Insight: Catching Up

Technology has traditionally played only a minor, supporting role in the low-volume, high-value transactions of reinsurance. Could this paper-intensive part of the insurance industry finally be ready for a hi-tech shift?

Although the primary property and casualty insurance industry invests heavily in automation and wrestles with ways to increase efficiency and trim transactional costs, many say there is a lag in the corresponding efforts of reinsurance companies to harness the power of information technology. But more reinsurers are preaching the need for efficiencies in standardized data, the opportunities of online trading platforms and the potential power of information management.

Aside from a sharp focus on catastrophe modelling and so-called “black-box” technology to measure accumulation levels, there is general agreement that the business process of reinsurance-insurance transactions has not made substantial gains in the area of automation.

“There is a disconnect between primary and reinsurance technology investment,” notes Ken Irvin, president and CEO, Munich Reinsurance Company of Canada. “Primary companies are concentrating on refining their interfaces with their insureds and brokers, while reinsurers are working on accumulation control, portfolio performance and technical modelling. Insurance to reinsurance B2B doesn’t seem to be a priority.”

In Canada especially, where branch offices of global reinsurance groups are the norm, the adoption of modern technology such as Web services, XML standards for data exchange and online platforms has been slow. “A lot of reinsurers have systems for treaties and they get their numbers out, but there is nothing more dramatic than that,” says Andre Fredette, vice president and general manager, Caisse Centrale de Reassurance (CCR) Canada. “I think that when it comes to transactions with the primary companies, there is no real magic there.”

There are reasons for this “disconnect,” according to several sources. “If you look at the primary insurers, you are talking about low-value, high-volume transactions, so they are looking at efficiencies to drive down the cost of handling those transactions,” says Mike Mitchard, chief information officer for Partner Re. “The reinsurance transaction on the other hand is low-volume, high-value, so there is not as compelling a case.”

“I believe the reinsurance industry still lags behind direct insurers in automation,” observes Philip Marzullo, senior vice president and chief information officer, Folksamerica Re. “Since the volume of policies and transactions are so significantly less than direct insurers, the payback [of a large IT investment] was always difficult to quantify.”

GREEN LIGHT OR ROAD BLOCK?

The opportunities for more efficient data exchange have been available to the reinsurance industry for some time now. The standards group ACORD, based in the United States, has had data standards for reinsurance and large commercial risk in place since 2001 (including for XML). The ability to share large volumes of standardized data has held promise to not only reduce transaction times and increase access to a variety of trading partner options, but also to improve reinsurer awareness of their exposures. However, the actual implementation of these standards stands out as a familiar obstacle to increased efficiency.

“Data standardization is a major barrier to more rapid progress in information mastery,” says Pierre Ozendo, CEO of Americas P&C for Swiss Re. “We applaud efforts in this area as we believe industry standardization will benefit all involved.”

Donald Light, a senior analyst with research group Celent, agrees standards are a roadblock for progress in reinsurance technology. “Agreeing on standards for data exchange is a big issue and there are several ways people are trying to do that,” he says. “There are ACORD XML standards and some use of Service Oriented Architecture (SOA), but there is still a lot of work to be done. There must be the ability to have contract certainty shared between the reinsurer and its ceding companies.”

Standards have been used in electronic data interchange, particularly through reinsurance brokers such as Guy Carpenter and Aon Re, as well as directly between reinsurance companies and cedents. But there is a strong sense that standards implementation and the ability to share structured data for treaties, contracts and claims have not reached critical mass, especially in Canada.

“The diversity of primary systems and the lack of adoption of standard interfaces are obstacles,” says Irvin. “Longer-term, insurance and reinsurance companies must be able to conduct business electronically. Certainly, negotiations would still be conducted via personal contact but the transfer of pricing information and the day-to-day transactions must be automated.”

This automation of traditional paper-based transactions is the goal of several online reinsurance trading platforms, such as eReinsure and Ri3k. These Web-based applications have consistently used ACORD XML standards.

STEPPING UP TO A NEW REINSURANCE PLATFORM

Since 2001, the eReinsure platform, a neutral and secure means by which insurers, reinsurers and brokers manage the reinsurance-placing process, has been used to handle more than 120,000 submissions for reinsurance. It is designed to allow users to communicate, review, negotiate and manage risks, and archive documents. In May 2006, U.S.-based eReinsure expanded its technology platform to allow for individual risk placing, automatic rating and bordereaux reporting, internal compliance support and linking systems through XML messaging.

UK-based Ri3k is also a paperless trading service for insurance and reinsurance. It allows all types and classes of large commercial insurance and facultative and treaty reinsurance to be transacted over the Internet. Its major claim is that it lets buyers, brokers and reinsurance carriers collaborate, create contracts, distribute risk and transact in a way that is faster, more accurate and more efficient. (These exchanges are still in existence today, but other online trading platforms, such as the joint venture of “inreon” from Swiss Re and Munich Re, as well as Lloyd’s “Kinnect,” have been disbanded).

Light says reinsurers and brokers have had “some reliance on these exchanges that are more a work in progress.” He says there is a lack of symmetry in these trading platforms between the reinsurer and the primary company. “The reinsurer wants efficiency and a closed system — i.e. ‘Come to me, and I will quote and issue your contract efficiently,'” he says. “The ceding company wants some level of competition, in which the exchanges can become a place to get pricing. There are definitely some differences.”

Light sees the automation of more basic reinsurance business as a priority for carriers. “I think for reinsurers getting automation of the simpler contracts, which tend to be facultative, should be the focus of their efforts,” he says. “They should also be working with the primary companies or brokers on developing collaborative workspaces in terms of document sharing and document management.”

One example of a simple online facultative platform is Swiss Re’s e-business reinsurance solution for small- to medium-sized facultative business, known as SwiftRe. Launched in 2000, it is available in 40 countries and is currently used by more than 200 insurance and broker companies, handling more than 17,000 facultative placements.

“SwiftRe is a simplified approach to facultative coverage that reduces transaction costs by roughly one half for both us and our clients,” notes Ozendo. “More importantly, it’s putting us on a path to becoming fully electronic with even more automated facultative trading.” (Other reinsurers, such as CNA Re with SwiftFac, offer similar online facilities).

Swiss Re is also focusing on how treaty relationships can be transacted electronically. “Here, the main requirement is a willingness to coll
aborate strategically, creating more cooperative approaches to information and knowledge, and perhaps even exploring new value chains and risk management structures,” says Ozendo.

But transactional efficiency is only one piece of a much larger puzzle, according to Ozendo. “Automation reduces transaction costs,” he says. “But more importantly it generates a storehouse of knowledge and opportunities for knowledge-sharing with our clients. It enables better risk selection and ultimately better risk management by our clients.”

Irvin says “the use of technology to analyze the portfolio, accumulation control and performance remain key objectives of technology investment.” This focus on information management, or business intelligence, may be the most crucial role that technology can play in the reinsurance industry, several sources argue.

“At Partner Re, our focus is around information management, or business intelligence,” notes Mitchard. “If you look at direct companies, their issue is around how you access the data warehouse and provide the right presentation layer to enable the business user to properly analyze the business. The reinsurance industry is a bit behind. We are into that stage in which we have been working on our data warehouses for several years. Now we are putting our efforts into the presentation layer, or how we deliver that information to the actual desktops.”

GETTING A GRIP

Many reinsurers are grappling with business intelligence areas such as data management and reporting, according to James Barber, North American sales manager for Information Builders, a technology firm that works with reinsurance and insurance companies on data solutions. “We see many reinsurance companies that are looking at how they collect and access data from a regulatory or compliance perspective,” he says. “The more opportunistic reinsurers are realizing that if they invest in an enterprise data warehouse and a single view of the business, they will also gain an advantage in risk management and risk segmentation.”

One key weakness in information technology for some reinsurance companies is the quality of business reports derived from disconnected Excel spreadsheets, which are accessing unrelated data sources, according to Barber. “This is not only cumbersome and inefficient, but there is a huge lost opportunity cost there,” he says. “If actuaries are spending 80% per cent of their time trying to get the information, they are not actually analyzing risks and doing what they are supposed to — pricing correctly.”

Information Builders has worked with Folksamerica Re to create an enterprise data warehouse and associated reports for loss reserving and other critical business processes. In June 2005, Folksamerica agreed to acquire a pre-built data warehouse as part of Information Builders’ Insurance Reporting Foundation. It interfaced the data warehouse with the Milliman Reserve Pro package to create an end-to-end loss reserving system. The data warehouse and reporting solution were also integrated with other management applications.

The results, according to Barber and Information Builders, include an enterprise data warehouse delivered in five months, a new reserving process for actuaries, custom reports for managing profitability and new types of performance indicators. Barber notes Information Builders is also working with Australian re/insurer group QBE and Everest Re on enterprise-wide data warehouse solutions.

Folksamerica Re’s Marzullo says business intelligence may be the biggest reinsurance bang for the IT buck. “The key opportunity and biggest payback for IT automation in reinsurance companies lie in risk management and business intelligence,” he notes. “P&C reinsurers are investing a lot of IT dollars in . . . business intelligence to address the need for much better risk management to satisfy the marketplace and rating agencies.”

This, in turn, is placing a burden on reinsurers to be able to collect, quickly access and thoroughly analyze quality data. “The demands being placed on reinsurance companies to be able to retrieve email and electronic documents in a short period of time has resulted in a priority on putting these technologies in place. Archiving and retrieval solutions . . . are playing a large role in how we are addressing the regulatory and compliance issues we face today.”

In reinsurance technology, the lure of greater transactional efficiency through data standards and simplified online trading platforms represents potentially quick gains in turnaround time and cost reduction. But for many reinsurers, that transactional efficiency is not an end, but a means to an end.

The right level of business process streamlining and automation frees up valuable time for analysts to spend more time on more complex treaties. Similarly, a smoothly functioning data warehouse that allows actuaries to quickly access verifiable and audit-proof information provides an enormous opportunity to meet compliance requirements confidently, while also spending more time on risk segmentation and risk management.

“Ultimately, my belief is that we need to look beyond transactions, at how information technology can help mitigate our common risk trends, enabling us to better understand variability and contain volatility,” concludes Ozendo. “In the end, information mastery will create new vehicles for understanding, managing, transferring and holding risk. The reinsurers and their clients who can get there first will win.”