by As per IRDA Regulation, a Balance Sheet is divided into two parts:
(a) Sources of Fund; and
(b) Application of Funds.
Sources of Fund (Schedule 5):
The first one under this head is the Shareholders’ Fund. Under the head, various classification of capital is to be shown separately (viz, Authorized Capital, Issued Capital, etc.).
Reserves and Surplus (Schedule 6):
All kinds of reserves (viz. Capital Redemption Reserve, General Reserve, Revaluation Reserve Securities Premium, etc.) will be shown separately.
Borrowings (Schedule 7):
All kinds of borrowings by way of Bonds, Debentures, Bank Loan, Loan from financial institutions etc. are to be shown separately. Similarly, unsecured borrowings and secured borrowings are to be shown separately.
Policyholders’ Fund:
Any kind of fund related to policyholders must be shown separately under the head Policyholders’ Fund.
Application of Funds Investments (Schedule 8):
It must be remembered that Shareholders’ Fund and Policyholders Fund are to be shown separately, i.e. Schedules 8 contains the investment of Shareholders’ Fund. On the contrary, Schedule 8A contains the Policyholders’ Fund.
Loans (Schedule 9):
Proper classifications of loan should be made first, i.e. as per security-wise, performance-wise, borrower- wise etc.
Fixed Assets (Schedule 10):
Detailed descriptions of all the, fixed assets must be made. They include: All tangible assets (viz. Plant and Machinery, Land and Building, etc.) and intangible assets (viz. patent, etc.).
Current Assets = Cash at Bank (Schedule 11):
Cash and Bank (balances should be shown separately)
Advances and Other Assets (Schedule 12):
These also include various kinds of advances made by the insurance company.
Current Liabilities (Schedule-13):
Current liabilities are those which need payment within one year, i.e. liabilities which are repayable within a short period of time, e.g., Creditors, Provisions for Tax, etc.
Provisions (Schedule 14):
All kinds of provisions .
Miscellaneous Expenditure (Schedule15):
These include – Discount on Issue of Shares or Debentures, Preliminary Expenses.
Valuation balance sheet is prepared by the life insurance company, or it is prepared by the actuary for the life insurance company. An Actuary is a person who evaluates risk in an insurance given by an insurance company. Valuation balance sheet is prepared by the life insurance company to evaluate the surplus or deficiency.
Ascertainment of Profit:
Ascertainment of profit in the case of life insurance is done after the expiration of a two-year period. For this purpose a valuation balance sheet is prepared. The balance of life insurance fund is compared with the amount of net liability as per actuarial valuation. In case the balance of life insurance fund on the valuation date is more than the net liability, there is said to be a surplus. In a reverse case there will be a deficiency.
Treatment of Profit:
According to section 28 of Life Insurance Corporation of India Act, 95% of the surplus as disclosed by the valuation Balance Sheet has to be allocated to or reserved for the policy-holders of the Corporation. The balance of the amount is to be paid either to the Central Government or utilised for such other purposes and in such manner the government may determine.
The following points should be kept in mind while determining the share of the policy holders:
(i) Any interim bonus paid to the policy holder should be added back to the surplus as disclosed by the valuation balance sheet since the interim bonus is really an advance payment of the bonus.
(ii) Any expenditure still to be incurred, e.g., dividends to shareholders should be deducted from the surplus as disclosed by the valuation balance sheet.
(iii) The share of the policy-holders will be 95% of the surplus left after any deduction made as above. Any interim bonus already paid should be deducted from the amounts as calculated.
The balance is the amount now due to the policy-holders.
If we subtract liabilities of a policyholder-owned insurance company from its assets, we get the Policyholder surplus. The financial strength of a company can be determined through its Policyholder surplus as it indicates the financial ability of a company. If an insurance company needs to pay a higher-than-expected amount of claims, this surplus serves as an additional source of funds other than the company’s reserves and reinsurance. In the case of a publicly owned insurance company, the Policyholder surplus is known as shareholder’s equity.
