The topic comes under Financial Services Industry
Roles of Operations of Banks and Insurance Companies by Hursh GuptaTOPIC: Role of operations of banks and insurance companies, processes, technology
Introduction
There are countless types of banks and financial Institutions currently operating in the world. Each, aiming to provide a specific set of services, catering to a particular market or type of investor. Banking operations involves the practices and procedures that a bank uses to ensure that customers’ transactions are completed accurately and appropriately Banks and Insurance companies are Financial Institutions play a key role in the Financial System.
- Banks provide a platform for individuals or businesses to deposit excess money for reasons of safety and provide incentives like interest while allowing for liquidity of their deposits. Also, bank provide loans to individuals who are in need of it. Thus they connect creditors and debitors
- Insurance companies spread the risk of an individual across a group of similarly risky individuals. Since, accidents can happen only to a few of them by chance, the insureds who don’t get into accidents end up subsidizing losses for other insureds in the group, but get an assurance that they will be covered for a price smaller than what they’d have to pay if they themselves had an accident.
To know their importance, first let’s try to visualize what would have happened in their absence:
- Without Banks,
- borrowers would have to look for people who wish to lend money
- lenders would have to look for people who wish to borrow money
- there will be a big hassle and security issue during the transfer of money
- people who don’t wish to take risk will lose real value of their money by leaving them uninvested in their safes at home (else they could have earned interest through a Savings account or FD)
- Without Insurance Companies,
- individuals would always be prone to risk, and would have to bear huge expenses in case of accidents
- there would be no concept of subsidizing the loss of few individuals of a group, as they will have no formal way to find people who have a similar risk profile, and to see how much money should each individual pay in a group.
Bank Operations
Core Functions
- Payment Systems
- Investment and wealth management
- Provision of Banking Services1
- Retail Banking:
- services to general public
- mortgages, loans, deposits, checking account
- internal operations: opening new accounts, inter-account money transfer, assist customers to manage deposits
- Business Banking
- their clients are businesses
- start-up loans, collecting deposits and investments
- more complex than retail banking ← the complexities of businesses
- treasury function → managing business’ accounts receivable and payable.
- Private Banking
- less common now
- tailored towards wealthy clients, have standard operations
- large amount of wealth → help establish trusts, and ensure tax law compliance
- Investment Banking
- provide underwriting services: debt underwriting and equity underwriting
- create security markets
- Retail Banking:
How technology has transformed these operations
- Online Banking
- Mobile Payments
- ATMs
Insurance Operations
Core Functions
- Risk assessment & Underwriting
- Risk assessment refers to putting a number or value on a risk that an insured has exposed himself/herself to
- The process is undertaken by a team of Actuaries
- Their goals are historical data should be used to predict the future claims and base the calculation of premiums on that. Rates should be fair overall and at an individual level
- For overall fairness, they ensure that all of the insurer’s expenses in the Fundamental Insurance Equation is covered by the premiums collected by all insureds
- For individual fairness, they ensure that no individual is subsidizing for someone else’s exposures.
- Finally, they perform those calculations and come up with a Rating Manual wherein there are various risk groups that each insured can be placed in and be charged the premium accordingly.
- Claims processing
- This is the part where the policy has already been sold and there has been an accident that caused some loss to the insured. Now, the insured demands for indemnification of his loss.
- The team will first validate whether the claim is genuine or fraudulent
- It is always possible to get into a legal court case, in case the insured is unhappy with the indemnification and demands for more or if a third party sues the insured and it is the insurer’s liability to defend the insured as per the policy.
- The case is closed if the payment of ultimate losses are done. It is also possible that the case can be reopened if new evidence is found or the situation changes that affects the original decision.
- Reinsurance Notes
- This is insurance that is sold to insurance companies.
- Catastrophic losses like COVID-19 cannot be accounted for in advance, and so the premiums will fall short for these losses. Thus, the insurer might want to buy reinsurance to transfer a portion of this risk to a Reinsurance Notes company.
- They might also want to do so in order to expand capacity. By having confidence that a portion of risk will be transferred, they can underwrite more policies and have a chance of getting more profitable
How technology has transformed these operations
- Telematics
- AI-powered claims processing
Common Processes & Technology
These are the processes that are shared by both Banks and Insurance Companies
- Customer Relationship Management (CRM)2
- manage and analyze customer interactions and data throughout the customer lifecycle3
- goal: improve customer service relationships, customer retention, drive sales growth.
- key components: (tech)
- (a) data collection: website, email, social media → comprehensive view of each customer
- (b) customer interaction management → track all the direct/indirect interactions with the customer
- (c) sales management → forecast sales performancedoubt
- (d) Marketing automation → email campaigns, social media engagement]]
- Compliance and Risk Management
- compliance → adhering to existing guidelines, rules and laws applicable to an organization
- internal and external requirements (government bodies, industry standard)
- Banks → Reserve Bank of India
- Insurance companies → Insurance Regulatory and Development Authority of India
- Monitoring and Reporting (tech)
Summary
The Cornerstones of Finance: Banks and Insurance Companies (748 words)
The financial system thrives on a network of institutions, with banks and insurance companies playing central roles. This summary explores their core functions, the impact of technology on their operations, and the shared processes that underpin them.
Introduction
From retail banks catering to everyday needs to specialized investment banks, countless financial institutions offer diverse services. Bank operations ensure the smooth and accurate handling of customer transactions. Both banks and insurance companies are considered financial institutions that significantly impact the financial system.
Banks: Facilitating Transactions and Growth
Banks act as intermediaries, connecting individuals with surplus funds (creditors) to those needing them (debtors). This core function fosters economic activity and growth. Key bank operations include:
- Payment Systems: Facilitating secure and efficient money transfers through various channels like checks, electronic transfers, and debit/credit cards.
- Investment and Wealth Management: Helping individuals and businesses invest their funds for growth through various investment products.
- Provision of Banking Services: This encompasses various categories:
- Retail Banking: Offering everyday services like checking accounts, mortgages, loans, and deposits to individuals.
- Business Banking: Catering to the needs of businesses, including providing start-up loans, managing their accounts receivable and payable, and collecting deposits and investments. Business banking is typically more complex as it deals with the intricacies of businesses.
- Private Banking: Tailored services for high-net-worth individuals, including wealth management, trust establishment, and tax planning. (While less common now, larger banks often have dedicated private banking departments.)
- Investment Banking: Providing underwriting services (debt and equity) for companies seeking to raise capital and facilitating the creation of security markets where these investments are traded.
Technology’s Transformation of Bank Operations
Technology has revolutionized banking, offering greater convenience and accessibility:
- Online Banking: Enables customers to manage accounts, transfer funds, and access financial services remotely.
- Mobile Payments: Allows secure and instant payments using smartphones and digital wallets.
- ATMs: Provide 24/7 access to cash withdrawals and deposits.
Insurance Companies: Mitigating Risk and Offering Protection
Insurance companies pool risk across a group of individuals facing similar risks. By contributing premiums, individuals receive financial protection against potential losses. Here’s a breakdown of core insurance operations:
- Risk Assessment and Underwriting: Actuaries, risk assessment specialists, analyze historical data to predict future claims and determine appropriate premiums. Fairness is key, ensuring overall expenses are covered while maintaining individual fairness by avoiding one insured subsidizing another’s risk. This analysis results in a rating manual that categorizes risks and assigns corresponding premiums.
- Claims Processing: When a policyholder suffers a covered loss, they file a claim. The insurance company validates the claim, assesses its legitimacy, and determines the payout amount. This process may involve legal complexities, and cases can be reopened if new evidence emerges.
- Reinsurance: Insurance companies can purchase reinsurance to mitigate catastrophic losses. This allows them to transfer a portion of the risk to another insurance company. Reinsurance can also be used to expand capacity, allowing them to underwrite more policies.
Technology’s Impact on Insurance Operations
Technology has streamlined insurance processes:
- Telematics: Utilizing devices that gather data on driving habits, enabling tailored insurance premiums for safe drivers.
- AI-powered Claims Processing: Leveraging artificial intelligence to expedite claim processing and enhance accuracy.
Shared Processes and Technologies
Both banks and insurance companies benefit from several common processes and technologies:
- Customer Relationship Management (CRM): CRM systems collect and analyze customer data throughout their lifecycle, aiming to enhance customer service relationships, improve retention, and drive sales growth. Key components include data collection (website, email, social media), customer interaction management, sales management (forecasting sales performance), and marketing automation (email campaigns, social media engagement).
- Compliance and Risk Management: Banks and insurance companies must adhere to internal and external regulations set by government bodies and industry standards. Examples include Reserve Bank of India (RBI) for banks and Insurance Regulatory and Development Authority of India (IRDA) for insurance companies. Technology plays a crucial role in monitoring compliance and generating reports.
- Data Analytics: Analyzing vast amounts of data is crucial for both banks and insurance companies. Analyzing customer data allows for personalized product offerings, while analyzing insurance claims data helps refine risk assessment processes.
Conclusion
Banks and insurance companies are pillars of the financial system, offering essential services that drive economic activity, facilitate secure transactions, and provide protection against risks. As technology continues to evolve, we can expect even more innovative solutions to emerge, further enhancing the functionalities and accessibility of these vital institutions.
Footnotes
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https://www.justia.com/banking-finance/banking/operations/ ↩
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https://www.investopedia.com/terms/c/customer_relation_management.asp ↩
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for an example, say you go to SBI to open a bank account or ICICI to buy life insurance. The bank doesn’t process your request properly, calls you next week, and tells you that you will have to start the process again. So, you leave and go to HDFC bank or Bajaj Finserv to buy insurance. They make you sit, get tea for you, listen to your request, ask you to wait in a waiting room for 20 mins, get back to you in 10 mins and tell you that the process is done. ↩