time from both the speakers and the audience at my conference. That, however, is no glass ceiling for anyone in the country.

Shanghai which is just an hour away from Hangzhou by a bullet train can take two plus hours by road. My friend Andreas, a German, his Chinese wife Min and little son Alexander chose to be driven by Mr Tao. We ended up sightseeing one of the many water towns in China. Wu Zhen (pronounced Oo Ten) is almost mid-way from Shanghai and Hangzhou. On a Sunday it was an incredible collection of cars. Andreas tells me why no smaller ones were visible. To keep the car population under control, in Shanghai, you must buy your registration number in an auction – if that costs equivalent of Rs 8 lacs, who would buy a small car? I remembered from my times in HK when cars were stolen and ferried across to the mainland in a speed boat. It all started with small cars. Eventually as the ‘other’ side got richer, it was the Mercs and Lexus which became the hot favourite. None cared whether it was a left or right hand drive! Today China is the largest auto market in the world.

Richard and I agreed that all this could not have just emanated from Deng Xiao Ping’s vision alone. It called for much more. He had the courage to make the choice to transform China, implement his grand design and eventually influence the rest of the world. Richard moved from textiles business to women’s designer clothing. From HK he was headed to New York where he was attending a trade show. With him was his business partner wife Lily. My Chairman is how he referred to her. The couple is extremely articulate in English. Their son Rocky is a budding artist. What to do, says Richard, he is constantly demanding attention. With the one child policy – he has no company. Every night I must tell him a story. Is it true I ask him whether there is a severe shortage of brides? Yes he says, they must buy them from Vietnam. With a chuckle he tells me sometimes the wives run away. They must buy another wife!

Zhejiang is a small province but one of the richest. The Zhejiangese are astute business folks and are often referred to as the Jews amongst the Chinese. Their businesses are not very big but profitable just like the Italian companies. Small is better! Says Richard. He is very proud to share that Jack Ma’s office is in the same building as theirs. Lily tells me Jack still runs English classes.

During the travel I discover what the Chinese call Jing-Jin-Ji (“Jing” for Beijing, “Jin” for Tianjin and “Ji” the traditional name for Hebei Province). This is supposed to rival both the Pearl and Yangtze River Deltas. This supercity of 130 million would be spread over 82,000 square miles and will hold a population larger than a third of the US, according to Ian Johnson in International New York Times. With high speed rail hitting 150 to 185 miles an hour will possibly stretch the urban area concentration way beyond the thumb rule of 60 miles which on an average a highway driving covers. “Speed replaces distance” the paper quotes Professor Zhang of Hebei University of Technology. Thereby “It has radically expanded the scope of what an economic area can be”, believes the Professor.

Alex who is not yet three, is what I call ‘ambilingual’ with either parent. He converses with the father in German and in Mandarin with the mom. Where will he eventually grow? Does it really matter? With grandparents in Beijing, self in the heart of the Yangtze River delta and a likelihood of his dad moving to HK could just make him transcend three of the civilisation’s most dynamic hubs ever.

On the Dragonair flight back to HK – we are discussing the prospects of what the Mainlanders are eagerly hoping will also translate the ‘One Country, Two Systems’ into a reality. The possible merger of Hong Kong with Shenzhen! The New Silk Road as means of soft power for China, as well. The on-flight magazine incidentally has a cover story on this theme. It features Kunming, Kathmandu, Almaty, Xiamen, Da Nang and Colombo. Richard is very excited about its prospects. Will it be a brick and mortar silk route this time or a virtual one? I believe it will be the likes of Alibaba riding the internet that will lay the newest silk route. Charting the road less travelled. As we get off and part, Richard ensures that I log on to ‘wechat’ to stay in touch. Well, Open Sesame if that is the access to The New Silk Route and how can one just not believe in miracles??

India’s newly opened and promising P&C* insurance market was fast out of the gate; however, as the market matures, insurers are rethinking their participation as they attempt to build a more solid business and attract investors.

The Maggi saga goes on and one does not know how far and wide could it be. Brand gurus and PR experts are at large prescribing what ought to have been done and what has so far not been done. My intent is not to just dole insurance solutions but take a holistic risk management perspective where brand and risk converge. Here is a wakeup call. All this while it was the errors and omissions of the IT enabled services catering to the off-shored or outsourced needs of overseas entities that were expected to be the only ones vulnerable, then came in the pharmaceuticals and more recently the auto component manufacturers. Off-shored FMCG brands, particularly the ones high on market share, tend to overlook the risks Emerging Markets pose howsoever successful a brand may seem in the present. Lost in their hubris? Are there lessons to be learnt from other segments? Let’s also not forget risks encountered by the Indian companies with multinational aspirations.

Risk transfer

Since the intent is not to dismiss insurance, I will touch upon this. It is a key component in the risk management value chain and the best known form of risk transfer. Unfortunately, we here are still obsessed with the asset class of coverages. Companies do not die due to the damage to its brick and mortar. They can however perish if there are law suits, consumer and reputational onslaughts. Some of you may remember Enron which even dragged its auditor along.

The early symptoms may include: Class action, Satyam Computers’ Indian retail share-holders could not but Maggi’s manufacturer is a sitting duck, now that the Companies Act 2013 has blessed it. There is already a call from the highest quarters suggesting action from consumers on these lines. This makes its Indian board susceptible.  Dipping stock price here may trigger suits against its directors and officers. The reputational issues in this market may have a drag effect on its globally traded stocks. A good D&O cover is also necessary for attracting and retaining quality independent directors.

While it is one thing to have a Product Liability cover in place with a product recall extension, most clients have no recall protocol. Just having a cover in place may not be good enough. Likewise, if you employ external technicians and professionals, they ought to have their respective Professional Indemnity insurance in place. So would be the case if you were to outsource manufacturing partially or fully to external parties. Buying any of these covers is a complex informed process. The customer must be upfront in disclosing all desired information. Do not be tempted by cheap pricing. Most of these covers are long-tail and call for underwriting expertise not abundantly available. The claims may present themselves several years later. Thus make sure your insurer has the expertise, balance sheet and longevity. Seek professional advice from specialist brokers.

Cultural diversity and uniqueness

Many multinationals have global risk management programmes but not all markets can be treated in the same breath. Each market will have its share of ups and downs which would neither be linear nor predictable. Disney’s success in Japan did not guarantee the same fate in France. The Euro Disney case, on the other hand, points to a situation whereby a business venture in which financial risk had been thoroughly assessed and controlled was seriously undermined by a failure to manage risks associated with national culture. It had previously taken the American theme park practice and successfully transplanted it to Japan where there appears to have been fewer, if any, problems than those that arose in France. It only goes on to show that even in a highly risk-conscious organisation, the strategic risk management framework in use did not cater for “soft” risks such as national culture, thereby endangering the brand.

Anticipating increases in global energy demands, Unocal started operations in Myanmar in 1992. The consortium of investors included the French oil company TOTAL and Burmese and Thai investors. The project consisted of a pipeline to transport natural gas from the offshore Yadana gas field into Myanmar and Thailand. Human rights and environmental groups were successful in mustering opposition to the company’s role in the country. This eventually led to sanctions imposed by Clinton Administration on new investments by US companies in Myanmar. The ‘Burma’ pipeline case illustrates the cost of ignoring ethics and supports the assertion that although ethical behavior for the firm can turn out to be costly, the risk of ignoring ethics may be costlier still. Pulling out of the whole deal in the end with attendant costs and loss of reputation was probably costlier. There seems to have been little awareness or identification of the risk impact of the company doing business with the regime.

According to an HBR report, successful European companies share one critical characteristic in addition to their reliance on alternative media: senior managers drive the brand building. They actively make brand building part of their strategic plans and, as a result, integrate their alternative approaches to brand building into their overall concept of the brand. In contrast, many US companies delegate the development of brand strategy to someone who lacks the clout and incentives to think strategically. Or they pass the task to an advertising agency. That creates a distance between senior managers and their key asset, the brand – the driver of future growth opportunities. That distance, it is believed, can make the coordination of communication efforts difficult, resulting in confusion for customers, loss of synergy and performance that falls short of potential. An interesting allusion could be the level at which the risk-management function in an organisation reports into. The higher it is, greater the commitment and the safer the organization. Did Nestle India miss out somewhere, could be a subject matter of another discussion?

In conclusion: But what is the big deal about risk management in brands and brand management of risks? In a complex world of insurance – other than deductibles, excess, cover limits, exclusions, et al – newer forms of catastrophe and interruptions keep rearing their heads. Increasingly, insurance covers less and less of more and more. Moreover, in a globalizing world, it is not the physical side of the risk, but the brand essence that is most vulnerable. A well-managed brand, with embedded risk management, can outlive any physical calamity and go well beyond known barriers of indemnity. A lesson Indian multinationals may wish to overlook only at their own peril.

Published in Autumn 2015 issue of INTdirector

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Stephen Rosling is Co-founder & Director of UK based  TCF Matters. Taking it beyond his interview of April 14, 2013 with this blog – he highlights the significance of conduct risk which tends to get lost in the dust and din of the marketplace. Conduct risk – a sum of systems, processes and most importantly people – will pose significant challenges to all markets notwithstanding whether or not they have a designated regulator in the market conduct space.

Q: Taking it from where we left it last, a poor consumer outcome amounts to poor delivery?

A: Yes, but poor delivery could be the result of poor product design, poor marketing, poor sales, poor claims handling. Poor delivery in just one of these areas can contribute towards a poor consumer outcome.

Q: Is the conduct merely about “consumer detriment arising from the wrong products ending up in the wrong hands, and the detriment to society of people not being able to get access to the right products”?

A: Customers expect and deserve to get financial services and products that meet their needs from firms that they can trust. Meeting customers’ fair and reasonable expectations should be the responsibility of firms. If the culture across the financial services “industry” is one where the customer needs are not being met, then the detriment to society is considerable.

However, “access” to the right products is not just about the responsibilities of firms, it also plays into education. Society must educate its people to help them understand how different types of financial products work so they can approach negotiations and discussions from a position of knowledge and understanding and therefore reduce the risk of being manipulated by unscrupulous firms. Education is the responsibility of government.

Q: Is it more to do with the intermediaries and the carriers only vicariously?

A: No – both product manufacturers and distributors have an equal responsibility to customers. Similarly, product manufacturers and distributors have a responsibility towards each other to ensure that they can each provide evidence that customers’ interests are at the heart of their corporate cultures.

Q: Could dis-intermediation in any ways change this situation?

A: Yes and No. The only real way to address issues of poor conduct is to understand the root cause. The root cause may not be the behaviour of the intermediary. Instead, it may be a poorly designed product and literature, or poor product training provided by the product manufacturer, or poor training of claims handling staff. Getting to the root cause is the key.

Q: Could the internet transform this into a “Buyer beware” situation?

A: Yes and No. Distributors and providers remain responsible for ensuring the information they provide on-line is clear, simple to understand and not mis-leading. “Cooling off” periods also apply giving customers the opportunity to re-consider their purchase and cancel if it is not suitable for their needs.

Q: Is conduct risk really a quantum shift of the regulatory process into the qualitative zone or is it merely a justification for the creation of a market conduct supervisory process?

A: I think this is a bit of a “chicken and egg” question….what came first? The increased regulation or the poor conduct? I would argue that increased regulation and more robust market supervisory processes only come about due the uncovering of poor conduct on the part of firms. If firms were behaving in a manner consistent with the principles of fair customer treatment, then you could argue that conduct regulation may not be required. I think the underlying point here is that many observers suggest that the poor behaviour of the “large” few has resulted in more regulation for the small “many.”

Q: Does the conduct risk pose any serious governance and regulatory risk to intermediaries and risk carriers in the insurance industry?

A: This all depends on understanding what governance is already in place and assessing how effective it is. Conduct regulation has not mandated the introduction of new committees over and above those which already exist; however, the focus on conduct has raised the bar in terms of the effectiveness of Risk Committees, Boards, NED’s etc. A key part of effective governance is being able to provide strong, robust evidence to support good conduct – the days of “no news is good news” are long gone.

Q: Does all this overlap with the ethics?

A: Absolutely – ethics, integrity, transparency, are all at the heart of good conduct. Ultimately, the behaviour of a firm reflects on the behaviour of its employees which is why embedding the right culture throughout the organisation is so important – systems, processes, and most importantly, people.

The late editor salutes the rise of women in television journalism in his last book:

“Another half a cheer for current – affairs TV is due. Not so long ago, women journalists were confined to the ghetto of fashion shows, flower shows and filmi shows. In the last few decades things have improved and a few have managed to crawl out of the ghetto. However, the most spectacular rise and rise of the young woman journalist has occurred in the time of current-affairs television. A disproportionate amount of reporting, including the thankless chowkidar duty outside the minister’s house where they wait for a sound bite from dawn to dusk, is done by young female reporters in the age group of twenty-five to thirty. They do the job with great patience and good humour.

But it is not restricted to asking a neta after he has supplied the required sound bite, ‘Thank you sir, but who are you?’ The serious reporting and analysis of major events is also the domain of their seniors. If you go to the offices of TV channels you will have difficulty finding a man. It is full of women of all ages busy with their work and clearly enjoying it. I once asked a young, bright, attractive reporter if she had a boyfriend. She replied she had just broken off a relationship because it was interfering with her work. She had her priorities right. TV 24×7, happily, is an unequal opportunity employer. And for once that inequality needs to be applauded.”

I am sure Mr. Mehta would be even happier with the rise of women journalists from just monopolizing serious reporting and analysis to their dominance as anchors. May the glass ceiling go!

Mr. Ganesh K V, Chief Financial Officer, Global Head-Legal & Company Secretary, Subex Limited, Banglore, India, oversees the corporate finance, treasury, taxation and legal functions across the Globe. He has more than two decades experience of leading Finance function of conglomerates like Hewlett Packard, HSBC and HCL Technologies Limited.