Reinsurance Can – and Should – Reap Automation Benefits

By Dave Willis

All insurance company departments are not created equal. That’s particularly true when it comes to technology and integration. Bart Patrick, global reinsurance product manager for software and IT services provider SunGard, says, “Underwriting systems, policy administration systems and accounting systems are all fairly well integrated. Reinsurance systems, on the other hand, can be generally fairly cobbled-together processes.”

Patrick, a co-presenter at a recent Web seminar sponsored by SunGard and National Underwriter, says underwriters and decision-makers too often see reinsurance as non-core, believing real profits come just from increased underwriting discipline and better underwriting data. He counters this, noting that regulators see reinsurance program quality and recovery ability as increasingly important.

Still, reinsurance departments often play second fiddle when it comes to technology. Too often, Patrick says, they find themselves extracting information from standalone systems, then adjusting data manually to correct known anomalies. They perform manual reviews of data, payments and correspondence, then check that against policy files. Data is entered into spreadsheets, crunched, extracted, then re-entered into some reporting system. And that’s just part of the picture.

These manual processes are places where audit trails can break down, and the accuracy of results can be jeopardized, he says. This is particularly troublesome in an era marked by calls for increased transparency and accountability.

Bad Things Happen to Good Carriers

In today’s environment, well intentioned and well managed carriers sometimes find themselves on the wrong end of reinsurance problems, restatements of reports, subpoenas and worse. Seminar co-presenter Donald Light, senior analyst for research and consulting firm Celent says there are reasons why bad things happen to good companies.

“The very nature of reinsurance is a prime reason,” he says, noting the presence of multiple systems, multiple participants and multiple layers. Long-tails, documentation, specialized jargon and difficulty predicting future liability also contribute to this complexity, he adds.

And then there is the consideration of how primary companies sometimes play the game. Program design, sketchy partner choice, claims slipping through the cracks, and difficulty collecting from reinsurers are problem areas.

Third, Light says, are morale and moral hazards. “Morale hazard is where people aren’t trying hard enough to manage their reinsurance book design and manage their book well,” he says. Moral hazard is where they try, perhaps too hard – playing too close to, or going over, an ethical line.

Technology to the Rescue

Technology can help primary carriers address these challenges. Integrated reinsurance solutions, for instance, offer broad functionality, cover all areas of the reinsurance cycle and are customizable. Reinsurance modules or functions within standard policy administration systems, are less broad and less deep than an integrated system, but present another option. And focused solutions – business intelligence, analytics, portals or exchanges, and business process outsourcing – can address tasks, often in a piece-meal fashion.

Light believes data standards are key contributors to letting programs and applications interact – within companies and outside. At the core is ACORD, which he says offers a “reasonably robust and continually developing set of reinsurance standards.” More companies are employing standards to ease integration, he notes.

“In light of market changes, and issues both in the business and regulatory sense, integration of reinsurance processing into the electronic audit trail should be placed near the top of the agenda of any company,” Patrick says.

Black or Brown? Pumps or Flats?

Okay. Automation is important. But what makes most sense? Managers faced with that choice might feel like Imelda Marcos at a shoe outlet. To help focus decision-making, presenters say looking at specific problem areas can point to potential fixes.

For instance, with reinsurance contracts and their administration, Light identifies inadequate and improper coding, lost or redirected certificates, and out-of-sequence endorsements as problems. Better document management and smarter contract templates, using business process management, can help.

Claims and recoverable management is another issue, with late or improper notice of loss to the reinsurer taking center stage. Recoverables are often too little, too slow, too late, Light says. Automation can improve screening of claim files and covered claims, guide reinsurance accountants or analysts on where to look, and boost transparency and recovery process management.

Program design and analysis poses another challenge. When senior management asks, ‘Does our reinsurance cover the hurricanes that hit Florida last week?’ and no one can answer quickly, that’s a problem. It strains relationships with rating analysts and can lower rates. Data mastery, business intelligence, data warehouses and specialized software for reinsurance schedules are potential solutions.

Knowledge and people management is another issue. “There are talented and informed people working in reinsurance groups at primary companies,” he says. “What happens when they get promoted, retire or transfer?” Integrated reinsurance solutions, components and business process outsourcing all can address this.

Danger in the Gaps

SunGard’s Patrick finds value in technology-based straight-through processing for the entire insurance value chain – including reinsurance, noting that gaps in processes can bring troublesome consequences. If auditors review the quality of accounts, particularly in the light of recent regulatory and legislative changes, they might add notes or provisos based on the lack of fully-integrated processes. He says, “Will your auditors be willing to risk punitive action over an unclear process that’s vital to the security of your company?”

Leakage is another risk. “There are hundreds of covers over tens of thousands of policies and millions of transactions,” Patrick says. “This creates a huge opportunity for recoveries to accidentally slip down the back of the couch. Why risk this with a disjointed process?”

Company ratings strike both sides of the reinsurance equation. Regulators and rating agencies must see see prudent management of reinsurance as part of company reviews. “It’s not always possible to write reinsurance with all AAA-rated reinsurers,” Patrick says. “Automation can give the security and analysis required to manage lower-rated reinsurance without damaging the quality of your cover.”

Finally, claims present other dangers. “Without a straight-through processing capability, a company jeopardizes its ability to speedily collect recoveries, putting increased pressure on the entire system,” he says.

Steps Toward Efficiency

So what can insurers do to pull it all together? First, Patrick says, identify where gaps exist. Then look for solutions. “Check out all possible options,” Patrick advises, whether it’s building a system or buying into one. “Review any outsourcing options.” Make sure the system covers all the pain points uncovered, without introducing any more, he adds, and resource the project with the right quantity and quality of staff.

Next, check the suitability of data available through existing ceded reinsurance systems. You have to overcome ‘junk in, junk out,’ Patrick says. From here, create automatic bridges to existing systems, to drive straight-through processes. If you have a standalone reinsurance recovery system, find a way to integrate it into the main administration systems, he advises.

“Don’t rush to go live,” he adds. “Make sure you can repeat and achieve the same result automatically before switching over.” Set metrics and see how successful the process change has been.

Carry out a historic data load, too. “In our experience, it’s been a great source of lost funds for companies,” he says, claiming it actually pays for the project for some companies.

Finding the Pay-Off. Now.

Patrick says the benefits of automation are numerous. Better reinsurance management leads to better financials. The risk of knowledge walking out the door when key staff leaves is reduced. Recoveries are speeded up. And since all actions can be tracked, auditors are happier and regulators can see where funds are entering and exiting the business.

“Finally,” he says, “reinsurance can be put to bed, knowing that it’s being handled in the most expedient manner possible, leaving the rest of the company to focus on underwriting discipline and ultimately profitability.

Light says the time to act is now. “Reinsurance issues never have had a higher profile,” he says. “If someone working in reinsurance can’t get a hearing today with senior management, saying ‘We’ve got some problems and here are some ways to address them,’ then maybe you’ll never be able to get a hearing.” The property/casualty industry has seen its best underwriting results in years, so it can focus on reinsurance. And the technology exists to bring all systems together – on the same playing field.

New Hampshire-based Dave Willis is a regular contributor to Property/Casualty Insurance magazine.

Posted: Monday, October 17, 2005 12:00:00 AM. Modified: Monday, October 17, 2005 2:57:41 PM.

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