Audit of Insurance | Commerce & Accountancy Optional Notes for UPSC PDF Download

Introduction

• In India, insurance companies are established in accordance with the Companies Act of 2013, and the Insurance Act of 1938 clearly defines the concept of insurance audit in section 12. According to this act, every insurance company is obligated to conduct an annual financial statement audit. The initiation of insurance audits by the government dates back to 1999 through the IRDA Act. In line with their insurance business, insurers are mandated to prepare the following documents as per IRDA regulations at the conclusion of each financial year:
  1. Balance Sheet
  2. Profit & Loss Account
  3. Separate Account of Receipts
  4. Payment and a Revenue Account
• Compliance with these regulations is essential. Professional auditors are engaged to conduct an independent examination of the accounting records of insurance companies. After a thorough evaluation, these professionals provide advice for improving the records. The necessity of auditors for insurance companies lies in ensuring adherence to regulatory standards and enhancing the overall quality of financial records. The process of auditing involves a meticulous examination of the Profit & Loss Account and Balance Sheet, aiming to scrutinize various aspects of insurance operations.

What is an Audit of Insurance Companies?

• In the audit of insurance companies, an assessment of insurance policies is carried out. During the insurance audit, a thorough examination is conducted to verify whether insurance rates and premiums encompass provisions for adequate insurance coverage. Additionally, the audit ensures that all insurance companies are in compliance with established laws and regulations.
• The audit process also entails a review of past claims submitted to the insurance company. This scrutiny aims to confirm whether any prior claims have been overlooked or excluded by the company. Importantly, insurance audits play a pivotal role in fostering a positive relationship between policyholders and insurance companies. By offering insights and recommendations, the audit process guides insurance companies on how to attract and satisfy a larger customer base.
• Furthermore, the investigation of insurance claims loss is carried out by insurance surveyors and loss assessors, while auditors of insurance companies focus on examining operational issues within the insurance business. Both roles contribute to ensuring that policyholders receive proper services, ultimately safeguarding their financial well-being.

Role of Insurance Auditors in Insurance Audit

• The appointment of Central and Branch Auditors for an insurance company takes place during the Annual General Meeting, contingent upon obtaining approval from the Comptroller and Auditor General before the appointment.
• Adherence to the regulations outlined in the Insurance Act of 1938 and the Companies Act of 2013 is mandatory for insurers in the appointment of auditors.
• The board, based on the recommendations of the Audit Committee, appoints statutory auditors. However, the final approval rests with the shareholders at the general meeting of the Indian Insurance Company.
• Branch auditors are designated to conduct audits of specific divisions within an insurance company, presenting their findings to the statutory auditors.
• The trial balance is certified by branch auditors, and they integrate the financial statements of the branches into the divisions at the divisional level.
• The removal of statutory auditors for insurance companies requires approval from the authority; the insurer cannot undertake this action unilaterally.

Important Audit Points in Profit & Loss Account of Insurance Company

Below are the important points that must be checked in the profit and loss account of the insurance company:

Verification of Premium

• For effective administration of premium collections, funds are deposited into a distinct bank account strictly designated for non-general expenditures. The insurance company's policy dictates the transfer of premium collections to either the Regional or Head Office.
• As stipulated by Section 64VB of the Insurance Act of 1938, insurers must receive premium payments before assuming any risk. The verification of premiums is of paramount importance for auditors as they signify the company's exposure to risk when policies are issued.
• In the auditing process, the auditor must scrutinize internal controls and ensure compliance with premium collection and recording procedures. Cover notes must be assigned serial numbers, and Premium Registers should be meticulously maintained in chronological order, detailing GST charges on a daily basis as per acceptance advice. The auditor verifies the alignment of premium figures in the register with those in the General Ledger. Additionally, the auditor ensures that all instalments, whether received or not, due on or before the balance sheet date are appropriately accounted for as premium income for the year under review.

Verification of Claim

• To ensure the accuracy of the business, the auditor is required to gather information from each division/branch. Subsequently, the auditor should assess the total number of documents for review, prioritizing claim provisions of higher value. Policies encompass both paid losses and estimated claims awaiting settlement.
• All expenditures, such as repair charges, firefighting expenses, police report fees, survey fees, court-ordered amounts, travel expenses, and photograph charges, are recorded in the Claim Account. The auditor for insurance companies needs to verify the following:
  1. Provisions are established for all unresolved claims.
  2. The provisions made do not surpass the insured amount.
  3. In the case of co-insurance agreements, the company has only made provisions for its own share of anticipated liability.
  4. Payments for settled claims have been authorized by the relevant authority.

Verification of Commission

Agents receive compensation for procured business in the form of a commission, calculated as a percentage of the collected premium and recorded in the Commission on Direct Business Account.
As an auditor, it is crucial to verify the following:

1. Confirm that disbursement entries on vouchers align with commission bills and statements.
2. Validate that vouchers have been duly authorized by the relevant officers in accordance with established rules, and they include any necessary income tax deductions.
3. Conduct a test-check to ensure the accuracy of commission amounts recorded.
4. Verify that commission payments made during the audit period of the insurance company have been accurately accounted for in the financial records.

Verification Of Operating Expenses

The administrative expenses, categorized under 13 distinct heads as outlined in Schedule IV, warrant scrutiny by the auditor.
The following checks should be performed:

1. Any expenses exceeding either Rs. 5 Lakhs or 1% of the net premium, whichever is higher, must be presented separately.
2. Expenses that are not directly associated with the insurance business, such as those related to the investment department, bank charges, etc., should be displayed separately.

Important Points to Check in Company’s Balance Sheet

The following are the key elements that must be checked during the insurance audit of the balance sheet:

Investments 

In scrutinizing an insurance company's investments, the auditor needs to be well-versed in the regulations outlined in the Investments section of the Insurance Act of 1938.
The regulations are summarized as follows:

• The insurance company is permitted to invest solely in approved securities, subject to certain conditions. These conditions include ensuring that such investments do not surpass 25% of the total investments and obtaining approval from the board of directors.
• The insurer is restricted from investing in shares or debentures of insurance or investment companies beyond a specified limit. This limit is determined by the lesser of two factors: 10% of its total assets or 2% of the subscribed share capital or debentures of the investee.
• Investments in shares or debentures of non-insurance or non-investment companies are also restricted to a certain limit. This limit is determined by the lesser of two factors: 10% of its total assets or 10% of the subscribed share capital or debentures of the investee.
• Notably, insurance companies are prohibited from investing in shares and debentures of private companies. Furthermore, the funds of policyholders cannot be invested outside of India by insurance companies.

Cash and Bank Balances 

When examining the cash and bank balances of an insurance company, the auditor needs to conduct the following checks on the financial statements:

• Ensure the preparation of bank reconciliation statements.
• Validate the bank balances for both active and inactive accounts.
• Physically inspect term deposit receipts issued by bankers, especially as all year-end cash is typically deposited as a term deposit with the bank.
• Verify random deposits and withdrawals, ensuring that only authorized individuals operate the account. In cases of funds in transit, the auditor should confirm their accurate representation in the reconciliation statement.

Outstanding Premium and Agents' Balances 

In the audit of insurance companies, when examining the agent's balance, the auditor should adhere to the following procedures:

• Confirm that the balances of agents and outstanding balances in the outstanding premium account have been meticulously listed, analyzed, and reconciled for audit purposes.
• Verify if any recoveries of substantial outstanding balances have been executed in the post-audit period.
• Examine for any lingering old outstanding debit or credit balances as of the year-end that necessitate adjustments. If such balances exist, seek a written explanation from management clarifying their nature.
• Ensure that the agent's balances explicitly exclude any balances related to employees and balances from other insurance companies.
• Verify that agents are not credited with commissions for businesses they directly procure.

Role of the Audit Committee in the Insurance Audit

According to the guidelines, insurance companies are mandated to establish several crucial committees, including:

• Audit Committee
• Investment Committee
• Risk Management Committee
• Policyholders Protection Committee
• Nomination and Remuneration Committee
• Corporate Social Responsibility Committee
• Profits Committee

The initiation of these committees serves specific purposes, as outlined below:

Audit Committee

• As per Section 177 of the Companies Act, 2013, the establishment of an Audit Committee is mandatory for every insurance company. This committee plays a pivotal role in reviewing the financial statements, cash flow statements, and financial reports annually and quarterly. 
• The chairperson of the Audit Committee is required to be an Independent Director with expertise in accounting, finance, or audit, potentially being a Chartered Accountant or possessing a strong financial analysis background. The involvement of the CEO in the Audit Committee is restricted to situations requiring specific information about audit findings. 
• The committee, comprising at least three directors, a majority of whom must be Independent Directors, is responsible for overseeing the efficient functioning of the internal audit department and reviewing its reports. Additionally, the Audit Committee should engage in pre-audit discussions with statutory auditors to discuss the audit's nature and scope and hold post-audit discussions to address any concerns.

Conclusion

In summary, the insurance audit serves as a comprehensive evaluation of various facets within the insurance process. This encompasses the scrutiny of insurance documents, liabilities, risk assessments, and financial statements. Evaluating the internal control system's robustness and effectiveness is a crucial aspect of the audit, aimed at identifying potential errors. Engaging professionals with expertise in audit procedures becomes essential to ensure a thorough and accurate assessment of the insurance company's operations.