University Of Mumbai

PROJECT WORK ON
"Study On Accounting And Statutory Requirements
Of Insurance Companies"

A Project Submitted to
University of Mumbai for partial completion of the degree of
Master of commerce (Accountancy) SEMESTER III
Under the faculty of commerce

Submitted By:
SALVI MANSI DILIP
Roll No: 41

Under the Guidance of

Cosmopolitan’s
Valia C. L. College of Commerce & Valia L.C. College of Arts
D.N. Nagar, Andheri (West), Mumbai-400053.

2023-24
 University Of Mumbai

PROJECT WORK ON
"A Study On Accounting And Statutory Requirements
Of Insurance Companies"

A Project Submitted to
University of Mumbai for partial completion of the degree of
Master of commerce (Accountancy) SEMESTER III
Under the faculty of commerce

Submitted By:
SALVI MANSI DILIP
Roll No: 41

Under the Guidance of

Cosmopolitan’s
Valia C. L. College of Commerce & Valia L.C. College of Arts
D.N. Nagar, Andheri (West), Mumbai-400053.

2023-24
 1

Cosmopolitan’s
Valia C. L. College of Commerce & Valia L.C. College of Arts
D.N. Nagar, Andheri (West), Mumbai-400053.

CERTIFICATE
This is to certify that Ms. SALVI MANSI DILIP has worked and duly completed
her Project Work for the degree of MASTER OF COMMERCE
(ACCOUNTANCY) under the Faculty of Commerce in the subject of
ACCOUNTANCY and her project is entitled, A STUDY ON ACCOUNTING
AND STATUTORY REQUIREMENTS OF INSURANCE COMPANIES
under my supervision.

I further certify that the entire work has been done by the learner under my
guidance and that no part of it has been submitted previously for any Degree or
Diploma of any University.
It is her own work and facts reported by her personal findings and investigations.

Internal Examiner, External Examiner,

Coordinator, Principal,

DR. MRS. SHOBHA MENO

 2

DECLARATION

I the under designed SALVI MANSI DILIP her by, declare that the work
embodied in this project work title A STUDY ON ACCOUNTING AND
STATUTORY REQUIREMENTS OF INSURANCE COMPANIES, forms my
own contribution to the research work carried out under the guidance of PROF.
MANJIRI RAJADHYAKSHA is a result of my own research work and has not
been previously submitted to any other university fir any other Degree/ Diploma to
this or any other University.
Wherever reference has been made to previous works of others, it has been clearly
indicated as such and included in the bibliography.
I, here by further declare that all information of this document has been obtained
and presented in accordance with academic rules and ethical conduct.

Name and Signature of the Learner

SALVIMANSI DILIP

Certified by
Name and signature of the Guiding Teacher
 3

ACKNOWLEDGMENT

To list who all have helped me is difficult because they are so

numerous and the depth is so enormous.
I would like to acknowledge the following as being idealistic
channels and fresh dimensions in the completion of this project.
I take this opportunity to thank the UNIVERSITY OF
MUMBAI for giving me chance to do this project.
I would like to thank my PRINCIPAL, DR. MRS. SHOBHA
MENON for providing the necessary facilities required for
completion of this project.
I take this opportunity to thank our COORDINATOR, PROF.
AKSHA MEMON for his moral support and guidance.
I would also like to express my sincere gratitude towards my
project guide PROF. MANJIRI RAJADHYAKSHA whose
guidance and care made the project successful.
I would like to thank my COLLEGE LIBRARY, for having
provided various reference books and magazines related to my
project.
Lastly, I would like to thank each and every person who directly
or indirectly helped me in the completion of the project
especially MY PARENTS AND PEERS who supported me
throughout my pro INDEX.
 4

INDEX
Chapter Sub Topic Page no
no point
1 Introduction
1.1 Introduction 6
1.2 Definition 10
1.3 Functional 11
1.4 History 12
1.5 Features 15
1.6 Features 19
1.7 Advantages & 20
Disadvantages
1.8 Scope 27
1.9 Research Problems 28
1.10 Types 31
1.11 Insurance Act, 1938 37

2 Research Methodology
 6

Chapter No. 1
Introduction
 7

1.1 INTRODUCTION

Under an insurance contract, one party, called insurer, undertakes to

indemnify the losses suffered for some specified causes, by the other
party called insured, in consideration for a fixed premium. Insurance
contracts may be characterized generally by the following:

(a) The purchaser of an insurance contract makes an initial payment or

deposit to the insurance company in advance of the possible occurrence
of an insured event.
(b) When the insurance contract is made, the insurance company does
not know if, how much, or when amounts will be paid under the
contract.

The document that contains terms of insurance contract is called

Insurance Policy. The amount payable by the Insured to the Insurer is
known as Premium. Premium for the first year of the policy is known as
the first year's premium.
 8

Premium for subsequent year is known as renewal premium. The

amount payable by the Insurer to the Insured is known as claim. In the
case of life insurance, claim may arise on death of the insured or
maturity of the policy. In case of general insurance, claim arises only on
loss.

Insurance business in India is governed by the Insurance Act, 1938,

Insurance Regulatory and Development Authority Act, 1999 and
Insurance Regulatory and Development Authority Regulations, 2002.

Everyone is exposed to various risks. Future is very uncertain, but there

is way to protect one’s family and make one’s children’s future safe.
Life Insurance companies help us to ensure that our family’s future is
not just secure but also prosperous. Life Insurance is particularly
important if you are the sole breadwinner for your family. The loss of
you and your income could devastate your family. Life insurance will
ensure that if anything happens to you, your loved ones will be able to
manage financially.

This study titled “Study of Consumers Perception about Life Insurance

Policies” enable les the Life Insurance Companies to understand how
consumer’s perception differs from person to person. How a consumer
selects, organizes and interprets the service quality and the product
quality of different Life Insurance Policies, offered by various Life
Insurance Companies.
 9

Insurance is a tool by which fatalities of a small number are

compensated out of funds (premium payment) collected from plenteous.
Insurance companies pa y back for financial losses arising out of
occurrence of insured events e.g. in personal accident policy death due
to accident, in fire policy the insured events are fire and other allied
perils like riot and strike, explosion etc. hence insurance safeguard
against uncertainties.

It provides financial recompense for losses suffered due to incident of

unanticipated events, insured with in policy of insurance. Moreover,
through a numb r of acts of parliament, specific types of insurance are
legally enforced in our country e.g. third party insurance under motor
vehicles Act, public liability insurance for hand leers of hazardous
substances under environment protection Act. Etc. 3 WHAT IS
INSURANCE It is a commonly acknowledged phenomenon that there
are countless risk s in every sphere of life .for property, there are fire
risk; for shipment of goods. There are perils of sea; for human life there
are risk of death or disability; and so on .the chances of occurrences of
the events causing losses are quite uncertain because there may or may
not take place. Therefore, with this view in mind, people facing
common risks come together and make their small contribution to the
common fund.
 10

1.2 DEFINITION

Insurance has been defined to be that in, which a sum of money as a

premium is paid by the insured in consideration of the insurer’s bearings
the risk of paying a large sum upon a given contingency.

The insurance thus is a contract whereby: a. b. and c.

Certain sum, termed as premium, is charged in consideration, Against

the said consideration, a large amount is guaranteed to be paid by insurer
who received the premium, The compensation will be made in certain
definite sum, i.e., the loss or the policy amount which ever may be, and
d. The payment is made only upon a contingency More specifically,
insurance may be defined as a contact between two parties, wherein one
party (the insurer) agrees to pay to the other party (the insured) or the
beneficiary, a certain sum upon a given contingency (the risk) against
which insurance is required.
 11

1.3 FUNCTIONAL

Insurance is a cooperative device to spread the loss caused by a

particular risk over some persons exposed to it and who agree to insure
themselves against the risk.

Thus, the insurance is;

1. A co-operative device to spread the risk;

2. The system to spread the risk over many persons who are insured
against the risk;
3. The principle to share the loss of each member of the society based on
the probability of loss to their risk; and
4. The method to provide security against losses to the insured.

Similarly, another definition can be given.

Insurance is a cooperative device of distributing losses falling on an

individual or his family over many persons, each bearing a nominal
expenditure and feeling secure against heavy loss.
 12

1.4 HOW DID INSURANCE GET STARTED?

Insurance has a history that dates back to the ancient world. Over the
centuries, it has developed into a modern business of protecting people
from various risks. The industry has been profitable for many years and
has been an important aspect of private and public long-term finance.

In the ancient world, the first forms of insurance were recorded by the
Babylonian and Chinese traders. To limit the loss of goods, merchants
would divide their items among various ships that had to cross treacherous
waters. One of the first documented loss limitation methods was noted in
the Code of Hammurabi, which was written around 1750 BC. Under this
method, a merchant receiving a loan would pay the lender an extra amount
of money in exchange for a guarantee that the loan would be cancelled if
the shipment were stolen. The first to insure their people were the
Achaemenian monarchs, and insurance records were submitted to notary
offices. Insurance was also noted for gifts of substantial value. These gifts
were given to monarchs. By recording their gifts in a register, givers
would receive help from a monarch by proving the gift’s existence if they
were in trouble.
 13

As the ancient world evolved, maritime loans with rates based on

favourable seasons for traveling surfaced. Around 600 BC, the Greeks
and Romans formed the first types of life and health insurance with their
benevolent societies.

These societies provided care for families of deceased citizens. Such

societies continued for centuries in many different areas of the world and
included funerary rituals. In the 12th century in Anatolia, a type of state
insurance was introduced. If traders were robbed in the area, the state
treasury would reimburse them for their losses.

Standalone insurance policies that were not tied to contracts or loans

surfaced in Genoa in the 14th century. This is where the first
documented insurance policy came from in 1347. In the following
century, standalone maritime insurance was formed. With this type of
insurance, premiums varied based on unique risks. However, the
separation of insurance from contracts and loans was a major change
that would influence insurance for the rest of time.

The first book printed on the subject of insurance was penned by Pedro
de Santarem, and the literature was published in 1552. As the
Renaissance ended in Europe, insurance evolved into a much more
sophisticated form of protection with several varieties of coverage. Until
the late 17th century, many areas were still dominated by friendly
societies that collected money to pay for medical expenses and funerals.
However, the end of the 17th century introduced a rapid expansion of
London’s importance in the world of trade
 14

This also increased the need for cargo insurance. London became a hub
for companies or people who were willing to underwrite the ventures of
cargo ships and merchant traders. Lords of London, one of London’s
leading insurers, is still a major insurance business in the city.

Modern insurance can be traced back to the city’s Great Fire of London,
which occurred in 1666. After it destroyed more than 30,000 homes, a
man named Nicholas Barbon started a building insurance business. He
later introduced the city’s first fire insurance company. Accident
insurance was made available in the late 19th century, and it was very
similar to modern disability coverage.

In U.S. history, the first insurance company was based in South Carolina
and opened in 1732 to offer fire coverage. Benjamin Franklin started a
company in the 1750s, which collected contributions for preventing
disastrous fires from destroying buildings. As the 1800s arrived and
passed, insurance companies evolved to include life insurance and several
other forms of coverage.

No type of insurance was mandatory in the United States until the 1930s.
At that time, the government created Social Security. In the 1940s, GI
insurance surfaced. It helped ease the financial difficulties of women
whose husbands died while fighting in World War II. It wasn’t until the
1980s that the need for car insurance grew enough that steps were taken
to make it mandatory. Although insurance is an established business, it
is still changing and will change in the future to meet the evolving needs
of consumers.
 15

1.4 Features

From the above explanation, we can find the following characteristics,

which are generally observed in life, marine, fire, and general
insurances.

1. Sharing of Risk

Insurance is a device to share the financial losses which might befall an

individual or his family on the happening of a specified event.

The event may be the death of a breadwinner to the family in the case
of life insurance, marine-perils in marine insurance, fire in
fire insurance, and other certain events in general insurance,
e.g., theft in burglary insurance, accident in motor
insurance, etc. The loss arising from these events, if insured,
are shared by all the insured in the form of a premium.
 16

2. Co-operative Device

The most important feature of every insurance plan is the cooperation of

a large number of persons who, in effect, agree to share the financial loss
arising due to a particular risk that is insured

Such a group of persons may be brought together voluntarily or through

publicity or solicitation of the agents.

An insurer would be unable to compensate for all the losses from his
own capital. So, by insuring or underwriting a large number of persons,
he can pay the amount of loss.

Like all cooperative devices, there is no compulsion here on anybody to

purchase the insurance policy

3. Value of Risk

The risk is evaluated before insuring to charge the share of an insured,

herein called, consideration or premium. There are several methods of
evaluation of risks.

If there is an expectation of more loss, a higher premium may be

charged. So, the probability of loss is calculated at the time
of insurance.
 17

4. Payment at Contingency

The payment is made at a certain contingency insured. If the

contingency occurs, payment is made.

Since the life insurance contract is a contract of certainty, because the

contingency, the death, or the expiry of the term will certainly occur, the
payment is certain. The contingency is the fire or the marine perils, etc.,
may or may not occur in other insurance contracts.

So, if the contingency occurs, payment is made. Otherwise, no amount is

given to the policy-holder. Similarly, in certain policies, payment is not
certain due to the uncertainty of a particular contingency within a
particular period.

5. Payment of Fortuitous Losses

Another characteristic of insurance is the payment of fortuitous losses. A

fortuitous loss is unforeseen and unexpected and occurs as a result of
chance. In other words, the loss must be accidental.

The law of large numbers is based on the assumption that losses are
accidental and occur randomly.

For example, a person may slip on an icy sidewalk and break a leg. The
loss would be fortuitous. Insurance policies do not cover
intentional issues.
 18
6. Amount of Payment

The amount of payment depends on the value of loss due to the particular
insured risk provided insurance is there up to that amount. In life
insurance, the purpose is not to make good the financial loss
suffered. The insurer promises to pay a fixed sum on the happening of an
event.

If the event or the contingency takes place, the payment does fail due if
the policy is valid and in force at the time of the event, like property
insurance, the dependents will not be required to prove the occurring of
loss and the amount of loss.

It is immaterial in life insurance what was the amount of loss was at the
time of contingency. But in the property and general insurances, the
amount of loss and the happening of loss is required to be proved.

7. A large number of Insured Persons

To spread the loss immediately, smoothly, and cheaply, a large number of

persons should be insured. The co-operation of a small number of persons
may also be insurance, but it will be limited to the smaller area.

The cost of insurance for each member may be higher.

So, it may be unmarketable. Therefore, to make the insurance cheaper,

it is essential to ensure many persons or property because the
lessor would be the cost of insurance, so the lower would be
premium.
 19

1.5 IMPORTANCE

The world we live in is full of uncertainties and risks. Individuals,

families, businesses, properties and assets are exposed to different types
and levels of risks. These include risk of losses of life, health, assets,
property, etc. While it is not always possible to prevent unwanted events
from occurring, financial world has developed products that protect
individuals and businesses against such losses by compensating them
with financial resources. Insurance is a financial product that reduces or
eliminates the cost of loss or effect of loss caused by different types of
risks.

Apart from protecting individuals and businesses from many kinds of

potential risks, the Insurance sector contributes significantly to the
general economic growth of the nation by providing stability to the
functioning of businesses and generating long-term financial resources
for the industrial projects. Among other things, Insurance sector also
encourages the virtue of savings among individuals and generates
employments for millions, especially in a country like India, where
savings and employment are important In life, there is no such thing as
a guarantee. There may be a loss of life, as well as some business
accidents. The loss is difficult to bear in both of these cases. As a result,
insurance provides.
 20

1.6 ADVANTAGES

Financial protection

In the event of death, he/she family member may be able to receive

financial assistance from insurance. In the event of a business loss,
insurance provides financial assistance to help the company recover and
rebuild. In the case of health insurance, he or she may be eligible for
financial assistance in treating his or her health.

Distribution of Risk/Spreading of Risk

The underlying concept of insurance is to spread the risk across a large
number of people. People pay a certain amount to an insurance
company up to a certain time or lifetime and receive a refund if a loss
occurs. Risk in life or business cannot be eliminated, but it can be
reduced, distributed, or shared. So, in this case, insurance companies
bear risks in order to redistribute business and individual risks among
insurance companies.
 21

Stability of Living Standard

Insurance provides financial support to ensure that people can sustain and
maintain stability in living standards against an unforeseen risk of losses.

Encouragement to Savings

In insurance, people pay a certain amount of money for a fixed time or

lifetime based on an agreement and this helps to develop a habit of saving
money. Knowing the importance of saving, people start doing saving in
various fields.

Job Opportunities

Insurance, like any other business, is a successful business model. It

targets many entrepreneurs and business owners. As a result, there is a lot
of cash flow in the business. They need employees to handle and maintain
cash flow and run the business, so they open vacancies in various
positions based on qualifications and provide job opportunities.

Promotes foreign/international trades

many years ago, people were afraid to engage in international trade
because of the possibility of accidents while transporting goods via ships,
roads, or other modes of transportation. However, in today's
competitive global economy, insurance companies bear all of those risks
and compensate for losses. They also protect an exporter of goods and
services from non-payment by a foreign buyer.
 22

Loan Facilities

If a company has purchased insurance, banks are more likely to lend to

that company. No, the problem for large businesses is getting a loan from
a bank, but if you have a small business or a start-up and have done
business insurance, your chances of getting a loan from a bank increase.

Stability of Business

Even if your company suffers unexpected losses, insurance can help you
manage your losses. Taking out an insurance policy for your employees
will encourage them to come into the office. As a result, insurance aids in
the smooth operation of the office. And business will become more stable.

Competitiveness

If you have insurance, then there will not be any tension related to
business, and life, and health. so, you can focus on your task and compete
with others.

Society and Country Welfare

The insurance company collects a large amount of money from an

insured and they invest in the development of trade and industry, which
finally leads the society and country toward development.
 23

Preserves Confidentiality

If there is some death in the family then the death benefit or to whom the
death benefits is payable will not be recorded publicly. This helps to
preserve confidentiality for the beneficiary of the policy.

Tax-free money

Another advantage of insurance is that the funds are often tax-delayed.

The benefits and all other earnings you may earn under the policy are tax-
free, except in the case of employer insurance schemes where benefits are
regarded as normal taxable income.

Short Term Coverage

The insurance coverage period can be changed. If you have short-term

needs then you can choose shorter-length insurance.

Long Term Coverage

Long-term insurance is an option if you have long-term needs. It may be

more cost-effective in some situations in the long run compared to short-
term coverage. You can use life insurance to pay for other policies such
as pensions or long-term care without paying taxes on the difference.
Furthermore, by utilizing features such as this, you can improve your
cash accumulation by increasing your life insurance death benefit.
 24

Easy to Apply

There are many genuine sources where you can get insurance
information and compare insurance of one company with another and
can apply online form as well.

1.7 DISADVANTAGES

Term and Conditions

Insurance does not cover every type of loss that can happen to an
individual or a business. They have terms and conditions, and they only
provide financial assistance based on those terms. Please read the terms
and conditions of any insurance before purchasing it. Also, seek
assistance from the appropriate person in order to obtain accurate
information about an insurance policy.

Long Legal formalities

It may take a long legal procedure for receiving your claims.

Fraud Agency

There are lots of fraud agencies available in the market so, before taking
any type of insurance does exercise you or take the help of an expert.
 25

Potential crime incidents

It could lead to social crimes as the users of the policy are tempted to
commit crimes to get the insured money.

Temporary and Termination

Insurance is temporary and will be terminated when the individual no

longer belongs to the group.

Can be Expensive

Often, the cost can vary depending on the policy and other factors.
However, if you buy at the right time, for the right reasons, and with the
right coverage, you may be able to get the best price.

Rise in Subsequent Premium

Many insurance firms have different subsequent premium rates, and you
should pay special attention to them. Before you purchase a policy,
ensure that you know at the start, whether your premium is guaranteed
throughout the policy, or whether inflation shifts from time to time.

Adds Expense for Some Projects

In some construction projects where compensation for the workers for
injuries are common, then insurance for this company can be expensive.
They are expensive as compared to other IT and accounting offices.
 26

Annoying and Frustration many claims in insurance are required

fulfilling and checking all of them takes time and energy which annoys
the people and may lead to frustration. So, it's better good to know
insurance you have done properly.

In general, in all types of insurance, Cash surrender values are typically

lower than premiums paid in the first few years of the policy, and a policy
owner may not be able to recover all of the premiums paid if the policy
is surrendered.
 27

1.8 SCOPE

The main aim of a life insurance cover is to secure the needs of

dependents after one’s untimely death. In addition to the emotional
suffering, the financial insecurity arising out of losing the primary earner
can be immense. This is the reason why most personal finance experts
suggest that life insurance should be the main part of one’s investment
planning. In India, life insurance is yet to reach its full potential as the
awareness about life insurance products is pretty low. While the Indian
life insurance industry has witnessed a lot of transformation ever since
the entry of private players, it still has a long way to go in terms of
protecting the entire population of our country.
 28

1.9 RESEARCH PROBLEMS

1. Lack of trust

This is a reason why many individuals don`t bother with insurance. Many
insurance firms fail to pay claims, and they don`t own up to offering some
benefits. Therefore, most people just see insurance as one of the
unnecessary expenses. Many insurance firms do shut down because of
financial challenges and individuals who are the victims of the loss don`t
even think twice about purchasing insurance policies.

2. Competition
 29

Today, there are many insurance firms on the market and therefore
there is an intensive challenge for insurers. Each company looks for the
best way of selling their insurance products in the best possible way and
targets a particular group of individuals. Most insurance businesses,
especially the new ones are the most doubted companies. In fact, most
people trust some of the existing insurance firms compared to the new
businesses since the new enterprises are operated on a thin line
between failure and success—and no one will want to take such risks
with the little among of money that they have.

3. Mismanagement

As the owner of the insurance business, one is solely responsible for all
issues that his or her clients may have regarding the management of the
insurance business. All insurance firms that are mismanaged can`t hide
their faults for a longer time without the clients noticing. As time move,
there will be a constant increase in the number of clients` complaints, and
if his or her insurance firm is not transparent, then he or she will lose more
customers. Also, incompetent management may cost the company a lot,
particularly if they have poor communication with their clients.

4. Economic instability

When the country`s economy is down, all insurance companies will be

affected. At such situations, the rates can be affected such that the
insurance companies might be forced to increase their rates, just like
interest rates on credit facilities provided by financial institutions.
 30

Of course, no client will appreciate this, even if it is stated clearly in the

contract that the insurance rates might change from time to time.
Therefore, such situations might create a bad image for a company since
costumers can spread the information about a service or product they
were not happy with very fast.

5. Weak manpower

Non-professionals run many of the insurance companies today. In fact,

many people think that what it takes to be an insurance professional is just
some knowledge of monetary studies with no specialized training. Indeed,
this has majorly affected the dependability and operations of insurance
firms in this century.

6. Excessive politicization of the insurance industry

Without a doubt, politics play a significant role in insurance companies`

operations depending on the power play & calculations that are dominant
in the operating domains of the insurance firms. The premiums to pay, the
outcomes of risk investigations, and the damages and benefits to pay
depend on political conspiracy sometimes.

These are some of the biggest challenges that are faced by insurance
companies. They include mismanagement, economic instability, lack of
trust, and competition among others.
 31

1.10 TYPES

Insurance business is basically of two types - Life and General.

These terms are defined under the Insurance Act,, 1938 as
follows.

(i) "Life insurance business" means the business of effecting

contracts of insurance upon human life, including any
contract whereby the payment of money is assured on death
(except death by accident only) or the happening of any
contingency dependent on human life and shall be deemed to
include the granting of disability and indemnity benefit;
annuities upon human life, and superannuation allowance and
annuities [S. 2(11)].

(ii) "General insurance business" means fire, marine or

miscellaneous insurance business, whether carried on singly
or in combination with one or more of them [S. 2(6B)].

EXHIBIT 1:
LIFE INSURANCE VS GENERAL INSURANCE
S.N Particulars Life Insurance
1 Timing of Insurable amount is payable
Payment of either on the happening of
Claim the event (death) or at the
maturity
2 Value of Policy Insurance can be done for
any value depending upon
the premiums the insured is
willing to pay
3 Duration of These are long term
Contract contracts running over the
number of
Years.
4 Assurance Life insurance is known
also by another term
'assurance' since the insured
gets an assured sum.
5 Determination Actuaries periodically
of Liability estimate the liability under
existing policies. On that
basis a valuation balance
sheet is prepared to
determine the profit
32
Other Insurance
Reimbursement of
loss or liability
incurred will be paid
at the happening of the
uncertain event only
The sum payable
under it is limited to
the amount of loss
actually suffered or
the liability incurred,
notwithstanding the
amount of policy.
These are only for one
year though renewable
after year.
Other policies are
known as insurance
A portion of the
premium is carried
forward as a provision
for unexpired liability
and the balance net of
claims and expenses is
taken as profit or loss.
 33
General Insurance:

"General insurance business" means fire, marine or miscellaneous

insurance business, whether carried on singly or in combination with one
or more of them [S. 2(6B)].

Fire Insurance:

“Fire insurance business” means the business of effecting, otherwise than

incidentally to some other class of insurance business, contracts of
insurance against loss by or incidental to fire or other occurrence
customarily included among the risks insured against in fire insurance
Policies [S. 2(6A)].

Fire insurance provides protection against damage to property caused

by accidents due to fire, lightening or explosion, whereby the explosion
is caused by boilers not being used for industrial purposes. Fire insurance
also includes damage caused due to other perils like storm, tempest or
flood; burst pipes; earthquake; aircraft; riot, civil commotion; malicious
damage; explosion; impact and so on.

Marine insurance:

"Marine insurance business" means the business of effecting contracts of

insurance upon vessels of any description, including cargoes, freights
and other interests which may be legally insured, in or in relation to such
vessels, cargoes and freights, goods, wares, merchandise and property of
whatever description insured for any transit, by land or water, or both,
 34

and whether or not including warehouse risks or similar risks in addition

or as incidental to such transit; and includes any other risks customarily
included among the risks insured against in marine insurance policies [S.
2(13A)].

Marine insurance basically covers three risk areas, namely, hull, cargo
and freight. The risks which these areas are exposed to are collectively
known as "Perils of the Sea".

Marine cargo policy provides protection to the goods loaded on a ship

against all perils between the departure and arrival warehouse.
Therefore, marine cargo covers carriage of goods by sea as well as
transportation of goods by land.

Marine hull policy provides protection against damage to ship caused

due to the perils of the sea. Marine hull policy covers three-fourth of the
liability of the hull owner (ship-owner) against loss due to collisions at
sea. The remaining 1/4th of the liability is looked after by associations
formed by ship-owners for the purpose (P and I Clubs).

Marine Freight policy provides protection against risk of loss of freight of

the shipping company where the owner of goods promises to pay the
freight when the cargo is safely delivered at the port of destination and
the cargo is destroyed on the way.
 35

Miscellaneous Insurance:

"Miscellaneous insurance business" means the business of effecting

contracts of insurance which is not principally or wholly of any kind or
kinds included in clause (6A), (11) and (13A) [S. 2(13B)]. As per the
Insurance Act, all types of general insurance other than fire and marine
insurance are covered under miscellaneous insurance. Some of the
examples of miscellaneous insurance are Motor, Workmen's
Compensation / Employers Liability, Public/ Product Liability,
Engineering, Aviation, Personal Accident, Health, Money insurance, etc.

While it may not be possible to tell in advance, which person will suffer
the losses, it is possible to work out how many persons on an average
out of the group, may suffer losses. When risk occurs, the loss is made
good out of the common fund .in this way each and every one shares the
risk .in fact they share the loss by payment of premium, which is
calculated on the likelihood of loss .in olden time, the contribution make
the above.

The arrangement in which an individual or concern sets up a private

fund to meet the future risk. If some losses happened in the future the
firm meet s the loss out of the fund. While it may be called ‘self-
insurance’ it is not a single matter of fact, insurance at all because there
is no hedge, no shifting, or distributing the burden of risk a mong larger
Persons. It is merely a provision to meeting the unforeseen event. He re
the insured becomes the insurer for the particular risk. But it can be
effectively worked only when there is wide distribution of risks
subjected the same hazard. b) Partnership A partnership firm may also
 36

carry on the insurance business for the sake of prof it. Since it is not an
entity distinct from the persons comprising it, the personal liability of
partners in respect to the partnership debts is unlimited. In case of
huge loss the partners may have to pay from their own personal funds
and it will not be profitable to them to start s insurance business.
 37

1.11 INSURANCE ACT, 1938

The provisions of insurance Act, 1938 as amended up-to

date, relevant to Insurance Accounting, are summed up
below

SEPARATION OF ACCOUNTS AND FUNDS (S. 10)

Where the insurer carries on business of more than one of the following
classes, namely, life insurance, fire insurance, marine insurance or
miscellaneous insurance, he shall keep a separate account of all receipts
and payments in respect of each such class of insurances business and
where the insurer carries on business of miscellaneous insurance
whether alone or in conjunction with business of another class, he shall,
unless the Authority waives this requirement in writing, keep a separate
account of all receipts and payments in respect of each of such sub
classes of miscellaneous insurance business as may be prescribed in this
behalf.

ACCOUNTS AND BALANCE SHEET [S. 11]

Every insurer, in respect of insurance business transacted by him and in

respect of his shareholders’ funds, shall, at the expiration of each
financial year, prepare with reference to that year
 38

A balance-sheet,
A profit and loss account.
A separate account of receipts and payments,
A revenue account in accordance with the regulations made by
the IRDA.
A separate account relating to funds of shareholders; and
A separate account relating to funds of policy-holders.

AUDIT (S. 12)

The balance sheet, profit and loss account, revenue account and profit
and loss appropriation account of every insurer, shall, unless they are
subject to audit under the Indian Companies Act, be audited annually by
an auditor, and the auditor shall in the audit of all such accounts have the
powers of exercise the functions vested in, and discharge the duties and
he subject to the liabilities and penalties imposed on, auditors of
companies by the Indian Companies Act.

REGISTER OF POLICIES AND REGISTER OF

CLAIMS[S-14]

Register of Policies: Every insurer shall maintain a register or record of

policies, in which shall be entered, in respect of every policy issued by
the insurer, the name and address of the policyholder, the date when the
policy was effected and a record of any transfer, assignment nomination
of which the insurer has notice
 39

Register of Claims: Every insurer shall maintain a register or record of

claims, in which shall be entered every claim made together with the
date of the claim, the name and address of the claimant and the date on
which the claim was discharged, or, in the case of a claim which is
rejected, the date of rejection and the grounds therefor

INVESTMENTS (S. 27 & S. 27B]

No insurer carrying on general insurance business shall invest any part

of his assets otherwise than in the approved investments listed in this S.
27B

LIMITS ON COMMISSION [S. 40]

No person shall pay any remuneration or reward whether by way of

commission or otherwise for soliciting or procuring insurance business
in India to any person except an insurance agent or an intermediary or
insurance intermediary

No insurance agent shall be paid or contract to be paid by way of

commission or as remuneration in any form an amount exceeding, in the
case of general insurance business of any other class, fifteen per cent of
the premium
 40

Chapter No. 2
Research Methodology
 41

2.1 SOURCE OF DATA

The study was conducted by the means of personal interview with

respondents and the information given by they were directly recorded on
questionnaire. For the purpose of analysing the data it is necessary to
collect the vital information. There are two types of data, this are
1. Primary Data
2. Secondary Data

PRIMARY DATA:

Primary data is collected from books, internet and questionnaire. The

data is collected from questionnaire. The questionnaire is filled from
Friend, Family and Colleagues through Google forms them.

SECONDARY DATA:

Secondary data is collected from social networking sites, books, etc

 42

2.2 ACCOUNTING

Premium: In case of Tariff business such as fire insurance, motor

insurance etc., the premium is charged as per tariff. In case of non-tariff
business the premium is charged as per the guideline rates fixed by the
respective technical departments of Head Office of the insurer with
certain discretion to the operating offices while underwriting such
business. According to section 64VB of the Insurance Act, 1938; no risk
can be assumed by an insurer unless premium is received in advance.

Recently, in addition to collection of premium by

cash/cheque/DD/BG/CD, IRDA has permitted to collect the premium by
other manner of receipt of premium such as credit card/ Debit card/E-
transfer etc. However, the same has to be collected before assumption of
the risk Sometimes, same business is shared by more than one insurer as
desired by the insured (co insurance). The lead insurer has to collect the
full premium.
However, only own share of premium is accounted as premium income
and the balance is shown as amount due to other co-insurers.
Premiums from short-duration insurance contracts, such as most
general insurance contracts, are intended to cover expected claim costs
resulting from insured events that occur during a fixed period of short
duration. Therefore, premiums from short-duration contracts ordinarily
are earned and recognized as revenue evenly as insurance protection is
provide
 43

Commission: Commission is paid at different rates on different

classes of insurance business. No commission is paid on certain classes
of business. Commission becomes payable as soon as business is
underwritten. However, the same is paid on monthly basis. In case of
cancellation of a policy due to cheque dishonour or any other reason,
commission/brokerage payable is reversed or recovered if already paid
to the agent/broker.

Claims: Claims outgo is the major outgo of an insurance company.

Claim processing is done by the respective technical department and
approved by the competent authority. The payment and accounting of
the claims is done by the accounts department. In case of claims on
policies involving co-insurance arrangements, the full amount of claim
is paid by the lead insurer, but only own share of claim is

Accounted as claims cost and the balance is shown as amount

recoverable from the co-insurers. Where a claim is reported but not
settled by the end of the financial year, an adequate provision is made
for such outstanding claims. At the end of each financial year, as
required by IRDA the actuarial valuation of the claims liability of an
insurer is made by the appointed actuary, and the shortfall, if any is
provided as Claims Incurred But Not Reported (IBNR)/ Claims Incurred
But Not Enough Reported (IBNER).
Expenses of Management: For managing insurance business certain
administrative expenses are incurred such as Employees' remuneration
and welfare benefit, managerial remuneration, travel, conveyance,
rent, rate and taxes, repairs, printing and stationery, communication,
legal and professional charges, medical fees, auditors fees & expenses,
advertisement and publicity, interest and bank charges, depreciation,
and others. These expenses are first aggregated and then apportioned
to each class of business viz. Fire, Marine and Miscellaneous revenue
 44

account on a reasonable and equitable basis. Any major expenses (5

laces or in excess of 1% of net premium, whichever is higher) are
required to be shown separately. Section 40C of the Insurance Act,
1938 prohibits an insurer to spend as expenses of management in
excess of the limits prescribed in the Act. An adequate provision for
outstanding expenses is made in the accounts at the end of the
financial year. A provision for leave encashment, gratuity etc. at the
end of each financial year is made on actuarial basis
Co-Insurance: The lead insurer accounts its own share as premium
and balance is shown as payable to other co-insurers. Similarly in case
of claim, the entire claim amount is paid by the lead insurer to the
policy holder, but only his own share is accounted as claims expense
and the balance is shown as amount due from the co-insurer. Lead
insurer also recovers certain percentage of the co-insurer's share for
managing co-insurance arrangement as a leader. Co-insurance accounts
are settled as per the agreement between the co-insurers.
Usually, there is a provision for charging of interest for delayed
settlement of accounts. At the end of each financial year, provision for
outstanding claims, if any is communicated by the lead insurer and
balance confirmation certificates are exchanged by all co-insurers.

Investments: Investments are assets held by an insurer for earning

income by way of dividends rent and interest or for capital appreciation
or for other benefits to the insurer. An insurance company makes
investment, apart from earning income, to comply with the statutory
requirements and also for meeting any unforeseen contingences and
claims. There are two main sources of investible funds viz., surplus
funds arising out of the business and income from interest and
dividends on existing investments. Sections 27B, 27C and 27D of the
 45

Insurance Act, 1938 lays down certain norms for investment of the
funds by an insurance company. The procedure to determine the value
of investments is laid down in the IRDA's Regulations for preparation of
financial statements. Further IRDA has also issued detailed guidelines
under IRDA (Investment) Regulations, 2001 for making investments by
the insurer.

IRDA prohibits any investment abroad out of policyholders' funds.

Accounting entries for investments are involved for buying selling
investments, receipts /
accrued and outstanding of interest, dividends, rent, and recording
impairments, write off and write down of certain investments. Cover the
insured for life. The insured does not receive money while he is alive;
the nominee receives the sum assured plus bonus upon death of the
insured. Endowment policies - Cover the insured for a specific period.
The insured receives money on survival of the term and is not covered
thereafter. Money back policies - The nominee receives money
immediately on death of the insured. On survival the insured receives
money at regular intervals during the term. These policies cost more
than endowment with profit policies. Annuities / Children s policies -
The nominee receives a guaranteed amount of money at a pre-
determined time and not immediately on death of the insured. On
survival the insured receives money at the same pre-determined time.

These policies are best suited for planning children s future education
and marriage costs. Pension schemes - are policies that provide
benefits to the insured only upon retirement. If the insured dies during
the term of the policy, his nominee would receive the benefits either as
a lump sum or as a pension every month. Since a single policy.
 46

2.3 SCHEDULE ‘B’ [GENERAL INSURANCE]

PART I-ACCOUNTING PRINCIPLES

The following Accounting Principles are relevant for preparation of
financial statements.

Applicability of Accounting Standards: Every Balance Sheet,

Revenue Account, Receipts and Payments Account [Cash Flow
statement] and Profit and Loss Account of an insurer shall be in
conformity with the Accounting Standards (AS) issued by the ICAI, to
the extent applicable to insurers carrying on life insurance business,
except that:

• Accounting Standard 3 - Cash Flow Statements shall be prepared only

under the Direct Method.

• Accounting Standard 17 - Segment Reporting shall apply to all

insurers irrespective of the requirements regarding listing and turnover
mentioned therein.
Premium: Premium shall be recognised as income when due. Premium
shall be recognised as income over the contract period or the period of
risk, whichever is appropriate. Premium received in advance, which
represents premium income not relating to the current accounting period,
shall be disclosed separately in the financial statements.

Reserve for Unexpired Risk: A reserve for unexpired risks shall be

created as the amount representing that part of the premium written
which is attributable to, and to be allocated to the succeeding accounting
periods and shall not be less than as required under section 64 V(1) (ii)
(b) of the Act, i.e.
Reserves for unexpired risks in respect of –

(i) Fire and miscellaneous business, 50 per cent.,

(ii) Marine cargo business, 50 per cent., and

(iii) Marine hull business, 100 per cent of the premium, net of re
insurances, during the preceding twelve months.
Premium Received in Advance, which represents premium received
prior to the commencement of the risk, shall be shown separately under
the head 'Current Liabilities' in the financial statements.

Premium Deficiency: Premium deficiency shall be recognised if the

sum of expected claim costs, related expenses and maintenance costs
exceeds related reserve for unexpired risks.

Acquisition Costs: Acquisition costs, if any, shall be expensed in the

period in which they are incurred. Acquisition costs are those costs that
vary with, and are primarily related to, the acquisition of new and
renewal insurance contracts. The most essential test is the obligatory
relationship between costs and the execution of insurance contracts (i.e.
commencement of risk)

Claims: The components of the ultimate cost of claims to an insurer

comprise the claims under policies and specific claims settlement costs.
Claims under policies comprise the claims made for losses incurred, and
those estimated or anticipated under the policies following a loss
occurrence. A liability for outstanding claims shall be brought to
account in respect of both direct business and inward reinsurance
business.
The components of the ultimate cost of claims to an insurer comprise
the claims under policies and specific claims settlement costs. Claims
under policies comprise the claims made for losses incurred, and those
estimated or anticipated under the policies following a loss occurrence.
A liability for outstanding claims shall be brought to account in respect
of both direct business and inward reinsurance business.

The liability shall include:

(a) Future payments in relation to unpaid reported claims;

(b) Claims Incurred but Not Reported (IBNR) including inadequate

reserves [sometimes referred to as Claims Incurred But Not Enough
Reported (IBNER)], which will result in future cash/ asset outgo for
settling liabilities against those claims. Change in estimated liability
represents the difference between the estimated liability for outstanding
claims at the beginning and at the end of the financial period.

The accounting estimate shall also include claims cost adjusted for
estimated salvage value if there is sufficient degree of certainty of its
realisation. Claims made in respect of contracts where the claims
payment period exceeds four years shall be recognised on an actuarial
basis, subject to regulations that may be prescribed by the Authority,
In such cases, certificate from a recognised actuary as to the fairness of
liability assessment must be obtained. Actuarial assumptions shall be
suitably disclosed by way of notes to the account.
Procedure to determine the value of investments: An insurer shall
determine the values of investments in the following manner:

(a) Real Estate - Investment Property: The value of investment property

shall be determined at historical cost, subject to revaluation at least
once in every three years. The change in the carrying amount of the
investment property shall be taken to Revaluation Reserve. The insurer
shall assess at each balance sheet date whether any impairment of the
investment property. has occurred. Gains/losses arising due to changes
in the carrying amount of real estate shall be taken to equity under
'Revaluation Reserve'. The bases for revaluation shall be disclosed in
the notes to accounts. The Authority may issue directions specifying the
amount to be released from the revaluation reserve for declaring bonus
to the policyholders. For the removal of doubt, it is clarified that except
for the amount that is released to policyholders as per the Authority's
direction, no other amount shall be distributed to shareholders out of
Revaluation Reserve Account. An impairment loss shall be recognised
as an expense in the Revenue/ Profit and Loss Account immediately,
unless the asset is carried at re-valued amount. Any impairment loss of
a re-valued asset shall be treated as a revaluation decrease of that
asset and if the impairment loss exceeds the corresponding revaluation
reserve, such excess shall be recognised as an expense in the
Revenue/Profit and Loss Account.
(b) Debt Securities: Debt securities, including government securities
and redeemable preference shares, shall be considered as "held to
maturity" securities and shall be measured at historical cost subject to
amortisation.

(c)Equity Securities and Derivative Instruments that are traded in

active markets: Listed equity securities and derivative instruments that
are traded in active markets shall be measured at fair value on the
balance sheet date. For the purpose of calculation of fair value, the
lowest of the last quoted closing price at the stock exchanges where
the securities are listed shall be taken. The insurer shall assess on each
balance sheet date whether any impairment of listed equity
security/derivative instrument has occurred. Unrealised gains/ losses
arising due to changes in the fair value of listed equity shares and
derivative instruments shall be taken to equity under the head 'Fair
Value Change Account". The Authority may issue directions specifying
the amount to be released from the Fair Value Change Account for
declaring bonus to the policyholders. For the removal of doubt, it is
clarified that except for the amount that is released to policyholders as
per the Authority's prescription, no other amount shall be distributed
to shareholders out of Fair Value Change Account.
Also, any debit balance in Fair Value Change Account shall be reduced
from profit/free reserves while declaring dividends. The insurer shall
assess, on each balance sheet date, whether any impairment has
occurred. An impairment loss shall be recognised as an expense in
Revenue/Profit and Loss Account to the extent of the difference between
the re-measured fair value of the security/investment and its acquisition
cost as reduced by any previous impairment loss recognised as expense
in Revenue/Profit and Loss Account. Any reversal of impairment loss,
earlier recognised in Revenue/Profit and Loss Account, shall be
recognised in Revenue/Profit and Loss Account.

(d) Unlisted and other than actively traded Equity Securities and
Derivative Instruments: Unlisted equity securities and derivative
instruments and listed equity securities and derivative instruments that
are not regularly traded in active markets shall be measured at
historical cost. Provision shall be made for diminution in value of such
investments. The provision so made shall be reversed in subsequent
periods if estimates based on external evidence show an increase in the
value of the investment over its carrying amount. The increased
carrying amount of the investment due to the reversal of the provision
shall not exceed the historical cost. For the purposes of this regulation,
a security shall be considered as being not actively traded, if as per
guidelines governing mutual funds laid down from time to time by SEBI,
such a security is classified as "thinly traded'.
Loans: Loans shall be measured at historical cost subject to impairment
provisions. The insurer shall assess the quality of its loan assets and shall
provide for impairment. The impairment provision shall not be lower
than the amounts derived on the basis of guidelines prescribed from time
to time by the Reserve Bank of India that apply to companies and
financial institutions.
Catastrophe Reserve: Catastrophe reserve shall be created in
accordance with norms, if any, prescribed by the Authority. Investment
of funds out of catastrophe reserve shall be made in accordance with
prescription of the Authority.

PART II - DISCLOSURES FORMING PART OF

FINANCIAL STATEMENTS

A. The following shall be disclosed by way of notes to the Balance

Sheet:

1. Contingent Liabilities:

Partly-paid up investments
Underwriting commitments outstanding
Claims, other than those under policies, not acknowledged as debts
Guarantees given by or on behalf of the company
Statutory demands/liabilities in dispute, not provided for
Reinsurance obligations to the extent not provided for in accounts
Others (to be specified)

2. Encumbrances to assets of the company in and outside India.

3. Commitments made and outstanding for Loans, Investments and

Fixed Assets

4. Claims, less reinsurance, paid to claimants in/outside India.

5. Actuarial assumptions for determination of claim liabilities in the case

of claims where the claims payment period exceed four years.
6. Ageing of claims - distinguishing between claims outstanding for
more than six months and other claims.

7. Premiums, less reinsurance, written from business in/outside India.

8. Extent of premium income recognised, based on varying risk pattern,

category wise, with basis and justification therefore, including whether
reliance has been placed on external evidence.

9. Value of contracts in relation to investments, for:

Purchases where deliveries are pending;
Sales where payments are overdue.

10. Operating expenses relating to insurance business: basis of allocation

of expenditure to various classes of business.

11. Historical costs of those investments valued on fair value basis.

12. Computation of managerial remuneration.

13. Basis of amortisation of debt securities.

14. (a) Unrealised gain/losses arising due to changes in the fair value of
listed equity shares and derivative instruments are to be taken to equity
under the head 'Fair Value Change Account' and on realisation reported
in profit and loss Account.
(b) Pending realisation, the credit balance in the 'Fair Value Change
Account' is not available for distribution.
15. Fair value of investment property and the basis therefor.
16. Claims settled and remaining unpaid for a period of more than six
months as on the balance sheet data.

B. The following accounting policies shall form an integral part of

the financial statements:
1. All significant accounting policies in terms of the accounting
standards issued by the ICAI, and significant principles and policies
given in Part I of Accounting Principles. Any other accounting policies
followed by the insurer shall be stated in the manner required under
Accounting Standard AS 1 issued by the ICAI.

2. Any departure from the accounting policies as aforesaid shall be

separately disclosed with reasons for such departure.

C. The following information shall also be disclosed:

1. Investments made in accordance with any statutory requirement

should be disclosed separately together with its amount, nature, security
and any special rights in and outside India.

2. Segregation into performing/ non performing investments for purpose

of income recognition as per the directions, if any, issued by the
Authority.

3. Percentage of business sector-wise.

4. A summary of financial statements for the last five years, in the

manner as may be prescribed by the Authority.

5. Accounting Ratios as may be prescribed by the Authority.

6. Basis of allocation of Interest, Dividends and Rent between Revenue

Account and Profit and Loss Account.

PART III-GENERAL INSTRUCTIONS

Following general instructions are relevant for preparation of financial

statements.
1. The corresponding amounts for the immediately preceding financial
year for all items shown in the Balance Sheet, Revenue Account and
Profit and Loss Account should be given.

2. The figures in the financial statements may be rounded off to the

nearest thousands

3. Interest, dividends and rentals receivable in connection with an

investment should be stated as gross value, the amount of income tax
deducted at source being included under advance taxes paid'.

4. Income from rent shall not include any notional rent.

5. (1) for the purposes of financial statements, unless the context

otherwise requires –

(a) The expression provision' shall, subject to note II below mean any
amount written off or retained by way of providing for depreciation,
renewals or diminution in value of assets, or retained by way of
providing for any known liability or loss of which the amount cannot be
determined with substantial accuracy;

(b) the expression "reserve" shall not, subject to as aforesaid, include

any amount written off or retained by way of providing for depreciation,
renewals or diminution in value of assets or retained by way of
providing for any known liability;

(c) the expression capital reserve shall not include any amount regarded
as free for distribution through the profit and loss account; and the
expression "revenue reserve" shall mean any reserve other than a capital
reserve;

(d) The expression "liability" shall include all liabilities in respect of

expenditure contracted for and all disputed or contingent liabilities.