Maintaining positive equity

For every policy, the insurer provides coverage, or service, for every day that the policy is in effect. However, the policyholder does not pay for each day of service as that day occurs. Instead, the policyholder pays for service only at specific intervals. This means that at any given point in time, there can be a difference between the amount of service provided and the amount of service paid for.

Equity is a measure of the amount of service that has been paid for minus the amount of service that has been provided. When equity is positive, the amount of service that has been paid for is greater than the amount of service that has been provided. Insurers generally want policies to have positive equity. This helps to ensure that the insurer is maintaining enough money in reserve for possible claims. Positive equity also prevents situations where a policy is canceled mid-term and the insurer must ask for a payment for services provided but not yet paid for.

The following diagram illustrates equity graphically. The horizontal axis represents the term of the policy. The vertical axis represents the policy premium. The solid brown line represents the theoretical graph of zero equity, in which the policyholder pays for every day of service as it occurs. The green dotted line represents a more typical graph of equity. The amount of service goes up only at specific points in time, namely when the policyholder pays an invoice.


Graph of zero equity compared to positive equity.

The green dotted line is also an example of positive equity. Invoices are paid in advance of service provided, so the amount of service paid for is always greater than the amount of service provided.

For every policy, BillingCenter displays the following equity information:

  • Policy equity – The financial amount of service paid for minus the financial amount of service provided. For example, if a policyholder paid $500 and has received $300 of service, the policy equity is $200.
  • The policy’s equity percent – This is defined as the policy equity amount divided by the total policy premium, expressed as a percent. For example, if the policy equity is $200 and the total policy premium is $1200, then the equity percent would be 200 divided by 1200, or 16.67%.
  • The number of days through which the policy is currently paid, rounded to the closest day. - For example, if a policy has a term length of 6 months (183 days), and the total policy premium is $1200, each day of service costs $6.56. If the policy equity is $200, the policy is paid through the next 30.5 days, which is rounded up to 31 days. If the policy equity is $199, the policy is paid through the next 30.35 days, which is rounded down to 30 days.
  • The date through which the policy is currently paid – For example, if a policy has been paid through the next 30 days and today is July 1, then the paid through date is July 31.