May 23, 2016
The Need to Automate Reinsurance Programs
by Grégory Moliner and Joseph Sebbag
Most insurers still use the equivalent of a shoebox to keep track of reinsurance contracts and claims.
“Do you know where your children are?” That was a popular catchphrase in a TV public service announcement.
Do you know where your reinsurance program is? Many senior executives at insurers can’t say for sure.
Many insurers find it a struggle to document their ceded reinsurance program (the risk they have transferred to a reinsurer) in a way that’s acceptable to regulators—and senior management—because they have not automated management of ceded reinsurance policies, data and claims. According to a recent survey, only 14% of primary carriers have a reinsurance system. Most insurers still use spreadsheets or other manual methods to keep track of their reinsurance contracts and claims.
The NAIC Risk Management and Own Risk and Solvency Assessment Model Act (RMORSA) became effective in January 2015, and many states have adopted this model legislation. RMORSA requires insurers to have a systematic way of identifying, assessing and managing risk, and everything related to reinsurance is certainly part of it. Under it, insurers are required to submit an annual summary report to their primary regulator. A key part of complying with RMORSA, and other regulations, will be documenting reinsurance coverage in detail.
It is possible to comply with RMORSA without a true reinsurance system. But it’s a difficult, time-consuming process that doesn’t guarantee good results. Using a spreadsheet and other manual methods to track contracts and claims doesn’t give you everything you need in one place for regulatory filings. For instance, an insurer might not being able to identify out-of-compliance policies. This can occur when a reinsurer requires one or more exclusions in the policies it reinsures. If the insurer issues the policies without the exclusions, the policies are out of compliance, and the reinsurer may deny liability when there’s a claim.
But complying isn’t just a bureaucratic exercise. The RMORSA process also helps insurers get a clearer picture of their risks—and what could be more important for a company whose business is managing risk?
Implementing a modern reinsurance management system enables complete automation, controls and audit trails. It will generate Schedule F and statutory reporting at a click of a button. This, in turn, will reduce Schedule F penalties to the bare minimum.
Regulatory compliance is hardly the only reason to use dedicated software to track ceded reinsurance. Intricate reinsurance contracts and special pool arrangements, numerous policies and arrays of transactions create a massive risk of having unintended exposures. Inability to ensure that each insured risk has the appropriate reinsurance program associated with it is a recipe for disaster.
An insurer must track and integrate many reinsurance processes. They include cession treaties and facultatives, claims and events, policy management, technical accounting (billing), bordereaux/statements, internal retrocession, assumed and retrocession operations, financial accounting, accounts payable, accounts receivable, regulatory reporting, statistical reports (such as triangulation per line of business, type of contract and region) and business intelligence.
With fragmented solutions such as spreadsheets and manual processes, things often fall between the cracks because there are so many reinsurance-related items to manage. Financial information for trends, profitability analysis and exposures becomes unreliable. Automating processes can reduce the chances of missing something important to almost zero.
Stanching Claims Leakage
One of the biggest problems is claims leakage. How do you know when a reinsurer owes your company money? Answering that question is not as straightforward as it seems, given the complexity of many different types of reinsurance contracts.
For instance, after implementing a reinsurance solution, a European insurer detected more than $1 million of overlooked claims. (You can’t file a claim if you don’t know you have one.) It contacted its reinsurer, which paid promptly.
The situation for insurers that don’t automate will only get worse. Many of the experienced reinsurance administrators have retired or will be retiring in the next few years, and there are few in the pipeline coming up. With reinsurance becoming ever more complicated, the only feasible answer for insurers is a comprehensive reinsurance system that puts everything in one place. The effort and cost are well worth the benefits in staff productivity, risk reduction, better claims tracking and improved regulatory compliance—to avoid RMORSA remorse and a host of other problems.