Reinsurance Ceding – A Core Strategic Function That Should Be Optimized
Author: James Mahon. Insurance Pre-Sales Consultant, UKIIMEA
Digital transformation and automation are at the forefront of every insurer’s priorities; not only from a customer experience perspective, but also across back-office operations. Despite being a mission-critical function, reinsurance ceding operations have always seemed to remain an afterthought in process and technology improvement initiatives. The reinsurance process is often siloed within the business and too often undertaken with manual handling and ad hoc tools. This creates significant issues for insurers and, given the size of reinsurance contracts, results in significant risks.
Here, we identify three key reinsurance challenges and related business risks.
- Increased Complexity Reinsurance contracts are becoming increasingly complex due to insurance product innovation, more complex risks being insured, and more sophisticated risk management strategies. Today, one reinsurance contract could consist of multiple treaties, specific terms and conditions, and involve several different parties. This typically results in the need for manual calculations (often involving multiple spreadsheets), reliance on several different (often legacy) systems, and disparate parties working together. With the combination of increased complexity and reliance on manual processing, insurers are even more susceptible to human errors with significant financial impact.
- Claims Leakage & Recovery. As a result of the complexity across reinsurance processes, claim leakage can cause significantly greater claims expense for insurers. Any policy adjustment or event could result in the insurer being due a recovery. However, without the appropriate level of integration or communication between systems and parties, recoveries due to the insurer can go unclaimed. Given that reinsurance arrangements are typically required for larger insurance policies, the risk of this claims leakage can often result in insurers losing millions in unclaimed recoveries.
- Operational Efficiency. The manual work often involved in reinsurance operations results in slow processes with too much operational risk. Given the complexity, there is heavy reliance on experienced staff which highlights a dependency risk and takes key employees away from more strategic aspects of the insurer’s reinsurance programme. The use of several spreadsheets and systems attached to individual contracts can also create barriers with obtaining access to data. Accurate reinsurance data is a vital part of an insurer’s data infrastructure and these barriers are presenting issues with accuracy in reporting and audit control. This therefore can create significant risks around compliance and regulation, as well as overall consistency and efficiency across the business.
Conclusion
The days of straight-forward reinsurance contracts are long behind us, yet many insurance organisations are still using ad-hoc, in-house developed solutions to manage their reinsurance operations. The use of manual spreadsheets for calculations and lack of automation on the complex arrangements and claim recoveries present significant business risks for insurers. The move to a more automated reinsurance solution will reduce errors and costs, as well as making claim recoveries a lot quicker and more accurate. The risks presented by manual reinsurance processing also highlight the need for integration into Policy Administration Systems, Billing/Accounting systems, etc. This will not only ensure accuracy and consistency across the entire process, but allow easy integration and access to key data, which in today’s world is vital for any insurer to achieve their strategic goals. To summarise, investing in the right reinsurance solution to fully automate processing end-to-end significantly improve operational efficiency, decrease unclaimed recoveries, and enable a more effective reinsurance programme.