PART 3 – Trust AND Verify
Managing programs through systematic audit including data analytics and human behavior to identify potential authority deviations.
The final topic of the Essential Components of Effective Program Management series addresses the function of the Audit process.
Prior to launch, significant due diligence is completed to ensure the program administrator had the appropriate skills and tools to meet the carrier’s requirements. Once the program is actively writing business, ongoing review is needed to ensure the program is running as expected. One form of review is performed through reporting outlined in Part 2 of this series. As noted in Part 2, exposure-based reporting is often challenging for carriers for a variety of reasons but largely driven by the complexity of the program, the line of business, catastrophe modeling, and regulatory reporting requirements.
Through the audit lens, an auditor will generally first look to the Underwriting Guidelines to define parameters for what is eligible, ineligible, and referral indications. Specific examples of these criteria might be:
Sample (fictional) Guideline:
Methods of Guideline Validation
Data
Many policy administration systems and underwriting platforms are able to produce reports which makes identification of outliers easy or block writing of otherwise prohibited business through automated underwriting rules.
If data/reporting requirements are properly structured, most of these criteria can be easily searched or flagged using filters or formulas with “greater than” ”less than” statements. Additionally, searching for specific items such as construction type (frame) or class code such as “class codes other than those for eligible contractors”. This method of review allows the carrier’s underwriting team to quickly identify questionable risks early rather than waiting until a full file audit is completed. The earlier an issue is spotted, the easier it is to mitigate the potential downfall, the largest of which might be a loss which cannot be ceded to the reinsurer or regulatory fine/penalty.
Manual/Human
Unfortunately, not all issues can be identified through data alone. Some of the criteria, such as “No more than 2 claims in last 3 policy years” is not likely to be submitted on a bordereau from the MGA, especially on a new program. Similarly, when the subjective understanding of whether a risk fits the assigned class code cannot be determined from bordereau data (unless more sophisticated third-party data sources are integrated), manual review may be needed. Both examples require an auditor to review the file documentation and determine compliance with the contracts governing the program
If a robust analytics/exception reporting program is in place, file audits could occur at a frequency reflected by the risk profile of the portfolio, all things being equal. Special attention to all other reporting metrics outlined in Part 2 of this series, otherwise indicating a healthy portfolio.
New programs (generally) do not have the benefit of mature reporting and monitoring practices; these are built over time. In these cases, conducting audits annually, at a minimum, provides the same opportunity to observe a trend ahead of its potential impact. Programs which are new to the carrier should be watched carefully within the first few months either through stricter referral requirements, a post launch audit within 6 months of the first policy being issued, or perhaps a combination thereof.
After the Audit
Audits tend to surface required actions ranging from administrative “clean-up” related recommendations to more serious infractions which could signal bumpy roads ahead. How each party approaches the findings and navigates their responses to recommendations can set the tone for the ongoing relationship. Having a transparent and objective process to deliver findings and resolve recommendations or other mitigatory actions that result from the audit can help keep both parties focused on their shared objective of writing a profitable book of business together.
The audit process can be disruptive to the business but an essential component of effective program management. It continues to be a common practice among program carriers to have its’ program manager responsible for coordinating and conducting the audit. While understanding why audits have and continue to be performed this way; bringing an unaffiliated third-party to perform the objective work of assessing all contracts against results delivers benefit to both stakeholders without jeopardizing the relationship between those parties.
In conclusion, MGAs and carriers must be aligned on their objectives, seeking profitable, targeted growth. Active program management bolstered by data, active monitoring, regular audit are the keys to identifying issues before they become trends, thus maintaining long-term profitability. Program business is special and while the inner workings of the carrier and the MGA may focus on different mechanical pieces of the programs’ operations, the execution of all those pieces are wholly dependent on getting the contracts aligned, the operational infrastructure correct, performance monitoring and reporting in place and audit cadence in motion.
Sproutr’s team of program professionals can advise and evaluate pre-deal arrangements as well as perform objective program health through a program quality review. The review includes six modules designed to provide a holistic understanding of the programs’ health.