Unearned Premium Reserves - Change is in the Wind

In the past few years, the National Association of Insurance Commissioner (NAIC) has changed the required practices and procedures used to calculate unearned premium reserve. For the first time, the instructions to the 1998 statutory annual statements carried the requirement that the statement of actuarial opinion on loss reserves also cover certain unearned premium reserves in some situations. This paper looks at the new requirements as they pertain to long term contracts (using the NAIC's definition). The calculations can be somewhat complex and attempt to simultaneously accomplish goals that sometimes conflict. We carry through with examples showing the calculations for three different contracts with different characteristics but which should be somewhat representative of the types of contracts most likely to be encountered in practice.