LIC Company

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Technical Guide on

Internal Audit of

Life Insurance Business


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Technical Guide on

Internal Audit ofLife Insurance Business

The Institute of Chartered Accountants of India(Set up by an Act of Parliament)

New Delhi


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The Institute of Chartered Accountants of India

All rights reserved. No part of this publication may be reproduced,

stored in a retrieval system, or transmitted, in any form, or by any

means, electronic, mechanical, photocopying, recording, or

otherwise without prior permission, in writing, from the publisher.

Edition : July, 2011

Committee/Department : Internal Audit Standards Board

E-mail : [email protected]

Website : www.icai.org

Price : 230/-

ISBN : 978-81-8441-473-8

Published by : The Publication Department on behalf

of the Institute of Chartered

Accountants of India, ICAI Bhawan,

Post Box No. 7100, Indraprastha

Marg, New Delhi - 110 002.

Printed by : Sahitya Bhawan Publications,

Hospital Road, Agra - 282 003.

July/2011/1,000 Copies


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Foreword

In the current scenario, insurance market in India has witnessed

dynamic changes including entry of a number of global insurers.

Most of the private insurance companies are joint venturing with

recognized foreign institutions across the globe. Saturation of

markets in many developed economies has made the Indian marketeven more attractive for global insurance majors.

The Insurance Regulatory and Development Authority (IRDA)

regulate and develop the insurance sector in India through calibrated

policy initiatives, helps to improve disclosures. The role and

importance of internal control systems in good risk management

practice, with a particular emphasis on the internal audit and

compliance functions within such a framework has become

necessary. Introduction of mandatory quarterly internal audit for

insurer is one such step taken by the Insurance Regulatory and

Development Authority which would contribute towardsstrengthening controls and also reducing risks under volatile market

conditions.

I am happy to note that the Internal Audit Standards Board is issuing

this Technical Guide on Internal Audit of Life Insurance Business

for guidance of the members and other readers. I congratulate

CA. Rajkumar S. Adukia, Chairman, Internal Audit Standards Board

and members of the Board on issuance of this Technical Guide.

This Technical Guide comprehensively deals with the peculiar

aspects of life insurance business, including various regulatory

aspects and provides a step-wise approach for internal audit.

I am sure that this Technical Guide will assist the members and

others in efficiently discharging their responsibilities.

July 11, 2011 CA. G. Ramaswamy

New Delhi President, ICAI


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Preface

During the last two decades, the economic reforms have impacted

the growth of financial sector of India significantly. As an integral

part of financial sector reforms, insurance sector has emerged as

regulatory development sector. Insurance Regulatory and

Development Authority has issued various regulations with theobjective of improving market efficiency, enhancing transparency

and bringing the Indian market up to international standards. With

the very same objectives, the Insurance Regulatory and

Development Authority being insurance sector regulator has

mandated quarterly internal audit of insurer. This would not only

ensure compliance with the legal and regulatory norms but would

also prove instrumental in making the system more efficient.

Internal audit is core competence area of chartered accountants. It

is an important assignment being undertaken both by practising

members of the Institute as well as those in industry. This demandsthe internal auditor to have requisite skills and high level of knowledge

of the sector as well as its interrelationship with variables in its

operating environment.

The Internal Audit Standards Board is issuing this Technical Guide

on Internal Audit of Life Insurance Companies. This Guide would

provide to the members of the Institute as well as others an in-

depth understanding of the activities undertaken by the insurer and

the regulatory and legal framework in which they operate.

With a view to providing appropriate guidance in a manner that is

easily understood by all the readers, this publication is divided into

parts, dealing with the very fundamental concepts in Life Insurance

Companies, sequentially as introduction, regulatory framework and

internal audit of functional areas. It gives a brief overview on various


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aspects like, actuarial process, underwriting, reinsurance, premium

collection, claims and agency licensing, etc. It also contains detailedchecklist on internal audit that would help the readers in

understanding the various technicalities arising during the internal

audit of life insurance companies. The Guide also contains the list

of abbreviations for better understanding of the readers.

I am extremely grateful to CA. Neeta Shah and her entire team viz.,

CA. Venkatachalam Sekar, CA. Shailendra Kothavale,

CA. Sangramjit Sarangi, CA. Ramandeep Sahni, CA. Prasanna

Bharatan, CA. Kalpita Nasikkar, CA. Durga Prasad and CA. Anand

Dubey for squeezing out sometime out of their professional and

personal commitments and preparing the basic drafts of thisTechnical Guide.

I also wish to thank CA. G. Ramaswamy, President, ICAI and

CA. Jaydeep Narendra Shah, Vice President, ICAI for their

continuous support and encouragement to the initiatives of the

Board. I must also thank my colleagues from the Council at the

Internal Audit Standards Board, viz., CA. Rajendra Kumar P.,

CA. Amarjit Chopra, CA. Ravindra Holani, CA. Anuj Goyal,

CA. Nilesh S. Vikamsey, CA. Vijay Kumar Garg, CA. Atul C. Bheda,

CA. J. Venkateswarlu, CA. Shiwaji Bhikaji Zaware, CA. Abhijit

Bandyopadhyay, Smt. Usha Narayanan, Smt. Usha Sankar,Shri R. P. Singh, Shri Prithvi Haldea, Shri Sidharth Birla, Dr. T.V.

Somanathan for their vision and support. I also wish to place on

record my gratitude for the co-opted members on the Board, viz.,

CA. Madhu Sudan Goyal, CA. Rohit Choksi, CA. Ketan Vikamsey,

CA. Pankaj Kumar Adukia, CA. Umakant Balkrishna Joshi as also

special invitees on the Board for their invaluable guidance as also

their dedication and support to the various initiatives of the Board.

I am certain that the readers, especially members of the Institute,

working as internal auditors in insurance sector would find this

technical guide immensely useful.

July 14, 2011 CA. Rajkumar S. Adukia

Mumbai Chairman,

Internal Audit Standards Board

(vi)


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Abbreviations

AML Anti Money Laundering

ASM Available Solvency Margin

AUM Assets Under Management

BI Benefit Illustration

CA Corporate Agent

CIE Corporate Insurance Executive

COI Certificate of Insurance

CTR Cash Transactions Report

F & U File and Use

FLC Free Look Cancellation

FPR First Premium Receipt

GPM Gross Premium Method

KYC Know Your Customer

LOB Line of Business

MAD Margin for Adverse Deviations

MOU Memorandum of Understanding

NAV Net Assets Value


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Technical Guide on Internal Audit of Life Insurance Business

NDS Negotiated Dealing System

NSDL National Securities Depository Limited

OYRGTA One Year Renewable Pure Group Term

Assurance Business

PMS Policy Management System

PTC Pass Through Certificates

RSM Required Solvency Margin

SOP Standard Operating Procedures

SP Specified Person

STR Suspicious Transaction Report

TAT Turn Around Time

TAT Turn Around Time

UAT User Acceptance Test

UIN Unique Identification number

ULIP Unit Linked Insurance Plan

URN Unique Reference Number

(viii)


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Contents

Foreword ......................................................................................... iii

Preface ........................................................................................... v

Abbreviations .................................................................................vii

Chapter 1: Introduction ......................................................... 114

What is Insurance? .............................................................. 1

Life Insurance ....................................................................... 1

Evolution of the Insurance Sector ....................................... 2

The Last Decade: Post Libralisation Transformation .......... 6

Insurance Products and Distribution Structures ................. 7

Objective and Scope of the Technical Guide .................... 13

Chapter 2: Regulatory Framework for Life Insurance

Sector ........................................................................... 1517

The Insurance Act, 1938 .................................................... 15

Life Insurance Council ........................................................ 16

Insurance Regulatory Development Authority

(IRDA) Act, 1999 ................................................................ 16

INTERNAL AUDIT AREAS:

Chapter 3: Product Development and File and Use ...... 1828

Product Development ......................................................... 18

File and Use (F & U) ....................................................... 24

Chapter 4: Actuarial Process ............................................. 2941

Sub-process ....................................................................... 29


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(x)

Statutory Valuation Process .............................................. 31

Chapter 5: New Business ................................................... 4258

Sub-process ....................................................................... 42

Scope and Objective .......................................................... 43

Chapter 6: Underwriting ..................................................... 5972

Sub-process ....................................................................... 59


Chapter 7: Reinsurance ...................................................... 7382


Chapter 8: Policy Servicing .............................................. 83132

Renewal Premium Processing ........................................... 83

Free Look Cancellation (FLC)............................................ 92

Policy Lapse and Revival .................................................. 98

Policy Surrender ............................................................... 105

Nomination/ Assignment .................................................. 111

Change of Address (COA)/ Change of

Payment Mode (COP) ..................................................... 113

Fund Switch ...................................................................... 118

Top-up Premium ............................................................... 123

Loan Against Policy .......................................................... 128

Chapter 9: Premium Collection, Accounting and

Reconciliation ......................................................... 133141

Sub-process ..................................................................... 134

Scope and Objective ........................................................ 134

Chapter 10: Claims........................................................... 142149


Chapter 11: Investments ................................................. 150169

Regulations Pertaining to Investment Process ............... 156


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(xi)

Regulation 5 of IRDA (Investment) Regulations, 2000... 160

Section 27A of The Insurance Act, 1938 ........................ 163

Limits for Mutual Fund Approved and

Unapproved Investments ................................................. 164

Risks and Internal Audit Procedures ............................... 169

Chapter 12: Legal Framework and Compliance .......... 170198

Relevant IRDA Regulations ............................................. 172

Regulation for Commencing Insurance Business .......... 173

Grant of Certificate of Registration .................................. 173

Rural and Social Sectors ................................................. 173Corporate Governance ..................................................... 176

Chapter 13: Relationship and Complaint Handling .... 199209


Chapter 14: Agency Licensing ....................................... 210233

Tied Agency, Tied Agent .................................................. 210

Corporate Agent ............................................................... 221

Chapter 15: Commission ................................................. 234243


Chapter 16: Rewards and Recognition ........................ 244250

Sub-process ..................................................................... 244


Chapter 17: Advertisements ........................................... 251271

Sub-process ..................................................................... 251


Chapter 18: Management Expenses ............................. 272285

Sub-process ..................................................................... 272



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(xii)

Circulars/ Acts/ Regulations ............................................ 275

Chapter 19: Financial Closing Process ........................ 286299

Sub Processes ................................................................. 287



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