Chapter 26&27: Accounting: Methods and Interpretation Flashcards
2 Distinct methods used by general insurers to present their accounts
- annual (or accident year) accounts
- funded (or underwriting year) accounts
Annual (or accident year) accounts
Consider all income earned and outgo incurred in a year
and permit the release of profits at the end of that year.
Funded (or underwriting year) accounts
Consider the business written in each year
and do not permit the release of profits until the end of a subsequent year (usually the 3rd year)
the term “accident year”
refers to a GROUPING of claims
… according to the year in which the LOSS EVENT ACTUALLY OCCURRED,
… irrespective of when they are reported or paid, and the year in which cover commenced.
the term “underwriting year”
refers to a GROUPING of claims
… according to the year in which COVER COMMENCED,
… irrespective of when the loss event occurred, and when the claims are reported or paid.
Annual accounting considerations:
Income
earned premiums, reinsurance recoveries received or accrued when the relevant claim has been recognised / paid, investment income, and changes in premium reserves / risk reserves / reinsurance reserves.
Annual accounting considerations:
Outgo
claims, claims handling expenses and other expenses paid and changes in claims outstanding (including IBNR) in the accounting period, reinsurance premiums, commissions, profit commissions, underwriting charges / taxes.
Annual accounting considerations:
Assets
- deferred acquisition costs
- reinsurers’ share of unearned premium reserves
- reinsurers’ share of claims outstanding
When policies are written the insurer pays commission and other initial expenses. At the accounting date those acquisition costs have been paid out but not wholly incurred for any policy that is unexpired at the time, just as part of the premium received has not yet been earned. (You could think of them as ‘unincurred expenses’, but the name ‘DAC’ is universally used.) DAC is usually a significant asset in the insurer’s accounts. It is like a negative reserve. Decreasing DAC reduces the insurer’s profit, just as increasing reserves does.
Annual accounting considerations:
Liabilities
- unearned premium reserve
- additional unexpired risk reserve
- claims outstanding
3 components of profit for a given year
profit = money in - money out - increase in reserves
4 components of “Money in”
- Gross premiums written
- Reinsurance and other recoveries
- Investment income on insurance funds
- Reinsurance commission received
4 Components of “Money out”
- Gross claims paid
- Reinsurance premiums paid
- Expenses paid
- Commission paid
3 components of “Increase in reserves”
- Increase in outstanding claims reserves
- Increase in unearned premiums
- Decrease in deferred acquisition costs
The conventional format:
Underwriting result
Underwriting result = Premiums - Claims - Expenses + Increase in DAC
The conventional format:
Insurance result
Insurance result = Underwriting result + Investment income
Net premiums written (2 components)
net premiums written = gross premiums written - reinsurance premiums paid
Net premiums earned (3 components)
net premiums earned =
net premiums written
+ unearned premiums brought forward (net of reinsurance)
- unearned premiums carried forward (net of reinsurance)
net claims incurred (4 components)
net claims incurred =
gross claims paid
- reinsurance and other recoveries
+ outstanding claim reserve carried forward (net of reinsurance)
- outstanding claim reserve brought forward (net of reinsurance)
Net Expenses (paid) (3 components)
net expenses =
commission paid
+ expenses paid
- reinsurance commission received
The profit and loss account:
Profit before taxation
insurance profit \+ other investment income \+ profits from other activities - interest on loans = PROFIT BEFORE TAXATION
The profit and loss account:
Retained profits
PROFIT BEFORE TAXATION - Taxation = PROFIT ATTRIBUTABLE TO SHAREHOLDERS - Dividends = RETAINED PROFITS
The balance sheet:
Total assets
Fixed assets
+ Investments
+ Other current assets
= TOTAL ASSETS
The balance sheet:
Shareholders’ net assets
TOTAL ASSETS - Current liabilities - Deferred taxation - Unearned premium reserve \+ Deferred acquisition costs - Outstanding claims reserve = SHAREHOLDERS' NET ASSETS
