Audit of Insurance Companies

Legal Framework

1. The primary legislations which deal with the insurance business in India
are the Insurance Act, 1938 and the IRDA Act, 1999
2. Various aspects relating to audit are dealt with around the framework of
the following statutes and rules made thereunder

2(a) The Insurance Act, 1938 as amended by the Insurance Laws

(Amendment) Act, 2015
2(b) The Insurance Regulatory and Development Authority Act, 1999 as
amended by the Insurance Laws (Amendment) Act, 2015
2(c) The Insurance Regulatory and Development Authority Regulations
framed under the IRDA, Act, 1999
2(d) The Companies Act, 2013
2(e) IRDA Investment Regulations, 2013 (as amended from time to time)

Insurer

• An Indian insurance companies

• A statutory body established by an act of parliament to carry on insurance
business
• An insurance co-operative society
• A foreign company engaged in re-insurance business through a branch
established in India

Policy Holder

Section 2(2) of the Insurance Act, 1938 defines the term policy holder as a
person to whom the whole of the interest of the policy holder in the policy
is assigned once and for all, but does not include an assignee thereof whose
interest in the policy is defensible or is for the time being subject to any
condition
Registration of Indian Insurance Companies

Section 3 of the Insurance Act, 1938 requires every insurer to obtain a

certificate of registration before commencement of insurance business in
India

Requirements as to the Minimum Paid-up Capital

The minimum paid-up equity share capital of an Indian insurance

company carrying on insurance business should be ₹100 crores excluding
preliminary expenses incurred in the formation and registration of
company

AUTHOR:CA VIKAS OSWAL

 Audit of General Insurance Companies

Premium

• The important part of the business operations of general insurance

companies comprises the issuance of policies for risks assumed and to
indemnify the insured for losses to the extent covered by such policies
• Premium is the consideration received by an insurer from the insured
under an insurance contract, whereby the insurer agrees to undertake
certain sum of risk on behalf of the insured
1. Verification of Premiums
2. No Risk Assumption without Premium
3. Verification of Premiums

Verification of Premiums:

• Internal controls and compliance

• Systems used by the company to collect money, underwrite and issue the
policy
• Cover notes, serially numbered
• Assessment of the reasonability of the risk pattern established by the
management
• Reinsurance company risk
• Collections lodged by agents
• Premium registers
• Policies to collect premium periodically
• Verify year end transactions
• Collections remitted by agents
• GST

AUTHOR: CA VIKAS OSWAL

 Audit of General Insurance Companies

Claims

Claims in general insurance business are primarily in the nature of indemnity

i.e. re-imbruing the loss incurred to the policy holder Direct Business
Inward Reinsurance Business Co- insurance Business

Registers and Records

1. Claims Intimation Register

2. Claims Paid Register
3. Claims Disbursement Bank Book
4. Claims Dockets
5. Report of quality assurance team and
6. Salvage register

Verification of Claims

1. Auditor obtains
2. Information for each class of business
3. Categorizing the claims value-wise
4. Determine the total number of documents to be checked giving due
importance to claim provisions of higher value
5. Provision for all unsettled claims
6. Pre-determined formula to ensure that initial reserving made is adequate
7. That provision has been made for only such claims for which the company
is legally liable, considering particularly
8. That the provision made is normally not in excess of the amount insured
9. Events after the balance sheet date have been considered
10. Claims status have been reviewed
11. Provision made is net of payments
Claims Paid

The auditor may determine the extent of checking of claims paid on the
same line as suggested for outstanding claims

Commission/Brokerage

• Commission is payable to the agents for the business procured through

them and is debited to Commission on Direct Business Account
• The rates of commission/brokerage are agreed and documented with the
agent and filed with IRDAI
• Ensure that commission/brokerage is not paid in excess of the limits
specified by IRDAI
• Ensure that commission/brokerage is paid as per rates with the agent and
rates filed with IRDAI
• Ensure that commission/brokerage is paid to the agent/broker who has
solicited the business
• Ensure that the agent/broker is not blacklisted by IRDAI and is not
terminated for fraud etc.
• Vouch 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 in force and income tax is deducted at source, as applicable
• Test check correctness of amounts of commission allowed
• Scrutinize agents’ ledger and the balances, examine accounts having debit
balances, if any, and obtain information on the same. Necessary
rectification of accounts and other remedial actions have to be considered
• Check whether commission outgo for the period under audit been duly
accounted.
 Operating Expenses related to Insurance Business:
These expenses are first aggregated and then apportioned to the Revenue
Account of each class of business on a reasonable and equitable basis
1) Legal and Professional Charges
2) Employees’ Remuneration and Welfare Benefits
3) Interest and Bank charges
4) Depreciation
5) Interest, Dividend and Rent
6) Underwriting
7) Investments
8) Cash and Bank Balances
9) Outstanding Premium and Agents’ Balances
10) Provision for Taxation
11) Unexpired Risks Reserve (URR)
12) Reinsurance
13) Co- Insurance
14) Solvency Margin
15) Trade Credit Insurance

Type of Reinsurance Contracts

Quota Share Treaty

Surplus Treaty
Proportional Treaty

Facultative Auto-fac Treaty

Types of Reinsurance

Reinsurance
Contracts

Pools

Treaty Reinsurance Excess of Loss (XL)

Treaty
Non-Proportional
Treaty
Stop Loss Treaty

AUTHOR: CA VIKAS OSWAL

 Audit of General Insurance Companies

Question 01

ABC Limited, an Indian insurance company carrying on general insurance

business is facing liquidity problems and, therefore it has decided to
maintain deposits under Section 7 of the insurance Act 1938 at one percent
of total gross premium written in India. The company thinks that it is
sufficient as the company has a paid-up capital of ₹150 Crores. As an auditor
of ABC limited what would be your suggestion to the company for
compliance of insurance Act and rules and regulation made there under

Answer:
The minimum paid-up equity share capital of an Indian insurance company
carrying on general insurance business should be ₹100 crores or more.
As per Section 7 of the Insurance Act, 1938 requires every insurer, carrying a
general insurance business, to deposit and keep deposited with RBI in it’s
one of the offices in India a sum equivalent to three percent of total gross
premium written in India in any financial year. The maximum limit of deposit
under this section is ₹ ten crores.
The deposit is to be for and on behalf of the Government of India. The
deposit can be made either by way of cash or investment in approved
securities. The Company has not complied with section 7 of the Insurance
Act and should increase the deposit from 1% of premium to 3%.
As per Insurance laws Amendment act 2015, Section 7 has been deleted
which means there is no criteria of depositing specified amount with RBI.
Question 02

Form and content of financial statements Sec 11(1A) of Insurance Act, 1938.
OR
“In an audit of an insurance company, the Receipts and Payments Account is
also subjected to audit”. Comment on this statement in brief.

Answer:
Audit of receipts and payments accounts:
Section 11 of the Insurance Act, 1938 provides that every insurer, on or after
the date of the commencement of the Insurance Laws (Amendment) Act,
2015, in respect of insurance business translated by him and in respect of
his shareholder’s funds, shall at the expiration of each financial year, every
insurer has to prepare its financial statements containing

1. Balance Sheet,
2. Profit and Loss Account,
3. Receipts and Payment account,
4. Revenue Account

Type of Insurance Company Format of Financial Statement

a. Insurance company in Life Schedule A of IRDA Regulations

insurance Business.

b. Insurance company in Schedule B of IRDA Regulations

General insurance Business.

c. Insurance company in both Schedule C of IRDA Regulations

Business.
 As per IRDA regulations and submit the same within 6 Months from the end
of the year with the concerned authority. IRDA has issued regulations as to
the financial reporting framework of Insurance companies. There are three
schedules under regulations:

The IRDA Regulations, 2002 require that the auditor of an insurance

company should:

i. Report whether the receipts and payments account of the insurer is in

agreement with the books of account and returns:
ii. Expenses an opinion as to whether the receipts and payments account has
been prepared in accordance with the provisions of the relevant statutes;
and
iii. Express an opinion whether the receipts and payments account give a true
and fair view of the receipt and payments of the insurer for the financial
year/period under audit.
 Question 03
As at 31-03-20XX while auditing safe insurance ltd you observed that a policy
has been issued on 25th March 20XX for fire risk favoring one of the leading
corporate houses in the country without the actual receipt of premium and
it was reflected as premium receivable. The company maintained that it is a
usual practice in respect of big customers and the money was collected on
5th April 20XX. You further noticed that there was a fire accident in the
premises of the insured on 31st March 20XX and claim was lodged for the
same. The insurance company also made a provision for claim. Please
respond.
OR
While auditing Suryakiran Insurance Ltd. as on 31" March, 20XX, you
observed that there is one policy which has been issued on 25" March. 20XX
towards fire risk favoring one of the leading corporate houses in the country
without the actual receipt of premium and it was reflected as premium
receivable. It is the usual practice maintained by the company in respect of
big customers that they would issue the policy before receiving the premium.
The premium money was collected on 5" of April 20XX. It is further noticed
that there was a fire accident in the premises of insured on 31" March 20XX
and a claim was lodged. The insurance company also provided for the same.
How would you respond?
Answer
1. No risk can be assumed by the insurer unless the premium is received.
2. According to section 64VB of the Insurance Act, 1938, “No insurer should
assume any risk in India in respect of any insurance business on which
premium is ordinarily payable in India unless and until the premium payable
is received or is guaranteed to be paid by such person in such manner and
within such time, as may be prescribed, or unless and until deposit of such
amount, as may be prescribed, is made in advance in the prescribed
manner”. The premium receipt of insurance companies carrying on general
insurance business normally arise out of three sources, viz., premium
received from direct business, premium received from reinsurance business
and the share of co-insurance premium.
3. In view of the above, the insurance company is not liable to pay the claim
and hence no provision for claim is required.
AUTHOR: CA VIKAS OSWAL
 Audit of General Insurance Companies

Question 04

Verification of premium received

Answer:
Before commencing verification of premium income, the auditor should look
into the internal controls and compliance thereof as laid down for collection
and recording of the premiums.
1. Verify that there is an adequate internal check on the issue of stationery
comprising of cover notes, policy documents, stamps & Other Records.
2. Ascertain that all the cover notes relating to the risks assumed have been
serially numbered for each class of business.
3. Check whether the premium received during the year but pertaining to
risk commencing in the following year has been accounted for under the
head ‘Premium Received in Advance’ and has been disclosed separately.
4. Check that in case of cancellation of policies/cover notes issued, no risk
has been assumed between the date of issue and subsequent cancellation
thereof.
5. Where premium originally received has been refunded, verify whether the
agency commission paid on such premium has been recovered.
6. In case of co-insurance business, where the company is not the leader,
verify that the company’s share of the premium has been accounted for
based on the available information on nature of risk and the provisional
premium charged by the leading insurer.
7. Where the company is the leader, obtain a reasonable assurance that only
the company’s own share of premium has been shown as income and
accounts of the other companies have been credited with their share of
the premium collected.
8. Verify whether service tax has been charged from the insured, at the rates
in force, on the total premium for all classes of business.
9. Examine that policy documents are issued where the premium has not
been collected or where the cheques has been dishonored.
10. Examine the collections lodged by the agents after the balance sheet date
which are related to the previous year.
Question 05

Registers and records for claims

Answer:
1. Claims Intimation Register
2. Claims Paid Register.
3. Claims Disbursement Bank Book.
4. Claims Dockets, normally containing the following records:

Claim intimation Claim form

Particulars of policy Survey report
Photograph showing damage Repairer’s bills
Letter of subrogation Police report
Fire service report Claim settlement note
Claim satisfaction note Salvage report
Salvage disposal notes Claims discharge voucher, etc
i. Report of quality assurance team; and
ii. Salvage register
Question 06

ABC & Co. Chartered Accountants are the auditors of Just Care General
Insurance Co. Ltd. As on 31.03.20XX the management made a provision for
claims outstanding. Enumerate the steps to be taken by the Auditor while
verifying the “Claims Provision”.
OR
Your audit assistant seeks your help in checking the claim liability of Bharat
insurance co. Ltd and wants to know the registers and records which they
should obtain and review in this regard.
OR
You are the Auditor of Good Luck general insurance company. You want to
ensure that there exists good system that effectively serves the
requirements of true and fair accounting of claim- related expenses and
liabilities. Suggest how this can be ensured .
Answer
Verification of claims Provision
1. Check whether provision for all unsettled claims has been made at the
end of year on the basis of claims lodged.
2. Check whether the provision has been made only for such claims for
which the company is legally liable.
3. Ensure that the amount of provision made does not exceed insured
amount.
4. Check whether the events occurring after Balance date has been
considered for making the provision for Claims.
5. Ensure that the provision is net of payments made ‘on account’ to the
parties where such payments have been booked to claims.
6. Ascertain the reasons for long delays after claiming lodged.
7. Ensure that the claim paid duly sanctioned.
8. Check the claim paid for its share in case of co-insurance.
9. Verify whether any legal advice is taken in respect of claims under
litigation.
[Link] that No contingent liability is shown in relation to claims already
intimated.
[Link] whether claims are provided for net of estimated salvage,
wherever applicable.
 [Link] whether the Intimation of loss by the policy holder is received
within reasonable time.
[Link] the claim paid after salvage accounted for.
[Link] the claim paid discharge note from claimant.

Question 07

While auditing an insurance company, the auditor in-charge instructed you

to examine “Claims Paid” by the company. What are the specific areas to
which you will give your attention while examining such “Claims Paid”?
OR
You are appointed as an auditor of United India Insurance Company
Limited. What are the specific areas to which you will give your attention
while examining “Claims Paid” by a General Insurance Company?

Answer:

Verification of Claims Paid:

The auditor may determine the extent of checking of claims paid on the same
line as suggested for outstanding claims. Other aspects in respect of claims
paid to be examined by the auditors are as follows:

i. Claims paid have been booked only in respect of company’s share in case
of co-insurance arrangements.
ii. Claims paid based on advices from other insurance companies, whether
share of premium was also received by the company.
iii. Claims payments have been duly sanctioned by the authority concerned
iv. The payments of the amounts are duly acknowledged by the claimants;
v. The salvage recovered has been duly accounted for in accordance with the
procedure applicable to the company
vi. Letter of subrogation has been obtained in accordance with the laid down
procedure;
vii. The amounts of the nature of pure advances/deposits with Courts, etc., in
matters under litigation/arbitration have not been treated as claims paid
 but are held as assets till final disposal of such claims. In such cases, full
provision should be made for outstanding claims;
viii. Payment made against claims partially settled have been duly vouched.
ix. The sanctioning authority should be the same as the one which has
powers in respect of the total claimed amount;
x. In case of final settlement of claims, the claimant has given an unqualified
discharge note
xi. That the figures of claims, wherever communicated for the year by the
Division to the Head Office for purposes of reinsurance claims, have been
reconciled with the trial balance-figure.
xii. That payments have been made within 30 days of the receipt of the last
document received.
xiii. If there are delays, interest on such delays have to be paid as per IRDAI
regulations.
xiv. Salvage recovered has been duly accounted for in accordance with the
procedure applicable to the company and a letter of subrogation has been
obtained in accordance with the laid down procedure.

AUTHOR: CA VIKAS OSWAL

 Audit of General Insurance Companies

Question 08
While auditing Secure Insurance Ltd., you observed that the major
proportion of expense of the company is the remuneration/ commission
paid to its insurance agents. As the auditor of the company, what audit
procedure would you adopt for verification of such expense?
OR
Verification of payment of remuneration to an insurance agent

Answer:
Commission Paid to Insurance Agents:
It is a well-known fact that insurance business is solicited by insurance
agents. 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 through
them and is debited to Commission on Direct Business Account. There is a
separate head for commission on reinsurance accepted which usually arise
in case of Head Office. It may be noted that under section 40 of Insurance
Act, 1938, no commission can be paid to a person who is not an agent or
intermediary of the insurance company.

The auditor should, inter alia, do the following for verification of

commission-
i. Vouch disbursement entries with reference to the disbursement vouchers
with copies of commission bills and commission statements.
ii. Check whether the vouchers are authorized by the officers-in–charge as
per rules in force and income tax is deducted at source, as applicable.
iii. Test check correctness of amounts of commission allowed.
iv. Scrutinize agents’ ledger and the balances, examine accounts having debit
balances, if any, and obtain information on the same. Necessary
rectification of accounts and other remedial actions must be considered.
v. Check whether commission outgo for the period under audit been duly
accounted.
Question 09

Provisions regarding Expenses

Answer:
1. Section 40C of the Insurance Act, 1938 read with Rule 17E lays down
the provisions regarding limit on expenses of management in general
insurance business.
2. It requires that no insurer shall, in respect of any class of general
insurance business transacted by him in India, spend in any calendar year
as expenses of management including commission or remuneration for
procuring business an amount in excess of the prescribed limits and in
prescribing any such limits regard shall be had to the size and age of the
insurer.
3. However, any excessive amount over the permissible limits may be
approved by the Insurance Regulatory Development Authority after
consultation with the Executive Committee of the General Insurance
Companies.
4. Such expenses mean all charges, wherever incurred whether directly or
indirectly, including commission payments of all kinds and, in the case of
an insurer having his principal place of business outside India, a proper
share of head office expenses, which shall not be less than such
percentage as may be prescribed, of his gross premium income written
direct in India during the year, but in computing the expenses of
management in India the following, and only the following, expenses may
be excluded, namely:
• In the case of an insurer who has his principal place of business in India,
a share of head office expenses in respect of general insurance business
transacted by him outside India not exceeding a prescribed percentage of
his gross direct premium written outside India.
• Any expenses debited to the profit and loss account relating exclusively to
the management of capital and dealings with shareholders and a proper
share of managerial expenses calculated in the prescribed manner.

5. Limit on expenses of management in general insurance business:

Section 40B: No insurer shall, in respect of insurance business transacted
by him in India, spend as expenses of management in any financial year
any amount exceeding the amount as may be specified by the regulations
made under this Act;
Section 40C: Every insurer transacting insurance business in India shall
furnish to the Authority, the details of expenses of management in such
manner and form as may be specified by the regulations made under this
Act.
 Question 10

Investments (As per Section 27C of Insurance Act, 1938 and IRDA
(Investment) Regulations)

Answer:

Investment Policy in case on Insurance

Company as per IRDA Guidelines

Rule 1 Rule 2
(Section Rule 3 (IRDA
(Section
27B) 27B) Regulations)

The Investment in
other than approved Insurance
investment can be Company or Other
up to 25% of total investment Company
investment assets. Company
Further, consent of
all the directors shall
be obtained.
 Insurance
Company or
Other Rule 3 (IRDA
investment
Company Regulations)
Company

Investment in approved securities;

The Insurer should 1. At least 20% of investment assets
The Insurer should in Government securities.
not invest in other
not invest in other 2. At least 30% including in
Insurance Company
company an amount Government securities and other
exceeding (higher of
exceeding (higher of approved securities.
the following)
the following): 3. At least 5% of investment asset in
1. 10% of total
1. 10% of total Housing and loan to State
assets of the
assets of Insurer Government.
Insurer OR
2. 10% of Share 4. At least 10% of investment asset
2. 2% of share
Capital/ in approved securities under
capital/
Debentures of the infrastructure and social
debenture of the
Company structure.
Company
concerned 5. Investment in other securities:
Concerned
up to 55%
Question 11
Outstanding premium and agents’ balance
OR
M/s ABC & Co. a CA Firm was appointed as the auditor of ‘Always Safe
General Insurance Ltd’. Advise them how they will verify outstanding
premium & agents balances.
OR

Briefly discuss the importance and role of auditor with respect to actuarial
process for Life Insurance business

Answer:
The audit procedures, which may be followed regarding agent’s
balance, are as follows –
1. Verify whether agent’s balances and outstanding balances in outstanding
premium account have been listed, analyzed and reconciled for the
purposes of audit.
2. Verify whether recoveries of large outstanding have been made in post
audit period.
3. Verify whether there is any old outstanding debit or credit balances as at
the yearend which require adjustment. A written explanation may be
obtained from the management is to their nature.
4. Verify that agent’s balances do not include employees’ balances and
balances of other insurance companies.
5. Verify that no credit of commission is given to agents for businesses
directly procured by it.
6. Vouch adjustments / payments against old outstanding balances in agents
account.
7. Ensure that the relevant control account in the General Ledger is
reconciled with the subsidiary records.
8. Check age-wise, sector-wise analysis of outstanding premium
9. Check the availability of adequate Bank Guarantee or Premium Deposit
for outstanding premium.

AUTHOR: CA VIKAS OSWAL

 Audit of General Insurance Companies

Question 12
Unexpired risk reserve
OR
AX Insurance Limited has made a provision of 75% of net premium in case
of marine hull insurance and 50% in case of marine cargo and miscellaneous
business of net premium for unexpired risks reserve in its books. Comment.

Answer:
Unexpired risks reserve: The insurance laws (Amendment) Act, 2015
notified dated 20th March 2015 has amended the Insurance Act, 1938,
General Insurance business (Nationalisation) Act, 1972 and Insurance
Regulatory and Development Authority Act, 1999.
1) All the Policies will not expire on the date on which the insurer closes the
books of accounts, which continues for the following year.
2) Risk will be there in succeeding year w.r.t. premium received in the current
year which is called as unexpired risk.
3) Profit & gains of the insurance company are covered under section 44 of
Income tax Act 1961.
4) Under Rule 6E of IT Act, following reserve should be created w.r.t. to the
unexpired risk, which is allowable as deduction,
5) 50% of Net Premium for all other types like Fire, Marine Cargo, Marine
Freight, Miscellaneous and
6) 100% for Marine Hull Insurance Business.
7) The need for Unexpired Risks Reserve arises from the fact that all policies
are renewed annually except in specific cases where short period policies
are issued. Since the insurers close their accounts on a particular date, not
all risks under policies expire on that date.
8) Policies normally extend beyond this date into the following year during
which risks continue.
9) At the closing date, there is unexpired liability under various policies which
may occur during the remaining term of the policy beyond the year end.
10) As per section 64V of the Insurance Act, 1938, for the purpose of
compliance with the provisions of maintaining control level of solvency
margin, a proper value of every item of liability of the insurer shall be
placed in the manner as may be specified by the regulations made in this
behalf. Assuming that there is no prescribed limit (till the time it is
specified in regulations), both the provisions made by AX Insurance
Limited is in order.
11) The Insurance Laws (Amendment) Act, 2015 notified dated 20th March
2015 has amended the Insurance Act, 1938, General Insurance Business
(Nationalization) Act, 1972 and Insurance Regulatory and Development
Authority Act, 1999.
12) In view of changes made by Amendment Act, valuation of every item of
liability of the insurer should be done in the manner as may be specified
by the regulations made in this behalf. Therefore, assuming that there is
no prescribed limit (till the time it is specified in regulations), both the
provisions made by AX Insurance Limited is in order.
 Question 13

Procedure to determine the value of listed and unlisted equity securities and
derivative instruments of an insurance company.

Answer:

The valuation of investment in case of

Insurance Company

AS 13 is Not Applicable to Insurance Company

Other
Real Estate Debt Security Equity & Derivative
Securities

Valued at
Valued at cost Valued at cost
historical cost
Fair valuation method is
adopted and any charge
in the value of
investment should be
shown in fair value
charge a/c
 ❖ The Valuation of investment in case of insurance company
• AS 13 is not applicable to Insurance Company

Real Estate – Investment Property- (Valued at historical cost)

a) Investment Property shall be measured at historical cost less
accumulated depreciation and impairment loss, residual value being
considered zero and no revaluation being permissible.
b) The Insurer shall assess at each balance sheet date whether
any impairment of the investment property has occurred.
c) An impairment loss shall be recognised as an expense in the
Revenue/Profit and Loss Account immediately.
d) Fair value as at the balance sheet date and the basis of its
determination shall be disclosed in the financial statements as
additional information.

Debt Security – Valued at cost

Debt securities including government securities and redeemable
preference shares shall be considered as “held to maturity” securities
and shall be measured at historical cost subject to amortization.

Equity and Derivative:

Fair valuation method is adopted and any change in the value of
Investment should be shown in Fair value change account.
a. Listed equity securities and derivative instruments that are traded in
active markets shall be measured at fair value as at the balance sheet
date.
b. For the purpose of calculation of fair value, the lowest of the last
quoted closing price of the stock exchanges where the securities are
listed shall be taken.
c. The insurer shall assess on each balance sheet date whether any
impairment of listed equity security(ies)/ derivative(s) instruments
has occurred.
d. An active market shall mean a market, where the securities traded are
homogenous, availability of willing buyers and willing sellers is
normal, and the prices are publicly available.
e. Unrealized gains/losses arising due to changes in the fair value of
listed equity shares and derivative instruments shall be taken to
equity under the head ‘Fair Value Change Account’
f. On realisation reported in Profit and Loss Account. The ‘Profit on sale
of investments’ or ‘Loss on sale of investments’, as the case may be,
shall include accumulated changes in the fair value previously
recognised in equity under the heading Fair Value Change Account in
respect of a particular security and being recycled to Profit and Loss
Account on actual sale of that listed security.
g. For the removal of doubt, it is clarified that balance, or any part
thereof shall not be available for distribution as dividends. Also, any
debit balance in the said Fair Value Change Account shall be reduced
from the profits/free reserves while declaring dividends.
h. The insurer shall assess, at each balance sheet date, whether any
impairment has occurred.
i. An impairment loss shall be recognised as an expense in
Revenue/Profit and Loss Account to the extent of the difference
between the remeasured fair value of the security/ investment and its
acquisition cost as reduced by any previous impairment loss
recognised as expense in Revenue/Profit and Loss Account.
j. Any reversal of impairment loss, earlier recognised in Revenue/Profit
and Loss Account shall be recognised in Revenue/Profit and Loss
Account.

Other Securities – Valued at Cost:

a) Unlisted equity securities and derivative instruments and listed equity
securities and derivative instruments that are not regularly traded in
active market will be measured at historical costs.
b) Provision shall be made for diminution in value of such investments.
The provision so made shall be reversed in subsequent periods if
estimates based on external evidence show an increase in the value
of the investment over its carrying amount.
c) The increased carrying amount of the investment due to the reversal
of the provision shall not exceed the historical cost.
d) For the purposes of this regulation, a security shall be considered as
being not actively traded, if its trading volume does not exceed ten
thousand units in any trading session during the last twelve months.

Loans:
Loans shall be measured at historical cost subject to impairment provisions.

The insurer shall assess the quality of its loan assets and shall provide for
impairment. The impairment provision shall not be less than the aggregate
amount of loans which are subject to defaults of the nature mentioned below:
-
(i) interest remaining unpaid for over a period of six months; and
(ii) instalment(s) of loan falling due and remaining unpaid during the last six
months.

Catastrophe Reserve:

Catastrophe reserve shall be created in accordance with norms, if any,

prescribed by the Authority. Investment of funds out of catastrophe reserve
shall be made in accordance with prescription of the Authority.

It is clarified that this reserve is towards meeting losses which might arise due
to an entirely unexpected set of events and not for any specific known
purpose. This reserve is in the nature of an amount set aside for the potential
future liability against the insurance policies in force.
Question 14

Disclosure requirements in respect of contingent liabilities in the notes to

the Balance Sheet of a General Insurance company

Answer:
The following shall be disclosed by a way of notes to the balance sheet of a
General insurance company in respect of contingent liabilities.
1. Partly paid up investments.
2. Statutory demands/Liabilities in dispute not provided for.
3. Underwriting commitments outstanding.
4. Claims, other than those under policies, not acknowledged as debts.
5. Guarantee given by or on behalf of the company.
6. Reinsurance obligations to the extent not provided for in the accounts
7. Others (to be specified)
Question 15
Proportional treaties
Answer:
Such treaties are based on pro-rata apportionment of the sum insured,
premium and losses, according to a pre-determined percentage/ratio. These
treaties can be further classified as follows:

(i) Quota share treaty

Under this treaty, the ceding company binds itself to cede a fix percentage
of all policies issued by it under a defined scope of business covered by
the agreement. The advantage to the reinsurer under this treaty is that
the reinsurer receives the same proportion of all business of the treaty
class defined under the treaty
Example: Re-insurance is done whereby a percentage is fixed, suppose
5% of total business insurance company will give it for re-insurance.

(ii) Surplus treaty

Where a company cedes those amounts which it cannot or does not want
to retain for its net account, such type of contract is known as surplus
reinsurance treaty. If certain risk is totally retained, no surplus is left to be
ceded. Surplus is always determined in multiples of ceding company’s
retention.
General insurance company will give for re-insurance only if GIC turnover
is more than specified limit.
E.g.: Suppose 100 crores is the premium, anything above 100 crores will
be re-insurance.

(iii) Auto-fact treaty

Under this treaty, a ceding company may reinsure up to a defined limit
after cession of its surplus treaties. It is obligatory for the reinsurer to
accept cessions within the purview of the agreement.

(iv) Pools
More than one insurer may form a Pool under an agreement whereby its
members cede a pre-determined proportion of a particular category of
business directly written by them into the Pool.
Question 16
Non-proportional treaties

Answer:
Such treaties are characterized by a distribution of liability between the
ceding company and the reinsurer based on losses rather than the sum
insured, as is the case in proportional reinsurance. Non-Proportional
Treaties can be further classified into following categories.

(i) Excess of Loss (XL) Treaties

In this type of treaty, the reinsurer’s liability arises only when a claim exceeds
a predetermined figure relating to a specific branch of the ceding company’s
business or to its entire business. The Treaty would provide for maximum
liability as well as the amount up to which the ceding company would bear
the loss itself, which is called the ‘Underlying Limit’.

(ii) Excess of loss cover on prevent basis

In this type of cover, in case as a result of one event several risks are affected,
the loss under each risk is arrived at separately and the underlying limit is
applied to each risk to determine the liability of the insurer. This is also
known as ‘Working Excess of Loss Cover’.

(iii) Excess of loss cover on non-prevent basis

In this type of cover, losses resulting from one event are considered together
and aggregate amount of loss is determined and one loss underlying limit is
deducted from the aggregate amount of the loss to determine the liability of
the excess of loss reinsurer.

(iv) Stop loss treaties

This is also known as ‘Excess of Loss Ration Cover’ and it protects the
company from losing more than a specified amount for a given class of
business. Such a treaty protects the annual results of a company in one
branch against negative deviation due to increase in the number and cost of
claims/losses.

AUTHOR: CA VIKAS OSWAL

 Audit of General Insurance Companies

Question 17
Verification of re-insurance inwards

Answer:
1. The Reinsurance inward underwriting should be as per the norms and
guidelines prescribed in the Insurance Act, 1938 IRDA Regulations as well
as the company’s approved program.
2. Verify whether re-insurance inward acceptance, both Indian and foreign,
are as per arrangements / agreements entered into with Indian and
foreign insurance companies.
3. Verify whether the policy adopted for booking the accounts is on
“receipt” basis or “due” basis with the appropriate basis of estimation
towards accounts not received and that the basis of estimation is fair and
consistently applied and properly disclosed.
4. Verify the foreign currency transactions and ensure that they comply with
Accounting Standards (AS) 11, Accounting for Effects of Changes in Foreign
Exchange Rates.
5. Examine whether the outstanding claim figures have been properly
obtained well in time, under proper arrangements and adequate
provision has been made for outstanding claims.
6. Examine the accounting policy of the company in regard to reinsurance
business received, premium received and payment of commission and
claim costs.
7. The auditor should satisfy himself about the system of control over the
reinsurance inward program.
8. Closing balances of the re-insurer’s accounts should be reconciled and the
confirmation of balances should be obtained from all the companies.
9. Ensure that foreign inward accounts balances have been re-stated at the
prevailing value at the year end and that difference arising out of re-
statement has been taken to Profit and Loss Account.
[Link] the requirement of provision / write off of reinsurance inward
balances based on the doubtful nature of recovery, if any.
Question 18

Verification of re-insurance outward or ceded

Answer:
1. Evaluate internal control system in the area of reinsurance ceded to
ensure determination of correct amount for reinsurance ceded, proper
valuation of assets and liabilities arising out of reinsurance transaction
and adherence to legal provisions and regulations.
2. Ascertain whether adequate guidelines and procedures are established
with respect to obtaining reinsurance.
3. Verify that re-insurance underwriting returns received from the operating
units regarding premium, claims, paid, outstanding claims, tally with the
audited figures of premium claims paid and outstanding claims.
4. Check whether the pattern of re-insurance underwriting for outward
cessions fits within the parameters and guidelines applicable to the
relevant year.
5. Check whether cessions have been made as per the stipulation applicable
to various categories of risk.
6. Verify whether the cessions have been made as per the agreements
entered with the various companies.
7. See whether the outward remittances to foreign re-insurance have been
done as per the foreign exchange regulations.
8. Ascertain whether the commission has been calculated as per the terms
of the agreement with the re-insurance.
9. Verify the computation of profit commission by various treaty
arrangements in the figure of the periodical accounts rendered and in
relation to outstanding loss pertaining to the treaty.
[Link] whether the cash loss recoveries have been claimed and
accounted on a regular basis.
[Link] whether the claims paid items appearing outstanding claims list by
ever. This can be verified at least in respect of major claims.
[Link] whether provisioning for outstanding losses recoverable on cessions
have been confirmed by the re-insurers and in the case of major claims,
documentary support was insisted and verified.
[Link] individual accounts of re-insurers to evaluate whether any
provision/write off or write back is required.
[Link] aspects of the re-insurance cession premium commission
recoverable, paid claims recovered and outstanding losses recoverable on
cessions have to be checked.
[Link] percentage pattern of gross to net premium, claim paid and
outstanding claim to ensure comparative justifications.
[Link] auditor should also check the re-insurers balance on cessions and
whether the sub ledger balances tallies with the general ledger balances.
[Link] should verify whether the balances with re-insurers are supported by
necessary confirmation obtained from them.
[Link] should verify whether opening outstanding claims no paid during the
year find place in the closing outstanding claims vis-a-vis the reinsurance
inwards outstanding losses recoverable on cessions appears in both
opening and closing list. If not, the reason for the same should be
analyzed.
19. Any major event after the balance sheet date which might have wider
impact with reference to subsequent changes regarding the claim
recovery both paid and outstanding and also re-insurance balances will
need to be brought out suitably.
Question 19

Co-insurance

Answer:
1. Large business risks are shared between more than one insurer.
2. The leading insurer issues the documents, collects premiums and settles
claims and renders statements of Accountants to the co-insurers.
3. The auditor should check that the premium account is credited on the
basis of statements revived from the leading insurer.
4. Auditor should check the communication in the post audit period and
obtain a written confirmation to the effect that all incoming advice has
been accounted for.
5. The claims provisions and claims paid should also be verified.
6. For outgoing co-insurance, the auditor should scrutinize the transactions
relating to outgoing business; i.e. where the company is the leader.

AUTHOR: CA VIKAS OSWAL

 Audit of General Insurance Companies

Question 20
Incoming co-insurance and outgoing co-insurance

Answer:
Incoming and outgoing co-insurance: In cases of large risks, the business
is shared between more than one insurer under co-insurance
arrangements at agreed percentages. The leading insurer issues
documents collects premium and settles claims. Statement of accounts is
rendered by the leading insurer to the other co-insurers. The auditor
should verify incoming co-insurance and outgoing co-insurance as
follows:

Incoming co-insurance
The auditor should see that the Premium account is credited based on
statements received from leading insurer. In case, the statement is not
received, the premium is accounted for based on the advices to ensure
that all premiums in respect of risks assumed in any year are booked in
the same year.

It would be advisable for the auditor to scrutinize the communication in

the post-audit period and obtain a written confirmation to the effect that
all incoming advices have been accounted for the auditor should also
verify claims provisions and claims paid with reference to the advice
received from the leading insurer.

Outgoing co-insurance
The auditor should scrutinize the transactions relating to the outgoing
business i.e. where the company is the leader. There should be checked
with reference to the relevant risks assumed under policies and
correspondingly for debits arising to the co-insurer on account of their
share of claims.
 The auditor is required to report C & AG whether the system of the
company insures
1. Claims are recorded net of co-insurance at the D.O/branch and net of re-
insurance as per arrangement with other insurer at the head office.
2. Proper recording of incoming and outgoing co-insurer’s balance, and
3. Balance under accepted treaties periodically reconciled and action taken
for outstanding recoveries.
Question 21

Solvency margin in case of an insurer carrying on general insurance

business

Answer:

Section 64VA: Control level of Solvency margin in case of Insurer or

re-insurer

Solvency margin: Assets- Liabilities >= 50% of minimum capital (Rule

6 of Act for Minimum capital)

Compliance with rules prescribed Noncompliance

If at any time the insurer or re-

insurer does not maintain the Deemed to be insolvent
solvency level

Submit a plan to authority indicating On application by an authority,

the corrective action plan court made order for wound-
up

Authority considers Authority considers Plan is

that Plan is adequate inadequate

Directs to change the plan

No issues
accordingly
 Section 64VA: Control level of Solvency margin in case of
Insurer or re-insurer

Solvency margin: Assets- Liabilities >= 50% of minimum capital

(Rule 6 of Act for Minimum capital)

Compliance with rules

Noncompliance
prescribed

If at any time the insurer or re-

insurer does not maintain the Deemed to be insolvent
solvency level

Submit a plan to authority On application by an

indicating the corrective action authority, court made order
plan for wound-up

Authority considers Authority considers

that Plan is adequate Plan is inadequate

Directs to change the

No issues
plan accordingly

i. Section 64VA of the Insurance Act, 1938 as amended by Insurance Laws

(Amendment) Act, 2015 requires every insurer and re-insurer to maintain
an excess of the value of assets over the amount of liabilities at all times
which shall not be less than 50% of the amount of minimum capital as
stated under section 6 (requirement as to capital) of the Act and arrived
at in the manner specified by the regulations.
ii. The Authority, by way of regulation, shall specify a level of solvency margin
known as control level of solvency.
iii. Maintenance of solvency margin has a great importance for an insurance
company considering their size and nature of business and also
involvement of public money.
Question 22

Trade credit insurance

Answer:
Trade Credit Insurance business means the business of effecting contracts
of insurance in respect of trade credit insurance transactions.

Trade credit insurance means insurance of suppliers against the risk of

non-payment of goods or services by their buyers who may be situated in
the same country as the supplier (domestic risk) or a buyer situated in
another country (export risk) against non-payment as a result of
insolvency of the buyer or non-payment after an agreed number of
months after due date (protracted default) or non-payment following an
event outside the control of the buyer or the seller (political risk cover).

Trade Credit insurance policy is a conditional insurance contract between

two parties (insurer and seller) that cannot be traded and is always directly
related to an underlying trade transaction, which is either the delivery of
goods or of services. The correct fulfilment of this trade transaction and
satisfaction of the contract terms which is essential for credit cover to
exist.
Basic Requirements of a Trade Credit Insurance Product:
An insurer shall offer trade credit insurance product only if all
requirements mentioned below are met:
1. Policyholder's loss is non-receipt of trade receivable arising out of a trade
of goods or services.
2. Policyholder is a supplier of goods or services in consideration for a fair
market value.
3. Policyholder's trade receivable does not arise out of factoring or reverse
factoring arrangement or any other similar arrangement.
4. Policyholder has a customer (i.e. Buyer) who is liable to pay a trade
receivable to the policyholder in return for the goods and services
received by him from the policyholder, in accordance with a policy
document filed with the insurer.
5. Policyholder undertakes to pay premium for the entire Policy Period.
AUTHOR: CA VIKAS OSWAL
 Audit of Life Insurance Companies

Specific Control Procedures Related to Audit of Life Insurance

Companies
Types of Life Insurance Products

1. Term/Protection: Takes care of pure income replacement needs rather

than capital appreciation requirements

2. Endowment/Pure: Cover the risk for a specified period and at the end of
the policy the sum assured is paid back to the policyholder

3. Money Back Plan: Periodic payments of partial benefits during the term
of policy as long as the policy holder is alive Peculiar nature
In event of death at any time during policy term, the death claim would
comprise of full sum assured without deduction of any survival benefit
amounts

4. Whole Life Insurance Product: Cover throughout the lifetime of the

person

5. Unit Linked Insurance Plan (ULIP): Value of the policy changes as per
the underlying investment assets

6. Pension or Retirement Plans: Retirement solution where policyholder

decides the retirement age and agrees to pay premium till the time of the
retirement
He has option to commute a part of his fund value and take an annuity for
the balance

7. Annuities: Insurer, in return for the payment at regular intervals till fixed date,
make series of agreed payments at regular intervals from fixed date
8. Groups Insurance: Insurer, in return for the payment at regular intervals
till fixed date, make series of agreed payments at regular intervals from
fixed date

Applicability of Accounting Standards

Every balance sheet, Revenue Account (Policy holders account), Receipts

and Payments account (Cash flow statement) and Profit and Loss account
(Shareholder’s account) of an insurer shall be in conformity with the
Accounting standards (AS) issued by the ICAI
Except:
a) Accounting standard 3 (AS 3) – Cash flow statements – Cash flow
statement shall be prepared only under the direct method
b) Accounting standard 17 (AS 17) – Segment Reporting – shall apply to all
insurers irrespective of the requirements regarding the listing and
turnover mentioned therein

Premium
Premium shall be recognized as income when due

Acquisition Costs
Shall be expensed in the period in which they are incurred

Claims
Shall comprise the policy benefit amount and specific claims settlement
costs

Actuarial valuation- Liability for Life Policies

The estimation of liability against life policies shall be determined by the
appointed actuary of the insurer pursuant to his annual investigation of the
life insurance business
Real estate investment property Determined at historical
cost:
1) Gains/losses arising due to changes in the carrying amount of real estate
shall be taken to equity under ‘Revaluation Reserve’
2) An impairment loss of shall be recognized as an expense in the revenue/
Profit and loss account immediately, unless the asset is carried at revalued
amount

Debt Securities
Debt securities, including government securities and redeemable
preference shares, shall be considered as ‘held to maturity’ securities and
shall be measured at historical cost subject to amortization

Equity Securities and Derivative Instruments that are

traded in markets
1. Listed equity securities and derivative instruments that are traded in
active markets shall be measured at fair value on the balance sheet date
2. calculation of fair value, the lowest of the last quoted closing price at the
stock exchanges where the securities are listed shall be taken
3. Investments made in accordance with any statutory requirements should
be disclosed separate amount, nature, security and special rights in and
outside India
4. Segregation into performing/non-performing investments for purpose of
Income recognitions’, directions, if any, issued by the Authority
5. Assets to the extent required to be deposited under local laws or
otherwise encumbered
6. Percentage of business sector-wise
7. A summary of financial statements for the last five years, in the manner
as may be prescribed by the Authority
8. Bases of allocation of investments and income thereon between Policy-
holders' Account
9. Accounting Ratios as may be prescribed by the Authority
All significant accounting policies in terms of the accounting standards
issued by the ICAI, and significant principles and policies given in part-I of
accounting principles. Any other account policies, followed by the insurer,
shall be stated in the manner required under Accounting Standard AS 1
issued by the ICAI
Any departure from the accounting policies shall be separately disclosed
with reasons for such departure

AUTHOR: CA VIKAS OSWAL

 Audit of Insurance Companies

Appointment of Auditors

Appointment of statutory auditors in In case of others

the General Insurance Corporation of
India

By the Comptroller and Auditor

Appointed at the AG
General of India

Note:
An auditor can conduct audit only for three insurance companies and
not more than 2 life or 2 generals

Remuneration of Auditors
The remuneration of auditor of an insurance company is to be fixed in
accordance with the provisions of section 142 of the Companies Act, 2013 in
the general meeting

• Comptroller and Auditor General of India

• Power to direct
• Manner
• Accounts shall be Audited
• Give instruction
• Regard
• Functions by Auditor
• Submit a copy of report to the C&AG

AUTHOR: CA VIKAS OSWAL

 Audit of Insurance Companies

Contents of Management Report

1. Confirmation regarding the continued validity of the registration granted.

2. Certification that all the dues payable to the statutory authorities have
been duly paid.
3. Confirmation to the effect that the shareholding pattern and any transfer
of shares during the year are in accordance with the statutory or
regulatory requirements
4. Declaration that the management has not directly or indirectly invested
outside in India the funds of the holders of policies issued
5. Confirmation that the required solvency margins have been maintained
6. Certification to the effect that the values of all the assets have been
reviewed on the date of the Balance Sheet and that in his (Insurer) belief
the assets not exceeding their realisable or market value

Disclosures forming part of Financial Statements

The following shall be disclosed by way of notes to the Balance Sheet:
1. Contingent Liabilities
• Partly paid up investments
• Underwriting commitments outstanding
• Claims, other than those under policies, not acknowledged as debts
• Guarantees given by or on behalf of the company
• Statutory demands/liabilities in dispute, not provided for
• Reinsurance Obligations to the extent not provided for in accounts
• Others (to be specified)
2. Actuarial assumptions for valuation of liabilities for life policies in force
3. Encumbrances to the assets of the Company in and outside India
4. Commitments made and outstanding for Loans, Investments and Fixed
Assets
5. Basis of amortization of debt securities
6. Claims settled and remaining unpaid for a period of more than six months
as on closing date
7. Value of Contracts in relation to Investment for (a) Purchases where
deliveries are pending. (b) Sales where payments are overdue
8. Operating expenses relating to insurance business, basis of allocation of
expenditure to various segments of business
9. Computation of managerial remuneration
10. Historical costs of those Investments valued on fair value basis
11. Basis of revaluation of Investment property

AUTHOR: CA VIKAS OSWAL

 Audit of Insurance Companies

Areas which are peculiar to Life Insurance business are

enumerated below

1. Actuarial Process: The job of actuary or actuarial department in any Life

Insurance Company involves, detailed analysis of data to quantify risk
2. Role of Auditor: Auditors in the Audit report are required to certify,
whether the actuarial valuation of liabilities is duly certified by the
appointed actuary, including to the effect that the assumptions for such
valuation are in accordance with the guidelines and norms, if any, issued
by the authority and/or the Actuarial Society of India in concurrence with
the IRDA

Actuarial Department Broadly Concentrates following Key

Areas of Insurance Business

1. Management reporting on various business valuations and profitability

models of the Life Insurance business
2. Solvency management
3. Business Planning
4. Statutory Valuations and reserving
5. Model Development
6. Product Development/ Pricing and Experience analysis

Audit of Accounts of Life Insurance Companies

Underwriting
Role of Auditor:
1. Review the process of acceptance of risk through the underwriting
process.
2. Evaluate and test the effectiveness of internal controls.

AUTHOR: CA VIKAS OSWAL

 Audit of Insurance Companies

Audit of Accounts of Life Insurance Companies

Reinsurance
Risk mitigating tool adopted by Insurer whereby the risk underwritten by one
Insurer is transferred partially to another Insurer
Role of Auditor:
Reinsurance premium calculation and payment is in accordance with the
agreement with the reinsurer
i. The audit in this regard would normally cover the followings areas of the
reinsurance
ii. Verification of agreements
iii. Updating/renewals of agreements, and verifying whether Insurer has
adhered to the terms and conditions of the agreement
iv. Verification of payments made to the reinsurer
v. Verifying whether adequate provisions are carried

Free Look Cancellation (FLC)

1) Insurer shall inform by the letter
2) He has a period of 15 days
3) From the date of receipt of the policy document to review the terms and
conditions of the policy
4) Where the insured disagrees
5) He has the option to return the policy stating the reasons for his objection
6) He shall be entitled to a refund of the premium paid
7) Subject only to a deduction of a proportionate risk premium for the period
&
8) Expenses incurred by the insurer on medical examination
Audit of Accounts of Life Insurance Companies

• FLC refund is calculated as follows:

• FLC premium paid XXX
• (Less) - proportionate risk premium XXX
• (Less)- medical charges. If any, by the insurer XXX

Role of Auditor
• Check and Confirm That FLC Requests Are Received Within 15 Days
• Verification of Signatures of The Policy Holder
• Processing of FLC Request Within TAT Defined by The Insurer

Policy Lapse and Revival

Discontinuance of the policy owing to non-payment of premium dues
• If the policy holder does not make the payment: If payment is missed,
Insurer allows a period of 15/30 days period which is termed as “grace
period”
• Policy gets “lapsed”: Where the premium is not paid within the grace
period
• The policy lapses: But may be revived during the lifetime of the life assured
• Some insurers do not allow revival: If the policy has remained in lapsed
condition for more than five years

Role of Auditor
• Check and confirm that surrender requests are received from the policy
holder only
• Adequate controls are in place to ensure proper verification process for
checking of request
• Surrender amount is paid only to the policy holder
• Paid only as per terms and conditions mentioned in the policy document
Policy Lapse and Revival
Discontinuance of the policy owing to non-payment of premium dues

Policy Surrender
• Policy becomes eligible for surrender on completion of 3 years
• The policy holder has to submit surrender request form
• Provided that 3 years premium have been paid within the due dates
• Along with the original policy document

Role of Auditor
• Check and confirm that due dates are recorded and monitored properly
• Polices are marked as “lapsed” on non-receipt of renewal premium within
due dates/grace period
• In case of revival request, whether adequate checks are in place for receipt
of outstanding amounts

AUTHOR: CA VIKAS OSWAL

 Audit of Insurance Companies

Audit of Accounts of Life Insurance Companies

Premium Collection, Accounting and reconciliation: Recognizing the

premium earned by the insure as income

Income is recognized as:

• New business premium: Premium received for the first policy year and
• Renewal premium: Premium received for subsequent policy years
Premium received but not identifiable against any policy would be treated
as ‘unallocated premium’/ ‘suspense amount’.

Further following points should be noted while recognizing the

premium:
• When the new policy is issued by the Insurer
• New business premium is recognised on the realisation of premium
• Renewal income is recognized (1) on realization of the premium amount
or (2) when premium is due but not received up to the end of grace period
• Evaluate various sub-processes, employed in accounting of premiums like
collection of premium booking of premium, banking, accounting and
reconciliation of the same.

Following are the certain illustrative points, Auditors are required to

follow during the Audit of Accounting of Premiums:
1. Collection of Premium
• Check whether there is daily reconciliation process to reconcile the
amounts collected, entered into the system and deposited into the bank
• Check that there is appropriate mechanism to ensure all the collections
are deposited into the Bank on timely basis
2. Calculation of Premium:
• Check that Accounting system, employed by the Company, calculates
premium amounts and its respective due dates correctly
• Check that system employed as such is equipped to calculate all types of
premium modes correctly
3. Recognition of income:
• Check that premium is recognised only based on ‘Issued Policies’ and not
on underwriting dates
• Check that there is inbuilt mechanism the system all the premium
collected are correctly allocated all various components of the Policies
• Check that there is appropriate mechanism in place to conduct
reconciliation on daily basis and reconciling items, if any, are rectified/
followed up

4. Accounting of ‘Advance Premium’:

• Check, whether system has capability to identify regular and advance
premium
• Check whether there is a process of applying advance premium to a
contract when premium is due

5. Reporting of Premium figured to IRDA/Management:

• Check the methodology for generation of MIS from the system and there
is no manual intervention
• Check the procedure for Maker/Checker before finalizing the MIS
• Check whether there is a reconciliation process between premium Income
as per financials and as reported

6. Other Areas:
• Check whether there are appropriate SOPs developed by the Companies
and are strictly followed by all the departments/branches of the Company
• Ensure duly approved Delegation of Authority parameters matrix already
in place for authorization limits
• Premium recognition and refund of premium are independent processes
with adequate segregation of duties amongst the personnel
• Check that the Company conducts premium reconciliation on daily basis
• Check the robustness of interface between administration and accounting
system

AUTHOR: CA VIKAS OSWAL

 Audit of Insurance Companies
Audit of Accounts of Life Insurance Companies

Following are certain illustrative points, Auditors are required to follow

during the Audit of Accounting of Premiums:
7. Claims:
Claims payouts would include a wide variety of customer benefits
including:
1. Death Claims
2. Maturity Claims
3. Annuities
4. Health Claims
5. Rider Claims
6. Policy surrenders
7. Other Survival benefits

Following are certain illustrative points, Auditors are required to follow

during the Audit of Claims:
1) Review the standard policy document template
2) Ensure that the Insurer maintains a register or record of claims
3) Claims are rejected, the reasons for the rejections should be closely reviewed
4) Check whether all claims received are registered and enter into the system
5) There is a system of collecting appropriate KYC documents
6) All processed claims are accounted into the system properly
7) Appropriate provisioning has been carried out, in cases of all the claims
intimated but not paid
8) Claims cost includes the Claims settlement Cost
9) In case of living / survival / maturity / annuity benefits, it should be ensured
that liability is automatically triggered
10) Ensured that there is system of regular reconciliation is carried out between
claims management system and General ledger
11) Liability of claims should be booked net of reinsurance
12) Ensure proper care taken while calculating portion of liability of claims in case
of reinsurance

AUTHOR: CA VIKAS OSWAL

 Audit of Insurance Companies

Audit of Accounts of Life Insurance Companies

Investments:

The Investment portfolio of Life Insurance companies comprise of

Shareholders’ funds and Policyholders’ funds

The overall functioning of the Investment function should include the

following independent functions:
• Investments front office / dealing desk
• Investments mid office – Compliance, Risk Management, Reporting,
Reconciliations
• Treasury – Cash Management, Deal settlement, Broker empanelment,
Custody
• Investment accounting – Fund accounting, NAV computation and
declaration.

Role of Auditor
• Review the Investment management structure to ensure adequate
segregation of duties between Investment Front office, Mid Office and
Back office
• Review of insurer’s Standard Operating Procedures which are prescribed
by the IRDA Regulations
• Review of insurer’s Investment policy
• Review of functioning and scope and minutes of Investment Committee
• Review of insurer’s Disaster Recovery, Backup and Contingency Plan
• Review of access Controls, authorization process for Orders and Deal
execution, etc.
• Review of fund wise reconciliation with Investment Accounts, Bank, and
Custodian records

•
• Review the arrangements and reconciliations of holdings with the
insurer’s custodian
• Review and check insurer’s Investment Accounting and valuation policy
and the controls around this process
• Insurer’s risk management policies and processes to manage investment
risk such as Market risk, Liquidity risk, Settlement risks, etc.
• Determine the extent of activities outsourced and the controls over such
activities
• Controls over NAV computation and declaration

AUTHOR: CA VIKAS OSWAL

 Audit of Insurance Companies

Audit of Accounts of Life Insurance Companies

1. Operating Expenses related to Insurance Business (Expenses of

Management)
All the administrative expenses in an insurance company are broadly
classified under 14 heads as mentioned in Schedule 3 forming part of
Financial Statements given under Schedule A to the Insurance Regulatory
and Development Authority (Preparation of Financial Statements and
Auditor’s Report of Insurance Companies) Regulations, 2002.
Role of Auditor
The auditor should ensure that these expenses are first aggregated and
then apportioned to the Revenue Account of each class of business on a
reasonable and equitable basis

2. Legal and Professional Charges

Attention is drawn to the head ‘claims incurred’ under schedule 2 where it
is clearly stated that fees, legal and other expenses should form part of
claim cost, and therefore, are not to be included under the head legal and
professional charges.
Role of Auditor
Ensure that all other expenses which are not covered under the claims
cost are required to be included under this head

3. Employees’ Remuneration and Welfare Benefits

• Employees’ remuneration includes all kinds of payments made to
employees in consideration of their services
• Reimbursement of medical expenses or premium in respect of employees’
health cover is covered under the employees’ remuneration and welfare
• Any medical fees incurred towards maintenance of healthcare policies
(which are not for employees) are required to be debited to the claims
cost
 Role of Auditor
Auditor is required to ensure the compliance of above

4. Interest and Bank Charges

All expenses incurred towards maintenance of Bank Account, interest and
other charges levied by bankers to the normal course of business other
than bank expenses relating to investments (interest, bank charges,
custodial charges, etc.) are shown under the head, “Interest and Bank
Charges.”

5. Depreciation
Charging of depreciation is governed by Schedule II to the Companies Act,
2013. In addition, compliance of relevant Accounting Standard is also to
be taken care.

AUTHOR: CA VIKAS OSWAL

 Requirements of Schedule B to the IRDA (Preparation of
Financial Statements and Auditors’ Report of Insurance
Companies) Regulations, 2002

Part I: Accounting Principles for Preparation of Financial

Statements

1. Applicability of Accounting Standard:-Every Balance Sheet, Receipts

and Payments Account [Cash Flow statement] and Profit and Loss Account
[Shareholders’ Account] of the insurer shall be in conformity with the
Accounting Standards (AS) issued by the ICAI, to the extent applicable to
the insurers carrying on general insurance business, except that:
• Accounting Standard 3 (AS 3) – Cash Flow Statements – Cash Flow
Statement shall be prepared only under the Direct Method
• Accounting Standard 13 (AS 13) – Accounting for Investments, shall
not be applicable
• Accounting Standard 17 (AS 17) - Segment Reporting – shall apply
irrespective of whether the securities of the insurer are traded
publicly or not

Premium
• Premium shall be recognised as income over the contract period or the
period of risk, whichever is appropriate
• Unearned premium as well as premium received in advance, both of
which represent premium income not relating to the current accounting
period, shall be disclosed separately
• Reserve for Unearned Premium, may be created as the amount
representing that part of the premium written which is attributable and to
be allocated to the succeeding accounting periods
• Premium Received in Advance, which represents premium received prior
to the commencement of the risk, shall be shown separately under the
head ‘Current Liabilities’ in the financial statements
• Unearned premium shall be shown separately under the head ‘Current
Liabilities’
• Appropriate disclosures regarding management’s basis of assessment
shall be made

Premium Deficiency: - Recognised if the sum of expected claim costs,

related expenses and maintenance costs exceeds related unearned
premiums

Acquisition Costs: -
Shall be expensed in the period in which they are incurred.
Acquisition costs are those costs that vary with, and are primarily related to,
the acquisition of new and renewal insurance contracts

Claims: - The components of the ultimate cost of claims to an insurer

comprise the claims under policies and claims settlement costs

A liability for outstanding claims shall be brought to account in respect

of both direct business and inward reinsurance business. The liability
shall include: -
➢ Future payments in relation to unpaid reported claims
➢ Claims Incurred but Not Reported (IBNR) including inadequate reserves
(sometimes referred to as Claims Incurred but Not Enough Reported
(IBNER))

Actuarial Valuation of claim liability - in some cases

Estimate of claims made in respect of contracts exceeding four years shall
be recognised on an actuarial basis.
Certificate from a recognised actuary as to the fairness of liability
assessment must be obtained.

AUTHOR: CA VIKAS OSWAL

 Audit of Insurance Companies

Procedure to Determine the Value of Investments

1. Real Estate – Investment Property
• Measured at historical cost less accumulated depreciation and
impairment loss, residual value being considered zero and no revaluation
being permissible
• Impairment loss shall be recognised as an expense in the revenue/profit
and loss account immediately
• Fair value as at the balance sheet date and the basis of its determination
shall be disclosed in the financial statements

2. Debt Securities
• Debt securities including government securities and redeemable
preference shares shall be considered as “held to maturity” securities and
shall be measured at historical cost

3. Equity securities and derivative instruments that are traded in active

markets
• Measured at fair value as at the balance sheet date
• For the purpose of calculation of fair value, the lowest of the last quoted
closing price of the stock exchanges shall be taken
• Unrealized gains/losses due to changes in the fair value of listed equity
shares and derivative instruments shall be taken to equity under the head
‘Fair Value Change Account’ and on realization reported in Profit and Loss
Account
• The ‘Profit on sale of investments’ or ‘Loss on sale of investments’, as the
case may be, shall include accumulated changes in the fair value
previously recognised in equity under the heading Fair Value Change
Account
4. Unlisted and other than actively traded Equity Securities and
Derivative Instruments
• Measured at historical costs
• Provision shall be made for diminution in value of such investments

Loans:
Measured at historical cost subject to impairment provisions
Impairment provision shall not be less than the aggregate amount of loans
which are subject to defaults of the nature mentioned below:-
I) Interest remaining unpaid for over a period of six months and
II) Instalment(s) of loan falling due and remaining unpaid during the last six
months

Catastrophe Reserve:
Catastrophe reserve shall be created in accordance with norms, if any,
prescribed by the Authority.
This reserve is towards meeting losses which might arise due to an entirely
unexpected set of events and not for any specific known purpose.

AUTHOR: CA VIKAS OSWAL

 Audit of Insurance Companies

PART II: Disclosures Forming Part of Financial Statements

A. The following shall be disclosed by way of notes to the Balance Sheet:

• Contingent Liabilities
• Encumbrances to assets of company in and outside India
• Commitments made and outstanding for Loans, Investments and Fixed
Assets
• Claims, less reinsurance, paid to claimants in/outside India
• Actuarial assumptions for claim liabilities in the case of policies exceeding
four years
• Ageing of claims – distinguishing between claims outstanding for more
than six months and other claims
• Premiums, less reinsurance, written from business in/outside India
• Extent of premium income recognised, based on varying risk pattern,
category wise, with basis and justification therefor, including whether
reliance has been placed on external evidence
• Value of contracts in relation to investments, for
• Operating expenses relating to insurance business: basis of allocation of
expenditure to various classes of business
• Historical costs of those investments valued on fair value basis
• Computation of managerial remuneration
• Basis of amortization of debt securities
• (a) Unrealized gain/losses arising due to changes in the fair value of listed
equity shares and derivative instruments are to be taken to equity under
the head ‘Fair Value Change Account’ and on realization reported in profit
and loss Account.
• (b) Pending realization, the credit balance in the ‘Fair Value Change
Account’ is not available for distribution
• Fair value of investment property and the basis therefor
• Claims settled and remaining outstanding for a period of more than six
months on the balance sheet date
PART II: Disclosures Forming Part of Financial Statements

B. The following accounting policies shall form an integral part of the

financial statements:
• All significant accounting policies in terms of the accounting standards
issued by the ICAI, and significant principles and policies given in Part I of
Accounting Principles. Any other accounting policies followed by the
insurer shall be stated in the manner required under Accounting Standard
AS 1 issued by ICAI.
• Any departure from the accounting policies as aforesaid shall be
separately disclosed with reasons for such departure.
• Investments made in accordance with any statutory requirement
• Segregation into performing/non-performing investments
• Percentage of business sector-wise
• Summary of financial statements for the last five years
• Accounting Ratios as may be prescribed by the Authority
• Basis of allocation of Interest, Dividends and Rent between Revenue
Account and Profit and Loss Account

AUTHOR: CA VIKAS OSWAL

 Audit of Insurance Companies

PART III: General Instructions for Preparation of Financial

Statements

• A. The corresponding amounts for the immediately preceding financial

year for all items shown in the balance sheet, revenue account and profit
and loss account should be given
• Figures in the financial statements may be rounded off to the nearest
thousands
• Interest, dividends and rentals receivable in connection with an
investment should be stated as gross value
• The amount of income tax deducted at source being included under
'advance taxes paid’
Income from rent shall not include any notional rent
• Make provisions for damages under lawsuits where the management is of
the opinion that the award may go against the insurer
• Risks assumed in excess of the statutory provisions, if any, shall be
separately disclosed indicating the amount of premiums involved and the
amount of risks covered
• Any debit balance of Profit and Loss Account shall be shown as deduction
from uncommitted reserves and the balance if any, shall be shown
separately

Part IV: Contents of Management Report

• Confirmation regarding the continued validity of the registration granted

by the Authority
• Certification that all the dues payable to the statutory authorities have
been duly paid
• Confirmation to the effect that the shareholding pattern and any transfer
of shares
• Declaration that the management has not directly or indirectly invested
outside India the funds of the holders of policies issued in India
• Confirmation that the required solvency margins have been maintained
• Certification to the effect that no life insurance fund has been directly or
indirectly applied in contravention of the provisions of the Insurance Act,
1938
• Disclosure with regard to the overall risk exposure and strategy adopted
to mitigate the same
• Ageing of claims indicating the trends in average claim settlement time
during the preceding five years
• Review of asset quality and performance of investment in terms of
portfolios

PART V: Preparation of Financial Statements

• An insurer shall prepare the Revenue Account, Profit and Loss Account
[Shareholders’ Account] and the Balance Sheet in Form B-RA, Form B-PL,
and Form B-BS, or as near thereto as the circumstances permit
• Insurer shall prepare revenue account separately for fire, marine, and
miscellaneous insurance business
• An insurer shall prepare separate Receipts and Payments Account in
accordance with the Direct Method prescribed in AS 3 – “Cash Flow
Statement” issued by the ICAI
• The important part of the business operations of general insurance
companies comprises the issuance of policies for risks assumed and to
indemnify the insured for losses to the extent covered by such policies

AUTHOR: CA VIKAS OSWAL

 PART II – Audit of Life Insurance Company

Question 23

Importance of Actuarial Process and Role of Auditor in case of Life

Insurance Business: Actuarial Process:

Answer:
I. Actuaries in Life Insurance business have gained tremendous importance.
The role of Actuary in life insurance has shifted from supervising
compliance to certify whether products and financial reports are in
accordance with the general regulatory guidelines.
II. The job of actuary or actuarial department in any Life Insurance Company
involves, detailed analysis of data to quantify risk.
III. The actuarial department is calculating and modelling hub of the
Company. Within the department fundamentals of Insurance business is
determined from pricing to policy valuations techniques.
IV. Role of Auditor: Auditors in the Audit report are required to certify,
whether the actuarial valuation of liabilities is duly certified by the
appointed actuary, including to the effect that the assumptions for such
valuation are in accordance with the guidelines and norms, if any, issued
by the authority and/or the Actuarial Society of India in concurrence with
the IRDA.
V. Hence, Auditors generally rely on the Certificate issued by the Appointed
Actuary, certifying the Policy liabilities. However, Auditor may discuss with
the Actuaries with respect to process followed and assumptions made by
him before certifying the Policy liabilities.
 Question 24

Briefly explain the term policy lapse and revival in case of Life Insurance
Company and role of auditor in verifying the same.

Answer:
Policy Lapse and Revival:
i. “Lapse” is the discontinuance of the policy owing to non-payment of
premium dues.
ii. The term “lapse” is not defined in the insurance legislation, except stating
that “a policy which has acquired a surrender value shall be kept alive to
the extent of the paid-up sum assured” - vide section 113(2) of the
Insurance Act,1938.
iii. In order to keep a life insurance policy “in force” the policy holder is
required to pay premiums when due (either monthly/
quarterly/annual/bi-annual).
iv. If payment is missed, the insurer allows a period of 15/30 days from the
premium due date for making the payment.
v. This period is termed as “grace period”. If the policy holder does not make
the payment within the grace period, the policy gets “lapsed”.
vi. Thus, a payment within the grace period is deemed to be a payment on
the due date.
vii. Lapsation affects all the stakeholders – the policy holder, agents and the
insurer.
viii. A lapsed policy ceases to provide insurance protection to the insured. It
forfeits the benefits under the policy and cost of new policy is higher.
ix. Agents do not get renewal premium commission if the policy is lapsed.
x. The terms and conditions of the policy stipulate, that where the premium
is not paid within the grace period, the policy lapses but may be revived
during the lifetime of the life assured.
 xi. Some insurers do not allow revival, if the policy has remained in lapsed
condition for more than five years.
xii. This is because of the possibility that the arrears of premiums on such a
policy would be too heavy and that it would be better to take out a fresh
policy.
xiii. The insurer should have taken persistent measures for monitoring receipt
of renewal premium within the due dates. In case of most of insurers,
policy lapsation is tracked over the PMS, wherein premium due dates are
monitored by the system once initial data of the policy is entered in the
system.
xiv. Role of Auditor: The primary objective of the audit is to check and confirm
that due dates are recorded and monitored properly and polices are
marked as “lapsed” on non -receipt of renewal premium within due
dates/grace period. In case of revival request, whether adequate checks
are in place for receipt of outstanding amounts and adequate documents
are obtained before reviving the policy.

AUTHOR: CA VIKAS OSWAL