Section A

Introduction
The law on supervision of co-operative insurance companies is responsible for the regulation of
Insurance and Re-insurance in Saudi Arabia. This law applies to all registered insurance
companies doing business in the country. Moreover, it also considers insurance brokers as well
as other insurance providers. This paper will discuss the general insurance industry and the
accounting provisions and specifically analyze the accounting standards adopted by Salama
Cooperative Insurance Company. The financial statement is for the year ended 2019.
Overview of Insurance Accounting
Accounting generally refers to the recording, analyzing and the reporting of a company’s
financial position. In Saudi Arabia, every corporate accounting and reporting is made possible by
a common set of standards, referred to as generally accepted accounting principles. These
principles are set by Saudi Organization for Certified Public Accountants. Furthermore, the
standards are fully compliant to International Financial Reporting Standards (IFRS). In Saudi,
there are further requirements that are not included in IFRS, those relating to Zakat and Religion
tax. During the year 2001, International Accounting Standards Board, an international
independent body formulated International Accounting Standards and International Financial
Reporting Standards. Tandawul requires insurance companies to file their financial statements
with them with clearly stipulated International Financial Reporting Standards. Overtime, they
have been evaluated and scrutinized to ensure that the requirements are strictly adhered to.
Accounting standards have changed over a period of time. In the early 90s, financial reporting
was inclined to addressing management needs and those of creditors. However, the accounting
standards have enabled organizations to analyze and compare their financial performance from
one period to the other. The generally accepted standards have also emphasized the need for
transparency. Financial reports and standards should be understood by people blessed with
knowledge. The information too in financial statements should be verifiable and addresses
reliability aspect. Furthermore, companies must fully disclose their financial statements as well
as other relevant information. There are also regulations protecting policy holders from situations
where an insurance company goes insolvent.
Insurance Basics
Insurance companies take the option of managing risks. The premium paid to cover protection is
calculated over time by taking consideration of historical information relating to policies of that
kind. The total cost of an insurance policy to the insurer is not known until the end of a policy
period so as to enable claims calculation in totality. The insurance industry is divided into two
majors: General Insurance and Life Insurance. Property insurance covers homes, automobiles
and businesses. Health on the other hand covers long term care, disability insurance among
others. The nature of accounting practices that apply to property and life insurance vary because
of their unique products. The cost duration and the variability of outcomes plays a very critical
role. Property insurance covers are usually short term in nature. Their periods are within 6
months and a year. Their costs can easily be estimated within a year. For life insurance,
disability insurance and annuities cover long periods of time. In property insurance, the
variability of claims is quite considerable. This is so especially when claims are clearly captured
in the policy. On the contrary, for life insurance, claims against it are typically measurable as
they are simply the amounts stated in the contracts. They are very predictable.
Insurance Contracts
The International Accounting Standard Board has issued a new accounting standard going by the
name International Financial Reporting Standard 17. It is a comprehensive accounting standard
that is meant for insurance contracts. It also has provisions for reinsurance related contracts.
There existed gaps in IFRS 4 thus did not give any measurement for accounting in insurance
contracts. This permitted insurance companies to adopt local practices. The divergence of
accounting practices use by companies is a recipe for difficulty in comparing financial
statements. IFRS 17 there carries along the advantage of increasing comparability of financial
statements globally and thus enhancing the quality of financial information. Furthermore, it
combines the current measurement of cash flows and recognizes profits over the service delivery
time period. Also, it provides financial results in the insurance industry separately from the
associated income and expenses. It further offers an organization a choice of adopting a financial
policy option of recording profit and loss for all incomes and expense or developing a separate
comprehensive plan. IFRS carries along key principles. An entity can only accept insurance
contracts in which it has relevant insurance risk from the other party. Secondly it separates the
diverse elements of insurance contracts. An insurance company should divide contracts into
groups that are recognizable and can be measured. The recognition and measurement of an
insurance contract is done by adjusting the risk of the present value of future cash flows or any
amount in the unearned value category. The insurance company should also be able to
acknowledge the profits from a group of insurance contracts with which it provides services. If
the said groups are making losses, it should be declared in the soonest time frame possible.
Further, the company should provide separate sections relating to insurance revenue, service
expenses and insurance expenses.
Asset Valuation
Insurance companies should be able to cash claims on their occurrence. The should also be able
to raise adequate money to cater for significant amount of claims arising over time. Most of their
assets therefore are reflected in the highly paying corporate and government bonds. Standard
Accounting Procedures value bonds at their amortized cost and not current market offer which
brings about stability in the future. The situation is different when prevailing interest rates are
higher than the coupon rates of bonds because the value of assets stand to be overstated. Property
insurance companies also has their asset base distributed in preferred and common stock. The
last category generally relates to those recoverable from reinsurance. The amounts from
Reinsurance companies are featured in reference to their overdue nature.
Liabilities and Reserves
Liabilities generally refers to what is owed to the other party. Also referred to as claims against
asset. For an insurance company, two categories represent liabilities. First are reserves that have
been set aside to meet obligations to policy holders. Secondly, are the general claims relating to
other creditors. Reserves are the largest liability segment. Reserves are grouped into three
categories. They are unearned premium reserves and loss reserves. Unearned reserves relate to
the unexpired section of a policy period. Loss reserves serve to compensate the insured on
occurrence of a risk. Some claims can be met in a short time frame due to their ease of estimation
while others take a longer period due to their nature.
Revenues, Expenses and Profits
Insurance companies earn profits from their underwriting practices as well as by investing.
Policyholders are the main source of revenue for insurance firms. Generally Accepted
Accounting Principles provides for the deferment of expenses on a way that relates to the
premiums earned.
Salama Cooperative Insurance Company
Salama is a lead provider of Shari’ah compliant insurance solutions. Incorporated in 1979, the
company provides services throughout the world. The company has done exceedingly well in
service provision overtime. The Takaful services provided by the company are aimed at insuring
property, insuring against accidents and proving a wide variety of medical insurance needs.
Further, the company has a paid capital amounting to $300 million and is also listed in the Dubai
financial market. The issuance of a public decree in 2006 gave the company the status of trading
in the kingdom of Saudi Arabia stock exchange. The company serves a global market, priding
itself in a diverse customer base. The market is not limited to individuals but serves institutions
as well. Besides, there are up to six companies providing Takaful services to a varied customer
base.
 Financial Statement
A financial statement is a written record that captures the financial activities of a business entity.
It clearly illustrates the financial performance of a firm as well as its financial position. The
components of a financial statement include a balance sheet, income statement and a cash flow
statement. A balance sheet is a summarized document containing assets, liabilities as well as a
company’s equity. An income statement analyzes a company’s expenses and revenue over a
given period of time. A cash flow on the other hand describes how a company finances its debt
needs, raises operating expenses and how it is able to finance its investment portfolio.
 Analysis
The company reported a net profit of AED 55 million in 2019 which is higher compared to that
of 2 million AED in 2018. There was also a significant rise in investment income reflected in a
high of 87 percent, culminating from a rise from 12.4 million to 23.3 million. The company’s
financial statements prepared each year meets international standards. The same is done in
compliance with the monetary authority of Saudi Arabia. The essence of this authority is to
counter check those relating to zakat and income tax. The provision for zakat and income is that
they should be accounted quarterly every year through equity. The equity in question in under
earnings that have been retained. Preparation of financial statements is done under the going
concern methodology whereby assets are recorded in their original value and not their present
value. The exception is provided on investments as they are captured in their fair value. Further,
the statement relating to the company financial position is laid out in the equity provision.
However, there are item exceptions like equipment and property, unsettled claims, intangible
assets and more. The other assets and liabilities are of short term nature except when stated
otherwise. The Saudi Arabian Insurance regulations requires the company to keep separate
account books. This should be done on insurance matters as well as those relating to
shareholders. They should be presented in an organized manner. The expenses are allocated
depending on the decisions made by the management and the team in the board.
The financial statements comprising of income statement, statement of financial position,
comprehensive income and cash flows are prepared in total compliance with regulations. In this
context, those relating to shareholders and insurance are done separately but abiding by the same
standards. The assets, liabilities, expenses and gains or losses are prepared separately following
SAMA standards. While company operations statements are prepared in adherence to IFRS, the
balances of insurance operations are intertwined and put together with those relating to
shareholders.
The company financials are prepared in the country’s transaction currency which is Saudi
Arabian Riyals commonly referred to as SAR. They are prepared with in depth estimations,
judgements as well as assumptions. The judgements are reflected in the amounts of assets and
liabilities. Anticipated assets and liabilities over a given period of time are also provided for.
Further, amounts relating to revenues and expenses are provided for. However, the final results
might differ with the projected estimates. Besides, amounts represented in estimates and by
substantial judgements are subject to change every financial year since historical information as
well as economic states are dynamic.
There are accounting judgements that were fundamental in the preparation of the 2019 financials.
First, the critical estimation relates to the liabilities arising from claims pertaining insurance
contracts. The estimates which are put forward at the end of the accounting period reflect
reported claims and those which were incurred but were not reported. Input Assessing is done in
order to estimate the liabilities associated with unreported claims. Secondly, the assets were
impaired because their fair values were less than the book value. Thirdly, a provision to impair
the amounts of receivables was considered as the company wasn’t able to collect the expected
amounts of receivable in the year. Lastly is the provision regarding financial instruments. They
should be reflected in their fair values. This mean that assets or liabilities values can be
exchanged at values agreeable between partners through considerable engagements and in
conditions prevailing at the market.
Section B
The company for Co-operative Insurance
Introduction
The company of co-operative insurance has its location based in Riyadh. The company forms
part of the wider insurance agencies and the brokerage industry. The company is among the
many listed in Saudi exchange market. Its existence is made possible by a royal decree number
m/5. It was registered in January1986. There are 673 employees in the company scattered across
its wider locations. The company serves diverse sectors of marine, fire, motor industry,
engineering, medical insurance, aviation insurance, takaful insurance as well as casualty. Further
it generates 1.93 billion dollars from its sales. There are also 2 companies forming up the entire
insurance company. The company has a huge capital structure of comprising of SR 1000 million
authorized, issued and paid capital. The number of shares is 100 million valued at SR 10 per
share. The distribution of capital ownership is given whereby twenty-three percent serves social
insurance, twenty-four percent reflects pension and the remaining percentage is that which is
held by the shareholders in the stock exchange market. The company is endowed with resources
and therefore can meet the diverse business needs ranging from corporate to those relating to
retailers. Further, it has the capacity to respond to various business risks irrespective of the
magnitude. Overtime, the company has been very responsive to client needs comprehensively.
The company regularly conducts market research to ascertain the ever evolving customer needs.
The research is aimed at enhancing product development and ensuring that the services are up to
date with the general expectations of the people in the market. During product launching phases,
the company serves the public with all the necessary information regarding products. While
doing so, it pays very close attention to the interests of the customers with the intention of
winning their trust and possibly incorporating them to the business. Besides, the company is
active in the media and thus assembles all the necessary information from the reviews that
customers give regarding their products. The reviews are vital in restructuring of company
operations.
Latest News
The financial results for the third quarter of the year registered a positive growth for the
company. There was a rise by 4.73 percent in the third quarter to a revenue of 113. 8 million
Saudi Arabia Riyal. The reason for a rise in growth was attributed to two critical factors. First,
the net income from underwriting shot to a high of 5.7 percent. Secondly, the higher insurance
excess resulting from higher policy holders contributed to a tremendous rise of 22.85 percent.
There are other items that recorded a downward trajectory. The incurred net claims significantly
dropped to a tune of 3.51 percent. Secondly, the investments by policy holders and the total
investments by shareholders also dropped by 30.72 percent. Furthermore, written premiums
witnessed a drop too by a margin of 16.2 percent. The actual figures are represented in
comparison to the previous year. The drop therefore was from 1.2 billion in the last quarter of
2019 to a record 990.22 million Saudi Riyal. However, the company’s first nine months’
performance rose by a tune of 81.3 percent which is translated to 49.86 million.
Financial analysis
Financial analysis refers to the assessments that an entity undergoes whereby the variables of
viability, stability and profitability are critically analyzed through ratio analysis and other
techniques. This is done to unravel performance over time. Discussed below are the financial
ratios pertaining the company for co-operative insurance of Saudi Arabia. The analysis will
utilize the financial performance for the year 2018 and 2019.
Net profit after taxes
Net profit margin =
Net Sales
327,586
2019 = = 0.048
6,877,318
279,333
2018 = = 0.040
7,065,754

Total debt
Loan to Asset ratio =
Total Assets
11,614,796
2019 = = 0.82
14,114,485
10,819,357
2018 = = 0.86
12,627,578
Earnings before tax
Return on capital employed =
Capital Employed
436,448
2019 = = 0.17
2,499,685
213,339
2018 = = 0.112
1,808,221
Net profit
Return on Assets =
Total Assets
327,586
2019 = = 0.023
14,114,485
279,333
2018 = = 0.022
12,627,578
Net return on investment−interest paid
Net interest Margin =
Average assets
327,586
2019 = = 6%
7,057,485.5
279,333
2018 = = 4%
6,313,789
 Total liabilities
Operating leverage =
Total equity
11,614,796
2019 = = 4.65
2,499,689
10,819,357
2018 = = 5.98
1,808,221

Explanations
Net profit Margin
Net profit margin simply considers profit being a percentage of revenue. It spells the profit that
an entity has generated over a period of time in reference to revenue. It can be expressed either
as a percentage or as a decimal. Comparing the periods of 2018 and 2019 reveals a close net
profit margin. In 2019, the margin was 0.048 while in 2018 the net profit margin was 0.040. The
same can be expressed as percentages of 4.8 percent and 4 percent respectively. The difference is
an increment of 0.8 percent. \
Loan to Asset Ratio
It is a financial ratio that compares the total debt of a company to its asset base. It enables assess
the financial health of a company. For the company of co-operative insurance, there was a
significant improvement in the company loan to asset ratio for the periods 2018 and 2019. In
2019, the ratio was 0.82 while in 2018 the it was 0.86. The positive improvement is a value of
0.04.
Return on capital employed
This is a profitability tool that is used to check how the entity is utilizing its capital in revenue
generation. This ratio helps various stakeholders in making decisions regarding where to invest.
The stakeholders can be managers, investors among others. The insurance company recorded an
upward trajectory in its ability to generate returns. In 2019, the return was 0.17 while in 2018 the
return was 0.11. The difference however represents a positivity of 0.06.
Return on Assets
This tool measures the performance of a company in reference to the asset composition. It
provides the concerned parties information on how they can fully utilize their asset base to
generate the required profits. In the insurance case study being examined, the return on assets in
2019 was 0.023 while in the year 2018 the return was 0.022. The difference therefore is a value
of 0.001.
Net Interest Margin
It represents the interest that a financial institution earns from its investments and that interest
expenditure that is paid out to lenders of income. The same is analyzed in relation to the assets
that an organization has. In 2019, the net interest margin was 6 percent while in 2018, the interest
margin was 4% therefore reflecting a difference of 2%.
Operating Leverage
This aspect of measuring the financial health of a company undertakes two crucial elements of
debt and equity. This is quite important since a company relies on both debt and equity to finance
its obligations. Understanding the loans that a company has reveals its ability to pay debtors in
future. In the insurance case being studied, the leverage ratio in 2019 was 4.65 to 1 while in 2018
was 5.98 to 1. This represents an improvement in the company health.