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Impact of Renewed Auditor Oversight on Insurance Liabilities

Recent years have seen a number of high profile company insolvencies despite these companies satisfying auditor requirements. Consequently, this has led to plans of the formation of a new entity the Audit, Reporting and Governance Authority (ARGA).
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By Henry Peach , 

Analytics Development Executive, UK&I

17/10/2022 · 3 minute read

Recent years have seen a number of high profile company insolvencies despite these companies satisfying auditor requirements; examples include the collapse of Wirecard, BHS, and Carillion. In all cases mentioned, each company’s financial accounts were signed off and authorised by their respective auditors. A 2020 report published by the industry’s regulator, the Financial Reporting Council (FRC), highlighted that over a third of audits were not up to the watchdog’s satisfaction. As such, there has been a growing push for greater auditor oversight in order to restore credibility and public trust within the sector.

New oversight supporting greater certainty

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

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

What does his mean for insurance?

In addition to auditors, Public Interest Entities (PIE), including (re)insurance companies, will fall under the oversight of ARGA.

More pertinent to non-PIE organisations is the fact that those opting to retain significant risk outside of their corporate insurance programme may also feel the effects of ARGA’s oversight. This could be through increased auditor scrutiny of insurance-related liabilities (set aside to fund both future and outstanding historical claims) held on balance sheets – especially for long-tail liabilities. [1]

How should this change your approach to reporting on insurance related liabilities?

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

To ensure financial reporting is as robust as possible and to help avoid unexpected insolvencies, auditors are increasingly challenging companies on the assumptions and methods underpinning the reserves held to fund insurance liabilities As part of this challenge, auditors also expect sensitivity analysis to be performed – providing a range for the calculated ‘best estimate’ reserves at various confidence levels. This sensitivity analysis could involve adjustment of assumptions, such as varying inflation rates – particularly pertinent in the current economic environment.

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

 

[1] Risks for which there is a significant gap between a loss event occurring and the final claims settlement.

[2] A professional using mathematical skills and methods to measure the probability and risk of future events.

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