Property and Liability Insurance Entities 2019

ABOUT THE AUTHOR
The American Institute of CPAs (AICPA) is the world's largest member association representing the CPA profession, with more than 429,000 members in the United States and worldwide, and a history of serving the public interest since 1887. AICPA members represent many areas of practice, including business and industry, public practice, government, education, and consulting. The AICPA sets ethical standards for its members and U.S. auditing standards for private companies, nonprofit organizations, federal, state and local governments. It develops and grades the Uniform CPA examination, offers specialized credentials, builds the pipeline of future talent and drives professional competency development to advance the vitality, relevance and quality of the procession.

TABLE OF CONTENTS
1 Nature, Conduct, and Regulation of the Business .01-.113

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-.41

Underwriting of Risks .18-.27

Pooling, Captives, and Syndicates .28-.30

Processing and Payment of Claims .31-.32

Investments .33-.36

Definition of Public Business Entity .37-.41

Revenue Recognition .42

Accounting Practices .43-.113

State Insurance Regulation .43-.51

National Association of Insurance Commissioners .52-.53

Federal Regulation — Securities and Exchange Commission .54-.59

Federal Regulation — The Dodd-Frank Wall Street Reform and Consumer Protection Act .60-.70

Federal Regulation — Terrorism .71-.75

Industry Associations .76Additional Guidance When

Statutory Accounting Practices .77-.104

Generally Accepted Accounting Principles .105-.112

Comparison of SAP and GAAP .113

2 Audit Considerations .01-.178

Introduction .01

Scope of the Audit Engagement .02-.05

General Considerations .02-.04

Integrated Audit of Financial Statements and Internal Control Over Financial Reporting .05

Planning and Other Auditing Considerations .06-.65

Audit Planning .07-.08

Audit Risk .09-.13

Risk Assessment Procedures .14-.19

Understanding the Entity, Its Environment, and Its Internal Control .20-.39

Common Industry Ratios and Performance Metrics .40-.52

Identifying and Assessing the Risks of Material Misstatement .53-.56

Performing Audit Procedures in Response to Assessed Risks .57-.63

Use of Assertions in Obtaining Audit Evidence .64-.65

Other Risk Assessment Activities and Considerations .66-.70

Planning Materiality .66-.68

Performance Materiality and Tolerable Misstatement .69-.70

Consideration of Fraud in a Financial Statement Audit .71-.72

Insurance Industry — Fraud Risk Factors .73-.95

The Importance of Exercising Professional Skepticism .75

Discussion Among Engagement Personnel Regarding the Risks of Material Misstatement Due to Fraud .76-.79

Obtaining the Information Needed to Identify the Risks of Material Misstatement Due to Fraud .80-.81

Identifying Risks That May Result in a Material Misstatement Due to Fraud .82-.86

Assessing the Identified Risks After Taking an Evaluation of the Entity’s Programs and Controls That Address the Risks Into Account .87-.88

Responding to the Results of the Assessment .89

Evaluating Audit Evidence .90

Responding to Misstatements That May Be the Result of Fraud .91-.92

Communicating About Possible Fraud to Management, Those Charged With Governance, and Others .93-.94

Documentation and Guidance .95

Use of Information Technology .96-.99

Going Concern Considerations .100-.108

Evaluating Misstatements .109-.112

Audit Documentation .113-.121

Consideration of the Work of Internal Auditors .120-.121

Communication of Matters Related to Internal Control .122-.129

Identification of Deficiencies in Internal Control .123-.124

Communication of Deficiencies in Internal Control .125-.129

Communication of Other Matters With Those Charged With Governance .130-.134

Matters to Be Communicated .132-.134

Communications by Successor Auditors .135

Auditor Independence .136-.137

Auditing Fair Value Measurements and Disclosures .138-.140

Considerations for Auditors to Comply With the NAIC Model Audit Rule .141-.162

Awareness .142-.143

Change in Auditor .144

Auditor’s Letter of Qualifications .145

Qualifications of the Auditor .146

Indemnification .147

Partner Rotation .148

Prohibited Services .149-.151

Consideration of Internal Controls in a Financial Statement Audit .152

Notification of Adverse Financial Condition .153-.154

Report on Internal Controls .155-.157

Working Papers .158

Communications to Audit Committees .159

Management’s Report on Internal Controls Over Financial Reporting .160-.162

Auditor’s Consideration of State Regulatory Examinations .163-.167

Auditor’s Consideration of Permitted Statutory Accounting Practices .168-.172

SEC Requirements for Management’s Report on Internal Control Over Financial Reporting .173-.178

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-.204

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 Recoverable .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-.95

GAAP Accounting .73-.74

Discounting Loss Reserves .75-.82

Structured Settlements .83-.85

Reinsurance Recoverables .86

Liability for Unpaid Claims and Claim Adjustment Expenses .87-.88

Statutory Accounting .89-.95

Disclosures of Certain Matters in the Financial Statements of Insurance Enterprises .96-.112

Applicability to Statutory Financial Statements .96

Relationship to Other Pronouncements .97-.112

Auditing Loss Reserves .113-.204

Planning Considerations — Overview .113-.118

Consideration of Fraud in a Financial Statement Audit .119-.121

Risk of Material Misstatement — Inherent Risk Factors .122

Internal Control .123-.125

Control Environment .126

The Entity’s Risk Assessment Process .127-.128

Information Systems .129

Control Activities .130-.131

Identifying and Assessing the Risks of Material Misstatement .132

Audit Procedures Responsive to the Assessed Risks of Material Misstatement .133-.141

Use of Loss Reserve Specialists .142

Loss Reserve Specialists Engaged by the Auditor .143-.145

Use of Management Specialists by Auditors in Evaluating Loss Reserves .146-.148

Auditor’s Response to Management’s Use or Non-Use of a Loss Reserve Specialist .149

Evaluating the Reasonableness of the Estimates .150

Analytical Procedures .151-.156

Testing the Data, Assumptions, and Selection of the Estimate .157-.161

Auditing the Underlying Data Used in the Loss Reserving Process .162-.167

Develop a Point Estimate or Range to Evaluate Management’s Estimate .168-.169

Loss Reserve Ranges .170-.176

Factors That Could Affect a Range of Reasonably Possible Outcomes .177-.183

Evaluating the Financial Effect of a Reserve Range .184-.192

Auditor Uncertainty About the Reasonableness of Management’s Estimate and Reporting Implications .193-.194

Evaluating the Reasonableness of Loss Adjustment Expense Reserves .195-.196

Ceded Reinsurance Recoverable .197-.202

Understanding the Impacts of Foreign Exchange .203

Audit Consideration Chart .204

5 Investments and Fair Value Considerations .01-.253

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-.226

Significant Differences Between GAAP and Statutory Accounting .42

Cash and Cash Equivalents .43-.50

Debt and Equity Securities .51-.100

Mortgage Loans .101-.115

Troubled Debt Restructurings .116-.124

Real Estate .125-.135

Derivatives, Including Futures, Options, and Similar Financial Instruments .136-.150

Joint Ventures and Partnerships .151-.167

Investments in SCA Entities .168-.184

Investment Income Due and Accrued .185-.190

Asset Transfers and Extinguishments of Liabilities .191-.204

Repurchase Agreements .205-.217

Securities Lending .218-.225

Other Information .226

Auditing Investments .227-.253

Audit Planning .227

Consideration of Fraud in a Financial Statement Audit .228

Audit Risk Factors — Investments .229-.232

Risk of Material Misstatement — Inherent Risk .233-.235

Internal Control .236-.238

Control Environment .239

Risk Assessment Process .240-.241

Information System .242-.243

Control Activities .244

Service Organizations .245-.248

Audit Procedures Responsive to the Assessed Risks of Material Misstatement .249-.250

Group Audit Considerations for Investments in Alternative Investments and Subsidiary, Controlled and Affiliated Entities .251

Audit Consideration Chart and Procedures .252-.253

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-.65

Introduction .01-.02

GAAP Accounting for Income Taxes .03-.41

Basic Principles of GAAP Accounting for Income Taxes .05-.25

Disclosure Requirements Contained in GAAP Literature .26-.41

Statutory Accounting for Income Taxes .42-.49

Disclosure Requirements Contained in Statutory Literature .49

Changes in Tax Law .50

Auditing Income Taxes .51-.65

Audit Planning .51

Consideration of Fraud in a Financial Statement Audit .52

Audit Risk Factors — Income Taxes .53-.55

Risk of Material Misstatement — Inherent Risk .56

Internal Control .57-.58

Control Environment .59

Risk Assessment Process .60-.61

Control Activities .62

Audit Procedures Responsive to the Assessed Risks of Material Misstatement .63-.64

Audit Consideration Chart .65

8 Insurance-Related Expenses, Taxes, and Assessments .01-.79

Introduction .01-.05

Premium and State Taxes .06-.12

Guaranty Fund and Other Assessments .13-.52

Generally Accepted Accounting Principles .19-.22

Statutory Accounting Principles .23-.30

The Patient Protection and Affordable Care Act .31-.52

Capitalized Costs and Certain Nonadmitted Assets .53-.57

Pensions .58-.61

Audit Considerations .62-.79

Audit Planning .62

Consideration of Fraud in a Financial Statement Audit .63

Audit Risk Factors .64-.66

Internal Control .67-.69

Audit Procedures Responsive to the Assessed Risks of Material Misstatement .70-.79

9 Captive Insurance Entities .01-.41

Introduction .01-.06

Types of Captive Organizations .07-.26

Captive Operations .27-.29

Specific Transaction Considerations and Accounting Principles .30-.33

Taxes .33

Audit Considerations .34-.41

Audit Planning .34

Consideration of Fraud in a Financial Statement Audit .35

Audit Risk Factors .36-.38

Internal Control .39-.40

Audit Procedures Responsive to the Assessed Risks of Material Misstatement .41

10 Reports on Audited Financial Statements .01-.75

Reports on Financial Statements .01-.02

Unmodified Opinions on GAAP Financial Statements .03-.04

Modified Opinions .05-.23

Qualified Opinion .09-.10

Disclaimer of Opinion .11-.13

Adverse Opinion .14-.16

Emphasis-of-Matter Paragraphs .17-.22

Evaluating Consistency of Financial Statements .23

Additional Guidance When Performing Integrated Audits of Financial Statements and Internal Control Over Financial Reporting .24

Integrated Audits Performed in Accordance With GAAS .24

Auditors’ Reports on Statutory Financial Statements of Insurance Entities .25-.44

NAIC — Codified Statutory Accounting .26-.28

Regulatory Basis Financial Statements Intended for General Use .29-.33

Regulatory Basis Financial Statements Intended for Limited Use .34-.38

Regulatory Basis Financial Statements — Other Issues .39-.44

Correction of Error .45-.50

Correction of an Error — Regulatory Basis Financial Statements Intended for General Use .49

Correction of an Error — Regulatory Basis Financial Statements Intended for Limited Use .50

Opinion on Supplemental Schedules .51-.57

Other Reports .58-.75

Accountant’s Awareness Letter .59-.61

Change in Auditor Letter .62-.65

Notification of Adverse Financial Condition Letter .66-.69

Auditor Reports for Communicating Unremediated Material Weaknesses in Internal Control to Insurance Regulators .70-.73

Accountant’s Letter of Qualifications .74-.75

Appendix

A Accounting for Financial Instruments

B The New Leases Standard: FASB ASC 842

C The New Revenue Recognition Standard: FASB ASC 606

D Overview of Statements on Quality Control Standards

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

Glossary

Index of Pronouncements and Other Technical Guidance

Subject Index

Stay up−to−date on current GAAP and statutory accounting and audit guidance for property and liability insurance entities. This guide provides a good grounding on the industry, its products and regulatory issues, and the related transaction cycles that a property and liability insurance entity is involved with.

Relevant guidance contained in standards issued through September 1, 2019, is covered, including the following:

FASB ASU No. 2017−12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
SSAP No. 26R, Bonds
SSAP No. 43R, Loan-backed and Structured Securities
SSAP No. 97, Investments in Subsidiary, Controlled and Affiliated Entities
Revised for SSAP No. 101, Income Taxes, and NAIC INT 18−03, Additional Elements Under the Tax Cuts and Jobs Act
Key topics covered:

Understand current GAAP and statutory accounting for property and liability insurance entities.
Get authoritative accounting and auditing guidance applicable to property and liability
Understand current GAAP and statutory accounting for property and liability insurance entities.
Get authoritative accounting and auditing guidance applicable to property and liability insurance entities.
Properly develop an audit plan for auditing loss reserves.
Easily educate your staff on property and liability insurance.