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IAI Actuarial Core Principles · Business Finance · Regulation of financial reporting of incorporated entities

Under IRDAI financial reporting norms, why does a general insurer create a provision for claims incurred but not reported (IBNR)?

An insurer provides for IBNR because claims from insured events that occurred before the year end are already liabilities, even if policyholders have not yet notified them. Recognising them matches claims cost to the period of the loss under the accruals principle, and it lowers reported profit.

  1. ABecause claims arising from events before the year end are liabilities even if not yet notified to the insurerCorrect
  2. BBecause future premiums will be received late
  3. CTo reduce the tax payable on investment income
  4. DBecause reinsurers require a cash deposit
  5. To increase the reported surplus transferred to shareholders

Explanation

Under the accruals principle, losses that have occurred by the balance sheet date create a liability even if the claim has not yet been reported. Estimating IBNR ensures claims cost is matched to the period in which the insured events happened. It reduces rather than increases reported profit, and it is not a tax or reinsurance deposit device.

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