Jürgen Petzold, Benita Bierstedt and Johannes Hirata consider the benefits technology can lend to facultative business.
The recent ascent of the internet to a powerful medium in business-to-business (B2B) relationships cannot be overlooked. What was traded by fax yesterday is auctioned online today. The speed and versatility of the worldwide web has contributed to the internet becoming a significant trading channel in an era when good and timely information is more important than ever. In facultative reinsurance in particular, technological innovators will have a great advantage over late adopters. It is also likely that external players will join the reinsurance market to offer their specialised services, for example on virtual marketplaces.
New information and communication technologies also have a huge potential for streamlining the internal processes in facultative reinsurance. A number of business processes - like underwriting, contract and claims management - are prime candidates for electronic optimisation or outsourcing.
To date, the reinsurance industry has used the internet, intranet and extranet1 primarily as additional marketing channels. This is in contrast to the much more dynamic development of online tools in the financial sector, which has been revolutionised by online brokerage and online banking solutions. The reinsurance industry's lag seems to be due to its more constrained vision of net technologies as one-way communication devices to advertise activities and products, rather than seeing the internet as a platform for doing business and managing knowledge.
The facultative reinsurance branch, however, has become the industry's forerunner in e-innovation. Since the beginning of 2000, the e-business opportunities available to facultative reinsurers have been widely discussed and evaluated.
New market position
International reinsurers will need to decide soon about their strategies on competing in virtual marketplaces. Supporting different electronic transaction stages creates additional value for customers and generates a competitive advantage for the company. Discussions to this effect have largely been taking place behind closed doors. Lately, however, the dialogue has gone public. Insurance experts at Hannover University's Institute for Insurance Studies and risk experts of St Gallen's Institute of Insurance Economics, for example, are actively engaged in cooperation and support processes.
There can be no doubt that the implementation of comprehensive e-business concepts and strategies in facultative reinsurance is still in its infancy. A few well-established reinsurers have begun to redesign their business processes and to create online e-commerce platforms. Remodelling internal processes, such as claims management and accounting, however, is proving to be a complex business. In addition, attempts to change these processes often meet considerable internal resistance.
Currently, very few facultative reinsurers exploit even a fraction of the potential benefits of e-business. One reason for this may be that not all innovations in this field have succeeded in the past. The failure of the electronic placing system (EPS) in the traditional London market is a point in case. Experiences like this can, to some degree, explain the industry's reluctance to embrace the new technologies.
Complementing the development activities of individual companies, virtual marketplaces are emerging, most of them specialised in highly standardised facultative reinsurance products. These platforms are operated by insurers, reinsurers, brokers and specialised service companies that are generally co-owned by reinsurers.
Current e-solutions for facultative reinsurance business provide only limited support to the underwriting process and are usually restricted to the information and evaluation stage. They do not support the complete process in the sense of a cradle-to-grave support. This must be no surprise in view of the fact that the economic breakthrough can only be expected once e-business integration spans the entire value chain. Potent tools such as expert systems and fuzzy logic applications, which are particularly suited for pre-underwriting support, have so far virtually been ignored. This reluctance to adopt the new technologies may be due to the peculiarities of facultative reinsurance, such as:
These peculiarities suggest a number of starting points for optimising business processes. E-business will certainly have to play a major role in such an optimisation strategy.
Efficiency and turnover
Even though the terms `e-commerce' and `e-business' are often used interchangeably, they should be understood as distinct concepts. While the former means the online selling and purchasing of goods and services, the latter refers to the optimisation and transformation of business processes. E-commerce solutions will typically rely on the internet, whereas e-business applications will more often make use of internet, intranet and extranet technologies as well as other electronic channels of information and communication .
Against this background the submission of a quote request and the acceptance of a facultative risk can be referred to as parts of an e-commerce process. On the other hand, the internal electronic transmission of client, risk and acceptance information to downstream departments and IT systems, including the subsequent forwarding to the clients - by inter-, intra- or extranet technology - is part of e-business processes. This procedure leads to an integration of the value chains of all companies and partners involved.
Focussing on the client
For a facultative reinsurer, e-business ultimately means the optimisation of all the business processes before they are handled via the internet, intranet and/or extranet. This way all functional areas like marketing, sales, service, accounts and claims handling, payments, etc. are integrated into a holistic value chain, covering the entire process of doing active facultative reinsurance business. External partners, such as clients and retrocessionaires, must be an integral part of every e-business process or project from the very beginning. This results in a pursuant consideration of their needs and requirements.
Virtual forms of organisation
A holistic model of cradle-to-grave business process support must allow clients (cedants and brokers) to update specified data in pre-defined limits online during the whole period a facultative risk is valid. The client, for instance, can key in changes of deductibles, the inclusion of additional risk locations, increases in sums insured and/or other risk relevant data directly. Furthermore, the clients are able to report claims online and to trace their processing almost in real-time. As a matter of course this has to be done in a pre-defined framework of authorities and rules.
The described e-business approach thus goes far beyond the pure marketing, sales and distribution perspective of a facultative reinsurer and offers a broader range of opportunities.
Organisation and structures
E-business bears significant potential for structural, process-based and function-oriented organisational variations that can be tailored to the particular (organisational) needs of a facultative reinsurer. In this context the so-called virtual organisation is certainly the most profound organisational change. For a facultative reinsurer, the implementation of a virtual organisation means the coordination of ad hoc task-oriented structures that can operate across all locations and within narrow time limits. The main purpose is to solve complex and novel problems by exploiting the advantages of active international networking and of a modular system design.
Furthermore the following conditions play a key role:
In the context of creating a virtual organisation, the international and the regional character of facultative reinsurance business is particularly taken into consideration by combining the two critical factors for success, namely location independence and partner networking. Bundling and integrating core competencies in centres of competence will stimulate the structuring and upgrading of skills and knowledge in the international mesh of the particular company and its affiliated partners.
Business process chain
The process of acquisition includes the planning, organisation and realisation of client contacts, the sub-process of product research and development, conducting market analyses as well as the process of defining target clients. Particularly with regard to these sub-processes, active and effective knowledge management is of prime importance.
Going through the underwriting process of a facultative reinsurer, the following business sub-processes have to be scrutinised:
The same process will be gone through if the terms and conditions of an existing risk participation are amended during the period of coverage and when the risk is offered for renewal at the expiry date on an unchanged or modified basis.
During the subsequent administration process, the contract documents are processed and data entered into, or modified in, the operative reinsurance IT system. Some reinsurers treat these administration works as a sub-process of their underwriting process.
Within the scope of the technical accounting process, the different types of premium, claim and reservation bookings mainly are handled.
The process of claims handling includes:
Payment receipts and outgoing payments as well as their verification and classification are the key elements of the payments handling/cash management process in facultative reinsurance.
Another sub-process of major importance is, of course, the controlling process. Controlling in facultative reinsurance comprises all planning, steering and supervision tasks which lead to a risk-appropriate allocation of reinsurance capacity. This particular process offers few opportunities, in a medium term perspective, for automation within the context of e-business activities. Importantly, however, the management information function, in particular in conjunction with supervision tasks, can be effectively supported by internet and intranet solutions.
The revision process of calculating and setting up different types of premium and loss reserves is a particular candidate for automation. The majority of activities belonging to this process are based on mathematical and actuarial models which can (easily) be transferred to e-business processes. The ultimate decision regarding the use of the mechanically calculated reserves will still be taken by management, taking into consideration the particular reserving policy.
The process of preparing statistics and reports has to be an integral part of every e-business concept in facultative reinsurance. This segment offers a broad variety of opportunities for automation.
Apart from the underwriting itself, two of the most important and useful instruments to control the net result of facultative reinsurance activities are a (pro)active controlling (meant as forward-steering activities) and the active use of retrocession. Consequently, the processes of controlling and retrocession belong to the key and core business processes. The latter normally includes the following sub-processes:
Within the scope of a fundamental reshaping of the reinsurance landscape, which could resemble the evolution in the primary insurance industry over recent years, e-business activities and the internet appearance of facultative reinsurers will change as a matter of course.
The further development leads away from the mere presentation of information via the e-enabling of the consultancy and client service segment, to individual one-to-one communication zones between the facultative reinsurer and client
Against this background, e-business will support more tailor-made products, reduce response delays, increase flexibility in respect of coverage, and better support the entire risk management process (including active retrocession).
Products with little need for explanation which can (easily) be standardised are currently traded on internet marketplaces for facultative risks, such as RI3K, inreon, Reway, ReasseguroNet and eReinsure. In order to remain competitive in these marketplaces, a facultative reinsurer first needs to optimise administration processes, such as contract management, (technical) accounting and claims processing, from a cost and efficiency perspective. The goal in this segment is to handle as much business as possible so as to realise the benefit of economies of scale. Furthermore, tight risk calculations shall be hedged in their statistical presumptions by high volume `mass business'. Thus, an efficient support of the operative business forms the centre of e-business activities in facultative reinsurance.
Knowledge-based marketing is gaining in importance. Within the scope of Customer Relation Management (CRM), client and market data are specifically utilised for customer care and acquisition of new customers.
The knowledge-based scoring of clients leads to an increase of service and quality in facultative reinsurance, which again should result in rising customer loyalty. The goal of this process is to deliver improved profitability of the risk portfolio.
The adoption of industry-wide XML-programming standards2 and the use of so-called software agents, which support customers by retrieving tailor-made solutions for facultative reinsurance on the internet, have several positive effects. On the one hand international e-business activities are stimulated, while on the other hand the general acceptance of this kind of distribution channel is raised.
Following the organisation of existing structures and processes, the so-called `hierarchical function silos' have to be integrated in `Value Flow Teams'3 (VFTs), depending upon the characteristics of separate marketing, accounting, claims and finance departments. Making use of internet technology and VFTs, it will be possible to increase the efficiency, the speed and the amount of information in facultative reinsurance.
As already illustrated, the main objective is to establish complete cradle-to-grave handling. The advantage for the client is the so-called `one stop buying'. Benefits are expected in faster processing, minimising or avoiding data loss or falsification, better information flow between all parties, and a reduction of the overall amount of communication.
In a first step, all business processes of facultative reinsurance should be converted into IT data. Consequently, each stage of the process must be transferred - as far as possible and reasonable - to an electronic platform in order to increase efficiency. In order to streamline the underwriting process, expert systems using technologies such as fuzzy logic can also be used.
In this way, facultative reinsurance evolves from e-marketing into facultative, direct e-reinsurance by means of the integration of the following process elements:
l update of existing facultative reinsurance acceptances (in this context it is necessary to grant customers access to contract data in order to allow them to execute for example additional contract closures, adjustments of sums insured etc.);
The outsourcing of non-core processes which are too expensive to be handled internally can optimise the efficiency of the entire operation. Specialised service companies already offer support like external treaty and claims administration.
Basically, the following e-business models are available for dealing in facultative reinsurance:
Successful e-business strategies are characterised by the pursuit of parallel activities in several of these fields. For example, active participation in online risk markets and public sales is recommended for the acquisition of new customers, and to increase turnover while developing an own reinsurance website at the same time.
Strategy re-examinationDue to the dynamics of information and communication technology, customer needs and the activities of competitors, e-business strategies require re-examination in six month cycles, in contrast to other business strategies which are generally worked out for a period of at least five years.
It is self-evident that investments should not exceed a certain level in the initial testing stage. Participating in online risk markets and public sales will help with orientation and learning.
Furthermore, the integration of individual facultative e-solutions into the corporate e-strategy should receive due attention. All activities should start from a joint website based on a standardised and compatible interface that combines a maximum flexibility, ease of maintenance and future adaptability, enabling these virtual structures to be adjusted easily to potential internal and external demands.
Unfortunately, the facultative reinsurance business is characterised by little spirit for integration and little sense of community. This deficiency affects the acceptance of electronic reinsurance marketplaces and auctions, which themselves do not have cradle-to-grave functionality at their disposal. Different IT systems of potential business partners as well as undefined data interfaces and missing and/or antiquated standards impede the integration in virtual reinsurance networks.
All things considered, it must be acknowledged that virtual facultative reinsurance is currently hampered by the limited possibilities of interactive customer service. These technological obstacles can be removed by so-called `kiosk systems' in virtual reinsurance marketplaces, which are equipped with appropriate communications technology and audio and video broadcasting support.
Any necessary modification of existing structures towards the virtual organisation should be actively encouraged. After all, it is only with a minimum of investment and an active management backing that the potential benefits of e-business will be exploited.
1 An extranet is characterised by granting an external user privileged direct access to selected data stored on an otherwise internal network.
2 Overcoming the limitations of HTML to internet solutions.
3 Value Flow Teams handle the complete process of facultative reinsurance from the beginning (receipt of the offer) to the closing (cancellation of participation) without any break in system or of communication.
4 In this context, e-mail and chart applications, internet phoning and video conferencing can be used.
By Jürgen Petzold, Benita Bierstedt and Johannes Hirata
Jürgen Petzold is head of the centre of competence, e-business-facultative reinsurance, of Hannover Re, a member of the Hannover University's Institute for Insurance Studies, and a managing partner of the JP Systemmanagement, advice emphasis: strategy development and information management. Benita Bierstedt is underwriter, e-commerce and project member e-business-facultative reinsurance, at Hannover Re. Johannes Hirata is a project member e-business-facultative reinsurance - at Hannover Re.