Millions in unallocated premium sitting on re/insurers books.

Richard Emmett, Head of Insurance Services from global (re)insurance expert solutions provider Pro, looks at why large volumes of unallocated cash build up over time at an insurance business and what the risks are if they're left unaddressed

For too long, cash management has been seen as an unglamorous and non-urgent issue for an industry that benefits from strong cash flows due to its premium-driven nature.

 

However, a culture of inefficiency – and at worst complacency – has led to some re/insurers to stumble across significant volumes of unallocated cash on their books, some of which date back many years and over different classes.

The challenge is growing

  • Hundreds of millions of dollars in unallocated premium is sitting on insurers books right now
  • One medium-sized global insurance company engaged Pro experts to reconcile US$60 million unallocated premium
  • Another re/insurer we worked with to allocate over $80m of premium booked that had built up over time.

 

The implications that having such large volumes of cash received but unapplied on the books can easily snowball. And the effect can be compounded by the current ultra low interest rate environment dampening investment returns and exacerbated by the increasing claims payouts across all classes.

 

The reality is that having large unreconciled positions on the books can lead to auditing failures, damaging client relationships and, ultimately, the reputation of the business in question and potentially the industry as a whole. It’s far from an ideal scenario in an environment of higher regulatory and media scrutiny.

The solution

When looking into reasons behind unallocated cash issues, it is often the case that multiple causes are discovered. Some of these can be simple to identify, such as manual cash to ledger matching, incorrect technical processing, or tax refunds from underwriters.

Structural causes, however, can be more technically and procedurally complex to solve, but potentially have a far more wide-ranging impact on the overall liquidity position of a re/insurers business.

There is no ‘one size fits all’ solution to actually allocating the unmatched cash, but here are some tips:

 

  • Securing access to historic data and working with credit control, each individual instance can – with time and effort – be resolved
  • Prompt query resolution to unlock problems at the earliest opportunity
  • Development of the right tools and processes to standardise accounting and reporting submissions
  • Ensuring adequate resources are available within the day-to-day operational management teams will negate the need for more costly remediation projects in the future
  • Standardised market data and adoption of straight through processing tools will help re/insurers reduce their exposure to unallocated cash scenarios
  • Taking lessons learned forward, including implementing new procedures, reporting and continued, resilient monitoring

To solve this headache once and for all, a structured approach across an organisation that encompasses all parts of the business involved in cash inflows, outflows and reconciliation is vital. Not only will an ongoing proactive and focused approach to addressing the issue avoid the unallocated cash challenge from re-building in the future, but it will also keep the company finance director smiling as it will improve overall liquidity going forwards.

 

Further reading on unallocated cash:

 

Actuarial Post: Reinsurers put the spotlight on cash management in 2021

Insurance Day: Unallocated premium cash is a serious issue for insurers
Unallocated Cash Ebook