The use of technology within the property-catastrophe reinsurance industry is a complex concept and one that is increasing in importance. In this post we will answer what it is and provide an overview of current practices in employing technology to support the property-catastrophe reinsurance underwriting life cycle, consisting of risk analysis, planning, and pricing. We will review the technological landscape as it is today and provide a basic understanding for what opportunities for innovation may exist for your organization.
What Does a Reinsurance Company Do
The primary function of a reinsurance company, whether traditional or collateralized, is to deploy capital to cover individual risks in return for a premium in a manner that is efficient and profitable. This process is predominantly data driven, involving the assessment of individual risks using statistical or stochastic models and identifying opportunities in the overall portfolio of risk for risk diversification. Today reinsurers employ a number of technologies to support them in this process as outlined in the following illustration:
A schematic illustration of the different technological components involved in an underwriting cycle, from submission to capital management and strategic planning.
These technologies can be described as follows:
- Modeling: The quantification of risks.
- Portfolio Analytics: The analysis of relationships between risks within a portfolio, understanding of risk diversification and the monitoring of overall portfolio performance against strategic objectives and goals.
- Pricing: The assessment of risk and reward trade-offs for a given risk with respect to individual and the company’s strategic objectives and constraints.
- Strategic Planning: The development of business and underwriting strategies in order to achieve the strategic objectives set by the company.
The Fragmentation of Reinsurance Technology
Depending on the technological sophistication of a reinsurance company, these components often have varying levels of complexity and capabilities. Many reinsurers opt to invest considerable resources in internal development, focusing their efforts on one or more of the technologies described above (see surveys here and here). Often, however, their internal development does not cover the entire broad range of components and is augmented with commercial off-the-shelf (OTS) solutions. One example of that is the development of catastrophe models, which is very resource intensive and requires specialized skills. External vendors specialize in the development of such catastrophe models. Risk Management Solutions (RMS) or AIR Worldwide (AIR) are among the leading providers of catastrophe modelling solutions for the insurance and reinsurance industry.
The degree to which different components are integrated and communicate with each other varies greatly among companies. It can range from full integration and automation to considerable manual work involving spreadsheets and data files that need to be manipulated and processed individually. Integration and automation are key to offering an efficient underwriting workflow and to reduce the chances of human error.
Investing in Reinsurance Technology
It is not unusual to see more sophisticated companies invest millions of dollars annually in technology in order to maintain or advance their technological advantage compared to their competitors. A large portion of this investment goes toward staffing, hardware cost, and software licensing. While many reinsurers see a way to differentiate themselves from their competition by developing applications internally, the majority of resources are spent on developing fundamental infrastructure for data management, data transport, and common analytics. Functions such as scalable data management, simulation, financial modeling, portfolio roll-ups and risk metrics are common across multiple organization and generally well understood. However, they are difficult to realize internally and require significant upfront investment. Only a small fraction of internal development is truly unique and differentiating.
Platforms – The Future for Reinsurance Technology
The solution for companies to address the inefficiency of “reinventing the wheel” is to utilizing platforms that provide domain-specific building blocks for solving common technological problems in the industry. In a manner similar to how Platform as a Service (PaaS) have helped innovation in other areas of IT, PaaS in insurance revolutionizes the way companies think about their technological capabilities and enable them to become more agile and responsive to changes in the industry. We believe that PaaS holds the future for a more efficient reinsurance industry.
Looking for more information on how reinsurers generate ROI from technology platforms? Drop us a line here, it is a subject we love to chat about.