Seller-driven proprietary platforms include MyReinsurance (operated byGE Employers Reinsurance), smartfac (operated by CNA), Auto Fac (operated by American Re) and FacWorld (operated by General Reinsurance Co.).

I think these [different models] can co-exist because they have slightly different flavors and are aimed at different sectors of the market, says Tony Martin, manager of eFacRe, a new electronic trading platform developed by Royal & SunAlliance to request and purchase its facultative reinsurance business online in the United Kingdom and Denmark.

Stanley Kott, CEO of Wellington Underwriting Inc. in Hartford, Conn., subscribes to inreon and also uses eReinsure, which is an online system that helps manage the reinsurance buying process. We endorse any measure to improve the efficiency of the process, he says. Wellington Underwriting Inc. is a managing general agent that is wholly owned by Wellington Underwriting plc. in London, which manages Syndicate 2020 at Lloyds.

I dont believe these [online] marketplaces can take over the whole trade of facultative business, insists Jrgen Petzold, senior underwriter for Hannover Re and head of the companys Center of Competence Facultative E-Business.

What drives adoption of these platforms is buyers of reinsurance making their business available online, rather than sellers just making capacity available, says Igor Best-Devereux, CEO of eReinsure, Salt Lake City, Utah.

Buyers understandably dont want to go to five or six different places to get their reinsurance coverage, says Kathrine Huelster, chief operating officer for inreon. If they can work through one channel that gives them access to all the capacity theyre looking for, then that certainly makes it more efficient for them.

However, she acknowledges proprietary platforms also can be useful. For instance, in the United States, there are middle-size primary insurance companies that do 80 to 90 percent of their reinsurance with one reinsurance carrier, Huelster says. In such a case, the added value of a trading platform is significantly reduced, she adds, noting the insurer might find it far more effective to use a proprietary portal in working with a single reinsurer.

Mike Moncada, North American casualty facultative leader, with GE Employers Re Corp., in Overland Park, Kan., says his companys proprietary platform is used as an underwriting tool rather than as a potential format to bring all facultative business online. We view some of these online platforms as [creating a danger to further commoditize] the product, and thats the exact opposite of what were trying to do, he says.

The online mechanisms address expense ratio issues. They dont address the loss ratio issues, he emphasizes. For larger more complex risks, more face-to-face negotiation is required, he says, noting the online mechanisms probably work better for the lighter hazard risks.

Slow Start

Most of those interviewed believe online trading platforms will be useful for certain types of business but will not supplant traditional underwriting. Indeed, the penetration of online trading mechanisms has been limited for both the buyers and sellers of reinsurance. For example, although inreon now represents 50 percent of large global reinsurance capacity, with 16 member reinsurers, its use by buyers has been slow.

We are participating on the inreon platform for the second year now, says Petzold. We have paid $30,000 for the first year and are expecting to pay another $30,000 for the second year, but we have only one risk bound, he says.

Swiss Re is an inreon shareholder along with Munich Re and Accenture. Christian Speiser, a member of thesenior management and head of electronic risk exchanges for Swiss Reinsurance Co. in Zurich, admits inreon has had limited market penetration thus far. Since its inception in December 2000, inreon has had over 1,200 submissions, which boils down to a double-digit number of bound transactions, he says. The volumes are far below what it takes to make it economically viable at this point in time. Swiss Re envisages a break-even for inreon in 2004, Speiser says.

Although cedents initially submit only a few risks to inreon to get their feet wet, Speiser expects they will start to place entire books of risks [with inreon], so that the volumes will increase and eventually achieve levels that allow a revenue stream that covers cost.

Huelster notes the platform had submissions worth 250 million euros ($247 million) since its 2000 startup, with 10 percent of that business bound. She explains inreon conducts facultative property, proportional and non-proportional, via its platform as well as treaty catastrophe excess-of-loss reinsurance, which is available only in Europe and Asia. It also conducts industry loss warranty (or original loss warranty), which is an indexed catastrophe cover available only in the United States. In September, it added a new facultative liability product. We certainly expect to see a lot of catastrophe excess of loss business being traded electronically again at this year-end renewal, she says.

Speiser adds part of the reason the inreon platform has seen limited business is the industry is slow to embrace innovation. In addition, he says, a more efficient reinsurance process is not at the top of the list of cedents problems: They now seek coverage at an acceptable price for them. Theyre increasingly challenged with finding efficient capital solutions, now that the [industrys] surplus has been washed away.

Speiser acknowledges, though, given the platform was initiated by sellers, in the beginning it did look a bit self-serving, because it was simplifying the transaction process and simplifying the product description. This was unusual for cedents or brokers, who were accustomed to going to the reinsurer, presenting stacks of paper, and asking for help to solve a problem, he says. If inreon then proposes that the cedent or the broker structures the risk and boils it down to a few parameters and complies with specific wording provided by the exchange, it may look like the aim is to serve the seller, rather than the buyer, he says.

Nevertheless, Speiser em-phasizes the inreon platform is an innovative model that will assist both buyers and sellers of reinsurance, and for certain risks we are convinced [it] will eventually dominate, he says. It just takes time to convince the cedent that even though he may not see immediate payback with the first small transactions, he will see the payback going forward.

Benefits Available

The motivation to find more efficient and less expensive solutions is reduced during a hard market, but Speiser asserts the industry will probably continue to be cyclical and sooner or later participants in the market will benefit from the inreon platform as margins are again squeezed. He is convinced that within a few years, a substantial part of facultative business and also part of treaty business will be conducted online because of the obvious benefits.

Speiser says it is difficult to assess which of the current exchanges or quasi-exchange models will prevail. We would assume that there would be very, very few real exchanges, maybe only one. An exchange is an organizer of a marketplace. Like a stock exchange, he explains, it determines rules for the process and links the buyer and seller sides into existing legacy systems, so they have the benefit of end-to-end processing.

He predicts a large number of application software providers would maintain a place in the market, providing specialized products that allow buyers or sellers to organize their information and their legacy systems,so they can connect with an exchange or connect directly between buyer and seller.

Fans and Critics

Stephen Card, managing director of risk and reinsurance solutions for the London-based broker, Alexander Forbes, says any electronic trading platform will struggle for full acceptance until the industry is more comfortable with online methods. Despite our best efforts to the contrary, were still a pretty archaic marketplace. Were not as well developed in IT as we should be, Card says. It is a generational issue and changing slowly. I still know a lot of brokers who cannot use a computer, he adds.

Meanwhile, Card says, inreon is just one of the tools in a brokers armory, in addition to traditional broking methods. Not only does inreon offer a simple product with clear and concise wording that everyone knows and understands, he asserts, but it also offers capacity dedicated to the online facility and guaranteed response times.

Those are quite important factors because during a busy renewal season, which is when these things are going to be at their most frantic, the toughest thing you find as a client is getting responses from people, Card says. Then when you get a response, reinsurers will come back and say theyve exhausted their aggregate in a certain geographic area. Additional capacity is available through inreon that is not available in the open marketplace, he notes, because this is seen as a way to encourage buyers to use the platform.

Less of a fan of inreon is Petzold, who believes the business seen by inreons reinsurer members is a bit anti-selective. He asserts risks come to inreon when they cant be placed anywhere else and adds inreon suffers from a lack of ceding company participants. They have well-reputed reinsurers, which are prepared to write business on that platform, but it seems they dont have many insurers or brokers that like to trade their whole books of business over the platform, he says.

You can really see where theyre doing their marketing, he adds. When you see two offers coming in from Belgium, for example, we know the inreon marketing people are in Belgium. You can also see when theyre leaving Belgium because no more Belgium risks are offered.

Proprietary Alternatives

Other seller-driven initiatives are the reinsurer-owned proprietary platforms. Some observers say these initiatives have had and will continue to have limited use by buyers because buyers have to contact each reinsurers platform separately, which requires more work. Others believe proprietary platforms will prevail over other online exchange models when software is developed that connects a buyer or broker with many propriety networks with one click of a mouse.

Petzold at Hannover Re says his company is working hard to develop a proprietary platform and is expecting to bring its first pilot online in the first half of next year. He believes developing XML standards for data transmission of online reinsurance submissions will end the extra work for buyers and brokers that deal with online platforms.

I think we can easily overcome the problem if we can say to our clients, As soon as youve entered your offer on our platform, you can use [this] data to offer this risk to anybody else youd liketo the marketplace, Petzold says.

For me, its not a question of having one marketplace, but its a question of talking one language [such as XML] protected by ACORD standards, he says, although noting they must be more developed with regard to reinsurance standards. He predicts brokers and buyers will one day have the ability to get online and distribute a risk around the marketplace.

Moncada of GE Employers Re also believes the proprietary networks run by reinsurers ultimately have the flexibility to provide the most benefit to customers. GE ERC runs MyReinsurance, which currently provides umbrella liability coverage. He admits GE ERCs platform has had limited usage, mainly for select customers with homogenous risks, namely, umbrella programs for mainstreet types of risks in the not terribly hazardous middle market.

Moncada asserts that its one of GE ERCs challenges to determine how much business would be generated through this online tool that the company would not otherwise generate via traditional distribution channels. He notes MyReinsurance does not handle property coverages, although the company may consider expansion into other areas if we perceive the demand is there and the opportunity is there for profit.

Were taking a different approach to online platforms. We gather the voice of the customer, and determine what they need and tailor our approach to them, Moncada says. He believes some online platforms create the potential to further commoditize certain reinsurance products, which is not the path that GE ERC wants to pursue. GE ERC tries to help clients succeed in their business by trying to create a more efficient reinsurance transaction process for them, he says.

If customers have a homogenous book of business for which they are seeking facultative reinsurance, then GE ERC can establish an automatic online facility for the client, he explains. This, however, will not be appropriate for all clients, which may not have online capability to set up such a facility. Each customer is at a different evolution. So its whatever feels right for the customer is how we structure it, he says.

Moncada notes MyRein-surance provides an underwriting tool but is not a replacement for underwriting. GE ERC is committed todigitizing our underwriting processes to make them more efficient, to make us more effective in making our underwriting decisions, to enhance our ability to gather data and have access to data, he says. So were using digitization to really improve our internal processes.

To the extent we can help our external customers improve their processes, he says, well bring those tools to them, too.

Next month: The state of buyer-driven online reinsurance systems.