Fix Your Reinsurance Leak
Reinsurance claims leakage can be a significant source of revenue loss in an insurance organization. Since “loss” is a dirty word to any organization it is critical to understand how and why claims leakage can occur. The major causes are manual processing and lack of proper controls.
Just how bad can it be? We’re talking millions or multi-millions of dollars. We know of a company that missed $3.1M due to improper calculations of facultative contracts and another company who lost $8.2M due to lack of aggregation of small claims. Ouch!
What are some of the reasons for these missteps?
- Claims not allocated to the correct reinsurance contract, therefore not recovered
- Claim recovery calculated incorrectly
- Claim billing – improper handling of counterparties accounts
Something that lends itself to human error is managing reinsurance activity via manual calculations (spreadsheets). Additionally, carriers can’t fully rely on the calculation of claims provided by its reinsurance department if the process lacks an effective control mechanism. Implementing reinsurance management technology is a significant improvement. However, many reinsurance management systems provide only a partial business solution, and significant functionality is still being handled manually. So even though a carrier may have some automated processes, the lack of proper control can still result in claims leakage.
How can you prevent these problems from occurring? A comprehensive reinsurance management technology platform is the first step and must enable overall management of the reinsurance program. It should include:
- Comprehensive management of all contracts, including terms and conditions
- Maintenance of data and business rules required for claims transaction allocation
- Management and processing of policy and claims transactions, performing automated allocation to reinsurance contracts, including all required calculations
- Flexibility to enable business users to quickly respond to changes and ongoing program adjustments
Maintaining a fully automated system must be matched with ensuring suitable controls. Basic accounting “inventory” controls are naturally required for ensuring completeness of transactions but there also must be a birds-eye “sanity” view of reinsurance results accuracy; this can be achieved by utilizing management information reporting and business intelligence technology, based on the underlying reinsurance software information repository. Managers should receive up-to-date, relevant and concise business information to notice business inconsistencies and irregularities.
Perhaps it’s time to see how your reinsurance administration stacks up. Is there any room for improvement?