INSURANCE COMPANIES

Accounting for Insurance Company

Unexpired Risks Reserve:

In most cases policies are renewed annually except in some cases where policies are issued for a
shorter period. Since insurers close their accounts on a particular date, not all risks under policies
expire on that date. Many policies extend into the following year during which the risk continues.
Therefore on the closing date, there is unexpired liability under various policies which may occur
during the remaining term of the policy beyond the year and therefore, a provision for unexpired risks
is made at normally 50% in case of Fire Insurance and 100% of in case of Marine Insurance. This
reserve is based on the net premium income earned by the insurance company during the year

Re-insurance.
If an insurer does not wish to bear the whole risk of policy written by him, he may reinsure a part of
the risk with some other insurer. In such a case the insurer is said to have ceded a part of his business
to other insurer. The reinsurance transaction may thus be defined as an agreement between a ‘ceding
company’ and ‘reinsurer’ whereby the former agreed to ‘cede’ and the latter agrees to accept a certain
specified share of risk or liability upon terms as set out in the agreement.
A ‘ceding company’ is the original insurance company which has accepted the risk and has agreed to
‘cede’ or pass on that risk to another insurance company or a reinsurance company. It may however be
emphasised that the original insured does not acquire any right under a reinsurance contract against
the reinsurer. In the event of loss, therefore, the insured’s claim for full amount is against the original
insurer. The original insurer has to claim the proportionate amount from the reinsurer.
There are two types of reinsurance contracts, namely, facultative reinsurance and treaty reinsurance.
Under facultative reinsurance each transaction has to be negotiated individually and each party to the
transaction has a free choice, i.e., for the ceding company to offer and the reinsurer to accept. Under
treaty reinsurance a treaty agreement is entered into between ceding company and the reinsurer
whereby the volume of the reinsurance transactions remain within the limits of the treaty.

Practical Questions:
Problem 1
Prepare the Fire Insurance Revenue A/c as per IRDA regulations for the year ended 31 st March, 2014 from
the following details:
Rs.
Claims paid 5,70,000
Legal expenses regarding claims 25,000
Premiums received 25,00,000
Re-insurance premium paid 3,00,000
Commission 5,00,000
Expenses of management 1,50,000
Provision against unexpired risk on 1st April, 2013 5,75,000
Claims unpaid on 1st April, 2013 45,000
Claims unpaid on 31st March, 2013 85,000

Problem 2

From the following information as on 31st March, 2014, prepare the Revenue Accounts of Sagar Co. Ltd.
engaged in Marine Insurance Business:
Particulars Direct Re-insurance
Business (Rs.)
(Rs.)
I. Premium :
Received 24,00,000 3,60,000
Receivable – 1st April, 2013 1,20,000 21,000
– 31st March, 2014 1,80,000 28,000
Premium paid – 2,40,000
Payable – 1st April, 2013 – 20,000
– 31st March, 2014 – 42,000
II. Claims :
Paid 16,50,000 1,25,000
Payable – 1st April, 2013 95,000 13,000
– 31st March, 2014 1,75,000 22,000
Received – 1,00,000
Receivable – 1st April, 2013 – 9,000
– 31st March, 2014 – 12,000
III. Commission :
On Insurance accepted 1,50,000 11,000
On Insurance ceded – 14,000

Other expenses and income:

Salaries – Rs. 2,60,000; Rent, Rates and Taxes – Rs. 18,000; Printing and Stationery – Rs. 23,000; Interest,
Dividend and Rent received (net) – Rs. 1.15.500; Income Tax deducted at source Rs. 24,500, Legal
Expenses (Inclusive of Rs. 20,000 in connection with the settlement of claims) Rs. 60,000;
Balance of Fund on 1st April, 2013 was Rs. 26, 50,000 including Additional Reserve of Rs. 3, 25,000.
Additional Reserve has to be maintained at 5% of the net premium of the year.
Problem 3

From the following information as on 31st March, 2011, prepare the Revenue Accounts of Essar Co. Ltd.
engaged in Marine Insurance Business:
Particulars Direct Re-insurance
Business (Rs.)
(Rs.)
I. Premium :
Received 92,00,000 14,40,000
 Receivable – 1st April, 2010 3,72,000 54,000
– 31st March, 2011 5 24,000 51,000
Premium paid – 9,20,000
Payable – 1st April, 2010 – 56,250
– 31st March, 2011 – 93,000
II. Claims :
Paid 47,00,000 6,00,000
Payable – 1st April, 2010 2,50,000 57,000
– 31st March, 2011 3,12,000 66,000
Received – 2,55,000
Receivable – 1st April, 2010 – 24,000
– 31st March, 2011 – 34,500
III. Commission :
On Insurance accepted 4,40,000 38,000
On Insurance ceded – 39,000
Other expenses and income:
Salaries – Rs. 4,80,000; Rent, Rates and Taxes – Rs. 58,000; Printing and Stationery – Rs. 86,000; Indian
Income Tax paid – Rs. 6,60,000; Interest, Dividend and Rent received (net) – Rs. 2,80,000; Income Tax
deducted at source – Rs. 56,000; Legal Expenses (Inclusive of Rs. 36,000 in connection with the
settlement of claims) – Rs. 80,000;
Balance of Fund on 1st April, 2010 was Rs. 76, 90,000 including Additional Reserve of Rs. 6, 90,000.
Additional Reserve has to be maintained at 5% of the net premium of the year.
Question 4
From the following balances extracted from the books of Perfect General Insurance Company Limited as
on 31.3.2011, you are required to prepare Revenue Accounts in respect of Fire and marine Insurance
business for the year ended 31.3.2011 to and a Profit and Loss Account for the same period :

Rs. Rs.
Directors’ Fees 80,000 Interest received 19,000
Dividend received 1, 00,000 Fixed Assets (1.4.2013) 90,000
Provision for Taxation Income-tax paid during
(as on 1.4. 2013) 85,000 the year 60,000

Fire Marine
Outstanding Claims on 1.4.2013 28,000 7,000
Claims paid 1, 00,000 80,000
Reserve for Unexpired Risk on 1.4.2013 2, 00,000 1, 40,000
Premiums Received 4, 50,000 3, 30,000
Agent’s Commission 40,000 20,000
Expenses of Management 60,000 45,000
 Re-insurance Premium (Dr.) 25,000 15,000
The following additional points are also to be taken into account:
(a) Depreciation on Fixed Assets to be provided at 10% p.a.
(b) Interest accrued on investments Rs. 10,000.
(c) Closing provision for taxation on 31.3.2014 to be maintained at Rs. 1, 24,138
(d) Claims outstanding on 31.3.2014 were Fire Insurance Rs. 10,000; Marine Insurance
Rs. 15,000.
(e) Premium outstanding on 31.3.2014 were Fire Insurance Rs. 30,000; Marine Insurance Rs. 20,000.
(f) Reserve for unexpired risk to be maintained at 50% and 100% of net premiums in respect of Fire
and Marine Insurance respectively.
(g) Expenses of management due on 31.3.2014 were Rs. 10,000 for Fire Insurance and Rs. 5,000 in
respect of marine Insurance.
Question 5
Modern Insurance Company’s fire insurance division proved the following information, show the amount
of claim as it would appear in the Revenue account for the year ended 31 st march 2014.
Particulars Direct Business Re-insurance (Rs.)
(Rs.)
Claim paid during the year 35,60,000 8,20,000
Claim received 3,20,000
Claim Payable:
- On 1/4/2013 8,23,000 58,000
- On 31/3/2014 8,75,000 87,000
Claim Receivable:
- On 1/4/2013 85,000
- On 31/3/2014 1,42,000
Expenses of management 3,45,000
(includes Rs 38,000 Survey Fees
and 42,000 legal expenses for
settlement of claims)

Question no 6
From the following information of XYZ Marin insurance company ltd for the year ended 31 st March
2014, find out the Net premium earned and Net claimed paid.
Particulars Direct Re-insurance
Business (Rs.)
(Rs.)
Premium Earned 92,00,000 7,86,000
Premium Receivable on 1/4/2013 4,59,000 37,000
Premium Receivable on 31/3/2014 3,94,000 33,000
Premium Paid 6,36,000
Premium Payable on 1/4/2013 28,000
 Premium Payable on 31/3/2014 20,000
Claim paid 73,00,000 5,80,000
Claim payable as on 1/4/2013 94,000 16,000
Claim payable as on 31/3/2014 1,01,000 12,000
Claim Received 2,10,000
Claim receivable as on 1/4/2013 42,000
Claim receivable as on 31/3/2014 39,000

Question no 7
Prepare revenue account in proper format for the year ended 31 st March 2014 from the following
information relating to Krishnan General Insurance co for the year ended 2013-14.
Particulars Direct Re-insurance
Business (Rs.)
(Rs.)
Premium Earned 30,00,000 2,40,000
Premium Receivable on 1/4/2013 1,80,000 24,000
Premium Receivable on 31/3/2014 2,40,000 36,000
Premium Paid 3,60,000
Premium Payable on 1/4/2013 30,000
Premium Payable on 31/3/2014 42,000
Claim paid 18,00,000 1,80,000
Claim payable as on 1/4/2013 60,000 12,000
Claim payable as on 31/3/2014 1,20,000 18,000
Claim Received 1,20,000
Claim receivable as on 1/4/2013 18,000
Claim receivable as on 31/3/2014 12,000
Commission:
Amount paid 72,000 10,800
Amount received 14,400

Additional Information:
I. Interest dividend and rent received (Gross) Rs 30,000,
II. Management expenses are Rs 1, 32,000 which include Rs 12,000 related to legal expense
regarding claim.
III. Provision for income tax existing at the beginning of the year was Rs 1,95,000, the income tax
actually paid during the year 1,68,000 and the provision necessary at the year end Rs 2,07,000
IV. The net premium income of the company during the year 2012-13 was Rs 24,00,000 on which
reserve for unexpired risk @ 50% and additional reserve @ 7.5% was created. This year balance
to be carried forward is 50% of net premium on reserve for unexpired risk and 5% additional
reserve.

Question no 8
Metro General insurance company submits the following information for the year ended 31 st March 2018
Particulars Direct Re-insurance
Business (Rs.)
(Rs.)
Premium Received 5,00,000
Premium paid 50,000
Claim paid during the year 2,00,000
Claim payable as on 1/4/2013 10,000
Claim payable as on 31/3/2014 15,000
Claim Received 50,000
Claim receivable as on 1/4/2013 10,000
Claim receivable as on 31/3/2014 15,000
Expenses of management 10,000
Commission 50,000
On insurance accepted 25,000
On insurance ceded 15,000
The following information is also available.
Expenses of Management include Rs 45,000 surveyor’s fees and Rs 55,000 legal expenses for settlement
of claims.
Reserve for unexpired risk is to be maintained @ 49%. The balance of reserve for unexpired risk as on
1/4/2017 was Rs 1,00,000.
You are required to make Revenue account for the year ended 31st March 2018.

Question no 9
From the following figures taken from the books of New India Assurance Company ltd, prepare Revenue
accounts and profit and loss accounts and Balance sheet as on 31st March 2014.

Particulars Rs.in lakhs Particulars Rs.in lakhs

3.00
Fire fund as on 1/4/2013 9.30 Commission on direct business
Commission on re insurance
General Reserve 4.50 accepted 0.60
Investment Outstanding premium 0.22
36.00
Claim intimated but not paid
Premiums 27.00 (1/4/13) 0.60
6.00
Claim paid Expenses of management 4.30

Share capital 9.00 Audit fees 0.36

Profit and loss a/c (Cr) Rent and Rates 0.24
0.75
Re insurance premium 1.12 Income from investment 1.53
 0.22
Claim recovered from reinsurance 0.25 Sundry creditors

Commission on reinsurance ceded 0.48 Cash at bank 2.82

Advance tax paid 2.5

The following further information is also available.

i. Expenses of management include legal expenses of Rs 36,000 relating to claims.
ii. Claims intimated but not paid on 31/3/2014 Rs 1,00,000
iii. Income tax to be provided at 35%
iv. Transfer Rs 2, 00,000 to general reserve.

Question 10

From the following details prepare revenue account profit and loss accounts and balance sheet of XYZ ltd
carrying on Marine insurance business for the year ended 31st march 2018.

Particulars Rs. Particulars Rs.

8,600
Equity share capital 15,00,000 Donation paid
Insurance of marine fund as on 1-4-
2017 7,60,000 Advance tax payment 62,000
Unclaimed dividend Sundry debtors 9,200
2,400
9,20,000
Profit and loss account credit bal 2,40,000 Government of India securities
12,600
Sundry creditors Debentures of public bodies 1,80,000
3,60,000
Agents balances (Dr) 1,46,400 Shares in limited companies
Interest accrued but not due State government securities 8,80,000
8,200
Due to reinsurance 60,000 Claim less reinsurance 10,60,000
Furniture and fixtures (cost rs 12,40,000
12,600) 8,400 Premium less reinsurance

Stock of stationary 2,500 Commission paid 62,400

Expenses of management 2,20,000 Interest and dividend 2,40,000

Foreign taxes and insurance 12,300 Transfer fees received 600

Outstanding premium 21,200 Cash and bank balance 94,400
Outstanding claim on 31st March 2018 was Rs 1, 40,000 and depreciation on Furniture should be provided
Rs 2,100.

Illustration 11

In case of fire Insurance Company limited the following are the balance as on 31 st December 2012, Draw
up the revenue account for the year ended 31st December 2012
Particulars Amount
Commission on Re insurance accepted 1,86,458
Commission on Direct Business 1,95,172
Depreciation on Furniture 630
Depreciation on Library 118
Depreciation on Moor car 6,290
Loss on sale of motor car 12,074
General Manager Salary 24,000

Postage telegram and telephone 10,250

Rent 62,500
Office Salary and bonus 1,50,00
Travelling 25,600
Motor car Expenses’ 85,000
Printing and Stationary 35,550
Papers and “Periodicals 14,062
Law charges 15,500
Provident fund contribution 10,875
Audit fees 2,500
Accountant fees 1,500
Professional Tax 250
Miscellaneous Expenses 2,375
Bad debts written off 1,206
Claim under policies less re-insurance paid during the year 1,52,930
Total estimated liability in respect of outstanding claim as on 31 st December 2011
whether due or intimated 1,198
Reserve for unexpired risk as on 31/12/2011 3,66,594
Additional Reserve made in 2011 for unexpired risk on 31/12/2011 45,824
Premium received less reinsurance 9,89,980
Commission on reinsurance ceded 3,41,208

You are required to make 40% if net premium received as reserve for unexpired risk as on
31/12/2012 and 10% of the net premium as additional reserve.

Illustration 12

Particular Amount Particulars Amount

Direct Business Income received Commission paid on direct
Reserve for unexpired Risk as on business
1-4-2013 Expenses of management
Claim outstanding as on 1-4-2013 Income tax deducted at sources
Bad debts Profit and loss account (cr)
Income from investment and balance as on 1-4-2013
dividends(gross) Other expenses
Rent received from properties Reinsurance premium receipts
Investment in government Outstanding claim as on 31-3-
securities as on 1-4-2013 2014(net)
Investment in shares as on 1-4- Direct claim paid (gross)
2013 Reinsurance claim paid
Prepare a revenue account and profit and loss account for the year after taking into account the
following further information
All direct risk are reinsured for 20% of the risk
Claim a commission of 25% on reinsurance ceded
Provide 25% commission on reinsurance accepted
Market value of investment as on 31st March 2014 is as follows:
Government securities Rs 105 lakhs
Shares Rs 18 Lakhs
Adjust separately for each of these two categories of investments
Provide 65% for income tax

Illustration 13

Particulars Debit (Rs) Credit (Rs)

Fire Fund as on 1-4-2017 620,000
General Reserve 3,00,000
Investment 20,00,000
Premiums 18,01,022
Claim paid 4,01,877
Share capital 6,00,000
Additional Reserve on 1-4-2017 2,20,000
Profit and loss account opening balance 50,000
Re insurance premium 75,017
Claim recovered from Re insurance 14,079
Commission on Re insurance ceded 32,011
Commission on Direct Business 1,99,777
Commission on Re insurance accepted 40,100
Outstanding premiums 14,865
Claim intimidated but not paid (1-4-2017) 40,000
Expenses of management 2,87,965
Audit fees 12,000
Director fees 12,000
Rent and Taxes 3,869
Rent paid 45,000
Income from Investment 1,00,000
Share transfer fees 2,000
Loans (Dr) 4,00,00
Sundry creditors 15,000
Agent Balance (Dr) 1,80,000
Cash in hand 20,155
Cash at Bank 1,01,487
37,94,112 37,94,112

From the above you are required to prepare fire Revenue account, Profit and loss account
And Balance sheet of the company after taking into account the following:
Income tax to be provided Rs 2, 50,000
Transfer to General Reserve Rs 1, 00,000
Proposed Dividend 12%
Claim intimated but not paid as on 31st March 2018 Rs 60,800

Illustration 20
From the following figures taken from the books of New Asia Insurance co ltd dong fire
underwriting business prepare the set of Final Accounts of the year 2016-17
Particulars Debit (Rs) Credit (Rs)
Fire Fund as on 1-4-2016 9,30,000
General Reserve 4,50,000
Investment 36,00,000
Premiums 27,01,533
Claim paid 6,02,815
Share capital 9,00,000
Additional Reserve on 1-4-2017 3,30,000
Profit and loss account opening balance 75,000
Re insurance premium 1,12,525
Claim recovered from Re insurance 21,119
Commission on Re insurance ceded 48,016
Advance income tax paid 2,50,000
Commission on Direct Business 2,99,777
Commission on Re insurance accepted 60,038
Outstanding premiums 22,300
Claim intimidated but not paid (1-4-2016) 60,000
Expenses of management 4,31,947
Audit fees 36,000
Rent and Taxes 5,804
Rent paid 67,500
Income from Investment 1,53,000
Sundry creditors 22,500
Agent Balance (Dr) 20,000
Cash in hand 1,82,462
56,91,168 56,91,168
The following information may be noted
Expenses of management includes survey fees and legal expenses of Rs 36,000 and Rs 20,000
relation to claim
Claim intimidated but not paid on 31-3- 2017 Rs 1, 04,000
Income tax to be provided Rs 3, 14,565.
Transfer of Rs 2,00,000 to be made from current profits to General Reserve
Additional Reserve will be Rs 3, 30,000.