Insurers Big Flaw: Billing Reinsurers

A confidential survey of property-casualty insurance executives has revealed that over half their companies are still using inefficient manual methods to track their reinsurance recoverables, which represent a huge chunk of their assets.

The findings were released by Minneapolis-based Paragon Strategic Solutions Inc., a reinsurance and asset recovery firm.

According to Paragon, reinsurance recoverables are the U.S. p-c sector's largest asset class, representing almost 45 percent of policyholder surplus, but less than half of primary insurers use an automated or semi-automated system to process and track reinsurance.

Paragon said most insurers employ "manual ceded reinsurance processes, which are largely inefficient and vulnerable to errors."

The study reported that insurers had an "inability to efficiently execute processing fundamentals" with "major gaps in the infrastructure need to perform the basic tasks required for prompt billing and collections of reinsurance recoveries.

"These gaps start with the inability of insurers to use technology effectively in supporting reinsurance automation," the study continued. "Further complicating this issue is the fact that people responsible for processing reinsurance are spread throughout the organization."

Rock Schindler, chief marketing officer for Paragon, said the findings affirmed what the company had previously detected in the marketplace, but, "While we expected it, it was still a surprise that the numbers were as large as they were."

He said Paragon believes the amount of manual processing is a reflection of the insurers "inability to deal with the complex components that make up the reinsurance assets." The study mentioned as other factors a lack of internal IT resources, low transaction volume, and system cost.

While processing of reinsurance assets may not be a key component of success for insurers to the same extent as distribution, underwriting and claims handling, "it can lead to their failure," Mr. Schindler warned.

Paragon said its survey was based on confidential telephone interviews with 151 insurers, mostly top level and senior executives, taken from a list of 679 companies representing about $142 billion of reinsurance recoverables.

Among the key numbers in the report:

o Fifty percent of the companies use a manual process, perhaps supported with Microsoft Excel or Access as their platform for managing reinsurance.

o Seventy-four percent of those polled have no dedicated department to manage ceded reinsurance transactions.

o Fifty-two percent of companies have no dedicated resources to track collateral and funding provisions in reinsurance contracts.

o Even when a company has a dedicated ceded reinsurance department other departments do a significant amount of the processing.

The report said 17 percent of those interviewed have a comprehensive reinsurance system in place but they are not achieving the benefits of automation, possibly caused by "the scarcity of people to effectively use the technology."

Of companies with a comprehensive system, defined as having a detailed reinsurance sub-ledger and automated data feeds to primary and general ledger systems, only 16 are able to process 90-100 percent of their ceded transactions on the system, with the rest processing only 50-89 percent of their ceded transactions with the system, Paragon said.

Paragon is a unit of Benfield Group Ltd., the London-based reinsurance and risk intermediary.