!"#$%&##'$(()(*+*,-!"*.&/0)12*3%&4(%&1*5(&.$".

*(&#&(6&*7487"84/$)%*

24th method: Unearned premium

reserve calculation
Category: Opinion 28 Apr 2015
Written by Dennis B. Funa

EVERY nonlife insurance company must set

aside
and
maintain
an
amount
corresponding to the legal reserves required
under Section 219 of the Amended
Insurance Code.
Thus, Section 219 states: Every insurance
company, other than life, shall maintain a
reserve for unearned premiums on its
policies in force, which shall be charged as a liability in any determination of
its financial condition. Such reserve shall be calculated based on the 24th
method. Under the previous Insurance Code, Section 213 provided: Every
insurance company, other than life, shall maintain a reserve for unearned
premiums on its policies in force, which shall be charged as a liability in any
determination of its financial condition. Such reserve shall be equal to 40 per
centum of the gross premiums, less returns and cancellations, received on
policies or risks having not more than a year to run, and pro rata on all gross
premiums received on policies or risks having more than a year to run:
Provided, that for marine cargo risks the reserve shall be equal to 40 per
centum of the premiums written in the policies upon yearly risks, and the full
amount of the premiums written during the last two months of the calendar
year upon all other marine risks not terminated. Thus, in calculating the
unearned premium reserve, the Philippines shifted from the 40-percent
method to the 24th method. The 40-percent method simply imposed a flat rate
of 40 percent as the reserve requirement.
Apparently, the move was to keep the Philippines aligned with other Asian
countries. Before we proceed, we will have to understand the concept of
earned and unearned premiums. In determining the earned premium, the
length of the policy and the time period that has elapsed will have to be
determined. Thus, if premium has been paid for a one-year home insurance
and nine months have elapsed, then the insurer has earned premium
equivalent to three- fourths of the premiums paid, representing the nine
months. The rest of the paid premium would, of course, be the unearned
premium. To give it a definition, unearned premium is that portion of premium
which is not earned by the insurer, i.e., the amount of premium that relates to
the policy period that has yet to be utilized or is still an ongoing concern or
being the unexpired future periods of cover. And pursuant to Section 219, a

0//5299:::;<"#$%&##.$(()(;7).;5091)7/($%&=)>=7)%1)%4/$)%=&?584$%&19*

!"#$%&##'$(()(*+*,-!"*.&/0)12*3%&4(%&1*5(&.$".*(&#&(6&*7487"84/$)%*

reserve has to be established for the unearned premiums, which shall be

charged as a liability. It is an actual liability in the balance sheet.
There are different methods of computing the reserves for unearned
premiums. Among these are the flat-rate method, the pro rata temporis
method, and the fractional value method that includes the 1/8th method, the
1/12th method, and the 1/24th method or the 24th method. Different
jurisdictions require different methods. Some jurisdictions require no method
at all, like the United States. The Philippines now requires the 24th method.
For a definition of the 24th method, we shall adopt that given by the
Accounting and Reporting for the Non-Life Insurance Industry (Statement of
Financial Accounting Standards 27), which states: [It] is a method for
computing an unearned premium reserve. It is computed by combining
premiums having the same term [e.g., 12, six or three months, one month or
any other term], each group being divided by the month in which premiums
were written and each premium deemed to have been written in the middle of
the month. Accordingly, any 12-month premium written in January will be
considered to have been written on January 15 and will, therefore, provide
coverage for 15 days beyond the closing date, i.e., 1/24th of the premium in
question. A premium written in December of the same year will be deemed to
take effect as of December 15 and provide coverage beyond the closing date
of 23/24th of the said premium. We may add: [It is] a basis for estimating
unearned premium reserves based on the assumption that premiums are
received evenly over each month and risk is spread evenly over the year.
Twelve months divided at the 15th of each month is equal to twenty four.

****
Atty. Dennis B. Funa is the Insurance Commissions deputy commissioner for
legal services. Send comments to dennisfuna@yahoo.com.

0//5299:::;<"#$%&##.$(()(;7).;5091)7/($%&=)>=7)%1)%4/$)%=&?584$%&19*