Premiums Question

[1695814]

Please describe the differences among due, deferred, and advance premiums.

Sincerely yours, :duh:

[Don Quijote]

Imagine the insurance takes effect January 1.

The premium is DUE January 1, and will normally be booked at that date.

Advance premiums would be premiums received in cash prior to January one which until 1/1 are not yet "premium", just some money the client gave us to keep for him for a while. This creates a liability on your balance sheet.

Deferred premiums would be those which, although DUE, through agreement between the company and the client are not yet paid. This creates an asset on your balance sheet.

Due and unpaid premiums are those premiums which are deferred without the agreement of the company.

[NoName]

Just an amplification of deferred: at least in the context I am familiar, this refers to premiums that are payable more frequently than annual. If premiums are semiannual at $1000/year, on 1/1 you would book $500 as either cash or premiums due, and another $500 as deferred. The second $500 really isn't due yet; it would be booked only if there is a liability item which was calculated on the assumption that all premiums are annual. (In other words, deferred premiums allow you to set reserves without having to consider the premium mode in the reserve calculation.)

[Actuary321]

I am surprised one of the expert's hasn't chimed in yet. But I will try.

I am in agreement with those posted above. To amplify what NONAME said the reason there is due, deferred and advance premiums is because of how reserves are calculated. Though since I haven't worked a lot with continuous net premiums I am not sure how it works with them.

When you set up a reserve liability, it is normally a mean reserve. This is the sum of the terminal reserve at the beginning of the year, the terminal reserve at the end of the year and the net premium for the year, all divided by 2.

Now since you have included a full years premium in the calculation of the reserve (liability) you should get to offset that with an asset for the full years premium. If the policy holder has paid their full annual premium then that is the asset. If they haven't then you need to find a way to get that full asset, thus due premium (those premium payments which should have been paid which have not yet been paid), deferred premiums (those portions of the annual premium which should have been paid had the premium been paid on the same baisis as reserves expect, but which has not been paid yet because of an agreement), and advance premium (any cash which has been paid for a period beyond the next policy anniversary).