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BACKGROUND
INFORMATION
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History of
the Unearned Factors
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[ Under
Construction, last updated: 02-06-2008 ]
Unearned factors is about how return premium is determined on cancelled insurance
policies. Since insurance policies are usually paid for in full in advance by the
insured, the historical problem described in this piece, is how the insurance industry
has evolved supporting agile business innovation and optimization, in this case,
in terms of determining the amount of return premium when a policy is cancelled.
There is no insurance industry functionality assumed to be more static, a non-issue
and non-evolving than the calculation to determine return premium on cancelled policies.
So, let's look at that assumption, since it's a major economic factor of production.
The question is - has the history of the unearned factors ended? Well, the current
state is: 1) the calculation is incorporated into automated accounting systems sold
by insurance industry software vendors as proprietary information management packages,
2) many 'old-timers' in the industry, in a pinch, know how to manually perform
the calculation using the slide-rule like device called the 'Calculator Wheel' which can still be purchased
today, and 3) some insurance companies use their own unique cancellation tables.
So, what's the issue? The problem is - the world isn't static. It's
in flux. The exact things assumed can't ever change, especially basic factors
of economic production, perhaps like how return premiums are determined, probably
will change in ways expected or not. Therefore, it is a reasonable endeavor to briefly
examine the history of the factors in terms of business innovation and optimization.
Then, conclude with brief look at how use of these factors can be expected to change
or not.
[Metadata figures here: Aggregate annual (global, regional)
insurance industry return premium = ? Amount subject to the factors= ? Percentage
of the amount has calculated with the customary ‘Pro-rata’ method = ?, ‘Short
Rate’ method = ? Use unique cancellation table = ?, etc., etc. ]
The overall idea of the unearned factors is both the insurance company and the insured
have the right to cancel an insurance policy at any time. Of course, there may be
exceptions to the right of an insurance company to cancel a policy depending on
local regulations and the class of insurance. Nevertheless, the history of determining
how much return premium gets returned customarily begins with determining who initiated
the cancellation request, the insurance company or the insured, and then how long
the policy was in force. Things do get a bit complex when factoring for policy endorsements
added and deleted, but the solution to that problem is simplified because same mathematical
tables are used to calculate return premium on cancelled policies as return premium
calculated on policy endorsements added and deleted.
Those actual mathematical tables have been basically standard and stable for a long
time. [See simple
web application demonstrating the basic
calculation] However, the approach of this history, and this may be novel, is to
consider the technology piece of the historical equation. The technology implementing
the customary math tables may now be as equally an important aspect of the practice
of determining return premium as the traditional math tables being implemented.
Moreover, it's now reasonable to at least consider the possibility that because
technology is evolving so rapidly and getting much more efficient, new implementation
techniques may eventually become so efficient as to change the assumptions behind
the use of the traditional unearned factors.
First, about the calculation itself. It's been standard insurance industry practice
for a long time that when the policy is cancelled by the insurance company the portion
of the premium to be repaid to the insured is determined pro-rata. The exact fraction
of the time of the policy which has not expired is determined and this fraction
of the premium is return to the insured. It's also been standard insurance industry
practice that when the policy is cancelled by the insured, the amount of premium
returned is determined by the "short rate". The short rate is an arbitrary
percent fixed by the insurance companies. Usually around 90% of the pro-rata, the
short rate is justified for such because of the relative higher expense involved.
[ future paragraph here ]
[ future paragraph here ]
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For more information about the Unearned Factors history project, send an email message
to
info@vinsurance.com
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