Financial Examination of Insurance Companies: What Carriers Should Prepare Before a Regulatory Review

Examiners, who increasingly work remotely rather than visiting the company’s premises, request three years of financial statements, a comprehensive governance review, and records explaining how the company identifies and manages its own risks. The company has thirty days in which to respond, and the examination itself will take several months. That is essentially what a current financial examination entails for an insurance company, and it is very different from the balance-sheet checks that regulators used to carry out a generation ago.

State insurance departments and the NAIC no longer view this as a simple matter of complying with routine procedures. Instead, the process has changed to involve a more extensive, risk-focused examination, and companies that go in unprepared often learn through experience just how much documentation an inspector can request.

The guide explains what happens during a financial examination, how it differs from a market conduct exam, what examiners look for, and what carriers should prepare well in advance of receiving the exam letter.

Our insurance compliance support page provides a more detailed account of the groundwork your team handles for the compliance calendar and the regulatory correspondence side of exam readiness.

What Is a Financial Examination in Insurance?

A financial examination is a formal review conducted by a state insurance department to assess an insurer’s financial position, corporate governance, and the legality of its operations. Within its main regulatory powers, the state can approve insurance rates, license companies, agents, and brokers, monitor claims handling, and conduct financial examinations of insurers.

The National Association of Insurance Commissioners sets standards for this process across the states, even though each state still retains the power to conduct its own examinations. The NAIC also operates an accreditation scheme, which means a state’s insurance department must meet certain minimum standards in solvency regulation, such as conducting risk-oriented financial surveillance and on-site examinations,, before other states will accept that state’s examination work for a multi-state insurer.

Why Regulators Conduct Financial Examinations

The aim is not merely to detect accounting errors. A financial examination aims to ensure the insurer can meet its commitments to policyholders, that its financial statements accurately reflect its financial position, and that its governance and risk-management systems are adequate to identify problems before they lead to insolvency. The accreditation framework was established because several large insurer failures years ago led regulators to standardize and strengthen this process nationally, rather than letting supervision quality vary widely from state to state.

Financial Examination vs. Market Conduct Examination

Sometimes carriers mix up these two regulatory reviews, but they examine completely different matters.

Even if a company passes a market conduct examination smoothly, it can still face a tough financial examination, since the two inquiries address entirely different questions about the business.

The Risk-Focused Examination Process

The financial examination process has shifted from mainly verifying that an insurer’s statutory financial statements contain material misstatements at a point in time to a broader, more qualitative evaluation of the risks in the insurer’s operations and the company’s ability to identify and mitigate them. This represents a real structural change, not merely a change in terminology.

The approach that focuses on risk is based on understanding the key operational activities of an insurer and the risks associated with each of these activities, on reviewing the corporation’s governance, on evaluating the control systems employed to manage the risks that have been identified, and on looking at any events that have occurred after the as-of date of the examination. In addition, examiners assess whether management’s risk assessments and internal controls are valid when examined closely, rather than relying entirely on the figures the insurer provides on its own.

What Examiners Actually Review

Beyond the balance sheet, a risk-focused financial examination typically covers:

• The corporate governance structure, including board oversight and the processes behind management’s decision-making.
• The methods used for reserving and pricing, especially for lines of business with longer claims tails.
• The terms of the reinsurance agreements, including whether the contracts actually transfer the risk and include the necessary clauses relating to insolvency and arbitration.
• The system’s controls and procedures for identifying and reducing both operational and financial risk.
• Events that occur after the as-of date of the examination and could materially affect the insurer’s financial position.
• Insurance companies must prepare and present financial statements in accordance with statutory accounting principles.

How Often Insurance Companies Get Examined

Most insurance companies have their finances examined every three to five years, with the exact interval varying by state and the company’s risk level. Today, insurance departments use prioritization tools, such as NAIC scoring systems and IRIS ratios, along with their own knowledge of the company, to determine which firms require more intensive or more frequent oversight.

Multi-State Coordination and the Lead State Model

Financial examinations for insurers licensed in several states are usually organized on a group basis, with one state taking the lead and the others participating instead of each conducting its own separate examination. For instance, Texas led a recent examination of a multi-state health insurance company, with more than a dozen other states taking part, including Alabama, Arkansas, Arizona, California, Connecticut, and Florida. While this approach reduces duplicate regulatory work for the insurer, it also means a single examination can be reviewed by regulators with very different priorities across states.

What’s Changed Since COVID: Virtual Examinations and Rising Costs

Since the pandemic, financial exams have increasingly taken place virtually, presenting insurers with a different kind of challenge compared to a traditional on-site inspection. Insurance departments are under considerable staffing pressure, as the industry is expected to lose about 400,000 employees due to attrition and is increasingly relying on outside vendors to conduct examinations and handle other regulatory tasks. This change has led to higher examination costs, with increases of 100 percent or more from one exam to the next having been reported in some instances.

This implies that the person reviewing your documents doesn’t have to be a government employee and that the review process can happen entirely through document portals and video conferences, rather than with an examiner visiting your office. Today, more than a decade ago, documentation must be well organized, in digital form, and easy to transfer.

What Carriers Should Prepare Before a Financial Examination

Financial statements and supporting workpapers: The financial statements and relevant workpapers should be properly organized and reconciled well before the exam period begins, not put together reactively after the request list arrives.

Corporate governance documentation: The documentation relating to corporate governance, including the board’s minutes, the governance policies, and evidence of how the system of oversight works in practice, since this aspect is specifically evaluated by the examiners as part of the risk-focused review.

Reserving and pricing rationale: The reasons for reserving and setting prices, including clear records of how the reserve estimates and pricing decisions were made, especially in the case of any line of business that has a record of adjustments or disputes.

Reinsurance contract files: The files concerning reinsurance contracts, which include complete and up-to-date reinsurance agreements clearly showing both the insolvency and arbitration clauses, are available, as examiners directly review these documents.

A response protocol for examiner requests: Here is a response protocol for requests made by examiners. Insurance departments record information requests, sometimes referred to as crits, noting both the date they are made and the date they are due. Insurance companies that designate one point of contact and use a tracking system for these requests complete the examination more quickly than those that handle each request on an ad hoc basis.

Remediation status on prior exam findings: Regarding the remediation of earlier examination findings. When problems are identified in a previous examination, you should have documented evidence of what was corrected and when, as examiners generally verify whether the earlier findings have been resolved.

Common Mistakes Insurers Make During an Exam

• Seeing the exam as a one-off rush rather than keeping exam-ready records throughout the year.
• Failing to appreciate the extent of the governance and risk-management evidence that the risk-focused process in fact needs, beyond the financial statements themselves.
• Not addressing the previous examination findings before the next cycle starts.
• If the amount of preparation needed for a market conduct exam is the same as that for a financial examination, then the two reviews cover entirely different aspects of the business.
• Failing to adjust the internal processes to accommodate the virtual and remote examination formats, which are now a major portion of the exams carried out.

How Operational Support Helps Carriers Prepare

A financial examination draws on records from the underwriting, claims, compliance, and finance departments at the same time, and this kind of extensive, cross-departmental documentation is precisely the sort of workload that overwhelms teams already busy with daily operations. It is only through the adoption of structured documentation procedures that are kept up continuously rather than put together under pressure from a tight deadline that a smooth examination can be achieved rather than a difficult one.

Techsurance provides U.S. carriers, MGAs, and TPAs with help in managing their compliance calendar, tracking regulatory correspondence, and producing audit-ready documentation for all aspects of underwriting, claims processing, and back-office operations; thus eliminating the last-minute rush that would otherwise result from a financial examination request list. For more information on our insurance compliance services, including how insurers can maintain full visibility into filing status and open items before a review, please see our compliance services page.

In-House vs. Outsourced Support for Exam Readiness

Those who consider this trade-off more broadly can review our comparison of running insurance operations in-house versus outsourcing, since the differences in cost and SLA apply just as directly to exam-readiness work as they do to underwriting or claims.

How Techsurance Supports Exam Readiness

Techsurance collaborates with US insurers on operational and administrative tasks that make a financial examination less disruptive, such as managing the compliance calendar, tracking regulatory correspondence, and maintaining consistent, audit-ready records throughout both the underwriting and claims processes. It does not replace legal advice or the insurer’s relationships with regulatory bodies, which are managed in-house, but it eliminates much of the manual documentation work that turns a normal exam cycle into a hectic rush. For a full list of the support we provide, see our services page, or for more details about our approach, visit the Why Techsurance page.

Conclusion

A financial examination today tests far more than an insurer’s balance sheet. It tests whether the company can produce organized, defensible documentation across governance, reserving, reinsurance, and risk management on a regulator’s timeline, often through a remote, third-party-supported process that looks nothing like the on-site reviews of a decade ago. The carriers that handle this well aren’t scrambling when the request list arrives. They’ve already been keeping the paperwork exam-ready all along.

FAQs

What is a financial examination for an insurance company?

It is a formal review carried out by a state insurance department to examine the insurer’s financial position, corporate governance, and compliance with statutory accounting and regulatory requirements.

How is a financial examination different from a market conduct examination?

A financial examination assesses a company’s solvency, financial condition, and governance, while a market conduct examination reviews sales practices, claims handling, and how the insurer treats customers. The two are separate reviews and each has its own reference handbook.

How often do insurance companies get examined?

Most insurance companies have their finances examined every three to five years; the exact interval, however, varies by state and the insurer’s risk profile as evaluated by that state’s insurance department.

What is the NAIC’s role in financial examinations?

The NAIC establishes standards and coordinates practices among the states through its accreditation program and the Financial Condition Examiners Handbook, although each state’s insurance department conducts and retains control over its own examinations.

Why have financial examinations become more expensive and more virtual?

Since COVID-19, many exams are conducted remotely, and insurance departments facing staffing shortages have increasingly turned to third-party vendors to help conduct exams, both of which have contributed to rising examination costs in recent years.

Can outsourced support help a carrier prepare for a financial examination?

Yes. Outsourced operational support can reduce the burden on internal teams by handling compliance documentation, tracking regulatory correspondence, and managing cross-functional record-keeping, while the insurer’s legal and regulatory strategy stays entirely in-house.