INSURANCE INDUSTRY

BSA-3
Insurance
 defined as a contract, which is called a policy, in which an individual or organization
receives financial protection and reimbursement of damages from the insurer or the
insurance company.
The basic principle of insurance is that an entity will choose to spend small periodic amounts
of money against a possibility of a huge unexpected loss. Basically, all the policyholder pool
their risks together. Any loss that they suffer will be paid out of their premiums which they
pay.
Functions of an Insurance Company
1] Provides Reliability - The main function of insurance is that eliminates the uncertainty of
an unexpected and sudden financial loss. This is one of the biggest worries of a business.
Instead of this uncertainty, it provides the certainty of regular payment i.e. the premium to
be paid.
2] Protection - Insurance does not reduce the risk of loss or damage that a company may
suffer. But it provides a protection against such loss that a company may suffer. So at least
the organization does not suffer financial losses that debilitate their daily functioning.
3] Pooling of Risk - In insurance, all the policyholders pool their risks together. They all pay
their premiums and if one of them suffers financial losses, then the payout comes from this
fund. So the risk is shared between all of them.
4] Legal Requirements - In a lot of cases getting some form of insurance is actually required
by the law of the land. Like for example when goods are in freight, or when you open a
public space getting fire insurance may be a mandatory requirement. So an insurance
company will help us fulfil these requirements.
5] Capital Formation -The pooled premiums of the policyholders help create a capital for the
insurance company. This capital can then be invested in productive purposes that generate
income for the company
7 Types of Insurance
Life Insurance - The insurer will pay the fixed amount of insurance at the time of death or at the
expiry of a certain period. This insurance provides protection to the family at the premature death or
gives an adequate amount at the old age when earning capacities are reduced. Under personal
insurance, a payment is made at the accident. The insurance is not only a protection but is a sort of
investment because a certain sum is returnable to the insured at the death or the expiry of a period.

Property Insurance - Under the property insurance property of person/persons are insured against a
certain specified risk. The risk may be fire or marine perils, theft of property or goods damage to
property at the accident.

Marine Insurance - The marine perils are; collision with a rock or ship, attacks by enemies, fire, and
captured by pirates, etc. these perils cause damage, destruction or disappearance of the ship and
cargo and non-payment of freight. So, marine insurance insures ship (Hull), cargo and freight.

Fire Insurance - With the help of fire insurance, the losses arising due to fire are compensated and
the society is not losing much. The individual is preferred from such losses and his property or
business or industry will remain approximately in the same position in which it was before the loss.
The fire insurance does not protect only losses but it provides certain consequential losses also war
risk, turmoil, riots, etc. can be insured under this insurance, too.

Liability Insurance - The term liability insurance refers to an insurance product that provides an
insured party with protection against claims resulting from injuries and damage to other people or
property. Liability insurance policies cover any legal costs and payouts an insured party is
responsible for if they are found legally liable. Intentional damage and contractual liabilities are
generally not covered in liability insurance policies.

Social Insurance - The social insurance is to provide protection to the weaker sections of the society
who are unable to pay the premium for adequate insurance. Pension plans, disability benefits,
unemployment benefits, sickness insurance, and industrial insurance are the various forms of social
insurance.

Guarantee Insurance -A guarantee insurance is a type of insurance contract where the insurer
agrees to indemnify the insured for a fixed sum against losses through fraud, dishonesty and breach
of contract by a third party. The most important feature of this contract states that the insurer
stands as a surety against the action of a third party. For example, in export insurance, the insurer
will compensate the loss at the failure of the importers to pay the amount of debt.
Audit of Insurance Companies
Guidelines for Corporate Governance for Insurance Commission Regulated Company
The Board should establish an Audit Committee
 to enhance its oversight capability over the company's financial reporting, internal
control system, internal and external audit processes, and compliance with
applicable laws and regulations.
 The committee should be composed of at least three appropriately qualified non-
executive directors, the majority of whom, including the Chairman, should be
independent.
 All of the members of the committee must have relevant background, knowledge,
skills, and/or experience in the areas of accounting, auditing and finance.
 The Chairman of the Audit Committee should not be the chairman of the Board or of
any other committees.
 The Audit Committee meets with the Board at least every quarter without the
presence of the CEO or other management team members, and periodically meets
with the head of the internal audit.
The Audit Committee has the following duties and responsibilities:
• Recommends the approval the lnternal Audit Charter which formally defines the role
of lnternal Audit and the audit plan as well as oversees the implementation of the lA
Charter;
• Through the lnternal Audit (lA) Department, monitors and evaluates the adequacy
and effectiveness of the corporation's internal control system, integrity of financial
reporting, and security of physical and information assets. Well-designed internal
control procedures and processes that will provide a system of checks and balances
should be in place in order to
(a) safeguard the company's resources and ensure their effective utilization,
(b) prevent occurrence of fraud and other irregularities,
(c)protect the accuracy and reliability of the company’s financial data, and
(d) ensure compliance with applicable laws and regulations.
• Prior to the commencement of the audit, discusses with the External Auditor the
nature, Scope and expenses of the audit, and ensures the proper coordination if
more than one audit firm is involved in the activity to secure proper coverage and
minimize duplication of efforts;
• Evaluates and determines the non-audit work, if any, of the External Auditor, and
periodically reviews the non-audit fees paid to the External Auditor in relation to the
 total fees paid to him and to the corporation's overall consultancy expenses. The
committee should disallow any non-audit work that will conflict with his duties as an
External Auditor or may pose a threat to his independence. The non audit work, if
allowed, should be disclosed in the corporation's Annual Report and Annual
Corporate Governance Report;
• Reviews and approves the lnterim and Annual Financial Statements before their
submission to the Board, with particular focus on the following matters:
i. Any change/s in accounting policies and practices
ii. Areas where a significant amount of judgment has been exercised
iii. Significant adjustments resulting from the audit
iv. Going concern assumptions
v. Compliance with accounting standards
vi. Compliance with tax, legal and regulatory requirements

AUDIT PROCEDURE
A. RELATING TO PROFIT AND LOSS ACCOUNT
B. RELATING TO BALANCE SHEET
Four Important Audit Points in Insurance Company Profit & Loss Account
PREMIUM
• Insurance premium is collected upon issuing policies. It is the consideration for
bearing the risk by the insurance company. The premium collections are credited to
a separate bank account and no withdrawals are normally permitted from that
account for meeting the general expenditure. As per the policy of the insurance
company, the collections are transferred to the Regional Office or Head Office.
VERIFICATION OF PREMIUM
Verification of premium is of utmost importance to an auditor. The auditor should apply the
following procedures: -
• Before commencing verification of premium income, the auditor should look into
the internal controls and compliance which are laid down for collection and
recording of the premiums.
• Cover notes should be serially numbered
• The auditor should check whether Premium Registers have been maintained
chronologically, giving full particulars including service tax charged as per acceptance
advice on a day -to-day basis.
 • The auditor should verify whether the figures of premium mentioned in the register
tally with those in General Ledger.
• The auditor should verify whether instalments falling due on or before the balance
sheet date, whether received or not, have been accounted for as premium income as
for the year under audit.
CLAIMS
The auditor should determine the total number of documents to be checked giving due
importance to claim provisions of higher value.  Claims under policies comprise the claims
paid for losses incurred, and those estimated or anticipated claims pending settlements
under the policies. Settlement cost of claims includes surveyor fee, legal expenses, etc. 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.
VERIFICATION OF CLAIMS
The auditor should obtain from the divisions/branches, the information for each class of
business. After that auditor should look after the following views-
 Check whether provision has been made for all unsettled claims.
 Check whether provision has been made for only such claims for which the company
is legally liable.
 Check whether provision made is normally not in excess of the amount insured.
 To check in case of co-insurance arrangements, the company has made provisions
only in respect of its own share of anticipated liability.
 To check claimed paid should be duly sanctioned by the authority concerned
COMMISSION
• An insurance business is solicited by insurance agents. The remuneration of an agent
is paid by way of commission which is calculated by applying a percentage to the
premium collected by him. Commission is payable to the agents for the business
procured and is debited to Commission on Direct Business Account.
VERIFICATION OF COMMISSION 
The auditor can do the verification of commission in the following way-
• Voucher disbursement entries with reference to the disbursement vouchers with
copies of commission bills and commission statements.
• Check whether the vouchers are authorized by the officers- in –charge as per rules
and income tax is deducted at source, as applicable.
• Test check correctness of amounts of commission allowed.
 • To check whether commission outgo for the period under audit been duly accounted
or not.
OPERATING EXPENSES RELATED TO INSURANCE BUSINESS 
All the administrative expenses in an insurance company are broadly classified under 13
heads as mentioned in Schedule IV. The auditor should check whether the required are as
per Insurance Act:
 Expenses in excess of Rs.5 Lakhs or 1% of net premium, whichever is higher, should
be shown separately; and
 Expenses not directly relating to insurance business should be shown separately for
example, expenses relating to investment department, bank charges etc.
Three Important Audit Points in Insurance Company Balance Sheet
1.INVESTMENTS
The auditor should keep in mind the following provisions related to Investments  of the
Insurance Act, 1938 while examining the investments-of an insurance company-
a. An insurance company can only invest in approved securities. However, it can invest
otherwise than in approved securities if the following conditions are satisfied.
• • Such investments should not exceed 25% of the total investments; and
• • Such investments are made with the consent of board of directors.
b. An insurer should not invest in shares or debentures of insurance or Investment Company
in excess of least of the following:
• • 10% of its own total assets;
• • 2% of the investee’s subscribed share capital or debentures.
c. An insurer company should not invest in shares or debentures of a company other than
insurance or investment company in excess of least of the following
• • 10% of its own total assets;
• • 10% of investee’s subscribed share capital or debentures.
d. An insurance company cannot invest in shares and debentures of a private company.
• e. The insurance companies cannot invest the funds of its policy holders outside
India.
VALUATION OF INVESTMENT
Accounting for investments, do not apply to insurance companies. The salient features of
valuation guidelines laid down for insurance companies are discussed as follows: 
 a. Real Estate Investment Property - Such investments should be valued at historical cost
less accumulated depreciation and impairment loss.
b. Debt Securities - Debt securities including Government Securities and Redeemable
Preference Shares are required to be considered as ‘held till maturity’ securities and shall be
measured at historical cost.
c. Equity securities and derivate instruments traded in active markets - the equity
securities and derivative instruments that are listed are required to be measured at the fair
value at the balance sheet date.
Additional Info's of Investments
Insurance company investment functions are responsible for taking profits earned from
policyholder premium payments and investing them in financial instruments such as bonds,
stocks, mortgages and real estate. In some cases, insurance investment teams may also lead
mergers and acquisitions. The management of the investment function is an important
element of an insurance company's profitability. Insurance companies face less regulation,
on the securities trading front, than banking, broker dealer and investment management
companies.
2. CASH AND BANK BALANCES
The auditor should apply the following audit procedures for verification of claims:
• The auditor should check whether late collections of cash and cheques on the last
working day of the financial year, which could not be deposited into bank account on
the same day, have been identified and booked as Cash in Hand and Cheques in
Hand Account, respectively.
• The auditor may apply test check on the bank transactions.
• The auditor should also check Bank Reconciliation statement.
• The auditor should obtain confirmation of Bank Balances for all operative and
inoperative accounts.
• The auditor should physically verify Term Deposit Receipts issued by bankers.
• The auditor should verify the deposits and withdrawals transactions at random and
check whether the Account is operated by authorized persons only .
• In case of funds, in -transit, he should verify that the same are properly reflected as
part of bank balance.
3. OUTSTANDING PREMIUM AND AGENTS’ BALANCE 
The audit procedures, which may be followed with regards to agent’s balance, are as
follows:
a. Verify whether agent’s balances and outstanding balances in outstanding premium
account have been listed, analyzed and reconciled for the purposes of audit.
 b. Verify whether recoveries of large outstanding have been made in post audit period.
c. Verify whether there is any old outstanding debit or credit balances as at the
yearend which require adjustment. A written explanation may be obtained from the
management is to their nature.
d. Verify that agent’s balances do not include employees’ balances and balances of
other insurance companies.
e. Verify that no credit of commission is given to agents for businesses directly
procured by it.
Books and Registers to be maintained
Registers
1. Register of Policies
2. Register of Claims
Books of Accounts
1. Cashbook.
2. Ledger.
3. Subsidiary Records.
4.Control Register
Submission of Reports and Reports
Every insurer is required to furnish to the authority a certified copy of every report on the
affairs of the concern. The audited accounts and statements shall be printed and four copies
thereof shall be furnished as returns to the Authority within 6 months.
The report of the auditors on the financial statements
1. That they have obtained all the information and explanations.
2. Examination of books of accounts.
3. Audited or unaudited proper returns from branches and other offices.
4. Examination Revenue Accounts, Profit and Loss Account and Balance Sheet and
Receipts & Payments Account.
5. The duly certification of actuarial valuation of liabilities.
The auditors shall express their opinion on
1.
(i) a true and fair view of Balance Sheet
(ii) a true and fair view of Revenue Account
(iii) a true and fair view of Profit and Loss Account
(iv) a true and fair view of Receipts and Payments Account
2. In accordance with the requirements of the Insurance Act, 1938, the Insurance Regulatory
and Development Authority Act, 1999 and the Companies Act, 1956, to the extent
applicable and in the manner as so required.
3. Investments in accordance with the provisions of the Act and the Regulations.
4. Appropriate Accounting policies and applicable Accounting Standards.
The auditors shall further certify that 
1. Management report properly reviewed
2. The insurer has complied with all the terms and conditions of the registration
specified by the Authority.
A certificate signed by the auditors must certify that 
1. Verified the cash balances and the securities and life interest
2. Extension can be done in case of trusts.
3. No part of the assets applied in contravention of the provisions of the Insurance Act,
1938.