Page 166 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 8: Accounting for Insurance Companies

8.3 Insurance Accounting Notes

Certain basic insurance accounting concepts include:

z z Loss and loss adjustment expense accounting basics
z z Reinsurance accounting basics

z z Deposit accounting basics
8.3.1 Loss and Loss Adjustment Expense Accounting

The following uses the terms “loss” and “claim” interchangeably, and “liability” and “reserve”
interchangeably. The author is aware that terminology varies by jurisdiction, sometimes by
company within a jurisdiction, or even within the same company. Hence the student is advised
to confirm the usage of these terms within their business environment. This discussion also
discusses losses exclusively, rather than loss and loss adjustment expense, although most of this
is also applicable to loss adjustment expenses.
Loss accounts: The basic accounting transactions involving losses are:

z z Paying claims
z z Increasing or decreasing claim reserves
These two items affect the income statement through incurred losses, which equals paid claims
(or “losses”) plus the change in loss reserves, or
Incurred losses = paid losses + (ending loss reserves - beginning loss reserves)

There may be several loss reserve accounts in a company’s ledger. All companies’ ledgers will
generally have the categories of case reserve (the estimate of unpaid claims established by a claim
adjuster or the claim system) and IBNR (the reserve for “Incurred but Not Reported” claims),
as several jurisdictions require that these amounts be disclosed separately in annual financial
reports.
Other accounts that may be set up include:
z z Bulk Reserve: This reserve represents the estimated deficiency in the aggregate of case
reserves for known claims. If forced to assign it to either case reserves or IBNR reserves,
some will assign it to case reserves, as it represents reserves for claims that have already
been reported. Others will assign it to IBNR, as it represents an aggregate calculation above
claim adjuster estimates not reliably assignable to an individual claim.
z z Additional Case Reserve: This represents an additional reserve for an individual claim,
above the level set up by the claim adjuster. It is most common for claims under assumed
reinsurance contracts, where the case reserve comes directly from the ceding company, as
it allows the assuming company to record a different estimate for the value of a claim than
the ceding company.
Companies may or may not also set up loss reserve accounts for reopened claims, anticipated
subrogation or salvage recoveries, deductible recoveries (where the full loss is paid by the insurer
who then bills the insured for the deductible), expected legal defence costs, etc.
Note that the above amounts may be positive or negative. For example, bulk reserves could be
negative if it is assumed that case reserves will be redundant in the aggregate. Case reserves for a
claim could be negative if it is assumed that amounts paid-to-date on a claim are greater than the
ultimate value, and that some future recovery of paid amounts is expected.

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