Professional Documents
Culture Documents
ACCOUNTING PRINCIPLES AND PRACTICES in INSURANCE COMPANIES
ACCOUNTING PRINCIPLES AND PRACTICES in INSURANCE COMPANIES
ACCOUNTING PRINCIPLES AND PRACTICES in INSURANCE COMPANIES
com/presentation/d/1FxCCCVqKUvTwHry6cCGVMSgebQceUAZp/
edit#slide=id.g116067df1c8_2_351
Every private or public insurance company needs to record, store and present its financial
information to internal (directors, managers) and external (policyholders, stockholders) users.
Two types of accounting principles greatly help to efficiently perform this tasks. These two
accounting principles are briefly described below:
The Financial Accounting Standard Board (FASB) has developed a set of accounting rules,
named GAAP which is used in almost every industry to conduct the accounting processes for
many years. The principles of GAAP and how they’re practiced in insurance companies are
listed below:
Since, the activities of insurance companies are drastically different from other business
organizations, the Generally Accepted Accounting Principles (GAAP) isn’t always enough to
conduct or record business transactions. Therefore, the Statutory Accounting Principles
(SAP) has been introduced by NAIC for preparing an insurance firm's financial statements.
SAP delivers the similar type of information about an insurer’s financial performance as
GAAP. But, the central objective of SAP is providing information about an insurance
company’s solvency – the capability of paying out policyholders. The three core values of
Statutory Accounting Principles are stated as below:
1. Conservatism:
Under this principle, insurance companies conduct valuations in a conservative
manner. The objective is to give protection to policyholders against any negative
movements in a company's financial situation.
2. Recognition:
The recognition approach states that, insurance companies should only write the
liquid and readily marketable assets in the balance sheet and the illiquid assets (such
as equity) should be marked against surplus. Recognition assumption is essential
because only liquid assets can be used to meet the firm's obligations when they are
due.
3. Consistency:
This approach regards that Statutory Accounting Principles should be applied in a
consistent manner which enables comparability among different years of statements.
1. Payroll management:
The most complex task of the insurance business is undoubtedly Payroll processing.
The accounting department routinely prepares the remunerations and payrolls of
internal employees. But the problem arises when paying agents. The agents and
brokers don’t earn the same amount of money, moreover, the commission they get is
subjected to income tax. Accountants are highly skilled to perform this types of
difficult tasks.
2. Claims Settlement:
We all know, Settling claims of the policyholders is the fundamental task of the
insurance companies. The accounting department is responsible for calculating
financial compensation and deductibles regarding payment of the policyholders.
3. Record Preservation:
The knowledge of accounting helps insurance companies to keep precise records of
each business transaction. By using powerful cloud-based insurance accounting
software to record information, insurance companies can prepare different financial
statements, which in turn, help to make various types of decisions regarding
underwriting fee, employable number of agents, reinsurance policies, new investment
opportunities etc.
4. Other uses of Accounting:
Other uses of accounting include tax preparation, auditing, asset valuation and so on.
Most of all, the practice of proper accounting methods can tremendously increase
accountability among internal users.