Insurance industry briefing materials template 2012 v17 06252012

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Insurance industry briefing materials template 2012 v17 06252012

  1. 1. Nonlife Insurance Industry BriefingJune 26, 2012
  2. 2. Agenda Industry Performance Overview  Commonly issued nonlife insurance products  Fraud risk considerations  Common types of reinsurance arrangements1
  3. 3. Agenda (Cont’d) 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 testing2
  4. 4. Agenda (Cont’d) Taxation  Applicable taxes  Common tax issues3
  5. 5. Industry Performance
  6. 6. Industry Performance in 2011 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- 2012.5
  7. 7. Industry Performance in 2010Financial 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. Line 2010 (Amount in 2009 (Amount in Increase (Amount Percentage Billion Pesos) Billion Pesos) in Billion Pesos) 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%6
  8. 8. Industry Performance in 2010 (Cont’d)Financial Performance (cont’d) Losses incurred per line of business are as follows: Line 2010 (Amount in 2009 (Amount in Increase (Amount Percentage Billion Pesos) Billion Pesos) in Billion Pesos) 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 0.037
  9. 9. Overall Performance 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%8
  10. 10. Overall Performance (Cont’d) 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%9
  11. 11. Major Industry Players
  12. 12. 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 % Top 20 Nonlife Insurance Companies 17,100 77.90 15,531 75.02 All Others 4,850 22.10 5,170 24.98 Total 21,950 100.00 20,701 100.00 Net Premiums Written 2011 % 2010 % Top 20 Nonlife Insurance Companies 18,316 21.34 16,336 75.30 All Others 4,970 78.66 5,359 24.70 Total 23,286 100.00 21,695 100.0011
  13. 13. Top 20 Nonlife Insurance based on Gross Premiums Written(Source: 2011 Ranking per Insurance Commission - in Php) Nonlife Insurance Companies 2011 Gross External Auditors Premiums 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.12
  14. 14. Top 20 Nonlife Insurance based on Gross Premiums Written(Source: 2011 Ranking per Insurance Commission - in Php) Nonlife Insurance Companies 2011 Gross External Auditors Premiums 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 776,607,925 Union) 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. 459,755,88413
  15. 15. Top 20 Nonlife Insurance based on Net Premiums Written(Source: 2011 Ranking per Insurance Commission - in Php) Nonlife Insurance Companies 2011 Net External Auditors Premiums 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 Lipana14
  16. 16. Top 20 Nonlife Insurance based on Net Premiums Written(Source: 2011 Ranking per Insurance Commission - in Php) Nonlife Insurance Companies 2011 Net External Auditors Premiums 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 400,506,200 Union) 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 263,777,57115
  17. 17. Commonly IssuedNonlife Insurance Products
  18. 18. Commonly Issued Nonlife Insurance Products Type of Product Description Normal Terms Motorcar Insurance Motorcar insurance is a contract by which the 1 year 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 .17
  19. 19. Commonly Issued Nonlife Insurance Products Type of Product Description Normal Terms Motorcar Insurance 2. Comprehensive Motor Insurance 1 year (Cont’d.) Own Damage Coverage against damages to the property insured arising from accidental collision, overturning, falling, fire and malicious acts of third party. Theft Coverage against stolen vehicles in which the sum insured is equivalent to the current market value of the vehicles upon date of policy issuance.18
  20. 20. Commonly Issued Nonlife Insurance Products Type of Product Description Normal Terms Motorcar Insurance 2. Comprehensive Motor Insurance (cont’d) 1 year (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.19
  21. 21. Commonly Issued Nonlife Insurance Products Type of Product Description Normal Terms Personal Accident Personal Accident Insurance gives monetary 1 year Insurance 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 Assault Burial Expense Accident Weekly Indemnity Cash Assistance Travel Emergency and Medical Assistance Vehicle Emergency Assistance Motorcycling Coverage Double Indemnity for Common Carrier20
  22. 22. Commonly Issued Nonlife Insurance Products Type of Product Description Normal Terms Property/Fire and Fire Insurance basically covers property against 1 year Lightning Insurance fire and lightning. However, the coverage may be extended to include, among others, the following details, subject to payment of additional premium: Earthquake Fire / Shock Typhoon Flood Riot, 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 Apparatus21
  23. 23. Commonly Issued Nonlife Insurance Products Type of Product Description Normal Terms Engineering Engineering Insurance covers all kinds of Usually depends Insurance construction / installation of structures, machinery, on the term of the equipment, systems and processes against loss, construction 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)22
  24. 24. Commonly Issued Nonlife Insurance Products Type of Product Description Normal Terms 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.23
  25. 25. Commonly Issued Nonlife Insurance Products Type of Product Description Normal Terms 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 Machinery24
  26. 26. Commonly Issued Nonlife Insurance Products Type of Product Description Normal Terms Marine Insurance Marine Cargo 1 year (Cont’d.) This 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 insureds 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 persons goods in order to save a venture; the sacrifice will be made good by those whose goods are saved.25
  27. 27. Commonly Issued Nonlife Insurance Products Type of Product Description Normal Terms Marine Insurance Marine Cargo Insurance Products (Cont’d.) Marine Open Policies A 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 Coverage A 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.26
  28. 28. Commonly Issued Nonlife Insurance Products Type of Product Description Normal Terms Marine Insurance Hull and Machinery 1 year or less (Cont’d.) This insurance covers ships or vessels, their hull, than 1 year machinery and equipment including liability arising from collision with other vessels. Its standard coverage are: • Physical Loss or damage to a ships hull, machinery or equipment which may result in either total loss (actual or constructive to the insureds 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 vessels27
  29. 29. Commonly Issued Nonlife Insurance Products Type of Product Description Normal Terms Surety/Bonds Suretyship is a contract whereby one person Depends on the engages to be answerable for a debt, default, or term of the miscarriage of another. It provides indemnity to the principal contract 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.28
  30. 30. Commonly Issued Nonlife Insurance Products Type of Product Description Normal Terms Medical Insurance Medical Insurance covers hospital medical 1 year 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.29
  31. 31. Commonly Issued Nonlife Insurance Products Type of Product Description Normal Terms OFW Compulsory Each migrant worker to be deployed by a Less than a year Insurance Coverage recruitment/manning agency shall be covered by a to 4 years compulsory insurance contract which shall be secured at no cost to the said worker. Covered by nonlife insurance companies: a) Permanent total disablement insurance b) Repatriation cost insurance c) Subsistence allowance insurance d) Money claims insurance e) Compassionate visit insurance f) Medical evacuation insurance g) 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.30
  32. 32. Fraud Risk Considerations
  33. 33. Fraud Risks Considerations 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 Perform test of reasonableness of the accounts/overstatement of net insurance allowance for doubtful accounts receivables32
  34. 34. Common Types ofReinsurance Arrangements
  35. 35. ReinsuranceReinsurance is a contract whereby the reinsurer, for aconsideration, agrees to indemnify the ceding insurancecompany for all or a position of losses which are sustained undercertain risks insured by the ceding company.Note: Essence of RI contract is the transfer of risk from cedingcompany to the reinsurer.34
  36. 36. Common Type of Reinsurance Arrangements Type of Reinsurance Description Normal Terms Facultative Reinsurance It is a method of reinsurance 90 days/1 year 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.35
  37. 37. Common Type of Reinsurance Arrangements Type of Reinsurance Description Normal Terms Treaty Reinsurance It is a general reinsurance 90 days/1 year 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.36
  38. 38. Common Type of Reinsurance Arrangements Type of Reinsurance Description Treaty Reinsurance Types of Treaty Reinsurance (Cont’d.) 1. 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.37
  39. 39. Common Type of Reinsurance Arrangements Type of Description Reinsurance Treaty Reinsurance 2. Non-proportional Treaty Reinsurance - the original insurer or (Cont’d.) 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.38
  40. 40. Common Type of Reinsurance Arrangements Type of Description Reinsurance Treaty Reinsurance c. “Per Risk” Excess of Loss Cover - the reinsurer indemnifies the (Cont’d.) ceding company for that portion of the company’s loss per risk which exceeds a predetermined amount, subject to an agreed maximum limit.39
  41. 41. UNDERSTANDING THE PROCESS
  42. 42. Common Application Systems
  43. 43. Common Application Systems Application Systems Nonlife Insurance Insurance System (NIIS) General Insurance Information System (GenIISys) General Insurance System (GIS)42
  44. 44. Significant Processes, SCOTs,Significant Accounts and Relevant Assertions
  45. 45. Significant Processes, SCOTs, Significant Accounts andRelevant Assertions Significant Significant Classes of Significant Accounts and Process Transactions Relevant Assertions Financial a. 24th/365th Method • Reserve for Unearned Premiums - V Statement Close Computation - calculation at Process every period end of the • Deferred Reinsurance Premiums - V amount of adjustment to arrive at the “should be” • Increase (Decrease) in Unearned balance of unearned Premium Reserves - M premium reserves, deferred reinsurance premiums, • Deferred Acquisition Costs - V deferred acquisition cost, and deferred reinsurance • Deferred Reinsurance Commissions - commissions. V • Commission Expense - M • Commission Income - M44
  46. 46. Significant Processes, SCOTs, Significant Accounts andRelevant Assertions (Cont’d) Significant Significant Classes of Significant Accounts and Process Transactions Relevant Assertions Underwriting a. New Business - issuance of • Premiums receivable - C, E, V new policy contracts • Premium income - C, O, M 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 company45
  47. 47. Significant Processes, SCOTs, Significant Accounts andRelevant Assertions (Cont’d) Significant Significant Classes of Significant Accounts and Process Transactions Relevant Assertions Reinsurance a. Outward Facultative • Due to Reinsurers - C, V Reinsurance - ceding out of • Funds held for reinsurers - V individual risks to reinsurers • Premiums Ceded - C, M b. Outward Treaty Reinsurance - automatic reinsurance of all risks that fall within the scope of the reinsurance agreement46
  48. 48. Significant Processes, SCOTs, Significant Accounts andRelevant Assertions (Cont’d) Significant Significant Classes of Significant Accounts and Process Transactions Relevant Assertions Commissions Commission Income •Commission Income - C, O, M Processing a. Outward Facultative Reinsurance Transactions - commission income •Due from reinsurers - C, E, V from premiums ceded to facultative reinsurers b. Outward Treaty Reinsurance Transactions - commission income from premiums ceded to treaty reinsurers Commission Expense - commissions •Commissions Expense - C, M due to agents/brokers/ceding companies for the amounts of •Commission Payable - C, V premiums written by the Company thru them. The following are the significant classes of transactions (SCOTs) for commission expense: a. New Business - agents’/brokers’ commissions47
  49. 49. Significant Processes, SCOTs, Significant Accounts andRelevant Assertions (Cont’d) Significant Significant Classes of Significant Accounts and Process Transactions Relevant Assertions Commissions b. Renewal - agents’/brokers’ Processing commissions (Cont’d) c. Endorsement - agents’/brokers’ commissions d. Inward Reinsurances - commissions due to ceding companies48
  50. 50. Significant Processes, SCOTs, Significant Accounts andRelevant Assertions (Cont’d) Significant Significant Classes of Significant Accounts and Process Transactions Relevant Assertions Claims Claims setup and payment - evaluation •Loss and Loss Adjustment Processing of the amount of loss, setup of loss Expense - C, M reserves, loss adjustments and payment of the claim amount •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, E49
  51. 51. Control Matrix
  52. 52. Control MatrixFinancial Statement Close Process WCGW Assertion Controls•Unearned Premium •Reserve for Unearned •System is configured toReserves, Deferred Premiums - V automatically and accuratelyReinsurance Premiums, compute for the balances ofDeferred Acquisition Costs, •Deferred Reinsurance the said affected accounts.Deferred Reinsurance Premiums - VCommissions are inaccuratelycomputed. •Increase (Decrease) in RUP - M •Deferred Acquisition Costs - V •Deferred Reinsurance Commissions - V •Commission Expense - M •Commission Income - M51
  53. 53. Control Matrix - Financial Statement Close Process WCGW Assertion Controls•24th/365th method •Reserve for Unearned •System automaticallycomputation adjustments are Premiums - C generates adjusting journalnot recorded. entries pertaining to the results •Deferred Reinsurance of the 24th/365th method Premiums - C computation. •Increase (Decrease) in RUP - C •Deferred Acquisition Costs - C •Deferred Reinsurance Commissions - C •Commission Expense - C •Commission Income - C52
  54. 54. Control Matrix - Underwriting WCGW Assertion Controls• Policies (New business •Premium Income - O, M •System detects duplicate/renewal/endorsements) may processing of thosebe processed twice. •Premiums Receivable - E, V policies/inward RI transactions•Inward reinsurance offers which have similar information.may be processed twice. •Premiums due from Ceding Companies - E, V •A log is being maintained listing those applications/renewals/ endorsements/inward offers which have been already subjected for processing.•Premiums may be recorded in •Premium Income - C, O •A journal entry is automaticallythe wrong period. generated upon encoding of the •Premiums Receivable - C, E details in the system. •Premiums Due from Ceding •Policies are appropriately Companies - C, E segregated manually based on its inception/effectivity dates.53
  55. 55. Control Matrix – Underwriting (Cont’d) WCGW Assertion Controls•Not all premium and •Premium Income - C, M •A journal entry ispremium adjustments are automatically generated uponrecorded. •Premium Receivables - C, V encoding of the details in the system. •Premiums Due from Ceding Companies - C, V •A manual review of all the information encoded in the system is done to ensure its completeness and correctness.54
  56. 56. Control MatrixUnderwriting (Cont’d) WCGW Assertion Controls•Coding of premiums may be •Premium Income - M •Reviews and approvals areincorrect, resulting in performed based on the limitsinaccurate computation of •Premiums Receivable - V of authority to ascertain thepremiums. accuracy and completeness of •Premiums Due from Ceding the details encoded in the Companies - V system.•Fictitious premiums are •Premium Income - O •Applications/renewals/endorsrecorded. ements/inward reinsurance •Premium Receivables - E offers must be approved by the authorized individual •Premiums Due from Ceding based on the limits of authority Companies - E being implemented.55
  57. 57. Control MatrixUnderwriting (Cont’d) WCGW Assertion Controls•Not all approved policies •Premium Income - C •Transactions are posted oncemay have been posted. approvals are obtained. •Premium Receivables - C •Bordereaux extracted from the •Premiums Due from Ceding system is compared to the Companies - C maintained log to see if all approved policies have been posted.56
  58. 58. Control Matrix - Reinsurance (Outward Facultative) WCGW Assertion Controls•Premium for retention may •Premiums Ceded to •Personnel handling/processingnot be properly segregated Facultative Reinsurers - C, M reinsurance transactions arefrom premium for cession. different from those who handle •Premiums Due to direct insurance transactions. Facultative Reinsurers - C, V •System has distribution feature to facilitate segregation of reinsurance transactions separately from the direct insurance transactions.57
  59. 59. Control Matrix - Reinsurance (Outward Facultative) (Cont’d) WCGW Assertion Controls•Premiums ceded may not be •Premiums Ceded to •System automatically generatesrecorded. Facultative Reinsurers - C, journal entry upon encoding of E reinsurance transaction details. •Premiums Due to •A log is maintained to monitor Facultative Reinsurers - C, the status of the reinsurance E transactions from placement to issuance of the binder.58
  60. 60. Control Matrix - Reinsurance (Outward Facultative) (Cont’d) WCGW Assertion Controls•Encoded distribution details •Premiums Ceded - M •Encoded details of theare incorrect resulting to distribution must be reviewed andinaccurate computation of the •Premiums Due to approved by the authorizedamounts relating to the Facultative Reinsurers - V signatories to ensure accuracy ofreinsurance made. the details/amounts.•Not all distribution made may •Premiums Ceded - C •The log used for monitoring thehave been posted. status of the reinsurance •Premiums Due to transaction is compared to the Facultative Reinsurers - C distribution register (RI bordereaux) at period end to ensure that all RI transactions processed and approved have been posted.59
  61. 61. Control Matrix - Reinsurance (Treaty) WCGW Assertion Controls•Not all transactions for treaty •Premiums Ceded to Treaty •System automaticallyreinsurance may have been Reinsurers - C, E generates journal entry uponrecorded. encoding of distribution details. •Premiums Due to Treaty Reinsurers - C, E•Amount computed for treaty •Premiums Ceded to Treaty •Review and approval of thereinsurance transactions may Reinsurers - M distribution to treaty reinsurersnot be in accordance with the is performed to ensure that thetreaty agreement. •Premiums Due to Treaty distribution made is in Reinsurers - V accordance with the treaty reinsurance agreement.•Premium adjustments may •Premiums Ceded to Treaty •At the end of each reportingnot be recorded accurately and Reinsurers - C, M period, a manual review ofcompletely. reinsurance agreements with •Premiums Due to Treaty provision for reinstatement Reinsurers - C, V premiums is being made to ensure complete take up of items requiring adjustments.60
  62. 62. Control Matrix – Claims Processing WCGW Assertion Controls•Unauthorized claim may be •Losses and Loss •Validity of the claim is evaluatedprocessed. Adjustment Expenses (net) initially by checking the effectivity -O of the policy as well as if all•Claims may be processed for premiums due have been paid.cancelled policies. •Claims Payable – E •All claims must be supported by•Fictitious claims may be •RI Recoverable on unpaid the necessary documents.recorded. losses - E •Valid claims must be reviewed and approved by the appropriate individual based on the limits of authority.61
  63. 63. Control Matrix - Claims Processing (Cont’d) WCGW Assertion Controls•Not all claims may be •Losses and Loss Adjustment •All claims that have been verifiedrecorded. Expenses (net) - C as valid are being created with a claim folder and a setup of loss •Claims Payable - C reserve is initially made in the system. •RI Recoverable on unpaid losses - C •A log is maintained to monitor the status of the claim.•Losses and reinsurers’ •Losses and Loss Adjustment •System has been configured toshare in losses may Expenses (net) - M automatically compute for theinaccurately be computed. Company’s and the reinsurers’ •Claims Payable - V share in the losses. •Reinsurance Recoverable on Unpaid Losses – V62
  64. 64. Control Matrix - Claims Processing (Cont’d) WCGW Assertion Controls•Losses are not adjusted when •Losses and Loss •Status of the claim filed islosses or loss adjustment Adjustment Expenses (net) tagged as “Closed”, “Partial” inexpense reserves are fully or -M the system once payment ispartially paid. made. •Claims Payable - V •Reinsurance Recoverable on Paid Losses - V•Claim may be processed for •Losses and Loss •Once the claim has been paid,payment twice. Adjustment Expenses - O system shows a “Closed” status. •Claims Payable - E •A log is maintained for monitoring purposes.63
  65. 65. Control Matrix - Claims Processing (Cont’d) WCGW Assertion Controls•Claim transactions may not •Losses and Loss •At period end, claim register isbe posted. Adjustment Expenses (net) compared to a log being -C maintained to monitor the status of the claim. •Claims Payable - C •Cash - C •Reinsurance Recoverable on Paid/Unpaid Losses - C•Reinsurance recoverables are •Reinsurers’ Share on •Reviews are performed tonot recorded in the same Losses and Loss ensure that claims forperiod as the claim to which it Adjustment Expenses - C, reinsurance recoveries are filedrelates. O and recorded. •Reinsurance Recoverables •Once a claim is processed and on Paid Losses - C, E posted, the corresponding reinsurance account is automatically updated and posted to the system.64
  66. 66. Control Matrix - Commissions Processing WCGW Assertion Controls•Commissions may be •Commission Expense - O •System detects duplicateduplicated. processing of similar policies as •Commissions Payable - E well as the related commissions.•Commissions may be •Commission Expense - C, O •A journal entry for the amount ofrecorded in the wrong commission expense/income isperiod. •Commissions Payable - C, E automatically generated upon encoding of the details of the •Commission Income - C, O related policy in the system. •Due from reinsurers - C, E•Not all commissions are •Commission Expense - C •Upon encoding of the details ofrecorded. the related policy, details •Commissions Payable - C pertaining to the commission is also required to be encoded. •Commission Income - C •Due from reinsurers - C65
  67. 67. Control Matrix – Commissions Processing (Cont’d) WCGW Assertion Controls•Coding of commissions may •Commission Expense - M •Reviews and approvals arebe incorrect, resulting in performed based on the limits ofinaccurate computation of •Commissions Payable - V authority to ascertain the accuracycommissions. of the details encoded in the •Commission Income - M system. •Due from reinsurers - V•Fictitious commissions may •Commission Expense - O •Setup of commission is alsobe recorded. made upon encoding of the •Commissions Payable - E details of the related policy. •Commission Income - O •Setup of commission is reviewed and approved by the authorized •Due from reinsurers - E individual based on the limits of authority.66
  68. 68. Substantive Procedures
  69. 69. Substantive Procedures Significant Accounts Audit Procedures Insurance Receivables (Due from • Agreement of subsidiary ledger (SL) with policyholders, agents and brokers, general ledger (GL) reinsurers, RI recoverable on paid losses) • 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 review68
  70. 70. Substantive Procedures Significant Accounts Audit Procedures RI Recoverable on unpaid losses • Agreement of SL with GL (Reinsurance Assets) • Verification of balances based on reinsurance agreements and losses incurred • Analytical review Deferred reinsurance premiums • Agreement of SL with GL (Reinsurance Assets) • Recomputation • Analytical review Deferred Acquisition Cost • Agreement of SL with GL • Recomputation • Analytical review69
  71. 71. Substantive Procedures Significant Accounts Audit Procedures Claims payable (Insurance Contract • Agreement of SL with GL Liabilities) • 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 • Agreement of SL with GL (Insurance Contract Liabilities) • Recomputation • Analytical review70
  72. 72. Substantive Procedures Significant Accounts Audit Procedures 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 agreements71
  73. 73. Substantive Procedures Significant Accounts Audit Procedures 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 IBNR72
  74. 74. Liability Adequacy Testing
  75. 75. Liability Adequacy Test► 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.
  76. 76. Liability Adequacy Test (Cont’d)Testing► If an insurer applies a liability adequacy test that meets specified minimum requirements, PFRS 4 imposes no further requirements.► If an insurers 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.
  77. 77. Taxation
  78. 78. Applicable TaxesNational 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)77
  79. 79. Applicable TaxesNational Taxes Local Taxes ► Local Business Tax (LBT) ► Real Property Tax (RPT)78
  80. 80. Common Tax Issues 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 VAT79
  81. 81. Income Tax
  82. 82. Income Tax 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.81
  83. 83. Income Tax (Cont’d) RCIT  The 30% RCIT is based on the taxable income earned during the taxable year from all sources within and outside the Philippines.  Nettaxable 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.82
  84. 84. Income Tax (Cont’d) 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 ► Pensions83
  85. 85. Income Tax (Cont’d) 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 Trusts84
  86. 86. Income Tax (Cont’d) 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.  Grossincome means gross receipts less sales returns, allowances, discounts and cost of services85
  87. 87. Income Tax (Cont’d) 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.86
  88. 88. Income Tax (Cont’d) 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 reinstatements87
  89. 89. Income Tax (Cont’d) 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.88
  90. 90. Tax Reconciling Items Peculiar to Non-Life Insurance Deferred Reinsurance Commission Excess Reserve for unearned premiums GAAP vs. STAT or Reserve for unearned Premiums Deferred Reinsurance Premiums Deferred Acquisition Cost89
  91. 91. Deferred Reinsurance Commission 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.90
  92. 92. Business Tax
  93. 93. Value Added Tax (VAT) 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 money92
  94. 94. Value Added Tax (VAT) (Cont’d) 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.93
  95. 95. Value Added Tax (VAT) (Cont’d)  Insurance commission and reinsurance commission received from ceded premiums to reinsurers are subject to 12% VAT  Miscellaneous/Other income is subject to 12% VAT94
  96. 96. Premium Tax Business Activities by Non-Life Insurance Taxes Applicable Tax Base Companies: Premiums received 2% premium tax (under Total premium collected from Health and Section 123 of Tax Accident Insurance Code) Contract underwritten by Non-life Insurance Company95
  97. 97. Withholding Taxes
  98. 98. Withholding TaxesAs withholding agents, non-life insurance companies are required to withholdon 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.97
  99. 99. Withholding Taxes (Cont’d) 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.98
  100. 100. Documentary Stamp Tax
  101. 101. Withholding Taxes (Cont’d)Non-Life Insurance - Transactions Subject to DSTIssued by Non-Life Insurance Companies: DST Rate1) Insurance Policies other than health and P0.50 on each P 4, or fractional part thereof, accident insurance policies (subject to DST of the premium charged regardless of the fact that policies may have become ineffective due to non-payment of the corresponding premiums)2) Health and Accident Insurance Policies DST on Life Insurance policy (RA 10001)3) Certificates issued P15 per certificate4) Certificate of Cover (COC) issued pertinent P15 per certificate to motor vehicle insurances
  102. 102. Local Tax
  103. 103. Local Taxes 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.102
  104. 104. Local Taxes 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.103
  105. 105. Common Tax Issues
  106. 106. Direct Costs Claimed as Deduction for MCIT purposes 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.105
  107. 107. DST on Certificates of Cover for Group PA Policies 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.106
  108. 108. DST on Intercompany Advances/Loans 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.107
  109. 109. DST on Intercompany Advances/Loans (Cont’d) 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.108
  110. 110. Final Tax Issue on ROP Bonds 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.109
  111. 111. VAT on Other Income 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.110
  112. 112. Question and Answers
  113. 113. THANK YOU!

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