Those who are elbow-deep in insurance daily throw around jargon like it’s nothing. This can leave the rest of us scratching our heads, trying to keep up or just giving up. As true business partners, we want everyone to be able to grasp insurance concepts and see how they apply to their organization. That’s why we started our “Explain Like I’m 5” series. We want to take sometimes confusing terminology and make it simple and digestible.
Today we simplify some captive financial statement terminology.
Total amount paid for the insurance policy. In the traditional marketplace, written premiums are the primary source of revenue for an insurance company.
Keeping in mind that premium is often paid prior to the start of the policy term, earned premium operates sort of as a measurement of both time and profit. In a year-long policy, it’s calculated by taking the annual premium and dividing by 365 days. That means a $365,000 policy would have an earned premium of $1,000 for every day of the policy that goes by without having to pay out a claim.
Fully Earned Premium
Premium can only be counted as fully earned when the entire policy term has passed without paying out any claims. In the traditional insurance marketplace, all that premium is considered a profit. In a captive program, that unearned premium is yours.
The amount of losses paid on reported losses
Case reserves established by the Claims Administrator for future payment of known claims
Incurred But Not Reported reserves are established through actuarial methods for claims that have not yet been reported or future development on known claims
Investment income earned by the captive and allocated to the underwriting years
The measurement of incurred losses (claims) to earned premium
Similar to loss ratio, but combined ratio adds operating expenses to the losses and the sum is then divided by the earned premium. This is considered the best measurement for how profitable a captive program is performing.
Every insurance captive works a little differently, and this information is for educational purposes only. As licensed insurance professionals, we can provide more detail and guidance for your specific needs. Contact email@example.com to get started.