Question

An internal auditor is assigned to perform an engagement to evaluate the organization's insurance program, including the appropriateness of the approach to minimizing risks. The organization self-insures against large casualty losses and health benefits provided for all its employees. It is a large national entity with over 15,000 employees located in various parts of the country. It uses an outside claims processor to administer its health care program. The organization's medical costs have been rising by approximately 8

1) Processing that occurs within the organization and not on evaluating the correctness of transactions processed by the health care processor
2) Interviewing management prior to beginning the engagement to understand its concerns and the underlying assumptions made and rationale used when making the self-insurance decision
3) Considering engaging an actuarial consultant to better understand the risks involved in order to help determine the scope of the engagement

Answer 1

The question focuses on the evaluation of a corporation's self-insurance program by an internal auditor, which involves assessing risk management strategies and the efficient functioning of health care program administration. It also deals with concepts like adverse selection, risk groups, and actuarial fairness within the insurance industry.

Step-by-step explanation:

The subject of the question pertains to the field of Business, focusing specifically on internal auditing, risk management, and the analysis of a corporate health insurance program. An internal auditor is evaluating the organization's approach to self-insurance for large casualty losses and health benefits, considering the use of an outside claims processor for administering its healthcare program.

Understanding insurance dynamics within the context of a company is critical, especially regarding the financing systems - fee-for-service and health maintenance organizations (HMOs). In the fee-for-service system, medical care providers receive payment based on the cost of services, while in HMOs, payment is based on patient count with the expectation of resource allocation efficiency. Adverse selection is a concern where individuals with more knowledge of their health risks might disproportionately take advantage of insurance offerings.

The role of an internal auditor is to assess these factors and others, such as actuarial fairness and risk groups, to ensure that the organization's insurance scheme is financially sound and aligns with its risk profile. This includes considering the balance between claim payouts, administrative costs, and the need for company profits.