Accounting in insurance companies basic concepts

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Financial Accounting in Insurance Companies Basic Concepts Prepared by Avik Saha ([email protected]) Reference: 1. LOMA 361(Accounting and Financial Reporting in Life Insurance Companies) Course Material 2. Essentials of Financial Accounting by Asish K, Bhattacharyya

Transcript of Accounting in insurance companies basic concepts

Financial Accounting in Insurance Companies

Basic Concepts

Prepared by Avik Saha ([email protected])

Reference: 1.  LOMA 361(Accounting and Financial Reporting in Life Insurance Companies) Course Material 2.  Essentials of Financial Accounting by Asish K, Bhattacharyya

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Accounting: A system or set of rules and methods for collecting, categorizing, measuring, recording, summarizing, reporting, analyzing and monitoring financial information about the financial condition and performance of a company as a whole, as well as of segments, product lines or divisions within the company.

Financial Reporting: The process of presenting financial data about a company’s financial position, the company’s operating performance, and the flow of funds for an accounting period.

Basic Terms

Business Transaction: A transaction to which a company must assign an objective monetary value, whether the impact on the company is large or small, actual or expected.

Solvency: Company’s ability to meet its financial obligation on time and with available cash.

Profitability: Degree to which a company is successful in consistently generating money for its owners.

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Financial Statements Balance sheet (Account form) Balance sheet (Report form)

Assets Liabilities

Owners’ Equity Assets Liabilities

Owners’ Equity

Income Statement

Revenues (-) Expenses

Cash Flow Statement

Cash Flow from operating activities

(+) Cash Flow from Investing activities

(+) Cash Flow from Financing activities

Earning Before Interest and Tax (EBIT)

(-) Income Tax Earning Before Tax (EBT)

(-) Interest Expense

Net Income

Net Increase (Decrease) in Cash

(+) Beginning Period Cash Balance

Ending Cash Balance

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User of Accounting information

External Users Internal Users

Direct Interest

Indirect Interest

•  Individual Policy Owners •  Group Policy Owners •  Beneficiaries •  Insureds •  Stockholders •  Producers •  Creditors

•  Employees •  Directors •  Officers

•  Competing Companies •  External Auditors •  Insurance Commissioners •  Independent Rating Agencies •  Tax Authorities

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Accounting Equation

Asset (A) Liability (L) Owner’s equity (E) Items of value owned by the company

Monetary value of a company’s current and future obligations

Owner investment in the company

•  Cash •  Investments (stocks, bonds) •  Premium due and receivable •  Accrued Income •  Equipment •  Real Estate etc

•  Contractual reserves •  Commissions payable •  Accrued Expense

•  Common Stocks outstanding •  Preferred Stock outstanding •  Additional Paid-in capital •  Retained Earnings

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Chart of Accounts An account is a tool that a company uses to record, group, and summarize similar type of business transactions which typically involve Assets, Liabilities, Owner’s Equity, Revenues and Expenses. Chart of Accounts is a numbered or an alphabetical list of all the company’s account names. Example: 1000 Assets

1001 Bonds 1002 Common Stocks 1003 Mortgages

2000 Liabilities 2001 Contractual Reserves 2002 Other Liabilities

3000 Owner’s Equity 3001 Capital 3002 Surplus

4000 Revenues 4001 Premium Income 4002 Investment Income

5000 Expenses 5001 Contractual benefits 5002 Operating Expenses

Permanent Account is a balance sheet account that has a balance at the beginning of each accounting period. E.g. Asset, Liability and Owner’s Equity Accounts

Temporary Account or a nominal account is an account that is closed out to a permanent account on the balance sheet at the end of each accounting period. E.g. Revenue and Expense accounts. At the beginning of each account period temporary accounts have zero balance

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Double Entry Accounting 1.  Every business transaction has at least one debit and one credit 2.  The total monetary amount of debits must equal that of the credits for that transaction 3.  Each accounting entry maintain the balance of the basic accounting equation (A=L+E)

Debit (Dr.)/Credit (Cr.): Specified change made to the monetary value of an account

Debit increases values of Asset and Expense accounts; decreases values of Liability, Owner’s Equity and Revenue Accounts

Credit decreases values of Asset and Expense accounts; increases values of Liability, Owner’s Equity and Revenue Accounts

Asset = Liabilities + Owner’s Equity

Expense Revenue

Dr. Cr.

Dr. Cr.

+ +

- -

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Accounting Cycle

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Journalisation (making journal entry) of transactions and

business events

General Ledger posting and balancing

Preparation of Trial Balance

Preparation of final accounts (Balance Sheet, Income Statements, Cash Flow

Statements)

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Accounting Entries Accounting entry or journal entry is a record of a business transaction that includes at least one debit and one credit and shows the monetary transactions in balance on a specified date

Simple Accounting Entry

Compound Accounting Entry

Insurer A receives $2000 annual premium on a life insurance policy: Cash…………..2000 Dr.

Premium Income………..2000 Cr.

Insurer A paid a claim of $10000 plus interest of $100 to a beneficiary: Death Claim Paid………10000 Dr. Interest Expense………..100 Dr.

Cash…………………………10100 Cr.

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Types of Accounting Entries Closing Entry is an accounting entry that a company makes at the end of each accounting period to start the next accounting period with zero balance in the temporary accounts. E.g.

Suppose in an accounting period Insurer A has $3000 of Revenue and $2000 of Expense. As Revenue and Expense accounts are temporary, their balances will be $0 at the beginning of the next accounting period. So a closing entry is made to transfer the net income of $1000 to the Retained Earnings or Surplus account (permanent Owner’s Equity account).

Adjusting Entry is an accounting entry that a company makes to record accruals for revenues and expenses, unearned revenues and prepaid expenses. Other adjusting entries include depreciation, changes made to reserve accounts and corrections to previous accounting periods.

Accruals refers to expense incurred but not yet paid or revenue earned but not yet received. Unearned revenues refers to the income e.g. unearned premium which has been collected in one accounting period but coverage to be provided in the next period but before policy anniversary date. Prepaid expense are those expenditures, remitted in advance, that the insurer expects will provide a future value of benefits The adjusting entry for salary earned by the producer but not yet paid: Accrued Salaries Expense……….XXX Dr.

Salaries Payable………………………….XXX Cr. When salary is paid to the producer: Salaries Payable…………………..XXX Dr.

Cash………………………………………XXX Cr.

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Normal Balances Account balance is the monetary amount (Debit minus Credit) in an account on a particular date. If Debit > Credit, the account has normal debit balance If Credit > Debit, the account has normal credit balance

Normal balance is the side of the account, whether debit or credit, to which increases to the account is recorded.

Normal Debit Balance Normal Credit Balance

Asset Expenses

Liability Owner’s Equity Revenue

If an account shows opposite of its normal balance, that account is subject to manager review. For example, if Cash account which has a normal debit balance, shows credit balance i.e. the cash balance is below zero, it needs investigation.

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Accounting Principles and Concepts Two Financial Statement Concepts: Entity Concept states that a company must account separately for the business activities of each entity, business unit or economic unit. An entity is the basic business unit for which a company keeps separate business records and prepare reports, e.g. a person, a partnership, a corporation , an organization, a business or a portion of a business. The Going Concern concept states that a company should maintain its accounting records with the assumption that the company would continue to operate indefinitely i.e. it is not facing liquidation. Liquidation is the process of selling all company assets for cash and using that cash to pay the company’s debts; any remaining funds are distributed to the company’s owners.

Insurers should disclose all material or significant information in the financial statements. The accounting information should be : Relevant i.e. useful and timely to affect an user’s decision about the company Reliable i.e. accurate, objective and free from bias and misrepresentation Comparable i.e. statements for different accounting periods and different companies can be compared Consistent i.e. company follows same accounting principles in different periods (unless there is a sound reason to change) Conservative i.e. prudent reaction; understating asset and revenue, overstating liabilities and expenses

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Realization and Matching principle

Realization principle states that a company should recognize revenue when it is earned, regardless of when the company receives the actual payment (insurance premium or annuity consideration for example), so long as a legal and reasonable expectation exists that the customer will remit payment in full. Recognition refers to the process of classifying an item in a financial statement as an asset, liability, owner’s equity, revenue or expense. Matching Principle states that a company should recognize expenses as the company earns the revenue related to those expenses, regardless of when the company receives payment for the revenues earned and regardless of when the company actually paid the expenses. Realization Principle and Matching Principle work in tandem.

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Account Bases – Accrual and Cash basis

Accrual basis Accounting is an accounting system under which a company records revenues when they are earned and expenses when they are incurred, even if the company has not yet received the revenues or paid the expenses.

Cash basis Accounting is an accounting system under which a company records revenues and expenses only when it receives cash or disburses cash.

December 31, 2010

January 10, 2010

Example: On 31st Dec, 2010, Insurance company ABC bought $5000 of furniture on account from XYZ. XYZ delivered it

same day. ABC remits the payment in full on Jan 10, 2011.

Furniture…….$5000 Dr. Cash…......$5000 Cr.

Furniture…….$5000 Dr. Accounts Payable…......$5000 Cr.

Accounts Payable …….$5000 Dr. Cash…......$5000 Cr.

Cash Basis Accrual Basis

Only accrual basis accounting follows realization and matching principles.

No Accounting entry

Note: All subsequent examples follow accrual basis accounting.

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Asset Accounting Some definitions

Valuation is the process of calculating monetary value of an asset

Historical Cost is the original price paid for the asset

Book value is the value at which the company records the asset in its accounting records and reports the asset

on the balance sheet. On date of purchase, asset’s historical cost equals book value.

Amortization is the periodic and systematic increase or decrease of the original cost of an investment to its

ultimate value at maturity

Depreciation is the allocation (spreading) of the cost of an asset over the asset’s estimated useful life. Total

amount of depreciation allocated to an asset as of a specified date is called Accumulated Depreciation.

Fair value is the price that an asset would obtain if the seller sells the asset to the buyer in the absence of a

required liquidation (in case of bankruptcy) or other condition that would force the asset’s sale by the seller.

Fair value accounting is reporting a company’s assets on the balance sheet at fair value.

Bond, Stock, Mortgages are some of the investment vehicles of insurance companies. These are invested assets.

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Asset Accounting…Cont.

Purchase on Cash

Asset A ……. $$$ Dr. (Asset)

Cash….$$$ Cr. (Asset)

Purchase on Account

Asset A ……. $$$ Dr. (Asset)

Accounts Payable ….. $$$ Cr. (Liability)

Purchase on Account with a cash down payment

Asset A ……. $$$ Dr. (Asset)

Cash….$ Cr. (Asset)

Accounts Payable ….. $$ Cr. (Liability)

Accounting for asset (A) purchase

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Asset Accounting…Cont.

Sale for Cash

Cash….$$$ Dr. (Asset)

Asset A ……. $$$ Cr. (Asset)

Sale on Account

Accounts Receivable - Asset A ….$$$ Dr. (Asset)

Asset A ……. $$$ Cr. (Asset)

Sale on Account with a cash down payment

Accounts Receivable - Asset A ….$$ Dr. (Asset)

Cash…………………………………$ Dr. (Asset)

Asset A ……. $$$ Cr. (Asset)

Accounting for asset (A) Sale

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Asset Accounting…Cont.

Bonds …………………………………...$1000 Dr.

Investment Income Due and Accrued …..$20 Dr.

Cash …………………………………$1020 Cr.

(To record the cash purchase of a bond with face value $1000 and accrued interest of $20)

Some Complex Asset Accounting Entries

Cash Dividend income due and accrued ………$200 Dr.

Dividend Income - Common Stock……….$200 Cr.

(To record (on ex-dividend date) the cash dividend income due and accrued on 200 held shares at the rate of

$1/share)

Ex-Dividend Date is the date used to determine whether a stockholder is eligible to receive a declared cash dividend.

Bonds pay interest (and return of capital). Stocks pay dividend (and capital gain or increase in stock price)

Note:

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Asset Accounting…Cont.

AT&T stock ………..$9500 Dr.

Cash………………..$9500 Cr.

(To record purchase of 100 shares of AT&T at $95/share)

Cash……………………………….$8000 Dr.

Loss on sale of AT&T stock……..$1500 Dr.

AT&T stock…………………….$9500 Cr.

(To record sale of those 100 AT&T shares at $80/share (at a loss))

Cash……………………………….$12000 Dr.

AT&T stock…………………….$9500 Cr.

Gain on sale of AT&T stock…..$2500 Cr.

(To record sale of those 100 AT&T shares at $120/share (at a gain))

Some Complex Asset Accounting Entries

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Asset Accounting…Cont.

Purchase and sale of real estate

Insurance company A purchases Axis Building for $1,000,000. Depreciation on the building is $10,000 per year. Accounting entry for recording

this depreciation is as follows:

Depreciation expense - Axis Building….$10,000 Dr.

Accumulated Depreciation – Axis Building….$10,000 Cr.

Accumulated Depreciation is a contra account . Contra Account accompanies a specified ‘companion’ account – typically an asset account, that has

a normal balance which is opposite of the companion account. The amount in contra account usually reduces the balance in its companion

account.

Insurer A sells Axis Building for $1,500,000 (gain). Depreciation on the building to date is $20,000.

Cash……………………………………………..$1,500,000 Dr.

Accumulated Depreciation - Axis Building…..$20,000 Dr.

Axis Building……………………………………….$1,000,000 Cr. (disposing the asset)

Gain on sale of Axis Building……………………..$70,000 Cr

If Insurer sells the building for $900,000 (loss), the following accounting entry is made:

Cash…………………………………………….$900,000 Dr.

Accumulated Depreciation - Axis Building….$20,000 Dr.

Loss on sale of Axis Building………………….$80,000 Dr.

Axis Building……………………………………….$1,000,000 Cr. (disposing the asset)

Some Complex Asset Accounting Entries

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Asset Accounting…Cont. Some Complex Asset Accounting Entries

Reinsurance Transactions

Life Insurance company XYZ issued an individual life insurance policy with a $300, 000 death benefit. XYZ reinsured $50,000

of the risk. While policy was in force, claim was made for the policy and XYZ determined that the beneficiary would receive the

full amount i.e. $300,000. The following accounting entry is made:

Death Claims Paid…………………$300,000 Dr. (Expense account)

Cash……………………………….$300,000 Cr.

(to record payment to beneficiary)

Amount recoverable from reinsurer……..$50,000 Dr. (Asset account)

Death Claims Paid……………………..$50,000 Cr.

(to record amount recoverable from reinsurer)

Cash…………………….$50,000 Dr.

Amount recoverable from reinsurer……..$50,000 Cr.

(when the amount received from insurer)

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Reserve (Liabilities) Accounting Reserve are estimates of the amount of money an insurer needs to pay future contract obligations. Reserve make up significant portion of insurer’s liabilities

Cash…XX Dr. Premium Income…XX Cr. To record premium income received from sales of new life insurance products

Invested Assets …XX Dr. Cash…XX Cr. To record purchase of invested assets to generate income and dividends

Change in reserves…XX Dr. Contractual reserves…XX Cr. To record the establishment of reserves for the new life insurance product

Cash…XX Dr. Invested Assets…XX Cr. To record sale of invested assets to provide cash for the payment of policy claims

Claims are incurred and reported against the new block of policies and are approved for payment

Death Claim paid…XX Dr. Cash…XX Cr. To record payment of approved life policy claims

Contractual reserves…XX Dr. Change in reserves…XX Cr. To record the reserves released from the settlement of claim

Actuaries provide an updated reserve amount for the product on the valuation date

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Reserve (Liabilities) Accounting…cont. Recording and paying policy owner dividends (for different payment options)

Actuaries determine and recommend dividend to board of directors

Board approves dividend and sets the date for policy owner dividend payment Policy owner dividend…..XX Dr. Policy owner dividend payable…..XX Cr.

Insurers update policy owner dividend record for policy owner dividend payment option

CASH Policy owner dividend paid….XX Dr. Cash…………………………….XX Cr.

REDUCE PRIMIUM Policy owner dividend applied to premium……….XX Dr. Premium Income…….XX Cr.

ACCUMULATE AT INTEREST Policy owner dividend applied to dividend accumulations……….XX Dr. Dividend Accumulations..…….XX Cr.

PURCHASE ADDITIONAL INSURANCE Dividends to purchase Paid-Up Addition…..XX Dr. Single premiums for Paid-Up Addition ……………XX Cr.

Or Dividends to purchase one year term insurance…….XX Dr. Single premium for one year term insurance ……………….XX Cr.

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Reserve (Liabilities) Accounting…cont. Waiver of premium accounting Waiver of premium contract provision provides premium payments to keep a life insurance policy in force if the insured suffers a qualifying disability. Waiver of premium benefits – ordinary……XX Dr.

Premium Income……………………..XX Cr. (to record the payment of a waived premium) Premium Suspense Account Suspense account is an account that is used to record transactions that can not be posted immediately to a specified account. Premium Suspense is the liability account used to record transactions that are intended as premiums, but that the insurer cannot accept as income until a particular event occurs. Insurers typically use premium suspense accounts for premium payment amounts that are a) renewal premiums b) different from the amounts in the insurer’s records or c) lacking critical information such as policy number. Cash…………………XXX Dr.

Premium Suspense …………..XXX Cr. (to record receipt of premium payment that cannot be immediately recorded to a premium income account) Premium Suspense …………..XXX Dr.

Premium Income……………..XXX Cr. (To record the application of a suspended premium as an actual premium – after the particular event occurs)

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Capital and Surplus Accounting Preferred Stock

Preferred stock is a type of equity security that represents ownership in a corporation and usually provides for the payment of fixed periodic dividend which is paid before any dividends can be paid on the corporation’s common stocks. Cash………………..XXX Dr.

Insurer’s Preferred Stock……………….XXX Cr. (to record issue and sale of Insurer preferred stock at par value)

Additional Paid-In Capital

Cash………………..XXX Dr. Insurer’s Preferred Stock…………………XX Cr. Additional Paid-in capital………………….X Cr.

(to record the sale of Insurer preferred stock at greater than par value)

Unrealized gains and losses

Unrealized Loss on Bonds…………..XXX Dr. Market Value adjustment – Bonds………….XXX Cr.

(to decrease the value of a bond temporarily as the bond’s current value is less than the value recorded in the accounting records )

Realized Loss on Bonds…………..XXX Dr. Bonds……………...………….XXX Cr.

(to write down the value of a permanently impaired bond)

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Revenue and Expense Accounting Premium Income Cash…………………XXX Dr.

Premium Income………..XXX Cr. (to record premium income on policy sale)

Investment Income Cash…………………XXX Dr.

Interest Income - Bonds………..XXX Cr. (to record interest income received on bonds owned by the insurer) Cash…………………XXX Dr.

Interest Income - Mortgages………..XXX Cr. (to record interest income received on mortgages owned by the insurer) Cash…………………XXX Dr.

Rental Income - Real Estate………..XXX Cr. (to record rental income received on real estate owned by the insurer) Cash…………………XXX Dr.

Dividend Income – Common Stock………..XXX Cr. (to record dividend income received for the common stock owned by the insurer)

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Revenue and Expense Accounting…cont.

Producer Commission Commission expense…………….XXX Dr.

Producers Ledger Control…………XXX Cr. (to record incurred producer commission expense) Producer Ledger Control………..XXX Dr.

Cash…………………………………XXX Cr. (to record the payment of producer commissions)

Producer Salaries Salaries Expense……………………………$1000 Dr.

Federal Income Taxes Payable………………...$100 Cr. Social Security and Medicare Taxes Payable…..$80 Cr. State Income taxes payable……………………...$20 Cr. Salaries Payable………………………………...$800 Cr.

(to record the establishment of a liability for a producer’s salary and appropriate tax withholdings) Salaries Payable…………………………….$800 Dr.

Cash……………………………………$800 Cr. (to record the payment of a producer’s salary) State Income taxes payable…………………$20 Dr.

Cash…………………………………….$20 Cr. (to record payment of state income taxes withheld from a producer’s salary)

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Revenue and Expense Accounting…cont. Reinsurance Allowances and Premiums Ceding Company is the insurer which purchases reinsurance Assuming Company is the reinsurer Ceding company pays periodic premiums to assuming company Reinsurance Allowance is the commission that reinsurer pays to the ceding company (like the insurer pays commission to producers) E.g. For a reinsurance contract reinsurance premium is $800, reinsurance allowance is $600. Following is the accounting entry made by the insurer for reinsurance premium payment: Reinsurance ceded – first year premium expense…………………$800 Dr.

Reinsurance Allowance – ceded……………………………..$600 Cr. Cash……………………………………………………………$200 Cr.

(to record payment of reinsurance premium; the insurer basically pays $200 to the reinsurer) The accounting entry made by the reinsurer is as follows: Reinsurance Allowance – assumed……………………$600 Dr. (Expense account) Cash…………………………………………………….$200 Dr. (Asset account)

Reinsurance assumed – first year premium income……$800 Cr. (Income account)

Premium Taxes Premium taxes are taxes on the paid premium income an insurer receives within a particular jurisdiction. Premium Tax expense………………..XXX Dr.

Premium Taxes Payable…………….XXX Cr. (to record incurred premium taxes) Premium Taxes Payable……………...XXX Dr.

Cash…………………………………..XXX Cr. (to record payment of premium taxes)

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Responsibility Accounting The area, function or organizational unit that a specified manager controls is called a Responsibility Center. The said manager is called the Responsibility Manager. Cost Center is a department or division to which costs (expenses) can be traced. E.g. accounting department, legal department and the claims department of an insurance company. Profit Center is a department or other business segments to which both costs (expenses) and revenues can be traced. E.g. companies’ lines of businesses – individual life insurance, annuities, health insurance, and group life insurance. Investment Center is a department or other business segments to which both costs (expenses), revenues and capital or investment funds can be traced. E.g. lines of businesses, investment division. Responsibility Accounting is a management accounting (i.e. for internal use as against financial accounting which is particularly prepared for external users) system of policies and procedures that allow for revenues, expenses and investments to be assigned to the specific employee or organizational level that is accountable for those revenues, expenses and investments.

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Insurance company responsibility centers organization

Insurance Company Home Office

Group Insurance Division

Individual Insurance Division

Health Insurance Line

Life Insurance Line

Health Insurance Line

Life Insurance Line

Policy Owner Service

Underwriting

Claims Administration

Policy Owner Service

Underwriting

Claims Administration

Policy Owner Service

Underwriting

Claims Administration

Policy Owner Service

Underwriting

Claims Administration

Investment Centers Profit Centers Cost Centers

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Cost Accounting Cost Classification by description

Cost Classification Definition Example

Direct cost A cost that is identified with a specific cost object

To the group life line of business, the salary of the division manager of group life insurance

Indirect Cost A cost that is not identified specifically with a single cost object

To the group life line of business, the salary of the vice president in charge of all group insurance

Controllable cost A cost over which a responsibility manager has decision making authority

To a line of business, the cost of its supplies, travel and employee overtime

Non-controllable cost A cost over which a responsibility manager has no decision making authority

To a line of business, home office rent and depreciation on equipment

Differential Cost The difference in cost between two alternative choices

To the group insurance division, the difference in costs if a new line of business is added, and if the line is not added, to the division

Marginal Cost The additional cost of producing an additional unit of an existing product or service

To a life insurer, the additional cost of processing one more policy application per hour

Sunk cost A cost that is already incurred and does not change as a result of a future decision

To a line of business, existing salary cost that will not change as a result of the decision to undertake a specified project

Unit cost A cost attributable to a single measured amount of work

To a life insurer, the cost per $1000 of insurance underwritten

Discretionary Cost A cost that result from periodic management decision that changes as conditions change

To a life insurer, the costs of product advertising, promotional campaigns, and employee training

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Cost Accounting…cont. Cost Classification by behavior

A fixed cost is a cost that remains constant for all levels of production or operating activity, e.g., fire insurance for home office facility, which remains same notwithstanding sales volume. A variable cost is a cost that changes in amount in direct proportion to changes in the level of operating activity, e.g. agent commission, which increases with sales volume. A semi variable cost has a fixed cost component and a variable cost component, e.g. cost of electricity which involves a basic monthly service charge and the rest depending on usage.

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Cost Accounting…cont. Cost Classification by measurement

An opportunity cost is the benefit forfeited as a result of choosing one decision alternative over other, e.g., if an insurer is considering introduction of a new universal life product requiring an out-of-pocket cost of $1 million, the opportunity cost in this case will be what other things the insurer could have done with $1 million like purchasing asset that would have generated investment income. Marginal cost and Unit cost, which are described under cost classification by description also fall under classification by measurement.

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Prepared by Avik Saha

Cost Accounting…cont. Cost Accumulation

Cost accumulation is the process of capturing all company costs and categorizing them in meaningful ways. Four methods of accumulating cost data: 1)  Type of cost – e.g. cost relating to salary 2)  Line of business – e.g. cost attributable to/allocated to a line of business 3)  Department or cost center – e.g. accumulating all claim cost under claims dept. 4)  Function – e.g. cost of policy maintenance function of insurer

Cost Allocation Base

Allocation base is used to ensure equitable allocation of indirect costs to cost centers, e.g. amount of square footage, number of employees, percentage of direct costs etc

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Prepared by Avik Saha

Auditing An audit is the examination and evaluation of company accounting records and procedures to ensure that 1) the financial information, financial statements and source documents comply with accounting standards and are fair and consistent depiction of the company’s financial condition and performance 2) quality assurance is maintained and 3) operation procedures and policies are effective. Internal audit is a financial audit performed by company employees. External audit is a financial audit performed by external auditors, who are employees of public accounting firms, insurance regulators or reinsurers. Audit trail is a chronological, sequential set of accounting records and reports from the beginning to the end of a business transaction.

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Prepared by Avik Saha

Accounting Regulation (US) Generally Accepted Accounting Principles (GAAP) is followed by stock insurers. Mutual and Fraternal insurers those sell variable products comply with US GAAP. Financial Statement is prepared based on GAAP Statutory Accounting is followed by all life insurers in US when preparing Annual Statement that they submit to insurance regulators.

US Regulatory Agencies and Organizations

•  Securities and Exchange commission (SEC) •  Financial Industry Regulatory Authority (FINRA) •  Financial Accounting Standards Board (FASB) •  National Association of Insurance Commissioners (NAIC) •  Internal Revenue Service (IRS)

Countries are moving to International Financial Reporting Standards (IFRS) for accounting and financial reporting.

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