o Claim is flagged by system.

o Claim is associated with appropriate contracts, certificates and reinsurers.

o Reinsurer billing is prepared with supporting documentation.

o Bill is sent to reinsurer and recorded on sub-ledger as reinsurance recoverable.

o Payment is received and recorded by company.

o Payment is cleared against reinsurance recoverable.

None of these tasks is overly complicated or burdensome. Nonetheless, very few companies are able to execute the entire sequence without fundamental flaws.

Perhaps the single greatest reason is that most companies don't anticipate ceding a high volume of claims and therefore don't invest in the required reinsurance claims technology. When they do finally realize the need, they're often in serious trouble.

Several factors make it especially difficult to use technology for managing reinsurance claims.

o Multiple Platforms:

Many insurance companies have multiple policy administration, underwriting and claims systems as part of their infrastructure.

Insurers have various lines of business with unique requirements, acquisitions that result in the melding of infrastructure, and/or the inability to migrate business from legacy systems to more current, state-of-the-art technology.

o Need to Accumulate, Aggregate, Allocate and Transact with Third Parties:

Reinsurance billing is the only task in which information from disparate systems needs to be accumulated, aggregated and allocated to transact with a third party.

While companies may perform similar tasks while conducting actuarial analysis or financial reporting, only ceded reinsurance claims have a third party scrutinizing supporting documentation and calculations.

o Multiple Departments Handle Reinsurance:

Underwriters are usually responsible for facultative placements and the certificate needed to recover a reinsured claim; the claims department is usually responsible for excess-of-loss reinsurance reporting; and the accounting department is responsible for proportional reinsurance administration, along with all billing and collection.

o Reinsurance Terms and Conditions:

Reinsurers use exclusions, limits, caps, carve-outs and other limitations to avoid undesirable risks. The result for cedents is that more and more reinsurance claims require special handling.

The optimal reinsurance claims system is one that blends automation with manual intervention capabilities that are user-friendly. However, for those features to be realized, it is critical to create and maintain a centralized repository of all reinsurance claims from which billings are prepared and data queries executed.

A central repository is created when all reinsurance claims and related premium cessions are captured before any transactions occur with a reinsurer.

One option for companies to achieve harmony in their reinsurance claim processing is the use of commercial software. Purchasing such a system is only the first step, however. Interfacing the system with the other technology platforms is the hard part.

The most common pitfall is getting the reinsurance system to properly calculate the cessions according to the reinsurance contract's terms. This process starts with loading the contract terms, along with the respective historical premium and loss data. That is followed by comparing system and manual calculations, making necessary adjustments, and then repeating the process until the system calculations are correct.

One way to minimize this particular pitfall is to recognize the role of the reinsurance system–and when and how to build around it. A reinsurance system should be limited to providing core functionality: capturing reinsurance claims, centralized billing, tracking collateral and payments, etc.

Special provisions in reinsurance contracts–such as exclusions, complex commission calculations, profit sharing, experience account balances and others–should generally be handled outside the system.

For those companies that choose to build a customized system, the key obstacle is the amount of time to build and maintain the system. From design and development to implementation, the typical development period is several months to a couple of years.

Rock J. Schindler is chief sales and marketing officer for Paragon Strategic Solutions Inc., based in Minneapolis.

“Purchasing a claims software system is only the first step. Interfacing the system with the other technology platforms is the hard part.”

Rock J. Schindler