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Deferral-matching vs UEP calculation
- current U.S. GAAP guidance is to recognize premiums as revenue over the period of the contract in proportion to the amount of insurance protection provided
- examples where pro-rata isn't adequate include seasonal risks, aggregate excess policies, warranty policies (incr as product ages), financial guarantee, multiyear policies
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Liability Adequacy Test
- UEP is considered deferred revenue
- liability adequacy test: used to determine if deferred revenue is sufficient to cover corresponding losses and expenses
- if UEP is inadequate, book an additional liability called premium deficiency reserve
- Canadian ASOPs require adjustment for PV discounting and provision for adverse deviation
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Premium Deficiency Reserve on the Balance Sheet
- U.S. GAAP accounting, reserve is established as contra-asset that reduces DAC, with a liability established only for the remainder after DAC = 0
- U.S GAAP and statutory exclude fixed expenses and general overhead expenses
- the more detailed the level of aggregation, the higher the prob of establishing a premium deficiency reserve and the higher its value
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