INSURANCE INDUSTRY
Overview of Insurance Industry
The insurance sector is made up of companies that offer risk management in the form
of insurance contracts. The basic concept of insurance is that one party, the insurer,
will guarantee payment for an uncertain future event. Meanwhile, another party, the
insured or the policyholder, pays a smaller premium to the insurer in exchange for
that protection on that uncertain future occurrence. As an industry, insurance is
regarded as a slow-growing, safe sector for investors.
I. Insurance Operations
Definition of Insurance
Insurance is a contract between two parties whereby one party agrees to undertake the
risk of another in exchange for consideration known as premium. It is a promise to
pay a fixed sum of money to the other party on the happening of an uncertain event
(death) or after the expiry of a certain period (in case of life insurance) or to
indemnify the other party on the happening of an uncertain event (in case of general
insurance). The party bearing the risk is known as the 'insurer or 'assurer and the party
whose risk is covered is known as the 'insured' or 'assured'.
The insurance industry occupies a very important place among financial services all
over the world. Today insurance affects people from all walks of life. Individuals as
well as business firms turn to insurance for managing various risks. Everyday new
coverage is added to the existing policy. The expanding scope of insurance highlights
the growing importance of insurance to individuals and organizations alike. A proper
appreciation of what insurance is and what it can do to help an individual or an
organization is therefore necessary.
Why Is Insurance Important?
Insurance helps protect you, your family, and your assets. An insurer will help you
cover the costs of unexpected and routine medical bills or hospitalization, accident
damage to your car or injury of others, and home damage or theft of your belongings.
An insurance policy can even provide your survivors with a lump-sum cash payment
if you die. In short, insurance can offer peace of mind regarding unforeseen financial
risks.
Is Insurance an Asset?
Depending on the type of life insurance policy and how it is used, permanent or
variable life insurance could be considered a financial asset because it can build cash
value or be converted into cash. Simply put, most permanent life insurance policies
have the ability to build cash value over time.
Distinction (Types) of Insurance
There are 2 distinctions of insurance, namely Life Insurance and General Insurance or
Non Life Insurance.
Life Insurance
Life insurance promises specific financial compensation to the beneficiary in case of
the demise of the insured person. To avail the insurance benefits, the policyholder is
liable to pay the premium amounts regularly and timely, as per the policies of the
chosen plan.It is a contract between an insurer and a policy owner. A life insurance
policy guarantees the insurer pays a sum of money to named beneficiaries when the
insured dies in exchange for the premiums paid by the policyholder during their
lifetime. A life insurance policy guarantees that the insurer pays a sum of money to
your beneficiaries (such as a spouse or children) if you die. In exchange, you pay
premiums during your lifetime. There are two main types of life insurance. Term life
insurance covers you for a specific period, such as 10 to 20 years. If you die during
that period, your beneficiaries receive a payment. Permanent life insurance covers
your whole life as long as you continue paying the premiums.
Types of Life Insurance:
Endowment
Endowment life insurance is a temporary type of life insurance. These policies do not
last your entire life. Instead, you pick how many years you want the policy to last,
known as the term. You could also set a target date depending on your savings goals.
Pension or Retirement Plans
Pension plan requires contributions by the employer and may allow additional
contributions by the employee. The employee contributions are deducted from wages.
The employer may also match a portion of the worker’s annual contributions up to a
specific percentage or dollar amount.
Non Life Insurance / General Insurance
General insurance is a general term used for all the insurance plans that safeguard
things other than life, such as health and valuables against theft, natural disasters,
accidents, etc. Timely premiums are to be paid for the value of protection chosen. The
insurance company is then liable to pay you the assured sum if any damage or theft
happens to the insured entity.
Types of General Insurance:
Home Insurance
Protects your home, other property structures, and personal possessions against
natural disasters, unexpected damage, theft, and vandalism. Your lender or landlord
will likely require you to have homeowners insurance coverage. Where homes are
concerned, you don't have coverage or stop paying your insurance bill, your mortgage
lender is allowed to buy homeowners insurance for you and charge you for it.
Auto Insurance
Auto insurance can help pay claims if you injure or damage someone else's property
in a car accident, help pay for accident-related repairs on your vehicle, or repair or
replace your vehicle if stolen, vandalized, or damaged by a natural disaster. Instead of
paying out of pocket for auto accidents and damage, people pay annual premiums to
an auto insurance company. The company then pays all or most of the covered costs
associated with an auto accident or other vehicle damage. If you have a leased vehicle
or borrowed money to buy a car, your lender or leasing dealership will likely require
you to carry auto insurance.
Travel Insurance
Travel Insurance covers the costs and losses associated with traveling, including trip
cancellations or delays, coverage for emergency health care, injuries and evacuations,
damaged baggage, rental cars, and rental homes. However, even some of the best
travel insurance companies do not cover cancellations or delays due to weather,
terrorism, or a pandemic. They also don't often cover injuries from extreme sports or
high-adventure activities.
Health Insurance
Is a form of financial service that provides financial security in the midst of an illness
or when health calls for it. It is a form of insurance that covers medical and surgical
costs, either by preventive or corrective means. In most cases, individuals who have
health insurance literally pay nothing after a procedure is done. In order to enjoy such
benefits, the insured pays a premium. While health insurance is mandatory in the
country through PhilHealth, its coverage leaves a lot to be desired.
Insurance Institutions (Private Health Insurance, PhilHealth, and HMO)
PhilHealth
The Philippine Health Insurance Corporation or PhilHealth is a government-run
insurance provider. Compared to private providers, this type of insurance is more
affordable. PhilHealth has an established insurance program that provides financial
assistance to Filipino citizens who are employed or otherwise, and in need of medical
attention or surgery. If you are an employee, half of your monthly contribution will be
shouldered by your employer and the other half will be deducted from your salary.
Senior citizens aged 60 and over are automatically covered by PhilHealth, and
recently, the Republic Act 11228 has been passed, which means Persons with
Disabilities in the country will also receive special benefits from PhilHealth.
PhilHealth, which is the most affordable of the three will cost you P1,400 to P6,600 a
year. This depends on how much you earn, and whether you are under the formal or
informal (voluntary) bracket. If you are employed, half of the contribution should be
covered by your company.
Private Health Insurance
Unlike HMOs that offer access to a limited network of healthcare providers, private
health insurance companies offer access to a more extensive network. It is not that
common for companies to offer this type of insurance as a part of their benefits
package, although there are a few that do.
Private health insurance premiums can be a little pricey. They are fully paid for by
individuals voluntarily if they want to be insured. These private health insurance
companies are comparable to international ones and some of their policies still apply
even when the insured member is out of the country.
The most well-known private health insurance providers in the country include
Manulife, PRU Life U.K., and Sun Life. For private health insurance, the lowest plan
you can get would cost you P40,000 per year.
HMO
HMO or Health Maintenance Organizations are private organizations providing
healthcare insurance to members. Their difference from private health insurance is
that they have a network of doctors and healthcare providers. Their members can only
avail of the benefits from those within that network.
The plans that are offered by HMOs are often customizable but there is usually a limit
to how much financial assistance you can get in a year. The higher the premium you
are paying, the bigger your annual allowance will be, too.
There are several HMO providers in the country but the most popular ones are
Maxicare and MediCard. HMO membership is usually provided by private companies
to their employees on top of their PhilHealth contribution.
The cost of HMO premiums varies depending on the coverage you’re getting. The
plans would cost anywhere from P10,000 to 60,000 per year.
II. Insurance Audit
An insurance audit is the carrier's way of determining how much risk they actually
insured over the past year. The company would have undergone a drastic change over
that whole year if your policy was in effect.
Essential Points Checked during Insurance Audit in the Company Balance Sheet
The essential points considered during an insurance audit in the Balance Sheet of
Company are as follows:
1. Investments
The auditor must follow the following prescribed provisions with regards to the
investments. At the time of the inspections of the investments of the insurance
company:
a. An insurance company can invest only in approved securities. However, it can
also invest in securities other than approved securities if the following conditions
are satisfied:
The investment made must not exceed 25% of the total investments made.
The investment must be made with the consent of the board of directors.
b. An insurer must not invest in shares or debentures of an insurance or investment
company over least of the following:
10% of its own total calculated assets
2% of the subscribed share capital or debentures of the investee.
c. An insurance company must not invest in the share or debentures of a company
other than an insurance or investment company above at least the following:
10% of its own total calculated assets.
10% of the subscribed share capital or debentures of the investee.
d. An insurance company is not allowed to invest in the shares and debentures
of a private company.
e. The insurance companies are not permitted to invest in funds of their
policyholders outside the country.
2. Cash and Bank Balances
a. The auditor shall during the insurance audit prepare Bank reconciliation
statements.
b. The auditor must obtain the confirmation of Bank Balances for all the
operative and inoperative accounts.
c. The auditor shall physically verify the Term Deposit Receipts that are
issued by the bankers.
d. The auditor shall verify the deposits and withdrawal transactions and also
check if the account is operated by authorized persons only.
e. In case of funds that are in transit, the auditor must verify that the same
amount is appropriately reflected in a reconciliation statement.
3. Outstanding Premium and Agents’ Balance
a. Verify whether the agent’s balances as well as outstanding balances in the
outstanding premium accounts have been listed, analyzed, and reconciled for
the purpose of audit.
b. Verify whether the recoveries of large and outstanding deposits have been
made during the post-audit period.
c. Check if there are any old outstanding debts or credit balances at the year-
end which need adjustments.
d. Check the agent’s balances that do not include employee’s balances as well
as balances of other insurance companies.
e. Verify that there is no credit or commission given to agents for businesses.
Essential Points Checked in a Profit and Loss Account During Insurance Audit
The essential points to look in Profit and Loss Account while conducting insurance
audit are as follows:
Figure 1: Audit in Profit or Loss Account
1. Verification of Premium
Insurance Premium is the amount paid to the insurance company for payment of the
insurance contract obtained.
Audit Procedure:
a. Auditor must look into the internal control and compliance which is laid
down for the collection and recording of premium.
b. The cover notes must be numbered serially.
c. The auditor needs to check if the premium registers are maintained
chronologically.
d. The auditor verifies if the premium register is equal to the amount shown in
the General Ledger.
e. Lastly, the auditor also verifies if the installments due on or before the
balance sheet date has been received or not and if it has been accounted as
premium income under the year in which the financial statement is audited.
2. Verification of Claims
Insurance Claims is a formal request by a policyholder to an insurance company for
coverage or compensation for a covered loss or policy event.
Audit Procedure:
a. The auditor shall verify and check for the unsettled claims.
b. Auditor must also check if the provision made with the company for the
claims is legally liable.
c. Then, check if the provision made is not more than the insured amount.
d. Lastly, check the co-insurance arrangement which contains the company’s
provision with respect to its own share of anticipated liability.
3. Verification of Commission
Insurance Commission is a certain percentage of premium produced that is retained as
compensation by insurance agents and brokers.
Audit Procedure:
a. The auditor shall verify the voucher disbursement entries with regards to the
disbursement voucher with the copies of commission bills and statements.
b. The auditor also checks if the vouchers are authorized by the officers-in-
charge and also if the income tax is deducted.
c. Then, check the amount of commission allowed.
d. Lastly, check the accounting period of commission.
4. Verification of Operating Expenses
Audit Procedure:
a. The auditor must check the operating expenses that are more than 500,000
or 1% of the net premium, whichever is higher, that should be shown
separately.
b. The auditor must also check the expenses that are not directly related to the
insurance business and must be shown separately.
Content of Auditors Report
"The report of the auditors on the financial statements of every insurer shall deal with
the specified herein- “
A. That they have obtained all the information and explanations which, to the best
of their knowledge and belief, were necessary for the purposes of their audit and
whether they have found them satisfactory;
B. Whether proper books of account have been maintained by the insurer so far
as appears from an examination of those books;
C. Whether proper returns, audited or unaudited, from branches and other offices have
been received and whether they were adequate for the purpose of their audit;
D. Whether the Balance Sheet, Revenue Accounts and Profit and Loss Account dealt
with by the report and the Receipts and Payments Account are in agreement with the
books of account and returns; and
E. Whether the actuarial valuation of liabilities is duly certified by the appointed
actuary, including to the effect that the assumptions for such valuation are in
accordance with the guidelines and norms, if any, issued by the authority.
B. The auditors shall express their opinion on:
a. (i) Whether the Balance Sheet gives a true and fair view of the insurers
affairs as at the end of the financial year/period;
(ii) Whether the Revenue Account gives a true and fair view of the surplus or
the deficit for the financial year/period;
(iii) Whether the Profit and Loss Account gives a true and fair view of the
profit or loss for the financial year/period;
(iv) Whether the Receipts and Payments Account gives a true and fair view of
the receipts and payments for the financial year/period.
b. Investments have been valued in accordance with the provisions of the Act
and the Regulations.
c. The accounting policies selected by the insurer are appropriate and are in
compliance with the applicable Accounting Standards and with the accounting
principles, as prescribed in these Regulations or any order or direction issued
by the Authority in this behalf.
C. The auditors shall further certify that:
a. They have reviewed the management report and that there is no apparent
mistake or material inconsistencies with the financial statements; and
b. The insurer has complied with the terms and conditions of the registration
stipulated by the Authority.
D. A certificate signed by the auditors (which is in addition to any other
certificate or report which is required by law to be given with respect to the
balance sheet) certifying that:
a. they have verified the cash balances and the securities relating to the
insurer's loans, reversions and life interests (in the case of life insurers) and
investments;
b. the extent, if any, to which they have verified the investments and
transactions relating to any trusts undertaken by the insurer as trustee; and
c. no part of the assets of the policyholders' funds has been directly or
indirectly applied in contravention of the provisions of the Insurance Republic
Act No. 10607
D. Audit Risk
Regulatory Compliance and Reporting
The insurance industry is highly regulated, with requirements related to financial
reporting, solvency, capital adequacy, and market conduct. Auditors need to ensure
compliance with regulatory requirements and assess the effectiveness of internal
controls over regulatory reporting. Non-compliance with regulatory requirements can
result in financial penalties, reputational damage, and regulatory sanctions.
Cybersecurity and Data Privacy Risks
Insurance companies collect and store vast amounts of sensitive data, including
policyholder information and claims data. Auditors need to assess the effectiveness of
controls over data security, privacy, and confidentiality to mitigate the risk of data
breaches, cyberattacks, and regulatory violations. Failure to adequately safeguard data
can lead to financial losses and legal liabilities.
Economic and Industry Risks
The insurance industry is exposed to various economic and industry risks, including
interest rate risk, credit risk, catastrophic risk, and competitive pressures. Auditors
need to consider the impact of macroeconomic factors and industry trends on the
financial performance and solvency of insurance companies. Failure to adequately
assess and respond to these risks can affect the accuracy of financial reporting.
E. Audit Considerations
Audit Considerations- Revenue
When auditing the sources of revenue in the insurance industry, auditors typically
focus on several key considerations to ensure accuracy, reliability, and compliance.
1. Insurance Premiums
The primary source of revenue for insurance companies is the premiums paid by
policyholders. Premiums are the fees charged by insurance companies in exchange for
coverage against specified risks. These premiums can be paid in a lump sum or in
installments over time.
Auditors examine how premiums are recognized in the financial statements. They
verify that premium revenue is recognized in accordance with the applicable
accounting standards, such as Generally Accepted Accounting Principles (GAAP) or
International Financial Reporting Standards (IFRS). This involves assessing whether
premiums are earned over time or recognized at a point in time, based on the terms of
the insurance contracts.
2. Fee-based Services and Ancillary Products
Some insurance companies offer fee-based services such as risk management
consulting, actuarial services, and claims processing to other insurers, businesses, and
individuals. Many insurance companies offer ancillary products such as annuities,
retirement plans, and financial advisory services
Auditors assess the recognition of revenue from fee-based services and ancillary
products offered by the insurance company. They verify that revenue is recognized in
accordance with the applicable revenue recognition criteria and that any associated
costs are appropriately matched with revenue. Auditors also evaluate the adequacy of
disclosures related to fee-based services and ancillary products.
3. Underwriting Practices and Controls
Auditors evaluate the underwriting practices and controls to assess the accuracy and
completeness of premium calculations. They examine the underwriting policies,
procedures, and systems to ensure that premiums are accurately calculated based on
the risk exposure and coverage provided. This includes reviewing the documentation
supporting premium calculations and assessing the effectiveness of underwriting
controls.
4. Regulatory Compliance
Auditors assess the insurance company's compliance with regulatory requirements
related to revenue recognition, underwriting practices, reinsurance arrangements, and
financial reporting. They verify that revenue recognition practices adhere to
regulatory guidelines and that any deviations are appropriately disclosed. Auditors
also evaluate the adequacy of regulatory disclosures related to revenue sources and
associated risks.
Audit Considerations- Expense
1. Acquisition Expenses
Acquisition expenses include costs associated with acquiring new insurance business,
such as marketing and advertising expenses, agent and broker commissions, and
policy issuance costs. Auditors scrutinize the acquisition expenses to ensure they are
properly recorded and allocated to the appropriate accounting periods. They assess the
reasonableness of acquisition expenses relative to the volume and profitability of new
business written.
2. Administrative Expenses
Administrative expenses encompass the general and administrative costs of running
an insurance company, such as salaries and benefits of administrative staff, office
rent, utilities, and other overhead expenses. Auditors examine the administrative
expenses to verify their accuracy and reasonableness. They assess the allocation of
overhead expenses to various business segments and evaluate the efficiency of
administrative operations.
3. Regulatory Compliance Expenses
Regulatory compliance expenses include costs associated with complying with
regulatory requirements, such as licensing fees, regulatory filings, and compliance
monitoring activities. Auditors review the regulatory compliance expenses to ensure
they are properly recorded and classified in accordance with accounting standards.
They assess the reasonableness of regulatory compliance expenses relative to the
regulatory environment and the size of the insurance company.
Reportorial Requirements
Insurance Industry Reportorial Requirement
A. Interim Financial Statements (IFS)
1. The IFS consist of the following with comparative figures from the
immediately preceding audited financial statements duly signed by the
President and Finance Officer of the company:
I. Balance Sheet
II. Income Statement
2. The IFS shall be prepared in accordance with the current financial reporting
requirements issued by the IC applicable to pre-need companies.
B. Consolidated Trust Fund Statements (CTFS)
Pre-Need companies shall consolidate the trust fund statements from the trustee
bank/entities for each type of plan at a given quarter.
The consolidated trust fund statements shall be signed by the authorized
representative of the pre-need company.
C. Amount of Availing Plans for the Succeeding Year
To ensure that the trustee maintains a liquidity reserve, which shall be sufficient to
cover at least fifteen percent of the trust fund but in no case less than one hundred
twenty five percent of the amount of the availing plans for the succeeding year, the
pre-need company shall quarterly submit the benefits payable with the following
breakdown:
1. Availing for succeeding year
2. Matured but unclaimed benefits
D. Other Reports
In addition to IFS, CTFS and AVPSY, the following reports shall also form part of
the quarterly reports to be submitted by the pre-need companies:
1. Breakdown of Pre-Need Reserves and Benefit Obligations/Payables per line
of business/type of plan
2. Breakdown of Investments in Trust Funds per line of business/type of plan.
