Premium Received and Premium Receivable
Context:
The PAA formula at initial recognition is
LRC = UEP - Prems Receivable - DAC
= Premium received - DAC
and since at time 0 UEP = Premiums received since no premium has been earned yet and premiums receivable = 0, we have
LRC = UEP - DAC
Question:
1. Can you explain what is premiums received and why is it equal to UEP at time 0?
2. Also, what is premiums receivable and why is it equal to 0 at time 0?
Originally, I thought that premiums received is the premium amount we have collected and premiums receivable is the premium amount we have yet to collect. If that is the case, say we have a contract that pays in instalments. It has total premium of $1000 and pays 40% at inception and 60% mid policy term.
In such case wouldn't we have the following at time 0?
UEP = $1000
Premium Received = $400
Premium Receivable =$600
Comments
Your understanding is correct regarding the definition of premiums received, but for premiums receivable those can only be booked after the policy has incepted which is why it is zero here.
In your example here, UEP will be 400