Definition:

Premium Balance Receivables refer to the outstanding amounts owed to an insurance company by policyholders for insurance premiums that have been billed but not yet paid. These are considered current assets on the insurer's balance sheet.

Examples

1. An insurance company issues a policy with an annual premium of $1,200, and the policyholder opts to pay monthly. If the policyholder has paid for the first three months, the remaining $900 is considered a premium balance receivable.
2. A corporate client owes $50,000 in premiums for a group insurance policy, which is due in installments. The unpaid installments are recorded as premium balance receivables.

Formula:

Premium Balance Receivables = Total Billed Premiums - Collected Premiums

How to use the metric:

This metric is used by insurance companies to monitor the amount of premiums that are due but not yet collected. It helps in assessing the liquidity position and cash flow management of the company. High levels of premium balance receivables may indicate potential collection issues or inefficiencies in the billing process.

Limitations:

1. It may not accurately reflect the true financial health if there are significant delays in premium collections.
2. It does not account for the potential risk of default by policyholders.
3. It may vary significantly due to seasonal factors or changes in billing cycles.

Applies to:

Insurance industry, as it directly relates to the billing and collection of insurance premiums.

Doesn't apply to:

Industries outside of insurance, such as manufacturing or retail, because they do not deal with premium billing and collection in the same manner.

Summary:

Premium Balance Receivables are a key financial metric for insurance companies, representing the amount of billed but unpaid premiums. It is crucial for managing cash flow and assessing the efficiency of the billing process. However, it has limitations in terms of reflecting collection risks and may not be applicable to non-insurance industries.