Property & Liability Insurance Companies — Checklists and Illustrative Financial Statements

    .01 The primary purpose of the property and liability insurance business is the spreading of risks. The term risk generally has two meanings in insurance. It can mean either a peril insured against (for example, fire is a risk to which most property is exposed) or a person or property protected (for example, young drivers, who many insurance companies believe are not good risks). For a payment known as a premium, insurance companies undertake to relieve the policyholder of all or part of a risk and to spread the total cost of similar risks among large groups of policyholders.

    .02 The functions of the property and liability insurance business include marketing, underwriting (for example, determining the acceptability of risks and the amounts of the premiums), billing and collecting premiums, investing and managing assets, investigating and settling claims made under policies, and paying expenses associated with these functions.

    .03 In conducting its business, an insurance company accumulates a significant amount of investable assets. In addition to funds raised as equity and funds retained as undistributed earnings, funds accumulate from premiums collected in advance; from sums held for the payment of claims in the process of investigation, adjustment, or litigation; and from sums held for payment of future claims settlement expenses. The accumulation of these funds, their investment, and the generation of investment income are major activities of insurance companies.

    .04 Property and liability insurance companies must file an annual statement, prepared on the basis of statutory accounting practice (SAP), with each state in which the companies are licensed. The primary purpose of the extensive regulatory laws enacted by the states has been the protection of the policyholders. The annual statements filed with the regulatory authorities are used to monitor the financial condition of insurance companies in the periods between examinations by state or zone auditors.

    .05 The National Association of Insurance Commissioners (NAIC) codified SAPs for certain insurance enterprises, resulting in a revised Accounting Practices and Procedures Manual. The insurance laws and regulations of the states require insurance companies domiciled in the states to comply with the guidance provided in the NAIC Accounting Practices and Procedures Manual except as prescribed or permitted by state law.

    .06 In December 2001, the AICPA issued Statement of Position (SOP) 01-5, Amendments to Specific AICPA Pronouncements for Changes Related to the NAIC Codification (AICPA, Technical Practice Aids, ACC sec. 10,840), which amends SOP 94-5, Disclosures of Certain Matters in the Financial Statements of Insurance Enterprises (AICPA, Technical Practice Aids, ACC sec. 10,630), as a result of the completion of the NAIC codification of SAPs for certain insurance enterprises.

    .07 The amendments to SOP 94-5 included in SOP 01-5 require insurance enterprises to disclose, at the date each balance sheet is presented, a description of the prescribed or permitted SAP and the related monetary effect on statutory surplus of using an accounting practice that differs from either state prescribed SAPs or NAIC SAPs.

    .08 Those disclosures should be made if (a) state prescribed SAPs differ from NAIC SAPs or (b) permitted state SAPs differ from either state prescribed SAPs or NAIC SAPs, and the use of prescribed or permitted SAPs (individually or in the aggregate) results in reported statutory surplus or risk-based capital that is significantly different from the statutory surplus or risk-based capital that would have been reported had NAIC SAPs been followed.

    .09 Those disclosures should be applied by a U.S. insurance enterprise, a U.S. enterprise with a U.S. insurance subsidiary, or a foreign enterprise with a U.S. insurance subsidiary, if the enterprise prepares U.S. generally accepted accounting principles (GAAP) financial statements. If a foreign insurance enterprise that does not have a U.S. insurance subsidiary prepares U.S.GAAPfinancial statements or is included in its parent's consolidated U.S. GAAP financial statements, the notes to the financial statements should disclose permitted regulatory accounting practices that significantly differ from the prescribed regulatory accounting practices of its respective regulatory authority and their monetary effects.

    .10 SOP 01-5 also includes the following auditing guidance that has been updated as a result of the completion of the NAIC codification: SOP 95-5, Auditor's Reporting on Statutory Financial Statements of Insurance Enterprises (AICPA, Technical Practice Aids, AUD sec. 14,310); SOP 94-1, Inquiries of State Insurance Regulators (AICPA, Technical Practice Aids, AUDsec. 14,290); and Interpretation No. 12, "Evaluation of the Appropriateness of Informative Disclosures in Insurance Enterprises' Financial Statements Prepared on a Statutory Basis," of AU section 623, Special Reports (AICPA, Professional Standards, vol. 1, AU sec. 9623 par. .60-.81). The included auditing guidance has been approved by the Auditing Standards Board.

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