What Is an Unearned Premium?

Premium income is the consideration income that insurance companies collect from policyholders in order to fulfill their obligations under insurance contracts. It is the main source of funds for insurance companies, and it is also the main source of funds for insurers to fulfill their insurance obligations. Insurance companies make use of the time difference between capital inflows and outflows to form profit or loss through the use of funds and the centralized and decentralized management of insurance risks, which are significantly different from other industries. At the same time, there is also a connotative difference in premium income between short-term insurance business and long-term insurance business, which have formed the basic characteristics of insurance industry income. ^[1]

Premium income

There are two aspects of premium income:

From premium income

I. The premium income recognized by the enterprise (insurance) under this account.

The price of insurance products is divided into total price and unit price. Total price refers to each

China uses the same principles of recognition and measurement of premium income for long-term business and short-term business. Its principles regulate three conditions for the recognition of premium income: First, the insurance contract is established and the corresponding

According to the results of the above studies, there are different models for the recognition and measurement of premium income ^[3] in various countries, and there is currently no unified opinion on this issue in international accounting standards. Reports on premium income vary, causing difficulties in language communication for insurance accounting information in various countries. After the Ministry of Finance made major changes to the insurance accounting system and financial system in 1998, it formulated a unified specification for the recognition and measurement of premium income based on the characteristics of the professional operation of the insurance industry. The emergence of insurance derivatives does not have specific specifications, resulting in inconsistencies in the recognition and measurement of premium income among insurance companies. By comparing the principles of confirmation and measurement of China's insurance accounting system with those of other countries, we believe that the current accounting system of China's insurance companies has the following issues in revenue recognition and measurement that are worth studying: First, are long-term insurance business and short-term insurance business different? Confirmation principles. Because long-term insurance contracts and short-term insurance contracts have different characteristics in terms of income types, and the connotations conferred by insurance income are different, for example, premium income from short-term insurance business is directly related to insurance risks, while long-term insurance contracts are Investment characteristics, including income, savings, investment and other factors, risk factors are not unique; the second is whether the report of premium income is based on accrual basis. Due to the inconsistency between the insurance year and the accounting year, the income reflected in the current year includes the income portion of the next fiscal year.At present, although China's insurance accounting system has standardized the basic principles of the recognition of premium income, the premium income reported in the financial statements Basically it is the amount based on the realization system. Insurance companies pay business tax on the basis of the realization system. The third is whether the savings or investment components contained in long-term contract income should be used as income recognition. At present, China's additional savings and investment components included in long-term insurance contracts are recognized as income. However, because the income from additional savings and investment components has no direct relationship with insurance risk, if it is recognized as income, it largely violates the true purpose of insurance, causing China's insurance industry income and other countries' premiums. The recognition of income is different, which is not conducive to international exchanges and comparative studies of the insurance industry. At the same time, it is also not conducive to the supervision of the government regulatory department on the insurance industry; the fourth is whether there are different methods of revenue recognition under the generally accepted accounting principles and regulatory accounting principles. At present, international insurance accounting adopts different recognition and measurement models for premium income.The more commonly accepted models are: the deferral and matching model of the short-term insurance business and the asset-liability model; the deposit model and policy holding model of the long-term insurance business. Someone's interest model. Here is a basic evaluation of these models:

1. Recognition model of premium income for short-term insurance business

(1) Deferred and matched mode is also called deferred premium mode. Under this model, the insurer is fully recognized as an unexpired liability reserve when it receives the premium. On the premise that insurance risk equilibrium occurs, during the validity period of the policy, premium income is divided into unexpired liability reserves on a straight-line basis during the policy expiration period, and this amount is recognized as premium income; if the insurance risks are significantly uneven, some The state also allows unbalanced liability reserves to be allocated in an uneven manner and recognized as premium income at the corresponding amount. The deferred and matched model defers premium income, so that the time and amount of revenue recognition are synchronized with the same level of risk as insurance should bear, which meets the requirements of accrual system based on generally accepted accounting principles.

(2) Asset-liability measurement model. Under this model, the insurer's full corresponding premium collected at the beginning of insurance liability is recognized as premium income. At the same time, the insurer achieves the purpose of matching premium income and insurance risk liability in the financial report by drawing unearned risk reserves. The asset-liability model separately recognizes premium income and insurance unexpired risk reserves, which are not related to each other and are essentially different from deferred and matching models. From the analysis of the characteristics of the insurance industry, the insurer's receipt of insurance premiums through the conclusion of insurance contracts means that the insurer should provide insurance protection in accordance with the insurance clauses, which is the beginning of uncertain insurance risks. The liability assumed by the insurer shall represent the net risk of the insurer under the policy, and the premium paid by the insurer is not exactly the value of the risk of the insured subject. Therefore, the unexpired liability reserve generated by the deferred and matched model cannot fully describe the true status of the insurer's liabilities. The liabilities that the insurer should record are not deferred income, but unexpired risk liabilities.

The above two models introduced two different revenue recognition concepts to the short-term insurance business, and also led to different perceptions of insurance liabilities. The deferral and matching model complies with the basic constraints of accrual basis in accounting, linking income and related expenses, emphasizing the amount and time of reporting income, but avoiding the basic characteristics of the insurance industry, and setting a new standard for insurance liabilities. Not exactly defined. The asset-liability model emphasizes the principle that premium income and insurance liability should be independent of each other, taking into account the basic characteristics of insurance business, but in the recognition of income, the matching relationship between income and liabilities cannot be intuitively reflected from the accounting statements.

2.Recognition model of premium income of long-term insurance business

(1) The deposit mode of policy holders is also called the backward-looking method. Under this model, the investment and savings contained in the premiums received are generally recognized as an increase in deposit liabilities, and the balance of this deposit represents the rights of the policy holder in the insurance contract. At the same time, premiums containing insurance risks are recognized as premium income. With the changes in life insurance policies and the emergence of more prudent policies, the policyholder deposit model has become more popular. Such as universal life insurance, investment-linked products, variable life insurance, and index-type policies.Although these policies have different terms, each of them contains separate accounts for the policyholders.These accounts are mainly used to transfer the economy of different periods and different functions. Activities are not much different from bank deposit accounts. These businesses derived from traditional insurance products only provide services to policyholders and charge corresponding management fees. The policyholder deposit model and deferred matching model have similar practices in the recognition of liabilities.In the recognition and measurement of premium income, a different approach from the deferred and matching model is adopted, mainly due to the long period of long-term insurance business. In addition, insurance risks are uneven, and premium income cannot be deferred.

(2) The policy holder's interest model is also called forward-looking method. Under this model, the insurer is fully recognized as premium income when it receives insurance premiums. At the same time, in the current accounting period, the actuarial insurance uses forward-looking technology to directly measure the results of liabilities. The policyholder's interest model puts aside the relationship between income and liabilities, and uses present value technology in the measurement of insurance liabilities to calculate future insurance liabilities in a comprehensive consideration of future income. The principle of measuring income and liabilities separately is consistent with the method of measuring assets and liabilities. However, due to the use of discount technology for the measurement of liabilities in long-term insurance types, and due to the characteristics of long insurance periods, the use of different discount rates by insurers will inevitably produce different expected results for future income, which may have a far-reaching impact on insurance profit and loss. Inconsistencies with asset and liability measurement methods.

The above two models introduce two different recognition concepts for long-term insurance business premium income. The confirmation concept of the policy holder's deposit model is based on the past, and the portion of the insurance premiums that is charged to bear the insurance risk is recognized as income; the portion that is part of the savings and investment is recognized as a liability based on the results of past transactions. The recognition concept of the policy holder's interest model is based on the future. The risk, investment and savings in insurance premiums are not divided, and the full amount is recognized as income, and the debt is reasonably measured using discount technology. The main difference between these two models is the understanding of future liabilities, but neither can intuitively reflect the matching process of income and expenditure.