Practical Guide to Reinsurance Audits
An overview of factors to consider when embarking on a Reinsurance Audit or Inspection
First Things First
Before embarking on a reinsurance inspection or audit, first establish the
motivation for the exercise, location of the records and scope of the Establish the parameters of the inspection at an early stage, i.e. what
review. The approach, composition of the audit team and cost will vary documents you expect to see and the availability of staff to answer
Ask about taking photocopies. Some entities will allow you unrestricted
Top 5 Reasons to access to their photocopier; others will require you to flag documents
Inspect so that they can monitor what you wish to copy.
Take the opportunity during the on-site visit to conduct a detailed
1. Establish appropriate premium & claim cessions inspection of the operations, policies, procedures, literature and
2. Help resolve a contractual dispute systems of the audit target.
3. Establish commutation position
4. MGU / TPA Compliance 1. A tour of the office can tell you how well the operation is
5. Due diligence organized.
2. Interview key staff to assess their capabilities and
You should be in a better position afterward in terms of quantifying issues professionalism, including functional responsibilities, span of
and having an improved understanding of the entity’s operation. control and reporting relationships.
3. Review technical premium and claims handling, including claims
adjusting guidelines, technical support, training, internal
auditing, customer service and productivity standards.
4. Assess their computer systems for the extent of automation,
• Minimize your time on-site by extracting as much data software support, diary usage and report generation.
beforehand from your own records, from the broker or 5. Examine financial issues, such as fund accounting, check
from the cedant, MGU or TPA. handling and fee billing.
• Ask for risk and loss runs in Excel format so that the
data can more easily be analyzed and evaluated. 6. Analyze forms, letters, claim documentation, marketing
• Set up a pro-forma or spreadsheet so that the audit material and consultants used.
team captures information in a consistent manner. 7. Find out if there are any lawsuits filed or complaints made
• Split tasks among the audit team so that all aspects of against them.
the inspection process are covered. 8. Identify areas where improvements or revisions might be
beneficial to all concerned.
Most contracts have an Access to Records or Inspection of Records Clause
that provides you with a legal right to inspect. If you are required to sign If you intend to outsource an inspection to a third party service
a confidentiality agreement, it may be prudent to have it reviewed by a provider, you may wish to ask for:
lawyer. They will ensure that there are no onerous terms. If there is a
concern over potential non-disclosure or misrepresentation, issue a • Qualifications and experience pertaining to the specific class of
general reservation of rights and take legal advice so that the inspection business to be reviewed.
does not waive any of your rights.
• Sample inspection reports.
Gather as much of the following information in advance of the on-site
• Hourly rates – do they vary by level of experience?
• Travel and expense policy – do they charge travel time?
1. Copy contracts, wordings and management agreements.
2. Copy procedure manuals, underwriting and/or claims handling
• A proposal outlining their understanding of the scope of the audit;
estimated time on-site; resources they intend to use; timeframe
for completion of the assignment and a budget.
3. A listing of all risks ceded under the pertinent contracts.
4. An updated loss run with paid to date and reserve figures. • An executive summary of their findings within 14 days of
5. An organization chart of the entity to be reviewed. completing the on-site inspection.
From the above data, you can select the records you wish to review. File
selection will depend on the objectives of the audit, but could include:
• All risks and claims affecting the contract above a certain • Identify a contact person responsible for the flow of
threshold or within a specified period. information between the audit team and target.
• Risks and claims with the highest exposures or loss experience • Unless there is suspicion of fraudulent activity, give
across multiple years and/or classes of business. the target and the broker ample advance notice to
• Known complex and/or controversial risks and claims. gather the records as some may be in storage.
• Random selection.
• A combination of the above.
– Continued overleaf –
Post-site Analysis & Reporting
If the inspection is likely to form part of an arbitration or legal
A full inspection would entail a review of the following operational areas proceeding, it may be appropriate to address the report to your lawyer
and some or all of the following subjects: to protect privilege.
General In analyzing the audit teams’ findings and constructing the report, it is
• Recent changes in key personnel, structure or ownership. important to clearly distinguish between fact and opinion. Any identified
• Financial stability of the entity. issues or problems should be supported by examples or copy
• Regulatory compliance. documentation.
Underwriting Notes taken during the course of any meetings or discussions will
• A review of placing material and selected risk files to ensure probably form the backbone of the narrative report.
compliance with representations made.
• An assessment of the underwriting philosophy and quality of Every inspection is unique, but typically, an audit report will consist of:
• Compliance with warranties. • Executive Summary – one page that encapsulates the major
• Compliance with limit structures and premium income estimates findings.
• Premium review to ensure correct application of brokerage,
commissions, deductions and reinstatements. • Scope of the Audit – provides an opportunity to document the
• Dependence of the target on reinsurance by a review of the objectives and extent of the audit targets’ cooperation.
program structure. • Coverage Information – if the report is likely to be circulated to
• Quotation, firm order, survey and cancellation procedures. those unfamiliar with the account, a brief summary is helpful.
• Competitive environment and underwriting trends. • Underwriting
Claims • Claims These sections will assess the underlying
• Timeliness and adequacy or redundancy of reserves. • Accounting business written, technical capabilities of
• Pursuit of coverage issues and recoveries. • Systems the entity and your detailed findings.
• Timely and appropriate case settlement or resolution.
• Allocation across multiple years or policies.
• Timeliness of reporting. • Conclusion – summarizes the inspection and next steps.
• File maintenance and litigation supervision. • Exhibits – documents used to support your findings.
• Internal controls and authority levels.
• Adequate business mitigation techniques, e.g. commutations. Recommendations for future action should be clearly highlighted within
the general narrative or itemized under Conclusions.
• Accuracy of billing statements and cessions.
• Application of inuring reinsurance.
• Internal procedures for handling premium, claims and bad debt. Tips
• Segregation of bank accounts (where applicable) and an
adequate audit trail. • Unless the inspection is part of a dispute or
arbitration, use a wrap-up session to outline any
Systems problems or missing information. This gives the
• Capture of pertinent information and report generation. entity an opportunity to correct any
• Links between underwriting and claim systems. misunderstandings and to clarify what is needed
• Conversion issues from older systems. to complete the inspection process.
• Software support.
• Backup and security measures.
• Adequate management or supervision of the portfolio’s
Top 4 Pitfalls
• Availability of statistical information such as IBNR and/or
• Scope for further deterioration and/or ultimate exposure, where 1. Waiting too long before inspecting an operation or contract.
possible. 2. Under-estimating the time and resources necessary to complete
3. Not following up on the recommendations or findings in the
Final Thoughts 4. Audit abuse. Using an inspection as a fishing expedition.
The inspection process allows a reinsurer to make sure that the
cedant, MGU or TPA is fulfilling their contractual obligations and should
therefore be seen as routine. To learn more about audits and inspections or our services contact:
There are no industry-accepted practices and procedures for
Nigel Curtis: (215) 343 8429
conducting inspections or audits. These checklists are not exhaustive Art Coleman: (203) 595 9650
and are meant to provide guidance only.
Citadel Risk Management, Inc.
Insurance and Reinsurance Specialists
Connecticut London New Jersey Pennsylvania