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Audit and Accounting Guide: Life and Health Insurance Entities 2018

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Audit and Accounting Guide: Life and Health Insurance Entities 2018

AICPA

ISBN: 978-1-945-49851-0 October 2018 752 Pages

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Description

This book helps simplify the complexities of insurance entity regulatory compliance. Whether performing audit engagements or management at an insurance entity, the 2018 edition of this guide is a must-have resource to keep abreast of recent regulatory changes related to the life and health insurance industry, its products and regulatory issues, and the related transaction cycles that an insurance entity is involved with.

New to the 2018 edition: This edition covers recent regulatory updates related to the Affordable Care Act and provides guidance for new standards that impact life and health insurance, including revenue recognition, financial instruments, leases, and more.

1 Overview of the Life and Health Insurance Industry 01-100

Introduction 01-03

Legal Forms of Organization 04

Size and Composition of the Industry 05-14

Stock Insurance Entities 07

Mutual Insurance Entities 08-12

Fraternal Benefit Societies 13

Assessment Entities 14

Operations and Distribution Systems 15-23

Operations 15-16

Distribution Systems 17-23

Major Lines of Business 24-33

Life Insurance Contracts 25-28

Accident and Health Insurance Contracts 29

Annuity Contracts 30

Investment Contracts 31

Fee-for-Service Contracts 32-33

Reinsurance 34-37

Regulation 38-68

National Association of Insurance Commissioners 47-50

Federal Regulations 51-68

Rating Agencies 69

Taxation 70-86

Federal Taxation 70-85

State Taxation 86

State Guaranty Funds 87-88

Industry Associations 89

International Considerations 90-95

Terrorism 96-100

2 Characteristics of Life and Health Insurance Products 01-52

Introduction 01

Classification of Insurance Contracts 02-07

Broad Lines of Business 02

Participating or Nonparticipating Classification 03

Group or Individual Classification 04-05

Accounting Classification 06-07

Types of Contracts 08-52

Life Insurance Contracts 08-30

Accident and Health Insurance Contracts 31-41

Annuity Contracts 42-45

Investment Contracts 46-51

Fee-for-Service Contracts 52

3 Sources of Accounting Principles and Reporting Requirements 01-67

Introduction 01-02

Statutory Accounting Principles 03-30

Permitted Statutory Accounting Practices 11-14

Statutory Reporting 15-20

Disclosure Issues 21-30

GAAP 31-37

Financial Statement Disclosures 31-35

Definition of Public Business Entity 36-37

Revenue Recognition 38

FASB ASC 820, Fair Value Measurement, and FASB ASC 825, Financial Instruments 39

Definition of Fair Value 40-41

Application to Nonfinancial Assets 42-45

Application to Liabilities and Instruments Classified in a Reporting Entity’s Shareholders’ Equity 46-51

The Fair Value Hierarchy 49-51

Fair Value Determination When the Volume or Level of Activity Has Significantly Decreased 52-60

Disclosures 55

Fair Value Option 56-58

Statutory Accounting 59-60

SEC Reporting Requirements 61-65

Tax Basis Accounting Requirements 66

Comparison of GAAP and Statutory Accounting Principles 67

4 General Audit Considerations 01-203

Introduction 01

Scope of the Audit Engagement 02-15

General Considerations 02-04

Integrated Audit of Financial Statements and Internal Control Over Financial Reporting 05-10

Additional PCAOB Audit Standards 11-15

Planning and Other Auditing Considerations 16-79

Audit Planning 17-18

Audit Risk 19-22

Risk Assessment Procedures 23-31

Understanding the Entity, Its Environment, and Its Internal Control 32-49

Common Industry Ratios and Performance Metrics 50-55

Risk Indicators in the Life and Health Insurance Industry 56-60

National Association of Insurance Commissioners Insurance Regulatory Information System 61-63

Identifying and Assessing the Risks of Material Misstatement 64-66

Performing Audit Procedures In Response to Assessed Risks 67-72

Analytical Procedures 73-77

Use of Assertions in Obtaining Audit Evidence 78-79

Other Risk Assessment Activities and Considerations 80-84

Planning Materiality 80-84

Consideration of Fraud in a Financial Statement Audit 85-108

Insurance Industry — Fraud Risk Factors 87-88

The Importance of Exercising Professional Skepticism 89

Discussion Among Engagement Personnel Regarding the Risks of Material Misstatement Due to Fraud 90-92

Obtaining the Information Needed to Identify the Risks of Material Misstatement Due to Fraud 93-94

Identifying Risks That May Result in a Material

Misstatement Due to Fraud 95-99

Assessing the Identified Risks After Taking Into Account an Evaluation of the Entity’s Programs and Controls That Address the Risks 100-101

Responding to the Results of the Assessment 102

Evaluating Audit Evidence 103

Responding to Misstatements That May Be the Result of Fraud 104-105

Communicating About Possible Fraud to Management, Those Charged With Governance, and Others 106-107

Documentation and Guidance 108

Use of Information Technology 109-112

Use of Service Organizations 113

Going Concern Considerations 114-122

Evaluating Misstatements 123-125

Audit Documentation 126-131

Accounting Estimates 132-149

Insurance Entities Use of Actuarial Specialists 133-135

Auditing Actuarially Determined Accounting Estimates 136-138

Auditor Use of Actuarial Specialists 139-140

Specialists Engaged by the Auditor 141-143

Use of Management Specialists by Auditors in Evaluating Actuarially Determined Estimates 144-146

Auditor’s Response to Management’s Use or Non-Use of an Actuarial Specialist 147

Evaluating the Reasonableness of the Estimates 148-149

Consideration of the Work of Internal Auditors 150-151

Communication of Matters Related to Internal Control 152-158

Identification of Deficiencies in Internal Control 153-154

Communication of Deficiencies in Internal Control 155-158

Communication of Other Matters With Those Charged With Governance 159-163

Matters to Be Communicated 161-163

Communications by Successor Auditors 164

Auditor Independence 165-166

Auditing Fair Value Measurements and Disclosures 167-169

Considerations for Auditors to Comply With the NAIC Model Audit Rule 170-188

Awareness 171

Change in Auditor 172

Auditor’s Letter of Qualifications 173

Qualifications of the Auditor 174

Indemnification 175

Partner Rotation 176

Prohibited Services 177-178

Consideration of Internal Control in a Financial Statement Audit 179

Notification of Adverse Financial Condition 180

Report on Internal Controls 181-183

Working Papers 184

Communications to Audit Committees 185

Management’s Report on Internal Controls Over Financial Reporting 186-188

Auditor’s Consideration of State Regulatory Examinations 189-193

Auditor’s Consideration of Permitted Statutory Accounting Practices 194-198

SEC Requirements for Management’s Report on Internal Control Over Financial Reporting 199-203

5 Auditing Inforce Files 01-19

Introduction 01-19

Control Objectives 07-09

Auditing Procedures 10-14

Confirmation of Insurance Contracts Inforce 15-18

Audit Consideration Chart 19

6 Insurance Revenues 01-52

Introduction 01

Regulation of Premium Rates 02

Taxation of Premiums 03

Accounting Practices 04-28

6 Insurance Revenues — continued Statutory Accounting Principles 06-11

Generally Accepted Accounting Principles 12-28

Auditing 29

Risk of Material Misstatement — Inherent Risk Factors 29

Obtaining an Understanding of Internal Control for

Premium Transactions 30-31

Control Environment 31

Risk Assessment Process 32-48

Control Activities 33-34

Information and Communication 35-48

Audit Procedures Responsive to the Assessed Risks of Material Misstatement 49-51

Audit Consideration Chart 52

7 Liabilities for Future Policy Benefits (Statutory Policy Reserves) and Other Contract Liabilities 01-147

Introduction 01-07

Regulation 08-14

Statement of Actuarial Opinion 13-14

Calculation Methods 15

Reserve Definitions 16-19

Retrospective and Prospective Methods 18-19

Accounting Practices 20

Statutory Accounting Principles 21-53

Calculation of Reserve Liabilities by Contract Type 33-52

Participating Policies 53

Generally Accepted Accounting Principles 54-109

Significant Actuarial Assumptions for Traditional

Life and Health Insurance Products 58-71

Calculation of Liabilities for Future Policy Benefits by Contract Type 72-96

Participating Contracts 97-109

Auditing 110

Risk of Material Misstatement — Inherent Risk Factors 110

Obtaining an Understanding of Internal Control for Auditing Liabilities for Future Policy Benefits and

Other Contract Liabilities 111-120

Control Environment 112

The Entity’s Risk Assessment Process 113-114

Control Activities 115-116

Information and Communication 117-120

Special Considerations 121-146

Auditing Statutory Reserve Adequacy 123-124

Auditing GAAP Benefit Liabilities — Reviewing Assumptions Used 125-146

Audit Consideration Chart 147

8 Benefit and Claim Payments 01-52

Introduction 01-23

Kinds of Benefit and Claim Payments 02-23

Regulation 24-25

Accounting Practices 26-30

Statutory Accounting Principles — Benefit and Claim Payments 27-29

Generally Accepted Accounting Principles — Benefit and Claim Payments 30

Auditing 31

Risk of Material Misstatement — Inherent Risk Factors 31

Obtaining an Understanding of Internal Control for Contract Benefit and Claim Transactions 32-51

Control Environment 33

The Entity’s Risk Assessment Process 34-35

Control Activities 36-37

Information and Communication 38-51

Audit Consideration Chart 52

9 Commissions, General Expenses, and Deferred Acquisition Costs 01-116

Introduction 01-04

Regulation 05

Accounting Practices 06-11

Statutory Accounting Principles 07-11

Generally Accepted Accounting Principles 12-97

Accounting for DAC in Connection With Contract Modifications or Exchanges 44-55

Sales Inducements to Contract Holders 56-61

Amortization of DAC 62-79

Calculation Methodologies 80-83

Recoverability Testing and Loss Recognition 84-92

Special Considerations 93-94

Auditing 95-96

Risk of Material Misstatement — Inherent Risk Factors 97

Obtaining an Understanding of Internal Control for Commissions, General Expenses, and Deferred Acquisition Costs 98-114

Control Environment 100

The Entity’s Risk Assessment Process 101-102

Control Activities 103-104

Information and Communication 105

Commissions and Allowances 106-111

General Expenses 112

DAC 113-114

Audit Consideration Chart 115-116

10 Investments 01-182

Introduction 01-03

Regulation 04-07

Accounting Practices 08

Security Investments 09-101

Debt Securities 09-27

Securities Lending Transactions 28-34

Repurchase Agreements and Wash Sales 35-45

Statutory Accounting 46

Equity Securities 47-71

Derivative Instruments 72-85

Short Sales 86

Interest Maintenance Reserve and Asset Valuation Reserve 87-92

Realized and Unrealized Gains and Losses on Debt and Equity Securities 93-101

Investments Other Than Securities 102-160

Mortgage Loans 102-124

Troubled Debt Restructurings 125-135

Real Estate Investments 136-145

Joint Ventures and Partnerships 146-156

Policy Loans 157-160

Investment Income Due and Accrued 161-163

Auditing 164-165

Debt and Equity Securities 164

Risk of Material Misstatement — Inherent Risk 165

Obtaining an Understanding of Internal Control for Investment Transactions 166-181

Control Environment 167

The Entity’s Risk Assessment Process 168-169

Control Activities 170-171

Information and Communication 172-180

Group Audit Considerations for Investments in Alternative Investments and Subsidiary, Controlled and Affiliated

Entities 181

Audit Consideration Chart 182

11 Reinsurance 01-70

Introduction 01-04

Reinsurance Transactions 05-09

Types of Reinsurance Entities 10-11

Bases of Reinsurance Agreements 12-14

Types of Reinsurance Agreements 13-14

Regulation 15-17

Accounting Practices 18-46

Statutory Accounting Principles 20-26

Generally Accepted Accounting Principles 27-29

Reporting Reinsurance Assets and Liabilities 30-33

Reporting Reinsurance Revenues and Costs 34-46

Auditing 47

Risk of Material Misstatement — Inherent Risk Factors 47

Obtaining an Understanding of Internal Control for Reinsurance Transactions 48-69

Control Environment 49

The Entity’s Risk Assessment Process 50-51

Control Activities 52-53

Information and Communications 54-58

Reinsurance Ceded 59-62

Planning Substantive Tests of Reinsurance Ceded 63-64

Reinsurance Assumed 65-68

Planning Substantive Tests of Reinsurance Assumed 69

Audit Consideration Chart: Reinsurance Transactions in General 70

12 Taxation of Life Insurance Entities 01-42

Introduction 01-02

Federal Income Taxes 01-02

Accounting Practices 03-11

Statutory Accounting Principles 04-11

GAAP Accounting for Income Taxes 12-33

Auditing 34

Risk of Material Misstatement — Inherent Risk Factors 34

Obtaining an Understanding of Internal Control for Auditing

Income Tax Transactions 35-41

Control Environment 36

The Entity’s Risk Assessment Process 37-38

Control Activities 39

Information and Communication 40-41

Audit Consideration Chart 42

13 Other Assets and Liabilities, Lending and Financing, Surplus Notes, Separate Accounts, Insurance Related Assessments and Equity Contract Holders’ Surplus 01-130

Introduction 01

Other Assets 02-06

Nonadmitted Assets, Statutory Financial Statements Only 03-06

Other Liabilities 07

Lending and Financing 08-09

Surplus Notes 10-17

Separate Accounts 18-50

Variable Annuity Contracts and Variable Life Insurance Contracts 21-22

Separate Account Structures 23-25

Group Annuity Contracts 26

Statutory Accounting Principles — Separate Accounts 27-34

Generally Accepted Accounting Principles — Separate Accounts 35-45

SEC Registration — Separate Accounts 46-49

Additional Literature — Separate Accounts 50

Insurance Related Assessments 51-115

Guaranty Fund Assessments 52-86

Generally Accepted Accounting Principles 87-91

Other Insurance Related Assessments 92-93

Reporting Liabilities 94-100

Application of Guidance 101

Present Value 102

Reporting Assets for Premium Tax Offsets and Policy Surcharges 103-109

Pensions 110-113

Guarantees 114-115

Equity Contract Holders’ Surplus 116-119

Statutory Accounting Principles — Capital and Surplus 119

Auditing 120-130

Auditing Procedures 122-130

14 Reports on Audited Financial Statements 01-82

Reports on Financial Statements 01-02

Unmodified Opinions on GAAP Financial Statements 03-05

Modified Opinions 06-26

Qualified Opinion 10-11

Disclaimer of Opinion 12-14

Adverse Opinion 15-17

Emphasis-of-Matter Paragraphs 18-25

Evaluating Consistency of Financial Statements 26

Additional Guidance When Performing Integrated Audits of Financial Statements and Internal Control Over

Financial Reporting 27-31

Integrated Audits Performed in Accordance With GAAS 27

Considerations for Audits Performed in Accordance With PCAOB Standards 28-30

Reporting on Whether a Previously Reported Material Weakness Continues to Exist 31

Auditors’ Reports on Statutory Financial Statements of Insurance Entities 32-51

NAIC — Codified Statutory Accounting 33-35

Regulatory Basis Financial Statements Intended for General Use 36-40

Regulatory Basis Financial Statements Intended for Limited Use 41-45

Regulatory Basis Financial Statements — Other Issues 46-51

Correction of Error 52-57

Correction of an Error — Regulatory Basis Financial Statements Intended for General Use 56

Correction of an Error — Regulatory Basis Financial Statements Intended for Limited Use 57

Opinion on Supplemental Schedules 58-64

Other Reports 65-82

Accountant’s Awareness Letter 66-68

Change in Auditor Letter 69-72

Notification of Adverse Financial Condition Letter 73-76

Auditor Reports for Communicating Unremediated Material Weaknesses in Internal Control to

Insurance Regulators 77-80

Accountant’s Letter of Qualifications 81-82

Appendix

Glossary

Index of Pronouncements andOther Technical Guidance

Subject Index