Page 32 - Insurance Times July 2022

(ii) (a) Marine Cargo Business - 50 percent relevance and simplicity of 1/365 method. 1/24 and 1/12
methods have become outdated.
(b) Marine Hull Business - 100 percent of the premium,
net of reinsurances, during the proceeding 12
2. Varying Risk Pattern Basis.
months. (Ideally this wording should be 'Premium,
However the basic assumption of uniform spread of risk over
net of reinsurances pertaining to unexpired
the entire risk period is not true in certain categories of
policies")
business / risks. One such example relates to project
insurances. The exposure in these insurances increases as
Schedule B Part I of the Insurance Regulatory and
the project progresses. Hence uniform accruing of premium
Development Authority of India regulations on Preparation
over the risk period is logical for such risks and premium on
of financial statements and Audit Reports of Insurance
such policies may have to be recognised in slightly different
companies) Regulations 2002 provide.
way and the method is known as "basis of pattern of risk".
This method is also recgonised by the regulator in its
" Premium deficiency shall be recognised, if sum of expected
regulations on preparation of financial statements and audit
claims costs related expenses and maintenance costs
report of insurance companies. Another example of varying
exceeds related reserve for unexpired risk reserves".
pattern of risk could be the flood risks. The risk is higher in
the rainy season compared to other seasons of the year. The
Special dispensation : "In accordance with IRDAI circular
practice of adjusting the yearly own damage premium to
IRDAI/F&A/CIR/FA/126/07/2013, dated 3rd July, 2013 insurers
the insured declared values of the vehicle in case of long
are not required to recognise premium deficiency arising
term motor policies is nothing but one form of recognition
out of Motor Third Party Portfolio including esrtwhile Motor
based on pattern of risk. Similarly the chances of fires in
Pool, Declined Risk Pool and Other Pools".
summer (if empirically supported) seem to be greater than
in other seasons and the varying risk pattern method might
G. Methods of calculating unearned
be more suitable for such risks. Crop insurance is another
premium (dominant part of unexpired class of business where the varying pattern basis is
appropriate as the risk goes on increasing and is at its
risks reserves)
highest, close to and at the time of harvesting. High level
There are three methods of calculating unearned premium.
of reserving seen historically in the marine hull segment
1. Time based apportionment - "Daily Prorata Basis"
might be based on the concept of skewed risk distribution
2. Varying Risk Pattern (or need for greater degree of precaution in the hull
business)
3. Statutory Minimum Requirements.
3. Minimum Statutory Requirements. Apart from the
1. Time based apportionment - "Daily Prorata Basis"
above two methods, as a prudent regulatory provision,
over the risk period/contract period (where risk period is not
Regulators / Laws do prescribe creation of minimum level
practicable) which ever is appropriate is the primary method
of reserves. In addition some special dispensations may be
of calculating unearned premium. In most of the policies the
considered by the regulators. The said provisions applicable
possibility of fortuitous events giving rise to claims is same
for Indian Non-life Insurers are reproduced in "E" above.
on all days of the risk period. In other words the risk (in
terms of the subject matter of risk and in terms of its
vulnerability to perils) is uninformally distributed over the H. Observations on status of Un-expired
entire risk period. Therefore the best method of accruing
Risks Reserves and related Practices of
income of insurers is to apportion the premium based on
time. Apportionment based on time is done by following Indian Non-life Insurers
either 1/365, 1/24, or 1/12 methods, the latter two being Keeping in mind the importance of these reserves and based
simplified versions 1/365 method. Prior to the advancements on the current Un-expired Risks Reserving Practices of Indian
in Information Technology, it was not easy to calculate these Non-life Insurers as reflected in their Annual Reports of 2019-
reserves on daily basis. Hence Insurers invented simplified 20, few issues have been listed below for further
methods of 1/24, and 1/12 methods of calculations. Now the examination by the Regulatory Authorities as well as
computers have made it easy to use 1/365 method. All Indian Insurance Company Authorities, so that the reserving quality
insurers follow only this method is a proof enough of to the improves. Extract of relevant portion of accounting policies

32 The Insurance Times, July 2022