Financial Accounting in Insurance Companies
Basic Concepts
Prepared by Avik Saha ([email protected])
Reference: 1. LOMA 361(Accounting and Financial Reporting in Life Insurance Companies) Course Material 2. Essentials of Financial Accounting by Asish K, Bhattacharyya
Prepared by Avik Saha
Accounting: A system or set of rules and methods for collecting, categorizing, measuring, recording, summarizing, reporting, analyzing and monitoring financial information about the financial condition and performance of a company as a whole, as well as of segments, product lines or divisions within the company.
Financial Reporting: The process of presenting financial data about a company’s financial position, the company’s operating performance, and the flow of funds for an accounting period.
Basic Terms
Business Transaction: A transaction to which a company must assign an objective monetary value, whether the impact on the company is large or small, actual or expected.
Solvency: Company’s ability to meet its financial obligation on time and with available cash.
Profitability: Degree to which a company is successful in consistently generating money for its owners.
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Financial Statements Balance sheet (Account form) Balance sheet (Report form)
Assets Liabilities
Owners’ Equity Assets Liabilities
Owners’ Equity
Income Statement
Revenues (-) Expenses
Cash Flow Statement
Cash Flow from operating activities
(+) Cash Flow from Investing activities
(+) Cash Flow from Financing activities
Earning Before Interest and Tax (EBIT)
(-) Income Tax Earning Before Tax (EBT)
(-) Interest Expense
Net Income
Net Increase (Decrease) in Cash
(+) Beginning Period Cash Balance
Ending Cash Balance
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User of Accounting information
External Users Internal Users
Direct Interest
Indirect Interest
• Individual Policy Owners • Group Policy Owners • Beneficiaries • Insureds • Stockholders • Producers • Creditors
• Employees • Directors • Officers
• Competing Companies • External Auditors • Insurance Commissioners • Independent Rating Agencies • Tax Authorities
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Accounting Equation
Asset (A) Liability (L) Owner’s equity (E) Items of value owned by the company
Monetary value of a company’s current and future obligations
Owner investment in the company
• Cash • Investments (stocks, bonds) • Premium due and receivable • Accrued Income • Equipment • Real Estate etc
• Contractual reserves • Commissions payable • Accrued Expense
• Common Stocks outstanding • Preferred Stock outstanding • Additional Paid-in capital • Retained Earnings
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Chart of Accounts An account is a tool that a company uses to record, group, and summarize similar type of business transactions which typically involve Assets, Liabilities, Owner’s Equity, Revenues and Expenses. Chart of Accounts is a numbered or an alphabetical list of all the company’s account names. Example: 1000 Assets
1001 Bonds 1002 Common Stocks 1003 Mortgages
2000 Liabilities 2001 Contractual Reserves 2002 Other Liabilities
3000 Owner’s Equity 3001 Capital 3002 Surplus
4000 Revenues 4001 Premium Income 4002 Investment Income
5000 Expenses 5001 Contractual benefits 5002 Operating Expenses
Permanent Account is a balance sheet account that has a balance at the beginning of each accounting period. E.g. Asset, Liability and Owner’s Equity Accounts
Temporary Account or a nominal account is an account that is closed out to a permanent account on the balance sheet at the end of each accounting period. E.g. Revenue and Expense accounts. At the beginning of each account period temporary accounts have zero balance
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Double Entry Accounting 1. Every business transaction has at least one debit and one credit 2. The total monetary amount of debits must equal that of the credits for that transaction 3. Each accounting entry maintain the balance of the basic accounting equation (A=L+E)
Debit (Dr.)/Credit (Cr.): Specified change made to the monetary value of an account
Debit increases values of Asset and Expense accounts; decreases values of Liability, Owner’s Equity and Revenue Accounts
Credit decreases values of Asset and Expense accounts; increases values of Liability, Owner’s Equity and Revenue Accounts
Asset = Liabilities + Owner’s Equity
Expense Revenue
Dr. Cr.
Dr. Cr.
+ +
- -
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Accounting Cycle
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Journalisation (making journal entry) of transactions and
business events
General Ledger posting and balancing
Preparation of Trial Balance
Preparation of final accounts (Balance Sheet, Income Statements, Cash Flow
Statements)
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Accounting Entries Accounting entry or journal entry is a record of a business transaction that includes at least one debit and one credit and shows the monetary transactions in balance on a specified date
Simple Accounting Entry
Compound Accounting Entry
Insurer A receives $2000 annual premium on a life insurance policy: Cash…………..2000 Dr.
Premium Income………..2000 Cr.
Insurer A paid a claim of $10000 plus interest of $100 to a beneficiary: Death Claim Paid………10000 Dr. Interest Expense………..100 Dr.
Cash…………………………10100 Cr.
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Types of Accounting Entries Closing Entry is an accounting entry that a company makes at the end of each accounting period to start the next accounting period with zero balance in the temporary accounts. E.g.
Suppose in an accounting period Insurer A has $3000 of Revenue and $2000 of Expense. As Revenue and Expense accounts are temporary, their balances will be $0 at the beginning of the next accounting period. So a closing entry is made to transfer the net income of $1000 to the Retained Earnings or Surplus account (permanent Owner’s Equity account).
Adjusting Entry is an accounting entry that a company makes to record accruals for revenues and expenses, unearned revenues and prepaid expenses. Other adjusting entries include depreciation, changes made to reserve accounts and corrections to previous accounting periods.
Accruals refers to expense incurred but not yet paid or revenue earned but not yet received. Unearned revenues refers to the income e.g. unearned premium which has been collected in one accounting period but coverage to be provided in the next period but before policy anniversary date. Prepaid expense are those expenditures, remitted in advance, that the insurer expects will provide a future value of benefits The adjusting entry for salary earned by the producer but not yet paid: Accrued Salaries Expense……….XXX Dr.
Salaries Payable………………………….XXX Cr. When salary is paid to the producer: Salaries Payable…………………..XXX Dr.
Cash………………………………………XXX Cr.
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Normal Balances Account balance is the monetary amount (Debit minus Credit) in an account on a particular date. If Debit > Credit, the account has normal debit balance If Credit > Debit, the account has normal credit balance
Normal balance is the side of the account, whether debit or credit, to which increases to the account is recorded.
Normal Debit Balance Normal Credit Balance
Asset Expenses
Liability Owner’s Equity Revenue
If an account shows opposite of its normal balance, that account is subject to manager review. For example, if Cash account which has a normal debit balance, shows credit balance i.e. the cash balance is below zero, it needs investigation.
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Accounting Principles and Concepts Two Financial Statement Concepts: Entity Concept states that a company must account separately for the business activities of each entity, business unit or economic unit. An entity is the basic business unit for which a company keeps separate business records and prepare reports, e.g. a person, a partnership, a corporation , an organization, a business or a portion of a business. The Going Concern concept states that a company should maintain its accounting records with the assumption that the company would continue to operate indefinitely i.e. it is not facing liquidation. Liquidation is the process of selling all company assets for cash and using that cash to pay the company’s debts; any remaining funds are distributed to the company’s owners.
Insurers should disclose all material or significant information in the financial statements. The accounting information should be : Relevant i.e. useful and timely to affect an user’s decision about the company Reliable i.e. accurate, objective and free from bias and misrepresentation Comparable i.e. statements for different accounting periods and different companies can be compared Consistent i.e. company follows same accounting principles in different periods (unless there is a sound reason to change) Conservative i.e. prudent reaction; understating asset and revenue, overstating liabilities and expenses
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Realization and Matching principle
Realization principle states that a company should recognize revenue when it is earned, regardless of when the company receives the actual payment (insurance premium or annuity consideration for example), so long as a legal and reasonable expectation exists that the customer will remit payment in full. Recognition refers to the process of classifying an item in a financial statement as an asset, liability, owner’s equity, revenue or expense. Matching Principle states that a company should recognize expenses as the company earns the revenue related to those expenses, regardless of when the company receives payment for the revenues earned and regardless of when the company actually paid the expenses. Realization Principle and Matching Principle work in tandem.
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Account Bases – Accrual and Cash basis
Accrual basis Accounting is an accounting system under which a company records revenues when they are earned and expenses when they are incurred, even if the company has not yet received the revenues or paid the expenses.
Cash basis Accounting is an accounting system under which a company records revenues and expenses only when it receives cash or disburses cash.
December 31, 2010
January 10, 2010
Example: On 31st Dec, 2010, Insurance company ABC bought $5000 of furniture on account from XYZ. XYZ delivered it
same day. ABC remits the payment in full on Jan 10, 2011.
Furniture…….$5000 Dr. Cash…......$5000 Cr.
Furniture…….$5000 Dr. Accounts Payable…......$5000 Cr.
Accounts Payable …….$5000 Dr. Cash…......$5000 Cr.
Cash Basis Accrual Basis
Only accrual basis accounting follows realization and matching principles.
No Accounting entry
Note: All subsequent examples follow accrual basis accounting.
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Asset Accounting Some definitions
Valuation is the process of calculating monetary value of an asset
Historical Cost is the original price paid for the asset
Book value is the value at which the company records the asset in its accounting records and reports the asset
on the balance sheet. On date of purchase, asset’s historical cost equals book value.
Amortization is the periodic and systematic increase or decrease of the original cost of an investment to its
ultimate value at maturity
Depreciation is the allocation (spreading) of the cost of an asset over the asset’s estimated useful life. Total
amount of depreciation allocated to an asset as of a specified date is called Accumulated Depreciation.
Fair value is the price that an asset would obtain if the seller sells the asset to the buyer in the absence of a
required liquidation (in case of bankruptcy) or other condition that would force the asset’s sale by the seller.
Fair value accounting is reporting a company’s assets on the balance sheet at fair value.
Bond, Stock, Mortgages are some of the investment vehicles of insurance companies. These are invested assets.
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Asset Accounting…Cont.
Purchase on Cash
Asset A ……. $$$ Dr. (Asset)
Cash….$$$ Cr. (Asset)
Purchase on Account
Asset A ……. $$$ Dr. (Asset)
Accounts Payable ….. $$$ Cr. (Liability)
Purchase on Account with a cash down payment
Asset A ……. $$$ Dr. (Asset)
Cash….$ Cr. (Asset)
Accounts Payable ….. $$ Cr. (Liability)
Accounting for asset (A) purchase
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Asset Accounting…Cont.
Sale for Cash
Cash….$$$ Dr. (Asset)
Asset A ……. $$$ Cr. (Asset)
Sale on Account
Accounts Receivable - Asset A ….$$$ Dr. (Asset)
Asset A ……. $$$ Cr. (Asset)
Sale on Account with a cash down payment
Accounts Receivable - Asset A ….$$ Dr. (Asset)
Cash…………………………………$ Dr. (Asset)
Asset A ……. $$$ Cr. (Asset)
Accounting for asset (A) Sale
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Asset Accounting…Cont.
Bonds …………………………………...$1000 Dr.
Investment Income Due and Accrued …..$20 Dr.
Cash …………………………………$1020 Cr.
(To record the cash purchase of a bond with face value $1000 and accrued interest of $20)
Some Complex Asset Accounting Entries
Cash Dividend income due and accrued ………$200 Dr.
Dividend Income - Common Stock……….$200 Cr.
(To record (on ex-dividend date) the cash dividend income due and accrued on 200 held shares at the rate of
$1/share)
Ex-Dividend Date is the date used to determine whether a stockholder is eligible to receive a declared cash dividend.
Bonds pay interest (and return of capital). Stocks pay dividend (and capital gain or increase in stock price)
Note:
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Asset Accounting…Cont.
AT&T stock ………..$9500 Dr.
Cash………………..$9500 Cr.
(To record purchase of 100 shares of AT&T at $95/share)
Cash……………………………….$8000 Dr.
Loss on sale of AT&T stock……..$1500 Dr.
AT&T stock…………………….$9500 Cr.
(To record sale of those 100 AT&T shares at $80/share (at a loss))
Cash……………………………….$12000 Dr.
AT&T stock…………………….$9500 Cr.
Gain on sale of AT&T stock…..$2500 Cr.
(To record sale of those 100 AT&T shares at $120/share (at a gain))
Some Complex Asset Accounting Entries
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Asset Accounting…Cont.
Purchase and sale of real estate
Insurance company A purchases Axis Building for $1,000,000. Depreciation on the building is $10,000 per year. Accounting entry for recording
this depreciation is as follows:
Depreciation expense - Axis Building….$10,000 Dr.
Accumulated Depreciation – Axis Building….$10,000 Cr.
Accumulated Depreciation is a contra account . Contra Account accompanies a specified ‘companion’ account – typically an asset account, that has
a normal balance which is opposite of the companion account. The amount in contra account usually reduces the balance in its companion
account.
Insurer A sells Axis Building for $1,500,000 (gain). Depreciation on the building to date is $20,000.
Cash……………………………………………..$1,500,000 Dr.
Accumulated Depreciation - Axis Building…..$20,000 Dr.
Axis Building……………………………………….$1,000,000 Cr. (disposing the asset)
Gain on sale of Axis Building……………………..$70,000 Cr
If Insurer sells the building for $900,000 (loss), the following accounting entry is made:
Cash…………………………………………….$900,000 Dr.
Accumulated Depreciation - Axis Building….$20,000 Dr.
Loss on sale of Axis Building………………….$80,000 Dr.
Axis Building……………………………………….$1,000,000 Cr. (disposing the asset)
Some Complex Asset Accounting Entries
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Asset Accounting…Cont. Some Complex Asset Accounting Entries
Reinsurance Transactions
Life Insurance company XYZ issued an individual life insurance policy with a $300, 000 death benefit. XYZ reinsured $50,000
of the risk. While policy was in force, claim was made for the policy and XYZ determined that the beneficiary would receive the
full amount i.e. $300,000. The following accounting entry is made:
Death Claims Paid…………………$300,000 Dr. (Expense account)
Cash……………………………….$300,000 Cr.
(to record payment to beneficiary)
Amount recoverable from reinsurer……..$50,000 Dr. (Asset account)
Death Claims Paid……………………..$50,000 Cr.
(to record amount recoverable from reinsurer)
Cash…………………….$50,000 Dr.
Amount recoverable from reinsurer……..$50,000 Cr.
(when the amount received from insurer)
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Reserve (Liabilities) Accounting Reserve are estimates of the amount of money an insurer needs to pay future contract obligations. Reserve make up significant portion of insurer’s liabilities
Cash…XX Dr. Premium Income…XX Cr. To record premium income received from sales of new life insurance products
Invested Assets …XX Dr. Cash…XX Cr. To record purchase of invested assets to generate income and dividends
Change in reserves…XX Dr. Contractual reserves…XX Cr. To record the establishment of reserves for the new life insurance product
Cash…XX Dr. Invested Assets…XX Cr. To record sale of invested assets to provide cash for the payment of policy claims
Claims are incurred and reported against the new block of policies and are approved for payment
Death Claim paid…XX Dr. Cash…XX Cr. To record payment of approved life policy claims
Contractual reserves…XX Dr. Change in reserves…XX Cr. To record the reserves released from the settlement of claim
Actuaries provide an updated reserve amount for the product on the valuation date
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Reserve (Liabilities) Accounting…cont. Recording and paying policy owner dividends (for different payment options)
Actuaries determine and recommend dividend to board of directors
Board approves dividend and sets the date for policy owner dividend payment Policy owner dividend…..XX Dr. Policy owner dividend payable…..XX Cr.
Insurers update policy owner dividend record for policy owner dividend payment option
CASH Policy owner dividend paid….XX Dr. Cash…………………………….XX Cr.
REDUCE PRIMIUM Policy owner dividend applied to premium……….XX Dr. Premium Income…….XX Cr.
ACCUMULATE AT INTEREST Policy owner dividend applied to dividend accumulations……….XX Dr. Dividend Accumulations..…….XX Cr.
PURCHASE ADDITIONAL INSURANCE Dividends to purchase Paid-Up Addition…..XX Dr. Single premiums for Paid-Up Addition ……………XX Cr.
Or Dividends to purchase one year term insurance…….XX Dr. Single premium for one year term insurance ……………….XX Cr.
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Reserve (Liabilities) Accounting…cont. Waiver of premium accounting Waiver of premium contract provision provides premium payments to keep a life insurance policy in force if the insured suffers a qualifying disability. Waiver of premium benefits – ordinary……XX Dr.
Premium Income……………………..XX Cr. (to record the payment of a waived premium) Premium Suspense Account Suspense account is an account that is used to record transactions that can not be posted immediately to a specified account. Premium Suspense is the liability account used to record transactions that are intended as premiums, but that the insurer cannot accept as income until a particular event occurs. Insurers typically use premium suspense accounts for premium payment amounts that are a) renewal premiums b) different from the amounts in the insurer’s records or c) lacking critical information such as policy number. Cash…………………XXX Dr.
Premium Suspense …………..XXX Cr. (to record receipt of premium payment that cannot be immediately recorded to a premium income account) Premium Suspense …………..XXX Dr.
Premium Income……………..XXX Cr. (To record the application of a suspended premium as an actual premium – after the particular event occurs)
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Capital and Surplus Accounting Preferred Stock
Preferred stock is a type of equity security that represents ownership in a corporation and usually provides for the payment of fixed periodic dividend which is paid before any dividends can be paid on the corporation’s common stocks. Cash………………..XXX Dr.
Insurer’s Preferred Stock……………….XXX Cr. (to record issue and sale of Insurer preferred stock at par value)
Additional Paid-In Capital
Cash………………..XXX Dr. Insurer’s Preferred Stock…………………XX Cr. Additional Paid-in capital………………….X Cr.
(to record the sale of Insurer preferred stock at greater than par value)
Unrealized gains and losses
Unrealized Loss on Bonds…………..XXX Dr. Market Value adjustment – Bonds………….XXX Cr.
(to decrease the value of a bond temporarily as the bond’s current value is less than the value recorded in the accounting records )
Realized Loss on Bonds…………..XXX Dr. Bonds……………...………….XXX Cr.
(to write down the value of a permanently impaired bond)
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Revenue and Expense Accounting Premium Income Cash…………………XXX Dr.
Premium Income………..XXX Cr. (to record premium income on policy sale)
Investment Income Cash…………………XXX Dr.
Interest Income - Bonds………..XXX Cr. (to record interest income received on bonds owned by the insurer) Cash…………………XXX Dr.
Interest Income - Mortgages………..XXX Cr. (to record interest income received on mortgages owned by the insurer) Cash…………………XXX Dr.
Rental Income - Real Estate………..XXX Cr. (to record rental income received on real estate owned by the insurer) Cash…………………XXX Dr.
Dividend Income – Common Stock………..XXX Cr. (to record dividend income received for the common stock owned by the insurer)
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Revenue and Expense Accounting…cont.
Producer Commission Commission expense…………….XXX Dr.
Producers Ledger Control…………XXX Cr. (to record incurred producer commission expense) Producer Ledger Control………..XXX Dr.
Cash…………………………………XXX Cr. (to record the payment of producer commissions)
Producer Salaries Salaries Expense……………………………$1000 Dr.
Federal Income Taxes Payable………………...$100 Cr. Social Security and Medicare Taxes Payable…..$80 Cr. State Income taxes payable……………………...$20 Cr. Salaries Payable………………………………...$800 Cr.
(to record the establishment of a liability for a producer’s salary and appropriate tax withholdings) Salaries Payable…………………………….$800 Dr.
Cash……………………………………$800 Cr. (to record the payment of a producer’s salary) State Income taxes payable…………………$20 Dr.
Cash…………………………………….$20 Cr. (to record payment of state income taxes withheld from a producer’s salary)
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Revenue and Expense Accounting…cont. Reinsurance Allowances and Premiums Ceding Company is the insurer which purchases reinsurance Assuming Company is the reinsurer Ceding company pays periodic premiums to assuming company Reinsurance Allowance is the commission that reinsurer pays to the ceding company (like the insurer pays commission to producers) E.g. For a reinsurance contract reinsurance premium is $800, reinsurance allowance is $600. Following is the accounting entry made by the insurer for reinsurance premium payment: Reinsurance ceded – first year premium expense…………………$800 Dr.
Reinsurance Allowance – ceded……………………………..$600 Cr. Cash……………………………………………………………$200 Cr.
(to record payment of reinsurance premium; the insurer basically pays $200 to the reinsurer) The accounting entry made by the reinsurer is as follows: Reinsurance Allowance – assumed……………………$600 Dr. (Expense account) Cash…………………………………………………….$200 Dr. (Asset account)
Reinsurance assumed – first year premium income……$800 Cr. (Income account)
Premium Taxes Premium taxes are taxes on the paid premium income an insurer receives within a particular jurisdiction. Premium Tax expense………………..XXX Dr.
Premium Taxes Payable…………….XXX Cr. (to record incurred premium taxes) Premium Taxes Payable……………...XXX Dr.
Cash…………………………………..XXX Cr. (to record payment of premium taxes)
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Responsibility Accounting The area, function or organizational unit that a specified manager controls is called a Responsibility Center. The said manager is called the Responsibility Manager. Cost Center is a department or division to which costs (expenses) can be traced. E.g. accounting department, legal department and the claims department of an insurance company. Profit Center is a department or other business segments to which both costs (expenses) and revenues can be traced. E.g. companies’ lines of businesses – individual life insurance, annuities, health insurance, and group life insurance. Investment Center is a department or other business segments to which both costs (expenses), revenues and capital or investment funds can be traced. E.g. lines of businesses, investment division. Responsibility Accounting is a management accounting (i.e. for internal use as against financial accounting which is particularly prepared for external users) system of policies and procedures that allow for revenues, expenses and investments to be assigned to the specific employee or organizational level that is accountable for those revenues, expenses and investments.
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Insurance company responsibility centers organization
Insurance Company Home Office
Group Insurance Division
Individual Insurance Division
Health Insurance Line
Life Insurance Line
Health Insurance Line
Life Insurance Line
Policy Owner Service
Underwriting
Claims Administration
Policy Owner Service
Underwriting
Claims Administration
Policy Owner Service
Underwriting
Claims Administration
Policy Owner Service
Underwriting
Claims Administration
Investment Centers Profit Centers Cost Centers
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Cost Accounting Cost Classification by description
Cost Classification Definition Example
Direct cost A cost that is identified with a specific cost object
To the group life line of business, the salary of the division manager of group life insurance
Indirect Cost A cost that is not identified specifically with a single cost object
To the group life line of business, the salary of the vice president in charge of all group insurance
Controllable cost A cost over which a responsibility manager has decision making authority
To a line of business, the cost of its supplies, travel and employee overtime
Non-controllable cost A cost over which a responsibility manager has no decision making authority
To a line of business, home office rent and depreciation on equipment
Differential Cost The difference in cost between two alternative choices
To the group insurance division, the difference in costs if a new line of business is added, and if the line is not added, to the division
Marginal Cost The additional cost of producing an additional unit of an existing product or service
To a life insurer, the additional cost of processing one more policy application per hour
Sunk cost A cost that is already incurred and does not change as a result of a future decision
To a line of business, existing salary cost that will not change as a result of the decision to undertake a specified project
Unit cost A cost attributable to a single measured amount of work
To a life insurer, the cost per $1000 of insurance underwritten
Discretionary Cost A cost that result from periodic management decision that changes as conditions change
To a life insurer, the costs of product advertising, promotional campaigns, and employee training
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Cost Accounting…cont. Cost Classification by behavior
A fixed cost is a cost that remains constant for all levels of production or operating activity, e.g., fire insurance for home office facility, which remains same notwithstanding sales volume. A variable cost is a cost that changes in amount in direct proportion to changes in the level of operating activity, e.g. agent commission, which increases with sales volume. A semi variable cost has a fixed cost component and a variable cost component, e.g. cost of electricity which involves a basic monthly service charge and the rest depending on usage.
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Cost Accounting…cont. Cost Classification by measurement
An opportunity cost is the benefit forfeited as a result of choosing one decision alternative over other, e.g., if an insurer is considering introduction of a new universal life product requiring an out-of-pocket cost of $1 million, the opportunity cost in this case will be what other things the insurer could have done with $1 million like purchasing asset that would have generated investment income. Marginal cost and Unit cost, which are described under cost classification by description also fall under classification by measurement.
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Cost Accounting…cont. Cost Accumulation
Cost accumulation is the process of capturing all company costs and categorizing them in meaningful ways. Four methods of accumulating cost data: 1) Type of cost – e.g. cost relating to salary 2) Line of business – e.g. cost attributable to/allocated to a line of business 3) Department or cost center – e.g. accumulating all claim cost under claims dept. 4) Function – e.g. cost of policy maintenance function of insurer
Cost Allocation Base
Allocation base is used to ensure equitable allocation of indirect costs to cost centers, e.g. amount of square footage, number of employees, percentage of direct costs etc
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Auditing An audit is the examination and evaluation of company accounting records and procedures to ensure that 1) the financial information, financial statements and source documents comply with accounting standards and are fair and consistent depiction of the company’s financial condition and performance 2) quality assurance is maintained and 3) operation procedures and policies are effective. Internal audit is a financial audit performed by company employees. External audit is a financial audit performed by external auditors, who are employees of public accounting firms, insurance regulators or reinsurers. Audit trail is a chronological, sequential set of accounting records and reports from the beginning to the end of a business transaction.
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Accounting Regulation (US) Generally Accepted Accounting Principles (GAAP) is followed by stock insurers. Mutual and Fraternal insurers those sell variable products comply with US GAAP. Financial Statement is prepared based on GAAP Statutory Accounting is followed by all life insurers in US when preparing Annual Statement that they submit to insurance regulators.
US Regulatory Agencies and Organizations
• Securities and Exchange commission (SEC) • Financial Industry Regulatory Authority (FINRA) • Financial Accounting Standards Board (FASB) • National Association of Insurance Commissioners (NAIC) • Internal Revenue Service (IRS)
Countries are moving to International Financial Reporting Standards (IFRS) for accounting and financial reporting.
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