For better or worse, the reinsurance industry is in the middle of its 15 minutes of fame. With regulators shining a spotlight-some might call it a blinding one-on the industry, insurance companies are being forced to take a hard look at their reinsurance practices.Regardless of the overall impact the attention will have on the reinsurance market-specifically on finite reinsurance (see "Regulators Focus on Finite Reinsurance" ), it's a safe bet to say that insurance carriers will start to more closely examine their reinsurance automation needs, according to Donald Light, senior analyst at Celent Communications Inc., a Boston-based financial services research and consulting firm.

"You know the ad that says 'It's 10 p.m., do you know where your children are?' Well, it's time now for senior insurance and reinsurance management to know what agreements they've made, the terms of those agreements and what claims have been paid and not paid," says Light, author of a report titled, "Property/Casualty Reinsurance Cedent Technology Strategies." "These have always been big issues in the reinsurance department, but now they have senior management's attention."

With senior executives engaged, many carriers are likely to get around to automating their reinsurance operations-a project that has taken a backseat to other information technology projects.

As a matter of fact, according to an survey conducted by SunGard, a global software provider that sells reinsurance systems, about 50% of insurers do not have any reinsurance automation in place.

"Traditionally, reinsurance has been the poor cousin that gets neglected," says Bart Patrick, global reinsurance product manager at the Wayne, Pa.-based company. "But now it seems that more and more companies are realizing that reinsurance is a key aspect of their business-and that they have to address [its IT investment] needs."

In fact, insurance executives can no longer ignore the need for automation in the reinsurance arena, according to many industry observers.

"Companies that were doing all of this manually-or on spreadsheets-are being forced to look at computerized systems," says John Carroll, president of TAI Life Reinsurance Systems Inc., an Orland Park, Ill.-based technology provider.

"In some cases now, if you don't have an auditable, automated way of reporting, reinsurers will not do business with you. So, computerization is becoming a matter of necessity, whether companies choose to implement a home-grown system or a vendor's system," he says.

What's needed and available

The need for automation for reinsurance processes is becoming more blatant every day. Currently, many companies with manual processes in place are finding they are apt to design suboptimal reinsurance programs, choose the wrong reinsurance partners or fail to realize all of the financial benefits available under a specific contract, according to Celent's Light.

Once insurance executives conclude they have to invest in IT to overcome these hurdles, they need to define their needs-and then scour the market for a system that matches these requirements, SunGard's Patrick says.

Many companies need systems that help to design reinsurance programs, obtain reinsurance, and manage the flow of premiums, commissions, claims and payments among carriers and their broker and reinsurer partners, he says.

In addition, reinsurance systems offer functions such as recording endorsements; tracking the amount of premium owed, commissions returned or discounted; identifying claims and tracking their status through payment; and reporting and analysis.

One important consideration for carriers choosing a system is its ability to interface with business, policy administration, claims and financial systems that are already in place, sources say. And shopping for systems should involve more than reviewing functionality.

Potential buyers should investigate user groups to determine how other companies are using a particular reinsurance system-and how happy these companies are with the system's performance, advises SunGard's Patrick. Buyers should also conduct due diligence on a vendor's financial stability, he says.

Not as easy as it looks

Finding a system that offers all of the features and functions that a company needs, however, is easier said than done, according to Lisa Banta, accounting analyst at Guard Insurance Group, a Wilkes-Barre, Pa.-based workers' compensation insurance provider.

"There are not that many reinsurance software vendors out there to choose from," Banta says. "Reinsurance varies so much from company to company and from deal to deal. It's hard for one software vendor to include all the needed features and functionality. That could be one of the reasons why there are so few vendors to choose from."

As a matter of fact, there are only five to 10 major players in the reinsurance information technology marketplace, compared to hundreds of vendors that offer core insurance administration systems, according to Celent's Light.

The relative lack of available systems did not stop Guard from forging ahead with automation plans about five years ago.

"The chore of doing everything manually was just becoming too inefficient," Banta says. "And, reinsurance just keeps getting more complicated. So, it was getting harder and harder to maintain everything manually. We had to find a way to improve the process."

Ultimately, Guard selected the Freedom Reinsurance System from Fiserv Insurance Solutions, Cedar Rapids, Iowa, which met the majority of the company's functional requirements.

"Fiserv includes a great percentage of what most [companies] have in their contracts-and the company continues to add functions and features as needed," Banta says.

The fact that the system easily communicates with Guard's general ledger, accounts payable and annual statement systems makes the software even more valuable, Banta notes.

Bringing a system in house, however, is only the beginning of an automation initiative. Ask Marshal Saunders, vice president of Axa Equitable Life Insurance Co. in New York City.

Even though the company had a commercial system in place, when the company initiated a new business strategy about five years ago, Saunders knew he had to re-evaluate the company's IT needs.

Because Axa was ceding to reinsurers a large percentage of every policy it sells, its system couldn't keep up with the volume. As a result, Saunders realized Axa needed a system that could handle a larger capacity of reinsurance transactions.

"We needed to have a system that would be able to keep up with the volume. With the system we had in place, we had been running behind in paying our reinsures. And, contractually, we were required to pay them in a defined period of time," he says.

After reviewing a number of available systems, Saunders decided to implement the client server TAI Life Reinsurance System. With the system in place, the company can now keep up with its processing needs.

Increasing recoverables

In addition, the system interfaces with Axa's other administrative computer systems, helping to streamline work processes, and the system's flexibility makes it easy for Axa to add new products at any time, Saunders says.

While insurers such as Guard and Axa have reaped the benefits of automating their reinsurance functions, others are likely to soon follow their lead, according to Celent's Light.

Reinsurance systems can provide carriers with more accurate and complete identification of valid claims to reinsurers; more complete and aggressive management of aging recoverables; and more effective applications of business intelligence capabilities, he claims.

As a matter of fact, if all cedents implemented technology and process changes, they could increase their insurance recoverables by 2% to 4%, amounting to $420 million to $840 million annually, according to Celent.

Reinsurance tools

Integrated reinsurance systems offer functionality across all processes, communicating with core systems and databases (policy administration, claims, finance and accounting).

Policy administration systems often have some level of reinsurance functionality, especially for contract administration premium cessions and claims.

Point solutions address a specific part of a process, for example data mining and analysis within the "reporting, analysis and program design" process. Business process outsourcing involves contracting with a third party for some or most of the reinsurance processes.

Components are enterprise-level solutions that cedents can use to wrap and extend legacy reinsurance applications. Components include document management systems, business process management and business rules engines.

Source: Celent Communications Inc.

Regulators focus attention on finite reinsurance

The U.S. Justice Department, New York Attorney General Eliot Spitzer and the Securities Exchange Commission all have launched investigations to determine if companies have used finite reinsurance to manipulate their financial statements.

These regulatory authorities claim insurers have used finite reinsurance agreements as a way to smooth earnings reports, thereby deceiving investors and regulators.

Dozens of insurers have been brought into the investigations, including companies such as AIG, XL Capital, RenaissanceRE Holdings, Assurant Inc., Partner RE Ltd., Bristol West and General Electric Co.

Part of the problem with finite reinsurance and its accompanying accounting methods is that it has always been somewhat controversial, according to Andrew Barile, president of Andrew Barile Consulting Corp., Rancho Santa Fe, Calif.

Although there is no clear definition of finite reinsurance, it is generally a blend of traditional reinsurance and financing. The agreements limit the risk assumed by the reinsurer.

The U.S. Accounting Standards Board stipulates, however, that for such a contract to classify as finite reinsurance, the reinsurer has to assume significant insurance risk and there has to be a reasonable possibility that the reinsurer may realize a significant loss from the deal.

Therein lies the rub. The fact that there is no commonly accepted definition of "significant risk" makes navigating the regulatory waters particularly challenging, Barile says.

"The regulators have not defined what significant risk means," he says. "Plus, the regulators are making statements that insurance companies are doing these things to smooth their earnings. But 10 years ago, the reason these finite insurance products came out were to smooth the earnings of a company. That's what finite reinsurance products were designed for."

Due to much confusion in the industry, the National Association of Insurance Commissioners (NAIC), Kansas City, Mo., is attempting to provide guidance. In response to the investigations, an NAIC study group approved enhanced disclosure requirements for insurers that use finite reinsurance. The proposed disclosures would require an insurer to report to state insurance regulators any finite reinsurance agreement that has the effect of alternating policyholders' surplus by more than 3% or that represents more than 3% of ceded premium or losses. In addition, reporting requirements regarding contract terms and management's intention in entering a contract have been added to improve transparency.

Despite guidance from the NAIC, the negative attention on finite reinsurance has already had an impact on the industry. For instance, reinsurance premiums at Hanover Re, one of the world's largest reinsurers, slumped 51% between March and June of this year.

Fallout from the regulatory mayhem, however, could become much worse, according to consultant Barile. With regulators clamping down on the finite reinsurance business, costs could be passed on to corporations and individuals instead, he predicts.

"As loss ratios get higher, the finite reinsurance kicks in and the finite reinsurance company takes the loss on its book. As a result, the primary insurer does not have to take corrective action right away," he says.

But if finite reinsurance is not an option, the primary insurer will have to pass the costs on to corporations and individuals, he predicts.

"It's a simple equation. If losses are greater than premiums, the insurance company has to lay it off on someone. If it can't lay it off to the finite reinsurer, then the only choice is to pass the cost off onto consumers via higher rates," Barile says.

John McCormack is a business writer based in Riverside, Ill.

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