Paper 5:Advanced Accounting Chapter 5. By CA SK Chhabra

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1 Paper 5:Advanced Accounting Chapter 5 By CA SK Chhabra

2 Types of Insurance businesses - General insurance, Life insurance Some Important terms and Principles Unexpired risk reserve Types of General Insurance Formats for different calculations Valuation balance sheet and related concepts Important Journal entries

3 Insurance Companies in India are governed by the Insurance Companies Act 1938, other guidelines given by the IRDA Act 1999 and IRDA Regulations 2002

4 Insurance Business is basically of two types General Insurance Life Insurance

5 General Insurance means other than life insurance This type of Insurance consists of Fire, Marine(Transport) and Miscellaneous Insurance Miscellaneous Insurance business consists of all types of Insurances other than Marine and Fire. For example, Motor vehicle insurance and Loss of profit policy General insurance is done for the maximum for 1 year

issued by the insurance company containing terms of the insurance contract.

6 Reinsurance An arrangement under which the insurance company insures the whole or part of the subject matter already insured by another insurance company Insurance Policy It is the document issued by the insurance company containing terms of the insurance contract. It specifies the losses that are covered by the policies and also the maximum amount that can be paid in the event of loss

Claim outstanding include both claim intimated and accepted Commission Commission

7 Premium The payment made by the insured to the insurance company in consideration of the contract of insurance Claims The claim arises only when loss occurs. Claim outstanding include both claim intimated and accepted Commission Commission is paid to the agent for getting insurance business. It is an expense in Revenue Account

Ceding company An insurance company that

commission from reinsurer Bonus in reduction

8 Ceding company An insurance company that gives part of a risk it has assumed to another insurance company(reinsurer). The ceding company pays premium and receives commission from reinsurer Bonus in reduction of premium General insurance policy can be renewed after the expiry of the policy. It is added in net premium received and decreased as expense of equal amount

Accepting company An insurance company that

created to meet the claim which may arise in

9 Accepting company An insurance company that accepts part of a risk which was earlier insured by another insurance company Unexpired risk reserve This reserve is created to meet the claim which may arise in respect of the policies which may remain unexpired at year end

Miscellaneous insurance=50% net premium Unless otherwise stated the same amount of

10 Minimum requirement of reserve Company can maintain additional reserve along with the above reserve Fire insurance=50% of net premium Marine insurance=100% net premium Miscellaneous insurance=50% net premium Unless otherwise stated the same amount of additional reserve as at the beginning of the year, should be maintained at the end of year

11 Fire insurance Marine insurance Miscellaneous insurance Any policy taken to protect the party against financial loss of goods or property due to fire Any policy taken to protect the party against loss of ship or cargo All policies of general insurance other than fire or marine policy

12 Premium Earned Direct business Add: Reinsurance accepted Less: Reinsurance ceded Claims Incurred Direct business Add: claim on reinsurance accepted Less: claim on reinsurance ceded Add: Surveyor expenses Add: All other expenses related to claim

13 Commission Direct business Add: On reinsurance accepted Less: On reinsurance ceded

14 Principle of Indemnity Insurance is a contract of indemnity. The insurer is called the indemnifier and the insured is called indemnified Insurable interest All and sundry cannot enter into contract of insurance. A cannot insure the life of B who is a total stranger But where B is a relative or debtor A has insurable interest and can insure B s life Uberrimae fidei Contract of utmost good faith

15 It covers the life risk of the insured person. In case of death the nominee will get the insurance policy. The payment can be either on maturity of the policy or may be in installments called annuity or on death

provision of cover for an event that is certain to

16 Insurance Refers to providing cover for an event that might happen(fire, theft, flood etc) Assurance Is the provision of cover for an event that is certain to happen like death and so life insurance is actually life assurance

17 It is classified into 3 types Whole life Assurance Term Assurance Policy amount is payable only at death of the policy holder Policy amount is paid on maturity along with bonus or at the time of death whichever is earlier Annuity On maturity of the policy instead of making payment in lump sum Amount is paid annually or monthly

of premiums paid X Sum assured/total no.

18 Paid up policy (only for life insurance) If an insured is unable To pay premium on his policy, he may discontinue the policy and convert it into paid up policy Paid up value=no. of premiums paid X Sum assured/total no. of premiums payable Surrender value When holder wishes to realize the amount of policy before expiry of period, he surrender his right and he is paid an amount by a fixed formula

of premium Reversionary bonus on maturity Interim bonus It is

19 Bonus Policy holders of with profit policies are entitled to receive bonus at the declared rate In cash Bonus in reduction of premium Reversionary bonus on maturity Interim bonus It is a bonus declared between two dates of valuation balance sheet

20 Consideration for annuities granted It refers to the lump sum amount paid to the insurer as consideration for the payment of annuities. It is an income of life insurance business Life assurance fund It refers to the fund which is retained to meet the aggregate liability on all policies outstanding A life insurance business is said to have earned profit only if its life assurance fund exceeds its net liability on all outstanding policies

21 For the purpose of ascertaining profit or losses of a life insurance company, a valuation balance sheet is prepared once in every two years

22 Particulars Rs Particulars Rs To Net liability By life insurance fund balance as on date To Surplus

23 Disposal of surplus Net liability 95% of surplus for policy holders 5% of surplus for shareholders As per Acturial valuation, it is the excess of the expected future liability on all outstanding policies over the premium payable/paid by the insured

24 Surplus as per valuation balance sheet Add:Interim bonus Less:Expenses to be written off Less:Provision for tax Surplus after tax Less:Surplus at the beginning of period Net profit for the valuation period

25 Total surplus after tax(after adding interim bonus) Less:Surplus to be carried forward Surplus available for distribution Share of shareholders at 5% Share of policy holders at 95% Less:Interim bonus paid Amount due to policy holders

26 } For transfer of total profit as per valuation balance sheet Life assurance fund A/c Dr To Profit and loss A/c } For tax provision Profit and loss A/c Dr To provision for tax A/c

27 } For bonus payable in cash Profit and loss A/c Dr To Bonus payable in cash } For Reversionary Bonus Profit and loss A/c Dr To Life assurance fund

28 } For making reserve for unexpired risk(in general insurance) Revenue A/c Dr To Reserve for unexpired risk

29 From B RA Name of the Insurance Company Revenue Account for the year ended Particulars Schedule Current Year Premiums earned Change in provision for unexpired risk Other Income(profit on sale of asset etc) Interest, dividend and rent(gross) Total (A) Claims Incurred Commission Operating Expenses for Insurance Business Total (B) Operating Profit/ (Loss) from Fire/ Marine/Miscellaneous Business (A) (B) A-B

30 Form B PL Name of the Company Profit and Loss Account for the year ended Particulars Amount 1. Operating Profit/(Loss) from (a) Fire Insurance (b) Marine Insurance (c) Miscellaneous Insurance 2. Income from Investments(Gross) 3. Other Income Total (A) 4. Provision ( To be specified) For diminution in the value of investment Other 5.Other expenses(like director fees etc) Total (B) Profit before tax (A) (B)

31 Form B PL Name of the Company Profit and Loss Account for the year ended Particulars Amount Profit before tax(from last slide) Less: Provision for tax Profit after tax Less: Catastrophe Reserve Profit available for appropriations Less: Appropriations Interim dividends paid during the year Proposed final dividend Balance net profit for the Current year Balance of profit carried forward from last year Balance of Profit carried to balance sheet

33 Comprehensive Problem Nov 1999

34 } From the following figures appearing in the books of Fire Insurance division of a General Insurance Company, show the amount of claim as it would appear in the Revenue Account for the year ended 31st March, 2012 : } Direct Business Re-insurance } Rs. Rs. } Claims paid during the year 46,70,000 7,00,000 } Claims Payable - 1st April, ,63,000 87,000 } 31st March, ,12,000 53,000 } Claims Received -- 2,30,000 } Claims Receivable -1st April, ,000 } 31st March, ,13,000 } Expenses of Management 2,30, } (includes Rs.35,000 surveyor s fee and Rs.45,000 Legal expenses for settlement of claims)

35 Direct Business Reinsurance Accepted Reinsurance Ceded Claims Received Less: Claims outstanding on 1 April 2011 Add: Claims oustanding on 31 March Total

36 General Insurance Company Fire Revenue Account (For the year ended 31st March 2012) Particulars Amount Amount Claims Due Direct Business Add: Claims on business accepted Less: claims on business ceded Add: Legal expenses for settlement of claims (278000)

37 Comprehensive Problem Nov 2000

38 } You are required to prepare Revenue Accounts in respect of Fire and Marine Insurance business for the year ended and a Profit and Loss Account for the same period for Perfect General Insurance Company Limited : } Rs. Rs. } Directors Fees 80,000 Interest received 19,000 } Dividend received 1,00,000 Fixed Assets ( ) 90,000 } Provision for Taxation Income-tax paid during } (as on ) 85,000 the year 60,000 } } Fire Marine } Rs. Rs. } Outstanding Claims on ,000 7,000 } Claims paid 1,00,000 80,000 } Reserve for Unexpired Risk on ,00,000 1,40,000 } Premiums Received 4,50,000 3,30,000 } Agent s Commission 40,000 20,000 } Expenses of Management 60,000 45,000 } Reinsurance Premium (Dr.) 25,000 15,000

39 } The following additional points are also to be taken into account : } (a)depreciation on Fixed Assets to be provided at 10% p.a. } (b)interest accrued on investments Rs.10,000. } (c)closing provision for taxation on to be maintained at Rs.1,24,138. } (d)claims outstanding on were Fire Insurance Rs.10,000; Marine Insurance Rs.15,000. } (e)premium outstanding on were Fire Insurance Rs.30,000; Marine Insurance Rs.20,000. } (f)reserve for unexpired risk to be maintained at 50% and 100% of net premiums in respect of Fire and Marine Insurance respectively. } (g)expenses of management due on were Rs.10,000 for Fire Insurance and Rs.5,000 in respect of Marine Insurance

40 Fire Marine Claims under policies re-insurance Claims paid during the year Add : Outstanding on 31st March, Less: Outstanding on 1st April, 1999 Expenses of management (28000) (7000) Expenses paid during the year Add : Outstanding on 31st March,

41 } Calculation of provision for tax for year ending } 1. Tax paid during the year 60,000 } Less: Opening provision (85,000) } Add: Closing provision 1,24,138 } Provision for current year 99,138 } Calculation of Unexpired Risk Reserve } Fire Marine } Opening } Less: Closing (227500) (335000) } Increase in reserve required (27500) (195000)

42 Form B RA Perfect General Insurance Co. Ltd Revenue Account for the year ended 31st March, 2000 Particulars Fire Insurance Marine insurance 1. Premiums earned 2. Other income 3. Change in provision for unexpired risk 4. Interest, Dividend and Rent Gross Total (A) 5.Claims Incurred 6.Commission 7.Operating Expenses for Business 8. Other Expenses Total (B) Operating Profit/ (Loss) from Fire/ Marine/Miscellaneous Business (A) (B) Nil (27500) Nil (195000) Nil Nil Nil Nil (18000)

43 Form B PL Perfect General Insurance Co. Ltd Profit and Loss Account for the year ended 31st March, 2000 Particulars Amount in 000s 1. Operating Profit/(Loss) from (a) Fire Insurance (b) Marine Insurance (c) Miscellaneous Insurance 2. Income from Investments 3. Other Income Total (A) 4. Provision ( Other than taxation) 5. Other Expenses (Director s fees, Depreciation on F.A.) Total (B) Profit Before Tax (A B) (18000) Nil Nil Profit After Tax(After Provision of 99138)

44 Annexure Particulars Fire Insurance Marine insurance Premiums earned Schedule 1 Premium Less: Reinsurance (Dr) Add:Outstanding closing (25000) (15000) Claims Incurred Schedule 2 Claims Less:Outstanding opening Add: Outstanding closing Commission Schedule 3 Agent Commission (28000) (7000)

45 Comprehensive Problem Nov 2006

46 X Fire Insurance Co. Ltd. commenced its business on It submits you the following information for the year ended } Rs. } Premium received 15,00,000 } Re-insurance premium paid 1,00,000 } Claims paid 7,00,000 } Expenses of Management 3,00,000 } Commission paid 50,000 } Claims outstanding on ,00,000 } Create reserve for unexpired 40% } Prepare Revenue Account for the year ended

47 Form B RA Perfect General Insurance Co. Ltd Revenue Account for the year ended 31st March, 2000 Particulars Schedule Current Year 1. Premiums earned 2. Change in reserve for unexpired risk( ) i.e 40% of Total (A) 3.Claims Incurred 4.Commission 5.Operating Expenses for Insurance Business Total (B) Operating Profit/ (Loss) from Fire/ Marine/Miscellaneous Business (A) (B) A-B (310000)

48 Annexure Particulars Amount Schedule 1 Premium Received Less:Reinsurance Total (100000) Schedule 2 Claims paid Add:Outstanding closing Total Schedule 3 Commission paid

49 Annexure Particulars Amount Schedule 4 Expenses of management

50 Comprehensive Problem May 1998

51 } Mohan Insurance Co. Ltd. Furnishes you with the following information: } On , it had reserve for unexpired risks to the tune of Rs. 40 crores. It comprised of Rs. 15 crores in respect of marine insurance business; Rs. 20 crores in respect of life insurance business and Rs. 5 crores in respect of miscellaneous insurance business. } It is the practice of Indian Insurance Co. Ltd. to create reserves at 100% of net premium income in respect of marine policies and at 50% of net premium income in respect of fire and miscellaneous income policies. } During 2012, the following business was conducted (Rs in crores) } Marine Fire Miscellaneous } Rs Rs Rs } Premium collected from: } (a) Insured in respect of policies issued } (b) Other insurance companies in respect } of risks undertaken } Premium paid/payable to other insurance } companies on business ceded

52 Indian Insurance Co. Ltd. asks you to: } (a)pass journal entries relating to Unexpired risks reserve. } (b)show in columnar form Unexpired risks reserve a/c for 2012.

53 Particulars Debit Credit Marine revenue A/c Dr To Unexpired Risks Reserve A/c (Being the difference between closing provision of Rs crores ( ) and opening provision of Rs. 15 crores charged to marine revenue account Fire Revenue A/c Dr To Unexpired Risks Reserve A/c (Being the difference between closing Provision of Rs crores [( )/2]and opening provision of Rs. 20 crores charged to fire revenue account) Unexpired Risks Reserve A/c Dr To Miscellaneous Revenue A/c (Being the excess of opening balance of Rs. 5 crores over the required closing balance of Rs. 4.5crores [(12+4-7)/2)] credited to miscellaneous revenue account.)

54 Unexpired Risk Reserve A/c(Rs in crores) Particulars Marine Fire Misc. Particulars Marine Fire Misc. To Revenue A/c 0.5 By balance b/d To Balance c/d By Revenue A/c

55 Comprehensive Problem Nov 2002

56 } Prepare the Revenue Accounts of Sagar Bhima Co. Ltd. engaged in Marine Insurance Business for year ended } Particulars Direct Business Re-Insurance } (Rs.) (Rs.) } I. Premium : } Received 24,00,000 3,60,000 } Receivable -1st April, ,20,000 21,000 } -31st March, ,80,000 28,000 } Premium paid -- 2,40,000 } Payable -1st April, ,000 } -31st March, ,000 } II. Claims : } Paid 16,50,000 1,25,000 } Payable -1st April, ,000 13,000 } -31st March, ,75,000 22,000 } Received -- 1,00,000 } Receivable -1st April, ,000 } -31st March, ,000 } III. Commission: } On Insurance accepted 1,50,000 11,000 } On Insurance ceded -- 14,000

57 } Other expenses and income: } Salaries - Rs.2, 60,000 } Rent, Rates and Taxes Rs18, 000 } Printing and Stationery - Rs.23, 000 } Foreign Tax paid - Rs.2, 40,000 } Interest, Dividend and Rent received (net) - Rs.1, 15,500 } Income Tax deducted at source - Rs.24,500 } Legal Expenses (Inclusive of Rs.20,000 in connection with the settlement of claims) - Rs.60,000 } Bad Debts - Rs.5,000 } Double Income Tax refund - Rs.12,000; Profit on Sale of Motor Car Rs.5,000. } Balance of Fund on 1st April, 2001 was Rs.26,50,000 including Additional Reserve of Rs.3,25,000. Additional Reserve has to be maintained at 5% of the net premium of the year.

58 Form B RA ( Prescribed by IRDA) Revenue Account for the year ended 31st March, 2002 Marine Insurance Business Particulars 1. Premiums earned 2. Other income(double Income tax refund and Profit on sale of car) 3. Change in provision for unexpired risk( ) 4. Interest, Dividend and Rent Gross ( ) Total (A) 5.Claims Incurred(net) 6.Commission 7.Operating Expenses for Insurance Business 8. Other Expenses(Bad debts and foreign taxes) Total (B) Sch Marine Insurance (43250) Operating Profit from Marine Business (A) (B)

59 Annexure Particulars Amount Schedule 1 Premium Received Less:Reinsurance Total (262000) Schedule 2 Claims incurred Schedule 3 Commission paid Add:Reinsurance accepted Less:Reinsurance ceded (14000)

60 Annexure Particulars Amount Schedule 4 Employee remuneration and benefits Rents rates and taxes Printing and stationary Legal and Professional charges Total

61 Comprehensive Problem

62 } The life fund of a Sri Krishna Life Assurance Company was Rs. 86,48,000 as on 31st March, 2012 } The interim bonus paid during the inter valuation period was Rs. 1,48,000. The periodical actuarial valuation determined the net liability at Rs 74,25,000 } Surplus brought forward from the previous valuation was Rs 8,50,000 } The directors of the company proposed to carry forward Rs. 9,31,000 } Show: } (a) the valuation balance sheet } (b) the net profit for the valuation period; and } (c) the distribution of surplus

63 Particulars Rs Particulars Rs To Net liability By life insurance fund balance as on date To Surplus

64 Surplus as per valuation balance sheet Add:Interim bonus Less:Expenses to be written off Nil Less:Provision for tax Nil Surplus after tax Less:Surplus at the beginning of period Net profit for the valuation period

Total surplus after tax 1371000 Less:Surplus to be carried forward 931000 Surplus available for distribution 440000 Share of

65 Total surplus after tax Less:Surplus to be carried forward Surplus available for distribution Share of shareholders at 5% Share of policy holders at 95% Less:Interim bonus paid Amount due to policy holders

66 Comprehensive Problem Nov 1995

67 } The following balances are extracted from the books of Gopal Life Insurance Corporation } Life Insurance Fund (as on ) 1,600 lakhs } Net Liabilities as per Valuation 1,200 lakhs } Interim Bonus Paid 150 lakhs } You are required to show: } (a) The valuation Balance Sheet as on } (b) The distribution statement

68 Particulars Rs (lakhs) Particulars Rs(lakhs) To Net liability 1200 By life insurance fund balance as on date 1600 To Surplus

69 Surplus as per Valuation statement 400 Add: Interim Bonus 150 Surplus available for distribution 550 Share of shareholders at 5% 27.5 Share of policy holders at 95% Less:Interim bonus paid 150 Amount due to policy holders 372.5

70 Phone

ACCOUNTS OF INSURANCE COMPANIES

T-1. GENERAL INSURANCE FINAL ACCOUNT Chapter A-12 ACCOUNTS OF INSURANCE COMPANIES AQ 1. The under mentioned figures amongst others appeared in the books of Y General Insurance Co. Ltd., as on 31 st December,