CHAPTER 2

Accounts of Insurance Companies

Insurance is a form of contract under which one party agrees in return of a consideration to pay an
agreed amount of money to another party to compensate for a loss, damage or some uncertain event.

There are two types of insurance i.e., Life insurance and General Insurance.

Life Insurance – under this type of insurance the corporation guarantees to pay a certain sum of
money to the policy holder on reaching a certain age or on his death whichever is earlier. Life
insurance has an element both of protection and investment.

General Insurance – it includes all other types of insurance except life insurance. e.g. – Fire, Marine,
Accident, [Link]. Under this type of insurance the insurer undertakes to indemnify the loss
suffered by the insured on happening of a certain event in consideration for a fixed premium.
Insurance Regulatory and Development Authority (IRDA)

In order to regulate the insurance business, the government set up in 1996, the Insurance Regulatory
Authority (IRA). Now this authority is known as the Insurance Regulatory and Development
Authority. In 2002, the authority came with regulations for the preparation of the financial statement
of insurance companies.

Objectives of Insurance
 Financial Protection: Guards individuals and dependents against sudden economic devastation caused by loss of income,
critical illness, or premature death.
 Risk Sharing & Transfer: Distributes the financial burden of a rare, catastrophic event across a large pool of policyholders
who all pay premiums.
 Peace of Mind: Alleviates the psychological stress and anxiety of unexpected emergencies by guaranteeing a structured
financial fallback
 Capital Formation & Savings: Many policies—such as life insurance or endowment plans—act as forced savings
mechanisms that aid in wealth creation and retirement planning.
 Business Continuity: Ensures that commercial operations can recover from property damage, liability lawsuits, or
employee-related risks without facing bankruptcy.

Preparation of Financial Statements

Final Accounts of Life Insurance Companies

The final accounts of a life insurance company consist of (a) Revenue Account, (b) P&L A/c and
(c) Balance Sheet.

Revenue Account (Form A‐RA)

Revenue Account is prepared as per the provisions of IRDA regulations 2002 and complies
with the requirements of Schedule A as follows:

Meaning of General Insurance

A contract or an agreement between two parties, under which one party guarantees to make good the loss
suffered by the other party on the happening of an unforeseen events like fire, accident, burglary etc.
Any insurance other than life insurance business is called general insurance. Fire insurance against loss of
property due to fire and Marine insurance against loss of carte, freight are examples of general insurance

Reinsurance premium and commission

Reinsurance is an arrangement made between two insurance companies where by one agrees to take over
a position of risk covered by other. The company passing on the risk will have to pay premium to the other
company and this is called reinsurance premium

Commission paid on reinsurance premium received is termed as Commission on re-insurance accepted

And it is an expense which is to be added to commission in Sc 3
Commission earned on reinsurance premium paid is termed as Commission on reinsurance ceded and it is
an income which is deducted from commission paid in Sc 3

Difference between Life Insurance and General Insurance

GENERAL INSURANCE LIFE INSURANCE
Insurance coverage is for shorter period, Long period commitments, it is continuous
usually not exceeding one year and covers for many years
No question of surrender value/paid up value Life policy provides both surrender value and
paid up value
No double or multiple insurance Double/multiple insurance is allowed
Measurable loss/insurable interest Non-measurable insurable interest([Link] loss
may be unlimited)
The insurable interest must exist at all times of The insurable interest must exist at the time
loss or both at the time of taking out the policy of taking out the policy
and claim
Final Accounts of General Insurance
FORM B – REVENUE ACCOUNT
Name of the Insurer:
Registration No and Date of Registration with the IRDA
Revenue Account for the year ended 31st March ------------
Particulars Schedule No Amount
Premium earned 1 Xxx
Profit on sale of Investment Xxx
Other income Xxx
Interest , Dividend and Rent - Gross Xxx
TOTAL (A) XXX
Claims Incurred 2 Xxx
Commission 3 Xx
Operating Expenses related to Insurance Business 4 Xxx
TOTAL (B) XXX
Operating Profit/Loss from Marine/Fire/other business ( C) XXX
A-B
APPROPRIATIONS
Transfer to Shareholder,s Account Xxx
Transfer to Catastrophe Reserve Xxx
Transfer to other Reserve Xxx
TOTAL (C ) XXX
FORM B – PROFIT AND LOSS ACCOUNT
Name of the Insurer:
Registration No and Date of Registration with the IRDA
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31st MARCH
PARTICULARS AMOUNT
1. OPERATING PROFIT/LOSS
Profit from Fire Insurance Xxx
Profit from Marine Insurance Xxx
Profit from Other Business Xxx
2. INCOME FROM INVESTMENTS
Interest, Dividend and Rent – Gross Xxx
Profit on sale of Investment Xxx
Less: Tax thereon Xxx
3. OTHER INCOME
Share transfer fees Xxx
Bad debts recovered Xxx
Refund of double taxation Xxx
Difference in exchange (cr) Xxx
Rent of staff quarters recovered from salaries Xxx
Total (A) XXX
Expenses not relating to Insurance Business/Common
Expenses
Depreciation on bank property Xxx
Operating loss from Insurance business Xxx
Directors fees Xxx
Rent, rate and taxes Xxx
Salaries Xxx
Printing and stationery Xxx
Postage Xxx
Others expenses Xxx
Loss on sale of assets Xxx
Bad debts Xxx
Audit fees Xxx
Provident fund contribution Xxx
Difference in exchange (debit) Xxx
TOTAL B XXX
Profit / Loss before tax A – B Xxx
Less Provision for taxation Xxx
Operating Profit after tax XXX
APPROPRIATIONS
Transfer to reserve fund Xxx
Proposed dividend Xxx
Interim dividend paid Xxx
Balance of profit b/d from last year Xxx
Profit carried forward to Balance Sheet xxxx
 FORM B – BALANCE SHEET
Name of the Insurer:
Registration No and Date of Registration with the IRDA
BALANCE SHEET AS AT 31st MARCH

PARTICULARS Schedule No Amount

SOURCES OF FUNDS
Share Capital 5 Xxx
Reserves and Surplus 6 Xxx
Fair Value Change Account Xxx
Borrowings 7 xxx
TOTAL XXX
APPLICATION OF FUNDS
Investments 8 Xxx
Loan 9 Xxx
Fixed Assets 10 Xxx
Current Assets:
Cash and Bank Balances 11 Xxx
Advances and Other Assets 12 xxx
Sub – Total (A) xxx
Current Liabilities 13 Xxx
Provisions 14 xxx
Sub – Total (B) xxx
Net Current Assets (C) = A – B Xxx
Miscellaneous Expenditure 15 Xxx
Debit Balance in Profit & Loss Account xxx
TOTAL XXX

Schedule forming part of financial statements

Particulars Amount Amount
SCHEDULE 1- PREMIUM EARNED
Premium from direct business Xxx
Add: Premium on reinsurance accepted Xxx
Less: Premium on reinsurance ceded Xxx
Bonus in reduction of premium xxx
Net Premium xxx
Less: Adjustment for change in unexpired risks xxx
Total Premium earned XXX

SCHEDULE 2 – CLAIMS INCURRED

Claims Paid Xxx
Add: Reinsurance accepted Xxx
Less: Reinsurance ceded Xxx
Add: Claims o/s at the end of the year Xxx
Less: Claims O/s at the beginning of the year Xxx
Total Claims Incurred XXX

SCHEDULE 3 – COMMISSION
Commission paid Xxx
Add: Commission on Reinsurance accepted Xxx
Less: Commission on Reinsurance ceded Xxx
Net Commission XXX

SCHEDULE 4 – OPERATING EXPENSES

Employees remuneration and welfare benefits Xxx
Travel, conveyance and vehicle running expenses Xxx
Training expenses Xxx
Rent,rate and taxes Xxx
Repairs Xxx
Printing and stationery Xxx
Communication Xxx
Auditors fees, expenses etc Xxx
Advertisement and publicity Xxx
Interest and bank charges Xxx
Depreciation Xxx
Total Expenses XXX
SCHEDULE 5 – SHARE CAPITAL
Share Capital XXX
SCHEDULE 6 – RESERVES & SURPLUS
Capital Reserve Xxx
Capital Redemption Reserve Xxx
General Reserve Xxx
Carastrophe Reserve Xxx
Profit & Loss A/c Balance xxx
TOTAL XXX
SCHEDULE 7 – BPRROWINGS
Debentures/Bonds Xxx
Banks loans Xxx
Others (specific) Xxx
TOTAL XXX
SCHEDULE 8 – INVESTMENTS
Shares/Bonds/Debentures Xxx
Fixed Deposits in Banks xxx
TOTAL XXX
SCHEDULE 9 – LOANS
Mortgage in India Xxx
Mortgage outside India Xxx
Loans against Policy Xxx
TOTAL XXX
SCHEDULE 10 – FIXED ASSETS
Land and Building xxx
Furniture xxx
Less Depreciation xxx
TOTAL XXX
SCHEDULE 11 – CASH & BANK BALANCES
Cash in hand xxx
Cash at Bank xxx
TOTAL XXX
SCHEDULE 12 – ADVANCES &OTHER ASSETS
Advanced tax paid Xxx
Accrued interest on investment Xxx
Outstanding Premiums Xxx
 Agents balance (debit) Xxx
Due from other insurance companies Xxx
Deposit with RBI Xxx
Debtors Xxx
Othters xxx
TOTAL XXX
SCHEDULE 13 – CURRENT LIABILITIES
Agents balances (credit) Xxx
Balances due to other insurance companies Xxx
Premium received in advance Xxx
Outstanding Claims Xxx
Creditors Xxx
Others Xxx
TOTAL XXX
SCHEDULE 14 – PROVISIONS
Reserve for unexpired risk Xxx
Provions for taxation Xxx
Proposed Dividend Xxx
Reserve for doubtful debts Xxx
Other provisions xxx
TOTAL XXX
SCHEDULE 15 – MISCELLANEOUS EXPENSES
Discount allowed on issue of shares/debentures Xxx
Preliminary expenses Xxx
Underwriting commission Xxx
TOTAL XXX

PROBLEMS
The following information relates to ABC General Insurance Co. Ltd. for the year ended 31 March 2025.

1. Particulars
Particulars Amount (₹)
Premium Received 80,00,000
Claims Paid 45,00,000
Commission Paid 6,00,000
Management Expenses 10,00,000
Interest and Dividend Income 4,00,000
Claims Outstanding (Opening) 3,00,000
Claims Outstanding (Closing) 5,00,000
Premium Outstanding (Closing) 2,50,000
Commission Outstanding 50,000
Furniture 5,00,000
Cash at Bank 12,00,000
Investments 40,00,000
Share Capital 50,00,000
General Reserve 15,00,000

2. Additional Information

1. Depreciate furniture by 10%.

2. Create a provision for income tax of ₹2,00,000.
2. Solution
1. Schedule 1 – Premium Earned
Particulars ₹
Premium Received 80,00,000
Add: Outstanding Premium 2,50,000
Premium Earned 82,50,000

2. Schedule 2 – Claims Incurred (Net)

Particulars ₹
Claims Paid 45,00,000
Add: Closing Outstanding Claims 5,00,000
Less: Opening Outstanding Claims (3,00,000)
Claims Incurred 47,00,000

3. Schedule 3 – Commission
Particulars ₹
Commission Paid 6,00,000
Add: Outstanding Commission 50,000
Total Commission 6,50,000

4. Schedule 4 – Operating Expenses

Particulars ₹
Management Expenses 10,00,000
Depreciation on Furniture (10% of ₹5,00,000) 50,000
Total 10,50,000

3. Revenue Account
Particulars ₹ Particulars ₹
Claims Incurred 47,00,000 Premium Earned 82,50,000
Commission 6,50,000
Operating Expenses 10,50,000
Surplus transferred to P&L A/c 18,50,000
Total 82,50,000 Total 82,50,000

4. Profit & Loss Account

Particulars ₹ Particulars ₹
Provision for Income Tax 2,00,000 Surplus from Revenue A/c 18,50,000
Interest & Dividend Income 4,00,000
Net Profit 20,50,000
Total 22,50,000 Total 22,50,000

1. Schedule 5 – Share Capital

Particulars ₹
Share Capital 50,00,000
 2. Schedule 6 – Reserves and Surplus
Particulars ₹
General Reserve 15,00,000
Add: Current Year's Net Profit 20,50,000
Total 35,50,000

3. Schedule 7 – Current Liabilities

Particulars ₹
Outstanding Claims 5,00,000
Outstanding Commission 50,000
Provision for Income Tax 2,00,000
Total 7,50,000

4. Schedule 8 – Investments
Particulars ₹
Investments 40,00,000

5. Schedule 9 – Fixed Assets

Particulars ₹
Furniture 5,00,000
Less: Depreciation (50,000)
Net Furniture 4,50,000

6. Schedule 10 – Cash and Bank

Particulars ₹
Cash at Bank 12,00,000

7. Schedule 11 – Loans and Other Assets

Particulars ₹
Outstanding Premium 2,50,000

5. Balance Sheet
Liabilities ₹ Assets ₹
Share Capital 50,00,000 Investments 40,00,000
Reserves & Surplus 35,50,000 Furniture (Net) 4,50,000
Current Liabilities 7,50,000 Cash at Bank 12,00,000
Outstanding Premium 2,50,000
Total 93,00,000 Total 59,00,000

1. From the following particulars prepare the Fire Revenue A/c for the year ending 31-3-2018

PARTICULARS AMOUNT
Claims paid 2,35,000
Legal expenses regarding claims 5,000
Premiums received 6,00,000
Re-insurance premiums payable 60,000
Commission 1,00,000
 Expenses of mamagement 1,50,000
Provisions against unexpired risks (1-4-2017) 2,60,000
Claims unpaid (1-4-2017) 20,000
Claims unpaid (1-4-2018) 35,000

2. The following balances are extracted from the books of General Insurance Company as on 31-3-18

PARTICULARS FIRE MARINE

Claims paid 2,00,000 1,74,000
Premium less reinsurance 7,48,000 5,94,000
Commission on reinsurance ceded 26,000 -
Management expenses 1,72,000 1,36,000
Commission paid 1,24,000 1,02,000
Reserve on 1-4-2017 4,20,000 4,80,000
Additional Reserve 1-4-2017 1,20,000 20,000
 Premium outstanding 1-4-2017 52,000 34,000
Claims outstanding 1-4-2017 48,000 22,000

1. Depreciation on Assets 72,000

2. Loss on sale of investments 16,000
3. Audit fees 26,000
4. Directors fees 72,000
5. Interest and dividend on investment 1,26,000
Additional Information
1. Premium O/S on 31-3-2018 Fire- 60,000, Marine – 30,000
2. Claims o/s on 31-3-2018 Fire- 92,000, Marine – 34,000
3. Reserve for unexpired risk to be maintained at 50% and 100% of net premium of fire and marine
insurance respectively
4. Additional reserve for fire to be kept at 20% of net premium
Prepare Fire Revenue A/c, Marine Revenue A/c and P&L A/c.

3. The following balances are extracted from the books of General Company as on 31-3-2018

PARTICULARS FIRE MARINE

Claims paid 1,00,00 87,000
Premium less reinsurance 3,74,000 2,97,000
Commission on reinsurance ceded 13,000 -
Management expenses 62,000 51,000
Commission paid 86,000 68,000
Reserve on 1-4-2017 2,10,000 2,40,000
Additional Reserve 1-4-2017 60,000 10,000
Premium outstanding 1-4-2017 26,000 17,000
Claims outstanding 1-4-2017 24,000 11,000
1. Depreciation on Assets 36,000
2. Loss on sale of investments 8,000
3. Audit fees 13,000
4. Directors fees 36,000
5. Interest and dividend on investment 63,000
Additional Information
1. Premium O/S on 31-3-2018 Fire- 30,000, Marine – 15,000
2. Claims o/s on 31-3-2018 Fire- 46,000, Marine – 17,000
3. Reserve for unexpired risk to be maintained at 50% and 100% of net premium of fire and marine
insurance respectively
4. Additional reserve for fire to be kept at 20% of net premium
5. Out of the above, a fire claim amounting to Rs.11,000 was recovered by reinsurance
6. Interest accrued on investments 13,000
Prepare Fire Revenue A/c, Marine Revenue A/c and P&L A/c.

4. Calculate the premium earned (net) for the year ended 31-3-2018 from the following in case of fire
insurance
Premium received less reinsurance 6,52,000
Premium outstanding at the end of the year 48,000
Reserve for unexpired risk on 1-4-2017 3,30,000
Additional reserve on 1-4-2017 30,000
It is the policy of the company to maintain 50% of premium towards reserve for unexpired risk
Additional reserve 10% of net premium is to be maintained
5. From the following calculate net premium earned for the year ended 31-3-2018 of a Fire Insurance
business
Premium on direct business 2,50,000
Premium on reinsurance accepted 1,00,000
Premium on reinsurance ceded 50,000
Premium due at the beginning of the year 10,000
Premium due at the end of the year 15,000
Reserve for unexpired risk 1/4/2017
Reserve for unexpired risk is to be maintained at 50% of the net premium

6. From the following balance of Moon Shine Insurance Co Ltd as on 31-3-2018, prepare
A) Fire Insurance
B) Marine Insurance
C) Profit and Loss A/c
Particulars Amount
Survey expenses (fire) 10,000
Additional reserve (fire ) opening 50,000
Commission paid- Fire 90,000
Marine 1,08,000
Management expenses Fire 1,45,000
Marine 4,00,000
Profit on sale of land 60,000
Miscellaneous receipts 5,000
Depreciation 35,000
Directors fees 5,000
Auditors fees 1,200
Bad debts Fire 5,000
Marine 12,000
Commission on reinsurance Fire 60,000
Marine 30,000
Claims paid and outstanding Fire 1,08,000
Marine 3,80,000
Premium less reinsurance Fire 6,00,000
Marine 10,80,000
Reserve for unexpired risk (opening) Fire 2,50,000
Marine 8,20,000
Bad debts recovered 1,200
Share transfer fees 800
Difference in exchange (cr) 300
Interest and dividend received 14,000
In addition to usual reserve additional reserve in case of fire insurance is to be increased by 5% of net
premium

7. From the following particulars of Star Insurance Co Ltd prepare separate Revenue A/c, for fire and marine
business and profit and loss A/c for the year ending 31-3-2018 and Balance Sheet as on that date
Particulars Amount Particulars Amount
Investment 4,06,980 Share Capital(4000 shares of Rs.100 4,00,000
each)
Free Hold Premises 3,06,412 Claims admitted but not paid- Fire 4,620
Marine 9,808
Lease hold Premises 12,604 Due to reinsurance Fire 2,471
Marine 4,143
Agents balances 46,212 Interest and dividends 19,512
Sundry debtors 17,918 Other receipts 807
Income tax on interest and dividend 4,513 Premium received Fire 3,56,418
Marine 8,59,960
Claims paid and outstanding – Fire 1,02,412 Creditors 44,962
Marine 2,61,512
Expenses of management - – Fire 96,512
Marine 1,42,218
Commission - Fire 34,921
Marine 62,857
Interest accrued 919
Office furniture 14,761
Preliminary expenses 90,212
Cash and bank balances 1,01,738
17,02,701 17,02,701
Provision for unexpired risk is to be made at 50% of premium received for fire insurance business and 100%
of premium for marine business.

8. The following is the trial balance of National Risk Insurance company as on 31-3-2108
Debit Balance Amount Credit Balance Amount
Claims paid Fire 74,315 Reserve for expired risks Fire 1,67,495
Marine 40,000 Marine 80,000
Commission Fire 45,500 Premium Fire 2,83,932
Marine 15,090 Marine 1,20,000
Management Expenses Fire 1,24,696 Claims o/s Fire (1/4/17) 5,085
Marine 75,000 Interest and dividend 34,692
Depreciation 15,419 Share Capital 2,50,000
Loss on sale of investment 23,169 Investment Reserve 10,690
Income tax 10,625 Agents Balance 2,612
Agents balances 57,404 P&L appropriation A/c 33,581
Government securities 3,86,921 Provision for tax 43,618
Outstanding premium 4,019 Sundry Creditors 4,919
Interest accrued on investment 6,028 Premium deposits 14,000
Advance on deposits 12,122
Cash at bank 65,650
Furniture 94,666
10,50,624 10,50,624
Adjustments
1. Reserve for unexpired risk to be provided at 50% on each case
2. Claims outstanding on 31/3/18 in respect of fire Rs. 3,137
3. Provide Rs.20,000 towards taxation
Prepare final accounts of the Insurance Company