Internal controls within local insurance companies : an evaluation

Abstract

Internal controls are an integral part of sound and prudent management within insurance companies. A properly designed and consistently enforced system of internal controls helps insurance companies safeguard their resources, produce reliable financial reports and comply with laws and regulations. The objective of this study is to identify and evaluate internal controls, in view of insurance Directive 27, required at the entity and application level of local insurance companies. The research was spread over a period of nine months and consisted of interviews with five local insurance companies, Big Four audit firms, the Malta Insurance Association and the Malta Financial Services Authority. The study revealed that adequate attention was already given to internal controls in the two above-mentioned levels prior to the introduction of Insurance Directive 27. However, the creation of functions at the entity-level such as risk management, internal audit and audit committee proved to be burdensome for the smaller companies. The evaluation identified certain weaknesses that should be mitigated. This will ensure better compliance with Insurance Directive 27 and an efficient running of the companies in general. This Directive created the correct climate for improvements. Insurance companies have to be well prepared to change and compete in order to thrive in this dynamic business world.