Accounting for

Insurance
Companies
 It is a contract between two parties were the insured party
(policy holder) transfer risk to another party( Insurance
company) in order to combine loss experienced
It is a very old idea which started back when sailing ships
got destroyed or lost their cargoes. Merchants found that
by dividing their cargoes among several boats, they
protected themselves from total financial ruin. That way,
if one of the boats was destroyed, no merchant lost
everything. Each stood to lose only a small portion.
 Introduction

Insurance involves pooling funds from many insured entities

(known as exposures) to pay for the losses that some may incur.

The insured entities are therefore protected from risk for a fee.

With the fee being dependent upon the frequency and severity of
the event occurring.
 TYPE OF INSURANCE

LIFE INSURANCE GENERAL INSURANCE

a written contract
typically comprises any
between the insured and
insurance that is not
the insurer, that provides
determined to be life
for the payment of the
insurance.
insured sum on the date
of the maturity of the
Ex: Health insurance,
contract or on the
Business insurance,
unfortunate death of the
Automobile insurance,
insured, whichever
Fire insurance, etc.
occurs earlier.
 Accounting for
Insurance company

collecting premiums of the insured party

pool the money to pay claims

pay for expenses involved in selling and

providing insurance protection

Invest it to another companies

 Realization and
Matching principle

Realization principle states that a company should

recognize revenue when it is earned, regardless of
when the company receives the actual payment, so
Realization
Matching Principle
long as a Principle
legal and
andstatesMatching Principle
company work
that aexpectation
reasonable in
should
exists
tandem.
recognize expenses
that the customer will as thepayment
remit company earns the
in full.
revenue related to those expenses, regardless of
when the company receives payment for the
revenues earned and regardless of when the
company actually paid the expenses.
 Accounts of Insurance
Companies
•Expenses
•Incomes
•Settlement of claim
•Major income – Premium
•Annuities
•Other sources
•Bonus payment
•Interest
•Commission paid to agent
•Dividends on investments
•Office & managerial expenses
•Rent earned from properties lent
•Income tax & other
 Accounting Entries
Sample problem

Mr. Binji, CPA, entered into a permanent life insurance contract with XYZ Insurers for
P2,000,000 with his beneficiary, his wife Cheche. The contract was on January 1, 2018
and the annual premium is P30,000 payable every Deceber 31 each year.

Jan. 1 No necessary entry

Dec. 31 Cash 30,000

Premium income 30,000

On January 1, 2019, unfortunately, Mr. Binji died due to an unknown cause.

Jan. 1 Death Claim paid 2,000,000

Cash 2,000,000
 Reserve (Liabilities)

are estimates of the amount of money an insurer

needs to pay future contract obligations.
Continuing the Sample:

To record the establishment of reserves for the new life insurance product from
Mr. Binji.
2018
Jan. 1 Change in reserves 2,000,000
Contractual reserves 2,000,000

To record the reserves released from the settlement of claim

2019
Jan. 1 Contractual reserves 2,000,000
Change in reserves 2,000,000
 Waiver of premium accounting

Is contract provision provides premium payments to

keep a life insurance policy in force if the insured
suffers a qualifying disability

Waiver of premium benefits xxx

Premium Income xxx
(to record the payment of a waived premium)
 Premium Suspense Account

is an account
Insurers thatuse
typically is used to record
premium transactions
suspense accountsthat
for
can not be posted payment
premium immediately to a specified
amounts that are: account
Premium Suspense is the liability account used to
record transactions that are intended
renewal as premiums,
premiums
but that the insurer cannot accept as income until a
particular event occurs.
different from the amounts in the
insurer’s records

lacking critical information such as

policy number.
Cash XXX
Premium Suspense XXX

(to record receipt of premium payment that cannot be

immediately recorded to a premium income account)

Premium Suspense XXX

Premium Income XXX

(To record the application of a suspended premium as an actual

premium – after the particular event occurs)
 Capital and Surplus Accounting

Preferred Stock

Cash
Is a type of equity xxx
security that represents ownership
Insurer’sand
in a corporation Preferred
usually stock xxx payment
provides for the
Additional
of fixed periodic Paid in capital
dividend xxx any
which paid before
To record issue
dividends andpaid
can be saleon
ofthe
insurer preferredcommon
corporation’s stock at
parrecord
To value.issue and salestock.
of insurer preferred stock at
par value.