ADVANCED AUDITING & PROFESSIONAL ETHICS CA C.V.SARMA, M.Com.

, FCA

6
AUDIT OF INSURANCE COMPANIES

AUDIT OF LIFE INSURANCE COMPANIES

INTRODUCTION
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‟.
Important points of distinction between Life Insurance and General
Insurance

Life Insurance General Insurance

Term may be fixed or variable.
Pay-outs are certain either as
claims or maturity benefits.
Multi-purpose (e.g. investment, tax
benefits, insurance).
Term is fixed (usually 1 year).
Pay-outs are uncertain as claims may or
may not arise.
Solely for the purpose of insurance.

LEGAL FRAMEWORK
The primary legislations which deal with the insurance business in India are the
Insurance Act, 1938 and the IRDA Act, 1999. Various aspects relating to audit are
dealt with around the framework of the following statutes and rules made
thereunder:
1. The Insurance Act, 1938 as amended by Insurance Laws (Amendment) Act, 2015
2. The IRDA Act, 1999 as amended by Insurance Laws (Amendment) Act, 2015
3. The Insurance Regulatory and Development Authority Regulations framed under
the IRDA, Act, 1999
4. The Companies Act, 2013; and
5. IRDA Investment Regulations, 2013 (as amended from time to time).
REGISTRATION
Section 3 of the Insurance Act, 1938 requires every insurer to obtain a certificate of
registration before commencement of insurance business in India. The section empowers
the Authority to make regulations for registration of insurers. It may be noted here that no
insurer other than an Indian insurance company can commence the insurance business
after the enactment of the IRDA Act, 1999. The registration of Indian insurance companies
is done in accordance with the IRDA (Registration of Indian Insurance Companies)
Regulations, 2000.

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MINIMUM PAID UP CAPITAL

The minimum paid-up equity share capital of an Indian insurance company
carrying on insurance business should be Rs.100 crores excluding preliminary
expenses incurred in the formation and registration of company. The insurer may
enhance the same in accordance with the provisions of the Companies Act, 2013, SEBI
Act, 1992 and the rules, regulations or directions issued thereunder or any other law for
the time being in force.
FORM AND CONTENTS OF FINANCIAL STATEMENTS
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 transacted by him and in respect of his shareholders' funds, shall, at
the expiration of each financial year, prepare with reference to that year, balance
sheet, a profit and loss account, a separate account of receipts and
payments, a revenue account in accordance with the regulations as may be specified.
The Authority, in pursuance of the powers conferred to it by the provisions of section 114
A of the Insurance Act, 1938, has issued regulations for the preparation of the
financial statements and auditor‟s report of companies carrying on insurance business.
The Regulations contain three schedules.

Schedule A is applicable to companies carrying on Life Insurance business.

Schedule B is applicable to Companies carrying on General Insurance

business.
Schedule C to the Regulations lays down the matters to be dealt with by the
auditor‟s report of an insurance company. Schedule C is applicable to
insurers carrying on general insurance business as well as life insurance
business.

AUDIT OF ACCOUNTS
Under section 12 of the Insurance Act, 1938, the financial statements of every insurer are
required to be audited annually by an auditor.
Section 2(4) of the Insurance Act, 1938 defines the term „auditor‟ as a person qualified
under the Chartered Accountants Act, 1949 to act as an auditor of a company. The
auditor, for audit of financial statements, has the powers to exercise the rights vested in,
and discharge the duties and be subject to the liabilities and penalties imposed on
auditors of companies under the Companies Act, 2013. (there is also a requirement by
IRDAI that half year accounts ended September 2016 need to be reviewed by the
statutory auditor)
The provisions of section 12 of the Insurance Act, 1938 apply only in a case where the
financial statements of the insurer are not subject to audit under the Companies Act,
2013. A company carrying on general insurance business is subject to audit requirements
laid down under the Companies Act, 2013.
APPOINTMENT OF AUDITORS
The appointment of statutory auditors in the General Insurance Corporation of
India, and its subsidiaries and the divisions is made by the Comptroller and
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Auditor General of India, as in the case of other public sector undertakings (For
example, in the case of New India Assurance Company Ltd., United India Insurance
Company Ltd.).
However, in the case of others, auditor is appointed at the AGM after ensuring that
the auditor satisfies the compliance requirements with the relevant sections of the
IRDAI Guidelines on Corporate Governance. These guidelines pose certain restrictions
on the number of insurance companies a statutory auditor can audit. Currently, an
auditor can conduct audit only for three insurance companies and not more than 2 life
or 2 general. The Guidelines also mandate a mandatory joint audit for all insurance
companies.
REMUNERATION OF AUDITOR
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 or in such
a manner as the company in general meeting may determine.
DIRECTIONS OF CAG
The Comptroller and Auditor General of India has the power to direct the manner in
which the accounts shall be audited and give such instructions in regard to any matter
relating to performance of functions by the auditor and to conduct the supplementary
or test audit of the accounts of such companies by such person or persons as may be
authorised in this behalf. For the purposes of such audit, the C&AG may require
information or additional information on such matters and in such form as may be
directed by him in terms of Section 143(5) and 143(6) of the Companies Act, 2013. The
statutory auditors are required to submit a copy of their report to the C&AG who has
the right to comment upon or supplement the audit report.
TAX AUDIT
It is necessary for general insurance companies to get their accounts audited under
Section 44 AB of the said Act. For this purpose, the tax auditor(s) may be appointed by
the company itself by means of a resolution of the Board of Directors or by the
Chairman/ Managing Directors if so authorised in this behalf. The company is expected
to fix separate remuneration for the auditor(s) appointed for this purpose.
The Form of tax audit report applicable would be Form 3CB and the prescribed
particulars would have to be given in Form 3CD, in accordance with Rule 6G of the
Income Tax Rules, 1962, pursuant to Section 44AB of the Income Tax Act, 1961.
TYPES OF LIFE INSURANCE PRODUCTS
Term / Protection: Term life Insurance is traditional form of Life Insurance Product.
Term Insurance generally takes care of pure income replacement needs rather than
Capital appreciation requirements. Term Insurance covers the policy holder for specific
period and pays the death benefits only if the policy holder dies during the policy period.
Endowment/ Pure Endowment: Endowment policies cover the risk for a specified
period and at the end of the policy the sum assured is paid back to the policyholder along
with all bonus accumulated during the policy term.
Money Back Plan: Money Back policies are t ype of Endowment policies which
provides periodic payments of partial benefits during the term of policy so long as the
policy holder is alive. Peculiar nature of these policies is that, in event of death at any
time during policy term, the death claim would comprise of full sum assured without

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deduction of any survival benefit amounts. Also, bonus is calculated on sum assured.
Whole Life Insurance Product: It provides cover throughout the life time of the person.
Unlike Endowment plans they do not carry any maturity value and sum assured is paid to
the family in case of unfortunate death of the policyholder.
Unit Linked Insurance Plan (ULIP): Unit Linked Insurance Plans are such Insurance
plans where the value of the policy changes as per the underlying Investment Assets. It
allows protection and flexibility in Investment. The Premium paid is used for the purchase
of units in Investment assets.
Pension or Retirement Plans: A pension plan is retirement solution where
policyholder decides the retirement age and agrees to pay premium till the time of the
retirement and thereafter he has option to commute a part of his fund value and take an
annuity for the balance. Pension plan provides Income protection as well as the Life Cover.
Annuities: Annuity is a contract where Insurer in return for the payment at regular
intervals till fixed date make series of agreed payments at regular intervals from fixed
date.
Group Insurance: Group Insurance is an insurance that covers a group of people, who
are the members of the societies, employees of an organisation or professionals in
common group.
AUDIT OF LIFE INSURANCE COMPANIES
AUDIT OF PREMIUM
Premium shall be recognized as income when due. Premium accounting
refers to recognizing the premium earned by the insurer as income in the accounting
system.
Income is recognized as:
(1) New business premium – premium received for the first policy year and
(2) Renewal premium – premium received for subsequent policy years.
Premium received but not identifiable against any policy would be treated as „unallocated
premium‟/„suspense amount‟.
When the new policy is issued by the Insurer, new business premium is
recognised on the realisation of premium. Generally, Policy is underwritten only
after the receipt of the first premium. However, in certain cases, policies are
issued awaiting realisation of premiums, for eg policies are issued subject to
realisation of cheques issued by the Insured. Auditors are required to check these cases
and ensure proper accounting of the same.
1. 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.
2. As a part of verification of Internal Controls over Premium, the auditor shall
check whether there is daily reconciliation process to reconcile the
amounts collected, entered into the system and deposited into the bank.

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3. Check that premium is recognised only on the basis of „Issued Policies‟ and not
on underwriting dates.
4. Verify whether the system is capable of identifying regular and advance
premium.
5. Also ensure that the system is capable of adjusting advance premium to
premium dues, if any.
CLAIMS
Checking of accuracy of processing and accounting of claims lodged with the Insurer, is the
primary objective of Audit of Life Insurance Companies.

Claims payouts would include a wide variety of customer benefits including:

Death Maturity Health Rider Policy Other

Claims Claims Annuities Claims Claims surrende Survival
rs benefits.

AUDIT OF CLAIMS INCLUDING PROVISION FOR CLAIMS

1. Ensure that the insurer maintains a register of claims. Such register shall
contain details such as date of claim, date on which the claim was discharged etc.
in respect of every claim received.
2. Ensure that appropriate KYC documents have been collected and discrepancies
if any are intimated to the policyholders within 15 days of intimation of claim.
3. Ensure that payment of claim has been properly authorized by a responsible
official.
4. Vouch the payment of claims into bank disbursement book.
5. In case the claim is rejected, the reasons for rejections should be closely
reviewed.
6. Ensure that the company has complied with applicable IRDA Regulations
and relevant sections of Insurance Act, 1938.
7. Also verify and ensure that appropriate provisioning has been made in respect
of claims intimated but not paid. Provision is required to be created net of
reinsurance, if any.
8. Also ensure that while creating provision for claims, claim settlement costs
were also included.
9. Provision is also required to be created in respect of IBNR claims.

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Free Look Cancellation (FLC)

FLC is an option provided to the policyholder wherein he has a period of 15 days from the
date of receipt of the policy document to review the Terms and Conditions of the policy and
in case of disagreement to any of the terms & conditions, the policy holder has the option to
return the policy stating the reasons for policy cancellation.
Audit Procedure
1. Check whether the FLC requests are received within 15 days from the date of
receipt of policy document by the policyholder.
2. Check whether the signature of the policy holder on FLC request tallies with the
signature in the original proposal form.
3. Verify the refund with debit entries in the bank statement and other relevant
documentary evidences.
POLICY LAPSE AND REVIVAL
“Lapse” is the discontinuance of the policy owing to non-payment of premium dues.
To keep the policy in force, the policyholder is required to pay premium when it is due. If
payment is missed, the insurer allows a grace period of 15/30 days. If the policyholder does
not make the payment within the grace period, the policy gets “lapsed”.
The lapsed policy may be revived during the life time of the life assured.
Audit Procedures
1. The auditor should verify and ensure that the due dates for payment of premiums are
monitored and policies are marked as “lapsed” properly.
2. In case of revival of the policy, the auditor should ensure that the amounts
outstanding on the lapsed policy were recovered fully.
3. Also ensure that the insurer had obtained adequate documents in case of
revival.
POLICY SURRENDER
Surrender of an insurance policy refers to the voluntary termination of the insurance
contract before the expiry of the term of the contract. A policy becomes eligible for
surrender on completion of 3 years from the commencement of the policy provided that
the 3 years premiums have been paid within the due dates. The policy can be surrendered
only when the insured person is alive.
Audit Procedures
1. Ensure that the surrendered policy has completed the 3 years period.
2. Also ensure that premium for 3 years has been received within the due dates.
3. Ensure that the insurance company has received a request from the policyholder
for surrender of policy accompanied by Original Policy Document.
4. Ensure that the surrender amount is paid only to the policyholder.

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AUDIT OF GENERAL INSURANCE COMPANIES

PREMIUM
BOOKS:
Books relating to premium:
1. Cash Receipt Register
2. Premium Register
3. Commission Register
4. Policies Issued Register
5. GST Register
6. Co-insurers Register
7. Cover Note Control Register
8. General Ledger
GENERAL
1. Premium is the consideration received by an insurer for bearing certain
sum of risk on behalf of the insured.
2. Premium may be received by an insurance company from 3 sources. They are
(a) Direct Business
(b) Reinsurance Business
(c) Share of Co-insurance
3. Generally premium collections are credited to a separate bank account and
such collections are transferred to Regional Office or Head office.
4. The Insurance Company will start to assume the risk once it accepts the
proposal form and issues a cover note/policy document.
5. As per section 64VB of the Insurance Act, 1938 an insurance company should not
assume any risk unless
(a) Premium is received or
(b) Premium is guaranteed to be paid within such time as may be prescribed.
6. Premium may be accepted in
(a) Cash (b) Cheque
(c) Demand Draft (d) pay - order
(e) Bank guarantee (f) Cash Deposit etc.
7. Upon issuance of a policy, the entry relating to it is made in the Register of
policies showing all relevant details.
8. Premium Revenue Recognition
Premium revenue recognition is generally based on pattern of risk to which the
insurer is exposed. Most insurers account for the premium on the basis of passage of
time. This is generally appropriate where the risk of events occurring that give raise to
claims is more or less uniform throughout the policy period.

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AUDIT PROCEDURE
I. Internal Control
Before commencing verification of premium income, the auditor should examine the
Internal Controls over premium established by the Insurance Company. In this
regard, the auditor may look into following controls.
i. Verify whether there exists a system for correct calculation of premiums.
ii. Verify whether there exists a system of verification of premium input by a
person other than the persons who inputs the same and also verify whether
monetary limits were established for this purpose.
iii. Proper control over insurance policy forms.
iv. Each reversal entry is properly authorized.
iv. The application system should be able to identify and report erroneous
inputs and processing of policy transactions by unauthorized personnel.
v. Maintenance and periodic reconciliation of various records like premium
register, general ledger, cash receipts etc.
vi. Verify whether there exists a system of collection of the premium before
assumption of the risk.
viii. Proper appropriation of premium income over time periods.
Based on the results of evaluation of internal controls, the auditor has to
decide the extent of substantive checking to be carried out.
II. Accounting of premium
(a) Verify whether premium in respect of risks assumed during the accounting year
were accounted properly as premium income.
(b) Vouch the premium with copies of Insurance policies, premium register, Cover
Notes, Policy Register, Counterfoils of receipts etc.
III. Premium received in advance
The auditor should pay particular attention to year-end transactions, to ensure that
amount received during the year for which risk commencing on or after the 1 st day of
the next financial year were not credited to premiums but to premium received in
advance.
In order to identify whether premium is received in advance or not, the auditor may
pay particular attention to a column called "commencement of risk" in the
premium register maintained by the company
IV. Collections through Agents after Balance Sheet Date
Verify the collections lodged by agents after the balance sheet date to ensure that all
collections pertain to risk commencing in the following year.
V. Co-insurance Business
a. Ensure that company's share of premium has been accounted for on the basis
of available information. This is particularly important because, in most of
the cases, the share of premium income is not booked even though the risk has

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commenced during the relevant year because of non-availability information

from the leader.
b. Verify the communication between the company and the leader wherein the
leader will advise the company with regard to the share of premium income.
Where the company under audit is the leader
Ensure that only company's own share of premium has been shown as income and
the accounts of other companies have been credited with their share of premium.
VI. Reconciliation with General Ledger
Verify whether the figures mentioned in the premium register tallies with those in
general ledger.
VII. Premium under Installments
Where policies have been issued with a provision to collect premium in installment
basis, ensure that premium is collected on the due dates.
Any installment falling due on or before the balance sheet date should be accounted
for as premium income irrespective of the fact whether they were received or not.
VIII. Cancellation of Policies
In case of cancellation of policies/cover notes issued, the auditor should ensure that
the company has assumed no risk between the date of issue and date of cancellations.
IX. Refund of Premium
Where premium originally received has been refunded, verify whether the agency
commission paid on such premium has been recovered.
X. GST
Examine whether GST at the rates in force is charged from the insured.
a. On total premium for all classes of business other than those exempted under
GST Law, if any.
b. For co-insurance business, on whole premium by the leader.
XI. Issue of Policy Document
Ensure that the company had not issued the policy documents in the following cases
a. Where premium has not been collected
b. Cheque for payment of premium dis-honoured

PROVISIONS FOR CLAIMS

A provision for claims may have to be created in respect of:
(a) Direct Business
(b) Reinsurance business
(c) Co-insurance
Records maintained in respect of Claims
(1) Claims intimation Register
(2) Claims paid Register

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(3) Claims disbursement bank Book

(4) Claims docket which normally contain the following
(a) Claim intimation
(b) Claim form
(c) Particulars of policy
(d) Survey Report
(e) Photograph showing damage
(f) Repairer‟s Bills
(g) Police Report
(h) Fire Service Report
(i) Claim Settlement Note
(j) Salvage Report
(5) Salvage Register
Audit Procedure
 Obtain a schedule of provision for claims including the information relating to each
class of business, value-wise bifurcation of claims.
 Since it is not possible for the auditor to verify each and every claim, it is advisable to
follow Statistical Sampling technique.
 While selecting, due importance should be given to claim provisions of higher
value.
1. Intimation of Loss
(a) Ensure that intimation of loss is received by the insurance company within
a reasonable time.
(b) Ascertain the reasons for any undue delay in such intimation.
2. Provision for Unsettled Claims
(a) Verify whether provision is created in respect of all unsettled claims as
at the end of the year.
(b) Verify the existence of unsettled claims with the help of claims
lodged/communicated by the parties. This can also be done by
comparing Claims Intimation and Claims Paid Register.
(c) Ensure that date of loss taken into account for the purpose making a
provision.
(d) Ensure that provision is also created in respect of claims incurred but not
reported (IBNR).
3. Limited to Amount Insured
(a) Ensure that the provision created is not in excess of the amount insured.
(b) Ensure that the provision includes survey fee and other direct expenses.
4. Salvage

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Ensure that provision is made only after taking into account any salvage value where
applicable.
5. Co-insurance
Where there exists a co-insurance arrangement with other insurers, ensure that the
provision is created only in respect of company‟s share of anticipated liability.
6. Net of Payment
Where certain payments were already made "on account", ensure that provision
is made only for net amount after deducting the payments made from the total
anticipated liability.
7. Average Clause
Verify whether "average clause" has been applied while creating a provision.
8. Net of Deposits
Where any claim is in dispute and the insurance company deposited certain amount
either with courts or with such other authorities, ensure that while making a
provision, such deposit should not be deducted. In other words, such deposits
should be stated separately as assets and provision is to be made at gross value.
9. Claim Status Report
Review "Claim Status Report" prepared by the insurance company for
determining excess/ short provisions. This report is generally prepared in respect of
large claims outstanding at the year end. Review of Claim Status Report helps the
auditor to take a fair view of the provision made.
10. Claims under Litigation
Where any claim is under litigation, ensure that provision is made only after taking
the opinion of the legal advisor.
11. Events After Balance sheet Date
Ensure that the insurance company had taken into accounts the effect of events
occurred after the Balance Sheet date while making a provision. The events that, can
materially affect the provision already made may be as under.
(a) Claims paid by co-insurance company and intimation made by them only after
the B/s date where such other company is the leader in co-insurance.
(b) Claims settled for materially higher/lower amount after B/s date.
12. Claims lodged at other offices
Ensure that adequate provision has been made in respect of claims lodged at an
office other than the one from where the policy was taken. For example, claims
ledged at Chennai office in respect of policy taken at Mumbai office.

CLAIMS PAID
“Claim” can be defined as a demand for payment of policy benefit because of occurrence of
an insured event.
The following are the audit procedures to be followed by the auditor in respect of claims
paid by the General Insurance Company.

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1. Verify Internal Controls

Before starting the process of verifying the claims paid, the auditor is required to
evaluate the internal controls listed below.
 Established procedures for proper processing and payment of claims.
 Adequate procedures to identify and investigate suspicious claims.
 Laying down procedures to ensure proper recovery of salvage value of assets.
 Monetary limits are established for review of claims paid by senior officer.
 Significant variances between expected and actual claims are identified and
investigated.
 Reinsurance claims if any are duly lodged with the re-insurer.
 There are adequate cut off date procedures.
2. Duly Sanctioned
Verify whether the payment of claims have been duly sanctioned by the concerned
authority.
3. Acknowledged by Claimant
Ensure that claims paid were duly acknowledged by the claimants.
4. Unqualified Discharge Note
Verify whether claimant has given an unqualified discharge note to the insurance
company in case of final settlement of claims, assuring that the company will
not be involved in further liability in respect of the claim.
5. Due accounting of Salvage Value
Ensure that salvage value recovered has been duly accounted for in accordance with
the procedure applicable to the company.
6. Co-insurance – Share - Leader
Where claims were paid in accordance with co-insurance arrangement, ensure that
the amount paid is only in respect of company's share and the balance has been
debited to other insurance companies.
7. Co-insurance - Premium
Where the company under audit is not the leader in co-insurance, ensure that the
company had actually received its share of premium from the leader, when
the claims were paid on the basis of advices from the leader.
9. Partly Paid Claims
Vouch the payment made against claims partially settled. In such cases, the
sanctioning authority should be the same as the one which has powers in respect of
the total claimed amount.

VERIFICATION OF COMMISSION
Insurance business is solicited by insurance agents. Commission is the consideration
payable for getting the insurance business. This is calculated by applying a % to the
premium collected by the agent. The commission so payable to agents shall be debited

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to commission on direct business account. The following are the records that are
maintained in respect of commission.
1. Register of Agents
2. Premium Register - Commission Column
3. Commission Bill Copies
4. Agents Ledger
5. Disbursement Voucher
6. TDS File
7. Bank Disbursement Book
OBJECTIVE
To ensure that commission paid is
a. in accordance with the rules and regulations of the company.
b. in accordance with the agreement with agents.
c. complied with the statutory requirements.
AUDIT PROCEDURE
1. Review internal controls relating to commission.
2. Based on the results of evaluation of internal control, determine the nature, timing
and extent of substantive procedures to be followed.
3. Verify whether commission vouchers are properly authorized by the officers-in-
charge as per the delegated powers.
4. Test check the correctness of commission.
5. Ensure that commission is calculated as per rates allowable by IRDA.
6. Vouch the payment of commission with relevant vouchers such as disbursement
voucher, bank disbursement book etc.
7. Cross check the same with the help of commission bills and commission
statements.
8. Ensure that tax is deducted at source at correct rates.
9. Ensure that adequate provision is made for "commission accrued but not
paid.
10. Review agents' ledger to identify the accounts having debit balances and ensure
that necessary action has been initiated in respect of adjustment of these
balances.
AUDIT OF EXPENSES OF MANAGEMENT/OPERATING EXPENSE

1. All the administrative expenses of an insurance company are broadly classified

under 13 heads as mentioned in Schedule 4 (OPERATING EXPENSES
RELATED TO INSURANCE BUSINESS). This schedule is part of the revenue
account to be prepared for insurance business.

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2. Section 40C of the Insurance Act, 1938 lays down the limits for expenses on
management (Also called Operating Expenses) in general insurance business
and therefore an insurer is not allowed to spend an amount in excess of the
limits prescribed under this section.
3. Any amount spent in excess of the limits laid down may be approved by IRDA
after consultation with the executive committee of such general insurance council
constituted u/s.64F of the Act. The term expenses of management means all
charges, direct or indirect including commission payments of all kinds.
4. Schedule 4 states that any expenditure amounting to Rs.5 lacs or in excess of
1% of net premium which ever is higher is required to be shown separately.
5. All the operating expenses incurred by an insurance company are aggregated first
and then apportioned to revenue account of each class of business on a
reasonable and equitable basis.
6. The accounting policy should clearly indicate the basis of apportionment of
these expenses to the respective revenue account (i.e. fire, marine, miscellaneous)
7. The insurance company is required to incorporate a certificate in their revenue
account which should be signed by the Chairman and 2 Directors and by the
Principal Officer and by an auditor certifying that all expenses of management have
been fully debited in the revenue account as expenses.
AUDIT PROCEDURE:
1. Review internal control procedures.
2. Verify whether all the administrative expenses are classified in accordance with the
requirement of schedule 4 of Insurance Act, 1938.
3. Examine whether these expenses are first aggregated and then apportioned to
revenue account of each class of business on a reasonable and equitable basis.
4. Ensure that expenses of Rs.5 lakhs or in excess of 1% of Net Premium, whichever is
higher, is shown separately.
5. Ensure that accounting policies indicates the basis of apportionment to revenue
account.
CO-INSURANCE
Co-insurance can be defined as sharing of a risk by more than one insurer. In cases of
large risks, the business is shared between more than one insurer under co-insurance
arrangements at agreed percentages.
The insurance companies may chose to be the members of Insurance Council. Members of
the Insurance Council could arrive at mutually agreeable terms of entering into co-
insurance agreement and the norms for settlement of dues.
There are two parties to a co-insurance arrangement. They are
a. Lead Insurer
b. Co-Insurer
The following are the responsibilities of a Lead Insurer

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1. Issue of Policy Document

2. Collection of premium
3. Settlement of Claims
4. Providing statement of account to co-insurers
5. Settlement of balances in periodical meetings and exchange of statements
VERIFICATION OF INCOMING CO-INSURANCE – AUDITEE IS A CO-
INSURER
1. Verify whether premium account is credited as per the agreed upon terms and
on the basis of statements received from the Leading Insurer.
2. Ensure that premium income is accounted for on the basis of advices received
from the Leading Insurer.
3. Obtain a written confirmation (Written Representation) to the effect that all
incoming advices have been accounted for.
4. Examine claims provisions and claims paid with reference to advice received
from the Leading Insurer.
5. Ensure that balances pertaining to other companies relating to premiums and
claims are accounted under co-insurance as "Amounts due to/due from other
insurance companies”.
VERIFICATION OF OUTGOING CO-INSURANCE - LEADER
The auditor should scrutinize the transactions relating to the outgoing business i.e. where
the company is the leader. These 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.
UNEXPIRED RISK RESERVE
The need for unexpired risk reserve arises from the fact that all policies are reviewed
annually except in specific cases where short period policies are issued. The insurers close
their accounts on a particular date and not all risks under policies expire on that date. Many
policies extend beyond that closing date into the following year during which risk continue.
Therefore, unexpired liability under various policies may occur during the term of the policy
beyond the year end and hence a reserve is required to be created called as URR.
According to the provisions of the Income Tax Act, 1961 an insurance company is allowed to
make a provision for unexpired risk reserve to the extent of 50% of net premium income in
respect of fire and miscellaneous business and at 100% of the net premium income in
respect of marine insurance business. In view of this, generally reserves are created at the
rates allowed under the Income Tax Act.

RE-INSURANCE
Meaning
When one insurance company passes on a part or whole of the risk undertaken to another
insurance company, the insurance is said to be ceded. The company which passes on (cede)
the risk to another company is called ceding company and the company to whom the risk is
passed on is called the acceptor of re-insurance.

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Definition
In other words, a transaction of re-insurance is defined as an agreement between a 'ceding'
company and 're-insurer' whereby the former agrees to cede and the latter agrees to accept a
certain specified share of risk or liability upon terms as set out in the agreement.
Types of Re-insurance
1. Facultative Re-insurance, is that in which particulars of risk to be re-insured are
submitted to re-insuring companies who may either accept or decline the business.
2. Treaty Re-insurance, is that in which the re-insurance company will have to
accept the risk on the terms and conditions of the Treaty without the option to
decline it.
VERIFICATION OF RE-INSURANCE INWARD (RE-INSURER)
1. Verify whether re-insurance inward is as per the norms and guidelines prescribed
by the Insurance Act, 1938 and IRDA Regulations.
2. The auditor should verify the reinsurance inward transactions are as per the
arrangements with re-insurers.
3. Also ensure that these arrangements were entered into by following prescribed
parameters applicable for the particular year.
4. The auditor should examine the accounting treatment given by the company with
regard to reinsurance business received, premium received and payment of
commission etc.
5. Obtain confirmation of closing balances from all the companies in respect of re-
insurance transactions.
6. The auditor should examine the foreign currency transactions and ensure that
they comply with Accounting Standards (AS) 11, Accounting for Effects of Changes
in Foreign Exchange rates.
7. Verify whether 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.
8. Ensure that proper provisions for outstanding claims is made for all
reinsurance arrangements accepted on the basis of loss information advices received
from brokers/ cedants and where such advices have not been received, on an
actuarial estimation basis.
9. Obtain confirmation of outstanding claims in respect of all inward
arrangements.
VERIFICATION OF RE-INSURANCE OUTWARD (CEDING COMPANY)
1. The auditor should verify that reinsurance outward transactions are as per the norms
and guidelines prescribed in the Insurance Act, 1938, IRDA Regulations.
2. The auditor should verify that insurance have been ceded as per agreements entered
into with various companies.
3. See whether commission on cession has been calculated as per the terms of
the agreement with the re-insurers.

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4. Accounting aspects of the re-insurance cession premium, commission receivable,

paid claims recovered, and outstanding losses recoverable on cessions have to be
checked.
5. See whether provision for outstanding losses recoverable, have been
confirmed by the re-insurers and in the case of major claims, documentary
support should be verified.
6. Obtain confirmations in respect of the balances with re-insurers.
7. Verify events after the Balance Sheet date which might have wider impact on
claim recovery both paid and outstanding.
8. The auditor should examine the foreign currency transactions and ensure that they
comply with Accounting Standard (AS) - 11.
9. He should verify any old outstanding claims paid or outstanding at the end of
the year.
INVESTMENTS
The primary objective in an audit of investments is to satisfy about the existence
and valuation of investments. The auditor should also satisfy about the compliance
with regulatory requirements and study the impact of non-compliances. The auditor
should
1. Obtain separate lists of securities held physically and those held in
dematerialization form.
2. Physically verify the securities on the balance sheet date or a date as near as
possible. He should prepare a reconciliation statement where verification is carried
out on date other than balance sheet date. When investments were held in
dematerialization form, the auditor should verify the Certificate of Holdings
issued by Depository Participant.
3. In case where the Investments were held at Branches, request the Branch
auditors to issue a certificate in this behalf.
4. Where certificates are held by other persons such as nominees, share transfer
agents etc, the auditor should obtain written certificates from such person. The
receipt originally issued by such person is not adequate for the purposes of audit.
5. Examine in detail investments on which income has not been received for a
long period and those which have not been redeemed even after redemption
date.
6. Examine whether income from investments is properly accounted for
7. Ensure that certificates of Tax Deducted at source are properly maintained.
8. Examine that the norms relating to valuation and disclosure in financial
statements have been complied with.
Norms for Valuation of Investments
1. Real Estate – Investment Property
These are valued at Historical Cost less Accumulated Depreciation and impairment
loss. Residual value shall be taken at Zero. No revaluation is permissible.

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Impairment loss shall be recognized as an expense in the Revenue/Profit and Loss

account immediately.
2. Debt Securities including Government Securities
These are considered as “held to maturity” securities and shall be measured at
historical cost subject to amortization.
3. Equity Securities that are traded in active markets
They shall be measured at fair value as at the Balance Sheet Date. Fair value is the
lowest of last quoted closing price.

CASH AND BANK BALANCES

The auditor should apply the following audit procedures for verification of cash
1. Physically verify cash balances at the year end. Where physical verification is
not possible on the balance sheet date, then the same can be done at a subsequent
date. In such a case, proper reconciliation should be drawn between the date of
verification and balance sheet data.
2. Check whether late receipt of cheques on the last working day of the financial
year which were not deposited into bank account on the same day have been
identified and booked as Cheques in Hand Account.
3. Test check the deposit and withdrawals transactions and check whether the account
is operated by authorized persons only.
4. Check the Bank Reconciliation statement and enquire into the reasons for long
outstanding entries.
5. Obtain confirmation certificate in respect of closing balances of all operative and
inoperative accounts.
6. Physically verify the Term Deposit Receipts issued by the Bankers.

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