October 4, 2004
Source: Associated Industries Insurance Services, Inc.

Proposal

Associated 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. 

Background

AIIS 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. 

Premium Audit Process

AIIS 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.

To perform 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.

AIIS has 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.

The AIIS 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.

The AIIS 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. 

Benefit versus Cost of Premium Audit Process 

The 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.

Another 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.

The 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.

The premium 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. 

Summary

Premium 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.

AIIS proposes 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.

 

 

Associated Industries Insurance Services, Inc.
901 N.W. 51st Street , Boca Raton , Florida 33431 • Phone (800) 866-1234 • Fax (561) 997-6444
Email us at: aiis@aif.com or visit our website: www.aiic-insurance.com