THIRD PARTY BILLING IN PROPERTY INSURANCE

Transcription

1 WHITE PAPER AUTHOR: REJI JOSE REVIEWER: RAJAKRISHNAN VENUGOPAL 1

2 Abstract Third Party Property Insurance premium billing was an implementation undertaken by Wipro for one of the leading US based insurance companies. During the course of the project, the Wipro team interacted closely with the customer s business team to get an insight into the principles of business considered while billing a third party for the insurance premium. The intent of this document is to provide an introduction to the business aspects of third party billing. A high level picture of the processes involved in processing such policies is documented. The document also provides an understanding on how the processing of these policies is different from processing other property policies. The policy inception, statement processing and non-payment of premium have been briefed with the driving factors for business. This document has been prepared based on my interaction with the business team of a U.S. based insurance company. The business jargons, terminologies and business model may not be relevant to all the insurance companies. The idea behind the document was to provide a brief picture of how 3rd party billing works. 2

3 Table of Contents 1. Introduction... 4 White Paper Third Party Billing in Property Insurance What is 3rd party billing? rd parties - Classification Storage of 3rd Party Information... 5 White Paper Third Party Billing in Property Insurance Premium Statement Generation How much to Bill and When to Bill? How to Bill? Payment Processing for 3rd Party Billed Policies Underpayments and Overpayments Non-payment References... 9

4 1.Introduction 1.1 What is 3 rd party billing? There are property insurance policies for which the premium is paid by someone other than the policyholder. These entities that pay the premium are called 3rd parties and such policies are called 3rd party billed policies. This usually happens when the policyholder borrows money from a financial institution to buy the property. The financial institution has to ensure that the property is insured. If the property is not insured, any damage to the property would be a risk to the financial institution as well. Hence, in these cases, the financial institutions have an interest in the property in addition to the policyholder rd parties - Classification As mentioned, financial institutions that lend money are a kind of 3rd party. There are service companies that process and pay the insurance premium on behalf of these financial institutions also. These are service providers who interact with the financial institution and the insurance companies to manage premium transactions for both. Veteran s Administration make premium payments on behalf of the veterans. The premium statement goes to the Veteran s Administration in these cases. There are also cases where a relative or a friend or somebody who has a financial interest in the property makes the insurance payment on behalf of the policyholder. A common example would be of parents paying the insurance premium on behalf of their child. These payors are referred to as Additional Insured. Hence, there are 2 broad classes of 3rd parties who can receive premium statements and can pay the premium on behalf of the policyholder; Financial Institutions (mortgage companies, lien-holders, service companies) and Nonfinancial entities (Veteran s Administration, Additional Insured). 4

5 2. Storage of 3 rd Party Information A property insurance policy can have multiple 3rd parties attached to it. Not all of the 3rd parties are payors. Only one of the 3rd party pays but the others have an interest in the property and would want to know details on the kind of insurance taken on the property, the payments made, the payments defaulted etc. The premium statement is, however, required to be sent only to the 3rd party who is the payor on the policy. This 3rd party can be changed by the policyholder depending on how, when and with whom the property is refinanced. Usually, it is the policy processing system s responsibility to maintain the 3rd party information on the policy. The system that generates the premium statement will have to interact with the policy processing system to get the latest information on the 3rd party policy before sending the statement. 5

6 3.Premium Statement Generation 3.1 How much to Bill and When to Bill? The 3rd parties who are not additional insured usually would want to pay up the premium at the beginning of the term in full. The premium statement is usually sent with the total policy balance. The additional insured usually would like to have an option to pay the premium just like the policyholder i.e. either in full or on a monthly basis. This will have to be kept in mind while design the statement generation system. Another consideration while designing would be about billing mid-term endorsements to the 3rd party or customer. Since the policy premium would have been paid in full after the first statement is sent out, the details of how the endorsement should be billed and who the bill should be sent to should be clarified. Usually the additional endorsements are billed to the policyholder but there are cases where the 3rd party is to be billed. 3.2 How to Bill? Most of the 3 rd parties can be billed the same way the policyholder is billed using the U.S. Postal service or by courier. However, there are some 3 rd parties that accept EDI (Electronic Data Interchange) to transact with the insurance company. The statement and declaration can be sent to the 3rd party as a sequential file in the agreed upon EDI format. EDI files are usually processed by an EDI Trading Partner. An EDI Trading partner is analogous to a Service Company. The Trading Partner processes EDI transactions for the 3rd party. The payment to EDI statements are also made in the EDI format. The Insurance Company should, hence, have the capability to send and accept transactions in EDI format. This saves cost to the Insurance companies in terms of postage and the time taken to process these statements is much faster than sending the statements through the postal service. 6

7 4. Payment Processing for 3 rd Party Billed Policies As mentioned, the payments from 3rd parties can come in as regular customer payments (checks, etc.) or as an EDI sequential file. The Insurance Company should be able to support both these modes. And again EDI processing takes lesser time to process and, hence, it is an investment to have this infrastructure set up. 4.1 Underpayments and Overpayments Sometimes, the payments made by 3rd parties come in even before the renewal statement has been sent and the amount that is sent is based on the prior year s premium. This often causes an underpayment or an overpayment on the policy balance. This results in an underpayment when the current term s premium is more than that of the previous term and in an overpayment when the current term s premium is less that that of the previous term. In case of an underpayment, the system should be capable to send out the balance statement to the policyholder or 3rd party depending on the business need and pursue the money. While sending the statement for the balance amount, the insurance company should not consider the equity date on the policy i.e. the statement generation system need not wait until the policy runs out of equity to send out the statement. However, the policyholder or 3rd party is not liable to pay until the policy runs out of equity. The payor can hold off payment until he/she is out of coverage based on the initial payment made. This principle holds for any endorsements that are made during the term as well the policyholder is not liable to pay until he/she is out of coverage. In case of an overpayment, the system should be able to refund the money back to the policyholder or 3rd party. It is usually the policyholder that the money is refunded to due to that fact that in most of the cases, the amount is 7

8 held as an escrow. An escrow account is a trust account held in the borrower s name to pay obligations such as property taxes and insurance premiums. This being the case, the policyholder would have already paid the mortgage company the premium amount and should be the recipient of the refund. The service center, however, should have the option to direct the refund to the 3rd party if needed. 4.2 Non-payment To give a background of the non-payment types, there are two types of nonpayment letters that can be sent out to the payor the Notice of Cancellation or the Notice of Expiration. A Notice of Cancellation is sent out to the payor when the payor has paid the renewal amount (policy is activated for the new term) but has missed paying one of the mid-term statements. These kinds of notices, upon non-payment, will follow a policy cancellation and a collection for the amount due. The policyholder is liable to pay for the period for which the payment was not received but the property was covered. A Notice of Expiration is sent out to the payor when the payor has not paid the renewal amount (policy is not activated for the new term). This could also mean that the policyholder does not want to continue the policy into the new term. These kinds of notices, upon non-payment, will follow a policy cancellation and the policyholder is not liable to pay for the period for which the payment was not received but the property was covered. When an NOC/NOE is being sent for a 3rd party billed policy or a policy that is not 3rd party billed but has 3rd parties attached to it, copied are to be sent to all the 3rd parties on the policy since all the 3rd parties have a financial interest in the property insured. In case, the 3rd party on the policy is an additional insured, the NOC/NOE being sent to the additional insured should have a coupon (to include while making the payment) similar to the one being sent to the policyholder. This is because the additional insured is an individual (versus an organization) and should be enabled to make a payment on the notice. 8

9 Now is a payment is made on the NOC/NOE, the notices sent to the other 3rd parties have to be nullified or rescinded. A rescind letter will have to be sent to all the 3rd parties invalidating the notice. This will have to be done even for policy that are not 3rd party billed but has 3rd parties attached to it. 5.References 1. Wikipedia ( 9