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CHAPTER SEVEN

Recording Life Insurance

Transactions
7.1 INTRODUCTION
Similar to business enterprises and in accordance

with the Egyptian laws which govern insurance

activities, insurance companies are required to

maintain some registers for each insurance branch.

For instance, Policies Register must include all

polices concluded and their details such as

policyholder name and address, issuing date and

number of the policy, the insurance premium, and

so on. Total amounts in this register are

journalized periodically in the general journal.

Claims Register in which all insurance claims are

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recorded, including all required details. Total

amounts of this register are recorded in the general

journal.

Mediators and Agents Register which is

assigned for recording all data belonging the

middlepersons who mediate in conducting

insurance transactions. Agreements and Treaties

Register which includes information about the

reinsurance transactions accepted from other

companies and reinsurance transactions ceded to

other companies.

General Cash Journal is devoted for recording

all cash receipts and payments. Also, totals of

subsidiary cash registers are recorded periodically

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in addition to other payments and receipts that do

not relate to a specific type of insurance business.

The General Journal, in which all subsidiary

journal totals are recorded periodically in addition

to the transactions that do not relate to specific

subsidiary journal. The General Ledger includes

assets, liability, revenues, expenses, and equity

accounts. Of course, the financial statements of

the life insurance branch are prepared from this

book.

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7.2 THE INSURANCE PREMIUMS:
Life insurance policy is a contract between the

insurance company (the insurer) and a determined

person (the insured). On payment of premium, the

insurance company is obliged or liable to pay to

that person or anyone else known as the

beneficiary, at a specific date or on the insured’s

death date, a certain amount of money.

On the other hand, the consideration paid by

the policyholder (the insured person) to the life

insurance company is termed the ‘premium’.

Insurance premiums represent the basic source of

revenues to the insurance company.

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 As discussed previously, the insurance

companies are obliged to cede or give up a certain

percentage of their premiums to the Egyptian

Reinsurance Company. Additionally, they can

optionally cede another percentage of their

premiums to other companies, whether local or

foreign companies.

On the same time, the insurance companies

often accept reinsurance premiums from other

companies. Accordingly, insurance premiums take

the following classifications.

7.2.1 Direct premiums:

Direct premiums are premiums which are obtained

from the company’s direct customers. The

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company records the following journal entries

regarding direct premiums:

a) When the premiums are accrued, the

following journal entry is passed:

Premiums receivable-life xxx

Direct premiums-life (net) xxx
Issue fees xxx
Supervision fees xxx

For example, the amount of direct premiums is

L.E.500,000. In addition, issue fees and

supervision fees amounted L.E.5,000 and

L.E.2,500, respectively. The following journal

entries are passed:

b) When the premiums are collected, the

following journal entry is recorded:

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Cash xxx
Premiums receivable-life xxx

For example, the amount of direct premiums is

L.E.500,000. In addition, issue fees and

supervision fees amounted L.E.5,000 and

L.E.2,500, respectively. The following journal

entries are passed:

Premiums receivable-life 507,500

Direct premiums-life (net) 500,000
Issue fees 5,000
Supervision fees 2,500
Cash 507,500
Premiums receivable-life 507,500

7.2.2 Reinsurance premiums accepted:

An insurance company receives reinsurance

transactions from other insurance companies. The

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company will get premiums revenues from such

other companies, thus the company is obliged to

cover a certain percentage of claims paid by such

other companies, which represents an expense for

the company. Furthermore, an insurance company

must pay its share in the commissions paid by

such reinsurance companies, that also represent an

expense for the company.

Reinsurance process includes three types of

reinsurance transactions.

(1) Compulsory (obligatory) reinsurance:

In this type of reinsurance transactions, the

insurance company is obligated to reinsure certain

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percentage of its direct insurance transactions in

Egypt to another insurance company

(2) Treaty reinsurance:

According to this type, reinsurance transactions

are made between insurance companies on the

basis of agreements (treaties) among them. The

agreement or treaty is effective for a given period.

such contracts provide an arrangement whereby a

certain class or type of business written is covered

on an agreed percentage of each outstanding

policy.

(3) Facultative (optional) reinsurance:

As its name means, the insurance company is free

or has its right to choose the preferable or

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appropriate kind of risks and the company for

reinsurance transactions.

The company records the following journal

entries regarding reinsurance premiums accepted:

a) When the reinsurance premiums accepted

are accrued, the following journal entry is

passed:

Egyptian reinsurance company xxx

Treaty reinsurance company xxx
Facultative reinsurance company xxx
Reinsurance premiums accepted-life xxx

b) When the reinsurance premiums accepted

are collected, the following journal entry is

recorded:

Cash xxx
Egyptian reinsurance company xxx

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Treaty reinsurance company xxx
Facultative reinsurance company xxx

7.2.3 Reinsurance premiums ceded:

An insurance company cedes insurance

transactions to other reinsurance companies. The

company will leave premiums revenues to such

other companies, thus the company is qualified to

receive a certain percentage of claims which have

been paid by it from other reinsurance companies,

which represents retrievable expenses for the

company. Furthermore, other reinsurance

companies must pay their share in the

commissions paid by the company, that also

represent a retrievable expense for the company.

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 The company records the following journal

entries regarding reinsurance premiums ceded:

a) When the reinsurance premiums ceded are

accrued, the following journal entry is

recorded:

Reinsurance premiums ceded-life xxx

Egyptian reinsurance company xxx
Treaty reinsurance company xxx
Facultative reinsurance company xxx

b) When reinsurance premiums ceded are paid,

the following journal entry is recorded:

Egyptian reinsurance company xxx

Treaty reinsurance company xxx
Facultative reinsurance company xxx
Cash xxx

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7.3 PRODUCTION COSTS:
The major product for insurance company is the

insurance policies. Hence, the production costs

represent include the commission of the producers

and agents in addition to their salaries and other

expenses incurred in the production department.

Usually, commissions are calculated at a

determined percentage of the premiums of the first

three years of the policy for life insurance.

Journalizing the production commission is done as

follows:

(1) At the time of recording the accrual of

direct premiums, the commissions become

due and the following journal entry is made:

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Direct production commission xxx
Production commission payable xxx

(2) When the premiums are collected and

recorded, the calculated commissions are

credited to the producers’ and agents’

current accounts as follows:

Production commission payable xxx

Producers’ and Agents’ Accounts xxx

(3) When the commission is paid, the

following journal entry is done:

Producers’ and Agents’ Accounts xxx

Cash xxx

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7.4 REINSURANCE COMMISSION ON
PREMIUMS ACCEPTED:
As the insurance company receives revenues of

premiums accepted from other insurance

companies, it must pay commission to reinsurance

companies on premiums accepted from these

companies. In such a situation, the insurance

company is regarded as a reinsurance company

and the other company is considered the

originating company.

The following journal entries are recorded with

respect to such commissions:

(1) When reinsurance commission on

premiums accepted from other companies is

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 accrued, the following journal entry is

passed:

Reinsurance commission on premiums

accepted-life xxx
Egyptian reinsurance company xxx
Treaty reinsurance company xxx
Facultative reinsurance company xxx

(2) On payment of commission, the following

journal entry is prepared:

Egyptian reinsurance company xxx

Treaty reinsurance company xxx
Facultative reinsurance company xxx
Cash xxx

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7.5 REINSURANCE COMMISSION ON
PREMIUMS CEDED:
As the company cedes the premiums revenues to

other reinsurance companies, it qualifies and has

the right to receive commission from the

reinsurance companies on premiums ceded. The

following journal entries are recorded:

(1) When the reinsurance commission on

premiums ceded is accrued, the following

journal entry is made:

Egyptian reinsurance company xxx

Treaty reinsurance company xxx
Facultative reinsurance company xxx
Reinsurance commission on premiums
ceded-life xxx

(2) Upon collection of commission, the

following journal entry is done:

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Cash xxx
Egyptian reinsurance company xxx
Treaty reinsurance company xxx
Facultative reinsurance company xxx

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7.6 INSURANCE CLAIMS:
The most important item of expenditure of the

insurance company is insurance claims

(compensations or remunerations). On basis of

terms the life insurance contracts, claims for

insured amounts are due in the following cases:

1. Death of the insured person.

2. Maturity of the policy.

3. Surrender (giving up or liquidation) of the

policy.

Also, claims may take other form such as in

case of pensions, annuities and prizes that must be

granted to policy holders.

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 In all insurance businesses, claims are

considered the most important type of expenditure

element incurred by insurance companies. The

most common types of insurance claims are:

a) Direct claims that are submitted directly by

policyholders to the insurance company.

b) Reinsurance claims on premiums accepted

which are submitted by the ceding companies

to the insurance company regarding the

reinsurance transactions accepted.

c) Reinsurance claims on premiums ceded that are

submitted by the insurance company to

reinsurance companies with respect to the

reinsurance transactions ceded.

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 Such types of claims are treated as follows:

1) Direct Claims:
All due claims are recorded in claim register. The

total amounts of claims are recorded on a

periodical basis in the general journal. For

example, if the due claims for a given period were

as follows (amounts in millions L.E.): 50 by

death, 30 by maturity, 10 by surrender, 7 pension

and annuities, and 3 in the form of prizes. The

following general journal is made:

Claims-life 100
By death 50
By maturity 30
By surrender 10
Pension & annuities 7
Prizes 3
Claims payable-life Or
Current accounts of insured persons 100
Accrual of claims.

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 On paying claims, the insurance company

deducts from the claims the amount of uncollected

premiums, loans and their interests. For instance,

if the following deductions are accrued: 10

millions premiums, 8 millions loans, and 2

millions interests on loans, the journal entry for

paying of claims is as below:

Claims payable-life 100

(or insured persons’ accounts)
Premiums receivable 10
Loans receivable 8
Interest receivable 2
Cash (net amount) 80

2) Reinsurance Claims on Premiums Accepted:

Reinsurance claims on premiums accepted may be

recorded by the insurance company using one

journal entry at the payment of claims or two

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 journal entries, one when the claims are accrued

and the other at payment of claims. Using one

journal entry will be as follows:

Reinsurance claims on premiums accepted-life xxx

Cash xxx

3) Reinsurance Claims on Premiums Ceded:

Reinsurance claims on premiums ceded is

recorded by the insurance company using two

journal entries, one when the claims are accrued

and the other on collection of the claims. Accrual

of reinsurance claims on premiums ceded is

recorded as follows:

Egyptian Reinsurance company xxx

Treaty Reinsurance company xxx
Facultative Reinsurance company xxx
Reinsurance claims on premiums ceded-life xxx

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 Collection of reinsurance claims on premiums

ceded is recorded as follows:

Cash xxx
Egyptian Reinsurance company xxx
Treaty Reinsurance company xxx
Facultative Reinsurance company xxx

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7.7 REVENUES FROM INVESTMENTS:
Like other business institutions, insurance

companies undertake investments transactions. As

a result, revenues yielded from such activity are

considered the second most important source of

income for the life insurance company after the

premiums.

These sources of revenues are in the form of:

* Dividends on equity investments.

* Interest on bonds, loans, and bank deposits.

* Rental revenues of real estates, and

* Other revenues.

Practically, revenues from investments are

recorded as usual (accrual and collection). On the

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other hand, any expense related to investments,

such as real estates expenses, is also recorded as

usual. Every insurance company prepares an

accounts named “ Net Income from Investments”

at year-end. Such account takes the following pro

forma account:

XXX Insurance Company

Net Income From Investments (Life Branch)
For the Year Ended Dec. 31, 2019
Real estate expenses: -Securities revenues xxx
maintenance, taxes, -Interest revenues on loans xxx
depreciation, etc. xxx -Real estate revenues xxx
-Interest on bank deposits xxx
-Revenues on amounts
invested against the
Reserve Fund for
purchasing of
Governmental Bonds xxx
xxx xxx

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7.8 PROFIT COMMISSION ON
REINSURANCE TRANSACTIONS:
In practice, insurance agreements between the

insurance company and other companies

regarding reinsurance transactions usually include

that the ceding company is entitled to receive a

particular percentage of the profits achieved by

the reinsurance company. Profit commissions

include two types as follows:

1- Profit Commission on Transactions of

Reinsurance Ceded:
In this type of profit commission, the insurance

company cedes part of its insurance transactions

to the reinsurance company. Accordingly, profit

commission is considered as a revenue for the

ceding company. The accrual of profit

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 commission on reinsurance ceded is recorded as

follows:

Egyptian Reinsurance company xxx

Treaty Reinsurance company xxx
Facultative Reinsurance company xxx
Profit Commission on reinsurance
transactions ceded xxx

Upon collection of profit commission, the

following journal entry is made:

Cash xxx
Egyptian Reinsurance company xxx
Treaty Reinsurance company xxx
Facultative Reinsurance company xxx

2- Profit Commission on Transactions of

Reinsurance Accepted:
In this type of profit commission, the insurance

company accepts percentage of insurance

transactions from other insurance companies.

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 Accordingly, profit commission is considered as

an expense for the accepting company. The

accrual of profit commission on reinsurance

accepted is recorded as follows:

Profit Commission on reinsurance

transactions accepted xxx
Egyptian Reinsurance company xxx
Treaty Reinsurance company xxx
Facultative Reinsurance company xxx

On payment of profit commission, the following

journal entry is made:

Egyptian Reinsurance company xxx

Treaty Reinsurance company xxx
Facultative Reinsurance company xxx
Cash xxx

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7.9 INTEREST ON RESERVE FUND OF
REINSURANCE TRANSACTIONS:
Reinsurance agreements made among insurance

companies may involve provision stating that the

ceding company has the right to withhold or keep

a certain percentage of the premiums ceded to the

reinsurance company. Such withheld amounts are

called “Reserve Fund of Reinsurance

transactions”.

In effect, this reserve is intended to provide a

guarantee against the payment of accrued claims.

Accordingly, interest at an agreed upon rate is due

on the withheld reserve fund. In the real world, the

reserve fund of reinsurance transactions withheld

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from the premiums ceded is taken into account

only for the foreign reinsurance companies.

Interest on reserve fund of reinsurance

transactions is as follows:

1) Interest expense on reserve fund of

reinsurance transactions ceded:
The original insurance company records the

following journal entries:

* At the time of withholding or deducting the

reserve fund from the amount of reinsurance

premiums ceded and accrued to the foreign

companies, the following journal entry is recorded

at the payment to the foreign companies:

Foreign Insurance Companies xxx

Reserve Fund of Reinsurance Transactions
Ceded xxx
Cash xxx
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* Accrual of interest on reserve fund:

Interest Expense on Reserve Fund of

Reinsurance Transactions Ceded xxx
Foreign Insurance Companies xxx

* Payment of interest expense on reserve fund:

Foreign Insurance Companies xxx

Cash xxx

2) Interest revenue on reserve fund of

reinsurance transactions accepted:
In such case, foreign reinsurance companies

withhold the reserve fund. So, the Egyptian

company is considered as a reinsurance company

in regard to the foreign company. At the collection

of the premiums accepted from the foreign

companies, the Egyptian reinsurance company

records the following journal entry:

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Reserve Fund of Reinsurance Transactions
Accepted xxx
Cash xxx
Foreign Insurance Companies xxx

On accrual of interest revenue on reserve fund

of reinsurance transactions accepted, the following

journal entry is done:

Foreign Insurance Companies xxx

Interest revenue on Reserve Fund of
Reinsurance Transactions accepted xxx

When interest revenue on reserve fund is

collected, the following journal entry is passed:

Cash xxx
Foreign Insurance Companies xxx

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General Example:
The following transactions are done by Cairo

Insurance Company- life insurance branch, during

the month of May 2019:

Cairo Insurance Company has an agreement

with Alexandria Insurance to reinsure 25% of its

life policies with Alexandria Co. The following

information is provided:

(1) The net premiums for policies concluded

during the month totaled L.E.4,000,000. Issue

fees were L.E.20,000 and supervision fees

amounted L.E.15,000.

(2) Reinsurance premiums accepted totaled

L.E.1,500,000.

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(3) Production commission due agents and

producers on direct premiums amounted

L.E.350,000. Reinsurance commission on

premiums ceded to Alexandria Co. totaled

L.E.100,000. Reinsurance commission on

premiums accepted from ceding companies

totaled L.E.140,000.

(4) The net premiums for renewed polices

during the month amounted L.E.1,000,000.

(5) Direct premiums collected from the new and

renewed polices during the month totaled

L.E.4,750,000.

(6) Commission paid to agents and producers

during the month totaled L.E.325,000.

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(7) Direct claims during the month reached

L.E.1,210,000, as follows (L.E.): 600,000 by

death, 380,000 by maturity, 80,000 by

surrender, 100,000 pension and annuities, and

50,000 prizes.

Reinsurance claims on premiums ceded

represents 25% of the direct claims.

Reinsurance claims on premiums accepted

from ceding companies totaled L.E.410,000, as

follows (L.E.): 150,000 by death, 125,000 by

maturity, 50,000 by surrender, 60,000 pension

and annuities, and 10,000 prizes.

(8) Total claims paid of L.E.1,050,000.

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(9) Profit commission on reinsurance

transactions accepted during the month

amounted L.E.37,500.

(10) Profit commission on reinsurance

transactions ceded during the month amounted

L.E.32,500.

(11) Interest on reserve fund withheld on

reinsurance transactions ceded of L.E.7,000.

(12) Interest on reserve fund withheld by the

foreign companies on reinsurance transactions

accepted was L.E.6,500.

Instructions:
Prepare journal entries for the above transactions.

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 Solution
No. Description L.E. L.E.
(1) Premiums Receivable-life 4,035,000
Direct premiums-life (net) 4,000,000
Issue fees 20,000
Supervision fees 15,000
Reinsurance premiums ceded 1,000,000
Reinsurance companies 1,000,000
4,000,000 × 25%
(2) Reinsurance companies 1,500,000
Reinsurance premiums accepted 1,500,000
(3) Direct production commission 350,000
Production commission payables 350,000
Reinsurance companies 100,000
Reinsurance commission on
premiums ceded 100,000
Reinsurance commission on
premiums accepted 140,000
Reinsurance companies 140,000
(4) Premiums receivable-life 1,000,000
Direct premiums-life 1,000,000
Premiums on renewed polices
Reinsurance premiums ceded 250,000
Reinsurance companies 250,000
25% of renewed polices
(5) Cash 4,750,000
Premiums receivable-life 4,750,000
(6) Production commission payable 325,000
Cash 325,000
(7) Direct claims: 1,210,000
By death 600,000
By maturity 380,000
By surrender 80,000
Pension and annuities 100,000
Prizes 50,000
Claims payable 1,210,000

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 Reinsurance companies 302,500
Reinsurance claims on
premiums ceded 302,500
25% of direct claims.
Reinsurance claims on premiums
accepted: 410,000
By death 150,000
By maturity 125,000
By surrender 50,000
Pension and annuities 60,000
Prizes 25,000
Reinsurance companies 410,000
(8) Claims payable 1,050,000
Cash 1,050,000
(9) Profit commission on reinsurance
transactions accepted 37,500
Reinsurance companies 37,500
(10) Reinsurance companies 32,500
Profit commission on reinsurance
transactions ceded 32,500
(11) Interest expense on reserve fund of
reinsurance transactions ceded 7,000
Foreign insurance companies 7,000
(12) Foreign insurance companies 6,500
Interest revenue on reserve fund of
reinsurance transactions accepted 6,500

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