Unearned premium reserve
|Unearned premium reserve|
Unearned Premiums Reserves (UPR or UEPR) are reserved premiums because the relevant insurance coverage period has not yet expired. This part of the income from contributions is recognized in the books during the accounting period. Part of this income is held at the end of the accounting period for risks that are not yet expired. This is the sum of unearned premiums from policies that are not valid on the day of estimation using the pro-rata temporis method, due to local regulations. A common situation is that in other countries, Unearned premiums reserves assume a value equal to the sum of all unearned premiums, which are reduced by deferred acquisition costs (B. Pavlović 2012, p. 4-5).
Unearned premiums reserves contain additional elements other than the premium itself (such as expenditure charges and risks). Not taking into account the transaction costs, unearned premiums reserves required pure premium reserve (T. Struppeck 2001, p. 50). R. L. Vaughan says that: “The Unearned Premium reserve is the largest liability on the balance sheet of most writers of Warranty Insurance” (R. L.Vaughan 2014, p. 1).
Usually, unrealized reserves of premiums going into the reserves of losses and surplus over the life of the policy are considered. Unfortunately, sometimes, losses occur faster than expected and in these cases, the excess may flow into the reserves of losses (T. Struppeck 2001, p. 54).
All insurers who draw up direct and / or established contracts or policies (excluding financial guarantee, mortgage guarantee and surety contracts) for a period of 13 months or longer, which the insurer cannot cancel and for which the insurer cannot raise premiums during this period in order to establish an appropriate unrealized premium reserve for each of the last three years of the policy, the reserve of unearned gross premiums must be not less than the highest score of the three tests. The three tests are:
- The most appropriate estimate of the amounts to be recovered for contract holders at the submit date.
- Gross premium multiplied by the ratio (a) to (b) where:
- (a) are the anticipated future gross losses and expenses that will be incurred during the period when the contracts expired;
- (b) is the estimated total gross losses and contractual expenses
- The amount of expected future losses and costs that will be incurred during the period of non-performance of the contract (after adjustment), reduced by the present value of future secure gross premiums (T. Struppeck 2001, p. 61).
Difference between unearned premium and unearned premium reserve
Unearned Premium is the part of the premium applicable to the unused term of the policy. The liability represented by the premium for unexpired risk associated with the insurer's books is called “Unearned premium reserve”. This is the amount of all premiums corresponding to unused parts of policies or contracts that the insurer or reinsurer has on its books as at a given date (T. Struppeck 2001, p. 47).
- Brander J., Manof S., (2003), ERM and DFA Using Active Knowledge Structures, The Casualty Actuarial Society Forum, Summer 2003 Edition
- Gould A. J, Linden O. M., (2000), Estimating Satellite Insurance Liabilities,
- Pavlović B., (2012), Unexpired Risk Reserve, Achieved Results and Prospects of Insurance Market Development in Modern World, Belgrade: Faculty of Economics, Publishing Centre
- Struppeck T., (2001), Premium Earning Patterns for Multi-Year Policies with Aggregate Deductibles, Journal of Actuarial Practice Vol. 9, Finance Department
- Vaughan R. L., (2014), The Unearned Premium Reserve for Warranty Insurance, Casualty Actuarial Society E-Forum, Fall 2014-Volume 1
Author: Katarzyna Satro