Insurance Finance and Accounting
Insurance Finance and Accounting tests how insurers recognise premium, reserve for claims, measure solvency, value investments, and report results. Expect computations and interpretation of the revenue account, balance sheet, loss ratio, expense ratio, and reserves.
Core rules
- Premium categories include gross written premium, net premium after reinsurance, and earned versus unearned premium.
- Claims cost includes paid claims, outstanding claims, and incurred but not reported (IBNR) claims.
- Reserves include unexpired risk reserve and claims reserves; life insurance requires actuarial valuation.
- The revenue account shows underwriting results; the balance sheet shows assets, liabilities, and solvency.
- Investments must comply with regulatory limits; valuation affects solvency.
- Reinsurance accounting records ceded premium and recoveries on a net basis.
Worked example
An insurer writes ₹500 crore gross premium, cedes ₹100 crore, and earns ₹360 crore of the net premium. Claims paid are ₹200 crore and outstanding claims rise by ₹40 crore. Incurred claims = ₹200 crore + ₹40 crore = ₹240 crore. Loss ratio = 240/360 = 66.7%. If expenses are ₹90 crore, expense ratio = 90/360 = 25%; combined ratio = 91.7%, an underwriting profit before investment income. Reasoning: ratios use earned net premium, not gross written premium.
Traps
Using gross premium instead of net or earned premium in ratios; treating cash paid as the only claims cost and ignoring IBNR; and confusing solvency margin with accounting profit.
Key points
- Distinguish gross, net, written, and earned premium.
- Incurred claims include paid, outstanding, and IBNR claims.
- Loss ratio = incurred claims ÷ earned premium.
- Combined ratio adds the expense ratio to the loss ratio.
- Solvency is a regulatory balance-sheet measure, not the same as profit.