Why Insurance Audit is Important for Insurance Companies?

  • September 25, 2023
  • Dushyant Sharma
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In India, insurance companies are established under the Companies Act of 2013. The definition of insurance audit is clearly outlined in section 12 of the Insurance Act 1938. As per this act, every insurance company is required to conduct an annual financial statement audit. This idea of insurance audits was commenced by the government in the year 1999 through the  IRDA Act. Every insurer should prepare  the following in accordance with their insurance business: 

  1. Balance Sheet
  2. Profit & Loss Account
  3. Separate Account of Receipts
  4. Payment and a Revenue Account

So, all of this must be done as per the IRDA regulations at the end of each financial year. The audit of insurance is done by professionals, it is an independent exam of accounting records. After evaluating the records, the professional will provide advice about the improvement in the records. Below is shared why auditors of insurance companies are required and the process of checking the P&L and Balance Sheet. Check to know different aspects of insurance audits. 

What is an Audit of Insurance Companies?

In the audit of insurance companies, the evaluation of insurance policies is done. While conducting an insurance audit, it is checked whether insurance rates and premiums include facilities for insurance coverage or not. Also, the audit ensures that all insurance companies are adhering to established laws and regulations. 

The previous claims made to the insurance company are also checked during the audit process. It is done to confirm whether the company has excluded any previous claims. However, insurance audits are crucial in maintaining a positive relationship between policyholders and insurance companies. The audit process provides guidance to insurance companies on how to attract and satisfy more customers.

However, the insurance surveyor and loss assessor investigates the loss of insurance claims, and the auditor of insurance companies checks the issues in your insurance business. Both of them assure that policyholder will get proper services, so their financial future can become safe.

Role of Insurance Auditors in Insurance Audit

  • The Central and Branch Auditors of an insurance company are appointed at the Annual General Meeting of the Company. 
  • An appointment from the Comptroller and Auditor General must be received before making the appointment. 
  • The insurers must comply with the provisions regarding the appointment of auditors as per the guidelines of the Insurance Act, of 1938, and the Companies Act, of 2013. 
  • The board appoints the statutory auditors as per the recommendation of the Audit Committee, subject to the shareholder's approval at the general meeting of the Indian Insurance Company. 
  • Branch auditors are appointed to conduct the audit of insurance company divisions and submit their reports to the statutory auditors. 
  • The branch auditors certify the Trial balance and incorporate the financial statements of the branches under the divisions at the division level. 
  • The insurer cannot remove the statutory auditor of insurance companies without obtaining the approval of the authority.

Important Audit Points in Profit & Loss Account of Insurance Company

Below are the important points that must be checked in the profit and loss account of the insurance company:

 the important points that must be checked in the profit and loss account of the insurance company:

Verification of Premium

For proper management of premium collections, the amounts are credited to a separate bank account that cannot be used for general expenditures. The policy of the insurance company shows that premium collections are transferred to either the Regional or Head Office. 

Section 64VB of the Insurance Act, of 1938 requires the insurer to receive premium payments before assuming any risk. For auditors, verifying premiums is crucial because they are collected upon issuing policies and considered the insurance company's risk-taking. 

  • To audit this, the auditor must examine the internal controls and compliance for premium collection and recording. 
  • Cover notes must be serially numbered, while Premium Registers should be chronologically maintained with full details, including GST charged on a daily basis as per acceptance advice. 
  • Confirms the premium figures in the register align with those in the General Ledger. 
  • The auditor also checks that all instalments due on or before the balance sheet date, whether received or not, are accounted for as premium income for the year under review.

Verification of Claim

To check the accuracy of the business, the auditor must gather information from each division/branch of business. Then the auditor must check the total number of documents to be reviewed and should prioritize the claim provisions of higher value. Claims under policies include both paid losses and estimated/anticipated claims pending settlement.

However, all payments, including repair charges, fire fighting expenses, police report fees, survey fees, court-ordered amounts, travel expenses, and photograph charges, are debited to the Claim Account. The auditor of insurance companies should check that: 

  • Provisions are made for all unsettled claims.
  • Provisions made do not exceed the insured amount.
  • In the case of co-insurance arrangements, the company has made provisions only for its own share of anticipated liability.
  • Claims paid have been sanctioned by the relevant authority.

Verification of Commission

The agents receive remuneration for businesses procured, in the form of a commission. So, this is based on a percentage of the premium collected and it is debited to the Commission on Direct Business Account. As an auditor, it is important to verify the following:

  • Disbursement entries on vouchers should match commission bills and statements.
  • Vouchers must be authorized by the appropriate officers according to rules and include applicable income tax deductions.
  • The accuracy of commission amounts should be test-checked.
  • Ensure that commission payments during the insurance company audit period have been properly accounted for.

Verification Of Operating Expenses

The 13 heads of administrative expenses are classified under 13 heads as mentioned in Schedule IV. So, the auditor should check:

  • Expenses in excess of Rs.5 Lakhs or 1% of 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.

Important Points to Check in Company’s Balance Sheet

The following are the key elements that must be checked during the insurance audit of the balance sheet:

The key elements that must be checked during the insurance audit of the balance sheet:

1. Investments

To examine an insurance company's investments, the auditor must be aware of the regulations outlined in the Investments of the Insurance Act, of 1938. The regulations are as follows:

  • The insurance company is only allowed to invest in approved securities unless certain conditions are met. These conditions include ensuring that the investments do not exceed 25% of the total investments and obtaining consent from the board of directors.
  • The insurer cannot invest in shares or debentures of insurance or investment companies beyond a certain limit. This limit is determined by the lesser of two factors: 10% of its total assets or 2% of the investee's subscribed share capital or debentures. 
  • The insurance company cannot invest in shares or debentures of a non-insurance or non-investment company beyond a certain limit. This limit is determined by the lesser of two factors: 10% of its total assets or 10% of the investee's subscribed share capital or debentures.
  • It is important to note that insurance companies are prohibited from investing in shares and debentures of private companies. Additionally, the funds of policyholders cannot be invested outside of India by insurance companies.

2. Cash and Bank Balances

In the cash and bank balances the auditor must check the following financial statements of the insurance company:

  • Bank reconciliation statements must be prepared. 
  • Confirm the bank balances for both operative and inoperative accounts. 
  • Physically verify term deposit receipts issued by bankers. Typically, all year-end cash is deposited as a term deposit with the bank. 
  • Verify random deposits and withdrawal transactions and check that only authorized persons operate the account. If there are funds in transit, the auditor should verify that they are correctly reflected in the reconciliation statement.

3. Outstanding Premium and Agents’s Balance

In an insurance companies audit  the agent checks the balance, and then the following procedures should be followed: 

  • Check if the agent's balances and outstanding balances in the outstanding premium account have been listed, analyzed and reconciled for the purposes of the audit. 
  • Verify if recoveries of large outstanding balances have been made in the post-audit period. 
  • Check if there are any old outstanding debit or credit balances as of the yearend that require adjustment. If so, obtain a written explanation from the management as to their nature. 
  • Verify that the agent's balances do not include employees' balances and balances of other insurance companies. 
  • Check that agents are not credited with commissions for businesses that they directly procure.

Role of the Audit Committee in the Insurance Audit

As per the guidelines, the insurance companies must form some important committees and these are as follows:

  • Audit Committee
  • Investment Committee
  • Risk Management Committee,
  • Policyholders Protection Committee,
  • Nomination and Remuneration Committee,
  • Corporate Social Responsibility Committee,
  • Profits Committee.

The purpose behind commencing these audit committees is as follows:

As per Section 177 of the Companies Act, 2013, it is mandatory for every insurance company to establish an Audit Committee. This committee is responsible for reviewing the financial statements, statements of cash flow, and financial reports on an annual and quarterly basis. 

The Audit Committee chairperson will be an Independent Director of the Board with expertise in accounting, finance, or audit. Also, he/she can be a Chartered Accountant or someone with a strong financial analysis background. The CEO's involvement with the Audit Committee should be limited to situations where specific information regarding insurance companies audit findings is required. 

The Committee should consist of at least three directors, with the majority being Independent Directors. So, the committee is responsible for overseeing the internal audit department's efficient functioning and reviewing its reports. Before the audit begins, the Audit Committee should discuss the nature and scope of the audit with the statutory auditors and hold post-audit discussions to address any areas of concern.


To conclude, the insurance audit is a process of monitoring different domains of the insurance process. This includes evaluating insurance documents, liabilities, risk valuation and financial statements. In the audit process, checking the internal control system and checking its effectiveness is important to find potential errors. So, the professional with the knowledge of audit can help you.


People Also Read: Roles and Functions of IRDA in the Insurance Sector



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Dushyant Sharma
Author: Dushyant Sharma

Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.

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