Insurance industry briefing materials template 2012 v17 06252012

Nonlife Insurance Industry Briefing

June 26, 2012

Agenda

Industry Performance

Overview

Commonly issued nonlife insurance products

Fraud risk considerations

Common types of reinsurance arrangements

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Understanding the Process

Common Application systems

Significant processes, significant classes of transaction, significant

accounts and relevant assertions

What can go wrongs

Common controls

Accounting and Auditing Matters

Substantive procedures

Liability adequacy testing

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Agenda (Cont’d)

Taxation

Applicable taxes

Common tax issues

4

Agenda (Cont’d)

Industry Performance

As of January 31, 2011, the following are the number of authorized insurance companies: 4 licensed composite (life and non-life insurance companies) 83 licensed non-life insurance companies and 1 licensed professional reinsurer

During 2011, CCC Insurance Corp. merged with Empire Insurance Co. due to the inability to comply with the minimum capital requirements imposed by the Insurance Commission (IC). Also, the IC did not issue Equitable Insurance Corporation a Certificate of Authority for the licensed year 2011-2012.

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Industry Performance in 2011

Financial Performance

The nonlife insurance industry maintained its upward trend with the 13.51% and 12.46% increase in gross premiums and net premiums, respectively. However, a slightly lower retention of 63.13% was registered as compared to 2009.

Increase in premiums produced in each line of business.

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Line 2010 (Amount in Billion Pesos)

2009 (Amount in Billion Pesos)

Increase (Amount in Billion Pesos)

Percentage

Fire 10.82 10.52 0.30 2.85%

Marine 4.06 3.71 0.35 9.43%

Motorcar 11.81 10.14 1.67 16.47%

Casualty 8.58 6.85 1.73 25.26%

Suretyship 1.57 1.24 0.33 26.61%

Industry Performance in 2010

Financial Performance (cont’d)

Losses incurred per line of business are as follows:

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Industry Performance in 2010 (Cont’d)

Line 2010 (Amount in Billion Pesos)

2009 (Amount in Billion Pesos)

Increase (Amount in Billion Pesos)

Percentage

Fire 2.02 3.11 (1.09) (35.05%)

Marine 1.14 0.66 0.48 72.73%

Motorcar 4.82 4.92 (0.10) (2.03%)

Casualty 1.83 1.59 0.24 15.09%

Suretyship 0.03 0.03

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2010 2009 % Change

Total investments at cost 51.36 B 45.24 B 13.52%

Total assets 108.70 B 108.63 B 0.06%

Total liabilities 29.26 B 36.90 B (20.70%)

Total networth 48.72 B 44.82 B 8.70%

Overall Performance

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2010 2009 % Change

Gross Premiums 36.89 B 32.50 B 13.51%

Earned Premiums 22.12 B 20.74 B 6.65%

Claims Incurred 9.84 B 10.30 B (4.47%)

Net Income 2.36 B 1.08 B 118.52%

Overall Performance (Cont’d)

Major Industry Players

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Statistics(Source: 2011 and 2010 Ranking per Insurance Commission - in Php Millions)

Gross Premiums 2011 % 2010 %

Top 20 Nonlife Insurance Companies 38,646 82.04 34,572 79.05

All Others 8,459 17.96 9,162 20.95

Total 47,105 100.00 43,734 100.00

Premiums Earned 2011 % 2010 %


All Others 4,850 22.10 5,170 24.98

Total 21,950 100.00 20,701 100.00

Net Premiums Written 2011 % 2010 %


All Others 4,970 78.66 5,359 24.70

Total 23,286 100.00 21,695 100.00

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Top 20 Nonlife Insurance based on Gross Premiums Written(Source: 2011 Ranking per Insurance Commission - in Php)

Nonlife Insurance Companies 2011 Gross Premiums

External Auditors

1. Malayan Insurance Company, Inc. P5,955,007,462 SGV & Co.

2. Prudential Guarantee. & Assurance Incorporated 4,736,842,281 SGV & Co.

3. Pioneer Insurance & Surety Corporation 3,852,369,034 SGV & Co.

4. BPI/MS Insurance Corporation 3,807,425,585 Isla Lipana

5. Standard Insurance Company, Inc. 2,473,530,107 KLS

6. Chartis Philippines Insurance, Inc. 2,371,240,915 Isla Lipana

7. Charter Ping An Insurance Corporation 2,257,438,089 SGV & Co.

8. Federal Phoenix Assurance Co., Inc. 2,179,741,683 SGV & Co.

9. UCPB General Insurance Company, Inc. 1,885,047,687 SGV & Co.

10. Mafpre Insular Insurance Corporation. 1,837,844,193 SGV & Co.

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Top 20 Nonlife Insurance based on Gross Premiums Written(Source: 2011 Ranking per Insurance Commission - in Php)

Nonlife Insurance Companies 2011 Gross Premiums

External Auditors

11. PNB General Insurers Company, Inc. P1,161,078,953 SGV & Co.

12. PGA Sompo Japan Ins., Inc. (PGA Yasuda) 984,194,042 SGV & Co.

13. Alliedbankers Insurance Corporation 917,501,705 SGV & Co.

14. MAA General Assurance Phils., Inc. 817,274,043 SGV & Co.

15. Paramount Life & Gen. Ins. Corp. (Paramount Union) 776,607,925

16. Insurance Company of North America 651,078,270

17. QBE Insurance (Phils.) 551,969,005

18. Blue Cross Insurance, Inc. 501,207,233

19. Seaboard-Eastern Insurance Company, Inc. 469,281,706

20. Republic Surety & Insurance Company, Inc. 459,755,884

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Top 20 Nonlife Insurance based on Net Premiums Written(Source: 2011 Ranking per Insurance Commission - in Php)

Nonlife Insurance Companies 2011 Net Premiums

External Auditors

1. Prudential Guarantee. & Assurance Incorporated P2,654,220,849 SGV & Co.

2. Malayan Insurance Company, Inc. 2,629,515,262 SGV & Co.

3. BPI/MS Insurance Corporation 1,621,418,121 Isla Lipana

4. Mapfre Insular Insurance Corporation 1,400,770,449 SGV & Co.

5. Charter Ping An Insurance Corporation 1,267,104,146 SGV & Co.

6. Pioneer Insurance & Surety Corporation 1,131,867,476 SGV & Co.

7. Standard Insurance Company, Inc. 1,074,639,900 KLS

8. Federal Phoenix Assurance Co., Inc. 1,022,469,377 SGV & Co.

9. UCPB General Insurance Company, Inc. 964,258,563 SGV & Co.

10. Chartis Philippines Insurance, Inc. 923,860,832 Isla Lipana

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Top 20 Nonlife Insurance based on Net Premiums Written(Source: 2011 Ranking per Insurance Commission - in Php)

Nonlife Insurance Companies 2011 Net Premiums

External Auditors

11. Blue Cross Insurance, Inc. P487,659,197

12. PNB General Insurers Company, Inc. 478,891,377 SGV & Co.

13. MAA General Assurance Phils., Inc. 476,655,246 SGV & Co.

14. Paramount Life & Gen. Ins. Corp. (Paramount Union) 400,506,200

15. Fortune General Insurance Corporation 333,777,932

16. Commonwealth Insurance Company 327,290,137

17. Seaboard-Eastern Insurance Company, Inc. 295,499,814

18. QBE Insurance (Phils.) 286,244,123

19. Philippine British Assurance Company, Inc. 276,021,631 SGV & Co.

20. Pacific Union Insurance Company 263,777,571

Commonly IssuedNonlife Insurance Products

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Type of Product Description Normal Terms

Motorcar Insurance Motorcar insurance is a contract by which the insurer assumes the risk of any loss the owner or operator of a vehicle may incur through damage of property or persons as a result of the accident.

Types of motorcar coverages:1. Compulsory Third Party Liability Cover

Commonly known as “CTPL”, this is an insurance coverage required by the Land Transportation Office (LTO) for the registration of the insured owner’s vehicle. This protects the insured from any liability in respect of bodily injury &/or death to any Third party in an accident caused by or arising out of the use of the insured vehicle .

1 year

Commonly Issued Nonlife Insurance Products

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Motorcar Insurance (Cont’d.)

2. Comprehensive Motor InsuranceOwn DamageCoverage against damages to the property insured arising from accidental collision, overturning, falling, fire and malicious acts of third party.

TheftCoverage against stolen vehicles in which the sum insured is equivalent to the current market value of the vehicles upon date of policy issuance.

1 year


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Motorcar Insurance (Cont’d.)

2. Comprehensive Motor Insurance (cont’d)Excess Bodily Injury (EBI)Voluntary coverage answers for indemnities beyond the limit set forth under CTPL coverage.

Third Party Property Damage (TPPD)Voluntary coverage against liability for damage to third party property arising from accident caused by the insured vehicle.

1 year


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Personal Accident Insurance

Personal Accident Insurance gives monetary compensation for the death, disablement or loss of income of the insured individual due to an accident. It is a protection plan for the assured and his/her family should the unexpected happens.

Aside from accidents, the Personal Accident Insurance coverage may be extended to include the following:Murder and AssaultBurial ExpenseAccident Weekly IndemnityCash AssistanceTravel Emergency and Medical AssistanceVehicle Emergency AssistanceMotorcycling CoverageDouble Indemnity for Common Carrier

1 year


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Property/Fire and Lightning Insurance

Fire Insurance basically covers property against fire and lightning. However, the coverage may be extended to include, among others, the following details, subject to payment of additional premium:Earthquake Fire / ShockTyphoonFloodRiot, Strike and Malicious Damage Landslide / Subsidence Broad Water Damage Sprinkler Leakage Robbery / Burglary Spontaneous Combustion Extended Coverage (which includes the perils of smoke, explosion, falling aircraft and impact of vehicles) Bursting and/or Overflowing of Water Tanks, Pipes and Apparatus

1 year


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Engineering Insurance

Engineering Insurance covers all kinds of construction / installation of structures, machinery, equipment, systems and processes against loss, material damage and third party liability.

Types of Engineering Insurance:Contractors All Risks (CAR) / Erection All Risks (EAR) Insurance Machinery Breakdown (MB) Insurance Electronic Equipment Insurance (EEI)

Usually depends on the term of the construction


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Aviation Insurance Aviation Insurance indemnifies the assured, subject to the limits of the contract, for physical loss or damage to an aircraft and/or its engines and accessories. It may also cover for the liability arising from death or injury to the passenger and/or damage to cargo, mail and/or baggage on board an aircraft. Such coverages include Third Party Bodily Injury and property damage arising from physical contact of falling objects.


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Marine Insurance Marine Insurance indemnifies the assured, subject to the limits of the contract, for losses incidental to a marine adventure. A marine adventure is a voyage or a period of time during which property is exposed to maritime perils.

Marine Insurance has two major lines:

1. Marine Cargo

2. Hull and Machinery


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Marine Insurance (Cont’d.)

Marine CargoThis covers goods, property and/or merchandise in transit whether on land, sea or air. The standard coverage provided under the Marine Cargo Insurance policy are:

•Physical loss or damage to insured goods which may result in either total loss (actual or constructive to the insured's property) or partial damage (known as particular average)

•Expenses to prevent or reduce loss (sue and labor)

•Forwarding charges for goods discharged short of destination as a result of an insured peril

•General Average or the sacrifice of one person's goods in order to save a venture; the sacrifice will be made good by those whose goods are saved.

1 year


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Marine Cargo Insurance ProductsMarine Open PoliciesA Marine Cargo Open Policy is the agreement between the assured and their insurance company to insure all goods in transit within that agreement for an indefinite period, until the agreement is cancelled by either party.

Inland Marine / Truck Risks CoverageA group of property insurance coverage designed to insure exposures that cannot be conveniently or reasonably confined to a fixed location or insured at a standard rate under a standard form. Includes coverage for property in transit over land, certain moveable property, property under construction, instrumentalities of transportation and communication (such as bridges, roads, piers, and television and radio towers), legal liability coverage for bailees, and computerized equipment.


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Hull and Machinery This insurance covers ships or vessels, their hull, machinery and equipment including liability arising from collision with other vessels. Its standard coverage are:

• Physical Loss or damage to a ship's hull, machinery or equipment which may result in either total loss (actual or constructive to the insured's property) or partial damage (known as particular average)

• Expenses to prevent or reduce loss (sue and labor, salvage charges)

• General average contributions• Liability arising from collision with other vessels

1 year or less than 1 year


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Surety/Bonds Suretyship is a contract whereby one person engages to be answerable for a debt, default, or miscarriage of another. It provides indemnity to the obligee against a loss up to a specified amount resulting from the failure of the principal to perform or fulfill the prescribed obligation or undertaking under the principal contract.

Any obligation that is to be performed by the Principal in the primary contract or those prescribed by law, rules and regulations of the government can be covered under the Bond.

Depends on the term of the principal contract


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Medical Insurance Medical Insurance covers hospital medical expenses incurred by the insured due to sickness or an accident. The policy pays out the expenses on a reimbursement basis. Individuals, families, and companies may avail the Medical Insurance.

1 year


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OFW Compulsory Insurance Coverage

Each migrant worker to be deployed by a recruitment/manning agency shall be covered by a compulsory insurance contract which shall be secured at no cost to the said worker.

Covered by nonlife insurance companies:a) Permanent total disablement insuranceb) Repatriation cost insurancec) Subsistence allowance insuranced) Money claims insurance e) Compassionate visit insurancef) Medical evacuation insuranceg) Medical repatriation insurance

Accidental death insurance may be written by both life and nonlife companies. Natural death insurance shall only be written by life insurance companies.

Less than a year to 4 years


Fraud Risk Considerations

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Fraud Risks Audit Response

Improper revenue recognition Perform high-level analytical procedures, cut-off testing.

Inadequate loss reserves Perform search for IBNR. Test of claim transactions.Send confirmation letters to adjusters/surveyors and assess reasonableness of claims outstanding.

Inadequate allowance for doubtful accounts/overstatement of net insurance receivables

Perform test of reasonableness of the allowance for doubtful accounts

Fraud Risks Considerations

Common Types ofReinsurance Arrangements

Reinsurance is a contract whereby the reinsurer, for a consideration, agrees to indemnify the ceding insurance company for all or a position of losses which are sustained under certain risks insured by the ceding company.

Note: Essence of RI contract is the transfer of risk from ceding company to the reinsurer.

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Reinsurance

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Type of Reinsurance Description Normal Terms

Facultative Reinsurance It is a method of reinsurance under which the ceding company reinsures each risk of policy individually.

There is no obligation on the ceding company to reinsure any particular risk. It has the liberty to decide how much it will reinsure and how much it will retain or the risk to be ceded.

90 days/1 year

Common Type of Reinsurance Arrangements

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Type of Reinsurance Description Normal Terms

Treaty Reinsurance It is a general reinsurance agreement which is obligatory between the ceding company and the reinsurer containing the contractual terms applying to the reinsurance of some class or classes of business, in contrast to a reinsurance agreement covering an individual risk. The reinsured and the reinsurer are automatically bound in advance as regards all risks that fall within the scope of their agreement.

90 days/1 year


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Type of Reinsurance Description

Treaty Reinsurance (Cont’d.)

Types of Treaty Reinsurance1. Proportional Treaty Reinsurance - premiums and claims are

shared by the ceding company and the reinsurer in proportion to the risk assumed

a. Quota Share Treaty - the ceding company cedes and the reinsuring company accepts a fixed percentage of all risks falling under the scope of the agreement and all premiums paid by the original assured on such risks.

b. Surplus Treaty – subject to the limitations of the agreement, the ceding company is obliged to cede on each and every risk it underwrites, all liability surplus to its own retained line and the reinsuring company is obliged to accept all such cessions. Premiums and losses arising from the original risk written by the ceding company are shared proportionally between the parties to the agreement, depending on the percentage of the liability that each assumes.


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Type of Reinsurance

Description


2. Non-proportional Treaty Reinsurance - the original insurer or ceding company decides upon a limit in monetary terms as to the amount it is prepared to bear for its own account as a result of loss or a series of losses affecting its net retention.

a. Catastrophe Excess of Loss Cover - the reinsurer does not incur any liability until after the ceding company’s aggregate claims resulting from a single accidental event (catastrophe) exceed a certain predetermined/pre-agreed limit called the “deductible”. There is normally a reinsurance limit or ceiling beyond which the reinsurer will no longer be liable.

b. Stop Loss Cover - the reinsurer pays for that portion of a ceding company’s annual aggregate net losses which exceed a predetermined amount or proportion of its annual net income. It provides protection against an unacceptable degree of variance in the aggregate loss experience of a reinsured portfolio of the ceding company during any one financial year due to the severity and/or frequency of losses.


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Type of Reinsurance

Description


c. “Per Risk” Excess of Loss Cover - the reinsurer indemnifies the ceding company for that portion of the company’s loss per risk which exceeds a predetermined amount, subject to an agreed maximum limit.


UNDERSTANDING THE PROCESS

Common Application Systems

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Application Systems

Nonlife Insurance Insurance System (NIIS)

General Insurance Information System (GenIISys)

General Insurance System (GIS)

Common Application Systems

Significant Processes, SCOTs, Significant Accounts and Relevant

Assertions

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Significant Process

Significant Classes of Transactions

Significant Accounts and Relevant Assertions

Financial Statement Close Process

a. 24th/365th Method Computation - calculation at every period end of the amount of adjustment to arrive at the “should be” balance of unearned premium reserves, deferred reinsurance premiums, deferred acquisition cost, and deferred reinsurance commissions.

• Reserve for Unearned Premiums - V

• Deferred Reinsurance Premiums - V

• Increase (Decrease) in Unearned Premium Reserves - M

• Deferred Acquisition Costs - V

• Deferred Reinsurance Commissions - V

• Commission Expense - M

• Commission Income - M

Significant Processes, SCOTs, Significant Accounts and Relevant Assertions

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Significant Process



Underwriting a. New Business - issuance of new policy contracts

b. Renewal - renewal of expiring policy contract

c. Endorsement - modification of the terms/provisions on the original policy contracts

d. Cancellation - cancellation of issued policy

e. Inward Reinsurance - acceptance of individual risk reinsurance from ceding company

• Premiums receivable - C, E, V

• Premium income - C, O, M

Significant Processes, SCOTs, Significant Accounts and Relevant Assertions (Cont’d)

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Significant Process



Reinsurance a. Outward Facultative Reinsurance - ceding out of individual risks to reinsurers

b. Outward Treaty Reinsurance - automatic reinsurance of all risks that fall within the scope of the reinsurance agreement

• Due to Reinsurers - C, V• Funds held for reinsurers - V

• Premiums Ceded - C, M


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Significant Process



Commissions Processing

Commission Incomea. Outward Facultative Reinsurance

Transactions - commission income from premiums ceded to facultative reinsurers

b. Outward Treaty Reinsurance Transactions - commission income from premiums ceded to treaty reinsurers

Commission Expense - commissions due to agents/brokers/ceding companies for the amounts of premiums written by the Company thru them. The following are the significant classes of transactions (SCOTs) for commission expense:

c. New Business - agents’/brokers’ commissions

•Commission Income - C, O, M

•Due from reinsurers - C, E, V

•Commissions Expense - C, M

•Commission Payable - C, V


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Significant Process



Commissions Processing (Cont’d)

b. Renewal - agents’/brokers’ commissions

c. Endorsement - agents’/brokers’ commissions

d. Inward Reinsurances - commissions due to ceding companies


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Significant Process



Claims Processing

Claims setup and payment - evaluation of the amount of loss, setup of loss reserves, loss adjustments and payment of the claim amount

•Loss and Loss Adjustment Expense - C, M

•Claims payable / Reserve for outstanding losses - C, V, E

•Cash in Bank - V

•Reinsurance Recoverable on Paid Losses - V, C

•Reinsurance Recoverable on Unpaid Losses - C, V, E


Control Matrix

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Financial Statement Close Process

Control Matrix

WCGW Assertion Controls

•Unearned Premium Reserves, Deferred Reinsurance Premiums, Deferred Acquisition Costs, Deferred Reinsurance Commissions are inaccurately computed.

•Reserve for Unearned Premiums - V

•Deferred Reinsurance Premiums - V

•Increase (Decrease) in RUP - M

•Deferred Acquisition Costs - V

•Deferred Reinsurance Commissions - V

•Commission Expense - M

•Commission Income - M

•System is configured to automatically and accurately compute for the balances of the said affected accounts.

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Control Matrix - Financial Statement Close Process


•24th/365th method computation adjustments are not recorded.

•Reserve for Unearned Premiums - C

•Deferred Reinsurance Premiums - C

•Increase (Decrease) in RUP - C

•Deferred Acquisition Costs - C

•Deferred Reinsurance Commissions - C

•Commission Expense - C

•Commission Income - C

•System automatically generates adjusting journal entries pertaining to the results of the 24th/365th method computation.

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Control Matrix - Underwriting


• Policies (New business /renewal/endorsements) may be processed twice.•Inward reinsurance offers may be processed twice.

•Premium Income - O, M

•Premiums Receivable - E, V

•Premiums due from Ceding Companies - E, V

•System detects duplicate processing of those policies/inward RI transactions which have similar information.

•A log is being maintained listing those applications/renewals/ endorsements/inward offers which have been already subjected for processing.

•Premiums may be recorded in the wrong period.

•Premium Income - C, O

•Premiums Receivable - C, E

•Premiums Due from Ceding Companies - C, E

•A journal entry is automatically generated upon encoding of the details in the system.

•Policies are appropriately segregated manually based on its inception/effectivity dates.

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Control Matrix – Underwriting (Cont’d)


•Not all premium and premium adjustments are recorded.

•Premium Income - C, M

•Premium Receivables - C, V

•Premiums Due from Ceding Companies - C, V

•A journal entry is automatically generated upon encoding of the details in the system.

•A manual review of all the information encoded in the system is done to ensure its completeness and correctness.

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Underwriting (Cont’d)

Control Matrix


•Coding of premiums may be incorrect, resulting in inaccurate computation of premiums.

•Premium Income - M

•Premiums Receivable - V

•Premiums Due from Ceding Companies - V

•Reviews and approvals are performed based on the limits of authority to ascertain the accuracy and completeness of the details encoded in the system.

•Fictitious premiums are recorded.

•Premium Income - O

•Premium Receivables - E

•Premiums Due from Ceding Companies - E

•Applications/renewals/endorsements/inward reinsurance offers must be approved by the authorized individual based on the limits of authority being implemented.

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Underwriting (Cont’d)

Control Matrix


•Not all approved policies may have been posted.

•Premium Income - C

•Premium Receivables - C

•Premiums Due from Ceding Companies - C

•Transactions are posted once approvals are obtained.

•Bordereaux extracted from the system is compared to the maintained log to see if all approved policies have been posted.

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Control Matrix - Reinsurance (Outward Facultative)


•Premium for retention may not be properly segregated from premium for cession.

•Premiums Ceded to Facultative Reinsurers - C, M

•Premiums Due to Facultative Reinsurers - C, V

•Personnel handling/processing reinsurance transactions are different from those who handle direct insurance transactions.

•System has distribution feature to facilitate segregation of reinsurance transactions separately from the direct insurance transactions.

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Control Matrix - Reinsurance (Outward Facultative) (Cont’d)


•Premiums ceded may not be recorded.

•Premiums Ceded to Facultative Reinsurers - C, E

•Premiums Due to Facultative Reinsurers - C, E

•System automatically generates journal entry upon encoding of reinsurance transaction details.

•A log is maintained to monitor the status of the reinsurance transactions from placement to issuance of the binder.

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Control Matrix - Reinsurance (Outward Facultative) (Cont’d)


•Encoded distribution details are incorrect resulting to inaccurate computation of the amounts relating to the reinsurance made.

•Premiums Ceded - M

•Premiums Due to Facultative Reinsurers - V

•Encoded details of the distribution must be reviewed and approved by the authorized signatories to ensure accuracy of the details/amounts.

•Not all distribution made may have been posted.

•Premiums Ceded - C

•Premiums Due to Facultative Reinsurers - C

•The log used for monitoring the status of the reinsurance transaction is compared to the distribution register (RI bordereaux) at period end to ensure that all RI transactions processed and approved have been posted.

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Control Matrix - Reinsurance (Treaty)


•Not all transactions for treaty reinsurance may have been recorded.

•Premiums Ceded to Treaty Reinsurers - C, E

•Premiums Due to Treaty Reinsurers - C, E

•System automatically generates journal entry upon encoding of distribution details.

•Amount computed for treaty reinsurance transactions may not be in accordance with the treaty agreement.

•Premiums Ceded to Treaty Reinsurers - M

•Premiums Due to Treaty Reinsurers - V

•Review and approval of the distribution to treaty reinsurers is performed to ensure that the distribution made is in accordance with the treaty reinsurance agreement.

•Premium adjustments may not be recorded accurately and completely.

•Premiums Ceded to Treaty Reinsurers - C, M

•Premiums Due to Treaty Reinsurers - C, V

•At the end of each reporting period, a manual review of reinsurance agreements with provision for reinstatement premiums is being made to ensure complete take up of items requiring adjustments.

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Control Matrix – Claims Processing


•Unauthorized claim may be processed.

•Claims may be processed for cancelled policies.

•Fictitious claims may be recorded.

•Losses and Loss Adjustment Expenses (net) - O

•Claims Payable – E

•RI Recoverable on unpaid losses - E

•Validity of the claim is evaluated initially by checking the effectivity of the policy as well as if all premiums due have been paid.

•All claims must be supported by the necessary documents.

•Valid claims must be reviewed and approved by the appropriate individual based on the limits of authority.

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Control Matrix - Claims Processing (Cont’d)


•Not all claims may be recorded.

•Losses and Loss Adjustment Expenses (net) - C

•Claims Payable - C

•RI Recoverable on unpaid losses - C

•All claims that have been verified as valid are being created with a claim folder and a setup of loss reserve is initially made in the system.

•A log is maintained to monitor the status of the claim.

•Losses and reinsurers’ share in losses may inaccurately be computed.

•Losses and Loss Adjustment Expenses (net) - M

•Claims Payable - V

•Reinsurance Recoverable on Unpaid Losses – V

•System has been configured to automatically compute for the Company’s and the reinsurers’ share in the losses.

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•Losses are not adjusted when losses or loss adjustment expense reserves are fully or partially paid.

•Losses and Loss Adjustment Expenses (net) - M

•Claims Payable - V

•Reinsurance Recoverable on Paid Losses - V

•Status of the claim filed is tagged as “Closed”, “Partial” in the system once payment is made.

•Claim may be processed for payment twice.

•Losses and Loss Adjustment Expenses - O

•Claims Payable - E

•Once the claim has been paid, system shows a “Closed” status.

•A log is maintained for monitoring purposes.

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•Claim transactions may not be posted.

•Losses and Loss Adjustment Expenses (net) - C

•Claims Payable - C

•Cash - C

•Reinsurance Recoverable on Paid/Unpaid Losses - C

•At period end, claim register is compared to a log being maintained to monitor the status of the claim.

•Reinsurance recoverables are not recorded in the same period as the claim to which it relates.

•Reinsurers’ Share on Losses and Loss Adjustment Expenses - C, O

•Reinsurance Recoverables on Paid Losses - C, E

•Reviews are performed to ensure that claims for reinsurance recoveries are filed and recorded.

•Once a claim is processed and posted, the corresponding reinsurance account is automatically updated and posted to the system.

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Control Matrix - Commissions Processing


•Commissions may be duplicated.

•Commission Expense - O

•Commissions Payable - E

•System detects duplicate processing of similar policies as well as the related commissions.

•Commissions may be recorded in the wrong period.

•Commission Expense - C, O

•Commissions Payable - C, E

•Commission Income - C, O

•Due from reinsurers - C, E

•A journal entry for the amount of commission expense/income is automatically generated upon encoding of the details of the related policy in the system.

•Not all commissions are recorded.

•Commission Expense - C

•Commissions Payable - C

•Commission Income - C

•Due from reinsurers - C

•Upon encoding of the details of the related policy, details pertaining to the commission is also required to be encoded.

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Control Matrix – Commissions Processing (Cont’d)


•Coding of commissions may be incorrect, resulting in inaccurate computation of commissions.

•Commission Expense - M

•Commissions Payable - V

•Commission Income - M

•Due from reinsurers - V

•Reviews and approvals are performed based on the limits of authority to ascertain the accuracy of the details encoded in the system.

•Fictitious commissions may be recorded.

•Commission Expense - O

•Commissions Payable - E

•Commission Income - O

•Due from reinsurers - E

•Setup of commission is also made upon encoding of the details of the related policy.

•Setup of commission is reviewed and approved by the authorized individual based on the limits of authority.

Substantive Procedures

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Significant Accounts Audit Procedures

Insurance Receivables (Due from policyholders, agents and brokers, reinsurers, RI recoverable on paid losses)

• Agreement of subsidiary ledger (SL) with general ledger (GL)

• Insurance receivables confirmation and test of subsequent cash receipts

• Agents' balances/insurance receivables rollforward procedures

• Credit balance and unusual items review• Valuation of insurance receivables denominated in foreign currencies

• Impairment assessment/review of receivables

• Analytical review


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RI Recoverable on unpaid losses (Reinsurance Assets)

• Agreement of SL with GL• Verification of balances based on reinsurance agreements and losses incurred

• Analytical review

Deferred reinsurance premiums (Reinsurance Assets)

• Agreement of SL with GL• Recomputation• Analytical review

Deferred Acquisition Cost • Agreement of SL with GL• Recomputation• Analytical review


71


Claims payable (Insurance Contract Liabilities)

• Agreement of SL with GL• Unusual items review• Vouching of accounts against the claim folders

• Analytical review• Confirmation of outstanding losses• Search for incurred but not reported losses

• Review of the range of loss and loss adjustment expense reserves

Reserve for unearned premiums (Insurance Contract Liabilities)

• Agreement of SL with GL• Recomputation• Analytical review


72


Insurance Payables • Agreement of SL with GL• Vouching against the Statement of Accounts

• Unusual item review• Valuation of foreign currency-denominated liabilities

• Analytical review• Insurance payables confirmation• Review of reinsurance agreements

Funds held for reinsurers • Agreement of SL with GL• Test of reasonableness• Review of reinsurance agreements


73


Deferred reinsurance commission • Agreement of SL with GL• Recomputation• Analytical review

Gross premiums • Agreement of SL with GL• Analytical review• Cutoff testing

Reinsurers share on gross premiums •Agreement of SL with GL• Analytical review•Cutoff testing

Insurance contract benefits and claims • Agreement of SL with GL• Analytical review• Search for IBNR


Liability Adequacy Testing

► Test to determine if the insurance liabilities are adequate, using current estimates of

future cash flows under its insurance contracts

► Use gross premiums, and best estimates assumptions (i.e. actual market rates)

Minimum requirements

► The test considers current estimates of all contractual cash flows, and of related

cash flows such as claims handling costs, as well as cash flows resulting from

embedded options and guarantees.

► If the test shows that the liability is inadequate, the entire deficiency is recognized in

profit or loss.

Liability Adequacy Test

Testing► If an insurer applies a liability adequacy test that meets specified

minimum requirements, PFRS 4 imposes no further requirements.► If an insurer's accounting policies do not require a liability adequacy

test that meets the minimum requirements, the insurer shall determine whether the net carrying amount is less than the carrying amount that would be required if the relevant insurance liabilities were within the scope of PAS 37. If it is less, the insurer shall recognize the entire difference in profit or loss and decrease the carrying amount of the related deferred acquisition costs or related intangible assets or increase the carrying amount of the relevant insurance liabilities.

Liability Adequacy Test (Cont’d)

Taxation

78

National Taxes Income Tax

► Regular Corporate Income Tax (RCIT)► Minimum Corporate Income Tax (MCIT)

Business Tax► Value Added Tax (VAT)► Premium Tax (PT)

Withholding Taxes► Expanded Withholding Tax (EWT)► Final Withholding Tax (FWT)► Withholding Tax on Wages (WTW)► Fringe Benefits Tax (FBT)► Withholding Value Added Tax (WVAT)► Documentary Stamp Tax (DST)

Applicable Taxes

79

National Taxes Local Taxes

► Local Business Tax (LBT)► Real Property Tax (RPT)

Applicable Taxes

80

Propriety of Expenses Considered as Part of Direct Costs for MCIT Purposes

DST on Certificate of Cover DST on Intercompany Advances/Loans (Non-trade) Final Tax Issue on ROP Bonds Miscellaneous/Other Income Not Subjected to VAT

Common Tax Issues

Income Tax

82

Non-Life Insurance

30% regular corporate income tax (RCIT) on net taxable income or 2% minimum corporate income tax (MCIT) on gross income, whichever is higher.

Income Tax

83

RCIT

The 30% RCIT is based on the taxable income earned during the taxable year from all sources within and outside the Philippines.

Net taxable income means the pertinent items of gross income specified in the Tax Code, less the deductions authorized for such types of income by the Tax Code or other special laws.

Income Tax (Cont’d)

84

RCIT Gross income means all income derived from whatever source, including (but not

limited to) the following items (Section 32 of Tax Code):

► Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items

► Gross income derived from the conduct of trade or business or the exercise of a profession

► Gains derived from dealings in property► Interests► Rents► Royalties► Dividends► Annuities► Prizes and winnings► Pensions


85

RCIT Deductions from Gross Income- In computing taxable income subject to income

tax, there shall be allowed the following deductions from gross income:(Section 34 of Tax Code):

► Expenses – (Ordinary and Necessary Trade, Business or Professional Expenses)► Interests► Taxes- (except for those listed in Sec. 34 C.1 )► Interests► Losses- (actually sustained during the taxable year and not compensated for by

insurance or other forms of indemnity)► Bad Debts- (ascertained to be worthless and charged off within the taxable year)► Depreciation► Depletion of Oil and Gas Wells and Mines Prizes and winnings► Charitable and Other Contributions.► Research and Development► Pension Trusts


86

MCIT

MCIT of 2% of the gross income is imposed beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations.

Gross income means gross receipts less sales returns, allowances, discounts and cost of services


87

MCIT Gross receipts shall mean actual or constructive receipts representing:

► Direct premium and reinsurance assumed (net of returns and cancellations);

► Miscellaneous income;

► Investment income not subject to final tax;

► Released reserves;

► All other income items treated as gross income under Section 32 of the Tax Code.


88

MCIT Cost of services shall be limited to the following:

► Salaries, wages and other employee benefits of personnel directly engaged in the following activities:

► Underwriting;► Claims and benefits;► Actuary;► Policy owner services, such as but limited to the following:

► Policy changes and amendments;► Policy endorsements/assignments;► Policy benefits and features;► Changes in forfeiture options; and► Policy reinstatements


89

MCIT Commissions on direct writings / reinsurance / agents of pre-need companies;

Cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies;

Inspection and medical fees;

Claims, losses, maturities and benefits net of reinsurance recoveries;

Net additions required by law to reserve fund (for insurance companies) and,

Reinsurance ceded.


90

Deferred Reinsurance Commission

Excess Reserve for unearned premiums GAAP vs. STAT or Reserve for unearned Premiums

Deferred Reinsurance Premiums

Deferred Acquisition Cost

Tax Reconciling Items Peculiar to Non-Life Insurance

91

An increase in the balance of deferred reinsurance commission causes a decrease in the amount of reinsurance commission subjected to income tax. A decrease on the other hand causes an increase in reinsurance commission subjected to income tax.

To eliminate the effect of this increase or decrease in the amount of reinsurance commission for tax purposes, a reconciling item is made to reverse the effect made to deferred reinsurance commission.

Deferred Reinsurance Commission

Business Tax

93

Gross receipts by Non-life Insurance Companies (except crop insurances) are subject to the twelve percent (12%) VAT.

“Gross receipts“ shall include the total premiums collected whether such premiums are paid in money, notes, credits or any substitute for money

Value Added Tax (VAT)

94

Gross Receipts does not include the following (RMC No. 30-08):

Premiums refunded within six (6) months after payment on account of rejection of risk or returned for other reason to the person insured (return premiums);

Premiums on reinsurance of a company that has already paid the tax;

Premiums on account of any reinsurance, if the risk insured against covers property located outside of the Philippines;

Documentary stamp and local taxes passed on by the insurance company to the insured; and

VAT passed on to the insured.

Value Added Tax (VAT) (Cont’d)

95

Insurance commission and reinsurance commission received from ceded premiums to reinsurers are subject to 12% VAT

Miscellaneous/Other income is subject to 12% VAT

Value Added Tax (VAT) (Cont’d)

96

Business Activities by Non-Life Insurance Companies:

Taxes Applicable Tax Base

Premiums received from Health and Accident Insurance Contract underwritten by Non-life Insurance Company

2% premium tax (under Section 123 of Tax Code)

Total premium collected

Premium Tax

Withholding Taxes

98

As withholding agents, non-life insurance companies are required to withhold on its income payments to certain resident and non-resident payees, hence, they are subject to the following withholding taxes:

Expanded Withholding Tax (EWT)

Various EWT rates, as prescribed by the EWT Regulations, of gross income payments to certain residents, as enumerated under the EWT Regulations.

Final Withholding Tax (FWT)

Various FWT rates, as prescribed by the Tax Code and the applicable Tax Treaties, on dividends, interests, and royalties actually or constructively paid to non-resident corporations.

Withholding Taxes

99

Withholding Tax on Wages (WTW)

5% to 32% of taxable compensation arising from an employer-employee relationship, which consists of gross compensation income less personal and additional exemptions.

Fringe Benefits Tax (FBT)

32% of grossed-up monetary value of taxable fringe benefits granted to non-rank and file employees.

Withholding VAT (WVAT)

The 12% WVAT is due from payments to non-residents for services rendered in the Philippines.

Withholding Taxes (Cont’d)

Documentary Stamp Tax

Non-Life Insurance - Transactions Subject to DST

Issued by Non-Life Insurance Companies: DST Rate

1) Insurance Policies other than health and accident insurance policies (subject to DST regardless of the fact that policies may have become ineffective due to non-payment of the corresponding premiums)

P0.50 on each P 4, or fractional part thereof, of the premium charged

2) Health and Accident Insurance Policies DST on Life Insurance policy (RA 10001)

3) Certificates issued P15 per certificate

4) Certificate of Cover (COC) issued pertinent to motor vehicle insurances

P15 per certificate

Withholding Taxes (Cont’d)

Local Tax

103

Local Business Tax (LBT)

The LBT, as provided for in the Local Government Code, in general, should not exceed 50% of 1% on the gross receipts of the preceding year.

The specific LBT rates depend on the city or municipality imposing the tax.

Local Taxes

104

Real Property Tax (RPT)

Minimum of 1% and maximum of 2%, as provided for in the LGC of 1991, plus Special Education Fund (SEF) of 1% of the assessed value of real properties.

Local Taxes

Common Tax Issues

106

Issue:Non-Life insurance companies commonly consider all costs (e.g.,

agents’ bonuses, supplies, salary of employees) incurred directly and exclusively in its insurance business as deductible for income tax purposes.

Resolution:Exclude expenses which are in the nature of agents’ bonuses,

incentives, and others as part of direct costs since these are not among the allowed deductions, as enumerated in RMC No. 59-08, for the determination of gross income subject to MCIT.

Direct Costs Claimed as Deduction for MCIT purposes

107

Issue:Non-Life insurance companies usually do not impose DST of P 15 on

individual certificates (issued or not) to each and every employee covered by group personal accident (PA) policies.

Resolution:RMC No. 24-11 provides that the corresponding DST (P15) for each

and every Certificate of Cover required to be issued shall be paid by the insurance company, whether or not the individual certificates are actually issued to the covered employees.

DST on Certificates of Cover for Group PA Policies

108

Issue:Non-Life insurance companies and its related parties commonly engage

in non- trade advances. These advances may come in form of actual cash advances (e.g., intercompany loans, advances for purchase of transportation equipments, or for capital requirement purposes) to be used in operations. These advances were not subjected to DST as they are evidenced merely by journal or cash vouchers, and letters approved by management.

Resolution: In Commissioner of Internal Revenue vs. FDC (G.R. No. 163653 dated

July 19, 2011), the Supreme Court ruled that instructional letters, as well as the journal and cash vouchers evidencing the advances FDC extended to its affiliates in 1996 and 1997 qualified as loan agreements upon which documentary stamp taxes may be imposed.

DST on Intercompany Advances/Loans

109

Resolution: In cases where no formal loan agreements or promissory notes have

been executed to cover credit facilities, the DST shall be based on the amount of drawings or availment of the facilities, which may be evidenced by credit/debit memo, advice or drawings by any form of check or withdrawal slip.

Instructional letters as well as journals and cash vouchers evidencing advances to affiliates qualify as loan agreements upon which DST may be imposed.

DST on Intercompany Advances/Loans (Cont’d)

110

Issue: Non-Life insurance companies usually do not include interest income

earned from investment in Republic of the Philippines (ROP) bonds in the computation of taxable income subject to income tax and consider this as tax-exempt/subjected to final tax.

Resolution:The Company must obtain and present prospectus of the investment

made in ROP bonds to support claims that such are tax exempt or were subjected to final tax. Failure to present proof shall expose the Company to deficiency income tax or related final tax.

Final Tax Issue on ROP Bonds

111

Issue: Are other income generated by non-life insurance companies (e.g., sale

of fixed assets, rentals, reinsurance fees) subject to 12% VAT?

Resolution:Yes. RMC No. 30-08 provides an enumeration of items not to be

considered as part of gross receipts subject to income tax and likewise, to 12% VAT. Moreover, in the same Regulation; management fees, rental income, or any other income earned by insurance companies from services which can be pursued independently of the insurance business activity, are thus, not subject to premium tax imposed under Section 123 but, rather, the same are treated as income for services that are subject to the imposition of VAT pursuant to Section 108 of the Tax Code, as amended.

VAT on Other Income

Question and Answers

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Documents

Insurance industry briefing materials template 2012 v17 06252012