reinsurance trends: opportunities for the future · 4 •global research and strategy advisors...

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Reinsurance Trends: Opportunities for the Future Karlyn Carnahan, CPCU Martin Greenberg, August 2014

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• Karlyn Carnahan is a Director in

Celent’s insurance practice focused on

issues related to insurance technology

strategy. She is widely published on

topics such as reinsurance policy

administration systems, rating, billing,

and distribution management and is a

widely recognized expert on these topics

who has written market leading reports

and presented at numerous conferences.

She joined Celent with an extensive

career in the insurance industry and

holds an MBA from Stanford Business

School and a Certified Property Casualty

Underwriter (CPCU) designation.

Reinsurance Trends: Opportunities for the Future

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• Martin Greenberg, the Reinsurance product

manager at Sapiens, possesses extensive

experience in IT development and

management, as well as in the insurance

business. Prior to joining Sapiens

International in January 2006, Martin was

deputy general manager at FIS Software for

over five years, managing the General

Insurance (P&C) product and global clients.

Martin previously held several managerial

positions at the Israel Phoenix Insurance

Group, including assistant general manager

and CIO of Hadar Insurance Company;

manager of IT development and systems at

City Fire Insurance Company, London; and

CEO of the Noga Insurance Company.

Reinsurance Trends: Opportunities for the Future

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• Global research and strategy advisors focused on financial services operations and technologies

• Insurance practice began in 2001

• Research focused on:

• Emerging trends

• Solution providers

• Peer group attitudes and behaviors

• Cross practice themes

• Division of Oliver Wyman, global financial services consulting firm

About Celent

Digital Legacy & Ecosystem

Transformation

Innovation & Emerging Technology

Data Mastery and Analytics

Implementation Best Practices

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Overview of the Reinsurance Market – Reinsurance Supply Increases Continue to Outpace Demand

• It’s a buyers market. Competition in the global reinsurance industry is fierce

• Global reinsurance rates continue to decline

• Excess capacity

• Loss activity remains low

• Alternative capital continues to enter the market.

• Terms and conditions for June and July renewals improved, continuing a trend from the beginning of the year.

• Private market renewals increased coverage and secured multi-year protection for portions of their reinsurance coverage.

• Insurers were able to secure more customized reinsurance protections

• Property catastrophe renewals saw movement in the terms (e.g. traditional reinstatements, occurrence definitions, and terrorism language)

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• The US marketplace is dominated by property catastrophe

• Overall cat losses in 2014 have been below normal.

• Probability of El Nino increased to 80% by fall.

• Below normal hurricane activity forecast for the 2014 Atlantic hurricane season.

• But we are still in hurricane season and it just takes one

• We are in a record-setting stretch without a major hurricane landfall (Category 3+).

• Carriers who retreated from catastrophe exposed coastal areas in the 1990’s are reassessing the potential opportunities

Overview of the Reinsurance Market – What about Catastrophes?

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More People Are Living In Coastal Regions

• 53% of the US population now lives in a coastal region

• The population living in coast regions continues to grow

• The value of the properties located in coastal regions continues to rise

• Limiting your appetite to non-coastal regions significantly reduces the potential market

• Regulators are charged with assuring access to insurance – will there be more laws, pools, etc requiring insurers participate? Maybe. Maybe not.

• With lower rates, governments are expecting to reduce their participation in catastrophe exposed regions as insurance availability and affordability improves.

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Hurricanes aren’t the Only Catastrophes to Watch

Tornado

Large Hail

Wind

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• The weather could continue to change • Continue along the current trajectory • Radically change • Bounce back and forth wildly

• Data • Out of date • Incomplete • Inaccurate

• Models • Multiple models exist yet models are missing for some key areas • Models don’t always match a carriers actual book of business • Black boxes that don’t give enough insight into drivers of risk

• Technology • Analysis is slow - lack of real time guidance to underwriters • Lag time - rollups take a long time

Catastrophe Challenges

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Result

• Sub optimal exposure management

• Sub optimal cross geography optimization

• Inefficient use of capital

• Broad actions instead of surgical strikes

• Higher cost of reinsurance

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• Individual account underwriting

• Establish guidelines

• Differentiate risks

• Analyze policy structures

• Develop pricing

• Book /territory management

• Determine risk drivers

• Evaluate capital adequacy

• Allocate capital across territories – balance your book

• Estimate losses quickly and accurately

Areas where a carrier can take action

Most of these take time to implement. Reinsurance is a relatively fast solution.

• Claims

• Staff training and augmentation to address peak seasons

• Consistent processes to address increasing regulatory scrutiny

• Expand fraud capabilities

• Capital management

• Structure risk transfer – reinsurance? Cat bonds?

• Determine reinsurance needs

• Optimize your reinsurance program

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• Reinsurance programs are increasingly complex

• Massive spreadsheets

• A reliance on paper documents

• Knowledge preserved in the heads of one or two gurus

• Carriers face increasing regulatory demands for transparency

• Many are finding huge dollars available through recoveries

• Technology availability makes automation of reinsurance a project with the potential for sizable returns

Reinsurance Is A Unique Area Within An Insurance Carrier

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What are Reinsurance Solutions?

• Reinsurance solutions are used:

• To store and track information about reinsurance contracts in place

• Both Treaty and Facultative

• Both proportional and non-proportional

• Information stored includes attachment points, aggregate limits and inurements, underwriting characteristics, participations, and commission

• To identify policies that are covered by reinsurance

• To calculate premiums owed to reinsurers, to identify claims that are covered by reinsurance and track the recoverables, payments, and commissions

• To provide the data needed for statistical reporting

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How Do They Work?

Policy

Claims

General Ledger

Reinsurance

Contracts/ Parties

Reports

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Summary

• It’s a buyers market. Competition in the global reinsurance industry is fierce.

• Capital is plentiful – but use it wisely.

• Utilize analysis and modeling tools – or look to your intermediary for support here – to assess exposures

• Take the opportunity to negotiate tailored programs that meet your specific book

• Spreadsheets are the dominant method used by cedants to handle reinsurance

• Manual processes lead to significant levels of leakage on the collections side

• Recommendation:

• Consider automation if you have complex reinsurance programs in place as they can lead to difficulty in calculations and allocations


The Business Case for Implementing a Reinsurance System

Martin Greenberg, August 2014

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Why Implement a Reinsurance System?

• Comprehensive Reinsurance program & information management:

• Providing accurate & timely information

• Support for compliance requirements and regulatory reporting

• Support for claims recoveries – preventing claims ‘leakage’

• Optimizing operational activities

• Business accuracy – allocation and calculations

• Improved efficiency & control

• Accounting support

• Current accounts management & credit control

• GL Accounts support

Support for Business:

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• Support for claims recoveries – preventing claims ‘leakage’


• Business accuracy – allocation and calculations





Business Topics:

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Sample Reinsurance Program

…reinsurance programs are complex…

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Sample Claim Reinsurance Coverage

FAC prop (1)

Treaty proportional (3)

RETENTION (6)

FAC XL capacity (2)

Treaty XL (4)

FAC XL Spot (5)

…managing claim reinsurance recoveries can be a challenge…

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Reinsurance Information Management

Quote from Celent Report:

Ceded Property/Casualty Reinsurance Solution Spectrum:

“… insurers thought they were successfully managing their programs, only

to discover that, at best, they could not provide

accurate snapshots and projections to senior

management…”

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Reinsurance Management – Common Situation

Reinsurers’ rating, collateral, and agreements Reinsurance programs & contracts

Ceded transactions • Premium –

proportional • Claims – proportional

& XL

Combination of:

Excel and data repository

Reinsurers and brokers management Word, Excel, scanned documents

Data repository

Reinsurance program and contracts

Policy system – Reinsurance processing

Claims system – Reinsurance processing

Reinsurance business functionality: • Premium deposit & adjustment • Commission & brokerage, rebates,

taxes, etc. • CAT claim handling • Reinstatements • Aggregate limits

Reinsurance Accounting functionality: • Technical documents & billing • Current accounts management • Information for GL, statistics and

compliance

Information Repository Business Process

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Reinsurance Management – Preferable Situation

Reinsurers and brokers management

Reinsurance program and contracts

Policy system – Reinsurance processing

Claims system – Reinsurance processing

Reinsurance business functionality: • Premium deposit & adjustment • Commission & brokerage, rebates,

taxes, etc. • CAT claim handling • Reinstatements • Aggregate limits

Reinsurance Accounting functionality: • Technical documents & billing • Current accounts management • Information for GL, statistics and

compliance

Business Process Comprehensive Information Repository

Reinsurance Parties & Rating Reinsurance programs & contracts

Ceded reinsurance transactions –

premium & claims

All reinsurance activities

Comprehensive accounting

“One Point of Truth”

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Why Implement a Reinsurance System? Comprehensive Information Management

Comprehensive repository • Contracts & programs • Counterparties information • Transactions & Claims • Current accounts • P&L and Balance Sheet • Aggregate information for MI

Business Benefits – Examples • Operational reporting & queries

• Contracts & counterparties

• Transaction reports

• Accounting

• Brokers & reinsurers statements

• Accounts aging & credit control


• Compliance

• Schedule F, P

• MI & Analytics

• Reinsurer exposure

• Profitability

• Triangulations

• Claims & Risk profiles

• What-if modeling

Reinsurance System Features

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• Support for the claims recovery process – preventing claims ‘leakage’


• Business accuracy – calculations & data management





Business Topics:

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Claims Leakage Source Complex Claim – Illustration

Cover A

Cover B

Cover C

Attachment Criteria A

Attachment Criteria B

Claim information

Attachment Criteria C

Cover D

Treaty X

FAC Y

Retention

Attachment Criteria B

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Claims Leakage in Reinsurance – The Issues

• Claim not allocated to reinsurance contract(s)

Not recovered

• Claim allocated to some reinsurance contracts, but not to others

Partially recovered

• Claim allocated incorrectly to reinsurance contracts

Wrongly recovered

• Claim recovery calculated incorrectly

Erroneous recovery amounts

Quote from: Celent Survey

“… still, other insurers discovered hundreds of millions of dollars of

unrecoverable reinsurance recoverables…”

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Claims Leakage in Reinsurance – The Issues

• Claim billing – improper handling in accounts

Late – or missed – recoveries

Quote from:

AON Reinsurance Survey

“… Companies with more recoverables outstanding over 60 days

write off a larger percentage of reinsurance recoverables …”

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Reinsurance Management – Unrecoverable Claims

Claims ‘leakage’

Extent of problems – Examples:

Company ‘A’ – missed $14.5M reinsurance recoveries (out of $2B direct claims)

Due to: reinsurance program complexity, manual processes

Company ‘B’ – $8.2M

Due to: aggregation of small claims

Company ‘C’ – $3.1M

Due to: improper calculation of facultative contracts

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Why Implement a Reinsurance System? Prevent Claims Leakage

• Comprehensive management of the reinsurance program

• Automated claims transactions processing

functionality

• Comprehensive accounting functionality

• Information & control

Business Benefits – Examples

• Secure claims recoveries – automatic attachment to contracts & calculation of allocated amounts

• Eliminating manual processing & errors

• Automated billing

• Effective credit control and debt-aging

• Claims reports & queries

• Operational results – detailed claims information

• MI & BI – indicating potential areas of claims leakage

Reinsurance System Features

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Why purchase a reinsurance system?

• Comprehensive Reinsurance program management:










Business Topics:

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Why Implement a Reinsurance System? Effective Business Management

• End-to-end business functionality

• Automated and convenient integration with external systems – Policy, Claims, Accounting, Reporting, etc.

• Authorization & security

• Comprehensive audit trail


• Ensuring business accuracy

• Comprehensive automated premium & commission calculations – all contract types – proportional, XoL, Facultative & treaty

• Support for inuring contracts

• Reliable accounting documents & information

• Ensuring information integrity

• Enabling growth – reducing extent of manual work

• Audit trail and tracking of all business & accounting activities – ensuring SOX compliance

Reinsurance system features

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Why Implement a Reinsurance System? Efficiency & Control

• Integrated workflow – process management

User-defined activities; based on business

rules

• Integration with document management



• Implementing pre-defined & controllable business processes

Examples:

• Contract authorization – underwriting approval chain

• Payment approval – 4-eyes confirmation

subject to authorization & security

• Ability to attach internal & external documents to business entities

Contract wording, claim notifications, billing docs

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• Comprehensive Reinsurance program management:










Business Topics:

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Why Implement a Reinsurance System? Superior Accounting & Credit Control

• Automated technical documents – for all types of contracts, and activities

• Current accounts management – brokers &

reinsurers


• Detailed information for compliance

• Additional features


• Technical documents:

• Claims billing

• Premium – credit notes, deposits, adjustments, etc.

• Q/S periodic accounts

• Broker/reinsurer statements

• Aging analysis

• P&L and Balance Sheet management

• Granularity of amounts – support for Schedule F, P

• Multi-currency

• Multi-company


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Summary

Implementing a comprehensive reinsurance system is essential for handling the business needs of an insurance company – the benefits are apparent & significant

So how do I proceed from here? Some proposed guidelines:

• Functional fit – look for a product with the best functional fit for your organization, based on your business needs

• Modern technology is imperative

• Enabling seamless integration with existing IT infrastructure

• Enabling connectivity with other IT systems and services e.g. Policy, Claims, GL Accounts, document management, etc.

• Migration of existing data is crucial – the reinsurance product must handle existing contracts and claims

• … and a reliable vendor with a track record of successful implementation of Reinsurance projects


Thank You

Contact: e-Mail: [email protected] Website www.Sapiens.com

mailto:[email protected]

mailto:[email protected]

http://www.sapiens.com/

reinsurance trends: opportunities for the future · 4 •global research and strategy advisors...

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