Audit of Insurance Companies

Question 1

You have been appointed to carry out the audit of Blue Heaven Life Insurance Company Ltd. for
the year 2021-22. During the course of audit, you observed that the commission payable 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 payable to agents.

Answer 1

Verification of Commission Payable by Life insurance company:
Insurance business is generally solicited by the Insurance agents. The remuneration of agent is paid
by way of commission which is calculated by applying percentage to premium collected by him.
Agency commission contributes towards significant portion of expenses incurred by the Insurance Commission.
Commission is payable towards generation of new business and towards settlement of renewal
premium.

Role of Auditor: The Auditor during his review of Commission paid to Agents should mainly consider the
following:

1. Review the system established by the Insurer with respect to calculation of commission to
   eligible agents accurately and processing the same in timely manner.
2. Review the commission payment system is in sync with the premium collection system.
3. Check whether commission paid is within the limit prescribed under Insurance Act.
4. Check whether commission is clawed-back on the cancelled policies.
5. Check the completeness of commission processing system.

Question 2

You are an auditor of Great Insurance Company Ltd. which offers variety of risk management
products to business entities wishing to protect their business activities against losses due to
various probable risks. Great Insurance Company Ltd. is in the process of offering to Unique Ltd.,
a multinational group having worldwide market, “Trade Credit Insurance Policy” to cover domestic
risk, export risk and political risk. You as an auditor of Insurance Company have been requested
to ensure that all the requirements have been met by Great Insurance Company Ltd. before Trade
Credit Insurance Product is offered to Unique Ltd. List down those requirements.

Answer 2

Basic Requirements of a Trade Credit Insurance Product: An insurer shall offer trade credit
insurance product only if all requirements mentioned below are met -
(i) Policyholder’s loss is non-receipt of trade receivable arising out of a trade of goods or
services.
(ii) Policyholder is a supplier of goods or services in consideration for a fair market value.
(iii) Policyholder’s trade receivable does not arise out of factoring or reverse factoring
arrangement or any other similar arrangement.
(iv) Policyholder has a customer (i.e. Buyer) who 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.
(v) Policyholder undertakes to pay premium for the entire Policy Period.
(vi) Any other requirement that may be specified by the Authority from time to time.