Long tail, Uninsured or Self Insured Losses on The Balance Sheet? What to Do???

Many business owners I talk with who have to account for uninsured losses, think these claims are cash and expense items only. The reality however is uninsured losses tend to not get settled quickly and you have to account for their eventual payouts on your balance sheet. They are usually long and drawn payouts and settlements.

This comes as a surprise to many business owners when their accounting folks put a big fat long term liability on the balance sheet for losses that have not been completely settled or closed. To rub salt in the wound, even after they are settled and expensed, many advisors suggest keeping some liability on the balance sheet as sometimes claims become active again down the road. This is called liability reserving for future losses.

This is a hard pill to swallow for business owners and CEO's.  Having a long term uninsured or self insured claim liability on the books which may take years to clear out, can hurt the business financials. This is especially true when it is time to get bank loans and capital,  participate in a merger or sale,  going public, or trying to attract investors.  

The good news is there are some risk management and insurance tools available to clear these out. Using alternative risk financing, which can transfer losses to an insurance company, is a way to move these long term uninsured claims off the balance sheet. I will dedicate a separate blog on alternative risk financing in the near future.

Until then be careful out there and know your risks!

Posted by: G. Kevin Nemith CIC. CRM  Agency Leader for Hilb Group of Delaware, a division of  Hilb Mid-Atlantic Group.

knemith@hilbgroup.com

Top 20 insurance brokers and risk managers in the USA. 

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