20

010 

B
M B dgeet Ma
Bud Manu
uall
U G
A U
D E
 

N A
T
L

Your
Y r eassy way
w tto prrepaare
ann
nuall buddgett & LRP
L P
 
 

Regional Operattions Dep
partment of GIC 
 Gulf In
nsurance Companyy 
07‐07‐2 2010 
 I ex
Inde
Secction A: Bu
udgeting & Planning Conceptts

1. Introduuction
a. Definitionn
b. Reasons foor budgetinng
c. Approach
d. Steps
e. Master Buudget
f. Checkpoinnts
2. Planninng
3. Markett Share

Secction B: Asssumption
ns behind budget
b ures
figu

4. Assummptions
a. GWP Assuumptions for f each LOOB
i. Maain New Clients
ii. Rennewals
iii. Maain assumedd R/I
iv. New w lines
b. Claims Asssumptionss
c. Reserves Assumption
A ns
d. R/I Assum mptions
e. Collectionn Policy forr Receivables
f. Investmennts projectio ons
i. Invvestment Inncome
ii. Invvestment Poortfolio
5. Projecttions
6. CAGR R & SWOT T
7. New rregulations & applicaable laws.

Bu
udgeting Process
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Manual Page 2 
 
 
Section C: Pro-forma R&E

8. Production (GWP) Budget:

g. Direct premiums (Sales Force, Agents, Brokers & Bank Assurance)
h. Sales Budget
i. Assumed R/I
9. Claims Budget
10. R/I Budget
11. Pro-forma R&E
j. Pro-forma R&E for Non-Life operations
k. Pro-forma R&E for Life operations

Section D: Pro-forma FS & Cash Budget

12. Capital Budget and budgeted Changes in Equity

13. Cash Budget & budgeted Cash Flow
14. Pro-forma IS
15. Pro-forma BS

Section E: Review & Checklist

16. Review

Budgeting Process Manual  Page 3 

 
 
Section A: Budgeting & Planning Concepts

1. Introduction
A. Definition

The budget could be defined as a plan and control tool for an entity that
identifies the resources and commitments needed to satisfy the entity’s goals
over a period.

Budget is a quantitative not qualitative; so the assumptions & strategies are

very important to be predefined before starting in numerical process.

Budgeting process could be for a short period of time (Less than one year) or
for long-term plans (Could be three to five or even ten years)

B. The reason for budgeting could be summarized into four main

points:
¾ Planning: the budgeting is that it forces the organization to
examine the future.
¾ Communication and Coordination within the organization
between deferent departments with different managerial
level & staff.
¾ Monitoring the organization process overall and to assist
each manager monitor his/her department performance, as
well the executives & top management.
¾ Employee’s evaluation: such as performance-based
bonuses.
¾ Controlling & MBO

Budgeting Process Manual  Page 4 

 
 
 C. Approach
h

Up
Bo
ottom
m

Top 
D
Down
n
It could be
b mix of top
t down & bottom up approaach.
In other words,
w if BOD/higghest levell of manaagement decided
d
that x% needed
n as a growthh in net prrofit; this approach would
be cascad ded downn to the loower leveel of manaagement. If this
results in y% “wheere y less than x” thhen it shouuld be raiised up
to the BOOD with thhe acceptaable reasoons/assummptions to let the
BOD deciide on thiss.

Bu
udgeting Process
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Manual Page 5 
 
 
 D. Budgeting process steps:
Budget proposal/Memo:
After the CEO/GM decides on the company strategy, a memo or
directive is sent to all line managers & executives, so they can start
aligning their budget process with the strategic plan. (That is top-
down implementation).

Budget Negotiation:
The budget is not one-shot work. To have an achievable & reliable
budget a certain negotiation from all the concerned parties should
take place to determine the acceptable and reliable figures.
Each party who share in this negotiation should participate on
scientific bases before his/her personal expectations. Some market
research & benchmarking study could help in better understanding
of the company position in the market.

Budget review & approval (It’s Top Management Responsibility) :

After each personnel add his acceptable share on the budget, and
after the budgeting Manager/in-charge accumulate the data &
represent it in a Pro-forma IS & Pro forma BS formats, it should be
signed of from the budgeting-committee and then to get approval
from the BOD.

Budget revision (Why revising Budgets?):

Budget reliability varies from organization to organization; this
mainly due to various issues. Some budgets must be followed
absolutely; others can be revised only under specific
circumstances/conditions. Regular revision may provide better
operating guidelines, however this may lead managers to anticipate
regular changes and to prepare it with more accuracy and closer to
the current status/scenario.

Budgeting Process Manual  Page 6 

 
 
 E. Master Budget: is a plan based on a company’s strategy for
controlling its operations for a specific period of time. A key
point is that master budgets are fixed at an expected level of
business of activity.
It’s broken down into:
Operational Budget: Identifies needed for operations & the
acquisition of these resources. Like:
• Sales Budget
• Staffing Budget
• R/I Budget
• Technical Departments Budget
• Marketing projections
Financial Budget: Matches resources of funds with uses of
funds in order to achieve firm’s goals. Like budgets of:
• Cash flows (Inflows & Outflows)
• Financial Position
• Operating income
• Capital Expenditure

Capital Budget: is used to plan how resources will be used to

support significant investments in projects that have long-term
implications. Like purchase of new fixed asset or investment in
new facilities.

Budgeting Process Manual  Page 7 

 
 
 F. Checkpoints:

I. Review the figures with the company’s strategy & its long term plans.
Is this matching with the plans adopted earlier in the CEO/GM
memo?
II. Benchmarking & Market expectations: Benchmarking is the
continuous process of measuring company’s performance, services,
products and practices against the best levels of performance of
company’s peers within the same sector/region; in other words it’s
frequently thought of capturing “best-in-class” data & performance
and then compare it fairly with the company’s ones. (I.e. Pricing,
Liquidity ratios, capital ratios, profitability ratios, etc)
III. Normal review of financial reporting:

As per the traditional review of financial reporting (Calculation, Accounting

concepts, IFRS, IAS and the harmony of FS) this should be applied while
reviewing budgeted FS. So the period results are reflected in the financial
position as will the changes in Equity. Also, the budgeted FS for year N start
point is the balances of year N-1.

Budgeting Process Manual  Page 8 

 
 
 2. Planning & Company’s objectives:

As known, planning is the most important part in the management process.

The ultimate goal for any company is to:

• Gain acceptable level of profits

• Achieve certain level of Equity
• Acquire certain percentage of the Market (Company’s Market Share)

Profitability

Equity

Market Share

Budgeting Process Manual  Page 9 

 
 
 3. Markeet Share
Take Care!
C

Maaybe the coompany planning

p foor growth,, but the company’s
c s market share
s is
corrroded or eaten by other peeers & thee newly-eentered coompanies to the
marrket.

Forr instance,, in the folllowing exxample thhe companny growingg YOY buut their
marrkets share reducingg from 10% % in the 1st year to reach 8.3%
%.

Perriod T
Total Markeet Coompany M
Market Sharre Com
mpany G
Currrent Actual 100 10 10.0% 1
10.0%
Y1 Budgeted 119 11 9.2% 9.1%
Y2 Budgeted 135 12 8.9% 8.3%
Y3 Budgeted 150 13 8.7% 7.7%
Y4 Budgeted 164 14 8.5% 7.1%
Y5 Budgeted 180 15 8.3%

Bu
udgeting Process
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Manual Page 10 
 
 
Section C: Pro-forma R&E

4. Production (GWP) Budget:

a. Direct premiums (Sales Force, Agents, Brokers & Bank
Assurance)
You have to start the tactical process; your budget should start from the production capacity and
the sales volume,

Thus, you have to start to predict Sales with respect to the reinsurance as well as your company’s
retention ratio according to the new reinsurance combined program, which should build up with
the following elements as follow:

GWP (inward & ceded premiums and company retention):

Which should include the following: the new issuance of the existing LOBs as well as new
products or even new LOBs, renewal of the policies with respect to the presentences percentages,
cancellation ratios (due to claims, normal cancellation, company cancelation ,lapsed policies,
surrenders and not taken up policies) and endorsements (technical & Non- technical). Which
occurs through the following channels:

b. Sales Budget
Direct sales force: (dependent & independent) with respect to the reinsurance share (inward and ceded as
well as the relative commission).

Bancassurance: with respect to the reinsurance share (inward and ceded as well as the relative
commission)

Brokers: with respect to the reinsurance share (inward and ceded as well as the relative commission).

Branches: predict the sales of the branches.

NOTE: The estimation of GWP should build based on up-down button, which reflect the major lines as per
the corporate strategy then the tactical process down-up button which should be based on the estimations
of the operation section heads for every LOB as well, in order to execute the purpose of the budget (to be
MBO).

Budgeting Process Manual  Page 11 

 
 
After calculating GWP as well as reinsurance section, you can conduct the Net written premium of the
company, reinsurance commission income, commission expense and other direct revenue (issuance policy
fee, re-printing the policies, endorsement amendments ….etc).

c. Assumed R/I
5. Claims Budget
After estimate the GWP, you have to start to predict company’s claims
based on the claims trends and frequencies, claim development table is an
important guide to evaluate or predict the claims paid as well as incurred
claims with respect to regulations, legal, combined reinsurance program in
order to determine company’s retention ratio as well as reinsurance share.

Note: you have to take into consideration the view of management (to
enhance combined ratio) & The estimation of Claims should build based on
up-down button, which reflect the major lines as per the corporate strategy
then the tactical process down-up button which should be based on the
estimations of the operation section heads for every LOB as well, in order
to execute the purpose of the budget (to be MBO).

6. R/I Budget
7. Pro-forma R&E

l. Pro-forma R&E for Non-Life operations

m. Pro-forma R&E for Life operations

Budgeting Process Manual  Page 12 

 
 
Section C: Pro-forma FS & Cash Budget

Cash flow 
Statement
Financial 
Position as 
well as change 
in Equity 
Pro‐forma Statement
profit & Loss 
Statement

8. Capital Budget and budgeted Changes in Equity

9. Cash Budget & budgeted Cash Flow
10. Pro-forma IS
11. Pro-forma BS

Budgeting Process Manual  Page 13 

 
 
 Authors:

Sherif Abd-El-Moamen Mousa

Mohamed A. Shoukry Al-Mahalawe

Budgeting Process Manual  Page 14