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Property and Liability Insurance Entities 2016

Property and Liability Insurance Entities 2016


ISBN: 978-1-943-54684-8

Feb 2018

640 pages

Select type: Paperback

In Stock


1 Nature, Conduct, and Regulation of the Business 01-98

General Nature of the Business   01-03

Kinds of Insurance   04-08

Legal Forms of Organization  09

Methods of Producing Business   10-17

Major Transaction Cycles   18-36

Underwriting of Risks    18-27

Pooling, Captives, and Syndicates  28-30

Processing and Payment of Claims  31-32

Investments   33-36

Accounting Practices  37-98

State Insurance Regulation  37-45

National Association of Insurance Commissioners  46-47

Federal Regulation—Securities and Exchange Commission  48-53

Federal Regulation—The Dodd-Frank Wall Street Reform and Consumer Protection Act  54-64

Federal Regulation—Terrorism  65-69

Industry Associations    70

Statutory Accounting Practices  71-89

Generally Accepted Accounting Principles 90-97

Comparison of SAP and GAAP 98

2 Audit Considerations 01-186

Introduction    01

Scope of the Audit Engagement  02-14

General Considerations   02-04

PCAOB Integrated Audit of Financial Statements and Internal Control Over Financial Reporting 05-09

Additional PCAOB Audit Standards   10-14

Planning and Other Auditing Considerations 15-73

Audit Planning  16-17

Audit Risk   18-22

Risk Assessment Procedures  23-28

Understanding the Entity, Its Environment, and Its Internal Control  29-47

Common Industry Ratios and Performance Metrics  48-60

Identifying and Assessing the Risks of Material Misstatement  61-64

Performing Audit Procedures in Response to Assessed Risks  65-71

Use of Assertions in Obtaining Audit Evidence 72-73

Other Risk Assessment Activities and Considerations  74-78

Planning Materiality   74-76

Performance Materiality and Tolerable Misstatement  77-78

Consideration of Fraud in a Financial Statement Audit  79-80

Insurance Industry—Fraud Risk Factors   81-103

The Importance of Exercising Professional Skepticism  83

Discussion Among Engagement Personnel Regarding the Risks of Material Misstatement Due to Fraud 84-87

Obtaining the Information Needed to Identify the Risks of Material Misstatement Due to Fraud   88-89

Identifying Risks That May Result in a Material Misstatement Due to Fraud  90-94

Assessing the Identified Risks After Taking an Evaluation of the Entity’s Programs and Controls That Address the Risks Into Account  95-96

Responding to the Results of the Assessment 97

Evaluating Audit Evidence  98

Responding to Misstatements That May Be the Result of Fraud   99-100

Communicating About Possible Fraud to Management, Those Charged With Governance, and Others  101-102

Documentation and Guidance  103

Use of Information Technology  104-107

Going Concern Considerations  108-116

Evaluating Misstatements   117-120

Audit Documentation   121-129

Consideration of the Work of Internal Auditors 128-129

Communication of Matters Related to Internal Control  130-137

Identification of Deficiencies in Internal Control 131-132

Communication of Deficiencies in Internal Control  133-137

Communication of Other Matters With Those Charged

With Governance   138-142

Matters to Be Communicated  140-142

Communications by Successor Auditors  143

Auditor Independence   144-145

Auditing Fair Value Measurements and Disclosures  146-148

Considerations for Auditors to Comply With the NAIC Model Audit Rule  149-170

Awareness   150-151

Change in Auditor  152

Auditor’s Letter of Qualifications 153

Qualifications of the Auditor  154

Indemnification   155

Partner Rotation   156

Prohibited Services   157-159

Consideration of Internal Controls in a Financial Statement Audit   160

Notification of Adverse Financial Condition 161-162

Report on Internal Controls  163-165

Working Papers   166

Communications to Audit Committees  167

Management’s Report on Internal Controls Over Financial Reporting   168-170

Auditor’s Consideration of State Regulatory Examinations  171-175

Auditor’s Consideration of Permitted Statutory Accounting Practices    176-180

SEC Requirements for Management’s Report on Internal Control Over Financial Reporting   181-186

3 Premiums 01-132

Background    01-29

Types of Premiums Adjustments  04

Summary of Premium Transaction Flow   05-26

Involuntary Markets   27-29

Accounting for Premiums and Acquisition Cost 30-110

Premium Revenue and Premium Adjustments 30-49

Premium Receivable   50-55

Acquisition Costs  56-83

Premium Deficiencies    84-97

Medicare Part D   98-102

Accounting for Contracts That Do Not Transfer Insurance Risk  103-104

Disclosure Considerations   105-110

Auditing Premiums and Acquisition Costs   111-132

Audit Planning  111

Consideration of Fraud in a Financial Statement Audit 112

Audit Risk Factors—Premiums and DAC  113-116

Management Estimates   117-119

Risk of Material Misstatement—Inherent Risk Factors  120-121

Internal Control  122-124

Control Environment   125-126

Risk Assessment Process  127-128

Control Activities  129

Audit Procedures Responsive to the Assessed Risks of Material Misstatement   130-131

Audit Consideration Chart  132

4 The Loss Reserving and Claims Cycle 01-205

Introduction    01-02

Types of Businesses and Their Effect on the Estimation Process   03-14

Policy Duration  04

Type of Coverage  05

Kind of Insurance Underwritten: Line of Business or Type of Risk  06-14

The Transaction Cycle   15-32

Claim Acceptance and Processing  16-18

Claim Adjustment and Estimation   19-24

Claim Settlement   25-28

Reinsurance Receivable   29-30

Salvage and Subrogation   31-32

Components of Loss Reserves  33

Estimating Methods  34-53

Illustrative Projection Data   44-53

LAE Reserves   54-62

DCC Reserve Calculation Approaches   56-59

AO Reserve Calculation Approaches  60-62

Changes in the Environment   63-66

Critical Accounting Policies and Estimates Disclosure  67-68

Use of Specialists by Management in Determining Loss Reserves    69-71

Guaranty Fund and Other Assessments  72

Accounting Principles   73-93

Discounting Loss Reserves   75-82

Structured Settlements    83-85

Reinsurance Receivables  86

SAP    87-93

Disclosures of Certain Matters in the Financial Statements of Insurance Enterprises  94-113

Applicability to Statutory Financial Statements  94

Relationship to Other Pronouncements  95

Liability for Unpaid Claims and Claim Adjustment Expenses  96-113

Auditing Loss Reserves   114-205

Planning Considerations—Overview  114-119

Consideration of Fraud in a Financial Statement Audit 120-122

Risk of Material Misstatement—Inherent Risk Factors  123

Internal Control  124-126

Control Environment   127

The Entity’s Risk Assessment Process   128-129

Information Systems   130

Control Activities  131-132

Identifying and Assessing the Risks of Material Misstatement  133

Audit Procedures Responsive to the Assessed Risks of Material Misstatement   134-142

Use of Loss Reserve Specialists 143

Loss Reserve Specialists Engaged by the Auditor 144-146

Use of Management Specialists by Auditors in Evaluating Loss Reserves   147-149

Auditor’s Response to Management’s Use or Non-Use of a Loss Reserve Specialist  150

Evaluating the Reasonableness of the Estimates 151

Analytical Procedures    152-157

Testing the Data, Assumptions, and Selection of the Estimate   158-162

Auditing the Underlying Data Used in the Loss Reserving Process    163-168

Develop a Point Estimate or Range to Evaluate Management’s Estimate  169-170

Loss Reserve Ranges   171-177

Factors That Could Affect a Range of Reasonably Possible Outcomes   178-184

Evaluating the Financial Effect of a Reserve Range  185-193

Auditor Uncertainty About the Reasonableness of Management’s Estimate and Reporting Implications 194-195

Evaluating the Reasonableness of Loss Adjustment Expense Reserves   196-197

Ceded Reinsurance Recoverable and Receivable  198-203

Understanding the Impacts of Foreign Exchange 204

Audit Consideration Chart  205

5 Investments and Fair Value Considerations 01-246

Introduction    01-08

Overview   01

Investment Evaluation    02-03

Recordkeeping and Key Performance Indicators 04-05

The Transaction Cycle   06-07

Safekeeping  08

Regulation   09-14

Statutory Limitations   10-14

FASB Accounting Standards Codification 820 and 825  15-40

Definition of Fair Value   16-22

Application to Liabilities and Instruments Classified in a Reporting Entity’s Shareholders’ Equity 23-25

The Fair Value Hierarchy  26-30

Fair Value Determination When the Volume or Level of Activity Has Significantly Decreased  31-33

Disclosures   34-35

Fair Value Option  36-38

Statutory Accounting   39-40

Accounting Practices  41-219

Significant Differences Between GAAP and Statutory Accounting  42

Cash and Cash Equivalents  43-49

Debt and Equity Securities  50-96

Mortgage Loans   97-111

Troubled Debt Restructurings   112-120

Real Estate   121-131

Derivatives, Including Futures, Options, and Similar Financial Instruments   132-146

Joint Ventures and Partnerships  147-161

Investments in SCA Entities  162-177

Investment Income Due and Accrued  178-182

Asset Transfers and Extinguishments of Liabilities 183-197

Repurchase Agreements  198-210

Securities Lending  211-218

Other Information  219

Auditing Investments  220-246

Audit Planning  220

Consideration of Fraud in a Financial Statement Audit 221

Audit Risk Factors—Investments 222-225

Risk of Material Misstatement—Inherent Risk 226-228

Internal Control  229-231

Control Environment   232

Risk Assessment Process  233-234

Information System   235-236

Control Activities  237

Service Organizations   238-241

Audit Procedures Responsive to the Assessed Risks of Material Misstatement  242-243

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

and Affiliated Entities  244

Audit Consideration Chart and Procedures  245-246

6 Reinsurance 01-119

Types of Reinsurance  07-08

Reinsurance Contracts   09-19

Bases of Reinsurance Transactions  15-18

Frequently Used Terms in Reinsurance Contracts 19

Accounting Practices  20-81

Generally Accepted Accounting Principles Accounting Practices  20-75

Statutory Accounting Principles  76-81

Special Risk Considerations   82-86

Auditing Reinsurance  87-119

Audit Planning  87

Consideration of Fraud in a Financial Statement Audit 88

Audit Risk Factors—Reinsurance   89-91

Risk of Material Misstatement—Inherent Risk 92

Internal Control  93-94

Control Environment   95

Risk Assessment Process  96-97

Information and Communication   98-99

Control Activities  100

Audit Procedures Responsive to the Assessed Risks of Material Misstatement  101-102

Internal Control of the Ceding Entity   103-104

Internal Control of the Reinsurer   105-106

Auditing Procedures for the Ceding Entity 107-109

Auditing Procedures for the Assuming Entity 110-113

Pools, Associations, and Syndicates   114

Reinsurance Intermediaries  115-118

Audit Consideration Chart  119

7 Income Taxes 01-78

Introduction    01-02

Federal Income Taxation   03-20

Statutory Accounting Practices and Taxable Income   05-07

Special Income Tax Provisions  08-20

State Taxation   21-22

GAAP Accounting for Income Taxes   23-56

Basic Principles of GAAP Accounting for Income Taxes  25-46

Disclosure Requirements Contained in GAAP Literature  47-56

Statutory Accounting for Income Taxes   57-62

Disclosure Requirements Contained in Statutory Literature 62

Changes in Tax Law  63

Auditing Income Taxes   64-78

Audit Planning  64

Consideration of Fraud in a Financial Statement Audit 65

Audit Risk Factors—Income Taxes  66-68

Risk of Material Misstatement—Inherent Risk 69

Internal Control  70-71

Control Environment   72

Risk Assessment Process  73-74

Control Activities  75

Audit Procedures Responsive to the Assessed Risks of Material Misstatement  76-77

Audit Consideration Chart  78

8 Insurance-Related Expenses, Taxes, and Assessments 01-91

Introduction    01-05

Premium and State Taxes   06-12

Guaranty Fund and Other Assessments  13-65

Generally Accepted Accounting Principles 19-22

Statutory Accounting Principles  23-30

The Patient Protection and Affordable Care Act 31-65

Capitalized Costs and Certain Nonadmitted Assets  66-70

Pensions    71-73

Audit Considerations  74-91

Audit Planning  74

Consideration of Fraud in a Financial Statement Audit 75

Audit Risk Factors  76-78

Internal Control  79-81

Audit Procedures Responsive to the Assessed Risks of Material Misstatement  82-91

9 Captive Insurance Entities 01-43

Introduction    01-06

Types of Captive Organizations  07-26

Captive Operations  27-29

Specific Transaction Considerations and Accounting Principles   30-35

Taxes   33-35

Audit Considerations  36-43

Audit Planning  36

Consideration of Fraud in a Financial Statement Audit 37

Audit Risk Factors  38-40

Internal Control  41-42

Audit Procedures Responsive to the Assessed Risks of Material Misstatement  43

10 Reports on Audited Financial Statements 01-85

Reports on Financial Statements  01-02

Unmodified Opinions on GAAP Financial Statements  03-05

Modified Opinions   06-28

Qualified Opinion  10-11

Disclaimer of Opinion   12-14

Adverse Opinion  15-17

Emphasis-of-Matter Paragraphs 18-27

Evaluating Consistency of Financial Statements 28

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

Financial Reporting   29-32

Considerations for Audits Performed in Accordance With PCAOB Standards  29-31

Reporting on Whether a Previously Reported Material Weakness Continues to Exist 32

Auditors’ Reports on Statutory Financial Statements of Insurance Entities  33-54

NAIC—Codified Statutory Accounting   34-36

Regulatory Basis Financial Statements Intended for General Use   37-42

Regulatory Basis Financial Statements Intended for Limited Use  43-48

Regulatory Basis Financial Statements—Other Issues  49-54

Correction of Error   55-60

Correction of an Error—Regulatory Basis Financial Statements Intended for General Use  59

Correction of an Error—Regulatory Basis Financial Statements Intended for Limited Use   60

Opinion on Supplemental Schedules  61-67

Other Reports   68-85

Accountant’s Awareness Letter  69-71

Change in Auditor Letter  72-75

Notification of Adverse Financial Condition Letter  76-79

Auditor Reports for Communicating Unremediated Material Weaknesses in Internal Control to

Insurance Regulators   80-83

Accountant’s Letter of Qualifications   84-85


A Accounting for Financial Instruments

B The New Leases Standard: FASB ASU No. 2016-02

C Overview of Statements on Quality Control Standards

D The New Revenue Recognition Standard: FASB ASU No. 2014-09

E Property and Liability Insurance Entity Specific Disclosures

F Examples of Development Data

G List of Industry Trade and Professional Associations, Publications, and Information Resources

H Schedule of Changes Made to the Text From the Previous Edition


Index of Pronouncements and Other Technical Guidance

Subject Index