As natural catastrophes and increasing regulatory requirements continue to threaten the industry, the argument for reinsurance technology to become a top priority is quickly gaining traction. Insurance Networking News asked Craig Robinson, a StoneRiver reinsurance sales engineer, to explain why insurers are cautious about automating reinsurance operations and what the potential benefits are.
INN: Why is ceded reinsurance still a manual process?
CR: While most insurers recognize that drastic improvements can be made through automation, the initiative rarely becomes an insurer's top priority. That is unfortunate, given that reinsurance is one of the largest, if not the largest, asset on an insurer's balance sheet. The fact that it is a back-office administration function and not client-facing may be part of the reason it is relegated to the 'we'll do it later' pile.
Insurers spend millions to analyze, refine and invest in automation to enhance their core administration processes. Yet, when it comes to ceded reinsurance-an administration process far more complex than any other P&C line of business-many insurers continue to depend on a small number of seasoned reinsurance experts employing manual practices and spreadsheet processing.
However, when catastrophe strikes, reinsurance jumps to the top of every insurer's priority list with a newfound commitment to pay closer attention to Sarbanes-Oxley (SOX) adherence to automate the administration process, reduce float times, and finally get the reinsurance house in order. Then, as time passes, the priority of the catastrophic moment gives way to the normal day-to-day priorities.
INN: What steps do insurers need to take?
CR: First, insurers should understand the potential consequences if they do not automate regulatory compliance. Audit issues have gotten stricter, and while manual processes and spreadsheets might be accepted one year, they could be rejected the next.
Second, with complex reinsurance arrangements and insuring relationships, risk exposures are greater and it is easier than ever to miss recoverables the insurer is due. An insurer should closely scrutinize its current reinsurance process with its accountants to determine if changes are necessary.
Third, once the automation commitment has been made, insurers need to decide if it's best to build an in-house solution or buy a vendor's SOX-compliant system. Then, if a vendor's system is selected, they need to decide if it is better to outsource or implement in-house.
INN: What can insurers expect in the way of ROI?
CR: Insurers can expect a significant reduction in the timeframe for collection of recoverables, thereby reducing negative float. As I mentioned earlier, automation also will provide audit trails for every aspect of the reinsurance administration process. Recoverables can be more effectively identified and tracked so that nothing is missed.
While the most pressing issue is proper management of one of the company's largest assets, beyond that there are additional benefits, which individually may not warrant the investment in automation. But, when you look at the whole, it makes for a compelling business case.
There are obvious benefits, moving away from a manual process eliminates costly workarounds and manual inefficiencies. New streamlined operations and data flows offer increased satisfaction with reinsurers and brokers. Then, there are more subtle benefits often overlooked because they may be difficult to measure, such as identification of previously undiscovered collectibles, increased management control, productivity, accuracy and efficiency.
There are always advantages when an insurer keeps pace with new technologies. For example, responding to new or different reinsurance contacts quickly; promoting business growth and the insurer's reputation with fast, high-quality service to reinsurers; and obtaining detailed tracking and reporting of reinsurance claims.
There are plenty of additional benefits, but insurers first need to commit to make automation a priority. Once automated, the potential benefits will become apparent. It's taking that first step to make it a priority that seems to be most challenging.
INN: What are the regulatory compliance implications?
CR: Whether the system is built in-house or automation is enabled via a vendor solution, the systems need to be SOX-compliant, and all inquires made by states or auditors should be answered by complete audit trails-exactly how the insurer's reinsurance was calculated, what did and didn't attach to any parts of the programs and why something kicked out. Statutory statements such as Schedules F and P should be automatically derived for the insurer, again with a complete audit trail as to how everything was generated.
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