News
Give Diligence Its Due
29 May 2008
Aspirat Primo Fortuna Labori (Fortune Smiles Upon Our First Effort)
It is often said that insurance is a relationship business. Perhaps no other segment of the business illustrates this truism better than program business. There is a symbiotic relationship between insurance carrier and program administrator that makes each party dependent upon the other to achieve the mutually desired objectives of stability, profitability, and growth. While it is often emphasized that carriers in the program marketplace must exercise superior judgment in the selection of their business partners, it is equally important for program administrators to select carriers that best exemplify their view of the business partnership.
The increased sophistication of program management in the past ten years has challenged carriers to respond to program administrator expectations in ways more nuanced than the expected delivery of paper, product and platform. One area ripe for alternative thinking is the carrier’s approach to due diligence.
Due diligence is the first effort in establishing the operational relationship between carrier and program administrator. Traditionally, due diligence has been a static, compliance-oriented review of core company functions: underwriting, claims and finance. But as carriers have become increasingly sensitized to risk awareness, some of the constructs of their risk management processes have found application in the evaluation and management of their business partnerships. The carrier value proposition presupposed by the program model can be enhanced by a diligence process that goes beyond core competency compliance to incorporate the broad spectrum of issues associated with traditional and enterprise risk management. The shared understanding and transparency derived from a process that encompasses business practices, controls, culture, strategy and decision-making, creates a baseline for risk awareness from which operational benefits can emerge.
The “Enterprise” in Risk Assessment
Insurance carriers that operate an unbundled business model expand their agents’ responsibilities from a production orientation to full insurance company operations. It reasonably follows then, that Enterprise Risk Management, which has gained prominence as an organizational practice in the insurance industry, also has application in the evaluation and management of program administrators. While identifying, understanding, managing and measuring risk should come natural to people whose business it is to underwrite and assume risk, carriers can provide added value, and place diligence in a consultative realm, by employing a diligence framework informed by enterprise risk management practices.
The five key areas of enterprise risk indentified by A.M. Best: credit, market, underwriting, operational and strategic, can be assessed in the carrier-program administrator context by tailoring the diligence process to fit the unique risk characteristics of the program administrator within the intended scope of carrier-delegated duties. Program administrators often have robust traditional risk management practices, and can add, subtract or contextualize risks specific to their operation to create what ultimately becomes a portfolio of risk assessment. In this way, diligence becomes a dynamic process in which information and risk awareness can be used to improve the management of the business.
Due Diligence is a Process
Due diligence is properly viewed as a joint exercise in risk mitigation. It is worth the investment in money, time and effort and should provide a sense of security to carrier and program administrator alike. Though the burden of information production and cooperation falls upon the program administrator, it should take comfort in the fact that a carrier who commits considerable thought and capital to efforts at risk mitigation is a desirable partner, and one that will help create ongoing value for its customers’ business. Due diligence should not end at the carrier’s initial review, nor be confined to an annual pre-renewal ritual. It is better regarded as an evolutionary process as dynamic as the business environment in which it operates. Its initial groundwork lays the foundation for a host of ongoing customer oversight and servicing functions, from flow of premium to payment of claims. The payback is tangible in the form of common understanding, realistic expectations, synchronization of practices and process efficiencies, all of which ultimately impact productivity and the financial bottom line. Carrier operations units can develop metrics consistent with the developed portfolio of risk assessment that prove the value of the parties’ first efforts, and create the opportunity for fortune to smile upon the business partnership.
By Neil Putman, CPA, CPCU, AIAF, Senior Vice President, Customer Operations, SPARTA Insurance Company
