Authoritative documents include:
- The Insurance Act
- The Companies Act
- IFRS 4 Insurance Contracts
The main legislation governing insurance companies and their conduct is the Insurance Act
Key audit areas: For an insurance company these are:
- unearned premiums, and
- Expired risks, this is when a category of business has proved to be unprofitable provision is made for future losses on risks already accepted,
- Outstanding claims,
- Ascertainment of debtors and creditors,
- Actuarial valuation re: life insurance.
Insurance companies like banks are also subject to special exempting provisions in the Companies Act and in the Insurance Act. Unlike banks, not only do they take advantage of the special provision but are in fact required by the Commissioner to take advantage of the provisions. The auditor therefore, in practice gives two audit reports for an insurance company and is also required to sign various reports that are submitted to the Commissioner of Insurance. The insurance company prepares statutory accounts which are audited in the normal way and a true and fair view report given and these are submitted to the members in the normal way and adopted and dividends paid on their strength. The Commissioner then requires accounts to be prepared in accordance with insurance regulations taking advantage of creating secret reserves. These are also audited and reported on accordingly by the auditor but not in true and fair view terms but rather by simply stating compliance with the insurance act.
Key audit areas in detail
(a)Ascertainment of debtors and creditors. Insurance companies do not maintain their personal ledgers in such a way as to produce directly a separate list of debtors and creditors. Their ledgers instead reflect the section of the market from which the business originates e.g. broker, reinsurer, direct policy holder etc, hence it is quite possible that both debtor and creditor balances will exist in one ledger sometimes for the same person. The legal position with regard to right of set off between debit and credit balances with the same person is not clear. From a professional point of view the auditor must ensure therefore that the company adopts a consistence approach in establishing the separate amounts of debtors and creditors.
(b)Unearned premiums: This represents the appropriate portion of a premium received during the year under review but is applicable to later accounting periods. Once again, a consistent approach should be adopted and the accounts should declare the basis selected by the insurance company under the heading of accounting policies. The most common basis adopted for annual premiums is the 24th basis.
(c)Expired risks: This represents the carry forward of provisions to the next accounting period in circumstances where it appears that insurance business undertaken in the period under review is unprofitable. This makes it similar to the provision on long term contracts in the construction industry. The audit difficulty is that a considerable element of adjustment enters the computation of such risks, the issue is for the auditor to form an opinion on the need for such a provision and if one exists whether the sum provided is adequate.
(d)Outstanding claims: We can classify these claims in the following three categories:
i. Those which have been notified and agreed but are still outstanding at the balance sheet date
ii. Those which have been notified before, but not yet agreed at the balance sheet date and
iii. Those which have arisen but have not yet been notified to the company by the balance sheet date.
A good deal of estimation is needed with regard to category (ii) and (iii) above. The audit procedures therefore would invariably include, review of the claims files in order to appraise the company's estimates. We must also compare the average cost of outstanding claims for each class of business with current experience and finally the auditor should examine statistical elements comparing past estimates with actual results.