Question
In insurance accounting, what do insurance companies
set aside to account for potential claims that may arise after the closing date but within the policy term?Solution
In most cases policies are renewed annually except in some cases where policies are issued for a shorter period. Since insurers close their accounts on a particular date, not all policies expire on that date. Many policies extend into the following year based on the date on which they were taken and as such the risk continues beyond the date of closing of books of the insurer. Therefore on the closing date, there is unexpired liability under various policies which may occur during the remaining term of the policy beyond the financial year and therefore, a provision for unexpired risks is made.
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