What Is a Portfolio Entry?
A portfolio entry is an account of all liabilities a reinsurer is responsible for when entering treaty reinsurance. A portfolio entry accounts for unearned premiums from policies that are inactive during an accounting period, as well as unearned premiums that carry over into a future accounting period.
- A portfolio entry is an account of all liabilities a reinsurer is responsible for when an insurer transfers liabilities to it through treaty reinsurance.
- Each entry in a portfolio is a policy that the insurer has ceded to the reinsurer.
- As premium payments are made by the insureds, the insurer transfers them to a separate account maintained by the reinsurer; after some time, the corresponding entry is marked as an earned premium.
Understanding a Portfolio Entry
An insurance company continuously underwrites policies over the course of the year. At any given time, it will have a portfolio of policies with different expiration dates. At the end of a reporting period—such as a fiscal year—the insurer must identify the dollar amount of premiums earnings and the remaining dollar amount of unearned premiums. Earned premiums are associated with policies that have ended. Unearned premiums, considered liabilities, represent premiums collected on active insurance policies. Active policies are a liability for the insurance company because the policyholder could still file a claim before the expiration of the policy contract.
Reinsurance treaties allow an insurance company to transfer some of its underwriting liabilities to a reinsurer. In exchange, the reinsurer receives a portion of the premiums that the insurer collects. A reinsurer is a company that provides financial protection to insurance companies. Because reinsurers handle risks that are too large for insurance companies to handle on their own, reinsurance companies make it possible for insurers to obtain more business than they would otherwise be able to.
The reinsurance company assumes existing obligations and the risks associated with the insurer’s loss reserves and unearned premiums. Reinsurance treaties basically transfer the liabilities related to unearned premiums from the insurer to the reinsurer. Because reinsurance treaties have fixed time frames, like insurance contracts, accounting for portfolio changes is a critical part of understanding a reinsurer’s risk exposure.
In reinsurance, the term "portfolio" refers to existing insurance policies the insurer ceded. Ceded items may include claims that have yet to be paid, new policies ceded by the insurer, and reinsurance renewals. Thus, the portfolio represents an account of the reinsurer’s premium portfolio, loss portfolio, and investment portfolio.
An insurer must list the value of unearned premiums associated with unexpired policies at the end of a reporting period. A reinsurer must also account for unearned premiums and evaluate its exposure to unearned premiums in an accounting year. When a reinsurance company receives premiums from the ceding company, it deposits them in an unearned premium reserve account. The account is used to pay for future claims. As time passes, a portion of the premiums is removed from the unearned premium reserve and marked as earned. The earned premiums represent the reinsurer’s profit.
When a reinsurance treaty expires or is canceled, the reinsurer can shift liabilities back to the ceding company by paying them for any premiums it collected but remain unearned.