Richard Emmett, Head of Insurance Services from global (re)insurance expert solutions provider Pro shines the spotlight on one of the biggest headaches in insurance – unallocated cash
And as we head in 2021, the cash management challenges that have often remained hidden in the past at re/insurance businesses, are at risk of being thrown into the spotlight if not resolved proactively.
Pressures including the ultra low interest rate environment dampening investment returns, increased claims payouts across classes, and higher regulatory and media scrutiny are sharpening re/insurers’ focus on their cash management, which for too long has been seen as a non-urgent issue in an industry that has enjoyed strong cash flows due to its premium-driven nature.
However, this culture of inefficiency - and at worst complacency - has led to some re/insurers to stumble across significant volumes of unallocated cash on their books, some of which date back many years.
Swiss Re estimated that 2018 global gross written premiums totalled US$5 trillion, representing a huge volume of cash flowing between original insureds, insurers, reinsurers and brokers. The Pro technical accounting experts are often called in at any point in the chain to resolve issues preventing the allocation of cash, many of which we have seen build up significantly over time.
There is a fine line between when unallocated cash is ‘expected’ to be resolved to when it develops into a ‘problem’. In most cases, re/insurance businesses with high volumes of transactions will tend to have unallocated cash at any given time; this is mainly due to the dynamics of timing differences and transaction periods.
A reputational issue for re/insurance
Problems, however, can arise when unallocated cash can’t be ‘matched’, and, if left undetected it can become a serious problem, leading to auditing fails, damaging client relationships, and ultimately, the reputation of the business in question, and the industry as a whole. Unallocated cash can also be a legacy issue – either inherited as part of historic mergers and acquisitions, or as part of a legacy system transition.
Whatever the causes, the implications caused by unallocated cash are far reaching. From hindered cashflow forecasting or inaccurate reporting and provisions of bad debt, right through to duplicate payments and late – or even missed – settlements of premiums and claims. Whatever the outcome, the results are detrimental and, to some insurers, somewhat unwisely treated as “part and parcel” of their business.
Finding the culprit
Managing unallocated cash is a compliance requirement and high volumes of uncorrelated cash are seen as a red flag to auditors.
Not only does it signify deep-rooted cash management problems, but it highlights control issues. It is therefore vital to identify the causes behind it.
When looking into reasons behind unallocated cash issues, it is often the case that multiple causes are discovered. Some of these can be simple to identify, such as manual cash to ledger matching, incorrect technical processing, or tax refunds from underwriters.
Structural causes, however, can be more technically and procedurally complex to solve.
Factors such as system constraints and ineffective auto-match capabilities, right through to incorrect or incomplete technical processing, can all be reasons behind cash discrepancies. The reasons behind unallocated cash could even be found on the ground – especially when resources are over-stretched or historic knowledge following mergers and acquisitions has been lost.
Once the scale of the problem has been investigated and the causes identified, the right resource needs to be applied to resolve the issues and, fundamentally, clear the backlog.
Solving the headache
There is no ‘one size fits all’ solution to actually allocating the unmatched cash, but by having access to historic data and working with credit control, each individual unallocated cash issue can – with time and effort – be resolved. There is a clear call to action for senior management to be vigilant to tackling unallocated cash holes in their books as we head into a challenging time for the re/insurance market as a whole.
Critical to resolving the issue is to take lessons learned forward, including implementing new procedures, reporting and continued, resilient monitoring to help prevent future issues occurring once and for all.
A structured approach across an organisation that encompasses all parts of the business involved in cash inflows, outflows and reconciliation is vital not only to avoiding unallocated cash challenges, but also to improving overall liquidity going forwards.
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