Explain premium accounting.

Premium accounting  

For the businesses that have a fixed rate like that of fire insurance, motor insurance etc., the premium is charged based on the rate. Where as in businesses that do not have fixed rate, the premium is charged based on the guideline rates fixed by the respective technical departments of the insurer‟s Head Office. According to section 64VB of the Insurance Act, 1938; the insurer cannot assume any risk unless the premium is received in advance. 

Apart from collection of premium by cash, cheque DD etc., the IRDA recently has permitted to collect the premium by other type of receipt like the credit card, debit card, E transfer etc. However, the same has to be collected before assumption of the risk. Service tax of 8% (presently) has to be collected on taxable premium and deposited with the respective excise authorities within prescribed time limit. If the same business is shared among more than one insurer as preferred by the policy holder, then the lead insurer has to collect the full premium along with service tax. But only one share of premium is accounted as premium and the balance is shown as the amount that is due to other co-insurers. As per the Stamp Act, a policy stamp has to be affixed and has to be accounted properly by debiting policy stamp expenses. A premium register is generated in the system on a daily basis. 

According to the IRDA Regulation, the premium has to be identified as the income over the contract period or the period of risk, whichever is suitable. Most of the general insurance policies are annual contracts and therefore the premium earned is worked out using 1/365 method. In the insurance policies in which the same is not practicable, it is worked out either using 1/24 or 1/12 method. According to the section 64V(1)(ii)(b) of the Insurance Act, 1938, the unearned premium is comparedwith the reserve for unexpired risks at the end of the financial year and if there is any shortfall it is accounted as unearned premium.