Health Insurance Premium Income

[cacornwell]

Is all reinsurance included in direct premiums written for health insurers? Also, I am thinking that for heath insurers there would not be a big difference between premiums written and premiums earned since I think under SSAP No. 54 premium income is recongized when due. Am I thinking correctly or are there certain instances where they would be significantly different?

[Bruce]

1) In the Health Annual Statement (Orange blank), Page 4, Line 2 "Net premium income" ties to Underwriting and Investment Exhibit Part 1, Line 12, Column 4 which is total net premium written after all reinsurance ceded and assumed. The after reinsurance reporting is required by SSAP 54, par. 5. Premium written is defined in the Annual Statement Instructions as follows:

"Written premium is defined as the contractually determined amount charged by the reporting entity to the policyholder for the effective period of the contract based on the expectation of risk, policy benefits, and expenses associated with the coverage provided by the terms of the insurance contract. For health contracts without fixed contract periods, premiums written will be equal to the amount collected during the reporting period plus uncollected premiums at the end of the period less uncollected premiums at the beginning of the period."

So, written premiums are essentially premiums as due. This is in fact the definition of premiums in SSAP 54, par. 2.

2) However, health premiums don't hit the bottom line as written, but as earned. In the Annual Statement this is accomplished by summing Page 4 Lines 2 and 3, where Line 3 is the "change in unearned premium reserves and reserve for rate credits."

In many health companies, written premiums are the same amount as earned premiums, because the unearned premium reserves and reserve for rate credits are zero on the valuation date. This happens when coverage is written on a calendar month basis, meaning all premiums are earned by the last day of coverage, which happens to always fall on a statement date (month-end). It also happens in the Annual Statement when coverage is written on a calendar year basis and all premiums are fully earned on December 31.

However, you will often encounter companies in which some policies' periods of coverage overlap month-ends, resulting in unearned premium reserves. Accruals of rate credits (which when paid are reversals of premium) also affect earned premium.

In the Health Annual Statement, earned premiums are not reported as such in the income statement, but they do show up in other places like U&I(2C) Section C, the A&H Policy Experience Exhibit and the Supplemental Health Care Exhibit.

[CherylD-NIC]

For A&H contracts that are defined as short-duration under FAS 60, can you explain the GAAP vs Statutory accounting differences between written and earned premium if any? If there are differences is it just a matter of presentation on the financials or are there actual bottom line differences to consider?

[Glenn]

Cheryl,
I believe if you refer back to Bruce's initial response he has sufficiently responded to the definition of "written premiums". GAAP under FAS 60 does not use written premiums but rather under FAS 60 as you mention, premiums are recognized as "earned" so as you take down the initial unearned premium reserve you will then recognize the earned premium over the short duration contract pro rata.
Stat premiums will also be recognized on an incurred basis which Bruce defined earlier :

Per Bruce response:
written premiums are essentially premiums as due. This is in fact the definition of premiums in SSAP 54, par. 2.

However, health premiums don't hit the bottom line as written, but as earned. In the Annual Statement this is accomplished by summing Page 4 Lines 2 and 3, where Line 3 is the "change in unearned premium reserves and reserve for rate credits."

This should clarify for you.

Regards,
Glenn