The Importance Of The Pre Bind Claims Review In The Reinsurance Context

By Marc Lanzkowsky – June 29, 2010

Don’t leave the gate open. Let a pre-bind claims review ensure you are secure in that new risk

I recently had a conversation with one of our Lanzko Associates, Nigel Shepherd, about the importance of conducting a pre-bind review in the reinsurance context. He was relaying a story from his past about how a POST bind review showed a significant exposures, which had not been reflected in the line of business profile contained in the client’s submission. This unknown exposure was largely responsible for that reinsurer going into run-off.  It was a preventable event had the review taken place prior to binding.

A lot can be uncovered when reviewing claims in advance of binding a new risk

Pre-bind reviews can greatly improve the information normally found on a submission. Claim numbers are just numbers when there is no context of information to understand the operation that supported them.

A good pre-bind review can help to:

• Uncover unknown issues about department staffing and operational deficiencies that could affect future reserves and loss payouts.
• Understand the reporting and reserve controls to see if there are impediments to setting appropriate reserves.
• Determine the nature of the reserve philosophy and how it is employed to learn if reserves reflected are likely to be increased or decreased significantly prior to payments.
• Ensure a claims system can handle reporting needs of the reinsurer as well to see if it is designed to improve efficiencies and help, not hinder, the managing of claims.
• Learn how effective cost cutting initiatives, such as anti-fraud programs, litigation management and subrogation, truly are.

Why take the risk?

I asked attorney, and fellow blogger, Phil Loree of the Reinsurance and Arbitration Law Forum, as to his views on pre-bind reviews and he said:

“A pre-binding audit is a dispute-prevention technique.  While reinsurers can in appropriate cases obtain rescission when a cedent fails to disclose facts material to the risk, why buy a costly lawsuit or arbitration proceeding that could have been avoided by a modest, upfront investment of time and money?”

So why do companies take the risk of not conducting pre-bind reviews? There are always a multitude of factors that can come into play and mostly center around cost. Reinsurance companies with no in-house claims departments sometimes don’t have the staff to handle these types of reviews. Even the ones that do are usually faced with departments with claims to manage, and accounts to audit, with pre-bind reviews running low on the priority list.

Regardless of the reason, the failing to conduct a pre-bind review can be a risky venture.

For a healthy dose of good business judgment, an ounce of prevention goes a long way.