Page 31 - Insurance Times July 2022

C. What are Unexpired Risks premium deficiency. Unearned premium is the premium
apportioned and allocated to subsequent accounting period.
From the discussions in the previous paras it is obvious that,
As stated above this reserve is meant to meet the expenses
in cases of many policies, the risk period overlaps over two
/ outgos expected in the future accounting period. But it
financial reporting periods. Part of the 'risk period' falls in
might happen that the reserve might prove insufficient to
one financial reporting period and part of it falls in the next
meet such expenses or outogs. For such contingency of
financial reporting period/s. That portion of the risk which
deficiency there is a need for an additional reserve. It is
overlaps into the next financial reporting period is called
called premium deficiency reserve. If the future period in
"unexpired risk'. The portion of the risk relevant to the
which events giving rise to claims are expected to produce
expiring reporting period is called 'expired risk'. Thus, policies
a situation where the outgos/expenses are more than the
where risk overlaps over more than one reporting period
corresponding premium apportioned for meeting those
will have a part of the risk period known as 'expired risk'
contingencies, a reserve is required to be created for
and a part (balance period of risk) which has not expired
meeting the resulting deficit.
called 'unexpired risk'.
F. Basis for creation of Unexpired Risk
D. What are unexpired risk reserves
Fortuitous events occuring during the entire risk period are Reserves
the subject matter of financial protection offered by Insurers Fundamental principles of financial accounting and Statutory
in their policies. The events giving rise to claims, viewed from / Regulatory provisions are primarily the two basis for the
the angle of reporting period might have occured in the concept of Unexpired Risk Reserves.
expired period, with a further potential of occuring in the
unexpired period too. The premium collected by insurers is As discussed above "Financial Accounting Principles" of
for the full period. Logically the insurers earn their premium 'Accrual method of accounting', 'Matching income against
over the entire risk period which overlaps more than one expenses/outgos' and 'Conservatism and Financial Prudence'
financial reporting period. Hence full premium can not be (Recognise the expected losses immediately and expected
included in a single financial reporting period. gains only on realisation) are at the roots of these reserves.
The purpose of these principles is to present just and fair
This is necessary to avoid / eliminate distortion which might financial statements.
be caused by taking all premium in the first reporting period.
In Financial Accounting terminology this is known by the Apart from the Financial Accounting Principles mentioned
name 'matching concept'- match the income with in the previous para, the statutory / regulatory provisions -
corresponding expenses/outgos. The premium Insurance Regulatory and Development Authority of India
corresponding to the unexpired period (also called unearned (Preparations of Financial Statements and Auditors Reports
premium) will have to be taken to the next financial of Insurance Companies) Regulations and The Insurance Act
reporting period. The premium corresponding to the expired 1938, also form the basis for creation of these reserves.
period is called earned premium. The process of taking the These provisions are reproduced below.
premium collected in one financial reporting period to the
next financial reporting period is done by way of creating "Premium shall be recognised as income over the contract
reserves. Such reserves are called reserves for unexpired period or the period of risk".
risks. These reserves are expected to take care of expected
outgos / expenses on such risks which have not expired and "A reserve for unexpired risks shall be created as the amount
will expire in the future period. representing that part of the premium written which is
attributable to and to be allocated to the succeeding
E. Two Components of Unexpired Risk accounting periods and shall not be less than as required
under section 64 V (1) (ii) (b) of the Act".
Reserves
Unexpired risks attract creation of reserves. These reserves Section 64 V (1) (ii) (b) of the Insurance Act
are actually of two types. Very often the term unexpired
1938.
risk reserve is used interchangeably with the term unearned
Reserves for unexpired risks in respect of
premium. However unearned premium is only a part of
(i) Fire and Miscellaneous Business - 50 percent
unexpired risk reserves, the other part being reserve for
The Insurance Times, July 2022 31