BSAF (6th Semester) Hailey College of Commerce Accounting for Financial Services
What Is Insurance?
Insurance is a financial arrangement in which an individual or business pays a premium to
an insurance company in exchange for protection against certain risks (like accidents,
illness, theft, fire, or death).
If that risk occurs, the insurance company pays compensation to reduce the financial loss.
Simple Example:
Imagine you buy a car. You pay an insurance company PKR 20,000 per year (called a
premium) to insure it. If the car is damaged in an accident, the company might pay PKR
500,000 to repair or replace it.
So, you pay a small amount regularly to protect against a big, unexpected loss.
How Does an Insurance Company Work?
Insurance companies work by spreading risk. They collect money (premiums) from many
people and use that pool of funds to pay for losses suffered by a few.
Let’s break it down into how they make money and operate.
1. Collecting Premiums
• Individuals or businesses pay a premium for insurance coverage.
• The amount is based on risk. Higher risk = higher premium.
o E.g., a driver with a history of accidents will pay more.
2. Paying Claims
• When an insured event occurs (accident, death, loss, etc.), the company pays out a
claim.
• They try to verify the claim, and ensure it's legitimate.
3. Investing the Premiums
• Insurance companies don’t just hold money—they invest it.
o In government bonds, stocks, real estate, etc.
• This generates investment income, which is a major source of profit.
4. Risk Pooling & Probability
• Not everyone files a claim. So, the company assumes:
o A small % of people will have losses.
o The rest will just pay premiums.
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BSAF (6th Semester) Hailey College of Commerce Accounting for Financial Services
• They use actuarial science (math + statistics) to predict:
o How many claims might happen
o How much they’ll cost
5. Profit Model
Insurance companies make money in 2 main ways:
Source Description
Underwriting Profit When premiums collected > claims + expenses
Investment Income Earnings from investing collected premiums
If they pay more in claims than they collect in premiums, they may lose money.
Types of Insurance
Here are a few common ones:
Type What It Covers
Life Insurance Pays to family when the insured person dies
Health Insurance Covers medical expenses
Auto Insurance Covers car damage, theft, and accidents
Fire/Property Insurance Protects homes and businesses from fire, theft, etc.
Marine Insurance Covers ships and cargo
Takaful (Islamic) Shariah-compliant mutual insurance alternative
In Pakistan — How It’s Regulated
• Insurance in Pakistan is regulated by SECP (Securities & Exchange Commission of
Pakistan).
• Key laws include the:
o Insurance Ordinance, 2000
o Takaful Rules, 2012
• Insurance companies must maintain reserves, solvency margins, and submit annual
reports.
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BSAF (6th Semester) Hailey College of Commerce Accounting for Financial Services
Let's go through this income statement layout for an insurance company step by step and
explain each line item—in the context of how insurance companies in Pakistan (and
elsewhere) typically report under IFRS and SECP guidelines.
1. Premium Revenue
• What it is: Total gross premiums written during the year, representing income from
issuing insurance policies.
• Includes all policies underwritten before accounting for reinsurance.
2. Less: Premium Ceded to Reinsurers
• What it is: Portion of premiums that is passed on to reinsurance companies to
transfer part of the risk.
• Net Premium Revenue = Premiums retained after reinsurance.
3. Net Premium Revenue (Note 28)
• Calculation:
Premium Revenue – Premium Ceded to Reinsurers
• This is the core revenue from insurance operations after reinsurance adjustments.
4. Fee Income (Note 29)
• What it is: Fees from services like:
o Policy issuance charges
o Administration fees
o Consultancy or asset management fees (in case of takaful or investment-linked
plans)
5. Investment Income (Note 30)
• What it is: Earnings from investment of surplus funds in:
o Government securities
o Equities
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BSAF (6th Semester) Hailey College of Commerce Accounting for Financial Services
o Bonds
o Sukuks (for Islamic insurance)
• Insurance companies invest premiums until claims are paid.
6. Net Realized Fair Value Gain on Financial Assets (Note 31)
• What it is: Gains from selling financial assets at a higher value than purchase cost.
• Example: Selling a bond for PKR 110 that was bought for PKR 100 gives a realized gain
of PKR 10.
7. Less: Net Fair Value Loss on Financial Assets at FVTPL (Note 32)
• What it is: Unrealized losses (decline in value) of financial assets marked to market
under "Fair Value Through Profit or Loss" (FVTPL).
• These are not sold, but the value dropped in the market.
8. Net Rental Income (Note 33)
• What it is: Income earned from property investments (less expenses like
maintenance or property taxes).
• Common for insurers owning commercial real estate.
9. Other Income (Note 34)
• May include:
o Penalties or late fees
o Gains on sale of fixed assets
o Miscellaneous income
10. Net Income
• Total revenue after accounting for all the above components.
• This includes premium income, investment and rental income, and other operating
income.
11. Insurance Benefits
• What it is: Total amount paid or payable to policyholders for claims, maturity benefits,
surrenders, or deaths (in life insurance).
12. Recoveries from Reinsurers
• What it is: Amount recoverable from reinsurers for claims paid by the insurer.
• Offset against insurance benefits to calculate net insurance cost.
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BSAF (6th Semester) Hailey College of Commerce Accounting for Financial Services
13. Claims-Related Expense
• What it is: Expenses directly related to handling and processing claims:
o Legal fees
o Surveyor/adjuster costs
o Claims staff salaries
14. Net Change in Insurance Liabilities (excluding outstanding claims)
• Change in actuarial reserves or future policyholder liabilities.
• Common in life insurance to account for future payouts.
15. Acquisition Expenses (Note 36)
• What it is: Commissions and costs to acquire new Projects/Insurance dealings:
o Agent or broker commissions
o Policy onboarding costs
17. Marketing and Administration Expenses (Note 37)
• Salaries, office rent, utilities, IT systems, marketing campaigns, etc.
18. Other Expenses (Note 38)
• Includes non-core expenses like:
o Donations
o Training
o Regulatory fines
19. Total Expenses
• Sum of all expenses listed above (insurance benefits, reserves, acquisition, admin, etc.)
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BSAF (6th Semester) Hailey College of Commerce Accounting for Financial Services
FINANCIAL STATEMENTS OF INSURANCE COMPANIES
STATEMENT OF FINANCIAL POSITION AS AT ………….
ASSETS Note Current year Prior year
Property and equipment 5 xxx xxx
Intangible assets 6 xxx xxx
Investment property 7 xxx xxx
Investments in subsidiaries and associates 8 xxx xxx
Investments
Equity securities 9 xxx xxx
Government securities 10 xxx xxx
Debt securities 11 xxx xxx
Term deposits 12 xxx xxx
Mutual funds 13 xxx xxx
Others (please specify) xxx xxx
Loans secured against life insurance policies xxx xxx
Insurance / reinsurance receivables 14 xxx xxx
Other loans and receivables 15 xxx xxx
Deferred tax asset 16 xxx xxx
Prepayments 17 xxx xxx
Cash & Bank 18 xxx xxx
Total Assets xxx xxx
EQUITY AND LIABILITIES
Capital and reserves attributable to Company's equity holders
Ordinary share capital xxx xxx
Share premium 19 xxx xxx
Reserves 20 xxx xxx
Unappropriated profit/(Accumulated loss) xxx xxx
Total Equity xxx xxx
Surplus on Revaluation of Fixed Assets 21 xxx xxx
Liabilities
Insurance Liabilities 22 xxx xxx
Retirement benefit obligations 23 xxx xxx
Deferred taxation 16 xxx xxx
Borrowings 24 xxx xxx
Premium received in advance xxx xxx
Insurance / reinsurance payables 25 xxx xxx
Other creditors and accruals 26 xxx xxx
Total Liabilities xxx xxx
TOTAL EQUITY AND LIABILITIES xxx xxx
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BSAF (6th Semester) Hailey College of Commerce Accounting for Financial Services
STATEMENT OF FINANCIAL PERFORMANCE / INCOME STATEMENT FOR THE YEAR
ENDED:
Note Current year Prior year
Premium revenue xxx xxx
Less: Premium ceded to reinsurers (xxx) (xxx)
Net Premium Revenue 28 xxx xxx
Fee income 29 xxx xxx
Investment income 30 xxx xxx
Net realized fair value gain on financial assets 31 xxx xxx
Less: Net fair value loss on financial assets at fair value 32 (xxx) (xxx)
through profit or loss
Net rental income 33 xxx xxx
Other income 34 xxx xxx
Net Income xxx xxx
Insurance benefits xxx xxx
Recoveries from reinsurers (xxx) (xxx)
Claims related expense xxx xxx
Net Insurance Benefits 35 xxx xxx
Net change in insurance liabilities (other than outstanding xxx xxx
claims)
Acquisition expenses 36 xxx xxx
Marketing and administration expenses 37 xxx xxx
Other expenses 38 xxx xxx
Total Expenses xxx xxx
Profit before tax xxx xxx
Income Tax Expense / Provision 40 (xxx) (xxx)
Profit For The Year xxx xxx
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BSAF (6th Semester) Hailey College of Commerce Accounting for Financial Services
Q#1: Following are the particulars drawn from the records of ABC Insurance Co. Prepare the
Report to know the Financial Performance for the year ended Dec, 2021.
Particulars Amount (Rs.)
Premium received against Life Insurance Policy 110,000
Fee Received 25,000
Salaries to office staff 250,000
Premium earned on medical insurance 175,000
Rent of office building 45,000
Electricity Bills 66,000
Investment income on debt securities 41,000
Claims related expenses 34,000
Premium earned against issuance of group policy 310,000
Insurance benefits to policy holders on maturity 140,000
Claims paid on losses 86,000
Taxation 34,500
Premium paid to Re-insurer 22,500
Rental Income earned 12,000
Claims recovered from Reinsurer 7,500
Acquisition expenses 35,000
Depreciation of Fixed Assets 27,500
Advertisement 9,000
Q#2: Following are the particulars drawn from the records of XYZ Insurance Co. Prepare the
Report to know the Financial Performance for the year ended Dec, 2020.
Particulars Amount (Rs.)
Premium against issuance of group policy 240,000
Electricity Bills 105,000
Claims related expenses 54,500
Tax paid 34,500
Salaries to office and field staff 125,000
Fee Received 75,000
Premium against Fire insurance 250,000
Rent of office building 65,000
Interest earned on bonds and debentures 65,000
Premium on life insurance plans 410,000
Insurance claims paid against group policy 210,000
Claims recovered from Reinsurer 26,500
Premium Ceded to Re-insurer 55,500
Rental Income earned 12,000
Advertisement 18,000
Commission paid on selling single policy 35,000
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BSAF (6th Semester) Hailey College of Commerce Accounting for Financial Services
Depreciation on Furniture 27,500
Advertisement 9,000
Claims paid on losses against individuals policies 32,500
Transportation and fuel expenses 41,800
Commission paid to agent on group policy 15,000
Insurance benefits to individuals on maturity 300,000
Q#3: Following are the particulars drawn from the records of XYZ Insurance Co. Prepare the
Report to show the Financial Position for the year ended Dec, 2023.
Rs. Rs.
Insurance Liabilities against single 180,000 Ordinary share capital (100000 Shares 1,000,000
policies @Rs.10 each)
Payable to suppliers against Stationery 25,000 Investments in Treasury Bills issued by 120,000
purchased SBP
Reserves 72,000 Borrowings 360,000
Intangible assets 240,000 Un-appropriated profit 133,000
Share premium 400,000 Insurance / reinsurance payables 10,000
Bank Balance 135,000 Furniture at cost 100,000
Investment in Mutual Funds 50,000 Deferred tax asset 15,000
Insurance Liabilities against Group 60,000 Loans secured against life insurance 80,000
policies policies
Premium received in advance 40,000 Surplus on Revaluation of Fixed Assets 60,000
Investment property 300,000 Plant and Machinery at cost 200,000
Insurance / reinsurance receivables 175,000 Investments in subsidiaries 320,000
Building at cost 600,000 Cash Balance 65,000
Other loans and receivables 50,000 Commission Payables to Agents 20,000
Note: Depreciation recorded @10% on original cost method on all fixed assets.
Q#4: Following are the particulars drawn from the records of XYZ Insurance Co. Prepare the
Report to know the Financial Performance and Financial Position for the year ended Dec, 2023.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Insurance claims under group policies 500,000 Premium on life insurance 300,000
(individuals)
Investment in subsidiaries sold during 75,000 Interest Receivables 50,000
the year
Investments in subsidiaries (Opening 310,000 Interest / Mark up on Bank Balance 25,000
Balance)
Rental Income 120,000 Office Repair and Maintenance 65,000
Utilities bills 190,000 Audit Fees and remuneration 150,000
Cash at Askari Bank Ltd. 318,000 Reserves 113,000
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BSAF (6th Semester) Hailey College of Commerce Accounting for Financial Services
Premium against Medical and Health 300,000 Premium on group policies 240,000
Expenses incurred on Claims 50,000 Interest paid on borrowings 40,000
Satisfaction
Premium on Group Life Insurance 700,000 Reinsurance recoveries on group life 440,000
claims
Investments in Govt. Securities 279600 Surplus on Revaluation of Fixed 80,000
Assets
Loans to Employees against life 70,000 Insurance Liabilities under Incurred 99,250
insurance and Reported Loss
Reinsurance receivables from United 92,500 Insurance Liabilities against Incurred 115,000
Ins. Ltd. But Not Reported Losses
Investments in subsidiaries and 115,000 Premium Ceded to Re-insurer (Life 560,000
Associates Insurance)
Investment in Real Estate 500,000 Land & Building (Freehold) 400,000
Computer Equipment’s and Laptop 600,000 printing and Stationery 28,000
Salaries to field staff 82,000 Interest on loan to employees 15,000
Intangible assets: Goodwill 400,000 Share premium 600,000
Reinsurance premium paid in 35,000 Return on Term Deposits in Askari 50,000
Advance Bank
Salaries to Directors and Managers 208,000 Premium received in advance 55,000
Deferred tax asset 15,000 Borrowings from MCB Bank Ltd. 700,000
Fee earned on inspection and 82,000 Insurance benefits to individuals on 315,000
evaluation services maturity
Dividend earned of Nestlé’s Shares 115,000 Advertisement 20,000
Cash in Hand 42,500 Insurance / reinsurance payables 23,500
Realised Gain on Selling the 62,500 Ordinary share capital (100000 2,000,000
Commercial papers Shares @Rs.20 each)
Investment in Debt Securities 150,000 Interest Payables on Borrowings 35,000
Premium on accidental insurance 400,000 Claims under medical and accidental 100,000
policies
Motor Vehicles at cost 800,000 Net change in insurance liabilities 15,000
Commission to agent on single 60,000 Transportation and fuel expenses 10,000
premiums
Office Entertainment 20,000 Rent of office building 95,000
Commission to agent on renewal 40,000 Commission paid to agent on group 15,000
premiums policies
➢ Depreciation recorded @8% on original cost method on all fixed assets.
➢ Taxation provision was made @10%.
Net Income:257850
B/S: 4078600
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