Insurance Company Audit UAE 2025: Actuarial Reserves, Claims & IA Compliance

Insurance company audits represent one of the most technically complex audit engagements in the UAE financial services sector, combining actuarial science, regulatory compliance, and sophisticated accounting standards.

Understanding Insurance Audit Complexity

Insurance audits differ fundamentally from standard commercial audits due to the estimated nature of primary liabilities. Unlike retail or manufacturing where liabilities are based on actual invoices, insurance companies' largest liabilityclaims reservesrequires actuarial estimation based on statistical models and historical experience patterns.

Key Unique Features

Actuarial Reserves: Insurance liabilities are estimates, not certainties. Auditors must validate complex actuarial calculations including Incurred But Not Reported (IBNR) reserves and case reserves for reported claims.

Long-Tail Exposure: Liability claims may take years to settle. This requires sophisticated reserving methodologies and creates audit complexity in validating 10-year-old assumptions.

Revenue Recognition Complexity: Premium revenue must be earned over the policy period, requiring unearned premium reserve calculations and premium deficiency testing.

Actuarial Reserve Validation

Types of Reserves Audited

Outstanding Claims Reserves (Case Reserves): For reported but unsettled claims, claims adjusters establish individual reserves based on expected settlement. Auditors sample large claims and verify the reserve amount is supported by claims file documentation, adjuster assessments, and legal opinions.

IBNR (Incurred But Not Reported) Reserve: The most complex reserve, IBNR estimates claims that occurred but haven't been reported. Actuaries use loss development triangles and historical reporting patterns to project ultimate claims.

Unearned Premium Reserve: Represents premium collected but not yet earned. For a 12-month policy issued July 1, as of December 31, six months remain unexpired, requiring 50% of premium to be deferred as unearned.

Auditor's Approach

For material reserves, auditors engage independent actuarial experts to:

• Review management's actuarial assumptions and models
• Develop independent reserve estimates using auditor's methodologies
• Assess reasonableness of key assumptions (loss ratios, development factors, discount rates)
• Provide actuarial opinion supporting audit conclusions

Auditors test mathematical accuracy, validate data inputs (earned premium, paid claims, case reserves), and compare current year actual development to prior year estimates to assess historical accuracy.

Claims Liability Audit Procedures

Claims Cycle Understanding

Claims flow through stages: occurrence → reporting → investigation → reserve establishment → negotiation → settlement → payment. Each stage creates audit touchpoints.

Key Audit Procedures

Sample Selection: Auditors examine all claims above materiality threshold, plus statistical samples of smaller claims, focusing on:

• Claims opened in final month (cut-off testing)
• Claims settled shortly after year-end (potential under-reserving indicators)
• Long-outstanding claims (potential impairment)

Claims File Review: For sampled claims, auditors verify:

• Claim notification documentation
• Investigation notes and assessments
• Medical reports, repair estimates, legal opinions
• Settlement correspondence and authorization
• Payment execution to valid beneficiaries

Reserve Adequacy: Auditors assess whether reserves reflect latest available information and whether adjusters are consistently conservative or aggressive in reserving philosophy.

Reinsurance Accounting & Audit

Why Reinsurance Matters

Most UAE insurers cede significant risk to reinsurers, creating:

• Reinsurance receivables on ceded claims
• Reinsurance premium expense for coverage purchased
• Complex treaty structures (quota share, excess of loss, catastrophe covers)

Audit Verification

Treaty Review: Auditors obtain all reinsurance agreements and understand cession percentages, retention limits, and reinsurer participation.

Ceded Premium Calculation: Recalculate reinsurance premiums owed based on treaty terms and verify payments to reinsurers.

Reinsurance Receivable Testing: Verify recovery calculations per treaty, obtain reinsurer confirmations, and assess collectability based on reinsurer credit ratings and financial health.

IFRS 17 Insurance Contracts

The New Standard

IFRS 17, effective from 2023, fundamentally changes insurance accounting from diverse national practices to a consistent global model.

General Measurement Model: Insurers measure liabilities as present value of future cash flows plus a contractual service margin (CSM), recognizing profit over the coverage period rather than upfront.

Premium Allocation Approach: Simplified method for short-duration contracts (typically general insurance under 1 year), similar to current unearned premium but requiring rigorous liability adequacy testing.

Audit Implications

Auditors must verify:

• Discount rate appropriately reflects time value of money
• Risk adjustment for non-financial risk is reasonable
• CSM calculation is accurate
• Onerous contracts properly identified
• Revenue disaggregation between insurance and investment components

First-time adoption requires retrospective application with significant systems changes and actuarial assumption updates.

Insurance Authority Compliance

UAE Regulatory Requirements

Minimum Capital: Life insurance AED 50M, general insurance AED 30M, composite AED 75M

Solvency Margin: Insurers must maintain available solvency exceeding required solvency based on premium and claims calculations.

Investment Restrictions:

• Maximum 10% in single issuer
• Maximum 20% in related parties
• Minimum 50% in UAE dirham assets

Auditor Regulatory Reporting

Beyond standard shareholder audit reports, auditors must prepare separate reports to the Insurance Authority addressing:

• Compliance with IA regulations
• Solvency margin adequacy
• Investment limit compliance
• Significant regulatory breaches

Common Insurance Audit Findings

Based on extensive UAE insurance audit experience:

Inadequate Reserving: Case reserves not updated for new information, overly optimistic settlement assumptions, or insufficient IBNR based on historical development.

Premium Deficiency Unrecognized: Expected future claims exceed unearned premiums but no premium deficiency reserve established.

Reinsurance Collectability: Reinsurer financial difficulties or disputed coverage without adequate provisioning for doubtful recoveries.

Investment Breaches: Exceeded concentration limits or related party investment restrictions without proper disclosure.

Preparing for Insurance Audit

Essential Documentation

Policy & Premium: Policy register, premium rate schedules, distribution agreements

Claims: Claims register, large claims files, settlement approvals, legal opinions

Reinsurance: All treaty agreements, premium bordeaux, recovery statements, reinsurer confirmations

Actuarial: Reserve reports, assumption documentation, loss triangles, premium deficiency analyses

Investment: Portfolio listings, compliance reports, related party schedules

Regulatory: Solvency calculations, Insurance Authority correspondence, filing confirmations

Claims Management and Reserving

IBNR (Incurred But Not Reported) Reserves

Critical liability estimation:

Actuarial Methodologies:

• Development triangle analysis for claim patterns
• Loss ratio method for initial estimates
• Bornhuetter-Ferguson technique for hybrid approach
• Chain ladder method for claim development

Reserve Adequacy Testing:

• Historical claims development review
• Adverse deviation scenarios
• Confidence level statistical analysis
• Regulatory minimum requirement compliance

Unearned Premium Reserves

Pro-rata calculation requirements:

Reserve Calculation Methods:

• Daily pro-rata method for precise allocation
• Monthly approximation for efficiency
• 1/365th daily earning pattern
• Seasonal adjustment considerations

Audit Procedures:

• Sample testing of policy terms and premiums
• Recalculation of reserve balances
• System logic and automation testing
• Cut-off testing for period-end policies

Reinsurance Accounting Complexities

Reinsurance Ceded Transactions

Risk transfer accounting:

Proportional Reinsurance:

• Quota share percentage application
• Surplus treaty layer calculation
• Commission income on ceded premiums
• Recoverable assets for ceded reserves

Non-Proportional Reinsurance:

• Excess of loss treaty accounting
• Reinstatement premium calculations
• Aggregate stop-loss provisions
• Catastrophe coverage accounting

Reinsurance Recoverables Asset

Collectibility assessment requirements:

Credit Risk Evaluation:

• Reinsurer financial strength rating
• Collateral and letter of credit requirements
• Past payment history analysis
• Allowance for doubtful recoveries

Frequently Asked Questions

What actuarial certifications are required for UAE insurance audits?

UAE insurance companies must engage qualified actuaries to certify technical reserves, validate pricing adequacy, and confirm solvency margin compliance. The actuary's report becomes part of the annual regulatory filing reviewed during audit procedures.

How often must insurance companies update loss reserves?

Insurance companies should review and update loss reserves quarterly at minimum, with comprehensive actuarial analyses performed annually. Significant loss events or emerging claim trends may trigger more frequent reserve reassessments.

What are the main differences between life and general insurance audits?

Life insurance audits focus on long-duration contract reserves, policyholder liability valuations, and embedded value calculations, while general insurance audits emphasize short-term claim reserves, premium recognition cycles, and reinsurance arrangements with different risk profiles.

Conclusion

Insurance company audits demand specialized technical expertise spanning actuarial science, complex IFRS 17 implementation, and rigorous Insurance Authority compliance. The combination of estimated liabilities, reinsurance complexities, and regulatory oversight makes these among the most specialized audits in UAE.

As Ministry-approved auditors with extensive insurance sector experience, Farahat & Co provides comprehensive audit services covering actuarial validation, claims assessment, IFRS 17 implementation, and Insurance Authority regulatory reporting, ensuring thorough audits meeting all UAE compliance requirements.