INSEAD Library

Includes bibliographical references and glossary

Digitized

Property and Liability Insurance Entities Contents Chapter 1 Nature, Conduct, and Regulation of the Business General Nature of the Business Kinds of Insurance Organizations Methods of Producing Business Major Transaction Cycles Underwriting of Risks Processing and Payment of Claims Investments Accounting Practices State Insurance Regulation National Association of Insurance Commissioners Federal Regulation--Securities and Exchange Commission Federal Regulation--Terrorism Industry Associations StatutOry Accounting Practices Permitted Statutory Accounting Practices Generally Accepted Accounting Principles Comparison of GAAP and SAP Audit Considerations Introduction Scope of the Audit Engagement General Considerations PCAOB Integrated Audit of Financial Statements and Internal Control Over Financial Reporting Planning and Other Auditing Considerations Audit Planning Audit Risk Planning Materiality Use of Assertions in Obtaining Audit Evidence Understanding the Entity, Its Environment, and Its Internal Control Risk Assessment Procedures Discussion Among the Audit Team Understanding of the Entity and Its Environment Understanding of Internal Control Use of Information Technology Paragraph .01-.86 .01-.03 .04-.08 .09-.17 .10-.17 .18-.39 .18-.30 .31-.35 .36-.39 .40-.86 .42-.49 .50 .51-.56 .57-.61 .62 .63-.74 .75-.80 .81-.85 .86 .01-.141 .01 .02-.07 .02-.03 .04-.07 .08-.20 .09-.10 .11-.14 .15-.20 .21-.22 .23-.44 .26-.27 .28 .29-.40 .41-.44 .45-.48 2 Assessment of Risks of Material Misstatement and the Design of Further Audit Procedures .49-.60 Assessing the Risks of Material Misstatement .50-.52 Designing and Performing Further Audit Procedures .53-.60 Evaluating Misstatements .61-.62 Audit Documentation .63-.69 Consideration of the Work of Internal Auditors .68 Communications by Successor Auditors .69 Communication of Matters Related to Internal Control .70-.74 Communication of Other Matters With Audit Committees.75-.79 Consideration of Fraud in a Financial Statement Audit .80-.103 The Importance of Exercising Professional Skepticism .82 Discussion Among Engagement Personnel Regarding the Risks of Material Misstatement Due to Fraud .83-.84 Insurance Industry Fraud Risk Factors .85-.86 Obtaining the Information Needed to Identify the Risks of Material Misstatement Due to Fraud .87 Considering Fraud Risk Factors .88 Identifying Risks Thqt May Result in a Material Misstatement Due to Fraud .89-.94 Assessing the Identified Risks After Taking Into Account an Evaluation of the Entity's Programs and Controls That Address the Risks .95-.96 Responding to the Results of the Assessment .97 Evaluating Audit Evidence .98-.99 Responding to Misstatements That May Be the Result of Fraud .100-.101 Communicating About Possible Fraud to Management, Those Charged With Governance, and Others .102 Documentation and Guidance .103 Auditing Fair Value Measurements and Disclosures .104-.106 Letters for State Insurance Regulators to Comply With the NAIC Model Audit Rule .107-.112 SEC Requirements for Management's Report on Internal Control Over Financial Reporting .113-.116 Auditor's Consideration of State Regulatory Examinations.117-.119 Auditor's Consideration of Permitted Statutory Accounting Practices .120-.124 The Auditor's Consideration of Regulatory RBC for Property and Liability Insurance Enterprises .125-.140 Introduction and Scope .125-.126 Overview of RBC .127-.129 Audit Planning .130 Going-Concern Considerations .131-.140 Exhibits .141 3 The Premium Cycle .01-.54 Rating .03-.05 The Transaction Cycle .06-.28 Evaluating and Accepting Risks .07-.14 Issuing Policies .15 Billing and Collecting Premiums .16-.21 Paying Commissions and Other Costs of Acquiring Business .22 Adjusting Premiums .23 Home Office and Branch Office Recordkeeping .24-.28 Premiums Transaction Flow .29 Accounting Principles .30-.42 Revenue Recognition .31-.34 Policy Acquisition Costs .35-.39 Premium Deficiencies .40-.42 Accounting for Contracts That Do Not Transfer Insurance Risk .43-.47 Special Risk Considerations .48-.51 Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others .52-.54 The Loss Reserving and Claims Cycle Accounting Practices Statutory Accounting Practices Types of Business and Their Effect on the Estimation Process Policy Duration Type of Coverage Kind of Insurance Underwritten, Line of Business, or Type of Risk The Transaction Cycle Claim Acceptance and Processing Claim Adjustment and Estimation Claim Settlement Reinsurance Receivable Salvage and Subrogation Claims Transaction Flow Components of Loss Reserves Estimating Methods Illustrative Projection Data Loss Adjustment Expense Reserves DCC Reserve Calculation Approaches AO Reserve Calculation Approaches Changes in the Environment .01-.135 .01-.05 .03-.05 .06-.15 .07 .08 .09-.15 .16-.32 .17-.19 .20-.25 .26-.29 .30-.31 .32 .33 .34-.35 .36-.54 .45-.54 .55-.62 .56-.59 .60-.62 .63-.66 4 Use of Specialists by Management in Determining Loss Reserves Guaranty Fund and Other Assessments Auditing Loss Reserves Auditing the Claims Database Evaluating the Reasonableness of the Estimate Analytical Procedures Loss Reserve Ranges Evaluating the Reasonableness of Loss Adjustment Expense Reserves Ceded Reinsurance Receivable Disclosures of Certain Matters in the Financial Statements of Insurance Enterprises Applicability to Statutory Financial Statements Relationship to Other Pronouncements Conclusions Illustrative Disclosures 5 The Investment Cycle Regulation Investment Alternatives Short-Term Investments Other Investment Alternatives The Transaction Cycle Investment Evaluation Safekeeping Recordkeeping FASB ASC 820 and 825 Definition of Fair Value Valuation Techniques Present Value Techniques The Fair Value Hierarchy Disclosures Fair Value Option Accounting Practices Held-to-Maturity Securities Trading Securities Available-for-Sale Securities Impairment of Securities Accounting for Derivative Instruments and Hedging Activities Statutory Accounting Practices Special Risk Considerations .67-.70 .71 .72-.121 .72-.75 .76-.84 .85-.90 .91-.115 .116-.117 .118-.121 .122-.135 .122 .123 .124-.131 .132-.135 .01-.126 .03 .04-.18 .05-.15 .16-.18 .19-.25 .21 .22 .23-.25 .26-.48 .27-.32 .33-.35 .36-.39 .40-.43 .44 .45-.48 .49-.124 .50-.53 .54-.59 .60-.61 .62-.83 .84-.88 .89-.124 .125-.126 6 Reinsurance Types of Reinsurance Kinds of Reinsurance Contracts Bases of Reinsurance Transactions Accounting Practices Reporting Assets and Liabilities Reporting Revenues and Costs Reinsurance Agreements Not Qualifying for Reinsurance Accounting Under FASB ASC 944 Disclosures Statutory Accounting Practices Special Risk Considerations Internal Control of the Ceding Entity Control Environment Control Activities Information and Communications Internal Control of the Assuming Entity Auditing Procedures for the Ceding Entity Auditing Procedures for the Assuming Entity Pools, Associations, and Syndicates Reinsurance Intermediaries Accounting for Foreign Property and Liability Reinsurance Current Practices Comparison With Practices in Other Industries Disclosures Taxes Federal Income Taxation Provisions of the Tax Reform Act of 1986 on Property and Liability Insurance Companies Provisions of the Pension Funding Equity Act of 2004 on Property and Liability Insurance Companies Statutory Accounting Practices and Taxable Income Special Income Tax Provisions GAAP Accounting for Income Taxes Basic Principles of Accounting for Income Taxes Changes in Tax Law Financial Statement Presentation and Disclosure Internal Control and Possible Tests of Control Control Environment Control Activities .01-.81 .04-.09 .10-.21 .18-.21 .22-.38 .25-.28 .29 .30-.35 .36 .37-.38 .39-.41 .42-.47 .44 .45 .46-.47 .48-.49 .50-.53 .54-.57 .58 .59-.62 .63-.81 .66-.70 .71-.80 .81 .01-.75 .01-.19 .03-.16 .17-.19 .20-.25 .26 .27-.28 .29-.52 .39 .40-.52 .53-.58 .54 .55 7 Information and Communication Substantive Procedures Net Operating Loss and Tax Credit Carryforwards Other Issues Unrealized Gains and Losses Accounting for the "Fresh Start" The Alternative Minimum Tax Accounting for Income Taxes--Special Areas Interim Financial Reporting State Taxation 8 .56-.57 .58 .59 .60-.69 .61-.63 .64-.65 .66-.67 .68 .69 .70-.75 Reports on Audited Financial Statements .01-.46 Reports on Financial Statements .01-.02 Unqualified Opinions on GAAP Financial Statements .03 Unqualified Opinions With Explanatory Language .04-.16 Emphasis of a Matter .04 Uncertainties .05-.12 Going Concern .13-.14 Evaluating Consistancy of Financial Statements .15-.16 Qualified Opinion .17 Disclaimer of Opinion .18-.19 Adverse Opinion .20 Additional Guidance When Performing Integrated Audits of Financial Statements and Internal Control Over Financial Reporting .21 Reporting on Whether a Previously Reported Material Weakness Continues to Exist .22 Auditors' Reports on Statutory Financial Statements of Insurance Entities .23-.41 NAIC-Codified Statutory Accounting .24-.26 General Use Reports .27-.32 Limited Use Reports .33-.35 General Use and Limited Use Reports .36-.41 Special Reports .42-.46 Special Reports on Loss Reserves .43-.46 Appendix A Additional Audit Considerations for Loss Reserves, Premiums, Claims, and Investments B Illustrations of Auditing Objectives and Procedures C Illustrative Financial Statements and Disclosures D NAIC Insurance Regulatory Information System E Examples of Development Data F Industry and Other Organizations G Information Sources H Major Existing Differences Between AICPA Standards and PCAOB Standards I Schedule of Changes Made to the Text From the Previous Edition Glossary Bibliography