Insurance Accounting 101 (2024)

FAQs

What is insurance accounting? ›

Insurance accounting is a distinct subset of accounting due to the specific nature of the insurance industry. Insurance agents face unique challenges and considerations in their financial reporting, which differentiate them from businesses in other sectors.

Assets – Liabilities = Equity (sometimes labeled “net assets” or “surplus”) • Revenue – Expense = Income (with expense including incurred losses and underwriting expenses for an insurance company).

Tip 1: Use separate accounts for insurance expense and prepaid insurance, and classify them as operating expenses and current assets, respectively. Tip 2: Record an insurance premium payment by debiting the insurance expense account and crediting the cash account, using the date and amount of the payment.

Statutory Accounting Principles, also known as SAP, are used to prepare the financial statements of insurance companies. In the United States, authorized insurers are required to prepare financial information according to SAP.

Expense Ratio = Expenses / Premium Combined Ratio = (Losses + Expenses) / Premium = Loss Ratio + Expense Ratio Underwriting Profit = 100% – Combined Ratio Example: Loss Ratio = 70% (ratios may be expressed as a % or a decimal; either is correct) Expense Ratio = 25% Combined Ratio = 95% I.e. 95% of premium is used to ...

Insurers charge more than the expected loss, in order to cover operating expense and make a profit. The “cost of goods sold” is the actual claims they cover. This includes paid claims, reserves for known future claims, and estimates of “incurred but not reported” (IBNR).

Owner's equity is used to explain the difference between a company's assets and liabilities. The formula for owner's equity is: Owner's Equity = Assets - Liabilities.

Underwriting income is calculated as the difference between an insurance company's earned premiums and its expenses and claims. For example, if an insurer collects $50 million in insurance premiums over a year, and spends $40 million in insurance claims and associated expenses, its underwriting income is $10 million.

What Is a Loss Ratio? Loss ratio is used in the insurance industry, representing the ratio of losses to premiums earned. Losses in loss ratios include paid insurance claims and adjustment expenses. The loss ratio formula is insurance claims paid plus adjustment expenses divided by total earned premiums.

To achieve this, the entity must follow three Golden Rules of Accounting: Debit all expenses/Credit all income; Debit receiver/Credit giver; and Debit what comes in/Credit what goes out.

Where to put insurance in balance sheet? ›

Insurance policies are considered as assets within a company's balance sheet. Depending on the type of insurance, it may fall under different categories. For example, if a company has insured its tangible assets like buildings or vehicles, the insurance would be classified as a non-current asset.

All policies come with premiums. If they expire, they must be recorded as an expense. Unexpired premiums should be listed as prepaid insurance, which is listed in an asset account.

The balance sheet is broken into two main areas. Assets are on the top or left, and below them or to the right are the company's liabilities and shareholders' equity. A balance sheet is also always in balance, where the value of the assets equals the combined value of the liabilities and shareholders' equity.

Statutory accounting seeks to determine an insurer's ability to satisfy its obligations at all times, whereas GAAP measures the earnings of a company on a going-concern basis from period to period.

A: Insurance is typically recorded as a debit in the trial balance. It is treated as a prepaid expense, reflecting the amount paid in advance for insurance coverage.

Protection Expenses

This expense category is typically used for all types of insurance, such as property insurance, health insurance, and liability insurance.

Insurance expense refers to the cost incurred by a business or an individual for obtaining insurance coverage. These costs are paid as premiums to an insurance company and are typically accounted for as expense items in the entity's financial statements.

Statutory accounting seeks to determine an insurer's ability to satisfy its obligations at all times, whereas GAAP measures the earnings of a company on a going-concern basis from period to period.

Actuary Job Description. GO! Actuarial accounting is a statistics based accounting method primarily used in the insurance industry, and for that reason is often referred to as insurance accounting.