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The Auditor's Guide to Analytical Procedures Under ISA 520
Complete guide: ISA 520 requirements quick reference, decision flowchart for when to use analytical procedures vs. tests of details, industry-specific ratio checklists for 12 sectors, threshold-setting guide by risk level, sample completed working paper, common quality-review findings, and documentation checklist.
ISA 520 Analytical Review for Insurance Entities
Insurance audits present unique analytical challenges due to the long-tail nature of insurance liabilities and the complexity of actuarial estimation. Under ISA 520, the auditor must develop expectations that account for the fundamentally different business model: insurers collect premiums upfront and pay claims over extended periods, creating significant estimation uncertainty in the reserves that dominate the balance sheet. The combined ratio — the sum of the loss ratio (claims incurred / earned premiums) and the expense ratio (operating costs / earned premiums) — is the primary profitability indicator. A combined ratio below 100% indicates underwriting profit; above 100% indicates underwriting losses that must be compensated by investment returns. Any significant change in the combined ratio or its components requires investigation under ISA 520.7.
Claims Reserve Analysis and Development Patterns
Insurance contract liabilities (claims reserves) are typically the largest balance sheet item and the area of highest estimation uncertainty. The auditor should analyse claims development patterns — comparing how prior-year reserve estimates have developed against actual claims settlements. Favourable development (reserves proving excessive) or adverse development (reserves proving insufficient) provides critical insight into the reliability of current reserves. The IBNR (incurred but not reported) component involves particularly significant judgment and should be analysed against historical emergence patterns. Under IFRS 17, the presentation of insurance contracts has changed significantly, with the contractual service margin representing unearned profit to be recognised over the coverage period. The auditor should verify that CSM release patterns are consistent with the expected service provision.
Premium Growth and Reinsurance Arrangements
Gross written premium growth should be analysed by product line and distribution channel. Organic growth from rate increases has different implications than growth from new business volumes. The auditor should consider whether premium growth is consistent with market conditions and the entity's underwriting strategy. Reinsurance arrangements significantly affect the net risk profile — changes in the reinsurance programme (higher retentions, different reinsurers, quota share vs. excess of loss structures) directly impact the comparison of gross and net figures. The auditor must understand any reinsurance programme changes to set appropriate expectations. Investment portfolio returns should be analysed against the portfolio composition and prevailing market conditions. A portfolio heavily weighted to fixed income should return differently from an equity-heavy portfolio. Unrealised gains and losses in other comprehensive income should be analysed for consistency with market movements.
Key Ratios to Monitor for Insurance
- Combined ratio
- Loss ratio
- Expense ratio
- GWP growth rate
- Investment yield
- Solvency coverage ratio
What Drives Account Fluctuations
Gross written premium growth from new business and renewals
Claims incurred movements including IBNR reserve changes
Investment portfolio returns impacting other comprehensive income
Reinsurance programme changes affecting net retained risk
IFRS 17 contractual service margin release patterns
Seasonal Considerations
Insurance operations are generally not seasonal for annual policies, but catastrophe events create lumpy claims patterns. Natural catastrophe-exposed portfolios may show significant year-on-year volatility. Renewal cycles (January 1 for commercial, throughout the year for personal lines) affect premium timing.
Recommended Investigation Thresholds for Insurance
| Account Category | Threshold % |
|---|---|
| Revenue | 5% |
| Cost of Goods Sold | 10% |
| Operating Expenses | 10% |
| Current Assets | 10% |
| Equity | 5% |
Regulatory note: Insurance entities are subject to Solvency II regulation in the EU. Solvency coverage ratios and own funds calculations affect the auditor's understanding. IFRS 17 implementation has changed financial statement presentation significantly.
Worked Example: Insurance Analytical Review
A mid-tier property and casualty insurer. Overall materiality €8,000,000, performance materiality €5,200,000.
Overall materiality: €8,000,000 | Performance materiality: €5,200,000 | Threshold: 10%
| Account | PY | CY | Change | % |
|---|---|---|---|---|
| Gross Written Premiums | €385,000,000 | €420,000,000 | €35,000,000 | +9.1% |
| Reinsurance Premiums Ceded FLAG | €54,000,000 | €63,000,000 | €9,000,000 | +16.7% |
| Claims Incurred — Gross FLAG | €248,000,000 | €285,000,000 | €37,000,000 | +14.9% |
| Acquisition Costs | €77,000,000 | €84,000,000 | €7,000,000 | +9.1% |
| Investment Income FLAG | €28,000,000 | €38,000,000 | €10,000,000 | +35.7% |
| Insurance Contract Liabilities | €820,000,000 | €890,000,000 | €70,000,000 | +8.5% |
| Reinsurance Contract Assets FLAG | €108,000,000 | €125,000,000 | €17,000,000 | +15.7% |