Business processes within the re-insurance sector are traditionally slow to re-engineer.
Global Reinsurance, in association with SAP, invited some leading experts in the European re/insurance sector to debate to what degree, realistically, technology will and can contribute to modernisation.
David Wilson - AnnoMM Management Consultants
Dr Jochen Wolf - Director, Business Development, IBU Insurance, SAP
Tim Riley - CIO, Alea Group Ltd
Roy O'Neil - Partner, Deloitte
Clive O'Connell - Partner, Barlow
Lyde & Gilbert
Susan Savage - Manager, Member Relations, ACORD
Andreas Molck-Ude - Munich Re
Business processes within the re/insurance sector are traditionally slow to re-engineer.
Global Reinsurance, in association with SAP, invited some leading experts in the European re/insurance sector to debate to what degree, realistically, technology will and can contribute to modernisation.
David Wilson: It seems to me that investment in operational improvement has a significant negative impact, both in terms of cost and disruption. Therefore as a result of the slow payback many want quick wins. To what extent is the industry prepared to make the fundamental changes necessary to achieve total realignment of the process?
Tim Riley: Our philosophy is based on implementing bite-sized chunks. By doing so the system becomes operational sooner and people can immediately gain value from it. Gathering the requirements and then going away for three years to return with a new system simply doesn't work. I would agree that many are after quick wins, but to deal with that you have to gain the users' trust from an IT perspective.
As an IT person, one thing that has struck me is that people seem fundamentally easier to change than systems. There is a certain inertia in organisations to changing their business processes, but this is more about getting the people to change than the systems.
David Wilson: In the insurance industry, the bridge between present process and future process is like a series of pontoons, which while flexible and with each pontoon representing good value, it doesn't produce a significant productivity gain because there's always somebody repairing a pontoon. Other industries, for example the supermarket industry, have had great productivity gains because they change the way they do things.
Clive O'Connell: Supermarkets can change their stock on a daily or weekly basis. Insurance and reinsurance companies need historical integrity. Without a link between historic data and what's going on today, there can be grave problems. If you can't access data easily, it creates problems.
David Wilson: Yet new reinsurers do not have those inhibitions or constraints, but also seem to under-invest in technology.
Tim Riley: As a fairly new boy, I don't think that's true of us. We have invested a significant amount in infrastructure both in terms of technology and underwriting control. We'd like to think that's a differentiator for us. And the fact that it is a differentiator is because most others don't.
David Wilson: But does the improvement in productivity justify the investment? Is the capital cost of making this investment being repaid? Have you ever benchmarked your actual productivity cost?
Tim Riley: We didn't view it in terms of productivity cost, but rather the profitable bottom line. IT systems will never really influence underwriting, particularly on reinsurance. You're not going to start selling reinsurance over the internet. Where it is essentially going to contribute is on costs. And the two main costs are people and the losses ultimately.
David Wilson: The underwriting result?
Tim Riley: Claims will have a far bigger impact than people. In terms of people, IT systems can help automate and improve information accuracy. On the losses side, we've tried to deliver underwriting control up front through our infrastructure investment.
Roy O'Neil: Do you have a business case attached to all this?
Tim Riley: In terms of a concrete set of numbers behind it, no. But it is not an unsound proposition to focus on bottom line profit-focused underwriting with rigorous controls around our underwriting philosophy.
Andreas Molck-Ude: The issue of costs is important. I'm responsible for managing the implementation of SAP technology for the Munich Re Group, and am also Executive Manager of the reinsurance business, perhaps changing the old perception of having IT projects headed up by IT people. The reinsurance battle is not going to be won on the basis of costs, which are somewhat irrelevant. Where the battle will be won is in terms of people and the ability of reinsurers to analyse risks, manage risks and manage portfolios. You need integrated software to enable you to compare `apples with apples' across the world by looking at numbers and by knowing that the semantics of the various pieces of data are the same.
David Wilson: Knowledge efficiency, not cost efficiency?
Andreas Molck-Ude: Yes. Reinsurance is a global business, with daughter companies and independent units around the world and you need to consolidate all that data.
Susan Savage: While I agree, so far you are looking quite inward, about becoming more efficient through internal communication. Part of your cost must be on external communication with your broker or those cedants that are dealing with you direct. So when talking technology, efficient communication both internally and externally is important.
Andreas Molck-Ude: What we are discussing is integrated systems and part of what you are addressing is a pure administrative function. We approached it from the aspect of steering the group risk management, risk evaluation etc. In terms of cost, the Munich Re reinsurance group IT budget is significantly less than 1% of the turnover, so it is essentially minimal. What you want to use the IT for is the key factor.
David Wilson: I'm going to say something quite provocative. Reinsurance is essentially an aggregation of many transactions. But the market has been a process of losing data, losing detail at each stage. The broker will have more information than the insurer and the insurer will then give less information to the reinsurer and the reinsurer will reinsure with even less information. It is constructed on the basis that data is progressively destroyed, lost or at least not transmitted. The theory being perhaps that, as capital got larger up the chain, individual risks became insignificant. It became the law of large numbers and it didn't matter what was underlying it. But no one now has sufficiently large capital to ignore such details. So now that technology is so cheap and storage of information even cheaper, shouldn't the industry be passing all the information all the way up the chain?
Tim Riley: I agree. But understanding the data and consolidating data is the big challenge. Continuing the apples analogy, just getting apples to add to apples has been a huge challenge. I agree that to get that information all the way through would be ideal, but for now the focus is on getting the apples to go to the apples internally.
Andreas Molck-Ude: We should also be aware of the issue of transparency - transparency within your own portfolio, and within the data from your primary insurance companies or retrocession parties. When a reinsurance company is using IT to support the business, not only must it support its own business, but also the primary insurer's, using a standardised kind of data. So there must be transparency not only internally but also within the supply chain.
David Wilson: That is a key point. A supermarket will have a supplier of apples in Paraguay who will label and pack those apples to the same standard as the supplier in South Africa. The store has achieved that by going up or down the supply chain. Insurance hasn't done that.
Clive O'Connell: Reinsurance is written in an environment of utmost good faith. There is an obligation to make full disclosure, which can be done by providing raw data. The problem is that nobody can underwrite from raw data. One needs to consolidate that information as it goes up, whether by each person in turn making a fair presentation of what the raw data is, or by imposing upon the whole chain an analytical tool that can analyse as it goes through. That needs to be resolved between reinsurers and their reinsureds. The important point is that the data sent upwards is correct and that it is capable within a relatively short period of time of being digested and understood and therefore underwritten.
David Wilson: I think the problem is that insurance actually amalgamates things at each level. So it doesn't send six apples from Paraguay, but rather five apples and one pear. Reinsurers will clump policies together which have different risks and those risks will be consolidated at each level. So there's not a consistent model of what's coming through the pipeline because bits are added in.
Clive O'Connell: But a supplier of pears in Paraguay will be packaging pears to a certain standard for a UK store, but might package them differently for a supermarket in North America. This is perhaps a closer analogy as to how reinsurance operates. People are presenting information in a way that their reinsurers can view it.
Tim Riley: There is also the shipping container paradigm. The apples or pears are put into the same standard tray to be loaded onto the container ships. That was an infrastructure that was built to allow these supply chains to be driven though. The reinsurance industry doesn't have that kind of shipping container standard. Standards don't really play a part, but that is an infrastructure which is missing. There is no communication infrastructure.
Clive O'Connell: Another issue is that in reinsurance one is doing business to a large extent with one's competitors and there is a form of restraint on how much raw information one wants to provide to one's competitors.
Andreas Molck-Ude: It all boils down to underwriting. I would qualify your statement initially about excess capital and individual risks, by saying that you will always have different groups of reinsurers. London is an area where you find lots of reinsurance traders, so not all of the money comes out of underwriting, but also from trading - portfolio management rather than individual risk assessment. The classic reinsurers ask the question to get the information to assess the risk. But at certain points in the market cycle the information you require may be difficult to get because too many competitors are not interested and the clients withhold some of the information. As professional reinsurers, we must know what information we need, ask for it, and internally have the structures and the technology supporting us to analyse the risk.
David Wilson: To do that you need to know the details. Motor fleet is a classic example of a container where you don't know what the content is. Composite insurers are writing motor fleet and they really don't know who the drivers are, what the vehicles are. It's done by declaration in retrospect. Is the insurance industry able to continue to support what is effectively blind underwriting?
Tim Riley: Not necessarily blind, but delegated. As I understand it, the large part of the underwriting process is assessing the insurance company that you are reinsuring and assessing their underwriting guidelines, how strictly they adhere to them. So you're delegating it to the insurance company to underwrite that fleet at the detail level to their standard, to their underwriting guidelines.
Jochen Wolf: But even if the underwriting is very good and they ask all those questions, you must ensure the answers go to the right part of your organisation and that those involved know how to handle that information. The World Trade Center incident showed us that, while many reinsurers talked to their primary insurers, they were not able to manage their own portfolio. Some discovered they'd insured five companies on the same floor but didn't know about it. They learned pretty quick. As a software and a system vendor this was a big issue - to let our customers know that tools existed to administrate such things. It was just not as common knowledge as it is now that companies were using such tools.
David Wilson: Why doesn't each piece of insurance business become a data unit? They can still be consolidated, but they maintain their integrity as a piece of data unit in the same way as stocks and shares can be consolidated into unit trust or bonds or whatever. At the bottom of the line is a single transactional value and I don't understand why there is this need to consolidate data and lose the detail.
Tim Riley: I've always believed that people who do deals have less understanding for the essences of data. The human mind can have five reinsurance contracts that are all completely different, but understand each one in detail. However, they're not necessarily trained to understand that actually trying to aggregate those five across, the data units aren't necessarily compatible. All we really generate is data. But nobody seems to treat data with the same respect they treat apples, which might get bruised in transit. But they are quite happy to do that because the human mind can cope with that kind of complexity of information.
Andreas Molck-Ude: What we do is differentiate between risks. You cannot put each individual risk for every line through the whole chain as an individual data unit. You can group things together, the more complex the individual risk gets, through the supply chain. For example, Daimler Chrysler worldwide as an individual data unit, which flows through the broker, the direct insurer and the reinsurer. There is no need to be able to track a portfolio consisting of a million individual car policies down to the individual car or the individual driver, at least not from a reinsurance perspective.
David Wilson: The primary seller is doing that for you and there is very low volatility in motor portfolios, which perform in a very predictable way. The changes that occur to the portfolio are inherently economic, pricing, legal or liability changes and not because one vehicle cost a huge amount on one loss. But there are embedded unforeseen risks with consolidated policies. What happens if Daimler Chrysler has an oil spill at a plant? It could cost billions and would come totally out of the blind side for that cover.
Andreas Molck-Ude: But it shouldn't, because it's a question of risk assessment. That sort of example supports the view for a globally acting reinsurer to have integrated software. We need to know where Daimler Chrysler is around the world and the policies that are in place. While we knew this before, integrated software facilitates enhance accumulation control.
David Wilson: So the cedants are delivering the information to your shape and size.
Andreas Molck-Ude: What do you mean by shape and size - the data format or the information?
David Wilson: Well, Munich Re used to write quota share cover for us in the Middle East. You knew nothing about the risk, but you took 40% of the premiums or 40% of the loss.
Andreas Molck-Ude: You don't as a reinsurance underwriter need to know each individual risk which runs into a treaty. I need to know what the contract covers, what it doesn't cover, and to form an opinion on the company's underwriting standards. You look at statistics of portfolios rather than individual risk. So I believe it's entirely prudent to underwrite treaty business on a basis that doesn't require a reinsurer to know each individual risk.
Jochen Wolf: David, you mentioned an important step. Are we in a position to support that supply chain? The market contains a lot of players - brokers, cedants etc. How can you ensure you get the right data for whatever integrated standardised system you have in place? One advantage of our solutions is that we serve the industry as a whole, not just the insurance or reinsurance sectors. The system can be used by primary cedants, insurance companies etc. Companies like Munich Re and Hannover Re want one day to have the same software as their customers, so information can flow back and forth easily. The whole industry could profit from streamlining the process through all the members of the chain.
Roy O'Neil: If there was one system streaming right through from the economy market to the reinsurance market, you wouldn't need standards.
Tim Riley: I don't think that's the case either because going back to the shipping container analogy, there is more than one shipping company, but all of them can carry any container. There is not one company making the containers, there are a whole variety of them.
Clive O'Connell: Also, the primary insurer is requiring data from its insureds ... it needs standardisation within the systems.
Roy O'Neil: If you walked out of this room and solved the provision of data between primary and reinsurers we would all be wealthy people.
David Wilson: On another issue, we are now seeing losses coming from places we never expected in scales never expected. How can technology help ensure the exposure is sensibly proportional to capital or capital to exposure? After all, the relatively small reinsurance market is having a pretty desperate time at the moment.
Andreas Molck-Ude: The question of capital is predominantly one of capital markets rather than actual business. At Munich Re, we didn't reduce capital because of major losses, but because of what the financial markets had done in the last couple of years. If you look at the figure for overall capital reduction as a percentage, I'm convinced 80% would be from capital markets and 20% actual reinsurance losses. This is not a technology issue. It comes down to people assessing risks, tracking risks, accumulation control, etc. One question I would like to ask is if an integrated system is successful, where does competition take place? And I think it will take place in these critical areas, because these will be the modules which the leading companies will probably not put into the standard. What we want to achieve, and what we're doing with SAP, is to standardise the core administration system. However, we would be crazy to integrate our 120 years of experience into creating modules to evaluate accumulations, pricing etc, only to be used by our competitors. We are willing to share a standardised administration system, because there is no real competitive advantage lost. But the really decisive modules are customer relationship management, pricing, accumulation control. I'm convinced competition will be on those fronts.
David Wilson: How will technology help risk evaluation? How is it going to help establish capital levels to cover risks that are now in that operation?
Tim Riley: It's accumulation control. I appreciate your views in terms of getting that information from the underlying insurance companies, but first apples and apples must agree between companies. The ACORD standards are starting to develop that kind of interface between the insurance company in terms of what apples are to them and to the reinsurance company. Given the number of players and complex terminology involved in reinsurance, it's a difficult process. It isn't necessarily tied to the cost of technology, but just getting everybody's head in the same place.
David Wilson: Hypothetically, if incontrovertible evidence were produced that mobile phones caused brain tumours to occur ten years earlier than in a case where a mobile phone was not used, would the industry know its exposure? How would systems cope if evidence against overhead power transmission cables or fluoridation came to light?
Clive O'Connell: The whole essence of insurance and reinsurance is that it protects people against the totally unknown, the unforeseen and unexpected. There is always going to be uncertainty. If there wasn't, there would be no need for insurance or reinsurance.
Andreas Molck-Ude: I totally agree; you cannot rule out all the risks. And technology can help. In an issue like mobile phones, we would be crazy not to carry out research. You can do so by looking at the direct insurance policies. You'll always find that this is the type of risk people want to insure because there is uncertainty. And the reinsurer must decide whether it is willing to take the risk and if so, how much. I think that's one of the lessons one should have learned from asbestosis; that we will always incur risks that were not appreciated at the time, but we should be in a position to limit our exposure to a level we feel comfortable with. So that unlike the asbestosis issue, you don't have quota share treaties all over the place filled with these risks.
Jochen Wolf: The first step has to be identifying and qualifying the risk. If you can't identify it because you don't see it as a risk - like toxic mould five years ago - you insure it. Next, you have to make sure that if you know about it that you make sure that not all the books are filled with the same thing and that's where technology comes in, because you can control all those policies through your systems. When placed in one system, it can organise them much better than a person. In a huge organisation, you would need huge numbers of people to administer it and would still not succeed. That's where technology comes in.
Susan Savage: I agree. Technology is a tool, not a panacea. Senior underwriters use their wealth of experience to make an underwriting decision, whether to take the risk, at what rate, the terms and conditions. The technology will help them file it. And it will help other departments use this information for research and development into new products, rating issues, where exposures lie, so if there is another, heaven forbid, World Trade Center, they'll know they are insuring three companies from the 50th to 115th floor. The technology will tell them where their exposure is, but it will not make the underwriter's decision on his behalf. Part of the problem in the past with the reinsurance industry is that they believed technology could be the solution, not the tool. It's a tool to help the underwriters and their colleagues come to correct underwriting decisions.
Jochen Wolf: That's a good point. There is confusion about where IT fits in. Sometimes IT departments think they run the business. But it's the business that runs the business, and IT supports it. When you have a project like that of Munich Re, you have to bring in the business side. However, the business people often think technology is doing what you just described, that you press a button, the underwriting is calculated and a premium is paid.
Susan Savage: Somebody commented on how the broker and the underwriter do the deals. I have been a broker and an underwriter on both sides of the Atlantic and I never understood what happened in the back office. All I knew was that I had all these papers and I handed them over and they disappeared. I had done a £5m deal and we had made £100,000 off that deal. The fact that it cost £350 to process it never entered my mind. Underwriters and brokers don't concentrate on the back room cost unless it becomes a business issue of maximising benefit to the consumer. Technology should bring in efficiencies that allow for better customer service to your cedant, to your broker, to your reinsurer.
Andreas Molck-Ude: Technology cannot change poor underwriting. If the underwriter doesn't know what to look out for they won't be able to guide the programmer in inserting the correct field or number in that field. And even if your programme has all the correct fields and numbers but you don't know what to look out for, it's useless. Technology needs to be led by the business, it needs to be supported by those who use it. Too often, underwriters are only interested in using the IT system and not in helping to design it. And when they are unhappy about the system and you invite them to assist in developing or improving it, they say no, because that's the job of the IT people. So it comes back to the point that IT can only be as good as the underwriters who say what should be put into the system.
Clive O'Connell: Twenty years ago we used to deal with problems where contracts were rated literally on the back of an envelope. Today we see marvellous models, computer-driven models calculated by actuaries, a massive amount of data going in. But you get disputes arising out of those as much as we had disputes arising in the past. The only difference is that they are far more impressive than they were in the past.
David Wilson: Say we have in place a wonderful information system and the industry was suddenly hit by a single huge loss. Every reinsurer or insurer can then instantly calculate their loss. But if the regulators suddenly call for increased capital to cover it, either because you haven't got the necessary capital resources or because suddenly your balance sheet has these loss reserves in them, who is going to put that capital in?
Andreas Molck-Ude: But if we all knew what we were in for, nobody would have a problem, because that would be the loss our capital was geared towards digesting.
David Wilson: But then that capital is parked against that loss. We're going to get huge volatility because it seems the insurance industry has habitually paid past losses with future income, whether provisions, loss reserves, etc. Reinsurance to close (RITC) was never a true representation of the unknown losses that materialise in the future. There was nothing in the RITC 20 years ago for asbestos. So can the industry actually stand this complete transparency? Or will reinsurers have to be enormous to even exist?
Andreas Molck-Ude: Not enormous, but rather profitable. Reinsurers have been poor in getting returns from an underwriting perspective. The capital markets have been performing badly for a long time. The big old reinsurers had so many hidden reserves which were permitted by the tax system of that country that you didn't need to worry about situations arising, because reinsurance was almost irrelevant to the company's overall success. Now, however, those huge amounts of excess capital have gone, and capital markets are delivering poor returns, but one very positive effect is the renewed focus on underwriting. The erosion of capital in the reinsurance market has been so great that there are hardly any companies who can afford to say we don't concentrate on underwriting because we make our money on financial investments.
Roy O'Neil: I agree, but you also have to look at your claims management process as well to make sure there is no element of further leakage.
Tim Riley: Insurance is like a stumbling giant, with claims dragging at its feet and income providing the momentum. So as long as it keeps moving, it's okay. Go into run-off and the feet stop moving and it falls. But banks are much the same.
David Wilson: There is a fundamental difference though. The bank's liabilities on both sides of its balance sheet, the deposits it has taken and the loans it has made, are certain and known figures at the point that they are attached. But with insurance, the liability is not certain at the point of attachment. Nor is the income always certain. There can be an inherent mismatch between premium and liability. From the balance sheet perspective - and that of company shareholders - hidden from us all, is a contingent risk of something that we aren't yet aware of. Not in the case of Munich Re I am sure, but probably in certain Lloyd's entities, there was a known loss, but it just wasn't found. They just couldn't do the calculation right, so the RITC was kind of fudged into the next year and it all rolled forward.
Andreas Molck-Ude: You reserve for events to the extent that they are known to you. You reserve prudently for the known events. There is a huge difference in the way companies are run and I think the reserving side of it, when it comes to reinsurers, is the most important one. And there again, the issue of integrated systems and being able to analyse the figures comes into play.
Jochen Wolf: That's where the tool comes in to play - reserve management, not only with one entity, but within all the entities within one group. This was just not possible in the past. Everyone had their book of business in their respective countries, they had their own reserves. Some of them reported one way, some another, and not always with the accuracy level required, and so they were under reserved and the whole thing just collapsed.
Andreas Molck-Ude: We mentioned earlier that when we change the system, data is lost. When we change our system, we want converted data going back to 1951 because we firmly believe that, not least for reserve management pricing on long-tail classes, we need those data and in a comparable unified format for all our companies. But this makes the process extremely cumbersome and reliant on manual inputs, and therefore prone to mistakes.
Clive O'Connell: What you're saying, David, is that risks have been under-rated consistently and reserves under-stated. But today by using technology, underwriters can see where underwriting occurred in the past, and actuaries could see where claims were reserved in the past, and they can use the data from that under-reserving to hopefully reserve more adequately in the future and to rate more adequately.
David Wilson: What I'm really talking about is volatility. As the communication of precise information improves and the time to produce it declines, that information will be available to the management under public domain and their credit agencies and everybody else very quickly. I think we will see considerable volatility, when things are suddenly exposed to the market.
Tim Riley: The tool won't change the fundamentals of the business. It may accelerate the timeframe by which these things are known, but won't change the fundamentals of the business, per se. There will still be things that you don't know about now which you will find out about in 20 years time.
Jochen Wolf: Another factor is that with all the new regulation such as Sarbanes Oxley, people are crying out for standardised systems to handle all the requirements. One has an impression that with all these regulations there is now a need for standardised software. Is this something that the technology tool could really help you with, or just an impression we have as the vendor?
Roy O'Neil: Can I extend that a little bit further? I think it's more about standardised processes than standardised systems. The system is an enabler to the production of this information, and I think what the regulators want to see is the underlying process in the system and the confidence a system can give you in the analysis of risk-based capital or whatever.
David Wilson: You must show the integrity of the information coming through.
Susan Savage: That's the whole point of LMP accounting and settlement. You can use the reader system, the SAP system, any system you want, but the data message is exactly the same, so that everyone can communicate the same way. So I agree, it's not standardising the software solution, but the message that goes across it.
David Wilson: Let's just throw another one in. If people are sorting out their technology, which is clearly the case, do we still need a London market settlement process or should the London market be settling principle to principle? Is the aggregation and redistribution of funds necessary now with effectively the opportunity to use systems that can manage multiple counter parties, and with the number of lines on a slip diminishing rapidly?
Susan Savage: We're seeing a number of large and mid-sized brokers, reinsurance companies and insurance companies adopting the ACORD messaging standards in XML for accounting and settlement, and the LMP process, as well as the use of the electronic slip. So the big message that has been coming out of all the LMP reforms is that we must move away from London market-centred work; to annual accounting from three-year accounting; the use of technology inter-operability between computer solutions; the increased use of messaging standards. But there must always be room for the idiosyncrasies, for some of the smaller niche players that actually provide a very important function to the entire insurance industry. Cultural idiosyncrasies need to be looked after. The announcements by Xchanging show they are moving towards repositories. While Munich Re can communicate with one of their senior brokers independently, without needing to go through the bureau, it does serve an enormous function because now it does the translation, so that Swiss Re or Converium can communicate with that small broker in a cost-effective way. If you look at the bureau as a translation tool, it's fascinating, and the fact that it's being done in London is immaterial.
David Wilson: But does it need to handle the cash?
Susan Savage: For some people it probably helps them, for others I'm not sure.I would like to consider the idea of a utopia of standards. Celent published in October 2002 a study, having interviewed a number of our members, predominantly US carriers and reinsurers, plus the ACORD staff themselves, which showed that they could achieve integration efficiencies in the order of 20%-30% by implementing the ACORD XML standards. They found that there were five main reasons why companies chose to do this: to speed up integration with external business partners through a common platform for communication; to speed up integration with external technology vendors; to enable internal integration; to save time and effort on developing their own internal standard; and to avoid internal politics. By using an independent messaging standard, you avoided ownership issues on some of the things that happen in all companies.Is there such a thing as the utopia of global standards? We are very much aware that our standards aren't the only standards out there. We work quite closely for example here in the UK with Polaris and have reciprocal membership affiliation with almost 20 other standards bodies around the world. We're also very active in the eEG7 (e-business Expert Group 7 for Insurance). This enables us to compare our standards. Because one thing we must be aware of, with the levels of transparency with the messaging standard, is that there are cultural rules and regulations, which is why, when promoting our standards around the world, we are always keen to meet with each country's insurance standards body. So in this way and by continuing to data map, I think we will move closer to global standards.At ACORD, we don't write these standards in isolation. We facilitate the discussion between our members and they're the ones that write the standards. So as you have large multinational corporations that go around the world incorporating our standards, adopting them for use in the local areas through data mapping, a data dictionary, all this information is free on the internet. I think that eventually we will have global standards but they will allow for cultural and regional differences around the world because that's something that our membership is driving forward. The messaging standards change on a regular basis because of valuable time and input. Our working groups are setting the future global strategy for clear transparency and the need for the messaging communication, which allows the companies to do what they do best - underwriting.
David Wilson: Who has been prepared to make the retrospective investment in formulating and re-working data which they've already got on their systems to the same format?
Susan Savage: Swiss Re found, in terms of their legacy system, that by implementing the ACORD standard they were able to reallocate two people and also saved on error reduction. It also touches on point of integration with your external trading partners. Some are actually leaving their legacy systems aside and automatically incorporating anything new into the ACORD standard. Some other companies are saying well, we'll only touch this piece of it with you. We have a number of different case studies on our website.
David Wilson: To what extent does changing data and changing the way things are managed compromise the ability to deal with claims?
Clive O'Connell: There can be significant problems with a change of data when one gets into disputes about underwriting core problems. For example, if data has been transformed during the period since underwriting the risk, then are very grave issues. If one is moving particularly a longer-tail account into a new system, one must preserve in some form the system as it was when the decisions were made. In a courtroom, with more data being preserved on computers, there is much more evidence for cross-examining an underwriter about his decision. However, if that information has been changed since the event, the other side will allocate very nefarious motives to the change, and will have to spend time, money and effort on trying to recreate the position as it was.
Tim Riley: It's about flexibility. By adopting the ACORD standard you are not really affecting existing data systems anyway. The data content in your existing system is still there. As you said, the local requirements are such that there may well be stuff that you need to record within a given system or given local regulatory requirement. It's not necessarily part of the ACORD standard but that doesn't mean that you throw that data away.
Clive O'Connell: That's the key thing - not to throw the data away, or corrupt it when moving to a standard. That's the danger, that people change the whole thing and leave no evidence of what was happening at that time.
David Wilson: There is also the problem of durability of information, which has lessened over the years. Modern printing is certainly not durable. How can the rapid development of technology systems preserve the original material?
Clive O'Connell: There is an obligation to preserve. Lloyd's brokers are required to preserve all data for 90 years and so must take steps to preserve it. Paper data has caused enormous problems, for example, in trying to trace the original broker who dealt with a particular placement. But with the backup of electronic storage, it shouldn't really be a problem today with preserving that data - if you can read it. Conversely, another problem can be created by preserving too much data.
David Wilson: If SAP is taking on a project, how much of the project will actually recognise the need to preserve the past?
Jochen Wolf: When you install a new system, especially in the insurance market, you must transfer the old data. This is one of the big issues, the migration from legacy system to new system, and the different format of the data, the different language the data is stored in. You must put in all those data otherwise the system won't make sense. Run-off business, long-tail business and everything else.
Andreas Molck-Ude: We're not destroying any data, but rather transferring that data across. There are well over 300 people involved in the project and roughly one third would be involved with data conversion. It's a huge part of the project and costly. The whole essence of the project is to convert data into one language onto one system to allow for analysis, so all of it must be included. And the efforts are huge because you have hundreds of systems and you are not only converting from one system to another, but that the information is stored in a different format, if it is stored at all. All of this speaks for a worldwide approach which is similar and which is supported by a worldwide platform.
David Wilson: So globalisation is not just the globalisation of capital markets and regulation, but also having common data sets?
Andreas Molck-Ude: Where you store the data and how you store it is the basis of being able to professionally run your business. What you do with the data is where the competitive advantage will be. But a company without a common platform will have huge problems in successfully using its data. The globalisation of the industry has resulted in an evolution in terms of complexity of risk. Fifteen or 20 years ago risks were less complex, because companies were operating on a smaller scale. But today you have to be able to track risks globally. With so many big companies around the world now, you have to be able to keep track of them. There is a huge risk of developing one system within a company and simply trying to make another company swallow it whole.
Tim Riley: Our strategy accepts that change is constant, both business change and technology change. We have endeavoured to create a common front-end system which gives us our underwriting control and a reporting at the lowest level, sort of a data warehouse at the back of the whole process, and within that allowed for different transactional systems in different regions. Because you will always have to deal with the issue of acquisitions, dealing with multiple regions, and we've adopted that strategy. It could be a perfect world if everyone had SAP, but people don't. You need an accumulation control, a reserving tool, you need a variety of other pieces to do various pieces. So it's almost as though you have a heterogeneous system.
Jochen Wolf: So the big issue is integration as well?
Tim Riley: We have followed an integration strategy, not replacing the whole system at once, but functions within it, like claims handling or underwriting. This reduces the risks associated with a `big bang' change approach. And I have seen other organisations tackling their systems integration issues by applying a messaging structure internally, so that the various systems can communicate to each other by messaging. I'm a firm believer in that component approach. And if you could then have these various pieces talking to each other via a messaging framework, you could almost outsource pieces of it. You could have your claims administered by someone else and the systems will talk to each other.
Roy O'Neil: You could even have your back office sitting somewhere completely different.
Tim Riley: Or pieces of your back office in different places.
Andreas Molck-Ude: Another aim of our project is organisational flexibility. We want someone from our office in Munich to be able to move to an American Re office in, for example, Australia and find the same system, the same data available there. Also, with offices having shorter lives, as you move operations from one region to another, that flexibility is vital. Organisational flexibility is a huge driver for a standardised solution.
Tim Riley: I'd agree, because again our underwriting system is common so we gain that flexibility and we also gain the ability to put together virtual teams irrespective of where they are. Flexibility is a strength that we gain from our component approach on the basis that you can change pieces without adversely affecting the others.
David Wilson: On a broader point, it's my perception the insurance industry has significantly under-invested in technology compared to similar industries. Is that correct?
Jochen Wolf: The insurance industry has a tradition of not spending too much on software vendors, but spending a lot on in-house development. In fact some of the global leaders have a development department which is bigger than some insurance companies.However, there is a misconception among IT people that new systems will result in them losing their jobs. This is not true, because when implementing a new system, you need people capable of understanding the old system.
David Wilson: So you're saying that vendors find it difficult to sell to the insurance industry. But if you sell at the executive level, the push back from the IT people is irrelevant, isn't it?
Jochen Wolf: At that level the understanding is totally different. They consider the new system in much broader terms of transparency, integration, saving costs, etc. We find that they are much more open to the big picture than someone from the IT department.
David Wilson: So what you're effectively saying is that the insurance industry is not prepared to invest in these massive infrastructural changes like other industries.
Jochen Wolf: People were willing to in the 1990s, and early 2000 when there was more money about. But issues like CRM [customer relationship management] saw some insurance companies get burnt by up to $40m-$50m, and those companies are not keen to invest again.
David Wilson: But did the fault lie in poor investment or with the vendors of those products for failing to deliver on the strategic promise?
Susan Savage: I think some of the earlier buying decisions were made without considering the quality of information that the underwriting side and the accounting side actually needed. These global companies are now sitting down and asking what business are we in, and who drives the business? And the business executives drive it, working with IT which is just as important a part as the accounting and legal department. So that collectively you pull together as a team, so that the solution that you have actually helps facilitate the generation and the accuracy of the business that you are in. So IT is no longer in a situation where they're making decisions in isolation.
David Wilson: But what I am trying to understand is why hasn't the insurance industry invested in technology and why have some of the projects that have been done on the primary insurer level not been spectacularly successful?
Jochen Wolf: I think there have been some spectacular successes. And those which have succeeded have done so because they have been set up in the proper manner involving the business side at a very early stage.
Roy O'Neil: We've done some research into project success and project failure, particularly in the financial services industry. One of the main reasons for failure is around executive commitment and buy-in. If you don't get that right at the top of the organisation and then bed it all the way down, you will never make anything work. Also, if you try to impose something from your head office into these devolved business units, and you don't get the people and the cultural aspects of that on tap 100% you can forget about doing anything.
David Wilson: I have a further question. Is the function of putting a system in to replicate the existing processes?
Jochen Wolf: That's a valuable point and is also an issue when it comes to delivering the project. Sometimes people don't even consider that their current system might not be the best one. Therefore, what we talk about is a best business practice approach, in close communication with our customers and try to find a way to tell them that maybe the way they conduct their business is not as effective as it could be.But we must be willing to learn ourselves. Munich Re, for example, gave us a lot of feedback and we adjusted the system accordingly. There is a co-development process.
Andreas Molck-Ude: As project manager, I have a clear brief from the board, which is to adapt to the system wherever possible, which for our company is quite a revolution and there have been lots of raised eyebrows.
David Wilson: Yes, people ask: "Do we have to run our business around the system?" You say no, you run your business, but the system processes it.
Roy O'Neil: It's about configuration, not about customisation. So you configure it to what the software can give you within its limits in terms of meeting your sort of business process, rather than actually investing in massive amounts of customisation.
Andreas Molck-Ude: I think that's the challenge in managing the process because if you have, as in our case, two teams from big companies involved or one team consisting of representatives, there can be conflict over which system to use. But there is a third way and that's the way the system is proposing and is geared to support our business with, and there may be a fourth way.
David Wilson: With all due respect, I do think software vendors are inclined to try and re-use the material they've got. I think conceptually they try and re-deploy previously invented stock.
Jochen Wolf: There probably are vendors in the market who provide a niche product to a company, and then try to re-use it. But one big advantage a company like SAP has is the technology platform behind it. So the technology requirement changes, our base technology can mirror it and we can do whatever the customer needs to be done. That's all that we re-use, and only for the benefit to the customer because that doesn't change the process. We adapt the platform to the technology, but the system runs on top of it.
Tim Riley: I think that in terms of the information technology, the pace of change seems to be accelerating. I remember when the London market tried to put in the electronic placing system, which failed spectacularly. And the opposition wasn't just from IT people. Yet now if I talk to my underwriters, they get a large proportion of their submission information on CD-ROM from the brokers, or by email, because brokers are finding it easier to email the stuff as they get it in. With the advent of email, more people are more involved in technology and as the younger generation comes in, it will be driven through even further and even faster.
Andreas Molck-Ude: Without any executive support, projects are prone to fail. But executive support is often difficult to define. Someone at the top says yes, we need it, and it passes over to IT and two years later the system is implemented. In some industries, logistical software is available which can immediately improve their business. However, with the SAP software we are not just implementing a standardised software, but must enhance it with certain key features. Where this breaks down is that no insurance or reinsurance manager wants to hand over their best underwriter for two years to help adapt the system. But if you want a very good system you have to dedicate very good people to developing it. The commitment may be there at the top, but not further down the line. So in the end you compromise and usually the weaker underwriters are delegated to the projects. You need to dedicate the best people to get the best results.
Clive O'Connell: I've always been in awe at the amount of investment made by insurance companies in IT compared with the legal profession. But perhaps the biggest wastage of investment has not been from failures where people have made bona fide attempts to improve systems, but simply redundancy of investment caused by mergers and acquisitions, the transfer of portfolios, where one system is abandoned.
Tim Riley: It seems that nobody knows the value within an M&A deal of the actual cost of doing that. Whether it raises its head or not, it never seems to preclude the deal being done.
Clive O'Connell: You can't really cost it because it is the buy-in of staff, the translation of staff across systems. Where you've developed a system within an organisation, you develop it for that organisation. You can't pigeonhole it into another system.
Jochen Wolf: The big advantage of standardised software is that you have all the possibilities when it comes to M&A. So if I buy your company and you run the same platform as I do, migration is not an issue.
Tim Riley: Alternatively, if I buy your company, and your company has a different system but has a standardised messaging platform that can talk to my system in the same way, then we achieve the same benefits.