Magazine article Risk Management

THE Information

Magazine article Risk Management

THE Information

Article excerpt

Why are so many investments in information technology disappointing? For the simple reason that the buying decisions violate truth: We buy technology for the features instead of to enhance underlying business processes. To leave process out of the picture is as fundamental a mistake as buying electrical appliances for a house with no electricity. You can employ high-speed communications, sophisticated Internet search engines and advanced software, and still not impact the real process. When considering your captive's information requirements, it pays to define key processes; based on those definitions, you can identify how technology can make a positive impact.

Decide, Then Automate

The bells and whistles of new information technology are irrelevant until they synchronize with the real-world processes of captive insurer management, Far too many technological projects end up with a new engine in an old box. To paraphrase a wise observation, efficiency and a poorly engineered process are very dangerous--you end up in the wrong place, only faster. To help guide you to a better use of information technology, here are some captive processes that deserve careful review:

Accounting--Most risk management departments do not do accounting. Instead, they provide various inputs to accounting. Production of financial statements is a somewhat mysterious process, In contrast, captives and accounting are critically linked. This means, for example, that unearned premiums, reinsurance recoveries due and IBNR reserves must be coordinated with more familiar claim and policy information. Be certain that you have carefully considered the ties between your RMIS and your accounting system. Audit to ensure that your accounting functions correspond to standard insurance company practice. Not doing so can lead to serious trouble. How? Consider a captive that paid valid expenses on claims that had been previously closed. Because the claims involved were not reopened in the computer database, the captive had no mechanism to be reimbursed from its excess carriers, Be sure you are auditing the process so that all disbursements are evaluated against possible recoveries or reimbursements.

Claims administration/litigation management--Data maintenance in many RMIS is a veritable Tower of Babel. RMIS vendors have data interface programs for hundreds of TPAs and insurers. However, be very careful to distinguish between loading data and creating a useful integrated database. Each input source uses distinct loss cause codes; sometimes even the corporate organization structure is not consistent. It is essential to provide a maintenance tool to standardize these codes and other conventions. Ideally, there should be industry standards. Realistically, the do-it-yourself approach is still the best practice. The ability to impose uniform codes and descriptions into the data records puts you in charge and forces a useful investment in the quality of data. There is much lip service paid to integrating data via an RMIS. However, a well-run captive program demands that you walk the talk.

Cost allocation--Organizations routinely accept higher overall loss retentions than are appropriate or feasible for their units or divisions. A captive insurer can write coverage for these customized, lower limits and then reinsure itself at the higher levels. The administration of these plans requires that each loss be logically assigned to the correct retention. Retentions are defined through coverage, date of loss, organization unit and additional considerations. …

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