An open electronic communications network for insurers and reinsurers around the world will soon transform the industry - or so enthusiasts claim. Three of the world's biggest networks are planning an alliance - with implications for the way the business is conducted. Mark Baylis reports.
Mention the words “electronic” and “vision” to the average reinsurance underwriter or broker, and you are likely to get a resigned, seen-it-all-before kind of reaction. So many market-wide information technology initiatives have come and gone, or at least failed to live up to expectations - that cynicism and even hostility abound.
This time, though, something big is happening. After decades of lagging behind other industries, reinsurance could be about to break into the electronic age as never before. Provided the political and financial issues can be resolved, the technology is relatively straightforward, and the business consequences will be far-reaching. A global electronic trading network beckons, bringing with it the prospect of a virtual market for commercial insurance and reinsurance.
The deal, already agreed in principle, would join three of the world's four main electronic networks - LIMNET, RINET and WIN - into one organisation. (See box for more information). A fourth, the US based IVANS network, is not directly involved, but is being kept informed with a view to ensuring compatibility. If - and commentators say the question is really when - the merger goes ahead, it will be the biggest ever step forward towards a global electronic network for reinsurers, their brokers and clients.
“The merger will mean the ability to negotiate and bind business over the electronic media,” says Tim Carroll, chairman of the International Underwriting Association of London (IUA), which represents companies that trade in the London market. “It will mean a reduction in face-to-face trading in the sense of two people sitting in the same room across a desk.”
Practitioners, who have heard this all before, may be tempted to be dismissive. After all, traditional working practices have survived in reinsurance with only slight modifications, seeing off or absorbing countless information technology initiatives. Such thoughts, though, would be misguided. Reinsurers may soon have to rethink the whole basis on which they deliver their products.
“The new organisation will be in pole position to act as a catalyst for the re-engineering of the insurance process itself,” says Mike Hannan, chief executive of the London Processing Centre (LPC), and a strong supporter of convergence. “Having three networks has caused confusion in people's minds and an unwillingness to invest in new technology. It should no longer be a question of choosing one network or the other. It will be all one network.”
The merger has the support, at least in principle, of an impressive range of organisations. The large European reinsurers all subscribe to rinet, while limnet represents the London market and WIN the world's four largest brokers. All three have differing agendas, but one shared overall goal - to improve the speed, efficiency and cost-effectiveness of the insurance and reinsurance industries through electronic commerce. Together they have the muscle to do so, if anyone can.
“The organisation is going to be global. It will not be dominated by any one sector or geographical interest. And it is about principals and what they want for the future,” says Kevin Ashby, chief executive of LIMNET and the person who has been spearheading the initiative on behalf of the three networks. Mr Ashby says he has had meetings with around 90 organisations, including most of the largest reinsurers and brokers, and that the plans command widespread support.“The market should welcome this development with open arms,” according to Tony Illinesi, a senior consultant at CSC, the world's largest supplier of underwriting software to the reinsurance industry. “It should provide insurance and reinsurance companies with a more efficient service and combine the best of all worlds.”Roger Summers, managing director of Rebus Insurance Systems, an important supplier of applications software to brokers and companies in the London market, comments: “We wholly endorse this merger having been actively involved with all three parties in the area of electronic commerce.”
The merger of LIMNET, RINET and WIN will, for the first time, make possible agreed electronic standards for reinsurers, their cedants and brokers worldwide. The new organisation will operate, in effect, as an international standards authority for electronic commerce.
This in itself does not make electronic trading happen - any more than buying a PC without software means that you have a word processor. Once you have an international network, however, you have the necessary framework for global electronic trading. Crucially, it will become possible to transfer large amounts of data electronically and to replicate some of the advantages of face-to-face trading through a low-cost video link up; and to do so in a secure environment and within an agreed legal framework.
The vision of an open network goes beyond insurers, reinsurers and brokers. It extends to service providers such as information specialists, risk analysts, software firms and other ancillary providers. In short, a global cybermarket for the industry.
“The idea of convergence is to provide a platform for the reinsurance industry,” says Dieter Losse, chairman of Limnet and deputy chairman of the reinsurance brokers Benfield Greig. “At its best it can be an innovative way of delivering services, making information more readily available to suppliers and clients at each end of the supply chain.”
Not everyone is convinced, however. Network convergence is politically correct these days, and the sceptics are reluctant to speak in public. At the offices of one successful European reinsurer, a senior underwriter expressed a private view that he would still want to meet the person with whom he was negotiating, thus, removing the need for electronic dealing. His chief executive, somewhat surprisingly, questioned what advantages an electronic network would have over a fax, making the point: “Faxes are a lot cheaper and more reliable.”
It would be easy to dismiss such views as outdated, but supporters of a new merged network can be criticised for not doing enough to promote its business case. Global reinsurers that have invested heavily in obtaining a physical presence in all their key markets are understandably cautious. No price has yet been put on the new network, and many reinsurers have had their fingers burnt by previous information technology initiatives.
Such fears are, nonetheless, fundamentally misplaced because electronic commerce is inevitable. It is not a question of “If?”, but “How?”.
Should this network fail at the eleventh hour, the result will be a series of independent, incompatible electronic arrangements between brokers and their clients. Indeed, for many companies the plans are already in place.
This, says Dieter Losse, would be a nightmare for the industry because there would be no common standards. “Anyone who thinks they can stand aside and not take advantage of information technology is deluding themselves. The reinsurance industry has absolutely no reason to be complacent about the delivery of its service. It is far too expensive.”
The bill for the new network has not been calculated, but is expected to be significantly lower than the current cost of having three networks, a consideration that should sway the sceptics. Assuming the merger goes ahead and delivers - and the impetus behind it is such that it is difficult to see any alternative scenario - the potential for the whole reinsurance business is enormous.
In the future
Although everyone agrees that some face-to-face trading will continue, there will be fewer brokers and those that remain will come under growing pressure to do more than just find capital. This search for “added value” by brokers will, in turn, put pressure on underwriters, who may find their creative role usurped by their intermediaries.
It also asks questions about reinsurance centres, like London. Will they still be needed? Tim Carroll of the IUA believes that centres of excellence will be strengthened, because it will make their skills more accessible. Others see fragmentation. Certainly, the industry will become more transparent and geographical boundaries less important. The need for companies to have secure ratings will become even more paramount.
The truth, though, is that no one knows exactly where the industry is heading. We are moving into an era when uncertainty is one of the few certainties. Individuals and companies that adapt successfully will be the ones to prosper.
Mark Baylis is a marketing consultant and writer