Complete or Not Complete? That is the Question…...Hates Yellow Skittles Completeness Testing 5 Presentation Objective – Examiners will develop a better understanding of the Handbook

Complete or Not Complete?

That is the Question…

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Presenter Extraordinaire

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Rick Nelson, CFE, CIEPrincipal – Regulatory Services Johnson Lambert LLP

Financial Examination Specialist 30+ Years Insurance Experience Read the entire FCEH from cover to cover Avid Muppet Enthusiast


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Richard Foster, CFEManager – Regulatory Services Johnson Lambert LLP

Financial Examination Specialist 29+ Years Insurance Experience Voted Best SOFE President (by himself) Semi-Professional Alaskan Bear Wrestler


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Scott Garduno, FSA, MAAAActuary / Original GangsterTaylor-Walker Consulting, LLC

Life and Health Actuary 15+ Years Actuarial Experience Retired Brad Pitt Impersonator Hates Yellow Skittles

Completeness Testing

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Presentation Objective – Examiners will develop a betterunderstanding of the Handbook requirements for datacompleteness testing and increase their exam skills throughan introduction to efficient testing approaches in the currentelectronic environment.

Completeness – Definition

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“What is in a name? That which we call a population would still be incomplete without testing.”Definition – Completeness is an

examination assertion that confirms that all transactions and events that should have been recorded have been recorded.

A complete population is necessary to make a proper shellection!

Handbook - Completeness

· The examination assertion for Completeness (CO)verifies whether all transactions and account balancesthat should be recorded in the annual financial statementwere recorded.

Applicable to noted reserving and operational risks Is particularly relevant for liability accounts Considered in accordance with the accreditation process

(whether the company has understated their liabilities)

· – NAIC Financial Condition Examiners Handbook

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“Oh, oh, is this from that ‘Book of Hands’?!”

Handbook – Accuracy & Cutoff

· The examination assertion for Accuracy (AC) verifieswhether recorded transactions and account balances aremathematically accurate, are based on correct amounts andhave been classified into the correct account. This assertionwould often be applicable to noted operational risks and isparticularly relevant for both liability and asset accounts.

· The examination assertion for Cutoff (CT) verifies whethertransactions are recorded in the correct accounting period.This assertion is essential for both asset and liability accountsas the inappropriate inclusion of assets or the exclusionof liabilities within the financial statements may cause thefinancial statements to be misstated.


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Handbook - Sampling for Control Testing (Phase 3)

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· Describe how completeness of the population was considered.

Scheduled or cyclical controls are executed by the company ona routine basis

Other controls are performed as often as a transaction or eventoccurs

The examiner should determine the number of occurrencesthat took place during the defined testing period and use thisnumber to proceed with sample selection and testing


“Can MY hands go in the book too?”

Handbook - Non-Statistical Sampling (Phase 5)

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Asset balance - A simple scanning or analytical reviewof the population may be sufficient to considercompleteness.

Liability balance - Additional review and testing forcompleteness may be necessary.

The sample used to test completeness cannot be drawnfrom the population of recorded items being tested.

Independent or reciprocal source of informationrelated to the account being tested

Source selected is truly independent


Handbook - Attribute Sampling (Phase 5)

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· Describe how the completeness of the population wasconsidered.

Confirm the completeness of the database throughcomparison to external sources.

Developing a test of completeness will vary fromcompany to company and requires a solid understandingof the company and available data.

Examiners should document their rationale and methodsused to ensure completeness.


“Does this mean I’m an Examiner now, too?”

Completeness Testing – Audit Workpapers

· Key Factors to consider when taking reliance upon the work of others:

Clearly document the source

Supplement with additional testing, if necessary

Document the reliance in the ROWD

Label and explain the testing performed, as well as results of the testing, if not already clear

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“No, it’s not cheating! Auditors like when we

use their work! ”

“No, it’s not cheating! Auditors like when we

use their work! ”

“Meee.”

Completeness Testing – AICPA Guidance

· Information Produced by the Entity and Used for the Auditor’sPurposes (Ref: par. .09a–b)

· .A50 In order for the auditor to obtain reliable audit evidence,information produced by the entity, including any management’sspecialist, that is used for performing audit procedures needs to besufficiently complete and accurate. For example, the effectiveness ofan audit procedure, such as applying standard prices to records ofsales volume to develop an expectation of sales revenue, is affected bythe accuracy of the price information and the completeness andaccuracy of the sales volume data. Similarly, if the auditor intends totest a population (for example, payments) for a certain characteristic(for example, authorization), the results of the test will be lessreliable if the population from which items are selected for testingis not complete.

· - AICPA, SAS, AU-C Section 500: Audit Evidence

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Completeness Testing – AICPA Guidance

· .A51 Obtaining audit evidence about the accuracy andcompleteness of such information may be accomplishedconcurrently with the actual audit procedure applied to theinformation when obtaining such audit evidence is an integralpart of the audit procedure itself. In other situations, theauditor may have obtained audit evidence of the accuracyand completeness of such information by testing controlsover the preparation and maintenance of the information.In some situations, however, the auditor may determine thatadditional audit procedures are needed.

· - AICPA, SAS, AU-C Section 500: Audit Evidence

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“Meep.”“Translation: Auditors should

test for completeness!”“Translation: Auditors should

test for completeness!”

Completeness – Reserving Risks

Incomplete claims data can distort development patterns leading to inaccurate reserve calculations

Reserves would likely be understated.

Incomplete or inaccurate exposure data can also have a major impact for reserves particularly for P&C companies where the actuary relies on exposure based reserving methods.

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What about the risk of running out of

cookies?

Completeness Testing - Reserves

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The type of Completeness Testing for Reserving varies by Line of Business

Life

Health

P&C / WC

LTD / LTC

You complete me…

Completeness Testing – Life

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“Shall I compare thee to a Mortality Table?”


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Key Attributes:

Age

Gender

Issue Date

Face Amount

Gross Premium

“What does it say?” “I don’t know, I don’t speak NERD!”

Completeness Testing - Life

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Identified Risk Possible Controls Possible Test of Controls Possible Detail Tests

In-force data is not complete or accurate nor consistent with accounting records

The insurer has established appropriate internal controls over the input and maintenance of in-force data as outlined in the Examination Repository –Underwriting.

The in-force data is tested periodically by the insurer’s quality assurance (QA) function for completeness and accuracy.

The insurer’s system is programmed to issue insurance contracts utilizing sequential policy numbers.

In-force database is reconciled to accounting records on a periodic basis.

Perform tests to verify the operating effectiveness of policy in-force controls as outlined in the Examination Repository –Underwriting.

Review the QA reports relating to the testing of in-force data to verify the operating effectiveness of the controls.

Verify through observation and/or reperformance that system parameters prohibit the issuance of non-sequential policy numbers. Ensure management review of exceptions.

Test reconciliation process for supervisory review, appropriateness and operating effectiveness.

Obtain a copy of the listing detailing in-force insurance contracts provided to the insurer’s actuary. Perform procedures to verify the completeness of this listing by tracing to the database a sample of contracts selected from sources outside the reserve system (e.g., premium cash collections). Use control totals for face amount, benefits, and policy count in order to detect use of incorrect files.*

In conjunction with the testing performed in the Examination Underwriting Repository, select a sample of in-force insurance contracts to verify that the system data reflects the actual insurance contract provisions.*

Review complaint logs for misapplied payments, missing policy documentation and investigate the status of the complaint.

Reconcile data elements to AS reporting.

Completeness Testing - Life

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In-force data is not appropriately restricted and protected to maintain accurate and complete data.

The insurer maintains logical access controls, including password protection and active directories, to properly restrict access to in-force data.

The insurer has appropriately segregated its duties to ensure that individuals with the ability to update in-force data do not have conflicting responsibilities.

The insurer has established policies and procedures for making accurate, timely changes to policies.

The insurer has established a QA process to review changes to policies to ensure compliance with the insurer’s policies and procedures on a sample basis.

Test the operating effectiveness of logical access controls by reviewing documentation relating to requests for access and by attempting to have unauthorized individuals access the in force data.

Test the operating effectiveness of segregation controls by attempting to have individuals authorized to access in-force data access claims processing or other systems.

Perform a walkthrough to gain an understanding of the insurer’s process to make changes to in-force policies.

Test a sample of changes to policies reviewed by the QA function for proper implementation of the insurer’s policies and procedures.

Select a sample of in-force policy data at the examination as of date for accuracy and completeness testing. *

Test a sample of changes made to in-force policies during the year by reviewing supporting documentation.*


Testing of the in-force policy listing is the most important.

Claims reserves are generally a very small percentage of reserves for life insurers

Completeness testing should focus on the in-force listing.

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“He said focus on the IN-FORCE POPULATION!”

Completeness Testing – Health

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“If you tickle us, do we not laugh? And if injured, shall

we not file a claim?”


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Key Attributes:

Claims Type / Grouping

Incurred and Paid Dates

Amount of the Claim

“One, ah, ah, ah,one paid claim!”

Completeness Testing - Health

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Claims data is incomplete or incorrectly entered into the claims management system.

Claims data is subject to independent verification or quality assurance (QA) reviews.

The claims system has automated controls that will not allow a claim to be entered without a valid in-force policy.

The claims system has automated controls that will not permit continued processing until all pertinent claim data has been entered. Entering a valid policy number will automatically populate select policy data. System edits will identify data that does not meet the predetermined criteria, resulting in inclusion on a system-generated exception report.

Segregation of duties exists between individuals responsible for new claim set-up and those responsible for setting up new policies.

Obtain documentation of independent claim verification or QA review. Ensure reviews performed address the completeness and accuracy of underlying claims information entered into the system.

Test the operating effectiveness of automated controls (i.e., edit checks) through reperformance and observation.

Obtain the error report and ensure proper resolution of exceptions.

Test the operating effectiveness of authority restrictions through reperformance and observation.

Obtain claims set-up and new policy set-up authorization listings and cross-reference the listings to ensure that there are no employees with conflicting authority.

Perform data validation tests to verify the accuracy of claim information maintained in the claims system, such as coverage terms, demographic data, date of service, provider name, service description or code, insured name, claim number and coverage period by vouching the information to the claimant’s insurance contract, claims form and any other underlying support.*

Scan the database(s) for internal inconsistencies, such as missing claim amounts, unusually small amounts and claims misclassified by type (e.g., Medicare).

In situations where adequate segregation of duties is not apparent, obtain data to determine whether any claims were set up by the same user who created the corresponding policy in the master file. If any instances are identified, investigate the claim to ensure the claim exists and is supported by underlying data.


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Focus on completeness of claims in the lag triangles

Cut-off Testing is important

Triangles can include claims that have been adjudicated but not paid.In such instances, a separate

reserve should be established for these claims

“There’s no accounting for an incomplete population!”

Completeness Testing – P&C / WC

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“The insured doth file too much, methinks!”


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Key Attributes:Incurred and Paid Date

Date of Changes to Case Reserves

Incurred Amount / Case Reserves

Paid Amount

Line of Business

Gross vs. Net Triangles

“What do Muppets and completeness testing have in

common?”


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Claims data is incomplete or incorrectly entered into the claims management system



The claims system has automated controls that will not permit continued processing until all pertinent claim data has been entered. Entering a valid active policy number will automatically populate select policy data. System edits will identify data that does not meet the predetermined criteria resulting in inclusion on a system generated exception report.


Obtain documentation of independent claim verification or QA review. Ensure reviews performed address the completeness and accuracy of underlying claims information entered into the claims system.


Obtain the error report and ensure proper exception resolution.



Perform data validation tests to verify the accuracy of claim information maintained in the claims system — such as coverage terms, demographic data, loss occurrence and/or loss report date, date of service, insured name, claim number and coverage period — by vouching the information to the claimant’s insurance contract, claims form and any other underlying support.

Scan the database(s) for internal inconsistencies, such as missing claim amounts, unusually small amounts and claims misclassified by type.In situations where adequate segregation of duties is not apparent, obtain data to determine whether any claims were set up by the same user who created the corresponding policy in the master file. If any instances are identified, investigate the claim to ensure the claim exists and is supported by underlying data.


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Focus should be on the Completeness of the claims in the development trianglesExposure data may need to be tested

as well

“Both have to be handled properly-

Wocka Wocka Wocka!”

Completeness Testing – LTD / LTC

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“We know what claims are, but know not what claims may be.”


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Key Attributes:Disability Date

Age / DOB

Salary

Gender

Benefit Election

Elimination Period

Issue Date

“We were the first ones to write LTC Policies!”

“And the first ones to go insolvent from them too!”


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Claims data is incomplete or incorrectly entered into the claims management system



The claims system has automated controls that will not permit continued processing until all pertinent claim data has been entered. Entering a valid active policy number will automatically populate select policy data. System edits will identify data that does not meet the predetermined criteria resulting in inclusion on a system generated exception report.


Obtain documentation of independent claim verification or QA review. Ensure reviews performed address the completeness and accuracy of underlying claims information entered into the claims system.


Obtain the error report and ensure proper exception resolution.



Perform data validation tests to verify the accuracy of claim information maintained in the claims system — such as coverage terms, demographic data, loss occurrence and/or loss report date, date of service, insured name, claim number and coverage period — by vouching the information to the claimant’s insurance contract, claims form and any other underlying support.

Scan the database(s) for internal inconsistencies, such as missing claim amounts, unusually small amounts and claims misclassified by type.In situations where adequate segregation of duties is not apparent, obtain data to determine whether any claims were set up by the same user who created the corresponding policy in the master file. If any instances are identified, investigate the claim to ensure the claim exists and is supported by underlying data.


Testing of both the inforce listing as well as the disabled life listing is necessary.

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“What are you looking at?”

“I see some of our LTC claimants in the audience!”

Case Study / Examples

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When the CPAs say they didn’t do any Completeness Testing…

Questions?

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“So, is the presentation Complete or Not

Complete?”

Contact Us

Scott Garduno, FSA, MAAATaylor-Walker Consulting, LLC(801) [email protected]

Rick Nelson, CFE, CIEJohnson Lambert LLP(207) [email protected]

Richard Foster, CFEJohnson Lambert LLP(678) [email protected]

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www.johnsonlambert.com – sign up to receive updates, newsletters, webinar invites, and more

@Johnson_Lambert

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Disclaimer

• This presentation is provided solely for educational purposes to Johnson Lambert LLP’s intended audience.

• The content contained herein should not be relied upon as accounting or tax advice because it does not take into account any specific organization’s facts and circumstances.

• The views expressed by the presenters are not necessarily those of Johnson Lambert LLP.

• This presentation is © 2018 Johnson Lambert LLP. All Rights Reserved.

Johnson Lambert LLP is a niche-focused CPA and consulting firm, focused on serving distinct industry niches. For over 30 years, we have focused on providing audit, tax, and consulting services to a national and selectively international client base including insurance entities, nonprofit organizations, and ERISA-qualified benefit plans. For more information about Johnson Lambert LLP, please visit www.johnsonlambert.com.

Documents

Complete or Not Complete? That is the Question…...Hates Yellow Skittles Completeness Testing 5 Presentation Objective – Examiners will develop a better understanding of the Handbook