Hidden assets (data management)
In our view, missed reinsurance assets are causing insurers significant financial pain. Too few, however, are even aware of the problem, or can’t quantify its size, as they don’t have the tools to capture accurate data which can then enable them to find out what’s being missed or not recovered.
Missed reinsurance assets come in several forms, from missed reinsurance recoveries or overpayments to reinsurance claims leakage. Data is not always seen as a reinsurance company’s biggest asset, but it most certainly is, as accurate data allows a reinsurer’s management to make informed decisions and ensure the enterprise is performing as it should. This is especially the case with data related to a company’s reinsurance protection and the recoveries it can make under its reinsurance programme.
However, incomplete or inaccurate data is misleading. The trouble is, without the right tools either to capture accurate data in the first place or to analyse large volumes of data, how can you tell if your data is one or the other, or both? Due to the inherently complex nature of reinsurance transactions, these problems are common; transactions are voluminous and data is fragmented across many different systems. Not only is it difficult to gather the data, it takes a significant amount of time and effort to translate it into meaningful, incisive reports to provide a high level view of performance. This has seen data collection in the insurance industry evolve to achieve piecemeal objectives, rather than provide holistic insight.
"The processes utilised by a reinsurer need to ensure that good practive is always followed and that manual calculations are not being used."
But an accurate high level view is required to make successful recoveries and is essential for anyone contemplating commutation. If the data utilised in your commutation analysis is incomplete or inaccurate, then the financial consequences can be very significant. You could be giving away millions of dollars’ worth of reinsurance protection for free. However, explaining to your board why something was missed in the first place could be far more challenging.
The answer to these challenges lies in improving the organisation’s systems, processes and data management capabilities. In order to make full and appropriate reinsurance recoveries, a reinsurer needs an enterprise-wide view that’s capable of showing all the intricacies of a reinsurance programme and the associated recoverable balances. The routes to achieving this will vary for each reinsurer. Typically, as each insurer will purchase reinsurance to suit its own particular portfolio or type of business, it’s likely that each reinsurance programme will have its own unique features.
In common with other industries, IT legacy problems persist. Many reinsurers have grown through acquisition and this has led to them inheriting different systems, whether for underwriting, administration, claims or outward reinsurance. Don’t forget too, that a lot of reinsurers still use spreadsheets and basic databases to calculate reinsurance recoveries. To compile accurate data and extract valuable analyses is surely easier when there’s one central system tosupport every core function. This should include the calculation of reinsurance recoveries, meaning that all data is being captured in one central location. Further benefits are derived when the system is fully auditable and allows reporting to be produced from any data field, thus supporting other financial and regulatory reporting needs.
While having a robust system goes a long way to solving some of these challenges, it cannot achieve the desired outcome alone. There’s a myriad of other business processes that are fundamental to achieving accurate, effective reinsurance data, including those that spill over into the claims leakage area. In our estimation, probably around 80 percent of this challenge can be dealt with by technology (particularly automation around processes), but there’s a vital 20 percent of manual intervention which relies on a special combination of reinsurance knowledge and reinsurance technology expertise and skill. The processes utilised by a reinsurer need to ensure that good practice is always followed and that manual calculations are not being used (or counted) as these will inevitably result in data not being captured in a central system and could potentially include some of the missed or inaccurate data we’re referring to. It’s worth emphasising the importance of excluding manual data as it will only diminish the benefit and quality of any data analysis and increase the risk of assets being missed.
There’s another part of the business that has a huge part to play and that’s the role of the ceded reinsurer’s/reinsurance accounting function. Not just at a procedural level but also at a cultural level, its impact is felt. In fact, it’s at the heart of the problem. In the same way that so many other priorities hit the proverbial IT wish list and then take a back seat in reinsurance, reinsurance accounting takes the last seat of all. What’s worse is that it could be the biggest contributor to identifying missed or unreported assets and, if done properly, it could even pay for the project many times over.
Sadly, in common with other sectors, reinsurance data gets far too little importance and recognition in financial reporting. Perceived as ‘not dynamic’ and ‘just accounting’, often the attention given to it is poorly considered (compared say, to the attention provided by IT for general ledger reporting) and it is rarely represented with a strong voice at the board level. Therefore many CFOs will not even realise the full extent of the ‘missed assets’ problem.
The good news is that technology has a lot to offer the reinsurance finance team. For ceded reinsurance, it can improve identification processes, such as claims subject to reinsurance and accurately calculating recoveries; it can also standardise and streamline a host of financial procedures for better, more accurate reporting. For assumed reinsurance, it offers a host of improvements, from identifying inadequate claims handling by cedants, to identifying slow-paying clients that might be an indication of a more serious problem ahead.
All these factors work to make up a watertight solution to identify and address missed and non-recovered reinsurance assets. The following questions may be useful:
• “Am I totally confident that I am not missing any reinsurance assets?”
• “Does my team have a sound explanation for all prior due reinsurance recoverables?”
• “And if so, how has this been tested?”
If there are any gaps in your answers, these will serve to highlight the challenges faced by your own organisation in addressing this issue. At the very least, it could provide a positive step towards reversing this trend so that, in time, your organisation is in a position to claim and recover all that it could be owed through its reinsurance contracts.
Michael Mackewich is lead principal, reinsurance, for the US, Bermuda and the Caribbean at CSC. He can be contacted at firstname.lastname@example.org
Michael Cook is an associate partner in the consulting practice, CSC financial services Europe, the Middle East and Africa. He can be contacted at email@example.com