Page 165 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

notes 8.2.3 commissions

Commissions are paid to brokers or agents (‘intermediaries’) as an incentive to sell policies and
maintain and expand the life company’s business. They are usually at very high levels ranging
from 5% to over 100% of the premiums paid. Commission can therefore amount to a very
considerable expense in the technical account of the life company.

There are two types of commission: initial commission on new policies and renewal commissions
for subsequent periods. The commission paid to the agents arises in the form of a large initial
payment but the insurer generally has the right to recover some of this money if the policy lapses
within the period over which the commission is earned.
Accounting Treatment for Initial Commissions: Example: A policy is sold by an agent and the
monthly premium payments for the policyholder are £25 a month. The agent receives commission
at a rate of 115% of the annual premium value. The policyholder pays the first month’s premium
and thus the accounting treatment for the commission is:
Deferred Acquisition Costs (Balance Sheet) Dr 345
Due to intermediaries (Balance Sheet) 345
The asset for the commission would be written off to the technical account over an appropriate
period. The monthly entry required would be:
Acquisition Costs (Technical Account) Dr 28.75
Deferred Acquisition Costs 28.75

When the agents are paid the entry is as follows:
Due to intermediaries Dr 345
Cash 345
Following the implementation of the EU Insurance Accounts Directive companies are now
required to defer acquisition costs over the term of the policy, so the charge to the technical
account will be more gradual.

8.2.4 reinsurance

Companies normally ‘lay-off’ a proportion of the risk by reinsuring with other insurance, or
specialist reinsurance, companies. The accounting for the reinsurance premiums paid, claims
reimbursements received and commissions paid is effectively the mirror image of the accounting
for the direct insurance.

self assessment

Fill in the blanks:
6. Companies normally ................. a proportion of the risk by reinsuring with other insurance,
or specialist reinsurance companies.
7. The amount of ................. that is paid to the policyholder depends the type of policy written,
and in particular whether it is without or with profit.
8. Commissions are paid to brokers or ................. (‘intermediaries’) as an incentive to sell
policies and maintain and expand the life company’s business.
9. There are two types of commission: ................. commission on new policies and .................
commissions for subsequent periods
10. The asset for the ................. would be written off to the technical account over an appropriate
period.

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