[E036]

equity in unearned premium reserve

An overstatement in the amount shown for this liability in the annual statement of an insurer. The overstatement is approximately 20-40% of an insurer's unearned premium reserve and is caused by statutory accounting requirements:

1) that initial expenses must be recorded immediately and cannot be deferred to track with premiums as they are earned and taken into revenue (as is done for expenses and income for other businesses).

2) that the sum of all premiums representing the unexpired portions of policies on the books must be kept in the reserve. The overstatement is the amount of initial expenses recognized, which will eventually flow to the surplus account with the passage of time.

(See unearned premium reserve.)