Property/casualty reinsurers suddenly saw the need for catastrophe modeling and risk-concentration data in 1992, after Hurricane Andrew pulverized parts of the Bahamas, South Florida and the Louisiana coast.

Desire for data intensified among casualty reinsurers after the 9/11 terrorist attacks. Life and health reinsurers have begun thirsting for better data ever since the AIDS epidemic broke out in the 1980s, and finally became proactive in seeking better data in the last year or so, sources say.

Not surprisingly, with claims soaring, no reinsurer wants to settle for aggregated data from primary carriers, says Karlyn Carnahan, a principal at Novarica, a New York-based consulting company. Reinsurance companies want to know the exact locations of the risk-down to the street addresses, Carnahan says. They want to know the precise nature of the risk, such as whether a building is brick- or wood-framed, for example. And they want to know the concentration of the risk, such as the number of employees working in a high-rise.

A reinsurer with too much risk in too small a geographic area or poorly understood risk could face gigantic losses from a single event, says Karen Pauli, research director in the insurance practice at TowerGroup Inc., a Needham, Mass.-based consulting company.

IN-HOUSE DATA TOOLS

These concerns have helped shape operations at Minneapolis-based ING North America Reinsurance Corp.

In 2003, ING Re created a risk concentration database in-house. The company uses the database to determine risk exposure by address or postal code, or at the city or regional level, and then compare the exposure to risk-management standards, says Rick Becchetti, the company's senior risk management analyst. Cat modeling software from an outside vendor, combined with the database, helps determine potential losses from terror attacks, earthquakes or other disasters, he says.

ING Re uses the information to create risk concentration analysis reports for clients. The reinsurer considers the reports a value-added service that differentiates the company from competitors, Becchetti says. Typically, the reports include color-coded maps that track the risk concentration and cat modeling results of the client's exposure, he says.

Yet, primary carriers handle data with varying degrees of sophistication, says Melissa Tilford, VP of marketing and underwriting for ING Re. "The larger writers typically are farther along in awareness," she says, adding that the differences in capabilities among primary carries derive mostly from their willingness to bear the cost and the commitment from top management.

To improve that performance among primary carriers, underwriters or account managers provide data to Becchetti, who says he "plows through it, filling in the gaps wherever necessary."

He then brings the information into the risk concentration database to check for violations of ING Re's parameters - too much exposure in a single building in Lower Manhattan, for example.

"If there are any violations, the president of our company gets involved," Becchetti says. "The president's going to approve violations with certain restrictions, and then that information goes into the database."

Originally, ING Reinsurance hoped its primary carriers would use the risk-concentration database themselves. Instead, clients have indicated they prefer the reinsurer to handle the entire risk-concentration process. Today, ING Reinsurance operates the system for internal reporting, and as a service to primary carriers.

However, clients take a "hands-on" approach to another service. Primary carriers with treaty agreements are using ING Re's Wingman, an in-house online system, to get quotes and bind individual policies 24 hours a day, Tilford says. Wingman became available in March 2007 for workers' compensation policies associated with corporate aircraft, she says.

When using the system, primary carriers answer questions about the policy, and then click a button and get a price based on the information specific to the policy, the terms of the treaty and other data, Tilford says.

Wingman also handles renewals, cancellations and mid-term changes, she notes, while allowing users to test varying levels of coverage.

ING Re learned to make the system easy for primary carriers to use, without sacrificing the data needed to understand the risk, Tilford notes. "If we had made it too cumbersome people wouldn't want to use it," she says.

FORMING PARTNERSHIPS

Developing a system that primary carriers want to use can transform reinsurers from low-bid contractors into valued partners, according to another reinsurer.

Charlotte, N.C.-based Transamerica Reinsurance Co. got more than it bargained for when it commissioned Edison, N.J.-based MajescoMastek to create an online system that streamlines data collection and underwriting on the life side of the reinsurance business.

The resulting technology not only reduces the underwriting workload more than anticipated, but also brought the unexpected benefit of refining all-important mortality calculations, says David Dorans, VP of product consulting and development for Transamerica Re.

"We went in there trying to save nickels and dimes, and instead found we were saving dollars," Dorans says, noting the system allocates much of the savings to the primary insurers.

Operational costs account for about 8% of each dollar in premiums, while mortality accounts for 60%, says Erik Stockwell, VP and GM of life and annuities for MajescoMastek. Dorans places mortality as high as 70%.

Stockwell quotes the CEO of a large reinsurer as saying that a 1% improvement in mortality results can increase corporate ROI by 3%. "It's a huge swing just by moving this dial just a little bit," he says.

With primary carriers achieving average margins of 3% to 4%, a 1% increase in profitability on the percent of premium brings a 25% increase in profitability, says Dorans. "It's where the money is," he says. "If we get the mortality right, everything else is going to go swimmingly. If the mortality is wrong, it doesn't matter what else went right - you're going to have a real problem on your hands."

The system's improvements in mortality results didn't become apparent to Transamerica Reinsurance and MajescoMastek until three years ago, which was more than three years after the launched the system, says Dorans.

ERRORS AND EXCEPTIONS

The system, dubbed the Mortality Management Solution by Majesco-Mastek, rids underwriters at the primary carriers of the job of sifting though every bit of information collected for policies. The system sorts through the data, and presents underwriters with only the information that falls outside established parameters and warrants personal review.

Relieved of the need to review data the system automatically approves, one primary carrier reports its underwriters have become 40% more productive, Dorans says. That means a lot because of the scarcity of good, experienced underwriters, says MajescoMastek's Stockwell.

The screening also eliminates errors because underwriters are no longer "buried under a mountain of meaningless data," says Dorans. And the system's auditing process also catches potentially costly mistakes.

Anytime an underwriter makes a decision that differs from the system's usual approach, the system alerts the primary insurer and Transamerica Reinsurance. That double-checking amounts to an audit of 100% of exceptions, Dorans says, noting that the insurance industry usually audits fewer than 1% of an underwriter's cases.

"There's a significant amount of human error in the traditional environment that a system like this can catch, and it can lead to substantial savings down the road - saving half a million or a million dollars," Dorans says.

Primary insurers that work with Transamerica Reinsurance can choose to use part of the system, but Dorans recommends taking on the entire offering. Many insurers are still converting paper records to digital images when they could take the additional step of converting the records to data ready for manipulation.

Some primary insurers hesitate to invest in the changes required to their basic IT systems to accommodate the system, Dorans acknowledges. Only six primary carriers, less 10% of the reinsurers' clients, have fully committed to the system, he says. Yet, two more primary insurers appear likely to sign up, according to Dorans, and Transamerica Reinsurance and MajescoMastek can now bring newcomers up to speed within four months, Stockwell says.

Ed McKinley is a freelance business writer based in Chicago.

(c) 2009 Insurance Networking News and SourceMedia, Inc. All Rights Reserved.

Technology and Standards

As reinsurers and reinsurance brokers have become more acutely aware of the importance of amassing, interpreting and transferring data, the underlying technology and standards have been evolving, too, says Peter Marotta, enterprise data administrator for ISO Inc., a Jersey City, N.J.-based provider of risk information.

Cat modeling, data analytics and geographic information systems, or GIS, are the overlapping methodologies that provide and feed off of better data, says Marotta. Most companies turn to vendors for cat modeling instead of developing the software in-house, he says, adding that many insurers buy more than one system so they can compare the results. Boston-based AIR WorldWide Corp., a company affiliated with ISO, began offering cat modeling software in 1987, when its founder saw no single company had broad enough experience to single-handedly understand hurricanes, earthquakes, terror attacks and other disasters, says Bill Churney, VP of business development at AIR Worldwide.

Better data and better analysis of the data matter most when companies can exchange that information well. That's where standards can help. The two-fold Reinsurance Large Commercial Standard helps companies speak the same "language" when exchanging data, says Lloyd Chumbley, VP for standards at Pearl River, N.Y.-based ACORD.

On one hand, the standards specify consistent technical parameters, making sure, for example, that two trading partners use the same set of Web services definitions. On the other, the standards define business terms so that all companies define a particular roofing material the same way.

ACORD updates the standards as technology evolves and the industry's understanding of risk improves, Chumbley says. "After 9/11, for instance, it became very important to understand not just the location of a risk, but what floor they're on," says Chumbley. "The technology side tends to be more stable."

Companies tend to adopt the standards when they update IT infrastructure, or when they start working with new trading partners that are committed to the standards process, Chumbley says, noting that "no one goes out and updates their systems just to meet standards."

(c) 2009 Insurance Networking News and SourceMedia, Inc. All Rights Reserved.

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