Study Note on Actuarial Evaluation of Premium Liabilities

In Canada, appointed actuaries are required to opine on the adequacy of the policy liabilities for property-casualty insurers. Policy liabilities include both claims and premium liabilities. Several papers have been written and actuarial techniques have been developed to estimate claims liabilities. Premium liabilities, however, have received little, virtually no attention in the actuarial literature. To date, we believe that only Canadian actuaries have been evaluating these liabilities. However, other countries are following that lead. We understand that in some states, regulators will soon require actuarial opinions on the adequacy of unearned premiums for policies with terms exceeding twelve months. The evaluation of premium liabilities consists of examining all related assets and liabilities to ensure that the anticipated net costs to discharge an insurer's obligations with respect to its insurance and reinsurance contracts, except its claim liabilities, are provided for. This paper intends to provide the practicing actuary with some guidelines on the evaluation of the premium liabilities. We will review the individual components of the premium liabilities and the related regulatory requirements and CIA recommendations. Finally, we will present an actuarial approach to evaluate the equity in the unearned premium, the unearned premium deficiency and the deferred policy acquisition expenses.