Page 30 - Insurance Times July 2022

of its's dependence on a contingency, non-life insurers unlike the year. Not only the risk period in all these policies may
other commercial entities do not enjoy the privilege or be different, risk commencement and expiry dates will also
luxury of knowing the precise cost of their products / service, be different. For example an annual policy issued on 1st of
in advance of pricing them. Therefore pricing is one of the April will expire on 31st March of next year and the one
toughest challenges of non-life insurers. This operational issued on 15th of April will expire on 14th April of next year.
limitation calls for extra precautions on their part in their
financial plans. They depend heavily on their past experience As stated above in certain policies the risk period and the
and support of actuarial techniques to price their products. period of contract are different. Some examples are given
below.
Yet, all said and done it is only an estimate based on so many Transit Policies - Risk begins from the movement of
variables. And such estimate may turn to be far from actual subject matter of insurance with an intention to begin
results. Hence additional and extra precautions are the transit and ends either on delivery or certain days after
second nature of insurance operations. Creation of adequate reaching the destination. Contract commencing period
and liberal reserves of various types is integral to their is policy issue period. No definite contract ending period
working. History has repeatedly evidenced, inadequacy of is recorded.
reserves to be the most dominant cause for failure of several
Marine Declaration Policies and Annual Policies - The
non-life insurers. A study of 640 US insurance insolvencies
contract period is clearly defined. Risk period is again
during 1969 to 1998 insufficient reserves were responsible
based on the pattern mentioned in 1 above.
for failure of 145 insurers (Based on AM Best Report of
Group health insurance policies. Contract period is
1999). Several subsequent studies in different markets have
normally the annual period. Risk period in case of
again and again reiterated this fact. It was also observed
additions and deletions of members may be different
that beneficial tax regime for holding extra reserves was the
for such persons.
cause for very low insolvencies in Germany.
With the appearance of usage based new motor policy,
Reserves of insurers can be classified as technical reserves risk period might be defined as certain kilometers,
and general reserves. Technical reserves can again be contract period and risk period may vary.
classified as claims reserves and premium reserves. Though
In case of liability Insurance, 'Claims Made basis' and
claim reserves are much more important, premium reserves
'Occurrence basis' can create an issue of risk period and
are no less important. Hence premium reserves are the
contract period.
focus and subject of this write-up.
Where as policy or the contract period is certain in all
B. Risk Period and Financial Reporting policies, risk period has an element of uncertainty in case of
some policies. In such cases of uncertainty insurers use
Period
contract period as risk period for some of their activities like
Idea and concept of unexpired risk reserves is closely
creation of reserves.
associated with the two periods mentioned above. Hence,
proper understanding of these terms 'risk period' and
Financial Reporting Period
'financial reporting period' should help in getting clarity on
For a sustained and viable commercial operation, regular
the concept of unexpired risk reserves.
periodic review and stock taking of the operations /
performance and the state of affairs, is a necessity. This
Risk Period
period is very often called Financial Reporting Period (also
Non-life insurances, with few exceptions, are annual
called Accounting Period).
contracts. In some categories of policies the period co-
incides with transit period or completion of certain activity.
Where as the reporting period is definite the risk period is
Technically policy period and risk period are different, but
not so. By the nature of insurer's operations the risk period
in most of the cases they do converge. The insured gets
and the financial reporting period will differ in case of most
protection against events during this risk period, defined
of their policies, though in some cases there is a possibility,
either by dates or by commencement and termination of
of the two being same. It is this attribute of differing risk
transit or similar other method of determining the period.
periods of policies and reporting period gives rise to unique
Insurers go on issuing the policies every day all through out
concepts of 'unexpired risks' and 'unexpired risk reserves'.
30 The Insurance Times, July 2022