UPR and loss reserves

[Shaft]

I get very confused looks from co=workers when I tell them that UPR is a premium reserve and not a loss reserve They say "but we use the UPR to pay claims" and I say "oh, do you".

I gave someone this example: I pay $100 on 12.31.2001 for an auto policy. The company sets up a loss reserve of $80 against it. I cancel the policy 6 months later and they return $50 to me (from UPR) and the company reduces the loss reserves by $80 as I am loss-free and have no future claim on the company.

Is this a correct way to put it?

[Troy McClure]

On 2002-03-04 04:56, Shaft wrote:
I get very confused looks from co=workers when I tell them that UPR is a premium reserve and not a loss reserve They say "but we use the UPR to pay claims" and I say "oh, do you".

I gave someone this example: I pay $100 on 12.31.2001 for an auto policy. The company sets up a loss reserve of $80 against it. I cancel the policy 6 months later and they return $50 to me (from UPR) and the company reduces the loss reserves by $80 as I am loss-free and have no future claim on the company.

Is this a correct way to put it?


Well, the company never sets up a loss reserve for the full policy amount. On 12.31.2001 (the day the policy is written), the company holds 100 in UPR (I think most people call it UEPR). Six months later, assuming 80% LR, 50 will be remaining in the UPR, and 40 will have been moved to loss reserves. Then, when you cancel the policy, the company returns 50 to you, reduces the UPR by 50, and leaves in the loss reserves (IBNR, if no claims have been made yet) until claims are made.

The simple way to put it is, on 12.31.2001 it cannot be a loss reserve because no loss could have occurred yet. The UPR moves to loss reserve over the course of the policy - as the premium is "used up" to provide coverage, it moves from UPR to loss reserve.

[Ammie]

I usually tell them that loss reserves cover claims that have already happened while the UPR will cover future claims.

[Double High C]

On 2002-03-04 08:58, Ammie wrote:
I usually tell them that loss reserves cover claims that have already happened while the UPR will cover future claims.



FWIW, my thought was pretty much the same; well stated.

(I am not a Casualty Actuary, but UPR exists, either implicitly or explicitly, for life insurance - and all periodic pay products - also.)

Unearned premium reserves are attributable to premiums that are not earned yet (duh!), and hence are attributable to future losses, which may or may not occur. In addition, these reserves cover future profits and future (admin-type) expenses.

Loss reserves are intended to cover losses only, and these losses have already been incurred at the valuation date.

Furthermore, you might want to explain it in the following timeline:

1. Premium $'s is collected

2. Premium $'s is are earned

3. Some of Premium $'s go into loss reserve (this really happens instantaneously after Step #2)

4. Loss reserve $'s are used to pay claims