Accounts For Insurance Company Chapter 2

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Chapter- 2 Accounts for Insurance

Companies
1. What is insurance ?
An arrangement by which a company or the state undertakes to provide a
guarantee of compensation for specified loss, damage, illness, or death in re-
turn for payment of a specified premium.
2. What is insurance company?
The insurance sector is made up of companies that offer risk management
in the form of insurance contracts. The basic concept of insurance is that
one party, the insurer, will guarantee payment for an uncertain future
event. Meanwhile, another party, the insured or the policyholder, pays a
smaller premium to the insurer in exchange for that protection on that un-
certain future occurrence.
3. Types of insurance
Broadly, there are 8 types of insurance, namely:
 Life Insurance
 Motor insurance
 Health insurance
 Travel insurance
 Property insurance
 Mobile insurance
 Cycle insurance
 Bite-size insurance
4. The insurance company generally prepares three types of accounts. They

are:-
 Revenue Account (most important)
 Profit & Loss Account
 Balance Sheet
Points to be considered
1. Separate revenue account is prepared for each type of life and non-life insur-
ance business.
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2. Direct premium is recognized on cash basis and re-insurance premium is ac-

crual basis.
3. Claim is recognized on accrual basis and claim shall include surveyor’s fees and
legal expenses relating to that claim.
4. Agents commission is accounted in the year in which related premium is rec-
ognized as income.
5. Insurance charge is 1% of gross premium income.
Distribution of management expenses

A. Cases of non-life insurance business
a. 10% of management expenses is charged to profit and loss account.
b. Balance 90% of total management expenses is distributed as below:
c. Management expenses= total management expenseS x 90% x weight/total
weight
d. Weight= direct insurance premium –agent’s commission
e. Total weight=sum of weight of each category of business
B. Cases of life insurance business
a. Conditions of (a), (b), and (c) remains same as non-life insurance business
but weight is different here.
b. Weight= direct insurance premium –agent’s commission-medical fee
c. Total weight= sim of weight
Distribution of investment income

A. For non-life insurance business
a. Investment income = total investment income X weight/total weight
b. Weight of each category of business = opening URR+ opening provision for
claim payable+net insurance premium +re-insurance commission –agent’s
commission-re-insurance commission expenses-claim payment
c. Weight for P&L Account= opening net worth
d. Total weight = sum of weight for each category of business +weight of profit
and loss account.
B. For life insurance business
a. Investment income= total investment income X weight/total weight.
b. Weight for each category of business = opening life-insurance fund +open-
ing URR+opening provision for claim payable+net insurance premium+re-
insurance commission income +interest on policy loan-re-insurance com-
misiion expenses-medical fee-claim payment
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c. Weight for profit and loss account = opening net worth

d. Total weight= sum of weight for each category of business +weight for
profit and loss account.
Distribution of income tax (life insurance business only)

a. Income tax = total income tax X weight/ total weight .
b. Total weight = income from investment –total management expenses
c. Weight for revenue account = income from investment in revenue account –
m,anagement expenses in revenue account
d. Weight for profit and loss account= income from investment in revenue ac-
count-management expenses in profit and loss account.
Insurance fund/ life insurance fund

a. 50% of the net profit of non-life insurance business is transferred to insurance
fund.
b. Alloc ation to each category is done on the basis of surplus of concerned cate-
gory.
c. Life insurance fund is created as per acturial valuation.
Unexpired risk reserve (URR)

a. For non-life insurance business = 50% of net premium income is to be created
b. For life insurance business = as per acturial valuation
c. For marine insurance, maintain URR for at least 3 years
d. For other business, URR is income for next years
Reserve for outstanding claim payable

a. Reserve for outstanding claim payable is maintained at 115% of remaining
amount of payment against claim.
b. This income is recognized as income in next years.
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Chapter- 2 Accounts for Insurance

4. The insurance company generally prepares three types of accounts. They

2. Direct premium is recognized on cash basis and re-insurance premium is ac-

Distribution of management expenses

Distribution of investment income

c. Weight for profit and loss account = opening net worth

Distribution of income tax (life insurance business only)

Insurance fund/ life insurance fund

Unexpired risk reserve (URR)

Reserve for outstanding claim payable

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