What do you understand between Unearned Premium Reserves (UPR) and Unexpired Risks Reserves (URR)?
UNEARNED PREMIUM RESERVES. Simply say and forgetting about the more technical aspect of it, UPR is that portion of premium which is not earned by the insurer, i.e. the amount of premium that relates to the policy period that has yet to be utilised or is still an ongoing concern or being the unexpired future periods of cover. The insurer has to maintain a premium reserve for this unearned period to meet their ongoing obligation to the policy holder. It is normal for insurer to use the 1/24th method for Non-Marine classes and for Marine, it is a norm to provide on basis of 25% of total net (of reinsurance) premium as unearned as at the end of each financial year. You can further read my earlier posting on RISK BASE CAPITAL FOR UNDERWRITER.
All the insurance companies have to maintain the minimum level of ‘unearned premium reserve’ in order to meet the condition set by the insurance regulatory board.
UNEXPIRED RISK RESERVES. Unexpired risk reserve works somewhat similarly like ‘unearned premium reserve’. In the normal workings for setting technical reserves, UPR = URR, however this is likely not true in reality as actuary is 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. The relationship can be viewed more clearly in Equation No. 2 below.
THE RELATIONSHIP BETWEEN UPR AND URR (from an equation perspectives)
THE EQUATION IN THE RELATIONSHIP. I usually equate their relationship in the following manner for easy understanding:
|Unearned Premium Reserves (UPR)||=||Unexpired Risk Reserves (URR) + Provision of Risk Margin for Adverse Deviation (PRAD) + Unrealised Profits|
The insurer usually appoints an actuary to compute the URR with provision for adverse portfolio deviation, and if the total of URR & PRAD is lower than the UPR, then there is likehood of a unrealised profit margin. Meaning, the UPR is deemed as adequately provided.
However if you are in the situation of a consistent portfolio loss after having adjusted for possible adverse deviation, you may see the following being true….
|Unexpired Risk Reserves (URR) + Provision of Risk Margin for Adverse Deviation||=||Unearned Premium Reserves (UPR) + Premium Deficiency Reserves|
In the second relation, there are portfolio losses as (URR + Actuarial assessed risk margin) > UPR and the difference is represented by PREMIUM DEFICIENCY RESERVES.
In a more humorous manner, URR is usually equal to UPR but as the actuary make their way to determine the loss development factor for the portfolio performance, URR is always inflated…. true or otherwise, all of us agree that there must be someone to blame if our reserves are eventually proven inadequate. But those guys are not stupid either, they just inflate it according to confidence level, ie. best estimate? 75% confidence level? 99.5% confidence level? So what exactly do you want to see….
Agree? Please comment….
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