Internal audit operating in isolation in UK insurance industry

According to a survey by leading accountant and consultant Moore Stephens, internal audit may be operating in too much isolation in some quarters of the UK insurance industry, and needs to continue to widen its remit beyond its traditional operational areas to include a broader range of skills, including business strategy. The survey also showed that, despite the current economic environment, investment and reinsurance security are not high on the internal audit agenda. The survey confirmed that the perceived independence of internal audit needs to be addressed. It showed that 28 per cent of internal audit departments do not report to an audit committee or to the board. This was seen as a major issue among respondents overall, 62 per cent of whom agreed that it is becoming increasingly important to ensure that internal audit reports to the right people. The survey also revealed that respondents have a positive view of internal audit’s effectiveness. Nine out of ten respondents said they felt that internal audit was offering “excellent”, “very good”, or “quite good” service to the insurance industry. However, there is a gap between how internal audit personnel perceive themselves and how others perceive their value. 55% of audit personnel believe they provide “extremely good value” compared with 15% of non-audit personnel. While 42 two per cent of respondents said they used feedback from external advisers to assess whether their internal audit function was best in class, almost 30 per cent either didn’t know, or didn’t care. Only one in four firms benchmarked their performance against that of their competitors. There was a wide divergence between underwriters and brokers over the approval of internal audit strategy. For all underwriters, the strategy, work plans and reports were approved by the audit committee, but this was the case for only one in five brokers. Moore Stephens says, “It is unhealthy if internal audit feels compromised in any way by its reporting lines. It is certainly desirable for reporting lines to be into the audit committee, which is normally comprised of predominantly independent non-executive directors.” Asked to identify the most important internal audit areas for their business, both brokers and underwriters placed financial management at the top of the list, followed by regulatory compliance, risk management, claims, IT systems, business strategy, and customer care. Moore Stephens comments, “Given the current economic climate, potentially steep reductions in investment portfolios and concerns over reinsurers’ credit ratings, it was surprising that underwriters did not consider investments or reinsurance as a high internal audit priority, with both areas scoring just three per cent.” Moore Stephens also notes that, while almost sixty per cent of respondents believed that internal audit needed to be punching at a higher level, the ability to influence business strategy was not seen as one of the main benefits of the internal audit function. Rather, the focus was on operational and tactical benefits. Over one-third of respondents perceived internal audit to be “extremely” or “very well” equipped with the necessary skills to go beyond its compliance role and integrate with risk management, HR, IT, underwriting and actuarial functions. But Moore Stephens notes, again, that there is a difference in perception in this regard between non-audit and audit personnel, with 45 per cent of audit personnel believing they are well-equipped, against just eleven per cent of non-audit personnel, the majority of whom consider that they are no more than “fairly well” equipped. Simon Gallagher, head of the Moore Stephens Insurance Industry Group, says, “The FSA sees internal audit practice as an integral part of the insurance industry, from providing assurance on risk management to helping to establish effective control frameworks. It is looking for embedded and effective risk management and control within firms, including evidence of action taken to improve the control framework, and to mitigate risk and confirmation of senior management's regard for internal audit findings. “How many insurance firms can claim their internal audit functions are best of breed? Traditionally, internal audit has not been especially innovative or visionary. However, it needs to be today, to ensure that a company's profitability and efficiency are not being allowed to leak away through the holes in its internal systems. “The challenge facing internal audit is to take a global, more open, expansive and outward view, incorporating business strategy into its remit. The internal audit function of the future will likely consist of a broader range of skills, well beyond traditional financial or auditing skills. “The two other main challenges which need to be faced head-on are resourcing levels and communication. Roughly half the respondents to our survey were concerned about the overall issue of resource, while almost a third were preoccupied with the need to communicate, internally, what internal audit is all about. “Finally, it is apparent from the survey that almost half those firms which do not have an internal audit function believe they are too small to need one, while fewer than ten per cent planned to establish such a function within the next three years. This fundamentally misses the point. Internal audit or some alternative form of control monitoring is more about risk and has less to do with the size of the business. It should be seen as an integral part of a prudent quality control system for any organisation.” The survey, entitled ‘Is Internal Audit in the Insurance Industry too internal?’, targeted fifty brokers and fifty underwriters with annual revenues in excess of £10m,  Moore Stephens LLP is noted for a number of industry specialisations and is widely acknowledged as a leading shipping and insurance adviser. Moore Stephens LLP is a member firm of Moore Stephens International Limited, one of the world's leading accounting and consulting networks, with 621 offices of independent member firms in 95 countries employing 19,279 people. Fee income increased in 2007 by US$340.3 million to US$1,884.0 million, a growth rate of 22%, doubling network turnover in the past three years. For more information: Issued by: Simon Gallagher, Moore Stephens LLP Chris Hewer, Merlin Corporate Communications Tel: +44 (0)7881 500016 Tel: +44 1903 50 20 50 email: simon.gallagher@moorestephens.com email: chris@merlinco.com