In this article, we outline a suggested roadmap that insurers can use to identify fraudulent transactions and claims much earlier and achieve complete cash clarity.
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Common structural causes of unallocated cash in insurance:
The underlying structure of an insurance business can create an unallocated cash problem, through:
- System constraints that lead to a lot of manual cash allocation.
- Ineffective accounting auto match capabilities that cannot cater for small differences or mis-matches cash to the wrong technical entries.
- Legacy system migrations that have data fallout. It is often the case that a data system migration produces mismatches. This could be due to data being covered by operating procedures that worked in the legacy system, but are difficult to integrate with a new system.
- Systems and unallocated cash inherited or left through M&A. This could be a simple matter of an acquisition bringing legacy systems or a number of cases of unallocated cash.
Poorly managed business processes can also result in unallocated cash, via:
- An absence of controls and unallocated cash monitoring. Both these issues could be well-established as part of business processes, leading to legacy problems and an increase in unallocated cash.
- Incomplete auto match exceptions reporting and procedures, which can lead to compliance issues and increased exposure to unallocated cash in insurance businesses.
- Individual practices for individual account or different ways of working among account managers.
- Incorrect or incomplete technical processing.
- Ineffective internal broker procedures, which can create problems around compliance, as well as ‘missed’ unallocated cash.
- KPIs not being in place between business units (usually IBA and Technical Processing teams, but also often Finance, Claims and Underwriting).
3 steps to maintaining cash clarity
There are 3 clear steps that will help any insurance business gain control of unallocated cash, streamline operations and generate business growth.
The first step to gaining cash clarity is to resolve it. The backlog should be categorised and prioritised and unallocated cash accounted for, with ongoing monitoring and reporting to evaluate progress. Legacy issues that caused the unallocated cash should be identified as part of the ongoing monitoring.
It is often necessary to create a ‘mapping’ strategy that matches up all balances with their origins and reconciles them. Implementing a mapping strategy properly can allow even the largest backlogs of unallocated funds to be identified and resolved.
It is vital that an organisation has a systematic approach to cash management across all departments involved in cash inflows, outflows, and reconciliation.
This means remodelling BAU to include activities like:
- Designing and testing new processes and procedures to prevent future unallocated cash.
- Obtaining business unit agreement and ownership and implementing new practices.
This step involves implementing a resilient monitoring and reporting structure along with revised procedures to prevent future unallocated cash and to ensure ongoing control. In addition to preventing the unallocated cash challenge from reoccurring in the future, a proactive and systematic approach to resolving it will also improve overall liquidity.
Let’s look at each of these steps in more detail.
Clearing a backlog of unallocated cash in insurance is the biggest challenge – there is no “one size fits all” solution to actually allocating the cash. In most cases, cash has not been accounted for because of an undetected problem which cannot be identified without looking into each individual piece of cash.
To help identify the issue, the following themes can guide this process:
- Currency fluctuations where there are a high volume of small unallocated cash values, this may be due to FX fluctuations.
- Particular territories may have premium or surplus tax lines that have been incorrectly processed which prevents cash being allocated.
- System generated bordereaux where a particular coverholder has a high volume of unallocated cash, this could be due to system reconciliation issues.
- Unprocessed mid-term adjustments are another common cause for unallocated cash in insurance.
While all of these themes can be identified and “blocks” of cash cleared, very often there are individual reasons which can be simple to solve, such as cash being allocated to the wrong instalment, which prevents subsequent cash being allocated.
Causes, however, can also be technically complex to solve; for example, when net payments are made to clear multiple premium and claim transactions and there are incorrectly processed technical transactions, RoE differences and tax issues. Each piece of unallocated cash therefore has to be investigated individually to resolve it.
With unallocated cash now being resolved, new processes and procedures to prevent future unallocated cash should be devised. Business unit agreement and ownership should ideally be assigned and new practices implemented.
Investigating unallocated will identify some procedures that just need tweaking; however, there may be some deep-seated procedural gaps to address and system amendments may be required.
This will require strategic thinking, because even simple changes may need to be implemented across multiple business units. Focusing on the following areas would be a great place to start:
- Centralised inboxes – these enhance workflow management and prevent individual emails being missed.
- A centralised cash documents repository will ensure duplicated or inaccurate documentation is kept to the minimum.
- Broker and client communication – Broker/ client facing teams should agree to schedule monthly cash monitoring meetings to stop aged balances and unallocated cash from being overlooked.
- Central register cleansing can also help to reduce incorrect processing.
As part of procedural change, responsibility for unallocated cash monitoring and reporting should be clearly defined. Where lack of resource or inexperienced resource is identified as a cause of historic unallocated cash, additional resource or training should be considered to maintain BAU, whilst removing unallocated cash from the balance sheet.
Systems generated reports that can be used for unallocated cash monitoring should be identified. Where these are not available, IT support may be needed to produce this reporting.
Through regular review of these reports, insurance businesses can monitor their re-modelled processes and make any necessary adjustments to ensure operational resilience, as well as ensuring the ongoing effectiveness of the process.
Being proactive with unallocated cash in insurance helps boost cashflow and streamline operations going forward. Resilient monitoring and a reporting structure should be implemented, along with revised procedures to prevent future unallocated cash from occurring.
Following initial changes in processes, management and communication of new BAU procedures, the following outcomes should be in place:
- Structures that ensure the identification and prioritisation of unallocated cash, so it is resolved quickly.
- Procedures around unallocated cash that are documented and can be audited.
- Reports providing transparency on the unallocated insurance cash position with weekly/ monthly variances.
- A minimal and controlled unallocated cash position.
The above 3-step approach involves effective management of resources and a robust strategy. Having said that, once the plan is implemented, insurers can rest assured that the problem of unallocated cash is solved.
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