Insurance Companies

Definition Who regulates Insurance Companies?

Insurance is a legal agreement (a contract) between two parties: Insurance Commission
1. Insurer (Assurer) • Attached agency of the Department of Finance
a. Company or person who provides insurance and (DOF).
agrees to take on the risk • It is committed to protect the interest and
2. Insured (Assured) welfare of the insuring public and to develop and
a. Person or entity whose risk is being covered by the strengthen the insurance industry.
insurance • Provide an opportunity for every Filipino to
secure insurance protection and we shall observe
Simple Definition practices at par with regional and global
• Non-bank financial institution standards.
• Provides insurance policy to protect individuals or policy
holders from the risk of financial losses in exchange for Special Considerations that makes Insurance Accounting
insurance premiums; Unique
• An insurance company operates to pool risk among a large • Insurers assume risk on return for a premium
number of policy holders • Statutory accounting principles apply to the
insurance industry
Reason for Insurance - To protect themselves financially from • Insurance category impacts accounting process
uncertain future events (death, illness, accident, fire, theft, or • How assets, liabilities, revenues, expenses, etc.
other types of loss) are classified and accounted for
• The purpose of financial statements to evaluate
How does it work? the business
• The insured pays a certain amount of money regularly to
the insurer. This payment is called a premium. Statutory Accounting Generally Accepted
• In return, the insurer promises to: Principles Accounting Principles
○ Pay a fixed amount of money if a certain uncertain Applies to Insurance Applies to virtually all
event (like death) happens, or companies other industries
○ Pay after a certain period ends (this is usually in life
insurance), or Evaluates the company’s Evaluates the company’s
○ Compensate for loss or damage if something goes ability to pay out profitability
wrong (this is for general insurance). policyholders
Focuses on protecting Focuses on protecting
Types of Insurance policyholders lenders and
• Life Insurance: investors
○ Pays out a sum when the insured person dies, or after Overseen by IC Overseen by FASB
a set period (like 20 or 30 years).
○ Promises specific financial compensation to the Expenses are accounted Matching principles is
beneficiary in case of the demise of the insured for immediately used to account for
person expenses
○ To avail the insurance benefits, the policy holder is
liable to pay the premium amounts regularly and Risky Accounts
timely (depending on chosen plan) • Premium Payments (IS)
• General Insurance: • Claim Payments (IS)
○ Covers things like health, car, property, or travel. • Agent Commissions (IS)
○ It provides indemnity, meaning it compensates you • Cash and Bank Balances (SFP)
for the actual loss you suffer. • Reserves (SFP) – Needed for future claims. Should
○ General term used for all the insurance plans that follow the IC rules.
safeguard things other than life, such as your health • Investments (SFP)
and valuables against theft, natural disasters,
accidents, etc.
○ Timely premiums are to be paid for the value of
protection chosen by you. The insurance company is
then liable to pay you the assured sum if any damage
or theft happens to the insured entity.

Life General
Term Long-term Short-term
Probability of Certain to happen Conditional
the event
Risk covered Life risks include Risks of damage to
mortality, morbidity, property, terrorism,
and longevity etc.

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Significant Classes of Transactions on a Risk- 3. Claim Processing
Based Audit ○ Step-by-step procedure an insurance
1. Underwriting company follows when a policyholder (or
○ Method an insurance company uses to understand service provider) submits a request for
how much of a risk you are to insure. payment after an insured event happens.
Audit Risk Audit Risk
○ Policies may be processed twice ○ An unauthorized claim may be processed
○ Fictitious premiums are recorded ○ Claims may be processed for cancelled or
○ The coding of premiums may be incorrect which expired policies or outside of the policy
may result in inaccurate computation of premiums coverage
○ Premiums are written even if policies have not been ○ Claims may be processed for payment twice
renewed ○ Loss reserves may not be as updated as
○ Not all approved policies may have been posted needed
○ Premiums may be recorded in the wrong period ○ Not all claims may be recorded and fictitious
Audit procedures claims may be recorded
○ Verification of existence (is there really a premium ○ Claim transactions may not be posted and its
recorded?) related reinsurer’s shares
○ Premium cut-off (Validate in the premium register) Audit Procedures
○ Secure outstanding claim register and
○ Premium analytical procedures
perform reconciliation between subsidiary
○ Premium register reconciliation (sub-ledger vs GL)
and general ledger
Critical Audit Procedures (Premium) ○ Select samples from subsidiary ledger and
Verification of Premium check from claims folder. Secure claim
○ Insurance premium is the amount paid to the number, line of insurance, amount, date, name
insurance company for payment of the insurance of insured, and check if it is recorded in the
contract obtained
correct period
Audit Procedure ○ Compare recorded reserves and reconcile
a. Auditor must look into the internal control and with report of insurance adjuster
compliance which is laid down for the collection and Critical Audit Procedures (Claims)
recording of premium
Verification of Claims
b. The cover notes must be numbered serially ○ Insurance claims is a formal request by
c. The auditor needs to check if the premium registers policyholder to an insurance company for
are maintained chronologically coverage or compensation for a covered loss
d. The auditor verifies if the premium register is equal or policy event
to the amount shown in the General ledger Audit Procedure
e. Lastly, the auditor verifies if the installments due on ○ The auditor shall verify and check for the
or before the balance sheet date has been received unsettled claims
or not and if it has been accounted as premium ○ Auditor must also check if the provision made
income under the year which the financial
with the company for the claims is legally
statement is audited liable
○ Then, check if the provision made is not more
2. Reinsurance than the insured amount
○ It is an insurance contract issued by one entity (the ○ Lastly, check the co-insurance arrangement
reinsurer) to compensate another entity for claims which contains the company's provision with
arising from one (1) or more insurance contracts respect to its own share of anticipated
issued by that other entity (underlying insurance liability
contracts) Critical Audit Procedures (Commissions)
○ basically insurance for insurance companies. Verification of Claims
Audit Risk ○ Insurance commission is a certain percentage
○ Reinsurance offers from unauthorized companies of premium produced that is retained as
may be processed compensation by insurance agents and
○ The assumed policy may be processed twice or brokers
fictitious premiums may be recorded Audit Procedure
○ Not all approved policies and premium adjustments ○ The auditor shall verify the voucher
or cancellations are recorded disbursement with regards to the
○ The coding of premiums may be incorrect, resulting disbursement voucher with the copies of
in inaccurate computation of premiums commission bills and statement
○ Premiums may be recorded in the wrong period and ○ The auditor also checks if the vouchers are
not all approved policies may have been posted authorized by the officers-in-charge and also
Audit procedures if the income tax is deducted
○ Check reinsurance premiums subsidiary ledger and ○ Then, check the amount of commission
GL control accounts allowed
○ Develop expected changes for reinsurance premiums ○ Lastly, check the accounting period of
○ Perform analytical procedures for the current commission
reinsurance premiums and previous reinsurance
premiums

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 Implementation of IFRS 17
• IFRS 17 is effective for annual reporting periods Insurance Revenue will consist of:
beginning on or before 01 January 2023 with earlier • Contractual Service Margin (CSM) recognized for
application permitted as long as IFRS 9 is also applied services provided
• Insurance contracts combine features of both a financial • Risk adjustment released in the period
instrument and a service contract. In addition, many • Expected claims
insurance contracts generate cash flows with substantial • Expected expenses (Directly attributable)
variability over a long period. To provide useful • Recovery of Insurance acquisition expenses
information about these features, IFRS 17:
○ Combines current measurement of the future cash Insurance Service Expense will consist of:
flows with the recognition of profit over the period • Actual Claims
that services are provided under the contract; • Actual Expenses (Directly Attributable)
○ Present insurance service results (including
• Amortization of Insurance Acquisition Expenses
presentation of insurance revenue) separately from
insurance finance income or expenses; and • Changes in Estimates in Liability for Incurred
○ Requires an entity to make an accounting policy Claim (LIC) fulfillment cash flows
choice of whether to recognize all insurance finance • Experience adjustments on the LIC
income or expense in profit or loss or to recognize
some of that income or expense in other
comprehensive income.

IFRS 17
• Fundamental change to the income statement under IFRS
17
• Very different view and presentation
• Different concept of "revenue" and "expense"
• Splits Income Statement into sections:
a. Insurance service results
b. Investment results
c. Other results / Income taxes

IFRS 17 - Simplifying Assumptions for our Example

• All business is non-participating, long-term life insurance
• All contracts are subject to the General Measurement
Approach (GMA)
• All groups of contracts are profitable currently and have
positive CM balances
• No other comprehensive income (OCI)

Income Statement

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Parts on Income Statement

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