reinsurance leakage – identification & prevention · · 2017-03-01prepared by aon benfield...
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Prepared by Aon Benfield Inpoint | Operations 2016 Educational Webinar Series
Reinsurance Leakage – Identification & Prevention Michigan Chapter IASA 23 September 2016
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 2
Agenda
Reinsurance basics
What is Leakage?
Insurance & assumed reinsurance (inwards business)
– Examples
– Remediation
Ceded reinsurance leakage (outwards business)
– Examples (case study)
– Causes & remediation
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 3
Definition & general characteristics
Reinsurance:
“Reinsurance is a contract of insurance whereby one insurer (called the reinsurer or assuming company) agrees, for a portion of the premium, to indemnify another insurer (called the reinsured or ceding company) for losses paid by the reinsured under insurance policies issued by the reinsured to its policyholders.”
General Characteristics:
Contract of indemnity – Transfer of Risk
Predicated on the “utmost good faith” of parties
Negotiated terms and conditions
No direct relationship between policyholder and reinsurer
Reinsurer(s)
Insurer / “Ceding Company”
Insured Insured Insured
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 4
Forms of reinsurance
Reinsurance Placement Basis:
• Facultative • Covering a single policy • Negotiated terms/conditions for
each placement
• Treaty • Covering multiple policies,
i.e., an entire book, line, geography, subsidiary, etc.
• Often obligatory that a certain policy cede to the reinsurer(s)
Reinsurance Coverage Method:
• Proportional or “Pro-Rata”
• Non-Proportional or “Excess of Loss”
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 5
Pro-Rata example – 25% Quota Share
Ced
ing
Co.
Ret
entio
n
Rei
nsur
er’s
Sha
re
In a Quota Share treaty, everything is split by percentage terms… almost:
Written / Earned Premium
Unearned Premium Reserves
Paid / Unpaid Losses
Allocated Loss Adjusting Expense
Incurred But Not Reported (IBNR) Reserves
Company: 75% Reinsurer: 25%
All policies: - Book / Line
of business - Unit - Geography - Etc.
Acquisition costs are not:
Reinsurer pays the company a negotiated percentage of the ceded premium:
Ceding Commission
This is part of the “price” of reinsurance, and may not be equal to actual acquisition costs
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 6
Excess of loss
Retention of loss usually fixed dollar amount
“Layered” reinsurance coverage, i.e.:
– First: $100,000 in excess of $100,000
– Second: $300,000 in excess of $200,000
– Third: $500,000 in excess of $500,000
$100,000
$1M “Ground Up”
$100,000 xs
$100,000
$300,000 xs
$200,000
$500,000 xs
$500,000
Ceded premium rate based on:
– Historical losses
– Expected/Modeled losses
– Exposure
– Etc.
Allocated Loss Adjustment Expenses can be:
– Included as part of Loss
– Shared Pro-Rata as to share of loss
– Excluded
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 7
Agenda
Reinsurance basics
What is Leakage?
Insurance & assumed reinsurance (inwards business)
– Examples
– Remediation
Ceded reinsurance leakage (outwards business)
– Examples (case study)
– Causes & remediation
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 8
What is “leakage”?
General examples
Spoiled, expired or lost inventory
Stolen equipment
Business assets redirected to personal usage
Financial examples Overpayment / duplicate
payment of liabilities Under / non-collection of
assets / receivables Related loss of
investment income
Insurance industry examples Under / non-collection of
premiums due Overpayment of direct /
assumed claim liabilities Under / non-collection of ceded
loss recoverables
Broad definition – leakage is the loss of assets through failures or gaps of processes and controls $
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 9
Insurance transaction chain (simplified)
Underwriting
Premium Payment
Claim Payment
Claim Adjusting
Each transactional stage involves – Exchanges of information –
internal and external – Various electronic and/or manual
systems There are many sub-processes
within the insurers operations – Underwriting – Accounting – Claims – Investments – Reinsurance – etc.
Each insurer will have different approaches and constraints in these processes
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 10
Agenda
Reinsurance basics
What is Leakage?
Insurance & assumed reinsurance (inwards business)
– Examples
– Remediation
Ceded reinsurance leakage (outwards business)
– Examples (case study)
– Causes & remediation
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 11
Reinsurance relationships can be complex – both internal and external
Reinsurance Department
Brokers
Claims NAIC
Reinsurer(s)
Affiliates
Direct Reinsurers
Actuarial
Cedents
MGA(s)
$ Accounting
Underwriting
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 12
Direct insurance and assumed XoL reinsurance claims leakage
Inward claims for direct and assumed liabilities follow similar general framework for processing
– Specific procedural steps may vary based on type or source of claim
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Initial notice of loss
Coverage evaluation
Evaluation / investigation of
liability
Establish / reserve liabilities
for future payment
Payment of liability and reduction of
reserve
Recoveries from salvage or
subrogation (if any)
Areas of potential leakage follow similar framework between direct and assumed claims
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 13 13
Line of Business Claims Leakage Auto Physical 5-7%
Auto Liability 12-14%
Homeowners 8-10%
Commercial MP 14-16%
Workers Comp 10-12%
Claims leakage in the industry (% of paid loss and allocated LAE)
Example: leakage by claim phase
Investigation % of Leakage Investigation failed to adequately address the relevant issues of the claim (liability, cause & origin, product defect, etc.) 22%
Comparative or contributory fault not considered in the determination of liability 16%
Prior damage not identified or addressed 13%
Recorded statements not taken on insured, claimant or witness 10%
Evidence not obtained or stored safely to allow recovery to proceed 8%
Example: root causes
Direct claims leakage – overall example
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 14
Direct claims leakage – APD rental example
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Phase Leading Practice Root Causes of Leakage Leakage $M
% of Total Leakage
Frequency %
Rental
Authorize correct rental duration commensurate with repair / damages
Shop delays; shop should have been responsible for the additional rental cost
Rental incurred when the insured vehicle is drivable
XX XX XX
Effectively manage rental authorizations / loss of use
Rental extended beyond policy limit Unjustified delay in returning rental vehicle Delay in total loss settlement; rental days in
excess of standards in total loss settlement
XX XX XX
Authorize correct rental vehicle type
Authorized higher vehicle class than commensurate with insured vehicle
Paid higher rate than negotiated for vehicle class with preferred vendor
XX XX XX
Total XX XX XX
APD root causes of leakage
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 15
Assumed claims leakage – workers compensation
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Phase Leading Practice Root Causes of Leakage Leakage $M
% of Total Leakage
Frequency %
Initial Notice
Review contract language for claim reporting “sunset clause”
Complete contract language not available to – or not reviewed by – adjuster at receipt of first notice
Claim reported after close of sunset period should be denied
XX XX XX
Subs. Pmt.
Re-calculate pro-rata loss adjustment expense with each updated report from cedent
Systems or spreadsheets do not automatically calculate pro-rata LAE
Failure to limit LAE payment to assumed pro-rata share
XX XX XX
Re-calculate previously paid profit share after adverse development
Initial profit share due to cedent may be adjustable as claims develop over time
Failure to recoup previously paid amounts XX XX XX
Total XX XX XX
Assumed work comp reinsurance - root causes of leakage
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 16
Leakage – additional factors
Direct Claim Leakage Assumed Claim Leakage
Failure of investigation to adequately address the relevant issues of the claim
o Liability
o Cause and origin
o Product defect
Failure to consider comparative or contributory fault in determining liability
Prior damage not identified
Recorded statements not taken from insured, claimant or witness
Evidence not obtained or stored safely to allow recovery to proceed
Improper contract review
Failure to confirm claim attachment and exclusions to treaty
Failure to follow treaty expense wording:
- Pro rata vs. UNL
Failure to confirm ceding company is reporting appropriate inuring reinsurance
Ceding company not complying with agreed underwriting / claim handling policies
Inadequate auditing of bordereau – claims not subject to the treaty
Inaccurate accounting for annual aggregate deductible / stop loss / profit share
Missed reinstatement premium
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 17
Direct claims leakage - remediation
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Leading Practices
Handling Performance
Continuous Improvement
Root Causes
Improve performance through strategic and tactical execution of leading claims practices
Monitor and quantify claim handling performance
Identify, seize and prioritize opportunities to improve claim handling
Pinpoint root causes Target leading practices required to realize opportunity
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 18
Direct claims leakage - remediation
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• Clearly defined policies / procedures
• Business rules and authority levels required
• Access to detailed data, possibly to transaction level
Remediation framework
• Stratification and trending of claim payment patterns
• Selective investigation of outlying data points
• Continuous monitoring of results • Feedback to stakeholders
Remediation analysis
• Analysis tools for remediation • Statistical / actuarial tools • Audit / data mining / data analysis
tools • Claims monitoring tools
Remediation methodologies
• File audits • Data analysis • Assignment of specific resources • TPA reviews / audits
Continuous review of compliance
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 19
Assumed claims leakage - remediation
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• Off-site programs – to be performed routinely based on data requests • On-site programs – increased scope and detail, conducted at the site of the
ceding company for deeper analysis • Underwriting audits – to test for compliance with underwriting standards and
accuracy of premium recording and reporting • Claims audits – to review claims handling and reserving practices, verify
coverage and confirm compliance with reporting requirements • Accounting/Transactional audits – to verify contractual payments between
parties
Reinsurance audit program
• Establish relevant operations metrics • Train staff that understand underlying claims and contract terms to validate
coverage • Implement various sign-offs throughout the claims process
Establish claim guidelines
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 20
Special constraints on assumed claim remediation
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Data
Terms
Systems
Access to detailed / transactional data
Completeness / accuracy of supporting data
Contractual reporting requirements
Existence of “right of inspection” clauses
Most systems record transactional accounting only
Detailed / coverage level transactions not recorded
Little automation in calculation of amounts to be assumed
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 21
Agenda
Reinsurance basics
What is Leakage?
Insurance & assumed reinsurance (inwards business)
– Examples
– Remediation
Ceded reinsurance leakage (outwards business)
– Examples (case study)
– Causes & remediation
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 22
What is ceded reinsurance leakage?
Over-cession of premium Inuring facultative premium not deducted Return adjustment premium not billed / collected Incorrect reinstatement premium calculations
The amount of potential reinsurance recoveries not realized
Under-collecting ceded reinsurance claims Claims not detected Claims not reported / billed timely Collections
$
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 23
Our experience analyzing success of reinsurance processes
Companies are 98% or more effective in identifying reinsurance assets
Typical results yielding $3M to $9M for mid to large size companies
Over 28 projects completed to date, 10 example results below
Rank Company Size Total Amount Confirmed
# of Total Direct Claims
# of Validated Claims
1 Large US $20.4M 1,066,450 326 2 Large US $12.5M 4,288,163 203
3 Large US $6.8M 198,000 157
4 Large US $2.9M 2,068,244 54
5 Large US $2.6M 1,163,161 334
6 Mid-Size US $1.8M 1,038,051 56
7 Mid-Size Canadian $1.7M 222,591 43
8 Large US $1.5M 57,000 33
9 Large US $1.1M 2,522 9
10 Small Canadian $812k 77,131 55
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 24
Remediation of ceded reinsurance leakage – leakage diagnosis
Policy Information
Direct & Ceded Loss Data
Ceded Prem. Data
Treaty and Fac Info
Obtain data
Research & validate missed cessions
Identify potential missed cessions
Present for confirmation
Adjust systems to reflect ceded paid
and O/S loss
Bill and collect missed recoverables
Diagnose root cause(s)
Model Analyze Identify
Bill Collect
Diagnose
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 25
ReFinderSM confirms efficacy of process and recovers $20 million CASE STUDY
Background
A top five US P&C insurer, being aware of some uncorrected system and process gaps, wanted assurance that there were no missed or underceded reinsurance recoverables
Approach
Inpoint partnered with client IT to transfer the required data: direct and ceded premium, claim transactions and reinsurance contract terms
Using proprietary analytics technology, client data was tested and the model fine tuned as contract and program details were refined
Claims pinpointed by the modeling platform for further review were first tested for cession accuracy; Inpoint staff performed in-depth analysis
Value delivered
Confirmed that 99.97% of company cessions were accurate
The remaining percent of cessions, although very small, yielded $20.4 million in claims validated as missed or under ceded
Identified specific root causes of process failures
1,066,450 claims modeled
329,334 out of scope
Analytics generated 21,509 with potential
715,607 deemed properly ceded
Detailed claim analysis to rule out false positives
1,109 submitted to client for review
$20.4M
307 claims validated
Data M
odeling C
laim A
nalysis Verification
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 26
A framework for addressing root-causes of leakage
Processes People Technology
• Incomplete data • Inadequate systems /
infrastructure • Conversions /
upgrades • Data loss at system
interface(s)
• Manual / incomplete processes
• Complex reinsurance structures
• Operational challenges
• Process disconnects – primary to ceded
• Transaction volume
• Turnover • Mergers &
acquisitions • Lack of centralized
processes • Lack of dedicated
reinsurance department
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 27
Understanding the why
Manual calculations or partial reinsurance system technology Complex reinsurance structure Multiple claim, policy or reinsurance systems Decentralized reinsurance processes Reinsurance processes handled by non-specialized resources Business volume (claims, premiums etc.)
Human Error
Clash, CAT, Aggregate
System Comm. Gaps Human Comm.
Gaps
Actg, Admin, Claims
Ever Growing Claim Volume
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 28
Creating a culture of improvement requires an on-going commitment
Basic process of addressing root causes can be applied across departments, companies, etc.
Specifics may differ across companies – Size/complexity – Systems in place
Must balance implementation cost vs. business benefits
Situations change over time
Cost/benefit associated with a particular solution may change – Future business needs – Control requirements
Not a “once and done”
Identify Root Cause
Understand Impact
Prioritize Action
Design / Implement
Control
Monitor Results
Adjust
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 29
Agenda
What is Leakage?
Insurance & assumed reinsurance (inwards business)
– Examples
– Remediation
Ceded reinsurance leakage (outwards business)
– Examples (case study)
– Causes & remediation
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 30
Contacts
Jon Morris Aon Benfield Inpoint | Operations +1.952.886.8324 [email protected]
Bethany Taylor Aon Benfield Inpoint | Operations +1.214.989.2199 [email protected]
Aon Benfield | Inpoint | Operations Proprietary & Confidential | September 23, 2016 31
Legal Disclaimer
© Aon Benfield Inc. All rights reserved. This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. This analysis is based upon information from sources we consider to be reliable, however Aon Benfield does not warrant the accuracy of the data or calculations herein. The content of this document is made available on an “as is” basis, without warranty of any kind. Aon Benfield disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Members of the Aon Benfield Analytics will be pleased to consult on any specific situations and to provide further information regarding the matters discussed herein.