Unit 4: Insurance company accounts
Corporate Accounting notes · PTU syllabus (BCOM 401-18)
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Unit summary
Insurance companies collect premiums today to pay claims tomorrow, so their accounts look very different. This unit covers books maintained by insurance companies, special terms in insurance business, accounts of life insurance business, types of policies, annuity business, surrender value, the valuation balance sheet and final accounts under IRDAI regulations.
After this unit you can
- Explain books and special terms of insurance companies
- Explain types of life insurance policies, annuities and surrender value
- Prepare a revenue account and valuation balance sheet of a life insurer
- Explain the format of final accounts under IRDAI regulations
PTU syllabus topics
- Books maintained by insurance companies
- special terms in insurance business
- accounts for life insurance business
- types of policies
- annuity business
- surrender value
- valuation balance sheet
- final accounts under IRDA provisions
- Premium
- Amount paid by the policyholder
- Claim
- Amount paid by the insurer on a loss
- Surrender value
- Amount paid if a policy ends early
- Annuity
- Regular payments, often after retirement
- Valuation balance sheet
- Compares life fund with actuarial liability
Topic 1
Books and special terms of insurance business
- Governed by the Insurance Act, 1938, IRDA Act, 1999 and IRDAI (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations, 2002 and later IRDAI regulations.
- Books maintained: proposal register, policy register, premium register, claims register, agents' ledger, commission register, register of investments, reinsurance accounts, lapse and revival registers.
- Premium
- Consideration paid by the insured for cover
- Claim
- Amount payable on maturity, death or loss
- Bonus
- Share of surplus given to with-profit policyholders — reversionary, cash, reduction in premium
- Reinsurance
- Insurer transfers part of risk to another insurer
- Commission
- Paid to agents for procuring business
- Surrender value
- Amount paid when a policy is discontinued
- Annuity
- Periodic payment in exchange for a lump sum
- Re-insurance accepted / ceded
- Risk taken from / given to another insurer
- Claims intimated but not paid
- Outstanding claims at year end
- Unexpired risk reserve
- Premium for the unexpired period of general insurance policies
- Life insurance is a long-term contract of assurance (death or maturity is certain); general insurance is a contract of indemnity, usually yearly.
Topic 2
Types of policies, annuity business and surrender value
| Policy | Features |
|---|---|
| Term assurance | Pays only on death within term; lowest premium |
| Whole life | Cover for life (up to 99/100) |
| Endowment | Pays on death or maturity, whichever earlier |
| Money-back | Periodic survival benefits plus death cover |
| With-profit / without-profit | With or without share in surplus (bonus) |
| ULIP | Unit-linked; premium invested in market funds |
| Joint life | Covers two lives |
| Pension / annuity | Regular income after a lump sum or premiums |
- Annuity business: immediate annuity (payments start immediately after a lump sum) or deferred annuity (after an accumulation period). Annuities paid are an expense in the revenue account; consideration for annuities granted is income.
- Surrender value: amount paid to a policyholder who discontinues a policy after it has acquired a surrender value (usually after paying premiums for a minimum period); guaranteed surrender value (GSV) and special surrender value (SSV). Treated as a claim (expense).
- Lapse and revival: a policy lapses on non-payment of premium beyond the grace period; can be revived within a period with arrears and interest.
Topic 3
Life insurance accounts: revenue account
Revenue Account (Form A-RA) — policyholders' account — shows income and expenses relating to policyholders, and the surplus (or deficit) is transferred to the shareholders' account.
- 1
Premiums earned (net of reinsurance)
First year, renewal, single premiums
- 2
Income from investments
Interest, dividends, rent, profit on sale
- 3
Other income
- 4
Less commission on premiums
- 5
Less operating expenses related to insurance business
- 6
Less benefits paid (net)
Claims by death, maturity, annuities, surrenders, bonus in cash
- 7
Less change in valuation of liability
Actuarial liability for policies in force
- 8
Surplus or deficit
Appropriated to shareholders' account and funds for future appropriation
- Claims: claims paid + claims outstanding at the end − claims outstanding at the beginning; less reinsurance recoveries.
- Premium: premium received + outstanding at end − outstanding at beginning; less reinsurance ceded.
Example
Death claims paid ₹50 lakh; outstanding at end ₹10 lakh; outstanding at beginning ₹8 lakh; reinsurance recovered ₹5 lakh. Net claims = 50 + 10 − 8 − 5 = ₹47 lakh.
Topic 4
Valuation balance sheet
Life insurers carry out an actuarial valuation (annually, as required by IRDAI) to determine the liability on policies in force and the surplus.
- 1Life Assurance Fund as per revenue account (closing)
- 2Less net actuarial liability on policies in force
From the valuation by the Appointed Actuary
- 3Surplus (or deficit)
- 4Allocate surplus
At least 90% to with-profit policyholders as bonus; up to 10% to shareholders (Insurance Act and IRDAI rules)
Example
Life fund ₹500 crore; net liability ₹460 crore. Surplus = ₹40 crore. Policyholders' bonus at least 90% = ₹36 crore; shareholders ₹4 crore (maximum).
- Interim bonus: paid on claims arising between two valuations — debited to the fund and adjusted in surplus.
- Valuation balance sheet shows the life assurance fund against the net liability, with the surplus or deficit.
Topic 5
Final accounts under IRDAI regulations
| Form | Statement (life insurer) |
|---|---|
| Form A-RA | Revenue Account (policyholders' account — technical account) |
| Form A-PL | Profit and Loss Account (shareholders' account — non-technical) |
| Form A-BS | Balance Sheet |
| Receipts and Payments Account | Cash flow (direct method) |
- Schedules support the forms: premium, commission, operating expenses, benefits paid, share capital, reserves, borrowings, investments (shareholders' and policyholders'), loans, fixed assets, cash, advances, current liabilities, provisions.
- General insurers use Forms B-RA (fire, marine, miscellaneous separately), B-PL and B-BS; they maintain a reserve for unexpired risk (generally 50% of net premium for fire and miscellaneous; 100% for marine hull).
- Investments follow IRDAI (Investment) Regulations — a large share must be in government and approved securities to protect policyholders.
Exam tip
Distinguish "technical account" (revenue account — insurance business) from "non-technical account" (profit and loss — shareholders) in your answer.
Key terms
- Revenue account
- Policyholders' account showing insurance income and expenses
- Actuarial valuation
- Valuation of liability on policies by an actuary
- Surrender value
- Amount paid on voluntary discontinuance of a policy
- Reinsurance
- Transfer of part of risk by one insurer to another
- Valuation balance sheet
- Statement comparing life fund with actuarial liability to find surplus
Quick revision
- Laws: Insurance Act 1938, IRDA Act 1999, IRDAI financial statement regulations.
- Policies: term, whole life, endowment, money-back, ULIP, annuity.
- Revenue account → surplus to shareholders' account.
- Surplus = life fund − net liability; ≥ 90% to policyholders.
- Forms A-RA, A-PL, A-BS for life insurers; B-forms for general insurers.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.What is reinsurance?
- Q2.What is surrender value?
- Q3.Distinguish immediate and deferred annuity.
- Q4.How are net claims calculated?
- Q5.What is a valuation balance sheet?
- Q6.Name the forms of final accounts of a life insurer.
Long-answer questions
- Q1.Explain the books and special terms used in insurance business.
- Q2.Explain the types of life insurance policies, annuity business and surrender value.
- Q3.Explain the preparation of the revenue account of a life insurance company.
- Q4.Explain the valuation balance sheet and the format of final accounts under IRDAI regulations.
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