Page 282 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes cases, the auditors have looked the other way on this issue or simply have gone by the averments
made by managements in this regard.

13.3.4 Estimation of Outstanding Claims

The most pronounced drain of an insurance company’s resources is the Claims cost (also known
as Incurred Claims), which is the actual claims paid less adjustments for reinsurance recoveries
on them and provisions for claims outstanding as on the date of financial reporting. On the
Direct side, the operating offices of the insurance companies are expected to make the provisions
based on the available information and create a liability as on the date of closing of books. The
sum total of such ‘direct’ figures, tempered by the Reinsurance recovery adjustments and added
by the Outstanding Claims figures received from the Reinsurers, in respect of ‘acceptances’
would be the total ‘net’ outstanding claims, which will form the integral and major part of the
“Claims Cost”. However, these are based on estimations based on information in possession of
the insurance companies on the date of closing the books. Such information could include
surveyor’s assessments, spot survey reports, insurers’ guesstimates based on the available
documents and sometimes even simply on the data given, not given or short given by the
claimants themselves in the claim forms. There are really no hard and fast rules on how to make
these provisions and it is left to the discretion and judgment of the claims personnel as also
pruning by the managements and hence unlike the URR, which will be a structured estimate, the
provision for outstanding claims will always be an unstructured estimate. This not only
significantly influences (sometimes, even unduly) the bottom lines but also has the potential to
distort the company’s liabilities in the Balance Sheet on a given date. The auditors’ responsibility
(both at operational office level and at the central office level) is very pronounced in this area.
Only subject knowledge and experience can lead auditor’s right in their ‘audit’ of this area.

13.3.5 Commissions and Brokerage

At the operational office level, one of the major items of expense is the ‘business procurement
cost’. In the pre-IRDA days, there were agency commission payments at structured rates and
though the system per se was abused to the hilt by the employees of the companies, nothing
much could be done by the auditors as everything used to be alright on papers. In the post-IRDA
scenario, the private insurance companies resort to ingenious methods of remunerating people,
who help them procure business. Though there are official agents and brokers, the outgo towards
procurement costs take different forms such as referral fee, consultancy fee etc. Unofficial rebating
is also done to grease the palms of decision makers of the insured. If auditors can be vigilant in
this area, many such cases can be brought to light. The auditors, especially at the operational
offices, would do well to analyse this account and seek clarifications on payments made to
persons other than agents and brokers.

13.3.6 Current Assets and Liabilities

When we come to Current Assets and Current Liabilities, it will become necessary to put the
concerned accounts under magnifying lens, to understand what the individual balances could
broadly contain within them, as it is just possible that anything inconvenient could have been
parked in the hazy sub-headlines.

For instance, every company will show both in Current Assets and Current Liabilities, the
balances with “other persons/entities carrying on insurance business”. Insurance, being a global
business by nature, is all about spread of risks far and wide and hence every insurer parts away
certain shares of his premium with other insurers, by way of co-insurance (where the preference
of the customer plays a role) as well as by reinsurance, both at home and abroad.

276 LOVELY PROFESSIONAL UNIVERSITY