Can Treaty Reinsurance placements be digitised?

5 Minute Read

There has been a great deal of progress developing digitised placing platforms and the Lloyd’s market has been successful to date in achieving targets for the use of its preferred platform PPL, accomplished principally thorough the execution of high volume / low value Direct and Facultative business. 

However, the binding of Treaty Reinsurance and Retrocession business remains a manual process in London, Bermuda, and elsewhere.  In this blog we are going to take a brief look at some of the reasons why and the potential implications of not embracing technology. 

There have been previous attempts to introduce digital placing platforms to Treaty placements, notably with Ri3K in the 2000s, but this did not achieve any real lasting success, take up rates were proportionately very low and it is fair to say that not every Treaty Underwriter was a willing participant at that time. 

This might suggest that the Treaty market is a poor adopter of technology and adverse to change, however I believe that at the current time the appetite and motivation exists in the market to evolve and embrace digitisation and the tools to achieve this have improved considerably.

In its Blueprint Two manifesto, Lloyd’s highlighted its intention to work with reinsurance brokers and markets to determine a way forward to support this business through consultation and experimentation.  It is the right approach but is the full digitisation of Treaty Reinsurance placements achievable?

Inhibiting factors towards digitisation

The path to full digital placement does not appear to be an easy one, and there are several inhibiting factors that may might hinder global progress:

  • Global spread of the reinsurance market
    The circa $235Bn GWP Non-Life Reinsurance Market (A.M. Best, 2022) is globally diverse with concentrated underwriting hubs in London, Bermuda, USA, Europe and Asia servicing a customer base located in almost every corner of the world.
  • Lack of leadership
    When it comes to placing business, Treaty Reinsurance is a tripartite process with the Buyer having a far more “hands-on” role in the placement than seen for Direct & Facultative placements.  The question of who drives the digitisation process is intriguing:
    • Sitting in the middle of the transaction and controlling the distribution of reinsurance placements, the Broker clearly has the greatest influence over how the business is placed and administered but will always be dictated by their Client’s (the Buyer) instruction.
    • The Buyer is at the start of the value chain and ultimately is the key decision maker however, with a diverse range of entities it is difficult to see if and how a consensus or joined-up approach to digitisation could be achieved.
    • Similarly, Underwriters sit at the opposite end of the value chain, but even where they command a sizable market share it would be a very brave move for a Reinsurer to mandate placements on a particular platform without a consensus approach
  • Lack of regulated influence
    While the Lloyd’s Market remains the largest Insurance marketplace in the world, its share of the global Non-Life Reinsurance Market is waning and equates to approximately 8%, some of which will be self-generated. There is a lack of regulated influence focussed on Reinsurance elsewhere in the world and Lloyd’s competitive market position will inhibit its ability to implement wider change to Treaty placements through a regulated mandate.
  • Multiple Solutions
    From having had only one or two viable options available for the past 18 Years, there are now several placing solutions at the disposal of the market.  Unfortunately, there doesn’t appear to be an iPhone equivalent in the Reinsurance world, each appears to have its own merits and often takes a siloed approach to isolate different aspects of the placing function to integrate with other broking and underwriting accounting systems through APIs.  The main concern is that underwriters will be turned-off digitisation if there are numerous platforms, portals, protocols and logins to remember for different clients, brokers or classes of business.
  • B3i Insolvency
    The B3i platform looked to have some great ideas and was probably the only platform seeking to offer a complete and fully integrated solution to the market utilising blockchain technology.  It appears that an unfortunate combination of timing and market conditions prevented them from securing the seed capital required to progress with their plans.  Nevertheless, this will have spooked many who will be very careful who they engage, you wouldn’t want to spend time and money integrating a platform only for it to go into insolvency.

But why does Treaty Reinsurance need to be digitised, it has operated well up until now hasn’t it?

  1. Treaty Reinsurance has never achieved Contract Certainty!

The manual placement of Treaty Reinsurance contracts is an inefficient process, mainly because there remains a discrepancy in the Contract Certainty guidance that has not fully removed execution risk from the placement process.

The introduction of the Contract Certainty guidelines in 2007 marked a paradigm shift for the London Insurance Market and beyond, to a large extent ending the culture of “deal now, detail later” where only the high-level terms were agreed before entering into the contract and the full wording finally agreed months or in some cases years after the inception. 

The Contract Certainty guidance definition is as follows (LMG, 2018):

“Contract Certainty is achieved by the complete and final agreement of all terms between the insured and insurer by the time that they enter into the contract, with contract documentation provided promptly thereafter”

“Promptly thereafter” is further defined as being 7 days following inception for consumer facing contracts and 30 Days for all other contracts, i.e., Treaty Reinsurance.

The intention of this definition was to allow a period of grace for contracting parties as a buffer to clear up the administrative documentation details in busy renewal periods. However, it remains the case for many placements that only the basic terms are agreed in advance of the inception date and the final contractual documentation is not agreed or released until well after the inception date in some cases. 

Effectively in these cases the benefit of the big change in 2007 was to bring full contract execution forward from months/years to 30 days, a huge improvement but by no means perfect.  If you are a Treaty Reinsurance or Retro Underwriter, how many times have you been faced with unexpected changes in conditions or negotiations after the inception date?  What would happen if there was a major loss to the contract in this period?

As the market hardens, contractual terms and conditions will inevitably tighten, therefore, it is not necessarily the case that an expiring contract can be relied upon as the basis of coverage for a renewal, if that ever was the case!

Digitisation of the placement process is the solution that should enable full contractual execution at the inception date of the contract, eliminating execution risk created by the inefficient manual process.

  1. Beware the funding gap

Insurtech led technologies are improving product efficiency at the front end of the risk transfer chain, providing customers with instant contracts and accelerated claims payments, often within days for short tail risks.

Cumbersome accounting systems and inefficiencies in the delegated underwriting process means that there is the possibility of a funding gap where there is heavy loss experience early in the contract period and the Treaty Placements have yet to be finalised.  Particularly where an Insurtech is backed utilising capacity via quota share reinsurance.

In addition, the existing funding arrangements within Treaty Reinsurance arrangements might prove too time consuming to establish, cumbersome to administer and provide insufficient performance to meet the commitments made to the original customer, especially where there is a large cat loss or heavy loss experience that exceeds any funds withheld provision.

So, what is the potential solution?

Digital placement is achievable, the appetite and the technology is improving all the time however, without regulatory impetus or a coordinated community approach I am sceptical that there will be a meaningful market take up of digitised placements in the near future without a crisis event that forces regulatory intervention or change.

This perhaps suggests that there will be a piecemeal approach over time where some pioneering entities lead the way, buying in to new placing formats, while the rest of the market follows a proven path of success at a later date when the winners have been decided.

Allemond Ltd

Allemond Ltd is an independent Reinsurance Consultant offering a range of specialist reinsurance services and expertise, providing support to start-ups, MGAs, Insurtechs, Brokers, ILS Funds and Reinsurers.

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Bibliography

A.M. Best. (2022). World’s 50 Largest Reinsurers. A.M. Best.

Lloyd’s. (2022). Bluepring Two.

LMG. (2018). Contract Certainty Principles and Guidelines.

LMG. (2020). London Matters 2020.re