Tag Archives: auditor

Top 10 Ways to Spook Policyholders

What are you afraid of this Halloween? That your customers might disappear like ghosts? That your competitors might pick them off like vultures? That it’s all going to drive you batty?

Your fears may not be unfounded, given public perceptions about insurance carriers, agents and brokers. Many people don’t find the industry trustworthy. (Just more than 50% trust the financial services industry as a whole, according to Edelman’s 2015 Trust Barometer.)

Many also view the industry as overwhelmingly complex. And most are not satisfied with their current providers. (Only 29% of property/casualty and life insurance customers surveyed by Accenture said they are satisfied, according to an August 2015 report.)

The current environment is, in a word, frightful.

To overcome these demons, insurance industry leaders must start addressing them at the source. To that end, and in the spirit of All Hallow’s Eve, below are the Top 10 ways that insurance providers spook their customers. (Read on…if you dare!)

10. Respond to customer requests like a zombie.

Are your responses to customer inquiries heavily scripted like they came out of some low-budget horror movie? Might your customers feel like, no matter what they say, they get form letters and teleprompter-like messages in response?

Remove active listening, critical thinking and personalized problem-solving from your front line and you miss a huge opportunity to impress your customer. If your front-line personnel perform like zombies, you can guarantee that customers will run from them.

9. Communicate in gobbledygook (or, on Halloween, goblin-dygook).

What do premium bills, policy contracts, claim settlement statements and other insurance communications have in common? Supernatural wizardry typically is required to decipher them.

Insurance professionals are steeped in the practices and language of their industry. As such, they often forget to translate their communications for easy public consumption. Instead, they convey their messages using jargon and acronyms that make their customers head for the hills.

8. Cut expenses and operate with a skeleton staff.

Particularly in times of economic distress, or increasing loss ratios, some insurers’ first reaction is to slash investments in post-sale operations, because these areas are not viewed as driving revenue and therefore become easy targets when profits need to be propped up.

But while skeleton staffs might offer some immediate gratification in expense reduction, they also foster negative impressions that could snuff out your company’s true brand.

Bare-bones operations translate into long wait times, inattentive service and visibly overworked and irritated employees-characteristics that are hardly the best ingredients for a great customer experience.

7. Embark on monstrous transformation projects.

Business transformation is overrated. It’s good to have high aspirations and stretch goals, but you’ve got to eat the elephant one bite at a time.

Big, hairy, audacious projects have a tendency to be ill-defined and nearly impossible to manage. Plus, most companies suffer from “organizational A.D.D.” and have trouble staying focused on a three-month project, let alone a three-year one.

Transformational projects make for good annual report copy, but they often fail to deliver meaningful improvements to employees and customers. Sometimes, all they deliver is disruption and dissatisfaction.

Yes, have a long-term vision-but never underestimate the power and efficiency of incremental advances toward that destination.

6. Never do a post-mortem.

In the whirlwind of daily business activities, people rarely take the time to dissect and diagnose customer annoyances.

Customer complaints present a wonderful opportunity to not just recover gracefully (and perhaps win back a policyholder’s loyalty) but to also dig up the root cause of a problem and fix it, once and for all, so it never again rears its ugly head.

What’s even rarer than post-mortems on customer complaints? Post-mortems on customer compliments. There’s great value in pinpointing what person or process generated customer delight, so you can then figure out how to replicate that outcome more routinely.

Post-mortems can yield silver bullet-like learnings that forever eradicate customer frustrations or permanently institutionalize loyalty-enhancing business practices.

5. Create a workplace that sucks the lifeblood out of people.

To create happy and loyal customers, you need happy and engaged staff. If yours is a work environment where people don’t feel appreciated, respected or well-equipped to do their jobs, then you’re practically guaranteed to make their energy and passion disappear faster than a vampire at dawn.

And if you don’t think customers will notice that difference in your employees, agents or brokers, then you really are hallucinating.

4. Don’t tell customers what’s lurking around the corner.

Creating happy, loyal customers is a lot about managing expectations. People’s frustration-or delight-with a business is closely tied to the expectations they had of an interaction.

Customers don’t like ambiguity or unpleasant surprises. If you don’t tell them what to expect-how long they’ll be on hold before speaking to a live person, how the claim adjudication process will unfold, what information they’ll need to provide for a premium audit, etc.-then they’re more likely to be annoyed when the interaction isn’t as quick or straightforward as they anticipated.

3. Give customers tricks and never treats.

Do policyholders walk away from interactions with your company feeling good about the encounter? Do they get what they expected; do they feel like they got a good value?

For many insurers, the answer is no-thanks to coverage terms that are narrower than what customers reasonably expect, insurance teaser quotes that rarely match offered insurance rates and fine print that inevitably results in unpleasant surprises.

These are examples of insurers’ tricks of the trade, and, while these practices may draw customers in momentarily, they certainly won’t create a foundation on which to build loyal policyholder relationships.

Contrast that with the indelible positive impressions left on policyholders who experience treats-like insurance representatives who do what they say they’re going to do, policy documents that describe coverage in plain language and premium bills that can actually be understood.

For the average insurance consumer, these are pleasant surprises and personal touches that they (sadly) have come to not even expect from carriers, agents and brokers. But when consumers do experience treats, they’ll come back, again and again.

2. Avoid ownership and accountability like the plague.

A gruesome ailment has descended upon the business community, eradicating all vestiges of ownership and accountability. Customer calls are not promptly (if ever) returned. Commitments are not kept. Obligations are forgotten. (If you’re like most consumers, you’ve surely experienced such rage-inducing frustrations, be it when dealing with the smallest local businesses or the largest multinational corporations.)

Here’s a little secret: What customers care most about isn’t your company’s stadium naming rights, funny commercials, Facebook feed or snazzy new mobile app. That’s all for naught if your core insurance product doesn’t work as advertised or your representatives simply don’t follow through on their promises.

Want to create a brand experience that outshines all others? Start by nailing these basics and making sure your policyholders feel cared for.

And the No. 1 way that insurance providers spook their customers…

1. Put scary people on the front line.

Who’s interacting with your policyholders on a daily basis? Is your front line composed of superheroes who go the extra mile for your customers or soulless automatons who frighten your customers with their discourtesy, uselessness and utter inability to get anything done?

It doesn’t matter how advanced your customer relationship management systems are, how well-adorned your field offices are or how sophisticated your predictive analytics engine is. It all means nothing if the people interacting with your customers-agents, brokers, underwriters, servicers, auditors, adjusters and others-are not professional, responsible and genuinely helpful.

Lose the Spookiness

No right-minded insurance provider sets out to spook its policyholders. But that’s inevitably the outcome when companies lose sight of what’s important and valuable to the people they serve.

Are you haunted by the prospect of your policyholders defecting to a competitor? Do something about it before your worst nightmares become a reality. Use this Top 10 list as a guide to avoid the most common pitfalls, and, before you know it, you’ll be casting a spell on your customers that’ll have them coming back for more.

This article was first published on carriermanagement.com.

How to Evaluate the External Auditors

The Audit Committee Collaboration (six associations or firms, including the National Association of Corporate Directors and NYSE Governance Services) recently published External Auditor Assessment Tool: A Reference for Audit Committees Worldwide.

It’s a good product, useful for audit committees and those who advise them — especially chief audit executives (CAEs), CFOs and general counsel.

The tool includes an overview of the topic, a discussion of important areas to assess (with sample questions for each) and a sample questionnaire to ask management to complete.

However, the document does not talk about the critical need for the audit committee to exercise professional skepticism and ask penetrating questions to test the external audit team’s quality.

Given the publicized failures of audit firms to detect serious issues (fortunately few, but still too many – the latest being the FIFA scandal) and the deficiencies continually found by the PCAOB Examiners, audit committees must take this matter seriously.

Let me Illustrate with a story. Some years ago, I joined a global manufacturing company as the head of the internal audit function, with responsibility for the SOX program. I was the first to hold that position; previously, the internal audit function had been outsourced. Within a couple of months, I attended my first audit committee meeting. I said there was an internal control issue that, if not addressed by year-end, might be considered a material weakness in the system of internal control over financial reporting. None of the corporate financial reporting team was a CPA! That included the CFO, the corporate controller and the entire financial reporting team. I said that, apart from the Asia-Pacific team in Singapore, the only CPAs on staff were me, the treasurer and a business unit controller. The deficiency was that, as a result, the financial reporting team relied heavily on the external auditors for technical accounting advice – and this was no longer permitted.

The chairman of the audit committee turned to the CFO, asked him if that was correct and received an (unapologetic) affirmative. The chairman then turned to the audit partner, seated directly to his right, and asked if he knew about this situation. The partner also gave an unapologetic “yes” in reply.

The chairman then asked the CEO (incidentally, the former CFO, whose policy it had been not to hire CPAs) to have the issue addressed promptly, which it was.

However, the audit committee totally let the audit partner off the hook. The audit firm had never reported this as an issue to the audit committee, even though it had been in place for several years. The chairman did not ask the audit partner why; whether he agreed with my assessment of the issue; why the firm had not identified this as a material weakness or significant deficiency in prior years; or any other related question.

If you talk to those in management who work with the external audit team, the most frequent complaint is that the auditors don’t use judgment and common sense. They worry about the trivial rather than what is important and potentially material to the financial statements. In addition, they often are unreasonable and unwilling to work with management – going overboard to preserve the appearance of independence.

I addressed this in a prior post, when I said the audit committee should consider:

  • Whether the external auditor has adopted an appropriate attitude for working with the company, including management and the internal auditor
  • Whether the auditor has taken a top-down and risk-based approach that focuses on what matters and not on trivia, minimizing both cost and disruption, and
  • Whether issues are addressed with common sense rather than a desire to prove themselves

Does your audit committee perform an appropriate review and assessment of the external audit firm and their performance?

I welcome your comments.

Financial Reporting Of Medical Malpractice Self-Insured Losses

Healthcare entities, or groups of physicians (through a captive), may self-insure losses to better control the costs of medical malpractice insurance, particularly when insurance premiums rise. Self-insured losses are typically estimated by an actuary, who will provide an unbiased estimate of the loss reserves and can also forecast losses for the next policy period for purposes of budgeting and assessing the feasibility of self-insuring, while an auditor will ensure full compliance with accounting and financial reporting standards. The following will provide background information and points to be discussed with the actuary and auditor.

Common Coverages

In a self-insured program, losses are retained by the program up to the self-insured retention amount, while losses greater than the retention amount are the responsibility of the excess or reinsurance policy. A claims-made policy provides coverage for claims that are reported within the policy period; claims reported after the policy expiration date are not covered. Most programs continually purchase claims-made policies for reportings in subsequent years. Occasionally, when a program changes excess carriers, it may purchase a tail policy for prior acts that have yet to be asserted. Physicians that purchase commercial claims-made coverage may also purchase a tail policy when leaving an organization or ceasing to practice.

When following guidance in the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC), most of these same entities record the self-insured liability in their financial statements on an occurrence basis. An occurrence basis is determined by when the incident happens, or occurs, regardless of when it is reported. An occurrence year can also be viewed as the combination of claims-made losses and tail reportings for claims occurring during a year that are unreported. It is important to note that if the physicians are covered on an occurrence basis by an entity (hospital or captive), but the entity purchases claims-made coverage from a commercial carrier for its physicians, then the entity is liable for the tail reportings.

Unpaid Claim Liability And IBNR

The self-insured liability recorded in financial statements has two main components: 1) case reserves on known claims and 2) an incurred but not reported (IBNR) provision for unknown losses. The case reserves are determined based on the most current available information about the known claims while IBNR losses are usually estimated by an actuary. The IBNR losses account for case reserve development on known cases, pure late reportings, reopened cases, and pipeline claims (reported but not yet recorded in the system as a claim). Liability is simply losses that have occurred but are unpaid.

Actuarial Theory

Actuaries utilize models, centered on the theory of consistency and the assumption that the past is predictive of the future, in order to project losses of a program. This includes similarities in reserving strategy, payment philosophy, homogeneous risk management exposures (same types of procedures, same mix of specialties and maturities of physicians), and other program design characteristics. Any intentional change in a program by management should be reported to the actuary to avoid redundant or inadequate estimations.

Financial Reporting Discussion Points

Five key financial reporting items to discuss with both the actuary and the auditor are listed below.

  • Discounting
    Currently, guidance in the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide Health Care Entities permits, but does not require, medical malpractice reserves to be recorded in the financial statements on a discounted basis. In order to discount a malpractice liability: 1) the amount of the liability must be fixed or reliably determinable; 2) the amount and timing of cash payments for the liability, based on the healthcare entity’s specific experience, must be fixed or reliably determinable; and 3) the expected insurance recoveries, if any, must also be discounted. If discounted reserves are presented, management must disclose the discount and be able to support the discount rate, which may include 1) the return on investments used to pay claims expected to be realized over the period the claims are expected to mature; 2) a risk-free rate; and 3) highly rated corporate bonds with maturities matching the average length of a malpractice payment, all of which may need to be periodically adjusted for future expectations.
  • Percentile
    Some healthcare entities record malpractice liabilities and fund for these losses with a contingency margin, such as at the 75th percentile, selected by management based on the nature and loss experience of the entity. ASC 954-450-25 provides that the liability recorded is independent of funding considerations. ASC 954-450-30 states that an entity should use all relevant information, including entity-specific data and industry experience, in estimating the liability.
  • Gross vs. net presentation
    FASB Accounting Standards Update (ASU) 2010-24, Healthcare Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries, requires healthcare entities to report medical malpractice and similar liabilities on a gross basis, separately reporting any receivable relating to anticipated insurance recoveries. One of the outcomes of such gross presentation is to more clearly reflect the entity’s exposure to credit risk from the insurer, as the healthcare entity generally remains primarily liable for payment of claims until the insurer makes payments. ASU 2010-24 must be applied to all policies, including ground-up commercial policies, where the entity has a gross liability even though the net liability is $0.
  • Tail liability
    As addressed in ASC 720-20-25 and ASC 450-20-25, entities that maintain claims-made coverage must accrue for incurred but not reported claims and incidents as of the reporting date if the related loss is probable and reasonably estimable. Some believe the tail should be estimated based on an unlimited basis while others assume a limit based on the entities’ historical loss experience (also known as the “working layer”). Regardless of the limit assumed, the entity cannot assume that claims-made coverage will continue to be purchased in the future.
  • Conservatism in estimates
    Management should understand the amount of conservatism in the actuary’s estimate. Understanding the impact of large losses, where estimates fall within a range, and how actual loss experience is used compared to relying on industry information is important.

Working With The Actuary And Auditor

Management should set a goal to have frequent conversations and in-person meetings with both the actuary and the auditor. Although actuarial analysis and financial reporting can be complicated, it is critical for management to have a full understanding and the ability to effectively communicate its program and story. Finally, management should not be afraid to ask questions of both the actuary and auditor as this often leads to a better understanding for all parties and supports a collaborative working relationship between management, the actuary, and the auditor.


Richard Frese collaborated with Pat Kitchen in writing this article. Pat Kitchen is an assurance partner in the Chicago office of McGladrey LLP’s Great Lakes health care and not-for-profit practice. Pat leads McGladrey’s health care practice in Chicago and in its Great Lakes region. He has more than 24 years of experience serving a variety of health care organizations, including hospitals and health systems, specialty hospitals, academic medical centers and faculty practice plans, physician practices, and continuing care retirement communities. Pat assists clients with financial statement audits and reviews, compliance audits, accounting consultation, internal control reviews, acquisition-related due diligence, agreed-upon procedures and debt and equity financings.