Hannover Re was the first international member of IUA predecessor LIRMA.
Long before e-commerce became an everyday aspect for the insurance and reinsurance industry, the London market was one of the pioneers in the use of electronic technology to enhance business practices. Today we share in that expertise, as the International Underwriting Association (IUA) and London Processing Centre (LPC) now play an important role in the way Hannover Re does business.
Back in 1995, Hannover Re was already taking a very serious interest in using electronic communication and money transfer systems to optimise our business processes. We saw it not least as a means of gaining a competitive advantage, but we also realised that it would be the way forward for the whole industry.
Our initial goals were varied and market-driven. We saw the opportunity to move closer to the London market without increasing our physical presence, thereby raising our company profile at the same time as improving our access to relevant market information and trends. We also wanted to enhance our ability to trade profitably and effectively with the UK and global insurance market, and to improve cash flow.
Our first experience with e-business processes was a major disappointment. Electronic Placing Support (EPS) made great theoretical sense, and we hoped it would become an important source of business for us, especially during the soft market. We would have been technically ready to receive business in time for the 1996/1997 renewal, but it became clear that a large majority of brokers and underwriters were not going to use the system, rendering it practically useless.
The experience had its positive side, however. Our relationship with LIRMA, the direct predecessor to the IUA, strengthened throughout 1996. Late that year, about six months after LIRMA opened to European companies, Hannover Re became a member. In the subsequent renewal season (and after some initial technical difficulties), we wrote a pilot portfolio of around 150 excess of loss contracts via LIRMA. For 1998 the number had risen to approximately 600 XLs, and for 2000 we wrote over 2,500 contracts through LPC, almost two-thirds of our total London market business. This number encompasses both treaties and facultative contracts placed by London market brokers in all classes of non-life business, including marine and aviation.
The system isn't exactly perfect from our point of view. There is still no electronic placing system available, and since LPC is still used mostly by London market intermediaries, those brokers placing business outside London are often displeased that Hannover Re writes via the IUA, as this seems to present them with administrative problems. There are difficulties even for those which are subsidiaries of London market brokers, as they are not included in the system.
Nevertheless, the advantages of IUA membership and the services of LPC are numerous, for technical accounting, corporate accounting and for our administration processes. The most obvious is the provision by LPC of fast, reliable and cost-effective data interchange between Hannover Re and other IUA member companies, mainly brokers.
This is primarily important from a technical accounting aspect. Statements are checked and processed competently by LPC. Single premium payment transactions are sorted by LPC according to currency and stamp code, and are then processed together. Naturally this not only dramatically reduces transaction costs, but also saves time – around 45 minutes per statement. As an extra service, LPC offers automatic chasing of overdue premium payments. We originally intended this process to run completely electronically, and thus for us to receive the information directly into our systems, but achieving that goal has been problematic due to varying definitions.
Claims settlement is optimised through LPC, providing an important service for our customers. The average time we gain from this process is a remarkable 2.5 days per claim. We also have no reason to fear our lack of control over claims handling, as LPC initiates thorough claims checking by the contract leader, then monitors the process.
The consolidated premium payment process is obviously most beneficial for our corporate accounting. It ensures efficient cash flow between all IUA members, and improves our own cash flow. These benefits were not seen immediately by our corporate accountants because it was difficult for them to accept a more limited role in the controlling of our cash flow. However, their initial reticence was gradually overcome through daily co-operation with LPC.
There are several invaluable benefits for our underwriting departments. Most important, from our perspective and also from that of our customers, is that IUA membership brings us much closer to the London market, without having a high-profile physical presence. It is ideal for our marketing purposes, as our contact with insurers, brokers and reinsurers alike is raised, as is our level of acceptance in the market as a peer, not just another European reinsurer.
Thanks to the many newsletters and bulletins of the IUA and LPC we are kept regularly informed in great detail of London market trends, new laws and financial developments. This is invariably more reliable and informative than the traditional word-of-mouth method. Furthermore, IUA offers seminars on various insurance and reinsurance topics, which are of high quality and competitively priced.
In addition, through the IUA's various initiatives we can feed back our own experiences and know-how in order to achieve uniform market solutions. We have had opportunities to take part, through the IUA, in market working parties, for example for the Y2K problem. The IUA has been prominent in the formulation of new reinsurance wording clauses for the benefit of members and, ultimately, non-members alike.
For a company with no separate wordings department, one of the most popular LPC services among our underwriters is the examination of contract documentation on our behalf. This important job is performed extremely thoroughly and efficiently, and LPC's standards are very high indeed, enabling us to save an estimated 1,875 hours per year. Although some people initially expressed their fear that we would have a reduced influence on the documents' content and form, this has not materialised. To the contrary, LPC checks every wording according to each reinsurer's precise slip conditions.
We were able to experience LPC's thoroughness at checking wordings first hand. In order to clear a backlog of London market wordings for various classes, we approached LPC for assistance. They arranged a one-off, extra service for us: a technician came to Hannover and spent two weeks with us. This proved to be most successful indeed. The vast majority of the backlog was cleared in a fast and unbureaucratic manner. That is not to say that quality suffered; we saw the efforts made to ensure that the smallest detail was correct. In short, the standard of service LPC provides is excellent – vital for an aspect of our business where trust is all-important.
Our use of LPC doesn't only benefit our core underwriting and technical accounting activities, however. From the point of view of AMG, our asset management company, our use of LPC has three clear advantages, and the first two are also of great benefit to Hannover Re's corporate accounting department.
LPC's Irrevocable Payment Scheme (LIPS) enables a multitude of individual broker payment transactions to be processed simultaneously in one single transaction, according to the relevant stamp code. The sum is credited to Hannover Re's bank accounts every third day. This procedure makes it much easier for our asset managers to administer monies in various currencies. Thanks to LIPS's three-day rolling settlement, the date of entry of any notified sum is pre-determined, making exact planning possible. Our asset managers therefore have access to the monies for investment purposes the same day. Finally, through the LPC's online ‘settlement balance enquiry' function, our asset manager's annual liquidity planning is based on far more exact information, and thus has been decisively improved.
These measures show positive results: we have calculated the average interest earned on investments with and without the use of LPC's services. Through early knowledge of relevant information, we earn extra interest income thanks to LPC.
Membership of the IUA and use of LPC is good for our business in many ways. It isn't just a question of cost, although the LPC's costs are still competitive. Although initially a stark culture change for us, technical accounting procedures are now more efficient and co-ordinated, and contract documentation is dealt with on a highly professional, speedy and cost-effective basis. It clearly relieves staff in our underwriting departments, technical accounting, corporate accounting and asset management from a variety of routine and time-consuming tasks, therefore releasing potential for other activities.
Staff are able to concentrate their attention on aspects of their job which increase efficiency and competence, therefore boosting professionalism. In other words, our membership of the IUA and use of LPC enables us to cement and improve the quality of service Hannover Re offers to the broking and re/insurance industry.