Advanced Financial Reporting

Module 4: Final Accounts of Insurance Companies

Insurance
• Insurance is a contract or agreement between two parties under
which one party undertakes, in consideration of a certain premium,
to indemnify the other against certain amount of loss arising from
the destruction of property by fire, accidents etc., or loss due to
death of an individual. The person who undertakes to indemnify the
other is called the insurer. The person whose risk is covered is
known as the Insured.
• Types of Insurance
• 1. Life insurance and 2. General insurance (Fire, Marine, and
Burglary Insurance)
Insurance
• Preparation of Financial Statements and Auditors’ Report of
Insurance Companies as per regulations of IRDA 2002
• Life Insurance Business:
• Revenue Account – Form A – RA
• Profit and Loss Account – Form A – PL
• Balance Sheet – Form A – BS
• General Insurance Business:
• It must to comply with requirements of Schedule B of the
Regulations - Same
Books required to be maintained
Mandatory
• The register of policies • General Cash book
• The register of claims • Lapsed and cancelled
• The register of licensed policies book
insurance agents • Chief Journal
Other books • Commission book
• New premium cash book • Agency ledger
• Renewal premium cash • Policy loan ledger
book
• General loan ledger
• Claims cash book
• Investment ledger
• Petty cash book
Types of Life insurance policies
• Whole life policy
Under whole life policy the insured does not get the amount during
his life time. The amount is paid only to his nominees or heirs on his
death
• Endowment policy
The amount is paid to the insured on his attainment of a specified
age or if he dies before, the amount is paid to his nominees or heir.
Important terms
• Annuity Business
Annuity refers to fixed annual payment made by the insurance
company to the insured on his attaining a specified age.
• Surrender Value
Insurance companies will be prepared to pay such value on the
surrender of the policy by a needy policy holder desiring to realize
the policy
Important terms
• Paid-up Policy
The policyholder is relieved from the obligation of paying off the rest
of premium, but he will not get the full value of policy which is
calculated as follows

Paid up value = Sum assured X No. of Premiums paid

Total no. of premiums payable

Important terms
• Life Assurance Fund
• This represents the excess of revenue receipts over revenue
expenditure relating to life business
• Revenue Account is prepared every year to ascertain the balance
of life insurance fund at the end of the year
• Re-Insurance
• Reinsurance is a form of insurance purchased by insurance
companies in order to mitigate risk.
• Reinsurance is insurance for insurance companies. Reinsurance is
the mechanism that insurance companies use to lower their risk or
reduce their exposure to a specific catastrophic event.
 Revenue Account for the Year ended 31st March ………
Particulars Schedule Rs.
1. Premiums earned - Net 1  
2. Profit on Sale/redemption of Investments    
3. Other income (to be specified)    
4. Interest, Dividend & Rent - Gross    
Total (A)    
1. Claims incurred (Net) 2  
2. Commission 3  
3. Operating Expenses related to Insurance Business Reserve protects
Catastrophe 4  
businesses and residences against
Total (B)    
natural disasters such as
Operating Profit/(Loss) from Fire/Marine/Miscellaneous
earthquakes, floods, and   
(C) = (A) - (B) hurricanes, and against human-
Appropriations   or
made disasters such as a riot  
Transfer To Shareholders' Account terrorist attack.    
Transfer to Catastrophe Reserve    
Transfer to other Reserves (to be specified)    
 Reinsurance ceded refers to a situation in
Schedule 1 : Premium Earned (Net)
which an insurance company transfers a risk
Premium from direct business  
in a policy to another company (the
Add: Premium on Reinsurance Accepted reinsurer).   
Less: Premium on reinsurance ceded  
Net Premium  
Adjustments for change in reserve for unexpired risks  
Total Premium Earned (Net)  

Schedule 2: Claims Incurred (Net)

Claims paid  
Direct  
Add: Claims on Reinsurance accepted  
Less: Claims on Reinsurance ceded  
Net Claims paid  
Add: Claims outstanding at the end of the year  
Less: Claims outstanding at the beginning  
Total Claims Incurred (Net)  
 Schedule 3: Commission
Commission Paid  
Direct  
Add: Commission on Reinsurance accepted  
Less: Commission on reinsurance ceded  
Net Commission  
 Schedule 4: Operating Expenses Related to Insurance Business
Employee remuneration and welfare benefits  
Travel, conveyance and vehicle running expenses  
Training expenses  
Rents, rates and taxes  
Repairs  
Printing and Stationery  
Communication Expenses  
Legal and Professional Expenses  
(a) Auditor  
(b) Taxation Matters, Insurance Matters, Management
 
Services etc
Advertisement and publicity  
Interest and Bank charges  
Depreciation  
Others (to be specified)  
Total Operating Expenses  
1. From the following particulars prepare the Fire Revenue Account for the year
ending 31st March 2017

Particulars Rs.
Claims Paid 2,35,000
Legal Expenses regarding claims 5,000
Premiums received 6,00,000
Re-insurance premiums 60,000
Commission 1,00,000
Expenses of Management 1,50,000
Provision against unexpired risk (1.4.2016) 2,60,000
Claims unpaid (1.4.2016) 20,000
Claims unpaid (31.3.2017) 35,000
Provide 50% pf the Net Premium Income as Reserve for Unexpired
Risk
2. Prepare Fire Revenue Account of Aahuthi Fire Insurance Company for the
financial Year ended with 31st March, 2018 from the following:

Particulars Rs. ('000)

Claims Paid 470
Legal Expenses relating to Claims 20
Commission 200
Provision against unexpired risk on 1.4. 2017 540
Premium received 1600
Premiums on re-insurance accepted 80
Expenses of management 300
Claims unpaid 1.4.2017 40
Claims unpaid 31.3.2018 70
Provide 50% pf the Net Premium Income as Reserve for
Unexpired Risk
3. From the following figures appearing in the books of Fire Insurance division of XYZ General Insurance
Company, show the amount of claim as it would appear in the Revenue Account for the year ended
31st March, 2014 :

Particulars Direct Business Re-Insurance

Claim paid during the year 7005 1050
Claim Payable - 1.4.2013 1144.5 130.5
31.3.2014 1218 79.5
Claims received -- 345
Claims Receivable - 1.4.2013 -- 98
- 31.3.2014 -- 169.5
Expenses of Management (Includes
Rs.52500 Surveyor's fee and
Rs.67500 Legal expnses for
settlement of claims) 345 
4. Calculate the amount of claim to be entered to the revenue account for the year
ended 31.03.2017

Particulars Direct Business Re-Insurance

Claims Paid during the year 4670 700
Claims payable (01.04.2016) 763 87
(31.03.2017) 812 53
Claims received - 230
Claims Receivable (01.04.2016) 65

(31.03.2017) - 113
Expenses of management 230 -
(Includes Rs. 80 for settlement of claims)
5. From the particulars you are required to prepare fire revenue account of
Aag Insurance Company for the year ended 31.3.2018
Particulars Rs.
Claims Paid 5,00,000
Premiums received 15,00,000
Reinsurance premium paid 1,00,000
Commission 1,00,000
Legal expenses regarding claims 30,000
Profit on sale of Investments 1,50,000
Interest & Dividends 50,000
Management expenses 2,00,000
Claims outstanding 1.4.2017 80,000
Reserves for unexpired risk 1.4.2017 5,00,000
Additional Information:
1. Claims outstanding on 31.3.2018 - Rs.50,000
2. Provide additional reserve for unexpired risk @ 1% of net premium in
addition to the opening balance.
6. Zaldi Pay Insurance Company Limited has furnished the following information for
preparation of Revenue Account for Fire Insurance Business for the year ended 31.3.2017

Particulars Rs.
Claims admitted but not paid 42,376
Commission paid 50,000
Commission on reinsurance ceded 12,000
Share transfer fees 2,000
Expenses of management 78,000
Bad debts 2,500
Claims paid 15,000
Premiums received less reinsurance 5,52,000
Reserve for unexpired risk on 1.4.2016 2,30,000
Additional reserve on 1.4.2016 40,000
Claims outstanding as on 1.4.2016 27,000
Dividend on Share Capital 18,500
The following further information has also to be considered:
(a) Premiums outstanding at the end of the year Rs.40,000
(b) It is the policy of the company to maintain 50% of premium towards reserve for
unexpired risks
(c) Additional reserve 10% of the net premium to be maintained.
7.From the following information, prepare a Revenue Account of a Fire Insurance
Company for the year ending 31st March 2018
Particulars Rs.
Premiums Received 450000
Premiums due but not received 30000
Premiums paid for reinsurance 10000
Interest, Dividends and rent (Gross) 70000
Profit on Sale of investments 7000
Sundry Incomes 2000
Claims paid during the year 380000
Commission on reinsurance accepted 3000
Claims outstanding on 1.4.2017 20000
Claims outstanding on 31.3.2018 24000
Claims recovered under reinsurance 18000
Expenses of Management 84000
Rent prepaid for office building 1000
Loss on sale of office machines 2000
Commission to Agents 42000
Keep a reserve for unexpired risk equal to 50% of the premiums and additional
reserve of Rs.80,000.
8.On 31st March 2018, the books of Good luck Insurance Company Limited contained the
following particulars in respect of the fire insurance
Particulars Rs.
Reserve for unexpired risk on 1.4.2017 500000
Additional reserce 100000
Reinsurance Premiums 75000
Reinsurance recoveries 20000
Premiums 1120000
Claims Paid 640000
Claims outstanding on 1.4.2017 65000
Claims outstanding on 31.3.2018 90000
Expenses of Management 280000
Interest and Dividends 65000
Income tax on above 6500
Profit on Sale of Investments 11000
Commission 152000
Claims Paid 640000
Prepare the Fire Insurance Revenue Account for the year ended 31st March 2018
reserving 50% of the premiums for unexpired risks and keeping an additional reserve of
Rs.1,00,000.
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