The state of e-enablement in the reinsurance market and look at its future prospects.

A metamorphosis is taking place that could transform the reinsurance sector. E-commerce is the catalyst; the result may be a revitalised industry where mundane costs have been driven out, swathes of business are standardised and conducted electronically, and professional reinsurers can devote more time to high value transactions that call for expert interaction.

Yet current e-commerce activity is only the beginning of the future. It can be described as e-enabling – the translation of existing business practice into an electronic environment. Although there is an opportunity for early movers to capture value in the medium term by web-enabling large parts of their business, the real potential – and the revolution that could reshape the reinsurance market – lies in the creation of new processes and new businesses. Reinsurers whose e-strategy stops with web-enabling risk ultimate relegation to the commodity product sector.

To begin our analysis of value capture and reinvention opportunities, we have tracked the pain points that are reducing profitability in the reinsurance sector. Most of these pain points are directly due to the complicated nature of reinsurance, and to the large volumes of information and analysis required. Various e-solutions aim to alleviate or eliminate these problems, and they will do so successfully because many component functions of the reinsurance process are ideally suited to e-commerce.

For example, the first challenge in risk assessment and underwriting is obtaining sufficient information. This is paper-intensive and complex, and is almost always complicated by the cedants' multiple products, markets, terms and conditions. There is nonsensical duplication of effort by insurers, reinsurers and their intermediaries, resulting in unnecessarily high administration costs. All of these areas can be addressed by applying e-business solutions.

In aggregate, reinsurers incur significant expenses along the value chain, but the costs arising from underwriting, administration and claims management could be sharply reduced. We estimate that for reinsurers alone, e-enabling the business can save at least $4bn, nearly all of which will come from these areas. Currently, these expenses run at up to 9% of premiums, but could be reduced through e-enabling to around 5%. For the broking industry the percentage improvement is probably similar, which means e-commerce offers intermediaries an even greater impact on bottom line income.

Incumbent reinsurers' efforts to date, at their most basic, encompass a simple notice board that offers company information and contact details. All the major players have made it to this point. Dozens of reinsurers and brokers have taken the next step, and are on the way to e-enabling part of their current business practice, including some transactional processes. They have started to create broader access to products, and facilitated faster, more efficient information flow between parties with the long-term aim of cutting costs – although there is no evidence yet that this has been achieved.

The largest players in the market are leading the removal of inefficiency and duplication through e-commerce. Many others will follow them. On the placement side, a quick surf of the web will illustrate the point. American Re's AutoFac, CNA Life Re's Agora Re, GE Frankona's Rio, GeneralCologne Re's FacWorld, ERC Group's MyReinsurance, SCOR's iFac and Zurich Re's e-Fac provide a very clear picture of where the future lies: new, low-cost distribution channels will facilitate data transfer to multiple partners. The back-office revolution is more difficult to illustrate, but Swiss Re, for example, claims that e-enabling will help it to achieve annual administration cost savings of $100m.

The need for standardisation will quickly surface as the biggest hindrance to e-placement. However, more business can be standardised than many market participants may believe. Facultative covers and catastrophe layers are the easiest and most obvious candidates because products and underwriting are already quite standardised, and it is in these segments that e-commerce has (and will increasingly have) the greatest impact.

However, e-commerce has a huge role to play in treaty business – in data exchange, back-office processing and claims management. Rather than replacing the underwriter, e-enabling will allow the underwriter's valuable time to be spent on value-creating rather than administrative activities. It could disentangle the relationship and the advice from the transaction itself, and ultimately lead to new standardised products that maximise the e-commerce value gain. About $24bn of the annual global trade in reinsurance involves more standardisable products.

In the evolving e-enabled marketplace, insurers and brokers will purchase catastrophe excess of loss and facultative covers through semi-automated processes, removing billions of frictional costs. A few transactions are taking place right now. For less standardisable treaty products, a market worth about $77bn annually, the distribution side of the business will carry on as always, but billions will be saved through electronic transfer of data.

Even though the industry is taking steps to make the business more efficient, the real value, still largely untouched, lies in the creation of new businesses and processes. Already there are some examples in operation: online exchanges such as CATEX and inreon; online auctions such as ELRiX, and Reway; and AXA uses the internet to offer parts of its global reinsurance programme to selected reinsurers.

Only a handful of players have embarked upon this, the third step in the e-commerce overhaul of the reinsurance industry: embracing structural change through disaggregation of the value chain, disintermediation, the creation of new horizontal and vertical markets, and the evolution of virtual communities. The boldest, such as Benfield Greig with CargoInsure and Swiss Re Life & Health with E-tpa, have gone even further, creating new products and services that rely on core risk skills as well as the electronic capture of data to revolutionise the role and potential of the industry.

Other new business models include the client portal, which gives clients quick and easy access to a range of services that could include benchmarking and tracking tools, libraries, placement engines or claims-tracking functions: Marsh's InMind is such a portal. Swiss Re's client portal is another example. Based on current costs in the value chain and the size of the global reinsurance market, savings to be achieved through new e-commerce processes could reach $1bn – in addition to the $4bn saving through basic e-enabling.

In this environment of change, reinsurers should be asking themselves a number of very important questions:

  • Have I begun a programme of e-enabling my existing business, with the aim of reducing administrative expenses by at least 50%? How? What are the quick wins?
  • What products can be sold online immediately? Are my brands and relationships strong enough to make it worthwhile establishing a distribution-oriented website?
  • What are my clients doing with e-commerce? What are they expecting from me?
  • Are my systems capable of linking with multiple external systems, and handling data in different forms?
  • What can I do to be distinctive and create stickiness to my website? Are there opportunities to cross-sell other services?
  • What can be standardised? How would my customers react?
  • Should I participate in an industry exchange?
  • Could new products be created to take advantage of e-commerce?
  • What skills or relationships do I have that could be used to create new businesses?

    The reinsurance industry operates over an unsustainable cost base. Data is generated, printed, re-keyed, printed and often re-keyed again. Cash transfers take months, not seconds. Millions are squandered on duplication of documents and replication of wordings. Meetings take place when new ways of transferring data would suffice, such as virtual information repositories. Inefficiency is rife at every point in the model. Even though reinsurers' risk transfer product remains the most attractive option for insurers, the industry itself risks becoming increasingly unattractive as alternatives emerge. If those alternatives evolve sufficiently and the reinsurance sector fails to improve its cost-burdened practice, customers may flee to the alternatives, leaving parts of the conventional market redundant.

    The reinsurance industry must continue to embrace e-commerce in both the back and front offices. Those who are the first to web enable will uncover opportunities to create value, but e-enabling is not enough.

    There is an opportunity for innovators to capture value in the medium term before the rest of the market catches up. They will drive out costs and focus on higher-value activities, leveraging risk pricing and capital strength as the industry's key skills, supported by strong data management, excellent relationships and a global perspective. Underwriting ability must remain at the core – e-commerce will make it even more important, and will multiply the data available to incorporate into underwriting decision-making. But ultimately only those reinsurers with a credible growth strategy encompassing value creation through visionary uses of e-commerce will remain in, or reach, the top echelon of the market.

    A day in the life of an e-re underwriter

    Morning

  • I check the progress of my bids in ten online auctions. Three finish today, so I will monitor them constantly. One in particular is a great fit into my current portfolio, and still well priced, so I set up SMS messaging and e-mail notification for any movements.
  • I check aggregate exposures, business volumes and available capacity for my book, and then for the entire company, on the group intranet.
  • I deal with a broker e-mail. It explains that they have put all the risk details for a facultative proposal from yesterday into their virtual information repository. I (and five other reinsurers) have to place a bid on the risk by midday today. Terms and conditions are fixed, but I grab the video, risk details and claims history from the repository and drag information into our real-time pricing model, then send my price back.
  • I am a bit worried about a heavy downpour in California, so I check predictions of current losses for my own book by running a couple of simulations to model the effect of movements in the weather pattern. I decide to purchase some additional retro cover – assuming it is reasonably priced.

    Afternoon

  • The broker e-mails me to say that I have won the facultative business, and asks for confirmation that I still want it. I cut the relevant details from e-mail and paste them into our policy system, which completes the documentation automatically. As soon as I reply to the message, the premium is transferred instantly from the broker's account to our own.
  • I visit the office of my largest cedant. Renewals are due, so we discuss plans for next year. The cedant's broker shows up, and the three of us discuss new products, and in particular the securitisation of intangible risks.
  • Back at the office, I check current prices of California retro on a couple of the online exchanges. Surprise, surprise: it's not cheap. I purchase some additional cover anyway, which is bound on-line.
  • I participate in a broker-hosted online roundtable discussion regarding the placement of the entire programme of a major insurer. We have had the portfolio details for a few days, and now is our chance to put questions to the chief underwriter and CFO before bidding commences tomorrow.
  • I place a revised bid on that good piece of business in the online auction. As normal, the price is falling pretty quickly as the deadline approaches, but it still represents good value.
  • I read the latest news on PDA on the way home, but am interrupted by an SMS message confirming that my bid was successful in the online auction. I confirm the bid and check progress of the other auctions.