INTRODUCTION

What is insurance?

Insurance is a contract between two parties whereby one party agrees to undertake the risk of

another in exchange for consideration known as premium and promises to pay a fixed sum of money to

the other party on happening of an uncertain event (death) or after the expiry of a certain period (in case

of life insurance) or to indemnify the other party on happening of an uncertain event (in case of general

insurance). The party bearing the risk is known as the 'insurer or 'assurer and the party whose risk is

covered is known as the 'insured' or 'assured'.

The insurance industry occupies a very important place among financial services all over the

world. Today insurance affects people from all walks of life. Individuals as well as business firms turn to

insurance for managing various risks. Everyday new coverage is added to the existing policy. The

expanding scope of insurance highlights the growing importance of insurance to individuals and

organizations alike. A proper appreciation of what insurance is and what it can do to help an individual or

an organization is therefore necessary.

Distinctions of Insurance

There are 2 distinction of insurance, namely Life Insurance and General Insurance.

Life Insurance

Life insurance promises specific financial compensation to the beneficiary in case of the demise

of the insured person. To avail the insurance benefits, the policyholder is liable to pay the premium

amounts regularly and timely, as per the policies of the chosen plan.

Types of life insurance are:

 Term/Protection Insurance
  Endowment/Pure Endowment

 Money Back Plan

 Whole Life Insurance Product

 Unit Linked Insurance Plan

 Pension or Retirement Plans

 Annuities

 Group Insurance; and

 Others

General Insurance

General insurance is a general term used for all the insurance plans that safeguard things other

than life, such as your health and valuables against theft, natural disasters, accidents, etc. Timely

premiums are to be paid for the value of protection chosen by you. The insurance company is then liable

to pay you the assured sum if any damage or theft happens to the insured entity.

Types of general insurance are:

 Health Insurance

 Motor Insurance

 Home Insurance

 Travel Insurance

What is an insurance audit?

An insurance audit is the carrier’s way of determining how much risk they actually insured over

the past year. The company could’ve undergone a drastic change over that whole year your policy was in

effect.

Who appoints auditor of Insurance company?

 The provisions of the companies Act 2013 applies for the appointment of an auditor. The auditor

of an insurance company is generally appointed at the annual general meeting of the company, and the

approval of the authority is required before making the appointment.

What is the role of Insurance auditors in Insurance audit?

 The Central and Branch Auditors of an insurance company is appointed at the Annual General

Meeting of the Company.

 Before making the appointment an appointment from the Comptroller and Auditor General must

be received.

 The insurers as per the guidelines of the Insurance Act, 1938, and the Companies Act, 2013 must

comply with the provisions with regard to the appointment of auditors.

 As per the recommendation of the Audit Committee, the board appoints the statutory auditors,

subject to the shareholder's approval at the general meeting of the Indian Insurance Company.

 The appointment of branch auditors is made to conduct the audit of the divisions having the same

rights and obligations as per the statute. The branch auditors submit their report to the statutory

auditors.

 However, at the division level, the branch auditors certify the Trial balance and incorporate the

financial statements of the branches under the divisions.

 The insurer does not have the power to remove the statutory auditor without taking the approval

of the authority.

 An audit firm cannot audits of more than three insurers (Life insurance or Health Insurance or

Reinsurer or Non-Life Insurance) at a time.

 They made an appointment that can be canceled if it is found that the appointment of auditors by

the insurers is not as per the proposed guidelines.

How often will an audit be done?

 It depends on the type of work you do and the size of the annual premium for the policy to be

audited. Generally, a policy is audited every year, but some policies may be audited every third year.

When will the audit be done?

Within 90 days after the expiration date of the policy period so that any premium adjustments

may be processed into your premium billing cycle. The auditor will notify you by mail or telephone

shortly after the policy expiration date to schedule a convenient date for the audit.

Why is an audit necessary?

Premiums for workers’ compensation insurance and for general liability insurance are calculated

based on estimates of insurance exposure (for example, payroll, receipts, sales, units, etc.) expected

during the policy period. An audit is conducted at the conclusion of the policy period to determine the

actual insurance exposure during the policy term. The final premium is determined by using the actual,

not the estimated, premium basis and the proper classifications and rates that apply to the business and the

work during the policy term. Adjustments will be made to the premium based on the actual information.

What if the estimates are not accurate?

Estimates should be as close as possible to the actual amount of payroll and receipts incurred

during the policy period. If the estimate is too low, you’ll receive a bill for the additional premium for the

audit period and the current year. If the estimate is too high, you’ll receive a refund, usually a credit to

your current policy.

What are the essential points checked in the audit of Profit and Loss Account of insurance

company?

The essential points to look in Profit and Loss Account while conducting insurance Audit are as

follows:

Verification of Premiums
  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.

 As prescribed in the policy of insurance company, the collections are transferred to the Regional

Office or Head office.

 According to Section 64VB of the Insurance Act, 1938, the insurer shall assume no risk without

the receipt of premium.

 It is of utmost importance to an auditor to verify a premium because the insurance premium is

collected upon issuing policies.

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

The auditor shall apply the below-mentioned procedures:

 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.

 The cover notes must be numbered serially.

 The auditor needs to check if the premium registers are maintained chronologically, providing

complete details including GST charged according to the acceptance advice daily.

 The auditor must verify if they figured the premium amount mentioned in the register tally with

those shown in General Ledger.

 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.

Verification of Claims

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

The auditor shall determine the total number of documents that is to be checked, providing due

importance to claims of higher value.

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

photograph charges etc. The auditor shall verify:

 Check the provision for unsettled claims.

 Check if the provision is made for such claims for which the company is legally liable.

 Check if the provision that is made is not more than the insured amount.

 Check the Co-insurance arrangements; the company has made provisions with respect to its own

share of anticipated liability.

Verification of Commission

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.

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:

 Voucher disbursement entries with regard to the disbursement vouchers with the copies of

commission bills and statements.

 Check if the vouchers are authorized by the officers-in-charge as per the rules and also income

tax is deducted at source.

 Check the amount of commission allowed.

 Check the accounting period of commission.

Verification of Operating Expense

The auditor must check the following operating expenses:

  Expenses that are more than PHP 500,000 or 1% of the net premium, whichever is higher. This

must be shown separately.

 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.,

What are the essential points checked in the audit of Balance Sheet of insurance company?

The essential points considered during an insurance audit in the Balance Sheet of Company are as

follows:

Investments

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:

 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.

 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.

 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.

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

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

Cash and Bank Balance

 The auditor shall during insurance audit prepare Bank reconciliation statements.

 The auditor must obtain the confirmation of Bank Balances for all the operative and inoperative

accounts.

 The auditor shall physically verify the Term Deposit Receipts that is issued by the bankers.

Generally, it is all cash that is deposited as term deposit with the bank at year-end.

 The auditor shall verify the deposits and withdrawal transactions and also check if the account is

operated by authorized persons only.

 In case of funds, that is in transit, and the auditor must verify that the same is appropriately

reflected in a reconciliation statement.

Outstanding Premium and Agents’ Balance

The audit procedures that may be followed in an agent’s balance are as follows:

 Verify whether the agent's balances, as well as outstanding balances in the outstanding premium

account, have been listed, analyzed, and reconciled for the purpose of audit.

 Verify whether the recoveries of large and outstanding deposits have been made post-audit

period.

 Check if there are any old outstanding debts or credit balances at the year-end which need

adjustment. A written explanation that is obtained from the management must be done.
  Check the agent’s balances that do not include employees’ balances as well as balances of other

insurance companies.

 Verify that there is no credit of commission is given to agents for businesses.

AUDIT PROCEDURE

While auditing the accounts of Insurance Company, which steps should be taken by the auditor?

Following steps should be taken by the auditor while auditing the accounts of insurance company:

1. Internal Check Inspection:

Generally internal check system insurance company is well organized that the bank. But auditor should

examine the details of the internal check system.

2. Verify the Premium:

Auditor should vouch the premium received with the insurance policy register. He should check the total

outstanding premium from the books also.

3. Inspect the Claim Register:

Auditor should compare the amount of claim with the claim register. He should also check the policies

cancelled with the documentary evidences.

4. Cash Balances:

Auditor should check the cash balances relating to the loans of the company. He should also verify the

interest earned.
5. Examine the Final Accounts

Auditor should examine that the final activities of the insurance company have been prepared according

the insurance act or not?

6. Verify the Payable Commission:

Auditor should vouch the commission payable to agents. He should verify that this commission does not

exceed the rates prescribed in the insurance act.

7. Examine the Investment:

Auditor should examine all the investment made by the insurance company. Valuation of investment

should also be checked.

8. Insurance Act 1938 Application:

Auditor should also examine that all that prescribed legal requirements have been complied by the

insurance company.

9. Checking of Bonus:

Auditor should vouch the bonus paid in the bonus register and agency register on closing balance.

10. Provision of Depreciation:

Auditor should also verify that sufficient depreciation is provided.

11. Examine Insurance Policies:

Auditor should inspect the accounts re insured. He should also note the amount of reserves relating to the

company loan.
12. Accrued Interest Checking:

Auditor should verify the receipts interest, dividends and rent. He should of reserves relating to the

company loans.

13. Allocation of Surplus:

Auditor should see that surplus is proper allocated to the shareholders policy holders.

14. Expenses Allocation:

Auditor should examine that the management expenses are allocated correctly between the various

accounts.

15. Deposits in State Bank:

Auditor should also verify that the required amount is deposited in the state bank or not?

16. Balances of Agency:

Auditor should verify the balances of agency and branch to see that they are all recoverable.

17. Loans Against Policy:

Auditor should verify those loans advanced to the policy holders against their policies. He should check

the receipts and see that they are within the surrender value policy.

Content of Auditor’s Report

Apart from normal contents of Auditors report, as prescribed for 'Limited Companies' IRDA has

prescribed the certain matters to be dealt with by the Auditors' in their Report vide Regulation 3 under

Schedule C of IRDA (Preparation of Financial Statements and Auditor's Report of Insurance Companies)

Regulations, 2002. The Schedule C is reproduced below –

"The report of the auditors on the financial statements of every insurer shall deal with the specified

herein-

1.

(a) That they have obtained all the information and explanations which, to the best of their knowledge and

belief, were necessary for the purposes of their audit and whether they have found them satisfactory;

(b) Whether proper books of account have been maintained by the insurer so far as appears from an

examination of those books:

(c) Whether proper returns. audited or unaudited, from branches and other offices have been received and

whether they were adequate for the purpose of their audit;

(d) Whether the Balance Sheet. Revenue Accounts and Profit and Loss Account dealt with by the report

and the Receipts and Payments Account are in agreement with the books of account and returns:

(e) 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 Authority.

2.

The auditors shall express their opinion on:

(a)

(i) Whether the Balance Sheet gives a true and fair view of the insurers affairs as at the end of the

financial year/period;

(ii) Whether the Revenue Account gives a true and fair view of the surplus or the deficit for the

financial year/period:
 (iii) Whether the Profit and Loss Account gives a true and fair view of the profit or loss for the

financial year/period:

(iv) Whether the Receipts and Payments Account gives a true and fair view of the receipts and

payments for the financial year/period:

(b) The financial statements stated at (a) above are prepared in accordance with the requirements of the

Insurance Act, 1938 (4 of 1938). the Insurance Regulatory and Development Authority Act. 1999 (41 of

1999) and the Companies Act, 1956 (1 of 1956) [now Companies Act, 2013). to the extent applicable and

in the manner so required.

(c) Investments have been valued in accordance with the provisions of the Act and the Regulations.

(d) The accounting policies selected by the insurer are appropriate and are in compliance with the

applicable Accounting Standards and with the accounting principles. as prescribed in these Regulations or

any order or direction issued by the Authority in this behalf.

3.

The auditors shall further certify that:

(a) they have reviewed the management report and that there is no apparent mistake or material

inconsistencies with the financial statements; and

(b) the insurer has complied with the terms and conditions of the registration stipulated by the Authority.

4.

A certificate signed by the auditors (which is in addition to any other certificate or report which is

required by law to be given with respect to the balance sheet) certifying that:

(a) they have verified the cash balances and the securities relating to the insurer's loans. reversions and

life interests (in the case of life insurers) and investments:

(b) the extent. if any. to which they have verified the investments and transactions relating to any trusts

undertaken by the insurer as trustee: and

(c) no part of the assets of the policyholders' funds has been directly or indirectly applied in contravention

of the provisions of the Insurance Act. 1938 (4 of 1938) relating to the application and investments of the

policyholders' funds."

From above, it is clear that the auditor has to examine the contents of the management report with

a view to certify that there are no material inconsistencies in the same with the financial statements. The

auditor should, based upon the audit conducted and information and explanations gathered during the

course of the audit, verify that there are no material misstatements in the management report. As far as

certification of compliance with the terms and conditions of the registration stipulated by the Authority is

concerned, the auditor should ask for the relevant documents from the management of the company and

conduct an examination thereof. Based on his observation, the auditor should certify the aforesaid

compliance.

The auditor also has to state in the report that reliance has been placed on the certificate obtained

from the appointed Actuary in respect of IBNR/IBNER, PDR and other reserves certified by the

appointed Actuary of the company.

The auditor also has to issue a separate certificate on verification of cash, cheques i n hand and other

securities as required by the Regulations.

Signatures and Reports to be attached with the Accounts and Statements

Sub-section (3) of section 11 of the Insurance Act, 1938 provides that the accounts and statements

referred to in sub-section (1) should be signed, in the case of a company, by the chairman, if any, and two

directors and the principal officer of the company. It further provides that the accounts and statements
should be accompanied by a statement containing the names, descriptions and occupations of, and the

directorships held by, the persons in charge of the management of the business during the period to which

such statements refers and by a report on the affairs of the business during that period.

EXAMPLE OF INSURANCE

One of the most common type of insurance offered in the Philippines is the health insurance, but what is

health insurance?

According to Investopedia, health insurance is an insurance coverage type that is specifically for

the coverage of medical or surgical expenses of the insured.

It can either pay the hospital directly or reimburse the insured for their expenses. Health

insurance is usually part of the benefit packages offered by companies to their employees. 

What is the Difference Between Health Insurance, PhilHealth, and HMO?

There are three types of medical insurance in the Philippines that you can choose from.

Let’s take a look at what each offers and what their differences are.

PhilHealth

The Philippine Health Insurance Corporation or PhilHealth is a government-run insurance provider.

Compared to private providers, this type of insurance is more affordable.

PhilHealth has an established insurance program that provides financial assistance to Filipino citizens

who are employed or otherwise, and in need of medical attention or surgery. 

If you are an employee, half of your monthly contribution will be shouldered by your employer and the

other half will be deducted from your salary.

Senior citizens aged 60 and over are automatically covered by PhilHealth, and recently, the Republic Act

11228 has been passed, which means Persons with Disabilities in the country will also receive special

benefits from PhilHealth.

How much financial assistance will you get as a PhilHealth member? It depends on the illness or medical

condition. 

Health Insurance

Unlike HMOs that offer access to a limited network of healthcare providers, private health insurance

companies offer access to a more extensive network.

It is not that common for companies to offer this type of insurance as a part of their benefits package,

although there are a few that do. 

Private health insurance premiums can be a little pricey. They are fully paid for by individuals voluntarily

if they want to be insured.

If you want your family members to be covered, that would be at an additional cost. Note that this only

applies to immediate family members. 

These private health insurance companies are comparable to international ones and some of their policies

still apply even when the insured member is out of the country.

The most well-known private health insurance providers in the country include Manulife, PRU Life

U.K., and Sun Life. 

HMO
HMO or Health Maintenance Organizations are private organizations providing healthcare insurance to

members.

Their difference from private health insurance is that they have a network of doctors and healthcare

providers. Their members can only avail of the benefits from those within that network. 

The plans that are offered by HMOs are often customizable but there is usually a limit to how much

financial assistance you can get in a year. The higher the premium you are paying, the bigger your annual

allowance will be, too. 

There are several HMO providers in the country but the most popular ones are Maxicare and MediCard.

HMO membership is usually provided by private companies to their employees on top of their PhilHealth

contribution.

To see closely what is included in audit procedure, we will use audit of HMO’s as an example.

Audit Procedure of HMO’s

The asset accounts (but not limited to the enumerated below) shall be considered as

accounted assets as long as its valuation is determinable and properly supported. Hence, assets or

doubtful economic value and/or unsupported shall not be considered in the determination of

HMOs' financial condition per section 1.4 b of CL 2016-41 .

Cash on Hand and in Banks

Objectives: To prove existence and ownership of cash on hand and in banks and to establish

proper valuation thereof.

Procedures:
Prove Existence and Ownership:

 Conduct physical count. Refer to Guidelines on Physical lnventory.

 Check the detailed schedule of Cash on Hand and in Banks (Cash and Cash Equivalents)

if the total amount is same in the audited fs.

 Verify the supporting documents of the following:

1. Cash on Hand - custodian's certificate

2. Cash in Banks - bank statement and bank reconciliation,

For reconciling items verify the following:

a. Deposit Slip - OR and validated deposit slips

b. Outstanding Checks - bank statement of the succeeding month 3. Time Deposit

- certificate of Time Deposit

 lf there is a difference between balance per company and balance per bank

reconciliation, you may consider the balance per bank reconciliation as accounted assets

if the items are fully supported.

 lf some or all items under cash on hand and in banks are not supported treat it as

unaccounted assets.

Valuation:
1. Cash on Hand and in Banks shall be valued at Book Value.

For foreign denominated accounts it must be valued at the prevailing exchange rate as of

31 December 20-. (Please refer to BSP exchange rates http ://www. bsp.gov.

ph/statistics/sdds/Exch Rate. htm )

Receivables

Objectives: To prove that the recorded receivables represents valid amounts due to the company

and the amount of the allowance for doubtful accounts is adequately set-up.

Procedures:

 Refer to the detailed schedule of receivables provided by the company.

 Prepare a list of samples to be taken for verification and focus more on huge amounts and

long/overdue outstanding balances.

 Verify collection of the balances on the succeeding year by requesting proof of collection

such as ORs, validated deposit slips and passbooUbank statements.

 For collection of Advances to Officers and Employees, you may request proof of payroll

deduction.

 For verification of Due from Affiliated Companies, request for a copy of the latest

audited financial statement of an affiliate which must reflect an amount payable to the

company.
  lf the amount of Due from Affiliated Companies is greater than the amount payable to the

company, treat the excess amount as an unaccounted asset.

Valuation: Receivables shall be valued at gross amount due less any allowance for doubtful

accounts.

lnvestment in Bonds (FVPL, AFS and/or HTM)

Objectives: To prove existence and company's ownership of investment in bonds and the proper

valuation thereof.

Procedures:

Prove Existence:

 Conduct physical count. Refer to Guidelines on Physical lnventory.

Ownership:

 If certificates, statement of Ross, Statement of lMA/Trust Accounts etc. are not available

during the physical count, verify transactions and supporting documents and confirm with

the issuing company.

Valuation: lnvestment in Bonds shall be valued at Fair Market Value.

lnvestment in Stocks (FVPL and/or AFS)

Objectives: To prove existence and company's ownership of investment in stocks and to

establish proper valuation thereof.

Procedures:

Prove Existence:

 Conduct physical count. Refer to Guidelines on Physical lnventory.

Ownership:

1. Agree on the details of the stocks counted/verified. Ensure that all stocks are in the name

of the company or if registered in the name of the nominee (qualifying shares), they are

properly endorsed in favor of the company, or accompanied by a power of attorney.

2. For stock certificates which are not available or not presented during the physical count,

present confirmation of purchase or confirm with the stock transfer agent. 31\./ lf sold

between count date and review date, verify transactions and supporting documents. If

partially sold, verify transactions, supporting documents and confirm on the balance

retained with the stock broker or stock transfer agent.

3. For stock dividends, verify documents evidencing that the stock dividends was received

and accounted for. Documents may take the form of actual certificates itself, notice of

dividend declaration, certification of corporate secretary and board resolution.

Valuation:

1. lnvestment in Stocks shall be valued at Fair Market Value if quoted or traded in

Philippine Stock Exchange (PSE).

 2. For unquoted or untraded stocks, it shall be valued at cost. lf the company wishes, to

value the stocks at Book Value (BV), the following documents must be submitted:

a. Audited Financial Statements of the lssuing Company for the last three (3)

years and

b. Proof of receipts of dividends for the last three (3) years

lnvestment in Real Estate (Propefi and EquipmenUlnvestment Property)

Objectives: To prove existence and company's ownership of real estate property (ies) and to

establish proper valuation thereof.

Procedures:

Prove Existence:

 Conduct physical count. Refer to Guidelines on Physical lnventory.

 ln case of additions or capital improvements, verify all supporting documents.

Ownership:

1. lf acquired through purchase, check purchase contract or deed of sale, evidence of

payment, Transfer of Certificates (TCTs) and/or Condominium Certificate of Title

(CCT).

2. Verify certificate Authorizing Registration (CAR) or application with the Register of

Deeds in the absence of TCT or CCT.

 3. If acquired through foreclosures, examine records and documents and verify if

foreclosures has been consummated.

Valuation:

1. Real Estate shall be valued at Net Book Value or lC accepted Appraised Value whichever

is higher (refer to Section 1.6 of CL2016-41).

2. Net Book Value shall refer to cost including capitalized and incidental costs less

allowance for depreciation.

Property and Equipment

Objectives: To prove existence and company's ownership of property and equipment and to

establish proper valuation thereof which include but not limited to the following:

a. Furniture and Fixtures

b. Office Equipment

c. Transportation Equipment

d. Leasehold Improvement

e. IT Equipment and Software

Procedures:
 1. Examine documents evidencing the acquisitions of assets such as purchase orders, sales

invoice, check vouchers, delivery receipts, etc. during the year under examination. For

development cost, trace the costs capitalized to source documents.

2. Verify the OR and CR if the transportation equipment is under company's name.

3. Verify propriety of charges to the asset account.

4. Ascertain the consistency in the application of the company's capitalization and

depreciation policy.

5. Test check the computation of depreciation expenses during the year under examination.

Valuation:

 The assets shall be valued at Net Book Value (NBV) or acquisition cost plus incidental

costs and/or development cost as applicable less allowance for depreciation and

amortized cost of leasehold improvement, software and/or development costs.

Other Assets

Objectives: To prove existence of other assets which include but not limited to the following:

a. Prepaid Expense

b. Creditable Withholding Tax

c. Security/Refundable Deposit
 d. Cash/Hospital Bond

e. Deferred Tax Asset

Procedures:

1. Refer to the detailed schedule of other assets provided by the company.

2. Prepare a list of samples to be taken for verification and focus more on huge amounts.

3. Verify supporting documents such as contract of lease for prepaid renUlease, proof of

hospital deposits such as written agreement between an HMO and a hospital and OR

issued by hospitals.

4. For deferred tax assets, refer to the computation of the external as shown in the notes to

financial statements/ disclosures of the audited financial statements