# Insurance Realisation on Abnormal Loss Stocks

An insurance premium is the amount that the insurance company collects from the insured for the assurance given. The premium that the insurance company collects is a small amount, 0.1% to 1% of the value insured for in most cases.

Insurance premium is the primary source of revenue for the insurance company.

## Profits made by the Insurance company

Say there are 10,000 trucks transporting some goods on a risky route, all of which are insured.

• Value (insured for) of each truck

= 10,00,000

• Insurance premium @ 1% of value

= 10,00,000 × 1%

= 10,000

= 10,000 trucks × 10,000 per truck

= 10,00,00,000

The insurance company needs to pay the insurance amount only when there is an accident and the truck has been damaged.

Say, there are 100 accidents in the period for which the trucks have been insured.

• 90 damaged to various extents (50% on an average)
• 10 completely damaged

Insurance being a contract of indemnity, the insurance company makes good the loss incurred.

#### Indemnity

• Protection against future loss
• A sum of money paid in compensation for loss or injury
• insurance
• redressal
• amend

Just because the truck has been insured for 10,00,000, the truck owner would not be given 10,00,000 whenever there is an accident. The truck owner would be given an amount that would place him in a no loss position i.e. the amount required to make good his loss on account of the accident.

The insurance company pays

• for 10 completely damaged trucks @ 10,00,000 each

= 10,00,000 × 10

= 1,00,00,000

• for 90 partially damaged trucks @ 5,00,000 each on an average

= 5,00,000 × 90

= 4,50,00,000

Total claims paid

= 1,00,00,000 + 4,50,00,000

= 5,50,00,000

Surplus with the insurance company

= Total premium collected − Total claims paid

= 10,00,00,000 − 5,50,00,000

= 4,50,00,000

From this surplus, the company meets its expenses and the rest would be its profit.

## Insurance only for Abnormal Loss Stocks

The insurance company can make profits only if the loss does not occur in all cases. This is not possible if the insurance company insures normal loss. Normal Loss by its nature occurs every time the transaction takes place. Insurance of loss means abnormal loss and not normal loss.

## Who insures the stock?

The expenditure on insurance of stock consigned would be borne by the consignor himself. If the premium is paid by the consignee he would be reimbursed the amount by the consignee.

## Who receives the insurance amount?

The insurance amount may be realised by the consignor or the consignee. The insurance amount would in general be received by a cheque.

### Receipt pending

The insurance company having accepted the insurance claim and the amount still to be received is also a possibility.

# General Insurance vs Life Insurance

A life insurance is a contract of guarantee whereas general insurance is a contract of indemnity.

The contract implies that the insurance company would pay

• the insured amount if the insured dies, in case of life insurance, and
• an amount that would make good the loss subject to a maximum of the insured amount, in case of general insurance.

In a general insurance contract whatever may be the amount insured for, the insurance company would not pay an amount greater than the loss incurred by the insured.

### Multiple Insurers

In general insurance, even if the same aspect had been insured by multiple policies by the same or different insurers, the total amount of loss made good by all the insurers and policies together would not be greater than the loss incurred by the insured.

This would not be the case with the life insurance where if a persons life had been insured through multiple policies by one or more insurers, all the insurers would be paying their respective guaranteed amounts.

### Premium paid - Asset vs Expenditure

In case of whole life insurance, the amount of premium paid is like a deposit made towards building up an asset with the insurance company. A whole life insurance policy is capable of being surrendered at any time and a certain value recovered from the insurance company, called the surrender value of the policy.

In case of general insurance and term life insurance, the premium paid each year gets exhausted or used up by the end of the year. They do not have a surrender value.

A 10,000 premium paid every year, to insure a truck or to insure a life through a term life insurance policy, is useful only for the year insured. This cannot be reclaimed back from the insurance company by canceling the policy. It amounts to a non refundable expenditure incurred.

### Surrender value - Whole Life Insurance Policy

If a whole life insurance policy is taken by paying 10,000 as premium every year, it can be surrendered (canceled) any time and some amount recovered from the insurance company.

Because the company would have to cover the expenses it incurred in making efforts to sell the policy to the insured, the surrender value in the initial period would be generally nil.

• first year - 0%
• second year - 10%
• third year - 25%
• fourth year - 50%
• fifth year - 80%
• ...

The surrender value as a % of the total amount paid till that time, would increase as the age of the policy increases.

# Transaction

### Example

1. consignor received 1,000 from the insurer for the abnormal loss (in transit) stock
2. consignee received 800 for the abnormal loss (in storage) stock
3. Insurance company agreed to pay 500 for the abnormal loss (in storage) stock. To be received by the consignee.

# Consignor Books

## Dr/Cr - Transaction analysis

By the money measurement concept, the transaction of making the insurance claim would not be recorded in the books of accounts as it has no influence in value terms. If the claim has been made and the insurer has not yet accepted the claim, nothing would be recorded.

The claim would be relevant for accounting only after it has been accepted by the insurer.

• ### Credit - ___ Loss a/c

Nominal

Credit
{all incomes & gains}

On account of the insurance realisation, the notional loss represented by the loss account decreases. Decrease in loss is an equivalent of a gain.

Real

Credit
{what goes out}

Attributing a part of the asset to the insurance amount being paid, we can say that the asset is moving out.

#### Note

• ##### Credit - Distinct Loss a/c

To derive greater information relating to losses

• ##### Credit - Combined Loss a/c

To derive lesser information relating to losses

• ### Debit -

The account to be debited depends on whether the insurer has paid or not.

• #### Paid -

It is further dependent on who received the claim.

• ##### Consignor -

If the consignor has received the insurance amount, it is further dependent on the mode of receipt.

Assuming that the amount would be received by a cheque.

###### Bank a/c
Personal

Debit

Amount gets into the bank, making Bank the benefit receiver.

• ##### Consignee a/c
Personal

Debit

Consignee receiving the amount on behalf of the consignor, makes him the benefit receiver.

The amount has to be remitted to the consignor later on. The mode of payment would be irrelevant.

• #### Due - Insurer a/c

Personal

Debit

If the insurer has accepted the claim and not yet paid it, then the insurer would be the benefit receiver.

## Journal

1. ### received 1,000 for the abnormal loss (in transit) stock

 Bank a/c To Loss in Transit a/c Dr 1,000 1,000 [For the amount received from the insurer towards claim on abnormal loss (in transit) stock]
• Opting to derive greater information

 Abnormal Loss in Transit a/c To Bank a/c Dr 1,000 1,000
• Opting to derive lesser information

 Abnormal Loss a/c To Bank a/c Dr 1,000 1,000
2. ### consignee received 800 for the abnormal loss (in storage) stock

 Consignee a/c To Loss in Storage a/c Dr 800 800 [For the amount received by the consignee from the insurer towards claim on abnormal loss (in storage) stock]
• Opting to derive greater information

 Abnormal Loss in Storage a/c To Consignee a/c Dr 800 800
• Opting to derive lesser information

 Abnormal Loss a/c To Consignee a/c Dr 800 800
3. ### Insurance company agreed to pay 500 for the abnormal loss (in storage) stock.

 Insurer a/c To Loss in Storage a/c Dr 500 500 [For the amount agreed to be paid by the insurer towards claim on abnormal loss (in storage) stock]

The consignee would not be responsible for this due till he receives the claim.

• Opting to derive greater information

 Insurer a/c To Abnormal Loss in Storage a/c Dr 500 500
• Opting to derive lesser information

 Insurer a/c To Abnormal Loss a/c Dr 500 500

## Ledger

One of the following sets of accounts will appear in the ledger depending on the choice made relating to the quantum of information that the accounting system has to provide.

• Normally

Loss in Transit a/c
Dr Cr
Particulars Amount Particulars Amount

By Bank a/c

1,000
Loss in Storage a/c
Dr Cr
Particulars Amount Particulars Amount

By Consignee a/c
By Insurer a/c

800
500
Consignee a/c
Dr Cr
Particulars Amount Particulars Amount

To Loss in Transit a/c

800

Insurer a/c
Dr Cr
Particulars Amount Particulars Amount

To Loss in Storage a/c

500

• Opting to derive greater information

Abnormal Loss in Transit a/c
Dr Cr
Particulars Amount Particulars Amount

By Bank a/c

1,000
Abnormal Loss in Storage a/c
Dr Cr
Particulars Amount Particulars Amount

By Consignee a/c
By Insurer a/c

800
500
Consignee a/c
Dr Cr
Particulars Amount Particulars Amount

To Abnormal Loss in Transit a/c

800

Insurer a/c
Dr Cr
Particulars Amount Particulars Amount

To Abnormal Loss in Storage a/c

500

• Opting to derive lesser information

Abnormal Loss a/c
Dr Cr
Particulars Amount Particulars Amount

By Bank a/c
By Consignee a/c
By Insurer a/c

1,000
800
500
Consignee a/c
Dr Cr
Particulars Amount Particulars Amount

To Abnormal Loss a/c

800

Insurer a/c
Dr Cr
Particulars Amount Particulars Amount

To Abnormal Loss a/c

500

# Consignees Books

Only the insurance realisation that is received by him would be recorded in the books of the consignee.

## Dr/Cr - Transaction analysis

To the consignee, this would be like any other receipt on behalf of the consignor, which has to be remitted to the consignor.

Since a claim made on itself would not be an accounting transaction, it would not be recorded. Moreover, even if the insurer accepts the claim, the consignee would not be due to the consignor until the claim amount is received from the insurer.

• ### Credit - Consignor a/c

Personal

Credit
{the benefit giver}

The amount received has to be remitted to the consignor, who would be the benefit giver.

• ### Debit -

The account to be debited is dependent on the mode of receipt, which generally would be a cheque.

#### Bank

Personal

Debit

Amount goes into the bank, making Bank the benefit receiver.

## Journal

1. ### received 800 for the abnormal loss (in storage) stock relating to consignment

 Bank a/c To Consignor a/c Dr 800 800 [For the insurance amount received on abnormal loss (in storage) stock relating to consignment]

## Ledger

Consignor a/c
Dr Cr
Particulars Amount Particulars Amount

By Bank a/c

800