Financial reporting and performance analysis
This domain tests general insurer financial statements, revenue and profit recognition, ratio analysis and the interpretation of reserve development.
Reporting framework
Ind AS 117, equivalent to IFRS 17, requires insurers to measure insurance contracts using fulfilment cash flows plus a contractual service margin. The CSM is released to profit as coverage is provided. Onerous contracts are recognised immediately. Insurance revenue excludes investment components. The liability for incurred claims includes estimates of claims and expenses. Performance analysis uses loss ratio, expense ratio, combined ratio, operating ratio and return on capital. Reserve development distinguishes accident-year and calendar-year results.
Worked example
Earned premium is INR 500 crore, incurred claims INR 300 crore and expenses INR 150 crore. The loss ratio is 60%, expense ratio 30% and combined ratio 90%. Investment income of INR 40 crore gives an operating ratio of 82%. If incurred claims include INR 20 crore of prior-year reserve strengthening, the calendar-year loss ratio is 60%, but the accident-year loss ratio is 280/500 = 56%. The 4-point difference is prior-year development.
Traps
Do not use written premium where earned premium is required. Investment income is not part of the combined ratio. Reserve releases can flatter the calendar-year result. Do not confuse accident-year and calendar-year loss ratios. Ind AS 117 revenue is not the same as gross written premium.