Diploma in Insurance

1. Diploma in Insurance M92 Insurance Business and Finance Chapter 7: Accounting standards and insurance company accounts

2. What is not included in Gross Written Premium?  A.  Adjustment premiums B.  Instalment premiums C.  Insurance premium tax D.  Renewal premiums

3. Half way through an underwriting year an insurer collected an annual premium of £1000 from a new customer. What is the net earned premium for that risk at the end of the underwriting year?  A.  £0 B.  £500 C.  £500 + IPT D.  £1000 + IPT

4. An insurer receives dividends, interest and rental income. How is this likely to appear in its accounts? • Gross profit • Net investment returns • Unearned premium • Unrealised gains

5. How will a tax liability that has not yet been paid, be shown in an insurer’s accounts? • Current • Deferred tax • Non current tax • Non current tax liability

6. Under which heading would you expect an insurer’s gross losses to be shown in its accounts? • Assets • Claims • Expenses • Liabilities

7. Under which heading would you expect reinsurance returns to be shown in an insurer’s accounts? • Assets • Claims returns • Reinsurer contributions • Liabilities

8. What is the total value of all invoices even if they have not been paid yet? • Cash flow • Gross Profit • Net profit • Revenue

9. In which financial statement would you expect to find the headings Operating Activities, Investment Activities and Financing Activities? • Balance sheet • Cash flow statement • Income statement • Profit and loss account

10. In its cash flow statement, under which heading would you expect to find premium paid to an insurance company? • Financing activities • Investment activities • Operating activities • Primary activities

11. In its cash flow statement, under which heading would you expect to find brokerage paid by an insurance company? • Financing activities • Investment activities • Operating activities • Primary activities

12. In its cash flow statement, under which heading would you expect to find interest received by an insurance company? • Financing activities • Investment activities • Operating activities • Primary activities

13. In its cash flow statement, under which heading would you expect to find dividends paid to shareholders by an insurance company? • Financing activities • Investment activities • Operating activities • Primary activities

14. What helps managers to make sound financial decisions as well as to set plans and targets through the budgeting process? • Financial accounting • Its balance sheet • Management accounting • Solvency II

15. What types of costing charges cost centres according to the activity from central functions? • Activity based • Central basis • Cost centre based • Function based

16. What is used is management accounting best used for when investigating a problem? • A basis for enquiries • Cash flow enquiries • To dictate actions to take • To provide solution

17. You received this report from your management accounts. What should you do now? • Close line C • Find out the reason for these results • Improve the marketing of line C • Reduce expenses for line C

19. Learning objectives By the end of this module, you should be able to: • Outline the main accounting standards that affect insurance company accounts

21. Aim of the chapter Provide you with an understanding of: • The bodies responsible for IFRS and UK GAAP • How IFRS has been adopted in the EU and how other countries such as the USA plan to, or currently do, allow the use of IFRS • The IFRS framework • The requirement that accounts should show a ‘true and fair’ view

23. What is the IFRS foundation? • Not-for-profit, public interest organisation • Established to develop a single set of high-quality, understandable, enforceable and globally accepted accounting standards • Promote and facilitate adoption of the standards. • IFRS Standards are set by the IFRS Foundation’s standard-setting body, the International Accounting Standards Board Source: https://www.ifrs.org/about-us/who-we-are/

24. Mission statement ‘Our mission is to develop IFRS Standards that bring transparency, accountability and efficiency to financial markets around the world. Our work serves the public interest by fostering trust, growth and long-term financial stability in the global economy. • IFRS Standards bring transparency by enhancing the international comparability and quality of financial information, enabling investors and other market participants to make informed economic decisions. • IFRS Standards strengthen accountability by reducing the information gap between the providers of capital and the people to whom they have entrusted their money. Our Standards provide information needed to hold management to account. As a source of globally comparable information, IFRS Standards are also of vital importance to regulators around the world. • IFRS Standards contribute to economic efficiency by helping investors to identify opportunities and risks across the world, thus improving capital allocation. Use of a single, trusted accounting language lowers the cost of capital and reduces international reporting costs for businesses’ Source: https://www.ifrs.org/about-us/who-we-are/

25. 3 tier governance structure Main responsibility to ensure that the Trustees discharge their duties as defined by the IFRS constitution Responsible for the governance and oversight of the International Accounting Standards Board. The Board is an independent group of experts with practical experience in setting accounting standards, preparing, auditing, or using financial reports. The Committee responds to questions about applying the Standards and other work for the board.

27. IFRS Framework – underlying assumptions

28. Qualitative characteristics of financial statements

29. Terminology

30. ‘True and Fair’ requirements

31. Financial crisis advisory group Created to consider financial reporting issues arising from the financial crisis Main areas addressed: • Effective financial reporting • Limitations of financial reporting • Convergence of accounting standards • Standard setter independence and accountability

32. Main problems exposed by the financial crisis

33. IFRS 4 Defines an insurance contract and gives guidance on presentation and disclosure by insurers • Extensive disclosures about risk management policy, interest and credit information and the impact on future cashflows • Insurance liabilities to be kept on the balance sheet until discharged – not to be offset against reinsurance assets • Adequacy test for insurance liabilities • Impairment test for reinsurance assets • Provisions for IBNR’s

34. IFRS17 To replace IFRS4 on 1 January 2021 and remedies some of its flaws • Difficult for investors to compare and contrast the performance of similar companies • Requires all insurance contracts to be accounted in a consistent manner • Accounting to be on current values rather than historical costs Some mismatch currently exists between how insurers measure assets and liabilities and financial accounting

35. Claims development tables Required by IFRS to show how accurate estimates of claims costs actually were. Variations between insurers in how they show/account for: • Acquisitions and disposals • Foreign exchange fluctuations • IBNR’s • Discounted liabilities

36. IFRS financial statements • Balance sheet • Income statement • Cashflow statement • Notes – including summary of significant accounting policies • Also require Statement of Changes in Equity (SOCE) or a Statement of Recognised Income and Expense (SORIE) • Also require comparative information from previous accounting years

38. FRS 102 • The new UK GAAP • 350 pages long • Old GAAP was 3000 pages • Reduced disclosure requirements for smaller entities • FRS103 is for insurance companies and allows them to keep current practices • There is a reluctance to change to IFRS – see later slide

39. Financial Reporting Council (FRC) Independent regulator responsible for promoting confidence in corporate reporting and governance Objectives to promote: • Corporate governance and cultures to promote long terms success of companies • Effective investor stewardship and engagement between companies and investors • Clear and concise reporting to meet investor needs • Actuarial work underpinned by sound standards

40. FRC Structure

41. Conduct committee of FRC

42. Small entity Satisfies two of the following: Turnover less than £10.5m Assets less than £5.1m Less than 50 employees Have to prepare ‘True and Fair’ accounts Must exercise judgement in disclosing additional information

43. Micro entity Satisfies two of the following: Turnover less than £632,000 Assets less than £316,000 Less than 10 employees Accounts presumes in law to be ‘True and Fair’ - Not required to make additional disclosures Very limited disclosures required

44. UK GAAP • UK quoted companies required to produce consolidated accounts in accordance with IFRS • No similar obligation for parent companies or subsidiaries • Common to adopt UK GAAP instead • The question is why

45. UK GAAP reasons • IFRS more onerous • Potential adverse tax consequences – timing issues • Potential adverse effects on distributable profits • Potential adverse impact on regulatory solvency • Potential adverse impacts on debt covenants • Implications on management time, available skills, training requirements, system changes and costs

46. Accounts on more than one basis if using UK GAAP

48. Which ‘not for profit’ organisation was established to develop a single set of high-quality, understandable, enforceable and globally accepted accounting standards? • FCA • IBNER • IFRS • PRA

49. Which part of the IFRS governance structure is made up of an independent group of experts with practical experience in setting accounting standards, preparing, auditing, or using financial reports? • IFRS standards committee • Institute of financial accountants • International Accounting Standards Board • Monitoring committee

50. Who are responsible for the governance and oversight of the International Accounting Standards Board. ? • IFRS standards committee • International Accounting Standards Board • Monitoring committee • Trustees of the IFRS foundation