To: Barry D. Zyskind, President,
AmTrust Financial Group, Inc. Michael Saxon, President, AmTrust North America,
From: Jon L. Shebel, President
& Chief Executive Officer
Subject: Proposal to Provide
Premium Audit Services on Technology Insurance Company
Business Written in Florida
by Associated Industries Insurance Services, Inc.
Date: October 4, 2004
to Provide Premium Audit Services
To AmTrust Financial Group
Industries Insurance Services, Inc. (AIIS) proposes to provide premium
audit services for AmTrust Financial Group on the policies produced
and administered by AIIS for Technology Insurance Company. AIIS proposes
to provide these services for a fee of 2% of full final audited premium.
is the MGA for Associated Industries Insurance Company, Inc. (AIIC).
As part of the services provided, AIIS performs premium audit services
for AIIC. As a company, AIIC has derived benefits from the premium audit
services provided. The additional premium received from the audits has
historically been greater than the costs of the services provided. The
additional premium has had the effect of reducing AIIC’s resulting direct
loss and ALAE ratio, as more premium has been collected to cover the
losses that have occurred.
utilizes both physical audits and voluntary audits in the premium audit
process. A physical audit (whereby the auditor will visit the insured
or its representative) is utilized in those instances that a voluntary
audit cannot be utilized. Under Florida statute, a voluntary audit can
be utilized when the annual premium for an insured is less than $4,500.
Other criteria include the insured must have an experience modification
factor equal to 1.0, and the insured does not have any contracting classifications
on its policy. If the insured has an experience mod other than 1.0 or
has contracting classifications, a physical audit must be performed.
When an insured is eligible for a voluntary audit, the first year the
insurance company is on the risk must be a physical audit. The subsequent
two years can be audited through a voluntary audit, and then a physical
audit is performed again.
a voluntary audit, AIIS requests information from the insured. When
the information is received, it is reviewed for completeness and processed
by the AIIS in-house audit staff.
When a physical
audit is required, AIIS will send an auditor to the insured to collect
and review the appropriate records. These records include payroll records,
as well as the insured’s general ledger and cash disbursement records.
This information is provided to the AIIS in-house audit staff, who will
then process the information to determine the final premium on the policy.
The auditor who visits the insured will be either an AIIS staff auditor,
or an auditor from a premium audit company that utilized by AIIS. As
the business written by an insurance company does not occur equally
throughout the year, the use of premium audit companies allows AIIS
to maintain an optimal level of personnel on its staff.
good working relationships with the premium audit fee companies it utilizes.
The effectiveness of these companies is continually monitored, and changes
in companies are made if warranted. AIIS helps maintain its working
relationships with premium audit fee companies through its participation
in the Southeast Auditors Association. The Field Audit Supervisor of
AIIS currently serves as the president of this association.
audit staff thoroughly reviews and analyzes the information received
from the insured directly or from the premium auditor. Any questions
regarding the information will be resolved in order to process the most
accurate audit possible. Areas where further clarification of information
may be required include the following:
Verification of officer exclusions and assurance they are in compliance
with Florida statute.
Verification of the calculation of the Florida Contracting Classification
Premium Adjustment Program (FCCPAP) credit.
Review of insured loss runs to ensure all claimants were on the
insured payroll at the time of loss.
Review of loss control reports to ensure the audit information is
in accordance with the operations as noted by the loss control consultant.
Review of contract labor for proper inclusion or exclusion from
the insured’s audited premium.
audit staff diligently follows up with insureds to ensure audit rules
are followed. The State of Florida has a rule that requires signatures
on the audit from the auditor performing the audit, an officer of the
insured, and any person other than a corporate officer providing the
information for the audit. The signatures must be on a state approved
form (AIIS has had their form approved), and the person signing must
present photo identification or have his/her signature notarized.
In the event
an insured does not comply with requests for information, an insurance
company may bill additional premium in the amount of two times the estimated
premium. In addition, a fee of $500 may be charged if a physical visit
has been made to the insured in an effort to obtain the information.
versus Cost of Premium Audit Process
audit process as conducted has resulted in benefits greater than the
cost of the program. For policy years 1997 through 2002, the audit process
has resulted in additional premium averaging 9.3% greater than the estimated
premium. This premium has been generated at a cost of approximately
1.6% of the estimated premium prior to audit.
benefit of the audit process is the positive effect on a company’s loss
and ALAE ratio. A company will have the same dollar amount of loss with
or without the effect of the additional premium generated from the audit
process. However, the loss and ALAE ratio can be materially different
without an effective audit process. Assuming a company would have had
a consistent 65% loss and ALAE ratio after the audit process, the following
graph presents what the loss and ALAE ratio would have been without
the effect of the audit process.
premium audit process has historically been cost effective for AIIC,
based upon the results achieved. AIIS will provide the same high level
of service to the premium audit process for the business serviced for
AmTrust Financial Group.
audit process has been an important step used by the Underwriting Department
in monitoring the overall book of business produced. The results of
the audit process assist in the underwriting decision-making process
through the verification of exposures on the policies.
auditing has resulted in additional collected premium for the Company,
and the benefit of this premium has been greater than the cost. In addition,
the additional premium has resulted in a lower loss ratio for the Company.
to provide the same high quality to AmTrust Financial Group for business
produced by AIIS for Technology Insurance Company. The proposed fee
for the premium audit service is 2% of full final audit premium.