1. Insurance, system of
insurance accounting
Sooraj.R

2. 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.

3. DEFINITION
In financial sense
• It is a social device in which
a group of individuals (insured)
transfer risk to another party (insurer)
in order to combine loss experienced, which
o permits statistical prediction of losses and
o provides for payment of losses from funds
contributed (premium) by all members who
transferred risk
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4. Definition (Contd.)
In legal sense
• It is a contract by which
one party (Insurer)
in consideration of price paid to him
proportionate to risk provides security to
the other party (Insured) that
o he shall not suffer loss, damage or prejudice by the
happening of certain specified events.
• Insurance is meant to protect insured against
uncertain events which may cause disadvantage to
him
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5. ELEMENTS IN INSURANCE
• Insurance - combination of three elements
1. Insurance as a Transfer System - transferring of risks
from Insured to IC which is financially sound and has
capacity and willingness to take risks.
• A Loss exposure can give rise to three types of losses,
namely:
a) Property loss (including net income loss),
b) Liability loss, and
c) Human and personnel loss.
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6. Elements in Insurance (Contd.)
2. Insurance as a Business - insurance primarily attempts to
meet its costs and expenses from premium that it earns and
also make a reasonable margin of profit for its own
sustainability.
• Other benefits to society as a whole such as:
a) Payments for the costs of covered losses
b) Reduction of the insured’s financial uncertain
c) Efficient use of resources
d) Support for credit
e) Satisfaction of legal requirements
f) Satisfaction of business requirements
g) Source of investment funds for infrastructure development
h) Reduction of social burden
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7. Elements in Insurance (Contd.)
3. Insurance as a Contract - an insurance policy is a
legally enforceable contract. The contract is between
IC and the Insured.
• An insurance contract must meet these four
requirements:
i. Offer and acceptance
ii. Consideration
iii. Capacity
iv. Legal purpose
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8. Insurers' business model
• Underwriting and investing - Insurers make
money in two ways:
1. Underwriting, the process by which insurers select
the risks to insure and decide how much in
premiums to charge for accepting those risks
2. Investing the premiums they collect from insured
parties.
• Claims - Claims and loss handling is the
materialized utility of insurance
• Marketing -Insurers will often use insurance
agents to initially market or underwrite their
customers.

9. TYPE OF INSURANCE
INSURANCE
LIFE GENERAL
INSURANCE INSURANCE

10. LIFE INSURANCE
Life insurance is a written contract between the
insured and the insurer, that provides for the
payment of the insured sum on the date of the
maturity of the contract or on the unfortunate
death of the insured, whichever occurs earlier.

11. GENERAL INSURANCE
• General insurance or non-life insurance
policies, including automobile and
homeowners policies, provide payments
depending on the loss from a particular
financial event. General insurance typically
comprises any insurance that is not
determined to be life insurance.

12. TYPES OF GENERAL INSURANCE
Health insurance
Business insurance
Automobile insurance
Fire insurance etc.

13. HEALTH INSURANCE
Just like one looks to safeguard ones wealth,
these policies ensure guarding the insurer's
health against any calamities that may cause
long term harm to ones life and even hamper
ones earning ability for a lifetime. Some
examples of this type of policy are mediclaim
policy, personal accident, group accident,
traffic accident, etc.

14. Business Insurance
Risks of loss of profits/business, goods, plant and
machinery are most profound in case of business.
Under this head they cover the most widely used
policies that cover a business from any loss of the
above kind. Some of these policies are burglary
insurance, shopkeepers insurance, key-man insurance,
marine insurance, public liability insurance, workmen
compensation insurance, air transit insurance, fidelity
guarantee insurance etc.

15. Automobile Insurance
Auto Policy is required to be taken to cover the
risks that arise to the owner, vehicle and third
party. This includes the Compulsory Vehicle
Policy (In India, by the Motor Vehicles Act, every
car owner is required to covered against Act
risks) and the Comprehensive Vehicle Policy.

16. FIRE INSURANCE
This policy is required to be taken to
prevent any loss of profits / property
from incidental fire. Eg: fire insurance
and fire consequential loss policy.

17. IRDA’S MISSION
To protect the interests of the policyholders, to regulate,
promote and ensure orderly growth of the insurance industry
and for matters connected therewith or incidental thereto.
Composition of Authority under IRDA Act, 1999
As per the section 4 of IRDA Act' 1999, Insurance Regulatory and
Development Authority (IRDA, which was constituted by an
act of parliament) specify the composition of Authority.
The Authority is a ten member team consisting of
a. a Chairman;
b. five whole-time members;
c. four part-time members,
(all appointed by the Government of India)

18. Duties, Powers and Functions of IRDA
Section 14 of IRDA Act, 1999 lays down the duties, powers and
functions of IRDA.
1. Subject to the provisions of this Act and any other law for
the time being in force, the Authority shall have the duty to
regulate, promote and ensure orderly growth of the
insurance business and re-insurance business.
2. Without prejudice to the generality of the provisions
contained in sub-section (1), the powers and functions of the
Authority shall include:
a. issue to the applicant a certificate of registration, renew,
modify, withdraw, suspend or cancel such registration;

19. Duties, Powers and Functions of IRDA contd…
b. protection of the interests of the policy holders in matters
concerning assigning of policy, nomination by policy
holders, insurable interest, settlement of insurance claim,
surrender value of policy and other terms and conditions of
contracts of insurance;
c. specifying requisite qualifications, code of conduct and
practical training for intermediary or insurance
intermediaries and agents;
d. specifying the code of conduct for surveyors and loss
assessors;
e. promoting efficiency in the conduct of insurance business;

20. Duties, Powers and Functions of IRDA contd…
f. specifying the form and manner in which books of account
shall be maintained and statement of accounts shall be
rendered by insurers and other insurance intermediaries;
g. regulating investment of funds by insurance companies;
h. regulating maintenance of margin of solvency;
i. adjudication of disputes between insurers and
intermediaries or insurance intermediaries;
j. supervising the functioning of the Tariff Advisory Committee;

21. Basic Insurance Accounting
• Loss and loss adjustment expense accounting
basics
• Reinsurance accounting basics
• Deposit accounting basics

22. Loss and loss adjustment expense
accounting
• The basic accounting transactions involving losses
are
• Paying claims
• Increasing or decreasing claim reserves
• These two items affect the income statement
through incurred losses, which equals paid claims
(or “losses”) plus the change in loss reserves, or
Incurred losses = paid losses + (ending loss reserves
- beginning loss reserves)

23. Reinsurance Accounting Basics
• There are two general approaches to ceded
reinsurance accounting currently in existence:
• 1) Treating the ceded reinsurance entries as
negatives of the direct or assumed
reinsurance entries, or
• 2) Treating the purchase of reinsurance as the
purchase of an asset.

24. Deposit accounting for a contract
generally observes the following rules
• The accounting is done on an individual contract-by-
contract basis, and not on a portfolio basis, even if the
resulting contract-by-contract amounts are reported on
a summary basis in financial reports.
• The amount(s) received for a contract is recorded as a
deposit liability, with no revenue or expense impact
(and therefore no impact on income).
• The deposit liability is increased due to additional
receipts, and usually investment income credits of
some sort, and decreased due to payments.
• As such, the deposit generally represents a present
value of future payment obligations.

25. Different forms
• Three general forms of deposit accounting
currently observable are
1. bank deposit approaches,
2. prospective approaches and
3. retrospective approaches

26. Bank deposit approach
• This is the simplest of the three deposit
accounting approaches to be discussed. Under
this approach, the initial deposit grows with
credited interest at a rate whose calculation is
determined in advance (and with possible
additional deposits depending on the contract
terms) and declines with withdrawals.

27. Prospective approach
• The defining characteristic of this approach is
that the current value of the deposit is set
equal to the present value of future payments,
irrespective of the initial deposit or past
payments
• The interest rate is generally a market rate,
which may be based on risk-free rates and
may be locked-in at inception such that it does
not change over time.

28. Retrospective approach
• The defining characteristic of this approach is
that the deposit is a function of the initial
deposit, all past payments, and the current
estimate of all future payments. Under this
method the interest rate is the rate for which
the discounted value of past payments and
estimated future payments would equal the
initial deposit. The interest rate can change
whenever the estimated cash flows under the
contract change.