Accounting Treatment for Insurance Claims

Written by marquis codjia
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Accounting Treatment for Insurance Claims
An insurance company records policyholder claims as expenses. (rope lock. the climbing insurance. image by Ivan Hafizov from Fotolia.com)

An insurance firm records policyholder claims at their face (current) values in accordance with state insurance rules and generally accepted accounting principles (GAAP). Claims represent operating expenses for an insurance company; therefore, senior leaders and department heads usually evaluate performance trends and claim levels to gauge corporate profitability in the short term and the long term.

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Insurance Claim Defined

A policyholder claim is debt, or a liability, that an insurance company must pay. An insurance covenant, or contract, generally details conditions under which an insurer must reimburse expenses resulting from insurance events such as health deterioration, accidents and real estate property damage. A claims investigator usually reviews policyholder requests for reimbursement, and he determines whether such requests are valid in accordance with National Association of Insurance Commissioners (NAIC) rules and recommendations.

Claim Accounting Significance

Claims accounting is a significant business practice because claims reduce an insurance firm's operating revenues. Top leaders generally establish record-keeping procedures and guidelines in claims accounting systems, and they ensure that such procedures adhere to generally accepted auditing standards (GAAS), government regulations and NAIC directives. A company's senior management also requires department heads to prepare periodic "risk and control self-assessment" (RCSA) reports to appraise internal problems and risks implicit in operating activities.

Recording Claim Expense

An insurance firm records a policyholder claim at its current value. To illustrate, a large insurance receives a £6,500 request for reimbursement from a policyholder who was involved in a car accident. A company's senior accounting manager forwards the request to a claims auditor, and he records the expense by debiting the policyholder claims expense account for £6,500 and by crediting the policyholder claims payable account (liability) for the same amount.

Adjusting Claim Liability

The insurance company's claim investigator reviews the client's request for reimbursement, and she ensures that it is accurate and complete. She confirms the accident with law enforcement officials, and she approves the claim. The accounting manager debits the policyholder claims payable account for £6,500, and he credits the cash account (asset) for the same amount. (In insurance accounting terminology, crediting an asset account means reducing its balance.)

Expert Insight

An insurance company's top leadership often hires a specialist to help review accounting methods or procedures that employees follow when recording insurance claims. For instance, an insurance company that provides coverage for federal and state employees may bring in a certified public accountant (CPA) to explain differences between statutory insurance accounting rules, GAAP and generally accepted government accounting standards (GAGAS). Senior managers can also hire an expert to evaluate whether internal controls and mechanisms in claims reporting systems are adequate and functional.

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