What do Sherlock Holmes and Reinsurance reviews have in common? At first blush this may seem like an odd comparison. Sherlock Holmes, is a fictional character famous for his “consulting” detective ways. Reinsurance reviews or audits involve some form of analysis on reinsurance business. This could include analyzing overall business performance, conducting due diligence on a new client or deal validation. So how do these two worlds collide? Well, Sherlock Holmes is known for his powers of observation and deductive reasoning which are the same traits required by those of us who perform reinsurance reviews.
Since reinsurance reviews can cover a wide range of topics depending on the scope of the review, they require different reference sections from the paper treaty. A thorough investigation, like Sherlock Holmes, involves a combination of detailed observation and detective skills to identify and find the sections needed for the type of review at hand.
In this post, I’m bringing out my inner Sherlock Holmes to walk you through three types of reviews and the sections required for a successful investigation.
Premium reviews can be performed from both the ceded and assumed perspective. Validating the amount of premium which is being sent to the reinsurers, ensures that the business is being administered properly and that the financials are accurate. It is equally important for the reinsurer to independently validate that the premium being received is accurate and conforms to the treaty parameters. Although this type of review is narrow in scope it has the potential to have a significant impact on a company’s financial results.
Sections of the treaty needed for Premium Reviews:
Premium Rate Factors (if applicable)
Allowance Factors (if applicable)
It can be surprisingly easy to miss important details when performing a premium review. For a policy in an early duration with relatively young insureds, errors in premium can be so small they might be mistaken for rounding errors. This is especially true when validating joint polices using the Frasier method. The treatment of first year premium (Zero premium vs allowance of 100%) will affect the premium rates for all policy durations. A seemingly small error in early durations will compound over time and create greater differences in later durations. Thus, “Holmes style” attention to detail is so important.
Retention Reviews ensure that the proper amount of risk is both retained and ceded per the treaty parameters. Under retaining could cause a company to pay out more premium than is necessary to a reinsurer on a particular risk. Conversely, over retaining on a risk would increase a company’s exposure on a particular life. This type of review not only confirms that the proper amount is being ceded but that all business that should be ceded is included.
Sections of the treaty needed for Retention Review:
Quota Share/Pool Percentage
A primary difficulty with retention reviews is that one rarely has full access to all of the policy information for an insured. Not having a complete list of all policies presents some challenges. By necessity the reviewer must make some assumptions and draw conclusions from the data that is available. If it were Sherlock Holmes, he would consider many possibilities and determine which ones are impossible until the only remaining scenario (even if improbable) had to be the truth. We apply a similar method to determine that the correct amount of business has been retained and ceded for a particular insured. In addition, we would ask for supplementary information if the conclusions seem unusual or improbable.
Claims reviews from a reinsurance perspective validate the amount of the claim request as well as supporting documentation. The review ensures that proper documentation supporting the death claim was received by the direct company. In addition, proof that payment was made to the beneficiary is also requested. Subsequent to authenticating the claim, it is then reviewed to determine if the retention and calculation of the risk amount is correct. In some cases, the premium is validated to ensure proper payment for the risk has been made. Claims reviews provide an opportunity to certify that reimbursement is being sought on valid claims and that the amount being requested is consistent with the treaty.
Sections of the treaty and other supporting documents needed for Claims Review:
Quota Share/Pool Percentage
Proof of Payment
Keen observation skills, knowledge of reinsurance administration and the ability to think logically are all key components of being successful in performing reinsurance reviews. Which are all evident throughout our approach to reviews and audits.
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Now that you know the key components of reinsurance reviews, its time to discover common issues that cause errors in treaties:
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