Reinsurance Audits: Strategies for Success

February 21, 2024

In the field of reinsurance, audits represent an important aspect of risk management. They are a valuable and in many cases, an essential tool in managing the progress and results of treaty and facultative reinsurance agreements. Audits ensure that reinsurance contracts are being administered properly, that claims are reported and settled according to agreed terms, and that the accounting follows regulatory and reinsurance contract requirements. When properly planned and executed, the reinsurance audit process can achieve positive goals—they can verify compliance and build trust in the business relationship between reinsurers, cedants, and brokers.

Within this article, we intend to highlight our customized approach to the mechanics of the reinsurance audit process and the benefits to our clients. We will outline the key elements of reinsurance auditing, whether the audit is focused on the underwriting, claims, accounting, or actuarial disciplines. These key elements are preparation, performance, and reporting.

Preparation:

This phase of an audit requires thorough reading and evaluation of the reinsurance contract or contracts between the reinsurer and the ceding company. It may also require a review of underwriting and pre-contract placement documents to understand why and how the contract was offered to and accepted by a reinsured.

While treaty and facultative reinsurance contracts may seem similar, nuances in terms require expertise for interpretation. Familiarity with reinsurance business and contract types is vital for effective analysis. Though reinsurance contracts have many common elements, property and casualty contracts differ significantly, with various subsets impacting premium accounting, loss cession, and contract organization. There can be significant differences in how contracts are terminated and run off within reinsurance. We at Alan Gray recognize and routinely address the complexity of reinsurance contracts.

Audit focus and client expectations are primary. Is the audit focus active and ongoing or prior underwriting periods? Is it on the quality and adequacy of claim handling? Is it adherence to and accuracy of accounting and actuarial processes? Whatever the goal, we realize the importance of thoroughly understanding the line or lines of business being audited. We familiarize ourselves with the terms and conditions of the contract(s) and, where possible, the pre-contract intent and expectations of our reinsurer clients.

We recognize the subtleties in contract interpretation among reinsurers, ceding companies, run-off entities, or regulatory bodies. Our approach ensures thorough preparation to address clients' unique concerns before the audit.

Performance:

After thorough preparation, we contact the party to be audited to ensure they understand the audit's timing, purpose, necessary records, and personnel availability. Clarity on the process duration and potential additional information is crucial for efficiency.

In active and ongoing relationships between the parties requesting an audit and the party being audited, timing and access details may be agreed upon, but the auditor must still possess the necessary knowledge for a comprehensive audit. The goal is customer satisfaction, and we work with our clients to understand how to achieve it.

There are also cases where the relationship between the parties is adverse. We at Alan Gray have proven ourselves capable of working with individuals and organizations to navigate the sometimes choppy waters of adversity. All of this must be handled with tact and respect.  During the audit, capturing and interpreting detailed data is essential. Our ability to gather, interpret, and present data ensures a comprehensive understanding and enables informed recommendations.

Lastly, completing an audit assignment in a time frame requested by a client is a key aspect of the performance phase. Once a deadline is set and agreed upon, consistently delivering on such promise is the hallmark of any top-quality auditing group.

By employing strategic planning, leveraging technology, and fostering a team of skilled professionals, we can effectively navigate the complexities of reinsurance audits.

Reporting:

Upon completion of an audit, the final and most critical phase of the process is the ability to clearly present, support, and assist in the interpretation of findings. This takes experience and a clear understanding of a client’s expectations as set forth at the outset of the process. Being able to provide a well-organized, detailed, and understandable narrative is important.

Strategies of a Successful Audit Service:

To recap, we at Alan Gray view the critical elements of the reinsurance audit process as follows:  

  1. Thorough Preparation: Begin with a comprehensive review of all contract terms and conditions.  
  2. Knowledge: Understanding the reinsurance business from the underwriting of contracts through the claims, accounting, and actuarial processes. An auditor must be able to interpret diverse, unique, and sometimes very technical reinsurance contract wordings.
  3. Experience: Auditors capable of performing multi-disciplined audits such as combined underwriting, claims, accounting, and actuarial performance are valuable.
  4. Awareness: Make no assumptions. Work with the client to thoroughly understand expectations and goals for the audit.
  5. Volume and Diversity of Data: Auditors must be capable of handling sometimes significant volumes of data, which can vary in format and detail.
  6. Technology: Auditors need to be familiar with and capable of using advanced software and other tools that will enhance their ability to gather and analyze data.
  7. Effective Communication: Address the client's expectations and focus the audit on the area or areas for which the client has concerns. Produce clear, detailed narrative reports supported by statistical exhibits and data explaining how the audit was conducted and the facts gathered.

Due to the nature of reinsurance, audits are integral to active and run-off reinsurer/ceding company arrangements. By employing strategic planning, leveraging technology, and fostering a team of skilled professionals, Alan Gray can effectively navigate the complexities of these audits. The goal is not just to comply with contractual and regulatory standards but to build a foundation of transparency and trust that benefits our clients.

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