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Ch. 2: Life insurance department operations

 The Accounting system in Insurance Companies :

The accounting system in insurance companies is a “unified system”

that is special to insurance companies in Egypt according to the

Local of control and supervision on insurance No. 10 for 1981

and the Egyptian Accounting Standard for Insurance &

Reinsurance Companies issued in 1999.

 (i.e. the insurance companies in Egypt are monitored (controlled)

by the Egyptian control and supervision authority , and the

Egyptian Accounting Standard for Insurance & Reinsurance

Companies).

Similarly, a unified chart of accounts was stated as per the Law of

control & Supervision on insurance No. 10 for 1981, a summary of

these codes is a follows:

Account type Account

code
 Assets [of the company]………………………… 1
 Liabilities [of the company]…………………… 2
 Expenses of a specific insurance Department ……… 3
 Incomes of a specific insurance department………… 4
 Expenses of the insurance Co; Head office…………… 5
 Incomes of the Insurance Co; Head office ………… 6

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  The difference between insurance & reinsurance:
1- Direct Insurance
Means that the insured person (individual) applied for insurance
contract with the insurance company.

The Insurance Co. The Insurance Co. The Insurance Co.

collect pays pays
Direct premiums Direct claims Direct commission
from insured individuals to insured individuals to agents and
(income) (expense) producers of the Co.
(expense)

2- Reinsurance
Means that the insurance company applied for reinsurance contract with
another insurance company

Inward Reinsurance Outward Reinsurance

This means that; insurance and
reinsurance companies have applied
for reinsuring some of their policies
with our insurance company.
This means that; our insurance
company has decided to re-insure
some policies that it has previously
issued to individual policyholders
with other insurance and reinsurance
companies.

The ins. The ins. The ins. The ins. The ins. The ins. Co.
Co. collect Co. pays Co. pays Co. pays Co. collect collect
Inward Inward Inward Outward Outward Outward
Reinsurance Reinsurance Reinsurance Reinsurance Reinsurance Reinsurance
premiums claims commission premiums claims commission
(income) (expense) (expense) (expense) (income) (income)

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  the Adoption of the Accrual Basis:
This principle has been proposed as follows:
1. On collecting incomes, 3 debit control accounts shall be
debited as follows :
Dr. Cr.
1) Debtors of insurance operations a/c (13) xxx
Or Insurance & Reinsurance Companies a/c (14) xxx
Or Debtors and other debit balances a/c (15) xxx
Any income a/c xxx
To record any income due.

2) Inward cheques a/c xxx

Debtors of insurance operations a/c (13) xxx
Or Insurance & Reinsurance Companies a/c (14) xxx
Or Debtors and other debit balances a/c (15) xxx
To record cheques received.

3) Bank current a/c xxx

Inward cheques a/c xxx

To record collection of cheques.

 Notice that:
1. Debtors of insurance operations a/c-code (13):
This account is debited when the insureds are debited for the
amounts due upon them to the insurance company.
2. Insurance & Reinsurance Companies a/c-code (14) :
This account is debited when other insurance and reinsurance
companies are debited to the insurance company as a result of
reinsurance transactions.
3. Debtors and other debit balances a/c-code (15) :
This account is debited when parties other than the insureds and
the other insurance companies, have to be debited.

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 2. When expenses become due, two credit control accounts

shall be credited :
Dr. Cr.

1) Any expense a/c xxx

Insurance & Reinsurance Companies a/c (24) xxx
Or creditors and other credit balances a/c (25) xxx
To record any expense due.

2) Insurance & Reinsurance Companies a/c (24) xxx

Or creditors and other credit balances a/c (25) xxx
Bank current a/c xxx
To record payment of expenses.

 Notice that:
1. Insurance and Reinsurance companies a/c-code (24):
This account is credited when other insurance and reinsurance
companies have amounts due upon the insurance company.

2. Creditors and other credit balances a/c- code (25) :

This credit account shall be credited when parties other than
insurance and reinsurance companies have to be credited.

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Recording of life insurance income& expenses
I-recording of life insurance income:
 Direct premiums
 Gross premium (41)  Inward reinsurance premiums
Outward reinsurance premium (42) (exp.)
 Outward reinsurance commission (43)
 Net income from investment (44)
 Other direct incomes (45)
 Incomes from other operations (46)

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 Gross premium contains :

Direct premiums Inward-reinsurance premiums

Outward-reinsurance premiums

Gross Premiums= direct premiums + inward reinsurance premiums

Net premiums = gross premium – out ward reinsurance premiums

Direct premiums:
Means, these are premiums to be received from individual
policy holder.

Inward re-insurance premiums:

Means, there are premiums to be received from other
insurance & reinsurance companies, which have applied for re
insuring some of their policies with the co.

Outward re insurance premiums:

These are premiums to be paid to other insurance &
reinsurance companies.

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 II Recording of life insurance department expenses:
Direct claims
 Claims inward reinsurance claims
outward reinsurance claims (income)
 Direct insurance commissions.
 Inward reinsurance commissions.
 Production costs.
 General & administrative expenses.
 Provisions for investments.
 Provisions other than investments provisions
 Depreciation of fixed assets.
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 Note that: types of premiums and claims: are as follows;

lead to
Direct premiums (income) → Direct claims (exp.)

Inward re-insurance lead to

Inward re-insurance
(income) → (exp.)
premiums claims

Outward re-insurance lead to

Outward re-insurance
(expense) → (income)
premiums claims

 Note that: Commissions: are as follows;

Paid to agents and producers of

Direct commission (expense)
the Company

Inward re-insurance commission (expense) Paid to other insurance Co.

Outward re-insurance commission (income) Received from other insurance Co.

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Exercise (1):
The life insurance department in Misr- insurance company incurred
the following transactions during the year 2020,
1- Direct premiums L.E 100000.
Issue fees 1%O
Control & supervision fees 2.5%O
Stamp tax on the insured 3%O
2- Stamp tax on the company at 8%O.
3- Cheques were received and collected by bank. And the amounts
due to outside authorities are paid by cheques.
4- Inward premiums L.E. 30000 retained portion at 25%. cheques
were received & collected.
5- Outward re insurance premiums L.E.40000 retained portion 25%.
Required:
Record the above transactions in the books of the insurance
company.

______ The answer ______

Issue fees= 100000×1%O= L.E.100.

Control & supervision fees = 100000×2.5%O = L.E.250.
Stamp tax = 100000×3%O = L.E.300.
Stamp tax on the company = 100000×8%O = L.E.800.

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 The journal entries:
Subs. Dr. Cr.

1) Debtors of insurance operations a/c (13) 100650

(premiums under collection) 100650

Gross premiums a/c 100000

Other direct incomes a/c 100

(Issue fees) 100

Creditors and other credit balances a/c (25) 550

(super vision & control authority) 250

(stamp tax department) 330

To record direct premium due.

2) Production costs a/c 800

(Stamp tax) 800

Creditors and other credit balances a/c (25) 800

(Stamp tax dep.) 800

To record stamp tax due on the company

3) a) Inward cheques a/c 100650

Debtors of insurance operations a/c (13) 100650

(premiums under collection) 100650

To record cheques received.

b) Bank current a/c 100650

Inward cheques a/c 100650

To record collection of cheques.

c) Creditors and other credit balances a/c (25) 1350

(super vision & control authority) 250

(stamp tax department) 300 +800 1100

Bank current a/c 1320

To record payment of supervision Fees & stamp

tax.
4) a) Insurance & re-insurance co. a/c (14) 22500

7500
Debit insurance fund a/c (30000×25%)
Inward re-insurance premiums a/c 30000

To record inward re-insurance premiums due.

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 Subs. Dr. Cr.

b) Inward cheques a/c 22500

Insurance & re-insurance co. a/c (14) 22500

To record cheques received from other

insurance companies.
c) Bank current a/c 22500

Inward cheques a/c 22500

To record collection of cheques.

d) Inward re-insurance premiums a/c 30000

Gross premiums a/c 30000

To close inward re-insurance premiums a/c in

gross premiums a/c
5)a) Outward re-insurance premiums a/c 40000

Insurance & re-insurance Companies a/c (24) 30000

Credit insurance fund a/c 10000

To record outward re-insurance Premiums due.

b) Insurance & reinsurance companies a/c (24) 30000

Bank current a/c 30000

To record payment of outward Re-insurance

premiums by cheques.
c) Gross premiums a/c 40000

Outward re-insurance premiums a/c 40000

To close outward reinsurance premiums a/c.

Gross premiums a/c

Dr. Cr.
5 c) outward re-insurance 40000 1 a) direct premiums 100000
Premiums
Bal. c/d 90000 4 d) inward re-insurance premiums 30000
130000 130000
Bal. b/d Net premiums 90000

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  Outward re-insurance commissions: (43)
This account represents the commission due to the insurance
company on the policies reinsurance with other insurance companies
as wells as the profit commission due on such reinsured policies.
Example:
Assume that commissions due to the insurance company from
other insurance and re-insurance companies for life policies re-
insured with them are L.E. 1000, in addition to a profits commission
of L.E. 200. These were received by cheques which were collected
by the company’s bank.
Sub. Dr. Cr.
1 Insurance & Re-insurance Companies a/c (14) 1200
Outward Re-insurance Commissions a/c 1200

To record outward re-insurance Commissions and profits

commissions due.

2 Inward cheques a/c 1200

Insurance & Re-Insurance Companies a/c (14) 1200
To record Cheques received .
3 Bank current a/c 1200
Inward cheques a/c 1200
To record collection of inward Cheques by bank.

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