Internet technology was once viewed as the next greatrevolutionary tool for the insurance industryonline trading betweeninsurers and reinsurers was expected to improve efficiencies,reduce costs, and assist with management information processes.

As with many things related to e-commerce and Internettechnology, the hype hasnt quite lived up to reality. Insurers andreinsurers are conducting business online, anddigitization is transforming the industry, albeit slowly. However,online trading volume is miniscule compared to traditional tradingmethods. Indeed, online trading for the most part has involvedsimple commodity-type lines such as single-line facultative risks,although more complex treaty products are starting to be seenonline. The use of Internet technology has been an evolutionaryprocess, rather than revolutionarylogical for the insuranceindustry, which is generally notoriously slow to embracechange.

Some online trading initiatives have been driven by the sellersof reinsurance, while others have been driven by the buyers.Prominent sellers initiatives include inreon, a reinsurer-drivenplatform that provides reinsurance capacity for a specific list ofproducts, and seller-driven proprietary platforms that provideonline property and casualty facultative coverage.

The London-based inreon describes itself as providing insurancecompanies with an online trading platform for reinsurancecapacities and products. The company goes on to explain: Whileusing the techniques of an exchange (quote requesting and quoting),inreon enables insurance companies (buyers) to distribute a shareof the risk to more than one reinsurer (sellers). The average timespent on each reinsurance transaction can be reduced considerablyand thus allows a reduction in costs.

Seller-driven proprietary platforms include MyReinsurance(operated byGE Employers Reinsurance), smartfac (operated by CNA),Auto Fac (operated by American Re) and FacWorld (operated byGeneral Reinsurance Co.).

I think these [different models] can co-exist because they haveslightly different flavors and are aimed at different sectors ofthe market, says Tony Martin, manager of eFacRe, a new electronictrading platform developed by Royal & SunAlliance to requestand purchase its facultative reinsurance business online in theUnited Kingdom and Denmark.

Stanley Kott, CEO of Wellington Underwriting Inc. in Hartford,Conn., subscribes to inreon and also uses eReinsure, which is anonline system that helps manage the reinsurance buying process. Weendorse any measure to improve the efficiency of the process, hesays. Wellington Underwriting Inc. is a managing general agent thatis wholly owned by Wellington Underwriting plc. in London, whichmanages Syndicate 2020 at Lloyds.

I dont believe these [online] marketplaces can take over thewhole trade of facultative business, insists Jrgen Petzold, seniorunderwriter for Hannover Re and head of the companys Center ofCompetence Facultative E-Business.

What drives adoption of these platforms is buyers of reinsurancemaking their business available online, rather than sellers justmaking capacity available, says Igor Best-Devereux, CEO ofeReinsure, Salt Lake City, Utah.

Buyers understandably dont want to go to five or six differentplaces to get their reinsurance coverage, says Kathrine Huelster,chief operating officer for inreon. If they can work through onechannel that gives them access to all the capacity theyre lookingfor, then that certainly makes it more efficient for them.

However, she acknowledges proprietary platforms also can beuseful. For instance, in the United States, there are middle-sizeprimary insurance companies that do 80 to 90 percent of theirreinsurance with one reinsurance carrier, Huelster says. In such acase, the added value of a trading platform is significantlyreduced, she adds, noting the insurer might find it far moreeffective to use a proprietary portal in working with a singlereinsurer.

Mike Moncada, North American casualty facultative leader, withGE Employers Re Corp., in Overland Park, Kan., says his companysproprietary platform is used as an underwriting tool rather than asa potential format to bring all facultative business online. Weview some of these online platforms as [creating a danger tofurther commoditize] the product, and thats the exact opposite ofwhat were trying to do, he says.

The online mechanisms address expense ratio issues. They dontaddress the loss ratio issues, he emphasizes. For larger morecomplex risks, more face-to-face negotiation is required, he says,noting the online mechanisms probably work better for the lighterhazard risks.

Slow Start

Most of those interviewed believe online trading platforms willbe useful for certain types of business but will not supplanttraditional underwriting. Indeed, the penetration of online tradingmechanisms has been limited for both the buyers and sellers ofreinsurance. For example, although inreon now represents 50 percentof large global reinsurance capacity, with 16 member reinsurers,its use by buyers has been slow.

We are participating on the inreon platform for the second yearnow, says Petzold. We have paid $30,000 for the first year and areexpecting to pay another $30,000 for the second year, but we haveonly one risk bound, he says.

Swiss Re is an inreon shareholder along with Munich Re andAccenture. Christian Speiser, a member of thesenior management andhead of electronic risk exchanges for Swiss Reinsurance Co. inZurich, admits inreon has had limited market penetration thus far.Since its inception in December 2000, inreon has had over 1,200submissions, which boils down to a double-digit number of boundtransactions, he says. The volumes are far below what it takes tomake it economically viable at this point in time. Swiss Reenvisages a break-even for inreon in 2004, Speiser says.

Although cedents initially submit only a few risks to inreon toget their feet wet, Speiser expects they will start to place entirebooks of risks [with inreon], so that the volumes will increase andeventually achieve levels that allow a revenue stream that coverscost.

Huelster notes the platform had submissions worth 250 millioneuros ($247 million) since its 2000 startup, with 10 percent ofthat business bound. She explains inreon conducts facultativeproperty, proportional and non-proportional, via its platform aswell as treaty catastrophe excess-of-loss reinsurance, which isavailable only in Europe and Asia. It also conducts industry losswarranty (or original loss warranty), which is an indexedcatastrophe cover available only in the United States. InSeptember, it added a new facultative liability product. Wecertainly expect to see a lot of catastrophe excess of lossbusiness being traded electronically again at this year-endrenewal, she says.

Speiser adds part of the reason the inreon platform has seenlimited business is the industry is slow to embrace innovation. Inaddition, he says, a more efficient reinsurance process is not atthe top of the list of cedents problems: They now seek coverage atan acceptable price for them. Theyre increasingly challenged withfinding efficient capital solutions, now that the [industrys]surplus has been washed away.

Speiser acknowledges, though, given the platform was initiatedby sellers, in the beginning it did look a bit self-serving,because it was simplifying the transaction process and simplifyingthe product description. This was unusual for cedents or brokers,who were accustomed to going to the reinsurer, presenting stacks ofpaper, and asking for help to solve a problem, he says. If inreonthen proposes that the cedent or the broker structures the risk andboils it down to a few parameters and complies with specificwording provided by the exchange, it may look like the aim is toserve the seller, rather than the buyer, he says.

Nevertheless, Speiser em-phasizes the inreon platform is aninnovative model that will assist both buyers and sellers ofreinsurance, and for certain risks we are convinced [it] willeventually dominate, he says. It just takes time to convince thecedent that even though he may not see immediate payback with thefirst small transactions, he will see the payback goingforward.

Benefits Available

The motivation to find more efficient and less expensivesolutions is reduced during a hard market, but Speiser asserts theindustry will probably continue to be cyclical and sooner or laterparticipants in the market will benefit from the inreon platform asmargins are again squeezed. He is convinced that within a fewyears, a substantial part of facultative business and also part oftreaty business will be conducted online because of the obviousbenefits.

Speiser says it is difficult to assess which of the currentexchanges or quasi-exchange models will prevail. We would assumethat there would be very, very few real exchanges, maybe only one.An exchange is an organizer of a marketplace. Like a stockexchange, he explains, it determines rules for the process andlinks the buyer and seller sides into existing legacy systems, sothey have the benefit of end-to-end processing.

He predicts a large number of application software providerswould maintain a place in the market, providing specializedproducts that allow buyers or sellers to organize their informationand their legacy systems,so they can connect with an exchange orconnect directly between buyer and seller.

Fans and Critics

Stephen Card, managing director of risk and reinsurancesolutions for the London-based broker, Alexander Forbes, says anyelectronic trading platform will struggle for full acceptance untilthe industry is more comfortable with online methods. Despite ourbest efforts to the contrary, were still a pretty archaicmarketplace. Were not as well developed in IT as we should be, Cardsays. It is a generational issue and changing slowly. I still knowa lot of brokers who cannot use a computer, he adds.

Meanwhile, Card says, inreon is just one of the tools in abrokers armory, in addition to traditional broking methods. Notonly does inreon offer a simple product with clear and concisewording that everyone knows and understands, he asserts, but italso offers capacity dedicated to the online facility andguaranteed response times.

Those are quite important factors because during a busy renewalseason, which is when these things are going to be at their mostfrantic, the toughest thing you find as a client is gettingresponses from people, Card says. Then when you get a response,reinsurers will come back and say theyve exhausted their aggregatein a certain geographic area. Additional capacity is availablethrough inreon that is not available in the open marketplace, henotes, because this is seen as a way to encourage buyers to use theplatform.

Less of a fan of inreon is Petzold, who believes the businessseen by inreons reinsurer members is a bit anti-selective. Heasserts risks come to inreon when they cant be placed anywhere elseand adds inreon suffers from a lack of ceding company participants.They have well-reputed reinsurers, which are prepared to writebusiness on that platform, but it seems they dont have manyinsurers or brokers that like to trade their whole books ofbusiness over the platform, he says.

You can really see where theyre doing their marketing, he adds.When you see two offers coming in from Belgium, for example, weknow the inreon marketing people are in Belgium. You can also seewhen theyre leaving Belgium because no more Belgium risks areoffered.

Proprietary Alternatives

Other seller-driven initiatives are the reinsurer-ownedproprietary platforms. Some observers say these initiatives havehad and will continue to have limited use by buyers because buyershave to contact each reinsurers platform separately, which requiresmore work. Others believe proprietary platforms will prevail overother online exchange models when software is developed thatconnects a buyer or broker with many propriety networks with oneclick of a mouse.

Petzold at Hannover Re says his company is working hard todevelop a proprietary platform and is expecting to bring its firstpilot online in the first half of next year. He believes developingXML standards for data transmission of online reinsurancesubmissions will end the extra work for buyers and brokers thatdeal with online platforms.

I think we can easily overcome the problem if we can say to ourclients, As soon as youve entered your offer on our platform, youcan use [this] data to offer this risk to anybody else youd liketothe marketplace, Petzold says.

For me, its not a question of having one marketplace, but its aquestion of talking one language [such as XML] protected by ACORDstandards, he says, although noting they must be more developedwith regard to reinsurance standards. He predicts brokers andbuyers will one day have the ability to get online and distribute arisk around the marketplace.

Moncada of GE Employers Re also believes the proprietarynetworks run by reinsurers ultimately have the flexibility toprovide the most benefit to customers. GE ERC runs MyReinsurance,which currently provides umbrella liability coverage. He admits GEERCs platform has had limited usage, mainly for select customerswith homogenous risks, namely, umbrella programs for mainstreettypes of risks in the not terribly hazardous middle market.

Moncada asserts that its one of GE ERCs challenges to determinehow much business would be generated through this online tool thatthe company would not otherwise generate via traditionaldistribution channels. He notes MyReinsurance does not handleproperty coverages, although the company may consider expansioninto other areas if we perceive the demand is there and theopportunity is there for profit.

Were taking a different approach to online platforms. We gatherthe voice of the customer, and determine what they need and tailorour approach to them, Moncada says. He believes some onlineplatforms create the potential to further commoditize certainreinsurance products, which is not the path that GE ERC wants topursue. GE ERC tries to help clients succeed in their business bytrying to create a more efficient reinsurance transaction processfor them, he says.

If customers have a homogenous book of business for which theyare seeking facultative reinsurance, then GE ERC can establish anautomatic online facility for the client, he explains. This,however, will not be appropriate for all clients, which may nothave online capability to set up such a facility. Each customer isat a different evolution. So its whatever feels right for thecustomer is how we structure it, he says.

Moncada notes MyRein-surance provides an underwriting tool butis not a replacement for underwriting. GE ERC is committedtodigitizing our underwriting processes to make them moreefficient, to make us more effective in making our underwritingdecisions, to enhance our ability to gather data and have access todata, he says. So were using digitization to really improve ourinternal processes.

To the extent we can help our external customers improve theirprocesses, he says, well bring those tools to them, too.

Next month: The state of buyer-driven online reinsurancesystems.