The following are some of the basic provisions for preparation of financial statements of insurance business:
Application of Accounting Standards:
Every Balance Sheet, Receipts and Payments Account [Cash Flow Statement] and Profit and Loss Account [Shareholders’ Account] of the insurer shall be in conformity with the Accounting Standards (AS) issued by the ICAI, to the extent applicable to the insurer carrying on general insurance business, except that:
(i) Accounting Standard 3 (AS 3) – Cash flow Statements shall be prepared only under the Direct Method.
(ii) Accounting Standard 13 (AS 13) – Accounting for Investments shall not be applicable.
(iii) Accounting Standard 17 (AS 17) – Segment Reporting shall apply irrespective of whether the securities of the insurer are traded publicly or not.
Disclosures Forming Part of Financial Statements:
A. The following shall be disclosed by way of notes to the Balance Sheet:
1. Contingent Liabilities:
(a) Partly paid-up investments
(b) Underwriting commitments outstanding
(c) Claims, other than those under policies, not acknowledged as debts
(d) Guarantees given by or on behalf of the company
(e) Statutory demands/liabilities in dispute, not provided for
(f) Reinsurance obligations
(g) Others (to be specified)
2. Encumbrances to assets of the company in and outside India.
3. Commitments made and outstanding for loans, investments and fixed assets.
4. Claims, less re-insurance, paid to claimants in/outside India.
5. Actuarial assumptions for claim liabilities in the case of policies exceeding four years.
6. Ageing of claims – distinguishing between claims outstanding for more than six months and other claims.
7. Premiums, less reinsurance, written from business in/outside India.
8. Extent of premium income recognized, based on varying risk pattern, category wise, with basis and justification therefore, including whether reliance has been placed on external evidence.
9. Value of contracts in relation to investments, for:
(a) Purchases where deliveries are pending, and
(b) Sales where payments are overdue.
10. Operating expenses relating to insurance business: Basis of allocation of expenditure to various classes of business.
11. Historical costs of those investments valued on fair value basis.
12. Computation of managerial remuneration.
13. Basis of amortisation of debt securities.
14. (a) Unrealised gains/losses arising due to changes in the fair value of listed equity shares and derivative instruments are to be taken to equity under the head ‘Fair Value Change Account’ and on realisation reported in Profit and Loss Account.
(b) Pending realisation, the credit balance in the ‘Fair Value Change Account’ is not available for distribution.
15. Fair value of investment property and the basis therefore.
16. Claims settled and remaining outstanding for a period of more than six months on the balance sheet date.
B. The following accounting policies shall form an integral part of the financial statements:
1. All significant accounting policies in terms of the accounting standards issued by the ICA, and significant principles and policies given in part I of Accounting Principles. Any other accounting policies followed by the insurer shall be stated in the manner required under Accounting Standard (AS) I issued by ICAI.
2. Any departure from the accounting policies as aforesaid shall be separately disclosed with reasons for such departure.
C. The following information shall also be disclosed:
1. Investments made in accordance with any statutory requirement should be disclosed separately together with its amount, nature, security and any special rights in and outside India.
2. Segregation into performing/non-performing investment for purpose of income recognition as per the directions, if any, issued by the Authority.
3. Percentage of business sector-wise.
4. A summary of financial statements for the last five years, in the manner as may be prescribed by the authority.
5. Accounting ratios as may be prescribed by the Authority.
6. Basis of allocation of Interest. Dividends and Rent between Revenue Account and Profit and Loss Account.
General Instructions for Preparation of Financial Statements:
1. The corresponding amounts for the immediately preceding financial year for all items shown in the Balance Sheet, Revenue Account and Profit and Loss Account should be given.
2. The figures in the financial statements may be rounded off to the nearest thousands.
3. Interest, dividends and rentals receivable in connection with an investment should be stated as gross value, the amounts of income tax deducted at source being included under ‘advance taxes paid’.
4. Income from rent shall not include and notional rent.
5. (I) For the purposes of financial statements, unless the context otherwise requires:
(a) The expression ‘provision’ shall, subject to note (II) below, mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability or loss of which the amount cannot be determined with substantial accuracy;
(b) The expression ‘reserve’ shall not, subject to as aforesaid, include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability;
(c) The expression capital reserve shall not include any amount regarded as free for distribution through the profit and loss account; and the expression ‘revenue reserve’ shall mean any reserve other than a capital reserve, and
(d) The expression ‘liability’ shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities.
(a) Any amount written off or retained by way of providing for depreciation renewals or diminution in value of assets, or
(b) Any amount retained by way of providing for any known liability is in excess of the amount which in the opinion of the directors is reasonably necessary for the purpose, the excess shall be treated for the purposes of these accounts as a reserve and not as a provision.
6. The company should make provisions for damages under law suits where the management is of the opinion that the award may go against the insurer.
7. Risks assumed in excess of the statutory provisions, if any, shall be separately disclosed indicating the amount of premiums involved and the amount of risks covered. The auditor shall, however, make an appropriate qualification in this regard in his report.
8. Any debit balance of Profit and Loss Account shall be shown as deduction from uncommitted reserves and the balance, if any, shall be shown separately.
There shall be attached to the financial statements, a management report containing, inter alia, the following duly authenticated by the management:
1. Confirmation regarding the continued validity of the registration granted by the Authority;
2. Certification that all the dues payable to the statutory authorities have been duly paid;
3. Confirmation to the effect that the shareholding pattern and any transfer of shares during the year are in accordance with the statutory or regulatory requirements;
4. Declaration that the management has not directly or indirectly invested outside India the funds of the holders of policies issued in India;
5. Confirmation that the required solvency margins have been maintained;
6. Certification to the effect that the values of all the assets have been reviewed on the date of the Balance Sheet and that in his (insurer’s) belief the assets set forth in the Balance Sheets are shown in the aggregate at amounts not exceeding their realizable or market value under the several headings-“Loans”, “Investments”, “Agents Balances”, “Outstanding Premiums”, “Interest, Dividends and Rents Outstanding”, “Interest, Dividends and Rents accruing but not due”, “Amounts due from other persons or Bodies carrying an insurance business”, “Sundry Debtors”. “Bills Receivable”, “Cash” and the several items specified under “Other Accounts”.
7. Certification to the effect that no part of the life insurance fund has been directly or indirectly applied in contravention of the provisions of the Insurance Act, 1938 relating to the application and investment of the life insurance funds;
8. Disclosure with regard to the overall risk exposure and strategy adopted to mitigate the same;
9. Operations in other countries, if any, with a separate statement giving the management’s estimate of country risk and exposure risk and the hedging strategy adopted;
10. Ageing of claims indicating the trends in average claim settlement time during the preceding five years;
11. Certification to the effect as to how the values, as shown in the balance sheet, of the investments and stocks and shares have been arrived at, and how the market value thereof has been ascertained for the purpose of comparison with the values so shown;
12. Review of asset quality and performance of investment in terms of portfolios, i.e., separately in terms of real estate, loans, investments, etc.
13. A responsibility statement indicating therein that:
(i) In the preparation of financial statements, the applicable accounting standards, principles and policies have been followed along with proper explanations relating to material departures, if any;
(ii) The management has adopted accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the operating profit or loss and of the profit or loss of the company for the year;
(iii) The management has taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the applicable provisions of the Insurance Act, 1938, Companies Act, 1956, for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;
(iv) The management has prepared the financial statements on a going concern basis, and
(v) The management has ensured that an internal audit system commensurate with the size and nature of the business exists and is operating effectively.