TAILIEUCHUNG - Premium Accounting By Ralph S. Blanchard III, FCAS, MAAA

Income statements in the accounting world focus heavily on revenue as a function of company volume and as a measure of company growth. The principal source of revenue for insurance companies is premium from insurance sales. (The other principal source of revenue for insurers is typically investment income.) The timing of when a company can recognize sales revenue in its income statement is a major issue for most accounting systems. This has occasionally been a source of fraud or earnings management in various (non-insurance) industries, such as companies involved in the sales of consumer goods or. | Premium Accounting By Ralph S. Blanchard III FCAS MAAA May 2005 CAS Study Note Premium Accounting The purpose of this study note is to explain the key accounting concepts and issues in the recording and evaluation of premium information specifically with regard to financial reports. Issues to be addressed by this study note include Revenue recognition written premium versus earned premium Written premium components Unearned premium issues Unearned premium and loss reserve interaction Miscellaneous topics A glossary is included at the end of the study note for certain terms involved in premium accounting. Revenue recognition Income statements in the accounting world focus heavily on revenue as a function of company volume and as a measure of company growth. The principal source of revenue for insurance companies is premium from insurance sales. The other principal source of revenue for insurers is typically investment income. The timing of when a company can recognize sales revenue in its income statement is a major issue for most accounting systems. This has occasionally been a source of fraud or earnings management in various non-insurance industries such as companies involved in the sales of consumer goods or in the sales of services. Some companies facing perceived growth targets from investors have tried to accelerate the recognition of sales revenue or manage its timing to bank high growth periods to release into income during future times of low growth. Hence the accounting world s major concern with the timing of when sales revenue such as insurance premiums should be recognized. For insurance these are several possibilities for determining when the policy premium will be recognized as revenue. These include When the insurance contract is signed When the premium is due from the policyholder When the premium is received When the insurance policy becomes effective Over time as the risk covered by the policy runs off Many life insurance accounting systems .

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