Auditing Ind AS 104 — testing the liability adequacy assessment

Ind AS 104 largely permits an insurer to continue existing accounting policies for insurance contracts, but it imposes one mandatory minimum test at every reporting date: a liability adequacy test, under which current estimates of all contractual cash flows (including claims handling costs and embedded options) are compared against the carrying amount of the insurance liability less related deferred acquisition costs and intangibles — and if the carrying amount is found inadequate, the entire deficiency is recognised in profit or loss immediately, with no smoothing permitted.

Audit procedures on the liability adequacy test

1. 01Confirm the test used current estimates, not the original pricing assumptionsThe test has to use best-estimate assumptions as at the current reporting date — mortality, morbidity, lapse, expense and discount rate — not the assumptions priced into the product when it was originally sold.
2. 02Independently evaluate the actuary as a management expertAssess the actuary's competence, objectivity and the reasonableness of the methodology, and obtain the underlying cash flow projections rather than accepting only the summary certificate.
3. 03Test the policy data supplied to the actuarial modelReconcile the in-force policy count, sum assured and premium data used in the model to the policy administration system as at the valuation date.
4. 04Check the deficiency, where one exists, was taken fully to profit or lossNo deferral or amortisation of a liability adequacy shortfall is permitted — confirm it hit the P&L in full in the period identified.