Skip Ribbon Commands
Skip to main content

E&O Audits Aren't Too Scary

By Eric Moberg, The Moberg Group

The word “audit” tends to make people cringe. For some the thoughts of mean IRS bean counters scrutinizing your finances come to mind. Over the years we have referred to audits as “E&O Risk Management Reviews” or “Agency Operational Reviews,” but that is really just semantics. Bottom line is that the word “audit” can have a very positive meaning.
After performing hundreds of audits, I can assure you that the vast majority of agencies that have audits performed become repeat clients. I’m sure most other auditors would tell you the same thing. There must be some significant benefit to the agency or it wouldn’t be the case. Let’s start with who the auditors are:
  • Most agency auditors have extensive agency backgrounds, some as managers, others as agency owners. The average auditor has more than 20 years in the business. Some that are more “seasoned,” like myself, have more than 40 years in the insurance business and have owned their own agency.

  • Most of us have performed audits in hundreds of agencies over the years and visit new agencies every month. We have probably seen almost every variation there is in agency operations and markets, including wholesalers, MGAs and MGUs. These agencies vary in size from just a few people to the largest agencies in the country. My smallest client has two employees including the agency principal; my largest has more than 1,200. They vary in other ways too, including agencies in the most rural areas to those in the largest cities, and agencies that are generalists to the extremely specialized.

  • Auditors gather a tremendous amount of agency operational knowledge from their exposure to so many different organizations. We see and learn new things from innovative agencies all the time, giving us a good perspective of what’s going on in the industry.

  • Sometimes it can be scary for the auditor too! On occasion we also see some of the worst of agency operations with little structure and little or no management. We learn from those agencies as well.
Now that I’ve covered who will perform your audit, I’m sure you want to know what’s in it for your agency. The answers are many, but let’s start with the benefit that catches most agency owner’s eye. The agency may receive a three-year 10 percent premium credit for completion and compliance with the audit. This credit is in addition to any E&O education credits you may earn on an annual basis through your association. In most cases the credit will pay for most or all of the cost of the audit in the first year!
The most obvious benefit is the reduction of E&O exposure for your agency. Going through an E&O claim is not pleasant. Besides the financial impact with the deductible, additional legal expenses, cost of management and staff being tied up in depositions or court, it can be an emotional event for the employees involved. Completing an audit does not guarantee that you will not be sued, but if you have followed the audit recommendations it should put you in a more defensible position.
Another benefit I hear often from my clients is that we bring industry knowledge that they would not be exposed to on their own. I am often asked “how does my agency stack up to others you see?” Of course things we see that are proprietary within an agency are never shared with another agency. However, general things we see including industry trends, communication methods used with agency clients and innovative marketing ideas can sometimes be shared as they are not specific to one agency.
One important benefit we have developed over the years is providing agencies with solutions to the more common recommendations of their audit results. We have more than 80 documents, checklists, disclaimers and wording they can use in client communications and documentation. We also have samples of compensation plans, non-piracy agreements, renewal questionnaires and catastrophe and data security plans. We also provide a copy of our widely used Agency Operations & Procedures Manual.
One objection, usually from an agency that has never had an audit, is the fear that it will take too much time away from their work. I can assure you that an audit is not disruptive to the agency. We are well aware that your work with clients comes first. We normally have just one staff member away from their desk at a time and for no more than 20-30 minutes for workflow and communications-oriented discussions. How do they interact with your clients, with each other and with your carriers? How is communication documented, and are the communication and documentation processes consistent with procedures?
The “trinity” of E&O risk management is: communication, documentation and consistency. Every agency can benefit from developing consistent workflow and documentation. Audits help to identify areas that can be improved and provide the path to achieve consistency in the agency.

The good news is that most agency audits are done voluntarily. They are not punitive in nature, and it is a “win-win” for the agency, state association program and E&O carrier. Great ideas can be exchanged, new methods learned and developed and E&O exposure reduced. The feedback from the staff is usually very positive as they feel included and hopefully influence positive change within the agency.
So, let your fears subside. Contact Laura Cornell at 803.760.1227 or about having an audit performed in your agency before your next renewal.

 Don't run from opportunity! E&O Audits aren't that scary.

This article appears in the Winter 2014 edition of SC Agent & Broker magazine.

View full issue