Final Accounts of a Life Insurer: Revenue Account and Balance Sheet
Policyholders' account, shareholders' account, balance sheet: what goes where, and why.
A life insurer runs two sets of money side by side. Policyholders' funds pay claims and bonuses. Shareholders' funds are the owners' capital and profit. The final accounts keep the two apart, which is why a life insurer's accounts look different from an ordinary company's.
IRDA's financial statement regulations require three statements: the Revenue Account (Policyholders' Account), the Profit and Loss Account (Shareholders' Account) and the Balance Sheet. Each has a prescribed form, to be followed as prescribed or as near to it as circumstances permit. A separate Receipts and Payments Account (the cash flow statement) is also required.
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The Three Statements at a Glance
Revenue Account
Form
Form A-RA
Heading on the form
Policyholders' Account (Technical Account)
What it shows
Premium, investment income, commission, expenses, benefits and the change in policy liabilities, down to surplus or deficit and its appropriation
Profit and Loss Account
Form
Form A-PL
Heading on the form
Shareholders' Account (Non-technical Account)
What it shows
The amount transferred from the Policyholders' Account, shareholders' investment income, other expenses, tax, and dividends
Balance Sheet
Form
Form A-BS
Heading on the form
Balance Sheet
What it shows
Shareholders' funds, policyholders' funds (Policy Liabilities, Funds for Discontinued Policies) and the assets that back them
| Statement | Form | Heading on the form | What it shows |
|---|---|---|---|
| Revenue Account | Form A-RA | Policyholders' Account (Technical Account) | Premium, investment income, commission, expenses, benefits and the change in policy liabilities, down to surplus or deficit and its appropriation |
| Profit and Loss Account | Form A-PL | Shareholders' Account (Non-technical Account) | The amount transferred from the Policyholders' Account, shareholders' investment income, other expenses, tax, and dividends |
| Balance Sheet | Form A-BS | Balance Sheet | Shareholders' funds, policyholders' funds (Policy Liabilities, Funds for Discontinued Policies) and the assets that back them |
How the Revenue Account Builds Up to Surplus
Form A-RA shows Current Year and Previous Year figures in Rs.'000, under the insurer's name and its IRDA registration number and date. It works in four blocks.
- 1
(A) Income
Premiums earned (net): premium, less reinsurance ceded, plus reinsurance accepted (Schedule 1). Income from investments: interest, dividends and rent (gross); profit on sale or redemption; loss on sale or redemption; and transfer or gain on revaluation or change in fair value. Plus other income.
- 2
(B) Expenses
Commission (Schedule 2), operating expenses related to insurance business (Schedule 3), other expenses, and provisions other than taxation, such as the provision for diminution in the value of investments (net).
- 3
(C) Benefits and liability
Benefits paid (net) (Schedule 4), interim bonuses paid, and the change in valuation of liability against life policies in force. That change is shown gross, less the amount ceded in reinsurance, plus the amount accepted.
- 4
(D) Surplus or deficit
Surplus/(Deficit) (D) = (A) minus (B) minus (C).
- 5
Appropriations
The surplus goes to three places: transfer to the Shareholders' Account, transfer to other reserves, and transfer to Funds for Future Appropriations.
Separate Revenue Accounts
One Revenue Account is not enough. The regulations require it to be prepared separately for:
- check_circleParticipating and non-participating policies.
- check_circleLinked, non-linked and health insurance business.
- check_circleBusiness within India and business outside India.
- check_circleThese separate accounts modify how AS 17 (Segment Reporting) applies to insurers, to that extent.
- check_circleFor unit linked business, the Unit Linked Revenue Account is further split into Non-Unit Funds and Unit Fund.
- check_circleThe Receipts and Payments Account must use the Direct Method under AS 3 (Cash Flow Statement).
Terms You Will See in the Accounts
- Liability against life policies in force
- Per the Form A-RA notes, this is the Mathematical Reserves after allocation of bonus. Valuation is as on 31 March every year, and Section 13 of the Insurance Act, 1938 requires an Actuarial Report and Abstract.
- Total surplus
- Disclosed separately as interim bonuses paid, plus allocation of bonus to policyholders, plus the surplus shown in the Revenue Account.
- Funds for Future Appropriations (FFA)
- For example, LIC's accounting policy describes FFA in non-linked participating business as funds not yet allocated to policyholders or shareholders at the Balance Sheet date, and in unit linked funds as surplus from lapsed policies unlikely to be revived.
- Funds for Discontinued Policies
- A separate head in the Balance Sheet under Policyholders' Fund, next to Policy Liabilities, with two sub-heads: discontinued for non-payment of premium, and others.
- Claims incurred
- Claims paid, plus settlement costs where applicable, plus the change in the outstanding claims provision at the year end. Fees and expenses connected with claims are included in claims.
- Deemed realised gain
- The Form A-RA footnote says the line "transfer/gain on revaluation/change in fair value" is the deemed realised gain as per norms specified by the Authority.
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Bonus: Only Out of Valuation Surplus
Section 49 of the Insurance Act, 1938 says no life insurer may declare a bonus except out of a surplus shown in the valuation Balance Sheet. The surplus cannot be increased by contributions from reserve funds unless they were brought in through the Revenue Account on or before the valuation date.
A young insurer whose participating fund is in deficit can still declare a bonus, but only under strict conditions in IRDAI's master circular. It must first make good the accumulated deficit in the Policyholders' Account and transfer enough assets to cover the cost of bonus. The money comes from shareholders (the Profit and Loss balance, shareholder reserves and/or paid-up capital), by debiting the Profit and Loss Account and crediting the Revenue Account. The transfer is irreversible, must be fully backed by assets, needs a special resolution of shareholders, and paid-up equity capital must be increased within six months (or a longer period the Authority approves). This route is open only in the first twelve financial years of life operations.
Presentation Rules Worth Knowing
- check_circleCSR expenditure goes in the Profit and Loss Account. It must not be charged to the Policyholders' Account.
- check_circleAny income or expense item above 1% of total premiums (less reinsurance) or ₹5,00,000, whichever is higher, is shown as a separate line item.
- check_circleReinsurance premiums, ceded or accepted, are shown gross, before deducting commission.
- check_circleInterest, dividends and rent are shown gross. Tax deducted at source goes under "advance taxes paid and taxes deducted at source".
- check_circleRent income includes only realised rent, never notional rent.
- check_circlePremium income from business in India and outside India is disclosed separately.
- check_circlePremium on a policy in force at 31 March is accrued if it is due and still within the grace period.
- check_circleDividends and dividend distribution tax are appropriations in the Profit and Loss Account, never the Revenue Account.
Quarterly Profit on Non-Par Business
Surplus in non-participating funds may be recognised as profit in the Profit and Loss Account every quarter, if: the quarter's statements are audited or limited-reviewed by the statutory auditor; the Appointed Actuary certifies and recommends the transfer; the financial statements disclose it; and the amount does not exceed the year's profit, with any difference adjusted in the fourth quarter. If the surplus varies by more than 10% or ₹5 crore, whichever is higher, a Board-approved explanation goes to the Authority with the annual statements.
Exam Traps in This Chapter
Form A-RA is the Revenue Account, A-PL the Profit and Loss Account, A-BS the Balance Sheet. CSR goes to Profit and Loss, not the Revenue Account. The separate-line threshold is the higher of 1% or ₹5,00,000, not the lower. A shareholder top-up is a debit to Profit and Loss and a credit to the Revenue Account, not the reverse. The deficit-funded bonus window is twelve financial years, with capital raised within six months. The Revenue Account says "Benefits Paid (Net)"; "claims incurred" is the term defined in the notes.
FAQs
What are the final accounts of a life insurance company?expand_more
The Revenue Account (Policyholders' Account, Form A-RA), the Profit and Loss Account (Shareholders' Account, Form A-PL) and the Balance Sheet (Form A-BS), plus a Receipts and Payments Account prepared by the Direct Method.
Why is the Revenue Account called the Policyholders' Account?expand_more
It records the insurance business run with policyholders' money: premiums, investment income on policyholders' funds, expenses, benefits and reserves. Its form is headed "Policyholders' Account (Technical Account)". The shareholders' side is in the Profit and Loss Account.
How is the surplus in the Revenue Account calculated?expand_more
Total income (A) minus expenses and provisions (B) minus benefits, interim bonuses and the change in policy liabilities (C). It is then appropriated to the Shareholders' Account, other reserves or Funds for Future Appropriations.
Can a life insurer declare bonus when its participating fund is in deficit?expand_more
Only in its first twelve financial years, and only after shareholders make good the deficit and fund the bonus with an irreversible, asset-backed transfer approved by special resolution. Otherwise Section 49 allows bonus only out of valuation surplus.
Where is CSR spending shown in an insurer's accounts?expand_more
In the Profit and Loss (Shareholders') Account. IRDAI's master circular says it must not be charged to the Policyholders' Account.
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