Dealing with certainty: technology is clarifying the reinsurance process.

The reinsurance sector operates on a curious blend of tradition, personal contact and varying levels of trust. Information moves, often under deadline pressure, among a maze of parties by letter, fax, e-mail, telephone and personal contact. Comments are offered, and fine points are disputed and smoothed out in a highly complex process of give and take.

Or are they? Recent events, such as the case of Larry Silverstein, who fought with insurers over whether the destruction of the World Trade Center was one event or two, have focused the attention of the reinsurance sector on the issue of contract certainty. If the terms of a policy aren't clear to all parties at the point of signature, there can be expensive repercussions.

London-based technology company ri3k Ltd. is working to change this through its Reinsurance Placement System, which was designed to capture and document the entire reinsurance process.

Alex Letts, chief executive of ri3k, said that the past three or lour years have seen four major events that have both "heightened the anxiety in the market and brought an increase in calls for contract certainty." These events, Letts said in an interview in the firm's headquarters, were: the terrorist attacks on the United States on Sept. 11, 2001; the Sarbanes-Oxley Act, which he described as a reaction to the Enron scandals; the investigations by Eliot Spitzer, the New York state attorney general, into the insurance industry; and the assumption of the regulation of Lloyd's by the U.K. Financial Services Authority.

The Reinsurance Process

Letts said an electronic process is the only way to ensure certainty at the point of contract and to achieve the clarity that has been mandated by Sarbanes-Oxley.

"The problem with reinsurance," Letts said, "is that there has never actually been a formal process. There is just 'the process.'"

The first step for ri3k, Letts said, was to document the entire reinsurance process and put it in a digital format that would work through a single channel. He said that ri3k now has a "mirror" of everything that happens from the time the ceding company contacts the broker. All parties will have a full audit trail on the business in which they are involved.

The system allows cedants, brokers and reinsurers to follow action on screen :is it happens. "All you need is your Web browser to do that," Letts said. "You don't need to install anything, apart from a digital certificate."

Letts said the system also contains a number of fields to be filled in with data that "can be squirted straight into the back office of the counterparties. So you get rid of the need for the manual processing and the mistakes and the costs that are associated with it."

This feature, Letts said, is suited to a second stage of operation. For now, he is encouraging users to become familiar with the system. The ri3k system, which began operating at the beginning of 2004, saw its first major test in this year's renewals. The system, Letts said, now contains more than 1,000 signed lines, or pieces of business, representing about $400 million in premiums. Each signed line yields a $500 payment to ri3k.

Letts said that ri3k has enrolled 102 reinsurers from around the world, "five or six" ceding companies and about a dozen major brokers. "So you have effectively got the entire reinsurance community represented on the system," he said.

Ri3k, which also has offices in Singapore and Toronto, was founded in 2000 finder the name of city3k.

Brit Insurance Holdings plc, which provided the founding capital for ri3k, has been notable in its support for the system. Brit, Letts said, has about 60% of relevant contract wordings, and all of its cat coverage, in place. "That was a big breakthrough," he said. "And I think, more and more, that will become the norm."

Letts would like to see the system add as many as 400 more signed lines during this year and another 2,000 to 3,000 lines at next year's renewals.

Such goals are modest, Letts said, when considered against the London market's annual total of more than 300,000 treaty lines. Over the longer term, he takes encouragement from the efforts of the Financial Services Authority to promote the use of electronic communications.

Letts has hopes of eventually winning over cedants in the lucrative U.S. market, which, he noted, accounts for 40% of the world's reinsurance. He said that by signing tip more U.S. insurers, ri3k also would attract more U.S. reinsurers.

Reaching Out

"If you get them [the U.S. insurers] on, then you get significant volumes," Letts said. There can be cultural factors, Letts said, in the ability of organizations to make full use of the technology. He said reinsurers in Bermuda and mainland Europe, for instance, generally are receptive to receiving business electronically and to experimenting in new methods.

But there have been suggestions that brokers in Germany have clung to e-mail instead of making full use of the ri3k platform. Letts said that London, "where they slice and dice the lines much smaller," has shown strong resistance on price. There is also, Letts said, resistance in London to the inflexibility of the electronic process. "You can't just tear up a slip," he explained. "So in a market that's a little bit less disciplined, the imposition of discipline has been resented in some areas."

Key Points

* Larry Silverstein's court case with insurers over whether the destruction of the World Trade Center was one event or two, and new regulations have focused the attention of reinsurers on the issue of contract certainty.

* If the terms of a policy aren't clear to all parties at the point of signature, there can be expensive repercussions.