Should you ever need to collect on an insurance claim, the insurance company is expected to have that money available. Otherwise, it is (aptly named) insurance fraud.
Insurance companies must have reserves set aside to cover insurance claims made by policyholders. It's not legal for an insurance company to collect the premiums if they can't reasonably, rationally pay claims as they legitimately come in. The level of balance sheet reserves is established based on the level of claims filed historically by that company's policyholders for a given level of risk, deductibles, and other dial-turning events in InsuranceLand, which is definitely not the happiest place on earth...where the theme song of the park remains, "It's A Risky World, After All."
Related or Semi-related Video
Finance: What are Aging Receivables/an A...70 Views
Finance a la shmoop what are aging receivables and an allowance for doubtful accounts
A lot of people don't realize this but that was the original title of Moby [Book title changes to Moby Dick]
Dick yeah all right My aching receivables that's your
balance sheet talking well wine is about the only thing that gets better with age [Wine poured into a glass]
and even it has its limits there yeah aliens go ahead and pour yourself a
glass all right when receivables a balance sheet item
that lives right here get old they - generally speaking get bad note how much
higher the probability of non collection called deadbeat-ism gets as the age of
the receivables increases well generally speaking bills that are gonna get paid
generally get paid fast or at least on time and those that don't have to be
tracked well best guesses matter in accounting so coming to an actual
predicted rational and reasonable number is a big deal and you can see that in [Man discussing receivables]
this case the spread between the legally owed money and the amount likely to be
collected is a pretty big spread well the decline hits the assets side of the
balance sheet in the form of accounts receivable here being lower and [Accounts receivable column highlighted]
eventually when a bad debt is finally recognized as a deadbeat bad debt never
to be collected and is dead dead dead well then it simply gets written off on
the income statement or well said another way it goes away as a sale that
never happened so that's aging receivables in a nutshell and yeah this [Aging receives inside a nut]
is the one time you don't need to respect the elderly [Man trips over elderly man and gives thumbs up]
Up Next
What is a balance sheet? A balance sheet is a financial document that public corporations are required to use. It shows their assets and liabilitie...
What is a Consolidated Balance Sheet? A consolidated balance sheet is one that includes all of the subsidiary companies’ aggregate balance sheets...
What is off balance sheet financing? Hit play to find out.