A PRESENTATION ON
MODIFIED ACCOUNTING REGULATIONS
FOR INSURANCE COMPANIES
By:
FARRUKH REHMAN
Partner, A.F. Ferguson & Co.
a member firm of the PwC network
Date: 20 August 2013
Scope
Draft Insurance Accounting Regulations, 2012
were issued by SECP on 19 November 2012
Therefore, this presentation covers the applicability and
changes applied through these regulations.
2
Session to cover:
•
Developments in respect of Accounting Regulations for insurance
companies in Pakistan
•
Some concerns in existing Accounting Regulations
•
Changes in presentation of Published Financial Statements
•
Presentation of Insurance Liabilities for life insurers
•
Applicability of IAS-27, IAS-39 & IAS-40
•
Recognition of Cover Note in the books of accounts
•
Explanation of management and other expenses – non-life insurers
•
Change in premium deficiency requirement
•
Key issues identified in modified regulations
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3
Developments in respect of Accounting regulation for
Insurance companies
•
•
•
Prior to the Insurance Ordinance, 2000 the concept of Accounting
Regulations alongwith the prescribed format of financial statements was
also given in Insurance Act, 1938. The Accounting Regulations were basic
and the formats of financial statements were not keeping pace with the
changes happening in the world with respect to the International
Accounting standards.
The Insurance Ordinance, 2000 brought about number of changes for the
insurance industry and there under the new Accounting Regulations &
formats of financial statements were introduced in 2002. The accounting
regulations both for life and non life segments were detailed enough to
address all aspects of the insurance transactions. The financial statements
formats were also largely brought in line with International Accounting
Standards.
Some of the major changes included method of premium income,
recognition of IBNR claims, creation of separate statutory funds for life
business, introduction of premium deficiency etc. This was considered a
major change at that time.
4
Developments in respect of Accounting regulation for
Insurance companies – contd.
•
With the passage of almost 10 years now there have been further
developments in the International Accounting Standards relating to
insurance.
•
In 2004, the first Insurance specific IFRS-4 was issued and SECP made
this applicable for insurance companies from period commencing from
1 January 2009. IFRS -4 did not change the existing accounting
practices in any substantive way. It catered more of disclosure
requirements than recognition and measurement.
•
Recently the IASB has issued exposure draft of IFRS-4 as part of its
phase II for developing insurance specific standard. This is expected to
change significantly the recognition and measurement requirements of
insurance industry.
5
Some concerns in existing regulations
•
Difference in Financial Statements for Insurers and Other Sectors
under the International Financial Reporting Standards (IFRS)
•
Total earnings of the Life Insurer not reflected completely
•
Consolidated financial statements are not required for investment by
statutory funds
•
Applicability of IAS 39 and IAS 40
•
Issues relating to calculation and classification of incurred but not
reported claims – IBNR
•
Correct classification / allocation of Management Expenses
•
Recognition of Cover Note in the books of accounts
•
No basis of preparation for Statement of Exposures
6
Changes in presentation of Published Financial
Statements
 The modified accounting regulations now prescribes format of
Financial Statements in accordance with International
Accounting Standards.
 A complete and detailed illustrative accounts have now been
provided in Published Financial Statements format by SECP. This
has been done to provide consistency across the insurance sector
as done in banking sector.
 A comparison of existing and revised Statements comprising
Financial Statements is given in the following slide.
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7
Changes in presentation of Published Financial
Statements - contd .
•
Balance sheet
•
Statement of financial position
•
Profit and loss account
•
Statement of comprehensive
income
•
Statement of cash flows
•
Statement of cash flows
•
Revenue account -
•
Statement of changes in equity
•
Notes to the accounts
(for life insurers only)
•
Statement of premiums
•
Statement of claims
•
Statement of expenses
•
Statement of investment income
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•
Notes to the accounts
8
Comparison of balance sheet (Life insurers)
Cash and Bank Deposits
Cash and others
Current and other accounts
Deposits maturing within 12 months
Fixed Deposits maturing after 12 months
Loans Secured Against Life Insurance Policies
Loans Secured Against other assets
To employees
To agents
Others
Unsecured Loans
To employees or agents
Others
Investment Property
Investment in subsidiaries and associates
Fixed Income Securities
Listed Equities
Unlisted Equities
Other Investments
Government Securities
Other Fixed Income Securities
Listed Equities
Unlisted Equities
Mutual Funds
Others (describe)
Deferred Taxation
Preliminary and Deferred Expenses
Current Assets - Others
Premiums due but unpaid
Amounts due from other insurers/ reinsurers
Investment Income Due but Outstanding
Investment Income Accrued
Taxation - payments less provision
Prepayments
Sundry receivables
Others (please specify)
Fixed Assets
Tangible & Intangible
Land and Builldings
Furniture, Fixtures and Office Equipment
Motor Vehicles
Capital Work in Progress
Intangibles (Please specify)
TOTAL ASSETS
Shareholders
Aggregate Aggregate
Fund
Ordinary life Conventional Accident & current
prior
(investment business health
year
year
linked)
Note
Assets
Property and equipment
Intangible assets
Investment property
Investments in subsidiaries and associates
(applicable where equity accounting is followed)
Investments
Equity securities
Government securities
Debt securities
Term deposits
Mutual funds
Others (please specifiy)
Loans secured against life insurance policies
Insurance / reinsurance receivables
Other loans and receivables
Deferred tax asset
Taxation - payments less provision
Prepayments
Cash & Bank
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Total Assets
Equity and Liabilities
Capital and reserves attributable to
Company's equity holders
Ordinary share capital
Share premium
Reserves
Unappropriated profit/(Accumulated loss)
19
20
Total Equity
Surplus on Revaluation of Fixed Assets
Liabilities
Insurance Liabilities
Liabilities under Investment Contracts
Retirement benefit obligations
Deferred taxation
Borrowings
Premium received in advance
Insurance / reinsurance payables
Other creditors and accruals
Taxation - provision less payments
Total Liabilities
Total Equity and Liabilities
Contingency(ies) and commitment(s)
21
Current
Prior
year
year
Rupees in thousand
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
22
23
16
24
25
26
27
Comparison of balance sheet (Life insurers) – contd.
Share Capital and Reserves
Authorised Share Capital
Issued, subscribed and paid up Share Capital
Accumulated Surplus/(Deficit)
Other Reserves (describe)
Less: Capital contributed by shareholders fund
Net Shareholders' Equity
Balance of statutory fund (including policyholder
liabilities Rs.
Prior year: Rs.
)
Deferred Liabilities
Deferred Taxation
Staff Retirement Benefits
Others
Creditors and Accruals
Outstanding claims (including IBNR)
Premiums Received in Advance
Amounts due to other insurers/reinsurers
Amounts due to Agents
Accrued Expenses
Taxation - Provision less payments
Other Creditors and Accruals (describe)
Borrowings
Short term running finance
Loans received from banks
Other loans
Other debt security issued
Other liabilities
Other liabilities (please specify)
TOTAL LIABILITIES
TOTAL EQUITY AND LIABILITIES
CONTINGENCIES AND COMMITMENTS (if applicable)
Shareholders
Aggregate Aggregate
Fund Ordinary life Conventional Accident & current
prior
Assets
(investment business health
year
year
Property and equipment
linked)
Intangible assets
Investment property
Investments in subsidiaries and associates
(applicable where equity accounting is followed)
Investments
Equity securities
Government securities
Debt securities
Term deposits
Mutual funds
Others (please specifiy)
Loans secured against life insurance policies
Insurance / reinsurance receivables
Other loans and receivables
Deferred tax asset
Taxation - payments less provision
Prepayments
Cash & Bank
Note
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Total Assets
Equity and Liabilities
Capital and reserves attributable to
Company's equity holders
Ordinary share capital
Share premium
Reserves
Unappropriated profit/(Accumulated loss)
19
20
Total Equity
Surplus on Revaluation of Fixed Assets
Liabilities
Insurance Liabilities
Liabilities under Investment Contracts
Retirement benefit obligations
Deferred taxation
Borrowings
Premium received in advance
Insurance / reinsurance payables
Other creditors and accruals
Taxation - provision less payments
Total Liabilities
Total Equity and Liabilities
Contingency(ies) and commitment(s)
21
Current
Prior
year
year
Rupees in thousand
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
22
23
16
24
25
26
27
Comparison of profit and loss (Life insurers)
Current Year
Prior Year
Investment income not attributable to statutory funds
Income from trading investments
Gain/ loss on trading
Dividend Income
Others if any (please specify)
Income from non-trading investments
Held to maturity or Available for sale (classify as appropriate)
Return on government securities
Return on other fixed income securities and deposits
Dividend income
Others (please specify)
Gain/(Loss) on Sale of Investments Available for sale
Gain/(Loss) on revaluation of investments
Trading investments
Available for sale
Provision for Impairment in Value of investments
Provision for portfolio held to maturity
Provision for portfolio available for sale
Less: Investment Related Expenses
Net Investment Income
Rental income from investment property
Other revenue (provide details)
Less: Expenses not attributable to statutory funds (provide details)
Add: Surplus transferred from statutory funds
Profit/(Loss) before tax (and extraordinary items, if any)
Extraordinary items (provide details)
Profit/(Loss) before Tax and after extraordinary items
Tax expense
Profit/(Loss) after tax
Profit and Loss appropriation account
Balance at commencement of the year
Profit for the year
Prior year adjustment (provide details)
Dividends paid
Transfers to / (from) reserves
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Other appropriations (provide details)
Balance at end of year
Note
Premium Revenue
Premium ceded to reinsurers
Net premium revenue
Fee income
Net investment income
Net rental Income
Net realised gains / losses on investment property
Net unrealised gains / losses on investment property
Other income / loss
28
Current
Year
-
Prior
Year
-
29
30
31
-
-
32
-
-
Net income
-
-
Insurance benefits
Recoveries from reinsurers
Claims related expenses
Net claims
-
-
33
Acquisition expenses
Marketing and administration expenses
Other expenses
Total Expenses
34
35
36
-
-
Finance costs
37
-
-
Excess of Income over Claims and Expenditure
-
-
Add: Policyholder liabilities at beginning of year
Less: Policyholder liabilities at end of year
Results of operating activities
Share of (loss)/profit of associates
Profit before tax
Income tax expense
Profit for the year
Other comprehensive income:
-
-
Change in unrealised gains/(losses) on
available-for-sale financial assets
Currency translation differences
(related to net investment in foreign currency)
Other comprehensive income for the year, net of tax
-
-
-
-
-
-
Total comprehensive income for the year
Earnings (after tax) per share - Rupees
-
38
39
11
-
Comparison of balance sheet (Non - life insurers)
Share Capital and Reserves
Domestic companies
Authorised Share Capital
Paid-up share capital
Retained earnings
Reserves
Other equity (please specify)
Foreign companies
Head office account
Other equity (please specify)
Current Prior
year year Cash and Bank Deposits
Cash and other equivalent
Current and other accounts
Deposits maturing within 12 months
Deposits maturing after 12 months
Loans (Secured or un-secured - classify as appropriate)
To employees
To agents
Others
Investments
Investment Property
Underwriting provisions
Provision for outstanding claims (including IBNR)
Provision for unearned premium
Commission income unearned
Total underwriting provisions
Deferred Liabilities
Deferred Taxation
Staff Retirement Benefits
Others (please specify)
Creditors and Accruals
Premiums Received in Advance
Amounts due to other insurers/reinsurers
Accrued Expenses
Taxation - Provision less payments
Other Creditors and Accruals (describe)
Borrowings
Short term running finance
Loans received from banks
Other loans
Other debt security issued
Deferred Taxation
Preliminary and Deferred Expenses
Current Assets - Others
Premiums due but unpaid
Amounts due from other insurers/ reinsurers
Reinsurance recoveries due but unpaid
Reinsurance recoveries against outstanding claims
Salvage recoveries accrued
Premium and claim reserves retained by cedants
Accrued investment income
Taxation - payments less provision
Deferred commission expense
Other deferred acquisition costs
Prepayments
Sundry receivables(provide details)
Fixed Assets
Tangible & Intangible
Land and Builldings
Furniture, Fixtures and Office Equipment
Motor Vehicles
Capital Work in Progress
Intangibles (Please specify)
Other liabilities
Other liabilities (please specify)
TOTAL LIABILITIES
TOTAL EQUITY AND LIABILITIES
CONTINGENCIES AND COMMITMENTS (if applicable)
TOTAL ASSETS
Current
year
Note
Prior
year
Current
Prior year
year
Rupees in thousand
Assets
Property and equipment
Intangible assets
Investment property
Investments in subsidiary and associate
Investments
Equity securities
Debt securities
Term deposits
Loans and other receivables
Insurance / Reinsurance receivables
Reinsurance recoveries against outstanding claims
Salvage recoveries accrued
Deferred Commission Expense / Acquisition cost
Deferred taxation
Taxation - payment less provisions
Prepayments
Cash & Bank
Total Assets
5
6
7
8
-
-
9
10
11
12
13
-
-
-
-
-
-
-
-
--
--
Total Equity
-
-
Surplus on revaluation of fixed assets
-
-
-
-
-
-
-
-
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15
16
17
Equity and Liabilities
Capital and reserves attributable
to Company's equity holders
Ordinary share capital
Share premium
Reserves
Unappropriated profit/(Accumulated loss)
Liabilities
Underwriting Provisions
Outstanding claims including IBNR
Unearned premium reserves
Premium deficiency reserves
Unearned commission income
Retirement benefit obligations
Deferred taxation
Borrowings
Premium received in advance
Insurance / Reinsurance Payables
Other Creditors and Accruals
Taxation - provision less payment
Total Liabilities
Total Equity and Liabilities
Contingency(ies) and commitment(s)
18
19
27
24
26
14
15
20
21
22
23
Comparison of profit and loss (Non - life insurers)
Note Fire Marine, Motor Act Liability Others Treaty Current Prior
& Aviation &
Year Year
Property Transport
AggregateAggregate Net insurance premium
Revenue Account
Net Premium Revenue
Net Claims
Premium Deficiency Expenses
Net Insurance Claims
Premium Deficiency
Net commission and other acquisition cost
Note
24
25
26
Insurance claims and acquisition expenses
Current
Prior year
year
Rupees in thousand
-
-
-
-
Expenses
Net Commission
Underwriting result
Investment Income
Rental Income
Other Income (provide details)
General and administration expenses
Profit/(Loss) before tax
Provision for Taxation
Profit/(Loss) after tax
Profit and Loss Appropriation Account
Balance at commencement of year
Profit/Loss after tax for the year
Prior Year Adjustments (provide details)
Proposed Dividend/Remittance to Head Office
Transfers to/(from) reserves (provide details)
Other appropriations
(provide details)
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Balance Unappropriated Profit/(Loss) at end of Year
Management Expenses
Underwriting results
27
-
-
Investment income
Rental income
28
29
-
-
Other income
Other expenses
Results of operating activities
30
31
-
-
Finance costs
Share of (loss)/profit of associates
Profit before tax
32
-
-
Income tax expense
33
Profit after tax
Other comprehensive income:
Unrealised gains / (losses) on
available-for-sale investments
Others (please specify)
Other comprehensive income for the year
Total comprehensive income for the year
Earnings (after tax) per share - Rupees
34
-
-
-
-
-
-
Change in presentation of Financial Statements - contd .
Segmental information to be disclosed
The segment information which at present is given on the face of the profit
and loss account and the information in the statements of premiums, claims,
investment income and expenses have now been presented in the note
Segment Information.
Revenue Account in the life insurers financial statements now also forms part
of the Segment Information. Additionally Segmental results by line of
business are now to be disclosed:
o
o
an analysis between group life, group health, individual life
distributed through direct sales force, individual life distributed
through banks;
an analysis between business written in Pakistan and business
written outside Pakistan.
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14
Presentation of insurance liabilities
One of the major changes in the modified accounting regulations for life
insurers relates to the classification of insurance liabilities:
1. Balance of statutory funds
Previously, retained earnings accounts A to D were part of balance
of statutory funds which was disclosed after the Shareholders’
Equity.
In the modified accounting regulations retained earnings accounts
C and D, which are effectively arising out of surplus of the statutory
funds attributable to the shareholders are therefore made part of
shareholders’ equity.
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15
Presentation of insurance liabilities – contd.
2. Incurred But Not Reported Claims (IBNR)
IBNRs were previously made part of Policyholder Liabilities on the
basis that these are determined by actuaries and payable to
policyholders. However, the nature of IBNR is different from
policyholder liabilities in that IBNR is something where the claim
event has actually happened but yet to be reported to the insurer.
Whereas, policyholder liability is in respect of future event. The
revised format of Financial Statements includes IBNR as insurance
liabilities after outstanding claims.
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16
Presentation of insurance liabilities – contd.
EXISTING BALANCE SHEET LINE
ITEMS
•
Outstanding Claims
•
Balance of statutory fund
Balance of statutory fund includes:
o Policyholder liabilities
(including IBNR)
o Balance in ledger account A
POST CHANGE BALANCE SHEET
LINE ITEMS
•
Insurance Liabilities
•
Unappropriated Profit / (Loss)
Insurance Liabilities include:
o Outstanding claims
o IBNR
o Policyholder liabilities
o Balance in ledger account A
o Balance in ledger account B
o Balance in ledger account B
o Balance in ledger account C
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o Balance in ledger account D
17
Applicability of IAS 27, IAS 39 and IAS 40
• As per existing regulations, insurers are given certain exemptions from
IAS 27, IAS 39 and IAS 40.
• However, revised regulations have encouraged compliance with IFRS,
therefore these exemptions have been withdrawn.
• These are presented in next slides.
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18
Applicability of IAS 27, IAS 39 and IAS 40 – contd.
Applicability of IAS 27
As per existing regulations, consolidated published financial statements in
respect of investments made through statutory funds is not required to be
presented. However, this exemption has been withdrawn in modified
regulations.
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19
Applicability of IAS 27, IAS 39 and IAS 40 – contd.
Applicability of IAS 39
The existing regulations requires available for sale investments to be valued
at lower of cost or market value.
Now the accounting regulations adopts the requirements of IAS 39
completely and all investments requiring marked to market will be valued
accordingly.
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20
Applicability of IAS 27, IAS 39 and IAS 40 – contd.
Applicability of IAS 40
Under IAS 40 companies have the option to select accounting policy of
valuing investment property either on cost or fair value basis. The existing
regulations however provides restriction and do not allow the use of fair
value option. The revised accounting regulation removes this restriction.
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21
Recognition of Cover Note in the books of accounts
In non-life insurance business, particularly in Marine Insurance there is a
practice of issuing cover notes for temporary period which remain in force
until the insurance policy is issued. It was observed that the insurance
companies start recognising the accounting for such transactions only when
the insurance policy is issued. However, it was viewed that the company
needs to record the transaction since its inception.
The existing and revised requirements of the accounting regulations are in
the next slide:
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22
Recognition of Cover Note in the books of accounts- contd.
EXISTING
Premium receivable under a policy shall be recognised as written from the
date of attachment of the policy to which it relates.
REVISED
Premium receivable under a policy / cover note shall be recognised as
written from the date of attachment of risk of the policy / cover note.
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23
Explanation of management and other expenses – non-life
insurers
Previously, there was no explanation of ‘expenses’ and ‘general and
administrative expenses’ for non-life insurers. However, in modified accounting
format ‘management expenses’ and ‘other expenses’ have been identified.
Following are included in other expenses in modified format:
o
Legal and professional fee other than business related
o
Auditors’ remuneration
o
Subscription
o
Registration fee
o
Expenses of bonus issue
o
Donations
o
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Workers Welfare Fund
24
Change in premium deficiency requirement
Existing
Revised
Where the unearned premium liability
The provision for premium
for any class of business is not adequate
deficiency (liability adequacy test)
to meet the expected future liability, after
shall be recognised in accordance
reinsurance, from claims and other
with the requirements given in
expenses, including reinsurance expense,
International Financial Reporting
commissions and other underwriting
Standard 4 – Insurance Contracts.
expenses, expected to be incurred after
balance date in respect of policies in that
class of business in force at balance date,
a premium deficiency reserve shall be
recognised
to meet the deficit.
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25
Change in premium deficiency requirement– contd.
Liability adequacy test
IF
Liability less related
deferred acquisition cost
and intangible assets
Current estimates of future
contractual cash flows
then recognise deficiency in profit and loss
If an insurer's liability adequacy test meets the minimum requirements as
above, the test is applied at the level of aggregation specified in that test.
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26
Key issues highlighted in modified regulations – life
insurance
Possible adverse impact of taxation
• The taxability of life insurers is computed as per the provisions of
Fourth Schedule of Income Tax Ordinance, 2001. As per the Fourth
Schedule only the amount of surplus transferred from revenue account
to profit and loss account is subject to taxation.
• The existing regulations present separate revenue account and profit
and loss account in which the transfer of surplus from revenue account
to profit and loss account is separately disclosed.
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27
Key issues highlighted in modified regulations – life
insurance – contd.
Possible adverse impact of taxation
• In the modified accounting regulations there will be no revenue account
and profit and loss account is prepared on a combined basis for all
statutory funds and shareholders fund therefore, the transfer of surplus
would not be separately identifiable on the face of profit and loss
account.
• The life insurance industry strongly feels that unless the requirements
of Income Tax Ordinance are changed to reflect the new accounting
regulations, taxation authorities may create huge demands on the
insurance companies.
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28
n issues highlighted in modified regulations – life
Key
insurance – contd.
The amount representing solvency margin in account D shall
not be taken as equity.
The surplus of any statutory fund which is not yet transferred to profit
and loss account is disclosed as ledger account D relating to non
participating business. This amount may be held in view of solvency
margins. It is viewed that since there is a restriction on transfer such
amount should be treated as liability.
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29
n
Thank you
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