The notorious inefficiency of insurer-reinsurer transactions is starting to be addressed now with online platforms driven by the buyers of facultative reinsurance. In fact, some industry observers believe it will be the needs of reinsurance buyers that will drive the models for e-commerce in the insurance and reinsurance arena. Buyers want to be able to send their business through one channel, sources say, rather than being forced to access different proprietary platforms run by different reinsurers, which requires multiple data re-entry.

The reason that buyer-driven platforms may dominate, according to some sources, is the buyers desire to develop a management information system. Buyers create their own platforms to gain control of their portfolios, says Jrgen Petzold, senior underwriter for Hanover Re and head of the companys Center of Competence Facultative E-Business.

He points out online platforms being developed by Royal & SunAlliance (RSA) and Axa Group, for example, were initiated as management information systems. They realize markets are changing, and theyd like to get control of their book of business, he says. As a result, these insurers and others are aiming to steer their facultative portfolios via such online platforms, which is also attractive for the sellers of reinsurance.

Petzold predicts the buyer-driven platforms will flourish because reinsurers go where the business is, especially since some insurers are placing their entire facultative books through the platforms. Seller-driven platforms, such as inreon, have a problem attracting customers to bring an entire portfolio onto those platforms, he says.

But if an insurance company comes on and says it will bring its whole portfolio, of course, its more interesting for us, says Petzold.

Seller-driven platforms are providing capacity, rather than management information systems, says Igor Best-Devereux, CEO of eReinsure in Salt Lake City, Utah. eReinsure provides Internet technologies for online reinsurance negotiation and transactions, particularly in the facultative area. The buyer wants to see, analyze, and control its entire purchase of facultative reinsurance, he says, which isnt possible with seller-driven platforms that limit placements to a specific number of policies.

Buyers will likely choose their own proprietary system over seller-driven systems because they want to be able to go to one place to access multiple markets, Best-Devereux adds.

Significant process efficiencies and information benefits can be gained if the buyer uses one system to access multiple reinsurance markets, he asserts. Our number-one customer is the buyer of reinsurance, either the direct buyer or the broker, says Best-Devereux, who describes eReinsure as a buyer-driven transaction/negotiation system.

The idea behind using Internet technology is to try to make the process easier for the client, according to Stanley Kott, CEO of Wellington Underwriting Inc., a managing general agency in Hartford, Conn., and part of Wellington Underwriting plc., which manages syndicate 2020 at Lloyds. I actually see the electronic platform as a tool to allow us to provide the type of service a 21^st century customer deserves, he says.

When Kott began in the industry, people used to call each other on the telephone, and details on the risk would be taken down long hand. Then it became fax, and in the last five years or so, its been mostly e-mail. He says the process is inefficient when a customer has to call five reinsurers to get five quotes. Thats why hes a fan of platforms, such as eReinsure, which allow the details of a risk to be entered once into the system, and then be sent to as few or as many reinsurers as desired.

Better Information Management

Buyers need a more effective process of buying, and they need to have much better information on whats happening during the buying process, particularly when the buying is distributed around a branch network and especially during a hard market, Best-Devereux says.

Traditional paper-based transactions lead to potential errors and omissions problems, lack of visibility in pricing, and an inability to manage the process of buying, he says. Indeed, several buyers of facultative reinsurance agree Internet technology is providing the facultative arena with improved management of the risk via better management information.

Kathleen S. Langner, senior vice president, Chubb Commercial Insurance, asserts her companys experience with the eReinsure platform has exceeded expectations. Chubb Insurance Co. in Warren, N.J., is eReinsures largest customer and major investor. I would say less than five percent of our facultative placements now are what we call off platform, she notes.

Langner says eReinsure facilitates the exchange of information on a risk. It condenses and consolidates the reinsurance transaction into a specific exchange of information, she explains.

Best-Devereux says eReinsure has facilitated close to 20,000 submissions for reinsurance among four major insurers and 14 reinsurers and brokers, mainly for U.S.-based business. Of those 20,000 submissions, at least 4,000 lines have now been bound, he says.

Beyond Chubb, he would not disclose the three insurers that also are buying facultative business via eReinsure because they are still conducting trials. Nevertheless, market sources reveal that American International Group (AIG), Firemans Fund, and Zurich North America are the companies in question. Representatives from AIG and Firemans Fund confirm their companies are conducting trials with eReinsure, while a Zurich representative says the company has no comment.

Langner affirms the biggest advantage of eReinsure is it provides the infrastructure to record the transaction to entail what was purchased, what the terms and conditions are, and what the price is. These were often done verbally in the past.

With this platform, theres a lot less room for error in terms of misunderstandings on what the final deal was, she says. Both parties review and sign off on the final terms and conditions.

With eReinsure, the deals are clearer and the exchange of monies is more timely, which I think makes everybody a little happier, she says. And at the time of loss, there should be no discrepancy as to what coverage applies and certainly what terms and conditions apply.

When a reinsurer wants to know more about a risk, its easier to share information with that reinsurer electronically on the platform, she says, whether its loss informa- tion, exposure information, or the exchange of thoughts on underwriting a risk. A critical issue is to make sure all the underwriters are following an established process that has been set by the company at its center, says Best-Devereux.

The reinsurance buyer can ensure the issues have been covered, such as ascertaining whether documentation is in place to reconcile accounts quickly and accurately with the reinsurers. This has always been a problem for the industry, he says. So the whole aspect of information consistency, accuracy, and availability is very key, he asserts.

Improved Control and Compliance

Effective use and control of management information was one of the principal reasons Royal & SunAlliance developed an electronic trading platform for purchasing facultative reinsurance, says Tony Martin, manager of eFacRe, a new electronic trading platform created by RSA for its facultative transactions in the United Kingdom, Denmark, and Ireland.

Although facultative reinsurance is a major area of expenditure for RSA, the group historically didnt have a standardized approach to the purchase of the coverage, he admits, explaining this was largely due to the companys acquisitions of a number of firms within different markets around the world. As a result, a big driver behind the development of eFacRe was to start collecting that management information to help develop internal controls for this business and adhere to external corporate government pressures, he says.

We needed to make sure we had the necessary controls and compliance and audit procedures in place, Martin continues. We have to make sure were clear on what were spending, with whom, what were getting for it in return, what level of cover weve got, etc.

Given the fact that RSA is sometimes seeking coverage for long-tail business where claims can arise many years later, we didnt want to rely too much on bits of paper distributed at various offices around the globe, he says. Further, regulators such as the Financial Services Authority in the United Kingdom are taking a greater interest in expenditure on facultative reinsurance, Martin adds.

So this was important not only from an internal compliance point of view, but also there are external pressures on insurers to make sure that it is a controlled auditable process, he says.

Although eFacRe was launched in three countries, RSA is looking to roll it out for other areas of operation across the globe, namely, the U.S., Canada, Latin America, and Asia-Pacific.

Sell-Side Reaction

The sellers of facultative reinsurance are also seeing advantages in the use of buyer-driven Internet trading platforms.

Kott, of Wellington Underwriting, says his company joined eReinsure last year and has found it to be a tremendous advantage in providing superior management information to both the customer and the supplier.

For every branch, in my small company, I know how many submissions they had with the buyer, what was the quickest response time, what was the longest response time, how many pieces of business we didnt quote, how many we bound, and how much premium was generated, he says.

Martin believes reinsurers have an opportunity with online platforms to manage their risks better by ensuring they are collecting appropriate information to make decisions on a specific facultative risk and therefore make more informed decisions down the line. Theres no excuse not to collect the proper documentation and make informed underwriting decisions, Martin says.

The eReinsure system is very comprehensive, so we get all the information we would normally get in an electronic, fax, or a telephone submission, yet we get it all online, says Kott. We can track our conversations back and forth with the customers, he says, noting that Wellington Underwriting Inc. has become one of the leading reinsurers using eReinsure.

In conducting business via the eReinsure system, Kott says, client underwriters decide whether they want to buy facultative support on an account, enter all the information necessary for a facultative submission into their own desktop, and then determine which of the panel of reinsurers they would like to send it to.

We, being one of those reinsurers, receive a submission. We receive a notice there is a submission in an Internet box. We go to that box, open it up, take a look at it, and respond with a quote or with questions when we need more information, he says. Everything is done electronically, and information can flow between the ceding company and the reinsurer, he adds.

Tracking Progress and Performance

Kott likes the system because it is quick and efficient and provides an audit trail for a transaction. Everything is saved, all the transactions and communications are recorded, so we can keep track of how a risk has progressed from the initial submission to the final binding.

Further, he notes, it tracks response time, which is good for companies that are trying to differentiate themselves in terms of service. Our organization is built on differentiating ourselves by virtue of service, not by virtue of price, he says.

Kott explains his company has taken the eReinsure system one step further. Weve put our IT people in London together with the eReinsure system designers, and we are about to introduce our own internal processing system that will be fed automatically when we open a submission, he says. So were going to eliminate all the key strokes an underwriter or a support person has to do on eReinsure accounts, he says. Its going to feed our clearance system, its going to feed our data product delivery system so all the fields are filled in, once the underwriters send a blinding notice to our system.

Kott notes his company pays $25,000 to be a member of eReinsure and is spending about an equal amount to integrate completely so the data flows directly into the companys system. So for a nominal sum, I have the availability of a first-class electronic platform to receive submissions, track response time, and improve my efficiency, he asserts.

It is still too early to gauge how much cost savings are provided by the system, Kott notes, but certainly underwriters efficiency is improved because they dont have to rekey data. So we end up being even more efficient, and now were starting to get a competitive advantage in terms of improving data flow, he says. Facultative transactions are basically a commodity market, and most carriers sell it for about the same price, he adds. So in my mind, the only way you can differentiate is with service and with efficiency on the cost side.

He likes to use the analogy of a dry cleaner: When you take your shirts to the dry cleaner, virtually anyone you go to is going to charge you about the same price. If youre like me, you make your decision to go to a dry cleaner because someone smiles at you or they have a better or more convenient location or they always ask you if you have stains. But its not based on price typically.

Eliminating Brokers?

Some market practitioners believe online platforms will lead to disintermediation of brokers. While RSA also developed eFacRe with an aim of reducing frictional costs and administrative costs, Martin emphasizes there is no intention to remove the broker from the value chain. We wanted eFacRe to facilitate our existing business partnerships, so in terms of development weve taken a collaborative approach, by working with reinsurers and brokers, he explains. We wanted something that gave us access to the full panel of reinsurers and brokers we deal with at the moment. When weve been out to speak to brokers, weve been quite pleased with the feedback theyve given to us, he says, noting that these brokers acknowledge the platform will reduce their frictional costs as well.

Martin notes eFacRe provides brokers with a consistent set of standard information. With the old way of doing business, the brokers will have to pick up the phone if some information is missing, such as the claims history or the survey report. If they know where they're going to get a standard set of information every time, thats going to help them and its going to help us, he says.

Kott acknowledges many people fear electronic platforms will transform the way facultative business is conducted. I think there are elements of fear in all forms of distributionbrokers, direct reinsurers, and broker markets, he says.

Langner adds some reinsurers are concerned online platforms will lead to bidding wars. Frankly, in the last market there were bidding wars, and that was long before technology came on the scene, she says.

If you can only differentiate because you do it my way or no way, then this is not going to be something you will embrace, says Kott. However, if you differentiate based on service and solutions and attention to the needs of customers, this is only going to make you better able to differentiate yourself. It wouldnt bother me to see as many people as we could using electronic platforms.

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