The purpose of insurance is generally created to share or spread the risk among the people or the entities with the insurance business is called the “insurer”. which the insurer provides the renter insurance to the people or entities through issuing the insurance policy.
The insurance business is to sell rights the prevent bad things happen through the coverage of financial compensation for people or entities at a specific time.
The insurer is typical as the legal entities that are registered and surveillance for complying with internal regulatory or relevant law and regulations to the country. Insurers provide the financial coverage and insured amount of payment to cover occurred unexpected or bad events that occur in the insurance time.
In any case of the catastrophes are occurred to the people or entities who are purchased or covered by insurance policy, the insurer will start to evaluate the risks and whether how the events occurred and how much amount should be claimed to cover the financial compensate outlined in the insurance policy.
Three types of insurance companies
There are, however, different types of insurance business are outlined but in general three types of insurance companies, such are the life insurance company, health insurance company, and property and liability insurance company.
1. The life insurance company, in short, is the so-called “Insurance company”: provides the financial compensation to cover life or permanent disability for those who are stated as the beneficiary by the policyholder.
The policyholder obligates to pay the agreed amounts to insure life in the specific period and the insurer obtains and receives the life premium where the payment or claim shall be made in case of a bad event occurrence in the insured event.
2. Health insurers: provide insurance to cover in term claiming on financial compensation for the current illness (accident, and health insurance) when there is any occurrence of illness happen in the insured event.
3. Property and liability insurance company: provide the protection on the damages or loss of the property caused by theft, fire and so on which are stated in the property and liability insurance contract between the insurer and property owner.
Another key term which is normally used in the insurance company is reinsurance. Reinsurance is referred to the group of insurance company, or the parent company who is cover the portion of the risks under the agreement with the insurance company. This mean that the insurance with cover parts of risk and reinsurance company or reinsurer will cover the risk for other parts for the policyholder.
This transfer risk to the reinsurer from the insurance company are not the same percentage of sharing but different as depend up on the internally agreement between insurance company and reinsurer.
Additionally, the term insurance securitization is also mostly used by the top management in insurance company to decide whether how to transfer of the underwriting risk for the further fruitful of return earning for the company. The company might consider transferring insurance risk to the investor operating or to invest by convert the underwriting risk into the notes in the financial market.
The auditor should know which type of insurance company to be audited and to understand the related important key term which mostly use.
There are varieties of the related insurance regulatory which are based on the promulgated by each country to governance the insurance business in their territory and the authorization to whether how the scope if the extended insurance business, insurance products are.
In general, the insurance regulatory are purposed to provide a legal framework for the insurance business to comply with and for the insurance consumer and policyholder protection.
The auditor must know insurance legal framework related to his/her audit engagement during the audit planning through searching whether which law / regulatory that the audit engagement comply with, and before discussion with audit client.
Governance and Internal control review
Governance refers to the business process, reporting line, and managing the roles and responsibilities of the team are appropriately managed and controlled. The governance’s result in an insurance company is through the increasing of the annual premium and number of customers.
The result of governance in insurance companies can also be defined through its processes, structure of the entity, accountability, control, and the working environment of the entity.
Besides the governance, there is also strong internal control which requires the company to comply with the local requirements, internal policies, and procedures. The insurance company also needs to comply with local regulations such are Annual Audit Requirements, Statement of Actuarial Opinion, Insurance Regulatory Information System Test, Risk-based Capital Requirement, and Statutory – Basis Accounting Practices.
There are several key accounting features in financial statements of insurance company whereas the auditor should bear in mind during conducting the internal or external auditing at insurance company as below:
– Premium Revenue: can be defined in insurance company that as the receiving incoming from the selling of the insurance policy to policyholder in return of such as life, accident, health or else in guaranteeing and protection by claiming benefits in the event of loss or harm.
– Unearned Premium (UEP or UP): is the part of the overall of premium that have not been recognized and the amount “earned” yet snice the insurance company still have more time in guarantee or protection the policyholder.
– Policy Additional/Acquisition Cost: The additional cost occurred such as sale commission, printing policy and so on.
– Valuation of Investments
– Non-admitted Assets
– Realized and Unrealized Investment Gains and Losses
– Asset Valuation Reserve and Interest Maintenance Reserve
– Investment in Subsidiaries.
– Income Taxes
– Policy Reserve (Future Policy Benefits) Valuation
– Loss (or Claim) but Loss (of Claim) Adjustment Expense Reserves
– Earned but Unbilled Premiums