Michael Bullard - Insurance Accounting

Insurance Accounting Overview 2

Policy Maintenance Systems and the General Ledger 3

Reserves 3

Claims 5

Investment 6

Reinsurance 7

Pooling 8

Risk Based Capital (RBC) 9

Statutory versus GAAP 9

The Annual Statement Overview 10

Pages, Exhibits, Schedules 12

Inputs to the Annual Statement 13

Importing Data 14

Attachments 15

Schedule P 16

Cash Flow 17

Validations 18

Filing and Submission 19

Signatures 19

State Filings 20

Premium Tax/ Municipal Tax 20

Annual Statement Detail 21

Basic Accounting 28

Financial Statements , Recording Transactions, Accrual versus Cash

Investment Accounting 33

Useful Formulas and Excel Techniques 46

Appendix 48

Insurance Accounting

This book is intended to fill a gap between too much information and too little. It is designed to give someone new to Insurance Accounting a comprehensive overview of the entire insurance accounting and NAIC Filing process. The topics and concepts presented have been taken from decades of helping insurance accountants complete their annual filings. They represent the common questions and uncertainties that people new to insurance accounting encounter. You can certainly get into more detail on specific insurance accounting issues but having a comprehensive overview will help speed up your training and jumpstart your insurance accounting career.

The book starts out with an Overview of some basic insurance concepts. The Annual Statement Detail section follows. It lists issues and information with specific statement pages. Then, there is a section on Basic Accounting and a section on Investment Accounting.

Overview

Insurance Accounting is one of the most exciting and challenging professions in accounting today. There are so many inputs from various systems that come together to produce a very comprehensive statement of financial position which is of utmost importance to policyholders and regulators. The Statutory Annual statement attempts to measure solvency, if the company was liquidated now, would the assets be adequate to pay off all current and future claims. Insurance policies contains a lot of information. Besides the basic contact and billing information, a policy might have Premium, Dividend, Policy Loan, Agents Commission, Valuation and Claims records associated with it. Each of these records will interface with the general ledger over time. For instance, when a policy is sold, a premium is received, a commission paid and a reserve for future claims is setup. Each of these events causes changes to balances on the General Ledger and ultimately the Annual Statement.

Policy Maintenance Systems and the General Ledger

Every night and every month end, the computer systems at an insurance company run their nightly and monthly cycles. The daily cycle might summarize the premiums received or claims paid during the day and transfer that information to other systems like the Agency system that will accumulate then pay commissions on the premiums. Or it may transfer information to the Valuation system which adjusts the reserves for the policy. The transactions entered for the day will be summarized and entered into the General Ledger. The updates to the premium records on the policies will be reconciled back to the daily entry to the general ledger. Keeping everything reconciled so that you can run a report of all the Policy Loan balances on the policy records and tie that out to the Policy Loan account balance on the General Ledger is necessary and vital to the flow of information through the insurance companys financial reporting system. There are many systems that need to be kept reconciled to the general ledger. What if the 1099s produced at year end for the agents commissions did not tie out to the commission expense in the general ledger? Do you think an agent that receives a 1099 showing more commission paid to him than he received would question the integrity of the general ledger and commission data?

Policy

The Policy systems will hold the detail to back up general ledger amounts such as the policy loan balance or the policy dividends unpaid balance. The Policy system has many tables that keep track of all the facets of a policy. Each policy has records in different tables which together describe the policy. Generally, every screen that you go into to view a policy represents a different record or partial record, associated with the policy. The individual data elements are the fields associated with the record in the table.

A database is comprised of multiple tables each with multiple records. The tables are linked by indexes so that you can query using the index value to pull all the data associated with a record from different tables.

Reserves

For life insurance, a reserve is set up using standard mortality tables and interest rates to determine the present value of the future claims payments that will be made. Usually the mortality rates and interest rates are determined by the assumptions used when the underlying policies were defined and approved for sale.

Life reserves are detailed in Exhibit 5 Aggregate Reserve for Life Contracts. The reserves are scheduled out by Line of Business; Life, Annuity, Supplementary Contracts With Life Contingencies, Accidental Death, Disability and Miscellaneous and also by Type; Industrial, Ordinary, Credit and Group. The reserves are shown net of reinsurance. The summary from all the net reserves shown on Exhibit 5 are shown on line 1 of the Liabilities page. Life reserves are set up on a mean reserve basis. This is kind of an averaging method to value all the policies as of the middle of their policy year no matter when they were issued. Since policies are sold throughout the year, actuaries assume that all policies are issued on June 30 th . Then they determine the December 31 reserve assuming that every policy has been in force for .5, 1.5, 2.5, 3.5, etc., years depending on the calendar year of issue. Thus the reserve at December 31 is approximated by taking the average of the reserve at the beginning of the policy year (initial) and the end of the policy year (terminal).

Mean Reserve = (Initial Reserve + Terminal Reserve) / 2

Because of this mean reserve valuation method, the company also needs to record net deferred premium and net uncollected premium assets to compensate for setting up the mean reserve. These assets offset the extra reserve liability which is set up for policies that have not yet paid their premium up to the mean reserve date.

On the Annual Statement, Uncollected Premiums are premiums whose due date was before December 31 but have not been collected yet. The grace period has not expired so the underlying policy is still in force. Uncollected premiums are shown on line 15.1 of the Asset page.

Deferred premiums will become due after December 31 but before the next anniversary date of the policy. Deferred premiums are shown on line 15.2 of the Asset page.

For example if a policy pays monthly premiums with an issue date of July 1, at year end, December 31, it may have not paid the December premium yet so 1 month of premium would be Uncollected (December) and 6 months of premium (January June) would be Deferred.

Conversely, Unearned Premiums are liabilities set up to reflect the companys obligation to provide insurance in the future for premium income that has been received in advance. For example if a policy with an issue date of July 1 pays annually then at year end it would show 6 months of premiums as earned and 6 months of premium as Unearned. Unearned Premiums show up on the Liabilities page in the Advance Premiums line.