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INSURANCE COMPANY ACCOUNTS

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Illustration . 1} From the following, you are required to calculate the loss on account of claim to be shown in the revenue account for the year ending 31st December, 1990 : Claims: Intimated in Admitted in 1989 1989 1990 1990 1988 1989 1988 1989 1990 1991 1990 1990 Claim .on account of Re-insurance was Rs. 25,000. Paid in 1990 1991 1989 1990 1991 1990 Rs. 15,000 10,000 5,000 12,000 8,000 1,02,000

llustration.2} Indian Insurance Co. Ltd. furnishes you with the following information: (i) On 31.12.1996 it had reserve for unexpired risks to the tune of Rs. 40 cores. It comprised of Rs. 15 crores in respect of marine insurance business; Rs. 20 crores in respect of fire insurance business and Rs. 5 crores in respect of miscellaneous insurance business. (ii) It is the practice of Indian Insurance Co. Ltd. to create reserves at 100% of net premium income in respect of marine insurance policies and at 50% of net premium income in respect of fire and miscellaneous income policies. During 1997, the following business was conducted: Rs. in corer Fire Miscellaneous

Marine Premium collected from: (a) Insured in respect of policies issued (b) Other insurance companies in respect of risks undertaken Premia paid/payable to other insurance companies on business ceded (a) Pass journal entries relating to Unexpired risks reserve.

18 7 6.7

43 5 4.3

12 4 7

Illustration .3} The life insurance fund of Prakash Life Insurance Co. Ltd. was Rs. 34,00,000 on 31st March, 2007. Its actuarial valuation on 31st March, 2007 disclosed a net liability of Rs. 28,80,000. An interim bonus of Rs. 40,000 was paid to the policyholders during the previous two years. It is now proposed to carry forward Rs. 1,10,000 and to divide the balance between the policyholders and the shareholders. Show (a) the valuation balance sheet, (b) the net profit for the two-year period, and (c) the distribution of the profits. Illustration 4} (Life Assurance Fund). The revenue account of a life insurance company shows the life assurance fund on 31st March, 2002 at Rs. 62,21,310 before taking into account the following items: (i) Claims covered under re-insurance Rs. 12,000. (ii) Bonus utilized in reduction of life insurance premium Rs. 4,500. (iii) Interest accrued on securities Rs. 8,260. (iv) Outstanding premium Rs. 5,410. (v) Claims intimated but not admitted Rs. 26,500. What is the life assurance fund after taking into account the above omissions? Statement showing Life Assurance Fund Illustration 5} The following trial balance was extracted from the books of the New India Life 03-2006. Particulars Dr (Rs) Cr (Rs) Assurance Company Ltd. as on 31-

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Paid-up Capital: 10,000 shares of Rs. 10 each Life fund balance as on 1-4-2001 Dividends Paid Bonus in reduction of premium Premium less re-assurance premium (Commission thereon Rs. 5,000) Claims paid Outstanding claims (1-4-2001) Commission Management expenses Mortgages in India Interest, dividend and rents Agents balances Freehold premises Investments Loans on Policies Cash on deposit Cash on current account Surrenders Medical Stores Consideration for annuities granted Annuity

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100,000 2,972,300 161,500 7,000

15,000 31,500 197,000 9,300 32,300 492,200 9,300 40,000 2,305,000 173,600 27,000 7,300 7,000 7,000 10,000

112,700

10,000

33,63,500

33,63,500

Prepare the revenue account for the year ended 31-3-2006 and a balance sheet of the company as at that date after taking the following into consideration: Rs (a) Claims outstanding (b) Further bonus in reduction of premium (c) Premium outstanding (d) Claims covered under re-insurance (e) Management expenses due 10,000 5,000 5,000 80,000

Illustration.6} From the following balances of All Care General Insurance Co. Ltd. as on 31st March, 2006, (i) Fire Revenue Account; (ii) Marine Revenue Account; and (iii) Profit and Loss Account: Dr. Particulars Rs. Particulars Survey expenses (fire) 10,000 Commission earned on Additional reserve opening (fire) 50,000 re-insurance ceded (marine) Commission paid (marine) 1,08,000 Commission earned on Commission paid (fire) 90,000 re-insurance ceded (fire) Claims paid and outstanding Management expenses (fire) (marine) 3,80,000 Management expenses (marine) Claims paid and outstanding (fire) 1,80,000 Marine premium Fire fund-opening 2,50,000 Less: Re-insurances Marine fund-opening 8,20,000 Fire premium Bad debts recovered 1,200 Less: Re-insurance Share transfer fee 800 Profit on sale of land Directors fees 5,000 Miscellaneous receipts Auditors fees 1,200 Differences in exchange (Cr.) Bad debts (marine) 12,000 Interest, dividends, etc. Bad debts (fire) 5,000 received Depreciation

prepare

Cr. Rs. 60,000 30,000 1,45,000 4,00,000 10,80,000 6,00,000 60,000 5,000 300 14,000 35,000

In addition to usual reserves, additional reserve in case of fire insurance is to be increased by 5% of net premium.

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1 State whether the following statements are True or False: (1) All insurance contracts are contracts of indemnity. (2) A life insurance business is said to have earned profits only if its life assurance fund exceeds its net liability on all outstanding policies. (3) For Life business premium income is to be recognized on receipt basis. (4) Bonus payable on maturity is called reversionary bonus. (5) Insurance company final accounts must also include a cash-flow statement. (6) The balance sheet of life insurance business is called Valuation Balance Sheet. 2. Fill in the blanks: (1) The concept of surrender value is peculiar to .............. (2) Profit on life business is ascertained by the preparation of .............. (3) Valuation Balance Sheet is prepared once in every years .. (4) The shortage of premium received in relation to claims experience in the part is called account. (5) When an insurance company finds the risk heavy, part of the risk is insured with another insurance company. Such a procedure is known as .............. (6) IRDA requires a minimum capital of Rs. .. crore for a company to start insurance business. 3. Indicate the correct answers: (1) A general insurance business carrying on more than one type of insurance business prepares (a) A separate revenue account for each type of business. (b) A separate profit and loss account for each type of business. (c) A separate revenue account and combined profit and loss account. (d) A separate revenue account and profit and loss account for each type of business. (2) Survey expenses for marine insurance claims must be (a) Added to claims (b) Added to law charges (c) Added to management expenses (d) Shown as a separate item (4) During a year a general insurance company has the following details: Rs in Lakh Premiums received 500 Premiums on re-insurance accepted 100 Premiums on re-insurance ceded 200 The amount to be credited as premium to revenue account should be (a) Rs. 500 lakh (b) Rs. 600 lakh (c) Rs. 700 lakh (d) Rs.400 lakh 1. The Life Assurance Fund of SK Life Insurance Company Limited shows a balance of Rs. 76,87,500 on 31-03-2006. It was later observed that the following had not been taken into account: (a) Dividend from investments Rs. 3,50,000 (b) Income-tax on the above Rs. 32,000 (c) Bonus in reduction of premium Rs. 4,85,000 (d) Claims covered under re-insurance Rs. 3,25,000 (e) Claims intimated but not yet admitted by the company Rs. 8,07,000. Ascertain the balance of Life Assurance Fund in the light of the above particulars. (Adjusted Life Assurance Fund Rs. 75,23,500) 2. From the following balances as at 31st March, 2006 in the books oft he Mega Life Assurance Company Limited, prepare the revenue account and the balance sheet: Life Assurance fund as on 1st April, 2005 Annuities paid Surrenders Reserve fund Deposit with Reserve Bank of India Government Securities: Indian Government securities Foreign Government securities Loans on companys policies Leasehold ground rent Rs 3,000,000 20,000 69,000 665,000 300,000 3,250,000 187,000 670,000 58,000

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39,000 49,000 20,000 15,000 4,000 700,000 30,000 60,000 400,000 500,000 40,000 1,350,000 5,000,000 1,636,000 30,000 16,000 105,000 888,000 40,000 68,000 50,000 6,000 8,000 2,000 4,000 1,500 300,000 30,000

Due from re-insurers Due to re-insurers Agents balances Interest outstanding Sundry creditors Premium less re-insurance Bonus to policyholders Commission Claims less re-insurances on death Claims less re-insurances on Maturity Consideration for annuities granted Securities on which interest is guaranteed Life Assurance fund as on by the Government Share Capital Mortgage in India Cash in Current Account Cash in deposit a/c with bank Cash in hand State Government securities Furniture Outstanding premium Salaries Directors fees Auditors fees Law charges Rent paid Other expenses of management Interest and rent less taxes Rs 60,000 Interest accrued but not due [Ans: Balance of life Assurance fund at the end of the year Rs 28,89,500; Balance sheet total Rs 86,07,500]

3. The life assurance fund of Suraksha Life Assurance Company Limited showed a balance of Rs. 50,25,000 at the end of. March 2007. The dividend payable to shareholders for the year amounted to Rs. 75,000. The actuarys valuation placed the net liability at Rs. 45,50,000. An interim bonus of Rs. 1,00,000 has been paid to the policyholders. Prepare a statement showing the amount now available as bonus to policyholders. (Surplus available to policyholders Rs. 4,75,000) 4. From the figures set out below, prepare the balance sheet of a Life Insurance Company as on 31st March 2006 in form (as far as circumstances permit) prescribed by Insurance Act, 1938 as governed by Life Insurance Corporation Act, 1956. The companys deposit with Controller General in 3.5 % G.P. Notes are of the face value of Rs. 10,00,000 and it also holds the following investments, besides loans of Rs. 3,00,000 on the security of the companys policies. 4% Port Trust bonds of the face value of Rs. 12,00,000. 5.5% War Bonds of the face value of Rs. 25,00,000. Agents collection of premium during the current year amounted to Rs. 20,00,000 out of which after deducting Rs. 2,00,000 for commission due to them, they remitted to the company in the year ended 31.3.2006 Rs. 14,00,000 and the balance after 1-4-2006. Other assets and liabilities were: Furniture Rs. 80,000, cash in hand Rs. 20,000, cash at bank Rs. 1,00,000. Outstanding premium Rs. 4,00,000. Interest accrued Rs. 1,00,000 out of which Rs. 30,000 was due. Share capital consists of 4,000 shares of Rs. 1,000 each, Rs. 500 paid-up. Commission due but not paid Rs. 2,00,000. Estimated liability regarding claims unpaid Rs. 6,00,000. The balance consists of Life Insurance Fund 75% and investments reserve fund 25%. (Balance sheet total Rs. 61,00,000; Life Insurance fund Rs. 24,75,000) 5. The following balances appeared in the books of the Hindustan Fire and General Insurance Company Limited on 31st March, 2007 : Re-insurance premiums paid 50,000 Reserves for unexpired risk as on 1-4-2006 Expenses of Management Premium received Commission Claims paid Loss on exchange Claims outstanding 1-4-2006 1,52,000 2,21,000 9,000 2,81,000

8,24,800 1,25,600 7,89,000

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You are required to prepare revenue account for the year ended 31st March, 2007, after taking the following information into consideration: (i) Provide for unexpired risks at 50% of the premiums; (ii) Create additional reserve of Rs. 75,000; [iii) Premiums outstanding at the end of the year were Rs. 1,50,000; (iv) On 31st March, 2007, the claims outstanding were Rs. 3,37,000. (Profit Rs. 6,39,700; Balance of fund Rs. 5,19,500) 6. From the following balances of Prudential General Insurance Co., prepare-(I) Fire revenue account: (il) Marine revenue account; and (iil) Profit and loss account for the year ending on 31st March 2006 : Rs (i) Claims paid and outstanding (Fire) 3.60,000 (ii) Claims paid and outstanding (Marine) 7,60,000 (iii) Additional reserve on 1.4.2005 (Fire) 1,00,000 (iv) Sundry expenses (Fire) 20,000 (v) Bad debts (Fire) 10,000 (vi) Bad debts (Marine) 24,000 (vii) Auditors fees 2,400 (viii) Directors fees 10,000 (ix) Share transfer fees 1,600 (x) Bad debts recovered 2,400 (xi) Fire fund on 1.4.2005 5,00,000 (xii) Marine fund on 1.4.2005 16,40,000 (xiii) Commission earned on re-insurance ceded (Fire) 20,000 (xiv) Commission earned on re-insurance ceded (Marine) 40,000 (xv) Depreciation 70,000 (xvi) Interest, Dividends, etc., received 28,000 (xvii) Difference in exchange (Cr.) 600 (xviii) Miscellaneous receipts 10,000 (xix) Profit on sale of land 1,20,000 (xx) Fire insurance premium less re-insurance 12,00,000 (xxi) Marine prc::mium re-insurance 21,60,000 (xxii) Management Expenses (Fire) 2,90,000 (xxiii) Management Expenses (Marine) 8,00,000 Additional reserve in case of fire insurance is to be raised by 5% of net premiums in addition to usual reserves. Reinsurance premium received amounted to Rs. 3,00,000 for the business and Rs. 6,40,000 for marine business. Management expenses are exclusive of commission. The net income of fire business in 2004-05 was Rs. 10,00,000. [Fire Rs. 3,00,000; Marine Loss 52,000; Net Profit 3,28,2001 7. The following figures have been extracted from the books of National Insurance Co. Ltd. in respect of their marine business for 2006-07: (Rs. In lakh) Direct premium income received 50.00 Reserve for unexpired risks as on 1-4-2006 60.00 Claims outstanding as on 1-4-2006 (net) 20.00 Bad debts 10.00 Income from investments and dividends (gross) 10.00 Rent received from properties 5.00 Investments in Government securities as on 1-4-2006 100.00 Investments in shares as on 1-4-2006 20.00 Commission paid on direct business 5.00 Expenses of management 5.00 Income-tax deducted at source 3.00 Profit and loss account (Cr.) balance on 1-4-2006 10.00 Other expenses 1.25 Re-insurance premium receipts 5.00 Outstanding claims as on 31-03-2007 (net) 30.00 Direct claims paid (gross) 25.00 Re-insurance claims paid 4.00 Prepare revenue account, profit and loss account and the profit and loss appropriation account for the year, after taking into account the following further information: (a) All direct risks are re-insured for 20% of the risk. (b) Claim a commission of 25% on re-insurance ceded. (c) Provide 25% commission on re-insurance accepted. (d) Market value of investments as on 31-03-2007 is as under: (i) Government securities Rs 105 Lakh (ii) Shares Rs 18 Lakh Adjust separately for each of these two categories of investment.

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(e) Provide 65% for income-tax [Balance in revenue account Rs. 18 lakh, Net profit Rs. 10.35 lakh, Balance in the appropriation account Rs. 20.35 Lakhl [Hints. (1) From the direct claims paid, deduct 20% covered by re-insurance. (2) From the premium received, deduct 20% passed onto the re-insurers. (3) Provision for income-tax Income as per revenue account Add: Tax deducted at source (income is not grossed up) Provision at 65% Less; Tax already deducted at source Net Provision required

(Rs. in lakh) 18.00 3.00 21.00 13.65 3.00 10.65

8. From the following details, prepare the Revenue Account, Profit and Loss Account and the Balance Sheet of Moonshine Insurance Co. Ltd., carrying on marine insurance business, for the 15 months ended 31 st March. 2002 : Rs Share Capital 15,00,000 Balance of Marine Fund as on 1 st January, 2001 7,60,000 Unclaimed dividends 2,400 Profit and Loss Account (Cr.) 2,40,000 Sundry Creditors 12,600 Agents Balance (Dr.) 1,46 ,400 Interest accrued but not due 8,200 Due to Re-insurers 60,000 Furniture and Fixtures (cost Rs. 12,600) 8,400 Stock of Stationery 2,500 Expenses of Management 2,20,000 Foreign Taxes and Insurance 12,300 Outstanding Premium 21,200 Donations Paid 8,600 Advance Income-Tax Payments 62,000 Sundry Debtors 9,200 Government of India Securities 9,20,000 Debentures of Public Bodies 1,80,000 Shares in Limited Companies 3,60,000 Claims less re-insurance 10,60,000 Premium less re-insurance 12,40,000 Commission paid 62,400 Interest and Dividends 2,40,000 Transfer fees Received 600 Cash and Bank Balances 94,400 Outstanding claims on 31st March 2006 were Rs 1,40,000. Depreciation on furniture to be provided @ 20 % p.a (B/ S total Rs. 29,55,000)

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