Impact of renewed auditor oversight on insurance liabilities


Recent years have seen a number of high-profile corporate insolvencies despite these companies meeting auditor requirements; examples include the collapse of Wirecard, BHS and Carillion. In all the cases mentioned, the financial accounts of each company have been closed and authorized by their respective auditors. A 2020 report by industry regulator the Financial Reporting Council (FRC) pointed out that more than a third of audits were not to the satisfaction of the watchdog. As such, there has been growing pressure for greater scrutiny of auditors to restore credibility and public trust within the sector.

New monitoring for greater certainty

A series of independent government reviews found that the current regulator “lacks the necessary powers and clarity of purpose to hold auditors and administrators to account”. Consequently, this led to plans for the formation of a new entity to replace the FRC – the Audit, Reporting and Governance Authority (ARGA). Some of the ARGA’s powers would include:

Failure to comply with this increased regulation would now carry the risk of severe penalties, and ARGA will have the ability to demand changes to a company’s report and accounts.

What does this mean for insurance?

In addition to auditors, public interest entities (PIEs), including insurance or reinsurance companies, will be placed under the supervision of ARGA.

More relevant to non-PIE organizations is the fact that those who choose to keep significant risk outside of their corporate insurance program may also feel the effects of ARGA oversight. This could mean increased scrutiny by auditors of insurance-related liabilities (set aside to fund both future and historical claims in progress) held on balance sheets – especially for long-term liabilities. [1]

How should this change your approach to reporting insurance liabilities?

With the formation of the proposed ARGA requiring government legislation, formal implementation of the regulator is not expected until April 2023 at the earliest. Despite this, Marsh has already observed increased auditor scrutiny with respect to actuarial valuations of insurance liabilities for our clients – both for self-insured retentions and for captive insurance companies.

To ensure financial reporting is as robust as possible and to avoid unexpected insolvencies, auditors are increasingly asking companies about the assumptions and methods underlying the reserves held to fund insurance liabilities. . As part of this challenge, auditors also expect sensitivity analysis to be performed – providing a range for reserves calculated as “best estimate” at various levels of confidence. This sensitivity analysis could involve an adjustment of the assumptions, such as the variation of inflation rates, which is particularly relevant in the current economic context.

A valuation like this is usually calculated by an actuary. [2] Through third-party actuarial validation, a company, its auditor, regulator and shareholders can be more confident that the level of provisioned reserves is appropriate.


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