A strong audit function drives a smoother regulatory examination process

An efficient risk-focused financial examination has typically been achieved through the effective leveraging of the work performed by both internal and external auditors, herein referred to as the “audit function.” In past iterations of the risk-focused exam process, the leveraging of the audit function work would include re-performance of the control and/or substantive testing available related to each risk identified by the examination team. Currently, the National Association of Insurance Commissioners (NAIC) Financial Condition Examiners Handbook (FCEH) includes guidance for examiners to apply additional judgment to not only leverage audit function work, but also to reduce the number of  financial reporting risks reviewed by the examination team as a result of the audit function work performed.

The purpose of this article is to provide the company with an understanding of an effective audit function and how the examiner’s reliance leads to a smoother and more efficient examination of your insurance company. The article also aims to provide the examiners with a high-level understanding of the reliance process and practices utilized during the examination.

Insurance organizations: leverage your audit function for examination success

Internal audit is known as the third line of defense and, based on the Institute of Internal Auditors, it can be defined as “an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations.” Its primary purpose is to enhance and protect organizational value by providing risk-based and objective assurance, advice and insight.

Internal audit achieves this goal through the identification and verification that the company has strong risk mitigation strategies (controls) in place that are operating consistently to mitigate risks. This value provided to your company extends to the examination team as well. How does this occur? As part of the NAIC risk-focused examination, specifically Phase 3  (control identification and risk mitigation strategies), the examiners may place reliance on internal audit for the controls identified during previous engagements, and how those controls can be utilized to mitigate the risks identified by the examiners.

In most cases, companies that have strong internal audit functions will have smoother examination (and potential cost savings) than companies that have not invested in a strong internal audit function. This concept is especially true if your company is required to comply with the Internal Control over Financial Reporting requirement of the Model Audit Rule, or your related state regulation. Please refer to our article for more information: