Global-Reinsurance Industry Foresees Growth in Online Services

If anyone needs proof that the Internet is no longer a curiosity, the reinsurance industry is a good place to start looking. Reinsurance companies aren’t generally known for the rapidity with which they adopt innovative techniques, but they haven’t been dragging their feet in embracing online technology.

The Catastrophe Risk Exchange (CATEX), founded in 1994, just announced the 1400th trade through its system. Specialized in cat re, the company estimates that as much as $900 million has passed through its system, possibly more. CATEX, which also offers technology solutions and data base systems, operates as a “neutral” exchange; it brings buyers and sellers together. Other initiatives are attempting to go further.

In December 2000, Munich Re and Swiss Re started a joint venture called inreon, described in its launch announcement as an exchange to provide “insurance companies, brokers and professional reinsurers with transaction capabilities for standardised reinsurance covers.”

RI3K Limited, founded in London in May 2000 as City 3K, takes a different approach. Marketing and communications manager Roddy Langley explained that “initially we set out to produce an ‘E-Lloyd’s’ for the City of London, but we realized that what people were mainly looking for was reinsurance, so we changed the name in September 2001 to reflect that.”

Speaking at a roundtable discussion held by the Centre for the Study of Financial Innovation (CSFI) last January, RI3K CEO Alex Letts described his vision of an “Exchange” as “solely a solution for creating an exchange of data and cash between parties.” He added that this would occur “as a result of a deal that may well have been agreed to elsewhere and not necessarily online.” His vision is to create “an Electronic Logistical Hub. This hub automates the traffic for the risk administration, cash and management information.”

Are these platforms successful? Well, CATEX seems to be. Rob Bredahl, who recently stepped down as inreon’s CEO, indicated that, “In 2001 around 200 risks were submitted online and we expect that figure to grow exponentially throughout 2002.” Letts said that RI3K was in a series of trials with buyers, sellers and brokers which could produce “around $1 billion in premiums this year and $3 billion next year if global players start putting [their transactions] through our system.”

According to spokesman Scott Farley, inreon initially offered only facultative products as they were easier to present and market. Last November it introduced a European Catastrophe treaty product, which Farley said “has been adopted reasonably well,” at least partially due to the familiarity that members already had with how to use the platform. He’s convinced that treaty reinsurance, which is more inclusive, as well as more valuable, will be as successful as inreon’s facultative offerings. The company has just introduced an innovative “industry loss warranty product” (ILW) which bases loss payments on parametric triggers linked to industry statistics.

Sellers and buyers
The advantage of an online platform comes down to transparency and convenience. “We currently work with 14 sellers,” said Farley, which are reinsurers who have opted to make capacity available online through inreon. In addition to the two founders, other reinsurers include American Re, Converium, the recently spun-off reinsurance arm of Zurich Financial Services, Hannover Re, Partner Re, Renaissance Re, St. Paul Re, SCOR Group and Wellington from the Lloyd’s market. Bredahl noted that together this represents more than 50 percent of the world’s reinsurance capacity.

Sellers are contacted by buyers, currently 53, who use inreon’s platform to place reinsurance risks. “They’re split about evenly between brokers and primary insurers or cedants,” said Farley. AXA Corporate Solutions, which recently decided to place risks through inreon, also took an equity position in the company. Others include Fortis, Achmea and Seguros GES in Europe and South China Insurance, Mingtai and Miller Insurance in Asia. Many U.S. companies also use the platform.

“A buyer generally submits a risk proposal to several different sellers,” said Farley. “This gives them an opportunity to get a response more quickly, as it’s online, and to compare the quotes they receive. It gives them a great deal of transparency, as they can access many different sellers at one time.”

inreon offers buyers the additional advantage of a structured time frame. “A buyer normally gives a response time, that can be short, medium or long,” said Farley. “Theoretically they could request a response in a couple of hours, but they can certainly get one within twenty four.” If a seller declines a certain risk, he specifies the reasons for doing so, such as lack of capacity in that sector. Farley said he’s never seen a risk declined because there wasn’t enough time to assess it. “The reinsurers are committed to making this work, and they will do what’s necessary to make sure it does,” he added.

Designated underwriters handle the risks, as in any transaction. Once a seller accepts the risk, the formalities are also handled online. In addition to the transparency achieved, the process is simplified, and processing costs are reduced.

RI3K’s efforts are aimed at this sector. Langley analogized it to Lloyd’s, “which provides the building and the services” for the syndicates, the underwriters and the brokers who use it. “We aim to provide the same services, but on the Web. It’s more than a trading platform, cedants can place their business worldwide, arrange premium and claims payments, and any other management services they may require. We aim to be a logistical hub—a utility for the industry.” RI3K gives reinsurers a place to make their products available, but the sellers themselves choose what they will offer. The site provides coverage for p/c risks, life reinsurance and related products.

Universal goal of cost reduction
A universal goal driving the reinsurance industry’s increasing interest in adopting new technology is cost reduction. In a White Paper prepared to accompany his CSFI presentation, Letts wrote: “As premiums rise in response to the events of 11 September, the rate hikes cannot disguise or remove the pressure for the industry to tackle its bloated cost base. It is estimated that as much as 40 precent of the premium is frictional cost. To maintain net profit margins, the industry urgently needs to tackle its cost base.” A company announcement goes to the heart of the problem, promising that, “RI3K will deliver 10-20 precent genuine cost savings over time.”

“A data and cash exchange operates after the [reinsurance] contract has been concluded,” said Letts. “Once you bring the contract to the exchange, utility or hub, it’s all readable and managed in a straight through way.” As an example he cited a contract that provides for premium payment in 60 days, which is made through the exchange electronically. Reinsurers frequently have to wait months before receiving a premium payment. The same system also provides claims settlements, contract administration, commission payments to brokers, billing cedants—essentially all the administrative services necessary to fully implement a reinsurance contract.

Langley said the aim wasn’t to replace the current process, but to help cedants, brokers and reinsurers do business. Letts believes that “e-commerce solutions based on disintermediation [direct buyer/seller deals] have failed to deliver,” and that RI3K hoped to achieve savings “by streamlining the processes not by attacking intermediaries.” His goal is to cut down on all costs, not just in the approximately 50 percent of the cases where there’s a broker involved.

RI3K works closely with the London market, especially with Lloyd’s, but interestingly enough, Langley said, “we’ve been better received in Europe than the U.K.” This led the company to establish French- and German-language Web sites several months ago, but it has no plans to open physical offices on the Continent. Letts explained that “Lloyd’s is broker driven, while Europe isn’t, it’s mainly buyer/seller, while brokers add complexity, but we feel we need to fit with the brokers and integrate them into the system as well.”

That’s good news for brokers and agents in the U.S., who have a strong presence in the reinsurance market, similar to their peers in the U.K. inreon has its U.S. headquarters in Jersey City, which will become increasingly important, as Board Chairman Kaj Ahlmann, former head of Employers Re, who recently took over as CEO when Bredahl stepped down, is based there.

RI3K also has plans to increase business in the U.S. “We’re very enthusiastic about it, said Langley, “but we’re taking things one step at a time.” Letts indicated that he saw the U.S. as a special and separate area, and that RI3K was currently exploring the possibility of creating partnerships with U.S. companies to provide the same types of services it furnishes in the U.K. Both companies have an Asian presence as well. RI3K operates from Singapore, and inreon just opened an office in Hong Kong.

Only the future will determine if both types of operations will ultimately succeed; there will be problems to solve. Although Letts feels that ultimately commodity type exchanges won’t be successful, while “electronic logistical hubs” will be, he also said, “with its backing, inreon stands the best chance.”

Topics USA Agencies Excess Surplus Europe Reinsurance Lloyd's London