ASCERTAINMENT OF PROFIT/LOSS

BY LIFE INSURANCE COMPANIES

The insurance companies are required to prepare their financial statements for ascertainment
of profit/loss i.e. Revenue Account, Profit and Loss Account and Balance Sheet according to
the Insurance Regulatory and Development Authority (Preparation of Financial Statements
and Auditors Report of Insurance Companies) Regulations, 2002.

Insurers carrying on Life Insurance Business should comply with the requirements of
Schedule A of the Regulations which among other things, gives the following Forms:

Revenue Account Form A RA

Profit and Loss Account Form A PL

Balance Sheet Form A-BS

Insurers doing General Insurance Business should comply with requirements of

Schedule B of the Regulations which among other things, gives the following Forms:

Revenue Account Form B RA

Profit and Loss Account From B PL

Balance Sheet From B BS

In both cases, Revenue Account and Balance Sheet are given in summary form. There are 15
Schedules in each case, the first four schedules relate to Revenue Account and the remaining
eleven schedules relate to Balance Sheet which give details of the summary heads. In both
Schedules A and B, Profit and Loss Appropriation Account is dispensed with and
appropriations are accommodated in the Profit and Loss Account.

Life Insurance Business:

The chief peculiarity of the life insurance business is that the life insurance contracts are for a
long term and that, on a particular date, the future implications of a contract must be
considered before profit can be ascertained. Under an annuity contract, the life insurance
office does not receive any amount after the initial payment but has to go on paying till the
annuitant dies.

On a particular date, therefore, there is a liability in respect of future payments to be made.

Under a life insurance policy, also, there is liability because against a policy, the premiums
expected to be received in future will generally be much less than the amount payable by way
of the claim. Suppose, A took out a policy for Rs 10,000 on 5th July, 1987 for twenty years,
the premium being Rs 500 per annum.

On 31st March, 2003, the life insurance company is faced with the position that only four
premiums (in 2003-04, 2004-05, 2005-06, 2006-07) can be expected, amounting in all to Rs
2,000. The company will have to pay Rs 10,000 latest, on 5th July, 2008.

There is a gap of Rs 8,000 In terms of 31st March, 2003 the gap is slightly less because of
interest. The possibility of As death must be kept in mind because death means stoppage of
payment of premium and hastening the payment of the claim leading to loss of interest.

The chief point to remember is that in respect of policies already issued and still in force,
there is a deficiency of claims that are expected to arise over premiums that are expected to
be received. This deficiency is known as net liability. A company cannot be said to have
made profits unless it has reserves equal to the net liability.

The calculation is made only by actuaries, mathematicians well versed in the intricacies of
life insurance. The valuation has to be got done by the insurance company every year.

In case of life insurance, Revenue Account (Policyholders Account), Profit and Loss Account
(Shareholders Account) and Balance Sheet are prepared as per Form A-RA, Form A-PL and
Form A-BS respectively.
Notes: (applicable to Schedules 8 and 8A & 8B):

(a) Investments in subsidiary/holding companies, joint ventures and associates shall be

separately disclosed, at cost.

(i) Holding company and subsidiary shall be construed as defined in the Companies Act,
1956:

(ii) Joint Venture is a contractual arrangement whereby two or more parties undertake an
economic activity, which is subject to joint control.

(iii) Joint control is the contractually agreed sharing of power to govern the financial and
operating policies of an economic activity to obtain benefits from it.

(iv) Associate is an enterprise in which the company has significant influence and which is
neither a subsidiary nor a joint venture of the company.
(v) Significant influence (for the purpose of this schedule) means participation in the
financial and operating policy decisions of a company, but not control of those policies.
Significant influence may be exercised in several ways, for example, by representation on the
board of directors, participation in the policy making process, material intercompany
transactions, interchange of managerial personnel or dependence on technical information.

Significant influence may be gained by share ownership statute or agreement. As regards

share ownership, if an investor holds, directly or indirectly through subsidiaries, 20 percent or
more of the voting power of the investee, it is presumed that the investor does have
significant influence, unless it can be clearly demonstrated that this is not the case.

Conversely, if the investor holds, directly or indirectly through subsidiaries, less than 20
percent of the voting power of the investee, it is presumed that the investor does not have
significant influence, unless such influence is clearly demonstrated. A substantial or majority
ownership by another investor does not necessarily preclude an investor from having
significant influence.

(b) Aggregate amount of companys investments other than listed equity securities and
derivative instruments and also the market value thereof shall be disclosed.

(c) Investment made out of Catastrophe Reserve should be shown separately.

(d) Debt securities will be considered as held to maturity securities and will be measured at
historical costs subject to amortisation,

(e) Investment Property means a property [land or building or part of a building or both] held
to earn rental income or for capital appreciation or for both, rather than for use in services or
for administrative purposes.

(f) Investments maturing within twelve months from balance sheet date and investments
made with the specific intention to dispose them of within twelve months from balance sheet
date shall be classified as short-term investments.
Notes:

(a) No item shall be included under the head Miscellaneous Expenditure and carried
forward unless:

1. some benefit from the expenditure can reasonably be expected to be received in future, and

2. the amount of such benefit is reasonably determinable.

(b) The amount to be carried forward in respect of any item included under the head
Miscellaneous Expenditure shall not exceed the expected future revenue/other benefits
related to the expenditure.