How to Achieve Audit-Ready Hierarchies in Insurance

Insurance is a business built on relationships, as anyone will tell you. But formally depicting the complex network of relationships that connects an underwriter to an insured is far from simple. A producer may be appointed with a carrier to write business as the principal of their firm, parked under the umbrella of a financial marketing organization (FMO) in a handful of states, while writing business with an MGA that works for the same carrier and by going through a different agency altogether in a specific state where their FMO doesn’t operate (probably New York).

These complex hierarchies are crucial for understanding how and why a carrier contract is structured, how much a commission check should be, and who’s responsible for any piece of business and the compliance oversight that goes with it. Yet, traditional and manual ways of handling these relationships are woefully inadequate. And the risks of representing your distribution channels’ hierarchies poorly are never more apparent than when you’re facing a state audit.

Five kinds of state audits for insurance agencies and carriers

Insurance agencies and carriers should be running internal audits for their own business controls, operational efficiency, resilience, and distribution management—that’s a given (and if you want to evaluate your own team’s performance there, take our quick, interactive Distribution Channel Management Assessment). But there are also times when carriers and agencies alike will find themselves under the microscope of a state audit.

States have different approaches to auditing their carriers and agencies for best practices and compliance with laws and regulations. Each state has its own process and expectation, but the five most common possible audit events for insurance are:

No. 1: The scheduled market conduct exam

Some states require agencies and/or carriers to undergo a market conduct exam on a periodic basis. That could be an annual event, or something that happens every five years. During a market conduct event, the state will sample a portion of the business and examine how that business was solicited, negotiated, sold, and serviced. This could get as detailed as checking emails and advertisements, or it could be as surface-level as verifying an agent’s license and commission payment.

Knowing you have a standing audit of your business practices is certainly helpful in giving you a timeline and some impetus to plan ahead. But collecting the necessary data and staying in lockstep with the state can be a time- and resource-intensive experience, even if you know it’s coming.

No. 2: The random market conduct exam

Some states do regional sampling and randomly select companies to audit. North Carolina, for instance, selects businesses addressed in a single region and runs a market conduct examination based on random sampling. Any insurance business can be randomly audited in the state as long as it’s not more than once in a three-year period.

A random audit practice may seem like the kind of scare tactic that’d incentivize insurance businesses to keep their records clean, but a random market conduct exam also can give businesses an out-of-sight-out-of-mind mentality.

No. 3: Complaint investigations

When a consumer complains about an insurer or agency to the state department of insurance, you’re bound to get a phone call. Complaint investigations may be as simple as a carrier providing an explanation for a claim that they denied because the consumer wasn’t covered for a specific event. But, especially when there’s evidence of wrongdoing, these complaint investigations can snowball.

No. 4: Data calls and internal reporting mandates

Particularly after a broad market event like a pandemic or a hurricane, states will issue line-of-authority-specific data calls to carriers that require the carrier to report on things like claims and how fast they were covered and how many agents or adjusters were deployed to an area. Other data calls may be standing requirements, such as the DOL fiduciary rule regulation that requires annuity insurers to run a report on their top salespeople and scan for twisting or churning practices.

No. 5: Follow-up investigations

Any of the four preceding investigative, audit, or examination events could find issues. The state could find evidence of wrongdoing, or carriers and agencies could be so slow to gather information that the speed alone becomes a red-flag for the state. In that case, the state will follow up with the carrier and agency to dig deeper and see if the first violation was isolated and quickly remedied, or if it was evidence of systemic compliance and data management problems.

Audits: Time is money

Any one instance where a regulator—or even an upstream distribution partner—requests data can mean:

• Hours of staff time, pulling staff from their regular jobs and causing delays and strain in other areas of your business
• Legal fees, as you staff up with attorneys who charge hundreds of dollars by the hour
• State fees: Many states recoup their costs by charging their staff’s hourly wages and per diems to the company being audited

We’ve said it before and we’ll say it again, when it comes to a regulatory investigation, the fine isn’t the punishment.

When it comes to the data you have on your producers, adjusters, and distribution channels, the difference between being able to generate time-stamped, automatic reports with the touch of a button versus manually connecting a papertrail and verifying timelines can mean hundreds of thousands of dollars in an audit.

An example: A large national carrier

We recently came across one carrier with around 10,000 producers that maintains nearly 30 commission levels, and five different hierarchy types based on different business purposes, such as regional sales assignments and commission structures.

What if North Carolina audits the carrier? With about 600 agents holding resident licenses in the state, let’s say it takes a speedy staff member 10 minutes to validate and collect each agent’s sales and position according to what agencies they’re contracted under and how they receive a commission for different products. Even at just 10 minutes apiece, that staff member would have to pull reports on producer data for two and a half weeks—100 hours doing nothing other than compiling producer information.

Solving for manual hierarchy management: 3 essentials

If you’re moving beyond time-intensive and risk-laden manual processes, you’re probably in the market for a distribution channel and compliance management solution. Any solution that truly makes you audit-ready will include these non-negotiables:

• Real-time tracking and change management: Changes to producer assignment, hierarchy shifts, and commission structure accurate to the day with everything logged, timestamped, and easy to integrate across your other systems.
• Effective dating with historical data retrieval: Your team should have the ability to view hierarchy snapshots both today and at other points in time.
• Integrated approval workflows: Your system should clearly document approvals and any supporting documents or commentary to establish quick validation and embolden proper governance.

AgentSync Hierarchy Management brings these core features fully to life within the Manage ecosystem so you can validate your data and better manage partners at speed without sacrificing the ability to cut hours out of any audits that might come your way.

To learn more about how you can move from a reactive to a proactive approach to address your hierarchy management and whether you’re audit-ready, watch a demo or schedule a personalized consultation.