The determination of claims reserves in general insurance companies and the related audit implications

Abstract

What does this research set out to do and why? This study seeks to analyze the difficulties insurers encounter in calculating claims reserves, and the relative audit implications that auditors must face during the audit of claims reserves. This study is particularly necessary due to the growth of the insurance industry in Malta and the many regulatory changes as a result of Solvency II and IFRS 4 Phase II. The nature of claims reserving and the new regulations also impact the auditors, auditing insurance companies. The study provides recommendations to reduce the difficulties associated with claims reserving and to aid both insurers and auditors adjust to the new environment. How did it seek to do it? This study was carried out through detailed interviews with both general insurance companies and the auditors of such firms, as well as the intensive research and analysis of recent developments in this field. What are the general findings and what do these suggest? The findings of this study prove that insurers encounter numerous problems when reserving for claims and that the audit procedure for claims reserves is in fact a very significant and complex one. It was also made evident that the adjustments necessary to implement the new requirements are time consuming and costly for both insurers and auditors and that many specific measures must be taken to aid this process. What conclusions are reached? The conclusions indicate that there is room for improvement in the claims reserving procedures used by insurers and that there are a number of ways how the implications on auditing claims reserves can be addressed. It was also concluded that if Solvency II and IFRS 4 Phase II are to achieve their desired goals then players in the insurance sector must make a great deal of these recommendations the implementation and adjustment process for the new frameworks will be smoother and less intimidating for auditors and especially the insurance companies. These frameworks will also be of greater benefit to insurance companies' stakeholders. The overall claims reserving process and audit procedure of claims reserves will also become less burdensome, as well as associated with less risk.