If the end-of-year unearned premium reserve increases, what is the effect on earned premium, all else equal?

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Multiple Choice

If the end-of-year unearned premium reserve increases, what is the effect on earned premium, all else equal?

The key idea is how the unearned premium reserve (UPR) relates to earned premium. The UPR is the portion of written premiums that hasn’t yet been earned, and earned premium for the period is the portion of premiums that actually becomes revenue during that period. Earned premium for the period can be expressed as beginning UPR plus premiums written during the period minus ending UPR. If the ending UPR increases, more of the written premiums remain unearned, so the amount recognized as earned premium for that period falls. So, an increase in the end-of-year unearned premium reserve leads to a decrease in earned premium.

The key idea is how the unearned premium reserve (UPR) relates to earned premium. The UPR is the portion of written premiums that hasn’t yet been earned, and earned premium for the period is the portion of premiums that actually becomes revenue during that period.

Earned premium for the period can be expressed as beginning UPR plus premiums written during the period minus ending UPR. If the ending UPR increases, more of the written premiums remain unearned, so the amount recognized as earned premium for that period falls.

So, an increase in the end-of-year unearned premium reserve leads to a decrease in earned premium.

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