Year-End Underwriting Result and Premium Receivable Provision
At 31 March, a general insurer reports gross written premium of ₹240 crore, of which ₹100 crore was received and ₹140 crore is outstanding from agents. It has unearned premium reserve of ₹50 crore opening and ₹60 crore closing. Claims paid are ₹150 crore; outstanding claims are ₹20 crore opening and ₹35 crore closing. Reinsurance recoveries on claims are ₹10 crore. Operating expenses are ₹40 crore, and investment income is ₹18 crore. The insurer ceded 20% of its premium to reinsurers and received ₹8 crore as profit commission. It wants to recognise the full gross premium as income and treat the outstanding premium as an asset without provision. The accountant argues that because the agents are licensed, no provision is needed.
1. Compute the underwriting result and net profit, showing each adjustment.
Read the worked answer
Earned premium: Gross written 240 – increase in URR (60 – 50 = 10) = 230. Reinsurance ceded = 20% × 240 = 48. Net earned premium = 230 – 48 = 182.
Incurred claims: Paid 150 + increase in outstanding (35 – 20 = 15) = 215 gross. Less reinsurance recoveries 10 = 205 net.
Underwriting result: 182 – 205 – 40 = –63 crore.
Net profit: –63 + investment income 18 + profit commission 8 = –37 crore.
Outstanding premium: The ₹140 crore due from agents is an asset only if collectible. A provision for doubtful debts is required. If, say, 10% is provided, profit falls by ₹14 crore to –51 crore. Recognising the full gross premium is correct on an accrual basis, but the receivable must be tested for impairment.
2. Critique the insurer's proposed accounting treatment of gross premium and the outstanding premium, and explain the correct treatment of reinsurance and profit commission.
Read the worked answer
Premium is recognised when the risk commences, not when cash is received. Gross written premium is therefore recognised, but the unexpired portion is deferred through the URR. Reinsurance ceded is shown as an expense or deduction, not netted invisibly against gross premium. Profit commission is reinsurance income and should be recognised separately.
The outstanding premium from agents must be shown as a receivable and tested for impairment. The accountant's argument that licensed agents make provisioning unnecessary is wrong; licensing does not guarantee collectability. A provision is required for doubtful receivables, and any premium that is not legally due or collectible should not be treated as an unconditional asset. The insurer should also ensure that the URR is actuarially justified and not manipulated to smooth profit.