Net earned premium - Fall 2017 Q 17
Hi, I have a basic accounting question. Would it be possible to confirm the formula for net earned premium?
Is it net written premium + change in net unearned premium? Or do we add this? Where the change in unearned premium = ending UEP - starting UEP
For exam Fall 2017, Q17 calculates net earned premium in (b) as net written premium - (ending UEP - starting UEP) = 1450 - (700-0)
In contrast, Q25 calculates the NEP as NWP + the increase/decrease in UEP (in other words, NWP + (ending UEP - starting UEP). Hence my confusion!
Thanks in advance!
Comments
beginning unearned premium = expected premium we will earn this year
written premium = actual premium written (some is for next year)
ending unearned premium = expected premium we will earn next year [deducted from written premium]
Note: this logic can be applied to deferred[expense]/unearned[income] commissions.
So Earned premium this year = expected[this year] +( written - expected [next year] )
Also, Delta(unearn) = (end - beg), but we actually want (beg[this year] - end[next year])
So we actually want: -Delta(unearn) gets applied to the impact of unearned premiums on this year's earned premium.
Or final equation.
< Written - Delta (unearn) >
Note the logic above should help you remember if you forget during the exam.
WRITTEN + << NEGATIVE DELTA UNEARN >>
[this is for a simple company selling 1-year term contracts]
Thank you Chris! I've never seen it spelt out like that, makes sense.
My last question would be then, why in Q25 do we calculate net earned premium as net written premium + increase/decrease in net unearned premium? Under the above logic, should we subtract it? Therefore net earned premium = 67.9k - (-2k) = 69.9k?
Much appreciated!
I think the question says "decrease" in unearned. Double negative (trick question). eg. you ADD the decrease and SUBTRACT the increase in unearned premiums.
plus (-2000)
or
minus 2000
Ah I misssed that! Completely understand now. Thanks a lot and good luck with your studies!