Financial accounting examples for insurance claims in P & C Insurance

Simplified example: different possibilities for insurance claims to be incurred, reported and paid

• The claims are booked as costs for the financial year during which the insured event occurs (claims incurred) not depending on when they are reported or paid out.

Simplified example of a) with a claim worth of 100: 

 b) The claims are reported to the insurance company with some time lag and it can also take some time to establish the final claims settlement. Thus the claims are not necessarily paid out during the same financial year they have occurred.

Simplified example of b) with a claim worth of 10

c) The claims can also be reported with some time lag so that there are some claims that have already incurred during the financial year but are not yet reported or paid out. The amount of these claims is not known during the financial year and therefore it is statistically estimated based on past experiences on such claims.

It is not known during year 1 that the insured event has incurred as it is not yet reported. Therefore the amount of the claim is not known. There is a separate reserve for claims incurred but not reported. The amount of claims in this reserve is statistically estimated (therefore the amount is 110 and not exactly 100 in this example). 

d) Claims that are paid continuously after the insured event until the insured person dies are booked into the provision for outstanding claims using statistical estimates on the expected life of the insured. Claims paid under the financial year are booked in the income statement as costs.

Simplified example of d)