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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)
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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
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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
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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
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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
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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
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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
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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
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Finance Charge vs. Service Charge
- 1. Service Charge - expressed as dollar amounts
- 2. Finance Charge - expressed as percentage of amounts
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