nia reinsurance accounting mr. n. b. sonawane new
DESCRIPTION
REINSURANCE TOOLSTRANSCRIPT
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REINSURANCE ACCOUNTING
N. B. Sonawane, GIC Re
15/16/2014
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Road Map
Accounting for Proportional Business Portfolio Accounts
Sliding Scale Commission
Profit Commission
Accounting for Non-proportional Business Adjustment Premiums
Reinstatement Premiums
Provisioning
Financial Items
Other terms
Special Arrangements Pool & ART
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FLOW OF ACCOUNTS
CEDING COMPANY
REINSURERS
BROKER REINSURER
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ADVANTAGES OF EFFICIENT
ACCOUNTING SYSTEM
FOR CEDING COMPANY
IMMEDIATE PICTURE OF ASSETS & LIABILITIES
CONTRIBUTES TO MANAGEMENTS CONFIDENCE
AVOIDS LIQUIDITY PROBLEMS, BY CONTROLING CASH FLOW
FOR REINSURER
ELEMENT TO FULFIL THE TERMS OF THE TREATY
FINANCIAL PLANNING POSSIBLE
ENABLES TO ASSESS QUALITY OF BUSINESS
BASE FOR STATISTICS.
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Clauses in the Treaty Terms
Insuring Clause Class of Insurance covered and excluded. Territorial scope, Reinsurers share, Monetary Limits.
Premium and commission Clause - Agreed share of original premium, charges & commission terms including overriding and profit commission.
Accounts Clause Interval at which accounts to be submitted, confirmed and settled.
Currency Conversion Clause Method of converting balances from one currency to another.
Inception & Termination Clause Clean cut or run to extinction
Deposit Terms and Interest Clause Rate of Premium/Loss Deposit, retained & released and rate of interest on such deposits.
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Financial Characteristics of Reinsurance
Arrangements
PROPORTIONAL
QUARTERLY ACCOUNTS
HIGH LEVEL OF COMMISSION
PROFIT COMMISSION
RESERVES
MINIMUM CASH FLOW
NON-PROPORTIONAL
MINIMUM & DEPOSITPREMIUM IN ADVANCEOR QTRLYINSTALMENTS
PREMIUM ADJUSTMENTA/C
LOW COMMISION
CLAIM RECOVERY &REINSTATEMENTPREMIUM
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PROPORTIONAL ACCOUNTS
LIST OF ITEMS
REVENUE OR TECHNICAL ITEMS PORTFOLIO PREMIUM ENTRY PORTFOLIO LOSS ENTRY PREMIUM COMISSION OVER RIDING COMMISSION PROFIT COMMISSION OTHER TAXES BROKERAGE LOSSES PAID P/F/ PREMIUM WITHDRAWN P/F/ LOSS WITHDRAWN
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OTHER REVENUE ITEMS
INTEREST ON RESERVES
EXCHANGES
NON-REVENUE OR FINANCIAL ITEMS
PREMIUM RESERVES RETAINED
LOSS RESERVE RETAINED
PREMIUM RESERVE RELEASED
LOSS RESERVE RELEASED
TAX ON INTEREST
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Gross Premium:
Premium ceded before commission. Also
called Original Gross Rates (OGR).
Net Premium:
In case of Treaty Written Premium Less Reinsurance Commission
In case of Company :
Premium on Accepted Business Less
Premium on ceded business
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PORTFOLIO PREMIUM:
-Represents unearned premium at the endof an annual period.
-This is traditionally calculated at a rate of35% to 40% of the year's Gross Premiumceded.
-Premium taken from old reinsurer is calledPortfolio Withdrawal
-Premium given to new reinsurer is calledPortfolio Entry
105/16/2014
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Methods of Portfolio Premium
1) Portfolio withdrawal "Prorata" -
Premiums for unexpired period are
calculated, policy by policy, on the
basis of number of days left, from the
date of termination of the Treaty.
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Methods of Portfolio Premium
1) Portfolio withdrawal "Prorata" -
Policy
Period
Case
1
01.1.2013
to
31.03.2013 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecNil
Policy
Period
Case
2
01.02.2013
to
31.01.2014 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
31 days
Premium
Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan
Treaty period
Treaty Period
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Methods of Portfolio Premium
2) Withdrawal using the "Half System"
It is assumed that the maturities of
policies issued during the year are
spread out uniformly over 12 months
of the year .
Formula :
( Premium - (Commission + Taxes))/2
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Methods of Portfolio Premium
3) Withdrawal using the "Eighth System":
Premium is ceded Quarterly. The average
maturity is fixed in the middle of the Quarter.
For example, at the end of the year of account,
7/8th of the premium of the Ist Quarter are
earned, whilst 1/8th is withdrawable.
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5/16/201415
FormulaPortfolio
Premium
1 2 3 4 5 6 7 8
1/8th of
premiumRs. 50 M
3/8th of
premiumRs. 225 M
5/8th of
premiumRs. 250 M
5/8th of
premiumRs. 525 M
Total Premium Rs. 2,000/-
Portfolio Premium Rs. 1,050/-
Premium Rs. 400
M
Premium Rs. 600
M
Quarter ending
31.03.2013
Quarter ending
30.06.2013
Quarter ending
30.09.2013
Quarter ending
31.12.2013
Premium Rs. 400
M
Premium Rs. 600
M
Methods of Portfolio Premium
3) Withdrawal using the "Eighth System":
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Methods of Portfolio Premium
4) Withdrawal using the "Twenty Fourth" System :
Premium ceded Monthly. The average
maturity of the policy is assumed in the
middle of the month.
For example : first month of the period
one can consider that 23/24th are earned
and 1/24th is unearned and so on.
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Methods of Portfolio Premium
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Treaty Period : 01.01.2013 to 31.12.2013
Premium
in Rs.
Million
Month
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Total Premium ; 1,440 M
Portfolio Premium : Rs. 750 M
23/24 th
7/24 th
65
75
85
95
105
115
15/24 th
17/24 th
19/24 th
21/24 th
120 120
25
35
45
55
5/24 th
9/24 th
11/24 th
13/24 th
120 120 120 120 120 120120
5
15
120 120 120
1/24 th
3/24 th
JunMayAprMarFebJan DecNovOctSepAugJul
4) Withdrawal using the "Twenty Fourth" System :
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PORTFOLIO PREMIUM USING
VARIOUS METHODS
PREMIUM 8TH METHOD HALF
SYSTEM
FLAT
RATE
40%
QTR 1 64,000 * 1/8 = 8,000
QTR 2 24,000 * 3/8 = 9,000
QTR 3 40,000 * 5/8 = 25,000
QTR 4 32,000 * 7/8 = 28,000
TOTAL 1,60,000 70,000 80,000 64,000
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Earned Premium:
Premium Net of Portfolio Premiums
Formula :
Earned Premium = Written Premium
+ Portfolio Premium Entry
- Portfolio Premium withdrawal
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Exercise No 1- Please Calculate Earned Premium for the year 2003
Details Year Amount
(Rs.)
Premium net of
commission
2002 Rs.100,000
Premium 1 qtr 2003
2 qtr 2003
3 qtr 2003
4 qtr 2003
Rs 50,000
Rs 60,000
Rs 70,000
Rs 70,000
Commission 2003 20%
Portfolio Premium
Transfer
2002
2003
Half system
Half system205/16/2014
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Exercise No 1- Earned Premium - 2003 - Answer
Details Year Amount (Rs.)
Premium 1 qtr 2003
2 qtr 2003
3 qtr 2003
4 qtr 2003
Rs 50,000
Rs 60,000
Rs 70,000
Rs 70,000
Total Premium 2003 (A) Rs. 250,000
Commission @ 20%
Net Premium
2003
2003
Rs. 50,000
Rs. 200,000
P/F Premium Withdrawal 2003 (B) Rs. 100,000
P/F Premium Entry 2002 - (C) Rs. 50,000
Earned Premium 2003(A-B+C) Rs. 200,000
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REINSURANCE COMMISSION
PAID BY REINSURER TO CEDING COMPANY. REIMBURSEMENT OF COST OF ACQUIRING
BUSINESS AND CONTRIBUTION TO MANAGEMENT EXPENSES.
PERCENTAGE OF PREMIUM FACTORS AFFECTING COMMISSION
Development of Market Type of Treaty Treaty Results
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TYPES OF COMMISSIONS
FLAT RATE BASIS Flat % of premium
SLIDING SCALE BASIS
Depending on the incurred claims ratio.
More the Claim ratio less is the commission.
Less the Claim ratio more commission rate.
- Minimum Commission.
- Maximum Commission.
- Provisional Commission.
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Exercise No. 2
Arrangement : Fire Surplus Treaty Earned Premium Rs. 1,00,000 Incurred Claims - Rs. 50,000 Provisional Commission : 35% Commission : Min. 25% Max 45% Terms :
Claim ratio is 40 but 50 but 60% , Comm @ 25%
Calculate commission on sliding scale basis
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Solution
Provisional Comm. - Rs. 35,000
Incurred claims ratio 50%
Hence commission is 40% of Premium
i.e. Rs. 40,000
Additional commission Rs. 5,000
(40,000-35000) is payable by reinsurer
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OVERRIDING COMMISSION -Commission over and above the Basic
commission. Charged on retrocessions.
TAXES Based on the laws of the country
OTHER DEDUCTIONS
as per treaty conditions
BROKERAGE
In case of reinsurance through brokers.
On proportional around 2.5%
On non-proportional around10.0%26
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PROFIT COMMISSION
The Profit derived from the Treaty is dueto the skill and care exercised in the
contract of the business by the Ceding
Company. In such case, a percentage of
the profit made by the reinsurer out of
the Treaty, is refunded to the ceding
company at the close of each treaty year.
The profit commission is paid in addition tothe normal commission.
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Calculating factors of Profit Commission
INCOME : Premiums for current year. Loss O/s from previous year/Portfolio Loss Entry Unexpired premium Reserve brought forward from
previous year/Portfolio Premium Entry.
OUT-GO : Commission paid for the current year. Losses paid during the current year. Reinsurance expenses - usually 2.5% to 5.0% of
premiums (notionally for P.C. computation purposes).
Taxes and Charges, if any. Un-earned premium Reserve for Current year/Portfolio
Premium Withdrawal.
Losses O/S at the end of the current year/Portfolio Loss Withdrawal.
Deficit, if any, brought forward from previous year.28
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Claims
Claims paid The amounts are debited in the quarterly statement of accounts.
Cash Calls Large loss above a certainmonetary limit are recovered as cash loss. To ensure cash flow Advance against cash claims credit for cash loss in immediately next/subsequent
quarterly account
Outstanding Claims Unpaid claims as on the date of submitting the accounts are included in the statement of account as additional information.
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Incurred Claims
Formula
Paid Claims
+ Outstanding Claims at the end
- Outstanding Claims at the beginning
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Portfolio Loss Transfer
The reinsurers' share of the total amount ofoutstanding losses as at the end of the Treatyyear is called "Portfolio Loss". Assuming thatthe Ceding Company is prudent in its lossestimates, a rate of 90% (or upto 100%) of thetotal estimated outstanding losses is deemedadequate, to be debited to the outgoingreinsurer and credited to the new reinsurer.
Portfolio Loss withdrawal from old reinsurer Portfolio Loss Entry to new reinsurer Applicable to Clean Cut Treaties.
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Exercise No 3-Please Calculate Profit Commission for
the year 2003
Details Year Amount (Rs.)
Premium 2003 Rs 2,500,000
P/F Premium entry
P/F Premium Withdrawal
2003 Rs. 700,000
Rs. 1,200,000
P/F Loss Entry
P/F Loss Withdrawal
2003 Rs. 800,000
Rs. 600,000
Commission 2003 @ 20%
Claims Paid 2003 Rs. 900,000
Management Expenses @ 4% on Premium
Loss of Previous Year 2002 Rs. 600,000
Profit Commission @ 20% 2003 losses till extinction
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Exercise No 3-Profit Commission - AnswerDetails Year Amount (Rs.)
Premium 2003 Rs 2,500,000
P/F Premium entry
P/F Loss Entry
2003 Rs. 700,000
Rs. 800,000
Total Income (A) Rs. 4,000,000
Commission @ 20% 2003 Rs. 500,000
Claims Paid 2003 Rs. 900,000
Management Expenses Rs. 100,000
P/F Premium Withdrawal
P/F Loss Withdrawal
2003 Rs. 1,200,000
Rs. 600,000
Total Outgo (B) Rs. 3,300,000
Profit (A-B) 2003 Rs. 700,000
Less : Loss of Previous Year 2002 Rs. 600,000
Profit for Calculation of P.C. Rs. 100,000
Profit Commission @ 20% 2003 Rs. 20,000
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Financial Items
Premium Reserve Deposit Proportion of premium retained as guarantee forobligation .
Agreed % of premium as per treaty terms.
Retained in one quarter and released in (as per treatyterms may be after 4 quarters i.e. 1 Qtr current yeardeposit released in 1st Qtr of next year) subsequentquarter.
Loss Reserve Deposit Additional security
100% or 90% of Outstanding Loss
Retained amount released next quarter
(should not be mixed up with Unexpired Risk Reserves)
Interest on Reserves is given by ceding company ondeposits held at agreed %.
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Items - Non-Proportional Cover
Minimum & Deposit Premium
Adjustment Premium
Excess of Loss recovery
Reinstatement Premium
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Minimum & Deposit Premium
As per terms of cover
Paid in advance or quarterly installments
Gross Net Premium Income. (G.N.P.I.)
Gross Net Premium Income of protected
portfolio of the company under X.L. Cover.
Excess of Loss Premium:
Arrived at by applying the X.L. Rate on G.N.P.I
Adjustment Premium : XL Premium lessDeposit Premium.
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Fire Catastrophe XL Cover
Adjustment Premium
Case 1 Case 2
Gross Net
Premium IncomeRs. 400 mln Rs. 400 mln
Minimum &
Deposit PremiumRs. 10,000,000 Rs. 10,000,000
Rate 2.00% 3.00%
XL Premium Rs. 8,000,000 Rs. 12,000,000
Adjustment
Premium
Nil Rs. 2,000,000
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REINSTATEMENT PREMIUM :
Consideration for re-establishing the suminsured to its original figure after it has
been reduced by the amount of a loss
payment.
There are three main methods
- 50% additional premium
-100% additional premium
- Prorata.
- Nil
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Formula for Reinstatement Premium
Method of 50% Additional Premium
Amount of Claim 0.5 XL Premium
Cover
Method of 100% Additional Premium
Amount of Claim 1.0 XL Premium
Cover
Prorata MethodAmount of Claim Period of reinstatement XL Premium
Cover Total period of the cover
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Fire Catastrophe XL Cover
Claim Recovery
Limit (Rs.)
1.4.02
31.3.03
Case 1
Claim 0.80 mln
Case 2
Claim 4 mln
Case 3
Claim
7 mln
Layer I 2 mln Xs 1mln Nil 2 mln 2 mln
Layer II 3 mln Xs 3 mln Nil 1 mln 3 mln
Layer III 4 mln Xs 6 mln Nil 1 mln
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Fire Catastrophe XL Cover
Reinstatement Premium
Limit (Rs.) XL
Premium
Rs.
Case 2
Claim4 mln
Reinstatem
ent @
100%
Case 3
Claim 7 mln
Reinstateme
nt @ prorata
D.O.L 1.7.02
Layer I 2 mln Xs 1 mln 120,000
Layer II 3 mln Xs 3 mln 100,000
Layer II 3 mln Xs 3 mln 60,000
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BURNING COST :
Burning Cost is defined as the ratio of excess of lossrecoveries incurred during the period of contract tothe corresponding Net Premium Income.
The rate is then loaded by a factor to meet the original acquisition cost, management expenses and profit margin.
In effect the reinsured pays to the reinsurer Premiums adjusted by the amount of Claims Paid. The Claims are then loaded by a factor and this is all subject to a Minimum and Maximum Rate.
(Paid + Outstanding Losses)/Gross Premium Income * Loading Factor
The most common loading factor is 100/70.
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Exchange Gain/Loss Transactions in foreign currency need to be
converted in National Currency.
Accounted as per Accounting Standard 11(A.S.11). Revenue transactions at the rate as on date of
transactions
Current Assets and liabilities in Foreign currency, arerequired to be revalued at the end of the year at yearend rate.
Gain or Loss arising out of different exchangerates on booking of account and date ofsettlement to be taken to respective revenueaccounts.
Exchange profit/loss arising out of revaluation ofcurrent assets and liabilities are recoded in theprofit and loss account.
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Credit Control Receivable Balances
monitoringSending recovery
letters in advance forthe installmentpremiums due in nearfuture.
Continuous updating of balances.
Continuous follow up.
Sorting out queries immediately.
Payable Balances Processing &
settlement of cashlosses in time.
Payment ofDeposit Premiums ondue dates.
Premium PaymentWarranty if any to bestrictly followed forpremiums payable.
Other balanceswith in reasonabletime.
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Credit Control - General
Monitoring financial status of the reinsurer/ security
Selective treatment for slow payers.Settlement on net basis
Continuous reconciliation of ledgerbalance.
Resorting to Commutation Agreement forrecovery of old outstanding balances.
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Provisions at the year end
I.B.N.R (Incurred but not reported) As per Appointed Actuarys certificate
I.B.N.E.R (Incurred but not enough reported) As per Actuarial Calculation
Unexpired Risk Reserve in Revenue Accounts as per I.R.D.A. guidelines.
- Fire @ 50% of Premium
- Miscellaneous - @ 50% of Premium
- Marine Hull @ 100% of Premium
- Marine Cargo @ 50% of Premium
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Statistics
Statistics is systematically gathered information, showingclear picture of the past business experience, whichenable safer decisions in the present for the future.
Enables checking performance and financial analysis,whether goals are achieved, analysis for deviations ifany, trends can be recognized and reacted in time.
Statistics are derived on various parameters like classwise, treaty wise, currency wise, , Accounting year wisedepending upon the requirements.
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Features of Inward Business
List of Arrangements with details
Returns summarised in national currency exchange rates
Yearly cut-off date for accounting returns
Estimation & Provision of OutstandingLosses
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Types of Outward Business
Cessions (out of direct business)
Retrocession Pools (out of reinsurance acceptances)
Specific Retrocessions
XL Covers protecting Net A/c
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Reinsurance Pool Arrangement
Pool Manager
A B C D E
Pool Fund
505/16/2014
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Pool Working - features
Cessions by pool members which are Indian insurers. (Includesquarterly accounts showing premium, Deductions & claims- in caseof motor pool monthly data is processed)
Administrative charges @ 2% for Pool Members (10% in case motorpool). Overriding Commission @ 1% (2.5% for Motor Pool) for GIC.
Retroceded to Pool members at agreed percentage on quarterlybasis.
No settlement of Pool Retro a/c, but fund is maintained by PoolManager.
Cost of XL cover paid through pool fund. Investment of Pool Fund are done separately as per guidelines
given by pool managing committee. Income on the investment isalso distributed as per agreed share.
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Books of Accounts
Inward and Outward Business
Journal reflecting all transactions
Accounts Balances Ledger Reinsurers Balances
Premium & Loss Reserve Ledger
Cash Loss Advance Ledger
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Finalisation of Accounts
All returns accounted for
Foreign Currency Conversions are correct
Adequate provisions i.r.o. OutstandingLosses
Profit Commission & Adjustment Premiumaccounted for
Retrocessions are accounted/provided for
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Revenue Account
Prepared Class-wise.
As per format prescribed by IRDA.
Supported by schedules for premium,commission and incurred claims.
Summary of revenue transactions.
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General Accounts Section
Functions
Expenses Accounting
Central Treasury Cell (including Bank Accounts in foreign currencies)
Taxation matters
Finalisation of Accounts
IRDA Statements.
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General Accounts Working
Expenses Accounting Verification of the vouchers.
Financial authority verification.
Payment through cheque & cash
Petty Cash imprest system limit Rs.25,000/-
Inter bank transfers.
Funds transfers to branches in India & Abroad.
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General Accounts Working
Central Treasury Cell
Bank Accounts in foreign Currency
Mainly for Reinsurance transactions
Short term deposits (less than 90 days) of surplus funds
Bank reconciliation statements
Revaluation of funds at the end of quarter
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General Accounts Working
Taxation matters
Income tax Rate 30% on income + 10% surcharge on tax + 3% Education cess on (Tax + surcharge), effectively 33.99%.
Service Tax on Reinsurance premium - @ 12% premium + 3% Education cess on tax. To be paid on monthly basis
585/16/2014
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General Accounts Working
Finalisation of Accounts
Consolidation of Trial Balances from various accounts sections Provision for depreciation on fixed assets. Preparation of Revenue Accounts Fire. Marine, Miscellaneous &
Life.
Preparation of P & L A/c & Balance Sheet. Balance sheet is the list of assets and liabilities as on the last day of the
year.
P & L A/c is a statement showing profit or loss incurred during thefinancial year.
Preparation of schedules like Premium schedule, Claims, Fixedassets etc.
Significant Accounting Policy & Notes forming part of accounts givethe basis & details of the working of the final accounts.
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General Accounts Working
Finalisation of Accounts
Final Accounts have to be drawn according tocompanies Act, IRDA regulations & AccountingStandards.
Final Accounts are accepted subject to StatutoryAudit & C & AG Audit.
Calculation of Solvency Margin as per IRDAsguidelines:
Available Solvency Margin (ASM)/ Requiredsolvency Margin (RSM)
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?
Questions
615/16/2014
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Thank You
625/16/2014