Reinsurance Commutation

A Case Study

A Case Where Accuracy Leads to an Equitable Agreement Resolution

Case Background

The engagement involved a dispute between a ced-ing company and a reinsurer over final balances due between them in an effort to commute a book of business. We were engaged by a large international reinsurance company, to:

1. Review the prior billings received from the ceding company and ensure the accuracy of the calculations and reliability of the supporting data;

2. Ensure treaty terms were followed in calculating the bills; and

3. Calculate a counter offer based on the findings.

Procedures Performed

The first step in the process was to meet with the Third Party Administrator (“TPA”) who administered the treaty for the ceding company. Throughout the process emphasis was placed on our goal, which was to gather information to ensure the accuracy of the billing and arrive at a fair commutation value for the book of business.

Our plan was to gather as much background infor-mation as possible from the TPA about the setup and administration of the treaty. Then, we collected the necessary data to reconstruct an inception-to-date bill based on our understanding of the treaty. Through discussions with the TPA, we were able to confirm

our interpretation of the treaty as well as determine that the TPA did not store the information in the level of detail needed to complete our analysis.

The next step was an on-site visit to the ceding company. We again opened with general questions to confirm our understanding of how the treaty was intended to operate. After background discussions with the Vice President and Treasurer and other individuals who were familiar with the program, we got into the details.

Numerous questions arose throughout our initial interview, which were then taken directly to the appropriate party for discussion. Some of the key issues that arose were:

• Claims were being billed to the reinsurer which should have been excluded based on treaty language;

• Salvage and subrogation recoveries were not being credited to the reinsurer;

• Claims were being billed that did not have policy numbers or included incorrect policy numbers; and

• Other terms of treaty were not met.

Each of the issues was discussed at length with the ceding company representatives. Since the interpre-tation of the treaty was reviewed and agreed to in our initial discussions, these issues were easily resolved in a non-confrontational manner as they arose. In some instances, the ceding company simply needed

© 2015 Smart, Devine & Company, LLC. All rights reserved.

Every dollar counts

“Without the professional,

open and positive manner in

which discussions were handled

with all parties, this quick and

successful resolution could not

have been possible.”

© 2015 Smart, Devine & Company, LLC. All rights reserved.

to provide additional documentation to support their position, and in other instances they agreed that it had been mishandled and changes were made to their records.

For example, claims that should not have been billed to reinsurers due to treaty exclusions were not being identified properly in the ceding company’s systems, and therefore were being billed to the reinsurer. Af-ter review, the ceding company agreed the claims should have been excluded. Claims with missing or incorrect policy numbers were also identified and corrected which led them to be considered valid claims after the changes were made.

Although many of these changes lowered the ex-pected recoverable that the ceding company had originally billed, the open conversations lead to a quick resolution and agreement on each of the is-sues. Others changes increased the balance our cli-ents owed, but it was the give and take that lead to the outcome that both parties hoped for, which was reaching a fair commutation value.

Resolution

Because of the honest and professional manner in which discussions were held, an agreement was reached on a majority of the issues before we be-gan calculating the commutation values and writing the report. In total, the original billing to our client was $130,000 due the ceding company. The re-vised amounted calculated after the investigation was a balance due to our client of $220,000 (due to a previous overpayment) - a benefit to our client of $350,000. Of that amount, all but $30,000 was agreed upon by the ceding company before we left their offices.

Without the professional, open and positive manner in which discussions were handled with all parties, this quick and successful resolution could not have been possible. All parties walked away feeling as though an equitable agreement had been reached and planned to do business again in the future.

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A c c o u n t i n g T a x A d v i s o r y

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