Draft Insurance Accounting Regulations 2012

The Pakistan Gazette

Securities and Exchange Commission of Pakistan

Islamabad, the 19th November, 2012

Notification

SRO No. 1383 / 2012. In exercise of powers conferred under sub-section (3) of section 167 of the Insurance Ordinance 2000 (XXXIX of 2000), read with sub-section (2) of section 46 thereof, and sub-section (2) of section 40 of the SECP Act 1997 (XLII of 1997), the Securities and Exchange Commission of Pakistan is hereby pleased to publish the following draft regulations for the information of all persons likely to be affected thereby and notice is hereby given that objections or suggestions if any, received within a period of thirty (30) days from the date of its publication in the official Gazette, shall be taken into consideration.

1. Short Title and commencement.- (1) These regulations shall be called Insurance Accounting Regulations, 2012.

(2) These regulations shall come into force at once.

2. Definitions.- In these Regulations, unless there is anything repugnant in the subject or context.

(i) “Ordinance” means the Insurance Ordinance 2000 (XXXIX of 2000);

(ii) “Commission” means the Securities and Exchange Commission of Pakistan established under section 3 of the Securities and Exchange Commission of Pakistan Act, 1997 (XLII of 1997);

(iii) “Regulatory Returns” means the statements which are required to be presented by Insurers under section 46 of the Ordinance as prescribed in Annexure II of the Securities and Exchange Commission (Insurance) Rules, 2002;

(iv) “Published Financial Statements” means the accounts which are required to be presented by Insurers under section 46 of the Ordinance as prescribed in Annexure II of the Securities and Exchange Commission (Insurance) Rules, 2002;

(v) “Policyholder Liabilities” has the same meaning given under section 2 of the Insurance Ordinance, 2000.

3. Application and Scope.- (1) These Regulations shall be applied to the Regulatory Returns and the Published Financial Statements, except in so far as:

(i) any of its provisions includes an express statement that it is not to apply to the Regulatory Returns or to the Published Financial Statements, as the case may be; and

(ii) a provision contained in the Companies Ordinance or in Rules thereto or in an instrument issued there under overrides a provision in these Accounting Regulations so far as concerns the Published Financial Statements.

(2) Every Insurer shall comply, so far as concerns recognition and measurement of assets, liabilities, expenses and revenues, with International Financial Reporting Standards which are adopted by the Institute of Chartered Accountants of Pakistan and notified by the Commission.

4. Provisions applicable only to Regulatory Returns only.- (1) Where an insurer controls other entities, then consolidated Regulatory Returns are not required to be presented.

(2) Explanatory Notes are not required in the Regulatory Returns except as specified in these Regulations or as specified in the Forms of Regulatory Returns.

5. Provision for statements to be prepared.- While preparing statements as required under sub-section (1) and (2) of Section 46 of the Insurance, 2000, an insurer carrying on life insurance business shall comply with the requirements of Part A and an insurer carrying on non-life insurance business shall comply with the requirements of Part B.

PART A
LIFE INSURANCE

6. Provisions applicable only to Published Financial Statements.- (1) For the purpose of classification and disclosure of profits;

(i) Profits for the year disclosed in the Published Financial Statements shall be determined by consolidating revenues and expenses relating to the Statutory as well as Shareholders' Fund. Except for the provisions relating to Ledger Accounts A and B below, balances retained within Statutory Funds over and above insurance liabilities shall be treated as a part of shareholders' equity and not as liabilities.

(ii) For the purpose of Published Financial Statements, Insurance Liabilities stated in the Statement of Financial Position shall include any balances in Ledger Accounts A and B in Statutory Funds which include participating business. Balances in Ledger Accounts C and D shall be included as part of Shareholders' Equity. Ledger Accounts A, B, C and D shall be as defined in Section 22 of the Ordinance.

7. Segment analysis.- (1) Some of the forms of Published Financial Statements specified in the Annexure II of the Securities and Exchange Commissioner (Insurance) Rules, 2002 provide segment analysis by type of business as well as fund (statutory fund or shareholders' fund). If the company writes any type of business which is different from other types of business in terms of nature of products or types of risks in addition to the segments already identified in the said published forms, if the gross premiums for that class constitute 10% or more of the gross premium revenue of the insurer the gross premiums for such types of business shall be disclosed separately.

(2) If an insurer writes business outside Pakistan then a complete set of Regulatory Returns except for Form LA shall be prepared for such business.

8. Audit Report.- Both the Regulatory Returns and Published Financial Statements shall be accompanied by an Audit Report as required under S48(2) of the Ordinance in accordance with the formats as specified by the Commission from time to time.

9. Appropriation of profit to shareholders' fund from statutory funds (Applicable to Regulatory Returns only).- (1) An appropriation of profit from a statutory fund shall be recorded as an appropriation in the revenue account of that statutory fund in the financial period in which it is made, and shall not be recorded as an expense.

(2) An appropriation of profit from a statutory fund shall be recorded as revenue of the shareholders' fund in the financial period in which it is made.

10. Shareholder interests in statutory funds (Applicable to Regulatory Returns only).- (1) The shareholders' fund shall not recognize as an asset any interest in, entitlement to the assets of or capital transfer provided to any statutory fund.

(2) A capital transfer provided to a statutory fund by the shareholders' fund shall be recorded as a debit balance in shareholders' equity, clearly identified as capital contributed to statutory fund, and changes in the amount of capital contributed to statutory funds shall not pass through the profit and loss account but shall be recorded in the financial statements of the shareholders' fund as increases or decreases in that debit balance.

(3) No statutory fund shall recognize as a liability any amount due to the shareholder's fund consisting of a capital transfer received from a shareholder's fund, or retained profits attributable to shareholders, or any loan or advance, other than a current liability consisting of amounts due to the shareholder's fund on account of expenses due to be reimbursed to the shareholder's fund.

11. Shareholders' Fund and Policyholders' funds (Applicable to Regulatory Returns only).- (1) The amount representing the residue of assets left after all liabilities other than policyholder liabilities in the balance sheet of a statutory fund or the aggregate of statutory funds balance sheet in the statutory accounts shall be disclosed as equity and policyholder funds.

(2) The following components of equity and policyholder funds shall be separately disclosed:

(i) Policyholder liabilities (inclusive of bonuses allocated);

(ii) Retained earnings attributable to participating policy holders which have not yet been distributed (Ledger Account A);

(iii) Retained earnings arising from participating business, attributable to shareholders but not available for distribution (Ledger Account B);

(iv) Retained earnings arising from participating business, attributable to shareholders and available for distribution (Ledger Account C);

(v) Retained earnings arising from business other than participating business, attributable to shareholders (Ledger Account D);

(vi) Surplus not yet allocated;

(vii) Shareholders' capital in the statutory fund; and

(viii) Such reserves, whether or not prescribed, as may be established by the statutory fund.

(3) The Notes to these statements shall include disclosure of movements in each of the accounts set out in sub-clause (2).

(4) Where these statements are made up to a date as at which a valuation of policyholder liabilities in accordance with section 50 of the Ordinance is carried out by the company's appointed actuary, the amount of policyholder liabilities recorded in these statements shall be the greater of the amount of policyholder liabilities certified by the appointed actuary and the minimum actuarial reserve for policyholder liabilities.

(5) Where these statements are made up to a date as at which a valuation of policyholder liabilities in accordance with section 50 of the Ordinance is not carried out by the company's appointed actuary, the amount of policyholder liabilities recorded in these statements shall be the greater of amount of policyholder liabilities certified by the appointed actuary and the minimum actuarial reserve for policyholder liabilities at the valuation most recently performed.

(6) The Notes to these statements shall show the allocation of surplus, if any, in the financial year, required to be made under section 21 of the Ordinance, and such accounts as are relevant shall be recorded following such allocation of surplus.

(7) Policyholder liabilities shall not include any bonuses proposed to be allocated to participating policies, unless before the balance date those amounts have been so allocated.

12. Admissibility of Assets (Applicable to Form LI only).- (1) The value of assets for the purposes of the Balance Sheet shall be in accordance with the company's accounting policies for such assets and the method of assigning values to investments provided for in these regulations.

(2) Where the value of any asset arrived at in accordance with sub-clause (1) is different from the value which may be treated as admissible under S32 of the Ordinance, then the Regulatory Returns will include Form LI ("Statement of Solvency").

PART B
NON-LIFE INSURANCE

13. Segment analysis.- (1) Some of the forms of Published Financial Statements specified in the Annexure II of the Securities and Exchange Commissioner (Insurance) Rules, 2002 provide segment analysis by class of business. Separate figures for any class of business are required in addition to the segments already identified in the published forms if the gross premiums for that class constitute 10% or more of the gross premium revenue of the insurer. Amounts relating to classes constituting less than 10% may be clubbed together in 'Miscellaneous'.

(2) If an insurer writes business outside Pakistan then a complete set of Regulatory Returns except for Form GA shall be prepared for such business.

14. Audit Report.- Both the Regulatory Returns and Published Financial Statements shall be accompanied by an Audit Report as required under S48(2) of the Ordinance in accordance with the format as specified by the Commission from time to time.

15. Premiums.- (1) Premium receivable under a policy / cover note issued shall be recognized as written from the date of attachment of risk to the policy / cover note.

(2) Over the period of insurance from inception to expiry, except as stated in sub-clause (3), premium shall be recognised as revenue as follows:

(i) For direct business, evenly over the period of the policy

(ii) For proportional reinsurance business, evenly over the period of the underlying policies.

(iii) For non-proportional reinsurance business, in accordance with the pattern of reinsurance service.

(3) Where the pattern of incidence of risk varies over the period of the policy, the premium shall be recognised as revenue in accordance with the pattern of incidence of risk.

(4) The unearned portion of premium income shall be recognised as a liability. Such liability shall be calculated either:

(i) as a proportion of the gross premium of each policy, determined as the ratio of the unexpired period of the policy and the total period, both measured to the nearest day; or

(ii) where the majority of policies are issued for one year, by applying the twenty-fourths method, whereby the liability shall equal 1/24 of the premiums relating to policies commencing in the first month of the insurer's financial year, 3/24 of the premiums relating to policies commencing in the second month of the insurer's financial year, and so on.

(5) Premium/ premium adjustments not yet processed but relating to the financial year shall, so far as is practicable, be recognised as a receivable and earned over the period in accordance with these rules.

(6) Premium revenue shall not include any levy which is an amount collected on behalf of a third party.

(7) Any levy charged on premiums which is not an amount collected on behalf of a third party shall be considered to be part of premium.

(8) Premiums accepted under a coinsurance or pool arrangement shall be considered to be revenue of the participating insurers each for their own share only, unless a contract of reinsurance exists under which an insurer has primary liability for the whole of the business and reinsures it to another or others.

(9) Where premiums for a policy are payable in installments, the full premium for the duration of the policy shall be recognized as income at the inception of the policy and a related asset set up for premiums, notwithstanding the fact that some installments may not, by agreement between the insurer and the insured, be payable until later.

16. Claims.- (1) A liability for outstanding claims shall be recognized in respect of all claims incurred to balance date, and must be measured at the undiscounted value of expected future payments.

(2) A claim shall be considered to be incurred at the time of the incident giving rise to the claim, except as otherwise expressly indicated in a contract of insurance.

(3) The claims liability must include amounts in relation to unpaid reported claims; claims incurred but not reported, and expected claims settlement costs.

(4) Claims incurred but not reported shall be recognized based on experience of past years excluding exceptional losses.

17. Reinsurance expense.- (1) Premium ceded to reinsurers must be recognized as a liability as follows:

(i) for reinsurance contracts operating on a proportional basis, on attachment of the underlying policies reinsured.

(ii) for reinsurance contracts operating on a non-proportional basis, on inception of the reinsurance contract.

(2) Over the period of reinsurance from inception to expiry, except as stated in sub-clause (3), reinsurance premium shall be recognized as an expense as follows:

(i) For proportional reinsurance business, evenly over the period of the underlying policies.

(ii) For non-proportional reinsurance business, evenly over the period of indemnity.

(3) Where the pattern of incidence of risk varies over the period of the policy, the premium shall be recognized as an expense in accordance with the pattern of incidence of risk.

(4) The portion of reinsurance premium not yet recognized as an expense shall be recognized as a prepayment.

(5) Premium adjustments not yet processed, and premium not yet processed but relating to the financial year shall, so far as is practicable, be recognized as a liability and brought to account as an expense in accordance with these rules.

18. Claims recoveries.- (1) Claims recoveries receivable from reinsurers and other recoveries receivable shall be recognized as assets and measured at the amount expected to be received.

(2) Claims recoveries receivable from reinsurers and other recoveries receivable shall be recognized at the same time as the claims which give rise to the right to the recovery are recognized.

19. Acquisition costs.- (1) Commissions and other incremental acquisition costs incurred in obtaining and recording policies of insurance and reinsurance may be deferred and recognized as assets where they can be reliably measured and it is probable that they will give rise to premium revenue that will be recognized in subsequent reporting periods. Incremental acquisition costs of a policy are costs of selling, underwriting and initiating an insurance policy which has been incurred because that particular policy has been issued, i.e., the costs are identified at the level of an individual policy and not at the level of a portfolio of policies. Such costs may include, for example, surveyor costs where a survey has been carried out as a part of the underwriting process. They will not, however, include costs of permanent underwriting staff of the insurer.

(2) Deferred acquisition costs must be amortized systematically over the reporting periods over which the related premium revenue is recognized.

(3) An acquisition cost which is not incremental must be recognized as an expense during the period in which it is incurred.

20. Exchange commissions.- Exchange commissions, profit commissions and other forms of revenue (apart from recoveries) receivable from reinsurers shall be deferred and brought to account as revenue in accordance with the pattern of recognition of the reinsurance premiums to which they relate.

21. Premium deficiency.- (1) The provision for premium deficiency (liability adequacy test) shall be recognized in accordance with the requirements given in International Financial Reporting Standard 4 – Insurance contracts.

(2) The movement in the premium deficiency reserve shall be recorded as an expense and shall form a part of the underwriting result.

22. Statement of estimated exposure.- The statement of estimated exposure shall be prepared in accordance with Form GI of the Regulatory Returns which also explains the basis of its preparation.

23. Admissibility of Assets.- (1) The value of assets for the purposes of the Balance Sheet shall be in accordance with the company's accounting policies for such assets and the method of assigning values to investments provided for in these regulations.

(2) Where the value of any asset arrived at in accordance with sub-clause (1) is different from the value which may be treated as admissible under S32 of the Ordinance, the Regulatory Returns will include Form GJ ("Statement of Solvency").

F.No. ID/IO-2000/46/Ins. Accounting Regs. 2012

Bushra Aslam
Secretary to Commission