Property & Liability Insurance Companies — Checklists and Illustrative Financial Statements

This financial accounting and reporting practice aid is invaluable to anyone who prepares financial statements and reports for property and liability insurance companies. The checklists have been updated to reflect AICPA and FASB pronouncements and interpretations issued as of September 30, 2008. These checklists can be used by preparers of property and liability insurance companies financial statements prepared in conformity with generally accepted accounting principles and by practitioners who audit, review, or compile those financial statements as they evaluate the adequacy of disclosures made in the basic financial statements, notes to the financial statements, and required supplementary information. Illustrative financial statements and auditor's reports are included in this practice aid.

The checklists cover new accounting pronouncements issued as of September 30, 2008 including:

• SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60
• SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement
  No. 133
• Multiple new SAS interpretations related to financial statements prepared in accordance with International Financial Reporting Standards, and financial statements audited in accordance with International Auditing Standards
• SSARS No. 17, Omnibus Statement on Standards for Accounting and Review Services - 2008
• Multiple new SSARS interpretations related to financial statements prepared in accordance with International Financial Reporting Standards, and the country of origin of the accounting principles used to prepare the
  financial statements

This nonauthoritative practice aid has been prepared by the AICPA staff and has not been reviewed, approved, disapproved, or otherwise acted on by any senior technical committee of the AICPA and do not represent official positions or pronouncements of the AICPA.

FSP Section 17,000

Checklists and Illustrative Financial Statements for Property and Liability Insurance Companies

.01 The checklists and illustrative financial statements in this section have been developed by the AICPA Accounting and Auditing Publications Team to service as nonauthoritative practice aids for use by preparers and auditors of financial statements. They have not been reviewed, approved, disapproved, or otherwise acted on by any senior technical committee of the AICPA and do not represent official positions or pronouncements of the AICPA. Readers should be aware of the following:

• The checklists and illustrative financial statements do not include all disclosures and presentation items promulgated; as a result, pronouncements deemed unlikely to be encountered in financial statements of life insurance companies are not included.
• The checklists and illustrative financial statements are “tools” and in no way represent official positions or pronouncements of the AICPA.

.02 A description of the insurance industry and a description of common accounting and reporting features of stock life insurance companies are presented in the AICPA Audit and Accounting Guide Property and Liability Insurance Entities (2006) (product no. 012676kk).

.03 The checklists and illustrative financial statements should be used by, or under the supervision of, persons having adequate technical training and proficiency in the application of generally accepted accounting principles (GAAP), generally accepted auditing standards (GAAS), PCAOB Auditing Standards, and SSARS.

.04 Users of the checklists and illustrative financial statements are urged to refer directly to applicable authoritative pronouncements when appropriate. If you have further questions, call the AICPA Technical Hotline at 1-877-242-7212.

FSP Section 17,100
Introduction

.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 accumulated 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 statutory accounting practices 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 statutory accounting practices 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 statutory accounting practice and the related monetary effect on statutory surplus of using an accounting practice that differs from either state prescribed statutory accounting practices or NAIC statutory accounting practices.

.08 Those disclosures should be made if (a) state prescribed statutory accounting practices differ from NAIC statutory accounting practices or (b) permitted state statutory accounting practices differ from either state prescribed statutory accounting practices or NAIC statutory accounting practices, and the use of prescribed or permitted statutory accounting practices (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 statutory accounting practices 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. GAAP financial 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: AICPA 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, AUD sec. 14,290); and AICPA Auditing 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, paragraphs .60–.81). The included auditing guidance has been approved by the Auditing Standards Board.

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