Premium Received in Advance, Open-Policy Declarations and Brokerage Accrual
Kaveri General Insurance receives ₹3.2 crore on 28 March 2025 for a group personal accident policy covering 1 April 2025 to 31 March 2026; the policy is issued on 2 April 2025. It also receives ₹80 lakh on 30 March 2025 under a marine cargo open policy that operates on declarations; one shipment covered by a declaration sailed on 29 March 2025. On 31 March 2025 the company pays ₹45 lakh brokerage for the group policy; the agent's invoice is dated 5 April 2025. Separately, a claims-made directors' and officers' policy renewed on 1 March 2025 for ₹1.2 crore has a retroactive date; a claim was reported on 25 March 2025 and the insurer is disputing coverage because the alleged act occurred before the retroactive date. The CFO asks what premium, brokerage and claim liability should appear in FY 2024-25.
1. When should premium be recognized for the group personal accident policy and the marine cargo open policy? Show the accounting treatment at 31 March 2025.
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Group personal accident: risk commences 1 April 2025, so the ₹3.2 crore received on 28 March is not written premium at 31 March 2025. It is premium received in advance, a liability. The policy is issued on 2 April, confirming that no risk attached in FY 2024-25. Recognizing it as income would breach the risk-attachment basis and would also pull the related claim exposure into the wrong year.
Marine cargo: an open policy is not earned on the deposit; premium is recognized on each declaration when risk attaches. The shipment that sailed on 29 March 2025 is covered, so the premium for that declaration is written in FY 2024-25, even though cash was received on 30 March. The remaining ₹80 lakh is a deposit or premium reserve, not income. The CFO should separate declaration premium from the deposit and reconcile the declarations to the cash received.
2. How should the ₹45 lakh brokerage be treated? Does the invoice date or the payment date determine the accounting?
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The ₹45 lakh brokerage relates to a policy with risk commencing 1 April 2025; at 31 March it is a prepayment, not an expense. The agent's invoice date of 5 April is not decisive; the accrual follows the risk and the policy. The payment date of 31 March is also not decisive.
For the marine cargo declaration, brokerage accrues on the declaration premium recognized in FY 2024-25. Do not charge the full ₹45 lakh to the FY 2024-25 revenue account simply because it was paid before year-end. If the company's policy is to expense acquisition costs when the policy is written, the group PA policy is written on 1 April, so it falls in FY 2025-26. The balance sheet at 31 March should show a prepaid brokerage asset, subject to recoverability.
3. What claim liability, if any, should be recognized for the D&O claim reported on 25 March 2025?
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The D&O claim is claims-made; the claim was reported on 25 March 2025, within the renewed policy period, so it is a claim of FY 2024-25. Coverage is disputed because the alleged act predates the retroactive date. The insurer must still assess whether a liability is probable and measurable.
If the policy responds only on a claims-made basis and the retroactive date excludes the act, the insurer may have a strong coverage defence; but until that is confirmed, disclose a contingent liability and, if probable, book a gross claim reserve. Do not offset any reinsurance until recoverability is confirmed. The ₹1.2 crore premium is earned over the policy period, so only the expired portion is earned at 31 March. The claim and the premium are separate accounting questions and should not be netted.