Page 164 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 8: Accounting for Insurance Companies

1. The investment performance; notes
2. The expenses;

3. The mortality experience;
4. The rate of lapses or surrenders of policies; and
5. Taxation.
The policyholder therefore bears much of the risk and only a small proportion of the claim is
represented by any guaranteed sum assured.
Unit-Linked Policies: The claim amount is determined by reference to the value of the specified
fund of investments.

Reversionary and terminal bonuses: Apart from the guaranteed death benefits assurance
companies give the ‘with-profits’ policyholders bonuses during the policy period which
are allocations of surplus arising from the life fund. There are usually two types of bonuses:
reversionary bonuses and terminal bonuses. Reversionary bonuses are declared, often annually,
during the policy term, normally as a proportion of the sum assured (simple reversionary
bonuses) or as a proportion of the sum assured and previously declared bonuses (compound
reversionary bonuses). They increase the policyholders’ claim entitlement but are actually paid
only when a claim arises. Terminal bonuses are paid in addition to the ordinary reversionary
bonuses and are allocated only to policies becoming claims by death or maturity.

Some assurance policies include what are known as ‘guaranteed bonuses’, which form part of
the contractual obligations that are allowed for in determining the original premium and are not
strictly bonuses at all.

Surrenders: Since many of the assurance policies are used, in part or whole, as a savings vehicle,
policyholders may wish not to continue with premium payments, so the insurer builds into the
contract a provision for its surrender for a cash sum prior to the end of the policy term. The amount
payable will generally be less than the total premiums already paid by the policyholder.
Accounting for Death Claims: Notification of the death of a policyholder will be received by the
assurance company. For example, if the sum assured is £2,000, the insurer will immediately set
up a provision for this amount.
Claims Paid (Technical Account) Dr 2,000
Claims Outstanding (Balance Sheet) 2,000

The company will then require a death certificate prior to paying the beneficiaries. Once this is
received the following entries will be made:
Claims Outstanding (Balance Sheet) Dr 2,000

Cash 2,000
For surrenders or a maturity no accounting entries will normally be made until the payment is
authorised. For example: a £1,000 surrender or maturity would be:
Claims Paid (Technical Account) Dr 1,000

Cash 1,000
Although the maturity could be previously foreseen, no entry for the liability is made in the
accounts as the amount will have previously been allowed for in the actuarial estimate of the
‘technical’ provision for the long term business.

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