IT for Financial Services
Abstract
This report investigates the role of information technology in the insurance sector and examines how information technology affects the insurance sector. What are insurance and a brief history of the insurance and its types and the concept of insurance in Islam? Role of information technology in the insurance sector The discussion then focuses on the advantages and disadvantages of Information technology used today in the insurance sector and the reasons for insurance. Then it will tell us how IT helps companies to et competitive advantage in today’s environment It is concluded that further technological advances in the insurance sector will continue to improve the efficiency of the companies.
Insurance Legal contract that protects people from the financial costs that result from loss of life, loss of health, lawsuits, or property damage. Insurance provides a means for individuals and societies to cope with some of the risks faced in everyday life 1. 0 Introduction Insurance, legal contract that protects people from the financial costs that result from loss of life, loss of health, lawsuits, or property damage. Insurance provides a means for individuals and societies to cope with some of the risks faced in everyday life. People purchase contracts of insurance, called policies, from a variety of insurance organizations. Almost everyone living in modern, industrialized countries buys insurance. For instance, laws in most states require people who own a car to buy insurance before driving it on public roads. Lenders require anyone who finances the purchase of a home or car with borrowed money to insure that property. Business partners take out life insurance on each other to make sure the business will succeed even if one of the partners dies. Insurance makes up part of the broader financial services industry. Some large companies sell virtually every type of insurance available in the marketplace. Smaller companies may specialize in a specific geographic region or type of insurance.
History of Insurance
Historians believe insurance first developed in Sumer and Babylonia (both in what is now Iraq) beginning in about 3000 bc.
The merchants and traders of these societies transferred and pooled their money to protect themselves from losses of cargo to thieves and pirates. In the 18th century bc, the Babylonian king Hammurabi developed a code of law, known as the Code of Hammurabi, which codified many specific rules governing the practices of early risk-sharing activities. For instance, the code dictated that traders had to repay merchants who financed trading voyages unless thieves stole goods in transit, in which case debts would be canceled. Seagoing merchants from Phoenicia (in and around present-day Lebanon) began using a system of insurance known as Bottomry about 1200 bc. In this system, backers loaned money to merchants to finance voyages. Merchants offered their ships (the hull was known as the ship’s ‘bottom’) as collateral for such loans. When a trip succeeded, the merchant would pay the trip’s backer the original loan plus interest, the equivalent of a premium. If a ship went down on its voyage, the trip’s backer would cancel the merchant’s loan. Forms of insurance resembling Bottomry had spread to other parts of Asia and the Mediterranean by 400 bc. In the last several centuries bc the societies of Greece and Rome developed some of the earliest systems of life insurance. Greek and Roman citizens formed benevolent societies; organizations in which members paid dues that went toward paying for the burial of members who died. Sometimes these societies also paid for the living expenses of deceased members’ families. During the Middle 3 Ages (5th to 15th centuries ad), workers joined together in the craft. Many guilds, particularly in England and Italy, provided benefits to workers and their families in the event of illness or death.
Reasons for Insurance
In life, losses are sometimes unavoidable. People may become ill and lose income or savings to pay ff medical bills. Individuals or their relatives may die of illness or accidents. People’s homes or other property may suffer damage or theft. People also may accidentally cause injury to others or damage to the property of others. No one knows in advance when a loss will occur or how serious that loss will be. The uncertainty surrounding potential losses is known as risk. Insurance offers a way for people to replace risk with known costs—the costs of buying and maintaining insurance policies. Assume a person buys a new car for $25,000. Its owner faces the possibility that, at some point, the car ill suffer damage in an accident. But how could the owner budget in advance for a loss of unknown cost? The cost to repair or replace the car in the event of an accident could range from the price of a bottle of touch-up paint to as much as $25,000. If the accident injures someone, the costs of medical care could be much higher. Through the mechanism of insurance, however, the car owner can share the risk of an accident with others who face the same risk. Insurance pools (combines) risks shared by many people, thereby reducing the risks faced by a group. People pay to buy insurance coverage (protection from risk).
In exchange, all policyholders (people who own insurance policies) receive a promise that the group of policyholders—as represented by the insurance organization—will pay when any policyholder experiences a covered loss. The reduction in risk brought by insurance relies on a mathematical concept called the law of large numbers. That law states that the ability to predict losses improves with larger groups. Using calculations based on statistics, experts known as actuaries can accurately predict the losses of a large population, even without knowing when or how anyone individual will experience loss.
Insurers distinguish between two types of risk:
- Speculative risk
- Pure risk.
Speculative risk offers both the potential for gain and the potential for loss. People who invest in the stock of companies, for example, take the speculative risk. An increase in stock prices produces again, while a decline in stock prices produces a loss. Pure risk, by contrast, creates the potential only for loss. Although pure risks do not necessarily result in losses, they never result in gains. Historically, insurance dealt only with pure risks, and most people still buy insurance to cover pure risks.
No one, for instance, experiences again when they go a full year without an auto accident. However, some insurance companies now help businesses finance large losses including those 4 incurred on speculative risks, such as the international exchange of currency. Also, in the 1990s financial markets and some professions outside insurance, such as the field of environmental impact and damage assessment, began to expand into risk management for the first time.
The Importance of Insurance
Insurance benefits society by allowing individuals to share the risks faced by many people.
But it also serves many other important economic and societal functions. Because insurance is available and affordable, banks can make loans with the assurance that the loan’s collateral (property that can be taken as payment if a loan goes unpaid) is covered against damage. This increased availability of credit helps people buy homes and cars. Insurance also provides the capital that communities need to quickly rebuild and recover economically from natural disasters, such as tornadoes or hurricanes. Insurance itself has become a significant economic force in most industrialized countries.
Employers buy insurance to cover their employees against work-related injuries and health problems. Businesses also insure their property, including technology used in production, against damage and theft. Because it makes business operations safer, insurance encourages businesses to make economic transactions, which benefits the economies of countries. In addition, millions of people work for insurance companies and related businesses. In 1996 more than 2. 4 million people working in the insurance industry in the United States and Canada. Insurance companies perform a type of monetary redistribution—they collect premiums and eventually redistribute that money as payments. Depending on the type of insurance, redistribution can take anywhere from a few months to many decades. Because of this delay between collecting and paying out funds, insurance companies invest their funds to bring in extra revenues. Such investments help businesses and governments finance their operations, and profits from those investments support the operations of insurance companies. With these investment earnings, insurance companies can keep rates much lower than would otherwise be possible. Not all effects of insurance are positive ones.
The possibility of earning insurance payments motivates some people to attempt to cause damage or losses. Without the possibility of collecting insurance benefits, for instance, no one would think of arson, the willful destruction of property by fire, as a potential source of money.
Types of Insurance
Home Cover
Home insurance provides compensation for damage or destruction of a home from disasters. In some geographical areas, the standard insurances exclude certain types of disasters, such as floods and earthquakes, that require additional coverage. Maintenance-related problems are the homeowners’ responsibility.
The policy may include inventory, or this can be bought as a separate policy, especially for people who rent housing. In some countries, insurers offer a package that may include liability and legal responsibility for injuries and property damage caused by members of the household, including pets.
Travel Sure
Travel sure offers an enhanced policy for Schengen states, now covering you for up to US$ 100,000 for medical expenses abroad for both hospitalization and out-patient treatment. It is the finest travel plan that has been specially tailored according to your traveling needs and in order to make your journey stress free with the assured that any and all emergencies will be taken care of in a prompt and professional manner. With Travel Sure you have the freedom of availing medical benefits at foreign facilities without having to pay the bills yourself. Health Sure Health sure offers a managed care solution to corporate clients and organizations to provide healthcare needs backed by professional staff, financial strength, and insurance experience accumulated over a period of fifty years. Health sure covers personal health covers, hospitalization covers, and maternity covers. In addition, the product covers pre- and post-hospitalization expenses as well. The covers also have a credit facility at IGI Insurance’s panel of hospitals across Pakistan, Health Cards; discounts at pharmacies and diagnostic laboratories; 24-hour medical hotline with staff doctors, etc.
Auto Cover
Auto Cover is a complete auto insurance plan for both individuals and corporate offering:
- A comprehensive cover including theft, snatching, armed hold-up, accidental damage, third party liability, and terrorism.
- The liberty to have your vehicle repaired at the workshop of your own choice and the cost of repairs are being directly settled with the workshop.
- Reduction of premium up to 50% through the no-claim bonus, which is transferable from other insurance companies and within immediate family members.
- Guaranteed settlement of Snatching/Theft/Total Loss claims within 15 days of recovery of snatched/stolen vehicles.
Insurance companies in Pakistan KSE listed companies in Pakistan 7 7. 0 Concept of insurance in Islam What is Sood (Interest) that is stated as Haram (forbidden) in Islam? Any income that falls under the following criteria
- Is fixed
- Is definitely profit (no risk of loss)
- Does not involve any effort/ work
Life Insurance
Life insurance of a human is a somewhat newer concept as compared to product insurance, which has been there for many centuries (so it is known). In life insurance, a person keeps on making a certain amount of payment for a certain number of years (we have 20 years normally offered by State Life and EFU) and it covers three areas.
- If the person dies within those 20 years, his family (beneficiaries) receives a handsome sum of money, already decided at the time of signing the insurance contract.
- If the person does not die within those 20 years, a handsome sum of money is given to him as profit incurred on the yearly installments of payments he had been making to the insurance company.
- In some cases, in addition to one of the above, if the person falls ill, his medical expenses are borne by the insurance company during those 20 years.
Now question specifically relates to the first 2 points. If the person dies, the family gets a fixed amount of insurance money (as is the case with product insurance). However, in life insurance, if a person does not die, he still gets a fixed profit on his actual installment payments in addition to the total actual amount paid to the insurance company.
Now this is a win-win situation and this income somewhat falls under my definition of interest i. e. Is fixed, Is definitely profit (no risk of loss), Does not involve any effort/ work.
What Is Takaful?
Takaful Ta’awuni is a system of mutual cooperation for financial assistance and protection based upon the Quranic principles of “Ta’awuni, or mutual assistance.
Reasons for Takaful
The right to protecting
- Religious
- Life
- Dignity
- Property
- Mind
Difference between Takaful and Conventional Insurance
Conventional Insurance Takaful
It is a Risk Transfer mechanism whereby risk is transferred from the policyholder (the Insured) to the Insurance Company (the Insurer) in consideration of ‘insurance premium’ paid by the Insured. It is based on mutuality; hence the risk is not transferred but shared by the participants who form a common pool. The Company acts only as of the manager of the pool (Takaful Operator).
It contains the element of uncertainty i. e. “gharrar” which is forbidden in Islam. There is uncertainty as to when any loss would occur and how much compensation would be payable. The element of ‘uncertainty’ i. e. ‘gharrar’ is brought down to acceptable levels under Shariah by making contributions as “Conditional Donations” (tabarru) for a good cause i. e. to mitigate the loss suffered by any one of the participants.
It contains an element of gambling i. e. “maisir” in that the insured pays an amount (premium) in the expectation of gain (compensation/payment against the claim). If the anticipated loss (claim) does not occur, the insured loses the amount paid as premium. If the loss does occur, the insurer loses a far larger amount than collected as premium, and the insured gains by the same. The participant pays the contribution (tabarru) n the spirit of Ne’ea (purity) and brotherhood; hence it obviates the element of ‘maisir’ while at the same time without losing the benefit of Takaful in the same way as conventional insurance.
Funds are mostly invested in fixed interest-bearing instruments like bonds, TFCs, securities, etc. Hence these contain the element of “riba” (usury) which is forbidden Funds are only invested in non-interest bearing, i. e. riba-free instruments. 9 in Islam.
Surplus or profit belongs to the Shareholders. The insured is covered during the policy period but is not entitled to any return at the end of such a period.
Surplus belongs to the participants and is accordingly returned to them (in proportion to their respective shares of contributions) at the end of the accounting period.
What Is Information Technology?
We use the term information technology or IT to refer to an entire industry. In actuality, information technology is the use of computers and software to manage information. In some companies, this is referred to as Management Information Services (or MIS) or simply as Information Services (or IS). The information technology department of a large company would be responsible for storing information, protecting information, processing the information, transmitting the information as necessary, and later retrieving information as necessary.
Role of Information Technology in Insurance
Information technology plays a vital role in the growth of the insurance sector. Companies that implement effective technology solutions can gain a competitive advantage in today’s environment. The proper use of technology can enhance a company’s competitive position. The services industry is one of the key sectors where IT can be exploited to its maximum potential. A substantial portion of delivering services involves a lot of information sharing and customer interaction. Thus, the role of IT becomes paramount in facilitating a smooth flow of information, providing multiple channels for customer interaction, generating business intelligence and envisaging innovative use of technology for the future. The financial services industry is one of the industries that have embraced Information technology in a big way in recent times. The emerging information technologies are influencing the delivery channels of financial services. In recent years, significant changes in the insurance industry have been forcing insurance providers to find better ways of doing business. Like other financial services providers, insurers are identifying new methods of generating revenue, supporting existing business processes, and integrating emerging business processes. To remain competitive and improve profitability, it has become increasingly critical for insurers to consolidate their legacy systems and data. Before the implementation of information technology in the insurance sector, it is very difficult to manage the data of large customers data and it was very time consuming as shown in fig 1 but with the help of IT companies get huge benefits from it in form of ease, time, etc we will discuss it later. Before IT after IT implementation
Importance of Information Technology in the 21st Century Insurance Industry
The insurance industry is today witness to a massive transformation from its earlier days. From a humble beginning made in 1956 since the nationalization of the industry and the birth of the Life Insurance Corporation, the industry today sees a deluge of multinational insurers all charging in to set up shop here considering the existent vast unexploited potential.
Multinational Partnerships
The winds of liberalization have initiated vast changes in the functioning of the industry today. The increasing number of multinational partnerships with private insurers has paved the way for a radical shift in insurance selling – through a number of new distribution channels besides bringing about more awareness on the need for insurance and also stressing on the important role technology can play. With major trade barriers gone, the insurance industry is slowly opening itself from a protected environment to e-business, incorporating newer technologies in insurance, thanks to competition, that ill hopefully brings forth a marked improvement in customer service, insurance marketing, risk management, claim settlement, underwriting, etc in comparison to its earlier days.
Faster Decision Making
Today, information dissemination is increasingly faster with the advent of information technology, which will largely help individuals gain access to every bit of information they would require, enabling faster decision-making. This is in stark contrast with the pre-liberalization era wherein information-sourcing was virtually non-existent except the recruited agents of the insurance company.
Policy servicing, an area that has long remained neglected will now receive a major thrust with insurance companies redefining strategies to weed out sluggishness and provide the policyholder with 11 prompt services. Online policy servicing too will soon become the norm thereby cutting down on the unnecessary delays.
Information Explosion
The oncoming technological revolution is all set to totally revamp the very concept of Knowledge Management. Automating knowledge management will become the sole aim to increase productivity. Large databases of raw information on individuals’ investment patterns can be fed into computers to enable faster segregation of information as per the required categories. Computerizing information can make a major difference to the general insurance industry wherein motor claim losses particularly have been hitting the roof. With an organized system of data collection and storage, data analysis and claim management system, keeping track of the claim applicants’ behavioral patterns become easy.
Easier Claims Settlement
Claims settlement that was hitherto a time-consuming affair will see a marked difference in operations. With competition building and improved customer service becoming the new mantra the time is taken or claim settlements will reduce considerably. World over underwriting risks, claims management, risk surveys, etc are far more simplified thanks to technology.
Bancassurance
Moreover, in addition to the single distribution channel of selling insurance policies through a large network of agents, Bancassurance is gradually gaining prominence. Utilizing the extensive network of banks for selling insurance will over a period of time bring about an increase in insurance density besides improving insurance penetration in rural areas wherein a large unexploited potential exists.
Improved Customer Service – the Ultimate Aim
The insurance industry, with competition hitting up has woken up to ground realities and is in the process of implementing software solutions. Realizing the unlimited power information technology holds, insurance companies have realized that the strategic deployment of technology gaining customer confidence through improved customer service is the need of the hour.
Advantages of information technology in the insurance sector
- Easier Information Accessibility
The Internet has ushered in a new wave of information accessibility. And hence, the internet medium has gained incredible importance.
Almost every insurer worth his salt has made his presence on the internet. Moreover, it has eased the time-consuming procedure of information sourcing. Other than providing information on policies the internet has also enabled making premium payment and selling insurance products online. The development of e-commerce and m-commerce has emerged as advanced distribution channels virtually turning companies into paperless organizations.
- Electronic Data
Knowledge management, which was unheard of before, has today converted loads of files that were a massive source of raw data into electronic form.
This database can help segregate information on the basis of buying habits, age groups, and purchasing power of a vast majority, proving to be a mass source of available information for determining the investment culture of individuals. Such information can help devise specific tailor-made insurance products too. Today information is made available at your fingertips. Files have given way to monitors and mouses and all one needs to do is punch a few keys and voila every piece of information you need is right before you.
- Comparison Shopping
Earlier the insurance agent in his inimitable style mouthed a few benefits f policies and most often the prospective customer ended up buying a policy the agent recommended. Today the customer can choose between a range of insurance products of various companies, suitable to his lifestyle and needs. He is in a position to compare between policies of various companies, analyze, work out calculations, demand more information than whatever he has been provided with and the insurance companies will only be glad to serve him. Improved service, innovative customer-friendly products, affordable covers, reduction in premium, improved quality were unimaginable a few years ago. But not anymore.
Newer Channels of Distribution
In the current scenario, the insurance distribution channels have gone through a sea change. Retailing of insurance products – a concept never heard before, has come into existence. Intermediaries such as brokers, bancassurance -selling insurance products through banks will play a major role in distribution. And an Insurance agent is no more the ‘sole information disseminating authority’ today, unlike yesteryears, thanks to technology.
Packaged Software Solutions
Now packaged software solutions for insurance agents and development officers have become a runaway success.
Premium calculations, future projections, proposals, etc. for clients need not be hard work anymore. Packaged software products are extensively used for presentations, proposal follow-ups, policy services, client services, commission tracking, underwriting, task management, etc.
Technology in Rural Areas
Technology needs to penetrate the rural areas too for it to be successful. Though an effort in this regard has already begun, insurers in order to make inroads in the rural areas need to bring about awareness among the masses by educating the rural folk on the benefits and necessity of insurance. It may take some time to educate the rural folk and also bring about a change in the traditional mindset. With innovative technology every communication whatsoever the customer has with the insurance company would be through the net soon. The advent of digital signature would be one step ahead – to happen shortly. All this has changed the very profile of the customer he was, earlier. And enabling such efficiency is what insurance companies need to get set for. In the face of accelerating changes insurance companies need to rework their strategies, do a rethink on core competencies, customer relationship management, facilitate distribution channels, settling claims, provide value additions, etc. In this era, only those companies, 13 which keep abreast of the changing technology and utilize them to the maximum extent possible will survive and succeed.
Other Advantages of information technology in the insurance sector
- Reduction in cost
- Increase efficacy
- Ease in managing large data
- Saving of time
- Boundaries less marketing
Some disadvantages of information technology in the insurance sector
- Unemployment
While information technology may have streamlined the business process it has also created job redundancies, downsizing, and outsourcing.
This means that a lot of lower and middle-level jobs have been done away by causing more people to become unemployed. Privacy Though information technology may have made communication quicker, easier, and more convenient, it has also bought along with privacy issues. From cell phone signal interceptions to email hacking, people are now worried about their once private information becoming public knowledge. Lack of job security Industry experts believes that the internet has made job security a big issue since technology keeps on changing with each day. This means that one has to be in a constant learning mode if he or she ishes for their job to be secure. Dominant culture While information technology may have made the world a global village, it has also contributed to one culture dominating another weaker one. For example, it is now argued that the US influences how most young teenagers all over the world now act, dress, and behave. Languages too have become overshadowed, with English becoming the primary mode of communication for business and everything else.
Contribution of Insurance in GDP
Usage of insurance Due to IT 15 SAS ® for Insurance Ensuring long-term success In insurance, policyholders demand certainty in an uncertain world.
Insurance firms must confront that uncertainty as they protect policyholders, retain agents, assure regulators, and satisfy stockholders. Insurers face many challenges in today’s uncertain world:
Build innovative pricing models Using the most advanced analytic techniques available.
- Accurately forecast business trends Using our high-performance forecasting server software.
- Make access to information simple for all users.
- Respond quickly and thoroughly to regulatory and rating bureau demands using transparent reporting applications.
- Detect and prevent fraudulent activity by mounting a multifaceted defense against would-be fraudsters and organized fraud rings.
- Effectively manage all aspects of risk – operational, market or credit risk.
- Determine customer LTV and predict behaviors such as attrition and cross-sell response with considerable accuracy and ease.
- Monitor all these initiatives with easy-to-use, industry-specific scorecards, and dashboards.
An insurance-specific data model reduces implementation time for major projects significantly, and integrated and extensible insurance solutions speed up both implementation and results, giving you a fast track to significant ROI. All of these solutions are part of the SAS Business Analytics Framework, which includes industry-leading data integration, analytics, and reporting technologies. This framework provides the structure that allows you to address the most critical business issues right now and then add new functionality as needed overtime to further drive performance improvements and increase value. With over three decades of insurance industry experience, SAS empowers insurance companies to transform data into intelligence. The future is of Takaful (Islamic insurance) Takaful industry is growing at the rate of 20-25 %. Not only Muslims but non-Muslims too by Takaful because it gives better features for customers as compared to insurance.
Conclusion
This report tells us the role of information technology in the insurance sector and we examine how information technology affects the insurance sector. We know about insurance and its brief history its types and the concept of insurance in Islam. Then we focus on the advantages and disadvantages of Information technology used today in the insurance sector and the reasons for insurance. Then it sees how IT helps companies to get a competitive advantage in today’s environment. Finally, the insurance business is at a critical stage in the world. Over the next two decades, we are likely to witness high growth in the insurance sector on the hope of technological improvements and more flexible terms to be insured. Thank you, for reading our report hopes you learn a lot.
References
- http://Flipkart.com
- http://www.insurancenewsnet.com
- http://www. tech-decisions. com
- http://www.yahooanswer.com
- http://www.buzzvines.com/
- http://en.wikipedia.org
- http://www.insurancetech.com
- http://wikianswer.com
- http://www.springerlink.com
- http://alhudacibe.com
- http://newstrump.com
- http://insurance.com
- http://ilo.uk
