Calendar Year Accounting Incurred Losses

Key Takeaways

• Calendar year incurred losses include payments for both new and old insurance claims.
• Reevaluation of claims can lead to incurred losses if claim values are underestimated.
• Loss reserves are funds set aside by insurers to cover anticipated and existing claims.
• Changes in loss reserves can result in accounting losses if more funds are needed.

What Are Calendar Year Accounting Incurred Losses?

Calendar year accounting incurred losses is a key insurance industry term used to describe the losses incurred by an insurance company during a calendar year. Losses incurred for an insurer occur through the payment of old claims as well as new claims, the reevaluation of claims already on the books at the beginning of the year, and changes in loss reserves in a particular calendar year.

It's important to understand how insurers manage both new and old claims, including reevaluation and changes in loss reserves, to depict the scope of incurred losses. Evaluating these losses aids insurance companies in financial planning and maintaining regulatory compliance, meeting the need for suitable loss reserves.

Analyzing Calendar Year Incurred Losses in Insurance

Calendar year accounting incurred losses refer to any amount of money an insurance company either pays or can no longer count as an asset on its books.

Key Causes of Incurred Losses in Insurance

Insurance claims: An insurance claim represents a request from a policyholder for coverage or compensation for a covered loss or policy event. The insurance industry views the amounts paid to claimants as losses, because the money spent to pay claims is money that is going out of the company as opposed to remaining with it, and that money is no longer an asset of the insurance company.

Reevaluation of claims: Reevaluation of claims occur when, after a review of the insurer's insurance claims already in process, the insurer determines the value of the claims to be greater than or less than the value already recorded in its books. The reevaluation would result in an accounting incurred loss to the insurer if the newly determined value of the claims is higher than the value already recorded.

Changes to loss reserves: Loss reserves are the amount of money budgeted or set aside by the management of an insurance company, at the beginning of the year, for payment of old claims and the anticipated payment of new claims. Regulators require U.S. insurers to maintain loss reserves to cover claims. Requirements for loss reserves are typically set at the state level, but standard levels range from 8% to 12% of the insurers' total revenues. As an insurer's revenues change, the amount that is mandated for loss reserves also changes. Changes to loss reserves would result in an accounting incurred loss if the amount needed for the loss reserves increased.