University Of Mumbai

PROJECT WORK ON
"A Study On Accounting And Statutory Requirements
Of Insurance Companies"

A Project Submitted to
University of Mumbai for partial completion of the degree of
Master of commerce (Accountancy) SEMESTER III
Under the faculty of commerce

Submitted By:
SALVI MANSI DILIP
Roll No: 41

Under the Guidance of

Cosmopolitan’s
Valia C. L. College of Commerce & Valia L.C. College of Arts
D.N. Nagar, Andheri (West), Mumbai-400053.

2023-24
 Cosmopolitan’s
Valia C. L. College of Commerce & Valia L.C. College of Arts
D.N. Nagar, Andheri (West), Mumbai-400053.

CERTIFICATE
This is to certify that Ms. SALVI MANSI DILIP has worked and duly completed
her Project Work for the degree of MASTER OF COMMERCE
(ACCOUNTANCY) under the Faculty of Commerce in the subject of
ACCOUNTANCY and her project is entitled, A STUDY ON ACCOUNTING
AND STATUTORY REQUIREMENTS OF INSURANCE COMPANIES
under my supervision.

I further certify that the entire work has been done by the learner under my
guidance and that no part of it has been submitted previously for any Degree or
Diploma of any University.
It is her own work and facts reported by her personal findings and investigations.

Internal Examiner, External Examiner,

Coordinator, Principal,

DR. MRS. SHOBHA MENO

 DECLARATION

I the under designed SALVI MANSI DILIP her by, declare that the work
embodied in this project work title A STUDY ON ACCOUNTING AND
STATUTORY REQUIREMENTS OF INSURANCE COMPANIES, forms my
own contribution to the research work carried out under the guidance of PROF.
MANJIRI RAJADHYAKSHA is a result of my own research work and has not
been previously submitted to any other university fir any other Degree/ Diploma to
this or any other University.
Wherever reference has been made to previous works of others, it has been clearly
indicated as such and included in the bibliography.
I, here by further declare that all information of this document has been obtained
and presented in accordance with academic rules and ethical conduct.

Name and Signature of the Learner

SALVIMANSI DILIP

Certified by
Name and signature of the Guiding Teacher
 ACKNOWLEDGMENT

To list who all have helped me is difficult because they are so

numerous and the depth is so enormous.
I would like to acknowledge the following as being idealistic
channels and fresh dimensions in the completion of this project.
I take this opportunity to thank the UNIVERSITY OF
MUMBAI for giving me chance to do this project.
I would like to thank my PRINCIPAL, DR. MRS. SHOBHA
MENON for providing the necessary facilities required for
completion of this project.
I take this opportunity to thank our COORDINATOR, PROF.
AKSHA MEMON for his moral support and guidance.
I would also like to express my sincere gratitude towards my
project guide PROF. MANJIRI RAJADHYAKSHA whose
guidance and care made the project successful.
I would like to thank my COLLEGE LIBRARY, for having
provided various reference books and magazines related to my
project.
Lastly, I would like to thank each and every person who directly
or indirectly helped me in the completion of the project
especially MY PARENTS AND PEERS who supported me
throughout my pro INDEX.
 INDEX
Chapter Sub Topic Page no
no point
1 Introduction
1.1 Introduction 1
1.2 Definition 5
1.3 Functional 6

1.4 History 7
1.5 Features 10
1.6 Features 14

1.7 Advantages & 15

Disadvantages
1.8 Scope 22
1.9 Research Problems 23
1.10 Types 26
1.11 Insurance Act, 1938 32

2 Research Methodology 35
2.1 Source of data 36

2.2 Accounting 37
 2.3 Schedule ‘B’ [General 41
Insurance]

2.4 Schedule C-Auditor's 51

Report

2.5 Special Items In Insurance 54

Accounts

Unexpired Risks Reserve

Re-Insurance
Co-Insurance
2.6 Life Insurance 57

Types of Policies
Financial Statement
Special Items In Accounts
2.7 Schedule A [Life 66
Insurance]

3 Review Of Literature 76

4 Data Analysis 79

5 Conclusion. Suggestions & 89

Reference

6 Bibliography 102
 1

Chapter No. 1
Introduction
 2

1.1 INTRODUCTION

Under an insurance contract, one party, called insurer, undertakes to

indemnify the losses suffered for some specified causes, by the other
party called insured, in consideration for a fixed premium. Insurance
contracts may be characterized generally by the following:

(a) The purchaser of an insurance contract makes an initial payment or

deposit to the insurance company in advance of the possible occurrence
of an insured event.
(b) When the insurance contract is made, the insurance company does
not know if, how much, or when amounts will be paid under the
contract.

The document that contains terms of insurance contract is called

Insurance Policy. The amount payable by the Insured to the Insurer is
known as Premium. Premium for the first year of the policy is known as
the first year's premium.
 3

Premium for subsequent year is known as renewal premium. The

amount payable by the Insurer to the Insured is known as claim. In the
case of life insurance, claim may arise on death of the insured or
maturity of the policy. In case of general insurance, claim arises only on
loss.

Insurance business in India is governed by the Insurance Act, 1938,

Insurance Regulatory and Development Authority Act, 1999 and
Insurance Regulatory and Development Authority Regulations, 2002.

Everyone is exposed to various risks. Future is very uncertain, but there

is way to protect one’s family and make one’s children’s future safe.
Life Insurance companies help us to ensure that our family’s future is
not just secure but also prosperous. Life Insurance is particularly
important if you are the sole breadwinner for your family. The loss of
you and your income could devastate your family. Life insurance will
ensure that if anything happens to you, your loved ones will be able to
manage financially.

This study titled “Study of Consumers Perception about Life Insurance

Policies” enable les the Life Insurance Companies to understand how
consumer’s perception differs from person to person. How a consumer
selects, organizes and interprets the service quality and the product
quality of different Life Insurance Policies, offered by various Life
Insurance Companies.
 4

Insurance is a tool by which fatalities of a small number are

compensated out of funds (premium payment) collected from plenteous.
Insurance companies pa y back for financial losses arising out of
occurrence of insured events e.g. in personal accident policy death due
to accident, in fire policy the insured events are fire and other allied
perils like riot and strike, explosion etc. hence insurance safeguard
against uncertainties.

It provides financial recompense for losses suffered due to incident of

unanticipated events, insured with in policy of insurance. Moreover,
through a numb r of acts of parliament, specific types of insurance are
legally enforced in our country e.g. third party insurance under motor
vehicles Act, public liability insurance for hand leers of hazardous
substances under environment protection Act. Etc. 3 WHAT IS
INSURANCE It is a commonly acknowledged phenomenon that there
are countless risk s in every sphere of life .for property, there are fire
risk; for shipment of goods. There are perils of sea; for human life there
are risk of death or disability; and so on .the chances of occurrences of
the events causing losses are quite uncertain because there may or may
not take place. Therefore, with this view in mind, people facing
common risks come together and make their small contribution to the
common fund.
 5

1.2 DEFINITION

Insurance has been defined to be that in, which a sum of money as a

premium is paid by the insured in consideration of the insurer’s bearings
the risk of paying a large sum upon a given contingency.

The insurance thus is a contract whereby: a. b. and c.

Certain sum, termed as premium, is charged in consideration, Against

the said consideration, a large amount is guaranteed to be paid by insurer
who received the premium, The compensation will be made in certain
definite sum, i.e., the loss or the policy amount which ever may be, and
d. The payment is made only upon a contingency More specifically,
insurance may be defined as a contact between two parties, wherein one
party (the insurer) agrees to pay to the other party (the insured) or the
beneficiary, a certain sum upon a given contingency (the risk) against
which insurance is required.
 6

1.3 FUNCTIONAL

Insurance is a cooperative device to spread the loss caused by a

particular risk over some persons exposed to it and who agree to insure
themselves against the risk.

Thus, the insurance is;

1. A co-operative device to spread the risk;

2. The system to spread the risk over many persons who are insured
against the risk;
3. The principle to share the loss of each member of the society based on
the probability of loss to their risk; and
4. The method to provide security against losses to the insured.

Similarly, another definition can be given.

Insurance is a cooperative device of distributing losses falling on an

individual or his family over many persons, each bearing a nominal
expenditure and feeling secure against heavy loss.
 7

1.4 HOW DID INSURANCE GET STARTED?

Insurance has a history that dates back to the ancient world. Over the
centuries, it has developed into a modern business of protecting people
from various risks. The industry has been profitable for many years and
has been an important aspect of private and public long-term finance.

In the ancient world, the first forms of insurance were recorded by the
Babylonian and Chinese traders. To limit the loss of goods, merchants
would divide their items among various ships that had to cross treacherous
waters. One of the first documented loss limitation methods was noted in
the Code of Hammurabi, which was written around 1750 BC. Under this
method, a merchant receiving a loan would pay the lender an extra amount
of money in exchange for a guarantee that the loan would be cancelled if
the shipment were stolen. The first to insure their people were the
Achaemenian monarchs, and insurance records were submitted to notary
offices. Insurance was also noted for gifts of substantial value. These gifts
were given to monarchs. By recording their gifts in a register, givers
would receive help from a monarch by proving the gift’s existence if they
were in trouble.
 8

As the ancient world evolved, maritime loans with rates based on

favourable seasons for traveling surfaced. Around 600 BC, the Greeks
and Romans formed the first types of life and health insurance with their
benevolent societies.

These societies provided care for families of deceased citizens. Such

societies continued for centuries in many different areas of the world and
included funerary rituals. In the 12th century in Anatolia, a type of state
insurance was introduced. If traders were robbed in the area, the state
treasury would reimburse them for their losses.

Standalone insurance policies that were not tied to contracts or loans

surfaced in Genoa in the 14th century. This is where the first
documented insurance policy came from in 1347. In the following
century, standalone maritime insurance was formed. With this type of
insurance, premiums varied based on unique risks. However, the
separation of insurance from contracts and loans was a major change
that would influence insurance for the rest of time.

The first book printed on the subject of insurance was penned by Pedro
de Santarem, and the literature was published in 1552. As the
Renaissance ended in Europe, insurance evolved into a much more
sophisticated form of protection with several varieties of coverage. Until
the late 17th century, many areas were still dominated by friendly
societies that collected money to pay for medical expenses and funerals.
However, the end of the 17th century introduced a rapid expansion of
London’s importance in the world of trade
 9

This also increased the need for cargo insurance. London became a hub
for companies or people who were willing to underwrite the ventures of
cargo ships and merchant traders. Lords of London, one of London’s
leading insurers, is still a major insurance business in the city.

Modern insurance can be traced back to the city’s Great Fire of London,
which occurred in 1666. After it destroyed more than 30,000 homes, a
man named Nicholas Barbon started a building insurance business. He
later introduced the city’s first fire insurance company. Accident
insurance was made available in the late 19th century, and it was very
similar to modern disability coverage.

In U.S. history, the first insurance company was based in South Carolina
and opened in 1732 to offer fire coverage. Benjamin Franklin started a
company in the 1750s, which collected contributions for preventing
disastrous fires from destroying buildings. As the 1800s arrived and
passed, insurance companies evolved to include life insurance and several
other forms of coverage.

No type of insurance was mandatory in the United States until the 1930s.
At that time, the government created Social Security. In the 1940s, GI
insurance surfaced. It helped ease the financial difficulties of women
whose husbands died while fighting in World War II. It wasn’t until the
1980s that the need for car insurance grew enough that steps were taken
to make it mandatory. Although insurance is an established business, it
is still changing and will change in the future to meet the evolving needs
of consumers.
 10

1.4 Features

From the above explanation, we can find the following characteristics,

which are generally observed in life, marine, fire, and general
insurances.

1. Sharing of Risk

Insurance is a device to share the financial losses which might befall an

individual or his family on the happening of a specified event.

The event may be the death of a breadwinner to the family in the case
of life insurance, marine-perils in marine insurance, fire in
fire insurance, and other certain events in general insurance,
e.g., theft in burglary insurance, accident in motor
insurance, etc. The loss arising from these events, if insured,
are shared by all the insured in the form of a premium.
 11

2. Co-operative Device

The most important feature of every insurance plan is the cooperation of

a large number of persons who, in effect, agree to share the financial loss
arising due to a particular risk that is insured

Such a group of persons may be brought together voluntarily or through

publicity or solicitation of the agents.

An insurer would be unable to compensate for all the losses from his
own capital. So, by insuring or underwriting a large number of persons,
he can pay the amount of loss.

Like all cooperative devices, there is no compulsion here on anybody to

purchase the insurance policy

3. Value of Risk

The risk is evaluated before insuring to charge the share of an insured,

herein called, consideration or premium. There are several methods of
evaluation of risks.

If there is an expectation of more loss, a higher premium may be

charged. So, the probability of loss is calculated at the time
of insurance.
 12

4. Payment at Contingency

The payment is made at a certain contingency insured. If the

contingency occurs, payment is made.

Since the life insurance contract is a contract of certainty, because the

contingency, the death, or the expiry of the term will certainly occur, the
payment is certain. The contingency is the fire or the marine perils, etc.,
may or may not occur in other insurance contracts.

So, if the contingency occurs, payment is made. Otherwise, no amount is

given to the policy-holder. Similarly, in certain policies, payment is not
certain due to the uncertainty of a particular contingency within a
particular period.

5. Payment of Fortuitous Losses

Another characteristic of insurance is the payment of fortuitous losses. A

fortuitous loss is unforeseen and unexpected and occurs as a result of
chance. In other words, the loss must be accidental.

The law of large numbers is based on the assumption that losses are
accidental and occur randomly.

For example, a person may slip on an icy sidewalk and break a leg. The
loss would be fortuitous. Insurance policies do not cover
intentional issues.
 13
6. Amount of Payment

The amount of payment depends on the value of loss due to the particular
insured risk provided insurance is there up to that amount. In life
insurance, the purpose is not to make good the financial loss
suffered. The insurer promises to pay a fixed sum on the happening of an
event.

If the event or the contingency takes place, the payment does fail due if
the policy is valid and in force at the time of the event, like property
insurance, the dependents will not be required to prove the occurring of
loss and the amount of loss.

It is immaterial in life insurance what was the amount of loss was at the
time of contingency. But in the property and general insurances, the
amount of loss and the happening of loss is required to be proved.

7. A large number of Insured Persons

To spread the loss immediately, smoothly, and cheaply, a large number of

persons should be insured. The co-operation of a small number of persons
may also be insurance, but it will be limited to the smaller area.

The cost of insurance for each member may be higher.

So, it may be unmarketable. Therefore, to make the insurance cheaper,

it is essential to ensure many persons or property because the
lessor would be the cost of insurance, so the lower would be
premium.
 14

1.5 IMPORTANCE

The world we live in is full of uncertainties and risks. Individuals,

families, businesses, properties and assets are exposed to different types
and levels of risks. These include risk of losses of life, health, assets,
property, etc. While it is not always possible to prevent unwanted events
from occurring, financial world has developed products that protect
individuals and businesses against such losses by compensating them
with financial resources. Insurance is a financial product that reduces or
eliminates the cost of loss or effect of loss caused by different types of
risks.

Apart from protecting individuals and businesses from many kinds of

potential risks, the Insurance sector contributes significantly to the
general economic growth of the nation by providing stability to the
functioning of businesses and generating long-term financial resources
for the industrial projects. Among other things, Insurance sector also
encourages the virtue of savings among individuals and generates
employments for millions, especially in a country like India, where
savings and employment are important In life, there is no such thing as
a guarantee. There may be a loss of life, as well as some business
accidents. The loss is difficult to bear in both of these cases. As a result,
insurance provides.
 15

1.6 ADVANTAGES

Financial protection

In the event of death, he/she family member may be able to receive

financial assistance from insurance. In the event of a business loss,
insurance provides financial assistance to help the company recover and
rebuild. In the case of health insurance, he or she may be eligible for
financial assistance in treating his or her health.

Distribution of Risk/Spreading of Risk

The underlying concept of insurance is to spread the risk across a large
number of people. People pay a certain amount to an insurance
company up to a certain time or lifetime and receive a refund if a loss
occurs. Risk in life or business cannot be eliminated, but it can be
reduced, distributed, or shared. So, in this case, insurance companies
bear risks in order to redistribute business and individual risks among
insurance companies.
 16

Stability of Living Standard

Insurance provides financial support to ensure that people can sustain and
maintain stability in living standards against an unforeseen risk of losses.

Encouragement to Savings

In insurance, people pay a certain amount of money for a fixed time or

lifetime based on an agreement and this helps to develop a habit of saving
money. Knowing the importance of saving, people start doing saving in
various fields.

Job Opportunities

Insurance, like any other business, is a successful business model. It

targets many entrepreneurs and business owners. As a result, there is a lot
of cash flow in the business. They need employees to handle and maintain
cash flow and run the business, so they open vacancies in various
positions based on qualifications and provide job opportunities.

Promotes foreign/international trades

many years ago, people were afraid to engage in international trade
because of the possibility of accidents while transporting goods via ships,
roads, or other modes of transportation. However, in today's
competitive global economy, insurance companies bear all of those risks
and compensate for losses. They also protect an exporter of goods and
services from non-payment by a foreign buyer.
 17

Loan Facilities

If a company has purchased insurance, banks are more likely to lend to

that company. No, the problem for large businesses is getting a loan from
a bank, but if you have a small business or a start-up and have done
business insurance, your chances of getting a loan from a bank increase.

Stability of Business

Even if your company suffers unexpected losses, insurance can help you
manage your losses. Taking out an insurance policy for your employees
will encourage them to come into the office. As a result, insurance aids in
the smooth operation of the office. And business will become more stable.

Competitiveness

If you have insurance, then there will not be any tension related to
business, and life, and health. so, you can focus on your task and compete
with others.

Society and Country Welfare

The insurance company collects a large amount of money from an

insured and they invest in the development of trade and industry, which
finally leads the society and country toward development.
 18

Preserves Confidentiality

If there is some death in the family then the death benefit or to whom the
death benefits is payable will not be recorded publicly. This helps to
preserve confidentiality for the beneficiary of the policy.

Tax-free money

Another advantage of insurance is that the funds are often tax-delayed.

The benefits and all other earnings you may earn under the policy are tax-
free, except in the case of employer insurance schemes where benefits are
regarded as normal taxable income.

Short Term Coverage

The insurance coverage period can be changed. If you have short-term

needs then you can choose shorter-length insurance.

Long Term Coverage

Long-term insurance is an option if you have long-term needs. It may be

more cost-effective in some situations in the long run compared to short-
term coverage. You can use life insurance to pay for other policies such
as pensions or long-term care without paying taxes on the difference.
Furthermore, by utilizing features such as this, you can improve your
cash accumulation by increasing your life insurance death benefit.
 19

Easy to Apply

There are many genuine sources where you can get insurance
information and compare insurance of one company with another and
can apply online form as well.

1.7 DISADVANTAGES

Term and Conditions

Insurance does not cover every type of loss that can happen to an
individual or a business. They have terms and conditions, and they only
provide financial assistance based on those terms. Please read the terms
and conditions of any insurance before purchasing it. Also, seek
assistance from the appropriate person in order to obtain accurate
information about an insurance policy.

Long Legal formalities

It may take a long legal procedure for receiving your claims.

Fraud Agency

There are lots of fraud agencies available in the market so, before taking
any type of insurance does exercise you or take the help of an expert.
 20

Potential crime incidents

It could lead to social crimes as the users of the policy are tempted to
commit crimes to get the insured money.

Temporary and Termination

Insurance is temporary and will be terminated when the individual no

longer belongs to the group.

Can be Expensive

Often, the cost can vary depending on the policy and other factors.
However, if you buy at the right time, for the right reasons, and with the
right coverage, you may be able to get the best price.

Rise in Subsequent Premium

Many insurance firms have different subsequent premium rates, and you
should pay special attention to them. Before you purchase a policy,
ensure that you know at the start, whether your premium is guaranteed
throughout the policy, or whether inflation shifts from time to time.

Adds Expense for Some Projects

In some construction projects where compensation for the workers for
injuries are common, then insurance for this company can be expensive.
They are expensive as compared to other IT and accounting offices.
 21

Annoying and Frustration many claims in insurance are required

fulfilling and checking all of them takes time and energy which annoys
the people and may lead to frustration. So, it's better good to know
insurance you have done properly.

In general, in all types of insurance, Cash surrender values are typically

lower than premiums paid in the first few years of the policy, and a policy
owner may not be able to recover all of the premiums paid if the policy
is surrendered.
 22

1.8 SCOPE

The main aim of a life insurance cover is to secure the needs of

dependents after one’s untimely death. In addition to the emotional
suffering, the financial insecurity arising out of losing the primary earner
can be immense. This is the reason why most personal finance experts
suggest that life insurance should be the main part of one’s investment
planning. In India, life insurance is yet to reach its full potential as the
awareness about life insurance products is pretty low. While the Indian
life insurance industry has witnessed a lot of transformation ever since
the entry of private players, it still has a long way to go in terms of
protecting the entire population of our country.
 23

1.9 RESEARCH PROBLEMS

1. Lack of trust

This is a reason why many individuals don`t bother with insurance. Many
insurance firms fail to pay claims, and they don`t own up to offering some
benefits. Therefore, most people just see insurance as one of the
unnecessary expenses. Many insurance firms do shut down because of
financial challenges and individuals who are the victims of the loss don`t
even think twice about purchasing insurance policies.

2. Competition
 24

Today, there are many insurance firms on the market and therefore
there is an intensive challenge for insurers. Each company looks for the
best way of selling their insurance products in the best possible way and
targets a particular group of individuals. Most insurance businesses,
especially the new ones are the most doubted companies. In fact, most
people trust some of the existing insurance firms compared to the new
businesses since the new enterprises are operated on a thin line
between failure and success—and no one will want to take such risks
with the little among of money that they have.

3. Mismanagement

As the owner of the insurance business, one is solely responsible for all
issues that his or her clients may have regarding the management of the
insurance business. All insurance firms that are mismanaged can`t hide
their faults for a longer time without the clients noticing. As time move,
there will be a constant increase in the number of clients` complaints, and
if his or her insurance firm is not transparent, then he or she will lose more
customers. Also, incompetent management may cost the company a lot,
particularly if they have poor communication with their clients.

4. Economic instability

When the country`s economy is down, all insurance companies will be

affected. At such situations, the rates can be affected such that the
insurance companies might be forced to increase their rates, just like
interest rates on credit facilities provided by financial institutions.
 25

Of course, no client will appreciate this, even if it is stated clearly in the

contract that the insurance rates might change from time to time.
Therefore, such situations might create a bad image for a company since
costumers can spread the information about a service or product they
were not happy with very fast.

5. Weak manpower

Non-professionals run many of the insurance companies today. In fact,

many people think that what it takes to be an insurance professional is just
some knowledge of monetary studies with no specialized training. Indeed,
this has majorly affected the dependability and operations of insurance
firms in this century.

6. Excessive politicization of the insurance industry

Without a doubt, politics play a significant role in insurance companies`

operations depending on the power play & calculations that are dominant
in the operating domains of the insurance firms. The premiums to pay, the
outcomes of risk investigations, and the damages and benefits to pay
depend on political conspiracy sometimes.

These are some of the biggest challenges that are faced by insurance
companies. They include mismanagement, economic instability, lack of
trust, and competition among others.
 26

1.10 TYPES

Insurance business is basically of two types - Life and General.

These terms are defined under the Insurance Act,, 1938 as
follows.

(i) "Life insurance business" means the business of effecting

contracts of insurance upon human life, including any
contract whereby the payment of money is assured on death
(except death by accident only) or the happening of any
contingency dependent on human life and shall be deemed to
include the granting of disability and indemnity benefit;
annuities upon human life, and superannuation allowance and
annuities [S. 2(11)].

(ii) "General insurance business" means fire, marine or

miscellaneous insurance business, whether carried on singly
or in combination with one or more of them [S. 2(6B)].
 27

EXHIBIT 1:
LIFE INSURANCE VS GENERAL INSURANCE
S.N Particulars Life Insurance Other Insurance

1 Timing of Insurable amount is payable Reimbursement of

Payment of either on the happening of loss or liability
Claim the event (death) or at the incurred will be paid
maturity at the happening of the
uncertain event only

2 Value of Policy Insurance can be done for The sum payable

any value depending upon under it is limited to
the premiums the insured is the amount of loss
willing to pay actually suffered or
the liability incurred,
notwithstanding the
amount of policy.

3 Duration of These are long term These are only for one
Contract contracts running over the year though renewable
number of after year.
Years.
4 Assurance Life insurance is known Other policies are
also by another term known as insurance
'assurance' since the insured
gets an assured sum.

5 Determination Actuaries periodically A portion of the

of Liability estimate the liability under premium is carried
existing policies. On that forward as a provision
basis a valuation balance for unexpired liability
sheet is prepared to and the balance net of
determine the profit claims and expenses is
taken as profit or loss.
 28
General Insurance:

"General insurance business" means fire, marine or miscellaneous

insurance business, whether carried on singly or in combination with one
or more of them [S. 2(6B)].

Fire Insurance:

“Fire insurance business” means the business of effecting, otherwise than

incidentally to some other class of insurance business, contracts of
insurance against loss by or incidental to fire or other occurrence
customarily included among the risks insured against in fire insurance
Policies [S. 2(6A)].

Fire insurance provides protection against damage to property caused

by accidents due to fire, lightening or explosion, whereby the explosion
is caused by boilers not being used for industrial purposes. Fire insurance
also includes damage caused due to other perils like storm, tempest or
flood; burst pipes; earthquake; aircraft; riot, civil commotion; malicious
damage; explosion; impact and so on.

Marine insurance:

"Marine insurance business" means the business of effecting contracts of

insurance upon vessels of any description, including cargoes, freights
and other interests which may be legally insured, in or in relation to such
vessels, cargoes and freights, goods, wares, merchandise and property of
whatever description insured for any transit, by land or water, or both,
 29

and whether or not including warehouse risks or similar risks in addition

or as incidental to such transit; and includes any other risks customarily
included among the risks insured against in marine insurance policies [S.
2(13A)].

Marine insurance basically covers three risk areas, namely, hull, cargo
and freight. The risks which these areas are exposed to are collectively
known as "Perils of the Sea".

Marine cargo policy provides protection to the goods loaded on a ship

against all perils between the departure and arrival warehouse.
Therefore, marine cargo covers carriage of goods by sea as well as
transportation of goods by land.

Marine hull policy provides protection against damage to ship caused

due to the perils of the sea. Marine hull policy covers three-fourth of the
liability of the hull owner (ship-owner) against loss due to collisions at
sea. The remaining 1/4th of the liability is looked after by associations
formed by ship-owners for the purpose (P and I Clubs).

Marine Freight policy provides protection against risk of loss of freight of

the shipping company where the owner of goods promises to pay the
freight when the cargo is safely delivered at the port of destination and
the cargo is destroyed on the way.
 30

Miscellaneous Insurance:

"Miscellaneous insurance business" means the business of effecting

contracts of insurance which is not principally or wholly of any kind or
kinds included in clause (6A), (11) and (13A) [S. 2(13B)]. As per the
Insurance Act, all types of general insurance other than fire and marine
insurance are covered under miscellaneous insurance. Some of the
examples of miscellaneous insurance are Motor, Workmen's
Compensation / Employers Liability, Public/ Product Liability,
Engineering, Aviation, Personal Accident, Health, Money insurance, etc.

While it may not be possible to tell in advance, which person will suffer
the losses, it is possible to work out how many persons on an average
out of the group, may suffer losses. When risk occurs, the loss is made
good out of the common fund .in this way each and every one shares the
risk .in fact they share the loss by payment of premium, which is
calculated on the likelihood of loss .in olden time, the contribution make
the above.

The arrangement in which an individual or concern sets up a private

fund to meet the future risk. If some losses happened in the future the
firm meet s the loss out of the fund. While it may be called ‘self-
insurance’ it is not a single matter of fact, insurance at all because there
is no hedge, no shifting, or distributing the burden of risk a mong larger
Persons. It is merely a provision to meeting the unforeseen event. He re
the insured becomes the insurer for the particular risk. But it can be
effectively worked only when there is wide distribution of risks
subjected the same hazard. b) Partnership A partnership firm may also
 31

carry on the insurance business for the sake of prof it. Since it is not an
entity distinct from the persons comprising it, the personal liability of
partners in respect to the partnership debts is unlimited. In case of
huge loss the partners may have to pay from their own personal funds
and it will not be profitable to them to start s insurance business.
 32

1.11 INSURANCE ACT, 1938

The provisions of insurance Act, 1938 as amended up-to

date, relevant to Insurance Accounting, are summed up
below

SEPARATION OF ACCOUNTS AND FUNDS (S. 10)

Where the insurer carries on business of more than one of the following
classes, namely, life insurance, fire insurance, marine insurance or
miscellaneous insurance, he shall keep a separate account of all receipts
and payments in respect of each such class of insurances business and
where the insurer carries on business of miscellaneous insurance
whether alone or in conjunction with business of another class, he shall,
unless the Authority waives this requirement in writing, keep a separate
account of all receipts and payments in respect of each of such sub
classes of miscellaneous insurance business as may be prescribed in this
behalf.

ACCOUNTS AND BALANCE SHEET [S. 11]

Every insurer, in respect of insurance business transacted by him and in

respect of his shareholders’ funds, shall, at the expiration of each
financial year, prepare with reference to that year
 33

A balance-sheet,
A profit and loss account.
A separate account of receipts and payments,
A revenue account in accordance with the regulations made by
the IRDA.
A separate account relating to funds of shareholders; and
A separate account relating to funds of policy-holders.

AUDIT (S. 12)

The balance sheet, profit and loss account, revenue account and profit
and loss appropriation account of every insurer, shall, unless they are
subject to audit under the Indian Companies Act, be audited annually by
an auditor, and the auditor shall in the audit of all such accounts have the
powers of exercise the functions vested in, and discharge the duties and
he subject to the liabilities and penalties imposed on, auditors of
companies by the Indian Companies Act.

REGISTER OF POLICIES AND REGISTER OF

CLAIMS[S-14]

Register of Policies: Every insurer shall maintain a register or record of

policies, in which shall be entered, in respect of every policy issued by
the insurer, the name and address of the policyholder, the date when the
policy was effected and a record of any transfer, assignment nomination
of which the insurer has notice
 34

Register of Claims: Every insurer shall maintain a register or record of

claims, in which shall be entered every claim made together with the
date of the claim, the name and address of the claimant and the date on
which the claim was discharged, or, in the case of a claim which is
rejected, the date of rejection and the grounds therefor

INVESTMENTS (S. 27 & S. 27B]

No insurer carrying on general insurance business shall invest any part

of his assets otherwise than in the approved investments listed in this S.
27B

LIMITS ON COMMISSION [S. 40]

No person shall pay any remuneration or reward whether by way of

commission or otherwise for soliciting or procuring insurance business
in India to any person except an insurance agent or an intermediary or
insurance intermediary

No insurance agent shall be paid or contract to be paid by way of

commission or as remuneration in any form an amount exceeding, in the
case of general insurance business of any other class, fifteen per cent of
the premium
 35

Chapter No. 2
Research Methodology
 36

2.1 SOURCE OF DATA

The study was conducted by the means of personal interview with

respondents and the information given by they were directly recorded on
questionnaire. For the purpose of analysing the data it is necessary to
collect the vital information. There are two types of data, this are
1. Primary Data
2. Secondary Data

PRIMARY DATA:

Primary data is collected from books, internet and questionnaire. The

data is collected from questionnaire. The questionnaire is filled from
Friend, Family and Colleagues through Google forms them.

SECONDARY DATA:

Secondary data is collected from social networking sites, books, etc

 37

2.2 ACCOUNTING

Premium: In case of Tariff business such as fire insurance, motor

insurance etc., the premium is charged as per tariff. In case of non-tariff
business the premium is charged as per the guideline rates fixed by the
respective technical departments of Head Office of the insurer with
certain discretion to the operating offices while underwriting such
business. According to section 64VB of the Insurance Act, 1938; no risk
can be assumed by an insurer unless premium is received in advance.

Recently, in addition to collection of premium by

cash/cheque/DD/BG/CD, IRDA has permitted to collect the premium by
other manner of receipt of premium such as credit card/ Debit card/E-
transfer etc. However, the same has to be collected before assumption of
the risk Sometimes, same business is shared by more than one insurer as
desired by the insured (co insurance). The lead insurer has to collect the
full premium.
However, only own share of premium is accounted as premium income
and the balance is shown as amount due to other co-insurers.
Premiums from short-duration insurance contracts, such as most
general insurance contracts, are intended to cover expected claim costs
resulting from insured events that occur during a fixed period of short
duration. Therefore, premiums from short-duration contracts ordinarily
are earned and recognized as revenue evenly as insurance protection is
provide
 38

Commission: Commission is paid at different rates on different

classes of insurance business. No commission is paid on certain classes
of business. Commission becomes payable as soon as business is
underwritten. However, the same is paid on monthly basis. In case of
cancellation of a policy due to cheque dishonour or any other reason,
commission/brokerage payable is reversed or recovered if already paid
to the agent/broker.

Claims: Claims outgo is the major outgo of an insurance company.

Claim processing is done by the respective technical department and
approved by the competent authority. The payment and accounting of
the claims is done by the accounts department. In case of claims on
policies involving co-insurance arrangements, the full amount of claim
is paid by the lead insurer, but only own share of claim is

Accounted as claims cost and the balance is shown as amount

recoverable from the co-insurers. Where a claim is reported but not
settled by the end of the financial year, an adequate provision is made
for such outstanding claims. At the end of each financial year, as
required by IRDA the actuarial valuation of the claims liability of an
insurer is made by the appointed actuary, and the shortfall, if any is
provided as Claims Incurred But Not Reported (IBNR)/ Claims Incurred
But Not Enough Reported (IBNER).
Expenses of Management: For managing insurance business certain
administrative expenses are incurred such as Employees' remuneration
and welfare benefit, managerial remuneration, travel, conveyance,
rent, rate and taxes, repairs, printing and stationery, communication,
legal and professional charges, medical fees, auditors fees & expenses,
advertisement and publicity, interest and bank charges, depreciation,
and others. These expenses are first aggregated and then apportioned
to each class of business viz. Fire, Marine and Miscellaneous revenue
 39

account on a reasonable and equitable basis. Any major expenses (5

laces or in excess of 1% of net premium, whichever is higher) are
required to be shown separately. Section 40C of the Insurance Act,
1938 prohibits an insurer to spend as expenses of management in
excess of the limits prescribed in the Act. An adequate provision for
outstanding expenses is made in the accounts at the end of the
financial year. A provision for leave encashment, gratuity etc. at the
end of each financial year is made on actuarial basis
Co-Insurance: The lead insurer accounts its own share as premium
and balance is shown as payable to other co-insurers. Similarly in case
of claim, the entire claim amount is paid by the lead insurer to the
policy holder, but only his own share is accounted as claims expense
and the balance is shown as amount due from the co-insurer. Lead
insurer also recovers certain percentage of the co-insurer's share for
managing co-insurance arrangement as a leader. Co-insurance accounts
are settled as per the agreement between the co-insurers.
Usually, there is a provision for charging of interest for delayed
settlement of accounts. At the end of each financial year, provision for
outstanding claims, if any is communicated by the lead insurer and
balance confirmation certificates are exchanged by all co-insurers.

Investments: Investments are assets held by an insurer for earning

income by way of dividends rent and interest or for capital appreciation
or for other benefits to the insurer. An insurance company makes
investment, apart from earning income, to comply with the statutory
requirements and also for meeting any unforeseen contingences and
claims. There are two main sources of investible funds viz., surplus
funds arising out of the business and income from interest and
dividends on existing investments. Sections 27B, 27C and 27D of the
 40

Insurance Act, 1938 lays down certain norms for investment of the
funds by an insurance company. The procedure to determine the value
of investments is laid down in the IRDA's Regulations for preparation of
financial statements. Further IRDA has also issued detailed guidelines
under IRDA (Investment) Regulations, 2001 for making investments by
the insurer.

IRDA prohibits any investment abroad out of policyholders' funds.

Accounting entries for investments are involved for buying selling
investments, receipts /
accrued and outstanding of interest, dividends, rent, and recording
impairments, write off and write down of certain investments. Cover the
insured for life. The insured does not receive money while he is alive;
the nominee receives the sum assured plus bonus upon death of the
insured. Endowment policies - Cover the insured for a specific period.
The insured receives money on survival of the term and is not covered
thereafter. Money back policies - The nominee receives money
immediately on death of the insured. On survival the insured receives
money at regular intervals during the term. These policies cost more
than endowment with profit policies. Annuities / Children s policies -
The nominee receives a guaranteed amount of money at a pre-
determined time and not immediately on death of the insured. On
survival the insured receives money at the same pre-determined time.

These policies are best suited for planning children s future education
and marriage costs. Pension schemes - are policies that provide
benefits to the insured only upon retirement. If the insured dies during
the term of the policy, his nominee would receive the benefits either as
a lump sum or as a pension every month. Since a single policy.
 41

2.3 SCHEDULE ‘B’ [GENERAL INSURANCE]

PART I-ACCOUNTING PRINCIPLES

The following Accounting Principles are relevant for preparation of
financial statements.

Applicability of Accounting Standards: Every Balance Sheet,

Revenue Account, Receipts and Payments Account [Cash Flow
statement] and Profit and Loss Account of an insurer shall be in
conformity with the Accounting Standards (AS) issued by the ICAI, to
the extent applicable to insurers carrying on life insurance business,
except that:

• Accounting Standard 3 - Cash Flow Statements shall be prepared only

under the Direct Method.

• Accounting Standard 17 - Segment Reporting shall apply to all

insurers irrespective of the requirements regarding listing and turnover
mentioned therein.
Premium: Premium shall be recognised as income when due. Premium
shall be recognised as income over the contract period or the period of
risk, whichever is appropriate. Premium received in advance, which
represents premium income not relating to the current accounting period,
shall be disclosed separately in the financial statements.

Reserve for Unexpired Risk: A reserve for unexpired risks shall be

created as the amount representing that part of the premium written
which is attributable to, and to be allocated to the succeeding accounting
periods and shall not be less than as required under section 64 V(1) (ii)
(b) of the Act, i.e.
 42

Reserves for unexpired risks in respect of –

(i) Fire and miscellaneous business, 50 per cent.,

(ii) Marine cargo business, 50 per cent., and

(iii) Marine hull business, 100 per cent of the premium, net of re
insurances, during the preceding twelve months.
Premium Received in Advance, which represents premium received
prior to the commencement of the risk, shall be shown separately under
the head 'Current Liabilities' in the financial statements.

Premium Deficiency: Premium deficiency shall be recognised if the

sum of expected claim costs, related expenses and maintenance costs
exceeds related reserve for unexpired risks.

Acquisition Costs: Acquisition costs, if any, shall be expensed in the

period in which they are incurred. Acquisition costs are those costs that
vary with, and are primarily related to, the acquisition of new and
renewal insurance contracts. The most essential test is the obligatory
relationship between costs and the execution of insurance contracts (i.e.
commencement of risk)

Claims: The components of the ultimate cost of claims to an insurer

comprise the claims under policies and specific claims settlement costs.
Claims under policies comprise the claims made for losses incurred, and
those estimated or anticipated under the policies following a loss
occurrence. A liability for outstanding claims shall be brought to
account in respect of both direct business and inward reinsurance
business.
 43

The components of the ultimate cost of claims to an insurer comprise

the claims under policies and specific claims settlement costs. Claims
under policies comprise the claims made for losses incurred, and those
estimated or anticipated under the policies following a loss occurrence.
A liability for outstanding claims shall be brought to account in respect
of both direct business and inward reinsurance business.

The liability shall include:

(a) Future payments in relation to unpaid reported claims;

(b) Claims Incurred but Not Reported (IBNR) including inadequate

reserves [sometimes referred to as Claims Incurred But Not Enough
Reported (IBNER)], which will result in future cash/ asset outgo for
settling liabilities against those claims. Change in estimated liability
represents the difference between the estimated liability for outstanding
claims at the beginning and at the end of the financial period.

The accounting estimate shall also include claims cost adjusted for
estimated salvage value if there is sufficient degree of certainty of its
realisation. Claims made in respect of contracts where the claims
payment period exceeds four years shall be recognised on an actuarial
basis, subject to regulations that may be prescribed by the Authority,
In such cases, certificate from a recognised actuary as to the fairness of
liability assessment must be obtained. Actuarial assumptions shall be
suitably disclosed by way of notes to the account.
Procedure to determine the value of investments: An insurer shall
determine the values of investments in the following manner:
 44

(a) Real Estate - Investment Property: The value of investment property

shall be determined at historical cost, subject to revaluation at least
once in every three years. The change in the carrying amount of the
investment property shall be taken to Revaluation Reserve. The insurer
shall assess at each balance sheet date whether any impairment of the
investment property. has occurred. Gains/losses arising due to changes
in the carrying amount of real estate shall be taken to equity under
'Revaluation Reserve'. The bases for revaluation shall be disclosed in
the notes to accounts. The Authority may issue directions specifying the
amount to be released from the revaluation reserve for declaring bonus
to the policyholders. For the removal of doubt, it is clarified that except
for the amount that is released to policyholders as per the Authority's
direction, no other amount shall be distributed to shareholders out of
Revaluation Reserve Account. An impairment loss shall be recognised
as an expense in the Revenue/ Profit and Loss Account immediately,
unless the asset is carried at re-valued amount. Any impairment loss of
a re-valued asset shall be treated as a revaluation decrease of that
asset and if the impairment loss exceeds the corresponding revaluation
reserve, such excess shall be recognised as an expense in the
Revenue/Profit and Loss Account.
(b) Debt Securities: Debt securities, including government securities
and redeemable preference shares, shall be considered as "held to
maturity" securities and shall be measured at historical cost subject to
amortisation.

(c)Equity Securities and Derivative Instruments that are traded in

active markets: Listed equity securities and derivative instruments that
are traded in active markets shall be measured at fair value on the
balance sheet date. For the purpose of calculation of fair value, the
lowest of the last quoted closing price at the stock exchanges where
 45

the securities are listed shall be taken. The insurer shall assess on each
balance sheet date whether any impairment of listed equity
security/derivative instrument has occurred. Unrealised gains/ losses
arising due to changes in the fair value of listed equity shares and
derivative instruments shall be taken to equity under the head 'Fair
Value Change Account". The Authority may issue directions specifying
the amount to be released from the Fair Value Change Account for
declaring bonus to the policyholders. For the removal of doubt, it is
clarified that except for the amount that is released to policyholders as
per the Authority's prescription, no other amount shall be distributed
to shareholders out of Fair Value Change Account.
Also, any debit balance in Fair Value Change Account shall be reduced
from profit/free reserves while declaring dividends. The insurer shall
assess, on each balance sheet date, whether any impairment has
occurred. An impairment loss shall be recognised as an expense in
Revenue/Profit and Loss Account to the extent of the difference between
the re-measured fair value of the security/investment and its acquisition
cost as reduced by any previous impairment loss recognised as expense
in Revenue/Profit and Loss Account. Any reversal of impairment loss,
earlier recognised in Revenue/Profit and Loss Account, shall be
recognised in Revenue/Profit and Loss Account.

(d) Unlisted and other than actively traded Equity Securities and
Derivative Instruments: Unlisted equity securities and derivative
instruments and listed equity securities and derivative instruments that
are not regularly traded in active markets shall be measured at
historical cost. Provision shall be made for diminution in value of such
investments. The provision so made shall be reversed in subsequent
periods if estimates based on external evidence show an increase in the
value of the investment over its carrying amount. The increased
 46

carrying amount of the investment due to the reversal of the provision

shall not exceed the historical cost. For the purposes of this regulation,
a security shall be considered as being not actively traded, if as per
guidelines governing mutual funds laid down from time to time by SEBI,
such a security is classified as "thinly traded'.
Loans: Loans shall be measured at historical cost subject to impairment
provisions. The insurer shall assess the quality of its loan assets and shall
provide for impairment. The impairment provision shall not be lower
than the amounts derived on the basis of guidelines prescribed from time
to time by the Reserve Bank of India that apply to companies and
financial institutions.
Catastrophe Reserve: Catastrophe reserve shall be created in
accordance with norms, if any, prescribed by the Authority. Investment
of funds out of catastrophe reserve shall be made in accordance with
prescription of the Authority.

PART II - DISCLOSURES FORMING PART OF

FINANCIAL STATEMENTS

A. The following shall be disclosed by way of notes to the Balance

Sheet:

1. Contingent Liabilities:

Partly-paid up investments
Underwriting commitments outstanding
Claims, other than those under policies, not acknowledged as debts
Guarantees given by or on behalf of the company
 47

Statutory demands/liabilities in dispute, not provided for

Reinsurance obligations to the extent not provided for in accounts
Others (to be specified)

2. Encumbrances to assets of the company in and outside India.

3. Commitments made and outstanding for Loans, Investments and

Fixed Assets

4. Claims, less reinsurance, paid to claimants in/outside India.

5. Actuarial assumptions for determination of claim liabilities in the case

of claims where the claims payment period exceed four years.
6. Ageing of claims - distinguishing between claims outstanding for
more than six months and other claims.

7. Premiums, less reinsurance, written from business in/outside India.

8. Extent of premium income recognised, based on varying risk pattern,

category wise, with basis and justification therefore, including whether
reliance has been placed on external evidence.

9. Value of contracts in relation to investments, for:

Purchases where deliveries are pending;
Sales where payments are overdue.

10. Operating expenses relating to insurance business: basis of allocation

of expenditure to various classes of business.

11. Historical costs of those investments valued on fair value basis.

 48

12. Computation of managerial remuneration.

13. Basis of amortisation of debt securities.

14. (a) Unrealised gain/losses arising due to changes in the fair value of
listed equity shares and derivative instruments are to be taken to equity
under the head 'Fair Value Change Account' and on realisation reported
in profit and loss Account.
(b) Pending realisation, the credit balance in the 'Fair Value Change
Account' is not available for distribution.
15. Fair value of investment property and the basis therefor.
16. Claims settled and remaining unpaid for a period of more than six
months as on the balance sheet data.

B. The following accounting policies shall form an integral part of

the financial statements:
1. All significant accounting policies in terms of the accounting
standards issued by the ICAI, and significant principles and policies
given in Part I of Accounting Principles. Any other accounting policies
followed by the insurer shall be stated in the manner required under
Accounting Standard AS 1 issued by the ICAI.

2. Any departure from the accounting policies as aforesaid shall be

separately disclosed with reasons for such departure.

C. The following information shall also be disclosed:

1. Investments made in accordance with any statutory requirement

should be disclosed separately together with its amount, nature, security
and any special rights in and outside India.
 49

2. Segregation into performing/ non performing investments for purpose

of income recognition as per the directions, if any, issued by the
Authority.

3. Percentage of business sector-wise.

4. A summary of financial statements for the last five years, in the

manner as may be prescribed by the Authority.

5. Accounting Ratios as may be prescribed by the Authority.

6. Basis of allocation of Interest, Dividends and Rent between Revenue

Account and Profit and Loss Account.

PART III-GENERAL INSTRUCTIONS

Following general instructions are relevant for preparation of financial

statements.
1. The corresponding amounts for the immediately preceding financial
year for all items shown in the Balance Sheet, Revenue Account and
Profit and Loss Account should be given.

2. The figures in the financial statements may be rounded off to the

nearest thousands

3. Interest, dividends and rentals receivable in connection with an

investment should be stated as gross value, the amount of income tax
deducted at source being included under advance taxes paid'.

4. Income from rent shall not include any notional rent.

 50

5. (1) for the purposes of financial statements, unless the context

otherwise requires –

(a) The expression provision' shall, subject to note II below mean any
amount written off or retained by way of providing for depreciation,
renewals or diminution in value of assets, or retained by way of
providing for any known liability or loss of which the amount cannot be
determined with substantial accuracy;

(b) the expression "reserve" shall not, subject to as aforesaid, include

any amount written off or retained by way of providing for depreciation,
renewals or diminution in value of assets or retained by way of
providing for any known liability;

(c) the expression capital reserve shall not include any amount regarded
as free for distribution through the profit and loss account; and the
expression "revenue reserve" shall mean any reserve other than a capital
reserve;

(d) The expression "liability" shall include all liabilities in respect of

expenditure contracted for and all disputed or contingent liabilities.
PART V - PREPARATION OF FINANCIAL
STATEMENTS

1. An insurer shall prepare the Revenue Account, Profit and Loss

Account [Shareholders' Account] and the Balance Sheet in Form B-RA,
Form B-PL, and Form B-BS, or as near thereto as the circumstances
permit.

Provided that an insurer shall prepare Revenue Accounts separately for

fire, marine, and miscellaneous insurance business and separate
schedules shall be prepared for Marine Cargo, Marine - Other than
 51

Marine Cargo and the following classes of miscellaneous insurance

business under miscellaneous insurance and accordingly application of
AS 17-Segment Reporting – shall stand modified.

(i) Motor

(ii) Workmen's Compensation/Employers' Liability

(iii) Public/Product Liability

(iv) Engineering

(v) Aviation

(vi) Personal Accident

(vii) Health Insurance

(viii) Others

2.4 SCHEDULE C-AUDITOR'S REPORT

The report of the auditors on the financial Statements of every insurer

shall deal with the matters Specified herein:

1. That they have obtained all the information and

explanations which, to the best of their knowledge and belief
were necessary for the purposes of their audit and whether
they have found them satisfactory;
 52

(a) Whether proper books of account have been maintained by the

insurer as far as appears from an examination of those books;

(b) Whether proper returns, audited or unaudited, from branches and

other offices have been received and whether they were adequate for the
purpose of audit;

(c) Whether the Balance sheet, Revenue account, Profit and Loss
account and the Receipts and Payments Account dealt with by the
report are in agreement with the books of account and returns;
(e) Whether the actuarial valuation of liabilities is duly certified by the
appointed actuary including to the effect that the assumptions for such
valuation are in accordance with the guidelines and norms, if any, issued
by the Authority, and/or the Actuarial Society of India in concurrence
with the Authority.

2. The auditors shall express their opinion on:

(a) (i) Whether the balance sheet gives a true and fair view of the
insurer's affairs as at the end of the financial year/period;

(ii) Whether the revenue account gives a true and fair view of the surplus
or the deficit for the financial year/period;
(iii) Whether the profit and loss account gives a true and fair view of the
profit or loss for the financial year/period;

(iv) Whether the receipts and payments account gives a true and fair
view of the receipts and payments for the financial year/period;
(b) The financial statements stated at (a) above are prepared in
accordance with the requirements of the Insurance Act, 1938 (4 of
 53

1938), the Insurance Regulatory and Development Authority Act, 1999

(41 of 1999) and the Companies Act, 1956 (1 of 1956), to the extent
applicable and in the manner so required.

(c) Investments have been valued in accordance with the provisions of

the Act and these Regulations.

(d) The accounting policies selected by the insurer are appropriate and
are in compliance with the applicable accounting standards and with the
accounting principles, as prescribed in these Regulations or any order or
direction issued by the Authority in this behalf.

3. The auditors shall further certify that:

(a) They have reviewed the management report and there is no apparent
mistake or material inconsistencies with the financial statements;
(b) The insurer has complied with the terms and conditions of the
registration stipulated by the Authority.
4. A certificate signed by the auditors [which shall be in
addition to any other certificate or report which is required
by law to be given with respect to the balance sheet]
certifying that:

(a) They have verified the cash balances and the securities relating to the
insurer's loans, reversions and life interests (in the case of life insurers)
and investments;
(b) To what extent, if any, they have verified the investments and
transactions relating to any trusts undertaken by the insurer as trustee;
and
 54

(c) No part of the assets of the policyholders' funds has been directly or
indirectly applied in contravention of the provisions of the Insurance
Act, 1938 (4 of 1938) relating to the application and investments of the
policyholders' funds.

2.5 SPECIAL ITEMS IN INSURANCE ACCOUNTS

UNEXPIRED RISKS RESERVE

In most cases General Insurance policies are renewed annually except

in some cases where policies are issued for a shorter period. Since
insurers close their accounts on a particular date, not all risks under
policies expire on that date. Many policies extend into the following
year during which the risk continues. Therefore on the closing date,
there is unexpired liability under various policies which may occur
during the remaining term of the policy beyond the year and therefore,
a provision for unexpired risks is made at normally 50% in case of Fire
Insurance, Miscellaneous Insurance and Marine Cargo Insurance; and
100% of in case of Marine Hull Insurance. This reserve is based on the
net premium income earned by the General Insurance Company during
the year.
RE-INSURANCE

If an insurer does not wish to bear the whole risk of policy written by
him, he may reinsure a part of the risk with some other insurer. In such a
case the insurer is said to have ceded a part of his business to other
insurer. The reinsurance transaction may thus be defined as an
agreement between a *ceding company' and 'reinsurer' whereby the
former agreed to 'cede' and the latter agrees to accept a certain specified
share of risk or liability upon terms as set out in the agreement.
 55

A ceding company is the original insurance company which has

accepted the risk and has agreed to *cede' or pass on that risk to
another insurance company or a reinsurance company. It may however
be emphasised that the original insured does not acquire any right
under a reinsurance contract against the reinsurer. In the event of loss,
therefore, the insured's claim for full amount is against the original
insurer. The original insurer has to claim the proportionate amount
from the reinsurer.
There are two types of reinsurance contracts, namely, facultative
reinsurance and treaty reinsurance. Under facultative reinsurance each
transaction has to be negotiated individually and each party to the
transaction has a free choice, i.e., for the ceding company to offer and
the reinsurer to accept. Under treaty reinsurance a treaty agreement is
entered into between ceding company and the reinsurer whereby the
volume of the reinsurance transactions remain within the limits of the
treaty.

The concepts regulation and supervision are often mixed. In this module,
regulators establish “the rules of the game,” such as regulations and guidelines
related to an Insurance Act (or Acts). Supervisors are the “referees” with the
function of overseeing that these rules are complied with and dealing with
consequences of non-compliance. This often requires supervisors to apply
judgement when making their determinations and decisions. Understanding this
difference in the context of the specific allocation of responsibilities for the
regulatory and supervisory functions in a supervisor is useful. The word
“supervisor’ is used to include both regulators and supervisors. It also assumes
that supervisors are insurance supervisors. Supervisors, as determined by the
context, may be either the individuals working for a supervisory entity or
authority or the entity itself.
 56

CO-INSURANCE

In cases of large risks the business is shared between more than one
insurer under co-insurance arrangements at agreed percentages. The
leading insurer issues the documents, collects premium and settles
claims. Statements of Account are rendered by the leading insurer to the
other co-insurers. Accounting for premium, claims etc. under co-
insurance is done in the same manner as that of the direct business
except in respect of the following peculiar features.

Incoming co-insurance

(i) Premium: The co-insurer books the premium based on the

statement received from the leading insurer usually by issuing dummy
documents. Entries are made in the Premium Register from which the
Premium Account is credited and the Leading Insurer Company's
Account debited. In case the statement is not received, the premium is
accounted for on the basis of advices to ensure that all premium in
respect of risk assumed in any year is booked in the same year; share of
premium relatable to further extension/endorsements on policies by
the leading insurer are also accounted for on the basis of subsequent
advices. Reference to the relevant communications should be made
from the concerned companies to ensure that premium collected by
them and attributable to the company is recorded.

(ii) Claims Paid: Normally, on the basis of claims paid, advices

received from the leading insurer, the Claims Paid Account is debited
with a credit to the co-insurer. All such advices are entered into the
 57

Claims Paid Register. It is a practice to treat all claims paid advices

relating to the accounting year received up to 31st January of the
subsequent year from leading insurer as claims paid.

(iii) Outgoing co-insurance: The share of the insurer only for both
premium and claims has to be accounted under respective accounts.
The share of other co-insurers is credited or debited, as the case may
be, to their personal accounts and not routed through revenue
accounts .The management of a company is entrusted to a board of
directors who is elected by the shareholders from amongst themselves.
The company can operate insurance business and policyholders have
nothing to do with the management of the concern. But in life
insurance it is the practice to share certain portion of profit among the
certain policyholders. 11 d) Mutual fund companies The mutual fund
companies are co- operative association formed for the purpose of
effecting insurance on the property of its members. The policyholders
are themselves the shareholders of the companies each member is
insured as well as insured.

2.6 LIFE INSURANCE

TYPES OF POLICIES

(1) Life Insurance Contract: Life insurance is a contract between the

insurer and insured. The person who insures his life is called the insured.
The company which insures his life is called insurer. The insured is
required to pay some amount of money in regular intervals. These
payments are referred as premiums. A sum of assured money is paid to
the insured in case the policy holder successfully makes all the payments
 58

and the policy comes to an end. On the contrary if the insured dies of an
unexpected event the sum assured is paid to his dependents irrespective
of full payment of the policy amount. The insurance company pays the
money on death or after the policy period whichever occurs first. If an
insured is unable to continue to paying premiums on his life policy, he
has two options –
(i) He may discontinue the payment and convert the policy into a "Paid-
up" policy, which matures in the normal course; or
(ii) He may surrender the policy and in lieu thereof is paid an amount
calculated according to a fixed formula adopted by the company.
(2) Term Life Insurance: A term insurance policy is a pure risk cover
for a specified period of time. The sum assured is payable only if the
policyholder dies within the policy term. For instance, if a person buys 2
lakh policy for 15-years, his family is entitled to the money if he dies
within that 15-year period. If he survives the 15-year period, then he is
not entitled to any payment; the insurance company keeps the entire
premium paid during the 15-year period. There is no element of savings
or investment in such a policy. It is a 100 per cent risk cover. It simply
means that a person pays a certain premium to protect his family against
his sudden death. He forfeits the amount if he outlives the period of the
policy. Therefore the Term Insurance Policy comes at the lowest cost.

(3) Whole Life Policy: A Whole Life Policy is an insurance cover against
death, irrespective of when it happens. Under this plan, the
policyholder pays regular premiums until his death, following which the
money is handed over to his family.
(4) Endowment Policy: In an Endowment Policy, the sum assured is
payable even if the insured survives the policy term. If the insured dies
during the tenure of the policy, the insurance firm has to pay the sum
assured just as any other pure risk cover. A pure endowment policy is
also a form of financial saving, whereby if the person covered remains
 59

alive beyond the tenure of the policy. He gets back the sum assured with
some other investment benefits.

(5) Money back Policies: These policies are structured to provide sums
required as anticipated expenses (marriage, education, etc.) over a
stipulated period of time. A portion of the sum assured is payable at
regular intervals. On survival the remainder of the sum assured is
payable. In case of death, the full sum assured is payable to the insured.
The premium is payable for a particular period of time.

(6) Annuities: In an annuity, the insurer agrees to pay the insured a

stipulated sum of money periodically. The purpose of an annuity is to
protect against risk as well as provide money in the form of pension at
regular intervals. A person entering into an annuity contract agrees to
pay a specified sum of capital (lump sum or by instalments) to the
insurer. The insurer in return promises to pay the insured a series of
payments until insured's death. Generally, life annuity is opted by a
person having surplus wealth and wants to use this money after his
retirement. There are two types of annuities, namely, immediate and
deferred. In an immediate annuity, the insured pays a lump sum
Amount (known as purchase price) and in return the insurer promises
to pay him in instalments a specified sum on a monthly/quarterly/half-
yearly/yearly basis. A deferred annuity can be purchased by paying a
single premium or by way of instalments. The insured starts receiving
annuity payment after a lapse of a selected period (also known as
Deferment period). The amount paid to an insurance company as
consideration for the payment of annuities is classified under the head -
"consideration for the payment of annuities" - in the Revenue Account.
(7) Pension Plans: Insurance companies offer two kinds of pension
plans - endowment and unit linked. Endowment plans invest in fixed
 60
income products, so the rates of return are very low. Unit-linked
Insurance Plans (ULIPS), introduced by the private players, are hugely
popular, because they combine the benefits of life insurance policies
with mutual funds. A certain part of the premium is invested in listed
equities/debt funds/bonds, and the balance is used to provide for life
insurance and fund management expenses.
(8) With or Without Profit: An insurance policy can be with' or
'without' profit. In the former, bonuses declared, if any, after periodical
value allotted to the policy and are payable along with the contracted
amount. In 'without pro the contracted amount is paid without any
addition. The premium rate charged for a "with w is therefore higher
than for a 'without' profit policy. Apart from the guaranteed death
benefit assurance companies give the 'with-profits' policyholders
bonuses during the policy period which are allocations of surplus arising
from the life fund (see Para 9.3 below). There are usually two types of
bonuses: reversionary bonuses and terminal bonuses. Reversionary
bonuses are declared, often annually, during the policy term, normally
as a proportion of the sum assured (simple reversionary bonuses) or as
a proportion of the sum assured and previously declared bonuses
(compound reversionary bonuses). They increase the policyholders'
claim entitlement but are actually paid only when a claim arises.
Terminal bonuses are paid in addition to the ordinary reversionary
bonuses and are allocated only to policies becoming claims by death or
maturity.
FINANCIAL STATEMENTS

(1) Fund Accounting: Life Insurance Accounting follows the principles

of Fund Accounting. There are two main funds
(i) Life Insurance Fund (also known as Policyholders Fund) and
(ii) Shareholders Fund. The balances of the Funds and their investments
are shown separately in the Balance Sheet. The changes or movements
 61

in the funds/investments are shown separately in the Revenue / Profit

and Loss Account.

(2) Revenue Account: The movements during the accounting year in

the Life Insurance Fund (or Policyholders Fund) are shown in the
Revenue Account. Revenue account is also known as Policyholders
Account - Technical Account. The Revenue Account sets out all income
and expenses relating to the insurance business accrued during the
accounting year (see Para 10.5/Form A RA). The balance of Revenue
Account shows, not the 'profit', but the closing balance of the Life
Insurance Fund.
(3) Profit and Loss Account (Shareholders' Account - Non-Technical
Account): The movements during the accounting year in the
Shareholders Fund are shown in the Profit and Loss Account. It is also
known as Shareholders' Account - Non-Technical Account. It shows all
income and expenses relating to Shareholders' Account. It shows those
items not relating to insurance business (see Para 10.5/Form a-PL).

(4) Balance Sheet: (i) the balances of Shareholders' Fund and Policy
Holders Fund; as well as the related Fund Investments are shown in the
balance sheet (see Para 10.5/ Form A-BS).

(ii) Shareholders Fund includes share capital less preliminary expenses,

reserves and surplus and fair value change account.
(iii) Policyholders' Fund consists of Policy liabilities, Fair value change
relating to policy fund investments, Insurance reserves, Provision for
linked liabilities, Funds for future appropriations, Surplus allocated to
shareholders etc. The balance in the 'Funds for future appropriations'
represents funds, the allocation of which, either to participating
policyholders or to shareholders has not been determined at the
balance sheet date.
 62

(iii)Transfers to and from this fund reflect the excess or deficiency of

income over expenses and Appropriations in each accounting period
arising in the Company's policy- holder fund.
(iv)The Investments of a Life Insurance Company must be in accordance
with the provisions of Section 27 of the Insurance Act, 1938, read with
Rule 3 of the IRDA (Investment) Regulations, 2000. Accordingly, the
controlled fund of the company has to be invested in the specified
securities. The assets relating to Pension business, Annuity business and
Linked Life Insurance business shall not form part of Controlled Fund.
Separate norms are formulated for investing funds of Pension business
and Annuity business. The funds relating to Unit Linked Insurance
business are to be invested as per the pattern of investment offered to
and approved by the policyholders. However, the total investment in
other than approved category of investments shall at no time exceed
25% of the Fund.
SPECIAL ITEMS IN ACCOUNTS

(1) Life Insurance Fund / Policyholders Fund: S. 10 of Insurance Act,

1938 states that where the insurer carries on the business of life
insurance all receipts due in respect of such business, shall be carried to
and shall form a separate fund to be called the life insurance fund. It is
also known as Policyholders Fund. The assets of Life Insurance Fund
shall be kept distinct and separate from all other assets of the insurer.
The deposit made by the insurer in respect of life insurance business
shall be deemed to be part of the assets of such fund. The life insurance
fund shall be the security of the life policy holders and shall not be liable
for any non-life insurance contracts of the insurer and shall not be
applied directly or indirectly for any purposes other than those of the life
insurance business of the insurer. The Policyholders Fund needs to
 63

maintain adequate level of solvency at all times. Separate Funds are

maintained for different types of policies like Participating Fund,
Pension Fund etc.

The solvency level is also to be maintained for declaration of bonuses to

Participating Fund and Non-participating Fund. During the initial period,
company starts with Shareholders Fund. In order to meet with the
above requirements of the Policyholders' Fund, the company needs to
transfer funds from Shareholders' Fund
Such transfer from Shareholders' Fund to Policyholders' A/c is
irreversible in nature and at no point of time, such amount can be
recouped (credited back) to the Shareholders' Fund. Transfer of such
funds is shown in Revenue Account and it adds to the revenue of the
Technical Account. The same amount treated us expenditure in Profits &
Loss account (Shareholders Account-Non Technical
2) Bonus: A life insurance policy may be "with profit" or "without
profits". The bolder of a "without profits policy is entitled to receive on
maturity only the amount specified in the policy, but on a with profits"
policy he is entitled to receive in addition, the amount of bonuses
declared on each valuation date. On each valuation date, the amount
standing to the credit of Life Fund which is in clever met liability, as
determined by the actuary, is distributed first among the policyholders
and then among the shareholders. The share of the policyholders is paid
to them as bonus, either cash on declaration or by reduction of future
premiums, or on maturity of the policy.

If the bonus is not payable in cash immediately but is to be payable at

the time of the claim, it is described as Reversionary bonus. The
amount of Reversionary Bonus is included in claims interim Bonus in a
bonus paid to a policyholder for a period for which valuation is not
complete and, therefore, the exact profit or bonus has not been
 64

determined. Such a bonus is also included claims. Terminal Bonus is

payable only on maturity of the policy.
(3) Valuation Balance Sheet: Section 49 of the Insurance Act, 1938
provides that no insurer shall declare bonus to the policyholders except
out of a surplus shown in the Valuation Balance Sheet which may arise
is a result of actuarial valuation of the assets and liabilities of the insurer,
nor shall such surplus be increased by contributions out of any reserve
fund or otherwise unless such contributions have been brought in as
revenue through the Revenue Account on or before the nor of valuation.
Revenue Account of a Life Insurance Company does not show the profit
or loss for a given year. For the purpose of ascertaining the profit or loss
of a Life Insurance Company, a Valuation Balance Sheet is prepared
periodically Valuation Balance Sheet is prepared by expert sales known
as actuaries. The steps in valuation are as follows

A frequent problem for supervisors in jurisdictions where investments

are primarily in real estate is to obtain appropriate valuations of
buildings and properties that are owned by insurers. Valuation
approaches that rely on estimates of future cash flows may or may not
be objective and must be analysed carefully by the supervisor. In
contrast, valuation methods that emphasise the sale of similar
properties to independent third-party buyers potentially have greater
objectivity because they do not involve estimates by persons who may
have an incentive to maximise the appraisal value. A preferred
alternative could involve the use of both methods to validate each
other.
(1) Calculate present (discounted) value of premium receivable on
current policies
 65

(2) Calculate present (discounted) value of claims payable on current

policies.

(3) Calculate net liabilities which is equal to (1)-(ii).

(4) Deduct Net Liability from Life Insurance Fund which will be equal
to Surplus or Deficit.

Distribution of Surplus (Bonus): The provisions laid down under the

Insurance Regulatory and Development Authority (Actuarial Report and
Abstract) Regulations, 2000, regarding bonus by Life Insurance
Companies are summed up below
Valuation date: "Valuation date means as respects any valuation the
date as at which the actuarial valuation is made

Inter Valuation Period: "Inter valuation period" means, as respects any

valuation, the period to the valuation date of that valuation from the
valuation date of the preceding valuation in connection with which an
abstract was prepared under the Act.

Statement: A statement of Composition of Surplus and Distribution of

Surplus in respect of Policyholders' funds is prepared by the Life
Insurance Company showing total amount of surplus arising during the
inter-valuation period, and the allocation of such surplus, for
participating business and for non-participating business, with the
particulars as mentioned below

Composition of Surplus:
Surplus for the year after provision for loss tax, etc. Inter Buses paid
during the inter-valuation period Terminal Bonuses paid during the
inter-valuation period Loyalty Additions or other forms of bonuses, if
 66

any, paid during the inter valuation period Sum transferred from
shareholders' funds during the inter-valuation period Amount of
surplus, from policyholders' funds, brought forward from preceding
valuation. Total Surplus [total of the items (a) to (f)]
Distribution of Surplus:
Policyholders' Fund:
To Interim Bonuses paid
To Terminal Bonuses
To Loyalty Additions or any other forms of bonuses, if any
Among policyholders with immediate participation
Among policyholders with deferred participation
Among policyholders in the discounted bonus class
To every reserve fund or other fund or account (sums passed through the
accounts during the inter valuation period to be separately stated);
As carried forward unappropriated.

Shareholders 'Fund:
To the shareholders' funds (sums passed through the accounts during
the inter valuation period to be separately stated);

2.7 SCHEDULE A [LIFE INSURANCE]

PART I ACCOUNTING PRINCIPLES FOR

PREPARATION OF FINANCIAL STATEMENTS

1. Applicability of Accounting Standards: Every Balance Sheet,

Revenue Account [Policyholders' Account]. Receipts and Payments
Account [Cash Flow statement] and Profit and Loss Account
[Shareholders' Account] of an insurer shall be in conformity with the
 67

Accounting Standards (AS) issued by the ICAI, to the extent applicable

to insurers carrying on life insurance business, except that:

• Accounting Standard 3 - Cash Flow Statements shall be prepared only

under the Direct Method

• Accounting Standard 17 - Segment Reporting shall apply to all insurers

irrespective of the requirements regarding listing and turnover
mentioned therein.

2 Premium: Premium shall be recognised as income when due. For

linked business the due date for payment may be taken as the date
when the associated units are created.
3. Acquisition Costs: Acquisition costs, if any, shall be expensed in the
period in which they are incurred. Acquisition costs are those costs that
vary with and are primarily related to the acquisition of new and renewal
insurance contracts.

4. Claims Cost: The ultimate cost of claims shall comprise the policy
benefit amount and specific claims settlement costs, wherever
applicable.

5. Actuarial Valuation - Liability for Life Policies: The estimation of

liability against life policies shall be determined by the appointed
actuary of the insurer pursuant to his annual investigation of the life
insurance business. Actuarial assumptions are to be disclosed by way of
notes to the account. The liability shall be so calculated that together
with future premium payments and investment income, the insurer can
meet all future claims (including bonus entitlements to policyholders)
and expenses.
 68

Procedure to determine value of investments: An insurer shall

determine the values of investments in the following manner:

(a) Real Estate Investment Property: The value of investment

property shall be determined at historical cost, subject to revaluation at
least once in every three years. The change in the carrying amount of the
investment property shall be taken to Revaluation Reserve. The insurer
shall assess at each balance sheet date whether any impairment of the
investment property has occurred. Gains/losses arising due to changes in
the carrying amount of real estate shall be taken to equity under
'Revaluation Reserve'. The bases for revaluation shall be disclosed in the
notes to accounts. The Authority may issue directions specifying the
amount to be released from the revaluation reserve for declaring bonus
to the policyholders. For the removal of doubt, it is clarified that except
for the amount that is released to policyholders as per the Authority's
direction, no other amount shall be distributed to shareholders out of
Revaluation Reserve Account. An impairment loss shall be recognised
as an expense in the Revenue/ Profit and Loss Account immediately,
unless the asset is carried at re-valued amount. Any impairment loss of a
re-valued asset shall be treated as a revaluation decrease of that asset and
if the impairment loss exceeds the corresponding revaluation reserve,
such excess shall be recognised as an expense in the Revenue/Profit and
Loss Account.

(b) Debt Securities: Debt securities, including government securities

and redeemable preference shares, shall be considered as "held to
maturity" securities and shall be measured at historical cost subject to
amortisation.

(c) Equity Securities and Derivative Instruments that are traded in

active markets: Listed equity securities and derivative instruments that
 69

are traded in active markets shall be measured at fair value on the

balance sheet date. For the purpose of calculation of fair value, the
lowest of the last quoted closing price at the stock exchanges where the
securities are listed shall be taken. The insurer shall assess on each
balance sheet date whether any impairment of listed equity
security/derivative instrument has occurred. Unrealised gains/ losses
arising due to changes in the fair value of listed equity shares and
derivative instruments shall be taken to equity under the head 'Fair
Value Change Account". The Authority may issue directions specifying
the amount to be released from the Fair Value Change Account for
declaring bonus to the policyholders. For the removal of doubt, it is
clarified that except for the amount that is released to policyholders as
per the Authority's prescription, no other amount shall be distributed to
shareholders out of Fair Value Change Account. Also, any debit balance
in Fair Value Change Account shall be reduced from profit/free reserves
while declaring dividends.

The insurer shall assess, on each balance sheet date, whether any
impairment has occurred. An impairment loss shall be recognised as an
expense in Revenue/Profit and Loss Account to the extent of the
difference between the re-measured fair value of the security/investment
and its acquisition cost as reduced by any previous impairment loss
recognised as expense in Revenue/Profit and Loss Account. Any
reversal of impairment loss, earlier recognised in Revenue/Profit and
Loss Account, shall be recognised in Revenue/Profit and Loss Account.

(d) Unlisted and other than actively traded Equity Securities and
Derivative Instruments: Unlisted equity securities and derivative
instruments and listed equity securities and derivative instruments that
are not regularly traded in active markets shall be measured at historical
cost. Provision shall be made for diminution in value of such
investments. The provision so made shall be reversed in subsequent
periods if estimates based on external evidence show an increase in the
 70

value of the investment over its carrying amount. The increased carrying
am of the investment due to the reversal of the provision shall not
exceed the historical cost. For the purposes of this regulation, a security
shall be considered as being not actively traded, if as per guidelines
governing mutual funds laid down from time to time by SEBI, such a
security is classified as "thinly traded'.
7. Loans: Loans shall be measured at historical cost subject to
impairment provisions. The insurer shall assess the quality of its loan
assets and shall provide for impairment. The impairment provision shall
not be lower than the amounts derived on the basis of guidelines
prescribed from time to time by the Reserve Bank of India that apply to
companies and financial institutions.

8. Linked Business: The accounting principles used for valuation of

investments are to be consistent with principles enumerated above. A
separate set of financial statements, for each segregated fund of the
linked businesses, shall be annexed. Segregated funds represent funds
maintained in accounts to meet specific investment objectives of
policyholders who bear the investment risk. Investment income/ gains
and losses generally accrue directly to the policyholders. The assets of
each account are segregated and are not subject to claims that arise out
of any other business of the insurer.

9. Funds for Future Appropriation: The funds for future appropriation

shall be presented separately. The funds for future appropriation
represent all funds, the allocation of which, either to the policyholders or
to the shareholders, has not been determined by the end of the financial
year.
 71

PART II -DISCLOSURES FORMING PART OF

FINANCIAL STATEMENTS

A. The following shall be disclosed by way of notes to the

Balance Sheet:

1. Contingent Liabilities:

(a) Partly-paid up investments

(b) Underwriting commitments outstanding
(c) Claims, other than those under policies, not acknowledged as debts
(d) Guarantees given by or on behalf of the company
(e) Statutory demands/liabilities in dispute, not provided for
(f) Reinsurance Obligations to the extent no provided for in account
(g) Others (to be specified).

2. Actuarial assumptions for valuation of liabilities for life policies in

force.

3. Encumbrances to assets of the company in and outside India.

4. Commitments made and outstanding for Loans, Investments and

Fixed Assets.

5. Basis of amortisation of debt securities.

6. Claims settled and remaining unpaid for a period of more than six
months as on the balance sheet date.

7. Value of contracts in relation to investments, for:

(a) Purchases where deliveries are pending;
(b) Sales where payments are overdue.
 72

8. Operating expenses relating to insurance business: basis of allocation

of expenditure to various segments of business.

9. Computation of managerial remuneration.

10. Historical costs of those investments valued on fair value basis.

11. Basis of revaluation of investment property.

B. The following accounting policies shall form an integral

part of the financial statements:

1. All significant accounting policies in terms of the accounting

standards issued by the ICAI, and significant principles and policies
given in Part I of Accounting Principles. Any other accounting policies,
followed by the insurer, shall be stated in the manner required under
Accounting Standard AS 1 issued by the ICAI.

2. Any departure from the accounting policies shall be separately

disclosed with reasons for such departure.

3. Insurance contracts present a similar situation to that of the company

providing landscaping services. The normal convention is for customers
to pay their premium at the beginning of the insurance term (or
periodically during that term for policies with more than one premium
expected). However, at this point in time, the insurer has not yet
provided any insurance coverage since the term is just commencing. It
would therefore give a misleading picture of an insurer’s earnings if
premiums were recognised as revenue at the time the customers pay
their premiums. Instead, premiums are “earned” over the term of the
policy or period for which premiums have been paid. See the detailed
discussion on accounting for premiums later.
 73

C. The following information shall also be disclosed:

1. Investments made in accordance with any statutory requirement

should be disclosed separately together with its amount, nature, security
and any special rights in and outside India;

2. Segregation into performing/ non performing investments for purpose

of per the directions, if any, issued by the Authority; income recognition
as
3. Assets to the extent required to be deposited under local laws or
otherwise encumbered in or outside India;

4. Percentage of business sector-wise;

5. A summary of financial statements for the last five years, in the

manner as may be prescribed by the Authority;

6. Bases of allocation of investments and income thereon between

Policyholders' Account and Shareholders' Account;

7. Accounting Ratios as may be prescribed by the Authority.

PART III - GENERAL INSTRUCTIONS FOR

PREPARATION OF FINANCIAL STATEMENTS

1. The corresponding amounts for the immediately preceding financial

year for all items shown in the Balance Sheet, Revenue Account, Profit
and Loss Account and Receipts and Payments Account shall be given.

2. The figures in the financial statements may be rounded off to the

nearest thousands.
 74

3. Interest, dividends and rentals receivable in connection with an

investment should be stated at gross amount, the amount of income tax
deducted at source should be included under 'advance taxes paid' and
taxes deducted at source.

4. (1) for the purposes of financial statements, unless the context

otherwise requires –

(a) the expression provision' shall, subject to (II) below mean any
amount written off or retained by way of providing for depreciation,
renewals or diminution in value of assets, or retained by way of
providing for any known liability or loss of which the amount cannot be
determined with substantial accuracy;

(b) the expression 'reserve' shall not, subject to as aforesaid, include any
amount written off or retained by way of providing for depreciation,
renewals or diminution in value of assets or retained by way of
providing for any known liability or loss;

(c) the expression capital reserve' shall not include any amount regarded
as free for distribution through the profit and loss account; and the
expression 'revenue reserve' shall mean any reserve other than a capital
reserve;

(d) The expression "liability" shall include all liabilities in respect of

expenditure contracted for and all disputed or contingent liabilities.

PART V-PREPARATION OF FINANCIAL

STATEMENTS

(1) An insurer shall prepare the Revenue Account [Policyholders'

Account], Profit and Loss Account [Shareholders' Account] and the
Balance Sheet in Form A-RA, Form A-PL and Form A-BS,
 75

As prescribed in this Part, or as near thereto as the circumstances permit.

An insurer shall prepare Revenue Account and Balance Sheet for the
under mentioned businesses separately and to that extent the application
of AS 17 shall stand modified:

(a)Participating policies and Non-participating policies;

(b) (i) Linked business [life insurance contracts or health insurance
contracts under which benefits are wholly or partly to be
determined by reference to the value of underlying assets or any
approved index]
(ii) Non-Linked business separately for Ordinary Life, General Annuity,
Pensions and Health Insurance;
(c) Business within India and business outside India.

(2) An insurer shall prepare separate Receipts and Payments Account in

accordance with the Direct Method prescribed in AS 3 - "Cash Flow
Statement" issued by the ICAI.
 76

Chapter No. 3
REVIEW OF LITERATURE
 77

REVIEW OF INSURANCE

This chapter presents the review of literature to identify and understand

the implications of different issues related to consumer perception and
satisfaction towards public and private life insurances companies in
India. The literature on life insurance industry in India includes books,
compendia, theses, dissertations, study reports and articles published by
academicians and researchers in different periodicals. The review of this
literature gives an idea to concentrate on the unexplored area and to
make the present study more distinct from other studies. The literature
available is presented below:

Gautama V and Kumar M T

The present research is an effort, to allegorise the attitudes of Indian

consumers towards the insurance services. The study has been made by
accumulating the antiphon of consumers through structured questionnaire
on five point Liker scale. The decree of the present study may act as an
important aspect for the insurance companies in Indian market to flounce
marketing strategies established on socio demographic and economic
factors.

Ansari Z. A

In the present study examines the attitude of individuals towards different

kinds of risks and scope they prefer in Saudi Arabia. The study by further
examine how the use of insurance particularly the binding insurance has
altered the perception towards risks and their future behaviour towards
buying other insurance policies and also what features the users of
insurance suggest in their insurance policy contract. The study is based on
primary data collected aimlessly from current users of binding insurance
policies that is motor insurance and health insurance and life insurance.
 78

Das S. K.

A study on insurance has been as essential part of financial services

system and acknowledged as a vital element of a country’s financial
health and mark of progress. Insurance suppliers for the financial
security of citizens and proposes valuable investment advices and serves
as a persuasive step towards both individual and national financial
stability. It is found that high operating cost, exertion break even,
confluence of accounting standard etc. are the main issues of life
insurance companies in India.

Ali L. and Chatley P

Ban assurance as an aqueduct of selling insurance has fast ameliorated

impulse in the Indian insurance scene. Hence conveying that future of
ban assurance can be bright in India too if the aggravating ascend
companies can channelize their achievements cogently is for corporate
image taking the place by size of operations and customer satisfaction
and adeptness in sales process.

Ahmed A. and Kwatra N

This papers aims at judging the quality of insurance services in India

through customer’s determination and how this can be used to increase
the demand for insurance which is at present low in India. The study by
revealed among other things that the total number of death claim settled
by an insurance company is the most important factor considered by the
customers of insurance companies in India in their judgement and
calculation of quality of the policies they are holding. The study
therefore advises that the culture of deferment in premium payment or
non-payment should be gridlocked and organisations should look in
going to see the acumen why the payment of premium is a difficulty.
 79

Chapter No. 4
DATA ANALYSIS
 80

SURVEY REPONSES AND CHART

1. Name :-

2. Gender

Male
Female
Gender

42

59

female Male

As we can see in a pie diagram survey on Insurance policy 59% of Male

& 41% of Female
As per survey conduction

3. Age

Below-20 Yrs
21- 30 Yrs
 81

31- 40 Yrs
41 Yrs- above

Age

10

30
16

44

Below-20 Yrs 21-30 Yrs 31-40Yrs 41 Yrs-Above

As we can see in “AGE” Criteria

30% are below – 20 yrs of age, 44% are 21-30 yrs of age, 16% are 31-40
yrs of age, and 10% are 41 yrs- above age.
As per survey conduction.

4. Educational Level

Under Graduate
Graduate
Post Graduate
Other
 82

Educational Level

10

23 59

Under Graduate Graduate Post Graduate Other

As we can see in “Educational Level” Criteria

59% people are under Graduate, 23% people are Graduate, 10% people
are Post Graduate, and 8% people have done other education.
As per survey conduction.

5. Occupation

Students
Service
Business
House Wife
Retired
 83

Occupation

6
8

10

59

23

Students Service Business House Wife Retired

As we can see in “Occupation” Criteria

59% people are students, 23% people are service, 10% people are
business, and 8% people are house wife, 6% people are retired
As per survey conduction

6. Annual Income

Below-50,000
51,000-1,00,000
1,00,000-5,00,000
5,00,000-Above
 84

Annual Income

10

15 36

39

Below-50,000 51,000-1,00,000 1,00,000-5,00,000 5,00,000-Above

As we can see in “Annual Income” Criteria 36% are below –50,000

annual incomes, 39% are51, 000-1, 00,000 annual incomes, 15% are 1,
00,000-5, 00,000 annual incomes, 10% 5, 00,000-above annual Incomes
As per survey conduction.

7. Do you have an insurance policy?

Yes
No
 85

insurance policy

36

65

yes no

As we can see there is a 65% person have insurance policy and were
35% people don’t have insurance policy.
As per survey conduction.

8. What type of insurance do you have?

Private
Public
 86

35

65

private public

As we can see there is a 65% person have private company insurance

and were other 35% people have public insurance policy.
As per survey conduction

9. Who influenced you to get an insurance policy?

The Media
Insurance Agents
Federal Government
Friends
Family
Colleagues
Other
 87

4
12 19

13

23

19

10

The Media Insurance Agents Federal Government Friends Family Colleagues Other

As we can see in people are influenced you to get an insurance policy

4% people know through the media, 23% people know through
insurance agents,10% people know through federal government, 19%
people know through friends, 13% people know through family , 12%
people know through colleagues, 4% people know through other source.
As per survey conduction

10. How many insurance policies do you currently have?

1
2
3
4
More than 5
 88

8
6

11

60
15

1 2 3 4 More than 5

As we can see in the number of policies own by people as per survey

conduction.
60% people have 1 policy, 15% people have 2 policies, 11% people
have 3 policies, 6% people have 4 policies, 8 % people have more than 5
policies.
As per survey conduction

11. What kind of insurance policies do you have? Check as many as

you’d like.

Savings Policy
Whole Life Policy
Endowment Policy
Money Back Policy
Automobile Insurance
 89

Pension Plan Policy

Property Insurance
Any Other

8
6
31
9

11

13
10
12

Savings Policy Whole Life Policy Endowment Policy Money Back Policy
Automobile Insurance Pension Plan Policy Property Insurance Any Other

As we can see in a pie diagram survey on insurance policy

31% people have saving policy, 13% people have whole life policy, 12%
people have endowment policy, 10% people have money back policy,
11% people have automobile Insurance,9% people have pension plan
policy,6% people have property Insurance, 8% people have any other
policy
As per survey conduction

12. What is the average term of the policies you have?

Up To 5 Yrs
Above 20 Yrs
 90

30

70

Up To 5 Yrs Above 20 Yrs

As we can see in a pie diagram survey on average term of the policies

people have
70% people have up to 5yrs and 30% people have above 20 yrs
As per survey conduction.

13. Have you ever received any benefits from any of the policies you
currently have?

Yes
No
 91

35

65

yes no

As we can see there is a 65% person have received benefits from

insurance policy and were 35% people do not received any benefits from
insurance policy
As per survey conduction.

14. If yes, how many times have you received it?

1
2
3
More Than Three
 92

5
8

10

77

1 2 3 More Than Three

There are some who have received benefits from there insurance policy
as follows
77% people have received 1 time benefit, 10% people have received 2
time benefits, 8% people have received 3 time benefits, and 5% people
have received more than three time benefits
As per survey conduction.

15. How regularly do you pay your premiums?

Monthly
Quarterly
Half Year
Yearly
 93

10

23 59

Monthly Quarterly Half Year Yearly

As we can see in people pay their insurance policy premiums as follows

59% people pay their premiums monthly, 23% people pay their
premiums quarterly, 10% people pay their premiums half year, and 8%
people pay their premiums yearly
As per survey conduction.

16. Have any of your policies ever lapsed due to non-payment of

premiums?

Yes
No
 94

25

75

yes no

As we can see in above pic diagram that people policies have lapsed due
to non-payment of premiums
Only 25% people have lapsed there due to non-payment of premiums
and 75% people have not lapsed there policies due to non-payment of
premiums
As per survey conduction.

17. Have you received any incentives from your insurance company on
the insurance premiums?

Yes
No
 95

39

61

yes no

As we can see there is a 61% person have received incentives on there

insurance policy and were other 39% people have not received any
incentives on there insurance policy. As per survey conduction.

18. Are you aware of any insurance bonuses of your policies?

Yes
No
 96

37

63

yes no

As we can see there is a 63% person have received bonuses on there

insurance policy and were other 37% people have not received any
bonuses on there insurance policy. As per survey conduction.

19. Have you ever surrendered any insurance policy?

Yes
No
 97

42

58

yes no

As we can see there is a 58% person have surrendered there insurance

policy and were other 42% people have not surrendered any insurance
policy. As per survey conduction.
 89

Chapter No. 5
CONCLUSION, SUGGESTIONS & REFERENCE
 99

CONCLUSION

Insurance is a large investment and you will most likely purchase

multiple policies throughout your lifetime. It is essential that you know
what each type of insurance covers and how it works so you can make
the best decision about what to buy. Do not base your decision on just
what is cheapest, but look at what it provides.

Take the time to shop around and find the right insurance for your
situation. People often say they cannot afford insurance, but the reality is
that they cannot afford not to have it. It can save them from thousands or
more dollars in unplanned expenses when unexpected situations arise.
You do not want to waste your money on policies that do not meet your
needs, but the right insurance policy can protect you and your family
from unforeseen disasters

This manuscript reviews and analyses the activities, reporting, and

valuation of insurance companies. The primary objectives are to
describe the insurance business, discuss and evaluate insurers’ financial
information and the accounting methods used in preparing financial
statements.
 100

SUGGESTIONS

Due to the intense competition in the insurance market, the insurance

companies have to adopt better strategies to attract more customers
keeping the cost quality and return on investment in tact is necessary in
order to tackle the competition

Return on investment, company reputation and premium outflow by the

respondent. Hence greater fows should be given to their attributes.
Companies should adopt effective promotional strategies to income the
awareness level among the consumers

REFERENCE

Library Books

01. Advanced Financial Accounting

02. Financial Services Banking and Insurance

03. Insurance: Concepts and Coverage

04. Insurance in India: Opportunities, Challenges and Strategic

Perspective

05. Valuation of Indian Insurance Companies

06. Insurance Law in India

 101

Chapter No. 6
BIBLIOGRAPHY
 102

BIBLIOGRAPHY

01. Tryst with Trust (1991) LIC of India, Bombay, India

02. Bhave S.R. (1970) “Saga of Security: Story of Indian Life insurance
(1870-1970”, LIC of India, Bombay

03. Haridas R. (2011) “Life Insurance in India” New Century

publications, New Delhi, India.

04. Agarwal, Abhishek, “Distribution of life Insurance products in

India”. Insurance Chronicle, 2002

05. Gupta, P.K. (1997) “Distribution strategies of insurance players in

India”, Insurance and Risk Management

06. Shankar (2004), “Marketing of Insurance Services”, Service

Marketing, the Indian Perspective

07. Adel Zia Khalid & Prof Mohammad As am (2013) “Insurance

Services”. In the journal of Pacific Business

08. Shahid Akhtar and Iftekhar Iqbal (2012)- Insurance and Risk
Management in India-Challenges.
 103

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