Chapter 8

Question 1

What is not an example of an area where the internal audit committee would have oversight?

Answer 1

The amount of business a broker has with another insurer

Question 2

What would be a suitable control for access to information?

Answer 2

Allowing underwriters access to the specific line of business they are responsible for

Question 3

Which of the following statements is true about an internal audit committee?

Answer 3

The purpose of the internal audit committee is to help the board of directors fulfill its
legal and fiduciary obligations.

Question 4

Which of the following statements most accurately describes the membership of the audit committee
for an underwriting department?

Answer 4

Every insurer decides for itself who to include on its audit committee for the underwriting
department

Question 5

How might an audit be used for training of the underwriting team?

Answer 5

Assess trends in underwriting practices and methods to improve risk assessment
Rationale: Audits entail an assessment of the underwriting process itself—the questions asked, the
assumptions made, and the quality and depth of the underwriting analysis that led to the decision on a
given account.

Question 6

How is the audit process used to verify standards?

Answer 6

It evaluates the adequacy of business processes.

Question 7

Which of the following is not an example of an auditor’s objectives for a pre-audit interview with the
underwriting department?

Answer 7

Asking staff whether plans are in place for corrective action on difficult or problem
accounts

Question 8

Why might a manager want to engage the underwriting team in preparing information for the audit
team?

Answer 8

The underwriters have a stake in the result of the audit and should be involved in the
process.

Question 9

What is a letter of authority in the context of an audit?

Answer 9

The authority that an underwriter has to accept risk
Rationale: Letters of authority specify the authority levels for underwriters.

Question 10

. Why would an auditor investigate underwriting intent?

Answer 10

To assess whether the underwriting intent has been adequately documented and
whether there was a good understanding of the risk

Question 11

What are five concerns of the internal audit department that involve safeguarding of sensitive
information? (5 marks)

Answer 11

Safeguarding sensitive information concerns of the internal audit department (any five of the
following):
* Whether system access is restricted
* What controls are in place
* Whether the controls work properly or whether they can be circumvented
* Whether the controls cover all the risks or whether there are gaps in the controls
* Whether controls have been built into the computer system to prevent underwriters or others from
acting beyond their authority
* Whether supervisory passwords are secure and whether the supervisor signs off the computer when
leaving the office
* How many times a user can enter a password incorrectly before a lockout occurs

Question 12

List five reasons a foreign parent company might audit its Canadian subsidiary or branch office. (5
marks)

Answer 12

Reasons for a foreign parent company to audit a Canadian subsidiary or branch office (any five of
the following):
* To become more familiar with Canadian business in general and the Canadian insurance business
more specifically
* To attain a certain level of comfort with a line of insurance or class of risk underwritten by its
Canadian subsidiary or branch office
* To determine what lines of insurance or classes of risk should be underwritten in Canada
* To identify the Canadian jurisdictions in which it should try to expand its business
* To learn why recent financial reports from the Canadian subsidiary or branch office have indicated a
decline in the profitability of its book of business
* To understand why a certain line of insurance or class of risk has become more profitable in Canada
* To check compliance with federal and provincial or territorial regulations

Question 13

Identify five specific uses of audits. (5 marks)

Answer 13

Specific uses of audits (any five of the following):
* Identifying negative trends early
* Managing the book
* Identifying performers
* Identifying positive practices
* Training
* Verifying standards
* Examining underwriting competence
* Preparing for regulatory or compliance audits
* Modifying underwriting guidelines if necessary
* Assessing the company vision

Question 14

List five pieces of information auditors might try to gather when questioning the underwriting
department. (5 marks)

Answer 14

Information auditors gather from the underwriting department (any five of the following):
* A description of operations and any unusual aspects
* The account exposures that cause the most concern
* The strategy for account pricing and renewals
* The loss experience and profitability of the book of business
* The volume of work and how it is done
* Any problems with producers
* The top producers for the office

Question 15

What are five elements of the work done by the underwriting department that an auditor will consider
when trying to identify positive or negative trends? (5 marks)

Answer 15

Elements an auditor can consider to identify a trend (any five of the following):
* Premiums
* Business strategy
 MIS reports
 Collections
 Cancellations
 Renewals
 Guidelines for producers
 Problem accounts
 Communication
 Team approach

Question 16

List five things an auditor will consider about how underwriters collect and manage the information
on which they base their decisions. (5 marks)

Answer 16

Loss history * Loss summaries * Loss control reports * Outside reporting agencies * Application or renewal questionnaire * Questions in general * Rating * Pricing