Final Report Policy and Procedures Manual for Supervision

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					Technical Assistance Consultant’s Report




Project Number: 34024
January 2003




SRI LANKA: Governance and Institutional Support for
Private Sector Development
(Financed by the Japan Special Fund)




Prepared by Yvette Bavin/James McLaren
The International Securities Consultancy Limited
Hong Kong, China


For the Insurance Board of Sri Lanka


This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and
ADB and the Government cannot be held liable for its contents. (For project preparatory technical
assistance: All the views expressed herein may not be incorporated into the proposed project’s design.
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                          POLICY AND PROCEDURES MANUAL FOR
                                          SUPERVISION



    Contents                                                                  Page


    Section I      Insurance Business Accounting                              2
I                  A. Books and Records
                   B. Reinsurance
I
    Section I1     Inspection of an Insurance Contract                        6


    Section 111    Method of Inspection of an Insurance Contract             12
                   A. Audit of Transactions                                  12
                   B. Performance of Examination Work                        13
                   C. Glossary                                               19


    Section IV     Inspection of an Insurance Broker                         21
                   A. Management of an Insurance Broker                      21
                   B    Broker's Sub-agents                                  21
                   C. Broker's Registration                                  22
                   D. Annual Return & Annual Registration of Broker          23
                   E. Broker's Books & Records                               24
                   F. Restrictions on Activities                             26

I                  G. Underwriting Authority                                 27


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    SECTION I                INSURANCE BUSINESS ACCOUNTING
I
I   Policy:          All those companies that are licensedregistered as an insurance company must
    keep records of all their accounting transactions.
I
I   Procedures:         Each company must be checked regularly (e.g. during on-site inspections) to
                                                                                                f\\




    ensure that they have set-up adequate policies to ensure that the correct procedures iir; being

I   carried out to comply with the law and enable prudent management of their organisation.



I   Note: {Law} indicates that an appropriate, enabling amendment to the RII Act 2000 is
    required to make the supervisory authorities more effective.

I   A.        Books and records

I             1 . The information from the P&P Manual on Monitoring, Section I11 Insurance

I                Business, will enable the inspector to predict what kind of accounting must be
                 taking place. (Refer to the Guideline for On-site Inspections (GOSI), Section 11.

I                B.).


I             2. The company is required to maintain books of account which:


I                       Deal separately with life and general business. (RII Act 2000, S.27)
                        Place assets of the long term fund in a separate estate. (RII Act 2000, S.38)

I                       Deal separately with the Life Funds which are set up for participating life
                        policies. (RII Act 2000, S.39) (GOSI Section 11. B.)
I                       Maintain separate insurance revenue accounting records for each of the
                        general insurance policy classes. (RII Act 2000, S.27)
I
              3. Obtain the chart of accounts from the Chief Accountant. They should contain
I                sufficient detail of analysis to prove that compliance with the law is possible.


I             4. Obtain the financial reports from the Chief Accountant which must show:

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I                 separate revenue accounts and balance sheets for life and general
                  segmented revenue accounts for general policy classes
I                 separate revenue accounts including investment income for the participating

I                 policy classes
                   separate balance sheets and lists of investments for the unitised policy classes.

I          5. The company is required to keep records on policies and claims that:
                                                                                                 XI




I                  Maintain policy registers or records (most effectively by broad p
                   (RII Act 2000, S.28 (a))
                                                                                ,
I                  Maintain claim registers or records (most effectively by broad policy class).
                   (RII Act 2000, S.28 (b)) (GOSI Section VI).

I          6. Policy records may have a master register where the policy numbers will indicate

I              the policy class with brief details of the policy.


I                  There must be paper files containing all matters necessary to the contract (e.g.
                  proposal form, adjustment forms, facultative reinsurance contracts, etc.)
I                  There must be policy files formats which allow generations of adjustments and
                   renewals to be recorded. together with reinsurance details relevant to each
1                  generation of sum insured, by year of policy. These are now generally
                   electronically recorded.
I                  Transactions where facultative reinsurance has been arranged must be clearly
                   recorded.
I                  Certain policies may have more than one insured e.g. a mortgaged property
                   where the bank is a co-insured.
I                  Certain life policies will have a assignment (say to a bank) noted.

I          7. Claims records must carry (GOSI Section VI):

I                  Reference to the parent policy
                   Date of loss. date ofnotification

I                  Records of payments. linked to cash or bank records
                   Records ofestimated outstandings payable value at a point in time

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                       Record of the reinsurance arrangements at the date of loss
I                  There should also be paper files containing the claim form, etc.


I
        B.     Reinsurance (GOSI Section V)
I
I              1. ISBL is to be notified of all reinsuran e treati s, contracts nd arr ngements. (MI
                   Act 2000, S.50)
                                                                                               4L


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I              2. There should be a personal ledger laying out the accounts for each reinsurer, in

I                  addition to the general ledger.



I              3 . The company's method of preparing treaty accounts, recording the payable/
                   receivable balances and cash recording should be investigated.

I              4. Pro-rata treaty cash claims should be investigated (a cash claim is a large claim

I                  requested and paid outside the normal time period for treaty accounting, that is
                   earlier).

I              5. The method of recording non-proportional premiums due, payments of premium

I   i
                   and claims recoverable should be investigated.


I              6. Facultative reinsurance:
                       Facultative reinsurance must be recorded on the policy record.

I                      The facultative contract must be evidenced in the policy file.
                       The claims department must be notified of and understand the basis of the
I                      facultative cession when there is a claim.
                   0   The claims department should be fully conversant with all treaty
I                      arrangements.
                       Premiums payable and claims recoverable systems must be investigated.
I
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               7. Examine the reinsurance ledger to ensure that settlements are being made, both by
I                  the company and its reinsurers.

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I          8. Where there appears to be a delay in the reinsurer responding to a request for
              settlement of a claim(s), request an explanation of the problem.
1
           9. Request details of any bad debt provision made for non performing reinsurers.
1             Ask if the outstanding claims recoverable have been adjusted for this reinsurer's
               share.
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    SECTION I1                        INSPECTION OF AN INSURANCE CONTRACT
I
    Policy:          All those companies that are licencedhegistered as an insurance company
1   must keep records of all their transactions.


I   Procedures: Each company must be checked regularly (e.g. during on-site inspections) to

I   ensure that they have set-up adequate policies to ensure that the correct procedures are being
    carried out to comply with the law and enable prudent management of their organisation.'

I
I   The following form lists out a procedure to enable a supervisor to inspect an individual
    contract. These should be examined on a sample basis to gain an overall impression of the

I   company's management control.



I             Test                     Action                         Reaction

              Determine a class of     Select a random sample of      If there is no policy register,
I             policies to be           policies from a policy class   this is a breach of the law.
              inspected.               register.
I   2         Select a policy.         Obtain the policy file and     If either does not exist, this is a
                                       the policy record.             breach of the law.
1   3         Was the policy           Examine the broker/ agent      If there is no file, this is a
              introduced by a          file.                          breach of the law. There must
I             broker or an agent?                                     be a contract of agency which
                                                                      defines the Broker in terms of
1                                                                     a company or the Agent in

I                                                                     terms of his National Identity
                                                                      Number.

I   4         Is the agent/broker
              registered'?
                                       Examine the IBSL data
                                       base.
                                                                      If unregistered, this is a breach
                                                                      of the law.

I   5         Agent qualify cation     Examine agent file for
                                       proof of qualification for
                                                                      If the file is inadequate, or the
                                                                      agent is inadequate, this is a

I                                      registration.                  breach of the law and rules.



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             Sum insured and        Compare the sum insured             Ask the underwriting manager
I            reinsured.             to the (company's) rules            to explain the breach of
                                    for reinsuring this class. If       internal company rules.
I                                   the rules are not followed,
                                    why not? If a facultative
I                                   cession was made, is the

I            Where facultative
                                    retention within the rules?
                                    Is the facultative contract         If not, ask the underwriting    '




R            reinsurance has
             been arranged.
                                    evidenced in the policy
                                    file, or associated file?
                                                                        manager where the proof of
                                                                        cover is.           1   /




I            Appropriate
             authority to arrange
                                    Is the authority to arrange
                                    the facultative cession and
                                                                        The authority for such a
                                                                        cession must be determined, if

I            a facultative
             cession.
                                    accept the broker, if any, as necessary at the level of asking
                                    well as to use that             k
                                                                        the Chief Executive.

I                                   reinsurer, for that class of
                                    business and size of risk,
                                                                    '




I                                   shown on the file or in a
                                    procedure manual?

I   9        Premium: was the
             premium computed
                                    Obtain rate table by class,
                                    or similar internal
                                                                        If there is a rate table, e.g. for
                                                                        motor, and the premium does

I            according to a
             company rate table,
                                    document.                           not agree with the rate table,
                                                                        ask the underwriting manager

I            or by some other,                                          to explain. If the rate was not
             authorised                                                 computed by some authorised

I            techque?                                                   technique, check the authority
                                                                        of the underwriter.
1   10       EML: was anEML         Obtain company                      Query the anomaly with the
             sum insured used to    procedures for the use of           underwriting manager.
I            compute cession        EML, check procedures
             and retention?         were followed.
I   11       Commission: Was        Compare published IBSL              Query the anomaly with the
             any commission         rules, or company's own             underwriting manager.
I            calculated in          rules. to the computation of


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             accordance with the      commission.
I            rules?
    12       Net premium: Was         Examine broker and agent       Query any anomaly with the
I            the premium paid         personal ledger account.       chief accountant.

I            gross or net of
             commission, was it

I            settled in account
             with a broker?

I   13       Facultative
             premium: Was the
                                      Check Facultative
                                      premium day book
                                                                     If the facultative premium has
                                                                     not been accounted or paid

I            facultative premium      (possibly a computer print
             accounted for by the out) for entry of the
                                                                     there is no cover and the
                                                                     company’s accounts are in

I            company and paid
             to the reinsurer or
                                      premium. Check the
                                      reinsurer or broker
                                                                     error. Ask chief accountant to
                                                                     explain.

I            broker?                  personal ledger account for
                                      the entry and cash

I   14       Mid-term sum
                                      settlement.
                                      Check the computation and      Query anomalies with the

I            insured adjustments
             properly computed
                                      allocation of mid-term
                                      premium adjustments to
                                                                     underwriting manager.


I            and reinsured.           pro rata treaty reinsurers
                                      and facultative reinsurers.

I                                     Repeat the actions under
                                      points 6, 9 and I0 above.
I                                     If a new facultative
                                      reinsurance has been
I                                     purchased. repeat points 7,
                                      8 and 13.
I   15       Claim: l f a claim is   I No claim file.               I This is a breach of the law.
I            reported within the
             policy period

I            inspected. obtain the
             claim tile.

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    16       Claim register:         No entry.                     This is a breach of the law.
             check claim is
             entered in the
             relevant claims
             register.


    17       The claim falls         If the claim is held to be    Obtain an explanation fo rhte
             within the terms of     not covered by the policy,    non-acceptance from the

I            the policy cover,
             date and time of
                                     what action was taken?        claims manager.



I            occurrence and the
             policy wording of

I   18
             cover.
             Reinsurance:            Compare pro-rata              Query any anomaly with the
             treaties and            reinsurance allocation on     claims manager.
             facultative cessions.   the policy premium at the

I                                    date of the claim event
                                     with the reinsurance

I                                    allocation of the claim.
                                     They should be the same

m   19       Reinsurance: non
             proportional
                                     Check if an EML amount
                                     was used and if the EML
                                                                   Query any anomaly with the
                                                                   claims manager.

I            protections properly
             applied.
                                     protection policy must be
                                     called upon, i.e. the

I                                    estimate was wrong.


I   20       Reinsurance: non        Check to see if there is an   Query any anomaly with the
             proportional            aggregation with other        claims manager.
I            protections properly    losses and if non
             applied.                proportional protections
I                                    must be used. A large loss
                                     file showing aggregating
I                                    losses should exist.


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    21       Reinsurance: non       Check to see if this is a loss Query any anomaly with the
I            proportional           from a portfolio which is       claims manager.
             protections properly   only protected by non
I            applied; indexing of   proportional reinsurance
             deductibles.           (e.g. liability). Is the loss
I                                   great enough to be partly

I                                   recoverable and are the
                                    programme protections

I                                   indexed and is the index
                                    being applied?
    --
I   33       Experts reports
             obtained.
                                    Test the procedure for
                                    obtaining experts' reports
                                                                    Query any anomaly with the
                                                                    claims manager.

I                                   for the type of claim
                                    examined. What type of

1                                   expert was used and what
                                    was the authorisation for

I   23       How is the claim
                                    his use'?
                                    Test the basis for arriving     If claims are seen to be badly

I            cost estimated?        at the provision by claim,
                                    within the policy class.
                                                                    under reserved when notified,
                                                                    compared to the final

I                                                                   settlement cost, query this
                                                                    treatment with the claims

I                                                                   manager.
    24       A u thorisation of     Test the procedure for          Query any anomaly with the
I            payments.              making payments and             claims manager.
                                    obtaining the agreement of
I                                   the claimant to the
                                    settlement.
I   25       Are the payments       Test the cash records
                                                                    ~~




                                                                    Query any anomaly with the
             being properly         against the claim records.      accounts manager.
I            recorded'?
    26       Are claims paid        Test accounts and personal      Query any anomaly with the
I            being recovered        ledger records against the      accounts manager.

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         from facultative       claim records.
         reinsurers?
27       Are reinsurers         Test the procedures             Query any anomaly with the
         paying cash losses     required by the reinsurance     accounts manager.
         for major losses as    contract. Examine the
         required by the        treaty returns for the period
         reinsurance            in which a cash loss was
         contract? Are they     received.
         being matched off
         in subsequent treaty
         statements?
28       Are reinsurers being   Test the procedures             Query any anomaly with the
         notified of major      required by the reinsurance     claims manager.
         losses as required     contract. Failure to notify
         by the reinsurance     the reinsurer can lead to
         contract?              contract problems and
                                subsequent refusals to pay.
29       Are non                Test the schedules which        Non proportional losses on
         proportional           compute the recovery. If        catastrophes and non
         reinsurance claims     the recovery is subject to      proportional indexed
         recoverable being      indexation, check that the      programmes give great
         properly computed      technician understands and      difficulty and reinsurers can
         and recovered?         can explain the                 demand to inspect the records.
                                methodology.                    Query any anomalies with the
                                                                claims and underwriting
                                                                managers.
                                                                ~~




30       Are treaty accounts    Test the treaty declarations    Query any delays or errors
         declarations being     for the policy class, say       with the accounts manager.
         prepared in            three quarters of them. Test
         accordance with the    the values inserted: their
         contract. both as to   basis in the accounts
         their content and      system. and the timing of
         timetable?             preparation and dispatch.

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     SECTION I11             METHOD OF INSPECTION OF AN INSURANCE CONTRACT
I
     Policy:         All those companies that are licencedregistered as an insurance company
I    must keep records of all their transactions.

I.   Procedures:     Each company must be checked regularly (e.g. during on-site inspections) to

I    ensure that they have set-up adequate policies to ensure that the correct procedures are being
     carried out to comply with the law and enable prudent management of their organi

I    The following is based on a relatively standard format that is used by many s
     conducting an on-site inspection, as well as by other inspectors ca            ut an 'audit' on a

I    random selection of files.]



I    A.        Inspection of Transactions

I              1. Quality standard

1                 During the course of the examination of systems and records, the Supervisor is to

1                 obtain sufficient, reliable, relevant and useful evidence to achieve the on-site
                  examination objectives effectively. The inspection findings and conclusions are to

I                 be supported by appropriate analysis and interpretation of this evidence.


I              2. Need for Guideline


I                 a. The purpose of this guideline is to provide guidance to the Supervisor to
                     design and select an examination sample and evaluate sample results.
I                    Appropriate sampling and evaluation will meet the requirements of "sufficient,
                     reliable, relevant and useful evidence'' and "supported by appropriate
I                    analysis".


I                 b. The Supervisor should consider selection techniques which result in a
                     statistically based representative sample for performing compliance or
I                    substantive testing.
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               c. Examples of compliance testing of documented procedures with laid down
I                  criteria where sampling could be considered would include levels of authority
                   exercised    by    individuals as shown       in   the    company’s procedures
I                  documentation,      premium     tariff   procedures,     reinsurance   programme
                   documentation, acceptable reinsurers criteria, claims settlement procedures
I                  and authorities, etc.

I              d. Examples of substantive tests where sampling could be considere

I                  performance of a complex calculation (e.g. premium rate) on
                   policies: a pro-rata reinsurance cession and claim recovery, accounting a

I                  facultative cession and reinsured claim recovery, the preparation of a quarterly
                   pro rata treaty account, etc.

I              e. This Guideline provides guidance in applying examination standards. The

I                  Supervisor should use professional judgement in its application and be
                   prepared to justify any departure.

I              f. Other useful references on Examination Sampling include the International

I                  Standard on Auditing #530, Audit Sampling and other Selective Testing
                   Procedures, issued by the International Federation of Accountants (IFAC).

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    B.     Performance of Examination Work

I
            1. Examination Sampling
I
               a. When using either statistical or non-statistical sampling methods, the
1                  Supervisor should design and select an examination sample, perform
                   examination procedures and evaluate sample results to obtain sufficient,
I                  reliable, relevant and useful examination evidence.


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               b. In forming an examination opinion Supervisors frequently do not examine all
I                 of the information available as it may be impractical and valid conclusions can
                  be reached using an examination sampling only.
I
               c. Examination sampling is defined as the application of examination procedures
I                 to less than 100% of the population (i.e. certain files) to enable the Supervisor

I                 to evaluate examination evidence about some characteristic of the items
                                                                                           b-
                  selected in order to form, or assist in forming, a conclusion concer'ning the
                                                                                                -,



I                 population.



I              d. Statistical sampling involves the use of techniques from which mathematically
                  constructed conclusions regarding the population can be drawn.

I              e. Non-statistical sampling is not statistically based and results should not be

I                 extrapolated over the population as the sample is unlikely to be representative
                  of the population.

I
I          2. Design of the Sample


I              a. When designing the size and structure of an examination sample, Supervisors
                  should consider the specific examination objectives, the nature of the

I                 population and the sampling and selection methods.


1              b. The Supervisor should consider the need to involve appropriate specialists in
                  the design and analysis of samples.
I
               c. Sampling Unit - The sampling unit will depend on the purpose of the sample.
I                 For compliance testing of controls. attribute sampling is typically used. where
                  the sampling unit is an event or transaction (e.g. a control such as an
I                 authorisation on an invoice). For substantive testing, variable or estimation
                  sampling is frequently used where the sampling unit is often monetary.
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               d. Examination objectives - The Supervisor should consider the specific
i                  examination objectives to be achieved and the examination procedures which
                   are most likely to achieve those objectives. In addition, when examination
1                  sampling is appropriate, consideration should be given to the nature of the

I                  examination evidence sought and possible error conditions.


               e. Population - The population is the entire set of data from which the Supervisor
I                  wishes to make a sample in order to reach a conclusion on the population.

I
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                   Therefore the population from which the sample is drawn has" to be
                   appropriate and verified as complete for the specific examination objective

I              f. Stratification - To assist in the efficient and effective design of the sample,

I                  stratification may be appropriate. Stratification is the process of dividing a
                   population into sub-populations with similar characteristics, explicitly defined,

I                  so that each sampling unit can belong to only one stratum.



I              g. Sample size    - When determining sample size, the Supervisor should consider
                   the sampling risk, the amount of the error that would be acceptable and the

I                  extent to which errors are expected.


I               h. Sampling risk - Sampling risk arises from the possibility that the Supervisor's
                   conclusion may be different from the conclusion that would be reached if the

I                  entire population were subjected to the same examination procedure. There are
                   two types of sampling risk:
                       The risk of incorrect acceptance - the risk that material misstatement is
                       assessed as unlikely. when in fact the population is materially misstated.
1                       The risk of incorrect rejection - the risk that material misstatement is
                       assessed as likely. when in fact the population is not materially misstated.
I
                i. Sample size is affected by the level of sampling risk that the Supervisor is
                   willing to accept. Sampling risk should also be considered in relation to the
                   examination risk model and its components. inherent risk. control risk. and
                   detection risk.

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I                 Tolerable error - Tolerable error is the maximum error in the population that
                  Supervisors are willing to accept and still conclude that the examination's
1                 objective has been achieved. For substantive tests, tolerable error is related to
                  the Supervisor's judgement about materiality. In compliance tests, it is the
I                 maximum rate of deviation from a prescribed control procedure that the

1                 Supervisor is willing to accept.



1              k. Expected error - If the Supervisor expects errors to be present in the
                  population, a larger sample than when no error is expected ordi

I                 examined to conclude that the actual error in the population is not greater than
                  the planned tolerable error. Smaller sample                   e justified when the

I                 population is expected to be error free. When
                  in a population, the Supervisor should consi
                                                                                ng the expected error
                                                                                atters as error levels

I                 identified in previous examinations, changes in the organisation's procedures
                  and evidence available from an evaluation of the system of internal control

I                 and results from analytical review procedures.


I          3. Selection of the Sample

I              a. There are four commonly used sampling methods:

I                        Statistical Sampling Methods:
                            Random sampling - ensures that all combinations of sampling units in
I                    +
                     .      the population have an equal chance of selection.
                            Systematic sampling - involves selecting sampling units using a fixed
1                           interval between selections. the first interval having a random start.
                            Examples include Monetary Unit Sampling or Value Weighted
I                           selection where each individual monetary value (e.g. $1) in the
                            population is given an equal chance of selection. As the individual
I                           monetary unit cannot ordinarily be examined separately. the item
                            u hich includes that monetary unit is selected for examination. This
I                           method systematically weights the selection in favour of the larger

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                            amounts but still gives every monetary value an equal opportunity for
I                           selection. Another example includes selecting every 'nth sampling unit.
                      Non Statistical Sampling Methods:
I                           Haphazard sampling - in which the Supervisor selects the sample

I                           without following a structured technique, avoiding? however, any
                            conscious bias or predictability. However, analysis of a haphazard

I                           sample should not be relied upon to form a conclusion on the
                            population.

I                           Judgmental sampling - in which the Supervisor places a bias-on the
                            sample (e.g. all sampling units over a certain value, all for a specific

I                           type of exception, all negatives? all new users, etc.). It should be noted
                            that a judgmental sample is not statistical1      sed and results should

I                           not be extrapolated over the population as, the sample is unlikely to be
                            representative of the population.

I              b. The Supervisor should select sample items in such a way that the sample is

I                 expected to be representative of the population regarding the characteristics
                  being tested, i.e. using statistical sampling methods. In order to maintain

I                 examination independence? the Supervisor should ensure the population is
                  complete and control the selection of the sample.

I
               c. For a sample to be representative of the population, all sampling units in the
I                 population should have an equal or known probability of being selected? i.e.
                  statistical sampling methods.
I
               d. There are two commonly used selection methods:
I                       selection on records: common methods being:
                        0   Random Sample (statistical sample)
I                           Haphazard Sample (non statistical)
                            Judgmental Sample (non statistical; high probability to lead to a biased
1
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                            conclusion)

I                 and



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                      Random Sample (statistical sample on monetary units)
                  0   Fixed Interval Sample (Statistical sample using a fixed interval)
                  0   Cell Sample (statistical sample using random selection in an interval)




       4. Documentation                                                                >   .




           The examination workpapers should include sufficient                describe clearly
           the sampling objective and the sampling process use                rkpapers should
           include the source of the population. the samplin                   used, sampling
           parameters (e.g. random start number or method by which random start was
           obtained. sampling interval), items selected, details of examination tests
           performed and conclusions reached.




       5. Evaluation of Sample Results


           a. Having performed, on each sample item. those examination procedures which
              are appropriate to the particular examination objective, the Supervisor should
               analyse any possible errors detected in the sample to determine whether they
              are actually errors and, if appropriate. the nature and cause of the errors. For
              those that are assessed as errors, the errors should be projected as appropriate
              to the population, if the sampling method used is statistically based.


           b. Any possible errors detected in the sample should be reviewed to determine
               whether they are actually errors. The Supervisor should consider the
              qualitative aspects of the errors. These include the nature and cause of the
              error and the possible effect of the error on the other phases of the
              examination. Errors that are the result of the breakdown of an automated
              process ordinarily have wider implications for error rates than human error.



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               c. When the expected examination evidence regarding a specific sample item
I                 cannot be obtained, the Supervisor may be able to obtain sufficient appropriate
                  examination evidence through performing alternative procedures on the item
I                 selected.


I              d. The Supervisor should consider projecting the results of the sample to the

I                 population with a method of projection consistent with the method used to
                  select the sampling unit. The projection of the sample may involve

I                 the probable error in the population and estimating any further error
                  not have been detected because of the imprecision of the technique, together

I                 with the qualitative aspects of any errors found.



I              e. The Supervisor should consider whether errors in the population might exceed
                  the tolerable error by comparing the projected population error to the tolerable

1                 error, taking into account the results of other examination procedures relevant
                  to the examination objective. When the projected population error exceeds the

I                 tolerable error, the Supervisor should reassess the sampling risk and if that risk
                  is unacceptable, consider extending the examination procedure or performing

I                 alternative examination procedures.


I   C.     Glossary

I          Examination Sampling: the application of examination procedures to less than 100%

I          of the items within a population to obtain examination evidence about a particular
           characteristic of the population.

I
           Error: control deviations (compliance testing) or misstatements (substantive testing).
I
           Muteriulity: an expression of the relative significance or importance of a particular
I          matter in the context of the organisation as a whole.


I          Populcrtion: the entire set of data from which a sample is selected and about which the
           Supervisor wishes to draw conclusions.
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I          Sampling Risk:       the probability that the Supervisor has reached an incorrect
           conclusion because an examination sample rather than the whole population was
I          tested. While sampling risk can be reduced to an acceptably low level by using an
           appropriate sample size and selection method, it can never be eliminated.
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    AD6 TA NO.3567-SRI
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    SECTION IV                        INSPECTION OF AN INSURANCE BROKER


    Policy:          All those broker companies that are licensedhegistered as an insurance broker
I   must keep records of all their transactions.


I   Procedures:      Each broker must be checked regularly (e.g. during on-site inspections) to

I   ensure that they have set-up adequate policies to ensure that the correct procedures are being
    carried out to comply with the law and enable prudent management of their organisation.
                                                                                       " & % *       5


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I   A.        Management of an insurance broker



I             1. The supervisor must ensure that the controllers, directors and managers are fit and
                 proper. (GOSI Section 11.D.)

I             2. The supervisor must ensure that the broker has no forbidden connection with an

I                insurer (GOSI Section 1I.D.)



I             3. The principal office of the broker must be registered and the premises inspected
                 from time to time.

I             4. Copies of the professional indemnity policy must be inspected. (GOSI Section

I                VII1.B)


I             5 . A copy of the membership list of the Sri Lanka Association of Insurance Brokers
                 must be matched with the IBSL list of registered insurance brokers.

I
I   B.        Broker's sub-agents


I             1 . A proposed agent must be clearly identified and a clean criminal record must be
                 proved.
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           2. A proposed agent must be compared to the IBSL database to ensure that the
I              person has not been recorded with an adverse comment, which should prevent him
               from being registrated. An agent already recorded as the (sub-)agent of another
I              broker cannot be registered as an agent of the proposing broker. (RII Act 2000,
               S.78 ( 5 ) )
I
I          3. A proposed agent must prove that he has the required level of education, as per the
               current IBSL rules (RII Act 2000, S.78 (4))

I          4. The broker maintenance of the IBSL agent database, available via the Internet,

I              must be checked. Failure to maintain this database should give rise to disciplinary
               action by the IBSL against the broker. (RII Act 2000, S.78 (1))

I
I   C.     Broker’s registration



I          1. The application for registration must have all of the following attached:



I              a. Certified copy of the Memorandum and Articles of Association.


I              b. Certified copy of the certificate of incorporation, with statements showing the:
                        Shareholders

I                  0    Directors
                   0    Senior managers
I
               c. Statements setting out paid up share capital as per the requirements made
I                  under (RII Act 2000, S.80 (1) (a)).


I              d. Certified copy of Form 48 , Registrar of Companies. duly perfected.


I              e. Statement setting out the class or classes of insurance business to be conducted
                   i.e. Lon2 Term or General (RII Act 2000, S. 1 14 (1) (a), (b)).
I
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               f. Certified copy(ies) of the professional indemnity policy(ies).
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               g. Any other specified documents.
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               h. Application fee.
I
I          2. The items mentioned in the paragr ph abc re must be satisfact ry, must meet the
               specifications made by the IBSL (where so specified) and, where appropriate, be

I              subjected to the methods specified in the GOSI Section 11.



I          3. The level of business activity (RII Act 2000, S.82 (1) (a)) compared to the level of
               capital (RII Act 2000, S.81 (c)) and financial standing (MIAct 2000, S.82 (1)

I              (c)). {Law} This process requires a proper three year financial plan, the data
               supplied is inadequate to make the judgement at RII Act 2000, S.82 (1) (c).

I
I   D.     Annual return and annual registration of broker



I          1 . The requirement for the annual registration application must be checked:
                  Policy of professional indemnity

I                 Statement of annual business transacted
                  Renewal fee
I
           2. Annually submitted audited financial statements. (RII Act 2000, S.86 (2)).
I              [{Law} A procedure to ensure that adequate capital resources exist to support the
               level of business written, is required.]
I
           3. On the annual returns. the names of insurers with whom the broker has done
I              business and the proportion of its placements placed with that insurer: must be
               checked. It may be necessar!. to make a restriction on the percentage of such
I              placements with an individual company. kvhere it appears that the broker is
               behaving like a tied agent, unless he can show that he has been obtaining quotes
I              from various companies. (RII Act 2000. S.86 (3)).

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     E.          Broker's books and records
 I
          1 Test
 I   I
                                          Action

              Determine a sub-class of Select a random sample of
                                                                         Reaction

                                                                         If there is no policy register,

 I            policies to be inspected.   policies from a policy class
                                          register.
                                                                         this a breach of the law.


 I   2    I Select a policy.              Obtain the policy file and
                                          review the policy record.
                                                                         If either does not exist, this i s
                                                                         a breach of the law.

 I                                        Examine the sub-agent file. If there is no file, this is a
                                                                         breach of the law. There must
'I                                                                       be a contract of agency which
                                                                         defines the (sub-) agent in
 I                                                                       terms of his National Identity
                                                                         Number.
 I   4        Agent registered.           Examine the IBSL               The agent must be registered.
                                          database.
 I   5        Agent qualification.        Examine the agent file for     If the file is inadequate, or the
                                          proof of his qualification     agent is inadequate, this is a
 I
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     +------
          I



              Premium received.
                                          for registration.


                                          Premium payment date
                                          should be checked against
                                          the cashbook.
                                                                         breach of the law and the
                                                                         rules.
                                                                         Ask the accountant for an
                                                                         explanation if the receipt is
                                                                         unrecorded.
                                          Examine the insurer            If not made on time, ask the
 I   7        Remittance to company
              made according to the       remittance record (e.g. the    accountant for an explanation.

 I   8
              law.
              Certificate of insurance
                                          ledger for that insurer).
                                          Test method of issuing         The issuance of a certificate

'I        1   issued (e.g. auto cover     certificates. Compare copy     must be recorded. Spoiled
              note, cargo insurance       of' certificates to policy     certificates must be retained.

 I            certificate, trav e I
              insurance, etc.)
                                          records.                       Any certificates not recorded
                                                                         against a policy record must

 8   9        Underwriting agent          Inspect contract of agency
                                                                         be queried with brokers.
                                                                         If there is no contract of

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        powers exercised (on          for a description of the      agency, ask the company
I       behalf of the insurance       broker’s powers.              secretary for an explanation.
        company), e.g. for an
1       auto insurance or cargo
        insurance policy.
I       Reporting of                  Inspect the bordereau and     Require an explanation from

I       underwriting by
        bordereau to company.
                                      compare to policy records.
                                      Check for missing policies
                                                                    the accountant.



I                                     not entered on the
                                      bordereau.

I       Commission rates.             Examine all the broker‘s
                                      agreements with the
                                                                    If the rates_pf-commission are
                                                                              an those set by the

I                                     individual companies
                                      setting out the commission
                                                                    IB-SL, query with the
                                                                    company secretary.

1                                     rates. Examine the broker-
                                      insurer accounting to see

I                                     what commission rates are
                                      actuaIIy being paid.

I       Other income from
        insurers.
                                      Examine accounting
                                      records to see if the
                                                                    Obtain a copy of the
                                                                    agreement under which these
I                                     insurers are paying the       payments are made. Consult
                                      brokers additional income     with IBSL Legal Department
I                                     (e.g. an overriding           on the legitimacy of these
                                      commission, volume            payments under the
I                                     commission, etc.)             determination of
                                                                    commissions.
I       Adjustment premiums.          Does the broker maintain a    If the broker does not
                                      schedule of policies? This    maintain this detail, ask why
I                                     should include a premium      not.
                                      adjustment based upon
I                                     turnover, wage roll. etc.
        Adjustment premiums.          Does the broker collect the   If the broker collects on his
I                                 ’



                                      declaration and adjustment    own volition, how is the

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                                                            ~~




                                    premium on his own            insurer notified? Ask the
I                                   volition or await             underwriter.
                                    notification from the
1    -
                                    insurer?
     15 Adjustment premiums.        Are all adjustment            See test 7.
I                                   premiums remitted?

1    16 Renewal notices and
          insurance certificates.
                                    Are all renewal insurance
                                    certificate papers returned
                                                                  If not, why not? Ask the
                                                                  broker manager.
                                                                                        i   ,




I                                   to the insurer where the
                                    policy was not renewed?

I                                   Are they returned swiftly
                                    after the non-renewal date?
     -

I    17 Insurance underwriters
          properly authorised.
                                    Are all the insurance
                                    companies being used by
                                                                  If the company is not Sri
                                                                  Lanka registered, request a

I                                   the broker with a Sri
                                    Lankan registered
                                                                  copy of the IBSL written
                                                                  consent, for their use, from

I                                   company or else authorised
                                    for use by IBSL. Check for
                                                                  the broker’s company
                                                                  secretary.

I                                   use of non Sri Lankan
                                    companies in the policy

I                                   records and accounts
                                    records.

I    -



I    F.     Restrictions on activities


I            I . The financial accounts of a broker must be examined and queries raised to
                discover if the broker is carrying on business other than that of a broker. If a
I               broker is conducting business other than insurance broking business, proof of the
                consent granted by the IBSL must be requested from the company secretary.
I
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           2. A broker may place business only with a Sri Lanka authorised insurer (RII Act
I              2000, S.101 (l), unless the IBSL has granted consent to the contrary. (RII Act
               2000, s.101 (2).
I
           3. Commission rates are subject to a maximum tariff. (MI 2000, S.89).
                                                                   Act
I
I   G.     Underwriting authority

I          1. The supervisor must examine the broker's con

I              activities are within the contract of agency as stipulated.



I          2. The supervisor must inspect the broker's reco
               agency is being properly operated.
                                                                                 e contract(s) of



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