Property and liability insurance entities

Audit and Accounting Guide: Property and Liability Insurance Entities......Page 3
Preface......Page 5
Table of Contents......Page 19
 Kinds of Insurance......Page 29
 Legal Forms of Organization......Page 32
 Methods of Producing Business......Page 33
  Underwriting of Risks......Page 35
  Pooling, Captives, and Syndicates......Page 36
  Investments......Page 37
  Definition of Public Business Entity......Page 38
 Revenue Recognition......Page 42
  State Insurance Regulation......Page 47
  National Association of Insurance Commissioners......Page 48
  Federal Regulation — Securities and Exchange Commission......Page 51
  Federal Regulation — The Dodd-Frank Wall Street Reform and Consumer Protection Act......Page 55
  Federal Regulation — Terrorism......Page 57
  Statutory Accounting Practices......Page 58
  Generally Accepted Accounting Principles......Page 66
  Comparison of SAP and GAAP......Page 69
  General Considerations......Page 83
  Audit Planning......Page 85
  Audit Risk......Page 86
  Risk Assessment Procedures......Page 87
  Understanding the Entity, Its Environment, and Its Internal Control......Page 88
  Common Industry Ratios and Performance Metrics......Page 92
  Identifying and Assessing the Risks of Material Misstatement......Page 96
  Performing Audit Procedures in Response to Assessed Risks......Page 97
  Use of Assertions in Obtaining Audit Evidence......Page 98
  Planning Materiality......Page 100
 Consideration of Fraud in a Financial Statement Audit......Page 101
 Insurance Industry — Fraud Risk Factors......Page 102
  Discussion Among Engagement Personnel Regarding the Risks of Material Misstatement Due to Fraud......Page 114
  Obtaining the Information Needed to Identify the Risks of Material Misstatement Due to Fraud......Page 116
  Identifying Risks That May Result in a Material Misstatement Due to Fraud......Page 117
  Assessing the Identified Risks After Taking an Evaluation of the Entity’s Programs and Controls That Address the Risks Into Account......Page 119
  Responding to the Results of the Assessment......Page 120
  Evaluating Audit Evidence......Page 121
  Communicating About Possible Fraud to Management, Those Charged With Governance, and Others......Page 122
 Use of Information Technology......Page 123
 Going Concern Considerations......Page 126
 Evaluating Misstatements......Page 128
 Audit Documentation......Page 129
  Consideration of the Work of Internal Auditors......Page 130
  Communication of Deficiencies in Internal Control......Page 131
  Matters to Be Communicated......Page 133
 Communications by Successor Auditors......Page 134
 Auditing Fair Value Measurements and Disclosures......Page 135
 Considerations for Auditors to Comply With the NAIC Model Audit Rule......Page 136
  Change in Auditor......Page 137
  Indemnification......Page 138
  Prohibited Services......Page 139
  Notification of Adverse Financial Condition......Page 140
  Working Papers......Page 141
  Management’s Report on Internal Controls Over Financial Reporting......Page 142
 Auditor’s Consideration of State Regulatory Examinations......Page 143
 SEC Requirements for Management’s Report on Internal Control Over Financial Reporting......Page 145
 Background......Page 149
  Types of Premiums Adjustments......Page 150
  Summary of Premium Transaction Flow......Page 151
  Involuntary Markets......Page 156
  Premium Revenue and Premium Adjustments......Page 158
  Premium Receivable......Page 163
  Acquisition Costs......Page 166
  Premium Deficiencies......Page 172
  Medicare Part D......Page 192
  Accounting for Contracts That Do Not Transfer Insurance Risk......Page 193
  Disclosure Considerations......Page 194
  Audit Planning......Page 196
  Audit Risk Factors — Premiums and DAC......Page 197
  Management Estimates......Page 198
  Risk of Material Misstatement — Inherent Risk Factors......Page 199
  Internal Control......Page 200
  Risk Assessment Process......Page 201
  Control Activities......Page 202
  Audit Procedures Responsive to the Assessed Risks of Material Misstatement......Page 203
  Audit Consideration Chart......Page 204
  Policy Duration......Page 211
  Kind of Insurance Underwritten: Line of Business or Type of Risk......Page 212
 The Transaction Cycle......Page 214
  Claim Adjustment and Estimation......Page 215
  Claim Settlement......Page 216
  Reinsurance Recoverable......Page 217
 Components of Loss Reserves......Page 218
 Estimating Methods......Page 219
  Illustrative Projection Data......Page 221
  DCC Reserve Calculation Approaches......Page 232
 Changes in the Environment......Page 233
 Critical Accounting Policies and Estimates Disclosure......Page 235
 Use of Specialists by Management in Determining Loss Reserves......Page 236
  GAAP Accounting......Page 237
  Discounting Loss Reserves......Page 238
  Reinsurance Recoverables......Page 240
  Statutory Accounting......Page 242
  Relationship to Other Pronouncements......Page 245
  Planning Considerations — Overview......Page 251
  Consideration of Fraud in a Financial Statement Audit......Page 253
  Internal Control......Page 254
  The Entity’s Risk Assessment Process......Page 255
  Identifying and Assessing the Risks of Material Misstatement......Page 256
  Audit Procedures Responsive to the Assessed Risks of Material Misstatement......Page 257
  Loss Reserve Specialists Engaged by the Auditor......Page 259
  Auditor’s Response to Management’s Use or Non-Use of a Loss Reserve Specialist......Page 260
  Analytical Procedures......Page 261
  Testing the Data, Assumptions, and Selection of the Estimate......Page 262
  Auditing the Underlying Data Used in the Loss Reserving Process......Page 266
  Loss Reserve Ranges......Page 268
  Factors That Could Affect a Range of Reasonably Possible Outcomes......Page 270
  Evaluating the Financial Effect of a Reserve Range......Page 272
  Auditor Uncertainty About the Reasonableness of Management’s Estimate and Reporting Implications......Page 273
  Ceded Reinsurance Recoverable......Page 274
  Audit Consideration Chart......Page 276
  Recordkeeping and Key Performance Indicators......Page 283
  Statutory Limitations......Page 284
  Definition of Fair Value......Page 285
  Application to Liabilities and Instruments Classified in a Reporting Entity’s Shareholders’ Equity......Page 287
  The Fair Value Hierarchy......Page 288
  Fair Value Determination When the Volume or Level of Activity Has Significantly Decreased......Page 290
  Disclosures......Page 291
  Fair Value Option......Page 292
 Accounting Practices......Page 293
  Significant Differences Between GAAP and Statutory Accounting......Page 294
  Cash and Cash Equivalents......Page 295
  Debt and Equity Securities......Page 297
  Mortgage Loans......Page 318
  Troubled Debt Restructurings......Page 321
  Real Estate......Page 324
  Derivatives, Including Futures, Options, and Similar Financial Instruments......Page 327
  Joint Ventures and Partnerships......Page 334
  Investments in SCA Entities......Page 341
  Investment Income Due and Accrued......Page 346
  Asset Transfers and Extinguishments of Liabilities......Page 348
  Repurchase Agreements......Page 353
  Securities Lending......Page 355
  Audit Planning......Page 357
  Audit Risk Factors — Investments......Page 358
  Risk of Material Misstatement — Inherent Risk......Page 359
  Internal Control......Page 362
  Control Environment......Page 363
  Risk Assessment Process......Page 364
  Control Activities......Page 365
  Service Organizations......Page 366
  Audit Procedures Responsive to the Assessed Risks of Material Misstatement......Page 367
  Audit Consideration Chart and Procedures......Page 368
Chapter 6 Reinsurance......Page 377
 Reinsurance Contracts......Page 378
  Frequently Used Terms in Reinsurance Contracts......Page 381
  Generally Accepted Accounting Principles Accounting Practices......Page 383
  Statutory Accounting Principles......Page 397
 Special Risk Considerations......Page 405
  Audit Planning......Page 406
  Audit Risk Factors — Reinsurance......Page 407
  Internal Control......Page 408
  Risk Assessment Process......Page 409
  Control Activities......Page 410
  Internal Control of the Ceding Entity......Page 411
  Internal Control of the Reinsurer......Page 412
  Auditing Procedures for the Ceding Entity......Page 413
  Auditing Procedures for the Assuming Entity......Page 414
  Reinsurance Intermediaries......Page 416
  Audit Consideration Chart......Page 417
  Basic Principles of GAAP Accounting for Income Taxes......Page 419
  Disclosure Requirements Contained in GAAP Literature......Page 424
 Statutory Accounting for Income Taxes......Page 433
 Changes in Tax Law......Page 438
  Audit Risk Factors — Income Taxes......Page 439
  Risk of Material Misstatement — Inherent Risk......Page 440
  Risk Assessment Process......Page 441
  Audit Procedures Responsive to the Assessed Risks of Material Misstatement......Page 442
  Audit Consideration Chart......Page 443
 Introduction......Page 447
 Premium and State Taxes......Page 448
 Guaranty Fund and Other Assessments......Page 449
  Generally Accepted Accounting Principles......Page 451
  Statutory Accounting Principles......Page 453
  The Patient Protection and Affordable Care Act......Page 456
 Capitalized Costs and Certain Nonadmitted Assets......Page 472
 Pensions......Page 473
  Audit Planning......Page 475
  Audit Risk Factors......Page 476
  Audit Procedures Responsive to the Assessed Risks of Material Misstatement......Page 477
 Introduction......Page 481
 Types of Captive Organizations......Page 482
 Captive Operations......Page 484
 Specific Transaction Considerations and Accounting Principles......Page 485
  Audit Planning......Page 486
  Audit Risk Factors......Page 487
  Audit Procedures Responsive to the Assessed Risks of Material Misstatement......Page 488
 Reports on Financial Statements......Page 491
 Unmodified Opinions on GAAP Financial Statements......Page 492
 Modified Opinions......Page 494
  Disclaimer of Opinion......Page 496
  Emphasis-of-Matter Paragraphs......Page 497
  NAIC — Codified Statutory Accounting......Page 503
  Regulatory Basis Financial Statements Intended for General Use......Page 504
  Regulatory Basis Financial Statements Intended for Limited Use......Page 506
  Regulatory Basis Financial Statements — Other Issues......Page 509
 Correction of Error......Page 510
  Correction of an Error — Regulatory Basis Financial Statements Intended for General Use......Page 511
  Correction of an Error — Regulatory Basis Financial Statements Intended for Limited Use......Page 513
 Opinion on Supplemental Schedules......Page 515
  Accountant’s Awareness Letter......Page 516
  Change in Auditor Letter......Page 517
  Notification of Adverse Financial Condition Letter......Page 518
  Auditor Reports for Communicating Unremediated Material Weaknesses in Internal Control to Insurance Regulators......Page 520
  Accountant’s Letter of Qualifications......Page 522
Appendix A Accounting for Financial Instruments......Page 527
Appendix B The New Leases Standard: FASB ASC 842......Page 547
Appendix C The New Revenue Recognition Standard: FASB ASC 606......Page 559
Appendix D Overview of Statements on Quality Control Standards......Page 569
Appendix E Property and Liability Insurance Entity Specific Disclosures......Page 579
Appendix F Examples of Development Data......Page 603
Appendix G List of Industry Trade and Professional Associations, Publications, and Information Resources......Page 607
Appendix H Schedule of Changes Made to the Text From the Previous Edition......Page 611
Glossary......Page 615
Index of Pronouncements and Other Technical Guidance......Page 629
Subject Index......Page 645
EULA......Page 670