Gateways, Hubs, and Transformers—Welcome to the World of Electronic Trading
August 2007
With electronic trading increasing in the
insurance industry, this article looks at what makes up a trading network, the
players involved, and the current argument between peer-to-peer data exchange
and the use of trading hubs or exchanges.1
by Andrew
Berry
Newport Risk
Services
Before analyzing the components of a trading network it is worth stepping
back and defining what we mean by electronic trading. In these articles, I have
used a broad definition of electronic trading to encompass the electronic exchange
of risk information supporting the insurance and reinsurance transaction. This
may or may not include the negotiation and completion of an insurance transaction
online.
Data is electronically exchanged in many situations within the insurance
industry. Why should it be so difficult to exchange risk data related to the
insurance transaction? The answer is in the multitude of the parties involved
in the transaction and the need for real time connectivity. A broker seeking
to obtain a quote will approach multiple insurers. Depending on the complexity
and the size of the risk, it may be insured with more than one insurer and then
reinsured as well. Trading systems are also looking to operate in real time
rather than through periodic batch uploads of data.
Components
Creating real-time multi-party connectivity becomes complex. A true trading
system will also go beyond connectivity and data exchange, and incorporate analysis
of the data being exchanged and even collaborative environments for negotiation
of deals.
Some of the early models sought to achieve this through an industry exchange
with industry participants connecting to the exchange. Absent a single dominant
industry exchange, a market-wide system needs to develop to incorporate connectivity
to multiple exchange type platforms as well as directly to the in-house systems
of trading partners. Several components have been developed and have to exist
in order for a market-wide system to operate.
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An accepted industry data standard: The standard refers not to an agreed data set, but to a common language
to be able to identify matching data fields in different systems. For example,
"client" in an agency management system may match "insured" in an underwriting
system. Applying a common tag to both data fields will assist in the mapping
of data between the systems. The insurance industry, like many other industries,
has adopted extensible mark-up language (XML) as its common language and
ACORD has emerged as the global standards-setting body for insurance and
reinsurance. While its work is not complete, ACORD has developed XML data
standards for much of the industry.
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Gateways: A gateway is the interface
from internal systems to be able to send and receive XML messages from trading
partners. A gateway allows trading partners to collate and send risk data
in the appropriate form and receive data messages from trading partners.
Gateways are particularly important in receiving messages. Often referred
to as a catcher's mitt, they take the standard message and rationalize or
adapt it to the unique requirements of the receiving party's system.
-
Trading hubs: The trading hub or exchange
provides additional functionality in collating and displaying information
relative to the transaction, such as a comparison of competing quotes or
analysis relative to requested coverage. The hub is likely to include a
mechanism to negotiate the coverage online through a structured counter-offer
process and/or collaboration areas. Recording the back and forth of the
negotiation online has the added advantage of creating an auditable log
of the negotiation. The trading hub simplifies integration issues in that
a trading partner may be able to indirectly connect to multiple trading
partners through one connection to the hub. The benefit of streamlining
the integration will depend on the extent to which the particular trading
hub has been adopted in the market and the number of companies integrated
to it.
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Messaging hubs: Messaging hubs manage
the technical aspects of maintaining real-time connectivity between trading
partners and act as the conduit for the actual exchange of messages. Each
partner to a trading network has security and network protocols that need
to be continuously managed to ensure safe, authenticated, and real-time
exchange of data. Different parties also have different messaging needs
and may be using messaging formats beyond the basic ACORD standard. Managing
these individual requirements and keeping them current becomes burdensome
as the number of trading partners increase. The messaging hub performs these
services centrally. In the same way that the data standard allows trading
partners to map to one standard, the central messaging hub allows partners
to manage these technical requirements with one entity rather than directly
with all trading partners.
The Players
The players can be divided into the smaller commercial lines and reinsurers.
Smaller Commercial Lines
Activity is occurring in three areas.
-
Agency management system interfaces: The traditional agency management systems increasingly provide external
data interfaces from their systems. This is the first step in the process
of allowing data from the agency management system to populate the insurer's
submission system. Two of the more popular interface solutions are TransactNOW,
an interface from the AMS system, and Transformation Station, an interface
service across a variety of agency management systems. These interfaces
are achieving significant volumes, with AMS predicting more than 5 million
transactions through its TransactNOW solution in 2007.
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Insurer connectivity systems: While
the ACORD standards are developing and have been helpful, they are not complete.
There are still unique elements to each insurer's data. You still need a
transformer to convert the data from the agency management interfaces to
the insurer's system. AgencyPort is one company providing these connectivity
products to the industry. Its insurer-focused solutions provide both a portal
and a data connection to the portal. The latter, called AgencyConnect, takes
data from the agency management system interfaces and converts it into the
insurer's portal. The user exports data from its agency management system
and connects to the insurers' portal where the data forms are pre-populated.
This is an insurer-provided solution removing the need for the brokers to
re-key information and is provided at no cost to the brokers.
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Trading hubs: The hub is more than
just a data interface. It provides a central area to manage the submission
and placement process with the markets. The user operates within the hub
rather than each insurer's Website. For the broker, the hub can manage multiple
submissions in one place. This is predominantly a broker-oriented solution.
A leading provider is SeaPass, whose Gateway product addresses business
owners (BOP) or package policies, commercial auto, workers compensation,
and umbrella. The SeaPass solution is being used by some of the leading
U.S. brokers to handle their small to middle market submission process,
including Aon, Acordia, and ABD.
Reinsurance
Electronic trading is also occurring in the reinsurance market, both for
facultative and treaty reinsurance. This market has seen two survivors of the
earlier Internet crash survive and prosper in eReinsure and Ri3K.
eReinsure has focused on the facultative market where the volume of transactions
lend themselves to the use of an electronic trading system. Its value proposition
was initially focused less on efficiency and more on the ability for a cedant
to receive management information on its facultative reinsurance placements.
The platform was developed primarily from the cedant's perspective, although
reinsurers and brokers are also subscribers. eReinsure has handled over 120,000
submissions since its inception in 2001. Some of the industry's major insurers
are using eReinsure to buy facultative reinsurance including Chubb, AIG, and
Fireman's Fund.
RI3K was founded in 2000 and backed primarily by Brit Insurance with the
vision of creating an electronic Lloyd's. Its electronic trading service is
focused on the broker and has seen strong adoption in the London market. The
company initially targeted treaty reinsurance but has moved into both facultative
and primary specialty insurance, which is expected to account for the bulk of
transactions processed over the RI3K platform in the near future. There are
currently over 160 companies who are using RI3K. To date, RI3K has stayed focused
in the London market. After the launch of its new V3 platform, RI3K was the
winner of the 2006 reinsurance e-business initiative of the year. (eReinsure
won in 2003).
Peer-to-Peer or One-to-Many
The current debate in electronic trading is more centered around the operating
model that will dominate rather than whether electronic trading will happen.
Two models are developing:
-
Peer-to-peer: This is where trading
partners connect directly with other trading partners through the use of
gateways to catch and translate the XML messages being sent. This approach
is less disruptive to existing business models. The exchange of data follows
the transaction, which is conducted offline. The technology platform does
not become part of the negotiation as it is in an exchange structure. While
being less disruptive, this approach is more complicated in that it requires
each party to build and manage connections between each of its trading partners,
although data standards and messaging hubs will help in that effort.
-
One-to-many: This is where the trading
partner uses a trading hub to connect to multiple trading partners. This
approach offers a couple of advantages. First, the trading partner uses
the hub as the means of connecting to other partners. In essence, it outsources
the connectivity to the hub rather than taking this on itself. It will benefit
from connections the hub has already made to industry participants. Second,
the trading hub should provide some data analytics to assist in the negotiation.
A one-to-many system is the most disruptive to existing offline trading
processes and faces more change management problems in implementation than
a peer-to-peer system.
Conclusion
This is an evolving area and, since my first article in April 2007, Advisen
and Xchanging have announced plans to launch a central messaging hub in the
London market using ACORD data standards. This will handle placement, endorsement,
accounting, and settlement. Also, it will cover claims messages between trading
partners and with the London processing bureaus. A central messaging hub will
be of most assistance to companies using peer-to-peer data exchange, although
it will also help trading hubs manage connections to their members.
Exactly how the electronic trading marketplace will play out is yet to be
determined. Whether a peer-to-peer or one-to-many approach will dominate will
depend on the balance of the trade-off between the change management issues
of the trading hub versus the cost and complexity of managing individual trading
partner connections under a peer-to-peer model. Changes in either side of this
trade-off will lead to one approach dominating over another. In the meantime,
expect to see both approaches develop in the marketplace, with some companies—as
we have seen with Aon in the United Kingdom—hedging their bets and using both.
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