Assignment 10: Risk Control and Premium Auditing Flashcards
Reasons to Conduct Risk Control Activities
- Earn a profit
- Meet customer needs
- Comply with legal requirements
- Fulfill duty to society
Benefits of Providing Risk Control Services
An insurer benefits from providing risk control services because it can:
- Enhance its relationship with the producers, staff, and customers of the independent agency
- Increase its own market share as well as that of the agency
- Attract and retain higher-quality accounts
- Help the agency and its customers accomplish their goals
Level of Risk Control Service
Some states require insurers to provide a minimum level of risk control service to commercial insureds (most often to WC, but may also exist for other lines of coverage)
Types of Risk Control Services
- Conducting Physical Surveys
- Performing Risk Analysis and Improvement
- Developing Safety Management Programs
Conducting Physical Surveys
This consists mainly of collecting underwriting information on a customer’s loss exposures by looking at things like building construction type(s), worker occupations, site diagrams, and fire protection systems
When conducting a physical survey, a risk control representative is likely to personally evaluate:
- Loss exposures and associated hazards
- Potential for and extent of moral hazards
- Ways to best control hazards
(NOT insured property values)
Evaluates loss exposures and associated hazards relating to causes of property loss, legal liability, and employee injuries relative to working conditions; there is a growing influence of technology in the risk control survey process (drones)
Benefits of Physical Surveys
- Helps underwriter gain a better understanding of the loss exposures being insured
- Insured can gain a better understanding of its loss exposures and the steps that could be taken to achieve its goals
- If property valuation is part of the survey, the insured can be more confident of an adequate recovery in the event of a total loss (and less likely to incur a coinsurance penalty)
Performing Risk Analysis and Improvement
Training, information, or counseling services include:
- Coordinated safety programs
- Technical risk-control information resources
- Workers compensation risk management strategies
- Fire protection systems testing and evaluation
- Preconstruction counseling
Written Safety Program
A collection of policies and procedures the insured uses in its operations to facilitate risk control
Developing Safety Management Programs
Begins with a complete evaluation of the insured’s operations; then a more experienced risk control representative assists in establishing risk control goals, selecting appropriate risk control measures, organizing the resources necessary to implement the chosen risk control measures, and establishing procedure to monitor the program
Factors Affecting Service Levels
- Line of Insurance
- Commercial Insured Size
- Types of Loss Exposures Insured
- Potential Legal Liability
Principal Opportunities for Risk Control Cooperation
- Underwriting
- Marketing and Sales
- Premium Auditing
- Claims
- Producers
Marketing and Sales w/ Risk Control
Risk control can assist marketing by providing advice on improving safety
Premium Auditing w/ Risk Control
Risk control can assist premium auditing by reporting the existence of new operations
Claims w/ Risk Control
Risk control staff can use claims information to:
- Identify areas for research
- Target loss exposures for additional attention
- Identify characteristics associated with particular types of losses
- Develop alternatives to control losses
Producers w/ Risk Control
Both insurers and insureds can benefit from risk control cooperation with producers through coordination of their efforts
Premium Audit
Methodical examination of a policyholder’s operations, records, and books of account to determine the actual exposure units and premium for insurance coverages already provided
Most often involves liability insurance (also some property insurance policies)
Reasons to Conduct Premium Audits
- Determine Correct Premiums (primary reason)
- Collect Ratemaking Data
- Meet Regulatory Requirements
- Deter and Detect Fraud
- Reinforce Insured’s Confidence
- Obtain Additional Information
Adjustable Premium Contract
Insured pays standard premium in year 1, which is adjusted the following year based on actual loss exposure
Exposure Unit
A fundamental measure of the loss exposure assumed by an insurer
Experience Modification
A rate multiplier derived from the experience rating computation
Importance of Premium Auditing for the Insurer
A prompt and accurate premium audit can benefit the insurer’s financial position because:
- Accurate classification of loss exposures helps ensure equitable and accurate insurance rates
- Delay in audits and the resulting billing delay can hurt the insurer’s cash flow
- Premium that has been developed by audit is fully earned and, consequently, has an immediate effect on profit and policyholders’ surplus
Premium Audits – Equity and Accuracy of Rates
Premium audits affect the equity and accuracy of rates in two ways:
- Classification determinations
- Measurement of the exposure unit base (under-reporting or over-reporting the exposure units affects the rate for that class)
Undetected Audit Errors
These can lead to improper experience modifications → Incorrect and inequitable premiums; this can affect future rates as well as current ones
Stages of the Premium Auditing Process
- Planning
- Reviewing Operations
- Determining Employment Relationships
- Finding and Evaluating Books and Records
- Auditing the Books or Records
- Analyzing and Verifying Premium-Related Data
- Reporting the Findings
Premium Auditing Process: Planning
This greatly improves a premium audit’s efficiency and quality and helps decide between accepting a voluntary report or conducting a field audit
Predictive modeling can be useful when planning both mandatory and discretionary audits
Voluntary Report
Also called a policyholder’s report, this is a form the insured completes and returns to the insurer which provides the insurer with information required to adjust the premium for the expired policy period
Field Audit
The decision of whether to conduct a field audit, also called a physical audit, is based on legal requirements, premium size, the insured’s operations, prior audit experience, the nature of the policy, the cost of auditing, geographical factors, and staffing requirements
Premium Auditing Process: Reviewing Operations
Premium auditor uses a process called auditing the risk rather than auditing the policy
ISO Premium Audit Advisory Service (PAAS) offers numerous guides and publications to assist premium auditors as they review insureds’ operations
Test Audit
Low-Quality Accounting Records
Premium Pay
Payroll records should identify the overtime premium pay (shift differential)
Deposit Premium
Premium Auditing Process: Analyzing and Verifying Premium-Related Data
The NCCI Basic Manual requires insurers to add or change a classification during either the audit or the policy period if the addition or change results in a premium decrease; however, if the appropriate class is rated higher, the correction may not be applied until the next renewal
Premium Auditing Contribution to Other Functions
- Underwriting (contributes most here)
- Marketing and Sales
- Claims
- Risk Control
Premium Auditing w/ Underwriting
The premium audit can reveal any classification changes necessary to update the policy; they can provide underwriters with information on the desirability of an account
Premium Auditing w/ Claims
Premium auditors help verify or correct the classification codes assigned to an insured’s claims
