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