Regulatory updates

Currently, the Insurance Regulatory and Development Authority of India (IRDAI) (Preparation of Financial Statements and Auditors Report of Insurance Companies) Regulations, 2002 (IRDAI FS regulations)⁴ provides the following guidelines with respect to recognition of premium:

1. Premium should be recognised as an income over the contract period or the period of risk, whichever is appropriate,
2. Premium received in advance is the premium where the period of inception of the risk is outside the accounting period and is to be shown under 'current liabilities', and
3. 'Unallocated premium’ includes premium deposit and premium which has been received, but for which the risk has not commenced. It is to be shown under 'current liabilities'.

IRDAI observed that while some of the reinsurers account for the premium received on an ‘actual’ basis, other reinsurers adopt the ‘estimation’ basis of accounting⁵.

Given that a significant part of the premium is accounted for on an estimation basis, the IRDAI, vide a circular dated 15 June 2022, has prescribed the guidelines with respect to accounting and disclosure of premium recognised on an estimation basis in the annual report. As per the prescribed guidelines, the reinsurers should ensure that in the annual financial statements, no premium is accrued/accounted on an estimate basis at least upto the third quarter of each financial year. However, for the fourth quarter ending on 31 March, where the statement of accounts has not been received in time, the premium, losses and related expenses may be accounted on an estimation basis, subject to the following conditions:

1. A consistent methodology should be followed across the entire portfolio
2. The estimates must be trued up, once the actual values emerge
3. A statement should be included in the annual report stating total premium, claims and expenses accounted for during the financial year and premium, claims and expenses accounted on estimation basis
4. Complete disclosure should be made for three years (including the current financial year), giving the segment wise break up of premium, claims and expenses accounted on estimation basis and its actual experience as per the prescribed formats, along with management’s comments on variation, if any, beyond 10 per cent on a yearly basis under notes to accounts, and
5. If the actual figures are not available at the time of closure of books of accounts for the said financial year:
   1. Any deviation beyond ± 10 per cent should be reported to IRDAI in the prescribed format, within 15 days from the end of the first quarter of the next financial year
   2. Disclosures in the notes to accounts as prescribed in point (d) should be made in the annual report for the next financial year

The new guidelines are effective from financial year 2022-23.

4. Part I of Schedule B of the IRDAI FS regulations prescribes the accounting principles for preparation of financial statements. Para 2 of Part I of Schedule B of the IRDAI FS regulations stipulates the accounting provisions for premium received.
5. The premium is accounted on estimation basis due to following reasons:
   1. Lag or delay in receiving the statement of accounts from the insurer(s), and
   2. Alignment of accounting practices with parent organisation

To access the text of the circular, please click here