##1) An Overview of Insurance Audit in Bangladesh (MAMA KOTHAO EITA NIA KISU PELAM NA JE LIKHBO OR CUT-PASTE KORBO-EITA NIA

DISCUSS KORA CHARA UPAY NAI OTHER JINIS GULA MOTAMUTI SIR E DIYA DISE) ##2) Guidelines of Insurance Audit ##3) Necessary Recommendations

Insurance audits are typically performed on commercial insurance policies providing automobile, general liability, garage liability, and umbrella and workers compensation coverage. When these policies are issued, you are asked to pay an estimated or deposit premium. Estimated premiums are based on the nature of your business and your estimated annual exposures (i.e. payroll, gross sales or receipts, cost of sub-contractors, etc.) for the policy term. Once the policy expires, the insurance company will conduct an audit to collect information on the actual exposures and operations for the policy term. They then determine the actual earned premium. Premium adjustments are then determined by comparing the audited exposures and operations with the original policy estimates.

Guidelines for Conducting Insurance Audit (i) An auditor should be thoroughly conversant with Insurance Act of 1938 and The Insurance Rules 1958 to enable him to perform his duties properly. Provisions of Companies Act shall apply to accounts of insurance companies according to Section 117 of the Insurance Act, 1938, if the latter is silent in such matter. An insurance company carrying on different classes of insurance businesses must have separate accounts for such class of insurance business. (Section 10) Section 14 of the Insurance Act requires every insurer to maintain Register of Policies and claims. Insurance Act places various restrictions on management expenses payment of commission and rebate etc. Audit of General Insurance Companys accounts: The auditor should examine the system of internal check in operation and see whether the internal check system is efficient. He should check a few transactions at random to ensure the accuracy and efficacy of the system of internal check.

(ii)

(iii)

(iv)

(a)

Premiums

1. The auditor should vouch the premiums received with the counterfoils of the receipt book, copies of the insurance policies, cover notes, Premium Register and the renewed policy register. If the policy is cancelled, the insured is entitled to a refund of the premium on pro rata basis. 2. If any change is made in the terms of the contract of insurance during the currency of the policy, such variations are made by means of an endorsement on the policy. According to such a variation either a part of the premium is refunded or more premium is charged. The duty of the auditor in such a case will be to see the copies of the endorsements to vouch the refund by examining the refund vouchers or receipt of extra premiums by examining the counterfoil of the receipt for premium. 3. The auditor should calculate the premiums and test check at random some of the items. 4. The auditor should ensure that outstanding premiums are recoverable. 5. Premiums paid in advance should not be credited to the revenue account of the current year but they should be carried forward to the next year. In the meantime they should be shown on the liability side of the balance sheet. 6. The auditor should pay particular attention to the premiums received by the branches as it may not be possible for him to check the counterfoils of such receipts. 7. The auditor should vouch the premiums paid on re-insurance ceded and those received on reinsurance accepted with reference to Re-insurance Treaties. 8. According to Section 41 of the Insurance Act, an insurance company is prohibited to pay any rebate on premium. 9. The auditor should see that the amount of gross premiums accrued less gross premiums on re-insurance ceded on each class of business has been disclosed in the relative revenue accounts.

(b)

Investments

1. The auditor should vouch as usual the receipt of the interest and dividends on investments and rents, as it is a very big source of income of an insurance company. 2. The auditor should see that the income receivable during the year under review is credited to the revenue account even though it might not have been received. (c) Commissions

1. Commission to the agents should be vouched with the Commission Vouchers giving the particulars of business, the agreement with them, their returns, and receipts received from them. 2. The auditor should see that the commission paid to the agents does not exceed the limit prescribed by S.40-A Sub-section 3(a)(b) of the Insurance Act, 1938. The auditor should make calculations in some cases to satisfy himself that correct amount of commission has been paid to the agents. 3. Commission payable to the agents should be paid by cheque unless the amount of commission is very small. 4. Check the re-insurance accounts and see that the commission received on re-insurance is shown separately. It is vouched with the receipts, statement of account received from reinsurance companies and treaties.

(d)

Claims

1. Claims paid must be vouched with the help of the Claims Register maintained under Section 14 of the Insurance Act, 1938, cancelled policies, the cash book, counterfoils of the cheque book, the receipts sent by the claimants, surveyors certificates, repairers bill, correspondence, confirmation sent by insured, and any other documentary evidence available. 2. Claims admitted but not paid on the date of the balance sheet should be shown as liabilities and must be debited to the revenue account. 3. The auditor should see that the amount of salvage is deducted from the claim amount. This amount should be calculated on conservative basis. 4. Similarly, any amount recoverable under re-insurance is deducted from the claim amount and the net amount is debited to the revenue account. 5. If certain claims are disputed, their liability should be computed on reasonable basis. 6. In case a claim has been paid but the insurer acquires a right against a third party on account of the doctrine of subrogation, he should see that such an amount has been recovered from the third party. 7. Legal expenses incurred in settling the claims, e.g., surveyors fees, should be debited to the claims account and not the revenue account of the current year. 8. The auditor see that any money paid on account in connection with the claim is deducted from the claim amount. 9. The auditor should see that the recovery has been made from the reinsurance company. 10. The auditor should see that the claims is passed according to the terms of the insurance policy and that it has been sanctioned by the principal officer of the company.

(e)

Management Expense

1. The auditor should see that the expenses of management do not exceed the limit laid down under Section 40G of the Insurance Act, 1938. 2. The auditor should see that the common expenses have been allocated properly between different classes of insurances, and that the basis of this allocation is followed consistently year after year. 3. The auditor should see that the expenses of management disclosed as one item in the revenue account give details of such expenditure under the following heads in the books of account of the company: (a) Directors Fees, (b) Salaries, (c) Gratuities and pensions, (d) Contribution to Provident Fund, (e) Bonus, (f) Travelling, (g) Stationery and Printing, (h) Postage and Telephones, (i) Advertising, (j) Entertainment (including fixed allowances) (k) Compensation to Directors and /or Managers for past services, or for loss of services, (l) Audit Fees (m) Legal Expenses, (n) Rents, (o) Sundry Expenses, and (p) Head office expenses in the case of foreign insurance companies.

(f) 1.

Provision for Un-expired Risks and Reserve Fund In case of un-expired risk, a minimum departmental reserve has to be maintained. Generally it is fifty percent of the premium received in a year less reinsurance, if any, but in the case of marine insurance the percentage is cent percent. The minimum reserve required is fifty percent is case of fire and miscellaneous insurance business and cent percent in the case of marine insurance. The controller of Insurance may lower these percentages in deserving cases.

2.

3.

Under Section 10 (1) of the Insurance Act, 1938, a separate fund in respect of each class of insurance (life, fire, marine and miscellaneous) has to be maintained by an insurance company. A General Insurance Company has to maintain a separate revenue account for each class of business. The assets comprising these funds need not be separated.

(g)

Reinsurance

When a part of the risk undertaken is passed on to another insurance company, the insurance is said to be ceded. The company which passes on (cedes) the risk to another company is called ceding company while the company to which such a risk is passed on is called acceptor of reinsurance. The auditor has to pay particular attention to the section 3D of the Insurance Act, 1938 with respect to re-insurance and requirements as to Treaty Reinsurance Arrangement.

(h)

Cash Balances and Investments

The auditor should verify these items as usual. The auditor should ask the management to give a schedule of the investments. He should pay special attention to their valuation. The balance sheet should state how the valuation of the investments has been arrived at. With regard to cash in hand, he should physically check it. He should get a certificate from the banks in respect of cash at banks. He should examine the bank reconciliation statement.

(i) 1.

Balance written off or Standing against Agents, etc. The auditor should scrutinize the Agency Register and verify the closing balance with the aggregate of the individual balances. The auditor should see whether those balances are recoverable and whether any provision has been made for bad and doubtful debts. The auditor should see whether the agents accounts have been maintained in the prescribed form. If any balances against the agents have been written off, distinguished from other bad debts written off, such balances should be scrutinized. Miscellaneous The auditor should see that no loans or temporary advances have been made to any director, manager, auditors, actuary or any other officer of the company except when the amount of the loan does not exceed the commission payable to them or loans advanced to them against a mortgage (Section 29). The auditor should see whether the accounts of the branches have been audited by qualified auditors. The auditor should see that other requirements of the Insurance Act have been duly complied with, e.g., deposit with the Bangladesh Bank, preparation and presentation of annual accounts as prescribed by the Insurance Act, etc. The auditors report should embody the requirements of the Companies Act. The auditor should see that the revenue account and the balance sheet of the insurance company is drawn up according to the Insurance Act, 1938, as amended from time to time.

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(j) 1.

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4. 5.

Necessary Recommendations RECORDS THAT ARE NEEDED FOR THE AUDIT Its important for all to maintain payroll, overtime, sales and cost summaries preferably on a monthly, quarterly and annual basis. Your records are very important to the audit process. They provide and verify information, save time and minimize your insurance costs. The auditor will let you know which of the following records will be needed for your audit when the audit appointment is made. Payroll records include payroll journals and summary, tax reports, state unemployment reports and individual earnings records. Totals should be kept for overtime when applicable. Employee records include the number of employees and hours, days or weeks worked annually. Sales journal includes all goods or products sold, rented and/or distributed as well as service, repair and installation. Sales or excise taxes collected separately and submitted to the government need to be identified in order to be excluded. Cash disbursements show subcontractors, materials and casual labor. Certificates of insurance show the subcontractors used during the policy period for construction, erection and/or structural alteration for general liability and workers compensation insurance coverage. They are also used for commercial automobile hired auto coverage. Income statements include subcontracted costs used to determine the cost of hired autos for commercial automobile audits.

WHEN AND HOW WILL THE AUDIT SHOULD BE DONE The insurance company will collect audit information from you shortly after the policy expires. Smaller, less complex policies may only require the assembling and sending the necessary information to the insurance company, or to have the information available when a telephone auditor calls. Larger and more complicated policies are generally assigned to a field auditor, or independent auditing firm, who will schedule an appointment with the client shortly after the policy expires. To change or cancel a scheduled appointment, the auditor should be known as far in advance as it can be. Its best to schedule and complete the audit within 30 days from the date after being contacted by the auditor. It is important for the auditor to ask questions about clients operations. If he cannot be present to answer questions, someone who is familiar with the specifics of his entire business should be available. If the client directs the auditor to his accountant, they will obtain as much information as possible from him/her and contact the client for any additional questions.

Most audits take an average of a half hour or less, but audits of larger policies may take longer. Though the auditor will have a number of questions, client will not have to be directly involved during the entire audit if adequate records are kept and made available.

WAYS TO SAVE MONEY There are several ways according which the client can save on premium depending on the type of business and coverage that he has. Not all of the following may apply to his particular business. PAYROLL DIVISION A single employees payroll can be divided, except when the employee works in a clerical or sales position. Proper records must be kept, in BDT amounts, that reflect work actually performed before a breakdown can be applied. Without adequate records, the entire payroll for the employee must be placed in the highest rated classification. EMPLOYEE TIPS Tips declared by employees may be excluded from their gross payroll only if separately identified. CERTIFICATES OF INSURANCE Client should have certificates available for the audit at his premises (or his accountants) to ensure that charges are not made unnecessarily. Certificates must cover the period when the subcontractor worked for him. This may require certificates covering two different policy terms for the subcontractor in some cases. For commercial automobile hired auto coverage, certificates of insurance covering the insured on a directprimary basis will reduce rates by 95%. DRIVERS (For general liability coverage) employees with the sole responsibility of driving may often be excluded from chargeable payroll if their wages are shown separately. However, employees who perform other duties besides driving must be placed in the highest rated class describing their duties. COST OF HIRE is commonly used on commercial automobile policies as a premium basis for hired auto coverage. This includes automobiles and trailers used under contract on behalf of or loaned to the client, which may include rental units as well as subcontracted hauling done for you.

SOME OTHER RECOMMENDATIONS FOR BEST AUDIT RESULTS Insurance can be complex. It is tempting to ignore it or presume it will cover client and his company in exactly the way he expects. However, thats not always the case and when things go wrong one can find out that small print can lead to big costs. Review of insurance can be a valuable tool in protecting clients balance sheet - it can highlight any shortfalls in coverage, values or limits. As every business changes and grows, there lies the need for insurance to change. Important proceeds of Insurance Audit To uncover obscure policy exclusion that effectively eliminated coverage for the main risk exposure Lead to the creation of a brand new policy to cover liabilities arising from Joint Venture agreements To identify significant claims that had not been reported to insurers because the client was unaware coverage existed To identify material information that had not been presented to insurers, which could have resulted in the coverage being voided in the event of a claim? To uncover corporate acquisitions those were not properly covered To identify alternate methods of risk transfer that had been overlooked AUDITORS RESPONSIBILITY 1. Auditors should carry out a complete review of all your insurance policies and risk information, such as schedule of values, inspection and loss prevention reports, claims history. 2. They should conduct research and thoroughly understand clients business: (ii) (iii) (iv) They should review your contracts, brochures, manuals and safely procedures They should learn about clients distribution network and use of technology They should find where and how client work and understand his relationships with employees, clients, suppliers and contactors

` 3. Auditor should prepare a written report and present their findings including: Observations (including discrepancies found) on clients current insurance program Suggested additional coverage (if need be) to better meet clients business operations Comments on engineering and loss mitigation (protecting clients human resources and assets) An overview of the current insurance market and what client should expect for the renewal of clients program International issues including a review of admitted policy requirements and the ramifications of non-admitted paper Claims review including problem solving and suggested adjusters Special projects such as limits benchmarking Conclusion and recommendations