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Transcript of Www.marsh.com / Accounting & Audit IMAC Captives Course November 9, 2011 Presented By: Alissa...
www.marsh.com / www.pkfcayman.com
Accounting & AuditIMAC Captives Course
November 9, 2011
Presented By: Alissa Matthews, CA Ben Leung, ACA Senior Vice President, Marsh Managing Partner, PKF [email protected] [email protected]
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The objective of this course is to understand the process specific to insurance captives, for the following topics:
Accounting & Financial Reporting
Auditing
Overview & Objective
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Accounting & Financial ReportingOverview
Accounting Oversight & Governance
Accounting for Premiums & Losses Example 1a: Premiums/Losses Example 1b: Reinsurance
Accounting for Retrospectively Rated Programs Example 2a: Retrospectively Rated Program Example 2b: Deposit Accounting
Other Accounting Considerations: Premiums & Losses
Accounting for Investments Example 3: Investment Classifications
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Accounting & Financial ReportingOversight & Guidance
US Generally Accepted Accounting Principles (US GAAP)– AICPA – American Institute of Certified Public Accountants www.aicpa.org– FASB – Financial Accounting Standards Board www.fasb.org – SEC – Securities Exchange Commission www.sec.gov– Vast majority of Cayman captives follow US GAAP
International Financial Reporting Standards (IFRS)– IASB – International Accounting Standards Board and IFRS Foundation
www.ifrs.org – European Union, Canada, Australia, Asia
US GAAP vs IFRS:– Differences– Global harmonization and convergence– Majority of Cayman Captives use US GAAP– Presentation will focus on US GAAP treatment
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Accounting & Financial ReportingAccounting for Premiums & Acquisition Costs
Accounting for the insurance program follows the insurance contracts. Under insurance accounting all contract amounts are set-up on day one:
– Premiums recognized as revenue over term of the contract in proportion to the insurance protection provided (typically evenly) (ASC944-605).
– Acquisition costs are related to acquiring the insurance contract and are set up on the balance sheet and expensed over term of contract. Acquisition Costs vary with the contract, ie. commissions, fronting fees, taxes, etc. (ASC944-30-25-1)
– General & Administrative Costs do not vary with contract & are not primarily related to the acquisition of the contract, ie. management fees, audit fees, etc. These costs are expensed as incurred. (ASC944-30-25-2)
– Reinsurance premiums assumed & ceded are accounted for on a gross basis
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Accounting & Financial ReportingAccounting for Losses & Loss Reserves
Paid Losses & Case/Reported Reserves are based on Loss Runs– Claims Handler estimates reserve for known reported claims
Incurred But Not Reported (IBNR) must be recorded (ASC944-40-30)
– Adverse development on case reserves– Claims not yet reported– Actuary projects ultimate losses then deduct paid losses and case
reserves to obtain the IBNR figure.
Losses related to reinsurance contracts must be recorded gross
Loss & Reserves Note Disclosures:– Narrative on how losses are derived– Break-down components of reserves between case & IBNR– Break-down of movement in loss reserves between incurred and
paid and between current and prior years
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Accounting & Financial ReportingAccounting for Losses & Loss Reserves
Reserves may be booked at a different confidence level and/or discount rate than that used for funding. – Confidence level or risk margin: higher = more conservative– Discount rate: comparable to risk free rate– Reserving Trends
Expected/Undiscounted 75% confidence level/Discounted
Reserving methodology should be reviewed annually:– Changing confidence level = change in accounting estimate– Changing discount rate = change in accounting estimate– Changing from discounted to undiscounted
Differing treatments: accounting policy vs accounting estimate Check with company’s auditors
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Accounting & Financial ReportingExample 1 – Accounting for Premiums & Losses
AM Insurance Company (AMIC) has a December 31st year end and their financial statements follow US GAAP.
On October 1st AMIC entered into a year long reinsurance contract with the following terms and conditions: – Premiums $100,000 – Fronting & Acquisition Costs $5,000 – Net premiums ceded quarterly– Administrative expenses were $30,000 for the year – During the year claims were reported of $15,000 of which $5,000
was paid and $10,000 reserved.– Actuary projected ultimate losses of $25,000 as at year-end.
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Accounting & Financial ReportingExample 1 – Accounting for Premiums & Losses
Fronting Company
AMIC
Insured
$100,000 in premiums
$95,000 ($23,750 per quarter sent to the captive)
$5,000 deducted for Fronting Fees
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Accounting & Financial ReportingExample 1a - Accounting for Premiums & Losses
.
Day 1 – Entries (in blue throughout) Debit Credit
Reinsurance Balances Receivable (B/S) $71,250
Acquisition Costs (I/S) $5,000
Cash (B/S) $23,750
Premiums Written (I/S) $100,000
Movement in UPR (I/S) $100,000
Unearned Premium Reserve (UPR) (B/S) $100,000
Deferred Acquisition Costs (DAC) (B/S) $5,000
Movement in DAC (I/S) $5,000
To record premiums written &
costs
To record unearned & deferred amounts
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Accounting & Financial ReportingExample 1 – Accounting for Premiums & Losses
Fronting Company
AMIC
Insured
$100,000 in premiums ($25,000 earned per quarter)
$95,000 ($23,750 per quarter sent to the captive)
Loss Runs / Cession Statement:
$5,000 Paid + $10,000 Reserved =
$15,000 Incurred
Invoices:
$30,000 Expenses
Actuarial Report:
$25,000 Ultimate Losses - $15,000 Reported =
$10,000 IBNR (Incurred But Not Reported)
$5,000 for Fronting Fees ($1,250 expensed per quarter)
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Accounting & Financial ReportingExample 1a - Accounting for Premiums & Losses
Year-End – Entries (in green throughout) Debit Credit
Unearned Premium Reserve (UPR) (B/S) $25,000
Movement in UPR (I/S) $25,000
Movement in DAC (I/S) $1,250
Deferred Acquisition Costs (DAC) (B/S) $1,250
Administrative Expenses (I/S) $30,000
Accounts Payable (B/S) $30,000
Losses Paid (I/S) $5,000
Losses Payable (B/S) $5,000
Movement in Loss Reserves (I/S) $20,000
Loss Reserves (B/S) $20,000
To Record Transfer to Incurred/ Earned
To Record Losses &
Loss Reserves
To Record Expenses
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Accounting & Financial ReportingExample 1a - Accounting for Premiums & Losses
Balance Sheet Opening Day 1 Entry Y/E Adj Total
Cash $1,500,000 $23,750 $0 $1,523,750
Insurance Balances Rec 0 71,250 0 71,250
Deferred Acquisition Costs 0 5,000 (1,250) 3,750
Total Assets $1,500,000 $100,000 ($1,250) $1,598,750
Accounts Payable 0 0 30,000 30,000
Losses Payable 0 0 5,000 5,000
Unearned Premium Reserve 0 100,000 (25,000) 75,000
Loss Reserves 0 0 20,000 20,000
Share Capital & APIC 1,500,000 0 0 1,500,000
Retained Earnings 0 0 (31,250) (31,250)
Total Liabilities & Equity $1,500,000 $100,000 ($1,250) $1,598,750
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Accounting & Financial ReportingExample 1a - Accounting for Premiums & Losses
Income Statement Opening Day 1 Entry Y/E Adj Total
Premiums Written $0 $100,000 $0 $100,000
Movement in UPR 0 (100,000) 25,000 (75,000)
Acquisition Costs 0 (5,000) 0 (5,000)
Movement in DAC 0 5,000 (1,250) 3,750
Underwriting Income $0 $0 $23,750 $23,750
Losses Paid 0 0 (5,000) (5,000)
Movement in Loss Reserves 0 0 (20,000) (20,000)
Net Underwriting Income $0 $0 ($1,250) ($1,250)
Administrative Expenses 0 0 (30,000) (30,000)
Net Income $0 $0 ($31,250) ($31,250)
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Accounting & Financial ReportingExample 1b – Accounting for Reinsurance
Example 1b: AMIC decided on October 1st to cede 100% of the premiums to an excess reinsurer for an amount of $85,000 plus $10,000 in commission costs, due to the reinsurers on Day 1 of the policy.
Day 1 – Additional Entries Debit Credit
Reinsurance Premiums Ceded (I/S) $85,000
Commissions (I/S) $10,000
Cash (B/S) $95,000
Deferred Reinsurance Ceded (B/S) $85,000
Movement in Def’d Reins Ceded (I/S) $85,000
Deferred Commissions (B/S) $10,000
Movement in Deferred Commissions (I/S) $10,000
To record premiums written &
costs
To record unearned & deferred amounts
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Accounting & Financial ReportingExample 1b - Accounting for Reinsurance
Example 1b: AMIC decided on October 1st to cede 100% of the premiums to an excess reinsurer for an amount of $85,000 plus $10,000 in commission costs, due to the reinsurers on Day 1 of the policy.
Year-End – Additional Entries Debit Credit
Movement in Def’d Reins Ceded (I/S) $21,250
Deferred Reinsurance Ceded (B/S) $21,250
Movement in Deferred Commissions (I/S) $2,500
Deferred Commissions (B/S) $2,500
Losses Recoverable (B/S) 25,000
Movement Losses Recoverable (I/S) 25,000
To Record Tsf to
Incurred/ Earned
To Record Recoverable
from Reinsurers
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Accounting & Financial ReportingExample 1b – Reinsurance Accounting
Balance Sheet Prior Total Day 1 Entry Y/E Adj Total
Cash $1,523,750 ($95,000) $0 $1,452,500
Insurance Balances Rec 71,250 0 0 71,250
Losses Recoverable 25,000 25,000
Deferred Reinsurance Ceded 0 85,000 (21,250) 63,750
Deferred Acquisition Costs 3,750 10,000 (2,500) 11,250
Total Assets $1,598,750 $0 $1,250 $1,600,000
Accounts Payable 30,000 0 0 30,000
Losses Payable 5,000 0 0 5,000
Unearned Premium Reserve 75,000 0 0 75,000
Loss Reserves 20,000 0 0 20,000
Share Capital & APIC 1,500,000 0 0 1,500,000
Retained Earnings (31,250) 0 1,250 (30,000)
Total Liabilities & Equity $1,598,750 $0 $1,250 $1,600,000
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Accounting & Financial ReportingExample 1b – Reinsurance Accounting
Income Statement Prior Total Day 1 Entry Y/E Adj Total
Premiums Written $100,000 $0 $0 $100,000
Movement in UPR (75,000) 0 0 (75,000)
Reins Premiums Ceded 0 (85,000) 0 (85,000)
Deferred Reins Prem Ceded 0 85,000 (21,250) 63,750
Acquisition Costs (5,000) (10,000) 0 (15,000)
Movement in DAC 3,750 10,000 (2,500) 11,250
Underwriting Income $23,750 $0 ($23,750) $0
Losses Paid (5,000) 0 0 (5,000)
Movement in Loss Reserves (20,000) 0 0 (20,000)
Mvmt in Losses Recoverable 0 0 25,000 25,000
Net Underwriting Income ($1,250) 0 $1,250 $0
Administrative Expenses (30,000) 0 0 (30,000)
Net Income ($31,250) $0 $1,250 ($30,000)
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Accounting & Financial ReportingAccounting for Retrospectively Rated Programs
Premiums may be subject to adjustment under retrospectively rated or other experience rated contracts.– If the premium is reasonably estimable, then that amount is
recognized as revenue over the course of the contract and revised to reflect current experience.
– If the premium is not reasonably estimable, then the cost recovery method or deposit method until it is estimable.
Retrospectively-Rated, ‘Zero-Bottom Line’, or ‘Harvard Model’ captives– Premiums typically initially based on the 75% confidence level in the
actuarial funding report plus operating expenses.– Policy notes premiums will be adjusted based on actual loss
experience.– May be subject to a maximum & minimum premium.– May include operating expenses and investment income.– Return excess funding through premium adjustments.
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Accounting & Financial ReportingAccounting for Retrospectively Rated Programs
Contracts must transfer risk in order to be accounted for on the insurance accounting basis.
ASC 944-20 (FAS113 (9)) states that both the following must be met in order for the transaction to be a risk transfer arrangement:
(a) The reinsurer assumes significant insurance risk under the reinsured portions of the underlying contracts.
(b) It is reasonably possible that that reinsurer may realize a significant loss from the transaction.
In general this clause has been interpreted as:
10% risk of a 10% loss = 90% confidence level x 90%
Evidence of risk transfer must be present at policy inception.
Cap maximum premiums at or below the risk transfer amount for the policy to qualify for insurance accounting treatment.
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Accounting & Financial ReportingAccounting for Retrospectively Rated Programs
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Accounting & Financial ReportingExample 2 – Retrospectively Rated Programs
On January 1st, AMIC issued a policy directly to its Parent with the following terms and conditions:– Premiums of $200,000 based on the 75% confidence level funding report of $165,000 plus $35,000 funding for admin expenses. – The policy includes a retrospective premium clause that meets the requirements for risk transfer – Premiums paid quarterly in advance – At year-end claims paid were $10,000
and case reserves $40,000.– The actuary adjusted their ultimate
losses to $130,000 at year-end. – Administrative expenses were $30,000 – Interest earned was $5,000.
Parent Insured
AMIC
$200,000
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Accounting & Financial ReportingExample 2a – Retrospectively Rated Programs
Day 1 - Entries Debit Credit
Insurance Balances Receivable (B/S) $150,000
Cash (B/S) $50,000
Premiums Written (I/S) $200,000
Movement in UPR (I/S) $200,000
Unearned Premium Reserve (UPR) (B/S) $200,000
To record premiums written &
costs
To record unearned & deferred amounts
Year-End - Entries Debit Credit
Cash (B/S) $155,000
Insurance Balances Receivable (B/S) $150,000
Interest Income (I/S) $5,000
To Record Premiums &
Interest received
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Accounting & Financial ReportingExample 2a – Retrospectively Rated Programs
Year-End – Entries Continued Debit Credit
Unearned Premium Reserve (UPR) (B/S) $200,000
Movement in UPR (I/S) $200,000
Administrative Expenses (I/S) $30,000
Accounts Payable (B/S) $30,000
Losses Paid (I/S) $10,000
Losses Payable (B/S) $10,000
Movement in Loss Reserves (I/S) $120,000
Loss Reserves (B/S) [$130k - $10k] $120,000
Movement in RPA (I/S) $45,000
Retrospective Premium Adj (RPA) Reserve (B/S)
$45,000
To Record Earned
Premiums
To Record Losses &
Loss Reserves
To Record RPA
Movement
To Record Expenses
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Accounting & Financial ReportingExample 2a – Retrospectively Rated Programs
Balance Sheet Opening Day 1 Entry Y/E Adj Total
Cash $1,500,000 $50,000 $155,000 $1,705,000
Insurance Balances Rec 0 150,000 (150,000) 0
Total Assets $1,500,000 $200,000 $5,000 $1,705,000
Accounts Payable 0 0 30,000 30,000
Losses Payable 0 0 10,000 10,000
Unearned Premium Reserve 0 200,000 (200,000) 0
Loss Reserves 0 0 120,000 120,000
Retro Prem Adj Reserve 0 0 45,000 45,000
Share Capital & APIC 1,500,000 0 0 1,500,000
Retained Earnings 0 0 0 0
Total Liabilities & Equity $1,500,000 $200,000 $5,000 $1,705,000
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Accounting & Financial ReportingExample 2a – Retrospectively Rated Programs
Income Statement Opening Day 1 Entry Y/E Adj Total
Premiums Written $0 $200,000 $0 $200,000
Movement in UPR 0 (200,000) 200,000 0
Underwriting Income $0 $0 $200,000 $200,000
Losses Paid 0 0 (10,000) (10,000)
Movement in Loss Reserves 0 0 (120,000) (120,000)
Movement in RPA 0 0 (45,000) (45,000)
Net Underwriting Income $0 $0 $25,000 $25,000
Investment Income 0 0 5,000 5,000
Administrative Expenses 0 0 (30,000) (30,000)
Net Income $0 $0 $0 $0
27
Accounting & Financial ReportingExample 2b – Retrospectively Rated Programs
Example 2b: All other contract terms remain the same, but the 90% confidence level discounted in the funding report was $230,000.
90% Confidence Level Discounted $230,000Multiply by 90% 90%
Maximum Premiums for Risk Transfer $207,000
Actual Premiums $200,000
Actual Premiums < Max Premiums YES
Retrospectively Rated Policy Cap $250,000
Retro Cap < Max Premiums NO
This example policy DOES NOT PASS the risk transfer test since the retro policy has a cap that is higher than the 90% confidence level discounted x 90%.
28
Accounting & Financial ReportingExample 2b – Retrospectively Rated Programs
Day 1 – Entries to record as Deposit Liab Debit Credit
Premiums Written (I/S) $200,000
Deposit Liability (B/S) $200,000
Unearned Premium Reserve (UPR) (B/S) $200,000
Movement in UPR (UPR) (I/S) $200,000
To set up deposit liability
To reverse UPR entries
Accounted for using Deposit Accounting– Premiums received are recorded as additions – Losses paid as deductions to the deposit liability– Includes retrospective premium adjustments as part of policy
The amount of deposit liability should be adjusted to reflect future estimated payments (ASC 340-30-35)
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Accounting & Financial ReportingExample 2b – Retrospectively Rated Programs
Year-End – Entries to Record as Deposit Liab Debit Credit
Deposit Liability (B/S) $35,000
Interest Income Allocated to Deposit Liab (I/S) $5,000
Admin Exp Allocated to Deposit Liab (I/S) $30,000
Losses Paid Allocated to Deposit Liab (I/S) $10,000
Loss Reserves (B/S) $120,000
Movement in Loss Reserves (I/S) $120,000
Retro Premium Adj Reserve (RPA) (B/S) $45,000
Movement in RPA (I/S) $45,000
Movement in UPR (I/S) $200,000
Unearned Premium Reserve (B/S) $200,000
To Allocate Income
Statement Amounts to
Deposit Liability
To Reverse Reserve Entries
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Accounting & Financial ReportingExample 2b – Retrospectively Rated Programs
DEPOSIT LIABILITY ACCOUNT
Premiums $200,000
Losses Paid (10,000)
Investment Income 5,000
Admin Expenses (30,000)
Balance $165,000
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Accounting & Financial ReportingExample 2b – Retrospectively Rated Programs
Balance Sheet Insurance Day 1 Entry Y/E Adj Deposit
Cash $1,705,000 $0 $0 $1,705,000
Insurance Balances Rec 0 0 0 0
Total Assets $1,705,000 $0 $0 $1,705,000
Accounts Payable 30,000 0 0 30,000
Losses Payable 10,000 0 0 10,000
Deposit Liability 0 200,000 (35,000) 165,000
Unearned Premium Reserve 0 (200,000) 200,000 0
Loss Reserves 120,000 0 (120,000) 0
Retro Premium Reserve 45,000 0 (45,000) 0
Share Capital & APIC 1,500,000 0 0 1,500,000
Retained Earnings 0 0 0 0
Total Liabilities & Equity $1,705,000 $0 $0 $1,705,000
32
Accounting & Financial ReportingExample 2b – Retrospectively Rated Programs
Income Statement Insurance Day 1 Entry Y/E Adj Deposit
Premiums Written $200,000 ($200,000) $0 $0
Movement in UPR 0 200,000 (200,000) 0
Underwriting Income $200,000 $0 ($200,000) $0
Losses Paid (10,000) 0 0 (10,000)
Losses Alloc to Deposit Liab 0 0 10,000 10,000
Movement in Loss Reserves (120,000) 0 120,000 0
Movement in RPA (45,000) 0 45,000 0
Net Underwriting Income $25,000 $0 ($25,000) $0
Investment Income 5,000 0 0 5,000
Administrative Expenses (30,000) 0 0 (30,000)
Inv/Admin Alloc to Deposit 0 0 25,000 25,000
Net Income $0 $0 $0 $0
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Accounting & Financial ReportingOther Premium/Loss Considerations
Loss Portfolio Transfers/Retroactive Contracts– Retroactive contracts occur when liabilities are transferred after the
end of the policy year ie. contract effective Jan 1, 2010 covering losses reported after
Jan 1, 2010 but occurring prior to Jan 1, 2010. Popular for new captives to cover tail liabilities.
– Initial Treatment: Consideration credited to reserves rather than income statement. Gain on transfer is deferred and recognized over the payout
period of the losses. Loss on transfer is recognized in the current period.
– Future movements in reserves go through income statement.
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Accounting & Financial ReportingAccounting for Investments
Types of Captive Investments– Liquid: Cash, Money Market Funds, CD’s– US Treasuries, Bonds, Government-Backed Securities– Equities– Managed Funds (private & exchange traded), fund of funds
Custodian Reports vs Investment Reports
Investment Note Disclosures: – Maturity tables– Gross up unrealized & realized gains/losses – ASC820 level disclosures
35
Accounting & Financial ReportingAccounting for Investments
Methods of Recording:– Held to Maturity:
amortized cost– Available for Sale:
Stated at fair value Changes reported in equity (other comprehensive income) Other Than Temporary Impairments (OTTI) ASC 825-10 Election to record at fair value
– Trading: Stated at fair value changes reported in income statement
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Accounting & Financial ReportingExample 3 – Investment Classifications
AM Insurance Company (AMIC) has a December 31st year end and their financial statements follow US GAAP.– On January 1st, AMIC purchases investments for $700,000. – During the year AMIC sold $100,000 for a profit of $20,000.– During the year the portfolio earned $10,000 of interest income– At year-end there were $20,000 in unrealized losses and $50,000 in
unrealized gains. – Of the unrealized losses at year-end $15,000 have been deemed to
be Other Than Temporary Impairments (OTTI) in the investment value
37
Accounting & Financial ReportingExample 3 – Investment Classifications
Balance Sheet Maturity Avail for Sale Trading
Cash (1) 930,000 930,000 930,000
Investments (2) 600,000 630,000 630,000
Total Assets $1,530,000 $1,560,000 $1,560,000
Share Capital & APIC 1,500,000 1,500,000 1,500,000
Unrealized Gains/Losses (3) 0 45,000 0
Retained Earnings 30,000 15,000 60,000
Total Liabilities & Equity $1,530,000 $1,560,000 $1,560,000
1. Cash value: 1,500,000 – 700,000 + 120,000 + 10,000 = 930,000
2. Investment value: 700,000 – 100,000 = 600,000 cost + unrealized 30,000 = 630,000
3. Unrealized Gains (Other Comprehensive Income): 50,000 - 20,000 + 15,000 = 45,000
38
Accounting & Financial ReportingExample 3 –Investment Classifications
Income Statement Maturity Avail for Sale Trading
Investment Income
Interest Income (1) 10,000 10,000 10,000
Unrealized Gains/Losses (2) 0 0 30,000
Other Than Temporary Impairment (3) 0 (15,000) 0
Realized Gains (4) 20,000 20,000 20,000
Net Income $30,000 $15,000 $60,000
1. Interest Income: 10,000
2. Unrealized Gains/Losses: 50,000 – 20,000 = 30,000
3. Other Than Temporary Impairment (OTTI): 15,000
4. Realized Gains: 20,000
39
AuditingOverview
Audit Purpose & Responsibilities
Audit Process
Audit Planning Timeline
Standard Audit Procedures
Audit Completion
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AuditingAudit Purpose & Responsibilities
Purpose & Scope– Enhance degree of confidence in the financial statements through
expression of an opinion on those financial statements– Requirement under Insurance Law to be filed 6 months after year-
end
Responsibilities of the Auditor– Conduct audit in accordance with appropriate standard (ISA/GAAS)– Obtain reasonable assurance financials are free from material
misstatement– Obtain evidence on amounts & disclosures– Evaluate appropriateness of accounting policies & reasonableness of
estimates, and overall presentation– Auditors judgement
41
AuditingAudit Overview
Responsibilities of Management– Management is any person(s) with executive responsibility for the
conduct of the entity’s operations – Financial statements are the responsibility of management– Properly recording transactions in the accounting records – Maintaining internal controls sufficient to permit reliable financial
statements– Adjusting the financial statements to correct material misstatements– Ensuring access to all company records and personnel– Ensure sufficient controls & programs to prevent & detect fraud– Ensure compliance with laws & regulations
42
AuditingAudit Process
Timetable & Scope Agreed
Confirmation
Planning & Review
ProceduresFieldwork & Testing
Meetings & Discussion
Completion
Delivery
Annual Audit Cycle
43
AuditingAudit Planning Timeline
Best practice is to get an audit timeline agreed with all parties prior to fieldwork:
Days after Y/E Who
Audit Planning Meeting > 2 weeks Prior Auditor
Actuarial Report Received (2 wks p/t drafts) + 2 weeks Actuary
Management Financials Completed + 3 weeks Manager
Confirmations Sent Out +4 weeks Auditor
Audit Fieldwork Start +4 weeks Auditor
Draft Audited Financials Received +9 weeks Auditor
Meeting to Approve Audited Financials +10 weeks Manager
Final Audited Financials Issued +11 weeks Auditor
44
AuditingStandard Audit Procedures
Investments/Investment Income– Confirm investment holdings with Custodian – Test market valuation of investments to third party pricing sources– Analytically review investment income– Review portfolio for Other Than Temporary Impairments, if applicable– Ensure disclosures have been made
Underwriting Income (Participant Contributions)– Confirm participant contributions assumed– Review policies and assess risk transfer– Agree policy contract terms and amounts– Confirm reinsurance & premiums written and related balances
Cash– Confirm cash balances for all accounts– Review cash reconciliations with bank statements
45
AuditingStandard Audit Procedures
Claim & Claim Expense Reserves– Review of current reserving policy– Test claims handling and/or obtain SAS 70 report from TPA– Obtain actuarial estimates for claim liability and IBNR claims– Review estimates used by actuary for reasonableness
Other Expenses & Procedures– Perform analytical procedures on operating expenses by comparing
previous year, budget, and expected changes– Agree expenses to service provider agreements– Based on the results of analytical review, additional procedures will
be performed, including review of detailed activity and testing of third-party documentation.
46
AuditingAudit Completion
Letter of Representations to Auditors– Sets out responsibilities of Management– Auditors are required to obtain written representations to support audit
evidence (ISA 580)
Management Letters & Control Letters– Proactive approach during the audit
Audit Report– Sets out responsibilities– Auditors Opinion
Clean/Unqualified Emphasis of Matter Qualified Adverse Disclaimer
47
Questions?
48
www.marsh.com / www.pkfcayman.com
Alissa Matthews, CA Ben Leung, ACA Senior Vice President, Marsh Managing Partner, PKF [email protected] [email protected]