In the situation that at year end an insurer is aware that there has been flooding in an area in which it has insured policy holders against flooding,the insurer should estimate the probable claims and treat them as an expense of the current period even though the claims have not yet been made.

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This statement is in accordance with the principle of accrual accounting, where expenses are recognized in the period in which they are incurred, regardless of payment timing. The insurer should estimate the probable claims and recognize them as an expense of the current period. This is known as the principle of prudence, which states that losses and expenses should be recognized as soon as they are anticipated, even if not yet certain.

In the Situation That at Year End an Insurer Is