Reinsurance claims processing very different than systems forprimary carriers

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Since reinsurance claims processing is very different from itsprimary insurer counterpart, systems for managing reinsuranceclaims require a great deal of flexibility and adaptability.Successful platforms need to interface with multiplepolicy/underwriting and claims systems while also providing acentralized repository to document the claim cycle fromidentification to settlement.

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Many primary claims systems have been developed and refined overa multitude of environments, platforms and strategies. However,systems for managing reinsurance claims are less developed andfewer in number.

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When a claim is made under a reinsurance contract, a sequence ofevents needs to be set in motion. These events include:

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o Claim is flagged by system.

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o Claim is associated with appropriate contracts, certificatesand reinsurers.

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o Reinsurer billing is prepared with supportingdocumentation.

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o Bill is sent to reinsurer and recorded on sub-ledger asreinsurance recoverable.

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o Payment is received and recorded by company.

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o Payment is cleared against reinsurance recoverable.

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None of these tasks is overly complicated or burdensome.Nonetheless, very few companies are able to execute the entiresequence without fundamental flaws.

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Perhaps the single greatest reason is that most companies don'tanticipate ceding a high volume of claims and therefore don'tinvest in the required reinsurance claims technology. When they dofinally realize the need, they're often in serious trouble.

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Several factors make it especially difficult to use technologyfor managing reinsurance claims.

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o Multiple Platforms:

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Many insurance companies have multiple policy administration,underwriting and claims systems as part of theirinfrastructure.

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Insurers have various lines of business with uniquerequirements, acquisitions that result in the melding ofinfrastructure, and/or the inability to migrate business fromlegacy systems to more current, state-of-the-art technology.

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o Need to Accumulate, Aggregate, Allocate and Transactwith Third Parties:

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Reinsurance billing is the only task in which information fromdisparate systems needs to be accumulated, aggregated and allocatedto transact with a third party.

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While companies may perform similar tasks while conductingactuarial analysis or financial reporting, only ceded reinsuranceclaims have a third party scrutinizing supporting documentation andcalculations.

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o Multiple Departments Handle Reinsurance:

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Underwriters are usually responsible for facultative placementsand the certificate needed to recover a reinsured claim; the claimsdepartment is usually responsible for excess-of-loss reinsurancereporting; and the accounting department is responsible forproportional reinsurance administration, along with all billing andcollection.

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o Reinsurance Terms and Conditions:

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Reinsurers use exclusions, limits, caps, carve-outs and otherlimitations to avoid undesirable risks. The result for cedents isthat more and more reinsurance claims require special handling.

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The optimal reinsurance claims system is one that blendsautomation with manual intervention capabilities that areuser-friendly. However, for those features to be realized, it iscritical to create and maintain a centralized repository of allreinsurance claims from which billings are prepared and dataqueries executed.

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A central repository is created when all reinsurance claims andrelated premium cessions are captured before any transactions occurwith a reinsurer.

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One option for companies to achieve harmony in their reinsuranceclaim processing is the use of commercial software. Purchasing sucha system is only the first step, however. Interfacing the systemwith the other technology platforms is the hard part.

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The most common pitfall is getting the reinsurance system toproperly calculate the cessions according to the reinsurancecontract's terms. This process starts with loading the contractterms, along with the respective historical premium and loss data.That is followed by comparing system and manual calculations,making necessary adjustments, and then repeating the process untilthe system calculations are correct.

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One way to minimize this particular pitfall is to recognize therole of the reinsurance system–and when and how to build around it.A reinsurance system should be limited to providing corefunctionality: capturing reinsurance claims, centralized billing,tracking collateral and payments, etc.

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Special provisions in reinsurance contracts–such as exclusions,complex commission calculations, profit sharing, experience accountbalances and others–should generally be handled outside thesystem.

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For those companies that choose to build a customized system,the key obstacle is the amount of time to build and maintain thesystem. From design and development to implementation, the typicaldevelopment period is several months to a couple of years.

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Rock J. Schindler is chief sales and marketing officer forParagon Strategic Solutions Inc., based in Minneapolis.

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“Purchasing a claims software system is only the first step.Interfacing the system with the other technology platforms is thehard part.”

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Rock J. Schindler

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