Date: 30 August 2021

VIRTUAL COACHING CLASSES

ORGANISED BY BOS (ACADEMIC), ICAI

FINAL LEVEL

CHAPTER 10 - AUDIT OF INSURANCE COMPANY

Faculty: CA Achal Jain

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1. 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’.
Insurance contracts are of two types i.e. indemnity and benefit. Indemnity contract is a re-
imbursement of the actual loss incurred by the insured. Generally non-life insurance contracts
are re- imbursement contracts. Examples are loss by fire or repair cost of a motor vehicle. The
actual cost/value of loss incurred is re-imbursed/indemnified to the policyholder.
An benefit contract is not an actual re-imbursement of the cost/value of loss incurred but is a
lumpsum amount which can be construed to be equal to the cost/value of loss incurred.

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 Eg 1 Sum assured in a life insurance is a benefit contract as the value of loss of life cannot
be computed but is a lumpsum amount.
Eg 2 Another example of a difference between the two is a health insurance contract which
re-imburses for the actual hospital bills (re-imbursement contract) but instead of pre-
imbursing the actual cost, if the insurance company pays a lumpsum amount of ` 500 per
day of hospitalization, then that contract is a benefit contract.
The insurance industry occupies a very important place among financial services all over the
world. Today insurance affects people from all walks of life. Individuals as well as business firms
turn to insurance for managing various risks. Everyday new coverage is added to the existing
policy. The expanding scope of insurance highlights the growing importance of insurance to
individuals and organizations alike. A proper appreciation of what insurance is and what it can
do to help an individual or an organization is therefore necessary.

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Life Insurance industry is one of the flourishing industries in today’s globalised world. Next to
banking, the life insurance industry is growing both in terms of economic impact as well as the
one who generates employment opportunities in today’s emerging markets such as India. Life
insurance deals with the insurance of individuals, groups, and pension plans. Since 1st
September, 1956, transacting life insurance business in India was the exclusive privilege of the
nationalised insurance company viz., LIC. However, with the passing of the IRDA Act, 1999, the
life insurance sector has been thrown open to private players.
Insurance can be broadly classified as (i) Life Insurance and (ii) General Insurance.
As defined under the Insurance Act, 1938 ‘Life Insurance business means business of effecting
contracts of insurance upon human life’ whereas ‘general insurance business’ means fire,
marine or miscellaneous insurance business, whether carried on singly or in combination with
one or more of them.

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Important points of distinction between Life Insurance and General Insurance

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2. LEGAL FRAMEWORK
It is important for the auditor to familiarize himself with various statutes governing the
insurance industry. The auditor, while familiarizing himself with various rules, regulations,
relevant notifications should also look into the important aspects arising out of those which
might have an effect on determination of nature, timing and extent of audit procedures, while
performing his role as an auditor. The Regulator for Insurance Companies is Insurance
Regulatory & Development Authority of India (IRDAI).

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:

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 Various regulations/guidelines/notifications issued by IRDAI from time to time. As of today there are
530 directions from IRDAI in the form of circulars, Regulations, Guidelines. Notifications, & Orders.
Some relevant statutory provisions are discussed below:
Insurer -Section 2(9) of the Insurance Act, 1938 defines the term ‘Insurer’ as:
a) an Indian Insurance Company, or
b) a statutory body established by an Act of Parliament to carry on insurance business, or
c) an insurance co-operative society, or
d) a foreign company engaged in re-insurance business through a branch established in India.
It may be noted that a "foreign company" shall mean a company or body established or incorporated under a law of any country
outside India and includes Lloyd's established under the Lloyd's Act, 1871 (United Kingdom) or any of its Members.
Policy Holder - Section 2(2) of the Insurance Act, 1938 defines the term policy holder as a person to whom the whole of the
interest of the policy holder in the policy is assigned once and for all, but does not include an assignee thereof whose interest in
the policy is defensible or is for the time being subject to any condition.
Prohibition of Insurance Business by Certain Persons -Third proviso to section 2C(1) of the Insurance Act, 1938 (inserted by
the IRDA Act, 1999) prohibits persons other than an Indian insurance company to begin to transact the insurance business after
the commencement of the IRDA Act, 1999.

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 2.1 Registration of Indian Insurance Companies:
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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 2.2 Requirements as to the Minimum Paid-up Capital:
The minimum paid-up equity share capital of an Indian insurance company carrying on
insurance business should be `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.
Insurance companies are required to maintain a minimum solvency ratio of 150%. Solvency
Ratio is the excess of assets over liabilities of an Insurance Company. There is a detailed
working provided by IRDAI on the manner of computing Solvency Margin.

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 2.3 Insurance Regulatory and Development Authority (IRDA) Act, 1999 and
Regulations framed thereunder

As mentioned earlier, the IRDA Act, 1999 has established the Insurance Regulatory and
Development Authority (the Authority) and has also provided for establishment of the
Insurance Advisory Committee to advise the Authority on various matters. The IRDA Act, 1999
has also made amendments to the Insurance Act, 1938, the Life Insurance Corporation Act,
1956 and the General Insurance Business (Nationalisation) Act, 1972 by insertion of the First,
Second and Third Schedules to the IRDA Act, 1999. These Schedules contain amendments to
rationalise the provisions of the Insurance Act, 1938 and other statutes with the IRDA Act,
1999 and the Regulations.

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 3. FORM AND CONTENTS OF FINANCIAL STATEMENTS
Every insurer, in respect of insurance business transacted and in respect of shareholder’s
funds, is required to prepare a Balance Sheet, a Profit and Loss Account, a separate Account of
Receipts and Payments, a Revenue Account for each year in accordance with the Regulations
as may be specified. Every insurer should keep separate accounts relating to funds of
shareholders and policyholders.
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

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 and auditor’s report of companies carrying on insurance business. The Regulations contain
three schedules.

4. 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

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 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.
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.
The financial statements under section 12 include Balance Sheet, Profit and Loss Account,
Revenue Account. Section 12 of the Insurance Act, 1938 does not cover the requirement for
audit of the Receipts and Payments Account of an insurer. However, sub-section (1) of section
11 of the Insurance Act, 1938 requires that every insurer, in respect of insurance business
transacted by him and in respect of his shareholders’ funds, should prepare, at the end of
each financial year, a Balance Sheet, a Profit and Loss Account, a separate Account of Receipts

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 and Payments and a Revenue Account in accordance with the regulations as may be specified.
Since Receipts and Payments Account has been made a part of financial statements of an
insurer, it is implied that the Receipts and Payment Account is also required to be audited.
The Authority, in exercise of the powers conferred by the Insurance Act, 1938, issued the IRDA
(Preparation of Financial Statements and Auditor’s Report of Insurance Companies)
Regulations, 2002. These Regulations require the auditor of an insurance company to report
whether the Receipts and Payments Account of the insurer is in agreement with the books of
account and returns. The auditor is also required to express an opinion as to whether the
Receipts and Payments Account has been prepared in accordance with the provisions of the
relevant statutes and whether the Receipts and Payments Account gives a true and fair view of
the receipts and payments of the insurer for the period under audit. This also implies that the
auditor is required to audit the Receipts and Payments Account of the insurer.

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 4.1 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 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.

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 4.2 Remuneration of Auditors
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.
4.3 Rights and duties of Branch Auditors
It is a practice in certain public sector insurance companies that the divisional offices prepares
atrial balance in a manner that it provides information required to be included in the various
formats of financial statements prescribed in the Insurance Act. Each trial balance, in which
are incorporated the figures relating to the branches of the divisions, is required to be audited
and the report thereon is furnished to the statutory auditors. The divisions of the companies
carrying on general insurance business are treated for the purposes of the Companies Act,
2013 as their branches. It follows that the branch auditors appointed to conduct the audit of
the divisions have the same rights and obligations under the statute as those of the, statutory

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 auditors to whom they are expected to submit their report.
However, in case of private companies, the accounting and operational systems of the
company are centralized and hence, the principle of divisional offices preparing accounts and
they being consolidated is not applicable to such companies. The accounts of all the divisions,
trial balances and their balance sheets are prepared at the Head office only.
4.4 Investment Risk Management Systems and Process Audit
The IRDA vide Circular No. INV/CIR/008/2008-09 Dt. 22nd Aug, 2008 advised that the
Chartered Accountants firm, which is not the Statutory or Internal or Concurrent Auditor of
the concerned Insurer shall certify that the Investment Risk Management Systems and
Processes are in place. For this purpose, the ICAI has also issued “Technical Guide on Review
and Certification of Investment Risk Management Systems and Processes of Insurance
Companies” in consultation with the IRDA.

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 4.5 Direction of C&AG
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.
4.6 Applicability of CARO, 2016
The additional reporting requirement under Companies (Auditor’s Report) Order, 2016 is
exempted for an insurance company as defined under the Insurance Act, 1938.

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 5. REQUIREMENTS OF THE INSURANCE ACT, 1938 VIS A VIS THE COMPANIES
ACT, 2013
Disclosures under the Companies Act, 2013 relating to the Balance Sheet and Profit and Loss
Account of the company also apply to an insurance company.
Proviso to sub-section (1) of section 129 of the Companies Act, 2013 provides that the
financial statements of a company shall not be treated as not disclosing a true and fair view of
the state of affairs of the company, merely by reason of the fact that they do not disclose, in
the case of an insurance company, any matters which are not required to be disclosed under
the Insurance Act, 1938, or the IRDA Act, 1999. However, if an insurance company so desires,
it may disclose additional information that is not specifically required to be disclosed
under the Insurance Act, 1938.
According to section 1 of the Companies Act, 2013, the provisions of the Companies Act, 2013
shall apply to insurance companies, except in so far as the said provisions are inconsistent
with the provisions of the Insurance Act, 1938 or the IRDA Act, 1999. Section 117 of Insurance
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 Act, 1938, provides that nothing in the Insurance Act, 1938 shall affect the liability of an
insurer, being a company, to comply with the provisions of the Companies Act, 2013 in matters
not otherwise specifically provided for by Insurance Act, 1938. Therefore, the provisions of the
Companies Act, 2013 would be applicable wherever the Insurance Act, 1938 does not cover
the relevant aspects and the insurer is a company within the meaning of the Companies Act,
2013. The provisions of the Companies Act, 2013 should be applied in a harmonised manner
with the provisions of the Insurance Act, 1938, and the rules and regulations framed
thereunder.
Note: Students may refer Chapter 5 on the Company Audit for the requirements given under
the Companies Act, 2013.
6. AUDITING IN AN INFORMATION TECHNOLOGY ENVIRONMENT
The Information Technology environment does not materially affect the scope and objectives
of an audit. However, in view of the computerisation in general and the insurance industry in

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 particular, the auditor has to familiarise himself with the IT environment in insurance
companies. He should gain an understanding to the workflow of various important
transactions.
The auditor may select a few transactions of each type and trace them through the system,
i.e., identify the audit trail. This would help him in not only understanding flow of transactions
and manner of processing but it will also provide him evidence as to whether the results of
processing are correct. Where the auditor is satisfied about the design and operation of the IT
system, he may limit the extent of his checking of transactions in so far as those aspects are
concerned, where the IT system has in-built control.
The auditor should seek a written representation from the management about any changes in
the IT systems that have taken place during the year. Where different systems have been in
operation during the year, the auditor should separately examine the efficacy of each such
system. The auditor should also obtain a written representation from the management that
there have been no changes in the system during the year other than those specified.

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 7. 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.
In addition auditor should familiarize himself with the provisions of Section 44 [The First
Schedule of the Income Tax Act, 1961 applicable for Insurance Business].
8. SPECIFIC CONTROL PROCEDURES RELATED TO AUDIT OF LIFE
INSURANCE COMPANIES
Life Insurance Industry in India has witnessed varied product designs during last 5 decades. Based
on the peculiarities involved, Life Insurance Products can broadly be categorised as follows:

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 8.1 Requirements of Schedule A to the IRDA (Preparation of Financial Statements
and Auditors’ Report of Insurance Companies) Regulations, 2002
Part I: Accounting Principles for Preparation of Financial Statements
1. Applicability of Accounting Standards: Every balance sheet, Revenue Account (Policy
holders account), Receipts and Payments account (Cash flow statement) and Profit and
Loss account (Shareholder’s account) of an insurer shall be in conformity with the
Accounting standards (AS) issued by the ICAI, to the extent insurers carrying on life
insurance business, except that:
▪ Accounting standard 3 (AS 3) – Cash flow statements – Cash flow statement shall be
prepared only under the direct method.
▪ Accounting standard 17 (AS 17) – Segment Reporting – shall apply to all insurers
irrespective of the requirements regarding the listing and turnover mentioned therein.

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 2. Premium: Premium shall be recognized as income when due. For linked business the due
date for payment may be taken as the date when the associated units are created.
3. Acquisition Costs: Acquisition costs if any shall be expensed in the period in which they
are incurred. Acquisition costs are those costs that vary with and are primarily related to
the acquisition of new and renewal insurance contracts. The most essential test is the
obligatory relationship between costs and the execution of insurance contracts (i.e.
commencement of risks)
4. Claims: The ultimate cost of claims shall comprise the policy benefit amount and specific
claims settlement costs, wherever applicable.
5. Actuarial valuation- Liability for Life Policies: The estimation of liability against life
policies shall be determined by the appointed actuary of the insurer pursuant to his
annual investigation of the life insurance business. Actuarial assumptions are to be
disclosed by way of notes to the account.

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 The liability shall be so calculated that together with future premium payments and
investment income, the insurer can meet all future claims (Including bonus entitlements
to policyholders) and expenses.
6. Procedure to determine ‘Value of Investments’: An insurer shall determine value of
investments in the following manner–
a) Real estate investment property – The value of investment property shall be
determined at historical cost, subject to revaluation at least once in every three
years. The change in the carrying cost of the investment property shall be taken to
revaluation reserve.
▪ The insurer shall assess at each balance sheet date whether any impairment of
the property has occurred.
▪ Gains/losses arising due to changes in the carrying amount of real estate shall be
taken to equity under ‘Revaluation Reserve’. The Profit on sale of investments or

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 ▪ loss on sale of investments, as the case maybe shall include any accumulated
changes in the carrying amount previously recognized in equity under the heading
revaluation reserve in respect of particular property and being recycled to the
relevant revenue account or profit and loss account on sale of that property.
▪ The bases for revaluation shall be disclosed in the notes to accounts. The authority
may issue directions specifying the amount to be released from the revaluation
reserve for declaring bonus to the policyholders. For the removal of doubt, it is
clarified that except for the amount that is released to policyholders as per the
authority’s direction, no other amount shall be distributed to shareholders out of
revaluation reserve account.
▪ An impairment loss of shall be recognized as an expense in the revenue/ Profit and
loss account immediately, unless the asset is carried at revalued amount. Any
impairment loss of a revalued asset shall be treated as a revaluation decrease of
that asset and if the impairment loss exceeds the corresponding revaluation reserve,
such excess shall be recognized as expense in the Revenue/Profit and loss account.

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 b) Debt Securities – Debt securities, including government securities and redeemable
preference shares, shall be considered as ‘held to maturity’ securities and shall be
measured at historical cost subject to amortization.
c) Equity Securities and Derivative Instruments that are traded in markets - Listed
equity securities and derivative instruments that are traded in active markets shall be
measured at fair value on the balance sheet date. For the purpose of calculation of
fair value, the lowest of the last quoted closing price at the stock exchanges where
the securities are listed shall be taken.
▪ The insurer shall assess on each balance sheet date whether any impairment of
listed equity security(ies)/ derivative(s) instruments has occurred.
▪ An active market shall mean a market, where the securities traded are
homogenous, availability of willing buyers and willing sellers is normal and the
prices are publicly available.
▪ Unrealised gains/losses arising due to changes in the fair value of the listed equity
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 ▪ shares and the derivative instruments shall be taken to equity under the head
‘Fair value change account’. The profit on sale of investments or loss on sale of
investment as the case maybe shall include accumulated changes in the fair value
previously recognized under equity under the heading ‘Fair value changes
account’ in respect of a particular security and being recycled to the relevant
Revenue account or Profit and loss account on actual sale of that security.
▪ The Authority may issue directions specifying the amount to be released from the
Fair Value Change Account for declaring bonus to the policyholders. For the
removal of doubt, it is clarified that except for the amount that is released to
policyholders as per the Authority’s prescription, no other amount shall be
distributed to shareholders out of Fair Value Change Account. Also, any debit
balance in Fair Value Change Account shall be reduced from profit/free reserves
while declaring dividends.
▪ The insurer shall assess, on each balance sheet date, whether any impairment has

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 ▪ occurred. An impairment loss shall be recognized as an expense in Revenue/Profit
and Loss Account to the extent of the difference between the re-measured fair
value of the security/investment and its acquisition cost as reduced by any
previous impairment loss recognized as expense in Revenue/ Profit and Loss
Account. Any reversal of impairment loss earlier recognized in Revenue/Profit and
Loss Account shall be recognized in Revenue/Profit and Loss Account.
(d) Unlisted and other than actively traded Equity Securities and Derivative
Instruments– Unlisted equity securities and derivative instruments and listed
equity securities and derivative instruments that are not regularly traded in active
markets shall be measured at historical cost. Provision shall be made for
diminution value of such investments. The provision so made shall be reversed in
subsequent periods if estimates based on external evidence show an increase in
the value of the investment over its carrying amount. The increased carrying
amount of the investment due to the reversal of the provision shall not exceed
the historical cost.

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 For the purposes of this regulation, a security shall be considered as being not
actively traded, if as per guidelines governing mutual funds laid down from time
to time by SEBI, such a security is classified as "thinly traded".
7. Loans: Insurance companies not only cater valuable death cover under policy but also
extend helping hand by way of granting loan under policies during life time of
policyholder when he is in need of funds. As per the privileges and conditions given on
the policy documents, insurer grants loan on the security of policy document to the
person who is entitled for the same.
Loans shall be measured at historical cost subject to impairment provisions. The
impairment provisions shall not be lower than the amounts derived on the basis of
guidelines prescribed from time to time by the Reserve bank of India, that apply to
Companies and Financial institutions.
8. Linked (ULIP) Business: The accounting principles used for valuation of Investments are to
be consistent with principles as enumerated above. A separate set of financial

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 statements, for each segregated fund of the linked business should be annexed.
Segregated funds represents funds maintained in accounts to meet specific investment
objectives of policy holders who bear the Investment risk. Investment income/ gains and
losses generally directly accrue to the policy holders.
9. Funds for Future Appropriation: The funds for future appropriation represent all funds,
the allocation of which, either to policyholders or to the shareholders, has not been
determined by the end of the financial year.

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B. The following accounting policies shall form an integral part of the financial statements

All significant accounting policies in terms of

the accounting standards issued by the ICAI, Any departure from the
and significant principles and policies given accounting policies shall be
in Part I of Accounting Principles. Any other separately disclosed with reasons
accounting policies, followed by the insurer, for such departure.
shall be stated in the manner required under
Accounting Standard AS 1 issued by the
ICAI.

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Part III: General Instructions for Preparation of Financial Statements:
1. The corresponding amounts for the immediately preceding financial year for all items
shown in the Balance Sheet, Revenue Account, Profit and Loss Account and Receipts and
Payments Account shall be given.
2. The figures in the financial statements may be rounded off to the nearest thousands.
3. Interest, dividends and rentals receivable in connection with an investment should be
stated at gross amount, the amount of income-tax deducted atsource should be included
under 'advance taxes paid and taxes deducted at source.
4. (I) For the purposes of financial statements, unless the context otherwise requires—
a) the expression 'provision' shall, subject to (II) below mean any amount written off or
retained by way of providing for depreciation, renewals or diminution in value of
assets, or retained by way of providing for any known liability or loss of which the
amount cannot be determined with substantial accuracy;
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 b) the expression 'reserve' shall not, subject to as aforesaid, include any amount written
off or retained by way of providing for depreciation, renewals or diminution in value of
assets or retained by way of providing for any known liability or loss;
c) the expression 'capital reserve' shall not include any amount regarded as free for
distribution through the profit and loss account; and the expression 'revenue reserve'
shall mean any reserve other than a capital reserve;
d) the expression liability" shall include all liabilities in respect of expenditure contracted
for and all disputed or contingent liabilities.
(II) Where:
a) any amount written. off or retained by way of providing for depreciation, renewals or
diminution in value of assets, or
b) any amount retained by way of providing for any known liability or loss, is in excess of
the amount which in the opinion of the directors is reasonably necessary for the
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 purpose, the excess shall be treated as a reserve and not provision.
5. The company shall make provisions for damages under lawsuits where the management is
of the opinion that the award may go against the insurer.
6. Extent of risk retained and re-insured shall be separately disclosed.
7. Any debit balance of the Profit and Loss Account shall be shown as deduction from
uncommitted reserves and the balance, if any, shall be shown separately.

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Part IV: Contents of Management Report
There shall be attached to the financial statements, a management report containing, inter alia,
the following duly authenticated by the management:
1. Confirmation regarding the continued validity of the registration granted by the Authority;
2. Certification that all the dues payable to the statutory authorities have been duly paid;
3. Confirmation to the effect that the shareholding pattern and any transfer of shares during
the year are in accordance with the statutory or regulatory requirements;
4. Declaration that the management has not directly or indirectly invested outside in India the
funds of the holders of policies issued in India.
5. Confirmation that the required solvency margins have been maintained.
6. Certification to the effect that the values of all the assets have been reviewed on the date
of the Balance Sheet and that in his (Insurer) belief the assets set forth in the Balance
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 Sheets are shown in the aggregate at amounts not exceeding their realisable or market
value under respective headings of the Assets.
7. Certification to the effect that no part of the life insurance fund has been directly or
indirectly applied in contravention of the provisions of the Insurance Act, 1938 (4 of 1938)
relating to the application and investment of the Life Insurance funds.
8. Disclosure with regards to the overall risk exposure and strategy adopted to mitigate the
same.
9. Operations in other countries, if any, with a separate statement giving the Management’s
estimate of country risk and exposure risk and the hedging strategy adopted.
10. Ageing of claims indicating the trends in average claim settlement time during the
preceding five years;
11. Certification to the effect as to how valuation of Investments has been carried out.

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12. Review of asset quality and performance of investment in terms of portfolios, i.e..,
separately in terms of real estate, loans, investments, etc.
13. A responsibility statement indicating therein that:
a) in the preparation of financial statements, the applicable accounting standards, principles
and policies have been followed along with proper explanations relating to material
departures, if any;
b) the management has adopted accounting policies and applied them consistently and
made judgments and estimates that are reasonable and prudent so as to give a true and
fair view of the state of affairs of the Company at the end of the financial year and of the
Operating profit or loss of the Company for the year.
c) the management has taken proper and sufficient care for the maintenance of adequate
accounting records with the applicable provisions of the Insurance Act, 1938 (4 of 1938)/
Companies Act, 2013, for safeguarding the assets of the Company and for preventing and
detecting fraud and other irregularities;
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 d) the management has prepared the financial statements on a going concern basis.;
e) the management has ensured that an internal audit system commensurate with the
size and nature of the business exists and is operating effectively;
14. A schedule of payments, which have been made to individuals, firms, companies and
organisations in which Directors of the Insurer are interested.
8.2 Audit of Accounts of Life Insurance Companies
The internal control functions have been categorized below under main operational cycles
considering the peculiar nature of life insurance business. Areas where the internal controls are
similar to the ones adopted by other companies such as for cash and bank, receipts and
payments and fixed assets, have to be dealt with as per the publications on the Internal Control
Questionnaire, published by the Institute of Chartered Accountants of India. Since various
operational cycles are inter-linked, the internal controls operating within the systems of such
cycles should be reviewed simultaneously.

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Areas which are peculiar to Life Insurance business are enumerated below:
1. Actuarial Process: Actuaries in Life Insurance business have gained tremendous
importance. The role of Actuary in life insurance has shifted from supervising compliance to
certify whether products and financial reports are in accordance with the general
regulatory guidelines.
The job of actuary or actuarial department in any Life Insurance Company involves, detailed
analysis of data to quantify risk. The actuarial department is calculating and modelling hub
of the Company. Within the department fundamentals of Insurance business is determined
from pricing to policy valuations techniques.
Role of Auditor: Auditors in the Audit report are required 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.

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 Hence, Auditors generally rely on the Certificate issued by the Appointed Actuary, certifying
the Policy liabilities. However, Auditor may discuss with the Actuaries with respect to
process followed and assumptions made by him before certifying the Policy liabilities.

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2. Underwriting: A proposal is an application for an insurance cover. The process of verifying
the level of risk in each new entrant is called ‘selection’ or ‘underwriting’.
The underwriter assesses the risk and determines the premium to be charged. The function
of the underwriter is to acquire-or to “write”-business that will bring money to the
insurance company, and to protect the company’s business from risks that they feel will
make a loss. The underwriters may either decline the risk or may provide a quotation in
which the premiums have been loaded or in which various exclusions have been stipulated,
which restrict the circumstances under which a claim would be accepted and paid.
Role of Auditor: While verifying the process of underwriting, the objective of the Audit
should be to review the process of acceptance of risk through the underwriting process,
and 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.

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3. Reinsurance: Reinsurance is a risk mitigating tool adopted by Insurer whereby the risk
underwritten by one Insurer is transferred partially to another Insurer. In other words,
Reinsurance means one insurer purchasing coverage from a second insurance company for
a risk that the first insurer is insuring.
Role of Auditor: The primary objective of the audit should be to check and confirm that
reinsurance premium calculation and payment is in accordance with the agreement with
the reinsurer. Necessary provision has been made for outstanding reinsurance premium
and is properly accounted for in books of accounts under respective heads.
The audit in this regard would normally cover the followings areas of the reinsurance:
i. Verification of agreements entered with the reinsurer.
ii. Updating/ renewals of agreements, and verifying whether Insurer has adhered to the
terms and conditions of the agreement.

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 iii. Verification of payments made to the reinsurer and verifying whether adequate
provisions are carried out in books.
4. Free Look Cancellation (FLC) : As per clause 6(2) of IRDA (Protection of Policyholders
Interest) Regulations, 2002, “the insurer shall inform by the letter forwarding the policy
that 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 where the insured disagrees to any of those
terms or conditions, he has the option to return the policy stating the reasons for his
objection, when he shall be entitled to a refund of the premium paid, subject only to a
deduction of a proportionate risk premium for the period on cover and the expenses
incurred by the insurer on medical examination of the proposer and stamp duty charges”.
Accordingly, 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 & 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 –e-mail, fax and letters depending on insurer’s policy. In case of
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 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.

Role of Auditor : The primary objective of the audit is to check and confirm that FLC
requests are received within 15 days from receipt of policy document by the policy holder,
verification of signatures of the policy holder and processing of FLC request within TAT
defined by the insurer. Also checking of appropriate accounting entries are recorded for
refund.

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 5.Policy Lapse and Revival: “Lapse” is the discontinuance of the policy owing to non-payment of
premium dues. The term “lapse” is not defined in the insurance legislation, except stating that “a policy
which has acquired a surrender value shall be kept alive to the extent of the paid-up sum assured” -
vide section 113(2) of the Insurance Act,1938.
In order to keep a life insurance policy “in force” the policy holder is required to pay premiums when
due (either monthly/ quarterly/annual/bi-annual). If payment is missed, the insurer allows a period of
15/30 days from the premium due date for making the payment. This period is termed as “grace
period”. If the policy holder does not make the payment within the grace period, the policy gets
“lapsed”. Thus, a payment within the grace period is deemed to be a payment on the due date.
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 five years. 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.

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 The insurer should have taken persistent measures for monitoring receipt of renewal
premium within the due dates. In case of most of insurers, policy lapsation is tracked over
the PMS, wherein premium due dates are monitored by the system once initial data of the
policy is entered in the system.
Role of Auditor: The primary objective of the audit is 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. In case of revival request, whether
adequate checks are in place for receipt of outstanding amounts and adequate documents
are obtained before reviving the policy.
6. 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. The process of
surrender is initiated by the policy holder. 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 at branch/processing centre along with the original
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 policy document and the discharge voucher. Eligibility for surrender is mentioned in the
policy document. The policy can be surrendered only when the insured person is alive.
Role of Auditor: The primary objective of the audit is to check and confirm that surrender
requests are received from the policy holder only, and that adequate controls are in place
to ensure proper verification process for checking of request, whether premiums are paid
on regular basis. 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 and appropriate
accounting entries are passed.
7. Premium Collection, Accounting and reconciliation: Premium accounting refers to
recognizing the premium earned by the insurer as income in the accounting system.
Income is recognized as:
i. New business premium – premium received for the first policy year and
ii. Renewal premium – premium received for subsequent policy years.
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 Premium received but not identifiable against any policy would be treated as ‘unallocated
premium’/ ‘suspense amount’.
Further following points should be noted while recognizing the premium:
1) 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.
2) 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.
3) Auditors should also 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.
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Following are the certain illustrative points, Auditors are required to follow during the Audit of
Accounting of Premiums:
(i) Collection of Premium:
❖The premium collections are credited to separate bank account and no withdrawals are normally
permitted from that account for meeting general expenditure.
❖Check whether there is daily reconciliation process to reconcile the amounts collected, entered into
the system and deposited into the bank.
❖Check that there is appropriate mechanism to ensure all the collections are deposited into the Bank
on timely basis.
(ii)Calculation of Premium:
▪Check that Accounting system, employed by the Company, calculates premium amounts
and its respective due dates correctly.
▪Check that system employed as such is equipped to calculate all types of premium modes
correctly.

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 III. Recognition of Income:
▪ Check that premium is recognised only on the basis of ‘Issued Policies’ and not on
underwriting dates.
▪ Check that there is inbuilt mechanism the system all the premium collected are
correctly allocated all various components of the Policies.
▪ Check that there is appropriate mechanism in place to conduct reconciliation on
daily basis and reconciling items, if any, are rectified/ followed up.
IV. Accounting of ‘Advance Premium’:
▪ Check, whether system has capability to identify regular and advance premium.
▪ Check whether there is a process of applying advance premium to a contract
when premium is due.

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 V. Reporting of Premium figures to IRDA/ Management:
▪ Check the methodology for generation of MIS from the system and there is no
manual intervention.
▪ Check the procedure for Maker/ Checker before finalising the MIS.
▪ Check whether there is a reconciliation process between premium Income as per
financials and as reported.
VI. Other Areas:
▪ Check whether there are appropriate SOPs developed by the Companies and are
strictly followed by all the departments/ branches of the Company.
▪ Ensure duly approved Delegation of Authority parameters matrix already in place
for authorisation limits.

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 ▪ Premium recognition and refund of premium are independent processes with
adequate segregation of duties amongst the personnel.
▪ Check that the Company conducts premium reconciliation on daily basis.
▪ Check the robustness of interface between administration and accounting system.
Auditors may also refer to IRDA (Preparation of Financial Statements & Auditors Report of
Insurance Companies) Regulations, 2000 for premium accounting.
8. Claims: Checking of accuracy of processing and accounting of claims lodged with the
Insurer, is the primary objective of Audit of Life Insurance Companies.

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Claims review primarily ensure focus on the following areas:
• Claims lodgement and processing
• Authority matrix for approval of claims
• Review of payouts and disbursements
• Review of compliance to applicable IRDA Regulations, relevant sections of Insurance Act
1938 and the prevention of Money Laundering Act, 2002.
• Review of Reinsurance recovery process
• Review of reporting of claims (life & health) and benefits paid.

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Following are the certain illustrative points, Auditors are required to follow during the Audit
of Claims:
1. Auditor should review the standard policy document template to ensure that the policy
document prescribes the minimum documentary evidence needed to support a claim.
2. Ensure that the Insurer maintains a register or record of claims, in which every claims
are entered along with the date of the claim and date on which the claim was
discharged.
3. In case the claims are rejected, the reasons for the rejections should be closely
reviewed.
4. Check whether all claims received are registered and enter into the system.
5. It should be ensured that there is a system of collecting appropriate KYC documents, as
required, and discrepancies, if any, are intimated to the policyholders within 15 days of
intimation.

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 6. It should be ensured that all the processed claims are accounted into the system
properly.
7. It should be ensured that appropriate provisioning has been carried out, in the cases of
all the claims intimated but not paid.
8. It should be ensured that Claims cost includes the Claims settlement Cost.
9. In case of living/ survival/ maturity / annuity benefits it should be ensured that liability
is automatically triggered.
10. It should be ensured that there is system of regular reconciliation is carried out
between claims management system and General ledger.
11. Liability of claims should be booked net of reinsurance.

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9. 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 however prescribed
separately for the following investment categories:

As Insurers essentially manage the funds for policyholders it becomes imperative for the
insurer to have adequate systems and processes that should not only ensure robust internal
controls, financial transparency and equity but also bring effective governance so as to
serve the interests of the management, stakeholders, consumers and the society, at large.
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.

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 Role of Auditor: The Auditor during his review of Investment Department should mainly
consider the following:
➢ Review the Investment management structure to ensure adequate segregation of duties
between Investment Front office, Mid Office and Back office;
➢ Review of insurer’s Standard Operating Procedures which are prescribed by the IRDA
Regulations and are required to cover the entire gamut of investment related processes
and policies;
➢ Review of insurer’s Investment policy;
➢ Review of functioning and scope and minutes of Investment Committee;
➢ Compliance of all Investment regulations, various other circulars specified by IRDAI and
other regulations specified in the Insurance Act, 1938;

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 ➢ Review of insurer’s Disaster Recovery, Backup and Contingency Plan;
➢ Review of access Controls, authorization process for Orders and Deal execution, etc;
➢ Review of insurer’s Cash Management System to track funds available for Investment
considering the settlement obligations and subscription and redemption of units, etc.
The system should be validated not to accept any commitment beyond availability of
funds and restrict Short Sales at the time of placing the order. Further insurer’s system
should be able to determine the amount of Investible surplus;
➢ Ensure that the system is be able to automatically monitor various Regulatory limits on
Exposure and Rating of debt instruments;
➢ Review of fund wise reconciliation with Investment Accounts, Bank, and Custodian
records;
➢ Ensure that there is split between Shareholders’ and Policyholders’ funds, and
earmarking of securities between various funds namely Life (Participating & Non-

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 Participating), Pension & Group (Participating & Non-Participating) and Unit Linked
Fund;
➢ Review the arrangements and reconciliations of holdings with the insurer’s custodian;
➢ Review and check insurer’s Investment Accounting and valuation policy and the controls
around this process;
➢ insurer’s risk management policies and processes to manage investment risk such as
Market risk, Liquidity risk, Settlement risks, etc;
➢ Determine the extent of activities outsourced and the controls over such activities;
➢ Controls over NAV computation and declaration;
➢ Controls over various system interfaces such as Seamless integration of data, between
front office and back office, in the Investments accounting system;
➢ Flow of data from PMS to the Investment Accounting system;
➢ Controls around personal dealings, insider trading and front running.

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10.Commission payable to Agent: Insurance business is generally solicited by the Insurance
agents. The remuneration of agent is paid by way of commission which is calculated by
applying percentage to premium collected by him. Agency commission contributes towards
significant portion of expenses incurred by the Insurance Commission. Commission is payable
towards generation of new business and towards settlement of renewal premium.
Role of Auditor: The Auditor during his review of Commission paid to Agents should mainly
consider the following:
❖ Review the system established by the Insurer with respect to calculation of
commission to eligible agents accurately and processing the same in timely manner.
❖ Review the commission payment system is in sync with the premium collection system.
❖ Check whether commission paid is within the limit prescribed under Insurance Act.
❖ Check whether commission is clawed-back on the cancelled policies.
❖ Check the completeness of commission processing system.

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10. Operating Expenses related to Insurance Business (Expenses of Management): All the
administrative expenses in an insurance company are broadly classified under 14 heads as
mentioned in Schedule 3 forming part of Financial Statements given under Schedule A to
the Insurance Regulatory and Development Authority (Preparation of Financial Statements
and Auditor’s Report of Insurance Companies) Regulations, 2002. In so far as financial
statements are concerned, this Schedule is part of the Revenue Account to be prepared for
insurance business. Any other expenses are required to be disclosed under the head
‘Others’. Any major expenses (` 5 lacs or in excess of 1% of net premium, whichever is
higher) are required to be shown separately.
Role of Auditor: The auditor should ensure that these expenses are first aggregated and
then apportioned to the Revenue Account of each class of business on a reasonable and
equitable basis. 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

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 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.
a. Legal and Professional Charges: As far as legal and professional charges are concerned,
attention is drawn to the head ‘Claims Incurred’ under Schedule 2 where it is clearly stated
that fees, legal and other expenses should form part of claim cost, and therefore, are not to
be included under the head Legal and Professional Charges.
Role of Auditor: The auditor should ensure that all other expenses which are not covered
under the claims cost are required to be included under this head.
b. Employees’ Remuneration and Welfare Benefits: The employees’ remuneration includes all
kinds of payments made to employees in consideration of their services. The
reimbursement of medical expenses or premium in respect of employees’ health cover is
covered under the employees’ remuneration and welfare. Any medical fees incurred
towards maintenance of health care policies (which are not for employees) are required to

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 be debited to the claims cost under the health care and not to be included under this head.
Any expenses towards medical treatment of employees incurred by the company should
also be included under this head. Non-training expenses have to be shown separately.
Role of Auditor: The auditor is required to ensure the compliance of above.
c. Interest and Bank Charges: All expenses incurred towards maintenance of Bank
Account, interest and other charges levied by bankers to the normal course of business
other than bank expenses relating to investments (interest, bank charges, custodial charges,
etc.) are shown under the head, “Interest and Bank Charges”. Any other interest charged on
the borrowings which could not form part of the Revenue Account not to be included
under this head.
d. Depreciation: Charging of depreciation is governed by Schedule II to the Companies
Act, 2013. In addition, compliance of relevant Accounting Standard is also to be taken care.
e. Interest, Dividend and Rent: An insurance enterprise, like any other, earns interest
dividend and rent through its assets. The interest, dividend and rent earned are to be
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 apportioned between Revenue Account and Profit and Loss Account.
The Regulations require that basis of allocation of interest, dividend and rent between the
Revenue Account and Profit and Loss Account should be clearly indicated in the company’s
accounting policy.
The interest or dividend earned as against the policyholders’ funds is required to be
apportioned to the Revenue Account. The interest earned on, say, grant of vehicle loans,
housing loans, deposits with banks of the shareholders, funds, rent received on let out
properties owned by the company, by way of investments shareholders, funds, etc. are
required to be shown under the profit and Loss Account.

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9. SPECIFIC CONTROL PROCEDURES RELATED TO AUDIT OF GENERAL INSURANCE COMPANY

Fig: Insurance Industries in India

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The system of recording, classifying and summarising the transactions in insurance companies,
is, in substance, no different from other entities. However, in case of insurance companies, the
ledger accounts specially those of premiums, claims, commissions, etc. need to be given greater
attention. The functions of accounting system in general insurance business under IT
environment may be based on:
❖ Premium receipting & issuance of policies based on Underwriting done
❖ Claims module
❖ Agency management module
❖ Accounts module
❖ Investment module
❖ Reinsurance module

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Every insurer, in respect of insurance business transacted and in respect of shareholder’s funds,
is required to prepare a Balance Sheet, a Profit and Loss Account (in respect of transactions of
the shareholders, in their capacity as shareholders), a separate Account of Receipts and
Payments, a Revenue Account (in respect of transactions with policy holders on account of
insurance) for each year in accordance with the Regulations as may be specified. Every insurer
should keep separate accounts relating to funds of shareholders and policyholders.
9.1 Requirements of Schedule B to the IRDA (Preparation of Financial Statements and
Auditors’ Report of Insurance Companies) Regulations, 2002
Part I: Accounting Principles for Preparation of Financial Statements
1. Applicability of Accounting Standards-Every Balance Sheet, Receipts and Payments
Account [Cash Flow statement] and Profit and Loss Account [Shareholders’ Account] of the

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 insurer shall be in conformity with the Accounting Standards (AS) issued by the ICAI, to the
extent applicable to the insurers carrying on general insurance business, except that:
Accounting Standard 3 (AS 3) – Cash Flow Statements – Cash Flow Statement shall be prepared only
under the Direct Method.
Accounting Standard 13 (AS 13) – Accounting for Investments, shall not be applicable.
Accounting Standard 17 (AS 17) - Segment Reporting – shall apply irrespective of whether the
securities of the insurer are traded publicly or not. The minimum segments are prescribed by IRDAI.

2. Premium-Premium shall be recognised as income over the contract period or the period of risk,
whichever is appropriate. Unearned premium as well as premium received in advance, both of
which represent premium income not relating to the current accounting period, shall be
disclosed separately in the financial statements.
A reserve for Unearned Premium, may be created as the amount representing that part of the
premium written which is attributable and to be allocated to the succeeding accounting periods.

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 Premium Received in Advance, which represents premium received prior to the
commencement of the risk, shall be shown separately under the head ‘Current Liabilities’ in
the financial statements.
Unearned premium shall be shown separately under the head ‘Current Liabilities’ and
appropriate disclosures regarding management’s basis of assessment shall be made in the
financial statements.
Premium received in advance shall not be included in the unearned premium and shall be
shown separately.
Premium revenue recognition is based on the pattern of risk to which the insurer is
exposed. An insurer, based on past experience can reliably estimate the pattern of risk for a
particular type of insurance business. Most insurers bring premium revenue to account on
the basis of the passage of time. This is generally appropriate where the risk of events
occurring that give rise to claims is more or less uniform throughout the policy period
subject to any regulatory prescription in this regard.

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 For some classes of insurance, it is usual for the premium to be adjusted as a result of
events and information that becomes known during or after the policy period, e.g. marine
cargo. Further, in some cases, risk pattern may not be evenly spread over the period of
insurance because of the very nature of the risk covered e.g. some infrastructure projects
involving varying degrees of risk factors. A deposit premium is paid in such cases at the
beginning of the policy period and subsequently adjusted. The basis of determination of
premium earned shall be adequately justified, preferably supported by external evidence
such as by certification from an actuary and/or other technical experts. Adequate
disclosure of such basis shall be made.
3. Premium Deficiency-Premium deficiency shall be recognised if the sum of expected claim
costs, related expenses and maintenance costs exceeds related unearned premiums.
For contracts exceeding four years, once a premium deficiency has occurred, future
changes to the liability shall be based on actuarial/technical evaluation.

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4. Acquisition Costs-Acquisition costs, if any, shall be expensed in the period in which they
are incurred. Acquisition costs are those costs that vary with, and are primarily related to,
the acquisition of new and renewal insurance contracts. The most essential test is the
obligatory relationship between costs and the execution of insurance contracts (i.e.
commencement of risk).
5. Claims-The components of the ultimate cost of claims to an insurer comprise the claims
under policies and claims settlement costs. Claims under policies comprise the claims made
for losses incurred, and those estimated or anticipated under the policies.
A liability for outstanding claims shall be brought to account in respect of both direct
business and inward reinsurance business. The liability shall include: -
a) Future payments in relation to unpaid reported claims;
b) Claims Incurred But Not Reported (IBNR) including inadequate reserves (sometimes
referred to as Claims Incurred But Not Enough Reported (IBNER))

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 which will result in future cash/asset outgo for settling liabilities against those claims.
Change in estimated liability represents the difference between the estimated liability for
outstanding claims in respect of claims under policies whether due or intimated at the
beginning and at the end of the financial period. The accounting estimate shall also include
claims cost adjusted for estimated salvage value if there is sufficient degree of certainty of
its realisation.
Actuarial Valuation of claim liability - in some cases: Estimate of claims made in respect of
contracts exceeding four years shall be recognised on an actuarial basis, subject to
regulations that may be prescribed by the Authority. In such cases, certificate from a
recognised actuary as to the fairness of liability assessment must be obtained. Actuarial
assumptions shall be suitably disclosed by way of notes to the account.
Necessary provision for unexpired risk shall be made subject to any minimum, statutorily
required.

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6. Procedure to determine the value of investments -An insurer shall determine the values
of investments in the following manner:-
a) Real Estate – Investment Property- Investment Property shall be measured at historical
cost less accumulated depreciation and impairment loss, residual value being considered
zero and no revaluation being permissible.
The Insurer shall assess at each balance sheet date whether any impairment of the
investment property has occurred.
An impairment loss shall be recognised as an expense in the Revenue/Profit and Loss
Account immediately.
Fair value as at the balance sheet date and the basis of its determination shall be disclosed
in the financial statements as additional information.

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b) Debt Securities-Debt securities including government securities and redeemable
preference shares shall be considered as “held to maturity” securities and shall be
measured at historical cost subject to amortisation.
c) Equity Securities and Derivative Instruments that are traded in active markets-Listed
equity securities and derivative instruments that are traded in active markets shall be
measured at fair value as at the balance sheet date. For the purpose of calculation of fair
value, the lowest of the last quoted closing price of the stock exchanges where the
securities are listed shall be taken.
The insurer shall assess on each balance sheet date whether any impairment of listed
equity security(ies)/ derivative(s) instruments has occurred.
An active market shall mean a market, where the securities traded are homogenous,
availability of willing buyers and willing sellers is normal and the prices are publicly
available.

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 Unrealised gains/losses arising due to changes in the fair value of listed equity shares and
derivative instruments shall be taken to equity under the head ‘Fair Value Change Account’
and on realisation reported in Profit and Loss Account. The ‘Profit on sale of investments’ or
‘Loss on sale of investments’, as the case may be, shall include accumulated changes in the
fair value previously recognised in equity under the heading Fair Value Change Account in
respect of a particular security and being recycled to Profit and Loss Account on actual sale
of that listed security.
For the removal of doubt, it is clarified that balance or any part thereof shall not be
available for distribution as dividends. Also, any debit balance in the said Fair Value Change
Account shall be reduced from the profits/free reserves while declaring dividends.
The insurer shall assess, at each balance sheet date, whether any impairment has occurred.
An impairment loss shall be recognised as an expense in Revenue/Profit and Loss Account
to the extent of the difference between the remeasured fair value of the security/
investment and its acquisition cost as reduced by any previous impairment loss recognised
as expense in Revenue/Profit and Loss Account. Any reversal of impairment loss, earlier
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 recognised in Revenue/Profit and Loss Account shall be recognised in Revenue/Profit and
Loss Account.
d) Unlisted and other than actively traded Equity Securities and Derivative Instruments-
Unlisted equity securities and derivative instruments and listed equity securities and
derivative instruments that are not regularly traded in active market will be measured at
historical costs. Provision shall be made for diminution in value of such investments. The
provision so made shall be reversed in subsequent periods if estimates based on external
evidence show an increase in the value of the investment over its carrying amount. The
increased carrying amount of the investment due to the reversal of the provision shall not
exceed the historical cost.
For the purposes of this regulation, a security shall be considered as being not actively
traded, if its trading volume does not exceed ten thousand units in any trading session
during the last twelve months.

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7. Loans-Loans shall be measured at historical cost subject to impairment provisions.
The insurer shall assess the quality of its loan assets and shall provide for impairment. The
impairment provision shall not be less than the aggregate amount of loans which are
subject to defaults of the nature mentioned below:-
i. interest remaining unpaid for over a period of six months; and
ii. instalment(s) of loan falling due and remaining unpaid during the last six months.
8. Catastrophe Reserve- Catastrophe reserve shall be created in accordance with norms, if
any, prescribed by the Authority. Investment of funds out of catastrophe reserve shall be
made in accordance with prescription of the Authority.
It is clarified that this reserve is towards meeting losses which might arise due to an entirely
unexpected set of events and not for any specific known purpose. This reserve is in the
nature of an amount set aside for the potential future liability against the insurance policies
in force.

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PART II: Disclosures forming part of Financial Statements
A. The following shall be disclosed by way of notes to the Balance Sheet:
1. Contingent Liabilities

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 2. Encumbrances to assets of the company in and outside India.
3. Commitments made and outstanding for Loans, Investments and Fixed Assets.
4. Claims, less reinsurance, paid to claimants in/outside India.
5. Actuarial assumptions for claim liabilities in the case of policies exceeding four years.
6. Ageing of claims – distinguishing between claims outstanding for more than six months
and other claims.
7. Premiums, less reinsurance, written from business in/outside India.
8. Extent of premium income recognised, based on varying risk pattern, category wise,
with basis and justification therefor, including whether reliance has been placed on
external evidence.

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 9. Value of contracts in relation to investments, for

10. Operating expenses relating to insurance business: basis of allocation of expenditure to

various classes of business.
11. Historical costs of those investments valued on fair value basis.
12. Computation of managerial remuneration.
13. Basis of amortisation of debt securities.
14.(a) Unrealised gain/losses arising due to changes in the fair value of listed equity shares
and derivative instruments are to be taken to equity under the head ‘Fair Value Change
Account’ and on realisation reported in profit and loss Account.

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 (b) Pending realisation, the credit balance in the ‘Fair Value Change Account’ is not
available for distribution.
15. Fair value of investment property and the basis therefor.
16. Claims settled and remaining outstanding for a period of more than six months on the
balance sheet date.
B. The following accounting policies shall form an integral part of the financial statements:

All significant accounting policies in terms of

the accounting standards issued by the ICAI, Any departure from the
and significant principles and policies given in accounting policies as aforesaid
Part I of Accounting Principles. Any other shall be separately disclosed with
accounting policies followed by the insurer reasons for such departure.
shall be stated in the manner required under
Accounting Standard AS 1 issued by ICAI.

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C. The following information shall also be disclosed:
1. Investments made in accordance with any statutory requirement should be disclosed
separately together with its amount, nature, security and any special rights in and outside
India.
2. Segregation into performing/ non performing investments for purpose of income
recognition as per the directions, if any, issued by the Authority.
3. Percentage of business sector-wise.
4. A summary of financial statements for the last five years, in the manner as may be
prescribed by the Authority.
5. Accounting Ratios as may be prescribed by the Authority.
6. Basis of allocation of Interest, Dividends and Rent between Revenue Account and Profit and
Loss Account.
7. Unclaimed amounts to Policyholders along with the ageing of such unclaimed amounts.

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PART III: General Instructions for Preparation of Financial Statements
1. The corresponding amounts for the immediately preceding financial year for all items
shown in the Balance Sheet, Revenue Account and Profit and Loss Account should be given.
2. The figures in the financial statements may be rounded off to the nearest thousands.
3. Interest, dividends and rentals receivable in connection with an investment should be
stated as gross value, the amount of income tax deducted at source being included under
'advance taxes paid'.
4. Income from rent shall not include any notional rent.
5. (I) For the purposes of financial statements, unless the context otherwise requires -
a) the expression ‘provision’ shall, subject to note II below mean any amount written off
or retained by way of providing for depreciation, renewals or diminution in value of
assets, or retained by way of providing for any known liability or loss of which the

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 amount cannot be determined with substantial accuracy;
b) the expression "reserve" shall not, subject to as aforesaid, include any amount written
off or retained by way of providing for depreciation, renewals or diminution in value of
assets or retained by way of providing for any known liability;
c) the expression capital reserve shall not include any amount regarded as free for
distribution through the profit and loss account; and the expression "revenue reserve"
shall mean any reserve other than a capital reserve;
d) The expression "liability" shall include all liabilities in respect of expenditure contracted
for and all disputed or contingent liabilities.
(II) Where:
a) any amount written off or retained by way of providing for depreciation, renewals or
diminution in value of assets, or

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 b) any amount retained by way of providing for any known liability is in excess of the
amount which in the opinion of the directors is reasonably necessary for the purpose,
the excess shall be treated for the purposes of these accounts as a reserve and not as a
provision.
6. The company should make provisions for damages under lawsuits where the management
is of the opinion that the award may go against the insurer.
7. Risks assumed in excess of the statutory provisions, if any, shall be separately disclosed
indicating the amount of premiums involved and the amount of risks covered. The auditor
shall, however, make an appropriate qualification in this regard in his report.
8. Any debit balance of Profit and Loss Account shall be shown as deduction from
uncommitted reserves and the balance if any, shall be shown separately.

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PART IV: CONTENTS OF MANAGEMENT REPORT
There shall be attached to the financial statements, a management report containing, inter alia, the
following duly authenticated by the management:
1. Confirmation regarding the continued validity of the registration granted by the Authority;
2. Certification that all the dues payable to the statutory authorities have been duly paid;
3. Confirmation to the effect that the shareholding pattern and any transfer of shares during the year
are in accordance with the statutory or regulatory requirements;
4. Declaration that the management has not directly or indirectly invested outside India the funds of
the holders of policies issued in India;
5. Confirmation that the required solvency margins have been maintained;
6. Certification to the effect that the values of all the assets have been reviewed on the date of the
Balance Sheet and that in his (insurer’s) belief the assets set forth in the Balance- sheets are shown in
the aggregate at amounts not exceeding their realisable or market value under the several headings –
“ Loans”, “ Investments”, “Agents balances”, “Outstanding Premiums”, “Interest, Dividends and Rents
outstanding”, “Interest, Dividends and Rents accruing but not due”, “Amounts due from other persons
or Bodies carrying on insurance business”, “ Sundry Debtors”, “ Bills Receivable”, “ Cash” and the
several items specified under “Other Accounts”;

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 7. Certification to the effect that the that no part of the life insurance fund has been directly or
indirectly applied in contravention of the provisions of the Insurance Act, 1938 (4 of 1938) relating to
the application and investment of the life insurance funds;
8. Disclosure with regard to the overall risk exposure and strategy adopted to mitigate the same;
9. Operations in other countries, if any, with a separate statement giving the management’s estimate of
country risk and exposure risk and the hedging strategy adopted;
10. Ageing of claims indicating the trends in average claim settlement time during the preceding five
years;
11. Certification to the effect as to how the values, as shown in the balance sheet, of the investments and
stocks and shares have been arrived at, and how the market value thereof has been ascertained for
the purpose of comparison with the values so shown;
12. Review of asset quality and performance of investment in terms of portfolios, i.e., separately in terms
of real estate, loans, investments, etc.

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13. A responsibility statement indicating therein that:
i. in the preparation of financial statements, the applicable accounting standards, principles and
policies have been followed along with proper explanations relating to material departures, if
any;
ii. the management has adopted accounting policies and applied them consistently and made
judgements and estimates that are reasonable and prudent so as to give a true and fair view of
the state of affairs of the company at the end of the financial year and of the operating profit or
loss and of the profit or loss of the company for the year;
iii. the management has taken proper and sufficient care for the maintenance of adequate
accounting records in accordance with the applicable provisions of the Insurance Act 1938 (4 of
1938) / Companies Act, 1956 (1 of 1956), for safeguarding the assets of the company and for
preventing and detecting fraud and other irregularities;
iv. the management has prepared the financial statements on a going concern basis;
v. the management has ensured that an internal audit system commensurate with the size and
nature of the business exists and is operating effectively.

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PART V: Preparation of Financial Statements

1. An insurer shall prepare the Revenue Account, Profit and Loss Account [Shareholders’ Account]
and the Balance Sheet in Form B-RA, Form B-PL, and Form B-BS, or as near thereto as the
circumstances permit. It may be noted that an insurer shall prepare Revenue Account separately
for fire, marine, and miscellaneous insurance business.
2. An insurer shall prepare separate Receipts and Payments Account in accordance with the Direct
Method prescribed in AS 3 – “Cash Flow Statement” issued by the ICAI.

9.2 Audit of Accounts of General Insurance Business

The internal control functions have been categorised below under main operational cycles considering
the nature of general insurance business. Areas where the internal controls are similar to the ones
adopted by other companies such as for cash and bank receipts and payments and fixed assets, have
been dealt in the Internal Control Questionnaire, published by the Institute of Chartered Accountants of
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 India. Since various operational cycles are inter-linked, the internal controls operating within the
systems of such cycles should be reviewed simultaneously.
Audit Procedures: The important part of the business operations of general insurance companies
comprises the issuance of policies for risks assumed and to indemnify the insured for losses to the
extent covered by such policies. In financial terms, these operations get translated into the receipt and
recording of premiums and the recording and settlement of claims. Both premiums and claims have a
significant impact on the insurance companies’ revenues, it would be an important part of the duty of
the auditor to satisfy himself that the financial transactions involving both these operations have been
fairly and properly recorded in the relevant books of account. The auditor should also ensure that the
legal requirements as to the disclosure of these items are complied with in the financial statements.
1. Premium: Premium is the consideration received by an insurer from the insured under an
insurance contract, whereby the insurer agrees to undertake certain sum of risk on behalf of the
insured. The 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
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 assumed by the company.
No Risk Assumption without Premium – Section 64VB of the Insurance Act, 1938
No insurer should assume any risk in India in respect of any insurance business on which premium is
ordinarily payable in India unless and until the premium payable is received or is guaranteed to be
paid by such person in such manner and within such time, as may be prescribed, or unless and until
deposit of such amount, as may be prescribed, is made in advance in the prescribed manner.
Premium Revenue Recognition:
According to the IRDA (Preparations & Presentations of the Financial Statements & Auditor’s Report),
Regulations 2000, Premium Revenue Recognition is based on the pattern of Risk to which the insurer
is exposed.These Regulations envisage that an Insurer based on the past experience, can reliably
estimate the pattern of Risk for a particular type of business.
Verification of Premiums – Verification of premium is of utmost importance to an auditor. The auditor
should apply, inter alia, the following procedures for verification of premium –
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 Insurance premium is collected upon issuing policies. It is the consideration for bearing the risk by the
insurance company. The assumption of the risk starts on the issue of a policy document or any
equivalent document that evidences risk has been accepted by the company on the acceptance of
proposal form or cover note by the respective underwriting department. This receipt is recorded as the
premium income in the books of the insurance company only when the risk is accepted by the company
Money received against which the company has not issued a policy document, cover note or any other
document that evidences acceptance of risk is recorded as a liability. It is recorded as premium income
only after the company has accepted risk. Premium may be accepted either in cash/cheque/Demand
Draft/pay order, bank guarantee, cash deposit, etc. The premium collections are credited to a separate
bank account. As per the policy of the insurance company, the collections are transferred to the
Regional Office or Head Office. As soon as the insurance policy is issued, an entry is made in the
Register of Policies showing all the relevant details.
No Risk Assumption without Premium -No risk can be assumed by the insurer unless the premium is
received. According to section 64VB of the Insurance Act, 1938, no insurer should assume any risk in
India in respect of any insurance business on which premium is ordinarily payable in India unless and

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 until the premium payable is received or is guaranteed to be paid by such person in such manner and
within such time, as may be prescribed, or unless and until deposit of such amount, as may be
prescribed, is made in advance in the prescribed manner. The premium receipt of insurance companies
carrying on general insurance business normally arise out of three sources, viz., premium received
from direct business, premium received from reinsurance business and the share of co- insurance
premium.

Verification of Premiums -Verification of premium is of utmost importance to an auditor. The auditor should
apply, inter alia, the following procedures for verification of premium –

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iv. The auditor should ensure that premium in respect of risks incepting during the relevant accounting year
has been accounted as premium income of that year on the basis of premium revenue recognition. The
auditor, as part of his audit procedures, should make an assessment of the reasonability of the risk
pattern established by the management. The auditor should also see whether the premium received
during the year but pertaining to risk commencing in the following year has been accounted for under
the head ‘Premium Received in Advance’ and has been disclosed separately. Normally, such instances
relate to the issue of cover notes and certificates at the end of the accounting year relating to risks
commencing in the next accounting period. Generally, there is a column in the Premium Register called
“Commencement of Risk”, indicating the date and time from which the risk under the policy issued has
commenced. The auditor should verify that policy documents have not been issued, in case:
a) premium had not been collected at all;
b) premium had been collected but the relevant cheques have been dishonoured; (refer Cheque
Dishonoured Book);

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(viii) The auditor should check whether Premium Registers have been maintained chronologically, for each
underwriting department, 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.
(xi) Where policies have been issued with a provision to collect premium periodically (i.e., under
instalment clause, special declaration policy or periodical declaration under open policies in marine
insurance), the auditor should check whether premium are collected as and when they become due.
(x) 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.
Also examine whether instalments of premium falling due in the subsequent year have not been
recognised in the accounts as outstanding premium.
(xi) The auditor should verify the year end transactions to check that amounts received during the year
in respect of risks commencing/ instalments falling due on or after the first day of next financial year
are not credited to premium account but credited to Premium Received in Advance Account.

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 2. Claims: A demand for payment of policy benefit because of the occurrence of an insured
event is known as ‘claim’. Claims in general insurance business are primarily in the nature
of indemnity i.e re-imbursing the loss incurred to the policy holder. Cost of claims to the
company includes all the expenses incurred in settlement of claims. Internal controls are
established over claims to ensure that only bonafide claims are paid and that claims paid
do not exceed the value of loss incurred and/r do not exceed the sum insured. Cost of
claims are properly recorded and disclosed in the financial statements.
The components of the cost of claims to an insurer comprise the claims under policies
and claim settlement costs. 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. A liability
for outstanding claims should be brought to account on the following:

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 The liability includes future payments in relation to unpaid reported claims and claims incurred but
not reported including inadequate reserves which would result in future cash or asset outgo for
settling liabilities against those claims. Change in estimated liability represents the difference between
the estimated liabilities for outstanding claims in respect of claims under policies, whether due or
intimated at the beginning and at the end of the financial period. The accounting estimate also
includes claims cost adjusted for salvage value if there is sufficient degree of certainty of its
realisation.

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 Registers and Records -The following register and records are generally prepared in respect
of claims:
(i) Claims Intimation Register;
(ii) Claims Paid Register;
(iii) Claims Disbursement Bank Book;
(iv) Claims Dockets, normally containing the following records:
Claim intimation, claim form, 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.

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 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. The provision for claims incurred but not reported is not made at
Branch/Divisional Office level but at the Head Office level.
Verification of Claims
Claims Provisions -The auditor should obtain from the divisions/branches, the information for
each class of business, categorizing the claims value-wise before commencing verification of the
claims provisions, so that appropriate statistical sampling techniques may be applied, to ensure
that representative volume of claims is verified for each class of business. The auditor should
determine the total number of documents to be checked giving due importance to claim
provisions of higher value.
The outstanding liability at the year-end is determined at the divisions/branches where the
liability originates for outstanding claims. Thereafter, based on the total consolidated figure for
all the divisions/branches, the Head Office considers a further provision in respect of

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outstanding claims. The auditor should satisfy himself that the estimated liability provided for
by the management is adequate with reference to the relevant claim files/dockets, keeping in
view the following:

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In cases of material differences in the liability estimated by the management and that which ought to be provided in
the opinion of the auditor, the same must be brought out in the auditor’s report after obtaining further information or
explanation from the management. For determining the adequacy of the provisions in respect of any category of
business, the auditor may resort to the method of testing the actual payments, wherever made, with the provisions
made earlier for that category of business. Whether such liability has been estimated in the past on a fair and
realistic basis can, thus, be examined by looking into current year’s payments against provisions of the earlier year.

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Claims Paid - The auditor may determine the extent of checking of claims paid on the same line
as suggested for outstanding claims. Other aspects in respect of claims paid to be examined by
the auditors are as follows:
i. that 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;
ii. that claims are not paid if the premiums are not received as per Section 64 (VB) of the
Insurance Act.
iii. that in case of claims paid on the basis of advices from other insurance companies (where
the company is not the leader in co-insurance arrangements), whether share of premium
was also received by the company. Such claims which have been communicated after the
year- end for losses which occurred prior to the year-end must be accounted for in the year
of audit;
iv. that the claims payments have been duly sanctioned by the authority concerned and the
payments of the amounts are duly acknowledged by the claimants;
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v. that the salvage recovered has been duly accounted for in accordance with the
procedure applicable to the company and a letter of subrogation has been obtained in
accordance with the laid down procedure;
vi. that the amounts of the nature of pure advances/deposits with Courts, etc., in matters
under litigation/arbitration have not been treated as claims paid but are held as assets
till final disposal of such claims. In such cases, full provision should be made for
outstanding claims;
vii. that payment made against claims partially settled have been duly vouched. In such
cases, the sanctioning authority should be the same as the one which has powers in
respect of the total claimed amount;
viii that in case of final settlement of claims, the claimant has given an unqualified discharge
note, not involving the company in any further liability in respect of the claim; and

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ix. that the figures of claims, wherever communicated for the year by the Division to the
Head Office for purposes of reinsurance claims, have been reconciled with the trial
balance-figure.
x. that payments have been made within 30 days of the receipt of the last document
received. In case, there are delays, interest on such delays have to be paid as per IRDAI
regulations.
xi. that the salvage recovered has been duly accounted for in accordance with the
procedure applicable to the company and a letter of subrogation has been obtained in
accordance with the laid down procedure.
xii. that necessary claims have been made to the re-insurer for all such claims paid. In
certain facultative re-insurance arrangements, prior approval of the re-insurer has
been obtained before the claim has been paid.

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 3. Commission/Brokerage

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It is a well-known fact that 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 through them and is debited to Commission on Direct Business Account.
There is a separate head for commission on reinsurance accepted which usually arise in case of
Head Office. It may be noted that under section 40 of Insurance Act, 1938, no commission can
be paid to a person who is not an agent of the insurance company. Commission cannot be paid
in excess of the maximum rates of commission as framed by IRDAI. The rates of
commission/brokerage are agreed and documented with the agent and filed with IRDAI.
Role of Auditor: The auditor should, inter alia, do the following for verification of commission:
Ensure that commission/brokerage is not paid in excess of the limits specified by IRDAI
Ensure that commission/brokerage is paid as per rates with the agent and rates filed with IRDAI
Ensure that commission/brokerage is paid to the agent/broker who has solicited the business
Ensure that the agent/broker is not blacklisted by IRDAI and is not terminated for fraud etc.

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Vouch disbursement entries with reference to the disbursement vouchers with copies of commission bills
and commission statements.
Check whether the vouchers are authorised by the officers-in–charge as per rules in force and income tax is
deducted at source, as applicable.

Test check correctness of amounts of commission allowed.

Scrutinise agents’ ledger and the balances, examine accounts having debit balances, if any, and obtain
information on the same. Necessary rectification of accounts and other remedial actions have to be
considered.

Check whether commission outgo for the period under audit been duly accounted.

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4. Operating Expenses related to Insurance Business (Expenses of Management)
All the administrative expenses in an insurance company are broadly classified under 13
heads as mentioned in Schedule 4 forming part of Financial Statements given under
Schedule B to the Insurance Regulatory and Development Authority (Preparation of
Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2002. In so
far as financial statements are concerned, this Schedule is part of the Revenue Account to
be prepared for insurance business. Any other expenses are required to be disclosed under
the head ‘Others’. Any major expenses (` 5 lacs or in excess of 1% of net premium,
whichever is higher) are required to be shown separately. Careful reading of the words
‘expenses related to insurance business’ clearly indicate any expenses which do not have
any direct relation to insurance business are to be shown separately in the Profit and Loss
Account. 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.
These expenses are first aggregated and then apportioned to the Revenue Account of each
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 class of business on a reasonable and equitable basis. 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. Refer to Schedule
4 on Operating Expenses for specific items.
IRDAI has prescribed a formula for limits on expenses that Insurance Companies can incur.
Expenses incurred beyond the prescribed limits need prior approval. The limit for expenses
is not a fixed amount but a formula based on the Premium Income per segment.
a.) Legal and Professional Charges: As far as legal and professional charges are concerned,
attention is drawn to the head ‘Claims Incurred’ under Schedule 2 where it is clearly stated
that survey fees, legal and other expenses should form part of claim cost, and therefore, are
not to be included under the head Legal and Professional Charges. Hence, the auditor
should ensure that all other expenses which are not covered under the claims cost are
required to be included under this head.
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 b.)Employees’ Remuneration and Welfare Benefits: The employees’ remuneration includes
all kinds of payments made to employees in consideration of their services. The
reimbursement of medical expenses or premium in respect of employees’ health cover is
covered under the employees’ remuneration and welfare. Any medical fees incurred
towards maintenance of health care policies (which are not for employees) are required to
be debited to the claims cost under the health care and not to be included under this head.
Any expenses towards medical treatment of employees incurred by the company should
also be included under this head. Non-training expenses have to be shown separately.
Incentives paid to employees of the company who have solicited insurance policies is also
debited in this account and not to the commission account.

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(c) Interest and Bank charges: All expenses incurred towards maintenance of Bank Account,
interest and other charges levied by bankers to the normal course of business other
than bank expenses relating to investments (interest, bank charges, custodial charges,
etc.) are shown under the head, “Interest and Bank Charges”. Any other interest charged
on the borrowings which could not form part of the Revenue Account not to be included
under this head.
(d) Depreciation: Charging of depreciation is governed by Schedule II to the Companies Act,
2013. In addition, compliance of relevant Accounting Standard is also to be taken care.
(e) Advertisement, Sales Promotion, Marketing expenses are a major component of
Operating expenses of an Insurance company and comprise of costs incurred to
promote the Company, a specific product or general awareness about Insurance.

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(f) Interest, Dividend and Rent: Funds received from the policy holders are invested in
securities as per the investment pattern specified by IRDAI. Interest income from such
investments forms a major part of the income of a general insurance company.
An insurance enterprise, like any other, earns interest dividend and rent through its assets.
The interest, dividend and rent earned are to be apportioned between Revenue Account
and Profit and Loss Account, based on the nature of investments i.e Policyholders or
shareholders. The Regulations require that basis of allocation of interest, dividend and rent
between the Revenue Account and Profit and Loss Account should be clearly indicated in
the company’s accounting policy. The interest or dividend earned as against the
policyholders’ funds is required to be apportioned to the Revenue Account. The interest
earned on, say, deposits with banks of the shareholders, funds, rent received on let out
properties owned by the company, by way of investments shareholders, funds, etc. are
required to be shown under the profit and Loss Account.

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5. Underwriting: The underwriting function, is the function of evaluating the risk and
whether the insurance company should accept the risk or not. This comprises of
examination and evaluation of applications for insurance, the rating of risks and the
establishment of premiums, which is fundamental to the operations of a general insurance
company. The prime objectives of an internal control system for underwriting is adherence
to guidelines for acceptances of insurance, proper recording of insurance risk and its
evaluation
6. Investments: : Insurance Companies make investments apart from earning income, to
comply with the relevant statutory requirements and also for meeting any unforeseen
contingencies and claims. The regulations issued by the authority from time to time affect
the quantum of investments, the nature of assets in which investments are to be made.

Investments by general insurance companies are governed by the provisions of section 27,
27A, 27B, 27C, 27D and 27E of the Insurance Act, 1938 as well as by the guidelines issued
from time to time by the Insurance Regulatory and Development Authority of India.

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 Audit Procedures - The auditor’s primary objective in audit of investments is to satisfy
himself as to their existence and valuation. Examination of compliance with statutory and
regulatory requirements is also an important objective in audit of investments insofar as
non-compliance may have a direct and material effect on the financial statements.
The auditor should verify the investment scrips from the custodian statement, demat
account or other equivalent electronic accounts where the balance of securities lie, at the
close of business on the date the balance sheet. In exceptional cases where physical
verification of investment scrips on the balance sheet date is not possible, the auditor
should carry out the verification on a date as near to the balance sheet date as possible. In
such a case, he should take into consideration any adjustments for subsequent transactions
of purchase, sale, etc.
He should take particular care to see that only genuine investments are produced before
him, and that securities held by the insurance company on behalf of others (e.g., those held
as security against loans) are not shown to him as the insurance company’s own
investments. To ensure this, the auditor should – require that all investment scrips held in
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 the name of the of the insurance company – whether belonging to it or to borrowers
should be produced before him simultaneously. Normally, the investments of an insurance
company are held by the insurance company itself or a depository (in the case of
dematerialised securities other than government securities). Investments in Mutual funds
are verified based on statements issued by the Mutual Funds.
Investments are normally dealt with at the Head Office and not at the branches. However,
sometimes, for realisation of interest, etc. and other similar purposes, investments of an
insurance company may be held at Branch Offices also. In such cases, the auditor should
examine the record maintained at the Head Office to record details of investments held at
other locations and request the respective branch auditors to physically verify such
investments as a part of their audit. The auditor should obtain a written confirmation to
this effect from the branch auditors. In case the verification has been done on a date other
than the balance sheet date, a statement showing the reconciliation of the investments
held at the time of physical verification with the investments held as on the balance sheet
date should also be obtained from the branch auditors. The branch auditors should report
whether adequate records are maintained by the branch for the securities held by it on
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 behalf of the Head Office.
Investments should not normally be held by any other person (as laid down in the City
Equitable Fire Insurance Co. case). If any investments are so held, proper enquiry should be
made to ensure that there is some justification for it, e.g., shares may be held by brokers for
the purpose of transfer or splitting-up, etc. Shares may also be lodged with the companies
concerned for transfer etc. When investments are held by any other person on behalf of the
insurance company, the auditor should obtain a certificate from him. The certificate should
state the reason for holding the investment (e.g., in safe custody or as security).
In respect of scripless dealings in investments through the OTC Exchange of India, the
auditor should verify the interim and other acknowledgements issued by dealers as well as
the year-end confirmation certificates of the depository organisation.
The auditor should also examine whether securities lodged for transfer are received back
within a reasonable period. Similarly, he should examine whether share certificates, etc. are
received within a reasonable period, of the lodging of the allotment advice. In case there is

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 an unusual delay in registration of transfers, etc., the auditor should see that adequate
follow-up action has been taken. He may, in appropriate cases, also enquire from the
issuers, or their registrars, about the delays. In cases where the issuer/registrar has refused
to register the transfer of securities in the name of the insurance company, the auditor
should verify the validity of the title of the insurance company over such securities.
The auditor should examine if any investments are pledged or hypothecated against
borrowings by the Insurance company. If so, then a disclosure of such pledge or
hypothecation should be made.
The auditor should examine whether the portfolio of the insurance company consists of any
securities whose maturity dates have already expired. It is possible that income on such
investments may also not have been received. In case the amount of such investments or
the income accrued thereon is material, the auditor should seek an explanation from the
management on this aspect. He should also consider whether any provision for loss on this
account is required. Similarly, where income on any security is long overdue, the auditor
should consider whether provision is required in respect of such income accrued earlier.
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Investments in securities now-a-days constitute a substantial part of total assets of many
insurance companies. Method of valuation of investments followed by an insurance company
may, therefore, have a significant effect on its Balance Sheet and Profit and Loss Account. The
auditor should examine whether the method of accounting followed by the insurance company
in respect of investments, including their year-end valuation, is appropriate.
The auditor should examine the manner of accounting for investments in the context of the
guidelines of the Insurance Regulatory and Development Authority and the accounting policy
followed by the insurance company in respect of investments. The auditor should examine the
appropriateness of accounting policies followed by the insurance company. In case any of the
accounting policies is not appropriate, the auditor should consider the effect of adoption of such
policy on the financial statements and, consequently, on his audit report.

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 A change in the method of valuation of investments constitutes a change in accounting
policy and adequate disclosure regarding the fact of the change along with its financial
effect should be made in the balance sheet.
The auditor should examine whether income from investments is properly accounted for.
This aspect assumes special importance in cases where the insurance company has opted
for receipt of income through the Electronic Clearing Service.
There may be cases where the certificates of tax deduction at source (TDS) received along
with the interest on investments are found missing. This increases the incidence of tax on
the insurance company. The auditor should see that there is a proper system for recording
and maintenance of TDS certificates received by the insurance company

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 Investments are to be bifurcated between the Shareholders and the Policyholders as per
IRDAI Regulations. The basis of bifurcation of Investments and its related income needs to
be examined.
7.Cash and Bank Balances: Cash and Bank balances at Branch Office/Divisional Office level
also constitute significant items related to balance sheet. The auditor should apply the
following audit procedures for verification of claims.
i. The auditor should physically verify cash balance cheques in hand collected from the
policy holders, impress for meeting day to day expenditures, postage stamps balance,
revenue, policy, licence fees, franking machine balance. The auditor should also obtain
a certificate from the management for the above mentioned balances as at the
balance sheet date.
If for some reason, the physical verification of the above on the balance sheet date is
not possible then the same can be done at a subsequent date and by way of backward
calculations, cash in hand at the balance sheet date can be verified.

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 ii. The auditor should also 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.
iii. The auditor should also check the dates of the cheques in hand to ensure that they
belong to the correct accounting period.
iv. The auditor may apply test check on the bank transactions.
v. The auditor should also check Bank Reconciliation statement and long outstanding
entries therein.
vi. The auditor should obtain confirmation of Bank Balances for all operative and
inoperative accounts.
vii. The auditor should physically verify Term Deposit Receipts issued by bankers.

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 viii. The auditor should verify the deposits and withdrawals transactions at random and
check whether the Account is operated by authorised persons only.
ix. The auditor should verify the subsequent realisations for all items appearing in the
reconciliation.
x. In case of funds, in-transit, he should verify that the same are properly reflected as
part of bank balance.
8. Outstanding Premium and Agents’ Balances: The following are the audit procedures to be
followed for verification of outstanding premium and agents’ balances:
i) Inquire reasons for long outstanding credit balances in outstanding premium accounts
and examine the reasons for policies not being issued or the outstanding premium not
adjusted against amounts due.
ii) Scrutinise and review control account debit balances and their nature should be enquired
into.

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iii.) Examine inoperative balances and treatment given for old balances with reference to
company rules.
iv.) Enquire into the reasons for retaining the old balances.
v.) Verify old debit balances which may require provision or adjustment. Notes of
explanation may be obtained from the management in this regard.
vi.) Check age-wise, sector-wise analysis of outstanding premium.
vii.) Verify whether outstanding premiums have since been collected.
viii.) Check the availability of adequate bank guarantee or premium deposit for outstanding
premium.
9. Provision for Taxation: The steps to be conducted by the auditor for audit and verification
are given below:
i. The auditor should check whether the provision for taxation has been made after
taking into account the specific provisions applicable to insurance companies carrying
on general insurance business.

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 ii. It should be seen by auditor whether for the purpose of computation not only the
profit, as disclosed by the annual accounts, copies of which are required under the
Insurance Act, 1938 to be furnished to IRDAI, is taken.
iii. The auditor should assess the past trend regarding the approach of the Income Tax
Department, the decision of the various appellate forums including the High Court and
the Supreme Court vis-a-vis the computation made.
iv. The compliance with the provisions of Chapter III of the Income Tax Act, 1961 which
provides for income which do not form part of total income is also to be seen.
v. The auditor should see whether deductions under Chapter VIA of the Income Tax Act,
1961 which provides for deduction have been made in computing total income is
properly taken into account.
vi. The auditor should examine whether income computation relating to foreign branches
and other income earned outside India is dealt with properly as per the double
taxation avoidance agreement, if any, entered into with those countries.
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 vii. Also, the auditor should check whether the grossing up of TDS relating to the income
has been properly done for the purpose of computation of taxable income.
viii. The auditor should ensure that the provisions of the Income Tax Act, 1961 regarding
the tax to be deducted at source have been properly complied with, relating to the
payments / credits for which the TDS provisions of the Income Tax Act are applicable
and the amount so deducted are remitted within the stipulated time. Also check TDS
implication on the interest paid /payable and included on claim settlement /
outstanding claims.
ix. The auditor should see the system of service tax collection and the payment to the
statutory authorities and the internal system including the filing of statutory returns.
x. The examination of sales tax implication on the sale of salvage should also be seen as
it is applicable to the respective states and the past trend in this regard.
xi. The auditor should check the liability under the VAT and whether provision for
adequate amount has been made in the books or not.
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 xii. The auditor should verify that adequate provision has been made for additional
liability relating to earlier years for which demands have been received in the current
year and where the company has gone into appeal, the fact that no provision has been
made and that an appeal has been preferred has to be disclosed in the notes to
accounts.
10. Unexpired Risks Reserve (URR): The need for Unexpired Risks Reserve arises from the fact
that all policies are renewed annually 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. Many policies normally extend beyond this date into the
following year during which risks continue. In other words, at the closing date, there is
unexpired liability under various policies which may occur during the remaining term of the
policy beyond the year end. There are two methods of creating this reserve. One is based
on the proportionate number of days of risk remaining to risk expired, which is called 1/365
method. The other method is by taking a URR directly on 50% of the premium amount. As
per section 64V of the Insurance Act, 1938, for the purpose of compliance with the
provisions of maintaining control level of solvency margin, a proper value of every item of
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 liability of the insurer shall be placed in the manner as may be specified by the regulations
made in this behalf.
It may be mentioned that the profit and gain of insurance companies are governed by the
provisions of section 44 of the Income Tax Act, 1961. In this regard, Rule 5 of the First
Schedule to the Income Tax Act-Computation of Profit & Loss of General Insurance Business
provides for creation of a reserve for unexpired risks as prescribed under Rule 6E of the
Income Tax Rules, 1962. According to this Rule, the insurance companies are allowed a
deduction of 50 per cent of net premium income in respect of Fire and Miscellaneous
Business and 100 per cent of the net premium income relating to Marine Insurance
business.

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 11. Reinsurance: A reinsurance transaction may be defined as 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. 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.
Types of Reinsurance Contract
There are broadly two types of reinsurance contracts, viz., facultative reinsurance and treaty
reinsurance. A diagrammatic presentation is as below:

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Facultative Reinsurance - It is that type of reinsurance whereby the contract relates to one
particular risk and is expressed in the reinsurance policy. This is the oldest method of
reinsurance and it necessitates consideration of each risk separately. Each transaction under
facultative reinsurance has to be negotiated individually. Each party to the transaction has a
free choice, i.e., for the ceding company to offer and the reinsurer to accept. The main
drawbacks of this type of insurance are the volume of work involved and time taken to cover
the risk. It is, however, still used even today, mainly when:
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i. automatic covers have already been exhausted.
ii. the risk is excluded from the Treaties.
iii. the insurer does not want his reinsurance treaties overburdened with particularly heavy
and abnormal risks.
iv. the insurer has no automatic cover at his disposal in a particular branch, where he issues
policies rarely.
v. the nature of business is such that technical guidance or consultation with the reinsurer is
required at every stage of acceptance of the risk itself or for a type of business where the
number of risks is very small, for example, in atomic energy installations, oils rigs, etc.
Treaty Reinsurance - Under this type of reinsurance, a treaty agreement is entered into
between the ceding company and the reinsurer(s) where reinsurances are within the limits of
the treaty. These limits can be monetary, geographical, section of business, etc. Under this
contract, it is obligatory for the reinsurer to accept all risks within the scope this treaty and it is

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obligatory for the ceding company to cede risks in accordance with the terms of the treaty. In
the case of treaty reinsurance contracts, the insurer generally prepares a statement of treaty
reinsurances accounts, either on quarterly basis or on half-yearly basis. These statements are
sent to the re-insurer for the purpose of reconciliation of claims lodged under the reinsurance
contracts, outstanding claims, claims paid and claims paid in advance. It may be noted here that
the treaty reinsurance contracts generally provide that in the event of any large claim being
lodged with the insurer, the re-insurer shall make the payment even before the claim is finally
settled or the statement of treaty reinsurance is received by the reinsurer. The reinsurer, in such
cases, treats the amount paid to the insurer as ‘advance against claim’. The Advance against
Claim Account is squared up as and when the claim is settled and the information of this
settlement is sent to the reinsurer through statement of treaty reinsurances. Such payments by
the reinsurer are called Cash Loss Payments. Treaties can also be divided into two categories,
viz., proportional treaties and non-proportional treaties.

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A. Verification of Re-insurance Inward
Under regulation 4 of the IRDA (General Insurance Re-insurance) Regulations, 2013, every

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insurer desirous of writing inward re-insurance business should have a well defined
underwriting policy. The decisions on acceptance of re-insurance should be taken by persons
with good knowledge and experience. The insurer is required to file with the Authority, its
underwriting policy and any changes therein from time to time. The auditor should apply the
following verifications measurers for re- insurance inward transactions:
i. Re-insurance Inward underwriting should be as per the norms and guidelines prescribed by
the Insurance Act, 1938 and IRDA Regulations. It is necessary to ensure that the inward
reinsurance arrangements and acceptances, both Indian and foreign are done as per the
prescribed parameters applicable for the particular year.
ii. The auditor should check that domestic inward acceptances are in accordance with the
approved programme.
iii. The auditor should verify whether re-insurance inward acceptance, both Indian and
foreign, are as per arrangements / agreements entered into with Indian and foreign
insurance companies.

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iv. The auditor should also verify whether the policy adopted for booking the accounts is on
“receipt” basis or “due” basis with the appropriate basis of estimation towards accounts
not received and that the basis of estimation is fair and consistently applied and properly
disclosed.
v. The auditor should examine whether proper system exists to have control over the
quantum of agreements existing at any point of time and also that periodical accounting
statements received in connection with the agreements.
vi. The auditor should verify whether proper closing returns have been received for premiums
and claims for facultative acceptances.
vii. The auditor should check the accounts for closure of any underwriting year, with portfolio
withdrawals as per the terms and conditions agreed.
viii. The auditor should evaluate the system and practice adopted in recognising the foreign
currency transaction and also whether it is in accordance with the Accounting Standard-11
“The Effects of Changes in Foreign Exchange Rates”.
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ix. The auditor should verify whether profit commission has been calculated as per the
agreement and terms and conditions and all the statements rendered are properly taken
into account.
x. The auditor should check whether there is any run off claim / large claim of long chain in
nature which requires any provisioning.
xi. The auditor should also verify whether the Foreign Inward acceptance components,
consisting of premium, commission, brokerage and other expenses, claims consisting of
paid claims opening and closing outstanding claims etc., have been recorded and
accounted as per the accounts rendered by the companies. It is essential that the
statement should be rendered in the currency in which it was agreed to be transacted and
the conversion of foreign currency balances from the accounts submitted have been done
at the appropriate conversion rates as per Accounting Standard -11.
xii. The auditor should examine whether the outstanding claim figures have been properly
obtained well in time, under proper systematic arrangements and sufficient provisioning

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 has been made for all the outstanding claims. The auditor should see that regarding foreign
inward, appropriate provisioning is done after adopting prescribed conversion rate to the
Indian rupee. The auditor should ensure that confirmation regarding the outstanding claims
have been received in respect of all inward arrangements.
xiii. As per IRDA (General Insurance Re-insurance) Regulations, 2013, every re-insurer is
required to make provision for outstanding claims for every reinsurance arrangement
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. In addition,
every re- insurer has to make an appropriate provision for ‘Incurred but Not Reported
(IBNR)’ claims on its reinsurance accepted portfolio on actuarial estimation basis. This
aspect has to be looked into as this may result in a lot of difference in the financial results
of the company.
xiv. Closing balances of the re-insurer’s accounts should be reconciled and the confirmation of
balances should be obtained from all the companies.

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xv. The auditor must ensure that 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.
xvi. The auditor should verify the requirement of provision / writing off of reinsurance inward
balances based on the doubtful nature of recovery, if any.
xvii. The auditor should check whether Indian inward balances including with the GIC have
reconciled and identical balances arrived at and affect, if any, due to co-insurance
transactions should also be looked into.
B. Verification of Re-insurance Outward
The following steps may be taken by the auditor in the verification of re-insurance outward:
i. The auditor should verify that re-insurance underwriting returns received from the
operating units regarding premium, claims paid, outstanding claims tally with the audited
figures of premium, claims paid and outstanding claims.

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ii. The auditor should check whether the pattern of re-insurance underwriting for outward
cessions fits within the parameters and guidelines applicable to the relevant year.
iii. The auditor should also check whether the cessions have been made as per the stipulation
applicable to various categories of risk.
iv. The auditor should verify whether the cessions have been made as per the agreements
entered into with various companies.
v. It should also be seen whether the outward remittances to foreign re-insurers have been
done as per the foreign exchange regulations.
vi. It should also be seen whether the commission on cession has been calculated as per the
terms of the agreement with the re-insurers.
vii. The auditor should verify the computation of profit commission for various automatic
treaty arrangements in the light of the periodical accounts rendered and in relation to
outstanding loss pertaining to the treaty.

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viii. The auditor should examine whether the cash loss recoveries have been claimed and
accounted on a regular basis.
ix. The auditor should also verify whether the Claims Paid item appears in Outstanding Claims
list by error. This can be verified at least in respect of major claims.
x. He should see whether provisioning for outstanding losses recoverable on cessions have
been confirmed by the re-insurers and in the case of major claims, documentary support
should be insisted and verified.
xi. Accounting aspects of the re-insurance cession premium, commission receivable, paid
claims recovered, and outstanding losses recoverable on cessions have to be checked.
xii. The auditor should check percentage pattern of gross to net premium, claims paid and
outstanding claims to ensure comparative justification.
xiii. The auditor should also check that the re-insurers balance on cessions and whether the
sub ledger balances tallies with the general ledger balances.

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xiv. The auditor should review the individual accounts to find out whether any balance requires
provisioning / write off or write back.
xv. He should verify whether the balances with re-insurers are supported by necessary
confirmation obtained from them.
xvi. He should verify whether opening outstanding claims not paid during the year find place in
the closing outstanding claims vis-a-vis the reinsurance inwards outstanding losses
recoverable on cessions appears in both opening and closing list. If not, the reason for the
same should be analysed.
xvii. Any major event after the Balance Sheet date which might have wider impact with
reference to subsequent changes regarding the claim recovery both paid and outstanding
and also re- insurance balances will need to be brought out suitably.
12. Co-Insurance: Where the insured chooses to have more than one insurer for the same
transaction of risk, it would amount to coinsurance. The concept of co-insurance emerges,
when there is a predetermined set of understandings, leader of the business receives the
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 premium and issues policy with a co-insurance clause in the policy and the referred leader
also settle the claims to the insured in case of the occurrence of claims. Balances pertaining
to other companies relating to premiums and claims are accounted under co-insurance as
“Amounts due to / due from” other insurance companies.
Balances are settled in periodical meetings and exchange of statements as agreed between
the companies. Suitable slot can be provided in the systems to incorporate co-insurance
requirements. Most of the practice in accounting and settlement of co-insurance
transactions are industry specific and insured specific. Hence, system may suitably be
designed to accommodate all the possibilities of co-insurance accounting and settlements.
The auditors should get information from the agreement arrived at the Insurance Council,
where the insurance companies may choose to be the members. (Wherever the concept of
Insurance Council is in place). Members of the Insurance Council could arrive the mutually
agreeable terms and norms of entering into coinsurance agreement and the norms for
settlement of dues. The Insurance Council may recommend the following norms while
entering into coinsurance agreement:
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  Settlement of commission Collection and Remittance of service tax
 Standard practices for settlement of dues
 Settlement of claims
 Reinsurance arrangement for the risk booked
 Exceptional booking and the powers thereof deviating from the Council’s understanding.

The auditor should go through the understanding of the Council and ensure that the risks are
covered as per the terms and conditions with adequate consideration and proper settlement.
18. Solvency Margin: Section 64VA of the Insurance Act, 1938 as amended by Insurance Laws
(Amendment) Act, 2015 requires every insurer and re-insurer to maintain an excess of the
value of assets over the amount of liabilities at all times which shall not be less than 50% of
the amount of minimum capital as stated under section 6 (requirement as to capital) of the
Act and arrived at in the manner specified by the regulations.
The Authority, by way of regulation, shall specify a level of solvency margin known as

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 control level of solvency’. However, in certain special circumstances, the authority may direct
application of this provision with some modifications provided this shall not result in the
control level of solvency being less than what is stipulated in above para.
If, at any time, an insurer or re-insurer does not maintain the required control level of
solvency margin, he is required to submit a financial plan to the Authority indicating the plan
of action to correct the deficiency. If, on consideration of the plan, the Authority finds it
inadequate, the insurer has to modify the financial plan.
Maintenance of solvency margin has a great importance for an insurance company
considering their size and nature of business and also involvement of public money. Sub-
section (2) of section 64VA states that if an insurer or re-insurer fails to comply with the
prescribed requirement of maintaining excess of value of assets over amount of liabilities, it
shall deemed to be insolvent and may be wound up by the Court on an application made by
the authority.
The Insurance Act requires every insurer to furnish a statement of his assets and liabilities as
assessed in the manner laid down by the section 64V.
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 Every Insurer is required to prepare a statement of value of assets in “Form IRDA-Assets-
AA.” A statement of the amount of liabilities in case of general insurance business is to be
prepared in “Form HG” and a statement of Solvency Margin in “Form KG” as specified in
the Insurance Regulatory and Development Authority (Assets, Liabilities and Solvency
Margin of Insurers) Regulations, 2000. The statement of assets, liabilities and solvency
margin are to be certified by an auditor and filed by the insurance company with the
Authority along with the audited accounts and statements.
14. Trade Credit Insurance: "Trade Credit Insurance business" means the business of effecting
contracts of insurance in respect of trade credit insurance transactions.
"Trade credit insurance" means insurance of suppliers against the risk of non-payment of
goods or services by their buyers who may be situated in the same country as the supplier
(domestic risk) or a buyer situated 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 (protracted default) or non-payment following an event outside the control
of the buyer or the seller (political risk cover).
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 Political risk cover is available only in case of buyers outside India and in countries agreed
upon at the proposal stage.
"Trade Credit Insurance transaction" means a transaction between two persons for supply
of goods or services on open and agreed terms.
"Trade Credit insurance policy" is a conditional insurance contract between two parties
(insurer and seller) that cannot be traded and is always directly related to an underlying
trade transaction, which is either the delivery of goods or of services. The correct
fulfilment of this trade transaction and satisfaction of the contract terms is essential for
credit cover to exist.
Basic Requirements of a Trade Credit Insurance Product: An insurer shall offer trade credit
insurance product only if all requirements mentioned below are met -

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 (i) Policyholder's loss is non-receipt of trade receivable arising out of a trade of goods or services.
(ii) Policyholder is a supplier of goods or services in consideration for a fair market value.
(iii) Policyholder's trade receivable does not arise out of factoring or reverse factoring arrangement or
any other similar arrangement.
(iv) Policyholder has a customer (i.e. Buyer) who 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.
(v) Policyholder undertakes to pay premium for the entire Policy Period.
(vi) Any other requirement that may be specified by the Authority from time to time.

Note: Students may note that procedure for remaining items of balance sheet items may be given on the
basis of general audit procedures applied in case of a company.

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10. CONTENTS OF AUDITOR’S REPORT
Apart from normal contents of Auditor’s report, as prescribed for ‘Limited Companies’ IRDAI has
prescribed the certain matters to be dealt with by the Auditors’ in their Report vide Regulation 3 under
Schedule C of IRDA (Preparation of Financial Statements and Auditor’s Report of Insurance Companies)
Regulations, 2002. The Schedule C is reproduced below –
“The report of the auditors on the financial statements of every insurer shall deal with the specified
herein –

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From above, it is clear that the auditor has to examine the contents of the management report
with a view to certify that there are no material inconsistencies in the same with the financial
statements. The auditor should, based upon the audit conducted and information and
explanations gathered during the course of the audit, verify that there are no material
misstatements in the management report. As far as certification of compliance with the terms
and conditions of the registration stipulated by the Authority is concerned, the auditor should
ask for the relevant documents from the management of the company and conduct an
examination thereof. Based on his observation, the auditor should certify the aforesaid
compliance.

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The auditor also has to state in the report that reliance has been placed on the certificate
obtained from the appointed Actuary in respect of IBNR/IBNER, PDR and other reserves
certified by the appointed Actuary of the company.
The auditor also has to issue a separate certificate on verification of cash, cheques in hand and
other securities as required by the Regulations.
10.1 Signatures and Reports to be attached with the Accounts and Statements
Sub-section (3) of section 11 of the Insurance Act, 1938 provides that the accounts and
statements referred to in sub-section (1) should be signed, in the case of a company, by the
chairman, if any, and two directors and the principal officer of the company. It further provides
that the accounts and statements should be accompanied by a statement containing the names,
descriptions and occupations of, and the directorships held by, the persons in charge of the
management of the business during the period to which such statements refers and by a report
on the affairs of the business during that period.

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 THANK YOU

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