Blanchard Premium

  1. 5 Possible Revenue Recognition Methods
    • 1. When the insurance contract is signed
    • 2. When the premium is due from the policyholder (e.g., Life insurance)
    • 3. When the premium is received
    • 4. When the insurance policy becomes eff ective
    • 5. Over time, as the risk covered by the policy runs off (deferral/matching approach; used by P&C insurers)
  2. Asset-Liability Approach To Premium Recognition
    • 1. Revenue recognized up front, once insurer gains control of asset
    • 2. Deposit premium liability
    • a) Needed if revenue recognized on eff ective date
    • b) Not needed if revenue recognized at date of sale or premium receipt
    • 3. Does not use Earned Premium
    • 4. Works best with policy/underwriting year
  3. 5 Items A ffecting Written Premium
    • 1. Deposits - premiums that are paid toward full policy premium that may be unknown at time
    • 2. Audits - used to determine the actual final exposure
    • 3. Endorsements / Cancellations - policies may be changed mid-term in a way that a ffects premiums
    • 4. Reinstatements - reinstate the original policy limit; used in catastrophe reinsurance treaties
    • 5. Retrospective premium adjustments - final premium determined based on losses incurred on contract
  4. 2 Purposes of Unearned Premium Reserve Under Deferral-Matching
    • 1. Recognize revenue over life of policy
    • 2. Ensure there's sufficient funds to cover the refund liability in event of policy cancellation
  5. Types of Premium Earned Before It Is Written
    • 1. Audit Premiums (Earned but not billed)
    • a) Premiums collected for any di fference between charged premium and actual premium after exposure is determined
    • 2. Reinstatement Premium (Earned by not reported)
    • a) Given current loss reserves, may be near certain
    • b) Actual payment not due until paid loss breach attachment point
  6. Treatment of Uncollectible Premium Written Off
    • 1. SAP treats this as negative "other income"
    • 2. GAAP treats it as an underwriting expense
    • 3. Another possibility might be negative premium
  7. Non-Pro Rata Approach to Calculating UPR
    • 1. Purpose: Match revenue with losses for policies for which insurance protection is not evenly spread over policy term
    • 2. Examples:
    • a) Seasonal Risks
    • b) Aggregate excess policy covering risk that total losses over certain period exceeds a certain amount
    • c) Warranty Policies
    • d) Financial Guarantee and other performance bonds
  8. 2 Items That May or May Not Be Treated As Premium
    • 1. Policyholder dividends
    • a) Treatment can vary based on rules of jurisdiction or preference of management
    • b) Can be a negative premium or positive expense
    • 2. Tax surcharges
    • a) Billed as a function of premium, but may not be included in reported premium
    • b) May not even be reported as part of income or expense
  9. Finance Charge vs. Service Charge
    • 1. Service Charge - expressed as dollar amounts
    • 2. Finance Charge - expressed as percentage of amounts
Card Set
Blanchard Premium