Reinsurers Must Optimize Data Utilization to Maximize Profitability

Many reinsurers fail to fully utilize their data, leaving open the potential to make costly mistakes regarding what business they book, how they allocate capital and how they prepare for changes in the market.

Insurance is a tough marketplace, but in many respects reinsurance is even tougher than the direct market. Today, the reinsurance industry is faced with an unprecedented number of challenges, especially with what appears to be an increasing frequency and severity of man-made and natural catastrophes. In 2011 alone, earthquakes in New Zealand, tsunamis that devastated parts of Japan, and severe floods in Thailand, combined to result in record losses. Reinsurers also face developing regulatory issues —such as Solvency II, a continuing global soft market, and legacy issues such as exposure to mold and asbestos claims. To combat these challenges, reinsurers are turning to technology for catastrophe modeling, data analytics and geographic information systems (GIS) to better understand risk exposure.

It is a maxim that "data is the lifeblood for insurers," but typically it's not about how much data you have but how smart you are with it. Although a reinsurer has access to much less data on a transaction compared to the ceding company, reinsurers still do have tremendous amounts of data in their possession. Yet many are not utilizing this data to the fullest extent. This leaves open the potential to make costly mistakes, such as:

• Turning away profitable business – or suboptimal capacity allocation to such business – due to underestimation of the profit potential.

• Misallocating capacity to unprofitable (or not sufficiently profitable) business due to overestimation of the expected return.

• Reacting to market cycles and changes in cedent underwriting policies or quality, claims handling, rate activities, etc., instead of anticipating these event and being proactive. This could lead to suboptimal decisions to enter or exit lines of business; suboptimal timing of nonrenewal decisions; or suboptimal timing of provision of capacity to new cedents.

Reinsurers' desire for data has intensified, but what do reinsurers do with this data? They certainly use it to underwrite and price reinsurance transactions. But many do nothing more than that with this wealth of information. So why don't more reinsurers make better use of the data at hand? One reason is that many reinsurers are still working with paper-based files, which are extremely labor-intensive, inefficient and poor in terms of data quality. These manual processes are error prone, provide inadequate exposure information, and typically lack the ability to enable an integrated customer view.

Reinsurance is a low-volume, high-value transaction business requiring reinsurers to gain maximum insight into the scarcity of data. Reinsurers who focus on data capture, data accuracy and data completeness not only improve their own profitability, but also prepare themselves for increased scrutiny of their own books with anticipated regulatory requirements, such as Solvency II and the NAIC Solvency Modernization Initiative (SMI). Reinsurance companies need to implement a framework that incorporates data management, advanced analytics and reporting capabilities to address the most critical issues right away, while also expanding to support future objectives and changing market dynamics.

Reinsurers can benefit from implementing a centralized data repository containing all of the data from reinsurance submissions to supplement the data provided in an individual submission, leading to better information for individual transactions, portfolio analyses, predictive modeling analyses, and better enterprise risk management (ERM). Reinsurers who are able incorporate analytics-based decision making into their practices can separate themselves from their competitors. Ultimately, better use of the available data can lead to a more efficient and more profitable reinsurance company.

Reinsurers are conducting what is an extremely complicated business by nature with what often appears to be a paucity of data. In fact, many do not fully utilize the data that they already have. Simply maintaining the status quo and not optimizing use of that data hampers a reinsurer's ability to manage its business as profitably as it could. Reinsurers that excel in data management, analytics and operational efficiencies will have an advantage against their less-advanced competitors.

About the Author: Stuart Rose, Global Insurance Marketing Manager at SAS. For further discussions connect with him on LinkedIn and Twitter.