The activity developed by an insurance company in reflected financially, synthetically in the receipts and expenditures budget, with is annually laid down.insurance company, financial equilibrium, receipts and expenditures budget

Florin Ion COANA

Iudit FODOR

Rodica Viorica COANA

English

Research Papers in Economics

Year VII, No.7/2008                                                                                                   159 
By elaborating the income and 
expenditure budget it is aimed firstly that 
in the year for which the budget is laid 
down the insurance fund obtained from 
insurance premiums, along with other 
incomes, to allow the payment of all 
costs as well as obtaining some profit. 
Therewith an insurance company when 
laying down its receipts and expenditures 
budget, it is necessary to watch that the 
predicted volume of insurance premiums 
is set according to real possibilities in 
economy concerning optional goods, 
persons and civil responsibility 
insurances. This thing is necessary, 
because every insurance company has 
to be preoccupied to act in order to reach 
the possible optimum level regarding the 
degree of inclusion of goods and persons 
in optional insurances they practice. 
Regarding the cost level, by 
laying down the receipts and expenditure 
budget it will be aimed that this is settled 
by taking into consideration the level 
recorded in the last year and the level 
recorded in a certain period of time (our 
opinion is minimum 5 years), of the 
compensations/requitals paid in the 
current year, as well as the possibility of 
them growing or a predictable 
consequence of changes in frequency 
and intensity of generating insured risks, 
as a result of the extension of the sphere 
of optional insurances therefore of the 
volume of assumed responsibility. A 
special attention is imposed when the 
volume of costs regarding constitution 
and administration of the insurance fund 
is established, permanently seeking for 
new solutions and possibilities to reduce 
it. Thus, for example, organizing and 
informatics system and the existence of 
programs that respond to the demands of 
competition specific to market economy, 
a certain reduction of these costs can be 
realized. 
The cost an income budget of an 
insurance company can be considered 
as a useful instrument in the 
management process and activity 
control. By drawing it one can see to 
what extent in that year the financial 
balance of the company’s activity 
appears possible. Also, by the way of 
scaling, through budget, costs and 
incomes, it can be acted in raising the 
liability of the company’s management 
regarding a better administration of all 
the funds and respecting financial 
discipline. In the receipts and expenditure 
budget is reflected, quantitative as well 
as qualitative, the company’s entire 
insurance activity. This budget of the 
insurance company, like any other 
company, has two parts, the income and 
cost parts and some chapters. In these 
chapters there are presented first the 
incomes and costs with the development 
of insurance and reinsurance activity and 
then the financial revenues and costs. 
After forecasting the total 
revenues and costs, the gross result of 
the financial exercise is mentioned. This 
result is put across in profit if the total 
incomes overcome total costs, or in loss 
if costs are higher that revenues. 
In table 1 is presented a receipts 
and costs budget with indicators 
 
RECEIPTS AND EXPENDITURES BUDGET OF THE 
INSURANCE COMPANY- BASIS INSTRUMENT IN 
ACHIEVING FINANCIAL BALANCE 
 
Assoc. Prof. Florin-Ion COANĂ, PhD 
„Aurel Vlaicu” University Arad 
Rodica-Viorica COANĂ, PhD Student, Arad 
Iudit FODOR, PhD Student, Arad 160                                                                  Finance – Challenges of the Future 
computed on conventional data. These 
data was thus selected, being the case of 
an anonymous company that practices 
only general insurances, to reflect what 
can easily happen on the insurance 
market in Romania. 
 
Table 1. Income and cost budget in year X, with general index, at N company, 
that practices general insurances. 
 Total 
Year 
I quarter  II 
quarter 
III 
quarter 
IV 
quarter 
TOTAL INCOMES*  17316372  3777123  3930759  4492891  5115540 
I. Exploitation incomes, from which:  16942312  3651123  3836759  4412891  5041540 
1.Insurance premiums incomes, 
from which: 
12960000 2826000 2934000  3350000 3850000 
-auto damage/theft insurances  4640000  960000  1128000  1192000  1310000 
-buildings and goods insurances  2160000  436000  568000  552000  604000 
-financial risk insurances  4080000  786000  894000  1110000  1290000 
-car civil liability  1200000  480000  152000  280000  288000 
-accident insurances  800000  154000  192000  216000  308000 
-health insurances  80000  10000  20000  20000  30000 
2.Incomes from reinsurance, from 
which: 
2922957 583086 673414  771226 895231 
-reinsurance commission  1072796  305332  250251  285226  331987 
-profit reinsurance commission  68234  13773  17943  17438  19080 
-damage recovery  1781926  363981  405226  468562  544163 
3.Recoveries and downtrends  1040316  240236  227545  286905  285629 
4.Other exploitation incomes  19040  1800  1800  4760  10680 
II. Financial  374000  126000 94000 80000 74000 
TOTAL EXPENSES*  16743703  3732592  3778004  4417007  4816099 
I. Exploitation expenses, from which  16728703  3729592  3774404  4412807  4811899 
1.Paid compensations, from which: 5337580  1245183  1161726  1458526  1472145 
- auto damage/theft insurances  2302220  477380  582100  621370  621370 
- buildings and goods insurances  130720  12856  26072  31028  60764 
-financial risk insurances  2226000  433650  490650  603750  698250 
-auto civil liability  650080  315870  56635  195381  82194 
-accident insurances  28000  5426  6569  6997  9568 
-health insurances  560  120  135  145  160 
2.Gross cession subscribed 
premiums  
4651272 913581  1061795  1228818  1447078 
3.Premium net reserve, from which: 1177611  303779  259921  280374  333536 
-gross premium reserve  1469082  425899  398771  344862  299550 
-premium reserve cession in 
reinsurance 
291471 122120 138850  64487  -33987 
4.Damage reserve  1041654  296322  225995  301306  218031 
-notified damages reserve  702090  232713  149155  198347  121874 
-un-notified damages reserve  339564  63609  76840  102958  96157 
5.Catastrophe  reserve  360360  73974  89686  92697  104003 
6.Equalization reserve  400  0  0  0  400 
7.ISC taxes  130680  32940  28140  32300  37300 
8.Aquisition commission  340297  91475  71888  83927  93007 
9.Administrative costs, from which: 3439278  718219  818971  870259  1031798 
-salaries and salary debts  2045416  436187  459202  530095  619931 
-working costs  1393831  289031  359769  340164  411867 
10.Premiums from annulled policies  249000  54120  56280  64600  74600 
II. Financial costs  15000 3000 3600  4200 4200 
GROSS PROFIT  572610  44531  152754  75884  299441 
Note*Data from above is conventional. Year VII, No.7/2008                                                                                                   161 
According to data from this 
budget, regarding the source of the 
insurance premiums, it is easily observed 
that on the first place are premiums for 
car insurances (civil liability together with 
damage insurance) followed by financial 
risk insurances and premiums regarding 
buildings and goods insurances. It also 
results that incomes from cessions in 
reinsurance are quite important. 
Regarding exploitation costs the ones 
concerning compensations are most 
predominant, and within them car 
insurances weight the most followed 
closely by the ones regarding financial 
risks. Therewith we see that cost 
regarding cessions in reinsurance, 
respectively premiums cession to 
reinsurers, have an important place 
within exploitation costs. This aspect has 
to be looked at in a close connection with 
the important weight of the premiums 
coming from financial risks insurances, 
because according to regulations
1for 
such insurances it is imperative to some 
extent cession in reinsurance in order to 
have a good dispersion of risks. Within 
the costs regarding insurance and 
reinsurance activity, an important place is 
held by the costs afferent to reserve 
constitution: premiums, damages, 
disasters and equalization. Important as 
volumes are also costs regarding 
constitution and administration of the 
insurance fund put across in: staff costs 
(salaries and those adjacent to them) and 
functioning costs. 
The determination of incomes 
from gross insurance premiums is made 
in a different way considering the legal 
form of insurance constitution (mandatory 
and optional insurances). 
Establishing the volume of gross 
premiums that are going to be obtained 
with mandatory civil liability insurance is 
made by taking into consideration several 
aspects. 
Thus, has to be considered the 
fact that making the mandatory civil 
                                                 
1 See Regulations regarding the limitation of credit 
risk subscription, emitted by ISC, published in 
Official Monitor no.818 from September 9 2005. 
liability insurance is made only by 
insurance companies that have been 
authorized by the Insurance Surveillance 
Committee. As a result, from one year to 
another could appear variations in the 
volume of realizable premiums, 
depending on many factors like: number 
of authorized insurance companies to 
make this insurance in the respective 
year; rise of vehicles from a certain 
category (having in consideration the 
difference in levels of insurance 
premiums on vehicle types and insurance 
holders categories) in the year for which 
the budget is being calculated, compared 
with the current year and the precedent 
year; the certain number of vehicle 
owners included in  car mandatory civil 
liability insurance that have not paid the 
insurance premiums until the elaboration 
date of the income and cost budget and 
preliminary data on this line, until the end 
of the year. 
Determining the volume of gross 
premiums that are going to be realized in 
different optional insurance categories is 
made by taking into consideration a 
series of indicators, such as: 
• The degree of inclusion in a 
certain optional insurance class of goods 
and/or persons, realized in the current 
year and the one possible of being 
realized in the year for which the budget 
is being drawn, taking into consideration 
the insurable potential, unit network and 
number of persons or brokers that make 
insurances; 
•  Volume of gross insurance 
premiums forecast to be realized on 
categories and insurance classes in the 
current year, according to objectives and 
existent goods on different territorial 
agencies, that are possible to be taken 
into optional insurance; 
•  Particularities and local 
conditions, population and economic 
agents preferences regarding some 
types of insurances of goods and/or 
persons; 
•  The weight of optional 
insurances with up to date premium 162                                                                  Finance – Challenges of the Future 
payment and of those remaining in the 
total of active insurances; 
•  Possibilities to raise the 
number of goods and persons insurable 
for next year. 
Collections from insurance 
premiums forecasted for current year are 
determined on the doubtless gains 
obtained until the data of the budget 
drawing, at which are added probable 
gains regarding the period remained until 
the end of the year. 
The volume of premiums 
attained in optional insurances is 
established on categories and insurance 
classes, on goods genre and insurance 
holders’ categories. Thus, for example, in 
Casco insurance, the volume of the 
premiums realizable can be determined 
by multiplying the first averages on types, 
manufacturers and categories of car 
possessors in the previous year with the 
probable number of cars which will be 
insured the next year. The first average 
on auto vehicle is obtained by dividing 
the gross collected premiums in the 
previous year with the number of insured 
auto vehicles. Another example is this 
one: the volume of premiums realized in 
animal optional insurances can be 
established by multiplying the animals’ 
possible existent per insurance holder 
(separately on species, breeds and age 
groups) with the average premium made 
in the previous year. 
In optional health insurances, the 
premiums that are stipulated of being 
realized in the next year can be 
determined taking into consideration the 
average sum insured in existent active 
insurances from the beginning of the 
period, entries representing new 
insurances and the number of annulled 
policies. After the average insured sum 
appropriate to them is established and 
the afferent average premiums, it is 
passed to determining the outputs of that 
same period. For this purpose, the 
average insured sum is considered and 
the average premium concordant to 
expired insurances. 
From the difference between the 
average insurance premium of the 
average sum insured initially and the one 
resulted from calculations made, we can 
establish the premiums obtained in that 
period. 
In a relatively similar way we can 
act in determining the volume of 
premiums realized in the plan year in 
other categories of optional insurances. 
Determining the cost volume that 
are included in the income and expense 
budget is made in a different way, 
because it is about expenses for paying 
compensations/requitals and costs 
regarding constitution and administration 
of the insurance fund. 
Suggestions regarding the 
level of expenses with 
compensations/requitals payments-if it 
is an insurance company that has the 
necessary experience and good 
informational system, the level can be 
determined by the average of the last 5 
year’s volume, as well as preliminary 
payments for the expiring year. The 
average of these costs on minimum 5 
years is needed because they are the 
result of the action of factors with random 
character. 
Preliminary compensations for 
the expiring year can be established by 
considering the effective expenses until 
the end of the month prior to the 
beginning of elaborating the budget; 
estimative compensations are booked as 
expenses for the damages until that date, 
but still unpaid, compensations afferent 
to damages that are likely to take place 
again until the end of the year, regardless 
of the fact that a part of these 
compensations will effectively be paid in 
the next year. 
In establishing damages that will 
take place eventually  until the end of the 
current year, the average damages 
produces in the same period in previous 
years will be taken into consideration. 
All calculations are made upon 
insurance holders’ categories (individuals 
or legal entities), classes and types of 
insurances (mandatory or optional) and 
on goods categories. Year VII, No.7/2008                                                                                                   163 
Expenses regarding the 
constitution and insurance fund 
administration are determined upon 
certain realizations from the current year 
until the date of elaborating the budget 
and preliminary data for the period 
remained until the end of the year. 
The volume of administrative-
ménage costs is established according to 
certain realization from the current year 
until the date of elaborating the budget 
and preliminary data for the period 
remained until the end of the year and 
the results of the solid analysis to reduce 
them from the previous year. Analyzing 
the way of reduction will head especially 
for costs that can practically be 
minimized. Thus, for example, to some 
office expenses, communication 
expenses and transport ones, could exist 
possibilities of reducing them by having a 
severe regime of saving up, limiting 
phone calls to the strict necessary 
number of calls and duration, wisely 
using means of transportation. 
After establishing the total 
incomes and expenses for one year, then 
they are allocated on trimesters. 
Referring to allocation of incomes and 
expenses on trimesters, as it results from 
the data presented in table 1, we take 
into consideration the fact that in many 
cases, forecasts for the first two 
trimesters are inferior to the ones from 3 
and 4. The budget thus laid down and 
assumed by the board of administration 
is undergoing the Annual General 
Meeting. For companies that have 
branch offices the incomes and at least 
the costs regarding constitution and 
administration of the insurance fund are 
allocated. 
Seeing how the collections and 
expenses are realized by head offices or 
other branch offices is made upon the 
data periodically given by them. In this 
purpose, within the informational system, 
symbols can be used for each existent 
index in the income and expense budget 
to which head offices have to 
communicate incomes and expenses 
made. 
This pursuing of achieving 
incomes and costs by head offices has a 
major importance in insuring financial 
balance in the entire insurance company. 
As a conclusion, we estimate 
that a good substantiation of the income 
and expense budget, at a central and 
territorial level, followed by the use of 
modern and flexible methods in 
executing this budget, throughout the 
financial exercise, leads to the 
consolidation of the budgetary balance 
and implicitly to the growth of financial 
stability of insurance companies.
 

Receipts and expenditures budget of the insurance company - basis instrument in achieving financial balance

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Research Papers in Economics