Voluntary Reserve

Voluntary Reserve

Voluntary reserves pass on to the extra amount held by the insurance business companies to build up their monetary fund’s and enhance their liquidity percentage. Such extra amount is not purposely required under the law. On the other hand, the reserve necessity of monetary institutions and business insurance firms are being regulated by government groups. This is usually made to ensure solvency.

Voluntary reserves willingly held by business insurance firms. Government groups frequently control the reserve necessities of monetary institutions and business insurance firms to avoid insolvency or bankruptcy. Monetary reserves are being held up as liquid assets. Business insurance firms uphold voluntary reserves to come out to be much financially steady and enhance the liquidity percentage. The requirements are more internally settled on and not decided under the law.

In the existing financial world, dealings regarding several kinds of assets, all of personal and business end view. Liquid assets are those easily transformed into hard cash in a comparatively short phase of time, usually within thirty (30) days. This article expresses some of the several examples which relates to the subject, assets.

Like cash on hand is known as liquid asset. Any cash in one’s possession or placed anywhere which can be readily accessible is taken into account as a liquid asset. This includes cash held in reserve at home or in a safety deposit box. It also include cash set aside in other place like a family member’s house or hidden in one’s property to be use only on emergency cases.

Checking accounts and savings accounts are primary samples of liquid assets. Certifications of guardianship accounts and deposit are also held as liquid assets. Money market financial records do fall under the category of liquid asset. Any of the financial records by which the name of the depositor shows is a liquid asset. The entire account list permits the depositor to have access in the cash comparatively easier, making the same as liquid assets.

Treasury bills are also liquid assets in the symbol of stocks as the same can be redeemed quickly to be interchange into cash. Joint fund shares and United States bonds qualify also as liquid assets. The non-term life insurance policies have a cash surrender cost which constitutes as liquid asset.

Another at hand is the possible liquid asset. Some other annuities permit the depositor to regain part or all of the income to be change into hard cash. Promissory notes are also taken into account as liquid assets except for existing reason to not include them. Ownership of a certain contract or agreement for deed can also be considered as liquid assets knowing that it correlates to the collection of expense on the principal every month. The retirement funds like those in “401K” or “IRA” program can be excluded from the category of liquid assets.

Finally, let it be noted that there are government groups which regulate the reserve necessities of insurance and financial institutions to assure that their firm will not undergo into a state of bankruptcy.

Valuation

Valuation

Valuation is way of estimating how much something is worth. The most common items that are usually valued are financial liability and assets. Valuations may be done on assets, for instance on investments of securities such as patents, stocks, trademarks, options and business enterprises or on liabilities such as the bonds provided by the company. Valuations have many purposes. It is practiced to answer many questions prior to litigation, investment analysis, tax liability, capital budgeting, financial reporting and acquisition and merger transactions.

Valuation is also done to check if the value given and reported is appropriate and accurate. If these assets are not well valued, it may ruin accounting documents which in turn may lead to problems in accounting audit, tax liability and many other issues.

There are other form of assets which are valued in a more independent and unique ways. In these cases, the valuation of the assets may be more complicated. For example, an intangible asset such as a copyright is hard to assign value. The same as the real estate, this may require an evaluation of the same real estate in the current market condition to be able to arrive in a reliable and accurate valuation that shows the fair market value of the asset.

If in case the assets are overvalued, the company may seem to be worthy compared to its public reporting. On the other hand, if the assets are undervalued, the company is set to be in abnormal stage of low value that may lead to complication on tax liability since tax authorities may check the assets which are undervalued and recalculate the tax of the company along with this information. Repetitive errors on valuation of assets may result to suspicions of fraud instead of innocent errors.

Valuation of different financial assets may be made with the use of these models:
1. Absolute Value Models– which show the present value of the future cash flow of the asset. These takes two major forms: multi-period models like discounted cash flow and the single-period models like the Gordon model. All of these models depend on mathematics instead of price observation.
2. Relative Value models-present the value according to observation of the prices of the same assets.
3. Option pricing models– are commonly used in many types of financial assets and are complex value models. The two most common options are the lattice models and the Black- Scholes- Merton models.

Common terms used to define the value of a liability or assets are intrinsic value, fair market value and fair value. These terms, however, differ in meaning depending on what field they are used.

Valuation is very important in many institutions such as banks, insurance companies and more. This is quite important since it provides the value of the assets of the company which will determine if the company is still making a good business in the industry. Although, there are different methods used in every company, valuation is still a must although the process may take time.

Valuation Reserve

Valuation Reserve

In insurance, Valuation reserve is basically allowances that start by enacting a charge contrary to earnings. Valuation reserve is created to help a company used its assets in the event that the value of the corporation’s holdings will change. The profits of the company that results to this kind of reserve fund can be considered when the worth of the assets of the corporation are reduced or lessen for some reasons. There are a couple of good reasons why a company should use valuation reserve. One reason is because of accumulated depreciation, which is determining the current or present net worth of a particular asset. Where in it consider the actual purchase price up to the current level of the investment.

Every company operates with assets that will eventually lose its value because of the repeated use, and eventually no loner be used because of the new equipments that will be available. Therefore, the use of valuation reserve is helpful because of the fact that equipment will become old in the coming years. This will help minimize the incremental depreciation impact from the actual purchase price on the overall worth of the corporation. Furthermore, valuation reserve helps to position the corporation or company so that it will be feasible to buy new and more efficient equipment in replacement of the older one. The task can be done through an accounting standpoint with ease.

Together with accumulated depreciation, a valuation reserve can also provide changes in a corporation’s assets, such as gathering bad debts. Bad debts may come in many forms. It may come due to failure in the sales of the equipment or other assets to another company. Moreover, bad debts can also be in a form of failure of other customers to pay for the goods and services rendered to them. This goods and services can be tangible or intangible goods that are produced to fulfill the customer’s needs and purchase orders. Goods and services are simultaneously offered. An insurance company holds in a valuation reserve against a life insurance policy with an amount that requires more funds than what is expected; may it be a liability or case assets.

A valuation reserve amount is determined by identifying an insured person’s age, sex, how long the questioned policy has been in force, and the interest rates that are used in calculations. Valuation reserve is also called “valuation account”. In other cases, the amount of the continuing collection can goes beyond the cost of the existing debt. When this condition occurs, most companies will take the loss and treat it as a debt. Therefore, it lessens the total amount or value of the existing Accounts Receivable.

Accounts Receivable is one of the basic needed in a business, it a mean of keeping up the money owned by the customers or clients as well as keeping track of the money that was received from the clients. The impact of bad debt can be partly eliminated by using valuation reserve as mechanism.

Underwriting

Underwriting

Underwriting in insurance is the method used to choose the persons and objects covered in a policy. The persons/objects to be insured, the amount of insurance premiums, the sum of the coverage, and the persons/objects not accepted to be insured are the subjects accomplished in underwriting. It as well involves the assessment of risks associated in a plan. Thus, the exposures and risks of prospective clients are properly evaluated.

The one who does the underwriting job is labeled as the insurance underwriter. The main role of an insurance underwriter is to “write” or acquire business to provide money to the insurance company. They likewise serve to secure the company from risks that are likely to result in loss. Thus, their primary job is to create the insurance policies.

The underwriting guidelines vary for each insurance company. These become the basis for the insurance underwriter in establishing policies. The coverage type is the main foundation in the formulation of risk evaluation for an applicant. For instance, a critical aspect in the coverage for automobile insurance is the driver’s driving record, while for health or life insurance is the person’s health status, occupation, and age. Other factors may include the applicant’s dangerous hobbies that are most likely to result to death or illness. Generally, individuals are classified as standard risk or substandard risk. Individual health or life insurance requires more underwriting analysis than group policies.

Insurance underwriters can make use of inspection reports, policy applications, medical examinations and history, data from the insurance agent, and from the Medical Information Bureau, as resources in supplying necessary facts in the process of risk determination.

Insurance underwriters must take in objective, cost relevant, practical, and law consistent factors in the classification of risks, as well as aspects intended for the protection of the insurance program’s long term practicability. They as well have the option to reject the risk or supply quotations loaded with the premium or with stipulated exclusions, which prohibit the situations wherein a claim should be compensated. Insurance companies normally employ systems in underwriting for encoding such rules, to arrive at the reduction of manual work amounts in the dealing out of quotations and the issuance of policies. This particularly applies to homeowners or automobile insurance.

To illustrate the role of underwriting, assume Mr. X went to an insurance company or insurance agent to obtain a car insurance policy. He then described that he has been in jail 5 times due to careless driving, and likewise admitted that he has been driving with the absence of a license for the last 3 years. Here, the insurance company or agent can restrict the admission of Mr. X because his previous transgressions may be included in the company’s forbidden circumstances for the insured, as specified by the company’s insurance underwriting department.

The major protection provided by insurance underwriters is against very poor risks or adverse selection, and those individuals with fraudulent objective. An insured risk or cluster of risks, or individuals, that are more expected to result to a loss than the average group, can produce adverse selection.

Underwriting is also pursued in real estate, forensic, and sponsorship activities.

Underwriting Guide

Underwriting Guide

Underwriting in insurance is the method used to choose the persons and objects covered in a policy. The persons/objects to be insured, the amount of insurance premiums, the sum of the coverage, and the persons/objects not accepted to be insured are the subjects accomplished in underwriting. It as well involves the assessment of risks associated in a plan. Thus, the exposures and risks of prospective clients are evaluated.

The underwriting guidelines vary for each insurance company. These become the basis for the insurance underwriter in establishing policies. The coverage type is the main foundation in the formulation of risk evaluation for an applicant. For instance, a critical aspect in the coverage for automobile insurance is the driver’s driving record, while for health or life insurance is the person’s health status, occupation, and age. Other factors may include the applicant’s dangerous hobbies that are most likely to result to death or illness. Generally, individuals are classified as standard risk or substandard risk. Individual health or life insurance requires more underwriting analysis than group policies.

The underwriting practices are contained and detailed in the underwriting guide. Other names for this is underwriting guidelines, underwriting manual, or manual of underwriting policies. This provides accurate guidance for underwriters in analyzing the different kinds of applicants.

To illustrate the role of underwriting, assume Mr. X went to an insurance company or insurance agent to obtain a car insurance policy. He then described that he has been in jail 5 times due to careless driving, and likewise admitted that he has been driving with the absence of a license for the last 3 years. Here, the insurance company or agent can restrict the admission of Mr. X because his previous transgressions may be included in the company’s forbidden circumstances for the insured, as specified by the company’s insurance underwriting department.

The one who does the underwriting job is labeled as the insurance underwriter. The main role of an insurance underwriter is to “write” or acquire business to provide money to the insurance company. They likewise serve to secure the company from risks that are likely to result in loss. Thus, their primary job is to create the insurance policies.

An underwriter functions as the one analyzing insurance applications whether to be agreed upon or discarded. Independent brokerage firms and insurance companies or carriers are typically the ones hiring insurance underwriters. In most cases, insurance underwriters work as back-ups to insurance agents, though they are sometimes allowed to go together with agents during client sales calls.

Analytic persons are ideal to become insurance underwriters. The career can also pave a way to becoming a general manager in insurance businesses.

In general terms, the job of an underwriter is to administer the distribution and public issuance of securities owned by an issuing body, such as a corporation. An underwriter could be any entity including a company. Establishing a security’s offering price, buying them from issuing companies, and selling them to stakeholders and investors through its distribution network, are the main responsibilities of an underwriter.

Underwriting is also pursued in real estate, forensic, and sponsorship activities.

Underwriting Expenses Incurred

Underwriting Expenses Incurred

Underwriting in insurance is the method used to choose the persons and objects covered in a policy. The persons/objects to be insured, the amount of insurance premiums, the sum of the coverage, and the persons/objects not accepted to be insured are the subjects accomplished in underwriting. It as well involves the assessment of risks associated in a plan. Thus, the exposures and risks of prospective clients are evaluated.

The one who does the underwriting job is labeled as the insurance underwriter. The main role of an insurance underwriter is to “write”, or acquire businesses to provide money to the insurance company. They likewise serve to secure the company from risks that are likely to result in loss. Thus, their primary job is to create the insurance policies.

In general terms, the job of an underwriter is to administer the distribution and public issuance of securities owned by an issuing body, such as a corporation. An underwriter could be any entity including a company. Establishing a security’s offering price, buying them from issuing companies, and selling them to stakeholders and investors through its distribution network, are the main responsibilities of an underwriter.

Underwriting fees are paid by issuing clients to underwriters. Aside from that, underwriters are given a profit share out of the sale of shares to various investors. The sole disadvantage in the underwriter’s task is the risk of not being able to sell all the underwritten securities. In case it’s not sold at the offering price, the underwriter has no other choice but to sell them in a lesser amount than its cost, and worse, keep the shares themselves.

Thus, in the world of insurance, an underwriter functions as the one analyzing insurance applications whether to be agreed upon or discarded. Independent brokerage firms and insurance companies or carriers are typically the ones hiring insurance underwriters. In most cases, insurance underwriters work as back-ups to insurance agents, though they are sometimes allowed to go together with agents during client sales calls.

Expenses pertaining to insurance underwriting are typically comprised of commissions, salaries, office rent, overhead expenses, guaranty association appraisals, membership fees for industry bureaus and associations, and related taxes, excluding foreign income, real estate, and federal income taxes.

Underwriting expenses incurred, on the other hand, take in expenses which can be attributed to the generation of net premiums written, either paid by the insurance company or not. These include net commissions, advertising costs, and salaries.

A ratio that stands for a percentage of the net premiums written of a company that traveled towards underwriting expenses is called the underwriting expense ratio. The formula for this ratio is:

Underwriting expense ratio = Underwriting expenses / Net premiums written

For instance, when a company obtains an underwriting expense ration of 28.1%, it means that such company pays out over 28 cents per dollar or the net premiums written in paying the costs of underwriting.

Underwriting income, on the other hand, represents the difference between earned premiums and the expenses in settling claims such as losses and paid dividends. Simply put, it is the total income generated by an insurance company. It is viewed as the revenue from premiums on the company’s various insurance policies.

Underwriter

Underwriter

In general terms, the job of an underwriter is to administer the distribution and public issuance of securities owned by an issuing body, such as a corporation. An underwriter could be any entity including a company. Establishing a security’s offering price, buying them from issuing companies, and selling them to stakeholders and investors through its distribution network, are the main responsibilities of an underwriter.

Underwriting fees are paid by issuing clients to underwriters. Aside from that, underwriters are given a profit share out of the sale of shares to various investors. The sole disadvantage in the underwriter’s task is the risk of not being able to sell all the underwritten securities. In case it’s not sold at the offering price, the underwriter has no other choice but to sell them in a lesser amount than its cost, and worse, keep the shares themselves.

In the world of insurance, an underwriter functions as the one analyzing insurance applications whether to be agreed upon or discarded. Independent brokerage firms and insurance companies or carriers are typically the ones hiring insurance underwriters. In most cases, insurance underwriters work as back-ups to insurance agents, though they are sometimes allowed to go together with agents during client sales calls.

Those who want to endeavor a career in insurance underwriting must possess a Bachelor’s Degree. Work experiences in finance, accounting, or other business-related jobs are likewise advantageous, but not mandatory. Some firms prefer to hire those with Masters in Business Administration (MBA) degrees. Since most of the analysis in line with the job is computerized, computer skills are as well essential.

Even if a certification is not typically necessary in an insurance underwriter’s basic job, it is still crucial in progressing with the field. In America, the prominent leaders in providing insurance underwriting certification and training are The American Institute for Chartered Property and Casualty Underwriters (AICPCU) and the Insurance Institute of America (IIA). The former has been honored in personal or commercial insurance. CPCU or Chartered Property and Casualty Underwriter is the most esteemed credential these two institutions tender, in which a relevant industry experience of 3 years and the applicant’s success in 8 beyond the 11 courses provided, are the requirements.

The duties of an insurance underwriter range from independent investigations pertaining to insurance applicants including background and credit checks, and analyzing specific insurance applications, to arranging the final policy of insurance conditions in congruence with the insurance company’s guidelines, such as the amount of premiums.

Insurance underwriters can also ask assistance from professional evaluators or appraisers especially transactions pertaining to property insurance. This is because insurance statisticians or actuaries can weigh up the related insurance risks at a higher level. Thus, the accurate policy terms and premiums are very well determined for extensive categories of properties and individuals.

The standard hours per week for an insurance underwriter’s work are 40 hours. This can take place in a permanent office. There can also be instances where insurance underwriters are required to travel, such as in construction sites, workplaces, ships, and other places covered in location underwriting.

Analytic persons are ideal to become insurance underwriters. The career can also pave a way to becoming a general manager in insurance businesses.

Total Admitted Assets

Total Admitted Assets

In business, assets refer to a business entity’s economic resources that is either tangible or has physical substance, or intangible with no physical substance. According to the Accounting Framework, paragraph 49, “An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.”

Anything capable to be controlled or owned towards the production of value and is also in custody to generate helpful economic value is classified as an asset. In simpler terms, assets symbolize possession of value which produces cash. Cash itself is considered as an asset.

Examples of tangible assets are real estate, buildings, currencies, equipment, vehicles, precious metals, and equipment; while trademarks, franchises, patents, goodwill, trade names, and copyrights are classified as intangible assets. According to US Generally Accepted Accounting Principles (GAAP), intangible assets must be amortized as expense for more than five to forty years, except for goodwill.

Assets in business are classified as either current or non-current. Current assets stand for assets which are expected to be transformed into cash in a period of one year, or the business’ operating cycle, the longer period more applicable. Cash is the major example of current assets. Others are cash equivalents, short-term investments, inventory, receivables, and prepaid expenses.

Non-current assets represent those assets which are expected to be transformed into cash in a period of more than one year. Long-term investments and accounts receivable, and fixed assets such as building and machinery, are examples of non-current assets.

Conversely, assets in an insurance company are comprised of all available company properties to be exhausted in paying its debts. Total admitted assets, all other assets, and invested assets are the three categories of an insurance company’s assets.

All other assets represent possessions that generate no income for the business, like office furniture, office building, and liabilities such as unpaid or deferred premiums; while invested assets stand for income-producing properties, which include stocks, bonds, income-generating real estate, and cash. However, not all states take in unpaid or deferred premiums in the category for “All other assets” as they consider it “non-admissible.”

Admitted assets, in contrast, represent those assets that are presented in an insurance carrier’s annual financial statements in accordance with the laws and regulations of the state where it resides, as well as to the corresponding insurance regulations. Although admitted assets differ for every state, it is necessary that all assets considered as admitted must be liquid and are capable of being valued.

Admitted assets are essential in the determination of the solvency of an insurance company in case abnormal amount of claims are processed. Accounts receivable that are most likely to be collected, stocks, mortgages, real estate, and bonds, are the assets typically classified as admitted.

Total admitted assets, on the other hand, is the sum total of all assets classified as admitted. This amount must be stated net of real estate encumbrances and recoverable amounts from reinsurers. Estate encumbrances must be deducted from the amount of real estate, whereas recoverable amounts from reinsurers should be subtracted from unpaid losses liabilities and premiums unearned.

Surplus

Surplus

The term surplus generally refers to a number in excess of what is needed. It means the quantity that remains when the need or use of a particular supply is gratified. It may also be regarded as excess.

In the government, a surplus indicates a figure in public treasury funds that is larger than what is necessitated for regular government purposes at a given time. Surplus is also a term widely used in economics for various related measures. When imports are exceeded by exports, a surplus occurs.

In accounting, surplus depicts a different meaning. It is the difference obtained by deducting the company’s total liabilities from the total assets; the remainder of receipts in excess of expenses; and the difference between a company’s net assets and the capital stock’s face value.

The term deficit is the reverse of surplus. It happens whenever a sum or amount of money falls short of the quantity required.

In insurance, the term surplus characterizes diverse meanings. A surplus account signifies an insurance company’s assets less its liabilities. The term surplus lines, in the regular insurance market, means an insurance coverage that is unavailable from a company which was admitted in the said market.

On the other hand, in the reinsurance market, surplus lines imply a contract between the ceding company and the reinsurer that has an agreement based on the former’s line guide, in which case the reinsured amount is expressed in number lines. The number line is the retention amount’s terms of multiples.

Example, a ceding company issues an insurance policy for $50,000 and maintains $12,500, or one-fourth of the total amount. The outstanding $37,500 is then transferred to the reinsurer company. This illustrates the three line surplus as the insurer transfers an amount line to the reinsurer three times more than how much he retains.

In addition, insurance companies measure its financial strength by way of surplus adequacy ratio, which is computed by dividing its adjusted surplus by adjusted liabilities. A high ratio for surplus adequacy depicts superior financial strength used to cover benefit compensations.

Meanwhile, a policyholder’s surplus means the remainder of the assets of an insurance company after deducting all of its liabilities to be able to provide the benefits expected to policyholders. It is the insurer’s net worth as shown in its financial statements. It is also considered as a financial support to protect the policyholders against unexpected predicaments.

To compute for policyholder surplus, the total paid in capital, paid in surplus, and contributed surplus, adding in contingency reserves accomplished voluntarily, are added. It can also be computed by subtracting total liabilities from total assets that have been admitted.

A change in policyholder surplus portrays a change in percentage of the previous year’s policyholder surplus, drawn from investment gains, operating earnings, contributed capital at net, and similar other sources.

Minority interests; stockholder’s equity, comprising of common stock, other comprehensive income, additional paid in capital (APIC), and retained earnings, in which case the equity must not include minority interests; and an equity substitute, specifically hybrid capital, are the accounts usually included in the policyholder surplus of a company.

Insurance: Accounting

Insurance: Accounting

The fundamental tool keeping mark for business activities is accounting. As being “the language of business”, accounting involves the recording, reporting, and evaluation of economic transactions and events which affects the organization. Luca Paciolo, a Franciscan monk, wrote a book way back year 1494, stating three main things a businessman should have in order to be successful: cash/credit, a skilled bookkeeper, and a relevant accounting system. The accounting system serves to track the business’ performance, while the bookkeeper is the one who maneuvers the system.

Financial activities are the central aspects covered in the accounting process. This includes sales, costs, expenses, and the owner’s equity. Inaccurate or incomplete financial data can give rise to a business’ insolvency, while accurate accounting information can cause managers and business owners to create strategic and correct decisions as to the future.

The accounting data administered in the accounting system can communicate significant financial information to users including business owners, managers, investors, creditors, and other stakeholders of the company. Since the information needs differ for each user, accounting is classified into two broad categories: management accounting for accounting data intended for internal users; and financial accounting which takes in information designed for external users.

When it comes to the recording of accounting information, and the reporting of financial data in audited financial reports, the standards, rules, and guidelines are contained in the Generally Accepted Accounting Principles (GAAP). These procedures must be complied by all accounting practitioners.

The information system designed for gathering and processing of financial data to be used for decision-making by users of such information is called an accounting system. This also controls the enterprise’s activities. The five main activities done using the accounting system in processing financial data are: data recording or collection; data classification; data processing, which involves data computation and summarizing; result storage or maintenance; and result reporting. The main instrument in which such financial data are communicated to users is the financial statements.

The five major financial statements are the balance sheet, income statement, cash flow statement, statement of retained earnings, and statement of changes in stockholder’s equity. Assets, comprehensive income, distribution to owners, equity, expenses, gains, liabilities, losses, and revenues are the primary elements of financial statements.

For an insurance company, claims are recorded in current values in line with GAAP and the insurance regulations of the state. Claims are considered as an expense to the insurance company.

Policyholder claims are, to the insurance company, a liability or debt which must be paid. Thus, claims decrease the operating revenues of the insurance firm. For instance, a reimbursement claim of $15,000 was filed by a policyholder who suffered a vehicle accident. The accounting department of the insurance firm records the claim as follows:
(debit) Policyholder Claims Expense $15,000
(credit) Policyholder Claims Payable $15,000

Once the claim is proven authentic by reviewing reports from local authorities, it is then approved and recorded by the accounting department as follows:
(debit) Policyholder Claims Payable $15,000
(credit) Cash $15,000

Therefore, since cash, an asset account, is credited, its balance is then reduced.

Generally, insurance companies hire accounting experts, such as Certified Public Accountants (CPA’s) in reviewing accounting procedures or methods to be followed by their company’s accounting department. This likewise helps assessing whether the internal control applied in the reporting of claims are enough and functional.