Reinsurance leakage and how to reduce the cost – Supercede

Reinsurance leakage has been discussed for decades. It is often framed narrowly as missed recoveries, something that can be identified retrospectively and fixed with better accounting controls.

According to Tom Spier, Supercede’s chief commercial officer, that view misses a much larger part of the problem.

“Claims leakage in particular has always been a big talking point and a big justification for spending money,” he said.

“People estimate that accounts for around about 3% of gross written premium of an insurance company.”

That figure is typically derived from analysis of historical claims and checking whether recoveries were missed under existing contracts.

But Spier said those exercises rest on a flawed assumption.

“They assume that every single reinsurance contract that’s been purchased can be accurately described, both financially and in the context of why it was purchased,” he said.

“What we found is that assumption turns out to be incorrect.”

In practice, only around 40% of that estimated leakage can be solved through robust accounting and post-placement processes alone, Spier suggested.

Another 40% sits in the gap between teams.

“There’s a transition from one team that’s buying the reinsurance and another team that’s accounting for it,” he said.

“It’s this gap that accounts for about another 40% of it.”

Closing that gap, he argued, requires tighter integration between placement and operations, not just better settlement tooling.

“We think there’s an opportunity to solve about 80% of it, by really connecting together the placement teams and the accounting and settlement teams,” said Spier (pictured, right).

The disconnect is something Ben Rose, co-founder and president at Supercede, emphasised he sees repeatedly in client conversations.

“The difference in reporting lines and the lack of communication between the front office and the back office has created a chasm that’s gone quite neglected for a long time,” he said.

Rose described a familiar pattern during the usual course of renewals negotiations for large reinsurance programme treaties.

“Underwriters, brokers and buyers go and do their bit through Monte Carlo and Baden-Baden, they get the deal done, plant the flag on the finish line, and it’s champagne all round,” he said.

“Then the signed slip is thrown over the wall to the operations side of the business,” Rose continued.

At that point, he observed, the deal is often being codified digitally for the first time.

“You get a different version in every cedant system, every broker system, and in many cases, there isn’t really a means of codifying it properly,” he said.

By contrast, Rose (pictured, right, below) said that much richer data already exists earlier in the process.

“Clients have captured some of this information really well months earlier as they were preparing for the placement,” he said.

“Now they’re asking, what if we gave that to the operations teams as the source data for the reinsurance deals?”

These challenges are echoed in a recent report published by Supercede, focused on post-placement friction for such reinsurance deals.

It describes a form of “leakage by design”, where sophisticated structures are negotiated at placement but degraded when loaded into legacy operational systems.

“Placement teams negotiate corridors, reinstatements and sub-limits,” the report says.

“When ops teams try to load them into old systems, accuracy degrades. Workarounds approximate the contract, but those approximations quietly reshape the economics,” it adds.

Most firms report inconsistent layer definitions as a top challenge, a majority cite premium allocation errors, and nearly half struggle with regulatory reporting, according to the paper.

Both Spier and Rose said market conditions tend to intensify scrutiny, particularly as soft market conditions lead to reinsurers to seek efficiency savings wherever they can be found, while several recent years of elevated rates have increased costs for cedants.

Spier described an unusual point reached in the market cycle.

“We’re almost at the same point in the market cycle for both insurance and reinsurance, which doesn’t happen very often,” he added.