Auditors assess compliance with a binding authority agreement by testing the coverholder's actual practice against the agreement's terms, the underlying TOBA, and applicable regulations. They review authorities and limits, sample underwriting and claims files, inspect bordereaux and financial controls, and grade each finding by severity.
The depth of testing depends on the class of business, the authority granted and the coverholder's track record. This article explains which clauses come first, how files are sampled, what evidence is requested, how findings are rated and what happens once the report is issued.
Which clauses do auditors test first in a binding authority?
Auditors usually test the clauses that define the boundaries of the coverholder's authority first: the scope of business, territorial limits, policy limits, premium and commission terms, and reporting obligations. These clauses set the benchmark against which every file, report and payment is later measured.
Before fieldwork begins, a good auditor reads the binding authority agreement alongside the TOBA, any endorsements and the previous audit report. This confirms that the version being tested is the current, signed one and that any open actions from earlier reviews are carried forward.
The clauses that typically receive early attention include:
- Authorised classes of business, territories and maximum limits of liability
- Rating, pricing and referral requirements
- Claims authority, including settlement limits and notification triggers
- Bordereaux content, format and deadlines
- Premium handling, trust accounts and settlement terms
- Sub-delegation, outsourcing and use of third-party administrators
TOBA compliance matters here too. If the TOBA requires specific payment timings or fiduciary account arrangements, the auditor checks that the coverholder's processes actually meet them rather than assuming the paperwork reflects practice.
How do auditors test underwriting and claims files?
Auditors test underwriting and claims files by selecting a sample, tracing each file from inception to current status, and comparing every decision to the authority granted. A delegated underwriting audit asks whether risks were within appetite, priced correctly and documented. A claims review asks whether handling stayed within settlement authority.
Sampling is rarely random alone. Auditors normally combine a random selection with targeted picks, such as large risks, referrals, declined business, late-notified claims and anything flagged in bordereaux. This gives a fairer picture than a purely random sample, which can miss the files that carry the most risk.
What does an underwriting file review cover?
For each sampled policy, the auditor checks that the risk fell within the authorised class, territory and limits. They look at whether the rating was supported, whether required referrals to the carrier took place, and whether the policy wording, premium and commission match the binding authority agreement. Documented underwriting rationale is as important as the outcome.
What does a claims file review cover?
For delegated claims authority, the auditor confirms that reserves were set promptly, settlements stayed inside authority, and notifications reached the carrier when required. They also look at fair customer outcomes, including communication quality and timeliness. Complaints handling is often reviewed alongside, since poor claims handling is a common source of complaints.
What evidence do auditors request from coverholders?
Auditors request documents that prove how the coverholder operates, not just what its policies say. This includes the signed agreement, procedures manuals, underwriting guidelines, sample files, bordereaux, financial records, and evidence of oversight such as committee minutes and training records.
A typical pre-audit request follows a clear order:
- Signed binding authority agreement, TOBA and any amendments
- Underwriting, claims, complaints and conduct policies and procedures
- Recent bordereaux (premium and claims) with supporting reconciliations
- Trust or fiduciary account statements and premium settlement records
- Staff authority matrices, CVs, training and competence records
- Business continuity, data protection and outsourcing arrangements
- Complaints logs, management information and previous audit responses
Strong bordereaux audit work depends on this evidence. Auditors reconcile reported figures against the underlying files and bank records, because data that looks tidy on a spreadsheet can still hide errors in risk coding, premium allocation or claims reserving.
Coverholders who send complete, well-labelled evidence in advance usually see shorter fieldwork and fewer follow-up queries.
How do auditors rate findings and non-compliance?
Auditors rate findings by severity and impact, typically using a scale such as high, medium and low, or critical, major and minor. The rating reflects the risk to the carrier and customers, how widespread the issue is, and whether it breaches the agreement, regulations or both.
There is no single market-wide scale, so carriers and audit firms define their own. Whatever the labels, a sound rating considers:
- Impact: potential financial loss, customer detriment or regulatory exposure
- Frequency: a one-off slip versus a pattern across the sample
- Control environment: whether a control exists but failed, or never existed
- Intent and awareness: whether the coverholder identified and reported the issue itself
Context matters. A missed referral on one file is a different matter from a systematic failure to refer risks above the limit. Clear reports explain why a finding earned its rating, so the coverholder understands the reasoning as well as the outcome. Auditors should also give credit where controls work well, since a balanced report is more credible and more useful.
What happens after a binding authority audit report?
After the report is issued, the coverholder reviews the findings and agrees an action plan with owners and deadlines, and the carrier tracks remediation to closure. Serious findings can lead to restricted authority, increased monitoring, a follow-up audit, or in the most severe cases, suspension or termination of the binding authority.
The usual sequence is straightforward. The auditor shares a draft so factual errors can be corrected, the final report goes to the carrier and coverholder, and the coverholder submits a management response. Each action should have a named owner and a realistic date.
Effective delegated authority oversight does not end with the report. Carriers monitor progress through follow-up reviews, desktop checks or a targeted re-audit of high-rated findings. Evidence of closure, such as updated procedures, retrained staff or corrected bordereaux, is what turns audit findings and remediation from a paperwork exercise into a genuine improvement in control.
How Otter Audit helps with binding authority audits
Otter Audit is a London-based specialist in delegated authority auditing, with ACII-qualified Chartered Insurers who understand how binding authorities work in practice. The team has visited over 500 insurance firms across 50 countries and works with over 60 insurers.
For carriers and coverholders, that experience translates into:
- Delegated underwriting, claims, complaints, pre-bind and run-off audits tailored to the agreement being tested
- Clear, reasoned findings that explain significance and recommended action
- Reports delivered on time, supported by a six-year record of meeting agreed deadlines
- Technical depth across niche and specialist products
To see how this works in practice, explore Otter Audit's delegated authority audits, or contact the team to discuss your next binding authority review.