Audit and Accounting Guide: Property and Liability Insurance Entities 2018

Description

Title page......Page 2 Copyright......Page 3 Preface......Page 4 Kinds of Insurance......Page 32 Legal Forms of Organization......Page 35 Methods of Producing Business......Page 36 Underwriting of Risks......Page 38 Pooling, Captives, and Syndicates......Page 39 Investments......Page 40 Definition of Public Business Entity......Page 41 Revenue Recognition......Page 45 State Insurance Regulation......Page 50 National Association of Insurance Commissioners......Page 52 Federal Regulation — Securities and Exchange Commission......Page 55 Federal Regulation — The Dodd-Frank Wall Street Reform and Consumer Protection Act......Page 59 Federal Regulation — Terrorism......Page 61 Statutory Accounting Practices......Page 62 Generally Accepted Accounting Principles......Page 70 Comparison of SAP and GAAP......Page 73 General Considerations......Page 92 Integrated Audit of Financial Statements and Internal Control Over Financial Reporting......Page 93 Additional PCAOB Audit Standards......Page 95 Planning and Other Auditing Considerations......Page 96 Audit Planning......Page 97 Audit Risk......Page 98 Risk Assessment Procedures......Page 99 Understanding the Entity, Its Environment, and Its Internal Control......Page 100 Common Industry Ratios and Performance Metrics......Page 105 Identifying and Assessing the Risks of Material Misstatement......Page 109 Performing Audit Procedures in Response to Assessed Risks......Page 110 Use of Assertions in Obtaining Audit Evidence......Page 112 Other Risk Assessment Activities and Considerations......Page 113 Performance Materiality and Tolerable Misstatement......Page 114 Consideration of Fraud in a Financial Statement Audit......Page 115 Insurance Industry — Fraud Risk Factors......Page 116 The Importance of Exercising Professional Skepticism......Page 129 Discussion Among Engagement Personnel Regarding the Risks of Material Misstatement Due to Fraud......Page 130 Obtaining the Information Needed to Identify the Risks of Material Misstatement Due to Fraud......Page 132 Identifying Risks That May Result in a Material Misstatement Due to Fraud......Page 133 Responding to the Results of the Assessment......Page 136 Responding to Misstatements That May Be the Result of Fraud......Page 138 Communicating About Possible Fraud to Management, Those Charged With Governance, and Others......Page 139 Use of Information Technology......Page 140 Going Concern Considerations......Page 143 Evaluating Misstatements......Page 145 Audit Documentation......Page 148 Consideration of the Work of Internal Auditors......Page 149 Communication of Deficiencies in Internal Control......Page 150 Matters to Be Communicated......Page 153 Auditor Independence......Page 154 Auditing Fair Value Measurements and Disclosures......Page 155 Change in Auditor......Page 156 Auditor’s Letter of Qualifications......Page 157 Partner Rotation......Page 158 Prohibited Services......Page 159 Report on Internal Controls......Page 160 Communications to Audit Committees......Page 161 Management’s Report on Internal Controls Over Financial Reporting......Page 162 Auditor's Consideration of State Regulatory Examinations......Page 163 Auditor's Consideration of Permitted Statutory Accounting Practices......Page 165 SEC Requirements for Management’s Report on Internal Control Over Financial Reporting......Page 166 Background......Page 172 Types of Premiums Adjustments......Page 173 Summary of Premium Transaction Flow......Page 174 Involuntary Markets......Page 180 Premium Revenue and Premium Adjustments......Page 181 Premium Receivable......Page 186 Acquisition Costs......Page 190 Premium Deficiencies......Page 199 Medicare Part D......Page 219 Disclosure Considerations......Page 221 Consideration of Fraud in a Financial Statement Audit......Page 224 Management Estimates......Page 225 Risk of Material Misstatement — Inherent Risk Factors......Page 226 Control Environment......Page 228 Risk Assessment Process......Page 229 Control Activities......Page 230 Audit Procedures Responsive to the Assessed Risks of Material Misstatement......Page 231 Audit Consideration Chart......Page 232 Types of Businesses and Their Effect on the Estimation Process......Page 242 Kind of Insurance Underwritten: Line of Business or Type of Risk......Page 243 The Transaction Cycle......Page 245 Claim Acceptance and Processing......Page 246 Claim Adjustment and Estimation......Page 247 Claim Settlement......Page 248 Salvage and Subrogation......Page 249 Components of Loss Reserves......Page 250 Estimating Methods......Page 251 Illustrative Projection Data......Page 253 LAE Reserves......Page 262 AO Reserve Calculation Approaches......Page 263 Changes in the Environment......Page 264 Critical Accounting Policies and Estimates Disclosure......Page 265 Use of Specialists by Management in Determining Loss Reserves......Page 266 Guaranty Fund and Other Assessments......Page 267 Discounting Loss Reserves......Page 268 Reinsurance Recoverables......Page 271 Statutory Accounting......Page 272 Applicability to Statutory Financial Statements......Page 275 Relationship to Other Pronouncements......Page 276 Planning Considerations — Overview......Page 282 Consideration of Fraud in a Financial Statement Audit......Page 283 Risk of Material Misstatement — Inherent Risk Factors......Page 284 Control Environment......Page 285 Control Activities......Page 286 Audit Procedures Responsive to the Assessed Risks of Material Misstatement......Page 287 Use of Loss Reserve Specialists......Page 290 Use of Management Specialists by Auditors in Evaluating Loss Reserves......Page 291 Auditor’s Response to Management’s Use or Non-Use of a Loss Reserve Specialist......Page 292 Analytical Procedures......Page 293 Testing the Data, Assumptions, and Selection of the Estimate......Page 294 Auditing the Underlying Data Used in the Loss Reserving Process......Page 299 Develop a Point Estimate or Range to Evaluate Management’s Estimate......Page 300 Loss Reserve Ranges......Page 301 Factors That Could Affect a Range of Reasonably Possible Outcomes......Page 303 Evaluating the Financial Effect of a Reserve Range......Page 304 Auditor Uncertainty About the Reasonableness of Management's Estimate and Reporting Implications......Page 306 Ceded Reinsurance Recoverable......Page 307 Audit Consideration Chart......Page 309 Investment Evaluation......Page 317 Regulation......Page 318 FASB Accounting Standards Codification 820 and 825......Page 319 Definition of Fair Value......Page 320 Application to Liabilities and Instruments Classified in a Reporting Entity’s Shareholders’ Equity......Page 321 The Fair Value Hierarchy......Page 322 Disclosures......Page 326 Fair Value Option......Page 327 Significant Differences Between GAAP and Statutory Accounting......Page 328 Cash and Cash Equivalents......Page 330 Debt and Equity Securities......Page 332 Mortgage Loans......Page 357 Troubled Debt Restructurings......Page 360 Real Estate......Page 364 Derivatives, Including Futures, Options, and Similar Financial Instruments......Page 367 Joint Ventures and Partnerships......Page 373 Investments in SCA Entities......Page 382 Investment Income Due and Accrued......Page 386 Asset Transfers and Extinguishments of Liabilities......Page 387 Repurchase Agreements......Page 393 Securities Lending......Page 395 Other Information......Page 397 Audit Risk Factors — Investments......Page 398 Risk of Material Misstatement — Inherent Risk......Page 399 Control Environment......Page 403 Risk Assessment Process......Page 405 Control Activities......Page 406 Service Organizations......Page 408 Group Audit Considerations for Investments in Alternative Investments and Subsidiary, Controlled and Affiliated Entities......Page 409 Audit Consideration Chart and Procedures......Page 410 Chapter 6 Reinsurance......Page 420 Types of Reinsurance......Page 421 Reinsurance Contracts......Page 422 Bases of Reinsurance Transactions......Page 424 Frequently Used Terms in Reinsurance Contracts......Page 425 Generally Accepted Accounting Principles Accounting Practices......Page 427 Statutory Accounting Principles......Page 441 Special Risk Considerations......Page 450 Audit Risk Factors — Reinsurance......Page 451 Risk of Material Misstatement — Inherent Risk......Page 452 Control Environment......Page 453 Information and Communication......Page 454 Control Activities......Page 455 Internal Control of the Ceding Entity......Page 456 Internal Control of the Reinsurer......Page 457 Auditing Procedures for the Ceding Entity......Page 459 Auditing Procedures for the Assuming Entity......Page 460 Reinsurance Intermediaries......Page 461 Audit Consideration Chart......Page 462 Basic Principles of GAAP Accounting for Income Taxes......Page 466 Disclosure Requirements Contained in GAAP Literature......Page 471 Statutory Accounting for Income Taxes......Page 482 Changes in Tax Law......Page 487 Audit Risk Factors — Income Taxes......Page 488 Internal Control......Page 489 Risk Assessment Process......Page 490 Audit Procedures Responsive to the Assessed Risks of Material Misstatement......Page 491 Audit Consideration Chart......Page 492 Introduction......Page 497 Premium and State Taxes......Page 498 Guaranty Fund and Other Assessments......Page 500 Generally Accepted Accounting Principles......Page 501 Statutory Accounting Principles......Page 503 The Patient Protection and Affordable Care Act......Page 506 Capitalized Costs and Certain Nonadmitted Assets......Page 534 Pensions......Page 535 Audit Planning......Page 538 Internal Control......Page 539 Audit Procedures Responsive to the Assessed Risks of Material Misstatement......Page 540 Introduction......Page 546 Types of Captive Organizations......Page 547 Specific Transaction Considerations and Accounting Principles......Page 550 Audit Planning......Page 551 Internal Control......Page 552 Audit Procedures Responsive to the Assessed Risks of Material Misstatement......Page 553 Reports on Financial Statements......Page 556 Unmodified Opinions on GAAP Financial Statements......Page 557 Modified Opinions......Page 560 Disclaimer of Opinion......Page 562 Emphasis-of-Matter Paragraphs......Page 563 Integrated Audits Performed in Accordance With GAAS......Page 572 Reporting on Whether a Previously Reported Material Weakness Continues to Exist......Page 573 NAIC — Codified Statutory Accounting......Page 574 Regulatory Basis Financial Statements Intended for General Use......Page 575 Regulatory Basis Financial Statements Intended for Limited Use......Page 577 Regulatory Basis Financial Statements — Other Issues......Page 579 Correction of an Error — Regulatory Basis Financial Statements Intended for General Use......Page 581 Correction of an Error — Regulatory Basis Financial Statements Intended for Limited Use......Page 584 Opinion on Supplemental Schedules......Page 586 Accountant’s Awareness Letter......Page 587 Change in Auditor Letter......Page 588 Notification of Adverse Financial Condition Letter......Page 590 Auditor Reports for Communicating Unremediated Material Weaknesses in Internal Control to Insurance Regulators......Page 591 Accountant's Letter of Qualifications......Page 594 Appendix A Accounting for Financial Instruments......Page 602 Appendix B The New Leases Standard: FASB ASC 842......Page 613 Appendix C The New Revenue Recognition Standard: FASB ASC 606......Page 625 Appendix D Overview of Statements on Quality Control Standards......Page 635 Appendix E Property and Liability Insurance Entity Specific Disclosures......Page 646 Appendix F Examples of Development Data......Page 669 Appendix G List of Industry Trade and Professional Associations, Publications, and Information Resources......Page 674 Appendix H Schedule of Changes Made to the Text From the Previous Edition......Page 677 Glossary......Page 683 EULA......Page 698