Accounting for Insurance Company
1. Introduction
Insurance companies operate by providing risk coverage to policyholders in exchange for
premium payments. They are broadly categorized into:
Life Insurance Companies: Provide insurance for life and annuities.
General Insurance Companies: Provide insurance for non-life risks like fire, health, and
marine.
Accounting for insurance companies is governed by specific regulatory requirements, such as the
Insurance Regulatory and Development Authority of India (IRDAI) in India or similar
authorities in other countries.
2. Key Features of Insurance Company Accounting
Premium Income: The primary source of revenue.
Claims: The primary expense, which includes the amounts paid to policyholders.
Reserves: Mandatory provisions set aside to meet future liabilities.
Investments: Significant assets, as insurance companies invest premiums received.
3. Financial Statements
Insurance companies prepare:
Revenue Account (Policyholders' Account): Records income and expenses related to
insurance.
Profit and Loss Account (Shareholders' Account): Reflects the overall profitability.
Balance Sheet: Shows financial position, including reserves and investments.
4. Accounting Principles
4.1. Recognition of Premium
Premiums are recorded as income when due.
Advance premiums are deferred to the period to which they relate.
4.2. Claims
Claims are recorded as expenses when notified.
Provisions are made for incurred but not reported (IBNR) claims.
4.3. Reinsurance
Insurance companies often share risks with other insurers (reinsurance).
Premiums paid to reinsurers are treated as expenses, and claims recoverable from reinsurers
are treated as income.
4.4. Commission
Commission paid to agents for procuring business is treated as an expense.
4.5. Policy Liabilities
Reserves are created for:
o Unearned Premium Reserve (UPR): Represents the unexpired portion of premium
income.
o Claims Outstanding Reserve: For claims pending settlement.
5. Regulatory Framework
5.1. IRDAI (in India) Requirements
Maintain separate accounts for life and general insurance businesses.
Mandatory actuarial valuation for life insurance liabilities.
Disclosure of solvency margins (minimum capital adequacy).
5.2. International Accounting Standards
IFRS 17 - Insurance Contracts: Specifies how to measure insurance contracts.
IFRS 9 - Financial Instruments: For investments held by insurance companies.
6. Key Ratios
Claim Ratio: Claims paid / Premium earned.
Expense Ratio: Operating expenses / Net premium earned.
Combined Ratio: Claim ratio + Expense ratio.
7. Disclosure Requirements
Insurance companies are required to disclose:
Break-up of premium income.
Nature and extent of reinsurance arrangements.
Movement in reserves.
Key assumptions used in actuarial valuations.
8. Challenges in Accounting
Estimation of liabilities like IBNR.
Managing investments in volatile markets.
Compliance with complex regulatory requirements.
2. Key Features of Insurance Accounting
2.1 Revenue Sources
Premium Income: Revenue from policyholders.
Investment Income: Earnings from investments of premiums.
2.2 Key Expenses
Claims: Payments to policyholders for insured events.
Operating Expenses: Commission, administration, and marketing costs.
Provisions: Reserves for future liabilities.
2.3 Regulatory Framework
Governed by local authorities (e.g., IRDAI in India).
International standards like IFRS 17 for insurance contracts.
3. Proforma of Financial Statements
3.1 Revenue Account (Policyholders' Account)
The Revenue Account is specific to insurance operations.
Particulars Amount
Income:
Premium Earned XXXX
Reinsurance Accepted XXXX
Income from Investments Allocated XXXX
Other Operating Income XXXX
Total (A) XXXX
Expenses:
Claims Paid XXXX
Reinsurance Ceded XXXX
Commission Paid XXXX
Operating Expenses XXXX
Increase/Decrease in Policy XXXX
Reserves
Total (B) XXXX
Surplus/(Deficit) (A - B) XXXX
Explanations:
1. Premium Earned: Revenue recognized for the period.
2. Claims Paid: Includes amounts paid and provisions for outstanding claims.
3. Reserves: Adjustments for unearned premiums and future claims.
4. Reinsurance: Includes premiums paid to other insurers.
3.2 Profit & Loss Account (Shareholders' Account)
Particulars Amount
Income:
Surplus from Revenue Account XXXX
Investment Income (Non-Policyholders) XXXX
Other Income XXXX
Total (A) XXXX
Expenses:
Management Expenses XXXX
Interest Paid XXXX
Tax Expense XXXX
Other Operating Expenses XXXX
Total (B) XXXX
Net Profit/(Loss) (A - B) XXXX
Explanations:
1. Surplus from Revenue Account: Transfer from policyholders’ account.
2. Investment Income: Non-policyholder-specific earnings.
3. Tax Expense: Provision for income tax and deferred taxes.
3.3 Balance Sheet
Particulars Amount
Liabilities:
Share Capital XXXX
Reserves & Surplus XXXX
Policyholder Liabilities XXXX
Claims Outstanding XXXX
Unearned Premium Reserve XXXX
Reinsurance Payables XXXX
Other Liabilities XXXX
Total Liabilities (A) XXXX
Assets:
Investments XXXX
Reinsurance Recoverables XXXX
Cash and Bank Balances XXXX
Premium Receivables XXXX
Fixed Assets XXXX
Deferred Tax Assets XXXX
Other Assets XXXX
Total Assets (B) XXXX
Explanations:
1. Liabilities:
o Policyholder Liabilities: Reserves for future claims.
o Unearned Premium Reserve: Premiums received but not yet earned.
2. Assets:
o Investments: Majority of premiums are invested in government bonds, equity, or
mutual funds.
o Reinsurance Recoverables: Claims to be received from reinsurers.
4. Key Ratios
Claim Ratio = Claims Incurred / Net Premium Earned
Expense Ratio = Operating Expenses / Net Premium Earned
Combined Ratio = Claim Ratio + Expense Ratio
5. Regulatory Considerations
1. Reserves: Adequate provisioning for unearned premiums and outstanding claims is mandatory.
2. Disclosure:
o Break-up of investments.
o Details of reinsurance arrangements.
o Actuarial assumptions for life insurance.
This document provides a detailed framework for understanding and preparing the financial
statements of insurance companies. Let me know if you need further clarifications or additional
examples!
Below is a detailed explanation of the components of the Revenue Account, Profit & Loss
Account, and Balance Sheet for insurance companies:
1. Revenue Account (Policyholders' Account)
The Revenue Account records all income and expenses directly related to insurance operations.
It focuses on policyholders’ activities.
Component Description
Premium Earned Premium income recognized for the period. Premiums received in
advance are deferred to future periods.
Reinsurance Accepted Premium received from other insurance companies for shared risks.
Investment Income Allocated Proportion of investment income allocated to policyholders.
Other Operating Income Miscellaneous income from underwriting or related activities.
Claims Paid Claims paid to policyholders, including amounts for partial or full
settlements.
Reinsurance Ceded Premiums paid to reinsurers for sharing risks.
Commission Paid Commission paid to agents or brokers for procuring insurance policies.
Operating Expenses Administrative, employee-related, and other costs directly related to
insurance operations.
Increase/Decrease in Policy Adjustments to reserves for unearned premiums or future claim
Reserves liabilities.
2. Profit & Loss Account (Shareholders' Account)
The Profit & Loss Account reflects overall profitability and shareholder returns.
Component Description
Surplus from Revenue Account The net income or deficit transferred from the policyholders' account.
Investment Income (Non- Returns from investments not allocated to policyholders (e.g.,
Policyholders) shareholders' funds).
Other Income Revenue from non-operating activities (e.g., sale of assets, interest,
or rental income).
Management Expenses Costs incurred in managing the business (e.g., salaries, office
expenses).
Interest Paid Interest on borrowed funds, loans, or other liabilities.
Tax Expense Provision for corporate taxes, including deferred taxes.
Other Operating Expenses Any additional expenses not classified under specific heads.
Net Profit/(Loss) The difference between total income and total expenses. Represents
earnings for shareholders.
3. Balance Sheet
The Balance Sheet shows the financial position of the insurance company, categorized into
Liabilities and Assets.
3.1. Liabilities
Component Description
Share Capital Funds raised by issuing shares to shareholders.
Reserves & Surplus Retained earnings and other reserves (e.g., general reserves,
contingency reserves).
Policyholder Liabilities Includes actuarial liabilities for life insurance and reserves for general
insurance.
Claims Outstanding Claims reported but not yet settled.
Unearned Premium Reserve Represents the portion of premium income relating to future periods.
(UPR)
Reinsurance Payables Amounts due to reinsurers for shared risks.
Other Liabilities Miscellaneous liabilities, including payables, accrued expenses, and
deferred taxes.
3.2. Assets
Component Description
Investments Majority of funds invested in government bonds, equities, or other approved
securities.
Reinsurance Claims receivable from reinsurers.
Recoverables
Cash and Bank Balances Cash in hand and deposits in banks.
Premium Receivables Outstanding premiums due from policyholders.
Fixed Assets Tangible assets like buildings, furniture, and equipment used in operations.
Deferred Tax Assets Future tax benefits arising from temporary differences in accounting and
taxable incomes.
Other Assets Includes prepaid expenses, advances, and any other miscellaneous assets.
Key Takeaways
1. Revenue Account: Focuses on policyholder-related operations.
2. Profit & Loss Account: Reflects the overall financial performance of the company.
3. Balance Sheet: Provides a snapshot of financial health, showing assets, liabilities, and
shareholders' equity.
