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🔍 '''Reinsurance audit''' is a formal examination of the records, processes, and financial transactions associated with a [[Definition:Reinsurance | reinsurance]] relationship, conducted either by the [[Definition:Reinsurer | reinsurer]] reviewing the [[Definition:Ceding company | ceding company's]] operations or by the cedent auditing the reinsurer's claims-paying practices and financial condition. In the insurance industry, reinsurance audits serve as a critical governance mechanism because the reinsurer's financial exposure depends entirely on the accuracy of information provided by the cedent — including [[Definition:Bordereaux | bordereaux]] data, [[Definition:Premium | premium]] reporting, [[Definition:Loss reserve | loss reserve]] estimates, and [[Definition:Claims management | claims]] handling decisions — all of which the reinsurer typically has no direct control over.

⚙️ Most [[Definition:Reinsurance treaty | reinsurance treaties]] and [[Definition:Facultative reinsurance | facultative]] contracts include an audit clause granting the reinsurer the right to inspect the cedent's books and records, usually with reasonable notice. In practice, reinsurers deploy audit teams or engage third-party specialists to visit the ceding company's offices and examine [[Definition:Underwriting | underwriting]] files, [[Definition:Claims handling | claims files]], [[Definition:Policy administration system | policy administration data]], and accounting records to verify that the cedent is operating within the terms of the treaty — including adherence to the agreed [[Definition:Risk appetite | risk appetite]], proper classification of ceded business, and accurate calculation of [[Definition:Ceding commission | ceding commissions]]. For [[Definition:Delegated underwriting authority (DUA) | delegated authority]] business flowing through [[Definition:Managing general agent (MGA) | MGAs]] or [[Definition:Coverholder | coverholders]], the audit may extend to those intermediaries as well. In the [[Definition:Lloyd's | Lloyd's]] market, reinsurance audits are supplemented by the market's own delegated authority audit framework, which imposes minimum standards on [[Definition:Syndicate | syndicates]] and their coverholders. Globally, regulatory expectations around reinsurance audit practices vary — [[Definition:Solvency II | Solvency II]] requires European insurers to have robust oversight of their reinsurance arrangements as part of the [[Definition:Own Risk and Solvency Assessment (ORSA) | ORSA]] process, while U.S. state regulators expect compliance with [[Definition:National Association of Insurance Commissioners (NAIC) | NAIC]] credit-for-reinsurance standards that implicitly require cedents to verify reinsurer reliability.

📊 Neglecting reinsurance audits exposes both parties to significant financial and operational risk. A cedent that does not audit its reinsurers may discover too late that a counterparty lacks the willingness or capacity to pay claims, converting what appeared to be a well-protected portfolio into an unhedged exposure. Reinsurers that forgo auditing their cedents may find themselves absorbing losses from business that was written outside the treaty's terms, or facing inflated [[Definition:Loss reserve | reserves]] driven by inadequate [[Definition:Claims management | claims management]]. High-profile reinsurance disputes — several of which have resulted in costly [[Definition:Arbitration | arbitrations]] — have often traced their origins to failures that a rigorous audit program would have caught. As reinsurance relationships increasingly involve complex structures such as [[Definition:Sidecar | sidecars]], [[Definition:Insurance-linked securities (ILS) | ILS]] arrangements, and [[Definition:Quota share reinsurance | quota share]] programs with embedded profit commissions, the scope and sophistication of reinsurance audits have expanded accordingly, making them an indispensable element of sound [[Definition:Enterprise risk management (ERM) | enterprise risk management]].

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Reinsurance]]
* [[Definition:Ceding company]]
* [[Definition:Bordereaux]]
* [[Definition:Delegated underwriting authority (DUA)]]
* [[Definition:Reinsurance treaty]]
* [[Definition:Enterprise risk management (ERM)]]
{{Div col end}}

Definition:Reinsurance audit - Revision history

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