NON LIFE FINANCIAL

STATEMENTS
 For material, concentrate on presentation
 Ignore material in the coursepack
(Chapter 6)
 For quiz/final, practice questions for
previous quizzes and finals.
Financial statements non-life Insurance

Basics of Accounting / Financial

Statements
1. Company/Entity start

2. Balance Sheet/Statement of Financial

Position
 Initial  subsequent
3. Profit & Loss OR Income Statement
(statement of Financial Performance)
 Movement over time
4. 2 other Basic Financial Statements
 Basic Financial Ratios to measure
performance
 Although many performance
indicators/ratios, some basic ones are :
1. Profit Margin
 Net Profit/Sales
2. Return on Equity
 Net Profit/Shareholders Equity
3. Current Ratio (Liquidity)
 Current Assets/Current liabilities

4. Debt/Equity Ratio
 Benchmarks for each
Key Differences in Financial Statements
of Insurers
1. Risks associated with business and
future profitability
2. Separation of Shareholder’s &
Policyholders accounts
 Significant assets in Insurance
Company belong to policyholders
3. Impact of Reinsurance
4. Revenue received in advance with bulk
of outgoes subsequently
 All claims expenses
 Significant portion of management expenses
Key Differences in Financial Statements
of Insurers
5. Impact & importance of reserves held to
pay claims and associated uncertainty
with that item
6. Emphasis on Revenue Account
 Can be considered as Policyholders
Income Statement (P&L)
 Split by major lines of business

7. Importance of profit by source analysis

Key Differences in Financial Statements
of Insurers
8. Additional difficulties in interpreting
Takaful Financial Statements
9. Detailed disclosures due to
 Uncertainties
 Technical nature
 Main Lines of Business for Non-Life
Insurers in Pakistan
 Separate legal entities for life and
non-life insurance in Pakistan
 Main lines of Business for Non-life
 Motor (driven mainly by loans & leases)
o damage, theft
 Fire-Property
o generally commercial properties
Main Lines of Business for Non-Life
Insurers in Pakistan
 Marine
o damage to goods
 Health
o generally outpatient
o sometimes in-patient
o mostly group (commercial)
 Gross Written Premium
 Gross premium is the total premium
written by the insurance company.
 Distribution of gross premium by line of
business gives a good indication about the
diversity of risk underwritten by the
insurance company.
 Split of gross premium by line of business
is presented in the notes to the accounts.
 Any line of business above 50% generally
shows a higher risk profile (particularly for
a risky line).
 While growth is important, high growth is
not always good (perhaps from a risky line,
 Gross Written Premium
 Example (Jubilee General FY 2018)
Fire Marine Motor Liability Acc. & Misc. Total
Health
GWP (PKR 2.8 0.75 1.5 0.4 1.5 2.2 9.2
Billions)
GWP % 31% 8% 16% 4% 16% 24% 100%
 Net To Gross Premium Ratio
 Net Premium is defined as gross premium
less reinsurance premium (premium paid to
reinsurer to acquire reinsurance coverage)
 Net to gross premium ratio presents the
percentage of premium retained by the
insurance company, calculated as:
Net Premium / Gross Premium x 100
 This ratio provides a good indication of the
risk retained by the insurance company.
 Retention ratios may vary by line of business
depending upon the profile of risks covered
and the risk appetite of the insurance
company.
 Concept of earned premium
 Since policyholders pay premiums in advance, it
creates a mismatch between earned premium
and premium paid during the accounting period.
 Premium received in any period is generally
partly earned in the current period and partly in
the next period(s).
 Premium earned in subsequent periods is called
unearned premium and is held as a reserve.
 Earned Premium for the Period = Premium
Written during the period + Unearned Premium
Reserve (beginning of period) – Unearned
Premium Reserve (end of period).
 To offset mismatch, future earned premium
should be subtracted and premium earned for
previous periods is added.
 Written Premium vs Earned Premium

1. Premium Written (in advance) in 2023 1,200

2. Premium Written for 2023 12 months

3. Premium Written on April 1, 2023 (9

months)
4. Premium Earned in 2023 9/12 x 1,200 = 900

5. Premium Unearned (UPR) at January 1, Nil

2023
6. Premium Unearned at December 31, 300
2023
Written Premium vs Earned Premium (cont…)

December 31, 2023

2023
Dec 31, 2024

Nov 1, UPR1 April 1,

UPR2
2023 2024
300
2,400 2,000 1,200
(WP) (WP)

Note: All policies are of 12 months

EP (2023) = WP (2023) + UPR1 – UPR2
 Process of Claims payments

Claims Claims
Claims
Incurred Reporting
Payments

 There is lag between claims incurred date and

reporting date as well as between claims reporting
date and claims payment date.

 Whenever, a Financial statement is made there

will be (i) claims paid during the reporting period
(ii) claims reported earlier but not paid
(outstanding) at the reporting date and (iii) claims
incurred during the reporting period but not
 Concept of incurred claims
 Incurred claims are claims which occur during the
accounting period.
 There is a lag in claims recording and its payment which
results in mismatch between its incurral and payment.
 Simply taking paid claims will result in timing mismatch
because it will add some claims for previous periods and
not take into account some claims for the current
accounting period.
 An insurer is usually not aware of all incurred claims at a
particular point in time or for a current accounting period.
 Claims Reserve for such instances is estimated at the end
of each reporting period which is a sum of :
 Incurred but not Reported Claims (IBNR), and
 Outstanding Claims (Reported but not Paid) (OSLR)
 Incurred Claims for the Period = Claims Paid during the
period - Claims Reserve (beginning of period) + Claims
Reserve (end of period)
INCURRED Claim (EXAMPLE)
 The Company estimates of IBNR and
OSLR Reserves are as follows:
 31.12.2023 – PKR 2,000
 31.12.2024 – PKR 3,000
 Claims paid during 2024 stand at PKR
8,000
 Incurred claims for 2024 stand at PKR
9,000 calculated as follows: PKR
Claims Paid FY 2023 8,000
Less IBNR+OSLR 31.12.2023 (2,000)
Plus Less: IBNR+OSLR 31.12.2018 3,000

Incurred Claims 9,000

 Underwriting Profits
 Underwriting profit is the profit earned by the insurance
company through its core business i.e. risk underwriting.
 Underwriting profit is the excess of premium earned over
claims and expenses incurred during a financial period.
 Underwriting profits should be assessed both at gross and
net of insurance.
 Underwriting loss (particularly if continued over years) should
generally be viewed negatively.
 Similar to GWP, distribution of Underwriting Profit should be
assessed by line of business.
 Important Ratio - Net Underwriting Profit to Gross Earned
Premium
 The ratio should preferably be at least 5% for each line of
business.
 The target for all lines combined should generally be 10-20%.
 Underwriting profit Worked Example
(Jubilee General FY 2018)
Fire (Gross) – PKR Billions Fire (Net) – PKR Billions

Insurance Premium Earned 2.39 Net Insurance Premium 0.87

Insurance Claims 1.05 Net Claims 0.56

Low - should
Commission Expense 0.23 Net Commission Expense 0.12 be flagged if
pattern
Management Expense 0.28 Management Expense 0.28
continues over
Underwriting Result 0.82 Underwriting Result -.09 years

Net Underwriting Results as % of Gross Earned Premium -4%

Misc. (Gross) – PKR Billions Misc. (Net) – PKR Billions

Insurance Premium Earned 2.09 Net Insurance Premium .55

Insurance Claims 1.49 Net Claims .14
Commission Expense 0.18 Net Commission Expense .01
Management Expense 0.18 Management Expense .18
Underwriting Result 0.24 Underwriting Result .22
Net Underwriting Results as % of Gross Earned Premium 10%
 Example
 You are given the following information about a
conventional insurer for a particular year :
Gross Earned Premium 1,000
Percentage of Premium given to reinsurer 60%
Gross Claims Incurred 700
Share of reinsurer in Gross Claims 40%
Commission received by insurer from reinsurer 100
Commissions & Management expense of insurer 200
Investment Income Earned by Insurer 100

Find the net underwriting profit earned by insurer for

the year.
 Example

Solutions :
i. Premium Earned by Insurer (1,000 x .4) 400
ii. Share of Insurer in Gross Incurred Claims (700 x .6) 420
iii. Commission Received from Insurer 100
iv. Management Expenses of Insurer 200
v. Investment Income of Insurer 100
vi. Net underwriting profit of Insurer -120
((i) – (ii) + (iii) – (iv))

Note : Investment Income is NOT included in Underwriting

Profit.