Alex Letts proposes how the London reinsurance market can satisfy the new regulatory environment

When it comes to reinsurance it is very easy to sit and talk. Forecasting doom for sinners is fun. But the real issue is that it is mighty difficult to understand what to do.

So how do we modernise and reform? This is highly important given that London represents about 10% of the world's reinsurance market, is the single most important market and worth about $14bn in premiums.

The rest of the world's reinsurance markets are watching London carefully. They are also facing their own issues: Sarbannes-Oxley, Spitzer lawsuits and local regulatory frenzy.

This industry is waiting to take its lead from London and it will follow London reform. Why? Because the truth is that no other market has a clue what to do, and they all think that London is further ahead. If London gets it right, then that will do for the rest.

Modernisation, therefore, and reform is not just a pain, it is an opportunity for London to reassert itself at the heart of the reinsurance industry with all the business stimulus that brings to all its participants.

In business terms this means we must move from a wide variety of methods of interaction between companies to a single, standardised way of doing business.

In other words, one set of forms, one style of slip, one clear process - just one way of doing things that satisfies the lawyers, the regulators and the business needs of the market.

This is the painful part of market reform. It really hurts to leave behind one's own routine and adopt a new routine. This is why people say that you are all change-haters. Actually I do not think this market is any more change averse than any other.

But our estimate is that about $1bn has already been vapourised in failed attempts to update this market.

The lunatics not only have the keys to the asylum, they have also been the designers, architects, quantity surveyors and civil engineers on the construction site.

So the question now is how? In other words, what is the plan to deliver the four above objectives?

The ‘how' is actually not nearly as complicated as people like to make out. I am not going to trivialise the extraordinary levels of grunt work, technical expertise and creativity it takes to execute, but the actual plan is quite straightforward. It asks you to think about a few simple questions:

  • If companies try to pursue their own separate solutions, can they ever get to a single standard method of doing business across a London market of 200 or so companies?
  • If a single set of standardised London Market Principles-compliant reinsurance forms and processes were available today from a centralised service, without the need for or added software, would they be used?
  • How could this service be synchronised with internal methods?
  • How would such a service sit between ways of working and the companies that should be dealt with, particularly the brokers, who need legally robust, auditable and transparent dealings with us?
  • How do we achieve efficiency given that not everyone will be able to to pass over the processing information in a language and form that other processing systems can handle and understand?

We can answer these questions by separating the concepts of what people do from the issue of where and how data flows.

The problem in the past is that people, including me, have become confused by talking about work processes and IT data transfer as if they are the same thing. They are not.

The overriding objective is to keep the FSA, Spitzer and Sarbannes at bay. This means sorting out to work in a consistent way to manage the reinsurance contract creation, endorsement and administration.

It is about working methods, not data. To my knowledge none of the external regulatory or compliance entities have commented, even in passing, about a requirement to sort out what the IT crowd does to process the information. Data transaction is a big issue but it remains an IT issue.

We have all become obsessed with what we provide and less concerned about what the market needs. It needs a straightforward service that provides a community of users, who can all use the same forms and structures to manage their reinsurance.

What tools do we need for this?Not email, for starters. Email is a wonderful tool, but in the compliance and governance area it is a liability. Not paper and fax either. Paper does not support standardisation any more than email does. Paper has had its day.

The best tool will be a computer. But to create a uniform and controlled market-wide solution, we need a single source service - otherwise the forms will get altered and people will revert to anarchic ways of using supplied software.

It will need to link cedant, to broker, to underwriter to bureau within the same community. They will have just one shared record of every version of the contract as it evolves. They will use the service as the only record of what was agreed and what the supporting documentation was. They will have an electronic LMP slip with wordings.

It is this that RI3K has built. The reinsurance community has nothing to fear within the new regulatory and legal regime that is being dictated globally. London may be under pressure, but the 2006 big bang deadline is achievable.

We should all feel extremely comfortable that London could set the gold standard for reform and modernisation of the reinsurance process. If it does not succeed it only has itself to blame.

‘ Alex Letts is chief executive of RI3K

RI3K Key Fact


  • Established in May 2000 employing more than 50 people in London, Singapore and Toronto.
  • The RI3K infrastructure allows you to quote, negotiate and bind every type and class of treaty and facultative reinsurance entirely online.
  • RI3K technology is secure, LMP and ACORD compliant and specifically designed to address the issues of contract certainty,
  • transparency and auditability.

  • To date 1,380 lines have been signed through the RI3K infrastructure representing gross premium estimated more than US$1bn.
  • 146 registered member companies - 19 cedants, 24 brokers and 103 reinsurers.
  • Over 1,000 individual users set up with a user name, password and personal security key.

What needs to be done

1.The London market has been directed by its regulator to produce full contract wordings on inception. The first objective is to remove a lot of the doubt and confusion surrounding contracts.

2.The regulator has indicated that doubt and confusion is exacerbated by wildly varying methods of providing underwriting and risk information and recording who presented what and when. The second objective, therefore, is to fix this.

3.Large brokers carry out most of their business in the US. To meet the post-Spitzer requirements they are changing their ways of doing business. They are global players and will not implement one method for London and one for other markets. They will bring their change to your tables. Their objective is to find a more transparent, auditable method of dealing with you and they will apply those methods to their relationships with you.

4.The market authorities are also demanding more competitive processing akin to the banking industry, insisting that the inefficiencies of paper and processing are driving the cost of doing business in London to unacceptable heights. The final objective, therefore, is to smooth out frictional costs.

Case study: Dane Douetil, chief executive of Brit Insuranc
In May 2000 Brit decided that the process of reinsurance should and could be managed electronically. We have supported the RI3K venture because we felt that, of all the dozens of e-commerce business plans that were around at the time, this one seemed to be the most likely to help us strategically. The following is our current analysis of how the RI3K service is beginning to support our business:

1. Reduction in contract disputes which cost companies millions of pounds per annum. The RI3K service manages and records every part of the offer and acceptance process, including electronic binding of final terms. It is the only legally binding record of our contracts. While there can always be room for dispute about the meanings of any wordings, there can be no wrangling room over what the wordings actually are if the process is managed on the platform.

2. Evidencing of process. A key area for dispute is over what was actually presented by whom at any stage of the process. When our placements are managed through the RI3K platform, the process is transparent to us, the customer.

We can see what is being presented during the process, and, that process is recorded so that there is a clear audit trail. This considerably reduces the potential for misunderstanding between ourselves and our brokers over what is to be presented.

3. Operational efficiency. Multiple offices keying and rekeying data in multiple ways and formats is grossly inefficient. The entire industry is grappling with the problem of finding a way to make these processes one touch so that there is more data integrity and greatly reduced resource requirement.