Following the failure of inreon last year, Jurgen Petzold and Dr Michael Pickel examine whether e-business and reinsurance can be compatible
After last year's closure of inreon (the online reinsurance facility backed by Munich Re and Swiss Re in co-operation with Accenture and Internet Capital Group), the reinsurance industry is facing a fundamental question over the reason for the failure. Was it the concept of this specific marketplace which was wrong or is the whole idea of e-business not applicable to reinsurance business processes? To build tailored and integrated e-business solutions for the reinsurance industry, the challenges faced by the sector need to be considered, otherwise every e-commerce attempt will fail.
Without the existence of reinsurance, the overall insurance capacity available would be insufficient to cover the protection demand of today's economic systems. In particular, the past three years have witnessed significant changes in the international reinsurance markets. The cycle reached a trough of premium rates for international non-life/reinsurance business in early 2001. Loss potentials have been increasing substantially due to, inter alia, ongoing mergers and acquisitions, and concentration processes in the industry and service business segment. New risks, which are difficult to forecast and calculate, emerge on a regular basis, for example as a result of new technology issues. Furthermore, the terrorism risk has reached a completely new dimension since September 11, 2001. With such a plethora of developments, there is a corresponding increase in demand for adequate primary and reinsurance solutions.
On the other hand the cost ratios in active reinsurance are increasing because of rising claim, capital and personnel costs.
Due to the fact that capital resources are limited, re/insurers need to direct their capital into those business areas which create the highest actuarial and managerial results. This includes a broad variety of efforts to reduce different kinds of costs.
Every cost reduction implies an increased productivity of at least the same level in active and passive reinsurance. For this purpose, all actual business processes have to be collected and subsequently analysed regarding their efficiency. Within the scope of so-called 'business process reengineering', flaws in the actual processes are eliminated and adequate optimised target processes are developed. In the context of e-business processes, these target processes are transferred to intranet, internet and/or extranet platforms. The following business transactions as such on these platforms are called e-commerce processes. They are also part of complex e-business processes.
One major prerequisite for the success of any e-business concept is that the target processes which have been developed meet the requirements of both the clients (cedants and brokers) and the reinsurer. This means that key clients must be involved from early in the process.
The constantly increasing cost and efficiency pressures on the reinsurance sector fuel the ongoing requirement to rethink processes and restructure.
One primary goal of a promising e-business concept is the optimisation of all business processes, from acquisition and marketing, across underwriting and technical accounting, to retrocession and claims management processes.
Secondary objectives of optimising business processes lie in the reduction of process flow times, the implicit reduction of transaction costs and the associated increase in process efficiency. The outcome of this is an indirect increase in turnover, because efficient client processes generally lead to increased client satisfaction. This increase in client satisfaction in turn can boost business flow in the direction of the 'satisfaction-causing reinsurer'.
This correlation emphasises how important a client-orientated approach is within e-business projects, increasing client benefit, client satisfaction and, ultimately, client loyalty.
Moreover, optimisation of the reinsurer's and the client's processes are central to strategy. Almost all 'traditional' business processes in reinsurance offer the opportunity for improvements, and these optimisation processes have to be supported by technology. To measure the exact degree of the existing optimisation potentials, a detailed analysis of the individual processes in each specific company is needed. A standardised optimisation is not possible and therefore not recommended.
Another target is increased productivity. All reinsurance e-business activities must drive towards increased productivity, as well as towards improved results. In addition to cost reduction, the creation of additional benefit for the client and the company has to be aimed for as well. The focus of all cost reduction efforts of an auspicious e-business concept lies in the process cost area. By the optimisation of business processes and their transfer to an intranet, internet and/or extranet platform the process flow times are reduced. Certain tasks and sub-processes are transferred from humans/employees to machines/software, reducing costs accordingly.
In the context of risk analysis and pre-underwriting processes, evaluation and inquiry sub-processes can be inherited by so-called pre-underwriting engines and software agents. Unburdened from routine jobs, the underwriter can concentrate on the core process, namely risk estimation and decision-making - the underwriting - to produce profitable business for the company and not to administer risk participations. For the client this means reduced response times and an improved service.
For reinsurance e-marketplaces in particular, additional turnover has to be generated, so extra reinsurance business has to be placed ancillary to the already existing business, placed and administered the 'traditional way'. Smaller risks(1), whose 'traditional placement'(2) was not worthwhile in the past for cedants as well as for reinsurers due to cost factors, now can be handled faster and more cost-effectively. Moreover, marketplaces as well as proprietary e-business solutions have to create added value for all parties involved, among other things by supporting administration, accounting and claims handling processes. Finally, this has to lead to an integration of the cedants' and reinsurers' IT systems with the chosen marketplace/hub and/or proprietary solutions via appropriate interfaces.
Thus the data transfer into all directions will be possible and breaks in the automatic data flow will be avoided.
When building proprietary e-solutions and marketplaces it is recommended initially to choose classes which are not too complex, and in which the underwriting processes can be standardised relatively easily and subsequently transferred to an intranet, internet and/or extranet level. Normally, the 'easier risks', involving just one location and one class of business (so-called 'single location and single risk coverages') are suitable for e-business initiatives. Next, risks should be chosen whose placement does not need extensive negotiation. Although these negotiations can be represented on e-platforms, the technical realisation of e-negotiation processes is not that easy. The same applies to the number and the complexity of the negotiation variables of each e-underwriting process. As a general rule these variables should at first only include the premium, the commission and the offered/written/signed share. With increasing experience in the e-enabling of reinsurance products, additional variables like, for example, alternative layers, deductibles, ratings/pricing, premium payment modalities and profit commissions can be integrated as well.
Also, the time pattern of the reinsurance business plays an important role for the suitability for transferring to the e-level. Short-tail business seems to be more suitable than long-tail business, which is characterised by significantly longer indemnity and run-off periods. This latter business is normally more complex, requires longer and deeper negotiations, and offers fewer possibilities for process standardisations.
Basically, facultative and short-tail treaty business are suitable for transactions via e-platforms. Niche business such as marine products, as well as smaller, uneconomical risks to place, are other areas with the potential to be e-enabled.
Irrespective of the chosen reinsurance type, class and size, every e-business solution has to guarantee a complete documentation of all transactions made, without any interruptions or gaps ('full audit trail'). This implies a complete and secure documentation of the history as well.
What went wrong?
So what caused inreon's failure? From our point of view, there were several reasons why it didn't catch on. Firstly, the investment and operating costs were extremely high, in the range of EUR55m to EUR65m. Such high costs meant that breakeven would have been reached at a placed premium in excess of EUR500m, according to figures stated by Kaj Ahlmann, the platform's former CEO. Furthermore, the platform lacked a clear product and client focus.
Besides non-life reinsurance, casualty business, catastrophe products and technical risks of different sizes should have been placed. A concentration on specific risk categories/sizes, classified for example by sums re/insured, was missing. The aim of the platform was to place small and medium sized risks with one location as well as multinational corporate group risks.
It remains the impression that potential inreon users were either not involved in the platform's development, or if they were, it happened too late in the process.
Although these weaknesses applied to inreon in particular, the current e-business approaches display their own deficiencies. Almost all reinsurance marketplaces and hubs seem to lack a sufficient number of risks, leading to a shortfall in the amount of reinsurance premium placed. It is difficult to see that these marketplaces/hubs are currently producing a profit for their shareholders out of the collected fees and commissions. A breakthrough can be achieved by the decision of at least one important cedant or broker to place its entire risk portfolio via one specific marketplace/hub. Currently, only eReinsure fits this category, having attracted the facultative risks portfolios of Chubb, AIG and Firemen's Fund. For those facilities which have not managed to acquire full cedant/broker portfolios, there is a real danger of risk anti-selection, with cedants and brokers trying to offload risks which are difficult to place or which have been declined by the traditional market.
One major weak point of current e-initiatives is that most only try to e-enable parts of the entire business process chain of active and passive reinsurance. The target should be a 'cradle to grave' process e-enablement, but most of the existing platforms currently are not integrated with the front and/or back office systems of cedants, brokers and reinsurers, mainly because outdated and inflexible systems are still being used. The inevitable result of this is interruptions of information flow, leading to potential errors and mistakes. In addition, there are at present no consistent standards and data formats, so no automatic/electronic data exchange takes place.
Too many of the current attempts at e-business solutions concentrate solely on direct placements, not taking into consideration the role of the broker. This is a strategic mistake, because in many cases the important and interesting risks are placed by brokers, who have considerable expertise and can therefore add value to the entire process. Thus a successful e-platform can only run by involving brokers.
Cedants, brokers and reinsurers rightly ask where the real added value of each individual marketplace/hub and platform lies. There is, without doubt, added value in e-business solutions for the reinsurance industry.
Among other things transparent, controllable and traceable placement and underwriting processes, standardised formats and business flows, day and night availability, default response times and reduced transaction times, as well as costs, are all benefits emanating from e-business solutions.
All parties to the business process must, however, choose which marketplace or hub to become involved with, and economic concerns are foremost in this decision. In addition, reinsurers must decide which are the right proprietary platforms of cedants and brokers to join and for which classes of business and products to build their own e-portal.
These problems cannot be resolved yet, since the entire reinsurance e-business sector is still evolving. After the first e-euphoria elapsed, a phase of consolidation started in 2003. Cedants, brokers, reinsurers and marketplace/hub operators are reconsidering their investments and adjusting their strategic direction. New the e-activities can be launched with lower financial demands than in the past, following a philosophy of evolution rather than revolution, and involving potential clients at the very beginning of the e-development process. In this way, solutions are created which the clients really need, accept and will use.
Principally, it certainly makes sense for reinsurers to participate in several marketplaces/hubs, provided that the fixed costs remain justifiable.
It is not to be assumed that ultimately there will be only one marketplace/hub for reinsurance. Reinsurance products are too diverse for this to become reality. Furthermore, the potential buyers and sellers have too different interests.
Data formats and standards
Against this background, it is vital to agree upon one 'consistent language' in the form of standards and data formats for the entire re/insurance industry. A 'standard data translator' would enable cedants and brokers to submit one offer to different reinsurers on different marketplaces/hubs, and proprietary platforms. The lack of such standards leads to a situation where cedants and brokers have to create additional offers either for additional marketplaces/hubs and reinsurer proprietary platforms or use traditional methods such as fax and e-mail. This normally requires data rekeying, resulting in additional efforts, and costs, for the reinsurance client. However, ACORD, supported by the world's leading re/insurers as well as the major brokers, can help find a remedy. Furthermore additional initiatives are needed which will lead to common standards for offers, (technical) accounts, claim advices, etc. At the end of the day, the users(3) will decide whether there is real value added in e-business solutions.
Too many different e-platforms lead to frustration and users can develop a negative attitude towards these new media from users. Often, additional resources are needed to handle and control e-business current solutions, which is counter to the original intention of saving time and cost. It is so much more important to come to consistent standards, integrated into existing work processes.
Cost benefit analysis
When making a decision to e-enable individual classes of business and products, the cost benefit perspective has to be considered very carefully.
There are classes and products which are 'no brainers' for e-business applications due to their high potential for cost saving and/or their relatively easy execution. This group includes, for example, facultative reinsurance, and smaller and 'easier' individual risks. More complex risks, like the heavy and predominantly hazardous industry business such as multinationals' international property business or combined property and casualty programs, are unsuitable because of their high degree of complexity. But even for the classes which lend themselves to e-business initiatives, products must be chosen with a low cost of e-enabling at the pilot stage, and which will generate a direct and predictable turnover.
The failure of inreon and other reinsurance marketplace initiatives has shown that a huge investment budget is not the only pre-requisite to e-business success. Additional success factors include:
- the early, active involvement of clients, including brokers;
- a focus on selected classes of business and products;
- a bottom-up approach, starting in the operating department and not in the IT department;
- integration of all business processes, from acquisition to retrocession;
- ensuring real data transfer and exchange processes;
- integration with front and back office systems of all parties involved;
- active interface management;
- partnering with universities and international software development experts; and
- the existence of a company-wide e-business strategy.
The target has to be the consolidation of all data of all reinsurance proprietary platforms and marketplaces/hubs. Whether the existing efforts of ACORD are sufficient is debatable. It can be assumed that the world's leading re/insurers as well as the major broking firms have to join in the initiative if e-business is to succeed. In this regard, marketplaces and hubs like eReinsure and ri3k can support this process actively and create added value for the re/insurance industry.
1. Smaller risks are risks which generate a premium below EUR5,000 per signed share for the reinsurer.
2. Without the use of e-solutions.
3. The group of users includes the employees of the cedants and brokers, who are placing the business, the underwriters of the reinsurers and the back-office as well as service colleagues at both ends.
- Jurgen Petzold is Senior E-Business Co-ordinator at Hannover Re and member of the Institute of Insurance Sciences at the University of Hannover. Dr Michael Pickel is a Member of Hannover Re's Board of Directors, with responsibility for Germany, Austria, Switzerland and Italy, as well as for the world-wide credit and surety business.