Lesson 2: Insurance Revenue Account

Revenue Account Format

Apart from generating projected cash flows for various actuarial studies, actuarial models are also used to prepare projected revenue account and balance for the budget exercise of an insurance / takaful company (i.e. project expected cash flows for the subsequent financial year(s), by considering target sales volumes and in force portfolio). Hence, having a good understanding on insurance revenue accounts forms a strong foundations on cash flows modeling.

Generally, the revenue account of a life insurance company (assuming no reinsurance arrangement) can be presented in the format below:

  • There is no one single standard format for revenue account of an insurance / takaful company. As shown above, the interim condensed income statement for Great Easter Life Assurance (M) Berhad has different format of presentation, however, all components listed in the table above are found in the statement.
  • Please note that the revenue account of a family takaful company is different from a conventional life insurance company.
    • For a conventional life insurance company, all insurance cash flows are managed in a SINGLE insurance fund.
    • For a family takaful company, the expenses and commissions are managed under the shareholders’ fund.
  • The unique component of the insurance revenue account is “increase in reserves”, which statutory reserves are set aside for future liabilities. Although “increase in reserves” reduces the gross profit, it is not considered as an outgo from the insurance fund.
  • Reserves remains in the insurance fund so that they can be used to pay for future claim, surrender and maturity outgo. Without “increase in reserves”, we may overstate the profits in early policy years and face deficits during later policy years (when the benefit outgo is more than premium income and investment income).