Reinsurance Liabilities
Commission and Expense Allowance Payable on Reinsurance Assumed
the reinsurer or assuming company agrees to reimburse the ceding company for the commissions incurred by it and to allow an amount for other expenses of the ceding company.
Reinsurance Liabilities
Funds Held Under Reinsurance Treaties With Unauthorized Reinsurers
If a reinsurer is not authorized, then a liability may need to be established for reserves reinsured with the unauthorized reinsurer.
This liability is possible when the ceding company has withheld assets as security for payment of obligations or if the reinsurer has deposited funds or assets with the ceding company which are under its complete control, such as in a trust account.
General Expenses Due or Accrued
At the statement date, most companies find there are payments that will be made in the next statement period, which were incurred during the current period. Provision has been made for all sums due as of the statement date.
Another group of liabilities for which a provision is needed are liabilities for payments that will be made at some future date but which have been incurred by the company as of the statement date. Examples include incentive bonus plans for company management or employees, benefit plans, agent conventions, and legal damages.
Transfers to Separate Accounts Due or Accrued (Net)
Companies maintain separate accounts so that funds can be segregated to support investment strategies that meet the particular needs of a class of policyholders.
Most companies process premium income on separate account business with their general account business. The premium or deposit is then transferred to the separate account less commissions, premium taxes if applicable, and a processing fee. Any expenses incurred within the separate account may be transferred to the general account.
Taxes, Licenses and Fees Due or Accrued, Excluding Federal Income Taxes
categories that should be examined.?
Premium taxes, employer payroll taxes, state insurance department examination fees, and real estate taxes are major expense categories that should be examined.
Taxes, Licenses and Fees Due or Accrued, Excluding Federal Income Taxes
Calculation of the premium tax liability
- Composite rate for premium taxes:
• The composite rate is generally calculated from the previous year’s actual premium tax returns adjusted by major tax rate changes of the current year.
• The composite rate is than applied to the total premiums collected in the current year to calculate a gross liability for premium taxes.
• From this gross premium tax liability, subtract any prepaid taxes to arrive at the net liability to be reported.
- Composite rate for premium taxes:
- Alternative method
• A company may calculate the actual premium tax for each of the appropriate states and municipalities
Advantages: it is more accurate than the composite rate method, and it provides the information necessary for the preparation of the actual premium tax return.
Taxes, Licenses and Fees Due or Accrued, Excluding Federal Income Taxes
state insurance department examination fees
Some companies accrue state insurance department examination fees in their financial statements even if an examination has not occurred, or been completed within that year.
Examinations of companies occur periodically, generally every 3 to 5 years.
Federal Income Taxes Due or Accrued (Excluding Deferred Taxes)
During the year, a company will pay taxes for more than one tax period. Therefore a liability account will be charged for final payments of the previous year’s taxes as well as for estimated payments on the current year’s taxes. In addition, a company will have transactions against this liability account for the tax expense estimated to be incurred during the current year.
Amounts Withheld and Retained by Company As Agent or Trustee
The primary purpose of this liability is to report those liabilities that will be disbursed by the company at some future date.
The most obvious liabilities are those relating to the withholdings from payroll or commissions for taxes, company-sponsored insurance programs, contributions to employee benefits, charitable contributions, and other salary-related deductions.
- Some companies include an amount withheld and retained by the company as an agent or trustee for uncashed checks. These are checks that have been removed from the outstanding check list even though they have not been presented to the bank on which they are drawn. The checks are maintained as a separate liability to be turned over to state authorities at some future date. These are called escheat funds, abandoned property or unclaimed equities
Amounts Held for Agents Account
Each member of the sales force has a separate record or account statement with the company. Debit balances of one agent cannot be offset by the credit balances of another agent.
Commissions earned are credited, and each payment to the agent, whether it be for earned commissions, unearned commissions, advanced commissions, or agent loans, is recorded as a debit
The gross credit balances are aggregated and recorded as a liability; the gross debit balances are carried as an asset titled agents balances, which is generally reported as a nonadmitted asset.
Remittances and Items Not Allocated
What transactions are classified as Remittances and Items Not Allocated?
To reduce costs some insurance companies might run certain systems less often than daily.
• To record cash receipts, many companies maintain a liability for the funds that have been deposited by the company but have not been processed through the premium system. These liabilities would be classified as Remittances and items not allocated.
• Funds that cannot be processed when they are received because of some special handling or research that must occur before they can be credited properly.
- • Sometimes a policy may have lapsed although the company received the premium. In other instances, a policyholder may make a payment toward a policy loan that does not exist, or the payment may exceed the amount of the policy loan. Whatever the case, the transactions that do not process and are booked to a suspense account are classified under this heading.
Net Adjustments in Assets and Liabilities Due to Foreign Exchange Rates
The net adjustment in assets and liabilities due to foreign exchange rates line is used to record this fluctuation in the value of the U.S. dollar versus foreign currency. The change in this amount from period to period represents an unrealized capital gain or loss.
Debt
- The amount outstanding on a loan is recorded as a liability. Some assets have encumbrances, such as funds borrowed to finance real estate transactions that are not presented as liabilities within the statutory statement; they are offsets to the real estate asset presented on the asset page of the statutory statement.
Borrowed funds do not include surplus notes
Debt discount or premium, if any, is reported in the balance sheet as a direct adjustment to the face amount of the note. Discount or premium is amortized `over the life of the note using the interest method.
Interest Maintenance Reserve (IMR)
This applies to capital gains and losses net of capital-gains tax on fixed income investments. The IMR captures capital gains and losses resulting from changes in the level of interest rates and amortizes them into income over the remaining life of the investments sold.
A realized gain or loss on debt securities (excluding loan-backed and structured securities) and preferred stocks is interest rate related if the debt securities’ beginning NAIC/SVO rating did not change by more
than one classification at the end of the holding period.
Any debt security (excluding loan-backed and structured securities) that has been in the NAIC/SVO rating classification of 6 at any time during the holding period is reported as a credit related gain or loss in the AVR and excluded from the IMR.
Mortgage loan prepayment penalties should be treated as regular investment income and are not included in IMR.
Asset Valuation Reserve (AVR)
This reserve applies to the specific risk characteristics of the invested asset categories excluding cash, policy loans, premium notes, collateral loans, and income receivable.
Asset Valuation Reserve (AVR)
It is divided into what components?
- Default Component and
• The Bond, Preferred Stock, and Short-term Investments Subcomponent, which includes all fixed income investments that are corporate or governmental unit obligations, preferred stock, and asset-backed securities as reported in Schedule D, part 1 and part 2 section 1, and Schedule DA.
- Default Component and
• The Mortgage Subcomponent, which contains all farm, commercial, and residential mortgages as reported in Schedules Band BA.
- Equity Component
• The Common Stock Subcomponent, which includes all affiliated and unaffiliated common stock investments reported in Schedule D, part 2 section 2.
- Equity Component
• The Real Estate and Other Invested Asset Subcomponent, which contains provisions for real estate reported on Schedule A and other invested assets reported in Schedules BA and DA.
Asset Valuation Reserve (AVR)
The Mortgage Subcomponent is divided into?
- Default Component and
• The Bond, Preferred Stock, and Short-term Investments Subcomponent
• The Mortgage Subcomponent - Equity Component
• The Common Stock Subcomponent
• The Real Estate and Other Invested Asset Subcomponent
requires each mortgage loan on real estate to be placed into one of five major groupings:
1) Farm mortgages.
2) Residential mortgages-insured or guaranteed.
3) Residential mortgages-all other.
4) Commercial mortgages-insured or guaranteed.
5) Commercial mortgages-all other.
These groupings are then each further segmented into three classifications:
1) In good standing;
2) Overdue, not in process of foreclosure;
3) In process of foreclosure.
Asset Valuation Reserve (AVR)
Common Stock Subcomponent is divided into?
AVR components:
1. Default Component and
• The Bond, Preferred Stock, and Short-term Investments Subcomponent
• The Mortgage Subcomponent
- Equity Component
• The Common Stock Subcomponent
• The Real Estate and Other Invested Asset Subcomponent
Common stocks are placed into six classifications,
1 Unaffiliated publicly traded common shares
2 Unaffiliated privately placed common shares: 25%
3 Affiliated life insurance companies with an AVR: 0%;
4 Affiliated investment subsidiaries, whose AVR is determined utilizing factors appropriate to the underlying investments held;
5 Affiliated companies valued under section 8(3)(a) or (c) of the SVO manual: 20%;
6 All other affiliated companies: 25%.
1 Unaffiliated publicly traded common shares
• Reserve factor 30% of the weighted average Portfolio Beta.
• calculating the portfolio beta (two methods)
1. Individual method
2. Aggregate method
•Companies that choose not to calculate the weighted average of the portfolio beta must use the maximum AVR factor of 30 percent.
Asset Valuation Reserve (AVR)
Real Estate and Other Invested Asset Subcomponent is divided into?
AVR components:
1. Default Component and
• The Bond, Preferred Stock, and Short-term Investments Subcomponent
• The Mortgage Subcomponent
- Equity Component
• The Common Stock Subcomponent
• The Real Estate and Other Invested Asset Subcomponent
three groupings for real estate.
• home office property; reserve factor of 7.5%
- properties acquired in satisfaction of debt; reserve factor of 11%
- investment properties: reserve factor of 7.5%
Other Invested Assets Subcomponent
• should be calculated by classifying each asset into one of five major categories and then further segmenting the assets down into their relative groupings. The remaining unclassified assets have a 20% reserve maximum.
Commissions to Agents Due or Accrued
Life insurance companies process premium collections through a system that develops commission transactions, which are accumulated over time before they are paid to the sales force. Therefore, there is a lag between the time premium income is recognized and a commission is paid. Of course there are some exceptions, such as companies in which field collections are allowed and net premium remittances are acceptable. In such cases, the agent collects the premium, subtracts his commission
Unearned Investment Income
- Unearned investment income can be for income collected in advance on mortgage loans, investment real estate and policy loans.
Dividends to Stockholders
Declared and Unpaid
- If the dividend has been declared by the board of directors and remains unpaid on the statement date, the appropriate liability needs to be recorded.
Interest Maintenance Reserve (IMR)
Methods available for calculating the amortization schedule for the IMR
- Seriatim Method:
the amount amortized is the excess of the amount of income which would have been reported in that year, had the asset not been disposed of, OVER the amount of income which would have been reported had the asset been repurchased at its sale price.
Grouped Method:
method may be used to amortize interest-related capital gains and losses among lines of business and policyholders in accordance with the investment income allocation process as approved by the state insurance departments.
- A company also may use a standard “simplified” method to determine the amortization schedule; this method groups capital gains, net of capital gains tax, in 5-year bands, according to the number of calendar years to expected maturity; except that investments with one calendar year to expected maturity will be grouped fro those with two to five calendar years to expected maturity.
- A negative IMR liability can only be recorded in the General or Separate Account(s) statements to the extent that it does not exceed a positive liability in the other statement. If a net negative IMR balance occurs, it is recorded as an asset and then nonadmitted.
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Chapter 251
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Chapter 358
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Chapter 427
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Chapter 521
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Chapter 655
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Chapter 718
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Chapter 823
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Chapter 918
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Chapter 1018
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Chapter 1120
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Chapter 1237
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Chapter 1317
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Chapter 1425
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Chapter 1520
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Chapter 1626
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Chapter 17 - Budget24
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Chapter 18 - Strategic Planning8
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Chapter 19 - Management reports18
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Chapter 20 - Mergers and Acquisitions20
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Chapter 2120
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Chapter 2220
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Chapter 24 - Internal Control22
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Chapter 25 - Reinsurance25
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Chapter 262
