Reinsurance Leakage – Identification & Prevention · · 2017-03-01Prepared by Aon Benfield Inpoint | Operations 2016 Educational Webinar Series Reinsurance Leakage – Identification

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


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


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”


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


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


Agenda

Reinsurance basics

What is Leakage?


– Examples

– Remediation





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 $


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


Agenda

Reinsurance basics

What is Leakage?


– Examples

– Remediation





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


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

12

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


Direct claims leakage – APD rental example

14

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


Assumed claims leakage – workers compensation

15

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


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


Direct claims leakage - remediation

17

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


Direct claims leakage - remediation

18

• 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


Assumed claims leakage - remediation

19

• 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


Special constraints on assumed claim remediation

20

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


Agenda

Reinsurance basics

What is Leakage?


– Examples

– Remediation





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

$


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


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


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


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


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


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


Agenda

What is Leakage?


– Examples

– Remediation





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]


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.

Documents

Reinsurance Leakage – Identification & Prevention · · 2017-03-01Prepared by Aon Benfield Inpoint | Operations 2016 Educational Webinar Series Reinsurance Leakage – Identification