In an ideal world, the Insurance industry will strive to operate at zero unallocated-cash levels. However, this is far from true for several reasons including existence of multiple trading partners, inter and intra departments within the firms, as well as cases of incomplete/missing information. With ever-increasing focus on cash receipt and application of funds, there is need for robust procedures and processes to ensure incoming receipts are duly applied and open cash kept to a minimum.
Technology and Digital interventions continue to be the key levers in turning this to reality.
A report by Swiss Re estimates, globally USD 5 trillion in premiums were written in 2018 with about USD 260 billion in gross direct premiums (Read Here). Natural catastrophes and man-made disasters resulted in USD 144 billion in insured losses in 2017 (Read Here). In addition to the business size of course, what does this study infer? Could we safely assert that this is tantamount to an equivalent amount of cash flow across primary Insurers and Reinsurers, and in most cases via the brokers? The answer is - Yes.
Impact of unapplied receipts
Needless to say, unallocated/unapplied receipts have a far-reaching impact on the overall Insurance/Reinsurance cycle. No one wants outstanding receivables on their books, or worse still, cash received but unapplied. This impacts the organizations in the following ways:
- Unrealized Income: Until cash is applied to the relevant account, organizations are not able to realize income on the books. This impacts their Credit positions.
- Fulfilling contractual obligations: Non application of cash stands in way of fulfilling contractual obligations. In a broker world, as a regulatory requirement the client money cannot be held on to for long and must be forwarded to the intended recipient.
- True picture on the Books: Unreconciled cash receipt does not reflect the true and correct position of the books.
Here are some suggestions, acronymically called ‘The 3 C’s’, aimed at addressing the challenges to ably manage Unallocated Cash and maintaining it well within the tolerable limits.
a) Collaboration: Reconciliation is touted to be the primary cause for Unapplied cash. This is a pervasive challenge that requires imminent attention. With the digital future ahead of us, Brokers/Insurers and Reinsurers alike should align their departments in a way that:
There is seamless flow of information (An E2E system covering Client Onboarding to F&A).
- A robust Workflow or a QMS (Query Management System), at the very least, that ensures queries within departments are structured for efficiency and tracked to bring them to a positive closure.
- Enabling a robust query management system to individualize, structure and streamline the process of raising query/questions, logging/tracking and escalation of queries to ensure the right audience works towards resolution. AI based predictive modelling to target repeated queries/understand repeat queries and devise preemptive solutions. This will also reduce the unreconciled receipts and help close old requests.
b) Consistence (Standardization/Automation): The most adopted settlement approach is a statement of Accounts (primarily from broker perspective), there are diverse formats leading to inconsistency/information deficit impacting reconciliation. Through data and field standardization activities (e.g. Policy references/Assured/Reassured names/Program details) Reinsurers, Cedants and Brokers must agree standards/ formats beforehand to ensure minimal efforts in reconciliation and settlement and in ensuring easy identification of invoices and prompt allocation of funds. As the Insurance industry continues to explore future ready alternatives in Blockchain/Integrated systems, it is worth mentioning that Electronic reconciliation modes (eBot/eCot purported by ACORD) encourage consistency.
Additionally, digital platforms to ensure standard information and details are available across ledgers of client/broker/reinsurers. A futuristic proposition towards frictionless risk transfer built upon the most talked about technology, Blockchain, has already been initiated under the banner of B3i, as a Digital and Future-proof solution.
c) Communion: Insurance is about relationship building and people-to-people connection. In our quest to standardize and operationalize aspects of the process, often, the fundamentals are overlooked or brushed under the proverbial carpet. By building better virtual connects, leveraging technology through WebEx and other secured Cloud connect technologies, the intent undoubtedly is to avoid heavy reliance on emails as a mode of correspondence, and explore/utilize new age avenues of communication thereby ensuring a seamless flow of queries/questions and follow-ups. This can be particularly beneficial in sensitive, business critical or high-value cases where a positive closure isn’t just dependent on age old modes of communication.
In summary, Unapplied cash is a challenge looming large for Brokers, Insurers and reinsurers alike. With challenges of diminishing rates, catastrophic weather changes contributing to increased claims, and competitive pricing, overcoming this challenge is undoubtedly a top priority for the Insurance industry players. Although cash application is far from being a perfect science, the aforementioned solutions have the potential to fix this to a considerable extent.