Julien Victor, Managing Director at Effisoft, explains how the European regulation will impact insurance companies and force them to review their reinsurance programs and strategy. This will be combined with the necessity to upgrade their reinsurance information system in order to be able to meet the ever increasing requirements for traceability and security of information flows.
Reinsurance finds itself at the heart of Solvency 2. It is a fact that manual or semi-automated reinsurance operations management will become problematic as early as 2012... If more efficient processes are not implemented, Insurers will find it increasingly difficult to deliver and conform to the new requirements.
Identification of required capital, choice between reinsurance and company retention, closer relationship management with reinsurers (e.g. for rating) are only a small number of operations which require the use of a centralized reinsurance software solution capable of recognizing all forms of reinsurance covers and offering trusted traceability options. With over 50% of insurers continuing to managing their reinsurance processes over multiple resources, it will soon become a real challenge.
Let's examine all 3 pillars:
At pillar 1 level, the regulatory authorities put an emphasis on the impact of reinsurance strategies in relation to the calculation of the required capital (SCR), thus underlining the need for acquiring an information system capable of measuring and testing various modeling opportunities, and helping to justify investment decisions.
A combination of risks (operational, market, underwriting, Counterparty default ...) must be included in the SCR calculation model. Several criteria must be considered when dealing with the Counterparty default risk, such as the relationship with the reinsurer (payment delays,...), its financial situation, its rating (a simple example: what pricing to apply to a CCC- rated reinsurer, knowing that its rating will increase the SCR of the ceding company, in comparison to a AA+ rated reinsurer?) and the anteriority of the relationship between both parties. Some claims can indeed carry on over the very long term (e.g. asbestos) and taking into account its whole history is fundamental when choosing a reinsurance software solution, in order to be able to run statistics and make the best possible placements.
Industry experts predict that reinsurance indicators are becoming more and more strategic as they provide analysts and decision makers with valuable structuring and steering tools.
At pillar 2 level, It is a fact that with ORSA (Own Risk and Solvency Assessment), choices made at the cession level will influence insurance companies in their reflection towards Solvency 2 compliance.
Otherwise, a defective follow up of reinsurance operations can be considered as an operational risk, at the same level as the dedicated Information System.
At pillar 3 level, a minimum of 3 new reinsurance reports will have to be produced and handed to the regulation authorities.
The newly identified reports in the QRT are J3 (facultative risks non-life), J4 (shared reinsurers) and J5 (outgoing reinsurance program).
It becomes clear that an information system able to automatically produce these reports would be extremely valuable.
However, a well secured, automated and structured reinsurance software solution will push reinsurance professionals towards the acquisition of a reinsurance tool in the coming months. Everyone from insurers, reinsurers, brokers to pension funds is concerned!