2. Unexpired risk reserve (URR) works somewhat similarly like UPR. However for URR an actuary will be called to assess the development of losses with reference to time factor. The insurer needs to maintain an extra level of reserve (usually in the form of PROVISION FOR PREMIUM DEFICIENCY) if the appointed actuary deemed that the specified ‘unearned premium reserve’ level is not sufficient to meet its ongoing or future obligations.
EQUATION RELATIONSHIP
1. When there is relisable profits @ Unearned Premium Reserves (UPR) = Unexpired Risk Reserves (URR) + Provision of Risk Margin for Adverse Deviation (PRAD) + Unrealised Profits
2. When portfolio incurred losses @ Unexpired Risk Reserves (URR) + Provision of Risk Margin for Adverse Deviation = Unearned Premium Reserves (UPR) + Premium Deficiency Reserves
CLAIMS FORECAST FOR UNEXPIRED RISK RESERVES
1. A forecast is made of the claims that are expected to occur in the future in relation to the unexpired exposure of a certain class of business (or homogeneous subgroup of it, if applicable), including the expected claims management expenses for that portfolio.
2. It is important to note that for the determination of the Unexpired Risk Reserve we are only concerned with claims that might occur in the Unexpired Exposure Period.
3. Homogeneous risk groups should be used to forecast the claims (e.g. motor third party liability bodily injury) where there are material differences in the claims characteristics (timing, amount, uncertainty etc) within each class.
4. Different models for frequency or severity of Attritional Losses, Large Losses, Catastrophe Losses, and exposure can be made for each risk group or class as deemed appropriate by the actuary.
5.The Claims Forecast must include all claims which might occur in the Unexpired Exposure Period including:
(i) Claims which are reported after the end of the Unexpired Exposure Period, but have occurred within the Unexpired Exposure Period.
(ii) Claims which are reopened at any date, but have occurred within the Unexpired Exposure Period.
6. The forecast should allow for the ultimate cost of all claims, allowing for factors not exhausted to the following:
(i) Any future development of the claims from the date of occurrence until their final settlement
(ii) Any claims which are expected to be reported after the end of the unexpired exposure period, but occurred within that period
(iii) Inflation/trends which are appropriate for the type of claims (e.g. court award inflation)
(iv) Inflation which is appropriate for the timing of expected payments
(v) The legal/judicial environment of the Unexpired Exposure Period and until the final settlement of all claims
(vi) The economic environment of the Unexpired Exposure Period and until the final settlement of all claims
(vii) Claims handling practices expected in the Unexpired Exposure Period and until the final settlement of all claims
(viii) Changes/trends in the frequency/severity
(ix) Claims with low frequency (and large severity) which might have not been observed in the most recent year(s).
EXPENSE FORECAST FOR UNEXPIRED RISK RESERVES
1. The expenses that are associated with the unexpired part of a risk constitute an important component of the overall analysis leading to the determination of the need for an Unexpired Risk Reserve and of the level of such reserve.
2. The categories of expenses that are used for the calculation of the URR are Claims management expenses (for which a part of them will be allowed for in the calculation of the outstanding claims reserve and a part in the calculation of unexpired risk reserve) and Maintenance Expenses.
3. Not forgetting to take account of factors not exhaustive to the following:
(i) Inflationary increases
(ii) Budgeting differences resulting from new staff recruits, extraordinary items in expenses that may not be recurrent, etc.
(iii) Circumstances under which maintenance expenses may be assumed to be spread unevenly over the life span of a policy.
REINSURANCE FORECAST FOR UNEXPIRED RISK RESERVES
1. Reinsurance might be considered either in the claims component or the expense component (as reinsurance net expense) and includes Reinsurance Claims Recoveries, Reinsurance Premiums or other Charges Paid, and Reinsurance Commission or other Income Received
2. Reinsurance Claims Recoveries include the following characteristics:
(i) In principle Reinsurance recoveries should be modelled separately from gross claims.
(ii) The reinsurance structure which will apply in the Unexpired Exposure Period for each risk group should be used
(iii) The reinsurance structure should be applied to the gross claims of each risk group
(iv) The cost of any additional expected reinstatement premiums should be included.
3. Reinsurance Premiums or other Charges Paid include the following characteristics:
(i) Any reinsurance premiums or other charges which will apply in the unexpired period should be included.
(ii) This includes the cost of any additional expected reinstatement premiums which should be consistent with the gross claims forecast and any expected reinsurance recoveries.
(iii) Additionally this should include the cost of renewing any reinsurance policies which expire in or before the unexpired exposure period.
4. Reinsurance Commission or other Income Received include the following characteristics:
(i) Reinsurance commission would partly be considered in the Deferred Acquisition Costs component if it is deferred.
(ii) Any other income expected to be received can also be included by making conservative assumptions which are consistent with all the other assumptions regarding gross claims
DATA GATHERING AND SCRUBING FOR URR
1. In general the actuary should make the following considerations with respect to data used for the determination of the Unexpired Risk Reserve. The claims forecast in principle should be based on historic data as well as qualitative information.
2. The main data items used for claims forecasting are:
(i) Claim payments
(ii) Claim reserves
(iii) Number of claims
(iv) Exposure data
(v) Premium data
3. The historic data to use depends on the relevance of the data to the Unexpired Exposure Period and the credibility of the data.
EQUATION FOR URR
Note:
(i) E [Claims] = Claims Expected to be incurred after the Valuation Date on policies with Unexpired Exposure Periods as at the valuation date, including the part of claims management expenses that relates to these claims
(ii) E [Expenses] = Expenses Expected to be incurred after the Valuation date on policies with Unexpired Exposure Periods as at the Valuation Date
(iii) UPR = Unearned Premium Reserve as at the Valuation Date
(iv) UPI = Unpaid Premium Installments as at the Valuation Date to the extent that they are not included in the UPR.
(v) DACUPR = Deferred Acquisition Costs relating to the premiums considered for the calculation of the UPR
(VI) DACUPI = Deferred Acquisition Costs relating to the premium installments considered for the calculation of the UPI
(vii) Acquisition expenses are all expenses (both direct and indirect) connected to the processing of proposals and the issuing of policies. They include both direct expenses, such as commissions, and indirect expenses, such as advertising costs or the administrative expenses connected with the processing of proposals and the issuing of policies. Deferred acquisition costs are part of acquisition costs to be paid during the current financial year, but in the company books can be carried forward into the next financial year in accordance with the duration of the policy.
ADJUSTING DATA
1. The data used might need to be adjusted to make it relevant and fit for purpose. A number of adjustments can be made to make the data relevant to the Unexpired Exposure Period. Differences between Unexpired Exposure Period and Historic Data could be due to the factors not exhaustive to the following:
(i) Inflation of each claim type
(ii) Mix of business/products/covers in each risk group
(iii) Mix of claim types
(iv) Changes in terms and conditions
(v) Changes in underwriting practices
(vi) Changes in claims handling practices
(vii) Changes in the economic environment
(viii) Changes in the legal environment, Changes in the tax environment
(ix) Frequency of each claim type, Severity of each claim type
(x) Frequency of claims settled with nil payments
(xi) Changes in the exposure measure (e.g. premium rates, property inflation)
(xii) Changes in the attitude of policyholders
(xiii) Changes in cover/limits/deductibles etc
(xiv Premium rate changes
2. The calculated reserve should also be adjusted to allow for known events between the accounting date and the computation date.
3. Underlying assumptions would necessitate different treatment due to changes in circumstances such as following:
(i) Known trends in premium rates
(ii) Known factors influencing the level of claims in respect of unexpired risks
(iii) Budgeted or planned changes to levels of expenses
(iv) Exceptional levels of claims in the most recent year which are not expected to
repeat
THOUGHTS
1. All accounting class must be evaluated separately to assess whether there is a need to form a URR and to determine appropriate URR.
2. It is reasonable to group together certain types of insurance, if it can be established that the method of calculating and the prospective claims are similar.
3. In cases where data for certain types of insurance are insufficient for credible statistical calculation of specific URR it is also recommended to group certain types of insurance. However, it should be done with caution, and the reasons for this should be fully documented.
4. If different types of insurance business may lead to different results, these segments can be analyzed individually.
5. The UPR is calculated by taking a proportion (not necessarily pro-rata) of the premium actually received. If the premium is too low then taking a proportion of it is not going to cover future claims, and you need an extra amount to bring you up to the URR. (This extra amount is often called the additional unexpired risk reserve, or AURR).
6. The positive excess of the unearned premium over unexpired risks in particular accounting class, should not be used to partially or fully compensate deficits that lead to the formation of reserves for unexpired risks in the second class of accrual.
(Source: Delta Generali, Committee of the Cyprus Actuarial Association)
