PPS Integrated Report 2021 Group Accounting Policies | 146 Group Accounting Policies (continued) 4. INSURANCE AND INVESTMENT CONTRACTS (continued) 4.2 Valuation and recognition (continued) 4.2.2 Short-term insurance contracts (continued) Deferred acquisition cost (DAC) Commissions that are related to securing new contracts and renewing existing contracts are deferred over the period in which the related premiums are earned, and included as a current asset. All other costs are recognised as expenses when incurred. Provision for unearned premiums (UPR) The Unearned Premium Reserve represents the portion of the current year’s premiums that relate to risk periods extending into the following year. The portion of unearned premium is calculated using the time apportionment method. Provision for unexpired risk Provision is made for underwriting losses that may arise from unexpired risks when it is anticipated that unearned premiums will be insufficient to cover future claims (including claims handling fees and related administrative costs). This liability adequacy test is performed annually. Outstanding Claims Reserve (OCR) Provision is made for the estimated final cost of all claims that had not been settled on the accounting date, less amounts already paid. Claims and loss adjustment expenses are based on the estimated liability under short-term insurance contracts. The claims reserve includes an estimated portion of the direct expenses of the claims and assessment charges. The outstanding claims reserve is not discounted. Provision for claims incurred but not reported (IBNR) Provision is also made for claims arising from insured events that occurred before the close of the accounting period, but which had not been reported to the company at that date or up to the date of preparation of the annual financial statements. This provision is calculated using actuarial modeling (refer note 14.1). This reserve is undiscounted. Reinsurance contracts outwards Contracts entered into by the Group with reinsurers under which the Group is compensated for losses on one or more insurance contracts issued by the Group and that meet the classification requirements for insurance contracts are classified as reinsurance contracts held. Contracts that do not meet these classification requirements are classified as financial assets. Reinsurance premiums Reinsurance premiums are recognised as an expense in the Statement of Profit or Loss and Other Comprehensive Income when they become due for payment in terms of the contracts at the undiscounted amounts payable in terms of the contract. Reinsurance claims The benefits to which the Group are entitled under its reinsurance contracts held are recognised as reinsurance assets, which are dependent on the expected reinsurance claims and benefits arising under the related reinsured insurance contracts. These assets consist of short-term balances due from reinsurers (classified as insurance and other receivables) and long-term receivables (classified as reinsurance assets) that are calculated based on the gross OCR and IBNR reserves. Amounts recoverable from or due to reinsurers are measured in terms of each reinsurance contract.
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