Prep for the Exam: How to Prepare for an Audit

By Andrew Costa, Devonshire

Devonshire’s Garry Nelson moderated the first panel discussion of the day which explored how an insurance company should prepare for an audit by one of its reinsurers.

Mr. Nelson began the discussion by introducing each of the panelists. Ariane Entrikin is the Vice President, Controller at Devonshire. She was joined by Devonshire’s Mark Haapala, Assistant Vice President, Claims Manager. They spoke from the perspective of an audit firm representing a reinsurer. Garry Ibello, Assistant Vice President of Fireman’s Fund, addressed the group representing a ceding company facing an audit by its reinsurer. Finally, Frank DeMento of Crowell Moring LLP discussed various legal issues associated with the audit process.

Ms. Entrikin began the forum by discussing how the reinsurer/cedant relationship is often characterized as one of utmost good faith rather than a fiduciary relationship, given that the parties to reinsurance transactions have significant reinsurance expertise. Most reinsurance agreements contain an access to records clause which provides an express audit right.

Reasons a reinsurer may decide to initiate an audit include questions concerning billing/cession accuracy or reserving, disputes over the allocation of indemnity and expense payments or the interpretation of contract wording. Reinsurers might analyze remaining exposures if a commutation is being considered or may simply verify that inuring reinsurance has been properly applied.

Mr. Haapala detailed the types of materials an auditor might request in advance or at the review. This is largely dependent upon the nature of the audit; for example is it a premium or a claim audit; are cessions being questioned; or are underlying risks, systems and internal controls to be reviewed?

Materials typically requested in advance of an audit include copies of slips, wording and cover notes if the reinsurer’s records are incomplete. Placement/renewal details can reveal what the original intent was of the contracting parties. Claims manuals, organizational charts, and interviews with key personnel in advance of the on-site review can significantly improve productivity while on-site. Records typically provided on-site include claims files and accounting reports.

Mr. Ibello discussed the importance of confirming the details of the audit team members, the scope of their review and agreeing on which records would be provided and how (paper vs. electronic). Policies and procedures for the audit team to follow need to be considered as well. A confidentiality agreement is usually negotiated in advance of the review and a wrap up meeting discussing the auditor’s preliminary findings is often requested at the conclusion of the audit.

Lastly, Mr. DeMento discussed a number of legal issues related to access to records by a reinsurer, which are complicated by the potential of waiving the attorney/client privilege. Various court cases were detailed and the common interest doctrine was also brought up. Arguments as to whether the interests of insurers and reinsurers are always aligned were discussed. Court decisions on this issue can vary between jurisdictions. Lastly, legal concepts concerning self-evaluative or self-critical analysis privilege and trade secret protections were discussed and audience questions were entertained afterwards.