Insurance cash flows mechanisms are overly complicated. This reduces available liquidity, increases risk to investment income in volatile markets, reduces underwriting margins and degrades customer service. As the industry tackles Covid-19, successful companies will move to digital financial operations. Adjoint Treasury is being used by leading insurers in P&C, specialty and life & pensions to kickstart this transformation.
Insurance is an important risk management tool for individuals, businesses and society at large. As we recover from the Covid-19 crisis, and consider scenarios to deal with pandemic risks as well as wider business and personal disruption, the insurance industry needs to digitize and use automation tools to stay resilient and adaptable in the “new normal”.
The typical value chain of the insurance industry looks like this:
However above is a stylized version. Things are typically more complicated in real life with the Insurer operating many separate legal entities and bank accounts by state or country, and then pooling risks at its own internal reinsurer or using an external reinsurer. Similarly in the Captive Insurance world, the fronting insurance firms serve to collect premiums and bind policies locally but transfer that risk to the client’s captive entity using brokers and other insurance companies as conduits. Other Alternative Risk Transfer (ART) solutions that include catastrophe bonds, risk retention groups, reinsurance sidecars, ILS, etc. add to the complexity.
For the most part, InsurTechs and innovative Carriers are doing a good job on the front-end of the value chain, e.g. in digital distribution or underwriting new types of risks, or using new or alternative data sets. So we see new digital brokers, digital managing and general agents (MGAs), broken-owned MGAs etc. supported by underwriting capacity from conventional Insurance Carriers as well as reinsurers. The use of Excess and Surplus (E&S) Lines coverage is also growing. At the other end of the chain, new alternative capital sources - from pension or hedge funds are bringing new risk capital.
But the connectivity from the middle to the back end, especially related to cash movements, is far from efficient. What we find from surveys and discussions with industry participants is that there are huge inefficiencies:
- Manual processes to calculate commissions, fees, taxes, bordereau reports payments and reconcile calculations across parties
- Reconciliation costs to match payments with their premiums and claims A/R and A/P
- Unreconciled cash at the end of the year
- Lost productivity due to manual data entry with multiple siloed systems that do not talk to each other
- Cost of Capital and Counterparty Credit Risks. It takes 30-90 days, if not longer, for the collected premium to reach its final destination.
- Inefficient processes to allocate investment income to group entities who contributed the premium capital
- Lost fees due to lack of netting options
- Loss of potential investment income
- Poor service and speed for the end client
All these factors lead to unnecessarily high expense ratios and frequent delays, ultimately leading to higher premiums, lower investment returns and delayed claims. Insurance and Reinsurance companies spend more time and money in the back-office rather than the value-enhancing piece of their operations. Stephen Catlin in his book, Risk & Reward devoted a chapter to Process Problems in the industry.
The new trends in this space can often create more challenges for the conventional and legacy systems in managing data and cash. Innovative services offer a good customer experience, but typically face sub-optimal underwriting margin and investment returns:
- usage-based and on-demand insurance
- peer based risk-pooling
- risk reduction rewards (risk prevention rewards)
- micro insurance
- embedded insurance (similar to embedded finance)
- premium financing
- insurance company ecosystems
- parametric insurance
- Open Insurance
Concepts like cash pooling have been used in the insurance industry for greater efficiency, and we see these being widely adopted for internal cash management by most players. However these also suffer from low speed of data and cash into and out of the cash pool, often adding a layer of complexity to operations.
Hence we resolved to work with forward thinking insurance firms to help the market embrace digital tools and processes to reduce costs, provide real-time visibility to cashflows and improve efficiency internally and with partners. This provides faster client service, especially relevant in these tough times. We see the Digital Finance and Real-time Treasury trends growing across the industry, alongside concepts like multi-currency, multi-bank API based cashpools.
B2B Insurance financial infrastructure
Our cloud-based digital finance platform is tied to banks and conventional insurance systems in real-time. It offers no-code workflow automation to benefit brokers, MGAs, their partner carriers and reinsurers. This drives end-to-end automation of the flows of cash and data, based on pre-agreed rules and using software that integrates with policy management systems and ERPs/Financial Accounting Systems, etc. using tools like APIs. Tying cash ownership to data brings cost efficiency and speed to the process. The automated processes include:
- Automated matching of premium received to outstanding premium invoice and policy admin system
- Automated earmarking of funds through virtual or sub-accounts so that premiums received for a policy for a particular carrier or reinsurer go to that carrier or reinsurer
- Net premiums payable and instant availability to carriers
- Agency sales “earned” commissions and taxes segregated from trust premium accounts
- Self-audited records to demonstrate regulatory compliance
- Digitised Bordereaux reporting and payments.
- Movement of captive payments almost instantly from a local subsidiary/fronter to the captive
- Netting of claims and premium
Example of automated premium flows for a MGA using Multiple Carriers and/or Captive and Reinsurers
Insurance Industry wide infrastructure
Our vision is for a financial infrastructure purpose-built for the insurance sector with the client benefits at its centre. We envision this platform to connect brokers, MGAs, Carriers, Reinsurers, etc. using market standards and real-time integration, so that data and payments can move to authorized parties without any friction. Each of the players will have a data and payment account for cross-company cash management and accounting, with the relevant privacy rules between the participants. The data is formatted to integrate with conventional internal systems in a straight-through process. Every cash transaction has the relevant data underlying the transaction to enable auto-reconciliation. This brings massive efficiencies to the industry, and improves client service. Multilateral netting reduces transaction fees, and using a common single source of truth for transactions improves operational productivity. CFOs and Treasurers can spend their time on strategic activities. Compliance officials can be assured that transactions are automated in a regulatory compliant and auditable fashion. And of course, most importantly, the clients, i.e. the insureds, are best served by the industry.
Join us in building this new infrastructure.