Unearned Premium Reserve

Definition - What does Unearned Premium Reserve mean?

Unearned premium reserve refers to policies that have not yet expired and therefore should be considered as liability in the balance sheet of an insurance company rather than income or revenue. It becomes earned only when the policies are past their due.

Insuranceopedia explains Unearned Premium Reserve

Policy owners pay premiums for risks. These payments can be considered as deferred income for an insurance company because these payments cannot yet be translated into income. It has to wait for the policy to expire before declaring it as such.

An insurance company even considers it a liability in its balance sheet. How so? Let's compare it with a store that takes orders. These orders might be cancelled at any moment. That is not income for the store. It is almost similar to policies that have not yet expired. These policies might be cancelled and the insurance company has to refund the policyholder. In another case, these premiums might be used to pay for a covered risk while the insurance term is still in place. Therefore, unearned premium reserve can even be seen as a potential financial loss.

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