1.

TITLE PAGE

Assignment No 2

ACCOUNTS FOR INSURANCE COMPANIES

PRESENTED BY:

SHAFIQUE AHMED Roll No: BR 546647

Course: Advanced Financial Accounting
Course Code: 8553
Level: M.COM-I

SUBMITTED TO
SIR ARISH AHMED

SHAFIQUE AHMED Roll No 546647 Level M.COM 2ND ASSIGN

2. ACKNOWLEDGEMENTs

In the name of Almighty Allah, the Most Merciful and Gracious; all praise is due to Allah,
we praise him, seek His help and ask for His forgiveness. I am thankful to Allah, who
supplied me with the courage, the guidance and the love to complete this assignment.
Also, I cannot forget the ideal man of the world and most respectable personality for
whom Allah created the whole universe, Prophet Mohammad (Peace Be Upon Him).

I would like to thanks my respected Sir, Mr. Arish Ahmed. He motivating and inspiring
every bit towards new possibilities in life. He has been living role model to me, taking up
new challenges every day. His guidance helped me in all the time of writing this
assignment.

I also thank my, my class colleague and my friend specially my ex-boss Mr Irfan Aziz
(Senior Accounts Manager in Sapphire Group), my friend Kashif Jawad (Accounts
Manager in Sapphire Group), Mr Safdar Ali (Excise Officer in Unit 5 of Sapphire Group)
and cousin Mr Muhammad Bilal Arain (PhD holder) who directly or indirectly support/
helped or prayed for me.

Last but not least, I would like to thank my parents along with my family members for
allowing me to realize my own potential. All the support they have provided me every time
is the greatest gift anyone has ever given me.

SHAFIQUE AHMED

SHAFIQUE AHMED Roll No 546647 Level M.COM 2ND ASSIGN i

3. AN ABSTRACT

This article is a collection of definitions and implications for a better understanding of the
life insurance industry and identifies the strategies, challenges, obstacles and problems
and implement strategies in life insurances offered. Defined in this article, the history,
causes, pictures, types of insurance, the insurance marketing, marketing strategy
appropriate to the role of insurance in the economy, constraints and implementation
challenges and solutions are expressed in life insurance. Most of the life insurance its
advantages and also its lack of development in Iran. Making Iran ranks 46th in the world
in terms of insurance the 75-year history of the place is not good.

SHAFIQUE AHMED Roll No 546647 Level M.COM 2ND ASSIGN (ii)

 TABLE OF CONTENTS
Particulars Page No

Introduction 1
Insurance Basics 1
Definition 2
History of Insurance in Pakistan 3
Types of Insurance 4
1. Life insurance 4
2. General insurance 4
(1) Fire Insurance 5
(2) Marine Insurance 5
(3) Miscellaneous Insurance 5
Maintenance of Accounts 6
Statutory Books 6
Subsidiary Books 7
Statements of Premium 9
Statement of Claims 9
Re-Insurance 9
Re-Insurance Accepted & Re-Insurance CEDED 9
Provision for Unexpired Risk 10
Purpose of Financial Statements 10
Format of Revenue Account 11
Format of Profit & Loss Accounts 12
Format of Balance Sheet 13

SHAFIQUE AHMED Roll No 546647 Level M.COM 2ND ASSIGN (iii)

INTRODUCTION

This modern era, every person faces various types of risks. These risks may be to his
life property and business. To avoid these types of risks, insurance is used as a shield.
Insurance is a promise between two parties (insurer and insured) for the compensation
of particular potential losses, against some periodic payment. Insurance is designed to
guard the financial well-being of an individual, company or other entity in the case of
uncertain loss. Some forms of insurance are required by law, while other are
operational. If both the parties (insurer and insured) agreed on the terms and conditions
of an insurance policy, it will create a contract called the insurance. The company selling
the insurance is known as insurer, the person or entity buying the insurance policy is
called the policy holder. The amount which is paid by the policy holder to the company
against the compensation of loss is termed as premium.

Insurance basics: Insurers assume and manage risk in return for a premium. The
premium for each policy, or contract, is calculated based in part on historical data
aggregated from many similar policies and is paid in advance of the delivery of the
service. The actual cost of each policy to the insurer is not known until the end of the
policy period (or for some insurance products long after the end of the policy period),
when the cost of claims can be calculated with finality.

SHAFIQUE AHMED Roll No 546647 Level M.COM 2ND ASSIGN 1

DEFINITION

“Financial protection against loss or harm”

“Insurance is an arrangement by which a company or the state undertakes to provide a

guarantee of compensation for specific loss, damage, illness, or death in return of

periodic payment”. (From Oxford Dictionary)

As per IFRS 4. An insurance contract is a "contract under which one party (the

insurer) accepts significant insurance risk from another party (the policyholder) by

agreeing to compensate the policyholder if a specified uncertain future event (the

insured event) adversely affects the policyholder." [IFRS 4.Appendix A]

"Insurance is a contract between two parties whereby one party called insurer
Undertakes in exchange for a fixed sum called premiums, to pay the other party called
insured a fixed amount of money on the happening of a certain event.

"According to the U.S. Life Office Management Association Inc. (LOMA), life insurance is
defined as follows: “Life insurance provides a sum of money if the person who is insured
dies whilst the policy is in effect”. “Insurance is a contract between two parties whereby
one party agrees to undertake the risk of another in exchange for consideration known
as premium and promises to pay a fixed sum of money to the other party on happening
of an uncertain event (death) or after the expiry of a certain period in case of life
insurance or to indemnify the other party on happening of an uncertain event in case of
general insurance. The party bearing the risk is known as the 'insurer' or 'assurer' and
the party whose risk is covered is known as the 'insured' or 'assured'.

SHAFIQUE AHMED Roll No 546647 Level M.COM 2ND ASSIGN 2

History of Insurance in Pakistan

At the time of independence, the country had 5 local and 77 foreign insurance companies.
These companies were regulated under the Insurance Act of 1938. The government in 1948
established the Department of Insurance within the domain of Ministry of Commerce to
supervise the affairs of insurance industry. The Act was amended in 1958 for the first time
keeping in view the requirements of local market and to have effective control over the
insurance premium rates. Since then, various amendments have been made in the Act.
The Department of Insurance further created the Controller of Insurance for the same
purpose that was abolished in 2000 when SECP was made responsible for supervising
insurance business in the country. It was also aimed to reduce the outflow of foreign
exchange that was earlier used as reinsurance premiums made to reinsurance companies
mainly in the U.K. The Pakistan Reinsurance Corporation. In 1955, National Co-insurance
Scheme (NCS) was initiated to promote insurance culture in Pakistan and to assist small
insurance companies in meeting financial requirements. The life insurance business (that
grew very rapidly from a total sum assured of only Rs. 130 million in 1949 to Rs. 51.7 billion
in 1972) was nationalized in 1972. Life Insurance Management Board managed the affairs
of these newly nationalized life insurance companies. The initial benefits were the reduction
in premium rates by 33 percent and resolution of various outstanding disputes between the
policyholders & the insurers. The number of domestic insurance companies increased to 62
in 1995 while foreign participation was reduced to 9 insurance companies. After the
conversion of Corporate law Authority into SECP, a new department was formed, to look
after the affairs of the insurance industry. Since the Insurance Act 1938 had become
outdated, it was prudent to replace it with some new regulations. The new Insurance
ordinance was promulgated in August 19, 2000 by the SECP that increased the minimum
paid-up capital of non-life insurance companies to Rs. 80 million and for life insurance
companies to Rs. 150 million.

SHAFIQUE AHMED Roll No 546647 Level M.COM 2ND ASSIGN 3

TYPES OF INSURANCE

There are two main types of insurance which are as follows:

1. Life insurance
2. General insurance

Life Insurance: Life insurance provides a monetary benefit to a decedent’s family or

other designated beneficiary, and may specifically provide for income to an insured
person's family, burial, funeral and other final expenses. Life insurance policies often
allow the option of having the proceeds paid to the beneficiary either in a lump sum cash
payment or an annuity. Annuities provide a stream of payments and are generally
classified as insurance because they are issued by insurance companies and regulated
as insurance and require the same kinds of actuarial and investment management
expertise that life insurance requires. Annuities and pensions that pay a benefit for life
are sometimes regarded as insurance against the possibility that a retiree will outlive his
or her financial resources. In that sense, they are the complement of life insurance and,
from an underwriting perspective, are the mirror image of life insurance. Certain life
insurance contracts accumulate cash values, which may be taken by the insured if the
policy is surrendered or which may be borrowed against. Some policies, such as
annuities and endowment policies, are financial instruments to accumulate or liquidate
wealth when it is needed.

General insurance: General insurance is basically an insurance policy that protects

you against losses and damages other than those covered by life insurance. For more
comprehensive coverage, it is vital for you to know about the risks covered to ensure
that you and your family are protected from unforeseen losses. General insurance
include following types of insurance:

1. Fire Insurance
2. Marine Insurance
3. Miscellaneous Insurance

SHAFIQUE AHMED Roll No 546647 Level M.COM 2ND ASSIGN 4

Fire Insurance:

Fire insurance is property insurance covering damage and losses caused by fire. The
purchase of fire insurance in addition to homeowner’s or property insurance helps to
cover the cost of replacement, repair, or reconstruction of property, above the limit set
by the property insurance policy. Fire insurance policies typically contain general
exclusions, such as war, nuclear risks.

Marine Insurance:

Coverage against loss of or damage to a ship; and in-transit cargo loss or damage over
waterways, land, and air.
The insurance protects from the hazards of sea-transport to cargo (goods), hull (body of
the ship) and freight.

Miscellaneous Insurance:

Miscellaneous insurance are covered, property, goods, machine, Furniture, automobiles,

valuable articles, etc. can be insured against the damage or destruction due to accident
or disappearance due to theft.

There are different forms of insurances for each type of the said property whereby not
only property insurance exists but liability insurance and personal injuries are also
insurer.

SHAFIQUE AHMED Roll No 546647 Level M.COM 2ND ASSIGN 5

Maintenance of Accounts

The purposes of maintenance of accounts, there are two types of books are required to
be maintained by such organizations:

Statutory Books

1. Register of Policies

It contains the particulars in respect of each policy issued by the insurer such as
the name and address of the policy holder, date when the policy was affected and
record of the assignment of the policy, etc.

2. Register of Claims

This register contains the particulars of each claim such as the date of claim,
name and address of claimant, the date on which the claim was discharged or
settled, date and reasons of rejection, in case the claim is rejected.

3. Register of Licensed Insurance Agents

It contains the particulars of various insurance agents, their names, occupations,

addresses, numbers of licence, dates of issue of licence, and date of renewal,
particulars of business done and commission due to every agent.

SHAFIQUE AHMED Roll No 546647 Level M.COM 2ND ASSIGN 6

Subsidiary Books

Subsidiary books are maintained taking into account the magnitude of the business and
convenience of the concern. Some important of these are- register of proposals,
proposal advance cash book, first year’s premium cash book, renewal premium cash
book, agency and branch cash book, petty cash book, claim cash book, general cash,
bank cash book, commission register, lapsed and cancelled policies cash book, journal,
agency ledgers, policy loan register, general loan register, investment ledger and many
others.

Some of these are being discussed here as under:

1. Premium Register

In this ledger, the amount received as premium from each insured category is
recorded. Separate registers are maintained for each type of policies.

2. Cash Receipt Register

Cash premium received from the insured is recorded in this book/register. Other
receipts like, fines, penalties, interest on investments, rent on outlet properties,
etc. are also recorded in this book.

3. Cash Disbursement Book

All expenditures or expenses paid by the insurance company are recorded in this
book such as settlement and payment of claims, payment of commission, refund
of premium and other expenditures for the management of the company.

SHAFIQUE AHMED Roll No 546647 Level M.COM 2ND ASSIGN

7
4. Claim Register

All the claims which are lodged with the company, and particulars of such claims
are to be recorded in this register. Separate registers must be maintained for each
type of policies.

5. Claim Disbursement Book

All the claims which are lodged with the insurance company are verified by
conducting surveys of the claims lodged. The amount as determined by the
licensed surveyor or loss assessor is paid by way of compensation. As such, all
the particulars of claim disbursements are recorded in this book.

6. General Cash Book

It contains the summary of all books such as register of proposals, premium cash
book, branch or agency cash book, petty cash book, claims cash book, first year’s
premium’s cash book etc. As such, it contains all particulars of information
received in the head office and may be called Summary Book.

7. General Ledger

This accounting book contains different accounts maintained by the insurance

company. This book helps in the preparation of Trial Balance from which final
accounts are prepared so as to calculate profits or loss and to know the financial
position of the company.

SHAFIQUE AHMED Roll No 546647 Level M.COM 2ND ASSIGN 8

Statements of Premium

Premium is an amount paid periodically to the insurer by the insured for covering his
risk. The risk is transferred from the insured to the insurer. For taking this risk, the
insurer charges an amount called the premium. The premium is a function of a number
of variables like age, type of employment, medical conditions, etc. The actuaries are
entrusted with the responsibility of ascertaining the correct premium of an insured. The
premium paying frequency can be different. It can be paid in monthly, quarterly,
semiannually, annually or in a single premium.

Statement of Claims

A statement of claim is a court document that sets out how much or what the other party
claims you owe them and why they are making the claim. The statement of claim starts
a court case. You are called the 'defendant', and the person who started the case
against you is called the 'plaintiff'.

Re-insurance.

If the risk involve in the subject matter is heavy it may be reinsured with other insurance
company. Such insurance is called as reinsurance.

Re-insurance Accepted & Reinsurance CEDED

When a company gets reinsurance business it has to pay commission to some other
company. This commission is called commission on reinsurance accepted. When a
company passes on a part of business to some other company then this company which
gives business get commission from the company to whom such business is given.
Such a commission is called commission on reinsurance ceded.

SHAFIQUE AHMED Roll No 546647 Level M.COM 2ND ASSIGN 9

Provision for Unexpired Risks

It is a provision created to meet the claims which may arise in respect of the policies
which remain unexpired at the end of the year. It is to be made as follows:
% of net premium
I. Marine Insurance 100%
II. Fire Insurance 50%

The companies may maintain such reserve at a higher percentage. The excess reserve
over the minimum reserve is called as additional reserve.

Purpose of Financial Statement

There are two main purposes of financial statements:

To report on the financial position of an entity (e.g. a business, an organization) on

a certain date; and

To show how the entity has performed financially over a particular period of time
(an "accounting period").

SHAFIQUE AHMED Roll No 546647 Level M.COM 2ND ASSIGN 10

Format of Revenue Account

S No Particular Schedule Amount Amount

A. INCOME
1. Premium earned (Net) 1

2. Other income -

3. Changes in provision for unexpired -

risk
4. Interest, dividend and rent received -

Total (A)

B. EXPENSES

5. Claims incurred (Net) 2

6. Commission 3

7. Operating expenses 4

Total (B)
Operating Profit /loss form Fire/Marine (A-B)

SHAFIQUE AHMED Roll No 546647 Level M.COM 2ND ASSIGN 11

Format of Profit & Loss Account

S No Particulars Schedule Amount

Operating Profit -
1
Fire -
Marine -
Income from investment -
2
Other Income -
3
Share/ Fees -
Difference in exchange -
Miscellaneous receipt -
Total (A)
Provision other than tax -
4
Expenses of Management -
5
Other Expenses -
6
Loss on Sale of Furniture -
Total (B) -
Profit before tax (A-B) -
(-) Provision for Tax -
= Provision after tax -
(+) Profit B/F of Previous year -
(-) Appropriations -
Transfer to any reserve -
Interim dividend paid -
Proposed dividend -
= Balance C/F to Balance Sheet -

SHAFIQUE AHMED Roll No 546647 Level M.COM 2ND ASSIGN 12

Format of Balance Sheet

S No Particulars Schedule Amount

1 SOURCES of FUNDs -
Share Capital 5 -

Reserve & Surplus 6 -

Borrowings 7 -
= Total -
2 APPLICATION OF FUNDs -
Investment 8 -

Loan & Advances 9 -

Fixed Assets 10 -

3 Current Assets
Cash and Bank Balance 11
Advances & Other assets 12
(A)
4 Current Liabilities -
Other Liabilities 13 -
Provisions 14 -
(B) -

SHAFIQUE AHMED Roll No 546647 Level M.COM 2ND ASSIGN 13