The right equipment: out of necessity, pragmatism or opportunity, reinsurers are developing primary business with ready-made software.

The trend over the past two years has been for reinsurers to write more primary business--often with the help of ready-made software solutions.

The Reinsurance Association of America reported that reinsurers wrote $3.82 billion of direct premiums in the United States in 2002 and more than $2.2 billion in the first half of 2003, or about 11% of gross premiums. The association did not track direct premiums before 2002.

Credit the growing amount of direct business in many reinsurers' portfolios to economic factors. During the soft market, reinsurers may have taken on direct business in order to help a direct-writing client they value. For example, a primary writer may have wanted to take on a block of business in 15 states but was only licensed in 13 states, so the reinsurer would take over the direct business in the other two states, said Clyde Owen, vice president of outsourcing at Insurity Inc., a Hartford, Conn.-based software provider. Or a primary writer might have offered a program including a strong auto and trucking component, but not good garage coverage, so a reinsurer would partner with the direct writer to fill in the gap, he said.

When the market hardened, a direct writer might have decided to exit less-profitable lines of business to concentrate on more lucrative lines, and a reinsurer might have taken over the abandoned fines of business to accommodate a client. And some reinsurers in a hard market may simply seek direct business written by third parties, such as managing general agents, because it appears to be profitable.

Few reinsurers are fully equipped to manage primary business. Owen said they lack both the staff and the technology, and they often underestimate the complexity of direct business and the amount of knowledge needed to participate effectively. That's particularly true when it comes to interfacing their systems with the managing general agencies that market direct coverages and in complying with the insurance laws, regulations and reporting requirements in 50 states.

For example, GE's Employers Reinsurance Corp. has developed a browser-based system with the help of Insurity that facilitates business with managing general agencies writing primarily auto insurance, and it plans to implement the system into other parts of its direct business, which was on track late last year for generating $2.4 billion in annual premiums. "We consider this a complete solution, from our customers using it to generate a quote to actuaries using it to get data," said Bruce Coates, customer advocacy leader at GE Commercial Insurance, an ERC subsidiary. "It's a huge improvement, and we're very excited about how this enables us to tackle the future."

Other reinsurers, particularly companies that started up after the terrorist attacks of Sept. 11, 2001, have shown interest not only in the efficiencies of an information-technology software program, but in the guidance it can provide in conducting direct business.

"We've had a reinsurer come to us who essentially had no IT systems," said Owen. "We provided capability in policy issuance, claims, billing, collection, reinsurance and data warehousing. It has allowed the company to bring up programs very rapidly, to add lines of business and discontinue others, and thus to pick and choose for the moment."

Some Insurity clients have embarked on smaller-scale projects, such as a single line or compliance reporting. Others have sought help for running off businesses they inherited from direct writers that have gone bankrupt.

Leaders of RebuslS, a 30-ycar-old London-based firm providing software and consulting to insurers, said they see two different trends among reinsurers writing primary business. One represents a slightly different view than Owen's: Traditional, established reinsurers are pulling back from primary lines to focus more on their core reinsurance arrangements, said Martyn Sutton, chief operating officer, and Neil Hodges, business development manager for Europe. Newer reinsurers, many based in Bermuda, are meanwhile expanding into primary specialty lines, they said. RebusIS has revenues approaching 50 [pounds sterling] million (about $86 million) and employs more than 500 people in the United Kingdom, United States. Bermuda, Malaysia, Thailand and India. The IS in the company name stands for "insurance services." About a third of its business is with reinsurers.

Hodges said established reinsurers are pulling back because their infrastructure is not well-suited to primary businesses and because they do not have the staff expertise. These companies have their own in-house systems and have "dabbled" in primary lines, but not always successfully. The newer reinsurers are moving into the gap left by established players, said Sutton. Mostly these lines are high-end commercial, excess and surplus. "These new players have an entrepreneurial approach,'" he said. "If they can see a way, they are prepared to go there."

These newer reinsurers want no part of in-house technology, according to Hodges. Instead, they seek packaged solutions that are more flexible. "They want systems and support with companies that are also fast on their feet," he said.

The terrorist attacks in New York and Washington also played a role. "There were a bunch of people out there who knew the rates would go through the roof and that they'd need to have their houses in order pretty quick," Sutton said. "Their only option was to buy off the shelf and go with a package. "That allowed them to focus on their core business--insurance--while reaping the benefits of lower risks and cost effectiveness, he added.

Other complexities aside, the routine course of primary business requires of reinsurers many procedures they aren't used to executing. These include billing, collecting premiums, issuing endorsements and policy changes, auditing, claims tracking, and reporting to each state required policy and financial statements. Owen said the automated systems of outsourced vendors also can provide early evaluation and detection of problems that otherwise could lead to underpricing and an accumulation of losses before the company becomes aware of them. The outsourced systems carry the advantages of having to enter data only once, after which it is in the system and available to all who have access to it. What's more, most new software-based systems operate over the Internet with browsers. Owen said that means they can be installed quickly and can avoid obsolescence.

Better browsing products and industry standards such as XML also mean that reinsurers are more likely to integrate general agents and managing general agents into the system. Owen suggested that insurers and reinsurers can decide to outsource everything, some functions like maintenance and/or regulatory re porting, or back-end functions while letting MGAs handle front-end functions.

Browser-based products also help reinsurers rid themselves of geographic limitations. Outsourced, browser-based systems also can allay the insurance industry's concerns about proposed changes in accounting/financial-reporting standards and regulatory regimes worldwide, Sutton said.

Implementing a New System

ERC clearly has tenure in direct business, having written excess workers' compensation for some 90 years and several other lines for 30 years. The company has expanded its primary writings mainly through acquisitions, and a major challenge over the years has been to integrate the technology it acquired. "It's clearly worse than starting from scratch," Coates said.

ERCs new suite of solutions, which it calls Jupiter, will become the platform of choice throughout the company. "Our customers would not have characterized us as easy to do business with," said Coates. "What we had wasn't workable. "To solve the problems, ERC assembled a team that convened focus groups, developed a request for proposals and then chose a vendor from among 20 that responded. The solution was an Insurity program modified to suit ERCs needs. The vendor houses the servers for ERC, and the ERC team works with Insurity to enhance the program as needed.

The resultant program eliminates rekeying of data and automatically uses the right rates and forms, said Coates. MGAs are able to issue policies in their offices and even can print them. The Jupiter system also provides data such as loss runs, bit and retention ratios of customers, and account levels, that it makes available to MGAs 24 hours a day through a self-service portal. Agency principals also can access this data from their home computers of from dial-ups in hotels.

Coates said ERC launched its focus groups in the third quarter of 2001 and launched its first three pilot programs in December 2002. It began using the programs to write business in January 2003 and has been rolling out additional programs through the year. At the end of last year, ERC expected to have about 35% to 40% of its direct business on the Jupiter platform, and it expects to reach 60% by the end of this year.

"We don't know what our competitor are doing," said Coates. "We don't think anybody is to the point we are, but we have to assume they will be."

ERC introduced its Jupiter program in the automobile insurance line, where Coates said customers were "feeling a lot of pain." In addition, the system was compliant with the Insurance Services Office, so it didn't need much modification, he said. Next in the queue are the company's lawyer-professional coverages. Most difficult to integrate likely will be health care, which Coates described as "very complex and deal-oriented."

Starting From Scratch

In contrast to ERC, Arch Reinsurance Ltd., a Bermuda-based post-Sept. 11 start-up, was able to start from scratch in building its information-technology system. During the first year, the fledgling company worked to build up expertise among its staff members, according to property underwriter Matt Dragonetti. The company's U.S. operations are based in Morristown, N.J. Officially, Arch Re has two IT staff members, but Dragonetti said the company runs "a very thin operation" so that individuals among its staff of 50 Bermuda employees learn many job functions, including IT.

Technically, Arch Re writes reinsurance on a treaty basis, but it deals exclusively through the broker market with such major brokers as Aon, Guy Carpenter, Willis and the Benfield Group. As of November, it was considering a software program offered by Q.Know Technologies Inc., a Reston, Va.-based software vendor that is itself a start-up. "Our staff in-house is more hardware-driven than development-driven," he said." Q.Know brings something to the table to help organize our electronic files."

Dragonetti said Arch Re, which benefits from certain tax advantages by being domiciled in Bermuda, does not travel to the United States and that conducting business over the Internet is therefore essential. The U.S. operation is set up to participate in the U.S. property/casualty market, he said. He estimated that in 2003, Arch Re will write from $1.4 billion to $1.5 billion of reinsurance, about 35% of which will be property, 40% casualty and 25% specialty lines. Company lines include surety, trade credit, marine, aviation, terrorism-specific contracts, casualty and liability commercial and some personal property lines.

Munich-American RiskPartners, the alternative market division of American Re-Insurance Co., a Princeton, N.J.-based subsidiary of MunichRe, Munich, Germany, considers primary business as core to its alternative market business. Anthony J. Kuczinski, president of Munich-American RiskPartners and a senior vice president of American Re, projected that 13% to 15% of American Re's overall premiums in 2003 would be primary business. Within RiskPartners, primary business represents almost 50%.That would be slightly less than the company wrote in 2002, but he attributed that to a refocusing and restructuring of the company and said he expects direct premiums to be higher in 2004. RiskPartners writes primary business As a way of promoting and writing more reinsurance business, and it is in most commercial lines, Kuczinski said.

Clients of Munich-American RiskPartners are involved in some form of self-insurance as part of the alternative market. "Part of the reason we originally started our primary insurance operations was to support the alternative-market operation," said Kuczinski. He said it is conceivable that a primary (front) company might move out of a business of segment RiskPartners might like, even if the business is profitable, and having the primary insurance capability gives RiskPartners the ability to respond to that displacement.

Kuczinski said RiskPartners has written primary business for a long time, but its legacy system is not so big that it would be disadvantageous in primary businesses. "We can move quicker than companies entrenched in the insurance business," he said. "Our current system allows us to be nimble."

The company also leverages its experience to write primary lines and does not feel more competition from Bermuda start-ups than from larger, more traditional competitors. "Wanting to be in the business and having the skill sets are two different things," he said. "It's not as easy as you'd think. So those new to the business still have some lessons to be learned. Coming in fresh allows you to use new technology easier because you don't have to deal with legacy systems, but you might not have a pool of talent, and you need a little of both."

The trend of reinsurers writing more direct business will continue, Owen said. "Technology is allowing more transparency into what happens, and it provides more options and fewer reasons not to participate," he said. "It used to be hard for general agents to use your system because of the need to double-key everything, but now with XML and ACORD standards, everything is easier. And now an insurer can give data to general agents for their own purposes."

"The reinsurance market is very buoyant," said Sutton. "It's an exciting place to be, and it's quite a happy hunting ground for us at the moment."

Software Vendors Drawn to Reinsurance

Whether writing primary business of reinsurance, companies face challenges of working faster while still making better decisions. Software vendors believe they can help.

"Reinsurers and insurers are being bombarded by information from all people involved in a potential deal," said Vineet Kalucha, president and chief executive officer of Q.Know Technologies Inc., a new vendor based in Reston, Va. "They've had no efficient way to help them manage and facilitate the processing of that information." Any slippage in information management--the inability to get the right information in front of the right person at the right time--can lead to inappropriate pricing and/or unexpected losses, Kalucha said. He estimated that 5%, to 10% of property/casualty losses today are preventable or controllable through improved information--and deal management.

Kalucha and cofounders Richard Meyer and Joseph Geaney all hail from property/casualty insurance backgrounds, and they said they know that when it comes to technology, insurance is "where the pain is." They and a few individuals funded the formation of Q.Know, and as of November, several venture capital firms were vying for positions in the first round of funding. Renaissance Reinsurance Co., Bermuda, was Q.Know's first client. It initiated a pilot program in April, and it has been using the product on its own since September.

Another software vendor, Atlanta-based Bridium, offers customer-centric technology that is similar to the online auction company eBay. Information is entered into the system and is self-administered but secure, said Steven Isaac, chief executive officer. Self-administered applications allow users to enter their own content, and are much more user-friendly and cost-effective than using dedicated lines, he said. The learning process is minimal, training and support costs are low, and even a new employee can be using the applications inside of an hour, he added. To the user, a self-administered system looks as if it is browser-based. Bridium's product complements and leverages Microsoft Windows technology. A major advantage for Bridium is that it does not require a big investment up front; instead, customers pay as they use the system, Isaac said.

Bridium's focus is in claims and the medical management side of property/casualty insurance, Isaac said. "We are the largest provider of workers' compensation compliance technology," he said. "We take information from a source, move it to a carrier, third-party administrator or employer, and meet state regulatory compliance requirements. Once we capture the data, no extra data entry is necessary."

Reinsurers Write More Direct Business

($Thousands, Statutory Results)

                                             Gross        Direct
                                           Premiums      Premiums
                                            Written       Written
                                           12 Months     12 Months
                                             Ended         Ended
Reinsurer                                  Dec 2002      Dec 2002

American Agricultural Insurance Co.          $691,071       $11,683
American Re Corp. (1)                       4,884,015       107,222
Berkley Insurance Co.                       1,119,143         6,397
Employers Reinsurance Corporation
  Group (2)                                 6,717,112     2,149,600
Everest Insurance Co.                       2,610,794        18,012
Folksamerica Reinsurance Co.                  965,342         7,182
General Re Group (3)                        4,655,223       756,936
Insurance Corporation of Hannover             769,450       346,552
National Indemnity Co.                      2,878,890        23,615
Odyssey America Re Corp/Odyssey Re
  Corp (4)                                  1,703,050       168,567
Radian Reinsurance Inc. (5)                   111,712         2,750
SCOR U.S. Group/SCOR Reinsurance Co.          954,781       110,955
Trenwick America Reinsurance Corp. (6)        415,916         4,320

TOTAL RESULTS                             $45,577,400    $3,821,827

                                             Gross           Direct
                                           Premiums        Premiums
                                            Written         Written
                                          Six Months     Six Months
                                             Ended            Ended
Reinsurer                                  June 2003      June 2003

American Agricultural Insurance Co.          $290,321        $1,767
American Re Corp. (1)                       2,300,079       213,425
Berkley Insurance Co.                         776,082           705
Employers Reinsurance Corporation
  Group (2)                                 3,109,777     1,218,209
Everest Insurance Co.                       1,890,228         9,309
Folksamerica Reinsurance Co.                  667,540         3,032
General Re Group (3)                        1,705,252       331,471
Insurance Corporation of Hannover             280,026       186,722
National Indemnity Co.                      1,732,010        84,542
Odyssey America Re Corp/Odyssey Re
  Corp (4)                                  1,050,809        91,981
Radian Reinsurance Inc. (5)                   121,265           817
SCOR U.S. Group/SCOR Reinsurance Co.          425,642        79,934
Trenwick America Reinsurance Corp. (6)         99,749         2,690

TOTAL RESULTS                             $24,651,581    $2,215,903

(1) Figures for 2002 include only American Re-Insurance Co. The results
reflect a re-estimation and strengthening of net loss and loss
adjustment expense reserves of $2 billion. Figures for 2003 include
the combined results of American Re-Insurance Co., American
Alternative Insurance Corp. and The Princeton Excess & Surplus Lines
Insurance Co.

(2) Includes the combined results of Employers Reinsurance Corp.,
Westport Insurance Corp., First Specialty Insurance Corp., The Medical
Protective Co. and GE Reinsurance Corp.

(3) All data presented for the North American Property/Casualty segment
of the General Re Group. Includes certain intercompany and other
adjustments. Excludes other affiliates of the Berkshire Hathaway Group.

(4) Includes combined results of Odyssey America Reinsurance Corp.,
Odyssey Reinsurance Corp., and Hudson Insurance Co.

(5) Effective April 30, 2003, Radian Reinsurance Inc. (the "Company")
entered into an assumptive reinsurance agreement with an affiliated
company whereby the Company assumed unearned premium and loss and loss
adjustment expense reserves. These reserves were offset in premium
written and paid losses to negate any profit and loss impact.

(6) Represents U.S. reinsurance operations only. Excludes other members
of the Trenwick Group that write direct insurance in the United States
as well as reinsurance and insurance in the United Kingdom and Bermuda.

Source: Reinsurance Association of America