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Basic Insurance Accounting — Selected Topics
By Ralph S. Blanchard III, FCAS, MAAA

June 2007 CAS Study Note

Basic Insurance Accounting – Selected Topics

The purpose of this study note is to educate actuaries on certain basic insurance accounting topics that may be omitted in other syllabus readings. These topics include: • Loss and loss adjustment expense accounting basics • Reinsurance accounting basics • Examples of how ceded reinsurance impacts an insurers financial statements • Deposit accounting basics In addition, the following two fundamental accounting equations are provided, representing basic equations that may no longer be found in the other syllabus articles but that all actuaries should know. • Assets – Liabilities = Equity (sometimes labeled “net assets” or “surplus”) • Revenue – Expense = Income (with expense including incurred losses and underwriting expenses for an insurance company). (Note: Most accounting systems rely on some form of double-entry bookkeeping, under which all transactions result in debit and credit entries that have to balance. This study note assumes that the study of debits and credits is not necessary for most actuaries. Those interested in such knowledge are hereby referred to a basic accounting text, possibly supplemented by the relevant chapters for their area of interest in the IASA’s text of Property-Casualty Insurance Accounting. This study note also assumes a basic understanding of bookkeeping terminology, such as” ledger”, “account” and “closing the books”, )

I. Loss and loss adjustment expense accounting
(learning objective B.2 for losses. Premiums already covered by other study note.) (Note: 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 • Paying claims • 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 1 ) 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:

Note that some claim departments define the case reserve as their estimate of the ultimate value for the claim, including amounts paid-to-date. This can occur even when the term is used to represent unpaid amounts only among the actuaries in the same company.


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Basic Insurance Accounting – Selected Topics
• 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. 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...
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