THE INSTITUTE of Chartered Accountants of Jamaica (ICAJ) has issued an accounting standard - 3.32 which prescribes the appropriate accounting practice for transactions that are peculiar to the General Insurance Industry. This standard is effective for accounting periods beginning on or after January 1, 2002. There is no corresponding International Accounting Standard (IAS), therefore, the ICAJ standard will have to be adopted along with IAS.
The standard states that:
Unearned premiums at the end of the accounting period should be computed
using one of the prescribed methods and accounted for as an Unearned Premium
Reserve. The Unearned Premium Reserve should be determined by reference to
Net Written Premiums.
Unearned Premium Reserve for all categories of risks, except Marine and
Transportation, should be computed as recommended below:
In the case of premiums that normally cover a period of risk of one year,
the 1/24th or 1/365th method should be used.
For policies extending coverage over a period of more or less than twelve
months, the Time Apportionment Method should be used unless the number of
such policies and their impact are not material.
In the case of Marine and Transportation Insurance the Unearned Premium
Reserve should be maintained at "100 per cent of net premiums in respect of
trip risks not terminated" in accordance with the Insurance Act.
UNEXPIRED RISKS PROVISION
An Unexpired Risks Provision, where applicable, is to be determined for
each class of business and is to be accounted for as a Premium Reserve in
addition to the Unearned Premiums Reserve. An assessment of the need for an
Unexpired Risks Provision should be made for each grouping of business which
is managed together. Unexpired risks surpluses and deficits within such a
grouping should offset each other.
The potential requirement for an Unexpired Risks Provision should be assessed
on the basis of information available as at the balance sheet date. Claims
occurring after the balance sheet date in relation to the unexpired period
of policies in force should not be taken into account in making the assessment.
Where material, however, post balance sheet claims should be disclosed in
the notes to the financial statements, together with an estimate of their
financial effect.
In computing the expected value of future claims in relation to the unexpired
periods of risk on policies in force at the balance sheet date, the future
investment income arising on investments supporting the unearned premium provision
and the existing unexpired risks provision should be taken into account. The
investment income will be that expected to be earned by the investments held
until the future claims are settled.
The following are to be disclosed:
The policy employed in the determination of the Unearned Premium Reserve
and the Unexpired Risks provision. The gross written premiums and reinsurance
ceded; either on the face of the Income statement or as note to the Financial
Statements.
The Unearned Premium Reserve and Unexpired Risks Reserve for each class
of insurance business at the end of the financial period.
Acquisition costs that have been set off against Gross Written Premium before
the computation of the Unearned Premium Reserve.
General Insurance Companies should maintain reserves for amounts estimated to provide for the expenses of loss adjustment on settlement of all claims, incurred on or prior to the end of the accounting period. This is to be case whether the claims are reported or unreported, once they are unpaid at the end of the accounting period and the general insurer faces liability.
Even though there may be many methods of estimating unpaid claims, the underlying goal is to have unpaid claims reflect the liability outstanding for losses that have occurred as at the financial statement date. Claims are to be recognised in the accounts as they occur and not as they are reported to the General Insurance Company. Because of this basis of recognition, unpaid claims are to be grouped into two types:
Reported
Incurred but not Reported (IBNR).
- In accounting for the provision of unpaid claims that have been reported,
the Case basis and the Paid/Loss Pattern are to be used.
IBNR claims are to be computed in accordance with the regulations to the
Insurance Act.
In accounting for claims/loss provisions, salvage realisation and claims
recoveries other than reinsurance recoveries are to be accounted for as and
when received unless the realisation can be determined with reasonable certainty.
The following are to be disclosed:
The method used in computing the provision for claims that have been incurred
and reported but not yet settled.
Post balance sheet claims that are material, and their financial effect,
in the context of the company's operation.
The gross claims payable and the amount recoverable from the reinsurers.
