What is a General Account?

How Does it Work?

It starts when the policyholder purchases a policy from the insurance company. After that, one may use the insurer’s premium in the following manner:

  • Day-to-Day expenses say administrative expensesAdministrative ExpensesAdministrative expenses are indirect costs incurred by a business that are not directly related to the manufacturing, production, or sale of goods or services provided, but are necessary for the smooth functioning of business operations, such as information technology, finance & accounts.read more.Creation of contingency reserve to meet unexpected and uncertain claims.Investments in varying assets to match the return and risk.

All the claims backed by individual/separate assets settle through the general account. If the claims arising from the individual or separate account are insufficient, then the residual would be settled through the general account.

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Example of General Account

An insured avails motor insurance from the insurance company for 5 years at prescribed charges per the regulatory norms. After a year, the vehicle got damaged and claimed the damages from the company.

The company availed lawyer and surveyor services to assess the claimant’s claim and rewarded the claim after receiving the surveyor’s assessment report.

They paid the claim out of the premiums received from the several insured over the period. The accumulated fund is the general account and is used to settle non-separate claims.

Investment Strategy

Insurance companies follow either of the two methodologies of investing their general fund balances:

  • Managing the funds in-house through creating a separate department that takes care of the invested funds’ risk, returns, dividends, etc.Outsourcing the functions to an external vendor, who would charge his management fees and manage the funds.

Many companies prefer the latter due to increased cut-throat competition. Corporations feel that they should focus on their core activities and outsource the non-core functions to the third party, meeting the liabilities of the policyholders as and when they accrue.

The companies also look for their risk appetiteTheir Risk AppetiteRisk appetite refers to the amount, rate, or percentage of risk that an individual or organization (as determined by the Board of Directors or management) is willing to accept in exchange for its plan, objectives, and innovation.read more as policyholders’ claims can arise anytime, so companies must ensure that their liquidityLiquidityLiquidity is the ease of converting assets or securities into cash.read more is at their disposal. As a result, they prefer to invest their general account funds in debt or fixed income securities compared to the companies’ stock.

Debt would ensure the consistent inflow of the funds and would be less risky than investing in the companies’ ownership.

General Account vs Separate Account

Conclusion

Unless there is a statutory requirement or insured specific mandate, the premiums received from the policyholders pool in a general fund are applied against meeting day-to-day expenses and invested in the fixed income fundsFixed Income FundsFixed Income Funds are those mutual funds that invest in high quality fixed income securities like the government debt, treasury bill, money market and pay the investors a fixed rate of return as per the payment terms and period.read more. The company needs to maintain good liquidity in general funds as the claim can arise anytime, unlike separate accounts, where there is a certainty for the tenure of the liability.

This article has been a guide to what is the general account and its meaning. Here, we discuss how a general account works, an example, and its differences. You can learn more about accounting from the following articles: –

  • Reinsurance MeaningCoinsuranceCalculate Insurance ExpenseTerm vs Whole Life Insurance