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Total Number of Subscribers: 464 |
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Date: 19th August 2008 |
Compiled by Mr. M. Sathya Kumar |
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Audit of Insurance Company using CAATs Introduction : Vivek Sawhney
has been the Chief Audit Executive at Wishful Insurance Company Ltd. for the
last 15 years. He and his team had been auditing, using around the computer
techniques for auditing the computer applications in the company. The techniques
followed defined the audit coverage, given the team size and the spread of
operations. While the Audit Committee in the last 3 quarter meetings has been
mentioning about the need to make the audit process rigorous and
comprehensive, no manpower increase has been sanctioned by the management.
The Operational Management was under pressure to focus resources on ensuring
being ahead of the competition leaving less for the Audit Budgets. Vivek attended the
International Conference on Internal Audit of Insurance Companies to identify
the international trends in the area of audit in Insurance Companies. He
returned to Methodology : The existing audit manual/objectives were
used as a basis for building up the audit plan and approach. The difference was in the place of audit.
While earlier travel plans for long periods was a norm, it was decided to analyse data locally and forward queries to the branches,
followed up with shorter duration visits for discussion and document
verification. If earlier reference to hard copies of the reports were used
for audit, now direct access to the transactional data was introduced for
verification and analysis. Earlier, the auditors used to apply
judgement at the time of audit in terms of the audit direction. The Audit
programs using the CAAT were sought to be made more detailed with specific
intermediate steps of analysis also being defined. Sample audit plans and
tests were prepared and an introductory training imparted to the team
members. Two user champions were identified who spearheaded the introduction
of the tool in the audit team. Referring to the audit plan, each audit
project and objective within the project was reviewed for applicability of
the audit tool. Objectives were established for the main streams of activity
covering premium and claims. Specific modules of the audit tool as applicable
were then identified for achievement of the objective. This detailed audit
program and audit program steps were then documented. A list of potential
audit tests is given in Exhibit 1. In Premiums, objectives were dealt with to
include establishing the accuracy of premiums collected, authorisation
for discounts offered, validity of manual policies
prior to system integration, justifications for policies cancelled shortly
after inception and accuracy of penalties levied in case of repetitive past
claim history. In Claims, objectives were dealt with to
include establishing the validity of claims, validity of close proximity
claims, justifications for operational delays in claim settlement, accuracy
of agency commission and settlement of claims on policies underwriting risks
for stolen motor vehicles. Certain additional analyses were dealt with
to include rolling comparison of incurred losses over three years to identify
cases for premium enhancement especially in case of repetitive claim history.
Development officer business solicitation practices were also studied in case
of high loss policies over a period of time. Finally, certain financial tests were
undertaken to establish the accuracy and validity of the system of balances
and postings between sub ledgers and general ledger control accounts. An
illustrative audit plan is given in Exhibit 2. The audit was initiated using this document.
Observations and recommendations : Under-recovery of premium : Using the extraction functionality and
applying the same to the premium file, 4 cases were identified out of 17013
during the period where motor premium has been under-recovered. A closer review showed the following : In Policy Numbers 103001140500007 and
103001140500444 the city being BHUJ, location was wrongly selected as PUNE
while preparing the policy. Hence the system picked up the premium rate for
PUNE, which is 2.5, whereas 4 should have been applied for BHUJ. In Policy Numbers 101701140500500 and 101701140500356
the city being LATUR, locations were wrongly entered as In Policy Numbers 101101160500085 and
101403160500784 the vehicles have been registered and are being used in Pune, but the Officer has wrongly selected the locations
as Learning : The development officer while selecting the location field in
the policy generation process has inadvertently selected the wrong location
from the index in the insurance application software without taking note of
the correct City field. As premium is applied based on the location field, and since the
location does not match with the city in certain cases, incorrect (short)
premium has been applied. As a system suggestion the Location field should not be a
stand-alone field. The field should be linked to the city field in the
application system. Re-verification of discretionary discount allowed on premiums
in the non-tariff free market insurance segment : Excess discount allowed for Vehicle registration number MH 14 CG
555, Insured Alok, and Agent code 11, the discount
allowed is 8% whereas agent 11 has the authority to give discounts only up to
4% of the Gross Premium. The Division Office has given a special approval for Policy No.
101205160500015, Insured Alok for a higher discount
rate from the norm, for which the necessary approval documents are available
on record prior to policy release. The agent while exercising his discretionary rights for discount
had gone over limit in two cases. The system has inbuilt controls to control
the discount rate as per the masters, and any exceptions over the masters
have to be electronically approved by the DO, which was actually done in the
first case. It appears that the system had been bypassed in the second case
without a preventive message. This matter needs to be addressed to the
in-house IT Team for their comments and action. Verification of rating fields for special additional
impost/penalty in case of frequent claim history on sensitive policies : The management audit team at the Divisional Office has
identified the following Policies in the earlier year having excessive claim
history — 101106160400045, 103001160400333, 101004160400478, &
101701160400174. This inference has been made from the Incurred Loss Statement
for Motor Claims for 2004. Due to repetitive claim history, the Divisional
Office has ordered an Additional Excess Impost of Rs. 500 to be charged per
renewal in the current year. Based on the policy numbers forwarded by Divisional Office to
the Branch office, the management audit team at the branch has used the
conversion facility in the insurance application software to ar-rive at the corresponding current policy numbers. The development officer while renewing the existing policy in
the system had not referred to the list of policies experiencing repetitive
claim history as informed by the Divisional Office to the branch. The procedure of manual comparison of current policies against
past policies is flawed, tedious and subject to error of oversight or
inadvertent omission. List of policies experiencing frequent claims in the past should
be mastered within the insurance application system. Whenever an agent renewed an existing policy which came within
the frequent claim history category, the system should automatically prompt the
agent to levy the impost, without which the new policy cannot be created in
the system. The discretion to waive the impost should vest with the
Divisional office through electronic validation. Conclusion : Based on such observations arising from the use of tools, the
auditor was able to effectively demonstrate improved performance in the next
Audit Committee meeting and the effort of the entire team was appreciated. Article by Deepjee Singhal Manish Pipalia
Chartered Accountants |
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