Reinsurance modernisation will inevitably include the use of technology, despite inreon's recent demise, says Tim Wright.

Reinsurance professionals could be forgiven for assuming that the demise of inreon means the industry will shelve technology initiatives and revert to its old ways of working. But the reality is very different. The industry is expected to spend another $40bn this year and next on technology. If anything, inreon's closure has provided a wake-up call to an industry that, more than ever, appears focused on deploying technology to address pressing business needs. Post-inreon, initiatives are destined to be very different, building on the lessons learned.

Reinsurance is a many-to-many market, where numerous insurers cede diverse risks from different business units, often through several brokers, to multiple reinsurers. For an insurer, reinsurance cessions represent a business-critical activity, comparable to the risk management function in a large corporation. Yet it is one that has been historically complex, opaque, fragmented and inefficient. In the 1990s it looked like industry consolidation and technology advances would provide relief. Unprecedented consolidation among global insurers, reinsurers and brokers made it potentially easier to establish common business practices. Equally, the advent of browser-based technologies and XML standards promised to overcome the frictional cost of doing business. As a result, the late 1990s saw a proliferation of reinsurance technology initiatives on an individual company and a collective level, many of which were focused on creating 'hubs' or 'exchanges' to place reinsurance risks.

While inreon was a very public departure, it is by no means alone in failing to achieve its purpose. Over 70 insurance-specific e-business ventures have been established over the past five years, of which only a handful remain.

The business drivers for modernising the way reinsurance is transacted are even more valid now than they were five years ago. Reinsurance cost ratios are still too high, and as balance sheets come under pressure and the cost of capital increases, the imperative to reduce costs escalates. New and more complex risks demand improvements in the control and efficiency of the reinsurance process, a demand compounded by the trend towards external regulation and internal compliance.

Reinsurers place greater scrutiny over the risks they assume, require ever more information about those risks and long for the benefits of straight-through processing. Cedants seek to leverage their buying power by centralising, restructuring, streamlining and channelling their reinsurance programs. And brokers are concerned to obtain the best deal for their clients, while protecting their exposure to errors and omissions claims.

So, if the demand for modernisation is even greater than in the past, what lessons can be learned from the technology experiences of the past five years?

1. Define distinct roles for all of the parties. Technology providers and reinsurance professionals must not assume each others' roles. Technology providers must not change the reinsurance business model or supplant themselves in the process.

2. Ensure all parties generate a sustainable commercial return. Technology companies can neither gift their solutions on the promise of future earnings, nor seek to extract a price that is not more than justified by the value created. Equally, insurers, reinsurers and brokers should not neglect an exacting return on investment analysis.

3. Focus on realising immediate benefits. Most of the failed reinsurance automation initiatives have been 'hubs', which muddy the roles of provider and customer, fail to generate sustainable economic returns for the parties and are predicated on a critical mass of adoption. Any successful solution must deliver immediate, tangible benefits to its earliest adopters.

4. Embrace the complexity of cross-enterprise transactions. Solutions must be flexible and extensible enough to handle both commodity-like facultative placements and complex, collaborative treaties involving large amounts of structured and unstructured information with multiple iterations between different organisations. Boiling these processes down to a standard set of data elements impedes adoption and constrains flexibility.

5. Harness 'web services'. Initiatives must reflect the fact that reinsurance is a many-to-many market where every party deals with more than one other party. Web services herald a fundamental shift in the way software applications are built and operated, enabling the participants in a multilateral workflow to retain control of their data and document repositories while exchanging them selectively and securely with their counterparties.

6. Motivate significant changes in behaviour. In the same way that other industries have rewarded changes of behaviour, initiators of modernisation in reinsurance have to provide motivators to overcome natural resistance. Whether discounts for users or increased premiums for non-users, the incentives need to be significant and visible.

Of these lessons, one in particular will characterise the next phase of reinsurance modernisation. Web services provides a cost-effective and standardised mechanism for technology applications at cedants and reinsurers to interact with one another. The use of web services for machine-to-machine communications, and ACORD XML data definitions, will negate the need for a central 'hub', by enabling each entity to control and maintain their own systems, while ensuring seamless inter-operability with trading partners.

The inevitable march towards web services has already begun. With roughly 23% of the $6.3bn spent last year on new projects in the US industry going towards integration work, an approach which supplants costly integration with one of web services interoperability is very attractive. This trend is supported by adopters of ACORD XML, which, comprising over half the cedants and reinsurance carriers globally, report average integration cost savings of 20-30%.By internalising the recent lessons learned and embracing the web services approach with neutral, economically viable software companies, the industry can focus on the real issues reducing process costs, ensuring compliance and empowering cedants.

By Tim Wright

Tim Wright is co-founder and CEO of Riskclick, a software company specialising in insurance and risk management.