Deloitte performed various group return audits over 2022 in which AIS have been involved. Before this, our AIS team have also performed group return reviews for our head of actuarial function clients. We therefore have significant group return experience in AIS from which we have identified the following key insights:
Start early to iron out potential issues
For the first group return audit, there are usually a lot of principles that need to be considered by the auditor – such as right of use assets, deferred tax assets, fungibility of assets, transfers between entities and different entities’ capital requirements. It is therefore recommended that insurers and their audit teams start discussions early to identify key issues. Ideally the audit team should perform a high-level review of the key audit areas as used in previous returns, to ensure a smoother audit next year when the December 2022 group return is being audited.
Scoping is the golden key
As with all audits, clear and detailed scoping right from the start is a key element of success. The scope for group return audits may differ substantially from the scope of solo return audits and that used in the audits of the consolidated financial statements, in part due to the various considerations discussed in this article. The links to the Prudential Standard Audit Requirements provided below are useful for scoping purposes.
The amount of audit effort involved is heavily dependent on the type of entities the group is made up of
It is not just the number of entities in the group that will determine the audit effort, but also the types of entities:
- The more insurance entities there are in the group, the higher the expected audit effort, because the solvency capital requirement of each material insurance entity needs to be audited separately (under the Deduction and Aggregation method, see below).
- If the audit team has not previously audited the solo returns of all the material insurance entities, this may drive up the effort significantly. This emphasises the point of auditors getting involved early on to identify any such insurance entities.
- If these insurance entities are domiciled in non-equivalent jurisdictions, it may increase the audit effort even more, since the capital requirements for insurers in non-equivalent regimes need to be recalculated according to the Prudential Authority (PA) specifications.
- Capital requirements for non-insurance entities that are regulated under non-equivalent jurisdictions, may also require additional audit consideration.
The amount of audit effort is likely to increase if the group makes use of the Accounting Consolidation (AC) method
Background: Insurance subsidiaries within an insurance group that are licensed by the PA, may apply the AC method to calculate group eligible own funds and capital requirements, if prior approval from the PA has been obtained to do so. The AC method involves treating all entities included in the AC group as a single entity, constructing a consolidated balance sheet for this entity and calculating group own funds and capital requirement from this single balance sheet. This contrasts to the DA method where the separate own funds and capital requirements for each entity are summed, after appropriate adjustments (including the removal of intragroup transactions) have been made.
- If an AC group has been approved by the PA, calculating the capital requirement for this group, or part thereof, under the AC method will typically require more audit effort. This is because an entire new Solvency Capital Requirement needs to be calculated from the consolidated balance sheet (less direct reliance on the audit of the solo capital requirements).
- It is worth noting that since only PA licensed insurers are eligible to form part of the AC group, the designated insurance group is likely to contain non-AC group entities for which the DA method would still need to be applied.
Clarify the split between accounting and actuarial parts of the audit team at the start already
Actuarial and accounting teams work closely together in group return audits. Actuarial specialists are traditionally involved in the auditing of the capital requirements. However, for group returns, actuarial specialists will likely also be involved in areas such as intragroup adjustments, fungibility adjustments, deferred tax asset adjustments and right of use asset adjustments.
Concluding remarks: The first group return audit is a new experience for both insurers and auditors and the effort involved should not be underestimated. The audit can be smoothed out to a large degree by communication and planning early on. The key planning and effort considerations discussed above are useful for insurers and auditors gearing up for the first group return audit.
