Let's solve a

Consulting case
problem statement
Your client called IA is an auto
insurance company operating in India
and has been facing reduced
profitability in the last two years.
They have come to you to help
identify the reasons and explore
possible solutions. You can ignore
reinsurance for the purpose of the
analysis.
 INTERVIEW THREAD
Interviewee: Can you tell me a little bit more about
the industry and the position of the client? The kind
of competition, the growth?
Interviewer: Sure. It's of the 5-6 major players
who dominate the industry and hold around 95% of
the market. The market has been growing steadily at
around 10% p.a.
Interviewee: Okay. And how is the company growing?
Is it in line with the industry?
Interviewer: The market is growing at around 10%
p.a, and the company's market share is growing
almost the same proportion.
Interviewee: Alright, is this reduction in profitability only
being faced by the company or by competitors?
Interviewer: We do not have very accurate data on
competitors. However, reliable estimates indicate that
most have maintained profitability, and some have
even increased profitability. What do you think are the
possible causes for this?
Interviewee: It can either be due to higher revenues or
lower costs.
Interviewer: The industry is fairly competitive, and
none of the players can get away with charging higher
prices without losing market share. And as for the
number of customers, there has not been any major
change. So you can move on from revenue.
Interviewee: Okay. Then I will move on to the costs
side. There will be fixed costs and variable costs.
Fixed costs in such a company would generally
include salaries, administrative expenses, etc.; the
main variable costs would be the claim costs. Am I
missing anything here?
Interviewer: No, go on.
Interviewee: Do we have any data about these costs? Any
increase in a particular cost head?
Interviewer: Umm, fixed costs have been growing as per
average trends.
Interviewee: And what about claim costs?
Interviewer: IA has seen a rise in claim costs over the past
few years, faster than revenue growth.
Interviewee: Right, so would it be fair to say that it may
be a significant reason for the decline in profitability?
Interviewer: Probably yes.
Interviewee: Okay, I would like to understand the possible
causes of the rising costs and why competitors are not
incurring this cost. But before I go into a deeper analysis, I
would like to ask, is it possible that competitors have
implemented stringent policies for claim approvals or
somehow provide lesser coverage using fine print in the
guidelines, due to which the costs are lower for them?
Interviewer: I do not think that is the case. This would
result in an unnecessary loss of goodwill for the
company. Further, the industry is highly regulated,
and all players have similar policy terms and claim
processes. Hence, this is not practical.
Interviewee: Alright, I would like to look at the claim
costs in greater detail. Before I do that, is there
another significant cost item I am missing?
Interviewer: No, you can focus on claim costs.
Interviewee: Okay. So with claim costs, the difference
may arise out of the difference in the customer
portfolios of the company as compared to the
competition.
Interviewer: Okay, that may be a possible reason. But
how will you analyse the portfolio?
Interviewee: We can segment customers into buckets
based on
1.Age group
2.Income bracket
3.Geography and terrain
4.Traffic in the area

That would give us an idea of the risk based on the

general profile of the customers. So do we
have any data regarding this?

Interviewer: Yes, although there is a fair mix in all the

buckets, the portfolio is generally dominated by
people of relatively younger age groups (less than 25
years). In terms of income, IA has a large base of
lower and middle-level income groups. It operates in
all major cities –Delhi, Bangalore, Mumbai, etc.
IInterviewee: That explains a lot. You mentioned that
the company has more number of young customers.
They can be considered riskier, as they tend to be
more rash while driving, increasing the risk of
accidents compared to middle-aged people with
families. Further, you mentioned that they do not
have too many customers in the higher income
brackets. Higher-income groups can be considered
less risky as they use expensive cars and usually
have more careful professional chauffeurs. Also, it
has many clients in cities with extremely high and
aggressive traffic, like Delhi, which have higher
incidents of accidents Thus, the company should
either focus on improving the portfolio mix or adjust
premiums more appropriately to factor in the risks.
Interviewer: That sounds good to me. Thank you.

THAT'S A WRAP!
 Approach
Profits

Revenue Cost

Fixed Costs Variable Costs

Administrative
Expenses Claim Costs

Salaries Customer
Service Costs

Licenses
 Observations and
Suggestions
> Have a straightforward approach. The candidate took many
questions in this interview before pinching claim costs as the
root cause. Nonetheless, it is clear that the candidate had an
evident framework in mind (Profitability > Revenues/Costs >
Industry-Wide/Firm-Wide Issue > Fixed/Variable > Claim
Costs).

> Furthermore, the candidate also asked if there were cost

components he was missing. This shows that the candidate
tried to have a MECE approach, which is what interviewers
are looking for.

> It is essential to understand the nuances of the insurance

industry to come up with the cost structure.
CAREER EDGE

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