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IP 50–1

Statutory Issue Paper No. 50

Classifications and Definitions of Insurance or Managed Care Contracts In

Force

STATUS

Finalized June 23, 1998

Original SSAP and Current Authoritative Guidance: SSAP No. 50

Type of Issue:

Common Area

SUMMARY OF ISSUE

1. Current statutory guidance and state regulatory requirements use many different groupings,

classifications and terminologies for insurance contracts in force. The Accounting Practices and

Procedures Manual for Life and Accident and Health Insurance Companies (Life/A&H Accounting

Practices and Procedures Manual) groups life insurance contracts into four product type categories based

on specific product or marketing attributes: ordinary, industrial, group and credit. The Life/A&H

Accounting Practices and Procedures Manual separates accident and health contracts into the categories

of individual, group and credit. The Accounting Practices and Procedures Manual for Property and

Casualty Insurance Companies (P&C Accounting Practices and Procedures Manual) groups property and

casualty products by type of coverage only for purposes of presentation in the various Annual Statement

exhibits and schedules.

2. GAAP classifies insurance contracts in force as either long-duration or short-duration based on the

nature of the insurance enterprise's obligations and policyholder rights under the provisions of the

contract. Long-duration contracts include contracts, such as whole life, guaranteed renewable term life,

endowment, annuity, and title insurance contracts, that are expected to remain in force for an extended

period. All other insurance contracts are considered short-duration contracts and include most property

and liability and all credit insurance contracts.

3. The purpose of this issue paper is to provide a general framework for classifying insurance or

managed care contracts into categories where the recognition of contract and policy reserves and related

revenue, benefits, and claims is fundamentally different. Separate issue papers will establish the

accounting principles for premium and income recognition and policy benefit and claim reserves for all

contracts as defined herein, including comparisons of statutory accounting principles to GAAP.

SUMMARY CONCLUSION

Overview

4. The primary purpose of insurance, including managed care coverage, is to provide economic

protection from identified risks occurring or discovered within a specified period. These risks include

death, disability, health benefits, outliving one’s financial assets, and damage to property by an insured

peril or damage or injury to the insured or third parties. The accounting for these contracts is significantly

influenced by the terms of the insurance or managed care contract.

5. In order to provide for a conservative, consistent, and comparable method of accounting for

insurance or managed care contracts, premiums and related benefits shall be recognized considering the

policy term, premium payment requirements, risks assumed and benefits provided under the contract

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using conservative assumptions as to interest, mortality, morbidity, and incurred costs for health benefits

as applicable. The reserve and income recognition methods reflect the premium payment pattern and the

insurance protection and/or benefits provided for in the insurance or managed care contract.

6. This issue paper establishes an overall framework for existing insurance or managed care contracts

by identifying four broad categories of insurance or managed care contracts where the premium payment

pattern and the protection and/or benefits provided are fundamentally different and therefore require

different income recognition and reserving methods.

7. Insurance contracts providing any protection against death, disability, accident or illness in which

the reporting entity assumes mortality or morbidity risk shall be classified as life or accident and health

contracts, as applicable. Managed care contracts provide defined health care services to subscribers,

members or policyholders, collectively referred to hereafter as subscribers, in return for fixed, periodic

premiums (usually paid monthly) that are generally due at or before the beginning of the coverage period

and shall be classified as health contracts. Contracts which insure against damage to property by an

insured peril or damage or injury to the insured or third parties, generally over a fixed/limited period of

time, shall be classified as property and casualty contracts. Contracts in which the reporting entity does

not assume any mortality, morbidity, health benefit costs incurred or casualty risk and which act

exclusively as investment vehicles shall be classified as deposit-type contracts. Such classification shall

be made at the inception of the contract and shall not change.

Life Contracts

8. The primary purpose of life insurance is to provide financial assistance to a beneficiary at the

insured’s death. The long period of coverage involving the risk of death, a risk which increases with age,

is the distinguishing characteristic by which life insurance is set apart from other forms of insurance. Life

insurance is often sold on a level premium basis under which the annual premium remains constant even

though the expected policy benefits and services do not occur evenly over the duration of the contract.

Premium revenue generally exceeds expected policy benefits in the early years of the contract and it is

necessary to accrue, as premium revenue is recognized, a liability for costs that are expected to be paid in

the later years of the contracts.

9. The liability for expected costs relating to most types of life contracts is accrued over the current

and expected renewal periods of the contracts. The net valuation premium is based upon an assumed

interest rate and upon the frequency of death derived from mortality tables. The net premiums collected,

after deducting benefits and other costs each year, are accumulated at interest. This accumulation, when

combined with future net premiums and future investment income theoretically generates a sum sufficient

to pay the claims resulting from the death or disabilities of the insured.

10. The liability which corresponds to this fund is referred to as the policy reserve. These contracts are

generally expected to be in-force for an extended period of time and require the performance of various

functions and services for an undefined period of time and are generally not subject to unilateral changes

in their provisions. The policy reserve is generally calculated as the excess of the present value of future

benefits to be paid to or on behalf of policyholders less the present value of future net premiums,

discounted at valuation interest and mortality.

11. Life insurance contracts shall include contracts with life contingencies, including, but not limited

to:

• Whole life contracts

• Endowment contracts

• Term life contracts

• Supplementary contracts

• Group life contracts

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• Franchise life contracts

• Universal life type contracts

• Variable life contracts

• Limited payment contracts

• Credit life contracts

• Annuity contracts

Accident and Health Contracts

12. Health insurance policies or managed care contracts, offered by a health maintenance or similar

organization, many life insurance and some property and casualty companies, may provide hospital,

surgical, medical, loss of income, accidental death and dismemberment, or long-term care coverage as

well as other health related benefits. The insurance protection involving economic loss resulting from a

medical condition (e.g., medical care expenses or the risk of disability) is the distinguishing characteristic

by which accident and health insurance or managed care contracts are set apart from other forms of

insurance. Health coverage is currently furnished under group or individual contracts. Coverage sold to

individuals can be subdivided according to the reporting entity’s right to continue the policy, limitations

on the reporting entity’s right to increase premiums, as well as other factors.

13. Accident and health contracts also include risk contracts with Medicaid and Medicare whereby the

reporting entity assumes insurance risk.

14. Managed care contracts are contracts that provide defined health care services to subscribers in

return for fixed, periodic premiums (usually paid monthly) that are generally due at or before the

beginning of the coverage period. Managed care means a system or technique(s) generally used by

reporting entities to affect access to and control payment for health care services. Managed care

techniques most often include one or more of the following: 1) review of medical necessity and

appropriateness of services or site of services; 2) contracts with selected providers; 3) financial incentives

for enrollees to use specific providers, services, or service sites; 4) controlled access to and coordination

of services by a case manager; and 5) payor efforts to identify treatment alternatives and modify benefit

restrictions for high cost patient care. Expenses for medical, hospital, pharmacy and other benefits are

recognized based on the way the reporting entity provides for the contracted services. In some instances,

this is through the payment of claims to providers as services are rendered which require a claims liability

to be recorded as addressed in Issue Paper No. 55—Unpaid Claims, Losses and Loss Adjustment

Expenses (Issue Paper No. 55) or through capitated arrangements based on contracts with providers,

where expense is recognized ratably over the contract period.

15. Similar to life insurance contracts, a significant amount of accident and health contracts is sold to

individuals and groups on a level premium basis under which the annual premium remains constant even

though the expected policy benefits and services may not occur evenly over the duration of the contract.

Premium revenue for level premium contracts generally exceeds expected policy benefits in the early

years of the contracts and it is necessary to accrue, as premium revenue is recognized, a liability for costs

that are expected to be paid in the later years of the contracts.

16. The liability for expected costs relating to accident and health contracts sold on a level premium

basis is accrued over the current and expected renewal periods of the contracts. The net valuation

premium is based upon an assumed interest rate, persistency, and the frequency of expected death and

disability claims generally derived from mortality and morbidity tables. The net premiums collected, after

deducting benefits and other costs each year, are accumulated at interest. Similar to life insurance, this

accumulation or policy reserve, when combined with future net premiums and future investment income

theoretically generate a sum sufficient to pay the claims resulting from the death or disabilities of the

insured or subscriber. The reserve is generally calculated as the excess of the present value of future

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benefits to be paid to or on behalf of insureds or subscribers less the present value of future net premiums,

discounted at valuation interest, mortality, and morbidity.

17. Accident and health contracts shall include contracts with health benefits or disability

contingencies, including, but not limited to:

• Managed care contracts

• Income replacement contracts

• Expense reimbursement contracts

• Credit accident and health contracts

• Continuing care contracts

• Long-term care contracts

• Accidental death and dismemberment contracts

Deposit-Type Contracts

18. Deposit-type or investment contracts do not incorporate insurance risk. Contracts issued by insurers

that do not incorporate risk from the death or disability of policyholders (mortality or morbidity risk) are

more comparable to financial or investment instruments issued by other financial institutions than to

insurance contracts.

19. Accounting for investment contracts issued by insurance enterprises should be consistent with the

accounting for interest-bearing and other financial instruments where the reserve is either based on the

accumulated amounts paid plus an income accumulation based on the contract provisions or based on the

present value of future benefits, discounted at the applicable interest factor.

20. Deposit-type contracts shall include contracts without life or disability contingencies, including, but

not limited to:

• Supplemental contracts

• Lottery payouts

• Structured settlements

• Guaranteed interest contracts

• Income settlement options

• Dividend and coupon accumulations

• Annuities certain

• Premium and other deposit funds

Property and Casualty Contracts

21. Contracts which insure against damage to property by an insured peril or damage or injury to the

insured or third parties shall be classified as property and casualty contracts. Damages shall include both

physical and financial damages. Premiums from property and casualty contracts are generally recognized

as earned over the exposure period of the contract in proportion to the amount of insurance protection

provided.

22. The exposure to insurance risk for most property and casualty insurance contracts does not vary

significantly during the duration of the contract. Premiums from property and casualty contracts shall be

recognized as earned premium as discussed in Issue Paper No. 53—Property and Casualty Contracts -

Premiums.

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23. These contracts shall include but shall not be limited to:

• Traditional property and casualty insurance contracts

• Title insurance contracts

• Mortgage and financial guaranty contracts

DISCUSSION

24. This issue paper establishes an overall framework for existing insurance contracts by identifying

four broad categories of insurance contracts where the premium payment pattern and the insurance

protection and/or benefits provided are fundamentally different and therefore require different income

recognition and reserving methods. The framework established for the purposes of this issue paper differs

from the SAP classifications. Additionally, this framework rejects the GAAP classifications (i.e., short-

duration and long-duration) found in FASB Statement No. 60, Accounting and Reporting by Insurance

Enterprises (FAS 60), FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for

Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments (FAS

97), and FASB Statement No. 120, Accounting and Reporting by Mutual Life Insurance Enterprises and

by Insurance Enterprises for Certain Long-Duration Participating Contracts (FAS 120). However, this

framework does incorporate certain elements of both SAP and GAAP. As new types of contracts are

developed, based on their characteristics, the contracts can be readily classified into one of the four

categories established by this issue paper. Establishing criteria for the evaluation of new products is

consistent with the Statement of Concepts which states:

The regulators' need for meaningful, comparable financial information to determine an insurer's

financial condition requires consistency in the development and application of statutory accounting

principles. Because the market place, the economic and business environment, and insurance

industry products and practices are constantly changing, regulatory concerns are also changing. An

effective statutory accounting model must be responsive to these changes and address emerging

accounting issues. Precedent or historically accepted practice alone should not be sufficient

justifications for continuing to follow a particular accounting principle or practice which may not

coincide with the objectives of regulators.

The multitude of unique circumstances and individual transactions makes it virtually impossible for

any codification of accounting principles to be totally comprehensive. Application of SAP, either

contained in the Accounting Practices and Procedures Manuals or defined as GAAP and adopted

by the NAIC, to unique circumstances or individual transactions should be consistent with the

concepts of conservatism, consistency, and recognition

25. Distinguishing between life, accident and health, deposit-type, and property and casualty contracts

is reflective of the insurer’s obligations under the terms of the contract. The common attributes of

insurance contracts are often readily identified with the duration of the contract, the insurer’s ability to

unilaterally change the terms of the contract, the premium payment pattern, as well as other factors. Based

on the attributes, the following general issue papers have been developed:

Issue Paper Title

Issue Paper No. 51 Life Contracts

Issue Paper No. 52 Deposit-Type Contracts

Issue Paper No. 53 Property Casualty Contracts - Premiums

Issue Paper No. 54 Individual and Group Accident and Health Contracts

Issue Paper No. 65 Property and Casualty Contracts

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26. If additional guidance is necessary, separate issue papers will establish statutory accounting

principles for specific insurance contracts as indicated below. Current statutory accounting for specific

types of contracts will be evaluated for consistency with the basic concepts established in Issue Paper

Nos. 51, 52, 53, 54, and 65, as well as for consistency with the Statement of Concepts. The descriptions

of specific types of insurance contracts in paragraphs 2 to 52 of this issue paper are consistent with the

descriptions of such contracts found in the AICPA Audits of Property and Liability Insurance Companies

(AICPA P&C Audit and Accounting Guide) and the AICPA Audits of Stock Life Insurance Companies

(AICPA Life Audit and Accounting Guide). A summary of those specific issue papers is as follows:

Issue Paper Title

Life Contracts

Issue Paper No. 56 Universal Life-Type Contracts, Policyholder Dividends, and Coupons

Issue Paper No. 59 Credit Life and Accident and Health Insurance Contracts

Issue Paper No. 74 Life, Deposit-Type and Accident and Health Reinsurance

Issue Paper No. 89 Separate Accounts

Accident and Health Contracts

Issue Paper No. 59 Credit Life and Accident and Health Insurance Contracts

Issue Paper No. 74 Life, Deposit-Type and Accident and Health Reinsurance

Property and Casualty Contracts

Issue Paper No. 57 Title Insurance

Issue Paper No. 69 Financial Guaranty Insurance

Issue Paper No. 88 Mortgage Guaranty Insurance

Issue Paper No. 75 Property and Casualty Reinsurance

27. Areas where premium, policy and claim reserves and related areas are accounted for similarly will

be combined and discussed as a single topic. Those categories are as follows:

Issue Paper Title

Issue Paper No. 55 Unpaid Claims, Losses and Loss Adjustment Expenses

Issue Paper No. 66 Accounting for Retrospectively Rated Contracts

Issue Paper No. 97 Underwriting Pools and Associations Including Intercompany Pools

Life Contracts

28. The contract for ordinary life insurance is between the company and the policy owner (often the

insured). Many variations of ordinary life coverages are available to a purchaser of insurance, including

participating, limited-payment periods, combinations of coverages, and decreasing (or increasing) death

benefits. Industrial life insurance, also called “debit” insurance, is insurance under which premiums are

paid monthly or more often, the face amount of the policy does not exceed a stated amount, and the words

"industrial policy" are printed in prominent type on the face of the policy. Ordinary and industrial life

insurance contracts are considered life contracts and include the following types of coverage as described

in the following paragraphs.

29. Whole life contracts provide a fixed amount of insurance coverage over the life of the insured and

the related benefits are normally payable only upon the insured's death. Premiums are paid over various

periods as allowed by the terms of the policy contract. Whole life insurance contracts provide for

nonforfeiture values, some common types being reduced paid up insurance, extended term insurance, and

cash values, and some provide for the payment of policy dividends. A level premium is usually paid for

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policies of this type; and the premium may be paid in annual or more frequent modes. An ordinary life

(straight-life) policy stipulates that premiums are to be paid during the life of the insured.

30. Endowment contracts are principally savings contracts which incorporate an element of life

insurance protection. Endowment insurance contracts provide a benefit if the insured survives the

endowment period or the amount is paid to a beneficiary if the insured does not survive. A pure

endowment contract only provides a benefit to the insured if he/she survives the endowment period.

Endowment policies mature at a specified attained age of the insured or at the end of a specified period.

Premium payments for endowment contracts are made over a specified period, but may also be made

under a single-premium or limited-payment plan. Both whole life and endowment policies contain

nonforfeiture or similar clauses which provide for a value in cash or some other form of insurance to be

available in the event of failure to continue the required premiums.

31. Term life contracts provide insurance over a specified period of time. If the insured dies during this

term, the face amount of the policy will be paid to the beneficiary. Policies for term insurance which are

written for relatively short periods of time commonly grant the policyholder the right to renew for an

additional period or periods up to a maximum age, such as 60 or 65, without requiring additional evidence

of insurability. Rights to convert to whole life or endowment contracts may also be included in the

contract. Term contracts may also be made for a period which will end when the insured reaches a certain

age (for example, age 60 or 65). Such policies do not usually provide nonforfeiture values.

32. Supplementary contracts with life contingencies are a type of agreement between the insurance

company and either the insured or the beneficiary, usually to provide for full or partial settlement of the

amount payable upon the termination of an original contract. Generally, the proceeds are paid over the

lifetime of one or more beneficiaries. This differs from a supplementary contract without life

contingencies under which the proceeds are paid over a definite period without regard to the life of the

beneficiary.

33. Group life contracts are insurance on the lives of a group of persons under a single master contract.

Insurance of this type is customarily written on a yearly renewable term basis although some permanent

group life is sold. Group life insurance is based on a master policy which usually precludes or disallows

individual selection and is for the benefit of persons other than the policyholder. The individual insured

members may receive certificates of insurance which evidence the contract. The contract is made by the

policyholder and the insurer; there is no contract of insurance between the policyholder and the members.

State statutes vary as to what constitutes a group and as to who may be a policyholder. Some states permit

only employee-employer relationships in a group contract. Others permit union members, credit union

members, or similar relationships in group contracts.

34. Franchise life contracts usually consist of individual policies offered to all persons in a general

class (usually a work profession) who are related in some way such as belonging to a certain association.

35. Universal life and variable life contracts include those contracts which have terms that are not fixed

and guaranteed relative to premium amounts, expense assessments, or benefits accruing to the

policyholder. These contracts generally provide for death benefits and nonforfeiture values and may be

issued on a fixed premium basis or on a flexible premium basis where the premiums are paid at the

insured’s discretion.

36. Limited-payment contracts are contracts with terms that are fixed and guaranteed, and for which

premiums are paid over a specified number of years or to a specified age. The insurance coverage

continues for the remainder of the insured's life. A single-premium policy requires a lump-sum payment

at the inception of the policy.

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37. Credit life contracts are sold in connection with loans or other credit transactions not exceeding a

stated duration and provide insurance protection against death. This form of insurance is generally issued

in connection with the issuance of credit to an individual by a bank, retailer, finance company, or other

similar organizations. This type of insurance most often protects the creditor to the extent of the unpaid

balance of the loan in the form of decreasing term insurance; however, some credit life insurance is sold

on a level-term basis.

38. An annuity contract is an arrangement whereby an annuitant is guaranteed to receive a series of

stipulated amounts commencing either immediately or at some future date. A contract with a purchase

rate guarantee represents a life contingency that would require an annuity contract to be classified as a life

contract. Annuity contracts are issued to individuals or to groups. Group annuities are often the vehicle

used to provide for a company's pension obligations to its employees. The main types of annuity

contracts with life contingencies are discussed below.

a. A deferred annuity provides for the accumulation of funds to be applied at some future period

designated by the policyholder. Premium payments can be made in a lump sum amount (single

premium deferred annuity), or periodically (flexible or fixed premium deferred annuity) as

allowed by the policy contract. At the end of the accumulation period, the policyholder may

elect to receive a lump sum distribution or may elect to receive periodic payments for life, over

specific period, or some combination thereof.

b. A variable annuity is an annuity which includes a provision for benefit payments which vary in

accordance with the rate of return of the underlying investment portfolio selected by the

policyholder. The considerations for a variable annuity are usually invested in a separate

account in which the value of the contract share varies according to the performance of the

separate account before the commencement of annuity payments as well as after. Premium

payments can be made in lump sum amounts, or periodically as allowed by the policy contract.

A minimum death benefit is often guaranteed during the annuity consideration accumulation

period and these contracts are therefore classified as life contracts.

c. A straight-life annuity provides for periodic payments to the annuitant as long as the annuitant

lives. Death of the annuitant constitutes completion of the contract and no further payments are

made by the insurance company.

d. A life annuity with a period certain works essentially the same way as the straight-life annuity

as the annuitant receives periodic payments for as long as the annuitant lives. However, if the

annuitant dies before the end of the specified “certain” period, payments are continued to a

beneficiary until the specified number of “certain” payments (i.e., the specified period in the

contract) is completed.

e. A refund annuity is similar to the life annuity with a period certain in which the annuitant

receives periodic payments for as long as the annuitant lives. There are two variants of this type

of annuity. Under the cash refund annuity, a lump-sum payment is made at the death of the

annuitant equal to the excess, if any, of the purchase price of the annuity over the sum of the

annuity payments made to date of death. The installment refund annuity provides that annuity

payments are to continue to a beneficiary after the death of the annuitant until the sum of all

payments made equals the purchase price.

f. A joint and survivorship annuity provides for the continuation of payments after the death of

one of the annuitants during the lifetime of the surviving annuitant.

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Accident and Health Contracts

39. Accident and health contracts provide protection against economic losses resulting from accident,

sickness, or medical condition. This coverage may be provided under individual policies, under group or

franchise policies, managed care contracts, or Medicaid or Medicare risk contracts, or it may be provided

under certain special types of policies, such as credit accident and health insurance.

40. The economic losses which accident and health policies cover, or the types of benefits provided,

will vary with different policies. The broad categories of economic losses protected against are medical

and hospital expense and income replacement. For example, payments for hospital, surgical, or medical

expenses may be provided under a hospital expense policy, while under other policies, a more

comprehensive form of coverage, known as major medical insurance, may be offered. Similarly, policies

may provide monthly benefits for loss of income from disability, either on a short term or a long term

basis, or only for disabilities due to accident. Loss of life from accident may be covered under accidental

death policies, while under certain limited accident policies, only accidental death from air travel may be

covered.

41. Accident and health policies may be categorized by the form of policy through which the coverage

is provided; it may be categorized according to the benefits provided by the policy; or it may be

categorized by the contingencies insured against. These variations in types of policies and the benefits

provided must be considered in discussing the reserves for accident and health policies.

42. Credit accident and health insurance contracts are similar to credit life insurance except the

insurance protection is in the form of disability insurance.

43. Long-term care contracts represent any contract or policy rider providing coverage for not less than

twelve consecutive months for each covered person for one or more necessary diagnostic, preventive,

therapeutic, rehabilitative, maintenance or personal care services, provided in a setting other than an acute

care unit of a hospital. Under long-term care contracts, the insured event is generally the inability of the

contractholder to perform certain activities of daily living as compared to medical contracts which

generally provide insurance protection against accident or sickness or disabilities contracts which

generally provide income replacement protection.

Deposit-Type Contracts

44. Under deposit-type contracts, the policyholder may assume all, some, or none of the investment

risk, depending on the contract terms. Amounts can be deposited in lump sum, or periodically as allowed

by the policy contract. Deposit-type contracts would include annuities certain, whose income payments

have no reference to life contingencies and benefits are paid over a specified period (i.e., 10 years, 20

years, etc.)

Property and Casualty Contracts

45. Property and casualty contracts include a variety of types of coverage, including, but not limited to,

fire, workers’ compensation, automobile, multiple peril, professional and miscellaneous liability, and

fidelity and surety bonds as further discussed below.

46. Types of insurance represent the perils that are insured by property and liability insurance

companies and classified as property and casualty contracts. Some of the more important types of

insurance are as follows:

a. Fire and allied lines, which include coverage for fire, windstorm, hail, and water damage

(but not floods);

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b. Ocean marine, which includes coverage for ships and their equipment, cargos, freight or

money to be paid for use of the ships, and liability to third parties for damages. This type

of insurance includes inland as well as ocean water transportation;

c. Inland marine, which covers property in transit. (It also includes floaters, which are

policies that cover movable property, such as a tourist’s personal property);

d. Workers’ compensation, which compensates employees for injuries or illness sustained in

the course of their employment;

e. Automobile, which covers personal injury or automobile damage sustained by the insured

and the related liability to third parties for losses caused by the insured;

f. Multiple peril, which is a package coverage including most property and liability

coverage except workers’ compensation, automobile insurance, and surety bonds;

g. Professional liability, which covers physicians, surgeons, dentists, hospitals, engineers,

architects, accountants, attorneys, and other professionals from liability arising from error

or misconduct in providing or failing to provide professional service;

h. Miscellaneous liability, which covers most other physical and property damages not

included under workers’ compensation, automobile liability, and multiple peril policies.

(Damages include death, cost of care, and loss of services resulting from bodily injury, as

well as loss of use of property);

i. Fidelity bonds, which cover employers against dishonest acts by employees. Blanket

fidelity bonds cover groups of employees; and

j. Surety bonds, which provide for monetary compensation to third parties for failure by the

insured to perform specifically covered acts within a stated period. (Most surety bonds

are issued for persons doing contract construction, persons connected with court actions,

and persons seeking licenses and permits. Surety bonds also include financial

guarantees.)

47. In addition to these types, insurance is provided by excess and surplus lines. Excess liability covers

the insured against loss in excess of a stated amount, but only for losses as covered and defined in an

underlying policy. The underlying amount is usually insured by another policy but can be retained by the

insured. Surplus lines include coverage for risks that do not fit normal underwriting patterns, risks that are

not commensurate with standard rates, or risks that will not be written by standard carriers because of

general market conditions. These kinds of policies are generally written by carriers not licensed in the

jurisdiction where the risk is located and generally are not subject to regulations governing premium rates

or policy language.

48. Insurance is generally available to the individual as a means of protection against loss. There are

instances, however, in which a person cannot obtain insurance in the voluntary insurance market. States

have established involuntary plans to provide insurance to those with high risks who otherwise would be

excluded from obtaining coverage. A common example is the Automobile Insurance Plan (formerly

called the Assigned Risk Plan). Under this plan, all companies writing automobile insurance in a state are

allocated a share of the involuntary business on an equitable basis. Other states use a reinsurance plan,

under which each insurer accepts all applicants but may place high-risk drivers in a reinsurance pool,

with

prem

iums paid to and losses absorbed by the pool. Still another approach is a joint underwriting

association, in which one or more servicing companies are designated to handle high-risk drivers. All

insurers in the state may be required to participate in the underwriting results. Another example of

involuntary plans includes Fair Access to Insurance Requirements (FAIR) plans. FAIR plans are federally

approved, state-supervised programs established to provide coverage for property in high-risk areas.

Companies that operate in the state are assessed for any underwriting losses experienced by the FAIR

plan.

49. Medical malpractice pools were established when health-care professionals and institutions were

experiencing difficulty in obtaining liability insurance in the voluntary insurance market. The pools were

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established by law and currently exist in the majority of states. All insurers writing related liability

insurance in such states are considered mandatory participants in the pools as a condition for their

continuing authority to transact business in such states.

50. Workers’ compensation pools are similar to FAIR plans. As with FAIR plans, companies operating

in a given state are assessed a proportionate share, based on direct writings, of the underwriting results of

the pool.

51. Title insurance insures, guarantees, or indemnifies owners of real property or the holders of liens or

encumbrances thereon against loss or damage suffered by unidentified instances of defective titles, liens

or encumbrances or the unmarketability of the title.

52. Mortgage guaranty insurance protects a lender against loss of all or a portion of the principal

amount of a mortgage loan upon default of the mortgagor. This type of insurance provides no protection

other than against loss due to default.

RELEVANT STATUTORY ACCOUNTING AND GAAP GUIDANCE (ONLY PERTINENT

EXCERPTS ARE INCLUDED BELOW)

Statutory Accounting

53. The Life/A&H Accounting Practices and Procedures Manual provides the following guidance with

respect to the classification of life and annuity contracts:

CHAPTER 10

AGGREGATE RESERVES FOR LIFE AND ANNUITY CONTRACTS

Life Insurance

All life insurance that is written can be separated into four lines of business: ordinary, industrial,

group and credit.

Ordinary life insurance is the most common type of the four lines, and it may consist of whole life,

term, or endowment coverages. The contract is between the company and the insured (or the

owner, if different). The payment of the premium by the insured/owner usually is sent directly to the

home office of the company and not to a company agent.

Many modifications of whole life, term, and endowment coverages are available to the insurance

buyer. Such variations include limited payment periods, combinations of coverages, and

decreasing (or increasing) death benefits. In addition, some policies, notably universal life policies,

offer the insurance buyer the option to vary, or even suspend, premium payments over the life of

the policy.

Also considered as ordinary insurance is franchise insurance. It usually consists of individual

policies offered to all persons in a general class (usually a work profession) who are related in

some way such as belonging to a certain association. Some states require that this relationship be

other than through the purchase of insurance.

Industrial life insurance, also called debit insurance, can be defined as insurance under which

premiums are paid weekly, or under which the premiums are payable monthly or more often if the

face amount of the insurance provided in the policy does not exceed a stated amount and the

words "industrial policy" are printed in prominent type on the face of the policy.

Group life insurance is insurance on the lives of a group of members, the minimum number of

which may be specified by statute. Group insurance is based on a master policy which usually

precludes or disallows individual selection and is for the benefit of persons other than the

policyholder. The individual insured members may receive certificates of insurance which evidence

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the contract. The contract is made by the policyholder and the insurer; there is no contract of

insurance between the policyholder and the members. The various state statutes vary as to what

constitutes a group and as to who may be a policyholder. Some states permit only

employee-employer relationships in a group contract. Others permit union members, credit union

members, or similar relationships in group contracts.

The fourth line of life insurance is credit. Credit insurance may be either individual or group. All life

and all accident and health insurance that is sold in connection with loans or other credit

transactions not exceeding a stated duration is to be reported as credit insurance.

54. The Life/A&H Accounting Practices and Procedures Manual provides the following guidance with

respect to the classification of accident and health contracts:

CHAPTER 13

AGGREGATE RESERVES FOR ACCIDENT AND HEALTH POLICIES

Accident and health insurance provides protection against economic losses resulting from accident

and/or sickness. This insurance may be provided under individual policies, under group or

franchise policies, or it may be provided under certain special types of policies which bear unique

titles such as credit insurance. The economic losses which accident and health insurance policies

cover, or the types of benefits provided, will vary with different policies. For example,

reimbursement for hospital, surgical, or medical expenses may be provided under a hospital

expense policy, while under other policies, a more comprehensive form of coverage, known as

major medical insurance, may be offered. Similarly, policies may provide monthly benefits for loss

of income from disability, either on a short term or a long term basis, or only for disabilities due to

accident. Loss of life from accident may be covered under accidental death policies, while under

certain limited accident policies, only accidental death from air travel may be covered. Therefore,

accident and health policies may be categorized by the form of policy through which the coverage

is provided; it may be categorized according to the benefits provided by the policy; or it may be

categorized by the contingencies insured against. These variations in types of policies and the

benefits provided must be considered in discussing the reserves for accident and health insurance

policies.

Accident and health policies are offered by life companies, casualty companies, fraternal benefits

societies, and certain specialty companies. While the coverage originated with casualty companies,

it is now the life insurance companies which provide the majority of accident and health insurance.

The history of the business is important because many of the concepts currently used originated

from casualty insurance practices and use casualty terminology. Since the life insurance

companies began writing this insurance, the form of the policies and the concept of coverages have

changed, which also produced changes in reserving practices.

Individual Accident and Health Policies

Individual accident and health policies, other than credit insurance, are separated for reserve

reporting purposes in the statutory financial statement into six classifications. The definitions are

included in the instructions for the

statutory financial statement and are based principally on the

renewal agreement of the policy. There is some variation in the reserve requirements which apply

to the different renewal classifications of policies but most reserve requirements apply to all

individual policies.

Group Policies

All organizations that qualify to purchase group life insurance may also, by most state laws,

purchase accident and health insurance. In many states, the definition of what constitutes an

eligible group for accident and health insurance is entirely left up to any set of good underwriting

practices established by the insurance company.

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IP 50–13

Credit Insurance

Credit accident and health insurance is insurance on a debtor to provide indemnity for payments

becoming due on a specific loan or other credit transaction while the debtor is disabled as defined

in the policy. Credit policies are limited to issues of 120 months or less in most states. Some states

limit such policies to 60 months.

Credit accident and health insurance is sold as either individual or group coverage, and the

reserves are included in the annual statement. Because of the significant growth in recent years of

credit insurance coverages of 120 months or less are now reported as a separate line of business

in the annual statement.

The premium payment methods of credit insurance may be single premium or monthly premium on

the outstanding balance. Outstanding balance rates, used only for group coverage, are determined

by multiplying a monthly rate times the amount of outstanding insured indebtedness. The premium

so determined is remitted on each monthly due date to the insurer by the group creditor. Under

single premium credit insurance, the premium rate is applied to the initial amount of insurance and

generally is included in the debt. Creditors usually remit the single premium for each new insured

once a month.

Although credit insurance may be written on an individual or a group basis, the major portion of

credit insurance that is written today is group. The two types differ only in form, not in substance.

Consequently, they are treated here as one, unless otherwise noted.

55. The P&C Accounting Practices and Procedures Manual and the Accounting Practices and

Procedures Manual for Health Maintenance Organizations do not contain relevant guidance related to the

classification and definitions of types of policies.

Generally Accepted Accounting Principles

56. FAS 60, as amended by FAS 120, provides the following guidance on definitions and classification

of insurance contracts:

Summary

Insurance contracts, for purposes of this Statement, need to be classified as short-duration or

long-duration contracts. Long-duration contracts include contracts, such as whole life, guaranteed

renewable term life, endowment, annuity, and title insurance contracts, that are expected to remain

in force for an extended period. All other insurance contracts are considered short-duration

contracts and include most property and liability insurance contracts.

Premiums from short-duration contracts ordinarily are recognized as revenue over the period of the

contract in proportion to the amount of insurance protection provided. Claim costs, including

estimates of costs for claims relating to insured events that have occurred but have not been

reported to the insurer, are recognized when insured events occur.

Premiums from long-duration contracts are recognized as revenue when due from policyholders.

The present value of estimated future policy benefits to be paid to or on behalf of policyholders less

the present value of estimated future net premiums to be collected from policyholders are accrued

when premium revenue is recognized. Those estimates are based on assumptions, such as

estimates of expected investment yields, mortality, morbidity, terminations, and expenses,

applicable at the time the insurance contracts are made. Claim costs are recognized when insured

events occur.

INTRODUCTION

1. The primary purpose of insurance is to provide economic protection from identified risks

occurring or discovered within a specified period. Some types of risks insured include death,

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disability, property damage, injury to others, and business interruption. Insurance transactions may

be characterized generally by the following:

a. The purchaser of an insurance contract makes an initial payment or deposit to the

insurance enterprise in advance of the possible occurrence or discovery of an insured

event.

b. When the insurance contract is made, the insurance enterprise ordinarily does not know if,

how much, or when amounts will be paid under the contract.

2. Two methods of premium revenue and contract liability recognition for insurance contracts

have developed, which are referred to as short-duration and long-duration contract accounting in

this Statement. Generally, the two methods reflect the nature of the insurance enterprise's

obligations and policyholder rights under the provisions of the contract.

3. Premiums from short-duration insurance contracts, such as most property and liability

insurance contracts, are intended to cover expected claim

costs resulting from insured events that

occur during a fixed period of short duration. The insurance enterprise ordinarily has the ability to

cancel the contract or to revise the premium at the beginning of each contract period to cover future

insured events. Therefore, premiums from short-duration contracts ordinarily are earned and

recognized as revenue evenly as insurance protection is provided.

--------------

Terms defined in the glossary (Appendix A) are in boldface type the first time they appear in this Statement.

--------------

4. Premiums from long-duration insurance contracts, including many life insurance contracts,

generally are level even though the expected policy benefits and services do not occur evenly

over the periods of the contracts. Functions and services provided by the insurer include

insurance protection, sales, premium collection, claim payment, investment, and other services.

Because no single function or service is predominant over the periods of most types of

long-duration contracts, premiums are recognized as revenue over the premium-paying periods

of the contracts when due from policyholders. Premium revenue from long-duration contracts

generally exceeds expected policy benefits in the early years of the contracts and it is necessary

to accrue, as premium revenue is recognized, a liability for costs that are expected to be paid in

the later years of the contracts. Accordingly, a liability for expected costs relating to most types of

long-duration contracts is accrued over the current and expected renewal periods of the

contracts.

5. Title insurance contracts provide protection for an extended period and therefore are

considered long-duration contracts. Premiums from title insurance contracts ordinarily are

recognized as revenue on the effective date of the contract because most of the services

associated with the contract have been rendered by that time. Estimated claim costs are

recognized when premium revenue is recognized because the insurance provides protection

against claims caused by problems with title to real estate arising out of ascertainable insured

events that generally exist at that time.

APPLICABILITY AND SCOPE

6. This Statement establishes accounting and reporting standards for the general-purpose

financial statements of stock life insurance enterprises, property and liability insurance

enterprises

, and title insurance enterprises, mutual life insurance enterprises, assessment

enterprises, and fraternal benefit societies. Except for the sections on premium revenue and

claim cost recognition and acquisition costs (paragraphs 9-11, 13-18, and 20-31), this Statement

applies to mortgage guaranty insurance enterprises. FASB Statement 120, Accounting and

Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-

Duration Participating Contracts, addresses the accounting for certain long-duration participating

life insurance contracts.

Classifications and Definitions of Insurance or Managed Care Contracts In Force IP No. 50

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--------------

Property and liability insurance enterprises, for purposes of this Statement include stock enterprises, mutual

enterprises, and reciprocal interinsurance exchanges.

--------------

STANDARDS OF FINANCIAL ACCOUNTING AND REPORTING

General Principles

7. Insurance contracts, for purposes of this Statement, shall be classified as short-duration or

long-duration contracts depending on whether the contracts are expected to remain in force

for

an extended period. The factors that shall be considered in determining whether a particular

contract can be expected to remain in force for an extended period are:

--------------

In force refers to the period of coverage, that is, the period during which the occurrence of insured events can

result in liabilities of the insurance enterprise.

--------------

a. Short-duration contract. The contract provides insurance protection for a fixed period of

short duration and enables the insurer to cancel the contract or to adjust the provisions of

the contract at the end of any contract period, such as adjusting the amount of the

premiums charged or coverage provided.

b. Long-duration contract. The contract generally is not subject to unilateral changes in its

provisions, such as noncancelable or guaranteed renewable contract, and requires the

performance of various functions and services (including insurance protection) for an

extended period.

8. Examples of short-duration contracts include most property and liability insurance contracts

and certain term life insurance contracts, such as credit life insurance. Examples of long-duration

contracts include whole life contracts, guaranteed renewable term life contracts, endowment

contracts, annuity contracts, and title insurance contracts. Accident and health insurance contracts

may be short-duration or long-duration depending on whether the contracts are expected to remain

in force for an extended period. For example, individual and group insurance contracts that are

noncancelable or guaranteed renewable (renewable at the option of the insured), or collectively

renewable (individual contracts within a group are not cancelable), ordinarily are long-duration

contracts.

57. FAS 97, as amended by FAS 120, provides the following guidance on definitions and

classifications of insurance contracts:

Summary

This Statement establishes standards of accounting for certain long-duration contracts issued by

insurance enterprises, referred to in this Statement as universal life-type contracts, that were not

addressed by FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises. The

Statement also establishes standards of accounting for limited-payment long-duration insurance

contracts and investment contracts and amends Statement 60 to change the reporting of realized

gains and losses on investments.

New life insurance contracts have evolved since the development of specialized insurance industry

accounting principles and practices in the early 1970s. Many of those new life insurance contracts

have different provisions than do the life insurance contracts to which Statement 60 applies. Those

new life insurance contracts are characterized by flexibility and discretion granted to one or both

parties to the contract. Statement 60 identifies but does not address those contracts, noting that the

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accounting was under study by the insurance industry and the accounting and actuarial

professions.

This Statement requires that the retrospective deposit method be used to account for universal

life-type contracts. That accounting method establishes a liability for policy benefits at an amount

determined by the account or contract balance that accrues to the benefit of the policyholder.

Premium receipts are not reported as revenues when the retrospective deposit method is used.

The Statement also requires that capitalized acquisition costs associated with universal life-type

contracts be amortized based on a constant percentage of the present value of estimated gross

profit amounts from the operation of a "book" of those contracts. Any gain or loss resulting from a

policyholder's replacement of other life insurance contracts with universal life-type contracts is

recognized in income of the period in which the replacement occurs.

This Statement requires that long-duration contracts issued by insurance enterprises that do not

subject the enterprise to risks arising from policyholder mortality or morbidity (investment contracts)

be accounted for in a manner consistent with the accounting for interest-bearing or other financial

instruments. Payments received on those contracts are not reported as revenue.

This Statement also addresses limited-payment contracts that subject the insurance enterprise to

mortality or morbidity risk over a period that extends beyond the period or periods in which

premiums are collected and that have terms that are fixed and guaranteed. This Statement requires

that revenue and income from limited-payment contracts be recognized over the period that

benefits are provided rather than on collection of premiums.

58. AICPA P&C Audit and Accounting Guide provides the following definitions of types of insurance

contracts:

Kinds of Insurance

1.04. Kinds of insurance, generally referred to as lines of insurance, represent the perils that are

insured by property and liability insurance companies. Some of the more important lines of

insurance are --

- Fire and allied lines, which include coverages for fire, windstorm, hail, and water damage (but not

floods).

- Ocean marine, which includes coverage for ships and their equipment, cargos, freight or money to

be paid for use of the ships, and liability to third parties for damages. (Ocean marine is perhaps the

oldest form of insurance, dating back to at least 600 years to the days of the Venetian traders.)

- Inland marine, which covers property being transported other than transocean. (It also includes

floaters, such as for personal property, jewelry, and furs.)

- Workers' compensation, which compensates employees for injuries or illness sustained in the

course of their employment.

- Automobile, which covers personal injury or automobile damage sustained by the insured and

liability to third parties for losses caused by the insured.

- Multiple peril, which is a package coverage including most property and liability coverages except

workers' compensation, automobile insurance, and surety bonds.

- Professional liability, which covers physicians, surgeons, dentists, hospitals, engineers, architects,

accountants, attorneys, and other professionals from liability arising from error or misconduct in

providing or failing to provide professional service.

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- Miscellaneous liability, which covers most other physical and property damages not included

under workers' compensation or automobile liability policies. (Damages include death, cost of care,

and loss of services resulting from bodily injury, as well as loss of use of property.)

- Fidelity bonds, which cover employers against dishonest acts by employees. Blanket fidelity

bonds cover groups of employees.

- Surety bonds, which provide for monetary compensation to third parties for failure by the insured

to perform specifically covered acts within a stated period. (Most surety bonds are issued for

persons doing contract construction, persons connected with court actions, and persons seeking

licenses and permits. Surety bonds also include financial guarantees.)

- Accident and health, which covers loss by sickness or accidental bodily injury. (It also includes

forms of insurance that provide lump-sum or periodic payments in the event of loss by sickness or

accident, such as disability income insurance and accidental death and dismemberment

insurance.)

1.05. In addition to these lines, insurance is provided by excess and surplus lines. Excess liability

covers the insured against loss in excess of a stated amount, but only for losses as covered and

defined in an underlying policy. The underlying amount is usually insured by another policy but can

be retained by the insured. Surplus lines include coverage for risks that do not fit normal

underwriting patterns, risks that are not commensurate with standard rates, or risks that will not be

written by standard carriers because of general market conditions. Policies are written by carriers

not licensed in the jurisdiction where the risk is located and generally are not subject to regulations

governing premium rates or policy language.

1.06. The lines and premium volume that may be written by a company are generally restricted by

state insurance regulations. For example, total written premiums may be limited to a ratio of the

company's statutory basis equity. (This and other insurance regulations developed by the National

Association of Insurance Commissioners (NAIC) are discussed further in paragraphs 2.05 and 2.06

"NAIC Insurance Regulatory Information System.")

1.07. Insurance written by property and liability insurance companies may be broadly classified as

personal lines, which consist of insurance policies issued to individuals, and commercial lines,

which consist of policies issued to business enterprises. Personal lines generally consist of large

numbers of relatively standard policies with relatively small premiums per policy. Examples are

homeowner's and individual automobile policies. Commercial lines involve policies with relatively

large premiums that are often retroactively adjusted based on claims experience. The initial

premium is often only an estimate because it may be related to payroll or other variables. Examples

are workers' compensation and general liability. Many large insurance companies have separate

accounting, underwriting, and claim-processing procedures for these two categories.

1.08. Insurance is generally available to the individual as a means of protection against loss. There

are instances, however, in which a person cannot obtain insurance in the voluntary insurance

market. States have established programs to provide insurance to those with high risks who

otherwise would be excluded from obtaining coverage. Following are some of the more common

programs that provide the necessary coverage:

- Involuntary automobile insurance. States have a variety of methods for apportioning involuntary

automobile insurance. The most widely used approach is the Automobile Insurance Plan (formerly

called the Assigned Risk Plan). Under this plan, all companies writing automobile insurance in a

state are allocated a share of the involuntary business on an equitable basis. Each automobile

insurer operating in the state accepts a share of the undesirable drivers, based on the percent of

the state's total auto insurance that it writes. For example, a company that writes 5 percent of the

voluntary business in a state may be assigned 5 percent of the involuntary applicants. It is then

responsible for collecting the premiums and paying the claims on the policies issued to these

applicants. Other states use a reinsurance plan, under which each insurer accepts all applicants

but may place high-risk drivers in a reinsurance pool, with premiums paid to and losses absorbed

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by the pool. Still another approach is a joint underwriting association, in which one or more

servicing companies are designated to handle high-risk drivers. All insurers in the state may be

required to participate in the underwriting results.

- FAIR plans. FAIR (Fair Access to Insurance Requirements) plans are federally approved,

state-supervised programs established to provide coverage for property in high-risk areas.

Companies that operate in the state are assessed for any underwriting losses experienced by the

FAIR plan.

- Medical malpractice pools. These pools were established when health-care professionals and

institutions were experiencing difficulty in obtaining liability insurance in the voluntary insurance

market. The pools were established by law and currently exist in the majority of states. All insurers

writing related liability insurance in such states are considered mandatory participants in the pools

as a condition for their continuing authority to transact business in such states.

- Workers' compensation pools. These pools are similar to FAIR plans. As with FAIR plans,

companies operating in a given state are assessed a proportionate share, based on direct writings,

of the underwriting results of the pool.

59. AICPA Life Audit and Accounting Guide, Chapter 3, Insurance Operations, provides the following

definitions of types of insurance contracts:

Types of Policies and Contracts

3.02. Policies and contracts usually issued by a life insurance company may generally be

designated by the following broad classifications:

1. Life insurance policies.

2. Annuity contracts.

3. Accident and health contracts.

In addition, certain life insurance companies may issue policies which incorporate features of two or

three of the broad categories shown above (e.g., an insurance-with-annuity policy). Each of the

types of policies is commonly issued both on a participating and on a nonparticipating basis.

3.03. Life Insurance Policies. Life insurance coverage consists of the following basic classes:

1. Whole life.

2. Endowment.

3. Term.

4. Other.

3.04. Whole life policies provide insurance over the insured's entire life and the proceeds (face

amount) are paid only upon death of the insured. A level premium is usually paid for policies of this

type; and the premium may be paid in annual or more frequent modes. An ordinary-life

(straight-life) policy stipulates that premiums are to be paid during the life of the insured. A

limited-payment policy is one for which premiums are payable over a stipulated period of time (10,

20, 30 years, etc.). A single-premium policy requires a lump-sum payment at the inception of the

policy.

3.05. Endowment policies provide insurance protection over the term of the endowment (i.e., from

inception of the policy to the maturity date). Such contracts stipulate payment of the face amount of

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IP 50–19

the policy to a beneficiary if the insured dies during the endowment period. However, if he is still

living at the maturity date, the insured will receive the face amount of the policy. Endowment

contracts can mature at a specified age of the insured or at the end of a specified period of time.

The premiums for contracts of this nature are usually payable over the endowment period, but the

premiums can be on a single-payment or limited-payment plan.

3.06. Both whole life and endowment policies contain nonforfeiture or similar clauses which provide

for a value in cash or some other form of insurance to be available in the event of failure to continue

the required premiums.

3.07. Term policies provide insurance over a specified period of time. If the insured dies during this

term, the face amount of the policy will be paid to his beneficiary. Policies for term insurance which

are written for relatively short periods of time commonly grant the policyholder the right to renew for

an additional period or periods up to a maximum age, such as 60 or 65, without requiring additional

evidence of insurability. Rights to convert to whole life or endowment contracts may also be

included in the contract. Term contracts may also be made for a period which will end when the

insured reaches a certain age (for example, age 60 or 65). Since the premium for term insurance

provides for neither maturity benefits nor higher death rates at advanced ages, such policies do not

usually accumulate cash surrender values. Collection of premiums for individual insurance may be

by mail, where a notice of premium due is sent to the payor, or may be on the debit basis whereby

an agent regularly calls at the home of the insured to collect small premium amounts. Usually, the

more popular plans of debit life insurance are industrial plans paid up at age 65 or 70 or 10-pay or

20-pay life. Ordinary plans may also be administered on the debit basis.

3.08. In addition to individual policies, life insurance companies offer group life insurance, which

insures lives of a group of persons under a single master contract. Insurance of this type is

customarily written on a yearly renewable term basis although some permanent group life is sold.

3.09. In addition to the policies and contracts for life insurance mentioned above, there are other life

insurance contracts which are becoming more prominent, such as credit life insurance. This form of

insurance is generally issued in connection with the issuance of credit to an individual by a bank,

retailer, finance company, or other similar organizations. This type of insurance most often protects

the creditor to the extent of the unpaid balance of the loan in the form of decreasing term insurance;

however, some credit life insurance is sold on a level-term basis.

3.10. In addition to the wide variety of whole life and endowment policies which are available from

life insurance companies, the basic policies can be supplemented by the use of riders which are

attached to and made a part of the contract. It is fairly common to provide for waiver of premiums

through the use of a rider in the event of disability of the insured or for an accidental death benefit.

The typical accidental death benefit is often referred to as double indemnity which means that the

company will pay twice the amount of the policy if the insured dies through accidental means.

3.11. Annuity Contracts. An annuity contract is an arrangement whereby an annuitant is

guaranteed to receive a series of stipulated amounts commencing either immediately or at some

future date. Annuity contracts are issued to individuals or to groups. Group annuities are often the

vehicle used to provide for a company's pension obligations to its employees.

3.12. The main types of annuities are the following:

3.13. Straight-life annuity -- The straight-life annuity provides for periodic payments to the annuitant

as long as he lives. Death of the annuitant constitutes completion of the contract and no further

payments are made by the insurance company.

3.14. Life annuity with a period certain -- The life annuity with a period certain works essentially the

same way as the straight-life annuity, except that if the annuitant dies before the end of the

specified period, payments are continued to a beneficiary until the specified number of payments is

completed.

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3.15. Refund annuity -- The refund annuity is similar to the annuity certain. There are two variants

of this type of annuity. Under the cash refund annuity, a lump-sum payment is made at the death of

the annuitant equal to the excess, if any, of the purchase price of the annuity over the sum of the

annuity payments made to date of death. The installment refund annuity provides that annuity

payments are to continue to a beneficiary after the death of the annuitant until the sum of all

payments made equals the purchase price.

3.16. Joint and survivorship annuity -- The joint and survivorship annuity provides for the

continuation of payments after the death of one of the annuitants during the lifetime of the surviving

annuitant.

3.17. Variable annuity -- At present, variable annuities for individuals or groups are being

introduced throughout the life insurance industry. A variable annuity is an annuity which includes a

provision for benefit payments which vary in accordance with investment experience. The

considerations for a variable annuity are usually invested in a separate account in which the value

of the contract share varies according to the performance of the separate account before the

commencement of annuity payments as well as after. Some variable annuities provide for a

guaranteed minimum death benefit during the annuity consideration accumulation period.

3.18. Accident and Health Insurance Contracts. There is a great variety of accident and health

contracts which life insurance companies may issue, but most contracts can be generally

categorized as follows:

1. Protection against loss of income through partial or total disability.

2. Reimbursement of expenses

a. Hospital expenses, laboratory services, drugs, and so forth.

b. Surgical or medical expenses.

3.19. Much of the above coverage is currently being furnished under group contracts. Coverage

furnished under individual contracts can be further subdivided according to the insured's right to

continue his policy and the limitations on the insurer's right to increase premiums.

60. The AICPA Audit and Accounting Guide: Health Care Organizations provides the following

guidance:

Health Care Contracting

1.18 Contracts between a health care provider and a payor based on anything other than full

charges requires the provider to accept some financial risk. The nature and degree of risk for the

provider varies depending on the contract terms (for example, the definition of the unit of service or

the basis for payment). In planning the audit of the health care provider, the auditor considers the

audit risk associated with the entity’s health care contracts. For example, contracts with payments

for services based on a discount from the provider’s established rates may have different risks than

contracts with payments for services based on a capitated arrangement.

1.19 Generally, capitation payments are made at the beginning of each month and obligate the

provider to render covered services during the month. Revenue is earned as a result of agreeing to

provide services to qualified beneficiaries and not as a result of actually providing the care. If the

provider’s accounting system records patient charges and establishes patient receivables as

services are rendered, appropriate valuation allowances or adjustments should be recorded so only

the amount of contract revenue is recorded.

1.20 A capitation contract may obligate the provider to assume the risk of physician referrals and

other outside services. In this case, a liability for unpaid claims, including incurred but not reported

claims, should be established. A lag analysis may be helpful in estimating the liability.

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1.21 In addition to the capitation payments, the amount of contract revenue may be affected by

factors such as reinsurance recoveries, deductibles, coinsurance, and risk pool adjustments. risk

pool adjustments may be based on factors such as utilization or cost targets.

1.22 Sometimes health care providers enter preferred provider arrangements with self-insured

employers whereby the provider guarantees that the employer’s health care cost will not increase

over a specified amount or percentage. In substance, these providers may have provided

aggregate stop-loss insurance to the self-insured employer, and a material liability to the provider

may exist. FASB Statement No. 5, Accounting for Contingencies, provides guidance on accounting

for these contingencies. FASB Statement No. 10, Accounting and Financial Reporting for Risk

Financing and Related Insurance Issues, provides guidance on accounting for contingencies by

governmental enterprises.

RELEVANT LITERATURE

Statutory Accounting

- Statutory Accounting Principles Statement of Concepts and Statutory Hierarchy

- Accounting Practices and Procedures Manual for Life and Accident and Health Insurance

Companies, Chapter 10, Aggregate Reserves for Life and Annuity Contracts, Chapter 13,

Aggregate Reserves for Accident and Health Policies

- Accounting Practices and Procedures Manual for Property and Casualty Insurance Companies

Generally Accepted Accounting Principles

- FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises

- FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-

Duration Contracts and for Realized Gains and Losses from the Sale of Investments

- FASB Statement No. 120, Accounting and Reporting by Mutual Life Insurance Enterprises and by

Insurance Enterprises for Certain Long-Duration Participating Contracts

- AICPA Audit and Accounting Guide: Audits of Property and Liability Insurance Companies,

Chapter 1, Nature, Conduct, and Regulation of the Business

- AICPA Audit and Accounting Guide: Audits of Stock Life Insurance Companies, Chapter 3,

Insurance Operations

- AICPA Audit and Accounting Guide: Health Care Organizations, Chapter 1, Unique

Considerations of Health Care Organizations

State Regulations

- No additional guidance obtained from state statutes or regulations.

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