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.Table of Contents
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
