Audit of Insurance Companies

It is mandated for all insurance companies of the country to be audited from time to time. The Indian Insurance Act, 1938, clearly mentions that all insurance companies’ financial statements and required documents must be audited every year.
This is done to ensure transparency, honesty, and integrity within the insurance sector in India. Insurance is a crucial industry in India, and its smooth and efficient functioning is critical to the nation’s development.
This article will aim to discuss some of the following essential aspects of the audit of insurance companies:

• Appointment of Insurance Auditors
• Role of Insurance Auditors
• List of Documents Audited
• Audit Committee
• 5 Important Audit Points

Appointment of Insurance Auditors

Every insurance company’s auditor needs to be selected by the company’s shareholders and approved by the Comptroller and Auditor General of India. The selected auditor should have an impeccable resume and no history of malpractices.

Role of Insurance Auditors

Mentioned within are the roles of the insurance auditor’s:

• It is the auditor’s role to scrutinize the insurance company’s financial documents and accounting books.
• The auditor should check the books within the insurance company’s head offices and each of their sub-branches.
• The audit should be dispassionate and objective.
• Further, the auditor should not come under the pressure of the management to misrepresent the facts.
• It is the auditor’s job to prepare a complete and objective audit report.

List of Documents Audited

An insurance auditor audits the following documents and financial statements:

• Balance Sheet
• Profit & Loss Statement
• Cash Flow Statement
• Register of Policies
• Cashbook
• Subsidiary Records & Control Register
• Register of Claims
• Additional Ledgers

Audit Committee

According to Section 177 of the Companies Act, 2013, every insurance company must appoint an audit committee. This audit committee comprises independent directors, experts in the financial field. The Chairman of the audit committee must be considered a financial expert.
It is the audit committee’s role to appoint external auditors, incorporate a whistleblower program, take action in the event of financial malpractices.

5 Important Audit Points

Mentioned below are the seven important audit points that every insurance auditor audit:

• Audit of Premium Received
• Audit of Commissions
• Audit of Operating Expenses
• Audit of Claims
• Audit of Financial Statements

Audit of Premium Received

The external insurance auditor will examine the bank accounts where customer premium is credited. All due diligence must be done to ensure that all received premium is accounted for. The auditor must tally the premium received with the number of policies issued. Any misgivings should be immediately flagged.

Audit of Commissions

Commissions are paid to the insurance brokers who bring business to the insurance company. It is the insurance auditor’s job to ensure that all commissions paid are accounted for. There should not be any misrepresentation of funds or illegitimate laundering taking place.

Audit of Operating Expenses

The operating expenses of an insurance company must be scrutinized, and the report must be filed accordingly. Any red flags in OPEX must be brought forward to the auditing committee. The auditors must be particularly prudent in their OPEX investigation as many dishonest company-men route illegitimate funds in the guise of OPEX.

Audit of Claims

It is the auditor’s task to ensure that the proper provisioning is made concerning claims liability. There should not be any over or under-provisioning. The provisioning should be in line with claim liability; this will ensure the sustainability of the insurance company.

Audit of Financial Statements

This is one of the cornerstone responsibilities of an auditor. The auditor must check the financial statements like the Balance Sheet, P&L Statements, Cash Flow Statements, etc. Further, the auditor must also provide audit reports on the cash and bank balance, equity, and debt investments of an insurance company.