MGA Audit Findings and Termination Risk
Granite Mutual delegates binding authority to Ridgeline Underwriters, an MGA, for small commercial package business. Ridgeline produced $24 million of gross written premium last year across 6,400 policies at a 22% commission. The three-year loss ratio is 71% and the expense ratio is 28%, so the combined ratio is 99%. A sample audit of 200 files finds 18% missing required inspection reports, 7% rated below the approved minimum, and 12% of claims reported more than 30 days late. Ridgeline's binding authority is $250,000 per risk. Granite's chief underwriting officer wants to terminate; the CFO notes that the commission and overhead recovery are material and that termination would leave a $3 million expense hole. The audit also finds that Ridgeline's underwriters have not completed the latest flood-endorsement training.
1. Estimate the financial exposure from the audit findings and explain which findings you would prioritize.
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Start with the rating finding: 7% of 6,400 policies is 448 policies. Average premium is $24m ÷ 6,400 = $3,750. If the average rate deficiency is 12%, premium leakage is about 448 × $3,750 × 12% ≈ $202,000, before any claims consequence. The missing inspection reports affect 18% of files, or about 1,152 policies; the exposure is not the report cost but unassessed risk, especially flood or wind hazards, so it should be prioritized above the premium leakage. Late claims reporting at 12% increases the chance of prejudice and late notice disputes, and the missing flood training compounds that. I would prioritize flood training and inspection remediation first, then retroactive rating corrections, then claims-timing controls. The $3m termination cost is a real constraint but does not justify leaving uncontrolled underwriting risk in place.
2. Recommend whether Granite should terminate, remediate, or impose sanctions, with specific conditions.
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Termination is premature on a 99% combined ratio, but continuing unchanged is not acceptable. Recommend a 90-day cure plan with sanctions: suspend binding authority above $100,000 per risk until inspection and training gaps are cleared; require Ridgeline to complete flood training for all underwriters within 30 days; require re-underwriting or endorsement of the 448 under-rated policies and recovery of the premium leakage; and require inspection reports on all open files within 60 days. Granite should hold a premium reserve or offset against commission until remediation is verified. If the 90-day targets are missed, terminate with a documented exit plan. The CFO's $3m expense hole should be addressed in the exit contingency, but it should not override the underwriting control failure.
3. Design the ongoing monitoring Granite should use after remediation.
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Use a risk-based monitoring package rather than a single annual audit. Monthly: premium and policy counts by product, average rate change, claims-reporting lag, and binding-authority exceptions. Quarterly: file audit of at least 50 policies weighted toward high-hazard occupancies, with pass/fail thresholds for inspections, rating, and flood endorsements. Annually: full underwriting and claims audit, plus a review of Ridgeline's own quality-control function. Set escalation triggers, such as more than 5% of files missing inspections or more than 3% rated below minimum, that automatically reduce authority or suspend new business. Require Granite's chief underwriting officer to sign off quarterly on the MGA's compliance, and report the results to the board risk committee. The goal is early detection, not another retrospective audit.