Key Takeaways from Our Latest Comprehensive Third-Party Insurance Verification Survey
January 11, 2023
Key Takeaways from Our Latest Comprehensive Third-Party Insurance Verification Survey
As an industry leader in Third Party Risk Management, Evident has a unique point of view on the landscape of insurance verification for 3Ps.
Each year, we comb through our huge trove of customer data and share our insights on the state of 3P insurance verification as we see it. You can get your own free copy of our 2022 report here.
Evident reviews more than 50,000 3P policies per month and has verified coverage from nearly 1,000 different carriers.
Our 2021 survey revealed that many companies struggle to verify 3P insurance coverage, resulting in a significant amount of vicarious liability hidden within their own 3P networks. Unfortunately, our 2022 findings reveal that not much has changed when it comes to how organizations are protecting themselves by verifying 3P coverage.
Our 2022 report dives even deeper into describing and understanding this problem, looking at specific coverage types and industries, and considering various financial indicators and implications. carriers.
Requiring third parties to carry adequate insurance coverage and enforcing compliance is one of the most effective ways enterprises can protect themselves. Verification reduces their risk by ensuring that 3Ps can cover any losses they themselves cause.
Verification drives better risk-management performance from a wide variety of 3Ps, including franchisees, vendors, sub-contractors, and borrowers.
That’s why it’s somewhat troubling that our 2022 data suggests that 75% of 3Ps are non-compliant. Putting an even more daunting number with that compliance gap, we estimate that enterprises have an average of $1.875 billion in hidden risk exposure when they fail to meet 3P insurance requirements.
In order to be certain that coverage is active and in place, enterprises expend a great deal of effort attempting to verify their 3Ps’ proof of insurance. Our research continues to demonstrate that many insurance verification programs deliver very poor performance, exposing organizations to substantial risk.
We’ve found that most 3P compliance gaps fall into four primary categories:
- The Requiring Company has confusing or overcomplicated insurance requirements.
- The Requiring Company is not communicating requirements effectively, resulting in errors in submitted COI’s and creating more work.
- The Requiring Company is making multiple exceptions and overrides to allow non-compliant 3Ps to stay in-network.
- The Requiring Company is unable to remedy the compliance gap for the Insured and compliance fails.
Enterprises that still verify 3P coverage compliance manually are prone to encounter one or more of these gap issues.
“One of the biggest challenges we see is that almost every enterprise has its own approach to verifying their 3Ps,” says Evident Chief Revenue Officer David Wellner., “This results in a lot of confusion for the 3P itself.”
As an example, Wellner says, “If I’m a pet food manufacturer and I sell to two different retailers, I’m likely going to have two different sets of requirements. One might ask for an emailed COI from me, while the other needs it from my broker, but I need access to a supplier portal to upload it.”
And while most of these challenges present themselves across the entire range of industries, each sector tends to face a unique set of issues when it comes to 3P compliance.
Industry-specific Pain Points
Here’s where our 2022 identified the biggest 3P verification challenges for eight major sectors:
Retail is a diverse segment to begin with and most retailers have significant diversity in their own 3P population. This is reflected in the wide array of coverage types present and in the huge range of products involved.
In order to manage this diversity, retailers need nuanced coverage groups and the ability to add to or modify them easily. Failing that, they risk having too-minimal requirements – which creates risk – or overly stringent requirements, which can drive off suppliers or force exceptions.
Grocery risk managers face a high volume of both providers and risk types. Being able to manage this quickly and efficiently is key, as it ensures always having up-to- date visibility into every third party – both compliant and non-compliant.
Speed is also an issue. If a grocery store owner or operator has a tainted or a recalled product on its shelves, they need to know quickly, and identify where the affected products are located to get them off the shelves and disclose this information to their customers.
At the same time, they need to rapidly identify the vendor of that product’s insurance information for reporting purposes to ensure that the vendor is paying for any losses that stem from the problem product.
Flexibility is key for convenience stores. While they face many of the same risks as other retailers – especially grocery stores – the variability of risks sets them apart.. Auto incidents on premises, fuel- handling incidents, crime, “slip and fall” incidents, and liquor sales all must be managed. Each store has a different mix of these risks.
Being able to build out third-party insurance requirements that can handle all of this complexity and change is critical.
Electronics & Technology Retailers
In this fast-moving sub-segment of retail, stores need to be able to respond quickly to changes in the market with up-to-the-minute information and minimal unexpected interruptions to relationships. Having a verification solution that can pinpoint issues with suppliers and anticipate problems provides a critical advantage when the next back-to- school season or iPhone release occurs.
Around 80% of fast food restaurant chains deploy franchise models that include multiple ownership categories. This can make it difficult to track insurance compliance when each franchise category has specific and varied requirements. A standalone franchise, for example, has different insurance requirements than a non-traditional franchise like those in malls and airports.. A small-town franchise in Alabama could have vastly different insurance requirements than a big-city franchise in California. For this reason – among others – franchisee insurance verification processes are no easy feat.
The fragmented and nuanced way that insurance coverage is applied in the trucking and transportation industries makes the verification process incredibly complex.
Additionally, high coverage requirements for transporters indicate that claims are both more expensive than average and relatively frequent. Compliance is critical in this space due to the high cost of damages in serious automobile accidents, which can result in claims against both the Requiring Company and the carrier in the search of deep pockets.
3P compliance is a significant concern for government agencies of all types: municipal, state, and even federal. Governmental organizations have the added burden of extensive regulatory oversight and scrutiny. As such, they must be able to demonstrate their third parties’ compliance with insurance and other requirements to an auditor on demand.
A failed audit can create a great deal of additional work and can be a direct threat to leadership. Putting a better system in place to verify insurance, accurately analyze it, ensure it is up to date, and produce reports on demand are all critical initiatives for these organizations.
For many manufacturers, the riskiest area with regard to 3Pis the sheer quantity and diversity of them, and the resulting supply chain risk that ensues when there are many different types of partners to manage. A single order can have several third-parties as a critical step or provider in the flow – and all must be covered in order to get the job done. Visibility into the total insurance risk of the supply chain is paramount.
Another common risk is a product recall, which can be complicated and catastrophic.
While commercial lenders, like any enterprise, have a need to verify insurance coverage for third parties that they employ or do business with, they are primarily concerned with how to verify insurance on loans for commercial assets and collateral.
Lenders require loans to be verified several times during the life of the loan: At origination, any time the loan or asset changes hands, and then again at renewal and verification of coverage for collateral can be extremely complicated.
This is where Evident’s 3P insurance verification comes in.
The most immediate benefit of automating third-party insurance verification is the improved visibility into compliance rates. The next benefit is a better understanding of previously provided COI’s and other communications. Finally, Requiring Companies end up with a comprehensive view of their entire network of third parties, including compliance levels and potential trouble spots.
The average company Evident partners with manages about 2,000 3P insurance verifications a year. Within the first six months of partnering with Evident, companies typically see their 3P insurance compliance rates double, dramatically reducing their exposure.
Requiring Companies that started out with a 42% compliance rate in December 2021, for example, are now over 85% compliant as of June 2022. The key drivers for this is Evident software’s unique ability to help enterprises deliver:
- Automation of all the major processes of verification: communication, extraction, decisioning, monitoring, and fulfillment
- Clear, specific communication with Insureds on requirements and how to accomplish them, including administrative requirements like Additional Insured and Waiver of Subrogation
- Flexibility of requirements in order to craft coverage groups that meet the needs of all third-parties
- Communication of both intent and process specific to an Insured with clarity and precision
Evident’s technology-based solution is focused on specifically improving performance in these areas. Using Evident demonstrably improves the performance of Requiring Companies. As more time passes, more improvement is seen.
“Our customers turn to us and are looking for freedom within a framework,” Wellner says, “They want something that will establish guardrails, but is adaptable to the way they do things. That’s what we’re here to provide.”