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RISK-FOCUSED SURVEILLANCE FRAMEWORK UPDATE. Agenda  Overview of Risk Assessment Cycle  Conducting Risk-Focused Exams  Seven Phases to Conducting Exams.

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Presentation on theme: "RISK-FOCUSED SURVEILLANCE FRAMEWORK UPDATE. Agenda  Overview of Risk Assessment Cycle  Conducting Risk-Focused Exams  Seven Phases to Conducting Exams."— Presentation transcript:

1 RISK-FOCUSED SURVEILLANCE FRAMEWORK UPDATE

2 Agenda  Overview of Risk Assessment Cycle  Conducting Risk-Focused Exams  Seven Phases to Conducting Exams  Status and Project Timeline

3 Risk Assessment Cycle INSURER PROFILE SUMMARY Internal/External Changes Examination Priority System Supervisory Plan Risk Based Examination Identify Functional Activities Identify/Assess Inherent Risk Identify & Evaluate Controls Determine Residual Risk Establish Procedures and Conduct Exam Update Supervisory Plan Exam Report//Mgmt Letter Develop Ongoing Supervision That Includes: Frequency of Exams Scope of Exams Meetings with Company Management Follow-Up on Recommendations Financial Analysis Monitoring Priority System Based on Dept. analysis and NAIC financial Analysis tools: Scoring System ATS Results IRIS Ratios Financial Analysis includes: Risk Assessment Results Financial Analysis Handbook Process Ratio Analysis (IRIS, FAST, Internal Ratios) Actuarial Analysis Update with internal/external changes Off-Site Risk Focused Financial Analysis Consider Changes to: NRSRO Ratings Ownership/Management/ Corporate Structure Business Strategy/Plan CPA Report or Auditor Legal or Regulatory Status

4 Examination Risk Based Examination Identify Functional Activities Identify/Assess Inherent Risk Identify & Evaluate Controls Determine Residual Risk Establish Procedures and Conduct Exam Update Supervisory Plan Exam Report//Mgmt Letter

5 Off-Site Risk Focused Financial Analysis Financial Analysis includes: Risk Assessment Results Financial Analysis Handbook Process Ratio Analysis (IRIS, FAST, Internal Ratios) Actuarial Analysis Update with internal/external changes

6 Internal/External Changes Consider Changes to: NRSRO Ratings Ownership/Management/ Corporate Structure Business Strategy/Plan CPA Report or Auditor Legal or Regulatory Status

7 Priority System Priority System Based on Dept. analysis and NAIC financial Analysis tools: Scoring System ATS Results IRIS Ratios

8 Supervisory Plan Develop Ongoing Supervision That Includes: Frequency of Exams Scope of Exams Meetings with Company Management Follow-Up on Recommendations Financial Analysis Monitoring

9 Insurer Profile Summary  General/Basic Information  Business Summary  Priority Rating  Regulatory Findings  Regulatory Plan  External Information  Key Financial Data  Overall Summary

10 Seven-Phase Examination Process 1-4  Phase 1 – Understand the Company and Identify Key Functional Activities to be Reviewed  Phase 2 – Identify and Assess Inherent Risks in Activities  Phase 3 – Identify and Evaluate Risk Mitigation Strategies/Controls  Phase 4 – Determine Residual Risk

11 Seven-Phase Examination Process 5-7  Phase 5 – Establish/Conduct Exam Procedures  Phase 6 – Update Prioritization and Supervisory Plan  Phase 7 – Draft Exam Report and Management Letter Based on Findings

12 Risk Assessment Matrix

13 Parts to Phase 1 1.Understanding the Company 2.Understanding the Corporate Governance Structure 3.Assessing the Adequacy of the Audit Function 4.Identifying Key Functional Activities 5.Consideration of Prospective Risks Phase 1 – Understand the Company/Identify Key Activities

14 Steps to Part 1- Understanding the Company 1.Gather Necessary Planning Information 2.Review the Gathered Information 3.Analytical and Operational Reviews 4.Consideration of Information Technology Risk 5.Update the Insurer Profile Phase 1 – Understand the Company/Identify Key Activities

15 Part 2- Understanding the Corporate Governance Structure  Understanding the Organizational Structure  Understanding & Assessing the Board of Directors  Understanding & Assessing Management Phase 1 – Understand the Company/Identify Key Activities

16 Part 3-Assessing the Adequacy of the Audit Function  External audit  Internal audit Phase 1 – Understand the Company/Identify Key Activities

17 Part 3-Assessing the Adequacy of the Audit Function External  Provide understanding of control structure  Understand CPA’s risk assessment  Review compliance and substantive procedures Phase 1 – Understand the Company/Identify Key Activities

18 Part 3-Assessing the Adequacy of the Audit Function Internal  Financial  Operational  Compliance  IS or Technology Phase 1 – Understand the Company/Identify Key Activities

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20 Part 4- Identify Key Functional Activities  Identify key activities using company background information from various sources. Phase 1 – Understand the Company/Identify Key Activities

21 Part 5-Consideration of Prospective Risks  Consideration of prospective risks is an intrinsic element of a risk-focused examination and should occur throughout all phases of the examination process

22 Phase 2 – Identify Inherent Risk  Key activities and sub-activities identified in Phase 1 are the building blocks for identifying inherent risk.  Inherent risk is the risk before considering internal controls.  The examiners asks the question, “What can go wrong?” for each of the key activities.

23 Phase 2 – Identify Inherent Risk Inherent risk that has been identified is then classified into the branded Risk Classifications. CreditMarketPricing/ Underwriting ReservingLiquidityOperational/ Financial Rptg. LegalStrategicReputational

24 Phase 2 – Assess Inherent Risk Inherent risk is assessed by considering:  the likelihood of occurrence,  the magnitude of impact and  examiner’s judgment.

25 Phase 2 – Assess Inherent Risk Likelihood of Occurrence: The likelihood that the risk will occur or would prevent a process or activity from attaining its objectives.  Low: rare occasions.  Moderate-low: at some time.  Moderate-high: probably occur at some time.  High: expected to occur most of the time.

26 Phase 2 – Assess Inherent Risk Magnitude of Impact: The potential impact or potential materiality of a risk.  Magnitude of Impact is measured as:  Threatening: Greater than 5% of surplus  Severe: 3-5% of surplus  Moderate: 1-3% of surplus  Immaterial: Less than 1% of surplus

27 Phase 2 – Assess Inherent Risk

28  The insurer’s control risk should be assessed by determining how well the risk mitigation strategies/controls offset the inherent risks identified  Leverage off work of external/internal audit and company self-assessments. Phase 3 – Risk Mitigation Strategies

29 The Overall Risk Mitigation Strategy/Control Assessment ratings to be indicated in the Risk Assessment Matrix are:  Strong Risk Management  Moderate Risk Management  Weak Risk Management

30 Phase 4 – Determine Residual Risk Inherent Risk – Internal Controls = Calculated Residual Risk Overall Residual Risk = Calculated Residual Risk +/- Examiner’s Judgment

31 Strong Controls Moderate Controls Weak Controls High IR Moderate to High High Moderate IR Low to Moderate Moderate Low IRLow IR = Inherent Risk Phase 4 – Determine Residual Risk

32 Phase 5 – Establish/Conduct Exam Procedures  After completion of the Risk Assessment for key activities, the nature and extent of testing can be determined and the examination procedures designed accordingly.  Examination procedures should be selected to correspond with the financial reporting and other than financial reporting risks noted within the entity.

33 Phase 5 – Establish Exam Procedures Key Concept: Focus examination effort where there is more risk. Examination procedures should be designed to focus on the risks that remain after consideration of internal controls.  High Residual Risk – Substantive tests  Moderate Residual Risk – Fewer substantive tests and analytical procedures  Low Residual Risk – Minimal substantive tests, more analytical procedures, potentially eliminate tests.

34 Phase 6 – Update Prioritization and Supervisory Plan  From relevant and material findings:  Update priority score  Establish the Supervisory Plan for on-going analysis  Examination Report and Management Letter should be a reflection of the Prioritization and Supervisory Plan

35 Phase 7 – Draft Exam Report and Management Letter  Examination Report – Contains the findings of the examination related to the scope  Management Letter – Optional tool to convey results and observations noted during the exam that are not needed in the public report  Vehicle for ongoing dialogue with insurer  Content determined by state insurance department

36 Handbook Revisions Exposed for Comment – Training Program for Implementation of the Risk-Focused Process 2004 Adoption of Risk-Focused Surveillance Framework 2010 Proposed Accreditation Standards 2006 – Adoption of the Revisions to the NAIC Financial Condition Examiners Handbook Timeline Dual Examination Approach


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