by stan.teitelbaum » Fri Oct 08, 2010 01:44 pm
does earned premium include those portions of your charges that are fees? I mean fees and other types of charges that generally pass thru to agencies other than the insurance co.
Posted: Fri Oct 08, 2010 05:12 pm Post Subject:
What type of fees are you referring to? Specifically if you could.
InsTeacher
Posted: Fri Oct 08, 2010 05:30 pm Post Subject:
late fees, reinstatement fees and state charges they use to recoup costs associated with regulating insurance companies doing business in their state.
Posted: Sat Oct 09, 2010 05:19 am Post Subject:
You don't discuss the type of insurance you are asking about, although you are posting in the AUTO forum. "Late fees" and "reinstatement fees" however normally do not apply to life insurance, so I'm guessing you are asking about auto or homeowner's or commercial property/liability.
Generally speaking, if you pay an insurance company $1000 for a year of coverage, for example, and cancel your coverage 6 months into the year, your "unearned" premium will be $500. Your refundable premium may be less due to a "short rate" cancellation fee. (If the insurance company cancels you, generally they must refund 100% of the unearned premium.)
Some commercial P&C policies, especially surplus lines, may have contractual language that expressly states there will be no unearned premium refund for an early cancellation.
Posted: Sun Oct 10, 2010 01:41 pm Post Subject: same
Thx Max Herr. I'm asking about earned premium which is an industry standard term.
From what I hear only certain types of payments can be considered "earned premium" once they are consumed over time. And you do elude to the time factor but not the type of charge that can eventually become "earned premium".
I'm asking specifically about auto. I believe the insurance company cannot categorize the fees I mentioned as "earned premium". I believe you are answering from a non auto perspective, but I would have to think that in your product there are also fees that cannot be categorized as "earned income" by your marketing and accounting folks.
I believe that if you are in the trenches selling, you wouldnt use this term.
Posted: Mon Oct 11, 2010 12:36 am Post Subject:
Stan . . .
Actually, auto was included in the discussion I provided. Your auto premium is generally inclusive of all charges that apply to your coverage. However, "modal" fees (those $2, $3, $4, or whatever) that you pay in addition to the actual premium when you make your payments more often than once in a policy period are not subject to being "earned" nor are they refundable. This is simply a convenience charge to cover the insurer's additional "administrative expense" not factored into your premium.
Premium is "earned" for each day the coverage is in effect. So, as previously explained, if you pay $1000 per year, your insurer is "earning" about $2.74 per day of that premium. If you are 183 days into the policy year, the insurance company will have earned $501.37 of the $1000.
If THEY cancel your coverage at that point, you are entitled to a refund of $498.73 (certain state laws require a 5 day or longer advance notice of a cancellation, so the numbers are relative). The refund is known as a "pro rata" refund.
However, if YOU cancel the coverage, they will usually refund some less than that by withholding a "cancellation fee" -- and the refund itself is known as a "short rate" refund. Your contract will describe what or how the cancellation fee is calculated or applied. In an auto policy, it might be stated as a $50 or $75 fee, which is deducted from the "pro rata" refund. It might even be as much as "30 days" worth of premium.
You are correct that "late fees" or "reinstatement fees", if any are allowed in your contract, are not refundable -- they do not affect "earned premium". State premium taxes on the other hand are calculated as a percentage of the premium (or may be a flat amount per policy per year), but are not usually a "separately stated" amount you pay over and above the premium -- premium taxes are usually included in the premium.
California, for example, has an additional fee of about $0.90 per vehicle identified and INCLUDED as part of a policy's premium to fund auto fraud investigation activities around the state, over and above premium taxes. That fee would be part of the "unearned premium" -- albeit at the rate of about $0.005 per day.
I believe that if you are in the trenches selling, you wouldnt use this term.
I assume you are speaking of "earned income". Earned income is not part of the discussion when it comes to earned premium -- whether being discussed by an agent or an insurance company executive. Earned income comes from a different part of a company's financial statement (obviously, earned premium has an influence over earned income, but it is not the only influence).
In your original post, I see you mention: fees and other types of charges that generally pass thru to agencies other than the insurance co. There are no such CHARGES that "pass through" to agencies. But an insurance "broker" may have authority to deposit clients' premium checks into an agency's trust account, and from that account they send "net premiums" to the insurance company, and keep their commissions. If an insurance company issues a refund of premium, the broker is also supposed to refund a portion of their "unearned commission" (your reference to "earned income" perhaps?).
Brokers may also charge a reasonable "fee" as your representative in addition to the premium due to the insurance company. The broker's fee is stated separately in another written agreement between you and him (which is supposed to be provided in advance of your transaction through him). It is NOT part of the premium, does not affect "earned premiums", and may or may not be refundable -- the agreement will tell you whether it is or is not (commonly, it is not) refundable in whole or in part.
On the other hand, an insurance "agent" is a direct representative of the insurance company, and as such does not have authority to charge any fees not a part of the premium paid to the insurer. To do otherwise violates the agent's contract with the insurance company and also violates state licensing law. Checks written to agents are passed on to the insurance company, not deposited into an account the agent controls.
Posted: Mon Oct 11, 2010 01:16 pm Post Subject: same
Thx Max. That makes more sense. And yes, I was only speaking of Earned Premium. By "Pass Thru" I meant passing (eg tax) thru to governmental agencies. I believe I pay those to the Insurance Comapny but they turn around and "pass" the tax right on to the governmental agency.
Posted: Mon Oct 11, 2010 02:33 pm Post Subject:
Stan . . .
You are correct in the description of "pass through" fees or taxes which may be collected and/or paid by insurance companies. Agents and brokers may collect those taxes or fees along with the premiums they are paid by insureds.
Premium taxes are collected by state regulators directly from insurance companies, and are either a percentage of (base or total) premiums collected or are a flat fee (such as $1 per policy) as described in state law. Most states allow insurance companies to "include" premium taxes in the "gross" premiums quoted to and charged to clients, to collect those taxes, and then remit the taxes to the state as required.
Some insurance companies, especially in certain policies where fees are more clearly itemized (such as commercial property and casualty policies, workers' compensation policies), disclose the tax as a separate charge. Since premium taxes are not usually refundable, if such a charge is itemized, that portion of the premium a client pays would not be refundable if it is not also refundable (or creditable) by the state.
When any state-imposed tax or fee added to a premium is not separately stated (which would be the case with most life insurance policies, and with most auto and homeowner's policies), leading a consumer to believe there was no such tax or fee added into the premium, then that fee, whether refundable or not, would have to be refunded as a portion of unearned premium in the event of a cancellation, even if the included amount was not refundable to the insurer.
Posted: Mon Oct 11, 2010 03:49 pm Post Subject: same
good stuff Max. Thank you.
Add your comment