Unearned Premium Reserve

fhorsman1

I am not understanding the figure for Unearned Premium Reserve.

Odomirok pg36:

Additional detail of the composition of the unearned premium recorded on page 3 (Liabilities,
Surplus and Other Funds) of the Annual Statement can be found on page 7, which is part of
the U&IE. Page 7 (U&IE Part 1) shows the breakdown of the total unearned premium into the
following four categories:
• Amount unearned (running one year or less from date of policy)
• Amount unearned (running more than one year from date of policy)
• Earned but unbilled premiums
• Reserve for rate credits and retrospective adjustments based on experience
The first two categories above are relatively self-explanatory and separate the unearned
premium related to policies with effective periods that are one year or less and policies with
effective periods that are longer than one year. The third category, earned but unbilled
(EBUB) premiums, includes estimated adjustments that will occur to the premium on audit type
policies where the actual amount of premium depends on some exposure measure, such
as payroll, and is unknown until the end of the policy period. EBUB premiums are only
recorded if they are reasonably estimable in the aggregate. The fourth category represents
the expected adjustments that will occur on retrospectively rated policies, where the premium
is variable based on the loss experience on the policy.

In the exhibit, Column 5 (Total Reserve for Unearned Premiums) is the sum of the 4 bulleted categories above. But the amount recorded as a liability is not the sum of Col 5 for all LOBs. There are additional adjustments on lines 36 and 37 of U&IE which appear to reverse the amounts in Cols 3 and 4 (but not exactly).

Related to S14Q14.

In this question they ask you to calculate the balance sheet liability for UEPR, and they only add Cols 1 and 2. What is the purpose of lines 36 and 37? Is it simply to reverse the effects of Cols 4 and 5? Why would we do that?

graham

This is not fully explained in Odomirok, but here's what I know should generally be true:

• The values on lines 36 & 37 of the U&IE (Part 1) should exactly reverse columns 3 & 4.
• This is the "base value" for the UEPR on line 9 of the liabilities.
• This "base value" is then further adjusted by several other items to get the final value for line 9.

Unfortunately in the Liberty Mutual example I included in the wiki, lines 36 &37 (as you said) don't quite fully reverse columns 4 & 5. I don't know why not. There is probably a very specific accounting reason for this that's related to details of Liberty Mutual's business. (Maybe a portion of the EBUB premium is not reasonably estimable and that's the source of the difference? Maybe for column 4, there were further adjustments to retrospectively rated policies from a prior year that are rolled into the totals for the current year? I'm only guessing but that seems like a reasonable explanation.)

Also, the value given for UEPR on line 9 of the liabilities doesn't seem to balance to the U&IE, even after making the stated adjustment for "unearned premiums for ceded reinsurance." I don't know why this doesn't work. There is obviously something more going here that just isn't explained.

So for the exam problem 2014.Spring Q14, the reason they only add columns 1 & 2 to get the UEPR is that columns 3 & 4 are supposed to be exactly reversed by lines 36 & 37. I have to think that's all you need to know for the exam.

Odomirok is really just an overview for actuaries on how the annual statement works. To actually create the annual statement requires an accountant's expertise and there is a lot more to it than is covered in Odomirok.

fhorsman1

Thank you.