Reinsurers need to modernise to stay differentiated

The reinsurance market is experiencing a number of macroeconomic headwinds and other challenges and in order to stay relevant, the need to modernise has never been more important.

Reinsurance is a vital part of the insurance ecosystem, and yet the administration, calculation, and accounting processes of outwards or ceded reinsurance between insurers and inwards or assumed reinsurance to reinsurers are often siloed and dysfunctional.

It is estimated, for example, that €200m is lost each year in the global reinsurance market due to slow financial closes, inaccurate pricing, slow claims recovery and claims leakage. But how can we negate this?

The reasons don’t seem overly complicated to fix, but the problems remain - and they remain because the technology deployed to complete these tasks is often outdated and re/insurers seem reticent to prioritise this (ceded and assumed reinsurance) area of the business.

For example, tasks such as administration, calculation, and accounting processes between insurers and reinsurers are often carried out separately and inputted into different spreadsheets. It’s manual processes such as this that can lead to human error and slow processing times which, in the case of claims, is a major contributing factor to these major losses of income in the reinsurance market.

It is also worth noting that the complexity and cost of reinsurance contracts are rising, resulting in greater need for flexible ceded and assumed reinsurance processes and technology and a higher chance of mistakes and financial error.

This is happening for a number of reasons, such as supply chain constraints, increasing geopolitical risk, inflation, climate change and more. Of course, some of these reasons are out of the hands of reinsurers, but there are ways and means of reducing the impact felt on insurers’ pockets, which again comes back to the outdated systems and reliance on a finite and reducing reinsurance expert resources.

There have been advancements in insurance technology, of course, but the transition from legacy systems to more advanced platforms has been too slow.

Outdated systems are causing problems

It’s an innocent yet financially vicious circle. For example, human error, time pressure, or oversight can lead to poor accounting reputations, overpayment of claims settlements or not recovering all entitlements. This then forces insurers to claim more on their reinsurance, which then shows up in the reinsurance cycle as future increases in reinsurance premiums.

Outdated systems have also led to insurers not having sight of all available data in one, easy-to-access place, and system intelligence is compromised. When negotiating new reinsurance policies, the lack of usable data may put reinsurers in a weaker negotiating position. Reinsurers may assume that an insurer is a higher risk or at least the same risk as last year, not negotiating lower prices or increasing the premium or retention, and the insurer and broker won’t have the data to disprove the assumptions.

As indicated earlier, other limiting factors of outdated systems that carriers face include not being able to cope with the complexities and nuances of international markets, where regulation differs from country to country. Not being able to have that reach simply restricts a reinsurance providers’ potential.

And finally, complex deals and structures may also be out of the question if reinsurers’ systems can’t cope with the complexities, which immediately renders them less desirable, putting them on the back foot when trying to win business.

All of the above may sound overwhelming, but the answer lies within the technology now available to carriers, including automation and modern reinsurance management systems. It’s simply a matter of investing and the ensuing beneficial return on investment.

Automation capability can more than halve the amount of time it takes to carry out monthly or quarterly financial close, so money can be accrued earlier, helping to prevent millions of dollars being lost. Pricing will also become far more accurate, which will help meet contract certainty and ever-complex industry regulations. Less inaccuracies, coupled with decreased calculation times, will strengthen an insurer’s relationship with reinsurers.

Finally, modern systems will ensure claims recoveries and less historic leakage as information can be easily searched and validated, so monies can be accrued faster or accounted for.

The ‘If it ain’t broke, don’t fix it’ mentality shouldn’t be taken too literally when it comes to legacy systems. To some, their current approach to outwards or inwards reinsurance is working so why change? What may not be realised is a better use of expensive reinsurance expertise, increased recoveries, faster financial close, clean audits, and better price negotiations are all possible.

Tim Spencer, Duck Creek’s reinsurance leader for London Markets, UK, and Ireland.