LEGAL & COMPLIANCE OPERATIONS

Organization of Legal & Compliance Operations

In some companies, members of the legal department are also responsible for regulatory compliance matters. Other insurers have a separate unit that is devoted solely to compliance. In still other companies, individuals in various departments throughout the company perform compliance activities.

The person in charge of an insurance company’s legal function is known as the general counsel or chief counsel. In some companies the general counsel is also the company’s chief compliance officer.

Responsibilities of the Legal Department

Incorporations and Changes in Corporate Structure

Attorneys typically perform many of the tasks necessary for incorporation. Attorneys also apply for the license that the insurer must obtain from SID of each state in which it plans to conduct business. 

The legal department is heavily involved when an insurance company changes its corporate form, such as through a demutualization or a conversion from a mutual company to a mutual holding company. The legal dept. advises the board of directors on [1] the differences in the regulation of stock companies, mutual companies, and mutual holding companies, [2] the legal issues involved in the change in corporate form [3] the structure that would be most beneficial to the insurer, and [4] the best way to accomplish a change in corporate form.

Company attorneys also play an important role when an insurer is involved in a merger or strategic alliance with, or an acquisition of, another company. Attorneys help negotiate the terms of the agreement; and they draft and review the contracts and other legal documents associated with mergers, acquisitions and strategic alliances.

Product Development

An insurer’s legal department advises the product development team on relevant laws and usually reviews policy form drafts to ensure that new products comply with the laws of each jurisdiction in which the company will sell the products.

Contracts

A body of law, known as contract law, governs the requirements the parties to a contract must meet to form an agreement that is legally binding on the parties and that specifies the rights and duties of the parties.

Because many insurance companies invest in real estate, an insurer’s legal department often includes attorneys who are skilled in real property law, which is a branch of law that deals with the ownership and transfer of rights in real estate.

Product Distribution

The body of law that has been developed to regulate the relationship between the principal and their agents is known as agency law. The legal dept. is responsible for overseeing the legal aspects of the agency relationship, including writing the agency contracts and advising the insurer whenever legal questions arise about an agency contract.

Claim Administration

When a claim analyst [1] believes there is cause to deny a claim, [2] has a question about the insurer’s liability for a claim or the appropriate recipient of a policy benefit’s payment, or [3] suspects fraud, the claim analyst typically consults the legal department. The insurer’s attorney assists the claim analyst in interpreting the language of the life insurance policy and analyzing the facts of the situation to determine the insurer’s liability.

Employee Relations

This body of law is known as employment law. Employment laws [1] protect employees against unfair discrimination in the workplace,[2] guarantee employees certain minimum workplace standards and [3] ensure that certain minimum requirements are included in employee benefit plans.

Nondiscrimination in the Workplace

Such laws may prohibit discrimination in any or all of the following employment process:

• Recruitment
• Pre-employment testing
• Hiring, promotions, or transfer
• Training
• Firing, layoff, or recall
• Compensation, including pay and benefits

Employment Standards Legislation

The U.S. federal Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, record keeping, and child labor standards that affect workers of federal, state, and local governments and employees of companies that meet an annual dollar-volume-of-business test.

Standards for Employee Benefits

ERISA is designed to ensure that certain minimum plan requirements are contained in employee welfare benefit plans.

Litigation

Is the process or act of resolving a dispute by means of a lawsuit. The legal department represents the company or arranges for legal representation whenever the company is involved in a lawsuit. Attorneys handling litigation for an insurance company are responsible for

• Instituting or responding to the lawsuit.
• Researching the facts of the case.
• Taking statements from the involved parties.
• Consulting with company employees who are called upon to provide depositions.
• Researching relevant court cases.
• Representing the company in all trial court proceedings.
• Filing for or defending an appeal of the original trial decision.

Arbitration is a method of resolving a conflict in which an impartial third party, known as the arbitrator, evaluates the facts in dispute and renders a decision that is binding on the parties involved.

Mediation is a method of conflict resolution in which an impartial third party, known as a mediator, facilitates negotiations between the parties in an effort to create a mutually agreeable resolution to the dispute.

Regulatory Compliance

Insurance companies are generally subject to two types of regulatory requirements: [1] laws enacted by national, state, or provincial legislatures, and [2] rules and regulations adopted by administrative agencies, such as national, state or provincial insurance departments.

To effectively meet their regulatory obligations, insurers typically establish compliance management programs. Such a program enables an insurer to know which laws affect its business and to ensure that the company complies with these laws.

Prevention

Internal control consists of the steps a company takes to encourage adherence to the company’s management policies, promote operational efficiency, and safeguard the organization’s assets. Internal control extends beyond the compliance area and includes accounting controls, management efficiency controls, and other types of controls. Examples include Prenumbering (prenumbering checks and purchase orders), Soliciting third-party information (periodically sending to producers statements requesting notification of errors in payment).

Solvency Compliance and Market Conduct Compliance

Insurance laws can be generally divided into market conduct laws and solvency laws. In US, all publicly traded companies – including – stock insurers are subject to the federal Sarbanes-Oxley Act which calls for significant changes to corporate governance and financial reporting activities. One important requirement of the Act is mandatory certification of the accuracy of a company’s financial statements by the company’s CEO and CFO.

Market Conduct Compliance in the US

Much of an insurer’s market conduct is governed by provisions of unfair trade practices laws that have been enacted in almost all states. These laws define certain business practices as unfair and prohibit those practices in the business of insurance if they [1] are committed flagrantly in conscious disregard of the law or [2] occur so frequently as to indicate a general business practice.

Insurance Marketplace Standards Association (IMSA) is an association of insurers that implements a voluntary market conduct compliance program for the life insurance industry. To qualify for IMSA certification, an insurer must have in place policies and procedures that ensure compliance with IMSA’s Six Principles of Ethical Market Conduct.

• Conduct business according to high standards of honesty and fairness and to render service to its customers which, in the same circumstances, it would apply to or demand for itself.
• Provide competent and customer-focused sales and service.
• Engage in active and fair competition.
• Provide advertising and sales materials that are clear as to purpose and are honest and fair as to content.
• Provide for fair and expeditious handling of customer complaints and disputes.
• Maintain a system of supervision and review that is reasonably designed to achieve compliance with these principles.

Policy Form Filing and Approval

In the US, a life insurer generally may not begin to sell an insurance product in a state until the product’s policy form has been filed with and approved by the SID. Such filing and approval requirements enable state insurance regulators to ensure that policies comply with all applicable regulatory requirements. The compliance area is responsible for filing policy forms with state insurance regulators and, if necessary, working with members of the product development team to revise policy forms so that they meet regulatory requirements. Once an insurer obtains approval of a policy form, the company – typically the compliance area – develops issue instructions for business units that are affected by the new product.

Life insurance companies that issue variable life insurance and annuity products must comply with federal securities laws that govern the purchase and sale of all types of securities.

Producer Licensing

Insurance producers must obtain a license to sell insurance from the SID of each state in which they conduct business. Each insurance company develops policies and procedures to ensure that its producers have been properly appointed by the company to sell insurance on its behalf and are appropriately licensed to do so. The insurer must also develop procedures for terminating a producer’s appointment.

A producer selling variable life insurance/ variable life annuity must be a registered representative with NASD and must be associated with a broker/dealer firm that has registered with the SEC and is a member of the NASD.

Marketing and Sales

Attorneys & compliance specialists usually play a role in ensuring that the company and its producers comply with all applicable state and federal regulatory requirements for the marketing and sale of insurance products. Examples are described below:

Producer Activities

An insurance company typically develops a producer compliance program that [1] explains the company’s expectations of its producers regarding market conduct compliance,[2] explains the applicable market conduct laws and regulations, [3] trains producers in proper market conduct practices, and [4] audits the activities of the producers.

Producers violating market conduct laws is subject to fines by SID and in extreme cases the insurance company could lose its license.

Advertising & Sales Materials

Must comply with reqts. Designed to ensure that consumers receive accurate information about the insurance products they are considering buying. An insurer is ultimately responsible under the law for all its written advertising and sales materials.

Disclosure

Insurers and producers are required to disclose specific types of information to applicants for and owners of certain products.

Underwriting

Insurance companies establish underwriting guidelines that direct their own risk-assessment decisions. They are also required to apply premium rates to their underwriting decisions in a consistent manner.

Claim Administration

Most states have enacted laws based on the NAIC model Unfair Claims Settlement Practices Act that require insurance companies to investigate and pay claims promptly and fairly.

Complaint Handling

According to the NAIC model Unfair Trade Practices Act, an insurer must maintain complaint records for at least the current year and the two preceding years. The complaint record must contain

• The total number of complaints.
• The line of insurance that is subject of each complaint.
• The nature of each complaint.
• The disposition of each complaint.
• The length of time to process each complaint.

Each SID maintains an office for receiving and acting on consumer complaints. When a compliant is filed with the state rather than with the insurer, a complaint examiner records the complaint and sends a written request to the insurer named in the complaint to respond in writing to the allegations in the complaint.

The compliance staff develops and supervises the company’s complaint handling procedures to ensure that complaints are dealt with promptly and fairly. The compliance area also makes sure that the insurer’s records reflect all complaints [1] received directly from consumers and [2] submitted to the SID and then referred to the insurer.

Consumer Privacy

Certain life insurance company operations – particularly underwriting, customer service, and claim administration – may require the use of sensitive information about consumers, such as their financial and health information. Insurers must comply with the following laws regarding the use, disclosure, and protection on financial institutions:

Gramm-Leach-Biley (GLB) Act, which requires financial institutions to develop privacy and security procedures for the handling of individual’s nonpublic personal information and imposes notice and disclosure requirements on financial institutions.

The Federal Fair Credit Reporting Act, which regulates the reporting and use of consumer credit information and seeks to ensure that consumer credit reports contain only accurate, relevant, and current information.

State insurance laws that set standards for the collection, use, and disclosure of information gathered in connected with insurance transactions.

Market Conduct Examinations         

The purpose is to determine whether an insurer’s market conduct i.e. non financial operations are in compliance with applicable laws and regulations.

During market conduct examinations, a team of examiners from the SID visits the insurer’s home office or regional office. The examiners inspect samples of the insurer’s business records, such as producer licensing records, underwriting records, and records of customer complaints. Examiners evaluate whether [1] the insurer has established standards to ensure that the activity is carried out effectively, [2] the insurer’s standards comply with applicable regulatory requirements, and [3] the activity is being carried out according to the established standards. The scope of the examination could be comprehensive (full-scale) or target (limited scope for one or more specific areas).

The team upon completion of examination prepares a written report of its findings. As necessary, the SID conducts a follow-up examination to determine whether the insurer has complied with the specified actions in the examination report. The SID may sanction (a line or in severe case suspension) an insurer that is found to have violated state insurance laws or regulatory requirements.

HUMAN RESOURCE MANAGEMENT

The HR staff typically performs the following activities:

• Develop plans to meet the company’s staffing needs
• Recruit potential employees
• Help dept. managers select employees for open positions.
• Assist with employee training.
• Administer a system for evaluating employee performance.
• Develop & administer a compensation system
• Handle the process associated with employee departures from the company.

HR Planning

Many insurers conduct human resource planning which is the process of [1] projecting a company’s need for qualified employees and [2] determining the number of qualified people who are now or may soon be available for employment.

Projecting Staffing Needs

Staffing needs are affected by

• The employee turnover rate or attrition rate.
• The performance of the company’s current employees.
• New products marketed by the company that may require the support of specially trained employees.
• IT developments that might change the nature & size of the company’s workforce.
• The company’s current & projected financial condition

Estimating Labor Supply

Internal Labor Supply The HR department often maintains a skills inventory, which is a manual or computerized database that contains information about the education, training, and experience of each person working for an organization.

External Labor Supply Estimating the number of people outside the company who have appropriate qualifications for specific jobs is difficult. However estimates can be made on the following factors:

• National economic conditions and the expected unemployment rate.
• Local economic developments such as the opening or closing of large businesses in the company’s geographic area of operations.
• The international, national, and local supplies of potential employees with certain job skills.

In HR, a core competency is ability, a skill, or a characteristic that has been shown to cause or predict outstanding performance in a given job.

Employee Selection

An insurance company’s procedure for selecting employees usually includes the following steps:

• The applicant completes an employment application form and undergoes a screening interview.
• The applicant completes pre-employment testing.
• An employment interview is conducted.
• The company performs a background check and in some cases a drug test on the applicant.

A screening interview is a series of questions that is intended to eliminate those applicants who are obviously not qualified for the job.

Pre-Employment Testing

For a pre-employment test to be of value to an employer, the test should be valid & reliable. Validity refers to the degree to which a test is correlated with job-related criteria. Reliability of a pre-employment test refers to the likelihood that an applicant will achieve similar results on repeated administrations of the same or an equivalent test. An aptitude test, also known as a cognitive abilities test, attempts to determine a job candidate’s general level of intelligence and reasoning ability.

A performance test, also known as a job skills test, attempts to evaluate how well a job applicant has mastered specific skills needed to perform well in the position.

In a situation management test, a job applicant is asked to respond to a particular work-related situation.

A behavioral tendencies test, also known as a personality test, attempts to discover a job candidate’s typical job behaviors such as whether he is a team player, follows rules & procedures.

Employment Interviews

An employment interview, which is often a series of interviews, provides the manager with the opportunity to decide whether the candidate is qualified for and suited to the job.

Following the employment interview, the manager generally either [1] informs HR that the candidate has been eliminated from consideration for the position or [2] continues the selection process for the candidate by asking HR for a background check on the person.

Background Checks & Drug Tests

The final step in the selection process involves conducting a background check which can include investigate the applicant’s

• Business & Personal references
• Previous Employment
• Education & Training
• Criminal record
• Credit record

Some companies have a policy of not hiring applicants who use illegal drugs. These companies often require that applicants undergo blood & urine tests.

Training

In the on-the-job training, an employee learns by performing real work in the actual environment. There are two methods of on-the-job training mentoring & job rotation. In mentoring, a less experienced employee is assigned to work with a more experienced employee, or mentor. In job rotation, an employee moves periodically from one job to another, staying in each job just long enough to learn how the job is done and how it relates to other jobs in the company.

Performance Evaluation

Is a formal process of reviewing and documenting an employee’s job performance with the primary goals of [1] continually improving performance and [2] determining the employee’s qualifications for an increase in compensation or promotion?

Graphic Rating Scale Appraisal

A supervisor rates an employee’s work during the evaluation period based on a number of job-related factors such as “completes work on time” identified at the beginning of the period. Many graphic rating scales require the supervisor to assign a numerical value for each performance factor say on a scale of 1 to 5.

Behaviorally Anchored Rating Scales (BARS)

Is similar in structure and format to a graphic rating scale. A BARS, however, contains job-related characteristics that are more specific to the job and more fully described. In addition, the scale for rating the employee on each characteristic is related to specific behavioral descriptions.

Essay Appraisal

Gives supervisors’ great freedom in evaluating their subordinates’ strengths, weaknesses, accomplishments, and potential for promotion.

Critical Incident Evaluation

A supervisor records examples of an employee’s accomplishments as well as any errors or problems that occurred during the evaluation period and uses these examples, or critical incidents, to evaluate the employee’s performance. Recorded examples of employee performance might include “developed more efficient procedure for administering group life insurance claims” or “misjudged movement in the stock market and sold stocks at a loss”. The advantage is that the documentation provides the evaluator with specific examples of employee’s work experience.

Ranking

Ranking methods require the supervisor to compare employees with one another and place them in order, from best to worst, based on specific characteristics of their work behavior or on overall performance.

Management by Objectives

Is a performance evaluation method in which the employee and his supervisor work together to [1] set clear and attainable goals that the employee should achieve in the upcoming evaluation period and [2] develop a plan for achieving the goals. One important advantage is that assuming the goals are stated in specific, measurable terms- the employee’s progress can be measured objectively.

360-Degree Feedback

is a performance evaluation method in which opinions about an employee’s performance are solicited from many sources, including the employee and her superiors, peers, subordinates, and customers. Each evaluator completes a questionnaire that asks for feedback about specific areas of the employee’s performance. The main advantage is that gathering information from several sources helps avoid the bias that can occur when a single person evaluates an employee’s performance.

Compensation

Job evaluation is the process of determining the relative worth of the various jobs in a company. Some common methods of job evaluation analyze jobs based on

• Education & training required
• Duties & responsibilities of the job
• Complexity of the job
• Accountability of the position
• Authority of the position

Benefits & Services

Most insurers also provide employees with a number of benefits and services in addition to normal salaries which include

            Payment for time not worked such as sick days, vacations.

            Life insurance.

            Health insurance

Retirement income, such as private pension plans, profit-sharing plans.

Employee services, such as subsidized day-care and elder-care facilities; subsidies to help pay for employees’ further education; company sponsored cafeterias; counseling; legal, and certain on-site medical services;

Government-required benefits, such as unemployment compensation, workers’ compensation, and government-sponsored retirement programs.

Employee retention

Employee loyalty is an employee’s inclination to commit energy and efforts to an organization and to remain employed by the company.

Separation of Employees

Exit Interview

Outplacement counseling usually involves providing career counseling, vocational testing and skills evaluation, and information about job searches to laid-off employees.

ACCOUNTING

Is a system or set of rules and methods for collecting, recording, analyzing, summarizing, and reporting financial information? It is essential for planning an insurer’s solvency and profitability goals and for determining whether the company is meeting these goals.

Financial reporting is one of the most important aspects of accounting for insurers which is the process of presenting financial data about a company’s financial position, the company’s operating performance, and its flow of funds during a specified period of time.

Users of Accounting Information

Internal Users company officers and members of board of directors who conduct strategic planning and financial management, to managers in all functional areas, who use accounting information to set departmental or team guidelines & procedures.

External Users are outside the insurance companies who have a need for information contained in the company’s financial statements. They include

• National, state & provincial regulatory bodies.
• Insurance companies rating agencies.
• Current & potential policy owners of the company.
• Current & potential investors in the company
• Government Taxing authorities
• Creditors of the company

Organization & Responsibilities of the Accounting Department

• Establishing a system of accounts, which are basic tools that a company uses to record, group, and summarize similar types of financial transactions.
• Maintaining the company’s accounting records and investigating any discrepancies.
• Recording receipts & disbursements of money.
• Preparing & analyzing financial statements.
• Assisting managers with the interpretation of financial results.
• Analyzing the company’s operating costs
• Assisting financial managers with the development of long-term financial plans for the entire organization.
• Compiling budgets and preparing reports on performance that deviates from budgets.

The person in charge of the accounting department holds the title controller (or comptroller), reflecting the fact that the accounting area is responsible for controlling the company’s operations and protecting its resources. Reporting to the controller are a number of assistant controllers each overseeing a different unit of the accounting department? Typical units include line of business accounting, financial reporting, tax accounting, and internal auditing. Depending on the insurer, internal auditing may be considered a part of accounting, a part of compliance, or an independent department.

Financial Accounting

Focuses primarily on reporting a company’s financial information to meet the needs of company’s external users. Management Accounting is the process of identifying, measuring, analyzing, and communicating financial information so that a company’s internal managers can decide how best to use the company’s resources. It also helps to identify areas or functions that are not performing as planned.

Accounting Standards

These standards advise, among other things, how and when accountants recognize revenues and expenses and how they value assets & liabilities. In accounting recognition is the process of [1] classifying items in a financial transaction as assets, liabilities, capital, and surplus, revenue or expenses, and [2] recording the transaction in the company’s accounting records.

In an attempt to promote consistency, comparability, and more complete disclosure of information included in corporation’s financial reports, the International Accounting Standards Board{IASB}-an organization founded in 2001 as the successor to the ?International Accounting Standards Committee- has developed a set of International Financial Reporting Standards[IFRS].The European Union has decided that the financial statements of all publicly held companies in EU countries must comply with IFRS by 2005.However the IASB has no authority to mandate the adoption of IFRS by any jurisdiction. In the US, two important accounting standards for life insurers are US generally accepted accounting principles and statutory accounting practices.

U.S Generally Accepted Accounting Principles

 Are a set of financial accounting standards, conventions, and rules that U.S. stock insurers follow when summarizing transactions and preparing their financial statements? Mutual & Fraternal insurers must comply with GAAP if they sell variable life insurance or variable annuities.

Financial statements prepared according to GAAP provide users with financial information that is based on standardized definitions, valuation methods, and formats. The underlying premise of financial statements prepared in accordance with GAAP is the going-concern concept. Under this concept, accounting processes are based on the assumption that a company will continue to operate for an indefinite period of time.

The Financial Accounting Standards Board [FASB], a private organization funded by the accounting profession and companies with an interest in accounting practices, established U.S. GAAP requirements.

Statutory Accounting Practices in the U.S.

In addition to complying with GAAP requirements, insurance companies in the US must comply with statutory accounting practices, which are the accounting standards that all life insurers in the US must follow when preparing the Annual Statement and specified other financial reports that are submitted to state regulators. In contrast to GAAP, which are oriented toward demonstrating an insurer’s profitability, statutory accounting practices are designed to provide insurance regulators with information about an insurer’s solvency.

Insurance companies must satisfy the statutory accounting requirements for each state in which they conduct business. To minimize the differences in statutory accounting practices among the states the NAIC approved the Codification of Statutory Accounting Principles, which creates a single, basic written standards for statutory accounting.

Statutory accounting is perceived as a more conservative approach than that of the going-concern concept used by GAAP. Accounting Conservatism is the choice of a financial reporting method that results in the projection of lower values for a company’s assets, higher values for its liabilities and expenses, and a lower level of net income than would be the case if the company used a less conservative reporting method.

Financial Accounting Operations

Can be classified into

Premium Accounting

Also called policy accounting, is the accounting operation that is responsible for maintaining detailed accounting records of all financial transactions related to the policies an insurer has issued, including premiums, commissions, claim payments, policy loans, and policy dividends.

• It ensures that policy owners are properly billed, premium payments from policy owners are properly accounted for, and premium income is recorded by appropriate categories so that the company can use data to compute premium taxes.
• The basic policy record is used for premium accounting usually identifies the producer who is to receive the commission and the amount of commission.
• When a life insurance claim payment is authorized, the accounting area records the transaction and sends the payment to appropriate person.
• Accounting for life insurance policy loans requires recording the principal-the initial amount borrowed
• Accounting for policy dividends involves recording the amount of each policy dividend and applying the dividend according to the dividend option that each policy owner has chosen.

Investment accounting

Is responsible for recording all accounting entries related to the assets in an insurer’s investment portfolios. It includes tracking and recording the following amounts:

• The cash inflows (investment income and sales of securities) & outflows (purchase of securities and investment expenses such as brokerage commissions) associated with the insurer’s investments.
• Investment valuations that will be used in the company’s financial statements.
• Realized and unrealized capital gains and losses from investments. When an investment matures or is sold, any gain or loss on the investment becomes a realized gain (loss).An unrealized gain (loss) occurs when the value of a currently held asset changes.

Accountants usually establish an investment account – a segment – for each product line within the general account.

General Accounting

As business entities, life insurance companies perform some of the same basic accounting operations like payroll accounting that all businesses undertake. Another type of general accounting that all businesses conduct is disbursement accounting. Large expenditures must usually be supported by a voucher, which is a payment request signed by someone with the authority to disburse the amount involved.

Tax Accounting

Keeps records related to all the company’s taxes, and prepare tax returns and filings. Insurance companies also pay premium taxes, which are taxes on the premium income an insurer earns within a particular jurisdiction. Premium taxes are calculated as a percentage of premium income. The definition of premium income for premium tax purposes varies from one jurisdiction to another. For Example in the US, some states impose a tax on gross premiums, whereas other states allow an insurer to deduct the amount of policy dividends from gross premiums before calculating the amount of premium taxes owed.

Financial Reporting

Is the preparation and filing of required financial statements that communicate summaries of a company’s numerous financial transactions? Important financial statements are

• Balance sheet.
• Income statement.
• Cash Flow Statement provides information about the company’s cash receipts, cash disbursements, and net change in cash during a specified period.
• Statements of owner’s equity which shows the changes that occurred in an insurer’s stockholders’ or policy owners’ equity during a specified period.

The Annual Statement

Each year, every life insurer operating in the US – whether domiciled in the US or in another country – must file an Annual Statement with the NAIC and with the insurance department of every state in which the company conducts business. An insurer’s senior officers must attest to the accuracy of the information contained in the annual statement. It includes the following reports and other information:

• A balance sheet in the form of an Assets page and Liabilities, Surplus, and other Funds page.
• An income statement in the form of a Summary Of Operations page.
• A Capital and Surplus Account page.
• A Cash Flow statement.
• Other exhibits, schedules, and supplemental reports that support the totals shown in the primary financial statements.

Statutory accounting practices prescribe specific rules for asset valuation, which is the process of setting reported values for invested assets. Admitted assets are assets whose full value can be reported on the Assets page of the Annual Statement. They are considered to support the insurer’s policy reserves. Some typical admitted assets are    

• Cash
• Investment-grade securities
• Computer equipment
• Accounts receivable due in less than 90 days

Partially admitted assets are assets for which only a portion of their monetary value is reported on the Assets page of the Annual statement. It includes invested assets reduced by any amount that exceeds statutory investment limitations.

Nonadmitted assets are assets that are accorded no value on the Assets page of the Annual Statement. Examples are

• Furniture, machines, and equipment.
• Office supplies
• Advances to agents.
• Speculative or low-quality securities
• Accounts receivable due in 90 days or more

Requiring the omission of certain non-liquid assets from the Annual Statement is one way insurance regulators ensure conservatism in insurer’s accounting operations.

The Annual Report

In the US, an annual report is a GAAP-based publication that a company’s management sends to its owners and other interested parties to report on the company’s financial performance during the past year. Because it conforms to GAAP, the annual report is less conservative than the Annual Statement.

The SEC requires all publicly traded companies – including stock life insurers but not required for mutual insurers – and companies that sell variable life insurance or variable annuity products to prepare an annual report so that stockholders and other investors can compare the relative merits of alternative investments.

Management Accounting

Focuses on providing financial information solely for a company’s managers. Management accounting systems use the accounting information captured by the company’s financial accounting system and then present the information in ways that are useful for company mergers.

Financial Accounting	Management Accounting
Provides data for external users	Provides data for internal users
Is required by law	Not Required
Is subject to specific accounting principles	Not specific
Emphasizes precision of data	Emphasizes flexibility & relevance of data
Has a historical focus	Forward-looking focus
Reports on the business as a whole	Reports on Whole or individual parts
Culminates in the presentation of financial statements and so is an end in itself	Helps managers make decisions, and so is a means to an end.

Two Aspects of Management Accounting are

Budgeting

Is a management accounting process that includes creating a financial plan of action that an organization believes will help it achieve its goals? A budget is a financial plan of action expressed in monetary terms that covers a specified term period. During the budgeting process, life insurance company managers and other staff make forecasts about the following values:

• Number of policies the company will sell during the budget period.
• Amount of income the company expects to earn during the budget period.
• Cost of the work that must be done to sell and administer the desired number of products.
• Cost of anticipated capital expenditures.
• Amount of benefits expected to be paid.

Three types of budgets are

Operational Budgets covers part or all of a company’s core business operations are referred to as an operational budget. The first type of operational budget that a company prepares is a revenue budget, which indicates the amount of income from operations. After preparing the revenue budget, budget planners prepare an expense budget, which is a schedule of expenses expected during the given period.

Cash Budgets projects a company’s beginning cash balance, cash inflows, cash outflows, and ending cash balance for a particular period. It provides information the insurer needs to develop its investment strategy and to conduct effective asset /liability management.

Capital Budgets shows a company’s plans for the financial management of its long-term, high cost investment proposals. Financial managers use capital budgets to analyze decisions about investing in such long-term projects and to help monitor the financial status of the company’s capital investments.

The difference between actual results and budgeted results budget variance.Management accountants prepare regular reports showing budget variances for the company, for individual departments, and for each product line.

Cost Accounting

Is a system for accumulating and categorizing expense data that is used to facilitate effective cost control and to generate accurate estimates of future costs for use in the pricing of a company’s products?

Comparative analysis is the process of comparing an expense in one period to the same expense in a different period. It can help the insurer spot cost trends, fluctuations, peaks, and valleys, but it does not explain the reasons for changes.

Functional cost analysis is the process of accumulating the costs that are involved in each activity within a function.

Activity based costing (ABC) is a method by which an insurer links its costs to its products based on the activities required to produce each product.

Auditing

Is the process of examining and evaluating company records and procedures to ensure that [1] the company’s accounting records and financial statements are presented fairly and reasonably, [2] quality assurance is maintained, and [3] operational procedures and policies are effective?

The most common type is financial audit which is an evaluation of whether a company’s financial information, financial statements, and source documents comply with accounting standards and are a fair and consistent depiction of the company’s financial condition and performance.

An insurer’s required financial statements must undergo an external audit, which is an evaluation by an auditor who is employed by a public accounting firm and who is not associated with the insurance company. The purpose of an external audit is to [1] issue an independent opinion as to whether those financial statements present fairly the company’s operations through adherence to a given set of accounting principles, [2] recommend changes to the company’s system of internal control and [3] prepare reports of audit findings.

At the conclusion of an external audit, the auditor issues and signs an auditor’s opinion, which is a statement, prepared by an independent public accounting company, that [1] expresses the auditor’s opinion as to whether the information contained in insurer’s financial statements fairly represents the operations of the company, and [2] attests that the audit was conducted in accordance with generally accepted standards.

Related to an external audit is a financial condition examination, which is a formal investigation of an insurer that is carried out by insurance regulators and is designed to identify and monitor any threats to an insurer’s solvency. During financial condition examination, examiners from the applicable regulatory agency

• Examine the insurer’s accounting records and evaluate whether the insurer is operating on a sound and lawful basis.
• Investigate the insurer’s financial and business activities to assure that they do not contain any hazards to the insurer’s solvency.

Upon completion of the examination, examiners file an examination report with the appropriate regulatory authority, which sends a copy of the report to the insurer under study. The report may suggest causes for any problems and recommend solutions to the problems. The insurer has a specified time after receiving the report, usually 30 days in US within which to respond. If the report indicates that the insurer is financially impaired, the IRA takes any necessary action to protect policy owners.