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FA6


UNIT 2


FINAL ACCOUNTS OF INSURANCE

COMPANY


Various Types of Insurance: Insurance is basically of two types-life insurance and general insurance. Life insurance policy covers the life risk of the insured (or assured) up to the policy amount. General insurance means insurance other than life insurance and various types of it are fire, marine or miscellaneous insurance business. Some common types of miscellaneous insurance in India are: exchange risk insurane, motor vehicle insurance, credit insurance, workmen's compensation insurance, professional liability insurance, cash in transit insurance etc.


1. Life insurance is a contract under which, in consideration of premiums paid by the insured, the insurer agrees to pay fixed sum of money either on the death of insured or on the lapse of a specified number of years. Example of LIC Companies are LIC, Prudential ICICI, Max New York Life Insurance etc.

Fire, marine and miscellaneous insurance business represents the type of contract under which, in return for premiums paid by the insured, the insurer undertakes to reimburse the insured for any loss or liability he may incur on the happening of an uncertain event. There are several types of policies issued for each class of business.

2. Maturity: Since, in life insurance, the amount insured is payable on the happening of an event which is bound to occur, namely, the lapse of the period of time or the death of the insured, this form of insurance is frequently described as “assurance” business. Other forms of insurance provide only for the reimbursement of loss or liability incurred and, therefore, they are known as ‘insurance’ business.

3. Insurance value: Human life, being invaluable, may be insured for any amount depending upon the premiums the insured is willing to pay. Other forms of insurance are contracts of indemnity and, therefore, notwithstanding the amount of policy, the sum payable under it is limited to the amount of loss actually suffered or the liability incurred.

4. Period of contract: Life insurance contracts are long term contracts running over the number of years but general insurance contracts are only for one year though renewable

Year after year.


Bonus: Policy holders of with profit policies are entitled to receive the bonus at the declared rate. Bonus is usually declared on sum assured and not on already accumulated bonus. For example, in case of LIC of India with profit policy holders are entitled to participate in 95% of profit (i.e., excess of Balance of Life Assurance Fund over Net Liability as per actuarial valuation). Such bonus may be paid.

1. In cash (i.e. Bonus in cash)

2. By reduction of future premiums (i.e., Bonus in reduction of premium).

3. On maturity of the policy. (i.e., Reversionary Bonus)

Interim Bonus: It is a bonus declared between dates of two valuation Balance Sheets. It is for a period for which valuation is not complete.

Surrender Value: In the case of a life insurance, the insured usually undertakes to pay premium for a very long time; and circumstances might arise when an insured ceases to pay further premium, then he has to surrender his policy and the value then paid by the insurer is called surrender value.

Re - Insurance: If an insurer does not wish to bear the whole of risk of a policy, he may reinsure a part of risk with other insurer. In such a case the insurer is said to have ceded a part of his business to other insurer. If, on the other hand, he insures the risk underwritten by another assurance company, he is said to have accepted reinsurance business. In such a case, on a claim arising, the claim will be shared between the two companies in the proportion they had agreed to underwrite the risk.

Consideration for Annuities Granted: It refers to the lump sum amount paid to the insurer as consideration for the payment of annuities. Consideration for annuities granted is a source of income of the life insurance business and as such it is shown on the credit side of its Revenue Account.

Co-Insurance: In cases of large risks the business is shared between more than one insurer under coinsurance arrangements at agreed percentages. The leading insurer issues the documents, collects premium and settles claims. Stat of accounts are rendered by the leading insurer to the other co-insurers.

Life Assurance Fund: It refers to the fund which is retained to meet the aggregate liability on all policies outstanding. Until the liability on all outstanding policies is computed, the amount of profit of the life business cannot be ascertained. A life business is said to have earned profit only if its Life Assurance Fund exceeds its net liability on all outstanding policies.

The computation of the net liability on all outstanding policies is a complicated mathematical process which can be done only experts in the field called ‘Actuaries’. This Computation is carried out by LIC, every two years. As such, the Life Insurance business cannot ascertain its profits every year.

 


There are various life insurance policies. The popular life insurance policies are discussed below:

1. With Profit Policies Holder is entitled to receive the bonus at the declared rate. Traditionally, bonus rate is expressed per thousand rupee of the sum assured. Bonus gets accumulated year after year but is paid at the time of maturity of the policy. Bonus is declared on sum assured and not on already accumulated bonus. For example, Mr. X takes with profit life insurance policy for a sum assured of Rs.1,00,000 for 5 years. If bonus is declared @ Rs.70, Rs.71, Rs.72, Rs.73 and Rs.74 for each of these 5 years. The amount to be received by Mr. X at the time of maturity of the policy will be calculated as under:

Particulars

RS

  1. Sum Assured

Rs. 1,00,000

B.      Add: Bonus

 

1st year (Rs.70 x Rs.1,00,000/ 1,000)                                                          7,000

 

2nd year (Rs.71 x Rs.1,00,000/1,000)                                                          7,100

 

3rd year (Rs.72 x Rs.1,00,000/ 1,000)                                                         7,200

 

4th year (Rs.73 x Rs.1,00,000/1,000)                                                          7,300

 

5th year (Rs.74 x Rs.1,00,000 / 1,000)                                                        7,400

Rs. 36,000

C.    Total Amount Receivable [A + B]

Rs.1,36,000

 

2. Without Profit Policies: Holder of Policy is not entitled receive the bonus declared from time to time.

 

3. With Accident Benefit Policies: On payment of some extra premium, the holder is entitled to claim the accidental benefit. Under life insurance policies with accidental benefit, on death of the insured due to accident either double or triple the sum assured is paid according to the type of policy taken.

 

4. Without Accident Policy: Neither extra premium is charged nor is extra sum assured paid. Some of the popular life insurance policies are discussed below:

  1. Whole Life Policy: Under this policy, the sum assured along with the bonuses (in case of with profit policies) is payable on death of insured.
  2. Endowment Policy: Under this policy, the sum assured along with the bonuses (in case of with profit policies) is payable on the expiry of specified term of policy or death of insured whichever is earlier.

 


Meaning of Provision for Unexpired Risks: Provision for Unexpired Risks is a provision created to meet the claims which may arise in respect of the policies which remain unexpired at the end of the year.

The minimum amount of such reserve to be kept scout the Executive Committee of the General Insurance Council is as under:

Types of General Insurance Business

% of Premium

  1. Marine Insurance

100%

2.      Other Insurance

50%

 

However, the income tax authorities allow 100% of the net premium in case of marine insurance and 50% of the net premium in case of other insurance.

Since there is no bar on creating such reserve at a percentage higher than those laid down by the Executive Committee, the Company may maintain such reserve at a higher percentage. The excess reserve over the minimum reserve is termed as ‘Additional Reserve’

Accounting Treatment of Provision for Unexpired Risks:

  1. The difference between the aggregate amount of minimum provision and additional provision in the beginning and aggregate amount thereof at the end is disclosed as ‘Changes in Provision for Unexpired Risks’ in Revenue Account.
  2. Balance of Minimum provision and additional provision of unexpired risks is shown on the liabilities side of Balance Sheet.

Schedule A: Format of the financial statements relating to Life insurance Companies.

Schedule B: Format of the financial statements relating to General Insurance Companies.

Schedule C: Relating to format of audit report.

Set of financial statements: Revenue A/c, Profit & Loss A/c, Balance sheet.

 

SCHEDULE -A

Part-V, Form B-RA, Revenue A/c for the year ended DD-MM-YYYY

Shareholders A/c (Technical)

Particulars

Schedule No

Current Year

Previous Year

1. Premiums Earned (Net)

a. Premium

b. Re-insurance ceded

c. Re-insurance accepted

2. Income from Investments

a. Interest, dividend & Rent (Gross) (*)

b. Profit on sales/redemption of investments

c. (Loss on sale/redemption of investments)

d. Transfer/Gain on revaluation/change in fair value

3. Other Income (to be specified)

 

TOTAL (A)

  1. Claims/Benefits paid (Net)
  2. Commission
  3. Operating expenses related to insurance business

TOTAL (B)

Operating Profit/(Loss) from Fire/Marine business Surplus/Deficit: (A) —(B) =C

Appropriations:

1. Transfer to Shareholders A/c

2. Transfer to Other reserves (to be specified)

3. Balance being Funds for Future Appropriations

TOTAL (C)

 

1

 

2

3

4

 

 

 

 

Schedule 1: Premium

Particulars

Current

Previous

1. First year premiums

2. Renewal Premiums

3. Single Premiums

Total Premium

 

 

 

Schedule 2: Benefits Paid

Particulars

Current

Previous

1. Insurance claims:

    a. Claims by death

    b. Claims by maturity

    c. Annuities/Pension payment,

    d. Other benefits, specify

2. Amount ceded in reinsurance:

    a. Claims by death

    b. Claims by maturity

    c. Annuities/Pension payment,

    d. Other benefits, specify

3. Amount on re-insurance accepted:

    a. Claims by death

    b. Claims by maturity

    c. Annuities/Pension payment,

    d. Other benefits, specify

Total

 

 

Note: Claims includes, fees, settlement cost, legal fees.

 

Schedule 3: Commission Expenses

Particulars

Current

Previous

Commission paid

     Direct: First year premiums

     Renewal premiums

     Single premiums

Add: Commission on reinsurance accepted:

Less: Commission on reinsurance ceded:

Net Commission

 

 

 

Schedule 4: Operating expenses related to Insurance Business

Particulars

Current

Previous

  1. Employees remuneration & welfare benefits
  2. Travel, conveyance and vehicle running expenses
  3. Training expenses
  4. Rents, rates & taxes
  5. Repairs
  6. Printing & Stationary
  7. Communication expenses
  8. Legal & Professional charges
  9. Medical fees
  10. Auditor's fees, expenses etc.,

            a. As auditor:

            b. As advisor or in any other capacity, in respect of:

                I. Taxation matters

                II. Insurance matters

                III. Management Services

            c. In any other capacity (details to be specified)

11.  Advertisement and publicity.

12.  Interest & Bank charges

13.  Others (to be specified)

14.  Depreciation

Total

 

 

The items of expenditure, which are in excess of 1% of net premium or 5 lakhs whichever is higher, shall be shown as separate items.

Form B-PL, Profit & Loss A/c for the year ending DD-MM-YYYY

Particulars

Schedule No

Current Year

Previous Year

  1. Amounts transferred from/to the Policyholders A/c (Technical A/c)
  2. Income from Investments

    a) Interest, Dividends & Rent — Gross

    b) Profit on sale/redemption of investments

    c) (Loss on sale/ redemption of investments

3.      Other Income (To be specified)

TOTAL (A)

  1. Expenses other than those directly related to the

Insurance business

2.      Bad Debts written off

3.      Provisions (Other than taxation)

    a) For diminution in the value of investments (Net)

    b) Provision for doubtful debts

    c) Others (to be specified)

TOTAL (B)

Profit/(Loss) before tax

Less: Provision for Taxation

Profit/(Loss) after tax

Appropriations:

  1. Balance at the beginning of the year.
  2. Interim dividend paid during the year.
  3. Proposed final dividend.
  4. Dividend distribution tax.
  5. Transfer to Reserves/other accounts (to be specified)

Profit carried to the Balance Sheet

 

 

 

Note: If investment is made out of Policyholders funds the income on such investments will be transferred to Revenue A/c otherwise to Profit & Loss A/c.

 

Form B-BS, Balance Sheet as on “DD-MM-YYYY”

Particulars

Schedule No

Current Year

Previous Year

Sources of funds

Share capital

Reserves & Surplus

Credit/(Debit) fair value change A/c

Borrowings

Total

Application of Funds

Investments

Loans

Fixed Assets

Current Assets

Cash & Bank balances

Advances & other current assets

Sub Total (A)

Current liabilities

Provisions

Sub Total (B)

Net current Assets (A)- (B)

Miscellaneous Expenditure (to the extent not written off or adjusted)

Debit Balance in Profit & Loss A/c (Shareholders A/c)

Total

 

5

6

 

7

 

8

9

10

 

11

12

 

13

14

 

15

 

 

Contingent Liabilities:

  1. Partly paid-up investments
  2. Claims, other than against policies, not acknowledged as debts by the company
  3. Underwriting commitments outstanding (in respect of shares and securities)
  4. Guarantees given by or on behalf of the Company
  5. Statutory demands’ liabilities in dispute, not provided for
  6. Reinsurance obligations to the extent not provided for
  7. Others (to be specified)

Total

 

 

 

 

Schedule 5: Share capital

Particulars

Current

Previous

  1. Authorised Capital

Equity shares of Rs.....each

2.      Issued Capital

Equity shares of Rs.....each

3.      Subscribed Capital

Equity shares of Rs.....each

4.      Called-up Capital

Equity shares of Rs.....each

Less: Calls unpaid

Add: Shares forfeited (Amount originally paid up)

Less: Preliminary Expenses

          Expenses including commission or brokerage on

          Underwriting or subscription of shares

Total

 

 

 

Schedule 6: Reserves & Surplus

Particulars

Current

Previous

  1. Capital Reserve
  2. Capital Redemption Reserve
  3. Share Premium
  4. Revaluation Reserve
  5. General Reserve

Less: Debit balance in Profit and Loss A/c, if any

Less: Amount utilized for Buy-back

6.      Catastrophe Reserve

7.      Other Reserves (to be specified)

8.      Balance of profit in Profit and Loss A/c

Total

 

 

 

Schedule 7: Borrowings

Particulars

Current

Previous

Debentures

Banks

Financial Institutions

Others (to be specified)

Total

 

 

Note: The extent to which the Borrowings are secured shall be separately disclosed stating the nature of the security under each sub-head.

 

Schedule 8: Investments

Particulars

Current

Previous

Long term investments

1. Govt. Securities and Govt. Guaranteed bonds including Treasury Bills

2. Other Approved Securities

3. Other Investments

    a. Shares

        I. Equity

        II. Preference

    b. Mutual Funds

    c. Derivative Instruments

    d. Debentures/Bonds

    e. Other Securities (to be specified)

    f. Subsidiaries

    g. Investment Properties-Real Estate

4. Investments in Infrastructure and Social Sector

5. Other than Approved Investments

 

Short term investments

1. Govt. Securities and Govt. Guaranteed bonds including Treasury

Bills

2. Other Approved Securities

3. Other Investments

a. 1. Govt. Securities and Govt. Guaranteed bonds including Treasury Bills

2. Other Approved Securities

3. Other Investments

    a. Shares

        I. Equity

        II. Preference

    b. Mutual Funds

    c. Derivative Instruments

    d. Debentures/Bonds

    e. Other Securities (to be specified)

    f. Subsidiaries

    g. Investment Properties-Real Estate

4. Investments in Infrastructure and Social Sector

5. Other than Approved Investments

Total

 

 

Note: Investments made out of Catastrophe Reserve shall be shown separately.

 

Schedule 9: Loans

Particulars

Current

Previous

1. Security wise classification:

    A. Secured

        a. On mortgage of property

             i. In India

             Ii. Outside India

        b. On shares, Bonds, Govt. Securities, etc.,

        c. Loans against policies

        d. Others (to be specified)

    B. Unsecured:

Total

2. Borrower wise classification:

    a. Central and State Government

    b. Banks and Financial Institutions

    c. Subsidiaries

    d. Companies

    e. Loans against policies

    f. Others (to be specified)

Total

3. Performance wise classification:

    A. Loans classified as Standard:

        a. In India

        b. Outside India

    B. Non-standard loans less Provisions:

         a. In India

         b. Outside India

Total

4. Maturity wise classification:

a. Short Term

b. Long Term

Total

 

 

 

Schedule 10: Fixed Assets

Particulars

Gross Block

Depreciation

Net Block

Opening

Additions

Deductions

Closing

Upto Last year

For the year

On sales/adjustments

To date

As ta year end

Previous year

Goodwill

Intangibles(Specify)

Land Freehold

Leasehold Property

Buildings

Furniture & Fittings

Information Technology Equipment

Vehicles

Office Equipment

Others

(Specify nature)

TOTAL:

Work in progress

 

 

 

 

 

 

 

 

 

 

Grand Total:

 

 

 

 

 

 

 

 

 

 

Previous Year

 

 

 

 

 

 

 

 

 

 

 

Schedule 11: Cash & Bank Balances

Particulars

Current

Previous

1. Cash (including cheques, drafts and stamps)

2. Bank Balances

    a. Deposit Accounts

        I. Short-term (due within 12 months)

        II. Others

    b. Current Accounts

    c. Others (to be specified)

3. Money at Call and Short Notice

    a. With Banks

    b. With other Institutions

4. Others (to be specified)

Total

Balances with non-scheduled banks included in 2 and 3 above

Cash & Bank Balances:

1. In India

2. Outside India

Total

 

 

 

Schedule 12: Advances & Other Assets

Particulars

Current

Previous

1. Advances (including advance tax & TDS)

    i. Reserve deposits with ceding companies

   Ii. Application money for investments

  Iii. Prepayments

 Iv. Advances to Directors/Officers

  v. Advance tax paid and taxes deducted at source

        (Net of provision for taxation)

  Vi. Others (to be specified)

Total (a)

2. Other assets

    a. Income accrued on interest

    b. Outstanding premium

    c. Agents’ balances.

    d. Foreign Agencies Balances

    e. Due from other entities carrying on insurance business

         (Including reinsures)

     f. Due from subsidiaries/Holding Company

    g. Deposits with R.B.I. [Pursuant to section 7 of Insurance Act,  

        1938]

    h. Others (details to be specified)

Total (b)

Grand Total (a + b)

 

 

 

Schedule 13: Current Liabilities

Particulars

Current

Previous

Agent's balances

Balance due to other insurance Company’s

Deposits held on re-insurance Companies

Premiums received in advance

Unallocated premium

Sundry Creditors

Due to Subsidiaries/Holdings Company's

Claims Outstanding

Annuities due

Due to Officers/Directors

Others (to be specified)

Total

 

 

 

Schedule 14: Provisions

Particulars

Current

Previous

For Taxation (less payment and taxes deducted at source)

For Proposed Dividends

For Dividend Distribution Tax

Others (To be specified)

Total

 

 

 

Schedule 15: Miscellaneous Expenses to the extent not written off

Particulars

Current

Previous

Discount Allowed in issue of shares/Debentures

Others (to be specified)

Total

 

 

 

Total No. Of Schedules -15

Relating to Revenue A/c - 1 to 4

Relating to P&L A/c   - Nil

Relating to Balance sheet - 5 to 15


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