Unearned Premium Reserve
What Does Unearned Premium Reserve Mean?
Unearned premium reserve is an account where an insurance company places advance insurance payments. Considered as liabilities in its accounting books, the payments have the possibility of being returned to the clients. These payments are going to be returned if policies are canceled before the period of coverage period begins.
Insuranceopedia Explains Unearned Premium Reserve
A person paid $1,000 an insurance company in January to cover him from March to July. For two months, January and February, that amount is considered unearned premium since coverage has yet to start in March. Should that person cancel the policy before coverage, the company has to return his payment. The policyholder might also just receive a fraction of the payments if a time period is already covered and therefore earned. Like in the mentioned example, if he decides to cancel the insurance in April, then he will not get a total reimbursement since the month of March is covered in the policy.
There are valid reasons why a company might not return the premium, such as false information entered in the application.