Published: September 19, 2011
Swiss Re is one of the world’s largest re-insurers with over 10,000 employees and operations in 20 countries across over 200 entities. Swiss Re has over 2,000 accounts globally with around 50 banks. Because of changing market conditions and a greater emphasis on transparency, efficiency and risk management within the business, Swiss Re made the decision to review and revise its bank connectivity.
As well as taking steps to enhance efficiency, controls and risk management, Swiss Re recognised that its existing banking connectivity infrastructure had a series of complexities (figure 1). With a multi-channel infrastructure in place, it was cumbersome and time-consuming to set up communications with each respective bank. At that time, Swiss Re used a core bank proprietary workstation with a variety of other bank links including fax, telex and electronic banking systems. This led to data and process fragmentation with a lack of visibility, a restricted information flow and delays in execution due to the variety of manual processes. Furthermore, by relying on a single bank, there were concerns about counterparty risk which became particularly evident after the events of both September 2001 and 2008. In addition to concerns about bank connectivity, fragmentation of internal systems meant that cash management information was frequently delayed, disjointed and incomplete.
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In Asia, there have been some specific challenges to overcome. For example, while it is Swiss Re’s intention to continue with a multi-bank approach to payments, not all banks in Asia were able to support the company’s preferred connectivity mechanism. Furthermore, while payment methods are being harmonised in Europe through migration to the Single Euro Payments Area (SEPA) there are far more substantial differences between countries in Asia. As a result, Swiss Re recognised that it needed to partner regional core payments banks that supported SWIFT connectivity and supported in-country payment requirements in each country.
To meet its global connectivity needs, Swiss Re made the decision in 2001 to rationalise its internal technology and concentrate its cash management activity, whilst still managing counterparty risk, and replace proprietary technology with a single bank-independent connection (figure 2). SWIFT was identified as the market standard for multi-bank connectivity which was a pivotal element of the overall infrastructure to standardise and rationalise bank communications. Over the last 10 years, the company consolidated its in-house systems and implemented a global treasury management system for treasury and cash management which was integrated with the two ERP installations, one of which covers Europe and Asia and the other for UK and the Americas.
In Asia, Swiss Re focused on regional banks with which many Swiss Re branches already happened to have a relationship, which helped to avoid internal roadblocks to make the transition. More significantly, it was important the banks were flexible in supporting an innovative arrangement that leverages Swiss Re’s ERP-based technology both for internal payment processing and SWIFT connectivity, therefore comprising a fully-fledged payment solution. The bank accepts payment messages through SWIFT using FIN and then automatically formats and reroutes them to the relevant local clearing systems as well as to cheque printing facilities which are still in use in some countries.
Despite the effectiveness of this solution, Swiss Re recognised that the company needed to manage its counterparty and concentration risk, so a mirrored arrangement was set up with more than one regional bank that could be used if total payment volumes reached a certain limit or in case of a bank’s inability to perform payment services. While the banks did not fully support the same automatic routing to local clearing systems, they were able to provide competitive pricing for local ACH payments. This mirrored approach, together with some remaining local banks, gives Swiss Re the flexibility and efficiency it requires to address both counterparty cash exposure and operational risk.
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The new technology and connectivity infrastructure has brought a variety of benefits to Swiss Re both at a global and regional level in Asia. With harmonised processes across the Swiss Re Group, Swiss Re has been able to centralise finance operations to a payments SSC that acts as a centre of competence. This has been a major advantage as previously, local business units maintained their own local payment systems which were costly to maintain and compromised control objectives. The finance teams were also able to decommission banks’ proprietary electronic banking systems, eliminating the associated security risks by having to manage different security devices and user profiles across systems.
Swiss Re made the decision to review and revise its bank connectivity.
Straight-through processing (STP) rates have increased significantly with a scalable solution that can easily be extended to new countries in the future. For example, the infrastructure is currently being extended to India, without the need to set up new systems, and with the same quality of data, process control and visibility that exist in other countries. Use of standardised, well-controlled information and communications infrastructure is also an important factor in complying with Sarbanes-Oxley and other compliance requirements, particularly as all payments are automatically screened against OFAC and further embargo lists, further enhancing security and control. The systems infrastructure is versatile so that other systems could be hooked in without the need to establish multiple interfaces or to set up new bank connectivity; this is particularly advantageous during mergers and acquisitions.
Transaction costs have been reduced substantially. Although the transmission cost through SWIFT may appear relatively high compared with using banks’ proprietary software, the end- to- end cost is lower with greater control and transparency. Software and hardware costs have declined and internal resources can be redeployed to more value-added tasks. Swiss Re has achieved greater visibility over its cash on a global basis. Although this is most difficult in Asia, with a more regulated financial environment than in other regions, Swiss Re has better control over cash and is able to avoid increasing working capital.
The advantages are not only operational in nature. Risk management is a key priority for Swiss Re and the project has contributed substantially to achieving the company’s risk management objectives. By following a multi-bank approach counterparty and concentration risk have been successfully mitigated. This structure is also instrumental in managing operational risk as Swiss Re can switch between bank service providers if one of its banks was unable to process transactions. The company now has greater negotiation capabilities with its banks, particularly to convince some of its local banks to support SWIFT Corporate Access.
A project of this scale and complexity, particularly in Asia, requires a combination of bottom-up and top-down approaches to implementation. For example, it was vital that senior management at both group and local levels were supportive of the project to help to remove roadblocks. A pragmatic attitude has also been crucially important. Swiss Re has developed significant expertise in SWIFT connectivity both globally and in Asia which has been very valuable in making the most of the opportunities that exist through SWIFT. Even so, when using non-standard FIN messages for local clearing system, it has been important to leverage partner banks’ expertise to ensure the right information and tags are used.
The new technology and connectivity infrastructure has brought a variety of benefits to Swiss Re both at a global and regional level in Asia.
There have inevitably been some challenges to contend with. As an early adopter of SWIFT Corporate Access in Asia, local banks did not necessarily understand why Swiss Re was choosing to use FIN to access local clearing systems. In some cases, they expected the company to use FileAct and in others, they were more generally unprepared. However, the solution that Swiss Re has subsequently put in place has helped to avoid the potential impact of non-readiness for SWIFT amongst its local banks.
Now that payments in Asia have been automated and streamlined, the next step is to further consolidate internal Swiss Re reporting platforms and enhance cash forecasting abilities. Although the ideal scenario would be to implement a global ERP, there remain local processes that are required to support local regulatory and technological requirements. However, Swiss Re has implemented a scalable, flexible treasury and cash management infrastructure that is well-positioned to support its requirements as they evolve in the future.
Originally published in the 2011 HSBC Connectivity Guide
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