Detailed Audit Programme On Important Areas Of Insurance Business

Audit Areas in case of premium

Auditor has to apply below mentioned procedures.

A. VERIFICATION OF PREMIUM

1. In a separate bank account, the premium collections are credited. No withdrawals are generally permitted from that account for the purpose of a general expenditure.

2. As prescribed in the policy of insurance company, the collections are transferred to the Regional Office or Head office.

3. According to Section 64VB of the Insurance Act, 1938, the insurer shall assume no risk without the receipt of premium.

4. It is of utmost importance to an auditor to verify a premium because the insurance premium is collected upon issuing policies.

5. It is a consideration for bearing the risk of the insurance company.

The auditor shall verify:

1. Before starting the verification of premium income, the auditor must look into the internal controls and compliance, which is laid down for the collection and recording of premiums.

2. The cover notes must be numbered serially.

3. The auditor needs to check if the premium registers are maintained chronologically, providing complete details including GST charged according to the acceptance advice daily.

4. The auditor must verify if they figured the premium amount mentioned in the register tally with those shown in General Ledger.

5. The auditor will also verify that the installments that are due on or before the balance sheet date has been received or not, have been accounted as premium income for the year under audit.

6. Whether premium has been recognized as income over contract period of risk or not.

7. Check whether the premium is realized before the commencement of policy.

8. Check whether due to dishonored cheques the respective policies were cancelled and properly notified.

9. Check refund of premium on cancellation of insurance policies.

10. Whether reserves for Unexpired Risks have been created as the amount representing that part of the premium written which is attributable to ,and to be allocated to the succeeding accounting periods.

11. Whether unearned premium has been shown separately as Current Liability.

12. The premium received in advance shall not be included in “ Unearned Premium Account”.

13. Whether unearned premium received in advance, which represents premium income not relating to Current Accounting period , has been disclosed separately in the Financial Statements.

14. Whether necessary changes based on actuarial/ technical evaluation has been made to the liability for contracts exceeding four years.

15. Whether premium deficiency has been recognized when sum of expected claim costs, related expenses and maintenance costs exceed related unearned premium.

16. Check whether the premiums fixed for different kinds of policies were based on the advice of the actuary as well as the data base available with it and approved by the Board before filing with IRDAI.

17. Check the reasonableness of the discounts allowed by the Insurer on the premiums. He should comment on the profitability of the portfolio due to allowance of excess discounts.

18. Check, while allowing discounts, whether the claims history of group portfolio or client‘s portfolio was taken into account.

19. check the standard clauses were included in the policy documents including inclusions and exclusions.

20. If any specific additions were made, check whether additional premium were collected.

21. Check whether the subrogation clause, agreed bank clause, average clause, reinstatement clause etc., were expressly included in the policies to protect the company.

22. Check whether for coverage of additional perils, extra premium was collected appropriately.

B. VERIFICATION OF CLAIMS

1. The auditor from each division or branch must obtain the information for all classes of business.

2. The auditor shall determine the total number of documents that is to be checked, providing due importance to claims of higher value.

3. The claim account gets debited with all the payments that include the repair charges, survey fees, photograph charges etc.

4. Classification and accounting under appropriate heading in Financial Statements.

5. Completeness of liability account.

6. Accuracy of expenses.

The auditor shall verify:

1. Check the provision for unsettled claims.

1. Check if the provision is made for such claims for which the company is legally liable.
2. Check if the provision that is made is not more than the insured amount.
3. Check the Co-insurance arrangements; the company has made provisions with respect to its own share of anticipated liability.
4. The Auditor should confirm that

a) The components of the ultimate cost of claims to an insurer comprise;

i) The claims under policies; and

ii) Specific claims settlement costs.

Please Note : Claims under policies comprise;

i) The claims made for losses incurred;

j) Those estimated or anticipated under policies following a loss occurrence.

b) The float account shows only the deposit amount. The auditor needs to verify that steps have been taken to reconcile at the year end.

6. Whether the liability for outstanding claims in respect of both Direct Business and inward Reinsurance business has rightly brought into accounts.

7. Whether all the claims have been recorded in the books of accounts and not kept outside the for any reason whatsoever.

8. Whether reserves have been made for IBNR and IBNER.

9. Whether TPA claims provisions have been made as per the statements received from TPAs.

10. Whether accounting estimates includes claims cost adjusted for estimated salvage value if there is sufficient degree of certainty of its realization.

11. Whether estimates of claims made for contracts exceeding four years has been recognized on the basis of Actuarial Report and valuation.

12. The Auditor should check details of premium received in last 15 days prior to closure of financial year and after closure of financial year.

13. The auditor should verify the claims lodged with the company within a period of 15 days before and after end of financial year.

14. Check whether proper intimation/notice was given by the insured to the insurer on the happening of fire/accident within the time prescribed.

15. Check whether the Insurer had appointed proper surveyor to assess the losses.

16. Check whether all the documentary evidences were submitted by the insured as per terms and conditions of the policy

17. Auditor should ensure that the surveyor had submitted the estimated loss within the time prescribed and the insured had given adequate cooperation in surveying the damages/perils.

18. Check whether the original policy was surrendered along with the claim application to check the title of the goods.

19. Check the documentary evidence produced by the insured about the efforts taken by him to prevent or reduce the loss due to perils and the reasonableness of the cost incurred for such prevention or minimisation of loss.

20. Check whether the average clause was enforced while settling the claims in case of under insurance.

21. Check reasonableness on the loss assessed and salvages were taken into account.

22. Check whether the claims were paid subject to exclusion clauses mentioned in the policy.

23. Auditor should ensure that the claims for losses be honoured on verifying the Total Loss, particular average, general average, salvage loss, sue and labour charges and survey charges.

24. Check whether all the larger claims were reported to the Reinsurance department in time to stake claim from the reinsurers.

C. VERIFICATION OF COMMISSION

1. The remuneration paid to an agent is made through commission. The remuneration amount is calculated by applying a percentage to the premium collected by the agent.

2. The commission is paid to the agents for the business procured, and it is then debited to commission on Direct Business Account. Insurance agents usually solicit the insurance business.

The auditor shall verify:

1. Voucher disbursement entries with regard to the disbursement vouchers with the copies of commission bills and statements.

1. Check if the vouchers are authorized by the officers-in-charge as per the rules and also income tax is deducted at source.
2. Check the amount of commission allowed.
3. Check the accounting period of commission.
4. Check if commission paid on portability of policies or not.
5. Check whether agent is depositing total premium received by them in bank account of company without deducting their commission.
6. Check commission /Brokerage paid to agents and intermediaries are in accordance with IRDAI Regulations and contract with them.
7. Check for list of agents and intermediaries and rate of payment of commission to them from the company.
8. Auditor should ensure that relevant expenditure in connection with claims like survey fees and expenses, legal expenses, charges payable to TPAs and Commission payable to Agents and Brokers were accounted in the respective revenue accounts.
9. check the commission receivable and payable in reinsurance were correctly accounted.
10. check whether TDS was deducted on the commission payments or declarations from the agents for nonreduction of taxes.
11. check that there is no excess commission paid than prescribed by the IRDA for different policies.
12. check the commission paid should match the policies sold through agents or other intermediaries.
13. Auditor should ensure appropriateness of the accounting treatment of the coinsurance business received, premium receivable and payment of commission.
14. check whether appropriate commission was retained by the leader while transferring the share of premium to the co-insurer.
15. Auditor should ensure appropriateness of the accounting treatment of the reinsurance business ceded, premium payable and payment of commission.
16. Auditor should examine the arrangements made with the Principal Insurer reinsurance business received, premium received and commission structure, event limits etc.
17. Auditor should check Non-proportional arrangements for each insurance segment, estimated gross and net premium, commission structure, cover limits, deductible, excess of loss premium, reinstatement provisions etc.
18. Auditor should check the structure of Reinsurance Program with details of proportional arrangements for each insurance segment including treaty capacity, retention limits, estimated premium and reinsurance commission.
19. Auditor should check the reasonableness of the commission payable to the dealers of vehicles.

D. MANAGEMENT EXPENSES/OPERATING EXPENSES

The auditor shall verify:

1. Expenses that are more than Rs. 5 lakhs or 1% of the net premium, whichever is higher. This must be shown separately.

1. Expenses that are not directly related to insurance business must be shown separately, for example, costs made in the investment department or bank charges etc.
2. Auditor should confirm that competent authority has approved all management expenses.
3. Check whether expenses properly classified as Revenue and Capital and proper effect has been given in the financial statements.
4. Check whether proper provisions has been made for outstanding expenses and shown separately in head “ Current Liabilities”.
5. Check whether operating expenses that cannot be allocated directly to product classifications or the companywide classification, such as salaries of officers and employees, and taxes, allocated in accordance with the Allocation Standards.

E. INVESTMENT AUDIT;

1. The auditor must follow the following prescribed provisions with regard to the investments of the Insurance Act, 1938, at the time of the inspection of the investments of the insurance company:

2. An insurance company can invest only in approved securities. However, it can also invest in securities other than approved securities if the following conditions are satisfied:

a) The investments made must not exceed 25% of the total investments made.

b) The investment must be made with the consent of the board of directors.

3. An insurer must not invest in shares or debentures of an insurance or investment company over least of the following:

a) 10% of its own total calculated assets.

b) 2% of the subscribed share capital or debentures of the investee.

4. An insurance company must not invest in the shares or debentures of a company other than an insurance or investment company above at least the following:

a) 10% of its own total calculated assets.

b) 10% of the subscribed share capital or debentures of the investee.

5. An insurance company is not allowed to invest in the shares and debentures of a private company.

6. The insurance companies are not permitted to invest in funds of their policyholders outside India.

7. Check from Certificates and other details the ownership of investments ,whether they are in the name of company or not.

8. Check the method of accounting of investments ,whether it is appropriate for the company.

9. Check valuation of investment whether done on continuous period of three years or not.

10. Check whether effect of impairment has been given or not.

11. Check whether Revaluation Reserve has been made for investment in real estate sector and cash amount to be credited in case of higher valuation and in case of loss same should be debited in PL of the company.

12. Check whether in case of impairment in investment of securities a “ Fair Value Change Account” has been created or not.

13. Check whether method of accounting consistently applied by the company year to year.

14. Check whether financial statements disclose Accounting Methods applied by the company.

15. Auditor should check the action taken to dispose of the non-performing investments to salvage them.

16. Auditor should check whether there is any system with the Insurer to review the investments and categorise them into performing and non-performing.

17. Auditor should check the decisions in investment in primary markets on equities and debts.

18. Auditor should ensure that an insurer should not out of the controlled fund / assets invest or keep invested in the shares or debentures of any one company more than the exposure prescribed in Regulation 9 above, provided that nothing in this regulation shall apply to any investment made with the previous approval of the Board of the Authority by an insurer, being a company with a view toforming a subsidiary company carrying on insurance / re-insurance business.

19. Where an investment is in partly paid-up shares, the uncalled liability on such shares shall be added to the amount invested for the purpose of computing exposure norms.

20. Auditor should ensure the exposure limit for financial and insurance activities (as per Section K of NIC classification – 2008, as amended from time to time) should stand at 25per cent of investment assets for all insurers. Investment in Housing Financing Companies and Infrastructure Financing Companies (except investment in Bonds / debentures of HUDCO, NHB and only bonds issued by Housing Finance Companies having a rating of not less than AAA, and investment in Debt, Equity in dedicated infrastructure financing entities forming part of Infrastructure sector) shall form part of exposure to financial and insurance activities (as per Section K of NIC classification – 2008).

21. Auditor should check that Investment Property within the meaning of Accounting Standards, and covered under Regulation 3 (a) (6) shall not exceed, at the time of investment, 5 per cent of Investment Assets in the case of general insurer held as ‗investment property‘ should not be for ‗self-use‘. Immovable property, for self-use, should be purchased only out of share-holders funds, and should comply with circular / guidelines issued.

22. Auditor should ensure that Investment in securitized assets [Mortgaged Backed Securities (MBS) / Asset Backed Securities (ABS) / Security Receipts (SR)] both under approved and other investment category shall not exceed 5 per cent of Investment Asset in the case of General companies. Approved Investment in MBS / ABS with underlying Housing or Infrastructure Assets and not more than 5per cent of investment assets in the case of General Insurance companies. Any MBS / ABS with underlying housing or infrastructure assets, if downgraded below AAA or equivalent, shall be reclassified as Other Investments.

23. Auditor should ensure that Investment Committee should at least on a half-yearly periodicity evaluate the risk of such investments and take necessary corrective actions where the parent company (ies) is floating more than one SPV.

24. Auditor should ensure whether at the time of investing, subject to group/ promoter group exposure norms, invest a maximum of 20per cent of the project cost (as decided by a competent body) of an Public Limited Special Purpose Vehicle (SPV) engaged in infrastructure sector (or) amount under Regulation 9 (B) (i), whichever is lower, as a part of Approved Investments provided:

A) such investment is in Debt

B) the parent company guarantees the entire debt extended and the interest payment of SPV.

C) the principal or interest, if in default and if not paid within 90 days of the due date, such debt shall be classified under other investments.

D) the latest instrument of the parent company (ies) has (have) rating of not less than AA

E) such guarantee of the parent company (ies) should not exceed 20per cent of net worth of parent company (ies) including the existing guarantees, if any, given

F) the net worth of the parent company (ies), if unlisted, shall not be less than Rs. 500 crores or where the parent company (ies) is listed on stock exchanges having nationwide terminals, the net worth shall not be less than Rs. 250 Crores.

25. Auditor should check that matured investments were properly encashed and reinvested properly on the due date to avoid loss of interest.

26. Auditor should check the money market transactions and the investment and disinvestment decisions for day-to-day operations.

27. Auditor should check all the contracts on the sale/purchase of securities in the market from the dealers and ensure that only the ordered quantity of investments was purchased and sold.

28. Auditor should check the appointment of dealers of investments for day-to-day operations.

29. The Internal Auditor should check whether the decisions taken on investment or disinvestment with reasons were properly minuted.

30. Auditor should check whether the Investment Committee meet frequently to oversee the investment operations.

31. check whether the proceedings of the Investment Committee were recorded and minuted.

32. Auditor should check whether the back office, middle office front office functions and accounting functions were segregated by the insurer. Moreover, he should check that these functions should not be outsourced. If not, comment on the impact.

a) Real Estate Investments

The Auditor shall verify

1. Investment property has been measured at Historical Cost less Accumulated Depreciation and Impairment Loss( Residual value being considered as zero and not revaluation is permissible).

2. The insurer has assessed at each Balance/Sheet date any impairment in invested property.

3. Impairment losses are recognized as expenses in the Revenue/Profit and Loss Account immediately.

4. Profit on revaluation of real estate investments shall be credited in Revaluation Reserve Account of the insurer and this is a Cash Reserve.

5. Whether disclosures of Fair Market Value of investment have been made in Notes to the Accounts of the insurer.

b) Debt Securities

The Auditor should confirm that the debt securities including Government Securities and Redeemable Preference Shares have been considered " Held to Maturity" securities and valued at Historical Cost less impairment if any.

c) Equity Securities and Derivative Instruments that are traded actively in active market.

The Auditor shall verify;

1. Whether the listed equity securities and derivatives instruments that are traded in active markets have been measured at Fair Market Value as at the Balance/Sheet date.

2. Whether the insurer has assessed on each Balance/Sheet date whether any impairment of listed equity security/derivative instruments has occurred.

3. Whether unrealized loss/gain arising in changes in Fair Value of listed shares and derivative instruments have been taken to Equity Portion of Balance sheet under head “ Fair Value Change Account”.

4. Whether profit on sale of investment or loss , as the case may be includes accumulated changes in Fair Value previously recognized in Equity under the “ Fair Value Change Account” in respect of a particular security and being recycled to Profit/Loss Account on actual sale of that listed security.

5. the debit balance in the “Fair Value Change Account” has been reduced from the profits/free reserves while declaring dividends.

6. Whether company has assessed if any impairment held on each Balance/Sheet date or not.

7. The impairment loss has been recognized as an expense in Revenue/PL to the extent difference between the remeasured Fair Value of the Security/Investment and its acquisition cost as reduced by any previous impairment loss recognized as an expense in the Revenue/PL Account .

8. Whether any reversal of impairment loss ,earlier recognized in Revenue/PL Account has been recognized in Revenue /PL Account.

d) Unlisted and other than actively traded Equity Securities and Derivative Instruments.

The Auditor shall verify;

Whether unlisted securities or derivative instruments not actively traded on stock exchange has been valued at Historical Cost less impairment loss if any in the books of accounts.