Insurance systems have historically been designed as tools to aid underwriters in the decision-making process; ease and flexibility in handling accounting were not considered factors that should be taken into account. However, what should distinguish a run-off system from other systems are its accounting strengths, says Paul Evans.
Many companies in run-off operate the IT systems that they used during active underwriting. These are usually expensive, complex and antiquated - and do not meet the unique requirements of managing a run-off company. Further, as the human resources required to run and maintain these systems become scarce, there is a higher dependency on those remaining. Such systems often dictate the number of people required to manage an account at a time when reducing costs and maintaining service levels become a priority.
Run-off companies commonly rank cost as the highest priority. While they must obviously carefully consider any expenditure on systems, they should weigh this against any savings that they can obtain. These may vary from company to company, but normally include reduced overheads, lower hardware/software licensing costs, and increased productivity.
A unique market, like run-off, requires unique product pricing. The market consists of active companies with run-off lines, management companies, liquidators and run-off companies or syndicates, each with different requirements. The pricing structure, therefore, needs to be equitable for both the individual run-off company as well as the management company administering several run-offs. Such management companies need to offer cost efficient IT, while maintaining a competitive edge.
The driving force behind any change in IT systems must be the business benefits that a new system can provide. IT systems should be built, primarily, using knowledge of complex and time-consuming business tasks, combined with elegant technological solutions. Developments in IT have made it possible to put control firmly in the hands of business managers, rather than in those of IT managers, as was once the case. Applications are now delivered in a user-friendly way.
It is particularly important that a run-off system is designed to improve cost controls and assist with efficient fund management. An essential feature is principal to principal accounting. The ability to analyse loss reserves and unpaid items for every participant greatly improves any commutation discussions. This information also enables other methods of accounting, such as net accounting and direct settlement. When the IT system provides sound, accurate information, management can make decisions regarding the future of the run-off with confidence.
A prime example where this method could be used is reinsurance programmes. In the past, systems have been unable to handle their complexities, resulting in the creation of separate sub-systems. Only a few people know how these programmes work and how they must be administered within the sub-systems. However, this information, the processes, and the accuracy of the results are among the most crucial areas for any insurance company.
To use IT to capture this business knowledge, while ensuring procedures are followed, is not simply good management - it is good risk management. When a company attains the position where business managers can handle its administration and processing, outsourcing becomes a possibility. This can offer several benefits, including known costs, guaranteed service and resources and a reduced dependency upon individuals or specialised skill sets.
Run-off system architecture is very important. It should be developed using standard technology, where the required skills are readily available. Lack of relevant IT skills throughout the industry has long been a problem, and one that can only get worse as older technologies are replaced. Standard technology future-proofs the system. Skills are readily available for development and support, and also for integration into new technologies as they arrive.
Part of this approach is to provide open systems (where users can utilise third party products, either as functionality components or for report writing). Recent advances in database technology have resulted in data warehousing functionality being included within the database product. This enables compilation of complex statistical analysis reports as data is input. When the information is retrieved, the response is instantaneous, whereas reports generated in the older systems would have run for many hours. Providing a true open system also includes making the source code available and distributed with the product. This enables customers to introduce specific developments to maintain their competitive advantage, while allowing the provider to concentrate on the features common to all.
Experience shows that active underwriting systems adapted for run-offs fail to deliver the functionality necessary for efficiently managing run-off accounts. The needs of companies in run-off are distinctly different from those of live insurers. The processing must be delivered in the most easy-to-use and time efficient manner possible. This includes fast processing of corrections and adjustments, the ability to split block payments, and automatic splitting by multiple stamp companies and participants. A system must have the flexibility to meet the specific needs of each customer, while maintaining the packaged approach. A design using table-driven customisation can provide different functionality to accommodate the needs of each customer.
As the run-off market evolves, the IT system needs to focus and develop in line with market changes. Maintaining relationships with all the major market players is important in achieving this as it helps to identify issues where technology can provide a solution.
Technology is constantly improving, but the perception that only active underwriting companies should concern themselves with technological developments is misguided. The business benefits accruing from these improvements are available for all companies. The increased power and substantially reduced cost of PC servers have provided a much more cost-effective network infrastructure. The support overhead required for this technology is also much lower than more specialist servers like Unix or AS/400. The thin client approach will revolutionise PC use in the business world by eliminating the need constantly to update desktop PCs to accommodate the latest software releases, while maintaining central control and administration.
Run-off is a global industry that requires a system designed to support the needs of a global market. It must enable processing and reporting in multiple currencies, while allowing a customer definable base currency. The settlement payment currencies must also be definable; although the market bureaux have set standards, direct processing has not. Another important requirement in a global enabled system is multi-language support. This displays all the screens and labels in the customer's chosen language.
In a market where (re)insurers find profitable business harder to obtain and world catastrophes have increased, run-off becomes a popular solution. Experience gained since the early 1990s shows that trying to underwrite a company out of difficulty only digs a deeper hole. Many active companies have a book of business in run-off. While it may be currently administered in-house, the economies to be gained from using a management company are becoming compelling. Using a strategy to achieve finality will become more common.
The future will also see more mergers and partnerships for run-off management companies, focused on increasing their presence overseas so that they become truly global.
IT will play an important role in these developments. The first step in facilitating future growth is to standardise the many different systems being used into one system. This synergy provides a common standard of functionality and reporting, as well as familiarity. It also produces cost saving in terms of software and hardware licences.
While using packaged technology, companies also need to provide features which distinguish them from the competition. These can be provided by allowing each company to develop its own components onto the core product.
Now that the Y2K furore has died down, companies have been taking stock and realising that they have dedicated a great deal of time and money to something that has provided no business benefit, other than allowing their IT systems to operate in the same way they did in 1999. They may well have been missing real opportunities.
The internet provides a new method for transacting business. For run-off, it provides a method of delivering applications and services. The infrastructure and technology are available to access and run business systems using standard web browsers, making the services accessible to a global user base. This will naturally lead to a different approach to software costs, probably emulating the telephone “pay-as-you-use” model.
The technology exists to make companies more efficient and productive - but the key factor is how it is applied. This is the challenge for the run-off industry in the first years of the 21st century.
Paul Evans is insurance systems manager, Michaelhouse Management Ltd.