statement of financial accounting standards no 28

indonesian institute of accountants

accounting for casualty insurance

as part of the effort to transfer the indonesian accounting principles (pai) into the statement of
financial accounting standards (sfas), pai no. 4, special accounting standard on casualty
insurance, has been amended as necessary to become sfas no. 28, accounting for casualty
insurance. this statement was adopted by a meeting of the indonesian accounting principles
committee on august 24, 1994 and was ratifed by the national council of the indonesian
institute of accountants on september 7, 1994.

compliance with the policies contained in this statement is not obligatory in the case of
immaterial items.

jakarta, september 7, 1994

national council
indonesian institute of accountants

indonesian accounting principles committee

blah, blah
 contents

paragraphs
introduction 01 – 16
characteristics of the casualty insurance 02
scope and implementation 03 – 04
definitions 05 – 16

presentation of financial statements 17 – 25

balance sheet 17 – 20
income statement 21 – 24
notes to the financial statements 25

revenue 26 – 34
premiums 26 – 34

expense 35 – 36
claim expense 35 – 36

assets 37 – 39
investments 38
reinsurance receivable 39

liabilities 40 - 44
claims payable 41
estimated claims retained 42
unearned premium revenue 43
reinsurance payable 44

disclosure 45

effective date 46

appendix
introduction

01 the insurance industry grows in line with the growth of the business
world. the rise of the insurance industry is a natural consequence and
unavoidable in a situation in which many business people and members of
the public have the inclination to avoid or transfer the risks of financial
loss. the insurance industry assumes or insures part of those risks in return
for insurance premiums from the entrepreneur or the insured.

the types of risk insured includes accidents, damage or loss of certain assets, or events
which result in the loss of rights or the incurrence of financial liabilities. the insurance
company will insure all or part of the loss suffered by the insured which result from events or
situations that have been insured for during the period of the insurance contract.

the casualty insurance business has special characteristics which makes the accounting
for the industry or the insurance transactions relatively complex. revenue is known and
recorded first, whil claims expense which represents the primary expense, has not arisen and
involves uncertainties as to the occurrence as well as to the amount.

this statement addresses the accounting treatment for transactions which are specifically
related to the casualty insurance industry. other general matters or matters that are not
addressed in this statement should be treated in accordance with the generally accepted
accounting principles.

characteristics of casualty insurance

2 casualty insurance has the following characteristics:

- the casualty insurance business represents a system of protection against risk of

financial loss as well as an effort to raise funds from the general public.

- financial accountability to the insured governs the presentation of financial statements.

- financial statements are highly influence by estimates, such as estimates of unearned

premium revenue, estimates of total claims, including claims incurred but not reported.
in calculating premium level, the casualty insurance industry applies assumptions on
the level of risk and expense.

the insured makes insurance premium payments to the insurance company before the event
resulting in loss occurs. this premium payment constitutes revenue to the insurance company.
at the time the insurance contract is signed, the insurance company ordinarily does not know if
it will have to pay an insurance claim, what the amount of the payment is going to be, and if
payment is made, when the payment should be made casualty insurance contracts are typically
of short duration. these factors will influence the recognition of revenue and measurement of
expenses.
- unearned premium revenue and total claims including incurred but not reported claims
are estimated using a specific method.
- the legal regulations in the insurance industry requires casualty insurance companies to
maintain guidelines for ensuring financial stability, such as those concerning level.

scope and implementation

03 this statement should be applied in the presentation of financial statements for casualty
insurance companies. generally accepted accounting principles should be followed in ail
circumstances not specifically covered by this statement. entities whose main transactions deal
with casualty insurance should refer to this statement.

04 the casualty insurance business is regulated by rules that may differ from generally
accepted accounting principles. financial statements presented in accordance with this
statement are not intended to comply with those specific rules.

definitions

05 short term contract is a contract that provides coverage for a specific period and allows
the insured to cancel die contract or amend contract terms at the end of each contract period,
such as amending the amount of total premiums; or coverage provided.

06 gross premium is the sum of the direct premium written and indirect premium written.
direct premium written includes premiums received from coinsurance.

07 coinsurance policy is coverage of one object of insurance by more than one insurance
company and is written in one policy.

08 unearned premium is the part of a premium not yet recognized as revenue because the
remaining coverage period spans beyond the end of the accounting period.

09 reinsurance premium is part of the gross premium that becomes the reinsurer's right
bused on the reinsurance agreement.

10 prospective reinsurance is a provision in the reinsurance contract binding the reinsurer

to pay the insurer an amount of payment for loss resulting from a future event.

11 retroactive reinsurance is a provision in the reinsurance contract binding the reinsurer

to pay the insurer an amount of payment for loss resulting from a. previous event.

12 gross claim is the total amount of a claim agreed to, including claim settlement
expenses.

13 reinsurance claim is a portion of the gross claim that becomes the liability of the
reinsurer.

14 estimated claim retained is an estimate of the total obligation retained in connection

with claims still in process, including incurred but not reported claims.

15 reinsurance receivable is a receivable from the reinsurer that results from a reinsurance
transaction.

16 reinsurance payable is an obligation to the reinsurer resulting from a reinsurance

transaction.

presentation of financial statements

balance sheet

17 in the balance sheet presentation, assets and liabilities should not be classified into
current and non-current items (unclassified), but emphasis should be placed on the investment
accounts and liability to the policyholders accounts. in this manner, the financial statements
reflect the company's ability to fulfill its liability to its policyholders.

18 assets are presented by listing investment accounts first followed by other asset
accounts. these other asset accounts are presented based on the order of their maturity dates.

19 in presenting the liabilities to policyholders ate presented first followed by other

liability accounts, which are presented based on the order of their maturity date.

20 subordinated loans are presented after other liability accounts and before equity
accounts.

income statement

21 the income statement is presented in a multiple step format.

22 premium revenue is presented in such manner that would reflect total gross premiums,
reinsurance premiums and an increased (decreased) in unearned premiums. reinsurance
premiums are presented as a reduction of gross premiums.

23 the reinsurer's portion in a claim that has been approved and/or paid, and the estimate of
the reinsurer's portion in a claim in the process of settlement, including incurred but not
reported claim, is presented as a reduction of claims expense.

24 the commission received from a reinsurance transaction is a reduction of commission

expense. if the amount of commission received is larger than the commission expense, the
difference is presented as revenue in the income statement.
notes to the financial statements

25 notes to the financial statements include disclosures covered by generally accepted

accounting principles, except as stated in paragraph 45.

revenue

premiums

26 premiums resulting from an insurance and reinsurance contracts are recognized as

revenue over the contract period in proportion to the level of coverage. when the contract
period differs significantly from the risk period (for instance, insurance coverage on
construction projects) the premium is recognized as revenue over the risk period, except as
stated in paragraph 27.

27 if the amount of the premium can be adjusted, for instance when the premium is
determined at the end of the contract or premium is adjusted at the end of the contract based on
the insured amount, then the premium revenue is recognized as follows:

a) if the total premium can be estimated in a reasonable manner, the premium

revenue is recognized aver the contract period and the estimated premium is
adjusted periodically to reflect the actual premium.

b) if the total premium cannot be estimated in a reasonable manner, the premium is

recognized under the deposit method until the premium can be reasonably
estimated.

28 coinsurance policy premiums are recognized to the extent of the share of the premiums
received by the company.

29 a ceding company can obtain indemnification on a claim in accordance with the

insurance contract coverage by entering into reinsurance contract with another insurer, or
reinsurer. furthermore, the reinsurer can also enter into a reinsurance contract with another
reinsurer, a process known as retrocession. the accounting treatment of the reinsurance
transactions depends on whether the reinsurance contract is prospective or retroactive.

30 the premium paid or the portion of the premium relating to the prospective reinsurance
transaction is recognized as the reinsurance premium over the remaining contract period in
proportion to the amount of coverage. if a portion of the reinsurance premium can be adjusted
and the amount can be reasonably estimated, then the reinsurance premium recognized over the
remaining contract period equals the estimated premium which will be paid.
31 the payment or obligation relating to a retroactive reinsurance transaction is recognized
as reinsurance receivable to the extent of the total liabilities with regard to the underlying
reinsurance contracts. when the liability recorded exceeds the amount paid, the reinsurance
receivable should be increased to reflect the difference as deferred profit. the deferred profit is
amortized over the remaining settlement period.

32 if the amount of payment or obligation relating to retroactive reinsurance transactions

exceeds that of the recorded obligation, the ceding company must increase the related
obligation or decrease the reinsurance receivable, or both at the time the reinsurance contract is
entered into. the difference is expensed in the income statement.

33 the change in the estimate of the obligation relating to the underlying reinsurance
contract is recognized in the income statement in the period of change. reinsurance receivables
should reflect the change in the total claims that could be obtained from the reinsurer, and the
resulting deferred profit is deferred and amortized.

34 reinsurance contracts which include prospective as well as retroactive reinsurance

transactions should be accounted for separately.

expense

claims expense

35 claims which arise as a result of loss relating to the object of insurance, including
settled claims, outstanding claims, incurred but not reported claims, and claim settlement
expenses are recognized as claim expenses when the obligation to settle the claims arises.
subrogation rights we recognized as a reduction of claim expense upon realization.

36 the amount of outstanding claims, including incurred but not reported claims, is
determined based on the estimate of claim liabilities. the change in the amount of estimated
total claim liabilities resulting from further review process and the difference between the
amount of the estimate and the claim paid are recognized in the income statement in the period
in which the change occurs.

assets

37 asset accounts ate recorded in accordance with generally accepted accounting principles,
except as stated in this statement, l

investment

38 accounting for investments should refer to sfas no. 13, accounting for investments and
sfas no. 15, accounting for investments in associates. marketable securities should be
accounted for in a different manner as follows:
a) debt securities intended to be held until maturity ate stated at acquisition cost net of
premium or discount amortization. in determining this intention, the company has to
take into account its experience relating to the sale and transfer of securities. a
company should not classify a debt security in this category if it intends to bold the
security for an unspecified period. debt securities should be classified in this category
if the company intends to sell the securities for example when it deals with:

(i) changes in market interest rate and changes relating to similar risks

(ii) liquidity needs

(iii) changes in the availability of and returns on alternative investment

(iv) changes in foreign exchange risk

b) debt and equity securities which are classified as trading securities are stated at
market value. trading in this case reflects active purchases and sales and is often
intended to benefit from short-term price differences. equity securities classified
under this category are those whose fair values can be determined that is when its
selling, price or bid and ask prices are available in a stock exchange registered with
bapepam. for debt securities with no quoted market prices, the estimated fair value
can be determined through various price determination techniques such as discounted
cash flow analysis, matrix pricing and fundamental analysis. unrealized gains or
losses resulting from increase (decrease) in market prices ate reported in the current
year's income statement.

c) other debt and equity securities not included in the two categories above are
classified as available for sale securities and are stated based on market price. debt
securities included in this category are held for an unspecified period, since for they
are intended to be sold at some point in time to fulfill liquidity requirements or serve
as part of the company's risk management program. unrealized gains or losses
resulting front increase (decrease) in market prices ate not recognized in the income
statement but is presented separately as a component of equity.

reinsurance receivable

39 reinsurance receivable cannot be offset against reinsurance payable, unless the

reinsurance contract specifically allows for the offset. if a credit balance arises from such an
offset, this balance should be presented in the liability section as reinsurance payable.
liabilities

40 liabilities should be recorded in accordance with generally accepted accounting

principles, except as specifically stated in this statement.

claims payable

41 a claim payable is recognized when the claim is approved to be settled.

estimated claim retained

42 estimated claim retained is stated at the estimated amount based on a technical

insurance review.

unearned premium revenue

43 unearned premium revenue for each type of insurance coverage is determined as

follows:

a) in aggregate without considering the end of the policy period and the amount is
calculated using a certain percentage; or

b) individually from each insurance policy and the amount of uneamed premium
income is determined in proportion to the insurance coverage during the
contract period or the risk period, consistent with recognition of premium
income as discussed in paragraphs 26, 27 and 28.

reinsurance payable

44 reinsurance payable cannot be offset against reinsurance receivable unless the

reinsurance contract specifically allows for the offset. if a debt balance arises from such an
offset, this balance should be presented in the assets section as reinsurance receivable.

disclosure

45 the following disclosures should be presented in the notes to the financial statements:

(a) accounting policy on:

- recognition of premium revenue and method of determining, unearned premium

revenue;

- reinsurance transactions including the nature, purpose and effect of reinsurance

transactions on the operations of the company;

- recognition of claim expense and method of determining estimated claim retained;

- other significant accounting policies in accordance with sfas no.1, disclosure of

accounting policies
(b) premium receivable arising from coinsurance policies and the resulting payable to the
member companies involved in those coinsurance policies .

(c) long-tem premiums not included in gross premiums.

effective date

46 this statement becomes effective for financial statements covering periods beginning at
or after january 1, 1996. earlier application is highly recommended.
appendix

examples of financial statements

the following examples of financial statements are presented for illustrative purposes only. the
account details may differ as long as it provides more informative disclosures.

1. balance sheet

casualty insurance company “abc”

balance sheet
as of december 31, 19x2 and 19x1

assets 19x2 19x1 liabilities and equity 19x2 19x1

investments liabilities xx xx
deposits xx xx claims payable xx xx
money market securities xx xx estimated claims retained xx xx
stocks and bokds xx xx unearned premiums xx xx
mortgages xx xx reinsurance/retrocession payable xx xx
land and buildings xx xx tax payable xx xx
direct investments xx xx other payable xx xx
other investments xx xx total liabilities xx xx
total investments xx xx
subordinated loans xx xx
cash and banks xx xx
premium receivables xx xx equity xx xx
reinsurance/ xx xx authorized capital … shares @ rp xx xx
retrocession receivables xx xx issued and paid in capital xx xx
other receivables xx xx additional paid in capital xx xx
land, buildings and other xx xx retained earnings xx xx
fixed assets xx xx total equity xx xx
(carrying value) xx xx
other assets xx xx

total assets xx xx total liabilities and equity xx xx

2. income statement

casualty insurance company “abc”

income statement
for years ended december 31, 19x2 and 19x1

19x2 19x1
PREMIUM REVENUE

Gross premiums xx xx
Reinsurance premiums (xx) (xx)
Decrease (increase) in unearned premiums (xx) (xx)
Total premium income xx xx

UNDERWRITING EXPENSE
CLAIM EXPENSE
Gross claims xx xx
Reinsurance claims (xx) (xx)
incerase (decrease) in estimated claim retained xx xx
Total claim expense xx xx
Commision expense - net xx xx
Other underwriting expense - net xx xx
Total underwriting expense xx xx
Underwriting income xx xx
Investment Income xx xx
Operating Expenses (xx) (xx)

Operating Income xx xx
Other income/expenses xx xx
Income before tax xx xx
Income taxes (xx) (xx)
Net income xx xx
3. retained earnings statement

casualty insurance company ‘abc”

statement of retained earnings
for years ended december 31, 19x2 and 19x1

19x2 19x1

beginning balance xxx xx

dividends (xx) (xx)
net income xx xx
ending balance xx xx
4. statement of cash flows (direct method)

casualty insurance company ‘abc”

statement of cash flows
year ended december 31, 19x2 and 19x1

19x2 19x1
cash flows from operating activities
receipt of reinsurance/retrocession claims xx xx
other receipts xx xx
receipt of premiums xx xx
payment for reinsurance premiums (xx) (xx)
payment for commissions (xx) (xx)
payment for claims (xx) (xx)
payment for general and administrative expenses (xx) (xx)
payment for taxes (xx) (xx)
payment for other expenses (xx) (xx)
net cash provided by/used in operating activities xx xx

cash flows from investing activities

receipt from investments xx xx
liquidation of deposits xx xx
liquidation of bond payable xx xx
proceeds from sales of equity and debt securities xx xx
proceeds from sales of fixed assets xx xx
additions to deposits (xx) (xx)
acquisition of equity and debt securities (xx) (xx)
acquisition of fixed assets (xx) (xx)
acquisition of other investments (xx) (xx)
net cash provided by/used in operating activities xx xx

cash flows from financing activities

receipt of subordinates loans xx xx
proceeds from paid-in capital xx xx
payment for subordinated loans (xx) (xx)
payment for cash dividends (xx) (xx)
net cash provided by /used in financing activities xx xx

increase (decrease) in cash balance xx xx

cash balance at the beginning of period xx xx
cash balance at the end of period xx xx
5. statement of cash flows (indirect method)

casualty insurance company “abc”

statement of cash flows
for years ended december 31, 19x2 and 19x1

19x2 19x1
cash flows from operating activities
income before income taxes xx xx
adjustments related to :
investment income xx xx
depreciation of fixed assets xx xx
gain on sale of fixed assets xx xx
increase/decrease in:
premium receivable xx xx
reinsurance receivable xx xx
other receivable xx xx
claims payable xx xx
estimated claims retained xx xx
reinsurance payable xx xx
other payable xx xx
total adjustments xx xx
cash from operating activities before income taxes xx xx
payment of income taxes (xx) (xx)
net cash provided by/used in operating activities xx xx

cash flows from investing activities

receipt from investments xx xx
liquidation of deposits xx xx
liquidation of bonds payable xx xx
proceeds from sales of equity and debt securities xx xx
proceeds from sales of fixed assets xx xx
additions to deposits (xx) (xx)
acquisition of equity and debt securities (xx) (xx)
acquisition of fixed assets (xx) (xx)
acquisition of other investments (xx) (xx)
net cash provided by/used in investing activities xx xx

cash flows from financing activities

receipt (payment) of subordinated loans xx xx
proceeds from paid-in capitals xx xx
payment for cash dividends (xx) (xx)
net cash provided by/used in financing activities xx xx
increase (decrease) in cash balance xx xx
cash balance at the beginning of period xx xx
cash balance at the end of period xx xx