| In Insurance service various risks are covered under | | | | population consists of all the claims; paid or denied or |
| terms and conditions mentioned in Insurance Policies | | | | pending; that became part of the system. Larger the |
| and in case of claims arising, they are managed or | | | | population, larger is the sample size if rest of the |
| settled accordingly. It is a common practice to audit | | | | factors remain unchanged. |
| the procedures for underwriting, policy management, | | | | 2. Variance: This is a measure of variation in the data. |
| claims management etc. to ensure that healthy | | | | If there is no variation then by checking any one |
| practices are followed by the organization. Since the | | | | item we can form accurate opinion about the entire |
| number of policies and claims are usually very high, it | | | | lot of item. But, if variations are there, we need to |
| is undesirable to audit each and every record. | | | | check more. Larger the variation, larger is the sample |
| Sampling techniques are used to reduce the volume | | | | size. Variance and standard deviation both are |
| of audit work without compromising on quality. | | | | measures of variation in the data and represent the |
| Sampling techniques have been in use in various | | | | same property of the data. |
| areas. Pathologists take a sample of blood from a | | | | 3. Confidence Level required: Suppose we audit 10 |
| human body and test that sample to get an idea | | | | claims cases and find that in 3 cases a business rule |
| about all of the blood. Similarly, while boiling rice, we | | | | was not taken care. Further, in 20 audited claims |
| test a few grains of rice as a sample to conclude | | | | cases we find this number to be 6. We may conclude |
| about the entire lot of rice. We know that this | | | | that in 30% of the cases this rule has been ignored. |
| technique takes us to the right conclusion. Properties | | | | But, how much confident we would be on this |
| of blood are uniform for pathological tests being | | | | conclusion? If we audit more cases and find similar |
| conducted. Rice being boiled too is uniformly heated | | | | results, the confidence level on the conclusion will be |
| by keeping the size of the container and volume of | | | | higher. So, If the confidence level required is high, the |
| water appropriately large. Due to this uniformity, a | | | | sample size required too is high. |
| small sample size is sufficient for reaching to the right | | | | 4. Accuracy: Higher the accuracy required, bigger the |
| conclusion. If the rice is boiled with lesser water than | | | | sample size should be. |
| what is required for uniform flow of heat, the rice | | | | As it is clear that a sampling technique and the |
| doesn't get cooked uniformly. In such cases, testing | | | | sample size cannot be decided without proper |
| few grains from top and forming opinion about the | | | | understanding of the nature of data. An auditor |
| entire lot may lead to wrong conclusion. Similarly, if | | | | cannot do anything with the population data and |
| the items being cooked together are not similar then | | | | variance in that data because these data are |
| again we need more samples to draw any acceptable | | | | generated through various operational activities |
| conclusion. | | | | performed in the organization. However, if a very |
| In Insurance industry, the data related to various | | | | high level of accuracy and confidence level is set, the |
| functions have variations because of its basic nature | | | | sample size required becomes very high. It is |
| of dealing with uncertainties. Keeping the sample size | | | | recommended to keep these values realistic to keep |
| large for auditing increases the cost of audit. On the | | | | the cost and time acceptable. |
| other hand keeping it low may lead to invalid or | | | | A good practice is to do a small initial study to |
| wrong conclusion. Hence, it is important to choose | | | | understand the population size, variance and basic |
| correct sampling technique and sample size. | | | | nature of the data. Then use them to compute the |
| Using sampling techniques effectively is very easy. | | | | sample size and conduct the detailed study. While |
| But it is not that easy that we pre-decide the sample | | | | picking the records for audit, the sample should |
| size without knowing the nature of data. Sample size | | | | represent the population without any bias. For this, |
| depends on following four factors: | | | | generating random numbers and associating them |
| 1. Size of the population: If we want to draw | | | | with actual records by using the statistical distribution |
| conclusion about claims management system, the | | | | of data gives the best result. |