Audit and Accounting Guide: Property and Liability Insurance Entities 2018

Title page......Page 2
Copyright......Page 3
Preface......Page 4
Kinds of Insurance......Page 32
Legal Forms of Organization......Page 35
Methods of Producing Business......Page 36
Underwriting of Risks......Page 38
Pooling, Captives, and Syndicates......Page 39
Investments......Page 40
Definition of Public Business Entity......Page 41
Revenue Recognition......Page 45
State Insurance Regulation......Page 50
National Association of Insurance Commissioners......Page 52
Federal Regulation — Securities and Exchange Commission......Page 55
Federal Regulation — The Dodd-Frank Wall Street Reform and Consumer Protection Act......Page 59
Federal Regulation — Terrorism......Page 61
Statutory Accounting Practices......Page 62
Generally Accepted Accounting Principles......Page 70
Comparison of SAP and GAAP......Page 73
General Considerations......Page 92
Integrated Audit of Financial Statements and Internal Control Over Financial Reporting......Page 93
Additional PCAOB Audit Standards......Page 95
Planning and Other Auditing Considerations......Page 96
Audit Planning......Page 97
Audit Risk......Page 98
Risk Assessment Procedures......Page 99
Understanding the Entity, Its Environment, and Its Internal Control......Page 100
Common Industry Ratios and Performance Metrics......Page 105
Identifying and Assessing the Risks of Material Misstatement......Page 109
Performing Audit Procedures in Response to Assessed Risks......Page 110
Use of Assertions in Obtaining Audit Evidence......Page 112
Other Risk Assessment Activities and Considerations......Page 113
Performance Materiality and Tolerable Misstatement......Page 114
Consideration of Fraud in a Financial Statement Audit......Page 115
Insurance Industry — Fraud Risk Factors......Page 116
The Importance of Exercising Professional Skepticism......Page 129
Discussion Among Engagement Personnel Regarding the Risks of Material Misstatement Due to Fraud......Page 130
Obtaining the Information Needed to Identify the Risks of Material Misstatement Due to Fraud......Page 132
Identifying Risks That May Result in a Material Misstatement Due to Fraud......Page 133
Responding to the Results of the Assessment......Page 136
Responding to Misstatements That May Be the Result of Fraud......Page 138
Communicating About Possible Fraud to Management, Those Charged With Governance, and Others......Page 139
Use of Information Technology......Page 140
Going Concern Considerations......Page 143
Evaluating Misstatements......Page 145
Audit Documentation......Page 148
Consideration of the Work of Internal Auditors......Page 149
Communication of Deficiencies in Internal Control......Page 150
Matters to Be Communicated......Page 153
Auditor Independence......Page 154
Auditing Fair Value Measurements and Disclosures......Page 155
Change in Auditor......Page 156
Auditor’s Letter of Qualifications......Page 157
Partner Rotation......Page 158
Prohibited Services......Page 159
Report on Internal Controls......Page 160
Communications to Audit Committees......Page 161
Management’s Report on Internal Controls Over Financial Reporting......Page 162
Auditor's Consideration of State Regulatory Examinations......Page 163
Auditor's Consideration of Permitted Statutory Accounting Practices......Page 165
SEC Requirements for Management’s Report on Internal Control Over Financial Reporting......Page 166
Background......Page 172
Types of Premiums Adjustments......Page 173
Summary of Premium Transaction Flow......Page 174
Involuntary Markets......Page 180
Premium Revenue and Premium Adjustments......Page 181
Premium Receivable......Page 186
Acquisition Costs......Page 190
Premium Deficiencies......Page 199
Medicare Part D......Page 219
Disclosure Considerations......Page 221
Consideration of Fraud in a Financial Statement Audit......Page 224
Management Estimates......Page 225
Risk of Material Misstatement — Inherent Risk Factors......Page 226
Control Environment......Page 228
Risk Assessment Process......Page 229
Control Activities......Page 230
Audit Procedures Responsive to the Assessed Risks of Material Misstatement......Page 231
Audit Consideration Chart......Page 232
Types of Businesses and Their Effect on the Estimation Process......Page 242
Kind of Insurance Underwritten: Line of Business or Type of Risk......Page 243
The Transaction Cycle......Page 245
Claim Acceptance and Processing......Page 246
Claim Adjustment and Estimation......Page 247
Claim Settlement......Page 248
Salvage and Subrogation......Page 249
Components of Loss Reserves......Page 250
Estimating Methods......Page 251
Illustrative Projection Data......Page 253
LAE Reserves......Page 262
AO Reserve Calculation Approaches......Page 263
Changes in the Environment......Page 264
Critical Accounting Policies and Estimates Disclosure......Page 265
Use of Specialists by Management in Determining Loss Reserves......Page 266
Guaranty Fund and Other Assessments......Page 267
Discounting Loss Reserves......Page 268
Reinsurance Recoverables......Page 271
Statutory Accounting......Page 272
Applicability to Statutory Financial Statements......Page 275
Relationship to Other Pronouncements......Page 276
Planning Considerations — Overview......Page 282
Consideration of Fraud in a Financial Statement Audit......Page 283
Risk of Material Misstatement — Inherent Risk Factors......Page 284
Control Environment......Page 285
Control Activities......Page 286
Audit Procedures Responsive to the Assessed Risks of Material Misstatement......Page 287
Use of Loss Reserve Specialists......Page 290
Use of Management Specialists by Auditors in Evaluating Loss Reserves......Page 291
Auditor’s Response to Management’s Use or Non-Use of a Loss Reserve Specialist......Page 292
Analytical Procedures......Page 293
Testing the Data, Assumptions, and Selection of the Estimate......Page 294
Auditing the Underlying Data Used in the Loss Reserving Process......Page 299
Develop a Point Estimate or Range to Evaluate Management’s Estimate......Page 300
Loss Reserve Ranges......Page 301
Factors That Could Affect a Range of Reasonably Possible Outcomes......Page 303
Evaluating the Financial Effect of a Reserve Range......Page 304
Auditor Uncertainty About the Reasonableness of Management's Estimate and Reporting Implications......Page 306
Ceded Reinsurance Recoverable......Page 307
Audit Consideration Chart......Page 309
Investment Evaluation......Page 317
Regulation......Page 318
FASB Accounting Standards Codification 820 and 825......Page 319
Definition of Fair Value......Page 320
Application to Liabilities and Instruments Classified in a Reporting Entity’s Shareholders’ Equity......Page 321
The Fair Value Hierarchy......Page 322
Disclosures......Page 326
Fair Value Option......Page 327
Significant Differences Between GAAP and Statutory Accounting......Page 328
Cash and Cash Equivalents......Page 330
Debt and Equity Securities......Page 332
Mortgage Loans......Page 357
Troubled Debt Restructurings......Page 360
Real Estate......Page 364
Derivatives, Including Futures, Options, and Similar Financial Instruments......Page 367
Joint Ventures and Partnerships......Page 373
Investments in SCA Entities......Page 382
Investment Income Due and Accrued......Page 386
Asset Transfers and Extinguishments of Liabilities......Page 387
Repurchase Agreements......Page 393
Securities Lending......Page 395
Other Information......Page 397
Audit Risk Factors — Investments......Page 398
Risk of Material Misstatement — Inherent Risk......Page 399
Control Environment......Page 403
Risk Assessment Process......Page 405
Control Activities......Page 406
Service Organizations......Page 408
Group Audit Considerations for Investments in Alternative Investments and Subsidiary, Controlled and Affiliated Entities......Page 409
Audit Consideration Chart and Procedures......Page 410
Chapter 6 Reinsurance......Page 420
Types of Reinsurance......Page 421
Reinsurance Contracts......Page 422
Bases of Reinsurance Transactions......Page 424
Frequently Used Terms in Reinsurance Contracts......Page 425
Generally Accepted Accounting Principles Accounting Practices......Page 427
Statutory Accounting Principles......Page 441
Special Risk Considerations......Page 450
Audit Risk Factors — Reinsurance......Page 451
Risk of Material Misstatement — Inherent Risk......Page 452
Control Environment......Page 453
Information and Communication......Page 454
Control Activities......Page 455
Internal Control of the Ceding Entity......Page 456
Internal Control of the Reinsurer......Page 457
Auditing Procedures for the Ceding Entity......Page 459
Auditing Procedures for the Assuming Entity......Page 460
Reinsurance Intermediaries......Page 461
Audit Consideration Chart......Page 462
Basic Principles of GAAP Accounting for Income Taxes......Page 466
Disclosure Requirements Contained in GAAP Literature......Page 471
Statutory Accounting for Income Taxes......Page 482
Changes in Tax Law......Page 487
Audit Risk Factors — Income Taxes......Page 488
Internal Control......Page 489
Risk Assessment Process......Page 490
Audit Procedures Responsive to the Assessed Risks of Material Misstatement......Page 491
Audit Consideration Chart......Page 492
Introduction......Page 497
Premium and State Taxes......Page 498
Guaranty Fund and Other Assessments......Page 500
Generally Accepted Accounting Principles......Page 501
Statutory Accounting Principles......Page 503
The Patient Protection and Affordable Care Act......Page 506
Capitalized Costs and Certain Nonadmitted Assets......Page 534
Pensions......Page 535
Audit Planning......Page 538
Internal Control......Page 539
Audit Procedures Responsive to the Assessed Risks of Material Misstatement......Page 540
Introduction......Page 546
Types of Captive Organizations......Page 547
Specific Transaction Considerations and Accounting Principles......Page 550
Audit Planning......Page 551
Internal Control......Page 552
Audit Procedures Responsive to the Assessed Risks of Material Misstatement......Page 553
Reports on Financial Statements......Page 556
Unmodified Opinions on GAAP Financial Statements......Page 557
Modified Opinions......Page 560
Disclaimer of Opinion......Page 562
Emphasis-of-Matter Paragraphs......Page 563
Integrated Audits Performed in Accordance With GAAS......Page 572
Reporting on Whether a Previously Reported Material Weakness Continues to Exist......Page 573
NAIC — Codified Statutory Accounting......Page 574
Regulatory Basis Financial Statements Intended for General Use......Page 575
Regulatory Basis Financial Statements Intended for Limited Use......Page 577
Regulatory Basis Financial Statements — Other Issues......Page 579
Correction of an Error — Regulatory Basis Financial Statements Intended for General Use......Page 581
Correction of an Error — Regulatory Basis Financial Statements Intended for Limited Use......Page 584
Opinion on Supplemental Schedules......Page 586
Accountant’s Awareness Letter......Page 587
Change in Auditor Letter......Page 588
Notification of Adverse Financial Condition Letter......Page 590
Auditor Reports for Communicating Unremediated Material Weaknesses in Internal Control to Insurance Regulators......Page 591
Accountant's Letter of Qualifications......Page 594
Appendix A Accounting for Financial Instruments......Page 602
Appendix B The New Leases Standard: FASB ASC 842......Page 613
Appendix C The New Revenue Recognition Standard: FASB ASC 606......Page 625
Appendix D Overview of Statements on Quality Control Standards......Page 635
Appendix E Property and Liability Insurance Entity Specific Disclosures......Page 646
Appendix F Examples of Development Data......Page 669
Appendix G List of Industry Trade and Professional Associations, Publications, and Information Resources......Page 674
Appendix H Schedule of Changes Made to the Text From the Previous Edition......Page 677
Glossary......Page 683
EULA......Page 698