Incurred liabilities for the payment of compensation include which components?

• A. An estimate of future compensation and an estimate for the administration of claims and legal costs
• B. Actual paid benefits to date
• C. Estimated penalties for late payments
• D. Future medical costs only

Answer: (A)

Incurred liabilities for the payment of compensation are reserves for all expected future cash outflows tied to claims that have occurred, not amounts already paid. They include two pieces: the estimate of future compensation to be paid to claimants, and the estimate for the costs to administer and defend the claims (loss adjustment expenses such as claims handling and legal costs).

Actual benefits paid to date are already out flows and are not part of the reserve for future payments. Penalties for late payments aren’t a standard component of this incurred liability, and focusing only on future medical costs ignores the needed administrative and legal costs. So the combination of future compensation plus administration and defense costs best represents the incurred liability.