Audit of Insurance Companies – CA Final Audit Question Bank

Audit of Insurance Companies – CA Final Audit Question Bank is designed strictly as per the latest syllabus and exam pattern.

Audit of Insurance Companies – CA Final Audit Question Bank

Question 1.
Write short notes on: Solvency Margin. [May 12 (4 Marks)]
Or
Discuss Solvency Margin in case of an Insurer carrying on General Insurance Business. [May 19 – Old Syllabus (4 Marks)]
Answer:
Solvency Margin (Sec. 64VA of Insurance Act, 1938 as amended by Insurance Laws (Amendment) Act, 2015):

1. Requirement of solvency margin: Sec. 64VAofInsuranceAct, 1938requiresthateveryinsurer and re-insurer shall at all times maintain an excess of value of assets over the amount of liabilities of, not less than 50% of the amount of minimum capital as stated u/s 6 and arrived at in the manner specified by the regulations,

2. Non-compliance of solvency margin: An insurer or re-insurer, as the case may be, who does not comply with the requirement of solvency margin shall be deemed to be insolvent and may be wound-up by the court on an application made by the Authority.

3. Power of authority to prescribe level of solvency: The Authority shall by way of regulation made for the purpose, specify a level of solvency margin known as control level of solvency on the breach of which the Authority shall act in accordance with without prejudice to taking of any other remedial measures as deemed fit.

4. Submission of Financial Plan: If, at any time, an insurer or re-insurer does not maintain the I required control level of solvency margin, he shall, in accordance with the directions issued by the Authority, submit a financial plan to the Authority, indicating a plan of action to correct the deficiency within a specified period not exceeding six months.

5. Modifications to Financial Plan: If the authority considers the financial plan submitted by an insurer inadequate, it shall propose modifications to the plan and shall give directions, as may be deemed necessary, including direction in regard to transacting any new business, or, appointment of an administrator or both.

6. Non-submission of financial plan: An insurer or re-insurer, as the case may be, who does not submit financial plan shall be deemed to have made default in complying with the requirements of this section.

Question 2.
AX Insurance Limited has made a provision of 75% of net premium in case of marine hull insurance and 50% in case of marine cargo and miscellaneous business of net premium for unexpired risks reserve in its books. Comment. [Nov. 15(4 Marks)]
Answer:
Reserve for Unexpired Risks:

The need for unexpired risks reserve arises from the fact that all policies are renewed annually except in specific cases where short period policies are issued. Since the insurers close their accounts on a particular date, not all risks under policies expire on that date.

In other words, at the closing date, there is an unexpired liability under various policies which may occur during the remaining term of the policy beyond the year end.

IRDA (General Insurance-Claim Reserving) Regulations, 2013 requires creation of a minimum amount of unexpired risks reserve at a specified percentage of net premium as under:
(a) For marine hull insurance -100% of net premium
(b) For fire, marine cargo and miscellaneous business – 50% of net premium.

Note: Section 64V of Insurance Act, 1938 also specifies these percentages. Subsequent to Amendment Act of 2015, these percentages are no more specified in amended Section 64V.

Conclusion: Auditor of AX Insurance Ltd. should qualify his report as the company has made a provision of only 75% against the prescribed minimum of 100% (Marine Hull Insurance), thereby resulting in over statement of profit.

Question 3.
You have been appointed as an auditor of a General Insurance Company. In this context, explain Unexpired Risks Reserve and audit procedures for the same. [Nov. 19 – Old Syllabus (5 Marks)]
Answer:
Reserve for Unexpired Risks:

The need for unexpired risks reserve arises from the fact that all policies are renewed annually except in specific cases where short period policies are issued. Since the insurers dose their accounts on a particular date, not all risks under policies expire on that date.

In other words, at the closing date, there is an unexpired liability under various policies which may occur during the remaining term of the policy beyond the year end.

There are two methods of creating this reserve. One is based on the proportionate number of days of risk remaining to risk expired, which is called 1/365 method. The other method is by taking a URR directly on 50% of the premium amount.

Note: Section 64V of Insurance Act, 1938 also specifies these percentages. Subsequent to Amendment Act of 2015, these percentages are no more specified in amended Section 64V.

Question 4.
M/s MPS & Associates, Chartered Accountants started the statutory audit of their client Contingencies Ltd., a General Insurance company, which has a paid-up capital of ₹ 16,800 lacs. During the course of the audit, it was found that the Company was not maintaining the required solvency margin as per the provisions of Insurance Act, 1938. When the issue was escalated to the management, they replied that solvency margin needs to be maintained as per limits prescribed only on last day of the financial year. Comment whether reply of management is tenable or not. [RTP-Nov. 20]
Answer:
Maintenance of Solvency Margin:

Sec. 64VA of the Insurance Act, 1938 requires that every insurer and re-insurer shall at all times maintain an excess of the value of assets over the amount of liabilities, of not be less than 50% of the amount of minimum capital as stated u/s 6 and arrived at in the manner specified by the regulations.

If, at any time, an insurer or re-insurer does not maintain the required control level of solvency margin, he shall, in accordance with the directions issued by the Authority, submit a financial plan to the Authority, indicating a plan of action to correct the deficiency within a specified period not exceeding six months.

If, on consideration of the plan, the Authority finds it inadequate, the insurer has to modify the financial plan.

An insurer or re-insurer, as the case may be, who does not comply with the requirements of solvency margin shall be deemed to be insolvent and may be wound up by the Court on an application made by the authority.

Conclusion: In the given case Contingencies Ltd has not maintained the Solvency Margin throughout the year. Accordingly, contention of Contingencies Ltd. that solvency margin is required to be maintained as per limits prescribed only on last day of the financial year is not tenable.

Question 5.
High Life Insurance is into life insurance business and has established presence in this field since last 25 years. Your firm, SR & Co. are appointed auditors of the High Life Insurance company. While conducting its audit, you come across several important actuarial processes being followed in accordance with general regulatory guidelines. You also understand & realise that the actuarial department is calculating and modelling hub of the company. In the above context explain the role of auditors. f MT P-Oct. 181
Answer:
Role of Auditor in Actuarial Process:
The role of Actuaries in life insurance business is to concentrate on following key areas:

Product Development/Pricing and Experience analysis.
Model Development.
Statutory Valuations and reserving.
Business Planning.
Solvency management.
Management reporting on various business valuations and profitability models of the Life Insurance business.

Role of Auditor:

To certify, whether the actuarial valuation of liabilities is duly certified by the appointed actuary, including to the effect that the assumptions for such valuation are in accordance with the guidelines and norms, if any, issued by the authority and/or the Actuarial Society of India in concurrence with the IRDA.

For this purpose, auditors generally rely on the Certificate issued by the Appointed Actuary, certifying the Policy liabilities. However, he may discuss with the Actuaries with respect to process followed and assumptions made by him before certifying the Policy liabilities.

Question 6.
What are the steps to be taken while verifying the Premium of Life Insurance Company?
Or
Auditors should evaluate various sub-processes, employed by the Insurance Companies in accounting of premiums like collection of premium from the policy holders, booking of premium, banking, accounting and reconciliation of the same. In view of above, you are required to briefly discuss some illustrative points, auditors are required to follow during the Audit of Accounting of Premiums in case of Life Insurance Companies. [RTP-Nov. 18]
Answer:
Steps to be taken while verifying the Premium of Life Insurance Company:

1. Collection of Premium

To check existence of appropriate mechanism to ensure all the collections are deposited into the Bank on timely basis.
To check whether there is daily reconciliation process to reconcile the amounts collected, entered into the system and deposited into the bank.

2. Calculation of Premium

To check that accounting system calculates premium amounts and its respective due dates correctly.
To check that system is equipped to calculate all types of premium modes correctly.

3. Recognition of Income

To ensure that premium is recognised only on the basis of ‘Issued Policies’ and not on underwriting dates.
To check that there is appropriate mechanism in place to conduct reconciliation on daily basis and reconciling items, if any, are rectified/followed up.

4. Accounting of’Advance Premium’

To check, whether system has capability to identify regular and advance premium.
To check whether there is a process of applying advance premium to a contract when premium is due.

Question 7.
ABC & Co., Chartered Accountants are the Auditors of Just Care Life Insurance Company Limited. Enumerate the steps to be taken by the auditor while verifying the “Investment”.
Or
Write short note on: Auditor’s considerations while reviewing of Investment Department of Life Insurance Company. [RTP-Nov. 19]
Answer:
Steps to be taken by the auditor while verifying the Investment:

(a) To review the management structure to ensure adequate segregation of duties between Investment Front office, Mid Office and Back office.
(b) To review the operating procedures prescribed by the IRDA Regulations.
(c) To review the investment policy.
(d) To review the functioning and scope of Investment Committee.
(e) To check compliance of Investment regulations.
(f) To review cash management system to track funds available for investment considering the settlement obligations and subscription and redemption of units, etc.
(g) To review fund wise reconciliation with investment accounts, bank, and custodian records.
(h) To ensure that there is split between Shareholders’ and Policyholders’ funds, and earmarking of securities between various funds namely Life (Participating & Non-Participating), Pension & Group (Participating & Non-Participating) and Unit Linked Fund.
(i) To review the arrangements and reconciliations of holdings with the insurer’s custodian.
(j) To review and check insurer’s Investment Accounting and valuation policy.
(k) To review the controls around personal dealings and insider trading.

Question 8.
Briefly explain the term policy lapse and revival in case of Life Insurance Company and role of auditor in verifying the same.
Answer:
Policy lapse and Revival:
Discontinuation of the policy owing to non-payment of premium dues is known as lapse. Lapsation affects all the stakeholders – the policy holder, agents and the insurer. A lapsed policy ceases to provide insurance protection to the insured. It forfeits the benefits under the policy and cost of new policy is higher. Agents do not get renewal premium commission if the policy is lapsed:

The terms and conditions of the policy stipulate, that where the premium is not paid within the grace period, the policy lapses but may be revived during the life time of the life assured. Some insurers do not allow revival, if the policy has remained in lapsed condition for more than specified period. This is because of the possibility that the arrears of premiums on such a policy would be too heavy and that it would be better to take out a fresh policy.

Role of Auditor in verifying the Policy Lapse and Revival:
(a) To check and confirm that due dates are recorded and monitored properly and polices are marked as “lapsed” on non-receipt of renewal premium within due dates/grace period.
(b) In case of revival request, check whether adequate checks are in place for receipt of outstanding amounts and adequate documents are obtained before reviving the policy.

Question 9.
Internal control functions in case of general insurance business can be categorised under main operational cycles. Since various operational cycles are inter-linked, the internal controls operating within the systems of such cycles should be reviewed simultaneously. State the specific control procedures to be evaluated in relation to general insurance business.
Answer:
Specific Control Procedures to be evaluated in relation to General Insurance Business:
1. Underwriting: Underwriting function comprises of examination and evaluation of applications for insurance, the rating of risks and the establishment of premiums. Prime objectives of internal control system for underwriting is adherence to guidelines for acceptances of insurance, proper recording of insurance risk and its evaluation.

2. Premium: Premium is the consideration received by an insurer from the insured. Prime objectives of internal controls over premium is to ensure that correct premium is calculated and collected before acceptance of any risk, that premium is accounted for in an appropriate manner and that the premium is collected only in respect of such risks which are assumed by the company.

3. Commission: Commission is the consideration payable for getting the insurance business. Prime objectives of internal controls over commission is to ensure that commission is paid in accordance with the rules and regulations of the company, commission is paid to the agent who brought the business and the legal compliances, for example, tax deduction at sources.

4. Claim: Claim is the demand for payment of policy benefit because of the occurrence of an insured event. Prime objectives of internal controls over claim are to ensure that only bona fide claims are paid. Cost of claims are properly recorded and disclosed in the financial statements.

5. Reinsurance: Prime objectives of internal controls over reinsurance transaction is determination of correct amounts for reinsurance ceded, proper valuation of assets and liabilities arising out of reinsurance transactions and adherence to legal provisions, regulations and reinsurance agreements.

Question 10.
What are the steps to be taken while verifying the Premium of a General Insurance Company?
Answer:
Verification of Premium of a General Insurance Company:
1. Review of Internal Control Procedure and Its compliance:
To ensure the followings:

Proper cover notes are issued and that no cover note/policy is omitted.
All cover notes are serially numbered.
Existence of adequate internal check on issue of stamps, stationery, etc.

Depending on the assurance obtained, decide the extent of substantive checking to be carried out.

2. Accounting of Premiums
To Ensure the followings:

All premiums in respect of risks incepting during the relevant accounting year has been accounted as the premium income of that year.
Premium received for fire, marine, motor and miscellaneous insurance business is recorded in relevant books of account.
In respect of risks commencing after the year end, and the premium is received in advance, the same has been shown as “Premium Received in Advance” and see whether the similar advance of last year is accounted this year as income.

3. Inception of Risk – Sec. 64VB
To Ensure the followings:

The company is not at risk in case policy documents have not been issued for any reason like dishonour of cheque and ensure that the risk has not commenced.
The company is not under risk in respect of amounts lying at credit (Premium received in advance) and outstanding (Uncollected premium) at the year end.

4. Co-insurance
Examine whether the company’s share of premium have been properly booked in the books of account in case the risk has commenced.

Question 11.
As at 31st March 2021 while auditing Safe Insurance Ltd. you observed that a policy has been issued on 25th March 2021 for fire risk favouring one of the leading corporate houses in the country without the actual receipt of premium and it was reflected as premium receivable.

The company maintained that It is a usual practice in respect of big customs and the money was collected on 5th April 2021. You further noticed that there was a fire aciddent in the premises of the Insured on 31st March 2021 and a claim was lodged for the same. The Insurance company also made a provision for claim. Please respond. (May 13 (4 Marks))
Or
While auditing Suryankiran Insurance Ltd. as on 31st March, 2021, you observed that there is one policy which has been issued on 25th March, 2021 towards fire risk favouring one of the leading corporate houses in the country without the actual receipt of premium and it was reflected as pre-mium receivable.

It is the usual practice maintained by the company in respect of big customers that they would issue the policy before receiving the premium. The premium money was collected on 5th April 2021. It is further noticed that there was a fire accident in the premises of insured on 31st March, 2021 and a claim was lodged. The insurance company also provided for the same. How would you respond? [May 16 (4 Marks)]
Or
While auditing Innocent Insurance Ltd., you observed that a policy has been issued on 31st March, 2021 evening to LMN Company. LMN Company had signed all the papers and taken insurance policy (value insured = ₹ 11 lac) for its new godown and premium for the same was paid through cheque subject to realization.

However, on the night of 31st March, a huge fire accident took place in LMN Company and goods worth ₹ 15 lac were destroyed. Further, cheque was also dishonoured due to insufficient fund. The Company informed the incident to Innocent Insurance Ltd. and a claim was lodged for the same. The insurance company also made a provision for claim. Advise the Innocent Insurance Ltd. in this regard. [MTP-Oct. 20]
Answer:
Inception of Risk:

As per Section 64VB of the Insurance Act, 1938, no insurer should assume any risk in India in respect of any insurance business on which premium is ordinarily payable in India unless and until the premium payable is received or is guaranteed to be paid by such person in such manner and within such time, as may be prescribed, or unless and until deposit of such amount, as may be prescribed, is made in advance in the prescribed manner.

In the present case, though policy was issued on 25th March, 2021, but premium was collected only on 5th April, 2021. Applying the provisions of Sec. 64VB, company cannot be held liable for the claim arises due to fire accident happened on 31st March, 2021.

Conclusion: In view of the above, the insurance company is not liable to pay the claim and hence
no provision for claim is required.

ICAI Examiner Comments”
Very few candidates related it to Section 64VB of the Insurance Act, 1938 and explained in a general manner.

Question 12.
You have been appointed as an auditor of ABC Insurance Co. Ltd. and found that M/s PQR Ltd. got their Plant & Machinery insured on 01-10-2020 but the amount of premium has been paid by them on 15-10-2020. In the meanwhile, on 10-10-2020 a fire has broken out in the factory and the company filed a claim for damages of plant & machinery with the Insurance company. Advise the insurance company in this regard. [May 19 – New Syllabus (5 Marks)]
Answer:
Inception of Risk:

In the present case, though Plant & Machinery insured on 01.10.2020, but premium was paid only on 15.10.2020. Applying the provisions of Sec. 64VB, company cannot be held liable for the claim arises due to fire accident happened on 10.10.2020.
Conclusion: In view of the above, the insurance company is not liable to pay the claim.

Question 13.
What are the specific areas to which you will give your attention while examining “Claims paid” by a General Insurance Company.
Or
While auditing claims paid in respect of a General Insurance company what aspects need to be looked into. [May 10 (6 Marks)]
Or
You are the Auditor of Good Luck General Insurance Company. You want to ensure that there exists goods system that effectively serves the requirements of true and fair accounting of claim-related expenses and liabilities. Suggest how this can be ensured. [May 18 – New Syllabus (4 Marks)]
Answer:
Verification of Claims Paid:

The following aspects needs to be examined in respect of claims paid:
(a) Co-insurance: In case of co-insurance arrangements, claims paid have been booked only in respect of company’s share and the balance has been debited to other insurance companies,

(b) Settlement Amount: Ensure that the Claim Account is debited with all the payments including repair charges, firefighting expenses, police report fees, survey fees, amount decreed by the Courts, travel expenses, photograph charges, etc.

(c) Claims communicated after the year-end for losses which occurred prior to the year-end must be accounted for in the year of audit.

(d) Accounting for salvage and letter of subrogation: salvage recovered has been duly accounted company and a letter of subrogation has been obtained in accordance with the procedure.

(e) Amount deposits with courts: in matters under litigation/arbitration have not been treated as claims paid but are held as assets till final disposal of such claims.

(f) Unqualified Discharge Note: has been given by claimant in case’ of final settlement of claims.

Question 14.
ABC & Co., Chartered Accountants are the Auditors of Just Care General Insurance Company Limited. As on March 31,2021 the Management made a provision for claims outstanding. Enumerate the steps to be taken by the Auditor while verifying the “Claims Provision”. [Nov. 14 (6 Marks), RTP-May 20]
Answer:
Verification of Claims Provisions:
The auditor should satisfy himself that the estimated liability provided for by the management is adequate with reference to the relevant claim files/dockets, keeping in view the following:

(a) Provision has been made for all unsettled claims as at the year-end on the basis of claims lodged/ communicated.

(b) Provision has been made for only such claims for which the company is legally liable, considering particularly, that

the risk was covered by the policy,
the claims arose during the currency of the policy; and
claim did not arise during the period the company was not supposed to cover the risk.

(d) Application of ‘average clause’ in case of under-insurance.

(e) In case of co-insurance arrangements, provisions should be made only in respect of its own share of anticipated liability.

(f) Claims are provided for net of estimated salvage, wherever applicable.

(g) No contingent liability is carried in respect of any claim intimated in respect of policies issued.

(h) Intimation of loss is received within a reasonable time and reasons for undue delay in intimation are looked into.

(i) Provisions have been retained as at the year-end in respect of guarantees given by company to various Courts for claims under litigation.

Question 15.
Your audit assistant seeks your help in checking the claim liability of Bharat Insurance Co. Ltd. and wants to know the registers and records which they should obtain and review in this regard. |May 18 – Old Syllabus (4 Marks)]
Answer:
Register of Claims:

Claims intimation register,
Claims paid register.
Claims Disbursement bank book.
Claims Dockets, normally containing the following records: Claim intimation, claim forms, particulars of policy, survey report, photograph showing damage. Repairer’s bills, letter of subrogation, police report, fire service report, claim settlement note, claim satisfaction note, salvage report, salvage disposal note, claims discharge voucher etc.
Report of quality assurance team and
Salvage register.

Question 16.
While auditing Secure Insurance Ltd., you observed that the major proportion of expense of the company is the remuneration/commission paid to its insurance agents. As the auditor of the company; what audit procedure would you adopt for verification of such expense?
Or
Write short note on: Verification of payment of remuneration to an insurance agent. [May 17 (4 Marks)]
Or
You have been appointed to carry out the audit of Sky Insurance Company Ltd. for the year 2020-21. In the course of your audit, you observed that the commission paid to agents constituted a major expense in operating expenses of the company. Enumerate the audit concerns that address to the assertions required for the Auditor to ensure the continued existence of internal control as well as fairness of the amounts in accounting of commission paid to agents. [Nov. 18-New Syllabus (4 Marks)]
Answer:
Verification of Commission paid to agents:
An insurance company pays commission to its agents for business procured through them, as per sec. 40 of the Insurance Act, 1938; no commission can be paid to a person other than its agent. In order to verify the amount of commission, the auditor should:

(a) Ensure that commission/brokerage is not paid in excess of the limits specified by IRDAI.
(b) Ensure that commission/brokerage is paid as per rates agreed with the agent and filed with IRDAI.
(c) Ensure that commission/brokerage is paid to the agent/broker who has solicited the business.
(d) Vouch disbursement entries with commission bills.
(e) Check whether all disbursements were properly authorized.
(f) Check the calculation of commission amount.
(g) Scrutinize agent’s ledger for any abnormal entries or balance.
(h) Examine whether commission outgo for the period has been properly accounted for.

Question 17.
“In an audit of an insurance company, the Receipts and Payments Account is also subjected to audit”. Comment on this statement in brief.
Answer:
Audit of receipt and Payment Account:

Section 11(1) of the Insurance Act, 1938 provides that every insurer, should prepare at the end of each financial year, a Balance Sheet, a Profit and Loss Account, separate account of receipts and payments and a Revenue Account in accordance IRDA Regulations.

Since receipts and payments account has been made a part of financial statements of an insurer, it is implied that the receipts and payments account is also required to be audited.

The IRDA (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2002 require that the auditor of an insurance company should:

report whether the receipts and payments account of the insurer is in agreement with the books of account and returns;
express an opinion as to whether the receipts and payments account has been prepared in accordance with the provisions of the relevant statutes; and
express an opinion whether the receipts and payments account give a true and fair view of the receipts and payments of the insurer for the financial year/period under audit.

Question 18.
State the audit procedures for verification of outstanding premium and agents’ balances of General Insurance companies. [Nov. 08, Nov. 10, Nov. 11 (4 Marks)]
Or
M/s ABC & Co., a CA firm was appointed as the auditor of‘Always Safe General Insurance Ltd.’ Advise them how they will verify outstanding premium and agent’s balances. [May 14 (6 Marks)]
Answer:
Verification aspects of outstanding premium & agents balances of General Insurance Company:

Scrutinize and review control account debit balances and their nature should be enquired into.
Examine in-operative balances and treatment given for old balances with reference to company rules.
Enquire into the reasons for retaining the old balances.
Verify old debit balances which may require provision or adjustment. Notes of explanation may be obtained from the management in this regard.
Check age-wise, sector-wise analysis of outstanding premium.
Verify whether outstanding premiums have since been collected.
Check the availability of adequate bank guarantee or premium deposit for outstanding premium.

Question 19.
State the disclosure requirements in respect of contingent liabilities in the notes to the Balance Sheet of a General Insurance Company. [May 11 (4 Marks)]
Answer:
Disclosure requirements in respect of Contingent Liabilities:
The following shall be disclosed by way of notes to balance sheet in respect of Contingent Liabilities.

Partly paid up investments.
Underwriting Commitments outstanding.
Claims, other than those under policies, not acknowledged as debts.
Guarantees given by or on behalf of the Company.
Statutory demands/Liabilities in dispute, not provided for.
Reinsurance obligations to the extent not provided for in the accounts.
Others (to be specified).

Question 20.
Write a short note on: Incoming and Outgoing Co-insurance.
Answer:
Incoming and Outgoing Co-insurance:
In cases of large risks, the business is shared between more than one insurer under co-insurance arrangements at agreed percentages. The leading insurer issues documents, collects premium and settles claims. Statement of accounts is rendered by the leading insurer to the other co-insurers. The auditor should verify incoming co-insurance and outgoing co-insurance as follows:

Incoming Co-Insurance

Ensure that the Premium Account is credited on the basis of statements received from the Lead insurer.
In case, the statement is not received, the premium is accounted for on the basis of advices to ensure that all premium in respect of risks assumed in any year is booked in the same year.
For this purpose, the auditor may examine the communication in the post-audit period and obtain a written confirmation to the effect that all incoming advices have been accounted for.
The auditor should also verify claims provisions and claims paid with reference to advice received from the Lead, insurer.

Outgoing Co-Insurance

The auditor should scrutinise the transactions relating to the outgoing business, i.e. where the company is the Lead Insurer.
These should be checked with reference to the relevant risks assumed under policies and correspondingly for debits arising to the co-insurer on account of their share of claims.

Question 21.
Enumerate the steps to be taken by an auditor for the verification of Re-insurance inward in case of a General Insurance Company.
Answer:
Verification of Re-insurance Inward (Reinsurance accepted):

Evaluate internal control system in the area of reinsurance accepted to ensure determination of correct amount for reinsurance accepted, proper valuation of assets and liabilities arising out of reinsurance transaction and adherence to legal provisions and regulations.
Ascertain whether adequate guidelines and procedures are established with respect to granting reinsurance.
Reconcile reinsurance underwriting returns received from various units with the figures of premium, claims paid and outstanding claims for the company as a whole.
Examine whether premium received and commission paid on reinsurance accepted is as per the terms of the agreement with the Principal Insurer.
Examine whether claims paid have been accounted on a regular basis.
Examine whether remittances from foreign Principal Insurer are as per foreign exchange regulations.
Examine whether confirmations have been obtained regarding balances with Principal Insurer.
Review individual accounts of Principal Insurers.

Question 22.
What are the steps to be taken by an auditor for the audit of re-insurancc ceded?
Or
Enumerate the steps to be taken by an auditor for the verification of Re-insurance outward in case of a General Insurance Company. [Nov. 09 (5 Marks), MTP-April 18]
Answer:
Verification of Re-insurance Outward (Reinsurance ceded):

Evaluate internal control system in the area of reinsurance ceded to ensure determination of correct amount for reinsurance ceded, proper valuation of assets and liabilities arising out of reinsurance transaction and adherence to legal provisions and regulations.
Ascertain whether adequate guidelines and procedures are established with respect to obtaining reinsurance.
Reconcile reinsurance underwriting returns received from various units with the figures of premium, claims paid and outstanding claims for the company as a whole.
Examine whether commission on reinsurance ceded is as per the terms of the agreement with the re-insurers.
Examine the computation of profit commission for automatic treaty arrangements in the light of the periodic accounts rendered and in relation to outstanding loss pertaining to the treaty.
Eamine whether loss recoveries have been claimed and accounted on a regular basis.
Examine whether outstanding losses recoverable have been confirmed by re-insurers.
Examine whether remittances to foreign re-insurers are as per foreign exchange regulations.
Examine whether confirmations have been obtained regarding balances with re-insurers.
Review individual accounts of re-insurers to evaluate whether any provision/write off or write back is required.

Question 23.
Write a short note on: Facultative reinsurance under Insurance Act, 1938.
Answer:
Facultative Reinsurance:
It is that type of reinsurance whereby contract relates to one particular risk and is expressed in the reinsurance policy. Each transaction has to be negotiated individually. Each party has free choice i.e., ceding company to offer and re-insurer to accept. The Insurance is used when:

Automatic cover has exhausted.
Risk is excluded from treaties
Reinsurance treaties have not to be overburdened for abnormal risks.
When insurer has no automatic cover.
Where technical guidance is required at each stage of acceptance of risk.

Question 24.
Explain the difference between the Proportional Treaties and Non-Proportional Treaties? [Nov. 16 (4 Marks)]
Answer:
Proportional Treaties and Non-Proportional Treaties:
Proportional Treaty Reinsurance

In proportional treaty reinsurance, the reinsurer will receive a prorated share of the premiums of all the policies sold by the insurance company being covered. Consequently, when claims are made, the reinsurer will also bear a portion of the losses. The proportion of the premiums and losses that will be shared by the reinsurer will be based on an agreed percentage.

In a proportional coverage, the reinsurance company will also reimburse the insurance company for all processing, business acquisition and writing costs. Also known as ceding commission, such costs may be paid to the insurance company upfront.

Non-proportional Treaty Reinsurance

In a non-proportional type of coverage, the reinsurer will only get involved if the insurance company’s losses exceed a specified amount, which is referred to as priority or retention limit. Hence, the reinsurer does not have a proportional share in the premiums and losses of the insurance provider.
The priority or retention limit may be based on a single type of risk or an entire business category.

Question 25.
Write short note on: “Trade credit insurance policy” and basic requirements of a trade credit in-surance product. [Nov. 16 (4 Marks)]
Answer:
Trade Credit Insurance
Trade credit insurance is business of effecting contracts of insurance in respect of trade credit insurance transactions. It provides protection to suppliers against the risk of non-payment of goods or services by their buyers who may be situated in the same country [domestic risk] or in another country [export risk) against non-payment as a result of insolvency of the buyer or non-payment after an agreed number of months after due date.

Requirements
Trade credit insurance product is offered subject to following requirements:

Policyholder’s loss arises due to non-receipt of trade receivable arising out of a trade of goods or services.
Policyholder is a supplier of goods or services for a consideration and does not arise out of factoring or reverse factoring arrangement or any other similar arrangement.
Buyer is liable to pay a trade receivable to the policyholder in return for the goods and services received by him from the policyholder, in accordance with a policy document filed with the insurer.
Premium for the entire Policy Period has been paid.
Other requirement that may be specified by the Authority from time to time.

Audit of Insurance Companies – CA Final Audit Question Bank

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