14

Insurance Company Accounts

Insurance business differs from other business entities. The terms used in insurance business are new and very peculiar. Although several types of insurance policies exist, they are grouped into two categories namely life insurance and non-life insurance. The accounting treatment differs with respect to each category. Even the final accounts have to be prepared in accordance with the statutory provisions of the IRDA Act and Regulations. All intricacies involved in the preparation of accounts of insurance companies are explained in a lucid manner in this chapter.

14.1 MEANING OF INSURANCE

Life is replete with risk and uncertainty, which may occur due to accident, death, destruction of property by fire or other natural calamities. Losses arising due to such risk may be minimized by way of insurance.

Insurance is an agreement between two parties under which the insurer undertakes to indemnify by the risk of the insured by getting a small sum for a specified period under regular instalments. This sum is called ‘premium’. The person or any form of organization, which agrees to indemnify such losses for a sum of money, i.e. premium is known as ‘insurer’. The person for whom such a risk is to be borne is known as ‘insured’. The document by which the contract to be entered is known as ‘insurance policy’.

Insurance is a contract through which the insurer agrees to pay a stipulated amount to the insured on the occurrence of an eventuality in lieu of a sum of premium. One important factor is that the insured must show that one has pecuniary interest in it. Hence, ‘insurable interest’ is an inevitable element in all insurance contracts.

14.2 PRINCIPLES OF INSURANCE

Following are the important underlying principles that govern insurance business:

1. Principle of indemnity: Insurance is a contract to protect against risk. It is a contract of indemnity, which is the fundamental principle of insurance. The insured is called the indemnified.
2. Principle of utmost good faith: All contracts of insurance are contract of ‘uberrimae fidei’, i.e. contract of utmost good faith. This necessitates the proposers to disclose all the material facts known to them in the insurance proposal form. Only on the basis of such frank disclosure the assessment of risk is taken into account by the insurer.
3. Insurable interest: Another important principle is ‘insurable interest’. As insurance is a contract between the insurer and the insured, this principle is an important ingredient in such contracts.

14.3 TYPES OF INSURANCE

Although there are several types of insurance policies (business), they may be broadly divided into two categories:

1. Life insurance
2. General insurance

14.3.1 Life Insurance

It is a contract under which the insurer (life insurance company) agrees to pay a certain amount on the death of the insured (assured) or upon the expiry of predetermined fixed period, whichever is earlier. Under this insurance, ‘risk of life’ is covered. Life insurance policies may further be classified into the following:

1. Whole life policy: Under this policy, premium has to be paid continuously till the death of the insured. The policy amount will be payable only after the death of the insured by the insurer.
2. Endowment policy: Under this, the insured gets a specified sum on completion of certain years of age or to a nominee of the insured on the event of death, whichever is earlier. Premium for this type of policies will be higher than those for whole life policies.
3. With profit policy: Under this type, the insured, i.e. the policy holders are entitled to participate in the profits of the insurance company besides getting a guaranteed sum of money on maturity of policies.
4. Without profits policy: Under this type of policies, the insured are not entitled to participate in the profits of the company. They will get a fixed sum of money.
5. Annuity: Under this, the insurer either pays a lump sum or a premium in regular instalment for a specified period. At the end of the period, the insurer will pay back the sum inregular instalments.

14.3.2 General Insurance

All insurance other than life will be grouped under this category. A contract under which the insurer (the company), in consideration of a fixed premium, undertakes to reimburse the insured (policy holder) for the loss due to an uncertain event is called general insurance. Various types of general insurance are as follows:

1. Fire insurance: This policy covers risks of fire.
2. Marine insurance: Under this type of policy, goods vehicle and freight exposed to marine risks are covered. Here, vehicle means cargo or the ship.
3. Burglary insurance: Losses of theft are covered under this insurance.
4. Other type: In addition to the above, there are various other policies to insure accidents, fidelity of employees, third party, workmen compensation, consequential loss and so on.

14.3.3 Difference Between Life Insurance and Non-life (General) Insurance

One has to understand the fundamental differences between these two broad categories of insurance, which are tabulated as follows:

Basis of Distinction	Life Insurance	Non-life Insurance (General Insurance)
1. Period	Life insurance contracts are of long-term, covering number of years.	These are of short term, generally, one year only.
2. Determination of actual loss	As human life cannot be valued precisely, the exact quantum of loss cannot be estimated. It depends entirely on the financial capacity of the individuals to pay premium.	These policies are contracts of indemnity. Actual loss can be ascertained. Hence, what ever may be the amount of policy, the insurer will reimburse the actual loss only.
3. Determination of profit	A valuation balance sheet is prepared on the basis of estimate by actuaries to determine the profit. The liability under existing policies are estimated by actuaries, which is a complicated mathematical process.	A portion of premium is carried forward as a provision for unexpired liability and the net balance of claims and expenses is treated as profit/loss.
4. Nomenclature	Life ‘insurance’ is also called as life ‘assurance’, as the insured gets an assured sum	These policies are called ‘insurance’ only and non-assurance.

14.4 INSURANCE BUSINESS IN INDIA

The following are the legislations enacted to govern the insurance business in India:

1. The Insurance Act, 1938; Insurance (Amendment) Act, 2000
2. Insurance Rules, 1939
3. The Companies Act, 1956
4. The General Insurance Business (Nationalization) Act, 1972
5. The Marine Insurance Act, 1963
6. The Insurance Regulatory and Development Authority Act, 1999 (IRDA)
7. The Insurance Regulatory and Development Authority Regulations, 2002

The IRDA Act was passed with the following objectives:

1. To protect the interests of policyholders
2. To regulate and promote the orderly growth of insurance business
3. To further amend the Insurance Act and other related acts

14.4.1 The IRDA Regulations, 2002

IRDA has issued, through a notification, regulations, which govern the preparation of financial statements and auditors report of the insurance companies.

1. An insurer carrying on life insurance business shall comply with the requirements of Schedule A (Refer Page 1073).
2. An insurer carrying on general insurance business shall comply with the requirements of Schedule B (Refer Page 1079).
3. The report of the auditors of the financial statements of every insurer and reinsurer shall be in conformity with the requirements of Schedule C (Refer Page 1085).

14.5 ACCOUNTS OF INSURANCE COMPANIES

Accounts of insurance companies shall be maintained according to the provisions of the Insurance Act, 1938, as amended in Insurance (Amendment) Act, 2000. The accounts shall comply with the requirements of Schedule A of the IRDA Regulations, 2002 (Refer Page 48)

14.5.1 Books of Accounts

It is obligatory on the part of all insurance companies to maintain the following books, which are called ’statutory books’.

They are as follows:

1. Register of policies: This book contains the following particulars relating to each policy:
   1. The name and address of the policyholder
   2. The date on which the policy was effected
   3. A record of any assignment of the policy
2. Register of claims: This contains the following particulars in respect of each claim:
   1. The date of claim
   2. The name and address of the claimant
   3. The date on which the claim was discharged
   4. In the case of claim, which is rejected, the date of rejection and the ground for rejection
3. Register of licensed insurance agents: This book contains the following particulars in respect of each agent:
   1. Name and address of every insurance agent appointed
   2. The date of appointment
   3. The date on which appointment was ceased, if any

Besides the above-mentioned statutory books, the insurance companies should maintain the following subsidiary books also for proper accounting:

1. Register of proposals and proposal advance cash book
2. First year’s premium cash book
3. Renewal premium cash book
4. Agency and branch cash book
5. Petty cash book
6. Claims cash book
7. General cash book
8. Bank cash book
9. Agency credit journal
10. Agency dedit journal
11. Commission book
12. Lapsed and cancelled policies book
13. Chief journal
14. Agency ledger
15. Policy loan ledger
16. General loan ledger
17. Investment ledger

14.5.2 Preparation of Final Accounts—Life Insurance Business

The final accounts of a life insurance company consist of: (i) revenue accounts, (ii) profit and loss account and (iii) balance sheet.

14.5.2.1 Revenue Account

Procedure:

Revenue Account is prepared in Form A—RA as per IRDA Regulations, 2002.

First, the following four Schedules should be prepared:

Schedule 1—under the caption ‘Premiums Earned (Net)’

Schedule 2—under the caption ‘Commission’

Schedule 3—under the caption ‘Operating expenses’

Schedule 4—under the caption —‘Claims’

The following are the next procedure in preparation of revenue account:

1. Add: Premiums earned, income from investments and other income.
2. From the aggregate of the above,

   Deduct: Commission expenses, operating expenses, benefits paid and provisions for debts and taxes.

3. The net result will be Surplus or deficit.
4. Transfer to shareholders’ account and other reserves shall be made from the surplus.
5. Balance of surplus is to be transferred to funds for future appropriations, represented by ‘life assurance fund’.

14.5.2.2 Profit and Loss Account

Procedure:

1. Profit is transferred from revenue A/c. Opening balance is shown at the beginning of the P & L A/c.
2. Deduct: Dividends declared and dividend distribution tax.
3. Transfer to specified reserves as per the provisions of IRDA.
4. Remaining balance → to be carried to balance sheet.

14.5.2.3 Balance Sheet

The balance sheet comprises two parts:

Part I: Sources of funds:

This includes:

1. Shareholders’ funds
2. Borrowings
3. Policyholders’ funds
4. Funds for future appropriations

Part II: Application of funds:

This includes:

1. Investments
2. Loans
3. Fixed assets
4. Net current assets
5. Miscellaneous expenditure

This should be accompanied by schedules, i.e. Schedules 5–15.

With respect to life insurance business, Revenue Account(Policy holder’s A/c), P & L A/c (Shareholders’ A/c) & Balance Sheet should be prepared as per Form A–RA, Form A–PL & Form A–BS–which are reproduced in the following pages:

 

 

Name of Insurer:

Registration No. and Date of Registration with the IRDA

Revenue Account for the year Ended on 31 March 20…

Policyholder’ Account (Technical Account)

The total surplus shall be disclosed separately with the following details:

1. Interim bonuses paid
2. Allocation of bonus to the policyholders
3. Surplus shown in the revenue account
4. Total surplus: [(a) + (b) + (c)]

See notes appended at the end of Form A-PL

 

Name of Insurer:

Registration No. and Date of Registration with the IRDA

NOTES TO FORM A-RA AND A-PL:

1. Premium income received from business concluded in and outside India shall be separately disclosed.
2. Reinsurance premiums whether on business ceded or accepted are to be brought into account gross (i.e. before deducting commissions) under the head ‘reinsurance premiums’.
3. Claims incurred shall comprise claims paid, specific claims settlement costs wherever applicable and change in the outstanding provision for claims at the year-end.
4. Items of expenses and income more than 1% of the total premium (less reinsurance) or 5,00,000, whichever is higher, shall be shown as a separate line item.
5. Fees and expenses connected with claims shall be included in claims.
6. Under the subhead ‘others’ shall be included items like foreign exchange gains or losses and other similar items.
7. Interest, dividends and rentals receivable in connection with an investment should be stated as gross amount. The amount of income tax deducted at source being included under ‘advance taxes paid and taxes deducted at source’.
8. Income from the rest should include only the realized rent. It should not include any national rent.

Name of Insurer:

Registration No. and Date of Registration with the IRDA

Schedule 1

 

Schedule 2

 

Particulars	Current Year (’000)	Previous Year (’000)
Commission Paid
Direct:
– First Year Premiums
– Renewal Premiums
– Single Premiums
Add: Commission on Reinsurance Accepted
Less: Commission on Reinsurance Ceded
Net Commission

Schedule 3

 

Schedule 4

 

Schedule 5

 

Schedule 5A

 

Schedule 6

 

Schedule 7

 

Schedule 8

 

Schedule 8A

 

Schedule 8B

 

1. Investments in subsidiary/holding companies, joint ventures and associates shall be separately disclosed, at cost.
   1. Holding company and subsidiary shall be construed as defined in the Companies Act, 1956.
   2. Joint venture is a contractual arrangement, whereby two or more parties undertake an economic activity, which is subject to joint control.
   3. Joint control is the contractually agreed sharing of power to govern the financial and operating policies of an economic activity to obtain benefits from it.
   4. Associates is an enterprise in which the company has significant influence and which is neither a subsidiary nor a joint venture of the company.
   5. Significant influence (for the purpose of this schedule)—means participation in the financial and operating policy decisions of a company, but not control of those policies. Significant influence may be exercised in several ways, for example, by representation on the board of directors, participation in the policy-making process, material intercompany transactions, interchange of managerial personnel or dependence on technical information. Significant influence may be gained by share ownership statute or agreement. As regards share ownership, if an investor holds, directly or indirectly through subsidiaries, 20% or more of the voting power of the investee, it is presumed that the investor does have significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the investor holds, directly or indirectly through subsidiaries, less than 20% of the voting power of the investee, it is presumed that the investor does not have significant influence. Unless such influence is clearly demonstrated, a substantial or majority ownership by another investor does not necessarily preclude an investor from having significant influence.
2. Aggregate amount of company’s investments other than listed equity securities and derivative instruments and also the market value thereof shall be disclosed.
3. Investment made out of catastrophe reserve should be shown separately.
4. Debt securities will be considered as ‘held to maturity’ securities and will be measured at historical costs subject to amortization.
5. Investment property means a property (land, building, part of a building or both) held to earn rental income, for capital appreciation or for both, rather than for use in services or for administrative purposes.
6. Investments maturing within 12 months from balance sheet date and investments made with the specific intention to dispose them of within 12 months from balance sheet date shall be classified as short-term investments.

Schedule 9

 

Schedule 10

 

Schedule 11

 

Schedule 12

 

Schedule 13

 

Schedule 14

 

Schedule 15

 

14.5.3 Final Accounts of General Insurance Companies

The final accounts of a general insurance company consist of: (1) revenue account, (2) profit and loss account and (3) balance sheet.

14.5.3.1 Revenue Account

This account is a summarized in forms of Schedules 1–4.

When the same company is doing various types of insurance businesses such as fire, marine, accident and the like,for each business separate account is prepared and shown in separate column in FORM B-RA as per the IRDA norms.

1. The following items are to be added and shown as Total (A):
   1. Premiums
   2. Income and profit from investments
   3. Other incomes
2. The following items are to be added and shown as Total (B):
   1. Expenditure on claims (net)
   2. Commission
   3. Operating expenses
3. The different (A) – (B) gives the operating profit of the business.
4. After appropriations, operating profit is to be transferred to P & L A/c.

14.5.3.2 Profit and Loss Account

If a general insurance company is indulged in doing more than one business, a combined P & L A/c is to be prepared.

As stared earlier, the operating profit or loss is to be transferred from revenue account to P & L A/c.

Income not related to specific business is to be added with operating profit and shown as ‘Total (A)’.

Similarly, expenses not related to specific business are to be added and shown as ‘Total (B)’.

Total (A) – total (B) – profit before tax

Provision for tax and appropriations has to be made.

Finally, balance of profit is to be addedto the balance brought forward from the previous year.

Net balance of profit is to be carried forward to the balance sheet.

14.5.3.3 Balance Sheet

This consists of two parts.

 

Part I:	Sources of funds:
	This is a summarized presentation of Schedules 5–7, which reveals share capital, reserves and surplus and borrowings. Part II: Application of funds:
Part II:	Application of funds:
	This is a summarized presentation of Schedules 8–15, which depicts
	investments, loans, fixed assets, net depicts investments, loans, fixed assets, net current assets, current liabilities, provisions and miscellaneous expenditure.

14.6 SPECIAL TERMS RELATING TO INSURANCE ACCOUNTS

Insurance business differs from other business undertakings. Even the terms used in insurance business are new and peculiar. Some of such new terms are explained here.

Claims: The risk of the insured covered for a consideration is referred to as premium. When the risk falls on the insured, one makes a claim on the insurer, i.e. on the insurance company.

Claim is to be shown after deducting the reinsurance claim in the revenue account. It is pertinent to note here that the actual loss borne is to be taken into account and ‘not’ the actual amount paid.

Accounting treatment:

At the commencement of the next accounting year, a reverse entry should be passed. The reason is that the claims intimated are paid, generally. However, when the company rejects any claim, the amount is to be transferred to the insurance fund account and ‘not’ to the claims account.

While determining the loss on account of claim, the claim outstanding at the end should be added and the claim outstanding at the beginning should be deducted. Further, while determining the claim outstanding at the end, (i) the claim intimated and (ii) the claim intimated and accepted should be added.

This can be best understood with the help of the following illustration:

Illustration 14.1

From the following, one is required to calculate the loss on account of claim to be shown in the revenue account for the year ending on 31 March 2010:

Claims on account of Reinsurance: 30,000.

Solution

Notes:

1. While determining loss on account of claim, the ‘column admitted in’ has to be ignored.
2. Items relating to 2007–08 (intimated in), admitted in 2008–09 and paid in 2008–09, 15,000 are to be ignored. The reason is that the amount paid in 2008–09 is not included in the amount paid in 2009–10.

Schedule 2

 

14.6.1 Bonus in Reduction of Premium

This term is widely used in general insurance. The common practice is that general insurance policy is taken for 1 year. It is renewed after the expiry of the insured period. In case if the insured did not make any claim during the year, the company grants a reduction in premium at prescribed rates. The rate of reduction will increase year after year when no claim is made. Such a type of reduction is referred to as ‘bonus in reduction of premium’.

Accounting treatment:

Total premium (without reduction) is to be treated as income and bonus, which is deducted is to be treated as expense.

Entry is:

Example:

Net premium received is 292. Bonus in reduction of premium is 28.

This will be treated. Thus:

Income → (292 + 28) = 320 is to be shown on the credit side of revenue A/c and

Expense → 28 is to be shown on the debit side of Revenue A/c.

14.6.2 Reversionary Bonus

This term is generally used in life insurance business. If the life policies with profits are opted, policyholders will be given the right to participate in the profits of the company. In general, profit is paid on the maturity of the policy. Such a type of bonus paid at the expiry of the policy with the policy amount is known as ‘reversionary bonus’. Policyholders are awarded 95% of profits of LIC by way of bonus.

14.6.3 Reinsurance

When an insurer thinks that a specific risk is so high that he cannot shoulder in his individual capacity, he may reinsure that part of the risk with some other insurer. This is known as reinsurance. In such a situation, proportionate premium has to be ceded by the first insurer. On maturity, both the insurers will share the claim in the ratio agreed by them.

Accounting treatment:

In the books of the first insurer, amountof claim recovered from the second insurer will be subtracted from the total claim payable by him. Premium ceded is to be deducted from the total premium received.

In the books of the second insurer, claims paid include claims paid on account of reinsurance and premium received include premium received on reinsurance business.

14.6.3.1 Commission on Reinsurance (Ceded and Accepted)

These are two types:

1. Commission on reinsurance accepted: When a company gets reinsurance business, it has to pay commission to other company. This commission is known as ‘commission on reinsurance accepted’. This should be shown as an expense, on the debit side in revenue account.
2. Commission on reinsurance ceded: When a company passes one part of business to some other company, then such a company gets commission, which is referred to as ‘commission on reinsurance ceded’. This should be shown on the credit side of the revenue account as it is treated as ‘income’.

Note: Under Schedule 2: Commission expenses.

Commissions on direct business and reinsurance accepted should be added and commission on reinsurance should be deducted. The net balance should be shown in the revenue account.

14.6.4 Annuities and Consideration for Annuity Granted

‘Annuity’ is an annual payment guaranteed and paid by an insurance company regularly till the life of an insurer or for a specified period in consideration of a ‘lump sum’ received at the beginning. Instead of a lump sum payment, it may be paid over a certain period in regular installments.

Treatment:

Annuity is shown under Schedule 4: It is an expenditure for the insurance company.

On the other hand, consideration for annuities granted is an income for the company. It is shown in revenue A/c

14.6.5 Surrender Value and Surrenders

When an insured is not in a position to pay premiums for the agreed period, he may surrender the policy to the company. The company will pay an amount, which is only a portion of the total premium paid. The surrender value usually will be of small amount and that too only a part of premium, which the insured has remitted to the company. If only one annual premium is paid, then such policyholders will not be eligible to surrender their policies. Surrender value includes the present value of bonus.

Under schedule 4: Surrenders is shown as an expenditure along with claims, annuities, etc.

14.6.6 Paid-up Value

A policy holder may opt to get the policy paid up, if he will not be able to continue paying premiums. It is calculated as:

This is shown like claims.

14.6.7 Life Assurance Fund

This fund is maintained by life insurance company, which represents the excess of revenue income over revenue expenditure. The object of maintaining this fund is to meet the aggregate liability of all policies.

This is depicted under Schedule 6.

Any amount that exceeds the liability is called ‘valuation surplus’. This is a profit to the company.

Illustration 14.2

Model: calculation of true or correct life assurance fund.

A life assurance company prepared its revenue A/c for the year ended on 31 March 2011 and ascertained its life assurance fund to be 35,00,000. It was found that the following had been omitted from the accounts.

 

(a) Interest Accrued on Investments:	45,000
Income Tax Liable to be Deducted There on is Estimated to be	10,500
(b) Outstanding Premiums:	37,500
(c) Bonus Utilized for Reduction of Premium:	8,500
(d) Claims Intimated but not Admitted:	18,750
(e) Claims Covered under Reinsurance:	7,250

What is the true life assurance fund?

Solution

Note: Bonus in reduction of premium will reduce both premiums and bonus. Hence, it should be added to and subtracted from the fund.

 

Illustration 14.3

Model: Correct assurance fund and Journal entries.

The revenue A/c of a life insurance company showed the life fund as 65,65,000 on 31 March 2011 before taking into account the following items:

(a) Claims Intimated but not Admitted	74,250
(b) Bonus Utilized in Reduction of Premium	11,750
(c) Interest Accrued on Investments	23,250
(d) Outstanding Premiums	21,500
(e) Claims Claims Covered under Reinsurance	39,000
(f) Provision for Taxation	29,500

Pass journal entries giving effect to the above adjustments and show the adjusted life fund.

Solution

 

14.7 SOME SPECIAL TERMS RELATING TO INSURANCE BUSINESS

14.7.1 Net Liability

14.7.1.1 Determination of Net Liability

In general, life policies are taken for a longer period. The premium by insurance companies cannot be taken as income for computation of profit for that year. The balance in life assurance fund cannot be taken as profit. Hence, in order to determine the profit, net liability on all outstanding policies is to be calculated. The difference between the present value of future liability and the present value of future premium is known as ‘net liability’. The method of calculation is done by highly technical experts called ‘actuaries’. It is a highly complicated mathematical calculation. The process by which net liability is ascertained by actuaries is called ‘actuarial valuation’.

14.7.1.2 Computation of Profit

To ascertain profit of the life insurance companies, the life assurance fund on a particulars date is to be determined. Then, net liability on all policies has to be determined, which is done by actuaries. These two values are to be compared.

If the amount of life assurance fund is more than net liability, the excess is treated as surplus (profit).

It net liability is more than life assurance fund, the excess is treated as deficiency (loss).

The surplus or deficiency is ascertained by preparing a statement known as ‘valuation balance sheet’.

The former of which is shown as follows:

 

Distribution of profits:

1. Ninety-five per cent of the surplus (profit) as disclosed in valuation balance sheet should be declared as share of (bonus) policyholders.
2. Interim bonus paid to policyholders is an advance. Payment of bonus should be adjusted with net profit.
3. Any dividend payable, provision for loss on revaluation of investments should be subtracted from surplus.
4. From the adjusted amount, 95% is calculated. Then the interim bonus is deducted. The resultant will be the amount due to policyholders.
5. The balance of 5% is payable to the shareholders.

Illustration 14.4

Model: Valuation balance sheet and distribution of profits.

The life insurance fund of Himalayan Life Insurance Co. Ltd. was 36,00,000 on 31 March 2011. Its actuarial valuation on 31 March 2011 disclosed a net liability of 28,00,000. An interim bonus of 50,000 was paid to the policyholders during the previous 2 years. It is now proposed to carry forward 1,50,000 and to divide the balance between the policyholders and shareholders.

Show

1. The valuation balance sheet
2. The net profit for the 2-year period
3. The distribution of profits

Solution

Stage (a):

 

Stage (b): Net profit for the 2-year period:

Step 1:	Profit (Surplus) as per Valuation Balance Sheet	8,00,000
Step 2:	Add: Interim Bonus Paid during the Previous 2 Years	50,000
Step 3:	Net Profit (for the 2-year Period):	________ 8,50,000 ________

Stage (c): Distribution of Profits:

Step 1:	Net Profit (Ref Stage (b)	8,50,000
Step 2:	Less: Amount Proposed to be Carried Forward	1,50,000 ________
Step 3	Balance (Step 1 – Step 2):	7,00,000
Step 4:	Share of Policyholders (95% of 7,00,000):	6,65,000
Step 5:	Less: Interim Bonus Paid:	50,000 ________
Step 6:	Amount Due to Policyholders:	6,15,000
Step 7:	Share of Shareholders 5% of 7,00,000:	35,000

Illustration 14.5

Model: True life assurance fund.

The life assurance fund of an insurance company as on 31 March 2011 showed a balance of 65,65,650. It was later found that the following were not taken into account:

 

(i) Dividend from Investments	2,22,250
(ii) Income Tax on above	22,220
(iii) Bonus in Reduction of Premium	6,66,660
(iv) Claims Covered under Reinsurance	3,33,330
(v) Claims Indicated but not Accepted by Company	5,55,550
(vi) Interest Accrued on Securities	44,440

Ascertain Correct Balance of Fund.

Solution

 

Illustration 14.6

Model: Valuation balance sheet distribution of surplus.

A life insurance company gets its valuation made once in every 2 years. Its life assurance fund on 31 March 2011 stood at 58,55,000. Before providing for 55,000 being the shareholders’ dividend for 2011, its actual valuation on 31 March 2011 disclosed a net liability of 46,00,000. An interim bonus of 1,00,000 was paid to the policyholders during the previous 2 years.

Prepare a statement showing the amount now available as bonus to policyholders, assuming that the policyholders are entitled to 95% of surplus as under LIC Act.

Solution

Stage I: In this problem, an adjustment has to be made to arrive as life insurance fund balance as in the balance sheet:

Life Assurance Fund as on 31 March 2011 (Give)	58,55,000
Less: Dividends for the Year 2011	55,000
Balance of Fund (as per B/S)	___________ 58,00,000 ___________

Stage II:

 

Stage III: Calculation of Net Profit:

Surplus as per Valuation Balance Sheet	12,00,000
Add: Interim Bonus	1,00,000
Net Profit for the Period	____________ 13,00,000   ____________

Stage IV: Distribution of Profits:

 

Net Profit (Ref: Stage III)	13,00,000
(i) Policy Holder’s Share as per LIC Act @ 95%	____________ 12,35,000
(95% of 13,00,000)	12,35,000
(ii) Less: Interim Bonus Paid	1,00,000
(iii) Revisionary Bonus to be Declared	____________ 11,35,000 ____________
(iv) Shareholders Share of Profit @ 5% 5% of 13,00,000	65,000 ____________

Illustration 14.7

Model: Valuation balance sheet and journal.

Life assurance fund of a company on 31 March 2011 was 5,00,00,000. Its net liability on that date amounted to 4,60,000 as per actuarial valuation. Investments held by the company on that date amounted to 4,00,00,000. Against which the investment reserve stood as 6,20,000. The investments have to be written down by 10,00,000. The company declared a reversionary bonus of 60 per 1,000 with the option of cash bonus at the rate of 24 per 1000. Out of the total of 6 crore policies in force, one-third of the policyholders (in value) opted for cash bonus. The company estimated that its liability for income tax would be 4,00,000. Draft the journal entries to record the above. Also show the valuation balance sheet as on 31 March 2011 [CS—Modified].

Solution

 

Illustration 14.8

Model: Revenue account.

The following balances are abstracted from the books of New Life Insurance Co. Ltd. as on 31 March 2011:

Prepare Revenue Account after Making the Following Adjustments:

	’000
(i) Outstanding Balances: Claims	18,000
Premiums	6,000
(ii) Further Bonus for Premium	2,800
(iii) Claims under Reinsurance	10,000

Solution

 

Important note:

As per IRDA norms, income tax on dividends, which is TDS, appears in Schedule 12.

Schedules Forming Part of Revenue Account Follow

Schedules Forming Part of Revenue Account

Schedule 1

 

Schedule 2

 

Schedule 3

 

Schedule 4

 

Illustration 14.9

Model: Revenue A/c and balance sheet.

From the following prepare a life insurance revenue A/c and balance sheet as on 31 March 2011:

Solution

 

Schedules forming part of financial statements:

Schedule 1

 

Premium O/S on 31 March 2011 will come under Schedule 12 as assets.

Schedule 2

 

Schedule 3

 

Schedule 4

 

Particulars	Current Year	Previous Year
	(’000)	(’000)
Claims Paid:		–
By Death	33,780	–
By Maturity	48,830	–
Add: Claim Expenses	82,610	–
	2,864	–
Less: Outstanding Claims on 1 April 2010	85,474	–
	4,752	–
Net Claims	80,722	–
Annuities	2,700	–
Surrenders	5,620	–
Bonus Paid Is Cash	5,650	–
Bonus Paid with Claims	5,400	–
	1,00,092	–

Claims O/s on 31 March 2011 will appear under Schedule 13 as liability

Schedule 5

Particulars	Current Year (’000)	Previous Year (’000)
Share Capital	4,00,000	–
	4,00,000

Schedule 6

 

Schedule 7

 

Schedule 8

 

Particulars	Current Year	Previous Year
Investments	2,93,400	—
	2,93,400

Schedule 9

 

Particulars	Current Year (’000)	Previous Year (’000)
Loans on Mortgages	5,81,120	–
Loans on Policies	76,600	–
	6,57,720	–

 

Particulars	Current Year	Previous Year
Freehold Premises	2,45,200	–
Furniture and Fittings	1,28,200	–
	3,73,400	–

 

Particulars	Current Year	Previous Year
Cash on Hand and Deposits	1,52,600	–
	1,52,600	–

 

Particulars	Current Year	Previous Year
Advances	–	–
Other Assets:
Outstanding Premiums	6,286	–
Outstanding Interest and Dividend	3,888	–
Agents’ Balances	1,500	–
	11,674	–

Schedule 13

 

Particulars	Current Year	Previous Year
Sundry Creditors	18,400	–
Outstanding Claims	7,470	–
	25,870	–

Schedule 14

 

Schedule 15

 

Illustration 14.10

Model: Net revenue A/c, P & L A/c and valuation balance sheet.

The valuation of Federal Life Assurance Company Ltd., having a paid-up capital of 2,50,000 disclosed a net liability of 33,25,000 on all their policies and contracts in force on 31 March 2011. From the figures set out below prepare the revenue account for the year ended on 31 March 2011 and a valuation balance sheet as on that date showing the surplus for the shareholders and policyholders (on the pattern of distribution prescribed in the LIC Act, 1950).

 

Life Assurance Fund as on 1 April 2010	25,00,000
Premiums Received	13,00,000
Interest and Dividends Received	7,50,000
Bonus in Cash	56,000
Bonus in Reduction of Premium	2,025
Claims Paid	1,30,000
Surrenders	95,000
Annuities Paid	57,000
Expenses of Management	1,10,000
Commission Paid to Agents	62,500
Reassurance Balance Irrecoverable	1,000
Income Tax	1,20,000
Surplus on Revaluation of Reversion Purchased	4,500
Consideration for Annuities Granted	42,500
Fines for Revival of Lapsed Policies	625

 

[ICWA (Final)–Modified]

Solution:

 

Schedule 1

 

Particulars
Renewal Premium	13,00,000
	13,00,000

Schedule 2

 

Particulars
Commission Paid	62,500
	62,500

Schedule 3

 

Particulars
Employee’s Remuneration and Welfare Benefits	1,10,000
	1,10,000

Schedule 4

 

Particulars
Insurance Claims:
Claims Paid	1,30,000
Annuities	57,000
Surrenders	95 ,000
	2,82,000

Illustration 14.11

Model: Revenue A/c, P & L A/c and balance sheet with schedules.

The following were the balances disclosed by the trial balance of the Indian Life Insurance Society as on 31 March 2011:

Balance of Account at the Beginning of the Year	1,00,00,000
Government Securities	50,00,000
Profit on Realization of Assets	10,000
Investment Fluctuation Account	50,000
Claims under Policies by Death	3,00,000
Claims under Policies at Maturity	5,00,000
Loans on Mortgage	28,00,000
Loans on Policies	15,00,000
Freehold Property and Furniture	4,15,000
Foreclosed Properties	18,000
Agent’s Balances Owing	18,000
Sundry Creditors	10,000
Outstanding Premiums	1,20,000
Commission Paid	1,20,000
Interest Accrued Not Due	15,000
Premiums (Other than Single)	10,00,000
Claims Admitted But Not Paid	30,000
Surrenders	1,00,000
Single Premiums	4,00,000
Consideration for Annuities Granted	2,50,000
Interest, Dividends and Rents Received	3,50,000
Depreciation on Furniture	15,000
Administration Expenses	1,80,000
Salaries	15,000
Auditors Fees	7,500
Director’s Fees	1,500
Legal Expenses	5,000
Advertising	7,000
Printing and Stationery	54,000
Cash as Bank	8,42,000
Provision for Depreciation	15,000
Prepare a Revenue A/c and Balance Sheet

 

[ICWA (Final)–Modified]

Solution:

Stage I: Preparation of revenue A/c:

 

Particulars	Schedule
Premiums Earned (Net):
Premium	1	14,00,000
Income from Investments
Interest, Dividends and Rent (Gross)		3,50,000
Consideration for Annuities Granted		2,50,000
Profit on Realization of Assets		10,000
Total (A)		20,10,000
Commission	2	1,20,000
Operating Expenses Related to Insurance Business	3	2,85,000
Total (B)		4,05,000
Benefits Paid (Net)	4	9,00,000
Total (C)		9,00,000
Surplus (D) = (A) – (B) – (C)		7,05,000

Stage II:

 

Particulars	Amount
Operating Profit	7,05,000
Other Income	—
Total (A)	7,05,000
Provisions Other than Tax	—
Other Expenses	—
Total (B)	Nil
Profit Before Tax	7,05,000
Provision for Taxation	—
Profit After Tax	7,05,000
Balance of Profit Brought Forward from Last Year	1,00,00,000
Balance Carried Forward to Balance Sheet	1,07,05,000

Particulars	Schedule
Sources of Funds:
Reserves and Surplus	6	1,07,55,000
Total		1,07,55,000
Application of Funds:
Investments	8A	50,00,000
Loans	9	43,00,000
Fixed Assets	10	4,00,000
Current Assets: Cash and Bank Balances	11	8,42,000
Advances and Other Assets	12	2,53,000
Sub-total (A)		10,95,000
Current Liabilities:	13	40,000
Sub-total (B)		40,000
Net Current Assets C = (A) – (B)		10,55,000
Total		1,07,55,000

Schedule 1

 

Particulars
Renewal Premiums	10,00,000
Single Premiums	4,00,000
Total	14,00,000

Schedule 2

 

Particulars
Commission Paid—Direct	1,20,000
	1,20,000

Schedule 3

 

Particulars
Employee’s Remuneration and Welfare Benefits	1,95,000
Printing and Stationery	54,000
Legal Expenses	5,000
Audit Fee	7,500
Advertisement and Publicity	7,000
Director’s Fee	1,500
Depreciation	15,000
	2,85,000

Schedule 4

 

Particulars
Claims by Death	3,00,000
Claims by Maturity	5,00,000
Surrenders	1,00,000
Total Benefits paid:	9,00,000

Schedule 6

 

Particulars
Investment Fluctuation A/c	50,000
Balance of P & L A/c	1,07,05,000
Total	1,07,55,000

Schedule 8A

 

Particulars
Govt. Securities	50,00,000
Total	50,00,000

Schedule 9

 

Particulars
Secured:
On Mortgage of Property in India	28,00,000
Unsecured:
Loans Against Policies	15,00,000
Total	43,00,000

Schedule 10

 

Schedule 11

 

Particulars
Cash as Bank	8,42,000
Total	8,42,000

Schedule 12

 

Particulars
Other Assets:
Interest Accrued on Investments	15,000
Outstanding Premium	1,20,000
Agents Balances	18,000
Foreclosed Properties	1,00,000
	2,53,000

Schedule 13

 

Particulars
Balances Due to Other Insurance Companies	10,000
Claims Outstanding	30,000
Total	40,000

14.8 GENERAL INSURANCE

14.8.1 Some Special Terms

14.8.1.1 Claims

Claims paid should be added with all expenses directly incurred in connection with assessment of claims. Claims should include expenses such as survey fees, legal fees and court expenses. It should not include expenses relating to establishment. If they are related to an employee, then it has to be included under the head claims. Expenses relating to reissuance should also be taken into account.

Illustration 14.12

Model: Claims—computation.

From the following particulars appearing in the books of fire insurance division of general insurance company, show the amount of claim as it would appear in the revenue A/c for the year ended on 31 March 2011:

 

	Direct Business	Reinsurance
	(’000)	(’000)
Claims Paid during the Year	9,340	1,400
Claims Payable—1 April 2010	1,526	174
31 March 2011	1,624	106
Claims Received	—	460
Claims Receivable—1 April 2010	—	130
31 March 2011	—	226
Expenses of Management	460	—
Includes 70,000 Surveyor’s
Fees and 90,000 Legal Expenses
For Settlement of Claim)

 

[CA (Inter)–Modified]

Solution

Note: With claims outstanding, on direct business reinsurance accepted should be added and reinsurance ceded should be subtracted.

Claims incurred (net) is shown under Schedule 2 as follows:

Schedule 2

 

14.8.2 Final Accounts of Insurance Companies

The final accounts have to be prepared in accordance with the provisions of IRDA Act. ‘The forms’ and ‘schedules’ for the preparation of final accounts of insurance as stipulated in the Act are reproduced in the following pages:

14.9 ACCOUNTING PRINCIPLES FOR PREPARATION OF FINANCIAL STATEMENTS

14.9.1 Applicability of Accounting Standards

Every balance sheet, revenue account (policyholder’s account), receipts and payments account (cash flow statement) and profit and loss account (shareholders’ 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:

1. Accounting Standard-3 (AS-3)—Cash flow statements—cash flow statement shall be prepared only under the direct method.
2. Accounting Standard-17 (AS-17)—Segment reporting—shall apply to all insurers irrespective of the requirement regarding listing and turnover mentioned therein.

14.9.2 Premium

Premium shall be recognized as income when due. For linked business the due date for payment may be taken as the date when the associated units are created.

14.9.3 Acquisition Costs

Acquisition costs, if any, shall be expensed in the period in which they are incurred.

Acquisition costs 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).

14.9.4 Claims Cost

The ultimate cost of claims shall comprise the policy benefit amount and specific claims settlement costs, wherever applicable.

14.9.5 Actuarial Valuation—Liability for Life Policies

The estimation of liability against life policies shall be determined by the appointed actuary of the insurer pursuant to his annual investigation of the life insurance business. Actuarial assumptions are to be disclosed by way of notes to the account.

The liability shall be so calculated that together with future premium payments and investments income, the insurer can meet all future claims (including bonus entitlements to policyholders) and expenses.

14.9.6 Procedure to Determine Value of Investments

An insurer shall determine the values of investments in the following manner:

14.9.6.1 Real Estate—Investment Property

The value of investment property shall be determined at historical cost, subject to revaluation at least once in every 3 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 ‘profit on sale of investments’ or ‘loss on sale of investments’, as the case may be, shall include accumulated changes in the carrying amount previously recognized in equity under the heading ‘revaluation reserve’ in respect of a particular property and being recycled to the relevant revenue account or profit and loss account on sale of that property.

The bases for revaluation should 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 recognized as an expense in the revenue/profit and loss account immediately. Unless the asset is carried at revalued amount, any impairment loss of a revalued 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 recognized as an expense in the revenue/profit and loss account.

14.9.6.2 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 amortization.

14.9.6.3 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(ies)/derivatives) instruments has occurred.

An active market means a market, where the securities traded are homogeneous, availability of willing buyers and willing sellers is normal and the prices are publicly available.

Unrealized 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 accoun’. The ‘profit on sale of investments’ or ‘loss on sale of investments, as the case may be, shall include accumulated changes in the fair value previously recognized in equity under the heading ‘fair value change account’ in respect of a particular security and being recycled to the relevant revenue account or profit and loss account on actual sale of that listed security.

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 recognized as an expense in revenue/profit and loss account to the extent of the difference between the remeasured fair value of the security/investment and its acquisition cost as reduced by any previous impairment loss recognized as expense in revenue/profit and loss account. Any reversal of impairment loss, earlier recognized in revenue/profit and loss account, shall be recognized in revenue/profit and loss account.

14.9.6.4 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 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 purpose 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’.

14.9.7 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.

14.9.8 Linked Business

The accounting principles used for valuation of investments are to be consistent with principles enumerated above. A separate set of financial statements, for each segregated fund of the linked businesses, shall be annexed. Segregated funds represent funds maintained in accounts to meet specific investment objectives of policyholders who bear the investment risk. Investment income/gains and losses generally accrue directly to the policyholders. The assets of each account are segregated and are not subject to claims that arise out of any other business of the insurer.

14.9.9 Funds for Future Appropriation

The funds for future appropriation should be presented separately. These funds represent all funds, the allocation of which, either to the policyholders or to the shareholder, has not been determined by the end of the financial year.

 

14.10 DISCLOSURES FORMING PART OF FINANCIAL STATEMENTS

1. The following shall be disclosed by way of notes to the balance sheet
   1. Contingent liabilities:
      1. Partly paid-up investments.
      2. Underwriting commitments outstanding.
      3. Claims, other than those under policies, not acknowledged as debts.
      4. Guarantees given by or on behalf of the company.
      5. Statutory demands/liabilities in dispute, not provided.
      6. Reinsurance obligations to the extent not provided for accounts.
      7. Others (to be specified).
   2. Actuarial assumptions for valuation of liabilities for life policies in force.
   3. Encumbrances to assets of the company in and outside India.
   4. Commitments made and outstanding for loans, investments and fixed assets.
   5. Basis of amortization of debt securities.
   6. Claims settled and remaining unpaid for a period of more than 6 months as on the balance sheet date.
   7. Value of contracts in relations to investments, for the following:
      1. Purchases where deliveries are pending.
      2. Sales where payments are overdue.
   8. Operating expenses relating to insurance business: basis of allocation of expenditure of various segments of business.
   9. Computation of managerial remuneration.
   10. Historical costs of those investments valued on fair value basis.
   11. Basis of revaluation of investment property.
2. 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 any other accounting policies, followed by the insurer, shall be stated in the manner required under accounting standard-1 (AS-1) issued by the ICAI.
   2. Any departure from the accounting policies shall be separately disclosed with reasons for such departure.
3. The following information shall also be disclosed:
   1. Investments made in accordance with any statutory requirements 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 the purpose of income recognition as per the directions, if any, issued by the authority.
   3. Assets to the extent required to be deposited under local laws or otherwise encumbered in or outside India.
   4. Percentage of business sector wise.
   5. A summary of financial statements for the last 5 years, in the manner as may be prescribed by the authority.
   6. Bases of allocation of investments and income thereon between policyholders’ account and shareholders’account.
   7. Accounting ratios as may prescribed by the authority.

14.11 GENERAL INSTRUCTIONS 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, profit and loss account and receipts and payments accounts shall 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 at gross amount. The amount or income tax deducted at source.

4. (I) For the purposes of financial statement, unless the context otherwise requires:

• The expression ‘provisionș shall, subject to (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.
• 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 or loss.
• The expression ‘capital reserve’ shall not include any amount regarded as fee for distribution through the profit and loss account and the expression s‘revenue reserve’ shall mean any reserve other than a capital reserve.
• The expression ‘liability’ shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities.

(II) Where:

• Any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or
• Any amount retained by way of providing for any known liability or loss is more than the amount which in the opinion of the directors is reasonably necessary for the purpose. The excess shall be treated as a reserve and not as provision.

5. The company shall make provisions for damages under lawsuits where the managements is of the opinion that the award may go against the insurer.

6. Extent of risk retained and reinsured shall be separately disclosed.

7. Any debit balance of the profit and loss account shall be shown as deduction from uncommitted reserves and the balance, if any, shall be shown separately.

 

14.12 CONTENTS OF MANAGEMENT REPORT

There shall be attached to the financial statements, a management report containing, inter alia, the following duly authenticated by the management.

1. Confirmation regarding the continued validity of the registration granted by the authority.
2. Certification that all the dues payable to the statutory authorities have been duly paid.
3. Confirmation to the effect that the shareholding pattern and any transfer of shares during the year are in accordance with the statutory or regulatory requirements.
4. Declaration that the management has not directly or indirectly invested outside India the funds of the holders of policies issued in India.
5. Confirmation that the required solvency margins have been maintained.
6. Certification to the effect that the values of all the assets have been reviewed on the date of the balance sheet and that in his (insurer’s) belief the assets set forth in the balance sheets are shown in the aggregate at amounts not exceeding their realizable or market value under several headings:
   1. ‘Loans’
   2. ‘Investments’
   3. ‘Agents balances’
   4. ‘Outstanding premiums’
   5. ‘Interest, dividends and rents outstanding’
   6. ‘Interest, dividends and rents accruing but not due’
   7. ‘Amounts due from other persons or bodies carrying on insurance business’
   8. ‘sundry debtors’
   9. ‘Bills receivable’
   10. ‘Cash’ and
   11. The several items specified under ‘other accounts’
7. Certification to the effect that no part of the life insurance fund has been directly or indirectly applied in contravention of the provisions of the Insurance Act, 1938 (4 of 1938) relating to the application and investment of the life insurance funds.
8. Disclosure with regard to the overall risk exposure and strategy adopted to mitigate the same.
9. Operations in other countries, if any, with a separate statement giving the management’s estimate of country risk and exposure risk and the hedging strategy adopted.
10. Ageing of claims indicating the trends in average claim settlement time during the preceding 5 years.
11. Certification to the effect as to how the values, as shown in the balance sheet, of the investments and stocks and shares have been arrived at, and how the market value thereof has been ascertained for the purpose of comparison with the values so shown.
12. Review of asset quality and performance of investment in terms of portfolios, i.e. separately in terms of real estate, loans, investments, etc.
13. A responsibility statement indicating therein that:
    • In the preparation of financial statements, the applicable accounting standard, principles and policies have been followed along with proper explanations relating to material departures, if any.
    • The management has adopted accounting policies and applied them consistently and made judgments and estimated that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the operating profit or loss and or the profit or loss of the company for the year.
    • The management has taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the applicable provisions of the Insurance Act 1938 (4 of 1938)/Companies Act, 1956 (1 of 1956), for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities.
    • The management has prepared the financial statements on a going concern basis.
    • The management has ensured that an internal audit system commensurate with the size and nature of the business exists and is operating effectively.
14. A schedule of payments, which has been made to individuals, firms, companies and organizations in which directors of the insurer are interested.

14.13 PREPARATION OF FINANCIAL STATEMENTS

1. An insurer shall prepare the revenue account (policyholder’s account), profit and loss account (shareholders’ account) and the balance sheet in Form A-RA, Form A-PL and Form A-BS, as prescribed in this Part, or as near thereto as the circumstances permit (see Pages 13.9 to 13.29).

   Provided that an insurer shall prepare revenue account and balance sheet for the undermentioned business separately and to that extent the application of AS 17 shall modified:

   1. Participating policies and non-participating policies.
   2. 1. Linked business [As defined in regulation 2(i) of the IRDA (Registration of Indian Insurance Companies) Regulations, 2000]
      2. Non-linked business separately for ordinary life, general annuity, pensions and health insurance.
   3. Business within India and outside India.
2. An insurer shall prepare separate receipts and payments account in accordance with the direct method prescribed in AS-3—‘Cash Flow Statement’ issued by the ICAI.

14.14 ACCOUNTING PRINCIPLES FOR PREPARATION OF FINANCIAL STATEMENTS

14.14.1 Applicability of Accounting Standards

Every balance sheet, receipts and payments account (cash flow statement)] and profit and loss account (shareholders’ account) of the insurer shall be in conformity with the accounting standards (AS) issued by the ICAI, to the extent applicable to the insurers carrying on general insurance business, except that:

1. Accounting standard-3 (AS-3)—Cash flow statements—shall be prepared only under the direct method.
2. Accounting standard-13 (AS-13)—Accounting for investments, shall not be applicable.
3. Accounting standard-17 (AS-17)—Segment reporting—shall apply to all insurers irrespective of the requirements regarding listing and turnover mentioned therein.

14.14.2 Premium

Premium shall be recognized as income over the contract 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.

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 (i) (ii) (b) of the IRDA Act.

14.14.3 Premium Deficiency

Premium Deficiency shall be recognized if the sum of expected claim costs, related expenses and maintenance costs exceeds related reserve for unexpired risks.

14.14.4 Acquisition Costs

Acquisition costs, if any, shall be expensed in the period in which they are incurred. Acquisition costs 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).

14.14.5 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.

The liability shall include the following:

• Future payments in relation to unpaid reported claims.
• 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 realization. Claims made in respect of contracts where the claims payment period exceeds 4 years shall be recognized on an actuarial basis, subject to regulations that may be prescribed by the authority. In such cases, certificate from a recognized actuary as to the fairness of liability assessment must be obtained. Actuarial assumptions shall be suitably disclosed by way of notes to the account.

14.14.6 Procedure to Determine the Value of Investments

An insurer shall determine the values of investments in the following manner:

• Real estate—investment property: Investment property shall be measured at historical cost, less accumulated depreciation and impairment loss, residual value being considered zero and no revaluation being permissible.
  The insurer shall assess at each balance sheet date whether any impairment of the investment property has occurred.

  An impairment loss shall be recognized as an expense in the revenue/profit and loss account immediately.
  Fair value as at the balance sheet date and the basis of its determination shall be disclosed in the financial statements as additional information.

• 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 amortization.
• 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 as at the balance sheet date. For the purpose of calculation of fair value, the lowest of the last quoted closing price of the stock exchanges where the securities are listed shall be taken.

  The insurer shall asses on each balance sheet date whether any impairment of listed equity security(ies)/ derivative(s) instruments has occurred.

  An active market shall mean a market, where the securities traded are homogeneous, availability of willing buyers and willing sellers is normal and the prices are publicly available.

  Unrealized 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 ‘profit on sale of investments’ or ‘loss on sale of investments’, as the case may be, shall include accumulated changes in the fair value previously recognized in equity under the heading fair value change account in respect of a particular security and being recycled to profit and loss account on actual sale of that listed security.

  For the removal of doubt, it is clarified that balance or any part thereof shall not be available for distribution as dividends. In addition, any debit balance in said fair value change account shall be reduced from the profits/free reserves while declaring dividends.

  The insurer shall asses, at each balance sheet date, whether any impairment has occurred. An impairment loss shall be recognized as an expense in revenue/profit and loss account to the extent of the different between the remeasured fair value of the security/investment and its acquisition cost as reduced by any previous impairment loss, recognized as expense in revenue/profit and loss account. Any reversal of impairment loss, earlier recognized in revenue/profit and loss account shall be recognized in revenue/profit and loss account.

• 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 market will 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 form time to time by SEBI, such a security is classified as ‘thinly traded’.

14.14.7 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.

14.14.8 Catastrophe Reserve

Catastrophe reserve shall be created in accordance with norms, if any, prescribed by the authority. Investment of funds of catastrophe reserve shall be made in accordance with prescription of the authority.

14.15 DISCLOSURES FORMING PART OF FINANCIAL STATEMENTS

1. The following shall be disclosed by way of notes to the balance sheet
   1. Contingent liabilities:
      1. Partly-paid up investments.
      2. Underwriting commitments outstanding.
      3. Claims, other than those under policies, not acknowledged as debts.
      4. Guarantees gives by or on behalf of the company.
      5. Statutory demands/liabilities in dispute, not provided for.
      6. Reinsurance obligations to the extent not provided for in accounts.
      7. Other (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 exceeds 4 years.
   6. Ageing of claims—distinguishing between claims outstanding for more than 6 months and other claims.
   7. Premiums, less reinsurance, written from business in/outside India.
   8. Extent of premium income recognized, 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:
      1. Purchases where deliveries are pending.
      2. 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 amortization of debt securities.
   14. 1. Unrealized 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 realization reported in profit and loss account.
       2. Pending realization, the credit balance in the ‘fair value change account’ is not available for distribution.
   15. Fair value of investment property and the basis therefore.
   16. Claims settled and remaining unpaid for a period of more than 6 months as on the balance sheet date.
2. The following accounting policies shall form an integral part of the financial statements

   All significant accounting in terms of the accounting standards issued by the ICAI, and

   1. 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-1(AS-1) issued by the ICAI.
   2. Any departure from the accounting policies as aforesaid shall be separately disclosed with reasons for such departure.
3. 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 the 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 5 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.

14.16 GENERAL INSTRUCTIONS 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, profit and loss account shall 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 at gross value; the amount of income tax deducted at source being included under ‘advance taxes paid’.

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

5. (I) For the purposes of financial statement, unless the context otherwise requires:

• 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.
• 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.
• 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.
• The expression ‘liability’ shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities.

        (II) Where:

• Any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or
• Any amount retained by way of providing for any known liability is more than the amount which in the opinion of the directors is reasonably necessary for the purpose, the excess shall be treated for the purpose of these accounts as a reserve and not provision.

6. The company should make provision for damages under lawsuits where the management is of the opinion that the award may go against the insurer.

7. Extent of risk retained and reinsured shall be separately disclosed.

8. Any debit balance of the profit and loss account shall be shown as deduction from uncommitted reserves and the balance, if any, shall be shown separately.

 

14.17 CONTENTS OF MANAGEMENT REPORT

There shall be attached to the financial statements, a management report containing, inter alia, the following duly authenticated by the management:

1. Confirmation regarding the continued validity of the registration granted by the Authority.
2. Certification that all the dues payable to the statutory authorities have been duly paid.
3. Confirmation to the effect that the shareholding pattern and any transfer of shares during the year are in accordance with the statutory or regulatory requirements.
4. Declaration that the management has not directly or indirectly invested outside India the funds of the holders of policies issued in India.
5. Confirmation that the required solvency margins have been maintained.
6. Certification to the effect that the values of all the assets have been reviewed on the date of the balance sheet and that in his (insurer’s) belief the assets set forth in the balance sheets are shown in the aggregate at amounts not exceeding their realizable or market value under the several headings:
   1. ‘Loans’
   2. ‘Investments’
   3. ‘Agents balances’
   4. ‘Outstanding premiums’
   5. ‘Interest, dividends and rents outstanding’
   6. ‘Interest, dividends and rents accruing but not due’
   7. ‘Amounts due from other persons or bodies carrying on insurance business’
   8. ‘sundry debtors’
   9. ‘Bills receivable’
   10. ‘Cash’ and
   11. The several items specified under ‘other accounts’
7. Disclosure with regard to the overall risk exposure and strategy adopted to mitigate the same.
8. Operations in other countries, if any, with a separate statement giving the management’s estimate of country risk and exposure risk and the hedging strategy adopted.
9. Ageing of claims indicating the trends in average claim settlement time during the preceding 5 years.
10. Certification to the effect as to how the values, as shown in the balance sheet, of the investments and stocks and shares have been arrived at, and how the market value thereof has been ascertained for the purpose of comparison with the values so shown.
11. Review of asset quality and performance of investment in terms of portfolios, i.e. separately in terms of real estate, loans, investments, etc.
12. A responsibility statement indicating therein that:
    • In the preparation of financial statements, the applicable accounting standards, principles and policies have been followed along with proper explanations relating to material departures, if any.
    • The management has adopted accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and the operating profit or loss and of the profit or loss of the company for the year.
    • The management has taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the applicable provisions of the Insurance Act, 1938 (4 of 1938)/ Companies Act 1956 (1 of 1956), for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities.
    • The management has prepared the financial statements on a going concern basis.
    • The management has ensured that an internal audit system commensurate with the size and nature of the business exists and is operating effectively.
13. A schedule of payments, which has been made to individuals, firms companies and organizations in which directors of the insurer are interested.

14.18 PREPARATION OF FINANCIAL STATEMENTS

1. An insurer shall prepare the revenue account, profit and loss account (shareholders’ account) and the balance sheet in Form B-RA, Form B-PL and Form B-BS, or as there to as the circumstances permit (see Pages 13.29 to 13.55 for the forms).

   Provided that an insurer shall prepare revenue account and balance sheet for fire, marine and miscellaneous insurance business and separate schedules shall be prepared for marine cargo, marine other than marine cargo and the following classes of miscellaneous insurance business under miscellaneous insurance and accordingly application of AS 17 segment reporting shall stand modified.

• (i) Motor, (ii) workmen’s compensation/employers’ liability, (iii) public/product liability, (iv) engineering, (v) aviation, (vi) personal accident, (vii) health insurance, (viii) others.
• An insurer shall prepare separate receipts and payments account in accordance with the direct method prescribed in AS-3—‘cash flow statement’ issued by the ICAI.

1. The report of the auditors on the financial statements of every insurer shall deal with the matters specified herein:
   • That they have obtained all the information and explanations which, to the best of their knowledge and belief were necessary for the purpose of their audit and whether they have found them satisfactory.
   • Whether proper books of account have been maintained by the insurer so far as appears from an examination of those books.
   • Whether proper returns, audited or unaudited, from branches and other offices have been received and whether they were adequate for the purpose of audit.
   • Whether the balance sheet, revenue account, profit and loss account and the receipts and payments account dealt with the report are in agreement with the books of account and returns.
   • Whether the actuarial valuation of liabilities is duly certified by the appointed actuary including to the effect that the assumptions for such valuation are in accordance with the guidelines and norms, if any, issued by the authority, and/or the Actuarial Society of India in concurrence with the authority.
2. The auditors shall express their opinion on:
   • • Whether the balance sheet gives a true and fair view of the insurer’s affairs as at the end of the financial year/period.
     • Whether the revenue account gives a true and fair view of the surplus or the deficit for the financial year/period.
     • Whether the profit and loss account gives a true and fair view of the profit or loss for the financial year/period.
     • Whether the receipts and payments account gives a true and fair view of the receipts and payments for the financial year/period.
   • The financial statements stated at (a) above are prepared in accordance with the requirements of the Insurance Act, 1938 (4 of 1938), the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999) and the Companies Act, 1956 (1 of 1956), to the extent applicable and in the manner so required.
   • Investments have been valued in accordance with the provision of the act and these regulations.
   • The accounting policies selected by the insurer are appropriate and are in compliance with the applicable accounting standards and with the accounting principles, as prescribed in these regulations or any order or direction issued by the authority in this behalf.
3. The auditors shall further certify that:
   • They have reviewed the management report and there is no apparent mistake or material inconsistencies with the financial statements.
   • The insurer has complied with the terms and conditions of the registration stipulated by the authority.
4. A certificate signed by the auditors (which shall be in addition to any other certificate or report which is required by law to be given with respect to the balance sheet) certifying that:
   • They have verified the cash balances and the securities relating to the insurer’s loans, reversions and life interest (in the case of life insurers) and investments.
   • To what extent, if any, they have verified the investments and transactions relating to any trusts undertaken by the insurer as trustee; and
   • No part of the assets of the policyholders’ funds has been directly or indirectly applied in contravention of the provisions of the Insurance Act, 1938 (4 of 1938) relating to the application and investments of the policyholders’ funds.

In case of general insurance, Revenue A/c, P & L A/c & Balance sheet should be prepared in the prescribed forms B–RA, B–PL & B–BS respectively as per IRDA Act, which are reproduced in the following pages:

Name of the Insurer:

Registration No. and Date of Registration with the IRDA

 

Name of the Insurer:

Registration No. and Date of Registration with the IRDA

• Premium income received form business concluded in and outside India shall be separately disclosed.
• Reinsurance premiums whether on business ceded or accepted are to be brought into account gross (i.e. before deducting commission) under the head ‘reinsurance premiums’.
• Claims incurred shall comprise claims paid, specific claims settlement costs, wherever applicable, and change in the outstanding provision for claims at the year-end.
• Items of expenses and income more than 1% of the total premiums (less reinsurance) or 5,00,000, whichever is higher, shall be shown as a separate line item.
• Fees and expenses connected with claims shall be included in claims.
• Under the subhead ‘others’ shall be included items like foreign exchange gains or losses and other items.
• Interest dividends and rentals receivable in connection with an investment should be stated as gross amount, the amount of income tax deducted at source being included under ‘advance taxes paid and taxes deducted at source’.
• Income from rest shall include only the realized rent. It shall not include any notional rent.

Name of the Insurer:

Registration No. and Date of Registration with the IRDA

Schedule 1

 

Particulars	Current Year (’000)	Previous Year (’000)
Premium from Direct Business
Add: Premium on Reinsurance Accepted
Less: Premium on Reinsurance Ceded
Net Premium
Adjustments for Change in Reserve for Unexpired Risks
Total Premium Earned (Net)

Schedule 2

 

Particulars	Current Year (’000)	Current Year (’000)
Claims Paid
Direct
Add: Reinsurance Accepted
Less: Reinsurance Ceded
Net Claims Paid
Add: Claims Outstanding at the End of the Year
Less: Claims Outstanding at the Beginning
Total Claims Incurred

Schedule 3

 

Particulars	Current Year (’000)	Previous Year (’000)
Commission Paid
Direct
Add: Reinsurance Accepted
Net Commission

Schedule 4

 

Schedule 5

 

Schedule 5A

 

Schedule 6

 

Schedule 7

 

Schedule 8

 

Schedule 9

 

Schedule 10

 

Schedule 11

 

Schedule 12

 

Schedule 13

 

Schedule 14

 

Provisions

Schedule 15

 

Miscellaneous Expenditure (To the Extent not Written off or Adjusted)

14.19 RESERVE FOR UNEXPIRED RISK

This refers the income received in advance by the insurance company as premium relating to general insurance business. In general insurance business, policies are restricted for 1 year. Every year it has to be renewed as if it were a new policy. Strictly speaking liability does not arise after the expiry of 1 year until and otherwise is gets renewed. In general insurance, it is the practice that policies are issued throughout the year. As such, most of the policies will be ‘in force’ even after the end of the accounting year, usually financial year. Risk may occur on any day, before the expiry of 1 year. Hence, a provision has to be created to meet claims that may arise after the end of the accounting year. Such a provision is referred to as ‘reserve for unexpired risk’.

According to Section 64 v (i) (ii) (b) of IRDA Act, the reserve for unexpired risk should be 100% of the net premium in the case of marine insurance and in the case of other business such as fine, theft accident and the like, the provision should be 50% of the net premium.

Accounting treatment:

Adjustment for change in reserve for unexpired risk should be shown in Schedule 1—Premiums Earned (Net).

Net premium has to be arrived as through adjustments as follows:

1. The difference between closing reserve for unexpired risk and additional reserve and opening reserve for unexpired risk and additional reserve should be determined.
2. When closing reserves are more than opening reserves, the amount of change has to be deducted, from the premium earned.
3. When opening reserves are more than closing reserves, the amount of change has to be added to the premium earned.

After the above adjustment, net premium has to be shown in revenue A/c as ‘premium earned (Net)’.

The closing reserve for unexpired risk should appear under Schedule 14—Provision for Balance Sheet Purpose.

It is important to note that the balance of provision appears on the liabilities side of the balance sheet under the head ‘balance of funds and accounts’.

Illustration 14.13

 

Model: Unexpired risk reserve.

The Bharath Insurance Co. Ltd. furnishes you the following information.

1. On 31 March 2010 it had reserve for unexpired risks to the tune of 80 crores. It comprised of 30 crores in respect of marine insurance business, 40 crores in respect of fire insurance business and 10 crores in respect of miscellaneous insurance business.
2. It is the practice of the company to crease reserves as 100% of the net premium income in respect of marine insurance policies and as 50% of the net premium income in respect of fire and miscellaneous insurance policies.
3. During 2010–11, the following business was conducted:

The Bharath Insurance Co. asks you to:

1. Pass journal entries relating to ‘unexpired RISKS reserve’
2. Show in columnar form ‘unexpired risks reserve account’ for 2010–11.

[CA (Inter)—Modified]

Solution

 

First, closing reserve for unexpired risk is to be ascertained as follows:

Closing reserve for unexpired risk:

Illustration 14.14

 

Model: Fire revenue A/c and schedules.

From the following particulars relating to Extinct Insurance Co. Ltd., prepare fire revenue A/c for the year ending on 31 March 2011:

You are required to provide for additional reserve for unexpired risk at 1% of the net premium in addition to the opening balance.

Solution

 

This question relates to general insurance business. Hence, form prescribed by IRDA, i.e. Form B-RA is to be used for the preparation of revenue A/c and schedules forming part of it as follows:

Schedules Forming

Part of Revenue Account

Schedule 1

 

Premium Earned (Net)

 

Schedule 2

Claims Incurred (Net)

Particulars	Current Year (’000)	Previous Year (’000)
Claims Paid	2,40,000	—
Add: Claims Intimated and Accepted but not Paid on 31 March 2011	30,000	—
Claims Intimated but not Accepted and Paid on 31 March 2011	5,000	—
	2,75,000	—
Less: Claims Outstanding on 1 April 2010	20,000	—
Total Claims Incurred (Net)	2,55,000	—

Schedule 3

 

Commission

Particulars	Current Year ’000	Previous Year ’000
Commission on Direct Business	1,00,000	—
Add: Commission on Reinsurance Accepted	2,500	—
	2,500	—
	1,02,500
Less: Commission on Reinsurance Ceded	5,000
Net Commission	97,500

Schedule 4

 

Operating Expenses Related to Insurance Business

Particulars	Current Year (’000)	Previous Year (’000)
Expenses of Management	1,52,500	—
Expenses of Management	6,000	—
Bonus in Reduction of Premium	6,000	—
Total	1,58,500

Illustration 14.15

 

Model: Marine insurance—revenue A/c and schedules forming part of it

From the following information as on 31 March 2011, prepare the revenue account of Seven Seas Co. Ltd., engaged in marine Insurance business:

Other expenses are incomes:

Balance on 1 April 2010 was 79,50,000 including additional reserve of 9,75,000. Additional reserve has to be maintained at 5% of the net premium of the year.

 

[CA (Final)—Modified]

Solution

 

Income tax paid and TDS should be shown in the balance sheet under Schedule 12.

 

 

Schedule 1

 

Premiums Earned (Net)

Schedule 2

 

Claims Incurred (Net)

Schedule 3

 

Commission

Particulars	Current Year (’000)	Previous Year (’000)
Commission on Direct Business	450	—
Add: Commission on Reinsurance Accepted	33	—
	483	—
Less: Commission on Reinsurance Ceded	42	—
Net Commission	441	—

Schedule 4

 

Operating Expenses Related to Insurance Business

Particulars	Current Year (’000)	Previous Year (’000)
Salaries	780	—
Rent, Rates and Taxes	54	—
Printing and Stationery	69	—
Legal Charges (not Connected with Claims)	120	—
Bad Debts	15	—
Total	1,038	—

Illustration 14.16

 

Model: Technical and non-technical account.

A Generous Insurance Co. Ltd. has furnished the following information for the preparation of revenue A/c for fire insurance business for the year ended on 31 March 2011 and its profit and loss A/c for the year:

The following further information have also to be considered:

1. Premium outstanding at the end of the year: 8,00,00,000)
2. Additional reserve @ 10% of net premium to be maintained.
3. It is the policy of the company to maintain 50% of the premium towards reserves for unexpired risks.

[CA (Inter)—Modified]

Solution

 

 

Schedule 1

 

Premiums Earned (Net)

 

Schedule 2

 

Particulars	Current Year (’000)	Current Year (’000)
Claims Paid	30,000	—
Add: Claims Admitted but not Paid on 31 March 2011	84,752	—
	1,14,752
Less: Claims Outstanding on 1 April 2010	54,000	—
Claims Incurred (Net)	60,752	—

Schedule 3

 

Commission

Particulars Current	Current Year (’000)	Previous Year (’000)
Commission Paid	1,00,000	—
Less: Commission on Reinsurance Received	24,000	—
Net Commission	76,000	—

Schedule 4

 

Operating Expenses Related to Insurance Business

Particulars	Current Year (’000)	Previous Year (’000)
Expenses of Management	1,56,000	—
Bad Debts	5,000	—
Total	1,61,000	—

Illustration 14.17

Model: Fire revenue and marine revenue accounts and profit and loss account.

From the following balances of universal General Insurance Co. Ltd. as on 31 March 2011 prepare:

(a) fire revenue account, (b) marine revenue account and (c) profit and loss account:

Provision for unexpired risk is to be kept at 50% of the premium for fire and 100% for marine departments. The additional reserve in case of fire insurance is to be increased by 5% of the net premium.

Solution

 

Note: The figures are given for marine and fire business. Revenue A/c is to be prepared by providing separate columns, for each, as shown below:

 

Schedules Forming Part of Financial Statements

Schedule 1

 

Premiums Earned (Net)

Particulars	Fire (’000)	Marine (’000)
Premium Received	6,000	10,800
Adjustment for Change in Reserve for Unexpired Risk:
Add: Provision for Unexpired Risk on 1 April 2010	2,500	8,200
Add: Additional Reserve on 1 April 2010	500	—
	9,000	19,000
Less: Provision for Unexpired Risk on 31 March 2011 50% of 6,000 and 100% of 10,800	3,000	10,800
	6,000	8,200
Less: Additional Reserve on 31 March 2011 for Fire ( 6,000 × 5%) + 500	800	—
Total Premiums Earned	5,200	8,200

Schedule 2

 

Claims Incurred (Net)

Particulars	Fire	Marine
Claims Paid and Outstanding	1,900	3,800
Claims Incurred (Net)	1,900	3,800

Schedule 3

 

Commission

Particulars	Fire	Marine
Commission Paid	900	1,080
Less: Commission on Reinsurance Ceded	300	600
Net Commission	600	480

Schedule 4

 

Operating Expenses Related to Insurance Business

Particulars	Current Year	Previous Year
Management Expenses	1,450	4,000
Bad Debts	50	120
Total	1,500	4,120

Illustration 14.18

 

Model: Revenue A/c; P and L A/c and balance sheet of general insurance company.

From the following details, prepare the revenue A/c, profit and loss A/c and the balance sheet of Deep Ocean Co. Ltd. carrying on marine insurance for 15 Months Ended on 31 March 2011:

Outstanding claims on 31 March 2011 were 7,00,00,000 depreciation on furniture to be provided @ 20% p.a.

[CA (Inter)—Modified]

Solution

 

Schedules Forming Part of Financial Statements

Schedule 1

 

Schedule 2

 

Claims incurred (Net)

Particulars	Current Year (000)	Previous Year (000)
Claims Paid	5,30,000	—
Add: Outstanding Claims on 31 March 2011	70,000	—
Claims Incurred (Net)	6,00,000	—

Schedule 3

 

Particulars	Current Year (000)	Previous Year (000)
Commission Paid	31,200	—
Net Commission	31,200	—

Schedule 4

 

Particulars	Current Year	Previous Year
Expenses of Management	1,10,000	—
Foreign Taxes and Insurance	6,150	—
Total	1,16,150	—

Schedule 5

 

Particulars	Current Year	Previous Year
Share Capital	7,50,000	—
Total	7,50,000	—

Schedule 6—Reserves and Surplus — Nil

Schedule 7—Borrowings—Nil

Schedule 8

 

Investments

Particulars	Current Year (’000)	Previous Year (’000)
Govt. of India Securities	4,60,000	—
Share Goverment Securities	4,40,000	—
Debentures of Public Bodies	90,000	—
Shares in Limited Companies	1,80,000
Total	11,70,000	—

Schedule 9—Loans—Nil

Schedule 10

 

Fixed Assets

Particulars	Current Year	Previous Year
Furniture	4,200	—
	1,050	—
Total	3,150	—

Schedule 11

 

Particulars	Current Year	Previous Year
Cash and Bank Balances	47,200	—
Total	47,200	—

Schedule 12

 

Particulars	Current Year	Previous Year
Advances:
Advance Income Tax Payments	31,000	—
Others Assets:
Outstanding Premiums	10,600	—
Agents Balances	73,200	—
Interest Accrued but not Due	4,100	—
Sundry Debtors	4,600	—
Stock of Stationery	1,250	—
Total	1,24,750	—

Schedule 13

 

Particulars	Current Year	Previous Year
Outstanding Claims	70,000	—
Due to Reinsurers	30,000	—
Sundry Creditors	6,300	—
Unclaimed Dividends	1,200	—
Total	1,07,500	—

Schedule 14

 

Particulars	Current Year	Previous Year
Provision for Unexpired Risk of Marine Business	6,20,000	—
Total	6,20,000	—

Schedule 15

 

Particulars	Current Year	Previous Year
Debit Balances in profit and Loss Account	1,32,400	—
Total	1,32,400	—

 

Insurance is a method of averaging risks.

There are several types of insurance policies, which may be broadly grouped into two categories: life and non-life insurance.

Principles of insurance: Principle of indemnity, insurable interest and utmost faith.

Important legislations to govern insurance business in India: The Insurance Act 1939, IRDA Act 1999 and Regulations 2002.

Important books to be maintained are: (i) the register of policies, (ii) the register of claims (iii) the register of licensed insurance agents and (iv) subsidiary books.

Bonus in reduction of premium is granted on renewal of policies. This is treated as an expense.

Reinsurance: Sometimes insurance companies share a part of risk with other companies. Commission on reissuance accepted is an expense, whereas commission on reinsurance ceded is an income to the company.

Reserve for unexpired risk: This is applicable generally to non-life insurance. Premium is reserved in advance for a year, which may extend beyond the accounting period. Hence, a portion of premium collected has to be reserved for that period. For marine business, it is 100% of net premium and for others it is 50% of net premium.

IRDA Regulations relating to preparation of financial statements: Formats of final accounts and all the schedules to be accompanied by then are discussed in detail with illustrations 14.1-14.17 (Refer the text)

 

Insurance Policy: A document of a contract entered into between the insurer (company) and the insured (policyholder).

Bonus in Reduction of Premium: A reduction allowed at prescribed rate on renewal of policy, a reward for not making any claims in the period the policy was in force.

Reversionary Bonus: A specified percentage (up to 95%) paid out of profits of LIC on maturity to the policyholders in addition to the policy amount.

Reinsurance: The practice of an insurer sharing a part of the risk with some other insurers.

Commission or Reinsurance ‘Ceded’: Under reinsurance, the commission got from the company to whom such business is given.

QUESTION BANK

 

I: State whether the following statements are true or false

1. Presence of ‘insurable interest’ is an important ingredient in all insurance contracts.
2. All insurance contracts are contracts of indemnity.
3. Under whole life policy, premium has to be paid for a fixed specified period.
4. Profit on life insurance business is determined by preparing a P & L A/c.
5. Bonus payable on maturity is known as reversionary bonus.
6. Every insurer shall keep a required ‘solvency margin’.
7. For life business premium income should be recognized on receipt basis.
8. Final accounts insurance business companies should be accompanied by schedules.
9. The balance sheet of life assurance business is also known as valuation balance sheet.
10. If life assurance, fund exceeds the net liability, and results in profit to the company.
11. Current liabilities are included as part of ‘sources of funds’.
12. Reinsurance premiums, whether on business ceded or accepted, are to be brought into account.
13. Fees and expenses connected with claims should not be included in claims.
14. Items of expenses and income more than 1% of the total premium (less reinsurance) or 5,00,000, whichever is higher, should be shown as a separate line item.
15. Investment made out of catastrophe reserve need not be shown separately.
16. Annuity is an income for the insurance company.
17. Surrenders are shown as expenditure under Schedule I.
18. The terms ‘insurance’ and ‘assurance’ are synonymous.
19. The process by which net liability is determined by an actuary is called valuation of balance sheet.
20. Combined revenue account is prepared for a general insurance company, conducting more than one business.

Answers:

1. True
2. False
3. False
4. False
5. True
6. True
7. False
8. True
9. False
10. True
11. False
12. True
13. False
14. True
15. False
16. False
17. True
18. True
19. False
20. False

II: Fill in the blanks with apt word(s)

1. Insurance is a contract of ________.
2. All contracts of insurance are contract of _________.
3. ________ is a contract entered into between the insurer and the insured.
4. Insurance is a method of averaging ________.
5. The amount payable by the insurer to the insured when the policy becomes due for payment is referred to as ________.
6. The policy money, i.e. sum assured that will be payable only after the death of the insured is called ________ policy.
7. ________ provides a source of regular income to the assured or his nominee after the expiry of a specified period.
8. Insurance business may be broadly divided into two categories: (i) ________ and (ii) ________.
9. The Insurance Regulatory and Development Authority Act was passed in the year ________.
10. Generally, ________ year is the accounting year of insurance companies.
11. An insurer carrying on life insurance business should comply with the requirements of ________ the IRDA Regulations, 2002.
12. Form ________ is the prescribed format for preparing revenue A/c of life insurance company, as per IRDA norms.
13. Form A-PL is the prescribed format for preparing ________ of life insurance companies, as per IRDA norms.
14. Form ________ is the standard format for preparing the balance sheet of life insurance companies, according to the provision of IRDA Regulations, 2002.
15. The revenue A/c is the summarized form of ________ schedules.
16. The first schedule to be prepared for revenue A/c deals with ________.
17. Schedule 3 is to be prepared by life insurance companies dealing with ________.
18. In revenue account of life insurance companies, balances of surplus transferred is represented by ________.
19. The balance sheet of insurance companies comprises of two parts: (i) ________ and (ii) ________.
20. Profit on life business is determined by the preparation of ________.
21. Valuation balance sheet is to be prepared ________ periodically.
22. The net liability on all outstanding policies is computed by experts called ________.
23. The concept of surrender value is exclusively confined to ________ business.
24. When an insurer reinsures a part of the risk with some other insurer, it is known as ________.
25. Taking more than one policy on the same subject with two or more companies is called ________
26. Only ________ of the balance of surplus amount should be earmarked as bonus to policyholders of life insurance.
27. Reserve for unexpired risk is peculiar to ________ business.
28. The reserve for unexpired risk should be ________ of the net premium earned for marine cargo business.
29. Revenue A/c is prepared in the Form ________ as per IRDI norms.
30. The excess provisions maintained by a general insurance company over the minimum prescribed amount is called ________.

Answers:

1. indemnity
2. utmost faith
3. A policy
4. risks
5. claims
6. whole life
7. Annuity
8. life insurance and non-life/general insurance
9. 1999
10. financial
11. Schedule A
12. A-RA
13. P & L A/c
14. A–BS
15. 4
16. premiums earned
17. commission
18. life assurance fund
19. sources of funds; application of funds
20. valuation balance sheet
21. once in 2 years
22. actuaries
23. life insurance
24. reinsurance
25. double insurance
26. 95%
27. general insurance
28. 50%
29. B-RA
30. additional reserve

III: Multiple choice questions—Choose the correct answer

1. In India, insurance business is regulated now by
   1. IRDA Act, 1999
   2. the Insurance Act, 1938
   3. the General Insurance (Nationalization) Act, 1972
   4. Insurance Rules, 1939
2. Which of the following is not a ‘statutory book’:
   1. register of policies
   2. register of proposals and proposal advance cash book
   3. register of claims
   4. register of licensed insurance agents
3. The final accounts of insurance business are accompanied by
   1. 4 schedules
   2. 11 schedules
   3. 15 schedules
   4. 12 schedules
4. Profit/loss of life business is determined by preparing
   1. profit and loss A/c
   2. profit and loss appropriations A/c
   3. trading A/c
   4. revenue A/c
5. The balance sheet of a life insurance company is to be presented in
   1. the prescribed form as per IRDA norms
   2. schedule VI of the Companies Act
   3. the traditional format of a trading concern
   4. the prescribed form as per Banking Regulation Act
6. Valuation balance sheet is prepared by a
   1. trading company
   2. life insurance company
   3. general insurance company
   4. banking company
7. In life insurance, the policy amount is payable
   1. after the expiry of the policy period
   2. after the death of the insured
   3. (a) or (b), whichever is earlier
   4. on the occasion of admission of insured in hospital
8. Claims paid by life insurance companies is shown in
   1. schedule 4
   2. schedule 1
   3. schedule 2
   4. schedule 3
9. The bonus that is to be paid on maturity of the policy is called
   1. interim bonus
   2. additional bonus
   3. annual bonus
   4. reversionary bonus
10. The percentage of profit of life insurance business to be distributed to share holders is
    1. 95%
    2. 100%
    3. 5%M
    4. none of these
11. The commission paid by the reinsurer is called
    1. commission on reissuance ceded
    2. commission on reinsurance accepted
    3. commission on direct business
    4. commission on agency paid
12. Agents balances (Dr.) are shown in the balance sheet of life insurance companies as
    1. other assets
    2. fixed assets
    3. current assets
    4. none of these
13. In general insurance, the policy amount is payable
    1. after the expiry of the policy period
    2. after one accounting period
    3. after the death of the insured
    4. after the loss incurred to the insured property
14. Survey expenses for marine insurance claims must be
    1. added to expenses of management
    2. shown as a separate item
    3. added to claims
    4. shown directly in balance sheet
15. Expenses of management must be charged to
    1. different revenue accounts
    2. P & L A/c
    3. P & L appropriation A/c
    4. none of the above
16. Income tax on interest, dividends and rest has to be
    1. added to provision for taxation
    2. subtracted from interest, dividends and rent
    3. debited to revenue A/c
    4. debited to P & L A/c
17. During 2010, a general insurance company reveals the following:

    	(in Lac)
    Premium Received	1,250
    Premium on Reinsurance Accepted	250
    Premium on Reinsurance Ceded	500

    The amount to be credited as premium to revenue A/c will be

    1. 1000 Lakhs
    2. 750 Lakhs
    3. 500 Lakhs
    4. 1500 Lakhs

Answers:

 

1. (b)	2. (b)	3. (c)	4. (d)	5. (a)
6. (b)	7. (c)	8. (a)	9. (d)	10. (c)
11. (b)	12. (a)	13. (d)	14. (c)	15. (a)
16. (b)	17. (d)

1. Define ‘Insurance’.
2. What do you mean by ‘Insure’ and ‘Insured’?
3. Explain the term ‘Uberrimae fidei’.
4. Mention the name of types of life policies.
5. What is the main difference between life policy and non-life policy?
6. What is the difference between whole life policy and endowment policy?
7. Mention some types of general insurance.
8. What do you mean by ‘life assurance fund’?
9. Explain the term ‘annuity’.
10. Mention two important regulations issued by IRDA Regulations, 2002.
11. Mention the important statutory books to be-maintained by life insurance companies.
12. Name of relevant forms specified under Schedule A of the IRDA Regulations, 2002.
13. Write short notes on revenue account.
14. What are the constituents of the balance sheet?
15. Explain the term ‘reinsurance’.
16. How can ‘claims’ be classified?
17. How will you determine ‘paid-up value’?
18. What is meant by ‘bonus in reduction of premium’?
19. Explain the term ‘reversionary bonus’.
20. Explain ‘surrender value’
21. What is ‘double insurance’?
22. Write short notes on valuation balance sheet.
23. What is meant by ‘actuarial valuation’?
24. Explain the term ‘reserve for unexpired risk’.
25. What is the legal provision in respect of reserve for unexpired risk?
26. What is meant by ‘additional reserve’?
27. What is the difference between ‘commission on reinsurance accepted’ and ‘commission on reinsurance ceded’?
28. Explain the term ‘net current assets’

1. Distinguish between life and non-life insurance business.
2. How the insurance industry in India has been regulated since its inception? Give special emphasis on the latest regulations.
3. Enumerate the books that are to be maintained for recording the transactions and preparing final accounts of insurance companies.
4. How would you prepare ‘revenue account’?
5. How would you prepare profit and loss account of life insurance companies?
6. Name the important schedules to be prepared, which form part of balance sheet. Explain the contents of each such schedule.
7. Explain the schedules to be prepared that form part of final accounts of general insurance companies.
8. Write notes on
   1. Net liability
   2. Bonus to shareholders
   3. Reserve for unexpired risk
   4. Reinsurance
   5. Net current assets

 

 

1. A life assurance fund of 12,50,000 was ascertained without taking into account the following:

1. Claims covered under reinsurance: 9,000
2. Reinsurance premium: 7,500

Calculate the correct life assurance fund.

[Ans.: 12,51,500]

[Model: Correct life assurance fund]

2. A life insurance company prepared a revenue A/c for the year ended on 31 March 2011 and ascertained its life assurance fund to be 67,03,200. It has found later that the following had been omitted from the accounts.

Interest Accrued on Investments	96,000
Income Tax Liable to be Deducted
Estimated to Be 30,000
Outstanding Premiums	94,200
Bonus Utilized for Reduction of Premium	19,800
Claims Intimated but not Admitted	45,600
Claims Covered under Reinsurance	1,5900
Compute the true life assurance fund
[Ans.: 68,33,700]

3. The life assurance fund of an insurance company on 31 March 2011 showed a balance of 43,88,250. It was found that the following were not taken into account.

Dividend from Investments	2,40,000
Income Tax on above	24,000
Bonus in Reduction of Premium	4,38,750
Claims Covered under Reinsurance	2,11,500
Claims Intimated but not	3,81,000
Accepted by the Company
Ascertain the Correct Balance of Fund.
[Ans : 44,34,750]

4. The following balances are extracted from the books of XYZ Life Insurance Corporation:

Life Insurance Fund as on 31 March 2011	6,400 Lakhs
Net Liabilities as per Valuation	4,800 Lakhs

Interim Bonus Paid 600 Lakhs

You are required to show (a) the valuation balance sheet as on 31 March 2011 and (b) the distribution statement.

[Model: Valuation balance sheet]

[Ans : Surplus 1,600 Lakhs; Bonus: 1490 Lakhs]

5. The Revenue A/c of a life insurance company showed a balanced of 23,75,000 at the end of 2010–11 before considering the following items:

(a) Bonus in Reduction of Premiums	2,00,000
(b) Outstanding Premiums	5,00,000
(c) Interest Accrued on Investments	1,00,000
(d) Claims Intimated but not Admitted	1,75,000
(e) Claims Recovered under Reinsurance	15,000

Pass necessary adjustment entries.

[Ans: Adjusted life assurance fund: 28,15,000]

Model: Adjustment entries—Life assurance fund

6. From the following you are required to calculate the amount on account of claim to be shown in revenue A/c for the year ending on 31 March 2011:

Claim on account of reinsurance in 2010–11 was 1,50,000.

[Ans : Net claim to be shown in revenue A/c: 5,70,000]

Model: Calculation of net claims

7. The following figures relate to a life insurance company for the year ended on 31

March 2011. Prepare the revenue A/c.

Additional information:

1. Premium outstanding: 36,000
2. Claims outstanding: 12,000

[Ans : Surplus: 5,70,000]

Model: Preparation of revenue A/c

8. From the following particulars prepare revenue A/c, in statutory form, of the Leo Life Assurance Co. Ltd. for the year ended on 31 March 2011:

	(in ’000)
Claims Paid by Death	71,000
Claims Paid by Maturity	35,100
Premiums	7,06,000
Consideration for Annuities Granted	82,00
Annuities Paid	53,450
Bonus Paid in Cash	2,400
Management Expenses	31,900
Commission	9,570
Interest, Dividends and Rents	97,850
Surrenders	13,150
Bonus in Reduction of Premium	900
Dividend Paid to Shareholders	4,500
Life Assurance Fund (1 April 2010)	15,22,500
Claims Outstanding (1 April 2010)	11,000
Claims Outstanding (31 March 2011)	8,000

[Ans : Surplus before payment of dividend: (in ’000) 6,71,380]

9. The following trial balance was extracted from the books of a Life Insurance Company Ltd. as on 31 March 2011:

	Dr. ’000	Cr. ’000
Paid-up Share Capital (50,00,000 Shares of 10 Each)	—	50,000
Life Assurance Fund on 1 April 2010	—	14,86,150
Dividend Paid	7,500	—
Bonus to Policyholders	15,750	—
Premia Received	—	50,750
Claims Paid	98,500	—
Commission Paid	4,650	—
Expenses of Management	16,150	—
Mortgages in India	2,46,100	—
Interest and Dividends	—	86,350
Received
Agents Balances	4,650	—
Freehold Premisesx	20,000	—
Investments	11,52,500	—
Loan on Company’s	86,800	—
Policies
Cash on Deposit	13,500	—
Cash in Hand	3,650	—
Surrenders	3,500	—
	16,73,250	16,73,250

You are required to prepare company’s revenue A/c for the year ended on 31 March 2011 and its balance sheet as on that date after taking the following matters into consideration:

	’000
(a) Claims Admitted but not Paid	4,650
(b) Expenses of Management Due	100
(c) Interest Accrued	9,650
(d) Premiums Outstanding	6,000

[Ans: In ’000—Surplus before divided: 9,450; balance sheet total: 15,38,100]

[Model: Revenue A/c and balance sheet]

10. The following trial balance was extracted from the books of a Life Assurance Company Ltd. as on 31 March 2011:

You are required to prepare the company’s revenue A/c for the year ended on 31 March 2011 and its balance sheet as on that date after taking the following matters into consideration

	( ’000)
(i) Claims Outstanding at the End of the Year	10,000
(ii) Interest Accrued but not Received	9,750
(iv) Claims Covered under Reassurance	6,000

[Ans : in ’000s—Surplus before divided: 1,30,750; balance sheet total: 18,39,850]

[Hint: Life Assurance Fund: 17,39,850]

11. The following balances were extracted form the books of Moon Life Assurance Co. Ltd. as on 31 March 2011:

You are required to prepare the revenue A/c for the year ended on 31 March 2011 and the balance sheet as on that date after taking into account the following adjustments:

	(’000)
(i) Premiums Outstanding	22.5
(ii) Interest Accruing but not Due	18.5
(iii) Claims Admitted but not Paid	6.0
(iv) Surrender Claims not Paid	5.5
(v) Further Bonus Utilized in Premium Reduction of	10.0

[Ans : in ’000s—Surplus 10,404.5; balance sheet total: 15,154.5]

12. From the following Trial balance of East Cost Life Insurance Co. Ltd., prepare revenue A/c and the balance sheet after taking into account the following adjustment:

	(′000)
(a) Claims Outstanding as on 31 March 2011	90
(b) Claims Recoverable from Reinsurer	25
(c) Further Bonus Utilized in Reduction of Premium	12
(d) Further Claims Intimated	15
(e) Premiums Outstanding	12
(f) Management Expenses Due	36
(g) Surrenders Adjusted Against Loans on Policies	60

 

[Ans : ( ′000)–Surplus 1,617; balance sheet total: 12,717]

13. Model: Revenue A/c and valuation balance sheet

From the figures stared below prepare a revenue A/c and valuation balance sheet as on 31 March 2011 showing surplus for policyholders:

	′000
Life Assurance Fund (Opening)	20,000
Premiums	12,500
Interest, for Annuities Granted	7,500
Consideration for Annuities Granted	500
Claims Paid	1,500
Surplus on Revaluation of Reversions Purchased	40
Bonus in Reduction of Premium	25
Surrenders	500
Commission	250

Net Liabilities on Policies in Force on 31 March 2011 28,265

[Ans : ( ’000)—Surplus 18,265; life assurance fund at the end: 37,265; surplus as per valuation balance sheet: 10,000]

14. The following were the revenue items of a life insurance company for the year ended on 31 March 2011:

At the valuation on 31 March 2011, the actuary’s certificate disclosed the net liability on policies and annuities at 14,40,45,000.

prepare revenue A/c and ascertain the valuation surplus.

[Ans : Surplus in revenue A/c: 54,79,500

Surplus in valuation balance sheet:	35,75,000
Life assurance fund on 31 March 2011:	1,79,79,500]

15. Model: Calculation of bonus due to policyholders

The Life Insurance fund of a company was 17,00,000 on 31 March 2011. Its actuarial valuation on 31 March 2011 disclosed a net liability of 14,40,000. An interim bonus of 20,000 was paid to policyholders during the previous 2 years. It is now proposed to carrying forward 55,000 and to divide the balance between the policyholders and shareholders. Show (a) the valuation balance sheet; (b) the net profit for the 2-year period and (c) the distribution of profits.

[Ans : (a) Surplus: 2,60,000; (b) net profit: 2,80,000; (c) amount due to policyholders: 1,93,750; shareholders: 11,250]

16. Crescent Life Assurance Company gets its valuation made once in 2 years. Its life assurance fund on 31 March 2011 stood as 22,82,500; before providing for 22,500 being the shareholders dividend for 2010–11. Its actuarial valuation on 31 March 2010 disclosed a net liability of 16,10,000. An interim bonus of 40,000 was paid to the policyholders during the previous 2 years.

Prepare a statement showing the amount now available as bonus to policy holders.

[Ans : Amount available as bonus to policyholders: 6,15,500; surplus: 6,72,500]

17. A life insurance company got its valuation made once in 3 years. The life assurance fund on 31 March 2011 amounted to 20,96,000 before providing for 16,000 for the share holders’ dividend for the year 2009–10. Its actuarial valuation on 31 March 2011 disclosed a net liability of 20,20,000. An interim bonus of 20,000 was paid to the policyholder during the previous 2 years.

    Prepare a statement showing the amount now available to policyholders as bonus.

    [Ans : Amount available as bonus to policyholders: 56,000; surplus as per valuation balance sheet: 76,000]

18. General Insurance

    Revenue A/c of Single Business

    From the following particulars, prepare the fire revenue A/c for 2010–11:

	’000
Claims Paid	940
Legal Expenses Regarding Claims	20
Premiums Received	2,400
Reinsurance Premium	240
Commission	400
Expenses of Management	600
Provision Against Unexpired Risk on 1 April 2010	1040
Claims Unpaid on 1 April 2010	80
Claims Unpaid on 31 March 2011	140
Model

[Ans : Operating profit: 1,00,000]

19. Prepare revenue A/c of the Marine Insurance Company Ltd. as on 31 March 2011 from the following information.

	′000
Reserve for Unexpired Risk (1 April 2010)	2483.00
Addition Reserve (1 April 2010)	248.30
Premiums Less Reinsurance	3600
Claims Outstanding (1 April 2010)	800
Claims Paid	2350
Commission	175
Management Expenses	270
Audit Fees	50
Directors Sitting Fees	17
Depreciation	25
General Charges	60

Outstanding claims due on 31 March 2011 was 300,000. Additional reserve is to be maintained at 10% on net premiums

[Ans : Operating loss: 75,700]

20. Model: More than one business—revenue A/c The following balances are extracted from the books of Bharath General Insurance Company Ltd. Prepare revenue A/c of fire and marine business for the year ending on 31 March 2011.

It was further noticed that premiums were outstanding:

Fire 70,00,000 and marine 80,00,000. Provision is to be made for unexpired risk on fire and marine at 40% and 100% of the premium received, respectively.

[Ans.: Operating profit fire: 5 15,87,700; Marine: 5 30,55,000]

21. Model: revenue A/c and P & L A/c for two businesses

From the following balances of Universal Insurance Co. Ltd. as on 31 March 2011, prepare (a) fire revenue A/c, (b) marine revenue A/c and (c) profit and loss A/c:

In addition to the usual reserve additional reserve in the case of fire insurance is to be increased by 5% of net premiums.

[Ans: Operating profit: Fire: 1.20,000; Operating loss: Marine: 20,000; profit carried forward to B/S: 1,40,100]

22. Model: Revenue A/c; P & L A/c and balance sheet of general insurance companies

From the following trial balance of a marine insurance company prepare final accounts for the year ended on 31 March 2011:

1. Depreciate furniture 10%; land and buildings 3%.
2. Outstanding claims 55,00,000.
3. Provide 35,00,000 to investment reserve fund in addition to existing balance.
4. Adjustment has to be made for 50,00,000 reinsurance premium paid and 25,00,000 for claims covered under reinsurance.

[Ans: Operating profit: 6,41,300; profit transferred to balance sheet: 6,47,800; Balance sheet total: 9,40,800]

23. On 31 March 2011, the trial balance of a general insurance company was as follows:

Depreciate furniture by 10% on the original cost and motor car by 15% provide 40% on premiums for unexpired risk and 35,000 for investment reserve fund in addition to the existing balance. Prepare revenue account of fire and marine departments, profit and loss A/c and balance sheet.

[Ans: Operating profit fire: 60,25,000; Operating profit marine: 101,91,000; profit carried to B/S: 177,88,000; Balance sheet total: 333,53,000

Model: Final accounts—more than one business

 

 

24. The life insurance fund of Hindustan Life Insurance Co. Ltd. was 1,36,00,000 on 31 March 2011. Its actuarial valuation on 31 March 2011 disclosed a net liability of 1,15,20,000. An interim bonus of 1,60,000 was paid to the policyholders during the previous 2 years. It is not proposed to carrying forward 4,40,000 and to divide the balance between the policyholders and the share holders.

Show (a) the valuation balance sheet, (b) the net profit for the 2-year period and (c) the distribution of profits

 

[CA (Inter)—Modified]

[Ans : (a) profit as per valuation balance sheet: 20,80,000; (b) Net profit for the 2-year; 22,40,000 period; (c) Amount due to policyholders: 15,50,000; Amount due to shareholders: 90,000].

Model: valuation balance sheet and net profit and distribution of profits

25. The revenue account of a life insurance company shows the life assurance fund on 31 March 2011 at 3,11,06,550. Before taking into account the following items:

 

(i) Claims Covered under Reinsurance:	60,000.
(ii) Bonus Utilized in Reduction of Life Insurance Premium:	22,500
(iii) Outstanding Premium:	27,050
(iv) Claims Intimated but not	1,32,500
Admitted:
(v) Interest Accrued on Securities:	41,300.

What is the life assurance fund after taking into account the above omissions?

[CS (Inter)—Modified]

[Ans : 3,11,02,400]

Model: True life assurance fund

26. From the following trial balance of long life assurance company prepare the revenue account, profit and loss account and the balance sheet. The statements need to be prepared in prescribed formats.

Other information:

1. Premium less reinsurances include 4 crores as first year’s premium, 5.5 crores as renewal premium and 50 Lakhs as single premium.
2. Premium outstanding at the end of the year is 1,25,00,000.
3. Commission on outstanding premium is 3,75,000.
4. Claims less reinsurances outstanding at the end of the year are 25,00,000 (by death) and 15,00,000 (by maturity).
5. Depreciation to be provided is 5,00,000 on property and 80,000 on furniture and office equipment.
6. Income tax provision to be made for 10,00,000.
7. Expenses of 15,00,000 and 5,00,000 are prepaid and outstanding respectively, at the end of the year.
8. Accrued interest, dividend and rent are 12,50,000.

[ICWA (Final)—Modified]

[Ans : Operating profit: 25,00,000; P & L A/ c balance carried forward to B/S: 15,00,000; Total of balance sheet: 1,15,00,000]

27. From the following balances as on 31 March 2011, prepare the necessary revenue A/c for the marine insurance business of an insurance company:

Particulars	Direct Business ’000	Reinsurance ’000
A. Premium:
Received	36,800	5,760
Receivable—1 April 2010	1,488	216
Receivable—31 March 2011	2,096	204
Paid	—	3,680
Payable—1 April 2010	—	225
—31 March 2011	—	372
B. Claims:
Paid	18,800	2,400
Payable—1 April 2010	1,000	228
—31 March 2011	1248	264
Received	—	1,020
Receivable—1 April 2010	—	96
—31 March 2011	—	138
C. Commission:
On Insurance Accepted	1760	152
On Reinsurance Ceded	—	156
D. Other Expenses and	—	—
Income

Salaries 19,20,000; rates and taxes 232,000; postage, telegrams, stationery and printing expenses 344,000; income tax paid 26,40,000; interest, dividend and rent received (net) 11,20,000; income tax deducted at source 224,000; legal expenses (including 144,000 incurred for settlement of claims) 320.

Balance of fund on 1 April 2010 was 3,07,60,000 including additional reserve of 27,60,000.

Additional reserve is to be maintained at 5% premium in the year.

[CA (Inter)—Modified]

[Ans : Operating profit: 37,99,458; P & L A/c balance carried forward to B/s: 22,79,548] Model: Revenue A/c and profit and loss A/c general insurance

28. From the following balances extracted from the books of Perfect General Insurance Company Ltd. as on 31 March 2011,

you are required to prepare revenue accounts in respect of fire and marine insurance business for the year ended on 31 March 2011 and a P & L A/c for the same period:

	Fire (’000)	Marine (’000)
Outstanding Claims on 1 April 2010	112	28
Claims Paid	400	320
Reserve for Unexpired Risk on 1 April 2010	800	560
Premium Received	1800	1320
Agent’s Commission	160	80
Expenses of Management	240	180
Reinsurance Premium(Dr.)	100	60

The following additional points are also to be taken into account:

1. Depreciation on fixed assets to be provided at 10% p.a.
2. Interest accrued on investment: 40,000.
3. Closing provision for taxation on 31 March 2011 to be maintained at 4,96,552.
4. Claims outstanding on 31 March 2011 were:

    

   Fire insurance	40,000
   Marine insurance	60,000

    

5. Premium outstanding on 31 March 2011 were:

    

   Fire insurance	120,000.
   Marine insurance	80,000.

    

6. Reserve and unexpired risk to be maintained at 50% and 100% of net premiums in respect of fire and marine insurance, respectively.
7. Expenses of management due on 31 March 2011 were 40,000 for fire insurance and 20,000 for marine insurance.

[CA (Inter)—Modified]

[Ans: Operating profit (fire): 9,42,000; Operating loss (marine): 72,000; Balance carried forward to balance sheet 6,33,448.]

Model: More than one business—revenue A/c and P & L A/c

29. The following figures have been extracted from the books of National Insurance Co. Ltd. in respect of their marine business for 2010–11:

Particulars	Schedule
Direct Premium Income Received	200
Reserve for Unexpired Risks as on 1 April 2010	240
Claims Outstanding as on 1 April 2010 (Net)	80
Bad Debts	40
Income from Investments and Dividends (Gross)	40
Rent Received from Properties	20
Investments in Govt. Securities as on 1 April 2010	400
Investment in Shares as on 1 April 2010	80
Commission Paid on Direct Business	20
Expenses of Management	20
Income Tax Deducted at Source	12
Profit and Loss A/c (Cr) Balance on 1 April 2010	40
Other Expenses	5
Reinsurance Premium Receipts	20
Outstanding Clams as on 31 March 2011 (Net)	120
Direct Claims Paid	100
Reinsurance Paid	16

Prepare revenue account, profit and loss account and profit and loss appropriation account for the year, after taking into account the following further information:

1. All direct risks are reinsured for 20% of the risk.
2. Claim a commission of 25% on reinsurance ceded.
3. Provide 25% commission on reinsurance accepted.
4. Market value of investment as on 31 March 2011 is as under:

    

   (i) Government Securities:	420 Lakhs
   (ii) Shares	72 Lakhs

   Adjust separately for each of these two categories of investments.

5. Provide 65% for income tax

[ICWA—Modified]

[Ans: Balance in revenue account: 72 Lakhs; Net profit: 41.40 Lakhs; Balance in P & L appropriation A/c: 81.40 Lakhs];

Model: Revenue A/c; P & L A/c and P & L appropriation A/c of general insurance business

30. From the following trial balance as on 31 March 2011 drawn from the books of Prompt General Insurance Co. Ltd., and with the help of further information, draw separate revenue accounts and profit and loss appropriation account for the year 2010–11 and a balance sheet as on 31 March 2011:

Further information:

1. Outstanding claims on 31 March 2011 (less reinsurance):

    

   Fire— 200,000

   Marine— 100,000

   Miscellaneous— 125,000

    

2. Market value of investments on 31 March 2011: 44,50,000.
3. Depreciation on furniture @ 10% and on building @ 2% to be charged to P & L A/c.
4. Reserve for unexpired risk to be provides @ 50% of the premium income for the year.
5. Transfer to general reserve: 10,00,000.
6. Ignore taxation.

[Ans: Balance in revenue A/c—fire: 6,50,000; Marine:

1,45,000; Miscellaneous: 1,05,000; P & L A/c balance: 8,32,000; To be carried to B/S; Total of balance sheet: 38,32,000]

Model: More than one business—final Accounts