Page 33 - Insurance Times July 2022

relating to un-expired risk reserves is annexed (Annexure B)
they have followed it). And also the varying practice
along with the summarised tabulated status of reserves
between the acceptor and ceding / retroceding
(Annexure A). The information pertains to Twenty Six (26)
company (like GIC Re reserving at 50% and the acceptor
Indian Non-life Insurers. It does not cover ECGC, Agricultural
of retro-cession providing 100%) might result in some
Insurance Corporation, and some non-life insurers whose
anomaly.
reports could not be accessed.
4. In case of some health policies by one of the Insurer a
1. As discussed above there are two methods of
variation of time based apportionment is followed.
calculating the unearned premium. All Insurers, except
a few (who have followed the minimum statutory 5. With respect to long term policies the practice observed
requirements), follow " Daily Prorata Basis" (1/365 from reports of some insurers the unearned premium
method) of calculating the unearned premiums. (premium pertaining to future period where the risk has
"Varying Risk Pattern" method of calculating unexpired begun) is taken to Advance premium or Allocated
risk reserves is followed by none (except in case of Kharif premium. Is it right to do so ? What is the need for this
Business (crop insurance) of Oriental Insurance) may deviation in treatment of unearned premium ?
be due to difficulties involved in evaluating the risk
6. The accounting policies reflected in Annual Reports of
pattern. But methods have to be developed so that at
2019-20 of Indian Non-life Insurers on Premium Income
some point in time insurers will adopt this method in
Recognition indicate some differences. The practices do
cases where "Daily Prorata Basis" is not appropriate.
have a bearing on the working of unexpired risk
2. From the table it may be noted that, the ratio of reserves. Efforts should be made to rationalise the
unexpired risk reserves to net premium range from 33% practices to ensure reasonable uniformity, so that the
(GIC re) of net premium to 87% (HDFC Ergo). Even if quality of unexpired risk reserves is improved. Ensuring
we exclude GIC Re being a re insurer, the range of 35% uniform practices from the participants is a good
to 87% appears unreasonable, though theoretically regulatory practice. It is also observed that the
such a vide range is perfectly possible. A closer language which leaves a scope for different
examination is required. The Insurers with very low interpretations and the silence which leaves scope for
percentage seems to have not complied with the imagined interpretations should be avoided in the
minimum requirements of 100% for Marine Hull and accounting policies and disclosures. Rationalisation even
50% for other classes of business. if minor, will considerably enhance the quality of
disclosure.
2. Time based apportionment of premium over the risk
period in a portfolio which is evenly spread during the 7. The term unexpired risk reserve and unearned premium
financial reporting period, must normally yield a some times used interchangeably. It will be better if
reserves ratio (to net premium) of 45 % to 55%. Skewed unexpired risk reserves should stand only for Unearned
distribution of business, share of long term policies, premium and premium deficiency. Though in practice
share of marine hull policies and (method of risk pattern in most of the cases premium deficiency being nil, the
based calculation of reserves, certain special amount of unexpired risk reserves and unearned
dispensations like the treatment of crop insurance, premium will be same.
Rashtriya Swasth Bima Yojana and pool business might
8. Premium deficiency reserve has been created by 3 out
be some of the reasons for the ratio being beyond this
of 26 insurers. Few Insurers have explicitly stated their
normal range. Yet the status of six insurers who fall in
reserve for premium deficiency to be Nil. Some have
the range of 61 to 87 % appear unusual. When the
disclosed the accounting policy even though there is no
regulatory provisions mandate a minimum of 100% for
such reserve. Others are silent. For the sake of good
Marine Hull business and 50% for Other business (of net
disclosure practice, silence should be avoided.
premium) the case of 7 insurers falling in the range of
9. Many insurer explicitly state that pattern of risk based
33% to 49% appears to be an issue of compliance, if
method has not been followed for creation of unexpired
not an issue of adequacy of reserves.
risk reserves. Many others are silent on this. Positive
3. Certain categories of Insurance, like Crop Insurance,
disclosure instead of being silent is a good practice.
Terrorism Pool Rashtriya Swasth Bima Yojana etc.
10. In their policies some insurers have stated that
appears to have received special treatment. But
unearned premium is calculated on net premium, others
uniformity is missing. Amongst the insurers (or some
have stated that it is calculated on gross basis. Amongst
insurers have not disclosed the policy though in practice
The Insurance Times, July 2022 33