The distinction between accounting for events based on when they occurred versus when they are reported is crucial, especially in industries with long-tail liabilities like insurance. One method recognizes events as they happen, regardless of when claims are filed or paid. The other method groups events based on the reporting period, regardless of when the underlying event took place. For example, a car accident occurring in December 2023 but reported and settled in February 2024 would be attributed to 2023 under the first method and 2024 under the second.
This differentiation provides distinct perspectives for financial analysis and risk management. The occurrence-based method offers a truer picture of the underlying risk profile during a specific period. The reporting-based method, on the other hand, reflects the financial impact of claims processing and settlements during a given period. This historical context informs forecasting, reserving practices, and pricing strategies. Understanding both provides a more comprehensive view of financial performance and potential future obligations.