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Home / IRDA Update 

Insurance cos given 5 years to pay off acquisition costs

The Insurance Regulatory and Development Authority (IRDA) in its draft regarding accounting norms for insurance companies has said that the latter can amortise acquisition costs for up to five years.

The deferment of acquisition costs will play an important role in the balance sheet of a new life insurance company. This is because first-year commissions in a life insurance policy can be as high as 75 percent of the premium. If companies have to provide for the entire commission up front they will have to report huge losses.

The draft Norms State that only commissions can be deferred when they are expected to give rise to future premium income. Any other acquisition costs should be expended in the years in which they are incurred.

IRDA has clarified that the capitalised part of the acquisition cost should be charged to expense in proportion to premium revenue recognised unless any other rational or reasonable basis of amortisation is adopted.

The draft report has also prescribed norms for revaluing investments in shares and property based on market rates with the surplus to be credited to separate revaluation reserves. Part of these surpluses can be utilised for declaring bonuses to the policyholders up to the limits prescribed by IRDA.

Balance sheets of insurance companies are expected to become more transparent with a large number of disclosures required to be made as part of notes to accounts.

Insurance companies will also have to maintain a catastrophe reserve that has be created out of the surplus in the policyholders' accounts. The accounting norms state that insurance companies should comply with the Accounting Standards (AS) issued by the Institute of Chartered Accountants of India to the extent applicable to life insurance companies except in the case of Accounting Standard (AS) 3,AS 13 and AS 17.

AS 13 will not apply as cash flow statement should be prepared only under the direct method. Similarly, AS 13 which pertains to investments will not apply and companies will have adopt IRDA guidelines for valuing investments. Moreover insurance companies will have to adopt segment reporting irrespective of whether their securities are listed or not unlike prescriptions under AS 17.

The valuation norms state that investment property must be measured at historical cost in value subject to revaluation at least once every three years. The change in value should be taken to Revaluation Reserve. The authority will prescribe the amount to be released from the revaluation reserve for declaring bonus to the policyholders.

Book keeping:

• Acquisition costs deferment to play important role in new companies balance sheets.
  
  
• First-year commission in life insurance policy can be 75 percent of premium.
  
  
• Upfront provision of commission can result in huge loss.
  
  
• Other acquisition costs to be provided for in the year they are incurred.
  
  
• Surplus valuation to be credited to the revaluation reserves.

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