Accounting for non-life insurances
- 2. What is a non-life insurance company? Non-life insurance includes: • All insurances that are not life insurances. • Bought separately. • Insurance of property against fire, burglary etc. • It is very common and covers businesses, governments and individuals. • The period for most general insurance policies and plans is usually one year, whereby premiums are paid on a one-time basis. • Non-life Insurance protects them, monetarily, from disaster by providing money in the event of a financial loss • It is also bought by small businesses to protect capital, tools and machinery against fire, theft.
- 3. Non-life insurance companies in Malta Total licences at end September 2011 Source: Malta Financial Services Authority Reinsurance Total licences 14% (at end September 2011) Composite Non-Life 35 4% Life Non-Life Life 8 15% 67% Composite 2 Reinsurance 7 During this presentation we are discussing between three Insurance Companies; Middle Sea, GasanMamo and Elmo. These are the main companies in non-life insurance industry in Malta.
- 4. Non-life Insurance Policies Personal Insurance Home Insurance Travel Insurance Motor Insurance
- 5. Non-life Insurance Policies Health Insurance Personal Accident Insurance Business Insurance Yachts & Pleasure Craft Insurance
- 7. Accounting for Insurance The Statement of Comprehensive Income of an insurance company is divided into two parts: 1. Technical Account – Trading Account (the underwriting result) 2. Non-Technical Account – Profit and Loss Account
- 8. Technical Accounts of a Non-Life Insurance Company (GasanMamo Insurance Limited Annual Reports and Financial Statements 31 December 2010)
- 9. Non-Technical Accounts of a Non-Life Insurance Company (GasanMamo Insurance Limited Annual Reports and Financial Statements – 31 December 2010)
- 10. Technical Accounts of a Non-Life Insurance Company
- 11. Technical Accounts of a Non-Life Insurance Company Earned premium, net of reinsurance (I) Gross premium written • Total premiums received for the whole year, from clients. • When non-life insurance companies close contracts to provide insurance against loss, the revenue expected to be received over the life of the contract are called gross premium written.
- 12. What is reinsurance? Reinsurance is the part of the risks from the direct insurer to a second insurance company, known as the reinsurer who has no direct contact with the insured. Insured Insurer Reinsurer
- 13. Technical Accounts of a Non-Life Insurance Company Earned premium, net of reinsurance (I) Outward reinsurance premium • This is also known as the cost of the reinsurance. • It is part of gross premium that is passed on the reinsurance; the premium for that portion of insurance is then paid to the reinsurance. premium written.
- 14. Technical Accounts of a Non-Life Insurance Company Earned premium, net of reinsurance (I) Net Premium Written is an indication of the level of sales for risks that they themselves cover. Net Premium written = Gross premiums written - Outward reinsurance Net premium written GasanMamo Middle Sea Elmo Gross premium written €26,531,812 €33,155,000 € 13,300,687 Outward reinsurer’s premium (€2,180,006) (€14,699,000) (€4,100,575) Net written premium €24,351,806 €18,456,000 €9,200,112
- 15. Differences between Premium Written, Earned and Unearned Accrual Basis: “Only premium related to the relevant accounting period are recognised as revenues (premium earned)” Earned Premium: • Part of the written premium for which protection of the policy has already been given. • What the insurance company profits. Unearned Premium: • Opposite of earned premium • Therefore it is a portion of written premium that is considered as unearned because protection of the policy is not given • Would be returned to the insured if the policy is cancelled
- 16. Earned and Unearned Premium Example: If a €1,000 policy has a two-year life span and no claim has been filed six months into the policy, the company will have an earned premium amount of €250. 2 years = 24 months 24 months = €1000 6 months = ? (1000x6)/24 = €250 Therefore: ` Written Premium = €1000 Earned Premium = €250 The rest (1000-250) €750 is called Unearned Premium
- 17. Technical Accounts of a Non-Life Insurance Company Earned premium, net of reinsurance (II) Provision of Unearned Premium/Unearned Premium Reserve (UPR) It is a fund that contains the portion of the premium that has been paid in advance for insurance that has not yet been provided. Example: If in 2010 the UPR is €100 and in 2011 the UPR is €90 the €10 is earned premium. Therefore we need to add it with other earned premium which is a profit to the company.
- 18. Provision of Unearned Premium GasanMamo Unearned premium in 2009 = 11,751,355 Unearned premium in 2010 = (12,353,384) change of unearned premium (net of reinsurance) (602,029) The increase in the unearned earnings reserve is not transferred into the earned earning. This creates a negative effect to the Income Statement. Therefore we need to deduct it from earned premium.
- 19. Provision of Unearned Premium Change in the Gross Provision for Unearned GasanMamo Middle Sea Elmo Premium Gross Amount (€602,029) (€937,000) (€26,800) Reinsurer’s share / €635,000 (€10,155) Change in the gross provision for (€602,029) (€302,000) (€36,955) unearned premium
- 20. Technical Accounts of a Non-Life Insurance Company Earned premium, net of reinsurance This is the entire earned premium that a company has after taking into account reinsurance operations. Earned Premium GasanMamo Middle Sea Elmo Net written premium €24,351,806 €18,456,000 €9,200,112 Change in the gross provision for (€602,029) (€302,000) (€36,955) unearned premium Earned premium, net of reinsurance €23,749,777 €18,154,000 €9,163,157
- 21. Technical Accounts of a Non-Life Insurance Company Allocated investment return transferred from the non-technical account • Return on average technical provisions, after deducting the capital employed in insurance operations • The allocated investment return is based on risk-free interest.
- 22. Technical Accounts of a Non-Life Insurance Company Allocated investment return transferred from the non-technical account GasanMamo Middle Sea Elmo GasanMamo Investment return €1,370,567 €1,667,000 €1,102,643
- 23. Technical Accounts of a Non-Life Insurance Company Total Technical Income When one adds the Allocated investment return transferred from the non-technical account to the Earned premium, the result will give the Total Technical Income. GasanMamo
- 24. Technical Accounts of a Non-Life Insurance Company Total Technical Income The Total Technical Income is the entire earned premium that a company has after taking into account reinsurance operations. Total Technical Income GasanMamo Middle Sea Elmo Earned premium, net of reinsurance €23,749,777 €18,154,000 €9,163,157 Allocated investment return transferred from the non-technical €1,370,567 €1,667,000 €1,102,643 account Other technical income / / €304,484 Total Technical Income €25,120,344 €19,821,000 €10,570,284
- 25. Technical Accounts of a Non-Life Insurance Company Claims incurred, net of reinsurance (I) • Insurance claim - a formal request to an insurance company asking for a payment based on the terms of the insurance policy. • Gross Claims Paid - claims paid directly or through reinsurance agreements including lawyer fees, adjustments fees, and all expenses to settle a claim. • Reinsurers’ Share - portion of gross claims that are covered by reinsurers.
- 26. Technical Accounts of a Non-Life Insurance Company Claims incurred, net of reinsurance (I) Therefore: Claims Paid = Gross Claims Paid – Reinsurers’ Shares Claims Paid GasanMamo Middle Sea Elmo Gross Amount €11,976,156 €18,036,000 €7,004,638 Reinsurers’ Share (€2,671) (€5,336,000) (€918,859) Claims paid €11,973,485 €12,700,000 €6,125,779
- 27. Technical Accounts of a Non-Life Insurance Company Claims incurred, net of reinsurance (II) Provision for Claim/Claims Reserve • Estimate of what a claim will cost • Money set aside for claims for claims which may occur • A claim is incurred when it happens. • Represent future obligations, and therefore they treated as liabilities in the balance sheet • Measure company’s financial health
- 28. Technical Accounts of a Non-Life Insurance Company Claims incurred, net of reinsurance (II) Provision for Claim/Claims Reserve Claims reserve money set aside for: • Claims outstanding - Amount set aside by the insurer for claims that been reported but not yet settled, including any projected adjustment expenses • IBNR (Incurred But Not Reported) - Amount set aside by the insurer for claims that have been incurred but not yet reported including any projected adjustment expenses
- 29. Provision for Claims GasanMamo Increase in the Gross Amount Gross amount: 2010 2009 €12,732,194 - €12,101,923 = €630,271
- 30. Provision for Claims GasanMamo Reinsurance Share: Increase in the reinsurance share 2010 2009 (-€252,733) - (-€254,571) = €1,838
- 31. Provision for Claims Provision for Claims GasanMamo Middle Sea Elmo Gross Amount €630,271 (€71,000) (€20,585) Reinsurers’ share €1,838 (€780,000) (€185,664) Change in the provision for claims €632,109 (€851,000) (€205,249) The total represents the difference between the balance in outstanding claims reserves and IBNR reserves at the end of the period and consecutively and the balance of the outstanding claims reserves and IBNR reserves at the beginning of the period. These reserves are net of the share of the reinsurance.
- 32. Technical Accounts of a Non-Life Insurance Company Claims incurred, net of reinsurance Claims incurred, net of Claims Paid= Gross Claims Paid – Reinsurers’ Shares reinsurance refers to the result of adding changes in net reserves to net claims paid. Claims incurred GasanMamo Middle Sea Elmo Claims paid €11,973,485 €12,700,000 €6,125,779 Change in the provision for claims €623,109 (€851,000) (€205,249) Claims incurred, net of reinsurance €12,605,594 €11,849,000 €5,920,530
- 33. Technical Accounts of a Non-Life Insurance Company Net Operating Expenses • Net Operating Expenses refers to the total expenditure incurred by the insurance in order to perform its daily operations. In simple terms it’s the total costs of running the insurance. • It consists of three elements: 1. Acquisition Costs 2. Change in Deferred Acquisition Costs (DAC) 3. Administrative Expenses
- 34. Technical Accounts of a Non-Life Insurance Company Net Operating Expenses 1. Acquisition Costs – costs relating to acquire a costumer like clerical work and inspection costs. 2. Deferred Acquisition Costs – costs of acquiring a new customer over the duration of the insurance contract like commissions to sales agents, underwriting and bonus interest. 3. Administrative Expenses - These include staff costs, premises costs, depreciation charge, directors’ fees, auditor's remuneration, professional fees, marketing and promotional costs, and other general office expenditure.
- 35. Technical Accounts of a Non-Life Insurance Company Net Operating Expenses GasanMamo GasanMamo Middle Sea Elmo Net Operating Expenses €7,190,943 €5,102,000 €2,155,454
- 36. Technical Accounts of a Non-Life Insurance Company Total Technical Charges Total Technical Charges are the addition of the claims incurred and the net operating expenses. Total Technical Charges GasanMamo Middle Sea Elmo Claims incurred, net of reinsurance €12,605,594 €11,849,000 €5,920,530 Net operating expenses €7,190,943 €5,102,000 €2,155,454 Total technical charges €19,796,537 €16,951,000 €8,750,984
- 37. Technical Accounts of a Non-Life Insurance Company Balance in the Technical Account The Balance in the Technical Account is the difference between Technical Income and Technical Charges. Balance in the Technical Account GasanMamo Middle Sea Elmo Total Technical Income €25,120,344 €19,821,000 €10,570,284 Total Technical Charges (€19,796,537) (€16,951,000) (€8,750,984) Balance €5,323,807 €2,870,000 €2,494,300
- 38. Balance Sheet Statement of Financial Position of a Non-Life Insurance Company
- 39. Statement of Financial Position of a Non-Life Insurance Company (GasanMamo Insurance Limited Annual Reports and Financial Statements 31 December 2010)
- 40. Statement of Financial Position of a Non-Life Insurance Company Assets: Reinsurers’ share of technical provision/Reserves of the Reinsurer • Represents setting reserve in reinsurance. The technical provisions are likely to be the biggest items in the Statement of Financial Position and adjustments to them are done in the Technical Account.
- 41. Statement of Financial Position of a Non-Life Insurance Company Assets: Reinsurers’ share of technical provision/Reserves by the reinsurer The reinsurance share of technical provision is made up of: GasanMamo GasanMamo Middle Sea Elmo Reinsurance Share of Technical Provision (€252,733) (€15,357,000) (€3,390,992)
- 42. Statement of Financial Position of a Non-Life Insurance Company Assets: Receivables GasanMamo GasanMamo Middle Sea Elmo Insurance and other receivables €4,749,760 €10,303,000 €3,866,933
- 43. Statement of Financial Position of a Non-Life Insurance Company Liabilities: Technical Provisions - Gross This represents the total amount of reserves kept by the company which in this case are: 1. Unearned premium reserve 2. Claims reserve: • Claims outstanding • IBNR- Incurred But Not Reported
- 44. Statement of Financial Position of a Non-Life Insurance Company Liabilities: Technical Provisions - Gross GasanMamo GasanMamo Middle Sea Elmo Technical Provisions €25,085,578 €55,531,000 €16,580,057
- 45. Statement of Financial Position of a Non-Life Insurance Company Liabilities: Payables GasanMamo GasanMamo Middle Sea Elmo Insurance and other payables €1,284,964 €12,674,000 €1,048,309
- 46. Conclusion After looking at the accounts of the insurance, we can say that accounting is important for every business because: • It is the business’s language which deals with the interpretations and finances of the company. • It is a guiding force to sound management decisions • And last and not least it helps your plan of your business to move to the next level.
Editor's Notes
- #16: Earned premium: You pay in advance the premium eg: for one year. This amount, paid in advance premium, will become earned and now will belong to the insured.
- #17: the money is not earned by the insurer until the insurance coverage has been provided. If either party cancels the contract, the insurer must have the unearned premium ready to refund. For this reason, insurance regulators require that insurers maintain an unearned premium reserve so that, in the event an insurer must be liquidated, there is enough money to pay claims and refund the unearned premium.
- #18: The decrease in the unearned premium reserve from one year to another is transferred into earned premium. This creates a positive effect to the income statement. This works exactly as the change in provision for doubtful debts
- #20: In MiddleSea the Reinsurer’s share decreased therefore it is added to the profit while in Elmo it increased.
- #21: Net premium – change in gross provision = earned premium
- #22: Insurance operations are in the form of, for example, premium receivables, less reinsurance deposits and other assets plus half of the technical result before allocated interest for the year.
- #24: When one add the Allocated investment return transferred from the non-technical account to the Earned premium, the result will give the Total Technical Income.
- #26: Insurance claims are reviewed by the company for their validity and then paid out to the insured once approved.
- #28: It is an estimate of what a claim will cost. An insurance company sets aside an amount of money for the payment of claims which may occur. From the company’s view, a claim is incurred when it happens, regardless of when in the future it is going to be paid.Reserves are obviously important since they can be a measure of a company's financial health. Improper reserves, either inadequate or excessive, can present a false picture of a company's financial condition and lead to serious problems.
- #47: In order to keep competitive one has to analyse not only one’s previous financial statements but of course those of their competitors. Accounts help insurers to estimate the provisions for claims by analyzing the number of claims of each year.