Page 169 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

notes Incurred losses 600 c

All prior years
Change in prior estimate of ultimate 500 d
incurred losses
step 2 - Determine iBnr reserves
AY 2012 All prior Total Source
May 31, 2012 case reserves 500 4,800 5,300 e ledger
May 31, 2012 IBNR 900 5,300 6,200 f ledger
May 31, 2012 total reserves 1,400 10,100 11,500 g (e) + (f)
- paid losses in June 2012 100 400 500 h ledger
+ incurred losses in June 2012 600 500 1,100 i (c) and (d)
June 30, 2012 total reserves 1,900 10,200 12,100 j (g) - (h) + (i)
June 30, 2012 case reserves 700 4,750 5,450 k ledger
June 30, 2012 IBNR reserves 1,200 5,450 6,650 l (j) - (k)
It is possible for an insurer to use one of the above approaches for some of its lines and the other
approach for its other lines. It may use both approaches on the same line, basing the reserves
early in an accident year on a loss ratio times earned premium and then moving to reserving
based on actual claim experience once the actual claim data becomes more credible. It may also
choose to use one method for some loss types and the other method for other loss types for the
same product line. The choice is generally up to the insurer, unless the applicable accounting
rules and/or insurance laws/regulations dictate a particular reserve estimation method.
Accounting for discounted reserves: The use of discounted reserves creates its own issues in
designing an accounting system, in that the ultimate paid losses will be recorded at nominal
value, more than the recorded discounted loss reserves. The accounting system must therefore
determine how to treat the increase in the reserve due to the amortisation of discount.
The current approach used in many jurisdictions for this situation is to record the increase due to
discount amortisation as incurred losses. This may show up as reserve strengthening in certain
reports, unless accompanied by adequate disclosure.
An alternative approach (not yet widely used for insurance loss accounting) is to record the
income statement impact of increasing loss reserves due to discount amortisation as interest
expense. Where interest expense is reported together with interest income, this would result in
incurred losses staying at the initial discounted value, unless incurred loss estimates change. It
would also result in lower investment income than occurs in many current insurance accounting
systems.

8.3.2 reinsurance accounting Basics

It includes the following concepts:

Assumed Reinsurance accounting: In general, the accounting rules applicable to insurers writing
direct insurance contracts also apply to those writing assumed reinsurance contracts. That said,
there may occasionally be differences, such as different risk transfer rules and different definitions
of loss versus loss expense.
Loss adjustment expense: It is common for reinsurance contracts covering tort liability insurance
risks to include coverage for legal defence costs. These are frequently coded as loss adjustment
expenses and are frequently reported separately from losses by the ceding company. But the
assuming company may record such costs as assumed losses on their books.

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