Chapter 20 Audit of GIC

Compiled by: Pankaj Garg
21.1
Chapter 21 - Audit of Insurance Companies ©www.altclasses.in
20 Audit of Insurance Companies
20.1 - Legal and Regulatory Requirements
Legal (a) The Insurance Act, 1938 (including Insurance Rules, 1939);
Framework of (b) The Insurance Regulatory and Development Authority Act,
GIC 1999;
(c) The Insurance Regulatory and Development Authority

Regulations framed under the IRDA, Act, 1999;
(d) The Companies Act, 2013; and
(e) IRDA Investment Regulations, 2013.
Regulatory Registration • Every insurer is required to obtain a certificate

Requirements – Sec. 3 of registration before commencement of
of Insurance insurance business in India.
Act 1938
• The section empowers the Authority to make
regulations for registration of insurers.
• The registration of Indian insurance companies

is done in accordance with the Insurance
Regulatory and Development Authority
(Registration of Indian Insurance Companies)
Regulations, 2000.

21.2
Requirement
Type of Insurance Minimum Paid-up
as to Capital
Business equity capital required
– Sec. 6
Life insurance or ₹100 crore
general insurance
Health insurance ₹100 crore

(exclusively)
Re-insurer ₹200 crore (besides re-

(exclusively) insurer shall not be
registered unless he has
net owned funds of not
less than ₹5,000 crore
Form and • Every insurer, in respect of insurance business

Contents of transacted by him and in respect of his
Financial shareholders' funds, shall, at the expiration of
Statements - each financial year, prepare with reference to
Section 11 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.

21.3
Audit – Sec. • The balance sheet, profit and loss account,

12 revenue account and profit and loss
appropriation account of every insurer, in
respect of all insurance business transacted by
him, shall, unless they are subject to audit
under the Companies Act, 2013, be audited
annually by an auditor, and
• the auditor shall in the audit of all such

accounts have the powers of, exercise the
functions vested in, and discharge the duties
and be subject to the liabilities and penalties
imposed on, auditors of companies by section
147 of the Companies Act, 2013."
Appointment • The appointment of statutory auditors in the

of Auditors GIC of India, and its subsidiaries and the
divisions are made by the CAG of India, as in
the case of other PSUs.
• 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.

21.4
Points to remember
• IRDAI Guidelines on Corporate Governance

poses certain restrictions on the number of
insurance companies a statutory auditor
can audit.
• Currently, an auditor can conduct audit only

for 3 insurance companies and not more
than 2 Life or 2 General.
• The Guidelines also mandate a mandatory

joint audit for all insurance companies.
Sufficiency of • Requirement of solvency margin: Every

assets insurer and re-insurer shall at all times
Or maintain an excess of value of assets over the

amount of liabilities of, not less than 50% of the
Solvency
amount of minimum capital as stated u/s 6 and
Margin
arrived at in the manner specified by the
– Sec. 64VA
regulations.
• Non-compliance of solvency margin: An

insurer or re-insurer, as the case may be, who
does not comply with the requirement of
solvency margin shall be deemed to be

21.5
insolvent and may be wound-up by the court on

an application made by the Authority.
• Power of authority to prescribe level of

solvency: The Authority shall by way of
regulation made for the purpose, specify a level
of solvency margin known as control level of
solvency on the breach of which the Authority
shall act in accordance with without prejudice
to taking of any other remedial measures as
deemed fit.
• Submission of Financial Plan: If, at any time,

an insurer or re-insurer does not maintain the
required control level of solvency margin, he
shall, in accordance with the directions issued
by the Authority, submit a financial plan to the
Authority, indicating a plan of action to correct
the deficiency within a specified period not
exceeding six months.
• Modifications to Financial Plan: If the

authority considers the financial plan submitted
by an insurer inadequate, it shall propose
modifications to the plan and shall give
directions, as may be deemed necessary,

21.6
including direction in regard to transacting any

new business, or, appointment of an
administrator or both.
• Non-submission of financial plan: An insurer

or re-insurer, as the case may be, who does not
submit financial plan shall be deemed to have
made default in complying with the
requirements of this section.
Other Reserve for The need for unexpired risks reserve arises from
Significant Unexpired the fact that all policies are renewed annually
Provisions Risks except in specific cases where short period

policies are issued. Since the insurers close their
accounts on a particular date, not all risks under
policies expire on that date.
In other words, at the closing date, there is an

unexpired liability under various policies which
may occur during the remaining term of the policy
beyond the year end.
IRDA (General Insurance-Claim Reserving)

Regulations, 2013 requires creation of a minimum
amount of unexpired risks reserve at a specified
percentage of net premium as under:

21.7
• For marine hull insurance – 100% of net

premium
• For fire, marine cargo and miscellaneous

business – 50% of net premium.
Important Questions
Q. No. 1: Write short note on: Solvency Margin. [May 12 (4 Marks)]
Or
Discuss Solvency Margin in case of an Insurer carrying on General

Insurance Business. [May 19 – Old Syllabus (4 Marks)]
HINT: Refer Section 64VA.
Q. No. 2: AX Insurance Limited has made a provision of 75% of net premium in

case of marine hull insurance and 50% in case of marine cargo and
miscellaneous business of net premium for unexpired risks reserve
in its books. Comment. [Nov. 15 (4 Marks)]
HINT: Auditor of AX Insurance Ltd should qualify his report as the

company has made a provision of only 75% against the prescribed
minimum of 100% (Marine Hull Insurance), thereby resulting in
overstatement of profit.
Q. No. 3: You have been appointed as an auditor of a General Insurance

Company. In this context, explain Unexpired Risks Reserve and audit
procedures for the same. [Nov. 19 – Old Syllabus (5 Marks)]
HINT: Refer the topic “Reserve for Unexpired Risks”.

21.8
20.2 – Audit Procedures in case of Life Insurance Business
[NOT RELEVANT FOR STUDENTS OF OLD COURSE]
Actuarial The role of Actuaries in life insurance business is to concentrate on

Process following key areas:
1. Product Development/ Pricing and Experience analysis.
2. Model Development.
3. Statutory Valuations and reserving.
4. Business Planning.
5. Solvency management.
6. Management reporting on various business valuations and

profitability models of the Life Insurance business.
Role of Auditor
• To certify, 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 IRDA.
• For this purpose, auditors generally rely on the Certificate

issued by the Appointed Actuary, certifying the Policy
liabilities. However, he may discuss with the Actuaries with
respect to process followed and assumptions made by him
before certifying the Policy liabilities.

21.9
Underwriting Underwriting is the process of verifying the level of risk in each new
entrant. Underwriter assesses the risk and determines the premium
to be charged. The function of the underwriter is to:
(a) acquire or to “write” business that will bring money to the

insurance company, and
(b)to protect the company’s business from risks that they feel will
make a loss.
Role of Auditor
• To review the process of acceptance of risk through the

underwriting process.
• Evaluate and test the effectiveness of internal controls in

place to ensure timely and accurate Insurance policy,
adherence to the IRDA Act and Rules and regulations made
thereunder.
Reinsurance It is a risk mitigating tool adopted by Insurer whereby the risk

underwritten by one Insurer is transferred partially to another
Insurer.
Role of Auditor
(a) To check and confirm that reinsurance premium calculation

and payment is in accordance with the agreement with the
reinsurer.

21.10
(b) To check whether necessary provision has been made for

outstanding reinsurance premium and is properly
accounted for in books of accounts under respective heads.
(c) To verify the agreements entered with the reinsurer.
(d) To verify whether Insurer has adhered to the terms and

conditions of the agreement.
(e) To verify payments made to the reinsurer.
Free Look • Free Look Cancellation is an option provided to the policyholder

Cancellation wherein he has a period of 15 days from the date of receipt of
(FLC) the policy document to review the Terms & Conditions of the
policy and in case of disagreement to any of the terms &
conditions, he/ she has the option to return the policy stating the
reason for policy’s cancellation.
• FLC requests can be received through any mode - mail, fax and
letters depending on insurer’s policy. In case of written letters
the signature of the policy holder should be matched with the
original proposal form.
• FLC request is processed only when the policy holder is not

satisfied with the terms and conditions of the policy document
and not for any other reasons.
• FLC refund is paid either by cheque or in case the policy holder

wants direct credit, then consent for direct credit along with
cancelled cheque for bank account details is submitted.

21.11
Role of Auditor
(a) To check and confirm that Free Look Cancellation requests

are received within 15 days from receipt of policy document
by the policy holder.
(b) To verify signatures of the policy holder and processing of

Free look cancellation request within time defined by the
insurer.
(c) To check recording of appropriate accounting entries for

refund.
Policy Lapse • Discontinuation of the policy owing to non-payment of premium

and Revival dues is known as lapse. Lapsation affects all the stakeholders –
the policy holder, agents and the insurer. A lapsed policy ceases
to provide insurance protection to the insured. It forfeits the
benefits under the policy and cost of new policy is higher. Agents
do not get renewal premium commission if the policy is lapsed.
• The terms and conditions of the policy stipulate, that where the
premium is not paid within the grace period, the policy lapses
but may be revived during the life time of the life assured. Some
insurers do not allow revival, if the policy has remained in
lapsed condition for more than specified period. This is because
of the possibility that the arrears of premiums on such a policy
would be too heavy and that it would be better to take out a
fresh policy.

21.12
Role of Auditor
(a) To check and confirm that due dates are recorded and
monitored properly and polices are marked as “lapsed” on
non -receipt of renewal premium within due dates/grace
period.
(b) In case of revival request, check whether adequate checks

are in place for receipt of outstanding amounts and
adequate documents are obtained before reviving the
policy.
Policy • Voluntary termination of the insurance contract before the

Surrender expiry of the term of the contract is known as surrender of
policy. A policy becomes eligible for surrender on completion of
3 years from the commencement of the policy provided that 3
years premium have been paid within the due dates.
• The policy holder has to submit surrender request form duly

signed off by him along with the original policy document and
the discharge voucher.
Role of Auditor
(a) To check and confirm that surrender requests are

received from the policy holder only.
(b) To check that adequate controls are in place to ensure

proper verification process for checking of request,
whether premiums are paid on regular basis.

21.13
(c) To check whether surrender amount is paid only to the

policy holder and is paid only as per terms and conditions
mentioned in the policy document
(d) To check whether appropriate accounting entries are

passed.
Premium Premium refers to consideration received by insurance company

Collection from the policy holder. Premium 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’.
Role of Auditor
Collection (a) To check existence of appropriate

of Premium mechanism to ensure all the collections are
deposited into the Bank on timely basis.
(b) To check whether there is daily

reconciliation process to reconcile the
amounts collected, entered into the system
and deposited into the bank.

21.14
Calculation (a) To check that accounting system calculates

of Premium premium amounts and its respective due
dates correctly.
(b) To check that system is equipped to

calculate all types of premium modes
correctly.
Recognition (a) To ensure that premium is recognised only

of Income on the basis of ‘Issued Policies’ and not on
underwriting dates.
(b) To check that there is appropriate

mechanism in place to conduct
reconciliation on daily basis and reconciling
items, if any, are rectified/ followed up.
Accounting (a) To check, whether system has capability to

of ‘Advance identify regular and advance premium.
Premium’ (b) To check whether there is a process of
applying advance premium to a contract
when premium is due.
Claims Primary objective of Audit of Life Insurance Companies is checking

of accuracy of processing and accounting of claims with focus on the
following areas:

21.15
• Claims lodgement and processing
• Authority for approval of claims
• Review of payouts and disbursements
• Review of compliance to Statutory Requirements and applicable

IRDA Regulations.
• Review of Reinsurance claims
• Review of reporting of claims.
Role of Auditor
(a) To review the standard policy document to ensure that the

policy document prescribes the minimum documentary
evidence needed to support a claim.
(b) To ensure that the insurance company maintains a register

of claims, in which every claim is entered along with the
necessary details.
(c) Review the reasons for the rejections, in case of rejection of

claims.
(d) Ensure complete recording of all claims received.
(e) Ensure that appropriate provisioning has been carried out,

in cases of claims intimated but not paid.
(f) Ensure that cost of claims includes the claims settlement

cost.

21.16
(g) Ensure that there is system of regular reconciliation is

carried out between claims management system and
General ledger.
(h) Ensure that liability of claims should be booked net of

reinsurance.
Investments • The Investment portfolio of Life Insurance companies comprise

of Shareholders’ funds and Policyholders’ funds.
• Policyholders’ funds can further be segregated as linked and non

- linked. Investment regulations are prescribed for different
categories of investments.
• IRDA (Investment) regulations, 2000 gives details of the pattern

in which Funds of the Life Insurance business, should be kept
invested at any given point of time.
Role of Auditor
(a) To review the management structure to ensure adequate

segregation of duties between Investment Front office,
Mid Office and Back office.
(b) To review the operating procedures prescribed by the

IRDA Regulations.
(c) To review of investment policy.
(d) To review the functioning and scope of Investment

Committee.

21.17
(e) To check compliance of Investment regulations.
(f) To review cash management system to track funds

available for investment considering the settlement
obligations and subscription and redemption of units, etc.
(g) To review fund wise reconciliation with investment

accounts, bank, and custodian records.
(h) To ensure that there is split between Shareholders’ and

Policyholders’ funds and earmarking of securities
between various funds namely Life (Participating & Non-
Participating), Pension & Group (Participating & Non-
Participating) and Unit Linked Fund.
(i) To review the arrangements and reconciliations of

holdings with the insurer’s custodian.
(j) To review and check insurer’s Investment Accounting

and valuation policy.
(k) To review the controls around personal dealings and

insider trading.
Operating • All administrative expenses are broadly classified under 14 heads

Expenses as mentioned in Schedule 3 forming part of Financial Statements
given under Schedule A to the IRDA (Preparation of Financial
Statements and Auditor’s Report of Insurance Companies)
Regulations, 2002.

21.18
• This Schedule is part of the Revenue Account to be prepared for

insurance business.
Role of Auditor
(a) To ensure that operating expenses are first aggregated and

then apportioned to the Revenue Account of each class of
business on a reasonable and equitable basis.
(b) To ensure that the accounting policy should clearly indicate

the basis of apportionment of these expenses to the
respective Revenue Accounts (i.e., Participating and Non-
participating policies and in between Linked and Non-
Linked business) along with the certificate that all expenses
of management, wherever incurred, directly or indirectly,
read with the accounting policy, have been fully debited to
the respective Revenue Account as expenses.
Important Questions
Q. No. 4: High Life Insurance is into life insurance business and has established
presence in this field since last 25 years. Your firm, SR & Co. are
appointed auditors of the High Life Insurance company. While
conducting its audit, you come across several important actuarial
processes being followed in accordance with general regulatory
guidelines. You also understand & realise that the actuarial
department is calculating and modelling hub of the company. In the

21.19
above context explain the role of auditors. [MTP-Oct. 18]
HINT: Refer the topic “Role of Auditor in Actuarial Process”.
Q. No. 5: What are the steps to be taken while verifying the Premium of Life
Insurance Company?
Or
Auditors should evaluate various sub-processes, employed by the

Insurance Companies in accounting of premiums like collection of
premium from the policy holders, booking of premium, banking,
accounting and reconciliation of the same. In view of above, you are
required to briefly discuss some illustrative points, auditors are
required to follow during the Audit of Accounting of Premiums in case
of Life Insurance Companies. [RTP-Nov. 18]
HINT: Refer the topic “Role of Auditor in Premium Collection”.
Q. No. 6: ABC & Co., Chartered Accountants are the Auditors of Just Care Life
Insurance Company Limited. Enumerate the steps to be taken by the
auditor while verifying the "Investment".
Or
Write short note on: Auditor’s considerations while reviewing of

Investment Department of Life Insurance Company. [RTP-Nov. 19]
HINT: Refer the topic “Role of Auditor in Verification of Investments”.
Q. No. 7: Briefly explain the term policy lapse and revival in case of Life
Insurance Company and role of auditor in verifying the same.
HINT: Refer the topic “Policy Lapse/Revival”.

21.20
20.3 - Specific Control Procedures related to General Insurance Business
Underwriting • Underwriting function comprises of examination and evaluation

of applications for insurance, the rating of risks and the
establishment of premiums.
• Prime objectives of internal control system for underwriting is

adherence to guidelines for acceptances of insurance, proper
recording of insurance risk and its evaluation.
Premium • Premium is the consideration received by an insurer from the

insured.
• Prime objectives of internal controls over premium is to ensure

that correct premium is calculated and collected before
acceptance of any risk, that premium is accounted for in an
appropriate manner and that the premium is collected only in
respect of such risks which are assumed by the company.
Commission • Commission is the consideration payable for getting the insurance

business.
• Prime objectives of internal controls over commission is to ensure

that commission is paid in accordance with the rules and
regulations of the company, commission is paid to the agent who
brought the business and the legal compliances, for example, tax
deduction at sources.

21.21
Claim • Claim is the demand for payment of policy benefit because of the
occurrence of an insured event.
• Prime objectives of internal controls over claim are to ensure that

only bonafide claims are paid. Cost of claims are properly
recorded and disclosed in the financial statements.
Reinsurance • Prime objectives of internal controls over reinsurance transaction

is determination of correct amounts for reinsurance ceded, proper
valuation of assets and liabilities arising out of reinsurance
transactions and adherence to legal provisions, regulations and
reinsurance agreements.
Important Questions
Q. No. 8: Internal control functions in case of general insurance business can be
categorised under main operational cycles. Since various operational
cycles are inter -linked, the internal controls operating within the
systems of such cycles should be reviewed simultaneously. State the
specific control procedures to be evaluated in relation to general
insurance business.
HINT: Refer the topic “Specific Control Procedures related to General
Insurance Business”

21.22
20.4 - Audit of Revenue Items of General Insurance Business
Verification Review of To ensure the followings:

of Premium Internal • Proper cover notes are issued and that no cover
Income Control note/policy is omitted.
Procedure
• All cover notes are serially numbered.
and Its
compliance • Existence of adequate internal check on issue of
stamps, stationery, etc.
Depending on the assurance obtained, decide the

extent of substantive checking to be carried out.
Accounting To Ensure the followings:

of Premium • All premiums in respect of risks incepting during
the relevant accounting year has been accounted as
the premium income of that year.
• Premium received for fire, marine, motor and

miscellaneous insurance business is recorded in
relevant books of account.
• In respect of risks commencing after the year end,

and the premium is received in advance, the same
has been shown as "Premium Received in Advance"
and see whether the similar advance of last year is
accounted this year as income.

21.23
• Premium collected is recorded at gross figure

without providing for unexpired risks and
reinsurance.
Inception of To Ensure the followings:

Risk – • The company is not at risk in case policy
Section documents have not been issued for any reason like
64VB dishonour of cheque and ensure that the risk has
not commenced.
• The company is not under risk in respect of

amounts lying at credit (Premium received in
advance) and outstanding (Uncollected premium)
at the year end.
Co-Insurance Examine whether the company's share of premium

have been properly booked in the books of account in
case the risk has commenced.
Examination Review of To ensure that

of claims Internal • only bonafide claims has been paid.
paid Control
• claims has been sanctioned by appropriate
Procedure
authority.
• information from branches/divisions regarding

each class of business categorising the claims
value-wise has been obtained.

21.24
Claims Paid Verify the followings:
(a) Coinsurance: In case of co-insurance

arrangements, claims paid have been booked only
in respect of company’s share and the balance has
been debited to other insurance companies.
(b) Settlement Amount: Ensure that the Claim

Account is debited with all the payments
including repair charges, fire fighting expenses,
police report fees, survey fees, amount decreed
by the Courts, travel expenses, photograph
charges, etc.
(c) Claims communicated after the year-end for

losses which occurred prior to the year end must
be accounted for in the year of audit.
(d) Accounting for salvage and letter of

subrogation: salvage recovered has been duly
accounted by the company and a letter of
subrogation has been obtained in accordance
with the procedure;
(e) Amount deposits with courts: in matters under

litigation/arbitration have not been treated as
claims paid but are held as assets till final
disposal of such claims.

21.25
(f) Unqualified Discharge Note: has been given by

claimant in case of final settlement of claims.
Claims Verify the followings:

Outstanding (a) Provision has been made for all unsettled claims
at year end as at the year-end on the basis of claims
Or lodged/communicated.
Claims (b) Provision has been made for only such claims for
Provisions which the company is legally liable, considering
particularly, that
• the risk was covered by the policy,
• the claims arose during the currency of the

policy; and
• claim did not arise during the period the

company was not supposed to cover the risk.
(c) Provision made should not be in excess of the

amount insured.
(d) Application of ‘average clause’ in case of under-

insurance.
(e) In case of co-insurance arrangements, provisions

should be made only in respect of its own share of
anticipated liability.
(f) Claims are provided for net of estimated salvage,

wherever applicable.

21.26
(g) No contingent liability is carried in respect of any

claim intimated in respect of policies issued.
(h) Intimation of loss is received within a reasonable

time and reasons for undue delay in intimation
are looked into.
(i) Provisions have been retained as at the year-end

in respect of guarantees given by company to
various Courts for claims under litigation.
Claims (i) Claims intimation register.

Registers (ii) Claims paid register.
(iii) Claims Disbursement bank book.
(iv) Claims Dockets, normally containing the

following records:
Claim intimation, claim forms, particulars of

policy, survey report, photograph showing
damage, Repairer’s bills, letter of subrogation,
police report, fire service report, claim
settlement note, claim satisfaction note, salvage
report, salvage disposal note, claims discharge
voucher etc.
(v) Report of quality assurance team and
(vi) Salvage register.

21.27
Commission An insurance company pays commission to its agents for business

procured through them, as per Sec. 40 of the Insurance Act, 1938;
no commission can be paid to a person other than its agent. In order
to verify the amount of commission, the auditor should:
(a) Ensure that commission/brokerage is not paid in excess of the

limits specified by IRDAI.
(b) Ensure that commission/brokerage is paid as per rates agreed

with the agent and filed with IRDAI.
(c) Ensure that commission/brokerage is paid to the agent/broker

who has solicited the business.
(d) Vouch disbursement entries with commission bills.
(e) Check whether all disbursements were properly authorized.
(f) Check the calculation of commission amount.
(g) Scrutinize agent’s ledger for any abnormal entries or balance
(h) Examine whether commission outgo for the period has been
properly accounted for.
Operating (a) Administrative expenses of an insurance company are broadly

Expenses classified under 13 heads as mentioned in Schedule 4.
(Expenses of
(b) In so far as financial statements are concerned, this Schedule is
Management)
part of the Revenue Account to be prepared for insurance
business.

21.28
(c) These expenses are first aggregated and then apportioned to the
Revenue Account of each class of business on a reasonable and
equitable basis.
(d) The accounting policy should clearly indicate the basis of

apportionment of these expenses to the respective Revenue
Accounts (i.e., fire, marine and miscellaneous) along with the
certificate that all expenses of management, wherever incurred,
directly or indirectly, read with the accounting policy, have been
fully debited to the respective Revenue Account as expenses.
(e) Any major expenses (₹5 lacs or in excess of 1% of net premium,

whichever is higher) are required to be shown separately.
(f) ‘Expenses related to insurance business’ clearly indicate that

expenses which do not have any direct relation to insurance
business are to be shown separately in the P & L A/c.
(g) Expenses relating to investment department, brokerage, bank

charges, transfer fees, etc. do not have a direct relationship to the
day-to-day working of the insurance business and as such would
not be included in the revenue account.
Receipt and Section 11 of the Insurance Act, 1938 provides that every insurer,
Payment should prepare at the end of each financial year, a Balance Sheet, a
Account Profit and Loss Account, separate account of receipts and payments
and a Revenue Account in accordance IRDA Regulations.

21.29
Since receipts and payments account has been made a part of

financial statements of an insurer, it is implied that the receipts and
payments account is also required to be audited.
The IRDA (Preparation of Financial Statements and Auditor’s

Report of Insurance Companies) Regulations, 2002 require that the
auditor of an insurance company should:
(i) report whether the receipts and payments account of the

insurer is in agreement with the books of account and returns;
(ii) express an opinion as to whether the receipts and payments

account has been prepared in accordance with the provisions
of the relevant statutes; and
(iii) express an opinion whether the receipts and payments account

give a true and fair view of the receipts and payments of the
insurer for the financial year/period under audit.
Important Questions
Q. No. 9: What are the steps to be taken while verifying the Premium of a
General Insurance Company?
HINT: Refer the Topic “verification of Premium”.
Q. No. 10: As at 31st March 2019 while auditing Safe Insurance Ltd you
observed that a policy has been issued on 25th March 2019 for fire
risk favoring one of the leading corporate houses in the country

21.30
without the actual receipt of premium and it was reflected as
premium receivable. The company maintained that it is a usual
practice in respect of big customers and the money was collected on
5th April 2019. You further noticed that there was a fire accident in
the premises of the insured on 31st March 2019 and a claim was
lodged for the same. The insurance company also made a provision
for claim. Please respond. [May 13 (4 Marks), RTP-May 19]
Or
While auditing Suryankiran Insurance Ltd. as on 31st March, 2019,
you observed that there is one policy which has been issued on 25th
March, 2019 towards fire risk favouring one of the leading corporate
houses in the country without the actual receipt of premium and it
was reflected as premium receivable. It is the usual practice
maintained by the company in respect of big customers that they
would issue the policy before receiving the premium. The premium
money was collected on 5th of April 2019. It is further noticed that
there was a fire accident in the premises of insured on 31st March,
2019 and a claim was lodged. The insurance company also provided
for the same. How would you respond? [May 16 (4 Marks)]
HINT: Applying provisions of Sec. 64VB, the insurance company is not
liable to pay the claim and hence no provision for claim is required.

21.31
Q. No. 11: You have been appointed as an auditor of ABC Insurance Co. Ltd. and
found that M/s PQR Ltd. got their plant & Machinery insured on 01-
10-2018 but the amount of premium has been paid by them on 15-10-
2018. In the meanwhile, on 10-10-2018 a fire has broken out in the
factory and the company filed a claim for damages of plant &
machinery with the Insurance company. Advise the insurance
company in this regard. [May 19 – New Syllabus (5 Marks)]
HINT: Applying provisions of Sec. 64VB, the insurance company is not
liable to pay the claim.
Q. No. 12: While auditing claims paid in respect of a General Insurance
company what aspects need to be looked into. [May 10 (6 Marks)]
Or
You are the Auditor of Good Luck General Insurance Company. You
want to ensure that there exists goods system that effectively serves
the requirements of true and fair accounting of claim-related
expenses and liabilities. Suggest how this can be ensured.
[May 18 – New Syllabus (4 Marks)]
HINT: Refer the topic “Verification of Claims Paid”
Q. No. 13: ABC & Co., Chartered Accountants are the Auditors of Just Care
General Insurance Company Limited. As on March 31, 2019 the
Management made a provision for claims outstanding. Enumerate the

21.32
steps to be taken by the Auditor while verifying the “Claims
Provision”. [Nov. 14 (6 Marks), RTP-May 20]
HINT: Refer the topic “Verification of Claims Provisions”
Q. No. 14: Your audit assistant seeks your help in checking the claim liability of
Bharat Insurance Co. Ltd. and wants to know the registers and
records which they should obtain and review in this regard.
[May 18 – Old Syllabus (4 Marks)]
HINT: Refer the topic “Claims Registers”
Q. No. 15: Write short note on: Verification of payment of remuneration to an
Insurance Agent. [May 17 (4 Marks)]
Or
While auditing Secure Insurance Ltd., you observed that the major
proportion of expense of the company is the
remuneration/commission paid to its insurance agents. As the
auditor of the company, what audit procedure would you adopt for
verification of such expense? [MTP-Aug. 18]
Or
You have been appointed to carry out the audit of Sky Insurance
Company Ltd. for the year 2017-18. In the course of your audit, you
observed that the commission paid to agents constituted a major

21.33
expense in operating expenses of the company. Enumerate the audit
concerns that address to the assertions required for the Auditor to
ensure the continued existence of internal control as well as fairness
of the amounts in accounting of commission paid to agents.
[Nov. 18-New Syllabus (4 Marks)]
HINT: Refer the topic “Verification of Commission”
Q. No. 16: “In an audit of an insurance company, the Receipts and Payments
Account is also subjected to audit”. Comment on this statement in
brief.
HINT: Refer the topic “Receipt and Payment Account”.
20.5 - Audit of Balance Sheet Items of General Insurance Companies
Investments 1. Physically verify the securities on the balance sheet date or a date
as near as possible. Prepare a reconciliation statement where
verification is carried out on date other than balance sheet date.
2. Obtain separate lists of securities held physically and those held

in demat form.
3. Examine the records for investments held at branches and

request the respective branch auditors to issue a certificate to this
effect.
4. Examine in detail investments on which income has not been

received for a long period and those which have not been

21.34
redeemed even after redemption date. He should consider the

creation of provision of these investments.
5. 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.
6. Examine that the norms relating to valuation and disclosure in

F.S. have been complied with. He should examine their accounting
policies in this area and the financial impact of changes in such
policies.
7. Examine whether income from investments is property

accounted for
8. Ensure that certificates of TDS are properly maintained.
9. Ensure compliance of Sections 27, 27A and 27B of the Insurance

Act, 1938 as well as the guidelines issued from time to time by the
Ministry of Finance through General Insurance Corporation of
India.
Outstanding (i) Scrutinize and review control account debit balances and their
Premium and nature should be enquired into.
Agent’s (ii) Examine in-operative balances and treatment given for old
Balances balances with reference to company rules.
(iii) Enquire into the reasons for retaining the old balances.
(iv) Verify old debit balances which may require provision or

21.35
adjustment. Notes of explanation may be obtained from the

management in this regard.
(v) Check age-wise, sector-wise analysis of outstanding premium.
(vi) Verify whether outstanding premiums have since been

collected.
(vii) Check the availability of adequate bank guarantee or premium

deposit for outstanding premium.
Disclosures (a) Partly paid up investments.

requirements (b) Underwriting Commitments outstanding.
of Contingent
(c) Claims, other than those under policies, not acknowledged as
Liabilities
debts.
(d) Guarantees given by or on behalf of the Company.
(e) Statutory demands/Liabilities in dispute, not provided for.
(f) Reinsurance obligations to the extent not provided for in the

accounts.
(g) Others (to be specified).
Important Questions
Q. No. 17: State the audit procedures for verification of outstanding premium
and agents’ balances of General Insurance companies.
[Nov. 08, Nov. 10, Nov. 11 (4 Marks)]
Or

21.36
M/s ABC & Co., a CA firm was appointed as the auditor of ‘Always Safe
General Insurance Ltd.’ Advise them how they will verify outstanding
premium and agent’s balances. [May 14 (6 Marks)]
HINT: Refer the topic “Outstanding Premium and Agent’s Balances”
Q. No. 18: State the disclosure requirements in respect of contingent liabilities

in the notes to the Balance Sheet of a General Insurance Company.
[May 11 (4 Marks)]
HINT: Refer the topic “Contingent Liabilities”
20.6 - Miscellaneous
Co-Insurance • Sharing of Business between more than one insurer at agreed

percentages is known as co-insurance.
• The Lead Insurer issues documents, collects premium and

settles claims.
• Statement of accounts is rendered by the Lead insurer to the

other co-insurers.
Incoming Co- 1. Ensure that the Premium Account is credited

Insurance on the basis of statements received from the
Lead insurer.
2. In case, the statement is not received, the

premium is accounted for on the basis of
advices to ensure that all premium in respect
of risks assumed in any year is booked in the
same year.

21.37
3. For this purpose, the auditor may examine the

communication in the post-audit period and
obtain a written confirmation to the effect that
all incoming advices have been accounted for.
4. The auditor should also verify claims

provisions and claims paid with reference to
advice received from the Lead insurer.
Outgoing Co- 1. The auditor should scrutinise the transactions

Insurance relating to the outgoing business, i.e. where the
company is the Lead Insurer.
2. 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.
Re-Insurance • An agreement between a ‘ceding company’ and a ‘reinsurer’

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.
• A ‘ceding company’ is the original insurance company which has

accepted the risk and has agreed to ‘cede’ or pass on that risk to
another insurance company or the reinsurance company.
• It may, however, be emphasised that the insured does not

acquire any right under a reinsurance contract.

21.38
• In the event of loss, the insured’s claim for full amount is against
the original insurer only. The original insurer in turn, lodges a
claim with the reinsurer.
Re-Insurance 1. Evaluate internal control system in the area of

inward reinsurance accepted to ensure determination
of correct amount for reinsurance accepted,
proper valuation of assets and liabilities
arising out of reinsurance transaction and
adherence to legal provisions and regulations.
2. Ascertain whether adequate guidelines and

procedures are established with respect to
granting reinsurance.
3. Reconcile reinsurance underwriting returns

received from various units with the figures of
premium, claims paid and outstanding claims
for the company as a whole.
4. Examine whether premium received and

commission paid on reinsurance accepted is as
per the terms of the agreement with the
Principal Insurer.
5. Examine whether claims paid have been

accounted on a regular basis.

21.39
6. Examine whether remittances from foreign

Principal Insurer are as per foreign exchange
regulations.
7. Examine whether confirmations have been

obtained regarding balances with Principal
Insurer.
8. Review individual accounts of Principal

Insurers.
Re-Insurance 1. Evaluate internal control system in the area of

Outward reinsurance ceded to ensure determination of
correct amount for reinsurance ceded, proper
valuation of assets and liabilities arising out of
reinsurance transaction and adherence to legal
provisions and regulations.
2. Ascertain whether adequate guidelines and

procedures are established with respect to
obtaining reinsurance.
3. Reconcile reinsurance underwriting returns

received from various units with the figures of
premium, claims paid and outstanding claims
for the company as a whole.
4. Examine whether commission on reinsurance

ceded is as per the terms of the agreement
with the re-insurers.

21.40
5. Examine the computation of profit
commission for automatic treaty
arrangements in the light of the periodic
accounts rendered and in relation to
outstanding loss pertaining to the treaty.
6. Examine whether loss recoveries have been
claimed and accounted on a regular basis.
7. Examine whether outstanding losses
recoverable have been confirmed by re-
insurers.
8. Examine whether remittances to foreign re-
insurers are as per foreign exchange
regulations.
9. Examine whether confirmations have been
obtained regarding balances with re-insurers.
10. Review individual accounts of re-insurers to
evaluate whether any provision/write off or
write back is required.

21.41
Types of Re-
Types of Reinsurance Contracts
insurance
Facultative Treaty Reinsurance
Proportional Non
Proportional
Quota Surplus Auto- Pools Excess Stop

Share fac of Loss
Loss
(XL)
Facultative It is that type of reinsurance whereby contract
reinsurance relates to one particular risk and is expressed in
the reinsurance policy. Each transaction has to be
negotiated individually. Each party has free
choice i.e., ceding company to offer and re-insurer
to accept. The Insurance is used when:
(i) Automatic cover has exhausted.
(ii) Risk is excluded from treaties
(iii)Reinsurance treaties have not to be over

burdened for abnormal risks.
(iv) When insurer has no automatic cover.
(v) Where technical guidance is required at each

stage of acceptance of risk.
Treaty Re- Unlike a facultative policy, a treaty type of

insurance coverage is in effect for a specified period of time,
rather than on a per risk, or contract basis. For

21.42
the duration of the contract, the reinsurer agrees

to cover all or a portion of the risks that may be
incurred by the insurance company being
covered.
Treaties can also be divided into two categories,

viz., proportional treaties and non-proportional
treaties.
Proportional • In a proportional treaty reinsurance, the

Treaty reinsurer will receive a prorated share of the
Reinsurance premiums of all the policies sold by the
insurance company being covered.
Consequently, when claims are made, the
reinsurer will also bear a portion of the losses.
The proportion of the premiums and losses
that will be shared by the reinsurer will be
based on an agreed percentage.
• In a proportional coverage, the reinsurance

company will also reimburse the insurance
company for all processing, business
acquisition and writing costs. Also known as
ceding commission, such costs may be paid to
the insurance company upfront.
Types of Proportional Treaties
Quota • Ceding company binds itself to cede

21.43
Share a fix %age of all policies issued by it

Treaty under a defined scope of business
covered by the agreement.
• The advantage to the reinsurer

under this treaty is that the
reinsurer receives the same
proportion of all business of the
treaty class defined under the
treaty.
Surplus • Only the amount which a company

Treaty cannot or does not want to retain
for itself is ceded. If certain risk is
totally retained, no surplus is left to
be ceded.
• Surplus is always determined in

multiples of ceding company’s
retention.
Auto-fac • Amount that remains after cession

Treaty of its surplus treaties are ceded
upto a defined limit.
• It is obligatory for the reinsurer to

accept reinsurance within the
purview of the agreement.

21.44
Pools • Two or more Insurers may form a

Pool under an agreement whereby
its members cede a pre-determined
proportion of a particular category
of business directly written by
them into the Pool.
• Members of the pool share the

aggregate premiums and claims in
the proportion of premium ceded
by each member.
Non- In a non-proportional type of coverage, the

proportional reinsurer will only get involved if the insurance
Treaty company’s losses exceed a specified amount,
Reinsurance which is referred to as priority or retention limit.
Hence, the reinsurer does not have a proportional
share in the premiums and losses of the
insurance provider.
The priority or retention limit may be based on a

single type of risk or an entire business category.
Types of Non - Proportional Treaties
Excess of Reinsurer’s liability arises only when

Loss (XL) a claim exceeds a predetermined
Treaties figure relating to a specific branch of
the ceding company’s business.

21.45
The Treaty would provide for

maximum liability as well as the
amount upto which the ceding
company would bear the loss itself,
which is called the ‘Underlying Limit’.
Excess of If as a result of one event, several

loss risks are affected, the loss under each
cover on risk is arrived at separately and the
prevent underlying limit is applied to each
basis risk to determine the liability of the
insurer.
Excess of • If as a result of one event, several

loss risks are affected, aggregate
cover on amount of loss is determined and
non- one loss underlying limit is
prevent deducted from the aggregate
basis amount of the loss to determine the
liability of reinsurer.
Stop Loss • It protects the company from losing

Treaties more than a specified amount for a
given class of business.
• Normally, the amount is fixed in

relation to the ceding company’s
annual premium income for the

21.46
class of business and is represented

as a percentage.
• Reinsurer is liable for the losses

which exceed the agreed
percentage of loss ratio.
Trade Credit Meaning Business of effecting contracts of insurance in

Insurance respect of trade credit insurance transactions.
It provides protection to suppliers against the

risk of non-payment of goods or services by their
buyers who may be situated in the same country
(domestic risk) or in another country (export
risk) against non -payment as a result of
insolvency of the buyer or non-payment after an
agreed number of months after due date.
Requirements Trade credit insurance product is offered subject

to following requirements:
1. Policyholder's loss arises due to non-receipt of

trade receivable arising out of a trade of goods
or services.
2. Policyholder is a supplier of goods or services

for a consideration and does not arise out of
factoring or reverse factoring arrangement or
any other similar arrangement.

21.47
3. Buyer is liable to pay a trade receivable to the

policyholder in return for the goods and
services received by him from the policyholder,
in accordance with a policy document filed
with the insurer.
4. Premium for the entire Policy Period has been

paid.
5. Other requirement that may be specified by the

Authority from time to time.
Important Questions
Q. No. 19: Write a short note on: Incoming and Outgoing Co-insurance.
HINT: Refer the topic “Incoming and Outgoing Co-insurance”
Q. No. 20: Enumerate the steps to be taken by an auditor for the verification of
Re-insurance inward in case of a General Insurance Company.
HINT: Refer the topic “Verification of Reinsurance inward”
Q. No. 21: What are the steps to be taken by an auditor for the audit of re-
insurance ceded?
or
Enumerate the steps to be taken by an auditor for the verification of

Re-insurance outward in case of a General Insurance Company.
[Nov. 09 (5 Marks), MTP-April 18]
HINT: Refer the topic “Verification of Reinsurance outward”

21.48
Q. No. 22: Write a short note on - Facultative reinsurance under Insurance Act,
1938.
HINT: Refer the topic “Facultative Reinsurance”.
Q. No. 23: Explain the difference between the Proportional Treaties and Non-
Proportional Treaties? [Nov. 16 (4 Marks)]
HINT: Refer the topic “Proportional Treaties and Non-Proportional

Treaties”
Q. No. 24: Write short note on: “Trade credit insurance policy” and basic
requirements of a trade credit insurance product.
[Nov. 16 (4 Marks)]
HINT: Refer the topic “Trade Credit Insurance”
Summary of Examination Weightage
Attempt Marks Topics Covered
May 2018 4 Examination of System related to accounting of claims.
Nov. 2018 4 Verification of Commission paid to agents
May 2019 5* Case Study on Sec. 64VB
Nov. 2019 0* --
* Only Descriptive Questions
--------------------

21.49
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21.50

Chapter 20 Audit of GIC

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Chapter 20 Audit of GIC

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Compiled by: Pankaj Garg

20 Audit of Insurance Companies

20.1 - Legal and Regulatory Requirements

(c) The Insurance Regulatory and Development Authority

(d) The Companies Act, 2013; and

(e) IRDA Investment Regulations, 2013.

Regulatory Registration • Every insurer is required to obtain a certificate

• The registration of Indian insurance companies

Compiled by: Pankaj Garg

Health insurance ₹100 crore

Re-insurer ₹200 crore (besides re-

Form and • Every insurer, in respect of insurance business

Compiled by: Pankaj Garg

Audit – Sec. • The balance sheet, profit and loss account,

• the auditor shall in the audit of all such

Appointment • The appointment of statutory auditors in the

• However, in the case of others, auditor is

Compiled by: Pankaj Garg

• IRDAI Guidelines on Corporate Governance

• Currently, an auditor can conduct audit only

• The Guidelines also mandate a mandatory

Sufficiency of • Requirement of solvency margin: Every

Or maintain an excess of value of assets over the

• Non-compliance of solvency margin: An

Compiled by: Pankaj Garg

insolvent and may be wound-up by the court on

• Power of authority to prescribe level of

• Submission of Financial Plan: If, at any time,

• Modifications to Financial Plan: If the

Compiled by: Pankaj Garg

including direction in regard to transacting any

• Non-submission of financial plan: An insurer

Provisions Risks except in specific cases where short period

In other words, at the closing date, there is an

IRDA (General Insurance-Claim Reserving)

Compiled by: Pankaj Garg

• For marine hull insurance – 100% of net

• For fire, marine cargo and miscellaneous

Q. No. 1: Write short note on: Solvency Margin. [May 12 (4 Marks)]

Discuss Solvency Margin in case of an Insurer carrying on General

HINT: Refer Section 64VA.

Q. No. 2: AX Insurance Limited has made a provision of 75% of net premium in

HINT: Auditor of AX Insurance Ltd should qualify his report as the

Q. No. 3: You have been appointed as an auditor of a General Insurance

HINT: Refer the topic “Reserve for Unexpired Risks”.

Compiled by: Pankaj Garg

20.2 – Audit Procedures in case of Life Insurance Business

[NOT RELEVANT FOR STUDENTS OF OLD COURSE]

Actuarial The role of Actuaries in life insurance business is to concentrate on

1. Product Development/ Pricing and Experience analysis.

3. Statutory Valuations and reserving.

6. Management reporting on various business valuations and

• To certify, whether the actuarial valuation of liabilities is

• For this purpose, auditors generally rely on the Certificate

Compiled by: Pankaj Garg

(a) acquire or to “write” business that will bring money to the

• To review the process of acceptance of risk through the

• Evaluate and test the effectiveness of internal controls in

Reinsurance It is a risk mitigating tool adopted by Insurer whereby the risk

(a) To check and confirm that reinsurance premium calculation

Compiled by: Pankaj Garg

(b) To check whether necessary provision has been made for

(c) To verify the agreements entered with the reinsurer.

(d) To verify whether Insurer has adhered to the terms and