Reinsurance firms are gripped by a series of major challenges, from increased consolidation in the industry to the rise in securitization and the greater risk primary insurers assume. Although the firms' brokers remain intent on winning clients by accentuating the personal touch, many reinsurers are aggressively adopting technology to confront the stiff obstacles they face.A principal new challenge for reinsurers is the rise in the use of securitization to support life insurance products. Both life and P&C insurance firms are turning to securitization to access capital markets, which has helped lead to a decline in recurring reinsurance since 2005, according to the recent study, "Emerging Trends in U.S. Life Reinsurance: Challenge or Opportunity," from the Hartford, Conn.-based firm Conning Research and Consulting Inc. While recurring reinsurance increased significantly from 1995 through 2000, it flattened out from 2001 until 2004, and then began declining in 2005. "To the extent that some primary insurers, initially several larger ones, use securitization as a substitute for reinsurance, it presents a threat to reinsurers," the study notes.
Furthermore, primary insurers are retaining more risk, as they exploit the greater capital position that they have acquired in years past. Since bottoming out at $227 billion at the end of 2001, capital and surplus across the U.S. life insurance industry has grown 5.4% annually, according to the study, which indicates that a stronger capital position enables an insurer to retain additional risk.
Still, these factors are not necessarily dampening reinsurers' appetites for new technology, and in some cases may stimulate it. Alternatives to reinsurance can be viewed as a double-edged sword, in that reinsurers may see their capital dip from reduced demand and so they will invest less in technology. Yet, some may see it as an opportunity to find those technologies that can boost their efficiencies. "Typically in those scenarios people tend to retrench their spending on technology," says Scott Schenker, a senior managing director of Smart Business Advisory and Consulting LLC, a Devon, Pa.-based company that provides services to both primary insurers and reinsurers, particularly on the ceded reinsurance side. "But it does seem like the reaction right now is to become more efficient so their overall operating costs can be driven down while there is a little bit of softness in their business."
Nonetheless, as the sidebar on p. 35 indicates, it is important not to overemphasize the import that reinsurers place on technology to get a competitive advantage, for reinsurance remains a high-touch business.
From a technological perspective, reinsurers need not view their relationships with primary insurers as a zero-sum game, for they often use technology to improve efficiencies in lock-step with one another. As primary insurers boost investments in technology, reinsurers are able to become more efficient as well. For instance, the two depend on each other to automate processes so information can flow from the primary insurer-the reinsurer's client-to the reinsurer. In fact, both insurers often face the same technological challenges.
"For reinsurers, half of the problem can be identical to those of direct insurers in that they also cede some of their business back out to the marketplace and they have the same needs from a systems standpoint for that as do the direct [insurers] when they cede to reinsurers," says Schenker.
For reinsurers such as Farm Mutual Reinsurance Plan Inc. (FMRP), based in Cambridge, Ontario, technology is vital in conquering these challenges. "Technology comes into it in the statistical analysis: being able to analyze your book of business carefully, looking at loss trends and having the proper data populated in your system to make sure you have information to accurately assess what the exposures are-through accurate limits profiles, loss exposure and loss frequency activity," says Steve Smith, president and CEO of FMRP, which has clients chiefly in Canada, but also in the United States. "All those things are supported by technology."
Reinsurers have reacted to tough market conditions by adding new products and services, as well as expanding internationally-where they do battle with the many heavy hitters based outside the United States, including Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft, or "Munich Re," Munich, Germany. Though sometimes facing the same challenges as their global counterparts, U.S. reinsurers can encounter both different and greater ones.
"The U.S. exposure to catastrophe is significantly higher than Canada-not just from an event point of view, but also from a value point of view," says Smith. "And I think the technology now is really gearing up to that (making sure that we understand our exposures much clearer)." Consequently, U.S. reinsurers have probably been more aggressive than Canadian ones in their risk modeling.
Tragedies such as the 9-11 attacks and Hurricanes Katrina, Wilma and Rita may have had a higher impact in the U.S. than in other countries, but they have helped trigger the adoption of technologies such as location intelligence throughout the world, says Craig Bedell, director of global insurance services for PB MapInfo Corp., a wholly-owned subsidiary of Pitney Bowes in Troy, N.Y.
"Whether it is a natural cause or man-made, [reinsurers] are realizing that portfolio risk analysis is important," he says. Disasters such as this June's flooding on Australia's east coast-which some attribute to global warming-have triggered insurers and reinsurers to closely examine flooding and SLOSH (sea, lake and overland surges from hurricanes) model information.
FRMP is just one reinsurer that has increasingly invested in technology to guard against disasters.
"One of the things that became very evident over the last few years is the effect of major catastrophes on reinsurers," says Smith. Like other reinsurers, based on its knowledge of its catastrophe exposure, FMRP buys retrocession coverage to protect itself. The company, which is increasingly seeing business in the larger limits area (i.e., in excess of $5 million), is developing proprietary location intelligence technology that it will launch in January 2008.
Reinsurers such as Guy Carpenter & Company LLC, a risk and reinsurance specialist based in New York, see location intelligence as giving them a competitive advantage. The firm's online data management platform, i-aXs, is one of its central technology initiatives. The platform integrates timely data with the company's risk analysis and catastrophe modeling capabilities to help insurers better use information to their strategic and operational advantage.
"i-aXs leverages cutting-edge geospatial technology and gives clients access to real-time exposure data and an innovative set of customizable imaging, tracking, analysis and reporting tools," says Lara Mowery, managing director of Guy Carpenter, which is a part of the Marsh & McLennan Cos. Guy Carpenter started its U.S. rollout last November for property catastrophe clients and later this year will expand globally and move into workers compensation and accident and health applications.
Though Guy Carpenter has been using location intelligence such as MapInfo for years, it now automates the use of the product so that geospatial data is automatically converted into a map and requires no training in mapping software to use. Mowery says the platform is like no other reinsurer's and has helped the company generate significant new business.
OTHER INTRIGUING TECHNOLOGIES
A spate of consolidations among reinsurers has also helped spur the adoption of new technologies. Swiss Re, Zurich, Switzerland, has trumpeted its success in its systems integration work following its acquisitions of firms such as GE Insurance Solutions, says George McKeon, author of the Conning study and formerly the company's assistant vice president and senior life analyst. (McKeon very recently retired, and Conning is a wholly-owned subsidiary of Swiss Re). Swiss Re standardized a number of its own systems and GE's systems, using a "better-than-both" approach.
Among vendors, titans like Walldorf, Germany-based SAP AG have made a splash upon entering the reinsurance market. SAP's new clients include Munich Re, which implemented SAP reinsurance management software. Munich Re's new IT platform, called Gloria (global reinsurance application), replaced 17 legacy systems for electronic data management. Munich Re is standardizing its reinsurance business and seeking to enhance its underwriting, claims management and accounting. (For more on improved claims systems, see the sidebar below.)
"That is a major step forward-to have such a large player understanding that [reinsurance] is a viable market that has warranted a significant investment," says Schenker. "Traditionally they [reinsurance firms] have been underserved, and I see that as an indication that some of the larger players [vendors] are understanding what their needs are, because they are clearly different than the direct marketplace."
Reinsurers have also begun focusing on data warehousing systems.
"From a reinsurance standpoint, business is all about the information and the data they have, and to be able to extract knowledge out of that is going to be critical for them," says Smart Business Advisory and Consulting's Schenker. While data warehousing solutions failed to meet expectations a decade ago, improved offerings may now better jibe with reinsurers' current demands.
Daniel Joelson is a freelance writer based in Alexandria, Va.
Balancing Technology and High Touch
Traditionally, reinsurers have competed more on a relationship basis than on anything else, according to various industry experts. For that reason, technology cannot be seen as the end-all-and-be-all for their problems. Reinsurers "are trying to bring expertise and services to companies that have a better touch and feel to them than a heavy technology interface," says George McKeon, author of a research study on reinsurance conducted by Conning Research, Hartford, Conn. "Life reinsurers bring expertise-mortality, product design and claims management-to their client companies. That expertise is more important than the systems that might be used to implement it."
This can be true for both U.S. and non-U.S. reinsurers. The London reinsurance market is very high-touch, which is "counter to technological advancement," says Schenker. Indeed, the key is finding the right balance of technology use to improve speed and cut costs, while enabling brokers to focus on their high-touch work.
"Given today's market, with its increasingly complex transactions, tighter margins, compliance and more complicated analytical requirements, the challenge has shifted from a technology focus to one of utilizing resources most efficiently across the organization," says Paul Fox, CIO of New York-based Guy Carpenter & Company LLC, noting that many reinsurers have nonetheless begun major integration projects or at least plan for them. "For both individual firms and the overall industry, transaction and placing systems continually provide challenges in finding the right balance of technology solutions with business practices that do not diminish or confuse the role of the broker in providing expert consultative services," he says.
Ratcheting Up Claims Processing
Many reinsurers are embracing technologies designed to improve claims processing. Cambridge, Ontario-based Farm Mutual Reinsurance Plan Inc. (FMRP) has begun focusing on improving claims assessments and monitoring claims activity. This is part of its drive to develop an ambitious customer reinsurance system with the help of vendors such as Magic Software Enterprises Inc., a Laguna Hills, Calif.-based company.
Guy Carpenter, lacking traditional file space and saddled by the high costs associated with reinforcing the flooring that could sustain the weight of its files, has gone so far as to make its claims processing functions in the United States almost completely paperless.
In the United Kingdom, however, its paperless move has been thornier, due to the London claims process's requirement that reinsurance brokers distribute paper documents by hand to underwriters. Still, Guy Carpenter will mandate the use of electronic claims file (ECF) for in-scope claims for all Lloyd's markets from Jan. 1, 2008. This decision follows the successful implementation of Guy Carpenter's ECF initiatives and underscores the firm's commitment to further market reform, according to the company. "This initiative is enjoying great success, and we are encouraged that the marketplace is actively working on becoming paperless in the near future," says Charles Higham, chief administration officer of Guy Carpenter. He adds that Latin America, Continental Europe and Asia also plan to become fully paperless within the next couple of years.
Its paperless play has netted Guy Carpenter big savings, in terms of rent and storage expense, postage and other labor-intensive administrative efficiencies such as file tracking and retrieval. Higham says the removal of paper files improves the company's claims service by enhancing information delivery and allowing all participants to communicate and view files concurrently. Both its speed of obtaining adjustment and agreement of claims has improved.
This, however, is not to suggest that reinsurers are going paperless across the board. FMRP, for one, is not there yet. "We are still faced with the large and small farm mutuals across Canada and the U.S. (though primarily in Canada) that have to report their information or provide information to us by paper," says Steve Smith, president and CEO of FMRP, which is owned by the 60 Farm Mutuals across Canada. "They don't have electronic capabilities at this point."
In Who's Buying What (July 2007) Skywire Software's headquarters was incorrectly listed as Scottsdale, Ariz. Skywire Software's actual headquarters is Oak Brook, Ill. We regret the error.
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