How to Prepare an Insurance Audit
The Insurance audit examined policy and liability procedures, risk valuation, tax documents, and other financial records of insurance. It ensures that proper insurance rates and premiums are implemented and that insurance companies follow the statutory laws. Claims and commissions are essential factors during audits. However, the auditors are expected to maintain quality control and balance between insurance companies and policyholders.
The Indian insurance company was formed and registered under the Companies Act 2013. Section 2 of the Insurance Act 1938 means that the aggregate holdings of equity shares by a foreign company, or through its subsidiary companies or by its nominees, do not exceed twenty-six per cent of the paid-up equity capital of such insurance company. The purpose of the Indian Insurance Company is to carry on the life insurance business, general insurance business, or re-insurance business.
Types of the Audit
Three different types of audit can be performed:
- External Audits
An external third party performs the audit where the third party provides a more unbiased and independent opinion since they are not subject to conflict of interests.
- Internal Audits
The internal employees of a company or an organisation perform the audit. The audit is not usually concerned with outside opinion but is used internally.
- Government Audit
The Gov. entities to ensure that the prepared financial records do not misrepresent taxable income. Generally, the audits are conducted by tax collectors.
Workers Compensation policy
Workers’ Compensation policies depend on estimated payrolls when written initially. The audit determines the actual payroll, remuneration and any uninsured contractors paid during the policy term being audited. The following items need to be furnished to the auditor at the time of audit is performed:
- Payroll Records – 941- Federal Tax Quarterly Reports;
- Individual Employee earnings with any overtime shown separately
- Provide a detailed explanation of each employee’s job duties to ensure proper classification
- Provide proof of all payments to all independent contractors and all subcontractors
- Provide copies of all certificates of insurance for independent and subcontractors proving they have workers’ compensation in force during the audited period or copies of the contractor exemptions filed with the state.
- Provide a detailed description of the business operations
- After the given details, the company calculated, prepared and provided a final audit, which could result in a return or a premium increase.
- The insurance company usually performs a General Liability insurance audit to determine if all risk exposures have been captured. It ensures that there is proper coverage for those exposures, as well as a reasonable premium charged.
- Depending upon the class code used to rate the coverage.
- The General Liability auditor requests the total annual receipts, the payrolls and any payments made to independent and sub-contractors during the audited policy term. The auditor required copies of the independent and sub-contractors certificates of insurance proving that General Liability coverage was in place during the audited period.
- Once all audit information is given to the auditor, the insurance company calculates, prepares and provides the final audit, either a return or a premium increase. Suppose there is a significant increase in risk exposures for the previous term. In that case, the current policy term is endorsed to reflect the previously audited term, and an additional premium will be due to the insurance company.
Preparing for an audit is a daunting task, usually because there needs to be more guesswork in the insurance world. Class codes and their corresponding description are readily available to agents for all lines and coverage. By setting the right policy, reviewing exposures is needed to keep the information organised.
Also Read: What Is a General Liability Insurance Audit?
Minakshi Bindhani has completed LL.M. with a specialization in Criminal Law from Madhusudan Law University, Cuttack, Odisha. She is more inclined toward legal research and writing and have prior experience in Civil and Criminal litigation and content writing.