Tackling a reinsurance treaty can be a comparable experience to tackling an obstacle course. You’re not sure when a surprise will pop up, there is little consistency between obstacle courses and it can be downright frustrating when you can’t find what you are looking for.
While they inflict similar feelings, the difference is that the frustrations you run into with a treaty can cause a serious financial impact on a company while a challenging obstacle course might just make you rethink taking one in the future.
So how do these errors happen in the first place? Below, I’m taking you to the frontlines of frustrating scenarios reinsurance professionals have likely run into with treaties and the consequences they impose.
1) Missing treaty documents/amendments
It can be a frustrating process when you are trying to validate information to resolve a treaty data problem, only to realize that you do not have the proper treaty documentation, accessibility, or version. These missing files turn what could have been a 30-minute task, into hours of investigation only to determine at the end that there is a missing amendment.
In addition to wasting a lot of time, this can also lead to inaccurate reinsurance processing. For example, if treaty amendments indicate changes in retention, rates, or share and you don’t have access to this information, you would be processing the wrong data without even knowing it. This can, of course, lead to financial repercussions if you are over or underpaying premiums as a result.
2) No treaty summary in place
Treaties can be difficult to work with if there is no treaty summary in place. Treaty summaries are extremely valuable for understanding the bigger picture of how a treaty is set up as they provide a full summarization of treaty terms.
Without one, it is hard for people administering the business (especially newcomers) to understand the product, specific treaty terms, and the block of the business overall. This is why treaty summaries are an essential component of our treaty review methodology. It involves a comprehensive summary per treaty and associated amendments. Examples of parameters captured includes; effective date, quota share, minimum cession, trivial amounts etc. We then use the treaty summary to conduct testing for the next phase of our review process.
3) Disconnect between treaties in reinsurance system and paper treaty agreement
Treaty labeling is done to clearly identify which treaty code in your reinsurance system (we use TAI), goes with which treaty. Unfortunately, mislabelling can occur which leads to a disconnect between the original documentation and what is being administered in TAI.
This can lead to several problematic scenarios. For example, if a treaty in TAI is mislabelled as a Universal Life plan when it is really supposed to be a Term plan, you are applying the wrong information to the business. Another example of mislabelling is with the effective date. If a treaty is labeled as ‘effective in 1992’ in TAI, but it turns out to be ‘effective in 1995’ on the paper documentation, the administrator will be using the wrong terms.
4) Ambiguous or missing treaty terms
The ambiguity of treaty language is a common problem in the reinsurance industry and can often lead to misinterpretation (which my colleague discussed here). In addition to being unclear of a treaty term’s meaning, you could also come across a treaty that simply does not spell out the full terms. This makes it very difficult to know what is and is not covered.
When it comes time to processing a claim, ambiguous or missing treaty terms can lead to a conflict of understanding. One side of the party could think the claims are netted and the other does not. This can lead to a drawn-out claims process and unfortunately, tension in relationships.
5) Incorrect setup of the treaty in reinsurance system
This issue often comes up when going through an audit. Auditors expect to see treaties being processed in your reinsurance system the same way they are outlined in treaty terms. However, if treaties aren’t set up correctly in the system, they might not line up.
Not only does this create a headache for auditors to reconcile, it could also mean that the reinsurance has been administered inaccurately. Therefore, more work will be required from your team to fix the setup, determine how long it has been happening for, and determine the historical financial impact.
How to reduce these frustrations?
A lot of treaty frustrations encountered by reinsurance professionals are due to incorrect setup, lack of treaty summary, missing documents, data errors or inconsistencies. They can be prevented if rigorous reviews are performed to thoroughly understand the terms of a treaty and proactively identify problems before they lead to financial repercussions. Not only will it save your team (and auditors) time in their day-to-day roles, it also ensures you are administering business correctly and not exposing yourself to serious financial risk.