The reinsurance industry’s needs have changed since the 19th century, as has the technology available to it. So why are we still so technophobic?
Technology offers so much to the reinsurance market that it’s hard to fathom why it isn’t more of a driving force for change. This is a people business, and in the past technology has often been seen as disruptive to relationships. Still, much time, effort and money has been invested over the past 20 years into developing technology. It’s a shame the industry is still so technophobic.
Technology will always be one of the foundations of a market. If we are going to maintain an important role in risk management, the reinsurance sector must embrace this. Many of the challenges facing the industry – such as the need for more control over processes and information, cost-effective approaches to distribution and efficient capital utilisation – can only be tackled by using technology. And much of this technology is already available.
The best technology available in 1852 in Cologne included a stage coach to move information – which meant reinsurers had to be close to companies that ceded premium – and a hand-written monthly bordereau detailing assumed risks and premium. The manual effort involved in copying and maintaining all the information available to describe exposure to a risk necessitated a less thorough approach. It wasn’t practical to hold a large volume of data, and even if it were, the processing power to do much with it did not exist. As is still the case, most risks were aggregated into treaties to make the process cheaper to manage.
Unfortunately, things haven’t changed much over the years. We now have the processing power to deal with huge volumes of data. If reinsurance treaties had only just been introduced, we would be seeking out much more data. Reinsurers would insist that each risk be described early on in the process by a dataset that would be available online to all downstream participants. There’s no reason why this shouldn’t be our aim for all risk records, from the point of origination through to any final retrocession or ultimate securitisation. Efforts by the Association for Cooperative Operations Research and Development to define standardised exposure messages are long overdue.
Furthermore, unlike the 19th century, relationships in the industry today are spread across the world. Reinsurers face the challenge of rapidly distributing products and expertise to a global customer base at a reasonable cost. The reinsurance market has always been a networked community, and the international nature of this community today means it is ideally placed to benefit from the internet – not just for transferring information, but maintaining and forming relationships through online collaboration. Social networking is an exciting way of interacting that was not available in the past.
Another legacy that has remained is the way in which reinsurance is purchased. The market is still segmented by treaty and facultative risk placing. We should recognise that these are merely labels that should not constrain our thoughts about how to package risks in the future. The preponderance of treaty over fac is in part owed to the costs of administering individual certificates in the absence of information technology and the difficulty inherent in controlling where, why and how reinsurance is purchased.
One reason for the renewed interest in the use of fac today is because it can be managed within a framework that supports consistency and central control, in which all parties use a common technological platform. Without such technology, the fac purchased by local offices of insurers around the world can suffer from failures in execution and transparency. This example of technology adoption, in which a critical mass of participants have moved the market forward and created an important beachhead for advancement, is a bright spot.
In my view, whether reinsurance is managed in a treaty or as a facultative transaction, individual risks should be building blocks – some requiring detailed scrutiny during underwriting, some automated pricing based on predetermined underwriting criteria. Some that are unique will stand alone, while some can be packaged together for predictability or to obtain the benefits of uncorrelated risks. It should be possible to drill down on all these unique elements rather than risks being hidden within an amorphous mass.
All the technologies necessary to support such enhancements in data management are available. There is, therefore, an opportunity for aggregators to finance risk more cost-effectively. The transparency necessary for risk trading can exist, no matter what labels we use to describe reinsurance products.
While most of us like the fact this is a people-based business, greater user of technology to bring people together and help them move and manage information, is key to ensuring we survive and thrive. GR
Igor Best-Devereux is chairman and chief executive of online reinsurance trading platform eReinsure