Concepts, Rules, and Examples

Premium Income

Premium income is recognized differently for short and long duration contracts. For short duration contracts, premium income is recognized over the contract term in proportion to the amount of insurance provided. In the case of long duration contracts, revenue is accrued as the premiums become due from policyholders, except for contracts that provide benefits over a term longer than the premium payment term (such as twenty‐year life policies), in which case income is recognized over the longer period during which benefits may be provided.

Claim Cost Recognition

Costs of benefits are recognized when insured events such as property damage occur. Estimated costs are accrued for as claims incurred but not yet reported. For long duration contracts, the present values of estimated future benefits are accrued, net of the present values of future net premiums to be collected. Accrual of these benefit obligations generally involves actuarial determinations. Accountants may be dependent on the services of specialists in such cases, as they are in computing costs related to defined benefit pension plans. Recognition of other expenses is governed by the matching concept. For example, costs that vary with acquisition activity are capitalized and amortized over the period during which premium income is earned. Catastrophic losses (as from natural disasters such as hurricanes) are accrued under the guidelines of FAS 5: when impairment of the asset ...

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