ENGLISH ABSTRACT: The South African long-term insurance industry is currently believed to be at animportant crossroads in its existence. The industry is haunted by concerns abouthigh cost structures, a lack of transparency in disclosure to policyholders, unfulfilledexpectations of policyholders and the proliferation of available investment vehicles inthe market. These concerns are exerting pressure on the existing products andpractices of South African long-term insurers.The audits of these insurers are of a complex and high-risk nature as a result of thecomplexity of their operations and, in particular, the highly complex actuarialvaluation process in respect of policy liabilities. The prevailing auditing standards inSouth Africa require auditors to include policy liabilities in the ambit of their auditopinions.Recent investigations into failed long-term insurers and their audits, including thoseof local Fedsure Life, British Equitable Life Assurance Society and Australian HIHInsurance, demonstrate the high risk involved in the audits of long-term insurers.Against this background, the objective of this research was to develop a bestpractice framework for the formulation of overall audit strategies for policy liabilitiesarising under insurance contracts and the related earnings of listed South Africanlong-term insurers.To justify the focus of the research on the abovementioned components of thefinancial statements of listed South African long-term insurers, a questionnaire wasdeveloped and sent to auditors of all long-term insurers listed on the JSE SecuritiesExchange South Africa for completion. Responses were processed to calculate aRelative Inherent Risk Index specifically developed for use in this research, rankingvarious industry-specific account balances and classes of transactions on the basisof their potential exposure to inherent risk. The results of this process providedsignificant support for the hypotheses that policy liabilities and the related earningsare potentially exposed to the highest levels of inherent risk. The remainder of theresearch consequently focused on these components. A further very comprehensive questionnaire was developed to collect data withrespect to respondents’ views of potential best practices for the audit of variousaspects relating to policy liabilities arising under insurance contracts and the relatedearnings of listed South African long-term insurers, on the basis of their extensiveexperience in the industry. This questionnaire was sent to experienced auditorsresponsible for the audits of the five largest listed long-term insurers in South Africafor completion.Responses were received from four of the five potential respondents, resulting in an80% response rate, enabling meaningful analysis and interpretation of the data.Responses were analysed, interpreted and documented in the form of a detailedbest practice framework for the formulation of overall audit strategies for policyliabilities arising under insurance contracts and the related earnings.The lack of a fifth response was compensated for by a review of the researchfindings by experienced auditors of Deloitte and the provision of their opinionsthereon. Deloitte was selected for this purpose as the fact that this auditing firm isthe only one of the so-called “Big Four” auditing firms that does not act as auditor ofone of the selected target long-term insurers, resulted in the initial exclusion of thefirm’s views from the research. The framework was updated to reflect theseopinions and now incorporates input from all of the so-called “Big Four” auditingfirms.The framework provides a comprehensive discussion of all possible types of auditprocedures that may be relevant to the audit of all aspects of policy liabilities arisingunder insurance contracts and the related earnings of listed South African long-terminsurers. As no such framework existed prior to this research, the developmentthereof made a significant contribution to existing knowledge. This contribution isthe result of, inter alia, the method followed in designing the framework, resulting in itrepresenting a synthesis of, inter alia, the following:• existing international and limited local guidance for auditors and, in particular,auditors of long-term insurers, customised for the South African environment; • best practices currently in use on the audits of listed South African long-terminsurers; and• views of experienced practitioners on the abovementioned types of bestpractices that might not be employed at the moment, but that should, in theirviews, be employed in future.The valuable contribution of this research to existing knowledge is clear from the factthat numerous publications in popular professional as well as accredited academicjournals, plus a paper delivered at a conference have resulted from it (refer to thesource list and Appendix A). Furthermore, the South African Institute of CharteredAccountants has approved a project to update existing South African guidance forauditors of long-term insurers on the basis of the findings of this research.
