Prof. (Mrs.) Bernadette C. Vaz



INSURANCE COMPANY ACCOUNTS

 

1.   How do you treat interest, dividends and rent in Insurance Company Accounts?

If there is any income by way of interest, dividend or rent of the insurance company, the net income (after deduction of tax) will be shown on the outer column of the credit side of the Revenue A/c. Any accrued and outstanding interest, dividend etc., is also taken into account.

 

 

2.   What do you mean by Claims and how do you treat it?

Claim is the amount payable by the insurance company to the insured, or to his nominee on the policy. In the case of an endowment policy, the claim arises either on the death or on the policy holder reaching a stipulated age whichever is earlier. In case of whole life policy, the amount is payable only on the death of the policyholder. Claim on the death of a policyholder is called claim by death. Claim on the policy holder reaching a stipulated age is called claim by maturity or survivance. Claims include reversionary bonus and interim bonus. The claim in life insurance business may arise due to two factors - by death or on maturity of the policy. Claims are shown on the debit side of the Revenue Account. Claims paid, claims outstanding for the year and claims accepted and claims intimated but not yet accepted will be taken into account and from which any reinsurance recoveries will be deducted.

 

 

3.   What do you mean by Annuity and how do you treat it?

(a) Annuity is an annual payment which a life insurance company agrees to pay to insured till his death for a lump sum received in the beginning known as considerations for annuities granted. Annuity is considered as an expense and shown on the debit side of the Revenue Account. The person who receives the annuity is called annuitant.

(b) Considerations for annuities granted. Any lump sum payment received in lieu of granting annuity is called consideration for annuities granted.

 

 

4.   What do you mean by Bonus in cash and how do you treat it?

The insurance company may pay the bonus in cash for the holder of a ‘with profit policy.’ The bonus paid in cash will be shown on the debit side of the Revenue Account.

 

 

5.   What do you mean by expenses of management and how do you treat it?

The expenses covered under this head will include administration, establishment charges, etc., will be shown on the debit side of the Revenue A/c separately or in the form of an attached schedule or working note.

 

 

6.   How should life fund be treated in final accounts of life insurance company?

Life fund at the beginning of an accounting year, given in the trial balance, should be entered on the credit side of the Revenue Account as the first item. Life fund at the end of an accounting year, which is nothing but the balancing figure of the Revenue Account, is entered on the debit side of the Revenue Account as the last item. It is then entered on the liabilities side of the balance sheet under the head ‘BALANCE OF FUNDS AND ACCOUNTS.’

 

7.   What do you mean by loan on life interest?

If a person takes a loan on the security of a certain properties or assets in which he has only a life interest such a loan is called loan on life interest.

 

 

8.   What do you mean by loan on reversions?

If a person to whom certain properties or assets revert upon the death of some other person who has life interest therein, takes loan against the security of such assets or properties, such a loan is called loan on reversion.

 

 

9.   How do you deal with dividend to shareholders in case of life insurance company?

  1. If it is given trial balance, and if there is any balance of profits, it should be deducted from the balance of profits of the liability side of the balance sheet under the head RESERVE OR CONTINGENCY   ACCOUNTS.’
  2. If it is given in the trial balance, and if there is no balance of profits, then, it should be entered on the debit side of revenue account after the management expenses are entered.
  3. If it is given in the adjustment, and if there is balance of profits, then, first, it should be deducted from the balance of profits on the liability side of the balance sheet under the head ‘RESERVE OR CONTINGENCY ACCOUNT.’  Secondly, as it is not paid, it should be entered on liability side of balance sheet under the head ‘OUTSTANDING DIVIDENDS.’
  4. If it is given in adjustments and there is no balance of profits, first, it should be entered on the debit side of the revenue after all management expenses are entered. Secondly, it should be entered on the liability side of the balance sheet under the head OUTSTANDING DIVIDENDS.’

 

 

10.   How are the following treated in the annual accounts of a general insurance company?

Outstanding claims - if it is given in the trial balance and if they relate to the last year, they should be entered only in the revenue account and shown as a deduction from the claims paid during the year on the debit side. If it is given in the trial balance and relates to the current year, they should be entered on the liability side of the balance sheet under the head Estimated Liability in respect of outstanding claims`. If it is given as an adjustment, it must be added to the claims paid during the year on the debit side of the revenue account and in the balance sheet, it should be entered in the liability side.

 

Agents balance - It is always taken on the asset’s side of the balance sheet under the head Agents Balance` and amount due from the agents are account of revenue to the insurance company.

 

 

11.   What do you mean by

(a)               Reversion: It means in reversions in order to enable the company to pay the bonus to its policyholders along with the policy amount on maturity of the policy. They are entered on the asset side of the balance sheet under the head ‘investment.’

(b)               Reversionary Bonus: If the bonus declared is neither paid in cash nor is utilized in the reduction of premiums due from them on the date of declaration of bonus, but is paid along with the policy amount on the maturity of the policy then it is called reversionary bonus.

 

 

12.   How do you treat the following in the books of a general insurance company?

(a)               Commission on re-insurance ceded:  It is an income to the company, which has ceded or transferred the reinsurance business, so it should appear on the credit side of the concerned revenue account.

 

(b)               Commission on re-insurance accepted:  It is an expense for the company, which has accepted the re-insurance business. So it should be entered on the debit side of the concerned revenue account.

 

(c)               Commission on direct business:  It is an expense (commission paid to their agents), so it should be entered on the debit side of the concerned revenue account.

 

(d)               Re-insurance:  Re-insurance is a device of reducing the risk carried by an Insurance Company. An insurance company does not like to carry at single risk of a huge amount, When it issues a singly policy of a large amount it get a part of the risk insured with another insurance company.  This is called re-insurance. The company which re-insures a risk is called Re-insuring or Accepting Company and the company which cedes re-insurance is called Ceding Company.

 

(e)               General Insurance:  An insurance company carrying on insurance business other than life insurance is said to be carrying on General insurance business. Under law a separate type revenue account has to be prepared for each type of business – fire, marine etc General Insurance policies are only for one year and therefore there is question of a future liability. Policies are issued throughout the year and remain in force till after the close of the financial year.  A provision has to be maintained to meet the claims arising under such policies (100% of net premium - marine and 50% of net premium for others.)