To manage almost every aspect of your business, including finances you have to quickly learn about business. However, if you are the owner of an insurance company, you will face an extremely difficult problem due to the risks and financial requirements associated with running this type of business.
Proper financial management
Proper financial management and reporting are important because you are responsible for ensuring that you can pay policyholders at virtually any time. To avoid the most common mistakes in insurance accounting, start by reading this guide, and if you decide you need help with accounting and managing the financial aspects of your insurance business, financial is here to help.
If you don’t know the principles of legal accounting or the fundamentals of accounting for insurance agencies, we recommend that you read this article cover to cover. However, if you have a specific question that you want an answer to, use these links to navigate through the post.
How is insurance accounting different from general accounting?
In any sector, there will be aspects that will require some adjustments to the accounting processes. When it comes to insurance accounting, there are several special considerations that make insurance accounting principles unique.
Insurers bear the risk in exchange for a premium.
Legal accounting principles apply to the insurance industry.
The insurance category influences accounting practices.
How liabilities, income, expenses, etc. are classified and accounted for.
The purpose of financial statements is to evaluate the business.
Introduction to the fundamentals of insurance accounting
Let’s dive into some of the fundamental factors of accounting for insurance agencies that make it unique from other industries. With a better understanding of these industry-specific attributes, you can implement insurance accounting practices that are appropriate for your business.
Property / casualty insurance vs. health / lifestyle insurance
Property insurance covers the property in the event of damage or theft. As well as the owner in the event of an accident on their property. Accident insurance helps protect individuals from liability if they are liable for damaging someone else’s property or causing an accident that results in injury to another person.
Whatever distinction your insurance company uses will affect certain aspects of its accounting practices. Some of the important differences are:
Different lengths of contracts: Health/life insurance policies usually have a long-term contract, while property/casualty insurance policies usually have a short-term contract.
Predictability of claims results: Health/life insurance policies have pre-established terms that establish parameters for claim results. However, property/casualty insurance policies are much less predictable because there are external factors that can significantly affect claims results.
Asset categories: In the case of P&C insurance, the main asset categories are bonds, common stocks, and recoverable reinsurance. In the case of health/lifestyle insurance, the main asset category is commercial mortgages.
What Accounting Method Should Insurance Companies Use?
The accounting method you use for your insurance company will determine when you track expenses and income. There are two general accounting methods:
When transferring money, transactions are processed in cash or cash register.
A sold policy will not be recorded until payment is received from the buyer if monetary or monetary accounting is used. Accrual Accounting: Transactions are recorded when money is made or when money is spent.