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ACCOUNTING STANDARD FOR INSURANCE COMPANIES

REINSURANCE ACCOUNTING

ACCOUNTING OF REVENUE ITEMS 06/10/04

1 PREMIUM : MOST OF REINSURANCE PREMIUM IS RECD ONLY IN THE NEXT


ACCOUNTING YEAR HENCE ACCOUNTING CAN BE DONE ONLY ON RECEIPT BASIS. A CUT-
OFF DATE LIKE 1ST HALF YEAR OF THE CURRENT FINANCIAL YEAR AND PROVISIONAL
ACCOUNTS OF 2ND HALF YEAR WITH AT LEAST 90% CONFIRMATION OF PREMIUM AND
PAID CLAIMS FIGURES IN RESPECT OF CESSIONS ,100%ACCURACY IN RESPECT OF
FACULTATTIVE BUSINESS CAN BE MADE MANDATORY.

2 COMMISSION : A STANDARD COMMISSION STRUCTURE DEVISED FOR ALL INDIAN


INSURANCE COMPANIES WILL HELP IN STANDARDISING COMMISSIONS.IT COULD BE
AROUND 30% FOR PROPOTIONAL TREATIES. THIS WILL BE USEFUL FOR INTERCOMPANY
COMPARISIONS.

3 ACCOUNTING OF EXCHANGE FLUCTUATIONS (AS-11) : FOREIGN


EXCHANGE TRANSACTIONS ARE CONVERTED AT THE AVERAGE RATE IN RESPECT OF
OPERATIONS AND AT YEAR END RATE FOR ALL O/S BALANCES . THIS HOWEVER CANNOT
BE APPLIED TO ERSTWHILE UNIT TRANSACTIONS AS WELL AS RESERVE DEOPSIT
BALANCES WHERE O/S BALANCES IN ORIGINAL CURRENCY ARE NOT AVAILABLE. ALL
COMPANIES CAN AGREE TO A COMMON CUT-OFF DATE FROM WHICH AS-11 CAN BE
COMPLIED WITH.

ACCOUNTING OF BALANCE SHEET ITEMS

1 OUTSTANDING LOSSES:WHERE ADVICES ARE RECD MAXIMUM WEIGHTAGE


SHOULD BE GIVEN FOR ARRIVING AT THE O/S LOSS FIGURE FOLLOWED BY O/S LOSS
FIGURES GIVEN IN THE ACCOUNTS RECD IN THE CURRENT YEAR . WHERE NO ACCOUNTS
ARE RECD IN THE FINANCIAL YEAR THE BASIS A COMPANY SHOULD ADOPT FOR
ESTIMATION OF O/S LOSSES COULD BE STANDARDISED. A GUIDELINE ON WHAT KIND OF
TREATIES NEED ACTURIAL VALUATION COULD ALSO BE MADE.

2 COMMUTATIONS: SOME CONSENSUS HAS TO BE FOUND ON WHAT COMMUTATIONS


TO ACCEPT AND WHAT NOT .A COMMITTEE WITH REP FROM ALL INSURANCE COMPANIES
WITH AN ACTUARY TO EVALUATE PROPOSALS IN CASE OF ACCEPTANCES AND MAKE
PROPOSALS IN CASE OF CESSIONS TO BE FORMED. THE ACCOUNTING TREATMENT COULD
BE INCREASING O/S LOSS PROVISION TO THE EXTENT OF COMMUTATION BEFORE
PAYMENT.A NOTE IN THE AUDITED ACCOUNTS THAT THIS PROCEDURE HAS BEEN
FOLLOWED IN RESPECT OF COMMUTATIONS PAID/RECD DURING THE YEAR COULD BE
MADE.THIS EXPENSE AS PER IFRS 4 PARA 37(B) COMMUTATION PAYMENTS CAN BE
AMORTISED.THIS WILLHELP IN REDUCING THE IMPACT OF THESE PAYMENTS IN THE
RESULTS OF THE CURRENT YEAR
3 PROVISION FOR BALANCES TO BE RECOVERED FOR COMPANIES IN
LIQUIDATION: A COMMON GUIDELINE TO BE FOLLOWED IN CASE OF COMPANIES IN
LIQUIDATION LIKE O/S LOSS PROVISIONING . IN CASE PART OF THE AMOUNT CAN BE
RECOVERED BAD DEBTS PROVISIONING CAN BE MADE TO A % OF TOTAL OUTSTANDINGS.

GENERAL ACCOUUNTING GUIDELINES

1 PREPARATION OF CASH FLOW STATEMENT (AS-3) CASH FLOW STATEMENT


CAN BE PREPARED ONLY BY INDIRECT METHOD AS IT IS VERY DIFFICULT TO SAGREGATE
CLAIMS/PREMIUM BREAK-UP FOR EACH SETTLEMENT OF O/S BALANCES TO THE
REINSURER. THIS IS BECAUSE IN ANY TREATY ESPECIALLY RUN-OFF , PREMIUM IS
ADJUSTED WITH CLAIMS ,COMMISSION AND OTHER EXPENSES FOR EACH ACCOUNTING
PERIOD AND SETTLEMENT IS MADE FOR SEVERAL ACCOUNTING PERIODS AT THE SAME
TIME. AN EXEMPTION MAY BE MADE IN RESPECT OF INSURANCE COMPANIES FOR AS-3

2 REINSURANCE PROGRAMME : A CERTIFICATION FROM THE AUDITORS DURING


AUDIT THAT THE REINSURANCE PROGRAM HAS BEEN MADE AFTER TAKING INTO
ACCOUNT THE IRDA REGULATIONS. THIS CAN BE DONE WITH IRDAS APPROVAL.

3 INWARD BUSINESS :AS THE NATIONAL REINSURER (GIC) DOES MOST OF THE
INWARD PLACEMENTS SOME GUIDELINES COULD BE GIVEN BY GIC SO THAT ACCEPTANCES
ARE DONE IN AN UNIFORM MANNER. THIS WILL BE USEFUL AT THE TIME OF COMMUTING
THE TREATY.

Basis of the above conclusions were arrived at as follows:

1 Differences in accounting direct and reinsurance business.

2 Adoption of IRDA /IRFS regulations.

3 ICAI accounting standards-impact of AS3 and AS11 on reinsurance.

1 Differences in accounting direct and reinsurance business

At the outset I give below heads of account where the accounting treatment in
respect of insurance and reinsurance differ.
HEAD OF DIRECT INSURANCE REINSURANCE ACTION SUGESSTED
ACCOUNT

PREMIUM ACCOUNTED AS RECD ACCOUNTED AS AS 5 ON PRIOR


UPTO 31ST MAR FOR RECD UPTO 31ST PERIOD
THE CURRENT YEAR MAR BUT USUALLY
DOES NOT PERTAIN ITEMS CANNOT BE
TO THE CURRENT COMPLIED HERE AS
YEAR. MOST OF
REINSURANCE
PREMIUM IS RECD
ONLY IN THE NEXT
ACCOUNTING YEAR
HENCE CAN BE
DONE ONLY ON
RECEIPT BASIS. A
CUT-OFF DATE LIKE
1ST HALF YEAR OF
THE CURRENT
FINANCIAL YEAR
CAN BE MADE
MANDATORY AND
PROVISIONAL
ACCOUNTS OF 2ND
HALF YEAR WITH AT
LEAST 90%
CONFIRMATION OF
PREMIUM AND PAID
CLAIMS FIGURES IN
RESPECT OF
CESSIONS ,
100%ACCURACY IN
RESPECT OF
FACULTATTIVE
BUSINESS.

COMMISSION FIXED RATES AS PER DIFFERS FOR EACH A COMMON


TARIFF CLASS EACH COMMISSION
TREATY-ADDL STRUCTURE
COMMISSION LIKE DEVISED FOR ALL
PROFIT AND INDIAN INSURANCE
OVERRIDING COMPANIES WILL
COMMISSION TO BE HELP IN
CALCULATED. STANDARDISING
COMMISSIONS.THIS
COULD BE AROUND
30% FOR
PROPOTIONAL
TREATIES . THIS
WILL BE USEFUL
FOR INTERCOMPANY
COMPARISIONS.

COMMUTATION NOT APPLICABLE TREATY IS CLOSED SOME CONSENSUS


FOR TREATIES HAS TO BE FOUND
(OTHER THAN ON WHAT
CLEAN CUT) ONLY COMMUTATIONS TO
BY ACCEPT AND WHAT
COMMUTATION.THIS NOT .A COMMITTEE
INCLUDES IBNR. WITH REP FROM ALL
INSURANCE
COMPANIES WITH
AN ACTUARY TO
EVALUATE
PROPOSALS IN CASE
OF ACCEPTANCES
AND MAKE
PROPOSALS IN CASE
OF CESSIONS TO BE
FORMED. THE
ACCOUNTING
TREATMENT COULD
BE INCREASING O/S
LOSS PROVISION TO
THE EXTENT OF
COMMUTATION
BEFORE PAYMENT.A
NOTE IN THE
AUDITED ACCOUNTS
THAT THIS
PROCEDURE HAS
BEEN FOLLOWED IN
RESPECT OF
COMMUTATIONS
PAID/RECD DURING
THE YEAR COULD BE
MADE .

O/S BALANCES TO IF COMPANY DOES BALNCES HAVE TO A COMMON


BE NOT PAY THE BE REVIEWED EACH GUIDELINE TO BE
RECOVERDED/PAI PREMIUM POLICY IS YEAR FROM EACH FOLLOWED IN CASE
D IN CASE OF CANCELLED. COMPANY AND IF OF COMPANIES IN
COMPANIES IN COMPANY IS UNDER LIQUIDATION LIKE
LIQUIDATION. LIQUIDATION O/S LOSS
ADEQUATE PROVISIONING TO
PROVISION HAS TO STANDARDISE
BE MADE. AMOUNTS TO BE
PROVIDED.IN CASE
AMOUNTS CAN BE
RECOVERED BAD
DEBTS
PROVISIONING CAN
BE MADE TO A % OF
TOTAL
OUTSTANDINGS.

2 Adoption of IRDA /IRFS regulations.

A IRDA ACCOUNTING PROVISIONS

(2) Surplus over and above the domestic reinsurance arrangements class wise can be placed by the
insurer independently with any of the reinsurers complying with sub-regulation (7) subject to a
limit of 10% of the total reinsurance premium ceded outside India being placed with any one
reinsurer. Where it is necessary in respect of specialised insurance to cede a share exceeding such
limit to any particular reinsurer, the insurer may seek the specific approval of the Authority giving
reasons for such cession.

(3) Every insurer shall offer an opportunity to other Indian insurers including the Indian Reinsurer to
participate in its facultative and treaty surpluses before placement of such cessions outside India.

(4) The Indian Reinsurer shall retrocede at least 50% of the obligatory cessions received by it to the
ceding insurers after protecting the portfolio by suitable excess of loss covers. Such retrocession
shall be at original terms plus an over-riding commission to the Indian Reinsurer not exceeding
2.5%. The retrocession to each ceding insurer shall be in proportion to its cessions to the Indian
Reinsurer.

(5) Every insurer shall be required to submit to the Authority statistics relating to its reinsurance
transactions in such forms as the Authority may specify, together with its annual accounts.

SUGESSTED ACTION-A CERTIFICATION FROM THE AUDITORS DURING AUDIT THAT


THE REINSURANCE PROGRAM HAS BEEN MADE AFTER TAKING INTO ACCOUNT THE
ABOVE REGULATIONS. THIS CAN BE DONE WITH IRDAS APPROVAL.

4. Inward Reinsurance Business

Every insurer wanting to write inward reinsurance business shall have a well-defined underwriting
policy for underwriting inward reinsurance business. The insurer shall ensure that decisions on
acceptance of reinsurance business are made by persons with necessary knowledge and experience.
The insurer shall file with the Authority a note on its underwriting policy stating the classes of
business, geographical scope, underwriting limits and profit objective. The insurer shall also file any
changes to the note as and when a change in underwriting policy is made.

SUGESSTED ACTION- AS THE NATIONAL REINSURER (GIC) DOES MOST OF THE


INWARD PLACEMENTS SOME GUIDELINES COULD BE GIVEN BY GIC SO THAT
ACCEPTANCES ARE DONE IN AN UNIFORM MANNER. THIS WILL BE USEFUL AT THE
TIME OF COMMUTING THE TREATY.

5. Outstanding Loss Provisioning

(1) Every insurer shall make outstanding claims provisions for every reinsurance arrangement
accepted on the basis of loss information advices received from Brokers/ Cedants and where such
advices are not received, on an actuarial estimation basis.
SUGESSTED ACTION- O/S LOSSES SHOULD BE BASED ON INFORMATION WHERE
ADVICES ARE GIVEN THE MAXIMUM WEIGHTAGE FOLLWED BY INFORMATION RECD IN
THE ACCOUNTS RECD IN THE CURRENT YEAR . WHERE NO ACCOUNTS ARE RECD IN THE
FINANCIAL YEAR WHAT BASIS THE COMPANY SHOULD ADOPT FOR ESTIMATION OF O/S
LOSSES COULD BE STANDARDISED. A GUIDELINE ON WHAT TREATIES NEED ACTURIAL
VALUATION COULD ALSO BE MADE.

B IFRS ON REINSURANCE CONTRACTS.-37(b)

Para 37 of IFRS 4 states that if the insurer is a cedant , it shall disclose


1 gains and losses recognized in profit or loss on buying reinsurance;
2 if the cedant defers and amortises gains and losses arising on buying reinsurance, the
amortisation for the period and the amounts remaining unamortised at the beginning and
end of the period.
3 the process used to determine the assumptions that have the greatest effect on the
measurement of recognized amounts described above. When practicable ,an insurer shall
also quantify disclosure of those assumptions.
4 reconciliation of changes in reinsurance assets and if any related deferred acquisition
costs.

SUGESSTED ACTION- COMMUTATION PAYMENTS CAN BE AMORTISED.THIS WILLHELP IN


REDUCING THE IMPACT OF THESE PAYMENTS IN THE RESULTS OF THE CURRENT YEAR

3 ICAI accounting standards-impact of AS3 and AS11 on reinsurance

AS-3 Cash Flow statement can be prepared only by Indirect Method only as it is very
difficult to segregate claims / premium break-up for each settlement of o/s balances to the
rein surer. This is because in any treaty especially run-off premium is adjusted with
claims commission and other expenses for each accounting period and settlement is made
for several accounting periods at the same time. An exemption may be made in respect of
insurance companies for AS-3.

AS-11 Foreign exchange Transactions are converted at the average rate in respect of
operations and at year end rate for all o/s balances, This however cannot be applied to
erstwhile unit transactions as well as reserve deposit balances where o/s balances in
original currency are not available. All companies having such balances can agree to a
common cut-off date from which AS-11 can be complied with.

Please note that this write up is only an attempt to identify a viable accounting
standard for reinsurance accounting .This can be circulated to reinsurance depts. Of
insurance companies for their comments. I would also welcome any comment
/suggestions from the members of this group.

Last but not least I take this opportunity in thanking Mr Prabhakar for accommodating
me as a member.