REINSURANCE ACCOUNTING

N. B. Sonawane, GIC Re
5/16/2014

Road Map
Accounting for Proportional Business
Portfolio Accounts
Sliding Scale Commission
Profit Commission

Accounting for Non-proportional Business

Adjustment Premiums
Reinstatement Premiums

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Provisioning
Financial Items
Other terms
Special Arrangements Pool & ART
2

FLOW OF ACCOUNTS

CEDING COMPANY
BROKER

REINSURER

REINSURERS

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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
5/16/2014

FOR REINSURER

ELEMENT TO FULFIL
THE TERMS OF THE
TREATY
FINANCIAL
PLANNING
POSSIBLE
ENABLES TO
ASSESS QUALITY
OF BUSINESS
BASE FOR
STATISTICS.

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

NON-PROPORTIONAL

QUARTERLY ACCOUNTS
HIGH LEVEL OF
COMMISSION
PROFIT COMMISSION
RESERVES
MINIMUM CASH FLOW

MINIMUM & DEPOSIT

PREMIUM IN ADVANCE
OR
QTRLY
INSTALMENTS
PREMIUM ADJUSTMENT
A/C
LOW COMMISION
CLAIM RECOVERY &
REINSTATEMENT
PREMIUM

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PROPORTIONAL ACCOUNTS
LIST OF ITEMS

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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P/F/ PREMIUM WITHDRAWN
P/F/ LOSS WITHDRAWN
7

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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
8

 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 end
of an annual period.
-This is traditionally calculated at a rate of
35% to 40% of the year's Gross Premium
ceded.
-Premium taken from old reinsurer is called
Portfolio Withdrawal
-Premium given to new reinsurer is called
Portfolio Entry

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10

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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11

Methods of Portfolio Premium

1) Portfolio withdrawal "Prorata" -

Case
1

Policy
Period
01.1.2013
to
31.03.2013

Case
2

Policy
Period
01.02.2013
to
31.01.2014

Treaty period

Jan

Feb

Mar

Apr May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Aug

Sep

Oct

Nov

Dec

Nil

Treaty Period

Jan

Feb

Mar

Apr May

Jun

Jul

31 days
Premium
Feb

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Mar

Apr May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

12

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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13

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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14

Methods of Portfolio Premium

3) Withdrawal using the "Eighth System":

Quarter ending Quarter ending

31.03.2013
30.06.2013
1
2
3
4
Premium Rs. 400
M

Quarter ending
30.09.2013
5
6

Quarter ending
31.12.2013
7
8

Formula

Portfolio
Premium

1/8th of
Rs. 50 M
premium
3/8th of
Rs. 225 M
premium

Premium Rs. 600

M
Premium Rs. 400
M

5/8th of
Rs. 250 M
premium
Premium Rs. 600 5/8th of
Rs. 525 M
premium
M

Total Premium Rs. 2,000/Portfolio Premium Rs. 1,050/-

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15

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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16

Methods of Portfolio Premium

4) Withdrawal using the "Twenty Fourth" System :
Treaty Period : 01.01.2013 to 31.12.2013
Premium
in Rs.
Million
Month

120

120

120

120

120

120

120

120

120

120

120

120

Jan

Feb

Mar
5 6

Apr

May
9 10

Jun
11 12

Jul

Aug
15 16

Sep
17 18

Oct
19 20

Nov
21 22

Dec
23 24

1 2
1/24 th
5

3/24 th
15

5/24 th
25

7/24 th
35

13

14

9/24 th
45
11/24 th
55
13/24 th
65
15/24 th
75
17/24 th
85
19/24 th
95
21/24 th
105
23/24 th
115

Total Premium ; 1,440 M

Portfolio Premium : Rs. 750 M

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17

PORTFOLIO PREMIUM USING

VARIOUS METHODS
8TH METHOD

PREMIUM

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

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HALF
FLAT
SYSTEM RATE
40%

70,000 80,000

64,000

18

 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

Premium net of
commission

2002

Amount
(Rs.)
Rs.100,000

Premium

1 qtr 2003
2 qtr 2003
3 qtr 2003
4 qtr 2003
2003

Rs 50,000
Rs 60,000
Rs 70,000
Rs 70,000
20%

Commission

Portfolio Premium 2002

Transfer
2003
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Half system
Half system

20

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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21

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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22

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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23

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%, Comm. max 45%
Claim ratio is > 40 but <= 50, comm 40%
Claim ratio is > 50 but <= 60, comm 30%
Claim ratio >60% , Comm @ 25%
Calculate commission on sliding scale basis
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24

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%
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26

PROFIT COMMISSION
The Profit derived from the Treaty is due
to 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 to
the normal commission.
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27

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.

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Claims
Claims paid The amounts are debited in the
quarterly statement of accounts.
Cash Calls Large loss above a certain
monetary 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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29

Incurred Claims
Formula
Paid Claims
+ Outstanding Claims at the end
- Outstanding Claims at the beginning

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30

Portfolio Loss Transfer

The reinsurers' share of the total amount of
outstanding losses as at the end of the Treaty
year is called "Portfolio Loss". Assuming that
the Ceding Company is prudent in its loss
estimates, a rate of 90% (or upto 100%) of the
total estimated outstanding losses is deemed
adequate, to be debited to the outgoing
reinsurer 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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31

Exercise No 3-Please Calculate Profit Commission for

the year 2003
Details
Premium
P/F Premium entry
P/F Premium Withdrawal
P/F Loss Entry
P/F Loss Withdrawal
Commission
Claims Paid

Year
2003
2003
2003
2003
2003

Management Expenses
Loss of Previous Year
2002
Profit Commission @ 20% 2003
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Amount (Rs.)
Rs 2,500,000
Rs. 700,000
Rs. 1,200,000
Rs. 800,000
Rs. 600,000
@ 20%
Rs. 900,000

@ 4% on Premium
Rs. 600,000
losses till extinction
32

Exercise No 3-Profit Commission - Answer

Details

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

Rs.

100,000

Management Expenses
P/F Premium Withdrawal
P/F Loss Withdrawal
Total Outgo
Profit

2003

(B)

(A-B)

Less : Loss of Previous Year

Rs. 3,300,000
2003
2002

Profit for Calculation of P.C.

Profit Commission @ 20%
5/16/2014

Rs. 1,200,000
Rs. 600,000
Rs.

700,000

Rs. 600,000
Rs. 100,000

2003

Rs.

20,000
33

Financial Items
Premium Reserve Deposit
Proportion of premium retained as guarantee for
obligation .
Agreed % of premium as per treaty terms.
Retained in one quarter and released in (as per treaty
terms may be after 4 quarters i.e. 1 Qtr current year
deposit released in 1st Qtr of next year) subsequent
quarter.
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 on
deposits 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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35

 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 less
Deposit Premium.

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Fire Catastrophe XL Cover

Adjustment Premium
Case 1
Gross Net
Rs. 400 mln
Premium Income
Minimum &
Rs. 10,000,000
Deposit Premium

Rate

XL Premium
Adjustment
Premium
5/16/2014

Case 2
Rs. 400 mln
Rs. 10,000,000

2.00%

3.00%

Rs. 8,000,000 Rs. 12,000,000

Nil

Rs.

2,000,000

37

 REINSTATEMENT PREMIUM :
Consideration for re-establishing the sum
insured 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 Method
Amount of Claim Period of reinstatement
Cover
Total period of the cover

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XL Premium

39

Fire Catastrophe XL Cover

Claim Recovery
Case 1
Claim
0.80 mln

Case 2
Claim 4
mln

Layer I

Limit (Rs.)
1.4.02
31.3.03
2 mln Xs 1mln

Nil

2 mln

Case 3
Claim
7 mln
2 mln

Layer II

3 mln Xs 3 mln

Nil

1 mln

3 mln

Layer III

4 mln Xs 6 mln

Nil

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1 mln

40

Fire Catastrophe XL Cover

Reinstatement Premium
Limit (Rs.)

XL
Premium
Rs.

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

5/16/2014

Case 2
Case 3
Claim4
Claim 7
mln
mln
Reinstatem Reinstateme
ent
@ nt @ prorata
100%
D.O.L 1.7.02

41

 BURNING COST :
Burning Cost is defined as the ratio of excess of loss
recoveries incurred during the period of contract to
the 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, are
required to be revalued at the end of the year at year
end rate.

Gain or Loss arising out of different exchange

rates on booking of account and date of
settlement to be taken to respective revenue
accounts.
Exchange profit/loss arising out of revaluation of
current assets and liabilities are recoded in the
profit and loss account.
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Credit Control
Receivable Balances
monitoring
Sending
recovery
letters in advance for
the
installment
premiums due in near
future.
Continuous
updating of balances.
Continuous follow
up.
Sorting out queries
immediately.

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Payable Balances
Processing
&
settlement of cash
losses in time.
Payment
of
Deposit Premiums on
due dates.
Premium Payment
Warranty if any to be
strictly followed for
premiums payable.
Other
balances
with in reasonable
time.
44

Credit Control - General

Monitoring financial status of the reinsurer
/ security
Selective treatment for slow payers.
Settlement on net basis
Continuous reconciliation of ledger
balance.
Resorting to Commutation Agreement for
recovery of old outstanding balances.
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45

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, showing
clear picture of the past business experience, which
enable safer decisions in the present for the future.
Enables checking performance and financial analysis,
whether goals are achieved, analysis for deviations if
any, trends can be recognized and reacted in time.
Statistics are derived on various parameters like class
wise, treaty wise, currency wise, , Accounting year wise
depending 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 Outstanding
Losses

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48

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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49

Reinsurance Pool Arrangement

Pool Manager

5/16/2014

Pool Fund

50

Pool Working - features

Cessions by pool members which are Indian insurers. (Includes
quarterly accounts showing premium, Deductions & claims- in case
of motor pool monthly data is processed)
Administrative charges @ 2% for Pool Members (10% in case motor
pool). Overriding Commission @ 1% (2.5% for Motor Pool) for GIC.
Retroceded to Pool members at agreed percentage on quarterly
basis.
No settlement of Pool Retro a/c, but fund is maintained by Pool
Manager.
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 is
also 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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52

Finalisation of Accounts
All returns accounted for
Foreign Currency Conversions are correct
Adequate provisions i.r.o. Outstanding
Losses
Profit Commission & Adjustment Premium
accounted 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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54

General Accounts Section

5/16/2014

Functions
Expenses Accounting
Central Treasury Cell (including Bank
Accounts in foreign currencies)
Taxation matters
Finalisation of Accounts
IRDA Statements.

55

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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56

General Accounts Working

5/16/2014

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

57

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

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58

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 the
financial year.

Preparation of schedules like Premium schedule, Claims, Fixed

assets etc.
Significant Accounting Policy & Notes forming part of accounts give
the 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 to
companies Act, IRDA regulations & Accounting
Standards.
Final Accounts are accepted subject to Statutory
Audit & C & AG Audit.
Calculation of Solvency Margin as per IRDAs
guidelines:
Available Solvency Margin (ASM)/ Required
solvency Margin (RSM)

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60

?
Questions

5/16/2014

61

Thank You

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62