Unearned Reinsurance Premium
The part of a reinsured premium that a reinsurer has not earned on an unexpired reinsurance policy.
Unearned Reinsurance Premium Details
An unearned reinsurance premium refers to the premium amount associated with the period remaining on a reinsured policy. The policy's premium that the reinsurance company has not yet earned because the policy is not yet expired. You may sometimes hear people refer to an unearned reinsurance premium as an unearned premium reserve.
A reinsurer or reinsurance company is a business that provides financial protection to insurance companies. An insurance company will pay reinsurers premiums similar to how an individual pays an insurance company premiums for insurance policies. A reinsurance premium is the amount an insurance company pays for a reinsurance policy with a reinsurer.
An insurance company or reinsurance company will calculate premiums using multiple indicators to assess risk depending on the type of insurance and the policyholder. If a reinsured policy is canceled, the remaining unearned portion of the reinsurance premium usually has to be refunded to the policyholder.
Example of an Unearned Reinsurance Premium
An insurance company will commonly seek a reinsurance policy to bring stability to their underwritten policies and distribute risk. When an insurance company pays a reinsurance company in advance premiums on a policy, the reinsurance company will have an unearned reinsurance premium notated in their balance sheet.
For example, a reinsurance company may have a prepaid 4-year reinsurance policy with premiums of $1,000 per year. At the end of the first year, the reinsurer will have earned $1,000, and the remaining $3,000 for the next three years is an unearned reinsurance premium amount.
Another example is that a reinsurance company receives $1,000 on June 25th for a reinsurance policy coverage from July 1st to September 30th. Since it is not yet within the coverage period, the reinsurance company will report the $1,000 as an unearned reinsurance premium.
Significance of an Unearned Reinsurance Premium
It is significant to take into account unearned reinsurance premiums, especially in a situation that a policyholder pays an advance premium. The reinsurer needs to acknowledge the unearned reinsurance component on their balance sheet because it is a liability. It is a liability because the reinsurance company would have to pay back this amount to the policyholder if the insurance company cancels the policy.
Unearned reinsurance premiums can be subject to return if a policyholder cancels their coverage or an insured item no longer needs coverage, like in a total loss situation. Although a reinsurance company may not have to issue a refund for an unearned premium in certain circumstances, it will still not be immediately recognized as earnings on the reinsurer's balance sheet.
History of an Unearned Reinsurance Premium
Insurance practices date back to 3000 BCE in the shipping industry when the Babylonians developed a system of maritime loans to relieve borrowers from the risk of accidents causing a total loss. The Romans also had plans for insurance, including burial societies providing an early form of life insurance.
One of the earliest agreements known to have reinsurance elements was a treaty dated July 12th, 1370, regarding a cargo ship sailing from Genoa to Sluis. An insurer transferred a risker part of the trip to another insurer. The latter insurer was acting similar to a reinsurer. However, reinsurance companies were not officially founded in various countries until the Industrial Revolution and the 19th Century.
The rise of reinsurance companies was mostly due to the need to support insurance companies that were nearly destroyed after incidents such as fires. For example, in 1842, a German company set up a subsidiary company to reinsure its business by appealing to shareholders.