Premium Earning Patterns for Multi-Year Policies

Multi-year policies with large aggregate deductibles or multiple triggers raise some interesting issues with respect to the correct amount of the unearned premium reserve. Examples in this paper illustrate some of the difficulties that arise when trying to establish such reserves. The theoretical approach taken here is that the pure premium portion of the unearned premium reserve should always be exactly adequate to cover the remaining risk. This can lead to some unusual and controversial earning patterns; there are even situations where negative premium is earned. In addition, the earning pattern for a particular loss scenario can differ materially from the earning pattern that is expected when the contract is written.