Preparation of Revenue Accounts for Life Insurance Companies

• To Ascertain the Operating Results of Life Insurance Business

The primary objective of preparing the Revenue Account is to determine the operating results of the life insurance business during an accounting period. The account records all income and expenses relating to insurance operations, such as premiums, claims, commissions, and management expenses. By comparing total income with total expenditure, the company can determine whether it has earned a surplus or incurred a deficit. This information helps management evaluate the efficiency and profitability of insurance operations. Therefore, the Revenue Account serves as an important tool for measuring the financial performance of a life insurance company.

• To Determine the Surplus or Deficit

Another important objective of preparing the Revenue Account is to determine the surplus or deficit arising from insurance operations. A surplus occurs when total income exceeds total expenses, whereas a deficit arises when expenses exceed income. The determination of surplus is essential because it forms the basis for the declaration of bonuses to policyholders and the strengthening of reserves. Accurate determination of surplus also helps management assess the financial health of the company. Therefore, the Revenue Account plays a vital role in calculating the actual financial result of life insurance business.

• To Provide Information Regarding Income and Expenses

The Revenue Account provides detailed information regarding the various sources of income and categories of expenses incurred by the insurance company. It records premium income, investment income, claims, commissions, and operating expenses in a systematic manner. Such information helps management and stakeholders understand the composition of income and expenditure and evaluate the efficiency of operations. Proper disclosure of these items also improves transparency and accountability. Therefore, one of the major objectives of preparing the Revenue Account is to provide comprehensive information about the income and expenses of the company.

• To Facilitate Actuarial Valuation

Life insurance companies have long-term obligations towards policyholders, making actuarial valuation an essential activity. The Revenue Account provides the financial data required by actuaries to determine policy liabilities, reserves, and future obligations. Information relating to premiums, claims, and expenses helps in estimating actuarial surplus or deficit accurately. Without proper accounting records, actuarial valuation would not be reliable. Therefore, one of the important objectives of preparing the Revenue Account is to facilitate the process of actuarial valuation and ensure accurate determination of policy liabilities.

• To Assist in Bonus Determination

Many life insurance policies are participating policies that entitle policyholders to receive bonuses from the surplus earned by the company. The Revenue Account helps determine the amount of surplus available for distribution after meeting all expenses and liabilities. Management uses this information to decide the amount of bonus that can be declared for policyholders. Proper determination of bonuses increases policyholder satisfaction and confidence in the insurance company. Therefore, one of the objectives of preparing the Revenue Account is to provide the necessary information for the fair and accurate declaration of bonuses.

• To Facilitate Managerial Decision-Making

The Revenue Account provides valuable information that assists management in making important business decisions. Information relating to profitability, claims experience, operating expenses, and investment income helps management formulate strategies for future growth and efficiency. Management can identify areas of high costs, evaluate operational performance, and take corrective measures when necessary. Therefore, one of the important objectives of preparing the Revenue Account is to provide financial information that supports effective planning, control, and decision-making by the management of the insurance company.

• To Ensure Compliance with Legal and Regulatory Requirements

Life insurance companies are required by law to prepare the Revenue Account in accordance with the provisions of the Insurance Act, IRDAI regulations, and applicable accounting standards. Preparing the Revenue Account ensures that the company complies with statutory requirements and maintains proper financial records. Compliance enhances transparency and protects the interests of policyholders, investors, and regulators. Failure to prepare the Revenue Account properly may lead to penalties and loss of confidence among stakeholders. Therefore, one of the major objectives of the Revenue Account is to ensure compliance with legal and regulatory requirements.

• To Provide Information to Stakeholders

The Revenue Account provides useful information to policyholders, investors, creditors, regulators, and other stakeholders regarding the financial performance of the insurance company. Stakeholders use this information to assess profitability, financial stability, and operational efficiency. Investors rely on the Revenue Account to make investment decisions, while regulators use it to monitor the financial condition of the insurer. Therefore, one of the important objectives of preparing the Revenue Account is to provide reliable and relevant information that helps various stakeholders make informed decisions regarding the insurance company.

Items Shown in the Revenue Account of a Life Insurance Company

The Revenue Account of a life insurance company records all income and expenses relating to insurance operations during an accounting period. The main items shown in the Revenue Account are classified into Income Items and Expenditure Items.

A. Income Items

1. Premium Earned (Net)

Premium income is the principal source of revenue for a life insurance company. It includes premiums received from policyholders after adjusting premiums on reinsurance ceded and accepted. Premiums may relate to individual policies, group insurance policies, and annuity contracts.

Example: If a company receives premiums of ₹50,00,000 and pays ₹2,00,000 as reinsurance premium, the net premium earned will be ₹48,00,000.

2. Income from Investments

Life insurance companies invest large amounts of funds in government securities, bonds, shares, and debentures. The income earned from these investments, such as interest, dividends, and rent, is recorded in the Revenue Account.

Example: Interest on government securities amounting to ₹8,00,000 is shown as investment income.

3. Interest, Dividends, and Rent

This item includes:

• Interest on fixed deposits and bonds.
• Dividends on shares and mutual funds.
• Rent from investment properties.

These incomes form an important part of the insurer’s earnings.

Example: Dividend income of ₹1,50,000 and rental income of ₹50,000 are credited to the Revenue Account.

4. Profit on Sale or Redemption of Investments

When investments are sold at a price higher than their book value, the profit earned is recorded as income.

Example: Investments purchased for ₹5,00,000 are sold for ₹5,80,000. The profit of ₹80,000 is credited to the Revenue Account.

5. Other Operating Income

This includes miscellaneous income arising from insurance operations, such as:

• Policy fees.
• Service charges.
• Commission on reinsurance accepted.
• Recovery of expenses.

Example: Policy service charges of ₹30,000 are recorded under other operating income.

B. Expenditure Items

6. Claims Incurred

Claims are the amounts payable by the insurance company due to death, maturity, surrender, or annuity benefits. This is one of the largest expenses of life insurance companies.

Example: Death claims of ₹20,00,000 and maturity claims of ₹10,00,000 are shown as claims incurred.

7. Commission

Commission paid to agents, brokers, and intermediaries for procuring insurance business is recorded as an expense.

Example: Commission of ₹3,50,000 paid to insurance agents is debited to the Revenue Account.

8. Operating and Management Expenses

These include administrative and operating expenses such as:

• Salaries and wages.
• Rent and office expenses.
• Printing and stationery.
• Advertisement expenses.
• Legal and professional charges.

Example: Salaries of ₹5,00,000 and office expenses of ₹1,00,000 are included under operating expenses.

9. Provision for Taxation

The amount set aside to meet income tax liabilities is shown as an expense in the Revenue Account.

Example: Provision for taxation amounting to ₹2,00,000 is debited to the Revenue Account.

10. Increase in Actuarial Liability

Life insurance companies must maintain adequate reserves to meet future policy obligations. Any increase in actuarial liability during the year is treated as an expense.

Example: If actuarial liability increases by ₹12,00,000, the amount is debited to the Revenue Account.

11. Bonus Paid or Payable to Policyholders

Insurance companies distribute a portion of their surplus to participating policyholders in the form of bonuses.

Example: Reversionary bonus of ₹4,00,000 declared for policyholders is shown as an expense.

12. Other Insurance Expenses

This includes expenses directly connected with insurance operations, such as:

• Medical examination fees.
• Policy issue expenses.
• Stamp duties.
• Reinsurance expenses.

Example: Medical examination expenses of ₹80,000 are debited to the Revenue Account.

Steps in Preparing the Revenue Account of a Life Insurance Company

Step 1. Collect and Verify Financial Information

The first step in preparing the Revenue Account is to collect and verify all financial information relating to the accounting period. This includes premium receipts, claims paid, commission expenses, investment income, and operating expenses. All books of accounts, vouchers, and supporting documents are examined to ensure the accuracy and completeness of the financial data. Proper verification helps identify errors and omissions before preparing the Revenue Account. Therefore, collecting and verifying financial information is the foundation for preparing an accurate and reliable Revenue Account.

Step 2. Determine Premium Earned (Net)

The next step is to calculate the net premium earned during the accounting period. Premium income represents the principal source of revenue for life insurance companies. The company adjusts the premium received by considering reinsurance premiums ceded and accepted. The net premium amount is then recorded on the income side of the Revenue Account. Accurate determination of premium income is essential because it directly affects the surplus or deficit of the insurance company.

Step 3. Calculate Investment Income and Other Income

Life insurance companies earn substantial income from investments made in securities, bonds, shares, and other financial instruments. Therefore, the next step is to calculate income from interest, dividends, rent, and profits on the sale of investments. Other operating income, such as policy fees and service charges, is also determined. All these incomes are added to the Revenue Account to ascertain the total income of the insurance company for the accounting period.

Step 4. Compute Claims Incurred

Claims constitute one of the major expenses of life insurance companies. The company calculates the total claims incurred during the year, including death claims, maturity claims, surrender claims, annuity payments, and outstanding claims. Any claims payable but not yet paid are also considered. Proper determination of claims is essential because it significantly influences the profitability and financial position of the insurer.

Step 5. Record Commission and Operating Expenses

The next step involves determining commission paid to agents and brokers and calculating all operating and management expenses. These expenses include salaries, rent, office expenses, printing, advertising, legal charges, and administrative costs. Accurate recording of expenses helps determine the actual cost of conducting insurance operations and provides a clear picture of the company’s operational efficiency.

Step 6. Determine Actuarial Liabilities and Other Provisions

Life insurance companies have long-term obligations toward policyholders. Therefore, an actuarial valuation is conducted to determine policy liabilities and reserves. Any increase in actuarial liability is treated as an expense and debited to the Revenue Account. The company also determines provisions for taxation and other contingencies. This step ensures that all future obligations are properly recognized and provided for in the financial statements.

Step 7. Ascertain the Surplus or Deficit

After determining all income and expenses, the total expenditure is compared with the total income. If income exceeds expenditure, the difference represents a surplus. If expenditure exceeds income, the difference represents a deficit. The surplus is then transferred according to the company’s policies and statutory requirements. Determining the surplus or deficit is one of the primary objectives of preparing the Revenue Account.

Step 8. Prepare and Present the Revenue Account

The final step is to prepare the Revenue Account in the prescribed format according to the Insurance Act, IRDAI regulations, and applicable accounting standards. All income items are shown on the credit side, while all expenses are shown on the debit side. The account is then reviewed and finalized for presentation in the financial statements. Proper presentation ensures transparency, facilitates decision-making, and provides useful information to policyholders, investors, and regulators.

Specimen Format of Revenue Account

Revenue Account of a Life Insurance Company

If expenditure exceeds income, the difference represents a deficit.

Illustration

Suppose a life insurance company has the following figures:

• Premium earned: ₹50,00,000
• Investment income: ₹8,00,000
• Claims incurred: ₹30,00,000
• Commission: ₹4,00,000
• Operating expenses: ₹6,00,000
• Increase in actuarial liability: ₹10,00,000

1. Revenue Account

Thus, the company earns a surplus of ₹8,00,000.