01.09. Unearned Premium

  1. 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
  2. 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
  3. 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
Card Set
01.09. Unearned Premium
Unearned Premium