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Short-Duration vs. Long-Duration Insurance Contracts
- 1. Short-Duration insurance contracts
- a) Most P/C contracts, term life insurance policies
- b) Insurer usually can cancel policy, revise premium, adjust provisions, or coverages at renewal
- c) Premiums are usually earned evenly over policy period
- d) Liability for unpaid claims and LAE accrued when events occur
- 2. Long-Duration insurance contracts
- a) Most life insurance contracts, whole-life, endowment contracts, annuity contracts
- b) Contract generally not subject to changes in provisions
- c) Premiums are generally level throughout, even though expected benefi ts are not
- d) Premiums are earned over the premium paying period of the contract when due from the policyholder
- e) Liabilities are accrued over the current and expected renewal periods of the contracts
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Premium De ficiency
- 1. Purpose is to reflect any perceived shortfall in unearned premium to cover all associated loss and expenses with a block of policies
- 2. Recognized if sum of expected claim costs and LAE, expected dividends to policyholders, unamortized acquisition costs, and maintenance costs exceeds related unearned premiums
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Disclosures in Financial Statements
- 1. Basis for estimating the liabilities for unpaid claims and claim adjustment expenses
- 2. Carrying amount of liabilities for unpaid claims and claim adjustment expenses presented at present value in the fi nancial statements and range of interest rates used to discount
- 3. Whether investment income is considered in determining premium de fficiency
- 4. Nature and signifi cance of reinsurance transactions, including assumed and ceded premiums and amount recoverable
- 5. Information on capital and surplus
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