Just when you thought the furore surrounding net-based trading had died down, the rebranded RI3K has launched a new exchange to transact reinsurance business. There is a plethora of such offerings around now, but RI3K chief executive Alex Letts is confident this one is significantly different from the others. This is partly because he has spoken to more than 150 re/insurers and brokers around the world, he says, and partly because the new exchange not only cuts out a tranche of expenses, but also allows payments through its link-up with Citibank.
In addition, he is avidly against the commonly-used internet trading model which states that ‘disintermediation' is automatically achieved through the adoption of net-based re/insurance services. “The e-commerce false dawn has already shown that disintermediation only occurs naturally and reinsurance is no different,” he says. “Someone had to deal with the issue of streamlining the entire reinsurance process regardless of whether a broker is at the party.”
With a background in marketing technology, Mr Letts set about this streamlining process in May last year. Since then, he has been “constantly revising the strategy” following his round of international meetings, but it became clear early on that the costs issue was one which needed to be faced head on. “People didn't want too much different from what they had today,” he says. “But they needed to reduce costs by 10-15%.” Other internet-based exchange models have approached this requirement by cutting out the broker from the process. As an alternative model, the RI3K system aims to lower the cost of business by refining the back office functions. Thus RI3K teamed up with Citibank to develop a payment gateway allowing point to point payments over the system. Mr Letts acknowledges this may undermine investment income by speeding up the process, but points out that the electronic handling of claims, amendments and the suchlike will make significant in-roads into the costs issue. He also points out that trading on the system does not automatically entail using all the functions on offer.
“Brokers can decide whether or not to use the payment system,” he says, though the benefits of having data flow out through brokers' back office systems and seamlessly into the RI3K payment system are pretty transparent. Using technology will result in “the biggest savings from e-settlement. It will save 90 days cashflow,” contends Mr Letts. In addition to the speed, using these types of model lowers the number of times data is rekeyed into the systems, reducing the possibility of inaccurate information being entered. To put this into context, there are certain reinsurance contracts for which data is entered almost 50 times under current ways of working. Thus reducing the costs and increasing the accuracy from the brokers' perspective could have a knock-on effect for clients, potentially leading to lower pricing, says Mr Letts. In addition, cedants with direct business will automatically see the costs benefits of the RI3K system, he suggests, and because the system has been designed from “the broker interface downwards,” it means that the modus operandi is familiar.
Already, $100m has been committed for both treaty and facultative business, and RI3K will use the 2002 renewal season to “tune up the exchange.” In essence, it operates by a broker placing a contract onto the system, and the system notifies the organisations the broker wishes to see the contract. Claims handling through the system is very similar to the traditional route, and the system was designed to incorporate the data formats required from the LPC and LPSO, now Ins-Sure. From its earliest days, RI3K – then city3k – has been involved with the WISe initiative, and is now following the WISe/Acord protocols.
Data is secured using 128-bit SSL, and public key infrastructure enables user ID to be authenticated through digital certificates held by a certification authority. RI3K contends that the system is a more secure trading environment than is possible in the non-e-commerce world. It has also eschewed the opportunity to collect management information through the system. “We have no desire to build content,” says Mr Letts.
Currently, trading through the exchange is priced at 0.5% for a completed transaction and 0.5% for money movements, on top of a $15,000 annual fee. “We have tried to charge people where they get the benefit,” says Mr Letts, though he anticipates the price will reduce as the volume of business transacted over the exchange increases. “The players will dictate what the prices should be,” he predicts.
Despite the possibilities of real-time international trading in a business which, because of its very nature could lend itself to complete electronic trading, Mr Letts is not foretelling the end of the personal side of the business, pointing out that RI3K focuses on the transactional aspects of reinsurance rather than the negotiation side. “The major deals will still be face-to-face,” he says.