Universirty
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
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