INSURANCE COMPANIES. Purushottam Nyati February 21, 2015

Transcription

1 MAJOR ISSUES IN AUDIT OF LIFE INSURANCE COMPANIES Purushttam Nyati February 21, 2015

2 PRESENTATION PATH Unique features f Life Insurance Cmpanies Significant Audit Areas/Financial Statement Areas Key cnsideratin and Majr Audit/Accunting Issues Auditrs Reprt Page 2 Page 2

3 UNIQUE FEATURES OF LIFE Q INSURANCE COMPANIES

4 UNIQUE FEATURES OF LIFE INSURANCE COMPANIES Regulated by Insurance Regulatry Develpment Authrity - IRDA All Prducts duly apprved by IRDA Features, Claims benefits, Cmmissin payments, etc. Maintenance f Slvency Margin rati similar t Capital Adequacy Rati mandatry fr Banks IRDA prescribes the fllwing related t Financial Statements: Page 4 Frmat f Financial Statements (Schedule III f the Cmpanies Act 2013 des nt apply) Separate Incme Statement fr Plicyhlder and Sharehlders Recgnitin and measurement f principles f certain items f financial statements Investment, Premium, Cmmissin, Free lk cancelatin,, Benefits paid, etc.) Applicability f Accunting Standards (except 3, 13 and 17) Page 4 Additinal disclsures in the financial statements

5 UNIQUE FEATURES OF LIFE INSURANCE COMPANIES Cncept f Mandatry appintment f Jint auditrs and cling perid Rle f Appinted Actuary - Prduct design, Actuarial Liabilities, etc. Cntents f Auditrs reprts has been prescribed Incme tax calculatin under sectin 44 (Sectin 28 t 43B is nt applicable), First Schedule and Sectin 115 B f the Incme tax Act, 1961 Page 5

6 SIGNIFICANT AUDIT AREAS/FINANCIAL STATEMENT AREAS

7 SIGNIFICANT AUDIT AREAS / FINANCIAL STATEMENT AREAS Premium and Reinsurance Cmmissin Benefits Paid Investments Actuarial Liability Payrll Page 7 Page 7

8 KEY CONSIDERATION FOR AUDIT OF LIFE INSURANCE COMPANY GENERAL Audit apprach is principally very similar t thse f ther Sectrs such as Banks, Mutual Funds, Manufacturing, etc. Risk Based Audit Apprach: Vlume and size requires auditrs t use a Risk based apprach. This apprach emphasizes n cverage f all majr areas f risk based n bjective assessment f risk factrs, their significance, and materiality. Use f In-huse experts fr cmfrt n Infrmatin Technlgy Systems, Tax psitins, etc taken by the Cmpany. Business and prduct understanding and their accunting Understand issues existing in the Insurance Industry Accunting, Taxatin, etc. Mnitring i f IRDA website bi fr circulars/rders d issued t Cmpany & Peer Page 8 Cmpanies Page 8

9 KEY CONSIDERATION FOR AUDIT OF LIFE INSURANCE COMPANY GENERAL Crdinatin /Discussin amng the Jint Auditrs All the critical matters/bservatin/issues shuld be discussed between the auditrs and there shuld be cnsensus n the issues/bservatins Allcatin f items f Trial balance between the Jint Auditrs Rtatin f areas amng auditrs May be 2 years Page 9 Page 9

10 COMMISSION KEY CONSIDERATION Understand cmplete prcess frm recruitment f agents till terminatin f agents vis-à-vis accunting entries Ensure rates at which Cmmissin/Brkerage is paid are duly apprved in File & Use guidelines fr respective prducts. Ensure that Cmmissin is paid within the prescribed limits as set by IRDA. Understand Cmpany s cmmissin plicy twards terminated agents, emplyees earlier wrking as agents and vice-versa fr payment f first year and renewal premium Review varius ther payments made t brkers/agents and assess the cmpliance under Sectin 40A Page 10

11 COMMISSION AUDIT /ACCOUNTING ISSUES Can the Cntest payuts be cnsidered fr cmpliance with Sectin 40A f the Insurance Act, 1938? Are Cmpanies liable t pay the Renewal Cmmissin i t agents wh have nt renewed the License and if yes, whether it is incmpliance with Sectin 40A? Can Cmpanies pay the renewal cmmissin t emplyees fr business generated during agency (relatinship) perid? Whether cmmitment fees paid by Insurance Cmpanies can be deferred r accunted upfrnt and whether the same is t be cnsidered fr cmpliance with Sectin 40A? Whether TDS n Cmmissin cnsidering IT Department Circular f 1973? t be deducted n Grss r Net amunts Whether payments made under Skill building schemes/arrangements need Auditr s Prfessinal Skepticism?

12 BENEFITS PAID KEY CONSIDERATION Review the Claims settlement terms agreed upn by the Cmpany in File & Use guidelines Understand the nature f claims and prcess theref Death, Maturity, Mney-back, Surrender (including partial surrender) Review the prcess f receipt f claims intimatin t its final payment Understand the Cmpany s plicy fr investigatin f claims Verify the calculatin f surrender charges and the same shuld be in line with File & Use. Verify adherence t cut ff prcedures by Cmpany fr Claims and Surrender intimatin received n last day, its status t in plicy admin system and its related impact n the Actuarial Liabilities Page 12 Page 12

13 BENEFITS PAID KEY CONSIDERATION Understand d the Internal cntrl ver the fllw up prcess fr payments twards Plicies matured/terminated, etc. Review the basis f prvisin twards cases under litigatin and amunts disclsed as cntingent liabilities. Ensure that actuarial reserves carried in the bks and payments made, if any are t be adjusted against prvisins t be made Perfrm data analytics between varius systems f the Cmpany and current status f Plicies (discussed in detail later) Page 13 Page 13

14 BENEFITS PAID AUDIT /ACCOUNTING ISSUES Whether the Cmpany has built sufficient cntrls t restrict pile-up f Unclaimed amunt by Plicyhlders? A steep increase in the unclaimed amunt has becme a cause f cncern fr the insurance cmpanies. (Whether insurance cmpanies are liable fr interest payment n such dues as they are earning returns n the same, is a matter f debate.) Whether Cheques issued dated March 31 but nt dispatched t plicyhlder, can be accunted in that perid? (T disclse lwer liability) Whether litigatins with Plicyhlders can be cnsidered fr cntingent liabilities disclsure? Whether prvisin has been made fr all the claims intimated at the end f the year Cmpany and whether crrespnding update has been made in the System?

15 BENEFITS PAID AUDIT /ACCOUNTING ISSUES Whether any adjustment is required in the financial statements fr Cheques issued prir t reprting perid but cnverted t stale befre sign ff the financial statement? Whether Death claims can be repudiated n nn-receipt f mandatry dcuments by Insurance Cmpanies?

16 BROAD LIFE CYCLE OF POLICY IN POLICY ADMIN SYSTEM Plicy Status IF Infrce Plicy On issuance f Plicy Brief Descriptins LA Lapse Nn payment f premium fr traditinal plicy within Traditinal due date including grace perid LU ULIP Lapse Nn payment f premium fr ULIP plicy within due date including grace perid LS Aut freclsure Pst cmpletin f revival perid f ULIP plicy SW Discntinuance Nn payment f premium fr ULIP plicy Plicies issued after 2010 PU Paid Up Nn payment f premium fr Traditinal plicy after 3 years SU Surrender Pst cmpletin f 3 years plicyhlder can cme fr surrender RD Death Register On receipt f intimatin f death f plicyhlder MU Maturity On cmpletin f Plicy perid Page 16 Page 16

17 DATA ANALYTICS - ILLUSTRATIVE Whether plicy is still under In-frce status thugh the premium is nt received within due date including grace perid Whether plicy is still under ULIP Lapse status after cmpletin f its revival perid Whether Plicy gets under Matured status after Risk Cessatin date Whether all in frce plicies f a Plicyhlder has been apprpriately dealt pst receipt f intimatin f death against ne plicy Page 17 Page 17

18 ACTUARIAL VALUATION OF LIABILITIES All Insurance Cmpanies are required t have an appinted actuary wh is respnsible fr ascertaining the actuarial prvisins twards plicies in frce and under discntinuance stage Insurance Reserves certified by the Appinted Actuary (als knwn as actuarial reserve) frm a significant item f Liability in the Financial Statements f Insurance Cmpany. An auditr is required t state that reliance has been placed n Appinted Actuary fr actuarial valuatin f liabilities in their Auditrs Reprt. Page 18 Page 18

19 ACTUARIAL VALUATION OF LIABILITIES AUDIT/ACCOUNTING ISSUES Can an auditr step in the shes f Actuaries and verify the actuarial reserves? Para A34 t Para A48 f Standard n Auditing Audit Evidence requires an auditr t dcument the reliability f infrmatin prduced by management s expert. Accrdingly, Auditrs shuld fllw the belw prcedures: Auditrs must review the assumptins used by Actuaries & benchmark the assumptins used by Peer Cmpanies Validate the inputs received frm varius systems fr calculatin f actuarial liability Obtain the list f plicies which are nt cnsidered fr actuarial valuatin and reasns theref Page 19 Page 19

20 ACTUARIAL VALUATION OF LIABILITIES AUDIT/ACCOUNTING ISSUES Whether the effect has been given in the actuarial liabilities twards prvisin has been made fr Premium will nt be received in the grace perid based n persistent rati. (Please als assess the related effect n Cmmissin and Reinsurance)? Free Lk In Cancellatin f Plicies and Cheques dishnr fr first year & renewal plicies after the reprting date but befre the singing f the financials? Whether the Actuarial Liabilities needs t be presented net f reinsurance reserves r grss? Page 20 Page 20

21 THANK YOU AUDITORS REPORT Page 21

22 AUDITORS REPORT IRDA prescribes matters t be dealt in the Auditrs reprt vide IRDA (Preparatin f Financial Statements and Auditrs Reprts f Insurance Cmpanies) Regulatin 2002 Reliance placed n Actuary fr Actuarial Valuatin f Liabilities Cmpliance with IRDA guidelines specifically in respect f investment valuatin Review f management reprt fr incnsistencies with the Financial Statements Cmpliance with the terms and cnditins f the registratin Verificatin f cash balances and investment Cmpliance with the applicatin f assets f plicyhlders funds Page 22 Page 22

23 THANK YOU Mbile: Page 23