Corporate Accounting and Auditing · Accounts of Banking, Electricity and Insurance Companies

Final Accounts of General Insurance Companies

Updated 10 October 2026 · Fact-checked

A general insurer prepares a separate revenue account for each class (fire, marine, miscellaneous), then a profit and loss account and a balance sheet. The revenue account shows premium earned less claims, commission and expenses of management. The balance is transferred to profit and loss. Adjust premium for reinsurance and the reserve for unexpired risks.

Understand Final Accounts of General Insurance Companies

A general insurer sells fire, marine and miscellaneous cover. Section 10 of the Insurance Act, 1938 requires a separate account of receipts and payments for each class of business. So you prepare a revenue account for each class, not one combined account.

Section 11 requires every insurer, at the end of each financial year, to prepare a balance sheet, a profit and loss account, a separate account of receipts and payments and a revenue account, in accordance with the regulations specified (the IRDAI financial statement regulations). It also requires separate accounts for shareholders' funds and policyholders' funds. Section 12 requires audit, either under the Companies Act, 2013 or by an auditor with the powers of a company auditor.

The revenue account is the core. It starts with premium earned (net): premium received, less reinsurance ceded, adjusted for the change in reserve for unexpired risks. From it you deduct claims incurred (net of reinsurance recoveries), commission and operating expenses. The result is the underwriting profit or loss of that class.

The reserve for unexpired risks carries forward the part of the premium that relates to the period after the year end. The usual exam convention is 100% of net premium for marine (hull and cargo) and 50% of net premium for fire and miscellaneous, unless the question gives other rates. Opening reserve is added back and closing reserve is deducted. Always read the question for the rate given.

The balance of each revenue account goes to the profit and loss account, together with investment income and other income, less items such as provision for doubtful debts. The balance sheet then shows shareholders' funds, policyholders' funds, provisions and investments.

Key rules to remember

Net premium: Net premium = Direct premium + Reinsurance premium accepted − Reinsurance premium ceded; Use the net figure as the base for the unexpired risk reserve.
Premium earned (net): Premium earned = Net premium + Opening reserve for unexpired risks − Closing reserve for unexpired risks; Reserve for unexpired risks is normally shown as an adjustment, not as a separate expense.
Closing reserve for unexpired risks: Closing reserve = Net premium × rate (usual exam convention: fire 50%, marine 100%); Use the rate stated in the question. Marine 100% is usual for a single-voyage basis.
Claims incurred (net): Claims paid + Closing outstanding claims − Opening outstanding claims − Reinsurance recoveries (adjusted for outstanding); Add claim expenses such as survey fees to claims.
Net commission: Commission = Commission paid on direct business + Commission on reinsurance accepted − Commission received on reinsurance ceded; Commission received on reinsurance ceded reduces the net commission.
Underwriting result: Revenue account balance = Premium earned − Claims incurred − Net commission − Expenses of management; A positive balance is transferred to profit and loss account; a negative balance is a loss.
Statutory requirements: Separate accounts for each class (s.10); shareholders' and policyholders' funds kept separate (s.11(2)); Section 11 requires the accounts in accordance with the specified regulations.

How to solve Final Accounts of General Insurance Companies questions

Use this order for any revenue account question. Prepare one account per class and keep workings visible.

1Read the data and note the class (fire, marine or miscellaneous) and the reserve rate given.
2Compute net premium: direct premium plus reinsurance accepted, less reinsurance ceded.
3Find the closing reserve for unexpired risks on net premium. Take the opening reserve from the data.
4Compute claims incurred: paid, plus closing outstanding, less opening outstanding, less reinsurance recoveries. Add claim-related expenses.
5Compute net commission, and add expenses of management.
6Draw the revenue account with premium earned on the credit side and claims, commission and expenses on the debit side. The balancing figure is the underwriting profit.
7Transfer the result to the profit and loss account, add other income, deduct other items, and prepare the balance sheet if asked.
8Show workings as notes so you earn step marks even if one figure is wrong.

Quickest way: Four-line working under time pressure

When to use it: Use when a revenue account question gives many items and you have under 20 minutes.

Write four lines: Premium earned, Claims, Commission, Expenses.
Fill each line with a small working beside it before you draw the account.
Premium earned = net premium + opening reserve − closing reserve.
Subtract the last three lines from the first to get the underwriting result, then draw the account to match it.

Common mistakes in Final Accounts of General Insurance Companies

Calculating the reserve on gross premium instead of net premium.
Students forget that reinsurance ceded reduces the premium retained.
Fix: Always compute net premium first, then apply the reserve rate.
Adding the closing reserve instead of deducting it.
The reserve is treated like an expense or a liability only.
Fix: Opening reserve is added to net premium and closing reserve is deducted when computing premium earned.
Ignoring outstanding claims at the start and end of the year.
Only claims paid are seen in the trial balance.
Fix: Use claims paid + closing outstanding − opening outstanding.
Subtracting commission on reinsurance ceded as an expense.
Commission is assumed to always be paid.
Fix: Commission received on ceded business is deducted from commission paid, giving net commission.
Preparing one combined revenue account for all classes.
Students want to save time.
Fix: Section 10 requires separate accounts for each class. Prepare one per class, then combine only in the profit and loss account.

Worked examples

Example 1

A general insurer provides these figures for its fire insurance business for the year: direct premium ₹12,00,000; reinsurance premium ceded ₹2,00,000; claims paid ₹4,00,000; outstanding claims at start ₹50,000 and at end ₹80,000; commission paid ₹1,00,000; expenses of management ₹1,20,000; opening reserve for unexpired risks ₹4,00,000. The closing reserve is 50% of net premium. Prepare the fire revenue account result.

Show the solution

Net premium = 12,00,000 − 2,00,000 = ₹10,00,000.
Closing reserve = 50% × 10,00,000 = ₹5,00,000.
Premium earned = 10,00,000 + 4,00,000 − 5,00,000 = ₹9,00,000.
Claims incurred = 4,00,000 + 80,000 − 50,000 = ₹4,30,000.
Total outgo = 4,30,000 + 1,00,000 commission + 1,20,000 expenses = ₹6,50,000.
Underwriting profit = 9,00,000 − 6,50,000 = ₹2,50,000, transferred to profit and loss account.

Answer: The fire revenue account shows an underwriting profit of ₹2,50,000.

Example 2

For a marine insurance business: direct premium ₹8,00,000; reinsurance accepted ₹1,00,000; reinsurance ceded ₹1,50,000; claims paid ₹3,00,000; outstanding claims at start ₹40,000 and at end ₹60,000; commission on direct business ₹70,000; commission received on reinsurance ceded ₹10,000; expenses of management ₹80,000; opening reserve ₹6,50,000. Closing reserve is 100% of net premium. Find the marine revenue account balance.

Show the solution

Net premium = 8,00,000 + 1,00,000 − 1,50,000 = ₹7,50,000.
Closing reserve = 100% × 7,50,000 = ₹7,50,000.
Premium earned = 7,50,000 + 6,50,000 − 7,50,000 = ₹6,50,000.
Claims incurred = 3,00,000 + 60,000 − 40,000 = ₹3,20,000.
Net commission = 70,000 − 10,000 = ₹60,000.
Total outgo = 3,20,000 + 60,000 + 80,000 = ₹4,60,000.
Underwriting profit = 6,50,000 − 4,60,000 = ₹1,90,000.

Answer: The marine revenue account shows an underwriting profit of ₹1,90,000, transferred to profit and loss account.

Exam tips

Draw the revenue account in a clear format and show the net premium, reserve and claims workings below it. Step marks depend on them.
Check the reserve rate in the question before you apply any default percentage.
In MCQs, the usual trap is gross versus net premium or an added instead of deducted closing reserve. Compute net premium first.
Know the statutory points: separate accounts for each class, separate shareholders' and policyholders' funds, and audit under section 12.
Link the result to the profit and loss account: write the transfer entry as the last line of your answer.

Practice questions from Accounts of Banking, Electricity and Insurance Companies

Final Accounts of General Insurance Companies in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Final Accounts of General Insurance Companies: frequently asked questions

What is a revenue account in general insurance?

It is the account prepared for each class of insurance business (fire, marine, miscellaneous). It shows premium earned against claims, commission and expenses of management. The balance is the underwriting result and goes to the profit and loss account.

How is the reserve for unexpired risk calculated?

Apply the stated percentage to net premium. In exam problems, 50% is commonly used for fire and 100% for marine unless the question says otherwise. Add the opening reserve and deduct the closing reserve when finding premium earned.

Does the Insurance Act require separate accounts for each class?

Yes. Section 10 requires a separate account of receipts and payments for each class of insurance business carried on. Section 11 also requires separate accounts for shareholders' and policyholders' funds.

Who audits an insurer's accounts?

Section 12 says the accounts are audited annually by an auditor unless they are subject to audit under the Companies Act, 2013. The auditor has the powers, duties and liabilities of a company auditor under section 147 of that Act.