Insurance Update – Includes our Takeaways from the Annual SIFM Conference
- For probability of default, where the insurer has no history of having experienced defaults in its reinsurance arrangements, it may be necessary to use industry statistics;
- For amount of loss in the event of default, the required reserve may not be very sensitive to this estimate if the probability of loss is low.
- As brokers perform due diligence on acquisition opportunities, client agreements should be reviewed to ensure that these agreements allow for transfer of the contract to the acquiring company. Otherwise the acquiring company could experience more rapid client attrition than anticipated.
- With the reduction in tax rates, as companies model acquisition opportunities, companies should be sure to incorporate these lower rates in the net operating loss forward calculations
- Brokers need to thoroughly understand the terms of their Carriers’ Supplemental Compensation Agreements. A worthwhile exercise is to read each agreement and recompute the amount that should have been received for each of the last few prior payment periods. Then compare these calculations to the computations provided by the Carrier.
- Some companies are using expedient methodologies to allocate corporate overhead across business units or products – i.e., the allocation of overhead as a percent of revenue. In other cases, when business drivers are utilized to allocate these costs, expenditures needed to support the rapid future growth of one product are inappropriately distributed across all products. This occurs because current period business drivers are used to compute the current period cost allocations. As a result of these two allocation approaches, Product and Business Unit internal reports could be inaccurate.
- Business intelligence tools and complex spreadsheets are often used to provide additional analysis. Financial information on these additional profit segments is used to make key decisions for business in a particular geography, industry, sub-product, or marketing channel. Control and review processes must be established in order to prevent the same revenue from being counted twice or partial capturing of certain costs.