Regulatory Bodies | NAIC | Financial Analysis and Examination

The financial examination, typically administered by the states on a cycle of three to five years, and sometimes includes participation of other states’ examiners. The examination process is supplemented by a number of solvency measuring and reporting tools, including the financial analysis function. Financial examination and analysis serve two main purposes: 1) ensuring that a company is prudently managed; and 2) identifying companies that are encountering financial difficulty or are assuming excessive risk.

The NAIC adopted a new risk-focused examination process in 2010 that was designed to encourage regulators to focus their attention where material risk was present. Since the creation of risk-focused surveillance at the NAIC, risk-focused analysis has often been performed by examiners during financial examinations rather than by analysts. This has resulted in an inefficient and costly examination/analysis process. For a reformed system of state property/casualty insurance regulation to come to fruition the financial examination function conducted by the states needs to reduce costs and provide additional training to reduce redundancy embedded in the process and to focus oversight on financial analysis and risk assessment.

Prior to risk-focused examination and analysis, regulators spent much of their time verifying that the financial statement of the company was accurate. Some states utilize the annual independent audit to serve the purpose of verifying financial reporting; however, many regulators still revert to the old way of ticking and tying things to the financial statements and duplicate the work done during the audit. NAMIC views this duplication of work as a leading factor for higher exam costs. Insurance regulators and independent auditors need to work together to reconcile their information needs and procedures so that the independent audit may satisfy regulatory data verification needs. Regulators need to rely on these independent audits for data verification so they can focus their resources on a risk-based financial analysis and examinations that are targeted at insurers who appear to be at financial risk.

NAMIC Position

NAMIC supports the financial examination and analysis function that are critical to solvency oversight; however, the methods used by some states are outdated and are highly inefficient, which leads to higher exam costs. There are several areas NAMIC has identified that need improvement, such as integrating annual CPA audits into the process, training from the NAIC for analysts, greater communication between analysts and examiners, and an NAIC peer review for the examination and analysis processes.

NAMIC News on Financial Analysis and Examination


Jonathan Rodgers
Director of Financial and Tax Policy