Insurance and risk go hand-in-hand. Even for insurance companies. This is where the re-insurance market comes in.

As Joe Zarandona, CEO of DataCede, explains, most insurance companies could never handle all the liability they cover. Not without help. So these companies, to manage risk, “cede” parts of their risk to re-insurers in exchange for a premium.

In other words, an insurer who holds a $1 million policy on a house in a flood zone might cede half the amount of the policy to a re-insurer. If a flood strikes, the primary insurer is only liable for its half of the claim, the re-insurer for the rest.

DataCede, which moved its headquarters from North Harrison Street to Research Way in January, makes sure claims for events like this make it through the process.

The company’s talent level increased on March 1 with the acquisition of Strategic Initiatives Management Group LLC, a firm that managed distressed insurance companies and was run by Holly Bakke— the commissioner of the state Division of Banking & Insurance from 2002 to 2005.

Bakke also was the CEO of the New Jersey Property Liability Guaranty Association from 1989 to 2001, where she managed claims of insolvent property casualty companies.

Zarandona says he has known Bakke for years, having met her when he was administering a $1 billion runoff company in Pennsylvania. The meeting, he says, was inevitable — both of them have been major figures in the insurance industry in the New Jersey area for a long time, and they share a number of high-profile friends (chiefly Warren Buffett, who once said Bakke “would be a success in any line of work”).

The acquisition (details of which were not released) brings someone on board whom Zarandona says has stood as an advocate for policy rights. Bakke will head DataCede’s regulatory and runoff practices.

Francesca Bliss, who ran Strategic Initiatives Management Group with Bakke, will be DataCede’s principal consultant and will work with state insurance guaranty associations. She is currently president of the International Association of Insurance Receivers.

DataCede produces software (CedeRight), a cloud-based package that untangles the process of getting insurers paid by re-insurers.

Like many things in the modern world, insurance claims have become too burdensome to do manually. Companies long ago abandoned their paper ledgers for computers, but even digital record keeping falls short in the industry unless the software is designed for the specifics of the industry.

“Contracts with re-insurance companies are very, very complex,” Zarandona says. “There are thousands of touch points on the average policy and all must be accurate and cost-effective.”

There are so many parts, so many paragraphs, so many stipulations that insurers often are not even sure what to bill the re-insurer. CedeRight, Zarandona says, can calculate a bill to the penny.

DataCede also provides consulting to insurance professionals, as well as technical professional staffing. A hefty number of insurance companies go insolvent, Zarandona says.

And almost all of them go insolvent for having made bad financial decisions and for not knowing how much money is really at stake for them. In many cases, companies go bust because they drastically underprice their products.

Bargain basement prices might look good to customers, he says, but they have a way of backfiring on insurers when disaster actually strikes. It’s simple economics — the insurer does not collect enough money on its premiums to cover a large-scale loss (say due to a hurricane). The claims come in and, suddenly, there is not enough money to pay out.

And while this sounds as if customers get the shaft when it comes time for claims, there is a safety net in place in any state’s guaranty association. This acts like the FDIC does in banking — it guarantees that someone will pick up the policy holder if that person’s insurance company goes insolvent.

DataCede handles this aspect — runoff — as well. Runoff is, essentially, administering the obligations a company has after it goes out of business. Zarandona has a lot of personal experience handling runoff for companies and did exactly this for Legion Insurance, which went out of business in 2009.

Zarandona credits such experience as part of the reason for DataCede’s success. The company’s biggest asset, he says, is the experience its people have in all avenues of the insurance and reinsurance industry.

Aiding its operation, DataCede has an office in Chennai, India, which Zarandona says helps companies process what they need to process during what would be the overnight hours in the United States.

The company was founded in 2008 and has had the offshore office the entire time, Zarandona says. “We get lots of orders at 5 p.m. on a Friday night.”

Having the offshore office lets the company never stop working for its clients (and those clients represent the biggest names in insurance, such as Geico). The weekend comes here, but the claims get processed afield and are ready for the next business day.

But the company’s headquarters has been in Princeton since its inception for a reason. “There’s a lot of intellectual capital in this area,” Zarandona says. And there is the world’s largest re-insurer, MunichRe, which is based at University Square, where Route 1 meets Alexander Road.

It is an area blessed with a huge talent pool and a steady economy, not to mention a good number of insurance and financial firms. As it settles its new Research Way office over the next few years, Zarandona hopes to add 20 to 30 new jobs.

Zarandona comes to DataCede from Bard Capital, where he was CEO of the early stage acquisition team. Before that he was with Legion, AXA Corporate Solutions, and GRE Insurance (Guardian). He began his career in 1977 with EBASCO Services.

Zarandona’s corporate background (he even holds a master’s in business finance systems management from FDU) is somewhat anomalous in his family. His father was an elementary school principal who did not think highly of the business world.

He has four grown children, none of whom have any interest in following him into the insurance business, he says. But what turned out to be the game changer for Zarandona was a drawer full of papers his grandfather had. His grandfather, born in Spain, had worked for Texaco and traveled all around the world. Eventually he came to Brooklyn and stayed there.

Zarandona’s grandfather made okay money, but he had always been angered by what he thought was a scheme by Texaco to pay him with something worthless.

So this drawer full of stock in Texaco, from its early days, sat there and built wealth Zarandona’s grandfather didn’t know he had. “He couldn’t see how money could be made on these pieces of paper,” he says. “But he died a very wealthy man.”

Zarandona was fascinated by how the process worked and eventually went to school to study finance. And, in the end, it seems poetic that he now deals with pieces of paper that represent large amounts of money for the ones who hold them.

“The insurance industry doesn’t like to admit it, but the only thing we really do is produce a piece of paper called a policy,” he says. But that piece of paper, in a drawer, or wherever, can spell the difference between a lot of money and a tragedy. It’s just a matter of making sure the process goes as it should.

DataCede, 2 Research Way, Princeton 08540; 877-789-2333; Joseph Zarandona, director & CEO. www.datacede.com.

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