An Overview of the Different Types of Insurance Audits

Insurance Audit

The Audit is done to ensure proper insurance rates and premiums are implemented and that the insurance companies follow regulator or federal laws. Some specific areas to verify during insurance audits are claims and commissions. Further, the insurance auditors must also maintain quality control between the policyholders and Insurance Companies.

What is Insurance Audit?

Section 12 of the Insurance Act 1938, every insurer must audit the financial statement annually by the Auditor prescribed by the IRDA, 1999; every insurer concerning his insurance business and also its shareholder’s funds should prepare:

  • A Balance Sheet
  • A Profit & Loss Account
  • Separate Account of Receipts
  • Payments and a Revenue Account

All these must be done as per instructions given under IRDA regulations. It must be conducted each financial year.

Audit insurance is an independent examination of the company’s accounting records that expresses a professional opinion about the accuracy.

The auditors of an insurance company are appointed at the annual general meeting by  Board. After the amendment to the Insurance Act, 1938, and the Companies Act 2013,  the (IRDAI) has issued revised guidelines for the  Insurers should comply with the provisions relating to the appointment of Auditors as provided in the Companies Act 2013.

The insurers shall also comply with the provisions contained in such guidelines. After the Audit Committee’s recommendation, the Board appoints an auditor concerning the shareholders’ approval at the general meeting of an Indian insurance company. The branch auditors are also appointed to conduct the Audit of the division branches, and they would have the same rights and obligations under the statute. However, the branch auditors at the division level certified the financial statements of the branches. An insurer can only remove its statutory Auditor with the Authority’s prior approval. An audit firm can only accept the audits of includes: Life, Nonlife, Health, and Reinsurer at a time. The appointment of the Auditor can be cancelled if he acts in contrast with the guidelines.

Essential Points of Insurance Audit.

1. Premium verification

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The premium collection of the amount is credited to a separate bank account; withdrawals are only sometimes permitted to meet the general expenditure. But as per the insurance company’s policy, the collections are generally transferred to the Regional Office or Head Office. The insurer shall assume no Risk without receipt of the premium according to section 64VB of the Insurance Act, 1938[1]. Verification of premiums is of utmost importance to an auditor because the premium is collected upon issuing policies to the insurer. Sometimes it is risky to bear the consideration amount by the company.

The Auditor should comply with the following procedures by the companies Act regulation.

  • Before continuing the verification of premium income, the Insurance Auditor must verify the internal controls and compliance laid down for collecting and recording the income premiums.
  • The cover notes should be serially numbered.
  • The Auditor must examine whether the Premium Registers have been adequately maintained, exact particulars, including GST charged and other services.
  • The Auditor should verify whether the premium figures mentioned in the register are similar to General Ledger.
  • The Auditor should verify that the installments falling due on the balance sheet date, or whether received or not, have been adequately accounted for as premium income for the year under Audit.

2. Claims verification

The Insurance Auditor should obtain information from the divisions or branches to verify the documents and give due importance to a high-value claim. Under policies, the claim comprises loss incurred and claims of pending settlements. The settlement cost of claims includes legal expenses, surveyor etc. The Claim Account is debited with the payments, including survey fees, repair charges, fire fighting expenses, police report fees, amount decreed by the Courts, travel expenses etc.

The Auditor should-

  • Verify that the provisions have been made for every unsettled or settled claim.
  • Verify the claims for which the company is legally liable.
  • Check whether the provision made usually does not exceed the amount insured.
  • Further verify the co-insurance arrangements of shares and the liability.
  • Verify that the paid claim should be duly sanctioned by the Authority concerned
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 3. Commission verification

An agent’s remuneration is paid through a commission by applying a percentage to the premium he collected. The agent’s commission should be payable, and the amount is debited to Commission on Direct Business Account. Insurance agents solicit the insurance business. The Auditor should verify the.

  • Voucher disbursement entries concerning the disbursement vouchers with copies of commission bills and commission statements.
  • Check vouchers are authorised by the officers–in–charge as per rules and verify whether the income tax is deducted.
  • Check the integrity of the correctness of the amounts of commission allowed.
  • To check whether the commission outgo for the period under Audit has been duly accounted.

 4. Operating expenses verification

 All the administrative expenses in an insurance audit are broadly classified in Schedule IV.

The Auditor should examine

  • Expenses over Rs.5 Lakhs or 1% of the net premium, whichever is higher, should be shown separately; and
  •  Expenses not directly relating to the insurance business should be shown separately, for example, expenses relating to the investment department, bank charges etc.

Types of Audits Assurance

1. Physical Audits

A physical audit is an on-site review of the organisation’s records by the Auditor in general. However, the business records are located at an organisation’s address other than your policy address or outside the accountant’s office. In that case, the same information should notify the Auditor.

2. Mail Audits

If a physical audit cannot be conducted, an audit is completed through the mail. One is to provide records to support this,  such as copies of tax or other relevant reports.

3. Preliminary Audits

The Auditor will review a representative period to project the premium for the entire policy term.

The Auditor may request information needed for an Insurance Audit. If more than one company or more entities are insured under one policy, the Auditor may request the information from each company or entity.

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General Informations

Describe company operations officer’s/owner’s names, titles, employee names and duties, number of employees working at each branch, and names of sub-contractors in insurance.

Payroll Record

Gross pay comprises

1. Bonuses, commissions, holiday pay, sick pay, overtime pay, vacation pay and all

2. Pretax amounts under section 125 amounts/401(k) amounts

3. Overtime pay is shown separately

Subcontractor Information

4. General ledger, cash disbursements book and chequebook registers.

5. Names of subcontractors and certificates of insurance.

6. Tax documents to Verify Payroll/Sales Records, income tax returns, etc.

Gross Sale

  • Gross sales for a different service or work performed by each branch location.
  • Profits and loss statements
  • General ledger or record
  • Gross sales premiums are commonly used for Commercial General Liability.
  • Gross sales comprise the total amounts charged for all products and services.
  • Gross sales exclude sales tax, returns and allowances. Cash discounts are not excluded.


The sub-contractors provide the Worker’s Compensation scheme and General Liability certificates of insurance. If the subcontractor does not provide a certificate of insurance, then the premium will be charged to them.

The premium for uninsured subcontractors can be substantial, so obtaining proof of insurance from subcontractors is advantageous.

Uninsured subcontractors are covered under the principal contractor’s policy and are classified based on the classifications that would apply if the principal’s employees performed the work.


Insurance audits are a routine part of commercial insurance policies, such as general liability and worker’s compensation. The premium is based on that year’s estimated exposures when these policies are issued. Factors include employee payroll, gross sales, and the cost of sub-contractors. The insurance company will contact the business owner to complete an audit when the policy term ends. The Audit is conducted to confirm the total business exposures for the year. The premium is then adjusted based on the actual numbers for the year provided in the Audit.

Also Read: What Is a General Liability Insurance Audit?

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