Incurred – Accrued Expenses, Reserved and Paid Amounts Combined
In plain language: To “incurred” something means that you’ve already got it or caused it to happen but you haven’t yet paid for it. It might be incurred expense like a credit card bill or it could be something you brought upon yourself like a late fee.
Technical definition: ‘Incurred’ is an accounting term, mainly used in insurance, to describe expenses or losses that have been recognized but not yet paid. In insurance, ‘incurred losses’ would include both, the sum of paid claims and the established reserves for claims reported but not settled or not reported.
Imagine you’ve just had your credit card statement. You have outstanding balance including some hefty late fees that you’ve yet to pay off. This is a real-life example of the term ‘incurred’.
TL;DR
- “Incurred” is an expense or loss that has been recognized but not yet paid.
- This term matters as it helps insurance professionals manage financial health and future payments.
- A common pitfall is misunderstanding the incurred losses which can create an incorrect view of the insurance company’s financial position.
- A quick win is to always count the losses that have been paid and those reserved as incurred losses in insurance.
What Is Incurred in Insurance?
In the world of insurance, ‘incurred’ is a term used to express the combined amount of losses that a company has paid and the amount it has in reserve for future payments. Incurred losses are calculated as the sum of paid claims and the reserves for yet-to-be-settled claims.
Incurred losses feature on the balance sheet of insurance companies. According to the accrual principle of accounting, such losses are recognized when they happen, not when the payment is made. This term is connected to broader coverage concepts in insurance such as policyholder claims and the ability of an insurance company to cover those claims.
Understanding ‘incurred’ is crucial as it affects the profit recorded by an insurance company and thus, influences the overall company’s financial health.
Key Related Terms to Know
- Accounts Payable – Money a business owes to its suppliers but has yet to pay.
- Outstanding Balance – Amount that is owed and yet to be paid off.
- Late Fees – Additional charges incurred for not paying a bill on time.
- Loss Reserves – The amount that an insurance company sets aside to pay future claims.
- Accrual Principle –The accounting practice of recognizing expenses and revenues when they are incurred, not actually paid.
Common Questions About Incurred
How is the term ‘incurred’ used in accounting?
In accounting, ‘incurred’ refers to when an expense has occurred but has not been paid yet. It is recognized when the goods or services are delivered, regardless of when the payment for these goods or services is made. This term adheres to the matches or accrual principle of accounting which states that expenses should be recognized in the same period as the revenues to which they relate.
How are incurred losses calculated in insurance?
In insurance, incurred losses are calculated by combining the losses that the company has already paid and the loss reserves, which are the amounts set aside to pay future claims. This allows the company to account for all recognized losses, both paid and unpaid.
What type of expenses can be incurred?
‘Incurred’ is a term that can refer to a variety of expenses. For example, a business might incur marketing costs to promote their products, legal expenses due to legal battles or even costs associated with disasters if they provide support to disaster-affected families.
What does it mean by “one incurs a debt”?
Incurring a debt means taking on an obligation to repay borrowed money or goods/services. The debt is incurred at the moment the money is borrowed or the goods/services are consumed.
Incurred vs. Paid
ncurred expenses are not paid immediately, they are recognized when they happen, not when the payment is made. In contrast, a payment is the transfer of money that settles an obligation. It may occur some time after an expense is incurred as per the agreed-upon billing arrangement.
Comparison Area | Incurred | Paid
|
Primary use case | Accounting and Insurance | All businesses |
Concept type | Financial recognition | Money transferring |
Typical exclusions | Amounts not recognized as liabilities | Amounts not yet transferred |
Who is most affected by errors | Businesses, insurers | Businesses, payers |
Common mistakes | Misunderstanding ‘incurred’ as ‘paid’ | Not recognizing payments accurately |
Real Claim Examples Involving Incurred
Scenario 1: Mr. Smith’s house was damaged in a fire incident while their insurance claim was still under processing. This damage is a cost that the insurance company has incurred but not yet paid. So in this case, Mr. Smith’s house repair costs were an incurred loss to the insurance company.
Scenario 2: Severe weather caused flooding in a town. An insured business suffered losses due to damage to inventory. The insurance company recognized the loss immediately. Even though the payment was made a few weeks later, it was counted as an incurred loss from the date it was recognized.
Scenario 3: A car accident resulted in a claim being filed to the driver’s insurance company. Part of the claim was paid immediately, while some of it was reserved for ongoing medical expenses. The total of the paid and reserved amount was the incurred loss to the company.
Limitations and Common Mistakes
Scenario 1: Mr. Smith’s house was damaged in a fire incident while their insurance claim was still under processing. This damage is a cost that the insurance company has incurred but not yet paid. So in this case, Mr. Smith’s house repair costs were an incurred loss to the insurance company.
Scenario 2: Severe weather caused flooding in a town. An insured business suffered losses due to damage to inventory. The insurance company recognized the loss immediately. Even though the payment was made a few weeks later, it was counted as an incurred loss from the date it was recognized.
Scenario 3: A car accident resulted in a claim being filed to the driver’s insurance company. Part of the claim was paid immediately, while some of it was reserved for ongoing medical expenses. The total of the paid and reserved amount was the incurred loss to the company.
How to Explain Incurred to Clients
Personal Lines client “Think of incurred like your credit card bill. You’ve made several purchases throughout the month (incurred expense), but you haven’t paid them off yet. The payment will come later.”
Small Business owner “You can think of ‘incurred’ similar to the costs you have in your business that you’re yet to pay. Like maybe some bills which you’ve received but haven’t paid off yet. In insurance, we count our paid losses and the losses we think we’ll have to pay in the future as incurred.”
CFO or Risk Manager “From an accounting perspective, ‘incurred’ refers to the recognition of expenses or losses at the time of occurrence, not payment. In the context of insurance, incurred losses include the sum of paid claims as well as reserved money for yet-to-be-settled claims. This understanding is crucial for examining an insurance company’s financial health.”