Igor Best-Devereux argues the case for online reinsurance purchase.
Buying facultative reinsurance is often a compromise between maintaining an underwriter's responsibility for results and authority to manage a book of business with the insurer's need to control excessive risk. As insurers are buffeted by market cycles and by the analyst community, the solution is usually a combination of guidelines and requirements broadly defined to keep exposures in check.
How comfortable a company is in making a move from the traditional method of buying or selling facultative reinsurance to online reinsurance placing will depend upon how well this new process can meet the needs of the parties. For the buyer, it's important to be able to maintain existing relationships and also access new markets, as need or opportunity arises, using one system. It may be necessary to deal with multiple reinsurers when seeking reinsurance, for reasons of competition, capability or capacity. Moving this one-to-many relationship online requires a new type of system that can permit individual negotiations to occur in a secure and neutral environment.
For the seller, an online system must offer a straightforward and low cost channel for originating deals and must also allow flexibility for negotiating terms and pricing. Given that all parties potentially bring value to a transaction through their expertise or service, they do not want reinsurance to be relegated to the status of a commodity. The need for flexibility for the buyer or seller is also a requirement for the broker who can use an online system to receive or place business.
With the passing of the euphoria surrounding the internet, there's a growing understanding of the use of online systems to buy reinsurance. The various systems available fall into distinct categories, depending upon the needs of reinsurance buyers and sellers. The different models bring with them different benefits - an important consideration when deciding how to assess the payback from adopting new technology.
Broadly speaking there are business models that have been developed from the buyer's perspective and others developed from the seller's perspective. Some of these are aimed at improving the availability and distribution of reinsurance capacity or specific reinsurance products; others are aimed at improving the buying process and the availability of information. Obviously there are also areas in which these different characteristics overlap.
For the `old guard', the promise of new systems might be sceptically received and viewed as something akin to a thorn in the side or even a nail in the coffin. How much is it worth to introduce a system to provide process consistency and information to reinsurance placement?
From both a time and cost perspective, the introduction of a new system should be measured against objective payback criteria. When an entire system infrastructure is impacted this is usually difficult and the payback is extended. Fortunately, the introduction of a placing platform such as eReinsure does not mean that you have to disrupt your entire data processing systems. A system designed to support an area of the business that has remained reliant on manual processes offers an opportunity to leverage information not previously available. Web-based systems can also represent building blocks for the market's future systems infrastructure, particularly where they can be integrated with legacy systems, for example sending data electronically between systems using standards-based messages.
The value proposition for a facultative placing system has not always been objectively explained. We believe that the benefits can be broadly described in terms of process improvements and improvements in the availability of information. Among the many issues in fac buying is the inconsistency of process - not just between companies but also within companies. The ability for an insurer to guide fac buying in a systematic manner will pay dividends in the reduction of effort and completeness of a placing file. Maintaining information in one place while protecting the confidentiality of individual threads of negotiation helps the underwriter to manage a critical but possibly infrequent activity. Transferring information on agreed terms from one record into the back office systems of the various parties to a transaction will speed reconciliation and settlement of accounts.
Process and information management go hand in hand. Most practitioners in the business will have anecdotes about fac that was overlooked when a reinsurance recovery could have been made; fac coverage that was purchased but overlapped with existing treaty protections; the difficulty in assessing the net impact to an insurer after a catastrophic loss such as Hurricane Andrew, the Northridge earthquake or the World Trade Center; or the potential exposure in the event of the financial failure of a reinsurer.
The information captured during the placement process and held in a structured form within a database allows an insurer to report on branch underwriter activities including what is being bought and from whom it's being bought. The ability to review exposure information centrally and relate this, in close to real time, to the decisions being made to purchase reinsurance represents the greatest potential payback from an online system.
A company that reviews this data on an ongoing basis and takes a systematic approach to managing fac, feeding back to underwriters new guidelines as appropriate, will be able to improve the return on their portfolio.
In considering this proposition in relation to the eReinsure platform, we retained a specialist analytical consultant (Certus Ltd) to model a sample of insurance company portfolios using equity portfolio theory. Our intention was to demonstrate the potential savings from improved information and consequent active management of reinsurance buying. The results of this modelling indicate that operating with limited real time information on reinsurance purchasing decisions is very expensive. We also learnt that results would vary significantly depending on prevailing market pricing and terms, indicating that information will be more critical in the current market conditions than when reinsurance was a cheap substitute for capital. We believe that the availability of information permitting more active management of purchasing decisions can result in the unlocking of millions of dollars of earnings without a corresponding increase in risk.
I've commented on the importance of collecting information at the time of reinsurance placement and using this information to form better decisions. The `return on information' comes from improvements in the management of reinsurance buying, improvements which rely on consistent workflow and the accurate recording of transactions. This accuracy results in reduced errors in placing and accounting and the availability of information enabling the formulation of strategies to best use available reinsurance capacity.