UNIT 2

FINAL ACCOUNTS OF INSURANCE

COMPANY

2.1 Introduction 

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.

2.2 Distinction between Life Insurance and other Forms of Insurance

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.

2.3 Terms used in Insurance Business

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.

2.4 Types of Life Insurance Policies

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:

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.

2.5 Unexpired Risks Reserve

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:

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.

2.6 TOTAL DIVISION OF THE FORMAT

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)

Schedule 1: Premium

Schedule 2: Benefits Paid

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

Schedule 3: Commission Expenses

Schedule 4: Operating expenses related to Insurance Business

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

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”

Schedule 5: Share capital

Schedule 6: Reserves & Surplus

Schedule 7: Borrowings

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

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

Schedule 9: Loans

Schedule 10: Fixed Assets

Schedule 11: Cash & Bank Balances

Schedule 12: Advances & Other Assets

Schedule 13: Current Liabilities

Schedule 14: Provisions

Schedule 15: Miscellaneous Expenses to the extent not written off

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