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CS Professional · Internal and Forensic Audit · Special Points relating to Internal Audit in various Entities

During a review of reinsurance at Himalaya General Insurance Ltd, the internal auditor finds that retention limits in the board-approved reinsurance programme are 10 per cent of the sum insured for fire risks, but several large fire policies were retained at 25 per cent with no reinsurance cession. Which conclusion and recommendation is most appropriate?

The auditor should report the breach of the board-approved retention limit, quantify the excess net exposure, and recommend a system block plus board ratification. Higher retained premium does not justify the added risk, and retroactively changing limits without approval would weaken governance.

  1. AReport breach of the approved retention limit, quantify the excess net exposure, and recommend a system block for such policies and ratification by the boardCorrect
  2. BTreat it as acceptable since higher retention increases retained premium and profit
  3. CRecommend increasing the retention limit retroactively without approval
  4. DReport it only in the statutory auditor's management letter

Explanation

Retention limits cap the net loss the insurer bears from one risk. Retaining 25 per cent breaches the approved programme and increases exposure to a single large fire loss. The auditor should quantify the excess, recommend preventive system controls, and seek board attention. Retroactively altering limits would undermine governance.

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