state examinations
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State Examinations. Have No Fear, Help is Here. Risk-Focused Financial Condition Exams. NAIC mandated for state insurance departments beginning 1/1/2010 Goal is to identify solvency issues earlier Compliance with laws and regulations. Risk-Focused Financial Condition Exams. - PowerPoint PPT PresentationTRANSCRIPT
State ExaminationsHave No Fear, Help is Here
Risk-Focused Financial Condition Exams
• NAIC mandated for state insurance departments beginning 1/1/2010
• Goal is to identify solvency issues earlier
• Compliance with laws and regulations
Risk-Focused Financial Condition Exams
Difference between former approach and risk-focused approach
•Former approach: Find material misstatements through detailed testing of account balances
•New approach: Evaluate effectiveness of risk management function; conduct testing in areas with high residual risk
Risk-Focused Financial Condition Exams
Phases of a Risk-Focused Examination Phase 1 Understand the company and identify key functional activities to be
reviewed
Phase 2 Identify and assess inherent risk in activities
Phase 3 Identify and evaluate risk mitigation strategies/controls
Phase 4 Determine residual risk
Phase 5 Establish/conclude examination procedures
Phase 6 Update prioritization and supervisory plan
Phase 7 Draft examination report and management letter based up on findings
Pre-Examination Phase
Review recent financial examination reports released by your state’s department of insurance
• Available on states’ websites
• Findings may be similar from company to company
• Evaluate your company’s compliance relative to these findings
Pre-Examination Phase
Familiarize yourself with the NAIC’s Financial Condition Examiner’s Handbook
• Examination repositories (control listings)
• Sample interview questions
• Exam planning questionnaires
Pre-Examination Phase
• Update/create process documentation including IT and corporate governance functions
• Consider whether controls are evidenced
Risk-Focused Financial Condition Exams
Phase 1: Understand company and identify key functional activities
• Corporate governance• Audit function• Risk management program• Key business processes/units• Prospective risks
Risk-Focused Financial Condition Exams
Corporate governance – “Tone at the Top”• Competency• Independence• Code of conduct• Involvement in risk management
Risk-Focused Financial Condition Exams
Audit function• Independent• Maintain or improve effectiveness of risk management
function• Assure accuracy and completeness of financial reporting• Operational effectiveness
Risk-Focused Financial Condition Exams
Risk management program• Active board oversight• Adequate processes, monitoring and management• Clear policies, authorization limits and procedures• Comprehensive internal controls• Compliance with laws and regulations
Risk-Focused Financial Condition Exams
Key business process/units• Activities and sub-activities • Information technology• Third party relationships
o SSAE 16 reports
Risk-Focused Financial Condition Exams
Prospective risks• Asset liability matching• Loss reserve development• Pricing and underwriting• Reinsurance• Growth, earnings• Capital adequacy• Other business risks
Risk-Focused Financial Condition Exams
Phase 2: Identify and assess inherent risks
•C-level interviews•Financial and environmental review•IT risk assessment•Likelihood of occurrence and significance of impact
Risk-Focused Financial Condition Exams
C-level interviews• Tone at the top• Risk areas• Corporate strategy
Risk-Focused Financial Condition Exams
Prepare for C-level interviews• Circulate sample questions in advance• Consistent message
Risk-Focused Financial Condition Exams
Financial and environmental review• Environmental pressures• Key solvency risks
Risk-Focused Financial Condition Exams
Assess IT risk• Quality and integrity of information• Access controls• Application controls• Availability of information• Security• Recoverability and business continuity
Risk-Focused Financial Condition Exams
Likelihood of occurrence and magnitude of impact• Percent of surplus• Material rating agency downgrade• Impact on reputation• Board and/or senior management attention
Risk-Focused Financial Condition Exams
Phase 3: Identify and evaluate risk mitigation strategies/controls
• Management oversight• Risk management program• Policies and procedures• Control monitoring• Compliance evaluation
Risk-Focused Financial Condition Exams
Management oversight and risk management program
• Evaluated during Phase I• Impacts activity-level controls
Risk-Focused Financial Condition Exams
Policies and procedures• Comprehensive and documented?• Followed?
Risk-Focused Financial Condition Exams
Control monitoring• Compare to commonly accepted standard• Perform control testing• Reliance on external auditor’s work• Evaluate control design and effectiveness
Risk-Focused Financial Condition Exams
Compliance evaluation• Test control procedures
Risk-Focused Financial Condition Exams
Phase 4: Determine residual risk
Phase 5: Conduct exam procedures
Phase 6: Update prioritization
Phase 7: Draft examination report and management letter
Overview of Phases 4-7
• Examiners consider the results of the control testing and then apply professional judgment to determine whether the residual risk in each business cycle is high, moderate or low
• High residual risk = Substantive, more detailed tests
• Moderate risk = Some substantive tests and analytical procedures
• Low residual risk = Few, if any, substantive tests. Mostly high level analytical procedures
Overview of Phases 4-7
Manage examination process using best practices• Provide information in a complete and timely manner
• Participate in regular update meetings with examiners
• Carefully review exam report and management letter for accuracy
Risk-Focused Financial Condition Exams
Contact InformationMarc Smith, CPA, CPCU
Partner
Johnson Lambert LLP
Kellie S. Mixon
Director of Finance
New Mexico Mutual
Janet Byrne, CPA
Sr. Financial Controls Analyst
Pinnacol Assurance