Audit of The Insurance Industry Hand-out PDF

AUDIT OF THE INSURANCE INDUSTRY HAND-OUT INTRODUCTION INSURANCE ➔ Insurance is a means of protection from financial loss. It is a form of risk management primarily used to hedg...

AUDIT OF THE INSURANCE INDUSTRY HAND-OUT INTRODUCTION INSURANCE ➔ Insurance is a means of protection from financial loss. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. ➔ An insurance transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer’s promise to compensate the insured in the event of a covered loss. INSURANCE CONTRACTS ➔ Under PFRS 17, an insurance contract is defined as a contract under which one party (the “issuer”) accepts significant insurance risk from another party (the “policyholder”) by agreeing to compensate the policyholder if a specified uncertain future event (the “insured event”) adversely affects the policyholder. ◆ Policyholder - a party that has the right to compensation under an insurance contract if an insured event occurs. ◆ Insured event - an uncertain future that is covered by an insurance contract and creates insurance risk. PFRS 17 applies to: a. Insurance and reinsurance contracts issued by an insurer; b. Reinsurance contracts held by an insurer; c. Investment contracts with discretionary participation features issued by an insurer. KEY FACTORS THAT DISTINGUISH INSURANCE CONTRACT FROM OTHER AGREEMENTS 1. Insurance Risk — the contract must transfer significant insurance risk from the policyholder to the insurer, where the insurer agrees to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects them. 2. Uncertainty — the event that triggers the insurer's obligation must be uncertain. This uncertainty is a fundamental aspect that differentiates insurance contracts from other types of contracts. 3. Compensation — the insurer must agree to provide compensation to the policyholder in the event of the insured event occurring. BASIC TYPES OF INSURANCE 1. Life Insurance — a contract in which an insurer guarantees payment to the beneficiaries of the insured upon the insured's death, in exchange for premium payments. This policy provides financial protection against uncertain life events. 2. General Insurance (Non-life Insurance) — provides coverage for damages or losses to the insured's property, liability, vehicles, and other assets to protect from unforeseen events. 3. Health Maintenance Organization (HMO) — network that offers health insurance coverage for a monthly or annual fee. Members typically choose a primary care physician and receive services within the HMO's network, often with lower out-of-pocket costs. 4. Pre-Need Insurance (Death Insurance) — permanent life insurance covers funeral care and burial or cremation expenses. It is designed for expected life events, ensuring that funds are available for end-of-life arrangements. 5. Reinsurance — insurance purchased by insurance companies to manage risk by sharing potential losses with other insurers. It helps insurers maintain financial stability and protect against large claims. 6. Variable Unit-Linked Insurance (VUL) — a type of insurance policy that combines permanent life insurance with investment components. Policyholders can invest their premiums in various funds, allowing for potential growth in cash value while providing life coverage. INSURANCE INDUSTRY IN THE PHILIPPINES Insurance Commission a. Protect Policyholders: Ensure fair practices and safeguard policyholders' rights. b. Regulate the Industry: Enforce rules and standards for a stable insurance market. Page 1  c. Ensure Financial Stability: Monitor insurers' solvency and financial health. d. Promote Fair Competition: Prevent monopolies and promote a diverse market. e. Educate and Protect Consumers: Raise public awareness and resolve disputes. Amended Insurance Code a. Republic Act No. 10607, approved on 15 August 2013 b. Repeals the 1974 Insurance Code (Presidential Decree 612) REGULATORY FRAMEWORK 1. Requirements as to Capital This is in accordance with the Insurance Code of the Philippines (Republic Act No. 10607). a. Minimum Capital (Section 194) Life and Non-Life Insurance Companies: must have a minimum paid-up capital of ₱1 billion. Reinsurance Companies: A new reinsurance company is required to have a minimum paid-up capital of ₱2 billion. b. Minimum Net Worth (For existing insurance companies, Life and Non-Life)(IC Circular Letter No. 2015-02-A) ₱550 million by December 31, 2016. ₱900 million by December 31, 2019. ₱1.3 billion by December 31, 2022. 2. Appointment of Auditors a. Accredited by the Insurance Commission (IC) and Independence. Insurance companies are required to obtain approval from the IC when appointing external auditors. IC Circular Letter No. 2016-36 b. Rotation Policy, the IC may impose a rotation policy, requiring insurance companies to rotate every five years, the partner must have a cooling-off period of at least two years. IC Circular Letter No. 2016-37 3. Sufficiency of Assets or Solvency Margin a. Sufficiency of Assets (Section 200) This section requires that every insurance company must maintain sufficient assets to cover its liabilities, including the reserves for unexpired risks, policy liabilities, and other obligations. The assets must be valued according to the standards set by the Insurance Commission. b. Solvency Margin (Section 194) The solvency margin ensures that the insurer has enough financial resources to meet its obligations to policyholders even in adverse conditions. The minimum solvency margin required is 50% of the company's net worth for life insurance companies and P500 million or 20% of the net premiums written for non-life insurance companies. The solvency margin requirement is also aligned with the Risk-Based Capital (RBC) Framework; it ensures that an insurance company's capital adequacy aligns with its risk profile. RBC Ratio = (Total Available Capital / Required Capital) x 100% (IC Circular Letter No. 2016-68 and No. 2018-59) 4. Inception of Risk An insurance company cannot take on any insurance risk until it has received the payment for the premium or has a guarantee that the premium will be paid within the required timeframe. Alternatively, the insurer must receive a deposit of a specified amount in advance, according to the prescribed procedures. Page 2  AUDIT OF THE INSURANCE INDUSTRY UNIQUE PROCESS ACTUARIAL PROCESS UNDERWRITING REINSURANCE ➔ Actuaries in an insurance ➔ Process of evaluating and ➔ Process by which an company use mathematical assessing the risks associated insurance company and statistical methods to with insuring an individual or transfers part of its risk to entity. another insurance analyze and manage financial ➔ Underwriters analyze various company to reduce its risks. factors, such as health, financial potential losses from ➔ Ensuring it can meet future stability, and other relevant large claims. obligations and comply with details, to determine whether to ➔ It reduces risks and regulations. financial stability. accept or reject an insurance ➔ Their expertise helps in making application. informed decisions that balance ➔ They set the terms of coverage risk and profitability. and establish premium rates based on the assessed risk, ensuring that the insurance company maintains a balanced risk portfolio while offering appropriate and fair coverage to policyholders. ROLE OF AUDITOR ➔ Certify actuarial valuation by ➔ To review the process of ➔ Ensure that all premiums verifying that the actuarial acceptance of risk through the received and claims paid valuation is accurate and underwriting process. are accurately recorded ➔ Evaluate and test the and properly allocated adheres to regulatory effectiveness of internal controls between the insurer and guidelines. reinsurer. in place to ensure timely and ➔ Rely on actuarial certificates by ➔ Review reinsurance accurate Insurance policy, using this from appointed contracts to ensure adherence to the Insurance compliance with regulatory actuaries but may discuss Regulatory and Development requirements and confirm processes and assumptions Authority Act, and Rules and that terms are correctly before certification. regulations made thereunder. applied in financial statements. UNIQUE ACCOUNTS 1. PREMIUM ➔ amount of money an insurer pays to maintain an insurance policy. ➔ insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured against. ➔ no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid. Revenue recognition of premium 1. Single pay premiums - single payment at the beginning of the term 2. Regular pay premiums - paid at regular intervals for a particular period of time. a. First-year premiums - payments made in the first year of the insurance policy b. Renewal year premiums - premium paid after the first year Audit Procedure of Premium Assertions Procedure Presentation and Verify that premium income is recognized only for issued policies. Disclosure Page 3  Existence and Inspect signed application and underwriting approval. Occurrence Validate the policy data to the master file. Reconcile the premiums and cash receipts. Rights and Verify the valid agreements with policyholders and the authority to Obligation collect and recognize these premiums. Completeness Review all transactions and reconciliations to verify that no and Cut-off premiums are omitted. Confirm that premiums are recorded in the correct accounting period. Valuation, Ensure that premiums are valued correctly. Accuracy, and Reconcile subsequent receipts with the amounts recorded in the Allocation premium accounts. Confirm that premiums are allocated correctly between earned and unearned premiums. 2. CLAIMS ➔ a demand for payment of a policy benefit because of the occurrence of an insured event. ➔ insurance claim is a formal request to an insurance provider for reimbursement against losses covered under the insurance policy. The claim is made after a covered incident occurs. The compensation that the insured individual receives will cover financial losses resulting from the incident. ➔ Insurance claims cover everything from death benefits on life insurance policies to routine and comprehensive medical exams. The insurance company will need to approve the insurance claim before releasing payment. Types of Insurance Claims 1. Health insurance claims — are raised to cover the costs of medical expenses. 2. Life insurance claims — are raised by the nominee in the unfortunate event of the policyholder's demise. 3. Group life insurance claims — are used by an employer to offer life insurance benefits for their employees. Cycle Of Claim 1. Notification a. Date of Loss — the date when an event or incident occurred that resulted in property damage or loss covered by an insurance policy. It is the starting point for calculating the time limit for filing a claim, the deadline for submitting proof of loss, and the time frame for completing the claim process. The date of loss is important, not the date of reporting. b. Beneficiaries — the person or entity that is legally designated to receive the benefits from the financial products. For life insurance coverage, that is the death benefit the policy will pay if the insured person dies. For retirement or investment accounts, that is the balance of the insured person’s assets in those accounts. 2. Verification a. Checking of required documents by check whether provision has been made for all unsettled claim or has been made for only such claims for which the company is legally liable or it is made normally not in excess of the amount insured. b. Policy Coverage 3. Evaluation a. Adjusters — investigate insurance claims to determine the extent of insuring a company's liability. b. Assess Value — appraisers assess the value of property or assets, often for the purpose of settling insurance claims or determining fair market value. 4. Settlement a. Payment in full b. Partial settlement Page 4  NAME OF THE INSURANCE COMPANY AUDIT PROGRAM FOR INSURANCE CLAIM Audit Objectives: 1. To ensure that all claims are valid, accurately recorded, and properly documented and that outstanding claims are correctly reported. 2. To verify that the claims register includes all claims paid and unpaid as of the balance sheet date and that claims are recorded in the appropriate accounting period. 3. To confirm that reserves and related balances under reinsurance assumed are properly recorded. 4. To verify that reinsurance recoverable on paid and unpaid losses is accurately recorded. 5. To assess whether the estimates of loss reserves are reasonable and accurately reflect the company’s liabilities. Audit Assertions: Existence or Occurrence (EO), Accuracy, Completeness and Cutoff (CC), Rights and Obligations (RO), Valuation and Allocation (VA) Audit Procedures: Activities WP Ref Date Done by 1. Validate claims notification and verification controls 2. Review of claim forms. 3. Validate Controls Over Reinsurance Transactions: a. Review Reinsurance Binders and Placement Slips b. Examine Authorization Procedures 4. Validate Controls Over Claims Settlement and Recording 5. Verify Review and Approval of Loss Reserves 6. Validate the assumptions made by the actuary in estimating loss reserves. Prepared by: Reviewed by: 3. COMMISSIONS ➔ Agent's salary ➔ Remuneration is based on certain percentage of premiums ➔ Income for non-life insurance and Expense for life insurance Commissions Process a. Agreement — Commission rate, Contractual agreement b. Recording — Commission expense c. Adjustments — If there's revocation and cancellations only Role of Licensed Agent/Broker Insurance Agent - represents Insurance Companies Insurance Broker - represents Customers/Consumers Page 5  NAME OF THE INSURANCE COMPANY AUDIT PROGRAM FOR INSURANCE COMMISSIONS Audit Objectives: 1. To verify the accuracy and completeness of commission payments to agents and brokers. 2. To ensure commissions comply with the limits set by contractual agreements. 3. To assess the effectiveness of internal controls over the commission calculation and payment process. 4. To confirm that commissions are adjusted back in cases of policy cancellations or adjustments. 5. To ensure timely and proper reconciliation of commission payments with financial records.. Audit Assertions: Existence/Occurrence (E/O), Accuracy and Valuation (AV), Completeness and Cut-off (CC), Presentation and Disclosure (PD), Rights and Obligations (RO) Audit Procedures: Activities WP Ref Date Done by 1. Recalculate a sample of commissions based on policy agreements to ensure accuracy. 2. Review commission payments do not exceed regulatory or contractual limits. 3. Review a sample of cancelled policies to ensure that commissions are recovered and reflected with financial records. 4. Confirm that commission payments match commission receipts and are accurately recorded in financial records. 5. Review a sample of commission payments to ensure they are made within the agreed timeframe and in proper accounting period. 6. Observe the design and effectiveness of internal controls over commission calculations, approvals, and payments. 7. Ensure that all commission payments are authorized and supported by valid documentation. 8. Review the segregation of duties in the commission processing cycle to minimize the risk of fraud or errors. Prepared by: Reviewed by: References: Ace.Razon. (2022, April 26). Amended Insurance Code (R.A. 10607). Insurance Commission. https://www.insurance.gov.ph/amended-insurance-code-r-a-10607/ Insurance Commission. (2022). Article 130: Guidelines on the Actuarial Valuation of Life Insurance Policy Reserves. https://www.insurance.gov.ph/wp-content/uploads/2022/04/Article130.pdf Studocu. (n.d.). (ASI) Auditing in Specialized Industries- - Audit of Insurance Infustries - Studocu. https://www.studocu.com/ph/document/new-era-university/bs-accountancy/asi-au diting-in-specialized-industries-banks-and-issurance/31435817?shared Page 6