Accounts of Insurance Companies Introduction, Formats

General insurance business means business other than life insurance business. General insurance companies operating in India were nationalised on 13th May, 1971 by the Ordinance of the President of India. The accounts of the General Insurance Companies were maintained according to the provisions of Insurance act 1938. Under the previous law, separate Revenue Account had to be prepared for each type of business-fire, marine, accident, etc.

(a) Revenue Account:

A separate revenue account is prepared for each type of business. Incomes and expenses of a particular business are recorded separately and profit or loss arising there from is transferred to Profit and Loss Account.

(b) Profit and Loss Account:

General incomes and expenses not belonging to a particular business are recorded in it and balance of profit or loss is transferred to Profit and Loss Appropriation Account.

(c) Profit and Loss Appropriation Account:

Appropriations of profit for various purposes are shown in it and it’s balance is transferred to balance sheet.

(d) Balance Sheet:

It shows various assets and liabilities of general insurance companies. Performa of Balance Sheet is same for general and life insurance companies.

Before the incorporation of IRDA Act, 2000 which allowed private players, general insurance business was conducted by General Insurance Corporation of India and its four subsidiaries.

Reserve for Unexpired Insurance:

According to the provisions of Insurance Act, 1938, provision for unexpired risks in case of fire, marine, cargo and miscellaneous business is to be created-@ 40% of the net premiums received and 100% in case for marine Hull. However, income determination of general insurance business is done as per section 44 of Income-tax Act, 1961 and Rule 6 E of the Income-tax Rules.

They provide for reserve for unexpired risk allowed as deduction up to 50% of net premium income in case of fire insurance and miscellaneous insurance and 100% of net premium in case of marine insurance.

As such, reserve is to be made at 50% of the net premium income in case of fire and other insurance businesses and at 100% of the net premium income in case of marine insurance business. A prudent insurance company may make additional reserve in case of fire and miscellaneous insurance business, if it considers it necessary.

Commission to Agents:

Commission on policies effected through insurance agents cannot exceed 5% of the premium in respect of fire and marine business and 10% in case of miscellaneous business. In case of policies effected through principal agents the maximum limits are 20% for fire and marine policies and 15% in the case of miscellaneous insurance less any commission payable to an insurance agent with respect to the policy concerned. Certain concessions are available in this respect to principal agents having a foreign domicile.

Claims:

Claims paid must include all expenses directly incurred in settling claims such as legal expenses, medical expenses, surveyor’s expenses etc.

No claim of Rs. 20,000 or more can be paid, except as the Controller of Insurance may otherwise direct, unless there is a report in respect thereof from an approved surveyor or loss assessor (licensed under the Insurance Act).

General Instructions for Preparation of Financial Statements:

1. The corresponding amount for the immediately preceding financial year for all items shown in the Balance Sheet, Revenue Account, and 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 notional rent.

(I) For the purposes of financial statements, unless the context otherwise requires:

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

(b)The expression ‘reserve’ shall not, subject to as aforesaid, include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability.

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

(d) The expression “liability” shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities.

(II) Where:

(a) Any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or

(b) Any amount retained by way of providing for any known liability is in excess of 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 law suits 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:
9. 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 near thereto as the circumstances permit.

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

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.

Formats