Risk Focused Surveillance Method Updates

By: Ryan Havick

You may have noticed many changes in the financial examination process in recent years. With the implementation of the risk focused examination in 2010 as a part of the accreditation program, state financial examiners have been migrating from a balance sheet focus to a prospective risk approach. As examiners have implemented the risk focused examination process, many insurance companies have observed redundancies in many documents required by state insurance departments.

Continual changes to the NAIC Financial Examiners Handbook address some of the challenges, both to examiners and to companies, as regulatory oversight evolves. More and more information is required by the examiners to adequately identify solvency risks that are inherent in each company. Much of the information examiners are asking for has already been provided to the insurance departments. Just as companies do not always communicate effectively internally between different operational areas, the same can be said for insurance departments. As such, information provided to one division of an insurance department is not necessarily made available to other divisions. One hand doesn't always know what the other hand is doing, so to speak.

The NAIC Risk Focused Surveillance Working Group has been tasked with trying to eliminate redundancies to the examination process to increase efficiency and decrease the burden to insurance companies. Tools increase communication between divisions within insurance departments. One such tool is the Insurer Profile Summary. It is maintained by the designated financial analyst assigned to the company and updated periodically as information is received. Information in this "living" document comes from insurance department divisions, including, Legal, Market Conduct, Rate Filings, Consumer Affairs, and Licensing and Admissions, among others. Having this information in a central location helps examiners obtain many documents which are normally requested from the company during the planning phases. Increased attention to the Insurer Profile Summary went into effect for the 2015 Handbook for as of 2014 year-end examinations.

Another change in the 2015 Handbook is the increased reliance allowed on CPA work papers. CPA statutory audits are an important part of the overall regulatory oversight process and have been a part of financial examinations for many years. Examiners have been tasked to assess the CPA firm, the methodology used in the audit, the quality of work performed, and the conclusions of the auditor on risk areas within the insurance company. These assessments have become more important now that the Handbook has freed the examiner to eliminate some or all testing of inherent risks based upon the work of the auditor. Examiners now have the option of writing a memorandum to completely eliminate control and substantive testing based upon the quality of the CPA's audit work. This change could significantly improve efficiencies in the testing phases of the exams and require fewer documents requested from the insurance company.

There are ongoing discussions on integrating recent changes such as the Corporate Governance framework and ORSA filing requirements into the examination process. There is also a stronger focus on coordinated examinations among state regulatory authorities. Coordinated examinations occur when an insurance holding company has multiple entities domiciled in different states. The NAIC's goal for these types of examinations is to reduce duplicative efforts among the participating state examiners. Additional efficiencies are being identified as more coordinated exams are taking place.

It is the hope that efficiencies in the examination process will increase effectiveness in achieving overall regulatory goals in a way that lessens the burden examinations carry on insurance companies. It is expected that many efficiencies will be noticed immediately, while others are a work in progress. You can become an interested party on the NAIC Risk Focused Surveillance Working Group to monitor progress of recent changes and listen in on discussions about future modifications in examinations.

For more information, contact your local Eide Bailly representative.