Ever skied down the slopes? Then you’re likely familiar with the motto “Dress for the slide instead of the ride” – and even if you’ve never had the experience, the basic idea is easy enough to grasp. It’s the same principle behind the universal need for insurance.
In the case of an insurance company, reinsurance is just like protective gear and an essential part of enterprise risk management (ERM) as well as capital management. But given the expense and importance of reinsurance, Excel spreadsheets no longer suffice for managing said coverages and contracts.
Managing and optimizing reinsurance coverage is a critical task. Executing it effectively in today’s fast-moving, increasingly complex world demands the use of reinsurance management software for ensuring accuracy.
Reinsurance almost always involves significant volumes of premium, ceded annually, to ensure acceptable ratings, protect surplus, and manage the enterprise risk profile. However, if poorly managed, there is the potential of inaccurate premium and acquisition costs, and given the complexity of many reinsurance arrangements, insurers risk missing significant claims collections. If the process is not transparent, documented, and auditable, untold time and resources may be spent to solve problems that need never have occurred.
Additionally, with the reinsurance transaction, the insurer must manage premium allocation and claim recovery while providing relevant, current data to brokers, reinsurers, and regulators. In an increasingly digital world, legacy insurers, especially those with multiple systems, face real challenges satisfying stakeholders’ “here and now” demands. But newer, leaner organizations built on a digital-first business model also face challenges, especially regarding future flexibility.
Unfortunately, many insurers today are still plagued with legacy technology which requires elaborate workarounds and multiple manual processes in order to get things done. For managing ceded reinsurance, manual processes, such as using spreadsheet sharing and reporting, are time consuming and error prone. An incorrect percentage in a formula and the inaccurate application of treaty terms can result in the misallocation of premiums and claims. If this is not corrected promptly, it can easily lead to losses in the millions of dollars and the potential need to refile years of financial statements.
Legacy technology siloes also ensure that uniform, accessible data is often lacking, preventing many insurers from conducting the performance analyses of individual contracts or individual reinsurers required in negotiations. The inaccessibility of enterprise data related to reinsurance contracts also makes it difficult for insurers to identify which coverages should be ceded to particular reinsurance covers to enhance financial performance and manage capital more efficiently.
Accentuate the Positive
Stating the obvious, doing reinsurance management manually today is not only dangerous, it’s irresponsible, especially when there are solutions available to help automate the process and to introduce much-needed measures of accuracy and efficiency. That said, in order to address the challenges inherent to the reinsurance management process in the most timely and affordable manner possible, insurers often decide to rely on solutions designed to integrate with existing systems to cede, manage, and record.
Currently, available reinsurance management solutions offer a reasonably wide array of functionality, more or less adaptable to any insurer’s needs, and can be deployed on-prem or hosted in the cloud. On a basic level, most modern solutions are primarily proficient at capturing existing contracts (both treaty and facultative), accounting appropriately for associated ceded premiums, commissions, and claims, and providing business reporting.
The need for more sophisticated technology solutions is also thrown into sharp relief when considering regulatory compliance issues. Generating key regulatory reports like the Schedule F for ceded reinsurance reporting in the United States is a critical process that must be carried out with uncompromising accuracy, which advanced reinsurance management software can provide.
Further, component-based or modular solutions make adding inputs, such as the ability to model results from capital models, catastrophe models, and exposure management systems, less difficult. Some solutions help primary insurers monitor reinsurance creditworthiness, which helps the cedant maintain a view on the financial security of its reinsurers.
Automation of ceded reinsurance management has numerous advantages, chief among them speed, accuracy, and efficiency of the process. Regardless of the solution chosen, the promise of eliminating some complexity inherent to the process and the introduction of auditability are also key.
No less so than the selection of a helmet for an avid skier, reinsurance is an important purchase for the insurer. Managing reinsurance is an equally important, if often overlooked and underserved, part of the process. But insurers can reduce costly errors, boost efficiency, reduce costs, and gain greater transparency and control of this vital function by eliminating complexity from the process through the intelligent application of the right technologies.