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Overview on Insurance Audit

According to the 2013 Companies Act, an Indian insurance company is registered. A foreign corporation may not possess more than 26% of the paid-up equity capital of this insurance business in total equity shares, whether directly or through subsidiaries or nominees. An Indian insurance company's main goal is to operate a life insurance, general insurance, or reinsurance business.

The policy and liability procedures, tax records, risk assessments, and other financial records of insurance are all subject to examination by insurance auditors during insurance audits. This is done to make sure that the insurance businesses adhere to regulatory regulations and that suitable insurance rates and premiums are applied. Claims and commissions are a couple of the main things that need to be checked during insurance audits. The insurance auditors must also uphold the policyholders' and insurance companies' quality control.

The auditor must annually examine each insurer's financial accounts in accordance with Section 12 of the Insurance Act of 1938. Every insurer is required by IRDA, 1999, to create a balance sheet for his insurance company's finances as well as the funds of its shareholders.

  • Balance Sheet
  • Account of Profit and Loss.
  • Separate Receipts Account.
  • Payments and an Account for Revenue.

At the conclusion of each fiscal year, all of these must be completed in accordance with IRDA requirements. An insurance audit is an unbiased review of accounting records that offers a qualified opinion regarding their accuracy.

What types of insurance are subject to insurance audits?

All different sorts of insurance contracts, whether they are for people or businesses, are covered by the insurance audit service.

The following are a few insurance types for which insurance audit is appropriate:

  • Property insurance that covers homes, buildings, stocks, and reserves.
  • Liability insurance, such as product liability, environmental liability, professional indemnity, and employer's liability.
  • Both business interruption and employee theft insurance are available.
  • Insurance policies covering property and money theft.
  • Insurance for transportation via land, water, or both.
  • Life insurance products such term and permanent insurance, etc.
  • Whether it is individual or corporate health insurance.
  • Life, accident, and health insurance are all included in the employee benefit plan.
  • Individual or group pension insurance is covered by pension insurance.
  • Vehicle insurance covering both single vehicles and fleets of vehicles.

What Function Do Insurance Auditors Have in the Insurance Audit Process?

  • An insurance company's central and branch auditors are chosen at the annual general meeting of the firm.
  • A confirmation from the Comptroller and Auditor General is required before making the appointment.
  • According to the Insurance Act of 1938 and the Companies Act of 2013, insurers are required to abide by the rules regarding the employment of auditors.
  • The board names the statutory auditors in accordance with the Audit Committee's recommendation, subject to the Indian Insurance Company's shareholders' approval at the general meeting.
  • To conduct the audit of the divisions with the same legal rights and obligations, branch auditors are appointed. The statutory auditors receive the branch auditors' report.
  • The branch auditors certify the Trial balance and incorporate the financial statements of the branches under the divisions, but only at the divisional level.
  • Without getting permission from the authority, the insurer is not permitted to fire the statutory auditor.
  • More than three insurers (life, health, reinsurer, or non-life) cannot be audited concurrently by an audit company.
  • They scheduled a meeting that may be cancelled if it became out that the insurers did not appoint auditors in accordance with the suggested rules.

What are the crucial elements examined during an Insurance Audit of a Profit & Loss Account?

The following are the key items to check in the profit and loss account when performing an insurance audit:

Checking the Premium

The premium collected amounts are credited to a different bank account. There are normally no withdrawals allowed from that account for general spending purposes.

The collections are sent to the Regional Office or Head office in accordance with the insurance company's policy. The Insurance Act of 1938's Section 64VB states that the insurer may not take on any risk without first receiving payment. Because insurance premiums are paid when policies are issued, it is crucial for an auditor to confirm them. It is a factor for taking on the insurance company's risk.

The auditor must follow the following guidelines:

  • The auditor must first review the internal controls and compliance that are required for the collecting and recording of premiums before beginning the premium income verification process.
  • The cover notes must be serially numbered.
  • The auditor must verify that the premium records are kept in chronological order and include all information, including GST charged daily in accordance with the acceptance advise.
  • The auditor must confirm that the premium amount calculated matches the amounts displayed in the general ledger.
  • Additionally, the auditor will confirm whether or not the payments that are expected on or before the balance sheet date have been received and have been recorded as premium revenue for the audited year. 

Claim Verification

The auditor from each division or branch is required to gather data for all business classes. The auditor will choose how many Documents in total need to be examined, giving more weight to claims with greater values. All payments, including those for the repairs, the survey, the photographs, etc., are deducted from the claim account. The auditor must confirm:

  • Inspect the clause for unresolved claims.
  • Verify whether there is a provision for claims for which the corporation is held legally liable.
  • Verify whether there is a provision for claims for which the corporation is held legally liable.
  • Verify that the provision provided does not exceed the insured amount.
  • Verify the co-insurance agreements; the business has made provisions for its own portion of the expected liabilities.

Commission Verification

A commission is used to fund an agent's compensation. The amount of compensation is determined by adding a percentage to the premium the agent has collected.

The commission is paid to the agents for the sales made, and the commission on direct business accounts is subsequently debited. In most cases, insurance salespeople approach potential customers. The auditor must confirm:

  • Entries on the disbursement vouchers pertaining to the copies of commission bills and statements.
  • Verify that the officers-in-charge have approved the vouchers in accordance with the rules and that income tax has been withheld at the source.
  • Verify the permitted commission rate.
  • Verify the commission accounting period.

Confirmation of operating costs

The auditor needs to examine the following operational costs:

  • The highest of Rs. 5 lakhs in expenses or 1% of the net premium. It needs to be displayed separately.
  • The costs incurred in the investment department, bank fees, etc., are examples of expenses that must be listed separately because they are not directly related to the insurance operation.

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What is checked in the Business Balance Sheet during an Insurance Audit?

The following are the key elements taken into account during an insurance audit of the company's balance sheet: -

Investments While inspecting the insurance company's investments, the auditor is required to adhere to the Insurance Act of 1938's stipulated provisions, which are as follows: -

  1. Only permitted securities may be purchased by insurance companies. The following requirements must be met in order for it to invest in securities other than those that have been approved: 
  • The investments made cannot account for more than 25% of the total investments made.
  • The board of directors must approve the investment before it may be made.
  1. An insurer may not purchase less than any of the following shares or debentures of an insurance or investment company:
  • Ten percent of its own estimated total assets.
  • 2% of the investee's subscribed share capital or debentures.
  1. An insurance or investment firm must meet at least the following criteria before an insurance company may invest in its shares or debentures:
  • Ten percent of its own estimated total assets.
  • 10% of the investee's subscribed share capital or debentures.
  1. A private firm's shares and debentures cannot be purchased by an insurance company.
  2. Insurance providers are prohibited from investing in policyholders' cash outside of India.

Balances in Cash and Banks

  • The auditor must create bank reconciliation statements during the insurance audit.
  • The certification of bank balances for all active and inactive accounts must be given to the auditor.
  • The term deposit receipts issued by the bankers must be physically verified by the auditor. Typically, at year's end, all cash is placed with the bank as a term deposit.
  • The auditor must confirm all deposits and withdrawals and determine whether only authorised individuals are using the account.
  • The auditor must confirm that any funds that are in transit are accurately reported in a reconciliation statement.

Balance of Outstanding Premium and Agents

The following audit techniques may be used on an agent's balance:

  • Check to see that all outstanding balances for the agent's account as well as the outstanding premium account have been reported, evaluated, and reconciled for the audit.
  • Check to see if big, unpaid deposits have been recovered after the audit period.
  • Check to see if there are any past-due obligations or credit balances that need to be adjusted at year's end. The management must provide a written explanation, which must be done.
  • Verify the agent's balances, excluding the balances of any staff, as well as the balances of any other insurance providers.
  • Check to see if agents for businesses are receiving any commission credit.

What laws or regulations apply to the performance of insurance audits?

Regarding life insurance and general insurance firms, there are numerous laws. The following acts and rules highlight the key legal aspects that are pertinent to the audit of life insurance firms.

  • The Insurance Act 1938
  • The Insurance Rules 1939
  • The Income Tax Act of 1961
  • The Companies Act 2013
  • The Life Insurance Corporation Act 1956.
  • Together with the aforementioned, the Workers State Insurance Act of 1948 will also apply in the case of general insurance.
  • There are also corporate governance guidelines for Indian insurers in addition to laws and regulations. Guidelines on Corporate Governance for Insurance Companies were released by the regulator IRDAI on August 5, 2009, and were updated in 2016.

Why must an insurance audit have an audit committee?

The regulations require insurance companies to create the following required committees, including:

  • Investment 
  • Audit committees.
  • Committee on Risk Management.
  • Nomination and Remuneration Committee; 
  • Policyholders Protection Committee.
  • Profits Committee; 
  • Corporate Social Responsibility Committee.

Below is a description of the audit committee's role in an insurance audit:

  • According to Section 177 of the 2013 Companies Act, every insurer must establish an audit committee.
  • The committee will review the financial reporting, cash flow statements, and annual and quarterly financial statements.
  • An independent director of the board who has experience in accounting, finance, or audit, as well as someone who may be a chartered accountant or have a solid background in financial analysis, will serve as the chair of the audit committee.
  • The CEO's involvement with the Audit Committee must be restricted to times when it is necessary for it to obtain specific information about audit results.
  • The Audit Committee must consist of at least three directors, the majority of whom must be Independent Directors, in accordance with Section 177 of the Companies Act of 2013.
  • The Audit Committee will monitor the department's effective operation and go over its reports.
  • The committee will also keep an eye on how well abnormalities are being fixed and how processes are changing in areas where flaws have been found.
  • The Audit Committee is responsible for overseeing the policies and procedures put in place to handle concerns regarding the upkeep of books of account, administrative practices, transactions, and other issues affecting the insurer's financial position, whether they are brought up by the auditors or by anyone else.
  • The Audit Committee must have pre-audit discussions with the statutory auditors regarding the nature and scope of the audit as well as post-audit conversations to resolve any areas of concern.

Frequently Asked Questions

A good method of figuring out how much risk the insurer has insured over the last year is through an insurance audit. Over the course of the year that your policy was in force, the company could have undergone a significant transformation.

The auditor must verify that the premium amounts listed in the register match those in the general ledger. If payments that are due on or before the balance sheet date, whether received or not, have been accounted for as premium revenue for the audited year, the auditor will confirm this.

For the appointment of an auditor, the provisions of the 2013 Companies Act apply. An insurance company's auditor is often chosen at the annual general meeting, and the appointment must first have the authority's approval.

An independent audit of an insurance company's books of accounts is done to determine how accurate they are.

90 days after the policy period's end dates, in order for any premium changes to be taken into account for your subsequent premium billing cycle.

The insurance audit is a routine procedure in the insurance sector. In order to determine your actual insurance exposure, including premium basis, classifications, and rates that apply, for a certain period coverage was provided, an audit is an analysis of your operation, records, and books of account.

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