Insurance industry briefing materials template 2012 v17 06252012

Nonlife Insurance Industry Briefing

June 26, 2012

Agenda

 Industry Performance

 Overview
 Commonly issued nonlife insurance products

 Fraud risk considerations

 Common types of reinsurance arrangements

1

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 testing

2

Agenda (Cont’d)

 Taxation

 Applicable taxes

 Common tax issues

3

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

Industry Performance in 2010

Financial Performance

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

 Increase in premiums produced in each line of business.
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

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 0.03

7

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

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

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

Gross Premiums 2011 % 2010 %
Top 20 Nonlife Insurance Companies 38,646 82.04 34,572 79.05

All Others 8,459 17.96 9,162 20.95

Total 47,105 100.00 43,734 100.00

Premiums Earned 2011 % 2010 %

All Others 4,850 22.10 5,170 24.98

Total 21,950 100.00 20,701 100.00

Net Premiums Written 2011 % 2010 %

All Others 4,970 78.66 5,359 24.70

Total 23,286 100.00 21,695 100.00

11

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

Top 20 Nonlife Insurance based on Gross Premiums Written

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. 459,755,884

13

Top 20 Nonlife Insurance based on Net Premiums Written

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 Lipana

14

Top 20 Nonlife Insurance based on Net Premiums Written

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 263,777,571

15

Commonly Issued
Nonlife Insurance Products

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


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


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


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 Carrier

20


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 Apparatus

21


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


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


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

Marine Insurance has two major lines:

1. Marine Cargo

2. Hull and Machinery

24


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
insured's property) or partial damage (known as
particular average)

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

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

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

25


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


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 ship's hull,
machinery or equipment which may result in either
total loss (actual or constructive to the insured's
property) or partial damage (known as particular
average)
• Expenses to prevent or reduce loss (sue and labor,
salvage charges)
• General average contributions
• Liability arising from collision with other vessels

27


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


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


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

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
receivables

32

Common Types of
Reinsurance Arrangements

Reinsurance

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

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

34

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


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


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


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


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

Common Application Systems

Application Systems
Nonlife Insurance Insurance System (NIIS)
General Insurance Information System (GenIISys)
General Insurance System (GIS)

42

Significant Processes, SCOTs,
Significant Accounts and Relevant
Assertions

Significant Processes, SCOTs, Significant Accounts and
Relevant 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 - M

44

Relevant Assertions (Cont’d)

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
company

45


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 agreement

46

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’
commissions

47

Commissions b. Renewal - agents’/brokers’
Processing commissions
(Cont’d) c. Endorsement - agents’/brokers’
commissions
d. Inward Reinsurances - commissions
due to ceding companies

48

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

Unpaid Losses - C, V, E

49

Control Matrix

Financial Statement Close Process
WCGW Assertion Controls
•Unearned Premium •Reserve for Unearned •System is configured to
Reserves, Deferred Premiums - V automatically and accurately
Reinsurance Premiums, compute for the balances of
Deferred Acquisition Costs, •Deferred Reinsurance the said affected accounts.
Deferred Reinsurance Premiums - V
Commissions are inaccurately
computed. •Increase (Decrease) in RUP -
M

•Deferred Acquisition Costs - V

•Deferred Reinsurance
Commissions - V

•Commission Expense - M

•Commission Income - M
51

Control Matrix - Financial Statement Close Process

•24th/365th method •Reserve for Unearned •System automatically
computation adjustments are Premiums - C generates adjusting journal
not 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 - C

52

Control Matrix - Underwriting

• Policies (New business •Premium Income - O, M •System detects duplicate
/renewal/endorsements) may processing of those
be 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 automatically
the 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

Control Matrix – Underwriting (Cont’d)

•Not all premium and •Premium Income - C, M •A journal entry is
premium adjustments are automatically generated upon
recorded. •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

Control Matrix

Underwriting (Cont’d)
•Coding of premiums may be •Premium Income - M •Reviews and approvals are
incorrect, resulting in performed based on the limits
inaccurate computation of •Premiums Receivable - V of authority to ascertain the
premiums. accuracy and completeness of
•Premiums Due from Ceding the details encoded in the
Companies - V system.
•Fictitious premiums are •Premium Income - O •Applications/renewals/endors
recorded. 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

Control Matrix

Underwriting (Cont’d)
•Not all approved policies •Premium Income - C •Transactions are posted once
may 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

Control Matrix - Reinsurance (Outward Facultative)

•Premium for retention may •Premiums Ceded to •Personnel handling/processing
not be properly segregated Facultative Reinsurers - C, M reinsurance transactions are
from 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

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

•Premiums ceded may not be •Premiums Ceded to •System automatically generates
recorded. 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

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

•Encoded distribution details •Premiums Ceded - M •Encoded details of the
are incorrect resulting to distribution must be reviewed and
inaccurate computation of the •Premiums Due to approved by the authorized
amounts relating to the Facultative Reinsurers - V signatories to ensure accuracy of
reinsurance made. the details/amounts.

•Not all distribution made may •Premiums Ceded - C •The log used for monitoring the
have 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

Control Matrix - Reinsurance (Treaty)

•Not all transactions for treaty •Premiums Ceded to Treaty •System automatically
reinsurance may have been Reinsurers - C, E generates journal entry upon
recorded. encoding of distribution details.
•Premiums Due to Treaty
Reinsurers - C, E
•Amount computed for treaty •Premiums Ceded to Treaty •Review and approval of the
reinsurance transactions may Reinsurers - M distribution to treaty reinsurers
not be in accordance with the is performed to ensure that the
treaty 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 reporting
not be recorded accurately and Reinsurers - C, M period, a manual review of
completely. 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

Control Matrix – Claims Processing

•Unauthorized claim may be •Losses and Loss •Validity of the claim is evaluated
processed. 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

Control Matrix - Claims Processing (Cont’d)

•Not all claims may be •Losses and Loss Adjustment •All claims that have been verified
recorded. 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 to
share in losses may Expenses (net) - M automatically compute for the
inaccurately be computed. Company’s and the reinsurers’
•Claims Payable - V share in the losses.

Unpaid Losses – V

62


•Losses are not adjusted when •Losses and Loss •Status of the claim filed is
losses or loss adjustment Adjustment Expenses (net) tagged as “Closed”, “Partial” in
expense reserves are fully or -M the system once payment is
partially 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


•Claim transactions may not •Losses and Loss •At period end, claim register is
be 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 to
not recorded in the same Losses and Loss ensure that claims for
period as the claim to which it Adjustment Expenses - C, reinsurance recoveries are filed
relates. 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

Control Matrix - Commissions Processing

•Commissions may be •Commission Expense - O •System detects duplicate
duplicated. 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 of
recorded in the wrong commission expense/income is
period. •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 of
recorded. the related policy, details
•Commissions Payable - C pertaining to the commission is
also required to be encoded.
•Commission Income - C

•Due from reinsurers - C

65

Control Matrix – Commissions Processing (Cont’d)

•Coding of commissions may •Commission Expense - M •Reviews and approvals are
be incorrect, resulting in performed based on the limits of
inaccurate computation of •Commissions Payable - V authority to ascertain the accuracy
commissions. of the details encoded in the
•Commission Income - M system.

•Due from reinsurers - V

•Fictitious commissions may •Commission Expense - O •Setup of commission is also
be 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

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 review

68



RI Recoverable on unpaid losses • Agreement of SL with GL
(Reinsurance Assets) • Verification of balances based on
reinsurance agreements and losses
incurred

Deferred reinsurance premiums • Agreement of SL with GL
(Reinsurance Assets) • Recomputation
Deferred Acquisition Cost • Agreement of SL with GL
• Recomputation

69



Claims payable (Insurance Contract • Agreement of SL with GL
Liabilities) • Unusual items review
• Vouching of accounts against the claim
folders
• 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

70



Insurance Payables • Agreement of SL with GL
• Vouching against the Statement of
Accounts
• Unusual item review
• Valuation of foreign currency-
denominated liabilities
• Insurance payables confirmation
• Review of reinsurance agreements
Funds held for reinsurers • Agreement of SL with GL
• Test of reasonableness
• Review of reinsurance agreements

71



Deferred reinsurance commission • Agreement of SL with GL
• Recomputation
Gross premiums • Agreement of SL with GL
• Cutoff testing
Reinsurers share on gross premiums •Agreement of SL with GL
•Cutoff testing
Insurance contract benefits and claims • Agreement of SL with GL
• Search for IBNR

72

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.

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 insurer's accounting policies do not require a liability adequacy
test that meets the minimum requirements, the insurer shall
determine whether the net carrying amount is less than the carrying
amount that would be required if the relevant insurance liabilities
were within the scope of PAS 37. If it is less, the insurer shall
recognize the entire difference in profit or loss and decrease the
carrying amount of the related deferred acquisition costs or related
intangible assets or increase the carrying amount of the relevant
insurance liabilities.

Applicable Taxes

National Taxes
 Income Tax
► Regular Corporate Income Tax (RCIT)
► Minimum Corporate Income Tax (MCIT)

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

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

77

Applicable Taxes

National Taxes
 Local Taxes
► Local Business Tax (LBT)
► Real Property Tax (RPT)

78

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 VAT

79

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

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


 RCIT
 Gross income means all income derived from whatever source, including (but not
limited to) the following items (Section 32 of Tax Code):

► Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items
► Gross income derived from the conduct of trade or business or the exercise of a
profession
► Gains derived from dealings in property
► Interests
► Rents
► Royalties
► Dividends
► Annuities
► Prizes and winnings
► Pensions

83


 RCIT
 Deductions from Gross Income- In computing taxable income subject to income
tax, there shall be allowed the following deductions from gross income:(Section
34 of Tax Code):
► Expenses – (Ordinary and Necessary Trade, Business or Professional Expenses)
► Interests
► Taxes- (except for those listed in Sec. 34 C.1 )
► Interests
► Losses- (actually sustained during the taxable year and not compensated for by
insurance or other forms of indemnity)
► Bad Debts- (ascertained to be worthless and charged off within the taxable year)
► Depreciation
► Depletion of Oil and Gas Wells and Mines Prizes and winnings
► Charitable and Other Contributions.
► Research and Development
► Pension Trusts

84


 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 services

85


 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


 MCIT
 Cost of services shall be limited to the following:
► Salaries, wages and other employee benefits of personnel
directly engaged in the following activities:
► Underwriting;
► Claims and benefits;
► Actuary;
► Policy owner services, such as but limited to the following:
► Policy changes and amendments;
► Policy endorsements/assignments;
► Policy benefits and features;
► Changes in forfeiture options; and
► Policy reinstatements

87


 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

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 Cost

89

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

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 money

92

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

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% VAT

94

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
Company

95

Withholding Taxes

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

 Expanded Withholding Tax (EWT)

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

 Final Withholding Tax (FWT)

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

97

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

Withholding Taxes (Cont’d)

Non-Life Insurance - Transactions Subject to DST

Issued by Non-Life Insurance Companies: DST Rate
1) 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 certificate
4) Certificate of Cover (COC) issued pertinent P15 per certificate
to motor vehicle insurances

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

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

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

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

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

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

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

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

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