Page 173 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

notes 12. Deposit accounting may be required by accounting paradigm for what might otherwise be
an insurance (or reinsurance) contract under the following conditions.
13. Some accounting paradigms require the assuming company to record estimated transactions
where the lags and the dollars involved are material.
14. Reinsurance contracts include language regarding reporting requirements of the ceding
company to the assuming company.
15. The current approach used in many jurisdictions for this situation is to record the increase
due to discount amortisation as incurred losses.
Illustration 1

xyZ insurance company
impact of large line capacity treaty
Balance sheet Without With
Assets
Bonds 2,575 2,663

Cash 75 113
Agents Balances 100 140
total 2,750 2,915
Liabilities
Loss Reserves Gross 750 1,125

Cede 0 300
Net 750 825
Unearned Premium Gross 500 700
Cede 0 150
Net 500 550

Ceded Agts. Balances 0 30
total 1,250 1,405
Surplus 1,500 1,510
income statement (net of reinsurance)

Earned Premium 1,000 1,100
Incurred Losses 750 825
Expenses 200 220
Underwriting Income 50 55
Investment Income 133 139

Total income 183 194
other financial statistics
Written Premium Gross 1,000 1,400
Cede 0 300

Net 1,000 1,100

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