There are hundreds of millions of dollars lying unidentified and unreconciled in the bank accounts of brokers, agents and other intermediaries around the world. A large proportion of these balances could be - should be - passed on to cedants and reinsurers, but the cash never moves. How has this come about, why does it remain such an issue and what can cedants and reinsurers do about it?

The road to anonymity – how balances become “lost”
Every cedant, every broker and every reinsurer has faced the situation at some juncture. Cash is received, it is not immediately evident against which technical entries the cash should be allocated and so it is “initially” entered as unallocated cash with a view to being investigated and allocated “later”.

Let’s complicate the picture a little. Over time, the cedant changes its computer systems, gets acquired by a foreign competitor and gets put into run-off. Meanwhile, the broker goes through a couple of mergers and office changes before being acquired by one of the mega-brokers. The reinsurer wrote its line as a member of a pool which became insolvent, the management of which has changed hands on more than one occasion. Now add to the mix a history of inadequate credit control by the cedant, poor accounting and reconciliation by the broker and head-in-the-sand claims monitoring by the reinsurer. Time passes, records are lost, insolvencies occur. The accounting situation goes from bad to worse. Despite pressure from the cedant and/or reinsurer, the run-off nature of the business means the brokers have no motivation to spend the time and money to address the situation and the problem stagnates.

The result of this cocktail of circumstances is an accounting quagmire where no one party knows the true position. In particular, which balances have been settled by whom to whom and when? How much premium has the cedant paid the broker that never reached the reinsurer and what claims were in fact settled by the reinsurer but credit never received by the cedant? There may be a mountain of cash trapped in the black hole that is the broker’s accounting ledgers. All too often, the broker has a huge incentive to ignore rather than explore that black hole. It is earning investment income on the cash and over time may be able to credit the unallocated cash to its own account. The onus to drive the unravelling of the situation lies firmly with the likely beneficiaries of the exercise – those who might find those wads of cash stuffed under the mattresses – the principals themselves.

Roadblocks to the truth
Assume that a reinsurer wishes to grasp the nettle with a broker through whom it has many accounts which might involve trapped funds owing to it. There are many possible obstacles in the path of the reinsurer.

The reinsurer acting alone will be entitled to access and inspect only those records and accounts relevant to the contracts upon which it participates. It will not be entitled to inspect those records not directly relevant – and in particular – unallocated cash records. The reinsurer is in a classic Catch-22 situation. Without access to the non-disclosed records, he cannot prove that they are relevant and therefore disclosable! The situation may well be exacerbated by the fact that the principals are in run-off and are therefore in any event being subjected to at best a third-rate level of service and co-operation from the broker.

The simplest solution is for the principals to co-operate to identify those premiums, claims and balances which appear to have entered the black hole that is the broker’s accounting ledgers but never surfaced out the other side. There is then a prima facie case for the broker to answer and a justification for a review of his records to explain the discrepancy. Indeed, the very request for such a “pincer movement” review to identify trapped funds may in of itself motivate the broker to investigate matters and own up to funds which are owed to one or other of the parties.

What are you waiting for?
There is one word of warning for the exuberant cedant or reinsurer hell bent on opening this accounting can of worms. There is the possibility that during the good times the broker funded either premiums or claims and may arguably be entitled to replenishment. That said, from an overall perspective, we can rest assured the world of intermediaries are well aware that they are sitting on more cash than they are owed. Many millions of dollars lie stuffed in those mattresses. It just needs cedants and reinsurers to be pro-active and put in the time and effort to reclaim their just rewards!

This Special item appeared in issue 103 of JTW News - March 2006

Author: Julian Ward - JTW