Chapter 4 - Accounting Flashcards
Annual basis of accounting
Annual accounting is one of two statutory bases of accounting, the other being fund
accounting. Annual accounting is based on the cover provided during the accounting
period, regardless of when the contracts of insurance start and end. AKA one-year (accident-year) accounting
Funded accounting
A method of accounting whereby premiums, claims and associated expenses are related
to the underwriting year in which the policies start. The recognition of any
underwriting profit is deferred until a subsequent accounting period (usually 3-years) but provision is made for losses as soon as they are foreseen
Deferred Acquisition Costs (DAC)
Acquisition costs relating to contracts in force at the balance sheet date. They are carried forward as an asset from one accounting period to subsequent accounting periods in the expectation that they will be recoverable out of future margins within insurance contracts after providing for future liabilities
Earned premiums
Different to written premiums. These are the premiums that are recognised during a financial year when considering the ‘deferral and matching’ accounting concept.
Unearned premiums = unearned premiums brought forward from earlier years + premiums written during the year - unearned premiums carried forward to later years
Reinsurance to Close (RITC)
A concept in funded accounting in which a premium is paid to another account to pass on liabilities that are still remaining from a funded account that is being closed
Going Concern
The enterprise will continue in operational existence for the foreseeable future
Accruals Basis
Revenue and costs are recognised as they are earned or incurred, not as the money is received or paid
Consistency
There is consistency of accounting treatment of like items within each accounting period and from one period to the next
Prudence and realisation
Revenue and profits are not anticipated, and provision is made for all known liabilities, whether the amount of these is known with certainty or is the best estimate in the light of the information available
Separate valuation of assets and liabilities
When determining the aggregate amount of any item the enterprise must determine separately the amount of each individual asset or liability that makes up that item
Solvency ratio
The free reserves divided by the net written premiums
Underwriting profit
The excess of earned premiums over incurred claims and expenses
Insurance profit
The underwriting profit plus the investment income earned on the technical reserves.
Profit before tax
The insurance profit plus investment income from other assets
Retained profit
Profit remaining after the payment of tax and dividends
Total shareholders’ funds
The excess of assets over liabilities
24ths Method
A method of estimating UPR, is based on the assumption that annual policies are written evenly over each month and risk is spread evenly over the year.
365ths Method
A method of estimating UPR, based on the assumption that the risk is spread evenly over the 365 days of a year of cover
Accident year
An accident year grou[ping of claims means that all claims relating to loss events that occurred in a 12-month period (usually a calendar year) are grouped together, irrespective of when they are actually reported or paid and irrespective of the year in which the period of cover commenced
Acquisition costs
Costs arising from the writing of insurance contacts (e.g. commission)
Additional Reserve for for unexpired risk (AURR)
The reserve held in excess of the UPR which allows for any expectation that the UPR will be insufficient to cover the cost of claims and expenses incurred during the period of unexpired risk
Claims ratio (AKA loss ratio)
Ratio of the cost of claims to the corresponding premiums, either gross or net of reinsurance.
Incurred claims/earned premiums
Closed year
In the case of fund accounting a closed year is an underwriting year that is older than the prescribed limit for the class in question. In the Lloyds market, a closed year is one that has been closed by reinsurance to close (RITC).
Combined Ratio
The sum of the claim ratio and the expense ratio. Also called the operating ratio or underwriting ratio
Eights Method
A method of estimating UPR, based on the assumption that annual policies are written evenly over each quarter and the risk is spread evenly over the year
Open year
Under fund accounting an open year is one that has not yet reached the stipulated period
for closure. In the Lloyd’s market, an open year is one that has not yet been closed by
RITC. I.e. it is not a ‘closed year’
Reporting year
A reporting year grouping of claims will combine all the claims that are reported within a given calendar year, irrespective of the date on which the relevant policy commenced, irrespective of when the claims are actually paid and irrespective of the year in which the incident actually arose
Underwriting year
An underwriting year grouping of claims will combine all the claims relating to loss events that can be attributed to all policies that commenced cover within a given calendar year, irrespective of when they are actually reported or paid and irrespective of the year in which the incident actually arose
