The accrual or reserve for anticipated salvage and subrogation receipts would be recorded in which account?

Question

Options

• Adraft register reserve
• Bdebt-first reserve
• Ccontra-liability loss reserve
• Dunstructured reserve

• A
  6% (2)
• B
  3% (1)
• C
  81% (26)
• D
  9% (3)

Explanation

Option C is correct because salvage and subrogation recoveries are anticipated future inflows that reduce an insurer's net claim costs - they offset the gross loss reserve, which is a liability. A contra-liability account is specifically designed to offset a corresponding liability account, so recording anticipated salvage and subrogation receipts as a contra-liability loss reserve properly nets against the gross loss reserve on the balance sheet, reflecting the insurer's true expected net loss exposure.

Why the distractors are wrong:

• A (Draft register reserve): A draft register tracks claim payment drafts issued to claimants - it's a payment-processing record, not a vehicle for anticipated recoveries.
• B (Debt-first reserve): This is not a recognized term in insurance statutory accounting; it's a distractor with no standard meaning.
• D (Unstructured reserve): Also not a standard reserve classification; legitimate reserve types (IBNR, case reserves, etc.) are defined categories - "unstructured" is meaningless in this context.

Memory tip: The word "contra" means "against." Salvage and subrogation work against (reduce) losses, so they live in the account that works against the loss reserve - the contra-liability loss reserve. If the recovery reduces the loss, it belongs in the contra-loss account.

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