Who are Insurance brokers? Regulation 2(k) of the Insurance Regulatory and Development Authority of India (Insurance Brokers) Regulations, 2018 provides the definition of an insurance broker which means a person who can be a direct broker, a reinsurance broker or a composite broker for the time being registered by IRDAI. It must be noted that a person according to given definition includes a company registered under the Companies Act, 2013 or a cooperative society registered under the Co-operative Societies Act, 1912 or under any law for the registration of co-operative societies; or a limited liability partnership formed under the e Limited Liability Partnership Act, 2008 or any other person recognised by IRDAI as the an insurance broker. Capital Requirements for Insurance brokers The first thing that is checked in an insurance broker audit is whether the Insurance brokers have maintained the following minimum prescribed paid-up capital/ contribution: Direct Broker – 75 lakhs Reinsurance Broker – 4 crores Composite Broker – 5 crores It will be seen whether the investment in the insurance broker made by the applicant has been made by the promoters/ shareholders/ partners from their own funds or from other sources. Deposit Requirements for Insurance brokers An insurance broker auditor shall also scrutinise whether the deposit requirements have been fulfilled by the insurance broker before commencement of its business where the depositor shall keep deposited the following amount with any scheduled bank equivalent to: 10 lakh Rupees for Direct brokers 10 percent of the minimum capital/ contribution mentioned under the abovementioned capital requirements for the reinsurance brokers or composite brokers in a fixed deposit which shall not be released to the brokers without the prior permission of IRDAI. Professional indemnity insurance for Insurance brokers An insurance broker auditor must ensure that every insurance broker must take out and maintain all the times a professional indemnity insurance cover throughout the validity of the period of the Certificate of Registration issued to them by the Authority as specified under the Regulations. What are the Aspects of Insurance Broker Audit Net worth Requirements An insurance broker at anytime during the period of certificate of registration is required to maintain the net-worth of Rupees 50 lakhs in case of direct broker and 50% of the minimum capital requirements or contributions or equivalent specified under Regulation 19(1) in case of composite and reinsurance brokers. The insurance broker auditor is supposed to check whether insurance broker has submitted to the IRDAI a net-worth certificate duly signed by an Auditor every half year. Internal controls and systems It is the duty of every insurance broker to ensure that a proper system of internal audit is in place and such systems are adequate according to their size, nature and complexity of the business. Additionally, in case of reinsurance and composite brokers it is required on the part of the insurance broker to have internal audit systems in place and designate a compliance officer who is an employee of the insurance broker. An insurance broker auditor must check whether the insurance broker, who earns more than Rupees 5 crores in remuneration including the awards, has designated a compliance officer who is responsible for the internal controls and systems. Maintenance of books of accounts, records etc. It is encumbent upon every insurance broker to prepare for a financial year a balance sheet or a statement of affairs at the end of each accounting period; a profit and loss account for that period; a state of cash/fund flow through direct method and additional statements on insurance brokering business which may be required by the IRDAI. The insurance broker is required to submit to IRDAI a copy of audited financial statements of the above mentioned records along with an auditor’s report on that within a period of 30 days of holding an annual general meeting or before 30th September every year whichever is earlier. The statutory auditor is also supposed to give his remarks or observations, if any, on the state of accounts, conduct of business etc. along with an explanation on such observations which shall be appended to such accounts to be filed with IRDAI. An insurance broker auditor must check whether the broker has taken any steps to rectify the deficiencies made out by the auditor in its report, within a period of 90 from the date of submission of the auditor’s report. According, the broker has to inform IRDAI about the steps taken by it to about the steps taken. The insurance broker is supposed to maintain all the above mentioned books of accounts, statements, documents etc. at the head office of the insurance broker or any other office designated by the broker and notified to IRDAI. This is done for the ease in inspection of such records by the officers of IRDAI. All the books of accounts, records and other above mentioned documents need to be maintained for at least a period of 7 years from the end of year to which they relate. In case where the documents relate to cases pending before the court of law, then such documents are supposed to be maintained till the disposal of such cases. Further, in case of reinsurance brokers, all other documents need to be maintained till its natural expiry. An insurance broker auditor is supposed to issue a certificate confirming compliance of these regulations in the prescribed format given in the schedule and the same shall be submitted to IRDAI by the Auditor. On the other hand, every insurance broker is required to submit the details of the statutory auditors engaged by them along with the audited accounts given in the prescribed form. It must be noted that an insurance broker can appoint the insurance broker auditor for a maximum continuous period of up to 5 years. Ceiling on the business from a single client The insurance broker auditor must check whether the business of the insurance broker is carried in such a manner that not more than 50 per cent of the business of the broker is generated from any one client during a financial year. An insurance broker is required to furnish a certificate duly furnished by a Chartered Accountant confirming compliance with this regulation every year along with the audited accounts. Obligations of the Insurer: An undertaking has to be filed by the insurer within the group that it will not pay a higher remuneration or reward to the insurance broker within the same group compared to what is payable to other brokers for the same class of insurance or insurance products; it will refrain from quoting terms to the insurance broker within the group that are more favourable than the terms quotes to other insurance brokers on the same proposal for insurance and it will not design special insurance products for sale exclusively through the insurance broker. The insurance broker auditor has to ensure that the insurer has filed an audit certificate on compliance with the above mentioned undertaking on an annually with the audited accounts of the insurer. Obligations of the insurance broker: The broker needs to make explicit disclosures of it being a sister company of the insurer and is part of the same promoter group in all the stationary that is used for communication with the clients, in the publicity materials and at all the offices of the broker. An insurance broker auditor needs to ensure whether the broker has disclosed Related Party transactions with the insurance company belonging to the promoter group in it s audited accounts and balance sheet as described in the Accounting Standards. Obligations on both Insurer and the Insurance Broker: An insurance broker auditor needs to check whether the insurance company or the insurance broker maintains arms length distance which means that no employee or director of the insurance broker shall be a director, employee or agent of the insurance company. The auditor also needs to ensure that the broker does not offer loan or other such facilities or incentives to officers or employees of the insurer within the group or vice versa. Filing of Returns An insurance broker auditor has to ensure whether following certificates duly certified by the auditor have been furnished to IRDAI before 31st October and 30th April each year: A certificate spelling that the insurance broker is maintaining the required capital; that the insurance broker is not engaged in any other business other than insurance broking and that the broker maintains the required net-worth required under the applicable regulations and the prescribed annexure. A certificate indicating that the insurance broker is maintaining the deposit in the scheduled banks in accordance with the applicable regulations and annexures; A certificate indicating that a Professional Indemnity Policy is in force according to the applicable regulations and annexures mentioned in the regulations; A certificate indicating that the insurance broker has received the remuneration according to the limits prescribed in the applicable Regulations and related annexures; A certificate indicating that a reinsurance broker or a composite broker is in compliance with the provisions of the Regulation 33 of the Insurance Regulatory and Development Authority of India (Insurance Brokers) Regulations, 2018 and that a separate Insurance Bank Account is being maintained and that monies lying in the said account are not being used for any purposes other than specified in the abovementioned regulations; A certificate in case a composite broker or a reinsurance broker on the amount of remuneration or fees earned during the period and any transfer made any other account as per these regulations. 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