Audit of General Insurance Companies

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Audit of General Insurance Companies

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Agenda
 Introduction
 Legal Frame Work
 Accounting System
 Financial Statements
 Audit Report
 Audit Plan
 Audit Procedure

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Introduction
 General Insurance Corporation
Incorporated in 1972, has under purview 107
Companies carrying General Insurance
Business in India
 IRDA Act 1999
To Protect Interest of Policy Holder
To Regulate & Promote Insurance Business in
India
Powers to Regulate – Registration, Operation,
Supervision & Control

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Legal Framework
 The Insurance Act 1938 (Including
Regulations)
 The IRDA Act 1993 (Including
Regulations)
 The Companies Act 1956
 The General Insurance Business Act
1972 (Including Rules)

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Accounting System
 Peculiar Nature of Business –
Under Writing
Claims
Agency Management
General Accounts
Investment
Reinsurance

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Financial Statements
 Balance sheet – true and fair view of affairs.
 Revenue – true and fair view of surplus / deficit.
 P & L – true and fair view of profit / loss.
 R & P – true and fair view of receipt / payment.
 Financial Statement prepared in accordance with
regulation.
 Investment as per regulation.
 A/c policies appropriate.

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Audit Report
Audit: Head Office – Regional Office – Divisional Office – Branch Office
 Main Audit Report :
Obtained all information
Proper books of Ac/. Maintained.
Proper returns received from branches.
Balance sheet, revenue A/c., P&L A/c., R&P A/c. in agreement with books.
 Opinion on :
Balance sheet – true and fair view of affairs.
Revenue – true and fair view of surplus / deficit
P & L – true and fair view of profit / loss.
R & P – true and fair view of receipt / payment.
Financial Statement prepared in accordance with regulation.
Investment as per regulations
A/c policies appropriate.
Contd…

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Audit Report Contd.
 Annexure to Main Audit Report:
Comments Upon-
Premium
Claims
Cash & Bank Balances
Inter Office Accounts
Reconciliation with Reinsurance Under Writing
Returns
Fixed Assets
Miscellaneous
Contd…

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Audit Report Contd.
 Supplementary Audit Repot u/s. 619(3) of the Co. Act 1956.
Comments Upon:
System of Accounts
System of Financial Control
Investments (HO)
Loans (HO)
Revenue Accounts
Annexure “A” (Information to be obtained from Management)
Computerization
Operation of Foreign Branches & Agencies
Investments
Loans
Outstanding Claims
Claims Provided / Settled – 10 for each Class of Business
Fraud etc.
Contd…

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Audit Report Contd.
• Sub Direction u/s. 6193(a) of the Co. Act 1956.
Comments upon-
Internal Control for Premium
Claims / Motor Department & Provision
Management Expenses
Maintenance of Records
Surveyor Rotation
Funds Transfer
Employee Advances
Frauds etc.
Lease Agreement
New Soft Ware and its Implications
Difference in Opinion with Management
 Tax Audit Report

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Audit Plan & Check List
S. No. Audit Check List S. No. Audit Check List
1 Review of Accounting System 10 Journal Vouching.
2 Review of Internal Control System 11 Bank Reconciliation.
3 Checking of Opening Balances 12 Ledger Verification.
4 Compliance with Previous Reports 13 Verifying Cash, Bank & Securities.
5 Premium Receipt Checking 14 Comparative Analysis.
6 Claims Payment Checking 15 Overall Review of Financial Statements
7 Claims Provision Checking 16 Verifying Tax Audit Requirements.
8 Commission Payment Checking 17 Compliance with Applicable Laws
9 Management Expenses Vouching. 18 Compliance with Statutory Questionnaire
19 Audit Report Drafting.

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Audit Procedures
Premium Checking
 Premium should be credited to separate bank account and no
withdrawals should be made from this account. The balance in
this account is periodically transferred to Regional or Head Office.
 No Risk is Assumed without receipt of Premium.
 Premium Revenue is recognized over policy period. In premium
register generally there is a column stating date of
commencement of Risk accordingly the premium should be
apportioned.
 Adequate Premium should be collected there should be no
premium deficiency.
 Proper Internal Control should be there for Collection of Premium.
Contd…

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Audit Procedures
Premium Checking Contd.
 Cover Notes should be serially numbered for each class of business.
 If any cheque for Premium is dishonored no risk should be assumed.
 Premium should be originally recorded at gross figure i.e. without
providing for unexpired risk or reinsurance.
 In case of Coinsurance only Companies share should be accounted as
Income while the balance should be treated as liability to be paid to other
companies.
 Proper Service Tax should be collected and accounted for.
 Premium should be collected as and when it becomes due.
 If Policy is cancelled no risk should be assumed between the period of
receipt and cancellation.
 In case premium is refunded the corresponding commission should also
be credited.
 Proper balance should be transferred to unearned premium account.

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Audit Procedures
 Claim – Provision / Payment
 Claim Register & Records:
Claim Intimation Register
Claim Paid Register
Disbursement Bank Book
Docket – Claim Intimation, Claim Form,
Particulars of Policy, Survey Report,
Photograph Showing Damage, Repair Bills,
Letter of Subrogation, Police Report, Fire
Service Report, Claim Settlement Note,
Claim Satisfaction Note, Salvage Report,
Salvage Disposal Note, Claim Discharge Voucher
Report of Quality Assurance Team
Salvage Register
Contd…

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Audit Procedures
Claim Provision
 Provision should be made for all unsettled claim. The date of loss is
important and not the date of reporting. (However provision for Claims
IBNR is made at RO/ HO)
 Provision should be made for the claims for which company is legally
liable -
a. The policy should be in force
b. Claim does not arise when the company was not supposed to cover
risk. (eg. Cheque Dishonoured or Premium Unpaid)
 Provision made should not be more than the Insured Amount.
 While making the provision events after Balance Sheet date should be
reviewed.
 Where there is any under insurance, Average Clause should be applied.
 Obtain and check Claim Status report.
Contd…

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Audit Procedures
Claim Provision Contd.
 Provision made is net of any on account payment or deposit with
any authority, if the payment or deposit has been expensed else
there should be full provision made.
 In case of coinsurance provision should be made only for
companies share.
 Any long outstanding provision should be properly followed up
and reason for the same should be ascertained.
 No Contingent Liability should be carried in respect of any Claim
Intimated.
 Provision should be net of Salvage Value, if any recoverable.
 Claim Intimation should be within time stipulated, reason for any
undue delay should be ascertained.

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Audit Procedures
Claim Payment
 In case of coinsurance only companies share should be
expensed and the balance should be shown as recoverable from
other companies.
 In case the leader is any other company then payment should be
made as per advice received from the said leader.
 If the claim is for the FY under review provision should be made
even if the advice is received after Balance Sheet Date.
 Claim should be sanctioned by proper authority and
acknowledged by the claimant.
 See that Salvage is recovered and subrogation (i.e. right over the
insured property) is obtained.
Contd…

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Audit Procedures
Claim Payment Contd.
 In case of on account payment or deposit with any authority, only net
payment should be made.
 If there is partial settlement the authority should be the same as that of
for Total Claim.
 After final settlement the claimant should give unqualified discharge, not
involving
 Company in any further liability in respect of claim.

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Audit Procedures
Commission
 Commission payment should be supported by proper
Vouchers, Bills and the same should be checked with
Commission register.
 The payment should be authorized by appropriate
authority.
 Proper TDS should be made and net amount should
be paid to the agent.
 Calculation should be properly checked.
 Any suspense item should be expeditiously cleared.
 Check if any agent has debit balance.

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Audit Procedures
Agents Balance
 Verify whether agent’s balances and outstanding balances in
outstanding premium account have been listed, analyzed and
reconciled for the purposes of audit.
 Verify whether recoveries of large outstanding have been made in
post audit period.
 Verify whether there is any old outstanding debit or credit balances
as at the year end which require adjustment. A written explanation
maybe obtained from the management is to their nature.
 Verify that agents balances do not include employees’ balances and
balances of other insurance companies.
 Verify that no credit of commission is given to agents for businesses
directly procured by it.
 Vouch adjustments / payments against old outstanding balances in
agents account.
 Ensure that the relevant control account in the General Ledger is
reconciled with the subsidiary records.

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Discussion & Questions
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