Whilst the earliest use of excess of loss reinsurance contracts can be traced to the late 1800s, their use rapidly accelerated after the 1950s due to the proliferation of modern risks and insurers requiring protection from both catastrophe losses and excessive, attritional losses. A further factor that supported the development of excess of loss reinsurance, prior to the availability of computers, was its apparent simplicity and comparatively low administrative costs.

With the introduction of computerised administration systems in the 1970s, many reinsureds soon achieved substantial cost savings with high volume proportional reinsurance transactions, which suited computerisation. However, the huge challenge of dealing with the real complexities of modern excess of loss processing, and the London market's propensity for ‘rinky-dinks', remained unsolved. Significant steps forward were the introduction of the PC in the 1980s, and, later, the release of Microsoft Windows. Reinsurance technicians were then able to develop their own solutions, usually in the form of Lotus 123 or Microsoft Excel spreadsheets, assisting them in performing some of the increasingly intricate and time-consuming calculations. Many of those spreadsheets continue to be used today.

The dynamics of today's market make it extremely difficult for reinsureds to operate successfully with an explosion of spreadsheets, each different and containing the hard-coded and mostly cryptic rules of its original author. The risk of failing to respond to change and deliver the right information on time is now unacceptable to most. Fortunately, there are several systems offering to serve the needs of cedants with substantial and potentially difficult-to-administer excess of loss reinsurance programs.


Information technology (IT) has evolved and continues to evolve more rapidly than excess of loss reinsurance. By the mid-1990s, suitable technology existed to deliver a comprehensive excess of loss system solution, but most IT developments since then have delivered what have amounted to neutral overall advances to this particular requirement. As PC software is increasingly delivered with unnecessary ‘bells-and-whistles', justifying the term ‘bloatware', faster processors and more capacity are needed to perform the same tasks as were achieved satisfactorily several years before.

The primary challenge for solution developers has been to recognise the fundamental characteristics of excess of loss reinsurance and to encapsulate that knowledge into appropriate and lasting data structures, relationships and business rules. To achieve this requires an intimate understanding of the many and varied types of excess of loss arrangements in use, and an ability to translate that knowledge into a system that is fundamentally capable of processing those arrangements, plus others that may be similar or derived in the future.

Software development resources employing the appropriate proven technology, to encapsulate and solve the complexities of excess of loss reinsurance, will always produce the better solution than using a functionally thin offering that has been focused on using reined-in ‘bleeding edge' technology.


The single most important prerequisite to evaluating systems is to establish the full depth and breadth of your particular organisation's requirements and to ascertain precisely how these requirements are met by the system being evaluated. To achieve this you should review, identify and record all the characteristics of your existing live and proposed future outwards excess of loss contracts. Also, illustrate with worked examples the requirements that may be unique to your organisation. Supply this information to your potential solution providers and request presentations showing you how their product meets your needs. Ensure that each vendor is given the same limited time in advance with your list of requirememts. This will greatly help you to establish and compare their product fit, flexibility, performance and service.

In even the briefest presentation, it is reasonable to expect to see completion of at least one full recovery cycle; the aggregation of the most recent ultimate net loss figures by event, processed through the evaluation system to show proposed recoveries and reinstatements. You should have the opportunity to intervene and/or authorise the calculated figures before they are used to produce the complete collection documentation.

Capabilities to look for include:

  • both date of loss- and date of settlement-based processing;

  • backups and inuring covers;

  • top & drops and cascades;

  • calculation of recoveries and reinstatements, on paid, outstanding and incurred bases;

  • specific clauses such as ‘interlocking' and ‘clash of retentions'; and

  • ‘what if?' scenario modelling and simulations.

    If you operate in London – or any other market – you should also be satisfied that the system meets your market's recognised standards. Now that the next generation of EDI (electronic data interchange) standards, which will use XML (extensible mark-up language), are being finalised, you should be certain that your system of choice will support these standards. If not, you will miss the substantial benefits that this business-to-business e-commerce will soon deliver.

    Reliability and scale

    It is critical that such an important system should operate reliably and predictably. One of the greatest benefits of computerising complex procedures is that once the system has successfully completed its development and test cycle, it will perform its tasks repeatedly in the same dependable manner. The system user then becomes the main variable to the operation of a stable and proven system. This can be addressed by effective user training and monitoring, combined with a consistent and intuitive system user interface.

    System reliability can be independently established by communicating with the vendor's existing clients. Most vendors will arrange visits to reference sites where you will see their systems in use. These visits are a valuable opportunity for you to establish the validity of the vendor's claims for their product and service. Ask in detail about the reference site's experience of the implementation process, training received, system documentation, production usage, technical support, bespoke developments, product maintenance and the vendor's service levels.

    Systems that perform well during a presentation can often prove to be slow under the demands of a high volume production environment. Provide your vendor with estimates and projections of the various record numbers involved and obtain their performance level indications. In calculating recoveries, several hundred variables need to be processed for each loss event against each possible outwards excess of loss cover. The number of loss events may be between 100 and several million, and the number of covers may be between just ten and several tens of thousands.

    As a benchmark, a London market company should expect to have its recoveries on 10,000 losses affecting up to 1,000 covers calculated in little over an hour on today's entry-level office PC. The ratio of the number of losses to covers can affect performance and this should be discussed with your vendor.

    Seek confirmation that the system will also be able to scale up to support the maximum number of simultaneous users that you are likely to have. This maximum could well be needed during the implementation phase as data input and cleansing takes place.


    By their nature, excess of loss reinsurance administration systems should be regarded as highly specialised sub-systems. It is improbable that a comprehensive general insurance administration system will ever incorporate the necessary excess of loss functionality. Therefore, it is vital that these sub-systems are capable of efficient data transfer to and from their host systems.

    Most host systems either have their own or use third party tools for effective data interfacing. Seek your vendors' advice on the interface standards that they support. Interfacing today's open systems is relatively straightforward and the results avoid the compromises that a monolithic corporate application can impose.

    Indeed, the whole new field of Enterprise Application Integration (EAI) is focused on delivering the substantial benefits of integrating ‘best of breed' solutions with existing legacy applications. Integrating applications and rearchitecting systems are now widely seen as preferable to repeated costly attempts to keep pace with ever-changing leading-edge IT.

    During any system presentation, you should evaluate its ease of use. Does it seem cryptic or require you to remember special keyboard commands? Alternatively, is it intuitive, working in the manner and using terminology that you would expect? A graphical user interface, such as Microsoft Windows, is essential to the delivery of successful excess of loss reinsurance administration systems. The variety and amount of information to be taken into account and displayed to users is immense, and successful systems present this information in a logical and easily navigated manner by using various familiar methods such as scroll-bars, tabs and multiple overlaid windows.

    Make sure it is easy to transfer selected information from the system into your preferred desktop applications such as spreadsheets and word processing. Review the system documentation. Is it easily accessible when using the system? Is it useful and importantly, is it current; are all the features in the most recent release fully documented?

    Cost and support

    Pricing structures vary by vendor and may include one-off licence fees, annually renewable licences, system rental and even a participation in recoveries processed. If you are a service provider, you may wish to negotiate costs that are proportional to your client-based revenue stream. Discuss your requirements with your vendor.

    Potential costs are not limited to licence fees. Consultancy, implementation resources, system maintenance and bespoke developments should also be taken into account.

    Overall cost of ownership can be significantly affected by the technology being used. Generally, the latest technology will require upgrades to your existing IT infrastructure. This can be costly and troublesome, although it is often sold on the promise of reduced long-term costs. Alternatively, systems that utilise and leverage investment in your existing IT infrastructure have their obvious attraction, and can greatly assist in the business case for implementing the right system.

    Despite the range and extent of costs to be borne, an early return on investment can often be achieved with the appropriate excess of loss recovery administration systems. The right systems can produce valuable positive cash flows and even substantial recoveries that might otherwise not have been realised.

    Establish that your vendor is sound and committed to providing excellent after-sales service. The fast and accurate technical support that is essential can only be delivered through electronic remote support facilities.

    Ensure that such facilities are available and that they are routinely implemented without security compromise. Ask about the product release cycle.

    Make sure the product continues to be actively developed to meet new market-wide requirements, and that any bespoke requirements you may have will be accommodated in the future.


    Priority should be given to evaluating system functionality in relation to your actual reinsurance requirements. Reinsurance management should involve the IT department in the procurement process, but should retain control of system evaluation and selection. Once a system has been selected, it is essential that its implementation is fully and correctly resourced, with clear project milestones set and achieved.

    You should soon have a fully operational system that provides you with far greater control, lower risk, increased flexibility and new efficiencies that will provide the time to truly optimise the utilisation of your reinsurance asset.

    Insurers in run-off are quick to appreciate the importance of managing their reinsurance assets efficiently. Experience of successful system implementations with organisations in run-off suggests that many active insurers place insufficient priority on this area, raising the question, “How many future run-offs can be avoided by insurers transforming their reinsurance administration today?”

    Gavin Blem is managing director of Blem Information Management Ltd, www.blem.com and the architect of XLRAS, an excess of loss reinsurance admininstration system.