If the life reinsurance market suffers in its ability to embrace technology, the good news is that it's got a lot to gain by doing so. From a technology perspective, "building the deal," i.e., processing myriad communications between cedants, reinsurers and retrocessionaires, involves layer upon layer of data input and information exchange, integration and ultimate transaction processing.From a business perspective, the drivers-competitive advantage, regulatory reporting, cost reduction and shareholder and broker demands, among others-are as pressing as ever.
Whatever the drivers, life reinsurers are rethinking the role technology standards play in their ability to remain competitive, and as a result, are taking a step away from processes that have historically resonated with frustration.
"In the life reinsurance world, we've lived in an environment where the mantra was 'take what you can get,'" says Lloyd Chumbley, assistant vice president, standards, at ACORD, Pearl River, N.Y.
"If you could get business in Excel or a flat file format, you took it, even though it's not in real time. It was a world in which the cedant owned the process-to the point where they even owned the definition of data. Reinsurers would literally take similar feeds from the same exact software packages, but the data definitions were different because the ceding company would have used that same package differently."
Laila Beane, ACORD's director, life and annuity, agrees that the industry faces a true problem. "The business problem we are trying to resolve," she says, "requires us to rectify all the different methods of receiving data from all the cedants in so many different formats. And since the semantics of what those data elements really mean varies, we are trying to bring standards into play to improve the data quality received at the reinsurer."
AGREEING ON SEMANTICS
Agreeing on the semantics is but one aspect of the bigger picture, adds Chumbley. "One of the arguments against XML messaging for life reinsurance has been 'let's work on just getting the semantics down, and not worry about the format. Let's agree on what the data means.' That's a huge step forward, but it only takes you half way."
The other half is enabling new methodologies, which reinforces the notion that the life reinsurance industry is behind the times.
"Remember, technology is really batch oriented," he says. "Typically the reinsurer finds out about a new piece of business through a batch download that occurs on a semi-frequent basis. They may be getting a once-a-month batch. At any point in time a life reinsurer can't access its liability or understand its capacity because of the timing of the feed."
Another obstacle concerns the insurance industry's slow warming to standards, the history of which is long and frustrating.
Chumbley maintains that in the late 1990s, ANSI, looking toward an EDI edifact (Electronic Data Interchange For Administration, Commerce and Transport, the international standard provided by ISO 9735) solution, attacked the problem on three fronts:
1. Facultative placement and all associated issues (request for capacity, capacity reservation, underwriting and other facultative issues).
2. Treaty (treaty status, change, all the things that happen during administration of the treaty).
3. Claims processing. "They delivered the ANSI standard X12 as a robust guide for this-but with no implementations," he says.
Having no cedants willing to be beta participants was largely the result of the industry's acceptance of reinsurance software vendors' existing capabilities-and cedants' concern about making significant changes to the status quo.
"The watchword for the late 90s was 'cedants rule,'" adds Chumbley. "If you had a cedant, you did whatever the cedant wanted. If they wrote it on a napkin-however they chose to let you know that they had wanted you to buy some of their business-you would do it that way."
By 2000, the XML standard was a foregone conclusion, ACORD recognized its importance, as did the industry, and many companies began implementing XML to communicate with back-end systems.
"Between 2001 and 2004, ACORD converted all the treaty and facultative documentation into ACORD XML documentation," Chumbley points out.
And although by 2004 the pendulum began swinging to more of a buyer's market, the industry still faced other issues, such as capacity, frictional data and error-prone processes.
STRUGGLE CONTINUES
Although life reinsurers are beginning to understand the importance of standards, the long-term result is an industry still struggling with inneficiencies, says Igor Best-Devereux, CEO of eReinsure, a Salt Lake City company that provides an online platform for managing the placement of reinsurance.
eReinsure, which services reinsurance customers from both life and P&C lines, leverages what Best-Devereux calls the most important standard of all-the IP standard. ACORD XML and SOAP (a standard for exchanging XML-based messages over a computer network) use IP to prepopulate fields within the company's system, facilitate collaboration by pushing data back and forth, and ultimately transfer data into a reinsurer's accounting, underwriting or document management system.
"We are in a business that has sadly lagged behind the mainstream of financial services in its return on capital," he says. "In fact, the problems associated with return on capital for reinsurance as compared with other financial sectors is disappointing-verging on pathetic."
Best-Devereux points to the need for data accuracy as the reinsurance industry's No. 1 priority. "We found one reinsurer had re-keyed the same data 40 times throughout the life of the transaction," he says. "So issues around accuracy can grow exponentially, and if an error is missed early on, it results in 100 times the cost to fix it later."
The costs associated with this are sometimes hidden, sometimes subtle. "When errors occur, the stack of regular work to be processed grows, because that person is now distracted with other areas. Now you face opportunity costs, because you are missing growth opportunities because you are so busy tracking the multiple facets of the problem," says Best-Devereux. "You need to solve these problems further upstream so they don't end up in the accounting process, primed for a failed audit."
Best-Devereux maintains from the technology side, the challenge originates with the carrier's legacy systems.
"You can't just come in with a fork lift and haul the mainframe out of the building," he says. "And we're talking about huge amounts of data not usually accessible in a usable form, but still considered the lifeblood of the company."
SIMPLIFYING COMPLEXITIES
Another ongoing challenge concerns the collaborative requirements unique to all parties in an insurance/life reinsurance transaction.
"The nature of the life reinsurance beast is its level of complexity," says Beane. "You are underwriting human beings for life. That involves its own complexities in a complex market. When you add federal regulations and state regulations such as upfront signature collections, disclosures, etc., you recognize the uphill technology battle."
From Leroy McCarty's perspective as a direct cedant, the biggest problem isn't "technology-related," but rather, one that technology can help solve-data quality. As vice president, reinsurance operations for Los Angeles-based Transamerica Occidental Life Insurance Co., McCarty decided to become part of the solution, and serves as chair of the Toronto-based Reinsurance Administrat-ion Professionals Assoc. (RAPA) Data Management Committee, which studies, recommends and promotes industry-reporting standards.
"Our business is dependent on the passing and processing of accurate data from cedant to reinsurer and reinsurer to retrocessionaire," says McCarty. "Every time one system passes data to another, there is the potential for degradation in the accuracy of that data. A cedant might have several systems process data before it's passed to the reinsurers and so forth. So the first step to improving data quality is to make sure everyone is speaking the same language."
To that end, ACORD's life reinsurance working group is currently focused on a six-month project to leverage some of the completed standards work and take those specifications to the next step.
"Because of the work already done by ACORD," says Beane, "we'll finalize and refine the in-force processing of reinsurance under the treaty umbrella first, followed by the transaction end (billing) and on from there."
Meanwhile McCarty and RAPA are working hand-in-hand with ACORD to move the vision of data standards forward. "Once we have wider adoption of those standards, we'll focus on additional methods and tools to improve the quality of the data," he says.
MORE WORK TO DO
McCarty acknowledges that the insurance industry still has more work to do, and his involvement as a catalyst for change in the standards movement is well founded. His company, a subsidiary of Transamerica Corp., reported $763 billion of in-force life insurance last year.
"Instead of having to work with dozens of reinsurers independently to meet their data needs, Transamerica will defer to the ACORD standards," McCarty says. "So there won't be much of what one particular company needs so much as what the industry needs. Those reinsurers will work through RAPA and ACORD to move their needs forward for consideration. It's a big savings in time and resources to have one central place for data needs to be championed."
Using standards to speak the same language is critical but heralds back to the industry's ongoing challenge: Standards alone don't necessarily address changes that must occur in a life reinsurer's business processes. Accordingly, Best-Devereux maintains that although standards may be considered by many to be the solution, they should instead be considered an enabler that allows reinsurers to rethink how their business is processed.
"Technology facilitates the movement of data and as such can be the catalyst for standardizing it," points out McCarty. "Once every system in the supply chain consistently passes the same data in the same format, the doors open to analyzing and improving the accuracy of that data."
Chumbley says the life reinsurance industry won't see a downside to embracing standards. "The reinsurer will have better understanding of the data they are managing and as a result, be able to better manage their risk. Cedants will also see some benefit, chiefly in the improved services they'll receive from the reinsurer."
McCarty takes Chumbley's comments a step further, stating that standards are becoming a condition for doing business. "The time will come when reinsurers will not offer capacity to cedants that cannot provide accurate, standardized data," he predicts. "At the very least, cedants that don't measure up will pay more than those that do. The same will be true for reinsurers and their retrocessionaires."
P&C: Some Similar Challenges
The specific problems encountered by P&C reinsurers may differ from the life and annuities sector, largely due to differences in business line complexities. But one thing held in common by both groups-getting up to speed-is an understatement, according to Richard Ruggiano, AIG's senior reinsurance officer and vice president, domestic brokerage group.
"We still process reinsurance the way we did 80 years ago," says Ruggiano, "and getting where we need to be is an uphill battle."
It was a mere five years ago when New York-based AIG, under Ruggiano's direction, embarked on a quest for improved data continuity, error reduction and overall communication between its internal reinsurance staff and external partners.
Ruggiano acknowledges that AIG represents something of a microcosm in the industry. At the corporate level, the company takes individual pieces of business, bundles them and cedes them off to reinsurers.
"We have a number of different companies using different systems, so we had look at each one of AIG's 23 systems and develop a common platform," he recalls.
Early on, the problem came down to consistency from department to department.
"A significant amount of time was spent deciding on just the nomenclature," Ruggiano says. "What the claims department referred to was not necessarily the same term used by the underwriting or actuarial departments."
Ruggiano realized the company needed standards, so it looked outside for common terms and definitions-and ended up with a 1,400-term glossary.
Using ACORD standards to help facilitate common nomenclature didn't address AIG's other problem, however: reducing the number of times staff input the same information into the system.
"Our goal was to capture information one time and move it on to someone else for input. This proactively addresses errors, which can be a tremendous problem when it comes to collections and recoverables," he says.
Finding a communication bridge to brokers and markets came next. "First we tried to develop one system everyone could use, and that was virtually impossible, so we created something that would receive information, manage edits and process it through. This meant we first had to understand everyone's process, so we changed a lot of our processes to create a system that would work. In some cases departmental users didn't agree, so we had a mandate."
Working with Salt Lake City-based software provider eReinsure, which uses XML standards to provide an online platform for managing the placing of reinsurance, AIG then built a system that would sit atop all the other systems.
Not surprising, the company's initial focus was on its larger treaty portfolios, but thanks to what he calls the "e-re" platform, the facultative side is also coming on board.
"We knew from our reinsurers' and reinsurance brokers' perspectives, we needed to look at the treaty side first and didn't want the facultative to draw down the larger piece we needed to get up and running."
Ruggiano says that use of standards to create its front end project, which has a target completion date of late 2007, can be compared to using a coin machine at the bank.
"It puts all coins in the bin and sorts through them, sliding them down into their respective slots. The same principle applies to property/casualty treaties, because with our new system, effective dates and other parameters become rules that are embedded for future use," he says.
