Audit of Insurance Companies

The Insurance auditors shall examine policy and liability procedures, risk valuation, tax documents, and various other financial records of insurance. It is to ensure that proper insurance rates and premiums are implemented and regulators laws are being followed by insurance companies. Claims and commissions are also the core areas to verify during the course of insurance audits. In addition to these responsibilities, insurance auditors might be expected to maintain quality control between insurance companies and policyholders.

An Indian insurance company is formed and registered under the Companies Act, 2013 and the aggregate holdings of equity shares by a foreign company, either by itself or through its subsidiary companies or its nominees, do not exceed twenty-six per cent of the paid-up equity capital of such Indian insurance company. The sole objects of the Indian Insurance Company shall be to carry on life insurance business or general insurance business or re-insurance business. The said definition is according to section 2 of Insurance Act 1938.

The Insurance Audit & Role of Insurance Auditors

As per Section 12 of the Insurance Act, 1938, the financial statements of every insurer are required to be audited annually by an auditor. According to IRDA Act, 1999, every insurer, in respect of insurance business transacted by him and in respect of his shareholders ‘funds, should prepare, a Balance Sheet, a Profit and Loss Account, a separate Account of Receipts and Payments and a Revenue Account in accordance with the regulations made by the IRDA at the end of each financial year.

The central and branch auditors of an insurance company are appointed at the annual general meeting of the company and the approval of the C & AG required before the appointment is made. With the latest amendment to the Insurance Act, 1938 and the Companies Act, 2013, Authority (IRDAI) has issued the revised guidelines that Insurers shall comply with the provisions relating to appointment of Auditors as contained in the Companies Act, 2013. Additionally, insurers shall also comply with the provisions contained in such guidelines. Further the recommendation of the Audit Committee, the Board shall appoint the statutory auditors, subject to the shareholders’ approval at the general meeting of an Indian insurance company. The branch auditors is appointed to conduct the audit of the divisions have the same rights and obligations under the statute as those of the, statutory auditors to whom they are expected to submit their report. However the branch auditors at division level certified the Trial balance of the division duly incorporated the financial statements of the branches under divisions.

An insurer cannot remove its statutory auditor without the prior approval of the Authority. An audit firm cannot accept the audits of more than three insurers (Life/Nonlife/Health /Reinsurer) at a time. The appointment can be cancelled if found that the appointment of auditors by insurers is not in line with the guidelines.

Four Important Audit Points in Insurance Company Profit & Loss Account

1. Verification of Premium

The premium collections are credited to a separate bank account and no withdrawals are normally permitted from that account for meeting the general expenditure. As per the policy of the insurance company, the collections are transferred to the Regional Office or Head Office. No Risk shall be assumed by the insurer without receipt of premium according to section 64VB of the Insurance Act, 1938. Verification of premium is of utmost importance to an auditor because Insurance premium is collected upon issuing policies. It is the consideration for bearing the risk by the insurance company. The auditor should apply the following procedures: –

• Before commencing verification of premium income, the auditor should look into the internal controls and compliance which are laid down for collection and recording of the premiums.
• Cover notes should be serially numbered
• The auditor should check whether Premium Registers have been maintained chronologically, giving full particulars including GST charged as per acceptance advice on a day -to-day basis.
• The auditor should verify whether the figures of premium mentioned in the register tally with those in General Ledger.
• The auditor should verify whether instalments falling due on or before the balance sheet date, whether received or not, have been accounted for as premium income as for the year under audit.

2. Verification of Claims

The auditor should obtain from the divisions/branches, the information for each class of business. The auditor should determine the total number of documents to be checked giving due importance to claim provisions of higher value. The claims under policies comprise the claims paid for losses incurred, and those estimated or anticipated claims pending settlements under the policies. Settlement cost of claims includes surveyor fee, legal expenses, etc. The Claim Account is debited with all the payments including repair charges, fire fighting expenses, police report fees, survey fees, amount decreed by the Courts, travel expenses, photograph charges, etc. The auditor should-

• Check whether provision has been made for all unsettled claims.
• Check whether provision has been made for only such claims for which the company is legally liable.
• Check whether provision made is normally not in excess of the amount insured.
• Check in case of co-insurance arrangements, the company has made provisions only in respect of its own share of anticipated liability.
• Check claimed paid should be duly sanctioned by the authority concerned

3. Verification of Commission

The remuneration of an agent is paid by way of commission which is calculated by applying a percentage to the premium collected by him. Commission is payable to the agents for the business procured and is debited to Commission on Direct Business Account. An insurance business is solicited by insurance agents. The auditor should verify-

• Voucher disbursement entries with reference to the disbursement vouchers with copies of commission bills and commission statements.
• Check whether the vouchers are authorized by the officers- in –charge as per rules and income tax is deducted at source, as applicable.
• Test check correctness of amounts of commission allowed.
• To check whether commission outgo for the period under audit been duly accounted or not.

4. Verification of Operating Expenses

All the administrative expenses in an insurance company are broadly classified under 13 heads as mentioned in Schedule IV. The auditor should check-

• Expenses in excess of Rs.5 Lakhs or 1% of net premium, whichever is higher, should be shown separately.
  
• Expenses not directly relating to insurance business should be shown separately for example, expenses relating to investment department, bank charges etc.