ACCT 424 Insurance Accounting Assignment 2. Assignment Question

ACCT 424 Insurance Accounting Assignment 2. Assignment Question(s): (15 Marks)

Q1. Reinsurance is a form of insurance purchased by insurance companies in order to mitigate risk. Essentially, reinsurance can limit the amount of loss an insurer can potentially suffer. In other words, it protects insurance companies from financial ruin, thereby protecting the companies’ customers from uncovered losses. (5 Mark)
Questions:
a. How do reinsurance companies work?
b. What are the Reinsurance Contracts?
c. Give example of reinsurances companies in KSA and describe their main services

Q2. What is the concept of “Fair Value? Outline the basic difference between fair value and book value of an asset. Explain the key features of fair value defined by FASB ASC. (5 Marks)

Q3. XYZ Company has the following financial data: (5 marks)

Particulars Amounts (SAR)
Total Profit for the Year 377,500
General Takaful Assets (Year 2014) 1,390,000
General Takaful Assets (Year 2015) 1,517,500
Cash 11,500
Short-term Investment 23,500
Short term liabilities 85,000
Underwriting Surplus Distributable to Participants/Participants’ Share of Profit 145,500
Gross Contribution 958,000
Net Contribution 662,500
Wakalah Fee 77,500
Commission Paid 28,300
Management Expense 58,000
Net Claim Incurred 287,500
Earned Contribution 632,500

You are required to calculate:
a) Return on Assets
b) Quick Liquidity
c) Surplus Distribution Ratio
d) Expense Ratio
e) Claims Ratio
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ACCT 424 Insurance Accounting Assignment 2 questions:
Q1. Reinsurance is a form of insurance purchased by insurance companies in order to mitigate risk. Essentially, reinsurance can limit the amount of loss an insurer can potentially suffer. In other words, it protects insurance companies from financial ruin, thereby protecting the companies’ customers from uncovered losses. (5 Mark)
Questions:
a. How do reinsurance companies work?
Reinsurance companies work by allowing primary insurers to transfer portions of risk portfolios to reinsurers. The primary insurer and reinsurer enter into a reinsurance agreement, where the reinsurer agrees to cover part of the primary insurer’s financial obligations from large claims in exchange for a portion of the premium. This allows the primary insurer to write more policies than its surplus could otherwise support.
b. What are the Reinsurance Contracts?

The main types of reinsurance contracts are quota share, surplus share, and excess of loss. A quota share covers a fixed percentage of the insurer’s business, while a surplus share covers losses above the insurer’s retention percentage of surplus. An excess of loss covers portions of losses above a specified retention amount.
c. Give example of reinsurances companies in KSA and describe their main services
Major reinsurers in KSA include Saudi Reinsurance Company (Saudi Re), the largest in the Middle East offering proportional and non-proportional reinsurance. Islamic Reinsurance Company (IRTIZA) based in Jeddah provides Shariah-compliant solutions to Takaful firms. Gulf Insurance Group (GIG) is a leading insurer in the GCC providing life and non-life reinsurance.
Q2. What is the concept of “Fair Value? Outline the basic difference between fair value and book value of an asset. Explain the key features of fair value defined by FASB ASC. (5 Marks)
Fair value represents the exit price for an asset or liability based on assumptions market participants would use. It differs from book value which shows the historical cost less depreciation/amortization. Key features of fair value per FASB are that it is an exit rather than entry price, valued from the market perspective using highest/best use with priority on observable market data.
Q3. XYZ Company has the following financial data: (5 marks)
Calculations:
a) Return on Assets = 26%
b) Quick Liquidity = 41%

c) Surplus Distribution Ratio = 22%
d) Expense Ratio = 9%

e) Claims Ratio = 45%