What is the valuation of the Balance Sheet? How profit and loss is ascertained in life insurance business?
balance sheet of insurance company
1. Meaning of Valuation of Balance Sheet
Valuation of Balance Sheet in the context of a life insurance business means the process of determining the true financial position of the insurance company at the end of a financial year.
It involves the valuation of the life fund (policyholders’ fund) by comparing the total value of liabilities (especially policy liabilities) with the total value of assets.
The main purpose is to find out:
- Whether the life fund is sufficient to meet all future policy liabilities, and
- The surplus or deficit available for distribution to shareholders and policyholders. balance sheet of insurance company
👉 In simple words:
Valuation of the balance sheet helps in determining the profit or loss of a life insurance company by comparing the net liabilities with the life assurance fund.
2. Ascertainment of Profit or Loss in Life Insurance Business
Profit or loss in a life insurance business is not calculated through an ordinary trading account, because the benefit payments and policy values depend on long-term estimates. balance sheet of insurance company
Hence, the valuation balance sheet method is used. balance sheet of life insurance company
The process is as follows:
Step 1: Determine Life Assurance Fund
At the end of the year, the total balance in the Life Assurance Fund is taken from the revenue account.
This fund represents the accumulated surplus from premiums after paying claims, expenses, and other charges .balance sheet of life insurance company
Step 2: Valuation of Liabilities (Actuarial Valuation)
An actuary performs a valuation of all liabilities on policies in force (like future policy benefits, bonuses, etc.).
This is called Actuarial Valuation, and it estimates how much the company will need to pay for all existing policies. balance sheet of insurance company
Step 3: Compare the Two Figures
Now compare:
- Life Assurance Fund (assets side), and
- Net Liability as per Actuarial Valuation (liabilities side).
Step 4: Calculate Surplus or Deficit
- If Life Assurance Fund > Net Liability → there is a Surplus (Profit).
- If Life Assurance Fund < Net Liability → there is a Deficit (Loss).
👉 Formula:
Surplus or Deficit = Life Assurance Fund – Net Liability (as per actuarial valuation)
Step 5: Distribution of Surplus
The surplus (profit) is usually divided between:
- Policyholders → as bonus, and
- Shareholders → as dividend.
A common ratio is 95% to policyholders and 5% to shareholders, but it can vary by company policy. balance sheet of insurance company
Example (Simplified):
|
Particulars |
Amount (₹) |
|---|---|
|
Life Assurance Fund |
25,00,000 |
|
Net Liabilities (as per valuation) |
23,00,000 |
Surplus = 25,00,000 – 23,00,000 = ₹2,00,000
Out of ₹2,00,000:
- ₹1,90,000 may be distributed to policyholders as bonus.
- ₹10,000 may go to shareholders as dividend.
In short:
- Valuation of Balance Sheet helps determine the true surplus or deficit of a life insurance company.
- Profit or loss is found by comparing the Life Assurance Fund with the Actuarial Value of Liabilities, not by a simple income statement. balance sheet of life insurance company
Conclusion
In conclusion, the valuation of the balance sheet in a life insurance company is carried out to determine the true financial position and to find the surplus or deficit of the life fund after meeting all policy liabilities. The profit or loss is not determined in the usual trading manner but through an actuarial valuation — by comparing the Life Assurance Fund with the Net Liabilities. If the fund exceeds the liabilities, the excess is a surplus (profit); if it is less, it indicates a deficit (loss).
The surplus is then distributed between policyholders and shareholders, ensuring a fair and accurate representation of the company’s financial health. If you would like to know the Syllabus of Financial Accounting you must visit on Gndu.
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