TAI REINSURANCE SOFTWARE BLOG
Stay connected to the people and software at TAI

[TAI Tips] How Leap Years Affect Annual Premium Calculations

February 2, 2016 / Reinsurance, Premium Calculations

leap year blog banner.png

As you know, approximately every four years we have what's called a leap year, a year with 366 days as opposed to 365. This additional day comes to us in February as the 29th day of the month. Intuitively, many of our clients would assume that 366 days in a year would affect the annual billing of their premiums, as one of the golden rules of annual premium calculation is to always divide by 365. So what happens in a leap year? Well, ultimately, I will address this question with this blog post, and share with you how leap years will not affect the calculation of your billed premiums. Let's learn more on how this is done.  

With the completion of your January monthly cycle, you will see the system dates roll forward to February 1 through February 29. 

Premium proration does not change for either monthly or annual cessions. The proration calculation always assumes 30 days for monthly billing, 90-92 days for quarterly billing and 365 days for annual billing. So, there will not be one additional day of premium paid on any cessions that cross February 29th.

In other words, if a cession calculates a premium that crosses February 29th, you will see the same premium as you would if the cession was calculated in the same time period in 2015. 

If you have policies issued on the 29th, 30th, or 31st of any month, there will be no difference in their processing during the leap year.  You have already seen that the reinsurance screen and billing history screen maintain the day of issue in the reinsurance dates during renewals in all months. So at times, on monthly renewals, you may see some invalid dates, such as February 31. However, the EDI extract will always sanitize those dates, to prevent errors if the data is imported to another system or database. That sanitization process involves simply replacing the invalid day with the last valid day of the month. Since this is a leap year, an invalid date of February 31 would be replaced by February 29. 

All of the above processing is common between mainframe and .Net installations.

In summary, the TAI System is designed to properly process and calculate your premiums no matter if there are 365 or 366 days in a given year. I hope that what I've shared with you today addresses any concerns that your teams might have had in the calculation of annual premiums. To learn more about TAI and the many facets of our System, head on over to our Reinsurance Software Solutions page.

 

Got questions on reinsurance processing? Get in touch!

Written by
Tom Freitas