Key Considerations during Audit of Insurance Companies

Audit of Insurance Companies

The insurance audit is a mandate of the insurance Companies. The change in business operations leads to a change in insurance premiums. The need for Insurance audits arises due to the requirement of estimation of insurance policies estimation at the time of underwriting. These policy types require a premium adjustment as per the exposures incurred during the policy term.

Insurance Audit: Meaning

Sec- 12 of the Insurance Act 1938[1], the auditor must audit the financial statements of the insurers on an annual basis. The insurers must provide the below-mentioned documents in respect of their insurance business and shareholders’ fund to the auditor as per the Insurance Act 1999

  • Balance Sheet
  • Profit and Loss Account
  • Different Receipts Account
  • Payments and Income Account

Applicability of Insurance Audits

The insurance audit shall be applicable to all types of insurance contracts, whether it is for individuals or entities.

The types of insurance wherein the insurance audit is applied are mentioned below.

Property insurance can be for stock, buildings, reserves, or homes.

  • Liability Insurance such as public liability, employer’s liability, professional indemnity, product liability, environmental liability etc.
  • Business Interruption and employee embezzlement insurance.
  • Insurances in connection with money and property theft
  • Transit Insurance that like sea, air, or land.
  • Life Insurance such as Permanent Insurance, Term Insurance, etc.
  • Health Insurance is individual or group insurance.
  • Employees benefit from Insurance Plan that includes life, accident, and health.
  • Pension Insurance includes individual or group pension insurance.
  • Vehicle Insurance consists of individual and vehicle fleets.

Key Considerations during Insurance Audit of Insurance Companies

The points which must be considered during the audit of insurance companies are discussed below –

Verification of premium

  • The premium collections are usually credited separately; no withdrawals are allowed on that account for general expenses.
  • The collection is forwarded to the RO or Head Office as mentioned in the insurance company policy,
  • As per Section 64VB of the Insurance Act of 1938, the insurer won’t take the risk without receiving a premium.
  • The auditor must confirm the premium, as the insurance premium is collected at the time of issuance of policies.
  • It is a consideration for bearing the risk of the insurance company.
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Procedure Applied by the Auditor General

The following procedures shall be applied by the Auditor-General.

  • The auditor must take into consideration the compliance and internal controls rules, which are set for the collection and recording of premiums prior to initiating the payment of revenue.
  • Sequentially numbering of the cover notes
  • The auditor must check the manner of maintenance of registers, i.e. chronologically, providing entire details,  inclusive of the GST charged as daily admission advice.
  • The auditor must verify the receipt of the amount stated in the register and those indicated in the general record.
  • The auditor shall also ensure that the instalments payable on or prior to the date of receipt of the balance are calculated as the revenue for the review year.

Claims Verification:

The auditor of each division or branch must be provided with access to information for all categories of business. The total number of documents to be inspected shall be determined by the Auditor-General, giving due consideration to high-value claims.

  • The claim account is deducted from all payments, including repair costs, survey fees, photographic costs, etc. The Auditor-General shall be
  • Checking the provision of non-adjustable claims
  • Checking whether the provision is made for those applications that the company is legally responsible for
  • Checking that the provision is not higher than the insured amount.
  • Check out Co-insurance programs; the company has made provisions in respect of its expected credit allocation.

Verification of Commission:

The agent’s salary is determined by the commission. Remuneration is calculated using the percentage of the proceeds collected by the agent.

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The commission is paid to the agents of the purchased business and is deducted from the commission in the Direct Business Account. Insurance agents usually ask for an insurance business. The Auditor-General will verify the following:

  • Authorization of the vouchers by law enforcement officers and deduction of income tax at the point of origin.
  • Vouchers’ entries regarding payment vouchers and copies of commission bills and statements.
  • Check the amount of allowed commission
  • Check for commission calculation time.

 Verification of Operating Cost

the operating costs that must be checked by the auditor are

  • Cost exceeding Rs. 5 lakhs or 1% of the total payable amount, depending on the maximum. This should be shown separately.
  • Costs which do not have a direct relation with the insurance business are required to be shown separately.

Key Points which are Checked at the time of Insurance Audit in the Company’s Balance Sheet

The key points considered during the same in the Balance Sheet of the Company are


The auditor must follow the prescribed provisions regarding the investments of the Insurance Act of 1938; during the inspection of the insurance company’s investments,

  • The investment can be made only in the approved securities. However, the same can be done in securities other than approved securities.
  • upon the fulfilment of the below-mentioned conditions
  • The investment should be made with the consent of the BOD.
  • The investments made shouldn’t exceed 25% of the total investments made.
  • An insurer shouldn’t invest in shares or debentures of an insurance or investment company over the least of the following:
    • 10 per cent of its own total calculated assets.
    • 2 Percent of the subscribed share capital or debentures of the investee.
    • An insurance company isn’t allowed to invest in the shares and debentures of a pvt company.

Insurance companies aren’t permitted to invest in the funds of their policyholders outside India.

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Cash and Bank Balances

  • The auditor must do the following during the audit of insurance companies.
  • Preparation of BRS
  • Obtainment of confirmation of Bank Balances for all the accounts irrespective of operative or inoperative
  • Physical verification of the Term Deposit Receipts that are issued by the bankers. Generally, cash is deposited as term deposits with the bank at year-end.
  • Verification of the deposits and withdrawal transactions and also checking of the account is operated by authorized persons only.

In case of funds that are in transit, verification that the same is correctly reflected in BRS and outstanding Premium and Agents’ Balance

Such procedures that must be  followed in an agent’s balance are as follows:

  • Verification of whether the agent’s balances and outstanding balances in the outstanding premium account are listed, analyzed and reconciled for the audit.
  • If the recoveries of large and outstanding deposits have been made post-audit period.
  • Check if any old outstanding debts or credit balances at the year-end need adjustment, and a written explanation should be obtained from the management in this regard.
  • Checking the agent’s balances that don’t include employees’ balances and balances of other insurance companies.
  • Verifying that there is no credit of commission given to agents for businesses.


The Audit of Insurance includes all the essential details which must be provided to the policyholders by the insurance company. However, policyholders should also read the Audit carefully prior to issuing any policy. In 2013, u/s 177, the government of India made it mandatory for all insurance companies to include all the reports and statements in the Audit of Insurance.

Also Read:
An Overview of the Different Types of Insurance Audits
What Is a General Liability Insurance Audit?
Procedure for Registration of Indian Insurance Companies under IRDAI Regulations

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