Exposure-Based Premium Audits and Adjustments
Insurance premiums are often determined based on underlying exposures of the risks insured. At the onset of the contract, an estimated premium is paid by the policyholder to the Insurer based on a rate per exposure. The Insurance Company earns the estimated premium evenly over the term of the contract. At the financial statement measurement date, exposures are re-estimated and a premium adjustment is recorded. Subsequent to the expiration of the policy, an exposure-based premium audit is finalized to determine the actual exposures insured and a premium audit is recorded. The premium audit is earned immediately since the premium audit is performed after the policy expiration.
Statutory-based financial statement filers must make an additional consideration for earned-but-unbilled premiums (EBUB) that are in excess of collateral. A nonadmitted asset is recorded for 10% of EBUB in excess of collateral.