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Current Challenges in Insurance and

Best Practice Solutions

Accounting in Insurance Industry


---- A Comparative GAAP Analysis
By: Khushroo B. Panthaky
  
At the Grand Hyatt – Mumbai, September 4, 2006
Regulatory Scene
- International scenario

☛ World over the Insurance Industry tends to be a regulated industry


relative to others
☛ The extent of regulation ranges from ‘Significant’ in developing
countries to ‘Some’ in the developed countries
☛ The focus of all regulatory bodies is the protection of the interests of
the consumer, solvency of the insurer and the orderly conduct and
growth of the insurance industry
☛ In some countries the regulators require reporting to be in line with
the GAAP prevailing in the country, whereas some regulators
prescribe the reporting requirements in addition to/different from the
GAAP prevailing in their respective countries

Insurance
Regulatory Act,
Scene 1938 scenario
- International
- Relevant provisions
United States
Respective State Insurance Laws with State Insurance Departments which require the use of
Statutory Accounting Principles (SAP). The State Insurance Department regulators have formed an
organisation known as the National Association of Insurance Commissioners (NAIC) which develops
the general form for the annual statements of all insurance companies. The NAIC completed a
process intended to codify statutory accounting practices for certain insurance enterprises, including
life and health companies, property/casualty companies, fraternal benefit organizations and
managed care providers. As a result of this process, in 1999, updated in 2000, the NAIC issued a
revised Accounting Practices and Procedures Manual (the revised Manual), which has been effective
January 1, 2001 for calendar year and quarterly 2001 financial statements.
UK
The Financial Services Authority (FSA) acts as the regulator, however they play their role primarily
for the protection of policyholders’ interest and ensuring adherence to solvency requirements. In UK
the Statement of Recommended Practice (SORP) on Accounting for Insurance Business by the
Association of British Insurers (ABI) is followed by most insurers. Further, the Companies have to
furnish returns to the DTI (Department of Trade and Industry) which run into several pages where
extensive additional information is asked for.


Regulatory Scene
Insurance Act, 1938
-- International scenario
Relevant provisions

Australia
Following the Australian Financial System Inquiry (Wallis Inquiry) and in recognition of the
increasing convergence in the financial sector, a new system of regulation was introduced on 1
July 1998 with the formation of Australian Prudential Regulation Authority (APRA) and the
Australian Securities and Investment Commission (ASIC). The responsibility for prudential
regulations lies with APRA whereas other responsibilities relating to disclosure standards,
market conduct, licensing of agents and brokers etc. have been transferred to ASIC.
Japan
In June 1998 with the introduction of the Financial System Reform Bill, one of the major
changes in the Insurance Business Law was the establishment of a policyholders’ protection
organisation. The Financial Supervisory Agency (FSA) was established on 22 June 1998 and is
responsbile for issuing and withdrawing licences, approving products/services, issuing orders
to improve/suspend the operations of financial institutions and monitoring the securities
market. Under the provisions of the Commercial Code and the Insurance Business Law, the
FSA issues administrative guidelines in order to set uniform accounting standards for
insurance companies


Regulatory Scene
- International scenario

Canada
The Federal Regulators, Office of the Superintendent of Financial Institutions (OSFI)
performs the regulatory function of insurance companies. A National Policy Statement issued
by the provincial securities administrators of the majority of provinces in Canada recognises
Accounting Recommendations of the CICA as constituting “generally accepted accounting
principles” (GAAP). The Federal regulators (OSFI) worked closely with the CICA to develop
a set of accounting rules for Canadian Insurance Companies, the intent of which was to
achieve consistency between Statutory and GAAP accounting. GAAP are also embodied in the
Act, wherein it states that the financial statements shall be prepared in accordance with
generally accepted accounting principles except as otherwise specified by the Office of
Superintendent of Financial Institutions. However, to date OSFI has not specified anything
otherwise. All federally registered companies file their Annual Returns with OSFI each year as
prepared in accordance with GAAP. Insurance Companies that are provincially registered file
their financial statements with the respective Provincial Superintendent as well as with the
Federal Superintendent.


Regulatory Scene
Insurance Act, 1938
-- International scenario
Relevant provisions

Europian Union
The European Union has issued a series of directives drafted with the help of Federation des
Experts Comptables Europeens (FEE) to harmonise various standards of accounting as a part
of its programme of company law harmonisation. As regard harmonisation, one can
distinguish between harmonisation through uniformity and harmonisation through
equivalence and comparability. This latter approach has been pursued within the European
Union which has resulted in a number of directives. In its directive dated 09/07/2002 the EU
has decided to adopt the International Accounting Standards in a phased manner to achieve
harmonisation of accounting practices across the EU. This would consequentially mean the
adoption of the proposed accounting standard on insurance which is at the DSOP stage and is
scheduled to be launched around 2005 the same time as the complete adoption of IAS by EU. ‘
IAS implementation plan’


Life Insurance Companies

Comparative Accounting
Analysis
International Scenario


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Country India US UK
Component

The insurance companies are In US there are two major considerations In UK insurers incorporated under
required to prepare their accounts in which influence accounting practices for the Companies Act, 1985 are required
accordance with the IRDA (Prep. of insurance cos. to prepare financial statements for
Fin. St. & Auditors’ Report of Ins. • Those defined by regulatory auth. shareholders annually under the Act.
Cos.) Reg, 2002. (State insurance departments / However, the Companies Act permits
NAIC) known as Statutory insurance companies to prepare the
The regulation guidelines prescribe financial statements under less
Accounting Practices (SAP)
compliance with all relevant extensive accounting and disclosure
accounting standards issued by the • Those described in Generally requirements compared to other
Overall Accepted Accounting Principles
ICAI to the extent applicable. companies in other industries. SSAPs
Accounting & (GAAP) (pronouncements of FASB, and FRSs issued by the UK
Reporting Further since the new insurance AICPA, EITF etc.) accounting bodies do not override the
companies have to be companies While the purpose of SAP is to provide disclosure exemptions.
(except for the new amendment to the reader with info. concerning solvency In UK , annual reports are submitted
allow co-operatives) they have to and ability to pay ultimate claims, GAAP to the Department of Trade &
ensure compliance u/s. 211 (3C) of the attempts to provide a more realistic Industry (DTI). These returns are
Indian Companies Act, 1956 matching of income and expense by required to demonstrate solvency of
although Schedule VI disclosure restoring assets not admitted for SAP the insurance company and not
requirements are not applicable in and by using more realistic assumptions intended to show a ‘true and fair’
view of disclosure requirements laid in determining the policy liabilities and view.
down in the IRDA Regulations carrying value of assets. (less
conservative)


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Country Japan Canada Australia
Component

Under the provisions of the Depending upon whether the insurer is According to the Insurance Act, 1973
Commercial Code and the a federally registered insurer or as a Insurance Companies in Australia have to
Insurance Business Law, the provincially registered insurer they submit their statutory returns to the
Financial Supervisory Agency
must file Annual Statements with the APRA/ASIC, earlier the ISC. The
(FSA) issues administrative
guidelines in order to set uniform relevant regulator. The federal objective is to obtain sufficient data to
accounting standards for regulator as noted earlier is the Office assess the solvency of the authorised
insurance companies. of the Superintendent of Financial insurers and to understand the emerging
Institutions (OSFI). trends within the industry as also to take
Overall Certain financial guidelines as action to protect policyholders’ interest.
These Annual Financial Statements are
issued by the FSA apply to all Insurers have to file quarterly and annual
Accounting & insurance companies. prepared on the basis of Canadian
GAAP which primarily comprise of the returns with the regulators in the
Reporting prescribed format
Others vary depending upon Accounting Standards issued by the
whether the company is a life or Canadian Institute of Chartered
non-life company. Additionally, the Australian Accounting
Accountants (CICA).
Standards Board (AASB) has issued
The reporting is done to the FSA The federal regulators (OSFI) work AASB:1023 Financial Reporting of General
and in case of listed companies closely with CICA to develop a set of Insurance Activities and AASB:1038 Life
the accounts are required to be accounting rules for Canadian insurers, Insurance Companies which constitute the
audited the intent of which is to achieve GAAP basis for preparation of accounts by
consistency between statutory and Companies to whom the Corporations Law
GAAP accounting. is applicable


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Community Europe International

Component
The harmonisation of standards of accounting has been The IASC had set up a steering committee on insurance in
introduced by European Union as a part of company 1997, the end objective being the issue of an IAS on Insurance
law harmonisation. accounting. After the ‘'Issues Paper‘ on the project the
Committee has issued a Draft Statement of Principles (DSOP)
The EU has vide its directive on the
(
'Annual and Consolidated accounts of certain types of companies and insurance undertakings'
dated 09/07/2002 has noted that on 13 June 2000, the IASC Insurance Project - DSOP and Comment Letters on Issues
Commission adopted its Communication The EU’s ) for comments. Based on the comments the the Steering
Financial Reporting Committee will then develop a final Statement of Principles and
Overall Strategy: The Way Forward. The Communication submit it to the IASC Board for approval which will then be used
proposes that all EU listed companies to develop an Exposure Draft of a Proposed International
Accounting & should be required to prepare their consolidated Accounting Standard and finally preparation of an IAS Present
Reporting accounts in accordance with a single set of
Status
accounting standards, namely International Accounting
Standards (IAS), from 2005 at the The IASB started discussing the DSOP in November 2001. By
latest. Adoption of uniform, high quality financial far the most significant proposal still under discussion is the
reporting rules in EU capital markets will measurement objective. As the IASB is still discussing this
enhance overall market efficiency, thereby reducing the proposal, it would not be realistic to expect implementation of
cost of capital for companies. a full recognition and measurement standard for insurance
contracts by 2005. This may cause difficulties in financial
reporting in Europe because of the 2005 deadline for
implementing IFRSs. Accordingly, the IASB agreed in May
2002 to investigate whether the key components of the project
could be put in place by 2005, without delaying the rest of the
project.


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Country India US UK
Component

Premiums are recognised as Recognition of revenue is driven by the For the purpose of Long Term Insurance
income when due as required classification of the contract. Business :
by the regulations issued by
the Insurance Regulatory Background and Classification of Insurance
Premiums,
Contracts including those for inwards
and Development Authority reinsurance business, should be accounted for
(IRDA) In general, when due for payment. Where the amount due is
not known, for example with certain pensions
Revenue - Premiums on short-duration contracts
Further according to section business, estimates should be used. For unit-
are ordinarily recognised as revenue
Premiums 64-VB of the Insurance Act, over the period of the contract in linked business the due date for payment may be
1938 risk maybe assumed proportion to the amount of insurance taken as the date when the liability is
not before the date on which protection provided. established. The following are considered as long
premium has been paid by term insurance business under Schedule I of the
cash or cheque to the insurer Premiums on long-duration contracts Insurance Act, 1984 :
are recognised as revenue when due
(Ref : IRDA Regulations and from policyholders. I Life and annuity. II Marriage and birth.
III Linked long term. IV Permanent health.
V Tontines. . VI Capital redemption.
Insurance Act, 1938 VII Pension fund management.
VIII Collective insurance etc
IX Social insurance
(Ref : FAS 60, FAS 97 and FAS 120)
(Ref : Statement of Recommended Practices
(SORP) issued by the Association of British
Insurers (ABI))


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs

Country
Japan Canada Australia
Component

Premiums are recorded on a There are no recommendations in The guidelines in the CICA Handbook lay down
cash basis connection with recognition of that
Premium as revenue in the CICA
Handbook and the accounting Traditionally the insurers have treated all premiums as
guidelines. revenue. However, premiums may comprise amounts that
give rise to:
a) revenues that are earned by providing services, including
It is generally noted that the
the bearing of risks
Canadian accounting practices tend
b) amounts that are akin to deposits and which qualify for
Revenue - to be similar to those adopted in the
recognition as liabilities.
Premiums US.
(say unearned premium) The hybrid nature of many
products and the sometimes complex manner in which fees
are levied on policyholders means that differentiating
between the revenue and the liability components of
premiums may be a difficult task . Notwithstanding the
(Ref : CICA Handbook section 4210, difficulties for products, where the components can be
AcG-9 Financial Reporting by Life reliably measured the premiums and claims associated with
Insurance Enterprises) those products are separately recognised as revenues, for
financial reporting purposes.

(Ref : AASB:1038 Life Insurance Companies)


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Community Europe International
Component

Gross Premium should comprise all amounts due during Under non-fair value account, premium is Recognised when
the financial year. due, whether or not earned. Further, Recognise a separate
expense for lapse during the current premium period.
According to the European Insurance Accounts Directive,
insurance companies are broadly governed by number of
accounting principles in their recognition /valuation of In respect of fair value accounting view is the same with an
transactions. Any departure from them (under additional note that in a fair value model, some may favour
exceptional cases) must be disclosed and justified in the reporting just a net change in fair value, without separate
notes together with an assessment of their effect on assets, reporting of premium and claim information.
Revenue - liabilities, financial position and profit and loss.

Premiums The basic accounting principles include Going Concern,


Consistency, Accrual, Prudence, Individual
Valuation/Recognition and all inclusive principle.

In the Insurance Accounts Directive, the profit and loss


account is divided into two parts, the technical account
and the non technical account.

Figures are generally shown as “gross minus


reinsurance”.


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Country India US UK
Component

The Regulations issued by the Under GAAP as in the case of premiums In compliance with Note 17 to the balance
IRDA require that the the recognition of expense is driven by the sheet format, acquisition costs should be
acquisition costs should be classification of the contracts. In general : deferred as follows:
expensed in the period in which Policy acquisition costs are deferred and
they are incurred. amortized in proportion to premium (i) as an explicit deferred acquisition costs asset,
recognition. which may be calculated in whole or in part by
Acquisition costs are those costs means of an actuarial method (eg zillmerisation)
that vary with and are In case of future assumption policies in which enables the costs so deferred to be separately
primarily related to the which premiums exceeding mortality and identified; zillmerisation will generally produce a
Acquisition
acquisition of new and renewal expense charges are considered deposits, deferred acquisition costs asset net of any related
Costs insurance contracts. The most these costs are amortised over the lives of deferred tax liability; or
(Including essential test is the obligatory the policies as gross profits emerge (i.e. in (ii) only where the gross premium method of
commission relationship between costs and proportion to estimated gross profits). As actuarial valuation is adopted, implicitly by means
the execution of insurance the expenses are charged, the value of the of an actuarial method which makes allowance in
and other costs
contracts (i.e., commencement deferred capital asset is reduced the computation of the long term business provision
etc.) of risk) accordingly for such deferred costs but not in a way which
readily identifies the costs so deferred.
However, for the purpose of SAP first
year acquisition expenses are generally The insurer is required to disclose both the
charged in full to the current year’s method of deferral and the basis of
statutory income. amortisation


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Country Japan Canada Australia

Component

Incorporation expenses Accounting Guideline 9 – Financial Reporting by In the life insurance industry, there is no
and operating expenses for Life Insurance Enterprises clarifies that reliable measure of the probable future
the first five years can be economic benefits that will arise from
deferred and amortised LIFE INSURANCE ENTERPRISES – SPECIFIC ITEMS,
acquisition costs. This is largely because
within ten years after paragraph 4210.25, includes a statement that under the
establishment. Canadian asset liability method "all acquisition costs,
of the uncertainty surrounding the
without arbitrary limitation, would be incorporated into
continuance or surrender of particular
For the purpose of valuing the computation of actuarial liabilities, with the policies. In practice, acquisition costs are
policy liabilities Zillmer computation being made over the full term of the
usually recognised as expenses in the
Acquisition adjustments are acceptable financial year in which they are incurred.
liabilities."
in special cases but This is generally offset by identifying a
Costs otherwise no acquisition This statement should be interpreted to mean that portion of the planned margins included
(Including costs are deferred acquisition costs expected to be incurred after the in policy liabilities as relating to the
valuation date should be incorporated into the calculation recovery of acquisition costs. The most
commission
of actuarial liabilities. Costs associated with the acquisition useful and reliable information available
and other costs of new business should not be deferred, but charged about the acquisition costs that will give
etc.) against income as incurred. This treatment does not rise to future economic benefits is the
preclude the establishment of negative balances in amount of future charges for acquisition
actuarial liabilities, which may have similar attributes to costs identified as part of the process of
deferred acquisition costs, but actually represent the determining policy liabilities.
present value of future premiums in excess of future policy
benefits and expenses.


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Community Europe International
Component

Deferred acquisition costs Acquisition costs should be recognised as an expense, on the


Article 18 of Directive 78/660/EEC in so far as such basis that they do not meet the Framework’s definition of
deferral is not prohibited by Member States. an asset.
Member States may, however, permit the deduction of
acquisition costs from unearned premiums in non-life- Also, the measurement of insurance liabilities already
insurance business and their deduction by an actuarial reflects the future cash flows to be generated by the
method from mathematical reserves in life-assurance insurance contract, so the recognition of an asset would
business. Where this method is used, the amounts lead to double counting.
deducted from the provisions must be indicated in the
Acquisition notes on the accounts.

Costs Directive 78/660/EEC - Article 18


(Including Expenditure incurred during the financial year but
relating to a subsequent financial year, together with any
commission income which, though relating to the financial year in
and other costs question, is not due until after its expiry must be shown
under "Prepayments and accrued income". The Member
etc.) States may, however, provide that such income shall be
included in "Debtors". Where such income is material, it
must be disclosed in the notes on the accounts


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Country India US UK
Component

The ultimate cost of claims Cost for claims are recognised when an insured Claims payable on maturity should be
shall comprise the policy event occurs for both long and short-duration accounted for when the claim becomes
benefit amount and specific contracts due for payment and claims payable on
claims settlement costs, death should be accounted on
wherever applicable. Cost of claims includes ‘Claims and Claims notification. In accordance with Note
Expenses Reserve’ which means Liability for all 21 to the balance sheet format,
Claims incurred shall costs associated with the settlement of losses provision for claims incurred but not
comprise claims paid, specific incurred as of the balance sheet date. Includes reported (IBNR), including related
claims settlement costs both reported, unpaid claims, as well as claims claims handling expenses, should be
Benefits Paid -
wherever applicable and incurred but not reported (IBNR) and expenses included within balance sheet
Claims change in the outstanding required to settle claims. liabilities. Any element of the claims
provision for claims at the payable which represents bonus
year-end Liability for losses should be based on the allocated in anticipation of the surplus
ultimate cost of settling the losses and should arising from the actuarial valuation at
include the effects of inflation and other social the balance sheet date should be
and economic factors. Liabilities for unpaid included in line 5(a) (Claims paid) of
losses, including estimates of losses incurred butthe technical account for long term
not reported, are accrued when insured events business.
occur. Claim reserves should not be discounted, Claims incurred should include related
unless the ultimate cost and payment pattern is internal and external claims handling
fixed. expenses.


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Country Japan Canada Australia

Component

Data not readily available. Unpaid claims, including internal and external Traditionally, life insurers have
adjustment expenses, and claims incurred but nottreated all claims as expenses.
In respect of non-life reported are set up as liabilities. The CICA However, claims may comprise
companies provisions for
Handbook and the Accounting guide ar e silent inamounts that give rise to:
outstanding claims are
determined as the greater of a respect of the recognition of the claims cost. a) expenses that are incurred in
percentage of earned Reference may be made here to the guidelines providing services, including the
premiums or estimated losses under AcG 3 on Property and Casualty bearing of risks
based on a statutory formula. companies where it is stated that Claims b) amounts that are akin to
Benefits Paid - Only external claims handling provisions, including provisions for claims withdrawals from deposits and which
costs are included in claim
Claims provisions. Outstanding incurred but not reported, are necessarily based qualify for recognition as reductions
in liabilities.
claims are not discounted. A on estimates and should be calculated taking into
Notwithstanding the difficulties
specific percentage of written consideration all circumstances known at the
premiums should be reserved date of review. Such provisions should take into associated with reliably measuring the
every year as a provision for account all aspects of the ultimate cost of components of claims, for products
extraordinary losses. settlement of claims in respect of insured events where the components can be reliably
which occurred before the end of the reporting measured the claims associated with
period. These aspects include, for example, those products are separately
salvage, subrogation, reinsurance, inflation, recognised as expenses and changes in
adjustment expenses (both internal and external) policy liabilities for financial
and any interest which will likely be paid to the reporting purposes.
claimants.


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Community Europe International
Component

Claims incurred shall comprise all payments made in Insurer’s liability for claims payable includes claims that
respect of the financial year plus the provision for claims have been reported, claims incurred but not reported, and
but minus the provision for claims for the preceding claim handling expenses. Those amounts meet the definition
financial year.
of a liability as outlined in IAS 37.
Article 28
Claims outstanding Insurer has a present obligation to incur claim handling
The provision for claims outstanding shall be the total expenses relating to existing contracts because the insurer
estimated ultimate cost to an insurance undertaking of will be compelled to pay these expenses if the policyholder
Benefits Paid - settling all claims arising from events which have occurred presents a valid claim. (And, if the insurer settles the
up to the end of the financial year, whether reported or liability by a transferring the liability to another party, the
Claims not, less amounts already paid in respect of such claims insurer will pay claim handling costs implicitly through the
pricing of the transfer.)
The amount of the provision for claims shall be equal to
the sums due to beneficiaries, plus the costs of settling
claims. It shall include the provision for claims incurred Claim handling expenses should be recognised based on the
but not reported. manner in which the insurer expects to settle the related
claim liabilities.
Claims management costs, external and internal, should
be included in the amount of claims incurred.


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Country India US UK
Component

The estimation of liability againstLiability for Future Policy Benefits Technical Provisions
life policies shall be determined by
the appointed actuary of the insurerA liability for future policy benefits Under Schedule 9a to the CA85 ,
pursuant to his annual investigation relating to long-duration contracts other technical provisions in respect of long
of the life insurance business.than title insurance contracts shall be term business are analysed as
Actuarial assumptions are to beaccrued when premium revenue is follows:-
disclosed by way of notes to therecognized. long term business provision;
account. technical provisions for linked
The liability, which represents the present liabilities; and
Technical
The liability shall be so calculatedvalue of future benefits to be paid to or on claims outstanding.
Reserves – that together with future premiumbehalf of policyholders and related
Valuation of payments and investment income,expenses less the present value of future Long Term Business Provision
Liability of Life the insurer can meet all futurenet premiums (portion of gross premium
claims (including bonus entitlementsrequired to provide for all benefits and Liabilities, taking account of the fund
Policies expenses), shall be estimated using for future appropriations, should be
to policyholders) and expenses.
methods that include assumptions, such as assessed on a basis consistent with the
The valuation method shall be calledestimates of expected investment yields, bases adopted for valuing the
“Gross Premium Method’. mortality, morbidity, terminations, and corresponding assets. The principal
expenses, applicable at the time the methods of valuation should be
Ref :insurance contracts are made. disclosed.
Valuation of Liabilities of Life Policies.doc


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Country India US UK
Component

-------------------- The liability also shall consider other Paragraph 46(2) of Part I of Schedule
assumptions relating to guaranteed 9A to the CA85 requires that a
contract benefits, such as coupons, annual summary of the principal assumptions
endowments, and conversion privileges. underlying the long term business
provision should be given. These
The assumptions shall include provision assumptions would include the more
for the risk of adverse deviation. Original significant of the following:
assumptions shall continue to be used in
subsequent accounting periods to interest rates;
Technical
determine changes in the liability for
Reserves – future policy benefits (often referred to as mortality and morbidity bases;
Valuation of the "lock-in concept") unless a premium
deficiency exists (paragraphs 35-37). allowance for future bonus where a
Liability of Life
Changes in the liability for future policy gross premium valuation has been
Policies carried out; and
benefits that result from its periodic
estimation for financial reporting purposes
allowance for future expenses where
shall be recognized in income in the period
the valuation is performed other than
in which the changes occur.
on a net premium approach.


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Country Japan Canada Australia

Component

Policy liabilities comprise of : Actuarial liabilities of life insurance Policy Liabilities


enterprises should be computed using Present value and best estimates
1) Actuarially determined the Canadian asset liability method Obligations arising from life insurance
liabilities using the pure premium
policies (policy liabilities) must be
method. Zillmer adjustments are
acceptable in special cases but recognised as liabilities and must be
Canadian asset liability method: a measured at each reporting date as:
otherwise no acquisition costs are
method of computing actuarial a) the net present value of future receipts
deferred
liabilities that uses: from and payments to policyholders,
Technical 2) Unearned premiums on a 1) the full amount of the premiums and including participating benefits, allowing
yearly pro rata basis other amounts due under the related for the possibility of discontinuance before
Reserves –
insurance policies over the term of the the end of policy contract periods, plus
Valuation of 3) Extraordinary losses on a
liabilities (i.e., the actual premiums); planned margins of revenues over expenses
statutory basis
Liability of Life 2) the estimated related expenses and relating to services yet to be provided to
Policies obligations incurred during the term of policyholders, on the basis of assumptions
the liabilities; and that are best estimates; or
b) where the result would not be materially
3) projected asset and liability cash different from the application of paragraph
flows that result in no net cash flow at 9.1(a), the accumulated benefits to
the end of the projection period. policyholders after allowing for the portion
of acquisition costs expected to be recouped.


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Community Europe International

Component

Article 56 The Steering Committee considers an explicit approach to


Technical provisions be superior to an implicit approach with respect to
The amount of technical provisions must at all times be assumptions.
such that an undertaking can meet any liabilities arising
out of insurance contracts as far as can reasonably be
foreseen. The Steering Committee favours an approach to
measurement that focuses on current information and
The items relating to technical provisions shown under
Liabilities to the balance sheet of Life Insurance assumptions.

Technical Companies are as follows L

Reserves – 1) Provision for unearned premiums In the Steering Committee’s view, a measurement based on
2) Life Assurance provision market expectations is appropriate under the asset-and-
Valuation of
3) Claims outstanding liability measurement view.
Liability of Life 4) Provision for bonuses and rebates
Policies 5) Equalisation provision
6) Other technical provisions The Steering Committee favours an all-future-events
approach to measurement assumptions, to the extent
For technical provisions the inset column shows gross practicable, consistent with the requirements of IAS 37.
amounts and reinsurance separately. The net amount is
shown in the final column.


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Community Europe International

Component

Article 59 While estimates are often difficult and subjective, financial


Life assurance provision statement users are best served by liability measurements
The life assurance provision shall in principle be that reflect the entire estimated cost of claims rather than
computed separately for each life assurance contract.
measurements that exclude some costs.
Member States may, however, permit the use of statistical
or mathematical methods where they may be expected to
give approximately the same results as individual
The Steering Committee favours a fresh-start approach to
calculations. A summary of the principal assumptions
made shall be given in the notes on the accounts. The changes in accounting estimates and current recognition of
computation shall be made annually by an actuary or the effect of differences between actual experience and
Technical
other specialist in this field on the basis of recognized earlier assumptions.
Reserves – actuarial methods.
Valuation of
The term ‘recognised actuarial methods’ is not defined.
Liability of Life However, the Third Life Assurance Single License
Policies directive sets out the principles to be followed in
calculating the life assurance provision for supervisory
purposes. The entire emphasis is on ‘PRUDENCE’. Some
the actuarial methods currently used are Net Premium,
Gross Premium, Discounted Cash Flow, Unit Liability,
Accrual and Embedded value, Modified Statutory,
German and French Method.


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Country India US UK
Component

The IRDA Regulations do no provide Interest income on all loans is The effective interest method is a method of
an specific guidelines in respect of the generally accrued and credited to calculating amortised cost and interest
same. Consequentially the interest income as it is earned using income or interest expense using the
requirements of AS 9 ‘Revenue the interest method. The objective effective interest rate of a financial asset or
Recognition’ would have to be of the interest method is to financial liability. For an individual
adhered to in respect of income recognize periodic interest income financial asset or financial liability, the
recognition. that reflects a constant effective effective interest rate is the rate that
yield on the recorded investment in exactly discounts the contractual stream of
It is stated under AS-9 that Interest the loan. In addition to the accrual future cash payments or receipts through
Investment
accrues, in most circumstances, on the of contractual interest, periodic maturity or the next market - based
Income time basis determined by the amount interest reflects the amortization of repricing date to the net carrying amount
outstanding and the rate applicable. deferred loan fees and costs and the of the financial asset or financial liability at
Usually, discount or premium on debt amortization of a purchase discount initial recognition or the most recent
securities held is treated as though it or premium. However, the accrual market - based repricing date after initial
were accruing over the period to of interest income has generally recognition, as applicable. The effective
maturity. been suspended when the collection interest rate is sometimes termed the level
of interest is less than probable or yield to maturity or to the next repricing
Dividends from investments in shares the collection of any portion of the date, and is the internal rate of return of
are not recognised in the statement of loan's principal is doubtful. the financial asset or financial liability for
profit and loss until a right to receive that period.
payment is established.


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Country Japan Canada Australia

Component
In respect of interest accrual, the No specific mention on recording of Only the disclosure and presentation
recognition and measurement investment income methodology. standard issued for Financial instruments
basis is similar to IAS. as of now
However, the accounts are prepared
Proposed dividends can using the accrual basis and considering Interest, Dividends , Gains and Losses
be accrued in the system the investment income would
consolidated be recognised when the same has 4.4 The classification of interest, dividends
financial statements. accrued. , gains and losses as expenses or revenues or
(GAAP Survey 2001)
as direct debits to equity or direct credits to
Investment
equity must be consistent with the
Income statement of financial position classification
of the related financial instrument or
component part as at the date when the
interest, dividends , gains or losses are
recognised.

The treatment of dividends


proposed after the balance
sheet date, particularly as
practice is generally to accrue
for them


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Community Europe International

Component

The present accounts directive does not specify clear Interest must be recogised on a basis that takes into account
uniform basis presently for recording employee the effective yield of the asset.
retirement benefits.

As such since the EU has decided to adopt the IAS by Dividends should be recognised when the shareholders’
around 2005 and make it mandatory for all countries right to receive dividend is established
listed in the European Union, the accounting would tend
Investment to be aligned to the International Accounting Standards in
the future (Ref : IAS 18 and IAS 39)
Income


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Country India US UK
Component

Debt securities, including Required to classify fixed maturity The accounting under UK GAAP is
government securities and securities and equity securities as either broadly similar to IAS.
redeemable preference shares, shall held-to-maturity (HTM), available-for-sale
be considered as “held to maturity” (AFS), or trading. AFS securities are
securities and shall be measured at stated at fair value with the unrealized
historical cost subject to gains and losses, reported in shareholders (Ref : FRS 4 and 5)
amortisation. equity. Only other than temporary
impairment is recognized in the income
Listed equity securities and statement. HTM securities are stated at
Investment
derivative instruments that are amortized costs (although fair value
Valuation traded in active markets shall be disclosure is required). Only other than
measured at fair value on the temporary impairment is recognized in the
balance sheet date. income statement. Trading securities are
stated at fair value with unrealized gains
The value of investment propertyand losses reported in the income
shall be determined at historicalstatement.
cost, subject to revaluation at least
once in every three years. TheAs per FAS 60, real estate shall be
change in the carrying amount ofclassified either as an investment or
the investment property shall beoperating asset, depending on its
taken to Revaluation Reserve. predominant use.


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Country Japan Canada Australia

Component Based on the recommendations of As stated under section 4210 of the There are inconsistencies
the Business Accounting CICA Handbook investments re between the IAS and the
Deliberation Council (BADC) classified into two as Fixed-term and Australian standards in so far as
several changes have been made
Equity : the below :
to the valuation basis and as such
the valuation is similar to U.S Fixed-term portfolio investments held
GAAP. -trading, available-for-sale and
by life insurance enterprises should be
derivative financial assets are
carried in the balance sheet at
Available for sale “marketable” amortized cost. Any premium or not recognized at fair value
Investment securities have been marked to
discount arising on purchase of these -gains and losses on the change
market through equity in the
Valuation financial statements for fiscal investments should be amortized to in value of trading financial
years beginning on and after income over the period to maturity. instruments are not required to
April 1, 2001. Those securities Equity portfolio investments held by life be taken to income
have been reported at cost or at insurance enterprises should be carried
the lower of cost or market. -investment properties can be
in the balance sheet at an amount
calculated using a moving average held at cost without
market method. depreciation
(Under the CICA handbook real estate
- the changes in value of
is classified as equity investment)
investment properties held at a
current value are taken to
reserves


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Community Europe International

Component

In respect of valuation of investments (Non-linked


business) the Insurance Accounts directive does not In respect of financial assets measurement depends upon
contain any generally valid definition of investments. the classification of investment – if held to maturity or
Extensive disclosure requirements though are laid out in originated by the entity they carry at amortised cost,
the Directive. otherwise at fair value.
Unrealised gains/losses to be recognised in the income
The Directive allows member states to require or permit
investments to be shown as assets on the basis of their statement and on available for sale investments recognised
current value. The choice may be exercise for “all” in either equity, or the income statement.
Investment
investments taken together or “categories” of investments
Valuation
For the purpose of Linked business the current value of Property held to earn rentals and/or for capital
investments is reflected in the technical provisions for life appreciation is considered as an investment. The standard
assurance policies hence the investment concerned must requires same cost based measurement for both acquired
be shown in the balance sheet at current value. This is to and self-constructed investment property. Initial
be done in order to balance the amount included in the life measurement based on purchase price and directly
assurance provisions which represents the difference attributable costs. Subsequently the entity can choose, for
between the historical cost and current value of the
all investment property, between the fair value model and
investments in question.
depreciated cost. When fair value is chosen the change is
recognised in the income statement and the carrying
amount is not depreciated.
(Ref : IAS 39)


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Country India US UK
Component

Loans shall be measured atThe measurements of impaired loans is An impairment loss must be
historical cost subject to impairmentnormally based on the present value of recognised in the income statement
provisions. expected future cash flows discounted at when an asset’s carrying amount
the loan’s effective interest rate or as a exceeds its recoverable amount.
The insurer shall assess the qualitypractical expedient, the fair value of the
of its loan assets and shall providecollateral, if the loan is collateral
The measurement requirements are
for impairment. The impairmentdependent. Loans in foreclosure and loans
similar to the International
provision shall not be lower than theconsidered to be impaired are placed on
accounting standard discussed later
amounts derived on the basis ofnon-accrual status.
Loans
guidelines prescribed from time to
Valuation and time by the Reserve Bank of India,There is prohibition on reversals of
Impairment that apply to companies andimpairment losses for assets to be held and (Ref FRS 11, FRS 15)
financial institutions. used.

(The effective interest rate is the rate of


return implicit in premiums of discount).

(Ref : FAS 5 and FAS 114)


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Country Japan Canada Australia

Component

The Business Accounting CICA Handbook – Section 3025 gives Cost or Fair Value Basis
Deliberation Council guidelines in respect of Impaired Loans 5.1 Subsequent to initial recognition as
(BADC), the advisory body
to the Minister of Finance,When a loan or portfolio of loans becomes assets, each class of
impaired as a result of a deterioration in non-current assets must be measured on
have have suggested several
changes which include thosecredit quality to the extent that the lender no either:
in respect of impairment oflonger has reasonable assurance of timely (a) the cost basis; or
loans. collection of the full amount of principal and (b) the fair value basis, under which
interest, the carrying amount of the loans revaluations must be made with sufficient
Impairment of loans is
Loans should be reduced. The reduction in carryingregularity to ensure that the carrying
recognised by discounting
Valuation and future cash flows at the amount should be recognized as a charge in amount of each asset in the class does not
differ materially from its fair value at the
Impairment effective interest rate or by the statement of income in the period in
which impairment is identified. reporting date, subject to paragraphs 5.2
deducting the future cash
inflows from foreclosures or When loans are identified as impaired, their and 5.3.
guarantees in the financial 5.1.1 Entities choose between measuring all
carrying amounts should be reduced to their of the assets in a class of non-current assets
statements for fiscal year
beginning on and after April estimated realizable amounts. Estimated on the cost basis or the fair value basis.
1, 2000 realizable amounts should be measured by This Standard permits some classes of non-
discounting the expected future cash flows at current assets to be measured on the cost
the effective interest rate inherent in the basis and other classes to be measured on
loans. the fair value basis.


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Community Europe International

Component

The present accounts directive does not specify clear


uniform basis presently for recording employee An impairment loss must be recognised in the income
retirement benefits. statement when an asset’s carrying amount exceeds its
recoverable amount.
As such since the EU has decided to adopt the IAS by The impairment loss is the difference between the asset’s
around 2005 and make it mandatory for all countries
carrying amount and its recoverable amount. The
listed in the European Union, the accounting would tend
to be aligned to the International Accounting Standards in recoverable amounts is the higher of the asset’s net selling
the future price and its value in use. Value in use is the future cash
Loans flows to be derived from the particular asset, discounted to
Valuation and present value using a pre-tax market determined rate that
Impairment reflects the current assessment of the time value of money
and risks specific to the asset.
Impairment losses to be reversed where there has been a
change in economic conditions or the expected use of the
asset.


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Country India US UK
Component

No specific mention on reinsurance Ceding enterprises shall report estimated Reinsurance recoveries should be
accounting so far. The Regulations reinsurance receivables arising from those accounted for in the same
only prescribe the procedures in contracts separately as assets. Amounts paid to the accounting period as the related
respect of reinsurance. Further, the reinsurer relating to the unexpired portion of claim and included in the balance
accounting requirements lay down reinsured contracts (prepaid reinsurance sheet as an asset
certain disclosure requirements premiums) also shall be reported separately as
assets. Amounts receivable and payable between Reinsurance recoveries should be
Extent of risk retained and reinsured the ceding enterprise and an individual reinsurer accounted for in the same
shall be separately shown shall be offset only when a right of setoff exists, as accounting period as the related
Reinsurance
defined in Interpretation 39. claim, and included in the balance
Accounting Reinsurance premiums whether on sheet as an asset under Assets
business ceded or accepted are to be Amortization of the estimated cost of reinsurance item Da3 (Reinsurers' share of
brought into account gross (i.e. before of long-duration contracts that meets the technical provisions: claims
deducting commissions) under the conditions for reinsurance accounting depends on outstanding). Although permitted
head reinsurance premiums. whether the reinsurance contract is long durationunder Schedule 9a to the CA85 ,
or short duration. The cost shall be amortized the alternative method of showing
Under Contingent liabilities the over the remaining life of the underlying reinsuredreinsurance recoveries as a
insurers are required to disclose contracts if the reinsurance contract is long disclosed deduction from
Reinsurance obligations to the extent duration, or over the contract period of the technical provisions is not
not provided for in accounts reinsurance if the reinsurance contract is short permitted by FRS 5.
duration.


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Country Japan Canada Australia

Component

No significant information in Actuarial liabilities and reported revenues Reporting by direct insurers
respect of reinsurance and expenses of a ceding life insurance
accounting prevalent in Japan enterprise should be adjusted to reflect all the7.3 A ceding insurer must recognise:
is readily available
costs and revenues of reinsurance-ceded
transactions and retrocessions. Such (a) premiums ceded to reinsurers as
adjustments should include an adjustment to reinsurance expenses
the provision for adverse deviations to give (b) claim recoveries and commissions
recognition to the impact of the transfer of from reinsurers as revenues
Reinsurance risks to the reinsuring enterprise. The effects (c) claim recoveries and other inflows
of the adjustments should be accounted for in not yet received from a reinsurer as an
Accounting
the period in which the risks are transferred. asset.
It is appropriate that actuarial liabilities
reflect the impact of reinsurance-ceded 7.3.1 Life insurers may reinsure some of
transactions and retrocessions just as they their business. The direct life insurer
reflect the impact of new business. Provisions remains responsible for the total amount
for adverse deviations on a block of business of successful claims of policyholders and
would be adjusted to the extent that the risks through reinsurance arrangements may
related to that business are transferred to be entitled to recover amounts relating
other enterprises to some of those claims.


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Community Europe International
Component

Reinsurance: Reinsurance can be shown either on the Improvements in communications mean that the deferred
assets or liabilities side of the balance sheet. It must be annual method is no longer needed.
broken down into two items in the P&L account.
Reinsurance amounts
1. The reinsurance amounts shall comprise the actual or To enhance the comparability of insurance financial
estimated amounts, which, under contractual reinsurance statements, it is recommended that activity with reinsurers
arrangements, are deducted from the gross amounts of
be reported gross in the income
technical provisions.
2. As regards the provision for unearned premiums, the
Reinsurance reinsurance amounts shall be calculated according to the
methods referred to in Article 57 or in accordance with the
Accounting terms of the reinsurance policy.
3. Member States may require or permit the reinsurance
amounts to be shown as assets. Where this option is
exercised, those amounts shall be shown as assets under an
item Da (Reinsurers' share of technical provisions),
subdivided as follows:
1. Provision for unearned premiums
2. Life assurance provision
3. Claims outstanding
4. Provisions for bonuses and rebates (unless shown under 2)
5. Other technical provisions
6. Technical provisions for life-assurance policies where the investment
risk is borne by the policyholders
Notwithstanding Article 5, these items shall not be combined.


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Country India US UK
Component

The IRDA regulations do not specifically Pension expenses under U.S GAAP isThe requirements are more or less
comment on employee benefits, however calculated upon specified methodology,similar to IAS & US GAAP. Defined
the regulations state that compliance withincluding a designated actuarialbenefit scheme assets are measured
the Accounting Standards issued by the approach that reflects the concept ofat fair value. Defined benefit scheme
ICAI should be ensured.. As such the accrual accounting with amountsliabilities are measured using the
employee benefits have to be recorded in reflected in the income statementprojected unit method. Defined
accordance with the requirements under systematically over the estimatedbenefit scheme liabilities are
AS–15. working lives of the employees covereddiscounted at the current rate of
Employee In respect of retirement benefits in the by the plan. Companies with unfundedreturn on a high quality corporate
form of provident fund and other defined or under-funded pension obligationsbond of equivalent term and
Retirement
contribution schemes, the contribution are generally required to record acurrency to the liability. Full
Benefits payable by the employer for a year is liability in the balance sheet. Otheractuarial valuations should be
charged to the statement of profit and post-retirement benefits are required toobtained at intervals not exceeding
loss for the year. be accounted on accrual basis and thethree years and should be updated
In respect of gratuity benefit and other provisions for computing such benefitsat each balance sheet date. Actuarial
defined benefit schemes, the accounting are conceptually similar to thosegains and losses are recognised
treatment depends on the type of required for pensions Compensatedimmediately in the statement of total
arrangement which the employer has absences (leave encashment) arerecognised gains and losses. They
chosen to make. required to be accrued and expensedare not recycled into the profit and
In most cases the accruing liability is when earned by the employee. loss account in subsequent
calculated according to actuarial periods(Ref : FRS 17)
valuation..


Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Country Japan Canada Australia

Component Japanese accounting There are inconsistencies The AASB has issued a standard to be effective
may differ from that between Canadian and IAS from 01/07/2002 :
required by IAS because rules that could lead to Post-Employment Benefits
of the absence of differences for many A liability for employee benefits in the form of
specific Japanese rules
on recognition and enterprises in certain areas. post-employment benefits must be recognised:
Under Canadian rules: (a) progressively over the reporting periods up
measurement
to the time when the benefits become vested,
accounting for employee - past service costs relating
where the benefits vest after a specified
benefits other than to employee benefits that
Employee severance qualifying period; and
are already vested are not (b) in the reporting period an employee is
Retirement indemnities. generally recognized appointed to a specified position, where the
Benefits immediately (IAS 19.96) benefits vest at the time of appointment and
The inconsistencies with
IAS are that : – the accumulated benefit continue to be recognised until they are settled.
1) the discount rate for method for defined benefit
employee benefit pension plans is used when Employee benefit liabilities that are expected to
obligations can be future salary levels and cost be settled more than 12 months after the
adjusted to take account escalation do not affect the reporting date must be measured as the present
of fluctuations within amount of the employee value of the estimated future cash outflows to
the future benefits and the be made by the employer in respect of services
previous five years discount rate used to provided by employees up to the reporting date.
2) any past service cost determine pension liabilities
of employee benefits is
may reflect the rate at
spread of the average
which the liability could be
service lives of active
employees even if the settled
cost is vested 
Comparitive Accounting Analysis
Life Insurance Companies – Respective GAAPs
Community Europe International

Component

The present accounts directive does not specify clear


uniform basis presently for recording employee For the purpose of determination of pension and post-
retirement benefits. retirement expense, the projected unit credit actuarial
method is used which is similar under US and UK GAAP.
As such since the EU has decided to adopt the IAS by The discount rate for obligations is based on market yields
around 2005 and make it mandatory for all countries
for high quality corporate bonds.
listed in the European Union, the accounting would tend
to be aligned to the International Accounting Standards in In respect of valuation of plan assets, they are measured at
Employee the future fair value or using discounted cash flows if market prices
are unavailable
Retirement
Benefits

(Ref : IAS 19, 39)

