Reinsurance Accounting for Life Insurers
Premium out, recoveries in. Here is where each reinsurance flow lands in the accounts.
A life insurer rarely keeps every rupee of risk it writes. It passes part of each large risk to a reinsurer, pays the reinsurer a share of the premium, and in return recovers a share of any claim. The law, as amended in 2015, defines reinsurance as insuring part of one insurer's risk with another, which rules out ceding 100% of a risk.
IC-26 does not ask how the treaty is designed (that is IC-22's ground). It asks where each reinsurance flow lands in the accounts: premium ceded, premium accepted, claim recoveries, commission, and the reinsurer's share of the policy liability.
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Reinsurance in the Revenue Account
From IRDA's prescribed Revenue Account (Form A-RA) and its notes.
Reinsurance ceded
Where it goes
Premiums earned (net), Schedule 1
Effect
Deducted from premium
Reinsurance accepted
Where it goes
Premiums earned (net), Schedule 1
Effect
Added to premium
Reinsurer's share of the policy liability
Where it goes
Change in valuation of liability against life policies in force
Effect
Gross change, less the amount ceded, plus the amount accepted
Claims recovered from reinsurers
Where it goes
Benefits paid (net)
Effect
Netted off against benefits paid (HDFC Life's policy)
| Item | Where it goes | Effect |
|---|---|---|
| Reinsurance ceded | Premiums earned (net), Schedule 1 | Deducted from premium |
| Reinsurance accepted | Premiums earned (net), Schedule 1 | Added to premium |
| Reinsurer's share of the policy liability | Change in valuation of liability against life policies in force | Gross change, less the amount ceded, plus the amount accepted |
| Claims recovered from reinsurers | Benefits paid (net) | Netted off against benefits paid (HDFC Life's policy) |
Key Terms
- Premium ceded
- The share of premium the insurer passes to its reinsurers. HDFC Life accounts for it on a due basis under the terms of its reinsurance treaties; LIC and SBI Life account for it per the treaty or in-principle arrangement with the reinsurer.
- Reinsurance accepted (inward)
- Business the insurer takes on from another insurer. Its premium is added in Schedule 1, and commission and expenses on it charged to the Revenue Account count as expenses of management.
- Profit commission
- A commission the reinsurer pays back when the ceded business does well. HDFC Life nets it against premium ceded rather than showing it as separate income.
- Claims receivable from reinsurers
- The reinsurer's share of a claim. HDFC Life accounts for it in the period the claim is intimated.
- Gross written premium
- Total premium written before deducting reinsurance ceded. Premium earned is after reinsurance.
Presentation Rules
- check_circleReinsurance premiums, ceded or accepted, are brought in gross, before deducting commission (notes to Form A-RA).
- check_circleThe separate-line test uses premium net of reinsurance: any income or expense item above 1% of total premiums (less reinsurance) or ₹5,00,000, whichever is higher, is shown on its own line.
- check_circleHDFC Life's later policy editions net reinsurance claims receivable off against benefits paid; its older editions say only that they are accounted for in the period the claim is intimated.
- check_circleSome HDFC Life editions qualify the profit commission rule with "if applicable".
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Reinsurance Outside the Revenue Account
Amounts due from reinsurers
Where it sits
Other Assets (amounts due from other entities in insurance business)
Source
IRDAI master circular
Balance due to other insurance companies
Where it sits
Other Liabilities
Source
IRDAI master circular
Cash paid to reinsurers
Where it sits
Operating payments in the Receipts and Payments Account, net of commissions and claims
Source
IRDAI master circular, Annexure III
Commission and expenses on reinsurance inward
Where it sits
Part of expenses of management, and part of the life insurer's EoM limit
Source
IRDAI EoM Regulations, 2024, Reg 2 and Reg 7
| Item | Where it sits | Source |
|---|---|---|
| Amounts due from reinsurers | Other Assets (amounts due from other entities in insurance business) | IRDAI master circular |
| Balance due to other insurance companies | Other Liabilities | IRDAI master circular |
| Cash paid to reinsurers | Operating payments in the Receipts and Payments Account, net of commissions and claims | IRDAI master circular, Annexure III |
| Commission and expenses on reinsurance inward | Part of expenses of management, and part of the life insurer's EoM limit | IRDAI EoM Regulations, 2024, Reg 2 and Reg 7 |
Measuring How Much Is Ceded
CARE Ratings' risk retention ratio is net premium written divided by gross premium written. It shows how much risk the insurer keeps compared with what it cedes to reinsurers. The ceded share is simply the other side of the same ratio. The financial ratios page covers it alongside the other insurer ratios.
The Reinsurer's Side
Reinsurers keep accounts too, and IRDAI has rules for them.
- check_circleThe financial statements regulations apply Schedule B (the general insurance format) to reinsurers, with necessary changes, until separate regulations are made. Schedule C sets the auditors' report for every insurer and reinsurer.
- check_circleReinsurers and foreign reinsurers' branches (FRBs) often wait for statements of account from insurers. They may not accrue premium on an estimate up to the third quarter. For the fourth quarter ending 31 March, they may estimate premium, losses and related expenses where statements have not arrived in time.
- check_circleWhen estimating, the reinsurer must use a consistent method across its whole portfolio, true up the estimates as actual figures arrive, and state in the annual report how much of the year's premium, claims and expenses was estimated.
- check_circleThe 2015 amendment let foreign reinsurers set up branches in India. GIC Re is the sole national reinsurer.
- check_circleInd AS 117 applies to any entity that issues or holds insurance contracts, including reinsurance contracts.
Exam Traps
Premium ceded is deducted from premium in Schedule 1, not added and not shown as an operating expense. Reinsurance premiums are shown gross, before commission. Profit commission is netted against premium ceded at HDFC Life, not shown as separate income. Claim recoveries reduce benefits paid; they are not an income line. The change in liability is less amount ceded, plus amount accepted. Reinsurers may not estimate premium before the fourth quarter.
FAQs
How is reinsurance premium ceded shown in a life insurer's accounts?expand_more
As a deduction from premium in Schedule 1, under Premiums earned (net) in the Revenue Account. Reinsurance accepted is added on the same schedule. Both are shown gross, before commission.
When does a life insurer account for premium ceded?expand_more
On a due basis under the terms of the reinsurance treaties (HDFC Life), or per the treaty or in-principle arrangement with the reinsurer (LIC, SBI Life).
How are reinsurance claim recoveries shown?expand_more
HDFC Life accounts for claims receivable from reinsurers in the period the claim is intimated and nets them off against benefits paid. The Revenue Account line is Benefits paid (net).
Does reinsurance affect the policy liability in the Revenue Account?expand_more
Yes. The change in valuation of liability is shown gross, less the amount ceded in reinsurance, plus the amount accepted.
Where do amounts due from reinsurers appear in the Balance Sheet?expand_more
Under Other Assets, as amounts due from other entities carrying on insurance business. A balance due to other insurance companies is an Other Liability.
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- IC-22: Life reinsurance and retentionarrow_forward
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