UNIVERSITY OF SANTO TOMAS

UST-Alfredo M. Velayo College of Accountancy

España, Manila

Case Study on Audit for Insurance:

Insular Life

Presented to the
University of Santo Tomas
Alfredo M. Velayo College of Accountancy

In partial fulfillment of the requirements for

Auditing and Assurance: Specialized Industries (ACC5118)
Bachelor of Science in Accountancy

Submitted by:
Basa, Angela Beatrice D. | Ceralde, Julien Sofia Yzabel T. | De Castro, Nicco Rob V. | Gaurano,
Aira Sofia M. | Herrera, Ayen Shelpel D. | Laurenciano, Jenavere Jade O. | Packay, Arianne B. |
Sarmiento, Hillery A.| Tamayo, Abby Maei B. | Ussher, Mikyla Elaine P. | Villapando, Jaira Mae
Ashley C. | Villarino, Camille P. | Villon, Joseph Ian D. | Yparraguirre, Bianca Yzabelle V.

4A5 Group 1

Submitted to:
Mr. Almario G. Parco, Jr.
I.Introduction

In the realm of financial protection, Insurance plays a crucial role in managing and
mitigating risks for individuals and organizations. Insurance is a social device that strategically
combines individual risks into a group, pooling financial contributions to cover potential losses.
By accepting significant insurance risks from another party, a contractual agreement is made
between the insured and the insurer in exchange for a premium. This risk transfer mechanism
effectively reduces individual exposure by distributing predictable losses across the group. In the
Philippines, the insurance landscape involves various stakeholders, including policyholders,
insurance companies (categorized into life, non-life, composite, reinsurance, and captive),
insurance agents, brokers, and regulatory bodies.

The industry operates through a well-defined process where the insured engages with
agents or brokers, who subsequently interact with insurers. In the case of insurers, known as
ceding companies, a portion of their risk is transferred to the reinsurance companies. The
reinsurers, also known as the assuming company, assume part or all of the risk of a ceding
insurance company.

As a prominent player, Insular Insurance Company, the first and largest Filipino life
insurance company and the only mutual company in the Philippines provides a diverse range of
insurance products. With over 100 years of experience, it offers solutions such as Medical
Insurance, Term Life Insurance, Universal Life Insurance, Participating Insurance, Annuities,
Unit-Linked Insurance, and many more. Each product serves as a tailored solution against
unforeseen events.

Insular Insurance Company, proudly Filipino, remains dedicated to spreading the benefits
of life insurance to every family, helping them plan confidently for the future. This case study
focuses on Insular Insurance Company's auditing process, discussing industry briefing, business
risks, accounting issues, and auditing procedures. This detailed examination ensures the
company's financial integrity and adherence to industry standards.

Significance of Insurance Industry in the Philippines

Form of Savings/Investment
Insurance functions as a financial instrument for individuals. Many Filipinos view life
insurance as a safeguard and a vehicle for savings or investment, given its cash value that can be
used for loans or as collateral. This characteristic renders life insurance an attractive option for
accumulating wealth over the long term.
Reliable Source of Income for Retirees
Annuities act as a dependable source of income for retirees, especially in a nation with
constrained social security benefits. By delivering consistent payments throughout the annuitant's
life, annuities play a role in lessening the risk of exhausting savings during the later stages of
life.

Protection towards unexpected events

We are not in control of what may happen in the future. Emergencies, retirement, long-
term care, and any other accidents that may occur are things that everyone should be prepared
for. Unexpected events drove this mindset shift, leading to a heightened interest in life insurance
and annuities in the country. Many Filipinos now recognize the significance of establishing a
safety net to safeguard their families and loved ones in case of unexpected incidents.

Disaster Resilience
Situated in the Pacific Ring of Fire, the Philippines faces daily minor earthquakes and the
risk of major seismic events and volcanic eruptions. Additionally, being in the typhoon belt
exposes the country to around 20 typhoons annually. Its unique geography makes it susceptible
to tsunamis, flash floods, and landslides, straining the underdeveloped infrastructure.

Financial Inclusion
Insurance helps in promoting financial inclusion by providing affordable and accessible
coverage to a broader segment of the population. This enables individuals and businesses to
participate more actively in economic activities without fearing catastrophic financial losses.

The Role of Auditing in the Sector

Ensuring effective internal control
The Audit Committee is important in ensuring effective internal audit functions within
the insurance sector. Its responsibilities encompass overseeing the internal audit department's
operations and reviewing the reports generated by the department. Furthermore, the committee
diligently monitors the progress made in rectifying any identified irregularities and implementing
process changes to address deficiencies.

Overall Integrity
The Audit Committee proactively engages with statutory auditors before and after audits,
discussing the audit's nature, scope, and addressing any concerns. This approach ensures a strong
system of checks and balances, bolstering the insurer's overall integrity and financial health.
Regulatory Compliance
Insurance companies operate in a highly regulated environment. Auditing ensures
insurers comply with industry regulations, legal requirements, and accounting standards. This
helps avoid legal issues and ensures fair and ethical business practices.

Fraud Detection and Prevention

Auditors play a vital role in detecting and preventing fraud within the insurance industry.
This includes assessing internal controls, identifying potential fraudulent activities, and
recommending improvements to prevent financial misconduct.

Reserve Adequacy
Insurance companies must maintain adequate reserves to cover future claims. Auditors
evaluate the sufficiency of these reserves, ensuring that insurers can meet their obligations to
policyholders. This is critical for the financial health and sustainability of insurance businesses.

II. Industry Briefing

Market Factors

The Philippine insurance industry has been experiencing growth over the past few years.
This is evidenced by the report of Global Data (2023), which indicates that the general insurance
market reached PHP 89.6 billion ($1.8 billion) and forecasts an annual growth of over 7% from
2020 to 2025. Furthermore 2022, the life insurance market amounted to Php 308.8 billion and is
anticipated to experience annual growth exceeding 5% from 2023 to 2027, according to the
Global Data (2023) report. Insights10 (2023) also projects that the healthcare insurance market
will increase from $4.46 billion in 2022 to $8.31 billion by 2030, experiencing an annual growth
rate of 8.1% from 2022 to 2030.

On the other hand, some key players in the general insurance market include Malayan
Insurance Company, Inc., Philippine AXA Life Insurance Corporation, Sun Life of Canada
(Philippines), Inc., and BPI-Philam Life Assurance Corporation. Apart from these, Insular Life
Assurance Company, Inc. is also considered a key player in the Philippines' life insurance
market. Established in 1910, Insular Life has grown to 58 branch locations around the
Philippines and has become one of the country's top life insurance companies. Moreover, in
2021, Insular Life earned a net income of Php 4.7 Billion, representing a significant increase
from the previous year, and the company reported a net worth of Php 47.8 Billion, reflecting its
financial stability and growth within the industry.

Market factors such as shifts in gross written premiums, investment income, and
economic conditions significantly impact Philippine insurance companies' financial statements.
For instance, the general insurance market is reported to have a gross premium 2021 of Php 89.6
billion ($1.8 billion) and expects a CAGR exceeding 7% from 2020 to 2025. Similarly, the life
insurance market, at Php 308.8 billion ($5.6 billion) in 2022, foresees a 5% increase in CAGR
from 2023 to 2027. These market trends directly impact financial performance, evidenced by a
positive relationship between the performance of insurance companies and their market size. In
summary, changes in market size, premiums, and investments influence the insurance companies'
revenue, profitability, and overall financial position.

Regulatory Factors

The insurance industry in the Philippines is subject to comprehensive regulation, which is

primarily executed by the Philippine Insurance Commission (PIC), a government agency tasked
with administering and enforcing insurance and reinsurance legislation. The PIC supervises
various entities such as insurance corporations, pre-need companies, agents, brokers, insurers,
and actuaries under the Insurance Code of the Philippines (PD No. 612, as amended by RA No.
10607). The agency's responsibilities include providing licenses, ensuring the strict observance
of insurance legislation, and protecting the interests of insurance consumers, all of which
contribute to the sector's overall stability. Other regulatory bodies, in addition to the PIC, include
the Securities and Exchange Commission (SEC), the Central Bank (Bangko Sentral ng Pilipinas),
the Anti-Money Laundering Council (AMLC), and the Philippine Competition Commission
(PCC), play roles in forming regulations that affect the insurance industry. This comprehensive
regulatory system aims to assure legal compliance, protect consumers, and protect the stability
and integrity of the Philippine insurance market.

The Insurance Code, as revised by Republic Act No. 10607, is the fundamental basis of
insurance regulation in the Philippines, providing the legal foundation for insurance and
reinsurance activities. The PIC administers this regulatory framework, supplemented by
corporate regulations from the SEC and BSP agencies. Furthermore, the AMLC and the PCC
contribute legislation with ramifications for the insurance industry. Adherence to SEC
regulations and the acquisition of necessary licenses are required for entities entering the
insurance business in the Philippines, as outlined in the Insurance Code, which designates
eligible entities for the insurance industry, including corporations, partnerships, and associations.

Economic Factors
Insurance companies, like Insular Life, get money from different places to run their
operations and meet financial commitments. These companies' primary sources of money usually
include payments from policyholders (premiums), investment earnings, and reinsurance.
Premiums, the money policyholders pay for coverage against specific risks, are a big part of the
funding. Insular Life, a life insurance company, collects premiums to offer various insurance
products covering Life, health, savings, investments, and education.
 Another critical source of financial support is investment income. Insurance companies
invest the premiums they collect in stocks, bonds, and real estate. The returns from these
investments significantly contribute to the overall financial health of the companies. Different
companies may have different investment strategies – some might go for higher returns but
riskier assets, while others might stick to safer, low-risk investments. Additionally, companies
like Insular Life may use reinsurance, transferring some of their risk to other insurers in
exchange for money. This helps them manage the risk of significant losses.

Looking specifically at Insular Life, it aligns with the standard industry practices, relying
mainly on premiums and investment income. As a mutual life insurance company, Insular Life
tends to take a long-term and careful approach to investments, aiming to preserve money and
meet the ongoing needs of policyholders. All these different sources of money help insurance
companies, including Insular Life, operate effectively, handle risks wisely, and fulfill their
promises to policyholders.

The insurance industry faces economic challenges, especially from inflation. Inflation can
affect insurance companies in various ways, increasing costs and making it harder to offer
competitive prices. It also influences how people buy insurance. The rising healthcare costs are a
big problem, leading to higher insurance premiums that can be tough for individuals and
businesses. Regulation changes due to inflation create uncertainty for insurance companies,
making it challenging to plan for the future. If there is a slowdown in the global economy, people
and businesses might have less money to spend on insurance, impacting the income and returns
of insurance companies. Inflation and economic challenges can also affect how insurance
companies invest their money, especially in fixed-income investments, influencing their financial
performance.

Technological Factors
Technological advancements play a crucial role in reshaping the operations and services
of insurance companies. Advanced data analytics enables precise evaluation of risks, allowing
insurers to customize policies based on individual profiles. Artificial Intelligence and machine
learning streamline underwriting processes, improving efficiency and decision-making accuracy.
The Internet of Things (IoT) facilitates behavior-centric underwriting and real-time risk
management through data obtained from connected devices. Cybersecurity technologies are
essential for safeguarding sensitive customer data in the face of growing cyber threats.

Additionally, many insurance companies are developing mobile applications and online
portals to make it easier for customers to manage their policies, submit claims, and access
information. This enriches customer interactions by enabling instant quotes and usage-based
insurance. Chatbots and virtual assistants enhance customer service by delivering prompt
responses and guiding customers through various processes. Lastly, many traditional insurance
companies collaborate with or invest in insurtech startups specializing in innovative
technologies. This allows them to leverage new ideas and technologies without building them
in-house. These technological advancements enhance operational efficiency and contribute to a
more personalized and engaging customer experience.

III. Business Risk

Operational Risks
Operational risk is naturally present in all business activities. It encompasses many risks,
including human resource management failures, processing errors, technology failures, business
interruption, information security and privacy breaches, business integration, theft and fraud, and
damage to physical assets. Exposures can be financial losses, regulatory sanctions, loss of
competitive positioning, or damage to our reputation. If not managed effectively, operational risk
can impact an insurance company’s ability to manage other vital risks, such as credit, market,
liquidity, and product risks.

Human Resource Risk

If insurance companies like Insular Life cannot attract and retain agency leaders
and sales representative, their competitive positions, growth, and profitability will suffer.
Additionally. competition for the best people is intense, and an inability to recruit
qualified individuals may negatively impact a company’s ability to execute business
strategies or conduct operations. Thus, insurance companies need to pay competitively to
reduce critical talent turnover risk and successfully attract new talent. They must also
adapt recruiting practices to draw on broader talent pools through labor market
intelligence and sourcing tools.

Processing Errors
Insurance business operations, including strategies and operations related to risk
management, asset liability management, and liquidity management, are interconnected
and complex. Changes in one area may have a secondary impact on another area of
operations. Failure to appropriately consider these inter-relationships or effectively
communicate changes in strategies or activities across operations could harm the strategic
objectives or operations of another group.

Insurance companies perform many complex transactions, and there is a risk that
errors may significantly impact customers or result in a loss to the organization. Taking
this into account, controls must be in place to ensure processing accuracy for most
significant business processes, and escalation and reporting processes have been
established for when errors do occur.
 Environmental Risk
Environmental risk may originate from investment properties subject to natural or
human-made environmental risk. Real estate assets owned, leased and/or managed, and
mortgaged by insurance companies might enter into the chain of liability due to
foreclosure ownership when in default due to damage in the natural environment.

Technology & Information Security Risk

Technology is used in virtually all aspects of business and operations. An
interruption in the service of technology resulting from system failure, cyber-attack,
human error, or other unpredictable events beyond reasonable control could prevent
insurance companies from effectively operating our business. The escalating risks of
fraud and cybersecurity threats are particularly noteworthy, given the growing reliance on
digital platforms and the vast amounts of sensitive data managed by insurers. Insurance
companies face the risk of being the target of cyber-attacks, including computer viruses,
malicious or destructive code, and phishing attacks, that could result in the unauthorized
release, gathering, misuse, loss, or destruction of confidential and other information of
the company, employees, customers or of third parties, disrupt our or our customers’ or
other third parties’ network access or business operations. These attacks could adversely
impact insurance companies from a financial, operational, and reputational perspective.

Successfully navigating and mitigating these operational risks requires implementing

effective risk management strategies, robust internal controls, and investments in technology and
talent. By addressing these challenges proactively, insurance companies can enhance their
resilience and maintain operational integrity.

Financial Risks
Insular Group faces financial risks linked to its financial assets, liabilities, insurance, and
liabilities. For insurance companies, one of the main concerns is that the returns from their
financial assets might not cover the obligations arising from their insurance contracts. These
risks emerge due to the exposure in interest rate, currency, and equity products, all subject to
fluctuations driven by general market movements.
Moreover, based on the notes to the financial statement, the company has established
guidelines and protocols for both fixed and equity investments. Regarding fixed investments,
they seek negotiable instruments that offer high returns with low risks, meeting the standards set
by the Investment Committee (IC) and the group’s criteria. The IC mandates that fixed
investments should come from financially sound institutions or corporations, preferably rated
highly by PhilRatings, particularly ranking within the top 15 for banks. In the case of negotiable
instruments tied to reserve and surplus investments, adherence follows the guidelines outlined by
the Code. Regarding equity investments, Insular aims to place its investment portfolio in the
equity market, seeking high returns with minimal risks while aligning with the standards of the
IC. Accordingly, the financial risks mainly comprise credit, liquidity, and market risks, but other
risks are also discussed below.

Market Risk
Changes in the financial markets can influence an insurance company's investment
holdings. Variations in interest rates, stock values, and bond yields can impact the worth of
insurance investments, potentially resulting in financial setbacks and losses. Moreover, market
risk within insurance firms arises from exposure to market fluctuations and uncertainties. These
companies invest the premiums from policyholders to generate profits and prepare for
forthcoming claims. Yet, these investments remain susceptible to market volatility, directly
influencing the overall financial well-being of the insurer.

Credit Risk
Insurance companies frequently allocate funds to assets like bonds, stocks, and real
estate. The risk emerges when the entities responsible for these assets fail to meet their payment
obligations, which could result in financial losses for the insurer. For Insular Life, the main areas
where they face credit risk involve the outstanding balances due from:
● Reinsurers in respect of unpaid claims
● Reinsurers in respect of claims already paid
● Financial assets at FVPL
● Financial assets at FVOCI
● Financial assets at Amortized Cost

Liquidity Risk
Insular Life, like other insurance companies, faces liquidity risks. This happens when an
insurance company lacks sufficient liquidity to cover its short-term liabilities. Meeting its
obligations might become challenging if the company encounters unexpectedly high claim
payments but needs more readily available cash or efficiently convertible assets. In addition,
since the company consistently receives premiums from policyholders, there is also a high
possibility of encountering unforeseen or abrupt claim settlements. If these cash flows aren't
synchronized, it could create a situation where immediate cash requirements surpass the
currently accessible funds. Aside from that, they also allocate their funds across diverse
investments such as bonds, stocks, and real estate. While these investments generate returns,
certain assets must be more readily converted to cash.
Because of these risks, handling liquidity risks effectively is vital for Insular Life to
guarantee meeting immediate obligations, sustaining financial stability, and upholding its
commitment to policyholders. They must employ strategies like preserving sufficient reserves
and utilizing credit options for abrupt liquidity demands, consistently overseeing cash flows, risk
evaluations, and adherence to regulatory liquidity standards, and diversifying assets to balance
liquid and illiquid investments.
Underwriting Risk and Insurance Risk
From the moment of acceptance of an insurance contract, the company should
compensate the policyholder with a specified payment upon the insured event's occurrence. From
the obligation that arises comes the so-called insurance risk. For a contract to be classified as
having exposure to insurance risk, it must meet all the following criteria: the risk associated with
the contract must exist, not be within the scope of financial risks, be subject to uncertainty, and
have a commercial substance. Over time, the insurance company undertakes an underwriting
process that involves assessing the risk associated with insuring an individual or entity and
considering factors like health, lifestyle, and property value. Based on this risk assessment, the
insurer sets the premium the policyholder pays for coverage. However, underwriting risk arises
due to the inherent uncertainty in predicting future events, such as accidents or illnesses. Suppose
the insurer underestimates the risk or unexpected events are more frequent or severe than
anticipated. In that case, the claims costs may surpass the premiums collected, leading to
financial losses for the insurance company. Insurers use tools, models, and historical data to
reduce their underwriting risks. Still, they cannot be eliminated due to the unpredictable
character of events that insurance is designed to cover.

Accounting and Reporting Risk

Changes in accounting standards and reporting requirements are considered business
risks in insurance companies due to their potential to significantly impact financial reporting and
operational practices. Insurance companies must adhere to specific accounting standards to
prepare accurate and transparent financial statements. When these standards evolve or are
reinterpreted, it introduces uncertainty and may necessitate adjustments to how revenue is
recognized, liabilities are measured, and profits are reported. The complexity of insurance
contracts and the need for precise financial reporting make insurers particularly vulnerable to the
effects of changing accounting rules. An in-depth discussion about the technical aspects of
accounting will be presented on the accounting issues. Adapting to new standards often requires
additional resources, time, and expertise.
Moreover, alterations in financial reporting can influence investor and stakeholder
perceptions, potentially affecting confidence and the company's market standing. Insurance is a
highly regulated industry, so failure to comply with updated standards may result in regulatory
penalties and reputational damage. Therefore, staying informed about changes in accounting
standards and proactively managing their implementation is crucial for insurance companies to
mitigate the associated business risks.

Compliance Risks (D) bea

Compliance risks in insurance companies pertain to the risk of facing legal suits, financial
penalties, and reputational damage that can arise from non-compliance to laws, policies,
regulatory requirements, and industry standards.
 The Philippine Insurance Industry is governed by the Insurance Commission which is
promulgated to regulate and supervise the insurance, pre-need, and health maintenance
organizations (HMO) industries based on the Insurance Code of the Philippines. Accordingly,
the following are some of the laws of the country that establish legal foundations for the
insurance companies:

● Pre-Need Code of the Philippines (Republic Act No. 9829)

● Revised Government Service Insurance Act of 1977 (Presidential Decree No.
1146)
● Social Security Act of 2018 (Republic Act No. 11199)
● Property Insurance Law (Republic Act No. 656)
● Philippine Deposit Insurance Corporation as created in Republic Act No. 3591
● Financial Products and Services Consumer Protection Act (Republic Act No.
11765)
● Data Privacy Act of 2012
● Anti-Money Laundering Act

Furthermore, the Insurance Commission also issues advisories, circular letters,

department orders, legal opinions, memorandum circulars, and rulings that serve as the legal
basis for the companies to adopt new and amended policies.

Regarding the presentation of financial statements, insurance companies in the country

must follow the Philippine Financial Reporting Standards (PFRS).

With the aforementioned regulations, insurance companies like Insular Life must have
robust compliance management systems to identify, assess, and mitigate compliance risks. It is
essential for these companies to be updated on the new laws or changes in existing regulations
and proactively adapt them to their practices. Regular monitoring, internal audits, and employee
training programs must be done to ensure ongoing compliance with the country's regulatory
requirements.

IV. Accounting Issues

Revenue Recognition
Insurance Revenue recognition
In the insurance industry, the primary source of operations is the revenue related to
insurance, leasing, investing in financial instruments, and fund management. Thus, the revenue
recognition principle is one of the essential audit matters that need to be considered because they
are significant and material in amount.
Insurance contracts, leasing agreements, and financial instruments are within the scope
of IFRS 4, Insurance Contracts, IFRS I6, Leases, and PAS 39 Financial Instruments. Thus, they
are outside the scope of IFRS 15 Revenue from Contracts with Customers except for fund
management, which is within the scope of IFRS 15.

Insular Life Revenue Recognition

Revenue recognition criteria for revenues of Insular Life are as follows:

● Insurance Premiums
Premiums are recognized as revenue when they become due from the policyholders,
which, for a single premium business, is the date from which the policy is elective. Due
premiums which remain unpaid within the statutory defined limit are recognized as part
of assets.

● Interest Income
Interest income is recognized on an accrual basis, considering the effective interest rate of
the related asset or an applicable floating rate. Interest income includes the amortization
of any discount or premium, or other differences between the initial carrying amount of
an interest-bearing instrument and its amount at maturity calculated on an effective
interest basis. Moreover, interest income on policy loans is earned over the loan term,
generally over one year.

● Dividend Income
Dividend income is recognized when the right to receive the payment is established.

● Rental Income
Rental income from investment properties is recognized straight-line over the term.

● Trading gains and losses

Trading gains and losses arising from the buying and selling, and changes in fair value of
financial assets and financial liabilities categorized upon initial recognition as at FVTPL
investments and disposal of AFS financial assets are also recognized.

● Claims processing fee

Claims processing fees pertain to revenue from managing medical funds of accounts
under the Cost Plus Program (CPP) of I-Care. This is recognized as revenue upon
payment of claims to accredited hospitals and clinics.

● Fund management, revenue from contracts with customers, and other revenues under
PFRS 15
A five-step approach for revenues under PFRS 15 is followed for recognizing revenue.
These steps are:
 1. Identify the contract with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognize revenues when a performance obligation is satisfied

Revenue from contracts with customers is recognized when control of the goods or
services is transferred to the customer at an amount that reflects the consideration to
which the company expects to be entitled in exchange for those goods or services. The
company concluded that it acts as principal in all its arrangements because it typically
controls the goods or services before transferring them to the customer.

Challenges in Revenue Recognition

The use of IFRS 15 and IFRS 4 in insurance companies introduces complexities and
challenges for auditors. IFRS 15 mandates a meticulous identification of all performance
obligations within a contract, which proves intricate and challenging. The difficulty arises from
contracts with multiple components and those encompassing various goods and services;
determining separate performance obligations is complex. Additionally, insurance policies,
spanning from short-term agreements to multi-year contracts, further complicate revenue
recognition, influencing the timing and the need for periodic adjustments.

Auditors face notable risks, particularly concerning commission income and revenue
recognition cut-off. The challenges extend to premiums received in advance, introducing
complexity in determining the appropriate timing for revenue recognition.

These complexities in revenue recognition present significant challenges for auditors.

Notably, the key audit risks involve the potential for (1) recognizing revenue in an incorrect
accounting period, (2) inaccurately calculating unearned premium reserves, and (3)
implementing inappropriate accounting policies for insurance contracts.

Auditors should pay attention to common audit findings, including ensuring proper
revenue recognition for unit-linked policies, accurate utilization cut-off for admin fee income
calculation, and implementing access restrictions in record modification. Hence, auditors must
thoroughly assess whether clients have established controls to mitigate these risks and
challenges. Additionally, evaluating the effectiveness of protocols for timing revenue recognition
and other accounting matters is crucial.

Asset Valuation

As an insurance provider, insurance companies prioritize their assets, especially asset

classes with lower risk and consistent cash flow, to meet their capital standards and fulfill their
goals. This includes various types of bonds, such as government securities, mortgage-backed
securities, municipal securities, and corporate bonds, among others. The following are the asset
valuations for each account:

● Cash and Cash Equivalents

This account comprises cash on hand and in banks. Cash equivalents are short-term,
highly liquid investments that are readily convertible to known amounts of cash with
original maturities of three months or less from the date of acquisition and are subject to
an insignificant risk of change in value. This is valued at face value.
● Financial Instruments
Insular recognizes a financial asset or a financial liability in the statements of financial
position when it becomes a party to the contractual provisions of the instrument. Initial
and subsequent measurement of financial instruments are under IFRS 9: Financial
Instruments.
● Financial Assets at FVPL
Financial assets at FVPL are measured at fair value through profit or loss.
This comprises quoted equity securities, FVPL debt instruments, and traditional
and structured Variable Universal Life insurance (VULs).
● Financial Assets at FVOCI
Financial assets at FVOCI, whose business model is achieved by
collecting contractual cash flows and selling financial assets, are measured at fair
value through OCI. These consist of equity securities (quoted and unquoted) and
debt securities (quoted, government, and corporate).
● Financial Assets at Amortized Cost
Financial assets at amortized cost, whose business model is to hold the
assets to collect contractual cash flows, are measured at amortized cost. This
consists of investment in debt securities in government and corporations, policy
loans, term loans, unquoted debt securities, interest receivable, housing loans, rent
receivable, and accounts receivable.

● Reinsurance Assets
Reinsurance assets represent balances due from reinsurance companies. Ceded
reinsurance arrangements do not relieve the company from its obligations to
policyholders. Recoverable amounts are estimated consistent with the outstanding claims
provision and per the reinsurance contract.

● Computer Software
Computer software is included under “other assets" in the consolidated statements of
financial position and is carried at cost, less accumulated amortization and impairment
loss, if any. Costs incurred to acquire computer software and costs directly associated
with developing identifiable computer software that generates expected future benefits to
 the Group are capitalized. All other costs of developing and maintaining computer
software programs are recognized as expenses incurred.

● Investments in Associates
The investments in associates are accounted for under the equity method. An associate is
an entity in which the company has significant influence. The company adjusts the
associates' equity and profit or loss, as applicable, for any significant difference in
accounting policies for similar transactions and circumstances except for the accounting
for financial instruments.

● Investment Properties
Investment properties consist of land, buildings, and improvements (or portion of them)
owned by the Group that are leased to others or held for capital appreciation or both.
Investment properties are stated at cost, including transaction costs, less accumulated
depreciation and amortization and any impairment in value. Depreciation of building is
computed on a straight-line method over the estimated useful life of the properties of 40
years.

● Property, Plant and Equipment

Property and equipment, including owner-occupied properties, except for land,
are stated at cost, net of accumulated depreciation and amortization and any impairment
in value. Land is stated at cost less any impairment in value. The initial cost of property
and equipment consists of its purchase price and any directly attributable costs of
bringing the asset to its working condition and location for its intended use.

Expenditures incurred after the property and equipment have been put into
operation, such as repairs and maintenance and overhaul costs, are normally charged to
consolidated statements of income in the period in which the costs are incurred.

Depreciation and amortization of property and equipment commence, once the

property and equipment are available for use and are computed using the straight-line
method over the estimated useful lives (EUL) of the assets regardless of utilization.
● Buildings (40 years)
● Building equipment (25 years)
● Furniture, fixtures, and equipment (3-10 years)
● Electronic and data processing equipment (3-5 years)
● Transportation equipment (4-5 years)
● Right-of-use asset (5-10 years)
 Insular recognizes right-of-use assets at the commencement date of the lease (i.e., the
date the underlying asset is available for use). Right-of-use assets are initially measured at cost,
less any accumulated amortization and impairment losses, and adjusted for any remeasurement
of lease liabilities. The initial cost of right-of-use assets includes the amount of lease liabilities
recognized, initial direct costs incurred, lease payments made at or before the commencement
date less any lease incentives received.

Challenges in Asset Valuation

Auditors confront multiple challenges when assessing the value of an insurance

company's assets due to the intricacies of the industry and the distinct nature of insurance-related
assets.

A primary challenge involves the complexity of financial instruments insurance

companies hold, such as derivatives and structured securities. These assets are often intricate to
value accurately, requiring auditors to comprehend their nuances and ensure alignment with
relevant accounting standards.

Another significant challenge arises in determining the appropriate valuation of insurance

liabilities, including claim reserves. This task involves estimating future cash flows discount
rates and evaluating the impact of changing economic conditions, necessitating a comprehensive
understanding of actuarial principles.

Additionally, difficulties may emerge when valuing assets at fair value, mainly when
market prices are unavailable. Auditors must assess the reasonableness of management's
assumptions and methodologies in such cases.

Valuing reinsurance assets and liabilities presents a crucial challenge, requiring

consideration of reinsurance contract terms, the financial strength of reinsurers, and potential
future claims. Accurate assessment of recoverability and liability estimation is imperative in this
context.

The challenge extends to valuing investment portfolios, mainly when encompassing

diverse asset classes like bonds, equities, and alternative investments. Expertise in various
valuation techniques is vital in navigating this complexity.

In summary, maintaining consistency in valuation methods proves challenging both

within an insurance company and across the industry. Different methodologies applied by entities
can lead to reported value variations, emphasizing the need for auditors to scrutinize these
approaches meticulously.
V. Auditing Procedures

Tax Exemption

Insurance companies in the Philippines are entitled to certain tax exemptions as provided
by the National Internal Revenue Code. The main objective of giving these incentives is to
encourage the insurance industry's growth and promote financial stability. Some of the Incentives
which are present for the industry are:

Exemptions from Income Tax:

● Income from premiums: the gross income derived from premiums on investment
contracts covering risks present within the Philippines is exempt from income tax. This
covers both life and non-life insurance companies.
● Income from investment: Provided that an insurance company’s investments are made
in certain specified securities, such as government bonds and bonds from other domestic
corporations, the income from these investments is generally exempt from income tax.
● Income from foreign sources: Income derived by an insurance company from activities
conducted outside of the Philippines are generally exempt from income taxes.

Exemptions from Value-added Tax (VAT):

● Insurance companies are exempt from VAT on their importation of goods and services
that are used directly and exclusively in the insurance business. This exemption is
provided under Section 8(a)(iv) of the National Internal Revenue Code of 1997, as
amended.
● Section 109(H) of the Tax Code exempts from VAT the sale of insurance policies by an
insurance company. This exemption applies to both life and non-life insurance policies
if the life insurance policy is issued to a resident of the Philippines.

Exemption from excise tax:

● Insurance companies are exempt from excise tax on premiums paid for insurance
policies. This exemption is provided under Section 165 of the NIRC.

Exemption from documentary stamp tax:

● Section 156(I) of the Tax Code exempts insurance policies, annuity contracts, and other
documents issued by an insurance company from Documentary Stamp Tax (DST). This
exemption applies to both life and non-life insurance policies and documents.

Exemption from withholding tax on certain payments:

 ● Insurance companies are exempt from withholding tax on certain payments, such as
payments for reinsurance premiums and payments for dividends.

In addition to the prior exemptions, Revenue Regulations No. 12-2002 also provides that
insurance companies also enjoy the following tax incentives on their operations:

● Gross premium tax deduction: Insurance companies are allowed to deduct a certain
percentage of their gross premium income from their taxable income. The deduction rate
is 10% for life insurance companies and 5% for non-life insurance companies.
● Deduction for reinsurance premiums: Insurance companies are allowed to deduct
the premiums they pay to reinsurers from their taxable income.
● Special deductions for mutual insurance companies: Mutual insurance companies are
allowed to deduct certain expenses, such as policyholder dividends and contributions to
policyholder reserve funds, from their taxable income.
● Special tax exemptions and deductions under the Special Economic Zone (SEZ)
incentives regime.

Tax Liabilities
Insurance companies must deal with tax responsibilities and intricacies outlined in
guidelines and the Tax Code. These companies face different types of taxes, such as income tax,
Value Added Tax (VAT), Documentary Stamp Tax (DST), premium tax on unrelated income, and
final withholding tax on interest earned from premium deposits. Income tax, their primary
obligation, is usually imposed at a flat rate of 30% on their net taxable income. Along with
income tax, insurance companies also have to pay VAT on the premiums they collect, typically
set at 12%, with exemptions that apply to specific transactions. Another critical factor for them is
the Documentary Stamp Tax (DST), which affects their operations and transactions as it is
imposed on insurance-related documents, like policies and contracts.

In addition, insurance companies may be required to pay a 5% premium tax on

management fees, rental income, or any other unrelated income they generate. The tax
obligations of insurance companies go beyond taxes. It Involves comprehensive regulatory
frameworks such as Revenue Regulations No. 34 2020 and No. 25 2020, as well as the CREATE
Law. These regulations introduce complexities related to transfer pricing documentation carrying
over operating losses and applying graduated corporate income tax rates based on assets.
Compliance with these regulations significantly impacts how insurance companies calculate and
disclose their tax liabilities. They must adhere to these rules and seek guidance to fulfill their tax
responsibilities accurately.

Auditing procedures play an indispensable role in this context by meticulously reviewing

various aspects such as income tax computations, deferred tax assets, and projected future
taxable profits. The COVID-19 pandemic has amplified the estimation uncertainty in the
recoverability of Deferred Tax Assets, further emphasizing the critical need for audits to ensure
accuracy and compliance amidst economic unpredictabilities. The assessment and accounting for
tax liabilities is complex and extensive for insurance companies in the Philippines, involving
various taxes and regulations. Therefore, a careful understanding and adherence to these
multifarious tax obligations is crucial, often requiring expert guidance to navigate and fulfill their
responsibilities amidst a constantly changing tax landscape.

Test of Controls
Internal controls are provided by the management and those charged with governance in
order to identify or prevent the risk of material misstatements. It is essential to evaluate the
internal controls in order to ensure that the company’s records and operations are accurate and
efficient, its assets are safeguarded from fraud or significant loss, and they comply with the
appropriate policies or standards for financial reporting. Under the test of controls, the auditor
shall perform Inquiry, Inspection, Observation, and Reperformance in order to ensure that the
company’s financial information is fairly stated.

For insurance companies like Insular Life, specific tests of control procedures shall be
applied in various activities conducted by the company. For underwriting, which assesses the
insurance policy applications and their exposure to risks, an auditor shall review and check the
approval of the encoded details in the system in order to avoid processing incomplete and
inaccurate applications. Through Inspection, the auditor discovered that Insular Life
continuously uses and maintains an up-to-date management information system that allows the
company to provide precise and valid data regarding risk exposure at any given time. Another
test of control for underwriting is the anti-fraud control, which involves the final approval of the
policy contract before its issuance. In order to adhere to this, the Board of Trustees conducts
regular meetings in order to review and approve the organizational and regulatory requirements
of Group risk management policies. This is essential since the policies are the means to identify
the company’s risks of the company and ensure the appropriate quality and diversification of
assets.
For the transactions on claims and losses of Insular Life, tests of controls that involve
Inquiry and Inspection are the notification or submission of claim documents and the verification
of whether the policy has the authorization to be claimed. Based on the auditor’s report, this is
performed by the company through their InLife’s Claims Portal. This portal is designed for the
policyholders and beneficiaries to file and access their claims for death, disability,
hospitalization, and dread diseases or critical illnesses. Through this, the policyholders can
monitor and check the status of their claims. Additionally, the Reperformance test of control is
done by evaluating the correct amount of claims to be paid and determining proper journal
entries for the claims. The auditor found that the company records claims receivable by offsetting
them against premiums payable to the reinsurers, which is customary in the industry.
Additionally, proactive claims handling procedures are followed to investigate and adjust claims
in order to prevent the settlement of fraudulent claims.

Segregation of Duties
In the context of mutual life insurance companies, specifically Insular Life, Segregation
of Duties is crucial in the implementation of internal control and prevention of financial losses.
The primary objective is to prevent occurrence of errors, fraud, and suspicious transactions and
most importantly, to uphold the integrity of insurance operations.
Segregation of Duties is employed by delegated incompatible authorities and
responsibilities both at individual and functional levels. This aims to mitigate conflict of interest
among employees through ascertaining that incompatible duties are not held by a single
individual only. With this, it prevents employees from having the capability to engage in
fraudulent activities or conceal errors in the routine execution of their duties. In the insurance
operations, all employees engage in the insurance undertakings according to their specific duties
and responsibilities and this minimizes the possibility of circumventing controls.

To reinforce the checks and balances in Insular Life, certain incompatible duties,
including authorization, approval, issuance of policy, collection of premium, processing of
claims, underwriting, recording of transactions, and control activities, are segregated among
different employees or departments. This reduces the risk of malpractice in the workplace.

It is imperative for the duties and responsibilities of each employee to be properly

documented as this is crucial as a reference, most especially in the course of the audit. This
documentation ensures employee adherence and facilitates seamless tracking of tasks in the
insurance operations. With this, efficient workflow is fostered and internal control is reinforced
at Insular Life.

Substantive Testing
Assertions

Substantive Test Audit Program for Claims Payables and Expenses

Assertion Audit Procedure
Completeness Reconciliation of the claims register and
accounting register. The insurance company
should obtain the schedule of claims payable
and confirm its mathematical correctness,
carry out the GL-SL reconciliation, and look
into any significant exceptions mentioned
related to claims payable and expenses.
 Financial data, as part of this, must be
examined and reconciled in order to guarantee
its accuracy and adherence to the applied
accounting standards. Furthermore, the audit
team should work with departments assigned
to the accounts to look into and resolve any
disparities or irregularities in claims payable
and expenses to ensure accurate reporting.
Accuracy Obtain and verify amounts/mathematical
accuracy of claims payable schedule from the
Accounting Department and summarize the
schedule per line of business. Data should be
graphed by the movement of the number of
claims during the year and then analyzed to
ensure that the movement of the graph is
within the expectation. The audit team should
simultaneously investigate and note material
exceptions
Completeness and Accuracy Checking of unrecorded liabilities:
Obtain a listing of paid claims after the
balance sheet date. Inspect and determine
whether the claims paid were incurred on or
before the balance sheet date. IPE testing
should be performed on the lists of paid
claims being used to select the samples.
Vouching should also be done to the items to
their supporting documents and traced to the
claims payable sub-ledger. The accounting
period when such has been recorded should
be noted and further verified if the items have
been properly recorded in the correct
accounting period. Assessment of unrecorded
liability at the end of the period should be
performed.
Existence and Accuracy Confirmation, assessment, and monitoring:
Obtain a list of all external adjusters and
counsel maintained by the claims department
of the company and subsequently dispatch
confirmation letters to all to ensure the
completeness and accuracy of the recorded
loss reserve for unsettled claims. To validate
this, a tracing process that involves cross-
referencing the company’s records with
 the information provided in the adjuster’s and
legal confirmation is undertaken within the
schedule. Any material excerptions noted
during the reconciliation are investigated in
order to pinpoint and address any
discrepancies or irregularities in the loss
reserve recordings.

Test of subsequent payment:

Obtain and verify the schedule disaggregated
to the relevant level like by line of business
and ensure its mathematical accuracy. Make
an evaluation of the data’s reliability and
select samples for testing, this includes
vouching for proof of claim payments,
folders, and other relevant documentation.
Any material exceptions observed are
thoroughly investigated to ensure a
comprehensive and accurate assessment of the
account’s integrity.

Risks within the insurance industry with regard to claims and benefits lie in the
processing and payment of fictitious claims as well as estimations of reserves that were incurred
but not reported. Risks with potential management bias are introduced through estimates and
judgments. In the context of claims payables and expenses, the risk lies in the inaccurate
assessment of the accounts like underestimating or overestimating the liabilities leading to
insufficient reserves or strain on financial resources respectively, thus, leading to misstatements
that impact the financial health of the insurer. If not appropriately identified and addressed, can
lead to improper processing and payment, resulting in financial losses for the insurer. In
response, the mitigation is to review the claims data regularly and ensure adherence to
accounting standards for the said accounts. Furthermore, having robust internal and external
audit processes wherein the utilization of technology is equipped for data analytics and
predictive modeling to enhance accuracy in estimating claims liabilities. Aside from this
verifying actual amounts in terms of schedules and confirmation by external adjusters and
counsel of the claims department.

Substantive Test Audit Program for Insurance Revenue

Assertion Audit Procedure

Existence and Occurrence Collect insurance contract samples and verify if there is
existing supporting documentation such as policy agreements,
To ensure that the insurance customer communication, and underwriting data. Verify a
revenue transactions sample of the insurance contracts with the presence of
recorded are for valid policyholders and/or beneficiaries. Test a sample of premium
contracts and services. payments to verify that they have been properly recorded and
associated with the appropriate policies.

Completeness To ensure completeness, select a sample of insurance contracts

and trace them to the general ledger. Compare a sample of
To ensure that all insurance policyholder payments to the accounting records to determine
revenue transactions are the completeness of premium revenue recognition. Obtain a list
recorded correctly. of policies that have expired or been canceled, and confirm that
the relevant revenue changes are appropriately documented.

Accuracy Recalculate rates for a sample of insurance contracts and

compare them to the amounts previously reported. Examine the
To ensure that insurance reserve computation for each type of insurance product,
revenue transactions are confirming the accuracy of assumptions and calculations.
recorded correctly. Confirm that the mortality rates, discount rates, expenditures,
and lapse rates are consistent with industry norms and
regulatory guidelines.

Valuation and Allocation By analyzing historical data and industry benchmarks, assess
the adequacy of assumptions applied for mortality, morbidity,
To ensure that insurance discount rates, costs, and lapse rates. Check the correctness of
revenue is properly valued reinsurance contract valuations by comparing recorded values
and allocated. to contract conditions and assumptions. Confirm that the use of
the Minimum for Adverse Deviation (MfAD) in assumptions is
compliant with regulatory standards.

Rights and Obligations Examine legal policy reserves and confirm that the company's
assumptions and values meet regulatory standards.Confirm that
To ensure that the company reinsurance agreements do not relieve the company of its direct
is legally entitled to duties to policyholders and that credit exposure is stated
recognize insurance adequately.
revenue.

Presentation and Disclosure Examine the financial statements' disclosure of assumptions

and methodologies used in calculating insurance revenue.
Confirm that the financial statements adequately disclose the
 To ensure that insurance sensitivity analysis. Ensure that the credit risk concentration is
revenue is presented and disclosed, particularly in relation to reinsurance contracts and
disclosed correctly in the debt securities.
financial statements.

Accuracy of Financial Risk Confirm that credit risk exposure is adequately disclosed,
Disclosures including credit risk concentrations in the Group's debt
securities portfolio. To ensure compliance with regulatory
requirements, review the Group's fixed and equity investment
To ensure the accuracy of
guidelines and procedures. Examine the adequacy of
credit risk, liquidity risk, disclosures related to the Group's exposure to interest rate,
and market risk disclosures. currency, and equity market risks.

Compliance with Regulatory To ensure compliance, obtain and review relevant sections of
Guidelines the Insurance Code as well as Insurance Commission
guidelines. Confirm that the Insurance Commission's discount
To ensure that insurance rates are consistently applied. Examine the suitability of credit
revenue recognition and risk policies and their compliance with regulatory requirements.
financial risk management
are in accordance with
regulatory requirements.

Adequacy of Allowances Examine the methodology used to estimate expected credit

losses and ensure that it is consistent with industry best
To ensure that allowances practices. Confirm that credit loss allowances are properly
established for receivables and financial assets subject to credit
for credit losses are
risk. Examine the ECL allowances for financial assets at
adequate. FVOCI, AC, and investments under VUL for accuracy.

The complexity of insurance contracts, the significant impact of revenue on financial

health, and the need to ensure regulatory compliance make substantive testing of insurance
revenue accounts vital. The testing of financial statements helps verify assertions, assess the risk
of overstatement of revenue, evaluate internal controls, and examine key assumptions regarding
mortality rates. Reinsurance contracts and credit risk exposure are disclosed accurately after it
confirms the reasonableness of assumptions, reviews sensitivity analyses, and performs
sensitivity analyses. In general, substantive testing assures stakeholders that financial statements
accurately reflect a company's financial position and that revenue risks are effectively managed.
 Substantive Test Audit Program for Legal Policy Reserves

Assertion Audit Procedure

Existence and Completeness
Rights and Obligations
Confirm the legal policy reserve balances with the insurance
company’s custodian or financial institutions, reconciling them
to the general ledger. Verify the inclusion of all pertinent
policies in the reserve calculation.
Scrutinize legal documentation, contracts, and policy
agreements to affirm the insurance company’s legal right to
establish and maintain policy reserves. Confirm compliance
with regulatory obligations related to reserve requirements.

Interview management and legal counsel to validate events

triggering the establishment of legal policy reserves. Verify
fulfillment of obligations to policyholders, including timely
payments and adjustments.
Valuation and Accuracy Evaluate actuarial reports supporting reserve calculations,
ensuring accurate mathematical computations and validating
assumptions used in the valuation. Assess the appropriateness
of changes in valuation methods.
Presentation and Disclosure Confirm the appropriate disclosure of legal policy reserve
balances in financial statements, ensuring compliance with
accounting standards and regulatory requirements for
disclosing insurance liabilities.
Measurement and Allocation Assess the consistency of actuarial methods for measuring legal
policy reserves. Evaluate the appropriateness of allocation
methods for diverse policy types (ordinary life, group life, unit-
linked, accident and health).
Legal and Regulatory Conduct a legal review to ensure adherence to applicable laws
Compliance and regulations governing insurance policy reserves. Confirm
compliance with regulatory guidelines for reserve adequacy
and reporting.

Conducting substantive testing on the Legal Policy Reserve account within an insurance
company is crucial for various reasons. Firstly, due to the considerable financial impact and
intricate nature of this account, comprehensive validation becomes essential to identify and
rectify errors or misstatements that could significantly affect financial statements. Secondly,
strict regulatory guidelines governing the sufficiency and precision of policy reserves necessitate
substantive testing to ensure adherence, thereby mitigating potential legal and financial
repercussions. The direct influence of the Legal Policy Reserve on financial statement
presentation underscores the necessity for precise reporting. Moreover, the risk of fraud or
mismanagement heightens the importance of substantive testing procedures as precautionary
measures. The accompanying table offers a structured approach, systematically addressing key
audit assertions like existence, rights and obligations, valuation, and compliance. Each specified
audit procedure, ranging from confirming balances to reviewing legal documentation and
assessing actuarial reports, acts as a targeted measure to bolster the accuracy of financial
reporting and provide stakeholders with confidence in the insurance company's financial
statements.

Subtantive Test Audit Program for Commission Expense

An essential component of insurance businesses' financial statements is Commission Expenses. It

stands for insurance firms' expenses to pay intermediaries, such as brokers and agents, for selling
insurance policies. It denotes a percentage of the premium paid, due, or owing to the agent in exchange
for facilitating a new and ongoing insurance policy application. For an insurance company's financial
performance and position to be appropriately reflected, commission expenses must be properly accounted
for.

Significant Risks:
● Recording Accuracy:
Risk: There is a risk that the recording of commission expenses in the financial statements will be
inaccurate.
● Timeliness of Identification:
Risk: The company's financial performance could be distorted by late recognition of commission
costs.
● Fraudulent Practices:
Risk: There is a risk that commission payments will be the subject of fraudulent activity, such as
making unlawful payments or falsifying commission records.

Assertion Audit Procedure

Completeness, Existence and Accuracy Correlation Analysis
➔ Gather details regarding monthly
premium assumed, premium ceded,
commission expense and commission
income per month.
➔ Reconcile the accumulated balances with
the trial balance at the end of the period.
➔ Determine the month-to-month
fluctuations in commissions and align
 these with the corresponding changes in
premiums.
➔ Additionally, assess the strength of the
correlation between premiums and
commissions in the available data by
utilizing the Microsoft Excel or
Correlation Analysis tool in IDEA.

Completeness, Existence and Accuracy Recalculation of Account Balances

➔ Obtain a Commission Expense schedule

for the period ended.
➔ Validate mathematical accuracy of the
provided schedule.
➔ Reconcile the schedule to the trial balance
at the end of the period.
➔ Conduct IPE (Information
Produced/Provided by Entity) testing on
the schedule.
➔ Vouch the rates used in the recalculation
through careful examination.
➔ Execute a recalculation of account
balances.
➔ Investigate any material exceptions
exceeding the Acceptable Materiality
Percentage Threshold (AMPT).

VI. Compliance Testing

Compliance testing, referred to as a compliance audit or regulatory testing, stands as a

critical procedure within the financial sector. Its significance lies in evaluating an organization's
conformity with applicable laws, regulations, policies, and industry benchmarks. The key aim of
compliance testing is to identify potential risks, weaknesses, and gaps within a company's
compliance framework while ensuring continuous adherence to regulatory requirements.
 For insurance companies, Republic Act 10607, also refer//red to as the Philippine
Insurance Code is a law in the Philippines governing the insurance sector. This law was
established with the primary goal of updating and strengthening the oversight and management
of insurance firms, aiming to safeguard policyholders' interests and ensure stability within the
industry.

In addition, Insular Life conducts regular internal audits or engages external auditors to
assess compliance with different areas. These evaluations help identify areas of non-compliance
or potential risks, allowing for corrective actions to ensure Insular Life operates within legal
boundaries, adheres to industry standards, and protects the interests of its policyholders. Some
factors that insurance companies need to consider are adherence to data protection compliance
with privacy and data security rules, particularly in the handling and safeguarding of customer
information. Additionally, it was also stated in the company's financial statement that the
consolidated FS had been prepared in compliance with Philippine Financial Reporting Standards
(PFRS).

Furthermore, the Insurance Commission issues Circular Letters, Rulings, and Memoranda
that insurance companies must comply with. Insurance Updates include Circular Letter No.
2021-07 that discusses the prepaid facilitation fees from bancassurance arrangements. Such
facilitation fees paid in advance and booked as prepaid expenses shall be treated as non-admitted
assets in determining its financial condition–regardless of whether there is a stipulation of a claw
back provision in a bancassurance engagement. Second is the Circular Letter No. 2021-47, 2021-
20 that deals with the adoption of the Annual Corporate Governance Report in lieu of the
ASEAN Corporate Governance Scorecard. Another illustration is for the compliance of non-life
insurance companies mentioned in Circular Letter No. 2021-27 which tackles the
implementation of sustainable catastrophe insurance premium rates. This is in accordance with
the establishment of the Philippine Catastrophe Insurance Facility that states that all non-life
insurance companies must determine, adopt, and implement risk-appropriate and sustainable
catastrophe insurance rates and rating structure. Lastly, is the Circular Letter No. 2021-43 that
contains the extension of the regulatory relief on the admittance of premiums receivable due to
the Covid-19 pandemic. This states that the admission of the Premiums Receivable account must
be adjusted from 90 days to 180 days from the date of issuance of the policies. Moreover, undue
installment premiums are still considered as admitted assets–given that the issuance of the policy
is within 180 days from the cut-off date. But in the case of defaults in any installment due, the
amounts of all the remaining unpaid installments must be treated as non-admitted assets.

In summary, compliance testing is essential for insurance companies to meet regulatory

obligations, manage risks, maintain a positive reputation, avoid financial penalties, and operate
efficiently in a competitive market. It is a proactive approach to ensure that the company
operates with integrity and aligns with legal and industry standards.
VI. Conclusion
In conclusion, the insurance industry in the Philippines holds immense significance as a
pivotal force in managing risks, pooling financial contributions, and safeguarding individuals
and organizations. With its extensive experience, Insular Life occupies a prominent role by
offering a diverse array of products. Beyond risk management, the industry contributes to
economic activities, acts as a form of savings, provides income for retirees, enhances disaster
resilience, and promotes financial inclusion.

Auditing is essential, ensuring internal control, integrity, regulatory compliance, fraud

detection, and reserve adequacy within the sector. Operational, financial, and compliance risks
are inherent challenges addressed by robust risk management, investment strategies, and
compliance systems. The specific challenges faced by Insular Life, such as human resource risks,
processing errors, and environmental concerns, exemplify broader operational risks in the
industry, requiring effective risk management, internal controls, and strategic investments.

Financial risks, encompassing market fluctuations and credit and liquidity risks, are
skillfully managed through investment guidelines and diversified portfolios. Compliance risks
are significant threats in the industry, prompting insurance companies to implement rigorous
compliance management systems, regular monitoring, audits, and employee training. Auditing
considerations include addressing revenue recognition challenges, asset valuation complexities,
and tax obligations, with meticulous procedures focusing on insurance revenue recognition, asset
valuation, tax exemptions, and internal controls to ensure accuracy and reliability in financial
statements.

Compliance testing, integral to financial sector audits, ensures adherence to relevant laws,
regulations, and industry benchmarks. For Insular Life, this involves evaluating conformity with
the Philippine Insurance Code through regular internal and external audits, emphasizing data
protection, privacy, and adherence to Philippine Financial Reporting Standards. Compliance
testing is also essential for fulfilling regulatory obligations, mitigating risks, upholding
reputation, avoiding financial penalties, and ensuring operational efficiency in a competitive
market.

In summary, the insurance industry, as exemplified by Insular Life in the Philippines, is

vital for risk management and financial protection and plays a crucial role in societal well-being.
With over a century of experience, Insular Life navigates operational, financial, and compliance
risks through robust risk management, internal controls, and strategic investments. Auditing,
with its multifaceted considerations, underscores the necessity for a thorough and adaptive
approach to navigate the intricacies of the insurance industry, upholding financial integrity and
accountability.
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