The new accounting norms for life insurers, scheduled to be finalised this week by the Insurance Regulatory and Development Authority (IRDA) could adversely impact profits of Life Insurance Corporation (LIC) owing to introduction of tougher income disclosure rules.
Industry officials said the insurance regulator was considering radical accounting reforms which include an actuarial valuation of claims in the books of accounts, valuation of listed equity shares at market value and introduction of a catastrophe reserve.
Also, the insurance regulator is considering introduction of valuation of liability against the life policies in force by applying actuarial method. In its draft accounting policy, it has proposed "that in India, like in many other developed countries, the liability for future claims be provided through the books of accounts and profit or loss be disclosed on the face of profit or loss account distinguishing clearly the profit attributable to the policyholders and shareholders respectively".
The regulator has also proposed that equity securities listed in stock exchanges should be measured at fair value while other investments, including investments in subsidiaries, joint ventures and associates, should be measured on historical cost basis.
The draft policy noted that "it is felt that there is a need to take decisions on critical issues concerning the accounts of Life Insurance Corporation (LIC), for instance, providing for the actuarial valuation of claims through books of accounts, valuation of listed equity shares at market value, introduction of catastrophe reserve, etc. This might result in a radical reform of the current accounting practices. In order to mitigate the rigours of revised accounting principles, a time period should be allowed as a transitory period in case of existing life insurance companies". It further envisaged that investments in real estates must be valued at historical costs less accumulated depreciation. Currently, insurance firms recognise notional rental income (fair rent) from real estate utilised in the operations of the company. It is now proposed that only rental income actually accrued should be recognised as income.
Also premium earned in advance must be disclosed in separate financial statements. The IRDA has appointed an Insurance Accounting Committee with terms of reference that include recommending formats of financial statements to be prepared by insurance firms, and formulating appropriate accounting principles.
