01.11. Loss and Loss Adjustment Expense Accounting

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01.11. Loss and Loss Adjustment Expense Accounting
2013-03-11 20:17:10
Loss Adjustment Expense Accounting

Loss and Loss Adjustment Expense Accounting
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  1. Accounting transactions involving losses
    • payment of claims
    • changes in claim reserves
    • Incurred losses = Paid + (end reserve - beg reserve)
  2. Loss reserve accounts
    • case reserve
    • IBNR
    • bulk reserve: estimated deficiency in the aggregate of case reserves
    • additional case reserve: additional reserve for individual claim (used for eg by reinsurer when reserve comes from insurer)
    • reopened claims
    • anticipated subrogation / salvage recoveries
    • deductible recoveries
    • expected legal defense cost
  3. Loss cycle
    • initial estimate of incurred losses for most recent exposure period
    • changes in estimate of incurred losses for prior periods
  4. Loss cycle - Actual Claim Activity approach
    • incurred for the most recent exposure period are established based on actual claim activity
    • (+) appropriate when claims are reported and settled quickly
  5. Loss cycle - Accrual of Estimated Incurred Losses Based on the Level of Earned Exposure
    • initial incurred loss estimate established based on a priori estimate of loss exposure
    • (+) appropriate for lines with slower reporting
  6. Loss cycle - choosing method
    • can use one or the other
    • can use both on the same line - start with estimated incurred loss and adjust with actual data
    • can use one method for some loss types and the other for other loss types
  7. Paid Loss vs Cash Payment
    • there may be delays such as:
    • 1. transaction recording: adjuster writing cheques in catastrophe zone may take some days to report it accordingly
    • 2. claim suspense account: backlog in clearing records in claim system (eg: waiting for missing fields)
    • 3. booking lag: closing a subsidiary ledger earlier means requiring estimate for missing period, which is then adjusted
  8. Losses - Recoverable Amounts
    • salvage: amount the insurer collects from sale of assets it has taken over
    • subrogation: insurer's right to recover amount of claim payment from a third party
    • ceded reinsurance: based on reinsurance contract
    • deductible: when insurer pays first and seeks reimbursement
  9. Losses - Unrecoverable amounts
    • may require reversal of the original recoverable entry (U.S. statutory for ceded reinsurance)
    • may require write-off of recoverable balance in a different account (U.S. statutory for billed deductibles)
  10. Accounting for Discounted Reserves
    • reserves are discounted while paid losses are recorded at nominal value
    • different ways to handle this issue
    • amount of discount can be treated as an asset, and liability reported undiscounted
    • liability can be established discounted directly
    • can include discount as a contra-liability