Accounting and Investment 會計及投資

The Accounting Function 會計部門的職能

The accounting department records every financial transaction of the insurer, including premiums received, claims paid, commission, reinsurance transactions and operating expenses. These records are the basis for preparing financial statements, calculating profit or loss and measuring business performance.

Credit control is an important day-to-day task. The department must check that premiums are collected on time, including premiums collected through insurance agents and brokers, so that long-outstanding premiums do not damage the company's cash flow.

The department also prepares audited annual financial statements and, as required under the Insurance Ordinance (Cap. 41), submits financial statements and regulatory returns to the Insurance Authority so that the regulator can assess the company's financial position and solvency.

It also gives management information to senior management, such as loss ratios and expense ratios for each class of business, to support underwriting, product development and pricing decisions. However, deciding whether to accept a proposal is the job of the underwriting department, not the accounting department.

Technical Reserves 技術準備金

At the end of each accounting year an insurer must set up reserves for obligations it has not yet met. Without them its profit would be overstated. The main technical reserves are the unearned premium reserve, the outstanding claims reserve and the incurred but not reported (IBNR) reserve.

Unearned premium reserve: policy periods often run across two accounting years. The premium for the part of the cover still unexpired at the accounting date has not yet been earned and must be held as a reserve. For example, if the year end is 31 December, a one-year policy starting on 1 October with an annual premium of HK$12,000 has run for only 3 months at the year end, so the pro rata unearned premium is HK$9,000.

The outstanding claims reserve covers claims that have been reported to the insurer but not yet paid, or not yet paid in full. The IBNR reserve covers losses that happened before the accounting date but have not yet been reported to the insurer. It is normally estimated from past experience.

For long-term business, such as life insurance, the liabilities are valued by the appointed actuary using actuarial methods to work out the reserves needed to meet future policy obligations.

The Investment Function and Investment Principles 投資功能及投資原則

An insurer receives premiums before it pays claims, so in between it holds large funds, including its technical reserves and shareholders' capital. Investment income from these funds is an important source of income for the insurer and helps it keep premiums competitive.

Investment must balance several principles: security (protecting capital and avoiding excessive risk), liquidity (being able to turn assets into cash quickly to pay claims), yield (earning a reasonable return for an acceptable level of risk) and spread (diversifying rather than concentrating in one asset or issuer).

Matching assets with liabilities is another key principle. Assets should be held in the same currency as the liabilities to reduce exchange-rate risk, and their term and nature should suit the liabilities. Life insurance liabilities are long-term and fairly predictable, so long-term assets such as long-dated bonds, property and equities are suitable. General insurance claims are shorter-term and less predictable, and a catastrophe such as a typhoon can cause many claims at once, so a general insurer needs more liquidity, holding more cash, deposits and short-term securities.

Regulatory Controls and the Overall Result 監管要求與整體業績

The Insurance Authority requires authorised insurers to maintain solvency at or above the statutory level, meaning their assets must be enough to meet their liabilities with an extra buffer. Hong Kong has moved from a simpler solvency margin calculation to a risk-based capital regime, under which capital requirements reflect the risks the insurer takes on.

An insurer carrying on long-term business must keep separate accounts and a separate fund for that business. The assets of this fund can be used only for long-term business, which protects long-term policyholders. An insurer carrying on general business must also maintain assets of a prescribed value in Hong Kong to cover its Hong Kong liabilities.

An insurer's overall result has two parts: the underwriting result (earned premium less claims incurred and expenses) plus investment income. Even with an underwriting loss, the company can still make an overall profit if investment income is large enough. Relying on investment income to cover underwriting losses is risky, though, because investment markets can turn.