So, insurers turn to reinsurance companies for help, and reinsurers turn to other reinsurers to spread the risk even more. Most important, though, both insurers and reinsurers need technology to track their exposures and allow them to function in the post-9/11 world where the word loss has acquired a whole new meaning.

Tools to Use

General Electric Employers Reinsurance Corp. (ERC) developed its own Internet-based database system to keep track of all its current reinsurance contracts, according to Jeff Cooper, who is the leader in the global ceded reinsurance department for ERC. Cooper takes the reinsurance policies his company issues and buys reinsurance for those policies. ERC implemented Ceded Agreement System (CAS), he says, as a means for the company to manage its credit exposure to reinsurers. [CAS] contains terms and conditions from all our current reinsurance contracts, explains Cooper. The data is in such a format that I can look up Reinsurer A and see what kinds of limits we would be exposed to if there was a hurricane in Florida tomorrow and my insurer went bankrupt.

Being Internet based, CAS allows Coopers reinsurance team to use the tool no matter what its location. We have team people in Munich, London, Chicago, and Kansas City, so it is important to have a global, real-time tool anyone can access, he says.

The important work of the system is to manage the amount of credit exposure ERC has to any single reinsurer. Over time, though, it has become more than a credit-exposure management tool. The enhancements allow us the capability to enter by reinsurer our current outstanding reserves, says Cooper. When we do our annual statement, we have to calculate what ceded reserves we have by reinsurers. Cooper calls these legacy reserves. In other words, what is the credit exposure we have to those reinsurers for claims that already have happened, he says. Then I can compare that with the exposures we have to our reinsurers for claims that might happen. That way we can see the front-end and the back-end views of what our credit exposure is to a reinsurer.

All Data, All the Time

ERC has all its bases covered with CAS, according to Cooper, because the system also is a database for all of the carriers reinsurance contracts and treaties. ERC is looking, as well, to link the system to the ERC operating system so there will be a single point of entry for both. As we enter data into this system, we use it for credit management purposes, but its also going to drive our operating systems and do the actual ceded reinsurance accounting and claims work, explains Cooper.

ERC can attach into the system its cover notes, the contracts, and all correspondence related to a single contract. Anyone with access to the system can enter and receive an overview of the terms and conditions of the contract as well as links to the additional information. Whether youre a claims person, an underwriting person, or an accounting person, you can have instant access to the terms and conditions and the actual contract language, says Cooper. Its a single point of contact available over the Internet in real time and globally.

Keeping Track

For years, reinsurance was not a top-of-mind concern for insurers, according to Donald Light, an insurance industry analyst for Celent Communications. Putting in new systems within reinsurance seemed like spending a lot of money for a little corner of [the carriers] operation.

The result of this negligence for insurers was many did not realize what policies were covered. How could a company not make a claim on a valid contract? asks Light. It may seem like a simple problem, but Light contends it is a complex one for insurers. There are so many primary policies, so many kinds of losses, he points out. The result was a bunch of reinsurance contracts with sometimes pretty obscure and difficult language in them. Having the right pair of glasses on to see the money lying in front of you in the middle of the road is not easy.

Light suggests a thoughtful look at the whole design process done by a higher level within the carrier. That may start to reveal some of your operational flaws, he asserts. You may not have good answers for how well the correct reinsurance contracts have been paying the carrier. Do they make timely payments or not? Do we have exposures right now with reinsurance companies whose ratings have dropped?

Such questions might reveal to the carrier any process pain. How messy and poorly documented are things? Light asks. How much potential financial gain is there?

Depending on the answers, he says, insurers may need to replace the current system with an end-to-end reinsurance system. Thats a significant initiative, he points out, noting such systems call for a significant dollar outlay as well as a commitment of staff time. Making the connections from your policy administration system to your claims system can be pretty complicated, he adds, depending on how complex the legacy environment is.

Finding the Right Fit

Nationwide has been using Universal Reinsurance System (URS) from Fiserv for more than a decade. The carrier extracts information from three sources to aid the system: new and current policies covered by reinsurance contracts, claims that are actually or potentially covered by reinsurance, and accounting and statistical information. The data is entered into URS and then matched against previously entered reinsurance contracts.

We rely on some systemic tools to help us identify [problems] early and efficiently enable us to report claims to our reinsurer, Trevethan says. The system allows Nationwide to calculate the amount of losses that have eroded and also document the policies in a timely fashion to speed up recovery.

Technology is helpful, Trevethan says, but so is training within the carrier. Nationwide formerly relied on a lot of manual recognition and identification, which required a significant emphasis on training claims personnel, he explains. Not surprisingly, he adds, thats fraught with the possibility of error because [claims personnel] have other things to do.

Trevethan describes the old process: Our claims department was responsible for reporting the claims to our reinsurers. The reinsurance department was responsible for laying off the reinsurancemaking the decisions about what protection we needed and then managing those relationships. Our accounting department had responsibility for getting the money and clearing the accounts when the money was received.

Despite best intentions, policies and claims fell through the cracks. That happens, unfortunately, more frequently than not in some organizations, Trevethan says.

Nationwide decided to take a team approach, and instead of having reinsurance-related personnel work in different departments, they were brought together in one department, working together, sitting next to each other, and jointly being responsible for the whole process, he says.

Nationwide also implemented the URS system to interface with the carriers mainframe system as well as with the accounting and claims systems. This allowed the carrier to capture data more accurately, identify the reinsurers, and quickly report claims to manage the recoverables.

The reinsurance group at Nationwide has access to the carriers online claims management system, and this allows the group to track how much has been paid on a claim and how much reserve is established. Those figures are interfaced monthly with the URS. So, for any claim that we have a record of or any claim that grows to a size that is half the deductible, [URS] automatically will recognize it without the claims staff having to remember to send a note to the reinsurance department to make [the department] aware of the claim.

If the insurers payments to the policyholder exceed the deductible offered by the reinsurer, Nationwide automatically will know of the event and then can bill the reinsurer for recovery.

The entire reinsurance system has allowed Nationwide to develop strong relationships with its reinsurers, Trevethan says. They have greatly improved confidence in our ability to keep them informed, he asserts. This is difficult to quantify, but we believe pretty strongly it has improved our relations to the point we are underwritten and given some favorable terms and rates because [reinsurers] have greater confidence in us.

Good for the Goose

Reinsurers wont hesitate to charge a higher rate if a primary insurance carrier is not a particularly good risk or if the carrier is not very good at its business. Carriers often have the same reluctance when working with reinsurers, Trevethan says. Our standards are we want to buy reinsurance only from companies that are financially sound and are good professional entities, he says. That equates to companies rated in the A category by A.M. Best. If they fall below that, we can be picky enough to say, You dont meet our standards. We try to maintain very high levels of security because some of these losses dont get paid this year. They may not be paid for 20 years because they are long tailed.

ERCs Cooper believes the foremost point insurers look at is the reinsurers ability to perform on its promise to pay. [Reinsurers] need to have the financial wherewithal to meet the promises they are committing themselves to, he says. The second thing is a little harder to get your hands around, and that is the willingness to pay. Thats an issue of good-faith business practice. Apart from that, certain reinsurers bring some expertise into certain product lines, and that can be very helpful, but thats typically secondary to the basic reinsurance transaction itself. Everything after that is value added.

Those Standards, Again

It is important insurers and reinsurers follow a standard such as ACORD reinsurance standards for property/casualty, Light believes. This allows the cedent [insurer] to communicate both with its broker and the reinsurance companies through XML-formatted messages, he says. The nature of the beast is there is a continuous flow of information, and there are a lot of parties involved. It could be 10 reinsurance companies with dozens of contracts growing over 10 to 15 years. To the degree systems change over that amount of time, if you have a universal language that is basically stable, it is going to simplify the level of communication and the efficiencies within the companies.

Communicating with ERCs reinsurers is done through the use of CAT models for the different product lines, Cooper says. We monitor our exposures ourselves, but more important, we can articulate those exposures to a third party in a standardized format, he notes. It gives us a common language to talk to reinsurers. These arent new tools, Cooper says, but what is new is the expanding number of product lines, such as workers comp CAT exposures, terrorism CAT exposures, and offshore oil rig CAT exposures. The menu of available models has expanded, and the territory that the property models are covering keeps expanding, as well, he explains. This helps ERC to monitor its exposure and articulate to third parties what those exposures are. It has become the language, he says. The people expect the data to arrive to them in those common formats.

Collision Course

One of the major worries in the reinsurance business has been the collision course insurers and reinsurers have been travelling. Issues such as the terrorist attacks of 9/11, asbestos, and mold have created some major rifts between the two parties. Some of the stakes are getting higher in terms of recoveries primary companies want to get from their reinsurance companies, says Light. The World Trade Center is a good example. Was [the attack] one occurrence or two? What was the contract language? Was it written or not? The issue of asbestos in buildings has been going on for years with no end in sight. When they wrote the reinsurance contracts 5, 10, 20 years ago, they were not envisioning the kinds of broad claims that are coming from all kinds of situations and circumstances. You are getting changes in the social, political, and legal environment that are whacking the heck out of the reserves of the primary companies, and they will seek help anywhere they canincluding the reinsurance companies.

Despite the conflicts, though, Light maintains the two sides need each other too much to have a total war. The interesting thing about the subject of reinsurance technology from the cedents is 98 percent of all primary companies use reinsurance, he says. There are only a couple dozen important reinsurance companies that write reinsurance, but of the 1,500 P&C companies out there writing, over 1,400 buy reinsurance at a significant level.

Value of Technology Seen in Reinsurance

In his report P/C Reinsurance Cedent Technology Strategies, Celent Communi-cations analyst Donald Light writes: There are also many reports about the discovery of valid, but unsubmitted, reinsurance claims which came to light during implementations of integrated reinsurance solutions. The amounts of these otherwise lost claims range from $1 million to more than $10 million. Celent believes that cedents can gain a significant financial benefit from available technology. The greatest benefits will occur through more accurate and complete identification of valid claims to reinsurers; more complete and aggressive management of aging recoverables; and improved program design through more effective applications of business intelligence capabilities. Although one-time windfall gains can occur, Celent believes that the best financial returns will result through the application of some form of continuous improvement or Six Sigma methodology to all reinsurance processes.