NIA Reinsurance Accounting Mr. N. B. Sonawane New

REINSURANCE ACCOUNTING

N. B. Sonawane, GIC Re

15/16/2014

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

25/16/2014

FLOW OF ACCOUNTS

CEDING COMPANY

REINSURERS

BROKER REINSURER

35/16/2014

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.

55/16/2014

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LOSS ENTRY PREMIUM COMISSION OVER RIDING COMMISSION PROFIT COMMISSION OTHER TAXES BROKERAGE LOSSES PAID P/F/ PREMIUM WITHDRAWN P/F/ LOSS WITHDRAWN

75/16/2014

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

85/16/2014

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

95/16/2014

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

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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5/16/201412


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


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

135/16/2014


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.

145/16/2014

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


3) Withdrawal using the "Eighth System":


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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5/16/201417

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 :

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

185/16/2014

Earned Premium:

Premium Net of Portfolio Premiums

Formula :

Earned Premium = Written Premium

+ Portfolio Premium Entry

- Portfolio Premium withdrawal

195/16/2014

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

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

225/16/2014

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.

235/16/2014

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

245/16/2014

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

5/16/2014

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.

275/16/2014

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

5/16/2014

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.

295/16/2014

Incurred Claims

Formula

Paid Claims

+ Outstanding Claims at the end

- Outstanding Claims at the beginning

305/16/2014

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.

315/16/2014

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

325/16/2014

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

335/16/2014

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 %.

345/16/2014

Items - Non-Proportional Cover

Minimum & Deposit Premium

Adjustment Premium

Excess of Loss recovery

Reinstatement Premium

355/16/2014

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.

365/16/2014

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

375/16/2014

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

385/16/2014

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

395/16/2014


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

405/16/2014


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

415/16/2014

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.

425/16/2014

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.

435/16/2014

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.

445/16/2014

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.

455/16/2014

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

465/16/2014

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.

475/16/2014

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

485/16/2014

Types of Outward Business

Cessions (out of direct business)

Retrocession Pools (out of reinsurance acceptances)

Specific Retrocessions

XL Covers protecting Net A/c

495/16/2014

Reinsurance Pool Arrangement

Pool Manager

A B C D E

Pool Fund

505/16/2014

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.

515/16/2014

Books of Accounts

Inward and Outward Business

Journal reflecting all transactions

Accounts Balances Ledger Reinsurers Balances

Premium & Loss Reserve Ledger

Cash Loss Advance Ledger

525/16/2014

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

535/16/2014

Revenue Account

Prepared Class-wise.

As per format prescribed by IRDA.

Supported by schedules for premium,commission and incurred claims.

Summary of revenue transactions.

545/16/2014

General Accounts Section

Functions

Expenses Accounting

Central Treasury Cell (including Bank Accounts in foreign currencies)

Taxation matters


IRDA Statements.

555/16/2014

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.

565/16/2014


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

575/16/2014


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



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.

595/16/2014



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)

605/16/2014

?

Questions

615/16/2014

Thank You

625/16/2014

Documents

NIA Reinsurance Accounting Mr. N. B. Sonawane New