Reinsurers must adopt a different model for procuring IT systems if the industry is ever to have the infrastructure it needs, argues Alex Mattelaer

Why do reinsurance IT applications frustrate and disappoint so frequently? What, if anything, can the industry learn from the wholesale banking sector, where we are told they do these things so much better? The debate has been going around in circles for as long as anyone can remember, and we always seem to arrive at the wrong answers.

Let me begin, therefore, with a statement that may seem controversial. Most technology suppliers are competent and honest, and there are some high-calibre individuals within the IT departments of reinsurance companies - men and women with considerable vision as well as technical skills.

This statement does not, of course, answer the question of why IT applications frequently fail to meet expectations - it just makes it all the more perplexing. And it helps to explain why many senior people have concluded that the technology problems that frustrate and bedevil us are built into the system. In short, reinsurance needs a new model if it is ever to have the e-commerce infrastructure it needs.

A patchwork system

If you wanted to build a new house, you would not ask one architect to design the exterior, another to design the bedrooms, a third to look at the dining room, and so on. Sadly, this is precisely the situation most reinsurers find themselves in, generally not by choice, when creating technology for e-business. Whilst almost inevitable when constructing a company's internal systems, it is alarming to observe that a similar approach is being taken with respect to e-business - which is in essence a 'new house' and need not be built in a patchwork manner.

In an excellent paper published in September 2004, Hannover Re made the point that a necessary pre-condition to success is the existence of a company wide e-business strategy, one that conceptually integrates all business processes, from acquisition to retrocession. This may appear to be pretty obvious but in practice most companies have several systems working at once. Linking and integrating them is in itself a challenging and time-consuming project; and yet there is no intrinsic reason for this complexity in the context of business-to-business e-commerce. The situation is partly a result of the tremendous consolidation of the past decade - companies that merge or acquire others have no choice but to absorb new IT systems. That, however, is not the main explanation; this runs much deeper.

Banking versus reinsurance

There is no obvious reason why a senior banking executive should be any more astute with regard to technology than his opposite number in reinsurance. Yet, despite a few well-publicised failures, his industry has been so much more successful in exploiting technology. Why is that?

The main reasons are to be found in differences between the two types of business. Banking IT departments process large volumes of easily-structured data, covering a relatively small number of categories of transaction. Reinsurance, by contrast, is more complex and diverse, with many more variables. By and large, we are quite good at handling structured information, but so much of the data is unstructured.

Banks have a second advantage; they have more money to spend. This may come as a surprise to reinsurance CFOs as they contemplate the apparently bottomless pit of often unproductive IT spend. Yet the buying power of the large merchant banks is of a completely different order to the reinsurance industry. Of course, it undoubtedly helps that the benefits to the business of 'getting it right' have been clearly defined, understood and accepted within the banking industry.

So we find reinsurers reluctant to commit themselves, with any natural resistance to technology amplified by the perceived complexity and cost of the exercise, not to mention the apparent lack of enough business justification to even start looking at e-commerce seriously.

Tip-toeing into the quagmire

Faced with these obstacles, reinsurers have tended to avoid the all-embracing, holistic approach to business-to-business e-commerce. Instead, they have preferred to tip-toe their way around technology, taking one step at a time.

Outward-facing projects have been limited in their scope, often ignoring the bigger and ultimately more important question of business process. They are conceived and delivered on a shoestring budget with too little, too late consultation with cedants, underwriters, claims managers and other practitioners who should have been involved from the outset. The (unsurprising) result is solutions that too often fail to make people's jobs any easier or provide any tangible, quantifiable benefit to the business or its customers.

The only way to get around the inevitable failings is to tip-toe further into the quagmire, adapting as you go along, trying to integrate with other technologies that have appeared elsewhere. And, when one of these systems has to be modified, so do all the rest, with knock-on effects for customers, underwriters, claims handlers, accounts departments and everyone else for whose benefit the technology was installed in the first place. Inevitably, it gives the whole IT department, and what it is trying to achieve, a bad name.

This, then, provides a defective framework within which IT providers to the reinsurance industry must operate. Certainly, some are more competent than others, whilst far too many products are over-sold but under-deliver. It has to be acknowledged, however, that the industry gets the providers it deserves.

Provider-buyer conflict

Given this background, it is hardly surprising that a fundamentally flawed model for acquiring IT systems has developed. As a result, we find a number of systemic weaknesses and contradictions and a mismatch between the needs of IT reinsurance buyers and providers. Here are some of the areas of conflict.

- Reinsurance companies have a far longer investment cycle than the next-quarter horizon of software suppliers.

- Software suppliers make the bulk of their money from licence fees and have limited interest in providing the service their customers want.

- Whatever you may be told about tailoring systems, buying an IT application means adopting someone else's business process model or changing it at great expense.

- Designers of software have a vested interest in making it as impenetrable as possible.

- Even the biggest software suppliers lack the depth and breadth of vision and the co-ordinated resources to supply what their customers really want.

An alternative model

Several leading European reinsurers have come to the conclusion that the industry will never have the IT infrastructure it needs unless it adopts an entirely different model - one based on a co-operative approach and the pooling of resources and ideas. There is no desire to exclude existing IT suppliers, rather to gain control of the key decision-making stages and to inject long-term, strategic thinking into the process.

These reinsurers are currently investigating why some collaborative IT ventures have failed in the past while others have succeeded. With these lessons, they intend to identify those areas where they can work together to build a highly successful business-to-business e-commerce model for the reinsurance industry. There is a growing acceptance among reinsurers that IT systems in their own right no longer create long-term competitive advantage.

By delivering a new IT model, based around the needs of the industry and its customers, reinsurers can focus on the quality of their products, services and capital - the issues that really matter.

Alex Mattelaer is a director of Technology for Europe, a technology co-operative for reinsurers.