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3 Common Issues That Cause Premium-Related Treaty Errors

September 1, 2016 / Reinsurance

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Have you ever thought to yourself, “How did I possibly miss this?” You find yourself working on a process or project at work (or even in your personal life) for an extended period of time and realize one day that there is an error. An error that you’ve overlooked for months, maybe even years! Once the anomaly has been pointed out, it is impossible to forget. But the nagging question remains, “How could I miss that for so long?”.

The fact of the matter is, missing an error is something that has happened and does still happen during treaty set-up and administration of reinsurance business. Based on my experience performing reinsurance premium reviews, it is a surprisingly frequent occurrence that an error in treaty set-up has gone unnoticed for years.

So why does this happen? 

To understand how errors go undetected, we first need to understand how they occur in the first place.  In this blog, I will identify the issues that I have encountered most often and provide recommendations for identifying these errors.

It wasn’t that long ago that reinsurance administration was an entirely manual process. Over time, however like many other administrative functions, reinsurance admin has evolved to be a more automated process. With automation, accurate treaty set-up became crucial for success. Further, as the volume of reinsured policies increased, it became infeasible to review each policy individually and the analyst became more dependent on the automated results.

What contributes to treaty errors?

The following three issues contribute to the majority of the premium-related treaty set-up errors:

System Conversions or Migrations

Sometimes in reinsurance administration, there will be a need to build ‘work arounds’ or custom coding to input data into their reinsurance system. However, when systems introduce updated or new versions to create a better experience for their users, the work around may not be correctly translated in the new version. For example, TAI makes enhancements to their system on an annual basis that are often influenced by clients. So users need to be mindful of how their data will translate to the new versions.

PRO TIP: track any customized coding or work arounds that you implement in your system so that when it comes time to upgrading you can make sure they are accounted for. Remember to discuss all customization and work arounds with your TAI analyst at time of upgrade.

Similarly, if a reinsurance company is going through a system migration, the custom data coding used in one system may not be recognized in the system being migrated too.

Acquisition of Blocks of Business

Treaty set-up errors are often found when a block of business is purchased and a new company is handling the administration.  Often, set-up errors are caught if the administration is migrated from one system to the other.  In some cases, however, the set-up error is carried over to the new administrator and without treaty level testing, errors may not be apparent for an extended time.  

Knowledge of Personnel

Knowledge sharing and employee retention also play a role in identifying treaty set-up errors. There are many instances when the person who handled the initial set-up of the treaty in the administration system is not the current person responsible for the block of business. Understanding the complete administration process and training play a crucial role in error prevention. Unfortunately, set-up errors occur simply because the analyst does not possess a complete understanding of the administration process. This is one of the many reasons to invest in and build a solid training program for new reinsurance analysts. It will become even more critical in the next few years as the industry brings on a new generation of reinsurance professionals to accommodate for retiring employees.


You might also like: Training Guide for Reinsurance Managers.


So the question remains, “How did we miss this error?” 

Sometimes errors go undetected for years. I have personally seen cases in which errors existed for more than 15 years.  How can that be? Some of the most common reasons that errors go undetected include:

  • In early durations, erroneous premium calculations that are less than the minimum premium are not noticed. This usually pertains to Joint Frasierized policies.
  • Rate Tables which have been input manually and have keying errors for a particular age and duration.
  • Errors are small enough to not attract attention. An example is the difference between using a multiplier of .085 or 1/12 to calculate a monthly premium.  The variance between the results from the two calculations is very small.
  • Multiple errors exist which creates a situation where they offset each other so the aggregate impact appears minor.
  • As policies age, different treaty parameters are invoked. Testing of the set-up at inception won’t catch these errors if the testing plan does not include all scenarios through the life of the policy.

How can you prevent these errors from occurring?

Test, test and test again. Testing is an essential component of our Treaty, Data and Compliance services. During the Assess phase, we complete a number of tests to assist our clients in identifying potential issues that may require a fix (which we would execute in the Improve phase). At the time of treaty set-up, it is a time consuming and laborious process to test every possible scenario but it can save you from major financial impact in the long run. And remember, it doesn’t end once the treaty is set up.

PRO TIP: Not sure where to start with testing? We put together 8 key questions to test treaty compliance AND 8 scenarios to test for accurate premium calculation.

The key is to test and review your treaty set-up periodically. It is especially crucial during and after times of change whether it be the system, administrator, personnel or new block of business. Without periodic testing, errors are often only identified after the fact when a significant variation in premium is noticed.

What to do when an error is detected?

Of course your first instinct is, fix it. BUT it’s not as simple as it sounds. First you need to assess the impact which can take some time especially if an error has been occurring for an extended period of time. Other stakeholders who have been affected need to be informed (perhaps money is owed or needs to be refunded). You also need a plan in place to mend the error, again if it has gone undetected for a long period of time, fixing the problem can take time. Learn about the approach our experts take when it comes to assessing treaties for inconsistencies, improving accuracy and maintaining their future state.

At the end of the day treaty errors can result in significant financial impact on your reinsurance business. While testing, identifying and mending errors can be a very laborious, time consuming process - I can't emphasize enough it is something that has to be done!

If you don’t have the resources or processes in place to test treaty accuracy or you’ve identified errors but are not sure what the next steps to take are, get in touch to learn about our experience with comprehensive treaty reviews to ensure compliance and accurate data. 

Download 16 Pro Tips for testing treaty compliance and accurate premium calculations here:

 

 Image Source: homedec.biz

Written by
Mindy Epstein