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6.Explain the internal control systems in insurance companies. Write down about the reporting internal control weaknesses. A Internal control systems in insurance companies Reporting internal control weaknesses

July 24, 2014 By: Meliza Category: 1st SEM

Operational risk management includes implementing:

  • defined levels of authority to make corporate decisions;
  • safeguards to protect the premises and assets of the credit union;
  • an operational and secure management information system (MIS) which accurately records transactions;
  • staffing and monitoring controls appropriate to the size of the credit union;
  • a framework for technology development
  • a process for outsourcing services
  • appropriate monitoring controls.

The specific elements of a comprehensive internal controls system are set out in DICO’s

By-law No. 5.  Internal controls relating to credit granting practices are covered in Chapter 5 on Credit Management.

 

In designing a system of internal controls, management must review the costs and benefits of implementation.  The cost of establishing a particular control must be measured against the expected savings attributable to loss prevention (e.g. reduction of fraud).  A particular internal control may not be required where in its absence the likelihood of financial loss is small due to the size of the operations or the existence of compensating controls.

 

A credit union can meet the standards of sound business and financial practices by ensuring it has developed and implemented policies and procedures comparable to those contained in this chapter.  Policies and procedures should be appropriate for the size and complexity of operations.

A primary factor of operational risk management is the existence of a framework of defined levels of authority to make corporate decisions.  Management must design and implement a framework for approval authorities, for all areas of operations which ensures that responsibilities and approvals for transactions are assigned to the proper and appropriate individuals within the organization.

 

The following essential elements of an approval framework should be required by board policy, and should be documented in internal control procedures:

  • General approvals;
  • Specific approvals;
  • Designated signing authority;
  • Organizational chart;
  • Designated suppliers of professional services.

General Approvals

General approvals need to be set within the procedures and job descriptions, for a group or class of transactions.  They should provide staff with the authority to complete a transaction without receiving specific approval.

Specific Approvals

Specific approvals are those that will require an authorizing action, evidenced by signature, before the transaction can be completed.  Specific approval authorities document:

  • to whom the approval is delegated (by position or by individual);
  • the absolute or incremental authority being delegated;
  • restrictions, if any, placed on the authority;
  • whether the person can further delegate the authority.

Signing Authority

The approvals framework should govern the signing authority of credit union’s officers and management.  The framework should address signing of:

  • corporate cheques;
  • documents under seal (e.g. mortgage discharges);
  • all contracts accepted on behalf of the credit union.

 

Cheques over a prescribed dollar amount should require signatures by two officers, or at least one officer and one staff member.

Authority to Enter into Contracts

Internal controls should provide for the following safeguards when officers or staff enters into the contracts on behalf of the credit union:

  • Contracts which are entered into should comply with legislated requirements and the objects of the credit union.

 

  • Where the approval of a contract results in a conflict of interest for a director or officer, the individuals involved must be guided by sections 146 to 149 of the Act, as well as legislation on restricted party transactions, in Part IX of the Act and Part X of Regulation 76/95.  (Refer to Section 2104 for further details in this regard.)
  • Contracts over a specified dollar amount should be subject to the control of dual, independent signatories.  The specified amount should be determined by the board in relation to the organization’s asset size and transaction base.
  • Contracts which commit the organization to external borrowings must be subject first to board approval, and then require the manager and other senior officers’ signature for validation.
  • Smaller purchases or contracts which commit the organization to daily business activities should have the signature of one or more operating officers and should be in compliance with the credit union’s capital budget, as approved by the board.
  • With respect to the authorization of loan contracts between the organization and its members, refer to Section 5502 of this Reference Manual on Loan Approvals and Disbursements.
  • Investment contracts should be authorized in compliance with a documented board policy on investments.  Refer to Section 6204 of this Reference Manual on Investment Approvals.

 

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