IC 46 – General Insurance Accounts Preparation and Regulation of Investment

Chapter 01 – Accounting Scope, Concepts, Principles and Standards

Unit 01 - Financial Accounting - Meaning and Scope

Accounting is the process of recording, classifying, summarising, analysing and interpreting the
financial transactions and communicating the results to its users.

All transactions are events but all events are not transactions.

The main objective and function of accounting is to report on the financial position of the entity
and highlight its performance for an accounting period.

In insurance business, the balance sheet is the basis of ASM (Available Solvency Margin) while
Revenue Accounts provide the required information for the computation of RSM (Required
Solvency Margin).

In general insurance companies, books of account maintained at the operating offices are different
from the accounts maintained at the head office level.

Unit 02 - Accounting Concepts, Principles and Convention

Generally Accepted Accounting Principles refer to the rules or guidelines adopted for recording
and reporting of business transactions in order to bring uniformity in the preparation and
presentation of financial statements. These principles are also referred to as concepts and
conventions.

The important accounting concepts are business entity, money measurement, going concern,
accounting period, cost, dual aspect, realisation, accrual, and matching concepts.

Busniness entity concept assumes that for accounting purposes, the business enterprise and its
owner(s) are two separate entities.

Money measurement concept states that only those transactions and happenings in an
organisation that can be expressed in terms of money are to be recorded in the books of
accounts. Also, records of the transactions are to be kept not in physical units, but in monetary
units.

Going concern concept states that a business firm will continue to carry on activities for an
indefinite period of time.

Accounting period concept states that all the business transactions are recorded in the books of
accounts on the assumption that profit of transactions is to be ascertained for a specified time
period.

Accounting cost concept states that all assests are recorded in the books of accounts at their
cost price (not at the market price).

Dual aspect concept states that every transaction has a dual effect. It is commonly expressed in
terms of the fundamental accounting equation Assets = Liabilities + Capital.

Revenue recognition concept requires that the revenue for a business transaction is considered
to be realised when a legal right to receive it arises.

Matching concept emphasises that expenses incurred in an accounting period should be matched
with revenues during that period. It follows from this that the expenses incurred to earn this
revenue must belong to the same accounting period.

Consistency concept states that accounting policies and practices followed by an entity should
be uniform and consistent so that results are comparable.

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Conservation (prudence) concept requires that business transactions should be recorded in such
a manner that profits are not overstated. All anticipated losses should be accounted for but all
unrealised gains should be ignored.

Materiality concept states that accounting should focus on material facts. If the item is likely to
influence the decision of a reasonably prudent investor or creditor, it should be regarded as
material, and should be disclosed in the financial statements.

Unit 03 - Accounting Standards - As and Ind As - Objectives and Interpretation

Financial statements are a structured representation of the financial position and financial
performance of an entity.

The objective of financial statements is to provide information about the financial position,
financial performance and cash flows of an entity that is useful to a wide range of users in making
economic decisions. To meet this objective, financial statements need to be prepared in
accordance with the provisions of Accounting Standards now which have become upgraded from
national standards known as Accounting Standards (ASs) to the international standards known as
International Financial Reporting Standards (IFRS).

The Accounting Standards reduce the possibility of difference in methods, procedures,

perspectives and terminology in the preparation of financial statements and provide the
framework, rules, and regulations in this regard thereby enabling comparative analysis of financial
statements of different enterprises.

Indian Accounting Standards (abbreviated as India-AS) are a set of accounting standards notified
by the Ministry of Corporate Affairs which are converged with International Financial Reporting
Standard (IFRS).

Accounting Standards whether AS, Ind-AS or IFRS deal with the issues of:

i. recognition of events and transactions in the financial statements,

ii. measurement of these transactions and events,
iii. presentation of these financial transactions in the financial statements in a meaningful and
understandable manner to the users of the financial statements with compliance of
disclosure requirements for various stakeholders.

The council of the Institute of Chartered Accountants of India has, so far, issued thirty two
Accounting Standards. These standards are developed and designed by the Accounting Standards
Board (ASB) constituted by the Council of ICAI in April, 1977.

Indian Accounting Standards get classified into two broad groups - 1 and 2

i. Groupd - 1 (AS1 to AS15): deal with Accounting policies, Disclosure Requirements,

Treatment of material transactions such as Revenue Recognition, Capitalization of
expenses, Depreciation Accounting, liability assessment towards accrued benefits of
employees, Prior period transactions, Contingent liability and events occuring after year
end etc.
ii. Group - 2 (AS16 to AS32): deal with Consolidation, Reporting Requirements, Segment
reporting, impairment of assets, earning per share and also on accounting issues like
deferred taxation, borrowing costs, intangible assets, derivatives etc.

The Accounting Standard 1 recognizes three fundamental accounting assumptions. These are (a)
Going Concern (b) Consistency and (c) Accrual. So long as these assumptions are followed in
preparation of financial statements, no disclosure of such adherence necessary. Any departure
from any of these assumptions should however be disclosed.

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At present India is now having two sets of accounting standards viz. existing accounting standards
(ASs) under Companies (Accounting Standard) Rules, 2006 and IFRS converged Indian Accounting
Standards (Ind-AS) the Companies (Indian Accounting Standards) Rules, 2015 as per the MCA
notification dated 16 February 2015. The new set of Ind-ASs are name and numbered in the same
way as the corresponding IFRS.

Financial Accounting and preparation of financial statements in India are now required to follow
the IFRS-converged Indian Accounting Standards (Ind-AS) to ensure transparency, consistency,
comparability, adequacy and reliability of financial reporting. India has chosen the path of IFRS
convergence instead of adoption of IFRS to the letter.

Unit 04 - Accounting Policies

Accounting policies are based on various accounting concepts, conventions, assumptions and
principles.

Accounting policies of various organisations depend on the nature, type and structure of the
enterprises and hence policies of one organisation may differ from those of another organisation.

The main objectives of the accounting policies are to maintain the quality and consistency ensure
reliability and bring about comparability of the financial statements, and to ensure full, fair and
adequate disclosure.

Appropriate selection of accounting policies is very important as wrong selection may lead to
overstatement or understatement of the financial position and performance of the enterprise.

Any changes to the accounting policies should be made only in exceptional circumstances. For
any change in an accounting policy, there must be full, fair and adequate disclosure of such
change and impact thereof in the "Notes on accounts", as per AS-1.

The financial statements of non-life insurance companies are drawn up in accordance with the
provisions of section 11(1) of as amended by the Insurance Laws (Amendment) Act 2015 and the
Regulations framed under the Insurance Regulatory Development Act, 1999.

These financial statements are prepared on the historical cost convention and accrual basis.

Chapter 02 – Accounting Process, Methods & Control and Finalisation of Accounts

Unit 05 - Accounting Process

Accounting process refers to the process of identifying, measuring, classifying, recording,

summarising, analysing, interpreting and reporting the financial performance and the financial
position of the enterprise through financial statements.

Stages of accounting process include journalising transactions, ledger posting, balancing ledger,
preparing trial balance, profit & loss account and balance sheet.

Accounting systems are of two types: single entry system and double entry system.

Accounts are classified into two main types: personal and impersonal.

Personal accounts can be natural and artificial and representative.

Real accounts can be tangible and intengible.

Nominal accounts include all expenses and losses, incomes and gains.

Golden rules of accounting:

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 Personal : debit the receiver and credit the giver

 Real : debit what comes in and credit what goes out
 Nominal : debit all expenses and losses and credit all incomes and gains

Subsidiary books maintained in business include: sales book, purchase book, cash book, bank
receipts book, sales return book or returns inward book, purchase return book or returns outward
book, bills receivable book and bills payable book.

Unit 06 - Accounting Methods and Control

The flow of accounting from the time a transaction takes place to its recording in the ledger may
be illustrated as follows:

 Source document
 Transaction takes place
 Transactions are recorded in journal/ subsidiary book
 Transactions are posted to ledger accounts
 Trial balance is prepared
 Adjustment entries at the end of accounting period is prepared
 Financial statements (final accounts) are prepared

A journal is a book of accounts in which all day to day transactions are recorded in the order of
their occurance.

In big business houses, a journal is classified into various special journals which record
transactions of similar and repetitive nature. All those transactions which arise occasionally or do
not find a place in any of the special journals are recorded in the journal proper.

There should not be confusion a journal entry and journal proper. A journal entry is a way of
recording a transaction in a debit/ credit form. A journal proper is a book of special transactions,
which are not otherwise recorded in the books of prime entry. These are generally the adjustment
entries such as provisions for doubtful debts, income receivable, expense payable etc.

The Cash Book records all transactions related to receipts and payments made in cash only.

The Cash Book itself is a Cash Account, and hence, no separate cash account will be maintained
in the ledger.

When there is a transaction that relates to both cash and bank, this will be written on one side of
the Bank Column and on other side of the Cash Column.Such transactions are known as 'Contra
entries'.

A separate cash book to record small transactions is called a petty cash book.

The Trial Balance may be defined as a statement containing balances of all ledger accounts on a
particular date.

The Trial Balance helps to determine the arithmetical accuracy of posting in the ledger.

Final Accounts (Financial statements) are the statements that are prepared at the end of the
accounting period, which is generally one year. These include the income statement i.e. Trading
and Profit & Loss Account and Balance Sheet.

Trading Account is prepared to ascertain the results, gross profit or gross loss, of the trading
activities of the business.

Profit and Loss Account is prepared to find out the Net Profit/ Net Loss.

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Balance Sheet is prepared to ascertain the financial position of a firm on a particular date.

Unit 07 - Depreciation Accounting

Depreciation is a process of allocating the cost of a fixed asset over its estimated useful life in a
rational and systematic manner.

As per 'Explanation' to AS 6: 'Assessment of depreciation and the amount to be charged in

respect thereof in an accounting are usually based on the following three factors:

1. Historical cost or other amount substituted for the historical cost of the depreciable
asset when the asset has been revalued;
2. Expected useful life of the depreciable asset; and
3. Estimated residual value of the depreciable asset

There are several methods of providing for depreciation out of which two methods are very
common which are Straight Line Method and Diminishing Balance Method.

In selecting a method, the principle of equitable distribution of the cost of the asset should be
given an essential consideration though a secondary thought of replacement of the asset should
also be kept in mind in a given situation. The implications of profit, tax, divident and cash flow are
the important considerations while choosing a method of depreciation.

Straight line method is considered as the simplest of all the methods of providing for depreciation.
Depreciation is arrived at by deducting salvage value from the historical cost and then dividing the
difference thus determined by the number of years of useful life.

Diminishing Balance Method is widely used in commercial organizations. Depreciation under this
method is expressed as a rate percent per annum on the Written Down Value of the asset. This
method is useful in the cases of exhausting and costly assets like Plant and Machinery, Electronic
Equipment etc.

Depletion Method is applied in the case of assets of wasting nature as well as to intengible assets
like patents, copyrights and leaseholds etc. Rate of depreciation per unit is determined by dividing
total cost by expected number of output in contrast to number of years.

Annuity Method takes into account the opportunity cost of interest, had the monetary outlay in
the asset been invested elsewhere.

Depreciation Fund method is a very important method specifically in respect of Plant & Machinery
of very high value where replacement of is desired at the end of its effective life in order to keep
liquidity position of fund in good position.

As per guidelines issued by Accounting Standard 6 (AS 6) issued by the ICAI, A change from one
method of providing depreciation to another is made only if the adoption of the new method is
required by statute or for the compliance with an accounting standard or if it is considered that
the change would result in a more appropriate preparation of presentation of the financial
statements of the enterprise. When such a change in the method of depreciation is made,
depreciation is recalculated in accordance with the new method from the date of the asset
coming into use.

Disposal of depreciable assets means sale, removal, destruction or exchange of any particular
asset usually when the usefulness of the said asset ceases. It is sold as an item of salvage or
scrap.

Revaluation of depreciable assets is done at the discretion and decision of the management of
any business organization. Revaluation is necessitated when it is felt that the depreciation cost is
not correct; rather it is understand or overstated so as to distort the financial picture of any

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business organization. This usually happens when the market value of any asset goes downward
or upward substantially.

Revaluation is done by appraisal by competent valuers usually and also by indexation and
reference to current prices with periodical checking by appraisal method.

Unit 08 - Bank Reconciliation Statement

Cash book is the record of cash and bank transactions, which is prepared by the entity, and pass
book is the statement of accounts prepared by the bank.

Pass book is a book issued by the bank to an account holder. It is almost a copy of the account
of the customer/ entity in the books of the bank.

There can be various reasons due to which the balances of the cash book and the pass book do
not match.

These reasons can be either timing differences or errors in recording.

Hence, bank reconciliation statement is prepared to reconcile both the balances.

Bank reconciliation statement is a statement, no an account.

Bank reconciliation statement eases, checking of errors and detection of frauds in the cash books
and pass books.

Unit 09 - Introduction to Company Accounts (Based on the Companies Act 2013)

Schedule III to the Companies Act, 2013, lays down principles for preparation and presentation of
balance sheet as well as statement of profit and loss for Indian enterprises for the financial years
commencing on or after April 1, 2014.

As required by the Companies Act 2013 (Schedule III to the Act) each item on the face of the
Balance Sheet and Statement of Profit and Loss shall be cross-referenced to any related
information in the notes to accounts.

Under Section 2(20) of the Companies Act 2013 "comapny" means a company incorporated
under this Act or under any previous company law. A company defined in this section may mean
either private company or public company.

There are different types of companies such as Private Company, Public Company, Government
Company, Foreign Company, Holding Company and Subsidiary Companies.

As per Section 2(13) books of account of a company includes records maintained in respect of:

1. all sums of money received and expended by a company and matters in relation to which
the receipts and expenditure take place;
2. all sales and purchases of goods and services by the company;
3. the assets and liabilities of the company; and
4. the items of cost as may be prescribed under section 148 in the case of a company which
belongs to any class of companies specified under that section.

Buy-back of shares means repurchase by the company of its own shares. Such repurchase may
take either at par or premium or discount in compliance with the provisions of Section 68 and
Section 69 of the Companies Act 2013. With the repurchase, the par value of shares repurchased
is reduced from the equity capital. Any excess paid on repurchase is to be debited to Reserve and
Surplus A/c.

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IC 46 – General Insurance Accounts Preparation and Regulation of Investment

Employee Stock Option Plan (ESOP) is an employee compensation system providing for sharing of
corporate wealth and profit by the employee. Under the scheme an employee is given an option to
buy shares of the company at less than the market price and the employee gets the benefit when
the share prices rise. ESOPs give right to the employee to buy shares at the specified price
during specified period.

A permanent employee whether working in India or out of India and a director whether a whole
time or not are eligible in participate in Employee Stock Option Scheme(ESOS).

Vesting means the process by which the employee is given right to apply for the shares of the
company in pursuance of the ESOS. The option granted to the employee is neither transferable
nor be pledged or hypothecated or mortgaged.

In Employee Stock Purchase Scheme (ESPS) the company offers shares to the employees as
part of public issue or otherwise.

A company sometimes may issue redeemable preference shares for raising fund in dull primary
market when it faces difficulty in raising equity capital. Such redeemable preference shares are
redeemed when the company finds surplus of capital (overcapitalization) and cannot utilize such
surplus funds in business for profitable purpose.

Redemption of preference shares can be effected either by fresh issue of shares or out of
distributable profits being retained and transferred to Capital Redemption Reserve Account.
Section 80 of the Companies Act deals with the process and rules of redemption of redeemable
preference shares.

Accounting entries depends on the methods of redemption. Fresh issue of share may be on three
situations: Issue at par, Issue at a premium and Issue at a discount. Redemption may be on two
situations: Redemption at par and Redemption at a premium.

Debenture is a bond issued by a company under its seal acknowledging its debt and obligation for
repayment along with the conditions and provisions for repayment of the principal amount and
interest.

The procedure for the issue of debentures is the same as that for the issue of shares. The
intending investors apply for debentures on the basis of the prospectus issued by the company.
The company may either ask for the entire amount to be paid on applications or by way means of
installments on application, on allotment and various calls.

Debentures can be issued at par, at a premium, or at a discount.

Underwriting is a contract entered by a company with certain parties called underwriters, whereby
the underwriters undertake that in case of the whole or an agreed portion of the shares or
debentures are not subscribed by the public, and then they will themselves take up the shares or
debentures in consideration of a commission.

An underwriter may be individual, partnership or company and the underwriting commission is

payable on the amount of shares or debentures underwritten by them. For this service
underwriters charge a commission which is generally calculated at a specified rate on the issue
price of the whole of the shares or debentures underwritten.

A company may decide to distribute past undistributed profit, when there is large amount of
accumulated reserves, by way of issuing shares free of cost to its existing shareholders. Such
shares are called Bonus Shares.

Bonus shares are issued to the existing members in proportion to their shareholding in the
company. The issue of bonus share helps in ploughing back of profits of the compnay bringing

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about proper balance between paid up capital and accumulated reserves, elicit good public
response and improve the market image of the company.

Calls in-Arrear in trial balance represents the amount not paid by the shareholders on the calls
made by the company on shares. This needs adjustment to be shown in Balance Sheet. In the
liability side this amount is deducted from the Called-Up and Paid Up Capital.

Unclaimed Dividend in trial balance represents the amount of dividend not collected by the
shareholders. It is to be shown on the liability side of Balance Sheet under the head "Current
Liabilities".

Tax calculated on taxable income is called Current Tax. Tax can be also calculated on accounting
income. Taxable income is the income determined in accordance with the tax laws (Income Tax
Act 1961 and Income Tax Rules), based on which income tax is payable for a period.

The difference between tax on accounting income and taxable income is called 'Deferred Tax'.
Deferred Tax is the effect of timing differences. The tax to be charged to Profit and loss account
is 'Tax Expenses' which include Current Tax plus Deferred Tax.

A deferred tax asset comes into existence when taxable income is more than accounting income
(Example Provision for Bad & Doubtful Debts) and this is due to time difference. Deferred tax
liability arises when taxable income is less than accounting income (Example Change in
Depreciation Method).

As per Section 197 of the Companies Act 2013, the total managerial remuneration payable by a
public company, to its directors, including managing director and whole-time director, and its
manager in respect of any financial year shall not exceed 11% of the net profits of that company
for that financial year.

Chapter 03 – Non-Life Insurance Business Accounting Methods, Techniques & Process

Unit 10 - General Insurance Accounting Process & Techniques

Legal aspects of insurance accounting in India is addressed by the Insurance Laws (Amendment)
Act 2015 and Companies Act 2013, and the IRDAI (Preparation of Financial Statements and
Auditor's Report of Insurance Companies) Regulations, 2002.

In India, only annual basis is adopted for insurance accounting for determination of underwriting
results for all departments of business including Fire, Marine, Motor, Engineering and
Miscellaneous.

Premium income is the consideration received from the insured by the insurance company in
accordance with the contract of insurance.

A provision for unexpired risks is made normally at 50% in case of fire insurance and 100% in case
of marine insurance which is in accordance with Section 64 V(1)(ii)(b) of The Insurace Act 1938
as amended by the Insurance Laws (Amendment) Act 2015.

Under Annual Basis Accouting, 'claims incurred' include paid claims plus outstanding claims at the
end of the year minus outstanding claims at the beginning of the year.

Acquisition costs, if any, shall be expensed in the period in which they are incurred.

The agency commission and brokerage are governed by the IRDAI circular issued in August 2008
which prescribes the maximum permissible percentage of premium that can be paid by way of
commission or brokerage on a general insurance policy.

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IC 46 – General Insurance Accounts Preparation and Regulation of Investment

Section 40C of the Insurance Act, 1938 as amended by the Insurance Laws (Amendment) Act
2015 prohibits an insurer to spend as expenses of management in excess of the limits prescribed
in the Act.

At the end of each financial year, as required by IRDAI, the actuarial valuation of the claims
liability of an insurer is made by the appointed actuary, and the shortfall, if any, is provided as
IBNR/IBNER.

Discounting refers to an accounting practice which places a present day value on a claim
outstanding provision. Discounting requires compliance of certain mandatory conditions.

Co-insurance is an arrangement whereby two or more insurers enter into a single contract with
the insured to cover a risk in agreed proportions at a specified premium.

Presentation and preparation of financial statements are in accordance with IRDAI (Preparation of
Financial Statements and Auditor's Report of Insurance Companies) Regulations, 2002.

Consolidated financial statements of Indian and Foreign operations are prepared in accordance
with IRDAI regulations which are then audited by the statutory auditors.

Unit 11 - Insurance Accounting Regulations

An insurer carrying on general insurance business shall comply with the requirements of Schedule
B to prepare financial statements.

General insurance includes Marine Insurance, Fire Insurance and Miscellaneous Insurance.

Insurance companies are required to maintain their financial accounts i.e. Revenue Account, Profit
and Loss Account and Balance Sheet in accordance with the provisions of the IRDAI (Preparation
of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2002.

General insurance companies should comply with the requirements of Schedule B. Schedule B is
broadly divided into the parts:

1. Part I – Accounting principles for preparation of financial statements

2. Part II – Disclosures forming part of financial statements
3. Part III – General instructions for preparation of financial statements
4. Part IV – Contents of management report
5. Part V – Preparation of financial statements

Premium shall be recognised as income over the contract period or the period of risk, whichever
is appropriate.

Acquisition costs, if any, shall be expensed in the period in which they are incurred.

A liability for outstanding claims shall be brought to account in respect of both direct business
and inward reinsurance business.

Loans shall be measured at historical cost subject to impairment provisions.

Catastrophe reserve shall be created in accordance with norms, if any, prescribed by the
authority.

Unit 12 – Preparation & Presentation of Financial Statements

General insurance includes Fire insurance, Marine insurance and Miscellaneous insurance.

An item of expense to be shown in the Revenue Account of a fire/marine insurance company

separately if it is in excess of 1% of premium or Rs. 5,00,000 whichever is higher.

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Premium, a primary source of income, is the consideration received by the insurance company
from the insured as per the insurance contract. Net premium earned is calculated as follows:

Particulars Amount
Premium from direct business X
Add : Premium on reinsurance accepted X
Less : Premium on reinsurance ceded (X)
Net premium
Add : Adjustment for change in reserve in unexpired risks X
Net premium earned X
X

Any amount payable by the insurance company is regarded as claim. Net claim payable is
calculated as follows:

Particulars Amount
Claims paid direct X
Add : Claims on reinsurance accepted X
Less : Claims on reinsurance ceded (X)
Net claims paid
Add : Outstanding claims at the end (net) X
Less : Outstanding claims at the beginning (net) X
Incurred claims net (X)
X

When an insurer insures the risk undertaken by him with another insurer, it is called reinsurance.

The premium payable by the orininal insurer to the reinsurer is called reinsurance premium ceded
and the premium receivable by the reinsurer from the original insurer is known as premium on
reinsurance accepted.

Commission on re-insurance ceded 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. Commission on reinsurance accepted is an expense for the company which has
accepted the reinsurance business. So it should be entered on the debit side of the concerned
revenue account.

In other words, Commission, being an expense, commission on reinsurance ceded is deducted

from the commission paid and commission on reinsurance accepted is added to derive the net
amount of commission paid.

A reserve for unexpired risks shall be created as the amount representing that part of premium
written which is attributable to, and allocated to the succeeding accounting periods shall not be
less than as required under 64V(1)(ii)(b) of the Act. As per the provisions of section 64V(1)(ii)(b),
reserve for unexpired risks shall be created in respect of (i) fire and miscellaneous business, 50%
(ii) marine cargo business, 50% and (iii) marine hull business, 100% of the premium, net of
reinsurances, during the preceding twelve months.

The direct expenses and incomes applicable to a particular business (fire, marine or misc.) are
recorded in the respective Revenue A/c, whereas common / general expenses and incomes are
recorded in the Profit and Loss A/c.

Cash flow statement can be prepared using either the direct method or the indirect method. It
classifies cash receipts and payments as operating, investing and financing activities.

In accordance with IRDAI regulations, Cash Flow statement in an insurance company is to be

prepared using Direct Method.

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There are several specialised ratios used to analyse an insurance company's financial condition.
They are:

1. Gross Premium and Growth Rate

2. Gross Premium to Shareholders Funds Ratio
3. Growth Rate of Shareholders Funds
4. Net Retention Ratio
5. Net Commission Ratio
6. Management Expenses to Gross Premium
7. Combined Ratio
8. Technical Reserve to Net Premium Ratio
9. Underwriting Balance Ratio
10. Operating Profit Ratio
11. Liquid Assets to Liabilities Ratio
12. Net Earnings Ratio
13. Return on Net Worth
14. Reinsurance Ratio
15. Solvency Ratio
16. NPA (Non-Performing Advances) Ratio

Unit 13 – Reinsurance Accounting

Reinsurance is insurance for insurance companies.

The purpose of reinsurance is to provide greater financial capacity to the primary insurer to
assume more risks.

Reinsurance brokers act as an intermediary between the primary insurer and reinsuers.

Reinsurance arrangements are broadly divided into : Facultative reinsurance and Treaty
reinsurance.

When the business is not covered by the insurer's reinsurance treaty, or the amount of insurance
needed exceeds the net treaty capacity of the primary insurer, the primary insurer can transfer
that excess to a facultative reinsurer.

Reinsurance accounting is a process of identifying, analyzing and reporting such financial data and
results for the various groups of people interested in reinsurance transactions for their various
decisions.

There are three major reinsurance accounting systems: Accounting Year System, Occurance Year
System and Underwriting Year System.

Reinsurance commission is paid by the reinsurer to the ceding (direct) insurer. Reinsurance
commission may be fixed either on a : fixed scale or sliding scale.

Profit commission is an additional commission percentage payable to a ceding insurer on

profitable treaties in accordance with an agreed formula.

Under the surplus treaty, the ceding insurer (direct insurer) decides the limit of liability which he
wants to retain on any one risk or class of risk. Surplus treaty insurance is usually arranged in
terms of number of lines of retention.

Excess of Loss treaties are characterized by a distribution of liability between the primary insurer
(referred to as the cedant) and the reinsurer on the basis of losses rather than sums insured.
There are three general classes of excess of loss treaties : per risk excess, per occurance excess
and aggregate excess.

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The placement of reinsurance business (both life and non-life) from the Indian market is governed
by IRDAI (General Insurance - Reinsurance) Regulation, 2000 framed by the IRDAI.

Chapter 04 – Accounting Methods & Process of Special Accounting Transactions

Unit 14 - IRDAI (Investment) Regulations [Based on IRDAI (Investment) (Fifth Amendment)

Regulations 2013]

Every insurer carrying on insurance or reinsurance business in India shall invest and at all times
keep invested his total assets as per provisions of Sec 27 or Sec 27A of the Insurance Act, 1938
as amended by the Insurance Laws (Amendment) Act 2015 and in the same manner as set out in
specific regulations framed by the IRDAI.

Investment Assets in case of a General Insurer includes shareholders’funds representing

solvency margin and policyholders’ funds at their carrying value as shown in its balance sheet
drawn as per the IRDAI (Preparation of Financial Statements and Auditors’ report of Insurance
Companies) Regulations 2000, but excluding items under Misc. Expenditure.

General Insurers can make investments on such assets that can be being rated as market
practice. Investments can be made on the basis of credit rating of such assets or instruments. No
investments shall be made in instruments, if such instruments are capable of being rated, but not
rated.

The rating should be carried out by a credit rating agency registered under SEBI (Credit Rating
Agencies) Regulations, 1999.

For investment in corporate bonds or debentures rating with not less than AA or its equivalent
and PI or equivalent ratings for short term bonds, debentures, certificate of deposits and
commercial paper, by a credit rating agency, registered under SEBI (Credit Rating Agencies) Reg,
1999 would be considered as Approved Investments.

Investments by General Insurance companies can be made in only such debt instruments for
which the rating is issued by All India Financial Instruments recognized as such by RBI and is of
AA or equivalent rating.

For General Insurance companies investment assets mean all investments made out of
shareholders’ funds representing solvency margin and policyholders funds at their carrying value
as shown in its balance sheet drawn as per the IRDAI (Preparation of Financial Statements and
Auditors Report of Insurance Companies) Regulations 2002.

Regulation 13A Provides for constitution Investment Committee and its Role, which states that
every insurer shall constitute an Investment Committee which shall consist of a minimum of two
non-executive directors, the CEO, Chief of Finance, Chief of Investment Division and the
Appointed Actuary.

As per Regulation on investment policy, every insurer shall draw up an Investment Policy (fund
wise IP in case of Unit Linked Insurance Business) and Place the same before its Board of
Directors for its approval and its annual review.

As per Schedule II of the IRDAI (Investment) all investments specified in section 27B of the Act
will be considered as Approved Investments for general insurance business except :

i. Securities of or guaranteed as to the principle and interest by the Government of the UK

in another country as stated in Section 27B (1)(b).
ii. Immovable property situated in another country as mentioned in 27A(1)(n).
iii. First mortgage on immovable property situated in another country as stated in 27A(1)(i).

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As per regulation on investment policy, every insurer shall have a model code of conduct to
prevent insider trading/personal trading of officers involved in various lavels of investment
operations in compliance with SEBI (Prohibition of Insider Trading) Regulations 1992 as amended
from time to time and place the same before the Board of Directors for approval.

As per Regulation 15 on Financial Derivatives every insurer carrying on the business of life
insurance or general insurance may deal in financial derivatives only to the extent permitted and
in accordance with the guidelines issued by the Authority in this regard from time to time.

Unit 15 – Investment Accounting

Investment may be classified as either current Investments or long-term Investments in

accordance with AS 13.

Valuation

 Current investments: lower of cost or fair value/NRV

 Long-term investments: at cost

Reclassification

 Current investments to long-term investments: valuation at cost or fair value/NRV,

whichever is lower.
 Long-term investments to current investments: valuation at cost or carrying amount,
whichever is lower.

Any dividend received out of pre-acquisition profit is credited to Investment A/c in the cost
column only. However, dividend received out of post-acquisition profit is credited to the income
column.

On disposal of investment, the difference between the carrying amount and the net disposal
proceeds should be charged or credited to the profit and loss A/c.

When the rights shares offered are subscribed for, the cost of right shares is added to the
carrying amount of the original holding.

Where an investment is acquired by way of issue of bonus shares, no amount is entered in the
capital column of investment account since the investor does not have to pay anything.

Chapter 05 – Annual Reports, Audit & International Financial Reporting Standards

Unit 16 - Annual Reports (Based on Companies Act 2013)

It is a legal obligation for the Board of Directors of every company to prepare and present annual
accounts to the shareholders along with its Annual report i.e. Board’s Report.

The Companies Act provides for the contents and disclosures required to be furnished in the
annual reports. It also provides the procedure of presenting at the meeting of the shareholders
and filing of these documents with Registrar of Companies.

Section 92(3) of the Companies Act 2013 provides that an extract of the annual return in such
form as may be prescribed shall form part of the Board’s report.

Section 134 (1) of the Act provides that the financial statement, including consolidated financial
statement, if any, shall be approved by the Board of Directors before they are signed on behalf of
the Board at least by the chairperson of the company.

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Section 135 (2) of the Act provides that the Board’s report under sub-section (3) of section 134
shall disclose the composition of the Corporate Social Responsibility Committee, shall be
constituted as per 135 (1) of the Act 2013.

Section 177(8) of the Act provides that the Board’s report under sub-section (3) of section 134
shall disclose the composition of an Audit Committee and where the Board had not accepted any
recommendation of the Audit Committee, the same shall be disclosed in such report along with
the reasons therefor.

Section 204 (1) of the Act provides that every listed company and a company belonging to other
class of companies as may be prescribed shall annex with its Board’s report made in terms of
sub-section (3) of section 134, a secretarial audit report, given by a company secretary in
practice, in such form as may be prescribed.

Section 394 (1) of the Act provides that where the Central Government is a member of a
Government company; the Central Government shall cause an annual report on the working and
affairs of that company to be prepared within three months of its annual general meeting before
which the comments given by the Comptroller and Auditor-General of India and the audit report is
placed under proviso to sub-section (6) of section 143.

Section 395 (1) of the Act provides that where the Central Government is not a member of a
Government company, every State Government which is a member of that company, the State
Government shall cause an annual report on the working and affairs of the company to prepared
within the time specified in sub-section (1) of section 394; and as soon as may be after such
preparation, laid before the House or both Houses of the State Legislature together with a copy
of the audit report and coments upon or supplement to the audit report referred to in sub-section
(1) of that section.

Unit 17 – Statutory Audit in General Insurance Business

Management is responsible for preparation and presentation of financial statements that give a
true and fair view of the state of affairs, results of operation, cash flows of the company.

An auditor's responsibility is to express his opinion on the financial statements based on audit
examinations of the financial statements in accordance with various Auditing Assurance
Standards.

Every auditor shall report to the members of the company on the financial records examined by
him and ensure that his report provides information and particulars as per regulatory norms.

Where a company has a branch office, the accounts of that office shall be audited by the
company's auditor appointed under Section 139 or a person qualified for appointment as auditor
of the company under Section 141.

Audit reports are prepared and submitted by the Branch Auditor or Statutory auditor keeping in
view statutory, regulatory and auditing standards.

Main reports are prepared in certain specified formats with expression of the auditor's opinion on
true and fair view of operating results as shown by income statement and true and fair view of the
profits and losses.

Long-form reports(LFAR) provide information on process lapses including underwriting, claims,

accounts, internal control, investments etc.

Unit 18 – Internal Audit in General Insurance Business

Internal Auditing is an independent, objective assurance and consulting activity designed to add
value and improve an organisation’s operations. It helps an organisation accomplish its objectives

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by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk
management, control and governance process.

The definition clearly implies that the scope of internal autdit is not confined to routine checking
of the accounting records but also includes an appraisal of the various operational functions, and
providing advice and recommendations on the activities and operations reviewed.

Internal audit is fundamentally concerned with identifying, analyzing, and evaluating risks
associated with management functions to realize objectives of an organisation. It is integral part
of enterprise risk management.

Under the Companies (Auditor’s Report) Order, 2015 notified by MCA on 10.04.2015 the
statutory auditor is required to comment (as amended in Nov, 2004) on the internal audit system.

In order to ensure effectiveness and adequacy of the internal audit system, the insurance
company generally considers the following aspects while devising an internal audit system:

1. Internal audit manual

2. Professional approach
3. Periodicity of audit
4. Coverage of audit
5. Special investigation
6. Supplementary short inspections
7. Revenue audit
8. EDP audit
9. Audit compliance cell
10. Audit committee of board (ACB)

There are no formal standards set on the reporting systems for the internal audit function.

While instituting the internal audit system in insurance companies, attempt should be made by the
head of the department to integrate it with other systems of internal control and accounting
control in respect of all operational activities which change with changes in market conditions,
technology, product development and regulatory requirements.

Unit 19 – International Financial Reporting Standard – IFRS 4 - & Indian Accounting Standards
(Ind-AS) 104

The objective of Indian Accounting Standard is to specify the financial reporting for insurance
contracts by any entity that issues such type of contracts. In particular, this Indian Accounting
Standard requires:

1. Limited improvements to accounting by insurers for insurance contracts.

2. Disclosure that identifies and explains the amounts in an insurer’s financial statements
arising from insurance contracts and helps users of those financial statements understand
the amount, timing and uncertainty of future cash flows from insurance contracts.

An entity shall apply this Indian Accounting Standard to:

1. Insurance contract that it issues and reinsurance contracts that it holds.

2. Financial intruments that it issues with a discretionary participation feature.

Ind AS 39 requires an entity to separate some embedded derivatives from their host contract,
measure them at fair value and include changes in their fair value in profit or loss. Ind AS 39
applies to derivatives embedded in an insurance contract unless the embedded derivative is itself
an insurance contract.

Unbundling of deposits components is required if both the following conditions are met:

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The insurer can measure the deposit component separately.

The insurer’s accounting policies do not otherwise require it to recognize all obligations and
rights arising from the deposit component.

An insurer shall assess at the end of each reporting period whether its recognised insurance
liabilities are adequate, using current estimates of future cash flows under its insurance contracts.
If that assessment shows that the carrying amount of its insurance liabilities (less related
deferred acquisition costs and related intangible assets) is inadequate in the light of the estimated
future cash flows, the entire deficiency shall be recognised in profit or loss.

If a cedant’s reinsurance asset is impaired, the cedant shall reduce its carrying amount
accordingly and recognise that impairment loss in profit or loss. A reinsurance asset is impaired if,
and only if:

1. There is objective evidence, as result of an event that occurred after initial recognition of
the reinsurance asset, that the cedant may not receive all amounts due to it under the
terms of the contract; and
2. That event has a reliably measurable impact on the amounts that the cedant will receive
from the reinsurer.

An insurer may change its accounting policies for insurance contracts if, and only if, the change
makes the financial statements more relevant to the economic decision-making needs of users
and no less reliable, or more reliable and no less relevant to those needs. An insurer shall judge
relevance and reliability by the criteria in Ind AS 8.

To comply with Ind AS 103, an insurer shall, at the acquisition date, measure at fair value the
insurance liabilities assumed and insurance assets acquired in a business combination.

An insurer shall disclose information that identifies and explains the amounts in its financial
statements arising from insurance contracts. An insurer shall disclose:

1. Its accounting policies for insurance contracts and related assets, liabilities, income and
expense.
2. The recognised assets, liabilities, income and expense arising from insurance contracts.
3. The process used to determine the assumptions that have the greatest effect on the
measurement of the recognised amounts described above.
4. The effect of changes in assumptions used to measure insurance assets and insurance
liabilities, showing separately the effect of each change that has a material effect on the
financial statements.
5. Reconciliations of changes in insurance liabilities, reinsurance assets and, if any, related
deferred acquisition costs.

An insurer shall disclose information that enables users of its financial statements to evaluate the
nature and extent of risks arising from insurance contracts.

HAPPY JOURNEY

BY MAHENDRA KUMAR YOGI

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